Read the book assigned (chapter 1 as I uploaded) and answer this question: Consider the three key forces driving the new marketing realities – Technology, Globalization & Social Responsibility. How are they likely to change in the future? What other major trends or forces might affect marketing?
You will be expected to read the questions, conduct initial research, and contribute to the discussion. In-depth discussion questions include use of sources from outside reading and from the textbook. One or two paragraphs should be enough.
15e
Marketing
M a n a g e M e n t
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this is a special edition of an established title widely
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15
PhiliP Kotler
Northwestern University
Kevin lane Keller
Dartmouth College
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Management
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with the Copyright, Designs and Patents Act 1988.
Authorized adaptation from the United States edition, entitled Marketing Management, 15th edition, ISBN 978-0-13-385646-0, by
Philip Kotler and Kevin Lane Keller, published by Pearson Education, Inc. © 2016.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any
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All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author
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endorsement of this book by such owners.
ISBN 10: 1-292-09262-9
ISBN 13: 978-1-292-09262-1
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ISBN 13: 978-1-292-092 -71 3
(Print)
(PDF)
This book is dedicated to my wife and best friend, Nancy, with love.
—PK
This book is dedicated to my wife, Punam, and my two daughters,
Carolyn and Allison, with much love and thanks.
—KLK
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4
Philip Kotler is one of the world’s leading authorities on
marketing. He is the S. C. Johnson & Son Distinguished Professor
of International Marketing at the Kellogg School of Management,
Northwestern University. He received his master’s degree at the
University of Chicago and his Ph.D. at MIT, both in economics. He did
postdoctoral work in mathematics at Harvard University and in behav-
ioral science at the University of Chicago.
Dr. Kotler is the coauthor of Principles of Marketing and Marketing:
An Introduction. His Strategic Marketing for Nonprofit Organizations,
now in its seventh edition, is the best seller in that specialized area.
Dr. Kotler’s other books include Marketing Models; The New Competition; Marketing Professional
Services; Strategic Marketing for Educational Institutions; Marketing for Health Care Organizations;
Marketing Congregations; High Visibility; Social Marketing; Marketing Places; The Marketing of
Nations; Marketing for Hospitality and Tourism; Standing Room Only—Strategies for Marketing the
Performing Arts; Museum Strategy and Marketing; Marketing Moves; Kotler on Marketing; Lateral
Marketing; Winning at Innovation; Ten Deadly Marketing Sins; Chaotics; Marketing Your Way to
Growth; Winning Global Markets; and Corporate Social Responsibility.
In addition, he has published more than 150 articles in leading journals, including the Harvard
Business Review, Sloan Management Review, Business Horizons, California Management Review,
the Journal of Marketing, the Journal of Marketing Research, Management Science, the Journal of
Business Strategy, and Futurist. He is the only three-time winner of the coveted Alpha Kappa Psi
award for the best annual article published in the Journal of Marketing.
Professor Kotler was the first recipient of the American Marketing Association’s (AMA) Distinguished
Marketing Educator Award (1985). The European Association of Marketing Consultants and Sales
Trainers awarded him their Prize for Marketing Excellence. He was chosen as the Leader in Marketing
Thought by the Academic Members of the AMA in a 1975 survey. He also received the 1978 Paul
Converse Award of the AMA, honoring his original contribution to marketing. In 1995, the Sales and
Marketing Executives International (SMEI) named him Marketer of the Year. In 2002, Professor Kotler
received the Distinguished Educator Award from the Academy of Marketing Science. In 2013, he
received the William L. Wilkie “Marketing for a Better World” Award and subsequently received the
Sheth Foundation Medal for Exceptional Contribution to Marketing Scholarship and Practice. In 2014,
he was inducted in the Marketing Hall of Fame.
He has received honorary doctoral degrees from Stockholm University, the University of Zurich,
Athens University of Economics and Business, DePaul University, the Cracow School of Business
and Economics, Groupe H.E.C. in Paris, the Budapest School of Economic Science and Public
Administration, the University of Economics and Business Administration in Vienna, and Plekhanov
Russian Academy of Economics. Professor Kotler has been a consultant to many major U.S. and
foreign companies, including IBM, General Electric, AT&T, Honeywell, Bank of America, Merck, SAS
Airlines, Michelin, and others in the areas of marketing strategy and planning, marketing organization,
and international marketing.
He has been Chairman of the College of Marketing of the Institute of Management Sciences, a Director
of the American Marketing Association, a Trustee of the Marketing Science Institute, a Director of the MAC
Group, a member of the Yankelovich Advisory Board, and a member of the Copernicus Advisory Board.
He was a member of the Board of Governors of the School of the Art Institute of Chicago and a member of
the Advisory Board of the Drucker Foundation. He has traveled extensively throughout Europe, Asia, and
South America, advising and lecturing to many companies about global marketing opportunities.
about the authors
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5
Kevin Lane Keller is the E. B. Osborn Professor of
Marketing at the Tuck School of Business at Dartmouth College.
Professor Keller has degrees from Cornell, Carnegie-Mellon, and
Duke universities. At Dartmouth, he teaches MBA courses on mar-
keting management and strategic brand management and lectures
in executive programs on those topics.
Previously, Professor Keller was on the faculty at Stanford
University, where he also served as the head of the marketing group.
Additionally, he has been on the faculty at the University of California
at Berkeley and the University of North Carolina at Chapel Hill,
has been a visiting professor at Duke University and the Australian
Graduate School of Management, and has two years of industry experience as Marketing Consultant
for Bank of America.
Professor Keller’s general area of expertise lies in marketing strategy and planning and branding. His
specific research interest is in how understanding theories and concepts related to consumer behavior
can improve marketing strategies. His research has been published in three of the major marketing
journals: the Journal of Marketing, the Journal of Marketing Research, and the Journal of Consumer
Research. He also has served on the Editorial Review Boards of those journals. With more than 90 pub-
lished papers, his research has been widely cited and has received numerous awards.
Actively involved with industry, he has worked on a host of different types of marketing projects.
He has served as a long-term consultant and advisor to marketers for some of the world’s most
successful brands, including Accenture, American Express, Disney, Ford, Intel, Levi Strauss, Procter
& Gamble, and Samsung. Additional brand consulting activities have been with other top companies
such as Allstate, Beiersdorf (Nivea), BlueCross BlueShield, Campbell, Colgate, Eli Lilly, ExxonMobil,
General Mills, GfK, Goodyear, Hasbro, Intuit, Johnson & Johnson, Kodak, L.L.Bean, Mayo Clinic, MTV,
Nordstrom, Ocean Spray, Red Hat, SAB Miller, Shell Oil, Starbucks, Unilever, and Young & Rubicam.
He has also served as an academic trustee for the Marketing Science Institute and served as their
Executive Director from July 1, 2013, to July 1, 2015.
A popular and highly sought-after speaker, he has made speeches and conducted marketing semi-
nars to top executives in a variety of forums. Some of his senior management and marketing training
clients have included include such diverse business organizations as Cisco, Coca-Cola, Deutsche
Telekom, ExxonMobil, GE, Google, IBM, Macy’s, Microsoft, Nestle, Novartis, Pepsico, SC Johnson and
Wyeth. He has lectured all over the world, from Seoul to Johannesburg, from Sydney to Stockholm,
and from Sao Paulo to Mumbai. He has served as keynote speaker at conferences with hundreds to
thousands of participants.
Professor Keller is currently conducting a variety of studies that address strategies to build, mea-
sure, and manage brand equity. His textbook on those subjects, Strategic Brand Management, in its
fourth edition, has been adopted at top business schools and leading firms around the world and has
been heralded as the “bible of branding.”
An avid sports, music, and film enthusiast, in his so-called spare time, he has helped to manage and
market, as well as serve as executive producer for, one of Australia’s great rock-and-roll treasures, The
Church, as well as American power-pop legends Tommy Keene and Dwight Twilley. He also serves on
the Board of Directors for The Doug Flutie, Jr. Foundation for Autism, the Lebanon Opera House, and
the Montshire Museum of Science. Professor Keller lives in Etna, NH, with his wife, Punam (also a Tuck
marketing professor), and his two daughters, Carolyn and Allison.
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Brief Contents
Preface 17
Part 1 Understanding Marketing Management 24
Chapter 1 Defining Marketing for the New Realities 25
Chapter 2 Developing Marketing Strategies and Plans 57
Part 2 Capturing Marketing Insights 88
Chapter 3 Collecting Information and Forecasting Demand 89
Chapter 4 Conducting Marketing Research 121
Part 3 Connecting with Customers 148
Chapter 5 Creating Long-Term Loyalty Relationships 149
Chapter 6 Analyzing Consumer Markets 179
Chapter 7 Analyzing Business Markets 211
Chapter 8 Tapping into Global Markets 239
Part 4 Building Strong Brands 266
Chapter 9 Identifying Market Segments and Targets 267
Chapter 10 Crafting the Brand Positioning 297
Chapter 11 Creating Brand Equity 321
Chapter 12 Addressing Competition and Driving Growth 357
Part 5 Creating Value 388
Chapter 13 Setting Product Strategy 389
Chapter 14 Designing and Managing Services 421
Chapter 15 Introducing New Market Offerings 451
Chapter 16 Developing Pricing Strategies and Programs 483
Part 6 Delivering Value 514
Chapter 17 Designing and Managing Integrated Marketing Channels 515
Chapter 18 Managing Retailing, Wholesaling, and Logistics 549
Part 7 Communicating Value 578
Chapter 19 Designing and Managing Integrated Marketing Communications 579
Chapter 20 Managing Mass Communications: Advertising, Sales Promotions, Events
and Experiences, and Public Relations 607
Chapter 21 Managing Digital Communications: Online, Social Media, and Mobile 637
Chapter 22 Managing Personal Communications: Direct and Database Marketing and
Personal Selling 657
Part 8 Conducting Marketing Responsibly for Long-Term
Success 678
Chapter 23 Managing a Holistic Marketing Organization for the Long Run 679
appendix: Sonic Marketing Plan and Exercises a1
Endnotes E1
Glossary G1
Name Index I1
Company, Brand, and Organization Index I5
Subject Index I18
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Contents
Preface 17
Part 1 Understanding Marketing
Management 24
Chapter 1 Defining Marketing for the New
Realities 25
The Value of Marketing 25
Marketing Decision Making 25
Winning Marketing 26
The Scope of Marketing 27
What Is Marketing? 27
What Is Marketed? 27
Who Markets? 29
Core Marketing Concepts 31
Needs, Wants, and Demands 31
Target Markets, Positioning, and
Segmentation 31
Offerings and Brands 32
Marketing Channels 32
Paid, Owned, and Earned Media 32
Impressions and Engagement 32
Value and Satisfaction 33
Supply Chain 33
Competition 34
Marketing Environment 34
The New Marketing Realities 35
Technology 35
Globalization 36
Social Responsibility 36
MarkEtING INSIGht Getting to
Marketing 3.0 37
A Dramatically Changed Marketplace 38
New Consumer Capabilities 38
New Company Capabilities 39
Changing Channels 41
Heightened Competition 41
Marketing in Practice 41
Marketing Balance 41
MarkEtING MEMO Reinventing Marketing
at Coca-Cola 42
Marketing Accountability 42
Marketing in the Organization 42
Company Orientation toward the
Marketplace 42
The Production Concept 42
The Product Concept 43
The Selling Concept 43
The Marketing Concept 43
The Holistic Marketing Concept 43
Updating the Four Ps 47
MarkEtING INSIGht Understanding the
4 As of Marketing 48
Marketing Management Tasks 49
Developing Marketing Strategies and
Plans 49
Capturing Marketing Insights 50
Connecting with Customers 50
Building Strong Brands 50
MarkEtING MEMO Marketers’ Frequently
Asked Questions 50
Creating Value 51
Delivering Value 51
Communicating Value 51
Conducting Marketing Responsibly for
Long-Term Success 51
Summary 51
applications 52
MarkEtING ExCEllENCE Nike 52
MarkEtING ExCEllENCE Google 54
Chapter 2 Developing Marketing Strategies
and Plans 57
Marketing and Customer Value 57
The Value Delivery Process 57
The Value Chain 58
Core Competencies 58
The Central Role of Strategic Planning 59
Corporate and Division Strategic Planning 60
MarkEtING MEMO What Does It Take
to Be a Successful CMO? 61
Defining the Corporate Mission 61
Establishing Strategic Business Units 64
Assigning Resources to Each SBU 64
Assessing Growth Opportunities 64
Organization and Organizational Culture 68
Marketing Innovation 69
MarkEtING INSIGht Creating Innovative
Marketing 69
Business Unit Strategic Planning 70
The Business Mission 71
SWOT Analysis 71
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MarkEtING MEMO Checklist for Evaluating
Strengths/Weaknesses Analysis 73
Goal Formulation 74
Strategic Formulation 74
Program Formulation and
Implementation 75
MarkEtING INSIGht Businesses Charting
a New Direction 76
Feedback and Control 77
The Nature and Contents of a Marketing
Plan 77
MarkEtING MEMO Marketing Plan
Criteria 77
The Role of Research 78
The Role of Relationships 78
From Marketing Plan to Marketing
Action 79
Summary 79
applications 80
MarkEtING ExCEllENCE Electrolux 80
MarkEtING ExCEllENCE Emirates 81
Sample Marketing Plan: Pegasus Sports
International 83
Part 2 Capturing Marketing
Insights 88
Chapter 3 Collecting Information and
Forecasting Demand 89
Components of a Modern Marketing
Information System 89
Internal Records 91
The Order-to-Payment Cycle 91
Sales Information Systems 91
Databases, Data Warehousing, and Data
Mining 91
MarkEtING INSIGht Digging Into Big
Data 92
Marketing Intelligence 92
The Marketing Intelligence System 92
Collecting Marketing Intelligence on the
Internet 94
Communicating and Acting on Marketing
Intelligence 94
Analyzing the Macroenvironment 94
Needs and Trends 95
Identifying the Major Forces 95
The Demographic Environment 96
MarkEtING MEMO Finding Gold at the
Bottom of the Pyramid 97
The Economic Environment 99
The Sociocultural Environment 100
The Natural Environment 101
MarkEtING INSIGht The Green Marketing
Revolution 103
The Technological Environment 104
The Political-Legal Environment 105
MarkEtING INSIGht Watching Out for Big
Brother 107
Forecasting and Demand Measurement 107
The Measures of Market Demand 108
A Vocabulary for Demand Measurement 109
Estimating Current Demand 111
Estimating Future Demand 113
Summary 115
applications 116
MarkEtING ExCEllENCE Microsoft 116
MarkEtING ExCEllENCE Ferrero 117
Chapter 4 Conducting Marketing
Research 121
The Scope of Marketing Research 121
Importance of Marketing Insights 121
Who Does Marketing Research? 122
Overcoming Barriers to the Use of Marketing
Research 123
The Marketing Research Process 124
Step 1: Define the Problem, the Decision
Alternatives, and the Research
Objectives 124
Step 2: Develop the Research Plan 125
MarkEtING MEMO Conducting Informative
Focus Groups 127
MarkEtING MEMO Marketing
Questionnaire Dos And Don’ts 130
MarkEtING INSIGht Getting into the
Heads of Consumers 131
MarkEtING INSIGht Understanding Brain
Science 133
Step 3: Collect the Information 135
Step 4: Analyze the Information 135
Step 5: Present the Findings 135
MarkEtING INSIGht Bringing Marketing
Research to Life with Personas 136
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Step 6: Make the Decision 136
Measuring Marketing Productivity 137
Marketing Metrics 137
MarkEtING MEMO Measuring Social
Media ROI 139
Marketing-Mix Modeling 140
Marketing Dashboards 140
MarkEtING MEMO Designing Effective
Marketing Dashboards 141
Summary 143
applications 143
MarkEtING ExCEllENCE IDEO 144
MarkEtING ExCEllENCE Intuit 146
Part 3 Connecting with
Customers 148
Chapter 5 Creating Long-Term Loyalty
Relationships 149
Building Customer Value, Satisfaction, and
Loyalty 149
Customer-Perceived Value 150
Total Customer Satisfaction 153
Monitoring Satisfaction 155
Product and Service Quality 156
MarkEtING INSIGht Net Promoter and
Customer Satisfaction 157
Maximizing Customer Lifetime Value 158
Customer Profitability 159
Measuring Customer Lifetime
Value 160
Attracting and Retaining Customers 160
MarkEtING MEMO Calculating Customer
Lifetime Value 161
Building Loyalty 164
Brand Communities 165
Win-Backs 168
Cultivating Customer Relationships 168
Customer Relationship Management 168
MarkEtING INSIGht The Behavioral
Targeting Controversy 169
Summary 174
applications 174
MarkEtING ExCEllENCE Audi 175
MarkEtING ExCEllENCE
Harley-Davidson 176
Chapter 6 Analyzing Consumer Markets 179
What Influences Consumer Behavior? 179
Cultural Factors 179
Social Factors 181
Personal Factors 183
MarkEtING MEMO The Average U.S.
Consumer Quiz 184
Key Psychological Processes 187
Motivation 187
Perception 189
MarkEtING MEMO The Power of Sensory
Marketing 189
Learning 191
Emotions 192
Memory 193
The Buying Decision Process: The Five-Stage
Model 194
Problem Recognition 195
Information Search 196
Evaluation of Alternatives 197
Purchase Decision 198
Postpurchase Behavior 200
Moderating Effects on Consumer Decision
Making 202
Behavioral Decision Theory and Behavioral
Economics 202
Decision Heuristics 203
Framing 204
Summary 205
applications 205
MarkEtING ExCEllENCE Disney 206
MarkEtING ExCEllENCE IKEA 207
Chapter 7 Analyzing Business Markets 211
What is Organizational Buying? 211
The Business Market versus the Consumer
Market 211
Buying Situations 214
Participants in the Business Buying
Process 215
The Buying Center 216
Buying Center Influences 216
Targeting Firms and Buying Centers 217
MarkEtING INSIGht Big Sales to Small
Businesses 218
The Purchasing/Procurement Process 219
Stages in the Buying Process 220
Problem Recognition 220
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General Need Description and Product
Specification 221
Supplier Search 221
Proposal Solicitation 223
Supplier Selection 223
MarkEtING MEMO Developing Compelling
Customer Value Propositions 224
Order-Routine Specification 226
Performance Review 226
Developing Effective Business-to-Business
Marketing Programs 226
Communication and Branding Activities 226
Systems Buying and Selling 228
MarkEtING MEMO Spreading the Word
with Customer Reference Programs 229
Role of Services 229
Managing Business-to-Business Customer
Relationships 230
The Benefits of Vertical Coordination 230
MarkEtING INSIGht Establishing
Corporate Trust, Credibility, and
Reputation 231
Risks and Opportunism in Business
Relationships 231
Institutional and Government Markets 233
Summary 234
applications 235
MarkEtING ExCEllENCE Accenture 235
MarkEtING ExCEllENCE GE 236
Chapter 8 Tapping into Global Markets 239
Competing on a Global Basis 239
Deciding Whether to Go Abroad 241
Deciding Which Markets to Enter 242
How Many Markets to Enter 242
Evaluating Potential Markets 243
Succeeding in Developing
Markets 243
Deciding How to Enter the Market 248
Indirect and Direct Export 249
Licensing 249
Joint Ventures 250
Direct Investment 250
Acquisition 250
Deciding on the Marketing Program 251
Global Similarities and Differences 252
Marketing Adaptation 253
Global Product Strategies 254
Global Communication Strategies 257
Global Pricing Strategies 257
Global Distribution Strategies 259
Country-of-Origin Effects 260
Building Country Images 260
Consumer Perceptions of Country of
Origin 261
Summary 262
applications 263
MarkEtING ExCEllENCE Twitter 263
MarkEtING ExCEllENCE L’Oréal 264
Part 4 Building Strong
Brands 266
Chapter 9 Identifying Market Segments and
Targets 267
Bases for Segmenting Consumer
Markets 268
Geographic Segmentation 268
Demographic Segmentation 271
Psychographic Segmentation 280
Behavioral Segmentation 281
How Should Business Markets Be
Segmented? 283
Market Targeting 284
Effective Segmentation Criteria 285
Evaluating and Selecting the Market
Segments 286
MarkEtING INSIGht Chasing the Long
Tail 289
MarkEtING MEMO Protecting Kids
Online 291
Summary 291
applications 292
MarkEtING ExCEllENCE HSBC 292
MarkEtING ExCEllENCE BMW 294
Chapter 10 Crafting the Brand Positioning 297
Developing a Brand Positioning 297
Understanding Positioning and Value
Propositions 297
Choosing a Competitive Frame of
Reference 298
Identifying Potential Points-of-Difference
and Points-of-Parity 300
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11
Choosing Specific POPs and PODs 304
Brand Mantras 307
Establishing a Brand Positioning 309
MarkEtING MEMO Constructing a Brand
Positioning Bull’s-eye 309
Alternative Approaches to Positioning 313
Brand Narratives and Storytelling 313
Cultural Branding 314
Positioning and Branding for A Small
Business 314
Summary 317
applications 317
MarkEtING ExCEllENCE
Nespresso 318
MarkEtING ExCEllENCE
Philips 319
Chapter 11 Creating Brand Equity 321
How Does Branding Work? 321
The Role of Brands 322
The Scope of Branding 323
Defining Brand Equity 324
Brand Equity Models 326
MarkEtING INSIGht Brand Bubble
Trouble 328
Building Brand Equity 331
MarkEtING MEMO The Marketing Magic of
Characters 332
Designing Holistic Marketing Activities 332
Leveraging Secondary Associations 334
Internal Branding 336
Measuring Brand Equity 337
MarkEtING INSIGht The Brand Value
Chain 337
MarkEtING INSIGht What Is a Brand
Worth? 339
Managing Brand Equity 340
Brand Reinforcement 340
Brand Revitalization 341
Devising a Branding Strategy 343
Branding Decisions 344
Brand Portfolios 345
Brand Extensions 347
Customer Equity 350
MarkEtING MEMO Twenty-First-Century
Branding 351
Summary 352
applications 352
MarkEtING ExCEllENCE McDonald’s 353
MarkEtING ExCEllENCE
Procter & Gamble 354
Chapter 12 Addressing Competition and
Driving Growth 357
Growth 357
Growth Strategies 357
Growing the Core 358
Competitive Strategies for Market
Leaders 359
Expanding Total Market Demand 360
Protecting Market Share 361
Increasing Market Share 363
Other Competitive Strategies 364
Market-Challenger Strategies 364
Market-Follower Strategies 366
MarkEtING INSIGht The Costs and
Benefits of Fast Fashion 367
Market-Nicher Strategies 368
MarkEtING MEMO Niche Specialist
Roles 370
Product Life-Cycle Marketing Strategies 370
Product Life Cycles 370
Style, Fashion, and Fad Life Cycles 371
Marketing Strategies: Introduction Stage and
the Pioneer Advantage 373
MarkEtING INSIGht Understanding
Double Jeopardy 374
Marketing Strategies: Growth Stage 375
Marketing Strategies: Maturity Stage 376
Marketing Strategies: Decline Stage 377
MarkEtING MEMO Managing a Marketing
Crisis 378
Evidence for the Product Life-Cycle
Concept 380
Critique of the Product Life-Cycle
Concept 381
Market Evolution 381
Marketing in a Slow-Growth Economy 381
Explore the Upside of Increasing
Investment 381
Get Closer to Customers 382
Review Budget Allocations 382
Put Forth the Most Compelling Value
Proposition 382
Fine-Tune Brand and Product Offerings 383
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12
Summary 384
applications 384
MarkEtING ExCEllENCE
Samsung 385
MarkEtING ExCEllENCE SABIC 386
Part 5 Creating Value 388
Chapter 13 Setting Product Strategy 389
Product Characteristics and
Classifications 389
Product Levels: The Customer-Value
Hierarchy 389
Product Classifications 391
Differentiation 392
Product Differentiation 393
Services Differentiation 394
Design 396
Design Leaders 396
Power of Design 397
Approaches to Design 397
Luxury Products 398
Characterizing Luxury Brands 398
Growing Luxury Brands 398
Marketing Luxury Brands 399
Environmental Issues 400
MarkEtING MEMO A Sip or A Gulp:
Environmental Concerns in the Water
Industry 401
Product and Brand Relationships 401
The Product Hierarchy 402
Product Systems and Mixes 402
Product Line Analysis 403
Product Line Length 404
MarkEtING INSIGht When Less Is
More 405
Product Mix Pricing 408
Co-Branding and Ingredient
Branding 409
MarkEtING MEMO Product-Bundle Pricing
Considerations 410
Packaging, Labeling, Warranties, and
Guarantees 412
Packaging 412
Labeling 414
Warranties and Guarantees 415
Summary 415
applications 416
MarkEtING ExCEllENCE
Nivea 416
MarkEtING ExCEllENCE
Toyota 418
Chapter 14 Designing and Managing
Services 421
The Nature of Services 421
Service Industries Are Everywhere 421
Categories of Service Mix 422
Distinctive Characteristics of Services 424
The New Services Realities 428
A Shifting Customer Relationship 428
MarkEtING MEMO Lights! Cameras!
Customer Service Disasters! 430
Achieving Excellence In Services
Marketing 431
Marketing Excellence 431
Technology and Service
Delivery 432
Best Practices of Top Service
Companies 433
Differentiating Services 435
MarkEtING INSIGht Improving Company
Call Centers 436
Managing Service Quality 439
Managing Customer Expectations 440
MarkEtING MEMO Recommendations for
Improving Service Quality 441
Incorporating Self-Service Technologies
(SSTS) 443
Managing Product-Support Services 444
Identifying and Satisfying Customer
Needs 444
Postsale Service Strategy 445
Summary 445
applications 446
MarkEtING ExCEllENCE
Club Med 446
MarkEtING ExCEllENCE
Parkway Group Hotels 448
Chapter 15 Introducing New Market
Offerings 451
New-Product Options 451
Make or Buy 451
Types of New Products 452
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Challenges in New-Product
Development 453
The Innovation Imperative 454
New-Product Success 454
New-Product Failure 455
Organizational Arrangements 456
Budgeting for New-Product Development 456
Organizing New-Product Development 457
Managing the Development Process: Ideas 460
Generating Ideas 460
MarkEtING MEMO Ten Ways to Find Great
New-Product Ideas 460
MarkEtING INSIGht P&G’S Connect +
Develop Approach to Innovation 461
MarkEtING MEMO Seven Ways to Draw
New Ideas from Your Customers 462
MarkEtING MEMO How to Run a
Successful Brainstorming Session 464
Using Idea Screening 465
Managing the Development Process: Concept
to Strategy 467
Concept Development and Testing 467
Marketing Strategy Development 470
Business Analysis 470
Managing the Development Process:
Development to Commercialization 472
Product Development 472
Market Testing 473
Commercialization 475
The Consumer-Adoption Process 476
Stages in the Adoption Process 476
Factors Influencing the Adoption
Process 476
Summary 478
applications 479
MarkEtING ExCEllENCE Apple 479
MarkEtING ExCEllENCE
Salesforce.com 481
Chapter 16 Developing Pricing Strategies
and Programs 483
Understanding Pricing 483
Pricing in a Digital World 484
A Changing Pricing Environment 484
MarkEtING INSIGht Giving It All Away 485
How Companies Price 486
Consumer Psychology and Pricing 487
Setting the Price 489
Step 1: Selecting the Pricing Objective 489
MarkEtING INSIGht Trading Up, Down,
and Over 490
Step 2: Determining Demand 492
Step 3: Estimating Costs 494
MarkEtING MEMO How to Cut Costs 496
Step 4: Analyzing Competitors’ Costs, Prices,
and Offers 496
Step 5: Selecting a Pricing Method 497
Step 6: Selecting the Final Price 502
MarkEtING INSIGht Stealth Price
Increases 503
Adapting the Price 504
Geographical Pricing (Cash, Countertrade,
Barter) 504
Price Discounts and Allowances 504
Promotional Pricing 505
Differentiated Pricing 506
Initiating and Responding to Price
Changes 507
Initiating Price Cuts 507
Initiating Price Increases 508
Anticipating Competitive Responses 508
Responding to Competitors’ Price
Changes 509
Summary 510
applications 510
MarkEtING ExCEllENCE eBay 511
MarkEtING ExCEllENCE
Air Arabia 512
Part 6 Delivering Value 514
Chapter 17 Designing and Managing Integrated
Marketing Channels 515
Marketing Channels and Value
Networks 516
The Importance of Channels 516
Multichannel Marketing 516
Integrating Multichannel Marketing
Systems 517
Value Networks 519
The Digital Channels Revolution 520
The Role of Marketing Channels 521
Channel Functions and Flows 522
Channel Levels 523
Service Sector Channels 524
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Channel-Design Decisions 525
Analyzing Customer Needs and Wants 525
MarkEtING INSIGht Understanding the
Showrooming Phenomena 525
Establishing Objectives and Constraints 526
Identifying Major Channel Alternatives 527
Evaluating Major Channel
Alternatives 529
Channel-Management Decisions 530
Selecting Channel Members 530
Training and Motivating Channel
Members 530
Evaluating Channel Members 531
Modifying Channel Design and
Arrangements 532
Channel Modification Decisions 532
Global Channel Considerations 532
Channel Integration and Systems 534
Vertical Marketing Systems 534
Horizontal Marketing Systems 536
E-Commerce Marketing Practices 536
Pure-Click Companies 536
Brick-and-Click Companies 537
M-Commerce Marketing Practices 538
Changes in Customer and Company
Behavior 539
M-Commerce Marketing Practices 539
Privacy 540
Conflict, Cooperation, and Competition 540
Types of Conflict and Competition 541
Causes of Channel Conflict 541
Managing Channel Conflict 541
Dilution and Cannibalization 543
Legal and Ethical Issues in Channel
Relations 543
Summary 543
applications 544
MarkEtING ExCEllENCE
Amazon.com 544
MarkEtING ExCEllENCE Tesco 546
Chapter 18 Managing Retailing,Wholesaling,
and Logistics 549
Retailing 549
Types of Retailers 550
MarkEtING MEMO Innovative Retail
Organizations 551
The Modern Retail Marketing
Environment 554
MarkEtING INSIGht The Growth of
Shopper Marketing 556
Marketing Decisions 557
MarkEtING MEMO Helping Stores to Sell 562
Private Labels 563
Role of Private Labels 564
Private-Label Success Factors 564
MarkEtING INSIGht Manufacturer’s
Response to the Private-Label
Threat 565
Wholesaling 565
Trends in Wholesaling 567
Market Logistics 567
Integrated Logistics Systems 568
Market-Logistics Objectives 569
Market-Logistics Decisions 570
Summary 573
applications 574
MarkEtING ExCEllENCE Zara 574
MarkEtING ExCEllENCE Best Buy 576
Part 7 Communicating Value 578
Chapter 19 Designing and Managing
Integrated Marketing
Communications 579
The Role of Marketing Communications 580
The Changing Marketing Communications
Environment 580
MarkEtING INSIGht Don’t Touch That
Remote 580
Marketing Communications Mix 581
How Do Marketing Communications
Work? 583
The Communications Process Models 584
Developing Effective Communications 586
Identify the Target Audience 586
Set the Communications Objectives 587
Design the Communications 587
Select the Communications
Channels 590
MarkEtING MEMO Celebrity
Endorsements as a Message
Strategy 591
MarkEtING INSIGht Playing Tricks to
Build a Brand 593
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15
Establish the Total Marketing
Communications Budget 594
Selecting the Marketing Communications
Mix 595
Characteristics of the Marketing
Communications Mix 596
Factors in Setting the Marketing
Communications Mix 597
Measuring Communication Results 599
Managing the Integrated Marketing
Communications Process 599
Coordinating Media 601
Implementing IMC 601
MarkEtING MEMO How Integrated Is Your
IMC Program? 601
Summary 602
applications 603
MarkEtING ExCEllENCE Red Bull 603
MarkEtING ExCEllENCE L’Oreal 604
Chapter 20 Managing Mass Communications:
Advertising, Sales Promotions,
Events and Experiences, and Public
Relations 607
Developing and Managing an Advertising
Program 608
Setting the Advertising Objectives 609
Deciding on the Advertising Budget 609
Developing the Advertising
Campaign 610
MarkEtING MEMO Print Ad Evaluation
Criteria 612
MarkEtING INSIGht Off-Air Ad Battles 614
Choosing Media 615
MarkEtING INSIGht Playing Games with
Brands 618
MarkEtING MEMO Winning The Super
Bowl of Advertising 619
Evaluating Advertising Effectiveness 621
Sales Promotion 622
Advertising Versus Promotion 622
Major Decisions 623
Events and Experiences 626
Events Objectives 626
Major Sponsorship Decisions 627
MarkEtING MEMO Measuring
High- Performance Sponsorship
Programs 628
Creating Experiences 628
Public Relations 629
Marketing Public Relations 629
Major Decisions in Marketing PR 630
Summary 631
applications 632
MarkEtING ExCEllENCE
Evian 632
MarkEtING ExCEllENCE Gillette 634
Chapter 21 Managing Digital Communications:
Online, Social Media, and
Mobile 637
Online Marketing 637
Advantages and Disadvantages of Online
Marketing Communications 638
Online Marketing Communication
Options 639
MarkEtING MEMO How to Maximize the
Marketing Value of E-mails 642
Social Media 642
Social Media Platforms 643
Using Social Media 644
Word of Mouth 645
Forms of Word of Mouth 646
Creating Word-of-Mouth Buzz 646
MarkEtING MEMO How to Start a Buzz
Fire 648
MarkEtING INSIGht Tracking Online
Buzz 649
Measuring the Effects of Word of
Mouth 650
Mobile Marketing 650
The Scope of Mobile Marketing 650
Developing Effective Mobile Marketing
Programs 651
Mobile Marketing across Markets 651
Summary 652
applications 653
MarkEtING ExCEllENCE
Facebook 653
MarkEtING ExCEllENCE Unilever
(Axe and Dove) 654
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16
Chapter 22 Managing Personal Communications:
Direct and Database Marketing and
Personal Selling 657
Direct Marketing 657
The Benefits of Direct Marketing 658
Direct Mail 659
Catalog Marketing 660
Telemarketing 660
Other Media for Direct-Response
Marketing 661
Public and Ethical Issues in Direct
Marketing 661
Customer Databases and Database
Marketing 662
Customer Databases 662
Data Warehouses and Data Mining 662
The Downside of Database Marketing 664
Designing the Sales Force 664
Sales Force Objectives and Strategy 666
Sales Force Structure 667
MarkEtING INSIGht Major Account
Management 668
Sales Force Size 668
Sales Force Compensation 668
Managing the Sales Force 669
Recruiting and Selecting
Representatives 669
Training and Supervising Sales
Representatives 669
Sales Rep Productivity 670
Motivating Sales Representatives 670
Evaluating Sales Representatives 671
Principles of Personal Selling 673
The Six Steps 673
Relationship Marketing 674
Summary 675
applications 675
MarkEtING ExCEllENCE Progressive 676
MarkEtING ExCEllENCE Victoria’s
Secret 677
Part 8 Conducting Marketing
Responsibly for Long-term
Success 678
Chapter 23 Managing a Holistic Marketing
Organization for the Long Run 679
Trends in Marketing Practices 679
Internal Marketing 680
MarkEtING MEMO Characteristics of
Company Departments That Are Truly
Customer Driven 681
Organizing the Marketing Department 682
Relationships with Other Departments 684
Building a Creative Marketing
Organization 684
MarkEtING INSIGht The Marketing CEO 685
Socially Responsible Marketing 685
Corporate Social Responsibility 686
MarkEtING INSIGht The Rise of
Organic 689
Socially Responsible Business
Models 690
Cause-Related Marketing 690
MarkEtING MEMO Making a Difference:
Top 10 Tips for Cause Branding 693
Social Marketing 694
Marketing Implementation and Control 697
Marketing Implementation 697
Marketing Control 697
The Future of Marketing 702
MarkEtING MEMO Major Marketing
Weaknesses 703
Summary 705
applications 705
MarkEtING ExCEllENCE
Starbucks 706
MarkEtING ExCEllENCE Virgin
Group 707
appendix Tools for Marketing Control 709
appendix: Sonic Marketing Plan
and Exercises a1
Endnotes E1
Glossary G1
Name Index I1
Company, Brand, and
Organization Index I5
Subject Index I18
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17
Preface
What’s New in the 15th Edition
The 15th edition of Marketing Management is a landmark entry in the long successful history of the market
leader. With the 15th edition, great care was taken to provide an introductory guide to marketing management
that truly reflects the modern realities of marketing. In doing so, classic concepts, guidelines, and examples were
retained while new ones were added as appropriate. Three broad forces—globalization, technology, and social
responsibility—were identified as critical to the success of modern marketing programs. These three topics are
evident all through the text.
As has been the case for a number of editions now, the overriding goal of the revision for the 15th edition
of Marketing Management was to create as comprehensive, current, and engaging a MBA marketing textbook
as possible. Where appropriate, new material was added, old material was updated, and no longer relevant or
necessary material was deleted.
Even though marketing is changing in many significant ways these days, many core elements remain, and
we feel strongly that a balanced approach of classic and contemporary approaches and perspectives is the way
to go. Marketing Management, 15th edition, allows those instructors who have used the 14th edition to build
on what they have learned and done while at the same time offering a text that is unsurpassed in breadth,
depth, and relevance for students experiencing Marketing Management for the first time.
The successful across-chapter reorganization into eight parts that began with the 12th edition of Marketing
Management has largely been preserved, although several adjustments have been made to improve student
understanding, as described below. Many of the favorably received within-chapter features that have been
introduced through the years, such as topical chapter openers, in-text boxes highlighting noteworthy compa-
nies or issues, and the Marketing Insight and Marketing Memo boxes that provide in-depth conceptual and
practical commentary, have been retained.
Significant changes to the 15th edition include:
• Brand-new opening vignettes for each chapter set the stage for the chapter material to follow. By covering
topical brands or companies, the vignettes are great classroom discussion starters.
• Almost half of the in-text boxes are new. These boxes provide vivid illustrations of chapter concepts using
actual companies and situations. The boxes cover a variety of products, services, and markets, and many
have accompanying illustrations in the form of ads or product shots.
• Each end-of-chapter section now includes two expanded Marketing Excellence mini-cases highlighting
innovative, insightful marketing accomplishments by leading organizations. Each case includes questions
that promote classroom discussion and student analysis.
• The global chapter (8, previously Chapter 21) has been moved into Part 3 on Connecting with Customers
and the new products chapter (15, previously Chapter 20) has been moved into Part 5 on Creating Value.
The positioning and brand chapters (10 and 11) have been switched to allow for the conventional STP
sequencing. These moves permit richer coverage of the topics and better align with many instructors’
teaching strategy.
• A new chapter (21) titled Managing Digital Communications: Online, Social Media, and Mobile has been
added to better highlight that important topic. Significant attention is paid throughout the text to what a
new section in Chapter 1 calls “the digital revolution.”
• The concluding chapter (23) has been retitled “Managing a Holistic Marketing Organization for the Long
Run” and addresses corporate social responsibility, business ethics, and sustainability, among other topics.
• Chapter 12 (previously Chapter 11) has been retitled “Addressing Competition and Driving Growth” to
acknowledge the importance of growth to an organization.
What Is Marketing Management All About?
Marketing Management is the leading marketing text because its content and organization consistently reflect
changes in marketing theory and practice. The very first edition of Marketing Management, published in 1967,
introduced the concept that companies must be customer and market driven. But there was little mention of
A01_KOTL2621_15_GE_FM.INDD 17 3/9/15 4:38 PM
18
what have now become fundamental topics such as segmentation, targeting, and positioning. Concepts such
as brand equity, customer value analysis, database marketing, e-commerce, value networks, hybrid channels,
supply chain management, and integrated marketing communications were not even part of the marketing
vocabulary then. Marketing Management continues to reflect the changes in the marketing discipline over the
past almost 50 years.
Firms now sell goods and services through a variety of direct and indirect channels. Mass advertis-
ing is not nearly as effective as it was, so marketers are exploring new forms of communication, such as
experiential, entertainment, and viral marketing. Customers are telling companies what types of product
or services they want and when, where, and how they want to buy them. They are increasingly reporting to
other consumers what they think of specific companies and products—using e-mail, blogs, podcasts, and
other digital media to do so. Company messages are becoming a smaller fraction of the total “conversation”
about products and services.
In response, companies have shifted gears from managing product portfolios to managing customer
portfolios, compiling databases on individual customers so they can understand them better and construct
individualized offerings and messages. They are doing less product and service standardization and more
niching and customization. They are replacing monologues with customer dialogues. They are improving
their methods of measuring customer profitability and customer lifetime value. They are intent on measur-
ing the return on their marketing investment and its impact on shareholder value. They are also concerned
with the ethical and social implications of their marketing decisions.
As companies change, so does their marketing organization. Marketing is no longer a company depart-
ment charged with a limited number of tasks—it is a company-wide undertaking. It drives the company’s
vision, mission, and strategic planning. Marketing includes decisions like whom the company wants as
its customers, which of their needs to satisfy, what products and services to offer, what prices to set, what
communications to send and receive, what channels of distribution to use, and what partnerships to develop.
Marketing succeeds only when all departments work together to achieve goals: when engineering designs
the right products; finance furnishes the required funds; purchasing buys high-quality materials; produc-
tion makes high-quality products on time; and accounting measures the profitability of different customers,
products, and areas.
To address all these different shifts, good marketers are practicing holistic marketing. Holistic marketing
is the development, design, and implementation of marketing programs, processes, and activities that recog-
nize the breadth and interdependencies of today’s marketing environment. Four key dimensions of holistic
marketing are:
1. Internal marketing—ensuring everyone in the organization embraces appropriate marketing principles,
especially senior management.
2. Integrated marketing—ensuring that multiple means of creating, delivering, and communicating value
are employed and combined in the best way.
3. Relationship marketing—having rich, multifaceted relationships with customers, channel members, and
other marketing partners.
4. Performance marketing—understanding returns to the business from marketing activities and programs,
as well as addressing broader concerns and their legal, ethical, social, and environmental effects.
These four dimensions are woven throughout the book and at times spelled out explicitly. The text is
organized to specifically address the following eight tasks that constitute modern marketing management
in the 21st century:
1. Developing marketing strategies and plans
2. Capturing marketing insights
3. Connecting with customers
4. Building strong brands
5. Creating value
6. Delivering value
7. Communicating value
8. Conducting marketing responsibly for long-term success
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19
What Makes Marketing Management
the Marketing Leader?
Marketing is of interest to everyone, whether they are marketing goods, services, properties, persons, places,
events, information, ideas, or organizations. As it has maintained its respected position among students,
educators, and businesspeople, Marketing Management has kept up to date and contemporary. Students (and
instructors) feel that the book is talking directly to them in terms of both content and delivery.
Marketing Management owes its marketplace success to its ability to maximize three dimensions that
characterize the best marketing texts—depth, breadth, and relevance—as measured by the following criteria:
• Depth. Does the book have solid academic grounding? Does it contain important theoretical concepts,
models, and frameworks? Does it provide conceptual guidance to solve practical problems?
• Breadth. Does the book cover all the right topics? Does it provide the proper amount of emphasis on
those topics?
• Relevance. Does the book engage the reader? Is it interesting to read? Does it have lots of compelling
examples?
The 15th edition builds on the fundamental strengths of past editions that collectively distinguish it from
all other marketing management texts:
• Managerial orientation. The book focuses on the major decisions that marketing managers and top
management face in their efforts to harmonize the organization’s objectives, capabilities, and resources
with marketplace needs and opportunities.
• Analytical approach. Marketing Management presents conceptual tools and frameworks for analyz-
ing recurring problems in marketing management. Cases and examples illustrate effective marketing
principles, strategies, and practices.
• Multidisciplinary perspective. The book draws on the rich findings of various scientific disciplines—
economics, behavioral science, management theory, and mathematics—for fundamental concepts and
tools directly applicable to marketing challenges.
• Universal applications. The book applies strategic thinking to the complete spectrum of marketing:
products, services, persons, places, information, ideas, and causes; consumer and business markets; profit
and nonprofit organizations; domestic and foreign companies; small and large firms; manufacturing and
intermediary businesses; and low- and high-tech industries.
• Comprehensive and balanced coverage. Marketing Management covers all the topics an informed
marketing manager needs to understand to execute strategic, tactical, and administrative marketing.
Instructor Resources
At the Instructor Resource Center, www.pearsonglobaleditions.com/kotler, instructors can easily register to gain
access to a variety of instructor resources available with this text in downloadable format. If assistance is needed,
our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit
http://247.pearsoned.com for answers to frequently asked questions and toll-free user support phone numbers.
The following supplements are available with this text:
• Instructor’s Resource Manual
• Test Bank
• TestGen® Computerized Test Bank
• PowerPoint Presentation
• Image Library
A01_KOTL2621_15_GE_FM.INDD 19 3/9/15 4:38 PM
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acknowledgments
the 15th edition bears the imprint of many people. From Phil Kotler: My colleagues and associates at the Kellogg School of Management at Northwestern University continue to have an important impact on my thinking: Nidhi Agrawal, Eric T. Anderson, James C. Anderson, Robert C. Blattberg, Miguel C.
Brendl, Bobby J. Calder, Gregory S. Carpenter, Alex Chernev, Anne T. Coughlan, David Gal, Kent Grayson,
Karsten Hansen, Dipak C. Jain, Lakshman Krishnamurti, Angela Lee, Vincent Nijs, Yi Qian, Mohanbir S.
Sawhney, Louis W. Stern, Brian Sternthal, Alice M. Tybout, and Andris A. Zoltners. I also want to thank the S.
C. Johnson Family for the generous support of my chair at the Kellogg School. Completing the Northwestern
team are my former Deans, Donald P. Jacobs and Dipak Jain and my current Dean, Sally Blount, for provid-
ing generous support for my research and writing.
Several former faculty members of the marketing department had a great influence on my think-
ing: Steuart Henderson Britt, Richard M. Clewett, Ralph Westfall, Harper W. Boyd, Sidney J. Levy, John
Sherry, and John Hauser. I also want to acknowledge Gary Armstrong for our work on Principles of
Marketing.
I am indebted to the following coauthors of international editions of Marketing Management and
Principles of Marketing who have taught me a great deal as we worked together to adapt marketing manage-
ment thinking to the problems of different nations:
• Swee-Hoon Ang and Siew-Meng Leong, National University of Singapore
• Chin-Tiong Tan, Singapore Management University
• Friedhelm W. Bliemel, Universitat Kaiserslautern (Germany)
• Linden Brown; Stewart Adam, Deakin University; Suzan Burton: Macquarie Graduate School of
Management, and Sara Denize, University of Western Sydney (Australia)
• Bernard Dubois, Groupe HEC School of Management (France) and Delphine Manceau, ESCP-EAP
European School of Management
• John Saunders, Loughborough University and Veronica Wong, Warwick University (United Kingdom)
• Jacob Hornick, Tel Aviv University (Israel)
• Walter Giorgio Scott, Universita Cattolica del Sacro Cuore (Italy)
• Peggy Cunningham, Queen’s University (Canada)
I also want to acknowledge how much I have learned from working with coauthors on more special-
ized marketing subjects: Alan Andreasen, Christer Asplund, Paul N. Bloom, John Bowen, Roberta C.
Clarke, Karen Fox, David Gertner, Michael Hamlin, Thomas Hayes, Donald Haider, Hooi Den Hua, Dipak
Jain, Somkid Jatusripitak, Hermawan Kartajaya, Milton Kotler, Neil Kotler, Nancy Lee, Sandra Liu, Suvit
Maesincee, James Maken, Waldemar Pfoertsch, Gustave Rath, Irving Rein, Eduardo Roberto, Joanne Scheff,
Norman Shawchuck, Joel Shalowitz, Ben Shields, Francois Simon, Robert Stevens, Martin Stoller, Fernando
Trias de Bes, Bruce Wrenn, and David Young.
My overriding debt continues to be to my lovely wife, Nancy, who provided me with the time, support,
and inspiration needed to prepare this edition. It is truly our book.
From Kevin Lane Keller: I continually benefit from the wisdom of my marketing colleagues at Tuck—
Punam Keller, Scott Neslin, Kusum Ailawadi, Praveen Kopalle, Peter Golder, Ellie Kyung, Yaniv Dover,
Eesha Sharma, Fred Webster, Gert Assmus, and John Farley—as well as the leadership of Dean Paul Danos.
I also gratefully acknowledge the invaluable research and teaching contributions from my faculty colleagues
and collaborators through the years. I owe a considerable debt of gratitude to Duke University’s Jim Bettman
and Rick Staelin for helping to get my academic career started and serving as positive role models to this
day. I am also appreciative of all that I have learned from working with many industry executives who have
generously shared their insights and experiences. With this 15th edition, I received some extremely help-
ful research assistance from a talented group of Dartmouth undergraduate RAs—Caroline Buck, James
Carlson, Ryan Galloway, Jack Heise, Jeff Keller, Jill Lyon, Richard Newsome-White, Rahul Raina, and
Cameron Woodworth, —who were as accurate, thorough, dependable, and cheerful as you could possibly
imagine. Alison Pearson provided superb administrative support. Finally, I give special thanks to Punam,
my wife, and Carolyn and Allison, my daughters, who make it all happen and make it all worthwhile.
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21
We are indebted to the following colleagues at other universities who reviewed this new edition:
• Jennifer Barr, Richard Stockton College
• Lawrence Kenneth Duke, Drexel University LeBow College of Business
• Barbara S. Faries, Mission College, Santa Clara, CA
• William E. Fillner, Hiram College
• Frank J. Franzak,Virginia Commonwealth University
• Robert Galka, De Paul University
• Albert N. Greco, Fordham University
• John A. Hobbs, University of Oklahoma
• Brian Larson,Widener University
• Anthony Racka, Oakland Community College, Auburn
• Hills, MI
• Jamie Ressler, Palm Beach Atlantic University
• James E. Shapiro, University of New Haven
• George David Shows, Louisiana Tech University
We would also like to thank colleagues who have
reviewed previous editions of Marketing Management:
Homero Aguirre, TAMIU
Alan Au, University of Hong Kong
Hiram Barksdale, University of Georgia
Boris Becker, Oregon State University
Sandy Becker, Rutgers University
Parimal Bhagat, Indiana University of Pennsylvania
Sunil Bhatla, Case Western Reserve University
Michael Bruce, Anderson University
Frederic Brunel, Boston University
John Burnett, University of Denver
Lisa Cain, University of California at Berkeley and Mills
College
Surjit Chhabra, DePaul University
Yun Chu, Frostburg State University
Dennis Clayson, University of Northern Iowa
Bob Cline, University of Iowa
Brent Cunningham, Jacksonville State University
Hugh Daubek, Purdue University
John Deighton, University of Chicago
Kathleen Dominick, Rider University
Tad Duffy, Golden Gate University
Mohan Dutta, Purdue University
Barbara Dyer, University of North Carolina at Greensboro
Jackkie Eastman,Valdosta State University
Steve Edison, University of Arkansas–Little Rock
Alton Erdem, University of Houston at Clear Lake
Elizabeth Evans, Concordia University
Barb Finer, Suffolk University
Chic Fojtik, Pepperdine University
Renee Foster, Delta State University
Ralph Gaedeke, California State University, Sacramento
Robert Galka, De Paul University
Betsy Gelb, University of Houston at Clear Lake
Dennis Gensch, University of Wisconsin, Milwaukee
David Georgoff, Florida Atlantic University
Rashi Glazer, University of California, Berkeley
Bill Gray, Keller Graduate School of Management
Barbara Gross, California State University at Northridge
Lewis Hershey, Fayetteville State University
Thomas Hewett, Kaplan University
Mary Higby, University of Detroit–Mercy
Arun Jain, State University of New York, Buffalo
Michelle Kunz, Morehead State University
Eric Langer, Johns Hopkins University
Even Lanseng, Norwegian School of Management
Ron Lennon, Barry University
Michael Lodato, California Lutheran University
Henry Loehr, Pfeiffer University–Charlotte
Bart Macchiette, Plymouth University
Susan Mann, Bluefield State College
Charles Martin,Wichita State University
H. Lee Matthews, Ohio State University
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22
Paul McDevitt, University of Illinois at Springfield
Mary Ann McGrath, Loyola University, Chicago
John McKeever, University of Houston
Kenneth P. Mead, Central Connecticut State University
Henry Metzner, University of Missouri, Rolla
Robert Mika, Monmouth University
Mark Mitchell, Coastal Carolina University
Francis Mulhern, Northwestern University
Pat Murphy, University of Notre Dame
Jim Murrow, Drury College
Zhou Nan, University of Hong Kong
Nicholas Nugent, Boston College
Nnamdi Osakwe, Bryant & Stratton College
Donald Outland, University of Texas, Austin
Albert Page, University of Illinois, Chicago
Young-Hoon Park, Cornell University
Koen Pauwels, Dartmouth College
Lisa Klein Pearo, Cornell University
Keith Penney, Webster University
Patricia Perry, University of Alabama
Mike Powell, North Georgia College and State University
Hank Pruden, Golden Gate University
Christopher Puto, Arizona State University
Abe Qstin, Lakeland University
Lopo Rego, University of Iowa
Richard Rexeisen, University of St. Thomas
William Rice, California State University–Fresno
Scott D. Roberts, Northern Arizona University
Bill Robinson, Purdue University
Robert Roe, University of Wyoming
Jan Napoleon Saykiewicz, Duquesne University
Larry Schramm, Oakland University
Alex Sharland, Hofstra University
Dean Siewers, Rochester Institute of Technology
Anusorn Singhapakdi, Old Dominion University
Jim Skertich, Upper Iowa University
Allen Smith, Florida Atlantic University
Joe Spencer, Anderson University
Mark Spriggs, University of St. Thomas
Nancy Stephens, Arizona State University
Michael Swenso, Brigham Young University, Marriott
School
Thomas Tellefsen, The College of Staten Island–CUNY
Daniel Turner, University of Washington
Sean Valentine, University of Wyoming
Ann Veeck, West Michigan University
R.Venkatesh, University of Pittsburgh
Edward Volchok, Stevens Institute of Management
D. J. Wasmer, St. Mary-of-the-Woods College
Zac Williams, Mississippi State University
Greg Wood, Canisius College
Kevin Zeng Zhou, University of Hong Kong
A warm welcome and many thanks to the following
people who contributed to the global case studies developed
for the 14th edition:
Mairead Brady, Trinity College
John R. Brooks, Jr., Houston Baptist University
Sylvain Charlebois, University of Regina
Geoffrey da Silva, Temasek Business School
Malcolm Goodman, Durham University
Torben Hansen, Copenhagen Business School
Abraham Koshy, Sanjeev Tripathi, and Abhishek, Indian
Institute of Management Ahmedabad
Peter Ling, Edith Cowan University
Marianne Marando, Seneca College
Lu Taihong, Sun Yat-Sen University
A01_KOTL2621_15_GE_FM.INDD 22 3/9/15 4:38 PM
The talented staff at Pearson deserves praise for their role in shaping the 15th edition. We want to thank
our editor, Mark Gaffney, for his contribution to this revision, as well as our program manager, Jennifer
M. Collins. We also want to thank our project manager, Becca Groves, for making sure everything was
moving along and falling into place in such a personable way, both with regard to the book and supple-
ments. We benefited greatly from the superb editorial help of Elisa Adams, who lent her considerable talents
as a development editor to this edition. We also thank our marketing managers, Anne Fahlgren and Lenny
Ann Raper. Certainly, we are grateful for the editorial support provided by Daniel Petrino. Lastly, we’d like
to thank the following MyLab contributors: Susan C. Schanne, School of Management, Eastern Michigan
University, and Barbara S. Faries, MBA, Mission College, Santa Clara.
Philip Kotler
S. C. Johnson Distinguished Professor of International Marketing,
Kellogg School of Management,
Northwestern University,
Evanston, Illinois
Kevin Lane Keller
E. B. Osborn Professor of Marketing,
Tuck School of Business,
Dartmouth College,
Hanover, New Hampshire
23
Pearson would like to thank and acknowledge the following
people for their work on the Global Edition:
Contributors
Andrea Rumler, Berlin School of Economics and Law,
Germany
Abderrahman Hassi, Al Akhawayn University, Morocco
Afifa Bouguerra, University of Toulouse, France
Bouchra Hamelin, Al Akhawayn University, Morocco
Abdelhamid Bennani Bouchiba, Al Akhawayn University,
Morocco
Muneeza Shoaib, Middlesex University Dubai, UAE
Reviewers
Naila Aaijaz, International Professors Project
Frances Ekwulungo, University of Westminster, UK
Michael Gründ, Zurich University of Applied Sciences in
Business Administration, Switzerland
Mohamed Dahlan Ibrahim, Universiti Malaysia Kelantan,
Malaysia
Jawahitha Sarabdeen, University of Wollongong in Dubai,
UAE
A01_KOTL2621_15_GE_FM.INDD 23 3/9/15 4:38 PM
24
In This Chapter, We Will Address
the Following Questions
1. Why is marketing important? (p. 25)
2. What is the scope of marketing? (p. 27)
3. What are some core marketing concepts? (p. 31)
4. What forces are defining the new marketing realities? (p. 35)
5. What new capabilities have these forces given consumers and
companies? (p. 38)
6. What does a holistic marketing philosophy include? (p. 42)
7. What tasks are necessary for successful marketing management? (p. 49)
Understanding Marketing ManagementPart 1
Unilever is fundamentally changing how
it is doing its marketing, including putting
more emphasis on developing markets.
Source: Bloomberg via Getty Images
Chapter 1 Defining Marketing for the New Realities
Chapter 2 Developing Marketing Strategies and Plans
Improve Your Grade!
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M01_KOTL2621_15_GE_C01.indd 24 03/03/15 1:59 PM
mymktlab.com
25
The Value of Marketing
Finance, operations, accounting, and other business functions won’t really matter without sufficient demand for
products and services so the firm can make a profit. In other words, there must be a top line for there to be a
bottom line. Thus, financial success often depends on marketing ability. Marketing’s value extends to society as a
whole. It has helped introduce new or enhanced products that ease or enrich people’s lives. Successful marketing
builds demand for products and services, which, in turn, creates jobs. By contributing to the bottom line, success-
ful marketing also allows firms to more fully engage in socially responsible activities.2
MarketInG DecIsIon MakInG
CEOs recognize that marketing builds strong brands and a loyal customer base, intangible assets that contrib-
ute heavily to the value of a firm.3 Many firms, even service and nonprofit, now have a chief marketing officer
(CMO) to put marketing on a more equal footing with other C-level executives such as the chief financial
officer (CFO) or chief information officer (CIO).4
Good marketing is no accident. It is both an art and
a science, and it results from careful planning and execution
using state-of-the-art tools and techniques. In this book, we
describe how skillful marketers are updating classic practices
and inventing new ones to find creative, practical solutions
to new marketing realities. In the first chapter, we lay our
foundation by reviewing important marketing concepts, tools,
frameworks, and issues.
Formally and informally, people and organizations engage in a vast number of activities
we can call marketing. In the face of a digital revolution and other major changes in the business environment,
good marketing today is both increasingly vital and radically new. Consider Unilever.1
Under the leadership of ex-P&G marketing executive Paul Polman and marketing whiz Keith
Weed, Unilever is steering in an aggressive new direction. Its new marketing model “Crafting
Brands for Life” establishes social, economic, and product missions for each brand, including
Dove, Ben & Jerry’s, Lifebuoy, and Knorr. Polman states, “I have a vision of all of our brands being
a force for good, with each having over a billion fans or more to help drive change.” One part of
the mission, for instance, is sustainability—specifically, to halve its ecological footprint while doubling revenues.
To improve advertising and marketing communications, it aims to strike a balance between “magic” and “logic,”
doubling marketing training expenditures and emphasizing ad research. To better understand the digital world,
CMO Weed took 26 top marketing executives to Silicon Valley to visit Google, Facebook, and Hulu and led a similar
group to visit Hollywood executives at Disney and Universal. Unile-
ver has set its sights on developing and emerging (D&E) markets,
hoping to grow 15 percent to 20 percent annually in China and to
draw 70 percent to 75 percent of business from D&E markets by
2020. The company has also adopted “reverse innovation” by apply-
ing branding and packaging innovations from developing markets to
recession-hit developed markets. In Spain, it now sells Surf deter-
gent in five-wash packs. In Greece, it offers mashed potatoes and
mayonnaise in small packages.
Defining Marketing
for the New Realities
1
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26 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
In an Internet-fueled environment where consumers, competition, technology, and economic forces change
rapidly and consequences quickly multiply, marketers must choose features, prices, and markets and decide how
much to spend on advertising, sales, and online and mobile marketing. Meanwhile, the economic downturn that
began globally in 2008 and the sluggish recovery since have brought budget cuts and intense pressure to make every
marketing dollar count.
There is little margin for error in marketing. Just a short time ago, MySpace, Yahoo!, Blockbuster, and Barnes
& Noble were admired leaders in their industries. What a difference a few years can make! Each of these brands
has been completely overtaken by an upstart challenger—Facebook, Google, Netflix, and Amazon—and they now
struggle, sometimes unsuccessfully, for mere survival. Firms must constantly move forward. At greatest risk are
those that fail to carefully monitor their customers and competitors, continuously improve their value offerings
and marketing strategies, or satisfy their employees, stockholders, suppliers, and channel partners in the process.
WInnInG MarketInG
Skillful marketing is a never-ending pursuit, but some businesses are adapting and thriving in these changing
times. Consider American Express. 5
AMericAn exPress: sMALL Business sAturdAy Launched in 2010 via
radio and TV ads, social media, and PR, American Express’s Small Business Saturday program encouraged people to shop
at smaller, local retailers on the Saturday after Thanksgiving. Among businesses that participated, sales rose 28 percent.
In 2012, American Express provided social media marketing kits, e-mail templates, and signage to help spread the word.
More than 350 small business organizations supported the initiative, more than 3 million users “liked” the Small Business
Saturday Facebook page, and 213,000 related tweets were posted on Twitter. President Obama tweeted, “Today, sup-
port small businesses in your community by shopping at your favorite store” and took his daughters to local bookstores.
American Express cardholders got a $25 rebate for shopping at local, independent stores on Small Business Saturday. The
company reported a roughly 21 percent increase in transactions for both 2011 and 2012 due to the program.
Other top marketers are following suit. Using a Web-only campaign, BMW claimed a $110 million revenue gain
for its 1-series. More than 3 million people saw a five-video teaser campaign, and 20,000 gave their contact details.
BMW also targeted influential bloggers and used feedback from social media as input to styling and sales forecasts.6
Even business-to-business firms are getting into the action. Corning has struggled transcending its reputa-
tion as sellers of Pyrex cookware—a business it sold more than a decade ago—to its current status as makers
of highly engineered specialty glass and ceramic products. To expand the vision on Wall Street as a company
with a rich portfolio, Corning created a YouTube video, “A Day Made of Glass . . . Made Possible by Corning.”
Unconventionally long but beautifully put together, within three weeks it attracted more than a million views.
Much of the social conversation it created revolved around themes of glass, product toughness, and hope for the
future—exactly what Corning wanted.7
So
ur
ce
: W
ire
Im
ag
e
fo
r A
m
er
ic
an
E
xp
re
ss
American Express’ Small
Business Saturday has struck a
chord with consumers, including
TV celebrity Katie Couric.
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defining MARkeTing foR The new ReAliTies | chapter 1 27
The Scope of Marketing
To be a marketer, you need to understand what marketing is, how it works, who does it, and what is marketed.
What Is MarketInG?
Marketing is about identifying and meeting human and social needs. One of the shortest good definitions of
marketing is “meeting needs profitably.” When Google recognized that people needed to more effectively and
efficiently access information on the Internet, it created a powerful search engine that organized and prioritized
queries. When IKEA noticed that people wanted good furnishings at substantially lower prices, it created knock-
down furniture. These two firms demonstrated marketing savvy and turned a private or social need into a profit-
able business opportunity.
The American Marketing Association offers the following formal 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.8 Coping with these exchange processes calls for a considerable
amount of work and skill. Marketing management takes place when at least one party to a potential exchange
thinks about the means of achieving desired responses from other parties. Thus, we see marketing management
as the art and science of choosing target markets and getting, keeping, and growing customers through creating,
delivering, and communicating superior customer value.
We can distinguish between a social and a managerial definition of marketing. A social definition shows the
role marketing plays in society; for example, one marketer has said that marketing’s role is to “deliver a higher
standard of living.” Here is a social definition that serves our purpose: Marketing is a societal process by which
individuals and groups obtain what they need and want through creating, offering, and freely exchanging products
and services of value with others. Cocreation of value among consumers and with businesses and the importance
of value creation and sharing have become important themes in the development of modern marketing thought.9
Managers sometimes think of marketing as “the art of selling products,” but many people are surprised
when they hear that selling is not the most important part of marketing! Selling is only the tip of the marketing
iceberg. Peter Drucker, famed management theorist, put it this way:10
There will always, one can assume, be need for some selling. But the aim of marketing is to make selling
superfluous. The aim of marketing is to know and understand the customer so well that the product or
service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy. All that
should be needed then is to make the product or service available.
When Nintendo designed its Wii game system, when Apple launched its iPad tablet computer, and when Toyota
introduced its Prius hybrid automobile, these manufacturers were swamped with orders because they had designed
the right product, based on careful marketing homework about consumers, competition, and all the external fac-
tors that affect cost and demand.
What Is MarketeD?
Marketers market 10 main types of entities: goods, services, events, experiences, persons, places, properties, orga-
nizations, information, and ideas. Let’s take a quick look at these categories.
Goods Physical goods constitute the bulk of most countries’ production and marketing efforts. Each year, U.S.
companies market billions of fresh, canned, bagged, and frozen food products and millions of cars, refrigerators,
televisions, machines, and other mainstays of a modern economy.
services As economies advance, a growing proportion of their activities focuses on the production of
services. The U.S. economy today produces a services-to-goods mix of roughly two-thirds to one-third.11 Services
include the work of airlines, hotels, car rental firms, barbers and beauticians, maintenance and repair people, and
accountants, bankers, lawyers, engineers, doctors, software programmers, and management consultants. Many
market offerings mix goods and services, such as a fast-food meal.
events Marketers promote time-based events, such as major trade shows, artistic performances, and company
anniversaries. Global sporting events such as the Olympics and the World Cup are promoted aggressively to
companies and fans. Local events include craft fairs, bookstore readings, and farmer’s markets.
experiences By orchestrating several services and goods, a firm can create, stage, and market experiences.
Walt Disney World’s Magic Kingdom lets customers visit a fairy kingdom, a pirate ship, or a haunted house.
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28 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
Customized experiences include a week at a baseball camp with retired baseball greats, a four-day rock and roll
fantasy camp, and a climb up Mount Everest.
persons Artists, musicians, CEOs, physicians, high-profile lawyers and financiers, and other professionals
often get help from marketers.12 Many athletes and entertainers have done a masterful job of marketing
themselves—NFL quarterback Peyton Manning, talk show veteran Oprah Winfrey, and rock and roll legends The
Rolling Stones. Management consultant Tom Peters, himself a master at self-branding, has advised each person to
become a “brand.”
places Cities, states, regions, and whole nations compete to attract tourists, residents, factories, and company
headquarters.13 Place marketers include economic development specialists, real estate agents, commercial banks,
local business associations, and advertising and public relations agencies. The Las Vegas Convention & Visitors
Authority has met with much success with its provocative ad campaign “What Happens Here, Stays Here,”
portraying Las Vegas as “an adult playground.”
properties Properties are intangible rights of ownership to either real property (real estate) or financial
property (stocks and bonds). They are bought and sold, and these exchanges require marketing. Real estate
agents work for property owners or sellers, or they buy and sell residential or commercial real estate. Investment
companies and banks market securities to both institutional and individual investors.
orGanizations Museums, performing arts organizations, corporations, and nonprofits all use marketing
to boost their public images and compete for audiences and funds. Some universities have created chief marketing
officer (CMO) positions to better manage their school identity and image, via everything from admission
brochures and Twitter feeds to brand strategy.14
So
ur
ce
: ©
M
cC
la
tc
hy
-T
rib
un
e
In
fo
rm
at
io
n
Se
rv
ic
es
/A
la
m
y
The pageantry of the Olympics,
shown here in Sochi, Russia,
adds to its marketability.
Oprah Winfrey has built a
personal brand worth billions
which she has used across
many lines of business.
So
ur
ce
: C
hr
is
P
iz
ze
llo
/I
nv
is
io
n/
A
P
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defining MARkeTing foR The new ReAliTies | chapter 1 29
information Information is essentially what books, schools, and universities produce, market, and
distribute at a price to parents, students, and communities. Firms make business decisions using information
supplied by organizations like Thomson Reuters: “We combine industry expertise with innovative technology
to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare,
science and media markets, powered by the world’s most trusted news organization.”15
ideas Every market offering includes a basic idea. Charles Revson of Revlon once observed: “In the factory we
make cosmetics; in the drugstore we sell hope.” Products and services are platforms for delivering some idea or
benefit. Social marketers promote such ideas as “Friends Don’t Let Friends Drive Drunk” and “A Mind Is a Terrible
Thing to Waste.”
Who Markets?
marketers and prospects A marketer is someone who seeks a response—attention, a purchase, a
vote, a donation—from another party, called the prospect. If two parties are seeking to sell something to each
other, we call them both marketers.
Marketers are skilled at stimulating demand for their products, but that’s a limited view of what they do. They
also seek to influence the level, timing, and composition of demand to meet the organization’s objectives. Eight
demand states are possible:
1. Negative demand—Consumers dislike the product and may even pay to avoid it.
2. Nonexistent demand—Consumers may be unaware of or uninterested in the product.
3. Latent demand—Consumers may share a strong need that cannot be satisfied by an existing product.
4. Declining demand—Consumers begin to buy the product less frequently or not at all.
5. Irregular demand—Consumer purchases vary on a seasonal, monthly, weekly, daily, or even hourly basis.
6. Full demand—Consumers are adequately buying all products put into the marketplace.
7. Overfull demand—More consumers would like to buy the product than can be satisfied.
8. Unwholesome demand—Consumers may be attracted to products that have undesirable social consequences.
In each case, marketers must identify the underlying cause(s) of the demand state and determine a plan of
action to shift demand to a more desired state.
markets Traditionally, a “market” was a physical place where buyers and sellers gathered to buy and sell
goods. Economists describe a market as a collection of buyers and sellers who transact over a particular product or
product class (such as the housing market or the grain market).
Five basic markets and their connecting flows are shown in Figure 1.1. Manufacturers go to resource markets
(raw material markets, labor markets, money markets), buy resources and turn them into goods and services, and
sell finished products to intermediaries, who sell them to consumers. Consumers sell their labor and receive money
with which they pay for goods and services. The government collects tax revenues to buy goods from resource,
Taxes,
goods
Services,
money
Services,
money
Money
Goods and services
Money
Goods and services
Services,
money Taxes
Taxes, goods Services
Taxes,
goods
Resources
Money
Resources
Money
Resource
markets
Consumer
markets
Manufacturer
markets
Intermediary
markets
Government
markets
| Fig. 1.1 |
Structure of Flows in
a Modern Exchange
Economy
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30 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
manufacturer, and intermediary markets and uses these goods and services to provide public services. Each nation’s
economy, and the global economy, consists of interacting sets of markets linked through exchange processes.
Marketers view sellers as the industry and use the term market to describe customer groups. They talk about
need markets (the diet-seeking market), product markets (the shoe market), demographic markets (the “millennium”
youth market), geographic markets (the Chinese market), or voter markets, labor markets, and donor markets.
Figure 1.2 shows how sellers and buyers are connected by four flows. Sellers send goods and services and com-
munications such as ads and direct mail to the market; in return they receive money and information such as cus-
tomer attitudes and sales data. The inner loop shows an exchange of money for goods and services; the outer loop
shows an exchange of information.
key customer markets Consider the following key customer markets: consumer, business, global, and
nonprofit.
Consumer Markets Companies selling mass consumer goods and services such as juices, cosmetics, athletic
shoes, and air travel establish a strong brand image by developing a superior product or service, ensuring its
availability, and backing it with engaging communications and reliable performance.
Business Markets Companies selling business goods and services often face well-informed professional buyers
skilled at evaluating competitive offerings. Advertising and Web sites can play a role, but the sales force, the price,
and the seller’s reputation may play a greater one.
Global Markets Companies in the global marketplace navigate cultural, language, legal, and political differences
while deciding which countries to enter, how to enter each (as exporter, licenser, joint venture partner, contract
manufacturer, or solo manufacturer), how to adapt product and service features to each country, how to set prices,
and how to communicate in different cultures.
Nonprofit and Governmental Markets Companies selling to nonprofit organizations with limited purchasing
power such as churches, universities, charitable organizations, and government agencies need to price carefully.
Much government purchasing requires bids; buyers often focus on practical solutions and favor the lowest bid,
other things equal.16
Money
Information
Goods/services
Communication
Market
(a collection of buyers)
Industry
(a collection of sellers)
| Fig. 1.2 |
A Simple Marketing
System
So
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ce
: ©
T
ra
ve
l P
ic
tu
re
s/
A
la
m
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Governments are a key customer
market for many companies.
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defining MARkeTing foR The new ReAliTies | chapter 1 31
Core Marketing Concepts
To understand the marketing function, we need to understand the following core set of concepts (see Table 1.1).
neeDs, Wants, anD DeManDs
Needs are the basic human requirements such as for air, food, water, clothing, and shelter. Humans also have strong
needs for recreation, education, and entertainment. These needs become wants when directed to specific objects that
might satisfy the need. A U.S. consumer needs food but may want a Chicago-style “deep-dish” pizza and a craft beer. A
person in Afghanistan needs food but may want rice, lamb, and carrots. Our wants are shaped by our society.
Demands are wants for specific products backed by an ability to pay. Many people want a Mercedes; only a few
can buy one. Companies must measure not only how many people want their product, but also how many are will-
ing and able to buy it.
These distinctions shed light on the criticism that “marketers get people to buy things they don’t want.”
Marketers do not create needs: Needs pre-exist marketers. Marketers might promote the idea that a Mercedes satis-
fies a person’s need for social status. They do not, however, create the need for social status.
Some customers have needs of which they are not fully conscious or cannot articulate. What does the customer
mean in asking for a “powerful” lawn mower or a “peaceful” hotel? The marketer must probe further. We can distin-
guish five types of needs:
1. Stated needs (The customer wants an inexpensive car.)
2. Real needs (The customer wants a car whose operating cost, not initial price, is low.)
3. Unstated needs (The customer expects good service from the dealer.)
4. Delight needs (The customer would like the dealer to include an onboard GPS system.)
5. Secret needs (The customer wants friends to see him or her as a savvy consumer.)
Responding only to the stated need may shortchange the customer.17 Consumers did not know much about
tablet computers when they were first introduced, but Apple worked hard to shape consumer perceptions of
them. To gain an edge, companies must help customers learn what they want.
tarGet Markets, PosItIonInG, anD seGMentatIon
Not everyone likes the same cereal, restaurant, university, or movie. Marketers therefore identify distinct segments
of buyers by identifying demographic, psychographic, and behavioral differences between them. They then decide
which segment(s) present the greatest opportunities. For each of these target markets, the firm develops a market
table 1.1 Core Marketing Concepts
Needs, Wants, and Demands
Target Markets, Positioning, and Segmentation
Offerings and Brands
Marketing Channels
Paid, Owned, and Earned Media
Impressions and Engagement
Value and Satisfaction
Supply Chain
Competition
Marketing Environment
M01_KOTL2621_15_GE_C01.indd 31 03/03/15 2:00 PM
opportunities.For
32 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
offering that it positions in target buyers’ minds as delivering some key benefit(s). Volvo develops its cars for the
buyer to whom safety is a major concern, positioning them as the safest a customer can buy. Porsche targets buyers
who seek pleasure and excitement in driving and want to make a statement about their wheels.
offerInGs anD BranDs
Companies address customer needs by putting forth a value proposition, a set of benefits that satisfy those
needs. The intangible value proposition is made physical by an offering, which can be a combination of products,
services, information, and experiences.
A brand is an offering from a known source. A brand name such as Apple carries many different kinds of
associations in people’s minds that make up its image: creative, innovative, easy-to-use, fun, cool, iPod, iPhone, and
iPad to name just a few. All companies strive to build a brand image with as many strong, favorable, and unique
brand associations as possible.
MarketInG channels
To reach a target market, the marketer uses three kinds of marketing channels. Communication channels deliver
and receive messages from target buyers and include newspapers, magazines, radio, television, mail, telephone,
smart phone, billboards, posters, fliers, CDs, audiotapes, and the Internet. Beyond these, firms communicate
through the look of their retail stores and Web sites and other media, adding dialogue channels such as e-mail,
blogs, text messages, and URLs to familiar monologue channels such as ads.
Distribution channels help display, sell, or deliver the physical product or service(s) to the buyer or user. These
channels may be direct via the Internet, mail, or mobile phone or telephone or indirect with distributors, wholesal-
ers, retailers, and agents as intermediaries.
To carry out transactions with potential buyers, the marketer also uses service channels that include warehouses,
transportation companies, banks, and insurance companies. Marketers clearly face a design challenge in choosing
the best mix of communication, distribution, and service channels for their offerings.
PaID, oWneD, anD earneD MeDIa
The rise of digital media gives marketers a host of new ways to interact with consumers and customers. We
can group communication options into three categories.18 Paid media include TV, magazine and display ads,
paid search, and sponsorships, all of which allow marketers to show their ad or brand for a fee. Owned media
are communication channels marketers actually own, like a company or brand brochure, Web site, blog,
Facebook page, or Twitter account. Earned media are streams in which consumers, the press, or other outsid-
ers voluntarily communicate something about the brand via word of mouth, buzz, or viral marketing meth-
ods. The emergence of earned media has allowed some companies, such as Chipotle, to reduce paid media
expenditures.19
chiPOtLe One of the fastest-growing restaurant chains over the last decade, Chipotle is commit-
ted to fresh food. The company supports family farms and sources sustainable ingredients from local growers who
behave responsibly toward animals and the environment. It has over 1,600 stores and over 1.7 million social media
fans–yet spends next to nothing on traditional paid media. Instead Chipotle engages customers through Facebook,
Twitter, and other social media via its grassroots “Food With Integrity” digital strategy which puts the focus on what
it sells and where it comes from. As CMO Mark Crumpacker notes, “Typically, fast-food marketing is a game of
trying to obscure the truth. The more people know about most fast-food companies, the less likely they’d want to be
a customer.” YouTube videos with country legend Willie Nelson and indie rocker Karen O from the Yeah Yeah Yeahs
musically made Chipotle’s case against processed foods and the industrialization of family farms.
IMPressIons anD enGaGeMent
Marketers now think of three “screens” or means to reach consumers: TV, Internet, and mobile. Surprisingly, the
rise of digital options did not initially depress the amount of TV viewing, in part because, as one Nielsen study
found, three of five consumers use two screens at once.20
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defining MARkeTing foR The new ReAliTies | chapter 1 33
Impressions, which occur when consumers view a communication, are a useful metric for tracking the scope or
breadth of a communication’s reach that can also be compared across all communication types. The downside is
that impressions don’t provide any insight into the results of viewing the communication.
Engagement is the extent of a customer’s attention and active involvement with a communication. It reflects a
much more active response than a mere impression and is more likely to create value for the firm. Some online
measures of engagements are Facebook “likes,” Twitter tweets, comments on a blog or Web site, and sharing
of video or other content. Engagement can extend to personal experiences that augment or transform a firm’s
products and services.
Value anD satIsfactIon
The buyer chooses the offerings he or she perceives to deliver the most value, the sum of the tangible and
intangible benefits and costs. Value, a central marketing concept, is primarily a combination of quality, service,
and price (qsp), called the customer value triad. Value perceptions increase with quality and service but decrease
with price.
We can think of marketing as the identification, creation, communication, delivery, and monitoring of customer
value. Satisfaction reflects a person’s judgment of a product’s perceived performance in relationship to expectations. If
performance falls short of expectations, the customer is disappointed. If it matches expectations, the customer is satis-
fied. If it exceeds them, the customer is delighted.
suPPlY chaIn
The supply chain is a channel stretching from raw materials to components to finished products carried to final
buyers. As Figure 1.3 shows, the supply chain for coffee may start with Ethiopian farmers who plant, tend, and
pick the coffee beans and sell their harvest. If sold through a Fair Trade cooperative, the coffee is washed, dried,
and packaged for shipment by an Alternative Trading Organization (ATO) that pays a minimum of $1.26 a
pound. The ATO transports the coffee to the developed world where it can sell it directly or via retail channels.
Each company in the chain captures only a certain percentage of the total value generated by the supply chain’s
value delivery system. When a company acquires competitors or expands upstream or downstream, its aim is to
capture a higher percentage of supply chain value.
Problems with a supply chain can be damaging or even fatal for a business. When Johnson & Johnson
ran into manufacturing problems with its consumer products unit (which makes Tylenol and other prod-
ucts), it hired away from Bayer AG a top executive known for her skill at fixing consumer and supply chain
problems.21
Chipotle found marketplace
success with little paid media,
focusing on social media to tell
its story of “Food With Integrity.”
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34 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
coMPetItIon
Competition includes all the actual and potential rival offerings and substitutes a buyer might consider. An
automobile manufacturer can buy steel from U.S. Steel in the United States, from a foreign firm in Japan or Korea,
or from a mini-mill such as Nucor at a cost savings, or it can buy aluminum parts from Alcoa to reduce the car’s
weight or engineered plastics from Saudi Basic Industries Corporation (SABIC) instead of steel. Clearly, U.S. Steel
is more likely to be hurt by substitute products than by other integrated steel companies and would be defining its
competition too narrowly if it didn’t recognize this.
MarketInG enVIronMent
The marketing environment consists of the task environment and the broad environment. The task environ-
ment includes the actors engaged in producing, distributing, and promoting the offering. These are the company,
suppliers, distributors, dealers, and target customers. In the supplier group are material suppliers and service
suppliers, such as marketing research agencies, advertising agencies, banking and insurance companies, transpor-
tation companies, and telecommunications companies. Distributors and dealers include agents, brokers, manufac-
turer representatives, and others who facilitate finding and selling to customers.
The broad environment consists of six components: demographic environment, economic environment,
social-cultural environment, natural environment, technological environment, and political-legal environ-
ment. Marketers must pay close attention to the trends and developments in these and adjust their marketing
strategies as needed. New opportunities are constantly emerging that await the right marketing savvy and
ingenuity. Consider Pinterest.22
Pinterest One of the fastest-growing social media sites ever–its surpassed 10 million monthly
unique U.S. visitors in January 2012 and doubled that just four months later–Pinterest is a visual bookmarking tool
that lets users collect and share images of projects or products on digital scrapbooks or “pinboards.” Especially
popular with women planning weddings, saving recipes, and designing kitchen upgrades, Pinterest has driven
more traffic to websites in a month than Twitter, Google+, LinkedIn, and YouTube combined. Part of its appeal is
its unique customizable grid of images. Pinterest’s sweet spot is that users are often in a shopping mindset; one
study showed almost 70% of online purchasers who found a product via Pinterest went on to buy, compared to
40% for Facebook. Brands from Dell and Mercedes-Benz to Peanut Butter & Co. and Zombie SAK are integrat-
ing the site into their social media strategies. Nevertheless, Pinterest is still exploring how to best monetize its
business venture.
Coffee is sold
directly or via
retail channels
Ethiopian farmers
grow and harvest
coffee beans
Farmers sell the
beans to Fair Trade
cooperative
Coffee is washed,
dried, and
packaged for
shipment
Alternative Trading
Organization
transports beans to
developed world
| Fig. 1.3 |
The Supply Chain
for Coffee
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defining MARkeTing foR The new ReAliTies | chapter 1 35
The New Marketing Realities
The marketplace is dramatically different from even 10 years ago, with new marketing behaviors, opportunities,
and challenges emerging. In this book we focus on three transformative forces: technology, globalization, and
social responsibility.
technoloGY
The pace of change and the scale of technological achievement can be staggering. The number of mobile phones
in India recently exceeded 500 million, Facebook’s monthly users passed 1 billion, and more than half of African
urban residents were able to access the Internet monthly.23
With the rapid rise of e-commerce, the mobile Internet, and Web penetration in emerging markets, the
Boston Consulting Group believes brand marketers must enhance their “digital balance sheets.” 24 Massive
amounts of information and data about almost everything are now available to consumers and marketers. In
fact, technology research specialists Gartner predicts that by 2017, CMOs will spend more time on information
technology (IT) than chief information officers (CIOs). Aetna’s CMO and CIO have already collaborated suc-
cessfully for years, launching new products and services including iTriage, a popular health app for the iPhone.
With iTriage, users can research ailments, find nearby physicians, and learn about prescribed medicines.25
Procter & Gamble (P&G) is determined to stay ahead of technology trends.26
P&G P&G uses the latest Web-based tools in all 80 countries where it sells products: ubiquitous high-speed
networking, data visualization, and high-speed analysis of multiple information streams. In 40 locations worldwide, a mas-
sive business sphere can display real-time market share, profits, and prices by country, region, brand, and product. Tide
laundry detergent has a dedicated “news desk” that monitors social media chatter and joins in when relevant. When Tide
was used to clean up a nasty fuel spill in a NASCAR race, the brand ran social media ads with real news footage within
72 hours. P&G looks at a wide range of technology applications. One pilot study showed that field salespeople increased
revenue 1.5 percent merely by using iPads to show store customers the layouts of different floor displays.
Pinterest has tapped into
consumer desire to collect
and share personally relevant
images online.
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36 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
The old credo “information is power” is giving way to the new idea that “sharing information is power.”27
Software giant SAP’s online community numbers more than 2 million customers, partners, and others. Once a
year, 100 are chosen to contribute ideas to product development.28
At the other end of the size spectrum, by running Facebook ads offering a free cut, shampoo, and hot towel
treatment to new customers in exchange for name, phone number, e-mail address, and preferred social network,
The Gent’s Place barbershop in Frisco, TX, has picked up 5,000 clients. Its average marketing cost for each was
$10.13, which it quickly recoups from repeat purchases.29
Even traditional marketing activities are profoundly affected by technology. To improve sales force effectiveness,
drug maker Roche decided to issues iPads to its entire sales team. Though the company had a sophisticated cus-
tomer relationship management (CRM) software system before, it still depended on sales reps to accurately input
data in a timely fashion, which unfortunately did not always happen. With iPads, however, sales teams can do
real-time data entry, improving the quality of the data entered while freeing up time for other tasks.30
GloBalIzatIon
The world has become a smaller place. New transportation, shipping, and communication technologies
have made it easier for us to know the rest of the world, to travel, to buy and sell anywhere. By 2025, annual
consumption in emerging markets will total $30 trillion and contribute more than 70 percent of global GDP
growth.31 A staggering 56 percent of global financial services consumption is forecast to come from emerging
markets by 2050, up from 18 percent in 2010.
Demographic trends favor developing markets such as India, Pakistan, and Egypt, with populations whose
median age is below 25. In terms of growth of the middle class, defined as earning more than $3,000 per year, the
Philippines, China, and Peru are the three fastest-growing countries.32
Globalization has made countries increasingly multicultural. U.S. minorities have much economic clout, and
their buying power is growing faster than that of the general population. According to the University of Georgia’s
Terry College of Business minority buying report, the combined buying power of U.S. racial minorities (African
Americans, Asians, and Native Americans) is projected to rise from $1.6 trillion in 2010 to $2.1 trillion in 2015,
accounting for 15 percent of the nation’s total. The buying power of U.S. Hispanics will rise from $1 trillion in
2010 to $1.5 trillion in 2015, nearly 11 percent of the nation’s total. One survey found that 87 percent of companies
planned to increase or maintain multicultural media budgets.33
Globalization changes innovation and product development as companies take ideas and lessons from one
country and apply them to another. After years of little success with its premium ultrasound scanners in the
Chinese market, GE successfully developed a portable, ultra-low-cost version that addressed the country’s unique
market needs. Later, it began to successfully sell the product throughout the developed world for use in ambu-
lances and operating rooms where existing models were too big.34
socIal resPonsIBIlItY
Poverty, pollution, water shortages, climate change, wars, and wealth concentration demand our attention. The
private sector is taking some responsibility for improving living conditions, and firms all over the world have
elevated the role of corporate social responsibility.
So
ur
ce
: G
et
ty
Im
ag
es
fo
r N
A
SC
A
R
When Tide was used to clean
a fuel spill at a NASCAR, P&G
quickly spread the word on social
media.
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defining MARkeTing foR The new ReAliTies | chapter 1 37
Because marketing’s effects extend to society as a whole, marketers must consider the ethical, environmen-
tal, legal, and social context of their activities.35 “Marketing Insight: Getting to Marketing 3.0” describes how
companies need to change to do that.
The organization’s task is thus to determine the needs, wants, and interests of target markets and satisfy them
more effectively and efficiently than competitors while preserving or enhancing consumers’ and society’s long-
term well-being.
So
ur
ce
: P
ho
to
gr
ap
he
r:
M
or
ad
B
ou
ch
ak
ou
r.
C
ou
rt
es
y
of
G
en
er
al
E
le
ct
ric
C
om
pa
ny
.
Product introduced into
developing markets, such
as GE’s portable ultrasound
scanner, are finding success
in developed markets too.
Getting to Marketing 3.0
Philip Kotler, Hermawan Kartayaya, and Iwan Setiawan believe
today’s customers want marketers to treat them as whole human
beings and acknowledge that their needs extend beyond pure con-
sumerism. Successful marketing is thus distinguished by its human
or emotional element. A third wave of thinking, values-driven and
heralded as “Marketing 3.0,” has moved us beyond the product-
centric and consumer-centric models of the past, these authors say.
Its three central trends are increased consumer participation and
collaborative marketing, globalization, and and the rise of a creative
society.
• We live with sustained technological development—low-cost
Internet, cheap computers and mobile phones, open source
services and systems. Expressive and collaborative social media,
such as Facebook and Wikipedia, have changed the way market-
ers operate and interact with consumers.
• Culturally relevant brands can have far-reaching effects. A cultural
brand might position itself as a national or local alternative to a
global brand with poor environmental standards, for instance.
• Creative people are increasingly the backbone of developed
economies. Marketing can now help companies tap into creativity
and spirituality by instilling marketing values in corporate culture,
vision, and mission.
These authors believe the future of marketing will be horizontal:
consumer-to-consumer. They feel the recent economic downturn has
not fostered trust in the marketplace and that customers now increas-
ingly turn to one another for credible advice and information when
selecting products.
Sources: Philip Kotler, Hermawan Kartajaya, and Iwan Setiawan, Marketing 3.0:
From Products to Customers to the Human Spirit (Hoboken, NJ: Wiley, 2010);
Michael Krauss, “Evolution of an Academic: Kotler on Marketing 3.0,” Marketing
News, January 30, 2011; Vivek Kaul, “Beyond Advertising: Philip Kotler Remains
One of the Most Influential Marketing Thinkers,” The Economic Times, February
29, 2012. For more stimulating related ideas, see also Jim Stengel, Grow: How
Ideals Power Growth and Profit at the World’s Greatest Companies (New York:
Crown, 2011).
marketing
insight
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38 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
As goods become more commoditized and consumers grow more socially conscious, some companies—including
The Body Shop, Timberland, and Patagonia—incorporate social responsibility as a way to differentiate themselves
from competitors, build consumer preference, and achieve notable sales and profit gains.36
A Dramatically Changed Marketplace
These three forces—technology, globalization, and social responsibility—have dramatically changed the mar-
ketplace, bringing consumers and companies new capabilities. The marketplace is also being transformed by
changes in channel structure and heightened competition.
neW consuMer caPaBIlItIes
Social media is an explosive worldwide phenomenon. In Germany, the percentage of consumers over 65 accessing
the Internet increased from 24 percent to 33 percent from 2011 to 2012; most belonged to a social media service.
The number of Germans browsing the Web wirelessly increased to 29 million in 2012 and was expected to hit
60 million in 2016. More than 10 percent of Germans were using tablets to access the Internet in 2012. Almost two-
thirds of German companies surveyed in 2012 reported positive payback to their social media activities (Facebook,
Twitter, social media newsrooms, customer feedback communities).37
Empowerment is not just about technology, though. Consumers are willing to move to another brand if they
think they are not being treated right or do not like what they are seeing, as Progressive Insurance found out.38
PrOGressiVe insurAnce Kate Fisher, a Progressive customer, was killed by an underinsured
driver who ran a red light. Her family felt they had to sue the driver for negligence to prompt Progressive to make up what
the driver could not pay. Matt Fisher, Kate’s brother, was furious when Progressive actively participated in the negligent
driver’s legal defense. His Tumblr post, “My Sister Paid Progressive Insurance to Defend Her Killer in Court,” was picked up
by media outlets and sparked public outrage on Progressive’s Facebook and Twitter pages. More than 1,000 customers
reported dropping Progressive, and many more said they would not do business with the company. Although Progressive felt
it had defensible business reasons for its actions, critics were enraged by its awkward responses, like: “We fully investigated
this claim and relevant background and feel we properly handled the claim within our contractual obligations.” After a few
tumultuous days, Progressive reportedly settled with the Fishers for tens of thousands of dollars more than the $76,000
they had sought.
Expanded information, communication, and mobility enable customers to make better choices and share their
preferences and opinions with others around the world. Table 1.2 summarizes some of the new consumer capabili-
ties we outline next.
• Consumers can use the Internet as a powerful information and purchasing aid. From the home, office, or
mobile phone, they can compare product prices and features, consult user reviews, and order goods online
table 1.2 New Consumer Capabilities
Can use the Internet as a powerful information and purchasing aid
Can search, communicate, and purchase on the move
Can tap into social media to share opinions and express loyalty
Can actively interact with companies
Can reject marketing they find inappropriate
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defining MARkeTing foR The new ReAliTies | chapter 1 39
from anywhere in the world 24 hours a day, seven days a week, bypassing limited local offerings and real-
izing significant price savings. They can also engage in “showrooming”: comparing products in stores but
buying online.39 Because consumers and other constituents can in fact track down virtually any kind of
company information, firms now realize that transparency in corporate words and actions is of paramount
importance.
• Consumers can search, communicate, and purchase on the move. Consumers increasingly integrate smart
phones and tablets into their daily lives. One study found the majority of European smart phone own-
ers use their devices to research products and make purchases.40 There is one cell phone for every two
people on the planet—and 10 times more cell phones are produced globally each day than babies are born.
Telecommunications is one of the world’s trillion-dollar industries, along with tourism, military, food, and
automobiles.41
• Consumers can tap into social media to share opinions and express loyalty. Personal connections and user-
generated content thrive on social media such as Facebook, Flickr, Wikipedia, and YouTube. Sites like Dogster
for dog lovers, TripAdvisor for travelers, and Moterus for bikers bring together consumers with a common
interest. At CarSpace.com, auto enthusiasts talk about chrome rims, the latest BMW model, and where to find
a great local mechanic.
• Consumers can actively interact with companies. Consumers see their favorite companies as work-
shops from which to draw out the offerings they want. By opting in or out of lists, they can receive
marketing and sales-related communications, discounts, coupons, and other special deals. With smart
phones, they can scan barcodes and QR (Quick Response) codes to access a brand’s Web site and other
information.42
• Consumers can reject marketing they find inappropriate. Some customers today may see fewer product
differences and feel less brand loyal. Others may become more price- and quality-sensitive in their search
for value. Almost two-thirds of consumers in one survey reported that they disliked advertising.43 For these
and other reasons, consumers can be less tolerant about undesired marketing. They can choose to screen out
online messages, skip commercials with their DVRs, and avoid marketing appeals through the mail or over
the phone.
neW coMPanY caPaBIlItIes
At the same time, globalization, social responsibility, and technology have also generated a new set of capabilities
to help companies cope and respond (see Table 1.3).
• Companies can use the Internet as a powerful information and sales channel, including for individually dif-
ferentiated goods. A Web site can list products and services, history, business philosophy, job opportunities,
and other information of interest to consumers worldwide. Solo Cup marketers note that linking their store-
fronts to their Web site and Facebook page makes it easier for consumers to buy Solo paper cups and plates
while engaging with the brand online.44 Thanks to advances in factory customization, computer technology,
and database marketing software, companies can allow customers to buy M&M candies with their names on
table 1.3 New Company Capabilities
Can use the Internet as a powerful information and sales channel, including for individually
differentiated goods
Can collect fuller and richer information about markets, customers, prospects, and competitors
Can reach customers quickly and efficiently via social media and mobile marketing, sending
targeted ads, coupons, and information
Can improve purchasing, recruiting, training, and internal and external communications
Can improve cost efficiency
M01_KOTL2621_15_GE_C01.indd 39 03/03/15 2:00 PM
CarSpace.com
40 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
them, Wheaties boxes or Jones soda cans with their picture on the front, and Heinz ketchup bottles with cus-
tomized messages.45
• Companies can collect fuller and richer information about markets, customers, prospects, and competitors.
Marketers can conduct fresh marketing research by using the Internet to arrange focus groups, send
out questionnaires, and gather primary data in several other ways. They can assemble information
about individual customers’ purchases, preferences, demographics, and profitability. The drugstore
chain CVS uses loyalty-card data to better understand what consumers purchase, the frequency of store
visits, and other buying preferences. Its ExtraCare program supports 69 million shoppers in more than
7,300 stores. Eighty-two percent of CVS’s front store (non-pharmacy) sales go through the ExtraCare
program.46
• Companies can reach consumers quickly and efficiently via social media and mobile marketing, sending tar-
geted ads, coupons, and information. GPS technology can pinpoint consumers’ exact location, letting marketers
send them messages at the mall with wish-list reminders and coupons or offers good only that day. Location-
based advertising is attractive because it reaches consumers closer to the point of sale. Social media and buzz are
also powerful. Over a two-year period, Dell took in more than $2 million in U.S. revenue from coupons provided
through Twitter and another $1 million from people who started at Twitter and bought a new computer on Dell’s
Web site. By mid-2012, the @DellOutlet Twitter account had more than 1.6 million followers.47 Word-of-mouth
marketing agency BzzAgent recruited 600,000 consumers who voluntarily join promotional programs for
products and services they deem worth talking about.
• Companies can improve purchasing, recruiting, training, and internal and external communications.
Firms can recruit new employees online, and many have Internet training products for their employees,
dealers, and agents. Blogging has waned as companies embrace social media. “We want to be where our
customers are,” said Bank of America after dropping its blog in favor of Facebook and Twitter.48 Farmers
Insurance uses specialized software to help its 15,000 agents nationwide maintain their own Facebook
pages.49 Via intranets and databases, employees can query one another, seek advice, and exchange informa-
tion. Seeking a single online employee portal that transcended business units, General Motors launched a
platform called mySocrates in 2006 to carry announcements, news, links, and historical information. GM
credits the portal with $17.4 million in cost savings to date.50 Popular hybrid Twitter/Facebook-type prod-
ucts designed especially for business employees have been introduced by Salesforce.com, IBM, and several
start-ups.51
• Companies can improve their cost efficiency. Corporate buyers can achieve substantial savings by using the
Internet to compare sellers’ prices and purchase materials at auction or by posting their own terms in reverse
auctions. Companies can improve logistics and operations to reap substantial cost savings while improving
accuracy and service quality. Small businesses can especially unleash the power of the Internet. Physicians
operating a small practice can use Facebook-like services such as Doximity to connect with referring
physicians and specialists.52
Many different products,
such as M&Ms, can now be
customized by consumers.
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defining MARkeTing foR The new ReAliTies | chapter 1 41
chanGInG channels
One of the reasons consumers have more choices is that channels of distribution have changed as a result of retail
transformation and disintermediation.
• Retail transformation. Store-based retailers face competition from catalog houses; direct-mail firms;
newspaper, magazine, and TV direct-to-customer ads; home shopping TV; and e-commerce. In response,
entrepreneurial retailers are building entertainment into their stores with coffee bars, demonstrations, and
performances, marketing an “experience” rather than a product assortment.
• Disintermediation. Early dot-coms such as Amazon.com, E*TRADE, and others successfully created dis-
intermediation in the delivery of products and services by intervening in the traditional flow of goods. In
response, traditional companies engaged in reintermediation and became “brick-and-click” retailers, adding
online services to their offerings. Some with plentiful resources and established brand names became stronger
contenders than pure-click firms.
heIGhteneD coMPetItIon
While globalization has created intense competition among domestic and foreign brands, the rise of private labels
and mega-brands and a trend toward deregulation and privatization have also increased competition.
• Private labels. Brand manufacturers are further buffeted by powerful retailers that market their own store
brands, increasingly indistinguishable from any other type of brand.
• Mega-brands. Many strong brands have become mega-brands and extended into related product categories,
including new opportunities at the intersection of two or more industries. Computing, telecommunications,
and consumer electronics are converging, with Apple and Samsung releasing a stream of state-of-the-art
devices from MP3 players to LCD TVs to fully loaded smart phones.
• Deregulation. Many countries have deregulated industries to create greater competition and growth oppor-
tunities. In the United States, laws restricting financial services, telecommunications, and electric utilities have
all been loosened in the spirit of greater competition.
• Privatization. Many countries have converted public companies to private
ownership and management to increase their efficiency. The telecommuni-
cations industry has seen much privatization in countries such as Australia,
France, Germany, Italy, Turkey, and Japan.53
Marketing in Practice
Given the new marketing realities, organizations are challenging their marketers
to find the best balance of old and new and to provide demonstrable evidence of
success. “Marketing Memo: Reinventing Marketing at Coca-Cola” describes some
of the many different ways that that top marketing organization has changed.
MarketInG Balance
Companies must always move forward, innovating products and services,
staying in touch with customer needs, and seeking new advantages rather than
relying on past strengths. India’s Hindustan Unilever asks all staff members—
not just marketers—to obtain a “consumer license” to work on its brands, which
requires spending 50 hours of face time with shoppers. As one senior executive
noted, “Our consumers are moving faster than marketers do; whether in terms
of rural or urban changes or the way they consume media and entertainment.”54
Moving forward especially means incorporating the Internet and digital efforts
into marketing plans. Marketers must balance increased spending on search
advertising, social media, e-mails, and text messages with appropriate spend-
ing on traditional marketing communications. But they must do so in tough
economic times, when accountability has become a top priority and returns on
investment are expected from every marketing activity. The ideal is retaining win-
ning practices from the past while adding fresh approaches that reflect the new
marketing realities.55
So
ur
ce
: A
ss
oc
ia
te
d
Pr
es
s
Coca-Cola reinforces its message of happiness with special
promotional “Hug Me” vending machines which dispense
free product.
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42 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
MarketInG accountaBIlItY
Marketers are increasingly asked to justify their investments in financial and profitability terms, as well as in terms
of building the brand and growing the customer base. Organizations recognize that much of their market value
comes from intangible assets, particularly brands, customer base, employees, distributor and supplier relations,
and intellectual capital. They are thus applying more metrics—brand equity, customer lifetime value, return on
marketing investment (ROMI)—to understand and measure their marketing and business performance and a
broader variety of financial measures to assess the direct and indirect value their marketing efforts create.
MarketInG In the orGanIzatIon
As the late David Packard of Hewlett-Packard observed, “Marketing is far too important to leave to the marketing
department.” Increasingly, marketing is not done only by the marketing department; every employee has an impact
on the customer. Marketers now must properly manage all possible touch points: store layouts, package designs,
product functions, employee training, and shipping and logistics. To create a strong marketing organization, mar-
keters must think like executives in other departments, and executives in other departments must think more like
marketers. Interdepartmental teamwork that includes marketers is needed to manage key processes like production
innovation, new-business development, customer acquisition and retention, and order fulfillment.
Company Orientation toward
the Marketplace
Given these new marketing realities, what philosophy should guide a company’s marketing efforts? Let’s first re-
view the evolution of marketing philosophies.
the ProDuctIon concePt
The production concept is one of the oldest concepts in business. It holds that consumers prefer products that are
widely available and inexpensive. Managers of production-oriented businesses concentrate on achieving high pro-
duction efficiency, low costs, and mass distribution. This orientation has made sense in developing countries such
Coca-Cola is fundamentally changing the way it does marketing, primarily by adding a strong digital component to its traditional marketing tools. The new
model is based on moving consumers from impressions to expressions to conversations to transactions.
Coca-Cola defines consumer expressions as any level of engagement with brand content: a comment, “like,” or share on Facebook, a Tweet, or an
uploaded photo or video. Coca-Cola strives to put strongly sharable pieces of communications online that will generate impressions but also lead to expres-
sions from consumers who join or extend the communication storyline and ultimately buy the product.
These communications focus on the core themes of “happiness” and “optimism” that define the brand’s positioning. One successful application is the
video of the “Hug Me” vending machine in Singapore that dispensed cans of Coke when people put their arms around it and hugged it. Within in a week, the
video generated 112 million impressions.
Coca-Cola actively experiments, allocating 70 percent of its budget to activities it knows will work, 20 percent to improving those activities, and
10 percent to experimentation. The company accepts that experiments can fail but believes in taking chances to learn and develop better solutions. Even
in its traditional advertising and promotion, it looks for innovation.
For instance, Coca-Cola places much importance on cultural leadership and causes that benefit others. The mission of its Artic Home project is to
protect the habitat of polar bears—who have starred in animated form in its holiday ads for years. Committing $3 million to the World Wildlife Fund,
Coca-Cola drew attention to the project by turning its traditional red cans white.
Sources: Joe Tripodi, “Coca-Cola Marketing Shifts from Impressions to Expressions,” Harvard Business Review, HBR Blog Network, April 27, 2011; Tim Nudd, “Coca-Cola
Joins the Revolution in World Where the Mob Rules,” Adweek, June 19, 2012; Surajeet Das Gupta and Vivea Susan Pinto, “Q&A: Joseph Tripodi,” Business Standard,
November 3, 2011; “Coca-Cola Sets Facebook Record,” www.warc.com, September 6, 2012.
Reinventing Marketing at Coca-Colamarketing memo
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defining MARkeTing foR The new ReAliTies | chapter 1 43
as China, where the largest PC manufacturer, Legend (principal owner of Lenovo Group), and domestic appli-
ances giant Haier have taken advantage of the country’s huge and inexpensive labor pool to dominate the market.
Marketers also use the production concept when they want to expand the market.
the ProDuct concePt
The product concept proposes that consumers favor products offering the most quality, performance, or innovative
features. However, managers are sometimes caught in a love affair with their products. They might commit the “better-
mousetrap” fallacy, believing a better product will by itself lead people to beat a path to their door. As many start-ups
have learned the hard way, a new or improved product will not necessarily be successful unless it’s priced, distributed,
advertised, and sold properly.
the sellInG concePt
The selling concept holds that consumers and businesses, if left alone, won’t buy enough of the organization’s
products. It is practiced most aggressively with unsought goods—goods buyers don’t normally think of buying
such as insurance and cemetery plots—and when firms with overcapacity aim to sell what they make, rather
than make what the market wants. Marketing based on hard selling is risky. It assumes customers coaxed into
buying a product not only won’t return or bad-mouth it or complain to consumer organizations but might even
buy it again.
the MarketInG concePt
The marketing concept emerged in the mid-1950s as a customer-centered, sense-and-respond philosophy. The
job is to find not the right customers for your products, but the right products for your customers. Dell doesn’t pre-
pare a PC or laptop for its target market. Rather, it provides product platforms on which each person customizes
the features he or she desires in the machine.
The marketing concept holds that the key to achieving organizational goals is being more effective than com-
petitors in creating, delivering, and communicating superior customer value to your target markets. Harvard’s
Theodore Levitt drew a perceptive contrast between the selling and marketing concepts: 56
Selling focuses on the needs of the seller; marketing on the needs of the buyer. Selling is preoccupied with
the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the
customer by means of the product and the whole cluster of things associated with creating, delivering,
and finally consuming it.
the holIstIc MarketInG concePt
Without question, the trends and forces that have defined the new marketing realities in the first years of the 21st
century are leading business firms to embrace a new set of beliefs and practices. The holistic marketing concept
is based on the development, design, and implementation of marketing programs, processes, and activities that
recognize their breadth and interdependencies. Holistic marketing acknowledges that everything matters in mar-
keting—and that a broad, integrated perspective is often necessary.
Holistic marketing thus recognizes and reconciles the scope and complexities of marketing activities. Figure 1.4
provides a schematic overview of four broad components characterizing holistic marketing: relationship market-
ing, integrated marketing, internal marketing, and performance marketing. We’ll examine these major themes
throughout this book.
relationship marketinG Increasingly, a key goal of marketing is to develop deep, enduring relationships
with people and organizations that directly or indirectly affect the success of the firm’s marketing activities.
Relationship marketing aims to build mutually satisfying long-term relationships with key constituents in order to
earn and retain their business.
Four key constituents for relationship marketing are customers, employees, marketing partners (channels, sup-
pliers, distributors, dealers, agencies), and members of the financial community (shareholders, investors, analysts).
Marketers must create prosperity among all these constituents and balance the returns to all key stakeholders. To
develop strong relationships with them requires understanding their capabilities and resources, needs, goals, and
desires.
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44 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
The ultimate outcome of relationship marketing is a unique company asset called a marketing network, con-
sisting of the company and its supporting stakeholders—customers, employees, suppliers, distributors, retailers,
and others—with whom it has built mutually profitable business relationships. The operating principle is simple:
build an effective network of relationships with key stakeholders, and profits will follow. Thus more companies
are choosing to own brands rather than physical assets, and they are subcontracting activities to firms that can do
them better and more cheaply while retaining core activities at home.
Companies are also shaping separate offers, services, and messages to individual customers, based on infor-
mation about their past transactions, demographics, psychographics, and media and distribution preferences.
By focusing on their most profitable customers, products, and channels, these firms hope to achieve profitable
growth, capturing a larger share of each customer’s expenditures by building high customer loyalty. They estimate
individual customer lifetime value and design their market offerings and prices to make a profit over the cus-
tomer’s lifetime.
Marketing must skillfully conduct not only customer relationship management (CRM), but partner relation-
ship management (PRM) as well. Companies are deepening their partnering arrangements with key suppliers
and distributors, seeing them as partners in delivering value to final customers so everybody benefits. IBM is a
business-to-business powerhouse that has learned the value of strong customer bonds.57
iBM Having celebrated its 100th corporate anniversary in 2011, IBM is a remarkable survivor that has main-
tained market leadership for decades in the challenging technology industry. The company has managed to success-
fully evolve its business and seamlessly update the focus of its products and services numerous times in its history—
from mainframes to PCs to its current emphasis on cloud computing, “big data,” and IT services. Part of the reason is
that IBM’s well-trained sales force and service organization offer real value to customers by staying close to them and
fully understanding their requirements. IBM often even cocreates products with customers; with the state of New York
it developed a method for detecting tax evasion that reportedly saved taxpayers $1.6 billion over a seven-year period.
As famed Harvard Business School professor Rosabeth Moss Kanter has noted, “IBM is not a technology company but
a company solving problems using technology.”
inteGrated marketinG Integrated marketing occurs when the marketer devises marketing activities
and assembles marketing programs to create, communicate, and deliver value for consumers such that “the
whole is greater than the sum of its parts.” Two key themes are that (1) many different marketing activities can
create, communicate, and deliver value and (2) marketers should design and implement any one marketing
activity with all other activities in mind. When a hospital buys an MRI machine from General Electric’s
Financial communityCustomers
PartnersEmployees
Products &
services Channels
PriceCommunications
Senior
management Other
departments
Marketing
department
SocialEthics
Integrated
marketing
Holistic
marketing
LegalEnvironment
Internal
marketing
Relationship
marketing
Performance
marketing
Brand &
customer equity
Sales revenue
| Fig. 1.4 |
Holistic Marketing
Dimensions
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defining MARkeTing foR The new ReAliTies | chapter 1 45
Medical Systems division, for instance, it expects good installation, maintenance, and training services to go
with the purchase.
The company must develop an integrated channel strategy. It should assess each channel option for its direct
effect on product sales and brand equity, as well as its indirect effect through interactions with other channel
options.
All company communications also must be integrated so communication options reinforce and complement
each other. A marketer might selectively employ television, radio, and print advertising, public relations and
events, and PR and Web site communications so each contributes on its own and improves the effectiveness of the
others. Each must also deliver a consistent brand message at every contact. Consider this award-winning campaign
for Iceland.58
iceLAnd Already reeling from some of the biggest losses in the global financial crisis in 2008, Iceland
faced more misfortune when dormant volcano Eyjafjallajökull unexpectedly erupted in April 2010. Its enormous plumes
of ash created the largest air-travel disruption since World War II, resulting in a wave of negative press and bad feelings
throughout Europe and elsewhere. With tourism generating around 20 percent of the country’s foreign exchange and
bookings plummeting, government and tourism officials decided to launch “Inspired by Iceland.” This campaign was
based on the insight that 80 percent of visitors to Iceland recommend the destination to friends and family. The coun-
try’s own citizens were recruited to tell their stories and encourage others to join in via a Web site or Twitter, Facebook,
and Vimeo. Celebrities such as Yoko Ono and Eric Clapton shared their experiences, and live concerts generated PR.
Real-time Web cams across the country showed that the country was not ash-covered but green. The campaign was
wildly successful—22.5 million stories were created by people all over the world—and ensuing bookings were dra-
matically above forecasts.
internal marketinG Internal marketing, an element of holistic marketing, is the task of hiring, training,
and motivating able employees who want to serve customers well. Smart marketers recognize that marketing
activities within the company can be as important—or even more important—than those directed outside the
company. It makes no sense to promise excellent service before the company’s staff is ready to provide it.
Marketing succeeds only when all departments work together to achieve customer goals (see Table 1.4): when
engineering designs the right products, finance furnishes the right amount of funding, purchasing buys the right
materials, production makes the right products in the right time horizon, and accounting measures profitability
Iceland’s fully integrated
modern tourism campaign
helped to halt a slide in visitors
to the country.
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46 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
table 1.4 Assessing Which Company Departments Are Customer-Minded
R&D
• They spend time meeting customers and listening to their problems.
• They welcome the involvement of marketing, manufacturing, and other departments to each new project.
• They benchmark competitors’ products and seek “best of class” solutions.
• They solicit customer reactions and suggestions as the project progresses.
• They continuously improve and refine the product on the basis of market feedback.
Purchasing
• They proactively search for the best suppliers.
• They build long-term relationships with fewer but more reliable, high-quality suppliers.
• They don’t compromise quality for price savings.
Manufacturing
• They invite customers to visit and tour their plants.
• They visit customer plants.
• They willingly work overtime to meet promised delivery schedules.
• They continuously search for ways to produce goods faster and/or at lower cost.
• They continuously improve product quality, aiming for zero defects.
• They meet customer requirements for “customization” where possible.
Marketing
• They study customer needs and wants in well-defined market segments.
• They allocate marketing effort in relation to the long-run profit potential of the targeted segments.
• They develop winning offers for each target segment.
• They measure company image and customer satisfaction on a continuous basis.
• They continuously gather and evaluate ideas for new products, product improvements, and services.
• They urge all company departments and employees to be customer centered.
Sales
• They have specialized knowledge of the customer’s industry.
• They strive to give the customer “the best solution.”
• They make only promises that they can keep.
• They feed back customers’ needs and ideas to those in charge of product development.
• They serve the same customers for a long period of time.
Logistics
• They set a high standard for service delivery time and meet this standard consistently.
• They operate a knowledgeable and friendly customer service department that can answer questions, handle complaints, and resolve prob-
lems in a satisfactory and timely manner.
Accounting
• They prepare periodic “profitability” reports by product, market segment, geographic areas (regions, sales territories), order sizes, channels,
and individual customers.
• They prepare invoices tailored to customer needs and answer customer queries courteously and quickly.
Finance
• They understand and support marketing expenditures (e.g., image advertising) that produce long-term customer preference and loyalty.
• They tailor the financial package to the customer’s financial requirements.
• They make quick decisions on customer creditworthiness.
Public Relations
• They send out favorable news about the company and “damage control” unfavorable news.
• They act as an internal customer and public advocate for better company policies and practices.
Source: © Philip Kotler, Kotler on Marketing (New York: Free Press, 1999), pp. 21–22. Reprinted with permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group. Copyright ©
1999 by Philip Kotler. All rights reserved.
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defining MARkeTing foR The new ReAliTies | chapter 1 47
in the right ways. Such interdepartmental harmony can only truly coalesce, however, when senior management
clearly communicates a vision of how the company’s marketing orientation and philosophy serve customers. The
following example highlights some of the potential challenge in integrating marketing:
The marketing vice president of a major European airline wants to increase the airline’s traffic share. His
strategy is to build up customer satisfaction by providing better food, cleaner cabins, better-trained cabin
crews, and lower fares, yet he has no authority in these matters. The catering department chooses food
that keeps food costs down; the maintenance department uses inexpensive cleaning services; the human
resources department hires people without regard to whether they are naturally friendly; the finance de-
partment sets the fares. Because these departments generally take a cost or production point of view, the
vice president of marketing is stymied in his efforts to create an integrated marketing program.
Internal marketing requires vertical alignment with senior management and horizontal alignment with
other departments so everyone understands, appreciates, and supports the marketing effort.
performance marketinG Performance marketing requires understanding the financial and nonfinancial
returns to business and society from marketing activities and programs. As noted previously, top marketers are
increasingly going beyond sales revenue to examine the marketing scorecard and interpret what is happening to market
share, customer loss rate, customer satisfaction, product quality, and other measures. They are also considering the
legal, ethical, social, and environmental effects of marketing activities and programs.
When they founded Ben & Jerry’s, Ben Cohen and Jerry Greenfield embraced the performance marketing
concept by dividing the traditional financial bottom line into a “double bottom line” that also measured the envi-
ronmental impact of their products and processes. That later expanded into a “triple bottom line” to represent the
social impacts, negative and positive, of the firm’s entire range of business activities.
Many firms have failed to live up to their legal and ethical responsibilites, and consumers are demanding more
responsible behavior.59 One research study reported that at least one-third of consumers around the world believed
that banks, insurance providers, and packaged-food companies should be subject to stricter regulation.60
Updating the Four Ps
Many years ago, McCarthy classified various marketing activities into marketing-mix tools of four broad kinds,
which he called the four Ps of marketing: product, price, place, and promotion.61 The marketing variables under
each P are shown in Figure 1.5.
A complementary view of the four Ps can be found in Marketing Insight: Understanding the 4 As of
Marketing,”
Given the breadth, complexity, and richness of marketing, however—as exemplified by holistic marketing—
clearly these four Ps are not the whole story anymore. If we update them to reflect the holistic marketing
Marketing mix
PLACE
Channels
Coverage
Assortments
Locations
Inventory
Transport
PROMOTION
Sales promotion
Advertising
Sales force
Public relations
Direct marketing
PRICE
List price
Discounts
Allowances
Payment period
Credit terms
PRODUCT
Product variety
Quality
Design
Features
Brand name
Packaging
Sizes
Services
Warranties
Returns
| Fig. 1.5 |
The Four
P Components of
the Marketing Mix
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48 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
concept, we arrive at a more representative set that encompasses modern marketing realities: people, processes,
programs, and performance, as in Figure 1.6.
People reflects, in part, internal marketing and the fact that employees are critical to marketing success.
Marketing will only be as good as the people inside the organization. It also reflects the fact that marketers must
view consumers as people to understand their lives more broadly, and not just as shoppers who consume products
and services.
Processes reflects all the creativity, discipline, and structure brought to marketing management. Marketers must
avoid ad hoc planning and decision making and ensure that state-of-the-art marketing ideas and concepts play an
Marketing
Mix
Four Ps
Product
Place
Promotion
Price
Modern Marketing
Management
Four Ps
People
Processes
Programs
Performance
| Fig. 1.6 |
The Evolution
of Marketing
Management
Accessibility
Accessibility, the extent to which customers are able to readily
acquire the product, has two dimensions: availability and convenience.
Successful companies develop innovative ways to deliver both, as on-
line shoe retailer Zappos does with excellent customer service and
return policies and its tracking of up-to-the-minute information about
warehouse stock, brands, and styles.
Awareness
Awareness is the extent to which customers are informed regarding
the product’s characteristics, persuaded to try it, and reminded to
repurchase. It has two dimensions: brand awareness and product
knowledge. Sheth and Sisodia say awareness is ripest for improve-
ment because most companies are either ineffectual or inefficient at
developing it. For instance, properly done advertising can be incred-
ibly powerful, but word-of-mouth marketing and co-marketing can
more effectively reach potential customers.
Sheth and Sisodia base the 4 As framework on the four distinctive roles
a consumer plays in the marketplace—seeker, buyer, payer, and user.
A fifth consumer role—evangelizer—captures the fact that consumers
often recommend products to others and are increasingly critical with
the advent of the Internet and social media platforms.
Note that we can easily relate the 4 As to the traditional 4 Ps.
Marketers set the product (which mainly influences acceptability),
the price (which mainly influences affordability), the place (which
mainly influences accessibility), and promotion (which mainly influences
awareness).
Sources: Jagdish N. Sheth and Rajendra Sisodia, The 4 A’s of Marketing:
Creating Value for Customer, Company and Society (New York: Routledge, 2012);
“New Rules: Jagdish Sheth Outlines 4A’s of Marketing,” The Financial Express,
April 6, 2004; “Industry Leaders Discuss Marketing for Not for Profit Organizations
@ BIMTECH Marketing Summit,” www.mbauniverse.com, May 1, 2012.
marketing
insight
Understanding the 4 As
of Marketing
According to Jagdish Sheth and Rajendra Sisodia, poor management
as a consequence of not knowing what drives consumers is behind
the majority of marketing failures. The authors make the case that
consumer knowledge is a much more reliable route to success. Their
customer-centric marketing management framework emphasizes what
they believe are the most important consumer values—acceptability,
affordability, accessibility, and awareness—which they dub the four As.
Acceptability
Acceptability is the extent to which a firm’s total product offer-
ing exceeds customer expectations. The authors assert that Ac-
ceptability is the dominant component in the framework and that
design, in turn, is at the root of acceptability. Functional aspects of
design can be boosted by, for instance, enhancing the core benefit
or increasing reliability of the product; psychological acceptability
can be improved with changes to brand image, packing and de-
sign, and positioning.
Affordability
Affordability is the extent to which customers in the target market
are able and willing to pay the product’s price. It has two dimensions:
economic (ability to pay) and psychological (willingness to pay).
Acceptability combined with affordability determines the product’s
value proposition. When Peachtree Software lowered the price of its
accounting software from $5000 to $199 and started charging for
customer support, sales demand increased enormously.
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www.mbauniverse.com
defining MARkeTing foR The new ReAliTies | chapter 1 49
appropriate role in all they do, including creating mutually beneficial long-term relationships and imaginatively
generating insights and breakthrough products, services, and marketing activities.
Programs reflects all the firm’s consumer-directed activities. It encompasses the old four Ps as well as a range of
other marketing activities that might not fit as neatly into the old view of marketing. Regardless of whether they are
online or offline, traditional or nontraditional, these activities must be integrated such that their whole is greater
than the sum of their parts and they accomplish multiple objectives for the firm.
We define performance as in holistic marketing, to capture the range of possible outcome measures that have
financial and nonfinancial implications (profitability as well as brand and customer equity) and implications
beyond the company itself (social responsibility, legal, ethical, and the environment).
Finally, these new four Ps actually apply to all disciplines within the company, and by thinking this way, manag-
ers more closely align themselves with the rest of the company.
Marketing Management Tasks
Figure 1.7 summarizes the three major market forces, two key market outcomes, and four fundamental pillars of
holistic marketing that help to capture the new marketing realities. With these concepts in place, we can identify
a specific set of tasks that make up successful marketing management and marketing leadership. We’ll use the fol-
lowing situation to illustrate these tasks in the context of the plan of the book. (The “Marketing Memo: Marketers’
Frequently Asked Questions” is a good checklist for the questions marketing managers ask, all of which we examine
in this book.)
Zeus Inc. (name disguised) operates in several industries, including chemicals, cameras, and film. The
company is organized into SBUs. Corporate management is considering what to do with its Atlas camera
division, which produces a range of professional quality 35mm and consumer-friendly digital cameras.
Although Zeus has a sizable share and is producing revenue, the 35mm market is rapidly declining at an
accelerating rate. In the much faster-growing digital camera segment, Zeus faces strong competition and
has been slow to gain sales. Zeus’s corporate management wants Atlas’s marketing group to produce a
strong turnaround plan for the division.
DeVeloPInG MarketInG strateGIes anD Plans
The first task facing Atlas is to identify its potential long-run opportunities, given its market experience and core
competencies (see Chapter 2). Atlas can design its cameras with better features. It can make a line of digital video
cameras, or it can use its core competency in optics to design a line of binoculars and telescopes. Whichever
direction it chooses, it must develop concrete marketing plans that specify the marketing strategy and tactics going
forward.
Relationship
Marketing
Integrated
Marketing
Internal
Marketing
Performance
Marketing
Technology
Social
Responsibility
New
Consumer
Capabilities
New
Company
Capabilities
Three Major
Market Forces
Two Key
Market Outcomes
Four
Fundamental Pillars of
Holistic Marketing
The New Marketing Realities
Globalization
| Fig. 1.7 |
The New Marketing
Realities
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50 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
caPturInG MarketInG InsIGhts
Atlas needs a reliable marketing information system to closely monitor its marketing environment so it can
continually assess market potential and forecast demand. Its microenvironment consists of all the players who
affect its ability to produce and sell cameras—suppliers, marketing intermediaries, customers, and competitors. Its
macroenvironment includes demographic, economic, physical, technological, political-legal, and social-cultural
forces that affect sales and profits (see Chapter 3).
Atlas also needs a dependable marketing research system. To transform strategy into programs, marketing
managers must make basic decisions about their expenditures, activities, and budget allocations. They may use
sales-response functions that show how the amount of money spent in each application will affect sales and profits
(see Chapter 4).
connectInG WIth custoMers
Atlas must consider how to best create value for its chosen target markets and develop strong, profitable, long-term
relationships with customers (see Chapter 5). To do so, it needs to understand consumer markets (see Chapter 6).
Who buys cameras, and why? What features and prices are they looking for, and where do they shop? Atlas also
sells 35mm cameras to business markets, including large corporations, professional firms, retailers, and government
agencies (see Chapter 7), where purchasing agents or buying committees make the decisions. Atlas needs to gain a
full understanding of how organizational buyers buy. It needs a sales force well trained in presenting product ben-
efits. Atlas must also take into account changing global opportunities and challenges (see Chapter 8).
BuIlDInG stronG BranDs
Atlas will not want to market to all possible customers. It must divide the market into major market segments, eval-
uate each one, and target those it can best serve (see Chapter 9). Suppose Atlas decides to focus on the consumer
market and develop a positioning strategy (see Chapter 10). Should it position itself as the “Cadillac” brand, offer-
ing superior cameras at a premium price with excellent service and strong advertising? Should it build a simple,
low-priced camera aimed at more price-conscious consumers? Or something in between? Atlas must understand
the strengths and weaknesses of the Zeus brand as customers see it (see Chapter 11). Is its 35mm film heritage a
handicap in the digital camera market?
Atlas must consider growth strategies while also paying close attention to competitors (see Chapter 12), antici-
pating their moves and knowing how to react quickly and decisively. It may want to initiate some surprise moves, in
which case it needs to anticipate how its competitors will respond.
1. How can we spot and choose the right market segment(s)?
2. How can we differentiate our offerings?
3. How should we respond to customers who buy on price?
4. How can we compete against lower-cost, lower-price competitors?
5. How far can we go in customizing our offering for each customer?
6. How can we grow our business?
7. How can we build stronger brands?
8. How can we reduce the cost of customer acquisition?
9. How can we keep our customers loyal longer?
10. How can we tell which customers are more important?
11. How can we measure the payback from different types of marketing communications?
12. How can we improve sales force productivity?
13. How can we establish multiple channels and yet manage channel conflict?
14. How can we get the other company departments to be more customer-oriented?
Marketers’ Frequently Asked Questionsmarketing memo
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defining MARkeTing foR The new ReAliTies | chapter 1 51
creatInG Value
At the heart of the marketing program is the product—the firm’s tangible offering to the market, which includes
the product quality, design, features, and packaging (see Chapter 13). To gain a competitive advantage, Atlas
may provide leasing, delivery, repair, and training as part of its product offering (see Chapter 14). Based on its
product positioning, Atlas must initiate new-product development, testing, and launching as part of its long-
term view (see Chapter 15).
A critical marketing decision relates to price (see Chapter 16). Atlas must decide on wholesale and retail prices,
discounts, allowances, and credit terms. Its price should match well with the offer’s perceived value; otherwise,
buyers will turn to competitors’ products.
DelIVerInG Value
Atlas must also determine how to properly deliver to the target market the value embodied in its products and
services. Channel activities include those the company undertakes to make the product accessible and available to
target customers (see Chapter 17). Atlas must identify, recruit, and link various marketing facilitators to supply its
products and services efficiently to the target market. It must understand the various types of retailers, wholesal-
ers, and physical-distribution firms and how they make their decisions (see Chapter 18).
coMMunIcatInG Value
Atlas must also adequately communicate to the target market the value embodied by its products and services.
It will need an integrated marketing communication program that maximizes the individual and collective con-
tribution of all communication activities (see Chapter 19). Atlas needs to set up mass communication programs
consisting of advertising, sales promotion, events, and public relations (see Chapter 21). It also has to tap into
online, social media, and mobile options to reach consumers whenever and wherever it may be appropriate (see
Chapter 20). Atlas also needs to plan more personal communications, in the form of direct and database market-
ing, as well as hire, train, and motivate salespeople (see Chapter 22).
conDuctInG MarketInG resPonsIBlY for lonG-terM
success
Finally, Atlas must build a marketing organization capable of responsibly implementing the marketing plan (see
Chapter 23). Because surprises and disappointments can occur as marketing plans unfold, Atlas will need feedback
and control to understand the efficiency and effectiveness of its marketing activities and how it can improve them.
experience. To create a strong marketing organiza-
tion, marketers must think like executives in other
departments, and executives in other departments must
think more like marketers.
4. Today’s marketplace is fundamentally different as
a result of major societal forces that have resulted
in many new consumer and company capabilities.
In particular, technology, globalization, and social
responsibility have created new opportunities and
challenges and significantly changed marketing man-
agement. Companies seek the right balance of tried-
and-true methods with breakthrough new approaches
to achieve marketing excellence.
5. There are five competing concepts under which orga-
nizations can choose to conduct their business: the
production concept, the product concept, the sell-
Summary
1. Marketing is an organizational function and a set of
processes for creating, communicating, and delivering
value to customers and for managing customer relation-
ships in ways that benefit the organization and its stake-
holders. Marketing management is the art and science
of choosing target markets and getting, keeping, and
growing customers through creating, delivering, and
communicating superior customer value.
2. Marketers are skilled at managing demand: They seek
to influence its level, timing, and composition for goods,
services, events, experiences, persons, places, prop-
erties, organizations, information, and ideas. They also
operate in four different marketplaces: consumer, busi-
ness, global, and nonprofit.
3. Marketing is not done only by the marketing depart-
ment. It needs to affect every aspect of the customer
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52 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
the company’s first spokesperson, had an irreverent
attitude that matched Nike’s spirit.
In 1985, Nike signed up then-rookie guard Michael
Jordan as a spokesperson. Jordan was still an up-and-
comer, but he personified superior performance. Nike’s
bet paid off—the Air Jordan line of basketball shoes flew
off the shelves and revenues hit more than $100 mil-
lion in the first year alone. As one reporter stated, “Few
marketers have so reliably been able to identify and
sign athletes who transcend their sports to such great
effect.”
In 1988, Nike aired the first ads in its $20 million “Just
Do It” ad campaign. The campaign, which ultimately fea-
tured 12 TV spots in all, subtly challenged a generation of
athletic enthusiasts to chase their goals. It was a natural
manifestation of Nike’s attitude of self-empowerment
through sports.
Marketing Excellence
>> Nike
Nike hit the ground running in 1962. Originally known as
Blue Ribbon Sports, the company focused on providing
high-quality running shoes designed for athletes by ath-
letes. Founder Philip Knight believed high-tech shoes
for runners could be manufactured at competitive prices
if imported from abroad. Nike’s commitment to design-
ing innovative footwear for serious athletes helped build
a cult following among U.S. consumers.
Nike believed in a “pyramid of influence” where the
preferences of a small percentage of top athletes influ-
enced the product and brand choices of others. Nike’s
marketing campaigns have always featured accom-
plished athletes. For example, runner Steve Prefontaine,
Applications
Marketing Debate
Does Marketing Create or Satisfy
Needs?
Marketing has often been defined in terms of satisfying
customers’ needs and wants. Critics, however, maintain
that marketing goes beyond that and creates needs and
wants that did not exist before. They feel marketers encour-
age consumers to spend more money than they should on
goods and services they do not really need.
Take a position: Marketing shapes consumer needs
and wants versus Marketing merely reflects the needs
and wants of consumers.
Marketing Discussion
Shifts in Marketing
Consider the three key forces driving the new marketing
realities. How are they likely to change in the future? What
other major trends or forces might affect marketing?
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional Assisted-graded writing questions.
ing concept, the marketing concept, and the holistic
marketing concept. The first three are of limited use
today.
6. The holistic marketing concept is based on the devel-
opment, design, and implementation of marketing pro-
grams, processes, and activities that recognize their
breadth and interdependencies. Holistic marketing rec-
ognizes that everything matters in marketing and that a
broad, integrated perspective is often necessary. Four
components of holistic marketing are relationship mar-
keting, integrated marketing, internal marketing, and
performance marketing.
7. The set of tasks necessary for successful marketing
management includes developing marketing strategies
and plans, capturing marketing insights, connecting
with customers, building strong brands, creating, deliv-
ering, and communicating value, and creating long-term
growth.
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defining MARkeTing foR The new ReAliTies | chapter 1 53
As Nike began expanding overseas, the com-
pany learned that its U.S.-style ads were seen as
too aggressive in Europe, Asia, and South America.
Nike realized it had to “authenticate” its brand in other
countries, so it focused on soccer (called football
outside the United States) and became active as a
sponsor of youth leagues, local clubs, and national
teams. However, for Nike to build authenticity among the
soccer audience, consumers had to see professional ath-
letes using its product, especially athletes who won.
Nike’s big break came in 1994 when the Brazilian
team (the only national team for which Nike had any real
sponsorship) won the World Cup. That victory transformed
Nike’s international image from a sneaker company into a
brand that represented emotion, allegiance, and identifi-
cation. Nike’s new alliance with soccer helped propel the
brand’s growth internationally. In 2003, overseas revenues
surpassed U.S. revenues for the first time, and in 2007,
Nike acquired Umbro, a British maker of soccer-related
footwear, apparel, and equipment. The acquisition made
Nike the sole supplier to more than 100 professional soc-
cer teams around the world and boosted Nike’s interna-
tional presence and authenticity in soccer. The company
sold Umbro in 2012 for $225 million.
In recent years, Nike’s international efforts have been
focused on emerging markets. During the 2008 Summer
Olympics in Beijing, Nike honed in on China and devel-
oped an aggressive marketing strategy that countered
Adidas’s sponsorship of the Olympic Games. Nike re-
ceived special permission from the International Olympic
Committee to run Nike ads featuring Olympic athletes
during the games. In addition, Nike sponsored several
teams and athletes, including most of the Chinese teams.
This aggressive sponsorship strategy helped ignite sales
in the Asian region by 15 percent.
In addition to expanding overseas, Nike has success-
fully expanded its brand into many sports and athletic
categories, including footwear, apparel, and equipment.
Nike continues to partner with high-profile and influential
athletes, coaches, teams, and leagues to build credibility
in these categories. For example, Nike aligned with tennis
stars Maria Sharapova, Roger Federer, and Rafael Nadal
to push its line of tennis clothing and gear. Some called the
famous 2008 Wimbledon match between Roger Federer
and Rafael Nadal—both dressed in swooshes from head to
toe—a five-hour Nike commercial valued at $10.6 million.
To promote its line of basketball shoes and apparel,
Nike has partnered with basketball superstars such as
Kobe Bryant and LeBron James. In golf, Nike’s swoosh
appears on many golfers but most famously on Tiger
Woods. In the years since Nike first partnered with
Woods, Nike Golf has grown into a $523 million busi-
ness and literally changed the way golfers dress and
play today. Tiger’s powerful influence on the game and
his Nike-emblazoned style has turned the greens at the
majors into “golf’s fashion runway.”
Nike is the biggest sponsor of athletes in the world
and plans to spend more than $3 billion in athletic
endorsements between 2012 and 2017. The com-
pany also has a history of standing by its athletes,
such as Tiger Woods and Kobe Bryant, even as they
struggle with personal problems. It severed its rela-
tionship with Lance Armstrong in 2012, however, after
strong evidence showed that the cyclist doped during
his time as an athlete and while competing during all
Tour de Frances. Nike released a statement explain-
ing, “Nike does not condone the use of illegal perfor-
mance enhancing drugs in any manner.” Prior to the
scandal, the company had helped develop Armstrong’s
LIVESTRONG campaign to raise funds for cancer. It
designed, manufactured, and sold more than 80 million
yellow LIVESTRONG bracelets, netting $500 million for
the Lance Armstrong Foundation.
While Nike’s athletic endorsements help inspire
and reach consumers, its most recent innovations in
technology have resulted in more loyal and emotion-
ally connected consumers. For example, Nike’s lead in
the running category has grown to 60 percent market
share thanks to its revolutionary running application and
community called Nike+ (plus). Nike+ allows runners
to engage in the ultimate running experience by seeing
their real-time pace, distance, and route and by giv-
ing them coaching tips and online sharing capabilities.
Nike expanded Nike+ to focus on key growth areas like
basketball and exercise and recently launched Nike+
Basketball, Nike+ Kinect, and Nike+Fuelband, a bracelet/
app that tracks daily activities.
Like many companies, Nike is trying to make its com-
pany and products more eco-friendly. However, unlike
many companies, it does not promote these efforts. One
brand consultant explained, “Nike has always been about
winning. How is sustainability relevant to its brand?” Nike
executives agree that promoting an eco-friendly message
would distract from its slick high-tech image, so efforts
like recycling old shoes into new shoes are kept quiet.
As a result of its successful expansion across geo-
graphic markets and product categories, Nike is the top
athletic apparel and footwear manufacturer in the world. In
2014, revenues exceeded $27 billion, and Nike dominated
the athletic footwear market with 31 percent market share
globally and 50 percent market share in the United States.
Swooshes abound on everything from wristwatches to
skateboards to swimming caps. The firm’s long-term strat-
egy, however, is focused on running, basketball, foot-
ball/soccer, men’s training, women’s training, and action
sports.
M01_KOTL2621_15_GE_C01.indd 53 03/03/15 2:00 PM
54 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
With its ability to deploy data that enable up-to-
the-minute improvements in a Web marketing program,
Google supports a style of marketing in which the adver-
tising resources and budget can be constantly monitored
and optimized. Google calls this approach “marketing
asset management,” implying that advertising should
be managed like assets in a portfolio depending on the
market conditions. Rather than following a marketing plan
developed months in advance, companies use the real-
time data collected on their campaigns to optimize the
campaign’s effectiveness and be more responsive to the
market.
Since its launch, Google has expanded far beyond
its search capabilities with numerous other products,
applications, and tools that benefit both consumers and
businesses. The goal behind each product was to help
users find information they need and to help them get
things done better, faster, and easier than before. Today,
Google’s wide range of products and services fall into the
following categories: Web (Web Search, iGoogle, Google
Chrome), Mobile (Mobile, Search for Mobile, Maps for
Mobile), Media (Picasa, Google Play, Youtube.com,
which Google acquired in 2006 for $1.65 billion), Geo
(Earth, Maps), Home & Office (Docs, Gmail, Calendar),
Social (Google+, Blogger), Specialized Search (Patents,
Finance, Scholarly Papers), and Innovation.
As the world becomes more mobile, Google is bet-
ting big in the mobile category. In 2008, Google launched
Android, a mobile operating system that went head
to head with Apple’s iPhone. The biggest differentia-
tion between the two was that Android was free, open
sourced, and backed by a multimillion-dollar investment.
That meant Google wanted its partners to help build and
design Android over the years. The investment paid off,
and by 2010, Android became the number-one mobile
operating system in the market.
As Google expanded into mobile technology, it quickly
became the leader in mobile advertising with 75 percent
market share for search ads and approximately 50 percent
market share for all mobile ads. In 2012, Google entered
the mobile device category when it purchased Motorola
and launched the Nexus 7, a sleek tablet that competed
directly with the iPad and Kindle. As Google looks toward
Marketing Excellence
>> Google
In 1998, two Stanford University PhD students, Larry
Page and Sergey Brin, founded a search engine com-
pany and named it Google. The name plays on the
number googol—1 followed by 100 zeroes—and refers
to the massive quantity of data available online that the
company helps users find. Google’s corporate mission
is “To organize the world’s information and make it uni-
versally accessible and useful.” As such, the company
focuses first and foremost on creating the perfect search
engine. Google search works because it uses the mil-
lions of links on other Web sites to help determine which
sites offer the most valuable content. The company has
become the worldwide market leader for search engines
through its strategic business focus and constant prod-
uct innovation.
Google creates and distributes its products for free,
which in turn has attracted a host of online advertisers
seeking targeted advertising space. About 96 percent of
its revenues come from online advertising, which means
that creating new advertising space is critical to the
company’s growth. Google sells advertising space on its
search pages through a program called AdWords, which
is linked to specific keywords. Hundreds of thousands
of companies use AdWords by buying “search ads,”
little text-based boxes shown alongside relevant search
results that advertisers pay for only when users click on
them. Google also runs an advertising program called
AdSense, which allows any Web site to display targeted
Google ads relevant to the content of its site. Web site
publishers earn money every time their visitors click on
these ads.
In addition to offering prime online real estate for
advertisers, Google adds value by providing tools so
businesses can better target their ads and understand
the effectiveness of their marketing. Google Analytics, for
example, is free to Google’s advertisers and provides a
custom report detailing how Internet users found the site,
what ads they saw and/or clicked on, how they behaved
on the site, and how much traffic was generated.
Questions
1. What are the pros, cons, and risks associated with
Nike’s core marketing strategy?
2. If you were Adidas, how would you compete with Nike?
Sources: Justin Ewers and Tim Smart, “A Designer Swooshes In,” U.S. News & World Report,
January 26, 2004, p. 12; “Corporate Media Executive of the Year,” Delaney Report, January 12,
2004, p. 1; Barbara Lippert, “Game Changers: Inside the Three Greatest Ad Campaigns of the Past
Three Decades,” Adweek, November 17, 2008; “10 Top Nontraditional Campaigns,” Advertising
Age, December 22, 2003, p. 24; Chris Zook and James Allen, “Growth Outside the Core,” Harvard
Business Review, December 2003, p. 66; Jeremy Mullman, “NIKE; What Slowdown? Swoosh
Rides Games to New High,” Advertising Age, October 20, 2008, p. 34; Allison Kaplan, “Look Just
Like Tiger (until You Swing),” America’s Intelligence Wire, August 9, 2009; Reena Jana and Burt
Helm, “Nike Goes Green, Very Quietly,” BusinessWeek, June 22, 2009; Emily Jane Fox and Chris
Isidore, “Nike Ends Contracts with Armstrong,” CNNMoney.com, October 17, 2012; Nike Annual
Report 2012.
M01_KOTL2621_15_GE_C01.indd 54 03/03/15 2:00 PM
Youtube.com
CNNMoney.com
defining MARkeTing foR The new ReAliTies | chapter 1 55
the future, the company wants to offer the ultimate mobile
solution—Google mobile devices along with mobile ser-
vices so users can use all Google all the time.
Google’s ultimate goal is to reach as many people
as possible on the Web—whether by PC or by mobile
devices. The more users on the Web, the more adver-
tising Google can sell. Google’s new products not only
accomplish this goal but also make the Web a more per-
sonalized experience.
Google has enjoyed great success as a company
and a brand in its short lifetime. From the beginning, it
has strived to be one of the “good guys” in the corpo-
rate world, supporting a touchy-feely work environment,
strong ethics, and a famous founding credo: “Don’t be
evil.” Google currently holds a 67 percent market share
for core searches in the United States, significantly
greater than Microsoft’s 17 percent and Yahoo!’s 15 per-
cent market shares. Globally, Google holds a more domi-
nant lead, with 85 percent market share over Yahoo!’s
8 percent and Microsoft’s 3 percent. Google’s revenues
topped $59 billion in 2013, and the company was ranked
the second most powerful brand in the world with a
brand value of $107 billion. In addition, Google’s $400
billion market capitalization in 2014 edged out companies
like Walmart and Microsoft to become the second most
valuable company in the world.
Questions
1. With a portfolio as diverse as Google’s, what are the
company’s core brand values?
2. What’s next for Google? Is the company right to put
so much focus on Mobile?
Sources: www.google.com; Catherine P. Taylor, “Google Flex,” Adweek, March 20, 2006, cover
story; Richard Karpinski, “Keywords, Analytics Help Define User Lifetime Value,” Advertising Age,
April 24, 2006, p. S2; Danny Gorog, “Survival Guide,” Herald Sun, March 29, 2006; Julie Schlosser,
“Google,” Fortune, October 31, 2005, pp. 168–69; Jefferson Graham, “Google’s Profit Sails Past
Expectations,” USA Today, October 21, 2005; Dan Frommer,“Google’s Android Mobile Platform Is
Getting Huge,” Advertising Age, October 8, 2009; Rita Chang, “Google Set for Richer Advertising
on Smartphones,” Advertising Age, October 5, 2009; “comScore Releases September 2012
U.S. Search Engine Rankings,” comScore.com, October 11, 2012; Claire Cain Miller, “As Google
Changes, Its Revenue Keeps Rising,” The New York Times, July 19, 2012; Roben Farzad, “Google at
$400 Billion: A New No. 2 in Market Cap,” Bloomberg Businessweek, February 12, 2104.
M01_KOTL2621_15_GE_C01.indd 55 03/03/15 2:00 PM
www.google.com
comScore.com
56
In This Chapter, We Will Address
the Following Questions
1. How does marketing affect customer value? (p. 57)
2. How is strategic planning carried out at the corporate and divisional levels?
(p. 60)
3. How is strategic planning carried out at the business unit level? (p. 70)
4. What does a marketing plan include? (p. 77)
HP, led by President and CEO Meg
Whitman, is revising its corporate
strategy to reflect significant changes
in the marketing environment.
Source: ChinaFotoPress via Getty Images
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57
Marketing and Customer Value
The task of any business is to deliver customer value at a profit. A company can win only by fine-tuning the value
delivery process and choosing, providing, and communicating superior value to increasingly well-informed buyers.
The Value DelIVerY Process
The traditional—but dated—view of marketing is that the firm makes something and then sells it, with market-
ing taking place during the selling process. Companies that take this view succeed only in economies marked by
goods shortages where consumers are not fussy about quality, features, or style—for example, basic staple goods
in developing markets.
In economies with many different types of people, each with individual wants, perceptions, preferences, and
buying criteria, the smart competitor must design and deliver offerings for well-defined target markets. This
realization inspired a new view of business processes that places marketing at the beginning of planning. Instead of
emphasizing making and selling, companies now see themselves as part of a value delivery process.
We can divide the value creation and delivery sequence into three phases.2 First, choosing the value is the
“homework” marketers must do before any product exists. They must segment the market, select the appropri-
ate target, and develop the offering’s value positioning. The formula “segmentation, targeting, positioning (STP)”
is the essence of strategic marketing. The second phase is providing the value. Marketing must identify specific
product features, prices, and distribution. The task in the third phase is communicating the value by utilizing the
Internet, advertising, sales force, and any other communication tools to announce and promote the product. The
value delivery process begins before there is a product and continues through development and after launch. Each
phase has cost implications.
This chapter begins by examining some of the stra-
tegic marketing implications in creating customer value. We’ll
look at several perspectives on planning and describe how to
draw up a formal marketing plan.
Developing the right marketing strategies over time requires a blend of discipline and
flexibility. Firms must stick to a strategy but also constantly improve it. In today’s fast-changing marketing world,
identifying the best long-term strategies is crucial—but challenging—as HP has been finding out.1
A true technology pioneer, Hewlett-Packard (HP) has encountered much difficulty in recent years,
culminating in a massive quarterly charge of more than $9.5 billion in 2012, its biggest ever. Of
that total, $8 billion was a write-down in the value of its IT services unit as the result of a disastrous
acquisition of EDS. Revenue for the unit dropped when customers stopped signing large, long-term
outsourcing contracts that were at the core of the unit’s business model. A feud with Oracle, among
other factors, hurt HP’s sales of large servers to business customers. In a maturing market with few good new prod-
ucts, PC sales slowed so much that HP announced it was exiting the business. Printer and ink sales dropped as con-
sumers began to print less. New CEO Meg Whitman vowed to increase
the company’s emphasis on design, reorganizing the PC group to come
up with a cleaner, minimalist sensibility. Admitting that the company
did not yet have a strategy for mobile phones, Whitman acknowledged
there was much work to be done.
Developing Marketing
Strategies and Plans
2
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58 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
The Value chaIn
Harvard’s Michael Porter has proposed the value chain as a tool for identifying ways to create more customer
value.3 According to this model, every firm is a synthesis of activities performed to design, produce, market,
deliver, and support its product. Nine strategically relevant activities—five primary and four support activities—
create value and cost in a specific business.
The primary activities are (1) inbound logistics, or bringing materials into the business; (2) operations,
or converting materials into final products; (3) outbound logistics, or shipping out final products; (4) mar-
keting, which includes sales; and (5) service. Specialized departments handle the support activities—(1)
procurement, (2) technology development, (3) human resource management, and (4) firm infrastructure.
(Infrastructure covers the costs of general management, planning, finance, accounting, legal, and government
affairs.)
The firm’s task is to examine its costs and performance in each value-creating activity, benchmarking against
competitors, and look for ways to improve. Managers can identify the “best of class” practices of the world’s
best companies by consulting customers, suppliers, distributors, financial analysts, trade associations, and
the media to see who seems to be doing the best job. Even the best companies can benchmark, against other
industries if necessary, to improve their performance. GE has benchmarked against P&G as well as developing
its own best practices.4
The firm’s success depends not only on how well each department performs its work, but also on how well the
company coordinates departmental activities to conduct core business processes.5 These processes include:
• The market-sensing process—gathering and acting upon information about the market
• The new-offering realization process—researching, developing, and launching new high-quality offerings
quickly and within budget
• The customer acquisition process—defining target markets and prospecting for new customers
• The customer relationship management process—building deeper understanding, relationships, and offer-
ings to individual customers
• The fulfillment management process—receiving and approving orders, shipping goods on time, and collect-
ing payment
Strong companies are reengineering their work flows and building cross-functional teams to be responsible
for each process.6 Ford established a cross-functional team to help reduce water usage per vehicle by 30 percent.7
AT&T, LexisNexis, and Pratt & Whitney have reorganized their employees into cross-functional teams; cross-
functional teams operate in nonprofit and government organizations as well.8
A firm also needs to look for competitive advantages beyond its own operations in the value chains of suppli-
ers, distributors, and customers. Many companies today have partnered with specific suppliers and distributors to
create a superior value delivery network, also called a supply chain.
core comPeTencIes
Companies today outsource less-critical resources if they can obtain better quality or lower cost. The key is to
own and nurture the resources and competencies that make up the essence of the business. Many textile, chemical,
and computer/electronic product firms use offshore manufacturers and focus on product design and develop-
ment and marketing, their core competencies. A core competency has three characteristics: (1) It is a source of
competitive advantage and makes a significant contribution to perceived customer benefits; (2) It has applica-
tions in a wide variety of markets; and (3) It is difficult for competitors to imitate.
Competitive advantage also accompanies distinctive capabilities or excellence in broader business processes.
Wharton’s George Day sees market-driven organizations as excelling in three distinctive capabilities: market
sensing, customer linking, and channel bonding.9 In terms of market sensing, Day believes tremendous opportu-
nities and threats often begin as “weak signals” from the “periphery” of a business.10 He suggests systematically
developing peripheral vision by asking three questions related to learning from the past, evaluating the present,
and envisioning the future.
Businesses may need to realign themselves to maximize core competencies. Realignment has three steps: (1)
(re)defining the business concept or “big idea”; (2) (re)shaping the business scope, sometimes geographically;
and (3) (re)positioning the company’s brand identity. Peabody Energy implemented a new global organizational
structure—creating geographic business units in the Americas, Australia, and Asia—to reflect its growing global
footprint.11 Changes in business fortunes often necessitate realignment and restructuring, as Panasonic and other
Japanese technology and electronic companies found.12
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 59
PanasOnic As Panasonic approaches its 100th anniversary in 2018, it faces unprecedented difficulties,
notably a massive loss of roughly $19 billion over 2011 and 2012. For years, its “Ideas for Life” positioning had fueled
innovation, generating successful products like its rugged Toughbook notebook computers. Its television sets and other home
electronics ran into trouble, however, when the economy stalled just as consumers began to treat flat-screen LCD televisions
as a commodity. Further, a strong yen and high manufacturing costs in Japan made it difficult for Panasonic to compete on
price. Anti-Japanese sentiment from a territorial dispute proved a stumbling block in China. Finally, the acquisition of Sanyo in
2009, designed to help the company sell more green-energy products, was disappointing. A major restructuring by new presi-
dent Kazuhiro Tsuga in fall 2012 scaled back manufacturing in Japan, abandoned the mobile phone market overseas, and cut
back investment in solar panels and rechargeable batteries. Tsuga emphasized that Panasonic will streamline business units
and emphasize profit, not just revenue growth.
The cenTral role of sTraTeGIc PlannInG
Only a select group of companies have historically stood out as master marketers (see Table 2.1). These compa-
nies focus on the customer and are organized to respond effectively to changing needs. They all have well-staffed
marketing departments, and their other departments accept that the customer is king. They also often have
strong marketing leadership in the form of a successful CMO (see “Marketing Memo: What Does It Take to Be a
Successful CMO?”).
To ensure they execute the right activities, marketers must prioritize strategic planning in three key areas:
(1) managing the businesses as an investment portfolio, (2) assessing the market’s growth rate and the company’s
position in that market, and (3) establishing a strategy. The company must develop a game plan for achieving each
business’s long-run objectives.
Most large companies consist of four organizational levels: (1) corporate, (2) division, (3) business unit, and (4)
product. Corporate headquarters is responsible for designing a corporate strategic plan to guide the whole enter-
prise; it makes decisions on the amount of resources to allocate to each division as well as on which businesses to
start or eliminate. Each division establishes a plan covering the allocation of funds to each business unit within the
division. Each business unit develops a strategic plan to carry that business unit into a profitable future. Finally,
each product level (product line, brand) develops a marketing plan for achieving its objectives.
The marketing plan is the central instrument for directing and coordinating the marketing effort. It operates
at two levels: strategic and tactical. The strategic marketing plan lays out the target markets and the firm’s value
proposition, based on an analysis of the best market opportunities. The tactical marketing plan specifies the
marketing tactics, including product features, promotion, merchandising, pricing, sales channels, and service. The
complete planning, implementation, and control cycle of strategic planning is shown in Figure 2.1. Next, we con-
sider planning at each of the four levels of the organization.
So
ur
ce
: A
lb
er
to
C
ris
to
fa
ri/
A
3/
co
nt
ra
st
o/
R
ed
ux
Panasonic has encountered
some marketplace challenges
in recent years, forcing it
to make changes in what
businesses it is in and how
they are run.
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60 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
Corporate and Division
Strategic Planning
Whether they let their business units set their own goals and strategies or collaborate in doing so, all corporate
headquarters undertake four planning activities:
1. Defining the corporate mission
2. Establishing strategic business units
3. Assigning resources to each strategic business unit
4. Assessing growth opportunities
We’ll briefly look at each process.
Organizing
Implementing
Diagnosing results
Planning Implementing Controlling
Measuring results
Taking corrective
action
Corporate planning
Division planning
Business planning
Product planning
| Fig. 2.1 |
The Strategic
Planning, Implemen-
tation, and Control
Processes
Table 2.1 Some Examples of Master Marketers
Amazon.com Enterprise Rent-A-Car Red Bull
Apple Google Ritz-Carlton
Bang & Olufsen Harley-Davidson Samsung
Best Buy Honda Southwest Airlines
BMW IKEA Starbucks
Caterpillar LEGO Target
Club Med McDonald’s Tesco
Costco Nike Toyota
Disney Nordstrom Virgin
eBay Procter & Gamble Walmart
Electrolux Progressive Insurance Whole Foods
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 61
The challenge chief marketing officers (CMOs) face is that success factors are many and varied. CMOs must have strong quantitative and qualitative skills;
they must have an independent, entrepreneurial attitude but work closely with other departments; and they must capture the “voice” of consumers yet have
a keen bottom-line understanding of how marketing creates value. Two-thirds of top CMOs think return-on-marketing-investment (ROMI) will be the primary
measure of their effectiveness in 2015.
One survey asking 200 senior-level marketing executives which innate and learned qualities were most important yielded these answers:
Innate Qualities Learned Qualities
• Risk taker • Global experience
• Willingness to make decisions • Multichannel expertise
• Problem-solving ability • Cross-industry experience
• Change agent • Digital focus
• Results-oriented • Operational knowledge
Marketing experts George Day and Robert Malcolm believe three driving forces will change the role of the CMO in the coming years: (1) predictable marketplace
trends, (2) the changing role of the C-suite, and (3) uncertainty about the economy and organizational design. They identify five priorities for any successful CMO:
1. Act as the visionary for the future of the company.
2. Build adaptive marketing capabilities.
3. Win the war for marketing talent.
4. Tighten the alignment with sales.
5. Take accountability for returns on marketing spending.
Perhaps the most important role for any CMO is to infuse a customer perspective in business decisions affecting any customer touch point (where a cus-
tomer directly or indirectly interacts with the company). Increasingly, these customer insights must have a global focus. As one top executive search firm leader
said, “Tomorrow’s CMO will have to have global and international experience. You can do it without living abroad . . . but you have to get exposure to those
markets. It opens your eyes to new ways of doing business, increases cultural sensitivity and increases flexibility.”
Sources: Jennifer Rooney, “CMO Tenure Hits 43-Month Mark,” Forbes, June 14, 2012; Steven Cook, “It’s Time to Raise the CMO Bar,” www.cmo.com, January 24, 2012;
“From Stretched to Strengthened: Insights from the Global Chief Marketing Officer Study,” IBM CMO C-Suite Studies, October 2011; Natalie Zmuda, “Global Experience
Rises as Prerequisite to Getting Ahead,” Advertising Age, June 10, 2012; George S. Day and Robert Malcolm, “The CMO and the Future of Marketing,” Marketing
Management, Spring 2012, pp. 34–43; Marc De Swann Arons and Frank Van Den Driest, The Global Brand CEO: Building the Ultimate Marketing Machine (New York:
Airstream, 2011); Marylee Sachs, The Changing MO of the CMO: How the Convergence of Brand and Reputation Is Affecting Marketers (Surry, England: Gower, 2011);
Marylee Sachs, What the New Breed of CMOs Know That You Don’t (Surry, England: Gower, 2013).
What Does it Take to Be a Successful CMO?marketing memo
DefInInG The corPoraTe mIssIon
An organization exists to accomplish something: to make cars, lend money, provide a night’s lodging. Over time,
the mission may change to respond to new opportunities or market conditions. Amazon.com changed its mission
from being the world’s largest online bookstore to aspiring to be the world’s largest online store; eBay changed
from running online auctions for collectors to running online auctions of all kinds of goods; and Dunkin’ Donuts
switched its emphasis from doughnuts to coffee.
To define its mission, a company should address Peter Drucker’s classic questions:13 What is our business? Who
is the customer? What is of value to the customer? What will our business be? What should our business be? These
simple-sounding questions are among the most difficult a company will ever face. Successful companies continu-
ously ask and answer them.
business DefiniTion Companies often define themselves in terms of products: They are in the “auto
business” or the “clothing business.” Market definitions of a business, however, describe the business as a customer-
satisfying process. Products are transient; basic needs and customer groups endure forever. Transportation is
a need: the horse and carriage, automobile, railroad, airline, ship, and truck are products that meet that need.
Consider how Steelcase takes a market definition approach to its business.14
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steeLcase The world’s best-selling maker of office furniture, Steelcase describes itself as “the global
leader in furnishing the work experience in office environments.” Defining its business broadly, former CEO James
Hackett believes, “enabled a lot of the great insights that we had found out about work to be transferred beyond the
office (and into furnishing home offices, schools and health care facilities).” Steelcase uses a 23-person research
team to gain those insights and conducts interviews and surveys, films office activities, and uses sensors to measure
how workers use rooms and furnishings. Firms are ordering fewer cubicles and filing cabinets, for instance, and
more benches, tables, and café seating to free employees to brainstorm and collaborate. Hackett defines the trend
as the move from an “I/Fixed” to a “We/Mobile” mentality. Increased performance is the company’s key goal. If it
feels it will make workers happier and more productive, Steelcase can convince a firm to modernize and upgrade its
office furniture.
Viewing businesses in terms of customer needs can suggest additional growth opportunities. Table 2.2 lists
companies that have moved from a product to a market definition of their business.
A target market definition tends to focus on selling a product or service to a current market. Pepsi could
define its target market as everyone who drinks carbonated soft drinks, and competitors would therefore be other
carbonated soft drink companies. A strategic market definition, however, also focuses on the potential market. If
Pepsi considered everyone who might drink something to quench his or her thirst, its competition would include
noncarbonated soft drinks, bottled water, fruit juices, tea, and coffee.
So
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: ©
St
ee
lc
as
e
20
14
Steelcase has found much
success by redefining its
business as more broadly than
office furniture.
Table 2.2 Product-Oriented versus Market-Oriented Definitions of a Business
Company Product Definition Market Definition
Union Pacific Railroad We run a railroad. We are a people-and-goods mover.
Xerox We make copying equipment. We help improve office productivity.
Hess Corporation We sell gasoline. We supply energy.
Paramount Pictures We make movies. We market entertainment.
Encyclopaedia Britannica We sell encyclopedias online. We distribute information.
Carrier We make air conditioners and furnaces. We provide climate control in the home.
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 63
CrafTing a Mssion sTaTeMenT A clear, thoughtful mission statement, developed collaboratively
with and shared with managers, employees, and often customers, provides a shared sense of purpose, direction,
and opportunity. At its best it reflects a vision, an almost “impossible dream,” that provides direction for the next
10 to 20 years. Sony’s former president, Akio Morita, wanted everyone to have access to “personal portable sound,”
so his company created the Walkman and portable CD player. Fred Smith wanted to deliver mail anywhere in the
United States before 10:30 am the next day, so he created FedEx.
Good mission statements have five major characteristics.
1. They focus on a limited number of goals. Compare a vague mission statement such as “To build total brand
value by innovating to deliver customer value and customer leadership faster, better, and more completely
than our competition” to Google’s ambitious but more focused mission statement, “To organize the world’s
information and make it universally accessible and useful.”
2. They stress the company’s major policies and values. Narrowing the range of individual discretion lets
employees act consistently on important issues.
3. They define the major competitive spheres within which the company will operate. Table 2.3 summarizes
some key competitive dimensions for mission statements.
4. They take a long-term view. Management should change the mission only when it ceases to be relevant.
5. They are as short, memorable, and meaningful as possible. Marketing consultant Guy Kawasaki advocates
developing three- to four-word corporate mantras—like “Enriching Women’s Lives” for Mary Kay—rather
than mission statements.15
Table 2.3 Defining Competitive Territory and Boundaries
in Mission Statements
• Industry. Some companies operate in only one industry; some only in a set of related industries; some only in
industrial goods, consumer goods, or services; and some in any industry.
• Caterpillar focuses on the industrial market; John Deere operates in the industrial and consumer markets.
• Products and applications. Firms define the range of products and applications they will supply.
• St. Jude Medical’s mission is “develop medical technology and services that put more control into the hands
of those who treat cardiac, neurological and chronic pain patients, worldwide. We do this because we are
dedicated to advancing the practice of medicine by reducing risk wherever possible and contributing to
successful outcomes for every patient.”
• Competence. The firm identifies the range of technological and other core competencies it will master and
leverage.
• Japan’s NEC has built its core competencies in computing, communications, and components to support
production of laptop computers, television receivers, and handheld telephones.
• Market segment. The type of market or customers a company will serve is the market segment.
• Aston Martin makes only high-performance sports cars. Gerber serves primarily the baby market.
• Vertical. The vertical sphere is the number of channel levels, from raw material to final product and distribution,
in which a company will participate.
• At one extreme are companies with a large vertical scope. American Apparel dyes, designs, sews, markets,
and distributes its line of clothing apparel out of a single building in downtown Los Angeles.16
• At the other extreme are “hollow corporations,” which outsource the production of nearly all goods and services
to suppliers. Metro newspaper is published in 56 editions in 22 countries on four continents and is read by
more than 17 million people every day. It employs few reporters and owns no printing presses; instead it
purchases its articles from other news sources and outsources all its printing and much of its distribution to
third parties.17
• Geographical. The range of regions, countries, or country groups in which a company will operate defines its
geographical sphere.
• Some companies operate in a specific city or state. Others are multinationals like Deutsche Post DHL and Royal
Dutch/Shell, which each operate in more than 100 countries.
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esTablIshInG sTraTeGIc busIness
unITs
Large companies normally manage quite different businesses, each
requiring its own strategy. At one time, General Electric classified
its businesses into 49 strategic business units (SBUs). An SBU has
three characteristics:
1. It is a single business, or a collection of related businesses, that
can be planned separately from the rest of the company.
2. It has its own set of competitors.
3. It has a manager responsible for strategic planning and profit
performance, who controls most of the factors affecting profit.
The purpose of identifying the company’s strategic business
units is to develop separate strategies and assign appropriate fund-
ing. Senior management knows its portfolio of businesses usually
includes a number of “yesterday’s has-beens” as well as “tomor-
row’s winners.” Liz Claiborne has put more emphasis on some of its
younger businesses such as Juicy Couture, Lucky Brand Jeans, Mexx,
and Kate Spade while selling businesses without the same buzz
(Ellen Tracy, Sigrid Olsen, and Laundry).
assIGnInG resources
To each sbu18
Once it has defined SBUs, management must decide how to allocate
corporate resources to each. The GE/McKinsey Matrix classified each
SBU by the extent of its competitive advantage and the attractiveness
of its industry. Management could decide to grow, “harvest” or draw
cash from, or hold on to the business. BCG’s Growth-Share Matrix used relative market share and annual rate of mar-
ket growth as criteria for investment decisions, classifying SBUs as dogs, cash cows, question marks, and stars.
Portfolio-planning models like these have largely fallen out of favor as oversimplified and subjective. Newer
methods rely on shareholder value analysis and on whether the market value of a company is greater with an SBU
or without it. These value calculations assess the potential of a business based on growth opportunities from global
expansion, repositioning or retargeting, and strategic outsourcing.
assessInG GrowTh oPPorTunITIes
Assessing growth opportunities includes planning new businesses, downsizing, and terminating older businesses.
If there is a gap between future desired sales and projected sales, corporate management will need to develop or
acquire new businesses to fill it.
Figure 2.2 illustrates this strategic-planning gap for a hypothetical manufacturer of blank DVD discs
called Cineview. The lowest curve projects expected sales from the current business portfolio over the next
So
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: ©
H
or
iz
on
s
W
W
P/
A
la
m
y
Metro outsources
much of its production
and operations for the
different newspapers
which it publishes in
markets around the
world.
Strategic-Planning
Gap
Time (years)
0 5
Sa
le
s
($
m
ill
io
ns
)
4321
Diversification g
rowth
Integrative growth
Intensive growth
Desired
sales
Current
portfolio
| Fig. 2.2 |
The Strategic-
Planning Gap
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 65
So
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: ©
P
at
ti
M
cC
on
vi
lle
/A
la
m
y
Liz Claiborne has
put more emphasis
on its Juicy Couture
stores than its other
slower-growing lines of
business.
five years. The highest describes desired sales over the same
period. Evidently, the company wants to grow much faster than
its current businesses will permit. How can it fill the strategic-
planning gap?
The first option is to identify opportunities for growth within
current businesses (intensive opportunities). The second is to
identify opportunities to build or acquire businesses related to cur-
rent businesses (integrative opportunities). The third is to identify
opportunities to add attractive unrelated businesses (diversification
opportunities).
inTensive growTh Corporate management should first
review opportunities for improving existing businesses. One useful
framework is a “product-market expansion grid,” which considers
the strategic growth opportunities for a firm in terms of current and
new products and markets.
The company first considers whether it could gain more market
share with its current products in their current markets, using a
market-penetration strategy. Next it considers whether it can find
or develop new markets for its current products, in a market-
development strategy. Then it considers whether it can develop new
products for its current markets with a product- development strat-
egy. Later the firm will also review opportunities to develop new
products for new markets in a diversification strategy. Consider
how ESPN has pursued a variety of growth opportunities (see
Figure 2.3).19
esPn Through its singular focus on sports programming and news, ESPN grew from a small regional broad-
caster into the biggest name in sports. In the early 1990s, the company crafted a well-thought-out plan: Wherever
sports fans watched, read, and discussed sports, ESPN would be there. It pursued this strategy by expanding its brand
and now encompasses 10 cable channels, a Web site, a magazine, a few restaurants (ESPN Zone), more than 600 lo-
cal radio affiliates, original movies and television series, book publishing, a sports merchandise catalog and online store,
music and video games, and a mobile service. ESPN International partly or wholly owns 47 television networks outside
the United States and a variety of additional businesses that reach sports fans in more than 200 countries and territories
across all seven continents. Now owned by The Walt Disney Company, ESPN contributes $9.4 billion a year in revenue, or
roughly three-fourths of Disney’s total cable network revenues. But perhaps the greatest tribute to the power of its brand
came from one male focus group respondent who said, “If ESPN was a woman, I’d marry her.”
So how might Cineview use these three major intensive growth strategies to increase its sales? It could try to
encourage its current customers to buy more by demonstrating the benefits of using DVD discs for data stor-
age in addition to video storage. It could try to attract competitors’ customers if it noticed major weaknesses
in their products or marketing programs. Finally, Cineview could try to convince nonusers to start using blank
DVD discs.
How can Cineview use a market-development strategy? First, it might try to identify potential user groups
in the current sales areas. If it has been selling DVD discs only to consumer markets, it might go after office and
factory markets. Second, it might seek additional distribution channels by adding mass merchandising or online
channels. Third, the company might sell in new locations in its home country or abroad.
Management should also consider new-product possibilities. Cineview could develop new features, such as
additional data storage capabilities or greater durability. It could offer the DVD discs at two or more quality
levels, or it could research an alternative technology such as flash drives.
These intensive growth strategies offer several ways to grow. Still, that growth may not be enough, and manage-
ment must also look for integrative growth opportunities.
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inTegraTive growTh A business can increase sales and profits through backward, forward, or
horizontal integration within its industry. Merck formed joint ventures as far back as 1989 with Johnson &
Johnson to sell over-the-counter pharmaceuticals and 1991 with DuPont to expand basic research. In 1997,
Merck and Rhône-Poulenc S.A. (now Sanofi-Aventis S.A.) combined their animal health and poultry genetics
businesses to form Merial Limited, a fully integrated animal health company. Finally, Merck acquired
Schering-Plough in 2009.20
Horizontal mergers and alliances don’t always work out. The merger between Sears and Kmart didn’t solve
either retailer’s problems.21 Nextel Communications Inc. merged with Sprint in 2005 in what Bloomberg’s financial
analysts called one the worst mergers of the past 10 years, in part due to their incompatible networks.22 Consider
the challenges faced by United and Continental in their merger.23
United and cOntinentaL Airline mergers are notoriously tricky, laden with regulations
and a host of potentially conflicting considerations about safety, cost, style, reliability, convenience, speed, and comfort.
United’s merger with Continental made sense strategically and financially, but logistical problems seemed endless because
the two airlines ran their businesses in very different ways, from boarding procedures to the way they brought planes into
the gate. Even coffee was a thorny issue; United served Starbucks while Continental used a company called Fresh Brew.
After extensive research, a suitable compromise was identified—a lighter fresh blend called Journeys—but customers
were unimpressed until the company discovered the two airlines had different brew baskets and United’s was actually
leaking water and diluting the coffee. New pillow packs were commissioned to solve the problem.
Online Television Interactive Other Media
ESPN
Zone
ESPN Wide World
Sports Complex
PrintConsumer
Products
ESPN The
Magazine
ESPN La
Revisita
Revisita
ESPN
ESPN
Books
ESPN
Books
ESPN
Music
ESPN Video
Games
ESPN Shop
Online
ESPN.com ESPNRadio.com
ESPNDeportes
.com
ESPNSoccer
net.com
ESPNCricinfo
.com
ESPNScrum
.com ESPNF1.com
ESPN
Radio
ESPN ESPN2 ESPN3 ESPN 3D ESPNU ESPN onABC ESPN Classic
ESPN
Deportes ESPN News
ESPN Deportes
Radio ESPN Mobile
ESPN
Rise ESPNw
Walt Disney
ESPN Brand Hierarchy
| Fig. 2.3 |
ESPN Growth
Opportunities
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Media companies, on the other hand, have long reaped the benefits of integrative growth. Consider how NBC
Universal leveraged one of its properties:24
Following the 2006 Curious George movie release via Universal Pictures, Curious George the TV show
was released on PBS Kids as a joint production by Universal Studios Family Productions, Imagine
Entertainment and WGBH Boston. Universal Studios Hollywood currently has an Adventures of
Curious George ride where kids can “soak up the thrills of a five hundred gallon water dump and
unleash thousands of flying foam balls. . . . ”
How might Cineview achieve integrative growth? The company might acquire one or more of its suppliers,
such as plastic material producers, to gain more control or generate more profit through backward integration.
It might acquire some wholesalers or retailers, especially if they are highly profitable, in forward integration.
Finally, Cineview might acquire one or more competitors, provided the government does not bar this horizontal
integration. However, these new sources may still not deliver the desired sales volume. In that case, the company
must consider diversification.
ESPN’s flagship SportsCenter
program is an anchor of its
television network and related
sports businesses.
So
ur
ce
: A
ss
oc
ia
te
d
Pr
es
s
United and Continental found it
harder to merge their airlines
than just blending their logos on
their planes.
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SP
N
, I
nc
.
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DiversifiCaTion growTh Diversification growth makes sense when good opportunities exist
outside the present businesses—the industry is highly attractive and the company has the right mix of
business strengths to succeed. From its origins as an animated film producer, The Walt Disney Company has
moved into licensing characters for merchandised goods, publishing general interest fiction books under the
Hyperion imprint, entering the broadcast industry with its own Disney Channel as well as ABC and ESPN,
developing theme parks and vacation and resort properties, and offering cruise and commercial theatre
experiences.
Several types of diversification are possible for Cineview. First, the company could choose a concentric strategy
and seek new products that have technological or marketing synergies with existing product lines, though appeal-
ing to a different group of customers. It might start a compact disc manufacturing operation because it knows
how to manufacture DVD discs or a flash drive manufacturing operation because it knows digital storage. Second,
it might use a horizontal strategy and produce plastic DVD cases, for example, though they require a different
manufacturing process. Finally, the company might seek new businesses with no relationship to its current
technology, products, or markets, adopting a conglomerate strategy to consider making application software or
personal organizers.
Downsizing anD DivesTing olDer businesses Companies must carefully prune, harvest, or
divest tired old businesses to release needed resources for other uses and reduce costs. To focus on its travel and
credit card operations, American Express spun off American Express Financial Advisors, which provided
insurance, mutual funds, investment advice, and brokerage and asset management services (it was renamed
Ameriprise Financial). American International Group (AIG) agreed to sell two of its subunits—American General
Indemnity Co. and American General Property Insurance Co.—to White Mountains Insurance Group as part of a
long-term growth strategy to discard redundant assets and focus on its core operations.25
orGanIzaTIon anD orGanIzaTIonal culTure
Strategic planning happens within the context of the organization. A company’s organization consists of
its structures, policies, and corporate culture, all of which can become dysfunctional in a rapidly changing
business environment. Whereas managers can change structures and policies (though with difficulty), the com-
pany’s culture is very hard to change. Yet adapting the culture is often the key to successfully implementing a
new strategy.
What exactly is a corporate culture? Some define it as “the shared experiences, stories, beliefs, and norms
that characterize an organization.” Walk into any company and the first thing that strikes you is the corporate
culture—the way people dress, talk to one another, and greet customers.
A customer-centric culture can affect all aspects of an organization. Enterprise Rent-A-Car features its own
employees in its latest “The Enterprise Way” ad campaign. Through its “Making It Right” training program,
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ty
Im
ag
es
Enterprise Rent-A-Car is known
for its strong consumer-centric
corporate culture.
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Enterprise empowers all employees to make their own decisions. One ad in the campaign, themed “Fix Any
Problem,” reinforces how any local Enterprise outlet has the authority to take actions to maximize customer
satisfaction.26
markeTInG InnoVaTIon
Innovation in marketing is critical. Imaginative ideas on strategy exist in many places within a company.
Senior management should identify and encourage fresh ideas from three generally underrepresented groups:
employees with youthful or diverse perspectives, employees far removed from company headquarters, and
employees new to the industry. Each group can challenge company orthodoxy and stimulate new ideas.
British-based Reckitt Benckiser has been an innovator in the staid household cleaning products industry by
generating 35 percent of sales from products under three years old.27 Its multinational staff is encouraged to dig
deep into consumer habits and is well rewarded for excellent performance. Slovenia-based Krka—makers of pre-
scription pharmaceuticals, non-prescription products and animal health products—aims to generate more than
40 percent of its total sales from new products.28 “Marketing Insight: Creating Innovative Marketing” describes
how some leading companies approach innovation.
Firms develop strategy by choosing their view of the future. The Royal Dutch/Shell Group has pioneered
scenario analysis, which develops plausible representations of a firm’s possible future using assumptions about
forces driving the market and different uncertainties. Managers think through each scenario with the question,
“What will we do if it happens?,” adopt one scenario as the most probable, and watch for signposts that might
confirm or disconfirm it.29 Consider the strategic challenges faced by the movie industry.30
parks and Walmart in retailing as examples of companies that were
successful by executing a big idea brilliantly over a long period of time.
To find breakthrough ideas, some companies immerse a range of
employees in solving marketing problems. Samsung’s Value Innovation
Program (VIP) isolates product development teams of engineers,
designers, and planners with a timetable and end date in the com-
pany’s center just south of Seoul, Korea, while 50 specialists help
guide their activities. To help make tough trade-offs, team members
draw “value curves” that rank attributes such as a product’s sound
or picture quality on a scale from 1 to 5. To develop a new car, BMW
mobilizes specialists in engineering, design, production, marketing,
purchasing, and finance at its Research and Innovation Center or
Project House.
Companies like Facebook and Google kickstart the creative
problem-solving process by using the phrase, “How might we?” Tim
Brown, CEO of IDEO, says IDEO asks “how might we” with each design
challenge. “The ‘How’ part assumes there are solutions out there—it
provides creative confidence,” Brown said. “The ‘Might’ part says we
can put ideas out there that might work or might not—either way, it’s
OK. And the ‘We’ part says we’re going to do it together and build on
each other’s ideas.”
Sources: Steve Hamm, “Innovation: The View from the Top,” BusinessWeek, April 3,
2006, pp. 52–53; Jena McGregor, “The World’s Most Innovative Companies,”
BusinessWeek, April 24, 2006, pp. 63–74; Rich Karlgard, “Digital Rules,” Forbes,
March 13, 2006, p. 31; Jennifer Rooney and Jim Collins, “Being Great Is Not Just
a Matter of Big Ideas,” Point, June 2006, p. 20; Moon Ihlwan, “Camp Samsung,”
BusinessWeek, July 3, 2006, pp. 46–47; Mohanbir Sawhney, Robert C. Wolcott,
and Inigo Arroniz, “The 12 Different Ways for Companies to Innovate,” MIT Sloan
Management Review (Spring 2006), pp. 75–85; Victoria Barret, “Why Salesforce.com
Ranks #1 on Forbes Most Innovative List,” Forbes, September 2012; Warren Berger,
“The Secret Phrase Top Innovators Use,” HBR Blog Network, September 17, 2012.
marketing
insight
Creating Innovative Marketing
When IBM surveyed top CEOs and government leaders about their pri-
orities, business-model innovation and coming up with unique ways of
doing things scored high. IBM’s own drive for business-model innova-
tion led to much collaboration, both within IBM and externally with com-
panies, governments, and educational institutions. Then-CEO Samuel
Palmisano noted how the breakthrough Cell processor, based on the
company’s Power architecture, would not have happened without col-
laboration with Sony and Nintendo, as well as competitors Toshiba and
Microsoft.
Procter & Gamble (P&G) has made it a goal for 50 percent of new
products to come from outside its labs—from inventors, scientists,
and suppliers whose new-product ideas can be developed in-house.
Mark Benioff, CEO and co-founder of Salesforce.com, believes the key
to innovation is the ability to adapt. While the company spent years
relying on disruptive ideas to come from within, it acquired two firms
for $1 billion because it “couldn’t afford to wait” and has purchased
24 firms in total. As Benioff notes, “Innovation is a continuum. You
have to think about how the world is evolving and transforming. Are
you part of the continuum?”
Business guru Jim Collins’s research emphasizes the importance
of systematic, broad-based innovation: “Always looking for the one big
breakthrough, the one big idea, is contrary to what we found: To build a
truly great company, it’s decision upon decision, action upon action, day
upon day, month upon month. . . . It’s cumulative momentum and no one
decision defines a great company.” Collins cites Walt Disney in theme
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So
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an
do
ut
/M
C
T
/N
ew
sc
om
Film studios are finding new
ways to expand their movie
franchises, as with Warner Bros.
and Batman.
Program
formulation
Strategy
formulation
Goal
formulation
Business
mission
External
environment
(opportunity &
threat analysis)
Internal
environment
(strengths/
weaknesses analysis)
SWOT analysis Implementation
Feedback
and
control
| Fig. 2.4 |
The Business Unit
Strategic-Planning
Process
MOVie indUstry Netflix and the Internet started a decline in DVD sales that began in 2007 and has
not stopped. The emergence of Redbox kiosks renting movies for $1 a day added yet another threat to the movie business
and DVD sales. Film studios clearly need to prepare for the day when films are primarily sold not through physical distribution
but through satellite and cable companies’ video-on-demand services. Although studios make 70 percent on a typical $4.99
cable viewing versus 30 percent on the sale of a DVD, sales of DVDs still generate 70 percent of a film’s profits. To increase
electronic distribution without destroying their DVD business, studios are experimenting with new approaches. Some, such
as Warner Bros., are releasing a DVD at the same time as online and cable versions of a movie. Disney cross-promotes its
parent-friendly films at its theme parks, on its TV channels, and in its stores. Warner has entered the video game business
(such as with Dark Knight Batman) in hopes of generating additional revenue on its movie characters. Warner Interactive
typically spends $30 million to $40 million to make its games and generated close to $1 billion in sales in 2011. Film studios
are considering all possible scenarios as they rethink their business model in a world where the DVD is no longer king.
Business Unit Strategic Planning
The business unit strategic-planning process consists of the steps shown in Figure 2.4. We examine each step in
the sections that follow.
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The busIness mIssIon
Each business unit needs to define its specific mission within the broader company mission. Thus, a television-
studio-lighting-equipment company might define its mission as “To target major television studios and become
their vendor of choice for lighting technologies that represent the most advanced and reliable studio lighting
arrangements.” Notice this mission does not mention winning business from smaller television studios, offering
the lowest price, or venturing into non-lighting products.
swoT analYsIs
The overall evaluation of a company’s strengths, weaknesses, opportunities, and threats is called SWOT analysis.
It’s a way of monitoring the external and internal marketing environment.
exTernal environMenT (opporTuniTy anD ThreaT) analysis A business unit must
monitor key macroenvironment forces and significant microenvironment factors that affect its ability to earn profits.
It should set up a marketing intelligence system to track trends and important developments and any related
opportunities and threats.
Good marketing is the art of finding, developing, and profiting from these opportunities.31 A market-
ing opportunity is an area of buyer need and interest that a company has a high probability of profitably
satisfying. There are three main sources of market opportunities.32 The first is to offer something that is in
short supply. This requires little marketing talent, as the need is fairly obvious. The second is to supply an
existing product or service in a new or superior way. How? The problem detection method asks consumers
for their suggestions, the ideal method has them imagine an ideal version of the product or service, and the
consumption chain method asks them to chart their steps in acquiring, using, and disposing of a product.
This last method can often lead to a totally new product or service, which is the third main source of market
opportunities.
Marketers need to be good at spotting opportunities. Consider the following:
• A company may benefit from converging industry trends and introduce hybrid products or services new to
the market. Cell phone manufacturers have released phones with digital photo and video capabilities, Global
Positioning Systems (GPS), and so on.
• A company may make a buying process more convenient or efficient. Mobil introduced Speed Pass, one
of the first widely deployed RFID (radio-frequency identification) payment systems, to allow consumers to
quickly and easily pay for gas at the pump.
• A company can meet the need for more information and advice. Angie’s List connects individuals with
local home improvement and other services that have been reviewed by others.
• A company can customize a product or service. Timberland allows customers to choose colors for different
parts of their boots, add initials or numbers, and select different stitching and embroidery.
• A company can introduce a new capability. Consumers can create and edit digital “iMovies” with the
iMac and upload them to an Apple Web server or Web site such as YouTube to share with friends around
the world.
• A company may be able to deliver a product or service faster. FedEx discovered a way to deliver mail and
packages much more quickly than the U.S. Postal Service.
• A company may be able to offer a product at a much lower price. Pharmaceutical firms have created generic
versions of brand-name drugs, and mail-order drug companies often sell for less.
To evaluate opportunities, companies can use market opportunity analysis (MOA) to ask questions like:
1. Can we articulate the benefits convincingly to a defined target market(s)?
2. Can we locate the target market(s) and reach them with cost-effective media and trade channels?
3. Does our company possess or have access to the critical capabilities and resources we need to deliver the
customer benefits?
4. Can we deliver the benefits better than any actual or potential competitors?
5. Will the financial rate of return meet or exceed our required threshold for investment?
In the opportunity matrix in Figure 2.5(a), the best marketing opportunities facing the TV-lighting-equipment
company appear in the upper-left cell (#1). The opportunities in the lower-right cell (#4) are too minor to consider.
The opportunities in the upper-right cell (#2) and the lower-left cell (#3) are worth monitoring in the event that
any improve in attractiveness and potential.
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72 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
An environmental threat is a challenge posed by an unfavorable trend or development that, in the absence of
defensive marketing action, would lead to lower sales or profit. Figure 2.5(b) illustrates the threat matrix facing the
TV-lighting-equipment company. The threats in the upper-left cell are major because they have a high probability
of occurrence and can seriously hurt the company. To deal with them, the company needs contingency plans. The
threats in the lower-right cell are minor and can be ignored. The firm will want to carefully monitor threats in the
upper-right and lower-left cells in the event they grow more likely or serious.
inTernal environMenT (sTrengThs anD weaknesses) analysis It’s one thing to find
attractive opportunities and another to be able to take advantage of them. Each business needs to evaluate its
internal strengths and weaknesses. Consider Loan Bright.33
LOan Bright At the Web site of Loan Bright, an online mortgage company, potential homebuyers
can get a personalized list of lenders and available terms. At first, Loan Bright made its money by selling the homebuyer
data to high-end mortgage lenders, including Wells Fargo Home Mortgage, Bank of America Mortgage, and Chase Home
Mortgage. These firms turned the data into leads for their sales teams. But worrisome internal issues arose. For one
thing, Loan Bright had to please every one of its big clients, yet each was becoming tougher to satisfy, eating up time
and resources. The company’s top managers gathered to analyze the market and Loan Bright’s strengths and weak-
nesses. They decided that instead of serving a few choice clients, they would serve many more individual loan officers
who responded to the company’s Google ads and only wanted to buy a few leads. The switch required revamping the
way Loan Bright salespeople brought in new business, including using a one-page contract instead of the old 12-page
contract and creating a separate customer service department.
A SWOT-like analysis was instrumental in the development of the corporate strategy that drove Dell to years of
success.
• Dell’s strength was selling more effectively and efficiently directly to consumers than IBM and Compaq, its
hardware competitors at the time.
• Dell’s weakness, however, was that its brand was not as strong and it lacked a well-entrenched channel infra-
structure and solid dealer relationships.
High
Success Probability
At
tr
ac
tiv
en
es
s
(a) Opportunity Matrix
Low 1.
2.
3.
4.
Company develops more powerful
lighting system
Company develops device to
measure energy efficiency
of any lighting system
Company develops device to
measure illumination level
Company develops software program
to teach lighting fundamentals to
TV studio personnel
43
21High
Low
High
Probability of Occurrence
Se
rio
us
ne
ss
(b) Threat Matrix
Low
1.
2.
3.
4.
Competitor develops superior
lighting system
Major prolonged economic
depression
Higher costs
Legislation to reduce number
of TV studio licenses43
21High
Low
| Fig. 2.5 |
Opportunity and
Threat Matrices
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 73
• Dell’s opportunity was that the consumer market was becoming more sophisticated and customers increas-
ingly knew exactly what they wanted.
• Dell’s threat was that it would fail to generate a big enough customer base in the face of strong competitors and
demanding channel partners.
With consumers desiring purchasing convenience and flexibility, however, the Internet offered a
powerful direct marketing and selling option. Dell’s business strategy combined direct sales, Internet
marketing, mass customization, and just-in-time manufacturing to capitalize on the market opportunity it
was offered.
Businesses can evaluate their own strengths and weaknesses by using a form like the one shown in
“Marketing Memo: Checklist for Evaluating Strengths/Weaknesses Analysis.” Clearly, the business doesn’t have
to correct all its weaknesses, nor should it gloat about all its strengths. The big question is whether it should
limit itself to those opportunities for which it possesses the required strengths or consider those that might
require it to find or develop new strengths.
Performance Importance
Major
Strength
Minor
Strength Neutral
Minor
Weakness
Major
Weakness High Med. Low
Marketing
1. Company reputation
2. Market share
3. Customer satisfaction
4. Customer retention
5. Product quality
6. Service quality
7. Pricing effectiveness
8. Distribution effectiveness
9. Promotion effectiveness
10. Sales force effectiveness
11. Innovation effectiveness
12. Geographical coverage
_____
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Finance
13. Cost or availability of capital
14. Cash flow
15. Financial stability
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Manufacturing
16. Facilities
17. Economies of scale
18. Capacity
19. Able, dedicated workforce
20. Ability to produce on time
21. Technical manufacturing skill
_____
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Organization
22. Visionary, capable leadership
23. Dedicated employees
24. Entrepreneurial orientation
25. Flexible or responsive
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Checklist for Evaluating Strengths/Weaknesses Analysismarketing memo
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Goal formulaTIon
Once the company has performed a SWOT analysis, it can proceed to goal formulation, developing specific goals
for the planning period. Goals are objectives that are specific with respect to magnitude and time.
Most business units pursue a mix of objectives, including profitability, sales growth, market share improvement,
risk containment, innovation, and reputation. The business unit sets these objectives and then manages by objec-
tives (MBO). For an MBO system to work, the unit’s objectives must meet four criteria:
1. They must be arranged hierarchically, from most to least important. The business unit’s key objective for
the period may be to increase the rate of return on investment. Managers can increase profit by increasing
revenue and reducing expenses. They can grow revenue, in turn, by increasing market share and prices.
2. Objectives should be quantitative whenever possible. The objective “to increase the return on investment
(ROI)” is better stated as the goal “to increase ROI to 15 percent within two years.”
3. Goals should be realistic. Goals should arise from an analysis of the business unit’s opportunities and
strengths, not from wishful thinking.
4. Objectives must be consistent. It’s not possible to maximize sales and profits simultaneously.
Other important trade-offs include short-term profit versus long-term growth, deep penetration of existing
markets versus development of new markets, profit goals versus nonprofit goals, and high growth versus low risk.
Each choice calls for a different marketing strategy.34
Many believe adopting the goal of strong market share growth may mean foregoing strong short-term profits.
Volkswagen has 15 times the annual revenue of Porsche—but Porsche’s profit margins are seven times bigger than
Volkswagen’s. Other successful companies such as Google, Microsoft, and Samsung have maximized profitability
and growth.
sTraTeGIc formulaTIon
Goals indicate what a business unit wants to achieve; strategy is a game plan for getting there. Every business
must design a strategy for achieving its goals, consisting of a marketing strategy and a compatible technology
strategy and sourcing strategy.
porTer’s generiC sTraTegies Michael Porter has proposed three generic strategies that provide a good
starting point for strategic thinking: overall cost leadership, differentiation, and focus.35
• Overall cost leadership. Firms work to achieve the lowest production and distribution costs so they can
underprice competitors and win market share. They need less skill in marketing. The problem is that other
firms will usually compete with still-lower costs and hurt the firm that rested its whole future on cost.
• Differentiation. The business concentrates on achieving superior performance in an important cus-
tomer benefit area valued by a large part of the market. The firm seeking quality leadership, for example,
must make products with the best components, put them together expertly, inspect them carefully, and
effectively communicate their quality.
• Focus. The business focuses on one or more narrow market segments, gets to know them intimately, and
pursues either cost leadership or differentiation within the target segment.
The online air travel industry has provided a good example of these three strategies: Travelocity has pursued a
differentiation strategy by offering the most comprehensive range of services to the traveler; Lowestfare has pur-
sued a lowest-cost strategy for the leisure travel market; and Last Minute has pursued a niche strategy by focus-
ing on travelers who have the flexibility to travel on very short notice. Some companies use a hybrid approach.
According to Porter, competing firms directing the same strategy to the same target market constitute a strate-
gic group.36 The firm that carries out the strategy best will make the most profits. Circuit City went out of business
because it did not stand out in the consumer electronics industry as lowest in cost, highest in perceived value, or
best in serving some market segment.
Porter draws a distinction between operational effectiveness and strategy. Competitors can quickly copy the
operationally effective company using benchmarking and other tools, thus diminishing the advantage of operational
effectiveness. Strategy, on the other hand, is “the creation of a unique and valuable position involving a different set of
activities.” A company can claim it has a strategy when it “performs different activities from rivals or performs similar
activities in different ways.”
sTraTegiC allianCes Even giant companies—AT&T, Philips, and Starbucks—often cannot achieve
leadership, either nationally or globally, without forming alliances with domestic or multinational companies that
complement or leverage their capabilities and resources.
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Just doing business in another country may require the firm to license its product, form a joint venture with a
local firm, or buy from local suppliers to meet “domestic content” requirements. Many firms have developed global
strategic networks, and victory is going to those who build the better one. The Star Alliance brings together 27 airlines,
including Lufthansa, United Airlines, Singapore Airlines, Air New Zealand, and South Africa Airways, in a huge global
partnership that allows travelers in 193 countries to make nearly seamless connections to hundreds of destinations.37
Many strategic partnerships take the form of marketing alliances. These fall into four major categories.
1. Product or service alliances—One company licenses another to produce its product, or two companies
jointly market their complementary products or a new product. The credit card industry is a complicated
combination of cards jointly marketed by banks such as Bank of America, credit card companies such as
Visa, and affinity companies such as Alaska Airlines.
2. Promotional alliances—One company agrees to carry a promotion for another company’s product or service. In
2011, VIBE urban music and lifestyle magazine announced a promotional alliance with Hoop It Up, the world’s
largest participatory 3-on-3 basketball tournament program, with competitions in 35 cities. The multi-platform
partnership included VIBE digital, VIBE Cityguide App, editorial coverage and promotion in VIBE, and a highly
integrated social media campaign with a strong VIBE branded presence at all Hoop It Up live events nationwide.38
3. Logistics alliances—One company offers logistical services for another company’s product. Warner Music
Group and Sub Pop Records created the Alternative Distribution Alliance (ADA) in 1993 as a joint venture
to distribute and manufacture records owned by independent labels. ADA is the leading “indie” distribution
company in the United States for both physical and digital product.
4. Pricing collaborations—One or more companies join in a special pricing collaboration. Hotel and rental car
companies often offer mutual price discounts.
Companies need to give creative thought to finding partners that might complement their strengths and offset
their weaknesses. Well-managed alliances allow companies to obtain a greater sales impact at lower cost. To keep
their strategic alliances thriving, corporations have begun to develop organizational structures to support them,
and many have come to view the ability to form and manage partnerships as core skills called partner relationship
management (PRM).
After years of growth through acquisition and buying interests in two dozen companies, the world’s
biggest wireless telecom operator, Vodafone, has looked outside for partners to help it leverage its existing assets.39
VOdafOne To spur more innovation and growth, London-based Vodafone has embraced open source
software and open platforms that allow it to tap into the creativity and skills of others. With its Web portal called Betavine,
amateur or professional software developers can create and test their latest mobile applications on any network, not just
Vodafone’s. While these developers retain intellectual property rights, Vodafone gains early exposure to the latest trends
and ensures that innovations are compatible with its network. Some of the new apps include real-time train arrivals
and departures, movie show times, and an Amazon.com widget with personalized details. With 404 million customers
in 30 countries, the £46 billion company hasn’t had trouble finding help from interested corporate partners either. Dell
has collaborated with Vodafone to design laptops and low-priced netbooks with built-in wireless broadband access over
Vodafone’s networks.
Rather than just form a partnership, a firm may choose to just acquire another firm. Kraft acquired Cadbury in
2010, in part due to Cadbury’s deep roots in emerging markets like India where Kraft did not have a strong pres-
ence. The acquisition also permitted Kraft to do a restructuring and divide its businesses into two companies: one
focused on grocery products, the other on snack foods.40
ProGram formulaTIon anD ImPlemenTaTIon
Even a great marketing strategy can be sabotaged by poor implementation. If the unit has decided to attain
technological leadership, it must strengthen its R&D department, gather technological intelligence, develop
leading-edge products, train its technical sales force, and communicate its technological leadership.
Once they have formulated marketing programs, marketers must estimate their costs. Is participating in a
particular trade show worth it? Will hiring another salesperson contribute to the bottom line? Activity-based
cost accounting (ABC)—described in greater detail in Chapter 5— can help determine whether each marketing
program is likely to produce sufficient results to justify its cost.41
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Today’s businesses recognize that unless they nurture other
stakeholders—customers, employees, suppliers, distributors—they
may never earn sufficient profits for the stockholders. A company
might aim to delight its customers, perform well for its employees,
and deliver a threshold level of satisfaction to its suppliers. It must
not violate any stakeholder group’s sense of fairness about the treat-
ment it is receiving relative to the others.42
A dynamic relationship connects the stakeholder groups.
A smart company creates a high level of employee satisfac-
tion, which leads to higher effort, which leads to higher-quality
products and services, which creates higher customer satisfaction,
which leads to more repeat business, which leads to higher growth
and profits, which leads to high stockholder satisfaction, which
leads to more investment, and so on. This virtuous circle spells
profits and growth.
According to McKinsey & Company, strategy is only one of seven
elements—all of which start with the letter s—in successful business
practice.43 The first three—strategy, structure, and systems—are
considered the “hardware” of success. The next four—style, skills,
staff, and shared values—are the “software.”
The first “soft” element, style, means company employees share
a common way of thinking and behaving. The second, skills,
means employees have the skills needed to carry out the company’s
strategy. Staffing means the company has hired able people, trained
them well, and assigned them to the right jobs. The fourth element,
shared values, means employees share the same guiding values.
When these elements are present, companies are usually more suc-
cessful at strategy implementation.44
So
ur
ce
: ©
A
nd
re
w
H
as
so
n/
A
la
m
y
Kraft acquired Cadbury in part because of its knowledge of and presence
in emerging markets.
clean energy, health and nutrition, consumerism in the emerging
world, and infrastructure. R&D investments in those four areas
totaled $9 billion over a five-year period.
• The runaway success of Amazon’s Kindle, Apple’s iPad, and
other tablet products have turned the book world upside down.
Bookstores, libraries, and publishers are all recognizing that
the sale and delivery of a book are now just a download away.
Libraries are lending e-readers in addition to “stocking” e-books
for lending. When the due date arrives, the book just disappears!
• The textbook market is being transformed by new entries such as
Flat World Knowledge offering customizable, discount texts. Free
e-textbooks at some schools allow users to scroll page by page,
highlight and annotate, and share comments with classmates and
instructors. Some students buy a new or used paper version of the
e-textbook anyway. As one notes, “When I’m using the e-textbook,
there’s the temptation to check e-mail, check my grades, or check
Facebook.”
Sources: Erik Rhey, “A GPS Maker Shifts Gears,” Fortune, March 19, 2012; Geoff
Colvin, “Dow’s New Direction,” Fortune, March 19, 2012; Ben Bradford, “Libraries
Grapple with the Downside of E-books,” www.npr.org, May 29, 2012; Sharon
Tregaskis, “Buy the Book,” Cornell Alumni Magazine, November–December 2012;
“Great Digital Expectations,” The Economist, September 10, 2011.
marketing
insight
Businesses Charting a New
Direction
Continued prosperity or even survival may depend on how quickly
and effectively a firm is able to chart a new direction. Consider these
examples.
• With consumers increasingly using smart phones for directions
and maps, Garmin, the biggest maker of GPS devices, found sales
declining rapidly. Its solution was to concentrate on partnering
with automakers to embed GPS systems in dashboard “command
centers.” Its selling points are that most smart phones are not
optimized for use when driving and are thus dangerous to use
behind the wheel. Hedging its bets, Garmin also has its own app
available for smart phones.
• When Dow Chemical found its commodity chemical strategy was
no longer profitable, new CEO Andrew Livirie decided to shift the
company’s focus to unique, innovative high-margin products like
solar shingles. Dow’s intent was to capitalize on four main trends:
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feeDback anD conTrol
A company’s strategic fit with the environment will inevitably erode because the market environment changes faster
than the company’s seven Ss. Thus, a company might remain efficient yet lose effectiveness. Peter Drucker pointed
out that it is more important to “do the right thing”—to be effective—than “to do things right”—to be efficient. The
most successful companies, however, excel at both.
Once an organization fails to respond to a changed environment, it becomes increasingly hard to recapture its
lost position. Organizations, especially large ones, are subject to inertia. It’s difficult to change one part without
adjusting everything else. Yet organizations can be changed through strong leadership, preferably in advance of a
crisis. The key to organizational health is willingness to examine the changing environment and adopt new goals
and behaviors. “Marketing Insight: Businesses Charting a New Direction” describes how some different companies
and industries are adjusting to the new marketing realities that have changed their fortunes.
The Nature and Contents
of a Marketing Plan
Working within the plans set by the levels above them, marketing managers come up with a marketing plan
for individual products, lines, brands, channels, or customer groups. A marketing plan is a written docu-
ment that summarizes what the marketer has learned about the marketplace and indicates how the firm plans
to reach its marketing objectives.45 It contains tactical guidelines for the marketing programs and financial
allocations over the planning period.46
A marketing plan is one of the most important outputs of the marketing process. It provides direction and focus
for a brand, product, or company. It informs and motivates key constituents inside and outside an organization
about its marketing goals and how these can be achieved. Nonprofit organizations use marketing plans to guide
their fund-raising and outreach efforts, and government agencies use them to build public awareness of nutrition
and stimulate tourism.
More limited in scope than a business plan, the marketing plan documents how the organization will achieve
its strategic objectives through specific marketing strategies and tactics, with the customer as the starting point. It
is also linked to the plans of other departments. Suppose a marketing plan calls for selling 200,000 units annually.
The production department must gear up to make that many units, finance must arrange funding to cover the
expenses, human resources must be ready to hire and train staff, and so on. Without the appropriate level of orga-
nizational support and resources, no marketing plan can succeed.
The most frequently cited shortcomings of current marketing plans, according to marketing executives, are
lack of realism, insufficient competitive analysis, and a short-run focus. (See “Marketing Memo: Marketing
Plan Criteria” for questions to ask in developing marketing plans.)
Here are some questions to ask in evaluating a marketing plan.
1. Is the plan simple and succinct? Is it easy to understand and act on? Does it communicate its content clearly and practically? Is it not unnecessarily
long?
2. Is the plan complete? Does it include all the necessary elements? Does it have the right breadth and depth? Achieving the right balance between
completeness and lots of detail and simplicity and clear focus is often the key to a well-constructed marketing plan.
3. Is the plan specific? Are its objectives concrete and measurable? Does it provide a clear course of action? Does it include specific activities, each with
specific dates of completion, specific persons responsible, and specific budgets?
4. Is the plan realistic? Are the sales goals, expense budgets, and milestone dates realistic? Has a frank and honest self-critique been conducted to raise
possible concerns and objections?
Sources: Adapted from Tim Berry and Doug Wilson, On Target: The Book on Marketing Plans, 2nd ed. (Eugene, OR: Palo Alto Software, 2000); Alexander Chernev,
The Marketing Plan Handbook (Chicago, IL: Cerebellum Press, 2011); authors’ experiences.
Marketing Plan Criteriamarketing memo
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Most marketing plans cover one year in anywhere from 5 to 50 pages. Smaller businesses may create shorter
or less formal marketing plans; corporations generally require highly structured documents. Every part of the
plan must be described in considerable detail. Some companies post their marketing plan on an internal Web
site so everyone can consult it and collaborate on changes. A marketing plan usually contains the following
sections.
• Executive summary and table of contents.
• Situation analysis. This section presents relevant background data on sales, costs, the market, competi-
tors, and the macroenvironment. How do we define the market, how big is it, and how fast is it growing?
What are the relevant trends and critical issues? Firms will use all this information to carry out a SWOT
analysis.
• Marketing strategy. Here the marketing manager defines the mission, marketing and financial
objectives, and needs the market offering is intended to satisfy as well as its competitive positioning.
All this requires inputs from other areas, such as purchasing, manufacturing, sales, finance, and human
resources.
• Marketing tactics. Here the marketing manager outlines the marketing activities that will be undertaken to
execute the marketing strategy.
• The product or service offering section describes the key attributes and benefits that will appeal to target
customers.
• The pricing section specifies the general price range and how it might vary across different types of cus-
tomers or channels, including any incentive or discount plans.
• The channel section outlines the different forms of distribution, such as direct or indirect.
• The communications section usually offers high-level guidance about the general message and media
strategy. Firms will often develop a separate communication plan to provide the detail necessary for
agencies and other media partners to effectively design the communication program.
• Financial projections. Financial projections include a sales forecast, an expense forecast, and a break-even
analysis. On the revenue side is forecasted sales volume by month and product category, and on the expense
side the expected costs of marketing, broken down into finer categories. The break-even analysis estimates
how many units the firm must sell monthly (or how many years it will take) to offset its monthly fixed costs
and average per-unit variable costs.
A more complex method of estimating profit is risk analysis. Here we obtain three estimates
(optimistic, pessimistic, and most likely) for each uncertain variable affecting profitability, under an
assumed marketing environment and marketing strategy for the planning period. The computer simulates
possible outcomes and computes a distribution showing the range of possible rates of returns and their
probabilities.
• Implementation controls. The last section outlines the controls for monitoring and adjusting implementa-
tion of the plan. Typically, it spells out the goals and budget for each month or quarter so management can
review each period’s results and take corrective action as needed.
The role of research
Marketers need up-to-date information about the environment, the competition, and the selected market seg-
ments. Often, analysis of internal data is the starting point for assessing the current marketing situation, supple-
mented by marketing intelligence and research investigating the overall market, the competition, key issues,
threats, and opportunities. As the plan is put into effect, marketers use research to measure progress toward
objectives and identify areas for improvement.
Finally, marketing research helps marketers learn more about their customers’ requirements, expectations,
perceptions, satisfaction, and loyalty. Thus, the marketing plan should outline what marketing research will be
conducted and when, as well as how the findings will be applied.
The role of relaTIonshIPs
Although the marketing plan shows how the company will establish and maintain profitable customer relation-
ships, it also affects both internal and external relationships. First, it influences how marketing staff work with
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each other and with other departments to deliver value and satisfy customers. Second, it affects how the com-
pany works with suppliers, distributors, and partners to achieve the plan’s objectives. Third, it influences the
company’s dealings with other stakeholders, including government regulators, the media, and the community
at large.
from markeTInG Plan To markeTInG acTIon
Marketers start planning well in advance of the implementation date to allow time for marketing research, analy-
sis, management review, and coordination between departments. As each action program begins, they monitor
ongoing results, investigate any deviation from plans, and take corrective steps as needed. Some prepare contin-
gency plans; marketers must be ready to update and adapt marketing plans at any time.
The marketing plan typically outlines budgets, schedules, and marketing metrics for monitoring and evaluat-
ing results. With budgets, marketers can compare planned and actual expenditures for a given period. Schedules
show when tasks were supposed to be completed and when they actually were. Marketing metrics track actual
outcomes of marketing programs to see whether the company is moving forward toward its objectives, as we’ll
discuss in Chapter 4.
Summary
1. The value delivery process includes choosing (or iden-
tifying), providing (or delivering), and communicating
superior value. The value chain is a tool for identifying
key activities that create value and costs in a specific
business.
2. Strong companies develop superior capabilities in man-
aging core business processes such as new-product
realization, inventory management, and customer acqui-
sition and retention. In today’s marketing environment,
managing these core processes effectively means cre-
ating a marketing network in which the company works
closely with all parties in the production and distribution
chain, from suppliers of raw materials to retail distribu-
tors. Companies no longer compete—marketing net-
works do.
3. Market-oriented strategic planning is the managerial pro-
cess of developing and maintaining a viable fit between
the organization’s objectives, skills, and resources and
its changing market opportunities. The aim of strate-
gic planning is to shape the company’s businesses
and products so they yield target profits and growth.
Strategic planning takes place at four levels: corporate,
division, business unit, and product.
4. The corporate strategy establishes the framework with-
in which the divisions and business units prepare their
strategic plans. Setting a corporate strategy means
defining the corporate mission, establishing strategic
business units (SBUs), assigning resources to each,
and assessing growth opportunities.
5. Marketers should define a business or business unit
as a customer-satisfying process. Taking this view can
reveal additional growth opportunities.
6. Strategic planning for individual businesses includes
defining the business mission, analyzing external
opportunities and threats, analyzing internal strengths
and weaknesses, formulating goals, formulating strategy,
formulating supporting programs, implementing the pro-
grams, and gathering feedback and exercising control.
7. Each product level within a business unit must develop
a marketing plan for achieving its goals. The marketing
plan is one of the most important outputs of the market-
ing process.
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
M02_KOTL2621_15_GE_C02.indd 79 04/03/15 9:02 PM
80 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
Applications
Marketing Debate
What Good Is a Mission Statement?
Mission statements are often the product of much delib-
eration and discussion. At the same time, critics claim they
sometimes lack “teeth” and specificity or do not vary much
from firm to firm and make the same empty promises.
Take a position: Mission statements are critical to a
successful marketing organization versus Mission state-
ments rarely provide useful marketing value.
Marketing Discussion
Marketing Planning
Consider Porter’s value chain and the holistic market-
ing orientation model. What implications do they have for
marketing planning? How would you structure a marketing
plan to incorporate some of their concepts?
presence, consumer insight, design, professional legacy,
Scandinavian heritage, wide product range, people and
culture, and sustainability leadership.
The vision of the Electrolux Group is to become the
best appliance company in the world as measured by
its customers, employees, and shareholders. It bases its
strategy on four pillars: innovative products, operational
excellence, profitable growth, and dedicated employees.
Its brand portfolio is strategically planned to serve luxury,
premium, and mass markets. Alongside the Electrolux
brand, the group has seven other strategic brands,
namely Grand Cuisine, AEG, Zanussi, Eureka, Frigidaire,
Molteni, and Westinghouse.
The “innovation triangle” at Electrolux encourages
close cooperation between its marketing, R&D, and de-
sign functions to ensure faster reach to the market based
on solid consumer insights. This enables Electrolux to
use “same product architecture, differentiated design” to
develop global modularized platforms. These platforms
facilitate planning across divisions by making it easier to
spread a successful launch from one market to another
with adaptations to local preferences, and deliver greater
customer value.
By maintaining strategic emphasis on increasing op-
erational efficiency, Electrolux has restructured its produc-
tion across divisions globally. Electrolux has shifted nearly
65 percent of its manufacturing from mainly Western
Europe and North America to low-cost regions.
Pursuing its strategy of profitable growth, Electrolux
continuously innovates to enhance its current products
and ranges to penetrate existing markets. In 2013, it
launched many innovative products in North America and
Japan. Expanding to growth markets, Electrolux tapped
the potential of the Chinese market by launching a full
range of kitchen and laundry appliances of more than 60
products designed exclusively for China.
An important aspect of Electrolux’s strategy is
to grow through mergers and acquisitions, and build
Marketing Excellence
>> Electrolux
AB Electrolux, popularly known as Electrolux, is a global
leader in home and professional appliances, including
refrigerators, cookers, dishwashers, washing machines,
vacuum cleaners, air conditioners, and small domes-
tic appliances. It sells more than 50 million products in
150 countries. Headquartered in Stockholm, Sweden,
Electrolux was founded in 1919, as a result of a merger
between AB Lux, and Svenska Electron AB. In 2013,
Electrolux had revenues of approximately $14.5 billion
and employed 61,000 people worldwide.
The Electrolux group consists of six business divi-
sions, including four major appliances divisions, a small
appliances division, and a professional products division.
The core markets for Electrolux are Western Europe,
North America, and Australia, New Zealand and Japan
accounting for 65 percent of group sales. These mar-
kets are characterized by low population growth and
high replacement product sales. The growth markets for
Electrolux are Africa, Middle East and Eastern Europe,
Latin America, and Southeast Asia and China contribut-
ing 35 percent to its sales. Given the rising living stan-
dards in the growth markets, Electrolux aims to increase
its share of sales in these markets to 50 percent by intro-
ducing innovative product offerings in the next two years.
In 2013, Electrolux was among the top five global
players in the household appliances industry, along
with Whirlpool, the Haier Group, Bosch-Siemens, and
LG Electronics. These companies contributed to nearly
50 percent of the global appliances sales. The major
drivers of this industry are increased per capita income,
changing lifestyles, consumer spending, housing ac-
tivities, and urbanization. Economic growth in emerg-
ing markets is expected to boost the industry. The
main competitive advantages of Electrolux are global
M02_KOTL2621_15_GE_C02.indd 80 04/03/15 9:02 PM
develoPing MARkeTing sTRATegies And PlAns | chapter 2 81
brand portfolio through horizontal integration. In the last
40 years, the group has had a series of acquisitions
around the world that strengthened its global posi-
tion through effective targeting and brand positioning
in domestic and regional markets. Examples of such
acquisitions include Zanussi in Europe; AEG in Germany;
Frigidaire, Kelvinator, and White Westinghouse in North
America; Refripar in Brazil; and the Olympic Group in
Middle East and North Africa.
In September 2014, Electrolux unveiled its agreement
to acquire the appliance business of General Electric, GE
Appliances, for a cash consideration of $3.3 billion. GE
Appliances is one of the leading manufacturers of kitchen
and laundry products in North America, and makes more
than 90 percent of its sales in this region and runs its own
distribution and logistics network. The acquisition also
included a 48.4 percent shareholding in the Mexican ap-
pliance company Mabe that develops and manufactures a
portion of the GE Appliances product range as part of a joint
venture with GE. According to Keith McLaughlin, President
and CEO of Electrolux, the acquisition was expected
to give the company more financial horsepower on its
balance sheet to do even more business around the world.
With a growing portfolio of smartly positioned brands,
global reach, innovations based on consumer insight,
operational excellence and manufacturing efficiency, and
increased financial power, Electrolux is all set to establish
greater dominance in the global home appliances industry.
Questions
1. Evaluate Electrolux’s strategy in light of its vision and
the global trends in the household appliance industry.
2. What benefits will Electrolux receive from the acqui-
sition of GE Appliances? How does it fit in with the
strategic direction of the group? What other strategic
options can Electrolux pursue for future growth to
achieve greater global dominance?
Sources: Electrolux Group Annual Report 2013, www.electrolux.com; “History,” “Strategy,” and
“Markets,” www.electrolux.com; Katarina Gustafsson, “Electrolux CEO Hints at More Deals After GE
Appliances Purchase,” Bloomberg, September 8, 2014.
Emirates operates four of the 10 longest, non-stop com-
mercial flights in the world from Dubai to Los Angeles,
San Francisco, Dallas, and Houston. It employs over
52,000 people from 162 different countries. Emirates has
also been the world’s most valuable airline brand for the
third consecutive year, with a value of $5.5 billion. It was
awarded the prestigious Airline of the Year Award numer-
ous times by Air Transport World, in addition to more than
400 other distinguished industry sector awards.
The company has a fleet aged 72 months (as of
2013), young in comparison to that of the industry,
which is 140 months old. Good terms with Airbus and
Boeing favored huge acquisitions of long-haul airplanes.
These massive purchases have made Emirates the larg-
est Airbus (A380) and Boeing (777) aircraft operator in the
world, reflecting the global aspirations of the company.
Emirates is looked upon as an innovative organi-
zation in terms of technology due to its acquisition of
the groundbreaking storage infrastructure in the Middle
East. Additionally, the company is a major shareholder in
luxury five-star hotels. Its performance is attributed to its
customer-oriented approach revolving around the provi-
sion of a quality product: exclusive grade-A manufactured
Boeing and Airbus aircrafts, premium flight services, and
traveling at a competitive price. To cost-effectively carry
out cargo and ground handling, catering services, informa-
tion technology, and other travel amenities, Dnata supports
Emirates’ global ambitions. It is considered one of the larg-
est and most competitive air service providers worldwide.
Marketing Excellence
>> Emirates
Emirates is an airline company with a mission to provide
high-quality commercial air transportation services. The
company’s global strategy aims at efficient competition,
exceeding far beyond the limits of the Arabian Gulf and
Middle Eastern markets. In 1985, the Dubai government,
cognisant of the country’s limited oil resources, launched
the flag carrier as an alternative means to economic
growth in the United Arab Emirates (UAE).
In the very beginning, the airline served 60 destina-
tions in 42 countries across Europe, Middle East, Africa,
Asia, and Australia. To keep up with the aggressive com-
petition, Emirates emphasized product, equipment, and
excellent service, and promoted a quality image. To do
so, a multinational crew was recruited and a state-of-the-
art fleet was purchased.
Within two decades, Emirates expanded its destina-
tions and had remarkable financial returns. In 2014, it
served 142 destinations in 80 countries from its hub in
Dubai. It carried 44.5 million passengers, 5.1 million more
than in 2012−13, and 2.3 million tons of airfreight, up by
8 percent, which contributed to the 26th consecutive year
of profitable operations. The company has witnessed a
steady growth over time since its inception – it carried
26 million passengers and served 101 destinations in
2010; these figures were 14.5 million and 83 in 2005.
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82 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
In terms of corporate positioning, Emirates is not
looked upon as an Arab airline operating internation-
ally but rather as a global company based out of the
Middle East. This global positioning of the company
has spawned aversion from competitors that considered
Emirates as a serious threat in the market. These com-
petitors are struggling to compete with Emirates, particu-
larly due to its significant cost advantage. Some of these
competitors unequivocally accused Emirates of benefiting
from obscured UAE subsidies and exemptions on air-
port and aviation service charges. They also alleged that
Emirates takes advantage of the UAE’s sovereign borrow-
ing status to secure loans below market rates.
Despite its many strengths, the airline company is
not without faults. In its disregard for growing regional
competition, Emirates overlooks very obvious flaws in its
market strategy. For instance, Etihad Airways, an arm of
the Abu Dhabi government, is offering products that ap-
peal to travelers seeking premium services at competitive
prices. Gulf Air, which is partly owned by the Abu Dhabi
government, has also taken advantage of the open skies
policy to gain free access to the Dubai airport. Emirates
has also been massively acquiring aircrafts and inflating
the size of its fleets. While this represents vast invest-
ments, the implications are far-reaching. To be able to
have long-term advantages, the company should be-
come a shareholder in the Airbus or Boeing companies.
The airline endures cost pressure as fuel costs represent
leading expenditures accounting for 30.7 percent (2013)
of the overall operating costs. The company’s human
resources are already lean and it is cost effective on other
cost components. For how long can Emirates hold on
to its cost-cutting strategy without paying attention to
competitors?
Questions
1. How has Emirates been able to build a strong brand
in the competitive airline industry worldwide?
2. What are some of the apparent weaknesses with the
company’s strategic direction? How can the airline
address them?
3. With the decline of fuel prices globally, airline compa-
nies continue to reap the benefits. What impact will this
have on Emirates’ business strategy in the future?
Sources: Emirates Group Annual Report 2013−2014; John F. O’Connell,“An Examination of
the World’s Most Profitable Airline in 2009/10: the Emirates business model,” John F O’Connell
and George Williams, eds., Air Transport in the 21st Century: Key Strategic Developments (UK:
Ashgate, 2012), p. 421; Justin Bachman, “Emirates Flies Into America, and U.S. Airlines Grow
Anxious,” BusinessWeek, October 2, 2014; Kenneth Rapoza, “Why UAE And Qatar Have The
‘World’s Best’ Airlines,” Forbes, April 1, 2014; Scott McCartney, “Emirates, Etihad and Qatar Make
Their Move on the U.S.,” Wall Street Journal, November 6, 2014; Andrew Parker and Simeon Kerr,
“Emirates: In a sweet spot,” Financial Times, December 8, 2013; “Emirates increases competition
with Etihad and Qatar as it adds Chicago to its US network,” Centre for Aviation (CAPA), March 5,
2014; Jad Mouawad, “Emirates’ Ambitions Worry European Rivals,” New York Times, February 12,
2011, p. BU1; Also see Timothy Clark’s, President and CEO of Emirates, speech to the International
Aviation Club, September 13, 2012.
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 83
sample marketing Plan Pegasus sports International
1.0 Executive Summary
Pegasus Sports International is a start-up aftermarket inline skat-
ing accessory manufacturer. Inline skates have four or five wheels
arranged in a single line and are often called Rollerblades by the
general public after one of the early pioneers in the category.
In addition to the aftermarket products, Pegasus is developing
SkateTours, a service that takes clients out, in conjunction with a
local skate shop, and provides them with an afternoon of skating
using inline skates and some of Pegasus’s other accessories such
as SkateSails.
The aftermarket skate accessory market has been largely
ignored. Although there are several major manufacturers of
the skates themselves, the accessory market has not been
addressed. This provides Pegasus with an extraordinary opportu-
nity for market growth. Skating is a booming sport. Currently, most
of the skating is recreational. There are, however, a growing num-
ber of skating competitions, including team-oriented competitions
such as skate hockey as well as individual competitions such as
speed skate racing. Pegasus will work to grow these markets and
develop the skate transportation market, a more utilitarian use of
skating.
Pegasus has outlined a go-to-market marketing program that
combines highly relevant products and services with an evolving
direct-to-consumer distribution strategy to tap into customer pas-
sions and loyalty.
2.0 Situation Analysis
Pegasus is entering its first year of operation. Its products have
been well received, and marketing will be key to the develop-
ment of brand and product awareness as well as the growth of
the customer base. Pegasus International offers several different
aftermarket skating accessories, serving the growing inline skating
industry.
2.1 Market Summary
Pegasus possesses good information about the market and
knows a great deal about the common attributes of the most
prized customer. This information will be leveraged to better
understand who is served, what their specific needs are, and how
Pegasus can better communicate with them.
Target Markets
■ Recreational
■ Fitness
■ Speed
■ Hockey
■ Extreme
2.1.1 Market Demographics
The profile for the typical Pegasus customer consists of the follow-
ing geographic, demographic, and behavior factors:
Geographics
■ Pegasus has no set geographic target area. By leverag-
ing the expansive reach of the Internet and multiple delivery
services, Pegasus can serve both domestic and international
customers.
■ The total targeted population is 31 million users.
Demographics
■ There is an almost equal ratio between male and female
users.
■ Ages 13–46, with 48 percent clustering around ages 23–34.
The recreational users tend to cover the widest age range,
Table 2.4 Target Market Forecast
Target Market Forecast
Potential Customers Growth 2015 2016 2017 2018 2019 CAGR*
Recreational 10% 19,142,500 21,056,750 23,162,425 25,478,668 28,026,535 10.00%
Fitness 15% 6,820,000 7,843,000 9,019,450 10,372,368 11,928,223 15.00%
Speed 10% 387,500 426,250 468,875 515,763 567,339 10.00%
Hockey 6% 2,480,000 2,628,800 2,786,528 2,953,720 3,130,943 6.00%
Extreme 4% 2,170,000 2,256,800 2,347,072 2,440,955 2,538,593 4.00%
Total 10.48% 31,000,000 34,211,600 37,784,350 41,761,474 46,191,633 10.48%
*Compound Annual Growth Rate
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84 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
including young users through active adults. The fitness users
tend to be ages 20–40. The speed users tend to be in their
late 20s and early 30s. The hockey players are generally in
their teens through their early 20s. The extreme segment is of
similar age to the hockey players.
■ Of the users who are over 20, 65 percent have an undergrad-
uate degree or substantial undergraduate coursework.
■ The adult users have a median personal income of
$47,000.
Behavior Factors
■ Users enjoy fitness activities not as a means for a healthy life
but as intrinsically enjoyable activities in themselves.
■ Users spend money on gear, typically sports equipment.
■ Users have active lifestyles that include some sort of recre-
ation at least two to three times a week.
2.1.2 Market Needs
Pegasus is providing the skating community with a wide range
of accessories for all variations of skating. The company
seeks to fulfill the following benefits that are important to its
customers:
■ Quality craftsmanship. The customers work hard for
their money and do not enjoy spending it on disposable prod-
ucts that work for only a year or two.
■ Well-thought-out designs. The skating market has not
been addressed by well-thought-out products that serve
skaters’ needs. Pegasus’s industry experience and personal
dedication to the sport will provide it with the needed informa-
tion to produce insightfully designed products.
■ Customer service. Exemplary service is required to build
a sustainable business that has a loyal customer base.
2.1.3 Market Trends
Pegasus will distinguish itself by marketing products not previ-
ously available to skaters. The emphasis in the past has been to
sell skates and very few replacement parts. The number of skaters
is not restricted to any one single country, continent, or age group,
so there is a world market. Pegasus has products for virtually
every group of skaters.
The fastest-growing segment of this sport is the fitness skater
(Table 2.4). Therefore, the marketing is being directed toward this
group. BladeBoots will enable users to enter establishments with-
out having to remove their skates. BladeBoots will be aimed at the
recreational skater, the largest segment. SkateAids, on the other
hand, are great for everyone.
The sport of skating will also grow through SkateSailing.
This sport is primarily for the medium-to-advanced skater,
and its growth potential is tremendous. The sails that Pega-
sus has manufactured have been sold in Europe, following a
pattern similar to windsurfing. Windsailing originated in Santa
Monica but did not take off until it had already grown big in
Europe.
Another trend is group skating. More and more groups are
getting together on skating excursions in cities all over the world.
For example, San Francisco has night group skating that attracts
hundreds of people. The market trends are showing continued
growth in all directions of skating.
2.1.4 Market Growth
With the price of skates going down due to competition by so
many skate companies, the market has had steady growth
throughout the world, although sales have slowed down in some
markets. The growth statistics for 2015 were estimated to be
about 31 million units. More and more people are discovering—
and in many cases rediscovering—the health benefits and fun of
skating.
2.2 SWOT Analysis
The following SWOT analysis captures the key strengths and
weaknesses within the company and describes the opportunities
and threats facing Pegasus.
2.2.1 Strengths
■ In-depth industry experience and insight
■ Creative yet practical product designers
■ The use of a highly efficient, flexible business model utilizing
direct customer sales and distribution
2.2.2 Weaknesses
■ The reliance on outside capital necessary to grow the business
■ A lack of retailers who can work face to face with the
customer to generate brand and product awareness
■ The difficulty of developing brand awareness as a start-up
company
2.2.3 Opportunities
■ Participation within a growing industry
■ Decreased product costs through economies of scale
■ The ability to leverage other industry participants’ marketing
efforts to help grow the general market
2.2.4 Threats
■ Future/potential competition from an already-established
market participant
■ A continued slump in the economy that could have a nega-
tive effect on people’s spending of discretionary income on
fitness/recreational products
■ The release of a study that calls into question the safety
of skating or the inability to prevent major skating-induced
traumas
2.3 Competition
Pegasus Sports International is forming its own market. Although
there are a few companies that do make sails and foils that a few
skaters are using, Pegasus is the only brand that is truly designed
for and by skaters. The few competitors’ sails on the market are
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 85
not designed for skating but for windsurfing or for skateboards.
In the case of foils, storage and carrying are not practical. There
are different indirect competitors who are manufacturers of the
actual skates. After many years in the market, these companies
have yet to become direct competitors by manufacturing acces-
sories for the skates that they make.
2.4 Product Offering
Pegasus Sports International now offers several products:
■ The first product that has been developed is BladeBoots,
a cover for the wheels and frame of inline skates, which
allows skaters to enter places that normally would not allow
them in with skates on. BladeBoots come with a small
pouch and belt that converts to a well-designed skate
carrier.
■ The second product is SkateSails. These sails are specifically
designed for use while skating. Feedback that Pegasus has
received from skaters indicates skatesailing could become a
very popular sport. Trademarking this product is currently in
progress.
■ The third product, SkateAid, will be in production by the end
of the year. Other ideas for products are under development
but will not be disclosed until Pegasus can protect them
through pending patent applications.
2.5 Keys to Success
The keys to success are designing and producing products that
meet market demand. In addition, Pegasus must ensure total cus-
tomer satisfaction. If these keys to success are achieved, it will
become a profitable, sustainable company.
2.6 Critical Issues
As a start-up business, Pegasus is still in the early stages. The
critical issues are for Pegasus to:
■ Establish itself as the premier skating accessory company.
■ Pursue controlled growth that dictates that payroll expenses
will never exceed the revenue base. This will help protect
against recessions.
■ Constantly monitor customer satisfaction, ensuring that the
growth strategy will never compromise service and satisfac-
tion levels.
3.0 Marketing Strategy
The key to the marketing strategy is focusing on the speed,
health and fitness, and recreational skaters. Pegasus can
cover about 80 percent of the skating market because it pro-
duces products geared toward each segment. Pegasus is
able to address all of the different segments within the market
because, although each segment is distinct in terms of its users
and equipment, its products are useful to all of the different
segments.
3.1 Mission
Pegasus Sports International’s mission is to provide the customer
with the finest skating accessories available. “We exist to attract
and maintain customers. With a strict adherence to this maxim,
success will be ensured. Our services and products will exceed
the expectations of the customers.”
3.2 Marketing Objectives
■ Maintain positive, strong growth each quarter (notwithstand-
ing seasonal sales patterns).
■ Achieve a steady increase in market penetration.
■ Decrease customer acquisition costs by 1.5 percent per
quarter.
3.3 Financial Objectives
■ Increase the profit margin by 1 percent per quarter through
efficiency and economy-of-scale gains.
■ Maintain a significant research and development budget
(as a percentage relative to sales) to spur future product
developments.
■ Achieve a double- to triple-digit growth rate for the first three
years.
3.4 Target Markets
With a projected world skating market of 31 million that is steadily
growing (statistics released by the Sporting Goods Manufactur-
ers Association), the niche has been created. Pegasus’s aim is to
expand this market by promoting SkateSailing, a new sport that
is popular in both Santa Monica and Venice Beach in California.
The breakdown of participation in skating is as follows: 1+ percent
speed (growing), 8 percent hockey (declining), 7 percent extreme/
aggressive (declining), 22 percent fitness (nearly 7 million—the
fastest growing), and 61 percent recreational (first-timers). Pega-
sus’s products are targeting the fitness and recreational groups
because they are the fastest growing. These groups are gearing
themselves toward health and fitness, and combined they can
easily grow to 85 percent (or 26 million) of the market in the next
five years.
3.5 Positioning
Pegasus will position itself as the premier aftermarket skating
accessory company. This positioning will be achieved by leverag-
ing Pegasus’s competitive edge: industry experience and passion.
Pegasus is a skating company formed by skaters for skaters.
Its management is able to use its vast experience and personal
passion for the sport to develop innovative, useful accessories for
a broad range of skaters.
4.0 Marketing Tactics
The single objective of the marketing program is to position
Pegasus as the premier skating accessory manufacturer, serv-
ing the domestic market as well as the international market. The
marketing program will seek to first create customer awareness
concerning the offered products and services and then develop
the customer base. Specifically, Pegasus’s marketing program is
composed of the following approaches to product, pricing, distri-
bution, and communications.
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86 PART 1 | UndeRsTAnding MARkeTing MAnAgeMenT
4.1 Product
Several of Pegasus’s currently developed products have pat-
ents pending, and local market research indicates that there
is great demand for these products. Pegasus will achieve fast,
significant market penetration through a solid business model,
long-range planning, and a strong management team that is
able to execute this exciting opportunity. The three principals on
the management team have more than 30 years of combined
personal and industry experience. This extensive experience
provides Pegasus with the empirical information as well as the
passion to provide the skating market with much-needed after-
market products.
4.2 Pricing
This will be based on a per-product retail price. Because of the
advantages of selling directly, higher margins can be achieved
with premium pricing that will still appeal to customer segments.
4.3 Distribution
Pegasus will sell its products initially through its Web site. In ad-
dition to allowing for higher margins, this direct-to-the-consumer
approach will allow Pegasus to maintain a close relationship with
customers, which is essential for producing products that have
a true market demand. By the end of the year, Pegasus also will
have developed relationships with different skate shops and will
begin to sell some of its products through retailers.
4.4 Communications
The message that Pegasus will seek to communicate is that it
offers the best-designed, most useful skating accessories. This
message will be communicated through a variety of methods. The
first will be the Pegasus Web site, which will provide a rich source
of product information and offer consumers the opportunity to
purchase. A lot of time and money will be invested in the site to
provide the customer with the perception of total professionalism
and utility for Pegasus’s products and services.
The second marketing method will be advertisements placed
in numerous industry magazines. The skating industry is sup-
ported by several different glossy magazines designed to pro-
mote the industry as a whole. In addition, a number of smaller
periodicals serve the smaller market segments within the skating
industry. The last method of communication is the use of printed
sales literature. The two previously mentioned marketing meth-
ods will create demand for the sales literature, which will be sent
out to customers. The cost of the sales literature will be fairly
minimal because it will use the already-compiled information from
the Web site.
4.5 Marketing Research
Pegasus is blessed with the good fortune of being located in the
center of the skating world: Venice, California. It will be able to
leverage this opportune location by working with many of the dif-
ferent skaters who live in the area. Pegasus was able to test all
of its products not only with its principals, who are accomplished
skaters, but also with the many other dedicated and “newbie”
users located in Venice. The extensive product testing by a wide
variety of users provided Pegasus with valuable product feedback
and has led to several design improvements.
5.0 Financials
This section will offer the financial overview of Pegasus related
to marketing activities. Pegasus will address break-even analysis,
sales forecasts, and expense forecast and indicate how these
activities link to the marketing strategy.
5.1 Break-Even Analysis
The break-even analysis (Table 2.5) indicates that $7,760 will be
required in monthly sales revenue to reach the break-even point.
5.2 Sales Forecast
Pegasus feels that the sales forecast figures are conservative.
It will steadily increase sales as the advertising budget allows.
Although the target market forecast (Table 2.4) listed all of the po-
tential customers divided into separate groups, the sales forecast
(Table 2.6) groups customers into two categories: recreational and
competitive. Reducing the number of categories allows the reader
to quickly discern information, making the chart more functional.
Table 2.5 Break-Even Analysis
Monthly Units Break-Even 62
Monthly Sales Break-Even $ 7,760
Assumptions:
Average Per-Unit Revenue $125.62
Average Per-Unit Variable Cost $ 22.61
Estimated Monthly Fixed Cost $ 6,363
Table 2.6 Monthly Sales Forecast
Sales 2015 2016 2017
Recreational $455,740 $598,877 $687,765
Competitive $ 72,918 $ 95,820 $110,042
Total Sales $528,658 $694,697 $797,807
Direct Cost of Sales 2015 2016 2017
Recreational $ 82,033 $107,798 $123,798
Competitive $ 13,125 $ 17,248 $ 19,808
Subtotal Cost of Sales $ 95,158 $125,046 $143,606
5.3 Expense Forecast
The expense forecast will be used as a tool to keep the department
on target and provide indicators when corrections/modifications
are needed for the proper implementation of the marketing plan.
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develoPing MARkeTing sTRATegies And PlAns | chapter 2 87
6.0 Controls
The purpose of Pegasus’s marketing plan is to serve as a guide for
the organization. The following areas will be monitored to gauge
performance:
■ Revenue: monthly and annual
■ Expenses: monthly and annual
Table 2.7 Milestones
Plan
Milestones Start Date End Date Budget Manager Department
Marketing plan completion 1/1/15 2/1/15 $ 0 Stan Marketing
Web site completion 1/1/15 3/15/15 $20,400 outside firm Marketing
Advertising campaign #1 1/1/15 6/30/15 $ 3,500 Stan Marketing
Advertising campaign #2 3/1/15 12/30/15 $ 4,550 Stan Marketing
Development of the retail channel 1/1/15 11/30/15 $ 0 Stan Marketing
Totals $28,450
Table 2.8 Marketing Expense Budget
2015 2016 2017
Web Site $ 25,000 $ 8,000 $ 10,000
Advertisements $ 8,050 $ 15,000 $ 20,000
Printed Material $ 1,725 $ 2,000 $ 3,000
Total Sales and Marketing
Expenses
$ 34,775 $ 25,000 $ 33,000
Percent of Sales 6.58% 3.60% 4.14%
Contribution Margin $398,725 $544,652 $621,202
Contribution Margin/Sales 75.42% 78.40% 77.86%
■ Customer satisfaction
■ New-product development
6.1 Implementation
The milestones identify the key marketing programs (Table 2.7).
It is important to accomplish each one on time and on budget
(Table 2.8).
6.2 Marketing Organization
Stan Blade will be responsible for the marketing activities.
6.3 Contingency Planning
Difficulties and Risks
■ Problems generating visibility, a function of being an Internet-
based start-up organization
■ An entry into the market by an already-established market
competitor
Worst-Case Risks
■ Determining that the business cannot support itself on an
ongoing basis
■ Having to liquidate equipment or intellectual capital to cover
liabilities
Source: Adapted from a sample plan provided by and copyrighted by Palo Alto Software, Inc. Find more complete sample marketing plans at www.mplans.com. Reprinted by permission of Palo Alto Software.
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88
In This Chapter, We Will Address
the Following Questions
1. What are the components of a modern marketing information system? (p. 89)
2. What are useful internal records for a marketing information system? (p. 91)
3. What makes up a marketing intelligence system? (p. 92)
4. What are some influential macroenvironment developments? (p. 94)
5. How can companies accurately measure and forecast demand? (p. 107)
Campbell’s designed a new line of
flavorful ready-to-eat soups to appeal
to a discerning Millennial consumer.
Source: CAMPBELL’S GO Soup images courtesy of
Campbell Soup Company.
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
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for simulations, tutorials, and
end-of-chapter problems.
Capturing Marketing InsightsPart 2
Chapter 3 Collecting Information and Forecasting Demand
Chapter 4 Conducting Marketing Research
M03_KOTL2621_15_GE_C03.indd 88 03/03/15 2:02 PM
89
Virtually every industry has been touched by dramatic
shifts in the economic, sociocultural, natural, technological, and
political-legal environments. In this chapter, we consider how
firms can identify and track relevant macroenvironment trends
and develop good sales forecasts.
Making marketing decisions in a fast-changing world is both an art and a science.
Holistic marketers recognize that the marketing environment is constantly presenting new opportunities and
threats, and they understand the importance of continuously monitoring, forecasting, and adapting to that
environment. Campbell is one of many companies trying to come to grips with the younger Millennial consumer.1
Collecting Information
and Forecasting Demand
3
Campbell Soup Company’s iconic red-and-white soup cans represent one of the most famous U.S.
brands and were even the subject of an Andy Warhol portrait. Recently, though, the 143-year old com-
pany has suffered a double whammy: Overall consumption of canned soup has declined 13 percent, and
Campbell’s market share has dropped from 67% to 53% due to the popularity of fresh and premium
soups. To stop the sales slide, Campbell set out to better understand the 18-to-34-year-olds who make
up 25% of the U.S. population and will profoundly affect the company’s future. Adopting an anthropological research
approach, they sent executives to study Millennial consumers face-to-face in “hipster market hubs” such as London;
Austin, TX; Portland, OR; and Washington D.C. They engaged in “live-alongs,” where they shopped and ate at home with
young consumers, and “eat-alongs” where they dined with them in restaurants. The key insight? Millennials loved spices
and ate more exotic food than their parents—they just couldn’t cook it at home! Campbell’s solution was a new line,
Campbell’s Go! Soup ready-to-eat meals in six flavor varieties such as Moroccan Style Chicken with Chickpeas, Spicy
Chorizo and Pulled Chicken with Black Beans, and Coconut Curry and Chicken with Shiitake Mushrooms. Sold in pouches
rather than cans to convey freshness and at a price ($3) more than three
times the basic red-and-white line, the product line was promoted entirely
online, including music and humor sites, gaming platforms, and social
media. Campbell also sells Pepperidge Farms baked goods, V8 vegetable
juices, and Prego pasta sauce, but soups account for half its revenue, so
marketing success for the new line was crucial.
Components of a Modern Marketing
Information System
The major responsibility for identifying significant marketplace changes falls to the company’s marketers.
Marketers have two advantages for the task: (1) disciplined methods for collecting information and (2) time spent
interacting with customers and observing competitors and other outside groups. Some firms have marketing
information systems that provide rich detail about buyer wants, preferences, and behavior.
DuPOnt DuPont commissioned marketing studies to uncover personal pillow behavior for its Dacron
Polyester unit, which supplies filling to pillow makers and sells its own Comforel brand. One challenge is that people don’t
give up their old pillows: 37 percent of one sample described their relationship with their pillow as being like that of “an old
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90 PART 2 | CAPTuRing MARkeTing insighTs
married couple,” and an additional 13 percent said their pillow was like “a childhood friend.” Respondents fell into distinct
groups in terms of pillow behavior: stackers (23 percent), plumpers (20 percent), rollers or folders (16 percent), cuddlers
(16 percent), and smashers, who pound their pillows into a more comfy shape (10 percent). Women were more likely to
plump, men to fold. The prevalence of stackers led the company to sell more pillows packaged as pairs and at different
levels of softness or firmness.2
Marketers also have extensive information about how consumption patterns vary across and within countries.
On a per capita annual basis, for example, the Irish consume the most chocolate (24.7 lbs.), Czechs the most beer
(131.7 liters), the French the most wine (45.7 liters), and Greeks the most cigarettes (4,313).3 Table 3.1 summa-
rizes other comparisons across countries. Consider regional differences: Seattle’s residents buy more sunglasses
per person than in any other U.S. city; people in Salt Lake City (and Utah) eat the most Jell-O; Long Beach, CA,
residents eat the most ice cream; and New York City dwellers buy the most country music CDs.4
Every firm must organize and distribute a continuous flow of information to its marketing managers.
A marketing information system (MIS) consists of people, equipment, and procedures to gather, sort, analyze,
evaluate, and distribute needed, timely, and accurate information to marketing decision makers. It relies on inter-
nal company records, marketing intelligence activities, and marketing research.
The company’s marketing information system should combine what managers think they need, what they really
need, and what is economically feasible. An internal MIS committee can interview a cross-section of marketing
managers to discover their information needs. Table 3.2 displays some useful questions to ask them.
Table 3.1 A Global Profile of Extremes
Highest fertility rate Niger 47.7 births per 1,000 population
Highest education expenditure as percent of GDP Timor-Leste 14.0% of GDP
Highest number of mobile phone subscribers Macau 206.4 subscribers per 100 people
Largest number of airports United States 15,079 airports
Highest military expenditure as percent of GDP Saudi Arabia 10.1% of GDP
Highest divorce rate South Korea 4.6 divorces per 1,000 population
Telephone lines per capita Bermuda 89.0 lines per 100 people
Highest cinema attendance India 4,432,700,000 cinema visits
Highest GDP per person Liechtenstein $105,190
Largest aid donors as % of GDP Norway 1.10% of GDP
Most economically dependent on agriculture Liberia 61.3% of GDP
Highest population in workforce Qatar 74.7%
Highest percent of women in workforce Mozambique 53.5%
Most crowded road networks Hong Kong 286.7 vehicles per km of road
Most deaths in road accidents Namibia 53.4 killed per 100,000 population
Most tourist arrivals France 77,526,000
Highest life expectancy Japan 83.7 years
Highest obesity rate United States 35.7% of adults
Source: CIA World Factbook, www.cia.gov/library/publications/the-world-factbook, accessed July 24, 2012; The Economist’s Pocket World in Figures, 2013 edition (London: Profile Books, 2012).
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Internal Records
To spot important opportunities and potential problems, marketing managers rely on internal reports of orders,
sales, prices, costs, inventory levels, receivables, and payables.
The Order-TO-PaYmenT CYCle
The heart of the internal records system is the order-to-payment cycle. Sales representatives, dealers, and
customers send orders to the firm. The sales department prepares invoices, transmits copies to various depart-
ments, and back-orders out-of-stock items. Shipped items generate shipping and billing documents that go
to various departments. Because customers favor firms that can promise timely delivery, companies need to
perform these steps quickly and accurately.
SaleS InfOrmaTIOn SYSTemS
Marketing managers need timely and accurate reports on current sales. Walmart operates a sales and inven-
tory data warehouse that captures data on every item for every customer, every store, every day and refreshes it
every hour.
Companies that make good use of “cookies,” records of Web site usage stored on personal browsers, are smart
users of targeted marketing. Many consumers are happy to cooperate: Not only do they not delete cookies, but they
also expect customized marketing appeals and deals once they accept them.
Marketers must carefully interpret sales data, however, to avoid drawing wrong conclusions. Michael Dell
illustrates: “If you have three yellow Mustangs sitting on a dealer’s lot and a customer wants a red one, the salesman
may be really good at figuring out how to sell the yellow Mustang. So the yellow Mustang gets sold, and a signal
gets sent back to the factory that, hey, people want yellow Mustangs.”5
daTabaSeS, daTa WarehOuSInG, and daTa mInInG
The explosion of data brought by the maturation of the Internet and mobile technology gives companies
unprecedented opportunities to engage their customers. It also threatens to overwhelm decision makers.
“Marketing Insight: Digging into Big Data” describes opportunities and challenges in managing massive
data sets.6
Table 3.2 Information Needs Probes
1. What decisions do you regularly make?
2. What information do you need to make these decisions?
3. What information do you regularly get?
4. What special studies do you periodically request?
5. What information would you want that you are not getting now?
6. What information would you want daily? Weekly? Monthly? Yearly?
7. What online or offline newsletters, briefings, blogs, reports, or magazines would you like to see on a
regular basis?
8. What topics would you like to be kept informed of?
9. What data analysis and reporting programs would you want?
10. What are the four most helpful improvements that could be made in the present marketing information system?
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Marketing Intelligence
The markeTInG InTellIGenCe SYSTem
A marketing intelligence system is a set of procedures and sources that managers use to obtain everyday infor-
mation about developments in the marketing environment. The internal records system supplies results data, but
the marketing intelligence system supplies happenings data. Marketing managers collect marketing intelligence
by reading books, newspapers, and trade publications; talking to customers, suppliers, distributors, and other
company managers; and monitoring online social media.
Before the Internet, sometimes you just had to go out in the field and watch the competition. Describing how he
learned about a rival’s drilling activity, oil and gas entrepreneur T. Boone Pickens recalls, “We would have someone
who would watch [the rival’s] drilling floor from a half mile away with field glasses. Our competitor didn’t like it
but there wasn’t anything they could do about it. Our spotters would watch the joints and drill pipe. They would
count them; each [drill] joint was 30 feet long. By adding up all the joints, you would be able to tally the depth of
the well.” Pickens knew that the deeper the well, the more costly for his rival to get the oil or gas up to the surface,
information that gave him an immediate competitive advantage.7
Marketing intelligence gathering must be legal and ethical. The private intelligence firm Diligence paid
auditor KPMG a fine of $1.7 million after its cofounder posed as a British intelligence officer and convinced a
member of the audit team to share confidential documents about a Bermuda-based investment firm for a Russian
conglomerate.8
A company can take eight possible actions to improve the quantity and quality of its marketing intelligence. After
describing the first seven, we devote special attention to the eighth: collecting marketing intelligence on the Internet.
• Train and motivate the sales force to spot and report new developments. The company must “sell” its
sales force on their importance as intelligence gatherers. Grace Performance Chemicals, a division of W. R.
signals, readings from sensors); and Volatility (with hundreds of new
data sources in apps, Web services, and social networks).
Some companies are harnessing Big Data. UK supermarket giant
Tesco collects 1.5 billion pieces of data every month to set prices and
promotions; U.S. kitchenware retailer Williams-Sonoma uses its cus-
tomer knowledge to customize versions of its catalog. Amazon reports
generating 30 percent of its sales through its recommendation engine
(“You may also like”).
Many financial brands are putting more emphasis on Big Data.
Bank of America is tracking spending and demographic data and
tailoring promotions—for example, offering back-to-school deals to
cardholders with children. JPMorgan Chase has improved com-
munications to new cardholders to gain more engagement. On the
production side, GE set up a team of developers in Silicon Valley to
improve the efficiency of the jet engines, generators, locomotives, and
CT scanners it sells. Even a 1 percent improvement in the operation
of commercial aircraft would save $2 billion for GE’s customers in the
airline industry.
Sources: Schumpter, “Building with Big Data,” The Economist, May 28, 2011;
Jessica Twentyman, “Big Data Is the ‘Next Frontier’” Financial Times, November
14, 2011; Jacques Bughin, John Livingston, and Sam Marwaha, “Seizing the
Potential of Big Data,” McKinsey Quarterly 4 (October 2011); “Mining the Big Data
Goldmine,” Special Advertising Section, Fortune, 2012; “Financial Brands Tap Big
Data,” www.warc.com, September 13, 2012; Thomas H. Davenport, Paul Barth,
and Randy Bean, “How ‘Big Data’ Is Different,” MIT Sloan Management Review
54 (Fall 2012), pp. 43–46; Andrew McAfee and Erik Brynjolfsson, “Big Data: The
Management Revolution,” Harvard Business Review, October 2012, pp. 60–68;
Ashlee Vance, “GE Tries to Make Its Machines Cool and Connected,” Bloomberg
Businessweek, December 10, 2012, pp. 44–46.
marketing
insight
Digging Into Big Data
Although unverified, one popular estimate says 90 percent of the data
that has ever existed was created in the past two years. In one year,
people stored enough data to fill 60,000 Libraries of Congress. YouTube
receives 24 hours of video every minute. The world’s 4 billion mobile
phone users provide a steady source of data. Manufacturers are putting
sensors and chips into appliances and products, generating even more
data.
The danger, of course, is information overload. More data are not
better unless they can be correctly processed, analyzed, and inter-
preted. In one poll of North American senior business executives, more
than 90 percent reported collecting more information—86 percent
more on average—than in years past. Unfortunately, roughly as many
said they were missing out on new revenue growth because they could
not gather the appropriate insights from those data.
And therein lies the opportunity and challenge of Big Data.
Although a universally agreed-upon definition does not exist, Big Data
describes data sets that cannot be effectively managed with traditional
database and business intelligence tools. One industry expert, James
Kobielus, sees Big Data as distinctive because of: Volume (from hun-
dreds of terabytes to petabytes and beyond); Velocity (up to and includ-
ing real-time, sub-second delivery); Variety (encompassing structured,
unstructured, and semi-structured formats: messages, images, GPS
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Grace, instructed its sales reps to observe the innovative ways
customers used its products and suggest possible new prod-
ucts. Some customers used Grace waterproofing materials to
soundproof their cars and patch boots and tents. Seven new-
product ideas emerged, worth millions in sales.9
• Motivate distributors, retailers, and other intermediaries to
pass along important intelligence. Marketing intermediaries
are often closer to the customer and competition and can of-
fer helpful insights. Combining data from its retailers Safeway,
Kroger, and Walmart with its own qualitative insights, food
producer ConAgra learned that many mothers switched to
time-saving meals and snacks when school started. It launched
its “Seasons of Mom” campaign to help grocers adjust to sea-
sonal shifts in household needs.10
• Hire external experts to collect intelligence. Many compa-
nies hire specialists to gather marketing intelligence.11 SavOn
Convenience Stores, an enterprise of the Oneida Indian
Nation, conducts 52 “mystery shopper” visits a month across
its 13 stores. Stores are graded on employee responsive-
ness to customers, product quality, food freshness, restroom
cleanliness, and stock levels. SavOn gives awards to winning
stores.12
• Network internally and externally. The firm can purchase
competitors’ products, attend open houses and trade shows,
read competitors’ published reports, attend stockhold-
ers’ meetings, talk to employees, collect competitors’ ads,
consult with suppliers, and look up news stories about
competitors.
• Set up a customer advisory panel. Members of advisory
panels might include the company’s largest, most outspoken, most sophisticated, or most representative cus-
tomers. GlaxoSmithKline sponsored an online community devoted to weight loss, where marketers felt they
learned far more than they could have gleaned from focus groups on topics from packaging its weight-loss pill
to where to place in-store marketing.13
• Take advantage of government-related data resources. The U.S. Census Bureau provides an in-depth look at
the population swings, demographic groups, regional migrations, and changing family structure of the more
than 311,591,917 people in the United States. Census marketer Nielsen Claritas SiteReports cross-references
census figures with consumer surveys and its own grassroots research for clients such as The Weather
Williams Sonoma
uses information it has
learned about its
customers to customize
its catalogs.
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Firms such as NPD provide
detailed audits on how
American consumers use
their kitchens.
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Channel, BMW, and Sovereign Bank. SiteReports offers more than 50 reports and maps that help companies
analyze markets, select site locations, and target customers effectively.14
• Purchase information from outside research firms and vendors. Well-known data suppliers like A.C. Nielsen
Company and Information Resources Inc. collect information about product sales and consumer exposure to
media; they also gather consumer-panel data. Attensity offers a suite of products to monitor customer conver-
sations from a variety of social, online, and internal sources.15 NPD conducts its Kitchen Audit study every
three years to determine what food ingredients U.S. households have on hand and what appliances, cookware,
and utensils they own and to assess usage and sources of recipes.16
COlleCTInG markeTInG InTellIGenCe
On The InTerneT
Online customer review boards, discussion forums, chat rooms, and blogs can distribute one customer’s expe-
riences or evaluation to other potential buyers and, of course, to marketers seeking information. Here are five
places to find competitors’ product strengths and weaknesses online.
• Independent customer goods and service review forums. Independent forums include Web sites such as
Epinions.com, RateItAll.com, ConsumerReview.com, and Bizrate.com. Bizrate.com collects millions of con-
sumer reviews of stores and products each year from two sources: its 1.3 million volunteer members and feed-
back from stores that allow Bizrate.com to collect it directly from customers as they buy.
• Distributor or sales agent feedback sites. Feedback sites offer positive and negative product or service re-
views, but the stores or distributors have built the sites themselves. Amazon.com offers an interactive feedback
opportunity through which buyers, readers, editors, and others can review all products on the site, especially
books. Elance.com is an online professional services provider that allows contractors to describe their experi-
ence and level of satisfaction with subcontractors.
• Combo sites offering customer reviews and expert opinions. Combination sites are concentrated in financial
services and high-tech products that require professional knowledge. ZDNet.com offers customer and expert
evaluations of technology products based on ease of use, features, and stability.
• Customer complaint sites. Customer complaint forums are designed mainly for dissatisfied customers.
PlanetFeedback.com allows customers to voice unfavorable experiences with specific companies.
• Public blogs. Tens of millions of blogs and social networks offer personal opinions, reviews, ratings, and recom-
mendations on virtually any topic—and their numbers continue to grow. Nielsen’s BuzzMetrics analyzes blogs
and social networks for insights into consumer sentiment and threats to the brand that may emerge online.17
Of course, companies can use many of these sources to monitor their own customers, products, services,
and brands. Customer-service forums linked on a company’s home page are a very useful tool. Customers often
respond faster and provide better answers to other customers than a company could.
COmmunICaTInG and aCTInG On markeTInG
InTellIGenCe
The competitive intelligence function works best when it is closely coordinated with the decision-making pro-
cess. Given the speed of the Internet, it is important to act quickly on information gleaned online, as StubHub and
Coca-Cola found:18
• When ticket broker StubHub detected criticism of its brand after confusion arose about refunds for a rain-
delayed Yankees–Red Sox game, it quickly offered appropriate discounts and credits. The director of customer
service observed, “This [episode] is a canary in a coal mine for us.”
• When its monitoring software spotted a Twitter post that went to 10,000 followers from an upset consumer
who couldn’t redeem a prize from a MyCoke rewards program, Coke quickly posted an apology on his
Twitter profile and offered to help resolve the situation. After the consumer got the prize, he changed his
Twitter avatar to a photo of himself holding a Coke bottle.
Analyzing the Macroenvironment
Successful companies recognize and respond profitably to unmet needs and trends.
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needS and TrendS
Dockers was created to meet the needs of baby boomers who could no longer fit into their jeans and wanted a
physically and psychologically comfortable pair of pants. Enterprising individuals and companies create new
solutions to similarly unmet needs. Let’s distinguish among fads, trends, and megatrends.
• A fad is “unpredictable, short-lived, and without social, economic, and political significance.” A company can
cash in on a fad such as Crocs clogs, Elmo TMX dolls, and Pokémon gifts and toys, but getting it right requires
luck and good timing.19
• A direction or sequence of events with momentum and durability, a trend is more predictable and durable
than a fad; trends reveal the shape of the future and can provide strategic direction. A trend toward health
and nutrition awareness has brought increased government regulation and negative publicity for firms seen
as peddling unhealthy food. Macaroni Grill revamped its menu to include more low-calorie and low-fat offer-
ings after The Today Show called its chicken and artichoke sandwich “the calorie equivalent of 16 Fudgesicles”
and Men’s Health declared its 1,630-calorie dessert ravioli the “worst dessert in America.”20
• A megatrend is a “large social, economic, political, and technological change [that] is slow to form, and once in
place, influences us for some time—between seven and ten years, or longer.”21
Several firms offer social-cultural forecasts. The Yankelovich Monitor has tracked 35 social value and lifestyle
trends since 1971, such as “anti-bigness,” “mysticism,” and “living for today.” A new market opportunity doesn’t
guarantee success, of course. Even if the new product is technically feasible, market research is necessary to deter-
mine profit potential.
IdenTIfYInG The majOr fOrCeS
The new century brought new challenges: the steep decline of the stock market, which affected savings, invest-
ment, and retirement funds; rising and long-lasting unemployment; corporate scandals; stronger indications of
global warming and other signs of deterioration in the environment; and continued terrorism.
Firms must monitor six major forces in the broad environment: demographic, economic, social-cultural, natu-
ral, technological, and political-legal. We’ll describe them separately, but remember their interactions will lead to
new opportunities and threats. For example, explosive population growth (demographic) leads to more resource
depletion and pollution (natural), which leads consumers to call for more laws (political-legal), which stimulate
new technological solutions and products (technological) that, if they are affordable (economic), may actually
change attitudes and behavior (social-cultural).
Macaroni Grill revamped its menu to
include more offerings to appeal to
health-conscious consumers.
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The demOGraPhIC envIrOnmenT
The main demographic factor marketers monitor is population, including the size and growth rate of population
in cities, regions, and nations; age distribution and ethnic mix; educational levels; and household patterns.
WorldWide PoPulaTion GroWTh World population growth is explosive: The world’s population
on July 1, 2012, was estimated at 7,027,349,193, forecasted to rise to 8.82 billion by 2040 and exceed 9 billion by
2045.22 Table 3.3 offers an interesting perspective.23
Population growth is highest in countries and communities that can least afford it. Developing regions of the
world house 84 percent of the world’s population and are growing at 1 percent to 2 percent per year; developed
countries’ populations are growing at only 0.3 percent.24 In developing countries, modern medicine is lowering
the death rate, but birthrates remain fairly stable.
A growing population does not mean growing markets unless there is sufficient purchasing power. Education
can raise the standard of living but is difficult to accomplish in most developing countries. Nonetheless, companies
that carefully analyze these markets can find major opportunities and sometimes lessons they can apply at home.
See “Marketing Memo: Finding Gold at the Bottom of the Pyramid.”25
PoPulaTion aGe Mix Mexico has a very young population and rapid population growth. Italy, at the other
extreme, has one of the world’s oldest populations. Milk, diapers, school supplies, and toys will be more important
products in Mexico than in Italy.
There is a global trend toward an aging population. In 1950, there were only 131 million people 65 and older;
in 1995, their number had almost tripled to 371 million. By 2050, one of 10 people worldwide will be 65 or older.
In the United States, baby boomers—those born between 1946 and 1964—represent a market of some 36 million,
about 12 percent of the population. By 2011, the 65-and-over population was growing faster than the population as
a whole in each of the 50 states.26
Table 3.3 The World as a Village
If the world were a village of 100 people:
• Sixty-one villagers would be Asian (of those, 20 would be Chinese and 17 would be Indian), 14 would be African,
11 would be European, nine would be Latin or South American, five would be North American, and none of the
villagers would be from Australia, Oceania, or Antarctica.
• At least 18 villagers would be unable to read or write, but 33 would have cellular phones and 16 would be online
on the Internet.
• Twenty-seven villagers would be under 15, and seven would be over 64. There would be an equal number of males
and females.
• There would be 18 cars in the village.
• Sixty-three villagers would have inadequate sanitation.
• Thirty-three villagers would be Christians, 20 would be Muslims, 13 would be Hindus, six would be Buddhists,
14 would be nonreligious, and the remaining 14 would be members of other religions.
• Thirty villagers would be unemployed or underemployed, while of those 70 who would work, 28 would work in
agriculture (primary sector), 14 would work in industry (secondary sector), and the remaining 28 would work in
the service sector (tertiary sector).
• Fifty-three villagers would live on less than two U.S. dollars a day. One villager would have AIDS, 26 villagers
would smoke, and 14 villagers would be obese.
• By the end of a year, one villager would die and two new villagers would be born so the population would
climb to 101.
Source: David J. Smith and Shelagh Armstrong, If the World Were a Village: A Book about the World’s People, 2nd ed. (Tonawanda, NY: Kids Can Press, 2002).
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Marketers generally divide the population into six age groups: preschool children, school-age children, teens,
young adults age 20 to 40, middle-aged adults 40 to 65, and older adults 65 and older. Some marketers focus on
cohorts, groups of individuals born during the same time period who travel through life together. The defining
moments they experience as they come of age and become adults (roughly ages 17 through 24) can stay with them
for a lifetime and influence their values, preferences, and buying behaviors.
eThnic and oTher MarkeTs Ethnic and racial diversity varies across countries. At one extreme is
Japan, where almost everyone is native Japanese; at the other extreme is the United States, 12 percent of whose
people were born in another country. As of the 2010 Census, the U.S. population was: White (72 percent),
Black or African American (13 percent), American Indian and Alaskan Native (0.9 percent), Asian (5 percent),
Hispanic (16 percent). More than half the growth between 2000 and 2010 came from the increase in the
Hispanic population, which grew by 43 percent, from 35.3 million to 50.5 million, representing a major shift
in the nation’s ethnic center of gravity. Geographically, the 2010 Census revealed that Hispanics were moving
to states like North Carolina where they had not been concentrated before and that they increasingly live in
suburbs.27 From the food U.S. consumers eat to the clothing, music, and cars they buy, Hispanics are having a
huge impact.
Companies are refining their products and marketing to reach this fastest-growing and most influential
consumer group: Research by Hispanic media giant Univision suggests 70 percent of Spanish-language viewers
are more likely to buy a product when it’s advertised in Spanish. Fisher-Price, recognizing that many Hispanic
mothers did not grow up with its brand, shifted away from appeals to their heritage. Instead, its ads emphasized
the joy of mother and child playing together with Fisher-Price toys.28 Hispanics are not the only fast-growing
minority segment.29
Business writer C. K. Prahalad believes much innovation can come from developments in emerging markets such as China and India. He estimates 5 billion
unserved and underserved people make up the “bottom of the pyramid.” One study showed that 4 billion people live on $2 or less a day. Firms operating in
those markets must learn how to do more with less.
In Bangalore, India, Narayana Hrudayalaya Hospital charges a flat fee of $1,500 for heart bypass surgery that costs 50 times as much in the United
States. The hospital has low labor and operating expenses and an assembly-line view of care. The approach works—the hospital’s mortality rates are
half those of U.S. hospitals. Narayana also operates on hundreds of infants for free and profitably insures 2.5 million poor Indians against serious illness for
11 cents a month.
Similarly, Arvind Eye Care System, established by Govindappa Venkatswamy in 1976 in India, has performed 4 million operations using an approach lik-
ened to “McDonald’s-style” high-volume assembly. Aravind also developed an intra-ocular lens, manufactured by its subsidiary, Aurolab, at a fraction of the
cost of imports. SalaUno, a for-profit social enterprise based in San Francisco, replicated the Aravind model in Mexico, carrying out 133 cataract operations a
month for a year—free of charge for those who could not afford the treatment.
The transfer of innovations from developing to developed markets is what Dartmouth professor Vijay Govindrajan calls reverse innovation. He sees
opportunity in focusing on the needs and constraints of a developing market to create an inexpensive product that can succeed there and then introducing it
as a cheaper alternative in developed markets. He also sees reverse innovation’s public policy benefits, which can transform industries through the successful
development of ultra-low-cost transportation, renewable energy, clean water, micro finance, affordable heath care, and low-cost housing.
Among successful reverse innovators, Nestlé repositioned its low-fat Maggi brand dried noodles—a popular, low-priced meal for rural Pakistan and
India—as a budget-friendly health food in Australia and New Zealand. U.S.-based Harman International, known for high-end dashboard audio systems
designed by German engineers, developed a radically simpler and cheaper way to create products for China, India, and emerging markets and is applying that
method to its product-development centers in the West. It now can sell a range of products priced from low to high and is looking into infotainment systems for
motorbikes, a popular form of transportation in emerging markets and around the world.
Sources: C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School Publishing, 2010); Bill Breen, “C. K. Prahalad: Pyramid
Schemer,” Fast Company, March 2007, p. 79; Reena Jane, “Inspiration from Emerging Economies,” BusinessWeek, March 23, 2009, pp. 38–41; Vijay Govindarajan and
Chris Trimble, Reverse Innovation: Create Far from Home, Win Everywhere (Boston, MA: Harvard Business School Publishing, 2012); Jeffrey R. Immelt, Vijay Govindarajan,
and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009, pp. 56–65; Vijay Govindrajan, “A Reverse-Innovation Playbook,” Harvard Business
Review, April 2012, pp.120–23; Felicity Carus, “Reverse Innovation Brings Social Solutions to Developed Countries,” The Guardian, August 29, 2012; Constantinos C.
Markides, “How Disruptive Will Innovations from Emerging Markets Be?,” MIT Sloan Management Review, 54 (Fall 2012), pp. 23–25.
Finding Gold at the Bottom of the Pyramidmarketing memo
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InDIan-aMerIcans The U.S. Indian-American population has exploded over the past decade,
according to the 2010 Census, surpassing Filipinos as the nation’s second-largest Asian population after Chinese. Affluent,
well-educated, and consumer-oriented, Indian-Americans are attractive to marketers. Nationwide Insurance developed print
and TV ads for them and other South Asians in the New York tristate area and San Francisco and Silicon Valley. Cadillac has
run newspaper ads and local TV spots in Chicago and New York after seeing many Indian-Americans and South Asians in its
showrooms. Zee TV was the first Hindi satellite channel and is the leading network serving the South Asian audience.
Yet marketers must not overgeneralize—within each group are consumers quite different from each other.30
Diversity also goes beyond ethnic and racial markets. More than 51 million U.S. consumers have disabilities, and
they constitute a market for home delivery companies such as Internet grocer Peapod.
educaTional GrouPs The population in any society falls into five educational groups: illiterates, high
school dropouts, high school diplomas, college degrees, and professional degrees. More than two-thirds of the
world’s 793 million illiterate adults are found in only eight countries (Bangladesh, China, Egypt, Ethiopia, India,
Indonesia, Nigeria, and Pakistan); of all illiterate adults in the world, two-thirds are women; extremely low literacy
rates are concentrated in three regions—the Arab states, South and West Asia, and Sub-Saharan Africa—where
around one-third of the men and half of all women are illiterate (2005 est.).31
The United States has one of the world’s highest percentages of college-educated citizens.32 As of March 2011,
just over 30 percent of U.S. adults held at least a bachelor’s degree, and 10.9 percent held a graduate degree, up from
26.2 percent and 8.7 percent 10 years earlier. Half of 18- and 19-year-olds were enrolled in college in 2009, but
not all college students are young. About 16 percent are 35 and older; they also make up 37 percent of part-time
students. The large number of educated people in the United States drives strong demand for high-quality books,
magazines, and travel and creates a supply of skills.
household PaTTerns The traditional U.S. household included a husband, wife, and children under 18
(sometimes with grandparents). By 2010, only 20 percent of U.S. households met this definition, down from about
25 percent a decade before and 43 percent in 1950. Married couples have dropped below half of all U.S. households
for the first time (48 percent), far below the 78 percent of 1950. The median age at first marriage has also never
been higher: 26.5 for brides and 28.7 for grooms.33
The U.S. family has been steadily evolving toward less traditional forms. More people are divorcing, separating,
choosing not to marry, or marrying later. Other types of households are single live-alones (27 percent), single-
parent families (8 percent), childless married couples and empty nesters (32 percent), living with nonrelatives only
(5 percent), and other family structures (8 percent).
Indian-Americans are a fast
growing minority segment with
much appeal to marketers.
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The biggest change for the decade was the jump in households headed by women without husbands—up
18 percent. Nontraditional households are growing more rapidly than traditional households. Academics and mar-
keting experts estimate the gay and lesbian population at 4 percent to 8 percent of the total U.S. population, higher
in urban areas.34
Each type of household has distinctive needs and buying habits. The single, separated, widowed, and divorced
may need smaller apartments; inexpensive and smaller appliances, furniture, and furnishings; and smaller-size
food packages. Many non-traditional households feel advertising ignores families like theirs, suggesting an oppor-
tunity for advertisers.35
Even traditional households have changed. Boomer dads marry later than their fathers and grandfathers
did, shop more, and are much more active in raising their kids. Bugaboo makes innovative baby strollers that
speaks to modern parents. Bugaboo’s iconic functional strollers have unique designs and functionalities such
as adjustable suspension and an extendable handle bar perfect for taller dads. And before Dyson, the high-end
vacuum company, appealed to U.S. dads’ inner geek by focusing on the machine’s revolutionary technology,
men weren’t even on the radar for vacuum cleaner sales. Now they make up 40 percent of Dyson’s customers.36
The eCOnOmIC envIrOnmenT
Purchasing power depends on consumers’ income, savings, debt, and credit availability as well as the price level.
As the recent economic downturn vividly demonstrated, fluctuating purchasing power strongly affects business,
especially for products geared to high-income and price-sensitive consumers. Marketers must understand con-
sumer psychology and levels and distribution of income, savings, debt, and credit.
consuMer PsycholoGy The recession that began in 2008 initiated new consumer spending patterns.
Were these temporary adjustments or permanent changes?37 The middle class—the bread and butter of many
firms—was hit hard by record declines in both wages and net worth. Some experts believed the recession had
fundamentally shaken consumers’ faith in the economy and their personal financial situations. “Mindless”
spending would be out; willingness to comparison shop, haggle, and use discounts would become the norm.38
Consumers at the time certainly seemed to believe so. In one survey, almost two-thirds said the recession’s eco-
nomic changes would be permanent; nearly one-third said they would spend less than before the recession. Others
believed tighter spending was a short-term constraint and not a fundamental behavioral change; they predicted
their spending would resume when the economy improved.39
Identifying the more likely long-term scenario—especially
for the coveted 18- to 34-year-old group—would help market-
ers decide how to spend their money. Executives at Sainsbury,
the third-largest UK chain of supermarkets, concluded that the
recession had created a more risk-averse British consumer, sav-
ing more, paying off debts instead of borrowing, and shopping in
more cost-conscious ways. Even wealthy UK consumers traded
down some to lower-cost items. As one retail executive said,
“There’s nobody who can afford not to try to save.”40
incoMe disTribuTion There are four types of
industrial structures: subsistence economies like Papua New
Guinea, with few opportunities for marketers; raw-material-
exporting economies like Democratic Republic of Congo
(copper) and Saudi Arabia (oil), with good markets for
equipment, tools, supplies, and luxury goods for the rich;
industrializing economies like India, Egypt, and the Philippines,
where a new rich class and a growing middle class demand new
types of goods; and industrial economies like Western Europe,
with rich markets for all sorts of goods.
Marketers often distinguish countries using five income-dis-
tribution patterns: (1) very low incomes; (2) mostly low incomes;
(3) very low, very high incomes; (4) low, medium, high incomes;
and (5) mostly medium incomes. Consider the market for the
Lamborghini, an automobile costing more than $150,000. The
market would be very small in countries with type 1 or 2 income
patterns. One of the largest single markets for the ultra-expensive
The unique design of
Bugaboo baby strollers
are especially appeal-
ing to modern parents.
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sports car Lamborghinis is Portugal (income pattern 3), one of the poorer countries in Western Europe, but with
high enough income inequality that there are also wealthy families who can afford expensive cars.41
incoMe, savinGs, debT, and crediT U.S. consumers have a high debt-to-income ratio, which slows
expenditures on housing and large-ticket items. When credit became scarcer in the recession, especially for lower-
income borrowers, consumer borrowing dropped for the first time in two decades. The financial meltdown that led
to this contraction was due to overly liberal credit policies that allowed consumers to buy homes and other items
they could not really afford. Marketers wanted every possible sale, banks wanted to earn interest on loans, and near
financial ruin resulted.
An economic issue of increasing importance is the migration of manufacturers and service jobs offshore.
From India, Infosys provides outsourcing services for Cisco, Nordstrom, Microsoft, and others. The 35,000
employees the fast-growing $4.2 billion company hires every year receive technical, team, and communication
training in Infosys’s $120 million facility outside Bangalore.42
The SOCIOCulTural envIrOnmenT
From our sociocultural environment we absorb, almost unconsciously, a world view that defines our relationships
to ourselves, others, organizations, society, nature, and the universe.
• Views of ourselves. Some “pleasure seekers” chase fun, change, and escape; others seek “self-realization.”
Some adopt more conservative behaviors and ambitions (see Table 3.4 for favorite consumer leisure-time
activities and how they have changed, or not, in recent years).
• Views of others. People are concerned about the homeless, crime and victims, and other social problems. At
the same time, they seek those like themselves for long-lasting relationships, suggesting a growing market for
social-support products and services such as health clubs, cruises, and religious activity as well as “social sur-
rogates” like television, video games, and social networking sites.
• Views of organizations. After a wave of layoffs and corporate scandals, organizational loyalty has declined.
Companies need new ways to win back consumer and employee confidence. They need to ensure they are
good corporate citizens and that their consumer messages are honest.
• Views of society. Some people defend society (preservers), some run it (makers), some take what they can
from it (takers), some want to change it (changers), some are looking for something deeper (seekers), and still
others want to leave it (escapers).43 Consumption patterns often reflect these social attitudes. Makers are high
achievers who eat, dress, and live well. Changers usually live more frugally, drive smaller cars, and wear sim-
pler clothes. Escapers and seekers are a major market for movies, music, surfing, and camping.
• Views of nature. Business has responded to increased awareness of nature’s fragility and finiteness by making
more green products, seeking their own new energy sources, and reducing their environmental footprint.
Companies are also literally tapping into nature more by producing wider varieties of camping, hiking, boat-
ing, and fishing gear such as boots, tents, backpacks, and accessories.
• Views of the universe. Most U.S. citizens are monotheistic, although religious conviction and practice have
waned through the years or been redirected into an interest in evangelical movements or Eastern religions,
mysticism, the occult, and the human potential movement.
Other cultural characteristics of interest to marketers are core cultural values and subcultures. Let’s look at both.
High-priced Lamborghini sports
cars have found success in
relatively poorer countries by
appealing to enough affluent
buyers.
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core culTural values Most people in the United States still believe in working, getting married,
giving to charity, and being honest. Core beliefs and values are passed from parents to children and reinforced
by social institutions—schools, churches, businesses, and governments. Secondary beliefs and values are more
open to change. Believing in the institution of marriage is a core belief; believing people should marry early is a
secondary belief.
Marketers have some chance of changing secondary values but little chance of changing core values. The
nonprofit organization Mothers Against Drunk Drivers (MADD) does not try to stop the sale of alcohol
but promotes lower legal blood-alcohol levels for driving and limited operating hours for businesses that
sell alcohol.
Although core values are fairly persistent, cultural swings do take place. In the 1960s, hippies, the Beatles, Elvis
Presley, and other cultural phenomena had a major impact on hairstyles, clothing, sexual norms, and life goals.
Today’s young people are influenced by new heroes and activities: music entertainer and mogul Jay-Z, singer Lady
Gaga, and snowboarder and skateboarder Shaun White.
subculTures Each society contains subcultures, groups with shared values, beliefs, preferences, and behaviors
emerging from their special life experiences or circumstances. Marketers have always loved teenagers because they
are trendsetters in fashion, music, entertainment, ideas, and attitudes. Attract someone as a teen, and you will likely
keep the person as a customer later in life. Frito-Lay, which draws 15 percent of its sales from teens, noted a rise in
chip snacking by grown-ups. “We think it’s because we brought them in as teenagers,” said Frito-Lay’s marketing
director.44
The naTural envIrOnmenT
In Western Europe, “green” parties have pressed for public action to reduce industrial pollution. In the United
States, experts have documented ecological deterioration, and watchdog groups such as the Sierra Club and
Friends of the Earth commit to political and social action.
Table 3.4 Favorite Leisure-Time Activities
1995
(via phone)
2013
(via online)
% %
Reading 28 Watch TV 42
TV watching 25 Reading 37
Spending time with
family/kids
12 Spending time with families
and friends
18
Fishing 10 Watching/Going to movies 11
Gardening 9 Exercise/working out 10
Playing team sports 9 Playing video games and computer/
Internet games
10
Going to movies 8 Walking/running/jogging 8
Walking 8 Gardening 7
Entertaining 7 Concerts/listening to/playing music 7
Golf 6 Hobby related activities 5
Sources: Harris Poll, “Favorite Leisure Activities” (via online), http://www.harrisinteractive.com/NewsRoom/HarrisPolls/tabid/447/mid/1508/ articleId/1345/ctl/
ReadCustom%20Default/Default.aspx, Table 4, accessed July 2014; and Harris Poll, “Favorite Leisure-Time Activities” (Spontaneous, Unaided Responses, via phone),
http://www.harrisinteractive.com/vault/Harris-Interactive-Poll-Research-Time-and-Leisure-2008-12 , Table 1, accessed July 2014.
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Steel companies and public utilities have invested billions of dollars in pollution-control equipment and environ-
mentally friendly fuels, making hybrid cars, low-flow toilets and showers, organic foods, and green office buildings
everyday realities. Opportunities await those who can reconcile prosperity with environmental protection. Consider
these solutions to concerns about air quality:45
• Nearly a quarter of the carbon dioxide that makes up about 80 percent of all greenhouse gases comes from
electrical power plants. Dublin-based Airtricity operates wind farms in the United States and the United
Kingdom that offer cheaper and greener electricity.
• Transportation is second only to electricity generation as a contributor to global warming, accounting for
roughly a fifth of carbon emissions. Vancouver-based Westport Innovations developed a conversion technol-
ogy—high-pressure direct injection—that allows diesel engines to run on cleaner-burning liquid natural gas,
reducing greenhouse emissions by a fourth.
• Due to millions of rural cooking fires, parts of Southern Asia suffer extremely poor air quality. A person cook-
ing over an open wood or kerosene fire inhales the equivalent of two packs of cigarettes a day. Illinois-based Sun
Ovens International makes family-sized and institutional solar ovens that use mirrors to redirect the sun’s rays
into an insulated box. Used in 130 countries, the oven both saves money and reduces greenhouse gas emissions.
Today’s youth are more likely to be influenced by contemporary music icons such as Jay-Z and Lady Gaga.
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Irish firm Airtricity is developing
new wind farms as an alterna-
tive energy source.
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Corporate environmentalism recognizes the need to integrate environmental issues into the firm’s strategic
plans. Trends for marketers to be aware of include the shortage of raw materials, especially water; the increased
cost of energy; increased pollution levels; and the changing role of governments.46 (See also “Marketing Insight:
The Green Marketing Revolution.”)
however, paying significantly more to be environmentally friendly
was becoming a barrier for many consumers.
Interestingly, although some marketers assume younger people
are more concerned about the environment, some research suggests
older consumers actually take their eco-responsibilities more seriously.
Company Perspectives
In the past, “green marketing” programs were not always entirely suc-
cessful. Those that were persuaded consumers they were acting in
their own and society’s long-run interest at the same time by buying,
for instance, organic foods that were healthier, tastier, and safer and
energy-efficient appliances that cost less to run.
Some green products have emphasized their natural benefits for
years, like Tom’s of Maine, Burt’s Bees, Stonyfield Farm, and Seventh
Generation. Products offering environmental benefits are becoming
more mainstream. Part of the initial success of Clorox Green Works
household cleaning products, launched in January 2008, was that it
found the sweet spot where a target market wanting to take smaller
steps toward a greener lifestyle met a green product with a very modest
price premium and sold through a grassroots marketing program.
The recession took its toll on some newly launched green prod-
ucts, however, and Green Works and similar products from Arm &
Hammer, Windex, Palmolive, and Hefty found sales stalling. Some con-
sumers have also become more skeptical of green claims that are hard
to verify. One challenge is the difficulty consumers have in experiencing
or observing the environmental benefits of products, leading to accu-
sations of “greenwashing” where products are not nearly so green or
environmentally beneficial as their marketing might suggest.
Some experts recommend avoiding “green marketing myopia” by
focusing on consumer value positioning, understanding what consum-
ers know and should know, and credible product claims. During tough
economic times especially, having the right value proposition and mak-
ing sure green products are seen as effective and affordable are critical.
Sources: Jacquelyn A. Ottman, Edwin R. Stafford, and Cathy L. Hartman, “Avoiding
Green Marketing Myopia,” Environment (June 2006), pp. 22–36; Jill Meredith
Ginsberg and Paul N. Bloom, “Choosing the Right Green Marketing Strategy,”
MIT Sloan Management Review (Fall 2004), pp. 79–84; Jacquelyn Ottman, Green
Marketing: Opportunity for Innovation, 2nd ed. (New York: BookSurge Publishing,
2004); Jacquelyn Ottman, The New Rules of Green Marketing (San Francisco:
Berrett-Koehler, 2012); Mark Dolliver, “Deflating a Myth,” Brandweek, May 12, 2008,
pp. 30–31; Jeffrey M. Jones, “Worry about U.S. Water, Air Pollution at Historic
Lows,” www.gallup.com, April 13, 2012; “The 2011 Green Brands Survey,” www
.cohenwolfe.com, June 8, 2011; “Greendex 2012: Consumer Choice and the
Environment—A Worldwide Tracking Survey,” www.nationalgeographic.com, July
2012; “Green Gets Real,” www.gfkamerica.com, accessed November 12, 2012;
Stephanie Clifford and Andrew Martin, “As Consumers Cut Spending, ‘Green’
Products Lose Allure,” New York Times, April 21, 2011; Tiffany Hsu, “Skepticism
Grows over Products Touted as Eco-Friendly,” Los Angeles Times, May 21, 2011.
marketing
insight
The Green Marketing Revolution
Both consumers and companies are changing the way they view envi-
ronmental issues, as the following descriptions illustrate.
Consumer Perspective
Consumers have put their very real environmental concerns into words
and actions, focusing on green products, corporate sustainability, and
other environmental issues. Here are highlights of some notable studies.
• WPP Green Brands Study. The WPP Green Brands Study surveys
9,000 people in eight countries and evaluates 370 brands. In 2011
it found consumer interest in green products had expanded to auto,
energy, and technology sectors in addition to personal care, food, and
household products. Sixty percent of consumers stated they wanted
to buy products from environmentally responsible companies. In
developed countries such as the United States and United Kingdom,
20 percent were willing to spend more than 10 percent extra on a
green product. Consumers in developing countries put even more
value on green products: Ninety-five percent of Chinese consumers,
for example, said they were willing to pay more for a green product.
• Greendex. A collaboration between National Geographic and
environmental research consultants GlobeScan, Greendex is a
sustainable consumption index of actual consumer behavior and
material lifestyles across 17 countries. It defines environmentally
friendly consumer behavior in terms of people’s transportation
patterns, household energy, resource use, and consumption of
food and everyday goods and how well consumers minimize their
environmental impact. The 2012 survey found the top-scoring
consumers in developing countries: India, China, and Brazil in de-
scending order. Developed countries scored lower, with U.S. con-
sumers lowest, followed by Canadians, Japanese, and the French.
• Gallup. Gallup has consistently found U.S. consumers are most
concerned about pollution of drinking water, rivers, lakes, and reser-
voirs and maintenance of fresh water for household needs and least
concerned about global warming. Overall, the 2012 survey showed
all ratings at lower levels than their 2000 peak as more U.S. adults
feel environmental conditions in the United States are improving.
• GfK Roper. The 2012 GfK Roper Green Gauge Study showed
key aspects of “green” culture—from organic purchase to
recyclability—have gone mainstream. U.S. consumers increas-
ingly turn to digital devices to learn about the environment and
share their green experiences. During slow economic recovery,
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• The earth’s raw materials consist of the infinite, the finite renewable, and the finite nonrenewable. Firms
whose products require finite nonrenewable resources—oil, coal, platinum, zinc, silver—face substan-
tial cost increases as depletion approaches. Firms that can develop substitute materials have an excellent
opportunity.
• One finite nonrenewable resource, oil, has created serious problems for the world economy. As oil prices soar,
companies search for practical means to harness solar, nuclear, wind, and other alternative energies.
• Some industrial activity will inevitably damage the natural environment, creating a large market for pollution-
control solutions such as scrubbers, recycling centers, and landfill systems as well as for alternative ways to
produce and package goods.
• Many poor nations are doing little about pollution, lacking the funds or the political will. It is in the
richer nations’ interest to help them control their pollution, but even richer nations today lack the
necessary funds.
The TeChnOlOGICal envIrOnmenT
The essence of market capitalism is a dynamism that tolerates the creative destructiveness of technology as the
price of progress. Transistors hurt the vacuum-tube industry; autos hurt the railroads. Television hurt newspa-
pers; the Internet hurt them both. When old industries fight or ignore new technologies, they decline. Tower
Records, Borders, and others had ample warning they would be hurt by Internet downloads; their failure to
respond led to their liquidation.
In some cases, innovation’s long-run consequences are not fully foreseeable. Cell phones, video games, and the
Internet allow people to stay in touch with each other and plugged in with current events but also reduce attention
to traditional media as well as face-to-face social interaction as people listen to music or watch a movie on their
cell phones.
Marketers should monitor the following technology trends: the accelerating pace of change, unlimited opportu-
nities for innovation, varying R&D budgets, and increased regulation of technological change.
acceleraTinG Pace of chanGe More ideas than ever are in the works, and the time between idea
and implementation is shrinking. In the first two-and-a-half years of the iPad’s existence, Apple sold a staggering
97 million units worldwide.47 In many markets, the next technological breakthrough seems right around the
corner,
unliMiTed oPPorTuniTies for innovaTion Consider just a few remarkable openings. Medical
researchers hope to use stem cells for organ generation and hybrid positron emission tomography (PET) and
magnetic resonance imaging (MRI) to dramatically improve diagnosis. Environmental researchers are exploring
plasma arc waste disposal to harness lightning and turn garbage into glass or a gaseous energy source. They are
Seventh Generation offers a
range of household products
for environmentally conscious
consumers.
So
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. W
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r/
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developing desalination methods to safely and economically remove salt from ocean water and make it drinkable.
Neuroscientists are studying how to harness brain signals via electroencephalography (EEG) as well as how to
construct a “thinking” DNA neural network that can answer questions correctly.48
varyinG r&d budGeTs The United States is the world leader in R&D, spending $436 billion in 2012. Its
advantage in innovation comes from all sectors—government-funded research from the National Aeronautics and
Space Administration (NASA) and National Institutes of Health (NIH); top academic institutions such as Johns
Hopkins University, University of Michigan, and the University of Wisconsin; and corporations such as Merck,
Pfizer, Intel, and Microsoft.
A growing portion of U.S. R&D, however, goes to the development side, not research, raising concerns about
whether the United States can maintain its lead in basic science. Too many companies seem to be putting their
money into copying competitors’ products with minor improvements. Other countries are not standing still
either. China, Israel, and Finland all are beginning to spend a larger percentage of their GDP on R&D than the
United States.49
increased reGulaTion of TechnoloGical chanGe Government has expanded
its agencies’ powers to investigate and ban potentially unsafe products. Safety and health regulations have
increased for food, automobiles, clothing, electrical appliances, and construction. Consider the Food and Drug
Administration (FDA).50
the FDa The FDA plays a critical public health role, overseeing a wide range of products. Here is its specific
charge:
FDA is responsible for protecting the public health by assuring the safety, efficacy and security of human and
veterinary drugs, biological products, medical devices, our nation’s food supply, cosmetics, and products that
emit radiation.
FDA is also responsible for advancing the public health by helping to speed innovations that make medicines
more effective, safer, and more affordable and by helping the public get the accurate, science-based informa-
tion they need to use medicines and foods to maintain and improve their health. FDA also has responsibility for
regulating the manufacturing, marketing and distribution of tobacco products to protect the public health and to
reduce tobacco use by minors.
Finally, FDA plays a significant role in the Nation’s counterterrorism capability. FDA fulfills this responsibil-
ity by ensuring the security of the food supply and by fostering development of medical products to respond to
deliberate and naturally emerging public health threats.
The FDA’s level of enforcement has varied some through the years, in part depending on the political administration.
It can also vary by product or industry. Congress recently empowered the FDA to place new restrictions on the prescrib-
ing, distribution, sale, and advertising of proposed new drugs. The FDA looks at the safety and efficacy of any proposed
new drug, but also additional considerations such as the integrity of the global manufacturing chain that makes it, post-
marketing studies as a condition of approval, and demonstrable superiority over existing therapies.
The POlITICal-leGal envIrOnmenT
The political and legal environment consists of laws, government agencies, and pressure groups that influence
organizations and individuals. Sometimes these create new business opportunities. Mandatory recycling laws
boosted the recycling industry and launched dozens of new companies making products from recycled materials.
On the other hand, overseas governments can impose laws or take actions that create uncertainty and even con-
fusion for companies. Political instability in certain Middle Eastern and African nations has created much risk
for oil firms and others. Two major trends are increased business legislation and the growth of special-interest
groups.51
increased business leGislaTion Business legislation is intended to protect companies from unfair
competition, protect consumers from unfair business practices, protect society from unbridled business behavior,
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106 PART 2 | CAPTuRing MARkeTing insighTs
and charge businesses with the social costs of their products or production processes. Each new law may also have
the unintended effect of sapping initiative and slowing growth.
The European Commission has established new laws covering competitive behavior, product standards, prod-
uct liability, and commercial transactions for the 28 member nations of the European Union. The United States has
many consumer protection laws covering competition, product safety and liability, fair trade and credit practices,
and packaging and labeling, but many countries’ laws are stronger.52
Norway bans several forms of sales promotion—trading stamps, contests, and premiums—as inappropriate or
unfair. Many countries throughout the world ban or severely restrict comparative advertising. Thailand requires
food processors selling national brands to also market low-price brands so low-income consumers will be served.
In India, food companies need special approval to launch duplicate brands, such as another cola drink or brand
of rice.
GroWTh of sPecial-inTeresT GrouPs Political action committees (PACs) lobby government
officials and pressure business executives to respect the rights of consumers, women, senior citizens, minorities,
and gays and lesbians. Insurance companies directly or indirectly influence the design of smoke detectors;
scientific groups affect the design of spray products. Many companies have established public affairs departments
to deal with such special-interest groups.
The consumerist movement organized citizens and government to strengthen the rights and powers of buy-
ers in relationship to sellers. Consumerists have won the right to know the real cost of a loan, the true cost per
standard unit of competing brands (unit pricing), the basic ingredients and true benefits of a product, and the
nutritional quality and freshness of food.
Privacy issues and identity theft will remain public policy hot buttons as long as consumers are willing to swap
personal information for customized products—from marketers they trust.53 Consumers worry that they will be
robbed or cheated; that private information will be used against them; that they will be bombarded by solicita-
tions; and that children will be targeted by ads. Online privacy greatly concerns consumers and regulators alike.
Technology now enables firms to collect all kinds of information.54
Make no mistake, your personal data isn’t your own. When you update your Facebook page, “Like” some-
thing on a website, apply for a credit card, click on an ad, listen to an MP3, or comment on a YouTube
video, you are feeding a huge and growing beast with an insatiable appetite for your personal data, a beast
that always craves more. Virtually every piece of personal information that you provide online (and much
that you provide offline) will end up being bought and sold, segmented, packaged, analyzed, repackaged,
and sold again.
“Marketing Insight: Watching Out for Big Brother” describes some of the data collection practices and privacy
concerns that have arisen with widespread Internet adoption and use.
Political unrest in the Middle
East was a major cause for
concern for many large
multinational firms
So
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G
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H
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A
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Forecasting and Demand
Measurement
Understanding the marketing environment and conducting marketing research (described in Chapter 4) can help
to identify marketing opportunities. The company must then measure and forecast the size, growth, and profit
potential of each new opportunity. Sales forecasts prepared by marketing are used by finance to raise cash for
investment and operations; by manufacturing to establish capacity and output; by purchasing to acquire the right
amount of supplies; and by human resources to hire the needed workers. If the forecast is off the mark, the com-
pany will face excess or inadequate inventory. Because it’s based on estimates of demand, managers need to define
what they mean by market demand. DuPont’s Performance Materials group knew that even when DuPont Tyvek
had 70 percent of the $100 million market for air-barrier membranes, there was greater opportunity with more
products and services to tap into the entire multi-billion-dollar U.S. home construction market.55
Can online data profiling go too far? New parents are highly lucra-
tive customers, but with birth records public, a slew of companies all
discover them at the same time. To beat them to the punch, Target
studied the buying histories of women who signed up for new-baby
registries at the store and found many bought large amounts of vitamin
supplements during their first trimester and unscented lotion around
the start of their second trimester. Target then used these purchase
markers to identify women of child-bearing age who were likely to be
pregnant and sent them offers and coupons for baby products timed
to the stages of pregnancy and later baby needs. When the practice
became known, however, some criticized the company’s tactics, which
had occasionally been the means of letting family members know
someone in the house was expecting. Target responded by including
the offers with others unrelated to pregnancy, and sales in the pro-
moted pregnancy-related categories soared.
This episode vividly illustrates the power of database management
in an Internet era, as well as the worries it can create among consum-
ers. Politicians and government officials are discussing a “Do Not Track”
option for consumers online (like the “Do Not Call” option for unsolicited
phone calls). Although it is not clear how quickly legislation can be put
into place, an online privacy bill that strengthens consumer rights seems
inevitable. One member of the Federal Trade Commission, Julie Brill, feels
data brokers should have to tell the public what data they collect, how
they collect them, with whom they share them, and how they are used.
Sources: Avi Goldfarb and Catherine Tucker, “Shifts in Privacy Concerns,”
American Economic Review: Papers & Proceedings 102, no. 3 (2012), pp. 349–53;
Avi Goldfarb and Catherine Tucker, “Online Display Advertising: Targeting and
Obtrusiveness,” Marketing Science 30 (May–June 2011), pp. 389–404, plus com-
mentaries and rejoinder; Alessandro Acquisti, Leslie John, and George Loewenstein,
“The Impact of Relative Judgments on Concern about Privacy,” Journal of Marketing
Research 49 (April 2012), pp. 160–74; Mark Sullivan, “Data Snatchers! The Booming
Market for Your Online Identity,” PC World, June 26, 2012; Charles Duhigg, “How
Companies Learn Your Secrets,” New York Times, February 16, 2012; Joshue
Topolsky, “Online Tracking Is Shady—but It Doesn’t Have to Be,” Washington Post,
December 11, 2011; Natasha Singer, “You for Sale: Mapping, and Sharing, the
Consumer Genome,” New York Times, June 16, 2012; Natasha Singer, “Consumer
Data, but Not for Consumers,” New York Times, July 21, 2012; Doc Searls, “The
Customer as a God,” Wall Street Journal, July 20, 2012.
marketing
insight
Watching Out for Big Brother
The explosion of digital data created by individuals online can nearly
all be collected, bought, and sold by the personal data economy,
including “advertisers, marketers, ad networks, data brokers, web-
site publishers, social networks, and online tracking and targeting
companies.” Companies know or can find your age, race, gender,
height, weight, marital status, education level, political affiliation,
buying habits, hobbies, health, financial concerns, vacation dreams,
and more.
The thought of such widespread transparency worries con-
sumers. Research shows more people, especially older consumers,
are refusing to reveal private information online. At the same time,
consumers are accepting more privacy intrusions every day, perhaps
because they don’t realize what information they are giving out, don’t
feel they have a choice, or don’t think it will really matter. Many don’t
realize, for example, that buried in the fine print of their agreement
to buy a new smart phone may be authorization to allow third-party
services to track their every move. One such firm, Carrier IQ, received
permission from any purchaser of an EVO 3D HTC smart phone to
see every call made and when, where text messages were sent, and
which Web sites were visited. Unfortunately, once data have been col-
lected online, they can end up in unexpected places, resulting in spam
or worse.
Consumers increasingly want to know where, when, how,
and why they are being watched online. Another data tracking firm
is Acxion, which maintains a database on about 190 million U.S.
individuals and 126 million households. Its 23,000 servers process
50 trillion data transactions a year as it attempts to assemble
“360-degree views” of consumers from offline, online, and mobile
sources. Its customers have included banks like Wells Fargo and
HSBC, investment services like E*TRADE, automakers like Toyota and
Ford, and department stores like Macy’s.
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The meaSureS Of markeT demand
Companies can prepare as many as 90 different types of demand estimates for six different product levels, five
space levels, and three time periods (see Figure 3.1). Each serves a specific purpose. A company might forecast
short-run demand to order raw materials, plan production, and borrow cash. It might forecast regional demand
to decide whether to set up regional distribution.
There are many productive ways to break down the market:
• The potential market is the set of consumers with a sufficient level of interest in a market offer. However,
their interest is not enough to define a market unless they also have sufficient income and access to the
product.
• The available market is the set of consumers who have interest, income, and access to a particular offer. The
company or government may restrict sales to certain groups; a state might ban motorcycle sales to anyone
under 21. Eligible adults constitute the qualified available market—the set of consumers who have interest,
income, access, and qualifications for the market offer.
Target was criticized by some
for its over-zealous targeting of
expecting mothers.
So
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lo
om
be
rg
v
ia
G
et
ty
I
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ag
es
Space
Level
Product
Level
World
U.S.A.
Region
Territory
Customer
All sales
Industry sales
Company sales
Product line sales
Product form sales
Product item sales
Short run Medium run Long run
Time Level
| Fig. 3.1 |
Ninety Types
of Demand
Measurement
(6 × 5 × 3)
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ColleCTing infoRMATion And foReCAsTing deMAnd | chapter 3 109
• The target market is the part of the qualified available market the company decides to pursue. The company
might concentrate its marketing and distribution effort on the East Coast.
• The penetrated market is the set of consumers who are buying the company’s product.
These definitions are a useful tool for market planning. If the company isn’t satisfied with its current sales, it can
try to attract a larger percentage of buyers from its target market. It can lower the qualifications for potential buy-
ers. It can expand its available market by opening distribution elsewhere or lowering its price, or it can reposition
itself in the minds of its customers.
a vOCabularY fOr demand meaSuremenT
The major concepts in demand measurement are market demand and company demand. Within each, we distin-
guish among a demand function, a sales forecast, and a potential.
MarkeT deMand The marketer’s first step in evaluating marketing opportunities is to estimate total market
demand. Market demand for a product is the total volume that would be bought by a defined customer group in a
defined geographical area in a defined time period in a defined marketing environment under a defined marketing
program.
Market demand is not a fixed number, but rather a function of the stated conditions. For this reason, we call
it the market demand function. Its dependence on underlying conditions is illustrated in Figure 3.2(a). The hori-
zontal axis shows different possible levels of industry marketing expenditure in a given time period. The vertical
axis shows the resulting demand level. The curve represents the estimated market demand associated with vary-
ing levels of marketing expenditure.
Some base sales—called the market minimum and labeled Q1 in the figure—would take place without
any demand-stimulating expenditures. Higher marketing expenditures would yield higher levels of demand,
first at an increasing rate, then at a decreasing rate. Take fruit juices. Given the indirect competition they
face from other types of beverages, we would expect increased marketing expenditures to help fruit juice
products stand out and increase demand and sales. Marketing expenditures beyond a certain level would
not stimulate much further demand, suggesting an upper limit called the market potential and labeled Q2 in
the figure.
The distance between the market minimum and the market potential shows the overall marketing sensitivity
of demand. We can think of two extreme types of markets, the expansible and the nonexpansible. An expansible
market, such as the market for racquetball playing, is very much affected in size by the level of industry market-
ing expenditures. In terms of Figure 3.2(a), the distance between Q1 and Q2 is relatively large. A nonexpansible
market—for example, the market for weekly trash or garbage removal—is not much affected by the level of
marketing expenditures; the distance between Q1 and Q2 is relatively small. Organizations selling in a nonex-
pansible market must accept the market’s size—the level of primary demand for the product class—and direct
their efforts toward winning a larger market share for their product, that is, a higher level of selective demand
for their product.
It pays to compare the current and potential levels of market demand. The result is the market-penetration
index. A low index indicates substantial growth potential for all the firms. A high index suggests it will be
(a) Marketing Demand as a Function of Industry
Marketing Expenditure (assumes a particular
marketing environment)
(b) Marketing Demand as a Function of Industry
Marketing Expenditure (two different
environments assumed)
Industry Marketing ExpenditureM
ar
ke
t D
em
an
d
in
th
e
Sp
ec
ifi
c
Pe
rio
d
M
ar
ke
t D
em
an
d
in
th
e
Sp
ec
ifi
c
Pe
rio
d
Industry Marketing Expenditure
Market
potential
(prosperity)
Market
potential, Q2
Market
forecast, QF
Market
minimum, Q1
Market
potential
(recession)Planned
expenditure
Prosperity
Recession
| Fig. 3.2 |
Market
Demand
Functions
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110 PART 2 | CAPTuRing MARkeTing insighTs
expensive to attract the few remaining prospects. Generally, price competition increases and margins fall when the
market-penetration index is already high.
Comparing current and potential market shares yields a firm’s share-penetration index. If this index is low,
the company can greatly expand its share. Holding it back could be low brand awareness, low availability, benefit
deficiencies, or high price. A firm should calculate the share-penetration increases from removing each factor to
see which investments produce the greatest improvement.56
Remember that the market demand function is not a picture of market demand over time. Rather, it shows
alternate current forecasts of market demand associated with possible levels of industry marketing effort.
MarkeT forecasT Only one level of industry marketing expenditure will actually occur. The market
demand corresponding to this level is called the market forecast.
MarkeT PoTenTial The market forecast shows expected market demand, not maximum market demand.
For the latter, we need to visualize the level of market demand resulting from a very high level of industry
marketing expenditure, where further increases in marketing effort would have little effect. Market potential is the
limit approached by market demand as industry marketing expenditures approach infinity for a given marketing
environment.
The phrase “for a given market environment” is crucial. Consider the market potential for automobiles. It’s
higher during prosperity than during a recession, as illustrated in Figure 3.2(b). Market analysts distinguish
between the position of the market demand function and movement along it. Companies cannot do any-
thing about the position of the market demand function, which is determined by the marketing environment.
However, they influence their particular location on the function when they decide how much to spend on
marketing.
Companies interested in market potential have a special interest in the product-penetration percentage,
the percentage of ownership or use of a product or service in a population. The lower the product-penetration
percentage, the higher the market potential, although this also assumes everyone will eventually be in the market
for every product.
coMPany deMand Company demand is the company’s estimated share of market demand at alternative
levels of company marketing effort in a given time period. It depends on how the company’s products, services,
prices, and communications are perceived relative to the competitors’. Other things equal, the company’s market
share depends on the relative scale and effectiveness of its market expenditures. As noted previously, marketing
model builders have developed sales response functions to measure how a company’s sales are affected by its
marketing expenditure level, marketing mix, and marketing effectiveness.57
coMPany sales forecasT Once marketers have estimated company demand, their next task is to
choose a level of marketing effort. The company sales forecast is the expected level of company sales based on a
chosen marketing plan and an assumed marketing environment.
We represent the company sales forecast graphically with sales on the vertical axis and marketing effort on the
horizontal axis, as in Figure 3.2. We often hear that the company should develop its marketing plan on the basis of
its sales forecast. This forecast-to-plan sequence is valid if forecast means an estimate of national economic activity
or if company demand is nonexpansible. The sequence is not valid, however, where market demand is expansible
or where forecast means an estimate of company sales. The company sales forecast does not establish a basis for
deciding what to spend on marketing. On the contrary, the sales forecast is the result of an assumed marketing
expenditure plan.
Two other concepts are important here. A sales quota is the sales goal set for a product line, company division,
or sales representative. It is primarily a managerial device for defining and stimulating sales effort, often set slightly
higher than estimated sales to stretch the sales force’s effort.
A sales budget is a conservative estimate of the expected volume of sales, primarily for making current
purchasing, production, and cash flow decisions. It’s based on the need to avoid excessive risk and is generally set
slightly lower than the sales forecast.
coMPany sales PoTenTial Company sales potential is the sales limit approached by company demand
as company marketing effort increases relative to that of competitors. The absolute limit of company demand is,
of course, the market potential. The two would be equal if the company captured 100 percent of the market. In
most cases, company sales potential is less than the market potential, even when company marketing expenditures
increase considerably. Each competitor has a hard core of loyal buyers unresponsive to other companies’ efforts to
woo them.
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51 Industry sector (information)
513 Industry subsector (broadcasting and telecommunications)
5133 Industry group (telecommunications)
51332 Industry (wireless telecommunications carriers, except satellite)
513321 National industry (U.S. paging)
eSTImaTInG CurrenT demand
We are now ready to examine practical methods for estimating current market demand. Marketing executives
want to estimate total market potential, area market potential, and total industry sales and market shares.
ToTal MarkeT PoTenTial Total market potential is the maximum sales available to all firms in an
industry during a given period, under a given level of industry marketing effort and environmental conditions.
A common way to estimate total market potential is to multiply the potential number of buyers by the average
quantity each purchases and then by the price.
If 100 million people buy books each year and the average book buyer buys three books a year at an average
price of $20 each, then the total market potential for books is $6 billion (100 million × 3 × $20). The most difficult
component to estimate is the number of buyers. We can always start with the total population in the nation, say,
314 million people. Next we eliminate groups that obviously would not buy the product. Assume illiterate people
and children under 12 don’t buy books and constitute 20 percent of the population. This means 80 percent of the
population, or 251 million people, is in the potential pool. Further research might tell us that people of low income
and low education rarely buy books, and they constitute more than 30 percent of the potential pool. Eliminating
them, we arrive at a prospect pool of approximately 175.7 million book buyers. We use this number to calculate
total market potential.
A variation on this method is the chain-ratio method, which multiplies a base number by several adjusting
percentages. Suppose a brewery is interested in estimating the market potential for a new light beer especially
designed to accompany food. It can make an estimate with the following calculation:
Demand
for the
new
light beer
= Population *
Average
percentage of
discretionary
income
spent
on food
Average
percentage of
amount spent
on food that is
spent on
beverages
* *
Average
percentage of
amount spent
on beverages
that is spent
on alcoholic
beverages
Expected
percentage of
amount spent
on beer that
will be spent on
light beer
area MarkeT PoTenTial Because companies must allocate their marketing budget optimally among
their best territories, they need to estimate the market potential of different cities, states, and nations. Two major
methods are the market-buildup method, used primarily by business marketers, and the multiple-factor index
method, used primarily by consumer marketers.
Market-Buildup Method The market-buildup method calls for identifying all the potential buyers in each
market and estimating their potential purchases. It produces accurate results if we have a list of all potential buyers
and a good estimate of what each will buy. Unfortunately, this information is not always easy to gather.
Consider a machine-tool company that wants to estimate the area market potential for its wood lathe in the
Boston area. Its first step is to identify all potential buyers of wood lathes in the area, primarily manufacturing
establishments that shape or ream wood as part of their operations. The company could compile a list from a
directory of all manufacturing establishments in the area. Then it could estimate the number of lathes each industry
might purchase, based on the number of lathes per thousand employees or per $1 million of sales in that industry.
An efficient method of estimating area market potentials makes use of the North American Industry Classification
System (NAICS), developed by the U.S. Bureau of the Census in conjunction with the Canadian and Mexican gov-
ernments.58 The NAICS classifies all manufacturing into 20 major industry sectors and further breaks each sector
into a six-digit, hierarchical structure as follows.
Personal
discretionary
income
per
capita
* *
Average
percentage of
amount spent
on alcoholic
beverages that
is spent on beer
*
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112 PART 2 | CAPTuRing MARkeTing insighTs
For each six-digit NAICS number, a company can purchase business directories that provide complete com-
pany profiles of millions of establishments, subclassified by location, number of employees, annual sales, and
net worth.
To use the NAICS, the lathe manufacturer must first determine the six-digit NAICS codes that represent
products whose manufacturers are likely to require lathe machines. To get a full picture of these, the company
can (1) identify past customers’ NAICS codes; (2) go through the NAICS manual and check off all the six-
digit industries that might have an interest in lathes; and (3) mail questionnaires to a wide range of companies
inquiring about their interest in wood lathes.
The company’s next task is to select an appropriate base for estimating the number of lathes each industry will
use. Suppose customer industry sales are the most appropriate base. Once the company estimates the rate of lathe
ownership relative to the customer industry’s sales, it can compute the market potential.
Multiple-Factor Index Method Like business marketers, consumer companies also need to estimate area
market potentials, but because their customers are too numerous to list, they commonly use a straightforward
index. A drug manufacturer might assume the market potential for drugs is directly related to population size. If
the state of Virginia has 2.55 percent of the U.S. population, Virginia might be a market for 2.55 percent of total
drugs sold.
A single factor is rarely a complete indicator of sales opportunity. Regional drug sales are also influenced by
per capita income and the number of physicians per 10,000 people. Thus, it makes sense to develop a multiple-
factor index and assign each factor a specific weight. Suppose Virginia has 2.00 percent of U.S. disposable per-
sonal income, 1.96 percent of U.S. retail sales, and 2.28 percent of U.S. population, and the respective weights
for these factors are 0.5, 0.3, and 0.2. The buying-power index for Virginia is then 2.04 [0.5(2.00) + 0.3(1.96)
+ 0.2(2.28)]. Thus, 2.04 percent of the nation’s drug sales (not 2.28 percent) might be expected to take place in
Virginia.
The weights in the buying-power index are somewhat arbitrary, and companies can assign others if appro-
priate. A manufacturer might adjust the market potential for additional factors, such as competitors’ presence,
local promotional costs, seasonal factors, and market idiosyncrasies.
Many companies compute area indexes to allocate marketing resources. Suppose the drug company is review-
ing the six cities listed in Table 3.5. The first two columns show its percentage of U.S. brand and category sales in
these six cities. Column 3 shows the brand development index (BDI), the index of brand sales to category sales.
Seattle has a BDI of 114 because the brand is relatively more developed than the category in Seattle. Portland’s BDI
is 65, which means the brand is relatively underdeveloped there.
Normally, the lower the BDI, the higher the market opportunity, in that there is room to grow the brand.
Other marketers would argue instead that marketing funds should go into the brand’s strongest markets, where
it might be important to reinforce loyalty or more easily capture additional brand share. Investment decisions
should be based on the potential to grow brand sales.
Table 3.5 Calculating the Brand Development Index (BDI)
(a) Percent
of U.S. Brand
(b) Percent
of U.S. Category
BDI
Territory Sales Sales (a ÷ b) × 100
Seattle 3.09 2.71 114
Portland 6.74 10.41 65
Boston 3.49 3.85 91
Toledo .97 .81 120
Chicago 1.13 .81 140
Baltimore 3.12 3.00 104
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Feeling it was underperforming in a high-potential market, Anheuser-Busch targeted the growing
Hispanic population in Texas with a number of special marketing activities. Cross-promotions with Budweiser
and Clamato tomato clam cocktail (to mix the popular Michiladas drink), sponsorship of the Esta Noche
Toca concert series, and support of Latin music acts with three-on-three soccer tournaments helped
drive higher sales. Anheuser-Busch later introduced Chelada with pre-mixed Budweiser or Bud Light and
Clamato.59
After the company decides on the city-by-city allocation of its budget, it can refine each allocation down to
census tracts or zip+4 code centers. Census tracts are small, locally defined statistical areas in metropolitan areas
and some other counties. They generally have stable boundaries and a population of about 4,000. Zip+4 code cen-
ters (designed by the U.S. Postal Service) are a little larger than neighborhoods. Data on population size, median
family income, and other characteristics are available for these geographical units. Using other sources such as
loyalty card data, Mediabrands’s Geomentum targets “hyper-local” sectors of zip codes, city blocks, and even
individual households with ad messages delivered via interactive TV, zoned editions of newspapers, Yellow Pages,
outdoor media, and local Internet searches.60
indusTry sales and MarkeT shares Besides estimating total potential and area potential, a
company needs to know the actual industry sales taking place in its market. This means identifying competitors
and estimating their sales.
The industry trade association will often collect and publish total industry sales, although it usually does not list
individual company sales separately. With this information, however, each company can evaluate its own perfor-
mance against the industry’s. If a company’s sales are increasing by 5 percent a year and industry sales are increas-
ing by 10 percent, the company is losing its relative standing in the industry.
Another way to estimate sales is to buy reports from a marketing research firm that audits total sales and brand
sales. Nielsen Media Research audits retail sales in various supermarket and drugstore product categories. A com-
pany can purchase this information and compare its performance to the total industry or any competitor to see
whether it is gaining or losing share, overall or brand by brand. Because distributors typically will not supply infor-
mation about how much of competitors’ products they are selling, business-to-business marketers operate with less
knowledge of their market share results.
eSTImaTInG fuTure demand
The few products or services that lend themselves to easy forecasting generally enjoy an absolute level or a
fairly constant trend and competition that is either nonexistent (public utilities) or stable (pure oligopolies). In
most markets, in contrast, good forecasting is a key factor in success.
Companies commonly prepare a macroeconomic forecast first, followed by an industry forecast, followed
by a company sales forecast. The macroeconomic forecast projects inflation, unemployment, interest rates,
Marketers can now target
consumers right down to their
zip code, neighborhood, or
individual households.
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consumer spending, business investment, government expenditures, net exports, and other variables. The
end result is a forecast of gross domestic product (GDP), which the firm uses, along with other environmental
indicators, to forecast industry sales. The company derives its sales forecast by assuming it will win a certain
market share.
How do firms develop forecasts? They may create their own or buy forecasts from outside sources such as
marketing research firms, which interview customers, distributors, and other knowledgeable parties. Specialized
forecasting firms produce long-range forecasts of particular macroenvironmental components, such as popu-
lation, natural resources, and technology. Examples are IHS Global Insight (a merger of Data Resources and
Wharton Econometric Forecasting Associates), Forrester Research, and the Gartner Group. Futurist research
firms such as the Institute for the Future, Hudson Institute, and the Futures Group produce speculative
scenarios.
All forecasts are built on one of three information bases: what people say, what people do, or what people have
done. Using what people say requires surveying buyers’ intentions, composites of sales force opinions, and expert
opinion. Building a forecast on what people do means putting the product into a test market to measure buyer
response. To use the final basis—what people have done—firms analyze records of past buying behavior or use
time-series analysis or statistical demand analysis.
survey of buyers’ inTenTions Forecasting is the art of anticipating what buyers are likely to do
under a given set of conditions. For major consumer durables such as appliances, research organizations conduct
periodic surveys of consumer buying intentions, ask questions like Do you intend to buy an automobile within the
next six months?, and put the answers on a purchase probability scale:
0.00 0.20 0.40 0.60 0.80 1.00
No Slight Fair Good High Certain
chance possibility possibility possibility possibility
Surveys also inquire into consumers’ present and future personal finances and expectations about the economy.
They combine bits of information into a consumer confidence measure (Conference Board) or a consumer senti-
ment measure (Survey Research Center of the University of Michigan).
For business buying, research firms can carry out buyer-intention surveys for plant, equipment, and materials,
usually falling within a 10 percent margin of error. These surveys are useful in estimating demand for industrial
products, consumer durables, product purchases where advanced planning is required, and new products. Their
value increases to the extent that buyers are few, the cost of reaching them is low, and they have clear intentions
they willingly disclose and implement.
coMPosiTe of sales force oPinions When interviewing buyers is impractical, the company
may ask its sales representatives to estimate their future sales. Few companies use these estimates without making
some adjustments, however. Sales representatives might be pessimistic or optimistic, they might not know
how their company’s marketing plans will influence future sales in their territory, and they might deliberately
underestimate demand so the company will set a low sales quota. To encourage better estimating, the company
could offer incentives or assistance, such as information about marketing plans or past forecasts compared with
actual sales.
Sales force forecasts do yield a number of benefits. Sales reps might have better insight into developing trends
than any other group, and forecasting might give them greater confidence in their sales quotas and more incentive
to achieve them. A “grassroots” forecasting procedure provides detailed estimates broken down by product, terri-
tory, customer, and sales rep.
exPerT oPinion Companies can also obtain forecasts from experts, including dealers, distributors,
suppliers, marketing consultants, and trade associations. Dealer estimates are subject to the same strengths and
weaknesses as sales force estimates. Many companies buy economic and industry forecasts from well-known
economic-forecasting firms that have more data available and more forecasting expertise.
Occasionally, companies will invite a group of experts to prepare a forecast. The experts exchange views and
produce an estimate as a group (group-discussion method) or individually, in which case another analyst might
combine the results into a single estimate (pooling of individual estimates). Further rounds of estimating and refin-
ing follow (the Delphi method).61
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Summary
1. To carry out their analysis, planning, implementation,
and control responsibilities, marketing managers need
a marketing information system (MIS) to assess infor-
mation needs, develop the needed information, and dis-
tribute it in a timely manner.
2. An MIS has three components: (a) an internal records
system, which includes information about the order-
to-payment cycle and sales information systems; (b) a
marketing intelligence system, a set of procedures to
obtain everyday information about the marketing en-
vironment; and (c) a marketing research system that
allows for the systematic design, collection, analysis,
and reporting of data and findings relevant to a specific
marketing situation.
3. Marketers find many opportunities by identifying trends
(directions or sequences of events that have some
momentum and durability) and megatrends (major
social, economic, political, and technological changes
that have long-lasting influence).
4. Within the rapidly changing global picture, marketers
must monitor six major environmental forces: demo-
graphic, economic, social-cultural, natural, technologi-
cal, and political-legal.
5. In the demographic environment, marketers must be
aware of worldwide population growth; changing mixes
of age, ethnic composition, and educational levels; the
rise of nontraditional families; and large geographic
shifts in population.
6. In the economic arena, marketers need to focus on
income distribution and levels of savings, debt, and credit
availability.
7. In the social-cultural arena, marketers must understand
people’s views of themselves, others, organizations,
society, nature, and the universe. Their products must
correspond to society’s core and secondary values and
address the needs of different subcultures within a society.
8. Acknowledging the public’s increased concern about the
health of the natural environment, marketers are embrac-
ing sustainability and green marketing programs.
9. In the technological arena, marketers should take
account of the accelerating pace of technological
change, opportunities for innovation, varying R&D
budgets, and the increased governmental regulation
brought about by technological change.
10. In the political-legal environment, marketers must work
within the many laws regulating business practices and
with various special-interest groups.
11. To estimate current demand, companies attempt to
determine total market potential, area market potential,
industry sales, and market share. To estimate future
demand, companies survey buyers’ intentions, solicit
their sales force’s input, gather expert opinions, analyze
past sales, or engage in market testing. Mathematical
models, advanced statistical techniques, and comput-
erized data collection procedures are essential to all
types of demand and sales forecasting.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
PasT-sales analysis Firms can develop sales forecasts on the basis of past sales. Time-series analysis breaks
past time series into four components (trend, cycle, seasonal, and erratic) and projects them into the future.
Exponential smoothing projects the next period’s sales by combining an average of past sales and the most recent
sales, giving more weight to the latter. Statistical demand analysis measures the impact of a set of causal factors
(such as income, marketing expenditures, and price) on the sales level. Finally, econometric analysis builds sets
of equations that describe a system and statistically derives the different parameters that make up the equations
statistically.
MarkeT-TesT MeThod When buyers don’t plan their purchases carefully or experts are unavailable
or unreliable, a direct-market test can help forecast new-product sales or established product sales in a new
distribution channel or territory. (We discuss market testing in detail in Chapter 15.)
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Applications
Marketing Debate
Is Consumer Behavior More a Function
of a Person’s Age or Generation?
How much do consumers change over time? Some market-
ers who target certain age groups maintain that age differenc-
es are critical and that the needs and wants of a 25-year-old in
2015 are not that different from those of a 25-year-old in 1980.
Others argue that cohort and generation effects are critical
and that marketing programs must therefore suit the times.
Take a position: Age differences are fundamentally
more important than cohort effects versus Cohort effects
can dominate age differences.
Marketing Discussion
Age Targeting
What brands and products do you feel successfully
speak to you and effectively target your age group? Why?
Which ones do not? What could they do better?
Microsoft Windows and Office the must-have software
of its time. The 1998 slogan “Where Do You Want to Go
Today?” promoted not individual Microsoft products like
Windows 98 but rather the company itself, communi-
cating that Microsoft could help empower companies
and consumers alike.
During the mid-1990s, Microsoft entered the notori-
ous “browser wars” as companies struggled to find their
place during the Internet boom. Realizing what a good
product Netscape had in its 1995 Navigator browser,
Microsoft launched its own, Internet Explorer later the
same year. By 1997, Explorer had grabbed 18 percent of
the market.
Over the next five years, Microsoft took three major
steps to overtake Netscape. First, it bundled Internet
Explorer with its Office product, which included Excel,
Word, and PowerPoint. This meant that consumers
who wanted MS Office automatically became Internet
Explorer users as well. Second, Microsoft partnered with
AOL, which opened the doors to 5 million new consum-
ers almost overnight. Third, Microsoft used its deep
pockets to ensure that Internet Explorer was available
free, essentially “cutting off Netscape’s air supply.” By
2002, Netscape’s market share had fallen to a meek
4 percent.
Microsoft’s fight to become the browser leader
was not without controversy; some perceived that the
company was monopolizing the industry. As a result,
Microsoft faced antitrust charges in 1998 and numerous
lawsuits based on its marketing tactics. Charges aside,
the company’s stock took off, peaking in 1999 at $60
per share. Microsoft continued to release new products,
including Windows 2000 in 2000 and Windows XP in
2001. It also launched Xbox in 2001, marking its entrance
into the multibillion-dollar gaming industry.
Marketing Excellence
>> Microsoft
Microsoft is the world’s most successful software com-
pany. Bill Gates and Paul Allen founded it in 1975 with
the original mission of having “a computer on every desk
and in every home, running Microsoft software.” Today,
Microsoft is the fifth most valuable company in the world
and has a brand value of $61.2 billion.
In the early 1980s, Microsoft developed the DOS
operating system for IBM computers. The company lev-
eraged this initial success to sell software to other manu-
facturers, quickly becoming a major player in the industry.
Initial advertising efforts communicated the company’s
range of products, from DOS to Excel and Windows, and
unified them under the Microsoft brand.
Microsoft went public in 1986 and grew tremen-
dously over the next decade as the Windows operating
system and Microsoft Office took off. In 1990, Microsoft
launched Windows 3.0, a completely revamped version
of its operating system, including applications like File
Manager and Program Manager that are still used today.
It was an instant success; Microsoft sold more than 10
million copies of the software within two years, a phe-
nomenal accomplishment in those days. In addition,
Windows 3.0 became the first operating system to be
preinstalled on certain PCs, marking another major mile-
stone for the industry and for Microsoft.
Throughout the 1990s, Microsoft’s communica-
tion efforts convinced businesses not only that its
software was the best choice but also that it should
be upgraded frequently. Microsoft spent millions in
magazine advertising and received endorsements from
the top computer magazines in the industry, making
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After the recession came to an end, Microsoft’s image
and stock started to recover, thanks to the success of its
retail stores, effective marketing, and a wide range of new
product launches. Microsoft went after Google’s domi-
nant position in the search marketplace, for instance, with
a search engine called Bing, and it entered the growing
mobile industry with its Windows Phone mobile operat-
ing system. The company’s 2011 expansion into smart
phones surprised many analysts, but Microsoft hoped
the smart phone and Windows Phone mobile OS would
forge a strong connection with its consumers around
the world. It continued its innovation momentum in 2012
with the launch of Windows 8, Windows 8 Phone, and
a computer called Surface Tablet. The tablet impressed
consumers with a detachable keyboard that also served
as its protective cover.
Today, Microsoft offers a wide range of software,
mobile, and home entertainment products. Its most prof-
itable products continue to be Microsoft Windows and
Microsoft Office, which bring in approximately 80 percent
of its $86 billion in annual revenue.
Questions
1. Evaluate Microsoft’s product and marketing evolution
over the years. What has the company done well,
and where did it falter?
2. Evaluate Microsoft’s recent expansions into areas
such as search engines and smart phones. Do you
think these are good areas of growth for Microsoft?
Why or why not?
Sources: Interbrand, “2014 Best Global Brands Report,” www.interbrand.com; Stuart Elliot, “Microsoft
Takes a User-Friendly Approach to Selling Its Image in a New Global Campaign,” New York
Times, November 11, 1994; “Todd Bishop, “The Rest of the Motto,” Seattle Post Intelligencer,
September 23, 2004; Devin Leonard, “Hey PC, Who Taught You to Fight Back?” New York Times,
August 30, 2009; Suzanne Vranica and Robert A. Guth, “Microsoft Enlists Jerry Seinfeld in Its Ad Battle
Against Apple,” Wall Street Journal, August 21, 2008, p. A1; Stuart Elliott, “Echoing the Campaign of a
Rival, Microsoft Aims to Redefine ‘I’m a PC,’” New York Times, September 18, 2008, p. C4; John Furguson,
“From Cola Wars to Computer Wars—Microsoft Misses Again,” BN Branding, April 4, 2009; Microsoft
press release, “Microsoft Retail Stores Maturation: Going Behind the Scenes,” November 8, 2012.
Over the next several years, Microsoft’s stock price
tumbled by more than $40 a share as consumers waited
for the next operating system to be released. During this
time, Apple made a strong comeback with consumer-
friendly products like Mac computers, iPods, iPhones,
and iTunes. Apple also launched a successful market-
ing campaign titled “Get a Mac” that featured a smart,
creative, easygoing Mac character alongside a geeky,
virus-prone, uptight PC character. Apple’s campaign
successfully converted many consumers and tarnished
Microsoft’s brand image.
In 2007, Microsoft launched the Vista operating sys-
tem to great expectations; however, it was plagued by
bugs and problems and the company’s stock and image
continued to slide, helped by the worldwide recession of
2008–2009. In response, Microsoft created a campaign
titled “Windows. Life Without Walls” to help turn its image
around. Its new message—that computers with Microsoft
software were more cost-effective than the competition—
resonated well in the recession. Microsoft also launched
a series of commercials that boasted, “I’m a PC” and fea-
tured a wide variety of individuals who prided themselves
on being PC owners, hoping to improve employee morale
and customer loyalty.
In 2009, Microsoft launched Windows 7, an improved
operating system, with the campaign “Windows 7 was
my idea.” Four years later, it was operating more than 30
stores like Apple’s across the United States and Canada.
Jonathan Adashek, general manager of Communications
Strategy, explained, “We’ve welcomed more than 15 mil-
lion customers and counting so far, and have learned a
lot from them. Having this direct connection to our cus-
tomers has really helped us better understand their tech
needs.” Travis Walter, general manager of Microsoft’s
International and New Store Formats, agreed, “In person,
you get a very different experience and it’s one we’ve
been very delighted to provide. When you see our tech-
nology in person—when you can touch and feel it—a light
goes off.”
was $10.6 billion, a 5.6 percent rise from the previous
year, and the company employs nearly 25,000 people in
18 factories worldwide.
The story of this remarkable company begins in
1946 with a small patisserie in Alba, Italy. There, Pietro
Ferrero invented a 50 percent hazelnut, 50 percent
cocoa confection. Because taxes on cacao beans were
extremely high in post–World War II Italy, pure chocolate
was not readily available. Alba was known for the produc-
tion of hazelnuts, and Ferrero’s cheaply produced pasta
Marketing Excellence
>> Ferrero
Ferrero is an Italian confectionery company, privately
owned by the Ferrero family. The Reputation Institute’s
2014 survey ranked it as the 22nd “most reputable com-
pany in the world” – Ferrero holds 8 percent of the world’s
chocolate market and is the leader in Western Europe
with an 18.9 percent share. Its revenue in fiscal year 2013
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118 PART 2 | CAPTuRing MARkeTing insighTs
Indian consumers are very price sensitive. Within 10
years, Ferrero transformed the chocolate market with
premium brands accounting for 27 percent of the market.
Ferrero’s main competitors in India are Cadbury, Nestle,
Hersey, Lindt, and Mars.
Ferro has around 6 percent of the Indian chocolate
market and they are credited with making premium
chocolate work in India. Ferrero launched Rocher in
2007 and Tic Tac and Kinder Joy two years later. In
late 2011, the company set up its first factory which now
produces 20 million packs of Tic Tacs per day along with
1 million Kinder Joy eggs.
In 2013, a $60-million hazelnut development busi-
ness was approved in New South Wales in Australia.
Ferrero had been working on this for some time and the
operation would see 1 million trees planted in two farms.
The first commercial crop is expected in 2017 and the
farms are expected to be in full production by 2021. This
is seen as part of Ferrero’s long-term commitment to
Australia and will provide vital jobs in the region.
At full production, the farms are expected to generate
some 5000 tons of hazelnuts. The initiative should also
help to convince other growers to reconsider hazelnuts
as a cash crop. Potentially, the hazelnut export business
is worth $170 million in Australia each year.
Ferrero uses its marketing insights to promote sales.
The company’s 2010 promotion of Nutella included
sponsorship of the Football Federation of Australia and
the Socceroos, the Australian national soccer team,
and was one of the biggest sponsorship exercises
in the history of the brand. It also emphasized that
Nutella was one of Australia’s best-known and most-
loved brands by associating it with a sport that most
Australians enjoy. The sponsorship program resulted
in an increase of Nutella’s household penetration from
15.1 to 16.3 percent.
Throughout 2013 there were persistent rumors that
Nestlé was about to launch an audacious, and expen-
sive, takeover of Ferrero. Ferrero consistently denied
the rumors and Nestlé was surprisingly quiet about it.
As the year went on, rather than being the subject of
a takeover, it was Ferrero that was doing the taking
over. In July they announced the takeover of Turkish
hazelnut procurement, processing, and marketing firm
Oltan Group. The Turkish business, based in the north
of the country, was active in the main hazelnut growing
regions. The company had five production facilities and
generated annual sales in excess of $500 million. At a
stroke, Ferrero had secured vital raw materials for its
core products.
gianduja block, made from readily available ingredients,
suitably satisfied consumers’ cravings for sweet foods.
The product was a hit, and by 1951 the Ferrero fam-
ily had decided to turn the pasta gianduja block into a
creamy spread. By 1951 Ferrero was marketing this as
Supercrema. In 1963, Pietro’s son Michele, by then CEO,
modified the recipe and marketed it as the immensely
popular Nutella. Ferrero now sells more than 67,000 jars
of Nutella a year in Italy alone. While it offers a limited
product range, Ferrero’s offerings are nonetheless con-
sumable at all times of day, from breakfast (Nutella) to
dessert (Ferrero Rocher) and any time in between (Kinder
chocolates—Bueno and Surprise—and the ever-popular
Tic Tac). The emphasis is on quality, and it is certainly part
of the key to Ferrero’s success.
Ferrero began expanding into Europe in 1956 by
setting up a factory in Germany, where chocolate was ex-
tremely popular. This early understanding of global trends
allowed the company to swiftly expand into French,
Australian, Canadian, Asian, Puerto Rican, Ecuadorian,
and finally the U.S. markets. In 1974, Ferrero established
operations in Australia with the mission of delighting cus-
tomers with unique products of the highest quality and
integrity, and contributing to the well-being of employers,
customers, and the company.
The firm concentrates on meeting high standards;
thus, it manufactures only in places where it is sure it can
deliver consistently and establish a secure retail supply
chain, meaning it will never let consumers down. Managing
Director of Ferrero Australia, Craig Barker, launched a CSR
report in late 2013 that highlighted Ferrero’s commitment
to maintaining excellence in quality, freshness, and innova-
tion. The company seeks to promote a balanced diet and
lifestyle, including regular physical exercise, and offering
grade products at the same time.
Ferrero’s focus on consumers is accompanied by
its emphasis on quality, integrity, product innovation,
and passion. The company strives to understand mar-
ket preferences. Ferrero Australia does extensive testing
of its products in the Australian market before bringing
them to market. First, it carries out internal taste testing
to see whether consumers rate the product to the same
high standards of the company. Then Ferrero conducts
market testing in one state before going national. Ferrero
test-marketed three products in the Kinder line in Victoria
for two years before nationally marketing them. By under-
standing the insights of the market, Ferrero has ensured
constant growth since the 1940s.
When Ferrero entered India in 2004, the country did
not really have a ready market for premium chocolates.
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Nutella’s role in a healthy and well-balanced breakfast and
pledging not to target children in its advertisements.
Questions
1. Evaluate Ferrero Australia’s decision to invest in the
hazelnut farm. What are the key reasons for doing
this?
2. How can Ferrero use new technology to market its
products better?
Sources: Klaus Kneale, “World’s Most Reputable Companies,” www.forbes.com, May 6, 2009;
Armorel Kenna, “Ferrero Won’t Make Takeover Bid for Cadbury to Challenge Kraft,” www.bloomberg.
com, January 25, 2010; Ferrero, www.ferrero.com.au; FlowerAdvisor, www.floweradvisor.com.
Finally, Ferrero Australia has also engaged in many
community programs, such as a food bank that dis-
tributes food and grocery industry donations to welfare
agencies to feed the hungry. It also supports Brainwave, a
charity supporting pediatric neuroscience. The company
introduced the pink Tic Tac in celebration of Pink Ribbon
Month to support breast cancer research and awareness
along with the National Breast Cancer Foundation (NBCF).
Ferrero also supports forest conservation methods and
the abolition of child labor. It purchases cacao only from
suppliers who grow and process without using child labor,
and it purchases palm oil only from countries and areas
not known for deforestation. Ferrero has been combating
the issue of childhood obesity since 2008 by emphasizing
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120
In This Chapter, We Will Address
the Following Questions
1. What is the scope of marketing research? (p. 121)
2. What steps are involved in conducting good marketing research? (p. 124)
3. What are the best metrics for measuring marketing productivity? (p. 137)
Samsung uses marketing research to
sharpen the launch of its new products.
Source: ASSOCIATED PRESS
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M04_KOTL2621_15_GE_C04.indd 120 03/03/15 2:03 PM
121
In this chapter, we review the scope of marketing
research and the steps involved in the marketing research
process. We also consider how marketers can develop effective
metrics for measuring marketing productivity.
To make the best possible tactical decisions in the short run and strategic decisions
in the long run, marketers need timely, accurate, and actionable information about consumers, competition, and
their brands. Discovering a marketing insight and understanding its implications can often lead to a successful
product launch or spur the growth of a brand. It is especially important to stay tuned in online.1
Conducting
Marketing Research
4
In launching its new Galaxy S III smart phone, Samsung faced a formidable opponent in Apple. To
gain the upper hand, Samsung sifted through hundreds of thousands of tweets and online conver-
sations to uncover recurring negative comments about the iPhone. One ad in its new campaign
mocked Apple fanatics eagerly waiting in line for the latest iPhone model. With a tagline “The Next
Big Thing Is Already Here,” the ad showcased features such as screen size and NFC file-swapping technology where
Samsung had an advantage. It ended with the clever twist that the Samsung phone user in the line—whose phone
had all the features the Apple users were hoping for—was just saving a spot for his parents. A huge hit online, the
ad attracted millions of YouTube downloads. The TV ad was a follow-
up to an earlier print ad contrasting a long list of Galaxy S III features
with a much smaller list for the iPhone. It also poked fun at Apple
and its Genius retail employees, adding the tagline “It Doesn’t Take
a Genius.”
The Scope of Marketing
Research
Marketing managers often commission formal marketing studies of specific problems and opportunities, like
a market survey, a product-preference test, a sales forecast by region, or an advertising evaluation. It’s the job
of the marketing researcher to produce insight to help the marketing manager’s decision making. Formally, the
American Marketing Association says:2
Marketing research is the function that links the consumer, customer, and public to the marketer
through information—information used to identify and define marketing opportunities and problems;
generate, refine, and evaluate marketing actions; monitor marketing performance; and improve under-
standing of marketing as a process. Marketing research specifies the information required to address
these issues, designs the method for collecting information, manages and implements the data collection
process, analyzes the results, and communicates the findings and their implications.
Importance of marketInG InsIGhts
Marketing research is all about generating insights. Marketing insights provide diagnostic information about
how and why we observe certain effects in the marketplace and what that means to marketers.3
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122 PART 2 | CAPTuRing MARkeTing insighTs
Good marketing insights often form the basis of successful marketing programs.
• When an extensive consumer research study of U.S. retail shoppers by Walmart revealed that the store’s key
competitive advantages were the functional benefit of “offers low prices” and the emotional benefit of “makes
me feel like a smart shopper,” its marketers used those insights to develop their “Save Money, Live Better”
campaign.4
• When marketing research showed that consumers viewed Walgreens largely as a convenience store with a
pharmacy in the back, the company took steps to reposition itself as a premium health care brand, putting
more emphasis on its wellness offerings such as its walk-in clinics.5
Gaining marketing insights is crucial for marketing success. To improve the marketing of its $3 billion Pantene
hair care brand, Procter & Gamble conducted a deep dive into women’s feelings about hair, using surveys with
mood scales from psychology, high-resolution EEG research to measure brainwaves, and other methods. As a re-
sult, the company reformulated Pantene products, redesigned packages, pared the line down from 14 “collections”
to eight, and fine-tuned the ad campaign.6
If marketers lack consumer insights, they often get in trouble. When Tropicana redesigned its orange juice
packaging, dropping the iconic image of an orange skewered by a straw, it failed to adequately test for consumer
reactions—with disastrous results. Sales dropped by 20 percent, and Tropicana reinstated the old package design
after only a few months.7
Who Does marketInG research?
Spending on marketing research topped $40.2 billion globally in 2013, according to ESOMAR, the world asso-
ciation of opinion and market research professionals.8 Most large companies have their own marketing research
departments, which often play crucial roles within the organization. Here is how Procter & Gamble describes its
marketing research department.9
Consumer & Market Knowledge (CMK) Department is P&G’s key internal compass guiding and cham-
pioning decisions related to brand and customer business development strategy based on in-depth
analysis of consumers, shoppers and the retail trade. CMK leads analysis of market trends and consumer
habits/motivations, shopper behavior, customer and competitive dynamics; designs and analyzes qualita-
tive and quantitative consumer and shopper research studies as well as syndicated market data. CMK is
an integral partner, involved in all the stages of the brand life cycle starting with design of a concept to
final product development and through to the in-market launch driving business growth. CMK brings to
life P&G stated global strategy “Consumer is Boss.”
Marketing research, however, is not limited to large companies with big budgets and marketing research de-
partments. Often at much smaller companies, everyone carries out marketing research—including the customers.
Small companies can also hire the services of a marketing research firm or conduct research in creative and afford-
able ways, such as:
1. Engaging students or professors to design and carry out projects—AT&T, GE, Samsung, Shell Oil, and others
have engaged in a “crowdcasting” exercise by sponsoring the Innovation Challenge, where top MBA students
P&G employed a wide
range of research
techniques to
completely overhaul
its Pantene product
line.
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compete in teams to address company problems. The students gain experience and visibility; the companies
get fresh sets of eyes to solve problems at a fraction of what consultants would charge.10 The nonprofit United
Way uses graduate students and interns as critical marketing research resources to collect and consolidate
marketplace data and set up larger research projects.11
2. Using the Internet—A company can collect considerable information at little cost by examining competitors’
Web sites, monitoring chat rooms and blogs, and accessing published data. Social media monitoring tools
from companies like Radian6, Attensity, and Lithium keep firms on top of online buzz. Home water filtration
company Aquasana uses tools from NetBase to collect what people are saying about Brita and other com-
petitors on Twitter, Facebook, news sites, blogs, message boards, and any other place there are relevant online
conversations.12
3. Checking out rivals—Many small businesses, such as restaurants, hotels, or specialty retailers, routinely visit
competitors to learn about changes they have made. Tom Stemberg, who founded the office supply superstore
Staples, made weekly unannounced visits to his own stores, competitors’ stores, and other stores outside his
category, always focused on “what the store was doing right” to get ideas for improving Staples.13
4. Tapping into marketing partner expertise—Marketing research firms, ad agencies, distributors, and other
marketing partners may be able to share relevant market knowledge they have accumulated. Partners target-
ing small or medium-sized businesses may be especially helpful. For example, to promote more shipping to
China, UPS conducted several in-depth surveys of the Chinese market to portray its complexities but also its
opportunities for even small and medium-sized businesses.14
5. Tapping into employee creativity and wisdom—No one may come into more contact with customers and
understand a company’s products, services, and brands better than its employees. Software maker Intuit puts
employees into four- to six-person “two pizza” teams—called that because it takes only two pizzas to feed
them. They observe customers in all walks of life and try to identify problems Intuit might be able to solve.
Intuit takes all the employees’ proposed solutions and experiments with them, building products behind the
ideas that seem to work best.15
Most companies use a combination of resources to study their industries, competitors, audiences, and channel
strategies. They normally budget marketing research at 1 percent to 2 percent of company sales and spend a large
percentage of that on the services of outside firms. Marketing research firms fall into three categories:
1. Syndicated-service research firms—These firms gather consumer and trade information, which they sell for a
fee. Examples include the Nielsen Company, Kantar Group, Westat, and IRI.
2. Custom marketing research firms—These firms are hired to carry out specific projects. They design the study
and report the findings.
3. Specialty-line marketing research firms—These firms provide specialized research services. The best example
is the field-service firm, which sells field interviewing services to other firms.
overcomInG BarrIers to the Use of marketInG research
In spite of the rapid growth of marketing research, many companies still fail to use it sufficiently or correctly.
They may not understand what it is capable of or provide the researcher the right problem definition and
The founder of Staples made
weekly visits to stores of
all kinds for insights and
inspiration.
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information from which to work. They may also have unrealistic
expectations about what researchers can offer. Failure to use mar-
keting research properly has led to numerous gaffes, including the
following historic one.16
Star WarS In the 1970s, a successful marketing
research executive left General Foods to try a daring gambit: bringing
market research to Hollywood, to give film studios access to the same
research that had spurred General Foods’s success. A major film studio
handed him a science fiction film proposal and asked him to research and
predict its success or failure. His views would inform the studio’s decision
about whether to back the film. The research executive concluded the
film would fail. For one, he argued, Watergate had made the United States
less trusting of institutions and, as a result, its citizens in the 1970s prized
realism and authenticity over science fiction. This particular film also had
the word “war” in its title; the executive reasoned that viewers, suffering
post-Vietnam hangover, would stay away in droves. The film was Star
Wars, which eventually grossed more than $4.3 billion in box office re-
ceipts alone. What this researcher delivered was information, not insight.
He failed to study the script itself, to see that it was a fundamentally hu-
man story—of love, conflict, loss, and redemption—that happened to
play out against the backdrop of space.
The Marketing
Research Process
To take advantage of all the resources and practices available, good
marketers adopt a formal marketing research process that follows the six steps shown in Figure 4.1. We illustrate
these steps in the following situation.17
American Airlines (AA) was one of the first companies to install phone handsets on its planes. Now
it’s reviewing many new ideas, especially to cater to its first-class passengers on very long flights,
mainly businesspeople whose high-priced tickets pay most of the freight. Among these ideas are:
(1) ultra high-speed Wi-Fi service, (2) 124 channels of high-definition satellite cable TV, and (3) a
250-CD audio system that lets each passenger create a customized in-flight playlist. The marketing
research manager was assigned to investigate how first-class passengers would rate these services,
specifically ultra high-speed Wi-Fi, and how much extra they would be willing to pay. One source
estimates revenues of $70 million from Wi-Fi access over 10 years if enough first-class passengers paid
$25. AA could thus recover its costs in a reasonable time, given that making the connection available
would cost $90,000 per plane.
step 1: DefIne the proBlem, the DecIsIon alternatIves,
anD the research oBjectIves
Marketing managers must be careful not to define the problem too broadly or too narrowly for the marketing
researcher. A marketing manager who says “Find out everything you can about first-class air travelers’ needs” will
collect a lot of unnecessary information. One who says “Find out whether enough passengers aboard a B777 fly-
ing direct between Chicago and Tokyo would pay $25 for ultra high-speed Wi-Fi service so we can break even in
one year on the cost of offering this service” is taking too narrow a view of the problem.
Poorly conceived
marketing research
almost doomed the
box office blockbuster
Star Wars.
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The marketing researcher might ask, “Why does Wi-Fi have to be priced at $25 as opposed to $15, $35,
or some other price? Why does American have to break even on the service, especially if it attracts new cus-
tomers?” Another relevant question is, “How important is it to be first in the market, and how long can the
company sustain its lead?”
The marketing manager and marketing researcher agreed to define the problem as follows: “Will offer-
ing ultra high-speed Wi-Fi service create enough incremental preference and profit to justify its cost against
other service enhancements American might make?” To help design the research, management should first
spell out the decisions it might face and then work backward. Suppose management outlines these decisions:
(1) Should American offer ultra high-speed Wi-Fi service? (2) If so, should it offer it to first-class only or
include business class and possibly economy class? (3) What price(s) should be charged? (4) On what types
of planes and lengths of trips should the service be offered?
Now management and marketing researchers are ready to set specific research objectives: (1) What types
of first-class passengers would respond most to ultra high-speed Wi-Fi service? (2) How many are likely
to use it at different price levels? (3) How many might choose American because of this new service? (4)
How much long-term goodwill will this service add to American’s image? (5) How important is ultra high-
speed Wi-Fi service to first-class passengers relative to other services, such as a power plug or enhanced
entertainment?
Not all research can be this specific. Some is exploratory—its goal is to identify the problem and to sug-
gest possible solutions. Some is descriptive—it seeks to quantify demand, such as how many first-class pas-
sengers would purchase ultra high-speed Wi-Fi service at $25. Some research is causal—its purpose is to test
a cause-and-effect relationship.
step 2: Develop the research plan
In the second stage of marketing research we develop the most efficient plan for gathering the needed in-
formation and discover what that will cost. Suppose American made a prior estimate that launching ultra
high-speed Wi-Fi service would yield a long-term profit of $50,000. If the manager believes the market-
ing research will lead to an improved pricing and promotional plan and a long-term profit of $90,000, he
should be willing to spend up to $40,000 on this research. If the research will cost more than $40,000, it’s
not worth doing.
To design a research plan, we need to make decisions about the data sources, research approaches, re-
search instruments, sampling plan, and contact methods.
Data SourceS The researcher can gather secondary data, primary data, or both. Secondary data are
data that were collected for another purpose and already exist somewhere. Primary data are data freshly
gathered for a specific purpose or project.
Researchers usually start their investigation by examining some of the rich variety of low-cost and readily avail-
able secondary data to see whether they can partly or wholly solve the problem without collecting costly primary
data. For instance, auto advertisers looking to get a better return on their online car ads might purchase a copy of a
J. D. Power and Associates survey that gives insights into who buys specific brands and where advertisers can find
them online.
Develop the
research plan
Collect the
information
Define the problem
and research objectives
Analyze the
information
Present the
findings
Make the
decision
| Fig. 4.1 |
The Marketing
Research
Process
To help make a decision
to offer ultra high-speed
Wi-Fi service on its
flights, an airline would
want to carefully conduct
consumer research.
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When the needed data don’t exist or are dated or unreliable, the researcher will need to collect primary data.
Most marketing research projects do include some primary-data collection.
reSearch approacheS Marketers collect primary data in five main ways: through observation, focus
groups, surveys, behavioral data, and experiments.
Observational Research Researchers can gather fresh data by observing unobtrusively as customers shop or
consume products. Sometimes they equip consumers with pagers and instruct them to write down or text what
they’re doing whenever prompted, or they hold informal interview sessions at a café or bar.18 Photographs and
videos can also provide a wealth of detailed information. Although privacy concerns have been expressed, some
retailers are linking security cameras with software to record shopper behavior in stores. In its 1,000 retail stores,
T-Mobile can track how people move around, how long they stand in front of displays, and which phones they pick
up and for how long.19
Ethnographic research uses concepts and tools from anthropology and other social science disciplines to
provide deep cultural understanding of how people live and work.20 The goal is to immerse the researcher into
consumers’ lives to uncover unarticulated desires that might not surface in any other form of research.21 Fujitsu
Laboratories, Herman Miller, Steelcase, and Xerox have embraced ethnographic research to design breakthrough
products. Technology companies like IBM, Microsoft, and Hewlett-Packard use anthropologists and ethnologists
working alongside systems engineers and software developers.22
Any type of firm can benefit from the deep consumer insights of ethnographic research. To boost sagging sales
for its Orville Redenbacher popcorn, ConAgra spent nine months observing families at home and studying weekly
diaries of how they felt about various snacks. Researchers found a key insight: the essence of popcorn was that
it was a “facilitator of interaction.” Four nationwide TV ads followed with the tagline “Spending Time Together:
That’s the Power of Orville Redenbacher.”23
Ethnographic research isn’t limited to consumer products. UK-based Smith & Nephew, a global medical tech-
nology business, used extensive international ethnographic research with patients and clinicians to understand
the physical and emotional toll of wounds, developing ALLEVYN Life, a new wound-management dressing, in
the process.24 In a business-to-business setting, a sharper focus on end users helped propel Thomson Reuters to
greater financial heights.25
thOMSOn reuterS Just before it acquired Reuters, global information services giant Thomson
Corporation embarked on extensive research to better understand its ultimate customers. Thomson sold to businesses
and professionals in the financial, legal, tax and accounting, scientific, and health care sectors, and it wanted to know how
individual brokers and investment bankers used its data, research, and other resources to make day-to-day investment
decisions for clients. Segmenting the market by its end users, rather than by its corporate purchasers, and studying the way
they viewed Thomson versus competitors allowed the firm to identify market segments that offered growth opportunities.
Thomson then conducted surveys and “day in the life” ethnographic research on how end users did their jobs. Using an
approach called “three minutes,” researchers combined observation with detailed interviews to understand what end users
were doing three minutes before and after they used one of Thomson’s products. Insights from the research helped the
company develop new products and make acquisitions that led to significantly higher revenue and profits in the year that
followed.
The American Airlines researchers might meander around first-class lounges to hear how travelers talk about
different carriers and their features or sit next to passengers on planes. They can fly on competitors’ planes to
observe in-flight service.
Focus Group Research A focus group is a gathering of 6 to 10 people carefully selected for demographic,
psychographic, or other considerations and convened to discuss various topics at length for a small payment. A
professional moderator asks questions and probes based on the marketing managers’ agenda; the goal is to uncover
consumers’ real motivations and the reasons they say and do certain things. Sessions are typically recorded, and
marketing managers often observe from behind two-way mirrors. To allow more in-depth discussion, focus groups
are trending smaller in size.26
Focus group research is a useful exploratory step, but researchers must avoid generalizing to the whole market
because the sample is too small and is not drawn randomly. Some marketers feel this research setting is too con-
trived and prefer less artificial means. “Marketing Memo: Conducting Informative Focus Groups” has some practi-
cal tips to improve the quality of focus groups.
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In the American Airlines research, the moderator might start with a broad question, such as “How do you feel
about first-class air travel?” Questions then move to how people view the different airlines, different existing ser-
vices, different proposed services, and, specifically, ultra high-speed Wi-Fi service.
Focus groups allow marketers to hone in on issues not easily addressed by surveys. The key to using them successfully is to thoughtfully listen and carefully
observe, leaving assumptions and biases behind.
Although useful insights can emerge, questions also arise about focus groups’ validity. Some researchers believe consumers are so bombarded with ads,
they unconsciously (or perhaps cynically) parrot back what they’ve heard instead of what they really think. It’s always possible participants are trying to main-
tain their self-image and public persona, engage in “groupthink,” or satisfy a need to identify with other members. They may be unwilling to acknowledge—or
even recognize—their behavior patterns and motivations, and one highly opinionated person can drown out the rest of the group. Getting the right participants
is crucial, but groups can be expensive too ($3,000 to $5,000 per group).
It can be difficult to generalize the results, even from multiple focus groups. For example, within the United States, findings often vary from region to region.
One firm specializing in focus group research claimed Minneapolis was the best city to get a sample of fairly well-educated people who were honest and
forthcoming. Many marketers interpret focus groups in New York and other northeastern cities carefully because people there tend to be highly critical and
generally don’t report that they like much.
Participants must feel relaxed and be strongly motivated to be truthful. Physical surroundings can be crucial. At one agency an executive noted, “We
wondered why people always seemed grumpy and negative—people were resistant to any idea we showed them.” Finally in one session a fight broke out
between participants. The problem was the room itself: cramped, stifling, forbidding. “It was a cross between a hospital room and a police interrogation room.”
To fix the problem, the agency gave the room a makeover. Other firms adapt the room to fit the topic—such as designing it to look like a playroom when
speaking to children. To increase interactivity among focus group members, some researchers assign pre-session homework such as diaries, photography,
and videography.
Online focus groups may cost less than a quarter of an in-person focus group. They are also less intrusive, allow geographically diverse subjects to par-
ticipate, and yield fast results. Proponents of traditional groups maintain that in-person sessions immerse marketers in the research process, offer a close-up
look at people’s emotional and physical reactions, and ensure that sensitive materials are not leaked. In-person, marketers can also adjust the flow of discus-
sion and delve deeply into more complex topics.
Regardless of the form it takes, the focus group is still, as one marketing executive noted, “the most cost-effective, quickest, dirtiest way to get information
in rapid time on an idea.” Wharton’s Americus Reed might have said it best: “A focus group is like a chain saw. If you know what you’re doing, it’s very useful
and effective. If you don’t, you could lose a limb.”
Sources: Sarah Jeffrey Kasner, “Fistfights and Feng Shui,” Boston Globe, July 21, 2001; Linda Tischler, “Every Move You Make,” Fast Company, April 2004, pp. 73–75;
Dennis Rook, “Out-of-Focus Groups,” Marketing Research 15, no. 2 (Summer 2003), p. 11; Piet Levy, “In with the Old, In Spite of the New,” Marketing News, May 30,
2009, p. 19; Piet Levy, “10 Minutes with … Robert J. Morais,” Marketing News, May 30, 2011; William Boateng, “Evaluating the Efficacy of Focus Group Discussion (FGD)
in Qualitative Social Research,” International Journal of Business and Social Science 3 (April 2012), pp. 54–57; Demetrius Madrigal and Bryan McClain, “Do’s and Don’ts
for Focus Groups,” www.uxmatters.com, July 4, 2011.
Conducting Informative Focus Groupsmarketing memo
Marketers can
unobtrusively observe
focus groups behind
two-way mirrors to gain
qualitative insights from
consumers.
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Survey Research Companies undertake surveys to assess people’s knowledge, beliefs, preferences, and
satisfaction and to measure these magnitudes in the general population. A company such as American Airlines
might prepare its own survey instrument, or it might add questions to an omnibus survey that carries the questions
of several companies at a much lower cost. It can also pose questions to an ongoing consumer panel run by itself or
another company. It may do a mall intercept study by having researchers approach people in a shopping mall and
ask them questions. Or it might add a survey request at the end of calls to its customer service department.
However they conduct their surveys—online, by phone, or in person—companies must feel the information
they’re getting from the mounds of data makes it all worthwhile. San Francisco–based Wells Fargo bank collects
more than 50,000 customer surveys each month through its bank branches. It has used customers’ comments to
begin more stringent new wait-time standards designed to improve customer satisfaction.
Of course, companies may risk creating “survey burnout” and seeing response rates plummet. Keeping a survey
short and simple is one key to drawing participants. Offering incentives is another. Walmart, Rite Aid, Petco, and
Staples include an invitation to fill out a survey on the cash register receipt with a chance to win a prize.27
Behavioral Research Customers leave traces of their purchasing behavior in store scanning data, catalog
purchases, and customer databases. Marketers can learn much by analyzing these data. Actual purchases reflect
consumers’ preferences and often are more reliable than statements they offer to market researchers. For example,
grocery shopping data show that high-income people don’t necessarily buy the more expensive brands, contrary
to what they might state in interviews, and many low-income people buy some expensive brands. As Chapter 3
described, there is a wealth of online data to collect from consumers. Clearly, American Airlines can learn many
useful things about its passengers by analyzing ticket purchase records and online behavior.
The most scientifically valid research is experimental research, designed to capture cause-and-effect relation-
ships by eliminating competing explanations of the findings. If the experiment is well designed and executed,
research and marketing managers can have confidence in the conclusions. Experiments call for selecting matched
groups of subjects, subjecting them to different treatments, controlling extraneous variables, and checking whether
observed response differences are statistically significant. If we can eliminate or control extraneous factors, we can
relate the observed effects to the variations in the treatments or stimuli.
American Airlines might introduce ultra high-speed Wi-Fi service on one of its regular flights from Chicago
to Tokyo and charge $25 one week and $15 the next week. If the plane carried approximately the same number of
first-class passengers each week and the particular weeks made no difference, the airline could relate any signifi-
cant difference in the number of passengers using the service to the price charged.
reSearch InStrumentS Marketing researchers have a choice of three main research instruments in
collecting primary data: questionnaires, qualitative measures, and technological devices.
Questionnaires A questionnaire consists of a set of questions presented to respondents. Because of its
flexibility, it is by far the most common instrument used to collect primary data. The form, wording, and sequence
of the questions can all influence the responses, so testing and de-bugging are necessary. Closed-end questions
specify all the possible answers, and the responses are easier to interpret and tabulate. Open-end questions allow
respondents to answer in their own words. They are especially useful in exploratory research, where the researcher
is looking for insight into how people think rather than measuring how many think a certain way. Table 4.1
provides examples of both types of questions; also see “Marketing Memo: Questionnaire Dos and Don’ts.”
Wells Fargo conducts
thousands of consumer
surveys to improve its
banking services.
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table 4.1 Types of Questions
Name Description Example
A. Closed-End Questions
Dichotomous A question with two possible answers In arranging this trip, did you personally phone American?
Yes No
Multiple choice A question with three or more answers With whom are you traveling on this flight?
□ No one □ Children only
□ Spouse □ Business associates/friends/relatives
□ Spouse and children □ An organized tour group
Likert scale A statement with which the respon-
dent shows the amount of agreement/
disagreement
Small airlines generally give better service than large ones.
Strongly Disagree Neither Agree Strongly
disagree agree nor agree
disagree
1_____ 2_____ 3_____ 4_____ 5_____
Semantic differential A scale connecting two bipolar words.
The respondent selects the point that
represents his or her opinion.
I find American Airlines …
Large _____________________________________ Small
Experienced ___________________________ Inexperienced
Modern ______________________________ Old-fashioned
Importance scale A scale that rates the importance
of some attribute
Airline in-flight service to me is
Extremely Very Somewhat Not very Not at all
important important important important important
1_____ 2_____ 3_____ 4_____ 5_____
Rating scale A scale that rates some attribute from
“poor” to “excellent”
American in-flight service is
Excellent Very Good Good Fair Poor
1_____ 2_____ 3_____ 4_____ 5_____
Intention-to-buy scale A scale that describes the respondent’s
intention to buy
If ultra high-speed Wi-Fi service were available on a long flight, I would
Definitely Probably Not sure Probably Definitely
buy buy not buy not buy
1_____ 2_____ 3_____ 4_____ 5_____
B. Open-End Questions
Completely unstructured A question that respondents can answer
in an almost unlimited number of ways
What is your opinion of American Airlines?
Word association Words are presented, one at a time,
and respondents mention the first word
that comes to mind.
What is the first word that comes to your mind when you hear the
following?
Airline_________________________________
American_________________________________
Travel_________________________________
Sentence completion An incomplete sentence is presented
and respondents complete the sentence.
When I choose an airline, the most important consideration in my
decision is _________________________________ .
Story completion An incomplete story is presented, and
respondents are asked to complete it.
“I flew American a few days ago. I noticed that the exterior and
interior of the plane had very bright colors. This aroused in me the
following thoughts and feelings . …” Now complete the story.
Picture A picture of two characters is pre-
sented, with one making a statement.
Respondents are asked to identify with
the other and fill in the empty balloon.
Thematic Apperception Test
(TAT)
A picture is presented and respondents
are asked to make up a story about
what they think is happening or may
happen in the picture.
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Qualitative Measures Some marketers prefer qualitative methods for gauging consumer opinion because they
feel consumers’ actions don’t always match their answers to survey questions. Qualitative research techniques are
relatively indirect and unstructured measurement approaches, limited only by the marketing researcher’s creativity,
that permit a range of responses. They can be an especially useful first step in exploring consumers’ perceptions
because respondents may be less guarded and reveal more about themselves in the process.
Qualitative research does have its drawbacks. The samples are often very small, and results may not generalize
to broader populations. And different researchers examining the same qualitative results may draw very different
conclusions.
Nevertheless, there is increasing interest in using qualitative methods. “Marketing Insight: Getting into the
Heads of Consumers” describes the pioneering ZMET approach. Other popular methods include:28
1. Word associations. To identify the range of possible brand associations, ask subjects what words come to
mind when they hear the brand’s name. “What does the Timex name mean to you? Tell me what comes to
mind when you think of Timex watches.”
2. Projective techniques. Give people an incomplete or ambiguous stimulus and ask them to complete or explain
it. In “bubble exercises” empty bubbles, like those in cartoons, appear in scenes of people buying or using cer-
tain products or services. Subjects fill in the bubble, indicating what they believe is happening or being said. In
comparison tasks people compare brands to people, countries, animals, activities, cars, nationalities, or even
other brands.
3. Visualization. Visualization requires people to create a collage from magazine photos or drawings to depict
their perceptions.
4. Brand personification. Ask “If the brand were to come alive as a person, what would it be like, what would it
do, where would it live, what would it wear, who would it talk to if it went to a party (and what would it talk
about)?” For example, the John Deere brand might make someone think of a rugged Midwestern male who is
hardworking and trustworthy.
5. Laddering. A series of increasingly specific “why” questions can reveal consumer motivation and deeper
goals. Ask why someone wants to buy a Nokia cell phone. “They look well built” (attribute). “Why is it im-
portant that the phone be well built?” “It suggests Nokia is reliable” (a functional benefit). “Why is reliability
important?” “Because my colleagues or family can be sure to reach me” (an emotional benefit). “Why must
you be available to them at all times?” “I can help them if they’re in trouble” (a core value). The brand makes
this person feel like a Good Samaritan, ready to help others.
1. Ensure that questions are without bias. Don’t lead the respondent into an answer.
2. Make the questions as simple as possible. Questions that include multiple ideas or two questions in one will confuse respondents.
3. Make the questions specific. Sometimes it’s advisable to add memory cues. For example, be specific with time periods.
4. Avoid jargon or shorthand. Avoid trade jargon, acronyms, and initials not in everyday use.
5. Steer clear of sophisticated or uncommon words. Use only words in common speech.
6. Avoid ambiguous words. Words such as usually or frequently have no specific meaning.
7. Avoid questions with a negative in them. It is better to say, “Do you ever…?” than “Do you never…?”
8. Avoid hypothetical questions. It’s difficult to answer questions about imaginary situations. Answers aren’t necessarily reliable.
9. Do not use words that could be misheard. This is especially important when administering the interview over the telephone. “What is your opinion of
sects?” could yield interesting but not necessarily relevant answers.
10. Desensitize questions by using response bands. To ask people their age or ask companies about employee turnover rates, offer a range of response
bands instead of precise numbers.
11. Ensure that fixed responses do not overlap. Categories used in fixed-response questions should be distinct and not overlap.
12. Allow for the answer “other” in fixed-response questions. Precoded answers should always allow for a response other than those listed.
Source: Adapted from Paul Hague and Peter Jackson, Market Research: A Guide to Planning, Methodology, and Evaluation (London: Kogan Page, 1999). See also Hans
Baumgartner and Jan-Benedict E. M. Steenkamp, “Response Styles in Marketing Research: A Cross-National Investigation,” Journal of Marketing Research (May 2001), pp.
143–56; Bert Weijters and Hans Baumgartner, “Misreponse to Reverse and Negated Items in Surveys: A Review,” Journal of Marketing Research 49 (October 2012), pp. 737–47.
Marketing Questionnaire Dos And Don’tsmarketing memo
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Getting into the Heads
of Consumers
Former Harvard Business School marketing professor Gerald Zaltman,
with colleagues, developed an in-depth methodology to uncover what
consumers think and feel about products, services, brands, and other
things. The basic assumption behind the Zaltman Metaphor Elicitation
Technique (ZMET) is that most thoughts and feelings are unconscious
and shaped by a set of universal deep metaphors, basic orientations
toward the world that shape everything consumers think, hear, say, or
do. According to Zaltman, there are seven main metaphors:
1. Balance: justice equilibrium and the interplay of elements;
2. Transformation: changes in substance and circumstance;
3. Journey: the meeting of past, present, and future;
4. Container: inclusion, exclusion, and other boundaries;
5. Connection: the need to relate to oneself and others;
6. Resource: acquisitions and their consequences; and
7. Control: sense of mastery, vulnerability, and well-being.
The ZMET technique works by first asking participants in advance
to select a minimum of 12 images from their own sources (magazines,
catalogs, family photo albums) to represent their thoughts and feelings
about the research topic. In a one-on-one interview, the study admin-
istrator uses advanced interview techniques to explore the images with
the participant and reveal hidden meanings. Finally, the participants
use a computer program to create a collage with these images that
communicates their subconscious thoughts and feelings about the
topic. The results often significantly influence marketing actions, as the
following two examples illustrate:
• In a ZMET study about pantyhose for marketers at DuPont, some
respondents’ pictures showed fence posts encased in plastic wrap
or steel bands strangling trees, suggesting that pantyhose are
tight and inconvenient. But another picture showed tall flowers in
a vase, suggesting the product made a woman feel thin, tall, and
sexy. The “love-hate” relationship in these and other pictures sug-
gested a more complicated product relationship than the DuPont
marketers had assumed.
• Although many older consumers told Danish hearing aid company
Oticon that cost was the reason they were postponing purchase,
a ZMET analysis revealed the bigger problem was fear of being
seen as old or flawed. Oticon responded by creating Delta, a line of
stylish new hearing aids that came in flashy colors such as sunset
orange, racing green, or cabernet red.
ZMET has also been applied to help design the new Children’s Hospital
in Pittsburgh, PA, remake the classic soup labels for Campbell,
and improve letters to prospective undergraduate applicants for the
University of North Carolina at Chapel Hill.
Sources: Gerald Zaltman and Lindsay Zaltman, Marketing Metaphoria: What
Deep Metaphors Reveal about the Minds of Consumers (Boston: Harvard
Business School Press, 2008); Glenn L. Christensen and Jerry C. Olson, “Mapping
Consumers’ Mental Models with ZMET,” Psychology & Marketing 19 (June 2002),
pp. 477–502; Emily Eakin, “Penetrating the Mind by Metaphor,” New York Times,
February 23, 2002; Anne Eisenberg, “The Hearing Aid as Fashion Statement,”
New York Times, September 24, 2006; Mackenzie Carpenter, “The New Children’s
Hospital: Design Elements Combine to Put Patients, Parents at Ease,” Pittsburgh
Post-Gazette, April 26, 2009; Jennifer Williams, “Campbell’s Soup Neuromarketing
Redux: There’s Chunks of Real Science in That Recipe,” Fast Company, February
22, 2010; Jay Matthews, “Admissions Office Probes Applicants’ Scary Depths,”
Washington Post, July 22, 2010.
marketing
insight
Marketers don’t have to choose between qualitative and quantitative measures. Many use both, recognizing that
their pros and cons can offset each other. For example, companies can recruit someone from an online panel to
participate in an in-home product use test by capturing his or her reactions and intentions with a video diary and
an online survey.29
A ZMET qualitative
research study helped
the University of North
Carolina at Chapel Hill
improve its undergraduate
admission efforts.
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Technological Devices Galvanometers can measure the interest or emotions aroused by exposure to a specific
ad or picture. The tachistoscope flashes an ad to a subject with an exposure interval that may range from less than
one hundredth of a second to several seconds. After each exposure, the respondent describes everything he or
she recalls. Many advances in visual technology techniques studying the eyes and face have benefited marketing
researchers and managers alike.30
Studying the eyeS and Face A number of increasingly cost-effective methods to
study the eyes and faces of consumers have been developed in recent years with diverse applications. Packaged goods
companies such as P&G, Unilever, and Kimberly-Clark combine 3-D computer simulations of product and packaging de-
signs with store layouts and use eye-tracking technology to see where consumer eyes land first, how long they linger on
a given item, and so on. After doing such tests, Unilever changed the shape of its Axe body wash container, the look of the
logo, and the in-store display. In the International Finance Center Mall in Seoul, Korea, two cameras and a motion detec-
tor are placed above the LCD touch screens at each of the 26 information kiosks. Facial recognition software estimates
users’ age and gender, and interactive ads targeting the appropriate demographic then appear. Similar applications are
being developed for digital sidewalk billboards in New York, Los Angeles, and San Francisco. Facial recognition cameras
and software are being tested to identify and reward participating loyal U.S. customers of retailers and restaurants via
opt-in smart phone updates. In one commercial application, SceneTap uses cameras with facial detection software to post
information about how full a bar is, as well as the average age and gender profile of the crowd, to help bar hoppers pick
their next destination.
Technology now lets marketers use skin sensors, brain wave scanners, and full-body scanners to get con-
sumer responses.31 For example, biometric-tracking wrist sensors can measure electrodermal activity, or skin
conductance, to note changes in sweat levels, body temperature and movement, and so on.32 “Marketing Insight:
Understanding Brain Science” provides a glimpse into some of the new marketing research frontiers in studying
the brain.33
Technology has replaced the diaries that participants in media surveys used to keep. Audiometers attached to
television sets in participating homes now record when the set is on and to which channel it is tuned. Electronic
devices can record the number of radio programs a person is exposed to during the day or, using Global
Positioning System (GPS) technology, how many billboards a person may walk or drive by during a day.
SamplIng plan After choosing the research approach and instruments, the marketing researcher must
design a sampling plan. This calls for three decisions:
1. Sampling unit: Whom should we survey? In the American Airlines survey, should the sampling unit consist
of only first-class business travelers, only first-class vacation travelers, or both? Should it include travelers
under age 18? Both traveler and spouse? With the sampling unit chosen, marketers must next develop a sam-
pling frame so everyone in the target population has an equal or known chance of being sampled.
2. Sample size: How many people should we survey? Large samples give more reliable results, but it’s not
necessary to sample the entire target population to achieve reliable results. Samples of less than 1 percent of
a population can often provide good reliability, with a credible sam-
pling procedure.
3. Sampling procedure: How should we choose the respondents?
Probability sampling allows marketers to calculate confidence
limits for sampling error and makes the sample more representa-
tive. Thus, after choosing the sample, marketers could conclude
that “the interval five to seven trips per year has 95 chances in
100 of containing the true number of trips taken annually by
first-class passengers flying between Chicago and Tokyo.”
contact methoDS Now the marketing researcher must
decide how to contact the subjects: by mail, by telephone, in person,
or online.
Mail Contacts The mail questionnaire is one way to reach people
who would not give personal interviews or whose responses might
Using sophisticated equipment and methods, neuroscience researchers are
studying how brain activity is affected by consumer marketing.
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be biased or distorted by the interviewers. Mail questionnaires require simple and clearly worded questions.
Unfortunately, responses are usually few or slow.
Telephone Contacts Telephone interviewing is a good method for gathering information quickly; the
interviewer is also able to clarify questions if respondents do not understand them. Interviews must be brief and
not too personal. Although the response rate has typically been higher than for mailed questionnaires, telephone
interviewing in the United States is getting more difficult because of consumers’ growing antipathy toward
telemarketers.
In late 2003, Congress passed legislation allowing the Federal Trade Commission to restrict telemarketing calls
through its “Do Not Call” registry. By mid-2010, consumers had registered more than 200 million phone numbers.
Marketing research firms are exempt from the ruling, but the increasingly widespread resistance to telemarketing
undoubtedly reduces the effectiveness of telephone surveys in the United States.
In other parts of the world, such restrictive legislation does not exist. Because mobile phone penetration in
Africa had risen from just 1 in 50 people in 2000 to almost eighty percent of the population by 2014, marketers use
cell phones there to convene focus groups in rural areas and to interact via text.34
Personal Contacts Personal interviewing is the most versatile method. The interviewer can ask more questions
and record additional observations about the respondent, such as dress and body language. Personal interviewing
is also the most expensive method, is subject to interviewer bias, and requires more planning and supervision.
In arranged interviews, marketers contact respondents for an appointment and often offer a small payment or
Understanding Brain Science
As an alternative to traditional consumer research, some researchers
have begun to develop sophisticated techniques from neuroscience
that monitor brain activity to better gauge consumer responses to
marketing. The term neuromarketing describes brain research on
the effect of marketing stimuli. Firms are using EEG (electroencepha-
lograph) technology to correlate brand activity with physiological cues
such as skin temperature or eye movement and thus gauge how people
react to ads.
Researchers studying the brain have found different results from
conventional research methods. One group of researchers at UCLA
used functional magnetic resonance imaging (fMRI) to find that the
Super Bowl ads for which subjects displayed the highest brain activity
were different from the ads with the highest stated preferences. Other
research found little effect from product placement unless the products
in question played an integral role in the storyline.
Several studies have found higher correlations with brain wave
research and behavior than with surveys. One study found that brain
waves better predicted music purchases than stated music prefer-
ences. One major finding from neurological consumer research is that
many purchase decisions appear to be characterized “as a largely
unconscious habitual process, as distinct from the rational, conscious,
information-processing model of economists and traditional marketing
textbooks.” Even basic decisions, such as the purchase of gasoline,
seem to be influenced by brain activity at the subrational level.
A group of researchers in England used EEG to monitor cognitive
functions related to memory recall and attentiveness for 12 different re-
gions of the brain as subjects were exposed to advertising. Brain wave
activity in different regions indicated different emotional responses. For
example, heightened activity in the left prefrontal cortex is characteristic
of an “approach” response to an ad and indicates an attraction to the
stimulus. In contrast, a spike in brain activity in the right prefrontal
cortex is indicative of a strong revulsion to the stimulus. In yet another
part of the brain, the degree of memory formation activity correlates
with purchase intent. Other research has shown that people activate
different regions of the brain in assessing the personality traits of other
people than they do when assessing brands.
Although it may offer different insights from conventional tech-
niques, neurological research can still be fairly expensive and has not
been universally accepted. Given the complexity of the human brain,
many researchers caution that it should not form the sole basis for
marketing decisions. The measurement devices to capture brain activity
can also be highly obtrusive, using skull caps studded with electrodes
or creating artificial exposure conditions.
Others question whether neurological research really offers unam-
biguous implications for marketing strategy. Brian Knutson, a professor
of neuroscience and psychology at Stanford University, compares the
use of EEG to “standing outside a baseball stadium and listening to
the crowd to figure out what happened.” Other critics worry that if the
methods do become successful, they will only lead to more marketing
manipulation by companies. Despite controversy, marketers’ endless
pursuit of deeper insights about consumers’ response to marketing
virtually guarantees continued interest in neuromarketing.
Sources: Carolyn Yoon, Angela H. Gutchess, Fred Feinberg, and Thad A. Polk,
“A Functional Magnetic Resonance Imaging Study of Neural Dissociations be-
tween Brand and Person Judgments,” Journal of Consumer Research 33 (June
2006), pp. 31–40; Martin Lindstrom, Buyology: Truth and Lies about Why We Buy
(New York: Doubleday, 2008); Brian Sternberg, “How Couch Potatoes Watch TV
Could Hold Clues for Advertisers,” Boston Globe, September 6, 2009, pp. G1,
G3; Kevin Randall, “Neuromarketing Hope and Hype: 5 Brands Conducting Brain
Research,” Fast Company, September 15, 2009; Todd Essig, “The Future of Focus
Groups: My Brain Knows What You Like,” Forbes, April 28, 2012; Carmen Nobel,
“Neuromarketing: Tapping into the ‘Pleasure Center’ of Consumers,” Forbes,
February 1, 2013.
marketing
insight
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134 PART 2 | CAPTuRing MARkeTing insighTs
incentive. In intercept interviews, researchers stop people at a shopping mall or busy street corner and request an
interview on the spot. Intercept interviews must be quick, and they run the risk of including nonprobability samples.
Online Contacts The Internet offers many ways to do research. A company can embed a questionnaire on its
Web site and offer an incentive for answering, or it can place a banner on a frequently visited site, inviting people
to answer questions and possibly win a prize. Online product testing can provide information much faster than
traditional new-product marketing research techniques.
Marketers can also host a real-time consumer panel or virtual focus group or sponsor a chat room, bulletin
board, or blog where they introduce questions from time to time. They can ask customers to brainstorm or have
the company’s Twitter followers rate an idea. Insights from Kraft-sponsored online communities helped the com-
pany develop its popular line of 100-calorie snacks.35
Del Monte tapped its 400-member, handpicked online community called “I Love My Dog” when it was consider-
ing a new breakfast treat for dogs. The consensus request was for something with a bacon-and-egg taste and an extra
dose of vitamins and minerals. Working with the online community throughout product development, the company
introduced fortified “Snausages Breakfast Bites” in half the time usually required to launch a new product.36
Online research was a $2.4 billion dollar business in 2011. A host of new online survey providers have entered
the market, such as SurveyMonkey, Survey-Gizmo, Qualtrics, and Google Consumer Surveys. Founded in
1999, SurveyMonkey has over 15 million registered users. Members can create surveys to quickly post on blogs,
Websites, Facebook, or Twitter. 37 Like any survey, however, online surveys need to ask the right people the right
questions on the right topic.
Other means to use the Internet as a research tool including tracking how customers clickstream through the
company’s Web site and move to other sites. Marketers can post different prices, headlines, and product features
on separate Web sites or at different times to compare their relative effectiveness. Researchers like Bluefin Labs
monitor all relevant Twitter tweets, Facebook posts, and broadcast television stories to provide companies with
real-time trend analysis.38
Firms like
SurveyMonkey
make it easy to
conduct online
consumer surveys.
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Yet, as popular as online research methods are, smart companies use them to augment rather than replace more
traditional methods. Like any method, online research has pros and cons. Here are some advantages:
• Online research is inexpensive. A typical online survey can cost 20 percent to 50 percent less than a conven-
tional survey, and return rates can be as high as 50 percent.
• Online research is expansive. There are essentially no geographical boundaries, allowing marketers to con-
sider a wide range of possible respondents.
• Online research is fast. The survey can automatically direct respondents to applicable questions, store data,
and transmit results immediately.
• Responses tend to be honest and thoughtful. People may be more relaxed and candid when they can answer on
their own time and respond privately without feeling judged, especially on sensitive topics (such as “how often
do you bathe or shower?”).39
• Online research is versatile. Virtual reality software lets visitors inspect 3-D models of products such as cam-
eras, cars, and medical equipment and manipulate product characteristics. Online community blogs allow
customer participants to interact with each other.
Some disadvantages include:
• Samples can be small and skewed. Some 28 percent of U.S. households still lacked broadband Internet access
in 2014; the percentage is higher among lower-income groups, in rural areas, and in most parts of Asia, Latin
America, and Central and Eastern Europe, where socioeconomic and education levels also differ.40 Although
Internet access will increase, online market researchers must find creative ways to reach population segments
on the other side of the “digital divide.” Combining offline sources with online findings and providing tem-
porary Internet access at locations such as malls and recreation centers are options. Some research firms use
statistical models to fill in the gaps left by offline consumer segments.
• Online panels and communities can suffer excessive turnover. Members may become bored and flee or, worse,
stay but participate halfheartedly. Panel and community organizers can raise recruiting standards, downplay
incentives, and monitor participation and engagement levels. A constant flow of new features, events, and
activities can keep members interested and engaged.
• Online market research can suffer technological problems and inconsistencies. Because browser software varies,
the designer’s final product may look very different on the research subject’s screen.
Online researchers have also begun to use text messaging in various ways—to conduct a chat with a respondent,
to probe more deeply with a member of an online focus group, or to direct respondents to a Web site. Text messag-
ing is also a useful way to get teenagers to open up on topics.
step 3: collect the InformatIon
The data collection phase of marketing research is generally the most expensive and error-prone. Some respon-
dents will be away from home, offline, or otherwise inaccessible; they must be contacted again or replaced.
Others will refuse to cooperate or will give biased or dishonest answers.
Internationally, one of the biggest obstacles to collecting information is the need to achieve consistency.41 Latin
American respondents may be uncomfortable with the impersonal nature of the Internet and need interactive ele-
ments in a survey so they feel they’re talking to a real person. Respondents in Asia, on the other hand, may feel
more pressure to conform and may not be as forthcoming in focus groups as online. Sometimes the solution may
be as simple as ensuring the right language is used.
step 4: analYze the InformatIon
The next-to-last step in the process is to extract findings by tabulating the data and developing summary measures.
The researchers now compute averages and measures of dispersion for the major variables and apply some ad-
vanced statistical techniques and decision models in the hope of discovering additional findings. They may test dif-
ferent hypotheses and theories, applying sensitivity analysis to test assumptions and the strength of the conclusions.
step 5: present the fInDInGs
As the last step, the researcher presents the findings. Researchers are increasingly asked to play a proactive, con-
sulting role in translating data and information into insights and recommendations for management. “Marketing
Insight: Bringing Marketing Research to Life with Personas” describes an approach that some researchers are us-
ing to maximize the impact of their consumer research findings.
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The main survey findings for the American Airlines case showed that:
1. Passengers would use ultra high-speed Wi-Fi service primarily to stay connected and receive and send large
documents and e-mails. Some would also surf the Web to download videos and songs. They would charge the
cost back to their employers.
2. At $25, about 5 of 10 first-class passengers would use Wi-Fi service during a flight; at $15, about 6 would.
Thus, a fee of $15 would produce less revenue ($90 = 6 × $15) than $25 ($125 = 5 × $25). Assuming the same
flight takes place 365 days a year, American could collect $45,625 (= $125 × 365) annually. Given an invest-
ment of $90,000 per plane, it would take two years for each to break even.
3. Offering ultra high-speed Wi-Fi service would strengthen American Airlines’ image as an innovative and pro-
gressive carrier and earn it some new passengers and customer goodwill.
step 6: make the DecIsIon
The American Airlines managers who commissioned the research need to weigh the evidence. If their confidence
in the findings is low, they may decide against introducing ultra high-speed Wi-Fi service. If they are predisposed
to launching it, the findings support their inclination. They may even decide to study the issue further and do
more research. The decision is theirs, but rigorously done research provides them with insight into the problem
(see Table 4.2).42
Some organizations use marketing decision support systems to help their marketing managers make better
decisions. MIT’s John Little defined a marketing decision support system (MDSS) as a coordinated collection
of data, systems, tools, and techniques, with supporting software and hardware, by which an organization gathers
and interprets relevant information from business and environment and turns it into a basis for marketing ac-
tion.44 Once a year, Marketing News lists hundreds of current marketing and sales software programs that assist
Bringing Marketing Research to
Life with Personas
To bring all their acquired information and insights to life, some re-
searchers are employing personas. Personas are detailed profiles of
one, or perhaps a few, hypothetical target consumers, imagined in terms
of demographic, psychographic, geographic, or other descriptive at-
titudinal or behavioral information. Photos, images, names, or short bios
help convey how the target customer looks, acts, and feels so marketers
can incorporate a well-defined target-customer point of view in all their
marketing decision making. Many software companies, Microsoft in
particular, have used personas to help improve user interfaces and ex-
periences, and marketers have broadened the application. For example:
• Unilever’s biggest and most successful hair-care launch, for
Sunsilk, was aided by insights into the target consumer the
company dubbed “Katie.” The Katie persona outlined the
20-something female’s hair-care needs, but also her perceptions
and attitudes and the way she dealt with her everyday “dramas.”
• Specialty tool and equipment maker Campbell Hausfeld relied on the
many retailers it supplied, including Home Depot and Lowe’s, to help
it keep in touch with consumers. After developing eight consumer
profiles, including a female do-it-yourselfer and an elderly consumer,
the firm was able to successfully launch new products such as drills
that weighed less or that included a level for picture hanging.
Although personas provide vivid information to aid marketing decision
making, it’s important not to overgeneralize. Any target market may
have a range of consumers who vary along a number of key dimen-
sions, so researchers sometimes employ two to six personas. Using
quantitative, qualitative, and observational research, Best Buy devel-
oped five customer personas to guide the redesign and relaunch of
GeekSquad.com, its national computer-support service:
• “Jill”—a suburban mom who uses her computer daily and de-
pends on the Geek Squad as on a landscaper or plumber.
• “Charlie”—a 50-plus male who is curious about technology but
needs an unintimidating guide.
• “Daryl”—a technologically savvy hands-on experimenter who oc-
casionally needs a helping hand.
• “Luis”—a time-pressed small business owner whose primary goal
is to complete tasks as expediently as possible.
• “Nick”—a prospective Geek Squad agent who views the site criti-
cally and needs to be challenged.
To satisfy Charlie, a prominent 911 button was added to the upper
right-hand corner in case a crisis arose, but to satisfy Nick, Best Buy
created a whole channel devoted to geek information.
Sources: Dale Buss, “Reflections of Reality,” Point, June 2006, pp. 10–11; Todd
Wasserman, “Unilever, Whirlpool Get Personal with Personas,” Brandweek,
September 18, 2006, p. 13; Daniel B. Honigman, “Persona-fication,” Marketing
News, April 1, 2008, p. 8; Lisa Sanders, “Major Marketers Get Wise to the Power
of Assigning Personas,” Advertising Age, April 9, 2007, p. 36; Paul Murray, “Who
Are They?,” www.chiefmarketer.com, June/July 2010, pp. 53–54; Lauren Sorenson,
“6 Core Benefits of Well-Defined Marketing Personas,” www.blog.hotspot.com,
December 13, 2011.
marketing
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in designing marketing research studies, segmenting markets, setting prices and advertising budgets, analyzing
media, and planning sales force activity.45
Measuring Marketing Productivity
Although we can easily quantify marketing expenses and investments as inputs in the short run, the resulting
outputs such as broader brand awareness, enhanced brand image, greater customer loyalty, and improved new
product prospects may take months or years to manifest themselves. Meanwhile internal changes within the or-
ganization and external changes in the marketing environment may coincide with the marketing expenditures,
making it hard to isolate its effects.46
Nevertheless, marketing research must assess the efficiency and effectiveness of marketing activities. Two
complementary approaches to measuring marketing productivity are: (1) marketing metrics to assess marketing
effects and (2) marketing-mix modeling to estimate causal relationships and measure how marketing activity af-
fects outcomes. Marketing dashboards are a structured way to disseminate the insights gleaned from these two
approaches.
marketInG metrIcs
Marketers employ a wide variety of measures to assess marketing effects.47 Marketing metrics is the set of mea-
sures that helps marketers quantify, compare, and interpret their performance.48
• The CMO of Mary Kay cosmetics would focus on four long-term brand strength metrics—market aware-
ness, consideration, trial, and 12-month beauty consultant productivity—as well as a number of short-term
program-specific metrics like ad impressions, Web site traffic, and purchase conversion.
• The VP of marketing at Virgin America would look at a broad set of online metrics—cost per acquisition,
cost per click, and cost per thousand page impressions (CPM). She would also look at total dollars driven by
natural and paid search and online display advertising as well as tracking results and other metrics from the
offline world.
table 4.2 The Seven Characteristics of Good Marketing Research
1. Scientific method Effective marketing research uses the principles of the scientific method: careful observation,
formulation of hypotheses, prediction, and testing.
2. Research creativity In an award-winning research study to reposition Cheetos snacks, researchers dressed up in
a brand mascot Chester Cheetah suit and walked around the streets of San Francisco. The
response the character encountered led to the realization that even adults loved the fun and
playfulness of Cheetos. The resulting repositioning led to a double-digit sales increase despite
a tough business environment.43
3. Multiple methods Marketing researchers shy away from overreliance on any one method. They also recognize
the value of using two or three methods to increase confidence in the results.
4. Interdependence of
models and data
Marketing researchers recognize that data are interpreted from underlying models that guide
the type of information sought.
5. Value and cost of
information
Marketing researchers show concern for estimating the value of information against its
cost. Costs are typically easy to determine, but the value of research is harder to quantify. It
depends on the reliability and validity of the findings and management’s willingness to accept
and act on those findings.
6. Healthy skepticism Marketing researchers show a healthy skepticism toward glib assumptions made by managers
about how a market works. They are alert to the problems caused by “marketing myths.”
7. Ethical marketing Marketing research benefits both the sponsoring company and its customers. The misuse of
marketing research can harm or annoy consumers, increasing resentment at what consumers
regard as an invasion of their privacy or a disguised sales pitch.
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Marketers choose one or more measures based on the particular issues or problems they face. Mindbody,
a web-based business management software provider for the wellness and beauty industries worldwide,
tracks numerous online analytics including landing page conversions, click through rates for online ads
and rankings on Google search. In addition, MINDBODY monitors the following online metrics on a
weekly basis: 1) Website analytics, details on site navigation and online interaction; 2) Social media pres-
ence, different demographic and geographic responses to social media channels across different markets;
and 3) Permission marketing statistics, measures of interactions and engagement with consumers from auto
e-mails. “Marketing Memo: Measuring Social Media ROI” offers some insight into the thorny issue of mea-
suring social media effects.
An advocate of simple, relevant marketing metrics, the University of Virginia’s Paul Farris draws an analogy to
the way Boeing 747 jet pilots select information from the vast array of instruments in the cockpit:49
Aircraft pilots have protocols. When they are sitting on the tarmac warming their engines waiting
to take off, they are looking at certain things. When they are taxiing, they look at others. When they
are in flight, they look at still others. There is a sequence of knowing when to pay attention to which
metrics, which lets them have their cake and eat it too, in terms of the simplicity and complexity
trade-off.
London Business School’s Tim Ambler believes firms can split evaluation of marketing performance into
two parts: (1) short-term results and (2) changes in brand equity.50 Short-term results often reflect profit-and-
loss concerns as shown by sales turnover, shareholder value, or some combination of the two. Brand-equity
measures could include customer awareness, attitudes, and behaviors; market share; relative price premium;
number of complaints; distribution and availability; total number of customers; perceived quality, and loyalty
and retention.51
Companies can also monitor an extensive set of internal metrics, such as innovation. For example, 3M tracks
the proportion of sales resulting from its recent innovations. Ambler also recommends developing employee mea-
sures and metrics, arguing that “end users are the ultimate customers, but your own staff are your first; you need to
measure the health of the internal market.” Table 4.3 summarizes a list of popular internal and external marketing
metrics from Ambler’s survey in the United Kingdom.52
Software provider MINDBODY
uses a wide variety of online
statistics to monitor its brand
and assess marketing effects.
So
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: M
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B
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Industry expenditures on social media campaigns are expected to double in the next four years, but many marketers do not know what they are getting in
return for their dollars. When Audi ran the first Super Bowl ad to feature a Twitter hashtag in 2011, it had no idea how much the high engagement of its
Facebook fan base translated into sales of more cars. One report showed that 50 percent of Fortune 1000 companies did not benchmark or measure the
payback of their social CRM projects.
Initially, the focus of measuring social media effects was on easily observed quantities like the number of Facebook “likes” and Twitter tweets per week.
These did not always correlate with marketing or business success, so researchers began digging deeper. Assessing social media value is not an easy
task. Some marketing pundits compare social media to a phone: How would you assess the ROI of all the different calls you make? Josh Bernoff, Forrester
Research’s acclaimed digital marketing guru, sees short-term and long-term benefits of social media in four categories:
1. Short-term financial benefits, such as increased revenue or decreased costs. On the revenue side, when NetShops.com added ratings and reviews to its
site, sales increased 26 percent within six months. On the cost side, National Instruments, makers of sophisticated technical engineering products, found
members of its user community answered 46 percent of other users’ questions, saving NI its typical $10 service cost per call. Similarly, AT&T’s revamped
online community saved the firm 16 percent in telephone customer support in one month.
2. Short-term overall digital benefits. When Swanson Health Products improved the visibility of its product reviews, they became more accessible to search
engines, and traffic to its product pages rose 163 percent. Online videos, communities, blogs, and Twitter can similarly boost search performance.
3. Long-term brand lift. Social media can improve long-term brand performance measures. When P&G created a Facebook page to support ski jumper Lindsey
Van, it solicited 40,000 signatures on a petition to make ski jumping an Olympic sport. Surveys of participating Facebook users found an 8 percent to 11
percent increase in brand preference and purchase intent.
4. Long-term risk avoidance. Dealing with a crisis can cost a firm millions of dollars over time. It is better to avoid or avert a crisis before it creates any
brand damage. Firms such as McDonald’s and AT&T have customer service teams who monitor Tweets about their products or services to nip any al-
leged problems in the bud.
Forrester social media analyst Zach Hofer-Shall believes mining actionable insights and measurable feedback from social media requires: (1) the right
people to interpret the data, (2) a business purpose to drive strategy, (3) the best social listening platform for achieving goals, and (4) a formalized process for
analyzing data and taking action.
The easiest way to create and measure social media’s payoff is to include a contest, sweepstake, or promotion. Silicon Valley ad agency Wildfire created a
promotion for Jamba Juice where the value of a “lucky coupon” was revealed only in-store. Tens of thousands of customers entered. The promotion was suc-
cessful, but social media results can still be unpredictable.
V. Kumar and his colleagues suggest a seven-step process to social media success with several helpful indices that could be developed for each step:
1. Monitor the conversations.
2. Identify influential individuals.
3. Identify the factors they share.
4. Locate potential influencers who have
relevant interests.
5. Recruit those influencers.
6. Incentivize them to spread positive word of
mouth.
7. Reap the rewards.
Research has also shown that our use of
social media differs in significant ways. People
tend to be more positive in one-way communica-
tions (such as blogs and Twitter) than in two-way
forums where they share and discuss brand or
product experiences with others.
Sources: “ROI Lacking in Social CRM,” www.warc.com. May 4, 2012; Josh Bernoff, “A Balanced Perspective on Social ROI,” Marketing News, February 28, 2011; Piet
Levy, “10 Minutes with . . . Zach Hofer-Shall,” Marketing News, September 15, 2011; Frahad Manjoo, “Does Social Media Have a Return on Investment?,” Fast Company,
July/August 2011; David A. Schweidel, Wendy W. Moe, and Chris Boudreaux, “Social Media Intelligence: Measuring Brand Sentiment from Online Conversation,” MSI
Report 12-100 (Cambridge, MA: Marketing Science Institute), 2012.
Measuring social media ROImarketing memo
P&G’s online campaign to support ski jumper Lindsay Van produced benefits for its Secret
deodorant brand too.
So
ur
ce
: G
et
ty
I
m
ag
es
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140 PART 2 | CAPTuRing MARkeTing insighTs
marketInG-mIx moDelInG
Marketing accountability also means that marketers must more precisely estimate the effects of different mar-
keting investments. Marketing-mix models analyze data from a variety of sources, such as retailer scanner data,
company shipment data, pricing, media, and promotion spending data, to understand more precisely the effects
of specific marketing activities.53 To deepen understanding, marketers can conduct multivariate analyses, such as
regression analysis, to sort through how each marketing element influences marketing outcomes such as brand
sales or market share.
Especially popular with packaged-goods marketers such as Procter & Gamble, Clorox, and Colgate, the findings
from marketing-mix modeling help allocate or reallocate expenditures. Analyses explore which part of ad budgets
are wasted, what optimal spending levels are, and what minimum investment levels should be.
Although marketing-mix modeling helps to isolate effects, it is less effective at assessing how different market-
ing elements work in combination. Wharton’s Dave Reibstein also notes three other shortcomings:54
• Marketing-mix modeling focuses on incremental growth instead of baseline sales or long-term effects.
• The integration of important metrics such as customer satisfaction, awareness, and brand equity into
marketing-mix modeling is limited.
• Marketing-mix modeling generally fails to incorporate metrics related to competitors, the trade, or the sales
force (the average business spends far more on the sales force and trade promotion than on advertising or
consumer promotion).
marketInG DashBoarDs
Firms are also employing organizational processes and systems to make sure they maximize the value of all
these different metrics. Management can assemble a summary set of relevant internal and external measures
in a marketing dashboard for synthesis and interpretation. Marketing dashboards are like the instrument panel
in a car or plane, visually displaying real-time indicators to ensure proper functioning. Formally, marketing
dashboards are “a concise set of interconnected performance drivers to be viewed in common throughout the
organization.”55
Dashboards are only as good as the information on which they’re based, but sophisticated visualization tools
are helping bring data alive. Color-coding, symbols, and different types of charts, tables, and gauges are easy to use
and effective. Some companies are also appointing marketing controllers to review budget items and expenses.
Increasingly, these controllers use business intelligence software to create digital versions of marketing dashboards
that aggregate data from internal and external sources.
table 4.3 Sample Marketing Metrics
I. External II. Internal
Awareness Awareness of goals
Market share (volume or value) Commitment to goals
Relative price (market share value/volume) Active innovation support
Number of complaints (level of dissatisfaction) Resource adequacy
Consumer satisfaction Staffing/skill levels
Distribution/availability Desire to learn
Total number of customers Willingness to change
Perceived quality/esteem Freedom to fail
Loyalty/retention Autonomy
Relative perceived quality Relative employee satisfaction
Source: Tim Ambler, “What Does Marketing Success Look Like?,” Marketing Management (Spring 2001), pp. 13–18.
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As input to the marketing dashboard, companies should include two key market-based scorecards that reflect
performance and provide possible early warning signals.
• A customer-performance scorecard records how well the company is doing year after year on such
customer-based measures as those shown in Table 4.4. Management should set target goals for each measure
and take action when results get out of bounds.
• A stakeholder-performance scorecard tracks the satisfaction of various constituencies who have a critical
interest in and impact on the company’s performance: employees, suppliers, banks, distributors, retailers, and
stockholders. Again, management should take action when one or more groups register increased or above-
norm levels of dissatisfaction.56
table 4.4 Sample Customer-Performance Scorecard Measures
• Percentage of new customers to average number of customers
• Percentage of lost customers to average number of customers
• Percentage of win-back customers to average number of customers
• Percentage of customers falling into very dissatisfied, dissatisfied, neutral, satisfied, and very satisfied categories
• Percentage of customers who say they would repurchase the product
• Percentage of customers who say they would recommend the product to others
• Percentage of target market customers who have brand awareness or recall
• Percentage of customers who say that the company’s product is the most preferred in its category
• Percentage of customers who correctly identify the brand’s intended positioning and differentiation
• Average perception of company’s product quality relative to chief competitor
• Average perception of company’s service quality relative to chief competitor
Marketing consultant Pat LaPointe sees marketing dashboards as providing all the up-to-the-minute information necessary to run the business operations for
a company—such as sales versus forecast, distribution channel effectiveness, brand equity evolution, and human capital development. According to LaPointe,
an effective dashboard will focus thinking, improve internal communications, and reveal where marketing investments are paying off and where they aren’t.
LaPointe observes four common measurement “pathways” marketers pursue today (see Figure 4.2).
• The customer metrics pathway looks at how prospects become customers, from awareness to preference to trial to repeat purchase, or some less linear
model. This area also examines how the customer experience contributes to the perception of value and competitive advantage.
• The unit metrics pathway reflects what marketers know about sales of product/service units—how much is sold by product line and/or by geography; the
marketing cost per unit sold as an efficiency yardstick; and where and how margin is optimized in terms of characteristics of the product line or distribution
channel.
• The cash-flow metrics pathway focuses on how well marketing expenditures are achieving short-term returns. Program and campaign ROI models measure
the immediate impact or net present value of profits expected from a given investment.
• The brand metrics pathway tracks the development of the longer-term impact of marketing through brand equity measures that assess both the percep-
tual health of the brand from customer and prospective customer perspectives and the overall financial health of the brand.
LaPointe feels a marketing dashboard can present insights from all the pathways in a graphically related view that helps management see subtle links
between them. Tabs can allow the user to toggle easily between different “families” of metrics organized by customer, product, experience, brand, channels,
efficiency, organizational development, or macroenvironmental factors. Each tab presents the three or four most insightful metrics, with data filtered by busi-
ness unit, geography, or customer segment based on the users’ needs. (See Figure 4.3 for a sample brand metrics page.)
Ideally, over time the number of metrics on the dashboard will be reduced to a few key drivers. Meanwhile, the process of developing and refining the
marketing dashboard will undoubtedly raise and resolve many key questions about the business.
Source: Adapted from Pat LaPointe, Marketing by the Dashboard Light, Association of National Advertisers, 2005, www.MarketingNPV.com.
Designing Effective Marketing Dashboardsmarketing memo
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142 PART 2 | CAPTuRing MARkeTing insighTs
Technically Sound But Ad-hoc Efforts
Across Multiple Measurement Silos
Customer
Metrics
Unit
Metrics
Cash-Flow
Metrics
100s of Reports
but Very Little
Knowledge
Integration or
Learning Synthesis
Brand
Metrics
Equity
Drivers
Financial
Valuation
Program and
Campaign ROI
Initiative Portfolio
Optimization
Media Mix
Models
Hierarchy of
Effects
Satisfaction/
Experience
Attitude/Behavior
Segment Migration
Marketing
Cost per Unit
Margin
Optimization
Product/Category
Sales
Brand Imagery
& Attributes
| Fig. 4.2 |
Marketing
Measure
Pathway
| Fig. 4.3 |
Example of
a Marketing
Dashboard
Source: Adapted from Patrick
LaPointe, Marketing by the
Dashboard Light—How to
Get More Insight, Foresight,
and Accountability from Your
Marketing Investments.
© 2005, Patrick LaPointe.
Some executives worry that they’ll miss the big picture if they focus too much on a set of numbers on a dash-
board. Some critics are concerned about privacy and the pressure the technique places on employees. But most
experts feel the rewards offset the risks. “Marketing Memo: Designing Effective Marketing Dashboards” provides
practical advice about the development of these marketing tools.
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ConduCTing MARkeTing ReseARCh | chapter 4 143
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
What Is the Best Type of Marketing
Research?
Many market researchers have their favorite research
approaches or techniques, though different researchers
often have different preferences. Some researchers maintain
that the only way to really learn about consumers or brands
is through in-depth, qualitative research. Others contend
that the only legitimate and defensible form of marketing
research uses quantitative measures.
Take a position: The best marketing research is quan-
titative in nature versus The best marketing research is
qualitative in nature.
Marketing Discussion
Survey Quality
When was the last time you participated in a survey?
How helpful do you think the information you provided was?
How could the research have been done differently to make
it more effective?
focus group, survey, behavioral data, or experimental)
and research instruments (questionnaire, qualitative
measures, or technological devices). In addition, they
must decide on a sampling plan and contact methods
(by mail, by phone, in person, or online).
5. Two complementary approaches to measuring
marketing productivity are: (1) marketing metrics to
assess marketing effects and (2) marketing-mix modeling
to estimate causal relationships and measure how mar-
keting activity affects outcomes. Marketing dashboards
are a structured way to disseminate the insights gleaned
from these two approaches within the organization.
6. Assessing the ROI of social media is challenging but
requires a range of short-term and long-term financial
and brand-related measures. Although Facebook “likes”
and Twitter tweets provide some sense of the engage-
ment for a brand, a more complete set of measures is
typically needed to get a more accurate picture of social
media or other online activities.
Summary
1. Companies can conduct their own marketing research
or hire other companies to do it for them. Some of
ways companies can creatively and affordably conduct
research include: engage students or professors to
design and carry out projects; use the Internet; check
out rivals; tap into marketing partner expertise; and tap
into employee creativity and wisdom.
2. Good marketing research is characterized by the sci-
entific method, creativity, multiple research methods,
accurate model building, cost-benefit analysis, healthy
skepticism, and an ethical focus.
3. The marketing research process consists of defining the
problem, decision alternatives, and research objectives;
developing the research plan; collecting the informa-
tion; analyzing the information; presenting the findings
to management; and making the decision.
4. In conducting research, firms must decide whether to
collect their own data or use data that already exist. They
must also choose a research approach (observational,
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144 PART 2 | CAPTuRing MARkeTing insighTs
use, and even dispose of products. For example, one
method shadows consumers, takes pictures or videos
of them during product purchase or use occasions,
and conducts in-depth interviews with them to further
evaluate their experiences. IDEO uses another method
called behavioral mapping and maintains a photo-
graphic log of people within a certain area like an airline
departure lounge, a hospital waiting room, or a food
court to gauge how the experience can be improved.
Participants keep a “camera journal” in which they
record their visual impressions of a given product or
category. IDEO also invites consumers to use storytell-
ing techniques and share personal narratives, videos,
skits, or even animations about their experiences with a
product or service.
IDEO’s human-centered approach runs counter to
the prevailing wisdom of many high-tech firms that
focus more on their own capabilities when designing
products. David Blakely, head of IDEO’s technology
group, explained, “Tech companies design from the
inside out, whereas we design from the outside in so
that we can put customers first.” Ultimately, the com-
pany designs products that consumers want and value
because they offer a superior experience and solve a
problem. Recent product innovations include a heart
defibrillator that talks with instructions during an emer-
gency and a renovated version of the classic wooden
classroom chair.
Marriott hired IDEO to help make its Courtyard by
Marriott hotels more appealing to younger guests. IDEO
Marketing Excellence
>> IDEO
IDEO is the largest and one of the most influential design
consultancy firms in the United States. The company has
created many recognizable design icons of the technol-
ogy age, including the first laptop computer, the first
mouse for Apple, the Palm V PDA, and the TiVo digital
video recorder. Beyond its high-tech wizardry, the com-
pany has designed revolutionary household items such
as the Swiffer Sweeper and Crest’s stand-up toothpaste
tube, both for Procter & Gamble. IDEO’s diverse roster
of clients includes AT&T, Bank of America, Ford Motor
Company, PepsiCo, Nike, Marriott, Caterpillar, Eli Lilly,
Lufthansa, Prada, and the Mayo Clinic.
IDEO’s success is predicated on an approach called
“design thinking”—an innovative method that incorpo-
rates behavior into design. It’s an unconventional way
of problem solving and starts by forming teams of indi-
viduals with various backgrounds and experiences. Team
members range from anthropologists and journalists to
MBAs and engineers. IDEO’s belief is that if you bring
together a diverse group with these talents, they will build
upon each other’s ideas and come up a solution that one
mind cannot reach alone.
Next, IDEO uses different methods of behavioral
research and observation to get into the mind of the
consumer. This helps IDEO uncover deep insights and
understand how consumers purchase, interact with,
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IDEO’s novel consumer-led approach to design has
generated countless success stories and awards for the
firm and its clients. Its work has also served as inspiration
for the creation of Stanford University’s design school—
The Hasso Plattner Institute of Design—where stu-
dents work on problem solving centered around design
thinking.
The most important result for IDEO is that its designs
solve a usability problem for clients. The company goes
broad and deep to achieve this goal. Since its founding,
it has been issued thousands of patents and generated
hundreds of millions in revenues.
Questions
1. Why has IDEO been so successful?
2. What is the most difficult challenge it faces in con-
ducting its research and designing its products?
3. In the end, IDEO creates great solutions for companies
that then receive all the credit. Should IDEO try to cre-
ate more brand awareness for itself? Why or why not?
Sources: Lisa Chamberlain, “Going Off the Beaten Path for New Design Ideas,” New York Times,
March 12, 2006; Chris Taylor, “School of Bright Ideas,” Time, March 6, 2005, p. A8; Scott Morrison,
“Sharp Focus Gives Design Group the Edge,” Financial Times, February 17, 2005, p. 8; Bruce
Nussbaum, “The Power of Design,” BusinessWeek, May 17, 2004, p. 86; Teressa Iezzi, “Innovate,
but Do It for Consumers,” Advertising Age, September 11, 2006; Barbara De Lollis, “Marriott Perks
Up Courtyard with Edgier, More Social Style,” USA Today, April 1, 2008; Tim Brown, “Change by
Design,” BusinessWeek, October 5, 2009, pp. 54–56; 60 Minutes, January 6, 2013.
conducted interviews and observed guests in the hotel’s
lounges, lobbies, and restaurants. Its research revealed
that younger guests were turned off by the lack of ac-
tivity in the hotel’s public places, the lack of technology
offered, and poor food options. As a result, Courtyard
by Marriott updated its furniture and decor to be more
comfortable and inviting. The hotel added advanced
technology options throughout its lobbies and lounges,
such as flat-screen TVs and free Wi-Fi. Marriott converted
its breakfast buffets to 24/7 coffee-shop-style cafés,
where guests could quickly grab a gourmet coffee drink
and healthy bite to eat anytime. Courtyard even created
new outdoor hangout spots with sound speakers and fire
pits. After the renovations, the chain changed its tagline
to “Courtyard. It’s a New Stay.”
Prototyping takes place throughout IDEO’s design
process so individuals can physically test out the prod-
uct, experience it, and improve upon it during each
level of development. IDEO encourages its clients, even
senior executives, to participate in the research so they
get a sense of the actual consumer experience with
their product or service. For example, when it created a
prototype for Apple’s first mouse, Steve Jobs didn’t like
the sound it made when it moved around on a desk and
insisted that IDEO find a way to reduce the noise. The
design firm overcame this huge technical obstacle and
successfully rubber-coated the steel ball without interfer-
ing with its function.
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146 PART 2 | CAPTuRing MARkeTing insighTs
From 1995 to 1997, Intuit’s stock tumbled 72 percent
and the company was forced to refocus its strategic ef-
forts. It turned to the growing power of the Internet, online
banking capabilities, and valuable insight from extensive
consumer research to develop new products. This new
strategic focus and emphasis on consumer research
helped improve the company’s stock value and market
position in the early 2000s.
In 2007, Scott Cook wanted the company to focus
even more intently on innovation. As a result, he adopted
an up-and-coming approach to product development
called design thinking. Design thinking is an unconven-
tional way of problem solving that incorporates extensive
consumer observation and research with trial and error
and ongoing product prototyping.
Today, Intuit spends a significant amount of time and
money—approximately 20 percent of net revenues—on
consumer research each year. This research helps Intuit
understand exactly how customers use and feel about
their products and keep abreast of technology, consumer
needs, and competition.
Field research helps Intuit uncover insight in a
variety of ways. During a Site Visit, Intuit researchers visit
the individual’s home or office to observe exactly how
products are used, what works well, what frustrates
users, and how products can be improved upon. A
Lab Study invites consumers to one of Intuit’s research
labs to test and experiment with Intuit’s new products
and ideas. During a Remote Study, consumers are
interviewed over the phone and often asked to view new
design concepts over the Internet. Intuit also conducts
an ongoing extensive research study with the Institute
for the Future to learn more about the future trends
affecting small businesses. The company uses what it
learns to improve versions of its products each year and
better understand the next generation of financial and
tax software.
Marketing Excellence
>> Intuit
Intuit develops and sells financial and tax solution
software for consumers and small and medium-sized
businesses. The company was founded in 1983 by a
former Procter & Gamble employee, Scott Cook, and
a Stanford University programmer, Tom Proulx, after
Cook realized there must be a better way to automate
his bill-paying process. For almost 30 years, Intuit’s
mission has been to “revolutionize people’s lives by
solving their important business and financial manage-
ment problems.”
Intuit launched its first product, Quicken, in 1984
but almost went out of business twice during its first few
years. In order to survive, Intuit changed its distribution
strategy and sold its software to banks. After some favor-
able reviews in the trade journals and an effective print
advertising campaign that featured a 1-800 number, the
company got its first break. By 1988, Quicken was the
best-selling finance product on the market. In 1992, Intuit
launched QuickBooks, a bookkeeping and payroll soft-
ware product for small businesses, and went public the
following year.
Intuit grew quickly in the early 1990s, thanks to the
success of Quicken, QuickBooks, and TurboTax, its
tax preparation software program. Intuit’s products did
something for small businesses that more complicated
accounting packages didn’t: They solved finance and
tax problems in a simple, easy-to-use manner. Intuit
had recognized correctly that simplicity was the key,
not in-depth accounting analysis. By 1995, the firm
held a 70 percent market share, and Microsoft tried
to purchase it for $2 billion. The Justice Department,
however, blocked the deal as anticompetitive, and the
buyout collapsed.
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communications tools for small businesses. In 2009, Intuit
won a rare fight against Microsoft when the software giant
discontinued its Money product line after an 18-year battle
with Quicken. And the company’s expansion into mobile
solutions has encouraged younger consumers to adopt
its finance and tax software. Intuit now has more than 50
mobile applications, and more than 45 million customers
have used its cloud-based services in the past five years.
As Intuit expands globally, it is developing new prod-
ucts for consumers worldwide. In India, for example,
Intuit launched Fasal, a service that gives hundreds of
thousands of farmers up-to-date marketing information to
help them get the best price for their crops. Intuit earned
$4.51 billion in revenue for fiscal year 2014, primarily from
Quicken, QuickBooks, and TurboTax sales.
Questions
1. Why are consumer research and design thinking so
critical to Intuit’s success?
2. What are the challenges Intuit faces in the near
future?
3. How important are Intuit’s products for mobile devices?
Sources: Intuit, 2012 Annual Report; Karen E. Klein, “The Face of Entrepreneurship in 2017,”
BusinessWeek, January 31, 2007; Intuit, “Intuit Study: Next-Gen Artisans Fuel New Entrepreneurial
Economy,” February 13, 2008; Michael Bush, “How PR Chiefs Have Shifted Toward Center of
Marketing Departments,” Advertising Age, September 21, 2009; Jon Swartz, “More Marketers
Use Social Networking to Reach Customers,” USA Today, August 28, 2009; Mark Johnson and
Joe Sinfield, “Focusing on Consumer Needs Is Not Enough,” Advertising Age, April 28, 2008;
“Intuit CEO Sees Growth in Mobile, Global Markets,” Associated Press, September 23, 2009;
Sarah Needleman, “How I Built It: For Intuit Co-Founder, the Numbers Add Up,” Wall Street Journal,
August 18, 2011, p. B4; Rachel Emma Siverman, “Companies Change Their Way of Thinking,” Wall
Street Journal, June 7, 2012; Robin Goldwyn Blumenthal, “Intuit: Lots More Than Quicken,” Wall
Street Journal, September 30, 2012.
Intuit’s in-depth research recently led to innovative
new products and services. For example, employees
watched younger consumers get frustrated using an
Intuit tax software program because they couldn’t take
pictures of their tax forms and complete their taxes via
their mobile device. This frustration and Intuit’s keen
empathy for the consumer led to the development of a
tax app called SnapTax. Launched in 2010, it has since
been downloaded more than a million times.
Demand for Intuit’s products is seasonal, and its
marketing efforts are typically concentrated around tax
preparation time—November through April. During that
time, Intuit develops promotions with original equipment
manufacturers (OEMs) and major retailers via direct mail,
Web marketing, print, radio, and television.
While Intuit’s marketing campaigns have evolved
over the years, positive word of mouth and exceptional
customer service have been its most effective market-
ing tools since its early days. Harry Pforzheimer, chief
communications officer and marketing leader, explained,
“It’s a little harder to measure but when you know that
roughly eight out of 10 customers bought your prod-
uct because of word-of-mouth that’s a pretty powerful
tool . . . So engaging with our customers directly is part
of our DNA and communicating with customers on
a timely basis is critical. And that timely basis now is
instantaneous.”
Intuit has expanded globally through new product
and service offerings and through strategic acquisitions.
Its purchase of Mint.com, for example, added value by
giving consumers another tool to analyze their spend-
ing against a budget. Intuit also acquired Demandforce,
which added the ability to provide online marketing and
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148
In This Chapter, We Will Address
the Following Questions
1. What are customer value, satisfaction, and loyalty, and how can companies
deliver them? (p. 149)
2. What is the lifetime value of customers, and how can marketers maximize it?
(p. 158)
3. How can companies attract and retain the right customers and cultivate strong
customer relationships and communities? (p. 164)
4. How do customers’ new capabilities affect the way companies conduct their
marketing? (p. 168)
Pandora has created strong customer
loyalty with its innovative online music
discovery and recommendation services.
Source: Bloomberg via Getty Images
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Connecting with CustomersPart 3
Chapter 5 Creating Long-Term Loyalty Relationships
Chapter 6 Analyzing Consumer Markets
Chapter 7 Analyzing Business Markets
Chapter 8 Tapping Into Global Markets
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149
Successful marketers are those who carefully culti-
vate customer satisfaction and loyalty. In this chapter, we spell
out the different ways they can go about winning customers
and beating competitors.
Although their enhanced capabilities can help companies earn strong customer loyalty,
increased consumer capabilities pose challenges. Regardless, marketers must connect with customers—in-
forming, engaging, and maybe even energizing them in the process. Customer-centered companies are adept at
building customer relationships, not just products; they are skilled in market engineering, not just product en-
gineering. Technology plays an increasing role for many companies and industries, offering new ways to satisfy
customer needs and build loyalty. The music industry is a dramatic example.1
Creating Long-Term
Loyalty Relationships
5
Building Customer Value,
Satisfaction, and Loyalty
Managers who believe the customer is the company’s only true “profit center” consider the traditional organiza-
tion chart in Figure 5.1(a)—a pyramid with the president at the top, management in the middle, and frontline
people and customers at the bottom—obsolete.2
Perhaps no industry has been more thoroughly transformed than the music industry. Technologi-
cal advances have changed the way consumers purchase, listen to, and share music, and music-
streaming services are in a virtual arms race for their loyalty. Internet radio company Pandora has
staked a claim to be the market leader with its innovative automated music discovery and recommen-
dation service, the Music Genome Project, which has helped attract more than 200 million registered
users. Based on a listener’s musical selection, Pandora recommends other musical selections of a similar well-defined
genre. Listener feedback to those recommendations and more than 400 different musical attributes judged by profes-
sional music lovers who pass a rigorous test are combined and analyzed to suggest future songs. Pandora launched
its smart-phone app in 2008, making its service available truly “anywhere, anytime” and enriching the opportunity to
provide feedback and buy music that makes it highly involving to listeners. Advertisers are able to target Pandora’s
audiences by key demographics and traits such as gender, birth year,
zip code location, type of music, and time of day. Pandora faces steep
competition, however, from Spotify, iHeartRadio, and Slacker, each of
which has unique features that may drive customer preference and
loyalty.
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150 PART 3 | ConneCTing WiTh CusTomeRs
Successful marketing companies invert the chart to look like Figure 5.1(b). At the top are customers; next in
importance are frontline people who meet, serve, and satisfy them; under them are the middle managers, whose
job is to support the frontline people so they can serve customers well; and at the base is top management,
whose job is to hire and support good middle managers. We have added customers along the sides of Figure
5.1(b) to indicate that managers at every level must be personally engaged in knowing, meeting, and serv-
ing customers.
Some companies have been founded on the customer-on-top business model, and customer advocacy
has been their strategy—and competitive advantage—all along. With the rise of digital technologies, in-
creasingly informed consumers expect companies to do more than connect with them, more than satisfy
them, and even more than delight them. They expect companies to listen and respond to them.
When Office Depot added customer reviews to its Web site, revenue and sales conversion increased
significantly. The company also incorporated review-related terms in its paid search advertising campaign.
As a result of these efforts, Web site revenue and the number of new buyers visiting the site both increased
by more than 150 percent.3
Customer-PerCeIved value
Consumers are better educated and better informed than ever, and they have the tools to verify compa-
nies’ claims and seek out superior alternatives. Even the best-run companies have to be careful not to take
customers for granted, as Dell found out.4
DeLL Dell rode to success by offering low-priced computers, logistical efficiency, and after-sales service.
The firm’s maniacal focus on low costs has been a key ingredient in its success. When it shifted its customer-
service call centers to India and the Philippines to cut costs, however, understaffing frequently led to 30-minute
waits for customers. Almost half the calls required at least one transfer. To discourage customer calls, Dell even re-
moved its toll-free service number from its Web site. With customer satisfaction slipping, while competitors matched
its product quality and prices and offered better service, Dell’s market share and stock price both declined sharply.
Dell ended up hiring more North American call center employees. “The team was managing cost instead of manag-
ing service and quality,” Michael Dell confesses.
How do customers ultimately make choices? They tend to be value maximizers, within the bounds of
search costs and limited knowledge, mobility, and income. Customers choose—for whatever reason—the
offer they believe will deliver the highest value and act on it (Figure 5.2). Whether the offer lives up to
CUSTOMERS
C
U
S
T
O
M
E
R
SC
U
S
T
O
M
E
R
S
Frontline people
(b) Modern Customer-Oriented Organization Chart
Middle management
Top
manage-
mentCUSTOMERS
Middle management
(a) Traditional Organization Chart
Frontline people
Top
manage-
ment
| Fig. 5.1 |
Traditional
Organization versus
Modern Customer-
Oriented Company
Organization
Customer-
perceived
value
Total
customer
benefit
Total
customer
cost
Monetary
cost
Time cost
Energy cost
Psychological
cost
Product
benefit
Services
benefit
Personnel
benefit
Image
benefit
| Fig. 5.2 |
Determinants
of Customer-
Perceived Value
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CReATing Long-TeRm LoyALTy ReLATionshiPs | chapter 5 151
expectation affects customer satisfaction and the probability that the customer will purchase the product again.
In one survey asking U.S. consumers “Does [Brand X] give good value for what you pay?” the top ten– scoring
brands were: Subway, Cheerios, Amazon, History Channel, Ford, Discovery Channel, Lowe’s, Olive Garden,
YouTube, and Google.5
Defining Value Customer-perceived value (CPV) is the difference between the prospective customer’s
evaluation of all the benefits and costs of an offering and the perceived alternatives. Total customer benefit is the
perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from
a given market offering because of the product, service, people, and image. Total customer cost is the perceived
bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market
offering, including monetary, time, energy, and psychological costs.
Customer-perceived value is thus based on the difference between benefits the customer gets and costs he or
she assumes for different choices. The marketer can increase the value of the offering by raising economic, func-
tional, or emotional benefits and/or reducing one or more costs. The customer choosing between two value offer-
ings, V1 and V2, will favor V1 if the ratio V1:V2 is larger than one, favor V2 if the ratio is smaller than one, and be
indifferent if the ratio equals one.
applying Value ConCepts Suppose the buyer for a large construction company wants to buy a tractor for
residential construction from either Caterpillar or Komatsu. He wants the tractor to deliver certain levels of reliability,
durability, performance, and resale value. The competing salespeople carefully describe their respective offers. The
buyer decides Caterpillar has greater product benefits based on his perceptions of those attributes. He also perceives
differences in the accompanying services—delivery, training, and maintenance—and decides Caterpillar provides
better service as well as more knowledgeable and responsive staff. Finally, he places higher value on Caterpillar’s
corporate image and reputation. He adds up all the economic, functional, and psychological benefits from these four
sources—product, services, people, and image—and perceives Caterpillar as delivering greater customer benefits.
Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting with
Caterpillar versus Komatsu, a cost that consists of more than money. As Adam Smith observed more than two
centuries ago in The Wealth of Nations, “The real price of anything is the toil and trouble of acquiring it.” Total
customer cost therefore also includes the buyer’s time, energy, and psychological costs expended in product acqui-
sition, usage, maintenance, ownership, and disposal. The buyer evaluates these elements together with the mon-
etary cost to form a total customer cost. Then he considers whether Caterpillar’s total customer cost is too high
compared to total customer benefits. If it is, he might choose Komatsu. The buyer will choose whichever source
delivers the highest perceived value.
Now let’s use this decision-making theory to help Caterpillar succeed in selling to this buyer. Caterpillar can improve
its offer in three ways. First, it can increase total customer benefit by improving economic, functional, and psychological
benefits of its product, services, people, and/or image. Second, it can reduce the buyer’s nonmonetary costs by reducing
the time, energy, and psychological investment. Third, it can reduce its product’s monetary cost to the buyer.
Suppose Caterpillar concludes the buyer sees its offer as worth $20,000. Further, suppose Caterpillar’s cost of
producing the tractor is $14,000. This means Caterpillar’s offer generates $6,000 over its cost, so the firm needs to
charge between $14,000 and $20,000. If it charges less than $14,000, it won’t cover its costs; if it charges more, it will
price itself out of the market.
When Dell cut costs too
much on its customer
service, customer
satisfaction dropped
and the company’s
stock price sank.
So
ur
ce
: B
lo
om
be
rg
v
ia
G
et
ty
I
m
ag
es
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152 PART 3 | ConneCTing WiTh CusTomeRs
Caterpillar’s price will determine how much value it delivers to the buyer and how much flows to Caterpillar.
If it charges $19,000, it is creating $1,000 of customer-perceived value and keeping $5,000 for itself. The lower
Caterpillar sets its price, the higher the customer’s perceived value and, therefore, the higher the customer’s in-
centive to purchase. To win the sale, the firm must offer more customer-perceived value than Komatsu does.6
Caterpillar is well aware of the importance of taking a broad view of customer value.7
CaterPiLLar Caterpillar has become a leading firm by maximizing total customer value in the construc-
tion equipment industry, despite challenges from a number of able competitors such as John Deere, Case, Komatsu, Volvo,
and Hitachi and emerging ones such as LiuGong Machinery in China. First, Caterpillar produces high-performance equip-
ment known for reliability and durability—key purchase considerations in heavy industrial equipment. The firm also makes it
easy for customers to find the right product by providing a full line of construction equipment and a wide range of financial
terms. Caterpillar maintains the largest number of independent construction-equipment dealers in the industry. These deal-
ers all carry a complete line of Caterpillar products and are typically better trained and perform more reliably than competi-
tors’ dealers. Caterpillar has also built a worldwide parts and service system second to none in the industry. Customers
recognize all the value Caterpillar creates in its offerings, allowing the firm to command a premium price 10 percent to
20 percent higher than competitors’. Caterpillar also makes strategic acquisitions to acquire new customers, such as pick-
ing up mining equipment maker Bucyrus International for $8.6 billion in 2010. Despite a recession that brought hard times
to its industry and battered many of its competitors’ finances, Caterpillar was one of the best-performing stocks among the
30 companies in the Dow Jones Industrial Average coming out of the recession.
Very often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses
relative to those of various competitors. The steps in this analysis are:
1. Identify the major attributes and benefits that customers value. Customers are asked what attributes, ben-
efits, and performance levels they look for in choosing a product and vendors. Attributes and benefits should
be defined broadly to encompass all the inputs to customers’ decisions.8
2. Assess the quantitative importance of the different attributes and benefits. Customers are asked to rate the
importance of different attributes and benefits. If their ratings diverge too much, the marketer should cluster
them into different segments.
3. Assess the company’s and competitors’ performances on the different customer values against their rated im-
portance. Customers describe where they see the company’s and competitors’ performances on each attribute
and benefit.
4. Examine how customers in a specific segment rate the company’s performance against a specific major com-
petitor on an individual attribute or benefit basis. If the company’s offer exceeds the competitor’s offer on all
important attributes and benefits, the company can charge a higher price (thereby earning higher profits), or
it can charge the same price and gain more market share.
5. Monitor customer values over time. The company must periodically redo its studies of customer values and
competitors’ standings as the economy, technology, and product features change.
Caterpillar’s market
success can be
attributed in part
to its focus on
maximizing total
customer value.
So
ur
ce
: J
am
es
M
at
ti
l/
Sh
ut
te
rs
to
ck
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ChoiCe proCesses anD impliCations Some marketers might argue the process we have described
is too rational. Suppose the customer chooses the Komatsu tractor. How can we explain this choice? Here are three
possibilities.
1. The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson’s task is then to con-
vince the buyer’s manager that buying on price alone will result in lower long-term profits and customer value
for the buyer’s company.
2. The buyer will retire before the company realizes the Komatsu tractor is more expensive to operate. The
buyer will look good in the short run; he is maximizing personal benefit. The Caterpillar salesperson’s task is
to convince other people in the customer company that Caterpillar delivers greater customer value.
3. The buyer enjoys a long-term friendship with the Komatsu salesperson. In this case, Caterpillar’s salesper-
son needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when
they discover its high fuel cost and need for frequent repairs.
The point is clear: Buyers operate under various constraints and occasionally make choices that give more weight
to their personal benefit than to the company’s benefit.
Customer-perceived value is a useful framework that applies to many situations and yields rich insights. It
suggests that the seller must assess the total customer benefit and total customer cost associated with each com-
petitor’s offer in order to know how its own offer rates in the buyer’s mind. It also implies that the seller at a dis-
advantage has two alternatives: increase total customer benefit or decrease total customer cost. The former calls
for strengthening or augmenting the economical, functional, and psychological benefits of the offering’s product,
services, personnel, and image. The latter calls for reducing the buyer’s costs by reducing the price or cost of own-
ership and maintenance, simplifying the ordering and delivery process, or absorbing some buyer risk by offering
a warranty.
DeliVering high Customer Value Consumers have varying degrees of loyalty to specific brands,
stores, and companies. Loyalty has been defined as “a deeply held commitment to rebuy or repatronize a
preferred product or service in the future despite situational influences and marketing efforts having the potential
to cause switching behavior.”9 Table 5.1 lists brands with the highest customer loyalty, according to one 2012
survey.
The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than
the core positioning of the offering. For example, Volvo’s core positioning has been “safety,” but the buyer is prom-
ised more than just a safe car; other benefits include good performance, design, and safety for the environment.
The value proposition is thus a promise about the experience customers can expect from the company’s market
offering and their relationship with the supplier. Whether the promise is kept depends on the company’s ability to
manage its value delivery system. The value delivery system includes all the experiences the customer will have on
the way to obtaining and using the offering. At the heart of a good value delivery system is a set of core business
processes that help deliver distinctive consumer value.10
total Customer satIsfaCtIon
In general, satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product
or service’s perceived performance (or outcome) to expectations.11 If the performance or experience falls short of
expectations, the customer is dissatisfied. If it matches expectations, the customer is satisfied. If it exceeds expec-
tations, the customer is highly satisfied or delighted.12
Customer assessments of product or service performance depend on many factors, including the type of loyalty
relationship the customer has with the brand.13 Consumers often form more favorable perceptions of a product
with a brand they already feel positive about. Research has also shown an asymmetric effect of product perfor-
mance and expectations on satisfaction: The negative effect on customer satisfaction of failing to meet expectations
is disproportionally stronger than the positive effect of exceeding expectations.14
Although the customer-centered firm seeks to create high customer satisfaction, that is not its ultimate goal.
Increasing customer satisfaction by lowering price or increasing services may result in lower profits. The company
might be able to increase its profitability by means other than increased satisfaction (for example, by improving
manufacturing processes or investing more in R&D).
The company also has many stakeholders, including employees, dealers, suppliers, and stockholders. Spending
more to increase customer satisfaction might divert funds from increasing the satisfaction of other “partners.”
Ultimately, the company must try to deliver a high level of customer satisfaction subject to also delivering accept-
able levels to other stakeholders, given its total resources.
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154 PART 3 | ConneCTing WiTh CusTomeRs
table 5.1 Top 30 Brands in Customer Loyalty
Brand Category Rankings
2012 2011
Apple Tablet 1 N/A
Amazon Tablet 2 N/A
Apple Smart phone 3 2
Amazon Online retail 4 1
Apple Computer 5 5
Samsung Tablet 6 N/A
Call of Duty Major league gaming 7 N/A
Samsung Cellphone 8 4
Halo Major league gaming 9 N/A
Twitter Social networks 10 20
Kindle E-reader 11 8
Mary Kay Cosmetics 12 10
Grey Goose Vodka 13 15
Google Search engine 14 16
YouTube Social networks 15 N/A
Facebook Social networks 16 3
Dunkin’ Donuts Coffee 17 12
Zappos Online retailer 18 6
Patron Tequila 19 9
Crest Whitestrips Tooth whitener 20 10
Walmart Discount retailer 21 13
Maybelline Cosmetics 22 14
Clinique Cosmetics, luxury 23 34
Ketel One Vodka 24 17
Hyundai Automotive 25 7
Samsung Smart phone 26 56
LG Cellphone 27 19
Mary Kay Facial moisturizer 28 28
Avis Car rental 29 23
LinkedIn Social networks 30 24
Source: “2012 Brand Keys Customer Loyalty Leaders List,” www.brandkeys.com.
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How do buyers form their expectations? Expectations result from past buying experience, friends’ and associates’
advice, public information and discourse, and marketers’ and competitors’ information and promises. If a company
raises expectations too high, the buyer is likely to be disappointed. If it sets expectations too low, it won’t attract
enough buyers (although it will satisfy those who do buy).15
Some of today’s most successful companies are raising expectations and delivering performances to match.
Korean automaker Kia found success in the United States by launching low-cost, high-quality cars with enough
reliability to offer 10-year, 100,000-mile warranties.
monItorInG satIsfaCtIon
Many companies are systematically measuring how well they treat customers, identifying the factors shaping sat-
isfaction, and changing operations and marketing as a result.16
Wise firms measure customer satisfaction regularly because it is one key to customer retention.17 A highly satis-
fied customer generally stays loyal longer, buys more as the company introduces new and upgraded products, talks
favorably to others about the company and its products, pays less attention to competing brands and is less sensi-
tive to price, offers product or service ideas to the company, and costs less to serve than new customers because
transactions can become routine.18
The link between customer satisfaction and customer loyalty is not proportional, however. Suppose customer
satisfaction is rated on a scale from 1 to 5. At a very low level of satisfaction (level 1), customers are likely to
abandon the company and even bad-mouth it. At levels 2 to 4, customers are fairly satisfied but still find it easy
to switch when a better offer comes along. At level 5, the customer is very likely to repurchase and even spread
good word of mouth about the company. High satisfaction or delight creates an emotional bond with the brand
or company, not just a rational preference. Xerox’s senior management found its “completely satisfied” customers
were six times more likely to repurchase Xerox products over the following 18 months than even its “very satis-
fied” customers.19
The company needs to recognize, however, that customers define good performance differently. Good delivery
could mean early delivery, on-time delivery, or order completeness, and two customers can report being “highly
satisfied” for different reasons. One may be easily satisfied most of the time, and the other might be hard to please
but was pleased on this occasion.20 It is also important to know how satisfied customers are with competitors in
order to assess “share of wallet” or how much of the customer’s spending the company’s brand enjoys: The more
highly the consumer ranks the company’s brand in terms of satisfaction and loyalty, the more the customer is likely
to spend on the brand.21
measurement teChniques Periodic surveys can track customers’ overall satisfaction directly and ask
additional questions to measure repurchase intention, likelihood or willingness to recommend the company and
brand to others, and specific attribute or benefit perceptions likely to be related to customer satisfaction.
The University of Michigan’s Claes Fornell has developed the American Customer Satisfaction Index (ACSI)
to measure consumers’ perceived satisfaction with different firms, industries, economic sectors, and national
economies.22 Research has shown a strong and consistent association between customer satisfaction, as measured
by ACSI, and firm financial performance in terms of ROI, sales, long-term firm value (Tobin’s Q), and other
metrics.23 Table 5.2 displays some of the 2014 ACSI leaders. “Marketing Insight: Net Promoter and Customer
Satisfaction” describes why some companies believe just one well-designed question is all that is necessary to assess
customer satisfaction.24
Companies need to monitor their competitors’ performance too. They can monitor their customer loss rate
and contact those who have stopped buying or who have switched to another supplier to find out why. Finally, as
described in Chapter 3, companies can hire mystery shoppers to pose as potential buyers and report on strong and
weak points experienced in buying the company’s and competitors’ products. Managers themselves can enter com-
pany and competitor sales situations where they are unknown and experience firsthand the treatment they receive,
or they can phone their own company with questions and complaints to see how employees handle the calls.
influenCe of Customer satisfaCtion For customer-centered companies, customer satisfaction
is both a goal and a marketing tool. Companies need to be especially concerned with their customer satisfaction
level today because the Internet allows consumers to quickly spread both good and bad word of mouth to the rest
of the world. Some customers set up their own Web sites to air grievances and galvanize protest, targeting high-
profile brands such as United Airlines, Home Depot, and Mercedes-Benz.25
Companies that do achieve high customer satisfaction ratings make sure their target market knows it. Once they
achieved number-one status in their category on J. D. Power’s customer satisfaction ratings, Hyundai, American
Express, Medicine Shoppe (a chain pharmacy), and Alaska Airways, among others, communicated that fact.
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156 PART 3 | ConneCTing WiTh CusTomeRs
table 5.2 2014 ACSI Scores by Industry
Industry Firm Score
Airlines Jet Blue 79
Apparel Levi-Strauss, V.F. 82
Automobiles & Light Vehicles Mercedes-Benz 84
Banks JPMorgan Chase 76
Breweries Anheuser-Busch InBev 81
Cellular Telephones Samsung 81
Department & Discount Stores Nordstrom 83
Fixed Line Telephone Service Verizon 73
Food Manufacturing H. J. Heinz, Quaker & General Mills 87
Health Insurance Blue Cross and Blue Shield 74
Hotels Marriott 81
Internet Brokerage Charles Schwab 84
Internet News & Information FOXNews.com & USATODAY.com 76
Internet Portals & Search Engines Google 83
Internet Retail Amazon 88
Internet Travel Orbitz 77
Life Insurance New York Life 80
Personal Care & Cleaning Products Clorox, Colgate-Palmolive & Unilever 85
Personal Computers Apple 84
Soft Drinks Dr Pepper Snapple 86
Supermarkets Publix 86
Wireless Telephone Service Verizon Wireless 75
Source: ACSI LLC, www.theacsi.org.
ProduCt and servICe QualItY
Satisfaction will also depend on product and service quality. What exactly is quality? Various experts have
defined it as “fitness for use,” “conformance to requirements,” and “freedom from variation.” We will use the
American Society for Quality’s definition: Quality is the totality of features and characteristics of a product or
service that bear on its ability to satisfy stated or implied needs.26 This is clearly a customer-centered defini-
tion. We can say the seller has delivered quality whenever its product or service meets or exceeds the customers’
expectations.
A company that satisfies most of its customers’ needs most of the time is called a high-quality company,
but we need to distinguish between conformance quality and performance quality (or grade). A Lexus pro-
vides higher performance quality than a Hyundai: The Lexus rides more smoothly, accelerates faster, and runs
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Net Promoter and Customer
Satisfaction
Many companies make measuring customer satisfaction a top priority,
but how should they go about doing it? Bain’s Frederick Reichheld sug-
gests only one customer question really matters: “How likely is it that
you would recommend this product or service to a friend or colleague?”
Reichheld was inspired in part by the experiences of Enterprise
Rent-A-Car. When the company cut its customer satisfaction survey
in 1998 from 18 questions to two—one about the quality of the rental
experience and the other about the likelihood customers would rent
from the company again—it found those who gave the highest ratings
to their rental experience were three times as likely to rent again than
those who gave the second-highest rating. The firm also found that
diagnostic information managers collected from dissatisfied customers
helped it fine-tune its operations.
In a typical Net Promoter survey that follows Reichheld’s thinking,
customers are given a 1-to-10 scale on which to rate their likelihood of
recommending the company. Marketers then subtract Detractors (those
who gave a 0 to 6) from Promoters (those who gave a 9 or 10) to arrive
at the Net Promoter Score (NPS). Customers who rate the brand with
a 7 or 8 are deemed Passively Satisfied and are not included. A typi-
cal set of NPS scores falls in the 10 percent to 30 percent range, but
world-class companies can score over 50 percent. Some firms with top
NPS scores in 2014 included USAA (82 percent), Amazon (64 percent),
Southwest (62 percent), Wegmans (61 percent), Apple (72 percent),
and Costco (82 percent).
Reichheld has picked up many believers through the years.
American Express, Dell, and Microsoft, among others, have all adopted
the NPS metric. GE has tied 20 percent of its managers’ bonuses to
its NPS scores. When the European unit of GE Healthcare scored low,
follow-up research revealed that response times to customers were a
major problem. After it overhauled its call center and put more special-
ists in the field, GE Healthcare’s Net Promoter scores jumped 10 to
15 points. Philips has focused on engaging Promoters as well as ad-
dressing the concerns of Detractors, developing a Reference Promoter
program to get customers willing to recommend the brand to actually
do so through taped testimonials.
Reichheld says he developed NPS in response to overly compli-
cated—and thus ineffective—customer surveys. So it’s not surprising
that client firms praise its simplicity and strong relationship to financial
performance. When Intuit applied Net Promoter to its TurboTax product,
feedback revealed dissatisfaction with the software’s rebate procedure.
After Intuit dropped the proof-of-purchase requirement, sales jumped
6 percent.
Net Promoter is not without critics. A common criticism is that
many different patterns of responses may lead to the same NPS. For
example, NPS equals 20 percent when Promoters equal 20 percent,
Passives equal 80 percent, and Detractors equal 0 percent, as well
as when Promoters equal 60 percent, Passives equal 0 percent, and
Detractors equal 40 percent, but the managerial implications of the
two patterns of responses are very different. Another common criticism
is that it is not a useful predictor of future sales or growth because it
ignores important cost and revenue considerations.
Others question its actual research support. One comprehensive
academic study of 21 firms and more than 15,000 consumers in
Norway failed to find NPS superior to any other metrics such as the
ACSI measure. Some have criticized both NPS and ACSI measures
for not fully accounting for ex-customers or those who were never
customers. Peoples’ opinions about any of the single items or indices
measuring customer satisfaction depend in part on how they value the
trade-off between simplicity and complexity.
Sources: Fred Reichheld, Ultimate Question: For Driving Good Profits and True
Growth (Cambridge, MA: Harvard Business School Press, 2006); Fred Reichheld,
“The One Number You Need to Grow,” Harvard Business Review, December
2003; Neil A. Morgan and Lopo Leotte Rego, “The Value of Different Customer
Satisfaction and Loyalty Metrics in Predicting Business Performance,” Marketing
Science 25 (September–October 2006), pp. 426–39; Timothy L. Keiningham,
Lerzan Aksoy, Bruce Cooil, and Tor W. Andreassen, “Linking Customer Loyalty to
Growth,” MIT Sloan Management Review (Summer 2008), pp. 51–57; Suhail Khan,
“How Philips Uses Net Promoter Scores to Understand Customers,” HBR Blog
Network, May 10, 2011; Robert East, Jenni Romaniuk, and Wendy Lomax, “The
NPS and ACSI: A Critique and an Alternative Metric,” International Journal of Market
Research 53, no. 3 (2011), pp. 327–45; Randy Hanson, “Life after NPS,” Marketing
Research (Summer 2011), pp. 8–11; Jenny van Doorn, Peter S. H. Leeflang, and
Marleen Tijs, “Satisfaction as a Predictor of Future Performance: A Replication,”
International Journal of Research in Marketing 30 (September 2013), pp. 314–18;
www.satmetrix.com.
marketing
insight
problem-free longer. Yet both a Lexus and a Hyundai deliver the same conformance quality if all the units de-
liver their promised quality.
impaCt of quality Product and service quality, customer satisfaction, and company profitability are
intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support
higher prices and (often) lower costs. Studies have shown a high correlation between relative product quality and
company profitability.27 The drive to produce goods that are superior in world markets has led some countries
to recognize or award prizes to companies that exemplify the best quality practices, such as the Deming Prize in
Japan, the Malcolm Baldrige National Quality Award in the United States, and the European Quality Award.
Companies that have lowered costs to cut corners have paid the price when the quality of the customer experi-
ence suffers. British Airways also encountered turbulence when it became overly focused on cost cutting.28
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158 PART 3 | ConneCTing WiTh CusTomeRs
BritiSH airWaYS Since 2012, British Airways has won no less than 35 major awards for its quality of
service. Most recently, the airline won Best Airline, Best Short Haul Carrier, and Best Frequent Flyer Program at the Business
Traveler Awards. In 2014, British Airways also scooped the Times Travel Award for Best Airline, the Condé Nast Traveller
Award for Short Haul Airline of the Year, several Daily Telegraph awards, and the renowned Chinese Travel Industry Award for
Best European Airline and the Superbrands Award for Consumer Superbrand.
For many global brands, such as British Airways, quality service is at the center of all their activities, but recognition of
their efforts tends to come periodically since they are perceived as leaders in one year and ignored the next.
British Airways celebrated its 90th anniversary in 2009, as part of the International Airlines Group; it now has 40,000
employees including 15,000 cabin crew members, 3,600 pilots, and 5,500 engineers.
All this is in sharp contrast with the problems British Airways suffered between 1996 and 2009 when sharp budget
cuts led to job losses, low employee morale, and strikes. Punctuality, customer service, and baggage handling all suffered
during this time.
Total quality is everyone’s job, just as marketing is everyone’s job. Nevertheless, marketing plays an especially
important role in helping companies identify and deliver high-quality goods and services to target customers. How
do marketers help?
• They correctly identify customers’ needs and requirements.
• They communicate customer expectations properly to product designers.
• They make sure customers’ orders are filled correctly and on time.
• They check that customers have received proper instructions, training, and technical assistance in the use of
the product.
• They stay in touch with customers after the sale to ensure they are, and remain, satisfied.
• They gather customer ideas for product and service improvements and convey them to the appropriate
departments.
When marketers do all this, they make substantial contributions to total quality management and customer
satisfaction as well as to customer and company profitability.
Maximizing Customer Lifetime Value
Ultimately, marketing is the art of attracting and keeping profitable customers. Yet every company loses money
on some of its customers. The well-known 80–20 rule states that 80 percent or more of the company’s profits
come from the top 20 percent of its customers. Some cases may be more extreme—the most profitable 20 percent
of customers (on a per capita basis) may contribute as much as 150 to 300 percent of profitability. The least prof-
itable 10 to 20 percent, on the other hand, can actually reduce profits between 50 and 200 percent per account,
Enterprise Rent-A-Car
found its customer
satisfaction surveys were
more effective with just
two questions.
So
ur
ce
: U
IG
v
ia
G
et
ty
I
m
ag
es
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with the middle 60 to 70 percent breaking even.29 The implication is that a company could improve its profits by
“firing” its worst customers.
Companies need to concern themselves with Return on Customer (ROC) and how efficiently they create value
from the customers and prospects available.30 It’s not always the company’s largest customers who demand consid-
erable service and deep discounts or who yield the most profit. The smallest customers pay full price and receive
minimal service, but the costs of transacting with them can reduce their profitability. Midsize customers who re-
ceive good service and pay nearly full price are often the most profitable.
Customer ProfItabIlItY
A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an
acceptable amount the company’s cost stream for attracting, selling, and serving that customer. Note the emphasis
is on the lifetime stream of revenue and cost, not the profit from a particular transaction.31 Marketers can assess
customer profitability individually, by market segment, or by channel.
Many companies measure customer satisfaction, but few measure individual customer profitability.32 Banks
claim this is a difficult task because each customer uses different banking services and the transactions are logged
in different departments. However, the number of unprofitable customers in their customer database has appalled
banks that have succeeded in linking customer transactions. Some report losing money on more than 45 percent
of their retail customers.
Customer profitability analysis A useful type of profitability analysis is shown in Figure 5.3.33
Customers are arrayed along the columns and products along the rows. Each cell contains a symbol representing
the profitability of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making
products (P1 and P2). Customer 2 yields mixed profitability; she buys one profitable product (P1) and one
unprofitable product (P3). Customer 3 is a losing customer because he buys one profitable product (P1) and two
unprofitable products (P3 and P4).
What can the company do about customers 2 and 3? (1) It can raise the price of its less profitable products
or eliminate them, or (2) it can try to sell customers 2 and 3 its profit-making products. Unprofitable custom-
ers who defect should not concern the company. In fact, the company should encourage them to switch to
competitors.
Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called
activity-based costing (ABC). ABC accounting tries to identify the real costs associated with serving each cus-
tomer—the costs of products and services based on the resources they consume. The company estimates all rev-
enue coming from the customer, less all costs.
With ABC, the costs in a business-to-business setting should include the cost not only of making and distribut-
ing the products and services but also of taking phone calls from the customer, traveling to visit the customer, pay-
ing for entertainment and gifts—all the company’s resources that go into serving that customer. ABC also allocates
indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in
some proportion to direct costs. Both variable and overhead costs are tagged back to each customer.
Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely
to misallocate their marketing effort. The key to effectively employing ABC is to define and judge “activities”
High-profit
customer
Mixed-bag
customer
Losing
customer
+ + +
Customers
C1 C2 C3
Highly profitable
product
+
Profitable
product
P2
P1
P3
P4
Products
– –
–
Unprofitable
product
Highly unprofitable
product
| Fig. 5.3 |
Customer-Product
Profitability Analysis
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160 PART 3 | ConneCTing WiTh CusTomeRs
properly. One time-based solution calculates the cost of one minute of overhead and then decides how much of
this cost each activity uses.34
measurInG Customer lIfetIme value
The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value.35
Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the
customer’s lifetime purchases. The company must subtract from its expected revenues the expected costs of at-
tracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between
10 and 20 percent, depending on cost of capital and risk attitudes). Lifetime value calculations for a product or
service can add up to tens of thousands of dollars or even run to six figures.36
Many methods exist to measure CLV.37 “Marketing Memo: Calculating Customer Lifetime Value” illustrates
one. CLV calculations provide a formal quantitative framework for planning customer investment and help mar-
keters adopt a long-term perspective. One challenge, however, is to arrive at reliable cost and revenue estimates.
Marketers who use CLV concepts must also take into account the short-term, brand-building marketing activities
that help increase customer loyalty. One firm that has excelled in taking a short-run and long-run view of customer
loyalty is Harrah’s.38
HarraH’S Harrah’s Entertainment, led by one-time academic Gary Loveman, has gone in a different direc-
tion from the big players in the Las Vegas gaming industry whose business models are based on building bigger and more
opulent casinos. Back in 1997, Harrah’s launched a pioneering loyalty program that pulled all customer data into a central-
ized warehouse and then ran sophisticated analyses to better understand the value of the investments the casino made in
its customers. Harrah’s has more than 40 million active members in its Total Rewards loyalty program, a system it has fine-
tuned to achieve near-real-time analysis: As customers interact with slot machines, check into casinos, or buy meals, they
receive reward offers—food vouchers or gambling credits, for example—based on predictive analyses from its database.
Harrah’s spends $100 million a year on information technology. The company has now identified hundreds of highly specific
customer segments, and by targeting offers to each of them, it can almost double its share of customers’ gaming budgets
and generate $6.4 billion annually (80 percent of its gaming revenue). Research has shown that contrary to conventional
wisdom, the most profitable customers are not the jet-setting high rollers, but older slot machine players. Harrah’s also
learned to dramatically cut back on its traditional ad spending, largely replacing it with direct mail and e-mail—a good cus-
tomer may receive as many as 150 pieces in a year. Harrah’s also rewards staff and bases compensation in part on cus-
tomer service scores. To better fine-tune its Web sites and online ads, Harrah’s monitors customer reviews and comments
on TripAdvisor.com as well as social media sites such as Twitter and Facebook. After the company made changes to reflect
customer interest in hotel amenities and the iconic views of the Las Vegas strip from its Paris Las Vegas hotel and casino,
online bookings increased by double digits. Data from the Total Rewards program even influenced Harrah’s decision to buy
Caesars Entertainment, when company research revealed that most of Harrah’s customers who visited Las Vegas without
staying at a Harrah’s-owned hotel were going to Caesars Palace. Harrah’s latest loyalty innovation is a mobile marketing
program that sends time-based and location-based offers to customers’ mobile devices in real time.
attraCtInG and retaInInG Customers
Companies seeking to expand profits and sales must invest time and resources searching for new customers. To
generate leads, they advertise in media that will reach new prospects, send direct mail and e-mails to possible new
prospects, send their salespeople to participate in trade shows where they might find new leads, purchase names
from list brokers, and so on.
Different acquisition methods yield customers with varying CLVs. One study showed that customers acquired
through the offer of a 35 percent discount had about one-half the long-term value of customers acquired without
any discount.39 Many of these customers were more interested in the offer than in the product itself.
Similarly, many local restaurants, car wash services, beauty salons, and dry cleaners have launched “daily deal”
campaigns from Groupon and LivingSocial to attract new customers. Unfortunately, these campaigns have some-
times turned out to be unprofitable in the long run because coupon users were not easily converted into loyal
customers.40
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Harrah’s uses
sophisticated customer
analytics to guide its
marketing activities,
including filling rooms
in its Paris Las Vegas
hotel and casino.
So
ur
ce
: A
FP
/G
et
ty
I
m
ag
es
Researchers and practitioners have used many different approaches for modeling and estimating CLV. Columbia’s Don Lehmann and Harvard’s Sunil Gupta
recommend the following formula to estimate the CLV for a not-yet-acquired customer:
CLV = a
T
t = 0
1pt – ct2 rt
11 + i 2 t – AC
where pt = price paid by a consumer at time t,
ct = direct cost of servicing the customer at time t,
i = discount rate or cost of capital for the firm,
rt = probability of customer repeat buying or being “alive” at time t,
AC = acquisition cost, and
T = time horizon for estimating CLV.
A key decision is what time horizon to use for estimating CLV. Typically, three to five years is reasonable. With this information and estimates of other vari-
ables, we can calculate CLV using spreadsheet analysis.
Gupta and Lehmann illustrate their approach by calculating the CLV of 100 customers over a 10-year period (see Table 5.3). In this example, the firm
acquires 100 customers with an acquisition cost per customer of $40. Therefore, in year 0, it spends $4,000. Some of these customers defect each year.
The present value of the profits from this cohort of customers over 10 years is $13,286.52. The net CLV (after deducting acquisition costs) is $9,286.52, or
$92.87 per customer.
Using an infinite time horizon avoids having to select an arbitrary time horizon for calculating CLV. In the case of an infinite time horizon, if margins (price
minus cost) and retention rates stay constant over time, the future CLV of an existing customer simplifies to the following:
CLV = a
∞
t = 1
mr t
11 + i 2 t = m
r
11 + i – r 2
In other words, CLV simply becomes margin (m) times a margin multiple [r/(1 + i – r)].
Table 5.4 shows the margin multiple for various combinations of r and i and a simple way to estimate CLV of a customer. When retention rate is 80 percent
and discount rate is 12 percent, the margin multiple is about two and a half. Therefore, the future CLV of an existing customer in this scenario is simply his or
her annual margin multiplied by 2.5.
Sources: Sunil Gupta and Donald R. Lehmann, “Models of Customer Value,” Berend Wierenga, ed., Handbook of Marketing Decision Models (Berlin, Germany: Springer
Science and Business Media, 2007); Sunil Gupta and Donald R. Lehmann, “Customers as Assets,” Journal of Interactive Marketing 17, no. 1 (Winter 2006), pp. 9–24;
Sunil Gupta and Donald R. Lehmann, Managing Customers as Investments (Upper Saddle River, NJ: Wharton School Publishing, 2005); Peter Fader, Bruce Hardie, and Ka
Lee, “RFM and CLV: Using Iso-Value Curves for Customer Base Analysis,” Journal of Marketing Research 42, no. 4 (November 2005), pp. 415–30; Sunil Gupta, Donald R.
Lehmann, and Jennifer Ames Stuart, “Valuing Customers,” Journal of Marketing Research 41, no. 1 (February 2004), pp. 7–18.
Calculating Customer Lifetime Valuemarketing memo
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162 PART 3 | ConneCTing WiTh CusTomeRs
Promotional campaigns that reinforce the value of the brand, even if targeted to the already loyal, may be more
likely to attract higher-value new customers. Two-thirds of the considerable growth spurred by UK mobile com-
munication leader O2’s loyalty strategy was attributed to recruitment of new customers; the remainder came from
reduced defection.41
reDuCing DefeCtion It is not enough to attract new customers; the company must also keep them and
increase their business.42 Too many companies suffer from high customer churn or defection. Adding customers
here is like adding water to a leaking bucket.
Cellular carriers and cable TV operators are plagued by “spinners,” customers who switch carriers at least three
times a year looking for the best deal. Many carriers lose 25 percent of their subscribers each year, at an estimated
cost of $2 billion to $4 billion. Defecting customers cite unmet needs and expectations, poor product/service qual-
ity and high complexity, and billing errors.43
To reduce the defection rate, the company must:
1. Define and measure its retention rate. For a magazine, subscription renewal rate is a good measure of reten-
tion. For a college, it could be first- to second-year retention rate or class graduation rate.
2. Distinguish the causes of customer attrition and identify those that can be managed better. Not much can be
done about customers who leave the region or go out of business, but poor service, shoddy products, and high
prices can all be addressed.44
3. Compare the lost customer’s lifetime value to the costs of reducing the defection rate. As long as the cost to dis-
courage defection is lower than the lost profit, spend the money to try to retain the customer.
table 5.3 A Hypothetical Example to Illustrate CLV Calculations
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Number of
Customers
100 90 80 72 60 48 34 23 12 6 2
Revenue per
Customer
100 110 120 125 130 135 140 142 143 145
Variable Cost per
Customer
70 72 75 76 78 79 80 81 82 83
Margin per
Customer
30 38 45 49 52 56 60 61 61 62
Acquisition Cost
per Customer
40
Total Cost or Profit –4,000 2,700 3,040 3,240 2,940 2,496 1,904 1,380 732 366 124
Present Value –4,000 2,454.55 2,512.40 2,434.26 2,008.06 1,549.82 1,074.76 708.16 341.48 155.22 47.81
table 5.4 Margin Multiple
Discount Rate
Retention Rate 10% 12% 14% 16%
60% 1.20 1.5 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.22
90% 4.50 4.09 3.75 3.46
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retention DynamiCs Figure 5.4 shows the main steps in attracting and retaining customers, imagined in
terms of a funnel, and some sample questions to measure customer progress through the funnel. The marketing
funnel identifies the percentage of the potential target market at each stage in the decision process, from merely
aware to highly loyal. Consumers must move through each stage before becoming loyal customers. Some marketers
extend the funnel to include loyal customers who are brand advocates or even partners with the firm.
By calculating conversion rates—the percentage of customers at one stage who move to the next—the funnel
allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. If the percent-
age of recent users is significantly lower than triers, for instance, something might be wrong with the product or
service that prevents repeat buying.
The funnel also emphasizes how important it is not just to attract new customers but to retain and cultivate
existing ones. Satisfied customers are the company’s customer relationship capital. If the company were sold, the
acquiring company would pay not only for the plant and equipment and brand name but also for the delivered cus-
tomer base, the number and value of customers who will do business with the new firm. Consider these data about
customer retention:45
• Acquiring new customers can cost five times more than satisfying and retaining current ones. It requires a
great deal of effort to induce satisfied customers to switch from their current suppliers.
• The average company loses 10 percent of its customers each year.
• A 5 percent reduction in the customer defection rate can increase profits by 25 percent to 85 percent, depend-
ing on the industry.
• Profit rate tends to increase over the life of the retained customer due to increased purchases, referrals, price
premiums, and reduced operating costs to service.
Aware
Open
to trial
Trier
(nonrejec-
ters)
Regular user
(e.g., At least
once every
2 weeks)
Recent user
(e.g., Once
in past
3 months)
Most
often used
• I have
heard of
the brand.
• I am open
to trying
the brand
but have
not done
so.
• I have
tried the
brand and
would use
again but
have not
done so in
the past
3 months.
• I have
used the
brand in
the past
3 months
but am
not a
regular
user.
• I am a
regular
user but
this is not
my most
often
used
brand.
• I use this
brand
most often
even
though I
do use
other
brands.
• I always
use this
brand as
long as
it is
available.
Target
market Loyal
| Fig. 5.4 |
The
Marketing
Funnel
Whole Foods builds
customer loyalty through
its skillful procurement
and merchandising
of natural and organic
foods.
So
ur
ce
: C
ou
rt
es
y
of
W
ho
le
F
oo
ds
M
ar
ke
t.
“
W
ho
le
F
oo
ds
M
ar
ke
t”
is
a
r
eg
is
te
re
d
tr
ad
em
ar
k
of
W
ho
le
F
oo
ds
M
ar
ke
t
IP
, L
.P
.
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164 PART 3 | ConneCTing WiTh CusTomeRs
managing the Customer base Customer profitability analysis and the marketing funnel help
marketers decide how to manage groups of customers that vary in loyalty, profitability, risk, and other factors.46
A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve that
value by excelling at strategies like the following:
• Reducing the rate of customer defection. Selecting and training employees to be knowledgeable and friendly
increases the likelihood that customers’ shopping questions will be answered satisfactorily. Whole Foods, the
world’s largest retailer of natural and organic foods, woos customers with a commitment to market the best
foods and a team concept for employees.
• Increasing the longevity of the customer relationship. The more engaged with the company, the more likely a
customer is to stick around. Nearly 65 percent of new Honda purchases replace an older Honda. Drivers cited
Honda’s reputation for creating safe vehicles with high resale value. Seeking consumer advice can be an effec-
tive way to engage consumers with a brand and company.47
• Enhancing the growth potential of each customer through “share of wallet,” cross-selling, and up-
selling.48 Sales from existing customers can be increased with new offerings and opportunities. Harley-
Davidson sells more than motorcycles and accessories like gloves, leather jackets, helmets, and sunglasses.
Its dealerships sell more than 3,000 items of clothing—some even have fitting rooms. Licensed goods sold by
others range from predictable items (shot glasses, cue balls, and Zippo cigarette lighters) to the more surpris-
ing (cologne, dolls, and cell phones). Cross-selling isn’t profitable if the targeted customer requires a lot of
services for each product, generates a lot of product returns, cherry-picks promotions, or limits total spend-
ing across all products.49
• Making low-profit customers more profitable or terminating them. To avoid trying to terminate them,
marketers can instead encourage unprofitable customers to buy more or in larger quantities, forgo certain
features or services, or pay higher amounts or fees.50 Banks, phone companies, and travel agencies all
now charge for once-free services to ensure minimum revenue levels from these customers. Firms can
also discourage those with questionable profitability prospects. Progressive Insurance screens custom-
ers and diverts the potentially unprofitable to competitors.51 However, “free” customers who pay little or
nothing and are subsidized by paying customers—as in print and online media, employment and dating
services, and shopping malls—may still create useful direct and indirect network effects, an important
function.52
• Focusing disproportionate effort on high-profit customers. The most profitable customers can be treated in a
special way. Thoughtful gestures such as birthday greetings, small gifts, or invitations to special sports or arts
events can send them a strong positive signal.
buIldInG loYaltY
Companies that want to form strong, tight connections to customers should heed some specific considerations
(see Figure 5.5). One set of researchers sees retention-building activities as adding financial benefits, social ben-
efits, or structural ties.53 Next we describe three marketing activities that improve loyalty and retention.
interaCt Closely with Customers Connecting customers, clients, patients, and others directly
with company employees is highly motivating and informative. End users can offer tangible proof of the positive
impact of the company’s products and services, express appreciation for employee contributions, and elicit
empathy. A brief visit from a student who had received a scholarship motivated university fundraisers to increase
their weekly productivity by 400 percent; a patient’s photograph inspired radiologists to improve the accuracy of
their diagnostic findings by 46 percent.54
• Create superior products, services, and experiences for the target market.
• Get cross-departmental participation in planning and managing the customer satisfaction and retention process.
• Integrate the “Voice of the Customer” to capture their stated and unstated needs or requirements in all business decisions.
• Organize and make accessible a database of information on individual customer needs, preferences, contacts, purchase
frequency, and satisfaction.
• Make it easy for customers to reach appropriate company staff and express their needs, perceptions, and complaints.
• Assess the potential of frequency programs and club marketing programs.
• Run award programs recognizing outstanding employees.
| Fig. 5.5 |
Forming
Strong
Customer
Bonds
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Listening to customers is crucial to customer relationship management. Some companies have created an ongoing
mechanism that keeps their marketers permanently plugged in to frontline customer feedback.
• Deere & Company, which makes John Deere tractors and has a superb record of customer loyalty—nearly
98 percent annual retention in some product areas—has used retired employees to interview defectors and
customers.55
• Chicken of the Sea has 80,000 members in its Mermaid Club, a core-customer group that receives special of-
fers, health tips and articles, new product updates, and an informative e-newsletter. In return, club members
provide valuable feedback on what the company is doing and thinking of doing. Their input has helped design
the brand’s Web site, develop messages for TV advertising, and craft the look and text on the packaging.56
• Build-A-Bear Workshop uses a “Cub Advisory Board” as a feedback and decision-input body. The board is
made up of twenty 5- to 16-year-olds who review new-product ideas and give a “paws up or down.” Many
products in the stores are customer ideas.57
But listening is only part of the story. It is also important to be a customer advocate and, as much as possible,
take the customers’ side and understand their point of view.58
DeVelop loyalty programs Frequency programs (FPs) are designed to reward customers who buy
frequently and in substantial amounts. They can help build long-term loyalty with high CLV customers, creating
cross-selling opportunities in the process. Pioneered by the airlines, hotels, and credit card companies, FPs now
exist in many other industries. Most supermarket and drug store chains offer price club cards that grant discounts
on certain items.
Typically, the first company to introduce an FP in an industry gains the most benefit, especially if competitors
are slow to respond. After competitors react, FPs can become a financial burden to all the offering companies, but
some companies are more efficient and creative in managing them. Some FPs generate rewards in a way that locks
customers in and creates significant switching costs. FPs can also produce a psychological boost and a feeling of
being special and elite that customers value.59
Club membership programs attract and keep those customers responsible for the largest portion of business.
Clubs can be open to everyone who purchases a product or service or limited to an affinity group or those willing
to pay a small fee. Although open clubs are good for building a database or snagging customers from competitors,
limited membership is a more powerful long-term loyalty builder. Fees and membership conditions prevent those
with only a fleeting interest in a company’s products from joining.
Apple encourages owners of its computers to form local Apple user groups. There are hundreds of groups,
ranging in size from fewer than 30 members to more than 1,000. The groups provide Apple owners with opportu-
nities to learn more about their computers, share ideas, and get product discounts. They sponsor special activities
and events and perform community service. A visit to Apple’s Web site will help a customer find a nearby user
group.60
Create institutional ties The company may supply business customers with special equipment
or computer links that help them manage orders, payroll, and inventory. Customers are less inclined to switch
to another supplier when it means high capital costs, high search costs, or the loss of loyal-customer discounts.
McKesson Corporation, a leading pharmaceutical wholesaler, invested millions of dollars in EDI (Electronic Data
Interchange) capabilities to help its independent-pharmacy customers manage inventory, order-entry processes,
and shelf space. Another example is Milliken & Company, which provides proprietary software programs,
marketing research, sales training, and sales leads to loyal customers.
brand CommunItIes
Thanks to the Internet, companies are interested in collaborating with consumers to create value through com-
munities built around brands. A brand community is a specialized community of consumers and employees
whose identification and activities focus around the brand.61 Three characteristics identify brand communities:62
1. A “consciousness of kind,” or a sense of felt connection to the brand, company, product, or other community
members;
2. Shared rituals, stories, and traditions that help convey the meaning of the community; and
3. A shared moral responsibility or duty to both the community as a whole and individual community members.
types of branD Communities Brand communities come in many different forms.63 Some arise
organically from brand users, such as the Atlanta MGB riders club and the Porsche Rennlist online discussion
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166 PART 3 | ConneCTing WiTh CusTomeRs
group. Others are company-sponsored and facilitated, such as Club Green Kids (official kids’ fan club of the
Boston Celtics) and the Harley Owners Group (H.O.G.).64
HarLeY-DaViDSOn Founded in 1903 in Milwaukee, Wisconsin, Harley-Davidson has twice narrowly
escaped bankruptcy but is today one of the most recognized motor vehicle brands in the world. In dire financial straits in
the 1980s, Harley licensed its name to such ill-advised ventures as cigarettes and wine coolers. Although consumers loved
the brand, sales were depressed by product-quality problems, so Harley began its return to greatness by improving manu-
facturing processes. It also developed a strong brand community in the form of an inclusive owners’ club, called the Harley
Owners Group (H.O.G.), which sponsors bike rallies, charity rides, and other motorcycle events and now numbers more than
1 million members in some 1,400 chapters. H.O.G. benefits include a magazine called Hog Tales, a touring handbook, emer-
gency road service, a specially designed insurance program, theft reward service, discount hotel rates, and a Fly & Ride pro-
gram enabling members to rent Harleys on vacation. The company also maintains an extensive Web site devoted to H.O.G.
with information about club chapters and events and a special members-only section. Harley is active with social media too
and boasts more than 3.3 million Facebook fans. One fan inspired a digital video and Twitter campaign dubbed E Pluribus
Unum—“Out of Many, One”—where Harley riders from all walks of life show their diversity and their pride in their bikes.
Companies large and small can build brand communities. When New York’s Signature Theatre Company built
a new 70,000-square-foot facility for its shows, it made sure there was a central hub where casts, crew, playwrights,
and audiences for all productions could mingle and interact.65
Online, marketers can tap into social media such as Facebook, Twitter, and blogs or create their own online
community. Members can recommend products, share reviews, create lists of recommendations and favorites, or
socialize together online.
Online forums can be especially helpful in a business-to-business setting for professional development and
feedback opportunities. The Kodak Grow Your Biz blog is a place for members to learn and share insights
about how Kodak products, services, and technologies can improve important company or industry business
performance.66 The Pitney Bowes User Forum is a place for members to discuss issues related to Pitney Bowes
equipment and to mailing and marketing in general. Members often answer each other’s business questions,
though Pitney Bowes customer service representatives are available for any particularly difficult support
questions.67
maximizing the benefits of branD Communities A strong brand community results in a
more loyal, committed customer base. One study showed that a multichannel retailer of books, CDs, and DVDs
enjoyed long-term incremental revenue of 19 percent from customers—what the authors called “social dollars”—
after customers joined an online brand community. The more “connected” a member of the community was, the
greater the likelihood he or she would spend more.68
A brand community can be a constant source of inspiration and feedback for product improvements or innova-
tions. The activities and advocacy of members of a brand community can also substitute to some degree for activi-
ties the firm would otherwise have to engage in, creating greater marketing effectiveness and efficiency as a result.69
Harley-Davidson has
built an active brand
community through
its Harley Owner’s
Group which boasts
more than one
million members.
So
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ce
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ic
ho
la
s
J
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ei
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G
et
ty
I
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ag
es
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To better understand how brand communities work, one comprehensive study examined communities around
brands as diverse as StriVectin cosmeceutical, BMW Mini auto, Jones soda, Tom Petty & the Heartbreakers rock
and roll band, and Garmin GPS devices. Using multiple research methods such as “netnographic” research with
online forums, participant and naturalistic observation of community activities, and in-depth interviews with
community members, the researchers found 12 value creation practices taking place. They divided them into four
categories—social networking, community engagement, impression management, and brand use—summarized in
Table 5.5.
Building a positive, productive brand community requires careful thought and implementation.70 One set of
researchers offers these recommendations for making online brand communities more effective:71
1. Enhance the timeliness of information exchanged. Set appointed times for topic discussion; give rewards for
timely, helpful responses; increase access points to the community.
2. Enhance the relevance of information posted. Keep the focus on topic; divide the forum into categories; en-
courage users to preselect interests.
3. Extend the conversation. Make it easier for users to express themselves; don’t set limits on length of responses;
allow user evaluation of the relevance of posts.
4. Increase the frequency of information exchanged. Launch contests; use familiar social networking tools; create
special opportunities for visitors; acknowledge helpful members.
table 5.5 Value Creation Practices
SoCIal NeTWoRkINg
Welcoming Greeting new members, beckoning them into the fold, and assisting in their brand learning and community socialization.
empathizing Lending emotional and/or physical support to other members, including support for brand-related trials (product failure,
customizing) and/or for nonbrand-related life issues (illness, death, job).
governing Articulating the behavioral expectations within the brand community.
ImPReSSIoN maNagemeNT
evangelizing Sharing the brand “good news,” inspiring others to use, and preaching from the mountaintop.
Justifying Deploying rationales generally for devoting time and effort to the brand and collectively to outsiders and marginal mem-
bers in the boundary.
CommuNITy eNgagemeNT
Staking Recognizing variance within the brand community membership and marking intragroup distinction and similarity.
milestoning Noting seminal events in brand ownership and consumption.
Badging Translating milestones into symbols and artifacts.
Documenting Detailing the brand relationship journey in a narrative way, often anchored by and peppered with milestones.
BRaND uSe
grooming Cleaning, caring for, and maintaining the brand or systematizing optimal use patterns.
Customizing Modifying the brand to suit group-level or individual needs. This includes all efforts to change the factory specs of the
product to enhance performance.
Commoditizing Distancing/approaching the marketplace in positive or negative ways. May be directed at other members (you should
sell/should not sell that) or may be directed at the firm through explicit link or through presumed monitoring of the site
(you should fix this/do this/change this).
Source: Adapted from Hope Jensen Schau, Albert M. Muniz, and Eric J. Arnould, “How Brand Community Practices Create Value,” Journal of Marketing 73 (September 2009), pp. 30–51.
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168 PART 3 | ConneCTing WiTh CusTomeRs
WIn-baCks
Regardless of how hard companies may try, some customers inevitably become inactive or drop out. The
challenge is to reactivate them through win-back strategies.72 It’s often easier to reattract ex-customers
(because the company knows their names and histories) than to find new ones. Exit interviews and lost-
customer surveys can uncover sources of dissatisfaction and help win back only those with strong profit
potential.73
Cultivating Customer
Relationships
Companies are using information about customers to enact precision marketing designed to build strong long-
term relationships.74 Information is easy to differentiate, customize, personalize, and dispatch over networks at
incredible speed. But that capability cuts both ways. For instance, customers now comparison-shop quickly and
easily through sites such as Bizrate.com, Shopping.com, and PriceGrabber.com, and Epinions.com and Yelp.com
let them share information about their product and service experiences with others. Company empowerment has
been matched by customer empowerment, and companies have to adjust to shifts in the nature and strength of
their customer relationships.
Customer relatIonshIP manaGement
Customer relationship management (CRM) is the process of carefully managing detailed information about
individual customers and all customer “touch points” to maximize loyalty.75 CRM is important because a major
driver of company profitability is the aggregate value of the company’s customer base. A related concept, cus-
tomer value management (CVM), describes the company’s optimization of the value of its customer base. CVM
focuses on the analysis of individual data on prospects and customers to develop marketing strategies to acquire
and retain customers and drive customer behavior.76
A customer touch point is any occasion when a customer encounters the brand and product—from actual ex-
perience to personal or mass communications to casual observation. For a hotel, the touch points include reserva-
tions, check-in and checkout, frequent-stay programs, room service, business services, exercise facilities, laundry
service, restaurants, and bars. The Four Seasons relies on personal touches, such as a staff that always addresses
guests by name, high-powered employees who understand the needs of sophisticated business travelers, and at
least one best-in-region facility, such as a premier restaurant or spa.77
CRM enables companies to provide excellent real-time customer service through the effective use of indi-
vidual account information. Based on what they know about each valued customer, they can customize market
offerings, services, programs, messages, and media. Companies’ increased ability to track and market to indi-
vidual customers is not without its controversies, as “Marketing Insight: The Behavioral Targeting Controversy”
highlights.
personalizing marketing Widespread Internet usage allows marketers to abandon the mass-market
practices that built brand powerhouses in the 1950s, 1960s, and 1970s for new approaches that are a throwback to
marketing practices from a century ago, when merchants literally knew their customers by name. Personalizing
marketing is about making sure the brand and its marketing are as personally relevant as possible to as many
customers as possible—a challenge, given that no two customers are identical.
Companies are using e-mail, Web sites, call centers, databases, and database software to foster continuous
contact between company and customer. Although technology can help with customer relationship management,
firms have to be careful not to roll out too many automated-response phone systems or social-networking tools as
ways to satisfy customer service requests. Many customers still prefer to talk to a live representative to receive more
personal service—an ongoing priority in marketing.78
Companies are recognizing the role of the personal component in CRM and its influence once customers
make actual contact with the company. Employees can create strong bonds with customers by individualiz-
ing and personalizing relationships. Consider the lengths to which British Airways is going to satisfy valued
customers.79
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BritiSH airWaYS British Airways took personalization to a higher level in the summer of 2012 with its
new “Know Me” program. One goal was to centralize information about frequent fliers from every one of BA’s service chan-
nels—Web site, call center, e-mail, on board planes, and inside airports—into a single database. For any one passenger
booked on a flight, BA would know his or her current seating location, previous flights and meal choices, prior complaint
history, and so on. BA also distributed 2,000 iPads among crew members and ground staff to allow them to access the
database as well as receive personal recognition messages about passengers on any one flight. The goal was to have
4,500 daily messages, or approximately seven message updates per flight. To facilitate VIP passenger identification, British
Airways also used stored photos of fliers downloaded from Google Image searches. One company representative described
the program as aiming to “recreate the feeling of recognition you get in a favorite restaurant when you’re welcomed there,
but in our case it will be delivered by thousands of staff to millions of customers.” Although some observers raised privacy
concerns—even calling it “creepy”—British Airways noted that the passenger information was already available or viewed
as helpful by its most valuable fliers.
The Behavioral Targeting
Controversy
The emergence of behavioral targeting is allowing companies to
track the online behavior of target customers and find the best match
between ads and prospects. Tracking an individual’s Internet usage
behavior relies on cookies—randomly assigned numbers, codes, and
data that are stored on the user’s computer hard drive and reveal which
sites have been visited, the amount of time spent there, which products
or pages were viewed, and which search terms were entered.
The Wall Street Journal reviewed 1,000 top Web sites and found
that 75 percent included code from social networks such as Facebook’s
“like” and Twitter’s “tweet” buttons. The existence of the code could
match people’s identities with their Web-browsing activities, tracking
a user’s arrival on a page even if the Facebook or Twitter button was
never clicked. Another Wall Street Journal study showed that roughly a
quarter of the times a user logged into one of 70 popular Web sites, the
user’s real name and e-mail address or other personal details, such as
username, were passed on to third-party companies.
A new customer signing up with Microsoft for a free Hotmail e-
mail account, for example, is required to give the company his or her
name, age, gender, and zip code. Microsoft can then combine those
facts with information such as observed online behavior and character-
istics of the area in which the customer lives to help advertisers better
understand whether, when, and how to contact that customer. Although
Microsoft maintains it carefully preserves consumer privacy—it claims
it won’t purchase an individual’s income history—it can still provide
advertising clients with behavioral targeting information.
For example, Microsoft can help a DiningIn franchisee zero in
on working moms ages 30 to 40 in a given neighborhood with ads
designed to reach them before 10 am when they’re most likely to be
planning their evening meal. Or if a person clicks on three Web sites
related to auto insurance and then visits an unrelated site for sports or
entertainment, auto insurance ads may show up on that site. Microsoft
claims behavioral targeting can increase the likelihood a visitor clicks an
ad by as much as 76 percent.
Proponents of behavioral targeting maintain that it also brings
consumers more relevant ads. Because the ads are more effective
as a result, more ad revenue is available to support free online con-
tent. Supporters also maintain that many consumers would be less
concerned if they knew exactly how tracking worked. They argue that
practices conform with the online ad industry’s self-regulation norms,
ensuring anonymity by not giving firms access to “personal identifiable
information” (PII).
Identity information is removed, protected, or separated from
browsing history in different ways. For example, a Web site can use a
formula to turn its users’ e-mail addresses into jumbled strings of num-
bers and letters, as can an advertiser. Both can send their jumbled lists
to a third company that looks for matches so the Web site can show
an ad targeted to a specific person without any real e-mail addresses
changing hands.
Nevertheless, as Chapter 3 pointed out, consumers have sig-
nificant misgivings about advertisers tracking them online. A single Web
page can contain computer code from dozens of different ad compa-
nies or tracking firms. Government regulators wonder whether industry
self-regulation will be sufficient or whether legislation is needed.
Sources: Elisabeth Sullivan, “Behave,” Marketing News, September 15, 2008, pp.
12–15; Stephanie Clifford, “Two-Thirds of Americans Object to Online Tracking,”
New York Times, September 30, 2009; Jessica Mintz, “Microsoft Adds Behavioral
Targeting,” Associated Press, December 28, 2006; Laurie Birkett, “The Cookie That
Won’t Crumble,” Forbes, January 18, 2010, p. 32; Alden M. Hayashi, “How Not
to Market on the Web,” MIT Sloan Management Review (Winter 2010), pp. 14–15;
Deborah L. Golemon and Laurie A. Babin, “How Marketers Are Dealing With the
Controversy Surrounding Behavioral Targeting,” International Journal of Business,
Marketing and Decision Sciences 4 (Spring 2011), pp. 127-141; Jennifer Valentino-
Devries and Jeremy Singer-Vine, “They Know What You’re Shopping For,” Wall
Street Journal, December 7, 2012.
marketing
insight
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170 PART 3 | ConneCTing WiTh CusTomeRs
While British Airways is personalizing its service experiences, BMW is figuring out ways to personalize its
products. While 15 percent of U.S. drivers custom-ordered their cars in 2010, BMW’s goal was to make that
number 40 percent of its buyers by 2015. The company offers 500 side-mirror combinations, 1,300 front bumper
combinations, and 9,000 center-console combinations and provides new buyers a video link to watch their car
being “born” while waiting for delivery. Its detailed manufacturing and procurement system takes the slack out
the production process, reduces inventory carrying costs, and avoids rebates on slow-moving sellers. Customers
tend to load up with options—generating more profitability for BMW and its dealers—but are also more loyal.80
Even Coca-Cola is getting in on the action. The Coca-Cola Freestyle dispensing machine can dispense 125
sparkling and still brands that consumers can mix via a touchscreen, creating a beverage to suit their particular
taste.81
To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission
marketing. Permission marketing, the practice of marketing to consumers only after gaining their expressed permis-
sion, is based on the premise that marketers can no longer use “interruption marketing” via mass media campaigns.
According to Seth Godin, a pioneer in the new technique, marketers develop stronger consumer relationships by
respecting consumers’ wishes and sending messages only when they express a willingness to become more engaged
with the brand.82 Godin believes permission marketing works because it is “anticipated, personal, and relevant.”
Permission marketing, like other personalization approaches, presumes consumers know what they want,
though they often have undefined, ambiguous, or conflicting preferences. “Participatory marketing” may be a
more appropriate concept than permission marketing because marketers and consumers need to work together to
find out how the firm can best satisfy consumers.
Customer empowerment Marketers are helping consumers become evangelists for brands by
providing them resources and opportunities to demonstrate their passion. Doritos held a contest to let consumers
name its next flavor. Converse asked amateur filmmakers to submit 30-second short films that demonstrated how
the iconic sneaker brand inspired them. The best of the 1,800 submissions were showcased in the Converse Gallery
As part of a broad
trend towards
personalization,
Coca-Cola has
introduced Freestyle
dispensing machines
that allow users to
customize their soft
drink choices.
So
ur
ce
: S
co
tt
K
ee
le
r/
Z
U
M
A
PR
E
SS
/N
ew
sc
om
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Web site, and the best of the best became TV commercials. Sales of shoes via the Web site doubled in the month
after the gallery’s launch.83
As much as new technologies help customers assist or become involved in a brand’s marketing, they also help
them avoid marketing at the same time. For example, ad blocking is the most popular software extension for lead-
ing browsers, and the overall rate of ad blocking by users averages about 10 percent.84
Although much has been made of the newly empowered consumer—in charge, setting the direction of the
brand, and playing a much bigger role in how it is marketed—it’s still true that only some consumers want to
get involved with some of the brands they use and, even then, only some of the time. Consumers have lives, jobs,
families, hobbies, goals, and commitments, and many things matter more to them than the brands they purchase
and consume. Understanding how to best market a brand given such diversity in customer interests is crucially
important.85
When will consumers choose to engage with a brand? Many factors can come into play, but follow-up analy-
sis of the IBM 2010 CEO Study revealed the following about customer pragmatism: “. . . most do not engage with
companies via social media simply to feel connected. . . . To successfully exploit the potential of social media, com-
panies need to design experiences that deliver tangible value in return for customers’ time, attention, endorsement
and data.” According to these IBM analysts, that “tangible value” includes discounts, coupons, and information to
facilitate purchase. They also note that many businesses overlook social media’s most potent capabilities for captur-
ing customer insights, monitoring the brand, conducting research, and soliciting new-product ideas.86
Customer reViews anD reCommenDations Although the strongest influence on consumer
choice remains “recommended by relative/friend,” an increasingly important decision factor is “recommendations
from consumers.” With increasing mistrust of some companies and their advertising, online customer ratings and
reviews are playing a growing role in the customer buying process.87
A Forrester research study, for example, found that close to 50 percent of consumers won’t book a hotel that
does not have online reviews. Not surprisingly, more hotels are launching their own program to post reviews
(Starwood places independent, authenticated reviews on individual hotel sites) or are using travel review sites
(Wyndham streams its five most recent reviews from TripAdvisor on its site, leading to a 30 percent increase in
bookings).88 TripAdvisor has quickly grown to be a valuable online resource for travelers.89
triPaDViSOr After being frustrated by the lack of detailed, reliable, and up-to-date information available
to help him decide where to go on a Mexican holiday, Stephen Kaufer founded TripAdvisor in 2001. The pioneer in online
consumer travel reviews, the company grew quickly and is now the world’s largest travel Web site, with more than 170 mil-
lion user reviews and opinions as of 2014. It allows users to collect and share information and make bookings for a wide
variety of hotels, vacation rentals, airlines, restaurants, and other travel-related locations or businesses through its hotel and
air booking partners. Users can post reviews, photos, and opinions and participate in discussions on a variety of different
topics. To improve the quality and accuracy of its content, TripAdvisor uses both manual review and advanced computer
algorithms, including a verification and fraud detection system that considers the IP and e-mail address of reviewers (as well
as other review attributes) and monitors suspicious patterns of postings as well as inappropriate language. About 30 hotels
have been blacklisted from the site for suspicious reviews. TripAdvisor has more than 280 million unique visitors monthly,
and hundreds of millions of people each month view its content on 500 other sites, including Best Western International,
Expedia, and Thomas Cook. In recent years, TripAdvisor has innovated to improve the personalization and social nature of its
services; in fact, it was one of Facebook’s initial launch partners for its “Instant Personalization” project, which allows users
to personalize their TripAdvisor experience by allowing them to see TripAdvisor content posted by their Facebook friends,
subject to their privacy elections. Local Picks is a Facebook app that allows users to localize TripAdvisor restaurant reviews
and auto-share user reviews on Facebook Timeline. The Friends of Friends function allows TripAdvisor users to sort reviews
by a user’s Facebook friend status. Its acquisitions of social and mobile connectivity travel sites Wanderfly and EveryTrail
have further strengthened TripAdvisor’s capabilities in that area.
When online pet food retailer PETCO started using consumer product ratings and reviews in e-mails and banner
ads, it found its click-through rate increased considerably as a result.90 Brick-and-mortar retailers such as Best Buy,
Staples, and Cabela’s are also recognizing the power of consumer reviews and have begun to display them in their
stores.91
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Despite consumer acceptance of such reviews, however, their quality and integrity can be in question.92 In one
famous example, over a period of seven years, the cofounder and CEO of Whole Foods Market posted more than
1,100 entries on Yahoo! Finance’s online bulletin board under a pseudonym, praising his company and criticizing
competitors.
Some companies offer computer-recognition technology to monitor for fraud. Bazaarvoice helps companies
such as Walmart and Best Buy manage and monitor online reviews using a process called device fingerprinting.
The company caught one firm posting hundreds of positive reviews of one of its products and negative reviews of
its competitor’s.93
Online reviews and blogging sites such as Gawker have struggled to police comments.94 To avoid attracting
anonymous or biased reviews, Angie’s List allows only paid and registered subscribers to access its Web site, which
compiles about 40,000 reviews of service companies and health care professionals from its 1.5 million North
American subscribers each month. Users rate providers on price, quality, responsiveness, punctuality, and profes-
sionalism using a report card–style A-to-F scale.95
Other sites offer summaries of professional third-party reviews. Metacritic aggregates music, game, TV, and
movie reviews from leading critics—often from more than 100 publications—averaged into a single 1-to-100
score. Review sites are important in the video game industry because of the influence they wield and the prod-
uct’s high selling price—often $50 to $60. Some game companies tie bonuses for their developers to game scores
on the more popular sites. If a major new release doesn’t make the 85-plus cutoff, the publisher’s stock price may
even drop.96
Bloggers who review products or services are influential because they may have thousands of followers;
blogs are often among the top links returned in online searches for certain brands or categories. A company’s
PR department may track popular blogs via online services such as Google Alerts and Technorati. Firms also
court the favor of key bloggers via free samples and advance information. Most bloggers disclose this special
treatment.
For smaller brands with limited media budgets, online word of mouth is critical. To generate prelaunch buzz for
one of its new hot cereals, organic food maker Amy’s Kitchen shipped out samples before its release to several of
the 50 or so vegan, gluten-free, or vegetarian food bloggers the company tracks. When favorable reviews appeared
on these blogs, the company was besieged by e-mails asking where to buy the cereal.97
As it turns out, sometimes even negative reviews can be surprisingly helpful. For one thing, although they can
hurt a well-known brand, they can create awareness about an unknown or overlooked one. They can also provide
valued information.
A Forrester study of 10,000 consumers of Amazon.com’s electronics and home and garden products found that
50 percent found negative reviews helpful. Most purchased the products regardless of negative comments because
they felt these merely reflected personal tastes and opinions different from their own. When consumers can better
learn the advantages and disadvantages of products through negative reviews, fewer product returns may result,
saving retailers and producers money.98
Online retailers often add their own recommendations to consumer selections or purchases: “If you like that
black handbag, you’ll love this red top.” One source estimated that recommendation systems contribute 10 percent
to 30 percent of an online retailer’s sales. Specialized software tools help facilitate customer “discovery” or un-
planned purchases.
At the same time, online companies need to make sure their attempts to create relationships with customers
don’t backfire, as when customers are bombarded by computer-generated recommendations that consistently miss
the mark. Buy a few baby gifts on Amazon.com, and your personalized recommendations suddenly don’t look so
personal! E-tailers need to recognize the limitations of online personalization while searching for technology and
processes that really work.
Customer Complaints Some companies think they’re getting a sense of customer satisfaction by
tallying complaints, but studies show that while customers are dissatisfied with their purchases about 25 percent
of the time, only about 5 percent complain. The other 95 percent either feel complaining is not worth the effort or
don’t know how or to whom to complain. They just stop buying.99
Of the customers who register a complaint, 54 percent to 70 percent will do business with the organization
again if their complaint is resolved. The figure goes up to a staggering 95 percent if the customer feels the com-
plaint was resolved quickly. Customers whose complaints are satisfactorily resolved tell an average of five people
about the good treatment they received.100 The average dissatisfied customer, however, gripes to 11 people. If each
of these tells still other people, the number exposed to bad word of mouth may grow exponentially.
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No matter how perfectly designed and implemented a marketing program is, mistakes will happen. The best
thing a company can do is make it easy for customers to complain. Suggestion forms, toll-free numbers, Web sites,
and e-mail addresses allow for quick, two-way communication. The 3M Company claims that more than two-
thirds of its product-improvement ideas come from listening to customer complaints.
Given that many customers may choose not to complain, companies should proactively monitor social media
and other places where customer complaints and feedback may be aired. Jet Blue’s 27-member customer service
team is charged with monitoring the airline’s Twitter account and Facebook page, among other responsibilities.
When a customer’s complaint about a fee for bringing a folded bike on board began to circulate online, Jet Blue
quickly responded and decided it was not a service it should charge for.101
Given the potential downside of having an unhappy customer, it’s critical that marketers deal with negative
experiences properly.102 Although challenging, the following practices can help to recover customer goodwill:103
1. Set up a seven-day, 24-hour toll-free hotline (by phone, fax, or e-mail) to receive and act on complaints—
make it easy for the customer.
2. Contact the complaining customer as quickly as possible. The slower the company is to respond, the more dis-
satisfaction may grow and lead to negative word of mouth.
3. Accept responsibility for the customer’s disappointment; don’t blame the customer.
4. Use customer service people who are friendly and empathic.
5. Resolve the complaint swiftly and to the customer’s satisfaction. Some complaining customers are not looking
for compensation so much as a sign that the company cares.
Not all complaints, however, reflect actual deficiencies or problems with a company’s product or service.104 Big
companies especially are targets for opportunistic customers who attempt to capitalize on even minor transgres-
sions or generous compensation policies. Some firms fight back and even take an aggressive stance if they feel a
criticism or complaint is unjustified.
When Taco Bell began to attract negative buzz online after rumors and a consumer lawsuit alleged that its
taco mixture consisted of more filler than meat, it leaped into action with full-page newspaper ads headlined,
“Thank you for suing us.” There and in Facebook postings and a YouTube video, the company pointed out that its
taco mixture was 88 percent beef, with ingredients such as water, oats, spices, and cocoa powder added only for
flavor, texture, and moisture. To help spread the word, Taco Bell marketers bought the key words “taco,” “bell,”
and “lawsuit” so that its official responses appeared as the first link on Yahoo!, Google, and Bing searches.105
Many senior executives worry about their firms using social media and the potential negative effects of cranky
customers communicating online. Marketers, however, contend that the positives outweigh the negatives and steps
can be taken to minimize the likelihood of such damage.
One strategy for companies active in corporate social responsibility is to actively shape their public image dur-
ing quiet times and then leverage that goodwill in paid or other media during difficult times. Nike was once a
target of Internet-savvy critics who skillfully used search engine optimization to populate unflattering portraits
of the company. Now, searches for Nike yield links to sites that describe its many environmental and community
initiatives (such as shoe recycling).106
Taco Bell aggressively
defends the quality
of its products via
social media.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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174 PART 3 | ConneCTing WiTh CusTomeRs
4. Quality is the totality of features and characteristics of
a product or service that bear on its ability to satisfy
stated or implied needs. Marketers play a key role in
achieving high levels of total quality so that firms remain
solvent and profitable.
5. Marketing managers must calculate customer lifetime
values of their customer base to understand their profit
implications. They must also determine ways to increase
the value of the customer base.
6. Companies are also becoming skilled in customer
relationship management (CRM), which focuses on
developing programs to attract and retain the right
customers and meeting the individual needs of those
valued customers.
Summary
1. Customers are value maximizers. They form an expec-
tation of value and act on it. Buyers will buy from the
firm that they perceive to offer the highest customer-
delivered value, defined as the difference between total
customer benefits and total customer cost.
2. A buyer’s satisfaction is a function of the product’s per-
ceived performance and the buyer’s expectations. Rec-
ognizing that high satisfaction leads to high customer
loyalty, companies must ensure that they meet and ex-
ceed customer expectations.
3. Losing profitable customers can dramatically affect a
firm’s profits. The cost of attracting a new customer is
estimated to be five times the cost of keeping a current
customer happy. The key to retaining customers is rela-
tionship marketing.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Marketing Discussion
Using CLV
Consider customer lifetime value (CLV). Choose a busi-
ness and show how you would go about developing a quan-
titative formulation that captures the concept. How would
that business change if it fully embraced the customer eq-
uity concept and maximized CLV?
Applications
Marketing Debate
Online versus Offline Privacy
As more firms practice relationship marketing and develop
customer databases, privacy issues are emerging as an
important topic. Consumers and public interest groups are
scrutinizing—and sometimes criticizing—the privacy poli-
cies of firms and raising concerns about potential theft of
online credit card information or other potentially sensitive
or confidential financial information. Others maintain online
privacy fears are unfounded and that security issues are as
much a concern offline. They argue that the opportunity to
steal information exists virtually everywhere and that it’s up
to consumers to protect their interests.
Take a position: Privacy is a bigger issue online than
offline versus Privacy is no different online than offline.
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CReATing Long-TeRm LoyALTy ReLATionshiPs | chapter 5 175
Audi also heavily invests in motor sports. Numerous
races and world championships have been won with
its cars. Besides its motor sports activities, Audi spon-
sors major teams like Germany’s number one soccer
club FC Bayern Muenchen. Since 2002, Audi and the
Bavarians have been strategic partners. Audi is also
the sponsoring partner for other leading European soc-
cer clubs like FC Barcelona and Chelsea FC. In India,
Audi became famous overnight in 1985. India won the
world championship in cricket, the sport the country is
most passionate about, and Ravi Shastri of the Indian
team was awarded an Audi 100 for his winning per-
formance—an event that is fondly remembered in the
country even today.
The success of Audi’s marketing over the past two
decades becomes clear if you compare the company’s
sales figures to the turnover of their major competi-
tive brands, BMW and Mercedes-Benz. In 2000, Audi
sold approximately 653,000 cars, BMW 822,000, and
Mercedes-Benz 1.053 million. Based on sales figures
from 2013, BMW is leading the market with a narrow
margin of 1.66 million cars as compared to Audi’s 1.58
million and Mercedes-Benz’s 1.46 million cars. In China,
the most important automotive market in the world with
15.9 million cars sold (USA: 15.6 million) in 2013, Audi
leads the market among the German competitors with
492,000 cars sold as compared to BMW’s 360,000 and
Mercedes-Benz’s 228,000. Overall, 84 percent of Audi’s
sales are realized outside of Germany today.
What else has Audi done over the past years besides
a bold move in repositioning, and the creation of a con-
vincing advertising and sponsorship concept? Audi offers
a variety of innovative products that meet the customer’s
increasing demand for SUVs and luxury cars on the one
hand, and alternative driving systems and compact cars
on the other. Audi’s SUVs are branded in its “Q” series.
The company is rounding up its product range with a
new Q7 in 2015, a Q1 in 2016, and a Q8 in 2017. With
other Audi products like the Audi A3 e-tron, customers
can combine the advantages of hybrids with traditional-
drive systems. The company’s image of being a superior
sports car manufacturer is being enhanced with models
like the R8, a car based on Audi’s race car prototype for
the Le Mans 24-hours race. Its compact and middle-
class cars A1, A3, and A4 mark the other side of the
product portfolio. They also profit from the company’s
innovativeness through light-weight construction and
plug-in hybrid technology. According to a 2014 con-
sumer survey, Audi is considered to be Germany’s most
innovative car manufacturer.
To further involve its customers emotionally, while at
the same time acknowledging the increasing importance
of the Internet as a communication and distribution
channel, Audi has introduced digital showrooms. In
Marketing Excellence
>> Audi
The year 1899 marked the establishment of August
Horch & Cie, the first car manufacturing company
founded by August Horch. As a pioneer in automotive
engineering, Horch had previously worked with Carl
Benz, inventor of modern automobiles with combustion
engines. Horch left his company in 1909 because of dif-
ferences with its co-management and supervisory board.
He immediately set up a second car venture which he
named “Audi”—the Latin translation of his German family
name, Horch (“hark” or “listen” in English). From the very
beginning, Audi established a tradition of sports victories.
Thanks to Audi’s accomplishments in the Austrian Alpine
Runs between 1911 and 1914, August Horch succeeded
in making the brand internationally well-known within just
a few years.
In 1932, the company’s famous four-ring emblem
was created when Audi merged with the previously in-
dependent companies Horch, Dampf-Kraft-Wagen, and
Wanderer to form Auto Union. For many years, the name
Audi was not in use. A new merger in 1969, between
Auto Union and NSU Motorenwerke AG, established Audi
NSU Auto Union AG. The company was renamed Audi in
1985 by Volkswagen, the holding company of Audi since
the mid-1960s.
A new advertising slogan was created for the com-
pany in 1971 and has been used as the company’s mis-
sion statement ever since. “Vorsprung durch Technik,”
which roughly translated means “progress through tech-
nology,” remains the main catchphrase for Audi. In the
1970s and 1980s, the company was effectively putting
this to practice with innovations like the quattro four-
wheel drive, aluminum car bodies, direct-injection en-
gines, and the first hybrid vehicles.
Despite these achievements, Audi had problems
and needed to reposition itself in an increasingly com-
petitive environment. Customers in the United States
complained about a mysterious acceleration in their
cars, and the image of Audi was not sophisticated
enough for a manufacturer of premium and luxury cars.
So in a bold move, the company’s management decided
on an extreme repositioning strategy. Audi was to be
the most progressive of all premium car manufacturers.
Sportiness was picked as the second differentiating fac-
tor. With a famous commercial, the brand transformation
was put into practice in 1986. An Audi 100 quattro, a
four-wheel drive, drove up a snow-covered ski jump,
apparently all by itself. The commercial won a Gold
Lion (Lion’ d’Or) at the international advertising festival in
Cannes, and in 1997 was voted best German advertising
of all times by a professional jury.
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176 PART 3 | ConneCTing WiTh CusTomeRs
Questions
1. In your opinion, how important is it to invest in cus-
tomer loyalty for cars, a product most people buy
only every couple of years?
2. Try to estimate the lifetime value of an Audi customer.
3. What measures should Audi take to build long-term
loyalty relationships?
Sources: Frank Janssen, Heiner Müller-Elsner, “Mutiger Steilpass”, Stern, March 7, 2005;
Debasish Roy, “Audi hands over Q5 to Yuvraj Singh; with some low-scale marketing moves,”
The Economic Times, April 17, 2011; Sergio Zyman, The End of Advertising as We Know it,
(Hoboken, New Jersey: Wiley, 2003); “Facebook bleibt für uns in erster Linie eine Dialog- und
Kommunikationsplattform,” Absatzwirtschaft, December 2, 2013; “Audi will noch größere SUVs
bauen,” Automobil Produktion, October 17, 2014; Rebecca Eisert, “Carsharing: Audi testet in
Stockholm,” Wirtschaftswoche, October 13, 2014; “Audi Case Study: Post-milennium success,”
MarketLine, December, 2011; Audi, www.audi.com; BMW, www.bmwgroup.com; Daimler, www.
daimler.de; Statista, http://de.statista.com; Volkswagen, www.volkswagenag.com.
these “Audi Cities,” consumers can experience the
virtual world of Audi in 3D. London, Beijing, and Berlin
were the starting places for the concept. Moscow and
other locations will follow. An innovative idea for car-
sharing has recently been presented by Audi’s Chief of
Sales and Marketing, Luca de Meo. Stockholm serves
as a test market for a concept where up to five persons
share a car for one or two years. Through an app, par-
ticipants can make advance reservations and locate
their car.
Despite its global success, there are challenges
remaining for Audi. The average selling price of an
Audi is still lower than an average BMW or Mercedes-
Benz. New entrants in the growing market for envi-
ronmentally sustainable cars like Tesla as well as its
German key competitors will test Audi’s innovativeness
even further.
Examples of events and activities that are sponsored
by independent dealerships, such as Harley-Davidson of
Singapore, can range from short rides and major destina-
tion rides, to local charity events. H.O.G. members are
also invited to events, such as new model launches, and
riders’ appreciation nights. Dealers in each country sup-
port H.O.G. members and foster positive bonding rela-
tionships among members and other dealers.
In Singapore, for instance, a community of friends
rides Harley-Davidson motorcycles with a passion. “We
ride ’em, and we have lots of fun! And we’ve been do-
ing it since 1996 in Singapore.” “To Ride and Have Fun”
is a motto that all H.O.G. chapters around the world
follow. Riders associate riding with other owners as a
time of bonding that conveys the image of freedom and
adventure.
Membership in H.O.G. has increased. Now not only
men but women, children, and families are a part of
H.O.G.’s many and varied group outings and activities.
Harley-Davidson has developed a strong brand image
and consumers appreciate it even more by experiencing
it firsthand. The desire to be associated with the Harley-
Davidson brand is strong because it is linked to an aspi-
rational lifestyle.
There are more than 2,000 H.O.G. members in
Malaysia alone, with around 500 active riders. The
Southeast Asia Harley Owners Group (SEA HOG) orga-
nizes rallies and rides as well as charity events. In late
2013, a two-day event followed by a five-day riding tour
attracted 800 owners to celebrate the 110th anniversary
of the brand.
Marketing Excellence
>> Harley-Davidson
Harley-Davidson, a U.S. brand synonymous with beauti-
ful motorbikes, inspires many to own its customized bike
with iconic engine. Today the brand is sought after not
only in the United States but globally too. What explains
its wide global acceptance, and the strong sense of
brand loyalty among Harley-Davidson motorbike owners?
Harley-Davidson dealers, ranging from the CEO to
the sales staff, maintain personalized relationships with
customers through face-to-face and social media con-
tact. Knowing customers as individuals and conducting
ongoing research to keep up with the changing expecta-
tions and experiences helps Harley-Davidson to define its
customers’ needs better.
Current customers have told Harley-Davidson’s man-
agement to keep the identity, look, and sound of the
motorcycles because they are unique. Globally, custom-
ers accept the U.S. brand image as it stands. When
customers’ views are heard and accepted by manage-
ment, customers develop greater brand loyalty, creating
an extraordinary customer experience that is unique and
valuable. Buying a Harley allows owners to express their
individualism and freedom, connect with friends, and share
a sense of comradeship through the activities of H.O.G.,
the company-sponsored Harley Owners Group and riding
club. Owners of new Harley-Davidson motorbikes enjoy
free H.O.G. membership in the first year. If renewed, mem-
bers can enjoy various discounts and benefits.
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CReATing Long-TeRm LoyALTy ReLATionshiPs | chapter 5 177
Some H.O.G. members around the world ride in ral-
lies every Sunday, rain or shine, displaying a strong sense
of loyalty to the Harley-Davidson brand. In Hong Kong,
H.O.G. members include professionals, like doctors, law-
yers, accountants, pilots, engineers, movie stars, and
business executives. Their participation shows the strong
brand loyalty among Harley-Davidson owners and the
strong desire to be engaged in H.O.G. members’ activities.
Proactive in people development, Harley-Davidson
shares company values, philosophy, and brand experi-
ence with its staff and provides effective communication to
its independent dealers. Professional training by members
of the Harley-Davidson University in the U.S. encour-
ages consistent service at every dealership. Thus, Harley-
Davidson’s employees around the world can be confident
about providing the genuine Harley-Davidson experience.
Satisfied employees deliver outstanding services that gen-
erates sustainable customer and brand loyalty, positive
word of mouth, and ultimately higher company sales.
To remain competitive, Milwaukee-based Harley-
Davidson has started to enlarge its customer base and
successfully connect with new, younger riders by way of
social media applications, such as Facebook and Twitter.
Engaging relationships have been established with young
adults who form a large part of its global followership.
Important feedback that Harley-Davidson’s strong brand
name remains appealing to the younger audience is
encouraging.
Harley-Davidson also makes in-person connec-
tions with potential riders at music festivals by using
dynamometers to create an interactive experience called
Jump Start, which allows novice or non-riders an oppor-
tunity to feel what it’s like to ride a Harley-Davidson.
In 2008, it became the leading manufacturer of
motorcycles to sell to customers younger than 34 years
without changing the products too drastically or lowering
its prices. Harley-Davidson merely modified some design
elements for its Dark Custom series of motorcycles,
which consists largely of existing Harley-Davidson motor-
cycles but with flat black paint, much less chrome, and
toned-down styling. It portrayed its heritage message of
freedom, uniqueness, individual expression, and shared
experience as recognized by older customers.
Questions
1. What has Harley-Davidson done with its H.O.G. pro-
gram to create an extraordinary customer experience
that is unique and valuable to its members? Has the
motorcycle manufacturer been successful?
2. To enlarge its customer base, what would you rec-
ommend Harley-Davidson do to cultivate long-term
relationships with a younger audience, aged between
18−34?
Sources: Jill Z. McBride, “DMA2010–How Harley-Davidson Builds Champion Customers One Rider
at a Time,” www.colloquy.com; Shaun Smith, “Customer Experience Management Plus: Harley-
Davidson,” CustomerThink, March 4, 2008; Harley-Davidson Hong Kong; Harley-Davidson Kuala
Lumpur; Harley-Davidson Singapore; H.O.G. Singapore, www.hogsingapore.com/events.php; Eric
Decker, “Harley reaches out to the next generation,” Biz Times, July 23, 2010.
M05_KOTL2621_15_GE_C05.indd 177 04/03/15 9:03 PM
178
In This Chapter, We Will Address
the Following Questions
1. How do consumer characteristics influence buying behavior? (p. 179)
2. What major psychological processes influence consumer responses
to the marketing program? (p. 187)
3. How do consumers make purchasing decisions? (p. 194)
4. In what ways do consumers stray from a deliberative, rational decision
process? (p. 202)
Based on detailed customer insights, Domino’s
improved its products and how they were marketed.
Source: Domino’s Pizza, LLC
MyMarketingLab™
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their results using the Pearson
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M06_KOTL2621_15_GE_C06.indd 178 03/03/15 2:06 PM
179
Adopting a holistic marketing orientation requires
fully understanding customers—gaining a 360-degree view of
both their daily lives and the changes that occur during their
lifetimes so the right products are always marketed to the right
customers in the right way. This chapter explores individual
consumers’ buying dynamics; the next chapter the buying dy-
namics of business buyers.
Marketers must have a thorough understanding of how consumers think, feel, and act
and offer clear value to each and every target consumer. In an award-winning marketing campaign, Domino’s
decided how to deal with negative consumer attitudes about its pizza.1
Analyzing
Consumer Markets
6
Known more for the speed of its delivery than for the taste of its pizza, Domino’s decided to ad-
dress negative perceptions head on. A major communication program themed “Oh Yes We Did”
featured documentary-style TV ads that opened with Domino’s employees at corporate headquarters
reviewing written and videotaped focus group feedback from customers. The feedback contains bit-
ing comments, such as “Domino’s pizza crust to me is like cardboard” and “The sauce tastes like
ketchup.” Company president Patrick Doyle is shown stating that these results are unacceptable, and the ads then
show Domino’s chefs and executives in their test kitchens proclaiming that their pizza is new and improved with a
bolder, richer sauce; a more robust cheese combination; and an herb-and-garlic-flavored crust. Many critics were
stunned by the company’s admission that its number-two-ranked pizza had, in effect, been inferior for years. Oth-
ers countered by noting that the new product formulation and unconventional ads were addressing a widely held,
difficult-to-change negative belief that was dragging the brand down and required decisive action. Doyle summed up
consumer reaction: “Most really like it, some don’t. And that’s OK.” Subsequent events proved Doyle right. Backed by
additional ads and social media campaigns—and the reformulated pizza—Domino’s found itself improving its image
and gaining share in the following years. From the end of 2009, when
Domino’s announced its plans, until the end of 2011, the stock gained
233 percent, compared with 37 percent for its key rival, Papa John’s. In
recent years, sales have been further spurred by marketing innovations
such as a mobile-optimized Web site for online ordering, new audible
formats for the chain’s popular Pizza Tracker, smart-phone and table
apps for ordering, and the Pizza Hero game for the iPad.
What Influences Consumer Behavior?
Consumer behavior is the study of how individuals, groups, and organizations select, buy, use, and dispose of
goods, services, ideas, or experiences to satisfy their needs and wants.2 Marketers must fully understand both the
theory and the reality of consumer behavior. Table 6.1 provides a snapshot profile of U.S. consumers.
A consumer’s buying behavior is influenced by cultural, social, and personal factors. Of these, cultural factors
exert the broadest and deepest influence.
Cultural FaCtors
Culture, subculture, and social class are particularly important influences on consumer buying behavior. Culture
is the fundamental determinant of a person’s wants and behavior. Through family and other key institutions, a
child growing up in the United States is exposed to values such as achievement and success, activity, efficiency
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180 PART 3 | ConneCTing WiTh CusTomeRs
Table 6.1 U.S. Consumer Almanac
Expenditures
Average U.S. outlays for goods and services in 2013
$
Housing $17,148
Transportation $9,004
Food $6,602
Personal insurance and pensions $5,528
Health care $3,631
Entertainment $2,482
Apparel and services $1,604
Cash contributions $1,834
All other $3,267
Total average annual expenditures $51,100
Time use on an average workday for employed persons
ages 25–54 with children in 2013
Working and related activities 8.7 hours
Sleeping 7.7 hours
Leisure and sports 2.5 hours
Caring for others 1.3 hours
Eating and drinking 1.0 hours
Household activities 1.1 hours
Other 1.7 hours
Average time spent per person per day—Q4 2013
Hours
Watching TV in the home 5.04
Watching time-shifted TV 0.32
Video games 0.12
DVD playback 0.09
Sources: Bureau of Labor Statistics, Consumer Expenditure Survey, www.bls.gov, September 9, 2014; Bureau of Labor Statistics, American Time Use Survey, www.bls.gov,
June 18, 2014; AC Nielsen, “An Era of Growth: The Cross-Platform Report: Q4 2013,” www.nielsen.com, March 5, 2014.
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AnAlyzing ConsumeR mARkeTs | chapter 6 181
and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and
youthfulness.3 A child growing up in another country might have a different view of self, relationship to others,
and rituals.
Marketers must closely attend to cultural values in every country to understand how to best market their exist-
ing products and find opportunities for new products. Each culture consists of smaller subcultures that provide
more specific identification and socialization for their members. Subcultures include nationalities, religions, racial
groups, and geographic regions. When subcultures grow large and affluent enough, companies often design spe-
cialized marketing programs to serve them.
Virtually all human societies exhibit social stratification, most often in the form of social classes, relatively ho-
mogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values,
interests, and behavior. One classic depiction of social classes in the United States defined seven ascending levels:
(1) lower lowers, (2) upper lowers, (3) working class, (4) middle class, (5) upper middles, (6) lower uppers, and
(7) upper uppers.4 Social class members show distinct product and brand preferences in many areas.
soCIal FaCtors
In addition to cultural factors, social factors such as reference groups, family, and social roles and statuses affect
our buying behavior.
RefeRence GRoups A person’s reference groups are all the groups that have a direct (face-to-face) or
indirect influence on their attitudes or behavior. Groups having a direct influence are called membership groups.
Some of these are primary groups with whom the person interacts fairly continuously and informally, such as
family, friends, neighbors, and coworkers. People also belong to secondary groups, such as religious, professional,
and trade-union groups, which tend to be more formal and require less continuous interaction.
Reference groups influence members in at least three ways. They expose an individual to new behaviors and
lifestyles, they influence attitudes and self-concept, and they create pressures for conformity that may affect prod-
uct and brand choices. People are also influenced by groups to which they do not belong. Aspirational groups are
those a person hopes to join; dissociative groups are those whose values or behavior an individual rejects.
Where reference group influence is strong, marketers must determine how to reach and influence the group’s
opinion leaders. An opinion leader is the person who offers informal advice or information about a specific prod-
uct or product category, such as which of several brands is best or how a particular product may be used.5 Opinion
leaders are often highly confident, socially active, and frequent users of the category. Marketers try to reach them
by identifying their demographic and psychographic characteristics, identifying the media they read, and directing
messages to them.6
cliques Communication researchers propose a social-structure view of interpersonal communication.7 They
see society as consisting of cliques, small groups whose members interact frequently. Clique members are similar,
and their closeness facilitates effective communication but also insulates the clique from new ideas. The challenge
is to create more openness so cliques exchange information with others in society. This openness is helped along
by people who function as liaisons and connect two or more cliques without belonging to either and by bridges,
people who belong to one clique and are linked to a person in another.
Cultural values differ by
countries and markets.
So
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: ©
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182 PART 3 | ConneCTing WiTh CusTomeRs
Best-selling author Malcolm Gladwell claims three factors work to ignite public interest in an idea.8 According
to the first, “The Law of the Few,” three types of people help to spread an idea like an epidemic. First are Mavens,
people knowledgeable about big and small things. Second are Connectors, people who know and communicate
with a great number of other people. Third are Salesmen, who possess natural persuasive power. Any idea that
catches the interest of Mavens, Connectors, and Salesmen is likely to be broadcast far and wide. The second factor
is “Stickiness.” An idea must be expressed so that it motivates people to act. Otherwise, “The Law of the Few” will
not lead to a self-sustaining epidemic. Finally, the third factor, “The Power of Context,” controls whether those
spreading an idea are able to organize groups and communities around it.
Not everyone agrees with Gladwell’s ideas.9 One team of viral marketing experts cautions that although in-
fluencers or “alphas” start trends, they are often too introspective and socially alienated to spread them. They
advise marketers to cultivate “bees,” hyperdevoted customers who are not satisfied just knowing about the
next trend but live to spread the word.10 More firms are in fact finding ways to actively engage their passionate
brand evangelists. LEGO’s Ambassador Program targets its most enthusiastic followers for brainstorming and
feedback.11 Some firms are exploring ways to identify the most influential and potentially lucrative customers
online.12
ScOring cOnSuMerS OnLine To better profile and market to customers, firms are ex-
ploring different ways to score consumers online. E-scores go beyond personal credit reports to estimate a consumer’s buy-
ing power. They take into account factors such as occupation, salary, and home value as well as the amount and nature of
luxury and non-luxury purchases. Independent suppliers like EBureau amass the personal information and combine it with
a company’s customer database to score a customer from 0 (unprofitable) to 99 (likely to return an investment). Another
area of online scoring is influence measurement. A pioneer in the field, Klout measures the clout a person has online with its
Klout Scores. Klout Scores range from 0 to 100 and are based on analysis of 400 different factors—and 12 billion pieces of
data a day—like how influential your followers are and how many people retweet or respond to your messages. President
Obama scored a near-perfect 99; singer Justin Bieber scored an impressive 92. Companies like Chevrolet pay Klout to
identify and contact influencers for auto purchases. Those people targeted by Chevrolet are given special perks, like a three-
day test drive of a Volt, in hopes that they will talk up the car on social media.
Of course, much word-of-mouth is offline person-to-person communication—face to face or over the phone.
One of the most valuable sources of information is almost always “people I know and trust.”13 Some word-of-
mouth tactics walk a fine line between acceptable and unethical. One controversial tactic, sometimes called shill
marketing or stealth marketing, pays people to anonymously promote a product or service in public places without
disclosing their financial relationship to the sponsoring firm.
To launch its T681 mobile camera phone, Sony Ericsson hired actors dressed as tourists to approach people
at tourist locations and ask to have their photo taken. Handing over the mobile phone created an opportunity to
discuss its merits, but many found the deception distasteful.14 Shill marketing is also a problem online, where the
legitimacy of a customer or so-called expert reviewer may be hard to verify.
family The family is the most important consumer buying organization in society, and family members
constitute the most influential primary reference group.15 There are two families in the buyer’s life. The family
of orientation consists of parents and siblings. From parents a person acquires an orientation toward religion,
politics, and economics and a sense of personal ambition, self-worth, and love.16 Even if the buyer no longer
interacts very much with his or her parents, parental influence on behavior can be significant. Almost 40 percent of
families have auto insurance with the same company as the husband’s parents.
A more direct influence on everyday buying behavior is the family of procreation—namely, the person’s spouse
and children. In the United States, in a traditional husband–wife relationship, engagement in purchases has varied
widely by product category. The wife has usually acted as the family’s main purchasing agent, especially for food,
sundries, and staple clothing items. Now traditional purchasing roles are changing, and marketers would be wise to
see both men and women as possible targets.
For expensive products and services such as cars, vacations, or housing, the vast majority of husbands and wives
engage in joint decision making.17 Men and women may respond differently to marketing messages, however.
Research has shown that women value connections and relationships with family and friends and place a higher
priority on people than on companies. Men, on the other hand, relate more to competition and place a high pri-
ority on action.18 Marketers have taken direct aim at women with new products such as Quaker’s Nutrition for
Women cereals and Crest Rejuvenating Effects toothpaste.
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AnAlyzing ConsumeR mARkeTs | chapter 6 183
Another shift in buying patterns is an increase in the amount of dollars spent by and the direct and indirect
influence wielded by children and teens. Direct influence describes children’s hints, requests, and demands—
“I want to go to McDonald’s.” Indirect influence means parents know the brands, product choices, and preferences
of their children without hints or outright requests—“I think Jake and Emma would want to go to Panera.”
Research has shown that more than two-thirds of 13- to 21-year-olds make or influence family purchase de-
cisions on audio/video equipment, software, and vacation destinations.19 In total, these teens and young adults
spend more than $120 billion a year. They report that to make sure they buy the right products, they watch what
their friends say and do as much as what they see or hear in an ad or are told by a salesperson in a store.
Television can be especially powerful in reaching children, and marketers are using it to target them at younger
ages than ever before with product tie-ins for just about everything—Disney Princess character pajamas, retro G.I.
Joe toys and action figures, Dora the Explorer backpacks, and Toy Story playsets.
By the time children are about 2 years old, they can often recognize characters, logos, and specific brands. They
can distinguish between advertising and programming by about ages 6 or 7. A year or so later, they can understand
the concept of persuasive intent on the part of advertisers. By 9 or 10, they can perceive the discrepancies between
message and product.20
Roles and sTaTus We each participate in many groups—family, clubs, organizations—and these are often
an important source of information and help to define norms for behavior. We can define a person’s position in
each group in terms of role and status. A role consists of the activities a person is expected to perform. Each role
in turn connotes a status. A senior vice president of marketing may have more status than a sales manager, and
a sales manager may have more status than an office clerk. People choose products that reflect and communicate
their role and their actual or desired status in society. Marketers must be aware of the status-symbol potential of
products and brands.
Personal FaCtors
Personal characteristics that influence a buyer’s decision include age and stage in the life cycle, occupation and
economic circumstances, personality and self-concept, and lifestyle and values. Because many of these have a di-
rect impact on consumer behavior, it is important for marketers to follow them closely. See how well you do with
“Marketing Memo: The Average U.S. Consumer Quiz.”
aGe and sTaGe in The life cycle Our taste in food, clothes, furniture, and recreation is often related
to our age. Consumption is also shaped by the family life cycle and the number, age, and gender of people in the
household at any point in time. U.S. households are increasingly fragmented—the traditional family of four with
a husband, wife, and two kids makes up a much smaller percentage of total households than it once did. The 2010
census revealed that the average U.S. household size was 2.6 persons.21
In addition, psychological life-cycle stages may matter. Adults experience certain passages or transformations as
they go through life.22 Their behavior during these intervals, such as when becoming a parent, is not necessarily
fixed but changes with the times.
Marketers should also consider critical life events or transitions—marriage, childbirth, illness, relocation, di-
vorce, first job, career change, retirement, death of a spouse—as giving rise to new needs. These should alert service
providers—banks, lawyers, and marriage, employment, and bereavement counselors—to ways they can help.
Many of Disney’s
successful products for
kids involve tie-ins with
their popular TV or movie
franchises.
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Not surprisingly, the baby industry attracts many marketers given the enormous amount parents spend—it’s
estimated to be a $36 billion market annually—and its life-changing nature.23
The BaBy MarkeT Although they may not yet have reached their full earning potential, expectant
and new parents seldom hold back when spending on their loved ones, making the baby industry more recession-proof
than most. Spending tends to peak between the second trimester of pregnancy and the 12th week after birth. First-time
mothers-to-be are especially attractive targets given the fact they will be unable to use many hand-me-downs and will need
to buy the full range of new furniture, strollers, toys, and baby supplies. Recognizing the importance of reaching expectant
parents early to win their trust—industry pundits call it a “first in, first win” opportunity—marketers use a variety of media
including direct mail, inserts, space ads, e-mail marketing, and Web sites. Product samples are especially popular; kits are
often given at childbirth education classes and other places. Many hospitals have banned the traditional bedside gift bag,
though, concerned with privacy and potentially adverse effects on a vulnerable audience (for example, distributing baby for-
mula may discourage new mothers from breast-feeding). Avenues of access still exist. Partnering with a company that sells
baby bedside photos, Disney Baby hands out playful Disney Cuddly Bodysuits and solicits sign-ups for e-mail alerts from
DisneyBaby.com. Not all expenditures go directly to the baby. Going through such a fundamental life change, expectant or
new parents have a whole new set of needs that has them thinking differently about life insurance, financial services, real
estate, home improvement, and automobiles.
Listed below is a series of statements used in attitude surveys of U.S. consumers. For each statement, estimate what percent of U.S. men and women agreed
with it in 2012 and write your answer, a number between 0 percent and 100 percent, in the columns to the right. Then check your results against the correct
answers in the footnote.*
The Average U.S. Consumer Quizmarketing memo
1. M = 81%, W = 81%; 2. M = 61%, W = 49%; 3. M = 67%, W = 63%; 4. M = 64%, W = 58%; 5. M = 61%, W = 60%; 6. M = 42%, W = 30%; 7. M = 45%, W = 51%;
8. M = 47%, W = 34%; 9. M = 66%, W = 52%; 10. M = 91%, W = 93%
Percent of Consumers Agreeing
Statements % Men % Women
1. Most companies today are becoming too inhuman and impersonal when it comes to connecting
with their customers
_____ _____
2. Even if others might find it offensive, it is always OK to speak what is on your mind _____ _____
3. I appreciate the influence that other cultures are having on the American way of life _____ _____
4. One of the reasons this country is losing its leadership position in the world is because parents
don’t push their kids hard enough to succeed
_____ _____
5. The food and beverage industry should take more responsibility for helping solve the obesity
problem in the U.S.
_____ _____
6. I believe I will become rich in my lifetime _____ _____
7. I could not get by without my cell phone/smart phone (among those who have a cell phone) _____ _____
8. I’d really like to start my own business _____ _____
9. I feel that I have to take whatever I can get in this world because no one is going to give me anything _____ _____
10. Protecting my personal information and privacy is more of a concern now than it was a few years ago _____ _____
Note: Results are from a nationally representative sample of more than 4,000 respondents surveyed in 2012.
Source: The Futures Company Yankelovich MONITOR (with permission). Copyright 2012, Yankelovich, Inc.
*Answers
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occupaTion and economic ciRcumsTances Occupation
also influences consumption patterns. Marketers try to identify the occupational
groups that have above-average interest in their products and services and even
tailor products for certain occupational groups: Computer software companies,
for example, design different products for brand managers, engineers, lawyers,
and physicians.
As the recent prolonged recession clearly indicated, both product and brand
choice are greatly affected by economic circumstances like spendable income
(level, stability, and pattern over time), savings and assets (including the percent-
age that is liquid), debts, borrowing power, and attitudes toward spending and
saving. Although luxury-goods makers such as Gucci, Prada, and Burberry may
be vulnerable to an economic downturn, some luxury brands did surprisingly
well in the latest recession.24 If economic indicators point to a recession, market-
ers can take steps to redesign, reposition, and reprice their products or introduce
or increase the emphasis on discount brands so they can continue to offer value
to target customers.
peRsonaliTy and self-concepT By personality, we mean a set of
distinguishing human psychological traits that lead to relatively consistent and
enduring responses to environmental stimuli including buying behavior. We
often describe personality in terms of such traits as self-confidence, dominance,
autonomy, deference, sociability, defensiveness, and adaptability.25
Brands also have personalities, and consumers are likely to choose brands
whose personalities match their own. We define brand personality as the spe-
cific mix of human traits that we can attribute to a particular brand. Stanford’s
Jennifer Aaker researched brand personalities and identified the following
traits:26
1. Sincerity (down to earth, honest, wholesome, and cheerful)
2. Excitement (daring, spirited, imaginative, and up to date)
3. Competence (reliable, intelligent, and successful)
4. Sophistication (upper-class and charming)
5. Ruggedness (outdoorsy and tough)
Aaker analyzed some well-known brands and found that a number tended to be strong on one particular trait:
Levi’s on “ruggedness”; MTV on “excitement”; CNN on “competence”; and Campbell’s on “sincerity.” These brands
will, in theory, attract users high on the same traits. A brand personality may have several attributes: Levi’s suggests
a personality that is also youthful, rebellious, authentic, and American.
A cross-cultural study exploring the generalizability of Aaker’s scale outside the United States found three of the
five factors applied in Japan and Spain, but a “peacefulness” dimension replaced “ruggedness” in both countries,
and a “passion” dimension emerged in Spain instead of “competence.”27 Research on brand personality in Korea
revealed two culture-specific factors—“passive likeableness” and “ascendancy”—reflecting the importance of
Confucian values in Korea’s social and economic systems.28
Consumers often choose and use brands with a brand personality consistent with their actual self-concept
(how we view ourselves), though the match may instead be based on the consumer’s ideal self-concept (how we
would like to view ourselves) or even on others’ self-concept (how we think others see us).29 These effects may also
be more pronounced for publicly consumed products than for privately consumed goods.30 On the other hand,
consumers who are high “self-monitors”—that is, sensitive to the way others see them—are more likely to choose
brands whose personalities fit the consumption situation.31
Finally, multiple aspects of self (serious professional, caring family member, active fun-lover) may often be
evoked differently in different situations or around different types of people. Some marketers carefully orchestrate
brand experiences to express brand personalities. Here’s how San Francisco’s Joie de Vivre does this.32
JOie de ViVre Joie de Vivre Hotels operates a chain of boutique hotels and resorts in the San Francisco
area as well as Arizona, Illinois, and Hawaii. Each property’s unique décor, quirky amenities, and thematic style are loosely
based on popular magazines. For example, The Hotel del Sol—a converted motel bearing a yellow exterior and surrounded
by palm trees wrapped in festive lights—is described as “kind of Martha Stewart Living meets Islands magazine.” The
The baby market, targeting expectant and new parents, is
highly lucrative for marketers.
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Phoenix, represented by Rolling Stone, is, like the magazine, described as “adventurous, hip, irreverent, funky, and young at
heart.” Each one of Joie de Vivre’s more than 30 hotels is an original concept designed to reflect its location and engage the
five senses. The boutique concept enables the hotels to offer personal touches, such as vitamins in place of chocolates on
pillows.
lifesTyle and Values People from the same subculture, social class, and occupation may adopt quite
different lifestyles. A lifestyle is a person’s pattern of living in the world as expressed in activities, interests, and
opinions. It portrays the “whole person” interacting with his or her environment. Marketers search for relationships
between their products and lifestyle groups. A computer manufacturer might find that most computer buyers are
achievement-oriented and then aim the brand more clearly at the achiever lifestyle.
Lifestyles are shaped partly by whether consumers are money constrained or time constrained. Companies aim-
ing to serve the money-constrained will create lower-cost products and services. By appealing to thrifty consum-
ers, Walmart has become the largest company in the world. Its “everyday low prices” have wrung tens of billions
of dollars out of the retail supply chain, passing the larger part of savings along to shoppers in the form of rock-
bottom bargain prices.
Consumers who experience time famine are prone to multitasking, doing two or more things at the same time.
They will also pay others to perform tasks because time is more important to them than money. Companies aiming
to serve them will create products and services that offer multiple time-saving benefits. For example, multitasking
blemish balm (BB) skin creams offer an all-in-one approach to skin care—incorporating moisturizer, anti-aging
ingredients, sunscreen, and maybe even whitening.33
In some categories, notably food processing, companies targeting time-constrained consumers need to be
aware that these very same people want to believe they’re not operating within time constraints. Marketers call
those who seek both convenience and some involvement in the cooking process the “convenience involvement seg-
ment,” as Hamburger Helper discovered.34
haMBurger heLPer Launched in 1971 in response to tough economic times, the inexpensive
pasta-and-powdered-mix Hamburger Helper was designed to quickly and inexpensively stretch a pound of meat into a
family meal. With an estimated 44 percent of evening meals prepared in under 30 minutes and given strong competi-
tion from fast-food drive-through windows, restaurant deliveries, and precooked grocery store dishes, it might seem that
Hamburger Helper’s days of prosperity are numbered. Market researchers found, however, that some consumers don’t
want the fastest microwaveable solution possible—they also want to feel good about how they prepare a meal. In fact, on
average, they prefer to use at least one pot or pan and 15 minutes of time. To remain attractive to this segment, market-
ers of Hamburger Helper are always introducing new flavors and varieties such as Tuna Helper, Asian Chicken Helper, and
Whole Grain Helper to tap into evolving consumer taste trends. Not surprisingly, the latest economic downturn saw brand
sales steadily rise.
Each of Joie de
Vivre’s hotel
properties has a
personality loosely
based on a popular
magazine, as
with the Rolling
Stone-inspired
Phoenix hotel.
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Consumer decisions are also influenced by core values, the belief systems that underlie attitudes and behaviors.
Core values go much deeper than behavior or attitude and at a basic level guide people’s choices and desires over
the long term. Marketers who target consumers on the basis of their values believe that with appeals to people’s in-
ner selves, it is possible to influence their outer selves—their purchase behavior.
Key Psychological Processes
The starting point for understanding consumer behavior is the stimulus-response model shown in Figure 6.1.
Marketing and environmental stimuli enter the consumer’s consciousness, and a set of psychological processes
combine with certain consumer characteristics to result in decision processes and purchase decisions. The mar-
keter’s task is to understand what happens in the consumer’s consciousness between the arrival of the outside
marketing stimuli and the ultimate purchase decisions. Four key psychological processes—motivation, percep-
tion, learning, and memory—fundamentally influence consumer responses.
MotIvatIon
We all have many needs at any given time. Some needs are biogenic; they arise from physiological states of tension
such as hunger, thirst, or discomfort. Other needs are psychogenic; they arise from psychological states of tension
such as the need for recognition, esteem, or belonging. A need becomes a motive when it is aroused to a sufficient
level of intensity to drive us to act. Motivation has both direction—we select one goal over another—and inten-
sity—we pursue the goal with more or less vigor.
Three of the best-known theories of human motivation—those of Sigmund Freud, Abraham Maslow, and
Frederick Herzberg—carry quite different implications for consumer analysis and marketing strategy.
fReud’s TheoRy Sigmund Freud assumed the psychological forces shaping people’s behavior are largely
unconscious and that a person cannot fully understand his or her own motivations. Someone who examines
specific brands will react not only to their stated capabilities but also to other, less conscious cues such as shape,
size, weight, material, color, and brand name. A technique called laddering lets us trace a person’s motivations from
the stated instrumental ones to the more terminal ones. Then the marketer can decide at what level to develop the
message and appeal.35
Motivation researchers often collect in-depth interviews with a few dozen consumers to uncover deeper mo-
tives triggered by a product. They use various projective techniques such as word association, sentence completion,
picture interpretation, and role playing, many pioneered by Ernest Dichter, a Viennese psychologist who settled in
the United States.36
Dichter’s research led him to believe that for women, pulling a cake out of the oven was like “giving birth.”
Because having women only add water to a cake mix could seem to marginalize their role, Dichter’s research sug-
gested having them also add an egg, a symbol of fertility, a practice used to this day.37
Another motivation researcher, cultural anthropologist Clotaire Rapaille, works on breaking the “code” behind
product behavior—the unconscious meaning people give to a particular market offering. Rapaille worked with
Boeing on its 787 “Dreamliner” to identify features in the airliner’s interior that would have universal appeal. Based
Marketing
Stimuli
Products & services
Price
Distribution
Communications
Buying
Decision Process
Problem recognition
Information search
Evaluation of
alternatives
Purchase decision
Post-purchase
behavior
Purchase
Decision
Product choice
Brand choice
Dealer choice
Purchase amount
Purchase timing
Payment method
Other
Stimuli
Economic
Technological
Political
Cultural
Consumer
Psychology
Motivation
Perception
Learning
Memory
Consumer
Characteristics
Cultural
Social
Personal
| Fig. 6.1 |
Model of
Consumer
Behavior
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188 PART 3 | ConneCTing WiTh CusTomeRs
in part on his research, the Dreamliner has a spacious foyer; larger, curved luggage bins closer to the ceiling; larger,
electronically dimmed windows; and a ceiling discreetly lit by hidden LEDs.38
maslow’s TheoRy Abraham Maslow sought to explain why people are driven by particular needs at
particular times.39 His answer is that human needs are arranged in a hierarchy from most to least pressing—from
physiological needs to safety needs, social needs, esteem needs, and self-actualization needs (see Figure 6.2).
People will try to satisfy their most important need first and then move to the next. For example, a starving man
(need 1) will not take an interest in the latest happenings in the art world (need 5), nor in the way he is viewed
by others (need 3 or 4), nor even in whether he is breathing clean air (need 2), but when he has enough food and
water, the next most important need will become salient.
heRzbeRG’s TheoRy Frederick Herzberg developed a two-factor theory that distinguishes dissatisfiers
(factors that cause dissatisfaction) from satisfiers (factors that cause satisfaction).40 The absence of dissatisfiers
is not enough to motivate a purchase; satisfiers must be present. For example, a computer that does not come
with a warranty is a dissatisfier. Yet the presence of a product warranty does not act as a satisfier or motivator of a
purchase because it is not a source of intrinsic satisfaction. Ease of use is a satisfier.
Physiological Needs
(food, water, shelter)
Safety Needs
(security, protection)
Social Needs
(sense of belonging, love)
Esteem Needs
(self-esteem, recognition, status)
Self-
actualization
Needs
(self-development
and realization)
1
2
3
4
5
| Fig. 6.2 |
Maslow’s Hierarchy
of Needs
Source: A. H. Maslow, Motivation and Personality,
3rd ed. (Upper Saddle River, NJ: Prentice Hall, 1987).
Printed and electronically reproduced by permission
of Pearson Education, Inc., Upper Saddle River, NJ.
In-depth
motivational
research on
product meaning
helped Boeing
design its 787
Dreamliner.
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Herzberg’s theory has two implications. First, sellers should do their best to avoid dissatisfiers (for example,
a poor training manual or a poor service policy). Although these things will not sell a product, they might easily
unsell it. Second, the seller should identify the major satisfiers or motivators of purchase in the market and then
supply them.
PerCePtIon
A motivated person is ready to act—how is influenced by his or her perception of the situation. In marketing, per-
ceptions are more important than reality because they affect consumers’ actual behavior. Perception is the pro-
cess by which we select, organize, and interpret information inputs to create a meaningful picture of the world.41
Consumers perceive many different kinds of information through their senses, as reviewed in “Marketing Memo:
The Power of Sensory Marketing.”
Sensory marketing has been defined as “marketing that engages the consumers’ senses and affects their perception, judgment and behavior.” In other words,
sensory marketing is an application of the understanding of sensation and perception to the field of marketing. All five senses may be engaged with sensory
marketing: sight, sound, smell, taste, and feel. In a 2012 Journal of Consumer Psychology article, Aradhna Krishna offers an excellent review of the rapidly
accumulating academic research on this topic.
In doing so, she notes, “Given the gamut of explicit marketing appeals made to consumers every day, subconscious ‘triggers’ which may appeal to the
basic senses may be a more efficient way to engage consumers.” In other words, consumers’ own inferences about a product’s attributes may be more per-
suasive, at least in some cases, than explicit claims from an advertiser.
Krishna argues that sensory marketing’s effects can be manifested in two main ways. One, sensory marketing can be used subconsciously to shape consumer
perceptions of more abstract qualities of a product or service (say, different aspects of its brand personality such as its sophistication, ruggedness, warmth, quality,
and modernity). Two, sensory marketing can also be used to affect the perceptions of specific product or service attributes such as its color, taste, smell, or shape.
Marketers certainly appreciate the importance of sensory marketing. Many hotels, retailers, and other service establishments use signature scents to set a
mood and distinguish themselves. Westin’s White Tea scent was so popular it began to sell it for home use. Although NBC, Intel, and Yahoo! have trademarked
their brand jingles (or yodels), Harley-Davidson was unsuccessful trademarking its distinctive engine roar. In packaging, companies try to find shapes that are
pleasing to the touch, and in food advertising, visual and verbal depictions try to tantalize consumers’ taste buds.
Based on Krishna’s review of academic research in psychology and marketing, we next highlight some key considerations for each of the five senses.
Touch (haptics)
Touch is the first sense to develop and the last sense we lose with age. People vary in their need for touch, and Peck and Childers have developed a scale to
capture those differences. In one application, high need-for-touch (NFT) individuals were more confident and less frustrated about their product evaluations
when they could actually touch a product than when they could only see it. For low NFT individuals, touching did not matter one way or another. Written prod-
uct descriptions helped alleviate the NFT’s level of frustration, though only for more concrete product attributes (such as the weight of a cell phone).
Smell
Scent-encoded information has been shown to be more durable and last longer in memory than information encoded with other sensory cues. People can
recognize scents after very long lapses of time, and using scents as reminders can cue all kinds of autobiographical memories. Pleasant scents have also
been show to enhance evaluations of products and stores. Consumers also take more time shopping and engage in more variety seeking in the presence of
pleasant scents.
Sound (audition)
Marketing communications by their very nature are often auditory in nature. Even the sounds that make up a word can carry meanings. One study showed that
Frosh-brand ice cream sounded creamier than Frish-brand ice cream. Language too can have its own associations. In bilingual cultures where English is the
second language—such as Japan, Korea, Germany, and India—use of English in ads signals modernity, progress, sophistication, and a cosmopolitan identity.
Ambient music in a store has also been shown to influence consumer mood, time spent in a location, perception of time spent in a location, and spending.
Taste
Humans can distinguish only five pure tastes: sweet, salty, sour, bitter, and umami. Umami comes from Japanese food researchers and stands for “delicious”
or “savory” as it relates to the taste of pure protein or monosodium glutonate (MSG). Taste perceptions themselves depend on all the other senses—the way a
food looks, feels, smells, and sounds to eat. Thus many factors have been shown to affect taste perceptions, including physical attributes, brand name, product
The Power of Sensory Marketingmarketing memo
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information (ingredients, nutritional information), product packaging, and advertising. Foreign-sounding brand names can improve ratings of yogurt, and ingre-
dients that sound unpleasant (balsamic vinegar or soy) can affect consumers taste perceptions if disclosed before product consumption.
Vision
Visual effects have been studied in detail in an advertising context. Many visual perception biases or illusions exist in day-to-day consumer behavior. For
example, people judge tall thin containers to contain more volume than short fat ones, but after drinking from the containers, people actually feel they have
consumed more from short fat containers than tall thin containers, over-adjusting their expectations. Even something as simple as the way a mug is depicted in
an ad can affect product evaluations. A mug photographed with the handle on the right side was shown to elicit more mental stimulation and product purchase
intent from right-handed people than if shown with the handle on the left side.
Sources: Aradhna Krishna, Sensory Marketing: Research on the Sensuality of Products (New York: Routledge, 2010); Aradhna Krishna, “An Integrative Review of Sensory
Marketing: Engaging the Senses to Affect Perception, Judgment and Behavior,” Journal of Consumer Psychology 22 (July 2012), pp. 332–51; Joann Peck and Terry L.
Childers, “To Have and to Hold: The Influence of Haptic Information on Product Judgments,” Journal of Marketing 67 (April 2003), pp. 35–48; Joann Peck and Terry L.
Childers, “Individual Differences in Haptic Information Processing: On the Development, Validation, and Use of the ‘Need for Touch’ Scale,” Journal of Consumer Research 30
(December 2003), pp. 430–42; Joann Peck and Terry L. Childers, “Effects of Sensory Factors on Consumer Behaviors,” Frank Kardes, Curtis Haugtvedt, and Paul Herr, eds.,
Handbook of Consumer Psychology (Mahwah, NJ: Erlbaum, 2008), pp. 193–220; Aradhna Krishna, May Lwin, and Maureen Morrin, “Product Scent and Memory,” Journal
of Consumer Research 37 (June 2010), pp. 57–67; Eric Yorkston and Geeta Menon, “A Sound Idea: Phonetic Effects of Brand Names on Consumer Judgments,” Journal of
Consumer Research 31 (June 2004), pp. 43–45; Aradhna Krishna and Rohini Ahluwalia, “Language Choice in Advertising to Bilinguals: Asymmetric Effects for Multinationals
versus Local Firms,” Journal of Consumer Research 35 (December 2008), pp. 692–705; Richard F. Yalch and Eric R. Spangenberg, “The Effects of Music in a Retail Setting on
Real and Perceived Shopping Times,” Journal of Business Research 49 (August 2000), pp. 139–47; France Leclerc, Bernd H. Schmitt, and Laurette Dube, “Foreign Branding
and Its Effect on Product Perceptions and Attitudes,” Journal of Marketing Research 31 (May 1994), pp. 263–70; Priya Raghubir and Aradhna Krishna, “Vital Dimensions:
Antecedents and Consequences of Biases in Volume Perceptions,” Journal of Marketing Research 36 (August 1994), pp. 313–26; Ryan S. Elder and Aradhna Krishna, “The
‘Visual Depiction Effect’ in Advertising: Facilitating Embodied Mental Simulation through Product Orientation,” Journal of Consumer Research 38 (April 2012), pp. 988–1003.
Perception depends not only on physical stimuli but also on the stimuli’s relationship to the surrounding envi-
ronment and on conditions within each of us. One person might perceive a fast-talking salesperson as aggressive
and insincere, another as intelligent and helpful. Each will respond to the salesperson differently.
People emerge with different perceptions of the same object because of three perceptual processes: selective at-
tention, selective distortion, and selective retention.
selecTiVe aTTenTion Attention is the allocation of processing capacity to some stimulus. Voluntary
attention is something purposeful; involuntary attention is grabbed by someone or something. It’s estimated that
the average person may be exposed to more than 1,500 ads or brand communications a day. Because we cannot
possibly attend to all these, we screen most stimuli out—a process called selective attention. Selective attention
means that marketers must work hard to attract consumers’ notice. The real challenge is to explain which stimuli
people will notice. Here are some findings:
1. People are more likely to notice stimuli that relate to a current need. A person who is motivated to buy a
smart phone will notice smart phone ads and be less likely to notice non-phone-related ads.
2. People are more likely to notice stimuli they anticipate. You are more likely to notice laptops than portable
radios in a computer store because you don’t expect the store to carry portable radios.
3. People are more likely to notice stimuli whose deviations are large in relationship to the normal size of the
stimuli. You are more likely to notice an ad offering $100 off the list price of a computer than one offering $5 off.
Though we screen out much, we are influenced by unexpected stimuli, such as sudden offers in the mail, over the
Internet, or from a salesperson. Marketers may attempt to promote their offers intrusively in order to bypass selec-
tive attention filters.
selecTiVe disToRTion Even noticed stimuli don’t always come across in the way the senders intended.
Selective distortion is the tendency to interpret information in a way that fits our preconceptions. Consumers will
often distort information to be consistent with prior brand and product beliefs and expectations.
For a stark demonstration of the power of consumer brand beliefs, consider that in blind taste tests, one group
of consumers samples a product without knowing which brand it is while another group knows. Invariably, the
groups have different opinions, despite consuming exactly the same product.
When consumers report different opinions of branded and unbranded versions of identical products, it must be
the case that their brand and product beliefs, created by whatever means (past experiences, marketing activity for
the brand, or the like), have somehow changed their product perceptions. We can find examples for virtually every
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type of product. When Coors changed its label from “Banquet Beer” to “Original Draft,” consumers claimed the
taste had changed even though the formulation had not.
Selective distortion can work to the advantage of marketers with strong brands when consumers distort neutral
or ambiguous brand information to make it more positive. In other words, coffee may seem to taste better, a car
may seem to drive more smoothly, and the wait in a bank line may seem shorter, depending on the brand.
selecTiVe ReTenTion Most of us don’t remember much of the information to which we’re exposed,
but we do retain information that supports our attitudes and beliefs. Because of selective retention, we’re likely
to remember good points about a product we like and forget good points about competing products. Selective
retention again works to the advantage of strong brands. It also explains why marketers need to use repetition—to
make sure their message is not overlooked.
subliminal peRcepTion The selective perception mechanisms require consumers’ active engagement
and thought. Subliminal perception has long fascinated armchair marketers, who argue that marketers embed
covert, subliminal messages in ads or packaging. Consumers are not consciously aware of them, yet they affect
behavior. Although it’s clear that mental processes include many subtle subconscious effects,42 no evidence
supports the notion that marketers can systematically control consumers at that level, especially enough to change
strongly held or even moderately important beliefs.43
learnInG
When we act, we learn. Learning induces changes in our behavior arising from experience. Most human behavior
is learned, though much learning is incidental. Learning theorists believe learning is produced through the inter-
play of drives, stimuli, cues, responses, and reinforcement.
A drive is a strong internal stimulus impelling action. Cues are minor stimuli that determine when, where, and
how a person responds. Suppose you buy an HP laptop computer. If your experience is rewarding, your response
The size and shape of
the glass and the color
and smell of the liquid
are all cues which
may affect consumer
perceptions and
evaluations when
drinking a glass of
orange juice.
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192 PART 3 | ConneCTing WiTh CusTomeRs
to the laptop and HP will be positively reinforced. Later, when you want to buy a printer, you may assume that be-
cause it makes good laptops, HP also makes good printers. In other words, you generalize your response to similar
stimuli. A countertendency to generalization is discrimination. Discrimination means we have learned to recog-
nize differences in sets of similar stimuli and can adjust our responses accordingly.
Learning theory teaches marketers that they can build demand for a product by associating it with strong
drives, using motivating cues, and providing positive reinforcement. A new company can enter the market by ap-
pealing to the same drives competitors use and providing similar cues because buyers are more likely to transfer
loyalty to similar brands (generalization); or the company might design its brand to appeal to a different set of
drives and offer strong cue inducements to switch (discrimination).
Some researchers prefer more active, cognitive approaches when learning depends on the inferences or inter-
pretations consumers make about outcomes (Was an unfavorable consumer experience due to a bad product, or
did the consumer fail to follow instructions properly?). The hedonic bias occurs when people have a general ten-
dency to attribute success to themselves and failure to external causes. Consumers are thus more likely to blame a
product than themselves, putting pressure on marketers to carefully explicate product functions in well-designed
packaging and labels, instructive ads and Web sites, and so on.
eMotIons
Consumer response is not all cognitive and rational; much may be emotional and invoke different kinds of feel-
ings. A brand or product may make a consumer feel proud, excited, or confident. An ad may create feelings of
amusement, disgust, or wonder. Brands like Hallmark, McDonald’s, and Coca-Cola have made an emotional con-
nection with loyal customers for years.
Marketers are increasingly recognizing the power of emotional appeals—especially if these are rooted in some
functional or rational aspects of the brand. Given it was released 10 years after Toy Story 2, Disney’s Toy Story 3
used social media to tap into feelings of nostalgia in its marketing.44
To help teen girls and young women feel more comfortable talking about feminine hygiene and feminine care
products, Kimberly-Clark used four different social media networks in its “Break the Cycle” campaign for its new U by
Kotex brand. With overwhelmingly positive feedback, the campaign helped Kotex move into the top spot in terms of
share of word of mouth on feminine care for that target market.45
An emotion-filled brand story has been shown to trigger’s people desire to
pass along things they hear about brands, through either word of mouth or on-
line sharing. Firms are giving their communications a stronger human appeal to
engage consumers in their brand stories.46
Many different kinds of emotions can be linked to brands. A classic example is
Unilever’s Axe brand.47
axe A pioneer in product development—it established the male body wash
category—and in its edgy sex appeals, Unilever’s Axe personal-care brand has become
a favorite of young males all over the world. With scents employing different combina-
tions of flowers, herbs, and spices, the Axe line includes deodorant body sprays, sticks,
roll-ons, and shampoos. The brand was built on the promise of the “Axe Effect”—an
over-the-top notion that using Axe products would get women to enthusiastically and
sometimes even desperately pursue the user. For Axe, Unilever employs both traditional
and nontraditional media with a heavy dose of sexual innuendo and humor. A recent
social media–driven campaign gave a cheeky wink to environmentalism while advocating
the practice of “showerpooling.” As one ad proclaimed, “When you Showerpool, you can
save water while enjoying the company of a like-minded acquaintance, or even an attrac-
tive stranger.” Facebook promotions, YouTube videos, and other social media messages
all helped to spread the word. By cleverly serving as the “wing man” for confidence in the
“mating game” —especially for 18- to 24-year-old males—the brand has become a key
player in the multibillion-dollar male grooming market. Axe has concentrated grassroots
marketing efforts on college campuses with brand ambassadors who hand out products,
host parties, and generate buzz. A Twitter account dispenses advice and giveaways.
Axe runs edgy promotional campaigns to connect
with its young male target audience, like this
Showerpooling event hosted by spokesperson and
actress Nikki Reed.
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Emotions can take all forms. Ray-Ban glasses and sunglasses’ 75th anniversary campaign “Never Hide” showed a
variety of stand-out hipsters and stylish people to suggest wearers will feel attractive and cool. Some brands have tapped
into the hip-hop culture and music to market a brand in a modern multicultural way, as Apple did with its iPod.48
MeMorY
Cognitive psychologists distinguish between short-term memory (STM)—a temporary and limited repository
of information—and long-term memory (LTM)—a more permanent, essentially unlimited repository. All the
information and experiences we encounter as we go through life can end up in our long-term memory.
Most widely accepted views of long-term memory structure assume we form some kind of associative model.
For example, the associative network memory model views LTM as a set of nodes and links. Nodes are stored in-
formation connected by links that vary in strength. Any type of information can be stored in the memory network,
including verbal, visual, abstract, and contextual.
A spreading activation process from node to node determines how much we retrieve and what information
we can actually recall in any given situation. When a node becomes activated because we’re encoding external in-
formation (when we read or hear a word or phrase) or retrieving internal information from LTM (when we think
about some concept), other nodes are also activated if they’re associated strongly enough with that node.
In this model, we can think of consumer brand knowledge as a node in memory with a variety of linked asso-
ciations. The strength and organization of these associations will be important determinants of the information we
can recall about the brand. Brand associations consist of all brand-related thoughts, feelings, perceptions, images,
experiences, beliefs, attitudes, and so on, that become linked to the brand node.
In this context we can think of marketing as a way of making sure consumers have product and service ex-
periences that create the right brand knowledge structures and maintain them in memory. Companies such as
Procter & Gamble like to create mental maps of consumers that depict their knowledge of a particular brand in
terms of the key associations likely to be triggered in a marketing setting and their relative strength, favorability,
and uniqueness to consumers. Figure 6.3 displays a very simple mental map highlighting some brand beliefs for a
hypothetical consumer for State Farm insurance.
memoRy pRocesses Memory is a very constructive process because we don’t remember information and events
completely and accurately. Often we remember bits and pieces and fill in the rest based on whatever else we know.
Memory encoding describes how and where information gets into memory. The strength of the resulting
association depends on how much we process the information at encoding (how much we think about it, for in-
stance) and in what way.49 In general, the more attention we pay to the meaning of information during encoding,
the stronger the resulting associations in memory will be. Advertising research in a field setting suggests that high
levels of repetition for an uninvolving, unpersuasive ad, for example, are unlikely to have as much sales impact as
lower levels of repetition for an involving, persuasive ad.50
Dependable
Good reputation
Reliable
Conservative
Safe
Around a long time
Convenient
Reputable
Fast settlement
Personal service
“Good Neighbors”
Agents that are part
of my neighborhood
Red color
Good home and auto
insurance
Top-of-the-line insurance
Responsive
| Fig. 6.3 |
Hypothetical State
Farm Mental Map
Source: Courtesy of State Farm Mutual
Automobile Insurance Co.
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194 PART 3 | ConneCTing WiTh CusTomeRs
Memory retrieval is the way information gets out of memory. Three facts are important about memory
retrieval.
1. The presence of other product information in memory can produce interference effects and cause us to either
overlook or confuse new data. One marketing challenge in a category crowded with many competitors—for
example, airlines, financial services, and insurance companies—is that consumers may mix up brands.
2. The time between exposure to information and encoding has been shown generally to produce only gradual
decay. Cognitive psychologists believe memory is extremely durable, so once information becomes stored in
memory, its strength of association decays very slowly.
3. Information may be available in memory but not be accessible for recall without the proper retrieval cues or
reminders. The effectiveness of retrieval cues is one reason marketing inside a supermarket or any retail store
is so critical—the product packaging and use of in-store mini-billboard displays remind us of information al-
ready conveyed outside the store and become prime determinants of consumer decision making. Accessibility
of a brand in memory is important for another reason: People talk about a brand when it is top-of-mind.51
The Buying Decision Process: The
Five-Stage Model
The basic psychological processes we’ve reviewed play an important role in consumers’ actual buying decisions.
Table 6.2 provides a list of some key consumer behavior questions marketers should ask in terms of who, what,
when, where, how, and why.
Smart companies try to fully understand customers’ buying decision process—all the experiences in learn-
ing, choosing, using, and even disposing of a product. Marketing scholars have developed a “stage model” of the
Table 6.2 Understanding Consumer Behavior
Who buys our product or service?
Who makes the decision to buy the product or service?
Who influences the decision to buy the product or service?
How is the purchase decision made? Who assumes what role?
What does the customer buy? What needs must be satisfied? What wants are fulfilled?
Why do customers buy a particular brand? What benefits do they seek?
Where do they go or look to buy the product or service? Online and/or offline?
When do they buy? Any seasonality factors? Any time of day/week/month?
How is our product or service perceived by customers?
What are customers’ attitudes toward our product or service?
What social factors might influence the purchase decision?
Do customers’ lifestyles influence their decisions?
How do personal, demographic, or economic factors influence the purchase decision?
Source: Based in part on figure 1.7 from George Belch and Michael Belch, Advertising and Promotion: An Integrated Marketing Communications Perspective, 8th ed. (Homewood, IL: Irwin, 2009).
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process (see Figure 6.4). The consumer typically passes through five stages: problem recognition, information
search, evaluation of alternatives, purchase decision, and postpurchase behavior.
Clearly, the buying process starts long before the actual purchase and has consequences long afterward.52 Some
consumers passively shop and may decide to make a purchase from unsolicited information they encounter in
the normal course of events.53 Recognizing this fact, marketers must develop activities and programs that reach
consumers at all decision stages. Consider how Procter & Gamble launched a new CoverGirl “Smokey Eye Look”
makeup kit.54
P&g cOVergirL To create awareness at product launch, P&G sent makeup bloggers “Makeup Master”
kits with packs of mascara, eyeliner, and eye shadow along with application instructions, blogging tips, product photo-
graphs, and a CoverGirl-emblazoned director’s chair before the product was available in stores. At stores, CoverGirl created
attention and interest with live product demonstrations, co-branded print ads with Walmart, and cardboard trays displaying
product features and the product kits themselves. After they bought, purchasers were encouraged via Facebook and other
online campaigns to provide feedback and write reviews to influence others. The brand’s Facebook page featured testimo-
nies from celebrities Ellen DeGeneres and Sofia Vergara. CoverGirl is one of P&G’s most digitally supported brands, recog-
nizing the high level of consumer involvement and the need to stay up to date. P&G is also supporting CoverGirl via mobile
marketing through targeted ads and a microsite with experts’ tips and video on proper application.
Consumers don’t always pass through all five stages—they may skip or reverse some. When you buy your regu-
lar brand of toothpaste, you go directly from the need to the purchase decision, skipping information search and
evaluation. The model in Figure 6.4 provides a good frame of reference, however, because it captures the full range
of considerations that arise when a consumer faces a highly involving or new purchase. Later in the chapter, we will
consider other ways consumers make decisions that are less calculated.
ProbleM reCoGnItIon
The buying process starts when the buyer recognizes a problem or need triggered by internal or external
stimuli. With an internal stimulus, one of the person’s normal needs—hunger, thirst, sex—rises to a threshold
level and becomes a drive. A need can also be aroused by an external stimulus. A person may admire a friend’s
new car or see a television ad for a Hawaiian vacation, which inspires thoughts about the possibility of making
a purchase.
Marketers need to identify the circumstances that trigger a particular need by gathering information from a
number of consumers. They can then develop marketing strategies that spark consumer interest. Particularly for
discretionary purchases such as luxury goods, vacation packages, and entertainment options, marketers may need
to increase consumer motivation so a potential purchase gets serious consideration.
Problem
recognition
Information
search
Evaluation
of alternatives
Purchase
decision
Postpurchase
behavior
| Fig. 6.4 |
Five-Stage
Model
of the
Consumer
Buying
Process
P&G engages consumers
at every stage of the
buying process for its
Cover Girl brand.
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196 PART 3 | ConneCTing WiTh CusTomeRs
InForMatIon searCh
Surprisingly, consumers often search for only limited information. Surveys have shown that for durables, half
of all consumers look at only one store, and only 30 percent look at more than one brand of appliances. We can
distinguish between two levels of engagement in the search. The milder search state is called heightened attention.
At this level a person simply becomes more receptive to information about a product. At the next level, the person
may enter an active information search: looking for reading material, phoning friends, going online, and visiting
stores to learn about the product.
Marketers must understand what type of information consumers seek—or are at least receptive to—at different
times and places.55 Unilever, in collaboration with Kroger, the largest U.S. retail grocery chain, has learned that
meal planning goes through a three-step process: discussion of meals and what might go into them; choice of ex-
actly what will go into a particular meal, and finally purchase. Mondays turn out to be critical days for planning for
the week. Conversations at breakfast time tend to focus on health, but later in the day, at lunch, discussion centers
more on how meals could possibly be repurposed for leftovers.56
infoRmaTion souRces Major information sources to which consumers will turn fall into four groups:
• Personal. Family, friends, neighbors, acquaintances
• Commercial. Advertising, Web sites, e-mails, salespersons, dealers, packaging, displays
• Public. Mass media, social media, consumer-rating organizations
• Experiential. Handling, examining, using the product
The relative amount of information and influence of these sources vary with the product category and the
buyer’s characteristics. Generally speaking, although consumers receive the greatest amount of information about
a product from commercial—that is, marketer-dominated—sources, the most effective information often comes
from personal or experiential sources or public sources that are independent authorities.57
Each source performs a different function in influencing the buying decision. Commercial sources normally
perform an information function, whereas personal sources perform a legitimizing or evaluation function. For
example, physicians often learn of new drugs from commercial sources but turn to other doctors for evaluations.
Many consumers alternate between going online and offline (in stores) to learn about products and brands.
seaRch dynamics By gathering information, the consumer learns about competing brands and their
features. The first box in Figure 6.5 shows the total set of brands available. The individual consumer will come to
know a subset of these, the awareness set. Only some, the consideration set, will meet initial buying criteria. As the
consumer gathers more information, just a few, the choice set, will remain strong contenders. The consumer makes
a final choice from these.58
Marketers need to identify the hierarchy of attributes that guide consumer decision making in order to under-
stand different competitive forces and how these various sets get formed. This process of identifying the hierarchy
is called market partitioning. Years ago, most car buyers first decided on the manufacturer and then on one of its
car divisions (brand-dominant hierarchy). A buyer might favor General Motors cars and, within this set, Chevrolet.
Today, many buyers decide first on the nation or nations from which they want to buy a car (nation-dominant hier-
archy). Buyers may first decide they want to buy a German car, then Audi, and then the A4 model of Audi.
The hierarchy of attributes also can reveal customer segments. Buyers who first decide on price are price
dominant; those who first decide on the type of car (sports, passenger, hybrid) are type dominant; those who
Apple
Dell
Hewlett-Packard
Toshiba
Compaq
NEC
.
.
.
Apple
Dell
Hewlett-Packard
Toshiba
Compaq
Apple
Dell
Toshiba
Apple
Dell
?
Total Set Awareness Set Consideration Set DecisionChoice Set
| Fig. 6.5 |
Successive Sets
Involved in
Consumer Decision
Making
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AnAlyzing ConsumeR mARkeTs | chapter 6 197
choose the brand first are brand dominant. Type/price/brand-dominant consumers make up one segment;
quality/service/type buyers make up another. Each may have distinct demographics, psychographics, and
mediagraphics and different awareness, consideration, and choice sets.
Figure 6.5 makes it clear that a company must strategize to get its brand into the prospect’s awareness, consider-
ation, and choice sets. If a food store owner arranges yogurt first by brand (such as Dannon and Yoplait) and then
by flavor within each brand, consumers will tend to select their flavors from the same brand. However, if all the
strawberry yogurts are together, then all the vanilla, and so forth, consumers will probably choose the flavors they
want first and then choose the brand name they want for that particular flavor.
Search behavior can vary online, in part because of the manner in which product information is presented.
For example, product alternatives may be presented in order of their predicted attractiveness for the consumer.
Consumers may then choose not to search as extensively as they would otherwise.59
The company must also identify the other brands in the consumer’s choice set so that it can plan the appropriate
competitive appeals. In addition, marketers should identify the consumer’s information sources and evaluate their
relative importance. Asking consumers how they first heard about the brand, what information came later, and the
relative importance of the different sources will help the company prepare effective communications for the target
market.
evaluatIon oF alternatIves
How does the consumer process competitive brand information and make a final value judgment? No single
process is used by all consumers or by one consumer in all buying situations. There are several processes, and the
most current models see the consumer forming judgments largely on a conscious and rational basis.
Some basic concepts will help us understand consumer evaluation processes. First, the consumer is trying to
satisfy a need. Second, the consumer is looking for certain benefits from the product solution. Third, the consumer
sees each product as a bundle of attributes with varying abilities to deliver the benefits. The attributes of interest to
buyers vary by product—for example:
1. Hotels—Location, cleanliness, atmosphere, price
2. Mouthwash—Color, effectiveness, germ-killing capacity, taste/flavor, price
3. Tires—Safety, tread life, ride quality, price
Consumers will pay the most attention to attributes that deliver the sought-after benefits. We can often segment
the market for a product according to attributes and benefits important to different consumer groups.
beliefs and aTTiTudes Through experience and learning, people acquire beliefs and attitudes. These
in turn influence buying behavior. A belief is a descriptive thought that a person holds about something. Just as
important are attitudes, a person’s enduring favorable or unfavorable evaluations, emotional feelings, and action
tendencies toward some object or idea. People have attitudes toward almost everything: religion, politics, clothes,
music, or food.
Attitudes put us into a frame of mind: liking or disliking an object, moving toward or away from it. They lead
us to behave in a fairly consistent way toward similar objects. Because attitudes economize on energy and thought,
they can be very difficult to change. As a general rule, a company is well advised to fit its product into existing at-
titudes rather than try to change attitudes. If beliefs and attitudes become too negative, however, more active steps
may be necessary.
expecTancy-Value model The consumer arrives at attitudes toward various brands through an
attribute-evaluation procedure, developing a set of beliefs about where each brand stands on each attribute.60 The
expectancy-value model of attitude formation posits that consumers evaluate products and services by combining
their brand beliefs—the positives and negatives—according to importance.
Suppose Linda has narrowed her choice set to four laptops (A, B, C, and D). Assume she’s interested in four
attributes: memory capacity, graphics capability, size and weight, and price. Table 6.3 shows her beliefs about how
each brand rates on the four attributes. If one computer dominated the others on all the criteria, we could predict
that Linda would choose it. But, as is often the case, her choice set consists of brands that vary in their appeal. If
Linda wants the best memory capacity, she should buy C; if she wants the best graphics capability, she should buy
A; and so on.
If we knew the weights Linda attaches to the four attributes, we could more reliably predict her choice. Suppose
she assigned 40 percent of the importance to the laptop’s memory capacity, 30 percent to graphics capability,
20 percent to size and weight, and 10 percent to price. To find Linda’s perceived value for each laptop according to
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198 PART 3 | ConneCTing WiTh CusTomeRs
the expectancy-value model, we multiply her weights by her beliefs about each computer’s attributes. This compu-
tation leads to the following perceived values:
Laptop A = 0.4182 + 0.3192 + 0.2162 + 0.1192 = 8.0
Laptop B = 0.4172 + 0.3172 + 0.2172 + 0.1172 = 7.0
Laptop C = 0.41102 + 0.3142 + 0.2132 + 0.1122 = 6.0
Laptop D = 0.4152 + 0.3132 + 0.2182 + 0.1152 = 5.0
An expectancy-model formulation predicts that Linda will favor laptop A, which (at 8.0) has the highest per-
ceived value.61
Suppose most laptop buyers form their preferences the same way. Knowing this, the marketer of laptop B, for
example, could apply the following strategies to stimulate greater interest in brand B:
• Redesign the laptop. This technique is called real repositioning.
• Alter beliefs about the brand. Attempting to alter beliefs about the brand is called psychological
repositioning.
• Alter beliefs about competitors’ brands. This strategy, called competitive depositioning, makes sense when
buyers mistakenly believe a competitor’s brand is higher quality than it actually is.
• Alter the importance weights. The marketer could try to persuade buyers to attach more importance to the
attributes in which the brand excels.
• Call attention to neglected attributes. The marketer could draw buyers’ attention to neglected attributes,
such as styling or processing speed.
• Shift the buyer’s ideals. The marketer could try to persuade buyers to change their ideal levels for one or
more attributes.62
PurChase DeCIsIon
In the evaluation stage, the consumer forms preferences among the brands in the choice set and may also form an
intention to buy the most preferred brand. In executing a purchase intention, the consumer may make as many as
five subdecisions: brand (brand A), dealer (dealer 2), quantity (one computer), timing (weekend), and payment
method (credit card).
noncompensaToRy models of consumeR choice The expectancy-value model is a
compensatory model, in that perceived good things about a product can help to overcome perceived bad things.
But consumers often take “mental shortcuts” called heuristics or rules of thumb in the decision process.
With noncompensatory models of consumer choice, positive and negative attribute considerations don’t
necessarily net out. Evaluating attributes in isolation makes decision making easier for a consumer, but it also
increases the likelihood that she would have made a different choice if she had deliberated in greater detail. We
highlight three choice heuristics here.63
Table 6.3 A Consumer’s Brand Beliefs about Laptop Computers
Laptop Computer Attribute
Memory Capacity Graphics Capability Size and Weight Price
A 8 9 6 9
B 7 7 7 7
C 10 4 3 2
D 5 3 8 5
Note: Each attribute is rated from 0 to 10, where 10 represents the highest level on that attribute. Price, however, is indexed in a reverse manner,
with 10 representing the lowest price, because a consumer prefers a low price to a high price.
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AnAlyzing ConsumeR mARkeTs | chapter 6 199
1. Using the conjunctive heuristic, the consumer sets a minimum acceptable cutoff level for each attribute and
chooses the first alternative that meets the minimum standard for all attributes. For example, if Linda decided
all attributes had to rate at least 5, she would choose laptop B.
2. With the lexicographic heuristic, the consumer chooses the best brand on the basis of its perceived most im-
portant attribute. With this decision rule, Linda would choose laptop C.
3. Using the elimination-by-aspects heuristic, the consumer compares brands on an attribute selected
probabilistically—where the probability of choosing an attribute is positively related to its importance—and
eliminates brands that do not meet minimum acceptable cutoffs.
Our brand or product knowledge, the number and similarity of brand choices and time pressures present, and the so-
cial context (such as the need for justification to a peer or boss) all may affect whether and how we use choice heuristics.
Consumers don’t necessarily use only one type of choice rule. For example, they might use a noncompensatory
decision rule such as the conjunctive heuristic to reduce the number of brand choices to a more manageable num-
ber and then evaluate the remaining brands.
One reason for the runaway success of the Intel Inside campaign in the 1990s was that it made the brand the
first cutoff for many consumers—they would buy only a personal computer that had an Intel microprocessor.
Leading personal computer makers at the time, such as IBM, Dell, and Gateway, had no choice but to support
Intel’s marketing efforts.
A number of factors will determine the manner in which consumers form evaluations and make choices.
University of Chicago professors Richard Thaler and Cass Sunstein show how marketers can influence consumer
decision making through what they call the choice architecture—the environment in which decisions are struc-
tured and buying choices are made.
According to these researchers, in the right environment, consumers can be given a “nudge” via some small
feature in the environment that attracts attention and alters behavior. They maintain Nabisco is employing a smart
choice architecture by offering 100-calorie snack packs, which have solid profit margins, while nudging consumers
to make healthier choices.64
inTeRVeninG facToRs Even if consumers form brand evaluations, two general factors can intervene
between the purchase intention and the purchase decision (see Figure 6.6). The first factor is the attitudes of others.
The influence on us of another person’s attitude depends on two things: (1) the intensity of the
other person’s negative attitude toward our preferred alternative and (2) our motivation to comply
with the other person’s wishes.65 The more intense the other person’s negativism and the closer he
or she is to us, the more we will adjust our purchase intention. The converse is also true.
Related to the attitudes of others is the role played by infomediaries’ evaluations: Consumer
Reports, which provides unbiased expert reviews of all types of products and services; J. D. Power,
which provides consumer-based ratings of cars, financial services, and travel products and ser-
vices; professional movie, book, and music reviewers; customer reviews of books and music on
such sites as Amazon.com; and the increasing number of chat rooms, bulletin boards, blogs, and
other online sites like Angie’s List where people discuss products, services, and companies.66
Consumers are undoubtedly influenced by these external evaluations, as evidenced by the run-
away success of the movie Ted.67
Ted With a modest production budget of $50 million, the R-rated comedy Ted became a summer
blockbuster in 2012, eventually grossing more than a staggering $530 million worldwide, thanks to favor-
able reviews by critics and moviegoers and a carefully constructed online marketing campaign. Edgy videos
and a Twitter feed with raunchy advice from Ted, the often-crude teddy bear star, created much online
buzz. Fans of the movie’s Facebook page approached 3 million, Twitter followers reached 400,000, and a
“Talking Ted” iPhone app was downloaded 3.5 million times. Universal Pictures’ marketing campaign also
included several different theater trailers to attract different types of audiences. Social media targeted fans
of the Family Guy television show, whose creator, Seth McFarlane, directed Ted and provided the voice of
the title character. After the first trailer went online, the studio picked up much online chatter with a song,
“Thunder Buddies,” that the other star of the movie, Mark Wahlberg, sang to Ted while in bed. To capitalize
on the buzz, the studio put out a remixed version of the song on the movie’s Web site, e-cards with lyrics on
Facebook, Thunder Buddy pajamas from CafePress.com, and a 30-second video clip of the song.
Evaluation of
alternatives
Purchase
intention
Purchase
decision
Attitudes of
others
Unanticipated
situational factors
| Fig. 6.6 |
Steps between
Evaluation of
Alternatives and a
Purchase Decision
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200 PART 3 | ConneCTing WiTh CusTomeRs
The second factor is unanticipated situational factors that may erupt to change the purchase intention. Linda might
lose her job before she purchases a laptop, some other purchase might become more urgent, or a store salesperson may
turn her off. As Chapter 15 discusses, much marketing occurs at the point of purchase: online or in the store.
Preferences and even purchase intentions are not completely reliable predictors of purchase behavior. A con-
sumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of
perceived risk:68
1. Functional risk—The product does not perform to expectations.
2. Physical risk—The product poses a threat to the physical well-being or health of the user or others.
3. Financial risk—The product is not worth the price paid.
4. Social risk—The product results in embarrassment in front of others.
5. Psychological risk—The product affects the mental well-being of the user.
6. Time risk—The failure of the product results in an opportunity cost of finding another satisfactory product.
The degree of perceived risk varies with the amount of money at stake, the amount of attribute uncertainty,
and the level of consumer self-confidence. Consumers develop routines for reducing the uncertainty and negative
consequences of risk, such as avoiding decisions, gathering information from friends, and developing preferences
for national brand names and warranties. Marketers must understand the factors that provoke a feeling of risk in
consumers and provide information and support to reduce it.
PostPurChase behavIor
After the purchase, the consumer might experience dissonance from noticing certain disquieting features or
hearing favorable things about other brands and will be alert to information that supports his or her decision.
Marketing communications should supply beliefs and evaluations that reinforce the consumer’s choice and help
him or her feel good about the brand. The marketer’s job therefore doesn’t end with the purchase. Marketers must
monitor postpurchase satisfaction, postpurchase actions, and postpurchase product uses and disposal.
posTpuRchase saTisfacTion Satisfaction is a function of the closeness between expectations and the
product’s perceived performance.69 If performance falls short of expectations, the consumer is disappointed; if it meets
expectations, the consumer is satisfied; if it exceeds expectations, the consumer is delighted. These feelings make a
difference in whether the customer buys the product again and talks favorably or unfavorably about it to others.
The larger the gap between expectations and performance, the greater the dissatisfaction. Here the consumer’s
coping style comes into play. Some consumers magnify the gap when the product isn’t perfect and are highly dis-
satisfied; others minimize it and are less dissatisfied.
posTpuRchase acTions A satisfied consumer is more likely to purchase the product again and will also
tend to say good things about the brand to others. Dissatisfied consumers may abandon or return the product.
They may seek information that confirms its high value. They may take public action by complaining to the
company, going to a lawyer, or complaining directly to other groups (such as business, private, or government
agencies) or to many others online. Private actions include deciding to stop buying the product (exit option) or
warning friends (voice option).70
Ted became a
summer blockbuster
due to strong posi-
tive word-of-mouth
and a well conceived
and executed social
media campaign.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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AnAlyzing ConsumeR mARkeTs | chapter 6 201
Chapter 5 described CRM programs designed to build long-term brand loyalty. Postpurchase communications to
buyers have been shown to result in fewer product returns and order cancellations. Computer companies, for example,
can send a letter to new owners congratulating them on having selected a fine new tablet computer. They can place ads
showing satisfied brand owners. They can solicit customer suggestions for improvements and list the location of avail-
able services. They can write intelligible instruction booklets. They can send owners e-mail updates describing new
tablet applications. In addition, they can provide good channels for speedy redress of customer grievances.
posTpuRchase uses and disposal Marketers should also monitor how buyers use and dispose of
the product (Figure 6.7). A key driver of sales frequency is product consumption rate—the more quickly buyers
consume a product, the sooner they may be back in the market to repurchase it.
Consumers may fail to replace some products soon enough because they overestimate product life.71 One strat-
egy to speed replacement is to tie the act of replacing the product to a certain holiday, event, or time of year (such
as promoting changing the batteries in smoke detectors when Daylight Savings ends).
Another strategy is to provide consumers with better information about either (1) the time they first used the
product or need to replace it or (2) its current level of performance. Batteries have built-in gauges that show how
much power they have left; razors have color in their lubricating strips to indicate when blades may be worn; and
so on. Perhaps the simplest way to increase usage is to learn when actual usage is lower than recommended and
persuade customers that more regular usage has benefits, overcoming potential hurdles.
If consumers throw the product away, the marketer needs to know how they dispose of it, especially if—like bat-
teries, beverage containers, electronic equipment, and disposable diapers—it can damage the environment. There
also may be product opportunities in disposed products: Air Salvage International is the largest plane dismantler
in Europe and a major player in the booming secondhand market for aircraft parts, which totaled $2.5 billion from
2009 to 2011; vintage clothing shops, such as Savers, resell 2.5 billion pounds of used clothing annually; Diamond
Safety buys finely ground used tires and then makes and sells playground covers and athletic fields.72
Product
Get rid of it
temporarily
Get rid of it
permanently
Keep it
Rent it
To be
(re)sold
To be
used
Direct to
consumer
Through
middleman
To
middleman
Trade it
Give it
away
Sell it
Throw it
away
Lend it
Use it to serve
original purpose
Convert it to serve
a new purpose
Store it
| Fig. 6.7 |
How Customers
Use or Dispose of
Products
Source: Jacob Jacoby, et al., “What about
Disposition?,” Journal of Marketing (July 1977),
p. 23. Reprinted with permission from the Journal
of Marketing, published by the American Marketing
Association.
Air Salvage International
is a market leader in
the booming business
of selling used aircraft
parts.
So
ur
ce
: ©
J
im
W
es
t
/ A
la
m
y
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202 PART 3 | ConneCTing WiTh CusTomeRs
MoDeratInG eFFeCts on ConsuMer DeCIsIon MakInG
The path by which a consumer moves through the decision-making stages depends on several factors, including
the level of involvement and extent of variety seeking.
low-inVolVemenT consumeR decision makinG The expectancy-value model assumes a high
level of consumer involvement, or engagement and active processing the consumer undertakes in responding to a
marketing stimulus.
Richard Petty and John Cacioppo’s elaboration likelihood model, an influential model of attitude formation and
change, describes how consumers make evaluations in both low- and high-involvement circumstances.73 There are
two means of persuasion in their model: the central route, in which attitude formation or change stimulates much
thought and is based on the consumer’s diligent, rational consideration of the most important product informa-
tion; and the peripheral route, in which attitude formation or change provokes much less thought and results from
the consumer’s association of a brand with either positive or negative peripheral cues. Peripheral cues for consum-
ers include a celebrity endorsement, a credible source, or any object that generates positive feelings.
Consumers follow the central route only if they possess sufficient motivation, ability, and opportunity. In other
words, they must want to evaluate a brand in detail, have the necessary brand and product or service knowledge in
memory, and have sufficient time and the proper setting. If any of those factors is lacking, consumers tend to fol-
low the peripheral route and consider less central, more extrinsic factors in their decisions.
We buy many products under conditions of low involvement and without significant brand differences.
Consider salt. If consumers keep reaching for the same brand in this category, it may be out of habit, not strong
brand loyalty. Evidence suggests we have low involvement with most low-cost, frequently purchased products.
Marketers use four techniques to try to convert a low-involvement product into one of higher involvement. First,
they can link the product to an engaging issue, as when Crest linked its toothpaste to cavity prevention. Second,
they can link the product to a personal situation—for example, fruit juice makers began to include vitamins such as
calcium to fortify their drinks. Third, they might design advertising to trigger strong emotions related to personal
values or ego defense, as when cereal makers began to advertise to adults the heart-healthy nature of cereals and the
importance of living a long time to enjoy family life. Fourth, they might add an important feature—for example,
when GE lightbulbs introduced “Soft White” versions. These strategies at best raise consumer involvement from a
low to a moderate level; they do not necessarily propel the consumer into highly involved buying behavior.
If consumers will have low involvement with a purchase decision regardless of what the marketer can do, they
are likely to follow the peripheral route. Marketers must give consumers one or more positive cues to justify their
brand choice, such as frequent ad repetition, visible sponsorships, and vigorous PR to enhance brand familiarity.
Other peripheral cues that can tip the balance in favor of the brand include a beloved celebrity endorser, attractive
packaging, and an appealing promotion.
VaRieTy-seekinG buyinG behaVioR Some buying situations are characterized by low involvement
but significant brand differences. Here consumers often do a lot of brand switching. Think about cookies. The
consumer has some beliefs about cookies, chooses a brand without much evaluation, and evaluates the product
during consumption. Next time, the consumer may reach for another brand out of a desire for a different taste.
Brand switching occurs for the sake of variety rather than from dissatisfaction.
The market leader and the minor brands in this product category have different marketing strategies. The mar-
ket leader will try to encourage habitual buying behavior by dominating the shelf space with a variety of related
product versions, avoiding out-of-stock conditions, and sponsoring frequent reminder advertising. Challenger
firms will encourage variety seeking by offering lower prices, deals, coupons, free samples, and advertising that
tries to break the consumer’s purchase and consumption cycle and presents reasons for trying something new.
Behavioral Decision Theory
and Behavioral Economics
As you might guess from low-involvement decision making and variety seeking, consumers don’t always process
information or make decisions in a deliberate, rational manner. One of the most active academic research areas
in marketing over the past three decades has been behavioral decision theory (BDT). Behavioral decision theorists
have identified many situations in which consumers make seemingly irrational choices. Table 6.4 summarizes
some provocative findings from this research.74
What all these and other studies reinforce is that consumer behavior is very constructive and the context of
decisions really matters. Understanding how these effects show up in the marketplace can be crucial for marketers.
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AnAlyzing ConsumeR mARkeTs | chapter 6 203
The work of these and other academics has also challenged predictions from economic theory and assumptions
about rationality, leading to the emergence of the field of behavioral economics.75 Here we review some of the is-
sues in three broad areas: decision heuristics, framing, and other contextual effects.
DeCIsIon heurIstICs
Above we reviewed some common heuristics that occur with non-compensatory decision making. Other heu-
ristics similarly come into play in everyday decision making when consumers forecast the likelihood of future
outcomes or events.76
1. The availability heuristic—Consumers base their predictions on the quickness and ease with which a par-
ticular example of an outcome comes to mind. If an example comes to mind too easily, consumers might over-
estimate the likelihood of its happening. For example, a recent product failure may lead consumers to inflate
the likelihood of a future product failure and make them more inclined to purchase a product warranty.
2. The representativeness heuristic—Consumers base their predictions on how representative or similar the
outcome is to other examples. One reason package appearances may be so similar for different brands in the
Table 6.4 Selected Behavioral Decision Theory Findings
• Consumers are more likely to choose an alternative (a home bread maker) after a relatively inferior option (a slightly
better but significantly more expensive home bread maker) is added to the available choice set.
• Consumers are more likely to choose an alternative that appears to be a compromise in the particular choice set
under consideration, even if it is not the best alternative on any one dimension.
• The choices consumers make influence their assessment of their own tastes and preferences.
• Getting people to focus their attention more on one of two considered alternatives tends to enhance the perceived
attractiveness and choice probability of that alternative.
• The way consumers compare products that vary in price and perceived quality (by features or brand name) and the
way those products are displayed in the store (by brand or by model type) both affect their willingness to pay more
for additional features or a better-known brand.
• Consumers who think about the possibility that their purchase decisions will turn out to be wrong are more likely to
choose better-known brands.
• Consumers for whom possible feelings of regret about missing an opportunity have been made more relevant are
more likely to choose a product currently on sale than wait for a better sale or buy a higher-priced item.
• Consumers’ choices are often influenced by subtle (and theoretically inconsequential) changes in the way alterna-
tives are described.
• Consumers who make purchases for later consumption appear to make systematic errors in predicting their future
preferences.
• Consumer’s predictions of their future tastes are not accurate—they do not really know how they will feel after con-
suming the same flavor of yogurt or ice cream several times.
• Consumers often overestimate the duration of their overall emotional reactions to future events (moves, financial
windfalls, outcomes of sporting events).
• Consumers often overestimate their future consumption, especially if there is limited availability.
• In anticipating future consumption opportunities, consumers often assume they will want or need more variety than
they actually do.
• Consumers are less likely to choose alternatives with product features or promotional premiums that have little or no
value, even when these features and premiums are optional (like the opportunity to purchase a collector’s plate) and
do not reduce the actual value of the product in any way.
• Consumers are less likely to choose products selected by others for reasons they find irrelevant, even when these
other reasons do not suggest anything positive or negative about the product’s values.
• Consumers’ interpretations and evaluations of past experiences are greatly influenced by the ending and trend of events.
A positive event at the end of a service experience can color later reflections and evaluations of the experience as a whole.
• When faced with a simple but important decision, consumers can actually make things more complicated than they
should.
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204 PART 3 | ConneCTing WiTh CusTomeRs
same product category is that marketers want their products to be seen as representative of the category as a
whole.
3. The anchoring and adjustment heuristic—Consumers arrive at an initial judgment and then adjust it—
sometimes only reluctantly—based on additional information. For services marketers, a strong first impres-
sion is critical to establishing a favorable anchor so subsequent experiences will be interpreted in a more
favorable light.
Note that marketing managers also may use heuristics and be subject to biases in their own decision making.
FraMInG
Decision framing is the manner in which choices are presented to and seen by a decision maker. A $200 cell phone
may not seem that expensive in the context of a set of $400 phones but may seem very expensive if other phones
cost $50. Framing effects are pervasive and can be powerful.77
We find framing effects in comparative advertising, where a brand can put its best foot forward by compar-
ing itself to another with inferior features; in pricing where unit prices can make the product seem less expensive
(“only pennies a day”); in product information where larger units can seem more desirable (a 24-month warranty
versus a two-year warranty); and with new products, where consumers can better understand a new product’s
functions and features by seeing how it compares with existing products.78
Marketers can be very clever in framing decisions. To help promote its environmentally friendly cars,
Volkswagen Sweden incorporated a giant working piano keyboard into the steps next to the exit escalator of a
Stockholm subway station. Stair traffic rose 66 percent as a result, a fact VW cleverly captured in a YouTube video
seen more than 20 million times.79
menTal accounTinG Researchers have found that consumers use a form of framing called “mental
accounting” when they handle their money.80 Mental accounting describes the way consumers code, categorize,
and evaluate financial outcomes of choices. Formally, it is “the tendency to categorize funds or items of value even
though there is no logical basis for the categorization, e.g., individuals often segregate their savings into separate
accounts to meet different goals even though funds from any of the accounts can be applied to any of the goals.”81
Consider the following two scenarios:
1. You spend $50 to buy a ticket for a concert.82 As you arrive at the show, you realize you’ve lost your ticket. You
decide to buy a replacement.
2. You decide to buy a ticket to a concert at the door. As you arrive at the show, you realize somehow you lost $50
along the way. You decide to buy the ticket anyway.
Which one are you more likely to do? Most people choose scenario 2. Although you lost the same amount in
each case—$50—in the first case you may have mentally allocated $50 for going to a concert. Buying another ticket
would exceed your mental concert budget. In the second case, the money you lost did not belong to any account, so
you had not yet exceeded your mental concert budget.
Mental accounting has many applications to marketing.83 According to the University of Chicago’s Richard
Thaler, it is based on a set of core principles:
In a clever promotion
by VW to emphasize
its environmental
friendliness, more
people used stairs
when they were
made into a piano
keyboard coming
out of a Stockholm
subway station.
So
ur
ce
: L
i Z
ho
ng
/X
in
hu
a/
Ph
ot
os
ho
t/
N
ew
sc
om
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AnAlyzing ConsumeR mARkeTs | chapter 6 205
1. Consumers tend to segregate gains. When a seller has a product with more than one positive dimension, it’s
desirable to have the consumer evaluate each dimension separately. Listing multiple benefits of a large indus-
trial product, for example, can make the sum of the parts seem greater than the whole.
2. Consumers tend to integrate losses. Marketers have a distinct advantage in selling something if its cost can be
added to another large purchase. House buyers are more inclined to view additional expenditures favorably
given the already high price of buying a house.
3. Consumers tend to integrate smaller losses with larger gains. The “cancellation” principle might explain why
withholding taxes from monthly paychecks is less painful than making large, lump-sum tax payments—the
smaller withholdings are more likely to be overshadowed by the larger pay amount.
4. Consumers tend to segregate small gains from large losses. The “silver lining” principle might explain the
popularity of rebates on big-ticket purchases such as cars.
The principles of mental accounting are derived in part from prospect theory. Prospect theory maintains that
consumers frame their decision alternatives in terms of gains and losses according to a value function. Consumers
are generally loss-averse. They tend to overweight very low probabilities and underweight very high probabilities.
4. The typical buying process consists of the following
sequence of events: problem recognition, information
search, evaluation of alternatives, purchase decision,
and postpurchase behavior. The marketers’ job is to
understand the behavior at each stage.
5. Consumers will not necessarily go through the buying
process in an orderly fashion and make skip and reverse
stages and alternative between going online and offline.
6. The attitudes of others, unanticipated situational factors,
and perceived risk may all affect the decision to buy, as
will consumers’ levels of postpurchase product satisfac-
tion, use and disposal, and the company’s actions.
7. Consumers are constructive decision makers and sub-
ject to many contextual influences. They often exhibit
low involvement in their decisions, using many heuris-
tics as a result.
Summary
1. Consumer behavior is influenced by three factors: cul-
tural (culture, subculture, and social class), social (ref-
erence groups, family, and social roles and statuses),
and personal (age, stage in the life cycle, occupation,
economic circumstances, lifestyle, personality, and self-
concept). Research into these factors can provide clues
to reach and serve consumers more effectively.
2. Four main psychological processes that affect consum-
er behavior are motivation, perception, learning, and
memory.
3. To understand how consumers actually make buying
decisions, marketers must identify who makes and has
input into the buying decision; people can be initiators,
influencers, deciders, buyers, or users. Different mar-
keting campaigns might be targeted to each type of
person.
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Is Target Marketing Ever Bad?
As marketers increasingly tailor marketing programs to
target market segments, some critics have denounced
these efforts as exploitive. They see the preponderance of
billboards advertising cigarettes and alcohol in low-income
urban areas as taking advantage of a vulnerable market
segment. Critics can be especially harsh in evaluating mar-
keting programs that target African Americans and other mi-
nority groups, claiming they often employ stereotypes and
inappropriate depictions. Others counter that targeting and
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206 PART 3 | ConneCTing WiTh CusTomeRs
positioning is critical to marketing and that these marketing
programs are an attempt to be relevant to a certain con-
sumer group.
Take a position: Targeting minorities is exploitive ver-
sus Targeting minorities is a sound business practice.
Marketing Discussion
What Are Your Mental Accounts?
What mental accounts do you have in your mind about
purchasing products or services? Do you have any rules you
employ in spending money? Are they different from what
other people do? Do you follow Thaler’s four principles in
reacting to gains and losses?
Aladdin (1992), The Lion King (1994), Toy Story (with
Pixar, 1995), and Mulan (1998). In addition, the company
thought of creative new ways to target its core family-
oriented consumers as well as expand into new areas to
reach an older audience. It launched the Disney Channel,
Touchstone Pictures, and Touchstone Television. Disney
featured classic films during The Disney Sunday Night
Movie and sold its classic films on video at extremely low
prices, reaching a whole new generation of children. It
tapped into publishing, international theme parks, and
theatrical productions that helped reach a variety of audi-
ences around the world.
Today, Disney consists of five business segments:
Studio Entertainment, which creates films, recording la-
bels, and theatrical performances; Parks and Resorts,
which focuses on Disney’s 11 theme parks, cruise lines,
and other travel-related assets; Consumer Products,
which sells all Disney-branded products; Media Networks,
which includes Disney’s television networks such as
ESPN, ABC, and the Disney Channel; and Interactive.
Disney’s greatest challenge today is keeping a
90-year-old brand relevant and current with its core au-
dience while staying true to its heritage and core brand
values. Disney’s CEO Bob Iger explained, “As a brand
that people seek out and trust, it opens doors to new
platforms and markets, and hence to new consumers.
When you deal with a company that has a great legacy,
you deal with decisions and conflicts that arise from the
clash of heritage versus innovation versus relevance. I’m
a big believer in respect for heritage, but I’m also a big
believer in the need to innovate and the need to balance
that respect for heritage with a need to be relevant.”
Internally, to achieve quality and recognition, Disney
has focused on the Disney Difference, which stems
from one of Walt Disney’s most recognizable quotes:
“Whatever you do, do it well. Do it so well that when peo-
ple see you do it they will want to come back and see you
do it again and they will want to bring others and show
them how well you do what you do.”
Disney works hard to connect with its customers
on many levels and through every single detail. For ex-
ample, at Disney World, “cast members” or employees
are trained to be “assertively friendly” and greet visitors
by waving big Mickey Mouse hands, hand out maps
to adults and stickers to kids, and clean up the park
Marketing Excellence
>> Disney
Few companies have been able to connect with their
audience as well as Disney has. From its founding by
brothers Walt and Roy Disney in 1923, the Disney brand
has always been synonymous with trust, fun, and qual-
ity entertainment for the entire family. Walt Disney once
stated, “I am interested in entertaining people, in bringing
pleasure, particularly laughter, to others, rather than being
concerned with ‘expressing’ myself with obscure creative
impressions.”
The Walt Disney Company has grown into the world-
wide phenomenon that today includes theme parks,
feature films, television networks, theatre productions,
consumer products, and a growing online presence. In
its first two decades, however, it was a struggling cartoon
studio that introduced the world to Mickey Mouse, who
went on to become its most famous character.
Few believed in Disney’s vision at the time, but the
smashing success of cartoons with sound and of the
first full-length animated film, Snow White and the Seven
Dwarfs, in 1937 led to other animated classics through-
out the 1940s, 1950s, and 1960s, including Pinocchio,
Bambi, Cinderella, and Peter Pan, live-action films such
as Mary Poppins and The Love Bug, and television series
like Davy Crockett.
When Walt Disney died in 1966, he was considered
the best-known person in the world. He had expanded the
Disney brand into film, television, consumer products, and
Disneyland in southern California, the company’s first theme
park. After Walt’s death, Roy Disney took over as CEO and
realized his brother’s dream of opening the 24,000-acre
Walt Disney World theme park in Florida. Roy died in 1971,
and the company stumbled for several years without the
leadership of its two founding brothers. It wasn’t until the
late 1980s that the company reconnected with its audience
and restored trust and interest in the Disney brand.
It all started with the release of The Little Mermaid,
which turned an old fairy tale into a magical animated
Broadway-style movie that won two Oscars. Between
the late 1980s and 2000, Disney entered an era known
as the Disney Renaissance as it released groundbreaking
animated films such as Beauty and the Beast (1991),
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AnAlyzing ConsumeR mARkeTs | chapter 6 207
shows as well as to post news about its products and
interviews with Disney’s employees, staff, and park of-
ficials. Disney’s Web site provides insight into its movie
trailers, television clips, Broadway shows, and virtual
theme park experiences.
Disney’s marketing campaign in recent years has
focused on how it helps make unforgettable family mem-
ories. The campaign, “Let the Memories Begin,” fea-
tures real guests throughout Disney enjoying different
rides and magical experiences. Leslie Ferraro, executive
vice president of global marketing, Disney Destinations,
elaborated, “The inspiration for this effort came from our
guests. Each and every day people are making memories
at our parks, posting them online and sharing them with
friends and family.”
According to internal studies, Disney estimates that
consumers spend 13 billion hours “immersed” with the
Disney brand each year. Consumers around the world
spend 10 billion hours watching programs on the Disney
Channel, 800 million hours at Disney’s resorts and theme
parks, and 1.2 billion hours watching a Disney movie—at
home, in the theater, or on their computer. Today, Disney
is the 13th most powerful brand in the world, and its rev-
enues topped $45 billion in 2013.
Questions
1. What does Disney do best to connect with its core
consumers?
2. What are the risks and benefits of expanding the
Disney brand in new ways, such as video games or
superheroes?
Sources: “Company History,” Disney.com; “Annual Reports,” Disney.com; Richard Siklosc, “The
Iger Difference,” Fortune, April 11, 2008; Brooks Barnes, “After Mickey’s Makeover; Less Mr. Nice
Guy,” New York Times, November 4, 2009; “World’s Most Powerful Brands,” Forbes, April 2012;
Dorothy Pomerantz, “Five Lessons in Success from Disney’s $40 Million CEO,” Forbes, January
23, 2013; “Disney Launches Infinity Video Game That Costs More Than an iPad Mini,” Daily Mail,
January 16, 2013; Carmine Gallo, “Customer Service the Disney Way,” Forbes, April 14, 2011;
Hugo Martin, “Disney’s 2011 Marketing Campaign Centers on Family Memories,” LA Times,
September 23, 2010; Elena Malydhina, “Disney Parks Campaign Borrows Family Memories,”
Adweek, September 23, 2010; Disney Annual Report 2013.
so diligently that it’s difficult to find a piece of garbage
anywhere.
Every detail matters, right down to the behavior of
custodial workers who are trained by Disney’s anima-
tors to take their simple broom and bucket of water and
quietly “paint” a Goofy or Mickey Mouse in water on the
pavement. It’s a moment of magic for guests that lasts
just a minute before it evaporates in the hot sun.
Disney’s broad range of businesses allows the com-
pany to connect with its audience in multiple ways, ef-
ficiently and economically. Hannah Montana provides an
excellent example. The company took a tween-targeted
television show and moved it across several divisions to
become a significant franchise for the company, includ-
ing millions of CD sales, video games, popular consumer
products, box office movies, concerts around the world,
and ongoing live performances at international Disneyland
resorts in Hong Kong, India, and Russia.
Recently, Disney acquired three huge brands: Pixar,
Marvel, and LucasFilms. The company has started to
leverage these properties, which include the Star Wars
brand and superheroes such as Spiderman, Iron Man,
and the Hulk, across many of its businesses in order to
create sustainable character brands and new growth op-
portunities for the company.
Perhaps the most anticipated new product of 2013
was the Disney Infinity gaming platform, which crossed all
Disney boundaries. Disney Infinity allowed consumers to
play with many of the Disney characters at the same time,
interacting and working together on different adventures.
For example, Andy from Toy Story might join forces with
Captain Jack Sparrow from Pirates of the Caribbean and
several monsters from Monsters, Inc. to fight villains from
outer space.
With so many brands, characters, and businesses,
Disney uses technology to ensure that a customer’s ex-
perience is consistent across every platform. The com-
pany connects with its consumers in innovative ways
through e-mail, blogs, and its Web site. It was one of the
first companies to begin regular podcasts of its television
a retail titan in home furnishings and a global cultural phe-
nomenon, inspiring BusinessWeek to call it a “one-stop
sanctuary for coolness” and “the quintessential cult brand.”
IKEA inspires remarkable levels of interest and devo-
tion from its customers. Each year more than 650 million
visitors walk through its stores all over the world. Most
need to drive 50 miles round-trip but happily make the
effort in order to experience IKEA’s unique value proposi-
tion: leading-edge design and functional home furnish-
ings at extremely low prices.
Marketing Excellence
>> IKEA
IKEA was founded in 1943 by a 17-year-old Swede named
Ingvar Kamprad who sold pens, Christmas cards, and
seeds out of a shed on his family’s farm. The name IKEA
was derived from Kamprad’s initials (IK) and the first letters
of the Elmtaryd farm and the village of Agunnaryd where
he grew up (EA). Over the years, the company grew into
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208 PART 3 | ConneCTing WiTh CusTomeRs
Year of the Rooster, IKEA stocked 250,000 plastic place-
mats with rooster themes, which quickly sold out. When
employees realized U.S. shoppers were buying vases
as drinking glasses because they considered IKEA’s
regular glasses too small, the company developed larger
glasses for the U.S. market. After IKEA managers vis-
ited European and U.S. consumers in their homes, they
learned that Europeans generally hang their clothes,
whereas U.S. shoppers prefer to store them folded. As a
result, IKEA designed wardrobes for the U.S. market with
deeper drawers.
Showrooms in each country or region vary as well.
For example, managers learned that many U.S. con-
sumers thought IKEA sold only European-size beds.
Beds are very important to U.S. consumers, so IKEA
quickly changed its U.S. showrooms to feature king
beds and a wide range of styles. After visiting Hispanic
households in California, IKEA added more seating and
dining space to its California stores, as well as brighter
color palettes and more picture frames on the show-
room walls. In China, IKEA set up its showrooms in small
spaces to accurately reflect the small size of apartments
in that country.
As the company expands globally, it is learning that
attitudes towards its core DIY (do it yourself) delivery
and assembly business model vary. In China, for ex-
ample, consumers do not want to assemble products
themselves and will pay a significant amount for home
delivery and assembly. As a result, IKEA has added these
services, and sales in Asia have taken off. The company
plans to implement the same strategy in India, where DIY
is also less common.
IKEA is known for its quirky marketing campaigns,
which help generate excitement and awareness of its
stores and brand. It ran a campaign inviting customers
to be the “Ambassador of Kul” (Swedish for “fun”), but in
order to collect the prize, the contestants had to live in an
IKEA store for three full days before it opened, which they
happily did.
Thousands of people will line up for a chance to win
prizes and IKEA furniture. In Sweden, IKEA launched a
Facebook page for the manager of a new store. Anyone
who could tag his or her name to an IKEA product on
the profile page won that item. The promotion generated
thousands of tags.
IKEA has evolved into the largest furniture retailer in
the world, with approximately 350 stores in 43 countries
and revenues topping €27.9 billion, or $36 billion, in
2013. The majority of sales still come from Europe, but
the company has aggressive plans to expand the $11 bil-
lion brand further into Asia, India, and the United States.
IKEA’s Scandinavian-designed products are well
made and appeal to the masses. To stay relevant and
fashionable, the company replaces approximately one-
third of its product lines each year. Most have Swedish
names, such as HEKTAR lamps, BILLY bookcases, and
LACK side tables. Kamprad, who was dyslexic, believed
it was easier to remember product names rather than
codes or numbers.
Besides featuring fashionable and good-quality prod-
ucts, IKEA stands out in the industry because of its bar-
gain prices. The company’s vision is and always has been
“to create a better everyday life for the many people.” As
Kamprad said, “People have very thin wallets. We should
take care of their interests.” A high percentage of its cus-
tomers are college students and families with children.
IKEA continuously seeks out new ways to run its
businesses more efficiently and pass those cost savings
on to the customer. In fact, it reduces prices across its
products by 1 percent to 3 percent annually. How can
it do so? For starters, IKEA engages the consumer on
many levels, including having the customer do all the
shopping, shipping, and assembly.
IKEA’s floor plan is designed in a winding, one-
way format featuring different inspirational room settings,
so consumers experience the entire store. Next, they
can grab a shopping cart, pay for the items, visit the
warehouse, and pick up their purchases in flat boxes.
Consumers load the items in their car, take them home,
and completely assemble the products themselves. This
strategy makes storage and transportation easier and
cheaper for the store.
IKEA has also implemented several company-wide
strategies to keep operational costs low. The company
buys in bulk, controls the supply chain, uses lighter pack-
aging materials, and saves on electricity through solar
panels, low-wattage light bulbs, and energy from its own
wind farms in six different countries. Its stores are located
a good distance from most city centers, which helps
keep land costs down and taxes low.
When IKEA develops new products, its designers
and product developers start with a low price tag first
and then work with one of their 1,350 suppliers around
the world to develop the product within that price range.
Designs are efficient, and waste is kept to a minimum.
Most stores resemble a large box with few windows and
doors and are painted bright yellow and blue—Sweden’s
national colors.
Many of IKEA’s products are sold uniformly through-
out the world, but the company also caters to local
and regional tastes. For example, stores in China stock
specific items for each New Year. During the Chinese
M06_KOTL2621_15_GE_C06.indd 208 03/03/15 2:06 PM
AnAlyzing ConsumeR mARkeTs | chapter 6 209
Sources: Kerry Capell, “IKEA: How the Swedish Retailer Became a Global Cult Brand,”
BusinessWeek, November 14, 2005, p. 96; “Need a Home to Go with That Sofa?,” BusinessWeek,
November 14, 2005, p. 106; Ellen Ruppel Shell, “Buy to Last,” Atlantic, July/August 2009;
Jon Henley, “Do You Speak IKEA?,” Guardian, February 4, 2008; “Innovative Retailers: IKEA,”
Retailinsider.com/PCMS, March 29, 2012; Jenna Goudreau, “How IKEA Leveraged the Art of
Listening to Global Dominance,” Forbes, January 30, 2013; IKEA, www.ikea.com.
Questions
1. What are some of the things IKEA is doing well to
reach consumers in different markets? What else
could it be doing?
2. IKEA has essentially changed the way people shop for
furniture. Discuss the pros and cons of this strategy,
especially as the company plans to continue to ex-
pand in places like Asia and India.
M06_KOTL2621_15_GE_C06.indd 209 03/03/15 2:06 PM
210
In This Chapter, We Will Address
the Following Questions
1. What is organizational buying? (p. 211)
2. What buying situations do business buyers face? (p. 215)
3. Who participates in the business-to-business buying process? (p. 215)
4. How do business buyers make their decisions? (p. 220)
5. In what ways can business-to-business companies develop effective marketing
programs? (p. 226)
6. How can companies build strong loyalty relationships with business customers?
(p. 230)
7. How do institutional buyers and government agencies do their buying? (p. 233)
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com
for simulations, tutorials, and
end-of-chapter problems.
CEO John Chambers has
helped transform Cisco
to become an exemplary
customer-focused
organization.
Source: ASSOCIATED PRESS
M07_KOTL2621_15_GE_C07.indd 210 09/03/15 6:23 PM
211
Some of the world’s most valuable brands belong
to business marketers: ABB, Caterpillar, DuPont, FedEx, GE,
Hewlett-Packard, IBM, Intel, and Siemens, to name a few. Many
principles of basic marketing also apply to business market-
ers. They need to embrace holistic marketing principles, such
as building strong loyalty relationships with their customers,
just like any marketer. But they also face some unique consid-
erations in selling to other businesses. In this chapter, we will
highlight some of the crucial similarities and differences for
marketing in business markets.3
Business organizations do not only sell; they also buy vast quantities of raw materials,
manufactured components, plant and equipment, supplies, and business services. According to the Census
Bureau, there were roughly 7.4 million businesses with paid employees in 2010 in the United States alone.1 To
create and capture value, sellers such as Cisco must understand these organizations’ needs, resources, policies,
and buying procedures.2
Analyzing
Business Markets
7
At the height of the dot-com boom, Cisco Systems was briefly the most valuable company in the world,
with a valuation of $500 billion. Since those heady days, Cisco has faced a number of challenges and
obstacles to its market leadership but has taken a series of steps to try to stay ahead. The company
prides itself on staying close to its customers and sees its core competency as helping them get
through big transitions by breaking down their corporate silos. Long-time CEO John Chambers cites
compact and efficient blade servers as a good example of how Cisco helps companies form a common technological
vision, noting that Cisco’s is the only computing technology that can handle data, voice, and video. As a technology
company, Cisco is constantly reinventing itself to reflect shifts in the
marketplace, whether by tapping into trends to enable voice and video
over the Internet or by becoming a major player in cloud computing.
Acquisitions play a key role, some notable ones being the $6.9 bil-
lion purchase of set-top box maker Scientific Atlanta in 2005 and the
$5 billion purchase of video software solutions provider NDS in 2012.
Cisco knows that as many as a third of its acquitions will fail, as was the
case when it bought Pure Digitial, maker of the Flip video camera, for
$600 million in 2009. Cisco does spend $6 billion annually on research
and development, and it generates 55 percent of its revenue and 70
percent of its growth from overseas.
What is Organizational Buying?
Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making process by which
formal organizations establish the need for purchased products and services and identify, evaluate, and choose
among alternative brands and suppliers.4
The BusIness MarkeT versus The ConsuMer MarkeT
The business market consists of all the organizations that acquire goods and services used in the production
of other products or services that are sold, rented, or supplied to others. Any firm that supplies components for
products is in the business-to-business marketplace. Some of the major industries making up the business market
are aerospace; agriculture, forestry, and fisheries; chemical; computer; construction; defense; energy; mining;
manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance;
distribution; and services.
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212 PART 3 | ConneCTing WiTh CusTomeRs
More dollars and items change hands in sales to business buyers than to consumers. Consider the process of
producing and selling a simple pair of shoes.5
A broad spectrum of materials and material combinations are used today in shoe manufacturing.
Leathers, synthetics, rubber and textile materials are counted among the basic upper materials. Each ma-
terial has its own specific character and they differ not only in their appearance but also in their physical
properties, their service life and treatment needs. The choice of shoe material significantly influences the
life of the footwear, and in many cases dictates its use.
For leather shoes, hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes
to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also
buys many other goods and services to support its operations.
Given the highly competitive nature of business-to-business markets, the biggest enemy to marketers here is
commoditization.6 Commoditization eats away margins and weakens customer loyalty. It can be overcome only if
target customers are convinced that meaningful differences exist in the marketplace and that the unique benefits of
the firm’s offerings are worth the added expense. Thus, a critical step in business-to-business marketing is to create
and communicate relevant differentiation from competitors. Here is how Siemens has improved its marketing to
better compete in recent years:7
SieMenS Although mammoth in size, with over $100 billion in revenue and approximately 336,000 employees
in 190 countries, German engineering giant Siemens was still not well known in its largest market, the United States, which
draws almost $20 billion in revenue. With a goal to establish “who we are, what we are about, and what we look like,” the
company launched the “Answers” campaign in 2007 to unify its diverse units—which design and manufacture products
ranging from trains to diagnostic imaging systems to wind turbines—into one brand identity. Developed by communication
agency partner Ogilvy, the campaign was thoroughly integrated across media. Over time, ads became more emotional and
human in nature, focusing on how Siemens has solutions that impact customers, society, the environment and the economy.
The advertising touched on Siemens’ job generation, productivity and work to ensure a sustainable society. Sustainability
solutions were reflected in approximately one-third of its revenue. Due to the severe economic recession, there was a strong
“buy American” push. The “Siemens Answers” advertising program also helped Siemens reinforce its American credentials.
With a focus on the number one Siemens market—the United States—and new emerging markets like China, Siemens
began to hit its financial stride again.
Business marketers face many of the same challenges as consumer marketers, especially understanding their
customers and what they value. The well-respected Institute for the Study of Business Markets (ISBM) notes that
the three biggest hurdles for B-to-B marketing are: (1) building stronger interfaces between marketing and sales;
(2) building stronger innovation-marketing interfaces; and (3) extracting and leveraging more granular customer
and market knowledge.
Four additional imperatives cited by ISBM are: (1) demonstrating marketing’s contribution to business
performance; (2) engaging more deeply with customers and customers’ customers; (3) finding the right mix
As with many products,
shoes are manufactured
with a wide variety of
different kinds of materials
and ingredients.
So
ur
ce
: ©
e
du
19
71
/F
ot
ol
ia
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AnAlyzing Business mARkeTs | chapter 7 213
of centralized versus decentralized marketing activities; and (4) finding and grooming marketing talent and
competencies.8
Business marketers contrast sharply with consumer markets in some ways, however. They have:
• Fewer, larger buyers. The business marketer normally deals with far fewer and much larger buyers than
the consumer marketer does, particularly in such industries as aircraft engines and defense weapons. The
fortunes of Goodyear tires, Cummins engines, Delphi control systems, and other automotive part suppliers
depend in large part on getting big contracts from just a handful of major automakers.
• Close supplier–customer relationships. Because of the smaller customer base and the importance and
power of the larger customers, suppliers are frequently expected to customize their offerings to individual
business customer needs. On an annual basis, Pittsburgh-based PPG Industries purchases more than
$7 billion in materials and services from thousands of suppliers. The company presented seven Excellent
Supplier Awards for superior performance in 2011, the criteria for which included product quality,
delivery, documentation, innovation, responsiveness, continuous improvement, and participation in
the Supplier Added Value Effort ($AVE) program.With its $AVE program, PPG challenges its suppliers
of maintenance, repair, and operating (MRO) goods and services to deliver on annual value-added and
cost-savings proposals equaling at least 5 percent of their total annual sales to PPG.9 Business buyers also
often select suppliers that also buy from them. A paper manufacturer might buy chemicals for its pulp
and paper making from a chemical company that in turn buys a considerable amount of paper from the
manufacturer.
• Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow
their organizations’ purchasing policies, constraints, and requirements. Many business buying instruments—
for example, requests for quotations, proposals, and purchase contracts—are not typically found in consumer
buying. Many professional buyers belong to the Institute for Supply Management (ISM), which seeks to im-
prove the profession’s effectiveness and status. This means business marketers must provide greater technical
data about their product and its competitive advantages.
Business-to-business
powerhouse Siemens has
emphasized its American
roots and sustainability
accomplishments in its most
important U.S. market.
So
ur
ce
: ©
S
ie
m
en
s
A
G
2
01
4
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214 PART 3 | ConneCTing WiTh CusTomeRs
• Multiple buying influences. More people typically influence business buying decisions. Buying committees
that include technical experts and even senior management are common in the purchase of major goods.
Business marketers need to send well-trained sales representatives and teams to deal with these equally well-
trained buyers.
• Multiple sales calls. A study by McGraw-Hill found that it took four to four-and-a-half calls to close an aver-
age industrial sale. For capital equipment sales for large projects, it may take many attempts to fund a project,
and the sales cycle—between quoting a job and delivering the product—can even take years.10
• Derived demand. The demand for business goods is ultimately derived from the demand for consumer goods.
For this reason, the business marketer must closely monitor the buying patterns of end users. Pittsburgh-based
Consol Energy’s coal and natural gas business largely depends on orders from utilities and steel companies,
which, in turn, depend on consumer demand for electricity and for steel-based products such as automobiles,
machines, and appliances. Business buyers must also pay close attention to economic factors like the level
of production, investment, and consumer spending and the interest rate. Business marketers can do little to
stimulate total demand. They can only fight harder to increase or maintain their share of it.
• Inelastic demand. The total demand for many business goods and services is inelastic—that is, not much
affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather
falls, nor less if the price rises unless they find satisfactory substitutes. Demand is especially inelastic in the
short run because producers cannot make quick changes in production methods. Demand is also inelastic for
business goods that represent a small percentage of the item’s total cost, such as shoelaces.
• Fluctuating demand. The demand for business goods and services tends to be more volatile than the demand
for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger
percentage increase in the demand for plant and equipment. Demand for plant and equipment is more vola-
tile because it reflects the normal year-to-year replacement demand as well as the need to satisfy increased
or decreased consumer demand. Economists refer to this as the acceleration effect. Sometimes a rise of only
10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in
the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand as
replacement needs drop considerably.
• Geographically concentrated buyers. For years, more than half of U.S. business buyers have been concen-
trated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. The
geographical concentration of producers helps to reduce selling costs. At the same time, business marketers
need to monitor regional shifts of certain industries such as the automobile industry, which is no longer con-
centrated around Detroit.
• Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediar-
ies, especially items that are technically complex or expensive such as servers or aircraft.
BuYInG sITuaTIons
The business buyer faces many decisions in making a purchase. How many depends on the complexity of the
problem being solved, newness of the buying requirement, number of people involved, and time required. Three
types of buying situations are the straight rebuy, modified rebuy, and new task.11
Consol Energy’s
revenue depends
indirectly on market
demand for
electricity and steel-
based products.
So
ur
ce
: ©
A
da
m
Z
ia
ja
/S
hu
tt
er
st
oc
k
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AnAlyzing Business mARkeTs | chapter 7 215
• Straight rebuy. In a straight rebuy, the purchasing department reorders items like office supplies and bulk
chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to
maintain product and service quality and often propose automatic reordering systems to save time. “Out sup-
pliers” attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a
small order and then enlarge their purchase share over time.
• Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices, delivery re-
quirements, or other terms. This usually requires additional participants on both sides. The in-suppliers be-
come nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer
to gain some business.
• New task. A new-task purchaser buys a product or service for the first time (an office building, a new security
system). The greater the cost or risk, the larger the number of participants, and the greater their information
gathering—the longer the time to a decision.12
The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situ-
ation. Over time, new-buy situations become straight rebuys and routine purchase behavior.
New-task buying is the marketer’s greatest opportunity and challenge. The buying process passes through
several stages: awareness, interest, evaluation, trial, and adoption. Mass media can be most important during the
initial awareness stage; salespeople often have their greatest impact at the interest stage; and technical sources can
be most important during evaluation. Online selling efforts may be useful at all stages.
In the new-task situation, the buyer must determine product specifications, price limits, delivery terms and
times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. Different
participants influence each decision, and the order in which these decisions are made varies.
Because of the complicated selling required, many companies use a missionary sales force consisting of their
most effective salespeople. The brand promise and the manufacturer’s name recognition will be important in
establishing trust and persuading the customer to consider change. The marketer also tries to reach as many key
participants as possible with information and assistance.
Once a customer has been acquired, in-suppliers are continually seeking ways to add value to their market offer
to facilitate rebuys. EMC has successfully acquired a series of computer software leaders to reposition the company
to manage and protect—not just store—information, helping companies to “accelerate their journey to cloud com-
puting” in the process. Where one hardware product once made up 80 percent of its sales, the company now gets
about 60 percent of its revenue from software and services.13 Oracle has also made a number of strategic acquisi-
tions to expand its offerings.14
OracLe Business-software giant Oracle became an industry leader by offering a range of products and
services to satisfy customer needs for enterprise software. Originally known for its flagship database management
systems, Oracle spent $30 billion in recent years to buy 56 companies, including $7.4 billion for Sun Microsystems,
doubling its revenue to $24 billion and sending its stock soaring in the process. To become a one-stop shop for all
kinds of business customers, Oracle now sells everything from server computers and data storage devices to operat-
ing systems, databases, and software for running accounting, sales, and supply-chain management. At the same
time, the company has launched “Project Fusion” to unify its applications so customers can consolidate solutions to
their software needs, as reinforced by their company slogan, “Hardware and Software, Engineered to Work Together.”
Oracle’s market power has sometimes raised both criticism from customers and concerns from government regula-
tors. At the same time, its many long-time customers speak to its track record of product innovation and customer
satisfaction.
Participants in the Business
Buying Process
Who buys the trillions of dollars’ worth of goods and services needed by business organizations? Purchasing
agents are influential in straight-rebuy and modified-rebuy situations, whereas other employees are more influ-
ential in new-buy situations. Engineers are usually influential in selecting product components, and purchasing
agents dominate in selecting suppliers.15
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216 PART 3 | ConneCTing WiTh CusTomeRs
The BuYInG CenTer
Webster and Wind call the decision-making unit of a buying organization the buying center. It consists of “all
those individuals and groups who participate in the purchasing decision-making process, who share some com-
mon goals and the risks arising from the decisions.”16 The buying center includes all members of the organization
who play any of seven roles in the purchase decision process.
1. Initiators—Users or others in the organization who request that something be purchased.
2. Users—Those who will use the product or service. In many cases, the users initiate the buying proposal and
help define the product requirements.
3. Influencers—People who influence the buying decision, often by helping define specifications and providing
information for evaluating alternatives. Technical people are particularly important influencers.
4. Deciders—People who decide on product requirements or on suppliers.
5. Approvers—People who authorize the proposed actions of deciders or buyers.
6. Buyers—People who have formal authority to select the supplier and arrange the purchase terms. Buyers may
help shape product specifications, but they play their major role in selecting vendors and negotiating. In more
complex purchases, buyers might include high-level managers.
7. Gatekeepers—People who have the power to prevent sellers or information from reaching members of the
buying center. For example, purchasing agents, receptionists, and telephone operators may prevent salesper-
sons from contacting users or deciders.
Several people can occupy a given role such as user or influencer, and one person may play multiple roles.17 A
purchasing manager, for example, is often buyer, influencer, and gatekeeper simultaneously. She can decide which
sales reps can call on other people in the organization, what budget and other constraints to place on the purchase,
and which firm will actually get the business, even though others (deciders) might select two or more potential
vendors that can meet the company’s requirements.
A buying center typically has five or six members and sometimes dozens. Some may be outside the orga-
nization, such as government officials, consultants, technical advisors, and other members of the marketing
channel.18
BuYInG CenTer InfluenCes
Buying centers usually include participants with differing interests, authority, status, susceptibility to persuasion,
and sometimes very different decision criteria. Engineers may want to maximize the performance of the product;
production people may want ease of use and reliability of supply; financial staff focus on the economics of the
purchase; purchasing may be concerned with operating and replacement costs; union officials may emphasize
safety issues.
Business buyers also have personal motivations, perceptions, and preferences influenced by their age, income,
education, job position, personality, attitudes toward risk, and culture. Some are “keep-it-simple” buyers, or “own-
expert,” “want-the-best,” or “want-everything-done” buyers. Some younger, highly educated buyers are technically
proficient and conduct rigorous analyses of competitive proposals before choosing a supplier. Other buyers are
“toughies” from the old school who pit competing sellers against one another, and in some companies, the pur-
chasing powers-that-be are legendary.
Webster cautions that ultimately individuals, not organizations, make purchasing decisions.19 Individuals are
motivated by their own needs and perceptions in attempting to maximize the organizational rewards they earn
(pay, advancement, recognition, and feelings of achievement). But organizational needs legitimate the buying pro-
cess and its outcomes.
In other words, according to Webster, businesspeople are not buying “products.” They are buying solutions to
two problems: the organization’s economic and strategic problem and their own personal need for achievement
and reward. In this sense, industrial buying decisions are both “rational” and “emotional”—they serve both the
organization’s and the individual’s needs.20
Research by one industrial component manufacturer found that although top executives at its small- and
medium-size customers were comfortable buying from other companies, they appeared to harbor subconscious
insecurities about buying the manufacturer’s product. Constant changes in technology had left them concerned
about internal effects within the company. Recognizing this unease, the manufacturer retooled its selling ap-
proach to emphasize more emotional appeals and the way its product line actually enabled the customer’s
employees to improve their performance, relieving management of the complications and stress of using its
components.21
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AnAlyzing Business mARkeTs | chapter 7 217
TarGeTInG fIrMs and BuYInG CenTers
Successful business-to-business marketing requires that business marketers know which types of companies to fo-
cus on in their selling efforts, as well as whom to concentrate on within the buying centers in those organizations.
TargeTing Firms As we will discuss in detail in Chapter 9, business marketers may divide the marketplace
in many different ways to choose the types of firms to which they will sell. Finding the sectors with the greatest
growth prospects, most profitable customers, and most promising opportunities for the firm is crucial, as Timken
found out.22
TiMken When Timken, which manufactures bearings and rotaries for companies in a variety of industries,
saw its net income and shareholder returns dip compared with competitors’, the firm became concerned that it was not
investing in the most profitable areas. To identify businesses that operated in financially attractive sectors and would be
most likely to value its offerings, it conducted an extensive market study and discovered that some customers generated a
lot of business but had little profit potential, while for others the opposite was true. As a result, Timken shifted its attention
away from the auto industry and into the heavy processing, aerospace, and defense industries. It also addressed custom-
ers that were financially unattractive or minimally attractive. A tractor manufacturer complained that Timken’s bearings
prices were too high for its medium-sized tractors. Timken suggested the firm look elsewhere but continued to sell bear-
ings at the higher price for the manufacturer’s large tractors to the satisfaction of both sides. By adjusting its products,
prices, and communications to appeal to the right types of firms, Timken experienced record revenue despite a recession.
It’s also true, however, that as a slowing economy has put a stranglehold on large corporations’ purchasing
departments, small and midsize business markets are offering new opportunities for suppliers. See “Marketing
Insight: Big Sales to Small Businesses” for more on this important B-to-B market.
TargeTing wiThin The Business CenTer Once it has identified the type of businesses on which
to focus marketing efforts, the firm must then decide how best to sell to them. Who are the major decision
participants? What decisions do they influence, and how deeply? What evaluation criteria do they use? Consider
the following example:
A company sells nonwoven disposable surgical gowns to hospitals. The hospital staff who participate in the
buying decision include the vice president of purchasing, the operating-room administrator, and the surgeons.
The vice president of purchasing analyzes whether the hospital should buy disposable or reusable gowns. If
disposable, the operating-room administrator compares various competitors’ products on absorbency, anti-
septic quality, design, and cost and normally buys the brand that meets functional requirements at the lowest
cost. Surgeons influence the decision retroactively by reporting their satisfaction with the chosen brand.
The business marketer is not likely to know exactly what kind of group dynamics take place during the decision
process, though whatever information he or she can obtain about personalities and interpersonal factors is useful.
Timken carefully
segments business
markets and adjusts
the marketing
programs for its
bearings and rotaries
to maximally satisfy
target segments.
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Big Sales to Small Businesses
In its March 2012 guidelines, the Small Business Administration (SBA)
defined small businesses as those with fewer than 500 employees for
most mining and manufacturing industries and $7 million in average
annual receipts for most nonmanufacturing industries. Some exceptions
exist in specialized industries, such as grocery and department stores
and motor vehicle and electronic appliance dealers, and the guide-
lines are constantly being updated to reflect changes in the business
environment.
The SBA counted approximately 28 million small businesses in the
United States in 2013. These provide almost half of all private-sector
employment and have generated almost two-thirds of net new private-
sector jobs since the 1970s. Those new ventures all need capital
equipment, technology, supplies, and services. Look beyond the United
States and you find a huge and growing B-to-B market, one that top
companies have recognized.
IBM launched Express, a line of hardware, software services, and
financing, specifically for the small to midsize customers (with fewer
than 1,000 employees) that supply 20 percent of its business. As one
VP of marketing noted, “In today’s world, we see that over 80% of the
time a small or medium business makes a technology decision, it starts
with a search engine. . . . We have to make sure we show up in their
search queries, not just paid or organic search, but we want to drive
stimulated search.”
IBM makes heavy use of social media—including blogs,
Facebook, LinkedIn, and Twitter—to drive conversations around top-
ics of interest to small and midsize businesses, such as IT security
and cloud-based computing. The company is also using events to
reach small businesses, such as a series on IT security that attracted
more than 10,000 attendees. It has pledged $1 billion in financing to
help small and midsize businesses procure certain IBM systems and
services.
Small and midsize businesses present huge opportunities and
huge challenges. The market is large and fragmented by industry, size,
and number of years in operation. Small business owners are notably
averse to long-range planning and often have an “I’ll buy it when I need
it” decision-making style. Here are some guidelines for marketing to
small businesses:
• Don’t lump small and midsize businesses together. There’s a
big gap between $1 million in revenue and $50 million or between
a start-up with 10 employees and a more mature business with
100 or more employees. IBM distinguishes its offerings to small
and medium-sized businesses on its common Web site for the two.
• Do keep it simple. Offer one supplier point of contact for all
service problems or one bill for all services and products. AT&T
serves millions of small-business customers (with fewer than 100
employees) with services that bundle Internet, local phone, long-
distance phone, data management, business networking, Web
hosting, and teleconferencing.
• Do use the Internet. Hewlett-Packard found that time-strapped
small-business decision makers prefer to buy, or at least research,
products and services online. So it designed a site for them that
pulls visitors through extensive advertising, direct mail, e-mail
campaigns, catalogs, and events.
• Don’t forget about direct contact. Even if a small business
owner’s first point of contact is via the Internet, you still need to of-
fer phone or face time.
• Do provide support after the sale. Small businesses want part-
ners, not pitchmen. When the DeWitt Company, a 100- employee
landscaping products business, purchased a large piece of machinery
from Moeller, the company’s president paid DeWitt’s CEO a personal
visit and stayed until the machine was up and running properly.
• Do your homework. The realities of small or midsize business man-
agement are different from those of a large corporation. Microsoft
created a small, fictional executive research firm, Southridge, and
baseball-style trading cards of its key decision makers to train its
employees to tie sales strategies to small-business realities.
Sources: Based on Barnaby J. Feder, “When Goliath Comes Knocking on David’s
Door,” New York Times, May 6, 2003; Jay Greene, “Small Biz: Microsoft’s Next
Big Thing?,” BusinessWeek, April 21, 2003, pp. 72–73; Jennifer Gilbert, “Small
but Mighty,” Sales & Marketing Management (January 2004), pp. 30–35; Kate
Maddox, “Driving Engagement with Small Business,” Advertising Age, November
7, 2011; Christine Birkner, “Big Business Think Small,” Marketing News, May 15,
2012, pp. 12–16; “IBM Luring SMBs with Expanded Finance Options,” Network
World, September 12, 2011; www.sba.gov; www.openforum.com; www-304.ibm
.com/businesscenter/smb/us/en, all accessed May 20, 2014.
marketing
insight
Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multilevel in-depth sell-
ing to reach as many participants as possible. Their salespeople virtually “live with” high-volume customers.
Companies must rely more heavily on their communications programs to reach hidden buying influences and
keep current customers informed.23
Business marketers must periodically review their assumptions about buying center participants. Traditionally,
SAP sold its software products to CIOs at large companies. A shift to focus on selling to individual corporate units
lower down the organizational chart raised the percentage of software license sales going to new customers to
40 percent.24
Insights into customers and buying centers are critical. GE’s ethnographic research into the plastic-fiber indus-
try revealed that the firm wasn’t in a commodity business driven by price, as it had assumed. Instead it was in an
artisanal industry, with customers who wanted collaboration at the earliest stages of development. GE completely
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AnAlyzing Business mARkeTs | chapter 7 219
reoriented the way it interacted with companies in the industry as a result. In developing markets, ethnographic
research also can be very useful, especially in far-flung rural areas, given that marketers often do not know these
consumers as well.25
In developing selling efforts, business marketers can also consider their customers’ customers, or end users, if
appropriate. Many B-to-B sales are to firms using the products they purchase as components in products they sell
to the ultimate consumers. Business marketers can seek out opportunities to interact with their customers’ custom-
ers and improve their offerings or even their business model. When XSENS, a Dutch supplier of three-dimensional
motion-sensor technology, helped solve the problems of one of its customers’ customers, it also developed a new
operating procedure that improved accuracy of its products by an order of magnitude.26
The Purchasing/Procurement
Process
In principle, business buyers seek the highest benefit package (economic, technical, service, and social) in rela-
tionship to a market offering’s costs. The strength of their incentive to purchase will be a function of the differ-
ence between perceived benefits and perceived costs.27
Business marketers must therefore ensure that customers fully appreciate how the firm’s offerings are different
and better. Framing occurs when customers are given a perspective or point of view that allows the seller to “put its
best foot forward.” It can be as simple as making sure customers recognize all the benefits or cost savings afforded
by the firm’s offerings or becoming more influential in the customers’ thinking about the economics of purchasing,
owning, using, and disposing of product offerings.
In the past, purchasing departments occupied a low position in the management hierarchy, in spite of of-
ten managing more than half the company’s costs. Recent competitive pressures have led many companies to
upgrade their purchasing departments and elevate administrators to vice presidential rank. These new, more
strategically oriented purchasing departments have a mission to seek the best value from fewer and better
suppliers.
Some multinationals have even elevated purchashing departments to “strategic supply departments” with re-
sponsibility for global sourcing and partnering. At Caterpillar, purchasing, inventory control, production schedul-
ing, and traffic have been combined into one department. Here are two other companies that have benefited from
improving their business buying practices.
• Rio Tinto is a world leader in finding, mining, and processing the earth’s mineral resources, with a significant
presence in North America and Australia. Coordinating with its suppliers was time-consuming, so Rio Tinto
embarked on an electronic commerce strategy with one key supplier. Both parties have reaped significant
benefits. In many cases, orders are being filled in the suppliers’ warehouse within minutes of being transmit-
ted, and the supplier can now use a pay-on-receipt program that has shortened Rio Tinto’s payment cycle to
about 10 days.28
GE learned that its
plastic-fiber customers
saw themselves more
as artisans, completely
changing how the
company treated those
customers.
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220 PART 3 | ConneCTing WiTh CusTomeRs
• Medline Industries, the largest privately owned manufacturer and distributor of health care products in the
United States, used software to integrate its view of customer activity across online and direct sales channels.
The results? The firm enhanced its product margin by 3 percent, improved customer retention by 10 percent,
reduced revenue lost to pricing errors by 10 percent, and enhanced the productivity of its sales representatives
by 20 percent.29
The upgrading of purchasing means business marketers must upgrade their sales staff to match the higher caliber
of today’s business buyers.
Supplier diversity may not have a price tag, but it is a benefit purchasing departments and business buyers
overlook at their own risk. Minority suppliers are the fastest-growing segment of today’s business landscape, and
CEOs of many of the largest companies see a diverse supplier base as a business imperative. In 2011, McDonald’s
U.S. restaurant system purchased nearly $6.7 billion in goods and services from minority- and women-owned
suppliers, about two-thirds of what the system spends for food, packaging, uniforms, operating supplies, and
premiums.30
Stages in the Buying Process
We’re ready to describe the general stages in the business buying-decision process. Patrick J. Robinson and his
associates identified eight stages and called them buyphases.31 The model in Table 7.1 is the buygrid framework.
In modified-rebuy or straight-rebuy situations, some stages are compressed or bypassed. For example, the
buyer normally has a favorite supplier or a ranked list of suppliers and can skip the search and proposal solicitation
stages. Here are some important considerations in each of the eight stages.
ProBleM reCoGnITIon
The buying process begins when someone in the company recognizes a problem or need that can be met by
acquiring a good or service. The recognition can be triggered by internal or external stimuli. The internal stimulus
might be a decision to develop a new product that requires new equipment and materials or a machine that breaks
down and requires new parts. Or purchased material turns out to be unsatisfactory and the company searches for
another supplier or lower prices or better quality. Externally, the buyer may get new ideas at a trade show, see an
ad, receive an e-mail, read a blog, or receive a call from a sales representative who offers a better product or a lower
price. Business marketers can stimulate problem recognition by direct marketing in many different ways.
TaBle 7.1 Buygrid Framework: Major Stages (Buyphases) of the Industrial
Buying Process in Relation to Major Buying Situations
(Buyclasses)
Buyclasses
New Task Modified Rebuy Straight Rebuy
Buyphases
1. Problem recognition Yes Maybe No
2. General need description Yes Maybe No
3. Product specification Yes Yes Yes
4. Supplier search Yes Maybe No
5. Proposal solicitation Yes Maybe No
6. Supplier selection Yes Maybe No
7. Order-routine specification Yes Maybe No
8. Performance review Yes Yes Yes
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AnAlyzing Business mARkeTs | chapter 7 221
General need desCrIPTIon and ProduCT sPeCIfICaTIon
Next, the buyer determines the needed item’s general characteristics and required quantity. For standard items, this is
simple. For complex items, the buyer will work with others—engineers, users—to define characteristics such as reliability,
durability, or price. Business marketers can help by describing how their products meet or even exceed the buyer’s needs.
The buying organization now develops the item’s technical specifications. Often, the company will assign a
product-value-analysis engineering team to the project. Product value analysis (PVA) is an approach to cost reduc-
tion that studies whether components can be redesigned or standardized or made by cheaper methods of produc-
tion without adversely affecting product performance. The PVA team will identify overdesigned components, for
instance, that last longer than the product itself. Tightly written specifications allow the buyer to refuse compo-
nents that are too expensive or that fail to meet specified standards.
Suppliers can use product value analysis as a tool for positioning themselves to win an account. Whatever the
method, it is important to eliminate excessive costs. Mexican cement giant Cemex is famed for “The Cemex Way,”
which uses high-tech methods to squeeze out inefficiencies.32
suPPlIer searCh
The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other
companies, trade advertisements, trade shows, and the Internet. The move to online purchasing has far-reaching
implications for suppliers and will change the shape of purchasing for years to come. Companies that purchase
online are utilizing electronic marketplaces in several forms:
• Catalog sites. Companies can order thousands of items through electronic catalogs, such as W. W. Grainger’s,
distributed by e-procurement software.
• Vertical markets. Companies buying industrial products such as plastics, steel, or chemicals or services such
as logistics or media can go to specialized Web sites called e-hubs. Plastics.com allows plastics buyers to search
the best prices among thousands of plastics sellers.
• “Pure Play” auction company. Ritchie Bros. Auctioneers is the world’s largest industrial auctioneer, with
44 auction sites worldwide. It sold $3.8 billion of used and unused equipment at more than 356 unreserved
auctions in 2013, including a wide range of heavy equipment, trucks, and other assets for the construction,
transportation, agricultural, material handling, oil and gas, mining, forestry, and marine industry sectors.
While some people prefer to bid in person at Ritchie Bros. auctions, they can also do so online in real time at
rbauction.com—the company’s multilingual Web site. In 2013, 50 percent of the bidders at Ritchie Bros. auc-
tions bid over the Internet; online bidders purchased $1.4 billion of equipment.33
• Spot (or exchange) markets. On spot electronic markets, prices change by the minute. IntercontinentalExchange
(ICE) is the leading electronic energy marketplace and soft commodity exchange with billions in sales.
• Private exchanges. Hewlett-Packard, IBM, and Walmart operate private exchanges to link with specially
invited groups of suppliers and partners over the Web.
• Barter markets. In barter markets, participants offer to trade goods or services.
• Buying alliances. Several companies buying the same goods can join together to form purchasing consortia
to gain deeper discounts on volume purchases. TopSource is an alliance of firms in the retail and wholesale
food-related businesses.
Mexican cement giant
Cemex is known for its
sophisticated ways
to reduce costs
for its customers.
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222 PART 3 | ConneCTing WiTh CusTomeRs
Online business buying offers several advantages: It shaves transaction costs for both buyers and suppliers,
reduces time between order and delivery, consolidates purchasing systems, and forges more direct relationships
between partners and buyers. On the downside, it may help to erode supplier–buyer loyalty and create potential
security problems.
e-proCuremenT Web sites are organized around two types of e-hubs: vertical hubs centered on industries
(plastics, steel, chemicals, paper) and functional hubs (logistics, media buying, advertising, energy management).
In addition to using these Web sites, companies can use e-procurement in other ways:
• Set up direct extranet links to major suppliers. A company can set up a direct e-procurement account at Dell
or Office Depot, for instance, and its employees can make their purchases this way.
• Form buying alliances. A number of major retailers and manufacturers such as Acosta, Ahold, Best Buy,
Carrefour, Family Dollar Stores, Lowe’s, Safeway, Sears, SUPERVALU, Target, Walgreens, Walmart, and
Wegmans Food Markets are part of a data-sharing alliance called 1SYNC. Several auto companies (GM, Ford,
Chrysler) formed Covisint for the same reason. Covisint is the leading provider of services that can integrate
crucial business information and processes between partners, customers, and suppliers. The company has
now also targeted health care to provide similar services.
• Set up company buying sites. General Electric formed the Trading Process Network (TPN), where it posts
requests for proposals (RFPs), negotiates terms, and places orders.
Moving into e-procurement means more than acquiring software; it requires changing purchasing strategy and
structure. However, the benefits are many. Aggregating purchasing across multiple departments yields larger, cen-
trally negotiated volume discounts, a smaller purchasing staff, and less buying of substandard goods from outside
the approved list of suppliers.
lead generaTion The supplier’s task is to ensure it is considered when customers are—or could be—in
the market and searching for a supplier. Marketing must work with sales to define what makes a “sales ready”
prospect and cooperate to send the right messages via sales calls, trade shows, online activities, PR, events, direct
mail, and referrals.
Marketers must find the right balance between the quantity and quality of leads. Too many leads, even of high
quality, and the sales force may be overwhelmed and allow promising opportunities to fall through the cracks; too
few or low-quality leads and the sales force may become frustrated or demoralized.34
To generate high-quality leads, suppliers need to know about their customers. They can obtain background
information from vendors such as Dun & Bradstreet and InfoUSA or information-sharing Web sites such as Jigsaw
and LinkedIn.35
Suppliers that qualify may be visited by the buyer’s agents, who will examine the suppliers’ manufacturing facili-
ties and meet their staff. After evaluating each company, the buyer will end up with a short list of qualified suppli-
ers. Many professional buyers have forced suppliers to make adjustments to their marketing proposals to increase
their likelihood of making the cut.
Richie Bros., the
world’s largest
industrial auctioneers,
conducts numerous
online as well as
in-person auctions for
its customers.
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AnAlyzing Business mARkeTs | chapter 7 223
ProPosal solICITaTIon
The buyer next invites qualified suppliers to submit written proposals. After evaluating them, the buyer will invite
a few suppliers to make formal presentations.
Business marketers must be skilled in researching, writing, and presenting proposals as marketing documents
that describe value and benefits in customer terms. Oral presentations must inspire confidence and position the
company’s capabilities and resources so they stand out from the competition.
Proposals and selling efforts are often team efforts that leverage the knowledge and expertise of coworkers.
Pittsburgh-based Cutler-Hammer, part of Eaton Corp., developed “pods” of salespeople focused on a particular
geographic region, industry, or market concentration.
suPPlIer seleCTIon
Before selecting a supplier, the buying center will specify and rank desired supplier attributes, often using a
supplier-evaluation model such as the one in Table 7.2.
To develop compelling value propositions, business marketers need to better understand how business buyers
arrive at their valuations.36 Researchers have identified eight different customer value assessment (CVA) methods.
Companies tended to use the simpler methods, though the more sophisticated ones promise a more accurate pic-
ture of CPV (see “Marketing Memo: Developing Compelling Customer Value Propositions”).
The choice of attributes and their relative importance vary with the buying situation. Delivery reliability, price,
and supplier reputation are important for routine-order products. For procedural-problem products, such as a
copying machine, the three most important attributes are technical service, supplier flexibility, and product reli-
ability. For political-problem products that stir rivalries in the organization (such as the choice of a computer sys-
tem or software platform), the most important attributes are price, supplier reputation, product reliability, service
reliability, and supplier flexibility.
overComing priCe pressures Despite moves toward strategic sourcing, partnering, and participation
in cross-functional teams, buyers still spend a large chunk of their time haggling with suppliers on price. The
number of price-oriented buyers can vary by country, depending on customer preferences for different service
configurations and characteristics of the customer’s organization.37
Marketers can counter requests for a lower price in a number of ways, including framing as noted above. They
may also be able to show that the total cost of ownership, that is, the life-cycle cost of using their product, is lower
TaBle 7.2 An Example of Vendor Analysis
Attributes Rating Scale
Importance
Weights Poor (1) Fair (2) Good (3) Excellent (4)
Price .30 x
Supplier reputation .20 x
Product reliability .30 x
Service reliability .10 x
Supplier flexibility .10 x
Total Score: .30(4) + .20(3) + .30(4)
+ .10(2) + .10(3) = 3.5
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224 PART 3 | ConneCTing WiTh CusTomeRs
than for competitors’ products. They can cite the value of the services the buyer now receives, especially if it is
superior to that offered by competitors.38 Research shows that service support and personal interactions, as well as
a supplier’s know-how and ability to improve customers’ time to market, can be useful differentiators in achieving
key-supplier status.39
Improving productivity helps alleviate price pressures. Burlington Northern Santa Fe Railway has tied 30 percent
of employee bonuses to improvements in the number of railcars shipped per mile.40 Some firms are using technol-
ogy to devise novel customer solutions. With Web technology and tools, Vistaprint printers can offer professional
printing to small businesses that previously could not afford it.41
Some companies handle price-oriented buyers by setting a lower price but establishing restrictive conditions:
(1) limited quantities, (2) no refunds, (3) no adjustments, and (4) no services.42
• Cardinal Health set up a bonus-dollars plan and gave points according to how much the customer pur-
chased. The points could be turned in for extra goods or free consulting.
• GE is installing diagnostic sensors in its airline engines and railroad engines. It is now compensated for hours
of flight or railroad travel.
• IBM is now more of a “service company aided by products” than a “product company aided by services.” It
can sell computer power on demand (like video on demand) as an alternative to selling computers.
To command price premiums in competitive B-to-B markets, firms must create compelling customer value propositions. The first step is to research the cus-
tomer. Here are a number of productive research methods:
1. Internal engineering assessment—Have company engineers use laboratory tests to estimate the product’s performance characteristics. Weakness:
Ignores the fact that the product will have different economic values in different applications.
2. Field value-in-use assessment—Interview customers about how costs of using a new product compare with those of using an incumbent. The task is to
assess how much each cost element is worth to the buyer.
3. Focus-group value assessment—Ask customers in a focus group what value they would put on potential market offerings.
4. Direct survey questions—Ask customers to place a direct dollar value on one or more changes in the market offering.
5. Conjoint analysis—Ask customers to rank their preferences for alternative market offerings or concepts. Use statistical analysis to estimate the implicit value
placed on each attribute.
6. Benchmarks—Show customers a benchmark offering and then a new-market offering. Ask how much more they would pay for the new offering or how
much less they would pay if certain features were removed from the benchmark offering.
7. Compositional approach—Ask customers to attach a monetary value to each of three alternative levels of a given attribute. Repeat for other attributes, then
add the values together for any offer configuration.
8. Importance ratings—Ask customers to rate the importance of different attributes and their suppliers’ performance on each.
Having done this research, firms can specify the customer value proposition, following a number of important principles. First, clearly substantiate value
claims by concretely specifying the differences between your offerings and those of competitors on the dimensions that matter most to the customer. Rockwell
Automation identified the cost savings customers would realize from purchasing its pump instead of a competitor’s by using industry-standard metrics of
functionality and performance: kilowatt-hours spent, number of operating hours per year, and dollars per kilowatt-hour. Also, make the financial implications
obvious.
Second, document the value delivered by creating written accounts of costs savings or added value that existing customers have actually captured by
using your offerings. Chemical producer Akzo Nobel conducted a two-week pilot on a production reactor at a prospective customer’s facility to document the
advantages of its high-purity metal organics product.
Finally, make sure the method of creating a customer value proposition is well implemented within the company, and train and reward employees for devel-
oping a compelling one. Quaker Chemical conducts training programs for its managers that include a competition to develop the best proposals.
Sources: James C. Anderson and Finn Wynstra, “Purchasing Higher-Value, Higher-Price Offerings in Business Markets,” Journal of Business-to-Business Marketing 17
(2010), pp. 29–61; James C. Anderson, Marc Wouters, and Wouter van Rossum, “Why the Highest Price Isn’t the Best Price,” MIT Sloan Management Review, Winter
2010, pp. 69–76; James C. Anderson, Nirmalya Kumar, and James A. Narus, Value Merchants: Demonstrating and Documenting Superior Value in Business Markets
(Boston: Harvard Business School Press, 2007); James C. Anderson, James A. Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,”
Harvard Business Review, March 2006, pp. 2–10; James C. Anderson and James A. Narus, “Business Marketing: Understanding What Customers Value,” Harvard Business
Review, November 1998, pp. 53–65.
Developing Compelling Customer Value Propositionsmarketing memo
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AnAlyzing Business mARkeTs | chapter 7 225
Solution selling can also alleviate price pressure and comes in different forms. Here are three examples.43
• Solutions to enhance customer revenues. Hendrix UTD has used its sales consultants to help farmers deliver
an incremental animal weight gain of 5 percent to 10 percent over competitors.
• Solutions to decrease customer risks. ICI Explosives formulated a safer way to ship explosives for quarries.
• Solutions to reduce customer costs. W. W. Grainger employees work at large customer facilities to reduce
materials-management costs.
More firms are seeking solutions that increase benefits and reduce costs enough to overcome any low-price
concerns. Consider the following example.44
LincOLn eLecTric Lincoln Electric has a decades-long tradition of working with its customers
to reduce costs through its Guaranteed Cost Reduction (GCR) Program. When a customer insists that a Lincoln distributor
lower prices to match competitors, the company and the distributor may guarantee that, during the coming year, they will
find cost reductions in the customer’s plant that meet or exceed the price difference between Lincoln’s products and the
competition’s. The Holland Binkley Company, a major manufacturer of components for tractor trailers, had been purchasing
Lincoln Electric welding wire for years. When Binkley began to shop around for a better price on wire, Lincoln Electric devel-
oped a package for reducing costs and working together that called for a $10,000 savings but eventually led to a six-figure
savings, a growth in business, and a strong long-term partnership between customer and supplier.
Risk and gain sharing can offset price reductions customers request. Suppose Medline, a hospital supplier, signs
an agreement with Highland Park Hospital promising $350,000 in savings over the first 18 months in exchange for
getting a tenfold increase in the hospital’s share of supplies. If Medline achieves less than this promised savings,
it will make up the difference. If it achieves substantially more, it participates in the extra savings. To make such
arrangements work, the supplier must be willing to help the customer build a historical database, reach an agree-
ment for measuring benefits and costs, and devise a dispute resolution mechanism.
numBer oF suppliers Companies are increasingly reducing the number of their suppliers. Ford,
Motorola, and Honeywell have cut their number of suppliers 20 percent to 80 percent. These companies want their
chosen suppliers to be responsible for a larger component system, achieve continuous quality and performance
improvement, and at the same time lower prices each year by a given percentage. They expect their suppliers to
work closely with them during product development, and they value their suggestions.
There is even a trend toward single sourcing, though companies that use multiple sources often cite the
threat of a labor strike, natural disaster, or any other unforseen event as the biggest deterrent to single sourcing.
Companies may also fear single suppliers will become too comfortable in the relationship and lose their competi-
tive edge.
Burlington Northern Santa
Fe (BNSF) Railway
rewards employees for
improvements in the
number of railcars shipped
per mile.
So
ur
ce
: ©
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226 PART 3 | ConneCTing WiTh CusTomeRs
order-rouTIne sPeCIfICaTIon
After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity
needed, the expected time of delivery, return policies, warranties, and so on. Many industrial buyers lease heavy
equipment such as machinery and trucks. The lessee gains a number of advantages: the latest products, better ser-
vice, the conservation of capital, and some tax advantages. The lessor often ends up with a larger net income and
the chance to sell to customers that could not afford outright purchase.
For maintenance, repair, and operating items, buyers are moving toward blanket contracts rather than periodic
purchase orders. A blanket contract establishes a long-term relationship in which the supplier promises to resup-
ply the buyer as needed, at agreed-upon prices, over a specified period of time. Because the seller holds the stock,
blanket contracts are sometimes called stockless purchase plans. They lock suppliers in tighter with the buyer and
make it difficult for out-suppliers to break in unless the buyer becomes dissatisfied.
Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign
long-term contracts with suppliers to ensure a steady flow of materials. DuPont, Ford, and several other major
companies regard long-term supply planning as a major responsibility of their purchasing managers. For example,
General Motors wants to buy from fewer suppliers, which must be willing to locate close to its plants and produce
high-quality components. Business marketers are also setting up extranets with important customers to facilitate
and lower the cost of transactions. Customers enter orders that are automatically transmitted to the supplier.
Some companies go further and shift the ordering responsibility to their suppliers, using systems called vendor-
managed inventory (VMI). These suppliers are privy to the customer’s inventory levels and take responsibility for
continuous replenishment programs. Plexco International AG supplies audio, lighting, and vision systems to the
world’s leading automakers. Its VMI program with its 40 suppliers resulted in significant time and cost savings and
allowed the company to use former warehouse space for productive manufacturing activities.45
PerforManCe revIew
The buyer periodically reviews the performance of the chosen supplier(s) using one of three methods. The buyer
may contact end users and ask for their evaluations, rate the supplier on several criteria using a weighted-score
method, or aggregate the cost of poor performance to come up with adjusted costs of purchase, including price.
The performance review may lead the buyer to continue, modify, or end a supplier relationship.
Many companies have set up incentive systems to reward purchasing managers for good buying performance,
leading them to increase pressure on sellers for the best terms.
Developing Effective Business-to-
Business Marketing Programs
Business-to-business marketers are using every marketing tool at their disposal to attract and retain customers.
They are embracing systems selling and adding valuable services to their product offerings and employing cus-
tomer reference programs and a wide variety of online and offline communication and branding activities.
CoMMunICaTIon and BrandInG aCTIvITIes
Business marketers are increasingly recognizing the importance of their brand. Swiss-based ABB is a global
leader in power and automation technologies with 145,000 employees in about 100 countries. The company
spends $1 billion in R&D annually to fuel a long tradition of groundbreaking and nation-building projects. An
extensive and carefully planned rebranding project in 2011 evaluated five alternative positioning platforms, con-
cluding that ABB should stand for “Power and Productivity for a Better World.” Magazines, posters, brochures,
and digital communication were all revamped to give the brand a new look.46 NetApp is another good example of
the increased importance placed on branding in business-to-business marketing.47
neTaPP NetApp is a Fortune 1000 company providing data management and storage solutions to medium-
and large-sized clients. Despite some marketplace success, the company found its branding efforts in disarray by 2007.
Several variations of its name were in use, leading to a formal name change to NetApp in 2008. Branding consultants
Landor also created a new identity, architecture, nomenclature, tone of voice, and tagline (“Go further, faster.”). Messages
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AnAlyzing Business mARkeTs | chapter 7 227
emphasized NetApp’s superior technology, innovation, and customer-centric “get things done” culture. Some marketing
efforts still left a few things to be desired, however. Called “Frankensites” because they had been modified by so many
developers over a 12-year period, the company’s Web sites were streamlined to organize the company’s presentation and
make updates easier. The new Web sites were estimated to increase sales leads from inquiries fourfold. Investing heavily in
marketing communications despite the recession, NetApp also ran print and online ads and tapped into a number of social
media outlets—communities and forums, bloggers, Facebook, Twitter, and YouTube. Social media initiatives helped it in Asia
where it did not have an advertising presence.
In business-to-business marketing, the corporate brand is often critical because it is associated with so many of
the company’s products. At one time, Emerson Electric, a global provider of power tools, compressors, electrical
equipment, and engineering solutions, was a conglomerate of 60 autonomous—and sometimes anonymous—com-
panies. A new CMO, Kathy Button Bell, aligned the brands under a new global brand architecture and identity,
allowing Emerson to achieve a broader presence so it could sell locally while leveraging its global brand name. She
also took on the challenge of strengthening the corporate brand online. A global consolidation cut the number of
company Web sites in half; Web sites and marketing campaigns were translated into local languages around the
globe; and social media platforms were built out. Record sales and stock price highs have followed.48 SAS is an-
other firm that recognized the importance of its corporate brand.49
SaS With sales of more than $2.3 billion and a huge “fan club” of IT customers, SAS, the business analytics soft-
ware and services firm, seemed to be in an enviable position in 1999. Yet its image was what one industry observer called
“a geek brand.” To extend the company’s reach beyond IT managers with PhDs in math or statistical analysis, the company
needed to connect with C-level executives in the largest companies—people who either didn’t have a clue what SAS’s
software was or didn’t think business analytics was a strategic issue. Working with its first outside ad agency ever, SAS
emerged with a new logo, a new slogan, “The Power to Know®,” and a series of TV spots and print ads in business publica-
tions such as BusinessWeek, Forbes, and the Wall Street Journal. One TV spot that exemplifies SAS’s rebranding effort ran
like this:
The problem is not harvesting the new crop of e-business information. It’s making sense of it. With e-intelligence
from SAS, you can harness the information. And put the knowledge you need within reach. SAS. The Power to Know.
Later research showed that SAS had made the transition to a mainstream business decision-making support brand and
was seen as both user-friendly and necessary. Highly profitable and now one of the world’s largest privately owned soft-
ware companies, more than doubling its revenue stream since the brand change, SAS has met with just as much success
inside the company. For more than 15 years, Fortune magazine has ranked it one of the best U.S. companies to work for.
Here are some examples of the way top firms are redesigning Web sites, improving search results, engaging in
social media, and launching Webinars and podcasts to improve their business performance through their B-to-B
marketing.
• Chapman Kelly provides audit and other cost-containment products to help firms reduce their health care
and insurance costs. The company originally tried to acquire new customers through traditional cold calling
and outbound selling techniques. After it redesigned its Web site and optimized the site’s search engine so the
company’s name moved close to the top of relevant online searches, revenue nearly doubled.50
• Emerson Process Management makes automation systems for chemical plants, oil refineries, and other types
of factories. Readers like to hear and swap factory war stories on the company’s blog about factory automa-
tion, which attracts 35,000 to 40,000 regular visitors each month and generates five to seven leads a week.
Given that its systems sell for millions of dollars, ROI on the blog investment is immense.51
• Machinery manufacturer Makino builds relationships with end-user customers by hosting an ongoing series
of industry-specific Webinars, averaging three a month. The company uses highly specialized content, such
as how to get the most out of machine tools and how metal-cutting processes work, to appeal to different
industries and different styles of manufacturing. Its database of Webinar participants has allowed the firm to
cut marketing costs and improve its effectiveness and efficiency.52
• Canadian supply-chain management company Kinaxis uses a fully integrated approach to communications
including blogs, white papers, and a video channel that hinges on specific keywords to drive traffic to its Web
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228 PART 3 | ConneCTing WiTh CusTomeRs
site and generate qualified leads. With research suggesting that 93 percent of all B-to-B purchases start with
search, Kinaxis puts much emphasis on search engine optimization (SEO), reusing and repurposing content
as much as possible to make it relevant and “Google-friendly.”53
Some business-to-business marketers are adopting marketing practices from business-to-consumer markets
to build their brand. Xerox ran a fully integrated communication campaign to cleverly reinforce the fact that
50 percent of its revenue comes from business services and not copiers. Here is how its Marriott ad unfolded:54
Two Marriott bellmen are sitting in an office. “Did you finish last month’s invoices?” one asks the other.
“No, but I did pick up your dry cleaning and have your shoes shined,” the second replies. “Well, I made
you a reservation at the sushi place around the corner!” the first bellman says. This voiceover follows:
“Marriott knows it’s better for Xerox to automate their global invoice processes so they can focus on serv-
ing their customers.”
Sometimes a more personal touch can make all the difference. Customers considering dropping six or seven
figures on one transaction for big-ticket goods and services want all the information they can get, especially from
a trusted, independent source. “Marketing Memo: Spreading the Word with Customer Reference Programs” de-
scribes the role of that increasingly important marketing tool.
sYsTeMs BuYInG and sellInG
Many business buyers prefer to buy a total problem solution from one seller. Called systems buying, this practice
originated with government purchases of major weapons and communications systems. The government solic-
ited bids from prime contractors that, if awarded the contract, became responsible for bidding out and assembling
the system’s subcomponents from second-tier contractors. The prime contractor thus provided a turnkey solution,
so-called because the buyer simply had to turn one key to get the job done.
Sellers have increasingly recognized that buyers like to purchase in this way, and many have adopted systems
selling as a marketing tool. Cisco Systems began to take share from telcommunications rival Avaya by offering cus-
tomers a one-stop solution for communications technology.55 Technology giants such as Hewlett-Packard, IBM,
Oracle, Dell, and EMC are all transitioning from specialists to competing one-stop shops that can provide the core
technology necessary as businesses shift to the cloud.56
One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its
entire requirement of MRO supplies. During the contract period, the supplier also manages the customer’s in-
ventory. Shell Oil manages the oil inventories of many of its business customers and knows when they require
replenishment. The customer benefits from reduced procurement and management costs and from price protec-
tion over the term of the contract. The seller achieves lower operating costs thanks to steady demand and reduced
paperwork.
Systems selling is a key industrial marketing strategy in bidding to build large-scale industrial projects such
as dams, steel factories, irrigation systems, sanitation systems, pipelines, utilities, and even new towns. Project
Machinery maker
Makimo employs an
extensive series of
webinars to build
stronger ties with its
customers.
So
ur
ce
: M
ak
in
o
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AnAlyzing Business mARkeTs | chapter 7 229
engineering firms must compete on price, quality, reliability, and other attributes to win contracts. Suppliers,
however, are not just at the mercy of customer demands. Ideally, they’re active early in the process to influence the
actual development of the specifications. Or they can go beyond the specifications to offer additional value in vari-
ous ways, as the following example shows.
SeLLing TO The indOneSian gOVernMenT The Indonesian govern-
ment requested bids to build a cement factory near Jakarta. A U.S. firm made a proposal that included choosing the
site, designing the factory, hiring the construction crews, assembling the materials and equipment, and turning over the
finished factory to the Indonesian government. A Japanese firm, in its proposal, included all these services, plus hiring
and training the workers to run the factory, exporting the cement through its trading companies, and using the cement to
build roads and new office buildings in Jakarta. Although the Japanese plan would cost more money, it won the contract.
Clearly, the Japanese viewed the problem not just as building a cement factory (the narrow view of systems selling) but
as contributing to Indonesia’s economic development. They took the broadest view of the customer’s needs, which is true
systems selling.
role of servICes
Services play an increasing strategic and financial role for many business-to-business firms selling primarily
products. Adding high-quality services to their product offerings allows them to provide greater value and estab-
lish closer ties with customers.
A classic example is Rolls-Royce, which has invested heavily in developing giant jet engine models for the new
jumbo planes being introduced by Boeing and Airbus. An important source of profits for Rolls-Royce, beyond sell-
ing engines and replacement parts, is the add-on “power by the hour” long-term repair and maintenance contracts
it sells. Margins are higher because customers are willing to pay a premium for the peace of mind and predictability
the contracts offer.57
In a networked economy, buyers increasingly rely on the input of others to help them make purchase decisions. One way to entice or reassure potential new
buyers is to create a customer reference program in which satisfied existing customers act in concert with the company’s sales and marketing department by
agreeing to serve as references. Technology companies such as HP, Lucent, and Unisys have all employed such programs.
Buyers can interact with a company and its customers in a variety of ways—via social media; conferences, events, and trade shows; and their own per-
sonal and professional networks. Companies need to recognize the importance of peer-to-peer interaction and know how they can assist a potential buyer.
One expert offers the following advice:
1. Establish a formal, organized customer reference program to build an army of advocates.
2. Put references at the center of your growth strategy.
3. Give your customer reference program a seat at the table by using an experienced executive as its leader.
4. Don’t strive for “100 percent referenceability”—put focus on a smaller group of truly committed, impactful company advocates.
5. Revolutionize your customer value proposition; find customers who want to be advocates because of their passion for the company and not as the result
of any financial inducement.
Research has shown that another potential benefit of a customer reference program is that it can increase the loyalty even of the customer advocates
themselves.
Sources: V. Kumar, J. Andrew Petersen, and Robert P. Leone, “Defining, Measuring, and Managing Business Reference Value,” Journal of Marketing 77 (January 2013),
pp. 68–86; David Godes, “The Strategic Impact of References in Business Markets,” Marketing Science 31 (March–April 2012), pp. 257–76; Bill Lee, “Customer
Reference Programs at the Tipping Point,” HBR Blog Network, June 7, 2012.
Spreading the Word With Customer Reference Programsmarketing memo
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230 PART 3 | ConneCTing WiTh CusTomeRs
Technology firms are also bundling services to improve customer satisfaction and increase profits. Like many
software firms, Adobe Systems is making the transition to a digital-marketing business with cloud-based monthly
subscriptions. Revenue is increasing because the company is able to sell support services, Web site hosting, and
server management to its cloud customers.58
All kinds of firms are finding ways to bundle value-added services to their products. Italian firm Mondo makes
state-of-the-art running tracks for stadiums all over the world. Despite competition, it has continued to win new
clients, such as the London Olympics, in part because of the installation and maintenance services it offers.59
Managing Business-to-Business
Customer Relationships
Business suppliers and customers are exploring different ways to manage their relationships.60 Loyalty is driven
in part by supply chain management, early supplier involvement, and purchasing alliances.61
Business-to-business marketers are avoiding “spray and pray” approaches to attracting and retaining custom-
ers in favor of honing in on their targets and developing one-to-one marketing approaches.62 Nearly 80 percent
of the Fortune 500 use SAP software, but the software giant begin to lose market share and revenue when, as one
cofounder observed, “We had lost the trust in relationships with our customers, and employees did not believe in
management.” Embracing innovation with new cloud-based services was a big part of the company’s turnaround
strategy; the other was focusing on improving customer relationships. A controversial price hike introduced dur-
ing the financial crisis was reversed, and new co-CEOs vowed to listen more closely to customer concerns.63
The BenefITs of verTICal CoordInaTIon
Much research has advocated greater vertical coordination between buying partners and sellers so they can
transcend merely transacting and instead create more value for both parties.64 Building trust is one prerequisite
to enjoying healthy long-term relationships. “Marketing Insight: Establishing Corporate Trust, Credibility, and
Reputation” identifies some key dimensions of such trust. Knowledge that is specific and relevant to a relation-
ship partner is also an important factor in the strength of interfirm ties.65
A number of forces influence the development of a relationship between business partners. Four relevant ones
are availability of alternatives, importance of supply, complexity of supply, and supply market dynamism. Based on
these we can classify buyer–supplier relationships into eight categories:66
1. Basic buying and selling—These are simple, routine exchanges with moderate levels of cooperation and infor-
mation exchange.
2. Bare bones—These relationships require more adaptation by the seller and less cooperation and information
exchange.
3. Contractual transaction—These exchanges are defined by formal contract and generally have low levels of
trust, cooperation, and interaction.
Mondo combines
state-of-the-art
running tracks with
value-added services
to successfully sell to
stadiums all over the
world.
So
ur
ce
: M
on
do
S
.p
.A
.
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AnAlyzing Business mARkeTs | chapter 7 231
4. Customer supply—In this traditional supply situation, competition rather than cooperation is the dominant
form of governance.
5. Cooperative systems—The partners in cooperative systems are united in operational ways, but neither dem-
onstrates structural commitment through legal means or adaptation.
6. Collaborative—In collaborative exchanges, much trust and commitment lead to true partnership.
7. Mutually adaptive—Buyers and sellers make many relationship-specific adaptations, but without necessarily
achieving strong trust or cooperation.
8. Customer is king—In this close, cooperative relationship, the seller adapts to meet the customer’s needs with-
out expecting much adaptation or change in exchange.
Over time, however, relationship roles may shift or be activated under different circumstances.67 Some needs
can be satisfied with fairly basic supplier performance. Buyers then neither want nor require a close relationship
with a supplier. Likewise, some suppliers may not find it worth their while to invest in customers with limited
growth potential.
One study found the closest relationships between customers and suppliers arose when supply was important
to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate
suppliers.68 Another study suggested that greater vertical coordination between buyer and seller through informa-
tion exchange and planning is usually necessary only when high environmental uncertainty exists and specific
investments (described next) are modest.69
rIsks and oPPorTunIsM In BusIness relaTIonshIPs
Researchers have noted that establishing a customer–supplier relationship creates tension between safeguarding
(ensuring predictable solutions) and adapting (allowing for flexibility for unanticipated events). Vertical coordi-
nation can facilitate stronger customer–seller ties but may also increase the risk to the customer’s and supplier’s
specific investments.70
Establishing Corporate Trust,
Credibility, and Reputation
Corporate credibility is the extent to which customers believe a firm can
design and deliver products and services that satisfy their needs and
wants. It reflects the supplier’s reputation in the marketplace and is the
foundation of a strong relationship.
Corporate credibility depends on three factors:
• Corporate expertise, the extent to which a company is seen as
able to make and sell products or conduct services.
• Corporate trustworthiness, the extent to which a company is seen
as motivated to be honest, dependable, and sensitive to customer
needs.
• Corporate likability, the extent to which a company is seen as lik-
able, attractive, prestigious, and dynamic.
In other words, a credible firm is good at what it does; it keeps its cus-
tomers’ best interests in mind and is enjoyable to work with.
Trust is a firm’s willingness to rely on a business partner. It
depends on a number of interpersonal and interorganizational fac-
tors, such as the firm’s perceived competence, integrity, honesty,
and benevolence. Personal interactions with employees of the firm,
opinions about the company as a whole, and perceptions of trust will
evolve with experience. A firm is more likely to be seen as trustworthy
when it:
• Provides full, honest information
• Provides employee incentives aligned to meet customer needs
• Partners with customers to help them learn and help themselves
• Offers valid comparisons with competitive products
Building trust can be especially tricky in online settings, and firms
often impose more stringent requirements on their online business
partners than on others. Business buyers worry that they won’t get
products of the right quality delivered to the right place at the right time.
Sellers worry about getting paid on time—or at all—and debate how
much credit they should extend. Some firms, such as transportation
and supply chain management company Ryder System, use automated
credit-checking applications and online trust services to assess the
creditworthiness of trading partners.
Sources: Kevin Lane Keller and David A. Aaker, “Corporate-Level Marketing: The
Impact of Credibility on a Company’s Brand Extensions,” Corporate Reputation
Review 1 (August 1998), pp. 356–78; Robert M. Morgan and Shelby D. Hunt, “The
Commitment–Trust Theory of Relationship Marketing,” Journal of Marketing 58,
no. 3 (July 1994), pp. 20–38; Christine Moorman, Rohit Deshpande, and Gerald
Zaltman, “Factors Affecting Trust in Market Research Relationships,” Journal of
Marketing 57 (January 1993), pp. 81–101; Glen Urban, “Where Are You Positioned
on the Trust Dimensions?,” Don’t Just Relate-Advocate: A Blueprint for Profit in
the Era of Customer Power (Upper Saddle River, NJ: Pearson Education/Wharton
School Publishers, 2005).
marketing
insight
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232 PART 3 | ConneCTing WiTh CusTomeRs
Specific investments are those expenditures tailored to a particular company and value chain partner
(investments in company-specific training, equipment, and operating procedures or systems).71 They help firms
grow profits and achieve their positioning.72 Xerox worked closely with its suppliers to develop customized pro-
cesses and components that reduced its copier manufacturing costs by 30 percent to 40 percent. In return, sup-
pliers received sales and volume guarantees, an enhanced understanding of their customer’s needs, and a strong
position with Xerox for future sales.73
Specific investments, however, also entail considerable risk to both customer and supplier. Transaction theory
from economics maintains that because these investments are partially sunk, they lock firms into a particular rela-
tionship. Sensitive cost and process information may need to be exchanged. A buyer may be vulnerable to holdup
because of switching costs; a supplier may be more vulnerable because it has dedicated assets and/or technology/
knowledge at stake. In terms of the latter risk, consider the following example.74
An automobile component manufacturer wins a contract to supply an under-hood component to an
original equipment manufacturer (OEM). A one-year, sole-source contract safeguards the supplier’s
OEM-specific investments in a dedicated production line. However, the supplier may also be obliged to
work (noncontractually) as a partner with the OEM’s internal engineering staff, using linked computing
facilities to exchange detailed engineering information and coordinate frequent design and manufactur-
ing changes over the term of the contract. These interactions could reduce costs and/or increase quality
by improving the firm’s responsiveness to marketplace changes. But they could also magnify the threat to
the supplier’s intellectual property.
When buyers cannot easily monitor supplier performance, the supplier might shirk or cheat and not deliver
the expected value. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit
contract.”75 When it was discovered in 2007 that a supplier to a supplier to a supplier to a supplier of Mattel
chose to use lead-based ingredients outside Mattel’s specification, the toy-makers reputation took a significant
PR hit.
A more passive form of opportunism might be a refusal or unwillingness to adapt to changing circumstances
or just negligance in satisfying contractual obligations. When a peanut-processing company, Peanut Corporation
of America, with only $25 million in sales was found to have a contaminated product, a $1 billion recall resulted
because the ingredient was found in 2,000 other products.76
Opportunism is a concern because firms must devote resources to control and monitoring that they could
otherwise allocate to more productive purposes. Contracts may become inadequate to govern supplier transac-
tions when supplier opportunism becomes difficult to detect, when firms make specific investments in assets they
cannot use elsewhere, and when contingencies are harder to anticipate. Customers and suppliers are more likely
to form a joint venture (instead of signing a simple contract) when the supplier’s degree of asset specificity is high,
monitoring the supplier’s behavior is difficult, and the supplier has a poor reputation.77 When a supplier has a
good reputation, it is more likely to avoid opportunism to protect this valuable intangible asset.
The presence of a significant future time horizon and/or strong solidarity norms typically causes customers and
suppliers to strive for joint benefits. Their specific investments shift from expropriation (increased opportunism
on the receiver’s part) to bonding (reduced opportunism).78
A firm like Mattel must
carefully monitor its
suppliers’ behaviors to
ensure they conform
to company standards
and values.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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AnAlyzing Business mARkeTs | chapter 7 233
Institutional and Government Markets
Our discussion has concentrated largely on the buying behavior of profit-seeking companies. Much of what we
have said also applies to the buying practices of institutional and government organizations. However, we want to
highlight certain special features of these markets.
The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that
must provide goods and services to people in their care. Many of these organizations are characterized by low
budgets and captive clienteles. For example, hospitals must decide what quality of food to buy for patients. The
buying objective here is not profit because the food is provided as part of the total service package; nor is cost mini-
mization the sole objective because poor food will cause patients to complain and hurt the hospital’s reputation.
The hospital purchasing agent must search for institutional-food vendors whose quality meets or exceeds a certain
minimum standard and whose prices are low. In fact, many food vendors set up a separate sales division to cater to
institutional buyers’ special needs and characteristics. Heinz produces, packages, and prices its ketchup differently
to meet the requirements of hospitals, colleges, and prisons. ARAMARK, which provides food services for stadi-
ums, arenas, campuses, businesses, and schools, also has a competitive advantage in providing food for the nation’s
prisons, a direct result of refining its purchasing practices and supply chain management.79
araMark Where ARAMARK once merely selected products from lists provided by potential suppliers, it now
collaborates with suppliers to develop products customized to meet the needs of individual segments. In the corrections seg-
ment, quality has historically been sacrificed to meet food cost limits that operators outside the market would find impossible
to work with. “When you go after business in the corrections field, you are making bids that are measured in hundredths of
a cent,” says John Zillmer, president of ARAMARK’s Food & Support Services, “so any edge we can gain on the purchasing
side is extremely valuable.” ARAMARK sourced a series of protein products with unique partners at price points it never could
have imagined before. These partners were unique because they understood the chemistry of proteins and knew how to
lower the price while still creating a product acceptable to ARAMARK’s customers, allowing the company to drive down costs.
Then ARAMARK replicated this process with 163 different items formulated exclusively for corrections. Rather than reducing
food costs by 1 cent or so a meal as usual, ARAMARK took 5 to 9 cents off—while maintaining or even improving quality.
In most countries, government organizations are a major buyer of goods and services. They typically require
suppliers to submit bids and often award the contract to the lowest bidder, sometimes making allowance for supe-
rior quality or a reputation for completing contracts on time. Governments will also buy on a negotiated-contract
basis, primarily in complex projects with major R&D costs and risks and those where there is little competition.
A major complaint of multinationals operating in Europe is that each country shows favoritism toward its
nationals despite superior offers from foreign firms. Although such practices are fairly entrenched, the European
Union is attempting to remove this bias. Another challenge is the volatility of spending due to economic swings
and cycles. When state governments suddenly cut back their spending, a firm like Cisco, which makes 22 percent
of its sales to the public sector, is likely to feel the effects.80 When the U.S. government announced a long-term
cutback of hundreds of billions of dollars in defense spending in 2011—with more cuts anticipated—many defense
contractors prepared to take signficant hits.81
Because their spending decisions are subject to public review, government organizations require considerable
paperwork from suppliers, who often complain about bureaucracy, regulations, decision-making delays, and frequent
shifts in procurement staff. But the fact remains that the U.S. government now spends more than $500 billion a year—
or roughly 14 percent of the federal budget—on private-sector contractors, making it the largest and potentially the
most attractive customer in the world.82 Motorola Solutions, created when Motorola was split into two companies,
sells wireless communications equipment to public-safety agencies around the world that need state-of-the-art com-
munications networks for police cars in a multibillion-dollar government market.83
Not only the dollar figure is large; so is the number of individual buys. According to the General Services
Administration Procurement Data Center, more than 20 million individual contract actions are processed every
year. Although most items purchased cost between $2,500 and $25,000, the government also makes purchases in
the billions, many in technology.
Government decision makers often think vendors have not done their homework. Different types of agencies—
defense, civilian, intelligence—have different needs, priorities, purchasing styles, and time frames. In addition,
vendors often do not pay enough attention to cost justification, a major activity for government procurement pro-
fessionals. Companies hoping to be government contractors need to help government agencies see the bottom-line
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234 PART 3 | ConneCTing WiTh CusTomeRs
impact of products. Demonstrating useful experience and successful past performance through case studies, espe-
cially with other government organizations, can be influential.84
Just as companies provide government agencies with guidelines about how best to purchase and use their prod-
ucts, governments provide would-be suppliers with detailed guidelines describing how to sell to the government.
Failure to follow the guidelines or to fill out forms and contracts correctly can create a legal nightmare.85
Fortunately for businesses of all sizes, the federal government has been trying to simplify the contracting pro-
cedure and make bidding more attractive. Reforms place more emphasis on buying off-the-shelf items instead
of customizing, communicating with vendors online to eliminate paperwork, and debriefing losing vendors to
improve their chances of winning the next time around.86 More purchasing is being done online via Web-based
forms, digital signatures, and electronic procurement cards (P-cards).
Several federal agencies that act as purchasing agents for the rest of the government have launched Web-based
catalogs that allow authorized defense and civilian agencies to buy everything from medical and office supplies to
clothing online. The General Services Administration, for example, not only sells stocked merchandise through its
Web site but also creates direct links between buyers and contract suppliers. A good starting point for any work
with the U.S. government is to make sure the company is in the Central Contractor Registration (CCR) database
(www.ccr.gov), which collects, validates, stores, and disseminates data in support of agency acquisitions.87
Still, many companies that sell to the government have not used a marketing orientation, though some have
established separate government marketing departments. Gateway, Rockwell, Kodak, and Goodyear anticipate
government needs and projects, participate in the product specification phase, gather competitive intelligence,
prepare bids carefully, and produce strong communications to describe and enhance their companies’ reputations.
environmental, organizational, interpersonal, and indi-
vidual factors.
4. The buying process consists of eight stages called buy-
phases: (1) problem recognition, (2) general need de-
scription, (3) product specification, (4) supplier search,
(5) proposal solicitation, (6) supplier selection, (7) order-
routine specification, and (8) performance review.
5. Business marketers are strengthening their brands and
using technology and other communication tools to de-
velop effective marketing programs. They are also using
systems selling and adding services to provide custom-
ers added value.
6. Business marketers must form strong bonds and rela-
tionships with their customers. Some customers, how-
ever, may prefer a transactional relationship.
7. The institutional market consists of schools, hospitals,
nursing homes, prisons, and other institutions that pro-
vide goods and services to people in their care. Buyers for
government organizations tend to require a great deal of
paperwork from their vendors and to favor open bidding
and domestic companies. Suppliers must be prepared
to adapt their offers to the special needs and procedures
found in institutional and government markets.
Summary
1. Organizational buying is the decision-making process by
which formal organizations establish the need for pur-
chased products and services, then identify, evaluate,
and choose among alternative brands and suppliers.
The business market consists of all the organizations
that acquire goods and services used in the production
of other products or services that are sold, rented, or
supplied to others.
2. Compared with consumer markets, business markets
generally have fewer and larger buyers, a closer cus-
tomer supplier relationship, and more geographically
concentrated buyers. Demand in the business market is
derived from demand in the consumer market and fluc-
tuates with the business cycle. Nonetheless, the total
demand for many business goods and services is quite
price inelastic. Business marketers need to be aware of
the role of professional purchasers and their influencers,
the need for multiple sales calls, and the importance of
direct purchasing, reciprocity, and leasing.
3. The buying center is the decision-making unit of a buy-
ing organization. It consists of initiators, users, influenc-
ers, deciders, approvers, buyers, and gatekeepers.
To influence these parties, marketers must consider
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M07_KOTL2621_15_GE_C07.indd 234 09/03/15 6:23 PM
AnAlyzing Business mARkeTs | chapter 7 235
Applications
Marketing Debate
How Different Is Business-to-Business
Marketing?
Some business-to-business marketing executives lament
the challenges of business-to-business marketing, main-
taining that many traditional marketing concepts and prin-
ciples do not apply and that selling products and services to
a company is fundamentally different from selling to individu-
als. Others disagree, claiming marketing theory is still valid
and only requires some adaptation in marketing tactics.
Take a position: Business-to-business marketing
requires a special, unique set of marketing concepts
and principles versus Business-to-business marketing
is really not that different, and the basic marketing con-
cepts and principles apply.
Marketing Discussion
Applying B-to-C Concepts to B-to-B
Consider some of the consumer behavior topics for
business-to-consumer (B-to-C) marketing from Chapter 6.
How might you apply them to business-to-business (B-to-B)
settings? For example, how might noncompensatory mod-
els of choice work? Mental accounting?
Ac.com Web site), which would help the firm retain some
of its former brand equity. At midnight on December
31, 2000, Andersen Consulting officially adopted the
Accenture name and launched a global advertising, mar-
keting, and communications campaign targeting senior
executives at its clients and prospects, all partners and
employees, the media, leading industry analysts, potential
recruits, and academia.
The results were quick and impressive. Accenture’s
brand equity increased 11 percent the first year, and the
number of firms that inquired about its services increased
350 percent. Awareness of the company’s breadth and
depth of services reached 96 percent of its previous level,
and awareness of Accenture as a provider of manage-
ment and technology consulting services already topped
76 percent of its previous level. These results enabled
Accenture to successfully complete a $1.7 billion IPO in
July 2001.
Accenture believed its differentiator was the abil-
ity both to provide innovative ideas—ideas grounded
in business processes as well as IT—and to execute
them. Competitors such as McKinsey were seen as
highly specialized at developing strategy, whereas other
competitors such as IBM were seen as highly skilled in
technological implementation. Accenture wanted to be
seen as excelling at both. As Ian Watmore, its UK chief,
explained: “Unless you can provide both transformational
consulting and outsourcing capability, you’re not going to
win. Clients expect both.”
In 2002, Accenture unveiled a new positioning state-
ment, which reflected its role as a partner that helped cre-
ate strategies and execute them. The tagline “Innovation
Delivered” was supported by the statement “From innova-
tion to execution, Accenture helps accelerate your vision.”
Marketing Excellence
>> Accenture
Accenture was launched as the Administrative Accounting
Group in 1942 and was the consulting arm of accounting
firm Arthur Andersen. In 1989, it became a separate busi-
ness unit focused on IT consulting and bearing the name
Andersen Consulting. At that time, though it was earning
$1 billion annually, Andersen Consulting had low brand
awareness among information technology consultancies
and was commonly mistaken for its corporate parent. To
build a strong brand and separate itself from the account-
ing firm, Andersen Consulting launched the first large-
scale advertising campaign in the professional services
area. By the end of the decade, it was the world’s largest
management and technology consulting organization.
In 2000, following arbitration against its former par-
ent, Andersen Consulting was granted full independence
from Arthur Andersen but had to relinquish the Andersen
name. Andersen Consulting was given three months to
find a name that could be trademarked in 47 countries,
was effective and inoffensive in more than 200 languages,
was acceptable to employees and clients, and corre-
sponded with an available URL. The effort that followed
was one of the largest and most successful rebranding
campaigns in corporate history.
The company’s new name came from one of
the company’s own consultants at its Oslo office. As
part of an internal name-generation initiative dubbed
“Brandstorming,” he submitted the Accenture name be-
cause it rhymed with “adventure” and suggested an
“accent on the future.” The name also retained the “Ac”
of the original Andersen Consulting name (echoing the
M07_KOTL2621_15_GE_C07.indd 235 09/03/15 6:23 PM
236 PART 3 | ConneCTing WiTh CusTomeRs
As the company diversified its business-to-business
product lines in the 1970s and 1980s, it created new
corporate campaigns, including “Progress for People”
and “We Bring Good Things to Life.” In 1981, Jack Welch
succeeded Reginald Jones as GE’s eighth CEO. During
Welch’s two decades of leadership, he helped grow GE
from an “American manufacturer into a global services
giant” and increased the company’s market value from
$12 billion in 1981 to $280 billion in 2001, making it the
world’s most valuable corporation at the time.
Over the years, GE has exhibited a keen under-
standing of the business market and the business buy-
ing process by putting itself in the shoes of its business
Marketing Excellence
>> GE
Thomas Edison founded the Edison Electric Light
Company in 1878. The company, which soon changed its
name to General Electric (GE), became an early pioneer
in lightbulbs and electrical appliances and served the
electrical needs of various industries, such as transporta-
tion, utilities, manufacturing, and broadcasting. GE be-
came the acknowledged pioneer in business-to-business
marketing in the 1950s and 1960s under the tagline
“Progress Is Our Most Important Product.”
As part of its new commitment to helping clients achieve
their business objectives, Accenture also introduced a
policy whereby many of its contracts contained incentives
that it realized only if specific business targets were met.
For instance, a contract with British travel agent Thomas
Cook was structured such that Accenture’s bonus de-
pended on five metrics, including a cost-cutting one.
In late 2003, Accenture built upon the “Innovation
Delivered” theme and announced its new tagline, “High
Performance. Delivered,” along with a campaign that fea-
tured golf superstar Tiger Woods as spokesperson. When
Accenture sought Woods as its spokesperson, the athlete
was at the top of his game—the world’s best golfer with
an impeccable image and an ideal symbol of high perfor-
mance. Accenture’s message communicated that it could
help client companies become “high-performing business
leaders,” and the Woods endorsement drove home the
importance of high performance.
Over the next six years, Accenture spent nearly $300
million in ads that mostly featured Tiger Woods, alongside
slogans such as “We know what it takes to be a Tiger”
and “Go on. Be a Tiger.” The campaign capitalized on
Woods’s international appeal, ran all over the world, and
became the central focus of Accenture-sponsored events
such as the World Golf Championships and the Chicago
Marathon.
That all changed when the scandal surrounding Tiger
Woods, his extramarital affairs, and his indefinite absence
from golf hit the press in late 2009. Accenture dropped
Woods as a spokesperson, saying he was no longer a
good fit for its brand. Indeed, focus groups showed that
consumers were too distracted by the scandal to focus
on Accenture’s strategic message. Accenture found itself
in familiar territory and worked on developing and execut-
ing a groundbreaking campaign that not only resonated
across the world and translated appropriately into differ-
ent cultures but also elevated Accenture’s brand to the
next level.
In 2011, Accenture launched the “Greater Than”
campaign to an international audience across 35 coun-
tries. The campaign highlighted successful case studies
from clients like Unilever, Starwood Hotels, and Caterpillar
and focused on Accenture’s capabilities in areas such as
emerging technologies and globalization. The company
conducted extensive research to ensure that its brand
positioning—“High performance. Delivered.”—was not
only effective but also still relevant to business leaders.
Lastly, Accenture created a new marketing twist to the
campaign. The “greater than” symbol, >, which had al-
ways appeared in the Accenture logo, was pulled out and
used as a major element of the campaign. It appeared on
cabs and billboards in major cities and became a critical
unifying element across all Accenture’s print, digital, and
social media as well as among employees.
Today, Accenture continues to excel as a global man-
agement consulting, technology services, and outsourc-
ing company. Its clients include 99 of the Fortune Global
100 and more than three-quarters of the Fortune Global
500. The company ended fiscal 2013 with revenues of
$28.6 billion and has a brand value close to $9 billion.
Questions
1. How does Accenture target its B-to-B audience so
effectively?
2. Evaluate Accenture’s history of branding campaigns.
What remains consistent throughout?
Sources: Accenture.com, “Annual Reports,” Accenture.com; “Lessons Learned from Top
Firms’ Marketing Blunders,” Management Consultant International, December 2003, p. 1; Sean
Callahan, “Tiger Tees Off in New Accenture Campaign,” BtoB Magazine, October 13, 2003, p. 3;
“Inside Accenture’s Biggest UK Client,” Management Consultant International, October 2003, pp.
1–3; “Accenture’s Results Highlight Weakness of Consulting Market,” Management Consultant
International, October 2003, pp. 8–10; “Accenture Re-Branding Wins UK Plaudits,” Management
Consultant International, October 2002, p. 5; Mary Ellen Podmolik, “Accenture Turns to Tiger for Global
Marketing Effort,” BtoB Magazine, October 25, 2004; Sean Callahan, “Tiger Tees Off in New Accenture
Campaign,” BtoB Magazine, October 13, 2003; Emily Steel, “After Ditching Tiger, Accenture Tries New
Game,” Wall Street Journal, January 14, 2010; “Best Global Brands 2012,” Interbrand.
M07_KOTL2621_15_GE_C07.indd 236 09/03/15 6:23 PM
AnAlyzing Business mARkeTs | chapter 7 237
customers. For example, the company understands that
buying an aircraft engine is a multimillion-dollar expendi-
ture that doesn’t end with the purchase. Customers (the
airlines) face substantial maintenance costs to meet FAA
guidelines and ensure reliability of the engines. In 1999,
GE pioneered a new pricing option called “Power by the
Hour,” giving customers an opportunity to pay a fixed fee
each time they run the engine. In return, GE performs all
the maintenance and guarantees the engine’s reliability.
When demand for air travel is uncertain, “Power by the
Hour” provides GE’s customers with a lower cost of
ownership.
In 2003, GE and its new CEO, Jeffrey Immelt,
faced a fresh challenge: how to promote its diversified
brand with a unified global message. A source at GE
explained, “(Immelt) wants advertising that’s more high-
tech, more innovative and contemporary. Something
that will make GE look more advanced, out in front.”
So, after 24 years and $1 billion in financial support, GE
dropped its signature slogan “We Bring Good Things
to Life” for the new tagline “Imagination at Work,”
highlighting its renewed focus on innovation and new
technology.
The award-winning new campaign promoted units
such as GE Aircraft Engines, Medical Systems, and
Plastics, focusing on the breadth of the company’s prod-
uct offerings, and it got results. “Research indicates GE is
now being associated with attributes such as being high
tech, leading edge, innovative, contemporary, and cre-
ative,” stated Judy Hu, GE’s general manager for global
advertising and branding. In addition, survey respondents
continued to associate GE with some of its traditional at-
tributes, including trust and reliability.
In 2005, GE evolved the campaign into a company-
wide initiative that continues today, “Ecomagination.”
Ecomagination highlighted the company’s efforts to de-
velop environmentally friendly “green” technologies such
as solar energy, lower-emission engines, and water pu-
rification technologies. GE initially set several aggressive
goals for the new initiative, including doubling the revenue
from “Ecomagination” products to $20 billion in five years
and promising to reduce greenhouse gas emissions by
1 percent within seven years. The company believed
then and still believes that embracing innovation around
Ecomagination is critical to its growth.
Immelt made some strategic restructuring decisions
that helped the company survive the worldwide reces-
sion of 2008 and 2009 and also helped shift it even more
in the B-to-B direction. GE moved from 11 divisions to
five and sold off some of its consumer-focused busi-
nesses, including 51 percent of NBC Universal (sold to
Comcast). This shift allowed the company to spend more
resources on innovation, green initiatives, and its growing
businesses such as power generation, aviation, medical
imaging, and fuel cell technologies.
GE understood that it needed another huge initia-
tive to help pull the conglomerate out of its current poor
financial situation. Management believed there was huge
growth potential in affordable health care around the
world. As a result, the company embraced a $6 billion
company-wide initiative called Healthymagination. The
business strategy aimed at growing GE’s health care
business by providing innovative solutions to more people
around the world, and the company launched an inte-
grated marketing plan for it.
GE’s B-to-B marketing savvy has helped it lock in
the top position in the Financial Times’s “World’s Most
Respected Companies” ranking for years. The com-
pany’s in-depth understanding of each of its business
markets has kept its B-to-B marketing strategies pro-
gressive, relevant, and effective. In addition, its global
marketing campaign helps keep brand equity strong. GE
was ranked sixth in Interbrand/BusinessWeek’s “Top 100
Global Brands” report, with a brand value of $45 billion.
“The GE brand is what connects us all and makes us so
much better than the parts,” Chief Marketing Officer Beth
Comstock said.
Today, General Electric operates in a wide range of
industries, including power and water, oil and gas, en-
ergy management, aviation, health care, transportation,
home and business solutions, and capital. As a result,
the firm sells a diverse array of products and services
from home appliances to jet engines, security systems,
wind turbines, and financial services. Its revenues topped
$146 billion in 2013, making it so large that its largest
business units could rank separately in the Fortune 200.
If GE were a country, it would be the 50th largest in the
world, ahead of Kuwait, New Zealand, and Iraq.
Questions
1. Discuss GE’s B-to-B marketing strategy. Why has
the company been so successful over the years at
targeting such a large business audience?
2. Have “Ecomagination” and “Healthymagination” suc-
cessfully communicated GE’s focus on its newer
endeavors? Why or why not?
Sources: “A New Life. General Elective to Change Corporate Image,” Delaney Report, June 10,
2002; Geoffrey Colvin, “What Makes GE Great?,” Fortune, March 6, 2006, pp. 90–104; Thomas
A. Stewart, “Growth as a Process,” Harvard Business Review, June 2006, pp. 60–70; Kathryn
Kranhold, “The Immelt Era, Five Years Old, Transforms GE,” Wall Street Journal, September 11,
2006; Daniel Fisher, “GE Turns Green,” Forbes, August 15, 2005, pp. 80– 85; John A. Byrne, “Jeff
Immelt,” Fast Company, July 2005, pp. 60–65; Rachel Layne, “GE’s NBC Sale Brings Immelt Cash,
Scrutiny,” BusinessWeek, December 3, 2009; GE Annual Report, 2013.
M07_KOTL2621_15_GE_C07.indd 237 09/03/15 6:23 PM
238
In This Chapter, We Will Address
the Following Questions
1. What factors should a company review before deciding to go abroad? (p. 239)
2. How can companies evaluate and select specific international markets to enter? (p. 241)
3. What are the differences between marketing in a developing and a developed
market? (p. 242)
4. What are the major ways of entering a foreign market? (p. 248)
5. To what extent must the company adapt its products and marketing program
to each foreign country? (p. 251)
6. How do marketers influence country-of-origin effects? (p. 260)
MyMarketingLab™
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By skillfully combining quality, reliability, and
style, Korean automaker Hyundai is finding
success in markets all over the world.
Source: HYUNDAI MOTOR COMPANY. Andy Glass Wyatt-Clarke
& Jones.
M08_KOTL2621_15_GE_C08.indd 238 09/03/15 6:24 PM
239
The world has dramatically shrunk in recent years. Countries are increasingly
multicultural, and products and services developed in one country are finding enthusiastic acceptance in
others. A German businessman may wear an Italian suit to meet an English friend at a Japanese restaurant,
who later returns home to drink Russian vodka and watch a U.S. movie on a Korean TV. Emerging markets that
embrace capitalism and consumerism are especially attractive targets. Some marketers are finding success
both in developing and developed markets. Consider the rapid ascent of Hyundai.1
Tapping into Global
Markets
8
Once synonymous with cheap and unreliable cars, Hyundai Motor Company has experienced a
massive global transformation. In 1999, its new chairman, Mong-Koo Chung, declared that Hyun-
dai would focus not on volume and market share but on quality instead. The company began to
benchmark industry leader Toyota, adopted Six Sigma processes, organized product development
cross-functionally, partnered more closely with suppliers, and increased quality oversight meetings. From a place
near the bottom of J. D. Power’s study of U.S. new vehicle quality in 2001—32nd of 37 brands—Hyundai zoomed
to number 4 by 2009, surpassed only by luxury brands Lexus, Porsche, and Cadillac. Hyundai also transformed its
marketing. Its groundbreaking 10-year warranty sent a strong signal of reliability and quality, and more consum-
ers began to appreciate the value its stylish cars had to offer. The U.S. market was not the only one receiving at-
tention from Hyundai and its younger, more affordable brand sibling,
Kia. Hyundai is the second-largest carmaker in India. In Europe, it
invested in a $1.4 billion factory in the Czech Republic and a new
$7.5 research center near a famed German racetrack, and its market
share has surpassed Toyota’s. A joint venture with Beijing Automotive
is targeting China.
Competing on a Global Basis
Some companies have long been successful global marketers—firms like Shell, Bayer, and Toshiba have sold
around the world for years. In luxury goods such as jewelry, watches, and handbags, where the addressable mar-
ket is relatively small, a global profile is essential for firms like Prada, Gucci, and Louis Vuitton to profitably grow.
But global competition is intensifying in more product categories as new firms make their mark on the interna-
tional stage.
In China’s fast-moving mobile-phone market, Motorola found its once-promising share drop to the point where
it was only the eighth-ranked competitor behind a slew of new entrants.2 To better understand the Chinese market,
Starwood’s CEO and top management team even temporarily relocated to Shanghai for five weeks in 2011. Sixty
percent of guests in their hotels in China were native Chinese, and the firm anticipated a wave of Chinese travelers
going abroad.3
Competition from developing-market firms is also heating up. Founded in Guatemala, Pollo Campero (Spanish
for “country chicken’) has launched more than 50 stores in different parts of the United States—including three
as far north as Massachusetts—blending old favorites such as fried plantains and milky horchata drinks with
Although opportunities to compete in international
markets are significant, the risks can be high. Companies sell-
ing in global industries have no choice, however, but to interna-
tionalize their operations. In this chapter, we review the major
decisions in expanding into global markets.
M08_KOTL2621_15_GE_C08.indd 239 09/03/15 6:24 PM
240 PART 3 | ConneCTing WiTh CusTomeRs
traditional U.S. fare such as grilled chicken and mashed potatoes.4 Tata has created a marketing powerhouse in
India and set its sights on other parts of the world.5
TaTa NaNO Tata Group, India’s biggest conglomerate, is also its largest commercial vehicle maker. The
company created a stir with the 2009 launch of its $2,500 Tata Nano, dubbed the “People’s Car.” Although impossibly low
by Western standards, the Nano’s price of 1 Indian lakh is three times India’s annual per capita income. Looking somewhat
like an egg on wheels, the Nano comfortably seats five while running a 33-horsepower engine that gets nearly 50 miles per
gallon. Aiming to sell 250,000 units annually, Tata targeted the 7 million Indians who buy scooters and motorcycles every
year, in part because they cannot afford a car. Huge market potential exists in the country, which has just seven automobiles
per 1,000 people. Tata is also targeting other “bottom of the pyramid” markets such as Africa and Southeast Asia, and
perhaps even parts of Eastern Europe and Latin America, as well as the U.S. market. Despite its positive features, the Nano
got off to a rocky start in India due in part to the stigma attached to buying a “cheap” car. In a country where incomes have
risen dramatically in recent years, some saw it as a glorified version of a tuk-tuk, the three-wheeled motorized rickshaw
often seen on the streets of developing nations. Many low-income consumers decided to try to stretch their budgets to buy
the Maruti-Suzuki Alto instead, with its bigger 800cc engine. On the other hand, some target customers who had never
owned a car before were intimidated by Tata’s glittering showrooms. After sales reached a low point in November 2012—
only 3,500 cars sold against a target of 10,000—another makeover was announced—the third since launch in 2009,
including a possible 800cc engine and a diesel option.
Although some U.S. businesses may want to eliminate foreign competition through protective legislation, the
better way to compete is to continuously improve products at home and expand into foreign markets. In a global
industry, competitors’ strategic positions in major geographic or national markets are affected by their overall
global positions.6 A global firm operates in more than one country and captures R&D, production, logistical, mar-
keting, and financial advantages not available to purely domestic competitors.
Global firms plan, operate, and coordinate their activities on a worldwide basis. Otis Elevator uses door systems
from France, small geared parts from Spain, electronics from Germany, and motor drives from Japan; systems
integration happens in the United States. Although some countries have erected entry barriers or regulations, the
World Trade Organization, consisting of 160 countries, continues to press for more free trade in international ser-
vices and other areas.7 An interconnected world and global supply chains can have drawbacks, though, as the 2011
tsunami and earthquake in Japan vividly demonstrated.8
To sell overseas, many successful global U.S. brands have tapped into universal consumer values and needs—
such as Nike with athletic performance, MTV with youth culture, and Coca-Cola with youthful optimism. These
firms hire thousands of employees abroad and make sure their products and marketing activities are consistent
with local sensibilities. Global marketing extends beyond products. Services represent the fastest-growing sector
of the global economy and account for two-thirds of global output, one-third of global employment, and nearly
20 percent of global trade.
Tata is attacking
automobile markets
all over the world
with its extraordinarily
inexpensive Nano or
“People’s Car.”
So
ur
ce
: ©
N
ei
l M
cA
lli
st
er
/A
la
m
y
M08_KOTL2621_15_GE_C08.indd 240 09/03/15 6:24 PM
TAPPing inTo globAl mARkeTs | chapter 8 241
For a company of any size or any type to go global, it must make a series of decisions (see Figure 8.1). We’ll
examine each of these decisions here.9
Deciding Whether to Go Abroad
Most companies would prefer to remain domestic if their domestic market were large enough. Managers
would not need to learn other languages and laws, deal with volatile currencies, face political and legal uncer-
tainties, or redesign their products to suit different customer needs and expectations. Business would be easier
and safer. Yet several factors can draw companies into the international arena:
• Some international markets present better profit opportunities than the domestic market.
• The company needs a larger customer base to achieve economies of scale.
• The company wants to reduce its dependence on any one market.
• The company decides to counterattack global competitors in their home markets.
• Customers are going abroad and require international service.
As cultures blend across countries, another benefit of global expansion is the ability to transfer ideas and
products or services from one market into another market. Cinnabon discovered that products it developed for
Central and South America were finding success in the United States, too, given its large Hispanic population.10
Reflecting the power of these forces, exports accounted for roughly 14 percent of U.S. GDP in 2013, more
than double the figure 40 years ago.11 Before making a decision to go abroad, the company must also weigh
several risks:
• The company might not understand foreign preferences and could fail to offer a competitively attractive
product.
• The company might not understand the foreign country’s business culture.
• The company might underestimate foreign regulations and incur unexpected costs.
• The company might lack managers with international experience.
• The foreign country might change its commercial laws, devalue its currency, or undergo a political revolu-
tion and expropriate foreign property.
Some companies don’t act until events thrust them into the international arena. The internationalization pro-
cess typically has four stages:12
Stage 1: No regular export activities
Stage 2: Export via independent representatives (agents)
Stage 3: Establishment of one or more sales subsidiaries
Stage 4: Establishment of production facilities abroad
The first task is to move from stage 1 to stage 2. Most firms work with an independent agent and enter a nearby
or similar country. Later, the firm establishes an export department to manage its agent relationships. Still later, it
Deciding whether
to go abroad
Deciding which
markets to
enter
Deciding how
to enter the
market
Deciding on
the marketing
program
Deciding on
the marketing
organization
| Fig. 8.1 |
Major
Decisions in
International
Marketing
Cinnabon found that
some products
developed for Central
and South America
found acceptance in
the U.S. too.
So
ur
ce
: A
ss
oc
ia
te
d
Pr
es
s
M08_KOTL2621_15_GE_C08.indd 241 09/03/15 6:24 PM
242 PART 3 | ConneCTing WiTh CusTomeRs
replaces agents with its own sales subsidiaries in its larger export markets. This increases investment and risk but
also earning potential. Next, to manage subsidiaries, the company replaces the export department with an inter-
national department or division. If markets are large and stable or the host country requires local production, the
company will locate production facilities there.
By this time, the firm is operating as a multinational and optimizing its sourcing, financing, manufacturing,
and marketing as a global organization. According to some researchers, top management begins to focus on global
opportunities when more than 15 percent of revenue comes from international markets.13
Deciding Which Markets to Enter
In deciding to go abroad, the company needs to define its marketing objectives and policies. What proportion of
international to total sales will it seek? Most companies start small when they venture abroad. Some plan to stay
small; others have bigger plans.
How ManY Markets to enter
The company must decide how many countries to enter and how fast to expand. Typical entry strategies are the
waterfall approach, gradually entering countries in sequence, and the sprinkler approach, entering many coun-
tries simultaneously. Increasingly, firms—especially technology-intensive firms or online ventures—are born
global and market to the entire world from the outset.14
Matsushita, BMW, General Electric, Benetton, and The Body Shop followed the waterfall approach. It allows
firms to carefully plan expansion and is less likely to strain human and financial resources. When first-mover
advantage is crucial and a high degree of competitive intensity prevails, the sprinkler approach is better. Microsoft
sold more than 60 million licenses and upgrades of Windows 8 in the first 10 weeks after its October 26, 2012,
global launch. Marketing spanned 42 countries with TV, print, and banner ads, outdoor posters, and branded
entertainment. The main risk in the sprinkler approach is the substantial resources needed and the difficulty of
planning entry strategies for many diverse markets.15
The company must also choose the countries to enter based on the product and on factors such as geography,
income, population, and political climate. Competitive considerations come into play too. It may make sense to go
into markets where competitors have already entered to force them to defend their market share as well as to learn
from them how they are marketing in that environment.
A critical consideration without question is market growth. Getting a toehold in a fast-growing market can be
a very attractive option even if that market is likely to soon be crowded with more competitors.16 KFC has entered
scores of countries as a pioneer by franchising its retail concept and making its marketing culturally relevant.17
KFC KFC is the world’s largest fast-food chicken chain, serving more than 12 million customers at more than
4,600 restaurants in the United States and more than 18,000 restaurants in 120 countries and territories around the
world. The company is world famous for its Original Recipe fried chicken—made with the same secret blend of 11 herbs
and spices Colonel Harland Sanders perfected more than a half-century ago. In China, KFC is the largest, oldest, most
popular, and fastest-growing quick-service restaurant chain, with more than 4,260 locations in 850 towns or cities, often
enjoying healthy margins of 20 percent per store. The company has tailored its menu in China to local tastes with items
such as the Dragon Twister, a wrap stuffed with chicken strips, Peking duck sauce, cucumbers, and scallions. KFC even
has a Chinese mascot—a kid-friendly character named Chicky, which the company boasts has become “the Ronald
McDonald of China.” Like any emerging market, China does pose challenges to KFC. Sales there took a stumble early in
2013 when state-owned Chinese media accused the company of using local suppliers that gave their chickens exces-
sive antibiotics to stimulate faster growth. A social media firestorm followed, eventually causing KFC to apologize for
not having tighter controls. Supply chain problems have posed a different challenge in Africa, KFC’s next growth target.
Without enough domestic supply of chickens, the company has to import them, but that is illegal in Nigeria and Kenya. To
overcome the supply problem in Nigeria, it added fish to the menu. By 2013, KFC had more than 1,000 restaurants in 17
countries in Africa. As it moved into more and more African markets, the company made sure to localize its menu—sell-
ing Ugali, a type of porridge, in Kenya and jollof rice in Nigeria—and to showcase local culture on the walls and in
the advertising.
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evaluatInG PotentIal Markets
However much nations and regions integrate their trading policies and standards, each market still has unique
features. Readiness for different products and services and attractiveness as a market depend on the market’s
demographic, economic, sociocultural, natural, technological, and political-legal environments.
How does a company choose among potential markets to enter? Many companies prefer to sell to neighboring
countries because they understand them better and can control their entry costs more effectively. It’s not surpris-
ing that the two largest U.S. export markets are Canada and Mexico or that Swedish companies first sold to their
Scandinavian neighbors.
At other times, psychic proximity determines choices. Given more familiar language, laws, and culture, many
U.S. firms prefer to sell in Canada, England, and Australia rather than in larger markets such as Germany and
France. Companies should be careful, however, in choosing markets according to cultural distance. Besides
overlooking potentially better markets, they may only superficially analyze real differences that put them at a
disadvantage.18
It often makes sense to operate in fewer countries, with a deeper commitment and penetration in each. In gen-
eral, a company prefers to enter countries that have high market attractiveness and low market risk and in which
it possesses a competitive advantage. Digicel has a very unusual market expansion strategy, an interesting twist on
those market-entry criteria.19
DigiCeL In its 11-year existence, Jamaica-based Digicel has conquered politically unstable developing coun-
tries such as Papua New Guinea, Haiti, and Tonga with mobile telecommunication products and services appealing to poor
and typically overlooked consumers. The company strives for 100 percent population coverage with its networks, bringing
affordable mobile service to local and rural residents who have never had the opportunity for coverage before and whose
fierce loyalty helps protect Digicel from aggressive government interventions. It operates in 32 markets in the Caribbean,
South Pacific, and Central and South America, serving 13 million customers. To be locally relevant, Digicel sponsors local
cricket, rugby and other high-profile sports teams in each of these areas. Well-known champion Olympic sprinter Usain Bolt
is the chief Digicel Brand Ambassador for various advertising and promotions across the region. The company also runs a
host of community-based initiatives in each market through the educational, cultural, and social development programs of its
Digicel Foundation. The company’s marketing efforts in Fiji are instructive. Pitched in a fierce battle with incumbent Vodafone
only two years after entry, Digicel Fiji even added a shade of light blue from the bottom of the Fiji national flag to its own red
logo to reflect the company’s pride in its contributions to Fijian life and sport, as reflected in its campaign, “Fiji Matters to Us.”
succeedInG In develoPInG Markets
One of the sharpest distinctions in global marketing is between developed and developing or emerg-
ing markets such as Brazil, Russia, India, China, and South Africa. These five countries have formed an
KFC has become one
of the world’s biggest
global brands by
adapting its products
appropriately and
overcoming any
local market obstacles.
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: ©
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association dubbed “BRICS” (for Brazil, Russia, India, China, and South
Africa).20 Another developing market with much economic and market-
ing significance is Indonesia. Some have begun grouping that country and
South Africa with Columbia, Vietnam, Egypt, and Turkey, dubbing them
CIVETS to raise their profile.21 These markets offer many opportunities but
also many challenges.
The unmet needs of the developing world represent huge potential markets
for food, clothing, shelter, consumer electronics, appliances, and many other
goods. Many market leaders are relying on developing markets to fuel their
growth. Nestlé estimates about 1 billion consumers in emerging markets have
increased their incomes enough to afford its products within the next decade.
The world’s largest food company now gets about 40 percent of its revenue
from emerging markets. Developing markets make up more than 50 percent of
Unilever’s sales and 30 percent of Kraft’s total business, as well as more than 40
percent of its newly spun-off snack business, Mondelēz.22
Developing markets account for about 82 percent of the world’s population,
and 90 percent of future population growth is projected to occur there.23 Can
marketers serve this huge population, which has much less purchasing power
and lives in conditions ranging from mild deprivation to severe deficiency?
Next we highlight some important developments in each of the BRICS coun-
tries and Indonesia.
BRAZIL24 Resource-rich Brazil is the biggest economy in Latin America and
the sixth largest in the world. According to a study by Goldman Sachs, it will
likely move into fourth place by 2050, meaning it would economically be larger
than countries like Germany, Japan, and the United Kingdom. The 2014 World
Cup in soccer and the 2016 Summer Olympics in Rio de Janeiro will put the
world’s spotlight on recent progress made by Brazil, though also highlighting
some of the country’s unease in huge investments in athletic events as opposed
to addressing pressing domestic concerns such as education and infrastructure.
Brazil is also the fifth-largest country globally in terms of digital users, with about 91 million people online,
making digital strategies attractive. Social media are especially popular. Firms are increasingly using mobile mar-
keting, with a strong local flavor in their marketing communications.
Marketers are finding innovative ways to sell products and services to Brazil’s poor and low-income residents.
Nestlé Brazil boosted sales of Bono cookies 40 percent after shrinking the package from 200 to 140 grams and low-
ering the price. One Unilever Brasil marketing vice president noted:
There are common themes that resonate well with Brazilians—family life, happiness, optimism, and
pride at being from Brazil. Brazilians are natural optimists, and notoriously upbeat, and the way brands
engage with them must reflect this.
Brazil experienced some “go-go” growth years in the 1960s and 1970s, when it was the world’s second-fastest-
growing large economy. As a result, it now boasts large and well-developed agricultural, mining, manufacturing,
and service sectors.
Brazilian firms that have succeeded internationally include aircraft manufacturer Embraer, sandal maker
Havaianas, and brewer and beverage producer AmBev, which merged with Interbrew to form InBev. Brazil also
differs from other emerging markets in being a full-blown democracy, unlike Russia and China, and it has no seri-
ous disputes with neighbors, unlike India.
A number of obstacles exist, however, that are popularly called custo Brasil (“the cost of Brazil”). The cost of
transporting products eats up nearly 13 percent of Brazil’s GDP, five percentage points more than in the United
States. Unloading a container is twice as expensive as in India and takes three times longer than in China. Strict
and costly labor laws have inspired a massive underground economy that McKinsey estimated accounted for as
much as 40 percent of Brazil’s gross domestic product, taking about half of all urban jobs. Crime and corruption
are still problems.
RussIA25 The 1991 splintering of the Soviet Union transformed Russia’s isolated, centrally planned economy
into a globally integrated, market-based economy. Russia is the largest exporter of natural gas, the second-largest
exporter of oil, and the third-largest exporter of steel and primary aluminum. Reliance on commodities has its
Digicel offers affordable mobile phone service and locally
relevant marketing programs to overlooked consumers in
developing markets.
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ce
: D
ig
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. K
at
ie
T
ay
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TAPPing inTo globAl mARkeTs | chapter 8 245
downside, however. The country’s economy was hammered in the recent recession by plunging commodity prices
and the credit crunch.
Russians make heavy use of social media, spending an average of 9.8 hours per visitor on a monthly basis, twice
the world average, though Facebook has lagged behind local competitors. The company is engaging Russian devel-
opers of apps, games, and similar tools to provide more local content.
Russia has a dwindling workforce and poor infrastructure. The Organization for Economic Cooperation &
Development (OECD) cautions that economic reforms have stagnated and ranks Russia as one of the most cor-
rupt countries in the world. Many feel the government of Vladimir Putin has been unpredictable and difficult to
work with.
For these and other reasons, market entry can be daunting. To distribute in Russia, Cyclo Industries, a U.S.
manufacturer of chemicals for the automotive industry, had to translate its labeling, determine how to competi-
tively price its products, and develop specialized marketing plans. Logistical problems caused one of the company’s
marketers to note, “The roads are just terrible and there’s no way to get from one part of Russia to another.”
Although it took the company more than a year to even establish a presence there, within six months the Russian
market was contributing 10 percent of Cyclo’s revenue.
IndIA26 India’s transformation over a generation has been staggering. Reforms in the early 1990s lowered trade
barriers and liberalized capital markets, bringing booming investment and consumption. India boasts a lively
democracy and a youthful population. The world’s second most populous nation with 1.21 billion people, it is also
one of the youngest large economies, with a median age of 25. In fact, one-quarter of the entire world’s under-25
population lives in India.
A strong economy has been matched by progress in literacy and access to financial services and modern tech-
nology. India has fully embraced mobile technology; mobile phone density is approximately 75 percent of the
population, of whom around 15 percent use their mobile devices to go online. Enjoying some of the lowest prices
anywhere, one-third of Indian mobile subscribers live in rural areas.
India’s ascent opens a larger market for U.S. and Western goods. About 16 million, or 3 percent, of Indian con-
sumers are high-earning targets of youth lifestyle brands connoting status and affluence, like luxury cars and shiny
motorbikes, followed by clothing, food, entertainment, consumer durables, and travel. Opportunities abound for
firms of all types. Indians drank an average of only 14 eight-ounce bottles of Coke in 2012, compared with an aver-
age of 241 bottles in Brazil and 745 bottles in Mexico, leading Coca-Cola to announce a $5 billion investment over
2012–2020.
As the seventh-largest country in size, however, India has important regional differences. Its 28 separate states
each have their own policies and tax rules, 23 official languages, 1,500 dialects, and a multitude of faiths. Areas
around Mumbai and Bangalore are richer and more highly literate, while poorer, less educated states lie in the east.
Even the weather is significant to marketers. Cool winters in the north create dry skin conditions, in stark contrast
to the humid climates of Mumbai and Chennai.
Some Indian firms—such as Mittal, Reliance Group, Tata, Wipro, Infosys, and Mahindra—have achieved
international success. Reliance touches the life of one in 10 Indians every day, and its worldwide customer base
numbers 100 million.
For all its opportunities, India struggles with poor infrastructure and public services—education, health, and
water supply—and restrictive labor laws. The national government in New Delhi vows to spend $1 trillion on
infrastructure over five years, although, as in many emerging markets, corruption remains a huge problem at vir-
tually all levels of government. A complicated retail network has been slow to modernize, leading to distribution
problems.
ChInA27 China’s 1.34 billion people have marketers scrambling to gain a foothold, and competition has heated
up between domestic and international firms. Its 2001 entry into the World Trade Organization (WTO) eased
China’s manufacturing and investment rules and modernized retail and logistics industries. Greater competition
in pricing, products, and channels resulted, though some industries remained fiercely protected or off-limits to
foreigners altogether.
Foreign businesses complain about subsidized competition, restricted access, conflicting regulations, opaque
and seemingly arbitrary bureaucracy, and lack of protection for intellectual property; 90 percent of PC software is
reportedly pirated in China. The Chinese government encourages partnerships with foreign companies, in part so
that its firms can learn enough to become global powerhouses themselves.
Nevertheless, opportunities exist. Although China is Nestlé’s ninth-biggest market, the company sells half what
it does in Brazil, despite China’s having seven times the population. While it’s the largest auto market in the world,
at 60 vehicles per 1,000 people, China lags in car ownership at half the world average. PepsiCo has big plans for its
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246 PART 3 | ConneCTing WiTh CusTomeRs
food and beverage brands knowing that consumption of potato chips in China is around one small bag every two
to four weeks, compared with 15 bags in the United States, and that the average Chinese buys a beverage 230 times
per year while the average U.S. consumer buys 1,500.
Selling in China means going beyond the big cities to the second- and third-tier cities, as well as to the 700 mil-
lion potential consumers in small communities in the rural interior. Chengdu and Chongqing are two second-tier
economic powerhouses in western China and experiencing much growth. Rural consumers can be challenging;
they have lower incomes (the income ratio between China’s coastal cities and rural interior is six to one), are less
sophisticated, and often cling to local habits. China is also ethnically diverse—the banknote features eight lan-
guages, including Arabic, Mongolian, and Tibetan.
China’s emerging urban middle class is active and discerning, demanding higher-quality products and variety.
Although they number four times the U.S. population, Chinese consumers spend a fraction of what U.S. consum-
ers do. China is now the world’s top consumer of luxury consumer goods, with many Chinese consumers view-
ing these as trophies of success. Luxury cars are the fastest-growing auto segment thanks to the swelling ranks of
Chinese millionaires. Burberry’s sales in China now almost match those in Europe as a whole.
Competition among foreign firms is fierce as they attempt to get the upper hand in the fast-growing market.
Walmart contends with Carrefour, General Motors fights Volkswagen, and Nike battles Adidas. In competing
with local firms, many Western companies benefit from their reputation of quality, safety, and dependability
with Chinese consumers, who have seen numerous scandals from their domestic companies. At the same time,
Western companies need to be locally relevant. Starbucks has a localized menu of beverages particularly tailored
for Chinese consumers—including a unique “East meets West” blend—from which local stores can choose.
south AfRICA28 Although South Africa is a developed market, we include it here not only as an important
market in its own right but also for its role as an access point to the African region; many international companies
are using it as a launch pad for African expansion. The 2010 World Cup in soccer offered a chance to reexamine
economic progress in South Africa and other African countries.
Africa has experienced much change in recent years. Although political turmoil in Egypt, Tunisia, and Libya
during the “Arab Spring” is a reminder of the instability that has plagued the continent and logistical and in-
frastructure problems prevail, improvements in many other areas such as health, education, and social services
paint a rosier picture of the continent’s future, as do economic forecasts. McKinsey Global Institute estimates the
number of African households with discretionary income—money available to spend on items other than food—is
expected to increase by a robust 50 percent to 128 million people by 2020.
Additional McKinsey research shows that many African consumers seek high-quality products and are brand
conscious, “belying the view that the continent is a backwater where companies can sell second-rate merchandise.”
Unilever is finding success by tailoring products for African customers: affordable food, water-conserving washing
powders, and grooming products to fit local tastes. Its best-selling Motions range of shampoos and conditioners
were made especially for African hair and black skin.
Some firms have worked for years to develop their African business. General Motors now sells in more than 50
African countries and has manufacturing facilities in South Africa, Egypt, and Kenya. Like any other continent,
Africa is highly heterogeneous, and some experts emphasize that it should be seen as 53 separate and often very
different countries. The Boston Consulting Group has dubbed eight of Africa’s strongest economies the “African
Lions”: Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa, and Tunisia. Nestlé is especially bullish
on Kenya, Ethiopia, Mozambique, Angola, and the Democratic Republic of the Congo.
Although agriculture is the largest economic sector, telecommunications, energy, consumer products, and health
care are experiencing the fastest growth. More than 650 million Africans had mobile phones by the end of 2011;
more than 300 million of them are new subscribers since 2000. Mobile phones are used not just for talking but also
as a platform to support daily living, playing a crucial role in health care and banking, for example, where extensive
infrastructure does not exist. Two-thirds of adults used a mobile money service, with Vodafone and MTN leading
the way. The Internet is playing an increasingly important marketing role in Africa, often accessed by mobile phones.
IndonesIA29 Indonesia’s reputation as a country historically struggling with natural disasters, terrorism, and
economic uncertainty is quickly being replaced by a profile of political stability and economic growth. The fourth-
largest country in the world and the largest Muslim country, given all its progress, Indonesia strikes many as ready
to join the BRICS countries.
It has become the third-fastest-growing economy in the region—behind India and China—largely on the basis
of its 240 million consumers. By 2030, forecasts expect the number of middle-class Indonesians—those making
between $2 and $20 per day—to increase from 131 million to 244 million and those in the “consumer class”—who
make more than $3,600 per year—to increase from 45 million to 135 million. Marketers have found Indonesian
consumers to be very brand conscious, an important preference given their rising incomes.
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An archipelago with more than 14,000 islands in a hot and humid climate, Indonesia does present challenges.
Effective, efficient distribution is critical. Large importers have established distribution networks that allow them
to reach beyond the one-third of the population living in the six or seven largest cities, but as in many developing
countries, infrastructure can be lacking.
Recent progress is noteworthy, however. Indonesia is L’Oréal’s fastest-growing market in Asia-Pacific, leading
the firm to build a plant there. IKEA has made a recent entry. With more than 20 percent of its Internet users hav-
ing a Twitter account, Indonesia is the fifth-most active country on the microblogging site.
MARketIng stRAtegIes foR deveLopIng MARkets Successfully entering developing markets
requires a special set of skills and plans and an ability to do a number of things differently and well.30 Consider
how these companies pioneered ways to serve “invisible” consumers in these markets:31
• Grameenphone marketed cell phones to 35,000 villages in Bangladesh by hiring village women as agents who
leased phone time to other villagers, one call at a time.
• Colgate-Palmolive rolled into Indian villages with video vans that showed the benefits of toothbrushing.
• Corporación GEO builds low-income housing in Mexico, featuring two-bedroom homes that are modular
and expandable.
These marketers capitalized on the potential of developing markets by changing their conventional marketing
practices. Selling in developing areas can’t be “business as usual.” Economic and cultural differences abound, a
marketing infrastructure may barely exist, and local competition can be surprisingly stiff.32
Many companies are tapping into the growing middle class in developing markets. Boston Consulting Group
estimates there will be nearly a billion middle-class Chinese and Indians by 2020.33 Many will have aspirations that
include the purchase of premium products and global brands.34
For example, when Unilever introduced TRESemmé in Brazil, it secured the support of 40 big retailers, courted
fashion bloggers, distributed 10 million free samples, and launched the company’s biggest-ever single-day online
ad blitz, which eventually lured 1 million fans to the brand’s Brazilian Facebook page. In under a year, sales of
TRESemmé surpassed those of P&G shampoo stalwart Pantene in hypermarkets and drugstores, giving Unilever
confidence to set its sights on India and Indonesia next.35
Because the needed marketing practices are more similar to those employed in developing markets, it is
typically much easier to tap into the middle class in developing markets than to reach the 4 billion people at the
“ bottom of the pyramid.” Although they may collectively be worth $3 trillion, each individual low-income con-
sumer may have very little to spend.
Satisfying the bottom of the pyramid also requires careful planning and execution. Conventional wisdom says
a “low price, low margin, high volume” business model is the key to successfully appealing to lower-income mar-
kets in developing markets. Although there are some good examples of such a strategy—Hindustan Unilever with
Wheel detergent in India, for one—others have struggled. Procter & Gamble launched its Pur water-purification
product in India, and although priced at only 10 cents a sachet, the product yielded a 50 percent margin. But after
disappointing overall results, the company transitioned the brand to a philanthropic venture.36
Marketers are learning the nuances in marketing to a broader population in emerging markets, especially when
cost reductions are difficult to realize because of the firm’s established supply chain and when production methods
and distribution strategy and price premiums are hard to command because of consumer price sensitivity.
Getting the marketing equation right in developing markets can pay big dividends:
• Smaller packaging and lower prices are often critical when income and space are limited. Unilever’s four-cent
sachets of detergent and shampoo were a big hit in rural India, where 70 percent of the population still lives.37
• The vast majority of consumers in emerging markets buy their products from tiny bodegas, stalls, kiosks, and
mom-and-pop stores not much bigger than a closet, which Procter & Gamble calls “high-frequency stores.” In
India, food is largely purchased from the 12 million neighborhood mom-and-pop outfits called kirana stores.
These thrive by offering convenience, credit, and even home delivery, though modern retailing is beginning to
make inroads.38
• Nokia sent marketing, sales, and engineering staff from its entry-level phone group to spend a week in
people’s homes in rural China, Thailand, and Kenya to observe how they used phones. By developing rock-
bottom-priced phones with just the right functionality, Nokia has retained market-share leadership in some
parts of Africa and Asia despite being surpassed by other brands in parts of the developed world.39
Digital strategies will be crucial in developing markets given the rapid penetration of smart phones as more
than a means of communication. One research study showed that social media is six times more important for
brands in developing markets such as Indonesia and Thailand than it is in Japan or the United Kingdom. 40
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deveLopIng and deveLoped MARkets Competition is also growing from companies based in
developing markets. Wipro of India, Cemex of Mexico, HTC from Taiwan, and Petronas of Malaysia have emerged
from developing markets to become strong multinationals selling in many countries. Often the key is to both
develop a global business model and build a global brand that will effectively work in all the targeted markets.41
One strategy successfully employed by some companies from emerging markets is to identify neglected niches
in larger markets.42 Mahindra has been selling U.S. farmers small tractors from its three U.S. assembly plants for
more than 20 years. It has used its expertise in manufacturing small tractors to also expand into niche mar-
kets for lawn care and golf course maintenance.
Another strategy for going global is to acquire one or more firms in developed markets. India’s Apollo Tyres
acquired businesses in the Netherlands and South Africa. After Lenovo bought IBM’s PC business for $1.25
billion in 2005, many other Chinese firms began to look overseas for possible acquisitions, leading one pundit
to declare that the well-known phrase “Made in China” would soon be replaced by “Owned by China.”43
On the other hand, many firms from developed markets are using lessons gleaned from developing mar-
kets to better compete in their home or existing markets (recall the “bottom of the pyramid” discussion from
Chapter 3). Product innovation has become a two-way street between developing and developed markets.
The challenge is to think creatively about how marketing can fulfill the dreams of most of the world’s popula-
tion for a better standard of living.44
Many companies are betting they can do that. To feed a projected world population of 9 billion by 2050, ana-
lysts estimate that food production globally must increase by 60 percent, a challenge John Deere is addressing.45
JOhN Deere John Deere’s new 8R line was the first tractor line designed to accommodate the
needs of different farmers in 130 countries worldwide. The 8R is powerful but agile and fuel-efficient, best suited for
larger farms. But it is highly customizable to suit the needs of growers in developing markets like Brazil and Russia
as much as the developed markets of the United States or Germany. From March 2011 to March 2012, customers
ordered more than 7,800 different configurations of the 8R tractor. Deere has nine factories outside the United States
in both developed and developing markets, including Germany, India, China, Mexico, and Brazil.
Regional economic integration—the creation of trading agreements between blocs of countries—has
intensified in recent years. This means companies are more likely to enter entire regions at the same time.
Certain countries have formed free trade zones or economic communities—groups of nations organized to
work toward common goals in the regulation of international trade.
Deciding How to Enter the Market
Once a company decides to target a particular country, it must choose the best mode of entry with its brands.
Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct investment, shown
in Figure 8.2. Each succeeding strategy entails more commitment, risk, control, and profit potential.
Joint
ventures
Direct
investment
Indirect
exporting
Licensing
Co
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itm
en
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Ri
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, C
on
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ol
, a
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P
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Direct
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| Fig. 8.2 |
Five Modes
of Entry
into Foreign
Markets
In India, millions of
consumers buy
their food from the
ubiquitous kirana or
“mom & pop” shops.
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IndIrect and dIrect exPort
Companies typically start with export, specifically indirect exporting—that is, they work through independent
intermediaries. Domestic-based export merchants buy the manufacturer’s products and then sell them abroad.
Domestic-based export agents, including trading companies, seek and negotiate foreign purchases for a commis-
sion. Cooperative organizations conduct exporting activities for several producers—often of primary products
such as fruits or nuts—and are partly under their administrative control. Export-management companies agree to
manage a company’s export activities for a fee.
Indirect export has two advantages. First, there is less investment: The firm doesn’t have to develop an export
department, an overseas sales force, or a set of international contacts. Second, there’s less risk: Because inter-
national marketing intermediaries bring know-how and services to the relationship, the seller will make fewer
mistakes.
Companies may eventually decide to handle their own exports. The investment and risk are somewhat greater,
but so is the potential return. Direct exporting happens in several ways:
• Domestic-based export department or division. A purely service function may evolve into a self-
contained export department operating as its own profit center.
• Overseas sales branch or subsidiary. The sales branch handles sales and distribution and perhaps warehous-
ing and promotion as well. It often serves as a display and customer service center.
• Traveling export sales representatives. Home-based sales representatives travel abroad to find business.
• Foreign-based distributors or agents. These third parties can hold limited or exclusive rights to represent the
company in that country.
Many companies use direct or indirect exporting to “test the waters” before building a plant and manufacturing
their product overseas. A company does not necessarily have to attend international trade shows if it can effectively
use the Internet to attract new customers overseas, support existing customers who live abroad, source from inter-
national suppliers, and build global brand awareness.
Successful companies adapt their Web sites to provide country-specific content and services to their highest-
potential international markets, ideally in the local language. Finding free information about trade and exporting
has never been easier. Here are some places to start a search:
www.trade.gov U.S. Department of Commerce’s International Trade Administration
www.exim.gov Export-Import Bank of the United States
www.sba.gov U.S. Small Business Administration
www.bis .gov Bureau of Industry and Security, a branch of the Commerce Department
Many states’ export-promotion offices also have online resources and allow businesses to link to their sites.
lIcensInG
Licensing is a simple way to engage in international marketing. The licensor issues a license to a foreign company
to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty. The
licensor gains entry at little risk; the licensee gains production expertise or a well-known product or brand name.
The licensor, however, has less control over the licensee than over its own production and sales facilities. If the
licensee is very successful, the firm has given up profits, and if and when the contract ends, it might find it has
created a competitor. To prevent this, the licensor usually supplies some proprietary product ingredients or com-
ponents (as Coca-Cola does). But the best strategy is to lead in innovation so the licensee will continue to depend
on the licensor.
Licensing arrangements vary. Companies such as Hyatt and Marriott sell management contracts to owners of
foreign hotels to manage these businesses for a fee. The management firm may have the option to purchase some
share in the managed company within a stated period.
In contract manufacturing, the firm hires local manufacturers to produce the product. Volkswagen has a
contract agreement with the GAZ Group through 2019, whereby GAZ will build the Volkswagen Jetta, Skoda
Octavia, and Skoda Yeti models in Nizhny Novgorod for the Russian market, with planned production volume of
110,000 vehicles per year.46 Toshiba, Hitachi, and other Japanese television manufacturers use contract manufac-
turing to service the Eastern European market.47
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Contract manufacturing reduces the company’s control over the process and risks
loss of potential profits. However, it offers a chance to start faster, with the opportu-
nity to partner with or buy out the local manufacturer later.
Finally, a company can enter a foreign market through franchising, a more com-
plete form of licensing. The franchisor offers a complete brand concept and operat-
ing system. In return, the franchisee invests in and pays certain fees to the franchisor.
Quick-service operators like McDonald’s, Subway, and Burger King have franchised
all over the world, as have service and retail companies such as 7-Eleven, Hertz, and
Best Western Hotels.48
JoInt ventures
Historically, foreign investors have often joined local investors in a joint venture
company in which they share ownership and control. To reach more geographic and
technological markets and to diversify its investments and risk, GE Capital—GE’s re-
tail lending arm—views joint ventures as one of its “most powerful strategic tools.” It
has formed joint ventures with financial institutions in South Korea, Spain, Turkey,
and elsewhere.49 Emerging markets, especially large, complex countries such as
China and India, see much joint venture action.
A joint venture may be necessary or desirable for economic or political reasons.
The foreign firm might lack the financial, physical, or managerial resources to un-
dertake the venture alone, or the foreign government might require joint ownership
as a condition for entry. Joint ownership has drawbacks. The partners might disagree
over investment, marketing, or other policies. One might want to reinvest earnings
for growth, the other to declare more dividends. Joint ownership can also prevent
a multinational company from carrying out specific manufacturing and marketing
policies on a worldwide basis.
The value of a partnership can extend far beyond increased sales or access to dis-
tribution. Good partners share “brand values” that help maintain brand consistency
across markets. For example, McDonald’s fierce commitment to product and service
standardization is one reason its retail outlets are so similar around the world. McDonald’s handpicks its global
partners one by one to find “compulsive achievers” who will put forth the desired effort.
dIrect InvestMent
The ultimate form of foreign involvement is direct ownership: The foreign company can buy part or full interest
in a local company or build its own manufacturing or service facilities. Cisco had no presence in India before
2005, but it has already opened a second headquarters in Bangalore to take advantage of opportunities in India
and other locations such as Dubai.50
If the market is large enough, direct investment offers distinct advantages. First, the firm secures cost econo-
mies through cheaper labor or raw materials, government incentives, and freight savings. Second, the firm
strengthens its image in the host country because it creates jobs. Third, the firm deepens its relationship with the
government, customers, local suppliers, and distributors, enabling it to better adapt its products to the local envi-
ronment. Fourth, the firm retains full control over its investment and can develop manufacturing and marketing
policies that serve its long-term international objectives. Fifth, the firm ensures its access to the market in case the
host country insists that locally purchased goods must have domestic content.
The main disadvantage of direct investment is that the firm exposes a large investment to risks like blocked or
devalued currencies, worsening markets, or expropriation. If the host country requires high severance pay for local
employees, reducing or closing operations can be expensive.
acquIsItIon
Rather than bringing their brands into certain countries, many companies choose to acquire local brands for
their brand portfolio. Strong local brands can tap into consumer sentiment in a way international brands may
find difficult. A good example of a company assembling a collection of “local jewels” is SABMiller.51
Companies such as Best Western have used franchise
arrangements to cost-effectively enter markets all over
the world.
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SabMiLLer From its isolated origins as the dominant brewery in South Africa, SABMiller now has a pres-
ence in 75 different countries all over the world, thanks to a series of acquisitions including its 2002 purchase of Miller
Brewing in the United States for $5.6 billion. The company is the world’s second-largest beer maker, producing such
well-known brands as Grolsch, Miller Lite, Peroni, Pilsner Urquell, South Africa’s Castle Lager, and Australia’s Victoria
Bitter. Its global strategy, however, is in stark contrast to that of its main competitor. Anheuser-Busch InBev’s strategy
with Budweiser is to sell the brand all over the world, positioned as “The American Dream in a Bottle.” SABMiller calls
itself “the most local of global brewers” and believes the key to global success is pushing local brands that appeal to a
home country’s customs, attitudes, and traditions. The company relies on sociologists, anthropologists, and historians to
find the right way to create “local intimacy” and also employs 10 analysts whose sole responsibility is segmentation re-
search in different markets. Peru’s Cusquena brand “pays tribute to the elite standard of Inca craftsmanship.” Romania’s
Timisoreana brand taps into its own 18th-century roots. In Ghana and other parts of Africa, cloudy Chibuku beer is priced
at only 58¢ a liter to compete with home brews. When research revealed that many beer drinkers in Poland felt “no one
takes us seriously,” SABMiller launched a campaign for its Tyskie brand featuring foreigners lauding the brew and the
Polish people.
Deciding on the Marketing Program
International companies must decide how much to adapt their marketing strategy to local conditions.52 At one
extreme is a standardized marketing program worldwide, which promises the lowest costs; Table 8.1 summarizes
some pros and cons. At the other extreme is an adapted marketing program in which the company, consistent with
the marketing concept, believes consumer needs vary and tailors marketing to each target group. A good example
of the latter strategy is Oreo cookies.53
tABLe 8.1 Globally Standardized Marketing Pros and Cons
Advantages
Economies of scale in production and distribution
Lower marketing costs
Power and scope
Consistency in brand image
Ability to leverage good ideas quickly and efficiently
Uniformity of marketing practices
Disadvantages
Ignores differences in consumer needs, wants, and usage patterns for products
Ignores differences in consumer response to marketing programs and activities
Ignores differences in brand and product development and the competitive environment
Ignores differences in the legal environment
Ignores differences in marketing institutions
Ignores differences in administrative procedures
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OreO In launching its Oreo brand of cookies worldwide, Kraft chose to adopt a consistent global positioning,
“Milk’s Favorite Cookie.” Although not necessarily highly relevant in all countries, it did reinforce generally desirable asso-
ciations like nurturing, caring, and health. To help ensure global understanding, Kraft created a brand book with a CD in an
Oreo-shaped box that summarized brand management fundamentals—what needed to be common across countries, what
could be changed, and what could not. At first, Kraft tried to sell the U.S. Oreo everywhere. When research showed cultural
differences in taste preferences—Chinese found the cookies too sweet whereas Indians found them too bitter—new for-
mulas were introduced across markets. In China, the cookie was made less sweet and with different fillings, such as green
tea ice cream, grape–peach, mango–orange, and raspberry–strawberry. Indonesia has a chocolate-and-peanut variety;
Argentina has banana and dulce de leche varieties. In an example of reverse innovation, Kraft successfully introduced some
of these new flavors into other countries. The company also tailors its marketing efforts to better connect with local con-
sumers. One Chinese commercial has a child showing China’s first NBA star Yao Ming how to dunk an Oreo cookie.
Global sIMIlarItIes and dIfferences
The vast penetration of the Internet, the spread of cable and satellite TV, and the global linking of telecommuni-
cations networks have led to a convergence of lifestyles. Increasingly shared needs and wants have created global
markets for more standardized products, particularly among the young middle class. Once the butt of jokes like
“Why do you need a rear-window defroster on a Skoda? To keep your hands warm when pushing it,” the Czech
carmaker Skoda was acquired by VW, which invested to upgrade quality and image and offer an affordable option
to lower-income consumers worldwide.54
At the same time, consumers can still vary in significant ways.55
• The median age is only about 26 or 27 in India and Mexico and 35 in China but about 43 to 45 in Japan,
Germany, and Italy.56
• Doughnuts don’t appeal to British consumers for breakfast, while Kenyans need to be convinced that cereal is
a good option.57
• When asked whether they are more concerned with getting a specific brand rather than the best price, roughly
two-thirds of U.S. consumers agreed, compared with about 80 percent in Russia and India.58
• The percentage of the population online varies wildly across countries: United Kingdom (85 percent), Japan
(80 percent), United States (79 percent), Brazil (40 percent), China (34 percent), and India (7.5 percent). U.S.
Internet users spend an average of 32 hours per month, compared with 16 hours globally.59
Consumer behavior may reflect cultural differences that can be pronounced across countries.60 Hofstede identi-
fies four cultural dimensions that differentiate countries:61
1. Individualism versus collectivism—In collectivist societies, the self-worth of an individual is rooted more in
the social system than in individual achievement (high collectivism: Japan; low: United States).
2. High versus low power distance—High power distance cultures tend to be less egalitarian (high: Russia; low:
Nordic countries).
SABMiller has assembled
a diverse portfolio of
iconic local beer brands
from all over the world.
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3. Masculine versus feminine—This dimension measures how much the culture reflects assertive characteristics
more often attributed to males versus nurturing characteristics more often attributed to females (highly mas-
culine: Japan; low: Nordic countries).
4. Weak versus strong uncertainty avoidance—Uncertainty avoidance indicates how risk-aversive people are
(high avoidance: Greece; low: Jamaica).
Consumer behavior differences as well as historical market factors have led marketers to position brands differ-
ently in different markets.
• Heineken beer is a high-end super-premium offering in the United States but more middle-of-the-road in its
Dutch home market.
• Honda automobiles denote speed, youth, and energy in Japan and quality and reliability in the United States.
• The Toyota Camry is the quintessential middle-class car in the United States but is at the high end in China,
though in the two markets the cars differ only in cosmetic ways.
MarketInG adaPtatIon
Because of all these differences, most products require at least some adaptation.62 Even Coca-Cola is sweeter or less
carbonated in certain countries. Rather than assuming it can introduce its domestic product “as is” in another coun-
try, a company should review the following elements and determine which add more revenue than cost if adapted:
• Product features
• Labeling
• Colors
• Materials
• Sales promotion
• Prices
• Advertising media
• Brand name
• Packaging
• Advertising execution
• Advertising themes
The best global brands are consistent in theme but reflect significant differences in consumer behavior, brand
development, competitive forces, and the legal or political environment.63 Oft-heard—and sometime modified—
advice to marketers of global brands is to “Think Global, Act Local.” In that spirit, HSBC was explicitly positioned
for years as “The World’s Local Bank.”
Take McDonald’s, for example.64 It allows countries and regions to customize its basic layout and menu staples
(see Table 8.2). In cities plagued by traffic tie-ups like Manila, Taipei, Jakarta, and Cairo, McDonald’s delivers via
fleets of motor scooters.
tABLe 8.2 McDonald’s Global Menu Variations
Country Noteworthy Menu Items
United States Big Mac, Chicken McNuggets, Filet-o-Fish, Egg McMuffin, Fries
India McVeggie, Chicken Maharaja-Mac, McSpicy Paneer
France Le McBaguette, Le Croque McDo, Le Royal Cheese
Egypt Beef N Pepper, McArabia (grilled kofta), McFalafel
Israel McKebab, McFalafel, Big New York and Big Texas (hamburgers)
Japan Ebi Filet-O, Mega Teriyaki Burger, Bacon Egg and Lettuce Wrap, Shaka Shaka Chicken
China Prosperity Burger, Taro Pie, McWings, McNuggets with Chili Garlic sauce
Brazil Banana Pie, McNífico Bacon, Cheddar McMelt, Big Tasty
Mexico Big Mac, McChicken, Fries, etc.
Sources: “Discover McDonald’s Around the World,” www.aboutmcdonalds.com/mcd/country/map.html, accessed May 20, 2014; David Griner, “McDonald’s 60-Second
Meals in Japan Aren’t Going So Well,” Adweek, January 7, 2013; Richard Vines and Caroline Connan, “McDonald’s Wins Over French Chef with McBaguette Sandwich,”
www.bloomberg.com, January 15, 2013; Ségolène Poirier, “McDonald’s Brazil Has Big Plans,” The Rio Times, April 8, 2012; Susan Postlewaite, “McDonald’s McFalafel
a Hit with Egyptians, Advertising Age, June 19, 2001.
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Companies must make sure their brands are relevant to consumers in every market they enter. After highlight-
ing how Amazon and Netflix are entering global markets, we next consider some specific issues in developing
global product, communications, pricing, and distribution strategies.65
aMazON aND NeTFLix Two of the most successful marketing companies in recent years,
Amazon and Netflix are going overseas to fuel their rapid growth, but they are also finding themselves butting heads as
they both seek to become the market leader for digital movie downloads. The older of the two, Amazon has been overseas
longer, finding much success in the United Kingdom, Germany, and other parts of Europe. Amazon has also moved into
Asia-Pacific but has found progress in emerging markets like China to be slow. Amazon acquired LoveFilm, a European DVD
rental and movie-streaming business, to compete with Netflix. It also opened up a massive media R&D center in London
and expanded its Android-based Appstore distribution business to cover 200 countries. Netflix has expanded aggressively
overseas, starting with Canada in 2010 and Latin America in 2011 and then the United Kingdom, Ireland, and Nordic coun-
tries in 2012. Although its international base of more than 6 million consumers is formidable, the company faces heavy
local and regional competition and has to negotiate with local broadcasters and distributors for its streaming TV licenses.
To attract new users, Netflix is emphasizing breadth of content and original programming such as the Emmy- and Golden
Globe–winning political thriller “House of Cards.”
Global Product strateGIes
Developing global product strategies requires knowing what types of products or services are easily standardized
and what are appropriate adaptation strategies.
pRoduCt stAndARdIZAtIon Some products cross borders without adaptation better than others,
and consumer knowledge about new products is generally the same everywhere because perceptions have yet to
be formed. Many leading Internet brands—such as Google, eBay, Twitter, and Facebook—made quick progress in
overseas markets.
High-end products also benefit from standardization because quality and prestige often can be marketed
similarly across countries. Culture and wealth factors influence how quickly a new product takes off in a coun-
try, though adoption and diffusion rates are becoming more alike across countries over time. Food and beverage
marketers find it more challenging to standardize, of course, given widely varying tastes and cultural habits.66
A company may emphasize its products differently across markets. In its medical-equipment business, Philips
traditionally reserved higher-end, premium products for developed markets and emphasized products with basic
functionality and affordability in developing markets. Increasingly, however, the company is designing, engineer-
ing, and manufacturing locally in emerging markets like China and India.67
Amazon has found
great success
moving into
global markets,
especially in
Europe.
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With a growing middle class in many emerging markets, many firms are assembling product portfolios to
tap into different income segments. French food company Danone has many high-end healthy products, such
as Dannon yogurt, Evian water, and Bledina baby food, but it also sells much lower priced products targeting
consumers with “dollar-a-day” food budgets. In Indonesia, where average per-capita income is about US$10
a day, the company sells Milkuat, a 6 month shelf life neutral ph milk beverage. Danone now generates over
60% of its sales from growth markets (i.e. all except Western Europe), up from just 23% in 1996 (source: www
.danone.com).68
pRoduCt AdAptAtIon stRAtegIes Warren Keegan has distinguished five product and communications
adaptation strategies (see Figure 8.3).69 We review the product strategies here and the communication strategies in
the next section.
Straight extension introduces the product in the foreign market without any change. Tempting because it
requires no additional R&D expense, manufacturing retooling, or promotional modification, the strategy has
been successful for cameras, consumer electronics, and many machine tools. In other cases, it has been a disaster.
Campbell Soup Company lost an estimated $30 million introducing condensed soups in England; consumers saw
expensive small-sized cans and didn’t realize water needed to be added.
Product adaptation alters the product to meet local conditions or preferences. Flexible manufacturing makes it
easier to do so on several levels.
• A company can produce a regional version of its product. Dunkin’ Donuts has been introducing more region-
alized products, such as Coco Leche donuts in Miami and sausage
kolaches in Dallas.70
• A company can produce a country version. Kraft blends different
coffees for the British (who drink coffee with milk), the French
(who drink it black), and Latin Americans (who want a chicory
taste).
• A company can produce a city version—for instance, a beer to meet
Munich’s or Tokyo’s tastes.
• A company can produce different retailer versions, such as one cof-
fee brew for the Migros chain store and another for the Cooperative
chain store, both in Switzerland.
Some companies have learned adaptation the hard way. The Euro
Disney theme park, launched outside Paris in 1992, was harshly criti-
cized as an example of U.S. cultural imperialism that ignored French
customs and values, such as the serving of wine with meals. As one
Do Not Change
Product
Adapt
Product
Product
Co
m
m
un
ic
at
io
ns
Develop New
Product
Straight
extension
Product
adaptation
Product
invention
Communication
adaptation
Do Not Change
Communications
Adapt
Communications
Dual
adaptation
| Fig. 8.3 |
Five International Product and
Communication Strategies
Milkuat is a popular
milk beverage in
Indonesia due to its
six month shelf life
and affordability.
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Euro Disney executive noted, “When we first launched, there was the belief that it was enough to be Disney.
Now we realize our guests need to be welcomed on the basis of their own culture and travel habits.” Renamed
Disneyland Paris, the theme park eventually became one of Europe’s biggest tourist attraction—even more popular
than the Eiffel Tower—by implementing a number of local touches.71
On the other hand, South Korea’s LG Electronics has found success in India by investing in local design and
manufacturing facilities that helped it develop TVs with higher-quality speakers, refrigerators with brighter colors
and smaller freezers, and microwaves with one-touch “Indian menu” functions, all reflecting Indian preferences.72
Product invention creates something new. It can take two forms:
• Backward invention reintroduces earlier product forms well adapted to a foreign country’s needs. A big hit in
developing markets in Latin America, Mexico, and the Middle East, the powdered drink Tang has added local
flavors like lemon pepper and soursop. Although its U.S. sales have fallen precipitously, its worldwide sales
doubled from 2006 to 2011.73
• Forward invention creates a new product to meet a need in another country. Less-developed countries need
low-cost, high-protein foods. Companies such as Quaker Oats, Swift, and Monsanto have researched their nu-
trition requirements, formulated new foods, and developed advertising to gain product trial and acceptance.
BRAnd eLeMent AdAptAtIon When they launch products and services globally, marketers may need
to change certain brand elements.74 Even a brand name may require a choice between phonetic and semantic
translations.75 When Clairol introduced the “Mist Stick,” a curling iron, in Germany, it found that mist is slang for
manure. In China, Coca-Cola and Nike have both found sets of Chinese characters that sounds broadly like their
names but also offer some relevant meaning at the same time (“Can Be Tasty, Can Be Happy” and “Endurance
Conquer,” respectively).76
Numbers and colors can take on special meaning in certain countries. The number four is considered unlucky
throughout much of Asia because the Japanese word sounds like “death.” Some East Asian buildings skip not only
the fourth floor but often every floor that has a four in it (14, 24, 40–49). Nokia doesn’t release phone models with
the number four in them in Asia.77
Purple is associated with death in Burma and some Latin American nations, white is a mourning color in India,
and in Malaysia green connotes disease. Red generally signifies luck and prosperity in China.78
Brand slogans or ad taglines sometimes need to be changed too:79
• When Coors put its brand slogan “Turn it loose” into Spanish, some read it as “suffer from diarrhea.”
• A laundry soap ad claiming to wash “really dirty parts” was translated in French-speaking Quebec to read “a
soap for washing private parts.”
• Perdue’s slogan—“It takes a tough man to make a tender chicken”—was rendered into Spanish as “It takes a
sexually excited man to make a chicken affectionate.”
Table 8.3 lists some other famous marketing mistakes in this area.
tABLe 8.3 Classic Blunders in Global Marketing
• Hallmark cards failed in France, where consumers dislike syrupy sentiment and prefer writing their own cards.
• Philips became profitable in Japan only after reducing the size of its coffeemakers to fit smaller kitchens and its
shavers to fit smaller hands.
• Coca-Cola withdrew its big two-liter bottle in Spain after discovering that few Spaniards owned refrigerators that
could accommodate it.
• General Foods’ Tang initially failed in France when positioned as a substitute for orange juice at breakfast. The
French drink little orange juice and almost never at breakfast.
• Kellogg’s Pop-Tarts failed in Britain because fewer homes have toasters than in the United States and the product
was too sweet for British tastes.
• The U.S. campaign for Procter & Gamble’s Crest toothpaste initially failed in Mexico. Mexicans did not care as much
about the decay-prevention benefit nor the scientifically oriented advertising appeal.
• General Foods squandered millions trying to introduce packaged cake mixes to Japan, where only 3 percent of
homes at the time were equipped with ovens.
• S. C. Johnson’s wax floor polish initially failed in Japan. It made floors too slippery for a culture where people do not
wear shoes at home.
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Global coMMunIcatIon strateGIes
Changing marketing communications for each local market is a process called communication adaptation. If it
adapts both the product and the communications, the company engages in dual adaptation.
Consider the message. The company can use one message everywhere, varying only the language and
name.80 General Mills positions its Häagen-Dazs brand in terms of “indulgence,” “affordable luxury,” and
“ intense sensuality.” To communicate that message, it ran a 30-second TV spot called “Sensation,” with the tag-
line “Anticipated Like No Other” in markets all over the world, substituting only the voice-over in the language
of each country.81
The second possibility is to use the same message and creative theme globally but adapt the execution. GE’s
global “Ecomagination” ad campaign substitutes creative content in Asia and the Middle East to reflect cultural
interests there. Even in the high-tech space, local adaptations may be necessary.82
The third approach, which Coca-Cola and Goodyear have used, consists of developing a global pool of ads from
which each country selects the most appropriate. Finally, some companies allow their country managers to create
country-specific ads—within guidelines, of course. The challenge is to make the message as compelling and effec-
tive as in the home market.
gLoBAL AdAptAtIons Companies that adapt their communications wrestle with a number of
challenges. They first must ensure their communications are legally and culturally acceptable. U.S. toy makers
were surprised to learn that in many countries (Norway and Sweden, for example), no TV ads may be directed
at children under 12. To foster a culture of gender neutrality, Sweden also now prohibits “sexist” advertising—a
commercial that spoke of “cars for boys, princesses for girls” was criticized by government advertising
regulators.83
A number of countries are taking steps to eliminate “super skinny” and airbrushed models in ads. Israel has
banned “underweight” models from print and TV ads and runway shows. Models must have a body-mass index—
a calculation based on height and weight—of greater than 18.5. According to that BMI standard, a female model
who is 5 feet, 8 inches tall can weigh no less than 119 pounds.84
Firms next must check their creative strategies and communication approaches for appropriateness. Comparative
ads, though acceptable and even common in the United States and Canada, are
less frequent in the United Kingdom, unacceptable in Japan, and illegal in India
and Brazil. The EU seems to have a very low tolerance for comparative advertis-
ing and prohibits bashing rivals in ads.
Companies also must be prepared to vary their messages’ appeal.85 In
advertising its hair care products, Helene Curtis observed that middle-class
British women wash their hair frequently, Spanish women less so. Japanese
women avoid overwashing for fear of removing protective oils. Language
can vary too, whether the local language, another such as English, or some
combination.86
When the brand is at an earlier stage of development in its new market, con-
sumer education may need to accompany brand development efforts. In launch-
ing Chik shampoo in rural areas of South India, where hair is washed with soap,
CavinKare showed people how to use the product through live “touch and feel”
demonstrations and free sachets at fairs.87
Personal selling tactics may need to change too. The direct, no-nonsense ap-
proach favored in the United States (“let’s get down to business” and “what’s in it
for me”) may not work as well in Europe or Asia as an indirect, subtle approach.88
Global PrIcInG strateGIes
Multinationals selling abroad must contend with price escalation and transfer
prices (and dumping charges). As part of those issues, two particularly thorny
pricing problems are gray markets and counterfeits.
pRICe esCALAtIon A Gucci handbag may sell for $120 in Italy and $240
in the United States. Why? Gucci must add the cost of transportation, tariffs,
importer margin, wholesaler margin, and retailer margin to its factory price.
Price escalation from these added costs and currency-fluctuation risk might
require the price to be two to five times as high for the manufacturer to earn the
same profit.
Marketers in Israel must observe the body-mass restrictions
prohibiting overly-skinny models.
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Companies have three choices for setting prices in different countries:
1. Set a uniform price everywhere. PepsiCo might want to charge $1 for Pepsi everywhere in the world, but
then it would earn quite different profit rates in different countries. Also, this strategy would make the price
too high in poor countries and not high enough in rich countries.
2. Set a market-based price in each country. PepsiCo would charge what each country could afford, but this
strategy ignores differences in the actual cost from country to country. It could also motivate intermediaries in
low-price countries to reship their Pepsi to high-price countries.89
3. Set a cost-based price in each country. Here PepsiCo would use a standard markup of its costs everywhere,
but this strategy might price it out of markets where its costs are high.
When companies sell their wares over the Internet, price becomes transparent and price differentiation between
countries declines. Consider an online training course. Whereas the cost of a classroom-delivered day of training
can vary significantly from the United States to France to Thailand, the price of an online-delivered day would be
similar everywhere.
In another new global pricing challenge, countries with overcapacity, cheap currencies, and the need to export
aggressively have pushed their prices down and devalued their currencies. Sluggish demand and reluctance to pay
higher prices make selling in these markets difficult. Here is what IKEA did to compete in China’s challenging
pricing market.90
iKea When the Swedish home furnishings giant IKEA opened its first store in Beijing in 2002, local stores were
selling copies of its designs at a fraction of IKEA’s prices. The only way to lure China’s frugal customers was to drasti-
cally slash prices. Western brands in China usually price products such as makeup and running shoes 20 percent to 30
percent higher than in their other markets, both to make up for China’s high import taxes and to give their products added
cachet. By stocking its Chinese stores with Chinese-made products, IKEA has been able to slash prices as low as 70 per-
cent below their level outside China. Western-style showrooms provide model bedrooms, dining rooms, and family rooms
and suggest how to furnish them, an important consideration given home ownership in China has gone from practically
zero in 1995 to about 70 percent today. Young couples are especially drawn to IKEA’s
stylish, functional modern styles. Although it still contends with persistent knockoffs,
IKEA maintains sizable stores in eight locations and aims to have 15 by 2015.
tRAnsfeR pRICes A different problem arises when one unit charges another
unit in the same company a transfer price for goods it ships to its foreign
subsidiaries. If the company charges a subsidiary too high a price, it may end up
paying higher tariff duties, though it may pay lower income taxes in the foreign
country. If the company charges its subsidiary too low a price, it can be accused
of dumping, charging either less than its costs or less than it charges at home in
order to enter or win a market. Various governments are watching for abuses and
often force companies to charge the arm’s-length price—the price charged by
other competitors for the same or a similar product.
When the U.S. Department of Commerce finds evidence of dumping, it can
levy a dumping tariff on the guilty company. After much debate over government
support for clean-energy products, the United States chose to set anti-dumping
duties of 44.99 percent to 47.59 percent on wind towers produced in China and
Vietnam and sent to the United States.91
gRAy MARkets Many multinationals are plagued by the gray market,
which diverts branded products from authorized distribution channels either
in-country or across international borders. Often a company finds some
enterprising distributors buying more than they can sell in their own country and
reshipping the goods to another country to take advantage of price differences.
Gray markets create a free-rider problem, making legitimate distributors’
investments in supporting a manufacturer’s product less productive and selective dis-
tribution systems more intensive to reduce the number of gray market possibilities.
They harm distributor relationships, tarnish the manufacturer’s brand equity, and
undermine the integrity of the distribution channel. They can even pose risks to
IKEA has gone to great lengths to draw customers into its
showrooms and establish a market presence in China.
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consumers if the product is damaged, relabeled, obsolete, without warranty or support, or just counterfeit. Because of
their high prices, prescription drugs are often a gray market target, though U.S. government regulators are looking at
the industry more closely after fake vials of Riche Holding AG’s cancer drug Avastin were shipped to U.S. doctors.92
Multinationals try to prevent gray markets by policing distributors, raising their prices to lower-cost distributors,
or altering product characteristics or service warranties for different countries.93 3Com successfully sued several
companies in Canada (for a total of $10 million) for using written and oral misrepresentations to get deep dis-
counts on 3Com networking equipment. The equipment, worth millions of dollars, was to be sold to a U.S. educa-
tional software company and sent to China and Australia but instead ended up back in the United States.
One research study found that gray market activity was most effectively deterred when penalties were severe,
manufacturers were able to detect violations or mete out punishments in a timely fashion, or both.94
CounteRfeIt pRoduCts As companies develop global supply chain networks and move production
farther from home, the chance for corruption, fraud, and quality-control problems rises.95 Sophisticated overseas
factories seem able to reproduce almost anything. Name a popular brand, and chances are a counterfeit version of
it exists somewhere in the world.96
Counterfeiting is estimated to cost more than a trillion dollars a year. U.S. Customs and Border Protection
seized $1.26 billion worth of goods in 2012; the chief culprits were China (81 percent) and Hong Kong (12 per-
cent), and the chief products were apparel and accessories, followed by electronics, optical media, handbags and
wallets, and watches and jewelry.97
At the Summer Olympics in London in 2012, the Egyptian Olympic team even admitted to buying fake Nike
gear from a Chinese distributor because of the country’s dire economic situation. Once Nike found out what had
happened, the company donated all the necessary training and village wear to the team.98
Fakes take a big bite of the profits of luxury brands such as Hermès, LVMH Moët Hennessy Louis Vuitton, and
Tiffany, but faulty counterfeits can literally kill people. Cell phones with counterfeit batteries, fake brake pads made
of compressed grass trimmings, and counterfeit airline parts pose safety risks to consumers. Pharmaceuticals are
especially worrisome. Toxic cough syrup in Panama, tainted baby formula in China, and fake teething powder in
Nigeria have all led to the deaths of children in recent years.99
Virtually every product is vulnerable. Microsoft estimates that four-fifths of Windows OS software in China is
pirated.100 As one anti-counterfeit consultant observed, “If you can make it, they can fake it.” Defending against
counterfeiters is a never-ending struggle; some observers estimate that a new security system can be just months
old before counterfeiters start nibbling at sales again.101
The Internet has been especially problematic. After surveying thou-
sands of items, LVMH estimated 90 percent of Louis Vuitton and
Christian Dior pieces listed on eBay were fakes, prompting the firm
to sue. Manufacturers are fighting back online with Web-crawling
software that detects fraud and automatically warns apparent viola-
tors without the need for any human intervention. Acushnet, maker of
Titleist golf clubs and balls, shut down 75 auctions of knockoff gear in
one day with a single mouse click.102
Web-crawling technology searches for counterfeit storefronts and
sales by detecting domain names similar to legitimate brands and unau-
thorized Internet sites that plaster brand trademarks and logos on their
homepages. It also checks for keywords such as cheap, discount, authen-
tic, and factory variants, as well as colors that products were never made
in and prices that are far too low.
Global dIstrIbutIon strateGIes
Too many U.S. manufacturers think their job is done once the product
leaves the factory. They should instead note how the product moves
within the foreign country and take a whole-channel view of distribut-
ing products to final users.
ChAnneL entRy Figure 8.4 shows three links between the
seller and the final buyer. In the first, seller’s international marketing
headquarters, the export department or international division makes
decisions about channels and other marketing activities. The second
Nike came to the rescue of the Egyptian Olympic team after they admit-
ted buying fake Nike gear because of the country’s budgetary problems.
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link, channels between nations, gets the products to the borders of the foreign nation. Decisions made in this
link include the types of intermediaries (agents, trading companies), type of transportation (air, sea), and
financing and risk management. The third link, channels within foreign nations, gets products from their entry
point to final buyers and users.
When multinationals first enter a country, they prefer to work with local distributors with good local knowl-
edge, but friction often arises later.103 The multinational complains that the local distributor doesn’t invest in
business growth, doesn’t follow company policy, and doesn’t share enough information. The local distributor
complains of insufficient corporate support, impossible goals, and confusing policies. The multinational must
choose the right distributors, invest in them, and set up performance goals to which they can both agree.104
ChAnneL dIffeRenCes Distribution channels across countries vary considerably. To sell consumer
products in Japan, companies must work through one of the most complicated distribution systems in the
world. They sell to a general wholesaler, who sells to a product wholesaler, who sells to a product-specialty
wholesaler, who sells to a regional wholesaler, who sells to a local wholesaler, who finally sells to retailers. All
these distribution levels can make the consumer’s price double or triple the importer’s price. Taking these same
consumer products to tropical Africa, the company might sell to an import wholesaler, who sells to several
jobbers, who sell to petty traders (mostly women) working in local markets.
Another difference is the size and character of retail units abroad. Large-scale retail chains dominate the
U.S. scene, but much foreign retailing is in the hands of small, independent retailers. Millions of Indian retailers
operate tiny shops or sell in open markets. Markups are high, but the real price comes down through haggling.
Incomes are low, most homes lack storage and refrigeration, and people shop daily for whatever they can carry
home on foot or bicycle. In India, people often buy one cigarette at a time. Breaking bulk remains an important
function of intermediaries and helps perpetuate long channels of distribution, a major obstacle to the expansion
of large-scale retailing in developing countries.
Nevertheless, retailers are increasingly moving into new global markets, offering firms the opportunity to sell
across more countries and creating a challenge to local distributors and retailers.105 France’s Carrefour, Germany’s
Aldi and Metro, and United Kingdom’s Tesco have all established global positions. But even some of the world’s most
successful retailers have had mixed success abroad. Despite concerted efforts and earlier success in Latin America
and China, Walmart had to withdraw from both the German and South Korean markets after heavy losses. Walmart
now earns a quarter of its revenue overseas by being more sensitive to local market needs in different countries.106
Country-of-Origin Effects
Country-of-origin perceptions are the mental associations and beliefs triggered by a country. Government offi-
cials want to strengthen their country’s image to help domestic marketers that export and to attract foreign firms
and investors. Marketers want to use positive country-of-origin perceptions to sell their products and services.
buIldInG countrY IMaGes
Governments now recognize that the images of their cities and countries affect more than tourism and have im-
portant value in commerce. Foreign business can boost the local economy, provide jobs, and improve infrastruc-
ture. Image can also help sell products. For its first global ad campaign for Infiniti luxury cars, Nissan chose to tap
into its Japanese roots and association with Japanese-driven art and engineering.107
Countries are being marketed like any other brand. New Zealand has developed concerted marketing programs
both to sell its products outside the country, via its New Zealand Way program, and to attract tourists, by show-
ing the dramatic landscapes featured in The Lord of the Rings film trilogy. Both efforts reinforce the image of New
Zealand as fresh and pure. The launch of the new Hobbit trilogy in November 2012—with the fictional Middle
Earth again being depicted by New Zealand—has attracted a new wave of visitors.108
Another film affected the image of a country in an entirely different way. Kazakhstan has a positive story to tell
given its huge size, rich natural resources, and rapid modernization. British comedian Sacha Baron Cohen’s mock
documentary Borat, however, portrayed the country in a sometimes crude and vulgar light, and the character
Borat was sexist, homophobic, and anti-Semitic. Despite that fact, Yerzhan Kazykhanov, Kazakhstan’s foreign min-
ister, observed: “After this film, the number of visas issued to Kazakhstan grew by ten times. This is a big victory
for us, and I thank Borat for attracting tourists to Kazakhstan.” Evidently, enough publicity about the country sur-
rounded the film to boost its awareness.109
A strong company that emerges as a global player can do wonders for a country’s image. Before World War II,
Japan had a poor image, which the success of Sony with its Trinitron TV sets and of Japanese automakers Honda,
Nissan, and Toyota helped change. Relying partly on the global success of Nokia, Finland campaigned to enhance
Final
buyers
Seller
Channels
between
nations
Seller’s
international
marketing
headquarters
Channels within
foreign nations
| Fig. 8.4 |
Whole-
Channel
Concept for
International
Marketing
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its image as a center of high-tech innovation. Current events can also shape the image of a country. When public
unrest and violent protests surrounded the government’s austerity program to address Greece’s debt crisis, tourist
bookings there dropped as much as 30 percent.110
consuMer PercePtIons of countrY of orIGIn
Global marketers know that buyers hold distinct attitudes and beliefs about brands or products from different
countries.111 These perceptions can be attributes in decision making or influence other attributes in the process
(“If it’s French, it must be stylish”). Coca-Cola’s success against local cola brand Jianlibao in China was partly due
to its symbolic values of U.S. modernity and affluence.112
The mere fact that a brand is perceived as successful on a global stage—whether it sends a quality signal, taps
into cultural myths, or reinforces a sense of social responsibility—may lend credibility and respect.113 Research
studies have found the following:114
• People are often ethnocentric and favorably predisposed to their own country’s products, unless they come
from a less developed country.
• The more favorable a country’s image, the more prominently the “Made in…” label should be displayed.
• The impact of country of origin varies with the type of product. Consumers want to know where a car was
made, but not the lubricating oil.
• Certain countries enjoy a reputation for certain goods: Japan for automobiles and consumer electronics; the
United States for high-tech innovations, soft drinks, toys, cigarettes, and jeans; France for wine, perfume, and
luxury goods.
• Sometimes country-of-origin perception can encompass an entire country’s products. In one study, Chinese
consumers in Hong Kong perceived U.S. products as prestigious, Japanese products as innovative, and
Chinese products as cheap.
Marketers must look at country-of-origin perceptions from both a domestic and a foreign perspective. In the
domestic market, these perceptions may stir consumers’ patriotic notions or remind them of their past. As international
trade grows, consumers may view certain brands as symbolically important in their own cultural identity or as playing
an important role in keeping jobs in their own country. More than three-quarters of U.S. consumers said that, given a
choice between a product made at home and an identical one made abroad, they would choose the U.S. product.115
Patriotic appeals underlie marketing strategies all over the world, but they can lack uniqueness and even be
overused, especially in economic or political crises. Many small businesses tap into community pride to emphasize
their local roots. To be successful, these need to be clearly local and offer appealing product and service offerings.116
Sometimes consumers don’t know where brands come from. In surveys, they routinely guess that Heineken is
German and Nokia is Japanese (they are Dutch and Finnish, respectively). Few consumers know Häagen-Dazs and
Estée Lauder originated in the United States.
With outsourcing and foreign manufacturing, it’s hard to know what the country of origin really is anyway. Only 65
percent of the content of a Ford Mustang comes from the United States or Canada, whereas the Toyota Avalon is assem-
bled in Georgetown, Kentucky, with one of the highest percentages of local components, 85 percent. Foreign automakers
The government of New
Zealand markets the country
as fresh and pure, a message
reinforced by the use of
stunning New Zealand
scenery in many popular
films such as the Hobbit
trilogy.
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262 PART 3 | ConneCTing WiTh CusTomeRs
are pouring money into North America, investing in plants, suppliers, and dealerships as well as design, testing, and
research centers. But what makes a product more “American”—having a higher percentage of North American compo-
nents or creating more jobs in North America? The two measures may not lead to the same conclusion.117
Many brands have gone to great lengths to weave themselves into the cultural fabric of their foreign markets.
One Coca-Cola executive tells of a young child visiting the United States from Japan who commented to her parents
on seeing a Coca-Cola vending machine—“Look, they have Coca-Cola too!” As far as she was concerned, Coca-
Cola was a Japanese brand. Haier is another global brand working hard to establish local roots in other countries.118
haier As China’s leading maker of refrigerators, washing machines, and air conditioners, Haier was well known
and respected in its home market for its well-designed products. For rural customers, Haier sold extra-durable washing
machines that could wash vegetables as well as clothes; for urban customers, it made smaller washing machines to fit in
tiny apartments. In 1999, the company set its sights on a much bigger goal: building a truly global brand. Unlike most other
Asian companies that chose to enter Asian markets before considering Western markets, Haier decided to first target the
United States and Western Europe. The company felt success there would enable greater success elsewhere in the world. In
the United States, Haier established a beachhead by tapping a neglected market—mini-fridges for homes, offices, dorms,
and hotels—and securing distribution at Walmart, Target, Home Depot, and other top retailers. After some initial success,
the company began to sell higher-end refrigerators and other appliances such as air conditioners, washing machines, and
dishwashers. Its goal is to be seen as a “localized U.S. brand,” not an “imported Chinese brand.” Thus, Haier invested $40
million in a manufacturing plant in South Carolina and became a marketing partner with the National Basketball Association.
The firm’s global marketing efforts have paid off. By 2012, 30 percent of U.S. households owned a Haier product, and Haier
is now the world’s top-selling home appliance brand.
Interestingly, even when the United States has not been that popular, its brands typically have been. As one
marketer noted, “Regardless of all the problems we have as a country, we are still looked to as the consumer capital
of the world.”119
cies. It must determine whether to market in a few or
many countries and rate candidate countries on three
criteria: market attractiveness, risk, and competitive
advantage.
3. Developing countries offer a unique set of opportunities
and risks. The “BRICS” countries—Brazil, Russia, India,
Summary
1. Despite shifting borders, unstable governments, foreign-
exchange problems, corruption, and technological
pirating, companies selling in global industries need to
internationalize their operations.
2. Upon deciding to go abroad, a company needs to
define its international marketing objectives and poli-
China’s large appliance
maker Haier has made
being seen as a
localized U.S. brand
one of their top
business priorities.
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MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Is the World Coming Closer Together?
Many social commentators maintain that youth and teens
are becoming more alike across countries over time. Oth-
ers, though not disputing the fact, point out that differences
between cultures at even younger ages by far exceed the
similarities.
Take a position: People are becoming more and more
similar versus The differences between people of differ-
ent cultures far outweigh their similarities.
Marketing Discussion
Diverse Channels
As observed in the chapter, global economy does not
necessarily mean homogeneity in distribution channels and
similarities in marketing, advertising, and promotions. In
fact, distribution channels around the world could not be
more different. Why is this the case?
only read them. In response to users’ comments and ideas,
the company added more features to help organize the on-
going communication on Twitter, including the @ sign in front
of usernames, direct messages, and the retweet. Web de-
veloper Chris Messina suggested adding a hashtag (#) sym-
bol to help organize categories of conversation or search for
tweets on a common topic. For example, #Grammys will
bring a user to conversations about the Grammys.
Twitter grew slowly during its first year, but things
started to heat up in 2007 when the company set up
51-inch plasma screens around the grounds of the South
by Southwest interactive festival and broadcast tweets
sent by attendees. Overnight, activity increased from
20,000 to 60,000 tweets a day.
Another milestone came on January 15, 2009, when
US Airways flight 1549 landed safely on the Hudson River
in New York City during an emergency. An eyewitness
on a commuter ferry broke the news worldwide when
Marketing Excellence
>> Twitter
Few companies have had such a vast global impact in so
short a time as Twitter. The online social networking com-
pany was the brainchild of Jack Dorsey, Evan Williams,
Biz Snow, and Noah Glass back in 2005. Dorsey thought
it would be revolutionary if people could send a text to
one number and have it broadcast to all their friends: “I
want to make something so simple, you don’t even think
about it, you just write.” The code name for the concept
was “twttr,” which eventually morphed into Twitter. Dorsey
sent the first Twitter message on March 21, 2006.
At the heart of Twitter are tweets, text messages lim-
ited to 140 characters. Dorsey once tweeted, “One could
change the world with 140 characters.” Registered users
can send and receive tweets, while unregistered users can
China, and South Africa—plus other significant markets
such as Indonesia are a top priority for many firms.
4. Modes of entry are indirect exporting, direct exporting,
licensing, joint ventures, and direct investment. Each
succeeding strategy entails more commitment, risk,
control, and profit potential.
5. In deciding how much to adapt their marketing programs
at the product level, firms can pursue a strategy of straight
extension, product adaptation, or product invention. At
the communication level, they may choose communica-
tion adaptation or dual adaptation. At the price level, firms
may encounter price escalation, dumping, gray markets,
and discounted counterfeit products. At the distribution
level, firms need to take a whole-channel view of distribut-
ing products to the final users. Firms must always consider
the cultural, social, political, technological, environmental,
and legal limitations they face in other countries.
6. Country-of-origin perceptions can affect consumers
and businesses alike. Managing those perceptions to
best advantage is a marketing priority.
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264 PART 3 | ConneCTing WiTh CusTomeRs
Much of the company’s early international expansion
is credited to Sir Lindsay Owen-Jones, who transformed
L’Oréal from a small French business into an international
cosmetics phenomenon with strategic vision and precise
brand management. During his almost 20 years as CEO
and chairman, Owen-Jones divested weak brands, in-
vested heavily in product innovation, acquired ethnically
diverse brands, and expanded into markets no one had
dreamed of, including China, South America, and the former
Soviet Union. His quest was to achieve diversity and “meet
the needs of men and women around the globe, and make
beauty products available to as many people as possible.”
Today, L’Oréal focuses on five areas of beauty ex-
pertise: skin care, hair care, makeup, hair coloring,
Marketing Excellence
>> L’Oréal
When it comes to globalizing beauty, no one does it
better than L’Oréal. The company was founded in Paris
more than 100 years ago by a young chemist, Eugene
Schueller, who sold his patented hair dyes to local
hairdressers and salons. By the 1930s, Schueller had
invented beauty products like suntan oil and the first
mass-marketed shampoo. Today, the company has
evolved into the world’s largest beauty and cosmetics
company, with distribution in 130 countries, 27 global
brands, and more than $30.8 billion in sales.
he snapped a photo of the plane on the river, wrote a
tweet, and sent it to his 170 followers. The tweet and
#Flight1549 went viral within minutes and proved that
Twitter had transformed the way we get news.
Seth Mnookin, MIT’s Associate Director of Science
Writing, explained why Twitter has been so revolution-
ary in media: “What the advent of television or radio did
was give a small group of people a new way to reach the
masses. And this essentially is doing the same thing, for
the masses.” Twitter captures and records history in real
time with eyewitness accounts, pictures, and thoughts.
Celebrities and sports figures started to embrace
Twitter in 2009. Perhaps the most influential early adopter
was Ashton Kutcher, the first celebrity to reach 1 mil-
lion followers. Katy Perry, Barack Obama, Lady Gaga,
and Justin Bieber are now among the most followed
Tweeters, with tens of millions followers each.
By 2011, Twitter had expanded across seven differ-
ent countries and languages. The medium had a huge
impact on the Arab Spring, when millions demanded the
overthrow of oppressive Middle East regimes. Bahraini
protester Maryam Al-Khawaja explained that in many
countries Twitter is about entertainment, but in the Middle
East and North Africa, it can make the difference between
life and death. Twitter gave activists a means to share
accurate and uncensored information, connect with like-
minded individuals, and organize street operations at
unheard-of speed. Hussein Amin, professor of mass
communication at the American University in Cairo,
explained, “[Social networks] for the first time provided
activists with an opportunity to quickly disseminate infor-
mation while bypassing government restrictions.”
During the 2012 U.S. presidential election, Twitter had
enormous impact on campaigns and communications
with voters. In fact, the most popular tweet of 2012 was
“Four more years,” posted by Barack Obama after he won
the reelection. It was retweeted almost 1 million times.
Twitter went public in November 2013 and raised
$2.1 billion in the second-biggest Internet IPO in history
(Facebook raised $16 billion in 2012). Its global impact
has grown so great that it operates in 35 languages and
70 percent of users live outside the United States. In
2014, 500 million users were registered on Twitter, 250
million were active, and more than 400 million tweets
were posted each day around the globe.
Today, people use Twitter for many reasons, includ-
ing promoting a brand or company, raising money for
charities, breaking news, following favorite celebrities,
or, as Dorsey said, changing the world. Twitter describes
itself as a global platform for public self-expression and
conversation in real time. Mark Burnett, the producer
of shows like The Voice, Survivor, and The Apprentice,
stated, “Twitter actually is the real time, water cooler
conversation of young America.” The company’s ultimate
goal is to reach everyone in the world.
Questions
1. Discuss Twitter’s global impact since its inception.
2. Who are Twitter’s biggest competitors? How does
Twitter differ from other social media companies?
3. What marketing challenges does Twitter face as it
continues to expand its brand globally?
Sources: Dom Sagolla, 140Characters.com, January 30, 2009; Nicholas Carlson, “The Real
History of Twitter,” BusinessInsider.com, April 13, 2011; Victor Luckerson, “The 7 Most Important
Moments in Twitter History,” Time, November 7, 2013; Drew Olanoff, “Twitter’s Social Impact
Can’t Be Measured, but It’s the Pulse of the Planet,” Techcrunch.com, January 15, 2013; Heesun
Wee, “Twitter May Be Going Public but Can It Make Money?” CNBC, November 5, 2013; Elizabeth
Kricfalusi, “The Twitter Hashtag: What Is It and How Do You Use It?” Tech for Luddites, November
12, 2013; Julianne Pepitone, “#WOW! Twitter Soars 73% in IPO,” CNNMoney.com, November
7, 2013; “#Twitter Revolution,” CNBC.com, August 7, 2013; David Wolman, “Facebook, Twitter
Help the Arab Spring Blossom,” Wired, April 16, 2013; David Jolly, Mark Scott, and Eric Pfanner,
“Twitters IPO Plan Has an International Focus,” New York Times, October 5, 2013; Saleem Kassim,
“Twitter Revolution: How the Arab Spring Was Helped by Social Media,” PolicyMic.com, July 3,
2012; www.twitter.com.
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and perfume. Its brands fall into four different groups:
(1) Consumer Products (52 percent of sales, includes mass-
marketed brands like Maybelline and high-technology
products sold at competitive prices through mass-market
retailing chains), (2) L’Oreal Luxe (27 percent of sales, in-
cludes prestigious brands like Ralph Lauren perfume that
are available only in premium stores, department stores,
or specialty stores), (3) Professional Products (14 per-
cent of sales, includes brands such as Redken designed
specifically for professional hair salons), and (4) Active
Cosmetics (7 percent of sales, includes dermo-cosmetic
products sold at pharmacies, drugstores, and medi-spas).
L’Oréal believes precise target marketing—hitting the
right audience with the right product and message at the
right place—is crucial to its global success. Owen-Jones
explained, “Each brand is positioned on a very precise
[market] segment, which overlaps as little as possible with
the others.”
The company has built its portfolio primarily by pur-
chasing local beauty companies all over the world, revamp-
ing them with strategic direction, and expanding the brand
into new areas through its powerful marketing arm. For ex-
ample, L’Oréal instantly became a player (with 20 percent
market share) in the growing ethnic hair care industry when
it purchased and merged the U.S. companies Soft Sheen
Products in 1998 and Carson Products in 2000. L’Oréal
believed the competition had overlooked this category be-
cause it was fragmented and misunderstood. Backed by a
deep portfolio of brands and products, SoftSheen-Carson
is now the market leader in the ethnic hair care industry.
L’Oréal also invests significant money and time in its
22 local research centers around the world. The com-
pany spends 3.5 percent of annual sales on R&D, more
than one percentage point above the industry average,
researching and innovating products that meet the local
needs of each region.
Understanding the unique beauty routines and needs
of different cultures, climates, traditions, and physiologies is
critical to L’Oréal’s global success. Hair and skin greatly dif-
fer from one part of the world to another, so L’Oreal listens
to and observes consumers across the globe to gather a
deep understanding of their beauty needs. L’Oréal scientists
study consumers in laboratory bathrooms and in their own
homes, sometimes achieving scientific beauty milestones.
In Japan, for example, L’Oréal developed Wondercurl
mascara specially formulated to curl Asian women’s
eyelashes, which are usually short and straight. Within
three months, Wondercurl mascara had become Japan’s
number-one selling mascara, and young women lined up
outside stores to buy it. L’Oréal continued to research the
market and developed nail polish, blush, and other cos-
metics aimed at this new Asian generation.
L’Oréal believes its future lies in emerging areas such
as Asia, Africa, and Latin America, where it expects to
find millions of new customers over the next few years.
Marc Menesguen, L’Oréal’s managing director-strategic
marketing, explained, “Our projection for 2020 is that
50% to 60% of sales will be coming from [emerging]
markets.” As a result, new research centers have popped
up in these countries, and the company is working ag-
gressively on understanding these consumers’ needs and
developing beauty products to satisfy them.
Well known for its 1973 advertising tagline—
“Because I’m Worth It”—L’Oréal is the leader in beauty
products around the world. The company spends ap-
proximately $5 billion in advertising each year, making
it the third-largest advertiser. As Gilles Weil, its head of
luxury products, explained, “You have to be local and as
strong as the best locals, but backed by an international
image and strategy.”
Questions
1. Review L’Oréal’s brand portfolio. What role have local
and global marketing, smart acquisitions, and R&D
played in growing those brands?
2. What are the keys to successful local product
launches like Maybelline’s Wondercurl in Japan?
3. What’s next for L’Oréal on a global level? Who are its
biggest competitors? If you were CEO, how would
you sustain the company’s global leadership?
Sources: Andrew Roberts, “L’Oréal Quarterly Sales Rise Most since 2007 on Luxury Perfume,”
Bloomberg BusinessWeek, April 22, 2010; Richard Tomlinson, “L’Oréal’s Global Makeover,”
Fortune, September 30, 2002; Doreen Carvajal, “International Business; Primping for the Cameras
in the Name of Research,” New York Times, February 7, 2006; Richard C. Morais, “The Color of
Beauty,” Forbes, November 27, 2000; Jack Neff, “How L’Oreal Zen Master Menesguen Shares
Best Practices around the Globe,” Advertising Age, June 11, 2012; L’Oréal, www.loreal.com.
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266
In This Chapter, We Will Address
the Following Questions
1. In what ways can a company divide the consumer market into segments? (p. 268)
2. How should business markets be segmented? (p. 283)
3. How should a company choose the most attractive target markets? (p. 284)
4. What are the requirements for effective segmentation? (p. 285)
5. What are the different levels of market segmentation? (p. 285)
LinkedIn offers a variety of relevant
value-added online services to its target
market of career-minded professionals.
Source: © PSL Images/Alamy
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com
for simulations, tutorials, and
end-of-chapter problems.
Building Strong BrandsPart 4
Chapter 9 Identifying Market Segments and Targets
Chapter 10 Crafting the Brand Positioning
Chapter 11 Creating Brand Equity
Chapter 12 Addressing competition and driving growth
M09_KOTL2621_15_GE_C09.indd 266 09/03/15 6:25 PM
267
To compete more effectively, many companies are
now embracing target marketing. Instead of scattering their
marketing efforts, they’re focusing on those consumers they
have the greatest chance of satisfying.
Effective target marketing requires that marketers:
1. Identify and profile distinct groups of buyers who differ in
their needs and wants (market segmentation).
2. Select one or more market segments to enter (market
targeting).
3. For each target segment, establish, communicate, and
deliver the right benefit(s) for the company’s market offering
(market positioning).
Market segmentation, targeting, and positioning are known as
the “STP” of marketing. This chapter will focus on the first two
steps; Chapter 10 discusses the third step. Chapters 11 and 12
describe how effective market segmentation, targeting, and
positioning can build strong brands that grow over time and
withstand competitive attacks.
Companies cannot connect with all customers in large, broad, or diverse markets.
They need to identify the market segments they can serve effectively. This decision requires a keen understand-
ing of consumer behavior and careful strategic thinking about what makes each segment unique and different.
Identifying and uniquely satisfying the right market segments are often the key to marketing success. LinkedIn
has built an online powerhouse by fulfilling the needs of career-minded professionals.1
Identifying Market
Segments and Targets
9
LinkedIn was the first major social network to issue an IPO, after being one of the first entries into
social networking back in 2003. The company targeted a different audience than most other social
networks, establishing itself as the premier professional networking site with a vision “…to create
economic opportunity for every professional in the world.” Also separating LinkedIn from other social
networks is the fact that it has diverse revenue streams, driven by three distinct customer segments:
job seekers who buy premium subscriptions with various special services; advertisers large and small who rely on
its marketing solutions unit; and, supporting its largest and fastest-growing business, corporate recruiters who buy
special search tools from its talent solutions unit. At the time of its IPO
on May 19, 2011, LinkedIn had amassed 100 million registered users,
adding a new one literally every second and a million every 10 days,
half of them outside the United States. These users were attracted by
the ability to manage their careers by networking with other profes-
sionals, seeking and sharing insights, and searching for jobs if the
need arose.
Like most online services, LinkedIn strives to engage users on its
site for as long as possible through continually improved content and
new features. Toward that goal, the company acquired SlideShare, a
presentation-hosting site, and Pulse, a news-reading application, and
also launched Talent Pipeline to help recruiters manage their leads.
LinkedIn sees much growth from its mobile users, who in 2013 ac-
counted for more than 30 percent of unique visits to the site, leading
to a complete makeover of its apps for easier navigation and greater
personalization. Although LinkedIn’s well-targeted and positioned brand
has led to much initial success, competition looms from other online
giants, such as Facebook, and from established professional network
services overseas, such as Viadeo SA in Europe and elsewhere.
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268 PART 4 | Building STRong BRAndS
Bases for Segmenting Consumer
Markets
Market segmentation divides a market into well-defined slices. A market segment consists of a group of customers
who share a similar set of needs and wants. The marketer’s task is to identify the appropriate number and nature
of market segments and decide which one(s) to target.
We use two broad groups of variables to segment consumer markets. Some researchers define segments by
looking at descriptive characteristics—geographic, demographic, and psychographic—and asking whether these
segments exhibit different needs or product responses. For example, they might examine the differing attitudes of
“professionals,” “blue collars,” and other groups toward, say, “safety” as a product benefit.
Other researchers define segments by looking at behavioral considerations, such as consumer responses to ben-
efits, usage occasions, or brands, then seeing whether different characteristics are associated with each consumer-
response segment. For example, do people who want “quality” rather than “low price” in an automobile differ in
their geographic, demographic, and/or psychographic makeup?
Regardless of which type of segmentation scheme we use, the key is adjusting the marketing program to rec-
ognize customer differences. The major segmentation variables—geographic, demographic, psychographic, and
behavioral segmentation—are summarized in Table 9.1.
GeoGraphIc SeGmentatIon
Geographic segmentation divides the market into geographical units such as nations, states, regions, counties,
cities, or neighborhoods. The company can operate in one or a few areas, or it can operate in all but pay attention
to local variations. In that way it can tailor marketing programs to the needs and wants of local customer groups
in trading areas, neighborhoods, even individual stores. In a growing trend called grassroots marketing, marketers
concentrate on making such activities as personally relevant to individual customers as possible.
Much of Nike’s initial success came from engaging target consumers through
grassroots marketing efforts such as sponsorship of local school teams, expert-
conducted clinics, and provision of shoes, clothing, and equipment to young
athletes. Citibank provides different mixes of banking services in its branches
depending on neighborhood demographics. Retail firms such as Starbucks,
Costco, Trader Joe’s, and REI have all found great success emphasizing local
marketing initiatives, and other types of firms have also jumped into the action.2
More and more, regional marketing means marketing right down to a specific
zip code. Many companies use mapping software to pinpoint the geographic
locations of their customers, learning, say, that most customers are within a
10-mile radius of the store and are further concentrated within certain zip+4
areas. By mapping the densest areas, the retailer can rely on customer cloning,
assuming the best prospects live where most of the customers already come from.
Some approaches combine geographic data with demographic data to yield
even richer descriptions of consumers and neighborhoods. Nielsen Claritas has
developed a geoclustering approach called PRIZM (Potential Rating Index by Zip
Markets) NE that classifies more than half a million U.S. residential neighbor-
hoods into 14 distinct groups and 66 distinct lifestyle segments called PRIZM
Clusters.3 The groupings take into consideration 39 factors in five broad catego-
ries: (1) education and affluence, (2) family life cycle, (3) urbanization, (4) race
and ethnicity, and (5) mobility. The neighborhoods are broken down by zip code,
zip+4, or census tract and block group. The clusters have descriptive titles such
as Blue Blood Estates, Winner’s Circle, Hometown Retired, Shotguns and Pickups,
and Back Country Folks. The inhabitants in a cluster tend to lead similar lives,
drive similar cars, have similar jobs, and read similar magazines. Table 9.2 has
examples of three PRIZM clusters.
Geoclustering captures the increasing diversity of the U.S. population. PRIZM
has been used to answer questions such as: Which neighborhoods or zip codes
contain our most valuable customers? How deeply have we already penetrated
these segments? Which distribution channels and promotional media work best
in reaching our target clusters in each area? Barnes & Nobles placed its stores
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Outdoor goods retailer REI emphasizes local marketing
initiatives in engaging its customers.
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idenTifying MARkeT SegMenTS And TARgeTS | chapter 9 269
Table 9.1 Major Segmentation Variables for Consumer Markets
Geographic region Pacific Mountain, West North Central, West South Central, East North Central, East South Central,
South Atlantic, Middle Atlantic, New England
City or metro size Under 5,000; 5,000–20,000; 20,000–50,000; 50,000–100,000; 100,000–250,000; 250,000–500,000;
500,000–1,000,000; 1,000,000–4,000,000; 4,000,000+
Density Urban, suburban, rural
Climate Northern, southern
Demographic age Under 6, 6–11, 12–17, 18–34, 35–49, 50–64, 64+
Family size 1–2, 3–4, 5+
Family life cycle Young, single; young, married, no children; young, married, youngest child under 6; young; married, youngest
child 6 or older; older, married, with children; older, married, no children under 18; older, single; other
Gender Male, female
Income Under $10,000; $10,000–$15,000; $15,000–$20,000; $20,000–$30,000; $30,000–$50,000;
$50,000–$100,000; $100,000+
Occupation Professional and technical; managers, officials, and proprietors; clerical sales; craftspeople; forepersons;
operatives; farmers; retired; students; homemakers; unemployed
Education Grade school or less; some high school; high school graduate; some college; college graduate;
post college
Religion Catholic, Protestant, Jewish, Muslim, Hindu, other
Race White, Black, Asian, Hispanic, Other
Generation Silent Generation, Baby Boomers, Gen X, Millennials (Gen Y)
Nationality North American, Latin American, British, French, German, Italian, Chinese, Indian, Japanese
Social class Lower lowers, upper lowers, working class, middle class, upper middles, lower uppers, upper uppers
Psychographic lifestyle Culture-oriented, sports-oriented, outdoor-oriented
Personality Compulsive, gregarious, authoritarian, ambitious
Behavioral occasions Regular occasion, special occasion
Benefits Quality, service, economy, speed
User status Nonuser, 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 toward product Enthusiastic, positive, indifferent, negative, hostile
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270 PART 4 | Building STRong BRAndS
where the “Money & Brains” segment hangs out. Hyundai successfully targeted a promotional campaign to neigh-
borhoods where the “Kids & Cul-de-Sacs,” “Bohemian Mix,” and “Pool & Patios” could be found.4
Marketing to microsegments has become possible even for small organizations as database costs decline, soft-
ware becomes easier to use, and data integration increases. Going online to reach customers directly can open a
host of local opportunities, as Yelp has found out.5
YeLP Founded in 2004, Yelp.com wants to “connect people with great local businesses” by targeting consum-
ers who seek or want to share reviews of local businesses in 96 markets around the world. Almost two-thirds of the Web
site’s millions of vetted online reviews are for restaurants and retailers. Yelp was launched in San Francisco, where monthly
parties with preferred users evolved into a formal program, Yelp Elite, now used to launch the service into new cities. The
company’s recently introduced mobile app allows it to bypass the Internet and connect with consumers directly; almost
50 percent of searches on the site now come from its mobile platform. Yelp generates revenue by selling designated Yelp
Ads to local merchants via hundreds of salespeople. The local advertising business is massive—estimated to be worth
between $90 billion and $130 billion—but relatively untapped given that many local businesses are not that tech-savvy.
Sheryl Sandberg, COO of Facebook (a Yelp competitor), calls local advertising the Internet’s “Holy Grail.” Local businesses
also benefit from Yelp—several research studies have demonstrated the potential revenue payback from having reviews of
their businesses on the site.
Table 9.2 Examples of PRIZM Clusters
• Young Digerati. Young Digerati are the nation’s tech-savvy singles and couples living in fashionable neighbor-
hoods on the urban fringe. Affluent, highly educated, and ethnically mixed, they live in areas typically filled with
trendy apartments and condos, fitness clubs and clothing boutiques, casual restaurants, and all types of bars—
from juice to coffee to microbrew.
• Beltway Boomers. One segment of the huge baby boomer cohort—college-educated, upper-middle-class, and
home-owning—is Beltway Boomers. Like many of their peers who married late, these boomers are still raising
children in comfortable suburban subdivisions and pursuing kid-centered lifestyles.
• The Cosmopolitans. Educated, midscale, and multiethnic, the Cosmopolitans are urbane couples in America’s
fast-growing cities. Concentrated in a handful of metros—such as Las Vegas, Miami, and Albuquerque—these
households feature older homeowners, empty nesters, and college graduates. A vibrant social scene surrounds
their older homes and apartments, and residents love the nightlife and enjoy leisure-intensive lifestyles.
Source: Nielsen, www.claritas.com.
Yelp has attracted
scores of consumers
and advertisers with
its carefully vetted
online reviews of
local businesses.
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idenTifying MARkeT SegMenTS And TARgeTS | chapter 9 271
Those who favor such localized marketing see national advertising as wasteful because it is too “arm’s length”
and fails to address local needs. Those against local marketing argue that it drives up manufacturing and market-
ing costs by reducing economies of scale and magnifying logistical problems. A brand’s overall image might be
diluted if the product and message are too different in different localities.
DemoGraphIc SeGmentatIon
One reason demographic variables such as age, family size, family life cycle, gender, income, occupation,
education, religion, race, generation, nationality, and social class are so popular with marketers is that they’re
often associated with consumer needs and wants. Another is that they’re easy to measure. Even when we de-
scribe the target market in nondemographic terms (say, by personality type), we may need the link back to
demographic characteristics in order to estimate the size of the market and the media we should use to reach
it efficiently.
Here’s how marketers have used certain demographic variables to segment markets.
age and life-CyCle STage Consumer wants and abilities change with age. Toothpaste brands
such as Crest and Colgate offer three main lines of products to target kids, adults, and older consumers. Age
segmentation can be even more refined. Pampers divides its market into prenatal, new baby (0–5 months), baby
(6–12 months), toddler (13–23 months), and preschooler (24 months+). Indirect age effects also operate for
some products. One study of kids ages 8–12 found that 91 percent decided or influenced clothing or apparel
buys, 79 percent grocery purchases, and 54 percent vacation choices, while 14 percent even made or swayed
vehicle purchase decisions.6
Nevertheless, age and life cycle can be tricky variables. The target market for some products may be the psycho-
logically young. To target 21-year-olds with its boxy Element, which company officials described as a “dorm room
on wheels,” Honda ran ads depicting sexy college kids partying near the car at a beach. So many baby boomers
were attracted to the ads, however, that the average age of Element buyers turned out to be 42! With baby boom-
ers seeking to stay young, Honda decided the lines between age groups were getting blurred. When sales fizzled,
Honda decided to discontinue sales of the Element. When it was ready to launch a new subcompact called the Fit,
the firm deliberately targeted Gen Y buyers as well as their empty-nest parents.7
life STage People in the same part of the life cycle may still differ in their life stage. Life stage defines
a person’s major concern, such as going through a divorce, going into a second marriage, taking care of an
older parent, deciding to cohabit with another person, buying a new home, and so on. As Chapter 6 noted,
these life stages present opportunities for marketers who can help people cope with the accompanying
decisions.
For example, the wedding industry attracts marketers of a vast range of products and services. No surprise—the
average U.S. couple spends almost $27,000 on their wedding (see Table 9.3 for some major wedding expenditures).8
But that’s just the start. Newlyweds in the United States spend a total of about $70 billion on their households in
the first year after marriage—and they buy more in the first six months than an established household does in
five years!
The Honda Fit targets
young Gen Y buyers as
well as psychologically
young empty nest
parents.
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272 PART 4 | Building STRong BRAndS
Marketers know marriage often means two sets of shopping habits and brand preferences must be blended
into one. Procter & Gamble, Clorox, and Colgate-Palmolive include their products in “Newlywed Kits,” distrib-
uted when couples apply for a marriage license. JCPenney has identified “Starting Outs” as one of its two major
customer groups. Marketers pay a premium for name lists to assist their direct marketing because, as one noted,
newlywed names “are like gold.”9
But not everyone goes through that life stage at a certain time—or at all, for that matter. More than a quarter of
all U.S. households now consist of only one person—a record high. It’s no surprise this $1.9 trillion market is at-
tracting interest from marketers: Lowe’s has run an ad featuring a single woman renovating her bathroom; DeBeers
sells a “right-hand ring” for unmarried women; and at the recently opened, ultra-hip Middle of Manhattan 63-floor
tower, two-thirds of the occupants live alone in one-bedroom and studio rental apartments.10
gender Men and women have different attitudes and behave differently, based partly on genetic makeup and
partly on socialization.11 Research shows that women have traditionally tended to be more communal-minded and
men more self-expressive and goal-directed; women have tended to take in more of the data in their immediate
environment and men to focus on the part of the environment that helps them achieve a goal.
A research study of shopping found that men often need to be invited to touch a product, whereas women are
likely to pick it up without prompting. Men often like to read product information; women may relate to a product
on a more personal level.
Marketers can now reach women more easily via media like Lifetime, Oxygen, and WE television net-
works and scores of women’s magazines and Web sites; men are more easily found at ESPN, Comedy Central,
and Spike TV channels and through magazines such as Maxim and Men’s Health.12 After Pinterest proved its
Table 9.3 Major Wedding Expenditures
Reception: $11,599
Engagement ring: $5,229
Wedding rings: $1,594
Photography: $2,186
Wedding gown: $1,355
Flowers: $1,334
Wedding cake: $486
Source: May 2012 survey from Brides magazine.
Given their elevated
household spending
rates, newlyweds
are a lucrative
target segment for
marketers.
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idenTifying MARkeT SegMenTS And TARgeTS | chapter 9 273
popularity among women, five different Web sites with similar functionality but targeted at men sprang up,
including MANinteresting, Dudepins, and Gentlemint.13
Gender differences are shrinking in some other areas as men and women expand their roles. One Yahoo sur-
vey found that more than half of men identified themselves as the primary grocery shoppers in their households.
Procter & Gamble now designs some ads with men in mind, such as for its Gain and Tide laundry detergents,
Febreze air freshener, and Swiffer sweepers. On the flip side, according to some studies, women in the United
States and the United Kingdom make 75 percent of decisions about buying new homes and purchase 60 percent of
new cars.14
Nevertheless, gender differentiation has long been applied in clothing, hairstyling, and cosmetics. Avon, for
one, has built a $6 billion-plus business by selling beauty products to women. Gillette has found similar success
with its Venus razor.15
Venus RazOR Gillette’s Venus razor has become the most successful women’s shaving line ever—
holding more than 50 percent of the global women’s shaving market—as a result of insightful consumer research and
extensive market tests revealing product design, packaging, and advertising cues. The razor was a marked departure from
earlier designs, which had essentially been colored or repackaged versions of men’s razors. Venus was designed to uniquely
meet women’s needs, instead of men’s. Extensive research identified unique shaving needs for women, including shaving
a surface area 9X greater than the male face; in a wet environment and across the unique curves of the body. The result-
ing female design included an oval shaped cartridge to better fit in to tight areas like underarms and bikini and additional
lubrication for better glide. Furthermore, after discovering that women change their grip on a razor about 30 times during
each shaving session, Gillette designed Venus razor with a
wide, sculpted rubberized handle offering superior grip and
control. Design work did not stop with the differences be-
tween men and women’s shaving needs, when Gillette later
found four distinct segments of female shavers—perfect
shave seekers (no missed hairs), skin pamperers, pragmatic
functionalists, and EZ seekers—the company designed
Venus products for each of them. It also commissioned
Harris Interactive to conduct an online study among more
than 6,500 women in 13 countries that found seven of 10
wanted so-called goddess skin, defined as smooth (68 per-
cent), healthy (66 percent), and soft (61 percent), leading to
the introduction of the new Gillette Venus & Olay razor.
inCome Income segmentation is a long-standing
practice in such categories as automobiles, clothing,
cosmetics, financial services, and travel. However,
income does not always predict the best customers for a
given product. Blue-collar workers were among the first
purchasers of color television sets; it was cheaper for them
to buy a television than to go to movies and restaurants.
Many marketers are deliberately going after lower-
income groups, in some cases discovering fewer com-
petitive pressures or greater consumer loyalty. Procter
& Gamble launched two discount-priced brand exten-
sions in 2005—Bounty Basic and Charmin Basic—
which have met with some success. Other marketers are
finding success with premium-priced products. When
Whirlpool launched a pricey Duet washer line, sales
doubled their forecasts in a weak economy, due primar-
ily to middle-class shoppers who traded up.
Increasingly, companies are finding their markets
are hourglass-shaped, as middle-market U.S. consumers
Years of in-depth consumer research with women has been critical to the long-term
success of Gillette’s Venus razor.
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274 PART 4 | Building STRong BRAndS
migrate toward both discount and premium products.
Companies that miss out on this new market risk being
“trapped in the middle” and seeing their market share
steadily decline. Recognizing that its channel strategy
emphasized retailers like Sears selling primarily to the
middle class, Levi-Strauss has since introduced pre-
mium lines such as Levi’s Made & Crafted to upscale
retailers Bloomingdales and Saks Fifth Avenue and the
less-expensive Signature by Levi Strauss & Co. line to
mass-market retailers Walmart and Kmart.
generaTion Each generation or cohort is
profoundly influenced by the times in which it grows
up—the music, movies, politics, and defining events of
that period. Members share the same major cultural,
political, and economic experiences and often have
similar outlooks and values. Marketers may choose
to advertise to a cohort by using the icons and images
prominent in its experiences. They can also try to
develop products and services that uniquely meet the
particular interests or needs of a generational target.
Although the beginning and ending birth dates of any
generation are always subjective—and generalizations can
mask important differences within the group—here are
some general observations about the four main genera-
tion cohorts of U.S. consumers, from youngest to oldest.16
Millennials (or Gen Y) Although different age splits
are used to define Millennials, or Gen Y, the term usually
means people born between 1977 and 1994. That’s about
78 million people in the United States, with annual
spending power approaching $200 billion. If you factor
in career growth and household and family formation
and multiply by another 53 years of life expectancy,
trillions of dollars in consumer spending are at stake
over their life spans. It’s not surprising that marketers
are racing to get a bead on Millennials’ buying behavior.
Here is how one bank has targeted these consumers.17
PnC’s ViRtuaL WaLLet In early 2007, PNC Bank hired design consultants IDEO to study Gen
Y—defined by PNC at that time as 18- to 34-year-olds—to help develop a marketing plan to appeal to them. IDEO’s research
found this cohort (1) didn’t know how to manage money and (2) found bank Web sites clunky and awkward to use. PNC thus
chose to introduce a new offering, Virtual Wallet, that combined three accounts—“Spend” (regular checking and bill payments),
“Reserve” (backup interest-bearing checking for overdraft protection and emergencies), and “Grow” (long-term savings)—with
a slick personal finance tool—the “Money Bar”—by which customers can drag money from account to account online by ad-
justing an on-screen slider. Instead of seeing a traditional ledger, customers can view balances on a calendar that displays esti-
mated future cash flow based on when they get paid, when they pay their bills, and what their spending habits are. Customers
also can set a “Savings Engine” tool to transfer money to savings when they receive a paycheck as well as get their account
balances via text. PNC has added even more features to Virtual Wallet, such as transaction information for credit cards and a
joint calendar view for joint account holders, which has expanded the service’s appeal beyond its 1 million Gen Y customers.
PNC also engages 80,000-plus of its Virtual Wallet customers in an “Inside the Wallet” blog, which the bank feels provides
more detailed feedback than it can get with its Twitter and Facebook accounts.
Also known as the Echo Boomers, “digital native” Millennials have been wired almost from birth—playing
computer games, navigating the Internet, downloading music, and connecting with friends via texting and social
The Signature by Levi Strauss & Co. line of jeans allows the company to effectively and
efficiently reach more mass-market consumers than with its other existing jeans lines.
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media. They are much more likely than other age groups to own multiple devices and multitask while online, mov-
ing across mobile, social, and PC platforms. They are also more likely to go online to broadcast their thoughts and
experiences and to contribute user-generated content. They tend to trust friends more than corporate sources of
information.18
Although they may have a sense of entitlement and abundance from growing up during the economic boom
and being pampered by their boomer parents, Millennials are also often highly socially conscious, concerned
about environmental issues, and receptive to cause marketing efforts. The recession hit them hard, and many have
accumulated sizable debt. One implication is they are less likely to have bought their first homes and more likely
to still live with their parents, influencing their purchases in what demographers are calling a “boom-boom” or
boomerang effect. That is, the same products that appeal to 20-somethings also appeal to many of their youth-
obsessed parents.
Because Gen Y members are often turned off by overt branding practices and “hard sell,” marketers have tried
many different approaches to reach and persuade them.19 Consider these widely used experiential tactics.
1. Student ambassadors—Red Bull enlisted college students as Red Bull Student Brand Managers to distribute
samples, research drinking trends, design on-campus marketing initiatives, and write stories for student
newspapers. American Eagle, among other brands, has also developed an extensive campus ambassador
program.
2. Street teams—Long a mainstay in the music business, street teams help to promote bands both big and small.
Rock band Foo Fighters created a digital street team that sends targeted e-mail blasts to members who “get
the latest news, exclusive audio/video sneak previews, tons of chances to win great Foo Fighters prizes, and
become part of the Foo Fighters Family.”
3. Cool events—Hurley, which defined itself as an authentic “Microphone for Youth” brand rooted in surf, skate,
art, music, and beach cultures, has been a long-time sponsor of the U.S. Open of Surfing. The actual title
sponsor for the 2013 event was Vans, whose shoes and clothing also have strong Millennial appeal. Vans has
also been the title sponsor for almost 20 years of the Warped tour, which blends music with action (or ex-
treme) sports.
Gen X Often lost in the demographic shuffle, the 50 million or so Gen X consumers, named for a 1991 novel by
Douglas Coupland, were born between 1964 and 1978. The popularity of Kurt Cobain, rock band Nirvana, and the
lifestyle portrayed in the critically lauded film Slacker led to the use of terms like grunge and slacker to characterize
Gen X when they were teens and young adults. They bore an unflattering image of disaffection, short attention
spans, and weak work ethic.
These stereotypes have slowly disappeared. Gen Xers were certainly raised in more challenging times, when work-
ing parents relied on day care or left “latchkey kids” on their own after school and corporate downsizing led to the
threat of layoffs and economic uncertainty. At the same time, social and racial diversity were more widely accepted,
and technology changed the way people lived and worked. Although Gen Xers raised standards in educational
achievement, they were also the first generation to find surpassing their parents’ standard of living a serious challenge.
These realities had a profound impact. Gen Xers prize self-sufficiency and the ability to handle any circum-
stance. Technology is an enabler for them, not a barrier. Unlike the more optimistic, team-oriented Gen Yers, Gen
Xers are more pragmatic and individualistic. As consumers, they are wary of hype and pitches that seem inauthentic
The Foo Fighters have
used digital street
teams to build stronger
ties and a sense of
community with their
devoted fan base.
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276 PART 4 | Building STRong BRAndS
or patronizing. Direct appeals where value is clear often work best, especially as Gen Xers have become parents
raising families.20
Baby Boomers Baby boomers are the approximately 76 million U.S. consumers born between 1946 and 1964.
Though they represent a wealthy target, possessing $1.2 trillion in annual spending power and controlling three-
quarters of the country’s wealth, marketers often overlook them. In network television circles, because advertisers
are primarily interested in 18- to 49-year-olds, viewers over 50 are referred to as “undesirables,” though ironically
the average age of the prime-time TV viewer is 51.
With many baby boomers approaching their 70s and even the last and youngest wave cresting 50, demand has
exploded for products to turn back the hands of time. According to one survey, nearly one in five boomers was
actively resisting the aging process, driven by the mantra “Fifty is the new thirty.” As they search for the fountain
of youth, sales of hair replacement and hair coloring aids, health club memberships, home gym equipment, skin-
tightening creams, nutritional supplements, and organic foods have all soared.
Contrary to conventional marketing wisdom that brand preferences of consumers over 50 are fixed, one study
of boomers ages 55 to 64 found a significant number are willing to change brands, spend on technology, use social
networking sites, and purchase online.21 Although they love to buy things, they hate being sold to, and as one mar-
keter noted, “You have to earn your stripes every day.” But abundant opportunity exists. Boomers are also less likely
to associate retirement with “the beginning of the end” and see it instead as a new chapter in their lives with new
activities, interests, careers, and even relationships.22
Silent Generation Those born between 1925 and 1945—the “Silent Generation”—are redefining what old
age means. To start with, many people whose chronological age puts them in this category don’t see themselves
as old.23 One survey found that 60 percent of respondents over 65 said they felt younger than their actual age.
A third of those 65 to 74 said they felt 10 to 19 years younger, and one in six felt at least 20 years younger than
their actual age.24
Consistent with what they say, many older consumers lead very active lives. As one expert noted, it is if they
were having a second middle age before becoming elderly. Advertisers have learned that older consumers don’t
mind seeing other older consumers in ads targeting them, as long as they appear to be leading vibrant lives. But
marketers have learned to avoid clichés like happy older couples riding bikes or strolling hand in hand on a beach
at sunset.
Strategies emphasizing seniors’ roles as grandparents are well received. Many older consumers not only happily
spend time with their grandkids, they often provide for their basic needs and at least occasional gifts. The founders
of eBeanstalk.com, which sells children’s learning toys, thought their online business would be driven largely by
young consumers starting families. They were surprised to find that as much as 40 percent of their customers were
older, mainly grandparents. These customers are very demanding but also more willing to pay full price than their
younger counterparts.25
But they also need their own products. To design better appliances for the elderly, GE holds empathy sessions to
help designers understand the challenges of aging. They tape their knuckles to represent arthritic hands, put ker-
nels of popcorn in their shoes to create imbalance, and weigh down pans to simulate the challenge of putting food
into ovens. Researchers at the MIT AgeLab use a suit called AGNES (Age Gain Now Empathy System) to research
Researchers at the MIT
AgeLab use special
suits in their shopping
experiments to mimic
the physical limitations
of being elderly.
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the changing needs of the elderly. The suit has a pelvic harness that connects to a headpiece, mimicking an aging
spine and restricted mobility, range of motion, joint function, balance, and vision.26
Race and Culture Multicultural marketing is an approach recognizing that different ethnic and cultural
segments have sufficiently different needs and wants to require targeted marketing activities and that a mass
market approach is not refined enough for the diversity of the marketplace. Consider that McDonald’s now does
40 percent of its U.S. business with ethnic minorities. Its highly successful “I’m Lovin’ It” campaign was rooted in
hip-hop culture but has had an appeal that transcended race and ethnicity.27
The Hispanic American, African American, and Asian American markets are all growing at two to three
times the rate of nonmulticultural populations, with numerous submarkets, and their buying power is expanding.
Multicultural consumers also vary in whether they are first, second, or a later generation and whether they are im-
migrants or born and raised in the United States.
Marketers need to factor the norms, language nuances, buying habits, and business practices of multicultural
markets into the initial formulation of their marketing strategy, rather than adding these as an afterthought. All this
diversity also has implications for marketing research; it takes careful sampling to adequately profile target markets.
Multicultural marketing can require different marketing messages, media, channels, and so on. Specialized
media exist to reach virtually any cultural segment or minority group, though some companies have struggled to
provide financial and management support for fully realized programs.
Fortunately, as countries become more culturally diverse, many marketing campaigns targeting a specific cul-
tural group can spill over and positively influence others. Ford developed a TV ad featuring comedian Kevin Hart
to launch its new Explorer model that initially targeted the African American market, but it became one of the key
ads for the general market launch too.28
Next, we consider issues in the three largest multicultural markets—Hispanic Americans, African Americans,
and Asian Americans. Table 9.4 lists some important facts and figures about them.29
Hispanic Americans Accounting for more than half the growth in the U.S. population from 2000 to 2010,
Hispanic Americans have become the largest minority in the country. It’s projected that by 2020, 17 percent of U.S.
residents will be of Hispanic origin. With annual purchasing power of more than $1 trillion in 2010—and expected
to rise to $1.5 trillion by 2015—Hispanic Americans would be the world’s ninth-largest market if they were a
separate nation.30
This segment is youthful. The median age of U.S. Hispanics is 27—right in the middle of the highly coveted 18-
to-34 Millennial age range—compared with a median age of 42 for non-Hispanic whites. In fact, every 30 seconds,
two non-Hispanics retire while a Hispanic turns 18.31 Hispanic Millennials have been called “fusionistas” because
Table 9.4 Multicultural Market Profile
Hispanic Americans Asian Americans African Americans
Estimated population—2012 52.4 million 15.7 million 41.1 million
Forecasted population—2060 128.8 million 34.4 million 61.8 million
Number of minority-owned businesses in 2007 2.3 million 1.5 million 1.9 million
Revenue generated by minority-owned businesses in 2007 $345.2 billion $507.6 billion $137.5 billion
Median household income in 2011 $38, 624 $65,129 $32,229
Poverty rate 2011 25.3% 12.3% 27.6%
Percentage of those ages >25 with at least a high school
education in 2012
65% 88.8% 84.9%
Number of veterans of U.S. armed forces in 2011 1.2 million 264,695 2.3 million
Median age in 2011 27.0 36.0 31.7
Percent of population under 18 years old in 2011 35% 23% 28%
Sources: www.selig.uga.edu and www.census.gov.
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they see themselves as both fully American and Latino.32 As one marketing executive noted, “they eat tamales and
burgers and watch football and fútbol.”33
More than half the U.S. Hispanic population lives in just three states—California, Texas, and Florida—and
more than 4 million Hispanics live in New York and Los Angeles. The Hispanic American market holds a wide
variety of subsegments. Hispanics of Mexican origin are the dominant segment, followed by those of Puerto
Rican and Cuban descent, though numbers of Salvadorans, Dominicans, Guatemalans, and Columbians are
growing faster.34
To meet these divergent needs, Goya, the largest U.S. Hispanic food company with $1.3 billion in annual rev-
enue, sells 1,600 products ranging from bags of rice to ready-to-eat, frozen empanadas and 38 varieties of beans
alone. The company also has found much success selling key products directly to non-Hispanics. Its new philoso-
phy: “We don’t market to Latinos, we market as Latinos.”35
Hispanic Americans often share strong family values—several generations may reside in one household—and
strong ties to their country of origin. Even young Hispanics born in the United States tend to identify with the
country their families are from. Hispanic Americans desire respect, are brand loyal, and take a keen interest
in product quality. Procter & Gamble’s research revealed that Hispanic consumers believe “lo barato sale caro”
(“cheap can be expensive,” or in the English equivalent, “you get what you pay for”). P&G found Hispanic consum-
ers were so value-oriented they would even do their own product tests at home. One woman was using different
brands of tissues and toilet paper in different rooms to see which her family liked best.36
U.S.-born Hispanic Americans also have different needs and tastes than their foreign-born counterparts and,
though bilingual, often prefer to communicate in English. Though two-thirds of U.S. Hispanics are considered
“bicultural” and comfortable with both Spanish- and English-speaking cultures, most firms choose to run Spanish-
only ads on traditional Hispanic networks Univision and Telemundo. Univision is the long-time market-leader,
which has found great success with its DVR-proof telenovelas (like daily soap operas), though new competition is
emerging from Fox and other media companies.37
Marketers are reaching out to Hispanic Americans
with targeted promotions, ads, and Web sites, but they
need to capture the nuances of cultural and market
trends.38 Consider two companies that did so.
• Although Kleenex was the market-share leader in fa-
cial tissues among Hispanics, brand owner Kimberly-
Clark felt there was much room to grow. Relying
on research showing that more than twice as many
Hispanics base their purchase decisions on package
and design as in the general population, it launched
the “Con Kleenex, Expresa Tu Hispanidad” cam-
paign. Amateur artists were solicited to submit de-
signs for customized packages sold during National
Hispanic Heritage Month. Public voting chose three
winners, and the campaign increased Kleenex sales at
participating retailers by an impressive 476 percent.39
• The Clorox Company found its Hispanic American
customers were relatively more likely to agree or over-
index on “cleaning more to prevent family and friends
from getting sick,” especially in spring and summer
months and when visitors came. Additional research
also revealed the importance of packaging and a
preference for scent as the final step in the cleaning
process. Product development led to the launch of the
FRANGAZIA line of cleaning products with lavender
and other scents that had tested well. As support,
Spanish-only ads were run on Hispanic media.40
General Motors, Southwestern Airlines, and Toyota
have used a “Spanglish” approach in their ads, conver-
sationally mixing some Spanish with English in dia-
logue among Hispanic families.41 Continental Airlines,
General Mills, and Sears have used mobile marketing
to reach Hispanics.42 With a mostly younger population
Clorox developed its Fraganzia line of cleaning products to appeal to those Hispanics who
had strong preferences for hygiene and scent.
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that may have less access to Internet or landline service, Hispanics are much more active with mobile technology and
social media than the general population. Staying connected to friends and family is important for them.43
Asian Americans According to the U.S. Census Bureau, “Asian” refers to people having origins in any of the
original peoples of the Far East, Southeast Asia, or the Indian subcontinent. Six countries represent 79 percent
of the Asian American population: China (21 percent), the Philippines (18 percent), India (11 percent), Vietnam
(10 percent), Korea (10 percent), and Japan (9 percent).
The diversity of these national identities limits the effectiveness of pan-Asian marketing appeals. For example,
in terms of general food trends, research has uncovered that Japanese eat much more raw food than Chinese;
Koreans are more inclined to enjoy spicy foods and drink more alcohol than other Asians; and Filipinos tend to be
the most Americanized and Vietnamese the least Americanized in terms of food choices.44
The Asian American market has been called the “invisible market” because, compared with the Hispanic
Americans and African American markets, it has traditionally received a disproportionally small fraction of U.S.
companies’ total multicultural marketing expenditure.45 Yet it is getting easier to reach this market, given Asian-
language newspapers, magazines, cable TV channels, and radio stations targeting specific groups.46
Telecommunications and financial services are a few of the industries more actively targeting Asian Americans.
Wells Fargo Bank has a long tradition of marketing to Asian Americans, aided by its deep historical roots in
California where a heavy concentration exists. The bank has engaged its Asian American agency partner, Dae
Partners, for years. Wells Fargo itself is diverse with an internal team of multicultural experts and a significant
group of Asian American executives. It has developed products and programs specifically for the Asian American
market and is highly engaged in volunteerism and community efforts.47
Asian Americans tend to be more brand-conscious than other minority groups yet are the least loyal to par-
ticular brands. They also tend to care more about what others think (for instance, whether their neighbors will
approve of them) and share core values of safety and education. Comparatively affluent and well educated, they are
an attractive target for luxury brands. The most computer-literate group, Asian Americans are more likely to use
the Internet on a daily basis.48
African Americans African Americans are projected to have a combined spending power of $1.1 trillion by
2015. They have had a significant economic, social, and cultural impact on U.S. life, contributing inventions, art,
music, sports achievements, fashion, and literature. Like many cultural segments, they are deeply rooted in the U.S.
landscape while also proud of their heritage and respectful of family ties.49
Based on survey findings, African Americans are the most fashion-conscious of all racial and ethnic groups but
are strongly motivated by quality and selection. They’re also more likely to be influenced by their children when
selecting a product and less likely to buy unfamiliar brands. African Americans watch television and listen to the
radio more than other groups and are heavy users of mobile data. Nearly three-fourths have a profile on more than
one social network, with Twitter being extremely popular.50
Media outlets directed at black audiences received only 2 percent of the $120 billion firms spent on advertising in
2011, however.51 A Nielsen research study found that roughly half of African Americans say they are more likely to buy
a product if its advertising portrays the black community in a positive manner. More than 90 percent said black media
are more relevant to them than generic media outlets.52 To encourage more marketing investment, the Cabletelevision
Advertising Bureau trade organization even created an information-laden Web site, www.reachingblackconsumers.com.
Ad messages targeting African Americans must be seen as relevant. In a campaign for Lawry’s Seasoned Salt tar-
geting African Americans, images of soul food appeared; a campaign for Kentucky Fried Chicken showed an African
American family gathered at a reunion—demonstrating an understanding of both the market’s values and its lifestyle.53
P&G’s “My Black Is Beautiful” campaign was started by women inside the company who saw a lack of positive images
of African American women in mainstream media. The campaign has a dedicated Web site, a national television show
on BET network, and various promotional efforts featuring P&G’s beauty, health, and personal care brands.54
Many companies have successfully tailored products to meet the needs of African Americans. Sara Lee
Corporation’s L’eggs discontinued its separate line of pantyhose for black women; now shades and styles popular
among black women make up half the company’s general-focus sub-brands. In some cases, campaigns have ex-
panded beyond their African American target. State Farm’s “50 Million Pound Challenge” weight-loss campaign
began in the African American community but expanded to the general market.
Cigarette, liquor, and fast-food firms have been criticized for targeting urban African Americans. As one writer
noted, with obesity a problem, it is disturbing that it is easier to find a fast-food restaurant than a grocery store in
many black neighborhoods.55
Lesbian, Gay, Bisexual, and Transgender (LGBT) The lesbian, gay, bisexual, and transgender (LGBT)
market is estimated to make up 5 percent to 10 percent of the population and have approximately $700 billion in
buying power.56 Many firms have recently created initiatives to target this market.57
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American Airlines created a Rainbow Team with a dedicated LGBT staff and Web site that has emphasized
community-relevant services such as a calendar of gay-themed national events. JCPenney hired openly gay Ellen
DeGeneres as its spokesperson, featured both male and female same-sex couples in its catalogs, and sponsored a
float in New York’s Gay Pride parade. Wells Fargo, General Mills, and Kraft are also often identified as among the
most gay-friendly businesses.58
Logo, MTV’s television channel for a gay and lesbian audience, has 150 advertisers in a wide variety of product
categories and is available in more than 52 million homes. Increasingly, advertisers are using digital efforts to reach
the market. Hyatt’s online appeals to the LGBT community target social sites and blogs where customers share
their travel experiences.
Some firms worry about backlash from organizations that will criticize or even boycott firms supporting gay
and lesbian causes. Although Pepsi, Campbell’s, and Wells Fargo all experienced such boycotts in the past, they
continue to advertise to the gay community.
pSYchoGraphIc SeGmentatIon
Psychographics is the science of using psychology and demographics to better understand consumers. In psycho-
graphic segmentation, buyers are divided into groups on the basis of psychological/personality traits, lifestyle, or
values. People within the same demographic group can exhibit very different psychographic profiles.
One of the most popular commercially available classification systems based on psychographic measurements
is Strategic Business Insight’s (SBI) VALS™ framework. VALS is based on psychological traits for people and clas-
sifies U.S. adults into eight primary groups based on responses to a questionnaire featuring four demographic and
35 attitudinal questions. The VALS system is continually updated with new data from more than 80,000 surveys
per year (see Figure 9.1). You can find out which VALS type you are by going to the SBI Web site.59
The main dimensions of the VALS segmentation framework are consumer motivation (the horizontal dimen-
sion) and consumer resources (the vertical dimension). Consumers are inspired by one of three primary motiva-
tions: ideals, achievement, and self-expression. Those primarily motivated by ideals are guided by knowledge and
principles. Those motivated by achievement look for products and services that demonstrate success to their peers.
Consumers whose motivation is self-expression desire social or physical activity, variety, and risk. Personality traits
such as energy, self-confidence, intellectualism, novelty seeking, innovativeness, impulsiveness, leadership, and
Thinkers Achievers
Innovators
Ideals
Experiencers
Believers Strivers
Survivors
Makers
Achievement Self-Expression
Low Resources
Low Innovation
High Resources
High Innovation
US VALS Framework
Primary
Motivation
| Fig. 9.1 |
The VALS
Segmentation
System: An Eight-
Part Typology
Source: www.strategicbusinessinsights.com/
vals © 2014 by Strategic Business Insights. All
rights reserved.
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vanity—in conjunction with key demographics—determine an individual’s resources. Different levels of resources
enhance or constrain a person’s expression of his or her primary motivation.
BehavIoral SeGmentatIon
Although psychographic segmentation can provide a richer understanding of consumers, some marketers fault
it for being somewhat removed from actual consumer behavior.60 In behavioral segmentation, marketers divide
buyers into groups on the basis of their knowledge of, attitude toward, use of, or response to a product.
needS and benefiTS Not everyone who buys a product has the same needs or wants the same benefits
from it. Needs-based or benefit-based segmentation identifies distinct market segments with clear marketing
implications. For example, Constellation Brands identified six different benefit segments in the U.S. premium wine
market ($5.50 a bottle and up).61
• Enthusiast (12 percent of the market). Skewing female, their average income is about $76,000 a year. About
3 percent are “luxury enthusiasts” who skew more male with a higher income.
• Image Seekers (20 percent). The only segment that skews male, with an average age of 35. They use wine
basically as a badge to say who they are, and they’re willing to pay more to make sure they’re getting the right
bottle.
• Savvy Shoppers (15 percent). They love to shop and believe they don’t have to spend a lot to get a good bottle
of wine. Happy to use the bargain bin.
• Traditionalist (16 percent). With very traditional values, they like to buy brands they’ve heard of and from
wineries that have been around a long time. Their average age is 50, and they are 68 percent female.
• Satisfied Sippers(14 percent). Not knowing much about wine, they tend to buy the same brands. About half
of what they drink is white zinfandel.
• Overwhelmed (23 percent). A potentially attractive target market, they find purchasing wine confusing.
deCiSion roleS It’s easy to identify the buyer for many products. In the United States, men normally
choose their shaving equipment and women choose their pantyhose, but even here marketers must be careful in
making targeting decisions because buying roles change. When ICI, the giant British chemical company now called
AkzoNobe, discovered that women made 60 percent of decisions on the brand of household paint, it decided to
advertise its Dulux brand to women.
People play five roles in a buying decision: Initiator, Influencer, Decider, Buyer, and User. For example, assume
a wife initiates a purchase by requesting a new treadmill for her birthday. The husband may then seek information
from many sources, including his best friend who has a treadmill and is a key influencer in what models to con-
sider. After presenting the alternative choices to his wife, he purchases her preferred model, which ends up being
used by the entire family. Different people are playing different roles, but all are crucial in the decision process and
ultimate consumer satisfaction.
USer and USage-relaTed VariableS Many marketers believe variables related to users or their
usage—occasions, user status, usage rate, buyer-readiness stage, and loyalty status—are good starting points for
constructing market segments.
Occasions Occasions mark a time of day, week, month, year, or other well-defined temporal aspects of a
consumer’s life. We can distinguish buyers according to the occasions when they develop a need, purchase a
product, or use a product. For example, air travel is triggered by occasions related to business, vacation, or family.
Occasion segmentation can help expand product usage.
User Status Every product has its nonusers, ex-users, potential users, first-time users, and regular users. Blood
banks cannot rely only on regular donors to supply blood; they must also recruit new first-time donors and
contact ex-donors, each with a different marketing strategy. The key to attracting potential users, or even possibly
nonusers, is understanding the reasons they are not using. Do they have deeply held attitudes, beliefs, or behaviors
or just lack knowledge of the product or brand benefits?
Included in the potential-user group are consumers who will become users in connection with some life stage
or event. Mothers-to-be are potential users who will turn into heavy users. Producers of infant products and
services learn their names and shower them with products and ads to capture a share of their future purchases.
Market-share leaders tend to focus on attracting potential users because they have the most to gain from them.
Smaller firms focus on trying to attract current users away from the market leader.
Usage Rate We can segment markets into light, medium, and heavy product users. Heavy users are often
a small slice but account for a high percentage of total consumption. Heavy beer drinkers account for
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282 PART 4 | Building STRong BRAndS
87 percent of beer consumption—almost seven times as much as light drinkers. Marketers would rather
attract one heavy user than several light users. A potential problem, however, is that heavy users are often
either extremely loyal to one brand or never loyal to any brand and always looking for the lowest price. They
also may have less room to expand their purchase and consumption. Light users may be more responsive to
new marketing appeals.62
Buyer-Readiness Stage Some people are unaware of the product, some are aware, some are informed, some are
interested, some desire the product, and some intend to buy. To help characterize how many people are at different
stages and how well they have converted people from one stage to another, recall from Chapter 5 that marketers
can employ a marketing funnel to break the market into buyer-readiness stages.
The proportions of consumers at different stages make a big difference in designing the marketing program.
Suppose a health agency wants to encourage women to have an annual Pap test to detect cervical cancer. At the
beginning, most women may be unaware of the Pap test. The marketing effort should go into awareness-building
advertising using a simple message. Later, the advertising should dramatize the benefits of the Pap test and the
risks of not getting it. A special offer of a free health examination might motivate women to actually sign up for
the test.
Figure 9.2 displays a funnel for two hypothetical brands. Compared with Brand B, Brand A performs poorly at
converting one-time users to more recent users (only 46 percent convert for Brand A compared with 61 percent
for Brand B). Depending on the reasons consumers didn’t use again, a marketing campaign could introduce more
relevant products, find more accessible retail outlets, or dispel rumors or incorrect beliefs consumers hold.
Loyalty Status Marketers usually envision four groups based on brand loyalty status:
1. Hard-core loyals—Consumers who buy only one brand all the time
2. Split loyals—Consumers who are loyal to two or three brands
3. Shifting loyals—Consumers who shift loyalty from one brand to another
4. Switchers—Consumers who show no loyalty to any brand63
A company can learn a great deal by analyzing degrees of brand loyalty: Hard-core loyals can help identify the
products’ strengths; split loyals can show the firm which brands are most competitive with its own; and by looking
at customers dropping its brand, the company can learn about its marketing weaknesses and attempt to correct
them. One caution: What appear to be brand-loyal purchase patterns may reflect habit, indifference, a low price, a
high switching cost, or the unavailability of other brands.
Attitude Five consumer attitudes about products are enthusiastic, positive, indifferent, negative, and hostile.
Workers in a political campaign use attitude to determine how much time and effort to spend with each voter.
They thank enthusiastic voters and remind them to vote, reinforce those who are positively disposed, try to win the
votes of indifferent voters, and spend no time trying to change the attitudes of negative and hostile voters.
Multiple Bases Combining different behavioral bases can provide a more comprehensive and cohesive view of a
market and its segments. Figure 9.3 depicts one possible way to break down a target market by various behavioral
segmentation bases.
96 65%
63
46%
29
62%
18
67%
12 6
50%Brand A
Aware Ever Tried Recent Trial Occasional
User
Regular User Most Often
Used
97 76% 74
61%
45
71%
32
75%
24 15
62%Brand B
Aware Ever Tried Recent Trial Occasional
User
Regular User Most Often
Used
| Fig. 9.2 |
Example of
Marketing
Funnel
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idenTifying MARkeT SegMenTS And TARgeTS | chapter 9 283
How Should Business Markets
Be Segmented?
We can segment business markets with some of the same variables we use in consumer markets, such as geog-
raphy, benefits sought, and usage rate, but business marketers also use other variables. Table 9.5 shows one set
of these. The demographic variables are the most important, followed by the operating variables—down to the
personal characteristics of the buyer.
The table lists major questions that business marketers should ask in determining which segments and custom-
ers to serve. A rubber-tire company can sell tires to manufacturers of automobiles, trucks, farm tractors, forklift
trucks, or aircraft. Within a chosen target industry, it can further segment by company size and set up separate
operations for selling to large and small customers.
A company can segment further by purchase criteria. Government laboratories need low prices and service
contracts for scientific equipment, university laboratories need equipment that requires little service, and indus-
trial labs need equipment that is highly reliable and accurate.
Business marketers generally identify segments through a sequential process. Consider an aluminum
company: The company first undertook macrosegmentation. It looked at which end-use market to serve: au-
tomobile, residential, or beverage containers. It chose the residential market, and it needed to determine the
most attractive product application: semifinished material, building components, or aluminum mobile homes.
Deciding to focus on building components, it considered the best customer size and chose large. The second
stage consisted of microsegmentation. The company distinguished among customers buying on price, service,
and quality. Because it had a high-service profile, the firm decided to concentrate on the service-motivated seg-
ment of the market.
Target Market
Negative
opinion
Neutral Favorable
opinion
Rejector
Not yet
repeated
Repeated
Loyal to
other brand
Switcher
Loyal to
brand
Light
user
Regular
user
Heavy
user
AwareUnaware
Not tried Tried
| Fig. 9.3 |
Behavioral Segmentation Breakdown
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284 PART 4 | Building STRong BRAndS
Business-to-business marketing experts James C. Anderson and James A. Narus have urged marketers to pres-
ent flexible market offerings to all members of a segment.64 A flexible market offering consists of two parts: a na-
ked solution containing the product and service elements that all segment members value and discretionary options
that some segment members value. Each option might carry an additional charge. Siemens Electrical Apparatus
Division sells metal-clad boxes to small manufacturers at prices that include free delivery and a warranty, but it
also offers installation, tests, and communication peripherals as extra-cost options.
Market Targeting
There are many statistical techniques for developing market segments.65 Once the firm has identified its market-
segment opportunities, it must decide how many and which ones to target. Marketers are increasingly combining
several variables in an effort to identify smaller, better-defined target groups. Thus, a bank may not only identify
a group of wealthy retired adults but within that group distinguish several segments depending on current in-
come, assets, savings, and risk preferences. This has led some market researchers to advocate a needs-based mar-
ket segmentation approach. Roger Best proposed the seven-step approach shown in Table 9.6.
Table 9.5 Major Segmentation Variables for Business Markets
Demographic
1. Industry: Which industries should we serve?
2. Company size: What size companies should we serve?
3. Location: What geographical areas should we serve?
Operating Variables
4. Technology: What customer technologies should we focus on?
5. User or nonuser status: Should we serve heavy users, medium users, light users, or nonusers?
6. Customer capabilities: Should we serve customers needing many or few services?
Purchasing Approaches
7. Purchasing-function organization: Should we serve companies with a highly centralized or decentralized purchasing organization?
8. Power structure: Should we serve companies that are engineering dominated, financially dominated, and so on?
9. Nature of existing relationship: Should we serve companies with which we have strong relationships or simply go after the most desirable
companies?
10. General purchasing policies: Should we serve companies that prefer leasing? Service contract? Systems purchases? Sealed bidding?
11. Purchasing criteria: Should we serve companies that are seeking quality? Service? Price?
Situational Factors
12. Urgency: Should we serve companies that need quick and sudden delivery or service?
13. Specific application: Should we focus on a certain application of our product rather than all applications?
14. Size or order: Should we focus on large or small orders?
Personal Characteristics
15. Buyer-seller similarity: Should we serve companies whose people and values are similar to ours?
16. Attitude toward risk: Should we serve risk-taking or risk-avoiding customers?
17. Loyalty: Should we serve companies that show high loyalty to their suppliers?
Source: Adapted from Thomas V. Bonoma and Benson P. Shapiro, Segmenting the Industrial Market (Lexington, MA: Lexington Books, 1983).
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Effective Segmentation Criteria
Not all segmentation schemes are useful. We could divide buyers of table salt into blond and brunette custom-
ers, but hair color is undoubtedly irrelevant to the purchase of salt. Furthermore, if all salt buyers buy the same
amount of salt each month, believe all salt is the same, and would pay only one price for salt, this market is mini-
mally segmentable from a marketing point of view.
To be useful, market segments must rate favorably on five key criteria:
• Measurable. The size, purchasing power, and characteristics of the segments can be measured.
• Substantial. The segments are large and profitable enough to serve. A segment should be the largest possible
homogeneous group worth going after with a tailored marketing program. It would not pay, for example, for
an automobile manufacturer to develop cars for people who are under four feet tall.
• Accessible. The segments can be effectively reached and served.
• Differentiable. The segments are conceptually distinguishable and respond differently to different marketing-
mix elements and programs. If married and single women respond similarly to a sale on perfume, they do not
constitute separate segments.
• Actionable. Effective programs can be formulated for attracting and serving the segments.
Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or mar-
ket segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats these forces
pose are as follows.66
1. Threat of intense segment rivalry—A segment is unattractive if it already contains numerous, strong, or
aggressive competitors. It’s even more unattractive if it’s stable or declining, if plant capacity must be added in
large increments, if fixed costs or exit barriers are high, or if competitors have high stakes in staying in the seg-
ment. These conditions will lead to frequent price wars, advertising battles, and new-product introductions
and will make it expensive to compete. The mobile phone market has seen fierce competition due to segment
rivalry.
2. Threat of new entrants—The most attractive segment is one in which entry barriers are high and exit bar-
riers are low. Few new firms can enter the industry, and poorly performing firms can easily exit. When both
entry and exit barriers are high, profit potential is high, but firms face more risk because poorer-performing
firms stay in and fight it out. When both entry and exit barriers are low, firms easily enter and leave the in-
dustry, and returns are stable but low. The worst case occurs when entry barriers are low and exit barriers
are high: Here firms enter during good times but find it hard to leave during bad times. The result is chronic
Table 9.6 Steps in the Segmentation Process
Description
1. Needs-Based Segmentation Group customers into segments based on similar needs and benefits sought by customers in solving
a particular consumption problem.
2. Segment Identification For each needs-based segment, determine which demographics, lifestyles, and usage behaviors make
the segment distinct and identifiable (actionable).
3. Segment Attractiveness Using predetermined segment attractiveness criteria (such as market growth, competitive intensity,
and market access), determine the overall attractiveness of each segment.
4. Segment Profitability Determine segment profitability.
5. Segment Positioning For each segment, create a “value proposition” and product-price positioning strategy based on that
segment’s unique customer needs and characteristics.
6. Segment “Acid Test” Create “segment storyboard” to test the attractiveness of each segment’s positioning strategy.
7. Marketing-Mix Strategy Expand segment positioning strategy to include all aspects of the marketing mix: product, price,
promotion, and place.
Source: Adapted from Roger J. Best, Market-Based Management, 6th ed. (Upper Saddle River NJ: Prentice Hall, 2013). © 2013. Printed and electronically reproduced by permission of Pearson Education, Inc.
Upper Saddle River, New Jersey.
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286 PART 4 | Building STRong BRAndS
overcapacity and depressed earnings for all. The airline industry has low entry barriers but high exit barriers,
leaving all carriers struggling during economic downturns.
3. Threat of substitute products—A segment is unattractive when there are actual or potential substitutes for the
product. Substitutes place a limit on prices and on profits. If technology advances or competition increases in
these substitute industries, prices and profits are likely to fall. Air travel has severely challenged profitability
for Greyhound and Amtrak.
4. Threat of buyers’ growing bargaining power—A segment is unattractive if buyers possess strong or growing
bargaining power. The rise of retail giants such as Walmart has led some analysts to conclude that the poten-
tial profitability of packaged-goods companies will become curtailed. Buyers’ bargaining power grows when
they become more concentrated or organized, when the product represents a significant fraction of their
costs, when the product is undifferentiated, when buyers’ switching costs are low, or when they can integrate
upstream. To protect themselves, sellers might select buyers who have the least power to negotiate or switch
suppliers. A better defense is developing superior offers that strong buyers cannot refuse.
5. Threat of suppliers’ growing bargaining power—A segment is unattractive if the company’s suppliers are able
to raise prices or reduce quantity supplied. Suppliers tend to be powerful when they are concentrated or orga-
nized, when they can integrate downstream, when there are few substitutes, when the supplied product is an
important input, and when the costs of switching suppliers are high. The best defenses are to build win-win
relationships with suppliers or use multiple supply sources.
evaluatInG anD SelectInG the market SeGmentS
In evaluating market segments, the firm must look at two factors: the segment’s overall attractiveness and the
company’s objectives and resources. How well does a potential segment score on the five criteria? Does it have
characteristics that make it generally attractive, such as size, growth, profitability, scale economies, and low risk?
Does investing in it make sense given the firm’s objectives, competencies, and resources? Some attractive seg-
ments may not mesh with the company’s long-run objectives, or the company may lack one or more competen-
cies necessary to offer superior value.
Marketers have a range or continuum of possible levels of segmentation that can guide their target market deci-
sions. As Figure 9.4 shows, at one end is a mass market of essentially one segment; at the other are individuals or
segments of one person each. Between lie multiple segments and single segments. We describe approaches to each
of the four levels next.
fUll markeT CoVerage With full market coverage, a firm attempts to serve all customer groups with all
the products they might need. Only very large firms such as Microsoft (software market), General Motors (vehicle
market), and Coca-Cola (nonalcoholic beverage market) can undertake a full market coverage strategy. Large
firms can cover a whole market in two broad ways: through differentiated or undifferentiated marketing.
In undifferentiated or mass marketing, the firm ignores segment differences and goes after the whole market
with one offer. It designs a marketing program for a product with a superior image that can be sold to the broad-
est number of buyers via mass distribution and mass communications. Undifferentiated marketing is appropriate
when all consumers have roughly the same preferences and the market shows no natural segments. Henry Ford
epitomized this strategy when he offered the Model-T Ford in one color, black.
The argument for mass marketing is that it creates the largest potential market, which leads to the lowest
costs, which in turn can lead to lower prices or higher margins. The narrow product line keeps down the costs of
research and development, production, inventory, transportation, marketing research, advertising, and product
management. The undifferentiated communication program also reduces costs. However, many critics point to the
increasing splintering of the market and the proliferation of marketing channels and communication, which make
it difficult and increasingly expensive to reach a mass audience.
Customizationomizati
Mass MarketMass Mar
Full
Market
Coverage
Multiple
Segments Single
Segments
Individuals
as Segments
| Fig. 9.4 |
Possible
Levels of
Segmentation
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When different groups of consumers have different needs and wants, marketers can define multiple segments.
The company can often better design, price, disclose, and deliver the product or service and also fine-tune the mar-
keting program and activities to better reflect competitors’ marketing. In differentiated marketing, the firm sells
different products to all the different segments of the market. Cosmetics firm Estée Lauder markets brands that
appeal to women (and men) of different tastes: The flagship brand, the original Estée Lauder, appeals to older con-
sumers; Clinique caters to middle-aged women; M.A.C. to youthful hipsters; Aveda to aromatherapy enthusiasts;
and Origins to ecoconscious consumers who want cosmetics made from natural ingredients.67 Perhaps no firm
practices differentiated marketing like Hallmark Cards, which celebrated its 100th birthday in 2010.68
HaLLMaRk Hallmark’s personal expression products are sold in more than 40,000 retail outlets nation-
wide and in 100 countries worldwide. Each year the company produces 10,000 new and redesigned greeting cards, as
well as related products including party goods, gift wrap, and ornaments. Its success is due in part to its vigorous seg-
mentation of the greeting card business. In addition to popular sub-branded card lines such as the humorous Shoebox
Greetings, Hallmark has introduced lines targeting specific market segments. Fresh Ink targets 18- to 39-year-old women.
The Simple Motherhood line targets moms with designs featuring fresh photography and simple, relatable sentiments.
Hallmark’s three ethnic lines—Mahogany, Sinceramente Hallmark, and Tree of Life—target African American, Hispanic,
and Jewish consumers, respectively. Specific greeting cards also benefit charities such as (PRODUCT) RED™, UNICEF,
and the Susan G. Komen Race for the Cure. Hallmark has also embraced technology. Musical greeting cards incorporate
sound clips from popular movies, TV shows, and songs. Hallmark recently introduced its Magic Prints line of interactive
products, with “magic mitt” technology that lets kids leave an imprint of their hand on an insert in a card or other keepsake
for parents or grandparents. Online, Hallmark offers e-cards as well as personalized printed greeting cards that it mails for
consumers. For business needs, Hallmark Business Expressions offers personalized corporate holiday cards and greeting
cards for all occasions and events.
Differentiated marketing typically creates more total sales than undifferentiated marketing. However, it also
increases the costs of doing business. Because differentiated marketing leads to both higher sales and higher costs,
no generalizations about its profitability are valid.
mUlTiple SegmenT SpeCializaTion With selective specialization, a firm selects a subset of all the
possible segments, each objectively attractive and appropriate. There may be little or no synergy among the
segments, but each promises to be a moneymaker. When Procter & Gamble launched Crest Whitestrips, initial
target segments included newly engaged women and brides-to-be as well as gay males. The multisegment strategy
also has the advantage of diversifying the firm’s risk.
Keeping synergies in mind, companies can try to operate in supersegments rather than in isolated segments. A
supersegment is a set of segments sharing some exploitable similarity. For example, many symphony orchestras
target people who have broad cultural interests, rather than only those who regularly attend concerts. A firm can
also attempt to achieve some synergy with product or market specialization.
Hallmark has thoroughly
segmented the greeting
card market according
to occasion, personality,
race, and other factors.
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ce
: ©
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• With product specialization, the firm sells a certain product to several different market segments. A microscope
manufacturer, for instance, sells to university, government, and commercial laboratories, making different
instruments for each and building a strong reputation in the specific product area. The downside risk is that the
product may be supplanted by an entirely new technology.
• With market specialization, the firm concentrates on serving many needs of a particular customer group, such
as by selling an assortment of products only to university laboratories. The firm gains a strong reputation
among this customer group and becomes a channel for additional products its members can use. The down-
side risk is that the customer group may suffer budget cuts or shrink in size.
Single-SegmenT ConCenTraTion With single-segment concentration, the firm markets to only one
particular segment. Porsche concentrates on the sports car enthusiast and Volkswagen on the small-car market—
its foray into the large-car market with the Phaeton was a failure in the United States. Through concentrated
marketing, the firm gains deep knowledge of the segment’s needs and achieves a strong market presence. It also
enjoys operating economies by specializing its production, distribution, and promotion. If it captures segment
leadership, the firm can earn a high return on its investment.
A niche is a more narrowly defined customer group seeking a distinctive mix of benefits within a segment.
Marketers usually identify niches by dividing a segment into subsegments. Whereas Hertz, Avis, Alamo, and
others specialize in airport rental cars for business and leisure travelers, Enterprise has attacked the low-budget,
insurance-replacement market by primarily renting to customers whose cars have been wrecked or stolen. By cre-
ating unique associations to low cost and convenience in an overlooked niche market, Enterprise has been highly
profitable. Another up-and-coming niche marketer is Allegiant Air.69
aLLegiant aiR The recent prolonged recession wreaked havoc on the financial performance of all the
major U.S. domestic airlines. Up-and-comer Allegiant Air, however, managed to turn a profit quarter after quarter. Founded
in Eugene, OR, in 2007, Allegiant has developed a highly successful niche strategy by providing leisure travelers afford-
able nonstop flights from smaller markets such as Great Falls, MT; Grand Forks, ND; Knoxville, TN; and Plattsburgh, NY; to
popular vacation spots in Florida, California, and Hawaii and to Las Vegas, Phoenix, and Myrtle Beach. By staying off the
beaten track, it avoids competition on all but a handful of its 100-plus routes. Much of its passenger traffic is additive and
incremental, attracting tourist travel that might not have otherwise even happened. If a market doesn’t seem to be taking
hold, Allegiant quickly drops it. The carrier carefully balances revenues and costs. It charges for services—like in-flight bev-
erages and overhead storage space—that are free on other airlines. It also generates additional revenue by cross-selling
vacation products and packages. Allegiant owns its 64 used MD-80 planes and also cuts costs by flying only a few times a
week instead of a few times a day like most airlines. It even fixes its seats at a pitch halfway between fully upright and fully
reclined—adjustable seats add weight, burn fuel, and are a “maintenance nightmare.” The formula seems to be working.
Passengers in its local markets love the convenience, keeping Allegiant’s planes full and the company profitable.
Allegiant Air has found
a niche flying leisure
travelers from smaller
markets.
So
ur
ce
: ©
M
ic
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el
M
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ew
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What does an attractive niche look like? Niche customers have a distinct set of needs; they will pay a
premium to the firm that best satisfies them; the niche is fairly small but has size, profit, and growth potential
and is unlikely to attract many competitors; and it gains certain economies through specialization. As marketing
efficiency increases, niches that seemed too small may become more profitable. See “Marketing Insight: Chasing
the Long Tail.”
indiVidUal markeTing The ultimate level of segmentation leads to “segments of one,” “customized
marketing,” or “one-to-one marketing.”70 As companies have grown proficient at gathering information about
individual customers and business partners (suppliers, distributors, retailers), and as their factories are being
designed more flexibly, they have increased their ability to individualize market offerings, messages, and media.
Mass customization is the ability of a company to meet each customer’s requirements—to prepare on a mass basis
individually designed products, services, programs, and communications.71
Chasing the Long Tail
The advent of online commerce, made possible by technology and
epitomized by Amazon.com, eBay, iTunes, and Netflix, has led to a shift
in consumer buying patterns, according to Chris Anderson, editor-in-
chief of Wired magazine and author of The Long Tail.
In most markets, the distribution of product sales conforms to a
curve weighted heavily to one side—the “head”—where the bulk of
sales are generated by a few products. The curve falls rapidly toward
zero and hovers just above it far along the X-axis—the “long tail”—
where the vast majority of products generate very little sales. The mass
market traditionally focused on generating “hit” products that occupy
the head, disdaining the low-revenue market niches comprising the tail.
The Pareto principle–based “80–20” rule—that 80 percent of a firm’s
revenue is generated by 20 percent of a firm’s products—epitomizes
this thinking.
Anderson asserts that as a result of consumers’ enthusiastic
adoption of the Internet as a shopping medium, the long tail holds
significantly more value than before. In fact, he argues, the Internet has
directly contributed to the shifting of demand “down the tail, from hits
to niches” in a number of product categories including music, books,
clothing, and movies. According to this view, the rule that now prevails
is more like “50–50,” with lower-selling products adding up to half a
firm’s revenue.
Anderson’s long-tail theory is based on three premises: (1) Lower
costs of distribution make it economically easier to sell products without
precise predictions of demand; (2) The more products available for sale,
the greater the likelihood of tapping into latent demand for niche tastes
unreachable through traditional retail channels; and (3) If enough niche
tastes are aggregated, a big new market can result.
Anderson identifies two aspects of Internet shopping that sup-
port these premises. First, the increased inventory and variety afforded
online permit greater choice. Second, the search costs for relevant
new products are lowered due to the wealth of information online, the
filtering of product recommendations based on user preferences that
vendors can provide, and the word-of-mouth network of Internet users.
Some critics challenge the notion that old business paradigms
have changed as much as Anderson suggests. Especially in entertain-
ment, they say, the “head” where hits are concentrated is valuable also
to consumers, not only to the content creators. One critique argued that
“most hits are popular because they are of high quality,” and another
noted that the majority of products and services making up the long tail
originate from a small concentration of online “long-tail aggregators.”
Although some academic research supports the long-tail theory,
other research is more challenging, finding that poor recommendation
systems render many very low share products in the tail so obscure and
hard to find they disappear before they can be purchased frequently
enough to justify their existence. For companies selling physical prod-
ucts, inventory, stocking, and handling costs can outweigh any financial
benefits of such products.
Harvard’s Anita Elberse provides an especially detailed analysis
of various media and entertainment options via sources such as sales
data from Nielsen Soundscan and online music service Rhapsody, with
some provocative findings. Blockbusters are capturing even more of the
market than they used to, which Elberse attributes to humans’ social
nature and desire to share experiences. Consumers in the tail tend to
be heavier users in the category but actually don’t like niche products
as much as they like the hit products.
Elberse concluded that consumer behavior online and offline in the
media and entertainment industries was highly similar and favored hit
products in both cases. She notes that niche products at the tail end
of a distribution can have value, but keeping costs low is critical. The
debate over the importance of the long tail is likely to continue; perhaps
the answer is that it is not so much either/or, but how hit and niche
products can best be created and marketed.
Sources: Chris Anderson, The Long Tail (New York: Hyperion, 2006); “Reading
the Tail,” interview with Chris Anderson, Wired, July 8, 2006, p. 30; “Wag the
Dog: What the Long Tail Will Do,” The Economist, July 8, 2006, p. 77; John
Cassidy, “Going Long,” New Yorker, July 10, 2006; Erik Brynjolfsson, Yu “Jeffrey”
Hu, and Michael D. Smith, “From Niches to Riches: Anatomy of a Long Tail,” MIT
Sloan Management Review (Summer 2006), p. 67; Anita Elberse, “Should You
Invest in the Long Tail,” Harvard Business Review, July–August 2008, pp. 88–96
(with online commentary); Lee Gomes, “Study Refutes Niche Theory Spawned
by Web,” Wall Street Journal, July 2, 2008; Erick Schonfeld, “Poking Holes in the
Long Tail Theory,” www.techcrunch.com, July 2, 2008; “Rethinking the Long Tail
Theory: How to Define ‘Hits’ and ‘Niches,’” Knowledge@Wharton, September
16, 2009.
insight
marketing
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290 PART 4 | Building STRong BRAndS
Consumers increasingly value self-expression and the ability to capitalize on user-generated products (UGP) as
much as user-generated content (UGC).72 MINI Cooper’s online “configurator” allows prospective buyers to virtu-
ally select and try out many options for a new MINI. Coke’s Freestyle vending machine allows users to choose from
more than 100 Coke brands or custom flavors or to create their own.73
Consumers can buy customized jeans, cowboy boots, and bicycles that cost thousands of dollars.74 Peter
Wagner started Wagner Custom Skis in Telluride, Colorado, in 2006. His company now makes about 1,000
snowboards and pairs of skis a year, with prices that start at $1,750. Each ski or snowboard is unique and
precisely fitted to the preferences and riding style of its owner. Strategies like using NASA-like materials and
making adjustments of thousands of an inch send a strong performance message, matched by the attractive
aesthetic of the skis.75
Services are also a natural setting to apply customized marketing; airlines, hotels, and rental car agencies are at-
tempting to offer more individualized experiences. Even political candidates are embracing customized marketing.
On Facebook, politicians can find an individual’s preferences by observing the groups or causes he or she joins,
and then, using Facebook’s ad platform, the campaign team can test hundreds of ad messages designed to reflect
the theme of these other interests. Hikers may get an environmentally themed message; members of particular
religious groups may get a Christian-themed message.76
Early pioneers in individual marketing Don Peppers and Martha Rogers outlined a four-step framework for
what they called one-to-one marketing as follows:77
1. Identify your prospects and customers. Don’t go after everyone. Build, maintain, and mine a rich customer
database with information from all the channels and customer touch points.
2. Differentiate customers in terms of (1) their needs and (2) their value to your company. Spend propor-
tionately more effort on the most valuable customers (MVCs). Apply activity-based costing and calculate
customer lifetime value. Estimate net present value of all future profits from purchases, margin levels, and
referrals, less customer-specific servicing costs.
3. Interact with individual customers to improve your knowledge about their individual needs and to build
stronger relationships. Formulate customized offerings you can communicate in a personalized way.
4. Customize products, services, and messages to each customer. Facilitate customer interaction through the
company contact center and Web site.
One-to-one marketing is not for every company. It works best for firms that normally collect a great
deal of individual customer information and carry a lot of products that can be cross-sold, need periodic
replacement or upgrading, and offer high value. For others, the required investment in information collection,
hardware, and software may exceed the payout. The cost of goods is raised beyond what the customer is willing
to pay.
Customers must know how to express their personal product preferences, however, or be given assistance to
best customize a product.78 Some customers don’t know what they want until they see actual products, but they
also cannot cancel the order after the company has started to work on it. The product may be hard to repair and
have little resale value. In spite of this, customization has worked well for some products.
legal and eThiCal iSSUeS WiTh markeT TargeTS Marketers must target carefully to avoid
consumer backlash. Some consumers resist being labeled.79 Singles may reject single-serve food packaging if they
don’t want to be reminded they are eating alone. Elderly consumers who don’t feel their age may not appreciate
products that label them “old.”
Market targeting also can generate public controversy when marketers take unfair advantage of vulnerable
groups (such as children) or disadvantaged groups (such as inner-city residents) or promote potentially harmful
products. The cereal industry has been criticized through the years for marketing efforts directed toward children.
Critics worry that high-powered appeals presented by lovable animated characters will overwhelm children’s de-
fenses and lead them to want sugared cereals or poorly balanced breakfasts. Toy marketers have been similarly
criticized. A key area of concern for many consumer protection advocates is the millions of kids who are online, as
discussed in “Marketing Memo: Protecting Kids Online.”
Not all attempts to target children, minorities, or other special segments draw criticism. Colgate-Palmolive’s
Colgate Junior toothpaste has special features designed to get children to brush longer and more often. Thus, the
issue is not who is targeted, but how and for what purpose. Socially responsible marketing calls for targeting that
serves not only the company’s interests but also the interests of those targeted.
This is the case many companies make in marketing to the nation’s preschoolers. With nearly one in four
youngsters under the age of five attending some kind of organized child care, they feel the potential market—in-
cluding kids and parents—is too great to pass up.80 So in addition to standards such as art easels, gerbil cages,
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With the explosion of cell phones, tablets, software apps, and social networking sites, an important concern is protecting unknowing or unsuspecting children
in an increasingly complex technological world. The 8-to-12 tween market today is highly mobile and happy to share locations via an app and communicate
with others by phone, leading one trendspotting expert to characterize them as “SoLoMo” (Social Local Mobile). Only one in five parents, however, uses basic
content control features on smart phones, tablets, and game consoles. Thus, establishing ethical and legal boundaries in marketing to children online—and
offline—continues to be a hot topic.
The Children’s Online Privacy Protection Act (COPPA) was designed to better control the online collection of personal information from children under
13. It became law in July 2000 and helped ensure that Web sites targeted to children could not inappropriately collect names, e-mail addresses, and other
sensitive information. Updates to the law in 2010 reflect the rapid technological developments that allowed marketers to collect so much more information
from kids.
COPPA spells out “what a Web site operator must include in a privacy policy, when and how to seek verifiable consent from a parent and what
responsibilities an operator has to protect children’s privacy and safety online.” The act forbids the collection of certain information about children
unless a parent first gives permission. That information includes photos, videos, and audio files containing a human image or voice, as well as location
data generated by a cell phone. “Personal identifiers” that allow a person to be tracked over time and across Web sites were deemed personal infor-
mation and covered by the law. The updated law also outlined how parental consent could be verified through electronically scanned consent forms,
video conferencing, and e-mail.
Some software developers were opposed to the amended COPPA, complaining that the cost of compliance and the risk of violations were too great.
Penalties can be stiff. In 2008, Sony BMG Music Entertainment agreed to pay $1 million as part of a settlement with the FTC after being charged with improp-
erly collecting information from 30,000 children under 13 on its Web sites. Mrs. Fields Cookies and Hershey Foods were fined early on.
Despite the restrictions of COPPA and other regulations, businesses continue to eye the potentially rewarding youth market. eBay has explored
allowing consumers under 18 to set up accounts with parental authorization and shop, with some safeguards to prevent access to adult content
and products. Facebook’s stated interest in allowing children 12 and under to join its site has met with criticism from consumer, privacy, and child
advocacy groups.
Sources: Anton Troianovski, “New Rules on Kids’ Web Ads,” Wall Street Journal, August 1, 2012; www.ftc.gov/ogc/coppa1.htm; “How to Comply with the Children’s Online
Privacy Protection Rule, www.business.ftc.gov/documents/; Richard Lardner, “Government Issues New Online Child Privacy Rules,” www.news.terra.com, December 19,
2012; Greg Bensinger, “EBay to Target Under-18 Set,” Wall Street Journal, July 26, 2012; Tim Peterson, “Tweenage Wasteland,” Adweek, June 25, 2012, p.11; Sharon M.
Goldman, “The Social Tween,” Adweek, June 25, 2012, p. T1; Heather Chaet, “The Tween Machine,” Adweek, June 25, 2012; Bruce Levinson, “Does Technology Change
the Ethics of Marketing to Children,” Fast Company, April 11, 2013.
Protecting Kids Onlinemarketing memo
3. Business marketers use all these variables along with
operating variables, purchasing approaches, and situ-
ational factors.
4. To be useful, market segments must be measurable,
substantial, accessible, differentiable, and actionable.
5. We can target markets at four main levels: mass, multi-
ple segments, single (or niche) segment, and individuals.
Summary
1. Target marketing includes three activities: market seg-
mentation, market targeting, and market positioning.
Market segments are large, identifiable, distinct groups
within a market.
2. The major segmentation variables for consumer mar-
kets are geographic, demographic, psychographic, and
behavioral. Marketers use them singly or in combination.
and blocks, the nation’s preschools are likely to have Care Bear worksheets, Pizza Hut reading programs, and
Nickelodeon magazines.
Teachers and parents are divided about the ethics of this increasingly heavy preschool marketing push. Some
side with groups such as Campaign for a Commercial-Free Childhood, whose members feel preschoolers are in-
credibly susceptible to advertising and that schools’ endorsements of products make children believe the product is
good for them—no matter what it is. Yet many preschools and day care centers operating on tight budgets welcome
the free resources marketers offer.81
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292 PART 4 | Building STRong BRAndS
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Marketing Discussion
Marketing Segmentation Schemes
Think of various product categories. In each segmenta-
tion scheme, to which segment do you feel you belong?
How would marketing be more or less effective for you de-
pending on the segment? How would you contrast demo-
graphic and behavioral segment schemes? Which one(s)
do you think would be most effective for marketers trying
to sell to you?
Applications
Marketing Debate
Is Mass Marketing Dead?
With marketers increasingly adopting more and more re-
fined market segmentation schemes—fueled by the Internet
and other customization efforts—some claim mass market-
ing is dead. Others counter there will always be room for
large brands employing marketing programs to target the
mass market.
Take a position: Mass marketing is dead versus Mass
marketing is still a viable way to build a profitable brand.
key player in reestablishing Hong Kong’s economy after
World War II. By the end of the 20th century, it had ac-
quired numerous companies in hopes of implementing a
“three-legged stool” strategy; the three legs represented
a foothold in the United Kingdom, the United States, and
Asia. HSBC continued to grow around the world for many
years, and by the early 21st century, it was the second-
largest bank in the world.
HSBC has successfully grown its business under a
single global brand and for years kept the tagline “The
World’s Local Bank.” The aim was to link its huge inter-
national size with the close relationships it nurtures in
each of the countries in which it operates. Sir John Bond,
HSBC’s former chairman, said, “Our position as the
Marketing Excellence
>> HSBC
HSBC, originally known as the Hong Kong and Shanghai
Banking Corporation Limited, was established in 1865 to
finance the growing trade between China and the United
Kingdom. Over the years, the bank has pioneered many
modern banking practices in different countries. For ex-
ample, it was the first bank in Thailand and printed the
country’s first banknotes. During the early 20th century,
HSBC issued significant loans to several national govern-
ments, including China, which helped finance projects
such as its railway development. The bank was also a
6. A mass market targeting approach is adopted only by
the biggest companies. Many companies target mul-
tiple segments defined in various ways such as vari-
ous demographic groups who seek the same product
benefit.
7. A niche is a more narrowly defined group. Globalization
and the Internet have made niche marketing more fea-
sible for many.
8. More companies now practice individual and mass cus-
tomization. The future is likely to see more individual
consumers take the initiative in designing products and
brands.
9. Marketers must choose target markets in a socially re-
sponsible manner at all times.
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trade in dollars, euros or renminbi, global markets are
opening up to everyone. At HSBC we can connect your
business to new opportunities on six continents—in more
than 90 currencies.”
HSBC has traditionally focused much of its advertis-
ing in airports but also sponsors more than 250 cultural
and sporting events, with a special concentration on
helping youth, growing education, and embracing com-
munities. These sponsorships allow the company to learn
from different people and cultures around the world.
The bank has gained insight into how to target con-
sumer niches with unique products and services. For
example, it found a little-known product area growing at
125 percent a year: pet insurance. HSBC now distributes
nationwide pet insurance to its depositors through its
HSBC Insurance agency. In Malaysia, it offered a “smart
card” and no-frills credit cards to the underserved student
segment and targeted high-value customers with special
“Premium Center” bank branches.
Today, HSBC remains one of the largest banks in
the world, with four global businesses: retail banking
and wealth management, commercial banking, global
banking and markets, and global private banking. It
serves 60 million customers through 6,600 branches
in 80 countries and earned $22.6 billion in profit in
2013, with a brand value of $11.4 billion, according to
Interbrand/BusinessWeek global brand rankings.
Questions
1. What were the risks and benefits of HSBC’s position-
ing itself as the “World’s Local Bank”?
2. Evaluate HSBC’s recent business and marketing
shift. How do you think its current ad campaign and
tagline, “HSBC helps you unlock the world’s poten-
tial,” resonate with its key consumers?
Sources: Carrick Mollenkamp, “HSBC Stumbles in Bid to Become Global Deal Maker,” Wall Street
Journal, October 5, 2006; Kate Nicholson, “HSBC Aims to Appear Global yet Approachable,”
Campaign, December 2, 2005, p. 15; Deborah Orr, “New Ledger,” Forbes, March 1, 2004,
pp. 72–73; “HSBC’s Global Marketing Head Explains Review Decision,” Adweek, January 19,
2004; “Now Your Customers Can Afford to Take Fido to the Vet,” Bank Marketing, December
2003; Kenneth Hein, “HSBC Bank Rides the Coattails of Chatty Cabbies,” Brandweek, December
1, 2003, p. 30; Sir John Bond and Stephen Green, “HSBC Strategic Overview,” presentation to
investors, November 27, 2003; “Lafferty Retail Banking Awards 2003,” Retail Banker International,
November 27, 2003, pp. 4–5; “Ideas That Work,” Bank Marketing, November 2003; “HSBC Enters
the Global Branding Big League,” Bank Marketing International, August 2003; Normandy Madden,
“HSBC Rolls Out Post-SARS Effort,” Advertising Age, June 16, 2003, p. 12; Douglas Quenqua,
“HSBC Dominates Ad Pages in New York Magazine Issue,” New York Times, October 20, 2008,
pg. B.6; Kimia M. Ansari, “A Different Point of View: HSBC.” Unbound Edition, July 10, 2009; “The
Evolution of “Your Point of View,” press release, October 20, 2008; Fortune, Global 500; Alex
Brownsell, “HSBC’s Chris Clark on a New Era for the Bank’s Marketing,” Marketingmagazine.co.uk,
May 31, 2012; “Best Global Brands 2012,” Interbrand; HSBC.com; 2013 HSBC Annual Report.
world’s local bank enables us to approach each country
uniquely, blending local knowledge with a worldwide op-
erating platform.”
HSBC launched one global campaign titled
“Different Values,” which embraced this exact notion
of understanding multiple viewpoints and different in-
terpretations. Print ads showed the same picture three
times with a different interpretation in each. For ex-
ample, an old classic car appeared with the words
freedom, status symbol, and polluter. Next to the pic-
ture the copy read, “The more you look at the world,
the more you realize that what one person values may
be different from the next.” In another set of print ads,
the word accomplishment is first shown on a picture
of a woman winning a beauty pageant, then an as-
tronaut walking on the moon, and a young child tying
his sneaker. The copy read, “The more you look at the
world, the more you realize what really matters to peo-
ple.” Tracy Britton, head of marketing for HSBC Bank,
USA, explained the strategy behind the campaign: “It
encapsulates our global outlook that acknowledges
and respects that people value things in very different
ways. HSBC’s global footprint gives us the insight and
the opportunity not only to be comfortable, but con-
fident in helping people with different values achieve
what’s really important to them.”
HSBC revised its business strategy in 2011, con-
solidating in underperforming markets and investing in
growth markets and businesses. As a result, it made a
strategic shift in its branding efforts, moving away from
the familiar “World’s Local Bank” message and introduc-
ing “HSBC helps you unlock the world’s potential.” HSBC
hoped to communicate how it connects local businesses
to the world economy and, ultimately, how it focuses on
the business elements that affect the world of the future.
Chris Clark, HSBC’s marketing director, explained that
the new ads and campaign “are symptomatic of a shift
from pure brand-led advertising to a more product-driven
approach.”
In one television ad, a young girl and her father set
up a lemonade stand advertising lemonade for 50 cents.
As customers passing by scramble to find a few quarters,
the girl explains (in a different language) that she accepts
other global currencies, including Hong Kong dollars and
Brazilian reals. The voiceover says, “At HSBC we believe
that in the future even the smallest business will be mul-
tinational.” The ads were meant to make consumers feel
reassured about banking with HSBC. In a corresponding
print ad, a lemonade stand sign displayed the cost of a
glass as 50¢, €0.4, and ¥3. The copy read, “Whether you
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294 PART 4 | Building STRong BRAndS
less about the bragging rights of the BMW brand and
instead desired a variety of design, size, price, and style
choices. As a result, the company took several steps to
grow its product line by targeting specific market seg-
ments. This resulted in unique premium-priced cars such
as SUVs, convertibles, and roadsters, as well as less
expensive compact cars like the 1 Series. In addition,
BMW redesigned its 3, 5, and 7 Series cars, making them
unique in appearance yet maintaining their exceptional
performance. BMW’s full range of cars now includes the
1 Series, 3 Series, 5 Series, 6 Series, 7 Series, X Series,
Z4 Roadster, M Series, Hybrids, and BMWi.
BMW created the lower-priced 1 Series and X1 SUV
to target the “modern mainstream,” a group who are also
family-focused and active but had previously avoided
BMWs because of their premium cost. The 1 Series
reached this group with its lower price point, sporty de-
sign, and luxury brand. The X1 and X3 also hit home with
a smaller, less expensive SUV design.
The redesign of the 7 Series, BMW’s most luxuri-
ous car, targeted a group called “upper conservatives.”
These wealthy, traditional consumers don’t usually like
sportier cars, so BMW added electronic components
such as multiple options to control the windows, seats,
airflow, and lights, a push-button ignition, and night vi-
sion, all controlled by a point-and-click system called
iDrive. These enhancements added comfort and luxury,
attracting drivers away from competitors like Jaguar and
Mercedes.
BMW successfully launched the X Series by targeting
“upper liberals” who had achieved success in the 1990s
and gone on to have children and take up extracurricular
activities such as biking, golf, and skiing. These consum-
ers needed a bigger car for their active lifestyles and
growing families, so BMW created a high-performance
luxury SUV. BMW refers to its SUVs as sport activity
vehicles in order to appeal even more to these active
consumers.
BMW introduced convertibles and roadsters to target
“post-moderns,” a high-income group that continues
to attract attention with more showy, flamboyant cars.
Marketing Excellence
>> BMW
BMW is the ultimate driving machine. Manufactured by
the German company Bayerische Motoren Werke AG,
BMW stands for both performance and luxury. The com-
pany was founded in 1916 as an aircraft-engine manu-
facturer and produced engines during World Wars I and
II. It evolved into a motorcycle and automobile maker by
the mid-20th century, and today it is an internationally
respected company and brand with $106 billion in sales
in 2012.*
BMW’s logo is one of the most distinctive and glob-
ally recognized symbols ever created. The signature
BMW roundel looks like a spinning propeller blade set
against a blue sky background—originally thought to
be a tribute to the company’s founding days as an
aircraft-engine manufacturer. Recently, however, a New
York Times reporter revealed that the logo, which fea-
tures the letters BMW at the top of the outer ring and
a blue-and-white checkered design in the inner ring,
was trademarked in 1917 and meant to show the col-
ors of the Free State of Bavaria, where the company is
headquartered.
BMW’s growth exploded in the 1980s and 1990s,
when it successfully targeted the growing market of
baby boomers and professional yuppies who put work
first and wanted a car that spoke of their success. BMW
gave them sporty sedans with exceptional performance
and a brand that stood for prestige and achievement.
The cars, which came in a 3, 5, or 7 Series, were basi-
cally the same design in three sizes. It was at this time
that yuppies made Beemer and Bimmer the slang terms
for BMW’s cars and motorcycles, popular names still
used today.
At the turn of the century, consumers’ attitudes to-
ward cars changed. Research showed that they cared
*BMW Group includes BMW, MINI, and Rolls-Royce brands.
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idenTifying MARkeT SegMenTS And TARgeTS | chapter 9 295
Questions
1. How does BMW segment its consumers? Why does
this work for BMW?
2. What does BMW do well to market to each seg-
ment group? Where could it improve its marketing
strategy?
3. Should BMW ever change its tagline, “The Ultimate
Driving Machine”? Why or why not?
Sources: Mark Clothier, “Mercedes Outlasts BMW’s Late Surge to Capture U.S. Luxury Crown,”
www.bloomberg.com, January 4, 2014; Stephen Williams, “BMW Roundel: Not Born from
Planes,” New York Times, January 7, 2010; Gail Edmondson, “BMW: Crashing the Compact
Market,” BusinessWeek, June 28, 2004; Neil Boudette, “BMW’s Push to Broaden Line Hits Some
Bumps in the Road,” Wall Street Journal, January 10, 2005; Boston Chapter BMW Club Car of
America, http://boston-bmwcca.org; Rupal Parekh, “BMW Changes Gears with New Campaign
from KBS&P,” Advertising Age, January 6, 2012; BMW.com; BMWgroup.com; BMW 2013 Annual
Report, Company History.
BMW’s 6 Series, a flashier version of the high-end 7
Series, also targeted this group.
BMW uses a wide range of advertising tactics to
reach each of its target markets. However, the com-
pany’s U.S. tagline, “The Ultimate Driving Machine,” has
remained consistent since it first launched there in 1974.
During that time, sales have grown to more than 300,000
units in the United States in 2013. In recent years, BMW
has returned to emphasizing performance over status,
stating, “We only make one thing, the ultimate driving
machine.”
BMW owners are very loyal to the brand, and enthu-
siasts host an annual Bimmerfest each year to celebrate
their cars. The company nurtures these loyal consumers
and continues to research, innovate, and reach out to
specific segment groups year after year.
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296
In This Chapter, We Will Address
the Following Questions
1. How can a firm develop and establish an effective positioning in the market?
(p. 297)
2. How do marketers identify and analyze competition? (p. 298)
3. How are brands successfully differentiated? (p. 300)
4. How do firms communicate their positioning? (p. 308)
5. What are some alternative approaches to positioning? (p. 313)
6. What are the differences in positioning and branding for a small business?
(p. 314)
DirecTV has established a unique position
in the marketplace as the world’s
leading provider of digital television
entertainment services.
Source: Courtesy of DIRECTV
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297
As the success of DirecTV demonstrates, a company can
reap the benefits of carving out a unique position in the market-
place. Creating a compelling, well-differentiated brand position
requires a keen understanding of consumer needs and wants,
company capabilities, and competitive actions. It also requires
disciplined but creative thinking. In this chapter, we outline a
process by which marketers can uncover the most powerful
brand positioning.
No company can win if its products and services resemble every other product and
offering. As part of the strategic brand management process, each offering must represent the right kinds of
things in the minds of the target market. Consider how DirecTV has positioned itself.1
Crafting the Brand
Positioning
10
Launched a little more than two decades ago, DirecTV now has more than 32 million subscribers in
the United States and Latin America. The direct-broadcast satellite service provider faces competition
on a number of fronts: from classic cable companies (Comcast and TimeWarner Cable), from other
direct broadcast satellite service providers (Dish), and from alternate ways to watch television digitally
through downloads and streaming (Hulu, Netflix, and Amazon). The world’s leading provider of digital
television entertainment services, DirecTV carries the slogan “Don’t Just Watch TV, DirecTV,” reflecting the unique po-
sitioning it has crafted thanks to a combination of features not easily matched by any competitor. Three pillars of that
positioning are captured by its claims to “state-of-the-art technology, unmatched programming, and industry leading
customer service.” The company puts much emphasis on its comprehensive set of sports packages, its wide array
of HD channels, and its broad broadcast platform that lets customers
watch programming on their TVs at home and on their laptops, tablets,
and cell phones. With its Genie service, users can record as many as
five shows at once. In exaggerated fashion, its “Get Rid of Cable” TV
ad campaign shows how customers who get mad at cable have their
lives turn for the worse through a series of unfortunate events. DirecTV
has made a strategic targeting shift to focus on “high quality” subscrib-
ers: loyal customers who purchase premium services, pay their bills on
time, and call less often to complain.
Developing a Brand Positioning
All marketing strategy is built on segmentation, targeting, and positioning (STP). A company discovers differ-
ent needs and groups of consumers in the marketplace, targets those it can satisfy in a superior way, and then
positions its offerings so the target market recognizes its distinctive offerings and images. By building customer
advantages, companies can deliver high customer value and satisfaction, which lead to high repeat purchases and
ultimately to high company profitability.
UnderstandInG PosItIonInG and ValUe ProPosItIons
Positioning is the act of designing a company’s offering and image to occupy a distinctive place in the minds of
the target market.2 The goal is to locate the brand in the minds of consumers to maximize the potential benefit to
the firm. A good brand positioning helps guide marketing strategy by clarifying the brand’s essence, identifying
the goals it helps the consumer achieve, and showing how it does so in a unique way. Everyone in the organiza-
tion should understand the brand positioning and use it as context for making decisions.
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298 PART 4 | Building STRong BRAndS
A useful measure of the effectiveness of the organization’s positioning is the brand substitution test. If, in some
marketing activity—an ad campaign, a viral video, a new product introduction—the brand were replaced by a
competitive brand, then that marketing activity should not work as well in the marketplace. A well-positioned
brand should be distinctive in its meaning and execution. If a sport or music sponsorship, for example, would work
as well if it were for a leading competitor, then either the positioning is not sharply defined well enough or the
sponsorship as executed does not tie closely enough to the brand positioning.
A good positioning has one foot in the present and one in the future. It needs to be somewhat aspirational so
the brand has room to grow and improve. Positioning on the basis of the current state of the market is not forward-
looking enough, but at the same time, the positioning cannot be so removed from reality that it is essentially unob-
tainable. The real trick is to strike just the right balance between what the brand is and what it could be.
One result of positioning is the successful creation of a customer-focused value proposition, a cogent reason
why the target market should buy a product or service. As introduced in Chapter 1, a value proposition captures
the way a product or service’s key benefits provide value to customers by satisfying their needs. Table 10.1 shows
how three companies—Hertz, Volvo, and Domino’s—have defined their value proposition through the years with
their target customers.3
Positioning requires that marketers define and communicate similarities and differences between their
brand and its competitors. Specifically, deciding on a positioning requires: (1) choosing a frame of reference by
identifying the target market and relevant competition, (2) identifying the optimal points-of-parity and points-
of-difference brand associations given that frame of reference, and (3) creating a brand mantra summarizing
the positioning and essence of the brand.
Choosing a Competitive Frame
of Reference
The competitive frame of reference defines which other brands a brand competes with and which should thus be
the focus of competitive analysis. Decisions about the competitive frame of reference are closely linked to target
market decisions. Deciding to target a certain type of consumer can define the nature of competition because cer-
tain firms have decided to target that segment in the past (or plan to do so in the future) or because consumers in
that segment may already look to certain products or brands in their purchase decisions.
IdentIfyIng CompetItors A good starting point in defining a competitive frame of reference for
brand positioning is category membership—the products or sets of products with which a brand competes and
that function as close substitutes. It would seem a simple task for a company to identify its competitors. PepsiCo
knows Coca-Cola’s Dasani is a major bottled-water competitor for its Aquafina brand; Wells Fargo knows Bank of
America is a major banking competitor; and Petsmart.com knows a major online retail competitor for pet food
and supplies is Petco.com.
The range of a company’s actual and potential competitors, however, can be much broader than the obvious. To
enter new markets, a brand with growth intentions may need a broader or maybe even a more aspirational com-
petitive frame. And it may be more likely to be hurt by emerging competitors or new technologies than by current
competitors.
The energy-bar market created by PowerBar ultimately fragmented into a variety of subcategories, including
those directed at specific segments (such as Luna bars for women) and some possessing specific attributes (such
table 10.1 Examples of Value Propositions
Company and Product Target Customers Value Proposition
Hertz (car rental) Busy professionals Fast, convenient way to rent the right type
of a car at an airport
Volvo (station wagon) Safety-conscious upscale families The safest, most durable wagon in which
your family can ride
Domino’s (pizza) Convenience-minded pizza lovers A delicious hot pizza, delivered promptly to
your door
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CRAfTing The BRAnd PoSiTioning | chapter 10 299
as the protein-laden Balance and the calorie-control bar Pria). Each represented a subcategory for
which the original PowerBar may not be as relevant.4
Firms should broaden their competitive frame to invoke more advantageous comparisons.
Consider these examples:
• In the United Kingdom, the Automobile Association positioned itself as the fourth “emergency
service”—along with police, fire, and ambulance—to convey greater credibility and urgency.
• The International Federation of Poker is attempting to downplay some of the gambling image
of poker to emphasize the similarity of the card game to other “mind sports” such as chess and
bridge.5
• The U.S. Armed Forces changed the focus of its recruitment advertising from the military as
patriotic duty to the military as a place to learn leadership skills—a much more rational than
emotional pitch that better competes with private industry.6
We can examine competition from both an industry and a market point of view.7 An industry
is a group of firms offering a product or class of products that are close substitutes for one another.
Marketers classify industries according to several different factors, such as the number of sellers;
degree of product differentiation; presence or absence of entry, mobility, and exit barriers; cost
structure; degree of vertical integration; and degree of globalization.
Using the market approach, we define competitors as companies that satisfy the same customer
need. For example, a customer who buys a word-processing software package really wants “writing
ability”—a need that can also be satisfied by pencils, pens, or, in the past, typewriters. Marketers
must overcome “marketing myopia” and stop defining competition in traditional category and
industry terms.8 Coca-Cola, focused on its soft drink business, missed seeing the market for coffee
bars and fresh-fruit-juice bars that eventually impinged on its soft-drink business.
The market concept of competition reveals a broader set of actual and potential competitors
than competition defined in just product category terms. Jeffrey Rayport and Bernard Jaworski
suggest profiling a company’s direct and indirect competitors by mapping the buyer’s steps in ob-
taining and using the product. This type of analysis highlights both the opportunities and the chal-
lenges a company faces.9
analyzIng CompetItors Chapter 2 described how to conduct a SWOT analysis that includes a
competitive analysis. A company needs to gather information about each competitor’s real and perceived strengths
and weaknesses.
Table 10.2 shows the results of a company survey that asked customers to rate its three competitors, A, B, and C, on
five attributes. Competitor A turns out to be well known and respected for producing high-quality products sold by a
good sales force, but poor at providing product availability and technical assistance. Competitor B is good across the
board and excellent in product availability and sales force. Competitor C rates poor to fair on most attributes. This result
suggests that in its positioning, the company could attack Competitor A on product availability and technical assistance
and Competitor C on almost anything, but it should not attack B, which has no glaring weaknesses. As part of this com-
petitive analysis for positioning, the firm should also ascertain the strategies and objectives of its primary competitors.
The U.S. Armed Forces is putting more
emphasis on its opportunities for
leadership and career development
vs. patriotic appeals for serving.
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Poker is putting more emphasis
on the intellectual rewards from
playing poker vs. the thrill from
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Once a company has identified its main competitors and their strategies, it must ask: What is each competitor
seeking in the marketplace? What drives each competitor’s behavior? Many factors shape a competitor’s objec-
tives, including size, history, current management, and financial situation. If the competitor is a division of a
larger company, it’s important to know whether the parent company is running it for growth or for profits, or
milking it.10
Finally, based on all this analysis, marketers must formally define the competitive frame of reference to guide
positioning. In stable markets where little short-term change is likely, it may be fairly easy to define one, two, or
perhaps three key competitors. In dynamic categories where competition may exist or arise in a variety of different
forms, multiple frames of reference may be present, as we discuss below.
IdentIfYInG PotentIal PoInts-of-dIfference
and PoInts-of-ParItY
Once marketers have fixed the competitive frame of reference for positioning by defining the customer
target market and the nature of the competition, they can define the appropriate points-of-difference and points-
of-parity associations.11
poInts-of-dIfferenCe Points-of-difference (PODs) are attributes or benefits that consumers strongly
associate with a brand, positively evaluate, and believe they could not find to the same extent with a competitive
brand.
Associations that make up points-of-difference can be based on virtually any type of attribute or benefit.12 Louis
Vuitton may seek a point-of-difference as having the most stylish handbags, Energizer as having the longest-lasting
battery, and Fidelity Investments as offering the best financial advice and planning.
Strong brands often have multiple points-of-difference. Some examples are Apple (design, ease-of-use, and
irreverent attitude), Nike (performance, innovative technology, and winning), and Southwest Airlines (value,
reliability, and fun personality).
Creating strong, favorable, and unique associations is a real challenge, but an essential one for competitive
brand positioning. Although successfully positioning a new product in a well-established market may seem par-
ticularly difficult, Method Products shows that it is not impossible.13
MethOd PrOducts The brainchild of former high school buddies Eric Ryan and Adam
Lowry, Method Products was started with the realization that although cleaning and household products are sizable
categories by sales, taking up an entire supermarket aisle or more, they are also incredibly boring ones. Method
launched a sleek, uncluttered dish soap container that also had a functional advantage—the bottle, shaped like a
chess piece, was built to let soap flow out the bottom so users would never have to turn it upside down. This signature
product, with its pleasant fragrance, was designed by award-winning industrial designer Karim Rashid. Sustainability
also became part of the core of the brand, from sourcing and labor practices to material reduction and the use of
nontoxic materials. By creating a line of unique eco-friendly, biodegradable household cleaning products with bright
colors and sleek designs, Method grew to a $100 million company in revenues. A big break came with the placement
of its product in Target, known for partnering with well-known designers to produce standout products at affordable
table 10.2 Customers’ Ratings of Competitors on Key Success Factors
Customer
Awareness
Product
Quality
Product
Availability
Technical
Assistance Selling Staff
Competitor A E E P P G
Competitor B G G E G E
Competitor C F P G F F
Note: E = excellent, G = good, F = fair, P = poor.
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prices. Because of its limited advertising budget, the company believes its attractive packaging and innovative products
must work harder to express the brand positioning. Social media campaigns have been able to put some teeth into the
company’s “People Against Dirty” slogan and its desire to make full disclosure of ingredients an industry requirement.
Method was acquired by Belgium-based Ecover in 2012; its strong European distribution network will help launch the
brand overseas.
Three criteria determine whether a brand association can truly function as a point-of-difference: desirability,
deliverability, and differentiability. Some key considerations follow.
• Desirable to consumer. Consumers must see the brand association as personally relevant to them. Select
Comfort made a splash in the mattress industry with its Sleep Number beds, which allow consumers to adjust
the support and fit of the mattress for optimal comfort with a simple numbering index. Consumers must also
be given a compelling reason to believe and an understandable rationale for why the brand can deliver the
desired benefit. Mountain Dew may argue that it is more energizing than other soft drinks and support this
claim by noting that it has a higher level of caffeine. Chanel No. 5 perfume may claim to be the quintessen-
tially elegant French perfume and support this claim by noting the long association between Chanel and haute
couture. Substantiators can also come in the form of patented, branded ingredients, such as NIVEA Wrinkle
Control Crème with Q10 co-enzyme.
• Deliverable by the company. The company must have the internal resources and commitment to feasibly
and profitably create and maintain the brand association in the minds of consumers. The product design
and marketing offering must support the desired association. Does communicating the desired association
require real changes to the product itself or just perceptual shifts in the way the consumer thinks of the
product or brand? Creating the latter is typically easier. General Motors has had to work to overcome pub-
lic perceptions that Cadillac is not a youthful, modern brand and has done so through bold designs, solid
craftsmanship, and active, contemporary images.14 The ideal brand association is preemptive, defensible,
and difficult to attack. It is generally easier for market leaders such as ADM, Visa, and SAP to sustain their
positioning, based as it is on demonstrable product or service performance, than it is for market leaders such
as Fendi, Prada, and Hermès, whose positioning is based on fashion and is thus subject to the whims of a
more fickle market.
• Differentiating from competitors. Finally, consumers must see the brand association as distinctive and
superior to relevant competitors. Splenda sugar substitute overtook Equal and Sweet’N Low to become the
leader in its category in 2003 by differentiating itself as a product derived from sugar without the associated
Method cleaning products
has met with great
success from being
uniquely positioned on the
basis of sustainability
and attractive and
functional product
designs.
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drawbacks.15 In the crowded energy drink category, Monster has become a nearly $2 billion brand and a
threat to category pioneer Red Bull by differentiating itself on its innovative 16-ounce can and an extensive
line of products targeting nearly every need state related to energy consumption.16
poInts-of-parIty Points-of-parity (POPs), on the other hand, are attribute or benefit associations that
are not necessarily unique to the brand but may in fact be shared with other brands.17 These types of associations
come in three basic forms: category, correlational, and competitive.
Category points-of-parity are attributes or benefits that consumers view as essential to a legitimate and credible
offering within a certain product or service category. In other words, they represent necessary—but not sufficient—
conditions for brand choice. Consumers might not consider a travel agency truly a travel agency unless it is able to
make air and hotel reservations, provide advice about leisure packages, and offer various ticket payment and delivery
options. Category points-of-parity may change over time due to technological advances, legal developments, or con-
sumer trends, but to use a golfing analogy, they are the “greens fees” necessary to play the marketing game.
Correlational points-of-parity are potentially negative associations that arise from the existence of positive associa-
tions for the brand. One challenge for marketers is that many attributes or benefits that make up their POPs or PODs
are inversely related. In other words, if your brand is good at one thing, such as being inexpensive, consumers can’t see
it as also good at something else, like being “of the highest quality.” Consumer research into the trade-offs consumers
make in their purchasing decisions can be informative here. Below, we consider strategies to address these trade-offs.
Competitive points-of-parity are associations designed to overcome perceived weaknesses of the brand in light
of competitors’ points-of-difference. One good way to uncover key competitive points-of-parity is to role-play
competitors’ positioning and infer their intended points-of-difference. Competitor’s PODs will, in turn, suggest the
brand’s POPs.
Regardless of the source of perceived weaknesses, if, in the eyes of consumers, a brand can “break even”
in those areas where it appears to be at a disadvantage and achieve advantages in other areas, the brand should
be in a strong—and perhaps unbeatable—competitive position. Consider the introduction of Hyundai Motor
Company—the biggest carmaker in South Korea and one of the top ten global auto companies.18
hyundai cars In recent years, Hyundai Motor Company has succeeded in boosting its presence in
the world car market by setting up overseas production bases and engaging in aggressive marketing. As South Korea’s larg-
est and the world’s fifth largest automaker, Hyundai has driven its sales growth through improvements in quality and design.
While its rivals are using reliability and fuel economy to build market share, Hyundai has taken the formula further with a
focus on making its cars more attractive and often at lower prices. The brand’s goal is to entice customers with the speed
and appeal of luxury European models, but at non-premium prices. To win the hearts of car buyers, Hyundai engages cred-
ible and attractive spokespersons, like Bollywood actor Shah Rukh Khan and German football celebrity Jürgen Klinsmann, to
help communicate its value proposition. To improve its overall brand perception, the company has a long-term commitment
with FIFA to sponsor the FIFA World Cup until 2022.
poInts-of-parIty Versus poInts-of-dIfferenCe For an offering to achieve a point-of-parity
on a particular attribute or benefit, a sufficient number of consumers must believe the brand is “good enough”
on that dimension. There is a zone or range of tolerance or acceptance with points-of-parity. The brand does not
literally need to be seen as equal to competitors, but consumers must feel it does well enough on that particular
Hyundai Motor Company has
pioneered the car market by
successfully establishing a
point-of-difference on low
prices and a point-of-parity
on quality and design.
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attribute or benefit. If they do, they may be willing to base their evaluations and decisions on other factors more
favorable to the brand. A light beer presumably would never taste as good as a full-strength beer, but it would need
to taste close enough to be able to effectively compete.
Often, the key to positioning is not so much achieving a point-of-difference as achieving points-of-parity!
Visa Versus aMerican exPress Visa’s point-of-difference in the credit card
category is that it is the most widely available card, which underscores the category’s main benefit of convenience.
American Express, on the other hand, has built the equity of its brand by highlighting the prestige associated with the
use of its card. Visa and American Express now compete to create points-of-parity by attempting to blunt each other’s
advantage. Visa offers gold and platinum cards to enhance the prestige of its brand, and for years it advertised, “It’s
Everywhere You Want to Be,” showing desirable travel and leisure locations that accept only the Visa card to reinforce
both its own exclusivity and its acceptability. American Express has substantially increased the number of merchants
that accept its cards and created other value enhancements while also reinforcing its cachet through advertising that
showcases celebrities such as Robert De Niro, Tina Fey, Ellen DeGeneres, and Beyoncé as well as promotions for exclu-
sive access to special events.
multIple frames of referenCe It is not uncommon for a brand to identify more than one actual or
potential competitive frame of reference, if competition widens or the firm plans to expand into new categories.
For example, Starbucks could define very distinct sets of competitors, suggesting different possible POPs and
PODs as a result:19
1. Quick-serve restaurants and convenience shops (McDonald’s and Dunkin’ Donuts)—Intended PODs might be
quality, image, experience, and variety; intended POPs might be convenience and value.
2. Home and office consumption (Folgers, NESCAFÉ instant, and Green Mountain Coffee K-Cups)—Intended
PODs might be quality, image, experience, variety, and freshness; intended POPs might be convenience
and value.
3. Local cafés—Intended PODs might be convenience and service quality; intended POPs might be product
quality, variety, price, and community.
Note that some potential POPs and PODs for Starbucks are shared across competitors; others are unique to a par-
ticular competitor.
Under such circumstances, marketers have to decide what to do. There are two main options with multiple
frames of reference. One is to first develop the best possible positioning for each type or class of competitors
and then see whether there is a way to create one combined positioning robust enough to effectively address
them all. If competition is too diverse, however, it may be necessary to prioritize competitors and then choose
the most important set of competitors to serve as the competitive frame. One crucial consideration is not to
try to be all things to all people—that leads to lowest-common-denominator positioning, which is typically
ineffective.
Finally, if there are many competitors in different categories or subcategories, it may be useful to either
develop the positioning at the categorical level for all relevant categories (“quick-serve restaurants” or “super-
market take-home coffee” for Starbucks) or with an exemplar from each category (McDonald’s or NESCAFÉ for
Starbucks).
straddle posItIonIng Occasionally, a company will be able to straddle two frames of reference with
one set of points-of-difference and points-of-parity. In these cases, the points-of-difference for one category
become points-of-parity for the other and vice versa. Subway restaurants are positioned as offering healthy, good-
tasting sandwiches. This positioning allows the brand to create a POP on taste and a POD on health with respect to
quick-serve restaurants such as McDonald’s and Burger King and, at the same time, a POP on health and a POD on
taste with respect to health food restaurants and cafés.
Straddle positions allow brands to expand their market coverage and potential customer base. Another example
is BMW.20
BMW When BMW first made a strong competitive push into the U.S. market in the late 1970s, it positioned
the brand as the only automobile that offered both luxury and performance. At that time, consumers saw U.S. luxury cars
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as lacking performance and U.S. performance cars as lacking luxury. By relying on the design of its cars, its German
heritage, and other aspects of a well-conceived marketing program, BMW was able to simultaneously achieve: (1) a
point-of-difference on luxury and a point-of-parity on performance with respect to U.S. performance cars like the Chevy
Corvette and (2) a point-of-difference on performance and a point-of-parity on luxury with respect to U.S. luxury cars like
Cadillac. The clever slogan “The Ultimate Driving Machine” effectively captured the newly created umbrella category: luxury
performance cars.
Although a straddle positioning is often attractive as a means of reconciling potentially conflicting consumer
goals and creating a “best of both worlds” solution, it also carries an extra burden. If the points-of-parity and
points-of-difference are not credible, the brand may not be viewed as a legitimate player in either category. Many
early personal digital assistants (PDAs), or palm-sized computers, that unsuccessfully tried to straddle categories
ranging from pagers to laptop computers provide a vivid illustration of this risk.
choosInG sPecIfIc PoPs and Pods
To build a strong brand and avoid the commodity trap, marketers must start with the belief that you can differ-
entiate anything. Michael Porter urged companies to build a sustainable competitive advantage.21 Competitive
advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match.
Some companies are finding success. Pharmaceutical companies are developing biologics, medicines produced
using the body’s own cells rather than through chemical reactions in a lab, because they are difficult for copycat
pharmaceutical companies to make a generic version of when they go off patent. Roche Holding will enjoy an
advantage of at least three years with its $7 billion-a-year in sales biologic rheumatoid arthritis treatment Rituxan
before a biosimilar copycat version is introduced.22
But few competitive advantages are inherently sustainable. At best, they may be leverageable. A leverageable
advantage is one that a company can use as a springboard to new advantages, much as Microsoft has lever-
aged its operating system to Microsoft Office and then to networking applications. In general, a company that
hopes to endure must be in the business of continuously inventing new advantages that can serve as the basis of
points-of-difference.23
Marketers typically focus on brand benefits in choosing the points-of-parity and points-of-difference that
make up their brand positioning. Brand attributes generally play more of a supporting role by providing “rea-
sons to believe” or “proof points” as to why a brand can credibly claim it offers certain benefits. Marketers of
Dove soap, for example, will talk about how its attribute of one-quarter cleansing cream uniquely creates the
benefit of softer skin. Singapore Airlines can boast about its superior customer service because of its better-
trained flight attendants and strong service culture. Consumers are usually more interested in benefits and
what exactly they will get from a product. Multiple attributes may support a certain benefit, and they may
change over time.
By combining the
seemingly incompatible
benefits of luxury and
performance, BMW has
found great success in
the American automotive
market.
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| Fig. 10.1a |
(a) Hypothetical Beverage Perceptual
Map: Current Perceptions
D
C
B
Strong
Flavor
Light
Flavor
Traditional
Image
Contemporary
Image
Brands: A, B, C, & D
Customer Segments
Ideal Points: 1, 2, & 3
A
1
2
3
| Fig. 10.1b |
(b) Hypothetical Beverage Perceptual
Map: Possible Repositioning for Brand A
D
C
B
A’
A”
Strong
Flavor
Light
Flavor
Traditional
Image
Contemporary
Image
Brands: A, B, C, & D
Customer Segments
Ideal Points: 1, 2, & 3
A
1
2
3
means of dIfferentIatIon Any product or service benefit that is sufficiently desirable, deliverable,
and differentiating can serve as a point-of-difference for a brand. The obvious, and often the most compelling,
means of differentiation for consumers are benefits related to performance (Chapters 13 and 14). Swatch offers
colorful, fashionable watches; GEICO offers reliable insurance at discount prices.
Sometimes changes in the marketing environment can open up new opportunities to create a means of differ-
entiation. Eight years after it launched Sierra Mist and with sales stagnating, Pepsico tapped into rising consumer
interest in natural and organic products to reposition the lemon-lime soft drink as all-natural with only five ingre-
dients: carbonated water, sugar, citric acid, natural flavor, and potassium citrate.24
Often a brand’s positioning transcends its performance considerations. Companies can fashion compelling im-
ages that appeal to consumers’ social and psychological needs. The primary explanation for Marlboro’s extraordi-
nary worldwide market share (about 30 percent) is that its “macho cowboy” image has struck a responsive chord
with much of the cigarette-smoking public. Wine and liquor companies also work hard to develop distinctive
images for their brands. Even a seller’s physical space can be a powerful image generator. Hyatt Regency Hotels
developed a distinctive image with its atrium lobbies.
To identify possible means of differentiation, marketers have to match consumers’ desire for a benefit with their
company’s ability to deliver it. For example, they can design their distribution channels to make buying the product
easier and more rewarding. Back in 1946, pet food was cheap, not too nutritious, and available exclusively in super-
markets and the occasional feed store. Dayton, Ohio–based Iams found success selling premium pet food through
regional veterinarians, breeders, and pet stores.
perCeptual maps For choosing specific benefits as POPs and PODs to position a brand, perceptual maps
may be useful. Perceptual maps are visual representations of consumer perceptions and preferences. They provide
quantitative pictures of market situations and the way consumers view different products, services, and brands
along various dimensions. By overlaying consumer preferences with brand perceptions, marketers can reveal
“holes” or “openings” that suggest unmet consumer needs and marketing opportunities.25
For example, Figure 10.1(a) shows a hypothetical perceptual map for a beverage category. The four brands—A,
B, C, and D—vary in terms of how consumers view their taste profile (light versus strong) and personality and
imagery (contemporary versus modern). Also displayed on the map are ideal point “configurations” for three
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306 PART 4 | Building STRong BRAndS
market segments (1, 2, and 3). The ideal points represent each segment’s most preferred (“ideal”) combination of
taste and imagery.
Consumers in Segment 3 prefer beverages with a strong taste and traditional imagery. Brand D is well
positioned for this segment because the market strongly associates it with both these benefits. Given that
none of the competitors is seen as anywhere close, we would expect Brand D to attract many of the Segment 3
customers.
Brand A, on the other hand, is seen as more balanced in terms of both taste and imagery. Unfortunately, no
market segment seems to really desire this balance. Brands B and C are better positioned with respect to Segments
2 and 3, respectively.
• By making its image more contemporary, Brand A could move to A’ to target consumers in Segment 1 and
achieve a point-of-parity on imagery and maintain its point-of-difference on taste profile with respect to
Brand B.
• By changing its taste profile to make it lighter, Brand A could move to A’’ to target consumers in Segment 2
and achieve a point-of-parity on taste profile and maintain its point-of-difference on imagery with respect to
Brand C.
Deciding which repositioning is most promising, A’ or A’’, would require detailed consumer and competitive analy-
sis on a host of factors—including the resources, capabilities, and likely intentions of competing firms—to identify
the markets where consumers can profitably be served.
emotIonal brandIng Many marketing experts believe a brand positioning should have both rational
and emotional components. In other words, it should contain points-of-difference and points-of-parity that appeal
to both the head and the heart.26
Strong brands often seek to build on their performance advantages to strike an emotional chord with custom-
ers. When research on scar-treatment product Mederma found that women were buying it not just for the physical
treatment but also to increase their self-esteem, the marketers of the brand added emotional messaging to what
had traditionally been a practical message that stressed physician recommendations: “What we have done is
supplement the rational with the emotional.”27 Kate Spade is another brand that blends functional and emotional
in its positioning.28
Kate sPade Although only a little more than 20 years old, Kate Spade has evolved from a bags-only
brand to a much more diversified fashion brand. Launched by husband-and-wife team Kate and Andy Spade—who
have since sold their stake—the brand was initially known for a tiny, minimalist-looking black bag. In 2007, a new
Kate Spade found a
consumer sweet spot
by skillfully blending
form and function in its
products.
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creative director, Deborah Lloyd, brought a stronger style sensibility to help hit the Kate Spade customer sweet spot
of being “the most interesting person in the room.” With greater emphasis on marrying form and function, the brand
expanded into apparel and jewelry and has become the centerpiece of a revamped Liz Claiborne (now known as Fifth
& Pacific). Accessories are updated constantly, and there are frequent new merchandise introductions. A men’s brand
(Jack Spade) and a more casual, affordable fashion brand targeting younger millennium consumers (Kate Spade
Saturday) have also been launched. Kate Spade has made a strong e-commerce push to complement its 200-plus
stores; 20 percent of sales come from online channels. The company has also made a well-integrated social media
foray, using Facebook, Twitter, Instagram, Tumblr, Pinterest, YouTube, FourSquare, and Spotify to reinforce its core brand
values of “patterns, colors, fun food and classic New York moments.” It has made a move into Europe and Asia and has
especially set its sights on China.
A person’s emotional response to a brand and its marketing will depend on many factors. An increasingly
important one is the brand’s authenticity.29 Brands such as Hershey’s, Kraft, Crayola, Kellogg’s, and Johnson &
Johnson that are seen as authentic and genuine can evoke trust, affection, and strong loyalty.30
Authenticity also has functional value. Family farmer–owned Welch’s—1,150 Concord and Niagara grape farm-
ers make up the National Grape Cooperative—is seen by consumers as “wholesome, authentic and real.” The brand
reinforces those credentials by focusing on its local sourcing of ingredients, increasingly important for consumers
who want to know where their foods come from and how they were made.31
By successfully differentiating themselves, emotional brands can also provide financial payoffs. As part of its
IPO, the UK mobile phone operator O2 was rebranded from British Telecom’s struggling BT Cellnet, based on a
powerful emotional campaign about freedom and enablement. When customer acquisition, loyalty, and average
revenue soared, the business was quickly acquired by Spanish multinational Telefonica for more than three times
its IPO price.32
Brand Mantras
To further focus brand positioning and guide the way their marketers help
consumers think about the brand, firms can define a brand mantra.33 A
brand mantra is a three- to five-word articulation of the heart and soul of
the brand and is closely related to other branding concepts like “brand es-
sence” and “core brand promise.” Its purpose is to ensure that all employees
within the organization and all external marketing partners understand
what the brand is most fundamentally to represent with consumers so they
can adjust their actions accordingly.
role of brand mantras Brand mantras are powerful devices. By
highlighting points-of-difference, they provide guidance about what products
to introduce under the brand, what ad campaigns to run, and where and how to
sell the brand. Their influence can even extend beyond these tactical concerns.
Brand mantras can guide the most seemingly unrelated or mundane decisions,
such as the look of a reception area and the way phones are answered. In
effect, they create a mental filter to screen out brand-inappropriate marketing
activities or actions of any type that may have a negative bearing on customers’
impressions.
Brand mantras must economically communicate what the brand is and
what it is not. What makes a good brand mantra? McDonald’s “Food, Folks,
and Fun” captures its brand essence and core brand promise. Two other high-
profile and successful examples—Nike and Disney—show the power and util-
ity of a well-designed brand mantra.
niKe Nike has a rich set of associations with consumers, based on its
innovative product designs, its sponsorships of top athletes, its award-winning
communications, its competitive drive, and its irreverent attitude. Internally,
Nike’s brand mantra of “authentic athletic performance” is
visibly reinforced by its endorsements of top athletes like
champion tennis player Rafael Nadal.
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Nike marketers adopted the three-word brand mantra,
“authentic athletic performance,” to guide their market-
ing efforts. Thus, in Nike’s eyes, its entire marketing
program—its products and the way they are sold—must
reflect that key brand value. Over the years, Nike has
expanded its brand meaning from “running shoes” to
“athletic shoes” to “athletic shoes and apparel” to “all
things associated with athletics (including equipment).”
Each step of the way, however, it has been guided by its
“authentic athletic performance” brand mantra. For ex-
ample, as Nike rolled out its successful apparel line, one
important hurdle was that the products must be made
innovative enough through material, cut, or design to
truly benefit top athletes. At the same time, the company
has been careful to avoid using the Nike name to brand
products that do not fit with the brand mantra (like casual
“brown” shoes).
disney Disney developed its brand mantra in
response to its incredible growth through licensing and product development during the mid-1980s. In the late
1980s, Disney became concerned that some of its characters, such as Mickey Mouse and Donald Duck, were be-
ing used inappropriately and becoming overexposed. The characters were on so many products and marketed in
so many ways that in some cases it was difficult to discern what could have been the rationale behind the deal to
start with. Moreover, because of the broad exposure of the characters in the marketplace, many consumers had
begun to feel Disney was exploiting its name. Disney moved quickly to ensure that a consistent image—reinforc-
ing its key brand associations—was conveyed by all third-party products and services. To that end, Disney ad-
opted an internal brand mantra of “fun family entertainment” to filter proposed ventures. Opportunities that were
not consistent with the brand mantra—no matter how appealing—were rejected. As useful as that mantra was to
Disney, adding the word “magical” might have made it even more so.
desIgnIng a brand mantra Unlike brand slogans meant to engage, brand mantras are designed
with internal purposes in mind. Although Nike’s internal mantra was “authentic athletic performance,” its external
slogan was “Just Do It.” Here are the three key criteria for a brand mantra.
• Communicate. A good brand mantra should clarify what is unique about the brand. It may also need to
define the category (or categories) of business for the brand and set brand boundaries.
• Simplify. An effective brand mantra should be memorable. For that, it should be short, crisp, and vivid in
meaning.
• Inspire. Ideally, the brand mantra should also stake out ground that is personally meaningful and relevant to
as many employees as possible.
For brands anticipating rapid growth, it is helpful to define the product or benefit space in which the brand
would like to compete, as Nike did with “athletic performance” and Disney with “family entertainment.” Words
that describe the nature of the product or service, or the type of experiences or benefits the brand provides, can
be critical to identifying appropriate categories into which to extend. For brands in more stable categories where
extensions into more distinct categories are less likely to occur, the brand mantra may focus more exclusively on
points-of-difference.
Other brands may be strong on one, or perhaps even a few, of the brand associations making up the brand
mantra. But for it to be effective, no other brand should singularly excel on all dimensions. Part of the key to both
Nike’s and Disney’s success is that for years no competitor could really deliver on the combined promise suggested
by their brand mantras.
Disney’s “fun family entertainment” brand mantra has been an invaluable guide for its
product and marketing decisions.
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Establishing a Brand Positioning
Once they have fashioned the brand positioning strategy, marketers should communicate it to everyone in
the organization so it guides their words and actions. One helpful schematic with which to do so is a brand-
positioning bull’s-eye. “Marketing Memo: Constructing a Brand Positioning Bull’s-eye” outlines one way
marketers can formally express brand positioning without skipping any steps.
Often a good positioning will have several PODs and POPs. Of those, often two or three really define
the competitive battlefield and should be analyzed and developed carefully. A good positioning should also
follow the “90–10” rule and be highly applicable to 90 percent (or at least 80 percent) of the products in the
brand. Attempting to position to all 100 percent of a brand’s product often yields an unsatisfactory “lowest
common denominator” result. The remaining 10 percent or 20 percent of products should be reviewed to
ensure they have the proper branding strategy and to see how they could be changed to better reflect the brand
positioning.
CommunICatIng Category membershIp Category membership may be obvious. Target
customers are aware that Maybelline is a leading brand of cosmetics, Cheerios is a leading brand of cereal,
Accenture is a leading consulting firm, and so on. When a product is new, marketers must inform consumers of the
brand’s category membership.
Sometimes consumers may know the category membership but not be convinced the brand is a valid member
of the category. They may be aware that HP produces digital cameras, but they may not be certain whether HP
cameras are in the same class as those made by Canon, Nikon, and Sony. In this instance, HP might find it useful
to reinforce category membership.
Brands are sometimes affiliated with categories in which they do not hold membership. This approach is
one way to highlight a brand’s point-of-difference, providing consumers know its actual membership. Instead
of putting it in the frozen pizza category, the marketers of DiGiorno’s frozen pizza have positioned it in
the delivered pizza category with ads that claim “It’s Not Delivery, It’s DiGiorno!” Similarly, pay channel
HBO has developed original, edgy programming to justify its premium fee, adopting the slogan “It’s Not TV,
It’s HBO.”
marketing
memo
Constructing a Brand Positioning Bull’s-eye
A brand bull’s-eye provides content and context to improve everyone’s understanding of the positioning of a brand in the organization. Here we look at a hy-
pothetical Starbucks example.
In the inner two circles is the heart of the bull’s-eye—key points-of-parity and points-of-difference as well as the brand mantra. Points-of-parity and
points-of-difference should be made as specific as possible without being too narrow. A POD of “gives confidence” for P&G’s Bounty paper towels—known as
the “Quicker Picker-Upper”—is very broad compared to the much more brand-relevant POD of “helps to relieve tense situations.”
Points-of-parity and points-of-difference should be constructed in terms of the benefits a customer would actually derive from the product or service. “Leading
Brand in the Category” as a point-of-difference fails to answer the question: What’s in it for the customer? Does being the leading brand give the customer greater
peace of mind, greater convenience, access to more innovative products, and/or social approval or self-respect from being associated with a “winner”?
Points-of-difference should also be stated in positive, aspirational terms, like “Irresistible Taste,” “Superior Value,” Tireless Customer Service,” and
“Unimpeachable Trust.” Points-of-parity are often stated in more muted terms to recognize the potential deficiencies they represent, such as “Sufficiently
Accessible,” “Appropriately Relevant,” and “Fairly Priced.”
In the next circle out are the substantiators or reasons-to-believe (RTB)—attributes or benefits that provide factual or demonstrable support for the
points-of-parity and points-of-difference. Finally, the outer circle contains two other useful branding concepts: (1) the brand values, personality, or character—
intangible associations that help to establish the tone for the words and actions for the brand; and (2) executional properties and visual identity—more
tangible components of the brand that affect the way customers see it.
Three boxes outside the bull’s-eye provide useful context and interpretation. To the left, two boxes highlight some of the input to the positioning analy-
sis. One includes the consumer target and a key insight about consumer attitudes or behavior that significantly influenced the actual positioning; the other
provides competitive information about the key consumer need the brand is attempting to satisfy and some competitive products or brands that need
suggests. To the right of the bull’s-eye, one box offers a “big picture” view of the output—the ideal consumer takeaway if the brand positioning efforts are
successful.
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The typical approach to positioning is to inform consumers of a brand’s membership before stating its point-
of-difference. Presumably, consumers need to know what a product is and what function it serves before deciding
whether it is superior to the brands against which it competes. For new products, initial advertising often con-
centrates on creating brand awareness, and subsequent advertising attempts to create the brand image. Ally Bank
tapped into a distrust of financial institutions to stake out a unique positioning. 34
aLLy FinanciaL In rebranding GMAC Financial as Ally Financial and launching its Ally Bank sub-
sidiary, the firm initially ran a campaign featuring a smarmy man in a suit—who symbolically represented the typical
bank—being mean to unsuspecting children—who symbolically represented typical bank customers. The idea was to
show Ally Bank as simple and direct. One ad had the slick spokesperson sitting with two young girls at a small table ask-
ing one of them whether she wanted a pony. When the girl said yes, he gave her a small toy pony. When the other girl said
yes, he gave her a real pony. The clearly unhappy first girl asked why she didn’t get a real pony, and the man answered,
in effect, “You didn’t ask.” Having established initial awareness, the campaign developed its “straightforward” positioning
with several follow-up ads relaying a “Your Money Needs an Ally” theme and touting customers’ ability to reach humans at
Ally Bank instead of machines. In the “Dry Cleaner” ad, seemingly real customers of a dry cleaner are captured via hidden
camera as they attempt to cope with a blender that a sign indicates they should use for help. The ad ends with the words
“Ally Bank. Helpful People. Not Machines.”
A Hypothetical Example of a Starbucks Brand Positioning Bull’s Eye
Consumer
Target
Discerning
coffee
drinker
Consumer
Insight
Coffee and the
drinking
experience is
often
unsatisfying
Consumer
Need State
Desire for
better coffee
and a better
consumption
experience
Competitive
Product Set
Local cafés,
fast -food
restaurants, &
convenience
shops
Consumer
Takeaway
Starbucks
gives me the
richest
possible
sensory
experience
drinking
coffee
Green &
Earth colors
Siren
logo
Caring
Contemporary
Thoughtful
Valu
es/Personality/Character
Executional Properties/Visu
al Ide
ntit
y
Fairly
Priced
Relaxing,
rewarding
moments
Responsible,
locally involved
Rich sensory
consumption
experience
Varied, exotic
coffee drinks
Fresh high-
quality coffee
24-hour
training of
baristas
Convenient,
friendly
service
Triple
filtrated
water
Totally
integrated
system
Substantiators
Points
–of–parity
(RTB)
Points–of–Differen
ce
Brand
Mantra
Rich, Rewarding
Coffee Experience
Stock options/
health benefits
for baristas
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Ally has positioned
itself as a consumer-
friendly banking
alternative.
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There are three main ways to convey a brand’s category membership:
1. Announcing category benefits—To reassure consumers that a brand will deliver on the fundamental reason
for using a category, marketers frequently use benefits to announce category membership. Thus, industrial
tools might claim to have durability, and antacids might announce their efficacy. A brownie mix might at-
tain membership in the baked desserts category by claiming the benefit of great taste and support this claim
by including high-quality ingredients (performance) or by showing users delighting in its consumption
(imagery).
2. Comparing to exemplars—Well-known, noteworthy brands in a category can also help a brand specify its cat-
egory membership. When Tommy Hilfiger was an unknown, advertising announced his status as a great U.S.
designer by associating him with Geoffrey Beene, Stanley Blacker, Calvin Klein, and Perry Ellis, recognized
members of that category.
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312 PART 4 | Building STRong BRAndS
3. Relying on the product descriptor—The product descriptor that follows the brand name is often a concise
means of conveying category origin. Ford Motor Co. invested more than $1 billion in a radical new 2004
model called the X-Trainer, which combined the attributes of an SUV, a minivan, and a station wagon. To
communicate its unique position—and to avoid association with its Explorer and Country Squire models—
the vehicle, eventually called Freestyle, was designated a “sports wagon.”35
CommunICatIng pops and pods We saw above that one common challenge in positioning is that
many of the benefits that make up points-of-parity and points-of-difference are negatively correlated. ConAgra
must convince consumers that Healthy Choice frozen foods both taste good and are good for you. Consider these
examples of negatively correlated attributes and benefits:
Low price vs. High quality Powerful vs. Safe
Taste vs. Low calories Strong vs. Refined
Nutritious vs. Good tasting Ubiquitous vs. Exclusive
Efficacious vs. Mild Varied vs. Simple
Moreover, individual attributes and benefits often have positive and negative aspects. For example, consider
a long-lived brand such as La-Z-Boy recliners, Burberry outerwear, or the New York Times. The brand’s heritage
could suggest experience, wisdom, and expertise as well as authenticity. On the other hand, it could also imply be-
ing old-fashioned and not contemporary and up to date.
Unfortunately, consumers typically want to maximize both the negatively correlated attributes or benefits.
Much of the art and science of marketing consists of dealing with trade-offs, and positioning is no different. The
best approach clearly is to develop a product or service that performs well on both dimensions. GORE-TEX was
able to overcome the conflicting product images of “breathable” and “waterproof ” through technological ad-
vances. When in-depth and quantitative interviews and focus groups suggested that consumers wanted the ben-
efits of technology without the hassles, Royal Philips launched its “Sense and Simplicity” campaign for its Philips
brand of electronics, using print, online, and television advertising.36
Other approaches include launching two different marketing campaigns, each devoted to a different brand attribute
or benefit; linking the brand to a person, place, or thing that possesses the right kind of equity to establish an attribute
or benefit as a POP or POD; and convincing consumers that the negative relationship
between attributes and benefits, if they consider it differently, is in fact positive.
monItorIng CompetItIon Positioning requires an organizational
commitment. It is not something that is constantly overhauled or changed. At the
same time, it is important to regularly research the desirability, deliverability, and
differentiability of the brand’s POPs and PODs in the marketplace to understand
how the brand positioning might need to evolve or, in relatively rare cases, be
completely replaced.
In assessing potential threats from competitors, three high-level variables are
useful:
1. Share of market—The competitor’s share of the target market.
2. Share of mind—The percentage of customers who named the competitor in
responding to the statement “Name the first company that comes to mind in
this industry.”
3. Share of heart—The percentage of customers who named the competitor in
responding to the statement “Name the company from which you would prefer
to buy the product.”
There’s an interesting relationship among these three measures. Table 10.3
shows them as recorded for three hypothetical competitors. Competitor A enjoys
the highest market share but is slipping. Its mind share and heart share are also
slipping, probably because it’s not providing good product availability and technical
assistance. Competitor B is steadily gaining market share, probably due to strate-
gies that are increasing its mind share and heart share. Competitor C seems to be
stuck at a low level of market, mind, and heart share, probably because of its poor
product and marketing attributes.
Heritage brands like the New York Times may be seen
as experienced and expert, but also may be seen as old-
fashioned and not up-to-date if they are not sufficiently
innovative and relevant.
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table 10.3 Market Share, Mind Share, and Heart Share
Market Share Mind Share Heart Share
2015 2016 2017 2015 2016 2017 2015 2016 2017
Competitor A 50% 47% 44% 60% 58% 54% 45% 42% 39%
Competitor B 30 34 37 30 31 35 44 47 53
Competitor C 20 19 19 10 11 11 11 11 8
We could generalize as follows: Companies that make steady gains in mind share and heart share will in-
evitably make gains in market share and profitability. Firms such as CarMax, Timberland, Jordan’s Furniture,
Wegmans, and Toyota are all reaping the benefits of providing emotional, experiential, social, and financial
value to satisfy customers and all their constituents.37
Alternative Approaches
to Positioning
The competitive brand positioning model we’ve reviewed in this chapter is a structured way to approach po-
sitioning based on in-depth consumer, company, and competitive analysis. Some marketers have proposed
other, less-structured approaches in recent years that offer provocative ideas on how to position a brand. We
highlight a few of those here.
Brand narratIVes and storYtellInG
Rather than outlining specific attributes or benefits, some marketing experts describe positioning a brand as
telling a narrative or story. Companies like the richness and imagination they can derive from thinking of the
story behind a product or service. To help sharpen its marketing and positioning, Jim Beam, with its namesake
Jim Beam and Maker’s Mark brands, hired The Moth, a group of professional storytellers best known for a
weekly public radio broadcast, to kick off a three-day biannual gathering of its marketing teams.38
Randall Ringer and Michael Thibodeau see narrative branding as based on deep metaphors that con-
nect to people’s memories, associations, and stories.39 They identify five elements of narrative branding:
(1) the brand story in terms of words and metaphors, (2) the consumer journey or the way consumers
engage with the brand over time and touch points where they come into contact with it, (3) the visual
language or expression for the brand, (4) the manner in which the narrative is expressed experientially or
the brand engages the senses, and (5) the role the brand plays in the lives of consumers. Based on literary
convention and brand experience, they also offer the following framework for a brand story:
• Setting. The time, place, and context
• Cast. The brand as a character, including its role in the life of the audience, its relationships and responsi-
bilities, and its history or creation myth
• Narrative arc. The way the narrative logic unfolds over time, including actions, desired experiences,
defining events, and the moment of epiphany
• Language. The authenticating voice, metaphors, symbols, themes, and leitmotifs
Patrick Hanlon developed the related concept of “primal branding” that views brands as complex belief sys-
tems. According to Hanlon, diverse brands such as Google, MINI Cooper, the U.S. Marine Corps, Starbucks,
Apple, UPS, and Aveda all have a “primal code” or DNA that resonates with their customers and generates their
passion and fervor. He outlines seven assets that make up this belief system or primal code: a creation story,
creed, icon, rituals, sacred words, a way of dealing with nonbelievers, and a good leader.40
Jim Beam has used
professional story-tellers
to sharpen its marketing
and positioning.
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314 PART 4 | Building STRong BRAndS
cUltUral BrandInG
Douglas Holt believes that for companies to build iconic, leadership brands, they must assemble cultural knowl-
edge, strategize according to cultural branding principles, and hire and train cultural experts.41 The University of
Wisconsin’s Craig Thompson views brands as sociocultural templates, citing research investigating brands as cul-
tural resources. ESPN Zone restaurants tap into competitive masculinity, for instance, and American Girl dolls tap
into mother–daughter relationships and the cross-generational transfer of femininity.42 Experts who see consum-
ers actively cocreating brand meaning and positioning even refer to this as “Brand Wikification,” given that wikis
are written by contributors from all walks of life and points of view.43
Positioning and Branding
for A Small Business
Building brands is a challenge for a small business with limited resources and budgets. Nevertheless, numerous
success stories exist of entrepreneurs who have built their brands up essentially from scratch to become power-
house brands. Consider the global success of UNIQLO.44
uniqLO Founded by Tadashi Yanai, now the wealthiest person in Japan, UNIQLO (short for Unique
Clothing Warehouse) has followed its mission statement and credo of “Made for All” (see Table 10.4) to become a
brand with a goal of reaching $50 billion in sales in 2020 and becoming the number-one retailer in the world. UNIQLO
stands out … by not standing out! Heavily inspired in its early days by the Gap and its one-time president Mickey
Drexler, the company expressly states that it does not want to be in the fashion game of chasing ever-changing trends.
With a strong technology emphasis, the company focuses on continual process improvement and the creation of new,
innovative products. Its signature mix of fleece, synthetic thermal underwear, down jackets, jeans, and other basics
is designed to capture the essence of each type of product. UNIQLO feels it provides the perfect components for its
customer’s everyday lives, products they can combine in different ways to create their own unique expressions. The
company’s marketing strategy combines active social media campaigns with aggressive in-store activities to connect
with customers and pull them into the stores.
By being inclusive and
focusing on how its
products can fit into
consumers’ everyday
lives, UNIQLO has
experienced
remarkable growth.
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When resources are limited, focus and consistency in marketing programs become critically important. Creativity
is also paramount—finding new ways to market new ideas about products to consumers. Here are some specific
branding guidelines for small businesses.
• Find a compelling product or service performance advantage. As for any brand, demonstrable, meaningful
differences in product or service performance can be the key to success. Upstart Dropbox.com has carved out
a strong position in the face of a slew of competitors large (Microsoft) and small (Box) that also offer consum-
ers a means to conveniently store massive amounts of documents, photos, videos, and other files, in part by
virtue of its convenient single-folder approach to accommodate multiple devices for a user.45
• Focus on building one or two strong brands based on one or two key associations. Small businesses often
must rely on only one or two brands and key associations as points-of-difference for them. These associations
must be consistently reinforced across the marketing program and over time. Rooted in the snowboarding
and surfing cultures, Volcom has adopted a “Youth Against Establishment” credo that has resulted in steady
sales of its music, athletic apparel, and jewelry.
• Encourage product or service trial in any way possible. A successful small business has to distinguish
itself in ways consumers can learn about and experience. One way is to encourage trial through sampling,
demonstrations, or any means to engage consumers with the brand. See’s Candies allows walk-in custom-
ers to sample any piece of candy in the shop they choose. As one senior executive noted, “That’s the best
marketing we have, if people try it, they love it.” See’s uses all fresh ingredients and no added preservatives
to create its enticing flavors.46
• Develop cohesive digital strategy to make the brand “bigger and better.” One advantage of the Internet is it
allows small firms to have a larger profile than they might otherwise. Urbane Apartments, a property invest-
ment and management company from Royal Oak, Michigan, has a virtual prominence that far exceeds its
real-world scope. The company boasts a resident-penned blog touting favorite Royal Oak destinations, its
own Urbane Lobby social networking site for tenants, and active YouTube, Facebook, and Twitter profiles.47
Sales for Rider Shack surf shop in Los Angeles increased when the firm began to emphasize Facebook and its
table 10.4 UNIQLO Made for All Credo
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Vitaminwater built its
brand, in part, through
endorsements from
popular entertainers
and athletes.
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Promoted Post service feature as a way to keep the brand in front of people.48 Mobile marketing can be espe-
cially important given the local nature of many small businesses.49
• Create buzz and a loyal brand community. Small businesses often must rely on word of mouth to establish
their positioning, but they can find public relations, social networking, and low-cost promotions and sponsor-
ship to be inexpensive alternatives. As discussed in Chapter 5, creating a vibrant brand community among cur-
rent and prospective customers can also be a cost-effective way to reinforce loyalty and help spread the word
to new prospects. Evernote has several dozen “power users” who serve as passionate ambassadors to spread the
word about the personal-organization application brand touted by the online company as the everything-in-
one-place “external brain” for its customers.50
• Employ a well-integrated set of brand elements. Tactically, it is important for small businesses to maxi-
mize the contribution of all types of brand equity drivers. In particular, they should develop a distinc-
tive, well-integrated set of brand elements—brand names, logos, packaging—that enhances both brand
awareness and brand image. Brand elements should be memorable and meaningful, with as much creative
potential as possible. Innovative packaging can substitute for ad campaigns by capturing attention at the
point of purchase. SMARTFOOD introduced its first product without any advertising by means of both
a unique package that served as a strong visual symbol on the shelf and an extensive sampling program
that encouraged trial. Proper names or family names, which often characterize small businesses, may
provide some distinctiveness but can suffer in terms of pronounceability, meaningfulness, memorability,
or other branding considerations. If these deficiencies are too great, alternative brand elements should be
explored.
• Leverage as many secondary associations as possible. Secondary associations—any persons, places, or
things with potentially relevant associations—are often a cost-effective, shortcut means to build brand
equity, especially those that help to signal quality or credibility. In 1996, J. Darius Bickoff launched an
electrolyte-enhanced line of bottled water called Smartwater, followed in two years by the introduction of
Vitaminwater, a vitamin-enhanced and flavored alternative to plain bottled water, and by Fruitwater two
years after that. Clever marketing including endorsement deals with rapper 50 Cent, singer Kelly Clarkson,
actress Jennifer Aniston, and football star Tom Brady helped drive success. Less than 10 years after its
launch, Bickoff ’s Energy Brands company, also known as Glacéau, was sold to the Coca-Cola company for
$4.2 billion in cash.51
• Creatively conduct low-cost marketing research. A variety of low-cost marketing research methods help
small businesses connect with customers and study competitors (Chapter 4). One way is to set up course
projects at local colleges and universities to access the expertise of both students and professors. Many online
options exist too.
Unlike major brands that often have more resources at their disposal, small businesses usually do not have the luxury
of making mistakes and must design and implement marketing programs much more carefully.
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Summary
1. To develop an effective positioning, a company must
study competitors as well as actual and potential cus-
tomers. Marketers need to identify competitors’ strate-
gies, objectives, strengths, and weaknesses.
2. Developing a positioning requires identifying a frame of
reference—by locating the target market and the nature
of the competition—and the optimal points-of-parity
and points-of-difference brand associations.
3. A company’s closest competitors are those seeking
to satisfy the same customers and needs and making
similar offers. A company should also pay attention to
latent competitors, who may offer new or different ways
to satisfy the same needs. Industry- and market-based
analyses both help uncover competitors.
4. Points-of-difference are those associations unique to the
brand that are also strongly held and favorably evaluated
by consumers. These differences may be based directly
on the product or service itself or on other considerations
related to employees, channels, image, or services.
Points-of-difference must be desirable (from a consumer
standpoint), deliverable (from a company standpoint),
and differentiated (from a competitor standpoint).
5. Points-of-parity are those associations not neces-
sarily unique to the brand but perhaps shared with
other brands. They help to negate any potential weak-
nesses for the brand. Category point-of-parity are
associations consumers view as being necessary
to a legitimate and credible product offering within
a certain category. Correlational points-of-parity are
associations designed to overcome perceived weak-
nesses or vulnerabilities of the brand. Competitive
point-of-parity are associations designed to negate
competitors’ points-of-difference.
6. Emotional branding is becoming an important way to
connect with customers and create differentiation from
competitors. Emotional differences are often most pow-
erful when they are connected to underlying functional
differences.
7. Several different alternative approaches exist to po-
sition a product or service. These less structured,
more qualitative approaches are based on concepts
such as brand narratives, storytelling, and cultural
branding.
8. Although small businesses should adhere to many of
the branding and positioning principles larger com-
panies use, they must place extra emphasis on their
brand elements and secondary associations, be more
focused, and create buzz for their brand.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
What Is the Best Way to Position?
Marketers have different views about how to position a brand.
Some value structured approaches such as the competitive
positioning model described in the chapter, which focuses
on specific points-of-parity and points-of-difference. Others
prefer unstructured approaches that rely more on stories,
narratives, and other flowing depictions.
Take a position: The best way to position a brand is
through a structured approach versus The best way to
position a brand is through an unstructured approach.
Marketing Discussion
Attributes and Benefits
Identify negatively correlated attributes and benefits not
described in this chapter. What strategies do firms use to
try to position themselves on the basis of pairs of attributes
and benefits?
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318 PART 4 | Building STRong BRAndS
that are known to focus on authenticity and quality. For
example, this high-range machinery equips at least 25
percent of the French restaurants. The chefs, as customer
influencers, are also regularly invited to taste new coffees.
Nespresso works with the advertising agency
McCann World to create the “ultimate coffee experi-
ence” in all its dimensions of communication. The com-
munication strategy of Nespresso strongly contributes to
the success of the brand. In Europe, since 2006, actor
George Clooney and the famous slogan “what else?”
have been synonymous with the brand. Clooney embod-
ies the values and the image of the brand in terms of
elegance and prestige. In the U.S., Penelope Cruz is the
brand ambassador. In Asian countries, the communica-
tion focuses on the fact that Nespresso symbolizes the
perfect cup of coffee at home or at high-end restaurants.
The brand’s unique and original positioning has allowed
it so far to keep the competition—Tassimo (Mondelez),
Senseo (Sara Lee), and in particular the Nespresso
compatible capsules (today more than 50 brands
offer capsules that fit in the Nespresso machines)—at bay.
Some competitors tried to use an ecological argument to
discredit the brand, saying that Nespresso capsules were
very polluting. This led the company to develop its own
circuit of recovery of used capsules.
Recently, Nespresso has been facing some serious
competition and is at risk of losing market share to Jacobs
Douwe Egberts, formed from the strategic merge of the
Dutch Douwe Egberts and the American Mondelez. Jacobs
Douwe Egberts is the current number one coffee company
in the world with a turnover of over $4 billion. In order to
reinforce its position in the coffee market and reclaim its
spot as the market leader, the Nestlé Group should aim to
strengthen the high-end positioning of Nespresso.
Questions
1. Why has Nespresso’s repositioning on the consumer
market led to the success of the brand?
2. Will the unique positioning of Nespresso enable it to
resist new competition from Jacobs Douwe Egberts?
Sources: Christopher Heine, “Deep Focus Snares Nespresso, Nabs BBDO Creative Exec Digital
shop gets U.S. social account for CPG brand,” Adweek, May 20, 2013; Andrew McMains, “Nestlé
Looks Beyond McCann on 3 Brands,” Adweek, December 9, 2013; Dale Buss, Nespresso Sticks
With Distribution Model Despite Increased Competition,” Brandchannel, May 22, 2013; “Nespresso
ou l’art de résister à la pression de 50 concurrents,” Capital, September 26, 2013; Effie France,
www.effie.fr; Nestlé Nespresso, www.nestle-nespresso.com; Nespresso, www.nespresso.com.
Marketing Excellence
>> Nespresso
Nespresso was created in 1986 as a subsidiary of the
Swiss group Nestlé. It was initially supplier to the coffee
machine market but it was only after its repositioning to the
high-end segment of the consumer market that Nespresso
became a global success. Today the Nespresso turnover
totals close to $3 billion. As of 2014, the brand has more
than 300 boutiques in 60 countries across the world.
The success of the brand has been due to a unique po-
sitioning in the coffee market, especially its choice of plac-
ing itself on the high-end market. The Nespresso system is
based on several fundamental criteria: practically designed
coffee machines, high-quality coffee, excellent service, and
strong and original communication. With this high-end and
unique positioning, the company reaches profitability levels
that are only recorded in the luxury industry.
Earlier, before the launch of competitors’ capsules,
a customer who bought a Nespresso machine was ob-
ligated to purchase the Nespresso brand capsules. The
strategy was efficient because the capsules represented
92 percent of the brand’s turnover as compared to a mea-
ger 4 percent for espresso machines. Since 2010, they
have adapted to receiving capsules from competitors.
While all its competitors sell in retail stores, Nespresso
distributes its products only from a distance—through
the Internet and mobile devices, or in one-of-a-kind
boutiques.
Customers who buy Nespresso machines automati-
cally become members of the brand club. As of now, more
than 8 million people belong to this club. They benefit from
exclusive offers and limited series, are informed of innova-
tions and creations, and receive a magazine subscription.
Nespresso cultivates a sense of belonging to a privileged
community that reinforces the brand’s positioning.
In addition to selling on the Internet, mobile devices,
and in boutiques, other means of distribution have been
developed. For example, fully automated distributors called
Nespresso Cube have colored walls made of cases of cap-
sules on display with an interactive interface. These cubes
are located in prominent European airports, and represent
innovative selling and communication media for the brand.
In order to reinforce its high-end positioning, the brand
also associates itself with well-established restaurants
Philips & Co. in 1891 in Eindhoven, the Netherlands by
manufacturing carbon filament lamps. Their firm eventu-
ally evolved into a global company and today employs a
workforce of 116,000 around the world. A market leader
in medical diagnostic imaging, patient monitoring systems,
energy-efficient lighting solutions, and lifestyle solutions
for personal wellbeing, Philips manufactures more than
Marketing Excellence
>> Philips
Royal Philips Electronics, established in 1891, is one of
the world’s largest electronics companies and one of the
most respected brands. Anton and Gerard Philips started
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CRAfTing The BRAnd PoSiTioning | chapter 10 319
external audience. The campaign’s primary objective was
to help Philips connect with people, and in this endeavor it
was successful. Nonetheless, the management team was
concerned that the campaign did not convey the design
excellence or technical superiority of its products.
To identify the perceptions consumers had, Philips
undertook a market research study of more than 1,650 con-
sumers and 180 companies, who were customers of Philips
around the world. It also undertook research among 26,000
respondents to measure the brand equity. Focus groups
and questionnaires helped to (a) identify and test new routes
for moving the Philips brand going forward, and (b) enable
the company to better understand its current market posi-
tion. The results showed that consumers believed they
could “rely on Philips’ products,” and that the company did
live up to its promise of making things better. The com-
pany also discovered that its core target group consisted
of well-educated and affluent decision makers between 35
and 55. This group typically disliked the unnecessary hassle
often created by new technology and valued simplicity and
efficiency in all fields. Its members wanted technology that
could get the job done without drawing attention to itself,
and were put off by the need to read and understand com-
plicated manuals before trying out their new purchases.
Philips acted on this information by rebranding it-
self again: The new campaign was called “sense and
simplicity.” The emphasis shifted to the benefits of tech-
nology without the hassle of understanding the technol-
ogy, and this strategy still characterizes everything Philips
does and reflects the market-oriented nature of the com-
pany, that is, everything is designed to meet customer
needs and consumer insights. The “sense and simplicity”
campaign was based on three premises – first, products
are designed around the consumer; second, they are
easy to experience; and third, they are advanced.
Philips continues to develop new products based on
these three premises, and communicates its brand posi-
tion through advertisements that target the core group
with relevant and interesting content. The new brand
positioning has proved to be a success. In 2014, the
company realized a 5 percent growth in total brand value
in Interbrand’s annual ranking, its 11th increase in as
many years. In 2004, before the launch of the new cam-
paign, the estimate of total brand value was $4.4 billion;
by 2014, it had more than doubled to $ 10.264 billion.
Questions
1. Evaluate Philips’ “sense and simplicity” strategy. What
are the risks the company faces in using this tagline?
2. What strategies can Philips follow to ward off com-
petition from Japanese manufacturers of consumer
electronics?
Sources: Philips, www.philips.com; “Philips—Strengthening a Global Brand,” Branding Asia,
www.brandingasia.com/cases/philips.htm.
50,000 products across 100 countries, in which it also op-
erates sales and service outlets. In 2014, the firm reported
sales of around $30.97 billion. It offers product content
and support in 100 countries and in over 35 languages.
With global outreach and products in many areas, Philips
needs to develop a borderless style of brand management
to solidify its reputation as a global brand. The company
has experimented with many different ways of doing this.
The branding of Philips started when Anton Philips cre-
ated a logo for the company by using the initial letters of
Philips & Co. The word Philips also appeared on the glass
of its metal filament lamps. In 1898, postcards showing a
variety of Dutch national costumes were used as marketing
tools, with the letters of the word Philips printed in a row of
lightbulbs at the top of every card. In 1926, Philips introduced
a symbol that featured waves and stars. The waves symbol-
ized radio waves, and the stars represented the evening sky
through which those radio waves travel. In 1930, the waves
and stars were enclosed in a circle as part of the design.
To avoid legal problems with owners of well-known circular
emblems and to find a trademark that would be unique to
Philips, the company eventually created a shield including the
circle and word mark, which it has used consistently since
the 1930s. However, marketing and advertising have varied
across products. Between 1930 and 1995, all advertising
and marketing campaigns were carried out at the product
level, on a local market basis. The company thus found itself
running many different marketing campaigns at once, and
not allowing for a global representation of the company.
Between 1970 and 1995, Philips also faced tough
competition from up-and-coming Japanese electronics
companies, which cut into its market share. Because they
had large automated plants, the Japanese companies were
able to flood markets with inexpensive consumer electron-
ics. This required Philips to close its less profitable factories
and start creating larger and more effective units. The com-
pany also closed its business units in defense and home
appliances that were not directly related to its core business.
To reduce costs, it began sharing its R&D expenses with
other large corporations, including AT&T and Siemens AG.
Philips has always been known for its technological
prowess and ability to innovate. It is credited with the intro-
duction of innovative products, including the radio, audio
cassette, video cassette recorder (VCR), compact disc (CD),
and digital video disc (DVD). However, simply being able to
use technology in new and innovative ways was not enough
for the company. It wanted to become a global brand and
champion the idea that technology will improve people’s lives.
For this purpose, Philips initiated a new branding cam-
paign, “Let’s make things better,” that emphasized improv-
ing people’s lives through technological solutions. The com-
pany rolled the campaign out globally in all markets and
related the campaign to all its products. This also brought
the whole company together, gave employees a sense
of belonging, and provided a unified company look for an
M10_KOTL2621_15_GE_C10.INDD 319 3/11/15 5:22 PM
320
In This Chapter, We Will Address
the Following Questions
1. What is a brand, and how does branding work? (p. 321)
2. What is brand equity? (p. 324)
3. How is brand equity built? (p. 331)
4. How is brand equity measured? (p. 337)
5. How is brand equity managed? (p. 340)
6. What is brand architecture? (p. 343)
7. What is customer equity? (p. 350)
MyMarketingLab™
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Market leader Gatorade has refocused
on its core target market of athletes
with a broad assortment of new
products and a revamped ad campaign.
Source: The Gatorade Company
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321
Marketers of successful 21st-century brands must
excel at the strategic brand management process. Strategic
brand management combines the design and implementation
of marketing activities and programs to build, measure, and
manage brands to maximize their value. It has four main steps:2
• Identifying and establishing brand positioning
• Planning and implementing brand marketing
• Measuring and interpreting brand performance
• Growing and sustaining brand value
Chapter 10 reviewed positioning; the latter three topics are
discussed in this chapter. Chapter 12 reviews important
concepts dealing with competitive dynamics.
One of the most valuable intangible assets of a firm is its brands, and it is incumbent
on marketing to properly manage their value. Building a strong brand is both an art and a science. It requires
careful planning, a deep long-term commitment, and creatively designed and executed marketing. A strong
brand commands intense consumer loyalty—and at its heart is a great product or service. Building a strong
brand is a never-ending process, as the marketers of Gatorade have found out.1
Creating Brand
Equity
11
Gatorade’s roots go back nearly five decades. The product was first developed by researchers at
the University of Florida to help the school’s athletes cope with the debilitating effects of the hot
and humid climate. Its subsequent success as the pioneering leader of the sports drink category
led PepsiCo to acquire its parent company, Quaker Oats, in 2001 for $13.4 billion in stock. The
brand took off even more in the following years as a result of PepsiCo’s massive distribution
system and a slew of new product and packaging introductions. But when market share dropped
from 80 percent to 75 percent and the brand seemed tired. Pepsico decided a change was needed, so Gatorade
marketers returned the brand to its roots, walking away from the mass market to focus more on athletes. Their
goal was to transcend the $7 billion a year sports drink market and become a major player in the $20 billion
a year sports nutrition market. Three new lines, labeled 01 Prime,
02 Perform, and 03 Recover, were introduced for pre-, during-, and
post-workout, respectively. Three different markets were targeted as
well. The G Series line aimed at “performance” athletes who engaged
in scholastic, collegiate, or high-intensity recreational sports; the
G Series Fit line targeted less competitive 18- to 34-year-olds who
exercised three to four times a week; and the G Series Pro line tar-
geted professional athletes. A new advertising tagline, “Win From
Within,” reflected the new Gatorade brand strategy. Gatorade wanted
to be all about what is inside an athlete’s body, as much as Nike was
seen as being all about what is outside the body. Other changes in-
cluded a shift in the brand’s communication budget from 90 percent
advertising to include a 30 percent digital component.
How Does Branding Work?
Perhaps the most distinctive skill of professional marketers is their ability to create, maintain, enhance, and pro-
tect brands, whether established brands such as Mercedes, Sony, and Nike or new ones like Pure Leaf Teas, Taste
Nirvana Coconut Waters, and Alexia All Natural Foods. Some of the hottest brands in recent years have emerged
online. Consider the runaway success of Tumblr and Instagram.3
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322 PART 4 | Building STRong BRAndS
TuMbLr Founded by technical wizard and high-school dropout David Karp, Tumblr is a multimedia platform
that allows users to post images, videos, and music in the form of a personal blog and, as the company’s motto says, “to
follow the world’s creators.” A combination of publishing platform and social network, Tumblr allows users to express them-
selves publicly and then follow the feedback on their posts and other people’s on a convenient dashboard. Boasting more
than 200 million blogs as of October 2014, the site is seen as a must-have for creative types, with most users between
18 and 24. Formally launched in February 2007, Tumblr was purchased by Yahoo! for approximately $1.1 billion in cash
in June 2013 with the hope of making it commercially more successful. Advertisers can create their own blogs for free
but have to pay to participate in two popular Tumblr modules: Spotlight (an accounts-to-follow suggestion) and the Radar
(editor’s picks).
InsTagraM Launched in October 2010 by Stanford grads Kevin Systrom and Mike Krieger, Instagram is
known for its photo-sharing app that uses filters to make photos from smart-phone cameras look more professional and
allows them to be easily uploaded and shared across multiple platforms simultaneously. These highly valued benefits led the
brand to quickly attract more than 100 million users, including some top brands such as Nike, MTV, Starbucks, Burberry,
and Gucci. Instagram’s name was chosen because it combines the concept of “instant” with the notion of connecting with
people via a “telegram.” Its success led Facebook to acquire it in April 2012 for approximately $1 billion in stock and cash.
A controversial change in its terms of service in December 2012 led users to think Instagram could sell their photos for use
in advertising. In the face of an uproar about a violation of privacy, the founders quickly reverted to the original terms.
The American Marketing Association defines a brand as “a name, term, sign, symbol, or design, or a combina-
tion of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them
from those of competitors.” A brand is thus a product or service whose dimensions differentiate it in some way
from other products or services designed to satisfy the same need. These differences may be functional, rational,
or tangible—related to product performance of the brand. They may also be more symbolic, emotional, or intan-
gible—related to what the brand represents or means in a more abstract sense.
Branding has been around for centuries as a means to distinguish the goods of one producer from those
of another.4 Medieval guilds in Europe required that craftspeople put trademarks on their products to protect
themselves and their customers against inferior quality. In the fine arts, branding began with artists signing their
works. Brands today play a number of important roles that improve consumers’ lives and enhance the financial
value of firms.
The Role of BRands
Brands identify the maker of a product and allow consumers to assign responsibility for its performance to that
maker or distributor. Brands perform a number of functions for both consumers and firms.
Brands’ role For Consumers A brand is a promise between the firm and the consumer. It is a
means to set consumers’ expectations and reduce their risk. In return for customer loyalty, the firm promises to
reliably deliver a predictably positive experience and set of desirable benefits with its products and services. A
brand may even be “predictably unpredictable” if that is what consumers expect, but the key is that it fulfills or
exceeds customer expectations in satisfying their needs and wants.
Consumers may evaluate the identical product differently depending on how it is branded.5 They learn about
brands through past experiences with the product and its marketing program, finding out which brands satisfy
their needs and which do not. As consumers’ lives become more rushed and complicated, a brand’s ability to sim-
plify decision making and reduce risk becomes invaluable.6
Brands can also take on personal meaning to consumers and become an important part of their identity.7
They can express who consumers are or who they would like to be. For some consumers, brands can even take on
human-like characteristics.8 Brand relationships, like any relationship, are not cast in stone, and marketers must be
sensitive to all the words and actions that might strengthen or weaken consumer ties.9
Brands’ role For Firms Brands also perform valuable functions for firms.10 First, they simplify product
handling by helping organize inventory and accounting records. A brand also offers the firm legal protection for
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CReATing BRAnd equiTy | chapter 11 323
unique features or aspects of the product.11 The brand name can be protected through registered trademarks,
manufacturing processes can be protected through patents, and packaging can be protected through copyrights
and proprietary designs. These intellectual property rights ensure that the firm can safely invest in the brand and
reap the benefits of a valuable asset.
A credible brand signals a certain level of quality so satisfied buyers can easily choose the product again.12
Brand loyalty provides predictability and security of demand for the firm, and it creates barriers to entry that make
it difficult for other firms to enter the market. Loyalty also can translate into customer willingness to pay a higher
price—often even 20 percent to 25 percent more than competing brands.13
Although competitors may duplicate manufacturing processes and product designs, they cannot easily match
lasting impressions left in the minds of individuals and organizations by years of favorable product experiences
and marketing activity. In this sense, branding can be a powerful means to secure a competitive advantage.14
Sometimes marketers don’t see the real importance of brand loyalty until they change a crucial element of the
brand, as the classic tale of New Coke illustrates.15
COCa-COLa Battered by a nationwide series of taste-test challenges from sweeter-tasting Pepsi-Cola,
Coca-Cola decided in 1985 to replace its old formula with a sweeter variation, dubbed New Coke. The company spent $4
million on market research, and blind taste tests showed Coke drinkers preferred the new, sweeter formula. But the launch
of New Coke provoked a national uproar. Market researchers had measured the taste but failed to adequately measure the
emotional attachment consumers had to Coca-Cola. There were angry letters, formal protests, and even lawsuit threats
to force the retention of “The Real Thing.” Ten weeks later, the company reintroduced its century-old formula as “Classic
Coke.” Efforts to resuscitate New Coke eventually failed, and the brand disappeared around 1992. Ironically, the failed in-
troduction of New Coke actually ended up giving the old formula measurably stronger status in the marketplace, with more
favorable attitudes and greater sales as a result.
For better or worse, branding effects are pervasive.16 One research study that provoked much debate about the
effects of marketing on children showed that preschoolers felt identical food items—even carrots, milk, and apple
juice—tasted better when wrapped in McDonald’s familiar packaging than when in unmarked wrappers.17
To firms, brands represent enormously valuable pieces of legal property that can influence consumer behavior,
be bought and sold, and provide their owner the security of sustained future revenues.18 Companies have paid
dearly for brands in mergers or acquisitions, often justifying the price premium on the basis of the extra profits ex-
pected and the difficulty and expense of creating similar brands from scratch.19 Wall Street believes strong brands
result in better earnings and profit performance for firms, which, in turn, create greater value for shareholders.20
The scope of BRandInG
How do you “brand” a product? Although firms provide the impetus to brand creation through marketing pro-
grams and other activities, ultimately a brand resides in the minds and hearts of consumers. It is a perceptual
entity rooted in reality but reflecting the perceptions and idiosyncrasies of consumers.
Branding is the process of endowing products and services with the power of a brand. It’s all about creating
differences between products. Marketers need to teach consumers “who” the product is—by giving it a name and
other brand elements to identify it—as well as what the product does and why consumers should care. Branding
creates mental structures that help consumers organize their knowledge about products and services in a way that
clarifies their decision making and, in the process, provides value to the firm.
For branding strategies to be successful and brand value to be created, consumers must be convinced there
are meaningful differences among brands in the product or service category. Brand differences often relate to at-
tributes or benefits of the product itself. Gillette, Merck, and 3M have led their product categories for decades, due
in part to continual innovation. Other brands create competitive advantages through nonproduct-related means.
Gucci, Chanel, and Louis Vuitton have become category leaders by understanding consumer motivations and de-
sires and creating relevant and appealing images around their stylish products.
Successful brands are seen as genuine, real, and authentic in what they sell as well as who they are. A successful
brand makes itself an indispensable part of its customers’ lives. Once a faded preppy afterthought, J.Crew tripled its
revenue to $2.2 billion from 2002 to 2012 by becoming a highly creative force in fashion. By constantly introducing
new styles—but retaining a cohesive look—the brand enjoys intense loyalty, numerous fan blogs, and high-profile
celebrity supporters like Michelle Obama and Anna Wintour.21
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324 PART 4 | Building STRong BRAndS
Marketers can apply branding virtually anywhere a consumer has a choice. It’s possible to brand a physical good
(Ford Focus automobile or Lipitor cholesterol medication), a service (Singapore Airlines or Blue Cross and Blue
Shield medical insurance), a store (Nordstrom or Dick’s Sporting Goods), a person (actress Angelina Jolie or tennis
player Roger Federer), a place (the city of Sydney or the country of Ireland), an organization (U2 or the American
Automobile Association), or an idea (abortion rights or free trade).22
Branding has become of great importance in sports, arts, and entertainment. One of the world’s top sports
brands comes from Madrid, Spain.23
reaL MadrId For the first time since Forbes magazine began its ranking in 2004, Real Madrid surpassed
Manchester United in 2013 to become the world’s most valuable team in soccer—or football as it is known as outside the
United States—with an estimated value of $3.3 billion. Also known by fans as “Los Merengues,” the iconic but floundering
club began to thrive when the billionaire construction tycoon Florentine Perez took over in 2000. Perez’s strategy was to at-
tract some of the very top players in the game, brand names in their own right, such as David Beckham, Zinedine Zidane,
and, later on, Cristiano Ronaldo and Kaka. Success on the pitch allowed Perez to develop three distinct and lucrative lines of
business: broadcast rights (worth $250 million annually), sponsorship and endorsement revenue (worth $240 million annu-
ally), and match-day revenue (worth $160 million annually). Real Madrid is truly a global brand and derives 65 percent of its
revenue abroad. Sponsorship includes high-profile deals with Adidas, Emirates Airlines, and Spanish banking group BBVA.
Defining Brand Equity
Brand equity is the added value endowed to products and services with consumers. It may be reflected in the way
consumers think, feel, and act with respect to the brand, as well as in the prices, market share, and profitability it
commands.
Marketers and researchers use various perspectives to study brand equity.24 Customer-based approaches view it
from the perspective of the consumer—either an individual or an organization—and recognize that the power of a
brand lies in what customers have seen, read, heard, learned, thought, and felt about the brand over time.25
Customer-based brand equity is thus the differential effect brand knowledge has on consumer response to the
marketing of that brand.26 A brand has positive customer-based brand equity when consumers react more favor-
ably to a product and the way it is marketed when the brand is identified than when it is not identified. A brand has
negative customer-based brand equity if consumers react less favorably to marketing activity for the brand under
the same circumstances. There are three key ingredients of customer-based brand equity.
Home to some of the top
soccer players in the world,
like Cristiano Ronaldo, Real
Madrid is an iconic sports
brand with multiple lines of
revenue.
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M11_KOTL2621_15_GE_C11.indd 324 04/03/15 9:05 PM
CReATing BRAnd equiTy | chapter 11 325
1. Brand equity arises from differences in consumer response. If no differences occur, the brand-name product is
essentially a commodity, and competition will probably be based on price.
2. Differences in response are a result of consumers’ brand knowledge, all the thoughts, feelings, images, experi-
ences, and beliefs associated with the brand. Brands must create strong, favorable, and unique brand associa-
tions with customers, as have Toyota (reliability), Hallmark (caring), and Amazon.com (convenience and wide
selection).
3. Brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a
brand. Stronger brands earn greater revenue.27 Table 11.1 summarizes some key benefits of brand equity.
The challenge for marketers is therefore ensuring customers have the right type of experiences with products, ser-
vices, and marketing programs to create the desired thoughts, feelings and brand knowledge. In an abstract sense, we
can think of brand equity as providing marketers with a vital strategic bridge from their past to their future.28
Marketers should also think of the marketing dollars spent on products and services each year as investments
in consumer brand knowledge. The quality of that investment is the critical factor, not necessarily the quantity
(beyond some threshold amount). It’s actually possible to overspend on brand building if money is not spent wisely.
Customers’ brand knowledge dictates appropriate future directions for the brand. Consumers will decide,
based on what they think and feel about the brand, where (and how) they believe the brand should go and grant
permission (or not) to any marketing action or program. New-product ventures such as BENGAY aspirin, Cracker
Jack cereal, Frito-Lay lemonade, Fruit of the Loom laundry detergent, and Smucker’s premium ketchup all failed
because consumers found them inappropriate extensions of the brand.
A brand promise is the marketer’s vision of what the brand must be and do for consumers. Virgin’s brand
promise is to enter categories where customers’ needs are not well met, do different things, and do things differ-
ently, all in a way that better meets those needs. With Virgin America, the company appears to have come up with
another brand winner.29
VIrgIn aMerICa After flying for only a few years, Virgin America became an award-winning airline
that passengers adore and that can make money. It is not unusual for the company to receive e-mails from customers say-
ing they actually wished their flights lasted longer! Virgin America set out to reinvent the entire travel experience, starting
with an easy-to-use and friendly Web site and check-in. In flight, passengers revel in Wi-Fi, spacious leather seats, mood
lighting, and in-seat food and beverage ordering through touch-screen panels. Some passengers remark that Virgin America
is like “flying in an iPod or nightclub.” The brand is seeking to be positioned as “an established player featuring discount
pricing and a hip, stylish customer experience for travelers.” Without a national TV ad campaign, Virgin America has relied
on PR, word of mouth, social media, and exemplary customer service to create that customer experience and build the
brand. To get customers more involved with the brand, Virgin America launched a digital marketing campaign offering the
opportunity to upload a photo to Instagram from the flight. By tweeting the company’s Twitter account, travelers can also
upload their photo onto Virgin America’s Times Square billboard or share it via their own social media accounts.
TaBle 11.1 Marketing Advantages of Strong Brands
Improved perceptions of product performance Greater trade cooperation and support
Greater loyalty Increased marketing communications effectiveness
Less vulnerability to competitive marketing actions Possible licensing opportunities
Less vulnerability to marketing crises Additional brand extension opportunities
Larger margins Improved employee recruiting and retention
More inelastic consumer response to price increases Greater financial market returns
More elastic consumer response to price decreases
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326 PART 4 | Building STRong BRAndS
Violating a brand promise can have severe consequences. Founded in 1984, TED talks (“Technology,
Entertainment, and Design”) became widely admired for their thought-provoking, leading-edge content. After
deciding to let anyone apply to manage and stage local events called TEDx with relatively minor oversight, the
organizers of TED saw thousands of events of varying quality spring up all over the world, leading some critics to
question whether the organization was losing control of its brand.30
BRand equITY Models
Although marketers agree about basic branding principles, a number of models of brand equity offer some differ-
ing perspectives. Here we highlight three more established ones.
BrandasseT® ValuaTor Advertising agency Young and Rubicam (Y&R) developed a model of brand
equity called the BrandAsset® Valuator (BAV). Based on research with more than 800,000 consumers in
51 countries, BAV compares the brand equity of thousands of brands across hundreds of different categories. There
are four key components—or pillars—of brand equity, according to BAV (see Figure 11.1):
Virgin America airline
exemplifies Virgin’s
corporate mission to
better satisfy customers
by doing different
things and doing things
differently.
So
ur
ce
: P
R
N
E
W
SW
IR
E
| Fig. 11.1 |
BrandAsset®
Valuator Model
Source: Courtesy of BrandAsset®
Consulting, a division of Young &
Rubicam.
ENERGIZED
DIFFERENTIATION
The brand’s point
of difference
Relates to margins
and cultural currency
ESTEEM
How you regard the
brand
Relates to perceptions
of quality and loyalty
KNOWLEDGE
An intimate
understanding
of the brand
Relates to awareness and
consumer experience
RELEVANCE
How appropriate the
brand is to you
Relates to consideration
and trial
BRAND STRENGTH
Leading Indicator
Future Growth Value
BRAND STATURE
Current Indicator
Current Operating Value
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CReATing BRAnd equiTy | chapter 11 327
• Energized differentiation measures the degree to which a brand is seen as different from others as well as its
pricing power.
• Relevance measures the appropriateness and breadth of a brand’s appeal.
• Esteem measures perceptions of quality and loyalty, or how well the brand is regarded and respected.
• Knowledge measures how aware and familiar consumers are with the brand and the depth of their
experience.
Energized differentiation and relevance combine to determine brand strength—a leading indicator that predicts
future growth value. Esteem and knowledge together create brand stature, a “report card” of past performance and
a lagging indicator of current operating value.
The relationships among these dimensions—a brand’s “pillar pattern”—reveal much about a brand’s current
and future status. Brand strength and brand stature combine to form the power grid, depicting stages in the cycle
of brand development in successive quadrants (see Figure 11.2). Strong new brands show higher levels of energized
differentiation and energy than relevance, whereas both esteem and knowledge are lower still. Leadership brands
| Fig. 11.2 |
The Universe
of Brand
Performance
Source: Young & Rubicam
BrandAsset Valuator.
Joost
Camper
Schlitz Diners Club Efferdent
STATURE
Esteem and Knowledge
ST
RE
NG
TH
En
er
gi
ze
d
Di
ffe
re
nt
ia
tio
n
an
d
Re
le
va
nc
e
Alpo
Prudential
Century 21
Midas
Greyhound
H&R Block
GerberAmerican Airlines
Sprint
Denny´s
Bausch & Lomb
Bank of America
AOL
Nordstrom Blockbuster
Staples
AdvilNASCAR
Burger King
Verizon
Tylenol
Xerox
Adidas
Amazon
Harley-Davidson
Apple
Toyota
GE
Target
MicrosoftNikeDr. Pepper
Ninetendo WiiLG
Pixar
Dristan
Vonage
VespaSecond Life
BitTorrent
Flickr
Kayak.com
Shiseido
Zara
Grameen Bank
Method
Lenovo
Tazo
Glacéau
Vitamin
Water
Palm
Pom
AMD
Crocs
Mini Cooper
Lindt SanDisk
TiVo
Wikipedia IKEA
iPhone
BlackBerry
Netflix
DirecTV
Nikon
Kodak
Xbox
Silk Soymilk
Absolut
Patagonia
Facebook
Moet & Chandon
Red Bull Autotrader
Kia
Michelob
Napster Viacom
Finesse
Taster´s Choice
Garnier
Lacoste NBA
LOW
HI
GH
These brands have low brand strength but high
potential. They have built some energy and
relevance, but are known to only a relatively
small audience. Consumers are expressing
curiosity and interest.
These brands have become irresistible,
combining high brand strength with high brand
stature. They have high earnings, high margin
power, and the greatest potential to create
future value.
These brands, with both low brand stature
and low brand strength, are not well known
among the general population. Many are new
entrants; others are middling brands that have
lost their way.
These brands show why high brand stature by
itself is insufficient for maintaining a leading
position. They struggle to overcome what
consumers already know about and expect
from them.
HIGH
ERODING/DECLINING
NEW/UNFOCUSED
NICHE/MOMENTUM
LEADERSHIP
By plotting a representative group of brands’ scores for both strength and stature, this matrix derived from the BrandAsset Valuator shows an
accurate picture of a brand’s status and overall performance.
M11_KOTL2621_15_GE_C11.indd 327 04/03/15 9:05 PM
328 PART 4 | Building STRong BRAndS
show high levels on all pillars, with strength greater than stature. As strength slips, they become mass market
brands. Finally, declining brands show high knowledge—evidence of past performance—a lower level of esteem,
and even lower relevance and energized differentiation.
According to BAV analysis, consumers are concentrating their devotion and purchasing power on an
increasingly smaller portfolio of special brands—brands with energized differentiation that keep evolving. These
brands connect better with consumers—commanding greater usage loyalty and pricing power and creating
greater shareholder value. Some recent insights from the BAV data are summarized in “Marketing Insight: Brand
Bubble Trouble.”
Brand Bubble Trouble
In The Brand Bubble, brand consultants Ed Lebar and John Gerzema
use Y&R’s historical BAV database to conduct a comprehensive ex-
amination of the state of brands. Beginning with data from mid-2004,
they discovered several odd trends. For thousands of consumer goods
and services brands, key brand value measures such as consumer
“top-of-mind” awareness, trust, regard, and admiration experienced
significant drops.
At the same time, however, share prices for a number of years
were being driven higher by the intangible value the markets were
attributing to consumer brands. Digging deeper, Lebar and Gerzema
found the increase was actually due to a very few extremely strong
brands such as Google, Apple, and Nike. The value created by the vast
majority of brands was stagnating or falling.
The authors viewed this mismatch between the value consumers
see in brands and the value the markets were ascribing to them as a
recipe for disaster in two ways. At the macroeconomic level, it implied
that stock prices of most consumer companies were overstated. At the
microeconomic, company level, it pointed to a serious and continuing
problem in brand management.
Why have consumer attitudes toward brands declined? The re-
search identified three fundamental causes. First, there has been a
proliferation of brands. New product introductions have accelerated, but
many fail to register with consumers. Two, consumers expect creative
“big ideas” from brands and feel they are just not getting them. Finally,
due to corporate scandals, product crises, and executive misbehavior,
trust in brands has declined.
Yet vital brands are still being successfully built. Although
all four pillars of the BAV model play a role, the strongest brands
resonated with consumers in a special way. Amazon.com, Axe,
Facebook, Innocent, IKEA, Land Rover, LG, LEGO, Tata, Nano, Twitter,
Whole Foods, and Zappos exhibited notable energized differentia-
tion by communicating dynamism and creativity in ways most other
brands did not.
Formally, the BAV analysis identified three factors that help define
energy and the marketplace momentum it creates:
1. Vision—A clear direction and point of view on the world and
how it can and should be changed.
2. Invention—An intention for the product or service to change
the way people think, feel, and behave.
3. Dynamism—Excitement and affinity in the way the brand is
presented.
John Gerzema’s follow-up research with Michael D’Antonio,
published in Spend Shift, examined developments later in the
decade and the way consumers were changing—or not—as a
result of the traumatic economic recession. The authors describe
“Spend Shift” as “a consumer-led movement to express their val-
ues through the power of their spending. We’re moving from mind-
less to mindful consumption. People are returning to old-fashioned
virtues, such as self-reliance, thrift, faith, creativity, hard work
and community—and powering them with social behaviors and
technology.”
The authors make several telling observations: Trust is de-
clining across industries, and brand attribute characteristics such
as “kind,” “empathetic,” “socially responsible,” and “leader” are
rising in importance with consumers. The authors offer 10 “post-
consumer learnings”:
1. We are moving from a credit to a
debit society.
2. There are no longer consumers,
only customers.
3. Industries are revealed as collec-
tions of individuals.
4. Generational divides are disap-
pearing.
5. Human regulation is remaking
the marketplace.
6. Generosity is now a business
model.
7. Society is shifting from consump-
tion to production.
8. We must think small to solve
big.
9. We are seeking better vs. more. 10. America is an emerging market
for value-led innovation.
Sources: John Gerzema and Ed Lebar, The Brand Bubble: The Looming Crisis in
Brand Value and How to Avoid It (San Francisco, CA: Jossey-Bass, 2008); John
Gerzema and Ed Lebar, “The Trouble with Brands,” Strategy+Business 55 (Summer
2009); John Gerzema and Michael D’Antonio, Spend Shift: How the Post-Crisis Values
Revolution Is Changing the Way We Buy, Sell and Live (San Francisco, CA: Jossey-
Boss, 2011).
marketing
insight
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CReATing BRAnd equiTy | chapter 11 329
Brandz Marketing research consultants Millward Brown and WPP have developed the Brandz model of
brand strength, at the heart of which is the BrandDynamics™ model, a system of brand equity measurements, based
on Millward Brown’s Meaningfully Different Framework, that reveals a brand’s current equity and opportunities
for growth (Figure 11.3).* BrandDynamics employs a set of simple scores that summarize a brand’s equity and are
relatable directly to real world financial and business outcomes.
BrandDynamics maintain that three different types of brand associations are crucial for building customer
predisposition to buy a brand—meaningful, different, and salient brand associations. The success of a brand along
those three dimensions, in turn, is reflected in three important outcome measures:
• Power: a prediction of the brand’s volume share
• Premium: a brand’s ability to command a price premium relative to the category average
• Potential: the probability that a brand will grow value share
According to the model, how well a brand is activated in the marketplace and the competition that exists there will
determine how strongly brand predisposition ultimately translates into sales.
Brand resonanCe model The brand resonance model also views brand building as an ascending
series of steps, from bottom to top: (1) ensuring customers identify the brand and associate it with a specific
| Fig. 11.3 |
BrandDynamics™
Model
Source: BrandDynamics™ Model.
Reprinted with permission of
Millward Brown.
Brand
Associations
Brand
Predisposition
Power
Premium
Barriers Facilitators
Potential In-Market
$
¥
£ €
Salient
Different
Meaningful
Innocent is a brand which
consumers rate as being
highly dynamic and creative.
So
ur
ce
: F
ru
it
To
w
er
s
*Nigel Hollis, “Making Marketing Meaningful Again,” talk given at MSI conference, Brands in
the Balance: Managing Continuity and Change,” Charleston, SC, February 11-12, 2014.
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330 PART 4 | Building STRong BRAndS
product class or need; (2) firmly establishing the brand meaning in customers’ minds by strategically linking a host
of tangible and intangible brand associations; (3) eliciting the proper customer responses in terms of brand-related
judgment and feelings; and (4) converting customers’ brand responses to intense, active loyalty.
According to this model, enacting the four steps means establishing a pyramid of six “brand building blocks” as
illustrated in Figure 11.4. The model emphasizes the duality of brands—the rational route to brand building is on
the left side of the pyramid, and the emotional route is on the right side.31 One brand that has found much success
going up both sides of the pyramid is MasterCard.32
MasTerCard In the mid-1990s, Visa and American Express were battling fiercely for market leadership.
To get back into the picture, MasterCard, with its ad agency McCann Erickson, launched the now iconic “Priceless” ad cam-
paign in 1997 to strengthen its brand image. Each ad focused on a consumer activity (such as a father and son going to a
baseball game) and identified three tangible products or services purchased as part of that activity and their prices (“One
autographed baseball. $50”) before ending with the true but intangible payoff (“Real conversation with 11-year-old son.
Priceless.”). The ads always ended with the campaign tagline, “There are some things money can’t buy; for everything else,
there’s MasterCard.” The campaign stressed the duality of the MasterCard brand, communicating both its rational advan-
tages—acceptance at establishments worldwide—and the emotional payoffs those advantages permitted. The campaign
has been a global success for more than 17 years, running similarly structured ads in 102 markets and 50 languages.
Lately, it has emphasized enabling “priceless” moments with the “Priceless Cities” initiative, launched in 2011 to create
special events for MasterCard cardholders in major cities around the world.
Creating significant brand equity requires reaching the top of the brand pyramid, which occurs only if the right
building blocks are put into place.
• Brand salience is how often and how easily customers think of the brand under various purchase or con-
sumption situations—the depth and breadth of brand awareness.
• Brand performance is how well the product or service meets customers’ functional needs.
• Brand imagery describes the extrinsic properties of the product or service, including the ways in which the
brand attempts to meet customers’ psychological or social needs.
• Brand judgments focus on customers’ own personal opinions and evaluations.
• Brand feelings are customers’ emotional responses and reactions with respect to the brand.
• Brand resonance describes the relationship customers have with the brand and the extent to which they feel
they’re “in sync” with it.
Resonance is the intensity of customers’ psychological bond with the brand and the level of activity it engen-
ders.33 Brands with high resonance include Harley-Davidson, Apple, and eBay. Fox News has found that the higher
levels of resonance and engagement its programs engender often lead to greater recall of the ads it runs.34
| Fig. 11.4 |
Brand
Resonance
Pyramid
3. Response =
What about you?
2. Meaning =
What are you?
4. Relationships =
What about you and me?
1. Identity =
Who are you?
Positive,
accessible reactions
Intense,
active loyalty
Deep, broad
brand awareness
Resonance
Judgments Feelings
Performance Imagery
Salience
Stages of Brand Development Brand Building
Blocks
Branding Objective at
Each Stage
Points-of-parity
& difference
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Building Brand Equity
Marketers build brand equity by creating the right brand knowledge structures with the right consumers. The
success of this process depends on all brand-related contacts—whether marketer-initiated or not.35 From a mar-
keting management perspective, however, there are three main sets of brand equity drivers:
1. The initial choices for the brand elements or identities making up the brand (brand names, URLs, lo-
gos, symbols, characters, spokespeople, slogans, jingles, packages, and signage)—Microsoft chose the
name Bing for its new search engine because it felt it unambiguously conveyed search and the “aha” mo-
ment of finding what you are looking for. It is also short, appealing, memorable, active, and effective
multiculturally.36
2. The product and service and all accompanying marketing activities and supporting marketing pro-
grams—General Mills and its long-time CMO Mark Addicks are employing a number of new marketing
activities to sell cereals, cake mixes, and yogurt. The company is exploring how to best use smart phones
with consumers via QR codes, apps, and augmented reality, developing new packaging strategies in the
process.37
3. Other associations indirectly transferred to the brand by linking it to some other entity (a person, place, or
thing)—The brand name of New Zealand vodka 42BELOW refers to both a latitude that runs through New
Zealand and the percentage of the drink’s alcohol content. The packaging and other visual cues are designed
to leverage the perceived purity of the country to communicate the positioning for the brand.38
Choosing Brand elemenTs Brand elements are devices, which can be trademarked, that identify
and differentiate the brand. Most strong brands employ multiple brand elements. Nike has the distinctive
“swoosh” logo, the empowering “Just Do It” slogan, and the “Nike” name from the Greek winged goddess
of victory.
Marketers should choose brand elements to build as much brand equity as possible. The test is what consum-
ers would think or feel about the product if the brand element were all they knew. Based on its name alone, for
instance, a consumer might expect SnackWell’s products to be healthful snack foods and Panasonic Toughbook
laptop computers to be durable and reliable.
Brand elemenT ChoiCe CriTeria There are six criteria for choosing brand elements. The first
three—memorable, meaningful, and likable—are brand building. The latter three—transferable, adaptable, and
protectable—are defensive and help leverage and preserve brand equity against challenges.
1. Memorable—How easily do consumers recall and recognize the brand element, and when—at both purchase
and consumption? Short names such as Tide, Crest, and Puffs are memorable brand elements.
2. Meaningful—Is the brand element credible? Does it suggest the corresponding category and a product in-
gredient or the type of person who might use the brand? Consider the inherent meaning in names such as
DieHard auto batteries, Mop & Glo floor wax, and Lean Cuisine low-calorie frozen entrées.
3. Likable—How aesthetically appealing is the brand element? A recent trend is for playful names that also offer
a readily available URL, especially for online brands like Flickr, Instagram, Pinterest, Tumblr, Dropbox, and
others.
4. Transferable—Can the brand element introduce new products in the same or different categories? Does it add
to brand equity across geographic boundaries and market segments? Although initially an online bookseller,
Amazon.com was smart enough not to call itself “Books ‘R’ Us.” The Amazon is famous as the world’s biggest
river, and the name suggests the staggeringly diverse range of products the company now sells.
5. Adaptable—How adaptable and updatable is the brand element? Logos can easily be updated. The past 100
years have seen the Shell logo updated 10 times.
6. Protectable—How legally protectable is the brand element? How competitively protectable? When names are
in danger of becoming synonymous with product categories—as happened to Kleenex, Kitty Litter, Jell-O,
Scotch Tape, Xerox, and Fiberglass—their makers should retain their trademark rights and not allow the
brand to become generic.
deVeloping Brand elemenTs Brand elements can play a number of brand-building roles.39 If
consumers don’t examine much information in making product decisions, brand elements should be easy to recall
and inherently descriptive and persuasive. But choosing a name with inherent meaning may make it harder to later
add a different meaning or update the positioning.40
The likability of brand elements can increase awareness and associations.41 “Marketing Memo: The Marketing
Magic of Characters” describes some of the marketing advantages of using brand characters.
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332 PART 4 | Building STRong BRAndS
Often, the less concrete brand benefits are, the more important that brand elements capture intangible char-
acteristics. Many insurance firms use symbols of strength for their brands (the Rock of Gibraltar for Prudential
and the stag for Hartford) or security (the “good hands” of Allstate, the Traveler’s umbrella, and the hard hat of
Fireman’s Fund).
Like brand names, slogans are an extremely efficient means to build brand equity.42 They can function as useful
“hooks” to help consumers grasp what the brand is and what makes it special, as in “Like a Good Neighbor, State
Farm Is There,” “Nothing Runs Like a Deere,” and “Every Kiss Begins with Kay” for the jeweler.
Firms should be careful in replacing a good slogan. Citi walked away from its famous “Citi Never Sleeps” slo-
gan, replacing it with “Let’s Get It Done,” only to return when the new slogan failed to catch on.43 After 50 years,
Avis Car Rental dropped “We Try Harder” for “It’s Your Space.” It’s not clear whether this new slogan will have the
staying power of the one it replaced.44
desIGnInG holIsTIc MaRkeTInG acTIvITIes
Brands are not built by advertising alone. Customers come to know a brand through a range of contacts and
touch points: personal observation and use, word of mouth, interactions with company personnel, online or tele-
phone experiences, and payment transactions. A brand contact is any information-bearing experience, whether
positive or negative, a customer or prospect has with the brand, its product category, or its market.45 The com-
pany must put as much effort into managing these experiences as into producing its ads. Any brand contact can
affect consumers’ brand knowledge and the way they think, feel, or act toward the brand.
As we describe throughout this text, marketing strategy and tactics have changed dramatically.46 Marketers are
creating brand contacts and building brand equity through new avenues such as online clubs and consumer com-
munities, trade shows, event marketing, sponsorship, factory visits, public relations and press releases, and social
cause marketing. Consider how BMW has built the MINI Cooper brand in the United States.47
Brand characters have a long and important history in marketing. The Keebler elves reinforce home-style baking quality and a sense of magic and fun for their
line of cookies. In the insurance industry, the AFLAC duck competes for consumer attention with GEICO’s gecko, and Progressive’s chatty Flo competes with
Met Life’s adorable Peanuts characters. Michelin’s friendly tire-shaped Bibendum—the “Michelin Man”—helps to convey safety for the family and is credited
with helping the brand achieve 80 percent awareness around the world. Each year Michelin distributes a “Passport” for Bibendum that sets boundaries on the
character’s use by marketers in advertising. Bibendum is never aggressive, for example, and never delivers a sales pitch.
Brand characters represent a special type of brand symbol—one with human characteristics that in turn enhance likeability and tag the brand as inter-
esting and fun. Consumers can more easily form relationships with a brand when it has a human or other character’s presence. Brand characters typically
are introduced through advertising and can play a central role in ad campaigns and package designs. M&M’s “spokescandies” are an integral part of all the
brand’s advertising, promotion, and digital communications. Some brand characters are animated, like the Pillsbury Doughboy, Peter Pan (from the peanut
butter), and numerous cereal characters like Tony the Tiger and Snap, Crackle, & Pop. Others are live-action figures like Juan Valdez (Colombian coffee) and
Ronald McDonald.
Because they are often colorful and rich in imagery, brand characters can help brands break through marketplace clutter and communicate a key product
benefit in a soft-sell manner. Maytag’s Lonely Repairman reinforced the company’s key “reliability” product association for years. Characters also avoid many
of the problems that plague human spokespeople—they don’t demand pay raises, cheat on their spouses, or grow old. Betty Crocker may be over 90, but
after seven makeovers, she doesn’t look a day over 39!
With the opportunity to shape the brand’s personality and facilitate consumer interactions, brand characters play an increasingly important role in a digital
world. The success of Mr. Peanut in viral videos led to the introduction of a new peanut butter line. For the namesake character of Captain Morgan rum, Diageo
has a team of eight people who work with its New York ad firm Anomaly to create daily online content. Even old-timers are making their way onto the Web. First
introduced in 1957, Mr. Clean has amassed almost 900,000 Facebook fans.
The online popularity and effectiveness of brand characters was demonstrated by a research study revealing that the Pillsbury Doughboy garners 10 times
the social media buzz for the Pillsbury brand as NBA star LeBron James does for his Nike sponsor!
Sources: Bruce Horovitz, “Mascots Top Celebrities in Social Media Buzz,” USA Today, June 10, 2013; Rupal Parekh, “Meet the Woman behind the Michelin Man,” Advertising
Age, June 11, 2012; Suzanne Vranica, “Knights, Pirates and Trees Flock to Facebook,” Wall Street Journal, March 26, 2012; David Welch, “Mr. Peanut Gets Smashed,”
Bloomberg Businessweek, March 12, 2012; “Betty Crocker Celebrates 90th Birthday,” www.marketwatch.com, November 18, 2011; Dorothy Pomerantz and Lacey Rose,
“America’s Most Loved Spokescreatures,” Forbes, March 18, 2010; Judith A. Garretson and Scot Burton, “The Role of Spokescharacters as Advertisement and Package
Cues in Integrated Marketing Communications,” Journal of Marketing 69 (October 2005), pp. 118–32; Judith Anne Garretson Folse, Richard G. Netemeyer, and Scot Burton,
“Spokescharacters: How the Personality Traits of Sincerity, Excitement, and Competence Help to Build Equity,” Journal of Advertising 41 (Spring 2012), pp. 17–32.
The Marketing Magic of Charactersmarketing memo
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MInI COOPer When BMW launched the modernized MINI Cooper in the United States in 2002, it em-
ployed a broad mix of media: billboards, posters, Internet, print, PR, product placement, and grassroots activities. Many were
linked to a cleverly designed Web site with product and dealer information. The car was placed atop Ford Excursion SUVs
at 21 auto shows across the United States; it was used as seats in a sports stadium; and it appeared in Playboy magazine
as a centerfold. The imaginative integrated campaign built a six-month waiting list for the MINI Cooper. Despite its relatively
limited communications budget, the brand has continued to develop innovative, award-winning campaigns ever since. MINI
has especially used outdoor advertising creatively: Two curved palm trees planted next to a speeding MINI on a billboard
MINI Cooper has been
supported since its
American launch by a
creative and full-integrated
marketing program.
So
ur
ce
: M
IN
I U
SA
Supported by an ad
campaign featuring star
NFL quarterback Tom
Brady, UGG has been
targeting men as one
of its new avenues for
growth.
So
ur
ce
: F
G
A
W
E
N
N
P
ho
to
s/
N
ew
sc
om
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334 PART 4 | Building STRong BRAndS
created an illusion of speed and power; a digital billboard personally greeted passing MINI drivers by using a signal from a
radio chip embedded in their key fobs; and a real MINI on the side of a building was able to move up and down like a yo-
yo. A new worldwide campaign, “Not Normal,” spotlights MINI’s strong, independent character through classic and digital
media. Now sold in 100 countries around the world, MINI has expanded into a six-model lineup, including a convertible, a
coupe, the Clubman four-door, and the Countryman wagon. These product introductions reinforce that MINI is agile, versa-
tile, and fun to drive, and the marketing campaign as a whole builds strong emotional connections with drivers.
Integrated marketing is about mixing and matching marketing activities to maximize their individual and
collective effects.48 Marketers need a variety of different marketing activities that consistently reinforce the brand
promise. Consider what Deckers is doing to make sure UGG does not become yesterday’s news.49
ugg UGG sheepskin boots were originally made for men; surfers in Australia wore them on the beach to warm
their feet after surfing. Acquired by Deckers in 1995, UGGs took off among women in 2000 after Oprah Winfrey showcased
them on her famous “Favorite Things” show. By 2011, sales had cracked $1 billion. The following year, women’s tastes in
boots shifted to leather, and sales of UGGs slipped. To bolster the brand, Deckers is using the credibility and influence of
bloggers who make up the “UGG Creative Council” to expand the brand’s social media footprint and build awareness of the
full range of its product line. To appeal to men, rugged New England Patriots quarterback Tom Brady was hired as an en-
dorser in a campaign featuring the comfort, craftsmanship, and quality of the brand. To broaden the brand’s appeal beyond
its quintessential winter boot, spring and summer lines including sandals and beach cover-ups were launched to position
UGG as an active, outdoor lifestyle brand.
We can evaluate integrated marketing activities in terms of the effectiveness and efficiency with which they
affect brand awareness and create, maintain, or strengthen brand associations and image. Although Volvo may
invest in R&D and engage in advertising, promotions, and other communications to reinforce its “safety” brand
association, it also sponsors events to make sure it is seen as active, contemporary, and up to date. Notable Volvo
sponsorships include golf tournaments and the European professional golf tour, the Volvo Ocean race, the famed
Gothenburg horse show, and cultural events.
Marketing programs should be put together so the whole is greater than the sum of the parts. In other words,
marketing activities should work singularly and in combination.
leveRaGInG secondaRY assocIaTIons
The third and final way to build brand equity is, in effect, to “borrow” it. That is, create brand equity by linking
the brand to other information in memory that conveys meaning to consumers (see Figure 11.5).
The Volvo Ocean race
is a way to help the
Volvo brand be seen
as modern, active and
energetic.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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These “secondary” brand associations can link the brand to sources such as the company itself (through
branding strategies), to countries or other geographical regions (through identification of product origin), and to
channels of distribution (through channel strategy), as well as to other brands (through ingredient or co-branding),
characters (through licensing), spokespeople (through endorsements), sporting or cultural events (through spon-
sorship), or some other third-party sources (through awards or reviews).
Suppose Burton—the maker of snowboards, snowboard boots, bindings, clothing, and outerwear—decided to
introduce a new surfboard called the “Dominator.” Burton has gained more than a third of the snowboard mar-
ket by closely aligning itself with top professional riders and creating a strong amateur snowboarder community
around the country.50 To support the new surfboard, Burton could leverage secondary brand knowledge in a num-
ber of ways:
• It could “sub-brand” the product, calling it “Dominator by Burton.” Consumers’ evaluations of the new prod-
uct would be influenced by how they felt about Burton and whether they felt that such knowledge predicted
the quality of a Burton surfboard.
• Burton could rely on its rural New England origins, but such a geographical location would seem to have little
relevance to surfing.
• Burton could sell through popular surf shops in the hope that their credibility would rub off on the Dominator
brand.
• Burton could co-brand by identifying a strong ingredient brand for its foam or fiberglass materials (as Wilson
did by incorporating Goodyear tire rubber on the soles of its Pro Staff Classic tennis shoes).
• Burton could find one or more top professional surfers to endorse the surfboard, or it could sponsor a surfing
competition or even the entire Association of Surfing Professionals (ASP) World Tour.
• Burton could secure and publicize favorable ratings from third-party sources such as Surfer or Surfing
magazine.
Thus, independent of the associations created by the surfboard itself, its brand name, or any other aspects of the
marketing program, Burton could build equity by linking the brand to these other entities.
Leveraging secondary associations can be an efficient and effective way to strengthen a brand. But linking a
brand to someone or something else can be risky because anything bad that happens to that other entity can also
be linked to the brand. When popular endorsers Tiger Woods and Lance Armstrong got into trouble, many of the
firms using them to promote their brands chose to cut ties.
| Fig. 11.5 |
Secondary Sources of
Brand Knowledge
CompanyIngredients
Alliances Extensions
Country
of origin
Channels
Employees
Endorsers
Causes
Third-party
endorsements
Events
BRAND
Other
Brands
Things
PlacesPeople
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336 PART 4 | Building STRong BRAndS
Ford’s external marketing efforts are matched by a strong internal branding program
within the company.
If Burton were to
introduce a surfboard,
there are many ways
it could leverage
secondary brand
knowledge and
associations.
So
ur
ce
: i
m
ag
o
sp
or
tf
ot
od
ie
ns
t/
im
ag
o/
Sc
hr
ey
er
/N
ew
sc
om
InTeRnal BRandInG
Marketers must now “walk the walk” to deliver the
brand promise. They must adopt an internal perspective
to be sure employees and marketing partners appreciate
and understand basic branding notions and how they
can help—or hurt—brand equity.51 Internal branding
consists of activities and processes that help inform and
inspire employees about brands.52 Holistic marketers
must go even further and train and encourage distribu-
tors and dealers to serve their customers well. Poorly
trained dealers or other intermediaries can ruin the best
efforts to build a strong brand image.
Brand bonding occurs when customers experience
the company as delivering on its brand promise. All the
customers’ contacts with company employees and com-
munications must be positive.53 The brand promise will
not be delivered unless everyone in the company lives the
brand. Disney is so successful at internal branding that it
holds seminars on the “Disney Style” for employees from
other companies. Chevrolet chose to send almost 3,000
of its dealers to the Disney Institute in Walt Disney World
to help them learn how to apply Disney principles to
improve the car-buying experience for their customers.54
When employees care about and believe in the
brand, they’re motivated to work harder and feel greater
loyalty to the firm. Some important principles for inter-
nal branding are:55
1. Choose the right moment. Turning points are
ideal opportunities to capture employees’ attention
and imagination. After it ran an internal branding
campaign to accompany its external repositioning,
the “Beyond Petroleum” ad campaign, BP found
most employees were positive about the new brand
and thought the company was going in the right
direction.
2. Link internal and external marketing. Internal
and external messages must match. Ford’s new
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CReATing BRAnd equiTy | chapter 11 337
branding push to “Go Further” targets car buyers as well as Ford employees. The company believes that mak-
ing Ford’s internal branding efforts consistent with its external branding can “create profound synergies that
will benefit the company in significant ways.” Internally, Ford CMO Jim Farley is emphasizing three areas to
help Ford employees “go further”: “people serving people,” “ingenuity,” and “attainable.”56
3. Bring the brand alive for employees. Internal communications should be informative and energizing.
Starbucks created a major facility and exhibit to physically immerse managers and employees in the brand
experience. To help its staff better understand how the brand positioning and promise affected their daily
work, a major services company invested more than 100,000 hours in deep manager and employee training,
with role-playing scenarios, exercises, and interactive tools.57
4. Keep it simple. Don’t overwhelm employees with too many details. Focus on the key brand pillars, ideally
in the form of a brand mantra. Walmart uses three very simple brand pillars: “Quality Products; Unbeatable
Prices; Easy Shopping.” 58
Measuring Brand Equity
How do we measure brand equity? An indirect approach assesses potential sources of brand equity by identify-
ing and tracking consumer brand knowledge structures.59 A direct approach assesses the actual impact of brand
knowledge on consumer response to different aspects of the marketing. “Marketing Insight: The Brand Value
Chain” shows how to link the two approaches.
The Brand Value Chain
The brand value chain is a structured approach to assessing the
sources and outcomes of brand equity and the way marketing activities
create brand value (Figure 11.6). It is based on several premises.
First, brand value creation begins when the firm targets actual or
potential customers by investing in a marketing program to develop the
brand, including marketing communications, trade or intermediary sup-
port, and product research, development, and design. This marketing
activity will change customers’ mind-sets—what customers think and
feel and everything that becomes linked to the brand. Next, these cus-
tomers’ mind-sets will affect buying behavior and the way consumers
respond to all subsequent marketing activity—pricing, channels, com-
munications, and the product itself—and the resulting market share
and profitability of the brand. Finally, the investment community will
consider this market performance of the brand to assess shareholder
value in general and the value of a brand in particular.
The model also assumes that three multipliers increase or de-
crease the value that can flow from one stage to another.
• The program multiplier determines the marketing program’s ability
to affect the customer mind-set and is a function of the quality of
the program investment.
• The customer multiplier determines the extent to which value created
in the minds and hearts of customers affects market performance.
This result depends on competitive superiority (how effective the
quantity and quality of the marketing investment of other compet-
ing brands are), channel and other intermediary support (how much
brand reinforcement and selling effort various marketing partners are
putting forth), and customer size and profile (how many and what
types of customers, profitable or not, are attracted to the brand).
• The market multiplier determines the extent to which the value
shown by the market performance of a brand is manifested in
shareholder value. It depends, in part, on the actions of financial
analysts and investors.
Researchers at Millward Brown adopt a very similar perspective.
They maintain that a brand’s financial success depends on its ability
to be meaningful, different, and salient. These three brand qualities
(MD&S) predispose someone to positive purchase behavior (choose
the brand over others, pay more for it, stick with or try it in the future),
which in turn generates financial benefits to the company (increased
volume share, higher price premium, increased likelihood to grow value
share in the future).
Millward Brown asserts that this brand predisposition is measured
by three brand equity metrics: power, premium and potential.
• People are predisposed to choose the brand over others. This will
drive brand volume, so power predicts volume share based entirely
on perceptions, absent of activation factors.
• People are predisposed to pay more for the brand. This will allow
the brand to charge more, so premium predicts the price index
your brand can command.
• Potential indicates the likelihood of value share growth for the
brand in the next 12 months, based on people’s predisposition to
stick to the brand or try it in the future.
Sources: Kevin Lane Keller and Don Lehmann, “How Do Brands Create Value,”
Marketing Management (May–June 2003), pp. 27–31. See also Marc J. Epstein
and Robert A. Westbrook, “Linking Actions to Profits in Strategic Decision Making,”
MIT Sloan Management Review (Spring 2001), pp. 39–49; Rajendra K. Srivastava,
Tasadduq A. Shervani, and Liam Fahey, “Market-Based Assets and Shareholder
Value,” Journal of Marketing 62 (January 1998), pp. 2–18; Shuba Srinivasan, Marc
Vanheule, and Koen Pauwels, “Mindset Metrics in Market Response Models: An
Integrative Approach,” Journal of Marketing Research 47 (August 2010), pp. 672–
84; Josh Samuel, “The Power of Being Meaningful, Different and Salient,” Point of
View, www.millwardbrown.com; Jorge Alagon and Josh Samuel, “The Meaningfully
Different Framework,” white paper, www.millwardbrown.com, April 2013.
marketing
insight
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338 PART 4 | Building STRong BRAndS
The two general approaches are complementary, and marketers can employ both. In other words, for brand
equity to perform a useful strategic function and guide marketing decisions, marketers need to fully understand
(1) the sources of brand equity and how they affect outcomes of interest and (2) how these sources and outcomes
change, if at all, over time. Brand audits are important for the former; brand tracking for the latter.
• A brand audit is a focused series of procedures to assess the health of the brand, uncover its sources of brand
equity, and suggest ways to improve and leverage its equity. Marketers should conduct a brand audit when
setting up marketing plans and when considering shifts in strategic direction. Conducting brand audits on a
regular basis, such as annually, allows marketers to keep their fingers on the pulse of their brands so they can
manage them more proactively and responsively. A good brand audit provides keen insights into consumers,
brands, and the relationship between the two.
• Brand-tracking studies use the brand audit as input to collect quantitative data from consumers over time,
providing consistent, baseline information about how brands and marketing programs are performing.
Tracking studies help us understand where, how much, and in what ways brand value is being created to facili-
tate day-to-day decision making.
One firm that recently conducted an influential major brand audit is Kellogg’s.60
KeLLOgg’s The ready-to-eat cereal category has been under siege in recent years as busy consumers
choose to eat on the run while nutrition-minded consumers worry about genetically modified ingredients. With a his-
tory spanning more than a century, Kellogg decided it needed to refresh the brand and address the issues head-on. An
extensive brand audit, dubbed “Project Signature,” was launched to provide strategic direction and creative inspiration.
After a year of work with brand consulting partner Interbrand, the result was a new tagline, “Let’s Make Today Great”; an
updated, more contemporary logo and design look; clear identification of the brand’s core purpose as highlighting the
“power of breakfast”; explicit incorporation of the Kellogg’s master brand into all its marketing campaigns; and consoli-
dation of 42 company Web sites around the world into one. The brand audit influenced a number of Kellogg’s specific
marketing programs and activities, from the cause-related “Share Your Breakfast” campaign (to help the one in five
U.S. children who might not have access to breakfast) to the “Love Your Cereal” social media program debunking myths
about cereal. An Olympic sponsor, Kellogg also devotes 20 percent of its communication budget to online engagement.
Marketers should distinguish brand equity from brand valuation, which is the job of estimating the total finan-
cial value of the brand. Table 11.2 displays the world’s most valuable brands in 2012 according to the Interbrand
rankings, as described below in “Marketing Insight: What Is a Brand Worth?”61 In these well-known companies,
brand value is typically more than half the total company market capitalization. John Stuart, cofounder of Quaker
Oats, said: “If this business were split up, I would give you the land and bricks and mortar, and I would take the
Marketing
Program
Investment
Customer
Multiplier
Market
Multiplier
Program
Multiplier
– Distinctiveness
– Relevance
– Integrated
– Value
– Excellence
– Competitive reactions
– Channel support
– Customer size & profile
– Market dynamics
– Growth potential
– Risk profile
– Brand contribution
Customer
Mind-set
Brand
Performance
Shareholder
Value
– Product
– Communications
– Trade
– Employee
– Other
– Awareness
– Associations
– Attitudes
– Attachment
– Activity
– Price premiums
– Price elasticities
– Market share
– Expansion success
– Cost structure
– Profitability
– Stock price
– P/E ratio
– Market capitalization
VALUE
STAGES
MULTIPLIERS
| Fig. 11.6 |
Brand Value Chain
Source: Kevin Lane Keller, Strategic Brand
Management, 4th ed. (Upper Saddle River, NJ:
Prentice Hall, 2013). Printed and electroni-
cally reproduced by permission of Pearson
Education, Inc. Upper Saddle River, New Jersey.
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CReATing BRAnd equiTy | chapter 11 339
TaBle 11.2 The World’s 10 Most Valuable Brands in 2014
Rank Brand 2014 Brand Value (Billions)
1 Apple $118.9
2 Google $107.4
3 Coca-Cola $81.6
4 IBM $72.2
5 Microsoft $61.2
6 GE $45.5
7 Samsung $45.5
8 Toyota $42.4
9 McDonald’s $42.3
10 Mercedes-Benz $34.3
Source: Interbrand. Used with permission.
What Is a Brand Worth?
Top brand-management firm Interbrand has developed a model to
formally estimate the dollar value of a brand. It defines brand value as
the net present value of the future earnings that can be attributed to
the brand alone. The firm believes marketing and financial analyses are
equally important in determining the value of a brand. Its process fol-
lows five steps (see Figure 11.7 for a schematic overview):
1. Market Segmentation—The first step is to divide the market(s)
in which the brand is sold into mutually exclusive segments that
help determine variations among the brand’s different customer
groups.
2. Financial Analysis—Interbrand assesses purchase price, vol-
ume, and frequency to help calculate accurate forecasts of
future brand sales and revenues. Once it has established Brand
Revenues, it deducts all associated operating costs to derive earn-
ings before interest and tax (EBIT). It also deducts the appropriate
taxes and a charge for the capital employed to operate the under-
lying business, leaving Economic Earnings, that is, the earnings
attributed to the branded business.
3. Role of Branding—Interbrand next attributes a proportion of
Economic Earnings to the brand in each market segment by first
identifying the various drivers of demand and then determining the
degree to which the brand directly influences each. The Role of
Branding assessment is based on market research, client work-
shops, and interviews and represents the percentage of Economic
Earnings the brand generates. Multiplying the Role of Branding by
Economic Earnings yields Brand Earnings.
4. Brand Strength—Interbrand then assesses the brand’s strength
profile to determine the likelihood that the brand will realize fore-
casted Brand Earnings. This step relies on competitive benchmark-
ing and a structured evaluation of the brand’s clarity, commitment,
protection, responsiveness, authenticity, relevance, differentiation,
consistency, presence, and understanding. For each segment,
Interbrand applies industry and brand equity metrics to determine
a risk premium for the brand. The company’s analysts derive the
overall Brand Discount Rate by adding a brand-risk premium to
marketing
insight
brands and trademarks, and I would fare better than you.” U.S. companies do not list brand equity on their balance
sheets, in part because of differences in opinion about what constitutes a good estimate. However, companies do
give it a value in countries such as the United Kingdom, Hong Kong, and Australia.
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340 PART 4 | Building STRong BRAndS
Managing Brand Equity
Because consumer responses to marketing activity depend on what they know and remember about a brand, as
the brand value chain suggests, short-term marketing actions, by changing brand knowledge, necessarily increase
or decrease the long-term success of future marketing actions.
BRand ReInfoRceMenT
As a company’s major enduring asset, a brand needs to be carefully managed so its value does not depreciate.62
Brand leaders of 70 years ago that remain leaders today—companies such as Wrigley’s, Coca-Cola, Heinz, and
Campbell Soup—only do so by constantly striving to improve their products, services, and marketing.
Marketers can reinforce brand equity by consistently conveying the brand’s meaning in terms of (1) what prod-
ucts it represents, what core benefits it supplies, and what needs it satisfies; and (2) how the brand makes products
superior and which strong, favorable, and unique brand associations should exist in consumers’ minds.63 NIVEA,
one of Europe’s strongest brands, expanded from a skin cream brand to a skin care and personal care brand
| Fig. 11.7 |
Interbrand Brand
Valuation Method
Demand
Drivers
Brand
Earnings
Brand
Discount
Rate
Competitive
Benchmarking
Market Segments
Brand Value
(net present value of future brand earnings)
Financial
Analysis
Economic
Earnings
Role of
Branding
Brand
Strength
the risk-free rate, represented by the yield on government bonds.
The Brand Discount Rate, applied to the forecasted Brand Earnings
forecast, yields the net present value of the Brand Earnings. The
stronger the brand, the lower the discount rate, and vice versa.
5. Brand Value Calculation—Brand Value is the net present value
(NPV) of the forecasted Brand Earnings, discounted by the Brand
Discount Rate. The NPV calculation is composed of both the fore-
cast period and the period beyond, reflecting the ability of brands to
continue generating future earnings.
Increasingly, Interbrand uses brand value assessments as a dynamic,
strategic tool to identify and maximize return on brand investment
across a whole host of areas.
Sources: Interbrand, the Interbrand Brand Glossary, and Interbrand’s Nik Stucky
and Rita Clifton, January 2009. For an alternative brand valuation method, see
Millward Brown’s BrandZ brand valuation methodology: http://www.millwardbrown
.com/BrandZ/Top_100_Global_Brands/Methodology.aspx.
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through carefully designed and implemented brand extensions that reinforced
the brand promise of “mild,” “gentle,” “caring,” and “protective.”
Reinforcing brand equity requires that the brand always be moving for-
ward—in the right direction and with new and compelling offerings and ways
to market them. In virtually every product category, once-prominent and
admired brands—such as Circuit City, Fila, Polaroid, and Slim-Fast—have
fallen on hard times or gone out of business.64 Consider the plight of one-time
highflier Nokia.65
nOKIa For 14 years, Nokia dominated cell phone sales as the world’s
industry leader before being surpassed by Samsung in 2012, marking the end of
an era. Once the pride of Finland, the company has found itself outsold by Samsung
even on its home soil. How could such a high-flying brand come crashing to earth?
In a nutshell, it failed to innovate and stay relevant. Nokia did not respond to the
wildly successful iPhone and the shifting consumer demand that accompanied it. The
company thought the iPhone was too expensive to manufacture and was not up to
its own product standards. The iPhone reportedly failed Nokia’s “drop test,” in which
a phone is dropped on concrete from a height of five feet at different angles. Nokia
had actually spent $40 billion on R&D over the preceding decade and was a smart
phone pioneer, but it chose not to invest in devices that anticipated what the iPhone
eventually became. Without the right new products, Nokia began to be associated
by consumers with a different era of technology, a fatal blow in the fast-moving,
technologically intensive smart phone market.
An important part of reinforcing brands is providing consistent marketing support. Consistency doesn’t mean
uniformity with no changes: While there is little need to deviate from a successful position, many tactical changes
may be necessary to maintain the strategic thrust and direction of the brand. When change is necessary, marketers
should vigorously preserve and defend sources of brand equity.
Marketers must recognize the trade-offs between activities that fortify the brand and reinforce its meaning,
such as a well-received product improvement or a creatively designed ad campaign, and those that leverage or
borrow from existing brand equity to reap some financial benefit, such as a short-term promotional discount.66 At
some point, failure to reinforce the brand will diminish brand awareness and weaken brand image. Consider what
happened to Sears.67
sears A classic U.S. company, Sears was one of the strongest department store brands for more than 100 years,
associated with high-quality merchandise and responsive customer service. Facing financial difficulties in the early 2000s,
the company started aggressively selling assets and cutting costs to maintain its revenue targets. As a result of spending
only $2 to $3 per square foot on annual maintenance and repair of its stores, far less than the $6 to $8 per square foot
spent by competitors Target and Walmart, Sears began hearing customer complaints about inattentive sales associates, dis-
organized sales racks, and stores in disrepair. As one analyst noted, “[T]hey weren’t keeping [their] promise. Consumers are
pretty sophisticated, and they walked into these stores and it was the same old place … without the freshness, the excite-
ment or the interactivity of the experience.” According to the ACS index of customer satisfaction, in 2012 Sears was ranked
10th among 11 department and discount stores, and same-store sales had been in a prolonged six-year decline.
BRand RevITalIzaTIon
Any new development in the marketing environment can affect a brand’s fortunes. Nevertheless, a number of
brands have managed to make impressive comebacks in recent years.68 After some hard times in the automotive
market, Cadillac, Fiat, and Volkswagen have all turned their brand fortunes around to varying degrees. General
Motors’s rescue of its fading Cadillac brand was fueled by a complete overhaul of its product lineup with new
designs that redefined its look and styling, such as the SRX crossover, the XTS and CTS sedans, the Escalade
By failing to sufficiently innovate and stay relevant, Nokia
quickly lost market leadership.
So
ur
ce
: ©
K
um
ar
S
ris
ka
nd
an
/A
la
m
y
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342 PART 4 | Building STRong BRAndS
SUV, and the new ATS sports sedan. A healthy dose of breakthrough marketing, including the first use of Led
Zeppelin’s music in advertising, also helped.69
Often, the first thing to do in revitalizing a brand is understand what the sources of brand equity were to begin
with. Are positive associations losing their strength or uniqueness? Have negative associations become linked to
the brand? Then decide whether to retain the same positioning or create a new one and, if so, which new one.70
Sometimes the actual marketing program is the source of the problem because it fails to deliver on the brand
promise. Then a “back to basics” strategy may make sense. We’ve mentioned that Harley-Davidson regained its
market leadership by doing a better job of living up to customer expectations for product performance. Pabst
Brewing Company did it by returning to its roots and leveraging iconic packaging and imagery and a perception
of authenticity.
In other cases, however, the old positioning is just no longer viable and a reinvention strategy is necessary.
Mountain Dew completely overhauled its brand image to become a soft-drink powerhouse. As its history reveals,
it is often easier to revive a brand that is alive but has been more or less forgotten. Old Spice is another example
of a brand that transcended its roots as the classic aftershave and cologne gift set that baby boomers gave their
dads on Father’s Day to become positively identified with contemporary male grooming products for a younger
Millennial audience. To revitalize Old Spice, P&G used product innovation and tongue-in-cheek communications
that stressed the brand’s “experience.”71
There is obviously a continuum of revitalization strategies, with pure “back to basics” at one end, pure “reinven-
tion” at the other, and many combinations in between. The challenge is often to change enough to attract some new
customers, but not enough to alienate old customers. Regardless of the strategy, brand revitalization of almost any
kind starts with the product.72 Consider how Burberry made its comeback. Eu Yan Sang, a company specializing in
traditional Chinese medicine, did it by returning to its roots and leveraging key brand assets.73
eu Yan sang Eu Yan Sang, a brand with more than 300 stores worldwide, has come a long way
since opening its first shop in 1873. The brand has succeeded in growing from a traditional Chinese medical hall to a
publicly listed company with stores in Hong Kong, Malaysia, China, Macau, and Singapore.
Traditional Chinese medicine (TCM) is commonly linked to images of elderly men measuring out dried herbs and
brewing bowls full of black, bitter soup. Though TCM is popular with the older generation, younger consumers saw it
as inconvenient. Eu Yan Sang remained stagnant with flat growth for a period of nearly 60 years. All this changed when
Richard Eu took over his family business in 1989. Knowing he had to make the brand relevant to younger consumers,
he leveraged Eu Yan Sang’s strong equity as a trusted brand and modernized it by going back to basics. Through
Eu Yan Sang revitalized
its brand by focusing
on core products and
refocusing on its
heritage and style.
So
ur
ce
: m
ar
ily
n
ba
rb
on
e/
Sh
ut
te
rs
to
ck
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research and development, he was able to provide innovative offerings such as ready-to-use concentrates and easy-
to-swallow pills that changed the way Chinese medicine was consumed. The retail stores were also redesigned to give
them a brighter and friendlier look. With the support of other marketing activities, such as advertising, road shows, and
cooking demonstrations, Eu Yan Sang’s business has grown by leaps and bounds. Initiatives, such as the Eu Yan Sang
TCM clinics that combined the best of east-west health care practices, help the brand stay relevant. In 2014 alone,
the brand won over 16 awards. It was given the Gold for Reader’s Digest Trusted Brands Award, numerous healthcare
awards across China and Malaysia, and was recognized for its commitment to product development and customer satis-
faction in what has become a highly competitive market.
Devising a Branding Strategy
A firm’s branding strategy—often called its brand architecture—reflects the number and nature of both com-
mon and distinctive brand elements. Deciding how to brand new products is especially critical. A firm has three
main choices:
1. It can develop new brand elements for the new product.
2. It can apply some of its existing brand elements.
3. It can use a combination of new and existing brand elements.
When a firm uses an established brand to introduce a new product, the product is called a brand extension.
When marketers combine a new brand with an existing brand, the brand extension can also be called a sub-
brand, such as Hershey Kisses candy, Adobe Acrobat software, Toyota Camry automobiles, and American Express
Blue cards. The existing brand that gives birth to a brand extension or sub-brand is the parent brand. If the parent
brand is already associated with multiple products through brand extensions, it can also be called a master brand
or family brand.
Brand extensions fall into two general categories. In a line extension, the parent brand covers a new product
within a product category it currently serves, such as with new flavors, forms, colors, ingredients, and package
sizes. Dannon has introduced several types of Dannon yogurt line extensions through the years—Fruit on the
Bottom, All Natural Flavors, Dan-o-nino, and Light & Fit. In a category extension, marketers use the parent brand
to enter a different product category, such as Swiss Army watches. Honda has used its company name to cover such
different products as automobiles, motorcycles, snowblowers, lawn mowers, marine engines, and snowmobiles.
This allows the firm to advertise that it can fit “six Hondas in a two-car garage.”
A brand line consists of all products—original as well as line and category extensions—sold under a particular
brand. A brand mix (or brand assortment) is the set of all brand lines that a particular seller makes. Many compa-
nies are introducing branded variants, which are specific brand lines supplied to specific retailers or distribution
channels. They result from the pressure retailers put on manufacturers to provide distinctive offerings. A camera
company may supply its low-end cameras to mass merchandisers while limiting its higher-priced items to specialty
camera shops. Valentino may design and supply different lines of suits and jackets to different department stores.74
A licensed product is one whose brand name has been licensed to other manufacturers that actually make the
product. Corporations have seized on licensing to push their company names and images across a wide range of
products—from bedding to shoes—making licensing a multibillion-dollar business. It is perhaps not surprising
that in a high-involvement category such as automobiles, licensing is big business.75
auTOMOTIVe LICensIng Several automotive brands have created lucrative licensing busi-
nesses. Jeep’s licensing program, with 600 products and 150 licensees, includes everything from strollers built for a
father’s longer arms to apparel with Teflon in the denim—as long as the product fits the brand’s positioning of “Life without
Limits.” Thanks to 600-plus dedicated shop-in-shops and 80 freestanding stores around the world, Jeep’s licensing reve-
nue now exceeds $550 million in retail sales. New areas of emphasis include outdoor and travel gear, juvenile products, and
sporting goods. As of 2014, Ford was generating $2 billion in licensing revenue from 18,000 different items sold through
400 licensees. Products range from apparel branded with the Ford Blue Oval logo and the popular Mustang nameplate logo
to radio-controlled cars sold in major retailers like Walmart and Toys R Us. An area of growth is products designed to equip
male fans and their “man caves.”
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344 PART 4 | Building STRong BRAndS
BRandInG decIsIons
alTernaTiVe Branding sTraTegies Today, branding is such a strong force that hardly anything goes
unbranded. Assuming a firm decides to brand its products or services, it must choose which brand names to use.
Three general strategies are popular:
• Individual or separate family brand names. Consumer packaged-goods companies have a long tradition of
branding different products by different names. General Mills largely uses individual brand names, such as
Bisquick, Gold Medal flour, Nature Valley granola bars, Old El Paso Mexican foods, Progresso soup, Wheaties
cereal, and Yoplait yogurt. If a company produces quite different products, one blanket name is often not de-
sirable. Swift & Company developed separate family names for its hams (Premium) and fertilizers (Vigoro).
Companies often use different brand names for different quality lines within the same product class. A major
advantage of separate family brand names is that if a product fails or appears to be of low quality, the company
has not tied its reputation to it.76
• Corporate umbrella or company brand name. Many firms, such as Heinz and GE, use their corporate
brand as an umbrella brand across their entire range of products.77 Development costs are lower with
umbrella names because there’s no need to research a name or spend heavily on advertising to create rec-
ognition. Campbell Soup introduces new soups under its brand name with extreme simplicity and achieves
instant recognition. Sales of the new product are likely to be strong if the manufacturer’s name is good.
Corporate-image associations of innovativeness, expertise, and trustworthiness have been shown to directly
influence consumer evaluations.78 Finally, a corporate branding strategy can lead to greater intangible value
for the firm.79
• Sub-brand name. Sub-brands combine two or more of the corporate brand, family brand, or individual
product brand names. Kellogg employs a sub-brand or hybrid branding strategy by combining the corporate
brand with individual product brands as with Kellogg’s Rice Krispies, Kellogg’s Raisin Bran, and Kellogg’s
Corn Flakes. Many durable-goods makers such as Honda, Sony, and Hewlett-Packard use sub-brands for
their products. The corporate or company name legitimizes, and the individual name individualizes, the new
product.
house oF Brands Versus a Branded house The use of individual or separate family brand
names has been referred to as a “house of brands” strategy, whereas the use of an umbrella corporate or company
brand name is a “branded house” strategy. These two strategies represent two ends of a continuum. A sub-brand
strategy falls somewhere between, depending on which component of the sub-brand receives more emphasis. A
good example of a house of brands strategy is United Technologies.80
unITed TeChnOLOgIes United Technology Corporation (UTC) provides a broad range of
high-technology products and services for the aerospace and commercial building industries, generating nearly $63 billion
in revenues. Its aerospace businesses include Sikorsky helicopters, Pratt & Whitney aircraft engines, and UTC Aerospace
Jeep generates
over $550 million
in revenues by
licensing its brand
to other companies
for other products.
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Systems (which includes Goodrich Corporation and Hamilton Sundstrand aerospace systems). UTC Building & Industrial
Systems, the world’s largest provider of building technologies, includes Otis elevators and escalators; Carrier heating, air-
conditioning, and refrigeration systems; and fire and security solutions from brands such as Kidde and Chubb. Most of its
in-market brands are the names of the individuals who invented the product or created the company decades ago; they
have more power and are more recognizable in the business buying marketplace than the name of the parent brand, and
employees are loyal to the individual companies. The UTC name is advertised only to small but influential audiences—the
financial community and opinion leaders in New York and Washington, DC. “My philosophy has always been to use the
power of the trademarks of the subsidiaries to improve the recognition and brand acceptance, awareness, and respect for
the parent company itself,” said UTC’s one-time CEO George David.
With a branded house strategy, it is often useful to have a well-defined flagship product. A flagship product is
one that best represents or embodies the brand as a whole to consumers. It often is the first product by which the
brand gained fame, a widely accepted best-seller, or a highly admired or award-winning product.81
Flagship products play a key role in the brand portfolio in that marketing them can have short-term benefits
(increased sales) as well as long-term benefits (improved brand equity for a range of products). Certain models
play important flagship roles for many car manufacturers. Besides generating the most sales, family sedans Toyota
Camry and Honda Accord represent brand values that all cars from those manufacturers share.82 In justifying
the large investments incurred in launching its new 2014 Mercedes S-class automobiles, Daimler’s chief executive
Dieter Zetsche explained, “This car is for Mercedes-Benz what the harbor is for Hamburg, the Mona Lisa
for Leonardo da Vinci and ‘Satisfaction’ for the Rolling Stones: the most important symbol of the reputation
of the whole.”83
Two key components of virtually any branding strategy are brand portfolios and brand extensions. (Chapter 13
discusses co-branding and ingredient branding, as well as line-stretching through vertical extensions.)
BRand poRTfolIos
A brand can be stretched only so far, and all the segments the firm would like to target may not view the same
brand equally favorably. Marketers often need multiple brands in order to pursue these multiple segments. Some
other reasons for introducing multiple brands in a category include:84
1. Increasing shelf presence and retailer dependence in the store
2. Attracting consumers seeking variety who may otherwise have switched to another brand
3. Increasing internal competition within the firm
4. Yielding economies of scale in advertising, sales, merchandising, and physical distribution
The brand portfolio is the set of all brands and brand lines a particular firm offers for sale in a particular category
or market segment. Building a good brand portfolio requires careful thinking and creative execution. In the hotel
industry, brand portfolios are critical. Consider Starwood. 85
United Technology
has adopted a “house
of brands” strategy
with a diverse brand
portfolio, including
Pratt & Whitney
aircraft engines.
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346 PART 4 | Building STRong BRAndS
sTarwOOd hOTeLs & resOrTs One of the leading hotel and leisure companies in the
world, Starwood Hotels & Resorts Worldwide has more than 1,200 properties in 100 countries and 181,400 employees at
its owned and managed properties. In its rebranding attempt to go “beyond beds,” Starwood has differentiated its hotels
along emotional, experiential lines. Its hotel and call center operators convey different experiences at the firm’s different
chains, as does the firm’s advertising. Starwood has nine distinct lifestyle brands in its portfolio. Here is how some of them
are positioned:
• Sheraton. The largest brand, Sheraton is about warm, comforting, and casual. Its core value centers on “con-
nections”—Sheraton enables you to connect to your location and to those back home.
• Four Points by Sheraton. For the self-sufficient traveler, Four Points is a select-service hotel that strives to be
honest and uncomplicated. The brand is all about providing the comforts of home with little indulgences like
local craft beers and free high-speed Internet access and bottled water.
• W. With a brand personality defined as flirty, for the insider, and an escape, W offers guests unique locally
inspired experiences with a “What’s New/What’s Next” attitude. W’s “Whatever/Whenever” service comple-
ments the sylish designs in its lobby gathering places and signature bars and restaurants.
• Westin. Westin’s emphasis on “personal, instinctive, and renewal” has led to a new sensory welcome featur-
ing a white tea scent, signature music and lighting, and refreshing towels. Each room features Westin’s own
“Heavenly” bed and bath products.
The hallmark of an optimal brand portfolio is the ability of each brand in it to maximize equity in combination
with all the other brands in it. Marketers generally need to trade off market coverage with costs and profitability.
If they can increase profits by dropping brands, a portfolio is too big; if they can increase profits by adding brands,
it’s not big enough.
The basic principle in designing a brand portfolio is to maximize market coverage so no potential customers are
being ignored, but minimize brand overlap so brands are not competing for customer approval. Each brand should
be clearly differentiated and appealing to a sizable enough marketing segment to justify its marketing and produc-
tion costs. Consider these two B-to-B and B-to-C examples.
• Dow Corning has adopted a dual-brand approach to sell its silicon, which is used as an ingredient by many com-
panies. Silicon under the Dow Corning name uses a “high touch” approach where customers receive much atten-
tion and support; silicon sold under the Xiameter name uses a “no frills” approach emphasizing low prices.86
• Unilever, partnering with PepsiCo, sells four distinct brands of ready-to-drink iced tea. Brisk Iced Tea is an
“on ramp” brand that is an entry point and a “flavor-forward” value brand; Lipton Iced Tea is a mainstream
brand with an appealing blend of flavor and tea; Lipton Pure Leaf Iced Tea is premium and “tea-forward” for
tea purists; and Tazo is a super-premium, niche brand.87
Marketers carefully monitor brand portfolios over time to identify weak brands and kill unprofitable ones.88
Brand lines with poorly differentiated brands are likely to be characterized by much cannibalization and require
pruning. There are scores of cereals, beverages, and snacks and thousands of mutual funds. Students can choose
among hundreds of business schools. For the seller, this spells hypercompetition. For the buyer, as Chapter 13
points out, it may mean too much choice.
Brands can also play a number of specific roles as part of a portfolio.
Flankers Flanker or fighter brands are positioned with respect to competitors’ brands so that more important
(and more profitable) flagship brands can retain their desired positioning. Busch Bavarian is priced and marketed
to protect Anheuser-Busch’s premium Budweiser.89 Marketers walk a fine line in designing fighter brands, which
must be neither so attractive that they take sales away from their higher-priced comparison brands nor designed so
cheaply that they reflect poorly on them.
Cash Cows Some brands may be kept around despite dwindling sales because they manage to maintain
their profitability with virtually no marketing support. Companies can effectively milk these “cash cow” brands by
capitalizing on their reservoir of brand equity. Gillette still sells the older Atra, Sensor, and Mach III razors because
withdrawing them may not necessarily move customers to another Gillette razor brand.
low-end enTry leVel The role of a relatively low-priced brand in the portfolio often may be to attract
customers to the brand franchise. Retailers like to feature these “traffic builders” because they are able to trade
up customers to a higher-priced brand. Toyota’s Scion, with its quirky design and low prices, has a very specific
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target: people in their early 30s or under. Its specific marketing mission is to capture buyers who have not
purchased anything from Toyota to move them into the franchise. The youngest average customers in the industry
for eight years running, Scion drivers are in fact three-quarters first-time Toyota buyers90.
high-end presTige The role of a relatively high-priced brand often is to add prestige and credibility to
the entire portfolio. One analyst argued that the real value to Chevrolet of its high-performance Corvette sports
car was “its ability to lure curious customers into showrooms and at the same time help improve the image of
other Chevrolet cars. It does not mean a hell of a lot for GM profitability, but there is no question that it is a traffic
builder.”91 Corvette’s technological image and prestige cast a halo over the entire Chevrolet line.
BRand exTensIons
Many firms have decided to leverage their most valuable asset by introducing a host of new products under their
strongest brand names. Most new products are in fact brand extensions—typically 80 percent to 90 percent in any
one year. Moreover, many of the most successful new products, as rated by various sources, are brand extensions.
Among the most successful in supermarkets in 2012 were Dunkin’ Donuts coffee, Progresso Light soups, and
Hormel Compleats microwave meals. Nevertheless, many new products are introduced each year as new brands.
The year 2012 also saw the launch of Zyrtec allergy relief medicine and Ped Egg foot files.
adVanTages oF Brand exTensions Two main advantages of brand extensions are that they can
facilitate new-product acceptance and provide positive feedback to the parent brand and company.
Improved Odds of New-Product Success Consumers form expectations about a new product based on
what they know about the parent brand and the extent to which they feel this information is relevant. When Sony
introduced a new personal computer tailored for multimedia applications, the Vaio, consumers may have felt
comfortable with its anticipated performance because of their experience with and knowledge of other Sony products.
By setting up positive expectations, extensions reduce risk. It also may be easier to convince retailers to stock
and promote a brand extension because of anticipated increased customer demand. An introductory campaign for
an extension doesn’t need to create awareness of both the brand and the new product; it can concentrate on the
new product itself.92
Extensions can thus reduce launch costs, important given that establishing a major new brand name for a con-
sumer packaged good in the U.S. marketplace can cost more than $100 million! Extensions also can avoid the dif-
ficulty—and expense—of coming up with a new name and allow for packaging and labeling efficiencies. Similar or
identical packages and labels can lower production costs for extensions and, if coordinated properly, provide more
prominence in the retail store via a “billboard” effect.93 Stouffer’s offers a variety of frozen entrees with identical or-
ange packaging that increases their visibility when they’re stocked together in the freezer. With a portfolio of brand
variants within a product category, consumers who want a change can switch to a different product type without
having to leave the brand family.
Toyota Scion plays an
important role as an
entry level offering
for the entire Toyota
product line.
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Positive Feedback Effects Besides facilitating acceptance of new products, brand extensions can provide
feedback benefits.94 They can help to clarify the meaning of a brand and its core values or improve consumer
loyalty to the company behind the extension.95 Through their brand extensions, Crayola means “colorful
arts and crafts for kids,” Aunt Jemima means “breakfast foods,” and Weight Watchers means “weight loss and
maintenance.”
Brand extensions can renew interest and liking for the brand and benefit the parent brand by expanding mar-
ket coverage. AB InBev introduced its Budweiser Black Crown line extension—a beer with more alcohol and a
stronger hops taste than regular Budweiser—with several purposes. The company hoped to both attract a younger
audience being wooed by the explosion of craft brews and reinvigorate the core brand with its established base.96
A successful category extension may not only reinforce the parent brand and open up a new market but also
facilitate even more new category extensions.97 The success of Apple’s iPod and iTunes products was that they:
(1) opened up a new market, (2) helped sales of core Mac products, and (3) paved the way for the launch of the
iPhone and iPad products.
disadVanTages oF Brand exTensions On the downside, line extensions may cause the brand
name to be less strongly identified with any one product. Al Ries and Jack Trout call this the “line-extension trap.”98
By linking its brand to mainstream food products such as mashed potatoes, powdered milk, soups, and beverages,
Cadbury ran the risk of losing its more specific meaning as a chocolate and candy brand.99
Brand dilution occurs when consumers no longer associate a brand with a specific or highly similar set of
products and start thinking less of the brand. Porsche found sales success with its Cayenne sport-utility vehicle and
Panamera four-door sedan, which accounted for three-quarters of its vehicle sales in 2012, but some critics felt the
company was watering down its sports car image in the process. Perhaps in response, Porsche has dialed up its on-
and off-road test tracks, driving courses, and roadshow events in recent years to help customers get the adrenaline
rush of driving a legendary Porsche 911 or Boxster roadster.100
If a firm launches extensions consumers deem inappropriate, they may question the integrity of the brand or
become confused or even frustrated: Which version of the product is the “right one” for them? Do they know the
brand as well as they thought they did? Retailers reject many new products and brands because they don’t have the
shelf or display space for them. And the firm itself may become overwhelmed.
The worst possible scenario is for an extension not only to fail, but to harm the parent brand in the process.
Fortunately, such events are rare. “Marketing failures,” in which too few consumers are attracted to a brand, are
typically much less damaging than “product failures,” in which the brand fundamentally fails to live up to its promise.
Even then, product failures dilute brand equity only when the extension is seen as very similar to the parent brand.
The Audi 5000 car suffered from a tidal wave of negative publicity and word of mouth in the mid-1980s when it
was alleged to have a “sudden acceleration” problem. The adverse publicity spilled over to the 4000 model. But the
Quattro was relatively insulated because it was distanced from the 5000 by its more distinct branding and advertising
strategy.101
Even if sales of a brand extension are high and meet targets, the revenue may be coming from consum-
ers switching to the extension from existing parent-brand offerings—in effect cannibalizing the parent brand.
Intrabrand shifts in sales may not necessarily be undesirable if they’re a form of preemptive cannibalization. In
other words, consumers who switched to a line extension might otherwise have switched to a competing brand
instead. Tide laundry detergent maintains the same market share it had 50 years ago because of the sales contribu-
tions of its various line extensions—scented and unscented powder, tablet, liquid, and other forms.
One easily overlooked disadvantage of brand extensions is that the firm forgoes the chance to create a new
brand with its own unique image and equity. Consider the long-term financial advantages to Disney of having
introduced more grown-up Touchstone films, to Levi’s of creating casual Dockers pants, and to Black & Decker of
introducing high-end DeWALT power tools.
suCCess CharaCTerisTiCs Marketers must judge each potential brand extension by how effectively it
leverages existing brand equity from the parent brand as well as how effectively, in turn, it contributes to the parent
brand’s equity. Crest Whitestrips leveraged the strong reputation of Crest and dental care to provide reassurance in
the teeth-whitening arena while also reinforcing its dental authority image.
Marketers should ask a number of questions in judging the potential success of an extension.102
• Does the parent brand have strong equity?
• Is there a strong basis of fit?
• Will the extension have the optimal points-of-parity and points-of-difference?
• How can marketing programs enhance extension equity?
• What implications will the extension have for parent brand equity and profitability?
• How should feedback effects best be managed?
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To help answer these questions, Table 11.3 offers a sample scorecard with specific weights and dimensions that
users can adjust for each application.
TaBle 11.3 Brand Extendibility Scorecard
Allocate points according to how well the new product concept rates on the specific dimensions in the following areas:
Consumer Perspectives: Desirability
10 pts. _____ Product category appeal (size, growth potential)
10 pts. _____ Equity transfer (perceived brand fit)
5 pts. _____ Perceived consumer target fit
Company Perspectives: Deliverability
10 pts. _____ Asset leverage (product technology, organizational skills, marketing effectiveness via channels and
communications)
10 pts. _____ Profit potential
5 pts. _____ Launch feasibility
Competitive Perspectives: Differentiability
10 pts. _____ Comparative appeal (many advantages; few disadvantages)
10 pts. _____ Competitive response (likelihood; immunity or invulnerability from)
5 pts. _____ Legal/regulatory/institutional barriers
Brand Perspectives: Equity Feedback
10 pts. _____ Strengthens parent brand equity
10 pts. _____ Facilitates additional brand extension opportunities
5 pts. _____ Improves asset base
TOTAL _____ pts.
Table 11.4 lists a number of academic research findings on brand extensions.103 One major mistake in evaluat-
ing extension opportunities is failing to take all consumers’ brand knowledge structures into account and focusing
instead on one or a few brand associations as a potential basis of fit.104 Bic is a classic example of that mistake.105
TaBle 11.4 Research Insights on Brand Extensions
• Successful brand extensions occur when the parent brand is seen as having favorable associations and there is a
perception of fit between the parent brand and the extension product.
• There are many bases of fit: product-related attributes and benefits, as well as nonproduct-related attributes and
benefits related to common usage situations or user types.
• Depending on consumer knowledge of the categories, perceptions of fit may be based on technical or
manufacturing commonalties or more surface considerations such as necessary or situational complementarity.
• High-quality brands stretch farther than average-quality brands, although both types of brands have boundaries.
• A brand that is seen as prototypical of a product category can be difficult to extend outside the category.
• Concrete attribute associations tend to be more difficult to extend than abstract benefit associations.
(continued )
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350 PART 4 | Building STRong BRAndS
Finally, we can relate brand equity to one other important marketing concept: customer equity. The aim of
customer relationship management (CRM) is to produce high customer equity.106 Although we can calculate it in
different ways, one definition is “the sum of lifetime values of all customers.”107 As Chapter 5 reviewed, customer
lifetime value is affected by revenue and by the costs of customer acquisition, retention, and cross-selling.108
• Acquisition depends on the number of prospects, the acquisition probability of a prospect, and acquisition
spending per prospect.
• Retention is influenced by the retention rate and retention spending level.
• Add-on spending is a function of the efficiency of add-on selling, the number of add-on selling offers given to
existing customers, and the response rate to new offers.
The brand equity and customer equity perspectives certainly share many common themes.109 Both emphasize
the importance of customer loyalty and the notion that we create value by having as many customers as possible
pay as high a price as possible.
bIC The French company Société Bic, by emphasizing inexpensive, disposable products, was able to create markets
for nonrefillable ballpoint pens in the late 1950s, disposable cigarette lighters in the early 1970s, and disposable razors in
the early 1980s. It unsuccessfully tried the same strategy in marketing BIC perfumes in the United States and Europe in
1989. The perfumes—two for women (“Nuit” and “Jour”) and two for men (“BIC for Men” and “BIC Sport for Men”)—were
packaged in quarter-ounce glass spray bottles that looked like fat cigarette lighters and sold for $5 each. The products were
displayed on racks at checkout counters throughout Bic’s extensive distribution channels. At the time, a Bic spokeswoman
described the new products as extensions of the Bic heritage—“high quality at affordable prices, convenient to purchase,
and convenient to use.” The brand extension was launched with a $20 million advertising and promotion campaign contain-
ing images of stylish people enjoying themselves with the perfume and using the tagline “Paris in Your Pocket.” Nevertheless,
Bic was unable to overcome its lack of cachet and negative image associations, and the extension was a failure.
Customer Equity
Achieving brand equity should be a top priority for any organization. “Marketing Memo: Twenty-First-Century
Branding” offers some wise advice on continued brand success.
• Consumers may transfer associations that are positive in the original product class but become negative in the ex-
tension context.
• Consumers may infer negative associations about an extension, perhaps even based on other inferred positive
associations.
• It can be difficult to extend into a product class that is seen as easy to make.
• A successful extension cannot only contribute to the parent brand image but also enable a brand to be extended
even farther.
• An unsuccessful extension hurts the parent brand only when there is a strong basis of fit between the two.
• An unsuccessful extension does not prevent a firm from “backtracking” and introducing a more similar extension.
• Vertical extensions can be difficult and often require sub-branding strategies.
• The most effective advertising strategy for an extension emphasizes information about the extension (rather than
reminders about the parent brand).
Source: Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Pearson, 2013). Printed and electronically reproduced by permission of Pearson
Education, Inc., Upper Saddle River, NJ.
TaBle 11.4 Continued
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CReATing BRAnd equiTy | chapter 11 351
An early pioneer in the study of branding and still active as a brand strategist, David Aaker has much experience with what makes brands successful. Here are
his top ten “to do tasks” for marketers—what you need to know to excel at brand building.
1. Treat brands as assets. Brand strategy needs to be developed in tandem with business strategy.
2. Show the strategic payoff of brand building. Show how the success of a business strategy depended on brand assets.
3. Recognize the richness of brands—go beyond the three-word phrase. Although two to four associations are often the most import, understand the full range
of associations that are cued by the brand.
4. Get beyond functional benefits. Emotional and self-expressive benefits and brand personality can provide a basis for sustainable differentiation and a deep
customer relationship.
5. Consider organizational associations—people, programs, values, strategies, and heritage that are unique to the company and meaningful to customers.
6. Look to role models. What other companies have been successful with similar branding efforts? Are there any people or programs internal to the firm that
exemplify desired characteristics for the brand?
7. Understand the brand relationship spectrum and the right degree of separation for new offerings.
8. Look for branded differentiators. Even functional benefits, if copied, can remain distinctive if given a strong brand identify initially.
9. Use branded energizers—a branded person or program you can associate with your brand.
10. Win the brand relevance battle—make your competitors seem irrelevant.
Twenty-First-Century Brandingmarketing memo
Source: “David Aaker’s Top 10 Brand Precepts,” white paper, www.prophet.com. For more insights into branding best practices, see Allen Adamson, The Edge: 50 Tips
from Brands That Lead (New York: Palgrave Macmillan, 2013).
In practice, however, the two perspectives emphasize different things. The customer equity perspective focuses
on bottom-line financial value. Its clear benefit is its quantifiable measures of financial performance. But it of-
fers limited guidance for go-to-market strategies. It largely ignores some of the important advantages of creating
a strong brand, such as the ability to attract higher-quality employees, elicit stronger support from channel and
supply chain partners, and create growth opportunities through line and category extensions and licensing. The
customer equity approach can overlook the “option value” of brands and their potential to affect future revenues
and costs. It does not always fully account for competitive moves and countermoves or for social network effects,
word of mouth, and customer-to-customer recommendations.
Brand equity, on the other hand, tends to emphasize strategic issues in managing brands and creating and le-
veraging brand awareness and image with customers. It provides much practical guidance for specific marketing
activities. With a focus on brands, however, managers don’t always develop detailed customer analyses in terms
of the brand equity they achieve or the resulting long-term profitability they create.110 Brand equity approaches
could benefit from sharper segmentation schemes afforded by customer-level analyses and more consideration
of how to develop personalized, customized marketing programs—whether for individuals or for organizations
such as retailers. There are generally fewer financial considerations put into play with brand equity than with
customer equity.
Nevertheless, both brand equity and customer equity matter. There are no brands without customers and no
customers without brands. Brands serve as the “bait” that retailers and other channel intermediaries use to attract
customers from whom they extract value. Customers are the tangible profit engine for brands to monetize their
brand value.
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352 PART 4 | Building STRong BRAndS
some other entity (the company, country of origin, chan-
nel of distribution, or another brand).
5. Brand audits measure “where the brand has been,” and
tracking studies measure “where the brand is now” and
whether marketing programs are having the intended
effects.
6. A branding strategy identifies which brand elements a
firm chooses to apply across the various products it sells.
In a brand extension, a firm uses an established brand
name to introduce a new product. Potential extensions
must be judged by how effectively they leverage existing
brand equity to a new product, as well as how effectively
they contribute to the equity of the parent brand in turn.
7. Brands may expand coverage, provide protection,
extend an image, or fulfill a variety of other roles for
the firm. Each brand-name product must have a well-
defined positioning to maximize coverage, minimize
overlap, and thus optimize the portfolio.
8. Customer equity is a concept that is complementary to
brand equity and reflects the sum of lifetime values of all
customers for a brand.
Summary
1. A brand is a name, term, sign, symbol, design, or some
combination of these elements, intended to identify the
goods and services of one seller or group of sellers and
to differentiate them from those of competitors. The
different components of a brand—brand names, lo-
gos, symbols, package designs, and so on—are called
brand elements.
2. Brands are valuable intangible assets that offer a num-
ber of benefits to customers and firms and need to be
managed carefully. The key to branding is that consum-
ers perceive differences among brands in a product cat-
egory.
3. Brand equity should be defined in terms of marketing
effects uniquely attributable to a brand. That is, different
outcomes result when a product or service is marketed
under its brand than when it is not.
4. Building brand equity depends on three main factors:
(1) The initial choices for the brand elements or identities
making up the brand; (2) the way the brand is integrated
into the supporting marketing program; and (3) the as-
sociations indirectly transferred to the brand by links to
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Are Brand Extensions Good or Bad?
Some critics vigorously denounce the practice of brand ex-
tensions because they feel that too often companies lose
focus and consumers become confused. Other experts
maintain that brand extensions are a critical growth strategy
and source of revenue for the firm.
Take a position: Brand extensions can endanger
brands versus Brand extensions are an important
brand-growth strategy.
Marketing Discussion
Brand Equity Models
How can you relate the different models of brand equity
in this chapter to one another? How are they similar? How
are they different? Can you construct a brand-equity model
that incorporates the best aspects of each model?
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CReATing BRAnd equiTy | chapter 11 353
offerings failed on many fronts. Product launches like
pizza, the Arch Deluxe, fajitas, and deli sandwiches did
not connect with consumers, nor did tweaks to the cur-
rent menu like multiple changes to the Big Mac special
sauce. Jim Skinner, McDonald’s former chief executive,
explained, “We got distracted from the most important
thing: hot, high-quality food at a great value at the speed
and convenience of McDonald’s.”
In 2003, McDonald’s implemented a strategic ef-
fort called the Plan to Win. Still in effect, the plan helped
McDonald’s restaurants refocus on offering a better,
higher-quality consumer experience rather than a quick
and cheap fast-food option. Its “playbook” provided
strategic insight on how to improve on the company’s 5
Ps—people, products, promotions, price, and place—yet
allow local restaurants to adapt to different environments
and cultures. For example, McDonald’s introduced a
Bacon Roll breakfast sandwich in the United Kingdom,
a premium M burger in France, and an egg, tomato, and
pepper McPuff in China. Prices also varied slightly across
the United States to better reflect different regional tastes.
Some changes that initially helped turn the com-
pany around included offering more chicken options as
beef consumption started to decline, selling milk in a
bottle instead of a carton, and removing “Super Size”
options after the documentary “Super Size Me” targeted
McDonald’s and its link to obesity. The company re-
sponded to customers’ desire for healthy foods with pre-
mium salads and apple slices instead of French fries in its
Happy Meals. It also dismissed claims of “mystery meat”
by introducing all-white-meat McNuggets.
Many of these healthier options targeted moms and
charged a premium price. Meanwhile, McDonald’s tar-
geted teenagers and its lower-income consumers with
the introduction of the $1 menu. The company improved
its drive-thru service, added more snack options, and
refurbished restaurants with leather seats, warm paint
colors, Wi-Fi, and flat-screen TVs. In many locations it
created three different “zones” that fit the needs of each
target audience: a linger zone with comfortable sofas
where teenagers could hang out and socialize, a family
zone with tables and chairs that could easily be reconfig-
ured, and an efficient zone for consumers who needed to
grab a quick bite and go.
Initial results were staggering; from 2003 to 2006,
revenues increased 33 percent and share price soared
170 percent. In 2008, McDonald’s was one of only two
companies in the Dow Jones industrial average whose
share price rose during the worldwide recession. Sales
continued to increase, and in 2012, McDonald’s experi-
enced record revenues of $27 billion.
Today, McDonald’s increases its consumer base
through global growth and product expansion. For ex-
ample, the successful introduction of McCafé directly
Marketing Excellence
>> McDonald’s
McDonald’s is the world’s leading hamburger fast-food
chain with more than 34,000 restaurants in 119 coun-
tries. More than 80 percent of McDonald’s restaurants are
owned and operated by franchisees, which decreases
the risk associated with expansion and ensures long-term
tenants for the company. McDonald’s serves 70 million
people each day and promises an easy and enjoyable
food experience for its customers.
McDonald’s Corporation dates back to 1955 when
Ray Kroc, a multi-mixer salesman, franchised a ham-
burger restaurant from the McDonald brothers. Kroc
named it McDonald’s and offered simple foods such as
the famous 15-cent hamburger. He helped design the
building, which featured red and white sides and a single
golden arch that attracted local attention. Just 10 years
later, McDonald’s had expanded to more than 700 U.S.
restaurants, and the brand was on its way to becoming a
household name.
During the 1960s and 1970s, Kroc led McDonald’s
growth domestically and internationally but always re-
inforced the importance of quality, service, cleanliness,
and value. The menu expanded to include iconic items
such the Big Mac, the Quarter Pounder, the Happy Meal,
Filet-O-Fish, and breakfast items like the Egg McMuffin.
The company ramped up its advertising as well. To target
its core audience—children and families—it introduced
Ronald McDonald during a 60-second commercial in
1965. Soon, characters like Grimace, the Hamburgler,
and Mayor McCheese made their debut in McDonald’s
advertising and helped lure children into its restaurants for
familiar food and a fun experience.
In 1974, McDonald’s opened the Ronald McDonald
House, a charitable cause to help children with leuke-
mia. Since then, it has expanded into a global effort
called Ronald McDonald House Charities that consists of
three major programs: Ronald McDonald House, Ronald
McDonald Family Room, and Ronald McDonald Care
Mobile.
McDonald’s aggressively expanded overseas during
the 1980s by adding locations throughout Europe, Asia,
the Philippines, and Malaysia. However, this rapid growth
led to many struggles during the 1990s and early 2000s.
The company lost focus and direction as it added as
many as 2,000 new restaurants a year. New employees
weren’t trained fast enough or well enough, which led to
poor customer service and dirtier restaurants. In addition,
new healthier-option competitors popped up such as
Subway and Panera Bread.
Consumers’ tastes and eating trends also started
to change in the early 2000s, and McDonald’s new food
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354 PART 4 | Building STRong BRAndS
2. How has McDonald’s grown its brand equity over
the years? Has McDonald’s changed in different
economic times or in different parts of the world?
Explain.
3. What risks do you think McDonald’s will face in the
future?
Sources: Andrew Martin, “At McDonald’s, the Happiest Meal Is Hot Profits,” The New York Times,
January 10, 2009; Janet Adamy, “McDonald’s Seeks Way to Keep Sizzling,” Wall Street Journal,
March 10, 2009; Matt Vella, “McDonald’s Thinks about the Box,” Businessweek, December 8,
2008; Jessica Wohl, “McDonald’s CEO: Tough Economy, but Some ‘Thawing,’” Reuters, April 17,
2009; “Interbrand’s Best Global Brands 2012,” Interbrand.com; Rance Crain, “Has Time Run Out
for McDonald’s Brand Chronicle after 10 years?” Ad Age, December 2, 2013; McDonald’s 2012
Annual Report.
targeted consumers in the booming coffee industry and
stole share from companies like Starbucks, Dunkin’
Donuts, and Caribou Coffee. It is a good example of how
McDonald’s works to appeal to new consumers and aims
to stay relevant through the years. Its current campaign,
“I’m Lovin’ It,” seems to connect with McDonald’s large
consumer base and keep them coming back again and
again.
Questions
1. What are McDonald’s core brand values? Have these
changed over the years?
Long-term outlook: P&G takes the time to analyze each
opportunity carefully before acting. Once committed, the
company develops the best product possible and exe-
cutes it with the determination to make it a success. For
example, it struggled with Pringles potato chips for almost
a decade before achieving market success. Recently,
P&G has increased its presence in developing markets by
focusing on affordability, brand awareness, and distribu-
tion through e-commerce and high-frequency stores.
Product innovation: P&G is an active product innova-
tor. The company employs 1,000 science PhDs, more
than Harvard, Berkeley, and MIT combined, and applies
for roughly 3,800 patents each year. Part of its innova-
tion process is to develop brands that offer new consumer
benefits. Recent innovations that created entirely new cat-
egories include Febreze, an odor-eliminating fabric spray;
Dryel, a product that helps “dry-clean” clothes at home in
the dryer; and Swiffer, a cleaning system that effectively
removes dust, dirt, and hair from floors. Larry Huston, for-
mer innovation officer at P&G, stated, “P&G is largely a
branded science company.”
Quality strategy: P&G designs products of above-
average quality and continuously improves and reformu-
lates them. When the company says “new and improved,”
it means it. Recent examples include Tide Pods, a com-
pact laundry detergent tablet; Pampers Rash Guard, a
diaper that treats and prevents diaper rash; and improved
two-in-one shampoo and conditioner products Pantene,
Vidal Sassoon, and Pert Plus.
Brand extension strategy: P&G produces its brands in
several sizes and forms. This strategy gains more shelf
space and prevents competitors from moving in to sat-
isfy unmet market needs. P&G also uses its strong brand
names to launch new products with instant recognition
and much less advertising outlay. The Mr. Clean brand
has been extended from household cleaner to bathroom
Marketing Excellence
>> Procter & Gamble
Procter & Gamble (P&G) began in 1837 when brothers-
in-law William Procter and James Gamble formed a small
candle and soap company. Over the next 150 years, P&G
innovated and launched scores of revolutionary products
with superior quality and value, including Ivory soap in
1882, Tide laundry detergent in 1946, Crest toothpaste
with fluoride in 1955, and Pampers disposable diapers
in 1961. The company also opened the door to new
product categories by acquiring a number of companies,
including Richardson-Vicks (makers of personal care
products like Pantene, Olay, and Vicks), Norwich Eaton
Pharmaceuticals (makers of Pepto-Bismol), Gillette,
Noxell (makers of Noxzema), Shulton’s Old Spice, Max
Factor, and the Iams pet food company.
Today, Procter & Gamble is one of the most skillful
marketers of consumer-packaged goods in the world
and holds one of the most powerful portfolios of trusted
brands. The company employs 121,000 people in
about 80 countries worldwide, has 25 billion-dollar global
brands, spends more than $2 billion annually on R&D,
and has total worldwide sales in excess of $84 billion a
year. Its sustained market leadership rests on a number
of different capabilities and philosophies. These include:
Customer knowledge: P&G studies its customers—
both the end consumers and its trade partners—through
continuous marketing research and intelligence gathering.
It spends more than $100 million annually on more than
10,000 formal consumer research projects and generates
more than 3 million consumer contacts via its e-mail and
phone center. The company also encourages its market-
ers and researchers to be out in the field, interacting with
consumers and retailers in their home environment.
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CReATing BRAnd equiTy | chapter 11 355
responsible for each brand. The system has been copied
by many competitors but not often with P&G’s success.
Recently, P&G modified its general management structure
so that a category manager runs each brand category and
has volume and profit responsibility. Although this new or-
ganization does not replace the brand-management sys-
tem, it helps to sharpen strategic focus on key consumer
needs and competition in the category.
P&G’s accomplishments over the past 177 years
have come from successfully managing the numerous
factors that contribute to market leadership. Today, the
company’s wide range of products are used by 4.8 billion
people around the world in 180 different countries.
Questions
1. P&G’s impressive portfolio includes some of the
strongest brand names in the world. What are some
of the challenges associated with being the market
leader in so many different categories?
2. With social media becoming increasingly important
and fewer people watching traditional commercials
on television, what does P&G need to do to maintain
its strong brand images?
3. What risks will P&G face in the future?
Sources: Robert Berner, “Detergent Can Be So Much More,” Business Week, May 1, 2006,
pp. 66–68; “A Post-Modern Proctoid,” The Economist, April 15, 2006, p. 68; P&G Fact Sheet
(December 2006); John Galvin, “The World on a String,” Point, February 2005, pp. 13–24; Jack
Neff, “P&G Kisses Up to the Boss: Consumers,” Advertising Age, May 2, 2005, p. 18; “The Nielsen
Company Issues Top Ten U.S. Lists for 2008,” press release, The Nielsen Company, December 12,
2008; Lauren Coleman-Lochner and Carol Hymowitz, “At Procter and Gamble, the Innovation Well
Runs Dry,” Business week, September 6, 2012; www.pg.com; Procter and Gamble 2013 Annual
Report.
cleaner and even to a carwash system. Old Spice extend-
ed its brand from men’s fragrances to deodorant. Often,
P&G will leverage the technologies already in place to cre-
ate a brand extension. For example, when Crest success-
fully extended its brand into a new tooth-whitening system
called Crest Whitestrips, the company used bleaching
methods from P&G’s laundry division, film technology
from the food wrap division, and glue techniques from the
paper division.
Multibrand strategy: P&G markets several brands in
the same product category, such as Luvs and Pampers
diapers and Oral-B and Crest toothbrushes. Each brand
meets a different consumer want and competes against
specific competitors’ brands. At the same time, the com-
pany is careful not to sell too many brands and recently
reduced its vast array of products, sizes, flavors, and vari-
eties to assemble a stronger brand portfolio.
Strong sales force: P&G’s sales force has been named
one of the top 25 sales forces by Sales & Marketing Man-
agement magazine. A key to its success is the close tie
its sales force forms with retailers, notably Walmart. The
150-person team that serves the retail giant works closely
with Walmart to improve both the products that go to the
stores and the process by which they get there.
Manufacturing efficiency and cost cutting: P&G’s
reputation as a great marketing company is matched by
its excellence as a manufacturing company. The company
has successfully developed and continually improves its
production operations, which keep costs among the low-
est in the industry. As a result, it is able to offer reduced
prices for its premium products.
Brand-management system: P&G originated the
brand-management system, in which one executive is
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356
In This Chapter, We Will Address
the Following Questions
1. Why is it important for companies to grow the core of their business? (p. 357)
2. How can market leaders expand the total market and defend market share?
(p. 359)
3. How should market challengers attack market leaders? (p. 364)
4. How can market followers or nichers compete effectively? (p. 366)
5. What marketing strategies are appropriate at each stage of the product life cycle?
(p. 370)
6. How should marketers adjust their strategies and tactics during slow economic
growth? (p. 381)
FedEx now offers ground shipping and
UPS now offers air shipping so each com-
pany can better compete with the other.
Source: Andrew Kelly/Insider Images/Polaris/Newscom
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
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M12_KOTL2621_15_GE_C12.indd 356 09/03/15 6:27 PM
mymktlab.com
357
This chapter examines growth, the role competi-
tion plays, and how marketers can best manage their brands
given their market position and stage of the product life cycle.
Competition grows more intense every year—from global com-
petitors eager to enter new markets, from online competitors
seeking cost-efficient ways to expand distribution, from private-
label and store brands providing low-price alternatives, and
from brand extensions by mega-brands moving into new cate-
gories. For these reasons and more, product and brand fortunes
change over time, and marketers must respond accordingly.
Growth is essential for the success of any firm. Thus, to be a long-term market leader
is the goal of any marketer. Today’s challenging marketing circumstances often dictate that companies refor-
mulate their marketing strategies and offerings several times. Economic conditions change, competitors launch
new assaults, and buyer interest and requirements evolve. Though the years an interesting competitive battle has
been fought between FedEx and UPS in which each has been a challenger on the other’s home turf.1
Addressing Competition
and Driving Growth
12
After FedEx watched UPS successfully invade its airborne delivery system, it invested heavily in ground
delivery through a series of acquisitions to challenge UPS on its home turf. The two firms are now in a
heated battle to gain the upper hand in the marketplace. Both are moving into the fast-growing, multi-
billion-dollar Chinese domestic delivery market, where FedEx has a head start and a bigger operation.
Overseas markets are attractive for both firms, given that a little more than half of FedEx revenue and
almost two-thirds of UPS revenue comes from the domestic U.S. market. Combined, the two companies account for an
impressive 10 percent of U.S. gross domestic product (GDP). To expand their reach and the range of services they can
provide, both are making strategic acquisitions of delivery companies
all over the world, none bigger than UPS’s attempted purchase of TNT,
blocked at least initially by European regulators. Back in their home
U.S. markets, both firms are trying to lock in customers with custom-
ized door-to-door deliveries. Fueled by the rapid rise of online shopping,
residential deliveries are growing fast, and FedEx has the advantage of
being able to make Saturday deliveries. Advertising “UPS Loves Logis-
tics,” UPS has made a strong play with businesses, positioning itself as
the “logistics expert” capable of providing a broader range of supply-
chain services than just deliveries.
Growth
An important function of marketing is to drive growth in sales and revenue for a company. Marketing is
especially adept at doing so for a new product with many competitive advantages and much potential. Good
marketing can help to induce trial and promote word of mouth and diffusion. Marketing in more mature markets
can be more challenging. In some cases, fighting over market share is less productive than expanding the size of
the market as a whole.
Growth StrateGIeS
Chapter 2 introduced how companies can grow through expansion with new products and new markets, the
detailed focus of Chapters 8 and 15. Along those lines, Phil and Milton Kotler stress the following strategies:2
• Grow by building your market share
• Grow by developing committed customers and stakeholders
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358 PART 4 | Building STRong BRAndS
• Grow by building a powerful brand
• Grow by innovating new products, services, and experiences
• Grow by international expansion
• Grow by acquisitions, mergers, and alliances
• Grow by building an outstanding reputation for social responsibility
• Grow by partnering with government and NGOs
Consider how Under Armour has grown in recent years.3
Under ArMOUr In his days as a University of Maryland football player, Kevin Plank had been dis-
satisfied with cotton T-shirts that retained water and became heavy during practice. Under Armour was born when, with
$500 and several yards of coat lining, Plank worked with a local tailor to create seven prototypes of snug-fitting T-shirts
that absorbed perspiration and kept athletes dry. With a focus on performance and authenticity and backed by intense,
in-your-face advertising, the brand quickly became a favorite at high schools, colleges, and universities, later introducing
a wide range of athletic apparel as well as football cleats, basketball shoes, and running shoes. By 2009, it was squarely
in competition with formidable opponents Nike and Adidas. A traditionally male-oriented brand, Under Armour soon rec-
ognized the value of a new target demographic—women. Not wanting to fall back on a “shrink it and pink it” approach,
the company united its marketing, product design, and consumer insights departments to develop focused solutions for
women. The fully integrated “What’s Beautiful” media campaign—with its tagline urging women to “No Matter What,
Sweat Every Day”—and the success of its footwear lines have helped the women’s division become the fastest-growing
Under Armour business. The company is also looking to expand internationally, focusing initially on Europe and Latin
America. While Nike and Adidas both generate about 60 percent of their revenue outside their home regions, Under
Armour generates only 6 percent outside North America, with very little of that in fast-growing emerging markets like
India, China, and Brazil.
GrowInG the Core
Although many different growth strategies are available to firms, some of the best opportunities come from grow-
ing the core—focusing on their most successful existing products and markets. Marketers must avoid the trap of
thinking the “grass is always greener” and overestimating the upside of new ventures that stretch the company
into uncharted territory.
Often a firm’s unique capabilities don’t effectively translate to a new industry. Mattel’s disastrous acquisition
of the Learning Company in 1999 failed in part because the toy company’s expertise was not as valuable in the
interactive-learning market. Further, an industry that is red-hot today may be ice-cold tomorrow.4
Growing the core can be a less risky alternative than expansion into new product categories. It strengthens a
brand’s credentials as a source of authority and credibility and can yield economies of scale. Through improved
revenues and lower costs, growing the core can also lead to greater profits. UK marketing guru David Taylor advo-
cates three main strategies, citing these examples:5
1. Make the core of the brand as distinctive as possible. Galaxy chocolate has successfully competed with
Cadbury by positioning itself as “your partner in chocolate indulgence” and featuring smoother product
shapes, more refined taste, and sleeker packaging,
2. Drive distribution through both existing and new channels. Costa Coffee, the number-one coffee shop in the
United Kingdom, has found new distribution routes using drive-through outlets, vending machines at service
stations, and in-school coffee shops.
3. Offer the core product in new formats or versions. WD40 offers a Smart Straw version of its popular multi-
purpose lubricant with a built-in straw that pops up for use.
Many firms are seeking success by focusing on their core businesses. London-based Aegis Group sold market
research firm Synovate in order to focus on becoming media and digital communciation specialists.6 Levi Strauss
phased out its Denizen brand in Asia to focus on its core Levi’s brand.7
Growth strategies are not necessarily “either/or” propositions. A focus on core businesses does not mean forego-
ing new market opportunities. Vancouver, Canada’s Fortuna Silver Mines has focused on its two fully owned, fully
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AddReSSing ComPeTiTion And dRiving gRowTh | chapter 12 359
integrated silver mines in Peru and Mexico to spur organic growth while looking
for a third mine to drive further growth.8 And sometimes the core business is
just not expandable. With personal computer sales steadily declining, leading PC
maker Lenovo began to look at smart phones as a new source of business for its
brand.9
Competitive Strategies
for Market Leaders
Suppose a market is occupied by the firms shown in Figure 12.1. Forty percent
is in the hands of a market leader, another 30 percent belongs to a market chal-
lenger, and 20 percent is claimed by a market follower willing to maintain its
share and not rock the boat. Market nichers, serving small segments larger firms
don’t reach, hold the remaining 10 percent. Sometimes growth depends on
adopting the right competitive strategies.
A market leader has the largest market share and usually leads in price
changes, new-product introductions, distribution coverage, and promotional
intensity. Some historical market leaders are Microsoft (computer software),
Gatorade (sports drinks), Best Buy (retail electronics), McDonald’s (fast food),
BlueCross BlueShield (health insurance), and Visa (credit cards).
Although marketers assume well-known brands are distinctive in con-
sumers’ minds, unless a dominant firm enjoys a legal monopoly, it must
maintain constant vigilance. A powerful product innovation may come along,
a competitor might find a fresh marketing angle or commit to a major mar-
keting investment, or the leader’s cost structure might spiral upward. One
well-known brand and market leader that has worked hard to stay on top is
Xerox.10
XerOX Xerox has had to become much more than just a copier company. Now a blue-chip icon with the
name that became a verb, the company sports the broadest array of imaging products in the world and dominates
the market for high-end printing systems while also offering a new range of printing and business-related services. It
has made a product line transition from the old light lens technology to digital systems and is finding ways to make
color copying less expensive and even to print in 3-D. Xerox provides broader document and print-manager services
to help companies lower costs by eliminating desktop printers, reducing paper use, and installing multifunction multi-
user devices that are more efficient, break down less, and use cheaper supplies. Under CEO Ursula Burns, the firm
is becoming more of a services company, providing bill processing, business processing, and IT outsourcing. A $6.4
billion acquisition of Affiliated Computer Services (ACS) allowed Xerox to plunge its technology into back-office opera-
tions. A call to Virgin America customer care, a paper or online submission of a health insurance claim, and a query
to solve a smart phone problem all might be handled by a Xerox employee. A new Xerox device—a compact com-
puter with scanning, printing, and Internet capabilities—allows ACS insurance agents in the field to scan claims on-
site to be sorted, routed, and put immediately into a workflow system. Xerox is embracing technology in its marketing
too. The company’s “Information Overload” campaign employed a personalized video, e-mail campaign, and direct
mail piece. Each customer received a personalized URL (PURL) based on his or her behavior and interests, leading
to click-through rates of 35 percent to 40 percent as opposed to the typical 1 percent to 2 percent industry rates. A
new print and TV ad campaign, “Simplicity by the Numbers,” acknowledges the brand’s heritage while highlighting
its new capabilities. One TV ad opened with a women standing in front of a copier saying, “When I say Xerox, I know
what you’re thinking,” After printing the image of a transit map, she states, “Transit fares, as in the 37 billion transit
fares we help collect each year.”
So
ur
ce
: P
R
N
E
W
SW
IR
E
Under Armour’s fastest growing
business has been with women.
40%
Market
leader
30%
Market
challenger
20%
Market
follower
10%
Market
nichers
| Fig. 12.1 |
Hypothetical
Market
Structure
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360 PART 4 | Building STRong BRAndS
To stay number one, the firm must first find ways to expand total market demand. Second, it must protect its
current share through good defensive and offensive actions. Third, it should increase market share, even if market
size remains constant. Let’s look at each strategy.
expandInG total Market deMand
When the total market expands, the dominant firm usually gains the most. If Heinz can convince more people to
use ketchup, or to use ketchup with more meals, or to use more ketchup on each occasion, the firm will benefit
considerably because it already sells almost two-thirds of the country’s ketchup. In general, the market leader
should look for new customers or more usage from existing customers.
New Customers As Chapter 2 suggested, a company can search for new users among three groups: those
who might use it but do not (market-penetration strategy), those who have never used it (new-market segment
strategy), or those who live elsewhere (geographical-expansion strategy). Here is how Starbucks has described its
multipronged approach to growth on its corporate Web site.11
Starbucks purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-
brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-related accesso-
ries and equipment—primarily through its company-operated retail stores. In addition to sales through
our company-operated retail stores, Starbucks sells whole bean coffees through a specialty sales group
and supermarkets. Additionally, Starbucks produces and sells bottled Frappuccino® coffee drinks and a
line of premium ice creams through its joint venture partnerships and offers a line of innovative premium
teas produced by its wholly owned subsidiary, Tazo Tea Company. The Company’s objective is to estab-
lish Starbucks as the most recognized and respected brand in the world.
In targeting new customers, the firm should not lose sight of existing ones. Daimler, maker of Mercedes-Benz,
has developed a balanced approach to capitalize on both the established demand from mature markets in the
European Union, United States, and Japan and the enormous potential offered by fast-growing emerging markets.
As the company’s chairman Dieter Zetsche proclaimed, “You cannot do either/or. You have to maintain your
strength in traditional markets and even expand it.”12
more usage Marketers can try to increase the amount, level, or frequency of consumption. They can
sometimes boost the amount through packaging or product redesign. Larger package sizes increase the amount
of product consumers use at one time.13 Consumers use more of impulse products such as soft drinks and snacks
when the product is made more available.
Ironically, some food firms such as Hershey’s have developed smaller packaging sizes that have actually
increased sales volume through more frequent usage.14 In general, increasing frequency of consumption requires
either (1) identifying additional opportunities to use the brand in the same basic way or (2) identifying completely
new and different ways to use the brand.
Additional Opportunities to Use the Brand A marketing program can communicate the appropriateness
and advantages of using the brand. Pepto-Bismol stomach remedies are in 40 percent of U.S. households, but only
7 percent of people claim to have used them in the previous 12 months. To expand usage and make the brand
more top of mind, a holiday campaign linked it to party festivities and celebrations with the tag line “Eat, Drink,
and Be Covered.” In a somewhat similar vein, on the inside of the front flap of its package, Orbit chewing gum
puts the message, “Eat. Drink. Chew. A Good Clean Feeling.” to reinforce that the brand can be a substitute for
brushing teeth.15
Another opportunity arises when consumers’ perceptions of their usage differs from reality. Consumers may
fail to replace a short-lived product when they should because they overestimate how long it stays fresh or operates
effectively.16 One strategy is to tie the act of replacing the product to a holiday, event, or time of year. Marketers of
household products such as batteries for alarms and filters for vacuum cleaners, furnaces, and air conditioners use
the beginning and end of Daylight Savings Time twice a year as a means to remind consumers.
Another approach might be to provide consumers with (1) better information about when they first used
the product or need to replace it or (2) a gauge of the current level of product performance. Gillette razor
cartridges feature colored stripes that slowly fade with repeated use, signaling the user to move on to the next
cartridge. Marketers for Monroe® shock absorbers and struts launched the clever, fully integrated “Everything
Gets Old. Even Your Shocks.” campaign, which drew comparisons between worn shocks and struts and
familiar consumer items that eventually wear out and need to be replaced such as shoes, socks, tires, and even
bananas!17
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New Ways to Use the Brand The second approach to increasing frequency of consumption is to identify
completely new and different applications. Food product companies have long advertised recipes that use their
branded products in different ways. After discovering that some consumers used Arm & Hammer baking soda as
a refrigerator deodorant, the company launched a heavy promotion campaign focusing on this use and succeeded
in getting half the homes in the United States to adopt it. Next, the company expanded the brand into a variety of
new product categories such as toothpaste, antiperspirant, and laundry detergent.
proteCtInG Market Share
While trying to expand total market size, the dominant firm must actively defend its current business: Boeing
against Airbus, Staples against Office Depot, and Google against Yahoo! and Microsoft.18 How can the leader
do so? The most constructive response is continuous innovation. The front-runner should lead the industry in
developing new products and customer services, distribution effectiveness, and cost cutting. Comprehensive
solutions increase competitive strength and value to customers so they feel appreciative or even privileged to be
a customer as opposed to feeling trapped or taken advantage of.19
ProaCtive marketiNg In satisfying customer needs, we can draw a distinction between responsive
marketing, anticipative marketing, and creative marketing. A responsive marketer finds a stated need and fills
it. An anticipative marketer looks ahead to needs customers may have in the near future. A creative marketer
discovers solutions customers did not ask for but to which they enthusiastically respond. Creative marketers are
proactive market-driving firms, not just market-driven ones.20
Many companies assume their job is simply to adapt to customer needs. They are reactive mostly because they
are overly faithful to the customer-orientation paradigm and fall victim to the “tyranny of the served market.”
Successful companies instead proactively shape the market to their own interests. Instead of trying to be the best
player, they change the rules of the game.21
A company needs two proactive skills: (1) responsive anticipation to see the writing on the wall, as when IBM
changed from a hardware producer to a service business, and (2) creative anticipation to devise innovative solu-
tions. Note that responsive anticipation is performed before a given change, while reactive response happens after
the change takes place. Accenture maintains that 10 consumer trends covering areas like e-commerce, social
media, and a desire to express individuality will yield market opportunities worth more than $2 trillion between
2013 and 2016.22 Proactive companies will reap the most benefit from those shifts.
Proactive companies create new offers to serve unmet—and maybe even unknown—consumer needs. In the
late 1970s, Akio Morita, the Sony founder, was working on a pet project that would revolutionize the way people
listened to music: a portable cassette player he called the Walkman. Engineers at the company insisted there
was little demand for such a product, but Morita refused to part with his vision. By the 20th anniversary of the
Walkman, Sony had sold more than 250 million in nearly 100 different models.23
Proactive companies may redesign relationships within an industry, like Toyota did with its relationship to its
suppliers. Or they may educate and engage customers, as lululemon does with yoga and workouts.24
LULULeMOn While attending yoga classes, Canadian entrepreneur Chip Wilson decided the cotton-
polyester blends most fellow students wore were too uncomfortable. After designing a well-fitting, sweat-resistant black
garment to sell, he also decided to open a yoga studio, and lululemon was born. The company has taken a grassroots
Monroe advertises to
remind consumers to
make sure they do not
forget to change their
shocks.
.
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362 PART 4 | Building STRong BRAndS
approach to growth that creates a strong emotional connection with its customers. Before it opens a store in a new city,
it first identifies influential yoga instructors or other fitness teachers. In exchange for a year’s worth of clothing, these yogi
serve as “ambassadors,” hosting students at lululemon-sponsored classes and product sales events. They also provide
product design advice to the company. The cult-like devotion of lululemon’s customers is evident in their willingness to
pay $92 for a pair of workout pants that might cost only $60 to $70 from Nike or Under Armour. lululemon can sell as
much as $1,800 worth of product per square feet in its approximately 100 stores, three times what established retailers
Abercrombie & Fitch and J.Crew sell. Although the company has encountered some challenges with inventory manage-
ment issues, production snafus, and negative publicity surrounding statements by its founder, it is still looking to expand
beyond yoga-inspired athletic apparel and accessories into similar products in other sports such as running, swimming,
and biking.
Companies need to practice “uncertainty management.” Proactive firms:
• are ready to take risks and make mistakes,
• have a vision of the future and of investing in it,
• have the capabilities to innovate,
• are flexible and non-bureaucratic, and
• have many managers who think proactively.
Companies that are too risk-averse won’t be winners.
DefeNsive marketiNg Even when it does not launch offensives, the market leader must not leave any
major flanks exposed. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less-
threatened areas, and lessen their intensity. A leader would like to do anything it legally and ethically can to reduce
competitors’ ability to launch a new product, secure distribution, and gain consumer awareness, trial, and repeat.25
In any strategy, speed of response can make an important difference to profit.
A dominant firm can use the six defense strategies summarized in Figure 12.2.26 Decisions about which strat-
egy to adopt will depend in part on the company’s resources and goals and its expectations about how competitors
will react.27
• Position defense. Position defense means occupying the most desirable position in consumers’ minds,
making the brand almost impregnable. Procter & Gamble “owns” the key functional benefit in many product
categories, with Tide detergent for cleaning, Crest toothpaste for cavity prevention, and Pampers diapers for
dryness.
• Flank defense. The market leader should erect outposts to protect a weak front or support a possible coun-
terattack. Procter & Gamble brands such as Gain and Cheer laundry detergent and Luvs diapers have played
strategic offensive and defensive roles in support of the Tide and Pampers brands, respectively.
• Preemptive defense. A more aggressive maneuver is to attack first, perhaps with guerrilla action across the
market—hitting one competitor here, another there—and keeping everyone off balance. Another is to achieve
broad market envelopment that signals competitors not to attack.28 Bank of America’s 16,220 ATMs and 5,858
retail branches nationwide provide steep competition to local and regional banks.29 Yet another preemptive
defense is to introduce a stream of new products and announce them in advance, signaling competitors that
they will need to fight to gain market share. If Microsoft announces plans for a new-product development,
ATTACKER
(1)
Position
DEFENDER
(5)
Mobile
(3)
(4)
Preemptive
Counteroffensive
Contraction(6)
(2) Flank
| Fig. 12.2 |
Six Types of Defense
Strategies
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smaller firms may concentrate their development efforts in other directions to avoid head-to-head competi-
tion. Some high-tech firms have been accused of selling “vaporware”—announcing products that miss deliv-
ery dates or are never introduced.30
• Counteroffensive defense. In a counteroffensive, the market leader can meet the attacker frontally and hit
its flank or launch a pincer movement so the attacker will have to pull back to defend itself. Another form of
counteroffensive is the exercise of economic or political clout. The leader may try to crush a competitor by
subsidizing lower prices for a vulnerable product with revenue from its more profitable products, or it may
prematurely announce a product upgrade to prevent customers from buying the competitor’s product. Or
the leader may lobby legislators to take political action to inhibit the competition or initiate appropriate legal
actions. Tech leaders like Apple, Intel, and Microsoft have aggressively defended their brands in court.
• Mobile defense. In mobile defense, the leader stretches its domain over new territories through market
broadening and market diversification. Market broadening shifts the company’s focus from the current prod-
uct to the underlying generic need. Thus, “petroleum” companies such as BP sought to recast themselves as
“energy” companies. This change required them to research the oil, coal, nuclear, hydroelectric, and chemical
industries. Market diversification shifts the company’s focus into unrelated industries. When U.S. tobacco
companies such as Reynolds and Philip Morris acknowledged the growing curbs on cigarette smoking,
instead of defending their market position or looking for cigarette substitutes, they moved quickly into new
industries such as beer, liquor, soft drinks, and frozen foods.
• Contraction defense. Sometimes large companies can no longer defend all their territory. In planned contrac-
tion (also called strategic withdrawal), they give up weaker markets and reassign resources to stronger ones.
Beginning in 2006, Sara Lee sold off products that accounted for a large percentage of its revenues—includ-
ing its strong Hanes hosiery brand and global body care and European detergents businesses. In 2012, it split
its remaining products into two businesses. Hillshire Brands became the new name of the company, which
focused on its core Hillshire Farms packaged meats business in North America, and D.E. Master Blenders
1753 was a spin-off company for its successful European coffee-and-tea business.31
P&G sold Pringles to Kellogg for almost $2.7 billion in an all-cash transaction when it decided it wanted to get
out of the foods business to focus on its core household and consumer products.32 Another company that restruc-
tured its business to improve competitiveness was Kraft.33
KrAft After years of acquisitions, CEO Irene Rosenfeld announced in 2011 that Kraft would split into two busi-
nesses by the end of 2012: A fast-growing global snacks and candy business to include Oreo cookies and Cadbury candy
and a slower-growing North American grocery business with long-terms stalwarts Maxwell House coffee, Planters peanuts,
Kraft cheese, and Jell-O. The rationale was to improve performance and give investors distinctly different choices. The
snacks and candy business was branded as Mondel-ez International and was positioned as a high-growth company with
many opportunities in emerging markets such as China and India. Coined by two employees, Mondel-ez is a mash-up of the
words for “world” and “delicious” in Latin and several other Romance languages. The grocery business retained the Kraft
Foods name, and because it consisted of many category-dominant meat and cheese brands, it was seen as more of a cash
cow for investors interested in consistent dividends. Mondel-ez has ramped up for rapid expansion, while Kraft Foods has
focused on cost-cutting and selective investment behind its power brands.
InCreaSInG Market Share
No wonder competition has turned fierce in so many markets: One share point can be worth tens of millions of
dollars. Gaining increased share does not automatically produce higher profits, however—especially for labor-
intensive service companies that may not experience many economies of scale. Much depends on the company’s
strategy.34
Because the cost of buying higher market share through acquisition may far exceed its revenue value, a com-
pany should consider four factors first:
• The possibility of provoking antitrust action. Frustrated competitors are likely to cry “monopoly” and seek
legal action if a dominant firm makes further inroads. Microsoft and Intel have had to fend off numerous law-
suits and legal challenges around the world as a result of what some feel are inappropriate or illegal business
practices and abuse of market power.
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364 PART 4 | Building STRong BRAndS
• Economic cost. Figure 12.3 shows that profitability might fall with market share gains after some level.
In the illustration, the firm’s optimal market share is 50 percent. The cost of gaining further market share
might exceed the value if holdout customers dislike the company, are loyal to competitors, have unique
needs, or prefer dealing with smaller firms. And the costs of legal work, public relations, and lobbying
rise with market share. Pushing for higher share is less justifiable when there are unattractive market
segments, buyers who want multiple sources of supply, high exit barriers, and few scale or experience
economies. Some market leaders have even increased profitability by selectively decreasing market share
in weaker areas.35
• The danger of pursuing the wrong marketing activities. Companies successfully gaining share typically
outperform competitors in three areas: new-product activity, relative product quality, and marketing expen-
ditures.36 Companies that attempt to increase market share by cutting prices more deeply than competitors
typically don’t achieve significant gains because rivals meet the price cuts or offer other values so buyers don’t
switch.
• The effect of increased market share on actual and perceived quality. Too many customers can put a strain on
the firm’s resources, hurting product value and service delivery. Charlotte-based FairPoint Communications
struggled to integrate the 1.3 million customers it gained in buying Verizon Communications’s New England
franchise. A slow conversion and significant service problems led to customer dissatisfaction, regulator’s
anger, and eventually short-term bankruptcy.37
Other Competitive Strategies
Firms that occupy second, third, and lower ranks in an industry are often called runner-up or trailing firms.
Some, such as PepsiCo, Ford, and Avis, are quite large in their own right. These firms can adopt one of two
postures. They can attack the leader and other competitors in an aggressive bid for further market share as
market challengers, or they can choose to not “rock the boat” as market followers.
Market-ChallenGer StrateGIeS
Many market challengers have gained ground or even overtaken the leader. Toyota today produces more
cars than General Motors, Lowe’s is putting pressure on Home Depot, and AMD has found some success
chipping away at Intel’s market share. Challengers set high aspirations, while market leaders can fall prey
to running business as usual. Challengers can also tap into public perceptions that they are the underdog.38
Now let’s examine the competitive attack strategies available to them.39
So
ur
ce
: B
lo
om
be
rg
v
ia
G
et
ty
Im
ag
es
Kraft split its company
into two to better
focus on fast-growing
categories and
markets, as well as to
adequately support its
solid core of heritage
brands.
Market Share (%)
Optimal Market Share
Pr
ofi
ta
bi
lit
y
25 50 75 1000
| Fig. 12.3 |
The Concept of
Optimal Market
Share
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DefiNiNg the strategiC objeCtive aND oPPoNeNt(s) A market challenger must first define
its strategic objective, which is usually to increase market share. It then must decide whom to attack:
• It can attack the market leader. This is a high-risk but potentially high-payoff strategy and makes good sense
if the leader is not serving the market well. Xerox wrested the copy market from 3M by developing a better
copying process. Later, Canon grabbed a large chunk of Xerox’s market by introducing desk copiers. This
strategy often has the added benefit of distancing the firm from other challengers.
• It can attack firms its own size that are not doing the job and are underfinanced. These firms have aging
products, are charging excessive prices, or are not satisfying customers in other ways.
• It can attack small local and regional firms. Several major banks grew to their present size by gobbling up
smaller regional banks, or “guppies.”
• It can attack the status quo. A challenger might not attack a specific firm as much as an industry as a whole
or a pervasive way of thinking that doesn’t adequately address customer needs. Firms like Jet Blue, Ally Bank,
and Netflix have succeeded by contrasting their services with those of competitors.40
ChoosiNg a geNeral attaCk strategy Given clear opponents and objectives, what attack
options are available? As Figure 12.4 shows, we can distinguish five: frontal, flank, encirclement, bypass, and
guerilla attacks.
• Frontal attack. In a pure frontal attack, the attacker matches its opponent’s product, advertising, price, and
distribution. The principle of force says the side with the greater resources will win. A modified frontal attack,
such as cutting price, can work if the market leader doesn’t retaliate and if the competitor convinces the mar-
ket its product is equal to the leader’s. Helene Curtis is a master at convincing the market that its hair-care
brands—such as Suave and Finesse—are equal in quality but a better value than higher-priced brands.
• Flank attack. A flanking strategy is another name for identifying shifts that cause gaps to develop in the
market, then rushing to fill the gaps. Flanking is particularly attractive to a challenger with fewer resources
and can be more likely to succeed than frontal attacks. Top communications companies such as Verizon,
AT&T, and T-Mobile found themselves losing sales in the specialized but fast-growing prepaid smart-phone
market when smaller carriers such as Boost Mobile, Virgin Mobile, and MetroPCS offered lower prices and
greater selection.41 Another flanking strategy is to serve uncovered market needs. Ariat’s cowboy boots
have challenged long-time market leaders Justin Boots and Tony Lama by making boots that are every bit as
ranch-ready but ergonomically designed to feel as comfortable as a running shoe—a totally new benefit in the
category.42 With a geographic attack, the challenger spots areas where the opponent is underperforming.
• Encirclement attack. Encirclement attempts to capture a wide slice of territory by launching a grand offensive
on several fronts. It makes sense when the challenger commands superior resources. Back when it was pitched
in a heated battle with much bigger rival Microsoft, Sun Microsystems licensed its Java software to hundreds
of companies and thousands of software developers for all sorts of consumer devices. As consumer electronics
began to go digital, Java started appearing in a wide range of gadgets.
• Bypass attack. Bypassing the enemy altogether to attack easier markets instead offers three lines of
approach: diversifying into unrelated products, diversifying into new geographical markets, and leapfrog-
ging into new technologies. In the “cola wars,” Pepsi used a bypass strategy against Coke by (1) rolling out
Aquafina bottled water nationally in 1997 before Coke launched its Dasani brand; (2) purchasing orange
juice giant Tropicana in 1998, when it owned almost twice the market share of Coca-Cola’s Minute Maid;
Strategic
Objective
Market Leader
(3) Encirclement
Attack
(2) Flank Attack (5) Guerrilla
Attacks
(4) Bypass Attack
(1) Frontal
AttackMarket Challenger
| Fig. 12.4 |
General Attack
Strategies
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366 PART 4 | Building STRong BRAndS
and (3) purchasing the Quaker Oats Company, owner of market leader Gatorade sports drink, for $14
billion in 2000.43 Coca-Cola has responded in turn with its own acquisitions. In technological leapfrog-
ging, the challenger patiently researches and develops the next technology, shifting the battleground to its
own territory where it has an advantage. Google used technological leapfrogging to overtake Yahoo! and
become the market leader in search.
• Guerrilla attack. Guerrilla attacks consist of small, intermittent attacks, conventional and unconven-
tional, including selective price cuts, intense promotional blitzes, and occasional legal action, to harass the
opponent and eventually secure permanent footholds. A guerrilla campaign can be expensive, though less
so than a frontal, encirclement, or flank attack, but it typically must be backed by a stronger attack to beat
the opponent.
ChoosiNg a sPeCifiC attaCk strategy Any aspect of the marketing program can serve as the
basis for attack, such as lower-priced or discounted products, new or improved products and services, a wider
variety of offerings, and innovative distribution strategies. A challenger’s success depends on combining several,
more specific strategies to improve its position over time. Once successful, a challenger brand must retain a
challenger mentality even if it becomes a market leader, highlighting the way it does things differently.
Market-Follower StrateGIeS
Theodore Levitt argues that a strategy of product imitation might be as profitable as a strategy of product
innovation.44 In “innovative imitation,” as he calls it, the innovator bears the expense of developing the new prod-
uct, getting it into distribution, and informing and educating the market. The reward for all this work and risk
is normally market leadership. However, another firm can come along and copy or improve on the new product.
Although it may not overtake the leader, the follower can achieve high profits because it did not bear any of the
innovation expense.
Many companies prefer to follow rather than challenge the market leader. Patterns of “conscious parallelism”
are common in capital-intensive, homogeneous-product industries such as steel, fertilizers, and chemicals. The
opportunities for product differentiation and image differentiation are low, service quality is comparable, and price
sensitivity runs high. The mood in these industries is against short-run grabs for market share because that only
provokes retaliation. Instead, most firms present similar offers to buyers, usually by copying the leader. Market
shares show high stability.
That’s not to say market followers lack strategies. They must know how to hold current customers and win a
fair share of new ones. Each follower tries to bring distinctive advantages to its target market—location, services,
financing—while defensively keeping its manufacturing costs low and its product quality and services high. It must
also enter new markets as they open up. “Marketing Insight: The Costs and Benefits of Fast Fashion” describes how
a set of firms is changing the fashion industry, both for better and for worse.
Followers must define a growth path, but one that doesn’t invite competitive retaliation. We distinguish three
broad strategies:
1. Cloner—The cloner emulates the leader’s products, name, and packaging with slight variations. Technology
firms are often accused of being cloners: Similar-sounding knockoffs copy mobile-messaging app maker
WhatsApp’s products, and Berlin-based Rocket Internet has copied competitors’ business models and
attempted to out-execute them.45 Ralston Foods, now owned by ConAgra, sells imitations of name-brand
cereals in look-alike boxes as part of its “Value+Brands” platform. Its Apple Cinnamon Tasteeos (versus
Cheerios), Cocoa Crunchies (versus Cocoa Puffs), and Corn Biscuits (versus Corn Chex) take aim at success-
ful General Mills brands, but with much lower price points.46
2. Imitator—The imitator copies some things from the leader but differentiates on packaging, advertising,
pricing, or location. The leader doesn’t mind as long as the imitator doesn’t attack aggressively. Fernandez
Pujals grew up in Fort Lauderdale, Florida, and took Domino’s pizza home delivery idea to Spain, where he
borrowed $80,000 to open his first store in Madrid. His Telepizza chain now holds about 70 percent of the
Spanish pizza delivery market and operates more than 1,200 stores in Europe and Latin America.47
3. Adapter—The adapter takes the leader’s products and adapts or improves them. The adapter may choose to
sell to different markets, but often it grows into a future challenger, as many Japanese firms have done after
improving products developed elsewhere.
Note that we can contrast these three follower strategies from an illegal and unethical follower strategy.
Counterfeiters duplicate the leader’s product and packages and sell them on the black market or through dis-
reputable dealers. High-tech firms like Apple and luxury brands like Rolex have been plagued by the counterfeiter
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The Costs and Benefits
of Fast Fashion
In the fashion industry, styles and tastes can change quickly, and some
savvy businesses and retailers are developing business models to allow
them to quickly capitalize. Notable among them are Sweden’s Hennes
& Mauritz, or H&M, and Spain’s Inditext with its Zara brand. These
firms can take a new garment or accessory from design to store in a
mere two weeks. Their success is forcing established luxury brands
like Burberry, Chanel, and Saint Tropez to speed up and increase the
frequency of their new product introductions beyond the traditional
fashion-week-driven fall and spring collections.
By sourcing more than half its products from Spain, Portugal, and
Morocco, Indetix pays more in production, but thanks to its tightly inte-
grated supply chain, the company can quickly stock and supply what is
selling and avoid having to discount what is not. Because there is al-
most always something new at appealing price points, shoppers always
have a reason to stop by and check out what has just arrived. H&M has
adopted a similar fast-fashion model that allows it to closely follow and
respond to what is selling in the marketplace.
Both firms generate most of their sales in Europe—four-fifths
for H&M and two-thirds for Zara—so they are furiously moving into
China, Russia, and elsewhere and opening up hundreds of new
stores. But this rapid growth and continual replenishment has both an
environmental and social cost that fast-fashion companies are trying
to address.
The social cost came to light when a tragic 2012 fire in a subcon-
tracted Bangladesh garment factory killed 111 workers. Competition
in the $18 billion fashion industry is fierce, and with a focus on lean
production costs, safety concerns took a backseat. Prodded by labor
rights activists, Western firms finally signed a building and fire safety
agreement that provided greater regulation to improve worker safety.
Another negative by-product of the fast-fashion business model is
the environmental cost of making and disposing of clothing with a lim-
ited shelf life. To deflect some of the criticism, H&M adopted a series of
“Recycle, Resell, or Reuse” programs and activities. Products were made
using fewer, recycled materials, and customer were able to trade in old
clothes for vouchers for new ones. The company also required all contract
suppliers to sign a code of conduct to ensure good working conditions.
Sources: William Mauldin and Suzanne Kapner, “Wal-Mart and Other U.S.
Retailers Commit to Factory Safety in Bangladesh,” Wall Street Journal, July
10, 2013; Katarina Gustafsson, “H&M’s New Love for Old Clothes,” Bloomberg
Businessweek, July 1, 2013; Kyle Stock, “H&M Has Been Slower than Its Fast-
Fashion Rival in Escaping Europe,” Bloomberg Businessweek, June 13, 2013;
Calum Macleod, “H&M, Zara to Sign Bangladesh Factory Safety Accord,” USA
Today, May 13, 2013; Oliver Balch, “H&M: Can Fast Fashion and Sustainability
Ever Really Mix?,” The Guardian. May 3, 2013; Renee Dudley, Arun Devanth, and
Matt Townsend, “The Hidden Cost of Fast Fashion: Worker Safety,” Bloomberg
Businessweek, February 7, 2013; Lucy Siegle, “Is H&M the New Home of Ethical
Fashion?,” The Guardian, April 7, 2012; “Fashion Forward,” The Economist, March
24, 2012; Gerard Cachon and Robert Swinney, “The Value of Fast Fashion: Quick
Response, Enhanced Design, and Strategic Consumer Behavior,” Management
Science 57 (April 2011); Andrew Roberts, “H&M, Zara Fast Fashion Pressures
Luxury to Speed Up,” www.bloomberg.com, September 30, 2010.
marketing
insight
Companies who have
adopted fast fashion
practices emphasize low
cost manufacturing with
quick replenishment
but must ensure that
working conditions and
safety are not sacrificed
in the process.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
problem for years, especially in Asia. Pharmaceutical counterfeits have become an enormous and potentially lethal
$75 billion business. Unregulated, drug fakes have been found to contain traces of chalk, brick dust, paint, and
even pesticides.48
What does a follower earn? Normally, less than the leader. A study of food-processing companies showed
the largest averaging a 16 percent return on investment, the number-two firm, 6 percent, the number-three
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368 PART 4 | Building STRong BRAndS
firm, –1 percent, and the number-four firm, –6 percent. No wonder
Jack Welch, former CEO of GE, told his business units that each must
reach the number-one or -two position in its market or else!
Followership is often not a rewarding path. Some follower firms
have found success, but in another industry. Les Wexner, who runs
Limited Brands and its Victoria’s Secret lingerie retailer, fully embraces
imitation. One month a year, he travels the world looking for ideas he
can borrow from other companies ranging from airlines to consumer
goods makers.49
Popchips has developed a $100 million business in part by
expressly copying the successful marketing formula for vitamin-
water (described in Chapter 10). As vitaminwater did, Popchips
started with a novel and appealing product, converting a Los Angeles
rice-cake plant to produce a new potato chip. Also like vitaminwa-
ter, Popchips then used an aggressive sampling strategy to create
consumer interest and secure distribution in top retailers such as
Safeway and Whole Foods. To generate buzz and broaden appeal,
Popchips brought in celebrities Ashton Kutcher and Katy Perry as
minority investors and marketing spokespeople.50
Market-nICher StrateGIeS
An alternative to being a follower in a large market is to be a leader in
a small market, or niche, as we introduced in Chapter 8. Smaller firms
normally avoid competing with larger firms by targeting small markets
of little or no interest to the larger firms. Over time, those markets can
sometimes end up being sizable in their own right, as Huy Fong Foods
has found.51Popchips adopted an introductory marketing program similar to
vitaminwater using celebrities like Katy Perry and much product
sampling with consumers.
Sriracha hot chili sauce has
grown its sales organically
with little marketing support.
So
ur
ce
: ©
J
oh
n
C
ro
w
e/
A
la
m
y
SrirAchA hOt chiLi SAUce David Tran started Huy Fong Foods in Los Angeles’s
Chinatown in 1980, naming the company after the Taiwanese freighter that brought him to the United States as a ref-
ugee from Vietnam. Based in part on a condiment made in Si Racha, Thailand, Tan’s Sriracha hot chili sauce is known
as the “rooster sauce” for the distinctive rooster (Tan’s astrological sign) on its green-capped squeeze bottle. A unique
combination of locally sourced jalapeño peppers, vinegar, sugar, salt, and garlic created a taste that his packaging
suppliers thought would be too spicy. Tran refused to change the recipe, saying, “Hot sauce must be hot. If you don’t
like it hot, use less. We don’t make mayonnaise here.” Fortunately, many consumers agreed. Huy Fong’s Sriracha
sauce can be bought at Walmart and enjoyed in dishes at Applebee’s restaurants and in street foods in major cities.
The product tastes so good that NASA has supplied it to its astronauts in space to help stave off dulled taste buds. It
has never been advertised, has no Facebook page and no Twitter account, and at one point had not updated its Web
site in years. Because of Sriracha’s popularity, however, Huy Fong has become one of the fastest-growing U.S. food
companies. Success has attracted imitators, but the firm’s revenues continue to grow by at least 20 percent a year.
Firms with low shares of the total market can become highly profitable through smart niching. They know
their target customers so well they can meet their needs better than other firms by offering high value, but they
can also charge a premium price, achieve lower manufacturing costs, and shape a strong corporate culture and
vision.52 The nicher achieves high margin, whereas the mass marketer achieves high volume.
Paul Reed Smith founded PRS Guitars to compete with big rivals Fender and Gibson and supply “the
Stradivarius of guitars.” PRS instruments are carefully constructed of selected mahogany and figured maple,
kiln-dried and sanded five times, followed by eight very thin coats of finish. They cost from $3,000 to
$60,000, but endorsements from top musicians like Carlos Santana and distribution through well-respected
retailers like Rudy’s Music Shop in Manhattan have helped the brand establish a foothold.53
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Nichers have three tasks: creating niches, expanding niches, and protecting niches. The risk is that the niche
might dry up or be attacked. The company is then stuck with highly specialized resources that may not have high-
value alternative uses. Zippo has successfully addressed the problem of a fast-shrinking niche market.54
ZiPPO With smoking on a steady decline, Pennsylvania-based
Zippo Manufacturing found the market for its iconic brass and chrome
“windproof” cigarette lighters shrinking from 18 million units sold in 1998
to 12 million in 2011. With the writing on the wall, the company decided
to broaden its focus to selling “flame,” warmth, and much more, reducing
its reliance on tobacco-related products to 50 percent of revenue by 2010.
Although an earlier attempt to diversify into tape measures, key holders,
and belt buckles in the 1960s and 1970s had diminished in the 1990s and
finally discontinued in 2007, Zippo came close to meeting its new goal. It
introduced a long, slender multipurpose lighter for candles, grills, and fire-
places; launched an Outdoors Line including hand warmers and fire start-
ers sold through Dick’s Sporting Goods, REI, and True Value; and acquired
W.R. Case & Sons Cutlery, a knife maker. Zippo has even launched a cloth-
ing line and men’s and women’s fragrances as a way to become more of a
lifestyle brand. The company still sells its fair share of lighters by promoting
new designs as well as perennial favorites like lighters with Elvis Presley’s
image and the Playboy logo. It now gets 60 percent of its sales outside the
United States, with China the biggest foreign market at 10 percent of sales.
Because niches can weaken, the firm must continually create
new ones. “Marketing Memo: Niche Specialist Roles” outlines some
options. The firm should “stick to its niching,” but not necessarily
to its niche. That is why multiple niching can be preferable to single
niching. With strength in two or more niches, the company increases
its chances for survival.
Firms entering a market should initially aim at a niche rather
than the whole market. The cell phone industry has experienced
phenomenal growth but is now facing fierce competition as the
number of new potential users dwindles.
PRS Guitars has found a
niche with its carefully-
crafted, high-end guitars
coveted by top musicians.
So
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ce
: C
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Sm
ith
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ui
ta
rs
a
nd
M
ar
k
Q
ui
gl
ey
Zippo has expanded its product offerings beyond lighters to sell “flame”
and more.
So
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ce
: Z
ip
po
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C
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370 PART 4 | Building STRong BRAndS
Product Life-Cycle Marketing
Strategies
A company’s positioning and differentiation strategy must change as its product, market, and competitors change
over the product life cycle (PLC). To say a product has a life cycle is to assert four things:
1. Products have a limited life.
2. Product sales pass through distinct stages, each posing different challenges, opportunities, and problems to the seller.
3. Profits rise and fall at different stages of the product life cycle.
4. Products require different marketing, financial, manufacturing, purchasing, and human resource strategies in
each life-cycle stage.
produCt lIFe CYCleS
Most product life cycles are portrayed as bell-shaped curves, typically divided into four stages: introduction,
growth, maturity, and decline55 (see Figure 12.5).
1. Introduction—A period of slow sales growth as the product is introduced in the market. Profits are nonexis-
tent because of the heavy expenses of product introduction.
2. Growth—A period of rapid market acceptance and substantial profit improvement.
3. Maturity—A slowdown in sales growth because the product has achieved acceptance by most potential
buyers. Profits stabilize or decline because of increased competition.
4. Decline—Sales show a downward drift and profits erode.
We can use the PLC concept to analyze a product category (liquor), a product form (white liquor), a product
(vodka), or a brand (Absolut). Not all products exhibit a bell-shaped PLC.56 Three common alternate patterns are
shown in Figure 12.6.
The key idea in successful nichemanship is specialization. Here are some possible niche roles:
• End-user specialist. The firm specializes in one type of end-use customer. For example, a value-added reseller (VAR) customizes computer hardware
and software for specific customer segments and earns a price premium in the process.
• Vertical-level specialist. The firm specializes at some vertical level of the production-distribution value chain. A copper firm may concentrate on producing
raw copper, copper components, or finished copper products.
• Customer-size specialist. The firm concentrates on either small, medium-sized, or large customers. Many nichers serve small customers neglected by
the majors.
• Specific-customer specialist. The firm limits its selling to one or a few customers. Many firms sell their entire output to a single company, such as Walmart
or General Motors.
• Geographic specialist. The firm sells only in a certain locality, region, or area of the world.
• Product or product line specialist. The firm carries or produces only one product line or product. A manufacturer may produce only lenses for micro-
scopes. A retailer may carry only ties.
• Product-feature specialist. The firm specializes in producing a certain type of product or product feature.
• Job-shop specialist. The firm customizes its products for individual customers.
• Quality-price specialist. The firm operates at the low- or high-quality ends of the market. McIntosh Laboratory only makes high-performance luxury audio
systems—its hand-built audio products appeal to audiophiles everywhere.
• Service specialist. The firm offers one or more services not available from other firms. A bank might take loan requests over the phone and hand-deliver
the money to the customer.
• Channel specialist. The firm specializes in serving only one channel of distribution. For example, a soft drink company makes a very large-sized
serving available only at gas stations.
Niche Specialist Rolesmarketing memo
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Figure 12.6(a) shows a growth-slump-maturity pattern, characteristic of small kitchen appliances like bread
makers and toaster ovens. Sales grow rapidly when the product is first introduced and then fall to a “petrified” level
sustained by late adopters buying the product for the first time and early adopters replacing it.
The cycle-recycle pattern in Figure 12.6 (b) often describes the sales of new drugs. The pharmaceutical company
aggressively promotes its new drug, producing the first cycle. Later, sales start declining, and another promotion
push produces a second cycle (usually of smaller magnitude and duration).57
Another common pattern is the scalloped PLC in Figure 12.6 (c). Here, sales pass through a succession of life
cycles based on the discovery of new product characteristics, uses, or users. Sales of nylon showed a classic scal-
loped pattern because of the many new uses—parachutes, hosiery, shirts, carpeting, boat sails, automobile tires—
discovered over time.58
StYle, FaShIon, and Fad lIFe CYCleS
We need to distinguish three special categories of product life cycles: styles, fashions, and fads (Figure 12.7).
A style is a basic and distinctive mode of expression appearing in a field of human endeavor. Homes can be
colonial, ranch, or Cape Cod; clothing is formal, business casual, or sporty; art is realistic, surrealistic, or abstract.
A style can last for generations and go in and out of vogue. A fashion is a currently accepted or popular style in a
given field. Fashions pass through four stages: distinctiveness, emulation, mass fashion, and decline.59
The length of a fashion cycle is hard to predict. One view is that fashions end because they represent a compro-
mise, and consumers start looking for the missing attributes.60 For example, as automobiles become smaller, they
become less comfortable, and then a growing number of buyers start wanting larger cars. Another explanation is
that too many consumers adopt the fashion, discouraging others. Still another is that the length of a fashion cycle
depends on whether the fashion meets a genuine need, is consistent with other trends, satisfies societal norms and
values, and keeps within technological limits as it develops.61
Fads are fashions that come quickly into public view, are adopted with great zeal, peak early, and decline very fast.
Their acceptance cycle is short, and they tend to attract only a limited following searching for excitement or wanting
Profit
Sales
Sa
le
s
an
d
Pr
ofi
ts
($
)
Time
Introduction Growth Maturity Decline
(a) Growth-Slump-Maturity Pattern (b) Cycle-Recycle Pattern (c) Scalloped Pattern
Sa
le
s
Vo
lu
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e
Sa
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s
Vo
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Sa
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Vo
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Time TimeTime
Primary
cycle
Recycle
| Fig. 12.6 |
Common Product Life-Cycle Patterns
| Fig. 12.5 |
Sales and Profit
Life Cycles
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372 PART 4 | Building STRong BRAndS
to distinguish themselves from others. Heelys wheeled shoes were the rage with kids—for a while. Dwindling sales
resulted in a sale to a private equity company for a fraction of what the company was worth at its IPO.62
Fads decline because they don’t normally satisfy a strong need. The marketing winners are those who recognize
fads early and leverage them into products with staying power, as Crocs has tried to do.63
crOcS Crocs’ signature plastic clogs or “boat shoes”—colorful, comfortable, perfect for summer— succeeded
soon after their introduction in Boulder, CO, in 2002. The company’s 2006 IPO was the largest ever in U.S. footwear, raising
$208 million. Its stock peaked a year later when Crocs’ sales reached $847 million. But the recession and consumer
fatigue with the brand were a double whammy that led to a steep drop in sales and drove the stock price down to a
mere $1 in what the CFO now calls a “near-death experience.” By 2011, however, Crocs had rebounded with more than
$1 billion in revenues and growth goals of 15 percent to 20 percent. What happened? The company had diversified into
more than 300 styles of stylish, comfortable boots, loafers, sneakers, and other shoes that helped to reduce its reliance on
clogs to less than 50 percent of sales. It also adopted a multichannel distribution approach to sell wholesale through retail-
ers like Kohl’s and Dick’s Sporting Goods (60 percent of business), as well as directly online (10 percent) and through more
than 500 of its own retail stores (30 percent). International sales now make up more than half its sales, including in emerg-
ing marketing and the growing middle-class markets in Asia and Latin America.
Time Time Time
Style Fashion Fad
Sa
le
s
Sa
le
s
Sa
le
s
| Fig. 12.7 |
Style, Fashion,
and Fad Life
Cycles
With sales fading fast,
Crocs turned around its
fortunes by expanding
its product line,
adopting a multichannel
distribution approach,
and tapping into global
markets.
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: ©
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MarketInG StrateGIeS: IntroduCtIon StaGe
and the pIoneer advantaGe
Because it takes time to roll out a new product, work out technical problems, fill dealer pipelines, and gain
consumer acceptance, sales growth tends to be slow in the introduction stage. Profits are negative or low, and pro-
motional expenditures are at their highest ratio to sales because of the need to (1) inform potential consumers,
(2) induce product trial, and (3) secure distribution in retail outlets.64 Prices tend to be higher because costs are
high, and firms focus on buyers who are the most ready to buy. Consider the challenges Zipcar faced in trying to
establish itself in the hourly car rental market.65
ZiPcAr Car sharing started in Europe as a means to serve those who frequently used public transportation but
still needed a car a few times a month. In the United States, the appeal of Zipcar, the market leader and pioneer in car shar-
ing, has been both environmental and economic. With a $50 membership fee and rates that total less than $100 a day—
including gas, insurance, and parking—a typical family could save $3,000 to $4,000 a year by substituting Zipcar use for
car ownership. The firm estimated that every car it added kept up to 20 private cars off the road. Targeting major cities and
college campuses, offering a wide variety of vehicles, and facing little competition, it grew about 30 percent annually for a
number of years. Rental leader Hertz decided to enter the hourly car rental business in 2012, however, equipping its entire
375,000-vehicle U.S. fleet with devices that let customers use a computer or smart phone to reserve and unlock a rental
car. Unlike Zipcar, Hertz offers one-way rentals and charges no membership or annual fees. With Enterprise also enter-
ing the market at home, Zipcar set its sights overseas, concentrating initially on the United Kingdom and Spain. Needing
resources to capitalize on global opportunities, in January 2013 it agreed to be acquired by Avis Budget, the number-two
rental car company.
Companies that plan to introduce a new product must decide when to do so. To be first can be reward-
ing, but risky and expensive. To come in later makes sense if the firm can bring superior technology, quality, or
brand strength to create a market advantage. We next consider some of the pros and cons of being a pioneer in a
new market.
PioNeeriNg aDvaNtages Studies show that a market pioneer can gain a great advantage.66 Campbell,
Coca-Cola, Hallmark, and Amazon.com developed sustained market dominance. Nineteen of 25 market leaders
in 1923 were still the market leaders 60 years later.67 In a sample of industrial-goods businesses, 66 percent of
pioneers survived at least 10 years versus 48 percent of early followers.68
Zipcar pioneered the
hourly car rental market
in the U.S. but encoun-
tered stiff competition
from established car
rental companies.
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Amazon.com
374 PART 4 | Building STRong BRAndS
What are the sources of the pioneer’s advantage? “Marketing Insight: Understanding Double Jeopardy”
describes one way market leaders can benefit from loyalty due to their size. Early users will recall the pioneer’s
brand name if the product satisfies them. The pioneer’s brand also establishes the attributes the product class
should possess.69 It normally aims at the middle of the market and so captures more users. Customer inertia also
plays a role, and there are producer advantages: economies of scale, technological leadership, patents, ownership of
scarce assets, and the ability to erect other barriers to entry. Pioneers can spend marketing dollars more effectively
and enjoy higher rates of repeat purchases. An alert pioneer can lead indefinitely.
PioNeeriNg DrawbaCks But the pioneering advantage is not inevitable.70 Bowmar (hand calculators),
Apple’s Newton (personal digital assistant), Netscape (Web browser), Reynolds (ballpoint pens), and Osborne
(portable computers) were market pioneers overtaken by later entrants. First movers also have to watch out for the
“second-mover advantage.”
Steven Schnaars studied 28 industries in which imitators surpassed the innovators.71 He found several weak-
nesses among the failing pioneers, including new products that were too crude, were improperly positioned, or
appeared before there was strong demand; product-development costs that exhausted the innovator’s resources;
a lack of resources to compete against entering larger firms; and managerial incompetence or unhealthy compla-
cency. Successful imitators thrived by offering lower prices, continuously improving the product, or using brute
market power to overtake the pioneer.
Peter Golder and Gerald Tellis raise further doubts about the pioneer advantage.72 They distinguish between
an inventor, first to develop patents in a new-product category, a product pioneer, first to develop a working
model, and a market pioneer, first to sell in the new-product category. Including nonsurviving pioneers in their
sample, they conclude that although pioneers may still have an advantage, more market pioneers fail than has been
reported, and more early market leaders (though not pioneers) succeed. Later entrants overtaking market pioneers
through the years included Matsushita over Sony in VCRs, GE over EMI in CAT scan equipment, and Google over
Yahoo! in search.
Follow-up research by Golder and his colleagues of 625 brand leaders in 125 categories from 1921 to 2010
provides further insight:73
• Leading brands are more likely to persist during economic slowdowns and when inflation is high and less
likely to persist during economic expansion and when inflation is low.
• Half the leading brands in the sample lost their leadership after being a leader over periods ranging from 12 to
39 years.
Understanding Double Jeopardy
Double jeopardy is an empirical generalization that has roots in many
areas but was popularized in marketing by the British academic Andrew
Ehrenberg. It boils down to the fact that a small-share brand is penal-
ized twice—it has fewer buyers than a large-share brand, and they buy
less frequently. As a consequence, most of a brand’s market share is
explained by its market penetration and the size of its customer base,
rather than by customers’ repeat purchases.
Implicit in the principle of double jeopardy is the assumption that
brands are substitutable and have target segments in common. It is, in
fact, most often observed with weakly differentiated brands targeting the
same group of people. Exceptions are highly differentiated niche brands
that thrive on small shares and high loyalty and seasonal brands that
offer unique value and tally cluster purchases in short periods of time.
One implication drawn by double jeopardy proponents is that
marketers seeking growth should focus on increasing the size of the
customer base rather than on deepening the loyalty of existing custom-
ers. They see PR efforts, distribution plans, and any means to increase
brand exposure, familiarity, and availability as more important than
persuasive advertising to target switchers or CRM efforts to reward loyal
customers.
Critics of double jeopardy question how inevitable it is and see
other implications for marketers. For example, they view new or
established brands with a new positioning or message as differentiated
enough to avoid double jeopardy’s predicted results.
Sources: John Scriven and Gerald Goodhardt, “The Ehrenberg Legacy,” Journal
of Advertising Research, June 2012, pp. 198–202; Byron Sharp, How Brands
Grow: What Marketers Don’t Know (Melbourne, Australia: Oxford University Press,
2010); Nigel Hollis, “The Jeopardy in Double Jeopardy,” www.millwardbrown.com,
September 2, 2009; Andrew Ehrenberg and Gerald Goodhardt, “Double Jeopardy
Revisited, Again,” Marketing Research, 2002. See also Andrew Ehrenberg:
A Tribute (1926–2010), Special Section, Journal of Advertising Research 52
(June 2012).
marketing
insight
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• The rate of brand leadership persistence has been substantially lower in recent eras than in
earlier eras (e.g., more than 30 years ago).
• Once brand leadership has been lost, it is rarely regained.
• Categories with above-average brand leadership persistence are food and household supplies;
those with below-average rates are durables and clothing.
gaiNiNg a PioNeeriNg aDvaNtage Tellis and Golder also identified five factors
underpinning long-term market leadership: vision of a mass market, persistence, relentless
innovation, financial commitment, and asset leverage.74 Other research has highlighted the role of
genuine product innovation.75 When a pioneer starts a market with a really new product, like the
Segway Human Transporter, surviving can be very challenging. For incremental innovators, like
MP3 players with video capabilities, survival rates are much higher.
Speeding up innovation is essential in an age of shortening product life cycles. Being early has
been shown to pay. One study found that products debuting six months late but on budget earned
an average of 33 percent less profit in their first five years; products that came out on time but
50 percent over budget sacrificed only 4 percent of potential profits.76
Companies should not try to move too fast; they must carefully design and execute
their product-launch marketing. General Motors rushed out its newly designed Malibu
to get a leg up over its Honda, Nissan, and Ford midsize competitors. When all the different versions
were not ready for production at launch, the brand’s momentum stalled.77 One study found Internet
companies that realized benefits from moving fast (1) were first movers in large markets, (2) erected
barriers of entry against competitors, and (3) directly controlled critical elements necessary for starting a
company.78
The pioneer should visualize the product markets it could enter, knowing it cannot enter all of them at
once. Suppose market-segmentation analysis reveals the segments shown in Figure 12.8. The pioneer should
analyze the profit potential of each singly and of all together and decide on a market expansion path. Thus, the
pioneer in Figure 12.8 plans first to enter product market P1M1, then move into a second market (P1M2), then
surprise the competition by developing a second product for the second market (P2M2), then take the second
product back into the first market (P2M1), then launch a third product for the first market (P3M1). If this game
plan works, the pioneer firm will own a good part of the first two segments, serving each with two or three
products.
MarketInG StrateGIeS: Growth StaGe
The growth stage is marked by a rapid climb in sales. Early adopters like the product, and additional consumers
start buying it. New competitors enter, attracted by the opportunities. They introduce new product features and
expand distribution. Prices stabilize or fall slightly, depending on how fast demand increases.
Companies maintain marketing expenditures or raise them slightly to meet competition and continue to
educate the market. Sales rise much faster than marketing expenditures, causing a welcome decline in the
marketing-to-sales ratio. Profits increase as marketing costs are spread over a larger volume, and unit manufactur-
ing costs fall faster than price declines, owing to the producer-learning effect. Firms must watch for a change to a
decelerating rate of growth in order to prepare new strategies.
To sustain rapid market share growth now, the firm:
• improves product quality and adds new features and improved styling.
• adds new models and flanker products (of different sizes, flavors, and so forth) to protect the main product.
• enters new market segments.
• increases its distribution coverage and enters new distribution channels.
• shifts from awareness and trial communications to preference and loyalty communications.
• lowers prices to attract the next layer of price-sensitive buyers.
By spending money on product improvement, promotion, and distribution, the firm can capture a dominant
position. It trades off maximum current profit for high market share and the hope of even greater profits in the
next stage.
Sustaining a competitive advantage in the face of many possible marketplace changes can be challenging but not
impossible, as evidenced by some of the long-time market leaders noted above. Finding new ways to consistently
M1 M2 M3
P3
P2
P1 2
34
5
1
| Fig. 12.8 |
Long-Range Product
Market Expansion
Strategy (Pi = product
i; Mj = market j)
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376 PART 4 | Building STRong BRAndS
improve customer satisfaction can go a long way. Brambles, a leading Australian logistics supplier, designed plastic
bins for its grocery customers that could be filled in farmers’ fields and placed directly on store shelves, saving the
grocers significant labor costs in the process.79
MarketInG StrateGIeS: MaturItY StaGe
At some point, the rate of sales growth will slow, and the product will enter a stage of relative maturity. Most
products are in this stage of the life cycle, which normally lasts longer than the preceding ones.
The maturity stage divides into three phases: growth, stable, and decaying maturity. In the first, sales growth
starts to slow. There are no new distribution channels to fill. New competitive forces emerge. In the second phase,
sales per capita flatten because of market saturation. Most potential consumers have tried the product, and future
sales depend on population growth and replacement demand. In the third phase, decaying maturity, the absolute
level of sales starts to decline, and customers begin switching to other products.
This third phase poses the most challenges. The sales slowdown creates overcapacity in the industry,
which intensifies competition. Weaker competitors withdraw. A few giants dominate—perhaps a quality
leader, a service leader, and a cost leader—and they profit mainly through high volume and lower costs.
Surrounding them is a multitude of market nichers, including market specialists, product specialists, and
customizing firms.
The question is whether to struggle to become one of the big three and achieve profits through high volume and
low cost or to pursue a niching strategy and profit through low volume and high margins. Sometimes the market
will divide into low- and high-end segments, and market shares of firms in the middle will steadily erode. Here’s
how Swedish appliance manufacturer Electrolux has coped with this situation.80
eLectrOLUX AB In 2002, Swedish manufacturer Electrolux faced a rapidly polarizing appliance
market. Low-cost Asian companies such as Haier, LG, and Samsung were applying downward price pressure, while
premium competitors like Bosch, Sub-Zero, and Viking were growing at the expense of the middle-of-the-road brands.
Electrolux’s CEO at the time, Hans Stråberg, decided to escape the middle by rethinking customers’ wants and needs. He
segmented the market according to the lifestyle and purchasing patterns of about 20 different types of consumers to help
target and position the company’s broad portfolio of brands, which includes Electrolux as well as Frigidaire refrigerators,
AEG ovens, and Zanussi coffee machines. Electrolux now successfully markets its steam ovens to health-oriented con-
sumers, for example, and its compact dishwashers, originally for smaller kitchens, to a broader consumer segment that
washes dishes more often. To companies stuck in the middle of a mature market, Stråberg offered this advice: “Start with
consumers and understand what their latent needs are and what problems they experience…then put the puzzle together
yourself to discover what people really want to have. Henry Ford is supposed to have said, ‘If I had asked people what they
really wanted, I would have made faster horses’ or something like that. You need to figure out what people really want,
although they can’t express it.” Under new CEO Keith McLoughlin, Electrolux is concentrating on the top end of the appli-
ance market, selling professional-grade ranges to the ultra-luxury consumer segment. With distribution and local market
presence in more than 150 countries, the company is well positioned for global growth, especially in emerging markets.
Some companies abandon weaker products to concentrate on new and more profitable ones. Yet they may
be ignoring the high potential many mature markets and old products still have. Industries widely thought to be
mature—autos, motorcycles, television, watches, cameras—were proved otherwise by Japanese firms, who found
ways to offer customers new value. Three ways to change the course for a brand are market, product, and market-
ing program modifications.
market moDifiCatioN A company might try to expand the market for its mature brand by working with
the two factors that make up sales volume, number of brand users and usage rate per customer, as in Table 12.1, but
competitors may match this strategy.
ProDuCt moDifiCatioN Managers also try to stimulate sales by improving quality, features, or style.
Quality improvement increases functional performance by launching a “new and improved” product. Feature
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improvement adds size, weight, materials, supplements, and accessories that expand the product’s performance,
versatility, safety, or convenience. Style improvement increases the product’s esthetic appeal.
Any of these improvements can attract consumer attention. In the highly competitive digital photography
space, Shutterfly has grown revenue to $600 million in annual sales by converting customers’ digital images to tan-
gible items: photo books, calendars, greeting cards, wedding invitations, wall decals, and more.81
The paper industry is also coping with the challenges of the digital era. As long as some consumers prefer to
read, store, or share hard-copy documents, the industry recognizes it must also provide as environmentally sound
a solution as possible. Suppliers have worked to develop a more environmentally friendly supply chain from seed-
lings and reforestation, adopt greener pulp and paper production, recycle, and reduce their carbon footprint.82
Such efforts are crucial for success and even survival. Due to the rise of e-mail, online bill payments, and other
digital developments, leading envelope maker National Envelope declared Chapter 11 bankruptcy twice from
2011 to 2013 as a result of dwindling sales, while leading postage meter supplier Pitney Bowes expanded its digital
operations.83
marketiNg Program moDifiCatioN Finally, brand managers might also try to stimulate sales by
modifying non-product elements—price, distribution, and communications in particular—as we will review in
later chapters. They should assess the likely success of any changes in terms of their effects on new and existing
customers.
MarketInG StrateGIeS: deClIne StaGe
Sales decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased
domestic and foreign competition. All can lead to overcapacity, increased price cutting, and profit erosion. The
decline might be slow, as for sewing machines and newspapers, or rapid, as it was for 5.25 floppy disks and eight-
track cartridges. Sales may plunge to zero or petrify at a low level. These structural changes are different from
a short-term decline resulting from a marketing crisis of some sort. “Marketing Memo: Managing a Marketing
Crisis” describes strategies for a brand in temporary trouble.
As sales and profits decline, some firms withdraw. Those remaining may reduce the number of products they
offer, exiting smaller segments and weaker trade channels, cutting marketing budgets, and reducing prices further.
Unless strong reasons for retention exist, carrying a weak product is often very costly. Encyclopædia Britannica
ceased production of its iconic bound sets of encyclopedias once consumers felt they could get adequate content
elsewhere for much less or free. The company rebounded by focusing on the online educational market. Valuing
table 12.1 Alternate Ways to Increase Sales Volume
Expand the Number of Users Increase the Usage Rates among Users
• Convert nonusers. The key to the growth of
air freight service was the constant search for new
users to whom air carriers could demonstrate the
benefits of using air freight rather than ground
transportation.
• Enter new market segments. When Goodyear
decided to sell its tires in Walmart, Sears, and
Discount Tire, it immediately boosted its market
share.
• Attract competitors’ customers. Marketers
of Puffs facial tissues are always wooing Kleenex
customers.
• Have consumers use the product on more
occasions. Serve Campbell’s soup for a snack.
Use Heinz vinegar to clean windows.
• Have consumers use more of the product on each
occasion. Drink a larger glass of orange juice.
• Have consumers use the product in new ways.
Use Tums antacid as a calcium supplement.
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Marketing managers must assume a brand crisis will someday arise. Chick-fil-A, BP, Domino’s, and Toyota have all experienced damaging and even potentially
crippling brand crises. Bank of America, JPMorgan, AIG, and other financial services firms have been rocked by scandals that significantly eroded inves-
tor trust. Repercussions include (1) lost sales, (2) reduced effectiveness of marketing activities, (3) increased sensitivity to rivals’ marketing activities, and
(4) reduced impact of the firm’s marketing activities on competing brands.
In general, the stronger the brand equity and corporate image—especially credibility and trustworthiness—the more likely the firm can weather the storm.
Careful preparation and a well-managed crisis management program are also critical, however. As Johnson & Johnson’s legendary and nearly flawless handling
of the Tylenol product-tampering incident taught marketers everywhere, consumers must see the firm’s response as both swift and sincere. They must feel
an immediate sense that the company truly cares. Listening is not enough.
The longer the firm takes to respond, the more likely consumers can
form negative impressions from unfavorable media coverage or word of
mouth. Perhaps worse, they may find they don’t like the brand after all and
permanently switch. Getting in front of a problem with PR, and perhaps
even ads, can help avoid those problems.
A classic example is Perrier—the one-time brand leader in the bottled
water category. In 1994, Perrier was forced to halt production worldwide
and recall all existing product when traces of benzene, a known carcinogen,
were found in excessive quantities in its bottled water. Over the next weeks
it offered several explanations, creating confusion and skepticism. Perhaps
more damaging, the product was off shelves for more than three months.
Despite an expensive relaunch featuring ads and promotions, the brand
struggled to regain lost market share, and a full year later sales were less
than half what they had been. With its key “purity” association tarnished,
Perrier had no other compelling points-of-difference. Consumers and re-
tailers had found satisfactory substitutes, and the brand never recovered.
Eventually it was taken over by Nestlé SA.
The more sincere the firm’s response—ideally a public acknowledg-
ment of the impact on consumers and willingness to take necessary
steps—the less likely consumers will form negative attributions. When
shards of glass were found in some jars of its baby food, Gerber tried to
reassure the public there were no problems in its manufacturing plants but
adamantly refused to withdraw products from stores. After market share
slumped from 66 percent to 52 percent within a couple of months, one
company official admitted, “Not pulling our baby food off the shelf gave the
appearance that we aren’t a caring company.”
If a problem exists, consumers need to know without a shadow of a
doubt that the company has found the proper solution. One of the keys to
Tylenol’s recovery was J&J’s introduction of triple tamper-proof packaging,
successfully eliminating consumer worry that the product could ever be
tampered with again.
Sources: Norman Klein and Stephen A. Greyser, “The Perrier Recall: A Source of Trouble,” Harvard Business School Case #9-590-104 and “The Perrier Relaunch,” Harvard
Business School Case #9-590-130; Harald Van Heerde, Kristiaan Helsen, and Marnik G. Dekimpe, “The Impact of a Product-Harm Crisis on Marketing Effectiveness,”
Marketing Science 26 (March–April 2007), pp. 230–45; Michelle L. Roehm and Alice M. Tybout, “When Will a Brand Scandal Spill Over and How Should Competitors
Respond?” Journal of Marketing Research 43 (August 2006), pp. 366–73; Michelle L. Roehm and Michael K. Brady, “Consumer Responses to Performance Failures
by High Equity Brands,” Journal of Consumer Research 34 (December 2007), pp. 537–45; Alice M. Tybout and Michelle Roehm, “Let the Response Fit the Scandal,”
Harvard Business Review, December 2009, pp. 82–88; Andrew Pierce, “Managing Reputation to Rebuild Battered Brands, Marketing News, March 15, 2009, p. 19; Kevin
O’Donnell, “In a Crisis Actions Matter,” Marketing News, April 15, 2009, p. 22; Anne Marie Kelly, “Has Toyota’s Image Recovered from the Brand’s Recall Crisis?,” Forbes,
March 5, 2012; Mark Guarino, “Chick-fil-A: Will the Controversy Hurt Chain’s Expansion Plans?,” Christian Science Monitor, August 3, 2012; Mark McNeilly, “5 Steps to
Handling Your Next Brand Crisis,” Fast Company, August 15, 2012; Kathleen Cleeren, Harald J. van Heerde, and Marnik G. Dekimpe, “Rising from the Ashes: How Brands
and Categories Can Overcome Product-Harm Crises,” Journal of Marketing 77 (March 2013), pp. 58–77.
Managing a Marketing Crisismarketing memo
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By mishandling a brand crisis, Perrier lost market share which it never
recovered.
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the company’s long-standing mission to bring expert knowledge to the general public, more than half of U.S. stu-
dents and teachers have access to some Britannica content.84
elimiNatiNg weak ProDuCts Besides being unprofitable, weak products consume a disproportionate
amount of management’s time, require frequent price and inventory adjustments, incur expensive setup for what
are usually short production runs, draw advertising and sales force attention better used to make healthy products
more profitable, and cast a negative shadow on company image. Maintaining them also delays the aggressive
search for replacement products, creating a lopsided product mix long on yesterday’s breadwinners and short on
tomorrow’s.
Recognizing these drawbacks, General Motors decided to drop the floundering Oldsmobile and Pontiac lines.85
Unfortunately, most companies have not developed a policy for handling aging products. The first task is to
establish a system for identifying them. Many companies appoint a product-review committee with representatives
from marketing, R&D, manufacturing, and finance who, based on all available information, make a recommenda-
tion for each product—leave it alone, modify its marketing strategy, or drop it.86
Some firms abandon declining markets earlier than others. Much depends on the height of exit barriers in the
industry. The lower the barriers, the easier for firms to leave the industry, and the more tempting for the remaining
firms to stay and attract the withdrawing firms’ customers. Procter & Gamble stayed in the declining liquid-soap
business and improved its profits as others withdrew.
The appropriate strategy also depends on the industry’s relative attractiveness and the company’s competi-
tive strength in it. A company in an unattractive industry that possesses competitive strength should consider
shrinking selectively. A company in an attractive industry that has competitive strength should consider
strengthening its investment. Companies that successfully restage or rejuvenate a mature product often do so by
adding value to it.
harvestiNg aND DivestiNg Strategies for harvesting and for divesting are quite different. Harvesting
calls for gradually reducing a product or business’s costs while trying to maintain sales. The first step is to cut
R&D costs and plant and equipment investment. The company might also reduce product quality, sales force size,
marginal services, and advertising expenditures, ideally without letting customers, competitors, and employees
know what is happening. Harvesting is difficult to execute, yet many mature products warrant this strategy. And it
can substantially increase current cash flow.87
When a company decides to divest a product with strong distribution and residual goodwill, it can probably sell
it to another firm. Some firms specialize in acquiring and revitalizing “orphan” or “ghost” brands that larger firms
want to divest or that have encountered bankruptcy, such as Linens n’ Things, Folgers and Brim coffee, Nuprin
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Despite its history with
one-time popular models
like the GTO, General
Motors chose to cease
production of the
floundering Pontiac
product line.
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380 PART 4 | Building STRong BRAndS
pain reliever, and Salon Selective shampoos.88 These firms attempt to capitalize on the residue of awareness in the
market to develop a brand revitalization strategy. Reserve Brands bought Eagle Snacks in part because research
showed 6 of 10 adults remembered the brand, leading Reserve’s CEO to observe, “It would take $300 million to
$500 million to recreate that brand awareness today.”89
If the company can’t find any buyers, it must decide whether to liquidate the brand quickly or slowly. It must
also decide how much inventory and service to maintain for past customers.
evIdenCe For the produCt lIFe-CYCle ConCept
Table 12.2 summarizes the characteristics, marketing objectives, and marketing strategies of the four stages of the
product life cycle. The PLC concept helps marketers interpret product and market dynamics, conduct planning
and control, and do forecasting. Another study by Golder and Tellis of 30 product categories unearthed a number
of interesting findings about the PLC:90
• New consumer durables show a distinct takeoff, after which sales increase by roughly 45 percent a year, but
they also show a distinct slowdown, when sales decline by roughly 15 percent a year.
• Slowdown occurs at 34 percent penetration on average, well before most households own a new product.
table 12.2 Summary of Product Life-Cycle Characteristics, Objectives, and Strategies
Introduction Growth Maturity Decline
Characteristics
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
Marketing
Objectives
Create product
awareness and trial
Maximize market share Maximize profit while defending
market share
Reduce expenditure
and milk the brand
Strategies
Product Offer a basic product Offer product extensions,
service, warranty
Diversify brands and items
models
Phase out weak products
Price Charge cost-plus Price to penetrate
market
Price to match or best
competitors’
Cut price
Distribution Build selective distribution Build intensive
distribution
Build more intensive distribution Go selective: phase out
unprofitable outlets
Communications Build product awareness
and trial among early
adopters and dealers
Build awareness and
interest in the mass
market
Stress brand differences
and benefits and encourage brand
switching
Reduce to minimal level
needed to retain hard-core
loyals
Sources: Chester R. Wasson, Dynamic Competitive Strategy and Product Life Cycles (Austin, TX: Austin Press, 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).
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• The growth stage lasts a little more than eight years and does not seem to shorten over time.
• Informational cascades exist, meaning people are more likely to adopt over time if others already have, instead
of making careful product evaluations. One implication is that product categories with large sales increases at
takeoff tend to have larger sales declines at slowdown.
CrItIque oF the produCt lIFe-CYCle ConCept
PLC theory has its share of critics, who claim life-cycle patterns are too variable in shape and duration to be gen-
eralized and that marketers can seldom tell what stage their product is in. A product may appear mature when it
has actually reached a plateau prior to another upsurge. Critics also charge that, rather than an inevitable course,
the PLC pattern is the self-fulfilling result of marketing strategies and that skillful marketing can in fact lead to
continued growth.91
Market evolutIon
Because the PLC focuses on what’s happening to a particular product or brand rather than the overall market,
it yields a product-oriented rather than a market-oriented picture. Firms also need to visualize a market’s
evolutionary path as it is affected by new needs, competitors, technology, channels, and other developments and
change product and brand positioning to keep pace.92 Like products, markets evolve through four stages: emer-
gence, growth, maturity, and decline. Consider the evolution of the paper towel market.
PAPer tOweLS Homemakers originally used cotton and linen dishcloths and towels in their kitchens.
Then a paper company looking for new markets developed paper towels, crystallizing a latent market that other
manufacturers entered. The number of brands grew and created market fragmentation. Industry overcapacity led
manufacturers to search for new features. One manufacturer, hearing consumers complain that paper towels were not
absorbent, introduced “absorbent” towels and increased its market share. Competitors produced their own versions of
absorbent paper towels, and the market fragmented again. One manufacturer introduced a “superstrength” towel that
was soon copied. Another introduced a “lint-free” towel, subsequently copied. A later innovation was wipes containing a
cleaning agent (like Clorox Disinfecting Wipes) that are often surface-specific (for wood, metal, or stone). Thus, driven by
innovation and competition, paper towels evolved from a single product to one with various absorbencies, strengths, and
applications.
Marketing in a Slow-Growth
Economy
Given economic cycles, there will always be tough times, such as the recession of 2008–2009 and the slow recov-
ery that has followed. Despite reduced funding for marketing programs and intense pressure to justify them as
cost effective, some marketers have survived—or even thrived—in tough economic times. Here are five guide-
lines for improving the odds for marketing success in a slow-growth economy.93
explore the upSIde oF InCreaSInG InveStMent
Forty years of evidence suggests those willing to invest during a recession have, on average, improved their for-
tunes more than those that cut back.94 Marketers should consider the potential upside of increasing investment to
exploit a marketplace advantage like an appealing new product, a weakened rival, or a neglected target market to
develop. Here are two companies that did.
• General Mills increased marketing expenditures for the 2009 fiscal year by 16 percent, increased revenues by
8 percent to $14.7 billion, and increased operating profit by 4 percent. As CEO Ken Powell explained, “In an
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382 PART 4 | Building STRong BRAndS
environment where you have consumers going to the grocery store more often and thinking more about meals
at home, we think that is a great environment for brand building, to remind consumers about our products.”95
• UK supermarket giant Sainsbury launched an advertising and point-of-sale campaign called “Feed Your
Family for a Fiver” that played off its corporate slogan, “Try Something New Today,” to encourage shoppers to
try new recipes that would feed families for only £5 (or $9).
Get CloSer to CuStoMerS
Consumers with leveling incomes may change what they want and where and how they shop. A downturn or
slow-growth period is an opportunity to learn even more about what consumers are thinking, feeling, and doing,
especially the loyal base that yields so much profitability.96
Firms should characterize any changes as temporary rather than permanent shifts.97 In explaining the need to
look forward, Eaton CEO Alex Cutler noted, “It is a time when businesses shouldn’t be assuming that the future
will be like the past. And I mean that in virtually every dimension whether it is economic growth, value proposi-
tions, or the level of government regulation and involvement.”98
A recent Booz & Company survey of 1,000 U.S. households found 43 percent were eating at home more and
25 percent were cutting spending on hobbies and sports activities; respondents said they would likely continue
to do so.99 Spending has shifted in many ways, and the potential value and profitability of some customers may
change. As one retail analyst commented, “Moms who used to buy every member of the family their own brand of
shampoo are buying one big cheap one.”100
revIew BudGet alloCatIonS
Slowed growth provides an opportunity for marketers to review their spending, opening promising new options
and eliminating sacred cows if they don’t yield results. It can be a good time to experiment. In London, T-Mobile
created spontaneous “happenings” to convey its brand positioning that “Life’s for Sharing” and generate massive
publicity. Its “Dance” video, featuring 400 dancers getting subway riders to dance, was viewed millions of times
on YouTube.101
Firms as diverse as Century 21 realtors and Red Robin gourmet burgers have increased online marketing
activities.102 Dentists are turning to marketing, communicating with patients via e-mail newsletters, calling to set
up appointments, and sending Twitter messages about new products or services.103
put Forth the MoSt CoMpellInG value propoSItIon
Focusing heavily on price reductions and discounts can harm long-term brand equity and price integrity.
Marketers should increase—and clearly communicate—their brands’ value, conveying all the financial, logistical,
and psychological benefits.104 GE changed its ad messages for the $3,500 Profile washer-and-dryer set during the
In a slow growth
economy, many dentists
have embraced market-
ing to better connect
with their patients.
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downturn to emphasize its practicality—it optimizes the use of soap and water per load and is gentle on clothes,
extending their life.105
Marketers should ensure pricing has not crept up unduly over time.106 Procter & Gamble adopted a “surgi-
cal” approach during the recession, reducing prices in some categories while communicating about innova-
tion and value to support premium prices in others. Ads for Bounty claimed it was more absorbent than a
“bargain brand”; ads for Olay Professional Pro-X’s Intensive Wrinkle Protocol called it as effective as prescription
“at half the price.”107
Discounting successful brands is not a good option because it tells the market two things: your
prices were too high before, and your products won’t be worth the price once the discounts are gone.
Appealing to frugal customers with a new brand at lower prices avoids alienating those still willing to pay for
higher-priced brands.
FIne-tune Brand and produCt oFFerInGS
Marketers can review product portfolios and brand architecture to confirm that brands and sub-brands are
clearly differentiated, targeted, and supported based on their prospects. Luxury brands can benefit from lower-
priced brands or sub-brands in their portfolios. Armani is an example.108
ArMAni Armani differentiates its product line into three tiers distinct in style, luxury, customization, and price.
In the most expensive, Tier I, are Giorgio Armani and Giorgio Armani Privé, custom-made couture products selling for
thousands of dollars. In Tier II are Emporio Armani—young, modern, more affordable styles—and Armani jeans. In lower-
priced Tier III are youthful and street-savvy versions, AIX Armani Exchange, sold exclusively at 268 retail locations. Each
extension lives up to the Armani brand’s core promise without diluting the parent’s image. But clear differentiation minimizes
consumer confusion and brand cannibalization. During slow growth, the lower end picks up the slack and helps maintain
profitability. In 2011, the Giorgio Armani line accounted for 32 percent of total sales, Emporio Armani for 27 percent, and
Armani Exchange for 14 percent.
Brands and sub-brands targeting the lower end of the socioeconomic spectrum may be particularly important
during slow growth. Value-driven companies like McDonald’s, Walmart, Costco, Aldi, Dell, E*TRADE, Southwest
Airlines, and IKEA may benefit most. Spam, the oft-maligned can of spiced ham and pork, found sales soaring
during the recession.109
Slow times also are an opportunity to prune products with diminished prospects. In the post-9/11 recession,
Procter & Gamble divested stagnant brands including Comet cleanser, Folgers coffee, Jif peanut butter, and Crisco
oil and shortening to concentrate on higher-growth opportunities.
Armani’s three price
tiers within its product
lines helps the company
survive and prosper in
good and bad times.
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384 PART 4 | Building STRong BRAndS
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional Assisted-graded writing questions.
Marketing Debate
Do Brands Have Finite Lives?
Often, after a brand begins to slip in the marketplace or
disappears altogether, commentators observe, “All brands
have their day,” implying brands have a finite life and cannot
be expected to be leaders forever. Other experts contend
brands can live forever and that their long-term success
depends on marketers’ skill and insight.
Take a position: Brands cannot be expected to last
forever versus There is no reason for a brand to ever
become obsolete.
Applications
Marketing Discussion:
Industry Roles
Pick an industry. Classify firms according to the four dif-
ferent roles they might play: leader, challenger, follower, and
nicher. How would you characterize the nature of compe-
tition? Do the firms follow the principles described in this
chapter?
7. Technologies, product forms, and brands exhibit life
cycles with distinct stages, usually introduction, growth,
maturity, and decline. Most products today are in the
maturity stage.
8. The introduction stage is marked by slow growth
and minimal profits. If successful, the product enters
a growth stage marked by rapid sales growth and
increasing profits. In the maturity stage, sales growth
slows and profits stabilize. Finally, the product enters
a decline stage. The company’s task is to identify
truly weak products and phase them out with mini-
mal impact on company profits, employees, and
customers.
9. Like products, markets evolve through stages: emer-
gence, growth, maturity, and decline.
10. In a slow-growth economy, marketers must explore the
upside of increasing investments, get closer to cus-
tomers, review budget allocations, put forth the most
compelling value proposition, and fine-tune brand and
product offerings.
Summary
1. Growing the core or seeking organic growth—focusing
on opportunities with existing products and markets—is
often a prudent way to increase sales and profits.
2. A market leader has the largest market share in the rel-
evant product market. To remain dominant, it looks to
expand total demand and protect and perhaps increase
its current share.
3. A market challenger attacks the market leader and other
competitors in an aggressive bid for more market share.
There are five types of general attack and specific attack
strategies.
4. A market follower is a runner-up firm willing to main-
tain its market share and not rock the boat. It can be a
cloner, imitator, or adapter.
5. A market nicher serves small market segments ignored
by larger firms. The key is specialization, which can
command a premium price in the process.
6. Companies should maintain a good balance of con-
sumer and competitor monitoring and not overly focus
on competitors.
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MP3 player, the first Blu-ray disc player, and the first
Smartwatch.
Samsung’s success has been driven not only by
successful product innovation, but also by aggressive
brand building. The company has spent billions of dollars
in marketing over the past decade, including sponsor-
ing the Olympics since 1998 and running several global
ad campaigns themed “Imagine,” “Quietly Brilliant,” and
“Men Are Idiots,” all of which included brand messages
such as “technology,” “design,” and “human sensation.”
In 2005, Samsung surpassed Sony in the Interbrand
ranking for the first time, and it continues to outperform
Sony today.
Samsung faces competitors in several different
industries, including Google and Apple. However, the
company is unique because, unlike rival firms, it has
become a global leader in making both the components
for electronics products and the actual devices sold to
consumers. It controls virtually everything in the smart
phone supply chain, from the chips to the screen, while
Apple has to outsource these products. As a result,
Samsung can keep costs low, create many products for
many needs, make design changes quickly, and intro-
duce new products at an unusually fast pace. The com-
pany recently passed Apple as the number-one player in
smart phones.
With record sales of $327 billion in 2013 and more
than 275,000 employees worldwide, Samsung continues
to work toward its goal of earning $400 billion in revenue
by the year 2020.
Questions
1. What are some of Samsung’s greatest competitive
strengths?
2. Samsung’s goal of earning $400 billion in sales by
2020 would bring it to the same level as Walmart.
Is this a feasible goal? Why or why not?
Sources: Moon Ihlwan, “Samsung Is Having a Sony Moment,” BusinessWeek, July 30, 2007,
p. 38; Martin Fackler, “Raising the Bar at Samsung,” New York Times, April 25, 2006; “Brand
New,” Economist, January 15, 2005, pp. 10–11; Patricia O’Connell, “Samsung’s Goal: Be Like
BMW,” BusinessWeek, August 1, 2005; Heidi Brown and Justin Doeble, “Samsung’s Next Act,”
Forbes, July 26, 2004; John Quelch and Anna Harrington, “Samsung Electronics Company: Global
Marketing Operations,” Harvard Business School, January 16, 2008; Evan Ramstad, “Samsung’s
Swelling Size Brings New Challenges,” Wall Street Journal, November 11, 2009; “Looking Good?
LG v. Samsung,” Economist, January 24, 2009; Haydn Shaughnessy, “What Makes Samsung Such
an Innovative Company,” Forbes, March 7, 2013; Zach Epstein, “Samsung Smashes Apple as
Smartphone Explosion Continues in Q2,” BGR.org, July 26, 2013; Darrell Etherington, “Samsung
Goes First, Google Experiments and Apple Refines,” Techcrunch.com, October 9, 2013; Chuck
Jones, “Apple vs. Samsung: Who Could Win the Smartphone War?,” Forbes, August 20, 2013;
Ashraf Eassa, “Apple Has a Problem,” The Motley Fool, September 27, 2013; Tim Worstall, “Why
Samsung Beats Apple or Perhaps Vice Versa,” Forbes, September 9, 2013; Samsung.com.
Marketing Excellence
>> Samsung
Korean consumer electronics giant Samsung has made
a remarkable transformation since its founding in 1938.
Originally created as an exporter of dried Korean fish,
vegetables, and fruit, the company evolved into a pro-
vider of value-priced commodity products during the
1970s and 1980s that original equipment manufacturers
(OEMs) sold under their own brands. When Samsung’s
founder passed away in 1987, his son Kun-Hee Lee
succeeded him and restructured the company with
the goal of becoming one of the world’s top electronic
companies.
Samsung initially focused on volume and market
domination rather than profitability. During the Asian
financial crisis of the late 1990s, other Korean chaebols
or conglomerates collapsed beneath a mountain of debt,
but Samsung took a different approach. The company
cut costs and refocused its vision on product quality,
complete customer satisfaction, and manufacturing flex-
ibility. This revolutionary strategy allowed its consumer
electronic products to go from project phase to store
shelves within six months. Samsung invested heavily
in innovation, and many of its products—from semi-
conductors to LCD screens—gained significant market
share and became industry leaders in their respective
categories. The company also focused intently on its
memory-chip business, which established an impor-
tant cash cow and made it the largest chipmaker
in the world.
Samsung continued to pour money into R&D during
the 2000s, budgeting $40 billion for 2005–2010 alone.
The company made innovation one of its highest priorities
and emphasized its importance through extensive train-
ing and recruiting. As a result, it introduced a wide range
of electronic products under its strong brand umbrella.
Samsung also partnered with longtime market leader
Sony to create a $2 billion state-of-the-art LCD factory in
South Korea and signed a milestone agreement to share
24,000 basic patents for components and production
processes.
Today, Samsung is a global marketer of premium-
priced, Samsung-branded consumer electronics such
as smart phones, flat-screen TVs, digital cameras,
batteries, digital appliances, and semiconductors. The
company’s high-end smart phones and cell phones
are now its growth engines, leading to a steady stream
of innovations including the first cell phone with an
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Techcrunch.com
Samsung.com
386 PART 4 | Building STRong BRAndS
and storage facilities to better serve its key markets
worldwide. SABIC has established technology centers
that serve as satellite research and development units.
Recently, it has expanded its business into China with the
building of new petrochemical plants.
The feedstock (raw material) used in the petrochemi-
cal industry has historically been a source of competitive
advantage for SABIC. The latter has enjoyed low-cost
gas feedstock, such as methane, ethane, propane, bu-
tane, light naphtha, and other natural gas liquids from
ARAMCO, a prominent Saudi oil company. It has also
benefited, and continues to do so, from land leased from
the Saudi government at no cost. However, there is a
growing gas shortage in the Gulf region, a fact that may
inevitably cut into SABIC’s margins and reduce its overall
cost advantage.
Although each business unit has adopted its own
business strategy, SABIC pursues a cost-leadership
strategy. Exceptionally, SABIC has not been successful in
espousing a cost-leadership strategy for the metals busi-
ness unit. Hence, the company focuses on the quality
of its steel products and the adoption of a differentiation
strategy. Historically speaking, SABIC was able to make it
to the global arena thanks to its cost-leadership strategy.
However, due to keen competition in recent years, SABIC
has begun shifting to differentiation. Regarding its fertil-
izers, as SABIC provides for mainly Saudi farmers who
benefit from government subsidies, the company adopts
a focused cost-leadership strategy.
At present, with strong competition from other global
petrochemical companies, other factors have become
an absolute must for success in this industry. To do
so, SABIC has established a state-of-the-art industrial
complex for research and development in Riyadh, Saudi
Arabia. The complex consists of research and technol-
ogy innovation-related activities and services destined to
enhance SABIC’s capabilities. This industrial complex has
also allowed SABIC to reach a competitive advantage by
maximizing product quality for its customers. For growth
prospects, SABIC is aware that it can no longer solely rely
on its abundant feedstock. Also, innovation has turned
out to be a key success factor. The company banks on
the capability of transforming feedstock into solutions for
its customers.
Recently, ARAMCO and a few other key petrochemi-
cal players, such as Dow Chemical Co., have begun the
process of building petrochemical plants in Saudi Arabia.
This increased competition in the raw materials industry
may result in SABIC further limiting the cost advantages it
has had for decades.
Marketing Excellence
>> SABIC
Saudi Basic Industries Corporation (SABIC) is a
petrochemical company headquartered in Riyadh, Saudi
Arabia. It was set up in 1976 by the Saudi government
to add value to the country’s natural resources. The in-
dustrial model consisted of capturing crude oil-related
gases and to delivering them as raw material to manu-
facture various industrial commodities. A chain of basic
industries were located next to these natural resources
to contribute to downstream industrial diversification in
Saudi Arabia. Throughout the 1980s, SABIC was head-
quartered in Al-Jubail city. The latter consequently wit-
nessed an intense and empowering transformation from
a small fishing village on the Arabian Sea into a modern
industrial hub. While SABIC built the basic industries, the
Royal Commission put in place the necessary infrastruc-
ture. SABIC is majority owned by the Saudi government
(70 percent) along with private investors from Saudi and
other GCC countries (30 percent).
SABIC is the fourth largest petrochemical company
in the world, based on turnover. The industry leader is
the German BASF, followed by the U.S. Dow and the
Dutch LyondellBasell. SABIC is the largest company in
the Middle East with a market capitalization of $94.4
billion (2014). SABIC’s total assets were valued at $33
billion and sales reached $50.4 billion in May, 2014. The
company employs 40,000 employees in 45 countries.
It has accumulated 9,000 patent portfolio filings. SABIC
is the world leader in the production of MTBE, ethylene
glycol, and fertilizers, and the second largest producer of
methanol (2013).
SABIC consists of six strategic business units that
manufacture four different products: chemicals, fertiliz-
ers, metals, and plastics. The chemicals represent over
60 percent of the company total production by value.
SABIC’s manufacturing network in Saudi Arabia com-
prises 18 technology and innovation centers that employ
1,400 scientists.
At the international stage, SABIC’s global presence
has grown steadily over the years. The company is part-
ner in three regional ventures in Bahrain. In 2002, SABIC
Europe Petrochemical (SEP) was established after the
acquisition of the petrochemical business from the Dutch
group DSM. SEP has two major manufacturing com-
plexes in Geleen in the Netherlands and Gelsenkirchen
in Germany. The global network of the company in-
cludes strategically located offices, distribution centers,
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AddReSSing ComPeTiTion And dRiving gRowTh | chapter 12 387
Suzanne Kapner, “Saudi Chemical Maker in Dutch Acquisition,” New York Times,
April 2, 2002; Andrew Horncastle, Asheesh Sastry, John Corrigan and David Branson,
“Future of Chemicals Part VI Global Feedstock Developments and Implications for GCC Players,”
Booz & Company, 2011, p. 20; Anthony DiPaola and Jack Kaskey, “Dow, Saudi Aramco Approve
$20 Billion Petrochemical Project,” Bloomberg, July 25, 2011; Sarah Algethami, “Forbes
ranks SABIC as top company in the Arab world,” Gulf News, June, 19, 2014; Mathias
Back, “BASF the Undisputed Leader in the Top 10 Chemical Company Rankings,” Process
Worldwide, May 25, 2014; Ahmed Al Omran, “Sabic Chief Optimistic on Global Petrochemical
Demand,” Wall Street Journal, July 20, 2014; Deema Almashabi and Sarmad Khan, “Sabic
Quarterly Profit Tops Estimates on Sales; Shares Fall,” Bloomberg, July 20, 2014; Guy Chazan,
“Sabic eyes investing in US petrochemicals,” Financial Times, October 8, 2013; Ahmed Al
Omran, “Saudi Sabic Third-Quarter Net Profit Down 4.5%,” Wall Street Journal,
October 26, 2014.
Questions
1. There are very few Middle Eastern companies that
have made it to the global arena due to various fac-
tors. What are the key factors for SABIC’s success?
2. What business risks and drawbacks does SABIC
face? What strategic direction should the company
pursue to avoid potential risks?
Sources: SABIC Annual Report 2013; SABIC, www.sabic.com; “SABIC: Firms must innovate to
compete, stay ahead of change,” Saudi Gazette, November 25, 2014; Saudi Basic Industries,
Forbes, May, 2014, http://www.forbes.com/companies/saudi-basic-industries/;
M12_KOTL2621_15_GE_C12.indd 387 09/03/15 6:27 PM
http://www.sabic.com
388
In This Chapter, We Will Address
the Following Questions
1. What are the characteristics of products, and how do marketers classify
products? (p. 389)
2. How can companies differentiate products? (p. 392)
3. Why is product design important, and what are the different approaches taken?
(p. 396)
4. How can marketers best manage luxury brands? (p. 398)
5. What environmental issues must marketers consider in their product strategies?
(p. 400)
6. How can a company build and manage its product mix and product lines? (p. 401)
7. How can companies combine products to create strong co-brands or ingredient
brands? (p. 409)
8. How can companies use packaging, labeling, warranties, and guarantees as
marketing tools? (p. 412)
With its relentless focus on quality and
strong dealer network, Lexus has become
one of the top luxury automotive brands
in the world.
Source: Robert Duyos/MCT/Newscom
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
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Creating ValuePart 5
Chapter 13 Setting Product Strategy
Chapter 14 Designing and Managing Services
Chapter 15 Introducing New Market Offerings
Chapter 16 Developing Pricing Strategies and Programs
M13_KOTL2621_15_GE_C13.indd 388 09/03/15 6:28 PM
389
Marketing planning begins with formulating an
offering to meet target customers’ needs or wants. The customer
will judge the offering on three basic elements: product features
and quality, service mix and quality, and price (see Figure 13.1).
In this chapter we examine product, in Chapter 14, services, in
Chapter 15, new products and services, and in Chapter 16, price.
All three elements—products, services, and pricing—must be
meshed into a competitively attractive market offering.
At the heart of a great brand is a great product. To achieve market leadership, firms
must offer products and services of superior quality that provide unsurpassed customer value. Lexus has
conquered the luxury car market in the United States and elsewhere, in part due to a relentless focus on product
and service quality.1
Setting Product
Strategy
13
Since its inception in 1989, Lexus has emphasized top-notch product quality and customer care, as
reflected by its long-time slogan, “The Relentless Pursuit of Perfection.” At one point, in response to
customer complaints over minor problems with its LS 400, the company sent technicians to each
owner’s home to fix the vehicles for free. As part of its “Lexus Covenant,” it has vowed to “have
the finest dealer network in the industry, and treat each customer as we would a guest in our own
home.” To this end, Lexus built its dealership framework from the ground up, hand-picking dealers committed to its
promise to provide an exceptional experience to customers, a system competitors acknowledge is the industry ideal.
The company offers a full product line anchored by its flagship LS sedan, as well as its GS sports coupe, RX SUVs,
and ES midsize car. It is consistently highly rated in the Luxury Institute’s annual Luxury Consumer Experience sur-
veys, bolstered by strong dealership experience. In addition, J. D. Power and Associates has ranked Lexus the “most
dependable” automotive brand 16 times since 1995, and the company
consistently ranks above the industry average in customer retention.
With its average buyer in his or her mid-50s, Lexus has set its sights
on attracting younger buyers by emphasizing more aggressive styling,
handling dynamics, and driver engagement. A new marketing initia-
tive uses television advertising to link the brand and the LS sedan to
a lavish, cool lifestyle. Social media and other promotions and events
also create novel customer experiences around food, fashion, enter-
tainment, and travel.
Product Characteristics
and Classifications
Many people think a product is tangible, but technically a product is anything that can be offered to a market to
satisfy a want or need, including physical goods, services, experiences, events, persons, places, properties, organi-
zations, information, and ideas.
Product LeveLs: the customer-vaLue hIerarchY
In planning its market offering, the marketer needs to address five product levels (see Figure 13.2).2 Each level
adds more customer value, and together the five constitute a customer-value hierarchy.
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390 PART 5 | CReATing VAlue
Differentiation arises and competition increasingly occurs on the basis of product augmentation. Each augmen-
tation adds cost, however, and augmented benefits soon become expected benefits and necessary points-of-parity
in the category. If today’s hotel guests expect large-screen HD TVs, wireless Internet access, and a fully equipped
fitness center, competitors must search for still other features and benefits to differentiate themselves.
As some companies raise the price of their augmented product, others offer a stripped-down version for less. Thus,
alongside the growth of expensive luxury hotels such as Four Seasons and Ritz-Carlton, we see lower-cost discount
hotels and motels emerge such as Motel 6 and Comfort Inn, catering to clients who want simply the basic product.
Marketers must be sure, however, that consumers not see lower quality or limited capability versions as unfair.3
Great companies make great products and services, as evident by Lego.4
LEGO LEGO may have been one of the first mass-customized brands. Every child who has ever had a set of
the Danish company’s most basic blocks has built his or her own unique creations with it, brick by plastic brick. Although
LEGO defines itself as being in the “business of play,” parents like the idea of buying LEGO’s products as a means of also
enhancing their children’s motor skills, creativity, and other cognitive capabilities. Some bricks and systems are exactly
the same as 50 years ago, but the company is always developing new product offerings. Popular play sets tied in with the
Pirates of the Caribbean and Star Wars film franchises also include video games. LEGO Design byME lets customers design,
share, and build their own custom products by downloading free Digital Designer 3.0 software. The creations that result can
exist—and be shared with other enthusiasts—solely online, or, if customers want to build them, the software tabulates the
pieces required and sends an order to LEGO’s Enfield, Connecticut, warehouse. Customers can request step-by-step build-
ing guide instructions and even design their own box to store the pieces. The success of The LEGO Movie in 2014 further
underscored the widespread popularity of the brand.
Attractiveness
of the market
offering
Services
mix and
quality
Product
features
and quality
Value-based prices
| Fig. 13.1 |
Components
of the Market
Offering
• The fundamental level is the core benefit: the service or benefit the customer is really buying. A hotel
guest is buying rest and sleep. The purchaser of a drill is buying holes. Marketers must see themselves
as benefit providers.
• At the second level, the marketer must turn the core benefit into a basic product. Thus a hotel room
includes a bed, bathroom, towels, desk, dresser, and closet.
• At the third level, the marketer prepares an expected product, a set of attributes and conditions buy-
ers normally expect when they purchase this product. Hotel guests minimally expect a clean bed,
fresh towels, working lamps, and a relative degree of quiet.
• At the fourth level, the marketer prepares an augmented product that exceeds customer expecta-
tions. In developed countries, brand positioning and competition take place at this level. In devel-
oping and emerging markets such as India and Brazil, however, competition takes place mostly at
the expected product level.
• At the fifth level stands the potential product, which encompasses all the possible augmentations and
transformations the product or offering might undergo in the future. Here companies search for new
ways to satisfy customers and distinguish their offering.
Timeless toy manufacturer Lego
constantly innovates so that its brand
stays relevant with kids of all ages.
So
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: ©
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Product cLassIfIcatIons
Marketers classify products on the basis of durability, tangibility, and use (consumer or industrial). Each type has
an appropriate marketing-mix strategy.5
Durability anD tangibility Products fall into three groups according to durability and tangibility:
1. Nondurable goods are tangible goods normally consumed in one or a few uses, such as beer and shampoo.
Because these goods are purchased frequently, the appropriate strategy is to make them available in many
locations, charge only a small markup, and advertise heavily to induce trial and build preference.
2. Durable goods are tangible goods that normally survive many uses: refrigerators, machine tools, and clothing.
They normally require more personal selling and service, command a higher margin, and require more seller
guarantees.
3. Services are intangible, inseparable, variable, and perishable products that normally require more quality con-
trol, supplier credibility, and adaptability. Examples include haircuts, legal advice, and appliance repairs.
Consumer-gooDs ClassifiCation When we classify the vast array of consumer goods on the basis
of shopping habits, we distinguish among convenience, shopping, specialty, and unsought goods.
The consumer usually purchases convenience goods frequently, immediately, and with minimal effort.
Examples include soft drinks, soaps, and newspapers. Staples are convenience goods consumers purchase on
a regular basis. A buyer might routinely purchase Heinz ketchup, Crest toothpaste, and Ritz crackers. Impulse
goods are purchased without any planning or search effort, like candy bars and magazines. Emergency goods are
purchased when a need is urgent—umbrellas during a rainstorm, boots and shovels during the first winter snow.
Manufacturers of impulse and emergency goods will place them where consumers are likely to experience an urge
or compelling need to purchase.
Shopping goods are those the consumer characteristically compares on such bases as suitability, quality,
price, and style. Examples include furniture, clothing, and major appliances. Homogeneous shopping goods are
similar in quality but different enough in price to justify shopping comparisons. Heterogeneous shopping goods
differ in product features and services that may be more important than price. The seller of heterogeneous
shopping goods carries a wide assortment to satisfy individual tastes and trains salespeople to inform and
advise customers.
Specialty goods have unique characteristics or brand identification for which enough buyers are willing to
make a special purchasing effort. Examples include cars, audio-video components, and men’s suits. A Mercedes
is a specialty good because interested buyers will travel far to buy one. Specialty goods don’t require comparisons;
buyers invest time only to reach dealers carrying the wanted products. Dealers don’t need convenient locations,
though they must let prospective buyers know where to find them.
Unsought goods are those the consumer does not know about or normally think of buying, such as smoke
detectors. Other classic examples are life insurance, cemetery plots, and gravestones. Unsought goods require
advertising and personal-selling support.
Potential product
Aug
mented product
Exp
ected product
Core
benefit
Ba
sic product
| Fig. 13.2 |
Five Product Levels
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392 PART 5 | CReATing VAlue
inDustrial-gooDs ClassifiCation We classify industrial goods in terms of their relative cost
and the way they enter the production process: materials and parts, capital items, and supplies and business
services. Materials and parts are goods that enter the manufacturer’s product completely. They fall into two
classes: raw materials and manufactured materials and parts. Raw materials in turn fall into two major groups:
farm products (wheat, cotton, livestock, fruits, and vegetables) and natural products (fish, lumber, crude
petroleum, iron ore).
Farm products are supplied by many producers, who turn them over to marketing intermediaries, who
provide assembly, grading, storage, transportation, and selling services. The perishable and seasonal nature of
farm products gives rise to special marketing practices, whereas their commodity character results in relatively
little advertising and promotional activity. At times, commodity groups will launch campaigns to promote their
product— potatoes, cheese, and beef. Some producers brand their products—Dole salads, Mott’s apples, and
Chiquita bananas.
Natural products are limited in supply. They usually have great bulk and low unit value and must be moved
from producer to user. Fewer and larger producers often market them directly to industrial users. Because users
depend on these materials, long-term supply contracts are common. The homogeneity of natural materials limits
the amount of demand-creation activity. Price and reliable delivery are the major factors influencing the selection
of suppliers.
Manufactured materials and parts fall into two categories: component materials (iron, yarn, cement, wires) and
component parts (small motors, tires, castings). Component materials are usually fabricated further—pig iron is
made into steel, and yarn is woven into cloth. The standardized nature of component materials usually makes price
and supplier reliability key purchase factors. Component parts enter the finished product with no further change
in form, as when small motors are put into vacuum cleaners and tires are put on automobiles. Most manufactured
materials and parts are sold directly to industrial users. Price and service are major marketing considerations, with
branding and advertising less important.
Capital items are long-lasting goods that facilitate developing or managing the finished product. They fall into
two groups: installations and equipment. Installations consist of buildings (factories, offices) and heavy equipment
(generators, drill presses, mainframe computers, elevators). Installations are major purchases. They are usually
bought directly from the producer, whose sales force includes technical staff, and a long negotiation precedes the
typical sale. Producers must be willing to design to specification and to supply postsale services. Advertising is
much less important than personal selling.
Equipment includes portable factory equipment and tools (hand tools, lift trucks) and office equipment (desk-
top computers, desks). These types of equipment don’t become part of a finished product. They have a shorter life
than installations but a longer life than operating supplies. Although some equipment manufacturers sell direct,
more often they use intermediaries because the market is geographically dispersed, buyers are numerous, and
orders are small. Quality, features, price, and service are major considerations. The sales force tends to be more
important than advertising, though advertising can be used effectively.
Supplies and business services are short-term goods and services that facilitate developing or managing the
finished product. Supplies are of two kinds: maintenance and repair items (paint, nails, brooms) and operating
supplies (lubricants, coal, writing paper, pencils). Together, they go under the name of MRO goods. Supplies are
the equivalent of convenience goods; they are usually purchased with minimum effort on a straight-rebuy basis.
They are normally marketed through intermediaries because of their low unit value and the great number and geo-
graphic dispersion of customers. Price and service are important considerations because suppliers are standardized
and brand preference is often not high.
Business services include maintenance and repair services (window cleaning, copier repair) and business
advisory services (legal, management consulting, advertising). Maintenance and repair services are usually supplied
under contract by small producers or from the manufacturers of the original equipment. Business advisory
services are usually purchased on the basis of the supplier’s reputation and staff.
Differentiation
To be branded, products must be differentiated. At one extreme are products that allow little variation: chicken,
aspirin, and steel. Yet even here some differentiation is possible: Perdue chickens, Bayer aspirin, and India’s
Tata Steel have carved out distinct identities in their categories. Procter & Gamble makes Tide, Cheer, and
Gain laundry detergents, each with a separate brand identity. At the other extreme are products capable of high
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differentiation, such as automobiles, commercial buildings, and furniture. Here the seller faces an abundance of
differentiation possibilities.
As Chapter 10 described, well-differentiated products can create significant competitive advantages. Intuitive
Surgical sells million-dollar robotic systems for operating rooms. Watching a high-definition video feed from a
camera inside the patient, surgeons use a joystick, pedals, and a robotic arm with tiny scalpels and needles to per-
form minimally invasive cardiac and urological procedures. One analyst said of Intuitive Surgical in 2010, “In our
view, they’ve got a decade’s worth of technological lead.”6
Means for differentiation include form, features, performance quality, conformance quality, durability, reli-
ability, repairability, and style.7 Design has become an increasingly important differentiator, and we discuss it
separately later in the chapter.
Product dIfferentIatIon
form Many products can be differentiated in form—the size, shape, or physical structure of a product.
Consider the many possible forms of aspirin. Although essentially a commodity, it can be differentiated by dosage,
size, shape, color, coating, or action time.
features Most products can be offered with varying features that supplement their basic function. A company
can identify and select appropriate new features by surveying recent buyers and then calculating customer value
versus company cost for each potential feature. Marketers should consider how many people want each feature,
how long it would take to introduce it, and whether competitors could easily copy it.8
To avoid “feature fatigue,” the company must prioritize features and tell consumers how to use and benefit from
them.9 Marketers must also think in terms of feature bundles or packages. Auto companies often manufacture cars
at several “trim levels.” This lowers manufacturing and inventory costs. Each company must decide whether to
offer feature customization at a higher cost or a few standard packages at a lower cost.
PerformanCe Quality Most products occupy one of four performance levels: low, average, high,
or superior. Performance quality is the level at which the product’s primary characteristics operate. Quality is
growing increasingly important for differentiation as companies adopt a value model and provide higher quality
for less money. Firms should design a performance level appropriate to the target market and competition,
however, not necessarily the highest level possible. They must also manage performance quality through time.
Continuously improving the product can produce high returns and market share; failing to do so can have negative
consequences.
MErcEdEs-BEnz From 2003 to 2006, Mercedes-Benz endured one of the most painful stretches in its
127-year history. The company saw its reputation for stellar quality take a beating in J. D. Power and other surveys, and BMW
surpassed it in global sales. To recoup, a new management team reorganized around functional elements—motors, chassis,
and electronic systems—instead of model lines. Engineers now begin testing electronic systems a year earlier and put each
new model through 10,000 diagnostics that run 24 hours a day for three weeks. Mercedes-Benz also tripled its number of
prototypes for new designs, allowing engineers to drive them 3 million miles before production. With these and other changes,
the number of flaws in the company’s cars dropped 72 percent from their 2002 peak, and warranty costs decreased 25 per-
cent. As an interesting side effect, Mercedes-Benz dealers have had to contend with a sizable drop in their repair and service
businesses! The challenge now is to match the impressive levels of quality and reliability set by Japanese luxury foes.10
ConformanCe Quality Buyers expect a high conformance quality, the degree to which all produced
units are identical and meet promised specifications. Suppose a Porsche 911 is designed to accelerate to 60 miles
per hour within 10 seconds. If every Porsche 911 coming off the assembly line does this, the model is said to have
high conformance quality. A product with low conformance quality will disappoint some buyers. Firms thoroughly
test finished products to ensure conformance. Although men account for almost three-quarters of the world’s beer
sales, SABMiller found that women were actually more sensitive to levels of flavor in beer and thus were better
product testers.11
Durability Durability, a measure of the product’s expected operating life under natural or stressful
conditions, is a valued attribute for vehicles, kitchen appliances, and other durable goods. The extra price for
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394 PART 5 | CReATing VAlue
durability must not be excessive, however, and the product must not be subject to rapid technological obsolescence,
as personal computers, televisions, and cell phones have sometimes been.
reliability Buyers normally will pay a premium for more reliable products. Reliability is a measure of the
probability that a product will not malfunction or fail within a specified time period. Maytag has an outstanding
reputation for creating reliable home appliances. Its long-running “Lonely Repairman” ad campaign was designed
to highlight that attribute.
rePairability Repairability measures the ease of fixing a product when it malfunctions or fails. Ideal
repairability would exist if users could fix the product themselves with little cost in money or time. Some products
include a diagnostic feature that allows service people to correct a problem over the telephone or advise the user
how to correct it. Many computer hardware and software companies offer technical support over the phone, by fax
or e-mail, or via real-time chat online.
style Style describes the product’s look and feel to the buyer and creates distinctiveness that is hard to copy. Car
buyers pay a premium for Jaguars because of their extraordinary looks. Aesthetics play a key role for such brands as
Apple computers, Godiva chocolate, and Harley-Davidson motorcycles.12 Strong style does not always mean high
performance, however. A car may look sensational but spend a lot of time in the repair shop.
Customization As Chapter 9 described, customized products and marketing allow firms to be highly
relevant and differentiating by finding out exactly what a person wants—and doesn’t want—and delivering on
that. Online retailers such as Zazzle and CafePress allow users to upload images and create their own clothing and
posters or buy merchandise created by other users. NikeiD, which allows customers to personalize and design their
own shoes and clothing either online or in store at NikeiD Studios, now generates hundreds of millions of dollars
in revenue.13
The demand for customization is certainly there. One Forrester study found that more than one-third of U.S.
online consumers were interested in customizing product features or in purchasing build-to-order products that
use their specifications. And companies have responded: M&M’s allows you to print specialized messages on your
candies; Pottery Barn Kids allows you to personalize a children’s book; and for $2,000 or so, Burberry allows you to
select the fabric, color, style, and five other features for your own personalized trench coat.14
servIces dIfferentIatIon
When the physical product cannot easily be differentiated, the key to competitive success may lie in adding val-
ued services and improving their quality. Rolls-Royce PLC has ensured its aircraft engines are in high demand
by continuously monitoring their health for 1,300 airplane engines around the world through live satellite feeds.
Under its TotalCare and CorporateCare programs, airlines pay Rolls a fee for every hour an engine is in flight,
and Rolls assumes the risks and costs of downtime and repairs.15
After experiencing some
declines in product quality,
Mercedes-Benz changed how it
made and tested its cars, with
positive results.
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The main service differentiators are ordering ease, delivery, installation, customer training, customer consult-
ing, maintenance and repair, and returns.
orDering ease Ordering ease describes how easy it is for the customer to place an order with the company.
Baxter Healthcare supplies hospitals with computer terminals through which they send orders directly to the
firm. Many financial service institutions offer secure online sites to help customers get information and complete
transactions more efficiently.
Delivery Delivery refers to how well the product or service is brought to the customer, including speed,
accuracy, and care throughout the process. Today’s customers have grown to expect speed: pizza delivered in
half an hour, eyeglasses made in 60 minutes, cars lubricated in 15 minutes. Many firms have computerized quick
response systems (QRS) that link the information systems of their suppliers, manufacturing plants, distribution
centers, and retailing outlets to improve delivery.
Cemex, a giant cement company based in Mexico, has transformed its business by promising to deliver concrete
faster than pizza, equipping every truck with a global positioning system (GPS) so dispatchers know its real-time
location. Its 24/7 LOAD service program guarantees delivery within a 20-minute window, providing important
flexibility in an industry where delays are costly but common.16
installation Installation refers to the work done to make a product operational in its planned location.
Ease of installation is a true selling point for technology novices and for buyers of complex products like heavy
equipment.
Customer training Customer training helps the customer’s employees use the vendor’s equipment
properly and efficiently. General Electric not only sells and installs expensive X-ray equipment in hospitals, it also
gives users extensive training. McDonald’s requires its new franchisees to attend Hamburger University in Oak
Brook, Illinois, for two weeks to learn how to manage the franchise properly.
Customer Consulting Customer consulting includes data, information systems, and advice services
the seller offers to buyers. Technology firms such as IBM, Oracle, and others have learned that such consulting is
an increasingly essential—and profitable—part of their business.
maintenanCe anD rePair Maintenance and repair programs help customers keep purchased
products in good working order. These services are critical in business-to-business settings. Goodyear’s TVTrack
program helps its fleet customers monitor and manage tires more effectively.17 Many firms offer online technical
support, or “e-support,” for customers, who can search an online database for fixes or seek online help from
a technician. Appliance makers such as LG, Kenmore, and Miele have introduced products that can transmit
self-diagnostic data over the phone to a customer service number that electronically describes the nature of any
technical problems.18
Makers of luxury products especially recognize the importance of a smooth repair process. Although
Movado watches are high-end, its repair process had been anything but, requiring time-consuming manual
labor and customer inconvenience. Recognizing the need to offer more digital services in general, Movado
created a Web site where customers can buy products directly from the company as well as execute many of
the initial steps in the repair process online, such as registering any problems and identifying possible repair
options before contacting customer service directly. The database created by users of the site has also allowed
the company to recruit potential focus group participants and identify repair trends that may suggest recurring
production problems.19
returns A nuisance to customers, manufacturers, retailers, and distributors alike, product returns are also an
unavoidable reality of doing business, especially in online purchases. Free shipping, growing more popular, makes
it easier for customers to try out an item, but it also increases the likelihood of returns.
Returns can add up. One estimate is that 10 percent to 15 percent of overall holiday sales come back
as returns or exchanges, and the total annual cost may be $100 billion.20 To the consumer, returns can be
inconvenient, embarrassing, or difficult to complete. Returns have a downside for merchants too, when the
returned merchandise is not in re-sellable condition, lacks proper proof of purchase, or is returned to the
wrong store. It may even be used or stolen. Yet if the merchant is reluctant to accept returns, customers can
become annoyed.21
Of course, product returns do have an upside. Physically returning a product can get the consumer into the
store, maybe for the first time. One research study found that a lenient return policy left customers more willing to
make other purchases and refer the company to others.22
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We can think of product returns in two ways:23
• Controllable returns result from problems or errors made by the seller or customer and can mostly be
eliminated with improved handling or storage, better packaging, and improved transportation and forward
logistics by the seller or its supply chain partners.
• Uncontrollable returns result from the need for customers to actually see, try, or experience products in
person to determine suitability and can’t be eliminated by the company in the short run.
One basic strategy is to eliminate the root causes of controllable returns while developing processes for handling
uncontrollable returns. The goal is to have fewer products returned and put a higher percentage back into the dis-
tribution pipeline to be sold again. San Diego-based Road Runner Sports, which sells running shoes, clothing, and
equipment through multiple stores, catalogs, and a Web site, trains its salespeople to be as knowledgeable as pos-
sible in order to recommend the right products. As a result, its return rate on running shoes has been 12 percent,
noticeably below the industry average of 15 percent to 20 percent. 24
Design
As competition intensifies, design offers a potent way to differentiate and position a company’s products and
services. Design is the totality of features that affect the way a product looks, feels, and functions to a consumer.
It offers functional and aesthetic benefits and appeals to
both our rational and emotional sides.25
desIGn Leaders
As holistic marketers recognize the emotional power of
design and the importance to consumers of look and
feel as well as function, design is exerting a stronger
influence in categories where it once played a small
role. Herman Miller office furniture, Viking ranges and
kitchen appliances, and Kohler kitchen and bathroom
fixtures and faucets are among the brands that now
stand out in their categories thanks to attractive looks
added to efficient and effective performance.26
Some countries have developed strong reputations for
their design skills and accomplishments, such as Italy
in apparel and furniture and Scandinavia in products
designed for functionality, aesthetics, and environmental
consciousness. Finland’s Nokia was the first to introduce
user-changeable covers for cell phones, the first to have
elliptical-shaped, soft, and friendly forms, and the first
with big screens, all contributing to its remarkable ascent.
When it later failed to innovate its smart-phone designs, its
fortunes dramatically declined. Braun, a German division
of Gillette, has elevated design to a high art in its electric
shavers, coffeemakers, hair dryers, and food processors.
The International Design and Excellence Awards
(IDEA) are given each year based on benefit to the user,
benefit to the client/business, benefit to society, ecologi-
cal responsibility, appropriate aesthetics and appeal, and
usability testing. IDEO has been one of the more suc-
cessful design companies through the years. Then in
2013 Samsung Electronics won 10 awards, 3M four, and
Coway, Lenovo, LG Electronics, Nokia, and PearsonLloyd
three each.27 Samsung’s design accomplishments have
been a result of a concerted effort.28
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Herman Miller has brought form and function to office furniture with their stylish,
well-designed products.
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saMsunG Much of Samsung’s remarkable marketing success comes from innovative new products that
have captured the imagination of consumers all over the world. The company has invested heavily in R&D and in design
capabilities, with big payoffs. It has a clear design philosophy it calls “Design 3.0,” and an internal design slogan, “Make
it Meaningful,” that reflects its relentless focus on making beautiful and intuitive products that will be integrated into
customers’ lifestyles. Samsung applies three design criteria: (1) simple and intuitive, (2) efficient and long-lasting, and
(3) adaptive and engaging. Like its chief rival Apple, the company organizes its design efforts through a cross-divisional
Corporate Design Center that reports directly to the CEO. The Corporate Design Center aligns the design efforts of various
divisions and analyzes cultural trends to help forecast the future of design. It also coordinates the work done at Samsung’s
five Global Design Centers, located in London, San Francisco, Shanghai, Tokyo, and Delhi. Among the many awards the
company has received for design were two IF Gold Awards in 2013—from one of the world’s top three design contests—
for its “split concept” color printer and its twin-tub washing machine especially designed for Southeast Asia users.
Power of desIGn
In a visually oriented culture, transmitting brand meaning and positioning through design is critical. “In a
crowded marketplace,” writes Virginia Postrel in The Substance of Style, “aesthetics is often the only way to make
a product stand out.”29
Design is especially important with long-lasting durable goods such as automobiles. As GM’s VP of Design
Ed Welburn notes, “. . . every car has its own mood, whether it’s a van for India or a Cadillac for China, and needs
to connect with customers at an emotional level.” The GM design team for the 2011 plug-in electric Chevy Volt
wanted to make sure the car looked better than other electric cars. As the Volt design director said, “Most electric
cars are like automotive Brussels sprouts. They’re good for you, but you don’t want to eat them.”30
Design can shift consumer perceptions to make brand experiences more rewarding. Consider the lengths
Boeing went to in making its 777 airplane seem roomier and more comfortable. Raised center bins, side
luggage bins, divider panels, gently arched ceilings, and raised seats make the aircraft interior seem bigger. One
design engineer noted, “If we do our jobs, people don’t realize what we have done. They just say they feel more
comfortable.”
aPProaches to desIGn
“Design is more than just creativity, or a phase in creating a product, service, or application. It’s a way of thinking
that can transform an entire enterprise.”31 Design should penetrate all aspects of the marketing program so all
design aspects work together. To the company, a well-designed product is easy to manufacture and distribute. To
the customer, it is pleasant to look at and easy to open, install, use, repair, and dispose of. The designer must take
all these goals into account.32
Given the creative nature of design, it’s no surprise there isn’t one widely adopted approach. Some firms employ
formal, structured processes. Design thinking is a very data-driven approach with three phases: observation,
ideation, and implementation. Design thinking requires intensive ethnographic studies of consumers, creative
brainstorming sessions, and collaborative teamwork to decide how to bring the design idea to reality. Whirlpool
used design thinking to develop the KitchenAid Architect Series II kitchen appliances with a more harmonized
look than had existed in the category.33 Not everyone employs design thinking, however.34
BanG & OLufsEn The Danish firm Bang & Olufsen (B&O)—which has received many kudos for
the design of its stereos, TV equipment, and telephones—trusts the instincts of a handful of designers who rarely con-
sult with consumers. The company does not introduce many new products in any given year, so each one is expected to
be sold for a long time. Its BeoLab 8000 speakers sold for $3,000 a pair when introduced in 1992 and retailed for more
than $5,000 almost 20 years later. When the company was the subject of a special exhibition at the Museum of Modern
Art in New York City, the museum noted, “Bang & Olufsen design their sound equipment as beautiful objects in their
own right that do not inordinately call attention to themselves.” Today, 15 B&O products are part of MOMA’s permanent
design collection.
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Luxury Products
Design is often an important aspect of luxury products, though these products also face some unique issues.
They are perhaps one of the purest examples of the role of branding because the brand and its image are often key
competitive advantages that create enormous value and wealth. Marketers for luxury brands such as Prada, Gucci,
Cartier, and Louis Vuitton manage lucrative franchises that have endured for decades in what some believe is now
a $270 billion industry.35
characterIzInG LuxurY Brands
Significantly higher priced than typical items in their categories, luxury brands for years were about social status
and who a customer was—or perhaps wanted to be. Times have changed, and especially in the aftermath of a
crippling recession, luxury for many has become more about style and substance, combining personal pleasure
and self-expression.36
A luxury shopper must feel he or she is getting something truly special. Thus the common denominators of
luxury brands are quality and uniqueness. A winning formula for many is craftsmanship, heritage, authenticity,
and history, often critical to justifying a sometimes extravagant price. Hermès, the French luxury leather-goods
maker, sells its classic designs for hundreds or even thousands of dollars, “not because they are in fashion,” as one
writer put it, “but [because] they never go out of fashion.”37 Here is how several luxury brands have become endur-
ing market successes:
• Sub-Zero refrigerators. Sub-Zero sells refrigerators that range from $1,600 for small, under-counter models
to $12,000 for a specialty Pro 48 with a stainless steel interior. The target is customers with high standards
of performance and design who cherish their home and what they buy to furnish it. Sub-Zero extensively
surveys this group as well as the kitchen designers, architects, and retailers who recommend and sell its
products.38
• Patrón tequila. Cofounded by Paul Mitchell hair care founder John Paul DeJoria, Patrón came about after a
1989 trip to a distillery in the small Mexican state of Jalisco. Named Patrón to convey “the boss, the cool guy,”
So
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With its unique product formulation and bottle,
Patron pioneered the high end tequila market.
the smooth agave tequila comes in an elegant hand-blown decanter and is sold in
individually numbered bottles for $45 or more. Essentially creating the high-end
tequila market, with more than $1.1 billion in retail sales, Patrón has surpassed Jose
Cuervo to become the world’s largest tequila brand.39
• Montblanc luxury goods. The goal of Montblanc, whose products now range from
pens to watches to leather goods and fragrances, is to be a strong luxury brand to
as many classes of luxury customers as possible, while still retaining a prominent
public image. The brand promise is that “the product you buy is of highest esteem,
based on its timeliness, elegant design and the high quality, which is derived from
the excellence of our craftsmen.” The company branched out from its origins in
writing instruments into categories such as leather goods and timepieces, where
it could “rely on the trust of our customers, who believed in Montblanc as a brand
that provides excellence in its core category writing instruments based on its
philosophy of manufacturing competence, highest quality, sustainable value and
creativity.”40
GrowInG LuxurY Brands
The recent recession challenged many luxury brands as they tried to justify their value
proposition and avoid discounting their products.41 Those that had already successfully
extended their brands vertically across a range of price points were usually the most
immune to economic downturns.
The Armani brand has extended from high-end Giorgio Armani and Giorgio
Armani Privé to mid-range luxury with Emporio Armani to affordable luxury with
Armani Jeans and Armani Exchange. Clear differentiation exists between these brands,
minimizing the potential for consumer confusion and brand cannibalization. Each
also lives up to the core promise of the parent brand, reducing chances of hurting the
parent’s image.
Horizontal extensions into new categories can also be tricky for luxury brands.
Even the most loyal consumer might question a $7,300 Ferragamo watch or an $85
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bottle of Roberto Cavalli vodka. Jewelry maker Bulgari has moved into hotels, fragrances, chocolate, and
skin care, prompting some branding experts to deem the brand overstretched.42 In the past, iconic fashion
designers Pierre Cardin and Halston licensed their names to so many ordinary products that the brands were
badly tarnished.
Ralph Lauren, however, has successfully marketed an aspirational luxury brand with wholesome all-American
lifestyle imagery across a wide range of products. Besides clothing and fragrances, Lauren boutiques sell linens,
candles, beds, couches, dishware, photo albums, and jewelry. Calvin Klein has adopted a similarly successful
expansive strategy, though with different lifestyle imagery.
Much of the growth in luxury brands in recent years has been geographical. China has overtaken the United
States as the world’s largest luxury market; it’s forecast that one-third of all high-end goods will be sold there in
the coming years. Although initially very “logo-driven” and interested in conspicuous brand signals, Chinese
luxury consumers have also become more quality and design conscious, like luxury consumers in other parts of
the world.43
marketInG LuxurY Brands
Luxury marketers have learned that luxury is not viewed the same way around the world. In post-communist
Russia for a time, as in China, the bigger and gaudier the logo, the better. But in the end, luxury brand marketers
have to remember they are often selling a dream, anchored in product quality, status, and prestige.
Just like marketers in less expensive categories, those guiding the fortunes of luxury brands operate in a
constantly evolving marketing environment. Globalization, new technologies, financial crises, shifting consumer
cultures, and other forces require them to be skillful and adept at their brand stewardship to succeed. Table 13.1
summarizes some key guidelines in marketing luxury brands.
One trend for luxury brands is to wrap personal experiences around the products. Top-end fashion retailers are
offering such experiences alongside their wares, expecting that customers who have visited a workshop or met the
designer will feel closer to the brand. Gucci is inviting its biggest spenders to fashion shows, equestrian events, and
the Cannes Film Festival.44
Porsche Sport Driving Schools and Experience Centers in Germany, the United States, and other parts of the
world allow Porsche drivers to “train their driving skills and enjoy the all-out pleasure of driving, on-road, off-
road, or on snow and ice.” The recently opened state-of-the-art facility in Southern California features 45-degree
off-road inclines and a simulated ice hill.45
table 13.1 Guidelines for Marketing Luxury Brands
1. Maintaining a premium image for luxury brands is crucial; controlling that image is thus a priority.
2. Luxury branding typically includes the creation of many intangible brand associations and an aspirational image.
3. All aspects of the marketing program for luxury brands must be aligned to ensure high-quality products and
services and pleasurable purchase and consumption experiences.
4. Besides brand names, other brand elements—logos, symbols, packaging, signage—can be important drivers of
brand equity for luxury products.
5. Secondary associations from linked personalities, events, countries, and other entities can boost luxury-brand
equity as well.
6. Luxury brands must carefully control distribution via a selective channel strategy.
7. Luxury brands must employ a premium pricing strategy, with strong quality cues and few discounts and
markdowns.
8. Brand architecture for luxury brands must be managed carefully.
9. Competition for luxury brands must be defined broadly because it often comes from other categories.
10. Luxury brands must legally protect all trademarks and aggressively combat counterfeits.
Source: Based on Kevin Lane Keller, “Managing the Growth Tradeoff: Challenges and Opportunities in Luxury Branding,” Journal of Brand Management 16 (March–May
2009), pp. 290–301.
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400 PART 5 | CReATing VAlue
In an increasingly wired world, some luxury marketers have struggled to find the appropriate online selling
and communication strategies for their brand.46 Some fashion brands have begun to go beyond glossy magazine
spreads to listening to and communicating with consumers through Facebook, Twitter, Foursquare, and other
digital and social media channels. Coach and Tiffany are two luxury brands praised for their Web site and digital
operations. E-commerce has also begun to take hold for some luxury brands. Sites such as Gilt Groupe and Ideel
now offer new ways for fashion brands to move high-end goods.47
Ultimately, luxury marketers are learning that, as for all marketers, success depends on getting the right balance
of classic and contemporary imagery and continuity and change in marketing programs and activities.
Environmental Issues
Environmental issues are also playing an increasingly important role in product design and manufacturing. Many
firms are considering ways to reduce the negative environmental consequences of conducting business, and some
are changing the manufacture of their products or the ingredients that go into them. “Marketing Memo: A Sip or
a Gulp: Environmental Concerns in the Water Industry” considers some of the environmental issues raised by the
sale of bottled water.
In a fascinating twist, Levi-Strauss found a highly creative way to address the problem of proliferating plastic
bottles.48
LEVi’s WastE
In 1882, pharmacist Paul C. Beiersdorf established his
company with a patent for medical plasters. Beiersdorf
sold his company to Oscar Troplowitz in 1890. By 1911,
Oscar Troplowitz had developed the world’s first stable
skin cream based on a water-in-oil emulsion. He named
the product Nivea, derived from the Latin words nix, nivis,
meaning “snow” or “of snow.” With this brand name,
the core benefit of Nivea was being highlighted: Nivea
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
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lotion packages was reshaped. It is now tilted toward the
user, and has a more inviting look and feel.
Nivea for Men was renamed Nivea Men to strengthen
the brand’s position in the fast growing market for
men’s cosmetics. Also, the product line of Nivea was
rearranged. Several products and categories, that
were less successful and not enough in sync with the
brand’s slightly reshaped core values—trust, care, and
closeness—were abandoned. All in all, the product port-
folio was reduced by approximately 25 percent, especially
in over-segmented categories like deodorants. Beauty
was dropped as an additional core value of the brand
that had been added in the 1990s. Consistently, makeup
products were withdrawn from the product line. But the
innovation process still continued. With In-Shower Body
Moisturizer, Nivea introduced a highly innovative and suc-
cessful product to be used on wet skin that is faster and
more convenient to use than traditional body lotion.
Today, Nivea is one of the strongest face care brands.
Around 30 percent of all women around the world use
Nivea products. The global brand awareness for Nivea
is 93 percent. Nivea is the market leader in the skin care
segment in 46 countries, and has repeatedly been voted
the Most Trusted Skin Care Brand by consumers in
12 European countries.
Questions
1. What were the key steps in maintaining Nivea’s lead-
ing position in the global facial care market?
2. Explain the connection between cultural norms and
product choice. What is Nivea’s strategy in respect-
ing cultural diversity while pursuing a global brand
strategy?
3. Discuss Nivea’s future. What should Beiersdorf do
next with its product line? Where is the future growth
for the brand?
Sources: Gregor Kessler, “Neue Rezeptur,” Capital, October 18, 2012; Michael Brandtner,
“Innovation & Branding,” A3BOOM, September 25, 2014; Frauke Schobelt, “Weltweit neues
Design: Beiersdorf adelt die Dose,” w&v, January 15, 2013; Beiersdorf, www.beiersdorf.com;
Nivea, www.nivea.com.
associated with the brand, and the typography was
changed to a more modern font. Furthermore, the po-
sitioning strategy was switched to keep up with the
social changes of that time. Nivea now allowed its con-
sumers to get a “healthy suntan” to reflect the changed
ideals of beauty. After a difficult period during World
War II, Beiersdorf started anew. In many countries, the
Nivea trademarks were lost since they had been seized
by the victorious nations. Soon after the war, Beiersdorf
started buying back the trademarks. In 1963, it intro-
duced innovative products like the world’s first “liquid
cream,” Nivea Milk. With Nivea Men After Shave Balsam,
Beiersdorf introduced in 1980 the first aftershave prod-
uct that soothed the skin. By the 1990s, Nivea was the
world’s leading skin care brand with a standardized global
brand policy. It had expanded its product line into new
areas, like makeup, men’s facial crème, and deodorants.
In only 10 years after standardizing its global
brand policy, sales had quadrupled and Nivea became
Beiersdorf’s largest brand. But not all product line exten-
sions were successful and several of the company’s inter-
national ventures were failures. The purchase of C-Bons
in 2007, China’s number two hair care brand, was a flop.
Even in Western Europe, Nivea sales dropped for several
years in a row. Nevertheless, Nivea continued its inter-
national expansion strategy with a series of local product
adaptations while the brand appearance was standard-
ized. In Asian countries, for example, facial products sold
much better since they contained ingredients promot-
ing a fair complexion whereas in the Middle East local
fragrances like musk were used.
In 2011, Beiersdorf started to restructure Nivea’s
product portfolio and brand appearance. Above all,
Nivea’s current square logo was redesigned to resemble
the classic Nivea logo. It now mirrors the famous tin
packaging with a round blue logo with the brand name
Nivea placed prominently in the middle. All Nivea products
underwent these logo changes to reconnect the brand to
its core product, Nivea crème. Tests showed that with the
new logo Nivea’s visibility at the points of purchase had
improved. In addition, the package design of most Nivea
products was changed. For example, the cap of all body
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http://www.nivea.com
418 PART 5 | CReATing VAlue
learned this market wanted more personalization, the
company now builds the car “mono-spec” at the factory,
with just one well-equipped trim level, letting customers
choose from dozens of customization elements at dealer-
ships. Toyota marketed the Scion at music events and
has showrooms where “young people feel comfortable
hanging out and not a place where they just go stare at a
car,” said Scion Vice President Jim Letz.
Another big reason behind Toyota’s success is its
mastery of lean manufacturing and continuous improve-
ment. Its plants can make as many as eight models at
the same time, bringing huge increases in productivity
and market responsiveness. The company also relent-
lessly innovates; a typical Toyota assembly line makes
thousands of operational changes in a year. Employees
see their purpose as threefold: making cars, making cars
better, and teaching everyone how to make cars better.
The company encourages problem solving, always look-
ing to improve the process by which it improves all other
processes.
Toyota has integrated its assembly plants around
the world into a single giant network that can custom-
ize cars for local markets and shift production quickly to
meet surges in demand from markets worldwide. The
company is thus able to fill market niches inexpensively
as they emerge, without building whole new assembly
operations. “If there’s a market or market segment where
they aren’t present, they go there,” said Tatsuo Yoshida,
auto analyst at Deutsche Securities Ltd.
Over the years, Toyota automobiles have consistently
ranked high in quality and reliability. In 2009 and 2010,
however, the company recalled more than 8 million cars
for potential perceived problems ranging from sticking
accelerator pedals to sudden acceleration to software
glitches in the braking system. The Lexus, Prius, Camry,
Corolla, and Tundra brands were all affected. Next,
Toyota lost billions of dollars when an earthquake and
tsunami in Japan destroyed the company’s plants and
parts suppliers in 2011. TMC President Akio Toyoda said,
“We have faced many challenges since 2009, but have
learned valuable lessons including the need for Toyota to
maintain sustainable growth.”
Despite these challenges, Toyota recouped its losses.
Its strong focus on hybrid vehicles has proved profitable
and helped the company rebound. It sold its 4 millionth
unit in 2012 and plans to continue to innovate hybrids,
believing “there are many more gains we can achieve
with hybrids.” Today, Toyota offers a full line of cars for
Marketing Excellence
>> Toyota
The world’s largest automaker, Toyota has come a
long way in its nearly 80-year history. The company
launched its first passenger car, the Model AA, in 1936,
copying the body design of Chrysler’s landmark Airflow
and the engine of a 1933 Chevrolet. Toyota then suf-
fered several challenges, including a financial crisis
in 1950. However, when consumers wanted smaller,
more fuel-efficient automobiles during the 1973 oil cri-
sis, the company responded. The Toyota Corona and
Toyota Corolla offered basic features and acted as the
company’s new entry-level cars. Toyota also launched
the Cressida, with the fuel efficiency consumers desired
but space and amenities like air conditioning and
AM-FM radio.
During the 1980s and 1990s, Toyota gradually added
more models ranging in price, size, and features. In
1982, the company introduced the Camry—a four-door,
mid-sized car that offered more space than the Corona
and became the best-selling passenger car in North
America. The first of the company’s popular SUVs, the
4Runner, appeared in 1984 looking and acting much like
a pickup truck. It later morphed into more of a passenger
vehicle and led the way for the Rav4, Highlander, and
LandCruiser. Toyota also introduced a full-sized pickup
truck—today’s Tundra—and several sporty and afford-
able cars that targeted young adults.
In 1989, it launched Lexus, its luxury division, promis-
ing an unparalleled experience starting with white-glove
treatment at the dealership. Toyota understood, however,
that each country defines luxury differently. In the United
States, it meant comfort, size, and dependability; in
Europe, attention to detail and brand heritage. As a result,
the company varied its advertising depending on the
country and culture.
In 1997, Toyota launched the Prius, the first mass-
produced hybrid car, for $19,995—between the Corolla
and the Camry. The company’s keen focus on develop-
ing a clean-energy car was brilliantly timed. Before the
second-generation Prius hit showrooms in 2002, deal-
ers had already received 10,000 orders. Over the next
decade, Ford, Nissan, GM, and Honda followed the Prius
with models of their own.
Toyota also started creating vehicles for specific
target groups, like the Scion for young adults. Having
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2. Has Toyota done the right thing by manufacturing a
car brand for everyone? Why or why not?
Sources: Martin Zimmerman, “Toyota’s First Quarter Global Sales Beat GM’s Preliminary Numbers,” Los
Angeles Times, April 24, 2007; Charles Fishman, “No Satisfaction at Toyota,” Fast Company, December
2006–January 2007, pp. 82–90; Stuart F. Brown, “Toyota’s Global Body Shop,” Fortune, February 9,
2004, p. 120; James B. Treece, “Ford Down; Toyota Aims for No. 1,” Automotive News, February 2,
2004, p. 1; Brian Bemner and Chester Dawson, “Can Anything Stop Toyota?,” BusinessWeek, November
17, 2003, pp. 114–22; Tomoko A. Hosaka, “Toyota Counts Rising Costs of Recall Woes,” Associated
Press, March 16, 2010; “World Motor Vehicle Production by Manufacturer,” OICA, July 2009; Chris
Isidore, “Toyota Recall Costs: $2 Billion,” http://money.cnn.com, February 4, 2010; Associated Press,
“Toyota Sells Most Cars despite China Slump,” July 26, 2013; Trefis Team, “Japan Quake, Tsunami
Take Heavy Toll On Toyota,” Forbes, April 8, 2011; Mike Ramsey, “Toyota Calls Hybrids ‘Sturdy Bridge’ to
Automotive Future,” Wall Street Journal, September 30, 2013; Toyota Motor Corporation 2013 Annual
Report; www.toyota.com.
the global market, from family sedans and sport utility
vehicles to trucks and minivans. In 2013, the company
earned more than 22 trillion yen (or $217 billion) and sold
8.87 million automobiles, edging past General Motors to
become the world’s largest carmaker.
Questions
1. Toyota has built a huge manufacturing capac-
ity that can produce millions of cars each year
for a wide variety of consumers. Why was it able
to become so much bigger than any other auto
manufacturer?
M13_KOTL2621_15_GE_C13.indd 419 09/03/15 6:29 PM
420
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. How can services be defined and classified, and how do they differ from
goods? (p. 421)
2. What are the new services realities? (p. 428)
3. How can companies achieve excellence in services marketing? (p. 432)
4. How can companies improve service quality? (p. 439)
5. How can goods marketers improve customer-support services? (p. 440)
USAA’s legendary quality of service and
continual innovation has created strong
customer loyalty.
Source: © Blend Images/Alamy
M14_KOTL2621_15_GE_C14.indd 420 09/03/15 6:30 PM
421
14 Designing and
Managing Services
The Nature of Services
The Bureau of Labor Statistics reports that the service-producing sector will continue to be the dominant
employment generator in the future economy, adding about 18 million jobs between 2010 and 2018, or about
88 percent of the expected increase in total employment. By 2020, the goods-producing sector is expected to
account for 11.9 percent of total jobs, down from 12.4 percent in 2010 and 16.8 percent in 2000. Manufacturing
lost a staggering 5.7 million jobs from 2000 through 2010.3 These numbers and others have led to a growing
interest in the unique opportunities of marketing services.4
ServIce InduStrIeS Are everYwhere
The government sector, with its courts, employment services, hospitals, loan agencies, military services, police
and fire departments, postal service, regulatory agencies, and schools, is in the service business. The private
nonprofit sector—museums, charities, churches, colleges, foundations, and hospitals—is in the service business.
A good part of the business sector, with its airlines, banks, hotels, insurance companies, law firms, management
consulting firms, medical practices, motion picture companies, plumbing repair companies, and real estate firms,
is in the service business. Many workers in the manufacturing sector, such as computer operators, accountants,
and legal staff, are really service providers. In fact, they make up a “service factory” providing services to the
As companies find it harder to differentiate their physical products, they turn to
service differentiation, whether that means on-time delivery, better and faster response to inquiries, or quicker
resolution of complaints. Top service providers know these advantages well and also how to create memorable
customer experiences.1 One service business that understands how to better satisfy customers’ needs is USAA.2
USAA Insurance sells auto and other insurance products to current and former members of the
military and their families. The company has increased its share of each customer’s business by
launching a consumer bank, issuing credit cards, opening a discount brokerage, and offering
no-load mutual funds. Its legendary quality of service has led to the highest customer satisfac-
tion in the industry. USAA subscribers will often relate how the company looks out for them, even
counseling them not to take out more insurance than they need. With such levels of trust, the company enjoys
high customer loyalty and significant cross-selling opportunities. It cross-trains its call center reps to answer
investment queries as well as insurance-related calls, increasing productivity and reducing the need to transfer
customers between agents. With servicemen and women needing remote access to financial products earlier and
more often than civilians, USAA has become a technological leader in the financial services industry. It was the
first bank to allow iPhone deposits for its military customers and to
conduct face-to-face video chats with soldiers in the field. Whether a
customer is using a tablet, smart phone, or computer or visiting one
of its financial centers—located mostly near military bases—USAA is
committed to providing exemplary service.
Because it is critical to understand the special nature of
services and what that means to marketers, in this chapter we
systematically analyze services and how to market them most
effectively.
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422 PART 5 | CReATing VAlue
“goods factory.” And those in the retail sector, such as cashiers, clerks, salespeople, and customer service represen-
tatives, are also providing a service.
A service is any act or performance one party can offer to another that is essentially intangible and does not result
in the ownership of anything. Its production may or may not be tied to a physical product. Increasingly, manufactur-
ers, distributors, and retailers are providing value-added services, or simply excellent customer service, to differentiate
themselves. Many pure service firms are now using the Internet to reach customers; some operate purely online.
cAteGorIeS of ServIce MIx
The service component can be a minor or a major part of the total offering. We distinguish five categories of
offerings:
1. A pure tangible good such as soap, toothpaste, or salt with no accompanying services.
2. A tangible good with accompanying services, like a car, computer, or cell phone, with a warranty or special-
ized customer service contract. Typically, the more technologically advanced the product, the greater the need
for high-quality supporting services.
3. A hybrid offering, like a restaurant meal, of equal parts goods and services. People patronize restaurants for
both the food and its preparation.
4. A major service with accompanying minor goods and services, like air travel with supporting goods such as
snacks and drinks. This offering requires a capital-intensive good—an airplane—for its realization, but the
primary item is a service.
5. A pure service, primarily an intangible service, such as babysitting, psychotherapy, or massage.
Restaurants are good examples of hybrid offerings combining products and services. One of the more success-
ful restaurant brands is Panera Bread.5
Panera Bread Founded by Ron Shaich as a Boston bakery called the Cookie Jar in 1980, Panera
Bread has emerged over time as a leader, with Chipotle, in the “fast casual” restaurant category. Panera combines the
speed and convenience of fast food with the quality and menu variety of waiter-service dining. The chain targets “food
people who understand and respond to food or those on the verge of that” by selling fresh “real” food at full prices
customers are more than willing to pay. An unpretentious atmosphere—no table service, but no time limit—encourages
customers to linger. The brand is seen as family-oriented but also sophisticated, offering fresh-baked artisan bread and a
full menu of healthy, good-tasting sandwiches, salads, soups, and breakfast foods. Panera has innovated in a number of
different ways, infusing a strong social conscience in much that it does. With the slogan “Live Consciously. Eat Deliciously,”
CMO Michael Simon leads a number of social and community initiatives such as the Panera Bread Foundation, collabora-
tions with Feeding America, and donations to local hunger relief agencies and charities. The company has opened five
“pay-what-you-can” Panera Cares stores. In other marketing areas, it has boosted its digital spend and boasts a loyalty
program with 14 million members, accounting for almost half its transactions.
The range of service offerings makes it difficult to generalize without a few further distinctions.
• Services are equipment-based (automated car washes, vending machines) or people-based (window washing,
accounting services). People-based services vary by whether unskilled, skilled, or professional workers
provide them.
• Service companies can choose among different processes to deliver their service. Restaurants offer cafeteria-
style, fast-food, buffet, and candlelight service formats.
• Some services need the client’s presence. Brain surgery requires the client’s presence; a car repair does not. If
the client must be present, the service provider must be considerate of his or her needs. Thus beauty salon
operators will invest in décor, play background music, and engage in light conversation with the client.
• Services may meet a personal need (personal services) or a business need (business services). Service providers
typically develop different marketing programs for these markets.
• Service providers differ in their objectives (profit or nonprofit) and ownership (private or public). These two
characteristics, when crossed, produce four quite different types of organizations. The marketing programs
of a private investor hospital will differ from those of a private charity hospital or a Veterans Administration
hospital.
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Designing AnD MAnAging seRViCes | chapter 14 423
Customers typically cannot judge the technical quality of some services even after they have received them.
Figure 14.1 shows various products and services according to difficulty of evaluation.6 At the left are goods high
in search qualities—that is, characteristics the buyer can evaluate before purchase. In the middle are goods and
services high in experience qualities—characteristics the buyer can evaluate after purchase. At the right are goods
and services high in credence qualities—characteristics the buyer normally finds hard to evaluate even after
consumption.7
Because services are generally high in experience and credence qualities, there is more risk in their purchase,
with several consequences. First, service consumers generally rely on word of mouth rather than advertising.
Second, they rely heavily on price, provider, and physical cues to judge quality. Third, they are highly loyal to
service providers who satisfy them. Fourth, because switching costs are high, consumer inertia can make it chal-
lenging to entice business away from a competitor.
Although customer loyalty can be strong with services, in today’s modern communications environment, a ser-
vice failure can be a PR nightmare and undermine that loyalty, as Carnival Cruises found.8
A leader in the “fast casual”
restaurant category, Panera
Bread has also opened some
“pay-what-you-can” Panera
Cares stores.
So
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ce
: ©
Z
U
M
A
P
re
ss
, I
nc
./
A
la
m
y
Cl
ot
hi
ng
Easy to
Evaluate
Most goods
High in Search
Qualities
Difficult
to Evaluate
Je
w
el
ry
Fu
rn
itu
re
Ho
us
es
Au
to
m
ob
ile
s
Re
st
au
ra
nt
m
ea
ls
Va
ca
tio
n
Ha
irc
ut
s
Ch
ild
c
ar
e
Te
le
vi
si
on
re
pa
ir
Le
ga
l s
er
vi
ce
s
Ro
ot
c
an
al
Au
to
re
pa
ir
M
ed
ic
al
d
ia
gn
os
is
High in Credence
Qualities
High in Experience
Qualities
Most services
| Fig. 14.1 |
Continuum of
Evaluation for
Different Types
of Products
Source: Valarie A. Zeithaml, “How Consumer
Evaluation Processes Differ between Goods
and Services,” James H. Donnelly and William
R. George, eds., Marketing of Services
(Chicago: American Marketing Association,
1981). Reprinted with permission of the
American Marketing Association.
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424 PART 5 | CReATing VAlue
CarniVaL The Carnival Triumph was on the third day of a four-day cruise from Galveston, Texas, to
Mexico when an engine room fire set the boat adrift and disabled, leaving 3,100 passengers with little access to food,
water, and toilets. Waste spilled into the hallways, and decks below became insufferably hot. When the boat returned
to shore after a long five days, the CEO greeted passengers as they disembarked, given them each $500, a free flight
home, a refund for the trip, and credit for another cruise. Nevertheless, given the publicity surrounding what the media
called the “poop cruise,” the damage had been done. Public opinion of cruises as a whole dropped. Carnival found its
bookings declining by a hefty 20 percent, forcing the company to pass along steep discounts to fill boats. To avoid future
problems, the cruise line invested $600 million to upgrade its fleet and hired a new VP of Technical Operations to oversee
its safety initiatives.
dIStInctIve chArActerIStIcS of ServIceS
Four distinctive service characteristics greatly affect the design of marketing programs: intangibility, inseparabil-
ity, variability, and perishability.9
IntangIbIlIty Unlike physical products, services cannot be seen, tasted, felt, heard, or smelled before
they are bought. A person getting cosmetic surgery cannot see the results before the purchase, and the patient
in the psychiatrist’s office cannot know the exact outcome of treatment. To reduce uncertainty, buyers will look
for evidence of quality by drawing inferences from the place, people, equipment, communication material,
symbols, and price. Therefore, the service provider’s task is to “manage the evidence,” to “tangibilize the
intangible.”10
Service companies can try to demonstrate their service quality through physical evidence and presentation.11
Suppose a supermarket wants to position itself as the “fast” supermarket. It could make this positioning strategy
tangible through any number of marketing tools:
1. Place—The layout of the checkout area and the traffic flow should be planned carefully. Waiting lines should
not get overly long.
2. People—Checkout staff should be busy, but there should be a sufficient number to manage the workload.
3. Equipment—UPC scanners, credit card readers, and electronic registers should all be state of the art.
4. Communication material—signage and brochures—text and photos—should suggest efficiency and speed.
5. Symbols—The supermarket’s name and symbol could suggest fast service, for instance, “Speedy Shop.”
6. Price—The supermarket could advertise a $10 rebate if customers have to wait in line more than five minutes.
Disney is a master at “tangibilizing the intangible” and creating magical fantasies in its theme parks; so are
retailers such as Toys “R” Us and Bass Pro Shops.12 Table 14.1 measures brand experiences along sensory, affective,
behavioral, and intellectual dimensions. Applications to services are clear.
An on-board disaster on one of
Carnival’s cruise ships created
longer-term problems for the
company.
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ce
: ©
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re
g
B
al
fo
ur
E
va
ns
/A
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Designing AnD MAnAging seRViCes | chapter 14 425
Because there is no physical product, the service provider’s facilities—its primary and secondary signage,
environmental design and reception area, employee apparel, collateral material, and so on—are especially
important. All aspects of the service delivery process can be branded, which is why Allied Van Lines is con-
cerned about the appearance of its drivers and laborers, why UPS has developed such strong equity with its
brown trucks, and why Doubletree by Hilton hotels offers fresh-baked chocolate chip cookies to symbolize care
and friendliness.
Service providers often choose brand elements—logos, symbols, characters, and slogans—to make the service
and its key benefits more tangible—for example, the “friendly skies” of United, the “good hands” of Allstate, and
the “bullish” nature of Merrill Lynch.
InseparabIlIty Whereas physical goods are manufactured, then inventoried, then distributed, and
later consumed, services are typically produced and consumed simultaneously.13 A haircut can’t be stored—
or produced without the barber. The provider is part of the service. Because the client is also often present,
provider–client interaction is a special feature of services marketing. Buyers of entertainment and professional
services are very interested in the specific provider. It’s not the same concert if Taylor Swift is indisposed and
replaced by Beyoncé or if a corporate legal defense is supplied by an intern because antitrust expert David
Boies is unavailable. When clients have strong provider preferences, the provider can raise its price to ration its
limited time.
Several strategies exist for getting around the limitations of inseparability. The service provider can work with
larger groups. Some psychotherapists have moved from one-on-one therapy to small-group therapy to groups
of more than 300 people in a large hotel ballroom. The service provider can work faster—the psychotherapist
can spend 30 more efficient minutes with each patient instead of 50 less-structured minutes and thus see more
patients. The service organization can train more service providers and build up client confidence, as H&R Block
has done with its national network of trained tax consultants.
VarIabIlIty Because the quality of services depends on who provides them, when and where, and to whom,
services are highly variable. Some doctors have an excellent bedside manner; others are less empathetic. Service
firms know that variability in their performance puts them at risk. Hilton initiated a major program to create more
uniformity in guest experiences.14
table 14.1 Dimensions of Brand Experience
Sensory
• This brand makes a strong impression on my visual sense or other senses.
• I find this brand interesting in a sensory way.
• This brand does not appeal to my senses.
Affective
• This brand induces feelings and sentiments.
• I do not have strong emotions for this brand.
• This brand is an emotional brand.
Behavioral
• I engage in physical actions and behaviors when I use this brand.
• This brand results in bodily experiences.
• This brand is not action-oriented.
Intellectual
• I engage in a lot of thinking when I encounter this brand.
• This brand does not make me think.
• This brand stimulates my curiosity and problem solving.
Source: Joško Brakus, Bernd H. Schmitt, and Lia Zarantonello, “Brand Experience: What Is It? How Is It Measured? Does It Affect Loyalty?,” Journal of Marketing 73 (May
2009), pp. 52–68.
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426 PART 5 | CReATing VAlue
HiLtOn HOteLs Between 1964 when Hilton Hotels
sold its foreign licensee Hilton International Co. and 2006 when it bought
it back, the two companies operated largely independently, and as a result,
the Hilton brand was no longer providing customers with a uniform high-
quality experience. Nomura research analyst Harry Curtis said, “The brand
standards in Europe were always very different from those in the U.S. I think
they were, quite frankly, a bit slacker in Europe.” Chris Nassetta, appointed
CEO in 2008, initiated H360, a project to review everything from breakfast
fare to bath amenities, the décor of lobbies, Wi-Fi service, hotel architecture,
and handling of customer complaints at all the company’s hotels. Nassetta
said, “There was a huge amount of inconsistency in the granular standards
that travelers care about.” As a result of H360, independent owners of
Hilton-branded hotels in the United States and abroad have been forced to
upgrade to Hilton standards where necessary or be dropped from the Hilton
system. Protecting the brand seems to have served the company well—by
2010, the company had the highest brand equity of nearly 40 hotel chains.
Service buyers are aware of potential variability and often talk to
others or go online to collect information before selecting a specific
service provider. To reassure customers, some firms offer service guar-
antees that may reduce consumer perceptions of risk.15 Here are three
steps service firms can take to increase quality control.
1. Invest in good hiring and training procedures. Recruiting the
right employees and giving them excellent training are crucial,
whether they are highly skilled professionals or low-skilled work-
ers. Better-trained people exhibit six characteristics that improve
service quality: competence, courtesy, credibility, reliability, re-
sponsiveness, and communication skill.
2. Standardize the service-performance process throughout the
organization. A service blueprint can map out the service process,
the points of customer contact, and the evidence of
service from the customer’s point of view.16 Figure 14.2 shows a service blueprint for an overnight
guest at a hotel.17 Behind the scenes, the hotel must skillfully help the guest move from one step
to the next. Service blueprints can be helpful in identifying potential “pain points” for custom-
ers, developing new services, supporting a zero-defects culture, and devising service recovery strategies.
3. Monitor customer satisfaction. Employ suggestion and complaint systems, customer surveys, and third-party
comparison shopping. Customer needs may vary in different areas, allowing firms to develop region-specific
customer satisfaction programs.18 Firms can also develop customer information databases and systems for
more personalized service, especially online.19
Service firms can also design marketing communication and information programs so consumers learn more
about the brand than what their subjective experience alone tells them.
perIshabIlIty Services cannot be stored, so their perishability can be a problem when demand fluctuates.
To accommodate rush-hour demand, public transportation companies must own more equipment than if demand
was even throughout the day. Some doctors charge patients for missed appointments because the service value (the
doctor’s availability) exists only at the time of the appointment.
Demand or yield management is critical—the right services must be available to the right customers at the right
places at the right times and right prices to maximize profitability. Several strategies can produce a better match
between service demand and supply.20 On the demand (customer) side:
• Differential pricing will shift some demand from peak to off-peak periods. Examples include low matinee
movie prices and weekend discounts for car rentals.21
• Nonpeak demand can be cultivated. McDonald’s pushes breakfast service, and hotels promote minivacation
weekends.
Hilton’s H360 program created higher and more uniform service
standards for its properties all over the world.
So
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/A
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Designing AnD MAnAging seRViCes | chapter 14 427
• Complementary services can provide alternatives to waiting customers, such as cocktail lounges in restaurants
and automated teller machines in banks.
• Reservation systems are a way to manage the demand level. Airlines, hotels, and physicians employ them
extensively.
On the supply side:
• Part-time employees can serve peak demand. Colleges add part-time teachers when enrollment goes up;
stores hire extra clerks during holiday periods.
• Peak-time efficiency routines can allow employees to perform only essential tasks during peak periods.
Paramedics assist physicians during busy periods.
• Increased consumer participation frees service providers’ time. Consumers fill out their own medical records
or bag their own groceries.
• Shared services can improve offerings. Several hospitals can share medical-equipment purchases.
• Facilities for future expansion can be a good investment. An amusement park might buy surrounding land
for later development.
For fast-food chains, drive-through windows are a way to expand selling opportunities beyond sit-down
meals. An impressive 70 percent of revenue for the fast-food industry comes via drive-through windows.
According to QSR magazine, Taco Bell operates some of the fastest and most accurate drive-through windows.
The company aims for 3 minutes and 30 seconds per order and is constantly looking at ways to shave seconds and
cut costs.22
Arrive at
Hotel
Give Bags
to Bellperson
Check In
Greet and
Take Bags
Process
Registration
Go to Room Sleep
Shower
Deliver
Bags
Call Room
Service
Receive
Food
Take Bags
to Room
Take
Food Order
Registration
System
Prepare
Food
Registration
System
Eat Check Out
and Leave
Deliver
Food
Process
Check Out
Hotel Exterior
Parking
Cart for
Bags
Desk
Registration
Papers
Lobby
Key
Elevators
Hallways
Room
Care for
Bags
Room
Amenities
Bath Menu
Delivery
Tray
Food
Appearance Food
Bill
Desk
Lobby
Hotel Exterior
Parking
Receive
Bags
Line of Interaction
Line of Visibility
Line of Internal Interaction
| Fig. 14.2 |
Blueprint for Overnight Hotel Stay
Source: Valarie Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating Customer Focus across the Firm, 4th ed. (New York: McGraw-Hill, 2006).
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428 PART 5 | CReATing VAlue
The New Services Realities
Service firms once lagged behind manufacturers in their understanding and use of marketing because they were
small or they faced large demand or little competition. This has certainly changed. Some of the most skilled mar-
keters now are service firms. One that wins consistent praise for its brand-building success is Singapore Airlines.23
singaPOre airLines Singapore Airlines (SIA) has been consistently recognized as the world’s
“best” airline, in large part due to its stellar marketing. The carrier wins so many awards, it has to update its Web site
monthly to keep up to date. Famous for pampering passengers, it continually strives to create a “wow effect” and surpass
customers’ expectations. SIA was the first to launch on-demand entertainment systems in all classes, Dolby sound systems,
and a book-the-cook service that allows business- and first-class passengers to order meals before boarding. Thanks to
a first-of-its-kind $1 million simulator the airline built to mimic the air pressure and humidity inside a plane, it found that
taste buds change in the air and that, among other things, it needed to cut back on spices in its food. New SIA recruits
receive four months of training, twice the industry average, and existing staff get nearly three weeks of refresher training a
year (costing $70 million). With its stellar reputation, the carrier attracts some of the best local graduates and staffs each
flight with more attendants and other cabin crew members than other airlines. SIA applies a 40–30–30 rule: 40 percent of
resources go to training and motivating staff, 30 percent to reviewing process and procedures, and 30 percent to creating
new product and service ideas.
A ShIftInG cuStoMer relAtIonShIp
Because U.S. consumers generally have high expectations about service delivery, they often feel their needs are
not being adequately met. A 2013 Forrester study asked consumers to rate 154 companies on how well they met
their needs and how easy and enjoyable they were to do business with. Almost two-thirds of the companies
were rated only “OK,” “poor,” or “very poor.” Retail and hotel companies were rated the highest on average, and
Internet, health service, and television service providers were rated the worst. The highest-ranking companies
were Marshalls, USAA (bank), Amazon.com, Kohl’s, Target, Courtyard by Marriott, Sam’s Club, Rite Aid, Costco,
Lowe’s, TJ Maxx, JCPenney, and Marriott Hotels & Resorts.24
Service providers receive low marks for many reasons. Customers complain about inaccurate information;
unresponsive, rude, or poorly trained workers; and long waits. Even worse, many find their complaints never reach
A huge source of revenue for
fast food chains, Taco Bell has
excelled in its drive-through
speed and accuracy.
So
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ac
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B
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l C
or
p.
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Designing AnD MAnAging seRViCes | chapter 14 429
a human ear because of slow or faulty phone or online reporting systems. They say companies mishandle online
complaints by responding selectively or inconsistently (or not at all) and by “cutting and running,” appearing insin-
cere, or attempting to just “bribe” the consumer.25
It doesn’t have to be that way. Fifty-five operators on Butterball Turkey’s 800 number handle 100,000 calls a year
about how to prepare, cook, and serve turkeys; 12,000 people call on Thanksgiving Day alone. Trained at Butterball
University, the operators have all cooked turkeys dozens of different ways and can handle any queries that come
their way, including why you shouldn’t stash turkeys in snow banks and how to tell when the turkey is done.26
Savvy services marketers are recognizing the new services realities, such as the importance of the newly em-
powered customer, customer coproduction, and the need to engage employees as well as customers.
Customer empowerment The digital era has clearly altered customer relationships. Customers are
becoming more sophisticated about buying product-support services and are pressing for “unbundled services”
and the right to select the elements they want. They increasingly dislike having to deal with a multitude of
service providers handling different types of products or equipment. With that in mind, some third-party service
organizations now service a greater range of equipment. A plumbing business may also service air conditioners,
furnaces, and other components of a household infrastructure.
Most importantly, the Internet has empowered customers by letting them send their comments around the
world with a mouse click. A person who has a good customer experience is more likely to talk about it, but some-
one who has a bad experience will talk to more people.27 Ninety percent of angry customers reported sharing their
story with a friend; now, they can share it with strangers too. At PlanetFeedback.com shoppers can send a com-
plaint, compliment, suggestion, or question directly to a company, with the option to post comments publicly on
the site as well. Online sites such as Angie’s List, Yelp, Google Places, and Urbanspoon are other popular means to
spread the word on customer service adventures.
Even more challenging for firms, unhappy customers may choose to download a damaging video to share their
customer service miseries with others. “Marketing Memo: Lights! Camera! Customer Service Disasters!” describes
some notable customer service disasters brought to light with online videos.
When a customer complains, most companies now respond quickly. Comcast allows contact 24/7 by phone
and e-chat but also reaches out to customers and monitors blogs, Web sites, and social media. If employees see a
customer report a problem on a blog, they get in touch and offer help. Clear, helpful e-mail replies to customers’ que-
ries can be effective too.28 Delta Airlines introduced Delta Assist to monitor customer Twitter tweets and Facebook
posts around the clock with a 10-person team and to provide real-time replies to any queries or problems.29
More important than simply responding to a disgruntled customer, however, is preventing dissatisfaction from
occurring in the future. That may mean simply taking the time to nurture customer relationships with attention
from a real person. Solving a customer’s problem quickly and easily goes a long way toward winning long-term
loyal customers.30
Customer CoproduCtIon The reality is that customers do not merely purchase and use a service;
they play an active role in its delivery. Their words and actions affect the quality of their service experiences and
those of others as well as the productivity of frontline employees.31
Singapore’s exemplary service
quality starts with its famed
flight attendants.
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430 PART 5 | CReATing VAlue
Customers often feel they derive more value, and feel a stronger connection to the service provider, if they are
actively engaged in the service process. This coproduction can put stress on employees, however, and reduce their
satisfaction, especially if they differ from customers culturally or in other ways.32 Moreover, one study estimated
that one-third of all service problems are caused by the customer.33 The growing shift to self-service technologies
will likely increase this percentage.
Preventing service failures is crucial because recovery is always challenging. One of the biggest problems is
attribution—customers often feel the firm is at fault or, even if not, that it is still responsible for righting any
wrongs. Unfortunately, although many firms have well-designed and executed procedures to deal with their own
failures, they find managing customer failures—when a service problem arises from a customer’s mistake or lack of
understanding—much more difficult. Solutions come in all forms, as these examples show:34
1. Redesign processes and redefine customer roles to simplify service encounters. Staples transformed its
business with its “Easy” program to take the hassle out of ordering office supplies.
2. Incorporate the right technology to aid employees and customers. Comcast, the largest U.S. cable operator,
introduced software to identify network glitches before they affected service and to better inform call-center
operators about customer problems. Repeat service calls dropped 30 percent as a result.
3. Create high-performance customers by enhancing their role clarity, motivation, and ability. USAA reminds
enlisted policyholders to suspend their car insurance when they are stationed overseas.
4. Encourage “customer citizenship” so customers help each other. At golf courses, players can not only follow
the rules by playing and behaving appropriately, they can encourage others to do so.
satIsfyIng employees as well as Customers Excellent service companies know that positive
employee attitudes will strengthen customer loyalty.35 Instilling a strong customer orientation in employees can also
increase their job satisfaction and commitment, especially if they have high customer contact. Employees thrive in
customer-contact positions when they have an internal drive to (1) pamper customers, (2) accurately read their needs,
(3) develop a personal relationship with them, and (4) deliver high-quality service to solve customers’ problems.36
The explosion of videos online has posed many challenges to firms. Not only customers but also employees can damage the firm’s reputation, and the Internet
greatly magnifies the impact.
Many fast-food chains have had to deal with unflattering or inappropriate behavior their employees capture on video as a prank. Online clips have shown
a Wendy’s worker with his mouth wide open under a Frosty machine, a Domino’s employee putting cheese up his nose and mucus on food meant for delivery,
and a Taco Bell employee licking a stack of empty taco shells.
Any service organization may pay the price for a service breakdown. When Canadian singer Dave Carroll faced $1,200 in damages to his $3,000 Gibson
guitar after a United flight, he put his creative energy to good use and launched a humorous YouTube video, United Breaks Guitars, with this catchy refrain:
“United, you broke my Taylor guitar. United, some big help you are. You broke it, you should fix it. You’re liable, just admit it. I should have flown with
someone else or gone by car ’cuz United breaks guitars.”
Carroll’s follow-up video about his frustrating efforts to get United to pay for the damage was viewed more than 5 million times. The airline got the mes-
sage and donated a check for $1,200 to a charity Carroll designated. It now uses the incident to train baggage handlers and customer-service representatives.
After a security camera caught a FedEx driver delivering a computer monitor by throwing it over a six-foot fence instead of ringing the doorbell, the
21-second YouTube video placed by the irate customer received millions of views and heaps of negative publicity. FedEx cut a YouTube apology of its own,
titled “Absolutely, Positively Unacceptable”—a play on its old advertising slogan, though with only a fraction of the views. FedEx not only replaced the cus-
tomer’s computer monitor free of charge, it also has shared the video internally with employees.
Critics credit the companies for attempting to deal with their problems quickly and forcefully, while often faulting them too for their hiring and training
practices and for not creating a stronger, brand-supportive climate with employees.
Sources: “Bruce Horovitz, “Wendy’s Is Latest to See Gross Photo Go Viral,” USA Today, June 13, 2013; Bruce Horovitz, “Photo of Taco Bell Worker Licking Shells Sends
Shudders,” USA Today, June 3, 2013; Chad Brooks, “Caught on Video: Employees Behaving Badly,” Business News, March 28, 2012; Chunka Mui, “The 5 Most Brand-
Damaging Viral Videos of 2011,” Forbes, December 28, 2011; Laurent Belsie, “FedEx Delivery Video: Package Thrown. FedEx Apologizes on YouTube,” Christian Science
Monitor, December 23, 2011; Dan Reed, “United Makeover Aims to Refresh and Renew,” USA Today, September 17, 2009, pp. 1B–2B; Elisabeth Sullivan, “Happy Endings
Lead to Happy Returns,” Marketing News, October 30, 2009, p. 20.
Lights! Cameras! Customer Service Disasters!marketing memo
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Consistent with this reasoning, Sears found a high correlation be-
tween customer satisfaction, employee satisfaction, and store profitability.
The downside of not treating employees right is significant. A survey of
10,000 employees from the largest 1,000 companies found that 40 percent
of workers cited “lack of recognition” as a key reason for leaving a job.37
Given the importance of positive employee attitudes to customer
satisfaction, service companies must attract the best employees they
can find. They need to market a career rather than just a job. They must
design a sound training program and provide support and rewards for
good performance. They can use an intranet, internal newsletters, daily
reminders, and employee roundtables to reinforce customer-centered
attitudes. Finally, they must audit employee job satisfaction regularly.
The Panda Express restaurant chain has management turnover that’s
half the industry average, due in part to a combination of ample bonuses
and health benefits with a strong emphasis on worker self-improvement
through meditation, education, and hobbies. Special wellness seminars
and get-to-know-you events outside work help create a caring, nurtur-
ing atmosphere.38
Zappos has built a customer-focused organization admired by many.39
ZaPPOs Online retailer Zappos was cofounded by Tony Hsieh
in 1999 with superior customer service at the core of its culture. With
free shipping and returns, 24/7 customer service, and fast turnaround
on the numerous products offered on the site from thousands of brands,
the company works hard to create repeat customers. Unlike many other
companies, it has not outsourced its Zappos.com call centers, and half
the interview process is devoted to finding out whether job candidates are
sufficiently outgoing, open-minded, and creative to be a good cultural fit.
Zappos empowers its customer service reps to solve problems. When a
customer called to complain that a pair of boots was leaking after a year
of use, the rep sent a new pair even though the company’s policy is that
only unworn shoes are returnable. Every employee has a chance each
year to contribute to the company’s Culture Book, about life at Zappos
and how each department implements superior customer service from
selling to warehousing, delivery, pricing, and billing. Bought by Amazon.
com in 2009 for a reported $850 million but still run separately, the company now also sells clothing, handbags, and
accessories. Thanks to its success, it even offers two-day seminars to business executives eager to learn the secrets
behind Zappos’s unique corporate culture and approach to customer service.
Achieving Excellence
In Services Marketing
The increased importance of the service industry has sharpened the focus on what it takes to excel in the market-
ing of services.40 Here are some guidelines.
MArketInG excellence
Marketing excellence in services requires excellence in three broad areas: external, internal, and interactive
marketing (see Figure 14.3).41
• External marketing describes the normal work of preparing, pricing, distributing, and promoting the service
to customers.
Founder Tony Hsieh’s customer service practices at online retailer
Zappos are widely-admired and studied.
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432 PART 5 | CReATing VAlue
• Internal marketing describes training and motivating employees to serve customers well. Arguably the most
important contribution the marketing department can make is to be “exceptionally clever in getting everyone
else in the organization to practice marketing.”42
• Interactive marketing describes the employees’ skill in serving the client. Clients judge service not only by
its technical quality (Was the surgery successful?), but also by its functional quality (Did the surgeon show
concern and inspire confidence?).43 In interactive marketing, teamwork is often key. Delegating authority
to frontline employees can allow for greater service flexibility and adaptability because it promotes better
problem solving, closer employee cooperation, and more efficient knowledge transfer.44
A good example of a service company achieving marketing excellence is Charles Schwab.45
CHarLes sCHwaB Charles Schwab, one of the nation’s largest discount brokerage houses, uses
the telephone, Internet, and wireless devices to create an innovative combination of high-tech and high-touch services.
One of the first major brokerage houses to provide online trading, the company today serves more than 8 million indi-
vidual and institutional accounts. It offers account information and proprietary research from retail brokers, real-time
quotes, an after-hours trading program, the Schwab learning center, live events, online chats with customer service rep-
resentatives, a global investing service, and market updates delivered by e-mail. It has also been adding a slew of mobile
capabilities to satisfy its customer on the go. Schwab grew during the financial crisis by offering new products for sophis-
ticated investors, such as managed portfolio ETFs and fixed income funds. Besides the discount brokerage, the firm offers
mutual funds, annuities, bond trading, and now mortgages through its Charles Schwab Bank. Its success has been driven
by its efforts to lead in three areas: superior service (online, via phone, and in local branch offices), innovative products,
and low prices. Its long-running “Talk to Chuck” marketing campaign reinforces how the firm is always there to help its
customers.
technoloGY And ServIce delIverY
Technology is changing the rules of the game for services in a very fundamental way. Banking, for instance, is
being transformed by the ability to bank online and via mobile apps—some customers rarely see a bank lobby or
interact with an employee anymore.46 Technology also has great power to make service workers more productive.
When USAirways deployed handheld scanners to better track baggage, mishandled baggage decreased almost
50 percent. The new technology paid for itself in the first year and helped contribute to a 35 percent drop in
complaints.47
Company
External
Marketing
Internal
Marketing
CustomersEmployees Interactive
Marketing
Cleaning/
maintenance
services
Restaurant
industry
Financial/
banking
services
$
| Fig. 14.3 |
Three Types of
Marketing in Service
Industries
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Designing AnD MAnAging seRViCes | chapter 14 433
Sometimes new technology has unanticipated benefits. When BMW introduced Wi-Fi to its dealerships to help
customers pass the time more productively while their cars were being serviced, more chose to wait rather than use
loaner cars, an expensive item for dealers to maintain.48
Companies must avoid pushing technological efficiency so hard, however, that they reduce perceived
quality.49 Some methods lead to too much standardization, but service providers must deliver “high
touch” as well as “high tech.”50 Amazon has some of the most innovative technology in online retailing,
but it also keeps customers extremely satisfied when a problem arises even if they don’t actually talk to an
Amazon employee.51 More companies are introducing “live chat” features to blend technology with a human
voice.52
As Chapter 5 reviewed, the Internet lets firms improve their service offerings and strengthen their relationships
with customers by allowing for true interactivity, customer-specific and situational personalization, and real-time
adjustments of the firm’s offerings. But as companies collect, store, and use more information about customers,
they have also raised concerns about security and privacy. Companies must incorporate the proper safeguards and
reassure customers about their efforts.
BeSt prActIceS of top ServIce coMpAnIeS
Well-managed service companies that achieve marketing excellence have in common a strategic concept, a his-
tory of top-management commitment to quality, high standards, profit tiers, and systems for monitoring service
performance and customer complaints.
strategIC ConCept Top service companies are “customer obsessed.” They have a clear sense of
their target customers and their needs and have developed a distinctive strategy for satisfying them. At the
Four Seasons luxury hotel chain, employees must pass four interviews before being hired. Each hotel also
employs a “guest historian” to track guest preferences. With more than 10,000 branches in the United States,
more than any other brokerage firm, Edward Jones stays close to customers by assigning a single financial
advisor and one administrator to each office. Although costly, maintaining such small teams fosters personal
relationships.53
top-management CommItment Companies such as Marriott, Disney, and Ace Hardware have
a thorough commitment to service quality. Their managers look monthly not only at financial performance,
but also at service performance. Ray Kroc of McDonald’s insisted on continually measuring each McDonald’s
outlet on its conformance to QSCV: quality, service, cleanliness, and value. Some companies insert a reminder
along with employees’ paychecks: “Brought to you by the customer.” Sam Walton of Walmart required the
following employee pledge: “I solemnly swear and declare that every customer that comes within 10 feet of
me, I will smile, look them in the eye, and greet them, so help me Sam.” Allstate, Dunkin’ Brands, Oracle, and
USAA have high-level senior executives with titles such as Chief Customer Officer, Chief Client Officer, or
Chief Experience Officer who have the power and authority to improve customer service across every customer
interaction.54
Edward Jones has invested in
an extensive branch network
to foster closer customer
relationships.
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434 PART 5 | CReATing VAlue
hIgh standards The best service providers set high quality standards. In the highly regulated
banking industry, Citibank still aims to answer customer phone calls within 10 seconds and letters within two
days; it has been an industry leader in using social media for customer service.55 The standards must be set
appropriately high. A 98 percent accuracy standard may sound good, but it would result in 64,000 lost FedEx
packages a day; six misspelled words on each page of a book; 400,000 incorrectly filled prescriptions daily; 3
million lost piece of USPS mail each day; no phone, Internet, or electricity for eight days per year or 29 minutes
per day; 1,000 mislabeled or (mispriced) products at a supermarket; and 6 million people unaccounted for in
a U.S. census.
profIt tIers Firms have decided to coddle big spenders to retain their patronage as long as possible.
Customers in high-profit tiers get special discounts, promotional offers, and lots of special service; those in lower-
profit tiers who barely pay their way may get more fees, stripped-down service, and voice messages to process their
inquiries.
When the recent recession hit, Zappos decided to stop offering complimentary overnight shipping to first-
time buyers and offer it to repeat buyers only. The money saved was invested in a new VIP service for the com-
pany’s most loyal customers.56 Companies that provide differentiated levels of service must be careful about
claiming superior service, however—customers who receive lesser treatment will bad-mouth the company and
injure its reputation. Delivering services that maximize both customer satisfaction and company profitability can
be challenging.
monItorIng systems Top firms audit service performance, both their own and competitors’, on a regular
basis. They collect voice of the customer (VOC) measurements to probe customer satisfiers and dissatisfiers and
use comparison shopping, mystery or ghost shopping, customer surveys, suggestion and complaint forms, service-
audit teams, and customers’ letters.
We can judge services on customer importance and company performance. Importance-performance analysis
rates the various elements of the service bundle and identifies required actions. Table 14.2 shows how customers
rated 14 service elements or attributes of an automobile dealer’s service department on importance and perfor-
mance. For example, “Job done right the first time” (attribute 1) received a mean importance rating of 3.83 and a
table 14.2 Customer Importance and Performance Ratings for an Auto Dealership
Number Attribute Attribute Description Mean Importance Ratinga Mean Performance Ratingb
1 Job done right the first time 3.83 2.63
2 Fast action on complaints 3.63 2.73
3 Prompt warranty work 3.60 3.15
4 Able to do any job needed 3.56 3.00
5 Service available when needed 3.41 3.05
6 Courteous and friendly service 3.41 3.29
7 Car ready when promised 3.38 3.03
8 Perform only necessary work 3.37 3.11
9 Low prices on service 3.29 2.00
10 Clean up after service work 3.27 3.02
11 Convenient to home 2.52 2.25
12 Convenient to work 2.43 2.49
13 Courtesy buses and cars 2.37 2.35
14 Send out maintenance notices 2.05 3.33
a Ratings obtained from a four-point scale of “extremely important” (4), “important” (3), “slightly important” (2), and “not important” (1).
b Ratings obtained from a four-point scale of “excellent” (4), “good” (3), “fair” (2), and “poor” (1). A “no basis for judgment” category was also provided.
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Designing AnD MAnAging seRViCes | chapter 14 435
mean performance rating of 2.63, indicating that customers felt it was highly important but not performed well.
The ratings of the 14 elements are divided into four sections in Figure 14.4.
• Quadrant A in the figure shows important service elements that are not being performed at the desired lev-
els; they include elements 1, 2, and 9. The dealer should concentrate on improving the service department’s
performance on these elements.
• Quadrant B shows important service elements that are being performed well; the company needs to maintain
this high performance.
• Quadrant C shows minor service elements that are being delivered in a mediocre way but do not need any
attention.
• Quadrant D shows that a minor service element, “Send out maintenance notices,” is being performed in an
excellent manner.
Perhaps the company should spend less on sending out maintenance notices and use the savings to improve
performance on important elements. Management can enhance its analysis by checking on competitors’ perfor-
mance levels on each element.57
satIsfyIng Customer ComplaInts On average, 40 percent of customers who suffer through a bad
service experience stop doing business with the company.58 But if those customers are willing to complain first,
they actually offer the company a gift if the complaint is handled well.
Companies that encourage disappointed customers to complain—and also empower employees to remedy the
situation on the spot—have been shown to achieve higher revenues and greater profits than companies without
a systematic approach for addressing service failures.59 Frontline employees who adopt extra-role behaviors and
who advocate the interests and image of the firm to consumers, as well as taking initiative and engaging in consci-
entious behavior in dealing with customers, can be a critical asset in handling complaints.60 Customers evaluate
complaint incidents in terms of the outcomes they receive, the procedures used to arrive at those outcomes, and
the nature of interpersonal treatment during the process.61
Companies also are increasing the quality of their call centers and their customer service representatives (CSRs).
“Marketing Insight: Improving Company Call Centers” illustrates what top companies are doing.
dIfferentIAtInG ServIceS
Finally, customers who view a service as fairly homogeneous care less about the provider than about the
price. Marketing excellence requires service marketers to continually differentiate their brands so they
are not seen as a commodity. Consider how JetBlue and Southwest Airlines have succeeded through
differentiation.62
1
2
3
4
5
7
8
6
9
10
11
12
13
14
D. Possible overkill
Slightly Important
Extremely Important
Fa
ir
Pe
rf
or
m
an
ce
Ex
ce
lle
nt
P
er
fo
rm
an
ce
C. Low priority
B. Keep up the good workA. Concentrate here
| Fig. 14.4 |
Importance-
Performance Analysis
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436 PART 5 | CReATing VAlue
JetBLue and sOutHwest airLines In an industry often characterized by bank-
ruptcies and unhappy customers, two exceptions are JetBlue and Southwest Airlines. The companies have followed very
different paths on their way to financial and marketplace success. Southwest, the older of the two, developed an unusual
business model for an airline: short hauls only, no travel agents, no meals, no gates at major airports, and no fees. Although
the carrier has changed some of those practices, it remains determined to avoid the bag, ticket change, and other fees
adopted by competing airlines, believing it would lose $1 billion in revenue from lost bookings otherwise. A true discount
airline, Southwest has been able to offer low fares by virtue of a disciplined cost structure that keeps planes in the air and
seats filled, all with an informal, friendly style. The company hires employees with outgoing personalities who like to work
with people and empowers them to do so. JetBlue also started with a very different business model, primarily targeting
leisure travelers at its JFK hub in New York City. Another discount carrier with a low-cost structure, the company had the
advantage of offering comfy seats, live TV, and choice of snacks. It is building a $25 million lodge at JetBlue University in
Orlando to foster culture and camaraderie among employees and exploring options for business travelers, including fancier,
more expensive seating on its transcontinental routes.
prImary and seCondary serVICe optIons Marketers can differentiate their service offerings
in many ways, through people and processes that add value. What the customer expects is called the primary
Improving Company Call Centers
Many firms have learned the hard way that empowered customers will
not put up with poor service. After Sprint and Nextel merged, they set
out to run their call centers as cost centers, rather than a means to
enhance customer loyalty. Employee rewards were based on keeping
customer calls short, and when management started to monitor even
bathroom trips, morale sank. With customer churn spinning out of
control, Sprint Nextel adopted a plan to emphasize service over effi-
ciency. The company appointed its first chief service officer and started
rewarding operators for solving problems on a customer’s first call
rather than for keeping their calls short. After a year, the average cus-
tomer was contacting customer service only four times instead of eight.
Some firms, such as AT&T, JPMorgan Chase, and Expedia, have
established call centers in the Philippines rather than India because
Filipinos speak lightly accented English and are more steeped in U.S. cul-
ture than Indians, who speak British-style English and may use unfamiliar
idioms. Others are getting smarter about the type of calls they send to
off-shore call centers, homeshoring by directing more complex calls to
highly trained domestic customer service reps. These work-at-home
reps often provide higher-quality service at less cost with lower turnover.
Firms have to decide how many customer service reps they need.
One study showed that cutting just four reps at a call center of three
dozen sent the number of customers put on hold for four minutes or
more from zero to eighty. Firms can also try to reasonably get more
from each rep. Marriott and other firms such as KeyBank and Ace
Hardware have consolidated call center operations into fewer locations,
allowing them to maintain their number of reps in the process.
Hiring and training are influential too. An extensive study by Xerox
demonstrated that a good call-center worker with a high probability to
stay the six months necessary to recoup the company’s $5,000 invest-
ment was likely to have a creative rather than an inquisitive personal-
ity. Rather than emphasizing prior experience in hiring for its roughly
50,000 call-center jobs, Xerox now factors in answers to questions like
“I ask more questions than most people do” and “People tend to trust
what I say.”
Some firms are taking advantage of Big Data capabilities to match
individual customers with the call center agent best suited to meet
their needs. Using something like the methods of online dating sites,
advanced analytics technology mines transaction and demographic
information about customers (products or services they’ve purchased,
contract terms and expiration date, record of complaints or average call
wait time) and call center agents (average call handling time and sales
efficiency) to identify optimal matches in real time.
Finally, keeping call center reps happy and motivated is obvi-
ously a key to boosting their ability to offer excellent customer service.
American Express lets call center reps choose their own hours and
swap shifts without a supervisor’s approval.
Sources: Claudia Jasmand, Vera Blazevic, and Ko de Ruyter, “Generating
Sales while Providing Service: A Study of Customer Service Representatives’
Ambidextrous Behavior,” Journal of Marketing 76 (January 2012), pp. 20–37;
Kimmy Wa Chan and Echo Wen Wan, “How Can Stressed Employees Deliver
Better Customer Service? The Underlying Self-Regulation Depletion Mechanism,”
Journal of Marketing 76 (January 2012), pp. 119–37; Joseph Walker, “Meet the
New Boss: Big Data,” Wall Street Journal, September 20, 2012; Vikas Bajaj, “A
New Capital of Call Centers,” New York Times, November 25, 2011; Michael
Shroeck, “Why the Customer Call Center Isn’t Dead,” Forbes, March 15, 2011;
Michael Sanserino and Cari Tuna, “Companies Strive Harder to Please Customers,”
Wall Street Journal, July 27, 2009, p. B4; Spencer E. Ante, “Sprint’s Wake-Up Call,”
BusinessWeek, March 3, 2008, pp. 54–57; Jena McGregor, “Customer Service
Champs,” BusinessWeek, March 5, 2007.
marketing
insight
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Designing AnD MAnAging seRViCes | chapter 14 437
service package. Vanguard, one of the world’s largest no-load mutual fund company, has a unique client ownership
structure that lowers costs and permits better fund returns. Strongly differentiated from many competitors, the
brand grew through word of mouth, PR, and viral marketing.63
The provider can also add secondary service features to the package. In the hotel industry, various chains have
introduced such secondary service features as merchandise for sale, free breakfast buffets, and loyalty programs.
Seaside Luxe has transformed sleepy gift shops into profitable revenue generators for various resorts by making
them a more engaging shopping experience that reflects their particular customers and locale.64
Many companies are using the Internet to offer primary or secondary service features that were never possible
before. Salesforce.com uses cloud computing—centralized computing services delivered over the Internet—to run
customer-management databases for companies. Häagen-Dazs estimated it would have had to spend $65,000 for
a custom-designed database to stay in contact with its retail franchises across the country. Instead, the company
spent only $20,000 to set up an account with Salesforce.com and pays $125 per month for 20 users to remotely
monitor franchises via the Internet.65
The service company that regularly introduces innovations can intrigue customers and stay a step ahead of any
competitors.66 Sometimes it can even reinvent a service category, as Cirque du Soleil did.67
Cirque du sOLeiL In its more than 25-year history, Cirque du Soleil (French for “circus of the
sun”) has repeatedly broken loose from circus convention. The company takes traditional ingredients such as trapeze
artists, clowns, muscle men, and contortionists and places them in a nontraditional setting with lavish costumes,
new age music, and spectacular stage designs. And it eliminates other common circus elements—there are no
animals. Each production is loosely tied together with a theme such as “a tribute to the nomadic soul” (Varekai) or
“a phantasmagoria of urban life” (Saltimbanco). The group has grown from its Quebec street-performance roots to
become a half-billion-dollar global enterprise, with 3,000 employees on four continents entertaining audiences of
millions annually. Part of its success comes from a company culture that encourages artistic creativity and innova-
tion and carefully safeguards the brand. One new production is created each year—always in-house—and is unique:
There are no duplicate touring companies. In addition to Cirque’s mix of media and local promotion, an extensive
interactive e-mail program to its million-plus-member Cirque Club creates an online community of fans—20 percent
to 30 percent of all ticket sales come from club members. Generating $800 million in revenue annually, the Cirque du
Soleil brand has expanded to encompass a record label, a retail operation, and resident productions in Las Vegas (five
in all), Orlando, Tokyo, and other cities.
InnoVatIon wIth serVICes Innovation is as vital in services as in any industry.68 After years of losing
customers to its Hilton and Marriott hotel competitors, Starwood decided to invest $1.7 billion in its Sheraton
chain of 400 properties worldwide to give them fresher décor and brighter colors, as well as more enticing lobbies,
restaurants, and cafés. In explaining the need for the makeover, one hospitality industry expert noted, “There was
a time when Sheraton was one of the leading brands. But it lagged in introducing new design and service concepts
and developed a level of inconsistency.”69
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Although they have very different business models, discount airlines JetBlue and Southwest Airlines have both experienced great marketplace success.
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438 PART 5 | CReATing VAlue
On the other hand, consider how these relatively new service categories emerged and how, in some cases, orga-
nizations found creative solutions in existing categories.
• Online travel. Online travel agents such as Expedia and Travelocity offer customers the opportunity to
conveniently book travel at discount prices. However, they make money only when visitors go to their Web
sites and book travel. Kayak successfully entered the category later by applying the Google business model of
collecting money on a per-click basis. Kayak’s marketing emphasis is on building a better search engine by
offering more alternatives, flexibility, and airlines. Hipmunk is a newer online travel agency that tries to make
things even simpler for the savvy traveler by fitting all search results on one easy-to-navigate page—with fewer
ads—ranking flights on an “agony algorithm” that factors in price, duration, and number of stops and offering
information about and discounts on nearby hotels.70
• Retail health clinics. One of the hardest areas in which to innovate is health care. But whereas the current
health care system is designed to treat a small number of complex cases, retail health clinics address a large
number of simple cases. Retail health clinics such as Quick Care, RediClinic, and MinuteClinic are often
found in drugstores and other retail chain stores such as Target and Walmart. They typically use nurse prac-
titioners to handle minor illnesses and injuries such as colds, flu, and ear infections; offer various health and
wellness services such as physicals and exams for high school sports; and administer vaccinations. They seek
to offer convenient, predictable service and transparent pricing, without an appointment, seven days (and
evenings) a week. Most visits take no more than 15 minutes, and costs vary from $25 to $100.71
• Private aviation. Initially, private aviation was restricted to those who could own or charter a private plane.
Fractional ownership, pioneered by NetJets, allowed customers to pay a percentage of the cost of a private
plane plus maintenance and a direct hourly cost, making it more affordable for a broader customer base.
Marquis Jets came up with the simple idea of prepaid time on the world’s largest, best-maintained fleet, offer-
ing the consistency and benefits of fractional ownership without the long-term commitment. The two compa-
nies merged in 2010. Along with competitor Flight Options, private aviation firms are capitalizing on business
executives’ increasing dissatisfaction with commercial airline service and need for efficient travel options.72
New service categories are constantly being introduced to satisfy unmet needs and wants: Examples include
drybar, the new “blow-dry bar” salon concept created around the simple promise “No Cuts. No Color. Just
Blowouts for Only $40”; Reddit, a giant online digital bulletin board with tens of thousands of active forums where
registered users can post content or links; and online start-up Carelinx, which functions as a matchmaking site for
families with at-home elderly and nonmedical caregivers who can provide home care.73
Innovation in existing services can also have big payoffs. When Ticketmaster introduced interactive seat maps
that allowed customers to pick their own seats instead of being given one by a “best seat available” function, the
conversion rate from potential to actual buyers increased by 25 percent to 30 percent. Persuading a ticket buyer to
add an “I’m going . . .” message to Facebook adds an extra $5 in ticket sales on average; adding reviews of a show on
the site doubles the conversion rate.74
Cirque du Soleil defied
conventions to create a totally
unique and non-traditional
circus experience.
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Designing AnD MAnAging seRViCes | chapter 14 439
Managing Service Quality
The service quality of a firm is tested at each service encounter. If employees are bored, cannot answer simple
questions, or are visiting each other while customers are waiting, customers will think twice about doing busi-
ness there again. Wells Fargo has succeeded in the banking industry by focusing on its customers and delivering
superior service.75
weLLs FargO Through acquisitions and steady growth, Wells Fargo has become the largest U.S. bank.
Marketing has also played a key role. The company’s stagecoach symbol reinforces heritage and experience, but it’s the
way Wells Fargo operates that ensures continued success, beginning with a customer-focused corporate culture that aims
to “treat the customer right.” The bank also sees a financial benefit to its customer focus. As its values handbook notes:
The core of our vision and our strategy is “cross-selling.” . . . The more we give our customers what they need,
the more we know about them. The more we know about their other financial needs, the easier it is for them to
bring us more of their business. The more business they do with us, the better value they receive, the more loyal
they are.
Given the diverse nature of its customer base in California, Wells Fargo actively seeks and trains a diverse workforce. The
average customer uses 5.2 different bank products, roughly twice the industry average, thanks in part to the teamwork of
the company’s highly motivated staff. Wells Fargo’s market share declined from 2003 to 2006, but because it also avoided
issuing risky mortgages, its stock has delivered a 25 percent return over the past 10 years, comparable to Goldman Sachs
and better than many other large banks.
Service outcome and customer loyalty are influenced by a host of variables. One study identified more than
800 critical behaviors that cause customers to switch services; see the eight categories of those behaviors in
Table 14.3.76 A more recent study honed in on the service dimensions customers would most like companies to
measure. Knowledgeable frontline workers and the ability to achieve one-call-and-done rose to the top.77
Flawless service delivery is the ideal output for any service organization. “Marketing Memo: Recommendations
for Improving Service Quality” offers a comprehensive set of guidelines to which top service marketing
organizations can adhere. Two top activities are managing customer expectations and incorporating self-service
technologies.
New service categories are
always being created as with
drybar, a blow-dry only chain of
salons founded by Alli Webb.
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table 14.3 Factors Leading to Customer Switching Behavior
Pricing Response to Service Failure
• High price • Negative response
• Price increases • No response
• Unfair pricing • Reluctant response
• Deceptive pricing Competition
Inconvenience • Found better service
• Location/hours Ethical Problems
• Wait for appointment • Cheat
• Wait for service • Hard sell
Core Service Failure • Unsafe
• Service mistakes • Conflict of interest
• Billing errors Involuntary Switching
• Service catastrophe • Customer moved
Service Encounter Failures • Provider closed
• Uncaring
• Impolite
• Unresponsive
• Unknowledgeable
Source: Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing (April 1995), pp. 71–82. Reprinted with
permission from Journal of Marketing, published by the American Marketing Association.
MAnAGInG cuStoMer expectAtIonS
Customers form service expectations from many sources, such as past experiences, word of mouth, and advertis-
ing. In general, they compare perceived and expected service. If the perceived service falls below the expected
service, customers are disappointed. Successful companies add benefits to their offering that not only satisfy
customers but surprise and delight them by exceeding expectations.78 One company that has built its business
around exceeding customer expectations is American Express.79
aMeriCan exPress Under the direction of Executive VP Jim Bush, American Express has em-
braced a relationship-building approach in which customer service reps are judged in part on whether customers say they
would recommend the brand to friends or family (NPS or Net Promoter Score; see Chapter 5). Reps—called customer
care professionals—can see all kinds of relevant data on their screen when a customer calls, including name, age, ad-
dress, and buying and payment habits. Whether a cardmember loses a wallet or purse while traveling or needs assistance
finding a missing child in a foreign country, American Express has empowered its customer care professionals to do what-
ever it takes to help. This exemplary customer service brings financial benefits too. Cardmembers designated promoters
on the basis of NPS score increase their AmEx card spending 10 percent to 15 percent and are four to five times more
likely to remain customers, increasing shareholder value. Not least, because of its strong service culture and support,
American Express boasts some of the highest employee retention rates in the industry.
The service-quality model in Figure 14.5 highlights the main requirements for delivering high service quality.80
It identifies five gaps that prevent successful delivery:
1. Gap between consumer expectation and management perception—Management does not always correctly
perceive what customers want. Hospital administrators may think patients want better food, but patients may
be more concerned with nurse responsiveness.
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441
GAP 5
GAP 3GAP 1
GAP 4
GAP 2
CONSUMER
MARKETER
Word-of-mouth
communications
Past experiencePersonal needs
Expected service
Perceived service
Service delivery
(including pre-
and post-contacts)
External
communications
to consumers
Translation of
perceptions into
service-quality
specifications
Management
perceptions of
consumer
expectations
| Fig. 14.5 |
Service-Quality
Model
Sources: A. Parasuraman, Valarie A. Zeithaml,
and Leonard L. Berry, “A Conceptual Model of
Service Quality and Its Implications for Future
Research,” Journal of Marketing (Fall 1985),
p. 44. The model is more fully discussed or
elaborated in Valarie Zeithaml, Mary Jo Bitner,
and Dwayne D. Gremler, Services Marketing:
Integrating Customer Focus across the Firm,
6th ed. (New York: McGraw-Hill/Irwin, 2013).
Sources: Leonard L. Berry, A. Parasuraman, and Valarie A. Zeithaml, “Ten Lessons for Improving Service Quality,” MSI Reports Working Paper Series, No.03-001
(Cambridge, MA: Marketing Science Institute, 2003), pp. 61–82. See also Leonard L. Berry, Venkatesh Shankar, Janet Parish, Susan Cadwallader, and Thomas Dotzel,
“Creating New Markets through Service Innovation,” Sloan Management Review (Winter 2006), pp. 56–63; and Leonard L. Berry, Kathleen Seiders, and Dhruv Grewal,
“Understanding Service Convenience,” Journal of Marketing (July 2002), pp. 1–17.
Pioneers in conducting academic service research, Berry, Parasuraman, and Zeithaml offer 10 lessons they maintain are essential for improving service quality
across service industries.
1. Listening—Service providers should understand what customers really want through continuous learning about the expectations and perceptions of
customers and noncustomers (for instance, by means of a service-quality information system).
2. Reliability—Reliability is the single most important dimension of service quality and must be a service priority.
3. Basic service—Service companies must deliver the basics and do what they are supposed to do—keep promises, use common sense, listen to customers,
keep customers informed, and be determined to deliver value to customers.
4. Service design—Service providers should take a holistic view of the service while managing its many details.
5. Recovery—To satisfy customers who encounter a service problem, service companies should encourage customers to complain (and make it easy for them
to do so), respond quickly and personally, and develop a problem-resolution system.
6. Surprising customers—Although reliability is the most important dimension in meeting customers’ service expectations, process dimensions such as
assurance, responsiveness, and empathy are most important in exceeding customer expectations, for example, by surprising them with uncommon swift-
ness, grace, courtesy, competence, commitment, and understanding.
7. Fair play—Service companies must make special efforts to be fair, and to demonstrate fairness, to customers and employees.
8. Teamwork—Teamwork is what enables large organizations to deliver service with care and attentiveness by improving employee motivation and capabilities.
9. Employee research—Marketers should conduct research with employees to reveal why service problems occur and what companies must do to solve problems.
10. Servant leadership—Quality service comes from inspired leadership throughout the organization; from excellent service-system design; from the effec-
tive use of information and technology; and from a slow-to-change, invisible, all-powerful, internal force called corporate culture.
Recommendations for Improving Service Qualitymarketing memo
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2. Gap between management perception and service-quality specification—Management might correctly
perceive customers’ wants but not set a performance standard. Hospital administrators may tell the nurses to
give “fast” service without specifying speed in minutes.
3. Gap between service-quality specifications and service delivery—Employees might be poorly trained or
incapable of or unwilling to meet the standard; they may be held to conflicting standards, such as taking time
to listen to customers and serving them fast.
4. Gap between service delivery and external communications—Consumer expectations are affected by
statements made by company representatives and ads. If a hospital brochure shows a beautiful room but
the patient finds it cheap and tacky-looking, external communications have distorted the customer’s
expectations.
5. Gap between perceived and expected service—The consumer may misperceive the service quality. The physi-
cian may keep visiting the patient to show care, but the patient may interpret this as an indication that some-
thing is really wrong.
Based on this service-quality model, researchers identified five determinants of service quality, in descending
order of importance:81
1. Reliability—The ability to perform the promised service dependably and accurately.
2. Responsiveness—The willingness to help customers and provide prompt service.
3. Assurance—The knowledge and courtesy of employees and their ability to convey trust and confidence.
4. Empathy—The provision of caring, individualized attention to customers.
5. Tangibles—The appearance of physical facilities, equipment, staff, and communication materials.
Based on these five factors, the researchers developed the 21-item SERVQUAL scale (see Table 14.4).82 They
also note there is a zone of tolerance, or a range in which a service dimension would be deemed satisfactory,
anchored by the minimum level consumers are willing to accept and the level they believe can and should be
delivered.
table 14.4 SERVQUAL Attributes
Reliability Empathy
• Providing service as promised • Giving customers individual attention
• Dependability in handling customers’ service problems • Employees who deal with customers in a caring fashion
• Performing services right the first time • Having the customer’s best interests at heart
• Providing services at the promised time • Employees who understand the needs of their customers
• Maintaining error-free records • Convenient business hours
• Employees who have the knowledge to answer customer questions
Responsiveness Tangibles
• Keeping customer informed as to when services will be performed • Modern equipment
• Prompt service to customers • Visually appealing facilities
• Willingness to help customers • Employees who have a neat, professional appearance
• Readiness to respond to customers’ requests • Visually appealing materials associated with the service
Assurance
• Employees who instill confidence in customers
• Making customers feel safe in their transactions
• Employees who are consistently courteous
Source: A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry, “A Conceptual Model of Service Quality and Its Implications for Future Research,” Journal of Marketing (Fall 1985), pp. 41–50. Reprinted by
permission of the American Marketing Association.
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Subsequent research has extended the service-quality model. One dynamic process model of service quality
was based on the premise that customer perceptions and expectations of service quality change over time,
but at any one point they are a function of prior expectations about what will and what should happen during
the service encounter, as well as the actual service delivered during the last contact.83 Tests of the dynamic
process model reveal that the two different types of expectations have opposite effects on perceptions of
service quality.
1. Increasing customer expectations of what the firm will deliver can lead to improved perceptions of overall
service quality.
2. Decreasing customer expectations of what the firm should deliver can also lead to improved perceptions of
overall service quality.
Much work has validated the role of expectations in consumers’ interpretations and evaluations of the service
encounter and in the relationship they adopt with a firm over time.84 Consumers are often forward-looking with re-
spect to their decision to keep or drop a service relationship in terms of their likely behavior and interactions with a
firm. Any marketing activity that affects current or expected future usage can help to solidify a service relationship.
With continuously provided services, such as public utilities, health care, financial and computing services,
insurance, and other professional, membership, or subscription services, customers have been observed to
mentally calculate their payment equity—the perceived economic benefits in relationship to the economic costs.
In other words, customers ask themselves, “Am I using this service enough, given what I pay for it?” A negative
response will lead to change in behavior and possible termination of an account.
Long-term service relationships can have a dark side. An ad agency client may feel that over time the agency is
losing objectivity, becoming stale in its thinking, or beginning to take advantage of the relationship.85
IncorporAtInG Self-ServIce
technoloGIeS (SStS)
Consumers value convenience in services,86 and many person-to-person service inter-
actions are being replaced by self-service technologies (SSTs) intended to provide that
convenience. To traditional vending machines we can add automated teller machines
(ATMs), self-pumping at gas stations, self-checkout at hotels, and a variety of activities
on the Internet, such as ticket purchasing, investment trading, and customization of
products.
Chili’s is installing tabletop computer screens in its restaurants so customers can order
directly and pay by credit card. The restaurant found users of the service spend more per
check, in part because they buy more desserts and coffee when the screen is present.87 You
can add an app like WaitAway to your cell phone and be contacted by text message when
your table is ready at a restaurant—and monitor the length of the line in the process.88
OpenTable lets you easily book the reservation ahead of time.89
OPentaBLe OpenTable has become the world’s largest online reservation
system, letting users book a reservation on its Web site or with its smart-phone app at thousands
of restaurants around the world. A new deal with Facebook allows users to book on a restaurant’s
Facebook page. For a fairly modest setup charge and monthly fee—$249 a month for software
to manage bookings plus $1 for every diner seated through the Web site—a restaurant can tap
into OpenTable’s vast customer base. With half of all restaurants in North America signed up and
more than 15 million people seated monthly via the Web site, the service has been adding func-
tionality. For instance, the acquisition of Foodspotting for $10 million allows users to search menu
images by dish. Now more than 40 percent of its reservations are booked via phone or tablet,
OpenTable is beefing up its mobile strategy and adding payment services with a new app. Its new
priority is to take the massive amounts of data it has collected on users’ dining preferences to
offer customized dining recommendations.
OpenTable, the market leader in online restaurant
reservations, is investing heavily in its mobile
offerings.
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Not all SSTs improve service quality, but they can make service transactions more accurate, convenient, and
faster. Obviously, they can also reduce costs. One technology firm, Comverse, estimates the cost to answer a query
through a call center at $7, but online at only 10 cents. One of Comverse’s clients was able to direct 200,000 calls a
week through online self-service support, saving $52 million a year.90
Every company needs to think about improving its service using SSTs. Comcast can offer less customer service
because 40 percent of its installations are done by the customer and 31 percent of customers now manage their
accounts completely online.91
Successfully integrating technology into the workforce thus requires a comprehensive reengineering of the front
office to identify what people do best, what machines do best, and how to deploy them separately and together.92
Some companies have found the biggest obstacle is not the technology itself, but convincing customers to use it,
especially for the first time.
Customers must have a clear sense of their roles in the SST process, must see a clear benefit, and must feel
they can actually use it.93 SST is not for everyone. Although some automated voices are actually popular with
customers—the unfailingly polite and chipper voice of Amtrak’s “Julie” has been generally well-received by
callers—many can incite frustration and even rage.94
Managing Product-Support Services
No less important than service industries are product-based industries that must provide a service bundle.95
Manufacturers of equipment—small appliances, office machines, tractors, mainframes, airplanes—all must
provide product-support services, now a battleground for competitive advantage. Many product companies also
have a stronger online presence than before and must ensure they offer adequate—if not superior—service
online as well.
Chapter 13 described how products could be augmented with key service differentiators—ordering ease, deliv-
ery, installation, customer training, customer consulting, maintenance, and repair. Some equipment companies,
such as Caterpillar Tractor and John Deere, make a significant percentage of their profits from these services.96 In
the global marketplace, companies that make a good product but provide poor local service support are seriously
disadvantaged.
IdentIfYInG And SAtISfYInG cuStoMer needS
Traditionally, customers have had three specific worries about product service:97
• They worry about reliability and failure frequency. A farmer may tolerate a combine that will break down once
a year, but not one that goes down two or three times a year.
• They worry about downtime. The longer the downtime, the higher the cost. The customer counts on the
seller’s service dependability—the ability to fix the machine quickly or at least provide a loaner.
• They worry about out-of-pocket costs. How much does the customer have to spend on regular maintenance
and repair costs?
A buyer takes all these factors into consideration and tries to estimate the life-cycle cost, which is the prod-
uct’s purchase cost plus the discounted cost of maintenance and repair less the discounted salvage value. A one-
computer office will need higher product reliability and faster repair service than an office where other computers
are available if one breaks down. An airline needs 100 percent reliability in the air. Where reliability is important,
manufacturers or service providers can offer guarantees to promote sales.
To provide the best support, a manufacturer must identify the services customers value most and their relative
importance. For expensive equipment, manufacturers offer facilitating services such as installation, staff training,
maintenance and repair services, and financing. They may also add value-augmenting services that extend beyond
the functioning and performance of the product itself. Johnson Controls reached beyond its climate control equip-
ment and components business to manage integrated facilities, offering products and services that optimize energy
use and improve comfort and security.
A manufacturer can offer, and charge for, product-support services in different ways. One specialty organic-
chemical company provides a standard offering plus a basic level of services. If the customer wants additional
services, it can pay extra or increase its annual purchases to a higher level. Many companies offer service contracts
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Designing AnD MAnAging seRViCes | chapter 14 445
(also called extended warranties), in which sellers agree to provide maintenance and repair services for a specified
period of time at a specified contract price.
Product companies must understand their strategic intent and competitive advantage in developing ser-
vices. Are service units supposed to support and protect existing product businesses or grow as an independent
platform? Are the sources of competitive advantage based on economies of scale (size) or economies of skill
(smarts)?98
poStSAle ServIce StrAteGY
The quality of customer service departments varies greatly. At one extreme are those that simply transfer cus-
tomer calls to the appropriate person for action with little follow-up. At the other extreme are departments eager
to receive customer requests, suggestions, and even complaints and handle them expeditiously. Some firms even
proactively contact customers to provide service after the sale is complete.99
Customer-serVICe eVolutIon Manufacturers usually start by running their own parts-and-service
departments. They want to stay close to the equipment and know its problems. They also find it expensive and
time consuming to train others and discover they can make good money from parts and service if they are the only
supplier and can charge a premium price. In fact, many equipment manufacturers price their equipment low and
compensate by charging high prices for parts and service.
Over time, manufacturers switch more maintenance and repair service to authorized distributors and dealers.
These intermediaries are closer to customers, operate in more locations, and can offer quicker service. Still later,
independent service firms emerge and offer a lower price or faster service. A significant percentage of auto-service
work is now done outside franchised automobile dealerships by independent garages and chains such as Midas
Muffler and Sears. Independent service organizations handle mainframes, telecommunications equipment, and a
variety of other equipment lines.
the Customer-serVICe ImperatIVe Customer-service choices are increasing rapidly, however, and
equipment manufacturers increasingly must figure out how to make money on their equipment, independent of
service contracts. Some new-car warranties now cover 100,000 miles before customers have to pay for servicing.
The increase in disposable or never-fail equipment makes customers less inclined to pay 2 percent to 10 percent of
the purchase price every year for service. A company with several hundred laptops, printers, and related equipment
might find it cheaper to have its own service people on-site.
coproduction, and the need to satisfy employees as
well as customers.
4. Achieving excellence in service marketing calls not only
for external marketing but also for internal marketing to
motivate employees, as well as interactive marketing to
emphasize the importance of both “high tech” and “high
touch.”
5. Top service companies adopt a strategic concept,
have a history of top-management commitment to
quality, commit to high standards, establish profit
tiers, and pay attention to their systems for moni-
toring service performance and customer com-
plaints. They also differentiate their brands through
Summary
1. A service is any act or performance that one party can
offer to another that is essentially intangible and does
not result in the ownership of anything. It may or may
not be tied to a physical product.
2. Services are intangible, inseparable, variable, and per-
ishable. Each characteristic poses challenges and
requires certain strategies. Marketers must find ways to
give tangibility to intangibles, to increase the productiv-
ity of service providers, to increase and standardize the
quality of the service provided, and to match the supply
of services with market demand.
3. Marketing of services faces new realities in the 21st
century due to customer empowerment, customer
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446 PART 5 | CReATing VAlue
Applications
Marketing Debate
Is Service Marketing Different from
Product Marketing?
Some service marketers maintain that service marketing is
fundamentally different from product marketing and relies on
different skills. Some traditional product marketers disagree,
saying “good marketing is good marketing.”
Take a position: Product and service marketing are
fundamentally different versus Product and service
marketing are highly related.
Marketing Discussion
Educational Institutions
Colleges, universities, and other educational institutions
can be classified as service organizations. How can you
apply the marketing principles developed in this chapter
to your school? Do you have any advice for how it could
become a better service marketer?
and sports that allowed them to be happy and one with
the others. Club Med proposed a new social link that
was more festive and less binding on the client. It wanted
to reconcile individual liberty and social life. At that time,
in the holiday villages, customers could do what they
wanted without the concept of money being present.
Upon arrival, customers were provided with necklaces
made out of beads that allowed customers to pay for their
drinks (which would later be patented). Big tables allowed
customers to share their meals and get acquainted with
each other. The notions of freedom and equality were and
still remain fundamental to the culture of Club Med. Since
its creation, Club Med has never ceased to innovate. New
and unknown destinations were added to the portfolio—
Tahiti in 1955 and Leysin in Switzerland in 1956. In 1967,
Club Med created the first mini clubs for children.
Marketing Excellence
>> Club Med
Club Méditerranée or Club Med is a French company
founded in 1950 by Gérard Blitz and Gilbert Trigano
with the objective of offering holidays to customers with
an innovative “all-inclusive” formula. The idea of happi-
ness was at the heart of the concept. Today, Club Med
has 72 resorts in more than 30 countries, including the
Mediterranean, the tropics, and even the snow-covered
Alps. In 2013, more than 1.5 million customers chose
Club Med for their holidays.
Club Med has revolutionized holidays with its all-
inclusive formula. At the time of its creation, the company
aimed to give people a sense of freedom through nature
primary and secondary service features and continual
innovation.
6. Superior service delivery requires managing customer
expectations and incorporating self-service technolo-
gies. Customers’ expectations play a critical role in their
service experiences and evaluations. Companies must
manage service quality by understanding the effects of
each service encounter.
7. Even product-based companies must provide post-
purchase service. To offer the best support, a manu-
facturer must identify the services customers value
most and their relative importance. The service mix
includes both presale services (facilitating and value-
augmenting services) and postsale services (cus-
tomer service departments, repair and maintenance
services).
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
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Designing AnD MAnAging seRViCes | chapter 14 447
The organization’s customer relationship has also
evolved through the development of customer rela-
tionship management tools for a finer segmentation
of customers. In some agencies, a concept of sale
side-by-side has been developed to allow clients to
customize their holiday packages along with the sellers.
Club Med’s communication campaign “and what’s your
idea of happiness?” highlights this upmarket strategy.
This campaign has been deployed in 47 countries and in
22 languages.
The positioning of Club Med’s resorts, from 3 trident
to 5 trident, allows for a broader coverage of the competi-
tion field—from standardization, and luxury services to
all-inclusive offers. No other company offers this. Club
Med’s 4 trident resorts are in competition with the Swiss
Mövenpick (69 hotels in 23 countries) and the Jamaican
Sandals (12 resorts in Jamaica and the Bahamas). Club
Med’s 5 trident resorts compete with the Singaporean
Banyan Tree (30 hotels and 60 spas all over the world).
Finally, the Club Med luxury villas are in competition
with the villas of the Mauritius company Beachcomber
that works on the philosophy “dream is a serious thing”
(9 hotels, resorts, and luxury villas), Aman Resorts
(25 hotels in 15 countries), and the Ritz-Carlton (80 hotels
in 27 countries).
With the range and quality of its service, Club Med
turns holidays into a one-of-a-kind experience. The fo-
cus on a globalized customer strategy helped Club Med
grow and ensured its unique positioning in the market.
As of January 2015, the proposed takeover of Club Med
by the Chinese investor Fosun will help accelerate the
internationalization of the brand and its development in
Asia.
Questions
1. How did Club Med reach an upscale positioning and
achieve excellence in the quality of service?
2. Was Club Med’s upmarket positioning the only one
viable strategy?
3. Do you think that Club Med takes a risk by not in spe-
cializing in a particular range level, such as 4 trident or
5 trident?
Sources: Marcel Michelson, “The Battle For Tourism Firm Club Med, Sharks Or Saviors?” Forbes,
August 2, 2014; Julia Pimsleur, “Reinventing a 50-Year-Old Brand: Lessons From Le Club Med,”
Forbes, January 15, 2013; David Jolly, “Chinese Investors Raise Their Bid for Club Med,” The New
York Times, December 19, 2014; “La transformation du Club Med en une marque mondiale de
tourisme haut de gamme,” Le Hub, October 14, 2011; “Le haut-de-gamme, la stratégie payante
du Club Med face à la concurrence,” Paris Tribune, July 25, 2014; Martin Soma, “Club Med, Leader
des vacances tout compris, l’empire du soleil levant change d’orbite,” Management Magazine,
Novembre 2014, pp. 30−34; Club Med, www.clubmed.com.
In the years 1980−1990, decline of the attractiveness
of the concept of holiday homes and the sharp rise of
competition at lower prices weakened Club Med’s posi-
tion. The company’s strategy at that point was unclear—it
was neither a volume nor a value strategy.
In addition, the economic crisis of 1993, a result of
the Gulf war, and the events of September 2001 severely
affected Club Med in the same way it affected all kinds of
tourism.
In 2004, Club Med decided to redirect to a value
strategy in order to target an international clientele that
wanted comfort, elegance, service, and customization.
The holiday package offer was therefore repositioned
with the closure of entry-level vacation villages (classified
2 trident), renovation of other villages in 4 trident to 5 tri-
dent, and the creation of a new range of luxury 5 trident
(villages, villas, and chalets).
Club Med now offers an all-inclusive premium with
a high range of services and an extension of the à la
carte services that come with gourmet food and high-
quality drinks. Starting at 4 trident, all clubs offer a spa
in partnership with a famous brand. The shows in the
resorts are all designed by specialized companies. Clubs
for children have dedicated spaces with an emphasis on
nature and local culture. The sports schools offer up to
10 different disciplines with qualified coaches and quality
equipment.
For its 5 trident resorts, Club Med chooses sites
of exception in the most beautiful destinations of the
world, such as Cancun in Mexico, Punta Cana in
the Dominican Republic, and Kani in the Maldives. The
development of these resorts is entrusted to renowned
architects and designers. The services developed are
high-end with all-day room service, a concierge service,
and champagne offered after 6 p.m. Private villas come
with a butler.
In the 5 trident resorts in the Maldives, the villas are
placed on stilts; clients have private access to the sea,
and can observe marine life through a transparent floor in
the room.
This repositioning to the high-end has also neces-
sitated a change in the relationship between custom-
ers, called Gentle Members, and staff, called Gentle
Organizers. Club Med has 15,000 Gentle Organizers of
100 different nationalities to meet the requirements of its
international clientele. They are qualified in various fields
and specialize in cooking, sport, amusement, and client-
servicing. Trainings to inculcate precision and a sense of
premium service have been developed. A resort school
has even been created in Vittel, France; it welcomes
10,000 trainees every year. Club Med is always looking to
recruit real talent and unique personalities.
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http://www.clubmed.com
448 PART 5 | CReATing VAlue
patients. Coverage begins from the moment initial surgery
is completed and ends 24 hours after a patient has been
discharged.
Parkway’s Pantai Hospital in Penang, Malaysia,
caters to patients at all socioeconomic levels. At the low-
est price range, beds in the open ward, painted a cool
lavender, begin at $40. However, a Deluxe Room costing
$110 per night has the feel of a luxury chalet. It is fully air-
conditioned and features a lounge area with a dining table
and private bathroom. A refrigerator is provided as well:
patients in Pantai Penang’s Deluxe suites are meant to
feel as much at home as possible.
Gleneagles Singapore has a novel way of attract-
ing new patients. The hospital invites specialists to
purchase or rent rooms on its premises. Then, because
of proximity, these doctors tend to admit their patients
to Gleneagles, the admissions desk operates around
the clock to accommodate every patient that walks in
through the door. A patient is allowed to proceed to the
admissions desk at any time of day, without the need
for a referral, and be guaranteed a bed. Gleneagles has
700 doctors and, across the whole of Singapore, the
group has around 4228 doctors.
Parkway understands that patients have the right
to be treated with dignity, respect, and be kept fully ap-
prised of the progress of their treatment, via a translator
if needed. A patient in a Parkway hospital is also always
entitled to request a second opinion from an accredited
doctor; the company believes every patient must be al-
lowed to participate in, and understand, their own health
care needs. Parkway Patient Assistance (PPA), one of the
Gleneagles Singapore’s initiatives, provides a one-stop
service for international patients looking for specialist
expertise, personalized care, and cutting-edge technol-
ogy. PPA staff also provides advice on estimated costs of
treatments and procedures.
The CEO of Parkway Holdings, Dr. Tan See Leng,
has noted that Asia is becoming a hub for patient treat-
ment. He believes that the next 1–2 years will see great
benefits for Asian health care providers, as long as high-
quality service is provided. Parkway Group’s biggest
strength lies in its ability to capture the market for medical
tourists in the Asian region, expected to be worth at least
$10 billion by 2015. Low-cost, high-quality health care
in Asia is estimated to attract over 10 million tourists a
Marketing Excellence
>> Parkway Group Hotels
Parkway Group Healthcare, headquartered in
Singapore, was founded by Dr. Lim Cheok Peng and
others in 1987 and has grown internationally by an-
nexing other hospitals. For example, Parkway’s joint
venture with Apollo Hospitals in India has facilitated
its expansion into that market. Parkway’s hospitals
provide exceptional patient care and offer specialty
clinics in areas, including oncology, neurology, optom-
etry, and fertility. Its radiology department serves hos-
pitals regionally, its laboratories serve inpatients and
outpatients in Singapore, and it runs a physical reha-
bilitation service. In 2013, the Medical Travel and Health
Tourism Quality Alliance (MTQVA) ranked Singapore’s
Gleneagles Hospital, Parkway’s flagship facility, as ninth
highest on its list for medical tourism in 2013. According
to the MTQVA, Gleneagles provides top-quality medical
services in a top-quality location. This high acclaim is
testament to Parkway Group’s primary mission, which
is to make a difference in people’s lives through a high
level of patient care.
Parkway’s focus on providing excellent service starts
with its pre-admission procedure and continues through
post-surgical care. To take patients’ needs fully into
account, the company applies a different set of service
standards in different hospitals. In all its hospitals, how-
ever, patients can just approach the reception counter
and ask for assistance instead of making appointments
beforehand. Doctors on duty make the preliminary recom-
mendations, then hospital administrators bring in appro-
priate specialists to provide the necessary care.
Parkway operates 18 hospitals with over 3,500 beds
in Singapore, Malaysia, Brunei, India, China, and the United
Arab Emirates. Patients are treated like five-star hotel
guests. At Danat Al Emarat Women & Children’s Hospital in
Abu Dhabi, patient rooms are fully equipped with high-speed
Internet, video-on-demand, and video games for children.
The Royal Suites at Danat Al Emarat have dedicated medi-
cal staff exclusive to each suite. But Parkway attends to
more than just a patient’s comforts. At Singapore’s flagship
Gleneagles Hospital, post-surgical care insurance provides
coverage for treatment of postsurgical complications for all
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Designing AnD MAnAging seRViCes | chapter 14 449
2. Parkway hospitals do not employ many doctors
but depend on the use of the hospital services
by private specialists. What are the risks in this
approach?
Sources: “Moving Up the Value Chain,” Business Times, November 10, 2009; “Patient Guide,”
Parkway Health, www.parkwayhealth.com; “Overview,” Pantai Holdings Berhad, www.pantai.com;
“Sustainable Design,” Danat Al Emarat Women & Children’s Hospital, www.danatalemarat.ae;
“Gleneagles Hospital,” Parkway Health, www.parkwayhealth.com.
year. If Parkway Group continues to expand its reach and
maintain the world-class quality of its medical establish-
ments, then the sky is the limit for what it can achieve.
Questions
1. With many hospitals in Asia competing in the medical
tourism market, how can Parkway position itself in
order to attract more patients?
M14_KOTL2621_15_GE_C14.indd 449 09/03/15 6:30 PM
450
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. How can new products be categorized? (p. 451)
2. What challenges does a company face in developing new products and
services? (p. 453)
3. What organizational structures and processes do managers use to oversee
new-product development? (p. 456)
4. What are the main stages in developing new products and services? (p. 458)
5. What is the best way to manage the generation of new ideas? (p. 460)
6. What is the best way to manage concept and strategy development? (p. 467)
7. What is the best way to manage the commercialization of new products? (p. 472)
8. What factors affect the rate of diffusion and consumer adoption of newly
launched products and services? (p. 476)
The unique features of General Motors’
innovative OnStar in-car communication
system are highly valued by GM’s
customers.
Source: General Motors, LLC 2011
M15_KOTL2621_15_GE_C15.indd 450 09/03/15 6:31 PM
451
15 Introducing New
Market Offerings
New-Product Options
There are a variety of types of new products and ways to create them.2
Make or BuY
A company can add new products through acquisition or development. When acquiring, the company can buy
other companies, buy patents from other companies, or buy a license or franchise from another company. Swiss
food giant Nestlé has increased its presence in North America by acquiring a variety of different brands such as
Carnation, Stouffer’s, Ralston Purina, Dreyer’s Ice Cream, Jenny Craig, Gerber, Poland Springs, and PowerBar.3
But firms can successfully make only so many acquisitions. At some point, they need organic growth—the
development of new products from within. Praxair, worldwide provider of industrial gases, achieved an ambi-
tious goal of $200 million per year of double-digit new annual sales growth only through a healthy dose of organic
growth and a large number of smaller but significant $5 million projects.4
For product development, the company can create new products in its own laboratories, or it can contract
with independent researchers or new-product development firms to develop specific new products or new tech-
nology.5 Firms such as Samsung, GE, Diageo, Hershey, and USB have engaged new-product consulting boutiques
to provide fresh insights and points of view.
New-product development shapes the company’s future. Improved or replacement
products and services can maintain or build sales; new-to-the-world products and services can transform
industries and companies and change lives. Companies that challenge industry norms and apply imaginative
solutions will delight and engage consumers, as General Motors has done with OnStar.1
Technology has always played an important role in the automobile industry, and breakthrough innova-
tions can have enormous payoffs. General Motors has found a real winner in its OnStar technology,
a creative blend of cellular technology, Bluetooth, GPS, speakers, and, most importantly, human
operators. The in-car communication system provides both safety and convenience benefits, includ-
ing hands-free calling, turn-by-turn navigation, stolen vehicle location assistance, and an Automatic
Crash Response System that contacts the driver immediately if airbags have been activated and sends emergency
medical assistance if needed. Two thousand advisers staff the call center 24 hours a day and can help drivers if they
have a flat tire, run out of gas, need to find the nearest bank or pizza parlor, or just want the weather report or a phone
number. An OnStar adviser can even unlock a car via satellite. More
than 4.5 million GM owners were so satisfied with the service, which
is backed by a strong ad campaign, that they signed up to pay for it
after their six-month free trial expired. OnStar FMV (“for my vehicle”)
expands many of these benefits to non-GM cars for a sign-up fee and
monthly charge by replacing the existing rear view mirror with a special
OnStar mirror.
Marketers play a key role in new-product develop-
ment by identifying and evaluating ideas and working with R&D
and other areas in every stage of development. This chapter
provides a detailed analysis of the new-product development
process. Much of the discussion is equally relevant to new
products, services, or business models.
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452 PART 5 | CReATing VAlue
TYpes of New producTs
New products range from new-to-the-world items that create an entirely new market to minor improvements
or revisions of existing products. Most new-product activity is devoted to improving existing products. Some
recent product launches in the supermarket were brand extensions, such as Tide To Go Stain Eraser, Gillette
Fusion ProGlide Styler, Dawn Power Clean, Crest 3D White Glamorous White Toothpaste, and Coconut Delight
Oreo Fudge Cremes.6 At Sony, modifications of established products accounted for more than 80 percent of new-
product activity.
It is increasingly difficult to identify blockbuster products that will transform a market, but continuous
innovation can broaden the brand meaning and also force competitors to play catch-up.7 Armstrong World
Industries moved from selling floor coverings to selling ceilings to decorating all interior surfaces. Once a
running-shoe manufacturer, Nike now competes with makers of all types of athletic shoes, clothing, and equip-
ment. Its innovative FuelBand measures a person’s energy output during the day and allows it to be shared
with others online; its sock-like Flyknit Racer shoes are environmentally friendly and create a wholly different
running experience.8
Fewer than 10 percent of all new products are truly innovative and new to the world.9 These products incur the
greatest cost and risk. And while radical innovations can hurt the company’s bottom line in the short run, if they
succeed they can improve the corporate image, create a greater sustainable competitive advantage than ordinary
products, and produce significant financial rewards.10
Keurig pioneered the one-cup-at-a-time pod-style brewing system that has swept homes and offices alike. For
the speed, convenience, and variety offered, users are willing to pay 10 times the cost of a traditionally brewed cup
of coffee, helping Keurig sales approach $4 billion and its sales based revenue market share exceed 40 percent.11
Another innovative new product that commands a premium is Beats by Dr. Dre headphones.12
Beats By Dre Born Andrew Young and a founding
member of N.W.A and famed rap producer, Dr. Dre had made an indel-
ible mark on the music scene before becoming an entrepreneur. His
Beats by Dre headphones, launched in 2006 with music mogul Jimmy
Iovine, have become a must for many music lovers despite costing
$300, nearly 10 times what ordinary ear buds sell for. Their appeal is
in the thumping bass-heavy sound and sleek look, even if the reviews
among audiophiles are somewhat mixed. With strong adoption among
celebrity musicians and athletes—the headphones were seen every-
where at the 2012 Summer Olympic Games in London—Beats became
as fashionable as they were practical and an essential modern lifestyle
item. Beats by Dre has partnered with firms like Chrysler, HP, and HTC to
build its sound technology in their cars, computers, and smart phones
and has also introduced its own version of ear buds and other products.
The company was acquired by Apple for $3 billion in August 2014.
Companies typically must create a strong R&D and marketing
partnership to pull off a radical innovation.13 The right corporate
culture is another crucial determinant; the firm must prepare to
cannibalize existing products, tolerate risk, and maintain a future
market orientation.14 A keen understanding of customers is also
paramount.15
Few reliable techniques exist for estimating demand for radi-
cal innovations.16 Focus groups can provide perspective on customer
interest and need, but marketers may need a probe-and-learn approach
based on observation and feedback of early users’ experiences and other
means such as online chats or product-focused blogs.
High-tech firms in telecommunications, computers, consumer elec-
tronics, biotech, and software in particular seek radical innovation.17
They face a number of product-launch challenges: high technological
Beats by Dre’s innovative features and design permits the brand to
command a premium price in the marketplace.
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inTRoduCing new MARkeT offeRings | chapter 15 453
uncertainty, high market uncertainty, fierce competition, high investment costs, short product life cycles, and scarce
funding sources for risky projects.18 Successes abound, however. Goggle has launched a number of path-breaking
products and is looking for more.19
GOOGLe Since its beginnings as the quintessential search engine, Google has launched a wide variety of
products that earned its reputation as one of the most innovative companies and amassed a market cap exceeding $300
billion. The company has introduced a series of related online products—notably gmail e-mail, Google+ social networking,
and the Google Chrome enhanced browser. It has made a strong entry in the mobile market with its Andrioid operating sys-
tem and its acquisition of Motorola Mobility for $12.5 billion. But not all new products are hits; some that seemed to miss
their mark were Google Answers, Dodgeball, and Lively. Perhaps one of Google’s most ambitious new products is Google
Glass, a computer worn like eyewear with an optical display that allows the user to answer calls, record video, and take
photos with voice activation, connect to a smart phone, post to social media, and perform Google searches, among other
things. The company has been beta-testing the product with thousands of Glass Explorers, who are paying $1,500 each for
the opportunity to be an early adopter and pass along feedback. Google X, the internal group that developed Google Glass,
is looking into other “out of this world” products, like self-driving cars and balloons that can transmit broadband Internet to
remote regions from 12 miles in the air.
Challenges in New-Product
Development
In retailing, consumer goods, electronics, autos, and other industries, the time to bring a product to market has
been cut in half.20 For instance, luxury leather-goods maker Louis Vuitton has implemented a new factory format
dubbed Pégase so it could ship fresh collections to its boutiques every six weeks—more than twice as frequently
as in the past—giving customers more new looks to choose from.21
Google co-founder Sergey
Brin is a strong supporter of
innovative new products such
as Google Glass.
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454 PART 5 | CReATing VAlue
The INNovaTIoN
IMperaTIve
In an economy of rapid change, continuous innovation
is a necessity. Companies that fail to develop new prod-
ucts leave themselves vulnerable to changing customer
needs and tastes, shortened product life cycles, increased
domestic and foreign competition, and especially new
technologies. Google, Dropbox, and Box update their
software daily.22
Highly innovative firms are able to repeatedly
identify and quickly seize new market opportunities.
They create a positive attitude toward innovation and
risk taking, routinize the innovation process, practice
teamwork, and allow their people to experiment and
even fail. One such firm is W. L. Gore.23
W. L. GOre Best known for its GORE-TEX
high-performance fabrics, W. L. Gore has introduced
breakthrough versions of guitar strings, dental floss,
medical devices, and fuel cells—while constantly
reinventing the uses of the polymer polytetrafluoroeth-
ylene (PTFE). Several principles guide the company’s
new-product development. First, it works with potential
customers. Its thoracic graft, designed to combat heart
disease, was developed in close collaboration with
physicians. Second, Gore has a distinctly egalitarian
culture; it lets employees choose projects and appoints
few product leaders and teams. The company likes to
nurture “passionate champions” who convince oth-
ers a project is worth their time and commitment, and
leaders have positions of authority because they have followers. The development of the fuel cell rallied more than
100 of Gore’s 9,000 research associates. Third, all research associates spend 10 percent of their work hours on
“dabble time,” developing their own ideas. Promising ideas are judged according to a “Real, Win, Worth” exercise:
Is the opportunity real? Can we win? Can we make money? Fourth, Gore knows when to let go, though dead ends
in one area can spark innovation in another: Elixir acoustic guitar strings were the result of a failed venture into
bike cables. Even successful ventures may need to move on. Glide shred-resistant dental floss was sold to Procter
& Gamble because Gore knew retailers want to deal with a company selling a family of health care products. The
10,000-person private company now has operations in dozens of countries around the globe and revenue of more
than $3 billion.
Innovation is about “creating new choices” the competition doesn’t have access to, says IDEO’s CEO Tim
Brown. It isn’t about brilliant people spontaneously generating new ideas, he argues, but about finding hidden
assumptions and ignored processes that can change the way a company does business.24
New-producT success
Most established companies focus on incremental innovation, entering new markets by tweaking products for new
customers, using variations on a core product to stay one step ahead of the market, and creating interim solutions for
industry-wide problems. With the widespread adoption of smart phones, mobile apps are becoming a lucrative busi-
ness, as the creators of Angry Birds video game have found, securing their leadership with continual innovation.25
YOU STAY DRY,
PROTECTED AND
FOCUSED OUTSIDE
gore-tex.com
Experience more
WITH GORE-TEX®
PRO SHELL INSIDE.
The question isn’t if you’re going to climb in
unpredictable weather, it’s how. Whether
enduring gusty winds, rain, sleet or snow,
GORE-TEX products improve performance by
providing durably waterproof, windproof and
breathable protection and comfort—guaranteed.
That’s why the best outdoor brands choose
GORE-TEX product technology.
The North Face
Point Five Jacket
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. G
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oc
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Through different policies and processes, W.L. Gore has created an innovative culture
that has produced numerous new product successes.
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inTRoduCing new MARkeT offeRings | chapter 15 455
anGry BirDs A spectacular success, Angry Birds has transcended its origins as a mobile app to
become a cultural phenomenon and entrenched brand franchise. Created in Finland by Niklas Hed and commercialized
by Rovio Entertainment, the video game uses a slingshot to hurl brightly colored birds at green pigs trying to take shelter.
It scored 50 million downloads in its first year while becoming the top seller at the Apple App Store, spawning a series
of sequels, RIO Seasons and Space, and two subsequent releases tied to Star Wars. Rovio has kept users interested in
existing titles by continually adding new levels to the games—Angry Birds had 63 levels when it began, which grew to
more than 360. Taking a page from Disney, the brand has been successfully extended within and outside entertainment,
with toys, games, backpacks, fruit snacks, underwear, and more that have reached $650 million in sales. Rovio—
Finnish for “bonfire”—is worth an estimated $9 billion. There is an Angry Birds television show, comic book series, and
planned 3-D movie; its YouTube site has had more than 1 billion views. The brand has more than 400 partners, from
Coca-Cola to Intel to Kraft. Rovio has also opened up retail stores in China and themed activity parks in Finland, China,
and the United Kingdom.
Newer companies create disruptive technologies that are cheaper and more likely to alter the competitive space.
Established companies can be slow to react or invest in these disruptive technologies because they threaten their
investment. Then they suddenly find themselves facing formidable new competitors, and many fail.26 To avoid this
trap, incumbent firms must carefully monitor the preferences of both customers and noncustomers and uncover
evolving, difficult-to-articulate customer needs.27
What else can a company do? In a classic study of industrial products, new-product specialists Cooper
and Kleinschmidt found that the number-one success factor is a unique, superior product. Such products
succeed 98 percent of the time, compared with products with a moderate advantage (58 percent success) or
minimal advantage (18 percent success). Another key factor is a well-defined product concept. The com-
pany carefully defines and assesses the target market, product requirements, and benefits before proceeding.
Other success factors are technological and marketing synergy, quality of execution in all stages, and mar-
ket attractiveness. Products designed with other countries and a global perspective in mind also tended to
fare better.28
New-producT faIlure
New products continue to fail at rates estimated as high as 50 percent or even 95 percent in the United States and
90 percent in Europe.29 The reasons are many: ignored or misinterpreted market research; overestimates of mar-
ket size; high development costs; poor design or ineffectual performance; incorrect positioning, advertising, or
Mobile app Angry Birds is so
popular that there are even
themed activity parks in some
different countries.
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456 PART 5 | CReATing VAlue
price; insufficient distribution support; competitors who fight back hard; and inadequate ROI or payback. Some
additional drawbacks new-product launches face are:
• Fragmented markets. Companies must aim their new products at smaller market segments than before,
which can mean lower sales and profits for each product.
• Social, economic, and governmental constraints. New products must satisfy consumer safety and environ-
mental concerns and stringent production constraints.
• Cost of development. A company typically must generate many ideas to find just one worthy of development
and thus often faces high R&D, manufacturing, and marketing costs.
• Capital shortages. Some companies with good ideas cannot raise the funds to research and launch them.
• Shorter required development time. Companies must learn to compress development time with new tech-
niques, strategic partners, early concept tests, and advanced marketing planning.
• Poor launch timing. New products are sometimes launched too late, after the category has already taken off,
or too early for sufficient interest to have gathered.
• Shorter product life cycles. Rivals are quick to copy success. At one time, Sony enjoyed a three-year lead on
its new products, but Matsushita and others learned to copy them within six months, leaving Sony with barely
time to recoup its investment.
• Lack of organizational support. The new product may not mesh with the corporate culture or receive the
financial or other support it needs.
But failure comes with the territory, and truly innovative firms accept it as part of what’s necessary to be suc-
cessful. Silicon Valley marketing expert Seth Godin maintains, “It is not just OK to fail; it’s imperative to fail.”30
Many Internet companies are the result of failed earlier ventures and experience numerous setbacks as their ser-
vices evolve. Dogster.com, a social network site for dog lovers, emerged after the spectacular demise of Pets.com.31
Failure is not always the end of an idea. Recognizing that 90 percent of experimental drugs are unsuccessful, Eli Lilly
looks at failure as an inevitable part of discovery and encourages its scientists to find new uses for compounds that fail
at any stage in a human clinical trial. Evista, a failed contraceptive, became a $1 billion-a-year drug for osteoporosis.
Strattera was unsuccessful as an antidepressant but became a top seller for attention deficit/hyperactivity disorder.32
Organizational Arrangements
Many companies use customer-driven engineering to develop new products, incorporating customer preferences in the
final design. Some, such as SAP, have relied on organizational changes to help develop more successful new products.33
saP After a series of high-profile acquisitions of firms such as SuccessFactors, Sybase, and Ariba, business software
leader SAP set out to create internal start-ups to pursue new business ideas in adjacent markets or just in markets where
large companies typically did not operate. Hiring entrepreneurs from inside and outside its ranks, the company treated every
project much like a typical start-up, making funding decisions like an investor at each stage of the new-product development
process. In formulating their business ideas, the start-ups had to be cognizant of SAP’s global footprint and the need to satisfy
regulatory requirements around the world, but they could also tap into its strong relationships with clients. One success was
the development of HANA, the company’s real-time database analysis technology. HANA was designed to be a powerful com-
puting platform, so SAP also enlisted the developer community to discover applications that could be part of that platform.
New-product development requires senior management to define business domains, product categories, and
specific criteria. One company established the following acceptance criteria:
• The product can be introduced within five years.
• The product has a market potential of at least $50 million and a 15 percent growth rate.
• The product can provide at least 30 percent return on sales and 40 percent on investment.
• The product can achieve technical or market leadership.
BudGeTING for New-producT developMeNT
R&D outcomes are so uncertain that it is difficult to use normal investment criteria when budgeting for
new-product development. Some companies simply finance as many projects as possible, hoping to achieve a few
winners. Others apply a conventional percentage-of-sales figure or spend what the competition spends. Still oth-
ers decide how many successful new products they need and work backward to estimate the required investment.
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Table 15.1 shows how a company might calculate the cost of new-product development. The new-products
manager at a large consumer packaged-goods company reviewed 64 ideas. Sixteen passed the screening stage and
cost $1,000 each to review at this point. Half, or eight, survived the concept-testing stage, at a cost of $20,000 each.
Four survived the product-development stage, at a cost of $200,000 each. Two did well in the test market, costing
$500,000 each. When they were launched, at a cost of $5 million each, one was highly successful. Thus, this one
successful idea cost the company $5,721,000 to develop, while 63 others fell by the wayside for a total development
cost of $13,984,000. Unless the company can improve its pass ratios and reduce costs at each stage, it will need to
budget nearly $14 million for each successful new idea it hopes to find.
Hit rates vary. Inventor Sir James Dyson claims he made 5,127 prototypes of his bagless, transparent vacuum
cleaner over a 14-year period before getting it right, resulting in the best-selling vacuum cleaner by revenue in the
United States with more than 20 million sold and annual revenue of more than $1.5 billion. He doesn’t lament his
failures, though: “If you want to discover something that other people haven’t, you need to do things the wrong
way . . . watching why that fails can take you on a completely different path.” His latest successes: the Airblade, an
energy-efficient hand drier for public restrooms, and the Air Multiplier, a bladeless table fan.34
orGaNIzING New-producT developMeNT
Companies handle the organizational aspect of new-product development in several ways. Many assign respon-
sibility to product managers. But product managers are often busy managing existing lines and may lack the skills
and knowledge to develop and critique new products.
Table 15.1 Cost of Finding One Successful New Product
(Starting with 64 New Ideas)
Stage Number of Ideas Pass Ratio Cost per Product Idea Total Cost
1. Idea screening 64 1:4 $ 1,000 $ 64,000
2. Concept testing 16 1:2 20,000 320,000
3. Product development 8 1:2 200,000 1,600,000
4. Test marketing 4 1:2 500,000 2,000,000
5. National launch 2 1:2 5,000,000 10,000,000
$5,721,000 $13,984,000
Inventor Sir James Dyson
acknowledges that he has
endured many unsuccessful
new product ideas on his way to
finding a few successful ones.
So
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: ©
A
dr
ia
n
Sh
er
ra
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/A
la
m
y
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Kraft and Johnson & Johnson have employed new-product managers who report to category managers.
Westinghouse has used growth leaders—a full-time job for its most creative and successful managers.35 Intuit uses a
team of innovation catalysts—design-thinking coaches—to help mangers work on initiatives throughout the organi-
zation.36 Some companies have a high-level management committee charged with reviewing and approving proposals.
Large companies often establish a new-product department headed by a manager with substantial authority,
access to top management, and responsibility for generating and screening new ideas, working with the R&D
department, and carrying out field testing and commercialization. Eli Lilly put every department engaged in the
process of turning molecules into medicine—from R&D staff to the team who seek FDA approval—under one roof
to improve efficiency and cut development time.37
Some firms open innovation centers in new geographical locations to better design new products for those
regions. Diageo, purveyor of premium spirits, beers, and wine, opened such a center in Singapore to support the
company’s Asian growth initiatives.38
Cross-FunCTional Teams 3M, Dow, and General Mills have assigned new-product development
to venture teams, cross-functional groups charged with developing a specific product or business. These
“intrapreneurs” are relieved of other duties and given a budget, time frame, and “skunkworks” setting.
Skunkworks are informal workplaces, sometimes garages, where intrapreneurial teams work to develop new
products. As it transforms itself from a PC company to a solutions company in the cyber-security and data cen-
ter design and management business, Dell has established separate headquarters for its new units with marching
orders to think entrepreneurially.39
Communities of practice are often housed on internal Web sites where employees from different departments are
encouraged to share knowledge and skills with others.40 Japanese pharmaceutical maker Esai Co. has formed more
than 400 innovation communities. One helped develop a jelly-like medication for Alzheimer’s patients that is easy to
swallow. Of the 29 innovation community projects commissioned by grocery retailer Supervalu, 22 were implemented
over a 10-year period.41
Cross-functional teams can collaborate and use concurrent new-product development to push new products to mar-
ket.42 Concurrent product development resembles a rugby match, with team members passing the new product back
and forth as they head toward the goal. Using this system, Allen-Bradley Corporation (a maker of industrial controls)
was able to develop a new device in just two years, down from six under its old system. Cross-functional teams help
ensure that engineers are not driven to create a “better mousetrap” when potential customers don’t need or want one.
CrowdsourCing The Internet lets companies engage external participants in the new-product development
process in rich and meaningful ways. Through crowdsourcing, these paid or unpaid outsiders can offer needed
expertise or a different perspective on a task or project that might otherwise be overlooked.
Companies such as Edison Nation and the Big Idea Group have sprung up to tap into crowdsourcing’s
possibilities.43 Quirky combines its own design, branding, engineering, and sales teams with 864,000 online partici-
pants, forming a community for devising new products. The company sifts through thousands of submissions weekly
to identify eight to ten ideas that merit greater scrutiny. For the chosen ideas, it will design, manufacture, and sell the
product. Inventors and any members of the community who contribute to the design and branding get a cut.44
As another example, P&G wanted to create a dishwashing detergent “smart enough” to reveal when the right
amount of soap has been added to a sink full of dirty plates. With its formidable in-house research and develop-
ment team stumped, the company went to InnoCentive, a spin-off of Eli Lilly, which handed the problem over to
its global network of volunteer tinkerers—professionals, retired scientists, students, and others. As it happened, an
Italian chemist working from her home laboratory had pioneered a new kind of dye that turns dishwater blue when
a certain amount of soap is added. For $30,000 in prize money, P&G had a solution.45
sTage-gaTe sysTems Many top companies use the stage-gate system to divide the innovation process into
stages, with a gate or checkpoint at the end of each.46 The project leader, working with a cross-functional team,
must bring a set of known deliverables to each gate before the project can pass to the next stage. To move from the
business plan stage into product development requires a convincing market research study of consumer needs and
interest, a competitive analysis, and a technical appraisal. Senior managers review the criteria at each gate to make
one of four decisions: go, kill, hold, or recycle.
For example, at Tata Steel, initial ideas generated by “trend scouting” become future pipeline developments and
then, in turn, priority product and process developments and finally product and process implementations. About
50 to 100 ideas are generated for every one that makes it to implementation, and at any point in time, 50 to 70 pri-
ority product or process development projects are in the pipeline before the final-phase gate. 47
The stages in the new-product development process are shown in Figure 15.1. Many firms have parallel sets of
projects working through the process, each at a different stage.48 Think of the process as a funnel: A large number
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of initial new-product ideas and concepts are winnowed down to a few high-potential products that are ultimately
launched. But the process is not always linear. Many firms use a spiral development process that recognizes the
value of returning to an earlier stage to make improvements before moving forward.49
Stage-gate systems make the innovation process visible to all and clarify the project leader’s and team’s
responsibilities at each stage.50 The gates or controls should not be so rigid, however, that they inhibit learning
and the development of novel products.51 These systems have evolved over the years as users have made them
more flexible, adaptive, and scalable; built in better governance; integrated portfolio management; incorporated
accountability and continuous improvement; and adapted the process to include open innovation and input from
sources outside the company at different stages.52
Quirky uses crowdsourcing with
a large online consumer panel
and its own experts to help
develop new products.
So
ur
ce
: Q
ui
rk
y
No
NoNoNoNoNo
No
No No
Yes Yes Yes Yes Yes Yes
Yes
Yes
Yes
Yes
No
Yes Yes Ye Ye Ye Yes Yes
Y
Send the idea
back for product
development?
7. Market
testing
6. Product
development
Have we got a
technically and
commercially
sound product?
5. Business
analysis
Will this
product meet
our profit
goal?
4. Marketing
strategy
development
1. Idea
generation
Is the
idea worth
considering?
Modify the product
or marketing
program?
2. Idea
screening
Is the product
idea compatible
with company
objectives,
strategies, and
resources?
Make
future
plans
Drop
8.
Commercialization
Are product sales
meeting
expectations?
3. Concept
development
and testing
Can we find a
good concept
consumers say
they would try?
Can we find a
cost-effective,
affordable
marketing
strategy?
Have product
sales met
expectations?
| Fig. 15.1 |
The New-Product Development Decision Process
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460 PART 5 | CReATing VAlue
Managing the Development
Process: Ideas
GeNeraTING Ideas
The new-product development process starts with the search for ideas. Some marketing experts believe we find the
greatest opportunities and highest leverage for new products by uncovering the best possible set of unmet customer
needs or technological innovation.53 New-product ideas can in fact come from interacting with various groups and
using creativity-generating techniques.54 (See “Marketing Memo: Ten Ways to Find Great New-Product Ideas.”)
inTeraCTing wiTh employees Employees can be a source of ideas for improving production,
products, and services.55 Consider what these three firms have done:
• Toyota reports its employees submit 2 million ideas annually (about 35 suggestions per employee), more than
85 percent of which are implemented.56
• LinkedIn launched an in-house incubator that allows any employee to organize a team and pitch a project to a
group of executives. The company has also created “hackdays”—one Friday a month when employees work on
creative projects.57
• Pricewaterhouse Coopers set up an American Idol–style innovation competition dubbed “PowerPitch,” in which
the winning team received $100,000 and the opportunity to implement their proposal for a new line of business
that could eventually be worth $100 million in revenue. Live chats and an online platform for discussion and vot-
ing led up to a five-team finale televised internally from the company’s New York City headquarters.58
Top management can be another major source of ideas. Some company leaders, such as former CEO Andy
Grove of Intel, take personal responsibility for technological innovation in the firm. New-product ideas can come
from a variety of outside sources, as discussed below, however, their chances of receiving serious attention often
depend on having an employee in the organization take the role of product champion.
inTeraCTing wiTh ouTsiders Encouraged by the open innovation movement, many firms are
going outside their bounds to tap external sources of new ideas, including customers, scientists, engineers, patent
attorneys, university and commercial laboratories, industrial consultants and publications, channel members,
marketing and advertising agencies, and even competitors.59 “Marketing Insight: P&G’s Connect + Develop
Approach to Innovation” describes how P&G has made new-product development more externally focused.
1. Run informal sessions where groups of customers meet with company engineers and designers to discuss problems and needs and brainstorm potential
solutions.
2. Allow time off—scouting time—for technical people to putter on their own pet projects. Google has allowed 20 percent time off; 3M 15 percent; and Rohm
& Haas 10 percent.
3. Make a customer brainstorming session a standard feature of plant tours.
4. Survey your customers: Find out what they like and dislike in your and competitors’ products.
5. Undertake “fly-on-the-wall” or “camping out” research with customers, as do Fluke and Hewlett-Packard.
6. Use iterative rounds: a group of customers in one room, focusing on identifying problems, and a group of your technical people in the next room, listening and
brainstorming solutions. Immediately test proposed solutions with the group of customers.
7. Set up a keyword search that routinely scans trade publications in multiple countries for new-product announcements.
8. Treat trade shows as intelligence missions, where you view all that is new in your industry under one roof.
9. Have your technical and marketing people visit your suppliers’ labs and spend time with their technical people—find out what’s new.
10. Set up an idea vault, and make it open and easily accessed. Allow employees to review the ideas and add constructively to them.
Source: Adapted from Robert G. Cooper, Product Leadership: Creating and Launching Superior New Products (New York: Perseus Books, 1998). Adapted with permission
from the author. See also Robert G. Cooper and Scott J. Edgett, “Ideation for Product Innovation: What are the Best Methods?,” PDMA Visions, March 2008, pp. 12–17.
Ten Ways to Find Great New-Product Ideasmarketing memo
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461
Pricewaterhouse Coopers has
run an American Idol style
innovation competition.
So
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: ©
M
ar
k
Pe
te
rs
on
2
01
1
P&G’S Connect + Develop
Approach to Innovation
In the first decade of the 21st century, one of the corporations with the
fastest-growing revenue and profit was Procter & Gamble. Fueling its
growth were successful new products such as Olay Regenerist, Swiffer,
Mr. Clean Magic Eraser, Pulsonic toothbrushes, and Actonel, prescribed
for osteoporosis. Many of these reflected innovation in what then-CEO
A. G. Lafley called “the core”—core markets, categories, brands, tech-
nologies, and capabilities.
To more effectively develop its core, P&G has adopted a “Connect
+ Develop” model that emphasizes the pursuit of outside innovation.
The firm collaborates with organizations and individuals around the
world, searching for proven technologies, packages, and products it can
improve, scale up, and market on its own or in partnership with other
companies. It has strong relationships with external designers, distributing
product development around the world to increase what it calls “con-
sumer sensing.”
P&G identifies the top 10 customer needs, closely related products
that could leverage or benefit from existing brand equity, and “game
boards” that map the adoption of technology across different product
categories. It may consult government and private labs as well as aca-
demic and other research institutions, venture capital firms, individual
entrepreneurs, and suppliers, retailers, competitors, and development
and trade partners, using online networks to reach thousands of experts
worldwide.
P&G’s three core requirements for a successful Connect +
Develop strategy are:
1. Never assume that “ready to go” ideas found outside are truly
ready to go. There will always be development work to do, includ-
ing risky scale-up.
2. Don’t underestimate the internal resources required. A full-time,
senior executive will need to run any connect-and-develop initiative.
3. Never launch without a mandate from the CEO. Connect-and-
develop cannot succeed if it’s cordoned off in R&D. It must be a
top-down, company-wide strategy.
P&G vets 4,000 submissions annually and actively solicits innova-
tion ideas from a larger network of individuals and businesses with a past
history of working with the company. Through Connect + Develop—and
improvements in product cost, design, and marketing—P&G increased
R&D productivity nearly 60 percent during the decade. The innovation
success rate has more than doubled, and costs have fallen.
Sources: www.pgconnectdevelop.com; Lydia Dishman, “How Outsiders Get Their
Products to the Innovation Big League at Proctor & Gamble,” Fast Company, July
13, 2012; Bruce Brown and Scott D. Anthony, “How P&G Tripled Its Innovation
Success Rate,” Harvard Business Review, June 2011, pp. 64–72; A.G. Lafley
and Ram Charan, The Game Changer: How You Can Drive Revenue and Profit
Growth Through Innovation (New York: Crown Business, 2009); Larry Huston and
Nabil Sakkab, “Connect and Develop: Inside Procter & Gamble’s New Model for
Innovation,” Harvard Business Review, March 2006, pp. 58–66.
marketing
insight
Customer needs and wants are the logical place to start the search.60 Griffin and Hauser suggest that conduct-
ing 10 to 20 in-depth experiential interviews per market segment often uncovers the vast majority of customer
needs.61 But other approaches can be profitable (see “Marketing Memo: Seven Ways to Draw New Ideas from
Your Customers”). One marketer-sponsored café in Tokyo tests products of all kinds with affluent, influential
young Japanese women.62
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462 PART 5 | CReATing VAlue
1. Observe how customers are using your product. Medtronic, a medical device company, has salespeople and market researchers regularly observe spine
surgeons who use their products and competitive products to learn how theirs can be improved. After living with lower-middle-class families in Mexico City,
Procter & Gamble researchers devised Downy Single Rinse, a fabric softener that removed an arduous step from the partly manual laundry process there.
2. Ask customers about their problems with your products. Komatsu Heavy Equipment sent a group of engineers and designers to the United States for
six months to ride with equipment drivers and learn how to make products better. Procter & Gamble, recognizing consumers were frustrated that potato chips
break and are difficult to save after opening the bag, designed Pringles to be uniform in size and encased in a protective tennis-ball-type can.
3. Ask customers about their dream products. Ask your customers what they want your product to do, even if the ideal sounds impossible. One 70-year-old
camera user told Minolta he would like the camera to make his subjects look better and not show their wrinkles and aging. In response, Minolta produced a
camera with two lenses, one for rendering softer images of the subjects.
4. Use a customer advisory board to comment on your company’s ideas. Levi Strauss uses youth panels to discuss lifestyles, habits, values, and brand engage-
ments; Cisco runs Customer Forums to improve its offerings; and Harley-Davidson solicits product ideas from its one million H.O.G. (Harley Owners Group) members.
5. Use Web sites for new ideas. Companies can use specialized search engines such as Technorati to find blogs and postings relevant to their businesses.
P&G’s corporate global Web site has a Share Your Thoughts section to gain advice and feedback from customers.
6. Form a brand community of enthusiasts who discuss your product. Harley-Davidson and Apple have strong brand enthusiasts and advocates; Sony
engaged in collaborative dialogues with consumers to codevelop its PlayStation products. LEGO draws on kids and influential adult enthusiasts for feedback
on new-product concepts in early stages of development.
7. Encourage or challenge your customers to change or improve your product. Salesforce.com wants its users to develop and share new software
applications using simple programming tools; International Flavors & Fragrances gives a toolkit to its customers to modify specific flavors, which IFF then
manufactures; LSI Logic Corporation also provides customers with do-it-yourself toolkits so customers can design their own specialized chips; and BMW
posted a toolkit on its Web site to let customers develop ideas using telematics and in-car online services.
Source: From an unpublished paper, Philip Kotler, “Drawing New Ideas from Your Customers,” 2013.
Seven Ways to Draw New Ideas from Your Customersmarketing memo
The traditional company-centric approach to product innovation is giving way to a world in which companies
cocreate products with consumers. At BlankLabel.com, you can design your own unique shirt by specifying the
cut, size, collar, buttons, cuffs, and pockets you want.63
As noted above, companies are also increasingly turning to crowdsourcing to generate new ideas. One form of
crowdsourcing invites the online community to help create content or software, often with prize money or a mo-
ment of glory as an incentive.64 When Baskin-Robbins ran an online contest to pick its next flavor, 40,000 consum-
ers entered. The winning entry—from a 62-year-old grandmother of four—combined chocolate, nuts, and caramel
and was launched as Toffee Pecan Crunch.65 One recent convert to crowdsourcing is Cisco.66
CisCO The Cisco Internet of Things (IoT) Grand Challenge (formerly the Cisco I-Prize) is a worldwide initiative,
aiming to bring the industry together and accelerate the adoption of breakthrough technologies and products that will
contribute to the growth and evolution of the Internet of Things. Awards of U.S. $250,000 in cash prizes are to be shared
among three winners, and can be used to jump-start ventures. Cisco also provides winners with mentoring, training, and
access to business expertise from Cisco and other supporting organizations. From the inception of I-Prize, Cisco’s ratio-
nale for these challenges—which drew 2,500 entrepreneurs from 104 countries in its first iteration—was simple: “In
many parts of the world, you have incredibly smart people with incredibly great ideas who have absolutely no access to
capital to take a great idea and turn it into a business.”
In the first year, high-potential technology start-ups aimed to meet five main criteria with their submissions: (1) Does it
address a real pain point? (2) Will it appeal to a big enough market? (3) Is the timing right? (4) If we pursue the idea, will
we be good at it? and (5) Can we exploit the opportunity for the long term? The public judged the entries online, where
Cisco found the detailed comments even more useful than the actual votes. The winning entry in the first competition was
a plan for a sensor-enabled smart-electricity grid. The second competition drew 3,000 participants from more than 156
countries. The winning entry was from a team of five university students from Mexico and based on the idea of a “Life
Account” that gathered information about users through connected devices in the physical world and online data from the
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Cisco’s I-Prize innovation
competition, now called IoT,
draws entries from around the
world, like this winning team
from Russia, and has generated
numerous new product ideas.
So
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ce
: C
is
co
I-
Pr
iz
e
(n
ow
re
fe
rr
ed
to
Io
T
C
ha
lle
ng
e)
M
os
co
w
T
ea
m
virtual world. The next two IoT Grand Challenges targeted Russia where Cisco has massive investment plans. One of the
winning Russian IoT Grand Challenge teams developed a system that uses a mobile phone as a mediator for transmitting
data from sensors to healthcare systems and is compatible with all major mobile phone platforms, as well as more than
40 medical devices.
As the Cisco I-Prize has evolved into the form of the Cisco IoT Grand Challenge, submissions are now entered into one of
six categories: Applications and Application Enablement, Analytics, Management, Networking, Security or Things. Each submis-
sion must map to one of a variety of industries Education, Energy, Healthcare, Manufacturing, Oil and Gas, Retail, Smart Cities,
Sports and Entertainment or Transportation.
Besides producing new and better ideas, cocreation can help customers feel closer to the company and create
favorable word of mouth.67 Getting the right customers engaged in the right way, however, is critical.68
Lead users can be a good source of input, even when they innovate products without the consent or knowledge
of the companies that produce them. Mountain bikes developed as a result of youngsters taking their bikes to the
top of a mountain and riding down. When the bikes broke, the youngsters began building more durable bikes
and adding motorcycle brakes, improved suspension, and accessories. They, not bike companies, developed these
innovations.
Some companies, particularly those that want to appeal to younger, leading-edge consumers, bring their lead
users into their product-design process. Technical companies can learn a great deal by studying customers who
make the most advanced use of the company’s products and who recognize the need for improvements before
other customers do.69 In a business-to-business market, collecting information from distributors and retailers who
are not usually in close contact can provide more diverse insights and information.70
Not everyone believes a customer focus helps create better new products.71 As Henry Ford famously said, “If I’d
asked people what they wanted, they would have said a faster horse.” Some still caution that being overly focused on
consumers who may not really know what they want, or what could be possible, can result in shortsighted product
development and miss real potential breakthroughs.72 Apple and IKEA have reputations for incorporating user
input with some caution, and others believe focusing on lead users leads to incremental and not breakthrough
innovation.73
sTudying CompeTiTors Companies can find good ideas by researching the products and services of
competitors and other companies. They can find out what customers like and dislike about competitors’ products.
They can buy their competitors’ products, take them apart, and build better ones. They can ask their own sales
representatives and intermediaries for ideas. These groups have firsthand exposure to customers and are often the
first to learn about competitive developments. Electronic retailer Best Buy even checks with venture capitalists to
find out what start-ups are working on.
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464 PART 5 | CReATing VAlue
To establish the optimal brand positioning for the new product and the right points-of-parity and
points-of-differences, marketers need a thorough understanding of the competition. Consider how the fierce
video game console battle among Microsoft, Sony, and Nintendo has spurred innovation as each firm attempts
to break loose from the pack.74
ViDeO GaMe COnsOLes Makers of video game consoles fight tooth-and-nail for the minds
and hearts of the 1 billion gamers worldwide, 220 million of whom live in the United States. For the 2013 holiday season,
Microsoft’s new Xbox One went head to head with Sony’s new PS4. Although the two game consoles both added many new
features—from motion-detection cameras to allow gamers to play using gestures to technology linking the gaming console
to a smart phone or tablet—the Xbox One was priced $100 higher than the PS4’s $399 list price. Microsoft also lost the
early PR battle when it announced policies that angered customers, such as restrictions on the process of gaming and shar-
ing games. And the company had a tough act to follow. Its earlier model, the Xbox 360, brought significant power and online
functionality to gamers, introducing Achievements and the gamer score to facilitate competition. With sales of more than 75
million units, Xbox 360 also drew more than 40 million users into Microsoft’s Xbox Live connected gaming service. The third
major player, Nintendo, found great success in 2006 with its Wii gaming system. Bucking industry trends, it chose a cheaper,
lower-power chip with fewer graphics capabilities, creating a totally different style of play based on physical gestures. A sleek
white design and motion-sensitive wireless controller also made Wii much more engaging and interactive, and Nintendo’s
decision to embrace outside software developers meant new titles quickly became available. Its collaborative nature made Wii
a hit with non-gamers drawn by its capabilities and with hard-core players seeking to master its many intriguing games. The
2012 follow-up, the Wii U, did not attract the same interest, putting Nintendo in a tough spot against its two chief competitors.
adopTing CreaTiviTy TeChniques Internal brainstorming sessions also can be quite effective—if
conducted correctly. “Marketing Memo: How to Run a Successful Brainstorming Session” provides some guidelines.
If done correctly, group brainstorming sessions can create insights, ideas, and solutions that would have been impossible without everyone’s participation.
If done incorrectly, they are a painful waste of time that can frustrate and antagonize participants. To ensure success, experts recommend the following:
1. A trained facilitator should guide the session, and the right physical environment must be used.
2. The right participants must be chosen. Sometimes it is useful to have a real mixture with many different points of view.
3. Participants must see themselves as collaborators working toward a common goal.
4. Rules need to be set up and followed so conversations don’t get off track. Some structure is needed, though flexibility is desired too.
5. Participants must be given proper background preparation and materials so they can get into the task quickly.
6. Individual sessions before and after the brainstorming can be useful for thinking and learning about the topic ahead of time and for reflecting afterward on
what happened.
7. During the session, each participant must be encouraged to participate and think freely and constructively. It may be useful to give participants time to think
and gather their thoughts based on what they have heard.
8. To help stimulate thinking, participants may be told to identify and challenge existing assumptions, role-play some aspect of the situation they are analyzing,
or consider borrowing ideas from other firms, even outside the industry.
9. Brainstorming sessions must lead to a clear plan of action and implementation so the ideas that materialize can provide tangible value.
10. Brainstorming can do more than just generate ideas—it should help build teams and leave participants better informed and energized.
Sources: Anne Fisher, “Why Most Brainstorming Sessions Fail,” Fortune, August 23, 2013; “7 Ways to Enliven Your Next Brainstorming Session,” Forbes, March 18, 2013;
Natalie Peace, “Why Most Brainstorming Sessions Are Useless,” Forbes, April 9, 2012; Linda Tischler, “Be Creative: You Have 30 Seconds,” Fast Company, May 2007,
pp. 47–50; Michael Myser, “When Brainstorming Goes Bad,” Business 2.0, October 2006, p. 76; Robert I. Sutton, “Eight Rules to Brilliant Brainstorming,” BusinessWeek IN
Inside Innovation, September 2006, pp. 17–21.
How to Run a Successful Brainstorming Sessionmarketing memo
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Creativity is mostly about making connections in ways that are not obvious. Here is a sampling of techniques
for stimulating creativity in individuals and groups.75
• Attribute listing. List the attributes of an object, such as a screwdriver. Then modify each attribute,
such as replacing the wooden handle with plastic, providing torque power, adding different screw
heads, and so on.
• Forced relationships. List several ideas and consider each in relationship to each of the others. In
designing new office furniture, for example, consider a desk, bookcase, and filing cabinet as separate
ideas. Then imagine a desk with a built-in bookcase or a desk with built-in files or a bookcase with
built-in files.
• Morphological analysis. Start with a problem, such as “getting something from one place to another
via a powered vehicle.” Now think of dimensions, such as the type of platform (cart, chair, sling, bed),
the medium (air, water, oil, rails), and the power source (compressed air, electric motor, magnetic
fields). By listing every possible combination, you can generate many new solutions.
• Reverse-assumption analysis. List all the normal assumptions about an entity and then reverse them.
Instead of assuming that a restaurant has menus, charges for food, and serves food, reverse each
assumption. The new restaurant may decide to serve only what the chef bought that morning, provide
some food but charge for the time the person sits at the table, or design an exotic atmosphere and rent
the space to people who bring their own food and beverages.
• New contexts. Take familiar processes, such as people-helping services, and put them into a new con-
text. Imagine helping dogs and cats with day care service, stress reduction, psychotherapy, funerals, and
so on. Instead of sending hotel guests to the front desk to check in, greet them at curbside and use a
wireless device to register them.
• Mind mapping. Start with an idea, such as a car, then think of the next idea that comes up (say
Mercedes) and link it to car, then think of the next association (Germany), and do this with all associa-
tions that come up with each new word. Perhaps a whole new idea will materialize.
New-product ideas can arise from lateral marketing that combines two product concepts or ideas to
create a new offering.76 Cereal bars are a successful combination of cereal and snacking. Kinder Surprise
combined candy with a toy.
usING Idea screeNING
In screening ideas, the company must avoid two types of errors. A DROP-error occurs when the company dis-
misses a good idea. It is extremely easy to find fault with other people’s ideas (Figure 15.2). Some companies
shudder when they look back at ideas they dismissed or breathe sighs of relief when they realize how close
they came to dropping what eventually became a huge success. Consider the hit television show Friends.77
FrienDs The NBC situation comedy Friends enjoyed a 10-year run from 1994 to 2004 as a perennial
ratings powerhouse. But the show almost didn’t see the light of the day. According to an internal NBC research report,
the pilot episode was described as “not very entertaining, clever, or original” and was given a failing grade, scoring 41
of a possible 100. Ironically, the pilot for an earlier hit sitcom, Seinfeld, was also rated “weak,” though the pilot for the
medical drama ER scored a healthy 91. Courteney Cox’s Monica was the Friends character who scored best with test
audiences, while characters portrayed by Lisa Kudrow and Matthew Perry were deemed to have marginal appeal, and
the Rachel, Ross, and Joey characters scored even lower. Adults 35 and older in the sample found the characters as a
whole “smug, superficial, and self-absorbed.”
The purpose of screening is to drop poor ideas as early as possible. The rationale is that product-
development costs rise substantially at each successive development stage. Most companies require
new-product ideas to be described on a standard form for a committee’s review. The description states the
product idea, the target market, and the competition and roughly estimates market size, product price,
development time and costs, manufacturing costs, and rate of return.
The executive committee then reviews each idea against a set of criteria. Does the product meet a need?
Would it offer superior value? Can it be distinctively advertised or promoted? Does the company have the
necessary know-how and capital? Will the new product deliver the expected sales volume, sales growth, and
profit? Consumer input may be necessary too.78
“Let’s discuss it at
our next meeting.”
“It will cost too much.”
“We’ve done all
right without it.”
“It won’t work here.”
“We’ve tried it before.”
“It can’t be done.”
“It’s not the way
we do things.”
“This isn’t the right time.”
“I’ve got a great idea!”
| Fig. 15.2 |
Forces Fighting
New Ideas
Source: With permission of Jerold
Panas, Young & Partners Inc.
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466 PART 5 | CReATing VAlue
Management can rate the surviving ideas using a weighted-index method like that in Table 15.2. The first
column lists factors required for successful product launches, and the second column assigns importance
weights. The third column scores the product idea on a scale from 0 to 1.0, with 1.0 the highest score. The final
step multiplies each factor’s importance by the product score to obtain an overall rating. In this example, the
product idea scores 0.69, which places it in the “good idea” level. The purpose of this basic rating device is to
promote systematic evaluation and discussion, not to make the decision for management.
As the idea moves through development, the company will need to constantly revise its estimate of the product’s
overall probability of success, using the following formula:
A research study almost killed
one of the all-time successful
TV sitcoms, Friends, reinforcing
the fact that research must be
interpreted and used carefully.
So
ur
ce
: ©
P
ic
to
ria
l P
re
ss
L
td
/A
la
m
y
Table 15.2 Product–Idea Rating Device
Product Success
Requirements Relative Weight (a) Product Score (b)
Product Rating
(c = a : b)
Unique or superior product .40 .8 .32
High performance-to-cost ratio .30 .6 .18
High marketing dollar support .20 .7 .14
Lack of strong competition .10 .5 .05
Total 1.00 .69
a Rating scale: .00–.30 poor; .31–.60 fair; .61–.80 good. Minimum acceptance rate: .61
Overall
probability
of success
=
Probability
of technical
completion
*
Probability of
commercialization
given technical
completion
*
Probability of
economic
success given
commercialization
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inTRoduCing new MARkeT offeRings | chapter 15 467
For example, if the three probabilities are estimated at 0.50, 0.65, and 0.74, respectively, the overall probability
of success is 0.24. The company then must judge whether this probability is high enough to warrant continued
development.
Managing the Development
Process: Concept to Strategy
Attractive ideas must be refined into testable product concepts. A product idea is a possible product the company
might offer to the market. A product concept is an elaborated version of the idea expressed in consumer terms.
coNcepT developMeNT aNd TesTING
Concept development is a necessary but not sufficient step for new-product success. Marketers must also distin-
guish winning concepts from losers by testing.
ConCepT developmenT Imagine a large food-processing company gets the idea of producing a powder
to add to milk to increase its nutritional value and taste. This is a product idea, but consumers don’t buy product
ideas; they buy product concepts.
A product idea can be turned into several concepts. The first question is: Who will use this product? It can
be aimed at infants, children, teenagers, young or middle-aged adults, or older adults. Second, what primary
benefit should this product provide—taste, nutrition, refreshment, or energy? Third, when will people consume
this drink—at breakfast, midmorning, for lunch, midafternoon, with dinner, late evening? By answering these
questions, a company can form several concepts:
• Concept 1. An instant drink for adults who want a quick nutritious breakfast without preparation.
• Concept 2. A tasty snack for children to drink as a midday refreshment.
• Concept 3. A health supplement for older adults to drink in the late evening before bed.
Each concept represents a category concept that defines the product’s competition. An instant
breakfast drink would compete against bacon and eggs, breakfast cereals, coffee and pastry, and other
breakfast alternatives. A snack drink would compete against soft drinks, fruit juices, sports drinks, and
other thirst quenchers.
Suppose the instant-breakfast-drink concept looks best. The next task is to show where this pow-
dered product would stand in relationship to other breakfast products via perceptual mapping. Figure
15.3(a) uses the two dimensions of cost and preparation time to create a product-positioning map for the
breakfast drink, which offers low cost and quick preparation. Its nearest competitors are cold cereal and
breakfast bars; its most distant is bacon and eggs. These contrasts can help communicate and promote
the concept to the market.
Next, the product concept becomes a brand concept. Figure 15.3(b) is a brand-positioning map, a per-
ceptual map showing the current positions of three existing brands of instant breakfast drinks (A–C) as
seen by consumers. As Chapter 10 described, it can also be useful to overlay current or desired consumer
preferences on to the map. Figure 15.3(b) also shows four segments of consumers (1–4) whose prefer-
ences are clustered around the points on the map.
The brand-positioning map helps the company decide how much to charge and how calorific to
make its drink. Three segments (1–3) are well served by existing brands (A–C). The company would
not want to position itself next to one of those existing brands, unless that brand is weak or inferior or
market demand was high enough to be shared. As it turns out, the new brand would be distinctive in the
medium-price, medium-calorie market or in the high-price, high-calorie market. There is also a seg-
ment of consumers (4) clustered fairly near the medium-price, medium-calorie market, suggesting this
may offer the greatest opportunity.
ConCepT TesTing Concept testing means presenting the product concept to target consumers,
physically or symbolically, and getting their reactions. The more the tested concepts resemble the final
product or experience, the more dependable concept testing is. Concept testing of prototypes can help
avoid costly mistakes, but it may be especially challenging with radically different, new-to-the-world
products.79 Visualization techniques can help respondents match their mental state with what might
occur when they are actually evaluating or choosing the new product.80
Slow
Pancakes
Quick
Expensive
Inexpensive
Bacon
and eggs
Cold
cereal
Hot
cereal
Instant
breakfast
Lo
w
in
c
al
or
ie
s
Hi
gh
in
c
al
or
ie
s
High price per ounce
Low price per ounce
Brand C
Brand A Brand B
(a) Product-positioning Map
(Breakfast Market)
(b) Brand-positioning Map
(Instant Breakfast Market)
Segment 3 Segment 4
Segment 2Segment 1
| Fig. 15.3 |
Product and Brand
Positioning
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468 PART 5 | CReATing VAlue
In the past, creating physical prototypes was costly and time consuming, but today firms can use rapid prototyp-
ing to design products on a computer and then produce rough models to show potential consumers for their reac-
tions. Firms developing big-ticket items such as orthopedic devices for knee replacements or electric cars use rapid
prototyping in new-product development to save time and money.81 In response to a short-term oversupply of
wine in the marketplace, the makers of Kendall-Jackson developed two new brands by using rapid prototyping to
quickly bring their ideas to life, selling 100,000 cases of each brand, 10 times more than expected, in the process.82
Companies are also using virtual reality to test product concepts. Virtual reality programs use computers and
sensory devices (such as gloves or goggles) to simulate reality. Lockheed Martin uses virtual reality to develop its
GPS satellites for the U.S. Air Force.83 Supercomputers allow for elaborate product testing to assess changes in per-
formance and supplement consumer input. Kenworth used to test new truck designs with clay models and wind
tunnels. Using supercomputer analysis, it can now make more accurate estimates of how much drag and fuel use it
can eliminate with new trimmed and tapered mud flaps (answer: $400 of a typical truck’s annual gas bill).84
Concept testing presents consumers with an elaborated version of the concept. Here is the elaboration of con-
cept 1 in our milk example:
Our product is a powdered mixture added to milk to make an instant breakfast that gives all the day’s
needed nutrition along with good taste and high convenience. The product comes in three flavors (choc-
olate, vanilla, and strawberry) and individual packets, six to a box, at $2.49 a box.
After receiving this information, researchers measure product dimensions by having consumers respond to
questions like these:
1. Communicability and believability—“Are the benefits clear to you and believable?” If the scores are low, the
concept must be refined or revised.
2. Need level—“Do you see this product solving a problem or filling a need for you?” The stronger the need, the
higher the expected consumer interest.
3. Gap level—“Do other products currently meet this need and satisfy you?” The greater the gap, the higher
the expected consumer interest. Marketers can multiply the need level by the gap level to produce a need-gap
score. A high score means the consumer sees the product as filling a strong need not satisfied by available
alternatives.
4. Perceived value—“Is the price reasonable in relationship to value?” The higher the perceived value, the higher
is expected consumer interest.
5. Purchase intention—“Would you (definitely, probably, probably not, definitely not) buy the product?”
Consumers who answered the first three questions positively should answer “Definitely” here.
6. User targets, purchase occasions, purchasing frequency—“Who would use this product, when, and how often?”
Respondents’ answers indicate whether the concept has a broad and strong consumer appeal, what products it
competes against, and which consumers are the best targets. The need-gap levels and purchase-intention levels can
A in-depth conjoint analysis
helped to design the Courtyard
by Marriott hotel chain.
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inTRoduCing new MARkeT offeRings | chapter 15 469
be checked against norms for the product category to see whether the concept appears to be a winner,
a long shot, or a loser. One food manufacturer rejects any concept that draws a definitely-would-buy
score lower than 40 percent.
ConjoinT analysis Consumer preferences for alternative product concepts can be measured
with conjoint analysis, a method for deriving the utility values that consumers attach to varying
levels of a product’s attributes.85 Conjoint analysis has become one of the most popular concept-
development and testing tools. For example, Marriott used it to design its Courtyard hotel concept.86
With conjoint analysis, respondents see different hypothetical offers formed by combining varying
levels of the attributes and rank them. Management can then identify the most appealing offer and
its estimated market share and profit. In a classic illustration, academic research pioneers Green and
Wind used this approach in connection with developing a new spot-removing, carpet-cleaning agent
for home use.87 Suppose the new-product marketer is considering five design elements:
• Three package designs (A, B, C—see Figure 15.4)
• Three brand names (K2R, Glory, Bissell)
• Three prices ($1.19, $1.39, $1.59)
• A possible Good Housekeeping seal (yes, no)
• A possible money-back guarantee (yes, no)
Although the researcher can form 108 possible product concepts with these five elements (3 × 3 × 3 × 2 × 2), it
would be too much to ask consumers to rank them all from most to least preferred. A sample of, say, 18 contrasting
product concepts is feasible.
The marketer now uses a statistical program to derive the consumer’s utility functions for each of the five at-
tributes (see Figure 15.5). Utility ranges between zero and one; the higher the utility, the stronger the consumer’s
preference for that level of the attribute. Looking at packaging, package B is the most favored, followed by C and
then A (A has hardly any utility). The preferred names are Bissell, K2R, and Glory in that order. The consumer’s
utility varies inversely with price. A Good Housekeeping seal is preferred, but it does not add that much utility and
may not be worth the effort to obtain it. A money-back guarantee is strongly preferred.
The consumer’s most desired offer is package design B, brand name Bissell, priced at $1.19, with a Good
Housekeeping seal and a money-back guarantee. We can also determine the relative importance to this consumer
of each attribute—the difference between the highest and lowest utility level for that attribute. The greater the
CA B
| Fig. 15.4 |
Samples for Conjoint
Analysis
No
0
1.0
Yes
Ut
ili
ty
Money-Back Guarantee?
A
0
1.0
B C
Ut
ili
ty
Package Design
K2R
0
1.0
Glory Bissell
Ut
ili
ty
Brand Name
$1.19
0
1.0
$1.39 $1.59
Ut
ili
ty
Retail Price
No
0
1.0
Yes
Ut
ili
ty
Good Housekeeping Seal?
| Fig. 15.5 |
Utility Functions
Based on Conjoint
Analysis
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470 PART 5 | CReATing VAlue
difference, the more important the attribute. Clearly, this consumer sees price and package design as the most
important attributes, followed by money-back guarantee, brand name, and a Good Housekeeping seal.
Preference data from a sufficient sample of target consumers help to estimate the market share any specific
offer is likely to achieve, given any assumptions about competitive response. Still, the company may not launch the
market offer that promises to gain the greatest market share because of cost considerations. The most customer-
appealing offer is not always the most profitable offer to make.
Under some conditions, researchers will collect the data by presenting not a full-profile description of each
offer, but two factors at a time. For example, respondents may see a table with three price levels and three pack-
age types and indicate which of the nine combinations they would like best, second-best, and so on. Another
table consists of trade-offs between two other variables. This trade-off approach may be easier to use when
there are many variables and possible offers. However, it is less realistic in that respondents are focusing on
only two variables at a time. Adaptive conjoint analysis (ACA) is a “hybrid” data collection technique that
combines self-stated or explicated importance ratings of attributes with pair-wise trade-off tasks comparing
two options.88
MarkeTING sTraTeGY developMeNT
Following a successful concept test, the new-product manager will develop a preliminary three-part strategy
plan for introducing the new product into the market. The first part describes the target market’s size, struc-
ture, and behavior; the planned brand positioning; and the sales, market share, and profit goals sought in the
first few years:
The target market for the instant breakfast drink is families with children who are receptive to a new,
convenient, nutritious, and inexpensive form of breakfast. The company’s brand will be positioned at
the higher-price, higher-quality end of the instant-breakfast-drink category. The company will aim
initially to sell 500,000 cases or 10 percent of the market, with a loss in the first year not exceeding $1.3
million. The second year it will aim for 700,000 cases or 14 percent of the market, with a planned profit
of $2.2 million.
The second part outlines the planned price, distribution strategy, and marketing budget for the first year:
The product will be offered in chocolate, vanilla, and strawberry, in individual packets of six to a box,
at a retail price of $2.49 a box. There will be 48 boxes per case, and the case price to distributors will
be $24. For the first two months, dealers will be offered one case free for every four cases bought, plus
cooperative-advertising allowances. Free samples will be distributed in stores. Coupons for 50 cents
off will appear in newspapers and online. The total sales promotional budget will be $2.9 million. An
advertising budget of $6 million will be split 50:50 between national and local. Two-thirds will go into
television and one-third into online. Advertising copy will emphasize the benefit concepts of nutrition
and convenience. The advertising-execution concept will revolve around a small boy who drinks instant
breakfast and grows strong. During the first year, $100,000 will be spent on marketing research to buy
store audits and consumer-panel information to monitor market reaction and buying rates.
The third part of the marketing strategy plan describes the long-run sales and profit goals and marketing-mix
strategy over time:
The company intends to win a 25 percent market share and realize an after-tax return on investment of
12 percent. To achieve this return, product quality will start high and be improved over time through
technical research. Price will initially be set at a high level and gradually drop to expand the market and
meet competition. The total promotion budget will be boosted about 20 percent each year, with the ini-
tial advertising–sales promotion split of 65:35 eventually evolving to 50:50. Marketing research will be
reduced to $60,000 per year after the first year.
BusINess aNalYsIs
After management develops the product concept and marketing strategy, it can evaluate the proposal’s business
attractiveness. Management needs to prepare sales, cost, and profit projections to determine whether they satisfy
company objectives. If they do, the concept can move to the development stage. As new information comes in, the
business analysis will undergo revision and expansion.
esTimaTing ToTal sales Total estimated sales are the sum of estimated first-time sales, replacement
sales, and repeat sales. Sales-estimation methods depend on whether the product is purchased once (such
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inTRoduCing new MARkeT offeRings | chapter 15 471
as an engagement ring or retirement home), infrequently, or often. For one-time products,
sales rise at the beginning, peak, and approach zero as the number of potential buyers
becomes exhausted [see Figure 15.6(a)]. If new buyers keep entering the market, the curve will
not go to zero.
Infrequently purchased products—such as automobiles, microwaves, and industrial equipment—
exhibit replacement cycles dictated by physical wear or obsolescence associated with changing
styles, features, and performance. Sales forecasting for this product category calls for estimating
first-time sales and replacement sales separately [see Figure 15.6(b)].
Frequently purchased products, such as consumer and industrial nondurables, have product
life-cycle sales resembling Figure 15.6(c). The number of first-time buyers initially increases and
then decreases as fewer buyers are left (assuming a fixed population). Repeat purchases occur
soon, providing the product satisfies some buyers. The sales curve eventually falls to a plateau
representing a level of steady repeat-purchase volume; by this time, the product is no longer a
new product.
In estimating sales, the manager’s first task is to estimate first-time purchases of the new product
in each period. To estimate replacement sales, management researches the product’s survival-age
distribution—that is, the number of units that fail in year one, two, three, and so on. The low end of
the distribution indicates when the first replacement sales will take place. Because replacement sales
are difficult to estimate before the product is in use, some manufacturers base the decision to launch
a new product on their estimate of first-time sales alone.
For a frequently purchased new product, the seller estimates repeat sales as well as first-time
sales. A high rate of repeat purchasing means customers are satisfied; sales are likely to stay high
even after all first-time purchases take place. Some products and brands are bought a few times and
dropped. Colgate’s Wisp disposable toothbrush received much trial, but repeat sales slowed consid-
erably after that.89
esTimaTing CosTs and proFiTs Costs are estimated by the R&D, manufacturing,
marketing, and finance departments. Table 15.3 illustrates a five-year projection of sales, costs, and
profits for the instant breakfast drink.
Row 1 shows projected sales revenue over the five-year period. The company expects to sell
$11,889,000 (approximately 500,000 cases at $24 per case) in the first year. Behind this projec-
tion is a set of assumptions about the rate of market growth, the company’s market share, and the
factory-realized price. Row 2 shows the cost of goods sold, which hovers around 33 percent of
sales revenue. We find this cost by estimating the average cost of labor, ingredients, and packaging
per case. Row 3 shows the expected gross margin, the difference between sales revenue and cost
of goods sold.
Row 4 shows anticipated development costs of $3.5 million, including product-development cost,
marketing research costs, and manufacturing development costs. Row 5 shows the estimated mar-
keting costs over the five-year period to cover advertising, sales promotion, and marketing research
and an amount allocated for sales force coverage and marketing administration. Row 6 shows the
allocated overhead to this new product to cover its share of the cost of executive salaries, heat, light,
and so on.
Row 7, the gross contribution, is gross margin minus the preceding three costs. Row 8, supplementary
contribution, lists any change in income to other company products caused by the new-product introduc-
tion. Dragalong income is additional income to them, and cannibalized income is reduced income.90 Table 15.3
assumes no supplementary contributions. Row 9 shows net contribution, which in this case is the same as gross
contribution. Row 10 shows discounted contribution—that is, the present value of each future contribution
discounted at 15 percent per annum. For example, the company will not receive $4,716,000 until the fifth year.
This amount is worth only $2,346,000 today if the company can earn 15 percent on its money through other
investments.91
Finally, row 11 shows the cumulative discounted cash flow, the accumulation of the annual contributions in
row 10. Two points are of central interest. First is the maximum investment exposure, the highest loss the project
can create. The company will be in a maximum loss position of $4,613,000 in year 1. The second is the payback
period, the time when the company recovers all its investment, including the built-in return of 15 percent. The
payback period here is about three and a half years. Management must decide whether to risk a maximum
investment loss of $4.6 million and a possible payback period of three and a half years. As part of their financial
analysis, firms may conduct a breakeven or risk analysis.
Sa
le
s
Time
(a) One-time
Purchased Product
Time
Sa
le
s
(b) Infrequently
Purchased Product
Replacement
sales
Sa
le
s
Time
(c) Frequently
Purchased Product
Repeat purchase
sales
| Fig. 15.6 |
Product Life-Cycle
Sales for Three Types
of Products
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472 PART 5 | CReATing VAlue
Managing the Development Process:
Development to Commercialization
Up to now, the product has existed only as a word description, a drawing, or a prototype. The next step represents
a jump in investment that dwarfs the costs incurred so far. The company will determine whether the product idea
can translate into a technically and commercially feasible product. If not, the accumulated project cost will be
lost, except for any useful information gained in the process.
producT developMeNT
The job of translating target customer requirements into a working prototype is helped by a set of methods
known as quality function deployment (QFD). The methodology takes the list of desired customer attributes (CAs)
generated by market research and turns them into a list of engineering attributes (EAs) that engineers can use.
For example, customers of a proposed truck may want a certain acceleration rate (CA). Engineers can turn this
into the required horsepower and other engineering equivalents (EAs). A major contribution of QFD is improved
communication between marketers, engineers, and manufacturing people.92
physiCal proToTypes The goal of the R&D department is to find a prototype that embodies the key
attributes in the product-concept statement, performs safely under normal use and conditions, and can be
produced within budgeted manufacturing costs. Sophisticated virtual reality technology and the Internet now
permit rapid prototyping and flexible development processes.
R&D must also decide how consumers will react to different colors, sizes, and weights. Historically, a yellow
mouthwash supported an “antiseptic” claim (Listerine), red a “refreshing” claim (Lavoris), and green or blue a
“cool” claim (Scope). Marketers need to supply R&D with information about what attributes consumers seek and
how they judge whether these are present.
Firms rigorously test product prototypes internally. Vibram, which makes its own FiveFingers line as well as
soles for all types of shoes—such as for skateboarding, cycling, rock climbing, and fly fishing—employs a team of
product testers. The company puts its products into the most extreme conditions by executing tests directly in the
field and employing a series of procedures:93
If our chemist creates a new compound targeted towards road running applications, first we perform a bat-
tery of lab tests to understand the compound’s physical properties. Next, we bring natural environments and
surfaces into the laboratory and calculate information. Then lastly shoes are distributed to our tester team
who will document things like weather/temp, distance, location, and running surfaces, etc. They’ll comment
on the differences in the grip of the soles. We then compile the results and make a decision on validation.
Table 15.3 Projected Five-Year Cash Flow Statement (in thousands of dollars)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1. Sales revenue $ 0 $11,889 $15,381 $19,654 $28,253 $32,491
2. Cost of goods sold 0 3,981 5,150 6,581 9,461 10,880
3. Gross margin 0 7,908 10,231 13,073 18,792 21,611
4. Development costs –3,500 0 0 0 0 0
5. Marketing costs 0 8,000 6,460 8,255 11,866 13,646
6. Allocated overhead 0 1,189 1,538 1,965 2,825 3,249
7. Gross contribution –3,500 –1,281 2,233 2,853 4,101 4,716
8. Supplementary contribution 0 0 0 0 0 0
9. Net contribution –3,500 –1,281 2,233 2,853 4,101 4,716
10. Discounted contribution (15%) –3,500 –1,113 1,691 1,877 2,343 2,346
11. Cumulative discounted cash flow –3,500 –4,613 –2,922 –1,045 1,298 3,644
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inTRoduCing new MARkeT offeRings | chapter 15 473
CusTomer TesTs When the prototypes are ready, they must be
put through rigorous functional and customer tests before they enter the
marketplace. Alpha testing tests the product within the firm to see how it
performs in different applications. After refining the prototype further, the
company moves to beta testing with customers.
Consumer testing can bring consumers into a laboratory or give them
samples to use at home. Procter & Gamble has on-site labs such as a diaper-
testing center where dozens of mothers bring their babies to be studied. To
develop its Cover Girl Outlast all-day lip color, P&G invited 500 women to
come to its labs each morning to apply the lipstick, record their activities, and
return eight hours later so it could measure remaining lip color, resulting in a
product that came with a tube of glossy moisturizer that women could apply
on top of their color without looking at a mirror. In-home placement tests are
common for products from ice cream flavors to new appliances.
MarkeT TesTING
After management is satisfied with functional and psychological perfor-
mance, the product is ready to be branded with a name, logo, and packag-
ing and go into a market test, if desired.
Not all companies undertake market testing. A company officer at
Revlon stated: “In our field—primarily higher-priced cosmetics not geared
for mass distribution—it would be unnecessary for us to market test. When
we develop a new product, say an improved liquid makeup, we know it’s
going to sell because we’re familiar with the field. And we’ve got 1,500 dem-
onstrators in department stores to promote it.”
One problem is that many managers find it difficult to kill a project
that attracted much effort and attention, even if they should do so based
on market testing. The result is an unfortunate (and typically unsuccessful)
escalation of commitment.94
Many companies, however, believe market testing, if done correctly, can
yield valuable information about buyers, dealers, marketing program ef-
fectiveness, and market potential. The main issues are: How much market
testing should be done, and what kind(s)?
The amount of testing is influenced by the investment cost and risk on the one hand and time pressure and
research cost on the other. High-investment–high-risk products, whose chance of failure is high, must be market
tested; the cost will be an insignificant percentage of total project cost. High-risk products that create new-product
categories (the first instant-breakfast drink) or have novel features (the first gum-strengthening toothpaste) war-
rant more market testing than modified products (another toothpaste brand).
Consumer-goods markeT TesTing Consumer-products tests seek to estimate four variables: trial,
first repeat, adoption, and purchase frequency. Many consumers may try the product but not rebuy it, or it might
achieve high permanent adoption but low purchase frequency (like gourmet frozen foods).
Here are four major methods of consumer-goods market testing, from least to most costly.
Sales-Wave Research Consumers who initially try the product at no cost are reoffered it, or a competitor’s
product, at slightly reduced prices. The offer may be made as many as five times (sales waves), while the company
notes how many customers select it again and their reported level of satisfaction.
Sales-wave research can be implemented quickly, conducted with a fair amount of security, and carried out
without final packaging and advertising. However, because customers are preselected, it does not indicate trial
rates the product would achieve with different sales incentives, nor does it indicate the brand’s power to gain distri-
bution and favorable shelf position.
Simulated Test Marketing Thirty to 40 qualified shoppers are asked about brand familiarity and preferences
in a specific product category and attend a brief screening of both well-known and new TV or print ads. One ad
advertises the new product but is not singled out for attention. Consumers receive a small amount of money and
are invited into a store where they may buy any items. The company notes how many consumers buy the new
brand and competing brands. This provides a measure of the ad’s relative effectiveness against competing ads in
stimulating trial. Consumers are asked the reasons for their purchases or nonpurchases. Those who did not buy
Vibram has professional product testers who put the soles it makes
for shoes through extreme conditions to see how they hold up.
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474 PART 5 | CReATing VAlue
the new brand are given a free sample. Some weeks later, they are contacted to ascertain product attitudes, usage,
satisfaction, and repurchase intention and are offered an opportunity to repurchase any products.
This method can give some surprisingly accurate results about advertising effectiveness and trial rates (and
repeat rates if extended) in a much shorter time and at a fraction of the cost of using real test markets, making
it especially appealing to marketers of fast-moving consumer goods.95 As media and channels have grown more
fragmented, however, it has become harder to truly simulate market conditions with only traditional approaches.
Controlled Test Marketing The company with the new product specifies the number of stores and geographic
locations it wants to test. A research firm delivers the product to a panel of participating stores and controls shelf
position, pricing, and number of facings, displays, and point-of-purchase promotions. Electronic scanners measure
sales at checkout. The company can also evaluate the impact of local advertising and promotions and interview a
sample of customers later to get their impressions of the product. It does not have to use its own sales force, give
trade allowances, or “buy” distribution. However, controlled test marketing provides no information about how
to sell the trade on carrying the new product. It also exposes the product and its features to competitors’ scrutiny.
Test Markets The ultimate way to test a new consumer product is to put it into full-blown test markets. The
company chooses a few representative cities and puts on a full marketing communications campaign, and the sales
force tries to sell the trade on carrying the product and giving it good shelf exposure. Test marketing also measures
the impact of alternative marketing plans by implementing them in different cities. A full-scale test can cost more
than $1 million, depending on the number of test cities, the test duration, and the amount of data the company
wants to collect.
In designing a test market, management faces several decisions: (1) How many test cities? (2) Which test cities?
(3) Length of the test? (4) Which information to collect? and (5) What action to take? A number of considerations
come into play for each decision. Columbus, Ohio, is a popular location for testing new fast-food products: The
city is reasonably representative demographically of the rest of the nation, with a healthy dose of college-aged
students, and is a contained media market with reasonable ad rates.96
Many major global consumer goods makers such as L’Oréal, Philips, and Nikon like to test in South Korea be-
cause its demanding but fair consumers and well-developed marketing infrastructure help ensure that products are
in good enough shape to enter other global markets.97 Gucci likes to test its luxury products in China because it
feels consumers there indicate where the luxury market is heading.98
Many companies today skip test marketing despite its benefits and rely on faster and more economical testing
methods. Starbucks regularly launches products before they have been deemed “perfect,” based on this philosophy
espoused by chief digital officer, Adam Brotman: “We don’t think it is okay if things aren’t perfect, but we’re willing
to innovate and have speed to market trump a 100% guarantee that it’s be perfect.” The company’s mobile payments
app had a number of flaws and corrections in its first six months after launch, but it now generates 3 million mobile
transactions a week.99 General Mills prefers to launch new products in 25 percent of the country, an area too large
for rivals to disrupt. Managers review retail scanner data, which tells them within days how the product is doing
and what corrective fine-tuning to do.
Some companies like to test their
new products in South Korea
because of the open-minded
attitude of consumers who
live there and the marketing
infrastructure that exists.
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business-goods markeT TesTing Business goods can also benefit from market testing. Expensive
industrial goods and new technologies will normally undergo alpha and beta testing.100 During beta testing, the
company’s technical people observe how customers use the product, a practice that often exposes unanticipated
problems of safety and servicing and alerts the company to customer training and servicing requirements. The
company can also observe how much value the equipment adds to the customer’s operation, as a clue to subsequent
pricing.
Companies must interpret beta test results carefully because only a small number of test customers are used,
they are not randomly drawn, and tests are somewhat customized to each site. Another risk is that testers unim-
pressed with the product may leak unfavorable reports about it. Square doesn’t employ beta testing—preferring to
test at its own internally controlled locations—because it feels it should never put out an unfinished product.101
At trade shows the company can observe how much interest buyers show in the new product, how they react to
various features and terms, and how many express purchase intentions or place orders. In distributor and dealer
display rooms, products may stand next to the manufacturer’s other products and possibly competitors’ products,
yielding preference and pricing information in the product’s normal selling atmosphere. However, customers who
come in might not represent the target market, or they might want to place early orders that cannot be filled.
Industrial manufacturers come close to using full test marketing when they give a limited supply of the product
to the sales force to sell in a limited number of areas that receive promotion support and printed catalog sheets.
coMMercIalIzaTIoN
Commercialization incurs the company’s highest costs to date.102 Too often companies are so focused on develop-
ing a new product that they neglect to spend adequate time developing a winning marketing launch program.103
The firm will need to contract for manufacture, or it may build or rent a full-scale manufacturing facility. Most
new-product campaigns also require a sequenced mix of market communication tools to build awareness and
ultimately preference, choice, and loyalty.104
To introduce a major new consumer packaged good into the national market can cost $25 million to $100 mil-
lion in advertising, promotion, and other communications in the first year. For new food products, marketing
expenditures typically represent 57 percent of first-year sales.
To raise funds, some inventors who don’t have the backing of a major corporation are relying on crowdfunding
and companies like Kickstarter.105 With crowdfunding, individuals or start-ups fund their projects by using social
media and other means to generate interest and contributions from the general public.
when (Timing) Suppose a company has almost completed the development work on its new product and
learns a competitor is nearing the end of its development work. The company faces three choices:
1. First entry—The first firm entering a market usually enjoys the “first mover advantages” of locking up key
distributors and customers and gaining leadership. But if rushed to market before it has been thoroughly
debugged, the first entry can backfire.
2. Parallel entry—The firm might time its entry to coincide with the competitor’s entry. The market may pay
more attention when two companies are advertising the new product.106
3. Late entry—The firm might delay its launch until after the competitor has borne the cost of educating the
market, and its product may reveal flaws the late entrant can avoid. The late entrant can also learn the size of
the market.
If a new product replaces an older product, the company might delay until the old product’s stock has been
drawn down. If the product is seasonal, it might wait until the season arrives; often a product waits for a “killer
application” to occur. Many companies are now encountering competitive “design-arounds”—rivals are making
their own versions just different enough to avoid patent infringement and royalties.107
where (geographiC sTraTegy) Most companies will develop a planned market rollout over time.
In choosing rollout markets, the major criteria are market potential, the company’s local reputation, the cost of
filling the pipeline, the cost of communication media, the influence of the area on other areas, and competitive
penetration. Small companies select an attractive city and put on a blitz campaign, entering other cities one at a
time. Large companies introduce their product into a whole region and then move to the next. Companies with
national distribution networks, such as auto companies, launch new models nationally.
With the Internet connecting far-flung parts of the globe, competition is more likely to cross national borders.
Companies are increasingly rolling out new products simultaneously across the globe. However, masterminding a
global launch poses challenges, as Chapter 8 described, and a sequential rollout across countries may still be the
best option.108
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476 PART 5 | CReATing VAlue
To whom (TargeT-markeT prospeCTs) Within the rollout markets, the company must target
initial distribution and promotion to the best prospect groups. Ideally these should be early adopters, heavy users,
and opinion leaders it can reach at low cost. Few groups include all these, so the company should rate prospects
and target the best group. The aim is to generate strong sales as soon as possible to attract further prospects.
how (inTroduCTory markeT sTraTegy) Because new-product launches often take longer and
cost more than expected, many potentially successful offerings suffer from underfunding. It’s important to allocate
sufficient time and resources—yet not overspend—as the new product gains traction in the marketplace.109
To coordinate the many tasks in launching a new product, management can use network-planning techniques
such as critical path scheduling (CPS), which develops a master chart showing the simultaneous and sequential ac-
tivities that must take place. By estimating how much time each activity takes, planners estimate completion time for
the entire project. Any delay in any activity on the critical path—the shortest route to completion—will delay the proj-
ect. If the launch must be completed sooner, the planner searches for ways to reduce time along the critical path.110
The Consumer-Adoption Process
Adoption is an individual’s decision to become a regular user of a product and is followed by the consumer-
loyalty process. New-product marketers typically aim at early adopters and use the theory of innovation diffusion
and consumer adoption to identify them.
sTaGes IN The adopTIoN process
An innovation is any good, service, or idea that someone perceives as new, no matter how long its history. Everett
Rogers defines the innovation diffusion process as “the spread of a new idea from its source of invention or
creation to its ultimate users or adopters.”111 The consumer-adoption process is the mental steps through which
an individual passes from first hearing about an innovation to final adoption.112 They are:
1. Awareness—The consumer becomes aware of the innovation but lacks information about it.
2. Interest—The consumer is stimulated to seek information about the innovation.
3. Evaluation—The consumer considers whether to try the innovation.
4. Trial—The consumer tries the innovation to improve his or her estimate of its value.
5. Adoption—The consumer decides to make full and regular use of the innovation.
The new-product marketer should facilitate movement through these stages. A water filtration system manu-
facturer might discover that many consumers are stuck in the interest stage; they do not buy because of their
uncertainty and the large investment cost.113 But these same consumers would be willing to use a water filtration
system at home on a trial basis for a small monthly fee. The manufacturer should consider offering a trial-use plan
with option to buy.
facTors INflueNcING The adopTIoN process
Marketers recognize the following characteristics of the adoption process: differences in individual readiness to
try new products, the effect of personal influence, differing rates of adoption, and differences in organizations’
readiness to try new products. Some researchers are focusing on use-diffusion processes as a complement to
adoption process models to see how consumers actually use new products.114
readiness To Try new produCTs and personal inFluenCe Everett Rogers defines a
person’s level of innovativeness as “the degree to which an individual is relatively earlier in adopting new ideas
than the other members of his social system.” Some people are the first to adopt new clothing fashions or new
appliances; some doctors are the first to prescribe new medicines.115 See the adopter categories in Figure 15.7.
After a slow start, an increasing number of people adopt the innovation, the number reaches a peak, and then it
diminishes as fewer nonadopters remain.
The five adopter groups differ in their value orientations and their motives for adopting or resisting the new
product.116
• Innovators are technology enthusiasts; they are venturesome and enjoy tinkering with new products and
mastering their intricacies. In return for low prices, they are happy to conduct alpha and beta testing and
report on early weaknesses.
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inTRoduCing new MARkeT offeRings | chapter 15 477
• Early adopters are opinion leaders who carefully search for new technologies that might give them a dramatic
competitive advantage. They are less price sensitive and are willing to adopt the product if given personalized
solutions and good service support.
• Early majority are deliberate pragmatists who adopt the new technology when its benefits have been proven
and a lot of adoption has already taken place. They make up the mainstream market.
• Late majority are skeptical conservatives who are risk averse, technology shy, and price sensitive.
• Laggards are tradition-bound and resist the innovation until the status quo is no longer defensible.
Each group requires a different type of marketing if the firm wants to move its innovation through the full
product life cycle. In addition to or instead of targeting opinions leaders, some experts advocate targeting revenue
leaders with a new product—those customers with higher customer lifetime-values—to accelerate the path to
profitability.117
Personal influence, the effect one person has on another’s attitude or purchase probability, has greater signifi-
cance in some situations and for some individuals than others, and it is more important in evaluation than in the
other stages. It has more power over late than early adopters and in risky situations.
Companies often target innovators and early adopters with product rollouts. When Nike entered the skate-
boarding market, it recognized an anti-establishment, big-company bias from the target market that could present
a sizable challenge. To gain “street cred” with teen skaters, it sold exclusively to independent shops, advertised
nowhere but skate magazines, and gained sponsorships from admired pro riders by engaging them in product
design.118
CharaCTerisTiCs oF The innovaTion Some products catch on immediately (roller blades),
whereas others take a long time to gain acceptance (diesel engine autos). One new-product concept that quickly
took hold was StubHub online ticket reselling service.119
stuBHuB The cofounders of StubHub, Jeff Fluhr and Eric Barker, came up with the idea for their site when
they were Stanford MBA students. Realizing there were far too many unused tickets for sporting events, theater events,
and concerts, they decided to set up an “eBay for tickets” where sellers could set a price higher or lower than face value
depending on demand. StubHub would take a 10 percent cut from the buyer and a 15 percent cut from the seller on every
purchase. The service had to negotiate state laws restricting ticket reselling, but by 2006 it was making $100 million in
revenue, split between sports (75 percent), concerts (20 percent), and theater (5 percent) in a market estimated to be worth
$4 billion in the United States. StubHub was sold to eBay for $310 million in 2007. Original-ticket seller Ticketmaster and
its Live Nation parent have fought the company from the start, threatening legal action, introducing paperless tickets that
limit reselling, and launching the TicketExchange service to compete. StubHub has sets its sights on being more than a
ticket seller and becoming a multiplatform e-commerce site. A brand-building multimedia campaign launched in 2012 was
designed to add emotional components to the company’s functional message, including the idea of tickets “growing on
trees.” With 40 percent of primary tickets going unsold, StubHub is also emphasizing helping consumers discover events
and attend more of them.
16%
Laggards
34%
Late majority
34%
Early majority
13 %
Early adopters
2 %
Innovators
Time of Adoption of Innovations
| Fig. 15.7 |
Adopter
Categorization
on the Basis of
Relative Time
of Adoption of
Innovations
Source: Tungsten, http://en.wikipedia.org/
wiki/Everett_Rogers. Based on E. Rogers,
Diffusion of Innovations (London: Free
Press, 1962).
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478 PART 5 | CReATing VAlue
Five characteristics influence an innovation’s rate of adoption. We consider them for digital video recorders
(DVRs) for home use, as exemplified by TiVo.120
1. Relative advantage—the degree to which the innovation appears superior to existing products. The greater the
perceived relative advantage of using a DVR, say, for easily recording favorite shows, pausing live TV, or skip-
ping commercials, the more quickly it was adopted.
2. Compatibility—the degree to which the innovation matches consumers’ values and experiences. DVRs are
highly compatible with the preferences of avid television watchers.
3. Complexity—the degree to which the innovation is difficult to understand or use. DVRs are somewhat com-
plex and therefore took a slightly longer time to penetrate into home use.
4. Divisibility—the degree to which the innovation can be tried on a limited basis. This provided a sizable chal-
lenge for DVRs—sampling could occur only in a retail store or perhaps a friend’s house.
5. Communicability—the degree to which the benefits of use are observable or describable to others. The fact
that DVRs have some clear advantages helped create interest and curiosity.
Other characteristics that influence the rate of adoption are cost, risk and uncertainty, scientific credibility, and
social approval. The new-product marketer must research all these factors and give the key ones maximum atten-
tion in designing the product and its marketing program.
organizaTions’ readiness To adopT innovaTions The creator of a new teaching
method would want to identify innovative schools. The producer of a new piece of medical equipment would
want to identify innovative hospitals. Adoption is associated with variables in the organization’s environment
(community progressiveness, community income), the organization itself (size, profits, pressure to change), and
the administrators (education level, age, sophistication). Other forces come into play in trying to get a product
adopted into organizations that receive the bulk of their funding from the government, such as public schools.
A controversial or innovative product can be squelched by negative public opinion.
StubHub, a leader in online
ticket reselling, is considering
other e-commerce options
while adding a more emotional
component to its core business.
choose product managers or new-product managers,
committees, departments, or venture teams. Increas-
ingly, they are adopting cross-functional teams, con-
necting to individuals and organizations outside the
company through crowd-sourcing and other means,
and developing multiple product concepts.
3. Eight stages define the new-product development pro-
cess: idea generation, screening, concept development
and testing, marketing strategy development, business
Summary
1. Once a company has segmented the market, chosen
its target customer groups and identified their needs,
and selected its desired market positioning, it is ready to
develop and launch appropriate new products and ser-
vices. Marketing should participate with other depart-
ments in every stage of new-product development.
2. Successful new-product development requires the
company to establish an effective organization for
managing the development process. Companies can
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inTRoduCing new MARkeT offeRings | chapter 15 479
analysis, product development, market testing, and
commercialization. At each stage, the company must
decide whether to drop the idea or move to the next
stage.
4. The consumer-adoption process is the process by which
customers learn about new products, try them, and
adopt or reject them. Today many marketers are targeting
heavy users and early adopters of new products because
both groups can be reached by specific media and tend
to be opinion leaders. The consumer-adoption process is
influenced by many factors beyond the marketer’s con-
trol, including consumers’ and organizations’ willingness
to try new products, personal influences, and the charac-
teristics of the new product or innovation.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Whom Should You Target with New
Products?
Some new-product experts maintain that getting close to
customers through intensive research is the only way to
develop successful new products. Other experts disagree
and say customers can’t possibly provide useful feedback
on what they don’t know and can’t provide insights that will
lead to breakthrough products.
Take a position: Consumer research is critical to new-
product development versus Consumer research may
not be all that helpful in new-product development.
Marketing Discussion
Product Innovativeness
Think about the last new product you bought. How do
you think its success will be affected by the five charac-
teristics of an innovation: relative advantage, compatibility,
complexity, divisibility, and communicability?
revolutionary MP3 player became “the Walkman of the
21st century,” and the launch of the iTunes online music
store helped drive iPod sales through the roof.
The iPod was also central in changing the way peo-
ple listened to and used music. According to musician
John Mayer, people felt like they were “walking through
musicology” when they used their iPods, leading them
to listen to more music and with more passion. The iPod
has gone through a series of re-generations, adding
features like photo, video, and radio capabilities along
the way.
Apple reached its impressive market domination
through a combination of shrewd product innovation
and clever marketing. The marketing effort appealed
to both Apple fans and people new to the brand. To
reach such a broad base, the company had to shift its
Marketing Excellence
>> Apple
Apple has transformed the way people listen to music,
play video games, talk on the phone, and even read
books. The company’s revolutionary product innova-
tions include the iPod, the iMac, the iPhone, and
the iPad. They are the reason the company topped
Fortune’s Most Admired Companies list every year from
2008 to 2014.
The iPod introduced many consumers to Apple and
initiated a series of monumental product innovations. It
exemplified Apple’s innovative design skills and looked,
felt, and operated like no other device. To the delight
of Apple (and the chagrin of competitor Sony), the
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480 PART 5 | CReATing VAlue
The launch of the iPad also created media frenzy in
2013. The multitouch device combined the look and feel
of the iPhone with the power of a MacBook and gave
consumers access to music, books, movies, pictures,
video games, documents, and hundreds of thousands
of applications at the touch of a finger without mouse or
keyboard. Apple followed up with the launch of the iPad
mini, a smaller version of the original, and the iPad Air,
accompanied by a powerful marketing campaign that
inspired consumers to do anything with their iPad, includ-
ing creating movies, building wind turbines, studying coral
reefs, and making mountain climbing safer.
In recent years, Apple has faced more serious com-
petition for its smart phones, tablets, and other handheld
devices, especially from Samsung and HTC. Investment
in research and development is just one way the com-
pany remains a leader in this cutthroat industry. It spent
$2.4 billion in R&D in 2011, $3.4 billion in 2012, and $4.5
billion in 2013. Creating, producing, and launching new
products is a top priority for Apple. With creative market-
ing support behind them, these products are the reason
consumers and analysts stay on their toes awaiting
Apple’s latest product news.
Questions
1. Apple’s product launches over the past decade have
been monumental. What makes the company so
good at innovation? Is anyone comparable to Apple
in this respect?
2. How important was the iPod to Apple’s current suc-
cess? Discuss the significance of the iPhone and
iPad launches to Apple’s new-product development
strategy.
3. It has been a few years since Apple’s last epic inno-
vation. What’s next for Apple?
Sources: Matt Vella, “Apples’ Latest Ad Is Probably Going to Give You the Chills,” Time, January 13,
2014; www.apple.com; 2013 Apple Annual Report; “iPhone4: The ‘Most Successful Product Launch’
in Apple’s History,” Independent, June 28, 2010; Joseph De Avila, “Why Some Apple Fans Won’t
Buy the iPhone,” Wall Street Journal, September 12, 2007, p. D3; Nick Wingfield, “Apple Businesses
Fuel Each Other; Net Jumps as Mac Sales Top PC-Industry Growth Rate; iPhones, iPods Also Thrive,”
Wall Street Journal, October 23, 2007; Terril Yue Jones, “How Long Can the iPod Stay on Top?,” Los
Angeles Times, March 5, 2006; Beth Snyder Bulik, “Grab an Apple and a Bag of Chips,” Advertising
Age, May 23, 2005; Jay Parsons, “A Is for Apple on iPod,” Dallas Morning News, October 6, 2005;
Peter Burrows, “Rock On, iPod,” BusinessWeek, June 7, 2004, pp. 130–31; Jay Lyman, “Mini iPod
Moving Quickly, Apple Says,” TechNewsWorld, February 26, 2004; Steven Levy, “iPod Nation,”
Newsweek, July 25, 2004; “Apple Computer: iPod Silhouettes,” New York Marketing Association;
Steven Levy, “iPod Nation,” Newsweek, July 25, 2004; Effie Worldwide, www.effie.org.
channel strategies. It added “mass electronic” retail-
ers such as Best Buy and Circuit City (now defunct) to
its existing channels, which quadrupled its number of
outlets.
Besides this enhanced “push” effort, Apple also
developed memorable, creative “pull” advertising that
helped drive the popularity of the iPod. The Silhouettes
campaign featured silhouettes of people listening to and
dancing with their iPods and appeared all over the world.
This simple message worked across cultures, portraying
the iPod as cool but not beyond the reach of anyone who
enjoyed music.
As the iPod’s popularity grew, a halo effect helped
increase Apple’s share in its other markets. In fact, in
2007 the company officially changed its name from Apple
Computer Inc. to Apple Inc. to help communicate its
focus on non-computer products.
Apple’s next-largest product launch after the iPod
was the iPhone, its 2007 entry to the cell phone industry.
With its touch-screen pad, virtual keyboard, and Internet
and e-mail capabilities, the iPhone launched to huge
consumer excitement; people lined up for hours to be
among the first to buy one. Investment analysts initially
feared that Apple’s two-year contract with AT&T and
the iPhone’s high price would hinder its success. But
74 days after the product’s debut, 1 million units had
been sold. It had taken the iPod two years to reach the
cumulative sales ($1.1 million) the iPhone had reached
after just its first quarter. In fact, half the iPhones’ buyers
switched to AT&T, incurring fees to break their contracts
with other carriers, just to have a chance to own an
iPhone.
Over the next few years, Apple dropped the price of
the iPhone significantly and added impressive picture and
video capabilities, video game features, a faster proces-
sor, and access to millions of additional applications. The
iPhone had become yet another game-changing techno-
logical invention. When the iPhone 4 launched in 2010,
showcasing FaceTime video calling, Steve Jobs declared
it “the most successful product launch in Apple’s history.”
Jobs died in 2011 and didn’t get to witness the success
of the iPhone 5 launch in 2012. Apple received more
than 2 million preorders of the iPhone 5 within the first
24 hours, far exceeding sales of any preceding iPhone
launch. When the phone officially hit the shelves on
September 21, 2012, the company couldn’t keep up with
the initial demand.
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social media sites like Twitter and Facebook. In addition,
The Marketing Cloud enables companies to monitor their
brand and products across the Internet and analyze their
sales leads.
Salesforce.com transitioned into the platform-as-a-
service or PaaS category with the launch of Force.com.
PaaS provides customers with tools to build their own
applications rather than supplying the application already
built. For example, a university might develop an appli-
cation for its student body that includes campus maps,
bus routes, and school events, while a clothing store
can customize sale discounts and product offerings for
each customer based on previous purchase patterns. By
2014, more than 4 million customers had created their
own applications using the Force.com platform.
A first mover, Salesforce.com is also the market
leader with 14 percent market share. The company
spends 7 percent of revenues on research and develop-
ment and an astonishing 53 percent on marketing to help
generate leads and new customers. Cloud computing
has become a competitive, rapidly evolving industry,
inhabited by big players like Oracle, IBM, and Workday as
well as niche companies that focus on specific industries
such as health care and hospitality.
Over the years, Salesforce.com has won numerous
awards for its products and services. Forbes ranked it
the most innovative company in the world from 2011 to
2014. With $3 billion in sales, it has expanded into 16 dif-
ferent languages and has more than 100,000 customers
and more than 2.1 million subscribers.
Questions
1. Why has Salesforce.com been so successful?
What did the company do well when it created and
expanded its product offerings?
2. What are some of the challenges Salesforce.com
faces in the near future?
3. What other products and services might Salesforce.
com offer next? Why?
Sources: Spencer E. Ante, “New Cloud-Software Firms Take Off,” Wall Street Journal, March 5,
2014, p. B5; Salesforce.com; 2013 Salesforce.com Annual Report; David Trainer, “Salesforce.
com Has Insider Selling, Valuation in the Clouds,” Forbes, December 16, 2013; blogs.salesforce.
com/company/2013/03/how-to-turn-a-simple-idea-into-a-high-growth-company, accessed June
2, 2014; Vauhini Vara, “Business Technology: An Early Adopter’s New Idea; Salesforce.com Sees
Future Built on ‘Platforms,’” Wall Street Journal, January 22, 2008, p. B3; Floyd Norris, “First
Insiders Sold Their Shares Privately, then Salesforce.com Filed to Go Public,” New York Times, May
14, 2004, p. C1.
Marketing Excellence
>> Salesforce.com
Salesforce.com was founded by former Oracle executive
Marc Benioff in 1999. Benioff believed software should
be free of troublesome installations, maintenance issues,
and continuous upgrades. His vision was “to make soft-
ware easier to purchase, simpler to use, and more demo-
cratic.” With that in mind, Benioff led a start-up company
called Salesforce.com that offered software-as-a-service
(SaaS), or cloud computing.
SaaS differs from old-school software technology
because companies pay for the product per use each
month, much like a utility bill. Salesforce.com uses the
Internet or “cloud” to host its customer relationship man-
agement (CRM) applications and to deliver them directly
to customers, who can access the software from any
device just by logging on to a Web site. They don’t have
to invest in servers or software licensing, install the soft-
ware, or store the data themselves. With this innovative
concept, Salesforce.com turned the software industry
upside down and created an entirely new multibillion-
dollar industry.
From the start, Salesforce.com wanted its products
to be everything traditional software wasn’t. Its first prod-
uct had an extremely user-friendly sales interface that
organized contacts, accounts, and opportunities. The
company welcomed customer feedback, and as a result
it could develop new features to fit users’ needs. Today,
The Sales Cloud is Salesforce.com’s key product. It lets
companies track leads, change forecasts, collaborate
with colleagues, and access real-time customer informa-
tion, improving productivity and closing more sales.
Salesforce.com next launched The Service Cloud, a
CRM solution that changed the way companies connect
with their customers. This product provides companies
with a call-center view of each customer and the abil-
ity to track each case on an individual basis. Users can
communicate with customers through every media chan-
nel, escalate complaints, and plug into conversations on
social networking sites, ultimately resulting in better over-
all customer service.
From 2010 to 2012, Salesforce.com acquired 19
companies in order to expand its product offerings. In
2011, it purchased Radian6, which allowed it to launch
The Marketing Cloud, with which customers can listen
to and engage in conversations taking place on public
M15_KOTL2621_15_GE_C15.indd 481 09/03/15 6:32 PM
482
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. How do consumers process and evaluate prices? (p. 483)
2. How should a company set prices initially for products or services? (p. 489)
3. How should a company adapt prices to meet varying circumstances and
opportunities? (p. 504)
4. When and how should a company initiate a price change? (p. 507)
5. How should a company respond to a competitor’s price change? (p. 509)
Ryanair’s revolutionary pricing strategy
charges a nominal airfare—or even
nothing—for the seat, but also charges a
fee for almost everything else involved in
the flight.
Source: © Alex Segre/Alamy
M16_KOTL2621_15_GE_C16.indd 482 09/03/15 6:33 PM
483
16 Developing Pricing
Strategies and Programs
Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Price also communicates the company’s intended value positioning of its product or brand.
A well-designed and marketed product can still command a price premium and reap big profits. But new
economic realities have caused many consumers to reevaluate what they are willing to pay for products and
services, and companies have had to carefully review their pricing strategies as a result. One that has caught the
attention of consumers and businesses is Ryanair, with an unusual pricing strategy.1
Profits for discount European air carrier Ryanair have been sky-high thanks to its revolutionary busi-
ness model. The secret? Founder Michael O’Leary thinks like a retailer, charging passengers for
almost everything—except their seat. A quarter of Ryanair’s seats are free, and O’Leary wants to
double that within five years, with the ultimate goal of making all seats free. Passengers currently
pay only taxes and fees of about $10 to $24, with an average one-way fare of roughly $52. Every-
thing else is extra: checked luggage ($9.50 per bag), snacks ($5.50 for a hot dog, $4.50 for chicken soup, $3.50 for
water), and bus or train transportation into town from the far-flung airports Ryanair uses ($24). Flight attendants sell a
variety of merchandise, including digital cameras ($137.50) and iPocket MP3 players ($165). Onboard gambling and
cell phone service are projected new revenue sources. Other strategies cut costs or generate outside revenue. Seats
don’t recline, window shades and seat-back pockets have been removed, and there is no entertainment. Seat-back
trays carry ads, and the exteriors of the planes are giant revenue-producing billboards for Vodafone Group, Jaguar,
Hertz, and others. More than 99 percent of tickets are sold online. The Web site also offers travel insurance, hotels,
ski packages, and car rentals. Only Boeing 737-800 jets are flown to reduce maintenance costs, and flight crews buy
their own uniforms. O’Leary has even discussed the possibility of pay
toilets and 10 rows of standing room with handrails like a New York City
subway car (to squeeze 30 more passengers aboard), though both sug-
gestions drew much public concern and skepticism. Although his ideas
may seem unconventional, the formula works for Ryanair’s customers;
the airline flies 58 million people to more than 150 airports each year.
All the extras add up to 20 percent of revenue. Ryanair enjoys net
margins of 25 percent, more than three times Southwest’s 7 percent.
Some industry pundits even refer to Ryanair as “Walmart with wings”!
Pricing decisions are complex and must take into
account many factors—the company, the customers, the com-
petition, and the marketing environment. Holistic marketers
know their pricing decisions must also be consistent with the
firm’s marketing strategy and its target markets and brand
positions. In this chapter, we provide concepts and tools to
facilitate the setting of initial prices and adjusting prices over
time and markets.
Understanding Pricing
Price is not just a number on a tag. It comes in many forms and performs many functions. Rent, tuition, fares, fees,
rates, tolls, retainers, wages, and commissions are all the price you pay for some good or service. Price also has
many components. If you buy a new car, the sticker price may be adjusted by rebates and dealer incentives. Some
firms allow customers to pay through multiple forms, such as $150 plus 25,000 frequent flier miles for a flight.2
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484 PART 5 | CReATing VAlue
Throughout most of history, prices were set by negotiation between buyers and sellers. Bargaining is still a
sport in some areas. Setting one price for all buyers is a relatively modern idea that arose with the development of
large-scale retailing at the end of the nineteenth century. F. W. Woolworth, Tiffany & Co., John Wanamaker, and
others advertised a “strictly one-price policy,” efficient because they carried so many items and supervised so many
employees.
PrIcInG In a DIGItal WorlD
Traditionally, price has operated as a major determinant of buyer choice. Consumers and purchasing agents who
have access to price information and price discounters put pressure on retailers to lower their prices. Retailers in
turn put pressure on manufacturers to lower their prices. The result can be a marketplace characterized by heavy
discounting and sales promotion.
Downward price pressure from a changing economic environment coincided with some longer-term trends
in the technological environment. For some years now, the Internet has been changing the way buyers and sellers
interact. Here is a short list of how the Internet allows sellers to discriminate between buyers and buyers to
discriminate between sellers.
Buyers can:
• Get instant price comparisons from thousands of vendors. Customers can compare the prices offered
by multiple retailers by clicking mySimon.com. Intelligent shopping agents (“bots”) take price comparison a
step further and seek out products, prices, and reviews from hundreds if not thousands of merchants.
• Check prices at the point of purchase. Customers can use smart phones to make price comparisons in stores
before deciding whether to purchase, pressure the retailer to match or better the price, or buy elsewhere.
• Name their price and have it met. On Priceline.com, customers state the price they want to pay for an airline
ticket, hotel, or rental car, and the site looks for any seller willing to meet that price.3 Volume-aggregating sites
combine the orders of many customers and press the supplier for a deeper discount.
• Get products free. Open source, the free software movement that started with Linux, will erode margins for
just about any company creating software. The biggest challenge confronting Microsoft, Oracle, IBM, and
virtually every other major software producer is: How do you compete with programs that can be had for
free? “Marketing Insight: Giving It All Away” describes how firms have been successful with essentially free
offerings.
Sellers can:
• Monitor customer behavior and tailor offers to individuals. GE Lighting, which gets 55,000 pricing requests
a year from its B-to-B customers, has Web programs that evaluate 300 factors going into a pricing quote, such
as past sales data and discounts, so it can reduce processing time from up to 30 days to six hours.
• Give certain customers access to special prices. Ruelala is a members-only Web site that sells upscale women’s
fashion, accessories, and footwear through limited-time sales, usually two-day events. Other business market-
ers are already using extranets to get a precise handle on inventory, costs, and demand at any given moment in
order to adjust prices instantly.
Both buyers and sellers can:
• Negotiate prices in online auctions and exchanges or even in person. Want to sell hundreds of excess and
slightly worn widgets? Post a sale on eBay. Want to purchase vintage baseball cards at a bargain price? Go to
www.baseball-cards.com. According to Consumer Reports, more than half of U.S. adults reported bargain-
ing for a better deal on everyday goods and services in the past three years; almost 90 percent were success-
ful at least once. Some successful tactics included: told salesperson I’d check competitor’s prices (57 percent
of respondents); looked for lower prices at a walk-in store (57 percent); chatted with salesperson to make a
personal connection (46 percent); used other store circulars or coupons as leverage (44 percent); and checked
user reviews to see what others paid (39 percent).4
a chanGInG PrIcInG EnvIronmEnt
Pricing practices have changed significantly, thanks in part to a severe recession in 2008–2009, a slow recovery,
and rapid technological advances. But the new millennial generation also brings new attitudes and values to con-
sumption. Often burdened by student loans and other financial demands, members of this group (born between
about 1977 and 1994) are reconsidering just what they really need to own. Renting, borrowing, and sharing are
valid options to many.
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DeVeloPing PRiCing STRATegieS AnD PRogRAmS | chapter 16 485
Giving It All Away
Giving away products for free via sampling has been a successful mar-
keting tactic for years. Estée Lauder gave free samples of cosmetics to
celebrities, and organizers at awards shows lavish winners with plenti-
ful free items or gifts known as “swag.” Other manufacturers, such
as Gillette and HP, built their business model around selling the host
product essentially at cost and making money on the sale of necessary
supplies, such as razor blades and printer ink.
Software companies adopted similar practices. Adobe gave away
its Adobe Reader for free in 1994, as did Macromedia with its
Shockwave player in 1995. Their software became the industry stan-
dard, but the firms really made their money selling their authoring
software. More recently, start-ups such as Blogger Weblog and Skype
have succeeded with a “freemium” strategy—free online services with
a premium component.
Chris Anderson, former editor-in-chief of Wired, believes that
in a digital marketplace companies can make money with free
products. As evidence, he offers revenue models relying on cross-
subsidies (giving away a DVR to sell cable service) and freemiums
(offering the Flickr online photo management and sharing application
for free to everyone while selling the superior Flickr Pro to more
committed users).
Some online firms have successfully moved “from free to fee” and
begun charging for services. Under a new participative-pricing mecha-
nism that lets consumers decide on the price they feel is warranted,
buyers often choose to pay more than zero, and even enough for sell-
ers’ revenues to increase over what a fixed price would have yielded.
Red Hat successfully applied a “freemium” model. A pioneer with
open source Linux software, the company offers its business custom-
ers stability and dependability. Every few years it freezes a version of
the constantly evolving software and sells a long-term support edition
with customized applications, backdated updates from later versions
of Linux, and customer support, all for a subscription fee. Red Hat also
works with developers and programmers for its free version of Linux via
its Fedora program. Thanks to these moves, Red Hat is now a billion-
dollar company serving 80 percent of the Fortune 500 companies.
Sources: Ashlee Vance, “Red Hat Sees Lots of Green,” Bloomberg Businessweek,
March 29, 2012; Jon Brodkin, “How Red Hat Killed Its Core Product—and
Became a Billion-Dollar Business,” www.arstechnica.com, February 28, 2012;
Chris Anderson, Free: The Future of a Radical Price (New York: Hyperion, 2009);
Ju-Young Kim, Martin Natter, and Martin Spann, “Pay What You Want: A New
Participative Pricing Mechanism,” Journal of Marketing 73 (January 2009), pp.
44–58; Koen Pauwels and Allen Weiss, “Moving from Free to Fee: How Online
Firms Market to Change Their Business Model Successfully,” Journal of Marketing
72 (May 2008), pp. 14–31.
marketing
insight
Champion of open source Linux
software, Red Hat complements
its free offerings with valuable
fee-based services.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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486 PART 5 | CReATing VAlue
Some say these new behaviors are creating a sharing economy in which consumers share bikes, cars, clothes,
couches, apartments, tools, and skills and extracting more value from what they already own. As one sharing-
related entrepreneur noted, “We’re moving from a world where we’re organized around ownership to one
organized around access to assets.” In a sharing economy, someone can be both a consumer and a producer,
reaping the benefits of both roles.5
Trust and a good reputation are crucial in any exchange, but imperative in a sharing economy. Most platforms
that are part of a sharing-related business have some form of self-policing mechanism such as public profiles and
community rating systems, sometimes linked with Facebook. Let’s look at bartering and renting, two pillars of a
sharing economy.
Bartering Bartering, one of the oldest ways of acquiring goods, is making a comeback through transactions
estimated to total $12 billion annually in the United States. Trade exchange companies like Florida Barter and
Web sites like www.swap.com connect people and businesses seeking win-win solutions. One financial analyst has
traded financial plans to clients in return for a tutorial in butter churning and trapeze and fire-breathing lessons.
ThredUP allows parents to swap kids’ outgrown and unused clothing and toys with other parents in similar
situations all over the United States. Zimride is a ride-sharing social network for college campuses.6
Experts advise using barter only for goods and services that someone would be willing to pay for anyway. The
founders of a Web site for swapping sporting goods and outdoor gear drew up these criteria for sharable objects:
cost more than $100 but less than $500, easily transportable, and infrequently used.7
renting The sector of the new sharing economy that is really exploding is rentals. RentTheRunway offers
affordable rentals of designer dresses. Customers are sent two different sizes of the dress they choose—to ensure
better fit—at a cost of $50 to $300, or about 10 percent of retail value. The site is adding 100,000 customers a
month, typically 15 to 35 years old.8 One of the pioneers in the rental economy is Airbnb.9
AIRBNB Rhode Island School of Design graduates Brian Chesky and Joe Gebbia came upon the idea of making
a little extra money by launching www.airbedandbreakfast.com and renting out air mattresses to attendees at an industrial
design conference in San Francisco. Emboldened by their success at attracting three very different guests for a week, the
two shortened the name of their venture to Airbnb, hired a tech expert, and set out to extend their “couch-surfing” business
by adding features such as escrow payments and professional photography so the potential rental properties looked their
best. Around-the-clock customer service for guests and a $1 million insurance policy for hosts provided each party with
valuable peace of mind. All kinds of spaces were included—not just rooms, apartments, and houses but also driveways,
treehouses, igloos, and even castles. Airbnb applied a broker’s model to generate revenues: 3 percent from the host and
6 percent to 12 percent from the guest, depending on the property price. Although it now operates in 190 countries and
28,000 cities, books millions of spaces annually, and has seen its valuation approach $10 billion, it faces several significant
challenges, including government intervention in the form of taxes, disputes over illegal subletting, and the imposition of
safety and other hospitality-related regulation.
Even big companies are getting in on the act. German car maker Daimler introduced its Car2Go service for
customers who want to rent a car for a short period of time—even at the spur of the moment. In about half its
stores, Home Depot has a unit that rents out all kinds of products such as drills and saws that it also sells.10
hoW comPanIEs PrIcE
In small companies, the boss often sets prices. In large companies, division and product line managers do. Even here,
top management sets general pricing objectives and policies and often approves lower management’s proposals.
Where pricing is a key competitive factor (aerospace, railroads, oil companies), companies often establish a
pricing department to set or assist others in setting appropriate prices. This department reports to the market-
ing department, finance department, or top management. Others who influence pricing include sales managers,
production managers, finance managers, and accountants. In B-to-B settings, research suggests that pricing perfor-
mance improves when pricing authority is spread horizontally across the sales, marketing, and finance units and
when there is a balance in centralizing and delegating that authority between individual salespeople and teams and
central management.11
Many companies do not handle pricing well and fall back on “strategies” such as: “We calculate our costs and
add our industry’s traditional margins.” Other common mistakes are not revising price often enough to capitalize
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DeVeloPing PRiCing STRATegieS AnD PRogRAmS | chapter 16 487
on market changes; setting price independently of the rest of the marketing program rather than as an intrinsic ele-
ment of market-positioning strategy; and not varying price enough for different product items, market segments,
distribution channels, and purchase occasions.
For any organization, effectively designing and implementing pricing strategies requires a thorough under-
standing of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.
consumEr PsYcholoGY anD PrIcInG
Many economists traditionally assumed that consumers were “price takers” who accepted prices at face value
or as a given. Marketers, however, recognize that consumers often actively process price information, interpret-
ing it from the context of prior purchasing experience, formal communications (advertising, sales calls, and
brochures), informal communications (friends, colleagues, or family members), point-of-purchase or online
resources, and other factors.12
Purchase decisions are based on how consumers perceive prices and what they consider the current actual price
to be—not on the marketer’s stated price. Customers may have a lower price threshold, below which prices signal
inferior or unacceptable quality, and an upper price threshold, above which prices are prohibitive and the product
appears not worth the money. Different people interpret prices in different ways. Consider the consumer psychol-
ogy involved in buying a simple pair of jeans and a T-shirt.13
JeANs ANd A t-shIRt Why does a black T-shirt for women that looks pretty ordinary cost $275
from Armani but only $14.90 from the Gap and $7.90 from Swedish discount clothing chain H&M? Customers who pur-
chase the Armani T-shirt are paying for a more stylishly cut T-shirt made of 70 percent nylon, 25 percent polyester, and 5
percent elastane with a “Made in Italy” label from a luxury brand known
for suits, handbags, and evening gowns that sell for thousands of dollars.
The Gap and H&M shirts are made mainly of cotton. For pants to go with
that T-shirt, choices abound. Gap sells its “Original Khakis” for $44.50,
though Abercrombie & Fitch’s classic button-fly chinos cost $70. But
that’s a comparative bargain compared to Michael Bastian’s plain khakis
for $480 or Giorgio Armani’s for $595. High-priced designer jeans may
use expensive fabrics such as cotton gabardine and require hours of me-
ticulous hand-stitching to create a distinctive design, but equally important
are an image and a sense of exclusivity.
Understanding how consumers arrive at their perceptions of
prices is an important marketing priority. Here we consider three
key topics—reference prices, price–quality inferences, and price
endings.
reference Prices Although consumers may have fairly good
knowledge of price ranges, surprisingly few can accurately recall
specific prices.14 When examining products, however, they often
employ reference prices, comparing an observed price to an internal
reference price they remember or an external frame of reference
such as a posted “regular retail price.”15
All types of reference prices are possible (see Table 16.1), and
sellers often attempt to manipulate them. For example, a seller
can situate its product among expensive competitors to imply
that it belongs in the same class. Department stores will display
women’s apparel in separate departments differentiated by price; dresses in the more expensive department are
assumed to be of better quality.16 Marketers also encourage reference-price thinking by stating a high manu-
facturer’s suggested price, indicating that the price was much higher originally, or by pointing to a competitor’s
high price.17
When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated
price.18 Research has found that unpleasant surprises—when perceived price is lower than the stated price—can
have a greater impact on purchase likelihood than pleasant surprises.19 Consumer expectations can also play a
For even something as
simple as a black t-shirt
and a pair of jeans or
pants, consumers may
choose to pay as little
as $50 or hundreds of
dollars instead.
So
ur
ce
: ©
Pe
sh
ko
v
D
an
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tt
er
st
oc
k
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488 PART 5 | CReATing VAlue
key role in price response. On Internet auction sites such as eBay, when consumers know similar goods will be
available in future auctions, they will bid less in the current auction.20
Clever marketers try to frame the price to signal the best value possible. For example, a relatively expensive item
can look less expensive if the price is broken into smaller units, such as a $500 annual membership for “under $50
a month,” even if the totals are the same.21
Price-Quality inferences Many consumers use price as an indicator of quality. Image pricing is
especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. A $100
bottle of perfume might contain $10 worth of scent, but gift givers pay $100 to communicate their high regard for
the receiver.
Price and quality perceptions of cars interact. Higher-priced cars are perceived to possess high quality. Higher-
quality cars are likewise perceived to be higher priced than they actually are. When information about true quality
is available, price becomes a less significant indicator of quality. When this information is not available, price acts
as a signal of quality.
Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing. Luxury-goods
makers of watches, jewelry, perfume, and other products often emphasize exclusivity in their communication mes-
sages and channel strategies. For luxury-goods customers who desire uniqueness, demand may actually increase
price because they then believe fewer other customers can afford the product.22
To maintain its air of exclusivity, Ferrari deliberately curtailed sales of its iconic, $200,000-or-more Italian
sports car to below 7,000 despite growing demand in China, the Middle East, and the United States. But even ex-
clusivity and status can vary by customer. Brahma beer is a no-frills light brew in its home market of Brazil but has
thrived in Europe, where it is seen as “Brazil in a bottle.” Pabst Blue Ribbon is a retro favorite among U.S. college
students, but its sales have exploded in China where an upgraded bottle and claims of being “matured in a precious
wooden cask like a Scotch whiskey” allow it to command a $44 price tag.23
Price endings Many sellers believe prices should end in an odd number. Customers perceive an item priced
at $299 to be in the $200 rather than the $300 range; they tend to process prices “left to right” rather than by
rounding.24 Price encoding in this fashion is important if there is a mental price break at the higher, rounded price.
Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company
wants a high-price image, it should probably avoid the odd-ending tactic.25 One study showed that demand actu-
ally increased one-third when the price of a dress rose from $34 to $39 but was unchanged when it rose from $34
to $44.26
Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve
from memory. “Sale” signs next to prices spur demand, but only if not overused: Total category sales are highest
when some, but not all, items in a category have sale signs; past a certain point, sale signs may cause total category
sales to fall.27
Pricing cues such as sale signs and prices that end in 9 are more influential when consumers’ price knowl-
edge is poor, when they purchase the item infrequently or are new to the category, and when product designs
vary over time, prices vary seasonally, or quality or sizes vary across stores.28 They are less effective the more
they are used. Limited availability (for example, “three days only”) also can spur sales among consumers actively
shopping for a product.29
taBle 16.1 Possible Consumer Reference Prices
• “Fair Price” (what consumers feel the product should cost)
• Typical Price
• Last Price Paid
• Upper-Bound Price (reservation price or the maximum most consumers would pay)
• Lower-Bound Price (lower threshold price or the minimum most consumers would pay)
• Historical Competitor Prices
• Expected Future Price
• Usual Discounted Price
Source: Adapted from Russell S. Winer, Pricing, MSI Relevant Knowledge Series (Cambridge, MA: Marketing Science Institute, 2006).
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DeVeloPing PRiCing STRATegieS AnD PRogRAmS | chapter 16 489
Setting the Price
A firm must set a price for the first time when it develops a new product, when it introduces its regular product
into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm
must decide where to position its product on quality and price.
Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands or
variations of brands for different price points: Marriott Vacation Club—Vacation Villas (highest price), Marriott
Marquis (high price), Marriott (high-medium price), Renaissance (medium-high price), Courtyard (medium
price), TownePlace Suites (medium-low price), and Fairfield Inn (low price). Firms devise their branding strategies
to help convey the price-quality tiers of their products or services to consumers.30
Having a range of price points allows a firm to cover more of the market and to give any one consumer more
choices. “Marketing Insight: Trading Up, Down, and Over” describes how consumers have been shifting their
spending in recent years.
The firm must consider many factors in setting its pricing policy.31 Table 16.2 summarizes the six steps in the
process.
stEP 1: sElEctInG thE PrIcInG objEctIvE
The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier
it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum
market skimming, and product-quality leadership.
Despite booming demand,
Ferrari limits production and
the number of sports cars
that it sells to maintain the
brand’s exclusivity.
So
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: ©
Ia
n
Sh
aw
/A
la
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y
taBle 16.2 Steps in Setting a Pricing Policy
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price
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Trading Up, Down, And Over
Michael Silverstein and Neil Fiske, the authors of Trading Up, have
observed a number of middle-market consumers periodically “trading
up” to what they call “New Luxury” products and services “that possess
higher levels of quality, taste, and aspiration than other goods in the
category but are not so expensive as to be out of reach.” The authors
identify three main types of New Luxury products:
• Accessible super-premium products, such as Victoria’s Secret
underwear and Kettle gourmet potato chips, carry a significant
premium over middle-market brands, yet consumers can readily
trade up to them because they are relatively low-ticket items in
affordable categories.
• Old Luxury brand extensions extend historically high-priced brands
down-market while retaining their cachet, such as the Mercedes-
Benz C-class and the American Express Blue card.
• Masstige goods, such as Kiehl’s skin care and Kendall-Jackson
wines, are priced between average middle-market brands and
super-premium Old Luxury brands. They are “always based
on emotions, and consumers have a much stronger emotional
engagement with them than with other goods.”
To trade up to brands that offer these emotional benefits,
consumers often “trade down” by shopping at discounters such
as Walmart and Costco for staple items or goods that confer no
emotional benefit but still deliver quality and functionality. As one con-
sumer explained in rationalizing why her kitchen boasted a Sub-Zero
refrigerator, a state-of-the-art Fisher & Paykel dishwasher, and a $900
warming drawer but a giant 12-pack of Bounty paper towels from a
warehouse discounter: “When it comes to this house, I didn’t give in on
anything. But when it comes to food shopping or cleaning products, if
it’s not on sale, I won’t buy it.”
The recent economic downturn increased the prevalence of trad-
ing down, as many found themselves unable to sustain their lifestyles.
Consumers began to buy more from need than desire and to trade
down more frequently in price. They shunned conspicuous consump-
tion, and sales of some luxury goods suffered. Even purchases that
had never been challenged before were scrutinized. Almost 1 million
U.S. patients became “medical tourists” in 2010 and traveled overseas
for medical procedures at lower costs, sometimes at the urging of U.S.
health insurance companies.
As the economy improved and consumers tired of putting off dis-
cretionary purchases, retail sales picked up, benefiting luxury products
in the process. Trading up and down has persisted, however, along with
“trading over” or switching spending from one category to another,
buying a new home theater system, say, instead of a new car. Often
this meant setting priorities and making a decision not to buy in some
categories in order to buy in others.
Sources: Cotten Timberlake, “U.S. 2 Percenters Trade Down with Post-Recession
Angst,” www.bloomberg.com, May 15, 2013; Anna-Louise Jackson and Anthony
Feld, “Frugality Fatigue Spurs Americans to Trade Up,” www.bloomberg.com,
April 13, 2012; Walker Smith, “Consumer Behavior: From Trading Up to Trading
Off,” Branding Strategy Insider, January 26, 2012; Sbriya Rice, “‘I Can’t Afford
Surgery in the U.S.,’ Says Bargain Shopper,” www.cnn.com, April 26, 2010; Bruce
Horovitz, “Sale, Sale, Sale: Today Everyone Wants a Deal,” USA Today, April 21,
2010, pp. 1A–2A; Michael J. Silverstein, Treasure Hunt: Inside the Mind of the New
Consumer (New York: Portfolio, 2006); Michael J. Silverstein and Neil Fiske, Trading
Up: The New American Luxury (New York: Portfolio, 2003).
marketing
insight
Some consumers are trading up to buy expensive luxury products like
Sub-Zero refrigerators, but also trading down to buy basic staples and
more functional products.
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survival Companies pursue survival as their major objective if they are plagued with overcapacity, intense
competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the
company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value
or face extinction.
MaxiMuM current Profit Many companies try to set a price that will maximize current profits. They
estimate the demand and costs associated with alternative prices and choose the price that produces maximum
current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and
cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may
sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and
legal restraints on price.
MaxiMuM Market share Some companies want to maximize their market share. They believe a higher
sales volume will lead to lower unit costs and higher long-run profit, so they set the lowest price, assuming the
market is price sensitive. Texas Instruments famously practiced this market-penetration pricing for years. The
company would build a large plant, set its price as low as possible, win a large market share, experience falling
costs, and cut its price further as costs fell.
The following conditions favor adopting a market-penetration pricing strategy: (1) The market is highly price
sensitive and a low price stimulates market growth; (2) production and distribution costs fall with accumulated
production experience; and (3) a low price discourages actual and potential competition.
MaxiMuM Market skiMMing Companies unveiling a new technology favor setting high prices to
maximize market skimming. Sony has been a frequent practitioner of market-skimming pricing, in which prices
start high and slowly drop over time. When Sony introduced the world’s first high-definition television (HDTV) to
the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue
from the various segments of the market, the price dropped steadily through the years—a 28-inch Sony HDTV
cost just over $6,000 in 1993, but a 42-inch Sony LED HDTV cost only $579 20 years later in 2013.
This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch
electronics manufacturer, priced its videodisc players to make a profit on each, Japanese competitors priced low
and rapidly built their market share, which in turn pushed down their costs substantially.
Moreover, consumers who buy early at the highest prices may be dissatisfied if they compare themselves with
those who buy later at a lower price. When Apple dropped the early iPhone’s price from $600 to $400 only two
months after its introduction, public outcry caused the firm to give initial buyers a $100 credit toward future Apple
purchases.32
Market skimming makes sense under the following conditions: (1) A sufficient number of buyers have a high
current demand; (2) the unit costs of producing a small volume are high enough to cancel the advantage of charg-
ing what the traffic will bear; (3) the high initial price does not attract more competitors to the market; and (4) the
high price communicates the image of a superior product.
Product-Quality leadershiP A company might aim to be the product-quality leader in the market.33
Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived
quality, taste, and status with a price just high enough not to be out of consumers’ reach. Brands such as Starbucks,
Aveda, Victoria’s Secret, BMW, and Viking have positioned themselves as quality leaders in their categories,
combining quality, luxury, and premium prices with an intensely loyal customer base. Grey Goose and Absolut
carved out a superpremium niche in the essentially odorless, colorless, and tasteless vodka category through clever
on-premise and off-premise marketing that made the brands seem hip and exclusive.
other oBjectives Nonprofit and public organizations may have other pricing objectives. A university
aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining
costs. A nonprofit hospital may aim for full cost recovery in its pricing. A nonprofit theater company may price its
productions to fill the maximum number of seats. A social service agency may set a service price geared to client
income.
Whatever the specific objective, businesses that use price as a strategic tool will profit more than those that
simply let costs or the market determine their pricing. For art museums, which earn an average of only 5 percent of
their revenues from admission charges, pricing can send a message that affects their public image and the amount
of donations and sponsorships they receive.
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stEP 2: DEtErmInInG DEmanD
Each price will lead to a different level of demand and have a different impact on a company’s market-
ing objectives. The normally inverse relationship between price and demand is captured in a demand curve
(see Figure 16.1): The higher the price, the lower the demand. For prestige goods, the demand curve sometimes
slopes upward. Some consumers take the higher price to signify a better product. However, if the price is too
high, demand may fall.
Price sensitivity The demand curve shows the market’s probable purchase quantity at alternative prices,
summing the reactions of many individuals with different price sensitivities. The first step in estimating demand
is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to low-cost
items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or
competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they
think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and
servicing the product over its lifetime.
A seller can successfully charge a higher price than competitors if it can convince customers that it offers the
lowest total cost of ownership (TCO). Marketers often treat the service elements in a product offering as sales
incentives rather than as value-enhancing augmentations for which they can charge. In fact, pricing expert Tom
Nagle believes the most common mistake manufacturers have made in recent years is to offer all sorts of services to
differentiate their products without charging for them.34
Of course, companies prefer customers who are less price-sensitive. Table 16.3 lists some characteristics associ-
ated with decreased price sensitivity. On the other hand, the Internet has the potential to increase price sensitivity.
In some established, fairly big-ticket categories, such as auto retailing and term insurance, consumers pay lower
prices as a result of the Internet. Car buyers use the Internet to gather information and borrow the negotiating
15050
Quantity Demanded per Period
105
$15
$10
Pr
ic
e
100
Quantity Demanded per Period
(b) Elastic Demand(a) Inelastic Demand
$15
$10
| Fig. 16.1 |
Inelastic and Elastic
Demand
taBle 16.3 Factors That Reduce Price Sensitivity
• The product is more distinctive.
• Buyers are less aware of substitutes.
• Buyers cannot easily compare the quality of substitutes.
• The expenditure is a smaller part of the buyer’s total income.
• The expenditure is small compared to the total cost of the end product.
• Part of the cost is borne by another party.
• The product is used in conjunction with assets previously bought.
• The product is assumed to have more quality, prestige, or exclusiveness.
• Buyers cannot store the product.
Source: Based on information from Thomas T. Nagle, John E. Hogan, and Joseph Zale, The Strategy and Tactics of Pricing, 5th ed. (Upper Saddle River, NJ: Pearson,
2011). Printed and electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
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clout of an online buying service.35 But customers may have to visit multiple sites to realize possible savings, and
they don’t always do so. Targeting only price-sensitive consumers may in fact be “leaving money on the table.”
estiMating deMand curves Most companies attempt to measure their demand curves using several
different methods.
• Surveys can explore how many units consumers would buy at different proposed prices. Although consumers
might understate their purchase intentions at higher prices to discourage the company from pricing high, they
also tend to actually exaggerate their willingness to pay for new products or services.36
• Price experiments can vary the prices of different products in a store or of the same product in similar territo-
ries to see how the change affects sales. Online, an e-commerce site could test the impact of a 5 percent price
increase by quoting a higher price to every 40th visitor to compare the purchase response. However, it must
do this carefully and not alienate customers or be seen as reducing competition in any way (thus violating the
Sherman Antitrust Act).37
• Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. The data
can be longitudinal (over time) or cross-sectional (from different locations at the same time). Building the
appropriate model and fitting the data with the proper statistical techniques call for considerable skill, but
sophisticated price optimization software and advances in database management have improved marketers’
abilities to optimize pricing.
One large retail chain was selling a line of “good-better-best” power drills at $90, $120, and $130, respectively.
Sales of the least and most expensive drills were fine, but sales of the midpriced drill lagged. Based on a price
optimization analysis, the retailer dropped the price of the midpriced drill to $110. Sales of the low-priced drill
dropped 4 percent because it seemed less of a bargain, but sales of the midpriced drill increased 11 percent. Profits
rose as a result.38
In measuring the price-demand relationship, the market researcher must control for various factors
that will influence demand.39 The competitor’s response will make a difference. Also, if the company
changes other aspects of the marketing program besides price, the effect of the price change itself will be hard
to isolate.
Price elasticity of deMand Marketers need to know how responsive, or elastic, demand is to a
change in price. Consider the two demand curves in Figure 16.1. In demand curve (a), a price increase from $10
to $15 leads to a relatively small decline in demand from 105 to 100. In demand curve (b), the same price increase
leads to a substantial drop in demand from 150 to 50. If demand hardly changes with a small change in price, we
say it is inelastic. If demand changes considerably, it is elastic.
The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. If demand is
elastic, sellers will consider lowering the price to produce more total revenue. This makes sense as long as the costs
of producing and selling more units do not increase disproportionately.
Price elasticity depends on the magnitude and direction of the contemplated price change. It may be
negligible with a small price change and substantial with a large price change. It may differ for a price cut
than for a price increase, and there may be a price indifference band within which price changes have little or
no effect.
Finally, long-run price elasticity may differ from short-run elasticity. Buyers may continue to buy from a cur-
rent supplier after a price increase but eventually switch suppliers. Here demand is more elastic in the long run
than in the short run, or the reverse may happen: Buyers may drop a supplier after a price increase but return later.
The distinction between short-run and long-run elasticity means that sellers will not know the total effect of a
price change until time passes.
Research has shown that consumers tend to be more sensitive to prices during tough economic times, but that
is not true across all categories.40 One comprehensive review of a 40-year period of academic research on price
elasticity yielded interesting findings:41
• The average price elasticity across all products, markets, and time periods studied was –2.62. In other words, a
1 percent decrease in prices led to a 2.62 percent increase in sales.
• Price elasticity magnitudes were higher for durable goods than for other goods and higher for products in the
introduction/growth stages of the product life cycle than in the mature/decline stages.
• Inflation led to substantially higher price elasticities, especially in the short run.
• Promotional price elasticities were higher than actual price elasticities in the short run (though the reverse
was true in the long run).
• Price elasticities were higher at the individual item or SKU level than at the overall brand level.
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stEP 3: EstImatInG costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor.
The company wants to charge a price that covers its cost of producing, distributing, and selling the
product, including a fair return for its effort and risk. Yet when companies price products to cover
their full costs, profitability isn’t always the net result.
tyPes of costs and levels of Production A company’s costs take two forms,
fixed and variable. Fixed costs, also known as overhead, are costs that do not vary with production
level or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so
on, regardless of output.
Variable costs vary directly with the level of production. For example, each tablet computer pro-
duced by Samsung incurs the cost of plastic and glass, microprocessor chips and other electronics,
and packaging. These costs tend to be constant per unit produced, but they’re called variable
because their total varies with the number of units produced.
Total costs consist of the sum of the fixed and variable costs for any given level of production.
Average cost is the cost per unit at that level of production; it equals total costs divided by produc-
tion. Management wants to charge a price that will at least cover the total production costs at a given
level of production.
To price intelligently, management needs to know how its costs vary with different levels of pro-
duction. Take the case in which a company such as Samsung has built a fixed-size plant to produce
1,000 tablet computers a day. The cost per unit is high if few units are produced per day. As produc-
tion approaches 1,000 units per day, the average cost falls because the fixed costs are spread over
more units. Short-run average cost increases after 1,000 units, however, because the plant becomes
inefficient: Workers must line up for machines, getting in each other’s way, and machines break
down more often [see Figure 16.2(a)].
If Samsung believes it can sell 2,000 units per day, it should consider building a larger plant.
The plant will use more efficient machinery and work arrangements, and the unit cost of
producing 2,000 tablets per day will be lower than the unit cost of producing 1,000 per day. This
is shown in the long-run average cost curve (LRAC) in Figure 16.2(b). In fact, a 3,000-capacity
plant would be even more efficient according to Figure 16.2(b), but a 4,000-daily production
plant would be less so because of increasing diseconomies of scale: There are too many work-
ers to manage, and paperwork slows things down. Figure 16.2(b) indicates that a 3,000-daily
production plant is the optimal size if demand is strong enough to support this level of
production.
There are more costs than those associated with manufacturing. To estimate the real profitability of selling
to different types of retailers or customers, the manufacturer needs to use activity-based cost (ABC) accounting
instead of standard cost accounting, as described in Chapter 5.
accuMulated Production Suppose Samsung runs a plant that produces 3,000 tablet computers
per day. As the company gains experience producing tablets, its methods improve. Workers learn shortcuts,
materials flow more smoothly, and procurement costs fall. The result, as Figure 16.3 shows, is that average cost
4,0001,000
1
2,000 3,000
Quantity Produced per Day
Co
st
p
er
U
ni
t
Co
st
p
er
U
ni
t
1,000
SRAC
SRAC
LRAC
Quantity Produced per Day
(b) Cost Behavior over
Different-Size Plants
(a) Cost Behavior in
a Fixed-Size Plant
2 3 4
| Fig. 16.2 |
Cost per Unit at
Different Levels of
Production per Period
200,000 400,000 800,000
$80
$60
$40
$20
$100
Co
st
p
er
U
ni
t
100,000
Accumulated Production
Current
price
Experience
curve
B
A
Samsung
| Fig. 16.3 |
Cost per Unit
as a Function
of Accumulated
Production: The
Experience Curve
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falls with accumulated production experience. Thus the average cost of producing the first 100,000 tablets is
$100 per tablet. When the company has produced the first 200,000 tablets, the average cost has fallen to $90.
After its accumulated production experience doubles again to 400,000, the average cost is $80. This decline in
the average cost with accumulated production experience is called the experience curve or learning curve.
Now suppose three firms compete in this particular tablet market, Samsung, A, and B. Samsung is the lowest-
cost producer at $80, having produced 400,000 units in the past. If all three firms sell the tablet for $100, Samsung
makes $20 profit per unit, A makes $10 per unit, and B breaks even. The smart move for Samsung would be to
lower its price to $90. This will drive B out of the market, and even A may consider leaving. Samsung will pick up
the business that would have gone to B (and possibly A). Furthermore, price-sensitive customers will enter the
market at the lower price. As production increases beyond 400,000 units, Samsung’s costs will drop still further and
faster, more than restoring its profits, even at a price of $90.
Experience-curve pricing nevertheless carries major risks. Aggressive pricing might give the product a cheap
image. It also assumes competitors are weak followers. The strategy leads the company to build more plants to
meet demand, but a competitor may choose to innovate with a lower-cost technology. The market leader is now
stuck with the old technology.
Most experience-curve pricing has focused on manufacturing costs, but all costs can be improved on, including
marketing costs. If three firms are each investing a large sum of money in marketing, the firm that has used it lon-
gest might achieve the lowest costs. This firm can charge a little less for its product and still earn the same return,
all other costs being equal.42
target costing Costs change with production scale and experience. They can also change as a result
of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing.
Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal
and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve.
The firm must examine each cost element—design, engineering, manufacturing, sales—and bring down costs
so the final cost projections are in the target range. When ConAgra Foods decided to increase the list prices of its
Banquet frozen dinners to cover higher commodity costs, the average retail price of the meals increased from $1
to $1.25. When sales dropped significantly, management vowed to return to a $1 price, which necessitated cutting
$250 million in other costs through a variety of methods, such as centralizing purchasing and shipping, using less
expensive ingredients, and designing smaller portions.43
Cost cutting cannot go so deep as to compromise the brand promise and value delivered. Despite the early suc-
cess of the PT Cruiser, Chrysler chose to squeeze out more profit by avoiding certain redesigns and cutting costs
with cheaper radios and inferior materials. Once a best-selling car, the PT Cruiser was eventually discontinued.44
Apparel makers tweak clothing designs to cut costs but are careful to avoid overly shallow pants pockets, waist-
bands that can roll over, and buttons that crack.45 “Marketing Memo: How to Cut Costs” describes how firms are
successfully cutting costs to improve profitability.
Overly aggressive cost-cutting
actions resulted in declines in
perceived quality for the PT
Cruiser, helping to contribute
to the brand’s demise.
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Prices inevitably have to reflect the cost structure of the products and services. Rising commodity costs and a highly competitive post-recession environment
have put pressure on many firms to manage their costs carefully and decide what cost increases, if any, to pass along to consumers in the form of higher
prices. When calf-skin prices surged due to a shortage, pressure was placed on those luxury goods makers that need fine leather. Similarly, when steel and
other input prices soared by as much as 20 percent, Whirlpool and Electrolux raised their own prices 8 percent to 10 percent.
Companies can cut costs in many ways. For General Mills, it was as simple as reducing the number of varieties of Hamburger Helper from 75 to 45 and
the number of pasta shapes from 30 to 10. Dropping multicolored Yoplait lids saved $2 million a year. Other firms are attempting to shrink their products and
packages while holding price and hoping consumers don’t notice or care. Canned vegetables dropped to 13 or 14 ounces from 16, boxes of baby wipes hold
72 instead of 80, and sugar is sold in 4-pound instead of 5-pound bags.
The cost savings from minor shrinkage can be significant. When the size of a Scott 1000 toilet paper sheet dropped from 4.5 by 3.7 inches to 4.1 by
3.7 inches, the height of a four-pack package decreased from 9.2 to 8 inches, resulting in a 12 percent to 17 percent increase in the amount of product Scott
can fit in a truck and a drop of 345,000 gallons in the gasoline needed for shipping because of the resulting fewer trucks on the road.
Some marketers attempt to justify packaging changes on environmental grounds (smaller packages are “greener”) or to address health concerns (smaller
packages have “fewer calories”), though consumers may not be duped. Others add other benefits in the process (“even stronger” or “new look”). Some com-
panies are applying what they learned from making affordable products with scarce resources in developing countries such as India to the task of cutting costs
in developed markets. Cisco blends teams of U.S. software engineers with Indian supervisors.
Supermarket giant Aldi takes advantage of its global scope. It stocks only about 1,000 of the most popular everyday grocery and household items, com-
pared with more than 20,000 at a traditional grocer such as Royal Ahold’s Albert Heijn. Almost all the products carry Aldi’s own exclusive label. Because it sells
so few items, Aldi can exert strong control over quality and price and simplify shipping and handling, leading to high margins. With more than 8,200 stores
worldwide currently, Aldi brings in almost $60 billion in annual sales.
Sources: Richard Alleyne, “Household Brands Slash Size of Goods in ‘Hidden Price Hikes,’” The Telegraph, March 21, 2013; Andrew Roberts, “Getting a Handle on
the Steep Price of Leather,” Bloomberg Businessweek, September 19, 2011; Stephanie Clifford and Catherine Rampell, “Inflation Looms, but Is Stealthily Disguised in
Packaging,” New York Times, March 28, 2011; “Everyday Higher Prices,” The Economist, February 26, 2011; Beth Kowitt, “When Less Is . . . Less,” Fortune, November 15,
2010, p. 21; Reena Jane, “From India, the Latest Management Fad,” Bloomberg BusinessWeek, December 14, 2009, p. 57; “German Discounter Aldi Aims to Profit from
Belt-Tightening in US,” www.dw-world.de, January 15, 2009; Mina Kimes, “Cereal Cost Cutters,” Fortune, November 10, 2008, p. 24.
How to Cut Costsmarketing memo
stEP 4: analYzInG comPEtItors’ costs, PrIcEs,
anD offErs
Within the range of possible prices identified by market demand and company costs, the firm must take com-
petitors’ costs, prices, and possible reactions into account. If the firm’s offer contains features not offered by
the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor’s
price. If the competitor’s offer contains some features not offered by the firm, the firm should subtract their
value from its own price. Now the firm can decide whether it can charge more, the same, or less than the
competitor.46
value-Priced coMPetitors Companies offering the powerful combination of low price and high
quality are capturing the hearts and wallets of consumers all over the world.47 Value players, such as Aldi,
E*TRADE Financial, JetBlue Airways, Southwest Airlines, Target, and Walmart, are transforming the way
consumers of nearly every age and income level purchase groceries, apparel, airline tickets, financial services, and
other goods and services.
Traditional players are right to feel threatened. Upstart firms often rely on serving one or a few consumer
segments, providing better delivery or just one additional benefit, and matching low prices with highly efficient
operations to keep costs down. They have changed consumer expectations about the trade-off between quality
and price.
One school of thought is that companies should set up their own low-cost operations to compete with value-
priced competitors only if: (1) their existing businesses will become more competitive as a result and (2) the new
business will derive some advantages it would not have gained if independent.48
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Low-cost operations set up by HSBC, ING, Merrill Lynch, and Royal Bank of Scotland—First Direct, ING
Direct, ML Direct, and Direct Line Insurance, respectively—succeed in part thanks to synergies between the
old and new lines of business. Major airlines have also introduced their own low-cost carriers. But Continental’s
Lite, KLM’s Buzz, SAS’s Snowflake, and United’s Shuttle have all been unsuccessful, due in part to a lack of syn-
ergies. The low-cost operation must be designed and launched as a moneymaker in its own right, not just as a
defensive play.
stEP 5: sElEctInG a PrIcInG mEthoD
Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is
now ready to select a price. Figure 16.4 summarizes the three major considerations in price setting:
Costs set a floor to the price. Competitors’ prices and the price of substitutes provide an orienting
point. Customers’ assessment of unique features establishes the price ceiling.
Companies select a pricing method that includes one or more of these three considerations. We
will examine seven price-setting methods: markup pricing, target-return pricing, perceived-value
pricing, value pricing, EDLP, going-rate pricing, and auction-type pricing.
MarkuP Pricing The most elementary pricing method is to add a standard markup to the
product’s cost. Construction companies submit job bids by estimating the total project cost and
adding a standard markup for profit. Lawyers and accountants typically price by adding a standard
markup on their time and costs.
Variable cost per unit $10
Fixed costs $300,000
Expected unit sales 50,000
Suppose a toaster manufacturer has the following costs and sales expectations:
The manufacturer’s unit cost is given by:
Unit cost = variable cost +
fixed cost
unit sales
= $10 +
$300,00
50,000
= $16
Now assume the manufacturer wants to earn a 20 percent markup on sales. The manufacturer’s
markup price is given by:
Markup price =
unit cost
(1 – desired return on sales)
=
$16
1 – 0.2
= $20
The manufacturer will charge dealers $20 per toaster and make a profit of $4 per unit. If deal-
ers want to earn 50 percent on their selling price, they will mark up the toaster 100 percent to $40.
Markups are generally higher on seasonal items (to cover the risk of not selling), specialty items,
slower-moving items, items with high storage and handling costs, and demand-inelastic items, such as
prescription drugs.
Creating a successful
low cost marketing entry
is not easy—United is
one of many airlines who
failed to do so.
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Low Price
(No possible
profit at
this price)
Customers’
assessment
of unique
product
features
Ceiling
price
Orienting
point
Competitors’
prices and
prices of
substitutes
Costs
Floor
price
High Price
(No possible
demand at
this price)
| Fig. 16.4 |
The Three Cs Model
for Price Setting
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Does the use of standard markups make logical sense? Generally, no. Any pricing method that ignores current
demand, perceived value, and competition is not likely to lead to the optimal price. Markup pricing works only if
the marked-up price actually brings in the expected level of sales. Consider what happened at Parker Hannifin.49
PARkeR hANNIfIN When Don Washkewicz took over as CEO of Parker Hannifin, maker of 800,000
industrial parts for the aerospace, transportation, and manufacturing industries, pricing was done one way: Calculate how
much it costs to make and deliver a product and then add a flat percentage (usually 35 percent). Even though this method
was historically well received, Washkewicz set out to get the company to think more like a retailer and charge what custom-
ers were willing to pay. Encountering initial resistance from some of the company’s 115 different divisions, Washkewicz
assembled a list of the 50 most commonly given reasons why the new pricing scheme would fail and announced he would
listen only to arguments that were not on the list. The new pricing scheme put Parker Hannifin’s products into one of four
categories depending on how much competition existed. About one-third fell into niches where Parker offered unique value,
there was little competition, and higher prices were appropriate. Each division now has a pricing guru or specialist who
assists in strategic pricing. The division making industrial fittings reviewed 2,000 different items and concluded that 28 per-
cent were priced too low, raising prices anywhere from 3 percent to 60 percent. As a result of the higher margins from this
new strategic pricing approach, Parker estimates it has added $1 billion in profit during the fiscal years 2005–2011.
Still, markup pricing remains popular. First, sellers can determine costs much more easily than they can esti-
mate demand. By tying the price to cost, sellers simplify the pricing task. Second, when all firms in the industry use
this pricing method, prices tend to be similar and price competition is minimized. Third, many people feel cost-
plus pricing is fairer to both buyers and sellers. Sellers do not take advantage of buyers when the latter’s demand
becomes acute, and sellers earn a fair return on investment.
target-return Pricing In target-return pricing, the firm determines the price that yields its target rate
of return on investment. Public utilities, which need to make a fair return on investment, often use this method.
Suppose the toaster manufacturer has invested $1 million in the business and wants to set a price to earn a 20
percent ROI, specifically $200,000. The target-return price is given by the following formula:
Target@return price = unit cost +
desired return * invested capital
unit sales
= $16 +
.20 * $1,000,000
50,000
= $20
The manufacturer will realize this 20 percent ROI provided its costs and estimated sales turn out to be accurate.
But what if sales don’t reach 50,000 units? The manufacturer can prepare a break-even chart to learn what would
happen at other sales levels (see Figure 16.5). Fixed costs are $300,000 regardless of sales volume. Variable costs,
not shown in the figure, rise with volume. Total costs equal the sum of fixed and variable costs. The total revenue
curve starts at zero and rises with each unit sold.
40 50
800
1,000
600
400
200
1,200
Do
lla
rs
(i
n
th
ou
sa
nd
s)
3020100
Sales Volume in Units (thousands)
Fixed cost
Total cost
Target profit
Total revenue
Break-even point
| Fig. 16.5 |
Break-Even Chart
for Determining
Target-Return
Price and Break-
Even Volume
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The total revenue and total cost curves cross at 30,000 units. This is the break-even volume. We can verify it by
the following formula:
Break@even volume =
fixed cost
(price – variable cost)
=
$300,000
$20 – $10
= 30,000
The manufacturer, of course, is hoping the market will buy 50,000 units at $20, in which case it earns $200,000
on its $1 million investment, but much depends on price elasticity and competitors’ prices. Unfortunately, target-
return pricing tends to ignore these considerations. The manufacturer needs to consider different prices and esti-
mate their probable impacts on sales volume and profits.
The manufacturer should also search for ways to lower its fixed or variable costs because lower costs will
decrease its required break-even volume. Taiwan’s Acer gained share in the tablet market through rock-bottom
prices made possible by its bare-bones cost strategy. Acer sells only via retailers and other outlets and outsources all
manufacturing and assembly, reducing its overhead to 8 percent of sales versus 14 percent at Dell and 15 percent
at HP.50
Perceived-value Pricing An increasing number of companies now base their price on the customer’s
perceived value. Perceived value is made up of a host of inputs, such as the buyer’s image of the product
performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the
supplier’s reputation, trustworthiness, and esteem. Companies must deliver the value promised by their value
proposition, and the customer must perceive this value. Firms use the other marketing program elements, such as
advertising, sales force, and the Internet, to communicate and enhance perceived value in buyers’ minds.
Caterpillar uses perceived value to set prices on its construction equipment. It might price its tractor at
$100,000, though a similar competitor’s tractor might be priced at $90,000. When a prospective customer asks a
Caterpillar dealer why he should pay $10,000 more for the Caterpillar tractor, the dealer answers:
$90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor
$7,000 is the price premium for Caterpillar’s superior durability
$6,000 is the price premium for Caterpillar’s superior reliability
$5,000 is the price premium for Caterpillar’s superior service
$2,000 is the price premium for Caterpillar’s longer warranty on parts
$110,000 is the normal price to cover Caterpillar’s superior value
– $10,000 discount
$100,000 final price
The Caterpillar dealer is able to show that although the customer is asked to pay a $10,000 premium, he is
actually getting $20,000 extra value! The customer chooses the Caterpillar tractor because he is convinced its life-
time operating costs will be lower.
Ensuring that customers appreciate the total value of a product or service offering is crucial. Consider the expe-
rience of PACCAR.51
PACCAR PACCAR Inc., maker of Kenworth and Peterbilt trucks, is able to command a 10 percent premium
through its relentless focus on all aspects of the customer experience to maximize total value. Contract Freighters truck-
ing company, a loyal PACCAR customer for 20 years, justified ordering another 700 new trucks, despite their higher
price, because of their higher perceived quality—greater reliability, higher trade-in value, even the superior plush interi-
ors that might attract better drivers. PACCAR bucks the commoditization trend by custom-building its trucks to individual
specifications. The company invests heavily in technology and can prototype new parts in hours rather than days and
weeks, allowing more frequent upgrades. It was the first to roll out hybrid vehicles in the fuel-intensive commercial
trucking industry (and sell at a premium). A $1 billion, multiyear program to design and develop the highest-quality,
most efficient trucks in the industry resulted in successful launches of the Kenworth T680, the Peterbilt Model 579, and
the DAF XF Euro 6 lines of trucks. The company generated $1.17 billion of net income on $17.21 billion of revenue in
2013—its 74th consecutive year of profitability—bolstered by an expanded geographic footprint and a thriving business
in aftermarket parts.
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Even when a company claims its offering delivers more total value, not all customers will respond positively.
Some care only about price. But there is also typically a segment that cares about quality. Umbrellas are essential
during the three months of near-nonstop monsoon rain in Indian cities such as Mumbai, and the makers of Stag
umbrellas there found themselves in a bitter price war with cheaper Chinese competitors. After realizing they were
sacrificing quality too much, Stag’s managers decided to increase quality with new colors, designs, and features
such as built-in high-power flashlights and prerecorded music. Despite higher prices, sales of the improved Stag
umbrellas actually increased.52
The key to perceived-value pricing is to deliver more unique value than competitors and to demonstrate this
to prospective buyers. Thus, a company needs to fully understand the customer’s decision-making process. For
example, Goodyear found it hard to command a price premium for its more expensive new tires despite innova-
tive new features to extend tread life. Because consumers had no reference price to compare tires, they tended to
gravitate toward the lowest-priced offerings. Goodyear’s solution was to price its models on expected miles of wear
rather than their technical product features, making product comparisons easier.53
The company can try to determine the value of its offering in several ways: managerial judgments within the
company, value of similar products, focus groups, surveys, experimentation, analysis of historical data, and con-
joint analysis.
value Pricing Companies that adopt value pricing win loyal customers by charging a fairly low price
for a high-quality offering. Value pricing is thus not a matter of simply setting lower prices; it is a matter of
reengineering the company’s operations to become a low-cost producer without sacrificing quality to attract a large
number of value-conscious customers.
Among the best practitioners of value pricing are IKEA, Target, and Southwest Airlines. In the early 1990s,
Procter & Gamble created quite a stir when it reduced prices on supermarket staples such as Pampers and Luvs
diapers, liquid Tide detergent, and Folgers coffee. To value-price these products, P&G redesigned the way it devel-
oped, manufactured, distributed, priced, marketed, and sold them to deliver better value at every point in the sup-
ply chain.54 Its acquisition of Gillette in 2005 for $57 billion (a record five times its sales) brought another brand
into its fold that has also traditionally adopted a value pricing strategy.
Value pricing can change the way a company sets prices too. One company that sold and maintained switch
boxes in a variety of sizes for telephone lines found that the probability of failure—and thus the level of mainte-
nance costs—was proportional to the number of switches customers had in their boxes rather than to the dollar
value of the installed boxes. The number of switches per box could vary, though. Therefore, rather than charging
customers based on the total spent on installation, the company began charging based on the total number of
switches that needed servicing.55
edlP A retailer using everyday low pricing (EDLP) charges a constant low price with little or no price
promotion or special sales. Constant prices eliminate week-to-week price uncertainty and the high-low pricing of
promotion-oriented competitors. In high-low pricing, the retailer charges higher prices on an everyday basis but
runs frequent promotions with prices temporarily lower than the EDLP level.56
These two strategies have been shown to affect consumer price judgments—deep discounts (EDLP) can lead
customers to perceive lower prices over time than frequent, shallow discounts (high-low), even if the price actually
By maximizing total value
and all aspects of the
customer experience,
PACCAR is able to com-
mand a significant price
premium for its trucks.
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averages to the same level.57 In recent years, high-low pricing has given way to EDLP at such widely different ven-
ues as Toyota Scion car dealers and upscale department stores such as Nordstrom, but the king of EDLP is surely
Walmart, which practically defined the term. Except for a few sale items every month, Walmart promises everyday
low prices on major brands.
The most important reason retailers adopt EDLP is that constant sales and promotions are costly and have
eroded consumer confidence in everyday shelf prices. Some consumers also have less time and patience for past
traditions like watching for supermarket specials and clipping coupons.
Yet promotions and sales do create excitement and draw shoppers, so EDLP does not guarantee success and is
not for everyone.58 However, given Daiso’s success, everyday low prices do work when done right.59
dAIsO Daiso is the famous one-price Japanese livingware store that recently opened in Kuala Lumpur, Malaysia.
Primarily based on the extreme EDLP strategy and modeled after Japanese 100 Yen shops, the chain has 2,500 stores in
Japan, 975 in South Korea, and 522 stores overseas, including the United States, Singapore, and Australia. Daiso is the ideal
place for an enjoyable, fast, cheap, and easy shopping experience where everything sells at the same low fixed price; for
example, in the Kuala Lumpur store, each item is 5 Malaysian ringgits, or approximately $1.49. Each store stocks a range of
kitchenware, tableware, bathroom accessories, house ware, storage units, and skin care products from Japan. Daiso stores
in Kuala Lumpur also introduced imported Japanese products that were not available there before, such as sweet and sa-
vory Japanese crackers, confectioneries, and furikake or Japanese savory rice-sprinkles. In fact, Daiso stores sell more than
90,000 products and introduce 1,000 new ones every month.
going-rate Pricing In going-rate pricing, the firm bases its price largely on competitors’ prices.
In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, all firms normally charge the same
price. Smaller firms “follow the leader,” changing their prices when the market leader’s prices change rather than
when their own demand or costs change. Some may charge a small premium or discount, but they preserve the
difference. Thus, minor gasoline retailers usually charge a few cents less per gallon than the major oil companies,
without letting the difference increase or decrease.
Going-rate pricing is quite popular. Where costs are difficult to measure or competitive response is uncertain,
firms feel it is a good solution because they believe it reflects the industry’s collective wisdom.
Daiso is the perfect
example of everyday low
pricing done right.
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auction-tyPe Pricing Auction-type pricing is growing more popular, especially with scores of
electronic marketplaces selling everything from pigs to used cars as firms dispose of excess inventories or used
goods. These are the three major types of auctions and their separate pricing procedures:60
• English auctions (ascending bids) have one seller and many buyers. On sites such as eBay and Amazon.com,
the seller puts up an item and bidders raise their offer prices until the top price is reached. The highest bid-
der gets the item. English auctions are used today for selling antiques, cattle, real estate, and used equipment
and vehicles. Kodak and Nortel sold hundreds of patents for wireless and digital imaging via auctions, raising
hundreds of millions of dollars.61
• Dutch auctions (descending bids) feature one seller and many buyers or one buyer and many sellers. In the
first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bid-
der accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers com-
pete to offer the lowest price. Ariba—acquired by SAP in 2012—runs business-to-business auctions to help
companies acquire low-priced items as varied as steel, fats, oils, name badges, pickles, plastic bottles, solvents,
cardboard, and even legal and janitorial work.62
• Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S.
and other governments often use this method to procure supplies or to grant licenses. A supplier will not bid
below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls is the bid’s
expected profit.63
To buy equipment for its drug researchers, Pfizer uses reverse auctions online in which suppliers submit the
lowest price they are willing to be paid. If the increased savings a buying firm obtains in an online auction translate
into decreased margins for an incumbent supplier, however, the supplier may feel the firm is opportunistically
squeezing out price concessions. Online auctions with a large number of bidders, higher economic stakes, and less
visibility in the specific prices involved result in greater overall satisfaction for both parties, more positive future
expectations, and fewer perceptions of opportunism.64
stEP 6: sElEctInG thE fInal PrIcE
Pricing methods narrow the range from which the company must select its final price. In selecting that price, the
company must consider additional factors, including the impact of other marketing activities, company pricing
policies, gain-and-risk-sharing pricing, and the impact of price on other parties.
iMPact of other Marketing activities The final price must take into account the brand’s quality
and advertising relative to the competition. In a classic study, Paul Farris and David Reibstein examined the
relationships among relative price, relative quality, and relative advertising for 227 consumer businesses and found
the following:65
• Brands with average relative quality but high relative advertising budgets could charge premium prices.
Consumers were willing to pay higher prices for known rather than for unknown products.
• Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands
with low quality and low advertising charged the lowest prices.
• For market leaders, the positive relationship between high prices and high advertising held most strongly in
the later stages of the product life cycle.
These findings suggest that in many cases price may not be necessarily as important as quality and other
benefits.
coMPany Pricing Policies The price must be consistent with company pricing policies. Yet companies
are not averse to establishing pricing penalties under certain circumstances.
Airlines charge $200 to buyers of discount tickets who change their reservations. Banks charge fees for too many
withdrawals in a month or early withdrawal of a certificate of deposit. Dentists, hotels, car rental companies, and
other service providers charge penalties for no-shows. Although these policies are often justifiable, marketers must
use them judiciously and not unnecessarily alienate customers. (See “Marketing Insight: Stealth Price Increases.”)
Many companies set up a pricing department to develop policies and establish or approve decisions. The aim is
to ensure salespeople quote prices that are reasonable to customers and profitable to the company.
gain-and-risk-sharing Pricing Buyers may resist accepting a seller’s proposal because they
perceive a high level of risk, such as in a big computer hardware purchase or a company health plan. The seller then
has the option of offering to absorb part or all the risk if it does not deliver the full promised value.
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Baxter Healthcare, a leading medical products firm, was able to secure a contract for an information manage-
ment system from Columbia/HCA, a leading health care provider, by guaranteeing the firm several million dollars
in savings over an eight-year period. An increasing number of companies, especially B-to-B marketers, may have
to stand ready to guarantee any promised savings but also participate in the upside if the gains are much greater
than expected.
iMPact of Price on other Parties How will distributors and dealers feel about the contemplated
price?66 If they don’t make enough profit, they may choose not to bring the product to market. Will the sales force
be willing to sell at that price? How will competitors react? Will suppliers raise their prices when they see the
company’s price? Will the government intervene and prevent this price from being charged?
U.S. legislation states that sellers must set prices without talking to competitors: Price-fixing is illegal.
Twenty-one airlines, including British Airways, Korean Air and Air France-KLM, were fined a total of $1.7
billion for artificially inflating passenger prices and cargo fuel surcharges between 2000 and 2006.67 Many
federal and state statutes protect consumers against deceptive pricing practices. For example, it is illegal for
a company to set artificially high “regular” prices, then announce a “sale” at prices close to previous everyday
prices.
Stealth Price Increases
With consumers resisting higher prices, companies trying to increase
revenue in other ways often resort to adding fees for once-free features.
Although some consumers abhor “nickel-and-dime” pricing strategies,
small additional charges can add up to a substantial source of revenue.
The numbers can be staggering. U.S. airlines collected a massive
$3.35 billion in baggage fees and $2.81 billion in reservation change/
cancellation fees in 2013. The telecommunications industry has been
aggressive in adding fees for setup, change-of-service, service termina-
tion, directory assistance, regulatory assessment, number portability, and
cable hookup and equipment, costing consumers billions of dollars. Fees
for consumers who pay bills online, bounce checks, or use automated
teller machines bring banks billions of dollars annually. Credit card compa-
nies responded to restrictions on certain of their pricing practices by adopt-
ing rate floors for variable rate cards, higher penalties for overdue pay-
ments at lower balance thresholds, and inactivity fees for unused cards.
This explosion of fees has a number of implications. Given that list
prices stay fixed, they may understate the degree of price inflation. They
also make it harder for consumers to compare competitive offerings.
Although various citizens’ groups have tried to pressure companies to
roll back some fees, they don’t always get a sympathetic ear from state
and local governments, which use their own array of fees, fines, and
penalties to raise necessary revenue.
Companies justify the extra fees as the only fair and viable way
to cover expenses without losing customers. Many argue that it makes
sense to charge a premium for added services that cost more to pro-
vide and that only some customers use. Thus, basic costs can stay low.
Companies also use fees to weed out unprofitable customers or get
them to change their behavior.
Ultimately, the viability of extra fees will be decided in the market-
place and by the willingness of consumers to vote with their wallets and
pay the fees or vote with their feet and move on.
Sources: Katia Hetter, “Airlines Collect $6 Billion in Fees,” www.cnn.com, May 15,
2013; Alexis Leondis and Jeff Plungis, “The Latest Credit Card Tricks,” Bloomberg
Businessweek, December 28, 2009, and January 4, 2010, p. 95; Brian Burnsed,
“A New Front in the Credit Card Wars,” BusinessWeek, November 9, 2009, p. 60.
marketing
insight
Airlines generate
billions of dollars
in baggage fees as
a source of extra
income.
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Adapting the Price
Companies usually do not set a single price but rather develop a pricing structure that reflects variations in geographi-
cal demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees,
service contracts, and other factors. As a result of discounts, allowances, and promotional support, a company rarely
realizes the same profit from each unit of a product that it sells. Here we will examine several price-adaptation strate-
gies: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing.
GEoGraPhIcal PrIcInG (cash, countErtraDE, bartEr)
In geographical pricing, the company decides how to price its products to different customers in different
locations and countries. Should the company charge higher prices to distant customers to cover higher shipping
costs or a lower price to win additional business? How should it account for exchange rates and the strength of
different currencies?
Another question is how to get paid. This issue is critical when buyers lack sufficient hard currency to pay for
their purchases. Many want to offer other items in payment, a practice known as countertrade, and U.S. compa-
nies are often forced to accept if they want the business. Countertrade may account for 15 percent to 20 percent of
world trade and takes several forms:68
• Barter. The buyer and seller directly exchange goods, with no money and no third party involved.
• Compensation deal. The seller receives some percentage of the payment in cash and the rest in products.
A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee.
• Buyback arrangement. The seller sells a plant, equipment, or technology to a company in another country
and agrees to accept as partial payment products manufactured with the supplied equipment. A U.S. chemi-
cal company built a plant for an Indian company and accepted partial payment in cash and the remainder in
chemicals manufactured at the plant.
• Offset. The seller receives full payment in cash for a sale overseas but agrees to spend a substantial amount of the
money in that country within a stated time period. In the Gorbachev era, PepsiCo sold its cola syrup to the govern-
ment of the Soviet Union for rubles and agreed to buy Russian vodka at a certain rate for sale in the United States.69
PrIcE DIscounts anD alloWancEs
Most companies will adjust their list price and give discounts and allowances for early payment, volume pur-
chases, and off-season buying (see Table 16.4).70 Companies must do this carefully or find their profits much
lower than planned.71
In the early days of its
entry into the Russian
market, PepsiCo used an
offset agreement with
the Russian government
involving a swap of cola
syrup for vodka.
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Discount pricing has become the modus operandi of a surprising number of companies offering both products
and services. Salespeople in particular are quick to give discounts to close a sale. But word can get around fast that
the company’s list price is “soft,” and discounting becomes the norm, undermining the perceived value of the offer-
ings. Some product categories self-destruct by always being on sale.
Some companies with overcapacity are tempted to give discounts or even begin to supply a retailer with a
store-brand version of their product at a deep discount. Because the store brand is priced lower, however, it
may start making inroads on the manufacturer’s brand. Manufacturers should consider the implications of
supplying retailers at a discount because they may end up losing long-run profits in an effort to meet short-run
volume goals.
Only people with higher incomes and higher product involvement willingly pay more for features, customer
service, quality, added convenience, and the brand name. So it can be a mistake for a strong, distinctive brand to
plunge into price discounting as a response to low-price attacks. At the same time, discounting can be a useful tool
if the customer will give concessions in return, such as signing a longer contract, ordering electronically, or buying
larger quantities.
Sales management needs to monitor the proportion of customers receiving discounts, the average discount, and
any tendency for salespeople to over-rely on discounting. Upper management should conduct a net price analysis
to arrive at the “real price” of the offering. The real price is affected not only by discounts but by other expenses that
reduce the realized price (see “Promotional Pricing” below). Suppose the company’s list price is $3,000. The aver-
age discount is $300. The company’s promotional spending averages $450 (15 percent of the list price). Retailers
are given co-op advertising money of $150 to back the product. The company’s net price is $2,100, not $3,000.
PromotIonal PrIcInG
Companies can use several pricing techniques to stimulate early purchase:
• Loss-leader pricing. Supermarkets and department stores often drop the price on well-known brands to
stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower
margins on the loss-leader items. Manufacturers of loss-leader brands typically object because this practice
can dilute the brand image and bring complaints from retailers who charge the list price. Manufacturers have
tried to keep intermediaries from using loss-leader pricing by lobbying for retail-price-maintenance laws, but
these laws have been revoked.
• Special event pricing. Sellers will establish special prices in certain seasons to draw in more customers. Every
August, there are back-to-school sales.
taBle 16.4 Price Discounts and Allowances
Discount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,”
which means payment is due within 30 days and the buyer can deduct 2 percent by paying
within 10 days.
Quantity Discount: A price reduction to those who buy large volumes. A typical example is “$10 per unit for
fewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be
offered equally to all customers and must not exceed the cost savings to the seller. They
can be offered on each order placed or on the number of units ordered over a given period.
Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channel
members if they perform certain functions, such as selling, storing, and record keeping.
Manufacturers must offer the same functional discounts within each channel.
Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels, motels,
and airlines offer seasonal discounts in slow selling periods.
Allowance: An extra payment designed to gain reseller participation in special programs. Trade-in
allowances are granted for turning in an old item when buying a new one. Promotional
allowances reward dealers for participating in advertising and sales support programs.
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• Special customer pricing. Sellers will offer special prices exclusively to certain customers. Members of Road
Runner Sports’ Run America Club get “exclusive” online offers with price discounts twice those given to
regular customers.72
• Cash rebates. Auto companies and other consumer-goods companies offer cash rebates to encourage
purchase of the manufacturers’ products within a specified time period. Rebates can help clear inventories
without cutting the stated list price.
• Low-interest financing. Instead of cutting its price, the company can offer low-interest financing. Automakers
have used no-interest financing to try to attract more customers.
• Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over longer
periods and thus lower the monthly payments. Consumers often worry less about the cost (the interest rate) of
a loan and more about whether they can afford the monthly payment.
• Warranties and service contracts. Companies can promote sales by adding a free or low-cost warranty or
service contract.
• Psychological discounting. This strategy sets an artificially high price and then offers the product at
substantial savings; for example, “Was $359, now $299.” Discounts from normal prices are a legitimate form of
promotional pricing; the Federal Trade Commission and Better Business Bureau fight illegal discount tactics.
Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them and they lose
their effectiveness. If they don’t work, they waste money that could have been put into other marketing tools, such
as building up product quality and service or strengthening product image through advertising.
DIffErEntIatED PrIcInG
Companies often adjust their basic price to accommodate differences among customers, products, locations, and
so on. Lands’ End creates men’s shirts in many different styles, weights, and levels of quality. In March 2014, a
men’s white button-down shirt could cost as little as $19.99 or as much as $70.00.73
Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect
a proportional difference in costs. In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
In second-degree price discrimination, the seller charges less to buyers of larger volumes. With certain services
such as cell phone service, however, tiered pricing results in consumers actually paying more with higher levels of
usage. With the iPhone, 3 percent of users accounted for 40 percent of the traffic on AT&T’s network, resulting in
costly network upgrades to AT&T and causing the firm to set higher prices for those users.74
In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the
following cases:75
• Customer-segment pricing. Different customer groups pay different prices for the same product or service.
For example, museums often charge a lower admission fee to students and senior citizens.
• Product-form pricing. Different versions of the product are priced differently, but not in proportion to their
costs. Evian prices a 2-liter bottle of its mineral water as low as $1 but 5 ounces of the same water in a moistur-
izer spray for as much as $12.
• Image pricing. Some companies price the same product at two different levels based on image differences.
A perfume manufacturer can put a scent in one bottle, give it a name and image, and price it at $10 an ounce.
The same scent in another bottle with a different name and image can sell for $30 an ounce.
• Channel pricing. Coca-Cola carries a different price depending on whether the consumer purchases it from a
fine restaurant, a fast-food restaurant, or a vending machine.
• Location pricing. The same product is priced differently at different locations even though the cost of
offering it at each location is the same. A theater varies its seat prices according to audience preferences for
different locations.
• Time pricing. Prices vary by season, day, or hour. Restaurants charge less to “early bird” customers, and some
hotels charge less on weekends. Retail prices for roses increase by as much as 200 percent in the lead-up to
Valentine’s Day.76
The airline and hospitality industries use yield management systems and yield pricing, by which they offer
discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just
before it expires. Airlines charge different fares to passengers on the same flight, depending on the seating class;
the time of day (morning or night coach); the day of the week (workday or weekend); the season; the person’s
employer, past business, or status (youth, military, senior citizen); and so on. That’s why on a flight from New York
City to Miami you might pay $200 and sit across from someone who paid $1,290.
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The phenomenon of offering different pricing schedules to different consumers and dynamically adjusting
prices is exploding. Merchants are adjusting process based on inventory levels, item velocity or how fast it sells,
competitor’s pricing, and advertising. Even sports teams are adjusting ticket prices to reflect the popularity of the
competitor and the timing of the game.77
Many companies are using software to make real-time controlled tests of actual consumer response to different
pricing schedules. Online merchants selling their products on Amazon.com are changing their prices on an hourly
or even minute-by-minute basis, in part so they can secure the top spot on search results.78
Constant price variation can be tricky, however, where consumer relationships are concerned. Research shows
it’s most effective when there’s no bond between the buyer and the seller. One way to make it work is to offer cus-
tomers a unique bundle of products and services to meet their needs precisely, making it harder to make price
comparisons. The tactic most companies favor is to use variable prices as a reward rather than a penalty. Shipping
company APL rewards customers who can better predict how much cargo space they’ll need with cheaper rates for
booking early.
Customers are getting savvier about how to avoid overpaying, changing their buying behavior to accommodate
the new realities of dynamic pricing. But most are probably not even aware of the degree to which they are the targets
of discriminatory pricing. Retailers like Staples, Office Depot, and Home Depot vary their online and in-store prices
on a host of factors related to costs of doing business and consumer sensitivity to prices. Some firms use computer
IP addresses to deduce people’s zip codes and use their proximity to a competitor’s store to adjust their prices.
When online travel agency Orbitz found that people using Apple Mac computers spent as much as 30 percent more
a night on hotels, it began to show them different, and sometimes costlier, travel options than Windows users saw.
Orbitz also considers a user’s location and history on the site as a well as a hotel’s overall popularity and promotions.79
Although some forms of price discrimination are illegal (such as offering different prices to different customers
within the same trade group), the practice is legal if the seller can prove its costs are different when selling different
volumes or different qualities of the same product to different retailers. Predatory pricing—selling below cost with
the intention of destroying competition—is unlawful, though.
For price discrimination to work, certain conditions must exist. First, the market must be segmentable and the
segments must show different intensities of demand. Second, members in the lower-price segment must not be
able to resell the product to the higher-price segment. Third, competitors must not be able to undersell the firm
in the higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra
revenue derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will.
Sixth, of course, the particular form of price discrimination must not be illegal.80
Initiating and Responding to Price
Changes
Companies often need to cut or raise prices.
InItIatInG PrIcE cuts
Several circumstances might lead a firm to cut prices. One is excess plant capacity: The firm needs additional busi-
ness and cannot generate it through increased sales effort, product improvement, or other measures. Companies
sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with
lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs.
Cutting prices to keep customers or beat competitors often encourages customers to demand price concessions,
however, and trains salespeople to offer them.81 A price-cutting strategy can lead to other possible traps:
• Low-quality trap. Consumers assume quality is low.
• Fragile-market-share trap. A low price buys market share but not market loyalty. The same customers will
shift to any lower-priced firm that comes along.
• Shallow-pockets trap. Higher-priced competitors match the lower prices but have longer staying power
because of deeper cash reserves.
• Price-war trap. Competitors respond by lowering their prices even more, triggering a price war.82
Customers often question the motivation behind price changes.83 They may assume the item is about to be
replaced by a new model, the item is faulty and is not selling well, the firm is in financial trouble, the price will
come down even further, or the quality has been reduced. The firm must monitor these attributions carefully.
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InItIatInG PrIcE IncrEasEs
A successful price increase can raise profits considerably. If the company’s profit margin is 3 percent of sales, a 1
percent price increase will increase profits by 33 percent if sales volume is unaffected. This situation is illustrated
in Table 16.5. The assumption is that a company charged $10 and sold 100 units and had costs of $970, leaving a
profit of $30, or 3 percent on sales. By raising its price by 10 cents (a 1 percent price increase), it boosted its profits
by 33 percent, assuming the same sales volume.
A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains
squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices
by more than the cost increase, in anticipation of further inflation or government price controls, in a practice
called anticipatory pricing.
Another factor leading to price increases is overdemand. When a company cannot supply all its customers, it
can raise its prices, ration supplies, or both. It can increase price in the following ways, each of which has a different
impact on buyers.
• Delayed quotation pricing. The company does not set a final price until the product is finished or delivered.
This pricing is prevalent in industries with long production lead times, such as industrial construction and
heavy equipment.
• Escalator clauses. The company requires the customer to pay today’s price plus all or part of any inflation
increase that takes place before delivery. Escalator clauses base price increases on some specified price index.
They are found in contracts for major industrial projects, such as aircraft construction and bridge building.
• Unbundling. The company maintains its price but removes or prices separately one or more elements that
were formerly part of the offer, such as delivery or installation. Car companies sometimes add higher-end
audio entertainment systems or GPS navigation systems to their vehicles as separately priced extras.
• Reduction of discounts. The company instructs its sales force not to offer its normal cash and quantity discounts.
Although there is always a chance a price increase can carry some positive meanings to customers—for
example, that the item is “hot” and represents an unusually good value—consumers generally dislike higher prices.
In passing price increases on to them, the company must avoid looking like a price gouger.84 Coca-Cola’s pro-
posed smart vending machines that would raise prices as temperatures rose and Amazon.com’s dynamic pricing
experiment that varied prices by purchase occasion both became front-page news. The more similar the products
or offerings from a company, the more likely consumers are to interpret any pricing differences as unfair. Product
customization and differentiation and communications that clarify differences are thus critical.85
Several techniques help consumers avoid sticker shock and a hostile reaction when prices rise: One is maintain-
ing their sense of fairness, such as by giving them advance notice so they can do forward buying or shop around.
Sharp price increases also need to be explained in understandable terms. Making low-visibility price moves first is
also a good technique: Eliminating discounts, increasing minimum order sizes, and curtailing production of low-
margin products are examples, and contracts or bids for long-term projects should contain escalator clauses based
on such factors as increases in recognized national price indexes.86
antIcIPatInG comPEtItIvE rEsPonsEs
The introduction or change of any price can provoke a response from customers, competitors, distributors, sup-
pliers, and even government. Competitors are most likely to react when the number of firms is few, the product is
homogeneous, and buyers are highly informed.
taBle 16.5 Profits before and after a Price Increase
Before After
Price $10 $10.10 (a 1% price increase)
Units sold 100 100
Revenue $1,000 $1,010
Costs –970 –970
Profit $30 $40 (a 33 1/3% profit increase)
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How can a firm anticipate a competitor’s reactions? One way is to assume the competitor reacts in the standard
way to a price being set or changed. Another is to assume the competitor treats each price difference or change as
a fresh challenge and reacts according to self-interest at the time. Now the company will need to research the com-
petitor’s current financial situation, recent sales, customer loyalty, and corporate objectives. If the competitor has a
market share objective, it is likely to match price differences or changes.87 If it has a profit-maximization objective,
it may react by increasing its advertising budget or improving product quality.
The problem is complicated because the competitor can put different interpretations on lowered prices or a
price cut: that the company is trying to steal the market, that it is doing poorly and trying to boost its sales, or that
it wants the whole industry to reduce prices to stimulate total demand. When Walmart began to run ads claim-
ing lower prices than Publix, the regional supermarket chain dropped its prices below Walmart’s on roughly 500
essential items and began its own advertising campaign in retaliation.88
rEsPonDInG to comPEtItors’ PrIcE chanGEs
How should a firm respond to a competitor’s price cut? It depends on the situation. The company must consider
the product’s stage in the life cycle, its importance in the company’s portfolio, the competitor’s intentions and
resources, the market’s price and quality sensitivity, the behavior of costs with volume, and the company’s alterna-
tive opportunities.
In markets characterized by high product homogeneity, the firm can search for ways to enhance its aug-
mented product. If it cannot find any, it may need to meet the price reduction. If the competitor raises its price in
a homogeneous product market, other firms might not match it if the increase will not benefit the industry as a
whole. Then the leader will need to roll back the increase.
In nonhomogeneous product markets, a firm has more latitude. It needs to consider the following: (1) Why did
the competitor change the price? To steal the market, to utilize excess capacity, to meet changing cost conditions,
or to lead an industry-wide price change? (2) Does the competitor plan to make the price change temporary or
permanent? (3) What will happen to the company’s market share and profits if it does not respond? Are other com-
panies going to respond? (4) What are the competitors’ and other firms’ likely responses to each possible reaction?
Market leaders often face aggressive price cutting by smaller firms trying to build market share. Using price,
Fuji has attacked Kodak, Schick has attacked Gillette, and AMD has attacked Intel. Brand leaders also face lower-
priced store brands. Three possible responses to low-cost competitors are: (1) further differentiate the product or
service, (2) introduce a low-cost venture, or (3) reinvent as a low-cost player.89 The right strategy depends on the
ability of the firm to generate more demand or cut costs.
An extended analysis of alternatives may not always be feasible when the attack occurs. The company may have
to react decisively within hours or days, especially where prices change with some frequency and it is important
to react quickly, such as in the meatpacking, lumber, or oil industries. It would make better sense to anticipate
possible competitors’ price changes and prepare contingent responses.
Consumers had a hostile
reaction when they heard
reports that Coca-Cola was
considering introducing smart
vending machines which
would adjust prices according
to the temperature outside.
So
ur
ce
: A
FP
/G
et
ty
Im
ag
es
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510 PART 5 | CReATing VAlue
discounts and allowances, (3) promotional pricing, and
(4) discriminatory pricing.
4. A price decrease might be brought about by excess
plant capacity, declining market share, a desire to
dominate the market through lower costs, or econom-
ic recession. A price increase might be brought about
by cost inflation or overdemand. Companies must
carefully manage customer perceptions when raising
prices.
5. Companies must anticipate competitor price changes
and prepare contingent responses, including maintain-
ing or changing price or quality.
6. The firm facing a competitor’s price change must try to
understand the competitor’s intent and the likely dura-
tion of the change. A market leader attacked by lower-
priced competitors can seek to better differentiate itself,
introduce its own low-cost competitor, or transform
itself more completely.
Summary
1. Price is the only marketing element that produces rev-
enue; the others produce costs. Pricing decisions have
become more challenging in a changing economic and
technological environment.
2. In setting pricing policy, a company follows a six-step
procedure. It selects its pricing objective. It estimates
the demand curve, the probable quantities it will sell at
each possible price. It estimates how its costs vary at
different levels of output, at different levels of accumu-
lated production experience, and for differentiated mar-
keting offers. It examines competitors’ costs, prices,
and offers. It selects a pricing method, and it selects
the final price.
3. Companies usually set a pricing structure that reflects
variations in geographical demand and costs, market-
segment requirements, purchase timing, order levels,
and other factors. Several price-adaptation strate-
gies are available: (1) geographical pricing, (2) price
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional Assisted-graded writing questions.
Applications
Marketing Debate
Is the Right Price a Fair Price?
Prices are often set to satisfy demand or to reflect the pre-
mium consumers are willing to pay for a product or service.
Some critics shudder, however, at the thought of $2 bottles
of water, $150 running shoes, and $500 concert tickets.
Take a position: Prices should reflect the value
consumers are willing to pay versus Prices should
reflect only the cost of making a product or delivering
a service.
Marketing Discussion
Pricing Methods
Think about the pricing methods described in this
chapter—markup pricing, target-return pricing, perceived-
value pricing, value pricing, EDLP, going-rate pricing, and
auction-type pricing. As a consumer, which do you prefer?
Why? If the average price were to stay the same, which would
you prefer a firm to do: (1) set one price and not deviate or
(2) employ slightly higher prices most of the year but offer
slightly discounted prices or specials for certain occasions?
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wait for an auction and are willing to pay the seller’s price.
Sellers can also use the fixed-price format with a “best
offer” option that allows them to counteroffer, reject, or
accept an offer.
The company’s business model is based on connect-
ing individuals who otherwise would not be in touch. It
was the first example of online social networking, years
before Twitter and Facebook existed, and consumer trust
is a key element of its success. While skeptics initially
questioned whether consumers would buy products from
strangers, Omidayar believed people are innately good,
and eBay’s originators did two things well: They built a
strong online community, and they developed tools to
help reinforce trust between strangers. The company
tracks and publishes the reputations of both buyers and
sellers on the basis of feedback from each transaction.
It now has four seller criteria: items as described, com-
munication, shipping time, and shipping and handling
rate. The ratings are anonymous but are visible to buy-
ers. Sellers with the highest rankings appear at the top of
search results.
Over the years, eBay has expanded its capabili-
ties, services, and partnerships to continue building its
community and connecting people around the world.
For instance, the company acquired PayPal, an online
payment service, in 2002 after eBay members made
it clear that PayPal was the preferred method of pay-
ment. The acquisition gave consumers a safe way to
transfer money, lowered currency and language barri-
ers, and helped merchants sell their products around
the world.
Although eBay was a darling in the dot-com boom
and has achieved tremendous success since then, it
has had its fair share of challenges. These include a
worldwide recession, increased competition from Google
and Amazon.com, and difficulties expanding globally into
markets such as China.
Meg Whitman retired in 2008 after leading the com-
pany for 10 years and was replaced by John Donahoe.
Under Donahoe, eBay has made 34 acquisitions—
primarily e-commerce and payments businesses such
as Shopping.com, StubHub, and Bill Me Later but also
businesses offering back-end technologies. Donahoe
is moving the company toward a business model that
can compete with Amazon.com, including expand-
ing its online marketplace to include many returnable
goods at fixed prices. Only 30 percent of eBay’s sales
now come from auctions. The company has also
been promoting eBay Now, which partners with big
retailers like Macy’s, Target, Home Depot, and Toys “R”
Marketing Excellence
>> eBay
In 1995, Pierre Omidayar, a French-Iranian immigrant,
wrote the code for an auction Web site where everyone
would have equal access to a single global market-
place. Omidayar couldn’t believe it when a collec-
tor bought the first item, a broken laser pointer, for
$14.83.* Soon the site grew into a broader auction site
where consumers could sell collectibles ranging from
baseball cards to Barbie dolls. The momentum contin-
ued when individuals and small businesses discovered
that eBay was an efficient way to reach new custom-
ers and other businesses, and large companies began
using it as a means of selling their bulk lots of unsold
inventory. The company grew from 250,000 auctions in
1996 to 2,000,000 auctions in 1997. In 1998, it hired
Meg Whitman as CEO, and she helped take eBay pub-
lic later that year.
eBay’s success created a pricing revolution because
it allowed buyers to decide what they would pay for an
item. The result pleased both sides; customers gained
control and received the best possible price for the item,
while sellers made good margins due to the site’s effi-
ciency and wide reach.
For years, buyers and sellers also used eBay as an
informal guide to market value. Even a company with
a new-product design that wanted to know the going
price for anything from a copier to a new DVD player
checked on eBay. The online marketplace was fascinat-
ing to economists as well, who used it to analyze pricing
theories and compare them with actual buying and selling
behaviors.
eBay itself doesn’t buy any inventory or own the
products on its site. It earns its revenue by collecting
fees: an insertion fee for each listing plus a final-value
fee based on the auction or fixed price. For example, if
an item sells for $60.00, the seller pays 8.75 percent on
the first $25.00 ($2.19) plus 3.5 percent on the remain-
ing $35.00 ($1.23). Therefore, the final-value fee for the
sale is $3.42. This pricing structure was developed to
attract high-volume sellers and deter those who list only
a few low-priced items. With eBay’s expansion into a
wide range of other categories—from boats, cars, and
travel to health and beauty and home and garden—
collectibles now make up only a small percentage
of sales.
eBay now offers more pricing options, including a
fixed-price “buy it now” option to those who don’t want to
*Some believe eBay was created to help Omidayar’s girlfriend collect Pez candy dispensers. However, that story was invented by an employee to
help generate initial interest in the company.
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512 PART 5 | CReATing VAlue
Questions
1. Why has eBay succeeded as an online auction mar-
ketplace while so many others have failed?
2. Evaluate eBay’s fee structure. Is it optimal, or could it
be improved? Why? How?
3. Discuss Donahoe’s vision for eBay. Is moving away
from online auctions sustainable for the company?
Sources: Douglas MacMillan, “Can eBay Get Its Tech Savvy Back?,” BusinessWeek, June 22,
2009, pp. 48–49; Catherine Holahan, “eBay’s New Tough Love CEO,” BusinessWeek, February
4, 2008, pp. 58–59; Adam Lashinsky, “Building eBay 2.0,” Fortune, October 16, 2006, pp.
161–64; Matthew Creamer, “A Million Marketers,” Advertising Age, June 26, 2006, pp. 1, 71;
Clive Thompson, “eBay Heads East,” Fast Company, July–August 2006, pp. 87–89; Glen L. Urban,
“The Emerging Era of Customer Advocacy,” MIT Sloan Management Review (Winter 2004): 77–82;
Greg Bensinger, “EBay’s New Goal: Double Its Users,” Wall Street Journal, March 29, 2013, p. B.5;
Elizabeth Harris, “After Carriers Falter, Questions for Web Shopping,” New York Times, December
27, 2013, p. B.1; Jeff Himmelman, “eBay’s Strategy for Taking on Amazon,” New York Times,
December 19, 2013; www.ebay.com.
Us to deliver orders in about an hour for a minimum
charge.
Today, people can buy and sell virtually any product
or service on the world’s largest online marketplace. From
appliances and computers to cars and real estate, sellers
can list anything as long as it is not illegal and does not
violate eBay’s rules and policies.
The impact of eBay’s global reach is significant. In
2014, the online marketplace had almost 150 million active
users and more than 500 million items listed. A pair of
shoes is sold there every two seconds, a man’s necktie
every 23 seconds, a major appliance every 26 seconds,
and an LCD television every six minutes. With its high
volume, its acquisitions, and consumers’ increased use
of mobile devices, Donahoe hopes to double eBay’s
active-user count to more than 200 million by 2015 and
increase revenue from $14 billion to $23 billion.
succeed in making such remarkable progress in little over
a decade?
The company made a careful and plucky choice
of aircraft from the outset—the Airbus A320 combined
comfort (boasting a 32-inch seat pitch) and efficiency
(162-passenger capacity). The A320s also benefitted
from larger cabin space and a wider aisle, allowing for
shorter boarding time and reduced in-flight congestion.
A generous seat width (18 inches) granted the Airbus
A320s best legroom offered by any of its competitors in
the LCC market. Finally, using a universal aircraft model
lowered their training expenditure.
Air Arabia currently owns 39 Airbus A320s, with a
current order of a further 44. Opting for brand-new planes
has reduced fuel costs and environmental impact. Ali Al
Naqbi, founding chairman of the Middle East Business
Aviation Association, confirmed that aircraft demand in
the Middle East was not affected by the uncertainty and
instability that the Arab Spring brought in the region be-
tween December 2010 and mid-2012.
The company also prides itself on using pioneer-
ing technologies to boost efficiency. In 2012, Air Arabia
smartly equipped its fleet with sharklet technology to
reduce emissions by up to 4 percent on fuel-burn.
Sharklets are curved fin-like attachments to the wingtips
that facilitate higher take-off weight, significantly reducing
overheads. In addition, Air Arabia foresaw the inevitable
fluctuations of fuel price and dealt with them ahead of
time by adopting a fuel hedging strategy in order to en-
sure that any increase in fuel prices would not automati-
cally result in an increase in the price of its flight tickets.
In other words, Air Arabia has constantly maintained low
prices, thus preserving customer loyalty.
Marketing Excellence
>> Air Arabia
Air Arabia took-off in 2003 with only two leased Airbus
A320 jets. The Sharjah-based airline began as a start-
up owned by the government and was the UAE’s third
airline. Air Arabia has managed to establish its position in
the regional market of low cost carriers (LCC). Recently,
Air Arabia’s low-cost rivals, flydubai and flynas, have ad-
opted what is referred to as hybrid model, which includes
a range of selected full-service offerings. This switch has
managed to position Air Arabia as the only entirely low-
cost airline in the Middle East and North Africa region. Air
Arabia CEO, Adel Abdullah Ali, pointed out in 2013 that
his company would always cater to the low-cost market.
Although one might have assumed that the region’s
airline market was saturated, the CEO of Air Arabia in-
sisted that his company was planning to target around
85 percent potential regional customers who cannot
afford normal flying expenses. Starting with short-haul
flights to neighboring countries in the peninsula, Air
Arabia quickly gained price leadership in the Middle East
region, becoming the first and largest LCC in the Middle
East and North Africa.
Today, the company serves tens of destinations
across three continents, with hubs in Morocco, Egypt,
and the UAE, and has earned recognition as the premier
LCC in the Middle East. Air Arabia has recently won two
awards at the esteemed Aviation Business Awards 2014.
Air Arabia has utilized the cost cutting practices
characteristic of other LCCs to maintain low costs, and
thus deliver competitive fares to customers. How did they
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exceptional offer granting low-cost solutions and high-
quality travel experience to passengers.
In the first nine months of 2014, Air Arabia continued
its upward progress and achieved a net profit of $135
million, up by 46 percent compared to the profit reported
at the same period in 2013. The company’s revenues
showed an increase of 17 percent compared to the
same period in the year before that. In the last decade,
40 million customers have chosen to fly with Air Arabia.
It was also the first publicly owned airline company in the
Arab world, floating for the first time on the Dubai Stock
Market in 2007. Air Arabia’s top management has re-
cently declared that the company’s fleet is expected to
have 55 aircraft by 2015.
The network expansion strategy, the persistent
focus on cost control by hedging fuel prices, and the
use of world-leading fleet rates and high load while pre-
serving passengers’ comfort have been the key factors
behind a small profitable airline company like Air Arabia’s
success.
Questions
1. Air Arabia has succeeded in profitably challenging big
established airlines companies in the Middle East and
North Africa. Why don’t all other airlines apply the
same business model as Air Arabia?
2. What challenges does Air Arabia face? Do you think
that the company will be able to maintain its leader-
ship position in the LCC market in the Middle East and
North Africa? What will happen if other airlines apply
the same business model as Air Arabia?
Sources: “Air Arabia lags flydubai in the battle for Middle East LCC supremacy, but opportunities
abound,” Aviation Analysis CAPA, May 5, 2014; Air Arabia Annual Report 2012; Alexander Cornwell,
“Air Arabia will not be a hybrid carrier,” Gulf News, November 18, 2013; Air Arabia PJSC, Fincorp,
November 6, 2012; Air Arabia Annual Report 2013; Alan Dron, “Air Arabia reports 2013 net profit
up 2%,”All Transport World, February 24, 2014; “Air Arabia posts record nine months net profit
of AED 498 million, up 46%,” Air Arabia, November 11, 2014; Bruce Drum, “Air Arabia accepts
its first Airbus A320 with Sharklets,” World Airline News, January 31, 2013; “Air Arabia books
$118-mn net profit in 2013,” Business Standard, February 18, 2014; “Conditions of Carriage
for Passengers and Baggage,” Air Arabia; “Double win for Air Arabia at Aviation Business Awards
2014,” Air Arabia, December 8, 2014; “GCC Aviation Industry,” Alpen Capital, March 3, 2014;
“Global Research Result Update Equity—Air Arabia Aviation Sector, May 9, 2011; Muzaffar Rizvi,
“UAE airlines dominate low-cost segment,” Khaleej Times, November 13, 2011; “Air Arabia vs
Jazeera Airways,” Kipp Report; “Air Arabia: Growth and turbulence in the desert,” The National
Investor, August 10, 2008; “Airline Business Award: Adel Ali,” The Airline Strategy Awards, 2014.
Since its inception in 2003, Air Arabia has made
considerable expansion exploiting the gap in the LCC
market and expanding its flights to more exotic des-
tinations. The airline now flies to nearly 100 destina-
tions, from its original base in the Middle East to North
Africa, Central Asia, the Indian subcontinent, and several
European cities.
Its booking system has been expedited by a user-
friendly online service, reducing turnaround time at air-
ports, and keeping planes in the air. In 2012, the airline
had an average flying time per aircraft of 14 hours per day
and an impressive seat load factor of 82 percent—one of
the highest figures in the industry. That year it upgraded
its online presence with a cutting-edge mobile Web site
that provided travel information on the move.
As confirmed by Adel Ali, prices in general represent
a very important factor when it comes to booking a flight,
which is why he made sure that Air Arabia prices are on
average 40 percent cheaper than the regular economy
fare.
Despite a thrifty “pay-less, fly-more” motto, the
business has not lost its human touch. Unlike many
other low-priced airlines, Air Arabia has consistently
kept its vision customer-oriented; its crew members are
dedicated and view passengers’ comfort as key to the
company’s success. The online message refers to the
fact that Air Arabia is always ready to serve its custom-
ers wherever they are. This message emphasized the
three main elements of the value triad espoused by the
company: great flying experience, affordable price, and
good customer service. In 2013, the company opened
additional sales offices aiming to serve the increasing
demand concentrated in the Middle Eastern and North
African markets.
Air Arabia’s business model has consistently put low
fares, frequent flights, and safety at the top of its agenda;
such efficacy has earned them high rankings and good
reputation among airline companies worldwide. Its recent
accolades include Skytrax’s World Airline Award for best
LCC in MENA, and the Low-Cost Carrier of the year at
the Aviation Business Awards for three consecutive years.
The Air Arabia Group’s CEO was named Airline CEO
of the Year twice by Aviation Business. The company
was also rewarded the Airline Business Award at the
Airline Strategy Awards 2014, in acknowledgment of its
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514
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. What is a marketing channel system and value network? (p. 516)
2. What work do marketing channels perform? (p. 521)
3. How should channels be designed? (p. 525)
4. What decisions do companies face in managing their channels? (p. 530)
5. How should companies integrate channels? (p. 534)
6. What are the key channel issues in e-commerce? (p. 536)
7. What are the key channel issues in m-commerce? (p. 538)
8. How should companies manage channel conflict? (p. 540)
Delivering ValuePart 6
Chapter 17 Designing and Managing Integrated Marketing Channels
Chapter 18 Managing Retailing, Wholesaling, and Logistics
L.L. Bean has expanded beyond its
famed catalog to sell online and
through its own stores.
Source: L.L.Bean
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515
17 Designing and Managing
Integrated Marketing
Channels
Successful value creation needs successful value delivery. Instead of limiting their
focus to their immediate suppliers, distributors, and customers, holistic marketers are examining the whole
supply chain as a value network, including their suppliers’ suppliers upstream and their distributors’ customers
downstream. They are also looking at how technology is changing the way customers shop and retailers sell and
finding new and different means to distribute and service their offerings. Consider how L.L.Bean develops strong
customer ties with a well-executed channel strategy.1
L.L.Bean’s founder Leon Leonwood (L.L.) Bean returned from a Maine hunting trip in 1911 with
cold, damp feet—and a revolutionary idea for stitching leather uppers to workmen’s rubber boots
to create a comfortable, functional boot. To a mailing list of hunters, Bean sent a three-page flier
describing the benefits of his new Maine Hunting Shoe and backing it with a complete guarantee.
The shoe was not an initial success. Of the first 100 pairs ordered, 90 were returned when the tops
and bottoms separated. True to his word, Bean refunded the purchase price and fixed the problem. L.L.Bean quickly
became known as a trusted source for reliable outdoor equipment and expert advice. The company’s guarantee of
100 percent satisfaction is still at the core of its business, as is its original Golden Rule, “Sell good merchandise at
a reasonable profit, treat your customers like human beings, and they will always come back for more.” Today, it is
a $1.5 billion company, selling through its famous catalogs as well as online and in retail stores. L.L Bean has also
expanded globally, with stores in Japan and China. To better meet its U.S. customers’ needs, the company launched
free shipping in 2011. Online it has opened up to customer ratings and reviews, given customers the opportunity
to chat and e-mail with customer service, and introduced a “click to
call” system that triggers a customer service call within two minutes.
Ranked #1 in customer service by Bloomberg Businessweek, L.L.Bean
monitors customer feedback closely. When one of its customer-
favorite products, Supima Cotton Fitted Sheets, began to be criticized
in online reviews, the company quickly pulled the product from its Web
site to investigate. It turned out that a wrinkle-resistance treatment
mistakenly added by a contractor was causing the cotton fabric to
tear or shred. L.L.Bean immediately offered new sheets to the 6,300
customers who had purchased the defective set and destroyed the
remaining faulty products.
With the advent of e-commerce (selling online) and
m-commerce (selling via mobile phones and tablets), custom-
ers are buying in ways they never have before. Companies
today must build and manage a continuously evolving and
increasingly complex channel system and value network. In this
chapter, we consider strategic and tactical issues in integrat-
ing marketing channels and developing value networks. We
will examine marketing channel issues from the perspective
of retailers, wholesalers, and physical distribution agencies in
Chapter 18.
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516 PART 6 | DeliveRing vAlue
Marketing Channels
and Value Networks
Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries
performing a variety of functions. These intermediaries constitute a marketing channel (also called a trade chan-
nel or distribution channel). Formally, marketing channels are sets of interdependent organizations participating
in the process of making a product or service available for use or consumption. They are the set of pathways a
product or service follows after production, culminating in purchase and consumption by the final end user.2
Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the merchandise; they
are called merchants. Others—brokers, manufacturers’ representatives, sales agents—search for customers and
may negotiate on the producer’s behalf but do not take title to the goods; they are called agents. Still others—
transportation companies, independent warehouses, banks, advertising agencies—assist in the distribution
process but neither take title to goods nor negotiate purchases or sales; they are called facilitators.
Channels of all types play an important role in the success of a company and affect all other marketing
decisions. Marketers should judge them in the context of the entire process by which their products are made,
distributed, sold, and serviced. We consider all these issues in the following sections.
The ImporTance of channels
A marketing channel system is the particular set of marketing channels a firm employs, and decisions about
it are among the most critical ones management faces. In the United States, channel members as a group have
historically earned margins that account for 30 percent to 50 percent of the ultimate selling price. In contrast,
advertising typically has accounted for less than 5 percent to 7 percent of the final price.3 One of the chief roles
of marketing channels is to convert potential buyers into profitable customers. Marketing channels must not just
serve markets, they must also make them.4
The channels chosen affect all other marketing decisions. The company’s pricing depends on whether it uses on-
line discounters or high-quality boutiques. Its sales force and advertising decisions depend on how much training and
motivation dealers need. In addition, channel decisions include relatively long-term commitments with other firms
as well as a set of policies and procedures. When an automaker signs up independent dealers to sell its automobiles,
it cannot buy them out the next day and replace them with company-owned outlets. But at the same time, channel
choices themselves depend on the company’s marketing strategy with respect to segmentation, targeting, and position-
ing. Holistic marketers ensure that marketing decisions in all these different areas are made to maximize value overall.
In managing its intermediaries, the firm must decide how much effort to devote to push and to pull marketing. A
push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to
carry, promote, and sell the product to end users. This strategy is particularly appropriate when there is low brand loyalty
in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood.
In a pull strategy the manufacturer uses advertising, promotion, and other forms of communication to persuade
consumers to demand the product from intermediaries, thus inducing the intermediaries to order it. This strategy is
particularly appropriate when there is high brand loyalty and high involvement in the category, when consumers are
able to perceive differences between brands, and when they choose the brand before they go to the store.
Top marketing companies such as Apple, Coca-Cola, and Nike skillfully employ both push and pull strate-
gies. A push strategy is more effective when accompanied by a well-designed and well-executed pull strategy that
activates consumer demand. On the other hand, without at least some consumer interest, it can be very difficult to
gain much channel acceptance and support, and vice versa for that matter.
mulTIchannel markeTInG
Today’s successful companies typically employ multichannel marketing, using two or more marketing channels to
reach customer segments in one market area. HP uses its sales force to sell to large accounts, outbound telemarketing
to sell to medium-sized accounts, direct mail with an inbound phone number to sell to small accounts, retailers to sell
to still smaller accounts, and the Internet to sell specialty items. Each channel can target a different segment of buyers,
or different need states for one buyer, to deliver the right products in the right places in the right way at the least cost.
When this doesn’t happen, channel conflict, excessive cost, or insufficient demand can result. Launched in
1976, Dial-a-Mattress successfully grew for three decades by selling mattresses directly over the phone and later
online. A major expansion into 50 brick-and-mortar stores in major metro areas was a failure, however. Secondary
locations, chosen because management considered prime locations too expensive, could not generate enough
customer traffic. The company eventually declared bankruptcy.5
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Designing AnD MAnAging inTegRATeD MARkeTing ChAnnels | chapter 17 517
On the other hand, when a major catalog and Internet retailer invested significantly in brick-and-mortar stores,
different results emerged. Customers near the store purchased through the catalog less frequently, but their online
purchases were unchanged. As it turned out, customers who liked to spend time browsing were happy to either
use a catalog or visit the store; those channels were interchangeable. Customers who shopped online, on the other
hand, were more transaction-focused and interested in efficiency, so they were less affected by the introduction
of stores. Returns and exchanges at the stores were found to increase because of ease and accessibility, but extra
purchases made by customers returning or exchanging at the store offset any revenue deficit.6
Research has shown that multichannel customers can be more valuable to marketers.7 Nordstrom found that
its multichannel customers spend four times as much as those who only shop through one channel, though some
academic research suggests that this effect is stronger for hedonic products (apparel and cosmetics) than for
functional products (office and garden supplies).8
InTeGraTInG mulTIchannel markeTInG sYsTems
Most companies today have adopted multichannel marketing. Disney sells its videos through multiple channels:
movie rental merchants such as Netflix and Redbox, Disney Stores (now owned and run by The Children’s Place),
retail stores such as Best Buy, online retailers such as Disney’s own online stores and Amazon.com, and the Disney
Club catalog and other catalog sellers. This variety affords Disney maximum market coverage and enables it to offer
its videos at a number of price points.9 Here are some of the channel options for leather-goods maker Coach.10
COaCh Coach markets a high-end line of luxury handbags, briefcases, luggage, and accessories. In its 2013
fiscal year 10-K, the company describes its multichannel global distribution model as follows: “Coach products are available
in image-enhancing locations globally wherever our consumer chooses to shop including: retail stores and factory outlets,
directly operated shop-in-shops, online, and department and specialty stores. This allows Coach to maintain a dynamic
balance as results do not depend solely on the performance of a single channel or geographic area.” The North America seg-
ment consists of direct-to-consumer and indirect channels and includes sales to consumers through 351 company-operated
retail stores, including the Internet, and sales to wholesale customers and distributors. Coach began as a U.S. wholesaler and
still sells to 1,000 U.S. department-store locations, such as Macy’s (including Bloomingdale’s), Dillard’s, Nordstrom, Saks Fifth
Avenue, and Lord & Taylor, often within a tightly controlled shop-within-a-shop, as well as on some of those retailer’s Web
sites. This segment represented approximately 69 percent of the company’s total net sales in fiscal 2013. The International
segment sells to consumers online and through company-operated stores in Japan and mainland China, Hong Kong, Macau,
Singapore, Taiwan, Malaysia, and Korea and to wholesale customers and distributors. Coach also has store-in-store offerings
in Japan and China inside major department stores. The International segment represented approximately 31 percent of total
net sales in fiscal 2013. Finally, Coach has licensing relationships with Movado (watches), Jimlar (footwear), and Marchon
(eyewear). These licensed products are sometimes sold in other channels such as jewelry stores, high-end shoe stores, and
optical retailers as Coach continues to broaden its meaning from a “bag brand” to a whole lifestyle brand.
Coach uses a broad range
of channels to better sell its
expanding product lines.
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Companies are increasingly employing digital distribution strategies, selling directly online to customers
or through e-merchants who have their own Web sites. In doing so, these companies are seeking to achieve
omnichannel marketing, in which multiple channels work seamlessly together and match each target customer’s
preferred ways of doing business, delivering the right product information and customer service regardless of
whether customers are online, in the store, or on the phone.
An integrated marketing channel system is one in which the strategies and tactics of selling through one chan-
nel reflect the strategies and tactics of selling through one or more other channels. Adding more channels gives
companies three important benefits. The first is increased market coverage. Not only are more customers able to
shop for the company’s products in more places, as noted above, but those who buy in more than one channel are
often more profitable than single-channel customers.11 The second benefit is lower channel cost—selling online or
by catalog and phone is cheaper than using personal selling to reach small customers. The third is the ability to do
more customized selling—such as by adding a technical sales force to sell complex equipment.
There is a trade-off, however. New channels typically introduce conflict and problems with control and
cooperation. Two or more may end up competing for the same customers.12 Clearly, companies need to think
through their channel architecture and determine which channels should perform which functions.13 Figure 17.1
shows a simple grid to help make channel architecture decisions. It consists of major marketing channels (as rows)
and the major channel tasks to be completed (as columns).14
The grid illustrates why using only one channel is typically not efficient. Consider a direct sales force. A sales-
person would have to find leads, qualify them, presell, close the sale, provide service, and manage account growth.
With an integrated multichannel approach, however, the company’s marketing department could run a preselling
campaign informing prospects about the company’s products through advertising, direct mail, and e-mails; generate
leads through telemarketing, more e-mails, and trade shows; and qualify leads as hot, warm, or cool. The salesper-
son enters when the prospect is ready to talk business and invests his or her costly time primarily in closing the sale.
This multichannel architecture optimizes coverage, customization, and control while minimizing cost and conflict.
Companies should use different sales channels for different-sized business customers—a direct sales force for
large customers, a digital strategy or telemarketing for midsize customers, and distributors for small customers—
but be alert for conflict over account ownership. For example, territory-based sales representatives may want credit
for all sales in their territories, regardless of the marketing channel used.
Multichannel marketers also need to decide how much of their product to offer in each of the channels.
Patagonia views the Web as the ideal channel for showing off its entire line of goods, given that its 88 retail
National account
management
Direct sales
Internet
Telemarketing
Direct mail
Retail stores
Distributors
Dealers and value-
added resellers
Gather
relevant
information
Develop &
disseminate
communications
Reach
price
agreements
Place
orders
Acquire
funds for
inventories
Assume
risks
Facilitate
product
storage &
movement
Facilitate
payment
Oversee
ownership
transfer
VE
ND
OR
CU
ST
OM
ER
Demand-generation Tasks
M
ar
ke
tin
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Ch
an
ne
ls
a
nd
M
et
ho
ds
| Fig. 17.1 |
The Hybrid Grid
Source: Adapted from Rowland T. Moriarty and Ursula Moran, “Marketing Hybrid Marketing Systems,” Harvard Business Review, November–December, 1990, p. 150.
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locations are limited by space to offering a selection only, and even its catalog promotes less than 70 percent of its
total merchandise.15 Other marketers prefer to limit their online offerings, theorizing that customers look to Web
sites and catalogs for a “best of ” array of merchandise and don’t want to have to click through dozens of pages.
Here’s a company that has carefully managed its multiple channels.16
REI Outdoor equipment supplier REI has been lauded by industry analysts for the seamless integration of its retail
store, Web site, Internet kiosks, mail-order catalogs, value-priced outlets, mobile app, and toll-free order number. If an item
is out of stock in the store, all customers need to do is tap into the store’s Internet kiosk to order it from REI’s Web site. Less
Internet-savvy customers can have clerks place the order for them at the checkout counters. And REI not only generates
store-to-Internet traffic, it also sends online shoppers into its stores. If a customer browses REI’s site and stops to read an
REI “Learn and Share” article on backpacking, the site might highlight an in-store promotion on hiking boots. To create a
more common experience across channels, the specific icons and information used in ratings and reviews on REI.com also
appear on in-store product displays. Like many retailers, REI has found that dual-channel shoppers spend significantly more
than single-channel shoppers, and tri-channel shoppers spend even more. For example, one of every three people who buy
something online will spend an additional $90 in the store when they come to pick that purchase up.
Value neTworks
A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow of
ingredients and components through the production process to their ultimate sale to customers. The company
should first think of the target market, however, and then design the supply chain backward from that point. This
strategy has been called demand chain planning.17
A broader view sees a company at the center of a value network—a system of partnerships and alliances that a
firm creates to source, augment, and deliver its offerings. A value network includes a firm’s suppliers and its suppli-
ers’ suppliers and its immediate customers and their end customers. It also incorporates valued relationships with
others such as university researchers and government approval agencies.
A company needs to orchestrate the work of these parties to deliver superior value to the target market. Oracle
relies on 15 million developers—the largest developer community in the world.18 Apple Developer—where
folks create iPhone apps for the Apple operating system—has 275,000 registered iOS members. Developers keep
70 percent of any revenue their products generate; Apple gets 30 percent. After releasing more than 850,000 apps
that were downloaded 45 billion times in the first five years, Apple has paid out almost $9 billion.19
Demand chain planning yields several insights.20 First, the company can estimate whether more money is made
upstream or downstream, in case it can integrate backward or forward. Second, the company is more aware of dis-
turbances anywhere in the supply chain that might change costs, prices, or supplies. Third, companies can go online
with their business partners to speed communications, transactions, and payments; reduce costs; and increase
accuracy. Ford not only manages numerous supply chains but also sponsors many B-to-B Web sites and exchanges.
Outdoor equipment supplier
REI is known for its seamless
blending of online and offline
channels.
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520 PART 6 | DeliveRing vAlue
Managing a value network means making increasing investments in information technology (IT) and software.
Firms have introduced supply chain management (SCM) software and invited such software firms as SAP and
Oracle to design comprehensive enterprise resource planning (ERP) systems to manage cash flow, manufactur-
ing, human resources, purchasing, and other major functions within a unified framework. They hope to break
up departmental silos—in which each department acts only in its own self-interest—and carry out core business
processes more seamlessly. Most, however, are still a long way from truly comprehensive ERP systems.
Marketers, for their part, have traditionally focused on the side of the value network that looks toward the
customer, adopting customer relationship management (CRM) software and practices. In the future, they will
increasingly participate in and influence their companies’ upstream activities and become network managers, not
just product and customer managers.
The DIGITal channels reVoluTIon
The digital revolution is profoundly transforming distribution strategies. With customers—both individuals and
businesses—becoming more comfortable buying online and the use of smart phones exploding, traditional brick-
and-mortar channel strategies are being modified or even replaced.
Online retail sales (or e-commerce) have been growing at a double-digit rate; apparel and accessories, consumer
electronics, and computer hardware are the three fastest-growing categories. Skeptics initially felt apparel wouldn’t
sell well online, but easy returns, try-on tools, and customer reviews have helped counter the inability to try clothes
on in the store.
As brick-and-mortar retailers promote their online ventures and other companies bypass retail activity by
selling online, they all are embracing new practices and policies. As in all marketing, customers hold the key.
Customers want the advantages both of digital—vast product selection, abundant product information, helpful
customer reviews and tips—and of physical stores—highly personalized service, detailed physical examination of
products, an overall event and experience. They expect seamless channel integration so they can:21
• Enjoy helpful customer support in a store, online, or on the phone
• Check online for product availability at local stores before making a trip
• Find out in-store whether a product that is unavailable can be purchased and shipped from another store to home
• Order a product online and pick it up at a convenient retail location
• Return a product purchased online to a nearby store of the retailer
• Receive discounts and promotional offers based on total online and offline purchases
Retailers and manufacturers are responding. Consider some of the changes being made by retail giant Walmart.22
WaLMaRt With a huge investment in brick-and-mortar stores, many entrenched executives, and long-
established policies, Walmart was slow to embrace online and mobile technology and had online operations accounting
for less than 2 percent of its global sales. Then the company decided to make its digital strategy a priority, giving custom-
ers anytime, anywhere access to Walmart by combining mobile, online, and physical stores. After acquiring social-media
start-up Kosmix, known for its strong expertise in search and analytics, it established its @WalmartLabs group in Silicon
Valley, leading to company innovations such as smart-phone payment technology, mobile shopping applications, and
Twitter-influenced product selection for stores. Walmart found that many of its core customer group who made $30,000
to $60,000 a year were shopping from its Web site in large numbers and often on smart phones rather than computers.
Always a wizard with logistics, Walmart adopted a “ship from store” practice that uses its more than 4,000 U.S. stores as
warehouses to fulfill online orders quickly. The company is also exploring same-day shipping. It improved the search engine
on its Web site, increasing its “browsers to buyers” conversion by as much as 15 percent; launched its Shopycat gift recom-
mendation app, which uses social media to suggest gifts; introduced its Scan and Go app so customers can automatically
apply coupons when checking out; and added an in-aisle mobile-scanning system to speed check-out. A top priority for
Walmart is its smart-phone app. Users of the app spend more and frequent the store twice as often as non-users. When
near a store, the app flips into “store mode” to help locate items on a shopping list and make additional recommendations,
provide a digital version of the latest circulars, and highlight new products available in the store.
Retailers and manufacturers are assembling massive amounts of social, mobile, and location (SoMoLo) infor-
mation they can mine to learn about their customers. They are using software that closely monitors what’s selling
where and at what price in order to adjust their offerings and prices.23 The goal for many marketers is to develop a
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customized “next best offer” (NBO) that takes into account customers’ attitudes and behavior, purchase (product
or service), and shopping channel (in store or online) and the marketer’s goal with respect to those consumers,
whether it is to increase sales, say, or build loyalty.24
The Role of Marketing Channels
Why does a producer delegate some of the selling job to intermediaries, relinquishing control over how and to
whom its products are sold? Through their contacts, experience, specialization, and scale of operation, interme-
diaries make goods widely available and accessible to target markets, offering more effectiveness and efficiency
than the selling firm could achieve on its own.25
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By skillfully combining
mobile, online, and physical
stores, Walmart’s goal is to
give customers access to
its merchandise anytime,
anywhere.
Many manufacturers would
find it cost prohibitive to open
up their own stores—their
best options are to tap into
established dealer and
retailer networks.
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Many producers lack the financial resources and expertise to sell directly on their own. The William Wrigley Jr.
Company would not find it practical to establish small retail gum shops throughout the world or to sell gum online
or by mail order. It is easier to work through the extensive network of privately owned distribution organizations.
Even Ford would be hard-pressed to replace all the tasks done by its almost 8,500 dealer outlets worldwide.26
channel funcTIons anD flows
A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time,
place, and possession gaps that separate goods and services from those who need or want them. Members of the
marketing channel perform a number of key functions (see Table 17.1).
Some of these functions (storage and movement, title, and communications) constitute a forward flow of activ-
ity from the company to the customer; others (ordering and payment) constitute a backward flow from customers
to the company. Still others (information, negotiation, finance, and risk taking) occur in both directions. Five flows
are illustrated in Figure 17.2 for the marketing of forklift trucks. If these flows were superimposed in one diagram,
we would see the tremendous complexity of even simple marketing channels.
Table 17.1 Channel Member Functions
• Gather information about potential and current customers, competitors, and other actors and forces in the
marketing environment.
• Develop and disseminate persuasive communications to stimulate purchasing.
• Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be affected.
• Place orders with manufacturers.
• Acquire the funds to finance inventories at different levels in the marketing channel.
• Assume risks connected with carrying out channel work.
• Provide for the successive storage and movement of physical products.
• Provide for buyers’ payment of their bills through banks and other financial institutions.
• Oversee actual transfer of ownership from one organization or person to another.
Suppliers Manufacturer Dealers Customers
Suppliers
Suppliers
Suppliers
Advertising
agency
Advertising
agency
Manufacturer Dealers Customers
1. Physical Flow
2. Title Flow
3. Payment Flow
4. Information Flow
5. Promotion Flow
Suppliers Transporters,
warehouses
Manufacturer Dealers Transporters Customers
Banks BanksManufacturer Dealers Customers
Transporters,
warehouses,
banks
Transporters,
warehouses,
banks
Manufacturer Dealers
Transporters,
banks Customers
Banks
Transporters,
warehouses
| Fig. 17.2 |
Five Marketing Flows in the Marketing Channel for Forklift Trucks
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Designing AnD MAnAging inTegRATeD MARkeTing ChAnnels | chapter 17 523
(a) Consumer Marketing Channels
RetailerRetailerRetailer
WholesalerWholesaler
Jobber
0-level 0-level1-level 1-level2-level 2-level3-level 3-level
Manufacturer Manufacturer Manufacturer Manufacturer
Consumer Consumer Consumer Consumer
(b) Industrial Marketing Channels
Manufacturer Manufacturer Manufacturer Manufacturer
Industrial
distributors
Industrial
customer
Industrial
customer
Industrial
customer
Industrial
customer
Manufacturer’s
representative
Manufacturer’s
sales branch
| Fig. 17.3 |
Consumer and Industrial Marketing Channels
A manufacturer selling a physical product and services might require three channels: a sales channel, a delivery
channel, and a service channel. To sell its Bowflex fitness equipment, the Nautilus Group historically has empha-
sized direct marketing via television infomercials and ads, inbound/outbound call centers, response mailings, and
the Internet as sales channels; UPS ground service as the delivery channel; and local repair people as the service
channel. Reflecting shifting consumer buying habits, Nautilus now also sells Bowflex through regional and national
retailers such as Sears and Dick’s Sporting Goods as well as through online merchants such as Amazon.com.
The question for marketers is not whether various channel functions need to be performed—they must be—
but, rather, who is to perform them. All channel functions have three characteristics in common: They use up
scarce resources; they can often be performed better through specialization; and they can be shifted among chan-
nel members. Shifting some functions to intermediaries lowers the producer’s costs and prices, but the intermedi-
ary must add a charge to cover its work. If the intermediaries are more efficient than the manufacturer, prices to
consumers should be lower. If consumers perform some functions themselves, they should enjoy even lower prices.
Changes in channel institutions thus largely reflect the discovery of more efficient ways to combine or separate the
economic functions that provide assortments of goods to target customers.
channel leVels
The producer and the final customer are part of every channel. We will use the number of intermediary levels to
designate the length of a channel. Figure 17.3(a) illustrates several consumer-goods marketing channels of differ-
ent lengths.
A zero-level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the
final customer. The major examples are mail order, online selling, TV selling, telemarketing, door-to-door sales,
home parties, and manufacturer-owned stores. Traditionally, Franklin Mint sold collectibles through mail order;
Red Envelope sold gifts online; Time-Life sold music and video collections through TV commercials or longer
“infomercials”; nonprofits and political organizations and candidates use the telephone to raise funds; Avon sales
representatives sold cosmetics door to door; Tupperware sold its containers via in-home parties; and Apple sold
computers and other consumer electronics through its own stores. Many of these firms now sell directly to custom-
ers online and via catalogs. Even traditional consumer-product firms are considering adding direct-to-consumer
e-commerce sites to their channel mix. Kimberly-Clark launched an online Kleenex Shop in the United Kingdom.27
A one-level channel contains one selling intermediary, such as a retailer. A two-level channel contains two
intermediaries, typically a wholesaler and a retailer, and a three-level channel contains three. In the meatpacking
industry, wholesalers sell to jobbers, essentially small-scale wholesalers, who sell to small retailers. In Japan, food
distribution may include as many as six levels. Obtaining information about end users and exercising control be-
come more difficult for the producer as the number of channel levels increases.
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524 PART 6 | DeliveRing vAlue
Figure 17.3(b) shows channels commonly used in B-to-B marketing. An industrial-goods manufacturer can use
its sales force to sell directly to industrial customers, or it can sell to industrial distributors who sell to industrial
customers, or it can sell through manufacturer’s representatives or its own sales branches directly to industrial cus-
tomers or indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level marketing
channels are quite common.
Channels normally describe a forward movement of products from source to user, but reverse-flow channels are
also important (1) to reuse products or containers (such as refillable chemical-carrying drums), (2) to refurbish
products for resale (such as circuit boards or computers), (3) to recycle products, and (4) to dispose of products
and packaging. Reverse-flow intermediaries include manufacturers’ redemption centers, community groups,
trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.
serVIce secTor channels
Many of the most successful new banks, insurance and travel companies, and stock brokerages have emerged
with strictly or largely online operations, such as Ally banking, Esurance insurance, Expedia travel, and
E*TRADE investments. Marketing channels also keep changing for “person marketing.” Besides providing live
and programmed entertainment, entertainers, musicians, and other artists can reach prospective and existing
fans online in many ways—through their own Web sites, on social community sites such as Facebook and Twitter,
and through third-party Web sites. Politicians also must choose a mix of channels—mass media, rallies, coffee
hours, spot TV ads, direct mail, billboards, faxes, e-mail, blogs, podcasts, Web sites, and social networking sites—
for delivering their messages to voters.
Nonprofit service organizations such as schools develop education-dissemination systems and hospitals develop
health-delivery systems. These institutions must figure out agencies and locations for reaching a far-flung population.28
CLEVELand CLInIC One of the largest and most highly respected hospitals in the country,
Cleveland Clinic provides medical care in a variety of ways and settings. Its main campus in Cleveland, 50 buildings on
166 acres, is its hub for patient care, research, and education. The clinic also operates 16 full-service Family Health Centers
in the suburbs, while eight hospitals extend its reach in Northeast Ohio. Community outreach programs in all these areas
provide patient education and free health screenings. Cleveland Clinic also offers major medical care in Florida, Toronto, and
manages a Mubadala Development Company medical campus in Abu Dhabi, United Arab Eimireates, scheduled to begin
seeing patients in 2015. It has a suite of secure online health services for both patients and physicians and is developing
partnerships with Google and Microsoft to extend its online capabilities.
Cleveland Clinic has
a comprehensive
health-delivery system to
provide different kinds of
medical care to different
markets.
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Channel-Design Decisions
To design a marketing channel system, marketers analyze customer needs and wants, establish channel objectives
and constraints, and identify and evaluate major channel alternatives.
analYzInG cusTomer neeDs anD wanTs
Consumers may choose the channels they prefer based on price, product assortment, and convenience as well as
their own shopping goals (economic, social, or experiential).29 Channel segmentation exists, and marketers must
be aware that different consumers have different needs during the purchase process.
Even the same consumer, though, may choose different channels for different reasons.30 As Chapter 16
described, some consumers are willing to “trade up” to retailers offering higher-end goods such as TAG Heuer
watches or Callaway golf clubs and “trade down” to discount retailers for private-label paper towels, detergent,
or vitamins.31 Others may browse a catalog before visiting a store or test-drive a car at a dealership before order-
ing online. “Marketing Insight: Understanding the Showrooming Phenomena” describes some of the new ways
customers are using multiple channels as they make their purchases.
Channels produce five service outputs:
1. Desired lot size—The number of units the channel permits a typical customer to purchase on one occasion.
In buying cars for its fleet, Hertz prefers a channel from which it can buy a large lot size; a household wants a
channel that permits a lot size of one.
Understanding the Showrooming
Phenomena
Consumers have always shopped around to get the best deal or
broaden their options, and now e-commerce and m-commerce (selling
via mobile phone and tablet) offer them a new twist. Showrooming lets
them physically examine a product and collect information in a store
but make their actual purchase from the retailer later online or, in the
store’s least desirable outcome, from a different retailer altogether, typi-
cally to secure a lower price.
Showrooming has been given a boost by smart phones. Thanks
to their mobile devices, consumers in stores have never been better
equipped to decide whether they should buy. One study showed that
more than half of U.S. mobile phone users, especially younger ones,
have used their phones to ask for purchase advice from a friend or fam-
ily member or to look for reviews or lower prices while shopping.
Retailers used to worry about getting consumers into the store, but
experts note they now need to worry instead about selling to consum-
ers who are bringing other stores in with them. Amazon’s Price Check
phone app, for instance, allows shoppers to instantly compare prices
while in a brick-and-mortar store. Online retailers that mobile users
can tap offer traditional brick-and-mortar chains serious competition
because of their wide selections, lower prices (often with no taxes), and
24/7 convenience.
Mobile has become a top priority for many retailers as a means
to combat showrooming. Target has expanded its use of mobile media,
incorporating QR codes, text-to-buy features, and new checkout scan-
ners to make mobile coupon redemption easier and faster. Forty per-
cent of PetSmart’s Web traffic comes from smart phones and tablets.
eBay observed that 60 percent of e-mails sent by its retail clients were
opened on mobile devices and more than half the time were transi-
tioned to other devices to make the transaction.32
Addressing showrooming head-on, Best Buy and Target an-
nounced they would permanently match the prices of online retailers.
Others have more closely linked their stores and Web sites in response
to the trend. Walmart, Macy’s, and Best Buy allow in-store pickup of
online orders and returns of online purchases.
Many retailers are making the in-store experience more informa-
tive and rewarding. Guess, PacSun, and Aéropostale are equipping
in-store sales staff with iPads or tablets for collecting more in-depth
product information to share with shoppers. Shoppers enrolled in loyalty
programs can also quickly download their purchase histories, product
preferences, and other useful background.
The main goal of all these efforts is to hold on to the customer.
One study found that 70 percent of a showrooming audience was more
likely to buy from retailers with well-designed Web sites and apps,
strong multichannel support, and price comparisons via QR codes.
Shifting sales from a store to online can actually be more profitable for a
retailer if it prevents the customer from buying elsewhere.
Sources: “Showrooming Threat Hits Major Chains,” www.warc.com, March
1, 2013; “‘Showrooming’ Grows in U.S.,” www.warc.com, February 4, 2013;
“Showrooming to Shape U.S. Holiday Sales,” www.warc.com, November 16,
2012; Hadley Malcolm, “Smartphones to Play Bigger Role in Shopping,” USA
Today, November 15, 2012; Maribel Lopez, “Can Omni-Channel Retail Combat
Showrooming,” Forbes, October 22, 2012; Australian School of Business, “Stop
Customers Treating Your Business as a Showroom,” www.smartcompany.com.au,
October 8, 2012.
marketing
insight
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526 PART 6 | DeliveRing vAlue
2. Waiting and delivery time—The average time customers wait for receipt of goods. Customers increasingly
prefer faster delivery channels.
3. Spatial convenience—The degree to which the marketing channel makes it easy for customers to purchase the
product. Toyota offers greater spatial convenience than Lexus because there are more Toyota dealers, helping
customers save on transportation and search costs in buying and repairing an automobile.
4. Product variety—The assortment provided by the marketing channel. Normally, customers prefer a greater
assortment because more choices increase the chance of finding what they need, though too many choices can
sometimes create a negative effect.33
5. Service backup—Add-on services (credit, delivery, installation, repairs) provided by the channel. The more
service backup, the greater the benefit provided by the channel.
Providing more service outputs also means increasing channel costs and raising prices. The success of discount
stores such as Walmart and Target and extreme examples like Dollar General and Family Dollar indicates that
many consumers are willing to accept less service if they can save money.
esTablIshInG objecTIVes anD consTraInTs
Marketers should state their channel objectives in terms of the service output levels they want to provide and
the associated cost and support levels. Under competitive conditions, channel members should arrange their
functional tasks to minimize costs and still provide desired levels of service. Usually, planners can identify several
market segments based on desired service and choose the best channels for each.
Channel objectives vary with product characteristics. Bulky products, such as building materials, require
channels that minimize the shipping distance and the amount of handling. Nonstandard products such as custom-
built machinery are sold directly by sales representatives. Products requiring installation or maintenance services,
such as heating and cooling systems, are usually sold and maintained by the company or by franchised dealers.
High-unit-value products such as generators and turbines are often sold through a company sales force rather than
intermediaries.
Marketers must adapt their channel objectives to the larger environment. When economic conditions are
depressed, producers want to move goods to market using shorter channels and without services that add to the
final price. Legal regulations and restrictions also affect channel design. U.S. law looks unfavorably on channel
arrangements that substantially lessen competition or create a monopoly.
In entering new markets, firms often closely observe what other firms are doing. French retailer Auchan consid-
ered the presence of its French rivals Leclerc and Casino in Poland as key to its decision to also enter that market.34
Apple’s channel objective of creating a dynamic retail experience for consumers was not being met by existing
channels, so it chose to open it own stores.35
aPPLE StORES When Apple launched its stores in 2001, many questioned their prospects;
BusinessWeek published an article titled “Sorry Steve, Here’s Why Apple Stores Won’t Work.” Just five years later, the
company was celebrating the launch of its spectacular Manhattan showcase. By the end of 2013, it had taken in global
sales of $16 billion from more than 400 stores in North America, Europe, and Asia, about 20 percent of total corpo-
rate revenue. Roughly 30,000 of Apple’s 43,000 U.S. employees work in its stores. Annual sales per square foot were
estimated to be $4,406 in 2011—the Fifth Avenue location reportedly earns a staggering $35,000 per square foot–
compared with Tiffany’s $3,070, Coach’s $1,776, and Best Buy’s $880. Any way you look at them, Apple Stores have
also been an unqualified success in fueling excitement for the brand. They let people see and touch the products—and
experience what Apple can do for them—making it more likely they’ll become customers. They target tech-savvy
customers with in-store product presentations and workshops; a full line of Apple products, software, and accessories;
and a “Genius Bar” staffed by specialists who provide technical support, often free of charge. Apple’s meticulous attention
to detail is reflected in the preloaded music and photos on demo devices, innovative touches such as roving credit-card
swipers to minimize checkout lines, and hours invested in employee training. Employees receive no sales commissions
and have no sales quotas. They are told their mission is to “help customers solve problems.” Although the stores initially
upset existing Apple retailers, the company worked hard to smooth relationships, in part justifying its decision as a natural
evolution of its online sales channel.
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IDenTIfYInG major channel alTernaTIVes
Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet—has
unique strengths and weaknesses. Sales forces can handle complex products and transactions, but they are expen-
sive. The Internet is inexpensive but may not be as effective for complex products. Distributors can create sales,
but the company loses direct contact with customers. Several clients can share the cost of manufacturers’ reps, but
the selling effort is less intense than company reps provide.
Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and
responsibilities of each. Let’s look at these factors.
Types of InTermedIarIes Consider the channel alternatives identified by a consumer electronics
company that produces satellite radios. It could sell its players directly to automobile manufacturers to be installed
as original equipment, auto dealers, rental car companies, or satellite radio specialist dealers through a direct sales
force or through distributors. It could also sell its players through company stores, online retailers, mail-order
catalogs, or mass merchandisers such as Best Buy.
Sometimes a company chooses a new or unconventional channel because of the difficulty, cost, or ineffective-
ness of working with the dominant channel. When video rental stores were rapidly declining, Coinstar successfully
introduced the Redbox chain of conveniently located DVD- and game-rental kiosks.36 Netflix is quickly moving
away from the revolutionary channel that brought it much success—direct mail—to capitalize on a new one.37
nEtfLIx Convinced that DVDs were the home video medium of the future, Netflix founder Reed Hastings
came up with a new form of rental distribution via mail order in 1997. The company quickly developed strong customer
loyalty and positive word of mouth with its modest subscription fees (as low as $9 a month), usually overnight delivery, and
extensive library of thousands of movies and television episodes with no late fees. The service also had proprietary software
that let customers search for obscure films and discover new ones. To improve the quality of its searches, Netflix sponsored
a well-publicized million-dollar contest that drew thousands of entrants; the winning solution was expected to make its
recommendation algorithm twice as effective. With new competition from thousands of Redbox rental kiosks and Amazon.
com’s download services, Netflix began emphasizing streaming videos and instantaneous delivery mechanisms. After an
initial misstep, the firm split the two businesses and charges roughly $8 a month each for physical DVDs and for a stream-
ing download plan. It is now the single-largest source of download traffic in North America, making up more than a third of
the total, but it still anticipates growth in DVD rentals from its more than 40 million subscribers. Netflix’s success has also
captured Hollywood’s attention. The company’s online communities of customers who read and post reviews and feedback
can be an important source of fans for films. Netflix is also creating its own award-winning television programming and has
moved into international markets in Canada, Europe, and Latin America.
Although some predicted it
would fail, Apple Stores have
become an unqualified
success both financially
and as a brand builder.
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number of InTermedIarIes Three strategies based on the number of intermediaries are exclusive,
selective, and intensive distribution.
Exclusive distribution severely limits the number of intermediaries. It’s appropriate when the producer wants
to ensure more knowledgeable and dedicated efforts by the resellers, and it often requires a closer partnership
with them. Exclusive distribution is used for new automobiles, some major appliances, and some women’s apparel
brands.
Exclusive distribution often includes exclusive dealing arrangements, especially in markets increasingly driven
by price. When the legendary Italian designer label Gucci found its image severely tarnished by overexposure from
licensing and discount stores, it decided to end contracts with third-party suppliers, control its distribution, and
open its own stores to bring back some of the luster.38
Selective distribution relies on only some of the intermediaries willing to carry a particular product. Whether
established or new, the company does not need to worry about having too many outlets; it can gain adequate mar-
ket coverage with more control and less cost than intensive distribution. STIHL is a good example of successful
selective distribution.39
StIhL STIHL manufactures handheld outdoor power equip-
ment. All its products are branded under one name, and it does not
make private labels for other companies. Best known for its chain saws,
the company has expanded into string trimmers, blowers, hedge trim-
mers, and cut-off machines. It sells exclusively to six independent U.S.
distributors and six company-owned marketing and distribution centers,
which sell to a nationwide network of more than 8,000 independent
retail dealers offering service. STIHL also exports to 80 countries
and is one of the few outdoor-power-equipment companies not sell-
ing through mass merchants, catalogs, or the Internet. It even ran an
ad campaign called “Why” that touted the strength and support of its
independent dealers with headlines such as “Why is the World’s No.
1-selling brand of chain saw not sold at Lowe’s or The Home Depot?”
and “What makes this handblower too powerful to be sold at Lowe’s or
The Home Depot?”
Intensive distribution places the goods or services in as many
outlets as possible. This strategy serves well for snack foods, soft
drinks, newspapers, candies, and gum—products consumers buy
frequently or in a variety of locations. Convenience stores such
as 7-Eleven and Circle K and gas-station outlets like ExxonMobil’s
On the Run survive by providing simple location and time
convenience.
Manufacturers are constantly tempted to move from exclusive or
selective distribution to more intensive distribution to increase cover-
age and sales. This strategy may help in the short term, but if not done
properly, it can hurt long-term performance by encouraging retailers to
compete aggressively. Price wars can then erode profitability, dampen-
ing retailer interest and harming brand equity. Some firms do not want
to be sold everywhere. After Sears acquired discount chain Kmart,
Nike pulled all its products from Sears to make sure Kmart could not
carry the brand.40
Terms and responsIbIlITIes of Channel members
Each channel member must be treated respectfully and be given the
opportunity to be profitable. The main elements in the “trade relations
mix” are price policies, conditions of sale, territorial rights, and specific
services to be performed by each party.
Stihl has successfully adopted a selective distribution strategy that
bypasses mass merchants, catalogs and the Internet.
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• Price policy calls for the producer to establish a price list and schedule of discounts and allowances that inter-
mediaries see as equitable and sufficient.
• Conditions of sale refers to payment terms and producer guarantees. Most producers grant cash discounts
to distributors for early payment. They might also offer a guarantee against defective merchandise or price
declines, creating an incentive to buy larger quantities.
• Distributors’ territorial rights define the distributors’ territories and the terms under which the producer
will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their terri-
tory, whether or not they did the selling.
• Mutual services and responsibilities must be carefully spelled out, especially in franchised and exclusive-
agency channels. McDonald’s provides franchisees with a building, promotional support, a record-keeping
system, training, and general administrative and technical assistance. In turn, franchisees are expected to
satisfy company standards for the physical facilities, cooperate with new promotional programs, furnish re-
quested information, and buy supplies from specified vendors, as well as pay monthly franchisee fees.
eValuaTInG major channel alTernaTIVes
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
eConomIC CrITerIa Every channel member will produce a different level of sales and costs. Figure 17.4
shows how six different sales channels stack up in terms of the value added per sale and the cost per transaction.
For example, in the sale of industrial products costing between $2,000 and $5,000, the cost per transaction has been
estimated at $500 (field sales), $200 (distributors), $50 (telesales), and $10 (Internet). A Booz Allen Hamilton study
showed that at one time the average transaction at a full-service branch cost a bank $4.07, a phone transaction $.54,
and an ATM transaction $.27, but a typical online transaction cost only $.01.41
Clearly, sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is
sufficient. Consider the following situation:
A North Carolina furniture manufacturer wants to sell its line to retailers on the West Coast. One alterna-
tive is to hire 10 new sales representatives to operate out of a sales office in San Francisco and receive a
base salary plus commissions. The other alternative is to use a San Francisco manufacturer’s sales agency
that has extensive contacts with retailers. Its 30 sales representatives would receive a commission based
on their sales.
The first step is to estimate the dollar volume of sales each alternative will likely generate. A company sales
force will concentrate on the company’s products, be better trained to sell them, be more aggressive, and be more
successful because many customers will prefer to deal directly with the company. The sales agency has 30 repre-
sentatives, however, not just 10; it may be just as aggressive, depending on the commission level; customers may
appreciate its independence; and it may have extensive contacts and market knowledge. The marketer needs to
evaluate all these factors in formulating a demand function for the two different channels.
Value-added
partners
Telemarketing
Internet
High
Low
Low High
Direct marketing
channels
“Indirect” channels
Direct sales
channels
Cost per Transaction
Va
lu
e-
ad
d
of
S
al
e
Retail stores
Distributors
Sales force
| Fig. 17.4 |
The Value-Adds
versus Costs
of Different
Channels
Source: Oxford Associates, adapted from
Dr. Rowland T. Moriarty. Cubex Corp.
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The next step is to estimate the costs of selling different volumes through each channel. The cost schedules are
shown in Figure 17.5. Engaging a sales agency is less expensive, but costs rise faster because sales agents get larger
commissions.
The final step is comparing sales and costs. As Figure 17.5 shows, there is one sales level (SB) at which sell-
ing costs for the two channels are the same. The sales agency is thus the better channel for any sales volume
below SB, and the company sales branch is better at any volume above SB. Given this information, it is not
surprising that sales agents tend to be used by smaller firms or by large firms in smaller territories where the
volume is low.
ConTrol and adapTIve CrITerIa Using a sales agency can pose a control problem. Agents may
concentrate on the customers who buy the most, not necessarily those who buy the manufacturer’s goods. They
might not master the technical details of the company’s product or handle its promotion materials effectively.
To develop a channel, members must commit to each other for a specified period of time. Yet these commit-
ments invariably reduce the producer’s ability to respond to change and uncertainty. The producer needs channel
structures and policies that provide high adaptability.
Channel-Management Decisions
After a company has chosen a channel system, it must select, train, motivate, and evaluate intermediaries for each
channel. It must also modify channel design and arrangements over time, including the possibility of expansion
into international markets.
selecTInG channel members
To customers, the channels are the company. Consider the negative impression customers would get of
McDonald’s, Shell Oil, or Mercedes-Benz if one or more of their outlets or dealers consistently appeared dirty,
inefficient, or unpleasant.
To facilitate channel member selection, producers should determine what characteristics distinguish the better
intermediaries—number of years in business, other lines carried, growth and profit record, financial strength,
cooperativeness, and service reputation. If the intermediaries are sales agents, producers should evaluate the
number and character of other lines carried and the size and quality of the sales force. If the intermediaries are
department stores that want exclusive distribution, their locations, future growth potential, and type of clientele
will matter.
TraInInG anD moTIVaTInG channel members
A company needs to view its intermediaries the same way it views its end users. It should determine their needs
and wants and tailor its channel offering to provide them with superior value.
Carefully implemented training, market research, and other capability-building programs can motivate and
improve intermediaries’ performance. The company must constantly communicate that intermediaries are crucial
partners in a joint effort to satisfy end users of the product. Microsoft requires its third-party service engineers
Manufacturer’s
sales agency
Company
sales force
SB
Se
lli
ng
C
os
ts
(d
ol
la
rs
)
Level of Sales (dollars)
| Fig. 17.5 |
Break-Even Cost
Chart for the Choice
between a Company
Sales Force and a
Manufacturer’s Sales
Agency
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to complete a set of courses and take certification exams. Those who pass are formally recognized as Microsoft
Certified Professionals and can use this designation to promote their own business. Other firms use customer sur-
veys rather than exams.
Channel power Producers vary greatly in their skill in managing distributors. Channel power is
the ability to alter channel members’ behavior so they take actions they would not have taken otherwise.42
Manufacturers can draw on the following types of power to elicit cooperation:
• Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if interme-
diaries fail to cooperate. This power can be effective, but its exercise produces resentment and can lead the
intermediaries to organize countervailing power.
• Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or
functions. Reward power typically produces better results than coercive power, but intermediaries may come
to expect a reward every time the manufacturer wants a certain behavior to occur.
• Legitimate power. The manufacturer requests a behavior that is warranted under the contract. As long as the
intermediaries view the manufacturer as a legitimate leader, legitimate power works.
• Expert power. The manufacturer has special knowledge the intermediaries value. Once the intermediaries
acquire this expertise, however, expert power weakens. The manufacturer must continue to develop new
expertise so intermediaries will want to continue cooperating.
• Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated
with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high referent power.43
Coercive and reward power are objectively observable; legitimate, expert, and referent power are more subjective
and depend on the ability and willingness of parties to recognize them.
Most producers see gaining intermediaries’ cooperation as a huge challenge. They often use positive motivators,
such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales
contests. At times they will apply negative sanctions, such as threatening to reduce margins, slow down delivery, or
terminate the relationship. The weakness of this approach is that the producer is using crude, stimulus-response
thinking.
In many cases, retailers hold the power. One estimate is that manufacturers offer the nation’s supermarkets
between 150 and 250 new items each week, of which store buyers reject more than 70 percent. Manufacturers need
to know the acceptance criteria buyers, buying committees, and store managers use. ACNielsen interviews found
that store managers were most influenced by strong evidence of consumer acceptance, a well-designed advertising
and sales promotion plan, and generous financial incentives.
Channel parTnershIps More sophisticated companies try to forge a long-term partnership with
distributors.44 The manufacturer clearly communicates what it wants from its distributors in the way of market
coverage, inventory levels, marketing development, account solicitation, technical advice and services, and
marketing information and may introduce a compensation plan for adhering to the policies.
To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient
consumer response (ECR) practices to organize their relationships in three areas: (1) demand-side management,
or collaborative practices to stimulate consumer demand by promoting joint marketing and sales activities, (2)
supply-side management, or collaborative practices to optimize supply (with a focus on joint logistics and supply
chain activities), and (3) enablers and integrators, or collaborative information technology and process improve-
ment tools to support joint activities that reduce operational problems, allow greater standardization, and so on.
Research has shown that although ECR has a positive impact on manufacturers’ economic performance and
capability development, manufacturers may also feel they are inequitably sharing the burdens of adopting it and
not getting as much as they deserve from retailers.45
eValuaTInG channel members
Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota
attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and
cooperation in promotional and training programs. A producer will occasionally discover it is overpaying par-
ticular intermediaries for what they are actually doing. One manufacturer compensating a distributor for holding
inventories found its goods were being held in a public warehouse at its own expense. Producers should set up
functional discounts in which they pay specified amounts for the trade channel’s performance of each agreed-
upon service. Underperformers need to be counseled, retrained, motivated, or terminated.
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moDIfYInG channel DesIGn anD arranGemenTs
No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry
barriers, the optimal channel structure will inevitably change over time. New technologies have created digital
channels undreamed of years ago. The change could mean adding or dropping individual market channels or
channel members or developing a totally new way to sell goods. When new competition from Best Buy and
Costco forced one-third of Leica’s U.S. dealers to close, the high-end camera maker decided to open its own
stylish stores to appeal to serious photographers.46
Channel evoluTIon A new firm typically starts as a local operation selling in a fairly circumscribed
market, using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is
often to convince the available intermediaries to handle the firm’s line.
If the firm is successful, it might branch into new markets with different channels. In smaller markets, it might
sell directly to retailers; in larger markets, through distributors. In rural areas, it might work with general-goods
merchants; in urban areas, with limited-line merchants. It may choose to create its own online store to sell directly
to customers. It might grant exclusive franchises or sell through all willing outlets. In one country, the firm might
use international sales agents; in another, it might partner with a local firm.
Early buyers might be willing to pay for high-value-added channels, but later buyers will switch to lower-cost
channels. Small office copiers were first sold by manufacturers’ direct sales forces, later through office equipment
dealers, still later through mass merchandisers, and now by mail-order firms and Internet marketers. In short, the
channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities,
and company resources and capabilities.
channel moDIfIcaTIon DecIsIons
A producer must periodically review and modify its channel design and arrangements.47 The distribution
channel may not work as planned, consumer buying patterns change, the market expands, new competi-
tion arises, innovative distribution channels emerge, and the product moves into later stages in the product
life cycle.48
To add or drop individual channel members, the company needs to make an incremental analysis. Customer
databases and sophisticated analysis tools can provide guidance.49 A basic question is: What would the firm’s sales
and profits look like with and without this intermediary? Perhaps the most difficult decision is whether to revise
the overall channel strategy.50 Avon’s door-to-door system for selling cosmetics was modified as more women left
the house and entered the paid workforce.
Global channel consIDeraTIons
International markets pose distinct challenges, including variations in customers’ shopping habits and the need to
gain social acceptance or legitimacy among others, but opportunities do exist.51 U.S. retailers such as The Limited
and the Gap have become globally prominent. Dutch retailer Ahold and Belgian retailer Delhaize earn almost
two-thirds and three-quarters of their sales, respectively, in nondomestic markets. Among foreign-based global
retailers in the United States are Italy’s Benetton, Sweden’s IKEA home furnishings stores, and Japan’s UNIQLO
casual apparel retailer.
Developing markets have become a target for many retailers. Franchised companies such as Subway sandwich
shops have experienced double-digit growth overseas, especially in Brazil and Central and Eastern Europe.
In some cases, master franchisees pay a significant fee to acquire a territory or country where they operate as “mini-
franchisers” in their own right. More knowledgeable about local laws, customs, and consumer needs than foreign
companies, they sell and oversee franchises and collect royalties.52
In India, sales from “organized retail”—hypermarkets, supermarkets, and department stores—make up only a
small percentage of the huge market. As Chapter 8 noted, most shopping still takes place in millions of indepen-
dent grocery stores or kirana shops, which are run by their owners and are popular because they extend credit and
deliver even small orders. India’s complex regulations, poor infrastructure, and expensive real estate also make it a
difficult market for retail chains to enter.53
China has similar logistical challenges, though a growing middle class offers opportunity and firms such as Best
Buy, Coach, and the Gap are meeting with some success.54 But many pitfalls exist in global expansion. The world’s
top three retailers—U.S.-based Walmart, UK-based Tesco, and France-based Carrefour—all have struggled to
enter certain overseas markets. Consider the plight of Tesco.55
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tESCO Tesco introduced its Fresh & Easy gourmet mini-supermarkets into California after much research
that included spending time with U.S. families and videotaping the contents of their refrigerators. Fresh & Easy’s 200 or
so stores were roughly 10,000 square feet, about one-fifth the size of a standard U.S. supermarket but much bigger than
a convenience store, with a focus on fresh-food offerings. Yet, after five unprofitable years and more than $1.6 billion in
losses, Tesco decided to exit the market in 2013. A host of problems plagued the retailer. Its U.S. customers were unaccus-
tomed to British-style ready meals, self-service cash registers, and unorthodox store layouts. Other complaints were that the
product range was too narrow, there was no bakery and an underwhelming flower department, and the stores were physi-
cally too cold. The United States was not the only trouble spot for Tesco. The company had exited Japan the preceding year
and was finding trouble in Central and Eastern Europe. While it focused on geographical expansion, its core supermarket
business in the United Kingdom was neglected. Stores weren’t properly staffed, fresh food was not properly maintained, and
new private-label products were not introduced. The attempt to add non-grocery items like clothing and electronics proved
difficult in a recession, and entry into new areas like banking and telephony was a distraction. After enduring six consecutive
quarters of same-store sales declines in its home market, Tesco announced a $1.7 billion program to refresh its UK stores
and a pull-back of its global ambitions.
The problems Tesco courted in the United Kingdom are a common downside of overly aggressive global
expansion. Selling everything from food to televisions, Carrefour, the world’s second-biggest retailer, has also
encountered stiff competition at home, from smaller supermarkets for groceries and from specialist retailers such
as IKEA for other goods. Although strong in some parts of Europe and Asia, Carrefour (which means “cross-
roads” in French) has been forced to cease operations in Japan, South Korea, Mexico, Czech Republic, Slovakia,
Switzerland, and Portugal.56
The first step in global channel planning, as so often in marketing, is to get close to customers. To adapt its
clothing lines to European tastes, Philadelphia-based Urban Outfitters set up a separate design and merchandising
unit in London before it opened its first store in Europe. Although it increased costs, the distinctive blend of U.S.
and European looks helped the retailer stand out, and it was one of the few fashion retailers to build strength dur-
ing the recent recession.57
A good retail strategy that offers customers a positive shopping experience and unique value, if properly
adapted, is likely to find success in more than one market. Take Topshop, for instance.58
Despite much consumer
research and a sizable
investment, British retailing
giant Tesco’s entry into the
U.S. market, Fresh & Easy
neighborhood markets,
ultimately failed.
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tOPShOP Founded by Sir Richard Green in 1994, British clothing retailer Topshop is a chain of more than
300 UK stores and 130 franchise stores in 37 countries that commands intense loyalty from its trendy, style-obsessed
customer base. Selling primarily women’s party clothes, accessories, and daywear, the chain blends English street fashion,
reasonable prices, and fun services. A higher-end, quirkier version of fast-fashion chains H&M and Zara, it allows middle-
market consumers to dress trendily and affordably, in punk-inspired pinafores or ladylike tweed. New products are flown in
two to three times a week, and store selections are updated multiple times in a day. Partnering with style icons Kate Moss,
Stella Vine, and Celia Birtwell to create the latest designs, Topshop offers style advisors, Topshop-to-Go (a Tupperware-
type party that brings a style advisor to a customer’s home with outfits for as many as 10 people), and Topshop Express
(an express delivery service via Vespa scooters for fashion “emergencies”). The company’s Topman chain caters to a male
audience. It seeks prime locations for its stores and complements them with an online store. The 60,000-square-foot
store on Broadway in New York City is Topshop’s second biggest and the first flagship store outside the United Kingdom. It
has shop-in-shop locations in Nordstrom department stores throughout the United States and in the Karstadt department
store chain in Germany.
Channel Integration and Systems
Distribution channels don’t stand still. We’ll look at the recent growth of vertical, horizontal, and multichannel
marketing systems. After considering some e-commerce and m-commerce issues, we next examine how these
systems cooperate, conflict, and compete.
VerTIcal markeTInG sYsTems
A conventional marketing channel consists of an independent producer, wholesaler(s), and retailer(s). Each is a
separate business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole.
No channel member has complete or substantial control over other members.
A vertical marketing system (VMS), by contrast, includes the producer, wholesaler(s), and retailer(s) acting
as a unified system. One channel member, the channel captain, sometimes called a channel steward, owns or fran-
chises the others or has so much power that they all cooperate. Stewards accomplish channel coordination without
issuing commands or directives by persuading channel partners to act in the best interest of all.59
A channel steward might be the maker of the product or service (Procter & Gamble or American Airlines), the
maker of a key component (microchip maker Intel), the supplier or assembler (Dell or Arrow Electronics), or the
Urban Outfitters carefully
studied the European market
to ensure its blend of fashion
merchandise would appeal
to consumer tastes there.
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distributor (W.W. Grainger) or retailer (Walmart). Within a company, stewardship might rest with the CEO, a top
manager, or a team of senior managers.
Channel stewardship has two important outcomes. First, it expands value for the steward’s customers, en-
larging the market or increasing existing customers’ purchases through the channel. Second, it creates a more
tightly woven and yet adaptable channel in which valuable members are rewarded and the less valuable are
weeded out.
VMSs arose from strong channel members’ attempts to control channel behavior and eliminate conflict over
independent members pursuing their own objectives. These systems achieve economies through size, bargaining
power, and elimination of duplicated services. Business buyers of complex products and systems value the exten-
sive exchange of information they can offer.60 VMSs have become the dominant mode of distribution in the U.S.
consumer marketplace, serving 70 percent to 80 percent of the market. There are three types: corporate, adminis-
tered, and contractual.
CorporaTe vms A corporate VMS combines successive stages of production and distribution under single
ownership. For years, Sears obtained more than half the goods it sells from companies it partly or wholly owned.
Sherwin-Williams makes paint but also owns and operates 3,500 retail outlets.
admInIsTered vms An administered VMS coordinates successive stages of production and distribution
through the size and power of one of the members. Manufacturers of dominant brands can secure strong trade
cooperation and support from resellers. Thus, Frito-Lay, Procter & Gamble, and Campbell Soup command high
levels of cooperation from their resellers in the matter of displays, shelf space, promotions, and price policies. The
most advanced supply-distributor arrangement for administered VMSs relies on distribution programming,
which builds a planned, professionally managed, vertical marketing system that meets the needs of both
manufacturer and distributors.
ConTraCTual vms A contractual VMS consists of independent firms at different levels of production and
distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they
could achieve alone.61 Sometimes thought of as “value-adding partnerships” (VAPs), contractual VMSs come in
three types:
1. Wholesaler-sponsored voluntary chains—Wholesalers organize voluntary chains of independent retail-
ers to help standardize their selling practices and achieve buying economies in competing with large chain
organizations.
2. Retailer cooperatives—Retailers take the initiative and organize a new business entity to carry on wholesal-
ing and possibly some production. Members concentrate their purchases through the retailer co-op and plan
their advertising jointly, sharing in profits in proportion to their purchases. Nonmember retailers can also buy
through the co-op but do not share in the profits.
3. Franchise organizations—A channel member called a franchisor might link several successive stages in
the production-distribution process. Franchising has been the fastest-growing retailing development in
recent years.
Although the basic idea is an old one, some forms of franchising are quite new. The traditional system is the
manufacturer-sponsored retailer franchise. Ford licenses independent businesspeople to sell its cars who agree
to meet specified conditions of sales and services. Another system is the manufacturer-sponsored wholesaler
franchise. Coca-Cola licenses bottlers (wholesalers) in various markets that buy its syrup concentrate and then
carbonate, bottle, and sell it to retailers in local markets. A newer system is the service-firm-sponsored retailer
franchise, organized by a service firm to bring its service efficiently to consumers. We find examples in auto rental
(Hertz and Avis), fast food (McDonald’s and Burger King), and the motel business (Howard Johnson and Ramada
Inn). In a dual distribution system, firms use both vertical integration (the franchisor actually owns and runs the
units) and market governance (the franchisor licenses the units to other franchisees).62
The new CompeTITIon In reTaIlIng Many independent retailers that have not joined VMSs have
developed specialty stores serving special market segments. The result is a polarization in retailing between large
vertical marketing organizations and independent specialty stores, which creates a problem for manufacturers. They
are strongly tied to independent intermediaries but must eventually realign themselves with the high-growth vertical
marketing systems on less attractive terms. Furthermore, vertical marketing systems constantly threaten to bypass
large manufacturers and set up their own manufacturing. The new competition in retailing is no longer between
independent business units but between whole systems of centrally programmed networks (corporate, administered,
and contractual), competing against one another to achieve the best cost economies and customer response.
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horIzonTal markeTInG sYsTems
Another channel development is the horizontal marketing system, in which two or more unrelated companies
put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the
capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies
might work together on a temporary or permanent basis or create a joint venture company.
For example, many supermarket chains have arrangements with local banks to offer in-store banking. Citizens
Bank has more than 500 branches in supermarkets, making up roughly one-third of its branch network. Citizens’s
staff members in these locations are more sales oriented, younger, and more likely to have some retail sales back-
ground than staff in the traditional brick-and-mortar branches.63
E-Commerce Marketing Practices
E-commerce uses a Web site to transact or facilitate the sale of products and services online. Online retail sales
have exploded, and it is easy to see why. Online retailers can predictably provide convenient, informative, and
personalized experiences for vastly different types of consumers and businesses. By saving the cost of retail floor
space, staff, and inventory, they can also profitably sell low-volume products to niche markets.
While consumers often go online to try to find lower prices,64 online retailers in fact compete in three key
aspects of a transaction: (1) customer interaction with the Web site, (2) delivery, and (3) ability to address problems
when they occur.65
We can distinguish between pure-click companies, those that have launched a Web site without any previous
existence as a firm, and brick-and-click companies, existing companies that have added an online site for informa-
tion or e-commerce.
pure-clIck companIes
There are several kinds of pure-click companies: search engines, Internet service providers (ISPs), commerce
sites, transaction sites, content sites, and enabler sites. Commerce sites sell all types of products and services,
notably books, music, toys, insurance, stocks, clothes, financial services, and so on. They use various strategies to
compete: AutoNation is a leading metamediary of car buying and related services; Hotels.com is the information
leader in hotel reservations; Buy.com leads on price.
e-CommerCe suCCess faCTors Companies must set up and operate their e-commerce Web sites
carefully. Customer service is critical. Online shoppers may select an item for purchase but fail to complete the
transaction. Worse, only 2 percent to 3 percent of visits to online retailers lead to sales, compared with 5 percent of
visits to department stores.66
To improve conversion rates, firms should make the Web site fast, simple, and easy to use. Something as simple
as enlarging product images on screen can increase perusal time and the amount customers buy.67 Some of the
larger e-commerce firms such as eBay and Amazon are offering same-day delivery in major markets.68 A good
return policy is also crucial.69 To drive traffic to a site, many firms employ affiliate marketing, paying online
content providers to drive business to their brands’ sites.70
Consumer surveys suggest that the most significant inhibitors of online shopping are the absence of pleasurable
experiences, social interaction, and personal consultation with a company representative.71 Firms have responded.
Many now offer live online chat to give potential customers immediate advice about products and suggest
additional items. When a representative is active in the sale, the average dollar amount per order is typically higher.
B-to-B marketers also need to put a human face on their e-commerce presence, and some are taking advantage of
technologies such as virtual environments, blogs, online videos, and click-to-chat.
To increase customer satisfaction and the entertainment and information value of online shopping experiences,
some firms are employing avatars, animated characters that act as company representatives, personal shopping
assistants, Web site guides, or conversation partners. Avatars can enhance the effectiveness of an online sales chan-
nel, especially if they are seen as expert or attractive.72
Ensuring security and privacy online remains important. Customers must find the Web site trustworthy, even if
it represents an already highly credible offline firm. Investments in Web site design and security can help reassure
customers sensitive to online risk.73
b-To-b e-CommerCe Although business-to-consumer (B-to-C) Web sites have attracted much attention in
the media, even more activity is being conducted on business-to-business (B-to-B) sites, which are changing the
supplier–customer relationship in profound ways.
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In the past, buyers exerted a lot of effort to gather information about worldwide suppliers. B-to-B sites make
markets more efficient, giving buyers easy access to a great deal of information from (1) supplier Web sites; (2)
infomediaries, third parties that add value by aggregating information about alternatives; (3) market makers, third
parties that link buyers and sellers; and (4) customer communities, where buyers can swap stories about suppliers’
products and services.74
Firms are using B-to-B auction sites, spot exchanges, online product catalogs, barter sites, and other online
resources to obtain better prices. Ironically, the largest of the B-to-B market makers is Alibaba, homegrown in
China where businesses have faced decades of Communist hostility to private enterprise.75
aLIbaba The brainchild of Jack Ma, Alibaba began in 1999 and has grown through the years to become
the world’s largest online marketplace, allowing people and businesses to buy and sell any type of product—from
Fuji apples to Boeing 737s. Its numbers are staggering. The $15 billion company has 500 million registered users
on nine platforms in 220 countries and regions and enjoys about 80 percent of the Chinese e-commerce market.
On Singles’ Day on November 11, 2012—a local twist on Valentine’s Day and China’s biggest online shopping
day—Taoboa (a consumer-to-consumer marketplace) and Tmall (a business-to-consumer marketplace), Alibaba’s
two main platforms, topped $5.75 billion in sales from 400 million unique visitors in 24 hours. More than 10 million
of the 16 million parcels delivered in China each day originate from Taobao and Tmall, so logistics providers are cru-
cial (there are no UPS or FedEx counterparts). A cross between Amazon.com, eBay, Rackspace, and PayPal, Alibaba
makes money primarily from commissions and from advertising by buyers and sellers exchanging goods. To establish
customer trust, the company set up TrustPass, in which users pay Alibaba a fee to hire a third party that verifies
them. Users must have five people vouch for them and provide a list of all their certificates/business licenses. Anyone
who has done business with a user is encouraged to comment, in the same way buyers comment on sellers in
Amazon.com’s or eBay’s marketplace. The company is valued at more than $120 billion, making Yahoo’s 24 percent
stake in it a very wise investment.
The effect of these B-to-B mechanisms is to make prices more transparent. For undifferentiated products, price
pressure will increase. For highly differentiated products, buyers will gain a better picture of the items’ true value.
Suppliers of superior products will be able to offset price transparency with value transparency; suppliers of undif-
ferentiated products will need to drive down their costs in order to compete.
brIck-anD-clIck companIes
Although many brick-and-mortar companies once hesitated to open an e-commerce channel for fear of conflict
with their channel partners, most have added the Internet after seeing how much business was generated
online.76 Even Procter & Gamble, which used traditional physical channels of distribution exclusively for years, is
selling some big brands such as Tide, Pampers, and Olay online via its P&G e-store, in part to be able to examine
consumer shopping habits more closely.77 One study showed that more than a third of Internet users have made
purchases directly from brand Web sites.78
Managing the online and offline channels has thus become a priority for many firms.79 There are at least three
strategies for trying to gain acceptance from intermediaries. One, offer different brands or products online and
offline. Two, offer offline partners higher commissions to cushion the negative impact on sales. Three, take orders
on the Web site but have retailers deliver and collect payment. Harley-Davidson decided to tread carefully before
going online.80
haRLEy-daVIdSOn Given that Harley-Davidson sells more than $1 billion worth of parts and
accessories and general merchandise to its loyal followers—generating roughly one-quarter of its annual revenue—an
online venture to reach even more customers was an obvious next step. The company needed to be careful, however, to
avoid the wrath of its 850 dealers who benefit from high margins on their sales. Its solution was to prompt online custom-
ers to select a participating Harley dealer from which to purchase, ensuring that the dealer remains the focal point of the
customer experience. Dealers, in turn, agreed to a number of standards, such as checking for orders twice a day and
shipping promptly. In-store pickup is also an option, and some products are available only in-store.
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M-Commerce Marketing Practices
Mobile channels and media can keep consumers as connected and interacting with a brand as they choose.
By mid-2013, more than half of all online U.S. buyers had made a purchase on a mobile device, and m-commerce
accounted for more than 11 percent of all e-commerce.81 Tablets are expected to overtake smart phones for
mobile shopping, and one estimate says tablets will make up more than 70 percent of mobile retail sales by 2017.82
In some parts of the world, m-commerce is very well established. Asian consumers use their mobile phones as
their main computers and benefit from a well-developed mobile infrastructure. Mobile ads are well accepted by
consumers and relatively inexpensive for firms. In South Korea, Tesco created virtual subway stores for commuters
traveling on Seoul’s underground transportation system. Interactive, lifelike store aisles with a wide range of prod-
uct and brand images were superimposed on walls. Consumers could order products for home delivery by simply
snapping photos with their phones.83
Millions of Japanese teenagers carry DOCOMO phones available from NTT (Nippon Telephone and
Telegraph), the country’s largest mobile service provider with an ultra-high-speed LTE network. They can also use
their phones to order goods. Each month, subscribers receive a bill from NTT listing the monthly subscriber fee,
usage fee, and cost of all m-commerce transactions.84
Harley-Davidson made
sure to not anger its
loyal dealer network
when it expanded online
distribution for its parts
and accessories and
general merchandise.
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M-commerce is well-
established in South
Korea where virtual stores
have been introduced
into underground subway
stations.
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In the United States, mobile marketing is becoming more prevalent
and taking all forms. It is easy to understand how entertainment, travel,
sporting events, and other time-sensitive categories can benefit from
mobile phone apps, but the impact of m-commerce extends far beyond
these. Consumers and companies are adapting.85 Look at Dunkin’
Donuts.86
dunkIn’ dOnutS An early mobile marketer, Dunkin’
Donuts has refined its DD Perks program as part of its corporate goal to
lead in digital mobility in the QSR (Quick Serve Restaurant) industry. The DD
program was integrated into the company’s unified point-of-sales and mobile
app to reward loyal customers and encourage them to visit more often and
spend more on each visit. The mobile app received 3.5 million downloads
in the first year alone. By constructing a purchase history and profile for
customers, Dunkin’ Donuts can offer more customized and geographically
targeted offers that change as customers go from market to market. The app
includes a store locator feature and lets customers pay for drinks and meals
with a bar code scanned at the point of sale. The company also uses Twitter
to run quick, fun promotions and sweepstakes for its on-the-go customers.
chanGes In cusTomer
anD companY behaVIor
Consumers are fundamentally changing the way they shop in stores,
increasingly using a cell phone to text a friend or relative about a prod-
uct while shopping in stores. Fifty percent of all Google searches are
done on mobile phones.87 Women may use smart phones more than
men in all phases of the shopping experience, making shopping lists
and product wish lists, collecting coupons, and sharing photos of their
purchases.88
Companies are trying to give their customers more control over
their shopping experiences by bringing Web technologies into the store,
especially via mobile apps. Consider these two examples:
• Although Nordstrom expected its app to be used remotely, many customers launched it while shopping in a
store rather than approaching a salesperson. As one executive noted, “A lot of customers like to touch and feel
and try on the merchandise, but they also want the information they get online.” Nordstrom has added Wi-Fi
to almost all its stores, in part so its app will work fast.89
• American Express launched its “Link-Like-Love” social commerce program, which sends cardmembers
couponless personalized offers from merchants based on their Facebook “likes” and Facebook Places check-
ins that are automatically redeemed through card use. Via a partnership with Foursquare, cardmembers
could also automatically receive and redeem promotional offers from merchants based on their Foursquare
activity.90
m-commerce markeTInG pracTIces
Marketers are using a number of new and traditional practices in m-marketing.
adverTIsIng and promoTIon Understanding how consumers want to use their smart phones is
critical to understanding the role of advertising. Given the small screen and fleeting attention paid, fulfilling
advertising’s traditional role of informing and persuading is more challenging for m-commerce marketers. On
the plus side, consumers are more engaged and attentive with their smart phones than when they are online.91
Nevertheless, a number of m-commerce companies are eliminating ads to allow consumers to make purchases
with as few clicks as possible.92
Dunkin’ Donuts is
determined to be
a market leader in
digital mobility for its
products and brands.
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Promotions are a different story. Consumers often use their smart phones to find deals or capitalize on them:
the redemption rate for mobile coupons (10 percent) far exceeds that of paper coupons (1 percent).93 For retailers,
research has shown that mobile promotions can get consumers to travel greater distances within a store and make
more unplanned purchases.94
geofenCIng The idea of geofencing is to target customers with a mobile promotion when they are within
a defined geographical space, typically near or in a store. The local-based service requires just an app and GPS
coordinates, but consumers have to opt in. Consider these applications: 95
• Neiman-Marcus is piloting geofencing in its stores so its salespeople know when their more valuable custom-
ers are on the premises and can look at their purchase history to provide more personalized service.
• Outdoor supplier North Face uses geofences around parks and ski resorts in addition to its stores.
• Cosmetics brand retailer Kiehl’s uses geofencing around its free-standing stores and kiosks within other stores.
It advertises the alerts at its cash register and on social media pages and e-mails list, and it offers customers
a free lip balm for enrolling. Thousands have done so, but the company limits it texts to three per month to
avoid being intrusive.
prIVacY
The fact that a company can pinpoint a customer’s or employee’s location with GPS technology raises privacy
issues. Like so many new technologies, such location-based services have potential for good and harm and will
ultimately warrant public scrutiny and regulation.
Many consumers are happy to tolerate cookies, profiles, and other online tools that let e-commerce businesses
know who they are and when and how they shop, but they are nevertheless concerned when such tracking occurs
in the store. When Nordstrom informed customers it was testing new technology to track customers’ movements
by following the Wi-Fi signals from their smart phones, some consumers objected, leading Nordstrom to drop the
experiment.96
Conflict, Cooperation,
and Competition
No matter how well channels are designed and managed, there will be some conflict, if only because the interests of
independent business entities do not always coincide. Channel conflict is generated when one channel member’s
actions prevent another channel member from achieving its goal. Software giant Oracle Corp., plagued by conflict
between its high-powered sales force and its vendor partners, has tried a number of solutions, including rolling out new
Outdoor supplier North
Face targets customers
with mobile promotions at
parks and ski resorts as
well as near its stores.
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“All Partner Territories” where all deals except for specific strategic accounts go through select Oracle partners and
allowing partners to secure bigger $1 billion-plus accounts.97
Channel coordination occurs when channel members are brought together to advance the goals of the channel
instead of their own potentially incompatible goals.98 Here we examine three questions: What types of conflict
arise in channels? What causes conflict? What can marketers do to resolve it?
TYpes of conflIcT anD compeTITIon
Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers hoping for channel
cooperation and greater profits for each member. Yet horizontal, vertical, and multichannel conflict can occur.
• Horizontal channel conflict occurs between channel members at the same level. Some Pizza Inn franchisees
complained about others cheating on ingredients, providing poor service, and hurting the overall brand
image.
• Vertical channel conflict occurs between different levels of the channel. When Estée Lauder set up a Web site
to sell its Clinique and Bobbi Brown brands, the department store Dayton Hudson reduced the space it gave
the company’s products.99 Greater retailer consolidation—the 10 largest U.S. retailers account for more than
80 percent of the average manufacturer’s business—has led to increased price pressure and influence from
retailers.100 Walmart, for example, is the principal buyer for many manufacturers, including Disney, Procter
& Gamble, and Revlon, and is able to command reduced prices or quantity discounts from these and other
suppliers.101
• Multichannel conflict exists when the manufacturer has established two or more channels that sell to the same
market.102 It’s likely to be especially intense when the members of one channel get a lower price (based on
larger-volume purchases) or work with a lower margin. When Goodyear began selling its popular tire brands
through Sears, Walmart, and Discount Tire, it angered its independent dealers and eventually placated them
by offering exclusive tire models not sold in other retail outlets.
causes of channel conflIcT
Some causes of channel conflict are easy to resolve; others are not. Conflict may arise from:
• Goal incompatibility. The manufacturer may want to achieve rapid market penetration through a low-price
policy. Dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.
• Unclear roles and rights. HP may sell laptops to large accounts through its own sales force, but its licensed
dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce
conflict.
• Differences in perception. The manufacturer may be optimistic about the short-term economic outlook and
want dealers to carry higher inventory, while the dealers may be pessimistic. In the beverage category, it is not
uncommon for disputes to arise between manufacturers and their distributors about the optimal advertising
strategy.
• Intermediaries’ dependence on the manufacturer. The fortunes of exclusive dealers, such as auto dealers, are
profoundly affected by the manufacturer’s product and pricing decisions. This situation creates a high poten-
tial for conflict.
manaGInG channel conflIcT
Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too
much is dysfunctional.103 The challenge is not to eliminate all conflict, which is impossible, but to manage it
better. Verbal reprimands, fines, withheld bonuses, and other remedies can punish a firm in violation and deter
others.104 Table 17.2 lists some mechanisms for effective conflict management that we discuss next.105
Strategic Justification In some cases, a convincing strategic justification that they serve distinctive segments
and do not compete as much as they might think can reduce potential for conflict among channel members.
Developing special versions of products for different channel members—branded variants as described in
Chapter 11—is a clear way to demonstrate that distinctiveness.106
Dual Compensation Dual compensation pays existing channels for sales made through new channels. When
Allstate started selling insurance online, it agreed to pay agents a 2 percent commission for face-to-face service to
customers who got their quotes online. Although lower than the agents’ typical 10 percent commission for offline
transactions, it did reduce tensions.107
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Superordinate Goals Channel members can come to an agreement on the fundamental or superordinate goal
they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually do
this best when the channel faces an outside threat, such as a more efficient competing channel, an adverse piece of
legislation, or a shift in consumer desires.
Employee Exchange A useful step is to exchange persons between two or more channel levels. GM’s executives
might agree to work for a short time in some dealerships, and some dealership owners might work in GM’s dealer
policy department. Thus participants can grow to appreciate each other’s point of view.
Joint Memberships Similarly, marketers can encourage joint memberships in trade associations. Good
cooperation between the Grocery Manufacturers of America and the Food Marketing Institute, which represents
most of the food chains, led to the development of the universal product code (UPC). The associations can
consider issues between food manufacturers and retailers and resolve them in an orderly way.
Co-optation Co-optation is an effort by one organization to win the support of the leaders of another by
including them in advisory councils, boards of directors, and the like. If the organization treats invited leaders
seriously and listens to their opinions, co-optation can reduce conflict, but the initiator may need to compromise
its policies and plans to win outsiders’ support.
Diplomacy, Mediation, and Arbitration When conflict is chronic or acute, the parties may need to resort
to stronger means. Diplomacy takes place when each side sends a person or group to meet with its counterpart
to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two parties’ interests.
In arbitration, two parties agree to present their arguments to one or more arbitrators and accept their decision.
Table 17.2 Strategies to Manage Channel Conflict
Strategic justification
Dual compensation
Superordinate goals
Employee exchange
Joint memberships
Co-optation
Diplomacy, mediation, or arbitration
Legal recourse
Sometimes channel
conflicts have to be
settled by legal recourse
as with Coca-Cola and its
dispute with Walmart over
Powerade.
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Legal Recourse If nothing else proves effective, a channel partner may choose to file a lawsuit.108 When Coca-
Cola decided to distribute Powerade thirst quencher directly to Walmart’s regional warehouses, 60 bottlers
complained the practice would undermine their core direct-store-distribution (DSD) duties and filed suit. A
settlement allowed for the mutual exploration of new service and distribution systems to supplement the DSD
system.109
DIluTIon anD cannIbalIzaTIon
Marketers must be careful not to dilute their brands through inappropriate channels, particularly luxury brands
whose images often rest on exclusivity and personalized service. Calvin Klein and Tommy Hilfiger both took a hit
when they sold too many of their products in discount channels.
Given the lengths to which they go to pamper customers in their stores—with doormen, glasses of champagne,
and extravagant surroundings—luxury brands have had to work hard to provide a high-quality digital experience.
They aren’t forgetting their stores, though, and are increasingly blending the two. Gucci partnered with Samsung
Electronics to create an immersive in-store experience for its timepieces and jewelry that combines physical and
mobile commerce. Stores feature transparent displays that show images on the screen without obscuring the
products behind them and a digital shop-in-shop section where customers can use tablet computers to browse.110
To reach affluent customers who work long hours and have little time to shop, many high-end fashion brands such
as Dior, Louis Vuitton, and Fendi have unveiled e-commerce sites for researching items before visiting a store—and
a means to combat fakes sold online.
leGal anD eThIcal Issues In channel relaTIons
Companies are generally free to develop whatever channel arrangements suit them. The law seeks to prevent only
exclusionary tactics that might keep competitors from using a channel. Here we briefly consider the legality of
certain practices, including exclusive dealing, exclusive territories, tying agreements, and dealers’ rights.
We saw earlier that in exclusive distribution, only certain outlets are allowed to carry a seller’s products, and
that requiring these dealers not to handle competitors’ products is called exclusive dealing. Both channel partners
benefit from exclusive arrangements: The seller obtains more loyal and dependable outlets, and the dealer gets
a steady supply of special products and stronger seller support. Exclusive arrangements are legal as long as they
do not substantially lessen competition or tend to create a monopoly and as long as both parties enter into them
voluntarily.
Exclusive dealing often includes exclusive territorial agreements. The producer may agree not to sell to other
dealers in a given area, or the buyer may agree to sell only in its own territory. The first practice increases dealer
enthusiasm and commitment. It is also perfectly legal—a seller has no legal obligation to sell through more outlets
than it wishes. The second practice, whereby the producer tries to keep a dealer from selling outside its territory,
has become a major legal issue.
Producers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line.
This practice is called full-line forcing. Such tying agreements are not necessarily illegal, but they do violate U.S.
law if they tend to lessen competition substantially.
Producers are free to select their dealers, but their right to terminate them is somewhat restricted. In general,
sellers can drop dealers “for cause,” but not if, for example, a dealer refuses to cooperate in a doubtful legal arrange-
ment, such as exclusive dealing or tying agreements.
3. Companies use intermediaries when they lack the finan-
cial resources to carry out direct marketing, when direct
marketing is not feasible, and when they can earn more
by doing so. The most important functions performed by
intermediaries are information, promotion, negotiation,
ordering, financing, risk taking, physical possession, pay-
ment, and title.
Summary
1. Most producers do not sell their goods directly to final
users. Between producers and final users stands one or
more marketing channels, a host of marketing interme-
diaries performing a variety of functions.
2. Marketing channel decisions are among the most critical
decisions facing management. The company’s chosen
channel(s) profoundly affect all other marketing decisions.
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Applications
Marketing Debate
Does It Matter Where You Sell?
Some marketers feel that the image of the particular chan-
nel in which they sell their products does not matter—all
that matters is that the right customers shop there and the
product is displayed in the right way. Others maintain that
channel images—such as a retail store—can be critical and
must be consistent with the image of the product.
Take a position: Channel images do not much affect
the brand images of the products they sell versus Chan-
nel images must be consistent with the brand image.
Marketing Discussion
Channel Integration
Think of your favorite retailers. How have they integrated
their channel system? How would you like their channels
to be integrated? Do you use multiple channels from
them? Why?
4. Manufacturers have many alternatives for reaching a
market. They can sell direct or use one-, two-, or three-
level channels. Deciding which type(s) of channel to
use calls for analyzing customer needs, establishing
channel objectives, and identifying and evaluating the
major alternatives, including the types and numbers of
intermediaries involved in the channel.
5. Effective channel management calls for selecting inter-
mediaries and training and motivating them. The goal is
to build a long-term partnership that will be profitable for
all channel members.
6. Marketing channels are characterized by continuous
and sometimes dramatic change. Three of the most
important trends are the growth of vertical marketing
systems, horizontal marketing systems, and multichan-
nel marketing systems.
7. E-commerce has become firmly established as more
companies have adopted “brick-and-click” channel
systems. M-commerce (selling via smart phones and
tablets) is also gaining in importance. Some consumers
engage in showrooming by which they shop in stores
to inspect products but buy online later to seek a lower
price.
8. Channel integration must recognize the distinctive
strengths of online, offline, and mobile selling and maxi-
mize their joint contributions.
9. All marketing channels have the potential for conflict and
competition resulting from goal incompatibility, poorly de-
fined roles and rights, perceptual differences, and inter-
dependent relationships. Companies can try to manage
conflict through dual compensation, superordinate goals,
employee exchange, co-optation, and other means.
10. Channel arrangements are up to the company, but cer-
tain legal and ethical issues to be considered include
exclusive dealing or territories, tying agreements, and
dealers’ rights.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
of e-commerce innovations that many executives have
studied and companies have followed.
Amazon initially set out to create personalized store-
fronts for each customer by providing more useful infor-
mation and more choices than found in a neighborhood
bookstore. Readers could review books and evaluate
them on a one- to five-star rating scale, while fellow
browsers could rate the reviews for helpfulness. The
Marketing Excellence
>> Amazon.com
Founded by Jeff Bezos in 1995, Amazon.com started
as the “world’s largest bookstore” and, ironically, owned
no books. Bezos promised to revolutionize retailing,
however, and over the years he has blazed a trail
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In 2013, Amazon.com announced a partnership with
the U.S. Postal Service to begin delivering orders on
Sundays. Bezos also predicted on 60 Minutes that the
company may use drones in the near future to make
same-day delivery of lightweight products within short
distances of distribution warehouses. (Critics find this
unlikely for many reasons, though.)
Amazon has also maintained competitive and low
prices throughout its product expansion. The company
understands how important it is to keep its prices low
in order to drive the volume it needs to remain a market
leader and expand geographically. Amazon’s practice
of selling books at heavily discounted prices, however,
has upset some of its channel partners in publishing,
as have its attempts to become a publisher in its own
right.
From the beginning, Bezos has said that even
though he started an online bookstore, he eventually
wanted to sell everything to everyone through Amazon.
com. The company continues to invest significantly in
technology, is focused on the long term, and has suc-
cessfully positioned itself as a technology company with
its wide range of Amazon Web Services. This growing
collection of infrastructure applications meets the retail-
ing needs of companies of virtually all sizes. Amazon has
successfully reinvented itself time and again and cre-
ated a critical channel for merchants around the world
who are able to reach more than 244 million customers
worldwide.
Questions
1. Why has Amazon succeeded online when so many
other companies have failed?
2. Will the Kindle revolutionize the book industry? Why
or why not?
3. What’s next for Amazon? Where else can it grow?
Sources: “Click to Download,” Economist, August 19, 2006, pp. 57–58; Robert D. Hof, “Jeff
Bezos’ Risky Bet,” BusinessWeek, November 13, 2006; Erick Schonfield, “The Great Giveaway,”
Business 2.0, April 2005, pp. 80–86; Elizabeth West, “Who’s Next?,” Potentials, February 2004,
pp. 7–8; Robert D. Hof, “The Wizard of Web Retailing,” BusinessWeek, December 20, 2004, p.
18; Chris Taylor, “Smart Library,” Time, November 17, 2003, p. 68; Deborah Solomon, “Questions
for Jeffrey P. Bezos,” New York Times, December 2, 2009; Patrick Seitz, “Amazon.com Whiz Jeff
Bezos Keeps Kindling Hot Concepts,” Investors’ Daily Business, December 31, 2009; Alistair Barr,
“Amazon Starts Sunday Delivery with U.S. Postal Service,” USA Today, November 25, 2013; Adam
Lashinsky, “Amazon’s Jeff Bezos: The Ultimate Disrupter,” Fortune, November 16, 2012; Michael
Wolf, “Here’s Why Amazon Drone Package Delivery May Never Happen,” Forbes, December 2,
2013; Holman Jenkins Jr., “Jeff Bezos’s Mysterious Amazon,” Wall Street Journal, December 6,
2013; “Amazon’s Jeff Bezos Looks to the Future,” 60 Minutes, CBS.com, December 1, 2013;
Amazon 2012 Annual Report; George Parker, “Cheap Words,” New Yorker, February 17, 2014.
company’s personal recommendation service aggregated
buying-pattern data to infer who might like which book.
Amazon also introduced its revolutionary one-click shop-
ping, which allowed buyers to make purchases effort-
lessly with a single click.
Amazon started to diversify its product line in the late
1990s, first with DVDs and videos and then with con-
sumer electronics, games, toys, software, video games,
and gifts. The company continued to expand its prod-
uct offerings and in 2007 launched Amazon Video On
Demand, allowing consumers to rent or purchase films
and television shows to watch on their computers or tele-
visions. Later that year, it introduced Amazon MP3, which
competed directly with Apple’s iTunes and had participa-
tion from all the major music labels.
Amazon’s most successful product launch was the
Kindle, its branded electronic book reader that delivered
hundreds of thousands of books, magazines, blogs, and
newspapers in a matter of seconds. As thin as a maga-
zine and light as a paperback, the device has been the
company’s best-selling product since 2009. Today, you
can find virtually anything you want on Amazon.com. The
company has successfully established itself as the big-
gest online retailer in the world by enabling merchants of
all kinds to sell items on the site.
In addition to its core business, Amazon also runs
an “Associates” program that allows independent sell-
ers and businesses to receive commissions for referring
customers to the site in a variety of ways, including direct
links and banner ads as well as Amazon Widgets, mini-
applications that feature the company’s wide selection
of products. Associates can create an Amazon-operated
online store easily, with low risk and no additional cost or
programming knowledge. Fulfillment by Amazon (FBA)
takes care of picking, packing, and shipping the mer-
chant’s products to its customers.
One consistent key to Amazon’s success is its will-
ingness to invest in the latest technology to make shop-
ping online faster, easier, and more personally reward-
ing for its customers and third-party merchants. During
peak season in 2012, the company sold approximately
306 items per second, or 26 million items per day.
Small wonder that it continually looks for ways to im-
prove delivery. For a $99 annual fee, Amazon Prime
provides unlimited free express shipping for millions
of items. While free shipping and price cuts are some-
times unpopular with investors, Bezos believes they
build customer satisfaction, loyalty, and frequency of
purchase orders.
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546 PART 6 | DeliveRing vAlue
specifically liked to buy, rather than general vouchers sent
to all customers. Different lifestyle magazines were created
for different customers. High-value shoppers received calls
from store managers, valet parking when they came to
shop, and other privileges so they would feel special and
continue to be loyal to Tesco. Tesco now has more than
16 million cardholders and sends about 8 million unique
coupon variations with each Clubcard mailing, to ensure
that everybody who gets an offer receives an appropriate
one. The Clubcard data provides Tesco with detailed infor-
mation about customers’ purchasing behavior. In addition
to this data, the company polls around 12,000 custom-
ers in their annual Customer Question Time. They receive
more direct feedback on products, price, quality, service,
and the company’s role within the community.
Stores are designed based on consumers’ needs.
The smallest floor plan, called ‘Express’, is less than
600 square feet and sells only grocery and food items; the
largest ‘Home Plus’ stores are more than 50,000 square
feet in size and sell only non-food items. In 1999, Tesco
opened its online store and online banking initiatives.
In 2000, it opened Tesco.com. Tesco Direct, another
online initiative, sells over 12,500 nonfood products,
guaranteeing next-day delivery for store pickup. It is also
experimenting with “drive-thru” supermarket service for
customers who order through Tesco Direct and can pick
up the items within a two-hour block at designated park-
ing spots without getting out of their cars.
In 2009, Tesco branched out to the iPhone by
launching three different applications. The first allowed
customers to scan their Clubcards using the iPhone’s
camera, so they didn’t have to carry the card on a shop-
ping trip. The second was a Storefinder that allowed
customers to find a nearby Tesco outlet. The third, a wine
application, allowed customers to take a photograph of a
wine they liked, so that they could read product informa-
tion and place an order using the phone.
In 2010, Tesco created a new mobile Web site to facili-
tate easy shopping for non-food and household items using
smart phones. This followed the launch of a grocery appli-
cation that allowed barcode scanning by the iPhone. Using
the mobile Web site, customers can now conveniently
search and buy everything, from televisions to tables to
toys. This initiative is part of a commitment to make Tesco
available to everyone, anywhere, at any time—whether
through the catalog, in-store, online, or by phone.
Tesco also concentrates on providing efficient ser-
vice. Under its “one-in-front” plan, for instance, if there
is more than one customer at a single checkout counter,
another counter will be opened. A number of self-service
Marketing Excellence
>> Tesco
Tesco’s main purpose is to earn a customer’s lifetime
loyalty by creating value. To achieve this goal, the
company has adopted the values of understanding cus-
tomers, being the first to meet their needs, and acting
responsibly in the communities they serve.
Tesco was founded in 1919 by Jack Kohen, who
began to sell surplus groceries from a stall in London’s
East End. On his first day, Kohen had sales of roughly
$6.40 and a profit of $1.60. In fiscal year 2014, Tesco
Group had sales of $111 billion, with a profit before taxes
of $4.78 billion and sales growth of around 1 percent. The
firm employs more than 597,784 people and occupies
41 million square feet of selling space in 12 countries.
Tesco’s success comes from years of building cus-
tomer loyalty through merchandising and pricing strategy.
Over the years, the company has expanded its range
of products and services from simple grocery items to
almost everything, including PCs and peripherals, cam-
eras, phones, home electrical appliances, televisions,
AV equipment, furniture, kitchen appliances, and home
furnishings, so customers can buy everything under one
roof. Tesco also offers services that include petrol sta-
tions, opticians, and pharmacies.
Tesco started expanding overseas in 1995, start-
ing with Hungary, and now has a presence in China,
the Czech Republic, Hungary, India, Japan, Malaysia,
Poland, Ireland, Slovakia, Thailand, and Turkey. In the
United States, it operates under the name Fresh & Easy
Neighborhood Market.
In trying to understand its customers based on their
total spending, Tesco found that the top 100 customers
were worth the same as the bottom 4,000. The bottom
25 percent of customers represented only 2 percent of
sales, whereas the top 5 percent accounted for 20 percent.
This showed the firm that all customers are not equal; as a
result, it started to measure its more valuable customers by
frequency of purchase and value of expenditure.
Tesco began its customer relationship management
program in 1995 by introducing Clubcard, which offered
loyal shoppers points on purchases and small rebates.
Stores captured valuable information with every swipe
of the card and built a powerful customer database that
could show what products customers were and were
not buying, and where they were spending their time in
the store (measured by what they spent their money on).
Clubcard customers received vouchers for items they
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Kingdom? Why or why not? What factors should
it take into account while formulating strategies in
global markets?
2. What are the ways in which Tesco connects with its
customers to provide more value for them?
Sources: “Tesco—The brand experience is everything,” Branding Asia, www.brandingasia.com/
cases/tesco.htm; Tesco, www.tescoplc.com.
checkouts are also available in all stores. With improved
CRM and service, Tesco has become a leading super-
market in the United Kingdom and is now expanding to
other parts of the world.
Questions
1. As Tesco expands overseas, can it succeed by
using the same strategies it has used in the United
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http://www.brandingasia.com/cases/tesco.htm
http://www.brandingasia.com/cases/tesco.htm
http://www.tescoplc.com
548
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In This Chapter, We Will Address
the Following Questions
1. What major types of marketing intermediaries occupy this sector? (p. 549)
2. What major changes are occurring in the modern retail marketing environment
with respect to competitive market structure and technology? (p. 554)
3. What marketing decisions do marketing intermediaries make? (p. 557)
4. What does the future hold for private label brands? (p. 563)
5. What are some of the important issues in wholesaling? (p. 565)
6. What are some important issues in logistics? (p. 567)
With an unconventional marketing
strategy blending fashion, value,
customer experience, and social
responsibility, Warby Parker has made
a splash in the staid eyewear category.
Source: Courtesy of Warby Parker. Photgrapher: Collin
Hughes.
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549
18 Managing Retailing,
Wholesaling, and Logistics
In the preceding chapter, we examined marketing intermediaries primarily from the
viewpoint of manufacturers that want to build and manage marketing channels. In this chapter, we view these
intermediaries—retailers, wholesalers, and logistical organizations—as requiring and forging their own market-
ing strategies in a rapidly changing world. Intermediaries also strive for marketing excellence and can reap the
benefits like any other type of company. Consider the runaway success of Warby Parker.1
Started by four Wharton MBA graduates while they were still in school, lifestyle brand Warby Parker
is challenging eyewear mammoth Luxottica with a marketing strategy that cleverly combines fash-
ion, value, customer experience, and social responsibility. The company designs its own glasses
with a hip if nerdy chic and a fashion ethic that promises, “We will not develop anything that you
will be embarrassed to wear in 20 years.” With material for frames from a family-owned Italian
company, assembly in China, and no middleman, it promises quality comparable to that of well-known designers
at a fraction of the cost. Warby Parker eyeglasses start at $95, with
free shipping, free exchanges, and free returns. To assess fit, custom-
ers can use a virtual try-on tool employing facial recognition technol-
ogy, have up to five sample pairs shipped to try on in person (free of
charge), or visit a retail location. Promoting “eyewear with a purpose,”
Warby Parker works with a non-profit partner to distribute one pair for
every pair sold. To expand reach and engagement beyond its stylish
and easy-to-use Web site, the company has launched shops within
shops in selected cities, a flagship store in the SoHo area of New York
City, and several retail locations across the country. Word of mouth
is critical for the brand—50 percent of Web site traffic comes from
recommendations by friends and family.
The retail market can be unforgiving. While innova-
tive retailers such as Zappos, Sweden’s H&M, Spain’s Zara and
Mango, and Britain’s Topshop have thrived in recent years, oth-
ers such as former U.S. stalwarts JCPenney, Kohl’s, and Kmart
have struggled. The more successful use strategic planning,
state-of-the-art technology, advanced information systems, and
sophisticated marketing tools. They segment their markets,
improve their market targeting and positioning, and connect
with their customers through memorable experiences, relevant
and timely information, and of course the right products and
services. In this chapter, we consider marketing excellence in
retailing, wholesaling, and logistics.
Retailing
Retailing includes all the activities in selling goods or services directly to final consumers for personal, nonbusi-
ness use. A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing.
Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing
retailing. It doesn’t matter how the goods or services are sold (in person, by mail, by telephone, by vending
machine, or online) or where (in a store, on the street, or in the consumer’s home).
Retailing is a fast-moving, challenging industry. Consider the plight of Sears.2
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SearS Sears is a classic U.S. company. It was one of the first to sell goods through a mail-order catalog, and
for more than 100 years, it was one of the strongest department store brands, associated with high-quality merchandise
and responsive customer service. However, in the early 2000s, the company began facing financial difficulties, and to
keep its earnings stable, it started aggressively selling assets and cutting costs. Customers began complaining about
inattentive sales associates, disorganized sales racks, and stores in disrepair. Sears was spending only $2 to $3 per
square foot in annual maintenance and repair of its stores, far less than the $6 to $8 per square foot spent by competitors
Target and Walmart. “[T]hey weren’t keeping [their] promise. Consumers are pretty sophisticated, and they walked into
these stores and it was the same old place . . . without the freshness, the excitement or the interactivity of the experience.”
According to the ACS index of customer satisfaction, in 2012, Sears ranked 10th among 11 Department and Discount
Stores. Given that same-store sales have declined for so many years, many feel Sears’ disillusioned customers may not
be coming back.
At the same time, there are many retailing success stories. “Marketing Memo: Innovative Retail Organizations”
highlights four examples of innovative retail organizations that have experienced market success in recent years.
After reviewing the different types of retailers and some important characteristics of the modern retail marketing
environment, we examine in detail the marketing decisions retailers make.
TYpes of ReTaIleRs
Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail organizations.
Store retailerS Perhaps the best-known type of store retailer is the department store. Japanese department
stores such as Takashimaya and Mitsukoshi attract millions of shoppers each year and feature art galleries,
restaurants, cooking classes, fitness clubs, and children’s playgrounds. The most important types of major store
retailers are summarized in Table 18.1.
Different formats of store retailers will have different competitive and price dynamics. Discount stores, for
example, historically have competed much more directly with each other than with other formats, though that is
Sears has struggled to stay
competitive in the dynamic,
constantly changing world
of retail.
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GameStop. Video game and entertainment software retailer GameStop has more than 6,600 convenient locations in malls and shopping strips all over
the United States, staffed by hard-core gamers who like to connect with customers. The company boasts a trade-in policy that gives credit for an old game
exchanged for a new one. To keep track of the activities of its 25 million customers, it also has a successful data-driven loyalty program, PowerUp Rewards,
which offers reward points and allows members to manage their gaming interests with the online Game Library to showcase games members have had in the
past, that they currently have, and that they wish they had.
Dick’s Sporting Goods. Dick’s Sporting Goods has grown from a single bait-and-tackle store in Binghamton, New York, into the largest U.S.-based full-line
sporting goods retailer, with approximately 574 stores in 44 states. Part of its success springs from the interactive features of its stores. Customers can test
golf clubs in indoor ranges, sample shoes on its footwear track, and shoot bows in its archery range. With an advertising tag line of “Every Season Starts
at Dick’s,” the retailer is also emphasizing the fundamental goal of sports achievement and improvement to establish a stronger emotional connection with
customers.
Lumber Liquidators. Lumber Liquidators is the largest hardwood flooring specialty retailer in the United States, with more than 345 locations. The company
buys excess wood directly from lumber mills at a discount and stocks almost 350 kinds of flooring, about the same as Lowe’s and Home Depot. It sells at lower
prices because it keeps operating costs down by cutting out the middlemen and locating stores in inexpensive locations. Lumber Liquidators also knows a lot
about its customers, such as the fact that shoppers who request product samples have a 30 percent likelihood of buying within a month and that most tend to
renovate one room at a time, not the entire home at once.
Net-a-Porter. London-based Net-a-Porter is an online luxury clothing and accessories retailer whose Web site combines the style of an fashion maga-
zine with the thrill of a chic boutique. Seen by its loyal customers as an authoritative fashion voice, the company publishes its interactive magazine weekly
and stocks more than 300 international brands, including Jimmy Choo, Alexander McQueen, Stella McCartney, Givenchy, and Marc Jacobs, as well as
many up-and-comers. It ships to 170 countries and offers same-day delivery in London and Manhattan; the average order is $250. A new site, Mr. Porter,
targets men.
Sources: GameStop: Steve Peterson, “GameStop Sees Targeted Marketing on the Rise,” www.thealistdaily.com, September 26, 2013; Jeanine Poggi, “GameStop Revamps
Business to Ensure Success in a Digital Future,” Advertising Age, April 9, 2012; Chris Daniels, “GameStop CMO Sees CRM as Key,” Direct Marketing News, October 2011;
Devin Leonard, “GameStop Racks Up the Points,” Fortune, June 9, 2008, pp. 109–22; Dick’s Sporting Goods: “Brand Genius: Lauren Hobart, Chief Marketing Officer,
Dick’s Sporting Goods,” Adweek, September 23, 2013; Matt Townsend, ”Dick’s Channels ‘Rudy’ in New Branding Strategy,” www.bloomberg.com, March 1, 2012; “Dick’s
Sporting Goods Details Growth Strategy to Reach $10 Billion in Sales and 10.5% Operating Margin by the End of Fiscal 2017,” PR Newswire, August 3, 2013; Lumber
Liquidators: Mark Heschmeyer, “Lumber Liquidators Planning to Spruce Up Retail Image, www.costar.com, January 30, 2013; Marilyn Much, “Lumber Liquidators’ New
CEO Helps Drive Sales Surge,” Investor’s Business Daily, May 17, 2012; Helen Coster, “Hardwood Hero,” Forbes, November 30, 2009, pp. 60–62; Net-a-Porter: David
Moth, “How Net-a-Porter Plans to Build on Its Mobile Success in 2013,” www.econsultancy.com, March 18, 2013; Christina Binkley, “Finding an Audience for Edgy Runway
Styles,” Wall Street Journal, March 28, 2012; Paul Sonne, “Richemont to Buy Net-a-Porter,” Wall Street Journal, April 2, 2010; John Brodie, “The Amazon of Fashion,”
Fortune, September 14, 2009, pp. 86–95.
Innovative Retail Organizationsmarketing memo
changing, as we’ll see below.3 Retailers also meet widely different consumer preferences for service levels and spe-
cific services. Specifically, they position themselves as offering one of four levels of service:
1. Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry
out their own “locate-compare-select” process to save money.
2. Self-selection—Customers find their own goods, though they can ask for assistance.
3. Limited service—These retailers carry more shopping goods and services such as credit and merchandise-
return privileges. Customers need more information and assistance.
4. Full service—Salespeople are ready to assist in every phase of the “locate-compare-select” process.
Customers who like to be waited on prefer this type of store. The high staffing cost and many ser-
vices, along with the higher proportion of specialty goods and slower-moving items, result in high-cost
retailing.
NoNStore retailiNg Although the overwhelming bulk of goods and services is sold through stores,
nonstore retailing has been growing much faster than store retailing, especially given e-commerce and m-commerce
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as Chapter 17 outlined. Nonstore retailing falls into four major categories: direct marketing (which includes
telemarketing and online selling), direct selling, automatic vending, and buying services:
1. Direct marketing has roots in direct-mail and catalog marketing (Lands’ End, L.L.Bean); it includes telemarket-
ing (1-800-FLOWERS), television direct-response marketing (HSN, QVC), and online shopping (Amazon.com,
Autobytel.com). People are ordering a greater variety of goods and services from a wider range of Web sites. In the
United States, online sales were estimated to be $225 billion in 2012, approaching 6 percent of total retail sales.4
2. Direct selling, also called multilevel selling and network marketing, is a multibillion-dollar industry, with com-
panies selling door to door or through at-home sales parties. Well-known in such one-to-one selling are Avon,
Electrolux, and Southwestern Company of Nashville (Bibles). Tupperware and Mary Kay Cosmetics are sold
one-to-many: A salesperson goes to the home of a host who has invited friends; the salesperson demonstrates
the products and takes orders. Pioneered by Amway, the multilevel (network) marketing sales system works by
recruiting independent businesspeople who act as distributors. The distributor’s compensation includes a per-
centage of sales made by those he or she recruits as well as earnings on his or her own direct sales to customers.
These direct-selling firms, now finding fewer consumers at home, are developing multi-distribution strategies.
3. Automatic vending offers a variety of merchandise, including impulse goods such as soft drinks, coffee, candy,
newspapers, magazines, and other products such as hosiery, cosmetics, hot food, and paperbacks. Vending
machines are found in factories, offices, large retail stores, gasoline stations, hotels, restaurants, and many
other places. They offer 24-hour selling, self-service, and merchandise that is stocked to be fresh. With more
than 5 million units, Japan has the highest per-capita coverage of vending machines in the world. You can buy
everything from fresh eggs to pet rhinoceros beetles. Coca-Cola has close to 1 million machines there and
annual vending sales of $50 billion—twice its U.S. figures.5
4. Buying service is a storeless retailer serving a specific clientele—usually employees of large organizations—
who are entitled to buy from a list of retailers that have agreed to give discounts in return for membership.
Without question, online nonstore retailing has been exploding and is taking many different forms. Consider
the success of flash-sales Web sites such as Gilt.6
table 18.1 Major Types of Store Retailers
Specialty store: Narrow product line. The Limited, The Body Shop.
Department store: Several product lines. JCPenney, Bloomingdale’s.
Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to meet total needs for food
and household products. Kroger, Safeway.
Convenience store: Small store in residential area, often open 24/7, limited line of high-turnover convenience
products plus takeout. 7-Eleven, Circle K.
Drug store: Prescription and pharmacies, health and beauty aids, other personal care, small durable, miscellaneous
items. CVS, Walgreens.
Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume stores. Walmart, Kmart.
Extreme value or hard-discount store: A more restricted merchandise mix than discount stores but at even lower
prices. Aldi, Lidl, Dollar General, Family Dollar.
Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than retail. Factory outlets;
independent off-price retailers such as TJ Maxx; warehouse clubs such as Costco.
Superstore: Huge selling space, routinely purchased food and household items, plus services (laundry, shoe repair,
dry cleaning, check cashing). Category killer (deep assortment in one category) such as Staples; combination store
such as Jewel-Osco; hypermarket (huge stores that combine supermarket, discount, and warehouse retailing) such
as Carrefour in France.
Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold by catalog at a discount.
Customers pick up merchandise at the store. Inside Edge Ski and Bike.
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GiLt During the recent recession, many designer brands found
themselves with excess inventory they badly needed to move. Third-party
“flash-sales” sites, offering deep discounts for luxury products and other
goods for only a short period of time each day, allowed them to do so in
a controlled manner less likely to hurt their brands. Modeled in part after
France’s flash-sales pioneer Vente-Privée, Gilt was launched in November
2007 to sell fashionable women’s clothing from top designer labels for up
to 60 percent off, but on a limited-time basis and only to those who joined
the online site. Members were alerted of deals and their deadlines via
e-mails that conveyed a sense of immediacy and urgency. Adding luxury
brands such as Theory and Louis Vuitton, the firm grew to more than 8
million members and an estimated value of $1 billion. As the recession
wound down, however, Gilt found itself challenged by dwindling inventory,
growing competition from other sites, and its own aggressive expansion
strategy, which included men’s clothes, kids’ products, home products,
travel packages, and food. The company responded by focusing more on
its core strength in women’s fashion and developing tighter relationships
with customers via personalized e-mails to announce its sales.
Corporate retailiNg aNd FraNChiSiNg Although
many retail stores are independently owned, an increasing number are
part of a corporate retailing organization. These organizations achieve
economies of scale, greater purchasing power, wider brand recognition,
and better-trained employees than independent stores can usually gain
alone. The major types of corporate retailing—corporate chain stores,
voluntary chains, retailer and consumer cooperatives, franchises, and
merchandising conglomerates—are described in Table 18.2.
Franchise businesses such as Hampton, Jiffy-Lube, Subway, Supercuts,
7-Eleven, and many others account for more than 10 percent of busi-
nesses with paid employees in the 295 industries for which franchising data are collected by the U.S. Census Bureau.7
table 18.2 Major Types of Corporate Retail Organizations
Corporate chain store: Two or more outlets owned and controlled, employing central buying and merchandising,
and selling similar lines of merchandise. Gap, Pottery Barn.
Voluntary chain: A wholesaler-sponsored group of independent retailers engaged in bulk buying and common
merchandising. Independent Grocers Alliance (IGA).
Retailer cooperative: Independent retailers using a central buying organization and joint promotion efforts. Unified
Grocers, ACE Hardware.
Consumer cooperative: A retail firm owned by its customers. Members contribute money to open their own store,
vote on its policies, elect a group to manage it, and receive dividends. Local cooperative grocery stores can be found
in many markets.
Franchise organization: Contractual association between a franchisor and franchisees, popular in a number of
product and service areas. Dunkin’ Donuts, Marriott, H&R Block, and The UPS Store.
Merchandising conglomerate: A corporation that combines several diversified retailing lines and forms under
central ownership, with some integration of distribution and management. Federated Department Stores renamed
itself after one of its best-known retailers, Macy’s, but also owns other retailers such as Bloomingdale’s.
Vending machines
can be found almost
anywhere in Japan,
selling almost any
kind of merchandise,
including umbrellas.
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In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic
operations are planned, directed, and controlled by the operation’s innovator, called a franchisor. Franchises are
distinguished by three characteristics:
1. The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments.
2. The franchisee pays for the right to be part of the system. Start-up costs include rental and lease equipment
and fixtures and usually a regular license fee. McDonald’s franchisees typically invest about $1.5 million in total
start-up costs and fees. The franchisee then pays McDonald’s a certain percentage of sales plus a monthly rent.8
3. The franchisor provides its franchisees with a system for doing business. McDonald’s requires franchisees to
attend “Hamburger University” in Oak Brook, Illinois, for two weeks to learn how to manage the business.
Franchisees must follow certain procedures in buying materials.9
Franchising benefits both parties. Franchisors gain the motivation and hard work of employees who are
entrepreneurs rather than “hired hands,” the franchisees’ familiarity with local communities and conditions,
and the enormous purchasing power of being a franchisor. Franchisees benefit from buying into a business with
a well-known and accepted brand name. They find it easier to borrow money for their business from financial
institutions, and they receive support in areas ranging from marketing and advertising to site selection and staffing.
Franchisees do walk a fine line between independence and loyalty to the franchisor. Some franchisors are giving
their franchisees freedom to run their own operations, from personalizing store names to adjusting offerings and
price. Great Harvest Bread believes in a “freedom franchise” approach that encourages its franchisee bakers to
create new items for their store menus and to share with other franchisees if they are successful.10
The ModeRn ReTaIl MaRkeTInG envIRonMenT
The retail marketing environment is dramatically different today from what it was just a decade or so ago. Here we
focus on two areas that have seen enormous change: competitive retail market structure and the role of technology.
Competitive retail market StruCture The retail market is very dynamic, and a number of new
types of competitors and competition have emerged in recent years. Here are five important developments (see
Table 18.3 for a summary).
• New Retail Forms and Combinations. To better satisfy customers’ need for convenience, a variety of new
retail forms have emerged. Bookstores feature coffee shops. Gas stations include food stores. Loblaw’s
Supermarkets have fitness clubs. Shopping malls and bus and train stations have peddlers’ carts in their aisles.
Retailers are also experimenting with “pop-up” stores that let them promote brands to seasonal shoppers for
a few weeks in busy areas. Pop-up stores are designed to create buzz often through interactive experiences.
Internet companies such as Amazon.com and Google use pop-up stores as an easy way to establish a physical
presence during holiday shopping seasons.11
• Growth of Giant Retailers. Through their superior information systems, logistical systems, and buying
power, giant retailers such as Walmart are able to deliver good service and immense volumes of product to
masses of consumers at appealing prices. They are crowding out smaller manufacturers that cannot deliver
enough quantity and often dictate to the most powerful ones what to make, how to price and promote it, when
and how to ship, and even how to improve production and management. Without these accounts, manufac-
turers would lose 10 percent to 30 percent of the market.
Some giant retailers are category killers that concentrate on one product category, such as pet food
(PETCO), home improvement (Home Depot), or office supplies (Staples). Others are supercenters that
combine grocery items with a huge selection of nonfood merchandise (Walmart). With their broad product
assortments, reasonable prices, and convenient service, category killers wiped out many smaller specialty
table 18.3 Recent Retail Developments
• New Retail Forms and Combinations
• Growth of Giant Retailers
• Growth of Intertype Competition
• Emergence of Fast Retailing
• Decline of Middle-Market Retailers
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retailers. The rise of Amazon.com and other online retailers has nullified their advantages, however, and some
category killers such as Borders, Circuit City, and Tweeter have even gone out of business.12
• Growth of Intertype Competition. One consequence of the growth of the supercenters is that department
stores can’t worry just about other department stores—discount chains such as Walmart and Tesco are
expanding into product areas such as clothing, health, beauty, and electrical appliances.13 Supermarkets also
have to worry about these supercenters. Grocery products accounted for 56 percent of Walmart’s U.S. sales in
2012, up from 41 percent just six years ago. The reality is that different types of stores can all compete for the
same consumers by carrying the same type of merchandise.
• Emergence of Fast Retailing. An important trend in fashion retailing in particular, but with broader
implications, is the emergence of fast retailing. Here retailers develop completely different supply chain and
distribution systems to allow them to offer consumers constantly changing product choices. Fast retailing
requires thoughtful decisions in a number of areas, including new product development, sourcing, manufac-
turing, inventory management, and selling practices. As Chapter 12 described, consumers have been attracted
to fast-fashion retailers such as H&M, Zara, Uniqlo, Top Shop, and Forever 21 because of the novelty, value,
and fashion sense of their offerings and have made them successful. Critics, however, pan fast fashion for its
planned obsolescence and the resulting disposability and waste.14
• Decline of Middle-Market Retailers. We can characterize the retail market today as hourglass or dog-bone
shaped: Growth seems to be centered at the top (with luxury offerings from retailers such as Tiffany and Neiman
Marcus) and at the bottom (with discount pricing from retailers such as Walmart and Dollar General). As dis-
count retailers improve their quality and image, consumers have been willing to trade down. Target offers Phillip
Lim, Jason Wu, and Missoni designs, and Kmart sells an extensive line of Joe Boxer underwear and sleepwear. At
the other end of the spectrum, Coach converted 40 of its nearly 300 stores to a more upscale format that offers
higher-priced bags and concierge services. Opportunities are scarcer in the middle, where once-successful retail-
ers like JCPenney, Kohl’s, Sears, CompUSA, RadioShack, and Montgomery Ward have struggled or even gone out
of business. Supermarket chains like Supervalu and Safeway have found themselves caught in the middle between
the affluent appeal of chains like Whole Foods and the discount appeal of Aldi and Walmart. Compounding prob-
lems is the plight of the middle class—the 40 percent of U.S. consumers with annual incomes between $50,000 and
$140,000—who have seen their buying power shrink due to slumping housing prices and stagnating incomes.15
role oF teChNology Technology is profoundly affecting the way retailers conduct virtually every facet
of their business. Almost all now use technology to produce forecasts, control inventory costs, and order from
suppliers, reducing the need to discount and run sales to clear out languishing products.
Technology is also directly affecting the consumer shopping experience inside the store. Electronic shelf label-
ing allows retailers to change price levels instantaneously at need.16 In-store programming on plasma TVs can run
continual demonstrations or promotional messages. Retailers are experimenting with virtual shopping screens,
audio/video presentations, and QR code integration.
For flagship stores in Taipei, Hong Kong, London, and Chicago, Burberry made “virtual rain” with a 360° film,
as part of its digital “Burberry World Live” program showcasing its rain gear. The UK’s Marks & Spencer installed
Many firms set up temporary
pop-up stores to create
special shopping experiences,
especially at Christmas.
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The Growth of Shopper
Marketing
Buoyed by research suggesting that as many as 70 percent to 80
percent of purchase decisions are made inside the store, firms are in-
creasingly recognizing the importance of influencing consumers at the
point of purchase. Shopper marketing is the way manufacturers and
retailers use stocking, displays, and promotions to affect consumers
actively shopping for a product.
Where and how a product is displayed and sold can have a signifi-
cant effect on sales. A strong proponent of shopper marketing, Procter &
Gamble calls the store encounter the “first moment of truth” (product use
and consumption are the second). P&G observed the power of displays
in a Walmart project designed to boost sales of premium diapers such as
Pampers. By creating the first baby center in which infant products—pre-
viously spread across the store—were united in a single aisle, the new
shelf layout encouraged parents to linger longer and spend more money,
increasing Pampers sales. Another successful promotion, this one for
P&G’s Cover Girl cosmetics brand, tapped into a fashion trend for a “smoky
eye” look by developing kits for Walmart and connecting with potential cus-
tomers on Facebook with instructions, blogs, and a photo gallery.
Retailers are also using technology to influence customers as they
shop. Some supermarkets are employing mobile phone apps or “smart
shopping carts” that help customers locate items in the store, find out
about sales and special offers, and pay more easily. One academic
research study found that real-time spending feedback from a smart
shopping cart stimulated budget shoppers to spend more (by buying
more national brands) but led non-budget shoppers to spend less (by
replacing national brands with store brands).
Kraft Foods spinoff Mondele-z uses “smart shelf” technology by put-
ting sensors on shelves near check-out that can detect the age and sex
of a consumer and, by virtue of advanced analytics, target them with ads
and promotions for a likely snack candidate on a video screen.18
Technology is also playing a crucial research role in the design
of shopper marketing programs. Some retailers outfit their aisles with
sensors or use video from security cameras or other means to monitor
shoppers’ movements. Others use infrared goggles or wearable video
cameras to record what test customers actually see. One finding was
that many shoppers ignored products at eye level—the optimal location
was between waist and chest level.
Other academic research found that unplanned purchases in-
creased the more a product is touched, the longer a purchase is consid-
ered, the closer a customer is to the shelf, the fewer the shelf displays in
sight, and the more quickly shoppers can reference external information.
To capitalize on these findings, researchers recommend that retailers put
Quick Response (QR) codes next to products to be scanned with smart
phones. Even the simple act of touching a product on a tablet screen has
been shown in research to increase purchase intent.
Sources: Megan Woolhouse, “Tablets Facilitate Impulse Shopping for Many,” Boston
Globe, December 18, 2013; Elizabeth Dwoskin and Greg Bensinger, “Tracking
Technology Sheds Light on Shopper Habits,” Wall Street Journal, December 9,
2013; S. Adam Brasel and Jim Gips, “Tablets, Touchscreens, and Touchpads: How
Varying Touch Interfaces Trigger Psychological Ownership and Endowment” Journal of
Consumer Psychology 24 (April 2014), pp. 226–33; Koert van Ittersum, Brian Wansink,
Joost M. E. Pennings, and Daniel Sheehan, “Smart Shopping Carts: How Real-Time
Feedback Influences Spending,” Journal of Marketing 77 (November 2013), pp. 21–36;
Barry Silverstein, “Will Mondelez’s ‘Smart Shelves’ Change Retail or Just Add to Privacy
Woes,” www.brandchannel.com, October 13, 2013; Noreen O’Leary, “Shopper
Marketing Goes Mainstream,” Adweek, May 20, 2013, p. 19; Yanliu Huang, Sam K.
Hui, J. Jeffrey Inman, and Jacob A. Suher, “Capturing the ‘First Moment of Truth’:
Understanding Point-of-Purchase Drivers of Unplanned Consideration and Purchase,”
MSI Report 12-101, www.msi.org, 2012; Pat Lenius, “P&G Leverages Facebook to
Enhance Promotions in Walmart,” www.cpgmatters.com, November 2011; Venkatesh
Shankar, “Shopper Marketing: Current Insights, Emerging Trends, and Future
Directions,” MSI Relevant Knowledge Series Book, www.msi.org, 2011; Anthony Dukes
and Yunchuan Liu, “In-Store Media and Distribution Channel Coordination,” Marketing
Science 29 (January–February 2010), pp. 94–107; Richard Westlund, “Bringing
Brands to Life: The Power of In-Store Marketing,” Special Advertising Supplement to
Adweek, January 2010; Pierre Chandon, J. Wesley Hutchinson, Eric T. Bradlow, and
Scott H. Young, “Does In-Store Marketing Work? Effects of the Number and Position
of Shelf Facings on Brand Attention and Evaluation at the Point of Purchase,” Journal
of Marketing Research 73 (November 2009), pp. 1–17; Michael C. Bellas, “Shopper
Marketing’s Instant Impact,” Beverage World, November 2007, p. 18; Michael
Freedman, “The Eyes Have It,” Forbes, September 4, 2006, p. 70.
marketing
insight
Smart shopping carts are just one of the technological innovations
transforming supermarkets.
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virtual mirrors in some of its stores so that, just as on its Web site, customers can see what an eye shadow or lipstick
would look like for them without having to physically put it on.17
After encountering problems measuring store traffic in the aisles—GPS on shopping carts didn’t work because
consumers tended to abandon their carts, and thermal imaging couldn’t tell the difference between babies and
turkeys—bidirectional infrared sensors sitting on store shelves have proven successful. “Marketing Insight: The
Growth of Shopper Marketing” describes the important role technology is taking in the aisles.
Retailers are also developing fully integrated digital communication strategies with well-designed Web sites,
e-mails, search strategies, and social media campaigns. Social media are especially important for retailers during
the holiday season when shoppers are seeking information and sharing successes. For the 2013 holiday season, Toys
“R” Us focused on YouTube; Sears used Instagram and hosted holiday parties on Twitter; Target used Pinterest as
well as six or seven other social media options.19 Beyond the holidays, many retailers are linking to customer photos
supporting their brands on Instagram, Pinterest, and other sites to create social engagement.20
MaRkeTInG decIsIons
With this new retail environment as a backdrop, we now examine retailers’ marketing decisions in some key areas:
target market, channels, product assortment, procurement, prices, services, store atmosphere, store activities and
experiences, communications, and location. We discuss private labels in the next section.
target market Until it defines and profiles the target market, the retailer cannot make consistent decisions
about product assortment, store decor, advertising messages and media, price, and service levels. Whole Foods has
succeeded by offering a unique shopping experience to a customer base interested in organic and natural foods.21
WhOLe FOOdS Market In 284 stores in North America and the United Kingdom, Whole Foods
creates celebrations of food. Its markets are bright and well staffed, and food displays are colorful, bountiful, and seductive.
Whole Foods is the largest U.S. organic and natural foods grocer, offering more than 2,400 items in four lines of private- label
products that add up to 11 percent of sales: the premium Whole
Foods Market, Whole Kitchen, and Whole Market lines and the low-
priced 365 Everyday Value line. Whole Foods also offers lots of in-
formation about its food. If you want to know, for instance, whether
the chicken in the display case lived a happy, free-roaming life,
you can get a 16-page booklet and an invitation to visit the farm in
Pennsylvania where it was raised. For other help, you have only to
ask a knowledgeable and easy-to-find employee. A typical Whole
Foods has more than 200 employees, almost twice as many as
Safeway. The company works hard to create an inviting store at-
mosphere with prices scrawled in chalk, cardboard boxes and ice
everywhere, and other creative display touches to make the shop-
per feel at home. Its approach is working, especially for consumers
who view organic and artisanal food as an affordable luxury. From
1991 to 2009, sales grew at a 28 percent compounded annual
growth rate (CAGR). Although the recession hit the retailer hard, it
did emerge with more double-digit growth.
Mistakes in choosing target markets can be costly. When
historically mass-market jeweler Zales decided to chase up-
scale customers, it replaced one-third of its merchandise,
dropping inexpensive, low-quality diamond jewelry for high-
margin, fashionable 14-karat gold and silver pieces and shift-
ing its ad campaign in the process. The move was a disaster.
Zales lost many of its traditional customers without winning
over the new customers it hoped to attract.22
To better hit their targets, retailers are slicing the market
into ever-finer segments and introducing new lines of stores
Whole Foods selects merchandise and creates a homey in-store atmosphere to ap-
peal to organic and natural foods lovers.
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to exploit niche markets with more relevant offerings: Gymboree launched Janie and Jack, selling apparel and gifts
for babies and toddlers; Hot Topic introduced Torrid, selling fashions for plus-sized teen girls; and Limited Brand’s
Tween Brands began to sell lower-priced fashion to tween girls through its Justice stores and tween boys through
its BROTHER shops.
ChaNNelS Based on a target market analysis and other considerations we reviewed in Chapter 17, retailers
must decide which channels to employ to reach their customers. Increasingly, the answer is multiple channels.
Staples sells through its traditional retail brick-and-mortar channel, a direct-response Internet site, virtual malls,
and thousands of links on affiliated sites.
As Chapter 17 also explained, channels should be designed to work together effectively. Although some experts
predicted otherwise, catalogs have actually grown in an Internet world as more firms have revamped them to use
them as branding devices and to complement online activity.23 Victoria’s Secret’s integrated multichannel approach
of retail stores, catalog, and Internet has played a key role in its brand development.24
VictOria’S Secret Victoria’s Secret, purchased by Limited Brands in 1982, has become one of the
most identifiable brands in retailing through skillful marketing of women’s clothing, lingerie, and beauty products. Most U.S.
women a generation ago did their underwear shopping in department stores and owned few items that could be consid-
ered “lingerie.” After witnessing women buying expensive lingerie as fashion items from small boutiques in Europe, Limited
Brands founder Leslie Wexner felt a similar store model could work on a mass scale in the United States, though such a
store format was unlike anything the average shopper would have encountered amid the bland racks at department stores.
Wexner, however, had reason to believe U.S. women would relish the opportunity to have a European-style lingerie shopping
experience with soft pink wallpaper, inviting fitting rooms, and attractive and attentive staff. “Women need underwear, but
women want lingerie,” he observed. Wexner’s assumption proved correct: A little more than a decade after he bought the
business, Victoria’s Secret’s average customer bought eight to 10 bras per year, compared with the national average of two.
To enhance its upscale reputation and glamorous appeal, the brand is endorsed by high-profile supermodels in ads and
televised fashion show extravaganzas. Victoria’s Secret sells through its stores, Web site, and catalog, mailing 325 million
U.S. catalogs a year at a cost of $200 million. Web and catalog sales account for 25 percent of the company’s $5 billion in
revenue. Overseas expansion is being led by “store within a store” beauty boutiques to reduce risk.
produCt aSSortmeNt The retailer’s product assortment must match the target market’s shopping
expectations in breadth and depth.25 A restaurant can offer a narrow and shallow assortment (small lunch
counters), a narrow and deep assortment (delicatessen), a broad and shallow assortment (cafeteria), or a broad and
deep assortment (large restaurant).
Destination categories may play a particularly important role because they have the greatest impact on where
households choose to shop and how they view a particular retailer. A supermarket could be known for the fresh-
ness of its produce or for the variety and deals its offers in soft drinks and snacks.26
Identifying the right product assortment can be especially challenging in fast-moving industries such as tech-
nology or fashion. At one point, Urban Outfitters ran into trouble when it strayed from its “hip but not too hip”
formula, embracing new styles too quickly.27 On the other hand, active and casual apparel retailer Aéropostale has
succeeded by carefully matching its product assortment to its young teen needs.28
aérOPOStaLe Fourteen- to 17-year-olds, especially those on the young end, often want to look
like other teens. So while Abercrombie and American Eagle might reduce the number of cargo pants on the sales floor,
Aéropostale embraces this key reality of its target market and will keep an ample supply on hand at an affordable price.
Staying on top of the right trends isn’t easy, but the company is among the most diligent of teen retailers when it comes to
consumer research. In addition to running high-school focus groups and in-store product tests, it launched an online pro-
gram that seeks the input of 10,000 of its best customers in creating new styles. An average of 3,500 participate in each
of 20 tests a year. Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing, and selling
all its own merchandise. The company’s products can be purchased only in its own stores and online. Aéropostale has gone
from a lackluster performer with only 100 stores to a powerhouse with more than 1,000 outlets in the United States, Puerto
Rico, and Canada. One hundred new P.S. from Aéropostale stores target 4- to 12-year-olds with a strong value emphasis.
Net sales totaled more than $2.6 billion in 2012, with net sales from e-commerce contributing more than $180 billion.
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The real challenge begins after defining the store’s product assortment, when the retailer must develop a product-
differentiation strategy. Here are some possibilities:
• Feature exclusive national brands not available at competing retailers. Saks might get exclusive rights to
carry the dresses of a well-known international designer.
• Feature mostly private-label merchandise. Benetton and Gap design most of the clothes carried in their
stores. Many supermarket and drug chains carry private-label merchandise.
• Feature blockbuster distinctive-merchandise events. Bloomingdale’s ran a month-long celebration for the
Barbie doll’s 50th anniversary.
• Feature surprise or ever-changing merchandise. Off-price apparel retailer TJ Maxx offers surprise assort-
ments of distress merchandise (goods the owner must sell immediately because it needs cash), overstocks, and
closeouts sourced from more than 16,000 vendors and priced 20 percent to 60 percent below department and
specialty store regular prices online and at its 1000-plus stores.
• Feature the latest or newest merchandise first. Zara excels in and profits from being first to market with
appealing new looks and designs.
• Offer merchandise-customizing services. Harrods of London will make custom-tailored suits, shirts, and ties
for customers in addition to ready-made menswear.
• Offer a highly targeted assortment. Lane Bryant carries goods for the larger woman. Brookstone offers
unusual tools and gadgets for the person who wants to shop in a “toy store for grown-ups.”
Merchandise may also vary by geographical market. Macy’s and Ross Stores employ micro-merchandising and
let managers select a significant percentage of store assortments.29
proCuremeNt After deciding on the product-assortment strategy, the retailer must establish merchandise
sources, policies, and practices. In the corporate headquarters of a supermarket chain, specialist buyers (sometimes
called merchandise managers) are responsible for developing brand assortments and listening to presentations
from their suppliers’ salespeople.
Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock control, space
allocation, and display. They use sophisticated software to track inventory, compute economic order quantities,
order goods, and analyze dollars spent on vendors and products. Supermarket chains use scanner data to manage
their merchandise mix on a store-by-store basis.
Some stores are using radio frequency identification (RFID) systems made up of “smart” tags—microchips
attached to tiny radio antennas—and electronic readers to facilitate inventory control and product replenishment.
The smart tags can be embedded on products or stuck on labels, and when the tag is near a reader, it transmits a
unique identifying number to its computer database. Coca-Cola and Gillette have used them to monitor inventory
and track goods in real time as they move from factories to supermarkets to shopping baskets.30
Apparel retailer Aeropostale
studies its young teen market
carefully as it strives to stock
and display the right product
assortment.
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Stores are using direct product profitability (DPP) to measure a product’s handling costs (receiving, mov-
ing to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse
until a customer buys it in the retail store. They learn to their surprise that the gross margin on a product
often bears little relation to the direct product profit. Some high-volume products may have such high han-
dling costs that they are less profitable and deserve less shelf space than low-volume
products.
ALDI has differentiated itself on its innovative procurement strategy.31
aLdi The ALDI success story started in 1913 with a single small food market in Germany.
Today, ALDI has two divisions, ALDI North and ALDI South, and 9,600 stores in 18 countries.
While other food retailers carry thousands of products, ALDI’s product range is very narrow. With
about 1,000 core products, dominated by ALDI-exclusive private labels, ALDI is very focused on
products with high turnover, which it can source in high quantities at low prices. Logistics, weekly
promotions, and store displays of products in transport boxes are designed to keep costs as low
as possible in order to provide value. Customer perception of ALDI and its products has improved
significantly over the years. High quality at low prices is the brand promise, and ALDI brands have
reached top ratings in many independent product tests. To its suppliers, ALDI is known as a tough
but reliable partner. Price negotiations are known to be very demanding. ALDI also expects suppli-
ers to guarantee high standards of quality, and it constantly monitors quality throughout its whole
supply chain.
priCeS Prices are a key positioning factor and must be set in relationship to the target
market, product-and-service assortment mix, and competition.32 All retailers would like
high turns × earns (high volumes and high gross margins), but the two don’t usually go
together. Most retailers fall into the high-markup, lower-volume group (fine specialty stores)
or the low-markup, higher-volume group (mass merchandisers and discount stores). Within
each of these groups are further gradations.
At one end of the price spectrum is by-appointment-only Bijan on Rodeo Drive in Beverly
Hills, known as the most expensive store in the world. The original cost of its cologne was
$1,500 for six ounces, and its suits are priced at $25,000, ties at $1,200, and socks at $100.33
At the other end of the scale, Target has skillfully combined a hip image with discount prices
to offer customers a strong value proposition. It first introduced a line of products from
ALDI’s unique
procurement strategy
emphasizes a constantly
rotating group of select
private label branded
products.
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Target’s “mass with class” assortment and
pricing strategy features designers like
popular entertainer Gwen Stefani.
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world-renowned designers such as Michael Graves, Isaac Mizrahi, and Liz Lange and has continued to add high-
profile names, such as singer Gwen Stefani to sell hip children’s clothes.34
Most retailers will put low prices on some items to serve as traffic builders (or loss leaders) or to signal their
pricing policies.35 They will run storewide sales. They will plan markdowns on slower-moving merchandise. Shoe re-
tailers, for example, expect to sell 50 percent of their shoes at the normal markup, 25 percent at a 40 percent markup,
and the remaining 25 percent at cost. A store’s average price level and discounting policies will affect its price image
with consumers, but non-price-related factors such as store atmosphere and levels of service also matter.36
As Chapter 16 noted, some retailers such as Walmart have abandoned “sale pricing” in favor of everyday low
pricing (EDLP). EDLP can lead to lower advertising costs, greater pricing stability, a stronger image of fairness and
reliability, and higher retail profits. Supermarket chains practicing everyday low pricing can be more profitable
than those practicing high–low sale pricing, but only in certain circumstances, such as when the market is charac-
terized by many “large basket” shoppers who tend to buy many items on any one trip.37
All retailers are seeking to cut costs to improve margins. Some do so in an environmentally friendly way.
Walmart has cut energy use by more than 50 percent and maintenance by more than 30 percent by painting store
roofs white to reflect sunlight and reduce the use of air conditioning; capturing rain in storage tanks for flushing
toilets and other uses that do not require drinking-quality water; and installing LED lights in parking lots.38
ServiCeS Another differentiator is unerringly reliable customer service, whether face to face, across phone
lines, or via online chat. Retailers must decide on the services mix to offer customers:
• Prepurchase services include accepting telephone and mail orders, advertising, window and interior display,
fitting rooms, shopping hours, fashion shows, and trade-ins.
• Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns, alterations and
tailoring, installations, and engraving.
• Ancillary services include general information, check cashing, parking, restaurants, repairs, interior decorat-
ing, credit, rest rooms, and baby-attendant service.
Due to consumer complaints, many retailers have loosened up their returns policies in recent years. To reduce
any possible impediment to sales and to improve their image with consumers, these firms are also eliminating
restocking fees and extending return periods. Some policies have necessarily stayed in place, though, to combat
frauds such as “wardrobing”—the practice of wearing and then returning clothing items.39 Gift cards remain an-
other popular service offering; consumers spend more than $100 billion on cards annually.40
Store atmoSphere Every store has a look and a physical layout that makes it hard or easy to move around
(see “Marketing Memo: Helping Stores to Sell”). Kohl’s floor plan is modeled after a racetrack loop and is designed
to convey customers smoothly past all the merchandise in the store. It includes a middle aisle that hurried shoppers
can use as a shortcut and yields higher spending levels than many competitors.41
Retailers must consider all the senses in shaping the customer’s experience. Varying the tempo of music affects
average time and dollars spent in the supermarket—slow music can lead to higher sales. Bloomingdale’s uses dif-
ferent essences or scents in different departments: baby powder in the baby store; suntan lotion in the bathing suit
area; lilacs in lingerie; and cinnamon and pine scent during the holiday season. Other retailers such as Victoria’s
Secret and Juicy Couture use their own distinctive branded perfumes, which they also sell.42
Store aCtivitieS aNd experieNCeS The growth of e-commerce has forced traditional brick-and-
mortar retailers to respond. In addition to their natural advantages, such as products that shoppers can actually
see, touch, and test; real-life customer service; and no delivery lag time for most purchases, stores also provide a
shopping experience as a strong differentiator.
The store atmosphere should match shoppers’ basic motivations—if customers are likely to be in a task-oriented
and functional mind-set, then a simpler, more restrained in-store environment may be better.43 On the other hand,
some retailers of experiential products are creating in-store entertainment to attract customers who want fun and
excitement.44 REI, seller of outdoor gear and clothing products, allows consumers to test climbing equipment on
25-foot or even 65-foot walls in the store and to try GORE-TEX raincoats under a simulated rain shower. Bass Pro
Shops also offers rich customer experiences.45
BaSS PrO ShOPS Bass Pro Shops, a retailer of outdoor sports equipment, caters to hunters, campers,
fisherman, boaters, and outdoors fans of any type. Its Outdoor World superstores feature 200,000 square feet or more of
giant aquariums, waterfalls, trout ponds, archery and rifle ranges, fly-tying demonstrations, indoor driving range and put-
ting greens, and classes in everything from ice fishing to conservation—all free. Every department is set up to replicate
the corresponding outdoor experience in support of product demonstrations and testing. During the summer, parents can
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bring their kids to the free in-store Family Summer Camp with a host of activities in all departments. Bass Pro Shops builds
a strong connection to its loyal customers from the moment they enter the store—through a turnstile designed to highlight
that “they are entering an attraction, not just a retail space”—and are greeted by the irreverent sign saying “Welcome
Fishermen, Hunters, and Other Liars.” One hundred and sixteen million people shopped at a Bass Pro Shop in 2012; the
average customer drove more than 50 miles and stayed for more than two hours. The showroom in Missouri—the first and
largest—is the number-one tourist destination in the state.
CommuNiCatioNS Retailers use a wide range of communication tools to generate traffic and purchases.
They place ads, run special sales, issue money-saving coupons, send e-mail promotions, and run frequent-
shopper-reward programs, in-store food sampling, and coupons on shelves or at check-out points. They work with
manufacturers to design point-of-sale materials that reflect both their images. They time the arrival of their e-mails
and design them with attention-grabbing subject lines and animation and personalized messages and advice.
Retailers are also using interactive and social media to pass on information and create communities around their
brands. They study the way consumers respond to their e-mails, not only where and how messages are opened but
In pursuit of higher sales volume, retailers are studying their store environments for ways to improve the shopper experience. Paco Underhill is a pioneer in
that field and managing director of the retail consultant Envirosell, whose clients include McDonald’s, Starbucks, Estée Lauder, Gap, Burger King, CVS, and
Wells Fargo. Using a combination of in-store video recording and observation tracking of as many as 40 different behaviors, Underhill and his colleagues study
50,000 people each year as they shop. He offers the following advice for fine-tuning retail space:
• Attract shoppers and keep them in the store. The amount of time shoppers spend in a store is perhaps the single most important factor in determining
how much they buy. To increase shopping time, give shoppers a sense of community; recognize them in some way; make them comfortable, such as by
providing chairs in convenient locations for spouses, children, or bags; and make the environment both familiar and fresh each time they come in.
• Honor the “transition zone.” On entering a store, people need to slow down and sort out the stimuli, which means they will likely be moving too fast to
respond positively to signs, merchandise, or sales clerks in the zone they cross before making that transition. Make sure there are clear sight lines. Create a
focal point for information within the store. Most right-handed people turn right upon entering a store.
• Avoid overdesign. Store fixtures, point-of-sales information, packaging, signage, and flat-screen televisions can combine to create a visual riot. Use crisp and
clear signage—“Our Best Seller” or “Our Best Student Computer”—located where people feel comfortable stopping and facing the right way. Window signs,
displays, and mannequins communicate best when angled 10 to 15 degrees to face the direction in which people are moving.
• Don’t make them hunt. Put the most popular products up front to reward busy shoppers and encourage leisurely shoppers to look more. At Staples, ink
cartridges are one of the first products shoppers encounter after entering.
• Make merchandise available to the reach and touch. It is hard to overemphasize the importance of customers’ hands. A store can offer the finest, cheapest,
sexiest goods, but if the shopper cannot reach them or pick them up, much of their appeal can be lost.
• Make kids welcome. If kids feel welcome, parents will follow. Take a 3-year-old’s perspective and make sure there are engaging sights at eye level. A virtual
hopscotch pattern or dinosaur on the floor can turn a boring shopping trip for a child into a friendly experience.
• Note that men do not ask questions. Men always move faster than women do through a store’s aisles. In many settings, it is hard to get them to look at
anything they had not intended to buy. Men also do not like asking where things are. If a man cannot find the section he is looking for, typically he will wheel
about once or twice, then leave the store without ever asking for help.
• Remember women need space. A shopper, especially a woman, is far less likely to buy an item if her body is brushed, even lightly, by another customer
when she is looking at a display. Keeping aisles wide and clear is crucial. With women playing an increasingly more significant buying role than men, design-
ing retail experiences to satisfy them is crucial. Cleanliness, control, safety, and consideration are among the important retail decision factors for women.
• Make check-out easy. Be sure to have the right high-margin goods near cash registers to satisfy impulse shoppers. People love to buy candy when they
check out—so satisfy their sweet tooth.
Sources: Paco Underhill, What Women Want: The Science of Female Shopping (New York: Simon & Schuster, 2011); Paco Underhill, Call of the Mall: The Geography of
Shopping (New York: Simon & Schuster, 2004); Paco Underhill, Why We Buy: The Science of Shopping (New York: Simon & Schuster, 1999). See also Gloria Moss, “Time
for Gatherers to Have More Clout in the Boardroom!,” Huffington Post, June 3, 2012; Brian Tarren, “Watchman,” Research, July 17, 2012; Susan Berfield, “Getting the Most
Out of Every Shopper, BusinessWeek, February 9, 2009, pp. 45–46; Kenneth Hein, “Shopping Guru Sees Death of Detergent Aisle,” Brandweek, March 27, 2006, p. 11.
Helping Stores to Sellmarketing memo
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also which words and images led to a click. Macy’s segments customers
into more than a dozen groups and sends different e-mails for different
products.46 Casual dining chain Houlihan’s social network site, HQ, gains
immediate, unfiltered feedback from 10,500 invitation-only “Houlifan”
customers in return for insider information about recipes and redesigns.47
With 15 percent of a retailer’s most loyal customers accounting for
as much as half its sales, reward programs are becoming increasingly
sophisticated. Consumers who choose to share personal information
can receive discounts, secret or advance sales, exclusive offers, and store
credits. CVS has 70 million loyalty club members who can use in-store
coupon centers and receive coupons with their sales receipts.48
Many retailers are using Twitter to connect with customers and send
ads to targeted groups.49 Some local retailers are using digital daily-deal
services from Groupon, LivingSocial, and others, although recently many
have soured on the approach due to a lack of profitability.50
loCatioN The three keys to retail success are often said to be
“location, location, and location.” Department store chains, oil companies,
and fast-food franchisers exercise great care in selecting regions of
the country in which to open outlets, then particular cities, and then
particular sites. Retailers can place their stores in the following locations:
• Central business districts. The oldest and most heavily trafficked
city areas, often known as “downtown”
• Regional shopping centers. Large suburban malls containing 40 to
200 stores, typically featuring one or two nationally known anchor
stores, such as Macy’s or Lord & Taylor or a combination of big-box
stores such as PETCO, Payless Shoes, or Bed Bath & Beyond, and a
great number of smaller stores, many under franchise operation.51
• Community shopping centers. Smaller malls with one anchor store
and 20 to 40 smaller stores
• Shopping strips. A cluster of stores, usually in one long building,
serving a neighborhood’s needs for groceries, hardware, laundry,
shoe repair, and dry cleaning
• A location within a larger store. Smaller concession spaces taken
by well-known retailers like McDonald’s, Starbucks, Nathan’s, and
Dunkin’ Donuts within larger stores, airports, or schools or “store-
within-a-store” specialty retailers located within a department store
such as with Gucci within Neiman Marcus
• Stand-alone stores. Some retailers such as Kohl’s and JCPenney are avoiding malls and shopping centers in
favor of freestanding storefronts so they are not connected directly to other retail stores.
In view of the relationship between high traffic and high rents, retailers must decide on the most advantageous loca-
tions for their outlets, using traffic counts, surveys of consumer shopping habits, and analysis of competitive locations.
Private Labels
A private-label brand (also called a reseller, store, house, or distributor brand) is a brand that retailers and whole-
salers develop. Benetton, The Body Shop, and Marks & Spencer carry mostly own-brand merchandise. In grocery
stores in Europe and Canada, store brands account for as much as 40 percent of the items sold. In Britain, roughly
half of what Sainsbury and Tesco, the largest food chains, sell is store-label goods. Germany and Spain are also
European markets with a high percentage of private-label sales.52
For many manufacturers, retailers are both collaborators and competitors. According to the Private Label
Manufacturers’ Association, store brands now account for one of every five items sold in U.S. supermarkets, drug
chains, and mass merchandisers. In one study, seven of 10 shoppers believed the private-label products they bought
were as good as, if not better than, their national-brand counterparts, and virtually every household purchases private-
label brands from time to time.53 The stakes in private-label marketing are high. A one-percentage-point shift from na-
tional brands to private labels in food and beverages is estimated to add $5.5 billion in revenue for supermarket chains.54
Bass Pro Shops brings outdoor experiences into different departments
of its stores.
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Private labels are rapidly gaining ground in a way that has many manufacturers of name brands running scared.
Recessions increase private-label sales, and once some consumers switch to a private label, they don’t always go
back.55 But some experts believe 50 percent is the natural limit on how much private-label volume to carry because
(1) consumers prefer certain national brands, and (2) many product categories are not feasible or attractive on a
private-label basis. In supermarkets, private labels are big sellers in milk and cheese, bread and baked goods, medi-
cations and remedies, paper products, fresh produce, and packaged meats.56
Role of pRIvaTe labels
Why do intermediaries sponsor their own brands?57 First, these brands can be more profitable. Intermediaries
may be able to use manufacturers with excess capacity that will produce private-label goods at low cost. Other
costs, such as research and development, advertising, sales promotion, and physical distribution, are also much
lower, so private labels can generate a higher profit margin.58 Retailers also develop exclusive store brands to dif-
ferentiate themselves from competitors. Many price-sensitive consumers prefer store brands in certain categories.
These preferences give retailers increased bargaining power with marketers of national brands.
We should distinguish private-label or store brands from generics. Generics are unbranded, plainly packaged,
less expensive versions of common products such as spaghetti, paper towels, and canned peaches. They offer
standard or lower quality at a price that may be as much as 20 percent to 40 percent lower than nationally adver-
tised brands and 10 percent to 20 percent lower than the retailer’s private-label brands. The lower price is made
possible by lower-cost labeling and packaging and minimal advertising and sometimes lower-quality ingredients.
Generics can be found in a wide range of different products, even medicines. Pharma giant Novartis is one of
the world’s top five makers of branded drugs, with such successes as Diovan for high blood pressure and Gleevec
for cancer, but it has also become the world’s second-largest maker of generic drugs following its acquisition of
Sandoz, HEXAL, Eon Labs, and others.59
pRIvaTe-label success facToRs
In the battle between manufacturers’ and private labels, retailers have increasing market power. Because shelf
space is scarce, many supermarkets charge a slotting fee for accepting a new brand to cover the cost of listing and
stocking it. Retailers also charge for special display space and in-store advertising space. They typically give more
prominent display to their own brands and make sure they are well stocked.
Retailers are building better quality into their store brands and emphasizing attractive, innovative packaging.
Supermarket retailers are adding premium store-brand items. When Kroger’s switched to new vendors to supply
better-quality cheeses, meats, and veggies for its upscale private-label pizza, sales soared; the supermarket chain
now owns 60 percent of the premium pizza market in its stores.60 One of the most successful supermarket retailers
with private labels is Canada’s Loblaw.61
LOBLaW Since 1984, when its President’s Choice line of foods made its debut, the term private label has
brought Loblaw instantly to mind. The Toronto-based company’s Decadent Chocolate Chip Cookie quickly became a
Canadian leader and showed how innovative store brands could compete effectively with national brands by matching
or even exceeding their quality. A finely tuned brand strategy for its premium President’s Choice line and its no-frills,
yellow-labeled No Name line (which the company relaunched with a vengeance during the recent recession) has helped
differentiate its stores and built Loblaw into a powerhouse in Canada and the United States. The President’s Choice line
has become so successful that Loblaw is licensing it to noncompetitive retailers in other countries. To complete a “good,
better, best” brand portfolio, Loblaw has also introduced an “affordable luxury” line of more than 200 President’s Choice
food products under a distinctive “Black Label” design. Each one—from eight-year-old cheddar and ginger-spiced choco-
late sauce to bacon marmalade—is marketed with a story about where it’s from, who produces it, and why it was chosen.
To capitalize on the overall strength of its private labels, Loblaw launched a Food Network reality TV show, Recipe to
Riches, where contestants compete to have their homemade recipes developed into an actual President’s Choice product
available to purchase the very next day at Loblaw’s stores.
Although retailers get credit for the success of private labels, the growing power of store brands has also
benefited from the weakening of national brands. Many consumers have become more price sensitive, a trend
reinforced by the continuous barrage of coupons and price specials that has trained a generation to buy on price.
Competing manufacturers and national retailers copy and duplicate the quality and features of the best brands in
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a category, reducing physical product differentiation. Moreover, by cutting marketing communication budgets,
some firms have made it harder to create any intangible differences in brand image. A steady stream of brand
extensions and line extensions has blurred brand identity at times and led to a confusing amount of product
proliferation.
Bucking these trends, many manufacturers or national brands are fighting back. “Marketing Insight:
Manufacturer’s Respond to the Private-Label Threat,” describes the strategies and tactics being taken to compete
more effectively with private labels.62
Wholesaling
Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use. It
excludes manufacturers and farmers because they are engaged primarily in production, and it excludes retailers.
The major types of wholesalers are described in Table 18.4.
Manufacturer’s Response to the
Private-Label Threat
To stay a step ahead of store brands, leading brand marketers are
investing significantly in R&D to bring out new brands, line extensions,
features, and quality improvements. They are also investing in strong
“pull” advertising programs to maintain high brand recognition and con-
sumer preference and to overcome the in-store marketing advantage
private labels can enjoy.
Top-brand marketers also are seeking to partner with major mass
distributors in a joint search for logistical economies and competitive
strategies that produce savings for both sides. Cutting all unnecessary
costs allows national brands to command a price premium, though
price can’t exceed consumers’ perception of value.
Creating strong consumer demand is crucial. When Walmart
decided to pull Hefty and Glad food bags from its shelves, selling just
Ziploc and its own Great Value brand, Hefty and Glad stood to lose
because the retail giant accounted for a third of their sales. When
consumers complained about the loss of these and other brands and
switched some of their shopping to other stores, Walmart relented and
put them back on the shelves.
Effective positioning is crucial. Despite holding a hefty 60 percent
price premium over its private-label competitors, Pepto-Bismol gained
market share during the recession. A clever advertising campaign por-
traying the product as an effective multipurpose “insurance policy” for
gastrointestinal maladies struck a chord with value-minded consumers.
University of North Carolina’s Jan-Benedict E. M. Steenkamp and
London Business School’s Nirmalya Kumar offer four strategic recom-
mendations for manufacturers to compete against or collaborate with
private labels.
• Fight selectively when manufacturers can win against private
labels and add value for consumers, retailers, and shareholders.
This typically occurs when the brand is number one or two in
the category or occupying a premium niche position. Procter &
Gamble rationalized its portfolio, selling off various brands such as
Sunny Delight juice drink, Jif peanut butter, and Crisco shortening,
in part so it could concentrate on strengthening its 20-plus brands
with more than $1 billion in sales.
• Partner effectively by seeking win-win relationships with retailers
through strategies that complement the retailer’s private labels.
Estée Lauder created four brands (American Beauty, Flirt, Good
Skin, and Grassroots) exclusively for Kohl’s to help the retailer
generate volume and protect its more prestigious brands in the
process. Manufacturers selling through hard discounters such as
Lidl and Aldi have increased sales by finding new customers who
have not previously bought the brand.
• Innovate brilliantly with new products to help beat private labels.
Continuously launching incrementally new products keeps the
manufacturer brands looking fresh, but the firm must also peri-
odically launch radically new products and protect the intellectual
property of all brands. Kraft doubled its number of patent lawyers
to make sure its innovations were legally protected as much as
possible.
• Create winning value propositions by imbuing brands with
symbolic imagery as well as functional quality that beats pri-
vate labels. Too many manufacturer brands have let private
labels equal and sometimes better them on functional quality.
In addition, to have a winning value proposition, marketers need
to monitor pricing and ensure that perceived benefits equal the
price premium.
Sources: Tony Fanin, “Brands Still Mean Something at Walmart,” www.bebranded.
wordpress.com, March 22, 2010; Parija Kavilanz, “Dumped! Brand Names Fight to
Stay in Stores,” USA Today, February 16, 2010; Jan-Benedict E. M. Steenkamp
and Nirmalya Kumar, “Don’t Be Undersold,” Harvard Business Review, December
2009, p. 91; Jack Neff, “Pepto Beats Private Label despite 60% Price Premium,”
Wall Street Journal, September 21, 2009; Nirmalya Kumar and Jan-Benedict E.
M. Steenkamp, Private Label Strategy: How to Meet the Store-Brand Challenge
(Boston: Harvard Business School Press, 2007); Nirmalya Kumar, “The Right
Way to Fight for Shelf Domination,” Advertising Age, January 22, 2007; James A.
Narus and James C. Anderson, “Contributing as a Distributor to Partnerships with
Manufacturers,” Business Horizons (September–October 1987).
marketing
insight
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Wholesalers (also called distributors) differ from retailers in a number of ways. First, wholesalers pay less
attention to promotion, atmosphere, and location because they are dealing with business customers rather
than final consumers. Second, wholesale transactions are usually larger than retail transactions, and wholesal-
ers usually cover a larger trade area than retailers. Third, wholesalers and retailers are subject to different legal
regulations and taxes.
Why do manufacturers not sell directly to retailers or final consumers? Why use wholesalers at all? In general,
wholesalers can more efficiently perform one or more of the following functions:
• Selling and promoting. Wholesalers’ sales forces help manufacturers reach many small business customers
at a relatively low cost. They have more contacts, and buyers often trust them more than they trust a distant
manufacturer.
• Buying and assortment building. Wholesalers are able to select items and build the assortments their cus-
tomers need, saving them considerable work.
• Bulk breaking. Wholesalers achieve savings for their customers by buying large carload lots and breaking the
bulk into smaller units.
• Warehousing. Wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and
customers.
• Transportation. Wholesalers can often provide quicker delivery to buyers because they are closer to the buyers.
• Financing. Wholesalers finance customers by granting credit and finance suppliers by ordering early and
paying bills on time.
table 18.4 Major Wholesaler Types
Merchant wholesalers: Independently owned businesses that take title to the merchandise they handle. They are
full-service and limited-service jobbers, distributors, and mill supply houses.
Full-service wholesalers: Carry stock, maintain a sales force, offer credit, make deliveries, provide management
assistance. Wholesale merchants sell primarily to retailers: Some carry several merchandise lines, some carry one or
two lines, others carry only part of a line. Industrial distributors sell to manufacturers and also provide services such
as credit and delivery.
Limited-service wholesalers: Cash and carry wholesalers sell a limited line of fast-moving goods to small retailers
for cash. Truck wholesalers sell and deliver a limited line of semiperishable goods to supermarkets, grocery stores,
hospitals, restaurants, and hotels. Drop shippers serve bulk industries such as coal, lumber, and heavy equipment.
They assume title and risk from the time an order is accepted to its delivery. Rack jobbers serve grocery retailers in
nonfood items. Delivery people set up displays, price goods, and keep inventory records; they retain title to goods and
bill retailers only for goods sold to the end of the year. Producers’ cooperatives assemble farm produce to sell in local
markets. Mail-order wholesalers send catalogs to retail, industrial, and institutional customers; orders are filled and
sent by mail, rail, plane, or truck.
Brokers and agents: Facilitate buying and selling, on commission of 2 percent to 6 percent of the selling price;
limited functions; generally specialize by product line or customer type. Brokers bring buyers and sellers together and
assist in negotiation; they are paid by the party hiring them—food brokers, real estate brokers, insurance brokers.
Agents represent buyers or sellers on a more permanent basis. Most manufacturers’ agents are small businesses with
a few skilled salespeople: Selling agents have contractual authority to sell a manufacturer’s entire output; purchasing
agents make purchases for buyers and often receive, inspect, warehouse, and ship merchandise; commission mer-
chants take physical possession of products and negotiate sales.
Manufacturers’ and retailers’ branches and offices: Wholesaling operations conducted by sellers or buyers
themselves rather than through independent wholesalers. Separate branches and offices are dedicated to sales or
purchasing. Many retailers set up purchasing offices in major market centers.
Specialized wholesalers: Agricultural assemblers (buy the agricultural output of many farms), petroleum bulk plants
and terminals (consolidate the output of many wells), and auction companies (auction cars, equipment, etc., to dealers
and other businesses).
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• Risk bearing. Wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage,
and obsolescence.
• Market information. Wholesalers supply information to suppliers and customers regarding competitors’
activities, new products, price developments, and so on.
• Management services and counseling. Wholesalers often help retailers improve their operations by training
sales clerks, helping with store layouts and displays, and setting up accounting and inventory-control systems.
They may help industrial customers by offering training and technical services.
TRends In WholesalInG
Wholesaler-distributors have faced mounting pressures in recent years from new sources of competition,
demanding customers, new technologies, and more direct-buying programs by large industrial, institutional,
and retail buyers. Manufacturers’ major complaints against wholesalers are: They don’t aggressively promote the
manufacturer’s product line and they act more like order takers; they don’t carry enough inventory and therefore
don’t fill customers’ orders fast enough; they don’t supply the manufacturer with up-to-date market, customer,
and competitive information; they don’t attract high-caliber managers to bring down their own costs; and they
charge too much for their services.
Savvy wholesalers have rallied to the challenge and adapted their services to meet their suppliers’ and target
customers’ changing needs. They recognize that they must add value to the channel. Arrow Electronics has done
just that.63
arrOW eLectrOnicS Arrow Electronics is a global provider of products, services, and solu-
tions to the electronic component and computer product industries. It serves as a supply-channel partner for more than
100,000 original-equipment manufacturers, contract manufacturers, and commercial customers through a global network
of 470 locations in 55 countries and territories. With huge contract manufacturers buying more parts directly from suppliers,
however, distributors like Arrow are being squeezed out. To better compete, the company has embraced services, providing
financing, on-site inventory management, parts-tracking software, and chip programming. Services helped quadruple its
share price over a five-year stretch, and the company topped $21.4 billion in sales in 2013.
Wholesalers have worked to increase asset productivity by better managing inventories and receivables. They’re
also reducing operating costs by investing in more advanced materials-handling technology, information systems,
and the Internet. Finally, they’re improving their strategic decisions about target markets, product assortment and
services, price, communications, and distribution.
Academic experts Jim Narus and Jim Anderson interviewed leading industrial distributors and identified four
ways they strengthened their relationships with manufacturers:64
1. They sought a clear agreement with their manufacturers about their expected functions in the marketing
channel.
2. They gained insight into the manufacturers’ requirements by visiting their plants and attending manufacturer
association conventions and trade shows.
3. They fulfilled their commitments to the manufacturer by meeting the volume targets, paying bills promptly,
and feeding back customer information to their manufacturers.
4. They identified and offered value-added services to help their suppliers.
The wholesaling industry remains vulnerable to one of the most enduring trends—fierce resistance to price
increases and the winnowing out of suppliers based on cost and quality. The trend toward vertical integration, in
which manufacturers try to control or own their intermediaries, is still strong.
Market Logistics
Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points) and transporta-
tion carriers that will deliver the goods to final destinations in the desired time or at the lowest total cost. Physical
distribution has now been expanded into the broader concept of supply chain management (SCM). Supply
chain management starts before physical distribution and includes strategically procuring the right inputs (raw
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materials, components, and capital equipment), converting them efficiently into finished products, and dispatch-
ing them to the final destinations. An even broader perspective looks at how the company’s suppliers themselves
obtain their inputs.
The supply chain perspective can help a company identify superior suppliers and distributors and then help it
improve productivity and reduce costs. Firms with top supply chains include Apple, McDonald’s, Amazon.com,
Unilever, Intel, Procter & Gamble, Cisco Systems, and Samsung Electronics.65 Some companies choose to partner
with and outsource to third-party logistics specialists for help with transportation planning, distribution center
management, and other valued-added services that go beyond shipping and storing.66
Getting the supply chain right can have huge payoffs. In 2005, Whirlpool found itself with a hodgepodge of
warehouses, transport depots, and factory-distribution centers. After a four-year, $600 million investment in a
new state-of-the-art distribution system built from scratch, the company reduced its annual inventory by about
$250 million a year and now realizes a savings of $100 million a year in increased efficiency while being able to
deliver products in 48 to 72 hours.67
Market logistics includes planning the infrastructure to meet demand, then implementing and controlling the
physical flows of materials and final goods from points of origin to points of use to meet customer requirements at
a profit. Market logistics planning has four steps:68
1. Deciding on the company’s value proposition to its customers. (What on-time delivery standard should we
offer? What levels should we attain in ordering and billing accuracy?)
2. Selecting the best channel design and network strategy for reaching the customers. (Should the company
serve customers directly or through intermediaries? What products should we source from which manufac-
turing facilities? How many warehouses should we maintain, and where should we locate them?)
3. Developing operational excellence in sales forecasting, warehouse management, transportation management,
and materials management
4. Implementing the solution with the best information systems, equipment, policies, and procedures
Studying market logistics leads managers to find the most efficient way to deliver value. For example, a software
company traditionally produced and packaged software disks and manuals, shipped them to wholesalers, which
shipped them to retailers, which sold them to customers, who brought them home to download onto their PCs.
Market logistics offered two superior delivery systems. The first let the customer download the software directly
onto his or her computer. The second allowed the computer manufacturer to download the software onto its
products. Both solutions eliminated the need for printing, packaging, shipping, and stocking millions of disks and
manuals and have quickly become the norm of the industries.
InTeGRaTed loGIsTIcs sYsTeMs
The market logistics task calls for integrated logistics systems (ILS), which include materials management,
material flow systems, and physical distribution, aided by information technology (IT). Information systems
play a critical role in managing market logistics, especially via computers, point-of-sale terminals, uniform prod-
uct bar codes, satellite tracking, electronic data interchange (EDI), and electronic funds transfer (EFT). These
developments have shortened the order-cycle time, reduced clerical labor, reduced errors, and provided improved
control of operations. They have enabled companies to promise “the product will be at dock 25 at 10:00 am
tomorrow” and to deliver on that promise.
Market logistics encompass several activities. The first is sales forecasting, on the basis of which the company
schedules distribution, production, and inventory levels. 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. Finished-goods inventory is
the link between customer orders and 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 delivery and service.
Management has become concerned about the total cost of market logistics, which can amount to as much
as 30 to 40 percent of the product’s cost. In the U.S. grocery business, waste or “shrink” affects 8 to 10 percent of
perishable goods, costing $20 billion annually. Stop & Shop, a $16 billion grocery chain, discovered that large,
mountainous displays of fruits and veggies and other perishables don’t necessarily equal more sales. Instead it often
led to spoilage on the shelf, displeasing customers and requiring more staff to sort out the perished items. After an
analysis of the perishable departments, Stop & Shop cut the number of foods on display—8 avocados instead of
24, 4 salmon filets instead of 12, for example—and saved an estimated annual $100 million by reducing shrink and
improving customer satisfaction. 69
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Many experts call market logistics “the last frontier for cost economies,” and firms are determined to wring
every unnecessary cost out of the system: In 1982, logistics represented 14.5 percent of U.S. GDP; by 2012, the
share had dropped to about 8.5 percent.70 Lowering these costs yields lower prices, higher profit margins, or both.
Even though the cost of market logistics can be high, a well-planned program can be a potent tool in competitive
marketing.
Many firms are embracing lean manufacturing, originally pioneered by Japanese firms such as Toyota, to
produce goods with minimal waste of time, materials, and money. CONMED’s disposable devices are used by a
hospital somewhere in the world every 90 seconds to insert and remove fluid around joints during orthoscopic
surgery.71
cOnMed To streamline production, medical manufacturer CONMED set out to link its operations as
closely as possible to the ultimate buyer of its products, applying lean manufacturing and Six Sigma philosophies to
boost productivity, improve its use of floor space, and cut inventory. Rather than moving manufacturing to China, which
might have lowered labor costs but could have also risked long lead times, inventory buildup, and unanticipated delays,
the firm put new production processes into place to assemble its disposable products only after hospitals placed orders.
Some 80 percent of orders were predictable enough that demand forecasts updated every few months could set hourly
production targets. As proof of CONMED’s new efficiency, the assembly area for fluid-injection devices went from cover-
ing 3,300 square feet and stocking $93,000 worth of parts to 650 square feet and $6,000 worth of parts. Output per
worker increased 21 percent. Similarly, its shaver blade factory increased production while decreasing costs by as much
as 30 percent in some cases.
Lean manufacturing must be implemented thoughtfully and monitored closely. Toyota’s crisis in product safety,
which resulted in extensive product recalls, has been attributed in part to the fact that some aspects of lean manu-
facturing—eliminating overlap by using common parts and designs across multiple product lines and reducing the
number of suppliers to procure parts with greater economies of scale—can backfire when quality-control issues
arise.72
MaRkeT-loGIsTIcs objecTIves
Many companies state their market-logistics objective as “getting the right goods to the right places at
the right time for the least cost.” Unfortunately, this objective provides little practical guidance. No sys-
tem can simultaneously maximize customer service and minimize distribution cost. Maximum customer
service implies large inventories, premium transportation, and multiple warehouses, all of which raise
market-logistics costs.
By cutting the number
of perishable fruits and
vegetables on display, Stop
& Shop saves an estimated
$100 million annually.
So
ur
ce
: S
to
p
&
S
ho
p
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Nor can a company achieve market-logistics efficiency by asking each market-logistics manager to minimize
his or her own logistics costs. Market-logistics costs interact and are often negatively related. For example:
• The traffic manager favors rail shipment over air shipment because rail costs less. However, because the
railroads are slower, rail shipment ties up working capital longer, delays customer payment, and might send
customers to competitors who offer faster service.
• The shipping department uses cheap containers to minimize shipping costs. Cheaper containers lead to a
higher rate of damaged goods and customer ill will.
• The inventory manager favors low inventories. This increases stock-outs, back orders, paperwork, special pro-
duction runs, and high-cost, fast-freight shipments.
Given these trade-offs, managers must make decisions on a total-system basis. The starting point is to
study what customers require and what competitors are offering. Customers are interested in on-time deliv-
ery, help meeting emergency needs, careful handling of merchandise, and quick return and replacement of
defective goods.
The wholesaler must then research the relative importance of these service outputs. For example, service-repair
time is very important to buyers of copying equipment. Xerox developed a service delivery standard that “can put a
disabled machine anywhere in the continental United States back into operation within three hours after receiving
the service request.” It then designed a service division of technicians, parts, and locations to deliver on this promise.
The company must also consider competitors’ service standards. It will normally want to match or exceed these,
but the objective is to maximize profits, not sales. Some companies offer less service and charge a lower price; other
companies offer more service and charge a premium price.
The company ultimately must establish some promise it makes to the market. Some companies define stan-
dards for each service factor. One appliance manufacturer promises to deliver at least 95 percent of the dealer’s
orders within seven days of order receipt, to fill them with 99 percent accuracy, to deal with inquiries about order
status within three hours, and to ensure that merchandise damaged in transit does not exceed 1 percent.
MaRkeT-loGIsTIcs decIsIons
The firm must make four major decisions about its market logistics: (1) How should we handle orders (order pro-
cessing)? (2) Where should we locate our stock (warehousing)? (3) How much stock should we hold (inventory)?
and (4) How should we ship goods (transportation)?
order proCeSSiNg Most companies today are trying to shorten the order-to-payment cycle—that is, the
time between an order’s receipt, delivery, and payment. This cycle has many steps, including order transmission by
the salesperson, order entry and customer credit check, inventory and production scheduling, order and invoice
shipment, and receipt of payment. The longer this cycle takes, the lower the customer’s satisfaction and the lower
the company’s profits.
WarehouSiNg Every company must store finished goods until they are sold because production and
consumption cycles rarely match. More stocking locations mean goods can be delivered to customers more
quickly, but warehousing and inventory costs are higher. To reduce these costs, the company might centralize its
inventory in one place and use fast transportation to fill orders. To better manage inventory, many department
stores such as Nordstrom and Macy’s now ship online orders from individual stores.73
Some warehouses are now taking on activities formerly done in the plant, including product assembly, packag-
ing, and construction of promotional displays. Moving these activities to the warehouse can save costs and match
the offerings more closely to demand.
iNveNtory Salespeople would like their companies to carry enough stock to fill all customer orders
immediately. However, this is not cost effective. Inventory cost increases at an accelerating rate as the customer-
service level approaches 100 percent. Management needs to know how much sales and profits would increase as a
result of carrying larger inventories and promising faster order fulfillment times and then make a decision.
As inventory draws down, management must know at what stock level to place a new order. This stock level
is called the order (or reorder) point. An order point of 20 means reordering when the stock falls to 20 units. The
order point should balance the risks of stock-out against the costs of overstock. The other decision is how much to
order. The larger the quantity ordered, the less frequently an order needs to be placed.
The company needs to balance order-processing costs and inventory-carrying costs. Order-processing costs for
a manufacturer consist of setup costs and running costs (operating costs when production is running) for the item.
If setup costs are low, the manufacturer can produce the item often, and the average cost per item is stable and
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equal to the running costs. If setup costs are high, however, the manufacturer can reduce the average cost per unit
by producing a long run and carrying more inventory.
Order-processing costs must be compared with inventory-carrying costs, which include storage charges, cost of
capital, taxes and insurance, and depreciation and obsolescence. Carrying costs might run as high as 30 percent of
inventory value and are higher the larger the average stock carried. This means marketing managers who want to
carry larger inventories need to show that incremental gross profits will exceed incremental carrying costs.
We can determine the optimal order quantity by observing how order-processing costs and inventory-carrying
costs add up at different order levels. Figure 18.1 shows that the order-processing cost per unit decreases as the
number of units ordered increases because the order costs are spread over more units. Inventory-carrying charges
per unit increase with the number of units ordered because each unit remains longer in inventory. We sum the two
cost curves vertically into a total-cost curve and project the lowest point of the total-cost curve on the horizontal
axis to find the optimal order quantity Q*.74
Companies are reducing their inventory costs by treating inventory items differently, keeping slow-moving
items in a central location and carrying fast-moving items in warehouses closer to customers. Managers are also
considering inventory strategies that give them flexibility should anything go wrong, as it often does, whether a
dock strike in California, an earthquake in Japan, or political turmoil in North Africa and the Middle East. In an
interconnected world, one weak link, if not properly managed, can bring down the entire supply chain.75
The ultimate answer to carrying near-zero inventory is to build for order, not for stock. Sony calls it SOMO,
“Sell one, make one.” Dell’s inventory strategy for years has been to get the customer to order a computer and pay
for it in advance. Then Dell uses the customer’s money to pay suppliers to ship the necessary components. As long
as customers do not need the item immediately, everyone can save money. Some retailers are unloading excess
inventory on eBay where, by cutting out the liquidator middleman, they can make 60 to 80 cents on the dollar as
opposed to 10 cents.76 And some suppliers are snapping up excess inventory to create opportunity. 77
caMerOn huGheS “If a winery has an eight-barrel lot, it may only use five barrels for its customers,”
says Cameron Hughes, a wine négociant who buys excess juice from high-end wineries and wine brokers in France, Italy, Spain,
Argentina, South Africa, and California and combines it to make limited-edition, premium blends that taste much more expen-
sive than their price tags. A $100 California Cabernet may sell for $25 a bottle or less under his Lot 500 Napa Valley Cabernet
Savignon label. Négociants have been around a long time, first as intermediaries who sold or shipped wine as wholesalers, but
the profession has expanded as opportunists such as Hughes began making their own wines. Hughes doesn’t own any grapes,
bottling machines, or trucks. He outsources the bottling, and he sells directly to retailers such as Costco, Sam’s Club, and
Safeway, eliminating intermediaries and multiple markups. Hughes never knows which lots of wine he will have or how many, but
he’s turned uncertainty to his advantage—he creates a new product with every batch. Rapid turnover is part of Costco’s appeal
for him. The discount store’s customers love the idea of finding a rare bargain, and Hughes promotes his wines through in-store
wine tastings and insider e-mails about his upcoming numbered lots, which sell out quickly. One thing customers won’t find out
is exactly where the wine comes from. In signing deals Hughes typically has to accept non-disclosure agreements prohibiting
him from naming his sources, though the Cameron Confidential flyer that accompanies each wine may hint at it.
Total cost per unit
Inventory-carrying
cost per unit
Order-processing
cost per unit
Order Quantity
Co
st
p
er
U
ni
t (
do
lla
rs
)
Q*
| Fig. 18.1 |
Determining Optimal
Order Quantity
Cameron Hughes buys
excess juice to make
and sell affordable,
high quality wines to
select merchants.
So
ur
ce
: C
am
er
on
H
ug
he
s
W
in
e
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traNSportatioN Transportation choices affect product pricing, on-time delivery performance, and the
condition of the goods when they arrive, all of which affect customer satisfaction.
In shipping goods to its warehouses, dealers, and customers, a company can choose rail, air, truck, waterway,
or pipeline. Shippers consider such criteria as speed, frequency, dependability, capability, availability, traceability,
and cost. For speed, the prime contenders are air, rail, and truck. If the goal is low cost, then the choice is water or
pipeline.
Shippers are increasingly combining two or more transportation modes, thanks to containerization.
Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transpor-
tation modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail;
and airtruck, air and trucks. Each coordinated mode offers specific advantages. For example, piggyback is cheaper
than trucking alone yet provides flexibility and convenience.
Shippers can choose private, contract, or common carriers. If the shipper owns its own truck or air fleet, it be-
comes a private carrier. A contract carrier is an independent organization selling transportation services to others
on a contract basis. A common carrier provides services between predetermined points on a scheduled basis and is
available to all shippers at standard rates. Some contract carriers are investing and innovating to create strong value
propositions.78
cOntract carrierS With so many transportation options available, firms in those industries
are constantly competing to cut costs, improve services, and offer even more value to their shipping customers. After
10 years and billions of dollars in investment, including $2.5 billion in 2010 alone, Union Pacific saw on-time delivery
on its railroads increase from 30 percent to roughly 90 percent. Improving reliability is also important in ocean ship-
ping. Copenhagen-based Maersk Group is the world’s largest global shipper, with around 550 container ships and
225 tankers. To improve efficiency, the firm in 2014 commissioned 20 of the largest ships ever built. Costing $185
million each, these giant ships can cost-effectively carry 18,000 containers, also emitting 50 percent less CO2 in the
process. Schneider, one of the country’s largest full-truckload freight haulers with more than $3 billion in revenue,
developed a fleet-wide “tactical simulator” that has saved the company tens of millions of dollars. Besides helping
in the crucial day-to-day route scheduling for drivers, the simulator has also helped with specific decisions ranging
from when to raise prices for certain customers to how many drivers to hire (and where). Little changes can make big
differences for shippers. Global logistics leader UPS calculated that by having its drivers use a fob instead of a key
to operate its trucks, it is cutting out on average 1.7 seconds per stop, or 6.5 minutes per day, saving an estimated
$70 million a year in the process.
Union Pacific has invested
billions to improve its
on-time delivery.
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MAnAging ReTAiling, WholesAling, AnD logisTics | chapter 18 573
To reduce costly handing at arrival, some firms are putting items into shelf-ready packaging so they don’t have
to unpack them from a box and place them individually on a shelf. In Europe, P&G has used a three-tier logistic
system to schedule deliveries of fast- and slow-moving goods, bulky items, and small items in the most efficient
way.79 To reduce damage in shipping, the size, weight, and fragility of the item must be reflected in the crating
technique used and the density of foam cushioning.80 With logistics, every little detail must be reviewed to see how
it might be changed to improve productivity and profitability.
Global shipping leader
Maersk commissioned
20 of the largest,
efficient ships ever built.
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ce
: A
.P
. M
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r-
M
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rs
k
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5. As new retail forms have emerged, competition between
them has increased, the rise of giant retailers has been
matched by the decline of middle-market retailers,
investment in technology has grown, and shopper mar-
keting inside stores has become a priority.
6. Like all marketers, retailers must prepare market-
ing plans that include decisions about target markets,
channels, product assortment and procurement, prices,
services, store atmosphere, store activities and experi-
ences, communications, and location.
7. Wholesaling includes all the activities in selling goods or
services to those who buy for resale or business use.
Wholesalers can perform functions better and more
cost-effectively than the manufacturer can. These func-
tions include selling and promoting, buying and assort-
ment building, bulk breaking, warehousing, transpor-
tation, financing, risk bearing, dissemination of market
information, and provision of management services and
consulting.
8. There are four types of wholesalers: merchant wholesal-
ers; brokers and agents; manufacturers’ and retailers’
sales branches, sales offices, and purchasing offices;
and miscellaneous wholesalers such as agricultural
assemblers and auction companies.
Summary
1. Retailing includes all the activities in selling goods or
services directly to final consumers for personal, non-
business use. Retailers can be store retailers, nonstore
retailers, and retail organizations.
2. Retailers pass through stages of growth and decline.
As existing stores offer more services to remain com-
petitive, costs and prices go up, which opens the door
to new retail forms that offer merchandise and ser-
vices at lower prices. The major types of retail stores
are specialty stores, department stores, supermarkets,
convenience stores, discount stores, extreme value or
hard-discount store, off-price retailers, superstores, and
catalog showrooms.
3. Nonstore retailing is growing and includes direct sell-
ing (one-to-one selling, one-to-many party selling, and
multilevel network marketing), direct marketing (which
includes e-commerce and Internet retailing), automatic
vending, and buying services.
4. Retail organizations achieve many economies of scale,
greater purchasing power, wider brand recognition, and
better-trained employees. The major types of corporate
retailing are corporate chain stores, voluntary chains,
retailer cooperatives, consumer cooperatives, franchise
organizations, and merchandising conglomerates.
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9. Like retailers, wholesalers must decide on target
markets, product assortment and services, price, pro-
motion, and place. The most successful are those
that adapt their services to meet suppliers’ and target
customers’ needs.
10. Producers of physical products and services must
decide on market logistics—the best way to store and
move goods and services to market destinations
and to coordinate the activities of suppliers, pur-
chasing agents, manufacturers, marketers, channel
members, and customers. Major gains in logistical
efficiency have come from advances in information
technology.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Should National-Brand Manufacturers
Also Supply Private-Label Brands?
Ralston-Purina, Borden, ConAgra, and Heinz have all admit-
ted at some point to supplying products—sometimes lower
in quality—to be used for private labels. Other marketers,
however, criticize this “if you can’t beat them, join them”
strategy, maintaining that these actions, if revealed, may
create confusion or even reinforce a perception by consum-
ers that all brands in a category are essentially the same.
Take a position: Manufacturers should feel free to sell
private labels as a source of revenue versus National
manufacturers should never supply private labels.
Marketing Discussion
Retail Customer Loyalty
Think of your favorite stores. What do they do that
encourages your loyalty? What do you like about the
in-store experience? What further improvements could
these stores make?
groundbreaking difference from the industry average of
six to nine months. As a result, the company now
makes between 10,000 and 20,000 different items a year,
approximately triple the number made by Gap or H&M.
With this revolutionary step, Zara was able to introduce
“fast fashion” at affordable prices.
Zara’s business model is keenly focused on four stra-
tegic elements:
Design and Production. Zara employs hundreds
of designers at its headquarters in Spain. Thus, new
styles are constantly being created and put into pro-
duction while others are tweaked with various colors
or patterns. The firm enforces the speed at which it
Marketing Excellence
>> Zara
Zara, the Spanish-based company, is Europe’s leading
apparel retailer, providing consumers with current, high-
fashion styles at reasonable prices. With more than $14.5
billion in sales and more than 2,000 stores, the company
has succeeded by breaking virtually every traditional rule
in the retailing industry.
The first Zara store opened in 1975. By the 1980s,
founder Amancio Ortega was working with computer
programmers on a new distribution model to reduce the
time from design to distribution to just two weeks—a
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MAnAging ReTAiling, WholesAling, AnD logisTics | chapter 18 575
high-traffic locations around the world, are its key
advertising element, featuring stylish and con-
stantly changing window displays. Other retailers
spend 3 percent to 4 percent of revenues on big
brand-building campaigns, while Zara spends just
0.3 percent. The company has said it would rather
use a percentage of revenue to open new stores
than to advertise.
Zara’s success comes from having complete control
over all the parts of its business—design, production, and
distribution. Louis Vuitton’s fashion director, Daniel Piette,
described the company as “possibly the most innovative
and devastating retailer in the world.” It has expanded
aggressively throughout Europe as well as into emerg-
ing markets such as Asia, the Americas, and the Middle
East, making sure it honors local tastes in each region.
Zara was a latecomer to the Internet and launched its first
online store only in 2011. However, the company now
uses its Web site to test the waters before entering po-
tential markets like China, Russia, and Canada with retail
storefronts.
While Zara has experience record sales as of late, it
faces unique challenges ahead, including what to do in
the United States, where obesity rates are much higher
than in the rest of the world and roomy clothes are
preferred to the slim fits and high fashion the company
offers. It also needs to decide how to maintain its tight
control on manufacturing as it expands throughout the
world.
Questions
1. Would Zara’s model work for other retailers? Why or
why not?
2. What can Zara do to ensure successful growth
around the world while maintaining the same level of
speed and instant fashion?
Sources: Rachel Tiplady, “Zara: Taking the Lead in Fast-Fashion,” BusinessWeek, April 4, 2006;
enotes.com, Inditex overview; “Zara: A Spanish Success Story,” CNN, June 15, 2001; “Fashion
Conquistador,” BusinessWeek, September 4, 2006; Caroline Raux, “The Reign of Spain,” The
Guardian, October 28, 2002; Kerry Capell, “Zara Thrives by Breaking All the Rules,” BusinessWeek,
October 20, 2008, p. 66; Christopher Bjork, “Zara Is to Get Big Online Push,” Wall Street Journal,
September 17, 2009, p. B8; “Best Global Brands 2013,” Interbrand; Walter Loeb, “Zara’s Secret to
Success: The New Science of Retailing,” Forbes, October 14, 2013; Jessica Sheft-Ason, “Zara to
Launch Online Shopping in September,” Forbes, August 3, 2011; Zara.com; Inditex 2012 Annual
Report.
puts these designs into production by locating half
its production facilities nearby in Spain, Portugal,
and Morocco. It produces only a small quantity of
each collection and is willing to experience occa-
sional shortages to preserve an image of exclusivity.
Clothes with a longer shelf life, like T-shirts, are out-
sourced to lower-cost suppliers in Asia and Turkey.
With tight control on its manufacturing process, Zara
can move more rapidly than any of its competitors
and continues to deliver fresh styles to its stores
every week.
logistics. Zara distributes all its merchandise,
regardless of origin, from Spain. Its distribution
process is designed so that the time from receipt of
an order to delivery in the store averages 24 hours in
Europe and 48 hours in the United States and Asia.
Having 50 percent of its production facilities nearby
is key to the success of this model. All Zara stores
receive new shipments twice a week, and the small
quantities of each collection entice consumers not
only to return frequently but also to make purchase
decisions more quickly. Because of its logistics and
inventory policy, while an average shopper in Spain
visits a main street store three times a year, shoppers
to a Zara store average 17 trips. Some fans know
exactly what day new shipments arrive and show up
early to be the first in line, keeping the company’s
sales strong throughout the year and even during
slow economic times. The company also sells more
products at full price—85 percent of its merchandise
versus the industry average of 60 percent.
customers. Everything revolves around Zara’s
customers. The retailer monitors customers’ chang-
ing needs, trends, and tastes through daily reports
from shop managers about which products and
styles have sold and which haven’t. Managers earn
as much as 70 percent of their salaries from com-
mission, so they have a strong incentive to stay on
top of things. Zara’s designers don’t have to predict
what fashion trends will be in the future. They react
to customer feedback—good and bad—and if an
idea fails, the line is withdrawn immediately. Zara
cuts its losses and the impact is minimal due to the
small quantities of each style produced.
stores. Zara does not run advertising cam-
paigns. The retailer’s stores, in prestigious
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Sometimes a store experienced a new type of lu-
crative customer. For example, in the coastal town of
Baytown, Texas, the local Best Buy observed frequent
visits from Eastern European workers coming off cargo
ships and oil tankers. These men and women used their
precious free time to race over to the store and search the
aisles for Apple’s iPods and laptops, which were cheaper
in the United States than in Europe. To cater to this unique
consumer, the store rearranged its layout, moving iPods,
MacBooks, and their accessories from the back to the
front, and added signage in simple English. The result:
Sales from these European workers increased 67 percent.
Best Buy is hailed for growing into a $50 billion com-
pany virtually through one channel. However, in recent
years, the company has struggled to maintain its retail-
ing dominance. One reason is that consumers no longer
have the same interest in large television sets, comput-
ers, or entertainment centers that took up so much retail
space in years past. In addition, “showrooming” has be-
come a problem, in which consumers visit stores to look,
touch, and test out the products but leave empty-handed
and purchase online instead. In fact, online retailers like
Amazon.com have become Best Buy’s biggest competi-
tors in recent years. The company’s overall market share
in electronics and appliances is 16 percent, but it has
only a 7 percent market share online. In comparison,
Amazon’s overall market share in electronics/appliances
is 4 percent, but it is the market leader online, with a 21
percent market share.
Best Buy has acknowledged that it was slow to
respond to category and channel shifts and was too
focused on a single channel strategy when consumers’
behaviors were changing. As a result, sales slipped, cus-
tomer satisfaction declined, and stock value went with
it. To turn things around, the company hired a new CEO
who implemented a strategic initiative in 2013. “Renew
Blue” was developed to reinvigorate and rejuvenate the
customer experience. Online, Best Buy put a huge em-
phasis on improving the consumer’s experience with
faster and easier navigation tools, more competitive pric-
ing, and relevant product offerings. The company also
started shipping many of its online orders directly from
nearby store locations, which improved delivery time and
inventory turns.
Marketing Excellence
>> Best Buy
Best Buy is the world’s largest multichannel consumer
electronics retailer, with $45 billion in sales in fiscal 2013.
Sales boomed in the 1980s as the company expanded
nationally and made some risky business decisions, like
putting its sales staff on salary instead of commission.
This decision created a more consumer-friendly, low-
pressure shopping atmosphere and resulted in an instant
spike in overall revenues. In the 1990s, Best Buy ramped
up its computer product offerings, and by 1995 it was the
biggest seller of home PCs, a powerful market position
during the Internet boom.
At the turn of the 21st century, Best Buy faced new
retail competitors, including Costco, Walmart, and Target,
which boosted their electronics divisions and product
offerings and often priced lower than Best Buy. The
company believed the best way to differentiate itself from
the competition was to emphasize customer service by
selling product warranties and offering personal services
like home delivery and installation. Its purchase of Geek
Squad, a 24-hour computer service company, proved
profitable and strategically wise as home and small-office
networks became more complex and the need for per-
sonal computing attention increased. By 2004, Best Buy
had placed a Geek Squad station in each of its stores,
providing consumers with personal computing services
in multiple channels: in the stores, online, on the phone,
and at home.
Best Buy also segmented its broad customer base
into a handful of specific targets such as the affluent tech
geek, the busy suburban mom, the young gadget en-
thusiast, and the price-conscious dad. It used extensive
research to determine which segments were the most
abundant and lucrative in each market and configured its
stores and trained its employees to target those shop-
pers. For example, stores targeting affluent tech geeks
offered a separate home theatre department with knowl-
edgeable salespeople on location. Stores with a high vol-
ume of suburban mom shoppers offered personal shop-
ping assistants to help Mom get in and out as quickly as
possible with the exact items she needed.
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Questions
1. What were the keys to Best Buy’s success? What are
the challenges it faces in today’s retail environment?
2. How else can Best Buy compete against retail com-
petitors like Walmart and Costco as well as online
competitors like Amazon.com?
Sources: Jena McGregor, “At Best Buy, Marketing Goes Micro,” Businessweek, May 15, 2008;
Matt Richtel, “Last Man Standing,” The New York Times, July 17, 2009; Matthew Boyle, “Best
Buy’s Giant Gamble,” Fortune, March 29, 2006; Millstein, “Best Buy’s Quest to Master Customer
Centricity,” Chain Store Age, December 2007; Ann Zimmerman, “Best Buy Plays Web Hardball,”
Wall Street Journal, October 12, 2012; Walter Loeb, “Best Buy in Turmoil, Will It Survive?,” Forbes,
August 22, 2012; Paula Rosenblum, “Can Best Buy Survive and Are Its Problems Really All about
Amazon?,” Forbes, August 12, 2013; Margaret Bogenrief, “Best Buy Is Pulling Off an Incredible
Turnaround,” BusinessInsider, July 30, 2013; NPD, Nielsen, Stevenson Traqline, Best Buy internal
analysis, “Renew Blue,” Best Buy Analyst and Investor Day presentation, November 12, 2012;
BestBuy.com, 2012 Annual Report.
Within its 1,477 domestic retail stores, Best Buy
integrated a new optimization layout, which allocated
additional space to growing and more profitable prod-
ucts like smart phones and reduced space for declining
categories like entertainment. The company also plans
to decrease the number of large stores it operates and
increase the number of smaller, mobile stores.
As Best Buy evolves from a single-channel to a
multichannel retailer, it faces many opportunities to grow
its business even further. The U.S. consumer electron-
ics and appliance market is a $228 billion industry, and
the company is making changes to compete better and
capture more market share. With so many storefronts
across the nation, Best Buy has a competitive advantage
and can leverage these assets as it expands into more
channels.
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578
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. What is the role of marketing communications? (p. 580)
2. What is the marketing communications mix? (p. 581)
3. How do marketing communications work? (p. 583)
4. What are the major steps in developing effective communications? (p. 586)
5. How should the communications mix be set and evaluated? (p. 595)
6. What is an integrated marketing communications program? (p. 599)
Oreo has become a truly global brand by creatively
communicating its message of “togetherness” and
“milk’s favorite cookie” in markets around the world.
Source: ASSOCIATED PRESS
Communicating ValuePart 7
Chapter 19 Designing and Managing Integrated Marketing Communications
Chapter 20 Managing Mass Communications: Advertising, Sales Promotions, Events and Experiences,
and Public Relations
Chapter 21 Managing Digital Communications: Online, Social Media, and Mobile
Chapter 22 Managing Personal Communications: Direct and Database Marketing and Personal Selling
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579
19 Designing and Managing
Integrated Marketing
Communications
Modern marketing calls for more than developing a good product, pricing it attractively,
and making it accessible. Companies must also communicate with present and potential stakeholders and the
general public. For most marketers, therefore, the question is not whether to communicate but rather what to
say, how and when to say it, to whom, and how often. Consumers can turn to hundreds of cable and satellite
TV channels, thousands of magazines and newspapers, and millions of Internet pages, and they are actively
deciding what communications they want to receive. To effectively reach and influence target markets, holistic
marketers are creatively employing multiple forms of communications. Consider what Mondele-z International
has done in building a global cookie brand.1
Oreo’s global brand positioning focuses on “milk’s favorite cookie” and “moments of togetherness”
using different communications in different countries. In the United States, the highly successful
“Celebrate the Kid Inside” campaign was buoyed by celebrations of the brand’s 100th anniversary.
Ads and in-store contests created a birthday party atmosphere and focused on the “twist, lick, and
dunk” method of eating Oreos with milk. The 100-day “Daily Twist” promotion paired the brand in
online and print ads with various cultural images, icons, and events, such as Elvis Presley week, the Mars Rover, Gay
Pride week, and Bastille Day. The Oreo birthday page on Facebook received 25 million likes, and U.S. sales increased
25 percent. When a power outage darkened the stadium during the
Super Bowl in February 2013 for more than half an hour, a tweet for
the brand was quickly sent—“Power Out? No problem. You can still
dunk in the dark.”—that became the social media talk of the game. In
India, launch ads featured a father and son in the “twist, lick, and dunk”
ritual. Parents there used social media to sign an “Oreo Togetherness
Pledge” promising to spend more quality time with their children. An
Oreo Togetherness Bus roamed the country providing a platform for
parents and children to catch fun family moments. Through these vari-
ous comunications in different markets, Oreo is establishing a strong
global positioning.
Done right, marketing communications can have
a huge payoff. This chapter describes how they work and
what they can do for a company. It also addresses how holis-
tic marketers combine and integrate marketing communica-
tions. Chapter 20 examines mass communications including
advertising, sales promotion, and public relations, Chapter 21
looks at digital communications like online, social media, and
mobile marketing, and Chapter 22 explores personal com-
munications including direct and database marketing and
personal selling.
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580 PART 7 | CommuniCATing VAlue
The Role of Marketing
Communications
Marketing communications are the means by which firms attempt to inform, persuade, and remind consumers—
directly or indirectly—about the products and brands they sell. In a sense, they represent the voice of the com-
pany and its brands; they are a means by which the firm can establish a dialogue and build relationships with
consumers. By strengthening customer loyalty, they can contribute to customer equity.
Marketing communications also work by showing consumers how and why a product is used, by whom,
where, and when. Consumers can learn who makes the product and what the company and brand stand for,
and they can become motivated to try or use it. Marketing communications allow companies to link their
brands to other people, places, events, brands, experiences, feelings, and things. They can contribute to brand
equity—by establishing the brand in memory and creating a brand image—as well as drive sales and even
affect shareholder value.2
The ChanGInG MarkeTInG CoMMunICaTIons
envIronMenT
Technology and other factors have profoundly changed the way consumers process communications, and even
whether they choose to process them at all. The rapid diffusion of powerful smart phones, broadband and
wireless Internet connections, and ad-skipping digital video recorders (DVRs) have eroded the effectiveness
of the mass media. In 1960, a company could reach 80 percent of U.S. women with one 30-second commercial
aired simultaneously on three TV networks: ABC, CBS, and NBC. Today, the same ad would have to run on 100
channels or more to achieve this marketing feat. “Marketing Insight: Don’t Touch That Remote” describes some
developments in television advertising.
Don’t Touch That Remote
That consumers have more power in the marketplace is perhaps no-
where more evident than in television broadcasting, where digital video
recorders (DVRs) allow viewers to watch shows when they want and to
skip past ads with a push of the fast-forward button. More than half the
U.S. adults who subscribe to a multichannel video service have a DVR,
and of viewers who use them, between 60 percent and 70 percent fast-
forward through commercials (the others either like ads, don’t mind
them, or can’t be bothered to skip them).
Is that all bad? Surprisingly, research shows that while focusing
on an ad in order to fast-forward through it, consumers actually retain
and recall a fair amount of information. The most successful ads in
fast-forward mode were those consumers had already seen, that used
familiar characters, and that didn’t have lots of scenes. It also helped to
have brand-related information in the center of the screen, where view-
ers’ eyes focus while skipping through. Although consumers are still
more likely to recall an ad the next day if they’ve watched it live, some
brand recall occurs even after an ad is deliberately skipped.
Another challenge marketers have long faced is viewers’
tendency to switch channels during commercial breaks. Recently,
however, Nielsen, which handles television program ratings, has
begun to offer ratings for specific ads. Before, advertisers had to pay
for air time based on the rating of the program, even if as many as
5 percent to 15 percent of consumers temporarily tuned away. Now
they can pay based on the size of the actual audience available when
their ad is shown. To increase viewership during commercial breaks,
the major broadcast and cable networks are shortening breaks and
delaying them until viewers are more likely to be engaged in
a program.
A newer challenge for marketers is the time-shifted viewing DVRs
permit as more consumers put themselves in charge of their TV sched-
ule. Nielsen now includes Live+3 and Live+7 ratings to capture viewing
that occurs three or seven days after initial airing. For some programs
and time slots, adding in delayed viewership can make a big difference
in the size of the audience.
Sources: Merrill Barr, “In a World of DVR Monsters, Do Time Slots Still Matter?,”
Forbes, November 1, 2013; “Over Half of Multi-Channel Video Households Have
a DVR,” www.leichtmanresearch.com, November 30, 2012; Andrew O’Connell,
“Advertisers: Learn to Love the DVR,” Harvard Business Review, April 2010, p.
22; Erik du Plesis, “Digital Video Recorders and Inadvertent Advertising Exposure,”
Journal of Advertising Research 49 (June 2009); S. Adam Brasel and James Gips,
“Breaking Through Fast-Forwarding: Brand Information and Visual Attention,”
Journal of Marketing 72 (November 2008), pp. 31–4; Kenneth C. Wilbur, “How
Digital Video Recorder Changes Traditional Television Advertising,” Journal of
Advertising 37 (Summer 2008), pp. 143–49.
marketing
insight
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Designing AnD mAnAging inTegRATeD mARkeTing CommuniCATions | chapter 19 581
But even as some marketers flee traditional media, they still encounter challenges. Commercial clutter is
rampant. The average city dweller is exposed to an estimated 3,000 to 5,000 ad messages a day. Short-form video
content and ads appear at gas stations, grocery stores, doctors’ offices, and big-box retailers.
Marketing communications in almost every medium and form have been on the rise, and some consumers
feel they are increasingly invasive. Marketers must be creative in using technology but not intrude in consumers’
lives. One agency that has proven to be a master at building brands and driving sales for its clients in this new
digital era is AKQA.3
AKQA Established in 2001, AKQA (standing for “All Known Questions Answered”) has emerged as one
of the premier digital ad agencies by virtue of its creative strategies for clients like Visa, Xbox, Clorox, and others.
An online ad for Audi took the visual point of view of the dashboard of a car on Halloween night to show the value
of the Audi A6’s “thermal imaging night vision assistant” as a safety feature that helped drivers avoid hard-to-see
trick-or-treaters. The ad was so well received online that it also ran on prime-time network TV. For Heineken, AKQA
created the award-winning Star Player game, which leveraged the brand’s UEFA Champions League soccer spon-
sorship. Using a smart phone or the brand’s Facebook page, soccer fans could simultaneously watch a televised
match, play the game in real time to predict what would happen next in the match, and publish their results on
Twitter and Facebook. For its long-time client Nike, AKQA has created a variety of apps and games, such as one
to help launch Nike+ Kinect for home fitness training. The agency also produced an attention-getting online short
featuring singer Ellie Golding and her song “Run into the Light” to promote the performance and social benefits of
running with Nike+.
Marketing Communications Mix
In this new communication environment, although advertising is often a central element of a marketing commu-
nications program, it is usually not the only one—or even the most important one—for sales and building brand
and customer equity. Mondelēz International is partnering with nine digital start-ups to gain an advantage in that
area, committing to spend 10 percent of its marketing budget on mobile.4 To engage its diverse audience, GE uses
an in-house content marketing and social media team to play the role of “storyteller” and explain the company’s
activities on a variety of online platforms.5
Ocean Spray—an agricultural cooperative of cranberry growers—has used a variety of communication vehicles
to turn sales around.6
Heineken and its digital
ad agency AKQA have
worked together to
leverage their UEFA
Champions League
soccer sponsorship.
So
ur
ce
: i
m
ag
o
sp
or
tf
ot
od
ie
ns
t/
N
ew
sc
om
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582 PART 7 | CommuniCATing VAlue
OceAn SPrAy Facing stiff competition, adverse consumer trends, and nearly
a decade of declining sales, Ocean Spray COO Ken Romanzi and Arnold Worldwide decided to
reintroduce the cranberry as the “surprisingly versatile little fruit that supplies modern-day ben-
efits,” through a true 360-degree campaign that used all facets of marketing communications to
reach consumers in a variety of settings. The intent was to support the full range of products—
cranberry sauce, fruit juices, and dried cranberries in different forms—and leverage the fact that
the brand was born in the cranberry bogs and remained there still. The agency decided to tell an
authentic, honest, and perhaps surprising story dubbed “Straight from the Bog.” The campaign
was designed to also reinforce two key brand benefits—that Ocean Spray products tasted good
and were good for you. PR played a crucial role. Miniature bogs were brought to Manhattan
and featured on an NBC Today morning segment. A “Bogs across America Tour” brought the
experience to Los Angeles and Chicago. Television and print advertising featured two growers
(depicted by actors) standing waist-deep in a bog and talking, often humorously, about what
they did. The campaign also included a Web site, in-store displays, and events for consumers
and for members of the growers’ cooperative itself. Product innovation was crucial too; new
flavor blends were introduced, along with a line of 100 percent juices, diet and light versions,
and Craisins sweetened dried cranberries. Since then, famed chef Ming Tsai appeared in a
pop-up restaurant in New York’s Rockefeller Center, and a leap year promotion urged consumers
to “leap” to Craisins. The campaign hit the mark, lifting sales an average of 10 percent in its first
five years despite continued decline in the fruit juice category.
The marketing communications mix consists of eight major modes of
communication:7
1. Advertising—Any paid form of nonpersonal presentation and promotion of ideas,
goods, or services by an identified sponsor via print media (newspapers and maga-
zines), broadcast media (radio and television), network media (telephone, cable,
satellite, wireless), electronic media (audiotape, videotape, videodisk, CD-ROM,
Web page), and display media (billboards, signs, posters).
2. Sales promotion—A variety of short-term incentives to encourage trial or purchase of a product or service
including consumer promotions (such as samples, coupons, and premiums), trade promotions (such as adver-
tising and display allowances), and business and sales force promotions (contests for sales reps).
3. Events and experiences—Company-sponsored activities and programs designed to create daily or special
brand-related interactions with consumers, including sports, arts, entertainment, and cause events as well as
less formal activities.
4. Public relations and publicity—A variety of programs directed internally to employees of the company or
externally to consumers, other firms, the government, and media to promote or protect a company’s image or
its individual product communications.
5. Online and social media marketing—Online activities and programs designed to engage customers or pros-
pects and directly or indirectly raise awareness, improve image, or elicit sales of products and services.
6. Mobile marketing—A special form of online marketing that places communications on consumer’s cell
phones, smart phones, or tablets.
7. Direct and database marketing—Use of mail, telephone, fax, e-mail, or Internet to communicate directly with
or solicit response or dialogue from specific customers and prospects.
8. Personal selling—Face-to-face interaction with one or more prospective purchasers for the purpose of mak-
ing presentations, answering questions, and procuring orders.
Table 19.1 lists examples of these platforms, but company communication goes beyond these. The product’s
styling and price, the shape and color of the package, the salesperson’s manner and dress, the store décor, and the
company’s stationery all communicate something to buyers. Every brand contact delivers an impression that can
strengthen or weaken a customer’s view of a company.8
As Chapter 1 noted, communication options appear in paid media (traditional outlets such as TV, print, direct
mail), owned media (company-controlled options such as Web sites, blogs, mobile apps, social media) and earned
media (virtual or real-world word of mouth, press coverage).
Ocean Spray’s fully integrated “Straight from the
Bog” communication program showcased miniature
bogs in big cities.
So
ur
ce
: P
ho
to
c
ou
rt
es
y
of
O
ce
an
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pr
ay
C
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nb
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rie
s,
In
c.
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Designing AnD mAnAging inTegRATeD mARkeTing CommuniCATions | chapter 19 583
How Do Marketing Communications
Work?
Marketing communication activities in every medium contribute to brand equity and drive sales in many ways:
by creating brand awareness, forging brand image in consumers’ memories, eliciting positive brand judgments or
feelings, and strengthening consumer loyalty. The way brand associations are formed does not matter. Whether
a consumer has a strong, favorable, and unique brand association of Subaru with “outdoors,” “active,” and “rug-
ged” because of a TV ad that shows the car driving over rough terrain or because Subaru sponsors ski, kayak, and
mountain bike events, the impact in terms of Subaru’s brand equity should be identical.
Table 19.1 Examples of the Eight Common Communication Platforms
Advertising Sales Promotion Events and
Experiences
Public Relations
and Publicity
Online and
Social Media
Marketing
Mobile
Marketing
Direct and
Database
Marketing
Personal
Selling
Print and
broadcast ads
Contests, games,
sweepstakes,
lotteries
Sports Press kits Web sites Text messages Catalogs Sales
presentations
Packaging–
outer
Premiums and
gifts
Entertainment Speeches E-mail Online marketing Mailings Sales
meetings
Packaging
inserts
Sampling Festivals Seminars Search ads Social media
marketing
Telemarketing Incentive
programs
Cinema Fairs and trade
shows
Arts Annual reports Display ads Electronic
shopping
Samples
Brochures and
booklets
Exhibits Causes Charitable
donations
Company blogs TV shopping Fairs and
trade shows
Posters and
leaflets
Demonstrations Factory tours Publications Third-party chat
rooms, forums,
and blogs
Fax
Directories Coupons Company
museums
Community
relations
Facebook and
Twitter messages,
YouTube channels
and videos
Catalogs
Reprints of
ads
Rebates Street
activities
Lobbying
Billboards Low-interest
financing
Identity media
Display signs Trade-in
allowances
Company
magazine
Point-of-
purchase
displays
Continuity
programs
DVDs Tie-ins
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584 PART 7 | CommuniCATing VAlue
But marketing communications activities must be integrated to deliver a consistent message and achieve the
strategic positioning. The starting point in planning them is a communication audit that profiles all interactions
customers in the target market may have with the company and all its products and services. For example, some-
one interested in purchasing a new smart phone might talk to friends and family members, see television ads, read
articles, look for information online, and look at smart phones in a store.
To implement the right communications programs and allocate dollars efficiently, marketers need to assess
which experiences and impressions will have the most influence at each stage of the buying process. Armed with
these insights, they can judge marketing communications according to their ability to affect experiences and
impressions, build customer loyalty and brand equity, and drive sales. For example, how well does a proposed
ad campaign contribute to awareness or to creating, maintaining, or strengthening brand associations? Does a
sponsorship improve consumers’ brand judgments and feelings? Does a promotion encourage consumers to buy
more of a product? At what price premium?
In building brand equity, marketers should be “media neutral” and evaluate all communication options
on effectiveness (how well does it work?) and efficiency (how much does it cost?). Chrysler’s gamble with
an unconventional campaign for Dodge Durango is one marketing communication program that appeared
to pay off.9
DODge DurAngO To promote its 2013 Dodge Durango, Chrysler chose actor Will Ferrell in char-
acter as Ron Burgundy to create an ad coinciding with the release of Ferrell’s Anchorman sequel. Paramount Productions,
Wieden + Kennedy ad agency, and Funny or Die’s Web site production company collaborated to shoot dozens of commer-
cials for TV and short films for the Internet of the classy but clueless 1970s-era anchorman admiring the modern features
of the new Durango. In one spot, Burgundy touts the glove box as being “comfortable enough to hold two turkey sandwiches
or 70 packs of gum.” A tongue-in-cheek “Hands on Ron Burgundy” online promotion rewarded those consumers who
could “touch” Ron Burgundy by following a moving circle with their cursor or smart-phone button. After the campaign was
launched, Web traffic shot up 80 percent with each video earning millions of views. Purchase intent rose 100 percent, and
sales increased by almost 60 percent.
The CoMMunICaTIons ProCess Models
Marketers should understand the fundamental elements of effective communications. Two models are useful: a
macromodel and a micromodel.
MacroModel of The coMMunicaTions Process Figure 19.1 shows a macromodel with nine
key factors in effective communication. Two represent the major parties—sender and receiver. Two represent the
An unconventional
marketing communication
campaign for Dodge
Durango featuring actor
Will Ferrell helped
increase sales.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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Designing AnD mAnAging inTegRATeD mARkeTing CommuniCATions | chapter 19 585
major tools—message and media. Four represent major communication functions—encoding, decoding, response,
and feedback. The last element in the system is noise, random and competing messages that may interfere with the
intended communication.
Senders must know what audiences they want to reach and what responses they want to get. They must
encode their messages so the target audience can successfully decode them. They must transmit the message
through media that reach the target audience and develop feedback channels to monitor the responses. The
more the sender’s field of experience overlaps that of the receiver, the more effective the message is likely to
be. Note that selective attention, distortion, and retention processes—first introduced in Chapter 6—may be
operating.
MicroModel of consuMer resPonses Micromodels of marketing communications concentrate
on consumers’ specific responses to communications.10 Figure 19.2 summarizes four classic response hierarchy
models.
All these models assume the buyer passes through cognitive, affective, and behavioral stages in that order. This
“learn-feel-do” sequence is appropriate when the audience has high involvement with a product category perceived
to have high differentiation, such as an automobile or house. An alternative sequence, “do-feel-learn,” is relevant
when the audience has high involvement but perceives little or no differentiation within the product category, such
as airline tickets or personal computers. A third sequence, “learn-do-feel,” is relevant when the audience has low
involvement and perceives little differentiation, such as with salt or batteries. By choosing the right sequence, the
marketer can do a better job of planning communications.
SENDER Encoding Decoding
ResponseFeedback
Noise
RECEIVERMessage
Media
| Fig. 19.1 |
Elements in the
Communications
Process
Stages
AIDA
Modela
Hierarchy-of-Effects
Modelb
Innovation-Adoption
Modelc
Models
Communications
Modeld
Cognitive
Stage Attention
Awareness
Awareness
Exposure
Knowledge Cognitive response
Reception
Affective
Stage
Liking Attitude
Conviction
Interest
Desire Intention
Preference
Interest
Evaluation
Behavior
Stage
BehaviorPurchaseAction
Trial
Adoption
| Fig. 19.2 |
Response Hierarchy
Models
Sources: aE. K. Strong, The Psychology of
Selling (New York: McGraw-Hill, 1925),
p. 9; bRobert J. Lavidge and Gary A. Steiner,
“A Model for Predictive Measurements
of Advertising Effectiveness,” Journal of
Marketing (October 1961), p. 61; cEverett M.
Rogers, Diffusion of Innovation (New York: Free
Press, 1962), pp. 79–86; dvarious sources.
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586 PART 7 | CommuniCATing VAlue
Let’s assume the buyer has high involvement with the product category and perceives high differentiation
within it. We will illustrate the hierarchy-of-effects model (the second column of Figure 19.2) in the context of a
marketing communications campaign for a small Iowa college named Pottsville:
• Awareness. If most of the target audience is unaware of the object, the communicator’s task is to build aware-
ness. Suppose Pottsville seeks applicants from Nebraska but has no name recognition there, though 30,000
Nebraska high school juniors and seniors could be interested in it. The college might set the objective of mak-
ing 70 percent of these students aware of its name within one year.
• Knowledge. The target audience might have brand awareness but not know much more. Pottsville may
want its target audience to know it is a private four-year college with excellent programs in English, foreign
languages, and history. It needs to learn how many people in the target audience have little, some, or much
knowledge about Pottsville. If knowledge is weak, Pottsville may select brand knowledge as its communica-
tions objective.
• Liking. Given target members know the brand, how do they feel about it? If the audience looks unfavorably
on Pottsville College, the communicator needs to find out why. In the case of real problems, Pottsville will
need to fix these and then communicate its renewed quality. Good public relations calls for “good deeds fol-
lowed by good words.”
• Preference. The target audience might like the product but not prefer it to others. The communicator must
then try to build consumer preference by comparing quality, value, performance, and other features to those
of likely competitors.
• Conviction. A target audience might prefer a particular product but not develop a conviction about buying
it. The communicator’s job is to build conviction and intent to apply among students interested in Pottsville
College.
• Purchase. Finally, some members of the target audience might have conviction but not quite get around to mak-
ing the purchase. The communicator must lead these consumers to take the final step, perhaps by offering the
product at a low price, offering a premium, or letting them try it out. Pottsville might invite selected high school
students to visit the campus and attend some classes, or it might offer partial scholarships to deserving students.
To see how fragile the communication process is, assume the probability of each of the six steps being suc-
cessfully accomplished is 50 percent. The laws of probability suggest that the likelihood of all six steps occurring
successfully, assuming they are independent events, is .5 × .5 × .5 × .5 × .5 × .5, which equals 1.5625 percent. If the
probability of each step’s occurring were, on average, a more likely 10 percent, then the joint probability of all six
events occurring drops to 0.0001 percent—or only 1 chance in 1,000,000!
To increase the odds of success for a communications campaign, marketers must attempt to increase the likeli-
hood that each step occurs. For example, the ideal ad campaign would ensure that:
1. The right consumer is exposed to the right message at the right place and at the right time.
2. The ad causes the consumer to pay attention but does not distract from the intended message.
3. The ad properly reflects the consumer’s level of understanding of and behaviors with the product and the brand.
4. The ad correctly positions the brand in terms of desirable and deliverable points-of-difference and
points-of-parity.
5. The ad motivates consumers to consider purchase of the brand.
6. The ad creates strong brand associations with all these stored communications effects so they can have an
impact when consumers are considering making a purchase.
The challenges in achieving success with communications necessitate careful planning, a topic we turn to next.
Developing Effective Communications
Figure 19.3 shows the eight steps in developing effective communications. We begin with the basics: identifying
the target audience, setting the communication objectives, designing the communications, selecting the commu-
nication channels, and establishing the total marketing communications budget.
IdenTIfY The TarGeT audIenCe
The process must start with a clear target audience in mind: potential buyers of the company’s products,
current users, deciders, or influencers, as well as individuals, groups, particular publics, or the general
public. The target audience is a critical influence on the communicator’s decisions about what to say,
how, when, where, and to whom.
Manage integrated
marketing
communications
Measure
results
Decide on
media mix
Establish
budget
Select
channels
Design
communications
Determine
objectives
Identify target
audience
| Fig. 19.3 |
Steps in Developing
Effective
Communications
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Designing AnD mAnAging inTegRATeD mARkeTing CommuniCATions | chapter 19 587
Though we can profile the target audience in terms of any of the market segments identified in Chapter 9, it’s
often useful to do so in terms of usage and loyalty. Is the target new to the category or a current user? Is the target
loyal to the brand, loyal to a competitor, or someone who switches between brands? If a brand user, is he or she
a heavy or light user? Communication strategy will differ depending on the answers. We can also conduct image
analysis by profiling the target audience in terms of brand knowledge.
seT The CoMMunICaTIons objeCTIves
As we showed with Pottsville College, marketers can set communications objectives at any level of the hierarchy-
of-effects model. John Rossiter and Larry Percy identify four possible objectives:11
1. Establish need for category—Establishing a product or service category as necessary for removing or
satisfying a perceived discrepancy between a current motivational state and a desired motivational state.
A new-to-the-world product such as electric cars will always begin with a communications objective of
establishing category need.
2. Build brand awareness—Fostering the consumer’s ability to recognize or recall the brand in sufficient detail
to make a purchase. Recognition is easier to achieve than recall—consumers asked to think of a brand of fro-
zen entrées are more likely to recognize Stouffer’s distinctive orange packages than to recall the brand. Brand
recall is important outside the store; brand recognition is important inside the store. Brand awareness pro-
vides a foundation for brand equity.
3. Build brand attitude—Helping consumers evaluate the brand’s perceived ability to meet a currently relevant
need. Relevant brand needs may be negatively oriented (problem removal, problem avoidance, incomplete
satisfaction, normal depletion) or positively oriented (sensory gratification, intellectual stimulation, or social
approval). Household cleaning products often use problem solution; food products, on the other hand, often
use sensory-oriented ads emphasizing appetite appeal.
4. Influence brand purchase intention—Moving consumers to decide to purchase the brand or take
purchase-related action. Promotional offers like coupons or two-for-one deals encourage consumers to
make a mental commitment to buy. But many consumers do not have an expressed category need and may
not be in the market when exposed to an ad, so they are unlikely to form buy intentions. In any given week,
only about 20 percent of adults may be planning to buy detergent, only 2 percent to buy a carpet cleaner,
and only 0.25 percent to buy a car.
The most effective communications can achieve multiple objectives. Consider what Jockey did.12
JKy by JOcKey Like many heritage brands with an aging customer base, Jockey suffered under
the image of being “your father’s” or maybe even “your grandfather’s” underwear. To be viable long-term, the brand
needed a youthful infusion. Research revealed that women ages 18 to 34 make almost half of all underwear pur-
chases, aligning well with retailer Target’s predominantly younger female audience. So in 2012, Jockey launched
an integrated, retailer-specific program with Target to change brand perceptions. A new line of underwear and
undershorts for men, JKY by Jockey, was introduced with the positioning that the right underwear or undershorts can
change the way men look and feel. Research also revealed that women like to see and feel the product, so sleek,
attractive packaging was introduced with a see-through box that allowed easy inspection. Color-coding and clean
graphics helped buyers find the right sizes and figure out which styles were best for different types of men’s clothing.
A strong call to action appeared on large in-store ceiling banners with the clever headline “It’s Time to Change Your
Underwear.” The slogan also appeared on the back wall of the store and in cards inserted into the back pockets of
men’s jeans sold in the store. A Facebook microsite was also launched to promote the line. The campaign achieved
its objectives, changing both attitudes and behavior. The average JKY buyer was 32 years old, more than 20 years
younger than the core Jockey customer, and the sales success of the line resulted in Target’s asking Jockey to create
a JKY line for women.
desIGn The CoMMunICaTIons
Formulating the communications to achieve the desired response requires answering three questions: what to say
(message strategy), how to say it (creative strategy), and who should say it (message source).
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588 PART 7 | CommuniCATing VAlue
Message sTraTegy In selecting message strategy, management searches for appeals, themes, or ideas
that will tie in to the brand positioning and help establish points-of-parity or points-of-difference. Some of
these appeals or ideas may relate directly to product or service performance (the quality, economy, or value of
the brand); others may relate to more extrinsic considerations (the brand as being contemporary, popular, or
traditional).
Researcher John C. Maloney felt buyers expected one of four types of reward from a product: rational, sensory,
social, or ego satisfaction.13 They might visualize these rewards from results-of-use experience, product-in-use
experience, or incidental-to-use experience. Crossing the four types of rewards with the three types of experi-
ence generates 12 types of messages. For example, the appeal “gets clothes cleaner” is a rational-reward promise
following results-of-use experience. The phrase “real beer taste in a great light beer” is a sensory-reward promise
connected with product-in-use experience.
creaTive sTraTegy Communications effectiveness depends on how well a message is expressed as well as
on its content. If a communication is ineffective, it may mean the wrong message was used or the right one was
poorly expressed. Creative strategies are the way marketers translate their messages into a specific communication.
We can broadly classify them as either informational or transformational appeals.14
Informational Appeals An informational appeal elaborates on product or service attributes or benefits.
Examples in advertising are problem-solution ads (Aleve offers the longest-lasting relief for aches and pains),
product demonstration ads (Thompson Water Seal can withstand intense rain, snow, and heat), product comparison
ads (AT&T offers the largest 4G mobile network), and testimonials from unknown or celebrity endorsers (NBA
phenomenon LeBron James pitching McDonald’s, Nike, Samsung, Sprite, and others). Informational appeals
assume strictly rational processing of the communication on the consumer’s part. Logic and reason rule.
Carl Hovland’s research at Yale has shed much light on informational appeals and their relationship to such
issues as conclusion drawing, one-sided versus two-sided arguments, and order of argument presentation. Some
early experiments supported stating conclusions for the audience. Subsequent research, however, indicates that the
best ads ask questions and allow readers and viewers to form their own conclusions.15
You might expect one-sided presentations that praise a product to be more effective than two-sided arguments
that also mention shortcomings. Yet two-sided messages may be more appropriate, especially when negative
associations must be overcome.16 Two-sided messages are more effective with more educated audiences and those
who are initially opposed.17 Chapter 6 described how Domino’s took the drastic step of admitting to its pizza’s taste
problems to try to change the minds of consumers with negative perceptions.
Finally, the order in which arguments are presented is important.18 In a one-sided message, presenting the
strongest argument first arouses attention and interest, important in media where the audience often does not
attend to the whole message. With a captive audience, a climactic presentation might be more effective.
Careful consumer
research helped
Jockey successfully
craft an integrated
communication
campaign to launch
its JKY underwear
and undershorts line
sold at Target.
So
ur
ce
: U
se
d
w
ith
p
er
m
is
si
on
o
f J
oc
ke
y
In
te
rn
at
io
na
l,
In
c.
A
ll
R
ig
ht
s
R
es
er
ve
d.
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For a two-sided message, if the audience is initially opposed, start with the other side’s argument and conclude
with your strongest argument. In a widely watched and admired Super Bowl ad in 2014, Radio Shack poked fun at
its old-fashioned image by featuring a host of 1980s icons who wanted their store back, ending with an appeal to
check out the chain’s newly redesigned stores.
Transformational Appeals A transformational appeal elaborates on a nonproduct-related benefit or image. It
might depict what kind of person uses a brand (VW advertised to active, youthful people with its famed “Drivers
Wanted” campaign) or what kind of experience results from use (Pringles advertised “Once You Pop, the Fun Don’t
Stop” for years). Transformational appeals often attempt to stir up emotions that will motivate purchase.19
Communicators use negative appeals such as fear, guilt, and shame to get people to do things (brush their teeth,
have an annual health checkup) or stop doing things (smoking, abusing alcohol, overeating). Fear appeals work
best when they are not too strong, when source credibility is high, and when the communication promises, in a be-
lievable and efficient way, that the product or service will relieve the fear it arouses. Messages are most persuasive
when they moderately disagree with audience beliefs. Stating only what the audience already believes at best just
reinforces beliefs, while messages too much at variance with those beliefs will be rejected.20
Communicators also use positive emotional appeals such as humor, love, pride, and joy. Motivational or “bor-
rowed interest” devices—such as cute babies, frisky puppies, popular music, and provocative sex appeals—are of-
ten employed to attract attention and raise involvement with an ad. These techniques are thought necessary in the
tough new media environment of low-involvement processing and competing messages. Attention-getting tactics
may also detract from comprehension, however, or wear out their welcome fast or overshadow the product. Thus,
one challenge is figuring out how to break through the clutter and deliver the intended message.
Even highly entertaining and creative means of expression must retain the appropriate consumer perspective, as
Toys “R” Us found out.21
TOyS “r” uS Before the 2013 holiday shopping season, Toys “R” Us filmed a prankish video showing a bus-
load of schoolchildren on a nature field trip. As the guide on the bus explains their plans, the children look obviously bored.
When the guide rips off his park ranger outfit to reveal a Toys “R” Us uniform, however, and announces they are going to a
Toys “R” Us store instead, the children explode with excitement. Many parents, educators, and others objected online to the
video’s portrayal of science education and nature as boring and the reinforcement of materialistic values instead.
The magic of advertising is to bring abstract concepts to life in the minds of the consumer target. In a print ad,
the communicator must decide on headline, copy, illustration, and color.22 For a radio message, the communicator
must choose words, voice qualities, and vocalizations. The sound of an announcer promoting a used automobile
should be different from one promoting a new luxury car. If the message is to be carried on television or in person,
all these elements plus body language must be planned. For the message to go online, layout, fonts, graphics, and
other visual and verbal information must be laid out.
To be seen as more modern
and up-to-date, Radio Shack
ran a Super Bowl ad spoofing
its old image.
So
ur
ce
: R
ad
io
Sh
ac
k
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590 PART 7 | CommuniCATing VAlue
Message source Research has shown that the source’s credibility is crucial to a message’s acceptance. The
three most often identified sources of credibility are expertise, trustworthiness, and likability.23 Expertise is the
specialized knowledge the communicator possesses to back the claim. Trustworthiness describes how objective and
honest the source is perceived to be. Friends are trusted more than strangers or salespeople, and people who are
not paid to endorse a product are viewed as more trustworthy than people who are paid. Likability describes the
source’s attractiveness, measured in terms of candor, humor, and naturalness.
The most credible source will score high on all three dimensions—expertise, trustworthiness, and likability.
Pharmaceutical companies want doctors to testify about product benefits because doctors have high credibility.
Charles Schwab became the centerpiece of ads for his $4 billion-plus discount brokerage firm via the “Talk to
Chuck” and “Own Your Tomorrow” corporate advertising campaigns.
Messages delivered by attractive or popular sources can achieve higher attention and recall, which is why some
advertisers use celebrities as spokespeople. “Marketing Memo: Celebrity Endorsements as a Strategy” focuses on
the proper use of testimonials.
On the other hand, some marketers are using ordinary people in the their ads to give them more realism and
overcome consumer skepticism. Ford featured actual customers being thrust into a press conference to describe
their vehicles. Red Lobster used chefs from its restaurants to extol the virtues of its menu.24
If a person has a positive attitude toward a source and a message or a negative attitude toward both, a state
of congruity is said to exist. But what happens if a consumer hears a likable celebrity praise a brand she dislikes?
Charles Osgood and Percy Tannenbaum believe attitude change will take place that increases the amount of con-
gruity between the two evaluations.25 The consumer will end up respecting the celebrity somewhat less or the
brand somewhat more. If she encounters the same celebrity praising other disliked brands, she will eventually
develop a negative view of the celebrity and maintain negative attitudes toward the brands. The principle of con-
gruity implies that communicators can use their good image to reduce some negative feelings toward a brand but
in the process might lose some esteem with the audience.
seleCT The CoMMunICaTIons Channels
Selecting an efficient means to carry the message becomes more difficult as channels of communication become
more fragmented and cluttered. Communications channels may be personal and nonpersonal. Within each are
many subchannels.
Personal coMMunicaTions channels Personal communications channels let two or more
persons communicate face to face or person to audience through a phone, surface mail, or e-mail. They derive
their effectiveness from individualized presentation and feedback and include direct marketing, personal selling,
and word of mouth.
We can draw a further distinction between advocate, expert, and social communications channels. Advocate
channels consist of company salespeople contacting buyers in the target market. Expert channels consist of inde-
pendent experts making statements to target buyers. Social channels consist of neighbors, friends, family members,
and associates talking to target buyers.
A study by Burson-Marsteller and Roper Starch Worldwide found that one influential person’s word of mouth
tends to affect the buying attitudes of two other people, on average. That circle of influence, however, jumps to
eight online. Word about good companies travels fast; word about bad companies travels even faster. Reaching the
right people is key.
Personal influence carries especially great weight (1) when products are expensive, risky, or purchased
infrequently, and (2) when products suggest something about the user’s status or taste. People often ask others to
recommend a doctor, plumber, hotel, lawyer, accountant, architect, insurance agent, interior decorator, or finan-
cial consultant. If we have confidence in the recommendation, we normally act on the referral. Service providers
clearly have a strong interest in building referral sources.
Even business-to-business marketers can benefit from strong word of mouth. To give loyal customers and oth-
ers a voice in product development, John Deere created its own chat show, “You’re On,” with a mobile production
studio called “Chatterbox” built to resemble a local radio station. The award-winning campaign was launched at
the world’s largest construction show, ConExpo, and also featured daily blogs and real-time texts to engage others
outside the event in the design of the 2012 product lineup.26
Consumers use word of mouth to talk about dozens of brands each day, from media and entertainment
products such as movies, TV shows, and publications to food products, travel services, and retail stores.
Companies are acutely aware of its power. Hush Puppies shoes, Krispy Kreme doughnuts, and, more recently,
Crocs shoes were built through strong word of mouth, as were companies such as Red Bull, Starbucks, and
Amazon.com.
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A well-chosen celebrity can draw attention to a product or brand—as Priceline found when it picked Star Trek icon William Shatner to star in campy ads rein-
forcing its low-price image. The quirky campaigns have run for more than a decade, and Shatner’s decision to receive stock options as compensation report-
edly netted him millions of dollars for his work. The right celebrity can also lend his or her image to a brand. To reinforce its high status and prestige image,
American Express has used movie legends Robert De Niro and Martin Scorsese in ads.
Celebrities are likely to be effective when they are credible or personify a key product attribute. Statesman-like Dennis Haysbert for State Farm insurance,
rugged Brett Favre for Wrangler jeans, and popular singer and actress Jennifer Hudson for Weight Watchers’ weight loss program have all been praised by
consumers as good fits. Celine Dion, however, failed to add glamour—or sales—to Chrysler, and even though she was locked into a three-year, $14 million
deal, she was let go. Ozzy Osbourne seems an odd choice to advertise “I Can’t Believe It’s Not Butter” given his seemingly perpetual confusion.
A celebrity should have high recognition, high positive affect, and high “fit” with the product. Paris Hilton, Howard Stern, and Donald Trump have high
recognition but negative affect among many groups. Johnny Depp has high recognition and high positive affect but might not seem relevant, for example, to
a new financial service. Tom Hanks and Oprah Winfrey could successfully advertise a large number of products because they have extremely high ratings for
familiarity and likability (known as the Q factor in the entertainment industry).
Celebrities can play a more strategic role too, not only endorsing but also helping to design, position, and sell merchandise and services. Nike often brings
its elite athletic endorsers in on product design. Tiger Woods, Paul Casey, and Stewart Cink have helped to design, prototype, and test new golf clubs and balls
at Nike Golf’s Research & Development facility. Beyoncé (Pepsi), will.i.am (Intel), Justin Timberlake (Bud Light Platinum), Alicia Keys (BlackBerry), and Taylor
Swift (Diet Coke) have all been designated “ambassadors” for their brands with various creative duties and responsibilities.
Some celebrities lend their talents to brands without directly using their fame. A host of movie and TV stars do uncredited commercial voice-overs, includ-
ing Jon Hamm (Mercedes-Benz), Morgan Freeman (Visa), Matt Damon (TD Ameritrade), Jeff Bridges (Duracell), and George Clooney (Budweiser). Although
advertisers assume some viewers will recognize the voices, the main rationale for using them is the actors’ incomparable voice talent and skill.
Using celebrities poses certain risks. The celebrity might hold out for a larger fee at contract renewal or withdraw. And just like movies and album releases,
celebrity campaigns can be expensive flops. The celebrity might lose popularity or, even worse, get caught in a scandal or embarrassing situation, as did Tiger
Woods in a heavily publicized 2009 episode. Besides carefully checking endorsers’ backgrounds, some marketers are choosing to use more than one to
lessen their brand’s exposure to any single person’s flaws.
Another solution is for marketers to create their own brand celebrities. Dos Equis beer, imported from Mexico, grew U.S. sales by more than 20 percent
during the recent recession by riding on the popularity of its “Most Interesting Man in the World” ad campaign. Suave and debonair, with an exotic accent and
a silver beard, the character has hundreds of thousands of Facebook friends despite being completely fictitious. Videos of his exploits log millions of views on
YouTube. Dos Equis has made it possible for customers to “call” him and listen to a series of automated voicemail messages.
Sources: Lauren Yapalater, “19 Commercials You May Not Have Realized Were Voiced by Famous Actors,” www.buzzfeed.com, August 6, 2013; Natalie Zmuda and Rupal
Parekh, “More than a Pitchman: Why Stars Are Getting Marketing Titles,” Advertising Age, February 10, 2013; Tim Nudd, “Dos Equis Invites You to Call the Most Interesting
Voicemail in the World,” Adweek, November 9, 2012; Lucia Moses, “Get Real,” Adweek, April 30, 2102; Linda Massarella, “Shatner’s Singing a Happy Tune,” Toronto Sun,
May 2, 2010; “Nike Golf Celebrates Achievements and Successes of Past Year,” www.worldgolf.com, January 2, 2009; Piet Levy, “Keeping It Interesting,” Marketing News,
October 30, 2009, p. 8; Irving Rein, Philip Kotler, and Martin Scoller, The Making and Marketing of Professionals into Celebrities (Chicago: NTC Business Books, 1997).
Celebrity Endorsements as a Message Strategymarketing memo
Jennifer Hudson
was seen as a
highly credible
spokesperson for
Weight Watchers.
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Positive word of mouth sometimes happens organically with little advertising, but as Chapter 21 discusses, it can
also be managed and facilitated.27 Without question, more advertisers now seek greater earned media—unsolicited
professional commentary, personal blog entries, social network discussion—as a result of their paid media and owned
media efforts. Choosing a unique event can also be helpful, as Volkswagen found out with its Shark Week promotion.28
VOLKSwAgen AnD ShArK weeK Discovery Channel’s Shark Week is a cultural TV phe-
nomenon that spans more than 25 years and always generates high ratings. To boost brand affinity among men for its newly
redesigned VW Beetle, Volkswagen and its agency partners formed a sponsorship for Shark Week and created a diving cage that
was plunged into shark-infested waters. The Shark Observation Cage, as it was called, was a fully operational Beetle. Stunning
images showed the car driving on the ocean floor with sharks swirling around. The campaign featured VW-branded videos that
ran on air and online, supported by much social media, PR, and traditional print and out-of-home ads. The campaign was liked on
Facebook 1.8 million times, and sales increased 50 percent; male buyers went from 20 percent to 40 percent.
Word of mouth can be particularly effective for smaller businesses, with whom customers may feel a more per-
sonal relationship. Many are investing in various forms of social media to get the word out instead of newspapers,
radio, and Yellow Pages. Southern Jewelz, started by a recent college grad, found sales doubling over six months
after it began to actively use Facebook, Twitter, and e-commerce software.29
nonPersonal (Mass) coMMunicaTions channels Nonpersonal channels are communi-
cations directed to more than one person and include advertising, sales promotions, events and experiences,
and public relations. Much recent growth has taken place through
events and experiences. Events marketers who once favored sports
events are now using other venues such as art museums, zoos, and ice
shows to entertain clients and employees. AT&T and IBM sponsor
symphony performances and art exhibits, Visa is an active sponsor
of the Olympics, and Harley-Davidson sponsors annual motorcycle
rallies. Citibank found a novel way to promote its corporate brand by
sponsoring a unique service.30
ciTi biKeS One growth area in big cities is bike-sharing pro-
grams that let members pick up and drop off rented bikes at street-side
stations. In New York City, Citibank struck a $41 million, six-year deal to
sponsor 10,000 cobalt-blue Citi Bikes at 600 stations across the city. Riders
pay a membership fee and a usage fee based on time. The program has
been wildly successful; millions of rides were taken in the first year alone.
Observers noted that in New York’s sea of billboards and ads, Citi Bikes cut
through the visual clutter. They also improved consumer perceptions of Citi
as “innovative,” “socially responsible,” and “a company for me.” With bike
stations often located near retail bank branches, Citi also experienced an
uptick in business and credit card applications.
Companies are searching for better ways to quantify the benefits of
sponsorship and demanding greater accountability from event owners
and organizers. They are also creating their own events designed to
surprise the public and create a buzz. Many efforts amount to guer-
rilla marketing tactics. “Marketing Insight: Playing Tricks to Build a
Brand” describes some clever marketing promotions that are out of the
ordinary.
Events can create attention, though whether they have a lasting
effect on brand awareness, knowledge, or preference will vary consider-
ably depending on the quality of the product, the event itself, and its
execution.
Citibank’s bike sponsorship in New York City has paid many different
kinds of dividends for the company.
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inTegraTion of coMMunicaTions channels Although personal communication is often
more effective than mass communication, mass media might be the major means of stimulating it. Mass
communications affect personal attitudes and behavior through a two-step process. Ideas often first flow from
radio, television, and print to opinion leaders or consumers highly engaged with media and then from these
influencers to less media-involved population groups.31
This two-step flow has several implications. First, the influence of mass media on public opinion is
not as direct, powerful, and automatic as marketers have supposed. It is mediated by opinion leaders and
media mavens, people who track new ideas and whose opinions others seek or who carry their opinions to
others. Second, the two-step flow challenges the notion that consumption styles are primarily influenced by
a “trickle-down” or “trickle-up” effect from mass media. People interact primarily within their own social
groups and acquire ideas from others in their groups. Third, mass communicators should direct messages
specifically to opinion leaders and others engaged with media if possible and let them carry the message
to others.
Playing Tricks to Build a Brand
Some marketers are taking advantage of viral videos and other digital
forms of expression to develop creative stunts or “reality pranks” to
promote their brands. The successful ones capture the public’s imagi-
nation while reinforcing the brand positioning in the process. Here are
two examples.
To demonstrate the picture quality of its Ultra HD TVs, with resolu-
tion up to four times greater than regular HD TVs, LG shot a hidden-
camera prank commercial in Chile. In an office in a high-rise building,
the company replaced the large window overlooking the city with one
of its Ultra HD TVs showing the same scene. Then it filmed unsuspect-
ing job seekers responding to interview questions from an actor pos-
ing as an employer. All is well until the middle of the interview when
a large meteor is shown crashing into the city with a monstrous dust
cloud rushing toward the building. The interviewees all try to remain
calm until the realistic images eventually overwhelm them and they
react in panic.
To demonstrate the eye-tracking feature of its new Galaxy S4
smart phone, Samsung ran a “Stare Down” challenge contest. The
concept was simple. Anyone who could sustain eye contact with an
S4 handset for a full hour in a busy public setting would win the phone
free. The phone was placed at eye level, but as time went on, increas-
ingly attention-getting distractions would appear: Police holding back
a barking German shepherd, a one-man band roaming around playing
loud music, a motorcycle crashing into a flower stand, and so on. There
was a consolation prize too. The longer a participant was able to stare
at the S4, the bigger the discount for purchasing one.
Both videos became viral sensations with millions of views, enter-
tainingly reinforcing key benefits that made up the brand positioning.
Sources: Will Burns, “Samsung ‘Stare Down’ the Latest Great Reality Prank,”
Forbes, May 31, 2013; “An Eye to Eye Phone Competition,” www.feishmanhillard.
com, accessed March 30, 2014; Will Burns, “LG Ultra HDTV: A Product Demo for
the Ages,” Forbes, September 5, 2013; Salvador Rodriguez, “LG Hidden-Camera
Prank Ad for Its Ultra HD TV Goes Viral,” Los Angeles Times, September 7, 2013.
marketing
insight
LG’s reality prank with
scared job interviewees
vividly demonstrated
the picture quality of its
Ultra HD TVs.
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ce
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esTablIsh The ToTal MarkeTInG CoMMunICaTIons
budGeT
One of the most difficult marketing decisions is choosing how much to spend on marketing communications.
John Wanamaker, the department store magnate, once said, “I know that half of my advertising is wasted, but I
don’t know which half.”
Industries and companies vary considerably in how much they spend on marketing communications.
Expenditures might be 40 percent to 45 percent of sales in the cosmetics industry, but only 5 percent to 10 percent
in the industrial-equipment industry. Within a given industry, there are low- and high-spending companies.
How do companies set their communications budgets? We will describe four common methods: the affordable
method, the percentage-of-sales method, the competitive-parity method, and the objective-and-task method.
affordable MeThod Some companies set the communications budget at what they think they can
afford. The affordable method completely ignores the role of marketing communications as an investment and
their immediate impact on sales volume. It leads to an uncertain annual budget, which makes long-range planning
difficult.
PercenTage-of-sales MeThod Some companies set communication expenditures at a specified
percentage of current or anticipated sales or of the sales price. Automobile companies typically budget a fixed
percentage based on the planned car price. Oil companies appropriate a fraction of a cent for each gallon of
gasoline sold under their own label.
The percentage-of-sales method has little to justify it. It views sales as the determiner of communications
rather than as the result. It leads to a budget set by the availability of funds rather than by market opportunities.
It discourages experimentation with countercyclical communication or aggressive spending. Dependence on year-
to-year sales fluctuations interferes with long-range planning. There is no logical basis for choosing the specific
percentage, except what has been done in the past or what competitors are doing. Finally, it does not encourage
building the communications budget by identifying what each product and territory deserves.
coMPeTiTive-PariTy MeThod Some companies set their communications budgets to achieve share-of-
voice parity with competitors. This approach is also problematic. There are no grounds for believing competitors
know better. Company reputations, resources, opportunities, and objectives differ so much that communications
budgets are hardly a guide. And there is no evidence that budgets based on competitive parity discourage
communication wars.
objecTive-and-Task MeThod The most defensible approach, the objective-and-task method, calls
upon marketers to develop communications budgets by defining specific objectives, identifying the tasks that must
be performed to achieve these objectives, and estimating the costs of performing them. The sum of these costs is
the proposed communications budget.
Suppose Dr. Pepper Snapple wants to introduce a new natural energy drink, called Sunburst, for the casual ath-
lete.32 Its objectives might be as follows:
1. Establish the market share goal. The company estimates 50 million potential users and sets a target of
attracting 8 percent of the market—that is, 4 million users.
2. Select the percentage of the market that should be reached by advertising. The advertiser hopes to reach
80 percent of the market (40 million prospects) with its advertising message.
3. Estimate the percentage of aware prospects who should be persuaded to try the brand. The advertiser would
be pleased if 25 percent of aware prospects (10 million) tried Sunburst. It estimates that 40 percent of all triers,
or 4 million people, will become loyal users. This is the market share goal.
4. Calculate the number of advertising impressions per 1 percent trial rate. The advertiser estimates that 40
advertising impressions (exposures) for every 1 percent of the population will bring about a 25 percent trial rate.
5. Find the number of gross rating points to be purchased. A gross rating point is one exposure to 1 percent of
the target population. Because the company wants to achieve 40 exposures to 80 percent of the population, it
will want to buy 3,200 gross rating points.
6. Calculate the necessary advertising budget on the basis of the average cost of buying a gross rating
point. Suppose it costs an average of $3,277 to expose 1 percent of the target population to one impression.
Then 3,200 gross rating points will cost $10,486,400 (= $3,277 × 3,200) in the introductory year.
The objective-and-task method has the advantage of requiring management to spell out its assumptions about
the relationship among dollars spent, exposure levels, trial rates, and regular usage.
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coMMunicaTions budgeT Trade-offs How much weight should marketing communications
receive compared to alternatives such as product improvement, lower prices, or better service? The answer
depends on where the company’s products are in their life cycles, whether they are commodities or highly
differentiable products, whether they are routinely needed or must be “sold,” and other considerations. Marketing
communications budgets tend to be higher when there is low channel support, the marketing program changes
greatly over time, many customers are hard to reach, customer decision making is complex, products are
differentiated and customer needs are nonhomogeneous, and purchases are frequent and quantities small.33
In theory, marketers should establish the total communications budget so the marginal profit from the last
communication dollar just equals the marginal profit from the last dollar in the best noncommunication use.
Implementing this economic principle can be a challenge, however.
Selecting the Marketing
Communications Mix
Companies must allocate their marketing communications budget over the eight major modes of communication —
advertising, sales promotion, events and experiences, public relations and publicity, online and social media
marketing, mobile marketing, direct and database marketing, and the sales force. Within the same industry,
companies can differ considerably in their media and channel choices. Avon concentrates its promotional funds
on personal selling, whereas Revlon spends heavily on advertising. Electrolux spent heavily on a door-to-door sales
force for years, whereas Hoover relied more on advertising. Table 19.2 forecasts spending on some major forms of
communication.
Table 19.2 Advertising and Digital Marketing Communications Forecast for 2016
Share of Global Adspend by Medium—2016 (%)
Cinema 0.5%
Desktop Internet 17.9%
Magazines 7.9%
Mobile Internet 2.7%
Newspapers 17.0%
Outdoor 6.9%
Radio 6.9%
Television 40.2%
Source: Executive Summary: Advertising Expenditure Forecasts December 2013, ZenithOptimedia, www.zenithoptimedia.com.
U.S. Digital Marketing Communications—2016
Display Advertising 26.4%
Email Marketing 2.4%
Mobile Marketing 25.5%
Search Marketing 37.5%
Social Media 8.2%
Source: Data from Forrester Research Online Display Advertising Forecast, 2014 to 2019 (US), May 21, 2014; Forrester Research Search Engine Marketing Forecast, 2014
to 2019 (US), May 8, 2014; Forrester Research Mobile Advertising Forecast, 2014 to 2019 (US), May 5, 2014; Forrester Research Social Media Forecast, 2014 to 2019
(US), April 4, 2014; Forrester Research Email Marketing Forecast, 2013 to 2018 (US), July 8, 2013.
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Companies are always searching for ways to gain efficiency by substituting one communications tool for others.
Many are replacing some field sales activity with ads, direct mail, and telemarketing. One auto dealer dismissed
his five salespeople and cut prices, and sales exploded. Substitutability among communications tools explains why
marketing functions need to be coordinated.
CharaCTerIsTICs of The MarkeTInG
CoMMunICaTIons MIx
Each communication tool has its own unique characteristics and costs. We briefly review them here and discuss
them in more detail in Chapters 20, 21, and 22.
adverTising Advertising reaches geographically dispersed buyers. It can build up a long-term image for
a product (Coca-Cola ads) or trigger quick sales (a Macy’s ad for a weekend sale). Certain forms of advertising
such as TV can require a large budget, whereas other forms such as newspaper do not. The mere presence of
advertising might have an effect on sales: Consumers might believe a heavily advertised brand must offer “good
value.”34 Because of the many forms and uses of advertising, it’s risky to make generalizations about it.35 Yet a few
observations are worthwhile:
1. Pervasiveness—Advertising permits the seller to repeat a message many times. It also allows the buyer to
receive and compare the messages of various competitors. Large-scale advertising says something positive
about the seller’s size, power, and success.
2. Amplified expressiveness—Advertising provides opportunities for dramatizing the company and its brands
and products through the artful use of print, sound, and color.
3. Control—The advertiser can choose the aspects of the brand and product on which to focus communications.
sales ProMoTion Companies use sales promotion tools—coupons, contests, premiums, and the like—to
draw a stronger and quicker buyer response, including short-run effects such as highlighting product offers and
boosting sagging sales. Sales promotion tools offer three distinctive benefits:
1. Ability to be attention-getting—They draw attention and may lead the consumer to the product.
2. Incentive—They incorporate some concession, inducement, or contribution that gives value to the consumer.
3. Invitation—They include a distinct invitation to engage in the transaction now.
evenTs and exPeriences Events and experiences offer many advantages as long as they have the
following characteristics:
1. Relevant—A well-chosen event or experience can be seen as highly relevant because the consumer is often
personally invested in the outcome.
2. Engaging—Given their live, real-time quality, events and experiences are more actively engaging for
consumers.
3. Implicit—Events are typically an indirect soft sell.
Public relaTions and PubliciTy Marketers tend to underuse public relations, yet a well-thought-
out program coordinated with the other communications-mix elements can be extremely effective, especially if a
company needs to challenge consumers’ misconceptions. The appeal of public relations and publicity is based on
three distinctive qualities:
1. High credibility—News stories and features are more authentic and credible to readers than ads.
2. Ability to reach hard-to-find buyers—Public relations can reach prospects who prefer to avoid mass media
and targeted promotions.
3. Dramatization—Public relations can tell the story behind a company, brand, or product.
online and social Media MarkeTing Online marketing and messages can take many forms to
interact with consumers when they are in active search mode or just browsing and surfing online for something to
do. They share three characteristics:
1. Rich—Much information or entertainment can be provided—as much or as little as a consumer might want.
2. Interactive—Information can be changed or updated depending on the person’s response.
3. Up to date—A message can be prepared very quickly and diffused through social media channels.
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Mobile MarkeTing Increasingly, online marketing and social media rely on mobile forms of communi-
cation and smart phones or tablets. Three distinguishing characteristics of mobile marketing are:
1. Timely—Mobile communications can be very time-sensitive and reflect when and where a consumer is.
2. Influential—Information received or obtained via a smart phone can reach and influence consumers as they
are making a purchase decision.
3. Pervasive—Consumers typically carry their smart phones everywhere, so mobile communications are at their
fingertips.
direcT and daTabase MarkeTing The advent of “Big Data” has given marketers the opportunity
to learn even more about consumers and develop more personal and relevant marketing communications. Three
noteworthy characteristics of direct and database marketing are:
1. Personal—Personal facts, opinions, and experiences can be stored in massive databases and incorporated into
personal messages.
2. Proactive—A direct marketing piece can create attention, inform consumers, and include a call to action.
3. Complementary—Product information can be provided that helps other marketing communications, espe-
cially in terms of e-commerce. A good catalog might spur online shopping.
Personal selling Personal selling is the most effective tool at later stages of the buying process,
particularly in building up buyer preference, conviction, and action. It has three notable qualities:
1. Customized—The message can be designed to appeal to any individual.
2. Relationship-oriented—Personal selling relationships can range from a matter-of-fact selling relationship to a
deep personal friendship.
3. Response-oriented—The buyer is often given personal choices and encouraged to directly respond.
faCTors In seTTInG The MarkeTInG
CoMMunICaTIons MIx
Companies must consider several factors in developing their communications mix: type of product market, con-
sumer readiness to make a purchase, and stage in the product life cycle.
TyPe of ProducT MarkeT Consumer marketers tend to spend comparatively more on sales promotion
and advertising; business marketers tend to spend comparatively more on personal selling. In general, personal
selling is used more with complex, expensive, and risky goods and in markets with fewer and larger sellers (hence,
business markets).
Although marketers rely more on sales calls in business markets, advertising still plays a significant role:
• Advertising can provide an introduction to the company and its products.
• If the product has new features, advertising can explain them.
• Reminder advertising is more economical than sales calls.
• Advertisements offering brochures and carrying the company’s phone number or Web address are an effective
way to generate leads for sales representatives.
• Sales representatives can use copies of the company’s ads to legitimize their company and products.
• Advertising can remind customers how to use the product and reassure them about their purchase.
Advertising combined with personal selling can increase sales over personal selling alone. Corporate advertis-
ing can improve a company’s reputation and improve the sales force’s chances of getting a favorable first hearing
and early adoption of the product. IBM’s recent corporate marketing effort is a notable success.36
ibM SMArTer PLAneT Working with long-time ad agency Ogilvy & Mather, IBM launched
“Smarter Planet” in 2008 as a business strategy and multiplatform communications program to promote the way in
which IBM technology and expertise help government as well as transportation, energy, education, health care, and
other businesses work better and “smarter.” The point was that technology has evolved so far that many of the world’s
problems are now fixable. The campaign began internally to inform and inspire IBM employees about how they could
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598 PART 7 | CommuniCATing VAlue
contribute to building a “Smarter Planet.” It was then rolled out with
unconventional long-form, content-rich print ads, targeted TV ads,
and detailed online interactive ads. A “Smarter Cities” tour hosted
major events at which IBM and other experts discussed and debated
challenges all cities face: transportation, energy, health care, educa-
tion, and public safety. The success of the campaign was evident in
the significant improvements in IBM’s image as a company that was
“making the world better” and “known for solving its clients’ most
challenging problems.” Despite a recession, significant increases
occurred in new business opportunities and the number of compa-
nies interested in doing business with IBM, and the company’s stock
price soared from $80 at the start of the campaign to more than
$200 five years later.
On the flip side, personal selling can also make a strong
contribution in consumer-goods marketing. Some consumer
marketers use the sales force mainly to collect weekly orders
from dealers and to see that sufficient stock is on the shelf. Yet an
effectively trained company sales force can make four important
contributions:
1. Increase stock position—Sales reps can persuade dealers
to take more stock and devote more shelf space to the
company’s brand.
2. Build enthusiasm—Sales reps can build dealer enthusiasm
by dramatizing planned advertising and communications
support for the company’s brand.
3. Conduct missionary selling—Sales reps can sign up more
dealers.
4. Manage key accounts—Sales reps can take responsibility for
growing business with the most important accounts.
buyer-readiness sTage Communication tools vary in cost-effectiveness at different stages of buyer
readiness. Figure 19.4 shows the relative cost-effectiveness of three communication tools. Advertising and
publicity play the most important roles in the awareness-building stage. Customer comprehension is primarily
affected by advertising and personal selling. Customer conviction is influenced mostly by personal selling.
Personal selling and sales promotion are most helpful in closing the sale. Reordering is also affected mostly by
personal selling and sales promotion and somewhat by reminder advertising. Note too that online activities can
affect virtually any stage.
IBM’s “Smarter Planet” corporate ad campaign improved the company’s image
and drove sales.
So
ur
ce
: R
ep
rin
t C
ou
rt
es
y
of
In
te
rn
at
io
na
l B
us
in
es
s
M
ac
hi
ne
s
C
or
po
ra
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n,
©
In
te
rn
at
io
na
l B
us
in
es
s
M
ac
hi
ne
s
C
or
po
ra
tio
n
Stages of Buyer Readiness
Co
st
E
ffe
ct
iv
en
es
s
Awareness
Advertising and publicityAd Sales promotionSa Personal sellingPe
Comprehension Conviction Order Reorder
| Fig. 19.4 |
Cost-Effectiveness
of Three Different
Communication
Tools at Different
Buyer-Readiness
Stages
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ProducT life-cycle sTage In the introduction stage of the product life cycle, advertising,
events and experiences, and publicity have the highest cost-effectiveness, followed by personal selling to
gain distribution coverage and sales promotion and direct marketing to induce trial. In the growth stage,
demand has its own momentum through word of mouth and interactive marketing. Advertising, events and
experiences, and personal selling all become more important in the maturity stage. In the decline stage, sales
promotion continues strong, other communication tools are reduced, and salespeople give the product only
minimal attention.
MeasurInG CoMMunICaTIon resulTs
Senior managers want to know the outcomes and revenues resulting from their communications investments. Too
often, however, their communications directors supply only inputs and expenses: press clipping counts, numbers
of ads placed, or media costs. In fairness, communications directors try to translate inputs into intermediate
outputs such as reach and frequency (the percentage of target market exposed to a communication and the
number of exposures), recall and recognition scores, persuasion changes, and cost-per-thousand calculations.
Ultimately, though, behavior-change measures capture the real payoff.
After implementing the communications plan, the communications director must measure its impact. Members
of the target audience are asked whether they recognize or recall the message, how many times they saw it, what
points they recall, how they felt about the message, and what are their previous and current attitudes toward the
product and the company. The communicator should also collect behavioral measures of audience response, such
as how many people bought the product, liked it, and talked to others about it.
Figure 19.5 provides an example of good feedback measurement. We find 80 percent of the consumers in the
total market are aware of brand A, 60 percent have tried it, and only 20 percent who tried it are satisfied. This indi-
cates that the communications program is effective in creating awareness, but the product fails to meet consumer
expectations. In contrast, 40 percent of the consumers in the total market are aware of brand B and only 30 percent
have tried it, but 80 percent of them are satisfied. In this case, the communications program needs to be strength-
ened to take advantage of the brand’s potential power.
Managing the Integrated Marketing
Communications Process
The American Marketing Association defines integrated marketing communications (IMC) as “a planning
process designed to assure that all brand contacts received by a customer or prospect for a product, service,
or organization are relevant to that person and consistent over time.” When done well, this planning process
evaluates the strategic roles of a variety of communications disciplines and combines them seamlessly to provide
clarity, consistency, and maximum impact of messages.
The wide range of communication tools, messages, and audiences available to marketers makes it imperative
that companies move toward integrated marketing communications. They must adopt a 360-degree view of con-
sumers to fully understand all the different ways communications can affect behavior.37
100%
market
100%
market80%
aware
60%
tried
80%
disappointed
Total Awareness Brand
Trial
Satisfaction Total Awareness Brand
Trial
Satisfaction
20%
not aware
40%
did not
try
60% not
aware
40%
aware
80%
satisfied
20%
satisfied
20%
disappointed
30% tried
70% did
not try
Brand A Brand B | Fig. 19.5 |
Current
Consumer States
for Two Brands
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600 PART 7 | CommuniCATing VAlue
To facilitate one-stop shopping for marketers, media companies and ad agencies have acquired promotion
agencies, public relations firms, package-design consultancies, Web site developers, social media experts, and
direct-mail houses. They are redefining themselves as communications companies that help clients improve
their overall communications effectiveness by offering strategic and practical advice on many forms of
communication.
These expanded capabilities make it easier for marketers to assemble various media properties—as well as
related marketing services—in an integrated communication program. Table 19.3 lists the different lines of
businesses for marketing and advertising services giant WPP, for example.
Table 19.3 WPP’s Lines of Businesses
Advertising
Global, national, and specialist advertising services from a range of top international and specialist agencies, among them Bates CHI &
Partners, Grey, JWT, Ogilvy & Mather, United Network, and Y&R
Media Investment Management
Above- and below-the-line media planning and buying and specialist sponsorship and branded entertainment services from GroupM
companies MediaCom, MEC, Mindshare, Maxus, plus tenthavenue and others
Consumer Insight
WPP’s Kantar companies, including TNS, Millward Brown, The Futures Company, and many other specialists in brand, consumer, media,
and marketplace insight, work with clients to generate and apply great insights
Public Relations & Public Affairs
Corporate, consumer, financial, and brand-building services from PR and lobbying firms Burson-Marsteller, Cohn & Wolfe, Hill+Knowlton
Strategies, Ogilvy Public Relations Worldwide, RLM Finsbury, and others
Branding & Identity
Consumer, corporate, and employee branding and design services, covering identity, packaging, literature, events, training, and architecture
from Addison Group, Brand Union, FITCH, Lambie-Nairn, Landor Associates, The Partners, and others
Direct, Promotion, & Relationship Marketing
The full range of general and specialist customer, channel, direct, field, retail, promotional, and point-of-sale services from AKQA, Geometry
Global, OgilvyOne, RTC Relationship Marketing, VML, Wunderman, and others
Health Care Communications
GCI Health, ghg, Ogilvy CommonHealth Worldwide, Sudler & Hennessey, and others provide integrated health care marketing solutions from
advertising to medical education and online marketing
Specialist Communications
A comprehensive range of specialist services, from custom media and multicultural marketing to event, sports, youth, and entertainment
marketing; corporate and business-to-business; media, technology, and production services
WPP Digital
Through WPP Digital, WPP companies and their clients have access to a portfolio of digital experts including 24/7 Media, Blue State Digital,
and POSSIBLE
Source: Adapted from WPP, “What We Do,” www.wpp.com/wpp/about/whatwedo, as of June 28, 2014.
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CoordInaTInG MedIa
Media coordination can occur across and within media types, but marketers should combine personal and
nonpersonal communications channels through multiple-vehicle, multiple-stage campaigns to achieve maximum
impact and increase message reach and impact.
Promotions and online solicitations can be more effective when combined with advertising, for example.38 The
awareness and attitudes created by advertising campaigns can increase the success of more direct sales pitches.
Advertising can convey the positioning of a brand and benefit from online display advertising or search engine
marketing that sends a stronger call to action.39
Most companies are coordinating their online and offline communications activities. Web addresses in
ads (especially print ads) and on packages allow people to more fully explore a company’s products, find store
locations, and get more product or service information. Even if consumers don’t order online, marketers can use
Web sites in ways that drive them into stores to buy.
IMPleMenTInG IMC
Many international clients such as IBM (Ogilvy), Colgate (WPP’s Red Fuse), and GE (BBDO) have opted to place
a substantial portion of their communications work with one full-service agency. The result is integrated and
more effective marketing communications at a much lower total cost.
Integrated marketing communications can produce stronger message consistency and help build brand equity
and create greater sales impact.40 It forces management to think about every way the customer comes in contact
with the company, how the company communicates its positioning, the relative importance of each vehicle, and
timing issues. It gives someone the responsibility—where none existed before—to unify the company’s brand
images and messages as they are sent through thousands of company activities. IMC should improve the company’s
ability to reach the right customers with the right messages at the right time and in the right place.41 “Marketing
Memo: How Integrated Is Your IMC Program?” provides some guidelines.
How Integrated Is Your IMC Program?
In assessing the collective impact of an IMC program, the marketer’s overriding goal is to create the most effective and efficient communications program
possible. The following “six Cs” criteria can help determine whether communications are truly integrated.
• Coverage. Coverage is the proportion of the audience reached by each communication option employed as well as the amount of overlap among those
options. In other words, to what extent do different communication options reach the designated target market and the same or different consumers
making up that market?
• Contribution. Contribution is the inherent ability of a marketing communication to create the desired response and communication effects from consumers
in the absence of exposure to any other communication option. How much does a communication affect consumer processing and build awareness, enhance
image, elicit responses, and induce sales?
• Commonality. Commonality is the extent to which common associations are reinforced across communication options; that is, the extent to which different
communication options share the same meaning. The consistency and cohesiveness of the brand image are important because they determine how easily
existing associations and responses can be recalled and how easily additional associations and responses can become linked to the brand in memory.
• Complementarity. Communication options are often more effective when used in tandem. Complementarity relates to the extent to which different
associations and linkages are emphasized across communication options. For effective positioning, brands typically need to establish multiple brand
associations. Different marketing communication options may be better suited to establishing a particular brand association; for example, sponsorship of a
cause may improve perceptions of a brand’s trust and credibility, but TV and print advertising may be needed to communicate its performance advantages.
• Conformability. In any integrated communication program, the message will be new to some consumers and not to others. Conformability refers to the
extent to which a marketing communication option works for such different groups of consumers. The ability to work at two levels—effectively communicat-
ing to consumers who have and have not seen other communications—is critically important.
• Cost. Marketers must evaluate marketing communications on all these criteria against their cost to arrive at the most effective and most efficient com-
munications program.
Source: Adapted from Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle River, NJ: Pearson, 2013).
marketing
memo
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602 PART 7 | CommuniCATing VAlue
6. Designing the communication requires answering three
questions: what to say (message strategy), how to say
it (creative strategy), and who should say it (message
source). Communications channels can be personal
(advocate, expert, and social channels) or nonpersonal
(media, atmospheres, and events).
7. Although other methods exist, the objective-and-task
method of setting the communications budget, which
calls upon marketers to develop their budgets by defin-
ing specific objectives, is typically most desirable.
8. In choosing the marketing communications mix, mar-
keters must examine the distinct advantages and
costs of each communication tool and the company’s
market rank. They must also consider the type of
product market in which they are selling, how ready
consumers are to make a purchase, and the prod-
uct’s stage in the company, brand, and product life
cycle.
9. Measuring the effectiveness of the marketing commu-
nications mix requires asking members of the target
audience whether they recognize or recall the commu-
nication, how many times they saw it, what points they
recall, how they felt about the communication, and what
are their previous and current attitudes toward the com-
pany, brand, and product.
10. Managing and coordinating the entire communica-
tions process calls for integrated marketing commu-
nications (IMC): marketing communications planning
that recognizes the added value of a comprehensive
plan to evaluate the strategic roles of a variety of com-
munications disciplines and that combines these dis-
ciplines to provide clarity, consistency, and maximum
impact through the seamless integration of discrete
messages.
Summary
1. Modern marketing calls for more than developing a good
product, pricing it attractively, and making it accessible
to target customers. Companies must also communi-
cate with present and potential stakeholders and with
the general public.
2. The marketing communications mix consists of eight
major modes of communication: advertising, sales
promotion, public relations and publicity, events and
experiences, online and social media marketing,
mobile marketing, direct and database marketing, and
personal selling.
3. The communications process consists of nine ele-
ments: sender, receiver, message, media, encoding,
decoding, response, feedback, and noise. To get their
messages through, marketers must take into account
how the target audience usually decodes messag-
es. They must also transmit the message through
efficient media that reach the target audience and
develop feedback channels to monitor response to
the message.
4. Developing effective communications requires eight
steps: (1) identify the target audience, (2) choose the
communications objectives, (3) design the communi-
cations, (4) select the communications channels, (5)
set the total communications budget, (6) choose the
communications mix, (7) measure the communications
results, and (8) manage the integrated marketing com-
munications process.
5. In identifying the target audience, the marketer needs
to close any gap that exists between current public
perception and the image sought. Communications
objectives can be to create a need for the category,
brand awareness, brand attitude, or brand purchase
intention.
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional Assisted-graded writing questions.
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Designing AnD mAnAging inTegRATeD mARkeTing CommuniCATions | chapter 19 603
Applications
Marketing Debate
Has TV Advertising Lost Its Power?
Long deemed the most successful marketing medium,
television advertising is increasingly criticized for being
too expensive and, even worse, less effective than it once
was. Critics maintain that consumers tune out too many
ads and that it is difficult to make a strong impression. The
future, claim some, is with online advertising. Supporters of
TV advertising disagree, contending that the multisensory
experience of TV is unsurpassed and that no other media
option offers the same potential impact.
Take a position: TV advertising has largely become
unimportant versus TV advertising is still the most
powerful advertising medium.
Marketing Discussion
Communications Audit
Pick a brand and go to its Web site. Locate as many
forms of communication as you can find. Conduct an
informal communications audit. What do you notice? How
consistent are the different communications?
As the company continued to expand worldwide,
it developed an integrated marketing communications
plan that reached its target audience on many differ-
ent levels and built its brand image of authenticity,
originality, and community. First, Red Bull focused on
pre-marketing, sponsoring events like the Red Bull
Snowthrill of Chamonix ski contest in France to help
build word-of-mouth excitement around the brand.
Once the company entered a new market, it built buzz
through its “seeding program,” micro-targeting trendy
shops, clubs, bars, and stores. This enabled the cultural
elite to access Red Bull’s product first and influence
other consumers. As one Red Bull executive explained,
“We go to on-premise accounts first, because the
product gets a lot of visibility and attention. It goes
faster to deal with individual accounts, not big chains
and their authorization process.” The company also
targeted opinion leaders likely to influence consumers’
purchases, including action sports athletes and enter-
tainment celebrities.
Once Red Bull gained some momentum in bars, it
moved into gyms, health food stores, restaurants, con-
venience stores near colleges, and eventually supermar-
kets. The company’s primary point-of-purchase tool has
always been its refrigerated sales units, prominently dis-
playing the Red Bull logo. These set the brand apart from
other beverages and ensure a prominent location in every
retail environment. To guarantee consistency and qual-
ity in its point-of-purchase displays, the company hired
teams of delivery van drivers whose sole responsibility
was stocking Red Bull.
Marketing Excellence
>> Red Bull
Red Bull’s integrated marketing communications mix has
been so successful that the company has created an
entirely new billion-dollar drink category—energy drinks.
In addition, Red Bull has become a multibillion-dollar
beverage brand among fierce competition from bever-
age kings like Coca-Cola, Pepsi, and Anheuser-Busch.
To date, the company has sold more than 40 billion cans
of energy drinks across 166 countries. How? Red Bull
became the energy drink market leader by skillfully con-
necting with youth around the globe and doing it differ-
ently than anyone else.
Dietrich Mateschitz founded Red Bull with a sin-
gle product in Austria in 1987. By 1997, the slender
silver-and-blue can was available in 25 markets globally,
including Western and Eastern Europe, New Zealand,
and South Africa. Its size and style immediately signaled
to consumers that its contents were different from tradi-
tional soft drinks. Red Bull’s ingredients—amino acid tau-
rine, B-complex vitamins, caffeine, and carbohydrates—
were specifically formulated to make the drink highly
caffeinated and energizing. In fact, some users have
referred to it as “liquid cocaine” or “speed in a can.” Over
the past decade, the company introduced other products
and flavors, many of which did not succeed. Today, Red
Bull offers the original Red Bull Energy Drink, Red Bull
Total Zero, Red Bull Sugar Free, and special editions
infused with berry, lime, and cranberry flavors.
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604 PART 7 | CommuniCATing VAlue
explained, “Media is not a tool that we use to estab-
lish the market. It is a critical part. It’s just later in the
development.”
Red Bull’s “anti-marketing” marketing communica-
tions strategy has been extremely successful connecting
with its young consumers. It falls directly in line with the
company’s mission to be seen as unique, original, and
rebellious—just as its Generation Y consumers want to
be viewed.
Questions
1. What are Red Bull’s greatest strengths as more
companies (like Coca-Cola, Pepsi, and Monster)
enter the energy drink category and gain market
share? What are the risks of competing against such
powerhouses?
2. Discuss the pros and cons of Red Bull’s nontradi-
tional marketing tactics. Should the company do
more traditional advertising? Why or why not?
3. Discuss the effectiveness of Red Bull’s sponsorships.
Where should the company draw the line in terms of
novelty and risk?
Sources: Kevin Lane Keller, “Red Bull: Managing a High-Growth Brand,” Best Practice Cases in
Branding, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008); Peter Ha, “Red Bull Stratos: Man
Will Freefall from Earth’s Stratosphere,” Time, January 22, 2010; “Red Bull to Go on Sale in U.S.
with Fruity Flavors,” Businessweek, October 8, 2012; www.redbull.com.
Another essential aspect of Red Bull’s marketing
communication mix is product trial. Whereas traditional
beverage marketers attempt to reach the maximum num-
ber of consumers with sampling, the company seeks to
reach consumers only in ideal usage occasions, namely
when they feel fatigue and need a boost of energy. As
a result, its sampling campaigns take place at concerts,
parties, festivals, sporting events, beaches, highway rest
areas (for tired drivers), and college libraries and in limos
before award shows.
Red Bull also aligns itself with a wide variety of
extreme sports, athletes, and teams and artists in music,
dance, and film. From motor sports to mountain biking,
snowboarding to surfing, rock concerts to extreme sail-
ing, there is no limit to the craziness of a Red Bull event
or sponsorship. A few company-sponsored events are
notorious for taking originality and extreme sporting to
the limit. For example, at the annual Flugtag, contestants
build homemade flying machines that must weigh less
than 450 pounds, including the pilot. Teams launch their
contraptions off a specially designed Red Bull–branded
ramp, 30 feet above a body of water. Crowds of as many
as 300,000 young consumers cheer as the contestants
and their craft try to stay true to the brand’s slogan: “Red
Bull gives you wings!”
Red Bull uses traditional advertising once the
market has grown mature and the company needs to
reinforce the brand to its consumers. As one executive
communications mix across television, print, events,
experiences, interaction, and social media to promote the
brand’s universal message of the power of beauty. More
than 40 years ago, L’Oreal Paris revolutionized the ad-
vertising world with the legendary slogan, “Because I am
worth it.” Written in 1973 by a 23-year-old female copy-
writer from McCann Erickson, when the idea of feminism
was at its peak, the slogan spread the message of respect
and recognition for women. The slogan’s positive and
empowering sentiment helped develop a line of celebrity
endorsements supported by 35 diverse international am-
bassadors like Jane Fonda, Jennifer Lopez, Beyoncé, and
Aishwarya Rai. The timeless appeal of the slogan is used
across many brands sold under the L’Oreal Paris umbrella,
and has been tweaked to “Because you are worth it” and
“Because we are worth it” to adapt to the changing times.
L’Oreal believes that events bring brands to life and
are a key component of its IMC strategy. It effectively in-
tegrates promotional events with the celebrity power of
its brand ambassadors from nearly 20 international red
carpets including the Cannes Film Festival. L’Oreal also
aligns its communications strategy with fashion events by
sponsoring global events like Graduate Fashion Weeks
and Fashion Weeks in London, Toronto, and Melbourne.
Marketing Excellence
>> L’Oreal
L’Oreal is one of the leading beauty and cosmetic compa-
nies in the world with well-segmented product offerings in
130 countries. Headquartered in Paris, France, L’Oreal’s
origins date back to 1909, when the young entrepre-
neur Eugene Schueller formed a company that sold hair
dyes to hairdressers. Growing through successful brand
launches and acquisitions, the company became the
L’Oreal Group. In 2013, L’Oreal had a market capitaliza-
tion of $94.76 billion with $9 billion spent on advertising
and promotion. It markets 27 global brands and operates
across five divisions selling high-end luxury cosmetics,
professional hairstyling products, specialized dermatologi-
cal products, mass-marketed consumer beauty products,
and the Body Shop brand. Some of its iconic brands are
YSL, Ralph Lauren, Lancôme, Kerastase, Redken, Vichy,
L’Oreal Paris, Maybelline, and Garnier.
L’Oreal Paris is the innovative brand from the compa-
ny’s consumer product division that sells high-end mass
marketed hair care, hair color, skin care, and makeup
products. L’Oreal uses a rich integrated marketing
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to reach relevant audiences by offering creative point-of-
purchase displays, sales presentations, demonstrations,
sampling, exhibits, and experiences within these shopping
malls. Following its worldwide approach, L’Oreal uses ce-
lebrity endorsements in the Middle East. In 2012, L’Oreal
named Najwa Karam, a top Lebanese artist and, known as
the “shining sun” of the Arab music world, as its first brand
ambassador in the Middle East. L’Oreal develops specific
promotional campaigns for popular festivals in the Middle
East as well. For example, the So Couture Eid Look cam-
paign in 2014, promoted the idea of celebrating the festival
of Eid by dressing up with the “most awaited L’Oreal Paris
Eid look,” endorsed by its latest brand spokesperson.
L’Oreal has also partnered with the online fashion store
Mooda.com to launch its first e-commerce platform in the
Middle East. This exclusive beauty-meets-fashion Web site
offers a distinctive mix of content and commerce to con-
sumers in the Middle East.
L’Oreal is changing the face of beauty marketing
by transforming its marketing model through complete
integration of its traditional and digital media. It uses
content-based marketing incorporating education, em-
powerment, and aspiration to develop creative messages
that increase its brand equity. With more than 4 billion
searches on the Web on the subject of beauty, consum-
ers are increasingly using digital and social media. L’Oreal
takes such consumer insights and the digital revolution
seriously. By developing content using how-to videos,
information on trends, fashion tips, virtual makeup trials,
celebrity appeals, and covering glamorous awards and
fashion events, L’Oreal stays relevant to the subject of
beauty globally.
Questions
1. Discuss L’Oreal Paris’s message strategy and creative
strategy in light of its slogan and use of brand am-
bassadors. Do you think L’Oreal Paris has adapted
its IMC strategy effectively in the Middle East?
2. Evaluate L’Oreal’s approach to events, experiences,
and sponsorships. Has L’Oreal been effective in
selecting its partners?
3. What are the benefits of content-based marketing for a
beauty brand like L’Oreal? Do you think L’Oreal is right in
completely integrating its traditional and digital media?
Sources: L’Oreal, www.loreal.com; L’Oreal Paris, www.lorealparisusa.com; L’Oreal Partnerships, www.
lorealparis.com; News release, “Project Runway Season 10 multi-platform Social Media Campaign
Unveils ‘Real-time Runway’ and ‘Favorite Fan’ to Complement ‘Fan Favorite’,” PR Newswire, July 19,
2012; News release, “Rent the Runway Announces L’Oreal Paris as the First Ever Presenting Sponsor
of RTR on Campus,” PR Newswire, August 26, 2013; Kelly Liyakasa, “L’Oreal CMO: Digital is Changing
Our Content, Creative and Conversation,” AdExchanger, September 13, 2013; Caroline Winter,
“L’Oreal’s Makeup Genius App: The Cosmetics Counter Goes Digital,” Businessweek, September 11,
2014; Kisten Comings, “3 Keys to L’Oreal’s Content Marketing Strategy,” iMedia Connection, September
30, 2013; Rachel McArthur, “Najwa Karam, L’Oreal’s First Arab Ambassador is Worth it,” Gulf News,
June 7, 2012; Press release, “Celebrate this Eid by dressing up in L’Oréal Paris’ most awaited Eid
look—Arwa’s So Couture Nude Look,” Go Dubai, September 4, 2014.
The L’Oreal Paris’s Powder Room, a pop-up brand experi-
ence, is set up during the fashion events where experts
provide professional advice, beauty tips, and gifts that help
in delivering synchronized brand messages to audiences.
L’Oreal also works on partnerships to gain visibility
across strategic traditional and digital media in develop-
ing its marketing communications. It successfully associ-
ated with the Emmy award-winning fashion reality show,
Project Runway that regularly featured its products on the
show. In addition to mass media sponsorships, L’Oreal’s
IMC strategy uses partnerships that work on more direct
communications. In 2013, L’Oreal partnered with Rent the
Runway, a leading online rental fashion store, for its campus
program that had a presence in more than 200 college
campuses in the U.S. with a reach of over 1.1 million fe-
male students. RTR’s network of 1,000 brand ambassa-
dors used its digital catalogs, social media, and organized
grassroots events to promote the brand. The program was
supported by L’Oreal in its nationally syndicated television
programs and on social media. Through such associations,
L’Oreal delivers a coordinated message of beauty and self-
worth to women at specifically targeted levels.
L’Oreal creatively uses interactive marketing as part of
its IMC to engage its consumers in online loyalty programs,
such as the L’Oreal Paris Gold Rewards. Consumers can
earn credit online and get free products upon collecting
enough points. Responding to the growth of online beauty
videos and utilizing the concept to build a stronger com-
munications strategy, L’Oreal teamed up with YouTube to
produce a one-stop beauty channel. The online channel,
called Destination Beauty offered its audience information
on latest trends, looks, and provided tutorials. In 2014,
offering a unique e-beauty experience, L’Oreal Paris intro-
duced its digital innovation app, Makeup Genius, a virtual
makeup tester that allows women to try different looks
and products through smart devices. L’Oreal believes this
will revolutionize the way women shop for makeup.
L’Oreal has also adapted its global communication
strategy in different local markets. For example, in the
Middle East, L’Oreal considers the region’s distinct concept
of beauty and cultural norms in developing communica-
tion messages. L’Oreal recognizes that Middle Eastern
women are becoming more sophisticated in their beauty
choices with easy access to international trends through
the Internet. L’Oreal has developed a careful blend of the
IMC tools to connect with the women in the Middle East,
and at the same time maintain synergy with its global com-
munication themes. Key elements of L’Oreal’s IMC strategy
in the Middle East include traditional advertising, sales
promotion, events, experiences, interactive marketing, and
personal selling. Each tool is implemented keeping in view
local preferences and customs. Many countries in the
Middle East, like the United Arab Emirates and Qatar, host
world-class malls that are the main entertainment destina-
tions for local families. L’Oreal uses these retail facilities
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http://www.loreal.com
http://www.lorealparisusa.com
http://www.lorealparis.com
http://www.lorealparis.com
606
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. What steps are required in developing an advertising program? (p. 608)
2. How should marketers choose advertising media and measure their
effectiveness? (p. 615)
3. How should sales promotion decisions be made? (p. 622)
4. What are the guidelines for effective brand-building events and experiences?
(p. 626)
5. How can companies exploit the potential of public relations? (p. 629)
Backed by a fully-integrated communications
program, P&G’s “Thank You Mom” Olympic
sponsorship has connected with customers
and improved sales worldwide.
Source: Xin yu tj-Imaginechina
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607
Managing Mass
Communications: Advertising,
Sales Promotions, Events and
Experiences, and Public Relations
20
Despite the enormous increase in marketers’ use of personal communications due to
the pervasive nature of the Internet, mass media are still a vitally important component of most market-
ing communications programs. The old days in which “If you build a great ad, they will come” are long gone,
however. To generate consumer interest and sales, mass media must often be supplemented and carefully
integrated with other communications. P&G has struck gold with its fully integrated Olympic-themed “Thank You
Mom” campaign.1
After its sponsorship of the U.S. national team at the 2010 Winter Olympics in Vancouver led to an
estimated $100 million in increased revenue, Procter & Gamble signed up to be an official Olympic
sponsor for the next five Summer and Winter Games from 2012 to 2020. Targeting women in their
roles as “caregivers and family anchors,” the company backed its sponsorship with the multimedia
“Thank You Mom” global marketing campaign. The “Best Job” online and broadcast ad campaign
for the 2012 Summer Olympics in London emotionally portrayed the crucial roles played by mothers whose children
went on to become Olympic champions. Each ad finished by showing the P&G corporate logo and some of its billion-
dollar-plus brands, such as Pampers, Gillette, Duracell, and Bounty. More than 70 million U.S. viewers watched at
least one digital ad or video during the fully integrated campaign. It also combined promotions, PR, cause marketing,
and other communications to “immerse the consumer with the brands and the message at every level, on every plat-
form, from smartphones to stores in 204 international markets.” P&G
marketers estimated the firm received $200 million in added sales
from the campaign. For the 2014 Winter Olympics in Sochi, Russia,
it launched the “Pick Them Back Up” campaign, which “paid homage
to moms of athletes from across the globe, bringing to life the daily
lessons all mom teach . . . and the unconditional love moms give kids
no matter what.” Additional online videos told the real-life stories of
Olympians from different countries.
Although P&G clearly has found great success with its
multimedia Olympics campaign, other marketers are trying to
come to grips with how to best use mass media in the new—
and still changing—communication environment.2 In this chap-
ter, we examine the nature and use of four mass-communication
tools—advertising, sales promotion, events and experiences,
and public relations and publicity.
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608 PART 7 | CommuniCATing VAlue
Developing and Managing
an Advertising Program
Advertising can be a cost-effective way to disseminate messages, whether to build a brand preference or to
educate people. Even in today’s challenging media environment, good ads can pay off. GEICO has succeeded by
keeping both its ad campaigns and their executions fresh.3
GeicO GEICO has spent hundreds of millions of dollars on TV advertising. Has it been worth it? Warren
Buffet, chairman and CEO of GEICO’s parent company Berkshire Hathaway, thinks so. GEICO has more than
quintupled its revenue over the past decade, from slightly under $3 billion in 1998 to more than $17 billion in
2013—making it the fastest-growing auto insurance company in the United States. The company sells directly to
consumers with a basic message, “15 Minutes Could Save You 15% or More on Your Car Insurance.” Partnering
with The Martin Agency, GEICO has run a series of highly creative and award-winning ad campaigns to emphasize
different aspects of the brand. Four ran concurrently in 2014. TV ads featuring the Cockney-speaking Gecko lizard
spokes-character reinforce GEICO’s brand image as credible and accomplished. The “Happier Than” campaign comes
up with exaggerated situations to describe how happy GEICO customers are, such as a camel on Wednesday (hump
day) or Dracula volunteering at a blood drive. A third campaign featuring Maxwell, a talking pig, focuses on specific
products and service features. The fourth campaign, “Did You Know,” starts with a person commenting on the com-
pany’s famous 15-minute slogan to a companion, who replies, “Everyone knows that.” The first speaker then tries to
save face with a twist on some other conventional wisdom, such as that Pinocchio was a poor motivational speaker
or Old McDonald was a really bad speller. The multiple campaigns complement each other and build on each other’s
success; the company dominates the TV airwaves with so many varied car insurance messages that competitors’
ads are lost.
In developing an advertising program, marketing managers must always start by identifying the target market
and buyer motives. Then they can make the five major decisions known as “the five Ms”:
1. Mission: What are our advertising objectives?
2. Money: How much can we spend and how do we allocate our spending across media types?
3. Message: What should the ad campaign say?
Fast-growing auto
insurance provider
Geico runs multiple
ad campaigns at
the same time, each
emphasizing different
aspects of its brand
and service.
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4. Media: What media should we use?
5. Measurement: How should we evaluate the results?
These decisions are summarized in Figure 20.1 and described in the following sections.
SettInG the AdvertISInG ObjectIveS
Advertising objectives must flow from earlier decisions about target market, brand positioning, and the market-
ing program. An advertising objective (or goal) is a specific communications task and achievement level to be
accomplished with a specific audience in a specific period of time:4
To increase among 30 million homemakers who own automatic washers the number who identify brand
X as a low-sudsing detergent, and who are persuaded that it gets clothes cleaner, from 10 percent to 40
percent in one year.
We classify advertising objectives according to whether they aim to inform, persuade, remind, or reinforce.
These goals correspond to stages in the hierarchy-of-effects model discussed in Chapter 19.
• Informative advertising aims to create brand awareness and knowledge of new products or new features of
existing products.5 Consumer packaged goods companies like Colgate, General Mills, and Unilever will often
focus on key product benefits.
• Persuasive advertising aims to create liking, preference, conviction, and purchase of a product or service.
Some persuasive advertising is comparative advertising, which explicitly compares the attributes of two
or more brands, such as the Chrysler TV ad for the Dodge Ram that asks, “What if you were to take away
horsepower, torque and warranty coverage from a Ram? Well, you’d end up with a Ford F-150.”6 Comparative
advertising works best when it elicits cognitive and affective motivations simultaneously and when consumers
are processing advertising in a detailed, analytical mode.7
• Reminder advertising aims to stimulate repeat purchase of products and services. Expensive, four-color
Coca-Cola ads in magazines remind people to purchase Coca-Cola.
• Reinforcement advertising aims to convince current purchasers they made the right choice. Automobile ads
often depict satisfied customers enjoying special features of their new car.
The advertising objective should emerge from a thorough analysis of the current marketing situation. If the
product class is mature, the company is the market leader, and brand usage is low, the objective is to stimulate more
usage. If the product class is new, the company is not the market leader, and the brand is superior to the leader, the
objective is to convince the market of the brand’s superiority.
decIdInG On the AdvertISInG budGet
How does a company know it’s spending the right amount? Although advertising is treated as a current expense,
part of it is really an investment in building brand equity and customer loyalty. When a company spends $5 mil-
lion on capital equipment, it can call the equipment a five-year depreciable asset and write off only one-fifth of
Message
Message generation
Message evaluation
and selection
Message execution
Social-responsibility
review Measurement
Communication impact
Sales impact
Money
Factors to consider:
Stage in PLC
Market share and
consumer base
Competition and clutter
Advertising frequency
Product substitutability
Mission
Sales goals
Advertising objectives Media
Reach, frequency, impact
Major media types
Specific media vehicles
Media timing
Geographical media
allocation
| Fig. 20.1 |
The Five Ms
of Advertising
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610 PART 7 | CommuniCATing VAlue
the cost in the first year. When it spends $5 million on advertising to launch a new product, however, it must
write off the entire cost in the first year, reducing its reported profit, even if the benefits will persist for many
years to come.
Factors aFFecting Budget decisions Here are five specific factors to consider when setting the
advertising budget:8
1. Stage in the product life cycle—New products typically merit large advertising budgets to build awareness and
gain consumer trial. Established brands usually are supported by lower advertising budgets, measured as a
ratio to sales.
2. Market share and consumer base—High-market-share brands usually require less advertising expendi-
ture as a percentage of sales to maintain share. Building share by increasing market size requires larger
expenditures.
3. Competition and clutter—In a market with a large number of competitors and high advertising spending, a
brand must advertise more heavily to be heard. Even advertisements not directly competitive to the brand cre-
ate clutter and a need for heavier advertising.
4. Advertising frequency—The number of repetitions needed to put the brand’s message across to consumers
has an obvious impact on the advertising budget.
5. Product substitutability—Brands in less-differentiated or commodity-like product classes (beer, soft drinks,
banks, and airlines) require heavy advertising to establish a unique image.
advertising elasticity The predominant response function for advertising is often concave but can be
S-shaped. When it is S-shaped, some positive amount of advertising is necessary to generate any sales impact, but
sales increases eventually flatten out.9
One classic study found that increasing the TV advertising budget had a measurable effect on sales only half the
time. The success rate was higher for new products and line extensions than for established brands and when there
were changes in copy or in media strategy (such as an expanded target market). When advertising increased sales,
its impact lasted up to two years after peak spending. Long-term incremental sales were approximately double
those in the first year of an advertising spending increase.10
Other research reinforces these conclusions. In a 2004 IRI study of 23 brands, advertising often didn’t increase
sales for mature brands or categories in decline. A review of academic research found that advertising elasticities
were estimated to be higher for new (.3) than for established (.1) products.11 Research has also found that what you
say (ad copy) is more important than the number of times you say it (ad frequency).12
develOpInG the AdvertISInG cAmpAIGn
Advertisers employ both art and science to develop the message strategy or positioning of an ad—what it attempts
to convey about the brand—and its creative strategy—how it expresses the brand claims. They use three steps:
message generation and evaluation, creative development and execution, and social-responsibility review.
Message generation and evaluation Advertisers are always seeking “the big idea” that connects
with consumers rationally and emotionally, distinguishes the brand from competitors, and is broad and flexible
enough to translate to different media, markets, and time periods. Fresh insights are important for creating unique
appeals and position.13
GOt MiLk? After a 20-year decline in milk consumption among Californians, in 1993 milk processors from
across the state formed the California Milk Processor Board (CMPB) with one goal in mind: to get people to drink more milk.
The ad agency commissioned by the CMPB, Goodby, Silverstein & Partners, developed a novel approach to pitching milk’s
benefits. Research had shown most consumers already believed milk was good for them. So the campaign reminded them
of the inconvenience of running out of it, which became known as the “milk deprivation” strategy. The “got milk?” tagline
reminded consumers to make sure they had enough milk in their refrigerators. A year after the launch, sales volume had
increased 1.07 percent. In 1995, the “got milk?” campaign was licensed to the National Dairy Board. In 1998, the National
Fluid Milk Processor Education Program, which had been using the “milk mustache” campaign since 1994 to boost sales,
bought the rights to the “got milk?” tagline, which it used for the next 15 years. The “got milk?” campaign paid strong divi-
dends by halting the decline in sales of milk in California, even more than a decade after its launch.
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A good ad normally focuses on one or two core selling propositions. As part of refining the brand position-
ing, the advertiser should conduct market research to determine which appeal works best with its target audience
and then prepare a creative brief, typically one or two pages. This is an elaboration of the positioning strategy
and includes considerations such as key message, target audience, communications objectives (to do, to know, to
believe), key brand benefits, supports for the brand promise, and media.
How many ad themes should the advertiser create before choosing one? The more themes explored, the higher
the probability of finding an excellent one. Fortunately, an ad agency’s creative department can inexpensively com-
pose many alternatives in a short time by drawing still and video images from computer files. Marketers can also
cut the cost of creative dramatically by using consumers as their creative team, a strategy sometimes called “open
sourcing” or “crowdsourcing.”14
cOnsuMer-Generated adVertisinG One of the first major marketers to feature
consumer-generated ads was Converse, whose award-winning campaign “Brand Democracy” used films created by consum-
ers in a series of TV and Web ads. H. J. Heinz ran a “Top This TV Challenge,” inviting the public to create the next commercial
for its Heinz Ketchup brand and win $57,000. More than 6,000 submissions and 10 million online views resulted, and sales
rose more than 13 percent year over year. In addition to creating ads, consumers can help disseminate advertising. A UK “Life’s
for Sharing” ad for T-Mobile in which 400 people break into a choreographed dance routine in the Liverpool Street Station was
shown exactly once on the Celebrity Big Brother television show, but it was watched more than 15 million times online when
word about it spread via e-mail messages, blogs, and social networks. McDonald’s similarly ran a popular user-generated cam-
paign for its 2012 London Olympics sponsorship. Academic researchers have shown that consumer-generated ads can create
more emotional and personal appeal, be deemed more credible and authentic, and lead to higher levels of brand loyalty and
purchase intentions among viewers than company-produced ads, at least as long as consumers are not overly skeptical.
Although entrusting consumers with a brand’s marketing effort can be pure genius, it can also be a regrettable
failure. When Kraft sought a hip name for a new flavor of its iconic Vegemite product in Australia, it labeled the
first 3 million jars “Name Me” to enlist consumer support. From 48,000 entries, however, the marketer selected one
that was thrown in as a joke—iSnack 2.0—and sales plummeted. The company had to pull iSnack jars from the
shelves and start from scratch in a more conventional fashion, choosing the new name Cheesybite.15
creative developMent and execution The ad’s impact depends not only on what it says but,
often more important, on how it says it. Creative execution can be decisive.16 Every advertising medium has
advantages and disadvantages. Here, we briefly review television, print, and radio advertising media.
Television Ads Television is generally acknowledged as the most powerful advertising medium and reaches a
broad spectrum of consumers at low cost per exposure. TV advertising has two particularly important strengths.
First, it can vividly demonstrate product attributes and persuasively explain their corresponding consumer
benefits. Second, it can dramatically portray user and usage imagery, brand personality, and other intangibles.
Because of the fleeting nature of the ad, however, and the distracting creative elements often found in it,
product-related messages and the brand itself can be overlooked. Moreover, the high volume of nonprogramming
material on television creates clutter that makes it easy for consumers to ignore or forget ads. Nevertheless, prop-
erly designed and executed TV ads can still be a powerful marketing tool that improves brand equity, sales, and
profits. In the highly competitive insurance category, advertising can help a brand to stand out.17
afLac Aflac, the largest supplier of supplemental insurance, was relatively unknown until a highly creative ad
campaign made it one of the most recognized brands in recent history. (Aflac stands for American Family Life Assurance
Company.) Created by the Kaplan Thaler ad agency, the lighthearted campaign features an irascible duck incessantly
squawking the company’s name, “Aflac!” while consumers or celebrities discuss its products. The duck’s frustrated bid for
attention appealed to consumers. Sales were up 28 percent in the first year the duck aired, and name recognition went
from 13 percent to 91 percent. Aflac has stuck with the duck in its advertising, even incorporating it into its corporate logo
in 2005. Social media have allowed marketers to further develop the duck’s personality—it has 515,000 Facebook fans
and counting. The Aflac duck is not just a U.S. phenomenon. It also stars in Japanese TV ads—with a somewhat brighter
disposition—where it has been credited with helping drive sales in Aflac’s biggest market.
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612 PART 7 | CommuniCATing VAlue
Print Ads Print media offer a stark contrast to broadcast media.
Because readers consume them at their own pace, magazines and
newspapers can provide detailed product information and effectively
communicate user and usage imagery. At the same time, the static
nature of the visual images in print media makes dynamic presentations
or demonstrations difficult, and print media can be fairly passive.
The two main print media—magazines and newspapers—share
many advantages and disadvantages. Although newspapers are timely
and pervasive, magazines are typically more effective at building user
and usage imagery. Newspapers are popular for local—especially
retailer—advertising. On an average day, roughly one-half to three-
quarters of U.S. adults read a newspaper, though increasingly online.
Print advertising has steadily declined in recent years.18 Although
advertisers have some flexibility in designing and placing newspaper
ads, relatively poor reproduction quality and short shelf life can dimin-
ish the impact.
Researchers report that the picture, headline, and copy in print ads
matter in that order. The picture must draw attention. The headline
must reinforce the picture and lead the person to read the copy. The
copy must be engaging and the brand’s name prominent. Even then, less
than 50 percent of the exposed audience will notice even a really out-
standing ad. About 30 percent might recall the headline’s main point, 25
percent register the advertiser’s name, and fewer than 10 percent read
most of the body copy. Ordinary ads don’t achieve even these results.
Some clear managerial implications emerge, as summarized in
“Marketing Memo: Print Ad Evaluation Criteria.” A print ad should be
clear, consistent, and well branded. In an award-winning campaign, ads
for the iPad Mini on the back covers of Time and The New Yorker com-
pared the actual sizes of the device and the magazine.19 To celebrate
its 75th anniversary, Ray-Ban’s award-winning “Never Hide” print ad
campaign featured seven ads showing how Ray-Ban wearers flouted
convention and stood out from the crowd through seven different decades.20
Radio Ads Radio is a pervasive medium: Ninety-three percent of all U.S. citizens age 12 and older listen daily
and for about 20 hours a week on average, numbers that have held steady in recent years. Much radio listening
occurs in the car and out of home. To be successful, radio networks are going multi-platform with a strong digital
presence to allow listeners to tune in anytime, anywhere.
In judging the effectiveness of a print ad, marketers should be able to answer yes to the following questions about its execution:
1. Is the message clear at a glance? Can you quickly tell what the ad is all about?
2. Is the benefit in the headline?
3. Does the illustration support the headline?
4. Does the first line of the copy support or explain the headline and illustration?
5. Is the ad easy to read and follow?
6. Is the product easily identified?
7. Is the brand or sponsor clearly identified?
Source: Adapted from Scott C. Purvis and Philip Ward Burton, Which Ad Pulled Best, 9th ed. (Lincolnwood, IL: NTC Business Books, 2002).
Print Ad Evaluation Criteriamarketing memo
The success of the Aflac duck has led to the character being
incorporated into the brand’s logo and appearing in many different
communications like its sponsorship of NASCAR driver Carl Edwards.
So
ur
ce
: S
M
I/
N
ew
sc
om
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Perhaps radio’s main advantage is flexibility—stations are very targeted, ads are relatively inexpensive to
produce and place, and short closings for scheduling them allow for quick response. Radio can engage listeners
through a combination of popular brands, local presence, and strong personalities.21 It is a particularly effective
medium in the morning; it can also let companies achieve a balance between broad and localized market coverage.
Radio’s obvious disadvantages are its lack of visual images and the relatively passive nature of the consumer
processing that results. Nevertheless, radio ads can be extremely creative. Clever use of music, sound, and other
creative devices can tap into the listener’s imagination to create powerfully relevant images. Here is an example:22
MOteL 6 Motel 6, the nation’s largest budget motel chain, was founded in 1962 when the “6” stood for $6
a night. After its business fortunes hit bottom in 1986 with an occupancy rate of only 66.7 percent, the company made a
number of marketing changes, including the launch of humorous 60-second radio ads featuring folksy writer Tom Bodett
delivering the clever tagline “We’ll Leave the Light on for You.” Named one of Advertising Age’s Top 100 Ad Campaigns of
the Twentieth Century, the campaign continues to receive awards, including the 2009 Radio Mercury Awards grand prize
for an ad called “DVD.” In this ad, Bodett introduces the “DVD version” of his latest commercial, utilizing his trademark self-
deprecating style to provide “behind the scenes” commentary on his own performance. Still going strong, the campaign is
credited with a rise in occupancy and a revitalization of the brand that continues to this day.
legal and social issues To break through clutter, some advertisers believe they have to push the
boundaries of what advertising consumers are used to seeing. They must be sure, however, not to overstep social
and legal norms or offend the general public or ethnic, racial, or special-interest groups.
A substantial body of U.S. laws and regulations governs advertising. Advertisers must not make false claims,
use false demonstrations, or create ads with the capacity to deceive, even if no one is actually deceived. A floor wax
advertiser can’t say the product gives six months’ protection unless it does so under typical conditions, and a diet
bread baker can’t say its product has fewer calories simply because its slices are thinner. The challenge is telling the
difference between deception and “puffery”—simple exaggerations that are not meant to be believed and that are
permitted by law. “Marketing Insight: Off-Air Ad Battles” describes a few recent legal disputes about what should
be permissible in a brand’s advertising.
Sellers in the United States are legally obligated to avoid bait-and-switch advertising that attracts buyers under
false pretenses. Suppose a seller advertises a sewing machine at $149. When consumers try to buy the advertised
machine, the seller cannot then refuse to sell it, downplay its features, show a faulty one, or promise unreasonable
delivery dates in order to switch the buyer to a more expensive machine.23
Magazine advertising can be
an effective way to build or
reinforce user imagery for
a brand, as with Ray-Ban’s
“Never Hide” campaign.
So
ur
ce
: L
ux
ot
tic
a
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614 PART 7 | CommuniCATing VAlue
Off-Air Ad Battles
In a highly competitive environment, perhaps it is not surprising that not
everyone sees eye to eye on what is suitable advertising. Here are two
notable recent disputes.
Splenda
Splenda’s tagline for its artificial sweetener was “Made from sugar, so
it tastes like sugar,” with “but it’s not sugar” in small writing almost
as an afterthought. McNeil Nutritionals, Splenda’s manufacturer, does
begin production of Splenda with pure cane sugar but burns it off in the
manufacturing process.
Merisant, maker of Equal, claimed that Splenda’s advertising
confused consumers who were likely to conclude that a product “made
from sugar” is healthier than one made from aspartame, Equal’s main
ingredient. A document from McNeil’s own files and used in court says
consumers’ perception of Splenda as “not an artificial sweetener” was
one of the biggest triumphs of the company’s marketing campaign,
which began in 2003.
Splenda became the runaway leader in the sugar-substitute cat-
egory with 60 percent of the market, leaving roughly 14 percent each to
Equal and Sweet’N Low. Although McNeil eventually agreed to settle the
lawsuit and pay Merisant an undisclosed but “substantial” award (and
change its advertising), it may have been too late to change consumers’
perception of Splenda as something sugary and sugar-free.
POM Wonderful
In May 2012, the Federal Trade Commission (FTC) issued a “cease-
and-desist” order against POM Wonderful, saying the company had
spread deceptive claims in print publications and billboards and online
that its POM pomegranate juice could treat or prevent erectile dysfunc-
tion, prostate cancer, and heart disease. The ruling came after two
years of legal back and forth. Oddly, however, POM appeared to declare
victory, running a full-page ad in the New York Times lauding the fact
that the ruling did not force it to seek re-approval from the Food and
Drug Administration (as drug companies must do). A later appeal was
rejected as the FTC continued to rule against POM ads using headlines
such as “Cheat Death” without stronger evidence.
POM was not the only one to run into trouble over pomegranates.
Welch’s settled two class-action suits for $30 million because labels
on its 100% Juice White Grape Pomegranate Flavored 3 Juice Blend
claimed more pomegranate than it really had—only 1 ounce in a
64-ounce bottle.
Sources: Sarah Hills, “McNeil and Sugar Association Settle Splenda Dispute,”
Food Navigator-usa.com, www.foodnavigator-usa.com, November 18, 2008;
James P. Miller, “Bitter Sweets Fight Ended,” Chicago Tribune, May 12, 2007;
Avery Johnson, “How Sweet It Isn’t: Maker of Equal Says Ads for J&J’s Splenda
Misled; Chemistry Lesson for Jurors,” Wall Street Journal, April 6, 2007; “In Lawsuit
Brought by POM Wonderful, a Federal Jury Finds Juice Maker Welch’s Intentionally
Misled Consumers,” Reuters, September 15, 2010; Ily Goyanes, “Welch’s Lies
about Its Juice, Pays $30 Million and No One Notices,” Miami New Times, February
24, 2011; Charlie Minato, “POM Wonderful Is Bragging about Loss to FTC in Full
Page Ads in the NY Times,” Business Insider, May 24, 2012; Alicia Mundy, “FTC
Bars Pom Juice’s Health Claims,” Wall Street Journal, January 16, 2013. For a
discussion of the possible role of corrective advertising, see Peter Darke, Laurence
Ashworth, and Robin J. B. Ritchie, “Damage from Corrective Advertising: Causes
and Cures,” Journal of Marketing 72 (November 2008), pp. 81–97.
marketing
insight
POM Wonderful has tangled with the FTC over its ad
claims.
So
ur
ce
: ©
P
re
ss
el
ec
t/
A
la
m
y
Advertising can play a more positive broader social role. The Ad Council is a nonprofit organization
that uses top-notch industry talent to produce and distribute public service announcements for nonprofits
and government agencies. From its early origins with “Buy War Bonds” posters, the Ad Council has tackled
innumerable pressing social issues through the years, from drunk driving to AIDS prevention to its current
focus on domestic violence.
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chOOSInG medIA
After choosing the message, the advertiser’s next task is to select media to carry it. The steps here are deciding
on desired reach, frequency, and impact; choosing among major media types; selecting specific media vehicles;
and setting media timing and geographical allocation. Then the marketer evaluates the results of these
decisions.
reach, Frequency, and iMpact Media selection is finding the most cost-effective media to deliver
the desired number and type of exposures to the target audience. What do we mean by the desired number of
exposures? The advertiser seeks a specified advertising objective and response from the target audience—for
example, a target level of product trial. This level depends on, among other things, level of brand awareness.
Suppose the rate of product trial increases at a diminishing rate with the level of audience awareness, as shown in
Figure 20.2(a). If the advertiser seeks a product trial rate of T *, it will be necessary to achieve a brand awareness
level of A*.
The next task is to find out how many exposures, E *, will produce a level of audience awareness of A*. The ef-
fect of exposures on audience awareness depends on the exposures’ reach, frequency, and impact:
• Reach (R). The number of different persons or households exposed to a particular media schedule at least
once during a specified time period
• Frequency (F). The number of times within the specified time period that an average person or household is
exposed to the message
• Impact (I). The qualitative value of an exposure through a given medium (thus, a food ad should have a
higher impact in Bon Appetit than in Fortune magazine)
Figure 20.2(b) shows the relationship between audience awareness and reach. Audience awareness will be
greater the higher the exposures’ reach, frequency, and impact. There are important trade-offs here. Suppose the
planner has an advertising budget of $1,000,000 and the cost per thousand exposures of average quality is $5. This
means 200,000,000 exposures ($1,000,000 ÷ [$5/1,000]). If the advertiser seeks an average exposure frequency of
10, it can reach 20,000,000 people (200,000,000 ÷ 10) with the given budget. But if the advertiser wants higher-
quality media costing $10 per thousand exposures, it will be able to reach only 10,000,000 people unless it is willing
to lower the desired exposure frequency.
The relationship between reach, frequency, and impact is captured in the following concepts:
• Total number of exposures (E). This is the reach times the average frequency; that is, E = R × F, also called
the gross rating points (GRP). If a given media schedule reaches 80 percent of homes with an average exposure
frequency of 3, the media schedule has a GRP of 240 (80 × 3). If another media schedule has a GRP of 300, it
has more weight, but we cannot tell how this weight breaks down into reach and frequency.
• Weighted number of exposures (WE). This is the reach times average frequency times average impact, that is
WE = R × F × I.
Reach is most important when launching new products, flanker brands, extensions of well-known brands,
and infrequently purchased brands or when going after an undefined target market. Frequency is most
important where there are strong competitors, a complex story to tell, high consumer resistance, or a frequent-
purchase cycle.24
T *
A*
Tr
ia
l
Awareness
A*
E*
Aw
ar
en
es
s
Reach
Frequency = 5,
Impact = 1.5
Frequency = 5,
Impact = 1
Frequency = 3,
Impact = 1
(a) Relationship between Product
Trial Rate and Audience
Awareness Level
(b) Relationship between Audience
Awareness Level and Exposure
Reach and Frequency
| Fig. 20.2 |
Relationship among
Trial, Awareness,
and the Exposure
Function
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616 PART 7 | CommuniCATing VAlue
A key reason for repetition is forgetting. The higher the forgetting rate associated with a brand, product cat-
egory, or message, the higher the warranted level of repetition. However, advertisers should not coast on a tired ad
but insist on fresh executions by their ad agency.25
choosing aMong Major Media types The media planner must know the capacity of the major
advertising media types to deliver reach, frequency, and impact. The major advertising media along with their
costs, advantages, and limitations are profiled in Table 20.1. Media planners make their choices by considering
factors such as target audience media habits, product characteristics, message requirements, and cost.
place advertising options Place advertising, or out-of-home advertising, is a broad category
including many creative and unexpected forms to grab consumers’ attention where they work, play, and, of course,
shop. Popular options include billboards, public spaces, product placement, and point of purchase.
Billboards Billboards use colorful, digitally produced graphics, backlighting, sounds, movement, and unusual—
even 3D—images.26 In New York, manhole covers have been reimagined as steaming cups of Folgers coffee; in
Belgium, eBay posted “Moved to eBay” stickers on empty storefronts; and in Germany, imaginary workers toiling
inside vending machines, ATMs, and photo booths were justification for a German job-hunting Web site to
proclaim, “Life Is Too Short for the Wrong Job.”27
New “Eyes On” measurement techniques allow marketers to better understand who has seen their outdoor
ads.28 A strong creative message can make all the difference. Chang Soda in Bangkok had enough money in its
budget for only one digital billboard. To maximize impact, it built a giant bubbling bottle onto the billboard to
illustrate the product’s carbonation. Word-of-mouth buzz quintupled bottle sales from 200,000 to 1 million.29
Public Spaces Ads are appearing in such unconventional places as movie screens, airplane bodies, and fitness
equipment, as well as in classrooms, sports arenas, office and hotel elevators, and other public places.30 Transit ads
on buses, subways, and commuter trains have become a valuable way to reach working women. “Street furniture”—
bus shelters, kiosks, and public areas—is another fast-growing option.
taBle 20.1 Profiles of Major Media Types
Medium Advantages Limitations
Newspapers Flexibility; timeliness; good local market coverage; broad
acceptance; high believability
Short life; poor reproduction quality; small “pass-along”
audience
Television Combines sight, sound, and motion; appealing to the
senses; high attention; high reach
High absolute cost; high clutter; fleeting exposure; less
audience selectivity
Direct mail Audience selectivity; flexibility; no ad competition within
the same medium; personalization
Relatively high cost; “junk mail” image
Radio Mass use; high geographic and demographic selectivity;
low cost
Audio presentation only; lower attention than television;
nonstandardized rate structures; fleeting exposure
Magazines High geographic and demographic selectivity; credibility
and prestige; high-quality reproduction; long life; good
pass-along readership
Long ad purchase lead time; some waste in circulation
Outdoor Flexibility; high repeat exposure; low cost; low competition Limited audience selectivity; creative limitations
Yellow Pages Excellent local coverage; high believability; wide reach;
low cost
High competition; long ad purchase lead time; creative
limitations
Newsletters Very high selectivity; full control; interactive opportunities;
relative low costs
Costs could run away
Brochures Flexibility; full control; can dramatize messages Overproduction could lead to runaway costs
Telephone Many users; opportunity to give a personal touch Relative high cost; increasing consumer resistance
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mAnAging mAss CommuniCATions | chapter 20 617
Advertisers can buy space in stadiums and arenas and on garbage
cans, bicycle racks, parking meters, airport luggage carousels, eleva-
tors, gasoline pumps, the bottom of golf cups and swimming pools,
airline snack packages, and supermarket produce in the form of tiny
labels on apples and bananas. They can even buy space in toilet stalls
and above urinals, which office workers visit an average of three to
four times a day for roughly four minutes per visit.31
Product Placement Marketers pay $100,000 to $500,000 so their
products will make cameo appearances in movies and on television.32
Sometimes such product placements are the result of a larger network
advertising deal, but small product-placement shops also maintain ties
with prop masters, set designers, and production executives.
Some firms get product placement at no cost. Nike does not pay
to be in movies but often supplies shoes, jackets, bags, and so on.
Increasingly, products and brands are being woven directly into the
story, as when a new iPad for the gadget-loving dad of Modern Family
became the story arc of a whole episode. In some cases, however, brands
pay for the rights to appear in a movie, as with Skyfall.33
skyfaLL With Skyfall, the 23rd film in the franchise, Heineken
reportedly paid almost $40 million for the rights to have James Bond drink
its beer instead of his traditional vodka martini, covering a third of the film’s
estimated production budget. Marketers with the most on-screen presence
beyond Heineken’s in the film included Adidas, Aston Martin, Audi, Omega,
Sony, and Tom Ford. One research firm estimated that brands in the film
received more than $7.6 million worth of exposure during its opening week-
end. Some brands featured their movie promotion off-screen too. Heineken
shot an extravagant 90-second ad featuring an inventive chase on a train
that ended with a cameo appearance by Daniel Craig, the British actor cur-
rently playing Bond. More than 22 million people viewed the campaign on-
line, and Heineken’s “Crack the Case” promotion invited consumers in major
cities to demonstrate their Bond-like skills in a game.
Product placement is not immune to criticism; lawmakers fault its stealth nature, threatening to force more
explicit disclosure of participating advertisers.34
Point of Purchase Chapter 18 discussed shopper marketing and in-store marketing efforts. The appeal of
point-of-purchase advertising is that consumers make many brand decisions in the store—74 percent according
to one study.35
There are many ways to communicate at the point of purchase (P-O-P), including ads on shopping carts,
cart straps, aisles, and shelves and in-store demonstrations, live sampling, and instant coupon machines.36 Some
supermarkets are selling floor space for company logos and experimenting with talking shelves. Mobile marketing
reaches consumers via smart phones when in store. P-O-P radio provides FM-style programming and commercial
messages to thousands of food stores and drugstores nationwide. Video screens in some stores, such as Walmart,
play TV-type ads.37
WaLMart sMart netWOrk Walmart, an in-store advertising pioneer, replaced its
original program with a new SMART network in 2008 playing on 27,000 individual screens in its 2,700 stores nation-
wide. Programming reaches 160 million viewers every four weeks with large welcome screens at the entrance of the
store, a category screen in departments, and endcap screens on each aisle. Advertisers pay $325,000 for 30-second
spots per two-week cycle in the grocery section and $650,000 per four-week run in the health and beauty department.
Five-second ads running every two minutes for two weeks on the welcome screens are $80,000, and 10-second spots
Heineken was a big sponsor of the popular James Bond film Skyfall,
using product placement, ads, and a promotion as support.
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running twice every six minutes on the full network cost $50,000 per week. By linking the time when ads were shown
and when product sales were made, Walmart can estimate how much ads increase sales by department (from 7 percent
in Electronics to 28 percent in Health & Beauty) and by product type (mature items increase 7 percent, seasonal items
18 percent).
evaluating alternate Media Nontraditional media can often reach a very precise and captive
audience in a cost-effective manner, with ads anywhere consumers have a few seconds to notice them. The message
must be simple and direct. Outdoor advertising, for example, is often called the “15-second sell.” It’s more effective
at enhancing brand awareness or brand image than at creating new brand associations.
Unique ad placements designed to break through clutter may also be perceived as invasive and obtrusive, how-
ever, especially in traditionally ad-free spaces such as in schools, on police cruisers, and in doctors’ waiting rooms.
Nevertheless, perhaps because of their sheer pervasiveness, some consumers seem less bothered by nontraditional
media now than in the past. “Marketing Insight: Playing Games with Brands” describes the how brands have be-
come infused in gaming.
The challenge for nontraditional media is demonstrating its reach and effectiveness through credible, indepen-
dent research. But there will always be room for creativity, as when Intel struck a five-year deal with the famed FC
Barcelona soccer team to place its Intel Inside logo on the inside of players’ jerseys, so when they lifted their shirts
after scoring a goal, a customary gesture, the logo would appear.38
selecting speciFic Media vehicles The media planner must choose the most cost-effective vehicles
within each chosen media type. The advertiser who decides to buy 30 seconds of advertising on network television
can pay $75,000 for a new show, $350,000 for a popular prime-time show such as Sunday Night Football, The Big
Bang Theory, or The Voice, or almost $4 million for the Super Bowl.39 These choices are critical: The average cost
to produce a national 30-second television commercial is about $300,000,40 so it can cost as much to run an ad
once on network TV as to create and produce it to start with! “Marketing Memo: Winning The Super Bowl of
Advertising” describes how marketers approach the biggest event on the U.S. sports scene.
Media planners rely on measurement services that estimate audience size, composition, and media cost and
then calculate the cost per thousand persons reached. A full-page, four-color ad in Sports Illustrated cost ap-
proximately $412,500 in 2014. If Sports Illustrated’s estimated readership was 3 million people, the cost of expos-
ing the ad to 1,000 persons was $13.75. The same ad in People cost approximately $337,400 and reached 3.475
Playing Games with Brands
More than half of U.S. adults and virtually all teens (97 percent) play
video games, and about one in five play every day or almost every day.
About 40 percent of gamers are women, who prefer puzzles and col-
laborative games, whereas men seem more attracted to competitive
or simulation games. Given this explosive popularity, many advertisers
have gotten on board.
A top-notch “advergame” can cost between $100,000 and
$500,000 to develop. The game can be played on the sponsor’s
corporate homepage, on gaming portals, or even at public locations
such as restaurants. Apple Jacks has an advergame on its Web site
called Race to the Bowl Rally that targets kids and gives point bonuses
for picking up Apple Jacks on the race course. In the M&M Chocolate
Factory game, users help the M&M characters make their way through
12 different game levels inside a candy factory and can share content
via Facebook and Twitter. Marketers collect valuable customer data
upon registration and often seek permission to send e-mail. Among
players of a game sponsored by Ford Escape SUV, 54 percent signed
up for e-mail.
Marketers are also starring in popular games. Gatorade appears
in NBA 2k13, AXE body spray in Splinter Cell: Chaos Theory, and White
Castle in Homefront. Mainstream marketers such as Apple, Procter
& Gamble, Toyota, and Visa have all developed games. By integrating
branded structures into a city-building game called We City for mo-
bile devices, Century 21 increased brand awareness with key 25- to
34-year-old targets.
Research suggests gamers are fine with ads and the way they af-
fect the game experience. One study showed 70 percent of gamers felt
dynamic in-game ads “contributed to realism,” “fit the games” in which
they served, and looked “cool.”
Sources: Lauren Johnson, “Mars Ups Brand-Building Efforts through Mobile
Game,” Mobile Marketer, December 12, 2012; Molly Soat, “Virtual Development,”
Marketing News, May 31, 2103; Michelle Kung, “We Interrupt This Video Game for
a Word from Our Sponsor,” Wall Street Journal, June 13, 2011; www.applejacks.
com/games/race-to-the-rally; Amanda Lenhart, “Video Games: Adults Are Players
Too,” Pew Internet & American Life Project, www.pewresearch.org, December 7,
2008; Erika Brown, “Game On!” Forbes, July 24, 2006, pp. 84–86.
marketing
insight
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mAnAging mAss CommuniCATions | chapter 20 619
The Super Bowl attracts the largest audience on television; 111 million viewers watched Fox’s broadcast in 2014. With an audience that large, a 30-second
ad slot sold for a pricey $4 million.
From the first game in 1975, Super Bowl advertising has grown in importance as football has become more popular. Apple’s iconic “1984” spot launch-
ing Macintosh computers featured a futuristic Orwellian world shot by famed film director Ridley Scott and ushered in a new world of Super Bowl advertising.
Appearing just once during a one-sided victory by the Los Angeles Raiders over the Washington Redskins, the ad became the talk of the game, and marketers
and ad agencies began to look at advertising in the game in a more ambitious way.
The introduction of the USA Today ad meter in 1989 focused even more consumer attention on the ads and their entertainment value. While the normal
rate of audience tune-out during a commercial is 4 percent, Super Bowl ads average less than 1 percent. They have been shown to be more memorable and
likable than typical ads and can even give a firm’s stock price a bump.
Many Super Bowl ads now have a new purpose: to create curiosity and interest so consumers will go online and engage in social media and word of mouth
to uncover more detailed information. The most popular—like a Honda CR-V ad with Matthew Broderick spoofing his Ferris Bueller film role and a VW ad with
a young kid playing Darth Vader—drew tens of millions of YouTube views. Increasingly, ads are released online before the game as firms attempt to maximize
their social media and PR power.
Given the large and diverse audience, many Super Bowl advertisers try to please as many people as possible, employing cute babies, playful animals, and
slapstick humor. But Paul Venables, a Super Bowl ad veteran, recommends being as clear as possible about the strategic goal sought. Is it to generate social
media buzz, online product searches, or store or dealer visits? As he says, “There are a million metrics and you have to decide what you are measuring.”
Another agency leader, Brad Kay, advocates a holistic approach, leveraging the high-profile TV spot to create more conversion opportunities online.
Sources: Ellen Killoran, “Super Bowl Ads 2014: What Does $4 Million Really Buy You?,” International Business Times, January 30, 2014; Jin-Woo Kim, Traci H. Freling,
and Douglas B. Grisaffe, “The Secret Sauce for Super Bowl Advertising,” Journal of Advertising Research 53 (June 2013), pp. 134–49; Noreen O’Leary, “How to Win the
Super Bowl,” Adweek, January 28, 2013; Lucia Moses, “Ad Play,” Adweek, January 28, 2013; Alex Konrad, “5 Ways the Super Bowl Ad Playbook Has Changed,” www.tech
.fortune.cnn.com, February 2, 2012; Michael Learmonth, “How USA Today’s Ad Meter Broke Super Bowl Advertising,” Advertising Age, January 30, 2012; Bruce Horovitz,
“Super Bowl Marketers Go All Out to Create Hype, Online Buzz,” USA Today, February 8, 2010.
Winning The Super Bowl of Advertisingmarketing memo
The Super Bowl is a
media extravaganza
that many advertisers
covet, even its halftime
shows as with Super
Bowl XLVIII in 2014
featuring Bruno Mars
and special guests Red
Hot Chili Peppers.
So
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: ©
T
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on
te
nt
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million people—at a lower cost-per-thousand of $9.71.41 Magazines often put together a “reader profile” for their
advertisers, describing average readers’ age, income, residence, marital status, and leisure activities.
Marketers need to adjust the cost-per-thousand measure. First, consider audience quality. For a baby lotion ad,
a magazine read by 1 million young parents has an exposure value of 1 million; if read by 1 million teenagers, it has
an exposure value of almost zero. Second, look at audience-attention probability. Readers of Vogue may pay more
attention to ads than do readers of Sports Illustrated. Third is the medium’s editorial quality, meaning its prestige
and believability. People are more likely to believe a TV or radio ad when it appears within a program they like.
Fourth, consider the value of ad placement policies and extra services, such as regional or occupational editions and
lead-time requirements for magazines.
Media planners are using more sophisticated measures of effectiveness and employing them in mathematical
models to arrive at the best media mix.42 Many advertising agencies use software programs to select the initial me-
dia and make improvements based on subjective factors.
selecting Media tiMing and allocation In choosing media, the advertiser makes both a
macroscheduling and a microscheduling decision. The macroscheduling decision relates to seasons and the business
cycle. Suppose 70 percent of a product’s sales occur between June and September. The firm can vary its advertising
expenditures to follow the seasonal pattern, to oppose the seasonal pattern, or to be constant throughout the year.
The microscheduling decision calls for allocating advertising expenditures within a short period to obtain maxi-
mum impact. Suppose the firm decides to buy 30 radio spots in September. The left side of Figure 20.3 shows that
advertising messages for the month can be concentrated (“burst” advertising), dispersed continuously throughout
the month, or dispersed intermittently. The top side shows they can be beamed with a level, rising, falling, or alter-
nating frequency.
The chosen pattern should meet the marketer’s communications objectives and consider three factors. Buyer
turnover expresses the rate at which new buyers enter the market; the higher this rate, the more continuous the
advertising should be. Purchase frequency is the number of times the average buyer buys the product during the
period; the higher the purchase frequency, the more continuous the advertising should be. The forgetting rate is
the rate at which the buyer forgets the brand; the higher the forgetting rate, the more continuous the advertising
should be.
In launching a new product, the advertiser must choose among continuity, concentration, flighting, and pulsing.
• Continuity means exposures appear evenly throughout a given period. Generally, advertisers use continuous
advertising in expanding markets, with frequently purchased items, and in tightly defined buyer categories.
• Concentration calls for spending all the advertising dollars in a single period. This makes sense for products
with one selling season or related holiday.
• Flighting calls for advertising during a period, followed by a period with no advertising, followed by a second
period of advertising activity. It is useful when funding is limited, the purchase cycle is relatively infrequent, or
items are seasonal.
(1) (2) (3) (4)
(5) (6) (7) (8)
(9) (10) (11) (12)
Level
Concentrated
Continuous
Intermittent
Rising Falling Alternating
Number of
Messages
per Month
Month
| Fig. 20.3 |
Classification of
Advertising Timing
Patterns
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mAnAging mAss CommuniCATions | chapter 20 621
• Pulsing is continuous advertising at low levels, reinforced periodically by waves of heavier activity. It draws on
the strengths of continuous advertising and flights to create a compromise scheduling strategy. Those who fa-
vor pulsing believe the audience will learn the message more thoroughly and at a lower cost to the firm.43
A company must allocate its advertising budget over space as well as over time. It makes “national buys”
when it places ads on national TV networks or in nationally circulated magazines. It makes “spot buys” when
it buys TV time in just a few markets or in regional editions of magazines. These markets are called areas of
dominant influence (ADIs) or designated marketing areas (DMAs). The company makes “local buys” when it
advertises in local newspapers, radio, or outdoor sites.
evAluAtInG AdvertISInG effectIveneSS
Most advertisers try to measure the communication effect of an ad—that is, its potential impact on aware-
ness, knowledge, or preference. They would also like to measure its sales effect.
coMMunication-eFFect research Communication-effect research, called copy testing, seeks
to determine whether an ad is communicating effectively. Marketers should perform this test both before an
ad is put into media and after it is printed or broadcast. Table 20.2 describes some specific advertising pretest
research techniques.
Pretest critics maintain that agencies can design ads that test well but may not necessarily perform well in
the marketplace. Proponents maintain that useful diagnostic information can emerge and that pretests should
not be used as the sole decision criterion anyway. Widely acknowledged as one of the best advertisers around,
Nike is known for doing very little ad pretesting.
Many advertisers use posttests to assess the overall impact of a completed campaign. If a company hoped to
increase brand awareness from 20 percent to 50 percent and succeeded in increasing it to only 30 percent, then
it is not spending enough, its ads are poor, or it has overlooked some other factor.
sales-eFFect research What sales are generated by an ad that increases brand awareness by
20 percent and brand preference by 10 percent? The fewer or more controllable other factors such as features
and price are, the easier it is to measure advertising’s effect on sales. The sales impact is easiest to measure in
direct marketing situations and hardest in brand or corporate image-building advertising.
Companies want to know whether they are overspending or underspending on advertising. One way to
answer this question is to work with the formulation shown in Figure 20.4. A company’s share of advertising
expenditures produces a share of voice (proportion of company advertising of that product to all advertising of
that product) that earns a share of consumers’ minds and hearts and, ultimately, a share of market.
taBle 20.2 Advertising Pretest Research Techniques
For Print AdS
Starch and Gallup & Robinson Inc. are two widely used print pretesting services. Test ads are placed in magazines,
which are then circulated to consumers. These consumers are contacted later and interviewed. Recall and recognition
tests are used to determine advertising effectiveness.
For BroAdcASt AdS
In-home tests: A video is taken or downloaded into the homes of target consumers, who then view the commercials.
Trailer tests: In a trailer in a shopping center, shoppers are shown the products and given an opportunity to select
a series of brands. They then view commercials and are given coupons to be used in the shopping center.
Redemption rates indicate commercials’ influence on purchase behavior.
Theater tests: Consumers are invited to a theater to view a potential new television series along with some
commercials. Before the show begins, consumers indicate preferred brands in different categories; after the viewing,
consumers again choose preferred brands. Preference changes measure the commercials’ persuasive power.
On-air tests: Respondents are recruited to watch a program on a regular TV channel during the test commercial
or are selected based on their having viewed the program. They are asked questions about commercial recall.
Share of
expenditures
Share of
voice
Share of
mind and
heart
Share of
market
| Fig. 20.4 |
Formula for
Measuring
Different
Stages in the
Sales Impact
of Advertising
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Researchers can measure sales impact with the historical approach, which uses advanced statistical techniques
to correlate past sales to past advertising expenditures.44 Other researchers use experimental data to measure
advertising’s sales impact. A growing number of researchers measure the sales effect of advertising expenditures
instead of settling for communication-effect measures.45 Millward Brown International has conducted tracking
studies for years to help advertisers decide whether their advertising is benefiting their brand.46
Sales Promotion
Sales promotion, a key ingredient in marketing campaigns, consists of a collection of incentive tools, mostly
short term, designed to stimulate quicker or greater purchase of particular products or services by consumers or
the trade.47 Whereas advertising offers a reason to buy, sales promotion offers an incentive.
AdvertISInG verSuS prOmOtIOn
Although sales promotion expenditures increased as a percentage of budget expenditure for a number of years,
their growth has recently slowed. Consumers began to tune out promotions: Coupon redemption peaked in 1992
at 7.9 billion coupons but dropped to 2.9 billion by 2013.48 Incessant price reductions, coupons, deals, and pre-
miums can also devalue the product in buyers’ minds. Having turned to 0 percent financing, hefty cash rebates,
and special lease programs during sluggish economic times, auto manufacturers have found it difficult to wean
consumers from discounts ever since.49
Some sales promotion tools are consumer franchise building. They impart a selling message along with the deal,
such as free samples, frequency awards, coupons with a selling message, and premiums related to the product. Sales
promotion tools that are typically not brand building include price-off packs, consumer premiums not related to a
product, contests and sweepstakes, consumer refund offers, and trade allowances.
Sales promotions in markets of high brand similarity can produce a high sales response in the short run
but little permanent gain over the longer term. In markets with high brand dissimilarity, they may be able
to alter market shares permanently. In addition to brand switching, consumers may engage in stockpiling—
purchasing earlier than usual (purchase acceleration) or buying extra quantities. But sales may then hit a
post-promotion dip.50
Price promotions also may not build permanent total-category volume. One study of more than 1,000 pro-
motions concluded that only 16 percent paid off.51 Small-share competitors may benefit from sales promotion
because they cannot match market leaders’ advertising budgets, nor can they obtain shelf space without offering
trade allowances or stimulate consumer trial without offering incentives. Dominant brands offer deals less fre-
quently because most deals subsidize only current users.
Consumer franchise-building promotions can offer the best of both worlds—building brand equity while mov-
ing product. McDonald’s, Dunkin’ Donuts, and Starbucks have given away millions of samples of their new prod-
ucts because consumers like them and they often lead to higher long-term sales for quality products.52 Gain’s “Love
at First Sniff ” campaign used direct mail and in-store scented tear-pads and ShelfVision TV to entice consumers to
smell the product, resulting in an almost 500 percent increase in shipments over the goal.53
The fastest-growing area in sales promotions is digital coupons, redeemed via smart phone or downloaded to
a consumer’s printer. Digital coupons eliminate printing costs, reduce paper waste, are easily updatable, and have
higher redemption rates. Coupons.com gets 620,000 unique daily visitors looking for money-saving deals, and
CoolSavings.com gets 120,000 seeking money-saving coupons and offers from name brands as well as helpful
tips and articles, newsletters, free recipes, sweepstakes, free trials, free samples, and more. Many retailers are now
offering customized coupons based on consumer purchase histories.54 One firm has devised a very different way
for firms to offer discounts.55
GrOuPOn Groupon launched in 2008 to help businesses leverage the Internet and e-mail to use promo-
tions as a form of advertisement. Specifically, the company sends its large base of subscribers a humorously worded
daily deal—a specific percentage or dollar amount off the regular price—for a specific client’s branded product or
service. Through these e-mailed discounts, Groupon offers client firms three benefits: increased consumer exposure to
the brand, the ability to price discriminate, and the creation of a “buzz factor.” Groupon takes 40 percent to 50 percent
of the revenues in each deal in the process. Many promotions are offered on behalf of local retailers such as spas, fit-
ness centers, and restaurants, but Groupon also manages deals on behalf of some national brands. Some businesses
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have complained that Groupon attracts only deal-seekers and is not as effective in converting regular customers. One
study found that 32 percent of companies lost money and 40 percent said they would not utilize such a promotion again,
with restaurants faring the worst among service businesses and spas and salons being the most successful. Groupon
has tried to innovate in several ways. Leveraging its massive sales force to sell Groupon Now, the company enlists local
businesses to offer time- and location-specific deals via the Web or smart phones. The iPhone app for the new service
has two buttons, “I’m Bored” and “I’m Hungry,” to trigger deals in real time. For businesses, the service is a way to boost
traffic at otherwise slow times. Even a popular restaurant might still consider some midday and midweek discounts
knowing it is rarely full then. After a heavily hyped IPO, its stock has not performed well as Groupon struggles to find the
right business formula.
mAjOr decISIOnS
In using sales promotion, a company must establish its objectives, select the tools, develop the program, imple-
ment and control it, and evaluate the results.
estaBlishing oBjectives Sales promotion objectives derive from communication objectives, which
derive from basic marketing objectives for the product.
• For consumers, objectives include encouraging more frequent purchases or purchase of larger-sized units
among users, building trial among nonusers, and attracting switchers away from competitors’ brands. If some
of the brand switchers would not have otherwise tried the brand, promotion can yield long-term increases
in market share.56 Ideally, consumer promotions have short-run sales impact and long-run brand equity
effects.57
• For retailers, objectives include persuading retailers to carry new items and more inventory, encouraging
off-season buying, encouraging stocking of related items, offsetting competitive promotions, building brand
loyalty, and gaining entry into new retail outlets.
• For the sales force, objectives of promotion include encouraging their support of a new product or model,
encouraging more prospecting, and stimulating off-season sales.
selecting consuMer proMotion tools The promotion planner should take into account
the type of market, sales promotion objectives, competitive conditions, and each tool’s cost-effectiveness. The
main consumer promotion tools are summarized in Table 20.3. Manufacturer promotions in the auto industry,
for instance, are rebates, gifts to motivate test-drives and purchases, and high-value trade-in credit. Retailer
promotions include price cuts, feature advertising, retailer coupons, and retailer contests or premiums.58
selecting trade proMotion tools Manufacturers use a number of trade promotion tools (see
Table 20.4).59 They award money to the trade (1) to persuade the retailer or wholesaler to carry the brand; (2) to
persuade the retailer or wholesaler to carry more units than the normal amount; (3) to induce retailers to promote
the brand by featuring, display, and price reductions; and (4) to stimulate retailers and their sales clerks to push the
product.
The growing power of large retailers has increased their ability to demand trade promotion.60 The manufac-
turer’s sales force and its brand managers are often at odds here. The sales force says local retailers will not keep the
company’s products on the shelf unless they receive more trade promotion money, whereas brand managers want
to spend their limited funds on consumer promotion and advertising.
Manufacturers often find it difficult to police retailers to make sure they are doing what they agreed to do and
increasingly insist on proof of performance before paying any allowances. Manufacturers face several challenges in
managing trade promotions.
• Some retailers are doing forward buying—that is, buying a greater quantity during the deal period than they
can immediately sell. The manufacturer must then schedule more production than planned and bear the costs
of extra work shifts and overtime.
• Some retailers are diverting, buying more than needed in a region where the manufacturer offers a deal and
shipping the surplus to their stores in non-deal regions.
Manufacturers handle forward buying and diverting by limiting the amount they will sell at a discount or by
producing and delivering less than the full order in an effort to smooth production.61
Ultimately, many manufacturers feel trade promotion has become a nightmare. It contains layers of deals, is
complex to administer, and often leads to lost revenues.
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taBle 20.3 Major Consumer Promotion Tools
Samples: Offer of a free amount of a product or service delivered door to door, sent in the mail, picked up in a store,
attached to another product, or featured in an advertising offer.
Coupons: Certificates entitling the bearer to a stated saving on the purchase of a specific product: mailed, enclosed in
other products or attached to them, inserted in magazine and newspaper ads, or emailed or made available online.
Cash Refund Offers (rebates): Provide a price reduction after purchase rather than at the retail shop: Consumer
sends a specified “proof of purchase” to the manufacturer who “refunds” part of the purchase price by mail.
Price Packs (cents-off deals): Offers to consumers of savings off the regular price of a product, flagged on the
label or package. A reduced-price pack is a single package sold at a reduced price (such as two for the price of one).
A banded pack is two related products banded together (such as a toothbrush and toothpaste).
Premiums (gifts): Merchandise offered at a relatively low cost or free as an incentive to purchase a particular
product. A with-pack premium accompanies the product inside or on the package. A free in-the-mail premium is
mailed to consumers who send in a proof of purchase, such as a box top or UPC code. A self-liquidating premium is
sold below its normal retail price to consumers who request it.
Frequency Programs: Programs providing rewards related to the consumer’s frequency and intensity in purchasing
the company’s products or services.
Prizes (contests, sweepstakes, games): Prizes are offers of the chance to win cash, trips, or merchandise as a result
of purchasing something. A contest calls for consumers to submit an entry to be examined by a panel of judges who will
select the best entries. A sweepstakes asks consumers to submit their names in a drawing. A game presents consumers
with something every time they buy—bingo numbers, missing letters—which might help them win a prize.
Patronage Awards: Values in cash or in other forms that are proportional to patronage of a certain vendor or group
of vendors.
Free Trials: Inviting prospective purchasers to try the product without cost in the hope that they will buy.
Product Warranties: Explicit or implicit promises by sellers that the product will perform as specified or that the seller
will fix it or refund the customer’s money during a specified period.
Tie-in Promotions: Two or more brands or companies team up on coupons, refunds, and contests to increase pulling
power.
Cross-Promotions: Using one brand to advertise another noncompeting brand.
Point-of-Purchase (P-O-P) Displays and Demonstrations: P-O-P displays and demonstrations take place at the
point of purchase or sale.
taBle 20.4 Major Trade Promotion Tools
Price-Off (off-invoice or off-list): A straight discount off the list price on each case purchased during a stated
time period.
Allowance: An amount offered in return for the retailer’s agreeing to feature the manufacturer’s products in some
way. An advertising allowance compensates retailers for advertising the manufacturer’s product. A display allowance
compensates them for carrying a special product display.
Free Goods: Offers of extra cases of merchandise to intermediaries who buy a certain quantity or who feature
a certain flavor or size.
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selecting Business and sales Force proMotion tools Companies spend billions of
dollars on business and sales force promotion tools (see Table 20.5) to gather leads, impress and reward customers,
and motivate the sales force.62 They typically develop budgets for tools that remain fairly constant from year to
year. For many new businesses that want to make a splash to a targeted audience, especially in the B-to-B world,
trade shows are an important tool, but the cost per contact is the highest of all communication options.
developing the prograM In planning sales promotion programs, marketers are increasingly blending
several media into a total campaign concept, such as the following award-winning promotion.63
saMsunG To promote its pricy ($450) Galaxy camera brand, Samsung developed a clever mobile and
social campaign, “Life’s a Photo: Take It.” A two-month contest asked 32 of the most popular Instagram influencers from
eight international markets to trade their favorite camera phone app for the Samsung Galaxy camera. Their task was to
use the new camera to showcase their city on Instagram and Tumblr to prove it was the most photogenic. Each week a
different feature of the camera was showcased and fans voted on their favorite photos. A video outlining the campaign
was viewed 1.3 million times, brand awareness of the Galaxy camera improved 58 percent, and purchase intent increased
115 percent.
In deciding to use a particular incentive, marketers must first determine its size. A certain minimum discount
is necessary if the promotion is to succeed. Second, the marketing manager must establish conditions for par-
ticipation. Incentives might be offered to everyone or to select groups. Third, the marketer must decide on the
duration of the promotion. Fourth, the marketer must choose a distribution vehicle. A 50-cents-off coupon can be
distributed in the product package, in stores, by mail, online, or in advertising. Fifth, the marketing manager must
establish the timing of promotion and, finally, the total sales promotion budget. The cost of a particular promo-
tion consists of the administrative cost (printing, mailing, and promoting the deal) and the incentive cost (cost of
premium or cents-off, including redemption costs), multiplied by the expected number of units sold. The cost of a
coupon deal recognizes that only a fraction of consumers will redeem the coupons.
iMpleMenting and evaluating the prograM Marketing managers’ implementation and
control plans must cover lead time and sell-in time for each individual promotion. Lead time is the time necessary
to prepare the program prior to launching it. Sell-in time begins with the promotional launch and ends when
approximately 95 percent of the deal merchandise is in the hands of consumers.
Manufacturers can evaluate the program using sales data, consumer surveys, and experiments.
• Sales (scanner) data help analyze the types of people who took advantage of the promotion, what they bought
before the promotion, and how they behaved later toward the brand and other brands. Sales promotions are
most successful when they attract competitors’ customers who then switch.
taBle 20.5 Major Business and Sales Force Promotion Tools
Trade Shows and Conventions: Industry associations organize annual trade shows and conventions. These are
a multibillion-dollar business, and business marketers may spend as much as 35 percent of their annual promotion
budget on them. Attendance can top 70,000 for large shows held by the restaurant or hotel-motel industries. The
International Consumer Electronics Show is one of the largest in the world, with more than 150,000 attendees in
2013. Participating vendors can generate new sales leads, maintain customer contacts, introduce new products,
meet new customers, sell more to present customers, and educate customers with publications, videos, and other
audiovisual materials.
Sales Contests: A sales contest aims at inducing the sales force or dealers to increase sales results over a stated
period, with prizes (money, trips, gifts, or points) going to those who succeed.
Specialty Advertising: Specialty advertising consists of useful, low-cost items bearing the company’s name and
address, and sometimes an advertising message, that salespeople give to prospects and customers. Common
items are ballpoint pens, calendars, key chains, flashlights, tote bags, and memo pads.
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• Consumer surveys can uncover how many consumers recall the promotion, what they thought of it, how many
took advantage of it, and how it affected later brand-choice behavior.64
• Experiments vary such attributes as incentive value, duration, and distribution media. For example, coupons
can be sent to half the households in a consumer panel. Scanner data can track whether they led more people
to buy the product and when.
Additional costs include the risk that promotions might decrease long-run brand loyalty or be more expensive
than they appear. Some are inevitably distributed to the wrong consumers. Special production runs, extra sales
force effort, and handling requirements bring other costs. Finally, certain promotions irritate retailers, who may
demand extra trade allowances or refuse to cooperate.
Events and Experiences
The IEG Sponsorship Report estimated that marketers spent $19.8 billion on sponsorships in North America
during 2013, with 70 percent going to sports; another 10 percent to entertainment tours and attractions; 4 percent
to festivals, fairs, and annual events; 4 percent to the arts; 3 percent to associations and membership organiza-
tions; and 9 percent to cause marketing.65 Becoming part of a personally relevant moment in consumers’ lives
through sponsored events and experiences can broaden and deepen a company’s or brand’s relationship with the
target market.
Daily encounters with brands may also affect consumers’ brand attitudes and beliefs. Atmospheres are “pack-
aged environments” that create or reinforce leanings toward product purchase. Law offices decorated with Oriental
rugs and oak furniture communicate “stability” and “success.”66 A five-star hotel will use elegant chandeliers,
marble columns, and other tangible signs of luxury.
eventS ObjectIveS
Marketers report a number of reasons to sponsor events:
1. To identify with a particular target market or lifestyle—Customers can be targeted geographically,
demographically, psychographically, or behaviorally according to events. Old Spice sponsors college sports—
including its college basketball Old Spice Classic in late November—to highlight product relevance and
sample among its target audience of 16- to 24-year-old males.
2. To increase salience of company or product name—Sponsorship offers sustained exposure for a brand, a
necessary condition for reinforcing brand salience. Top-of-mind awareness for soccer World Cup sponsors
Emirates, Hyundai, Kia, and Sony benefited from the repeated brand and ad exposure over the month-long
tournament.
3. To create or reinforce perceptions of key brand image associations—Events themselves have associations
that help to create or reinforce brand associations.67 To toughen its image and appeal to the heartland, Toyota
Tundra sponsors B.A.S.S. fishing tournaments and has sponsored Brooks & Dunn country music tours.
Major sporting
events like the FIFA
World Cup in soccer
attract enormous
sponsorship dollars.
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4. To enhance corporate image—Sponsorship can improve perceptions that the company is likable and
prestigious. Although Visa views its long-standing Olympic sponsorship as a means of enhancing interna-
tional brand awareness and increasing usage and volume, it also engenders patriotic goodwill and taps into
the emotional Olympic spirit.
5. To create experiences and evoke feelings—The feelings engendered by an exciting or rewarding event may
indirectly link to the brand. Audi models featured prominently in the 2010 blockbuster Iron Man 2, includ-
ing main character Tony Stark’s personal R8 Spyder and the A8, Q5 and Q7 SUVs, and A3 hatchback. After a
month-long marketing blitz, positive word of mouth doubled for the brand.68
6. To express commitment to the community or on social issues—Cause-related marketing sponsors nonprofit
organizations and charities. Firms such as Timberland, Stonyfield Farms, Home Depot, Starbucks, American
Express, and Tom’s of Maine have made their support of causes an important cornerstone of their marketing
programs.
7. To entertain key clients or reward key employees—Many events include lavish hospitality tents and other
special services or activities only for sponsors and their guests. These perks engender goodwill and establish
valuable business contacts. From an employee perspective, events can also build participation and morale or
serve as an incentive. BB&T Corp., a major banking and financial services player in the South and Southeast
United States, used its NASCAR Busch Series sponsorship to entertain business customers and its minor
league baseball sponsorship to generate excitement among employees.69
8. To permit merchandising or promotional opportunities—Many marketers tie contests or sweepstakes,
in-store merchandising, direct response, or other marketing activities with an event. Ford and Coca-Cola have
used their sponsorship of the popular TV show American Idol in this way.
Despite these potential advantages, the result of an event can still be unpredictable and beyond the sponsor’s
control. And although many consumers credit sponsors for providing the financial assistance to make an event
possible, some may resent its commercialization.
mAjOr SpOnSOrShIp decISIOnS
Making sponsorships successful requires choosing the appropriate events, designing the optimal sponsorship
program, and measuring the effects of sponsorship.70
choosing events Because of the number of sponsorship opportunities and their huge cost, many
marketers are becoming more selective. The event must meet the marketing objectives and communication
strategy defined for the brand. It must have sufficient awareness, possess the desired image, and be able to create
the desired effects. The audience must match the target market and make favorable attributions for the sponsor’s
engagement. An ideal event is also unique but not encumbered with many sponsors, lends itself to ancillary
marketing activities, and reflects or enhances the sponsor’s brand or corporate image.71
designing sponsorship prograMs Many marketers believe the marketing program accompanying
an event sponsorship ultimately determines its success. At least two to three times the amount of the sponsorship
expenditure should be spent on related marketing activities.
Event creation is a particularly important skill in publicizing fund-raising drives for nonprofit organizations.
Fund-raisers have developed a large repertoire of special events, including anniversary celebrations, art exhibits,
auctions, benefit evenings, book sales, cake sales, contests, dances, dinners, fairs, fashion shows, phonathons,
rummage sales, tours, and walkathons.
More firms are now using their names to sponsor arenas, stadiums, and other venues that hold events, spend-
ing billions of dollars for naming rights to major North American sports facilities. But as with any sponsorship, the
most important consideration is the additional marketing activities.
Measuring sponsorship activities It’s a challenge to measure the success of events. “Marketing
Memo: Measuring High-Performance Sponsorship Programs” offers some guidelines from industry experts IEG.
Supply-side methods for measuring an event’s success assess the media coverage, for example, the number of
seconds the brand is clearly visible on a television screen or the column inches of press clippings that mention it.
These potential “impressions” can translate into the dollar cost of actually advertising in the particular vehicle. Some
industry consultants estimate that 30 seconds of logo exposure during a televised event can be worth 6 percent,
10 percent, or as much as 25 percent of a 30-second TV ad spot.
Although supply-side methods provide quantifiable measures, equating media coverage with advertising
exposure ignores the content of the respective communications. The advertiser uses media space and time to
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communicate a strategically designed message. Media coverage and telecasts only expose the brand and don’t
necessarily embellish its meaning in any direct way. Although some public relations professionals maintain that
positive editorial coverage can be worth five to 10 times the equivalent advertising value, sponsorship rarely
provides such favorable treatment.
The demand-side method identifies the sponsorship’s effect on consumers’ brand knowledge. Marketers
can survey spectators to measure their recall of the event and their resulting attitudes and intentions toward the
sponsor.
creAtInG experIenceS
A large part of local, grassroots marketing is experiential marketing, which not only communicates features and
benefits but also connects a product or service with unique and interesting experiences. “The idea is not to sell
something, but to demonstrate how a brand can enrich a customer’s life.”72 Many firms are creating their own
events and experiences to create consumer and media interest and involvement.
Consumers seem to appreciate that effort. In one survey, four of five respondents found participating in a live
event was more engaging than all other forms of communication. The vast majority also felt experiential marketing
gave them more information than other forms of communication and would make them more likely to tell others
about the experience and be receptive to other marketing for the brand.73
Companies can even create a strong image by inviting prospects and customers to visit their headquarters and
factories.74 Ben & Jerry’s, Boeing, Crayola, and Hershey’s all sponsor excellent company tours that draw millions of
visitors a year. Hallmark, Kohler, and Beiersdorf (maker of NIVEA) have built corporate museums at or near their
headquarters that display their history and the drama of producing and marketing their products. Many firms are
also creating off-site product and brand experiences. There are the World of Coca-Cola in Atlanta and Las Vegas
and M&M’s World in Times Square in New York City.
1. Measure outcomes, not outputs. Focus on what a sponsorship actually produced rather than what a sponsor got or did—rather than focus on 5,000
people sampled at an event, how many of those people would be classified as members of the target market and what is the likely conversion rate
between their trial and future behaviors?
2. Define and benchmark objectives on the front end. Specific objectives help to identify what measures should be tracked. An objective of motivating
the sales force and distributors suggests different measures than one of building brand image and key brand benefits. Contrast measures in terms of
sponsorship effects and what might have happened if the sponsorship had not occurred.
3. Measure return for each objective against prorated share of rights and activation fees. Rank and rate objectives by importance and allocate the total
sponsorship budget against each of those objectives.
4. Measure behavior. Conduct a thorough sales analysis to identify shifts in marketplace behavior as a result of the sponsorship.
5. Apply the assumptions and ratios used by other departments within the company. Applying statistical methods used by other departments makes it easier
to gain acceptance for any sponsorship analysis.
6. Research the emotional identities of customers and measure the results of emotional connections. In what ways does a sponsorship psychologically
affect consumers and facilitate and deepen long-term loyalty relationships?
7. Identify group norms. How strong of a community exists around the sponsored event or participants? Are their formal groups that share interests that will be
impacted by the sponsorship?
8. Include cost savings in ROI calculations. Contrast expenses that a firm has typically incurred in the past achieving a particular objective from those
expenses allocated to achieve the objective as part of the sponsorship.
9. Slice the data. Sponsorship affects market segments differently. Breaking down a target market into smaller segments can better identify sponsorship
effects.
10. Capture normative data. Develop a core set of evaluation criteria that can be applied across all different sponsorship programs.
Source: “Measuring High Performance Sponsorship Programs,” IEG Executive Brief, IEG Sponsorship Consulting, www.sponsorship.com, 2009.
Measuring High-Performance Sponsorship Programsmarketing memo
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Public Relations
Not only must the company relate constructively to customers, suppliers, and dealers, it must also relate to a large
number of interested publics. A public is any group that has an actual or potential interest in or impact on a com-
pany’s ability to achieve its objectives. Public relations (PR) includes a variety of programs to promote or protect
a company’s image or individual products.
The wise company takes concrete steps to manage successful relationships with its key publics. Most have a
public relations department that monitors the attitudes of the organization’s publics and distributes information
and communications to build goodwill. The best PR departments counsel top management to adopt positive pro-
grams and eliminate questionable practices so negative publicity doesn’t arise in the first place. They perform the
following five functions:
1. Press relations—Presenting news and information about the organization in the most positive light
2. Product publicity—Sponsoring efforts to publicize specific products
3. Corporate communications—Promoting understanding of the organization through internal and external
communications
4. Lobbying—Dealing with legislators and government officials to promote or defeat legislation and regulation
5. Counseling—Advising management about public issues as well as company positions and image during good
times and bad
mArketInG publIc relAtIOnS
Many companies are turning to marketing public relations (MPR) to support corporate or product promotion and
image making. MPR, like financial PR and community PR, serves a special constituency, the marketing department.
The old name for MPR was publicity, the task of securing editorial space—as opposed to paid space—in print
and broadcast media to promote or hype a product, service, idea, place, person, or organization. MPR goes beyond
simple publicity and plays an important role in the following tasks:
• Launching new products. The amazing one-time commercial success of toys such as LeapFrog, Beanie
Babies, and Silly Bandz owes a great deal to strong publicity.
• Repositioning mature products. In a classic PR case study, New York City had extremely bad press in the
1970s until the “I Love New York” campaign.
• Building interest in a product category. Companies and trade associations have used MPR to rebuild interest
in declining commodities such as eggs, milk, beef, and potatoes and to expand consumption of such products
as tea, pork, and orange juice.
• Influencing specific target groups. McDonald’s sponsors special neighborhood events in Latino and African
American communities to build goodwill.
• Defending products that have encountered public problems. PR professionals must be adept at managing
crises, such as those weathered by such well-established brands as Tylenol, Toyota, and BP in recent years.
• Building the corporate image in a way that reflects favorably on its products. The late Steve Jobs’s heav-
ily anticipated Macworld keynote speeches helped to create an innovative, iconoclastic image for Apple
Corporation.
As the power of mass advertising weakens, marketing managers are turning to MPR to build awareness and
brand knowledge for both new and established products. MPR is also effective in blanketing local communities
and reaching specific groups, and it can be more cost-effective than advertising. Increasingly, MPR takes place
online, but it must be planned jointly with advertising and other marketing communications.75
Clearly, creative public relations can affect public awareness at a fraction of the cost of advertising. The com-
pany doesn’t pay for media space or time but only for a staff to develop and circulate stories and manage certain
events. An interesting story picked up by the media can be worth millions of dollars in equivalent advertising.
Some experts say consumers are five times more likely to be influenced by editorial copy than by advertising. The
following is an example of an award-winning PR campaign.76
MeOW Mix A heritage brand, Meow Mix Cat Food decided to tap into its roots and bring back one of its
most identifiable brand elements—a jingle with repetitive meow refrain that had been off the air for 16 years. Marketers
chose singer and TV reality coach CeeLo Green and his Persian cat Purrfect to do the honors. The video with Green singing
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a remixed version of the jingle in a duet with Purrfect garnered attention from all kinds of outlets. The
story received 1,200 media placements and 535 million media impressions, including exclusives with
AP and Access Hollywood. Web traffic for the brand rose 150 percent, and more than 10,000 fans
downloaded the song or ringtone. For each download, a pound of Meow Mix was donated to a local
pet charity in Los Angeles.
mAjOr decISIOnS In mArketInG pr
In considering when and how to use MPR, management must establish the marketing objec-
tives, choose the PR messages and vehicles, implement the plan, and evaluate the results. The
main tools of MPR are described in Table 20.6.
estaBlishing oBjectives MPR can build awareness by placing stories in the media
to bring attention to a product, service, person, organization, or idea. It can build credibility
by communicating the message in an editorial context. It can help boost sales force and dealer
enthusiasm with stories about a new product before it is launched. It can hold down promotion
cost because MPR costs less than direct-mail and media advertising.
A good MPR campaign can achieve multiple objectives. With its reputation slipping, Cisco
launched “The Comeback Kid Initiative” to rebuild faith in its corporate vision and leadership.
Raising the profile of key global executives, creating two timely global research studies, and
showcasing some of its own technological products and solutions contributed to a 25 percent
increase in stock valuation, an 11 percent increase in sales revenue, and a 15 percent boost in
employee confidence.77
choosing Messages and vehicles Suppose a relatively unknown college wants
more visibility. The MPR practitioner will search for stories. Are any faculty members
working on unusual projects? Are any new and unusual courses being taught? Are any
interesting events taking place on campus? If there are no interesting stories, the MPR practitioner should propose
newsworthy events the college could sponsor. Here the challenge is to create meaningful news. PR ideas include
hosting major academic conventions, inviting expert or celebrity speakers, and developing news conferences. Each
event and activity is an opportunity to develop a multitude of stories directed at different audiences.
Meow Mix cat food reintroduced its famous
ad jingle in a comprehensive PR campaign
featuring singer CeeLo Green and his Persian
cat Purrfect.
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taBle 20.6 Major Tools in Marketing PR
Publications: Companies rely extensively on published materials to reach and influence their target markets. These
include annual reports, brochures, articles, company newsletters and magazines, and audiovisual materials.
Events: Companies can draw attention to new products or other company activities by arranging and publicizing
special events such as news conferences, seminars, outings, trade shows, exhibits, contests and competitions, and
anniversaries that will reach the target publics.
Sponsorships: Companies can promote their brands and corporate name by sponsoring and publicizing sports and
cultural events and highly regarded causes.
News: One of the major tasks of PR professionals is to find or create favorable news about the company, its products,
and its people and to get the media to accept press releases and attend press conferences.
Speeches: Increasingly, company executives must field questions from the media or give talks at trade associations
or sales meetings, and these appearances can build the company’s image.
Public Service Activities: Companies can build goodwill by contributing money and time to good causes.
Identity Media: Companies need a visual identity that the public immediately recognizes. The visual identity is carried
by company logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms, and dress codes.
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Whereas PR practitioners reach their target publics through the mass media, MPR is increasingly borrow-
ing the techniques and technology of online and direct-response marketing to reach target-audience members
one on one.
iMpleMenting the plan and evaluating results MPR’s contribution to the bottom line is
difficult to measure because MPR is used along with other promotional tools. The easiest gauge of its effectiveness
is the number of exposures carried by the media. Publicists supply their client with a clippings book showing all the
media that carried news about the product and a summary statement such as the following:
Media coverage included 3,500 column inches of news and photographs in 350 publications with a
combined circulation of 79.4 million; 2,500 minutes of air time on 290 radio stations and an estimated
audience of 65 million; and 660 minutes of air time on 160 television stations with an estimated audience
of 91 million. If this time and space had been purchased at advertising rates, it would have amounted to
$1,047,000.78
This measure is not very satisfying because it contains no indication of how many people actually read,
heard, or recalled the message and what they thought afterward; nor does it contain information about the net
audience reached because publications overlap in readership. It also ignores the effects of electronic media.
Publicity’s goal is reach, not frequency, so it would be more useful to know the number of unduplicated
exposures across all media types.
A better measure is the change in product awareness, comprehension, or attitude resulting from the MPR
campaign (after accounting for the effect of other promotional tools as well as possible). For example, how many
people recall hearing the news item? How many told others about it (a measure of word of mouth)? How many
changed their minds after hearing it?
5. Events and experiences are a means to become part
of special and more personally relevant moments in
consumers’ lives. Events can broaden and deepen the
sponsor’s relationship with its target market, but only if
managed properly.
6. Public relations (PR) includes a variety of programs
designed to promote or protect a company’s image
or its individual products. Marketing public relations
(MPR), to support the marketing department in cor-
porate or product promotion and image making, can
affect public awareness at a fraction of the cost of
advertising and is often much more credible. The main
tools of PR are publications, events, news, commu-
nity affairs, identification media, lobbying, and social
responsibility.
Summary
1. Advertising is any paid form of nonpersonal presentation
and promotion of ideas, goods, or services by an identi-
fied sponsor. Advertisers include not only business firms
but also charitable, nonprofit, and government agencies.
2. Developing an advertising program is a five-step pro-
cess: (1) set advertising objectives, (2) establish a bud-
get, (3) choose the advertising message and creative
strategy, (4) decide on the media, and (5) evaluate com-
munication and sales effects.
3. Sales promotion consists of mostly short-term incentive
tools, designed to stimulate quicker or greater purchase
of particular products or services by consumers or the
trade.
4. In using sales promotion, a company must establish its
objectives, select the tools, develop the program, imple-
ment and control it, and evaluate the results.
MyMarketingLab
Go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
M20_KOTL2621_15_GE_C20.INDD 631 3/9/15 4:40 PM
632 PART 7 | CommuniCATing VAlue
Applications
Marketing Debate
Should Marketers Test Advertising?
Advertising creatives believe ad pretesting inhibits their
creative process and results in too much sameness in com-
mercials. Marketers, on the other hand, believe it ensures
the ad campaign will connect with consumers and be well
received in the marketplace.
Take a position: Ad pretesting is often an unneces-
sary waste of marketing dollars versus Ad pretesting
provides an important diagnostic for marketers as to
the likely success of an ad campaign.
Marketing Discussion
Television Advertising
What are some of your favorite TV ads? Why? How
effective are the message and creative strategies? How are
they creating consumer preference and loyalty and building
brand equity?
In 1998, Evian in association with its advertiser
BETC Paris launched the hugely successful ad campaign
“Water Babies” that had babies swimming in synchronic-
ity, a metaphor through which the brand evoked youth.
In France, the approval rating for this ad was 94 percent
and the recognition score was 91 percent. This television
commercial had a very strong impact on the collective
conscious of people.
Globally, the brand focused on purity and used the
slogan, “the Original.” Press advertisements portrayed,
for example, a beautiful black angel lying on a white
cloud who brought down rain with a bottle of Evian,
or a mermaid quenching her thirst with Evian water.
Despite the differences in product-positioning based on
markets, the brand has always been conscious of its
upscale image.
The economic crisis of 2007−2009 had a negative
effect on the market for mineral water. Sales dropped
as more and more consumers turned to less expensive
water. During this time, the brand went through a restruc-
ture to keep from losing its market share. As a result,
Evian has a premium and popular positioning in France,
Switzerland, the UK, and Belgium, while it is a luxury
brand in almost all the other countries. This is due to the
fact that in Europe, the brand is sold in every supermar-
ket, whereas in many other countries across the world,
the brand is sold only in urban centers. Evian generates
50 percent of its sales outside of France.
Marketing Excellence
>> Evian
Evian is one of the most famous mineral water brands
owned by the French food-products group Danone.
Each year, approximately 1.5 billion bottles are sold in
more than 140 countries across the world. According to
the market research company Millward Brown, the Evian
brand can be valued at $1,027 million. The success of
the brand is a result of continuous innovation and power-
ful and original communication.
At the end of the 19th century, Evian water, which
was sourced from a natural spring, became known for
its “miraculous” healing properties and was being sold
in pharmacies. By mid-1930s, Evian was recommended
as the perfect water for babies. Campaigns designed to
target mothers, midwives, and doctors were developed
consequently. In the 1950s, Evian was still catering to this
segment but its communication added a new reference
to health, and the theme of the Alps was introduced.
In the 1980s, the brand decided to go in a different
direction and the concept of equilibrium (“the force of bal-
ance”) was dropped. The theme of purity was chosen to
differentiate the brand from competitors and enable high-
end positioning of the product. The company adopted a
new slogan to reflect this change—“the water you drink is
as important as the air you breathe.”
M20_KOTL2621_15_GE_C20.INDD 632 3/9/15 4:40 PM
mAnAging mAss CommuniCATions | chapter 20 633
strong presence outside the Internet. Since 2007, it has
carried out several promotional operations with limited
edition glass bottles signed by major designers, such as
Paul Smith in 2009, Issey Miyake in 2010, and Kenzo in
2014. Evian has also been credited with creating the first
Women’s Golf Open Championship. Today, it is consid-
ered to be one of the major tournaments in Europe and is
broadcast live on television in 167 countries. Evian is the
official water brand for the Wimbledon tennis tournament.
The brand is also a sponsor for the Paris fashion shows.
In addition to this, Evian supports a variety of causes
linked to its brand territory. It is committed to the protec-
tion of the environment through creation of schools of
water to help populations manage their water resources
in an autonomous and sustainable way. It has developed
partnerships with the Red Cross, and offers fellowships in
pediatrics, thereby affirming its positioning on health and
children.
Questions
1. Evian is a global mineral water brand that is sold to
millions of people across the world. Analyze the rea-
sons for its success.
2. What will be the strategic evolution of the brand’s
communication?
3. Can any other mineral water brand ever take over
Evian’s market share?
Sources: Natalie Zmuda, “Evian Seeking Return to Relevance, New Head Marketer,” Advertising
Age, August 7, 2013; “Saga Evian,” Prodimarques, January, 2002; “Evian: le marketing comme
élixir de jeunesse,” Dynamique-Mag, October 19, 2012; Alexandre Debouté, “Les bébés d’Évian
font un carton sur Internet,” Le Figaro, September 5, 2013; Lauren Johnson, “Evian’s Real-Time
Marketing Reaps Big Social Stats: Targets New Yorkers with Twitter-enabled service,” Adweek,
September 5, 2014; Effie France, www.effie.fr.
A bottle of Evian can reach three times the price of a
regular soft drink. The brand caters to a very narrow urban
market, and it therefore felt the need to unify its brand
communication in favor of something more global. It is in
this regard that Evian and BETC decided to pick up from
where the water babies left off and launched the “Roller
Babies” campaign. Health and purity of the Alps were
abandoned in favor of a single message, “Live young.”
This advertisement was broadcast around the world and
went on to become one of the most-watched ads ever
on YouTube with 254 million views, and held the Guinness
world record in this category at one point. It was the
advert of the year for Time Magazine, Wall Street Journal,
and The Guardian. It was also the 20 percent most effec-
tive ad ever (source: GfK France, Belgium, and Germany).
In Asia, however, consumers did not understand quite
well the relationship between Evian, seen as the pinnacle
of luxury, and babies on rollers dancing to hip-hop music.
BETC, then, had the idea of creating T-shirts with images
of baby bodies and launched a campaign showing people
of all ages dressed in these tees. With this, the advertisers
wanted to represent their brand as one that keeps adults
young at heart. The T-shirts were a huge success globally
and created the desired brand awareness.
In 2013, Evian launched “Baby & Me,” its third major
campaign with BETC since 1998. This commercial used
a baby-and-adult mirrored-dancing concept to highlight
their “Live Young” slogan. The idea behind this video was
to allow consumers to reconnect with their inner child, in
line with the brand promise.
Since 2009, Evian’s global brand communication
strategy has been focused on both digital and tradi-
tional media. With the Web, Evian can target precisely
and reach masses easily, and is one of the top brands
viewed online. The brand has also always cultivated a
M20_KOTL2621_15_GE_C20.INDD 633 3/9/15 4:40 PM
http://www.effie.fr
634 PART 7 | CommuniCATing VAlue
EVP for Major League Baseball, explains, “Gillette is a
sports marketing pioneer that paved the way for modern
day sports sponsorship and endorsements.” Gillette has
formed strong ties to football as well. The company has
sponsored the Orange Bowl, Sugar Bowl, Cotton Bowl,
and Rose Bowl. Today, it spends $7 million annually to
sponsor Gillette Stadium, home of the New England
Patriots, and is a corporate sponsor of the NFL.
Gillette has also sponsored boxing matches,
NCAA Basketball, NCAA Football, NASCAR, PGA Tour,
Champions Tour, LPGA Tour, and the National Hockey
League. Internationally, the company has sponsored
events such as the FIFA World Cup, the UK Tri-Nations
rugby tournament, the Gillette Cup in Cricket, and
Formula One racing. Greg Via, Global Director of Sports
Marketing, explains, “We have an 18-month cycle that
starts with a brand strategy. We produce a lot of prod-
ucts on a global basis, and we try to holistically leverage
our major partnerships. That requires a lot of planning
and work. We’re not a company that is going to lever-
age a partnership with one commercial and one SKU.
We wrap our arms around a partnership with TV, digital,
social media and in-store promotions.” The company
often integrates creativity into its sponsorships as well.
For example, it transformed Zambonis into giant Fusion
razors at NHL games to create the illusion that a Gillette
razor had just given the ice a perfectly smooth shave.
Gillette also partners with individual athletes to com-
municate its marketing messages and reflect the brand’s
image. In 2004, the company signed soccer star David
Beckham to appear in its advertising and promotional
campaigns around the world. In 2007, it launched the
Gillette Champions program, highlighting the athletic
accomplishments of Roger Federer, Thierry Henry, and
Tiger Woods. It has featured baseball superstar Derek
Jeter, soccer star Park Ji-Sung, motorcycle champion
Kenan Sofuoglu, cricketer Rahul Dravid, and several NFL
players.
While sports marketing is a critical element of Gillette’s
marketing strategy, the brand aims to reach every man
and therefore also aligns with musical acts, video games,
and movies. In one James Bond film, Goldfinger, a
Gillette razor contained a homing device.
Marketing Excellence
>> Gillette
Gillette knows men. Not only does the company un-
derstand what products men desire for their grooming
needs; it understands how to market to men in different
countries, cultures, and languages around the world.
Today, Gillette holds a commanding lead in the shaving
and razor business with a 70 percent global market share
and $8 billion in annual sales. More than 800 million men
use Gillette products, helping to generate a brand value
of $22.9 billion. Gillette’s mass appeal is a result of several
factors, including high-quality innovation, extensive con-
sumer research, and successful mass communications.
Since the invention of the safety razor by King C.
Gillette in 1901, Gillette has made a number of break-
through product innovations. These include the Trac II,
the first twin-blade shaving system in 1971, a razor with
a pivoting head called the Atra in 1977, and the first razor
with spring-mounted twin blades dubbed the Sensor in
1989. In 1998, Gillette introduced the first triple-blade
system, Mach3, which became a billion-dollar brand sur-
passed only by the 2006 launch of the six-blade Fusion,
promoted as “the best shave on the planet.” Today, the
Fusion and Fusion ProGlide account for approximately
45 percent of men’s razors sold in the United States.
While Gillette has launched high-quality products, the
company’s impressive marketing knowledge and mass
marketing campaigns have helped it achieve international
success. Traditionally, it uses one global marketing mes-
sage rather than individual targeted messages for each
country or region. This message is backed by a wide
spectrum of advertising support, including athletic spon-
sorships, television campaigns, in-store promotions, print
ads, online advertising, and direct marketing.
Perhaps the most critical element is sports market-
ing. Gillette ads have featured baseball heroes such as
Hank Aaron, Mickey Mantle, and Honus Wagner since
1910, and the company’s sponsorship of Major League
Baseball dates to 1939. The brand’s natural fit with base-
ball and tradition has helped the company connect emo-
tionally and literally with its core audience. Tim Brosnan,
M20_KOTL2621_15_GE_C20.INDD 634 3/9/15 4:40 PM
mAnAging mAss CommuniCATions | chapter 20 635
2. Explain why Gillette’s sports marketing partnerships
have been so successful.
3. Some of Gillette’s spokespeople such as Derek Jeter
and Tiger Woods have run into controversy af-
ter becoming endorsers for the brand. Does this
hurt Gillette’s brand equity or marketing message?
Explain.
4. Will Gillette ever become as successful at marketing
to women as to men? Why or why not?
Sources: Gillette press release, “Gillette Launches New Global Brand Marketing Campaign,” July
1, 2009; Major League Baseball press release, “Major League Baseball Announces Extension of
Historic Sponsorship with Gillette Dating Back to 1939,” April 16, 2009; Gillette, 2009 Annual
Report; Jeremy Mullman and Rich Thomaselli, “Why Tiger Is Still the Best Gillette Can Get,”
Advertising Age, December 7, 2009; Louise Story, “Procter and Gillette Learn from Each Other’s
Marketing Ways,” New York Times, April 12, 2007; Dan Beucke, “A Blade Too Far,” BusinessWeek,
August 14, 2006; Jenn Abelson, “And Then There Were Five,” Boston Globe, September 15, 2005;
Jack Neff, “Six-Blade Blitz,” Advertising Age, September 19, 2005, pp. 3, 53; Editorial, “Gillette
Spends Smart on Fusion,” Advertising Age, September 26, 2005, p. 24; “World’s Most Valuable
Brands,” Fortune, November 2013; “Five Questions: Greg Via, Gillette Global Director of Sports
Marketing,” IEG Sponsorship Report, November 18, 2013; “Gillette Enlists Top NFL Players and
Sport Science’s John Brenkus to Highlight the Importance of Precision in Football and Shaving,”
P&G corporate press release, September 3, 2013; P&G 2013 Annual Report.
Gillette’s advertising has resonated well with consum-
ers over the years and left behind some of the most famil-
iar taglines in advertising history. Two of the best known
are “Look Sharp, Feel Sharp” and the current “The Best a
Man Can Get.”
When Procter & Gamble acquired Gillette in 2005
for $57 billion (a record 5-times sales), it aimed to gain
more than sales and profit. P&G, an expert on marketing
to women, wanted to learn about marketing to men on a
global scale, and no one tops Gillette. Today, shaving and
grooming make up 9 percent of P&G’s total revenues,
and razors are one of its most profitable businesses, with
operating margins of 31 percent.
Questions
1. Gillette has successfully convinced the world that
“more is better” in terms of number of blades and
other razor features. How did it do it? Why has that
worked in the past? Will it continue to work in the
future? Why or why not?
M20_KOTL2621_15_GE_C20.INDD 635 3/9/15 4:40 PM
636
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. What are the pros and cons of online marketing? (p. 637)
2. How can companies carry out effective social media campaigns? (p. 642)
3. What are some tips for enjoying positive word of mouth? (p. 645)
4. What are important guidelines for mobile marketing? (p. 650)
With its “Crash the Super Bowl” contest, Frito-Lay
gives participants a chance to win $1 million and
have their home-made ad aired during the game
broadcast.
Source: Used with permission of Daved Wilkins (talent) and Frito-Lay, Inc.
M21_KOTL2621_15_GE_C21.indd 636 09/03/15 6:40 PM
637
Managing Digital
Communications: Online,
Social Media, and Mobile
21
In the face of the Internet revolution, marketing communications today increasingly
occur as a kind of personal dialogue between the company and its customers. Companies must ask not only “How
should we reach our customers?” but also “How should our customers reach us?” and “How can our customers
reach each other?” New technologies have encouraged companies to move from mass communication to more
targeted, two-way communications. As a result, consumers can now play a much more participatory role in
the marketing process. Consider how PepsiCo has engaged the consumer in marketing communications for its
various brands.1
PepsiCo has been an early champion of digital marketing. For its Mountain Dew soft drink, its first
“Dewmocracy” contest had consumers go online to determine the flavor, color, packaging, and name
of a new Mountain Dew product. The winning flavor, Voltage, generated several hundred million dol-
lars in revenue for the company in its first year. The second contest, Dewmocracy 2, expanded voting
through Facebook, Twitter, and a private online Dew Labs Community and crowned White Out as the
winner. For its Doritos brand, PepsiCo runs the “Crash the Super Bowl”
contest every year, giving contestants a chance to develop an ad to be
run during the game broadcast and receive $1 million in the process.
In 2014, anyone from Dorito’s 35 global markets was allowed to enter
the competition, resulting in more than 3,000 submissions. The win-
ning ad, “Time Machine,” had a man humor a small kid by taking a ride
in the kid’s cardboard time machine—with unexpected results. It cost
only $200 to make and one day to film, but it was one of the most posi-
tively received Super Bowl ads by viewers that year. During the contest,
Doritos always enjoys a healthy uptick in Twitter, Facebook, and other
social media activity.
The newest and fastest-growing channels for com-
municating and selling directly to customers are digital. The
Internet provides marketers and consumers with opportunities
for much greater interaction and individualization. Very few
marketing programs can be considered complete without a
meaningful digital component. In this chapter, we consider how
marketers can use online marketing, social media, and mobile
marketing to create loyal customers, build strong brands,
and generate profits. We also consider the broader topic of
word-of-mouth marketing.
Online Marketing
As described in Chapter 1, marketers distinguish paid and owned media from earned (or free) media. Paid
media includes company-generated advertising, publicity, and other promotional efforts. Earned media is all
the PR and word-of-mouth benefits a firm receives without having directly paid for anything—all the news
stories, blogs, and social network conversations that deal with a brand.2 Social media play a key role in earned
media. A large part of owned media consists of online marketing communications, which we review next.
M21_KOTL2621_15_GE_C21.indd 637 09/03/15 6:40 PM
638 PART 7 | CommuniCATing VAlue
AdvAntAGes And dIsAdvAntAGes
of onlIne MArketInG
CoMMunICAtIons
Four of the main categories of online marketing communications,
which we discuss here, are: (1) Web sites, (2) search ads, (3) display ads,
and (4) e-mail. The variety of online communication options means
companies can offer or send tailored information or messages that en-
gage consumers by reflecting their special interests and behavior.
Online marketing communications have other advantages. Marketers
can easily trace their effects by noting how many unique visitors or
“UVs” click on a page or ad, how long they spend with it, what they do
on it, and where they go afterward.3 The Internet also offers the advan-
tage of contextual placement, which means marketers can buy ads on
sites related to their own offerings. They can also place advertising based
on keywords customers type into search engines to reach people when
they’ve actually started the buying process.
Going online has disadvantages too. Consumers can effectively
screen out most messages. Marketers may think their ads are more
effective than they really are if bogus clicks are generated by software-
powered Web sites.4 Advertisers also lose some control over their
online messages, which can be hacked or vandalized.
But the pros clearly can outweigh the cons, and the Internet is
attracting marketers of all kinds. Beauty pioneer Estée Lauder, who, in
a reflection of times gone by, famously said she relied on three means of
communication to build her multimillion-dollar cosmetics business—
“telephone, telegraph, and tell a woman”—would now have to add the
Internet, where the company’s official site describes new and old prod-
ucts, announces special offers and promotions, and helps customers
locate stores where they can buy Estée Lauder products.
Marketers must go where the customers are, and increasingly that’s
online. Of the time U.S. consumers spend with all media, almost half is
spent online (see Figure 21.1).5 Customers define the rules of engage-
ment, however, and insulate themselves with the help of agents and intermediaries if they so choose. They define
what information they need, what offerings they’re interested in, and what they’re willing to pay.6
Magazines
00:12
Other
00:14
Mobile
(nonvoice)
02:51
Desktop &
laptop
02:12
Other
digital
00:43
TV
04:28
Radio
01:20
Newspapers
00:14
Estee Lauder has always relied on word of mouth to build its brands but
now has added a sizable digital component.
So
ur
ce
: W
en
g
le
i-
Im
ag
in
ec
hi
na
| Fig. 21.1 |
Share of Time
Spent per Day with
Major Media by
U.S. Adults, 2014
(hrs:mins)
Source: eMarketer, April 2014, accessed
at http://www.emarketer.com/Article/
Digital-Set-Surpass-TV-Time-Spent-with-US
-Media/1010096.
M21_KOTL2621_15_GE_C21.indd 638 09/03/15 6:40 PM
mAnAging DigiTAl CommuniCATions: online, soCiAl meDiA, AnD mobile | chapter 21 639
Digital advertising continues to show much more rapid growth than traditional media. In fact, total digital ad
spending in 2013 was estimated to have grown to $42.8 billion, which meant it surpassed TV advertising (at $40.1
billion) for the first time. Search ads made up 43 percent of the total at $18.4 billion; display-related advertising
was 30 percent with $12.8 billion; mobile 17 percent with $7.1 billion; and digital video 7 percent with $2.8 billion.7
More brands are being built by online means. Consider Tough Mudder.8
TOugh Mudder Tough Mudder is a challenging obstacle race for teams, designed in the spirit of
British Special Forces, that features 29 different obstacles with such creative names as the Devil’s Beard, Shocks on the
Rocks, and Funky Monkey. Competitors encounter hazards such as walls, 15-foot planks, ice baths, nightmare monkey
bars, greased halfpipes, and electrified army crawls. Funded with $20,000 in seed capital in 2010, Tough Mudder spent
its entire $8,000 communication budget at launch on Facebook advertising, which generated plenty of word of mouth. The
first race was a hit, and word quickly spread. By 2013, more than 750,000 competitors were participating in 53 scheduled
events. With entry fees of about $155 per person, the company’s margin is about 48 percent.
onlIne MArketInG CoMMunICAtIon optIons
A company chooses which forms of online marketing will be most cost-effective in achieving communication
and sales objectives.9 The options include Web sites, search ads, display ads, and e-mail.
Web SiteS Companies must design Web sites that embody or express their purpose, history, products,
and vision and that are attractive on first viewing and interesting enough to encourage repeat visits.10 Jeffrey
Rayport and Bernard Jaworski propose that effective sites feature seven design elements they call the 7Cs (see
Figure 21.2).11 To encourage repeat visits, companies must pay special attention to context and content factors and
embrace another “C”—constant change.12
Visitors will judge a site’s performance on ease of use and physical attractiveness.13 Ease of use means: (1)
The site downloads quickly, (2) the first page is easy to understand, and (3) it is easy to navigate to other pages
that open quickly. Physical attractiveness is ensured when: (1) Individual pages are clean and not crammed with
content, (2) typefaces and font sizes are very readable, and (3) the site makes good use of color (and sound). J. D.
Power found that consumers who were “delighted” with an automotive manufacturer’s Web site were more likely to
test drive one of its vehicles as a result.14
As we describe in more detail below, firms such as comScore and Nielsen Online track where consumers
go online through measures like number of page views, number of unique visitors, length of visit, and so on.15
Tough Mudder used only
Facebook advertising and
word of mouth to launch its
brand.
So
ur
ce
: ©
D
av
id
B
uz
za
rd
/A
la
m
y
M21_KOTL2621_15_GE_C21.indd 639 09/03/15 6:40 PM
640 PART 7 | CommuniCATing VAlue
Companies must also be sensitive to online security and privacy-protection issues. One set of researchers recom-
mends transforming various “touch points” related to privacy on the Web site into a positive customer experience
by: (1) developing user-centric privacy controls to give customer control, (2) avoiding multiple intrusions, and
(3) preventing human intrusion by using automation whenever possible.16
Besides their Web sites, companies may employ microsites, individual Web pages or clusters of pages that func-
tion as supplements to a primary site. They’re particularly relevant for companies selling low-interest products.
People rarely visit an insurance company’s Web site, for example, but the company can create a microsite on used-
car sites that offers advice for buyers of used cars and a good insurance deal at the same time.
Search aDS An important component of online marketing is paid search or pay-per-click ads. Thirty-five
percent of all searches are reportedly for products or services.
In paid search, marketers bid in a continuous auction on search terms that serve as a proxy for the consumer’s
product or consumption interests. When a consumer searches for any of the words with Google, Yahoo!, or Bing,
the marketer’s ad may appear above or next to the results, depending on the amount the company bids and an algo-
rithm the search engines use to determine an ad’s relevance to a particular search.17
Advertisers pay only if people click on the links, but marketers believe consumers who have already expressed
interest by engaging in search are prime prospects. Average click-through in terms of the percentage of consumers
who click on a link is about 2 percent, much more than for comparable online display ads, which range from .08
for standard banner ads with graphics and images to .14 for rich media (expandable banners) ads that incorporate
audio and/or video.18
The cost per click depends on how highly the link is ranked on the page and the popularity of the keyword. The
ever-increasing popularity of paid search has increased competition among keyword bidders, significantly raising
search ad prices and putting a premium on choosing the best possible keywords, bidding on them strategically, and
monitoring the results for effectiveness and efficiency.
Search engine optimization (SEO) describes activities designed to improve the likelihood that a link for a brand
is as high as possible in the rank order of all nonpaid links when consumers search for relevant terms. SEO is a cru-
cial part of marketing given the large amount of money marketers are spending on search. A number of guidelines
have been suggested as part of SEO as well as paid search.19
• Broader search terms (“MP3 player” or “iPod”) are useful for general brand building; more specific ones
identifying a particular product model or service (“Apple iPod classic 160GB”) are useful for generating and
converting sales leads.
• Search terms need to be spotlighted on the appropriate pages of the marketer’s Web site so search engines can
easily identify them.
• Any one product can usually be identified by means of multiple keywords, but marketers must bid on each
keyword according to its likely return on revenue. It also helps to have popular sites link back to the marketer’s
Web site.
• Data can be collected to track the effects of paid search.
Any size business can benefit from a well-executed search strategy. The owner of River Pools and Spas in
Virginia and Maryland turned around his floundering business by posting question-and-answer articles that were
picked up easily by search engines and drove traffic to the company’s Web site.20
Consumers are also influenced by the online opinions and recommendations of other consumers. The informal
social networks that arise among consumers complement the product networks set up by the company.21 Online
“influentials” who are one of a few or maybe even the only person to influence certain consumers are particularly
important and valuable to companies.22
DiSplay aDS Display ads or banner ads are small, rectangular boxes containing text and perhaps a picture
that companies pay to place on relevant Web sites.23 The larger the audience, the higher the cost. In the early days
| Fig. 21.2 |
Seven Key Design
Elements of an
Effective Web Site
• Context. Layout and design
• Content. Text, pictures, sound, and video the site contains
• Community. How the site enables user-to-user communication
• Customization. Site’s ability to tailor itself to different users or to allow users to personalize the site
• Communication. How the site enables site-to-user, user-to-site, or two-way communication
• Connection. Degree that the site is linked to other sites
• Commerce. Site’s capabilities to enable commercial transactionsSource: Jeffrey F. Rayport and Bernard
J. Jaworski, e-commerce (New York:
McGraw-Hill, 2001), p. 116.
M21_KOTL2621_15_GE_C21.indd 640 09/03/15 6:40 PM
mAnAging DigiTAl CommuniCATions: online, soCiAl meDiA, AnD mobile | chapter 21 641
of the Internet, viewers clicked on 2 percent to 3 percent of the banner ads they saw, but as noted previously, that
percentage has quickly plummeted, and advertisers have explored other forms of communication.
Given that Internet users spend only 5 percent of their time online actually searching for information, display
ads still hold great promise compared to popular search ads. But ads need to be more attention-getting and influ-
ential, better targeted, and more closely tracked.24
Interstitials are advertisements, often with video or animation, that pop up between page changes within a
Web site or across Web sites. For example, ads for Johnson & Johnson’s Tylenol headache reliever would pop up on
brokers’ Web sites whenever the stock market fell by 100 points or more. Because consumers find such pop-up ads
intrusive and distracting, many use software to block them.
e-mail E-mail allows marketers to inform and communicate with customers at a fraction of the cost of a d-mail,
or direct mail, campaign. E-mails can be very productive selling tools. The rate at which they prompt purchase
has been estimated to be at least three times that of social media ads, and the average order value is thought to
be 17 percent higher.25 Firms such as Kellogg, Whirlpool, and Nissan are emphasizing both e-mail and search
marketing.26
Consumers are besieged by e-mails, though, and many employ spam filters to halt the flow. Privacy concerns
are also growing—almost half of British survey respondents said they would refuse to share any personal details
with brands even if doing so would bring them better-targeted offers and discounts.27 Some firms are asking con-
sumers to say whether and when they would like to receive e-mails. FTD, the flower retailer, allows customers to
choose whether to receive e-mail reminders to send flowers for virtually any holiday as well as specific birthdays
and anniversaries.28
E-mails must be timely, targeted, and relevant. The Gilt Groupe sends more than 3,000 variations of its daily
e-mail for its flash-sale site based on recipient’s past click-throughs, browsing history, and purchase history.29
“Marketing Memo: How to Maximize the Marketing Value of E-mails” provides some important guidelines for
launching productive e-mail campaigns.
With a customer’s
permission, flower
retailer FTD sends
email reminders for
important events.
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Social Media
An important component of digital marketing is social media. Social media are a means for consumers to share
text, images, audio, and video information with each other and with companies, and vice versa.
Social media allow marketers to establish a public voice and presence online. They can cost-effectively reinforce
other communication activities. Because of their day-to-day immediacy, they can also encourage companies to
stay innovative and relevant. Marketers can build or tap into online communities, inviting participation from
consumers and creating a long-term marketing asset in the process.
After reviewing the different social media platforms, we consider how to use social media and how
social media can promote the flow of word of mouth. We then delve into more detail on how word of mouth
is formed and travels. To start our discussion, consider how one company cleverly used social media to build
its brand.30
dOLLar ShaVe CLub E-commerce startup Dollar Shave Club sells a low-priced monthly
supply of razors and blades online according to three different plans. The key to the company’s launch was an
online video. Dubbed the “best startup video ever” by some and the winner of multiple awards, the 90-second
Dollar Shave Club video garnered millions of views on YouTube and gained thousands of social media followers in
the process. In the quirky, irreverent video, CEO Michael Dubin rides a forklift, plays tennis, and dances with a fuzzy
bear while touting the quality, convenience, and price of the company’s razors and blades. Dubin has observed, “We
are presenting a new business, a good idea, a funny video and tapped the pain point for a lot of consumers.” While
it was securing several hundred thousand customers, the company was also able to raise more than $20 million in
venture capital.
• Give the customer a reason to respond. Offer powerful incentives for reading e-mail pitches and online ads, such as trivia games, scavenger hunts,
and instant-win sweepstakes.
• Personalize the content of your e-mails. Williams-Sonoma reported a tenfold increase in response rates when it adopted personalized e-mail offerings
based on individuals’ on-site and catalog shopping behavior. An engaging subject line is especially critical. One expert notes, “You really have about five
seconds to grab them or they are clicking out.”
• Offer something the customer can’t get via direct mail. Because e-mail campaigns can be carried out quickly, they can offer time-sensitive information.
Travelocity sends frequent e-mails pitching last-minute cheap airfares, and Club Med pitches unsold vacation packages at a discount.
• Make it easy for customers to opt in as well as unsubscribe. Run controlled split tests to explore how location, color, and other factors affect “Sign Up
Now” messages. Controlled split tests assemble online matched samples of consumers with one sample given a test message that manipulates one factor
and the other being a status quo control. Online customers also demand a positive exit experience. Dissatisfied customers leaving on a sour note are more
likely to spread their displeasure to others.
• Combine e-mail with other communications such as social media. Southwest Airlines found the highest number of reservations occurred after
an e-mail campaign followed by a social media campaign. Papa John’s was able to add 45,000 fans to its Facebook page through an e-mail campaign
inviting customers to participate in a “March Madness” NCAA basketball tournament contest.
To increase the effectiveness of e-mails, some researchers are employing “heat mapping,” which tracks eye movements with cameras to measure what
people read on a computer screen. One study showed that clickable graphic icons and buttons that linked to more details of a marketing offer increased
click-through rates by 60 percent over links that used just an Internet address.
Sources: Nora Aurfreiter, Julien Boudet, and Vivien Weng, “Why Marketers Keep Sending You E-Mails,” McKinsey Quarterly, January 2014; “Email Marketing Central for
U.S. Retailers,” www.warc.com, December 20, 2012; Richard Westlund, “Success Stories in eMail Marketing,” Adweek Special Advertising Section, February 16, 2010;
Suzanne Vranica, “Marketers Give E-mail Another Look,” Wall Street Journal, July 17, 2006.
How to Maximize the Marketing Value of E-mailsmarketing memo
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soCIAl MedIA plAtforMs
There are three main platforms for social media: (1) online communities and forums, (2) blogs (individual blogs
and blog networks such as Sugar and Gawker), and (3) social networks (like Facebook, Twitter, and YouTube).
Online cOmmunitieS anD FOrumS Online communities and forums come in all shapes and sizes.
Many are created by consumers or groups of consumers with no commercial interests or company affiliations.
Others are sponsored by companies whose members communicate with the company and with each other through
postings, text messaging, and chat discussions about special interests related to the company’s products and
brands. These online communities and forums can be a valuable resource for companies and fill multiple functions
by both collecting and conveying key information.
A key for success in online communities is to create individual and group activities that help form bonds
among community members. Apple hosts a large number of discussion groups organized by product lines and
type of user (consumer or professional). These groups are customers’ primary source of product information
after warranties expire.
Information flow in online communities and forums is two-way and can provide companies with useful, hard-
to-get customer information and insights. When GlaxoSmithKline prepared to launch its first weight-loss drug,
Alli, it sponsored a weight-loss community. The firm felt the feedback it gained was more valuable than what it
could have received from traditional focus groups.
Research has shown, however, that firms should avoid too much democratization of innovation. One risk is that
groundbreaking ideas can be replaced by lowest-common-denominator solutions.31
blOgS Blogs, regularly updated online journals or diaries, have become an important outlet for word of mouth.
There are millions in existence, and they vary widely, some personal for close friends and families, others designed
to reach and influence a vast audience. One obvious appeal of blogs is that they bring together people with
common interests.
Blog networks such as Gawker Media offer marketers a portfolio of choices. Online celebrity gossip blog
PopSugar has spawned a family of breezy blogs on fashion (FabSugar), beauty (BellaSugar), and romance and cul-
ture (TrèsSugar), attracting women ages 18 to 49.
Corporations are creating their own blogs and carefully monitoring those of others.32 Popular blogs are
creating influential opinion leaders. At the TreeHugger site—“the leading media outlet dedicated to driving
sustainability mainstream”—a team of bloggers tracks green consumer products for 5 million unique visitors
per month, offering an up-to-the minute blog, weekly and daily newsletters, and regularly updated Twitter and
Facebook pages.33
Because many consumers examine product information and reviews contained in blogs, the Federal Trade
Commission has also taken steps to require bloggers to disclose their relationship with marketers whose products
they endorse. At the other extreme, some consumers use blogs and videos as a means of getting retribution for a
company’s bad service or faulty products. Some customer retaliations are legendary.
Dell’s customer-service shortcomings were splashed all over the Internet through a series of blistering “Dell
Hell” postings. AOL took some heat when a frustrated customer recorded and broadcast online a service represen-
tative’s emphatic resistance to his wish to cancel his service. Comcast was embarrassed when a video surfaced of
one of its technicians sleeping on a customer’s couch.34
CEO Michael Dubin’s
online video to launch
Dollar Shave Club was
an Internet sensation.
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SOcial netWOrkS Social networks have become an important force in both business-to-consumer and
business-to-business marketing.35 Major ones include Facebook, one of the world’s biggest; LinkedIn, which
focuses on career-minded professionals; and Twitter, with its 140-character messages or “tweets.” Different
networks offer different benefits to firms. For example, Twitter can be an early warning system that permits rapid
response, whereas Facebook allows deeper dives to engage consumers in more meaningful ways.36
Marketers are still learning how to best tap into social networks and their huge, well-defined audiences.37 Given
networks’ noncommercial nature—users are generally there looking to connect with others—attracting attention
and persuading are more challenging. Also, given that users generate their own content, ads may find themselves
appearing beside inappropriate or even offensive material.38
Advertising is only one avenue, however. Like any individual, companies can also join social groups and actively
participate. Having a Facebook page has become a virtual prerequisite for many companies.39 Twitter can benefit
even the smallest firm. To create interest in its products and the events it hosted, small San Francisco bakery
Mission Pie began to send tweet alerts, quickly gaining 1,000 followers and a sizable uptick in business. “Follow Me
on Twitter” signs are appearing on doors and windows of more small shops.40
And although major social networks offer the most exposure, niche networks provide a more targeted market
that may be more likely to spread the brand message, as CafeMom did for Playskool.41
CafeMOM Started in 2006, CafeMom has 20 million users across its flagship CafeMom site and other
properties such as The Stir (an “all-day, every day content destination for Moms”) and Mamás Latinas (the first bilingual
site for Latina moms). Users can participate in 70,000 different group forums for moms. When the site started a forum for
discussing developmentally appropriate play activities, toymaker Playskool sent toy kits to more than 5,000 members and
encouraged them to share their experiences with each other, resulting in 11,600 posts at Playskool Preschool Playgroup.
“The great thing is you get direct feedback from actual moms,” says the director of media at Hasbro, Playskool’s parent
company. This kind of feedback can be invaluable in the product-development process as well. The site’s sweet spot is
young, middle-class women with kids who love the opportunity to make friends and seek support, spending an average of
44 minutes a day on the site.
usInG soCIAl MedIA
Social media allow consumers to become engaged with a brand at perhaps a deeper and broader level than ever
before. Marketers should do everything they can to encourage willing consumers to engage productively. But as
useful as they may be, social media are rarely the sole source of marketing communications for a brand.42
• Social media may not be as effective in attracting new users and driving brand penetration.
• Research by DDB suggests that brands and products vary widely in how social they are online. Consumers are
most likely to engage with media, charities, and fashion and least likely to engage with consumer goods.43
• Although consumers may use social media to get useful information or deals and promotions or to enjoy
interesting or entertaining brand-created content, a much smaller percentage want use social media to engage
in two-way “conversations” with brands.
In short, marketers must recognize that when it comes to social media, only some consumers want to engage with
some brands, and, even then, only some of the time.
Embracing social media, harnessing word of mouth, and creating buzz also require companies to take the
good with the bad. When Frito-Lay’s “Do Us a Flavor” contest invited U.S. fans to suggest new potato chip
flavors for a chance to win a huge cash prize, the Facebook app for submissions crashed the first day due to
high traffic. The promotion got back on track, though, with the winner, Cheesy Garlic Bread–flavored chips,
joining earlier winners from other countries such as Caesar salad–flavored chips in Australia and shrimp chips
in Egypt.44
The Frito-Lay example shows the power and speed of social media, but also the challenges they pose to
companies. The reality, however, is that whether a company chooses to engage in social media or not, the Internet
will always permit scrutiny, criticism, and even “cheap shots” from consumers and organizations.
By using social media and the Internet in a constructive, thoughtful way, firms at least have a means to create a
strong online presence and to better offer credible alternative points of view if negative feedback occurs.45 And if
the firm has built a strong online community, members of that community will often rush to defend the brand and
play a policing role over inaccurate or unfair characterizations.
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Word of Mouth
Social media are one example of online word of mouth. Word of mouth (WOM) is a powerful marketing tool.
AT&T found it was one of the most effective drivers of its sales, along with unaided advertising awareness. Some
brands have been built almost exclusively by word of mouth.46
SOdaSTreaM SodaStream, a product that allows
consumers to carbonate regular tap water at home to replace store-
bought sodas, was built with minimal media spend due to the power of
word of mouth. To help promote conversations about the brand, the com-
pany has sampled liberally, used product placement, and engaged with
affinity groups that might be interested in home carbonation because of
its environmental advantages, including various “green” organizations,
or because it offers the convenience of not having to store bottles and
cans, which appeals to boat and RV owners. CEO Daniel Birnbaum notes,
“I would much rather invest in PR than in advertising, because with
PR it’s not me talking—it’s someone else.” One of SodaStream’s most
successful marketing activities is “The Cage.” The company calculates
the average number of cans and bottles thrown away by a family in a
year in a given country and then fills a giant cage-like box to hold them,
placing it in high-traffic locations like airports to draw attention to it. After
deciding to target Coke and Pepsi head on, SodaStream did purchase
advertising time in the 2013 and 2014 Super Bowls. Ironically, with this
decision the company still benefited from PR and word of mouth because
the networks banned its initial ads for being too aggressive. The banned
ads received more attention than the ones that actually ran, racking up
millions of views online and a barrage of media coverage. Purchased
for $6 million in 2007, SodaStream had a 2014 market cap of more than
$1 billion.
Frito-Lay used a social
media campaign for
new consumer-created
flavors it introduced.
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646 PART 7 | CommuniCATing VAlue
forMs of Word of Mouth
Contrary to popular opinion, most word of mouth is not generated online. In fact, research and consulting firm
Keller Fay notes that 90 percent occurs offline, specifically 75 percent face to face and 15 percent over the phone.
Keller Fay also notes how advertising and WOM are inextricably linked: “WOM has proven to be highly credible
and linked to sales; advertising has proven to help spark conversation.”47 Others note how well offline word of
mouth works with social media. Consumers “start conversations in one channel, continue them in a second and
finish them in a third. When the communication is happening in so many channels, it becomes almost impos-
sible to separate online and offline.”48
Viral marketing is a form of online word of mouth, or “word of mouse,” that encourages consumers to pass
along company-developed products and services or audio, video, or written information to others online.49 With
user-generated content sites such as YouTube, Vimeo, and Google Video, consumers and advertisers can upload
ads and videos to be shared by millions of people.50 Online videos can be cost-effective—they can be made for as
little as $50,000 to $200,000—and marketers can take more freedom with them, as Blendtec has done.51
bLendTeC Utah-based Blendtec used to be known primarily for its commercial blenders and food mills.
The company wasn’t really familiar to the general public until it launched a hilarious series of “Will It Blend?” online
videos to promote some of its commercial products for home use. The videos feature founder and CEO Tom Dickson
wearing a white lab coat and pulverizing objects ranging from golf balls and pens to beer bottles, all in a genial but
deadpan manner. The genius of the videos (www.willitblend.com) is that they tie into current events. As soon as the
iPhone was launched with huge media fanfare, Blendtec aired a video in which Dickson smiled and said, “I love my
iPhone. It does everything. But will it blend?” After the blender crushed the iPhone to bits, Dickson lifted the lid on the
small pile of black dust and said simply, “iSmoke.” The clip drew more than 3.5 million views on YouTube. Dickson has
appeared on Today and other network television shows and has had a cameo in a Weezer video. One of the few items
not to blend: A crowbar!
Outrageousness is a two-edged sword. The Blendtec Web site clearly puts its comic videos in the “Don’t try this
at home” category and developed another set showing how to grind up vegetables for soup, for instance, in the “Do
try this at home” category.
CreAtInG Word-of-Mouth Buzz
Products don’t have to be outrageous or edgy to generate word-of-mouth buzz. Although more interesting brands
are more likely to be talked about online, whether a brand is seen as novel, exciting, or surprising has little effect
on whether it is discussed in face-to-face, oral communications.52 Brands discussed offline are often those that
are salient and visible and come easily to mind.53
Blendtec built its
consumer brand in
part with a series of
clever “Will It Blend”
online videos.
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Research has shown that consumers tend to generate positive WOM themselves and share information about
their own positive consumption experiences. They tend to only transmit negative WOM and pass on information
they heard about others’ negative consumption experiences.54
It’s worth remembering that much online content is not necessarily naturally shared and does not go viral. One study
found that only 4 percent of content “cascaded” to more than one person beyond the initial recipient.55 In deciding
whether to contribute to social media, consumers can be motivated by intrinsic factors such as whether they are hav-
ing fun or learning, but more often they are swayed by extrinisic factors such as social and self-image considerations.56
Harvard Business School viral video expert Thales Teixeira offers this advice for getting a viral ad shared: Utilize
brand pulsing so the brand is not too intrusive within the video; open with joy or surprise to hook those fickle
viewers who are easily bored; build an emotional roller coaster within the ad to keep viewers engaged throughout;
and surprise but don’t shock—if an ad makes viewers too uncomfortable, they are unlikely to share it.57
Companies can help create buzz for their products or services, and media and advertising are not always neces-
sary for it to occur. Proctor & Gamble (P&G) has enrolled more than half a million mothers in Vocalpoint, a group
built on the premise that certain highly engaged individuals want to learn about products, receive samples and
coupons, share their opinions with companies, and, of course, talk up their experiences with others. P&G chooses
well-connected people—the Vocalpoint moms have big social networks and generally speak to 25 to 30 other
women during the day, compared to an average of five for other moms—and their messages carry a strong reason
to share product information with a friend. A campaign for P&G’s Secret Clinical Strength Deodorant resulted in
42,000 click-throughs to an opt-in coupon redemption and 50,000 strong product reviews on the brand’s Web site.
Some agencies exist solely to help clients create buzz. BzzAgent is one.58
bzzagenT Boston-based BzzAgent has assembled an international word-of-mouth media network powered
by 1 million demographically diverse—but essentially ordinary—people who volunteer to talk up products they deem worth
promoting. The company pairs consumers with its clients’ products, information, and digital tools to activate widespread opinion-
sharing throughout its own social media site, called BzzScapes, and within each member’s personal social circles. BzzAgent
believes this unique combination of people and platform accelerates measurable word of mouth and fosters sustained brand
advocacy. As one senior executive at the firm notes: “The bar is pretty low to be a fan and pretty high to be an advocate.” The
company claims the buzz is honest because being in the network requires just enough work that few people enroll solely for
freebies, and members don’t talk up products they don’t like. Members are also supposed to disclose they’re connected to
BzzAgent. After being acquired by Dunhumby, BzzAgent launched its analytics dashboard Pulse, which combines social media
information with actual sales data to trace the impact of word-of-mouth buzz. The company has completed hundreds of projects.
For Hasbro, it helped launch the Nerf FireVision toys—which appear to glow in the dark when viewed with special glasses—by
sampling the product among members of its panel who have younger children. For Green Mountain Coffee, it sent samples and
information to 10,000 carefully chosen members to spread the word about the client’s commitment to Fair Trade Coffee as one
component of a bigger marketing program. More than 1.8 million messages were shared about Green Mountain’s Fair Trade
program, increasing customers’ understanding of Fair Trade certification by 61 percent and sales of the coffee by 14 percent.
Viral marketing tries to create a splash in the marketplace to showcase a brand and its noteworthy features.
Some believe viral marketing efforts are driven more by the rules of entertainment than by the rules of selling.
Consider these examples: Quicksilver puts out surfing videos and surf-culture books for teens, Johnson & Johnson
and Pampers both have popular Web sites with parenting advice; Walmart places videos with money-saving tips on
YouTube; Grey Goose vodka has an entire entertainment division; Mountain Dew has a record label; and Hasbro is
joining forces with Discovery to create a TV channel.59
Ultimately, however, the success of any viral or word-of-mouth buzz campaign depends on the willingness of
consumers to talk to other consumers.60 Customer reviews can be especially influential.61 A recent Nielsen survey
found that online customer reviews were the second-most trusted source of brand information (after recommen-
dations from friends and family).62 Many review sites are now using a Facebook login that attaches a review posted
by someone to their Facebook profile. By attaching their review to their Facebook page, users can find out what
friends or noteworthy celebrities deem positive or negative about a brand.63
As Chapter 5 noted, however, online reviews can be biased or just plain fake.64 Research has shown that social
influence can lead to disproportionally positive online ratings, and subsequent raters are more likely to be influ-
enced by previous positive ratings than negative ones. Consumers posting reviews are susceptible to conformity
pressures and adopting norms of others.65 On the other hand, positive online reviews or ratings are often not as
influential or valued as much as negative ones.66
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648 PART 7 | CommuniCATing VAlue
Companies can try to stimulate personal influence channels to work on their behalf. U.S. women’s specialty
retailer Chico’s increased its revenue per visitor and average order value for its three brands after adding ratings,
reviews, questions, and answers to the brands’ sites.67 “Marketing Memo: How to Start a Buzz Fire” describes some
techniques to increase word of mouth.
A customer’s value to a company depends in part on his or her ability and likelihood of making referrals and
engaging in positive word of mouth.69 As useful as earning positive word of mouth from a consumer can be,
though, getting consumers to directly engage with the company and provide it with feedback and suggestions can
In analyzing the online success of different songs, media researcher Duncan Watts found their popularity was “incredibly unpredictable.” The key
to setting a song on the path to popularity was to achieve some early downloads—a phenomenon Watts dubs “cumulative advantage.” Although
many word-of-mouth effects are beyond marketers’ control—as Watts’ work suggests—certain steps can improve the likelihood of starting
positive buzz:
• Identify influential individuals and companies and devote extra effort to
them. In technology, influencers might be large corporate customers,
industry analysts and journalists, selected policy makers, and early
adopters. Companies can trace online activity to identify more influen-
tial users who may function as opinion leaders.
• Supply key people with product samples. Chevrolet selected about 900
people with a Klout online influence score of more than 50 (of a possible
100) and gave them a free three-day rental of the Chevy Volt, resulting
in 46,000 tweets and more than 20.7 million largely positive blog posts
about the electric car.
• Work through community influentials. Ford’s prelaunch “Fiesta
Movement” campaign invited 100 handpicked young Millennials to
live with the Fiesta car for six months. Drivers were chosen based on
their online experience with blogging and size and quality of their online
social network as well as a video they submitted about their desire for
adventure. After the six months of trial usage, the campaign had drawn
4.3 million YouTube views, more than 500,000 Flickr views, more than
3 million Twitter impressions (the number of times a tweet is read), and
50,000 potential customers, 97 percent of whom were not already Ford
owners.68
• Develop word-of-mouth referral channels to build business. Profes-
sionals will often encourage clients to recommend their services. Weight
Watchers found that word-of-mouth referrals from someone in the
program had a huge impact on business.
• Provide compelling information that customers want to pass along.
Companies shouldn’t communicate with customers in terms better
suited for a press release. Make it easy and desirable for a customer
to borrow elements from an e-mail message or blog. Information
should be original and useful. Originality increases the amount of
word of mouth, but usefulness determines whether it will be positive
or negative.
Sources: Beth Saulnier, “It’s Complicated,” Cornell Alumni Magazine, September/October 2013, pp. 45-49; Olga Kharif, “Finding a Haystack’s Most Influential Needles,”
Bloomberg Businessweek, October 22, 2012; Michael Trusov, Anand V. Bodapati, and Randolph E. Bucklin, “Determining Influential Users in Internet Social Networks,”
Journal of Marketing Research 47 (August 2010), pp. 643–58; Matthew Dolan, “Ford Takes Online Gamble with New Fiesta,” Wall Street Journal, April 8, 2009; Sarit
Moldovan, Jacob Goldenberg, and Amitava Chattopadhyay, “What Drives Word of Mouth? The Roles of Product Originality and Usefulness,” MSI Report No. 06-111
(Cambridge, MA: Marketing Science Institute, 2006); Karen J. Bannan, “Online Chat Is a Grapevine That Yields Precious Fruit,” New York Times, December 25, 2006.
How to Start a Buzz Firemarketing memo
To fuel buzz for its Chevy Volt electric car, Chevrolet gave 900 influential
consumers a free three-day rental.
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Tracking Online Buzz
Marketers have to decide what they are going to track online as well as
how they are going to track it.
What to track. DuPont employs measures of online word of
mouth such as scale (how far the campaign reached), speed (how fast
it spread), share of voice in that space, share of voice in that speed,
whether it achieved positive lift in sentiment, whether the message was
understood, whether it was relevant, whether it had sustainability (and
was not a one-shot deal), and how far it moved from its source.
Other researchers focus more on characterizing the source of
word of mouth. For example, one group seeks to evaluate blogs accord-
ing to three dimensions: relevance, sentiment, and authority. Academic
researchers Hoffman and Fodor advocate measuring the various types
of investments customers make in engaging with brands in terms of
their activity with blogs, microblogging (e.g., Twitter), cocreation (e.g.,
NIKEiD), forums and discussion boards, product reviews, social net-
works, and video and photo sharing.
How to track it. More firms are setting up technologically
advanced central locations to direct their online tracking efforts. To
monitor the Gatorade brand on social networks around the clock,
Gatorade created a “Mission Control Center”—set up like a broadcast
television control room—in the middle of the marketing department in
its Chicago headquarters. Mission Control is staffed 24/7 by a cross-
function of Gatorade digital, media, and social agencies, with six big
monitors providing data visualizations and dashboards.
The Gatorade team reviews blog conversations and tracks senti-
ment and feedback. The team also has to decide when it is appropriate
to intervene in an online conversation and when it is not. Any post that
includes a query directly about the brand or that reflects a misunder-
standing is usually an opportunity for the team to weigh in, but as one
team member notes, “If they want to talk about working out, we let
them have that conversation.”
Gatorade is just one of many firms that recognize the importance of
keeping a finger on the digital pulse of the brand. Consider these efforts.
• Nestlé’s Digital Acceleration Team is a 24/7 monitoring center that
tracks real-time sentiment about its 2,000 brands.
• Dell’s social media ground control and command center in Round
Rock, Texas, has 70 employees and processes 25,000 daily social
media events in 11 different languages, responding to most que-
ries and complaints within 24 hours.
• Wells Fargo’s social media command center tracks 2,000 to
4,000 mentions a day. The team monitors and posts to social
media channels such as Facebook, Twitter, LinkedIn, Pinterest,
and YouTube. When a rumor started that the bank was going to
institute a new $5 fee on domestic direct deposits, the command
center was able to quickly squash it.
Sources: Wendy W. Moe and David A. Schweidel, Social Media Intelligence (New York:
Cambridge University Press, 2014); Cotton Dello, “Wells Fargo Command Center to
Handle Surge of Social Content,” Advertising Age, April 8, 2014; Ryan Holmes, “NASA-
Style Mission Control Centers for Social Media Are Taking Off,” www.tech.fortune
.cnn.com, October 25, 2012; Lionel Menchaca, “Dell’s Next Step: The Social Media
Listening Command Center,” www.en.community.dell.com/dell-blogs, December 8,
2010; Donna L. Hoffman and Marek Fodor, “Can You Measure the ROI of Your Social
Media Marketing,” MIT Sloan Management Review, Fall 2010, pp. 41–49; “Valerie
Bauerlin, “Gatorade’s ‘Mission’: Sell More Drinks,” Wall Street Journal, September
13, 2010; Adam Ostrow, “Inside Gatorade’s Social Media Command Center,” www
.mashable.com, June 15, 2010; Rick Lawrence, Prem Melville, Claudia Perlich, Vikas
Sindhwani, Steve Meliksetian, Pei-Yun Hsueh, and Yan Liu, “Social Media Analytics,”
OR/MS Today, February 2010, pp. 26–30; “Is There a Reliable Way to Measure Word-
of-Mouth Marketing?” Marketing NPV 3 (2006), www.marketingnpv.com, pp. 3–9.
marketing
insight
Gatorade’s HQ-based
Mission Control
Center tracks brand
buzz 24/7.
So
ur
ce
: T
he
G
at
or
ad
e
C
om
pa
ny
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lead to even greater loyalty and sales.70 Huba and McConnell describe the following rungs on the customer loyalty
ladder (in ascending order):71
1. Satisfaction—Sticks with your organization as long as expectations are met.
2. Repeat purchase—Returns to your company to buy again.
3. Word of mouth/buzz—Puts his or her reputation on the line to tell others about you.
4. Evangelism—Convinces others to purchase/join.
5. Ownership—Feels responsible for the continued success of your organization.
MeAsurInG the effeCts of Word of Mouth
Many marketers concentrate on the online effects of word of mouth, given the ease of tracking them through
advertising, PR, and digital agencies. Through demographic information or proxies for that information and cookies,
firms can monitor when customers blog, comment, post, share, link, upload, friend, stream, write on a wall, or update
a profile. With these tracking tools it is possible, for example, for movie advertisers to target “1 million American
women between the ages of 14 and 24 who had uploaded, blogged, rated, shared, or commented on entertainment in
the previous 24 hours.”72 “Marketing Insight: Tracking Online Buzz” describes some company efforts there.
Mobile Marketing
Given the presence of smart phones and tablets everywhere and marketers’ ability to personalize messages based
on demographics and other consumer behavior characteristics, the appeal of mobile marketing as a communica-
tion tool is obvious.
the sCope of MoBIle MArketInG
Wharton’s David Bell notes four distinctive characteristics of a mobile device: (1) It is uniquely tied to one user;
(2) it is virtually always “on” given it is typically carried everywhere; (3) it allows for immediate consumption
because it is in effect a channel of distribution with a payment system; and (4) it is highly interactive given it
allows for geotracking and picture and video taking.73
Six of every 10 U.S. consumers owned a smart phone in 2014, creating a major opportunity for advertisers to
reach consumers on the “third screen” (TV and the computer are the first and second).74 Perhaps not surprisingly,
U.S. consumers spend a considerable amount of time on mobile—more than on radio, magazines, and newspapers
combined (an average of two hours and 51 minutes versus one hour and 46 minutes).75
Mobile ad spending was almost $18 billion worldwide in 2013. With the increased capabilities of smart phones,
however, mobile ads can be more than just a display medium using static “mini-billboards.” Much recent interest
has been generated in mobile apps—bite-sized software programs that can be downloaded to smart phones.
Apps can perform useful functions—adding convenience, social value, incentives, and entertainment and making
consumers’ lives a little or a lot better.76
In a short period of time, thousands of apps have been introduced by companies large and small. Many
companies are adding apps to their marketing toolkit. VW chose to launch its GTI in the United States with an
iPhone app, which was downloaded 2 million times in three weeks. In Europe, it launched the VW Tiguan with
a mobile app as well as text messages and an interstitial Web site.77 A mobile app became an important part of a
Bank of America campaign for one of its Merrill Lynch products.78
MerriLL edge’S “faCe reTireMenT” aPP One challenge for many financial services
firms is to motivate younger customers to think about their financial needs, especially in terms of retirement. A recent academic
study found that aged-progressed renderings of themselves helped younger people better imagine their future selves and adopt
a longer-term financial planning perspective. Based in part on this research, Bank of America developed the “Face Retirement”
program for its Merrill Edge low-cost financial planning platform. Initially using the brand’s Web site and later an app, the Face
Retirement tool allowed users to snap pictures of themselves and, with the use of 3D “virtual makeover” imaging technology, see
what they might look like when they were 47, 57, or even 107! Accompanying the photos was information about the expected
prices of different items in those future years (bread, a gallon of gas, utilities) to provide additional context and motivation. Also
present was a link to more information about investing for retirement. Almost 1 million individuals used the app, with 60 percent
seeking more information. Many found the photos so intriguing they posted them on Facebook or shared them on Twitter.
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Smart phones are also conducive to boosting loyalty programs in which customers can track their visits to and
purchases from a merchant and receive rewards. By tracking the whereabouts of receptive customers who opt in
to receive communications, retailers can send them location-specific promotions when they are near shops or
outlets.79 Sonic Corp. used GPS data and proximity to cell towers in Atlanta to identify when those customers who
had signed up for company communications were near one of roughly 50 Sonic restaurants in the area. When that
was the case, the company sent customers a text message with a discount offer or an ad to entice them to visit the
restaurant.80
Because traditional coupon redemption rates have been declining for years, the ability of mobile to make more
relevant and timely offers to consumers at or near the point of purchase has piqued the interest of many marketers.
These new coupons can take all forms, and digital in-store signs can dispense them to smart phones.81
Although the cookies that allow firms to track online activity don’t typically work in wireless applications,
technological advances are making it easier to track users across their smart phones and tablets too. With user
privacy safeguards in place, marketers’ greater knowledge of cross-screen identities (online and mobile) can permit
more relevant, targeted ads.82
New measurement techniques are also aiding the adoption of mobile marketing. Nielsen has added consumers’
viewing of television programing on mobile devices to its Live+3 TV ratings system, which combines average live
commercial ratings with three days of time-shifted viewing.83
developInG effeCtIve MoBIle MArketInG proGrAMs
Even with newer-generation smart phones, the Web experience can be very different for users given smaller
screen sizes, longer download times, and the lack of some software capabilities. Marketers are wise to design
simple, clear, and clean sites, paying even greater attention than usual to user experience and navigation.84
Experts point out that being concise is critical with mobile messaging, offering the following advice:85
• Mobile ad copy should occupy only 50 percent of the screen, avoiding complex viewing experiences that may
take a toll on consumers’ battery and data availability as well as on their time.
• Brands should limit their ads to a pair of phrases—the offer and the tagline.
• Brands should place their logo in the corner of the mobile ad frame.
• Ads should use at least one bright color, but no more than two. Calls to action should be highlighted with a
bright color.
MoBIle MArketInG ACross MArkets
Although a growing population segment uses smart phones and tablets for everything from entertainment to
banking, different people have different attitudes toward and experiences with mobile technology. U.S. marketers
can learn much about mobile marketing by looking overseas.
To motivate younger
consumers to consider
investing in retirement,
Merrill Edge’s “Face
Retirement” program
created a virtual makeover
of consumers to show
how they might look at
progressively older ages.
So
ur
ce
: B
an
k
of
A
m
er
ic
a
C
or
po
ra
tio
n
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In developed Asian markets such as Hong Kong, Japan, Singapore, and South Korea, mobile marketing is fast
becoming a central component of customer experiences.86 In developing markets, high smart-phone penetration
also makes mobile marketing attractive. A pioneer in China, Coca-Cola created a national campaign asking Beijing
residents to send text messages guessing the high temperature in the city every day for just over a month for a
chance to win a one-year supply of Coke products. The campaign attracted more than 4 million messages over the
course of 35 days.87
As marketers learn more about effective mobile campaigns from all over the world, they are figuring out how to
adapt these programs to work in their markets. There is no question that successful marketing in the coming years
will involve a healthy dose of mobile marketing.
Marketers like Coca-Cola
are learning much about
mobile marketing in China
and other Asian countries
given the high smart
phone penetration and
usage there.
So
ur
ce
: W
en
g
le
i-
Im
ag
in
ec
hi
na
the process. Social media are rarely the sole source of
marketing communications for a brand.
4. Word-of-mouth marketing finds ways to engage cus-
tomers so they will choose to talk positively with others
about products, services, and brands. Viral market-
ing encourages people to exchange online information
related to a product or service.
5. Mobile marketing is an increasingly important form of
interactive marketing by which marketers can use text
messages, software apps, and ads to connect with
consumers via their smart phones and tablets.
Summary
1. Online marketing provides marketers with opportuni-
ties for much greater interaction and individualization
through well-designed and executed Web sites, search
ads, display ads, and e-mails.
2. Social media come in many forms: online communities
and forums, blogs, and social networks such as Face-
book, Twitter, and YouTube.
3. Social media offer marketers the opportunity to have a
public voice and presence online for their brands and
reinforce other communications. Marketers can build or
tap into online communities, inviting participation from
consumers and creating a long-term marketing asset in
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MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
What Is the Value of Buzz?
One of the classic debates in the popular press is whether all
buzz or word of mouth—positive and negative—is good for
a brand. Some feel that “any press is good press” and that
as long as people are talking, that is a good thing. Others
challenge that notion and say the content of the dialogue is
what really matters.
Take a position: “All news is good news” and any
buzz is helpful for a brand versus The content of buzz
can make or break a brand.
Marketing Discussion
Corporate Web Sites
Pick one of your favorite brands and go to its Web site.
How would you evaluate the Web site? How well does it
score on the 7Cs of design elements: context, content,
community, customization, communication, connection,
and commerce?
users. It allows users to create customized personal pro-
files with information such as their hometown, work expe-
rience, educational background, and relationship status as
well as an unlimited number of photos and albums. To in-
teract with each other, users send messages, “poke” each
other, and “tag” or label people in their photos. They can
post comments on friends’ “walls,” join groups, upload
and view albums, plan group events, and create status
updates viewable by everyone. In summary, Facebook is
on its way to fulfilling its mission: Give people the power
to share and make the world more open and connected.
Facebook is not only an important part of many peo-
ple’s lives but also a critical marketing component for just
about any brand and company. Its pages provide a way
to personally interact and communicate with consumers
no matter the size of the company. In fact, Facebook is
a great way for smaller companies to build strong, long-
lasting one-to-one relationships with their initial consumer
base and listen to consumer feedback. Even politicians
use the site to push their campaigns and communicate
with supporters on a local, personal level.
Facebook provides companies a place to expand
their personalities in an inviting and nonthreatening en-
vironment where they can show a softer side than
they might in traditional marketing media. Marketers can
launch videos and trailers, unveil promotions, run con-
tests, upload images, and post news. Some companies
Marketing Excellence
>> Facebook
Facebook was founded in 2004 by Mark Zuckerberg,
a Harvard University student at the time. Zuckerberg
recalls, “I just thought that being able to have access to
different people’s profiles would be interesting. Obviously,
there’s no way you can get access to that stuff unless
people are throwing up profiles, so I wanted to make an
application that would allow people to do that, to share
as much information as they wanted while having control
over what they put up.”
Within 24 hours of its launch, nearly 1,500 Harvard
students had registered on the site. A month later, half
the campus had joined. Initially, only Harvard students
could view and use the site, which had relatively simple
profile and navigation tools at first. The early momentum
was tremendous, though, and Facebook soon expanded
to include students throughout the Ivy League and then
other colleges. The initial decision to keep the site exclu-
sive to college students was critical to its early success.
It gave Facebook a sense of privacy, unity, and exclusivity
that social media competitors like MySpace did not offer.
In 2006, the site opened its doors to everyone.
Today, Facebook is the most popular social network-
ing Web site in the world, with more than 1.3 billion active
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654 PART 7 | CommuniCATing VAlue
tied only with beer. The site offers a unique opportunity to
engage consumers on a personal, meaningful level and
even reach new ones through its targeted advertising
options.
Questions
1. Why is Facebook unique in the world of personal
marketing? What are Facebook’s greatest strengths?
2. Who are Facebook’s biggest competitors? What are
the greatest risks it faces in the future?
3. What does a company gain by having a Facebook
page or advertising through Facebook? What
would you think if a brand or company were not on
Facebook?
Sources: John Cassidy, “Me Media,” New Yorker, May 15, 2006; “Survey: College Kids Like
iPods Better than Beer,” Associated Press, June 8, 2006; Peter Corbett, “Facebook Demographics
and Statistics Report 2010,” I Strategy Labs, www.istrategylabs.com; Brian Womack, “Facebook
Sees Fourfold Jump in Number of Advertisers since 2009,” BusinessWeek, June 2, 2010; Kermit
Pattison, “How to Market Your Business with Facebook,” New York Times, November 11, 2009;
Allen Adamson, “No Contest: Twitter and Facebook Both Play a Role in Branding,” Forbes, May
6, 2009; Eilene Zimmerman, “Small Retailers Open Up Storefronts on Facebook Pages,” New
York Times, July 26, 2012; Andrew Adam Newman, “Online a Cereal Maker Takes an Inclusive
Approach,” New York Times, July 24, 2013; “20 Best Company Facebook Pages,” Inc.com; www
.facebook.com; Facebook 2012 Annual Report.
tie into charitable causes through Facebook. Pacific
Bioscience Laboratories, maker of Clarisonic face
brushes, pledged to donate $1 to charity each time a
Facebook user clicked the “Like” button on its page and
raised $30,000 for women suffering from cancer. Burt’s
Bee’s uses Facebook to introduce new products to its
loyal consumer base first and hear their immediate feed-
back. Old Spice has successfully used the site to take its
humorous commercials viral. The brand has millions of
fans and believes Facebook was one of the key factors
in revitalizing a 70-plus-year-old product among young
consumers.
Facebook also offers highly targeted advertising op-
portunities with personalized messages. Ads—the com-
pany’s major source of income—can target individuals
by demographic or keywords based on the demographic
and interest information they have placed in their profiles.
Many ads include an interactive element such as polls or
opportunities to comment or invite friends to an event.
Facebook can include “social context” with the adver-
tiser’s marketing message, which highlights a friend’s
connection with that particular brand.
In one survey, college students named Facebook the
second-most popular thing in their undergraduate world,
girls by the dozen, hundreds, or even thousands after
dousing themselves with Axe. The result: The brand is
aspirational and approachable, and the lighthearted tone
appeals to young men.
Axe has won numerous advertising awards not only
for its creativity but also for its effective use of unconven-
tional media channels. From edgy online videos to video
games, mating game tool kits, chat rooms, and mobile
apps, the Axe brand engages young adult males at rel-
evant times, locations, and environments. In Colombia,
for example, a female Axe Patrol scopes out the bar
and club scene and sprays men with Axe body sprays.
Unilever Marketing Director Kevin George explained, “This
is all about going beyond the 30-second TV commercial
to create a deeper bond with our guy.”
Axe knows where to reach its consumers. It adver-
tises only on male-dominated networks such as MTV,
ESPN, Spike, and Comedy Central. It partners with the
NBA and NCAA, which draw young male audiences, and
runs ads during big sporting events. After Axe’s Super
Bowl commercial ran in February 2014, it was viewed
on YouTube.com more than 100 million times. Print ads
appear in Playboy, Rolling Stone, GQ, and Maxim. Axe’s
online efforts via Facebook and Twitter help drive con-
sumers back to its Web site, TheAxeEffect.com.
Marketing Excellence
>> Unilever (Axe and Dove)
Unilever—manufacturer of several home care, food, and
personal care brands—uses personal marketing com-
munications strategies to target specific age groups,
demographics, and lifestyles. The company has devel-
oped some of the most successful brands in the world,
including Axe, a male grooming brand, and Dove, a per-
sonal care brand aimed at women.
The Axe brand launched in 1983, was introduced in
the United States in 2002, and is now the most popular
male grooming brand in the world, sold in more than 70
different countries. It offers young male consumers a wide
range of personal care products such as body sprays,
body gel, deodorant, and shampoo in a variety of scents.
It effectively broke through the clutter by finding the right
target group and delivering personal marketing messages
that touched home.
The biggest opportunity existed with males who
might have felt a need for help in attracting the opposite
sex and could easily be persuaded to buy products to
help their appearance. Most Axe ads use humor and sex,
often featuring skinny, average guys attracting beautiful
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described her. The difference in language and descriptions
revealed how women are often their harshest beauty crit-
ics. The ad ended with the tagline “You are more beautiful
than you think.” The Sketches film has become the most
watched video advertisement of all time and had more
than 175 million views in its first year alone.
Dove’s latest effort to change the attitudes of women
and promote positive self-esteem was called the Ad
Makeover. The campaign appeared only on Facebook
and gave women the power to replace negative ads
(such as for plastic surgery or weight-loss products) on
their friends’ Facebook pages with positive messages
from Dove like “Hello Beautiful” and “The Perfect Bum Is
the One You Are Sitting On.” Unilever in effect bought the
ad space from Facebook for the positive ads to appear
on the friend’s site, effectively squeezing out the nega-
tive ads. During the first week the Ad Makeover app was
launched, 171 million banners with negative messages
were replaced.
Although the Axe and the Dove campaigns have both
sparked much controversy and debate, they couldn’t be
more different. Yet both have effectively targeting their
consumer base with personal marketing strategies and
spot-on messages. In fact, in the 10 years that Dove has
focused on changing women’s attitudes and promoting
positive self-esteem, sales have jumped from $2.5 bil-
lion to $4 billion. Axe is not only the most popular male
grooming brand in the world, but also Unilever’s best-
selling brand.
Questions
1. What makes personal marketing work? Why are
Dove and Axe so successful at it?
2. Can a company take personal marketing too far?
Explain.
3. Is there a conflict of interests in the way Unilever mar-
kets to women and young men? Is it undoing all the
good that might be done in the “Campaign for Real
Beauty” by making women sex symbols in Axe ads?
Discuss.
Sources: Jack Neff, “Dove’s ‘Real Beauty’ Pics Could Be Big Phonies,” Advertising Age, May 7,
2008; Catherine Holahan, “Raising the Bar on Viral Web Ads,” BusinessWeek, July 23, 2006;
Randall Rothenberg, “Dove Effort Gives Packaged-Goods Marketers Lessons for the Future,”
Advertising Age, March 5, 2007; Laura Petrecca, “Amusing or Offensive, Axe Ads Show That
Sexism Sells,” USA Today, April 18, 2007; Kim Bhasin, “How Axe Became the Top-Selling
Deodorant by Targeting Nerdy Losers,” Business Insider, October 10, 2011; https://blogs.monash
.edu/presto/2013/04/07/dove-flies-high-with-social-media-ii/; Jonathan Salem Baskin, “The
Opportunity for Dove to Get Real with Its Branding,” Forbes, March 7, 2013; Danielle Kurtzleben,
“Unilever Faces Criticism for Real Beauty Ad Campaign,” U.S. News, April 18, 2013; Jack Neff,
“Campaign Has Won Lots of Awards, Sold Heap of Product. But Has It Changed Perceptions?” Ad
Age, January 22, 2014; Dove, www.campaignforrealbeauty.com; www.unilever.com; Unilever 2013
Annual Report.
Unilever understands that it must keep the brand
fresh, relevant, and cool in order to stay current with its
fickle young audience. As a result, the company launches
a new fragrance every year and refreshes its online and
advertising communications constantly, realizing that new
young males enter and exit the target market each year.
Axe’s success in personal marketing has lifted the brand
to become the leader in what many had thought was the
mature deodorant category.
On the other side of the personal marketing spec-
trum, Unilever’s Dove brand speaks to women with a
different tone and message. In 2003, Dove shifted away
from its historical advertising, which touted the brand’s
benefit of one-quarter moisturizing cream, and launched
the “Real Beauty” campaign. “Real Beauty” celebrated
“real” women and spoke personally to the target market
about the notion that beauty comes in all shapes, sizes,
ages, and colors. The campaign arose from research
revealing that only 4 percent of women worldwide think
they are beautiful.
The first phase of the “Real Beauty” campaign fea-
tured nontraditional female models and asked viewers
to judge their looks online and decide whether they were
“Wrinkled or Wonderful” or “Oversized or Outstanding.”
The personal questions shocked many but created such
a large PR buzz that Dove continued the campaign. The
second phase featured candid and confident images of
curvy, full-bodied women. Again, the brand smashed
stereotypes about what should appear in advertising and
touched many women worldwide. The third phase, “Pro-
Age,” featured older, nude women and asked questions
like, “Does beauty have an age limit?” Immediately, the
company heard positive feedback from its older consum-
ers. Dove also started a Self-Esteem Fund, aimed at
helping women feel better about their looks.
In addition, Dove released a series of short Dove
Films, one of which, Evolution, won both a Cyber and a
film Grand Prix at the International Advertising Festival in
Cannes in 2007. The film shows a rapid-motion view of
an ordinary-looking woman transformed by makeup art-
ists, hairdressers, lighting, and digital retouching to end
up looking like a billboard supermodel. The end tagline is:
“No wonder our perception of beauty is distorted.” The
film became an instant viral hit.
Dove followed up with Onslaught, a short film that
showed a fresh-faced young girl being bombarded with
images of sexy, half-dressed women and promises of
products to make her look “smaller,” “softer,” “firmer,” and
“better.” Dove’s 2013 film called Sketches featured a police
sketch artist who drew two pictures of the same woman.
For one, the woman described herself to the sketch artist
from behind a curtain, and for the other, a total stranger
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656
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
end-of-chapter problems.
In This Chapter, We Will Address
the Following Questions
1. How can companies conduct direct marketing for competitive advantage?
(p. 657)
2. What are the pros and cons of database marketing? (p. 662)
3. What decisions do companies face in designing a sales force? (p. 664)
4. What are the challenges of managing a sales force? (p. 669)
5. How can salespeople improve their selling, negotiating, and relationship
marketing skills? (p. 673)
Breaking new ground with database
marketing helped propel President
Barack Obama to re-election in 2012.
Source: © epa european pressphoto agency b.v./Alamy
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657
Managing Personal
Communications: Direct
and Database Marketing
and Personal Selling
22
Although mass and digital communications provide many benefits, there are times
personal communications are needed to be relevant and close a sale—or perhaps even to elect a president!
Many political pundits credit savvy database marketing as a crucial factor in the reelection of U.S. President
Barack Obama in 2012.1
After database marketing proved a key to winning the presidential election in 2008, the Obama cam-
paign team vowed to exploit it even more during his 2012 reelection campaign. By merging the main
Democratic voter files with information from pollsters, fund-raisers, field workers, and customer data-
bases, as well as social media and mobile contacts, they created one comprehensive database. Sophis-
ticated data analytics helped raise $1 billion and fine-tune the use of TV ads, phone calls, direct mail,
door-to-door campaigning, and social media, especially in critical swing states. Much of the $690 million raised online
resulted from carefully targeted and tested e-mails. Every day, the campaign used small groups of supporters to test as
many as 18 different versions of e-mails varying in subject line, amounts requested, and sender. The winning combination
went to the broad base of tens of millions of supporters. Campaign analysts found that a casual tone (such as the word
hey) was often effective in subject lines and that supporters seemed to
never tire of the e-mails. The campaign also broke new ground with a
Facebook campaign in which people who downloaded an app were sent
messages with pictures of their friends in swing states and asked to click
a button to automatically urge those targeted voters to register to vote or
get to the polls. As a result of all these efforts, 1.25 million more 18- to
24-year-old voters supported Obama in 2012 than 2008.
Personalizing communications and saying and doing
the right thing for the right person at the right time are critical for
marketing effectiveness. In this chapter, we consider how com-
panies personalize their marketing communications to have more
impact. We begin by evaluating direct and database marketing,
then move on to consider personal selling and the sales force.
Direct Marketing
Today, many marketers build long-term relationships with customers. They send birthday cards, information
materials, or small premiums. Airlines, hotels, and other businesses adopt frequency reward programs and
club programs.2 Direct marketing is the use of consumer-direct (CD) channels to reach and deliver goods and
services to customers without using marketing middlemen.
Direct marketers can use a number of channels to reach individual prospects and customers: direct mail, catalog
marketing, telemarketing, interactive TV, kiosks, Web sites, and mobile devices. They often seek a measurable
response, typically a customer order, through direct-order marketing.
Direct marketing has been a fast-growing avenue, partly in response to the high and increasing costs of reach-
ing business markets through a sales force. Sales produced through traditional direct marketing channels (catalogs,
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658 PART 7 | CommuniCATing VAlue
direct mail, and telemarketing) have been growing rapidly, along with direct-mail sales, which include sales to the
consumer market, B-to-B, and fund-raising by charitable institutions. Direct marketing has been outpacing U.S.
retail sales. It produced $2.05 trillion in sales in 2012, accounting for approximately 8.7 percent of GDP.3
The BenefITs of DIrecT MarkeTInG
Market demassification has resulted in an ever-increasing number of market niches. Consumers short of time and
tired of traffic and parking headaches appreciate toll-free phone numbers, always-open Web sites, next-day delivery,
and direct marketers’ commitment to customer service. In addition, many chain stores have dropped slower-moving
specialty items, creating an opportunity for direct marketers to promote these to interested buyers instead.
Sellers benefit from demassification as well. Direct marketers can buy a list containing the names of almost any
group: left-handed people, overweight people, or millionaires. They can customize and personalize messages and
build a continuous relationship with each customer. New parents will receive periodic mailings describing new
clothes, toys, and other goods as their child grows.
Direct marketing can reach prospects at the moment they want a solicitation and therefore be noticed by more
highly interested prospects. It lets marketers test alternate media and messages to find the most cost-effective
approach. Direct marketing also makes the company’s offer and strategy less visible to competitors. Finally, direct
marketers can measure responses to their campaigns to decide which have been the most profitable.
Direct marketing must be integrated with other communications and channel activities.4 Eddie Bauer, Lands’
End, and the Franklin Mint made fortunes building their brands in the direct marketing mail-order and phone-
order business and then opened retail stores. They cross-promote their stores, catalogs, and Web sites, for example,
by putting their Internet addresses on their shopping bags.
Successful direct marketers view a customer interaction as an opportunity to up-sell, cross-sell, or just deepen
a relationship. They make sure they know enough about each customer to customize and personalize offers and
messages and develop a plan for lifetime marketing to each valuable customer, based on their knowledge of life
events and transitions. They also carefully orchestrate each element of their campaigns. Here is an award-winning
campaign that did just that.5
TiP TOP ice creaM New Zealand loves ice cream—the country has one of the highest per-capita
consumption rates in the world. With fierce competition among brands, local brand Tip Top needed a way to maintain
its leadership over its well-financed rivals. The “Feel Tip Top” campaign was a clever way to engage its customers.
A Facebook app allowed people to nominate friends and family to receive ice cream delivered personally in the company’s
new truck. The happy reactions of some lucky recipients were captured on film for ads and viral videos. Winner of the
Direct Marketing Association’s Diamond Echo Award for 2013, the campaign generated 2,000 nominations in 24 hours,
rising eventually to 30,000. Sales increased 5 percent.
New Zealand’s Tip
Top ice cream used
social media and
video to connect its
brand with customers
to retain its market
leadership.
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We next consider some of the key issues that characterize different direct marketing channels.
DIrecT MaIl
Direct-mail marketing means sending an offer, announcement, reminder, or other item to an individual con-
sumer. Using highly selective mailing lists, direct marketers send out millions of mail pieces each year—letters,
fliers, foldouts, and other “salespeople with wings.”
Direct mail is a popular medium because it permits target market selectivity, can be personalized, is flexible,
and allows early testing and response measurement. Although the cost per thousand is higher than for mass media,
the people reached are much better prospects. The success of direct mail, however, has also become its liability—so
many marketers are sending out direct-mail pieces that mailboxes are becoming stuffed, leading some consumers
to disregard the blizzard of solicitations they receive.
In constructing an effective direct-mail campaign, direct marketers must choose their objectives, target markets
and prospects, offer elements, means of testing the campaign, and measures of campaign success.
Objectives Most direct marketers judge a campaign’s success by the response rate, measured in customer
orders. An order-response rate for letter-sized direct mail averages 3.4 percent to an internal company list and
1.3 percent to a general public list. Although that can vary with product category, price, and the nature of the
offering, it is much higher than e-mails’ average response rates of 0.12 percent and 0.03 percent, respectively.6
Direct mail can also produce prospect leads, strengthen customer relationships, inform and educate customers,
remind customers of offers, and reinforce recent customer purchase decisions.
target Markets and PrOsPects Most direct marketers apply the RFM (recency, frequency,
monetary amount) formula to select customers according to how much time has passed since their last purchase,
how many times they have purchased, and how much they have spent since becoming a customer.7 Suppose the
company is offering a leather jacket. It might make this offer to the most attractive customers—those who made
their last purchase between 30 and 60 days ago, who make three to six purchases a year, and who have spent at least
$100 since becoming customers. Points are established for varying RFM levels; the more points, the more attractive
the customer.8
Marketers also identify prospects on the basis of age, sex, income, education, previous mail-order purchases,
and occasion. College freshmen will buy laptop computers, backpacks, and compact refrigerators; newlyweds look
for housing, furniture, appliances, and bank loans. Another useful variable is consumer lifestyle or “passions” such
as electronics, cooking, and the outdoors.
Dun & Bradstreet provides a wealth of data for B-to-B direct marketing. Here the prospect is often not an
individual but a group or committee of both decision makers and decision influencers. Each member needs to
be treated differently, and the timing, frequency, nature, and format of contact must reflect the member’s status
and role.
The company’s best prospects are customers who have bought its products in the past. The direct marketer can
also buy lists of names from list brokers, but these lists often have problems, including name duplication, incom-
plete data, and obsolete addresses. Better lists include overlays of demographic and psychographic information.
Direct marketers typically buy and test a sample before buying more names from the same list. They can build their
own lists by advertising a promotional offer and collecting responses.
Offer eleMents The offer strategy has five elements—the product, the offer, the medium, the distribution
method, and the creative strategy.9 Fortunately, all can be tested. The direct-mail marketer also must choose
five components of the mailing itself: the outside envelope, sales letter, circular, reply form, and reply envelope.
A common direct marketing strategy is to follow up direct mail with an e-mail.
testing eleMents One of the great advantages of direct marketing is the ability to test, under real
marketplace conditions, different elements of an offer strategy, such as products, product features, copy platform,
mailer type, envelope, prices, or mailing lists. The Teaching Company mails 50 million catalogs and sends
25 million e-mails to sell educational DVDs of lectures and courses. Every element of the offer is tested. Changing
the color and location of an “Add to Cart” button on its Web site (from pale green to orange and from side to
bottom) increased sales almost 6 percent. Replacing an image of Michelangelo’s God’s hand with one depicting the
ruins of Petra improved sales more than 20 percent.10
Response rates typically understate a campaign’s long-term impact. Suppose only 2 percent of the recipients
who receive a direct-mail piece advertising Samsonite luggage place an order. A much larger percentage became
aware of the product (direct mail has high readership), and some percentage may have formed an intention to buy
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660 PART 7 | CommuniCATing VAlue
at a later date (either by mail or at a retail outlet). Some may mention Samsonite luggage to others as a result of the
direct-mail piece. To better estimate a promotion’s impact, some companies measure the impact of direct market-
ing on awareness, intention to buy, and word of mouth.
Measuring caMPaign success: lifetiMe value By adding up the planned campaign costs, the
direct marketer can determine the needed break-even response rate. This rate must be net of returned merchandise
and bad debts. A specific campaign may fail to break even in the short run but can still be profitable in the long
run if we factor in customer lifetime value (see Chapter 5) by calculating the average customer longevity, average
customer annual expenditure, and average gross margin, minus the average cost of customer acquisition and
maintenance (discounted for the opportunity cost of money).11
caTaloG MarkeTInG
In catalog marketing, companies may send full-line merchandise catalogs, specialty consumer catalogs, and
business catalogs, usually in print form but also as DVDs or online. In 2010, three of the top B-to-C catalog
sellers were Dell ($52 billion), Staples ($9.8 billion), and CDW ($8.8 billion). Three top B-to-B catalog sellers
were Thermo Fisher Scientific lab and research supplies ($10.8 billion), Henry Schien dental, medical, and vet
supplies ($7.5 billion), and WESCO International electrical and industry maintenance supplies ($5.0 billion).12
Thousands of small businesses also issue specialty catalogs. Many direct marketers find combining catalogs and
Web sites an effective way to sell.
Catalogs are a huge business—the Internet and catalog retailing industry includes 20,000 companies with
combined annual revenue of $350 billion.13 Successfully marketing a catalog business depends on managing cus-
tomer lists carefully to avoid duplication or bad debts, controlling inventory, offering good-quality merchandise
so returns are low, and projecting a distinctive image. Some companies add literary or information features, send
swatches of materials, operate a special online or telephone hotline to answer questions, send gifts to their best cus-
tomers, and donate a percentage of profits to good causes. Putting their entire catalog online also provides business
marketers with better access to global consumers than ever before, saving printing and mailing costs.
TeleMarkeTInG
Telemarketing is the use of the telephone and call centers to attract prospects, sell to existing customers, and pro-
vide service by taking orders and answering questions. It helps companies increase revenue, reduce selling costs,
and improve customer satisfaction. Companies use call centers for inbound telemarketing—receiving calls from
customers—and outbound telemarketing—initiating calls to prospects and customers.
As Chapter 4 noted, because of the establishment of the National Do Not Call Registry in 2003, consumer
telemarketing has lost much of its effectiveness. Business-to-business telemarketing is increasing, however.
Raleigh Bicycles used
telemarketing to cuts
costs and drive sales.
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Raleigh Bicycles used telemarketing to reduce the personal selling costs of contacting its dealers. In the first
year, sales force travel costs dropped 50 percent and sales in a single quarter went up 34 percent. As it improves
with the use of video conferencing, telemarketing will increasingly replace, though never eliminate, more ex-
pensive field sales calls.
oTher MeDIa for DIrecT-response MarkeTInG
Direct marketers use all the major media. Newspapers and magazines carry ads offering books, clothing,
appliances, vacations, and other goods and services that individuals can order via toll-free numbers. Radio ads
present offers 24 hours a day. Some companies prepare 30- and 60-minute infomercials to combine the selling
power of television commercials with the draw of information and entertainment. Infomercials promote prod-
ucts that are complicated or technologically advanced or that require a great deal of explanation. Some of the
most successful are for Proactiv acne system, P90X workout DVDs, and the George Foreman grill. At-home
shopping channels are dedicated to selling goods and services through a toll-free number or via the Internet for
delivery within 48 hours.
puBlIc anD eThIcal Issues In DIrecT MarkeTInG
Direct marketers and their customers usually enjoy mutually rewarding relationships. Occasionally, however, a
darker side emerges:
• Irritation. Many people don’t like hard-sell direct marketing solicitations. Firms have been popping up to
help block unwanted junk mail.14
• Unfairness. Some direct marketers take advantage of impulsive or less sophisticated buyers or prey on the
vulnerable, especially the elderly.
• Deception and fraud. Some direct marketers design mailers and write copy intended to mislead or exagger-
ate product size, performance claims, or the “retail price.” The Federal Trade Commission receives thousands
of complaints each year about fraudulent investment scams and phony charities.
• Invasion of privacy. It seems that almost every time consumers order products by mail or telephone, apply
for a credit card, or take out a magazine subscription, their names, addresses, and purchasing behavior may be
added to several company databases. As Chapters 3 and 5 discussed, critics worry that marketers may know
too much about consumers’ lives and that they may use this knowledge to take unfair advantage.15
People in the direct marketing industry know that, left unattended, such problems will lead to increasingly
negative consumer attitudes, lower response rates, and calls for greater state and federal regulation. Most direct
marketers want the same thing consumers want: honest and well-designed marketing offers targeted only to those
who appreciate hearing about them.
TV infomercials have
been used with great
success to sell the
George Foreman grill,
backed by the former
heavyweight boxing
champion.
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Customer Databases and Database
Marketing
To conduct direct marketing, marketers must know their customers.16 And to do that, they must collect
information and store it in a database from which to conduct database marketing. A customer database is an
organized collection of comprehensive information about individual customers or prospects that is current,
accessible, and actionable for lead generation, lead qualification, sale of a product or service, or maintenance
of customer relationships. Database marketing is the process of building, maintaining, and using customer
databases and other databases (of products, suppliers, or resellers) to contact, transact, and build customer
relationships.
Chapter 3 reviewed “Big Data” and the analysis of massive data sets. Here we consider some additional issues in
building customer databases and conducting database marketing.
cusToMer DaTaBases
Many companies confuse a customer mailing list with a customer database. A customer mailing list is simply
a set of names, addresses, and telephone numbers. A customer electronic mailing or e-mail list may literally be
just names and e-mail addresses. A customer database, however, contains much more information, accumulated
through customer transactions, registration information, telephone queries, cookies, and every customer contact.
Ideally, a customer database also contains the consumer’s past purchases, demographics (age, income, family
members, birthdays), psychographics (activities, interests, and opinions), mediagraphics (preferred media), and
other useful information.
A typical business database contains business customers’ past purchases; past volumes, prices, and profits;
buyer team members’ names (and ages, birthdays, hobbies, and favorite foods); status of current contracts;
the supplier’s estimated share of the customer’s business; competitive suppliers; assessment of competitive
strengths and weaknesses in selling and servicing the account; and relevant customer buying practices, pat-
terns, and policies. A Latin American unit of the Swiss pharmaceutical firm Novartis keeps data on 100,000
of Argentina’s farmers, knows their crop protection chemical purchases, groups them by value, and treats each
group differently.
DaTa Warehouses anD DaTa MInInG
Savvy companies capture information every time a customer contacts any of their depart-
ments, whether via purchase, a service call, an online query, or a mail-in rebate card.17 Banks
and credit card companies, telephone companies, catalog marketers, and many other com-
panies have a great deal of information about their customers, including transaction history
and enhanced data on age, family size, income, and other demographics.
These data are collected by the company’s contact center and organized into a data ware-
house where marketers can capture, query, and analyze them to draw inferences about an
individual customer’s needs and responses. Customer service reps inside the company can
respond to customer inquiries based on a complete picture of the customer relationship, and
customized marketing activities can be directed to individual customers. Some firms provide
specialized help to support database marketing.18
dunnhuMby British research firm Dunnhumby has increased the profitability
of retailers and other firms by gleaning insights from their loyalty program data and credit card
transactions. The firm has helped British supermarket giant Tesco manage every aspect of its
business: creating new shop formats, arranging store layouts, developing private label products,
and tailoring coupons and special discounts to its loyalty card shoppers. Tesco decided against
dropping a poor-selling type of bread after Dunnhumby’s analysis revealed it was a “destina-
tion product” for a loyal cohort that would shop elsewhere if it disappeared. U.S. clients of
Dunnhumby have included Coca-Cola, Kroger, Macy’s, and Home Depot. Based on data from
In Argentina, Novartis keeps a detailed data
base on its farmer customers so that it can
market more effectively to them.
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350 million people in 28 countries, Dunnhumby’s insights have aided decisions about product range, availability,
space planning, and new-product innovations. For a major European catalog company, Dunnhumby found that not
only did shoppers with different body types prefer different clothing styles, they also shopped at different times of the
year: Slimmer consumers tended to buy early in a new season, whereas larger folks tended to take fewer risks and
wait until later in the season to see which styles proved popular.
Through data mining, marketing statisticians can extract from the mass of data useful information about
individuals, trends, and segments. Data mining uses sophisticated statistical and mathematical techniques such as
cluster analysis, automatic interaction detection, predictive modeling, and neural networking.
Some observers believe a proprietary database can provide a company with a significant competitive
advantage.19 In general, companies can use their databases in five ways:
1. To identify prospects—Many companies generate sales leads by advertising their product or service and
including a response feature, such as a link to a home page, a business reply card, or a toll-free phone
number, and building a database from customer responses. The company sorts through the database
to identify the best prospects, then contacts them by mail, e-mail, or phone to try to convert them into
customers.
2. To decide which customers should receive a particular offer—Companies interested in selling, up-selling,
and cross-selling set up criteria describing the ideal target customer for a particular offer. Then they search
their customer databases for those who most closely resemble the ideal. By noting response rates, a company
can improve its targeting precision. Following a sale, it can set up an automatic sequence of activities: One
week later e-mail a thank-you note; five weeks later e-mail a new offer; 10 weeks later (if the customer has not
responded) e-mail an offer of a special discount.
3. To deepen customer loyalty—Companies can build interest and enthusiasm by remembering customer
preferences and sending appropriate gifts, discount coupons, and interesting reading material.
4. To reactivate customer purchases—Automatic mailing programs (automatic marketing) can send out
birthday or anniversary cards, holiday shopping reminders, or off-season promotions. The database can help
the company make attractive or timely offers.
5. To avoid serious customer mistakes—A major bank confessed to a number of mistakes it had made by not
using its customer database well. In one case, the bank charged a customer a penalty for late payment on his
mortgage, failing to note he headed a company that was a major depositor in this bank. The customer quit the
bank. In a second case, two different staff members of the bank phoned the same mortgage customer offering
a home equity loan at different prices. Neither knew the other had made the call. In a third case, the bank gave
a premium customer only standard service in another country.
Tesco uses insights
gained from a massive
customer data base to
help make all kinds of
business and marketing
decisions.
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The DoWnsIDe of DaTaBase MarkeTInG
Database marketing is most frequently used by business marketers and service providers that routinely collect
masses of customer data, like hotels, banks, airlines, and insurance, credit card, and phone companies. Other
types of companies that invest in database marketing are those that favor cross-selling and up-selling (such as
GE and Amazon.com) or whose customers have highly differentiated needs and are of highly differentiated value
to the company. Although packaged-goods retailers and consumer packaged-goods companies use database
marketing less frequently, many (such as Kraft, Quaker Oats, Ralston Purina, and Nabisco) are building databases
for certain brands.
Having covered the upside of database marketing, we also need to cover the downside. Five main problems can
prevent a firm from effectively using database marketing.
1. Some situations are just not conducive to database marketing. Building a customer database may not be
worthwhile when: (1) the product is a once-in-a-lifetime purchase (a grand piano); (2) customers show little
loyalty to a brand (there is a lot of customer churn); (3) the unit sale is very small (a candy bar) so customer
lifetime value is low; (4) the cost of gathering information is too high; and (5) there is no direct contact
between the seller and ultimate buyer.
2. Building and maintaining a customer database require a large investment. Computer hardware, database
software, analytical programs, communication links, and skilled staff can be costly. It’s difficult to collect the right
data, especially to capture all the occasions of company interaction with individual customers. Deloitte Consulting
found 70 percent of firms experienced little or no improvement from implementing customer relationship
management (CRM) because the system was poorly designed, it became too expensive, users didn’t make much
use of it or report much benefit, and collaborators ignored it. Sometimes companies mistakenly concentrate on
customer contact processes without making corresponding changes in internal structures and systems.20
3. Employees may resist becoming customer-oriented and using the available information. Employees find it
far easier to carry on traditional transaction marketing than to practice CRM. Effective database marketing
requires managing and training employees as well as dealers and suppliers.
4. Not all customers want a relationship with the company. Some may resent knowing the company has col-
lected that much personal information about them. Online companies should explain their privacy policies
and give consumers the right not to have their information stored. European countries do not look favorably
on database marketing and are protective of consumers’ private information. The European Union passed a
law handicapping the growth of database marketing in its 28 member countries.
5. The assumptions behind CRM may not always hold true.21 High-volume customers often know their value
to a company and can leverage it to extract premium service and/or price discounts, so it may not cost the
firm less to serve them. Loyal customers may also be jealous of attention lavished on other customers. When
eBay began to chase big corporate customers such as IBM, Disney, and Sears, some mom-and-pop businesses
that helped build the brand felt abandoned.22 Loyal customers also may not necessarily be the best ambas-
sadors for the brand. One study found those who scored high on behavioral loyalty and bought a lot of a
company’s products were less active word-of-mouth marketers than customers who scored high on attitudinal
loyalty and expressed greater commitment to the firm.23
When it works, a data warehouse yields more than it costs, but the data must be in good condition, and the
discovered relationships must be valid and acceptable to consumers.
Designing the Sales Force
The original and oldest form of direct marketing is the field sales call. To locate prospects, develop them into
customers, and grow the business, most industrial companies rely heavily on a professional sales force or hire
manufacturers’ representatives and agents. Many consumer companies such as Allstate, Amway, Avon, Mary Kay,
Merrill Lynch, and Tupperware use a direct-selling force.
U.S. firms spend more than a trillion dollars annually on sales forces and sales force materials—more than on
any other promotional method. In 2012, more than 10 percent of the total workforce worked full time in sales
occupations, both nonprofit and for profit.24 Hospitals and museums, for example, use fund-raisers to contact
donors and solicit donations. In asserting that selling is the core function of every company, Boston Beer founder
Jim Koch notes, “Without sales, there is no business to manage.”25 For many firms, sales force performance is
critical.26
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SObe John Bello, founder of SoBe nutritionally enhanced teas and juices, has given much credit to his sales force
for the brand’s successful ascent. Bello claims that the superior quality and consistent sales effort from the 150 salespeople
the company had at its peak was directed toward one simple goal: “SoBe won in the street because our salespeople were
there more often and in greater numbers than the competition, and they were more motivated by far.” SoBe’s sales force
operated at every level of the distribution chain: At the distributor level, steady communication gave SoBe disproportionate
focus relative to the other brands; at the trade level, most senior salespeople had strong personal relationships with retail-
ers such as 7-Eleven, Costco, and Safeway; and at the individual store level, the SoBe team was always at work setting and
restocking shelves, cutting in product, and putting up point-of-sale displays. According to Bello, bottom-line success in any
entrepreneurial endeavor depends on sales execution.
Although no one debates the importance of the sales force in marketing programs, companies are sensitive
to the high and rising costs of maintaining one, including salaries, commissions, bonuses, travel expenses, and
benefits. Not surprisingly, companies are trying to increase sales force productivity through better selection,
training, supervision, motivation, and compensation.27
The term sales representative covers six positions, ranging from the least to the most creative types of selling:28
1. Deliverer—A salesperson whose major task is the delivery of a product (water, fuel, oil).
2. Order taker—An inside order taker (standing behind the counter) or outside order taker (calling on the su-
permarket manager).
3. Missionary—A salesperson not permitted to take an order but expected rather to build goodwill or educate
the actual or potential user (the medical “detailer” representing an ethical pharmaceutical house).
4. Technician—A salesperson with a high level of technical knowledge (the engineering salesperson who is pri-
marily a consultant to client companies).
5. Demand creator—A salesperson who relies on creative methods for selling tangible products (vacuum clean-
ers, cleaning brushes, household products) or intangibles (insurance, advertising services, or education).
6. Solution vendor—A salesperson whose expertise is solving a customer’s problem, often with a system of the
company’s products and services (for example, computer and communications systems).
Boston Beer founder Jim Koch
is a firm believer that the
selling function is essential
to the success of its Samuel
Adams brand.
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Salespeople are the company’s personal link to its customers. In designing the sales force, the company must
develop sales force objectives, strategy, structure, size, and compensation (see Figure 22.1).
sales force oBjecTIves anD sTraTeGY
The days when all the sales force did was “sell, sell, and sell” are long gone. Sales reps need to know how to di-
agnose a customer’s problem and propose a solution that can help improve the customer’s profitability. The best
salespeople even go beyond the customer’s stated problems to offer fresh insights into the customer’s business
model and identify unrecognized needs and unstated problems.29
In performing their jobs, salespeople complete one or more specific tasks:
• Prospecting. Searching for prospects or leads
• Targeting. Deciding how to allocate their time among prospects and customers
• Communicating. Communicating information about the company’s products and services
• Selling. Approaching, presenting, answering questions, overcoming objections, and closing sales
• Servicing. Providing various services to the customers—consulting on problems, rendering technical assis-
tance, arranging financing, expediting delivery
• Information gathering. Conducting market research and doing intelligence work
• Allocating. Deciding which customers will get scarce products during product shortages
To manage costs, most companies are choosing a leveraged sales force that focuses reps on selling the company’s
more complex and customized products to large accounts and uses inside salespeople and online ordering for low-
end selling. Salespeople handle fewer accounts and are rewarded for key account growth; lead generation, proposal
writing, order fulfillment, and postsale support are turned over to others. This is far different from expecting sales-
people to sell to every possible account, the common weakness of geographically based sales forces.30
Companies must deploy sales forces strategically so they call on the right customers at the right time in the right
way, acting as “account managers” who arrange fruitful contact between people in the buying and selling organiza-
tions. Selling increasingly calls for teamwork and the support of others, such as top management, especially when
national accounts or major sales are at stake; technical people, who supply information and service before, during,
and after product purchase; customer service representatives, who provide installation, maintenance, and other
services; and office staff, consisting of sales analysts, order expediters, and assistants.31
To maintain a market focus, salespeople should know how to analyze sales data, measure market potential,
gather market intelligence, and develop marketing strategies and plans. Especially at the higher levels of sales man-
agement, they need analytical marketing skills. Marketers believe sales forces are more effective in the long run if
they understand and appreciate marketing as well as selling.
Too often marketing and sales are in conflict: the sales force complains marketing isn’t generating enough leads,
and marketers complain the sales force isn’t converting them (see Figure 22.2). Improved collaboration and com-
munication between these two can increase revenues and profits.32
Designing the
Sales Force
Sales force
objectives
Sales force
strategy
Sales force
structure
Sales force
compensation
Sales force
size
| Fig. 22.1 |
Designing a
Sales Force
| Fig. 22.2 |
A Hypothetical (Dysfunctional) Sales Marketing Exchange
Sales: I need leads, but marketing never sends me any good leads. How am I supposed to get new business with no good leads?
Marketing: We deliver tons of leads, and they just sit in the system. Why won’t sales call on any of them?
Sales: I have nothing new to sell. What is marketing doing? Why can’t they figure out what customers want before they give it to
us? Why don’t they give me anything that’s easy to sell?
Marketing: Why won’t sales get out and sell my new programs? How do they expect customers to place orders without sales
contacts?
Sales: My people spend too much time on administration and paperwork. I need them out selling.
Marketing: We need information to get new ideas. How long does it take to type in a few words? Don’t they know their own
customers?
Sales: How am I going to hit my number? Marketing is a waste of time. I’d rather have more sales reps.
Marketing: How am I going to hit my number? Sales won’t help, and I don’t have enough people to do it myself.
Source: Based on a talk by Scott Sanderude and Jeff Standish, “Work Together, Win Together: Resolving Misconceptions between Sales and Marketing,”
talk given at Marketing Science Institute’s Marketing, Sales, and Customers conference, December 7, 2005.
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Jim Farley, CMO at Ford, notes that “the coolest thing about my job at Ford is that I’m in charge of both market-
ing and sales” and maintains that it is a mistake to have separate people in charge. He sees the best salespeople at
Ford as a cross between problem solvers, who help explain and customize all the sophisticated automobile electron-
ics, and concierges, who help with all the steps in the complicated process of buying a car.33 To improve mutual
understanding, Honeywell moves marketers into sales and vice versa when appropriate, as well as getting them
together for joint meetings throughout the year.34
Once the company chooses its strategy, it can use a direct or a contractual sales force. A direct (company)
sales force consists of full- or part-time paid employees who work exclusively for the company. Inside sales people
conduct business from the office and receive visits from prospective buyers, and field sales people travel and visit
customers. A contractual sales force consists of manufacturers’ reps, sales agents, and brokers who earn a com-
mission based on sales.
sales force sTrucTure
The sales force strategy also has implications for its structure. A company that sells one product line to one end-
using industry with customers in many locations would use a territorial structure. A company that sells many
products to many types of customers might need a product or market structure.
Some companies need a more complex structure and adopt some combination of four types of sales force: (1) a
strategic market sales force assigned to major accounts (see below); (2) a geographic sales force calling on custom-
ers in different territories; (3) a distributor sales force calling on and coaching distributors; and (4) an inside sales
force marketing and taking orders online and via phone.
Established companies need to revise their sales force structures as market and economic conditions change.
SAS, seller of business intelligence software, reorganized its sales force into industry-specific groups to serve such
customers as banks, brokerages, and insurers and saw revenue soar by 14 percent.35 “Marketing Insight: Major
Account Management” discusses a specialized form of sales force structure.
Ford CMO Jim Farley
believes that it is highly
beneficial that he is in
charge of both marketing
and sales.
So
ur
ce
: G
E
O
FF
R
O
B
IN
S/
A
FP
/G
et
ty
Im
ag
es
/N
ew
sc
om
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668 PART 7 | CommuniCATing VAlue
sales force sIze
Sales representatives are one of the company’s most productive and expensive assets. Increasing their number in-
creases both sales and costs. Once the company establishes the number of customers it wants to reach, it can use a
workload approach to establish sales force size. This method has five steps:
1. Group customers into size classes according to annual sales volume.
2. Establish desirable call frequencies (number of calls on an account per year) for each customer class.
3. Multiply the number of accounts in each size class by the corresponding call frequency to arrive at the total
workload for the country, in sales calls per year.
4. Determine the average number of calls a sales representative can make per year.
5. Divide the total annual calls required by the average annual calls made by a sales representative to arrive at the
number of sales representatives needed.
Suppose the company estimates it has 1,000 A accounts and 2,000 B accounts. A accounts require 36 calls a year,
and B accounts require 12, so the company needs a sales force that can make 60,000 sales calls (36,000 + 24,000) a
year. If the average full-time rep can make 1,000 calls a year, the company needs 60 reps.
sales force coMpensaTIon
To attract top-quality reps, the company must develop an attractive compensation package. Sales reps want
income regularity, extra reward for above-average performance, and fair pay for experience and longevity.
Management wants control, economy, and simplicity. Some of these objectives will conflict. No wonder compen-
sation plans vary tremendously among and even within industries.
The company must quantify four components of sales force compensation. The fixed amount, a salary, satis-
fies the need for income stability. The variable amount, whether commissions, bonus, or profit sharing, serves to
Major Account Management
Marketers typically single out for attention major accounts (also called key
accounts, national accounts, global accounts, or house accounts). These
are important customers with multiple divisions in many locations that use
uniform pricing and coordinated service for all divisions. A major account
manager (MAM) usually reports to the national sales manager and
supervises field reps calling on customer plants within their territories.
The average company manages about 75 key accounts. If a company has
several such accounts, it’s likely to organize a major account manage-
ment division, in which the average MAM handles nine accounts.
Large accounts are often handled by a strategic account manage-
ment team with cross-functional members who integrate new-product
development, technical support, supply chain, marketing activities, and
multiple communication channels to cover all aspects of the relation-
ship. Procter & Gamble has a strategic account management team of
300 staffers to work with Walmart in its Bentonville, Arkansas, head-
quarters, with more stationed at Walmart headquarters in Europe, Asia,
and Latin America. P&G has credited this relationship with saving the
company billions of dollars.
Major account management is growing. As buyer concentration
increases through mergers and acquisitions, fewer buyers are account-
ing for a larger share of sales. Many are centralizing their purchases of
certain items, gaining more bargaining power. And as products become
more complex, more groups in the buyer’s organization participate in
the purchase process. The typical salesperson alone might not have the
skill, authority, or coverage to sell effectively to the large buyer.
In selecting major accounts, companies look for those that
purchase a high volume (especially of more profitable products), pur-
chase centrally, require a high level of service in several geographic
locations, may be price sensitive, and want a long-term partnership.
Major account managers act as the single point of contact, develop
and grow customer business, understand customer decision processes,
identify added-value opportunities, provide competitive intelligence,
negotiate sales, and orchestrate customer service.
Many major accounts look for added value more than a price
advantage. They appreciate having a single point of dedicated con-
tact, single billing, special warranties, EDI links, priority shipping, early
information releases, customized products, and efficient maintenance,
repair, and upgraded service. And there’s the value of goodwill.
Personal relationships with people who value the major account’s busi-
ness and have a vested interest in its success are compelling reasons
for remaining a loyal customer.
Sources: Noel Capon, Dave Potter, and Fred Schindler, Managing Global
Accounts: Nine Critical Factors for a World-Class Program, 2nd ed. (Bronxville, NY:
Wessex Press, 2008); Peter Cheverton, Global Account Management: A Complete
Action Kit of Tools and Techniques for Managing Key Global Customers (London,
UK: Kogan Page, 2008); Malcolm McDonald and Diana Woodburn, Key Account
Management: The Definitive Guide, 2nd ed. (Oxford, UK: Butterworth-Heinemann,
2007); Jack Neff, “Bentonville or Bust,” Advertising Age, February 24, 2003.
More information can be obtained from SAMA (Strategic Account Management
Association) and the Journal of Selling and Major Account Management.
marketing
insight
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stimulate and reward effort.36 Expense allowances enable sales reps to meet the costs of travel and entertaining on
the company’s behalf. Benefits, such as paid vacations, sickness or accident benefits, pensions, and health and life
insurance, provide security and job satisfaction.
Fixed compensation is common in jobs with a high ratio of nonselling to selling duties and jobs where
the selling task is technically complex and requires teamwork. Variable compensation works best where
sales are cyclical or depend on individual initiative. Fixed and variable compensation give rise to three basic
types of compensation plans—straight salary, straight commission, and combination salary and commission.
One survey revealed that more than half of sales reps receive 40 percent or more of their compensation in
variable pay.37
Straight-salary plans provide a secure income, encourage reps to complete nonselling activities, and reduce
incentive to overstock customers. For the firm, these plans deliver administrative simplicity and lower turnover.
When semiconductor company Microchip dropped commissions for its sales force, sales actually increased.38
Straight-commission plans attract higher performers, provide more motivation, require less supervision, and con-
trol selling costs. On the negative side, they emphasize getting the sale over building the relationship. Combination
plans feature the benefits of both plans while limiting their disadvantages.
Plans that combine fixed and variable pay link the variable portion to a wide variety of strategic goals. One
current trend deemphasizes sales volume in favor of gross profitability, customer satisfaction, and customer
retention. Other companies reward reps partly on sales team or even company-wide performance, motivating
them to work together for the common good.
Managing the Sales Force
Various policies and procedures guide the firm in recruiting, selecting, training, supervising, motivating, and
evaluating sales representatives to manage its sales force (see Figure 22.3).
recruITInG anD selecTInG represenTaTIves
At the heart of any successful sales force are appropriately selected representatives. One survey revealed that
the top 25 percent of the sales force brought in more than 52 percent of the sales. It’s a great waste to hire the
wrong people. The average annual turnover rate of sales reps for all industries is almost 20 percent. Sales force
turnover leads to lost sales, the expense of finding and training replacements, and often pressure on existing
salespeople to pick up the slack.39
Studies have not always shown a strong relationship between sales performance on one hand and
background and experience variables, current status, lifestyle, attitude, personality, and skills on the other.
More effective predictors of high performance in sales are composite tests and assessment centers that
simulate the working environment and assess applicants in an environment similar to the one in which they
would work.40
Although scores from formal tests are only one element in a set that includes personal characteristics, refer-
ences, past employment history, and interviewer reactions, they have been weighted quite heavily by companies
such as IBM, Prudential, and Procter & Gamble. Gillette claims tests have reduced turnover and scores have cor-
related well with the progress of new reps.
TraInInG anD supervIsInG sales represenTaTIves
Today’s customers expect salespeople to have deep product knowledge, add ideas to improve operations, and
be efficient and reliable. These demands have required companies to make a much greater investment in sales
training.
New reps may spend a few weeks to several months in training. The median training period is 28 weeks in
industrial-products companies, 12 in service companies, and 4 in consumer-products companies. Training time
varies with the complexity of the selling task and the type of recruit. New methods of training are continually
emerging, such as the use of programmed learning, distance learning, and videos. Some firms use role playing
and sensitivity or empathy training to help reps identify with customers’ situations and motives.
Reps paid mostly on commission generally receive less supervision. Those who are salaried and must cover
definite accounts are likely to receive substantial supervision. With multilevel selling, which Avon, Sara Lee,
Virgin, and others use, independent distributors are also in charge of their own sales force selling company prod-
ucts. These independent contractors or reps are paid a commission not only on their own sales but also on the
sales of people they recruit and train.
Managing the
Sales Force
Recruiting
and selecting
sales
representatives
Training
sales
representatives
Supervising
sales
representatives
Motivating
sales
representatives
Evaluating
sales
representatives
| Fig. 22.3 |
Managing the
Sales Force
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670 PART 7 | CommuniCATing VAlue
sales rep proDucTIvITY
How many calls should a company make on a particular account
each year? Some research suggests today’s sales reps spend too
much time selling to smaller, less profitable accounts instead of
focusing on larger, more profitable ones.41
nOrMs fOr PrOsPect calls Left to their own devices,
many reps will spend most of their time with current customers, who
are known quantities. Reps can depend on them for some business,
whereas a prospect might never deliver any. Companies therefore
often specify how much time reps should spend prospecting for
new accounts.42 Spector Freight wants its sales representatives to
spend 25 percent of their time prospecting and stop after three
unsuccessful calls. Some companies rely on a missionary sales force
to create new interest and open new accounts.
using sales tiMe efficiently In the course of a day,
reps plan, travel, wait, sell, and perform administrative tasks
(writing reports and billing, attending sales meetings, and talking
to others in the company about production, delivery, billing, and
sales performance). It’s no wonder face-to-face selling accounts for
as little as 29 percent of total working time!43 The best sales reps
manage their time efficiently. Time-and-duty analysis and hour-
by-hour breakdowns of activities help them understand how they
spend their time and how they might increase their productivity.
Companies constantly try to improve sales force productivity.44
To cut costs, reduce time demands on their outside sales force, and
leverage technological innovations, many have increased the size
and responsibilities of their inside sales force.
Inside selling is less expensive and growing faster than in-
person selling. Each contact made by an inside salesperson might cost a company $25 to $30 compared with $300
to $500 for a field staff person with travel expenses. Virtual meeting software such as WebEx, communication tools
such as Skype, and social media sites such as LinkedIn, Facebook, and Twitter make it easier to sell with few if any
face-to-face meetings. And inside sellers don’t even need to be in the office—a growing percentage work at home.45
The inside sales force frees outside reps to spend more time selling to major accounts, identifying and
converting new major prospects, and obtaining more blanket orders and systems contracts. Inside salespeople
spend more time checking inventory, following up orders, and phoning smaller accounts. They typically earn a
salary or salary-plus-bonus pay.
sales technOlOgy The salesperson today has truly gone electronic. Not only is sales and inventory
information transferred much more quickly, but specific computer-based decision support systems have been
created for sales managers and sales representatives. Going online with a tablet or laptop, salespeople can prime
themselves on backgrounds of clients, call up prewritten sales letters, transmit orders and resolve customer-service
issues on the spot, and send samples, pamphlets, brochures, and other materials to clients.
One of the most valuable digital tools for the sales rep is the company Web site. It can help define the firm’s
relationships with individual accounts and identify those whose business warrants a personal sales call. It provides an
introduction to self-identified potential customers and a way to contact the seller; it might even receive the initial order.
Social media are another valuable digital selling tool. Social networking is useful in “front end” prospecting and
lead qualification as well as in “back end” relationship building and management. When one B-to-B sales rep for
virtual-meetings company PGi was monitoring Twitter tweets for various keywords, he noticed that someone from a
company tweeted about dissatisfaction with “web conferencing.” The sales rep got in touch with the company’s CEO
and was able to quickly convince him of the merits of PGi’s products, securing an agreement within a few hours.46
MoTIvaTInG sales represenTaTIves
The majority of sales representatives require encouragement and special incentives, especially those in the field who
encounter daily challenges.47 Most marketers believe that the higher the salesperson’s motivation, the greater the
effort and the resulting performance, rewards, and satisfaction—all of which in turn further increase motivation.
Avon was an early pioneer in multilevel selling, using women as sales reps
to sell to other women.
So
ur
ce
: A
SS
O
C
IA
T
E
D
P
R
E
SS
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intrinsic versus extrinsic rewards Marketers reinforce intrinsic and extrinsic rewards of all
types. One research study found the employee reward with the highest value was pay, followed by promotion,
personal growth, and sense of accomplishment.48 Least valued were liking and respect, security, and recognition. In
other words, salespeople are highly motivated by pay and the chance to get ahead and satisfy their intrinsic needs,
and they may be less motivated by compliments and security. Some firms use sales contests to increase sales effort.49
Compensation plans may even need to vary depending on the type of salespersons: stars, core or solid perform-
ers, and laggards.50 Stars benefit from no ceiling or caps on commissions, overachievement commissions for ex-
ceeding quotas, and prize structures that allow multiple winners.51 Core performers benefit from multi-tier targets
that serve as stepping stones for achievement and sales contests with prizes that vary in nature and value. Laggards
respond to consistent quarterly bonuses and social pressure.52
sales QuOtas Many companies set annual sales quotas, developed from the annual marketing plan, for
dollar sales, unit volume, margin, selling effort or activity, or product type. Compensation is often tied to degree
of quota fulfillment. The company first prepares a sales forecast that becomes the basis for planning production,
workforce size, and financial requirements. Management then establishes quotas for regions and territories, which
typically add up to more than the sales forecast to encourage managers and salespeople to perform at their best.
Even if they fail to make their quotas, the company nevertheless may reach its sales forecast.
Conventional wisdom says profits are maximized by sales reps focusing on the more important products and more
profitable products. Reps are unlikely to achieve their quotas for established products when the company is launching
several new products at the same time. The company may need to expand its sales force for new-product launches.
Setting sales quotas can create problems. If the company underestimates and the sales reps easily achieve their
quotas, it has overpaid them. If it overestimates sales potential, the salespeople will find it very hard to reach
their quotas and be frustrated or quit. Another downside is that quotas can drive reps to get as much business
as possible—often ignoring the service side of the business. The company gains short-term results at the cost
of long-term customer satisfaction. For these reasons, some companies are dropping quotas. Even hard-driving
Oracle has changed its approach to sales compensation.53
OracLe Finding sales flagging and customers griping, Oracle, the second-largest software company in the world,
decided to overhaul its sales department and practices. Its rapidly expanding capabilities, with diverse applications such as hu-
man resources, supply chain, and CRM, meant one rep could no longer be responsible for selling all Oracle products to certain
customers. Reorganization let reps specialize in a few particular products. To tone down the sales force’s reputation as overly
aggressive, Oracle changed the commission structure from a range of 2 percent to 12 percent to a flat 4 percent to 6 percent
and adopted guidelines on how to “play nice” with channels, independent software vendors (ISVs), resellers, integrators, and
value-added resellers (VARs). Six principles instructed sales staff to identify and work with partners in accounts and respect
their positions and the value they add in order to address partner feedback that Oracle should be more predictable and reliable.
evaluaTInG sales represenTaTIves
We have been describing the feed-forward aspects of sales supervision—how management communicates what
the sales reps should be doing and motivates them to do it. But good feed-forward requires good feedback, which
means getting regular information about reps to evaluate their performance.
sOurces Of infOrMatiOn The most important source of information about reps is sales reports.
Additional information comes through personal observation, salesperson self-reports, customer letters and
complaints, customer surveys, and conversations with other reps.
Sales reports are divided between activity plans and write-ups of activity results. The best example of the former is
the salesperson’s work plan, which reps submit a week or month in advance to describe intended calls and routing. This
report forces sales reps to plan and schedule their activities and inform management of their whereabouts. It provides a
basis for comparing their plans and accomplishments, or their ability to “plan their work and work their plan.”
Many companies require representatives to develop an annual territory-marketing plan in which they outline
their program for developing new accounts and increasing business from existing accounts. Sales managers study
these plans, make suggestions, and use them to develop sales quotas. Sales reps write up completed activities on
call reports. They also submit expense reports, new-business reports, lost-business reports, and reports on local
business and economic conditions.
These reports provide raw data from which sales managers can extract key indicators of sales performance: (1)
average number of sales calls per salesperson per day, (2) average sales call time per contact, (3) average revenue
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672 PART 7 | CommuniCATing VAlue
per sales call, (4) average cost per sales call, (5) entertainment cost per sales call, (6) percentage of orders per hun-
dred sales calls, (7) number of new customers per period, (8) number of lost customers per period, and (9) sales
force cost as a percentage of total sales.
fOrMal evaluatiOn The sales force’s reports along with other observations supply the raw materials for
evaluation. One type of evaluation compares current with past performance. An example is shown in Table 22.1.
The sales manager can learn many things about rep John Smith from this table. Total sales increased every year
(line 3). This does not necessarily mean Smith is doing a better job. The product breakdown shows he has been
able to push the sales of product B further than the sales of product A (lines 1 and 2), though A is more profitable
for the company. Given his quotas for the two products (lines 4 and 5), Smith could be increasing product B sales
at the expense of product A sales. Although he increased total sales by $1,100 between 2013 and 2014 (line 3), gross
profits on total sales actually decreased by $580 (line 8).
Sales expense (line 9) shows a steady increase, though total expense as a percentage of total sales seems to be
under control (line 10). The upward trend in total dollar expense does not seem to be explained by any increase in
the number of calls (line 11), though it might be related to success in acquiring new customers (line 14). Perhaps
in prospecting for new customers, this rep is neglecting present customers, as indicated by an upward trend in the
annual number of lost accounts (line 15).
The last two lines show the level and trend in sales and gross profits per customer. These figures become more
meaningful when compared with overall company averages. If Smith’s average gross profit per customer is lower than
the company’s average, he could be concentrating on the wrong customers or not spending enough time with each
customer. A review of annual number of calls (line 11) shows he might be making fewer annual calls than the average
table 22.1 Form for Evaluating Sales Representative’s Performance
Territory: Midland Sales Representative: John Smith 2011 2012 2013 2014
1. Net sales product A $251,300 $253,200 $270,000 $263,100
2. Net sales product B 423,200 439,200 553,900 561,900
3. Net sales total 674,500 692,400 823,900 825,000
4. Percent of quota product A 95.6 92.0 88.0 84.7
5. Percent of quota product B 120.4 122.3 134.9 130.8
6. Gross profits product A $50,260 $50,640 $54,000 $52,620
7. Gross profits product B 42,320 43,920 55,390 56,190
8. Gross profits total 92,580 94,560 109,390 108,810
9. Sales expense $10,200 $11,100 $11,600 $13,200
10. Sales expense to total sales (%) 1.5 1.6 1.4 1.6
11. Number of calls 1,675 1,700 1,680 1,660
12. Cost per call $6.09 $6.53 $6.90 $7.95
13. Average number of customers 320 24 328 334
14. Number of new customers 13 14 15 20
15. Number of lost customers 8 10 11 14
16. Average sales per customer $2,108 $2,137 $2,512 $2,470
17. Average gross profit per customer $289 $292 $334 $326
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salesperson. If distances in the territory are similar to those in other territories, he might not be putting in a full work-
day, might be poor at sales planning and routing, or might be spending too much time with certain accounts.
Even if effective in producing sales, the rep may not rate highly with customers. Success may come because
competitors’ salespeople are inferior, the rep’s product is better, or new customers are always found to replace
those who dislike the rep. Managers can glean customer opinions of the salesperson, product, and service by mail
questionnaires or telephone calls. Sales reps can analyze the success or failure of a sales call and how they would
improve the odds on subsequent calls. Their performance could be related to internal factors (effort, ability, and
strategy) and/or external factors (task and luck).54
Principles of Personal Selling
Personal selling is an ancient art. Effective salespeople today have more than instinct, however. Companies now
spend hundreds of millions of dollars each year to train them in methods of analysis and customer management
and to transform them from passive order takers into active order getters. Reps are taught the SPIN method to
build long-term relationships by asking prospects several types of questions:55
1. Situation questions—These ask about facts or explore the buyer’s present situation. For example, “What
system are you using to invoice your customers?”
2. Problem questions—These deal with problems, difficulties, and dissatisfactions the buyer is experiencing. For
example, “What parts of the system create errors?”
3. Implication questions—These ask about the consequences or effects of a buyer’s problems, difficulties, or
dissatisfactions. For example, “How does this problem affect your people’s productivity?”
4. Need-payoff questions—These ask about the value or usefulness of a proposed solution. For example, “How
much would you save if our company could help you reduce errors by 80 percent?”
Most sales training programs agree on the major steps in any effective sales process. We show these steps in
Figure 22.4 and discuss their application to industrial selling next.56 Note that application of these selling practices
can vary in different parts of the world. Pfizer has to sell very differently in Latin America than in North America.57
The sIx sTeps
PrOsPecting and Qualifying The first step in selling is to identify and qualify prospects. More
companies are taking responsibility for finding and qualifying leads so salespeople can use their expensive time
doing what they do best: selling. IBM qualifies leads according to the BANT acronym: Does the customer have the
necessary budget, the authority to buy, a compelling need for the product or service, and a timeline for delivery that
aligns with what is possible?
Marketers these days are going beyond BANT and getting increasingly sophisticated in their pursuit of qualified
leads. One software firm, Infer, uses 150 different signals—including dozens of online data feeds—to rate customer
leads. Using inputs as diverse as prospects’ hiring practices, job boards, and sample tweets from customers and
employees, the company’s software classifies prospects as worth a call or offer—or not.58
PreaPPrOach The salesperson needs to learn as much as possible about the prospect company (what it
needs, who takes part in the purchase decision) and its buyers (personal characteristics and buying styles). How
is the purchasing process conducted at the company? How is it structured? Many purchasing departments in
larger companies have been elevated to strategic supply departments with more professional practices. Centralized
purchasing may put a premium on having larger suppliers able to meet all the company’s needs. At the same time,
some companies are also decentralizing purchasing for smaller items such as coffeemakers, office supplies, and
other inexpensive necessities.
The sales rep must thoroughly understand the purchasing process in terms of who, when, where, how, and why
in order to set call objectives: to qualify the prospect, gather information, or make an immediate sale. Another
task is to choose the best contact approach—a personal visit, phone call, e-mail, or letter. The right approach is
crucial given that it has become harder for sales reps to get into the offices of purchasing agents, physicians, and
other time-starved and Internet-enabled potential customers. Finally, the salesperson should plan an overall sales
strategy for the account.
PresentatiOn and deMOnstratiOn The salesperson tells the product “story” to the buyer, using
a features, advantages, benefits, and value (FABV) approach. Features describe physical characteristics of a market
offering, such as chip processing speeds or memory capacity. Advantages describe why the features give the
Prospecting
and qualifying
Preapproach
Presentation
and
demonstration
Overcoming
objections
Closing
Follow-up
and
maintenance
| Fig. 22.4 |
Major Steps
in Effective
Selling
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674 PART 7 | CommuniCATing VAlue
customer an edge. Benefits describe the economic, technical, service, and social
pluses delivered. Value describes the offering’s worth (often in monetary terms).
Salespeople often spend too much time on product features (a product orienta-
tion) and not enough time stressing benefits and value (a customer orientation),
especially when selling individualized or premium-priced products and in highly
competitive markets.59 The pitch to a prospective client must be highly relevant,
engaging, and compelling—there is always another company waiting to take that
business.60
OvercOMing ObjectiOns Customers typically pose objections.
Psychological resistance includes resistance to interference, preference for established
supply sources or brands, apathy, reluctance to give up something, unpleasant
associations created by the sales rep, predetermined ideas, dislike of making decisions,
and a neurotic attitude toward money. Logical resistance might be objections to the
price, delivery schedule, or product or company characteristics.
To handle these objections, the salesperson maintains a positive approach, asks
the buyer to clarify the objection, questions in such a way that the buyer answers
his own objection, denies the validity of the objection, or turns it into a reason for
buying. Although price is the most frequently negotiated issue—especially in tight
economic times—others include contract completion time, quality of goods and
services offered, purchase volume, product safety, and responsibility for financing,
risk taking, promotion, and title.
Salespeople sometimes give in too easily when customers demand a discount.
One company recognized this problem when sales revenues went up 25 percent
but profit remained flat. The company decided to retrain its salespeople to “sell
the price” rather than “sell through price.” Salespeople were given richer informa-
tion about each customer’s sales history and behavior. They received training to
recognize value-adding opportunities rather than price-cutting opportunities. As
a result, the company’s sales revenues climbed and so did its margins.61
clOsing Closing signs from the buyer include physical actions, statements or comments, and questions. Reps
can ask for the order, recapitulate the points of agreement, offer to help write up the order, ask whether the buyer
wants A or B, get the buyer to make minor choices such as color or size, or indicate what the buyer will lose by not
placing the order now. The salesperson might offer specific inducements to close, such as an additional service, an
extra quantity, or a token gift.
If the client still isn’t budging, perhaps the salesperson is not interacting with the right executive—a more senior
person may have the necessary authority. The salesperson also may need to find other ways to reinforce the value
of the offering and how it alleviates financial or other pressures the client faces.62
fOllOw-uP and Maintenance Follow-up and maintenance are necessary to ensure customer
satisfaction and repeat business. Immediately after closing, the salesperson should cement any necessary details
about delivery time, purchase terms, and other matters important to the customer. He or she should schedule a
follow-up call after delivery to ensure proper installation, instruction, and servicing and to detect any problems,
assure the buyer of his or her interest, and reduce any cognitive dissonance. The salesperson should develop a
maintenance and growth plan for the account.
relaTIonshIp MarkeTInG
The principles of personal selling and negotiation are largely transaction-oriented because their purpose is to
close a specific sale. But in many cases the company seeks not an immediate sale but rather a long-term supplier–
customer relationship. Today’s customers prefer suppliers who can sell and deliver a coordinated set of products
and services to many locations, who can quickly solve problems in different locations, and who can work closely
with customer teams to improve products and processes.63
Salespeople working with key customers must do more than email or call only when they think customers
might be ready to place orders. They should get in touch at other times and make useful suggestions about the
business to create value. They should monitor key accounts, know customers’ problems, and be ready to serve
them in a number of ways, adapting and responding to different customer needs or situations.64
Relationship marketing is not effective in all situations. But when it is the right strategy and is properly imple-
mented, the organization will focus as much on managing its customers as on managing its products.
Pharma giant Pfizer sells its drug brands differently in
different parts of the world.
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mAnAging PeRsonAl CommuniCATions | chapter 22 675
mix of selling approaches. Structuring the sales force
entails dividing territories by geography, product, or
market (or some combination of these). To estimate
how large the sales force needs to be, the firm esti-
mates the total workload and how many sales hours
(and hence salespeople) will be needed. Compensating
reps requires identifying the types of salaries, commis-
sions, bonuses, expense accounts, and benefits to give
and how much weight customer satisfaction should
have in determining total compensation.
8. There are five steps in managing the sales force: (1) re-
cruiting and selecting sales representatives; (2) training
the representatives in sales techniques and in the com-
pany’s products, policies, and customer-satisfaction
orientation; (3) supervising the sales force and helping
reps to use their time efficiently; (4) motivating the sales
force and balancing quotas, monetary rewards, and
supplementary motivators; and (5) evaluating individual
and group sales performance.
9. Effective salespeople are trained in methods of analysis
and customer management as well as the art of sales
professionalism. No single approach works best in all
circumstances, but most trainers agree that selling has
six steps: prospecting and qualifying customers, preap-
proach, presentation and demonstration, overcoming
objections, closing, and follow-up and maintenance.
Summary
1. Direct marketing is an interactive marketing system that
uses one or more media to effect a measurable response
or transaction at any location. Direct marketing, espe-
cially electronic marketing, is showing explosive growth.
2. Direct marketers plan campaigns by deciding on objec-
tives, target markets and prospects, offers, and prices.
Next, they test and establish measures to determine the
campaign’s success.
3. Major channels for direct marketing include face-to-face
selling, direct mail, catalog marketing, telemarketing, in-
teractive TV, kiosks, Web sites, and mobile devices.
4. Customer relationship management often requires build-
ing a customer database and data mining to detect trends,
segments, and individual needs. A number of significant
risks also exist, so marketers must proceed thoughtfully.
5. What are the pros and cons of database marketing?
6. Salespeople serve as a company’s link to its customers.
The sales rep is the company to many of its customers,
and it is the rep who brings back to the company much-
needed information about the customer.
7. Designing the sales force requires choosing objectives,
strategy, structure, size, and compensation. Objectives
may include prospecting, targeting, communicating,
selling, servicing, information gathering, and allocating.
Selecting strategy requires choosing the most effective
MyMarketingLab
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Applications
Marketing Debate
Are Great Salespeople Born or Made?
One debate in sales is about the impact of training versus se-
lection in developing an effective sales force. Some observers
maintain the best salespeople are born that way and are effec-
tive due to their personalities and interpersonal skills developed
over a lifetime. Others contend that application of leading-edge
sales techniques can make virtually anyone a sales star.
Take a position: The key to developing an effective
sales force is selection versus The key to developing
an effective sales force is training.
Marketing Discussion
Role of the Salesperson
Think about the last time you went to make a major pur-
chase in a store. How important was the salesperson in that
decision? What did he or she do that you liked or didn’t like?
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676 PART 7 | CommuniCATing VAlue
or changing insurers. The company has found that using
a person to represent the brand helps consumers envi-
sion the intangible act of buying and selling insurance as
a tangible one. Its ads also often feature a large white-
and-blue “insurance” package, again reinforcing the idea
that Progressive sells something concrete rather than
abstract. In every commercial, Flo goes out of her way to
help customers and their businesses. She works along-
side plumbers, lugs shrubbery with landscapers, and
finds stranded cars and drivers in pouring rain. Flo, her
packages of insurance, and the Progressive supercenters
have all helped differentiate Progressive in a competitive
industry.
Flo is now one of the most recognized advertis-
ing icons, and as Chief Marketing Officer Jeff Charney
explained, “Flo has made us a household name.”
However, Progressive’s marketing team is careful to
keep her modern and relevant. She appears across all
screens, including TV, the Internet, mobile devices, smart-
phone apps, video games like Sims Social, and animated
YouTube videos, and she even has her own Facebook
page (along with millions of fans). The company’s market-
ing has also won multiple awards, including Adweek’s
“Brand Genius: Marketer of the Year Award” in 2011 and
an Effie award for marketing efficiency.
Progressive has experienced impressive growth over
the past two decades thanks to its innovative and afford-
able insurance solutions and direct marketing campaigns.
Between 1996 and 2005, the company grew an average
of 17 percent per year, from $3.4 billion to $14 billion. In
2013, it wrote 17.3 billion policies and earned $18.2 bil-
lion in revenue.
Questions
1. What has Progressive done well over the years to at-
tract new insurance customers?
2. Discuss Progressive’s direct marketing campaign,
which primarily revolves around the character Flo.
Why does it resonant so well with consumers?
3. What else should Progressive be doing to ensure
it stays top of mind in the competitive industry of
insurance?
Sources: Avi Dan, “How Progressive’s CMO Jeff Charney Made ‘Flo’ More Loveable than Ducks
and Geckos,” Forbes, May 3, 2012; Giselle Abramovich, “How Progressive Got Its Social Flow,”
CMO.com, December 11, 2013; Stuart Elliott, “A Nomadic Insurance Pitchman, Luring New
Consumers,” New York Times, November 30, 2010; Gary Strauss, “Progressive CEO Calls Flo
‘Essential’ to Its Marketing Plan,” USA Today, July 26, 2012; E. J. Schultz, “Progressive Goes
Flo-less in Corporate Image Campaign,” Ad Age, September 23, 2013; “BtoB’s Best—Integrated
Campaign (more than $200,000): Progressive Commercial,” Ad Age, October 8, 2013; E. J.
Schultz, “Flo Gets More Company as Progressive Rolls Out ‘The Box,’” Ad Age, December 5, 2012;
Progressive.com; Progressive Insurance 2013 Annual Report.
Marketing Excellence
>> Progressive
Progressive Corporation is among the largest providers
of auto, motorcycle, boat, and RV insurance in the United
States. The company was founded in 1937 and is con-
sidered one of the most innovative in the industry. From
the beginning, its philosophy has been to approach auto
insurance “like no other company had.”
Progressive attracts new customers through its
unique product offerings and services. For example, it
was the first insurance company to offer a drive-thru
claim service, a 24-hour claim service, and reduced rates
for low-risk drivers. In 1994, it introduced comparison in-
surance shopping service, encouraging customers to call
800-AUTO-PRO (now 800-PROGRESSIVE) and receive
a Progressive quote as well as comparison quotes from
three other competitors. The company extended this ser-
vice when it launched comparison rate shopping on the
Internet. It was also the first insurance company to offer
the Immediate Response Vehicle (IRV), a special vehicle
that brought trained claims professionals to wherever
customers needed them, including the scene of an ac-
cident. Today, Progressive has thousands of IRVs located
across the country.
The insurance industry has changed a lot over the
years as consumers have become more educated,
more cost-conscious, and less likely to use an agent
during the buying process. Jonathan Beamer, marketing
strategy and innovation business leader at Progressive,
explained the company’s media strategy: “As a com-
pany, we’ve always had the belief that customers should
be able to interact with us in their channel of choice.
In the past, that was by phone, online, or through an
agent. Social media is another means for customers to
engage with our brand.” The company has a network of
35,000 independent agents but also gives customers
the opportunity to interact with it via the Internet or mo-
bile devices. It offers consumers several options to man-
age their service claims as well. Policyholders can bring
their damaged vehicle to a Progressive service center,
or they can call Progressive for roadside assistance to
take care of problems ranging from flat tires to locksmith
needs.
Consumers have responded positively Progressive’s
marketing campaigns in recent years thanks to the
company’s iconic character Flo, a quirky, witty employee
dressed in a white uniform and white apron bearing the
company’s logo. Flo commercials are often set in an
imaginary insurance superstore and aimed at consum-
ers who are considering getting a new insurance policy
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mAnAging PeRsonAl CommuniCATions | chapter 22 677
mailings in 1998. Today, Victoria’s Secret spends approxi-
mately $220 million a year and mails 390 million catalogs
worldwide. Its catalog business has been so successful be-
cause it accomplishes several things a retail store cannot.
Most importantly, catalogs allow consumers to browse and
shop for lingerie in the comfort and privacy of their homes.
To accommodate them, Victoria’s Secret takes telephone
orders 24 hours a day. Before the Internet, this was a critical
key to the company’s success. Catalogs also provide the
opportunity to extend and test different product offerings,
including bathing suits, sweaters, and dresses.
Another milestone in Victoria’s Secret’s marketing
strategy was its shift to include supermodel fashion
shows and television commercials in the 1990s. In 1999,
the company’s steamy 30-second Super Bowl ad re-
sulted in millions of visits to the company’s Web site. Each
year, millions more tune in to watch the world’s top super-
models, including Victoria’s Secret Angels, strut down the
runway in diamond-studded lingerie, high heels, and the
company’s signature angel wings. Erika Maschmeyer, an
analyst at Robert W. Baird & Co., explained that the TV
show “is essentially an hour-long commercial. . . . There
are a lot of places to buy intimate apparel, but there’s no
other place that has such a strong brand connotation to
it, and I think the fashion show is definitely a part of that.”
Victoria’s Secret has accomplished what no company
has: It took an intimate product and made it stylish, trendy,
acceptable, and accessible through innovative and pitch-
perfect direct marketing. The company recently expanded
with the launch of Pink, a lingerie line targeted at 15- to
22-year-old women. The hope is that Pink consumers re-
main loyal to the Victoria’s Secret brand as they grow older.
Today, Victoria’s Secret sells its products through al-
luring catalogs, through its Web site, and in more than
1,075 stores located primarily in shopping malls through-
out the United States, Canada, and the United Kingdom.
Annual sales topped $6 billion in 2013, and the company
continues to grow the business, making lingerie trendy
and stylish for women of all ages.
Questions
1. Why has Victoria’s Secret been so successful? How
does the company reach its target audience?
2. What do you think are Victoria’s Secret’s biggest
challenges?
3. What’s next for Victoria’s Secret? How does the com-
pany grow?
Sources: Carlye Adler, “How Victoria’s Secret Made Lingerie Mainstream,” Newsweek, June
9, 2010; Carlye Adler, “Victoria’s Secret’s Secret—The Man behind the Company That Made
Lingerie Mainstream and Mall-friendly,” Newsweek, October 15, 2012; Sapna Maheshwari,
“Victoria’s Secret Marketing Goes Own Way,” SFgate.com, November 12, 2013; Ashley Lutz, “How
Victoria’s Secret Gets Way with Marketing to Teenagers,” Business Insider, November 15, 2013;
VictoriasSecret.com; 2013 Limited Brands Annual Report.
Marketing Excellence
>> Victoria’s Secret
Victoria’s Secret is the largest retailer of lingerie in the
United States. Roy Raymond founded the company in
1977 because he thought retailers offered only “racks of
terry-cloth robes and ugly floral-print nylon nightgowns.”
In 1982, Raymond sold the company to Leslie Wexner,
creator of Limited Stores Inc., for $1 million. At the time,
Victoria’s Secret had expanded to four stores and a cata-
log business. The company wasn’t profitable, but Wexner
recalled its attraction: “There wasn’t erotic lingerie, but
there was very sexy lingerie, and I hadn’t seen anything like
it in the U.S.” Although Wexner knew nothing about lingerie
at the time, he saw an opportunity to look at the market in
a new light. He explained, “Most of the women that I knew
wore underwear most of the time, and most of the women
that I knew I thought would rather wear lingerie most of the
time, but there were no lingerie stores. I thought if we could
develop price points and products that have a broader
base of customer, it could be something big.”
The market during the 1970s and early 1980s in fact of-
fered women very few options for lingerie shopping. At one
end, women could buy Fruit of the Loom, Hanes, or Jockey
cotton underwear in three-pair packages just as men did.
Department stores offered little in terms of design and style.
And lacy lingerie could be found only in stores like Frederick’s
of Hollywood, whose products were considered provoca-
tive, not for daily wear, and often embarrassing to shop for.
Wexner took several steps to revamp Victoria’s Secret.
First, he realized the company should target female con-
sumers who buy for themselves, rather than male cus-
tomers who shop for their significant others. As a result,
Victoria’s Secret launched a range of new products in
stylish colors, textiles, and patterns that made women feel
sexy and glamorous in a tasteful manner. The company fo-
cused on consistency of fit, which helped create customer
loyalty, and stores were reconfigured to appeal to female
shoppers. Bra displays and fitting rooms were moved to the
back, for instance, to provide customers with more privacy.
Next, Wexner reinforced the brand image of style
and sophistication by evoking a European look and feel
throughout the stores and catalogs. Catalogs bore a fake
London address (the company was really headquartered
in Columbus, Ohio), while storefronts resembled 19th-
century England, complete with soft classical music
and romantic-style details throughout. Within five years,
Victoria’s Secret had expanded from a handful of stores
to 346 and a growing catalog business.
Victoria’s Secret’s catalog business is considered one
of the most successful in the retail industry. When Wexner
bought the company in 1982, each catalog cost a hefty $3
to produce and distribute. Its customer database grew sig-
nificantly over the next 20 years and peaked at 400 million
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678
MyMarketingLab™
Improve Your Grade!
Over 10 million students improved
their results using the Pearson
MyLabs. Visit mymktlab.com for
simulations, tutorials, and
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In This Chapter, We Will Address
the Following Questions
1. What are important trends in marketing practices? (p. 679)
2. What are the keys to effective internal marketing? (p. 680)
3. How can companies be socially responsible marketers? (p. 685)
4. What tools are available to help companies monitor and improve
their marketing activities? (p. 697)
5. What do marketers need to do to succeed in the future? (p. 702)
Environmental concerns impacts all that outdoor
clothing and equipment provider Patagonia does,
leading to some fairly unconventional advertising!
Source: Patagonia, Inc.
Conducting Marketing Responsibly for Long-term SuccessPart 8
Chapter 23 Managing a Holistic Marketing Organization for the Long Run
M23_KOTL2621_15_GE_C23.indd 678 09/03/15 6:44 PM
679
Managing a Holistic
Marketing Organization
for the Long Run
23
Healthy long-term growth for a brand requires holistic marketers to engage in a host of
carefully planned, interconnected marketing activities and satisfy a broad set of constituents and objectives.
Marketers must also consider a wide range of short- and long-term effects of their actions. Corporate social
responsibility and sustainability have become priorities for many. Some firms fully embrace this vision of
corporate enlightenment.1
Patagonia, maker of high-end outdoor clothing and equipment, has always put environmental
issues at the core of what it does. Company founder Yvon Chouinard, also the author of The
Responsible Company, actively promotes a post-consumerist economy in which goods are “high
quality, recyclable and repairable.” Under Chouinard’s leadership, Patagonia even ran a full-page
ad in the New York Times headlined “Don’t Buy This Jacket.” Below a photo of the retailer’s R2
jacket was text explaining that despite its many positive features—“60% recyclable polyester, knit and sewn to
high standards, and exceptionally durable”—the jacket still imposed many environmental costs (using 135 liters
of water and 20 pounds of carbon dioxide to manufacture). The ad
concluded by promoting the Common Threads Initiative asking con-
sumers to engage in five behaviors: (1) reduce (what you buy); (2) re-
pair (what you can); (3) reuse (what you have); (4) recycle (everything
else); and (5) reimagine (a sustainable world). With $575 million in
annual sales, privately held Patagonia is always trying to find bet-
ter environmental solutions for everything it does and makes, such
as offering the first wetsuits made from plant-based material as an
alternative to neoprene.
Brands such as Ben & Jerry’s, Odwalla, Stonyfield Farm,
Whole Foods, and Seventh Generation have embraced simi-
lar philosophies and practices. Successful holistic marketing
requires effective relationship marketing, integrated marketing,
internal marketing, and performance marketing. In this chapter,
we consider internal and performance marketing and how to
conduct them responsibly. We begin by examining changes in
the way companies conduct marketing today.
Trends in Marketing Practices
With globalization, deregulation, market fragmentation, consumer empowerment, environmental concerns, and
all the remarkable developments in communication technology, the world has unquestionably become a very
different place for marketers.2 Table 23.1 summarizes some important shifts in marketing realities.
In making all these shifts in marketing and business practices, firms also face ethical dilemmas and perplexing
trade-offs. Consumers may value convenience, but how can they justify disposable products or elaborate packag-
ing in a world trying to minimize waste? Increasing material aspirations can defy the need for sustainability. Smart
companies are creatively designing with energy efficiency, carbon footprints, toxicity, and disposability in mind.
There have been some successes.3
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680 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
Table 23.1 Important Shifts in Marketing and Business Practices
• Reengineering. Appointing teams to manage customer-value-building processes and break down walls between departments
• Outsourcing. Buying more goods and services from outside domestic or foreign vendors
• Benchmarking. Studying “best practice companies” to improve performance
• Supplier partnering. Partnering with fewer but better value-adding suppliers
• Customer partnering. Working more closely with customers to add value to their operations
• Merging. Acquiring or merging with firms in the same or complementary industries to gain economies of scale and scope
• Globalizing. Increasing efforts to “think global” and “act local”
• Flattening. Reducing the number of organizational levels to get closer to the customer
• Focusing. Determining the most profitable businesses and customers and focusing on them
• Justifying. Becoming more accountable by measuring, analyzing, and documenting the effects of marketing actions
• Accelerating. Designing the organization and setting up processes to respond more quickly to changes in the environment
• Empowering. Encouraging and empowering personnel to produce more ideas and take more initiative
• Broadening. Factoring the interests of customers, employees, shareholders, and other stakeholders into the activities of the enterprise
• Monitoring. Tracking what is said online and elsewhere and studying customers, competitors, and others to improve business practices
• Uncovering. Using data mining and other analytical methods to develop deep insights into customers and how they behave
TOyOTa Prius Some auto experts scoffed when Toyota predicted sales of 300,000 cars within five
years of launching its gas-and-electric Prius hybrid sedan in 2001. But by 2004, the Prius had a six-month waiting list.
Toyota’s winning formula consists of a powerful electric motor and the ability to quickly switch power sources—resulting
in 55 miles per gallon for city and highway driving—with the roominess and power of a family sedan and an eco-friendly
design and look for a little more than $20,000. Some consumers also liked that the Prius’s distinctive design allowed them
to make a visible statement about their commitment to the environment. The lesson? Functionally successful products
that consumers see as also being good for the environment can offer enticing options. In both 2012 and 2013, Consumer
Reports rated the Toyota Prius as best overall value for the automotive dollar. Toyota is now rolling out hybrids throughout its
auto lineup, and U.S. automakers have followed suit.
Now more than ever, marketers must think holistically and use creative win-win solutions to balance conflict-
ing demands. They must develop fully integrated marketing programs and meaningful relationships with a range
of constituents.4 They must do all the right things inside their company and consider the broader consequences in
the marketplace, topics we turn to next.
Internal Marketing
Traditionally, marketers played the role of intermediary, charged with understanding customers’ needs and trans-
mitting their voice to various functional areas.5 But in a networked enterprise, every functional area can interact
directly with customers. Marketing no longer has sole ownership of customer interactions; it now must integrate
all the customer-facing processes so customers see a single face and hear a single voice when they interact with
the firm.6
Internal marketing requires that everyone in the organization accept the concepts and goals of marketing and
engage in identifying, providing, and communicating customer value. Only when all employees realize their job
is to create, serve, and satisfy customers does the company become an effective marketer.7 “Marketing Memo:
Characteristics of Company Departments That Are Truly Customer Driven” presents a tool that evaluates which
company departments excel at being customer-centric.
Let’s look at how marketing departments are being organized, how they can work effectively with other depart-
ments, and how firms can foster a creative marketing culture across the organization.8
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R&D ___ They spend time meeting customers and listening to their problems.
___ They welcome the involvement of marketing, manufacturing, and other departments on each new project.
___ They benchmark competitors’ products and seek “best of class” solutions.
___ They solicit customer reactions and suggestions as the project progresses.
___ They continuously improve and refine the product on the basis of market feedback.
Purchasing ___ They proactively search for the best suppliers rather than choose only from those who solicit their business.
___ They build long-term relationships with fewer but more reliable high-quality suppliers.
___ They do not compromise quality for price savings.
Manufacturing ___ They invite customers to visit and tour their plants.
___ They visit customer factories to see how customers use the company’s products.
___ They willingly work overtime when it is important to meet promised delivery schedules.
___ They continuously search for ways to produce goods faster, at lower costs, and with fewer adverse environmental consequences.
___ They continuously improve product quality, aiming for zero defects.
___ They meet customer requirements for “customization” where this can be done profitably.
Marketing ___ They study customer needs and wants in well-defined market segments.
___ They allocate marketing effort in relationship to the long-run profit potential of the targeted segments.
___ They develop winning offerings for each target segment.
___ They measure company image and customer satisfaction and loyalty on a continuous basis.
___ They continuously gather and evaluate ideas for new products, product improvements, and services to meet customers’ needs.
___ They influence all company departments and employees to be customer-centered in their thinking and practice.
Sales ___ They acquire specialized knowledge of the customer’s industry.
___ They strive to give the customer “the best solution” but make only promises they can keep.
___ They feed customers’ needs and ideas back to those in charge of product development.
___ They serve the same customers for a long period of time.
Logistics ___ They set a high standard for service delivery time and meet it consistently.
___ They operate a knowledgeable and friendly customer service department that can answer questions, handle complaints, and
resolve problems in a satisfactory and timely manner.
Accounting ___ They prepare periodic profitability reports by product, market segment, sales territory, order size, and individual customers.
___ They prepare invoices tailored to customer needs and answer customer queries courteously and quickly.
Finance ___ They understand and support marketing investments (like image advertising) that produce long-term customer preference
and loyalty.
___ They tailor the financial package to the customers’ financial requirements.
___ They make quick decisions on customer creditworthiness.
Public Relations ___ They disseminate favorable news about the company and handle damage control for unfavorable news.
___ They act as an internal customer and public advocate for better company policies and practices.
Other Customer-
Contact
Employees
___ They are competent, courteous, cheerful, credible, reliable, and responsive.
Characteristics of Company Departments that
Are Truly Customer Driven
marketing
memo
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682 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
OrGanIzInG the MarketInG DepartMent
Modern marketing departments can be organized in a number of different, sometimes overlapping ways: func-
tionally, geographically, by product or brand, by market, or in a matrix.
FuncTional organizaTion In the most common form of marketing organization, functional
specialists report to a marketing vice president who coordinates their activities. Figure 23.1 shows five specialists.
Others might include a customer service manager, a marketing planning manager, a market logistics manager, a
direct marketing manager, and a digital marketing manager.
The main advantage of a functional marketing organization is its administrative simplicity. It can be quite a
challenge for the departments to develop smooth working relationships, however. This form also can result in
inadequate planning as the number of products and markets increases and each functional group vies for budget
and status. The marketing vice president constantly weighs competing claims and faces a difficult coordination
problem.
geographic organizaTion A company selling in a national market often organizes its sales force
(and sometimes its marketing) along geographic lines.9 The national sales manager may supervise four regional
sales managers, who each supervise six zone managers, who in turn supervise eight district sales managers, who
each supervise 10 salespeople.
Some companies are adding area market specialists (regional or local marketing managers) to support sales ef-
forts in high-volume markets. One such market might be Miami-Dade County, Florida, where almost two-thirds
of households are Hispanic.10 The Miami specialist would know Miami’s customer and trade makeup, help mar-
keting managers at headquarters adjust their marketing mix for Miami, and prepare local annual and long-range
plans for selling all the company’s products there. Some companies must develop different marketing programs in
different parts of the country because geography alters their brand development so much, as noted in Chapter 8.
producT- or brand-ManageMenT organizaTion Companies producing a variety of
products and brands often establish a product- (or brand-) management organization. This does not replace the
functional organization but serves as another layer of management. A group product manager supervises product
category managers, who in turn supervise specific product and brand managers.
A product-management organization makes sense if the company’s products are quite different or there are
more than a functional organization can handle. This form is sometimes characterized as a hub-and-spoke sys-
tem. The brand or product manager is figuratively at the center, with spokes leading to various departments repre-
senting working relationships (see Figure 23.2). The manager may:
• Develop a long-range and competitive strategy for the product.
• Prepare an annual marketing plan and sales forecast.
• Work with advertising, digital, and merchandising agencies to develop copy, programs, and campaigns.
• Increase support of the product among the sales force and distributors.
• Gather continuous intelligence about the product’s performance, customer and dealer attitudes, and new
problems and opportunities.
• Initiate product improvements to meet changing market needs.
The product-management organization lets the product manager concentrate on developing a cost-effective
marketing program and react more quickly to new products in the marketplace; it also gives the company’s smaller
brands a product advocate. However, it has disadvantages too:
• Product and brand managers may lack authority to carry out their responsibilities.
• They become experts in their product area but rarely achieve functional expertise.
Marketing
vice president
Marketing
administration
manager
Advertising and
sales promotion
manager
Sales
manager
Marketing
research
manager
New-products
manager
| Fig. 23.1 |
Functional
Organization
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MAnAging A HolisTiC MARkeTing oRgAnizATion foR THe long Run | chapter 23 683
• The system often proves costly. One person is appointed to manage each major product or brand,
and soon more are appointed to manage even minor products and brands.
• Brand managers normally manage a brand for only a short time. Short-term involvement leads to
short-term planning and fails to build long-term strengths.
• The fragmentation of markets makes it harder to develop a national strategy. Brand managers must
please regional and local sales groups, transferring power from marketing to sales.
• Product and brand managers focus the company on building market share rather than customer
relationships.
A second alternative in a product-management organization is product teams. There are three types:
vertical, triangular, and horizontal (see Figure 23.3). The triangular and horizontal product-team
approaches let each major brand be run by a brand-asset management team (BAMT) consisting of
key representatives from functions that affect the brand’s performance. The company consists of several
BAMTs that periodically report to a BAMT directors committee, which itself reports to a chief branding
officer. This is quite different from the way brands have traditionally been handled.
A third alternative is to eliminate product manager positions for minor products and assign two or
more products to each remaining manager. This is feasible when two or more products appeal to a similar
set of needs. A cosmetics company doesn’t need product managers for each product because cosmetics
serve one major need—beauty. A toiletries company needs different managers for headache remedies,
toothpaste, soap, and shampoo because these products differ in use and appeal.
In a fourth alternative, category management, a company focuses on product categories to manage
its brands. Procter & Gamble (P&G), a pioneer of the brand-management system, and other top
packaged-goods firms have made a major shift to category management, as have firms outside the grocery
channel.11 Diageo’s shift to category management was seen as a means to better manage the development
of premium brands. It also helped the firm address the plight of under-performing brands.12
P&G cited a number of advantages to its shift to category management. By fostering internal competi-
tion among brand managers, the traditional brand-management system had created strong incentives
to excel, but also internal competition for resources and a lack of coordination. The new scheme was
designed to ensure adequate resources for all categories.
Another rationale is the increasing power of the retail trade, which has thought of profitability
in terms of product categories. P&G felt it only made sense to deal along similar lines. Retailers and
regional grocery chains such as Walmart and Dominick’s embrace category management as a means
to define a particular product category’s strategic role within the store and address logistics, the role of
private-label products, and the trade-offs between product variety and inefficient duplication.13
Advertising
agency
Sales force
Manufacturing
and
distribution
Media
Research and
development
Promotion
services
Legal Packaging
Fiscal Purchasing
Market
research
Publicity
Brand/Product
Manager
| Fig. 23.2 |
The Product Manager’s
Interactions
APM
PA
PM
PM
R C
PM
R C S D F E
(a) Vertical Product Team
(b) Triangular Product Team
(c) Horizontal Product Team
= product manager
= associate product manager
= product assistant
= market researcher
= communication specialist
= sales manager
= distribution specialist
= finance/accounting specialist
= engineer
PM
APM
PA
R
C
S
D
F
E
| Fig. 23.3 |
Three Types of
Product Teams
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684 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
In fact, in some packaged-goods firms, category management has evolved into
aisle management and encompasses multiple related categories typically found
in the same sections of supermarkets and grocery stores. General Mills’ Yoplait
Yogurt has served as category advisor to the dairy aisle for 24 major retailers,
boosting the yogurt base footprint four to eight feet at a time and increasing sales
of yogurt by 9 percent and category sales in dairy by 13 percent nationwide.14
MarkeT-ManageMenT organizaTion Canon sells printers
to consumer, business, and government markets. Nippon Steel sells to the
railroad, construction, and public utility industries. When customers fall into
different user groups with distinct buying preferences and practices, a market-
management organization is desirable. Market managers supervise several
market-development managers, market specialists, or industry specialists
and draw on functional services as needed. Market managers of important
markets might even have functional specialists reporting to them.
Market managers are staff (not line) people, with duties like those of prod-
uct managers. They develop long-range and annual plans for their markets
and are judged by their market’s growth and profitability. Because this system
organizes marketing activity to meet the needs of distinct customer groups, it
shares many advantages and disadvantages of product-management systems.
Many companies are reorganizing along market lines and becoming market-
centered organizations. Xerox converted from geographic selling to selling
by industry, as did IBM and Hewlett-Packard.
When a close relationship is advantageous, such as when customers have
diverse and complex requirements and buy an integrated bundle of products
and services, a customer-management organization, which deals with indi-
vidual customers rather than the mass market or even market segments, should
prevail.15 One study showed that companies organized by customer groups
reported much higher accountability for the overall quality of relationships and
greater employee freedom to take actions to satisfy individual customers.16
MaTrix-ManageMenT organizaTion Companies that produce many products for many markets
may adopt a matrix organization employing both product and market managers. The rub is that it’s costly and
often creates conflicts. There’s the cost of supporting all the managers and questions about where authority and
responsibility for marketing activities should reside—at headquarters or in the division?17 Some corporate marketing
groups assist top management with overall opportunity evaluation, provide divisions with consulting assistance on
request, help divisions that have little or no marketing, and promote the marketing concept throughout the company.
relatIOnshIps wIth Other DepartMents
Under the marketing concept, all departments need to “think customer” and work together to satisfy customer
needs and expectations. Yet departments define company problems and goals from their own viewpoints, so con-
flicts of interest and communications problems are unavoidable. The marketing vice president or the CMO must
usually work through persuasion rather than through authority to coordinate the company’s internal marketing
activities and coordinate marketing with finance, operations, and other company functions to serve the customer.18
Many companies now focus on key processes rather than on departments because departmental organization
can be a barrier to smooth performance. They appoint process leaders, who manage cross-disciplinary teams that
include marketing and salespeople. Marketers thus may have a solid-line responsibility to their teams and a dotted-
line responsibility to the marketing department.
Given the goal of providing positive customer experiences from start to finish, all areas of the organization need
to work effectively together. In particular, because of the growing importance of “Big Data,” marketers must work
closely with those in the IT department to gain critical insights and updates.
BuIlDInG a CreatIve MarketInG OrGanIzatIOn
Many companies realize they’re not yet really market and customer driven—they are product and sales driven.
Transforming into a true market-driven company requires, among other actions: (1) developing a company-wide
passion for customers; (2) organizing around customer segments instead of products; and (3) understanding
customers through qualitative and quantitative research.
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Sales in the dairy aisle increased once marketers for General
Mills’ Yoplait Yogurt became category advisors to a number of
major retailers.
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The task is not easy, but the payoffs can be considerable. See “Marketing Insight: The Marketing CEO” for con-
crete actions a CEO can take to improve marketing capabilities.
Although it’s necessary to be customer oriented, it’s not enough. The organization must also be creative.19
Companies today copy each others’ advantages and strategies with increasing speed, making differentiation harder
to achieve and lowering margins as firms become more alike. The only answer is to build a capability in strategic
innovation and imagination. This capability comes from assembling tools, processes, skills, and measures that let
the firm generate more and better new ideas than its competitors.20 Companies also try to put together inspiring
work spaces that help to stimulate new ideas and foster imagination.
Companies must watch trends and be ready to capitalize on them. Nestlé was late seeing the trend toward cof-
feehouses such as Starbucks. Coca-Cola was slow to pick up beverage trends toward fruit-flavored drinks such as
Snapple, energy drinks such as Gatorade, and designer water brands. Market leaders can miss trends when they
are risk averse, obsessed about protecting their existing markets and physical resources, and more interested in
efficiency than innovation.21
Socially Responsible Marketing
Effective internal marketing must be matched by a strong sense of ethics, values, and social responsibility.22
Taking a more active, strategic role in corporate social responsibility is thought to benefit not just customers,
employees, community, and the environment but also shareholders. Firms feel they also benefit in different ways,
as Figure 23.4 illustrates.
6. Develop strong in-house marketing training programs. The
company should design well-crafted marketing training programs
for corporate management, divisional general managers, market-
ing and sales personnel, manufacturing personnel, R&D personnel,
and others. Many companies such as GE, Unilever, and Accenture
have centralized training facilities to run such programs.
7. Install a modern marketing planning system. The planning
format will require managers to think about the marketing environ-
ment, opportunities, competitive trends, and other forces. These
managers then prepare strategies and sales-and-profit forecasts
for specific products and segments and are accountable for
performance.
8. Establish an annual marketing excellence recognition pro-
gram. Business units that believe they’ve developed exemplary
marketing plans should submit a description of their plans and
results. Winning teams should be rewarded at a special ceremony
and the plans disseminated to the other business units as “models
of marketing thinking.” Procter & Gamble, SABMiller, and Becton,
Dickinson and Company follow this strategy.
9. Shift from a department focus to a process-outcome
focus. After defining the fundamental business processes that
determine its success, the company should appoint process lead-
ers and cross-disciplinary teams to reengineer and implement
these processes.
10. Empower the employees. Progressive companies encourage
and reward their employees for coming up with new ideas and
empower them to settle customer complaints to save the cus-
tomer’s business. IBM lets frontline employees spend as much as
$5,000 to solve a customer problem on the spot.
marketing
insight
The Marketing CEO
What steps can a CEO take to create a market- and customer-focused
company?
1. Convince senior management of the need to become cus-
tomer focused. The CEO personally exemplifies strong customer
commitment and rewards those in the organization who do like-
wise. Former CEOs Jack Welch of GE and Lou Gerstner of IBM
famously spent 100 days a year visiting customers in spite of their
many strategic, financial, and administrative burdens.
2. Appoint a senior marketing officer and marketing task
force. The marketing task force should include the CEO; C-level
executives from sales, R&D, purchasing, manufacturing, finance,
and human resources; and other key individuals.
3. Get outside help and guidance. Consulting firms have consider-
able experience helping companies adopt a marketing orientation.
4. Change the company’s reward measurement and system. As
long as purchasing and manufacturing are rewarded for keeping costs
low, they will resist accepting some costs required to serve customers
better. As long as finance focuses on short-term profit, it will oppose
major investments designed to build satisfied, loyal customers.
5. Hire strong marketing talent. The company needs a strong
chief marketing officer who not only manages the marketing
department but also gains respect from and influence with the
other C-level executives. A multidivisional company will benefit
from establishing a strong corporate marketing department.
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The most admired—and most successful—companies in the world abide by high standards of business and market-
ing conduct that dictate serving people’s interests, not only their own. Procter & Gamble has made “brand purpose” a
key component of the company’s marketing strategies. The company has launched a number of award-winning cause
programs to support its brands, such as with Downy fabric softener’s “Touch of Comfort,” Tide laundry detergent’s
“Loads of Hope,” and Secret deodorant’s “Mean Stinks.”23 P&G is not alone, as the following demonstrates. 24
FirMs OF EndEarMEnT Researchers Raj Sisodia, David Wolfe, and Jag Sheth believe
humanistic companies make great companies. They see “Firms of Endearment” as those with a culture of caring that
serve the interests of their stakeholders, who are defined by the acronym SPICE: Society, Partners, Investors, Customers,
and Employees. Sisodia and colleagues believe Firms of Endearment create a love affair with stakeholders. Their senior
managers run an open-door policy, are passionate about customers, and earn modest compensation. They pay their em-
ployees more, relate more closely to a smaller group of excellent suppliers, and give back to the communities in which
they work. They actually spend less on marketing as a percentage of sales yet earn greater profits because customers who
love the company do most of the marketing. The authors see the 21st-century marketing paradigm as creating value for
all stakeholders and becoming a beloved firm. Table 23.2 lists firms receiving top marks as Firms of Endearment from a
sample of thousands of customers, employees, and suppliers.
COrpOrate sOCIal respOnsIBIlItY
Raising the level of socially responsible marketing calls for making a three-pronged attack that relies on proper
legal, ethical, and social responsibility behavior. One company that puts social responsible marketing squarely at
the center of all it does is Stonyfield Farm.25
| Fig. 23.4 |
Rationale for
Investing in
Corporate Social
Responsibility
Table 23.2 Top Firms of Endearment
Best Buy BMW CarMax Caterpillar
Commerce Bank Container Store Costco eBay
Google Harley-Davidson Honda IDEO
IKEA JetBlue Johnson & Johnson Jordan’s Furniture
L.L.Bean New Balance Patagonia Progressive Insurance
REI Southwest Starbucks Timberland
Toyota Trader Joe’s UPS Wegmans
Whole Foods
Source: Raj Sisodia, David B. Wolfe, and Jag Sheth, Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (Upper Saddle River, NJ:
Wharton School Publishing, 2007), p. 16, © 2007. Printed and electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
Rationale for Investing in Corporate Social Responsibility
• Companies need to differentiate themselves. Companies with civic virtues will be preferred.
• Companies need a decision framework for facing daily requests for sponsorships, improved health coverage,
injury prevention, environmental protection, and community contributions.
• Corporate heads and boards need to understand the social pressures and opportunities facing their companies.
• Companies need to build a bank of public goodwill to offset potential criticisms.
• Employees, investors, and partners will be more motivated and loyal.
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sTOnyFiELd FarM Stonyfield Farm was cofounded in 1983 by long-time “CE-Yo” Gary Hirshberg
on the belief that there was a business opportunity in selling all-natural organic dairy products while “restoring the
environment.” The company’s suppliers avoid the productivity practices of agribusiness, including the use of antibiot-
ics, growth hormones, pesticides, and fertilizers. After calculating the amount of energy used to run its plant, Stonyfield
decided to make an equivalent investment in environmental projects such as reforestation, wind farms, and the com-
pany’s own anaerobic wastewater digester. The company has modified the plastic lids on its yogurt, saving about a
million pounds of plastic a year, and added on-package messages about global warming, the perils of hormones, and
genetically modified foods. It has also added cultures or dietary supplements to help the immune system fight off ill-
ness and makes low-fat versions of its products. Stonyfield donates 10 percent of profits “to efforts that help protect
and restore the Earth.” Although premium-priced, the
brand still lacks the margins for big budget advertis-
ing campaigns and relies on sampling (such as at the
Boston marathon), PR, word of mouth, and guerilla tactics
instead. Its progressive business practices have not hurt
its financial performance. Stonyfield is the number-
three yogurt brand in the United States and has added
smoothies, milk, frozen yogurt, and ice cream. Hirshberg,
now just chairman of the company, has also launched a
nonprofit foundation called “Climate Counts” that scores
companies annually on the basis of their voluntary actions
to reverse climate change. The goal is to spur corporate
responsibility and inform consumers about which compa-
nies are more engaged.
legal behavior Organizations must ensure every
employee knows and observes relevant laws.26 For example,
it’s illegal for salespeople to lie to consumers or mislead
them about the advantages of buying a product. They may
not offer bribes to purchasing agents or others influencing
a B-to-B sale. Their statements must match advertising
claims, and they may not obtain or use competitors’
technical or trade secrets through bribery or industrial
espionage. They must not disparage competitors or their
products by suggesting things that are not true. Managers
must make sure every sales representative knows the law
and acts accordingly.
Procter & Gamble has embraced
cause marketing programs,
such as Tide laundry detergent’s
“Loads of Hope,” to help its
brands achieve their brand
purposes.
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Stonyfield Farm co-founder Gary Hirshberg is leading the charge in labeling products
which use genetically modified organism (GMO) ingredients.
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eThical behavior Business practices come under attack because business situations routinely pose ethical
dilemmas: It’s not easy to draw a clear line between normal marketing practice and unethical behavior. Some issues
can generate controversy or sharply divide critics, such as acceptable marketing to children.27
rEguLaTing FOOd and BEVEragE MarkETing TO ChiLdrEn
Amid pressure from regulators and the threat of lawsuits, food and beverage manufacturers have cut back on marketing their
least healthful products to kids; developed new recipes to reduce calories, sodium, sugar, and fat in thousands of products; and
made changes to place nutrition information on the front of the package. Some watch groups feel that is still not enough, and
with childhood obesity an administration priority being addressed by First Lady Michelle Obama’s “Let’s Move!” and other pro-
grams, tight new government standards to further limit advertising to children and teens take effect in 2016. These standards
require food marketed toward children ages 2 to 17 to make a “meaningful contribution” to a healthy diet by providing a certain
amount of healthy items (fruits, vegetables, whole grains) and limiting unhealthy items (sodium, sugar, and saturated fat). Later
regulation was proposed to ban in-school advertising for foods high in sugar, fat, and salt and to eliminate the tax deductions of
advertising and marketing expenses for food and marketing companies if the products are of “poor nutritional quality” and mar-
keted to kids. Although proposed regulations often change a great deal before taking effect, there will be increased government
scrutiny of the way food and beverages are marketed to children.
Of course, certain business practices are clearly unethical or illegal. These include bribery, theft of trade secrets,
false and deceptive advertising, exclusive dealing and tying agreements, quality or safety defects, false warranties,
inaccurate labeling, price-fixing or undue discrimination, and barriers to entry and predatory competition.
Companies must adopt and disseminate a written code of ethics, build a company tradition of ethical behavior,
and hold their people fully responsible for observing ethical and legal guidelines. In the past, a disgruntled customer
might bad-mouth an unethical or poorly performing firm to 12 other people; today, via the Internet, he or she can
reach thousands. The general distrust of companies among U.S. consumers is evi-
dent in research showing the percentage of those who view corporations unfavor-
ably is almost 40 percent.28
Social reSponSibiliTy behavior Marketers must exercise their social
conscience in specific dealings with customers and stakeholders. Some top-rated
companies for corporate social responsibility are Whole Foods, Walt Disney, Coca-
Cola, Johnson & Johnson, and Google.29
Increasingly, people want information about a company’s record on social and
environmental responsibility to help them decide which companies to buy from,
invest in, and work for.30 Communicating corporate social responsibility can be
a challenge. Once a firm touts an environmental initiative, it can become a target
for criticism. Often, the more committed a company is to sustainability and envi-
ronmental protection, the more dilemmas can arise, as Green Mountain Coffee
Roasters has found.31
grEEn MOunTain COFFEE rOasTErs
Vermont-based Green Mountain Coffee Roasters prides itself on sustainability efforts that
have helped it become one of the fastest-selling coffee brands around. The company sup-
ports local and global communities by offsetting 100 percent of its greenhouse gas emis-
sions, investing in sustainably grown coffee, and allocating at least 5 percent of its pre-tax
profits to social and environmental projects. Through its C.A.F.E. Time or Community Action
for Employees programs, employees are encouraged to volunteer as many as 52 hours
annually of company-paid service to give back to local organizations and communities. All
these activities help Green Mountain fulfill its purpose statement to “create the ultimate
coffee experience in every life we touch, from tree to cup— transforming the way the
world views business.” The firm’s 2006 purchase of Keurig and its popular single-cup
brewing system posed a quandary, though: The K-Cups used with the Keurig brewing
So
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E
D
P
R
E
SS
A firm that prides itself on its sustainability efforts, Green
Mountain Coffee Roasters is committed to reducing any
adverse environmental impact of its popular K-cups.
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system were made of totally nonrecyclable plastic and foil. Although disposal makes up only about 5 percent of their total
environmental impact—more significant effects are related to brewer use, coffee cultivation, and product packaging—Green
Mountain has engaged in extensive R&D and explored numerous partnerships to find a more environmentally sound solution,
vowing to make K-Cup packs recyclable by 2020 while also addressing their other environmental effects in different ways.
Corporate philanthropy also can pose dilemmas. Merck, DuPont, Walmart, and Bank of America have each
donated $100 million or even more to charities in a year. Yet good deeds can be overlooked—even resented—if the
company is seen as exploitive or fails to live up to a “good guys” image. Some critics worry that cause marketing or
“consumption philanthropy” may replace virtuous actions with less thoughtful consumer buying, reduce emphasis
on real solutions, or deflect attention from the fact that markets may create many social problems to begin with.32
SuSTainabiliTy Sustainability—the ability to meet humanity’s needs without harming future generations—
now tops many corporate agendas. Major corporations outline in great detail how they are trying to improve the
long-term impact of their actions on communities and the environment. Coca-Cola, AT&T, and DuPont have even
installed Chief Sustainability Officers.33
As one sustainability consultant put it, “There is a triple bottom line—people, planet, and profit—and the
people part of the equation must come first. Sustainability means more than being eco-friendly, it also means you
are in it for the long haul.”34 Corporate actions toward achieving sustainability take all forms. For example, Whole
Foods, Wegmans, Target, and Walmart no longer sell fish caught in areas subject to overfishing or in a manner
likely to harm other marine life or habitats.35
Sustainability ratings exist, but there is no consistent agreement about what metrics are appropriate.36 One
comprehensive study used 11 factors to assemble a list of the top 100 sustainable corporations in the world: energy,
water, CO2, and waste productivity; leadership diversity; CEO-to-average-worker pay; taxes paid; sustainability
leadership; sustainability pay link; innovation capacity; and transparency. Some notable global firms in the top
10 include Statoil (Norway), Adidas (Germany), and Westpac Banking (Australia).37
Some feel companies that score well on sustainability exhibit high-quality management in that “they tend to be
more strategically nimble and better equipped to compete in the complex, high-velocity, global environment.”38
Consumer interest is also creating market opportunities, such as for organic products (see “Marketing Insight: The
Rise of Organic”).
could remain private, in part so he could continue its focus on eco-
friendly practices. Other small firms have not followed suit, however,
and major corporations like Cargill, ConAgra, Kraft, and M&M Mars
now control much of the nation’s organic food industry. Farms with
annual sales of $500,000 or more account for nearly 80 percent of
all organic sales, even though such farms make up only 12.5 percent
of all farms.
Many nonfood companies are embracing organic ingredients
to avoid chemicals and pesticides. Apparel and other nonfood items
make up the second-fastest-growing category of the organic products
industry. Organic nonfood grew to $2.8 billion in 2013—now 8 percent
of the $35.1 billion organic products industry. Organic cotton grown by
farmers who fight boll weevils with ladybugs, weed crops by hand, and
use manure for fertilizer has become a hot product at retail.
Sources: Liz Webber, “USDA Survey Reveals Extent of Big Organic,” Supermarket
News, October 18, 2012; Stephanie Strom, “Has ‘Organic’ Been Oversized?,”
New York Times, July 7, 2012; George Avalos, “Annie’s CEO Aims to Make
Profit on Organic Mission,” Oakland Tribune, June 24, 2012; Michelle Wu, “A
Company Fueled by Athletes’ Sweat,” Wall Street Journal, March 22, 2010; Jessica
Shambora, “The Honest Tea Guys Look Back,” Fortune, July 26, 2010; Megan
Johnston, “Hard Sell for a Soft Fabric,” Forbes, October 30, 2006, pp. 73–80.
See also Ram Bezawada and Koen Pauwels, “What Is Special about Marketing
Organic Products? How Organic Assortment, Price, and Promotions Drive Retailer
Performance,” Journal of Marketing 77 (January 2013), pp. 31–51.
marketing
insight
The Rise of Organic
Organic and natural products have become a strong presence in many
food and beverage categories. Caster & Pollux’s success with organic
and natural pet foods led to its distribution in major specialty retail chains
such as PETCO. All-organic Honest Tea grew 50 percent a year after its
founding in 1998; the firm sold 40 percent of the business to Coca-Cola
in 2008. Annie’s Home Grown started as an organic farm in Connecticut
in 1989, went public in 2012 with an IPO raising $95 million, and was
bought by General Mills for $820 million in 2014.
Many organic and natural products ground their brand position-
ing in sustainability and social values. Started in 1990 by avid cyclist
Gary Erickson and named to honor his father, CLIF Bar set out to offer
a better-tasting energy bar with wholesome, organic ingredients. CLIF
Bar relies on biodiesel-powered vehicles, supports the construction of
farmer- and Native American–owned wind farms through carbon off-
sets, and is active in its local community.
Given their premium prices and profitability, organic food and
beverage products have also become big business. Erickson turned
down a $120 million offer from Quaker Oats in 2000 so his firm
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Heightened interest in sustainability has also unfortunately resulted in greenwashing, which gives
products the appearance of being environmentally friendly without living up to that promise. One study
revealed that half the labels on allegedly green products focus on an eco-friendly benefit (such as re-
cycled content) while omitting information about significant environmental drawbacks (such as manu-
facturing intensity or transportation costs).39 Stonyfield Farm’s cofounder Gary Hirshberg is leading the
charge with the “Just Label It!” campaign to provide more useful information on labels about the use of
GMO (genetically modified organism) ingredients.40
Because insincere firms have jumped on the green bandwagon, consumers bring a healthy skepti-
cism to environmental claims. They are also unwilling to sacrifice product performance and quality, nor
are they necessarily willing to pay a price premium for green products.41 Unfortunately, green products
can be more expensive because ingredients are costly and transportation costs are higher for lower ship-
ping volumes. As Chapter 3 described, when the recession hit, sales of many green household products
slid. Sales of the premium-priced Clorox Green Works line, for example, dropped from more than $100
million in 2008 to $60 million five years later.42
sOCIallY respOnsIBle BusIness MODels
Companies that innovate solutions and values in a socially responsible way are most likely to suc-
ceed.43 Consider Timberland.44
TiMBErLand Timberland, the maker of rugged boots, shoes, clothing, and gear, targets
individuals who live, work, and play outdoors, so it only makes sense to do whatever it takes to protect the
environment. The company’s actions have blazed trails for green companies around the world. Its revolutionary
initiatives include putting a “nutrition label” on its shoeboxes, measuring the brand’s environmental footprint—
from renewable energy used in its facilities to recycled, organic, and renewable materials in its products to
trees planted around the globe. Timberland also introduced a new line of shoes called Earthkeepers, which in-
corporates organic cotton, recycled PET, and recycled rubber (for the soles) and later expanded across multiple
Timberland product categories. Outside of product, the brand has made a major commitment to reforestation,
with nearly five million trees planted worldwide. With sales topping $1.6 billion in 2013, its business accom-
plishments prove that socially and environmentally responsible companies can be successful.
Companies such as The Body Shop, Working Assets, and Smith & Hawken are also giving social responsibility
a more prominent role, as has Newman’s Own. Late actor Paul Newman’s homemade salad dressing grew into a
huge business. Newman’s Own brand also includes pasta sauce, salsa, popcorn, and lemonade and is now sold in
15 overseas markets. The company has given away all its profits and royalties after tax—more than $400 million so
far—to thousands of educational and charitable programs worldwide, including the Hole in the Wall Gang camps
Newman created for children with serious illnesses.45
Corporate philanthropy as a whole is on the rise. After years of steady growth, even during a recession, $16.8
billion in cash and in-kind support was given in 2013.46 In addition to these contributions, more firms are coming
to believe corporate social responsibility in the form of cause marketing and employee volunteerism programs is
not just the “right thing” but also the “smart thing to do.”47
Cause-relateD MarketInG
Many firms blend corporate social responsibility initiatives with marketing activities.48 Cause-related
marketing links the firm’s contributions toward a designated cause to customers’ engaging directly or
indirectly in revenue-producing transactions with the firm. Cause marketing is part of corporate societal
marketing (CSM), which Minette Drumwright and Patrick Murphy define as marketing efforts “that have
at least one noneconomic objective related to social welfare and use the resources of the company and/or of
its partners.”49 Drumwright and Murphy also include traditional and strategic philanthropy and volunteerism
in CSM.
One study showed that 90 percent of U.S. consumers have a more positive image of, are more loyal to, and trust
more a company that supports a cause, and 54 percent have bought a product because it was associated with a
cause.50 After describing Dawn’s successful cause marketing program, we next review pros and cons of such pro-
grams and some important guidelines that apply to them.51
Timberland has adopted practices
to protect the environment across
a broad range of its corporate
activities.
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dawn Procter & Gamble’s Dawn, the top dishwashing liquid in the United States, has an unusual side benefit—it
can clean birds caught in oil spills. A report by the U.S. Fish and Wildlife Service called Dawn “the only bird-cleaning agent
that is recommended because it removes oil from feathers; is non-toxic; and does not leave a residue.” A Web site launched
in 2006, www.DawnSavesWildlife.com, drew 130,000 people who formed virtual groups to encourage friends and others to
stop gas and oil leaks from their cars. After the catastrophic BP oil spill in 2010, P&G donated thousands of bottles of Dawn as
well as placing a code on bottles and donating $1 to Gulf wildlife causes for each code customers activated, eventually totaling
$500,000. To date, the company has donated more than 50,000 bottles of Dawn to help rescue and release 75,000 animals
harmed by oil pollution. Teaming up with the Marine Mammal Center and International Bird Rescue, P&G pledged $1 million for
2014, also launching the premiere of a seven-part documentary series narrated by actor Rob Lowe.
cauSe-MarkeTing beneFiTS and coSTS A successful cause-marketing program can improve social
welfare, create differentiated brand positioning, build strong consumer bonds, enhance the company’s public image,
create a reservoir of goodwill, boost internal morale and galvanize employees, drive sales, and increase the firm’s market
value.52 Consumers may develop a strong, unique bond with the firm that transcends normal marketplace transactions.
Specifically, from a branding point of view, cause marketing can (1) build brand awareness, (2) enhance brand
image, (3) establish brand credibility, (4) evoke brand feelings, (5) create a sense of brand community, and (6) elicit
brand engagement.53 It has a particularly interested audience in socially minded 18- to 34-year-old Millennial
consumers who, not surprisingly, are more likely than the general population to use social media to learn about
cause activities and engage with companies about them.54
Cause-related marketing could backfire, however, if consumers question the link between the product and the
cause or see the firm as self-serving and exploitive.55 Problems can also arise if consumers do not think a company
is consistent and sufficiently responsible in all its behavior, as happened to KFC.56
kFC KFC’s “Buckets for the Cure” program was to donate 50 cents to the Susan G. Komen for the Cure Foundation
for every $5 “pink” bucket of fried chicken purchased over a one-month period. It was slotted to be the single biggest cor-
porate donation ever to fund breast cancer research—more than $8.5 million. One problem: At virtually the same time, KFC
also launched its Double Down sandwich with two pieces of fried chicken, bacon, and cheese. Critics immediately pointed
out that KFC was selling a food item with excessively high calories, fat, and sodium that contributed to obesity. On the
Susan G. Komen site, being overweight was flagged for increasing the risk of breast cancer by 30 percent to 60 percent in
postmenopausal women, also leaving the foundation open to criticism over the partnership.
P&G has created a series of
cause-related activities around
its Dove dishwashing liquid,
taking advantage of its unusual
side benefit to clean birds
caught in oil spills.
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To avoid backlash, some firms take a soft-sell approach to their cause marketing.57 One interesting recent cause
program is the PRODUCT(RED) campaign.58
PrOduCT(rEd) The highly publicized launch of PRODUCT(RED) in 2006, championed by U2 singer and
activist Bono and Bobby Shriver, chairman of DATA, raised awareness and money for the Global Fund by teaming with some
of the world’s most iconic brands—American Express cards, Motorola phones, Converse sneakers, Gap T-shirts, Apple
iPods, and Emporio Armani sunglasses—to produce (RED)-branded products. As much as 50 percent of the profits from
sales of these products go to the Global Fund to help women and children affected by HIV/AIDS in Africa. Each company
that becomes PRODUCT(RED) places its logo in the “embrace” signified by the parentheses and is “elevated to the power of
red.” Although some critics felt the PRODUCT(RED) project was either misguided or overmarketed, more than $275 million
has been donated to date, an enormous increase over donations to the Global Fund prior before the program launch. Many
well-known brands have joined the cause since then, such as Bank of America, Beats by Dr. Dre, Microsoft, and Starbucks.
deSigning a cauSe prograM Firms must make a number of decisions in designing and implementing
a cause-marketing program, such as how many and which cause(s) to choose and how to brand the cause program.
“Marketing Memo: Making a Difference: Top 10 Tips for Cause Branding” provides some tips from a top cause-
marketing firm.
Some experts believe the positive impact of cause-related marketing is diluted if a company is only occasionally
engaged in a number of causes. Cathy Chizauskas, Gillette’s director of civic affairs, states: “When you’re spreading
out your giving in fifty-dollar to one-thousand-dollar increments, no one knows what you are doing. . . . It doesn’t
make much of a splash.”59 Many companies focus on one or a few main causes to simplify execution and maximize
impact. McDonald’s has focused on children and family health and well-being through three major programs:60
• Ronald McDonald Houses in 35 countries and regions offer more than 8,000 rooms each night to families
needing support while their child is in the hospital, saving them a total of $657 million annually in hotel costs.
• Ronald McDonald Family Rooms in 23 countries help 4,000 families each day with a place to rest and regroup
at the hospital next to their sick child.
• Fifty-two Ronald McDonald Care Mobiles in nine countries provide neighborhood on-site medical care for
children.
Limiting support to a single cause, however, may limit the pool of consumers or other stakeholders who can
transfer positive feelings from the cause to the firm. Many popular causes also already have numerous corporate
sponsors. More than 130 companies, including American Airlines, Dell, Ford, Georgia Pacific, Merck, Samsung,
and Walgreens, have become corporate partners of Susan G. Komen for the Cure.61 Thus, a brand may find itself
overlooked in a sea of symbolic pink ribbons.
U2’s Bono has been the spokes-
person for the PRODUCT(RED)
partnership, whereby major
brands donate proceeds from
sales of designated “red”
products to fight HIV/AIDS
in Africa.
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Cone, a Boston-based strategic communications agency specializing in cause branding and corporate responsibility, offers these tips for developing authentic
and substantive programs:
1. Select a focus area that aligns with your mission, goals, and organization.
2. Evaluate your institutional “will” and resources. If you, your employees, and other allies don’t believe or invest in your organization’s cause, neither will
your audience.
3. Analyze your competitors’ cause positioning. There are few remaining wide, open spaces, but this may help you locate a legitimate societal need or an
untapped element within a more crowded space that you can own.
4. Choose your partners carefully. Look for alignment in values, mission, and will. Carefully outline roles and responsibilities. Set your sights on a multiyear,
sustainable relationship with annual measurement of accomplishments for both partners.
5. Don’t underestimate the name of your program—it’s key to the identity of your campaign. Develop a few words that say exactly what you do and
create a visual identity that is simple yet memorable. The Avon Breast Cancer Crusade, American Heart Association’s Go Red for Women, and Target Take
Charge of Education are good examples.
6. To create a sustainable and effective program, start by developing a cross-functional strategy team. Include representatives from the office of
the CEO, public affairs, human resources, marketing, public and community relations, research/measurement, and volunteer and program management,
among others. If you’re in silos, you will spend too much valuable time building bridges to other departments to get the real work done.
7. Leverage both your assets and those of your partner(s) to bring the program to life. Assets may include volunteers, cash and in-kind donations,
special events, in-store presence, partner resources, and marketing/advertising support. And, remember, emotion is one of your greatest assets. It can help
you to connect with your audience and differentiate your organization in a crowded marketplace.
8. Communicate through every possible channel. Craft compelling words and visuals because stirring images can penetrate the heart. Then take your
messages beyond traditional media outlets and become multidimensional! Think special events, Web sites, workshops, PSAs, expert spokespersons, and
even celebrity endorsements.
9. Go local. National programs reach the “grass tops,” but true transformation begins at the grassroots. Engage citizens/volunteers through hands-on activities
at local events, cause promotions, and fund-raisers.
10. Innovate. True cause leaders constantly evolve their programs to add energy, new engagement opportunities, and content to remain relevant and to build
sustainability.
Sources: Carol C. Cone, “Top 10 Tips for Cause Branding,” www.coneinc.com/10-tips-cause-branding; see also Carol L. Cone, Mark A. Feldman, and Alison T. DaSilva,
“Cause and Effects,” Harvard Business Review, July 2003, 95–101.
Making a Difference: Top 10 Tips for Cause Brandingmarketing memo
McDonald’s has
focused its cause
marketing efforts on
Ronald McDonald
House Charities which
includes its Ronald
McDonald Care Mobiles
to provide local medical
care for children.
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Opportunities may be greater with “orphan causes”—diseases that afflict fewer than 200,000 people.62 Another
option is overlooked diseases; pancreatic cancer is the fourth-deadliest form of cancer behind skin, lung, and
breast yet has received little or no corporate support. Diabetes is linked to the deaths of many more people than
breast cancer but receives significantly less funding support. Even major killers such as prostate cancer for men
and heart disease for women have been relatively neglected compared to breast cancer, though some firms have
begun to fill the void. The American Heart Association launched a “Go Red for Women” program, with a red dress
symbol and a national “Wear Red Day” sponsored by Macy’s, to draw attention from corporations and others to a
disease that kills roughly 12 times as many women a year as breast cancer.63
Most firms choose causes that fit their corporate or brand image and matter to their employees and sharehold-
ers.64 LensCrafters’ Give the Gift of Sight program—rebranded OneSight after the company was purchased by the
Italian firm Luxottica—is a family of charitable vision-care programs providing free vision screenings, eye exams,
and glasses to millions of needy people in North America and developing countries around the world. Luxottica
pays most of the overhead, so more than 90 percent of all donations goes directly to fund programming.65
Barnum’s Animal Crackers launched a campaign to raise awareness of endangered species and help protect the
Asian tiger. Issuing special edition packaging and collaborating with the World Wildlife Fund, the Nabisco brand
saw a “healthy lift in sales.”66 Here is an example of a firm that used cause marketing in part to successfully build a
new business.67
TOMs Although Blake Mycoskie did not win the reality show contest Amazing Race, his return trip to Argentina
in 2006 sparked a desire to start a business to help the scores of kids he saw who suffered for one simple reason—they
lacked shoes. Shoeless children incur a health risk but are also disadvantaged by often being barred from school. Thus
was born TOMS shoes, named to suggest “a better tomorrow,” with a pledge to donate a pair of shoes to a needy child for
each pair sold. Picked up by stores like Whole Foods, Nordstrom, and Neiman Marcus and also sold online, TOMS shoes are
based on the rope-soled, canvas-topped alpargata footwear of Argentina and can now be found on the feet of more than
1 million kids in developing countries. The donations were good marketing too. The firm has garnered heaps of publicity,
and AT&T and American Express even featured Mycoskie in a commercial. TOMS also sponsored “A Day Without Shoes”
promotion to help people imagine what life would be like shoeless. Some critics feel the brand is treating a symptom but not
really addressing the root economic problem and that it could even be undermining the local shoe economy. Nevertheless,
it has moved into eyewear with the same business model and is estimated to earn $250 million in revenues annually while
giving away literally millions of shoes and now eyeglasses.
sOCIal MarketInG
Cause-related marketing supports a cause. Social marketing by nonprofit or government organizations furthers
a cause, such as “say no to drugs” or “exercise more and eat better.”68 Some notable global social marketing suc-
cesses are:
• A mass media campaign to promote oral rehydration therapy in Honduras significantly decreased deaths
from diarrhea in children under 5.
TOMS shoes puts cause
marketing at the core of
what it does, donating
a pair of shoes to
underprivileged children
in developing countries
for each pair it sells.
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• Social marketers created booths in marketplaces where Ugandan midwives sold contraceptives at affordable
prices.
• Population Communication Services created and promoted two extremely popular songs in Latin America,
“Stop” and “When We Are Together,” to help young adults learn sexual responsibility.
• The National Heart, Lung, and Blood Institute successfully raised awareness in the U.S. about cholesterol and
high blood pressure, which helped significantly reduce deaths.
Different types of organizations conduct social marketing in the United States. Government agencies include
the Centers for Disease Control and Prevention, Departments of Health, Social, and Human Services, Department
of Transportation, and the U.S. Environmental Protection Agency. The literally hundreds of nonprofit organiza-
tions include the American Red Cross, the United Way, and the American Cancer Society.
Choosing the right goal or objective for a social marketing program is critical. Should a family-planning cam-
paign focus on abstinence or birth control? Should a campaign to fight air pollution focus on ride sharing or mass
transit? Table 23.3 illustrates the range of possible objectives.
While social marketing uses a number of different tactics to achieve its goals, the planning process follows
many of the same steps as for traditional products and services (see Table 23.4).69 Some key success factors for
changing behavior include:70
• Choose target markets that are most ready to respond.
• Promote a single, doable behavior in clear, simple terms.
• Explain the benefits in compelling terms.
• Make it easy to adopt the behavior.
• Develop attention-grabbing messages and media.
• Consider an education-entertainment approach.
One organization that has accomplished many of these goals through the application of modern marketing
practices is the World Wildlife Fund.71
wOrLd wiLdLiFE Fund The World Wildlife Fund (WWF) is a Washington, D.C.-based nonprofit
with 1.2 million members in the United States and 5 million globally. Its annual budget does not allow for lavish marketing,
so it relies primarily on creative direct marketing to solicit contributions. The organization sends about 36 million pieces of
eco-friendly mail in the United States each year, garnering 65 percent of its membership revenue in the process. It has an
award-winning Web site, is active on Facebook and Twitter, and earns revenue through partnerships with a host of firms
including Avon, Disney, The Gap, and Build-A-Bear Workshop. Partnerships sometimes include joint marketing programs;
Coca-Cola donated $2 million for a campaign to help create safe areas for polar bears in Canada and other Arctic regions.
WWF also tackles important wildlife issues head on, as with its multimedia anti-poaching campaign, which used billboards,
print ads, public service announcements, and online posters with the tagline “Stop Wildlife Crime—It’s Dead Serious.”
Table 23.3 Some Possible Social Marketing Program Objectives
Cognitive Campaigns
• Explain the nutritional values of different
foods.
• Demonstrate the importance of
conservation.
Action Campaigns
• Attract people for mass immunization.
• Motivate people to vote “yes” on a certain
issue.
• Inspire people to donate blood.
• Motivate women to receive a Pap test.
Behavioral Campaigns
• Demotivate cigarette smoking.
• Demotivate use of hard drugs.
• Demotivate excessive alcohol consumption.
Value Campaigns
• Alter ideas about abortion.
• Change attitudes of bigoted people.
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Social marketing programs are complex; they take time and may require phased programs or actions. There
were many steps involved in curbing the prevalence of smoking: release of cancer reports, labeling of cigarettes
as harmful, bans on cigarette advertising, education about secondary smoke effects, bans on smoking in restau-
rants and planes, increased taxes on cigarettes to pay for antismoking campaigns, and states’ suits against tobacco
companies.
Social marketing organizations should evaluate program success in terms of their objectives, measuring criteria
like incidence of adoption, speed of adoption, continuance of adoption, low cost per unit of adoption, and absence
of counterproductive consequences.
Table 23.4 The Social Marketing Planning Process
Where Are We?
• Choose program focus
• Identify campaign purpose
• Conduct an analysis of strengths, weaknesses, opportunities, and threats (SWOT)
• Review past and similar efforts
Where Do We Want to Go?
• Select target audiences
• Set objectives and goals
• Analyze target audiences and the competition
How Will We Get There?
• Product: Design the market offering
• Price: Manage costs of behavior change
• Distribution: Make the product available
• Communications: Create messages and choose media
How Will We Stay on Course?
• Develop a plan for evaluation and monitoring
• Establish budgets and find funding sources
• Complete an implementation plan
In addition to its popular
Christmas ads featuring
playful animated polar
bears, Coca-Cola also
partners with the World
Wildlife Fund to protect
real polar bears in their
native regions.
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Marketing Implementation
and Control
Table 23.5 summarizes the characteristics of a great marketing company, great not for what it is but for what it
does. Great marketing companies know the best marketers thoughtfully and creatively devise marketing plans
and then bring them to life. Marketing implementation and control are critical to making sure marketing plans
have their intended results year after year.
MarketInG IMpleMentatIOn
Marketing implementation is the process that turns marketing plans into action assignments and ensures they
accomplish the plan’s stated objectives.72 A brilliant strategic marketing plan counts for little if not implemented
properly. Strategy addresses the what and why of marketing activities; implementation addresses the who, where,
when, and how. They are closely related: One layer of strategy implies certain tactical implementation assign-
ments at a lower level. For example, top management’s strategic decision to “harvest” a product must be translated
into specific actions and assignments.
Companies today are striving to make their marketing operations more efficient and their return on marketing
investment more measurable (see Chapter 4). Marketing costs can amount to as much as a quarter of a company’s
total operating budget. Marketers need better templates for marketing processes, better management of marketing
assets, and better allocation of marketing resources.
Marketing resource management (MRM) software provides a set of Web-based applications that automate and
integrate project management, campaign management, budget management, asset management, brand manage-
ment, customer relationship management, and knowledge management. The knowledge management component
consists of process templates, how-to wizards, and best practices. Software packages can provide what some have
called desktop marketing, giving marketers information and decision structures on computer dashboards. MRM
software lets marketers improve spending and investment decisions, bring new products to market more quickly,
and reduce decision time and costs.
MarketInG COntrOl
Marketing control is the process by which firms assess the effects of their marketing activities and programs and
make necessary changes and adjustments. Table 23.6 lists four types of needed marketing control: annual-plan
control, profitability control, efficiency control, and strategic control.
Table 23.5 Characteristics of a Great Marketing Company
• The company selects target markets in which it enjoys superior advantages and exits or avoids markets where it is
intrinsically weak.
• Virtually all the company’s employees and departments are customer- and market-minded.
• There is a good working relationship between marketing, R&D, and manufacturing.
• There is a good working relationship between marketing, sales, and customer service.
• The company has installed incentives designed to lead to the right behaviors.
• The company continuously builds and tracks customer satisfaction and loyalty.
• The company manages a value delivery system in partnership with strong suppliers and distributors.
• The company is skilled in building its brand name(s) and image.
• The company is flexible in meeting customers’ varying requirements.
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annual-plan conTrol Annual-plan control ensures the company achieves the sales, profits, and
other goals established in its annual plan. At its heart is management by objectives (see Figure 23.5). First,
management sets monthly or quarterly goals. Second, it monitors performance in the marketplace. Third,
management determines the causes of serious performance deviations. Fourth, it takes corrective action to close
gaps between goals and performance.
This control model applies to all levels of the organization. Top management sets annual sales and
profit goals; each product manager, regional district manager, sales manager, and sales rep is commit-
ted to attaining specified levels of sales and costs. Each period, top management reviews and interprets
the results. Marketers today have better marketing metrics for measuring the performance of market-
ing plans (see Table 23.7 for some samples).73 Four tools for the purpose are sales analysis, market
share analysis, marketing expense-to-sales analysis, and financial analysis. The chapter appendix out-
lines them in detail.
proFiTabiliTy conTrol Companies should measure the profitability of their products, territories,
customer groups, segments, trade channels, and order sizes to help determine whether to expand, reduce, or
eliminate any products or marketing activities. The chapter appendix shows how to conduct and interpret a
marketing profitability analysis.
eFFiciency conTrol Suppose a profitability analysis reveals the company is earning poor
profits in certain products, territories, or markets. Are there more efficient ways to manage the sales force,
advertising, sales promotion, and distribution?
Some companies have established a marketing controller position to work out of the controller’s office
but specialize in improving marketing efficiency. These marketing controllers examine adherence to
profit plans, help prepare brand managers’ budgets, measure the efficiency of promotions, analyze media
Table 23.6 Types of Marketing Control
Type of Control Prime Responsibility Purpose of Control Approaches
I. Annual-plan control Top management
Middle management
To examine whether the planned
results are being achieved
• Sales analysis
• Market share analysis
• Sales-to-expense ratios
• Financial analysis
• Market-based scorecard analysis
II. Profitability control Marketing controller To examine where the company is
making and losing money
Profitability by:
• product
• territory
• customer
• segment
• trade channel
• order size
III. Efficiency control Line and staff
management
Marketing controller
To evaluate and improve the
spending efficiency and impact of
marketing expenditures
Efficiency of:
• sales force
• advertising
• sales promotion
• distribution
IV. Strategic control Top management
Marketing auditor
To examine whether the company is
pursuing its best opportunities with
respect to markets, products, and
channels
• Marketing effectiveness rating instrument
• Marketing audit
• Marketing excellence review
• Company ethical and social responsibility review
Why
is it
happening?
What is
happening?
What do
we want
to achieve?
Corrective
Action
Performance
Diagnosis
Performance
Measurement
Goal Setting
What should
we do about
it?
| Fig. 23.5 |
The Control
Process
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production costs, evaluate customer and geographic profitability, and educate marketing staff on the financial im-
plications of marketing decisions.
STraTegic conTrol Each company should periodically reassess its strategic approach to the marketplace
with a good marketing audit. Companies can also perform marketing excellence reviews and ethical/social
responsibility reviews.
The Marketing Audit The average U.S. corporation loses half its customers in five years, half its employees
in four years, and half its investors in less than one year. Clearly, this points to some weaknesses. Companies that
discover weaknesses should undertake a thorough study known as a marketing audit.74
A marketing audit is a comprehensive, systematic, independent, and periodic examination of a company’s
or business unit’s marketing environment, objectives, strategies, and activities, with a view to determining
problem areas and opportunities and recommending a plan of action to improve the company’s marketing
performance.
Let’s examine the marketing audit’s four characteristics:
1. Comprehensive—The marketing audit covers all the major marketing activities of a business, not just a few
trouble spots as in a functional audit. Although functional audits are useful, they sometimes mislead management.
Excessive sales force turnover, for example, could be a symptom not of poor sales force training or compensation
but of weak company products and promotion. A comprehensive marketing audit usually is more effective in
locating the real source of problems.
2. Systematic—The marketing audit is an orderly examination of the organization’s macro- and micromarket-
ing environments, marketing objectives and strategies, marketing systems, and specific activities. It identifies
the most-needed improvements and incorporates them into a corrective-action plan with short- and long-
run steps.
Table 23.7 Marketing Metrics
Sales Metrics
• Sales growth
• Market share
• Sales from new products
Customer Readiness to Buy Metrics
• Awareness
• Preference
• Purchase intention
• Trial rate
• Repurchase rate
Customer Metrics
• Customer complaints
• Customer satisfaction
• Ratio of promoters to detractors
• Customer acquisition costs
• New-customer gains
• Customer losses
• Customer churn
• Retention rate
• Customer lifetime value
• Customer equity
• Customer profitability
• Return on customer
Distribution Metrics
• Number of outlets
• Share in shops handling
• Weighted distribution
• Distribution gains
• Average stock volume (value)
• Stock cover in days
• Out-of-stock frequency
• Share of shelf
• Average sales per point of sale
Communication Metrics
• Spontaneous (unaided) brand awareness
• Top-of-mind brand awareness
• Prompted (aided) brand awareness
• Spontaneous (unaided) advertising awareness
• Prompted (aided) advertising awareness
• Effective reach
• Effective frequency
• Gross rating points (GRP)
• Response rate
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3. Independent—Self-audits, in which managers rate their own operations, lack objectivity and independence.
The 3M Company has made good use of a corporate auditing office, which provides marketing audit services
to divisions on request.75 Usually, however, outside consultants bring the necessary objectivity, broad experi-
ence in a number of industries, familiarity with the industry being audited, and undivided time and attention.
4. Periodic—Firms typically initiate marketing audits only after failing to review their marketing operations
during good times, with resulting problems. A periodic marketing audit can benefit companies in good health
as well as those in trouble.
A marketing audit starts with agreement between the company officer(s) and the marketing auditor(s) on the
audit’s objectives and time frame and a detailed plan of who is to be asked what questions. The cardinal rule for
marketing auditors is: Don’t rely solely on company managers for data and opinions. Ask customers, dealers, and
other outside groups. Many companies don’t really know how their customers and dealers see them, nor do they
fully understand customer needs.
The marketing audit examines six major components of the company’s marketing situation. Table 23.8 lists the
major questions.
Table 23.8 Components of a Marketing Audit
Part I. Marketing Environment Audit
Macroenvironment
A. Demographic What major demographic developments and trends pose opportunities or threats to this company? What actions has the
company taken in response to these developments and trends?
B. Economic What major developments in income, prices, savings, and credit will affect the company? What actions has the company
been taking in response to these developments and trends?
C. Environmental What is the outlook for the cost and availability of natural resources and energy needed by the company? What concerns
have been expressed about the company’s role in pollution and conservation, and what steps has the company taken?
D. Technological What major changes are occurring in product and process technology? What is the company’s position in these technol-
ogies? What major generic substitutes might replace this product? What are the digital implications of how the company
conducts its business and its marketing?
E. Political What changes in laws and regulations might affect marketing strategy and tactics? What is happening in the areas of sustain-
ability, equal employment opportunity, product safety, advertising, price control, and so forth, that affects marketing strategy?
F. Cultural What is the public’s attitude toward business and toward the company’s products? What changes in customer lifestyles
and values might affect the company?
Task Environment
A. Markets What is happening to market size, growth, geographical distribution, and profits? What are the major market segments?
B. Customers What are the customers’ needs and buying processes? How do customers and prospects rate the company and its com-
petitors on reputation, product quality, service, sales force, and price? How do different customer segments make their
buying decisions?
C. Competitors Who are the major competitors? What are their objectives, strategies, strengths, weaknesses, sizes, and market shares?
What trends will affect future competition and substitutes for the company’s products?
D. Distribution
and Dealers
What are the main trade channels for bringing products to customers? What are the efficiency levels and growth poten-
tials of the different trade channels?
E. Suppliers What is the outlook for the availability of key resources used in production? What trends are occurring among suppliers?
F. Facilitators and
Marketing Firms
What is the cost and availability outlook for transportation services, warehousing facilities, and financial resources? How
effective are the company’s advertising agencies and marketing research firms?
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G. Publics Which publics represent particular opportunities or problems for the company? What steps has the company taken to
deal effectively with each public?
Part II. Marketing Strategy Audit
A. Business Mission Is the business mission clearly stated in market-oriented terms? Is it feasible?
B. Marketing
Objectives
and Goals
Are the company and marketing objectives and goals stated clearly enough to guide marketing planning and perfor-
mance measurement? Are the marketing objectives appropriate, given the company’s competitive position, resources,
and opportunities?
C. Strategy Has the management articulated a clear marketing strategy for achieving its marketing objectives? Is the strategy
convincing? Is the strategy appropriate to the stage of the product life cycle, competitors’ strategies, and the state of
the economy? Is the company using the best basis for market segmentation? Does it have clear criteria for rating the
segments and choosing the best ones? Has it developed accurate profiles of each target segment? Has the company
developed an effective positioning and marketing mix for each target segment? Are marketing resources allocated
optimally to the major elements of the marketing mix? Are enough resources or too many resources budgeted to
accomplish the marketing objectives?
Part III. Marketing Organization Audit
A. Formal Structure Does the marketing vice president or CMO have adequate authority and responsibility for company activities that affect
customers’ satisfaction? Are the marketing activities optimally structured along functional, product, segment, end user,
and geographical lines?
B. Functional
Efficiency
Are there good communication and working relations between marketing and sales? Is the product-management system
working effectively? Are product managers able to plan profits or only sales volume? Are there any groups in marketing
that need more training, motivation, supervision, or evaluation?
C. Interface
Efficiency
Are there any problems between marketing and manufacturing, R&D, IT, purchasing, finance, accounting, and/or legal
that need attention?
Part IV. Marketing Systems Audit
A. Marketing
Information
System
Is the marketing information system producing accurate, sufficient, and timely information about marketplace devel-
opments with respect to customers, prospects, distributors and dealers, competitors, suppliers, and various publics?
Are company decision makers asking for enough marketing research, and are they using the results? Is the company
employing the best methods for market measurement and sales forecasting?
B. Marketing
Planning System
Is the marketing planning system well conceived and effectively used? Do marketers have decision support systems
available? Does the planning system result in acceptable sales targets and quotas?
C. Marketing
Control System
Are the control procedures adequate to ensure that the annual-plan objectives are being achieved? Does management
periodically analyze the profitability of products, markets, territories, and channels of distribution? Are marketing costs
and productivity periodically examined?
D. New-Product
Development
System
Is the company well organized to gather, generate, and screen new-product ideas? Does the company do adequate
concept research and business analysis before investing in new ideas? Does the company carry out adequate product
and market testing before launching new products?
Part V. Marketing Productivity Audit
A. Profitability
Analysis
What is the profitability of the company’s different products, markets, territories, and channels of distribution? Should the
company enter, expand, contract, or withdraw from any business segments?
B. Cost-Effectiveness
Analysis
Do any marketing activities seem to have excessive costs? Can cost-reducing steps be taken?
Table 23.8 (Continued)
(Continued)
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The Marketing Excellence Review The three columns in Table 23.9 distinguish among poor, good, and
excellent business and marketing practices. The profile management creates from indicating where it thinks the
business stands on each line can highlight where changes could help the firm become a truly outstanding player in
the marketplace.
The Future of Marketing
Top management recognizes that marketing requires more accountability than in the past. “Marketing Memo:
Major Marketing Weaknesses” summarizes companies’ major deficiencies in marketing and how to find and
correct them.
To succeed in the future, marketing must be more holistic and less departmental. Marketers must achieve wider
influence in the company, continuously create new ideas, and strive for customer insight by treating customers
differently but appropriately. They must build their brands more through performance than promotion. They must
go electronic and win through building superior information and communication systems.
The coming years will see:
• The demise of the marketing department and the rise of holistic marketing
• The demise of free-spending marketing and the rise of ROI marketing
• The demise of marketing intuition and the rise of marketing science
• The demise of manual marketing and the rise of both automated and creative marketing
• The demise of mass marketing and the rise of precision marketing
Part VI. Marketing Function Audits
A. Products What are the company’s product line objectives? Are they sound? Is the current product line meeting the objectives?
Should the product line be stretched or contracted upward, downward, or both ways? Which products should be
phased out? Which products should be added? What are the buyers’ knowledge and attitudes toward the company’s
and competitors’ product quality, features, styling, brand names, and so on? What areas of product and brand strategy
need improvement?
B. Price What are the company’s pricing objectives, policies, strategies, and procedures? To what extent are prices set on cost,
demand, and competitive criteria? Do the customers see the company’s prices as being in line with the value of its
offer? What does management know about the price elasticity of demand, experience-curve effects, and competitors’
prices and pricing policies? To what extent are price policies compatible with the needs of distributors and dealers,
suppliers, and government regulation?
C. Distribution What are the company’s distribution objectives and strategies? Is there adequate market coverage and service? How
effective are distributors, dealers, manufacturers’ representatives, brokers, agents, and others? Should the company
consider changing its distribution channels?
D. Marketing
Communications
Is the company making enough use of mass, digital, and personal communications? What are the organization’s com-
munication objectives? Are they sound? Is the right amount being spent on communications? What do customers and
the public think about the communications? Are media well chosen? Is the internal communications staff adequate?
Is the communication budget adequate?
E. Sales Force What are the sales force’s objectives? Is the sales force large enough to accomplish the company’s objectives? Is the
sales force organized along the proper principles of specialization (territory, market, product)? Are there enough (or
too many) sales managers to guide the field sales representatives? Do the sales compensation level and structure
provide adequate incentive and reward? Does the sales force show high morale, ability, and effort? Are the procedures
adequate for setting quotas and evaluating performance? How does the company’s sales force compare to competitors’
sales forces?
Table 23.8 (Continued)
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Table 23.9 The Marketing Excellence Review: Best Practices
Poor Good Excellent
Product driven Market driven Market driving
Mass-market oriented Segment-oriented Niche-oriented and customer-oriented
Product offer Augmented product offer Customer solutions offer
Average product quality Better than average Legendary
Average service quality Better than average Legendary
End-product oriented Core-product oriented Core-competency oriented
Function oriented Process oriented Outcome oriented
Reacting to competitors Benchmarking competitors Leapfrogging competitors
Supplier exploitation Supplier preference Supplier partnership
Dealer exploitation Dealer support Dealer partnership
Price driven Quality driven Value driven
Average speed Better than average Legendary
Hierarchy Network Teamwork
Vertically integrated Flattened organization Strategic alliances
Stockholder driven Stakeholder driven Societally driven
A number of “deadly sins” signal that the marketing program is in trouble. Here are 10 deadly sins, the signs, and some solutions.
Deadly Sin #1: The company is not sufficiently market focused and customer driven.
Signs: There is evidence of poor identification of market segments, poor prioritization of market segments, no market segment managers, employees who think
it is the job of marketing and sales to serve customers, no training program to create a customer culture, and no incentives to treat the customer especially well.
Solutions: Use more advanced segmentation techniques, prioritize segments, specialize the sales force, develop a clear hierarchy of company values, fos-
ter more “customer consciousness” in employees and company agents, and make it easy for customers to reach the company and respond quickly to any
communication.
Deadly Sin #2: The company does not fully understand its target customers.
Signs: The latest study of customers is three years old; customers are not buying your product like they once did; competitors’ products are selling better; and
there is a high level of customer returns and complaints.
Solutions: Do more sophisticated consumer research, use more analytical techniques, establish customer and dealer panels, use customer relationship soft-
ware, and do data mining.
Deadly Sin #3: The company needs to better define and monitor its competitors.
Signs: The company focuses on near competitors, misses distant competitors and disruptive technologies, and has no system for gathering and distributing
competitive intelligence.
Solutions: Establish an office for competitive intelligence, hire competitors’ people, watch for technology that might affect the company, and prepare offerings
like those of competitors.
Major Marketing Weaknessesmarketing memo
(Continued)
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Deadly Sin #4: The company does not properly manage relationships with stakeholders.
Signs: Employees, dealers, and investors are not happy; and good suppliers do not come.
Solutions: Move from zero-sum thinking to positive-sum thinking; and do a better job of managing employees, supplier relations, distributors, dealers, and investors.
Deadly Sin #5: The company is not good at finding new opportunities.
Signs: The company has not identified any exciting new opportunities for years, and the new ideas the company has launched have largely failed.
Solutions: Set up a system for stimulating the flow of new ideas.
Deadly Sin #6: The company’s marketing planning process is deficient.
Signs: The marketing plan format does not have the right components, there is no way to estimate the financial implications of different strategies, and there
is no contingency planning.
Solutions: Establish a standard format including situational analysis, SWOT, major issues, objectives, strategy, tactics, budgets, and controls; ask marketers what
changes they would make if they were given 20 percent more or less budget; and run an annual marketing awards program with prizes for best plans and performance.
Deadly Sin #7: Product and service policies need tightening.
Signs: There are too many products and many are losing money; the company is giving away too many services; and the company is poor at cross-selling
products and services.
Solutions: Establish a system to track weak products and fix or drop them; offer and price services at different levels; and improve processes for cross-selling
and up-selling.
Deadly Sin #8: The company’s brand-building and communications skills are weak.
Signs: The target market does not know much about the company; the brand is not seen as distinctive; the company allocates its budget to the same market-
ing tools in about the same proportion each year; and there is little evaluation of the ROI impact of marketing communications and activities.
Solutions: Improve brand-building strategies and measurement of results; shift money into effective marketing instruments; and require marketers to estimate
the ROI impact in advance of funding requests.
Deadly Sin #9: The company is not organized for effective and efficient marketing.
Signs: Staff lacks 21st-century marketing skills, and there are bad vibes between marketing/sales and other departments.
Solutions: Appoint a strong leader and build new skills in the marketing department, and improve relationships between marketing and other departments.
Deadly Sin #10: The company has not made maximum use of technology.
Signs: There is evidence of minimal use of the Internet, an outdated sales automation system, no market automation, no decision-support models, and no
marketing dashboards.
Solutions: Use the Internet more, improve the sales automation system, apply market automation to routine decisions, and develop formal marketing decision
models and marketing dashboards.
Source: Philip Kotler, Ten Deadly Marketing Sins: Signs and Solutions (Hoboken, NJ: Wiley, 2004). © Philip Kotler.
To accomplish these changes and become truly holistic, marketers need a new set of skills and competencies in:
• Customer relationship management (CRM)
• Partner relationship management (PRM)
• Database marketing and data mining
• Contact center management and telemarketing
• Digital marketing and social media
• Public relations marketing (including event and sponsorship marketing)
• Brand-building and brand-asset management
• Experiential marketing
• Integrated marketing communications
• Profitability analysis by segment, customer, and channel
The benefits of successful 21st-century marketing are many, but they will come only with hard work, insight, and
inspiration. New rules and practices are emerging, and it is an exciting time. The words of 19th-century U.S. author
Ralph Waldo Emerson have perhaps never been more true: “This time like all times is a good one, if we but know
what to do with it.”
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Summary
1. The modern marketing department has evolved through
the years from a simple sales department to an orga-
nizational structure where marketers work mainly on
cross-disciplinary teams.
2. Some companies are organized by functional special-
ization; others focus on geography and regionalization,
product and brand management, or market-segment
management. Some companies establish a matrix orga-
nization consisting of both product and market managers.
3. Effective modern marketing organizations are marked by
customer focus within and strong cooperation among
marketing, R&D, engineering, purchasing, manufactur-
ing, operations, finance, accounting, and credit.
4. Companies must practice social responsibility through
their legal, ethical, and social words and actions. Cause
marketing can be a means for companies to produc-
tively link social responsibility to consumer marketing
programs. Social marketing is done by a nonprofit or
government organization to directly address a social
problem or cause.
5. A brilliant strategic marketing plan counts for little unless
implemented properly, including recognizing and diag-
nosing a problem, assessing where the problem exists,
and evaluating results.
6. The marketing department must monitor and control
marketing activities continuously. Marketing plan control
ensures the company achieves the sales, profits, and
other goals in its annual plan. The main tools are sales
analysis, market share analysis, marketing expense-to-
sales analysis, and financial analysis of the marketing
plan. Profitability control measures and controls the prof-
itability of products, territories, customer groups, trade
channels, and order sizes. Efficiency control finds ways
to increase the efficiency of the sales force, advertising,
sales promotion, and distribution. Strategic control peri-
odically reassesses the company’s strategic approach to
the marketplace using marketing effectiveness and mar-
keting excellence reviews as well as marketing audits.
7. Achieving marketing excellence in the future will require
a new set of skills and competencies.
MyMarketingLab
go to mymktlab.com to complete the problems marked with this icon
as well as for additional assisted-graded writing questions.
Applications
Marketing Debate
Is Marketing Management an Art or a
Science?
Some observers maintain that good marketing is mostly an
art and does not lend itself to rigorous analysis and delibera-
tion. Others contend it is a highly disciplined enterprise that
shares much with other business disciplines.
Take a position: Marketing management is largely an
artistic exercise and therefore highly subjective versus
Marketing management is largely a scientific exercise
with well-established guidelines and criteria.
Marketing Discussion
Cause Marketing
How does cause or corporate societal marketing affect
your personal consumer behavior? Do you ever buy or not
buy any products or services from a company because of its
environmental policies or programs? Why or why not?
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mainly by supporting literacy programs for children and
families in the United States and Canada and charities
worldwide. In 2013, the foundation gave $8.7 million to 144
nonprofit organizations around the world. Starbucks has do-
nated more than $11 million to the Global Fund through its
partnership with PRODUCT(RED), a global initiative to help
stop the spread of HIV in Africa.
Ethical Sourcing: Starbucks collaborates with
Conservation International (CI), a nongovernmental orga-
nization, and follows Coffee and Farmer Equity (C.A.F.E.)
Practices, a comprehensive coffee-buying program, to
purchase high-quality coffee from farmers who meet
social, economic, and environmental standards. Of 396
million pounds of coffee Starbucks purchased in 2013,
95 percent was ethically sourced. The company also
works continuously with farmers to improve responsible
methods of farming, such as by planting trees along riv-
ers and using shade-growing techniques to help preserve
forests. Over the years, Starbucks has invested more than
$70 million in collaborative farmer programs and activities.
Environment: Starbucks is considered a leader in
green initiatives, building new LEED-certified green build-
ings, reducing waste, and improving water conservation.
The world’s first recycled beverage cup made of 10 per-
cent postconsumer fiber, 10 years in the making, and a
new hot-cup paper sleeve that requires fewer materials
to make conserve approximately 100,000 trees a year.
Now the team is working to ensure that customers
recycle. Jim Hanna, Starbucks’s director of environmental
impact, explained, “[Starbucks] defines a recyclable cup
not by what the cup is made out of but by our customers
actually having access to recycling services.” Starbucks’s
goal: to make 100 percent of its cups recycled or reused
by 2015.
Howard Schultz stepped down as CEO in 2000 but
returned as CEO, president, and chairman in 2008 to help
restore growth and excitement to the powerhouse chain.
Today, more than 3 billion customers visit Starbucks’
20,000 stores in 65 countries annually. The company has
more than 200,000 employees and brought in $14.9 bil-
lion in revenue in 2013. To achieve its international growth
goals, Schultz believes Starbucks must retain a passion
for coffee and a sense of humanity and continue to prove
that the company “stands for something more than just
profitability.”
Questions
1. Starbucks makes business decisions that are both
ethical and responsible. Has it done a good job com-
municating its efforts to consumers? Do consumers
believe Starbucks is a socially responsible company?
Why or why not?
Marketing Excellence
>> Starbucks
Starbucks opened in Seattle in 1971, when coffee con-
sumption in the United States had been declining for a
decade and rival brands used cheaper beans to compete
on price. The company’s founders decided to try a new
concept: selling only the finest imported coffee beans and
coffee-brewing equipment. (The original store didn’t sell
coffee by the cup, only beans.)
Howard Schultz came to Starbucks in 1982. While
in Milan on business, he had walked into an Italian coffee
bar and had an epiphany: “There was nothing like this in
America. It was an extension of people’s front porch. It
was an emotional experience.” To bring this concept to
the United States, Schultz set about creating an environ-
ment that would blend Italian elegance with U.S. informal-
ity. He envisioned Starbucks as a “personal treat” for its
customers, a comfortable, sociable gathering spot bridg-
ing the workplace and home.
Starbucks’ expansion throughout the United States
was carefully planned. All stores were company-owned
and operated, ensuring complete control over the prod-
uct and an unparalleled image of quality. Starbucks used
a “hub” strategy; coffeehouses entered a new market in a
clustered group. Although this deliberate saturation often
cannibalized 30 percent of one store’s sales, any drop in
revenue was offset by efficiencies in marketing and dis-
tribution costs and the enhanced image of convenience.
A typical customer stopped by Starbucks 18 times a
month. No U.S. retailer had a higher frequency rate of
customer visits.
Starbucks’ success is often attributed to its high-quality
products and services and its relentless commitment to
providing consumers the richest possible sensory experi-
ence. However, another critical component is its commit-
ment to social responsibility.
Community: Starbucks gives back to its community
in many ways starting with employees, called partners.
Schultz believed that to exceed customers’ expectations,
the company must first exceed those of employees.
Since 1990, it has provided comprehensive health care
to all employees, including part-timers. (Health insurance
now costs the company more each year than coffee.)
A stock option plan allows employees to participate in the
firm’s financial success, and the company has commit-
ted to hiring 10,000 veterans and military spouses over
the next five years. In 2013, employees donated 630,000
hours of community service; the company hopes to top
1 million hours by the end of 2015.
Starbucks created The Starbucks Foundation in 1997
to “create hope, discovery, and opportunity in communities,”
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Sources: Howard Schultz, “Dare to Be a Social Entrepreneur,” Business 2.0, December 2006, p. 87;
Edward Iwata, “Owner of Small Coffee Shop Takes on Java Titan Starbucks,” USA Today, December
20, 2006; “Staying Pure: Howard Schultz’s Formula for Starbucks,” Economist, February 25, 2006,
p. 72; Diane Anderson, “Evolution of the Eco Cup,” Business 2.0, June 2006, p. 50; Bruce Horovitz,
“Starbucks Nation,” USA Today, May 19, 2006; Theresa Howard, “Starbucks Takes Up Cause for
Safe Drinking Water,” USA Today, August 2, 2005; Howard Schultz and Dori Jones Yang, Pour Your
Heart into It: How Starbucks Built a Company One Cup at a Time (New York: Hyperion, 1997); “At
MIT-Starbucks Symposium, Focus on Holistic Approach to Recycling,” MIT, www.mit.edu, May 12,
2010; Starbucks Global Responsibility Report 2013; Starbucks 2013 Annual Report.
2. Where does a company like Starbucks draw the line
on supporting socially responsible programs? How
much of its annual budget should go toward these
programs? How much time should employees focus
on them? Which programs should it support?
3. How do you measure the results of Starbucks’s so-
cially responsible programs?
morning. In 2002, he plunged into Times Square from a
crane to announce his new mobile phone business. In
2004, he appeared at a New York City nightclub wearing
flesh-colored tights and a strategically placed portable
CD player to introduced a line of hip techie gadgets called
Virgin Pulse. Branson has attended press conferences
dressed in an astronaut’s suit and angel’s wings, driven
across the English Channel in an amphibious car, and
even bared his bottom to the press when Virgin Atlantic
landed in Canada for the first time. His good-natured
humor and flamboyant personality attract media attention
and customer admiration around the globe. Reports say
Virgin’s press coverage equates to $1.6 billion in media
value per year.
Although Branson avoids traditional market research,
he stays in touch through constant customer contact.
When he first set up Virgin Atlantic, he called 50 custom-
ers every month to chat and get their feedback. He ap-
peared in airports to rub elbows with customers, and if
a plane was delayed, he handed out gift certificates to a
Virgin Megastore or discounts on future travel.
Virgin Unite is a nonprofit foundation that tackles
global, social, and environmental problems with an entre-
preneurial approach. A team of scientists, entrepreneurs,
and environmental enthusiasts work with Virgin to rein-
vent the way “we live and work to help make people’s
lives better.” Virgin Green Fund is a private equity firm
investing in renewable energy and resource efficiency
sectors. Virgin established the Earth Challenge in 2007 to
award $25 million to any person or group who develops
a safe, long-term, commercially viable way to remove
greenhouse gases from the atmosphere. Submissions
are being reviewed by a team of scientists, professors,
and environmental professionals.
Now knighted by the Queen of England, Sir Richard
never does anything small and quiet. He once said,
“Lavish praise on people and people will flourish; criticize
and they shrivel up.” This philosophy has led him to many
successes both in business and in life. Whether looking
for a new business, generating publicity in his charac-
teristic style, or encouraging research to help the planet,
Branson does it with a bang.
Marketing Excellence
>> Virgin Group
Virgin roared onto the British stage in the 1970s with the
innovative Virgin Records, the brainchild of entrepreneur
Richard Branson, a high school dropout who signed
unknown artists and began a marathon of publicity that
continues to this day. The flamboyant Briton sold Virgin
Records in 1992 and has gone on to launch more than
400 companies worldwide whose combined revenues
exceeded $24 billion in 2012.
The Virgin name—the third most respected brand
in Britain—and the Branson personality help sell the
company’s diverse portfolio of branded air travel, rail-
roads, financial services, music, mobile phones, cars,
wine, publishing, and medical devices. The Virgin Group
looks for new opportunities in markets with underserved,
overcharged customers and complacent competition.
Branson explained, “Wherever we find them, there is a
clear opportunity area for Virgin to do a much better job
than the competition. We introduce trust, innovation, and
customer friendliness where they don’t exist.”
Some marketing and financial critics have pointed
out that Branson dilutes the brand and covers too many
businesses. There have been some fumbles: Virgin Cola,
Virgin Cosmetics, Virgin Vodka, and Virgin Brides have
all but disappeared. But despite the diversity, all Virgin
Group’s brands stand for quality, innovation, and fun.
Branson is a master of the strategic publicity stunt and
knows photographers will turn up if he gives them a good
reason. When he took on stodgy British Airways in 1984,
he wore World War I–era flying gear to announce the for-
mation of Virgin Atlantic. The first Virgin flight took off laden
with celebrities, media, a brass band in full swing, waiters
from Maxim’s dressed in white tie and tails, and free-flowing
champagne. The airborne party enjoyed international press
coverage and millions of dollars’ worth of free publicity.
When Branson launched Virgin Cola in the United
States in 1998, he steered an army tank down New
York’s Fifth Avenue and blew up a Coca-Cola sign, gar-
nering interviews on network TV news shows the next
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Sources: Peter Elkind, “Branson Gets Grounded,” Fortune, February 5, 2007, pp. 13–14; Alan
Deutschman, “The Enlightenment of Richard Branson,” Fast Company, September 2006, p. 49; Andy
Serwer, “Do Branson’s Profits Equal His Joie de Vivre?,” Fortune, October 17, 2005, p. 57; Kerry
Capell with Wendy Zellner, “Richard Branson’s Next Big Adventure,” BusinessWeek, March 8, 2004,
pp. 44–45; Melanie Wells, “Red Baron,” Forbes, July 3, 2000, pp. 151–60; Sam Hill and Glenn
Rifkin, Radical Marketing (New York: HarperBusiness, 1999); “Branson Pledges Three Billion Dollars to
Develop Cleaner Energy,” Terra Daily, September 21, 2006; Richard Wachman, “Virgin Brands: What
Does Richard Branson Really Own?,” The Guardian, January 7, 2012; Carmine Gallo, “The Key to a
Lasting Relationship in Business and in Marriage,” Forbes, April 10, 2014; Virgin, www.virgin.com.
Questions
1. How is Virgin unique in its quest to be a socially respon-
sible and sustainable company?
2. Discuss the contradiction between Virgin’s negative
environmental impact (via air and rail) and the green
message and communication efforts behind endeav-
ors such as the Earth Challenge.
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709
Appendix
tools for Marketing control
In this appendix, we provide detailed guidelines and insights about how to best conduct several marketing
control procedures.
annual plan COntrOl
Four sets of analyses can be useful for annual plan control.
SaleS analySiS Sales analysis measures and evaluates actual sales in relationship to goals. Two specific tools
make it work.
Sales-variance analysis measures the relative contribution of different factors to a gap in sales performance.
Suppose the annual plan called for selling 4,000 widgets in the first quarter at $1 per widget, for total revenue of
$4,000. At quarter’s end, only 3,000 widgets were sold at $.80 per widget, for total revenue of $2,400. How much
of the sales performance gap is due to the price decline, and how much to the volume decline? This calculation
answers the question:
Variance due to price decline: ($1.00 – $.80) (3,000) = $ 600 37.5%
Variance due to volume decline: ($1.00)(4,000 – 3,000) = $1,000 62.5%
= $1,600 100.0%
Almost two-thirds of the variance is due to failure to achieve the volume target. The company should look
closely at why it failed to achieve expected sales volume.
Microsales analysis looks at specific products, territories, and so forth, that failed to produce expected sales.
Suppose the company sells in three territories, and expected sales were 1,500 units, 500 units, and 2,000 units,
respectively. Actual volumes were 1,400 units, 525 units, and 1,075 units, respectively. Thus, territory 1 showed a
7 percent shortfall in terms of expected sales; territory 2, a 5 percent improvement over expectations; and territory 3,
a 46 percent shortfall! Territory 3 is causing most of the trouble. Maybe the sales rep in territory 3 is underperform-
ing, a major competitor has entered this territory, or business is in a recession there.
MarkeT Share analySiS Company sales don’t reveal how well the company is performing relative to
competitors. For this, management needs to track its market share in one of three ways.
Overall market share expresses the company’s sales as a percentage of total market sales. Served market share is
sales as a percentage of the total sales to the market. The served market is all the buyers able and willing to buy the
product, and served market share is always larger than overall market share. A company could capture 100 percent
of its served market and yet have a relatively small share of the total market. Relative market share is market share
in relationship to the largest competitor. A relative market share of exactly 100 percent means the company is tied
for the lead; more than 100 percent indicates a market leader. A rise in relative market share means a company is
gaining on its leading competitor.
Conclusions from market share analysis, however, are subject to qualifications:
• The assumption that outside forces affect all companies in the same way is often not true. The U.S. Surgeon
General’s report on the harmful consequences of smoking depressed total cigarette sales, but not equally for
all companies.
• The assumption that a company’s performance should be judged against the average performance of all
companies is not always valid. A company’s performance is best judged against that of its closest competitors.
• If a new firm enters the industry, every existing firm’s market share might fall. A decline in market share
might not mean the company is performing any worse than other companies. Share loss depends on the
degree to which the new firm hits the company’s specific markets.
• Sometimes a market share decline is deliberately engineered to improve profits. For example, management
might drop unprofitable customers or products.
• Market share can fluctuate for many minor reasons. For example, it can be affected by whether a large sale
occurs on the last day of the month or at the beginning of the next month. Not all shifts in market share have
marketing significance.76
M23_KOTL2621_15_GE_C23.indd 709 09/03/15 6:44 PM
710 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
A useful way to analyze market share movements is in terms of four components:
Overall
market
Customer
Customer
*
Customer
Price
share
=
penetration
*
loyalty
selectivity
*
selectivity
where:
Customer penetration Percentage of all customers who buy from the company
Customer loyalty Purchases from the company by its customers as a percentage of their total purchases
from all suppliers of the same products
Customer selectivity Size of the average customer purchase from the company as a percentage of the size
of the average customer purchase from an average company
Price selectivity Average price charged by the company as a percentage of the average price charged
by all companies
Now suppose the company’s dollar market share falls during the period. The overall market share equation
provides four possible explanations: The company lost some customers (lower customer penetration); existing
customers are buying less from the company (lower customer loyalty); the company’s remaining customers are
smaller in size (lower customer selectivity); or the company’s price has slipped relative to competition (lower price
selectivity).
MarkeTing expenSe-To-SaleS analySiS Annual-plan control requires making sure the company
isn’t overspending to achieve sales goals. The key ratio to watch is marketing expense-to-sales. In one company,
this ratio was 30 percent and consisted of five component expense-to-sales ratios: sales force-to-sales (15 percent),
advertising-to-sales (5 percent), sales promotion-to-sales (6 percent), marketing research-to-sales (1 percent), and
sales administration-to-sales (3 percent).
Fluctuations outside the normal range are cause for concern. Management needs to monitor period-to-period
fluctuations in each ratio on a control chart (see Figure 23.6). This chart shows the advertising expense-to-sales
ratio normally fluctuates between 8 percent and 12 percent, say 99 of 100 times. In the 15th period, however, the
ratio exceeded the upper control limit. Either (1) the company still has good expense control and this situation
represents a rare chance event, or (2) the company has lost control over this expense and should find the cause.
If there is no investigation, the risk is that some real change might have occurred, and the company will fall behind.
Managers should make successive observations even within the upper and lower control limits. Note in Figure 23.6
that the level of the expense-to-sales ratio rose steadily from the 8th period onward. The probability of encountering six
successive increases in what should be independent events is only 1 in 64.77 This unusual pattern should have led to an
investigation sometime before the 15th observation.
Financial analySiS Marketers should analyze the expense-to-sales ratios in an overall financial frame-
work to determine how and where the company is making its money. They can, and are increasingly, using finan-
cial analysis to find profitable strategies beyond building sales.
1 2 3 4 5 6 7 8
Time Period
9 10 11 12 13 14 15
14
12
10
8
6
Ad
ve
rt
is
in
g
Ex
pe
ns
e/
Sa
le
s
Ra
tio
Upper limit
Desired level
Lower limit
0
| Fig. 23.6 |
The Control-
Chart Model
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MAnAging A HolisTiC MARkeTing oRgAnizATion foR THe long Run | chapter 23 711
Management uses financial analysis to identify factors that affect the company’s rate of return on net worth.78 The
main factors are shown in Figure 23.7, along with illustrative numbers for a large chain-store retailer. The retailer
is earning a 12.5 percent return on net worth. The return on net worth is the product of two ratios, the company’s
return on assets and its financial leverage. To improve its return on net worth, the company must increase its ratio
of net profits to assets or increase the ratio of assets to net worth. The company should analyze the composition of
its assets (cash, accounts receivable, inventory, and plant and equipment) to see whether it can improve its asset
management.
The return on assets is the product of two ratios, the profit margin and the asset turnover. The profit margin in
Figure 23.7 seems low, whereas the asset turnover is more normal for retailing. The marketing executive can seek to
improve performance in two ways: (1) increase the profit margin by increasing sales or cutting costs, and (2) increase
the asset turnover by increasing sales or reducing assets (inventory, receivables) held against a given level of sales.
prOfItaBIlItY COntrOl
MarkeTing proFiTabiliTy analySiS We will illustrate the steps in marketing profitability analysis
with the following example: The marketing vice president of a lawn mower company wants to determine the prof-
itability of selling through three types of retail channels: hardware stores, garden supply shops, and department
stores. The company’s profit-and-loss statement is shown in Table 23.10.
1.5%
3.2
Asset Turnover
Profit Margin
Net profits
Net sales
4.8%=
Return on Assets
Net profits
Total assets
2.6x
Financial
Leverage
Total assets
Net worth
12.5%=
Rate of Return
on Net Worth
Net profits
Net worth
Net sales
Total assets
| Fig. 23.7 |
Financial Model
of Return on Net
Worth
Table 23.10 A Simplified Profit-and-Loss Statement
Sales $60,000
Cost of goods sold 39,000
Gross margin $21,000
Expenses
Salaries $9,300
Rent 3,000
Supplies 3,500
15,800
Net profit $ 5,200
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712 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
Step 1: Identifying Functional Expenses Assume the expenses listed in Table 23.10 are incurred to sell the
product, advertise it, pack and deliver it, and bill and collect for it. The first task is to measure how much of each
expense was incurred in each activity.
Suppose most of the salary expense went to sales representatives and the rest to an advertising manager, pack-
ing and delivery help, and an office accountant. Let the breakdown of the $9,300 be $5,100, $1,200, $1,400, and
$1,600, respectively. Table 23.11 shows the allocation of the salary expense to these four activities.
Table 23.11 also shows the rent account of $3,000 allocated to the four activities. Because the sales reps work
away from the office, none of the building’s rent expense is assigned to selling. Most of the expenses for floor space
and rented equipment are for packing and delivery. The supplies account covers promotional materials, packing
materials, fuel purchases for delivery, and home office stationery. The $3,500 in this account is reassigned to func-
tional uses of the supplies.
Step 2: Assigning Functional Expenses to Marketing Entities The next task is to measure how much
functional expense was associated with selling through each type of channel. Consider the selling effort, indicated
by the number of sales in each channel. This number is in the selling column of Table 23.12. Altogether, 275 sales
calls were made during the period. Because the total selling expense amounted to $5,500 (see Table 23.12), the
selling expense averaged $20 per call.
We can allocate advertising expense according to the number of ads addressed to different channels. Because
there were 100 ads altogether, the average ad cost $31.
The packing and delivery expense is allocated according to the number of orders placed by each type of chan-
nel. This same basis was used for allocating billing and collection expense.
Table 23.11 Mapping Natural Expenses into Functional Expenses
Natural
Accounts Total Selling Advertising
Packing
and Delivery
Billing
and Collecting
Salaries $ 9,300 $5,100 $1,200 $1,400 $1,600
Rent 3,000 — 400 2,000 600
Supplies 3,500 400 1,500 1,400 200
$15,800 $5,500 $3,100 $4,800 $2,400
Table 23.12 Bases for Allocating Functional Expenses to Channels
Channel Type Selling Advertising
Packing and
Delivery
Billing and
Collecting
Hardware stores 200 50 50 50
Garden supply shops 65 20 21 21
Department stores 10 30 9 9
275 100 80 80
Functional expense ÷ No. of units $5,500 $3,100 $4,800 $2,400
275 100 80 80
equals $ 20 $ 31 $ 60 $ 30
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MAnAging A HolisTiC MARkeTing oRgAnizATion foR THe long Run | chapter 23 713
Step 3: Preparing a Profit-and-Loss Statement for Each Marketing Entity We can now prepare a profit-
and-loss statement for each type of channel (see Table 23.13). Because hardware stores accounted for half of total
sales ($30,000 out of $60,000), charge this channel with half the cost of goods sold ($19,500 out of $39,000). This
leaves a gross margin from hardware stores of $10,500. From this we deduct the proportions of functional expenses
hardware stores consumed.
According to Table 23.12, hardware stores received 200 of 275 total sales calls. At an imputed value of $20 a
call, hardware stores must bear a $4,000 selling expense. Table 23.12 also shows hardware stores were the target
of 50 ads. At $31 an ad, the hardware stores are charged with $1,550 of advertising. The same reasoning applies
in computing the share of the other functional expenses. The result is that hardware stores gave rise to $10,050
of the total expenses. Subtracting this from gross margin, we find the profit of selling through hardware stores
is only $450.
Repeat this analysis for the other channels. The company is losing money in selling through garden supply
shops and makes virtually all its profits through department stores. Notice that gross sales is not a reliable indicator
of the net profits for each channel.
deTerMining correcTive acTion It would be naive to conclude the company should drop garden
supply shops and hardware stores to concentrate on department stores. We need to answer the following questions
first:
• To what extent do buyers buy on the basis of type of retail outlet versus brand?
• What trends affect the relative importance of these three channels?
• How good are the company’s marketing strategies for the three channels?
Using the answers, marketing management can evaluate five alternatives:
1. Establish a special charge for handling smaller orders.
2. Give more promotional aid to garden supply shops and hardware stores.
3. Reduce sales calls and advertising to garden supply shops and hardware stores.
4. Ignore the weakest retail units in each channel.
5. Do nothing.
Marketing profitability analysis indicates the relative profitability of different channels, products, territories, or
other marketing entities. It does not prove the best course of action is to drop unprofitable marketing entities or
capture the likely profit improvement of doing so.
Table 23.13 Profit-and-Loss Statements for Channels
Hardware
Stores
Garden Supply
Shops Dept. Stores
Whole
Company
Sales $30,000 $10,000 $20,000 $60,000
Cost of goods sold 19,500 6,500 13,000 39,000
Gross margin $10,500 $ 3,500 $ 7,000 $21,000
Expenses
Selling ($20 per call) $ 4,000 $ 1,300 $ 200 $ 5,500
Advertising ($31 per advertisement) 1,550 620 930 3,100
Packing and delivery ($60 per order) 3,000 1,260 540 4,800
Billing ($30 per order) 1,500 630 270 2,400
Total expenses $10,050 $ 3,810 $ 1,940 $15,800
Net profit or loss $ 450 $ (310) $ 5,060 $ 5,200
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714 PART 8 | ConduCTing MARkeTing ResPonsibly foR long-TeRM suCCess
direcT verSuS Full coSTing Like all information tools, marketing profitability analysis can lead or
mislead, depending on how well marketers understand its methods and limitations. The lawn mower company
chose bases somewhat arbitrarily for allocating the functional expenses to its marketing entities. It used “number
of sales calls” to allocate selling expenses, generating less record keeping and computation, when in principle
“number of sales working hours” is a more accurate indicator of cost.
A far more serious decision is whether to allocate full costs or only direct and traceable costs in evaluating a
marketing entity’s performance. The lawn mower company sidestepped this problem by assuming only simple
costs that fit with marketing activities, but we cannot avoid the question in real-world analyses of profitability. We
distinguish three types of costs:
1. Direct costs—We can assign direct costs directly to the proper marketing entities. Sales commissions are a
direct cost in a profitability analysis of sales territories, sales representatives, or customers. Advertising expen-
ditures are a direct cost in a profitability analysis of products to the extent that each advertisement promotes
only one product. Other direct costs for specific purposes are sales force salaries and traveling expenses.
2. Traceable common costs—We can assign traceable common costs only indirectly, but on a plausible basis, to
the marketing entities. In the example, we analyzed rent this way.
3. Nontraceable common costs—Common costs whose allocation to the marketing entities is highly arbitrary
are nontraceable common costs. To allocate “corporate image” expenditures equally to all products would be
arbitrary because all products don’t benefit equally. To allocate them proportionately to the sales of the various
products would be arbitrary because relative product sales reflect many factors besides corporate image mak-
ing. Other examples are top management salaries, taxes, interest, and other overhead.
No one disputes the inclusion of direct costs in marketing cost analysis. There is some controversy about in-
cluding traceable common costs, which lump together costs that would and would not change with the scale of
marketing activity. If the lawn mower company drops garden supply shops, it would probably continue to pay the
same rent. Its profits would not rise immediately by the amount of the present loss in selling to garden supply shops
($310).
The major controversy is about whether to allocate the nontraceable common costs to the marketing entities.
Such allocation is called the full-cost approach, and its advocates argue that all costs must ultimately be imputed in
order to determine true profitability. However, this argument confuses the use of accounting for financial report-
ing with its use for managerial decision making. Full costing has three major weaknesses:
1. The relative profitability of different marketing entities can shift radically when we replace one arbitrary way
to allocate nontraceable common costs by another.
2. The arbitrariness demoralizes managers, who feel their performance is judged adversely.
3. The inclusion of nontraceable common costs could weaken efforts at real cost control.
Operating management is most effective in controlling direct costs and traceable common costs. Arbitrary as-
signments of nontraceable common costs can lead managers to spend their time fighting cost allocations instead of
managing controllable costs well.
Companies show growing interest in using marketing profitability analysis or its broader version, activity-based
cost accounting (ABC), to quantify the true profitability of different activities.79 Managers can then reduce the
resources required to perform various activities, make the resources more productive, acquire them at lower cost,
or raise prices on products that consume heavy amounts of support resources. The contribution of ABC is to refo-
cus management’s attention away from using only labor or material standard costs to allocate full cost and toward
capturing the actual costs of supporting individual products, customers, and other entities.
M23_KOTL2621_15_GE_C23.indd 714 09/03/15 6:44 PM
Appendix
Sonic Marketing Plan and exerciSeS
The Marketing Plan: An Introduction
As a marketer, you’ll need a good marketing plan to provide direction and focus for your brand,
product, or company. With a detailed plan, any business will be better prepared to launch an in-
novative new product or increase sales to current customers. Nonprofit organizations also use
marketing plans to guide their fund-raising and outreach efforts. Even government agencies put
together marketing plans for initiatives such as building public awareness of proper nutrition and
stimulating area tourism.
The Purpose and Content of a Marketing Plan
A marketing plan has a more limited scope than a business plan, which offers a broad overview
of the entire organization’s mission, objectives, strategy, and resource allocation. The marketing
plan documents how the organization’s strategic objectives will be achieved through specific
marketing strategies and tactics, with the customer as the starting point. It is also linked to the
plans of other organizational departments. Suppose a marketing plan calls for selling 200,000
units annually. The production department must gear up to make that many units, finance must
arrange funding to cover the expenses, human resources must be ready to hire and train staff,
and so on. Without the appropriate level of organizational support and resources, no marketing
plan can succeed.
Although the exact length and layout vary from company to company, a marketing plan usually
contains the sections described in Chapter 2. Smaller businesses may create shorter or less formal
marketing plans, whereas corporations generally require highly structured marketing plans. To
guide implementation effectively, every part of the plan must be described in considerable detail.
Sometimes a company will post its marketing plan on an internal Web site so managers and em-
ployees in different locations can consult specific sections and collaborate on additions or changes.
The Role of Research
To develop innovative products, successful strategies, and action programs, marketers need up-
to-date information about the environment, the competition, and the selected market segments.
Often, analysis of internal data is the starting point for assessing the current marketing situa-
tion, supplemented by marketing intelligence and research investigating the overall market, the
competition, key issues, threats, and opportunities. As the plan is put into effect, marketers use
research to measure progress toward objectives and to identify areas for improvement if results
fall short of projections.
Finally, marketing research helps marketers learn more about their customers’ requirements,
expectations, perceptions, satisfaction, and loyalty. This deeper understanding provides a foun-
dation for building competitive advantage through well-informed segmenting, targeting, and
positioning decisions. Thus, the marketing plan should outline what marketing research will be
conducted and when, as well as how, the findings will be applied.
The Role of Relationships
Although the marketing plan shows how the company will establish and maintain profitable
customer relationships, it also affects both internal and external relationships. First, it influences
how marketing personnel work with each other and with other departments to deliver value and
satisfy customers. Second, it affects how the company works with suppliers, distributors, and
partners to achieve the plan’s objectives. Third, it influences the company’s dealings with other
stakeholders, including government regulators, the media, and the community at large. All these
relationships are important to the organization’s success and must be considered when developing
a marketing plan.
A1
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A2 Appendix
From Marketing Plan to Marketing Action
Most companies create yearly marketing plans, though some plans cover a longer period.
Marketers start planning well in advance of the implementation date to allow time for marketing
research, analysis, management review, and coordination between departments. Then, after each
action program begins, marketers monitor ongoing results, investigate any deviation from the
projected outcome, and take corrective steps as needed. Some marketers also prepare contingency
plans for implementation if certain conditions emerge. Because of inevitable and sometimes
unpredictable environmental changes, marketers must be ready to update and adapt marketing
plans at any time.
For effective implementation and control, the marketing plan should define how progress to-
ward objectives will be measured. Managers typically use budgets, schedules, and marketing met-
rics for monitoring and evaluating results. With budgets, they can compare planned expenditures
with actual expenditures for a given period. Schedules allow management to see when tasks were
supposed to be completed and when they were actually completed. Marketing metrics track the
actual outcomes of marketing programs to see whether the company is moving forward toward
its objectives.
Sample Marketing Plan for Sonic
This section takes you inside the sample marketing plan for Sonic, a hypothetical start-up com-
pany. The company’s first product is the Sonic 1000, a state-of-the-art, fully loaded multimedia
smart phone. Sonic will be competing with Apple, Samsung, LG, Motorola, HTC, and other
well-established rivals in a crowded, fast-changing marketplace where smart phones have many
communication and entertainment capabilities. The annotations explain more about what each
section of the plan should contain.
1.0 Executive Summary
Sonic is preparing to launch a major new state-of-the-art multimedia smart phone, the Sonic
1000, in a mature market. We can effectively compete with many types of smart phones because
our product offers a unique combination of advanced features and functionality at a very compet-
itive value-added price. We are targeting specific segments in the consumer and business markets,
taking advantage of the growing interest in a single powerful but affordable device with extensive
communication, organization, and entertainment benefits.
The primary marketing objective is to achieve first-year U.S. market share of 1 percent with unit
sales of 800,000. The primary financial objectives are to achieve first-year sales revenues of $200
million, keep first-year losses to less than $40 million, and break even early in the second year.
2.0 Situation Analysis
Sonic, founded 18 months ago by two well-known entrepreneurs with telecommunications expe-
rience, is about to enter the highly competitive smart-phone market. Multifunction cell phones
are increasingly popular for both personal and professional use, with more than 968 million
smart phones sold worldwide in 2013. Competition is increasingly intense even as technology
evolves, industry consolidation continues, and pricing pressures squeeze profitability. To gain
market share in this dynamic environment, Sonic must carefully target specific segments with
valued features and plan for a next-generation product to keep brand momentum going.
2.1 Market SuMMary Sonic’s market consists of consumers and business users who prefer
to use a powerful but affordable single device for fully functional communication, information
storage and exchange, organization, and entertainment on the go. Specific segments being targeted
during the first year include professionals, corporations, students, entrepreneurs, and medical
users. Exhibit A.1 shows how the Sonic 1000 addresses some of the most basic needs of targeted
consumer and business segments in a cost-effective manner. The additional communication and
entertainment benefits of the product just enhance its appeal to those segments.
This section summarizes market
opportunities, marketing strategy,
and marketing and financial objec-
tives for senior managers who will
read and approve the marketing
plan.
The situation analysis describes the
market, the company’s capability to
serve targeted segments, and the
competition.
Market summary includes size,
needs, growth, and trends. De-
scribing the targeted segments
in detail provides context for
marketing strategies and programs
discussed later in the plan.
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Appendix A3
Smart-phone purchasers can choose between models based on several different operating
systems. The biggest-selling smart-phone operating system is Android. Android’s smaller rivals in-
clude BlackBerry OS, iOS, and the Windows Phone OS. Storage capacity (hard drive or flash drive)
is an expected feature, so Sonic is equipping its first product with an ultra-fast 64-gigabyte drive
that can be supplemented by extra storage. Technology costs are decreasing even as capabilities are
increasing, which makes value-priced models more appealing to consumers and to business users
with older smart phones who want to trade up to new, high-end multifunction units.
2.2 StrengthS, WeakneSSeS, OppOrtunitieS, and threat analySiS Sonic
has several powerful strengths on which to build, but our major weakness is lack of brand aware-
ness and image. The major opportunity is demand for multifunction communication, organiza-
tion, and entertainment devices that deliver a number of valued benefits at a lower cost. We also
face the threat of ever-higher competition and downward pricing pressure.
Strengths Sonic can build on three important strengths:
1. Innovative product—The Sonic 1000 offers a combination of features that are hard to find
in single devices, with extensive telecommunications capabilities and highest-quality digital
video/music/TV program storage/playback.
2. Security—Our smart phone uses a Linux-based operating system that is less vulnerable to
hackers and other security threats that can result in stolen or corrupted data.
3. Pricing—Our product is priced lower than competing smart phones—none of which offer the
same bundle of features—which gives us an edge with price-conscious customers.
Weaknesses By waiting to enter the smart-phone market until considerable consolidation
of competitors has occurred, Sonic has learned from the successes and mistakes of others.
Nonetheless, we have two main weaknesses:
1. Lack of brand awareness—Sonic has no established brand or image, whereas Samsung, Apple,
Motorola, and others have strong brand recognition. We will address this issue with aggressive
promotion.
2. Heavier and thicker unit—The Sonic 1000 is slightly heavier and thicker than most compet-
ing models because it incorporates so many telecommunication and multimedia features. To
counteract this weakness, we will emphasize our product’s benefits and value-added pricing,
two compelling competitive strengths.
Strengths are internal capabilities
that can help the company reach
its objectives.
Weaknesses are internal ele-
ments that may interfere with the
company’s ability to achieve its
objectives.
Targeted Segment Customer Need Corresponding Feature/Benefit
Professionals
(consumer market)
Students
(consumer market)
Corporate users
(business market)
Entrepreneurs
(business market)
Medical users
(business market)
� Stay in touch while on the go
� Record information while on the go
� Perform many functions without carrying
multiple gadgets
� Express style and individuality
� Input and access critical data on the go
� Use for proprietary tasks
� Organize and access contacts, schedule
details
� Update, access, and exchange medical
records
� Wireless e-mail to conveniently send and receive messages from
anywhere; cell phone capability for voice communication from
anywhere
� Voice recognition for no-hands recording
� Compatible with numerous applications and peripherals for
convenient, cost-effective functionality
� Case wardrobe of different colors and patterns allows users to
make a fashion statement
� Compatible with widely available software
� Customizable to fit diverse corporate tasks and networks
� No-hands, wireless access to calendar and address book to easily
check appointments and connect with contacts
� No-hands, wireless recording and exchange of information to
reduce paperwork and increase productivity
| Exh. A.1 |
Needs and Corresponding Features/Benefits of Sonic Smart Phone
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A4 Appendix
This section summarizes the main
features of the company’s various
products.
Opportunities Sonic can take advantage of two major market opportunities:
1. Increasing demand for state-of-the-art multimedia devices with a full array of communication
functions—The market for cutting-edge multimedia, multifunction devices is growing rapidly.
Smart phones are already commonplace in public, work, and educational settings; in fact, us-
ers who bought entry-level models are now trading up.
2. Lower technology costs—Better technology is now available at a lower cost than ever before.
Thus, Sonic can incorporate advanced features at a value-added price that allows for reason-
able profits.
Threats We face three main threats at the introduction of the Sonic 1000:
1. Increased competition—More companies are offering devices with some but not all of the fea-
tures and benefits provided by the Sonic 1000. Therefore, Sonic’s marketing communications
must stress our clear differentiation and value-added pricing.
2. Downward pressure on pricing—Increased competition and market share strategies are push-
ing smart-phone prices down. Still, our objective of breaking even with second-year sales of
the original model is realistic, given the lower margins in the smart-phone market.
3. Compressed product life cycle—Smart phones are reaching the maturity stage of their life cycle
more quickly than earlier technology products. Because of this compressed life cycle, we plan
to introduce an even greater-enhanced media-oriented second product during the year fol-
lowing the Sonic 1000’s launch.
2.3 COMpetitiOn The emergence of well-designed multifunction smart phones, including
the Apple iPhone, has increased competitive pressure. Competitors are continually adding features
and sharpening price points. Key competitors:
• Apple: The leader in smart-phone market share, Apple takes pride in being forward thinking,
innovative, and consumer-centric. Its latest iPhone 5s features an impressively thin and light-
weight metallic design, fingerprint identity sensor, dual LED flash, and CPU power up to two
times faster than the previous generation.
• Samsung: A strong competitor in the smart-phone industry, Samsung ranks as a top 10 global
brand and has plans to reach $400 billion in revenue by 2020. The Galaxy S5 features a whop-
ping 16-megapixel camera and the first-ever built-in heart rate monitor.
• LG: Founded in 1958, LG Electronics strives to be a worldwide leader in the digital market
and in 2014 ranked third in total smart-phone subscribers, behind Apple and Samsung. Its G2
smart phone features a large 5.2-inch full HD IPS display and ergonomically positioned rear
key control on the back.
• Motorola: Motorola pioneered the mobile communications industry and invented the first
mobile phone in 1973. Today, the company prides itself on creating value with comfortable,
approachable, and powerful devices. The Moto X is first smart phone to be designed, engi-
neered, and assembled entirely in the United States.
• HTC: Founded in 1997, HTC is a relatively new competitor to the industry but still ranks fifth
in smart-phone market share. HTC built its reputation on providing high-quality products
that garnered recommendations and referrals from both retailers and consumers. Its HTC
One (M8) smart phone comes with a 5.0-inch full HD 1080p display and is curved to fit in the
palm of the hand.
Despite strong competition, Sonic can carve out a definitive image and gain recognition among
targeted segments. Our appealing combination of state-of-the-art features and low price is a
critical point of differentiation for competitive advantage. Our second product will be even more
media-oriented to appeal to segments where we will have strong brand recognition. Exhibit A.2
shows a sample of competitive products and prices.
2.4 prOduCt OfferingS The Sonic 1000 offers the following standard features:
• Voice recognition for hands-free operation
• Full array of apps
• Complete organization functions, including linked calendar, address book, synchronization
Opportunities are areas of buyer
need or potential interest in which
the company might perform profit-
ably.
Threats are challenges posed by an
unfavorable trend or development
that could lead to lower sales and
profits.
This section identifies key
competitors, describes their
market positions, and provides an
overview of their strategies.
Z01_KOTL2621_15_GE_APP.indd 4 09/03/15 6:45 PM
Appendix A5
• Digital music/video/television recording, wireless downloading, and instant playback
• Wireless Web and e-mail, text messaging, instant messaging
• Four-inch high-quality color touch screen
• Ultra-fast 64-gigabyte drive and expansion slots
• Integrated 12-megapixel camera with flash and photo editing/sharing tools
First-year sales revenues are projected to be $200 million, based on sales of 800,000 of the
Sonic 1000 model at a wholesale price of $250 each. Our second-year product will be the Sonic
All Media 2000, stressing enhanced multimedia communication, networking, and entertainment
functions. The Sonic All Media 2000 will include Sonic 1000 features plus additional features
such as:
• Built-in media beaming to share music, video, and television files with other devices
• Webcam for instant video capture and uploading to popular video Web sites
• Voice-command access to popular social networking Web sites
2.5 diStributiOn Sonic-branded products will be distributed through a network of retailers
in the top 50 U.S. markets. Among the most important channel partners being contacted are:
• Office supply superstores. Office Depot and Staples will all carry Sonic products in stores, in
catalogs, and online.
• Computer stores. Independent computer retailers will carry Sonic products.
• Electronics specialty stores. Best Buy will feature Sonic smart phones in its stores, online, and
in its media advertising.
• Online retailers. Amazon.com will carry Sonic smart phones and, for a promotional fee, will
give Sonic prominent placement on its homepage during the introduction.
Distribution will initially be restricted to the United States, with appropriate sales promotion
support. Later, we plan to expand into Canada and beyond.
3.0 Marketing Strategy
3.1 ObjeCtiveS We have set aggressive but achievable objectives for the first and second years
of market entry.
• First-Year Objectives. We are aiming for a 1 percent share of the U.S. smart-phone market
through unit sales volume of 800,000.
• Second-Year Objectives. Our second-year objective is to achieve break-even on the Sonic
1000 and launch our second model.
3.2 target MarketS Sonic’s strategy is based on a positioning of product differentiation.
Our primary consumer target for the Sonic 1000 is middle- to upper-income professionals who
need one fully loaded device to coordinate their busy schedules, stay in touch with family and
Distribution explains each channel
for the company’s products and
mentions new developments and
trends.
Objectives should be defined in
specific terms so management can
measure progress and take correc-
tive action to stay on track.
All marketing strategies start with
segmentation, targeting, and posi-
tioning.
| Exh. A.2 |
Selected Smart-Phone Products and Pricing
Apple
iPhone 5s
Samsung
Galaxy S5 LG G2
Motorola
Moto X HTC One (M8)
Built-in Storage 64 GB 32 GB, micro SD up
to 128 GB
32 GB 16 GB 32 GB, micro SD up
to 128 GB
Display 4″ IPS LCD 5.1″ Super AMOLED 5.2″ IPS LCD 4.7″ AMOLED 5.0″ IPS LCD
Camera 8.0 MP 16 MP 13 MP 10 MP 4 MP
Price $399.99 $199.99 $399.99 $399.99 $199.99
Z01_KOTL2621_15_GE_APP.indd 5 09/03/15 6:45 PM
A6 Appendix
colleagues, and be entertained on the go. Our secondary consumer target is high school, college,
and graduate students who want a multimedia, dual-mode device. This segment can be described
demographically by age (16–30) and education status. Our Sonic All Media 2000 will be aimed at
teens and twentysomethings who want a device with features to support social networking and
heavier, more extensive entertainment media consumption.
The primary business target for the Sonic 1000 is mid- to large-sized corporations that want to
help their managers and employees stay in touch and input or access critical data when out of the
office. This segment consists of companies with more than $25 million in annual sales and more
than 100 employees. A secondary target is entrepreneurs and small business owners. Also we will
target medical users who want to update or access patients’ medical records.
Each of the marketing-mix strategies conveys Sonic’s differentiation to these target market
segments.
3.3 pOSitiOning Using product differentiation, we are positioning the Sonic smart phone as
the most versatile, convenient, value-added model for personal and professional use. Our market-
ing will focus on the value-priced multiple communication, entertainment, and information capa-
bilities differentiating the Sonic 1000.
3.4 StrategieS
Product The Sonic 1000, including all the features described in the earlier Product Offerings sec-
tion and more, will be sold with a one-year warranty. We will introduce the Sonic All Media 2000
during the following year, after we have established our Sonic brand. The brand and logo (Sonic’s
distinctive yellow thunderbolt) will be displayed on our products and packaging as well as in all
marketing campaigns.
Pricing The Sonic 1000 will be introduced at a $250 wholesale price and a $300 estimated retail
price per unit. We expect to lower the price of this model when we expand the product line by
launching the Sonic All Media 2000, to be priced at $350 wholesale per unit. These prices re-
flect a strategy of (1) attracting desirable channel partners and (2) taking share from established
competitors.
Distribution Our channel strategy is to use selective distribution, marketing Sonic smart phones
through well-known stores and online retailers. During the first year, we will add channel part-
ners until we have coverage in all major U.S. markets and the product is included in the major
electronics catalogs and Web sites. We will also investigate distribution through cell-phone outlets
maintained by major carriers such as Verizon Wireless. In support of channel partners, we will pro-
vide demonstration products, detailed specification handouts, and full-color photos and displays
featuring the product. Finally, we plan to arrange special payment terms for retailers that place
volume orders.
Marketing Communications By integrating all messages in all media, we will reinforce the
brand name and the main points of product differentiation. Research about media consumption
patterns will help our advertising agency choose appropriate media and timing to reach prospects
before and during product introduction. Thereafter, advertising will appear on a pulsing basis to
maintain brand awareness and communicate various differentiation messages. The agency will
also coordinate public relations efforts to build the Sonic brand and support the differentiation
message. To generate buzz, we will host a user-generated video contest on our Web site. To attract,
retain, and motivate channel partners for a push strategy, we will use trade sales promotions and
personal selling. Until the Sonic brand has been established, our communications will encourage
purchases through channel partners rather than from our Web site.
3.5 Marketing Mix The Sonic 1000 will be introduced in February. Here are summaries of
action programs we will use during the first six months to achieve our stated objectives.
• January. We will launch a $200,000 trade sales promotion campaign and participate in
major industry trade shows to educate dealers and generate channel support for the prod-
uct launch in February. Also, we will create buzz by providing samples to selected product
reviewers, opinion leaders, influential bloggers, and celebrities. Our training staff will work
Positioning identifies the brand,
benefits, points-of-difference, and
points-of-parity for the product or
line.
Product strategy includes deci-
sions about product mix and lines,
brands, packaging and labeling,
and warranties.
Pricing strategy covers decisions
about setting initial prices and
adapting prices in response to
opportunities and competitive chal-
lenges.
Distribution strategy includes se-
lection and management of chan-
nel relationships to deliver value to
customers.
Marketing communications
strategy covers all efforts to com-
municate to target audiences and
channel members.
The marketing mix includes tactics
and programs that support prod-
uct, pricing, distribution, and mar-
keting communications strategy.
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Appendix A7
with retail sales personnel at major chains to explain the Sonic 1000’s features, benefits, and
advantages.
• February. We will start an integrated print/radio/Internet/social media campaign targeting
professionals and consumers. The campaign will show how many functions the Sonic smart
phone can perform and emphasize the convenience of a single, powerful handheld device.
This multimedia campaign will be supported by point-of-sale signage as well as online-only
ads and video tours.
• March. As the multimedia advertising campaign continues, we will add consumer sales pro-
motions such as a contest in which consumers post videos to our Web site, showing how they
use the Sonic in creative and unusual ways. We will also distribute new point-of-purchase
displays to support our retailers.
• April. We will hold a trade sales contest offering prizes for the salesperson and retail organi-
zation that sell the most Sonic smart phones during the four-week period.
• May. We plan to roll out a new national advertising campaign this month. The radio ads will
feature celebrity voices telling their Sonic smart phones to perform functions such as initiat-
ing a phone call, sending an e-mail, playing a song or video, and so on. The stylized print and
online ads will feature avatars of these celebrities holding their Sonic smart phones. We plan
to repeat this theme for next year’s product launch.
• June. Our radio campaign will add a new voice-over tagline promoting the Sonic 1000 as a
graduation gift. We will exhibit at the semiannual electronics trade show and provide retail-
ers with new competitive comparison handouts as a sales aid. In addition, we will analyze the
results of customer satisfaction research for use in future campaigns and product development
efforts.
3.6 Marketing reSearCh Using research, we will identify specific features and benefits
our target market segments value. Feedback from market tests, surveys, and focus groups will help
us develop and fine-tune the Sonic All Media 2000. We are also measuring and analyzing custom-
ers’ attitudes toward competing brands and products. Brand awareness research will help us de-
termine the effectiveness and efficiency of our messages and media. Finally, we will use customer
satisfaction studies to gauge market reaction.
4.0 Financials
Total first-year sales revenue for the Sonic 1000 is projected at $200 million, with an average
wholesale price of $250 per unit and variable cost per unit of $150 for unit sales volume of
800,000. We anticipate a first-year loss of as much as $40 million. Break-even calculations indi-
cate that the Sonic 1000 will become profitable after the sales volume exceeds 267,500 during the
product’s second year. Our break-even analysis assumes per-unit wholesale revenue of $250 per
unit, variable cost of $150 per unit, and estimated first-year fixed costs of $26,750,000. With these
assumptions, the break-even calculation is:
26,750,000
$250 – $150
= 267,500 units
5.0 Controls
Controls are being established to cover implementation and the organization of our marketing
activities.
5.1 iMpleMentatiOn We are planning tight control measures to closely monitor quality
and customer service satisfaction. This will enable us to react very quickly in correcting any prob-
lems that may occur. Other early warning signals that will be monitored for signs of deviation from
the plan include monthly sales (by segment and channel) and monthly expenses.
5.2 Marketing OrganizatiOn Sonic’s chief marketing officer, Jane Melody, holds
overall responsibility for all of the company’s marketing activities. Exhibit A.3 shows the struc-
ture of the eight-person marketing organization. Sonic has hired Worldwide Marketing to handle
national sales campaigns, digital, trade and consumer sales promotions, and public relations efforts.
Programs should coordinate with
the resources and activities of
other departments that contribute
to customer value for each product.
This section shows how marketing
research will support the develop-
ment, implementation, and evalu-
ation of marketing strategies and
programs.
Financials include budgets and
forecasts to plan for marketing
expenditures, scheduling, and
operations.
Controls help management
measure results and identify any
problems or performance variations
that need corrective action.
The marketing department may be
organized by function, as in this
sample, or by geography, product,
customer, or some combination of
these.
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A8 Appendix
Sonic Marketing Plan
Chapter Assignments
Chapter 2: Developing Marketing Strategies
and Plans
As an assistant to Jane Melody, Sonic’s chief marketing officer, you’ve been assigned to draft a
mission statement for top management’s review.1 This should cover the competitive spheres
within which the firm will operate and your recommendation of an appropriate generic com-
petitive strategy. Using your knowledge of marketing, the information you have about Sonic, and
library or Internet resources, answer the following questions.
• What should Sonic’s mission be?
• In what competitive spheres (industry, products and applications, competence, market-
segment, vertical, and geographic) should Sonic operate?
• Which of Porter’s generic competitive strategies would you recommend Sonic follow in for-
mulating overall strategy?
As your instructor directs, enter your answers and supporting information in a written market-
ing plan to document your ideas.
Chapter 3: Collecting Information
and Forecasting Demand
Jane Melody asks you to scan Sonic’s external environment for early warning signals of new op-
portunities and emerging threats that could affect the success of the Sonic 1000 smart phone.
Using Internet or library sources (or both), locate information to answer three questions about
key areas of the macroenvironment.
• What demographic changes are likely to affect Sonic’s targeted segments?
• What economic trends might influence buyer behavior in Sonic’s targeted segments?
• How might the rapid pace of technological change alter Sonic’s competitive situation?
Enter your answers about Sonic’s environment in the appropriate sections of a written market-
ing plan to record your comments.
Jane Melody,
Chief Marketing
Officer
Amelia Howard,
Advertising
Manager
Ron Hall,
Promotion
Manager
Tony Calella,
Sales
Manager
Tiffany White,
Regional
Sales
Viktor Chenkov,
Regional
Sales
Carlos Dunn,
Advertising
Analyst
Kate McConnell,
Promotion
Analyst
| Exh. A.3 |
Sonic’s Marketing
Organization
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Appendix A9
Chapter 4: Conducting Market Research
Your next task is to consider how marketing research can help Sonic support its marketing strat-
egy. Jane Melody also asks you how Sonic can measure results after the marketing plan is imple-
mented. She wants you to answer the following three questions.
• What surveys, focus groups, observation, behavioral data, or experiments will Sonic need to
support its marketing strategy? Be specific about the questions or issues that Sonic needs to
resolve using marketing research.
• Where can you find suitable secondary data about total demand for smart phones over the
next two years? Identify at least two sources (online or offline), describe what you plan to draw
from each source, and indicate how the data would be useful for Sonic’s marketing planning.
• Recommend three specific marketing metrics for Sonic to apply in determining marketing ef-
fectiveness and efficiency.
Enter this information in the marketing plan you’ve been writing to document your responses.
Chapter 5: Creating Long-Term Loyalty
Relationships
Sonic has decided to focus on total customer satisfaction as a way of encouraging brand loyalty in
a highly competitive marketplace. With this in mind, you’ve been assigned to analyze three spe-
cific issues as you continue working on Sonic’s marketing plan.
• How (and how often) should Sonic monitor customer satisfaction?
• Would you recommend that Sonic use the Net Promoter method? Explain your reasoning.
• Which customer touch points should Sonic pay particularly close attention to, and why?
Consider your answers in the context of Sonic’s current situation and the objectives it has set.
Then enter your latest decisions in the written marketing plan.
Chapter 6: Analyzing Consumer Markets
You’re responsible for researching and analyzing the consumer market for Sonic’s smart-phone
product. Look again at the data you’ve already entered about the company’s current situation and
macroenvironment, especially the market being targeted. Now answer these questions about the
market and buyer behavior.
• What cultural, social, and personal factors are likely to most influence consumer purchasing
of smart phones? What research tools would help you better understand the effect on buyer
attitudes and behavior?
• Which aspects of consumer behavior should Sonic’s marketing plan emphasize, and why?
• What marketing activities should Sonic plan to coincide with each stage of the consumer buy-
ing process?
After you’ve analyzed these aspects of consumer behavior, consider the implications for Sonic’s
marketing efforts to support the launch of its smart phone. Finally, document your findings and
conclusions in the written marketing plan.
Chapter 7: Analyzing Business Markets
You’ve been learning more about the business market for Sonic’s smart phone. Jane Melody has
defined this market as mid- to large-sized corporations that want their employees to stay in touch
and be able to input or access data from any location. Respond to the following three questions
based on your knowledge of Sonic’s current situation and business-to-business marketing.
• What types of businesses appear to fit Melody’s market definition? How can you research the
number of employees and find other data about these types of businesses?
• What type of purchase would a Sonic smart phone represent for these businesses? Who would
participate in and influence this type of purchase?
• Would demand for smart phones among corporate buyers tend to be inelastic? What are the
implications for Sonic’s marketing plan?
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A10 Appendix
Your answers to these questions will affect how Sonic plans marketing activities for the business
segments to be targeted. Take a few minutes to note your ideas in the written marketing plan.
Chapter 8: Tapping into Global Markets
As Jane Melody’s assistant, you’re researching how to market the Sonic 1000 smart-phone product
outside the United States within a year. You’ve been asked to answer the following questions about
Sonic’s use of global marketing.
• As a start-up company, should Sonic use indirect or direct exporting, licensing, joint ventures,
or direct investment to enter the Canadian market next year? To enter other markets? Explain
your answers.
• If Sonic starts marketing its smart phone in other countries, which of the international prod-
uct strategies is most appropriate? Why?
• Although some components are made in Asia, Sonic’s smart phones will be assembled in
Mexico through a contractual arrangement with a local factory. How are country-of-origin
perceptions likely to affect your marketing recommendations?
Think about how these global marketing issues fit into Sonic’s overall marketing strategy. Now
document your ideas in the marketing plan you’ve been writing.
Chapter 9: Identifying Market Segments
and Targets
Identifying suitable market segments and selecting targets are critical to the success of any mar-
keting plan. As Jane Melody’s assistant, you’re responsible for market segmentation and targeting.
Look back at the market information, buyer behavior data, and competitive details you previously
gathered as you answer the following questions.
• Which variables should Sonic use to segment its consumer and business markets?
• How can Sonic evaluate the attractiveness of each identified segment? Should Sonic market
to one consumer segment and one business segment or target more than one in each market?
Why?
• Should Sonic pursue full-market coverage, market specialization, product specialization, se-
lective specialization, or single-segment concentration? Why?
Next, consider how your decisions about segmentation and targeting will affect Sonic’s market-
ing efforts. Depending on your instructor’s directions, summarize your conclusions in the written
marketing plan.
Chapter 10: Crafting the Brand Positioning
As before, you’re working with Jane Melody on Sonic’s marketing plan for launching a new smart
phone. Now you’re focusing on Sonic’s brand positioning by answering three specific questions.
• In a sentence or two, what is an appropriate brand positioning for the Sonic 1000 smart
phone?
• Create a perceptual map to diagram points-of-parity and points-of-difference between Sonic
and its competitors. Are there any opportunities based on your findings?
• How can Sonic create differentiation from competitors using emotional branding?
Document your ideas in the written marketing plan. Note any additional research you may
need to determine how to proceed after the Sonic 1000 has been launched.
Chapter 11: Creating Brand Equity
Sonic is a new brand with no prior brand associations, which presents a number of marketing
opportunities and challenges. Jane Melody has given you responsibility for making recommenda-
tions about three brand equity issues that are important to Sonic’s marketing plan.
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Appendix A11
• What brand elements would be most useful for differentiating the Sonic brand from compet-
ing brands?
• How can Sonic sum up its brand promise for the new smart phone?
• Should Sonic add a brand for its second product or retain the Sonic name?
Be sure your brand ideas are appropriate in light of what you’ve learned about your targeted
segments and the competition. Then add this information to your written marketing plan.
Chapter 12: Addressing Competition and Driving
Growth
Knowing that the smart-phone market is likely to remain highly competitive, Jane Melody wants
you to look ahead at how Sonic can develop new products outside the smart-phone market.
Review the competitive situation and the market situation before you continue working on the
Sonic marketing plan.
• List three new-product ideas that build on Sonic’s strengths and the needs of its various target
segments. What criteria should Sonic use to screen these ideas?
• Develop the most promising idea into a product concept, and explain how Sonic can test this
concept. What particular dimensions must be tested?
• Assume that the most promising idea tests well. Now develop a marketing strategy for intro-
ducing it, including a description of the target market; the product positioning; the estimated
sales, profit, and market share goals for the first year; your channel strategy; and the mar-
keting budget you will recommend for this new-product introduction. If possible, estimate
Sonic’s costs and conduct a break-even analysis.
Document all the details of your new-product development ideas in the written marketing plan.
Chapter 13: Setting Product Strategy
Introducing a new product entails a variety of decisions about product strategy, including differ-
entiation, ingredient branding, packaging, labeling, warranty, and guarantee. Your next task is to
answer the following questions about Sonic’s product strategy.
• Which aspect of product differentiation would be most valuable in setting Sonic apart from its
competitors, and why?
• Should Sonic use ingredient branding to tout the Linux-based operating system that it says
makes its smart phone more secure than smart phones based on some other operating
systems?
• How can Sonic use packaging and labeling to support its brand image and help its channel
partners sell the smart-phone product more effectively?
Once you’ve answered these questions, incorporate your ideas into the marketing plan you’ve
been writing.
Chapter 14: Designing and Managing Services
You’re planning customer support services for Sonic’s new smart-phone product. Review what
you know about your target market and its needs; also think about what Sonic’s competitors are
offering. Then respond to these three questions about designing and managing services.
• What support services are buyers of smart-phone products likely to want and need?
• How can Sonic manage gaps between perceived service and expected service to satisfy
customers?
• What postsale service arrangements must Sonic make, and how would you expect these to af-
fect customer satisfaction?
Consider how your service strategy will support Sonic’s overall marketing efforts. Summarize
your recommendations in the written marketing plan to document your ideas.
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A12 Appendix
Chapter 15: Introducing New Market Offerings
Sonic is a new entrant in an established industry characterized by competitors with relatively high
brand identity and strong market positions. Use research and your knowledge of how to deal with
competitors to consider three issues that will affect the company’s ability to successfully introduce
its first product:
• What factors will you use to determine Sonic’s strategic group?
• Should Sonic select a class of competitor to attack on the basis of strength versus weakness,
closeness versus distance, or good versus bad? Why is this appropriate in the smart-phone
market?
• As a start-up company, what competitive strategy would be most effective as Sonic introduces
its first product?
Take time to analyze how Sonic’s competitive strategy will affect its marketing strategy and tac-
tics. Now summarize your ideas in the written marketing plan.
Chapter 16: Developing Pricing Strategies
and Programs
You’re in charge of pricing Sonic’s product for its launch early next year. Review the SWOT analy-
sis you previously prepared as well as Sonic’s competitive environment, targeting strategy, and
product positioning. Now continue working on your marketing plan by responding to the follow-
ing questions.
• What should Sonic’s primary pricing objective be? Explain your reasoning.
• Are smart-phone customers likely to be price sensitive? What are the implications for your
pricing decisions?
• What price adaptations (such as discounts, allowances, and promotional pricing) should
Sonic include in its marketing plan?
Make notes about your answers to these questions and then document the information in the
written marketing plan.
Chapter 17: Designing and Managing Integrated
Marketing Channels
At Sonic, you have been asked to develop a marketing channel system for the new Sonic 1000
smart phone. Based on what you know about designing and managing integrated marketing
channels, answer the three questions that follow.
• Do you agree with Jane Melody’s decision to use a push strategy for the new product? Explain
your reasoning.
• How many channel levels are appropriate for Sonic’s targeted consumer and business
segments?
• In determining the number of channel members, should you use exclusive, selective, or inten-
sive distribution? Why?
Be sure your marketing channel ideas support the product positioning and are consistent with
the goals that have been set. Record your recommendations in the written marketing plan.
Chapter 18: Managing Retailing, Wholesaling,
and Logistics
At this point, you need to make more specific decisions about managing the marketing interme-
diaries for Sonic’s first product. Formulate your ideas by answering the following questions.
• What types of retailers would be most appropriate for distributing Sonic’s smart phone? What
are the advantages and disadvantages of selling through these types of retailers?
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Appendix A13
• What role should wholesalers play in Sonic’s distribution strategy? Why?
• What market-logistics issues must Sonic consider for the launch of its first smart phone?
Summarize your decisions about retailing, wholesaling, and logistics in the marketing plan
you’ve been writing.
Chapter 19: Designing and Managing Integrated
Marketing Communications
Jane Melody has assigned you to plan integrated marketing communications for Sonic’s new-
product introduction. Review the data, decisions, and strategies you previously documented in
your marketing plan before you answer the next three questions.
• What communications objectives are appropriate for Sonic’s initial campaign?
• How can Sonic use personal communications channels to influence its target audience?
• Which communication tools would you recommend using after Sonic’s initial product has
been in the market for six months? Why?
Confirm that your marketing communications plans make sense in light of Sonic’s over-
all marketing efforts. Now, as your instructor directs, summarize your thoughts in the written
marketing plan.
Chapter 20: Managing Mass Communications:
Advertising, Sales Promotions,
Events and Experiences, and Public
Relations
Mass communications will play a key role in Sonic’s product introduction. After reviewing your
earlier decisions and thinking about the current situation (especially your competitive circum-
stances), respond to the following questions to continue planning Sonic’s marketing communica-
tions strategy.
• Once Sonic begins to use consumer advertising, what goals would be appropriate?
• Should Sonic continue consumer and trade sales promotion after the new product has been in
the market for six months? Explain your reasoning.
• Jane Melody wants you to recommend an event sponsorship possibility that would be appro-
priate for the new-product campaign. What type of event would you suggest, and what objec-
tives would you set for the sponsorship?
Record your ideas about mass communications in the marketing plan you’ve been writing.
Chapter 21: Managing Digital Communications:
Online, Social Media, and Mobile
Digital communications strategies will be essential to Sonic’s marketing plan as brand awareness
can be generated quickly through online channels, social media, and word of mouth. Jane Melody
is especially interested in your answers to the following questions.
• How should Sonic use word of mouth to generate brand awareness and encourage potential
buyers to visit retailers to see the new smart phone in person?
• Which social media platforms and networks should Sonic pursue based on their target audi-
ences? Explain your reasoning.
• Is mobile marketing a viable strategy for Sonic’s smart phone? Why or why not?
Consider your overall marketing objectives as you compile your answers. Document your ideas
in your marketing plan.
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A14 Appendix
Chapter 22: Managing Personal Communications:
Direct and Database Marketing
and Personal Selling
Sonic needs a strategy for managing personal communications during its new-product launch.
This is the time to look at direct marketing, database marketing, and personal selling. Answer
these three questions as you consider Sonic’s personal communications strategy.
• Which forms of direct marketing are appropriate for Sonic, given its objectives, mass commu-
nications arrangements, and channel decisions?
• Should Sonic use database marketing to identify and cultivate prospects? What are the oppor-
tunities and potential downsides of this approach?
• Does Sonic need a direct sales force or can it sell through agents and other outside
representatives?
Look back at earlier decisions and ideas before you document your comments about personal
communications in your written marketing plan.
Chapter 23: Managing a Holistic Marketing
Organization for the Long Run
With the rest of the marketing plan in place, you’re ready to make recommendations about how
to manage Sonic’s marketing activities. Here are some specific questions Jane Melody wants you
to consider.
• How can Sonic drive customer-focused marketing and strategic innovation throughout the
organization?
• What role should social responsibility play in Sonic’s marketing?
• How can Sonic evaluate its marketing? Suggest several specific steps the company should take.
To complete your written marketing plan, enter your answers to these questions. Finally, draft
the executive summary of the plan’s highlights.
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Endnotes E1
15. http://thomsonreuters.com/about/, accessed October 1, 2012.
16. Jena McGregor, Matthew Boyle, and Peter Burrows, “Your New
Customer: The State,” BusinessWeek, March 23 and 30, 2009, p. 66.
17. Nikolaus Franke, Peter Keinz, and Christoph J. Steger, “Testing the
Value of Customization: When Do Customers Really Prefer Products
Tailored to Their Preferences?” Journal of Marketing 73 (September
2009), pp. 103–21.
18. Sean Corcoran, “Defining Earned, Owned and Paid Media,” Forrester
Blogs, December 16, 2009. For an empirical examination, see Andrew
T. Stephen and Jeff Galak, “The Effects of Traditional and Social
Earned Media on Sales: A Study of a Microlending Marketplace,”
Journal of Marketing Research 49 (October 2012), pp. 624–39.
19. Jim Edwards, “How Chipotle’s Business Model Depends on NEVER
Running TV Ads,” Business Insider, March 16, 2012; Dan Klamm,
“How Chipotle Uses Social Media to Cultivate a Better World,”
Spredfast, March 21, 2012; Danielle Sacks, “For Exploding All the
Rules; Chipotle: The World’s 50 Most Innovative Companies in 2012,”
Fast Company, October 2012; Leslie Patton, “Chipotle, Growth
Slowing, Looks at Fast Food Future,” Bloomberg BusinessWeek,
October 25, 2012.
20. “Three Screen Report: Media Consumption and Multi-tasking Continue
to Increase across TV, Internet and Mobile,” NielsenWire, December
18, 2009; Felix Gillette, “For Bravo, One Screen Isn’t Enough,”
Bloomberg BusinessWeek, November 8, 2010; “Global Online
Consumers and Multi-Screen Media: Today and Tomorrow,” A Nielsen
Report, May 2012.
21. Jonathan D. Rockoff and Joann S. Lublin, “J&J Recruits Bayer
Executive, Wall Street Journal, September 14, 2012.
22. Jessi Hempel, “Is Pinterest the Next Facebook?,” Fortune, April 9, 2012,
pp. 109–14; “Can Ben Silberman Turn Pinterest into the World’s Greatest
Shopfront?,” Fast Company, September 2012; Pui-Wing Tam, “Pinterest
Raises $100 Million with $1.5 Billion Valuation,” Wall Street Journal, May
17, 2012; “Pinterest Holds Major Promise for Brands,” www.warc.com,
October 18, 2012; Laura Schlereth, “Marketers’ Interest in Pinterest,”
Marketing News, April 30, 2012, p. 8.
23. Geoffrey Precourt, “Engaging with Media and Markets: Unilever’s
Prowl for Experiential Improvement,” WARC Events Report: 4A’s
Transformation, March 2011; “Facebook Hits 1bn Users,” www.warc.
com, October 5, 2012; “African Consumers Get Online,” www.warc.
com, October 5, 2012.
24. “Digital Focus Vital for Brands,” www.warc.com, January 30, 2012.
25. Jessi Hempel, “Don Draper Goes to the Data Center,” Fortune, July 23,
2012.
26. “P&G Uses Real-Time Approach,” www.warc.com, October 15,
2012; “Procter & Gamble Taps New Tech Trends,” www.warc.com,
September 19, 2012; Quentin Hardy, “The Matrix of Soap,” Forbes,
August 22, 2011. For broader discussion, see David Kiron, Pamela Kirk
Prentice, and Renee Boucher Ferguson, “Innovating with Analytics,”
MIT Sloan Management Review, Fall 2012, pp. 47–52.
27. David Kirkpatrick, “Social Power and the Coming Corporate
Revolution,” Forbes, September 26, 2011.
28. David Kiron, Doug Palmer, Anh Nguyen Phillips and Nina Kruschwitz,
“What Managers Really Think about Social Business,” Sloan
Management Review, Summer 2012, pp. 51–60.
29. Alex Knapp, “Hair Extensions,” Forbes, April 20, 2012, p. 60.
30. Peter Mansell, “Pharma Sales and the Digital Rep,” Eye for Pharma,
May 28, 2012.
31. Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan,
“Winning the $30 Trillion Decathalon: Going for Gold in Emerging
Marketing Markets,” McKinsey Quarterly, August 2012.
32. “Brands Must Serve New Consumers,” www.warc.com, October 22,
2012.
33. “Multicultural Shoppers Attract U.S. Brands,” www.warc.com,
October 8, 2012.
Chapter 1
1. “‘Captain Planet,’ The HBR Interview: Unilever CEO Paul Polman,”
Harvard Business Review, June 2012; “Unilever Reframes Marketing,”
February 8, 2012, www.warc.com; “Unilever Gets Back to Basics,”
www.warc.com, September 11, 2012; “Unilever Confident on
China,” www.warc.com, September 17, 2012; Geoffrey Precourt,
“Engaging with Media and Markets: Unilever’s Prowl for Experiential
Improvement,” WARC Events Report: 4A’s Transformation, March
2011; “Unilever Targets Russia,” www.warc.com, October 4, 2012;
“Unilever Adopts ‘Reverse Engineering,’” www.warc.com, October 1,
2012; “Unilever Seeks New Way Forward,” www.warc.com, October
23, 2012; “Unilever Prioritises Emerging Markets,” www.warc.com,
October 31, 2012.
2. Philip Kotler, “Marketing: The Underappreciated Workhorse,” Market
Leader Quarter 2 (2009), pp. 8–10.
3. Marc de Swan Arons and Frank van den Driest, The Global Brand
CEO: Building the Ultimate Marketing Machine (New York: Airstream,
2010).
4. Peter C. Verhoef and Peter S. H. Leeflang, “Understanding the
Marketing Department’s Influence within the Firm,” Journal of
Marketing 73 (March 2009), pp. 14–37; Pravin Nath and Vijay Mahajan,
“Marketing in the C-Suite: A Study of Chief Marketing Officer Power
in Firm’s Top Management Teams,” Journal of Marketing, 75 (January
2012), pp. 60–77; Christian Schulze, Bernd Skiera, and Thorsten
Weisel, “Linking Customer and Financial Metrics to Shareholder
Value: The Leverage Effect in Customer-Based Valuation,” Journal of
Marketing, 76 (March 2012), pp. 17–32.
5. “How We See It: Three Senior Executives on the Future of Marketing,”
McKinsey Quarterly, July 2011; “American Express Open: Small Business
Saturday,” Jay Chiat Strategic Excellence Awards: Gold 2012, www.warc.
com, accessed November 5, 2012; John Tozzi, “Black Friday’s Younger
Cousin Grows Up,” Bloomberg Businessweek, December 3, 2012, pp.
54–55; Christine Birker, “AmEx’s Small Business Saturday a Big Marketing
Hit,” Marketing News, January 2013, p. 4.
6. Alex Webb, “BMW Courts Bloggers for $100 Million Online Boost:
Cars,” www.bloomberg.com, June 11, 2012.
7. Geoffrey Precourt, “How Corning Broke the Rules in Online Video—
and Won,” www.warc.com, July 2012.
8. American Marketing Association, “Definition of Marketing,” www.
marketingpower.com/AboutAMA/ Pages/DefinitionofMarketing.aspx,
2007; Lisa Keefe, “Marketing Defined,” Marketing News, January 15,
2008, pp. 28–29.
9. Robert F. Lusch and Frederick E. Webster Jr., “A Stakeholder-Unifying,
Cocreation Philosophy for Marketing,” Journal of Macromarketing
31,no. 2, 2011, 129–34. See also Robert F. Lusch and Frederick E.
Webster Jr., “Elevating Marketing: Marketing Is Dead! Long Live
Marketing!,” Journal of Academy of Marketing Science 41 (January
2013), pp. 389–99.
10. Peter Drucker, Management: Tasks, Responsibilities, Practices (New
York: Harper and Row, 1973), pp. 64–65.
11. Lisa Mataloni and Andrew Hodge, “Gross Domestic Product: First
Quarter 2012 (Second Estimate),” Bureau of Economic Analysis, May
31, 2012.
12. Irving J. Rein, Philip Kotler, Michael Hamlin, and Martin Stoller, High
Visibility, 3rd ed. (New York: McGraw-Hill, 2006).
13. Philip Kotler, Christer Asplund, Irving Rein, and Donald H. Haider,
Marketing Places in Europe: Attracting Investments, Industries,
Residents, and Visitors to European Cities, Communities, Regions,
and Nations (London: Financial Times Prentice Hall, 1999); Philip
Kotler, Irving J. Rein, and Donald Haider, Marketing Places: Attracting
Investment, Industry, and Tourism to Cities, States, and Nations (New
York: Free Press, 1993).
14. Emily Glazer and Melissa Korn, “Marketing Pros: Big Brands on
Campus,” Wall Street Journal, August 5, 2012.
Endnotes
Z02_KOTL2621_15_GE_NOTE.INDD 1 3/10/15 2:57 PM
E2 Endnotes
55. Rachel Dodes, “Twitter Goes to the Movies,” Wall Street Journal,
August 3, 2012; Dave Roos, “How Movie Marketing Works,” www.
howstuffworks.com, September 25, 2008; Ryan McKee, “The 7 Best
Viral Marketing Campaigns in Movie History,” www.moviefone.com,
June 7, 2011; Mallory Russell, “13 Really Strange Movie Marketing
Campaigns,” www.businessinsider.com, February 12, 2012.
56. Theodore Levitt, “Marketing Myopia,” Harvard Business Review, July–
August 1960, p. 50.
57. “1100100 and Counting,” The Economist, June 11, 2011; Spencer Ante,
“As Economy Cools, IBM Furthers Focus on Marketers,” Wall Street
Journal, July 17, 2012.
58. “Case Study: Promote Iceland,” www.warc.com, 2012; “How to Use
a Volcanic Eruption to Your Advantage in Marketing,” ICCA Best
Marketing Award Entry 2010; Marc Springate and George Bryant,
“Promote Iceland: Inspired by Iceland,” www.warc.com, 2012.
59. For a discussion of the conditions when consumers are most likely to
prefer fair-trade products, see Katherine White, Rhiannon MacDonnell,
and John H. Ellard, “Belief in a Just World: Consumer Intentions and
Behaviors Toward Ethical Products,” Journal of Marketing 76 (January
2012), pp. 103–18.
60. “Many Shoppers Support Regulation,” www.warc.com, July 10, 2012.
61. E. Jerome McCarthy and William D. Perreault, Basic Marketing: A
Global-Managerial Approach, 14th ed. (Homewood, IL: McGraw-Hill/
Irwin, 2002).
Chapter 2
1. Ben Worthen and Shara Tibken, “H-P to Book $8 Billion Charge,”
Wall Street Journal, August 8, 2012; Ben Worthen, “H-P Tries On
a Sleeker Look,” Wall Street Journal, September 17, 2012; Ben
Worthen, “H-P, Dell Struggle as Buyers Shun PCs,” Wall Street
Journal, August 22, 2012; Aaron Ricadela, “Why Hewlett-Packard
Impulse Buy Didn’t Pay Off,” Bloomberg Businessweek, December 3,
2012, pp. 35–36.
2. Nirmalya Kumar, Marketing as Strategy: The CEO’s Agenda for Driving
Growth and Innovation (Boston: Harvard Business School Press,
2004).
3. Michael E. Porter, Competitive Advantage: Creating and Sustaining
Superior Performance (New York: Free Press, 1985).
4. For an academic treatment of benchmarking, see Douglas W. Vorhies
and Neil A. Morgan, “Benchmarking Marketing Capabilities for
Sustained Competitive Advantage,” Journal of Marketing 69 (January
2005), pp. 80–94.
5. Michael Hammer and James Champy, Reengineering the Corporation:
A Manifesto for Business Revolution (New York: Harper Business,
1993).
6. Ibid.; Jon R. Katzenbach and Douglas K. Smith, The Wisdom of
Teams: Creating the High-Performance Organization (Boston:
Harvard Business School Press, 1993). Matias G. Enz and Douglas
M. Lambert, “Using Cross-Functional, Cross-Firm Teams to Co-
Create Value: The Role of Financial Measures,” Industrial Marketing
Management, 41 (April 2012), pp. 495–507.
7. “Ford Targets 30% Water Reduction per Vehicle,” Manufacturing
Close-Up, January 10, 2012.
8. Agneta Larsson, Mats Johansson, Fredrik Bååth, and Sanna Neselius,
“Reducing Throughput Time in a Service Organization by Introducing
Cross-Functional Teams,” Production Planning & Control 23 (July
2012), pp. 571–80.
9. George S. Day, “Closing the Marketing Capabilities Gap,” Journal of
Marketing 75 (July 2011), p. 183–95.
10. George S. Day and Paul J. H. Schoemaker, Peripheral Vision: Detecting
the Weak Signals That Will Make or Break Your Company (Cambridge,
MA: Harvard Business School Press, 2006); Paul J. H. Schoemaker
and George S. Day, “How to Make Sense of Weak Signals,” MIT Sloan
Management Review (Spring 2009), pp. 81–89.
11. “Peabody Energy Announces Global Business Realignment,” www.
bizjournals.com, March 7, 2012.
34. Vijay Govindarajan and Chris Trimble, Reverse Innovation: Create
Far from Home, Win Everywhere (Boston: Harvard Business School
Publishing, 2012).
35. Rajendra Sisodia, David Wolfe, and Jagdish Sheth, Firms of
Endearment: How World-Class Companies Profit from Passion (Upper
Saddle River, NJ: Wharton School Publishing, 2007).
36. Jeffrey Hollender and Stephen Fenichell, What Matters Most (New
York: Basic Books, 2004), p. 168. But CSR efforts may not work
well for all types of brands, e.g., luxury brands; see Carlos J. Torelli,
Alokparna Basu Monga, and Andrew M. Kaikati, “Doing Poorly by
Doing Good: Corporate Social Responsibility and Brand Concepts,”
Journal of Consumer Research 38 (February 2012), pp. 948–63.
37. “Older Consumers Go Social in Germany,” www.warc.com, September
10, 2012; “Digital Media Booms in Germany,” www.warc.com, October
26, 2012; “German Firms See Social Payback,” www.warc.com,
November 2, 2012; “German Web Users Willing to Spend More,” www.
warc.com, November 15, 2012; “Tablet Uptake Rises in Germany,”
www.warc.com, November 20, 212, “Mobile Web Gains Ground in
Germany,” www.warc.com, November 23, 2012; “German Firms Focus
on Social Media,” www.warc.com, December 11, 2012.
38. Dana Garrett, “Progressive Settles with Accident Victim’s Family after
Tale Went Viral,” www.money.cnn.com, August 17, 2012; Erik Holm,
“On Twitter, Over 1,000 Claim They’ve Already Dropped Progressive,”
Wall Street Journal, August 20, 2012; Brian Patrick Eha, “Progressive
Robo-Tweets Spark Social Media Crisis,” www.money.cnn.com,
August 14, 2012.
39. “’Showrooming Is Not a Worry for Retailers,” www.warc.com,
October 8, 2012.
40. “Smartphones Shape Habits in Europe,” www.warc.com, October 8,
2012.
41. Allen Tsai, “A Second Chance for Sprint and Dan Hesse,” www.
mobiledia.com, October 18, 2012.
42. Gina Trapini, “What Business Card? Just Scan My QR Code,” Fast
Company, March 17, 2010; for a description of alternative technology,
see Jason Feifer, “To Catch a Customer,” Fast Company, February 2012,
p. 36.
43. Greg Stuart, “Why Consumers Hate Advertising and What They Are
Doing About It,” Market Research Report, Vizu Answers, September
2008.
44. “New Directions: Consumer Goods Companies Honea Cross-Channel
Approach to Consumer Marketing,” The Economist Intelligence Unit
Special Report, February 2012.
45. Bruce Horovitz, “In Trend toward Vanity Food, It’s Getting Personal,”
USA Today, August 9, 2006; J. P. Gownder, “Why Large-Scale Product
Customization Is Finally Viable for Business,” www.mashable.com,
April 13, 2011.
46. http://info.cvscaremark.com/our-company/ cvs-caremark-facts,
accessed February 16, 2014.
47. Antonio Gonsalves, “Dell Makes $3 Million from Twitter-Related Sales,”
InformationWeek, June 12, 2009; Lionel Menchaca, “Expanding
Connections with Customers through Social Media,” www.Direct2Dell.
com, December 8, 2009.
48. Mark Schaefer, “The 10 Best Corporate Blogs in the World,” www.
businessesgrow.com, January 5, 2011; Roger Yu, “More Companies
Quit Blogging, Go with Facebook Instead,” USA Today, April 20, 2012
49. David Kirkpatrick, “Social Power and the Coming Corporate
Revolution,” Forbes, September 26, 2011.
50. “Intranet Case Study: GM’s mySocrates,” www.communitelligence.
com, accessed February 16, 2014.
51. David Kirkpatrick, “Social Power and the Coming Corporate
Revolution,” Forbes, September 26, 2011.
52. Byron Acohido, “Social-Media Tools Can Boost Productivity,” USA
Today, August 12, 2012.
53. “Privatisation in the 21st Century: Recent Experiences of OECD
Countries,” white paper, Organisation for Economic Co-operation and
Development, January 2009, p. 10.
54. “Hindustan Unilever Empowers Staff,” www.warc.com, July 19, 2012.
Z02_KOTL2621_15_GE_NOTE.INDD 2 3/10/15 2:57 PM
Endnotes E3
38. “VIBE Announces Partnership with Hoop It Up,” Business Wire, March
14, 2011
39. Kerry Capell, “Vodafone: Embracing Open Source with Open Arms,”
BusinessWeek, April 20, 2009, pp. 52–53; “Call the Carabiniere,” The
Economist, May 16, 2009, p. 75; Vodafone Annual Report, www.
vodfone.com, March 31, 2012.
40. Sonya Misquitta and Cecilie Rohwedder, “Kraft Covets Cadbury’s
Know-How in India,” Wall Street Journal, September 10, 2009; Scott
Moeller, “Case Study: Kraft’s Takeover of Cadbury,” Financial Times,
January 9, 2012.
41. Robin Cooper and Robert S. Kalpan, “Profit Priorities from Activity-
Based Costing,” Harvard Business Review, May–June 1991, pp.
130–135.
42. See Robert S. Kaplan and David P. Norton, The Balanced Scorecard:
Translating Strategy into Action (Boston: Harvard Business School
Press, 1996) as a tool for monitoring stakeholder satisfaction.
43. Thomas J. Peters and Robert H. Waterman Jr., In Search of Excellence:
Lessons from America’s Best-Run Companies (New York: Harper and
Row, 1982), pp. 9–12.
44. John P. Kotter and James L. Heskett, Corporate Culture and
Performance (New York: Free Press, 1992).
45. An excellent hands-on guide to developing a marketing plan can
be found with Alexander Chernev, The Marketing Plan Handbook
(Chicago, IL: Cerebellum Press, 2011), on which some of the
discussion in this section is built. See also Marian Burk Wood, The
Marketing Plan: A Handbook, 4th ed. (Upper Saddle River, NJ:
Pearson, 2011); Tim Calkins, Breakthrough Marketing Plans: How
to Stop Wasting Time and Start Driving Growth (New York: Palgrave
MacMillan, 2008).
46. Donald R. Lehmann and Russell S. Winer, Product Management,
3rd ed. (Boston: McGraw-Hill/Irwin, 2001).
Chapter 3
1. David Welch, “Campbell Looks Way Beyond the Tomato,” Bloomberg
BusinessWeek, August 13, 2012; Candice Choi, “Campbell Soup
Tries to Reinvent Itself,” Huffington Post, September 7, 2012; Karl
Greenberg, “Campbell’s Go Soups Add Zing for Millennial Palates,”
Marketing Daily, November 13, 2012; Craig Torres and Anthony Field,
“Campbell’s Quest for Productivity,” Bloomberg BusinessWeek,
November 29, 2012; Jenna Goudreau, “Kicking the Can,” Forbes,
December 24, 2012, pp. 46–51.
2. Susan Warren, “Pillow Talk: Stackers Outnumber Plumpers; Don’t
Mention Drool,” Wall Street Journal, January 8, 1998.
3. Dan Buckley, “Sweet Teeth Serve Irish Well in Chocoholics League,”
Irish Examiner, June 27, 2012; “Health Statistics: Tobacco: Cigarette
Consumption (Most Recent) by Country,” www.nationmaster.com,
accessed November 7, 2012; “Global Beer Consumption by Country
in 2010,” Kirin Institute of Food and Lifestyle Report 33 (December 21,
2011); “Per Capita Wine Consumption by Country,” 2010, Trade Data
and Analysis, www.wineinstitute.org.
4. Ronald D. Michman, Edward M. Mazze, and Alan J. Greco, Lifestyle
Marketing: Reaching the New American Consumer (Westport: Praeger,
2008); Scarlett Lindeman, “Jell-O Love: A Guide to Mormon Cuisine,”
The Atlantic, March 24, 2010; Julie Zeveloff, “These Cities Love Ice
Cream the Most,” Business Insider, July 20, 2012; Jim Farber, “New
York is the King of Country,” Daily News, August 9, 2012; “About
Seattle,” www.depts.washington.edu/uwsp/tsa/seattle.html, accessed
February 7, 2014.
5. William Holstein, “The Dot Com within Ford,” BusinessWeek, January
30, 2000.
6. For some thought-provoking academic perspectives on the challenges
of Big Data, see George S. Day, “Closing the Marketing Capabilities
Gap,” Journal of Marketing 75 (July 2011), pp. 183–95.
7. Leonard M. Fuld, “Staying a Step Ahead of the Rest,” Chief Executive
218 (June 2006), p. 32.
8. “Spies, Lies & KPMG,” BusinessWeek, February 26, 2007.
12. Kana Inagaki and Juro Osawa, “Panasonic Beats a Retreat as Green
Energy Bets Flop,” Wall Street Journal, October 31, 2012; “Panasonic
to Close Czech LCD Panel Plant,” Industry Week, October 31, 2012;
Jonathan Soble, “Panasonic Warns of Second $10bn Loss,” Financial
Times, November 1, 2012; Daisuke Wakabayashi, “Panasonic Returns
to Profit,” Wall Street Journal, July 31, 2012.
13. Peter Drucker, Management: Tasks, Responsibilities and Practices
(New York: Harper and Row, 1973), chapter 7.
14. James R. Hagerty, “Office Furniture in the Age of Smartphones,” Wall
Street Journal, August 7, 2012.
15. Kawasaki also humorously suggests checking out comic strip
character Dilbert’s mission statement generator first if one has to be
developed by the organization: Dilbert.com.
16. www.americanapparel.net/aboutus/verticalint/, accessed October 20,
2012.
17. Peter Freedman, “The Age of the Hollow Company,” TimesOnline, April
25, 2004; www.metro.lu/about/metro_facts, accessed October 20,
2012.
18. This section is based on Robert M. Grant, Contemporary Strategy
Analysis, 8th ed. (New York: John Wiley & Sons, 2013), chapter 5.
19. Diane Mermigas, “ESPN Could Be Digital Sports Nirvana,” www.
mediapost.com, January 14, 2011; www.worldofespn.com, accessed
February 20, 2014.
20. “Merck: Acquisitions & Divestments,” www.merckgroup.com, October
23, 2010.
21. Jesse Eisinger, “The Marriage from Hell,” Condé Nast Portfolio,
February 2008, pp. 84–88, 132.
22. Peter Svensson, “Sprint’s Nextel to Be Shut Off as Early as June
2013,” www.huffingtonpost.com, May 29, 2012.
23. Susan Carey, “United’s CEO Apologizes for Service Woes,” Wall Street
Journal, July 26, 2012; Drake Bennett, “Marriage at 30,000 Feet,”
Bloomberg BusinessWeek, February 6, 2012; Becky Quick, “A Sticky
(Notes) Problem: Mergers and Consumers,” Fortune, October 8, 2012,
p. 75.
24. Curious George (Movie), www.rottentomatoes.com; The Adventures
of Curious George, www.universalstudioshollywood.com; Curious
George (TV Show), www.pbskids.org; all accessed October 20, 2012.
25. “AIG to Divest Runoff Businesses,” Zacks Equity Research Analyst
Blog, www.zacks.com, June 28, 2012.
26. Beth Snyder Bulik, “Customer Service Playing Bigger Role as
Marketing Tool,” Advertising Age, November 7, 2011.
27. Reckitt Benckiser (RB) New Product Review, Invention & New Product
Exposition, www.inpex.com, accessed October 20, 2012.
28. “About Krka,” www.krka.si, accessed October 20, 2012.
29. Paul J. H. Shoemaker, “Scenario Planning: A Tool for Strategic
Thinking,” Sloan Management Review (Winter 1995), pp. 25–40.
30. Ronald Grover, “Hollywood Ponders a Post-DVD Future,
BusinessWeek, March 2, 2009, p. 56; Brooks Barnes, “Movie Studios
See a Threat in Growth of Redbox,” New York Times, September 7,
2009; Ben Fritz, “Warner’s Approach to Video Games Is Paying Off,”
Los Angeles Times, October 18, 2011; Dan Sabbagh, “Hollywood in
Turmoil as DVD Sales Drop and Downloads Steal the Show,” www.
guardian.co.uk, May 4, 2011.
31. Philip Kotler, Kotler on Marketing (New York: Free Press, 1999).
32. Ibid.
33. Phaedra Hise, “Was It Time to Go Downmarket?” Inc., September
2006, p. 47; Patrick J. Sauer, “Returning to Its Roots,” Inc., November
2007; www.loanbright.com, accessed February 20, 2014.
34. Dominic Dodd and Ken Favaro, “Managing the Right Tension,” Harvard
Business Review, December 2006, pp. 62–74.
35. Michael E. Porter, Competitive Strategy: Techniques for Analyzing
Industries and Competitors (New York: Free Press, 1980), chapter 2.
36. Michael E. Porter, “What Is Strategy?” Harvard Business Review,
November–December 1996, pp. 61–78.
37. “Member Airlines, Travel the World with the Star Alliance Network,”
www.staralliance.com, accessed October 20, 2012.
Z02_KOTL2621_15_GE_NOTE.INDD 3 3/10/15 2:57 PM
E4 Endnotes
34. Susan Donaldson James, “Gay Americans Make Up 4 Percent of
Population,” www.abcnews.go.com, April 8, 2011.
35. Lucia Moses, “Data Point: Modern Families,” Adweek, August 20,
2012.
36. Nanette Byrnes, “Secrets of the Male Shopper,” BusinessWeek,
September 4, 2006, p. 44.
37. For a data-rich examination of the post-recession consumer, see John
Gerzema and Michael D’Antonio, Spend Shrift: How the Post-Crisis
Values Revolution Is Changing the Way We Buy, Sell and Live. (San
Francisco: Jossey-Bass, 2011).
38. Elisabeth Sullivan, “The Age of Prudence,” Marketing News, April
15, 2009, pp. 8–11; Steve Hamm, “The New Age of Frugality,”
BusinessWeek, October 20, 2008, pp. 55–60; Jessica Deckler, “Never
Pay Retail Again,” CNNMoney.com, May 30, 2008.
39. Richard K. Miller and Kelli Washington, Consumer Behavior 2011,
Richard K. Miller & Associates, chapter 11, pp. 63–74.
40. Michael Barnett, “They’re Shopping, but Not As We Know It,”
Marketing Week, June 14, 2012.
41. Peter Wise, “Austerity Set to Increase Inequality in Portugal,” Financial
Times, December, 2011.
42. Julie Schlosser, “Infosys U.,” Fortune, March 20, 2006, pp. 41–42;
“Q1 Earnings: Five Things to Watch Out For from Infosys-TCS Double
Header,” Economic Times, July 12, 2012.
43. “Clearing House Suit Chronology,” Associated Press, January 26,
2001; Paul Wenske, “You Too Could Lose $19,000!” Kansas City Star,
October 31, 1999.
44. Laura Zinn, “Teens: Here Comes the Biggest Wave Yet,”
BusinessWeek, April 11, 2004, pp. 76–86.
45. Chris Taylor (ed.), “Go Green. Get Rich.” Business 2.0, January/
February 2007, pp. 68–79.
46. Philip Kotler, “Reinventing Marketing to Manage the Environmental
Imperative,” Journal of Marketing 75 (July 2011), pp. 132–35;
Subhabrata Bobby Banerjee, Easwar S. Iyer, and Rajiv K Kashyap,
“Corporate Enviromentalism: Antecedents and Influence of Industry
Type,” Journal of Marketing 67 (April 2003), pp. 106–22.
47. Apple quarterly press releases, culminating in “Apple Reports Fourth
Quarter Results,” www.apple.com, October 25, 2012.
48. David DiSalvo, “10 Big Science and Technology Advances to Watch,”
Forbes, July 29, 2011.
49. Allison Lim, “The U.S Is Still No. 1 in R&D Spending, but . . . ,” www.
nbcnews.com, August 17, 2012; Martin Grueber and Tim Studt, R&D,
December 16, 2011.
50. www.fda.gov/AboutFDA, accessed February 7, 2014; Henry I. Miller,
“The FDA’s Imprudent Caution,” Policy Review, June/July 2010,
pp. 73–85; John A. Vernon and Joseph H. Golec, “The Case for Less,
not More, US FDA Regulation,” Pharmaeconomics 2011 29, no. 8,
pp. 637–40.
51. Schumpter: Beyond Economics, “Businesspeople Need to Think Harder
about Political Risk,” February 12, 2011.
52. See Dorothy Cohen, Legal Issues in Marketing Decision Making
(Cincinnati: South-Western, 1995).
53. Paul Ohm, “Don’t Build a Database of Ruin,” HBR Blog Network,
August 23, 2012.
54. Mark Sullivan, “Data Snatchers! The Booming Market for Your Online
Identity,” PC World, June 26, 2012.
55. Conference Summary, “Excelling in Today’s Multimedia World,”
Economist Conferences’ Fourth Annual Marketing Roundtable, Landor,
March 2006.
56. For a good discussion and illustration, see Roger J. Best, Market-
Based Management, 6th ed. (Upper Saddle River, NJ: Prentice Hall,
2013).
57. For further discussion, see Gary L. Lilien, Philip Kotler, and K. Sridhar
Moorthy, Marketing Models (Upper Saddle River, NJ: Prentice Hall,
1992); Gary L. Lilien, “Bridging the Academic-Practitioner Divide in
Marketing Decision Models,” Journal of Marketing 75 (July 2011),
pp. 196–210.
9. Jennifer Esty, “Those Wacky Customers!” Fast Company, January
2004, p. 40.
10. Helen Coster, “Shopping Cart Psychology,” Forbes, September 7,
2009, pp. 64–65.
11. Sara Steindorf, “Shoppers Spy on Those Who Serve,” Christian
Science Monitor, May 28, 2002; Edward F. McQuarrie, Customer
Visits: Building a Better Market Focus, 3rd ed. (Newbury Park, CA:
Sage Press, 2008).
12. “Customer Service Is Key: SavOn Convenience Stores Score
Exceptionally High on Mystery Shop Reviews for Its Customer Service
Skills,” Convenience Store Decisions, June 6, 2012.
13. Heather Green, “It Takes a Web Village,” Business Week, September 4,
2006, p. 66.
14. www.claritas.com/sitereports/default.jsp, accessed November 7, 2012.
15. www.attensity.com/products/, accessed February 5, 2014.
16. “More Younger Homemakers Rate Their Cooking Skills as Very Good
Than Do Older Age Groups, Reports NPD,” www.npd.com, November
29, 2011.
17. www.nielsen-online.com/products_buzz.jsp?section=pro_buzz#1,
accessed February 7, 2014.
18. Alex Wright, “Mining the Web for Feelings, Not Facts,” New York Times,
August 24, 2009; Sarah E. Needleman, “For Companies, a Tweet in Time
Can Avert PR Mess, Wall Street Journal, August 3, 2009, p. B6.
19. See BadFads Museum, www.badfads.com, for examples of fads and
collectibles through the years.
20. Katy McLaunghlin, “Macaroni Grill’s Order: Cut Calories, Keep
Customers,” Wall Street Journal, September 16, 2009, p. B6.
21. John Naisbitt and Patricia Aburdene, Megatrends 2000 (New York:
Avon Books, 1990).
22. World POPClock Projection, U.S. Census Bureau, www.census.gov,
2011; Statistical Abstract of the United States 2011, U.S. Census
Bureau.
23. See Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers,
Beyond Limits (White River Junction, VT: Chelsea Green, 1993) for
some commentary; see also Matt Rosenberg, “If The World Were a
Village . . . ,” www.geography.about.com, August 19, 2011.
24. “World Development Indicators Database,” World Bank, http://site_
resources.worldbank.org/DATASTATISTICS/Resources/POP ,
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org/depweb/english/beyond/beyondco/beg_03 .
25. For an academic examination of some relevant consumer behavior
issues, see Kelly D. Martin and Ronald Paul Hill, “Life Satisfaction,
Self-Determination, and Consumption Adequacy at the Bottom of the
Pyramid,” Journal of Consumer Research 38 (April 2012), pp. 1155–68.
26. “Facts and Statistics,” U.S. Census Bureau, November 30, 2011.
27. Christine Birker, “The Census and the New American Consumer,
Marketing News, May 15, 2011.
28. Queena Sook Kim, “Fisher-Price Reaches for Hispanics,” Wall Street
Journal, November 1, 2004.
29. “Census: Asian-Indian Population Explodes across U.S.,” www.
newamericamedia.org, May 13, 2011; Dan Ouellette, “Spice Market,”
Adweek, May 12, 2008;
30. Mark R. Forehand and Rohit Deshpandé, “What We See Makes Us Who
We Are: Priming Ethnic Self-Awareness and Advertising Response,”
Journal of Marketing Research 38 (August 2001), pp. 336–48.
31. The Central Intelligence Agency’s World Factbook, www.cia.gov/
library/publications/the-world-factbook, June 25, 2012.
32. www.census.gov/newsroom/releases/archives/facts_for_features_
special_editions/cb11-ff15.html; Richard Pérez-Peña, “U.S.
Bachelor Degree Rate Passes Milestone,” www.nytimes.com,
February 23, 2012.
33. Sabrina Tavernise, “Married Couples Are No Longer a Majority,
Census Finds,” The New York Times, May 26, 2011; D’Vera Cohn,
Jeffrey Passel, Wendy Wang and Gretchen Livingston, “Barely Half of
U.S. Adults Are Married—A Record Low,” www.pewsocialtrends.org,
December 14, 2011.
Z02_KOTL2621_15_GE_NOTE.INDD 4 3/10/15 2:57 PM
Endnotes E5
Bennett, and Judy Drennan, “Capturing Affective Experiences Using
the SMS Experience Sampling (SMS-ES) Method,” International
Journal of Market Research 53, no. 4 (2011), pp. 479–506.
19. Ashley Lutz and Matt Townsend, “Big Brother Has Arrived at a Store
Near You, Bloomberg Businessweek, December 19, 2011.
20. For a detailed review of some relevant academic work, see Eric
J. Arnould and Amber Epp, “Deep Engagement with Consumer
Experience,” Rajiv Grover and Marco Vriens, eds., Handbook of
Marketing Research (Thousand Oaks, CA: Sage Publications, 2006).
For a range of academic discussion, see the following special issue:
“Can Ethnography Uncover Richer Consumer Insights?” Journal of
Advertising Research 46 (September 2006). For some practical tips,
see Richard Durante and Michael Feehan, “Leverage Ethnography
to Improve Strategic Decision Making,” Marketing Research (Winter
2005).
21. Eric J. Arnould and Linda L. Price, “Market-Oriented Ethnography
Revisited,” Journal of Advertising Research 46 (September 2006),
pp. 251–62; Eric J. Arnould and Melanie Wallendorf, “Market-
Oriented Ethnography: Interpretation Building and Marketing Strategy
Formulation,” Journal of Marketing Research 31 (November 1994),
pp. 484–504.
22. Michael V. Copeland, “Intel’s Cultural Anthropologist,” Fortune,
September 27, 2010.
23. Helen Coster, “Shopping Cart Psychology,” Forbes, September 7,
2009, pp. 64–65.
24. “Smith & Nephew Launches ALLEVYN Life,” www.smith-nephew.com,
July 20, 2012.
25. Richard J. Harrington and Anthony K. Tjan, “Transforming Strategy
One Customer at a Time,” Harvard Business Review, March 2008,
pp. 62–72; Stanley Reed, “The Rise of a Financial Data Powerhouse,”
BusinessWeek, May 15, 2007; Stanley Reed, “Media Giant or Media
Muddle?” BusinessWeek, May 1, 2008.
26. Piet Levy, “In with the Old, in Spite of the New,” Marketing News, May
30, 2009, p. 19.
27. William Grimes, “When Businesses Can’t Stop Asking, ‘How Am I
Doing,’” New York Times, March 16, 2012.
28. Catherine Marshall and Gretchen B. Rossman, Designing Qualitative
Research, 4th ed. (Thousand Oaks, CA: Sage Publications, 2006);
Bruce L. Berg, Qualitative Research Methods for the Social Sciences,
6th ed. (Boston: Allyn & Bacon, 2006); Norman K. Denzin and Yvonna
S. Lincoln, eds., The Sage Handbook of Qualitative Research, 3rd ed.
(Thousand Oaks, CA: Sage Publications, 2005); Linda Tischler, “Every
Move You Make,” Fast Company, April 2004, pp. 73–75.
29. Paula Andruss, “Keeping Both Eyes on Quality,” Marketing News,
September 15, 2008, pp. 22–23.
30. Evan Ramstead, “Big Brother, Now at the Mall,” Wall Street Journal,
October 8, 2012; Natasha Singer, “Face Recognition Makes the Leap
From Sci-Fi,” The New York Times, November 13, 2011; Emily Glazer,
“The Eyes Have It: Marketers Now Track Shoppers’ Retinas,” Wall
Street Journal, July 12, 2012; Lessley Anderson, “A Night on the Town
with SceneTap,” The Verve, May 29, 2012; Kashmir Hill, “SceneTap
Wants to One Day Tell You the Weights, Heights, Races and Income
Levels of the Crowd at Every Bar,” www.forbes.com, September 25,
2012.
31. Laurie Burkitt, “Battle for the Brain,” Forbes, November 16, 2009,
pp. 76–77.
32. Emily Steel, “Does Shopping Stress You Out Too Much?,” Wall Street
Journal, November 23, 2011. For an academic application of some of
these techniques, see Thales Teixeira, Michel Wedel, and Rik Pieters,
“Emotion-Induced Engagement in Internet Video Advertisements,”
Journal of Marketing Research 49 (April 2012), pp. 144–59.
33. For a comprehensive and informative review of the topic, see Hilke
Plassmann, Thomas Zoëga Ramsøy, and Milica Milosavljevic,
“Branding the Brain: A Critical Review and Outlook,” Journal of
Consumer Psychology 22 (2012), pp. 18–36, as well as other articles in
that special issue.
34. Jon Evans, “In Five Years, Most Africans Will Have Smart Phones,”
www.techcrunch.com, June 9, 2012.
58. www.naics.com, accessed February 7, 2010; www.census.gov/epcd/
naics02, December 9, 2010.
59. Stanley F. Slater and Eric M. Olson, “Mix and Match,” Marketing
Management, July–August 2006, pp. 32–37; Brian Sternthal and
Alice M. Tybout, “Segmentation and Targeting,” Dawn Iacobucci, ed.,
Kellogg on Marketing (New York: John Wiley & Sons, 2001), pp. 3–30.
60. Stephanie Clifford, “Measuring the Results of an Ad Right Down to the
City Block,” New York Times, August 5, 2009.
61. For an excellent overview of market forecasting, see Scott Armstrong,
ed., Principles of Forecasting: A Handbook for Researchers and
Practitioners (Norwell, MA: Kluwer Academic Publishers, 2001) and
his Web site: www.forecastingprinciples.com; also see Roger J. Best,
“An Experiment in Delphi Estimation in Marketing Decision Making,”
Journal of Marketing Research 11 (November 1974), pp. 447–52;
Norman Dalkey and Olaf Helmer, “An Experimental Application of the
Delphi Method to the Use of Experts,” Management Science, April
1963, pp. 458–67.
Chapter 4
1. “Twitter Buzz Informs TV Ads,” www.warc.com, October 24, 2012;
Josh Lowensohn, “Samsung Slams iPhone 5 Linegoers in New
Attack Ad,” CNET News, September 19, 2012; Salvador Rodriguez,
“Samsung Pokes Fun at People Waiting in Line for iPhone 5,” Los
Angeles Times, September 19, 2012.
2. www.marketingpower.com/AboutAMA, accessed February 16, 2014.
3. See Robert Schieffer, Ten Key Customer Insights: Unlocking the Mind
of the Market (Mason, OH: Thomson, 2005) for a comprehensive,
in-depth discussion of how to generate customer insights to drive
business results.
4. David Kiley, “Walmart Is Out to Change Its Story with New Ads,”
Bloomberg Businessweek, September 13, 2007.
5. Jessica Shambora, “Wanted: Fearless Marketing Execs,” Fortune,
August 15, 2011, p. 27.
6. Ellen Byron, “Wash Away Bad Hair Days,” Wall Street Journal, June 30,
2010.
7. Natalie Zmuda, “Tropicana Line’s Sales Plunge 20% Post-Rebranding,”
Advertising Age, April 2, 2009.
8. “2012 Global Market Research Report,” Esomar, accessed February
16, 2014.
9. www.pgjobs.com, accessed February 16, 2014.
10. www.innovationchallenge.com, accessed February 16, 2014.
11. Christine Birkner, “High Impact Research on a Small-Business
Budget,” Marketing News, May 30, 2011.
12. Scott Martin, “Custom Research Easier in Digital Era,” USA Today,
August 28, 2012. For an interesting academic application, see Rex
Yuxing Du and Wagner Kamakura, “Quantitative Trendspotting,”
Journal of Marketing Research 49 (August 2012), pp. 514–36.
13. Stephanie L. Gruner, “Spies Like Us,” Inc., August 1, 1998; Darren
Dahl, “10 Tips on How to Research Your Competition,” Inc., May 11,
2011.
14. Michael Fielding, “Special Delivery: UPS Conducts Surveys to Help
Customers Export to China,” Marketing News, February 1, 2007,
pp. 13–14.
15. Brad Smith, “Figure Out the Customer,” Bloomberg BusinessWeek,
April 12, 2012.
16. Adapted from Arthur Shapiro, “Let’s Redefine Market Research,”
Brandweek, June 21, 2004, p. 20; Kevin Ohannessian, “Star Wars:
Thirty Years of Success,” Fast Company, May 29, 2007.
17. Ned Levi, “What’s the Future for U.S. Airline Inflight Entertainment?,”
www.consumertraveler.com, April 9, 2012.
18. Fiona Blades, “Real-time Experience Tracking Gets Closer to the
Truth,” International Journal of Market Research 54, no. 2 (2012),
pp. 283–85; Emma K. Macdonald, Hugh N. Wilson and Umut Konus,
“Better Consumer Insight—in Real Time,” Harvard Business Review,
September 2012, pp. 102–108; Lynda Andrews, Rebekah Russell
Z02_KOTL2621_15_GE_NOTE.INDD 5 3/10/15 2:57 PM
E6 Endnotes
Goes Local,” Adweek, February 14, 2011; Charlie White, “Music
Services Compared,” www.mashable.com, February 13, 2013.
2. For discussion of some of the issues involved, see Glen Urban, Don’t
Just Relate—Advocate (Upper Saddle River, NJ: Pearson Education
Wharton School Publishing, 2005).
3. “Customer Reviews Drive 196% Increase in Paid Search Revenue for
Office Depot,” Bazaarvoice, September 15, 2008.
4. Steven Burke, “Dell’s vs. HP’s Value,” CRN, May 15, 2006, p. 46;
David Kirkpatrick, “Dell in the Penalty Box,” Fortune, September 18,
2006, p. 70.
5. 2012—US Mid-Year Rankings, www.brandindex.com.
6. Irwin P. Levin and Richard D. Johnson, “Estimating Price–Quality
Tradeoffs Using Comparative Judgments,” Journal of Consumer
Research 11 (June 1984), pp. 593–600. Customer-perceived value
can be measured as a difference or as a ratio. If total customer value
is $20,000 and total customer cost is $16,000, then the customer-
perceived value is $4,000 (measured as a difference) or 1.25 (measured
as a ratio). Ratios that are used to compare offers are often called
value–price ratios.
7. Alex Taylor, “Caterpillar: Big Trucks, Big Sales, Big Attitude,” Fortune,
August 20, 2007, pp. 48–53; Tim Kelly, “Squash the Caterpillar,”
Forbes, April 21, 2008, pp. 136–41; Jeff Borden, “Eat My Dust,”
Marketing News, February 1, 2008, pp. 20–22; Geoff Colvin,
“Caterpillar Is Absolutely Crushing It,” Fortune, May 23, 2011, pp.
136–44; Jon Birger, “10 Best Stocks for 2012,” Fortune, December 26,
2011, pp. 100–7; Simon Montlake, “Cat Scammed,” Forbes, March 4,
2013, pp. 36–38.
8. For an interesting approach to assess customer product perceptions
and market structure online, see Thomas Y. Lee and Eric T. Bradlow,
“Automated Marketing Research Using Online Customer Reviews,”
Journal of Marketing Research 48 (October 2011), pp. 881–94.
9. Gary Hamel, “Strategy as Revolution,” Harvard Business Review, July–
August 1996, pp. 69–82.
10. Vikas Mittal, Eugene W. Anderson, Akin Sayrak, and Pandu
Tadilamalla, “Dual Emphasis and the Long-Term Financial Impact of
Customer Satisfaction,” Marketing Science 24 (Fall 2005), pp. 544–55.
11. Michael Tsiros, Vikas Mittal, and William T. Ross Jr., “The Role of
Attributions in Customer Satisfaction: A Reexamination,” Journal of
Consumer Research 31 (September 2004), pp. 476–83. For a succinct
review, see Richard L. Oliver, “Customer Satisfaction Research,” Rajiv
Grover and Marco Vriens, eds., Handbook of Marketing Research
(Thousand Oaks, CA: Sage Publications, 2006), pp. 569–87; for in-depth
discussion, see Richard L. Oliver, Satisfaction: A Behavioral Perspective
on the Consumer (Armonk, NY: M. E. Sharpe, 2010).
12. For some provocative analysis and discussion, see Praveen K.
Kopalle and Donald R. Lehmann, “Setting Quality Expectations when
Entering a Market: What Should the Promise Be?,” Marketing Science
25 (January–February 2006), pp. 8–24; Susan Fournier and David
Glenmick, “Rediscovering Satisfaction,” Journal of Marketing 63
(October 1999), pp. 5–23.
13. Jennifer Aaker, Susan Fournier, and S. Adam Brasel, “When Good
Brands Do Bad,” Journal of Consumer Research 31 (June 2004), pp.
1–16; Pankaj Aggrawal, “The Effects of Brand Relationship Norms on
Consumer Attitudes and Behavior,” Journal of Consumer Research
31 (June 2004), pp. 87–101; Florian Stahl, Mark Heitmann, Donald
R. Lehmann, and Scott A. Neslin, “The Impact of Brand Equity on
Customer Acquisition, Retention, and Profit Margin,” Journal of
Marketing 76 (July 2012), pp. 44–63.
14. Vikas Mittal, William T. Ross and Patrick M. Baldasare, “The
Asymmetric Impact of Negative and Positive Attribute-Level
Performance on Overall Satisfaction and Repurchase Intentions,”
Journal of Marketing 62 (January 1998), pp. 333–347.
15. For an interesting analysis of the effects of different types of
expectations, see William Boulding, Ajay Kalra, and Richard Staelin,
“The Quality Double Whammy,” Marketing Science 18 (April 1999),
pp. 463–84.
16. Neil A. Morgan, Eugene W. Anderson, and Vikas Mittal, “Understanding
Firms’ Customer Satisfaction Information Usage,” Journal of Marketing
69 (July 2005), pp. 131–51.
35. Bradley Johnson, “Forget Phone and Mail: Online’s the Best Place to
Administer Surveys,” Advertising Age, July 17, 2006, p. 23.
36. Emily Steel, “The New Focus Groups: Online Networks Proprietary
Panels Help Consumer Companies Shape Products, Ads,” Wall Street
Journal, January 14, 2008.
37. Scott Martin, “Custom Research Easier in Digital Era,” USA TODAY,
August 28, 2012.
38. Neil Swidey, “Cambridge’s Bluefin Labs Decodes Social Media
Chatter,” Boston Globe, November 25, 2012.
39. For an interesting examination of consumer candidness, see David Gal
and Derek D. Rucker, “Answering the Unasked Question: Response
Substitution in Consumer Surveys,” Journal of Marketing Research 48
(February 2011), pp. 185–95.
40. Jon Brodkin, “119 Million Americans Lack Broadband Internet, FCC
Reports,” www.arstechnica.com, August 21, 2012.
41. Deborah L. Vence, “Global Consistency: Leave It to the Experts,”
Marketing News, April 28, 2003, p. 37. For some scaling issues,
see Bart de Langhe, Stefano Puntoni, Daniel Fernandes, and Stijn
M. J. Van Osselaer, “The Anchor Contraction Effect in International
Marketing Research,” Journal of Marketing Research 48 (April 2011),
pp. 366–80.
42. Kevin J. Clancy and Peter C. Krieg, Counterintuitive Marketing: How
Great Results Come from Uncommon Sense (New York: Free Press,
2000).
43. The Advertising Research Foundation, www.thearf.org/assets/
ogilvy-09, accessed February 16, 2014.
44. John D. C. Little, “Decision Support Systems for Marketing Managers,”
Journal of Marketing 43 (Summer 1979), p. 11.
45. Marketing News can be found at www.marketingpower.com.
46. Karen V. Beaman, Gregory R. Guy, and Donald E. Sexton, “Managing
and Measuring Return on Marketing Investment,” The Conference
Board Research Report R-1435-08-RR, 2008.
47. Paul Farris, Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein,
Marketing Metrics: 50+ Metrics Every Executive Should Master (Upper
Saddle River, NJ: Pearson Education, 2006); John Davis, Magic Numbers
for Consumer Marketing: Key Measures to Evaluate Marketing Success
(Singapore: John Wiley & Sons, 2005).
48. Elisabeth Sullivan, “Measure Up,” Marketing News, May 30, 2009, pp.
8–11.
49. Michael Krauss, “Which Metrics Matter Most?” Marketing News,
February 28, 2009, p. 20.
50. Tim Ambler, Marketing and the Bottom Line: The New Methods of
Corporate Wealth, 2nd ed. (London: Pearson Education, 2003).
51. Kusum L. Ailawadi, Donald R. Lehmann, and Scott A. Neslin, “Revenue
Premium as an Outcome Measure of Brand Equity,” Journal of
Marketing 67 (October 2003), pp. 1–17.
52. Tim Ambler, Marketing and the Bottom Line: The New Methods of
Corporate Wealth, 2nd ed. (London: Pearson Education, 2003).
53. Gerard J. Tellis, “Modeling Marketing Mix,” Rajiv Grover and Marco
Vriens, eds., Handbook of Marketing Research (Thousand Oaks, CA: Sage
Publications, 2006).
54. David J. Reibstein, “Connect the Dots,” CMO Magazine, May 2005.
55. For insightful discussion of the design and implementation of
marketing dashboards, see Koen Pauwels, It’s Not the Size of the
Data, It’s How You Use It: Smarter Marketing with Analytics and
Dashboards (New York: AMACOM: 2014) and consult the resources at
www.marketdashboards.com.
56. Robert S. Kaplan and David P. Norton, The Balanced Scorecard
(Boston: Harvard Business School Press, 1996).
Chapter 5
1. Seth Fiegerman, “Pandora Now Has 200 Million Registered Users,”
www.mashable.com, April 9, 2013; Drake Baer, “What You Can Learn
from Pandora’s Near-Death Experience,” Fast Company, April 4,
2013; Tyler Gray, “Pandora Pulls Back the Curtain on Its Magic Music
Machine,” Fast Company, January 21, 2011; Rob Medich, “Pandora
Z02_KOTL2621_15_GE_NOTE.INDD 6 3/10/15 2:57 PM
Endnotes E7
30. Don Pepper and Martha Rogers, “Return on Customer: How Marketing
Creates Value,” Marketing Review St. Gallen 28 (June 2011), pp. 14–19.
31. Werner J. Reinartz and V. Kumar, “The Impact of Customer
Relationship Characteristics on Profitable Lifetime Duration,” Journal
of Marketing 67 (January 2003), pp. 77–99; Werner J. Reinartz
and V. Kumar, “On the Profitability of Long-Life Customers in a
Noncontractual Setting: An Empirical Investigation and Implications for
Marketing,” Journal of Marketing 64 (October 2000), pp. 17–35.
32. Rakesh Niraj, Mahendra Gupta, and Chakravarthi Narasimhan,
“Customer Profitability in a Supply Chain,” Journal of Marketing 65
(July 2001), pp. 1–16.
33. Thomas M. Petro, “Profitability: The Fifth ‘P’ of Marketing,” Bank
Marketing, September 1990, pp. 48–52; “Who Are Your Best
Customers?,” Bank Marketing, October 1990, pp. 48–52.
34. “Easier Than ABC,” Economist, October 25, 2003, p. 56; Robert S.
Kaplan and Steven R. Anderson, Time-Driven Activity Based Costing
(Boston MA: Harvard Business School Press, 2007); “Activity-Based
Accounting” Economist, June 29, 2009. See also Morten Holm, V. Kumar,
and Carsten Rohde, “Measuring Customer Profitability in Complex
Environments: An Interdisciplinary Contingency Framework,” Journal of
the Academy of Marketing Science 40 (May 2012) pp. 387–401.
35. V. Kumar, “Customer Lifetime Value,” Rajiv Grover and Marco Vriens,
eds., Handbook of Marketing Research (Thousand Oaks, CA: Sage
Publications, 2006), pp. 602–27; Sunil Gupta, Donald R. Lehmann,
and Jennifer Ames Stuart, “Valuing Customers,” Journal of Marketing
Research 61 (February 2004), pp. 7–18; Rajkumar Venkatesan and V.
Kumar, “A Customer Lifetime Value Framework for Customer Selection
and Resource Allocation Strategy,” Journal of Marketing 68 (October
2004), pp. 106–25.
36. V. Kumar, “Profitable Relationships,” Marketing Research 18 (Fall
2006), pp. 41–46.
37. For some recent analysis and discussion, see Michael Haenlein,
Andreas M. Kaplan, and Detlef Schoder, “Valuing the Real Option
of Abandoning Unprofitable Customers when Calculating Customer
Lifetime Value,” Journal of Marketing 70 (July 2006), pp. 5–20; Teck-Hua
Ho, Young-Hoon Park, and Yong-Pin Zhou, “Incorporating Satisfaction
into Customer Value Analysis: Optimal Investment in Lifetime Value,”
Marketing Science 25 (May–June 2006), pp. 260–77; and Peter S. Fader,
Bruce G. S. Hardie, and Ka Lok Lee, “RFM and CLV: Using Iso-Value
Curves for Customer Base Analysis,” Journal of Marketing Research
62 (November 2005), pp. 415–30; V. Kumar, Rajkumar Venkatesan,
Tim Bohling, and Denise Beckmann, “The Power of CLV: Managing
Customer Lifetime Value at IBM,” Marketing Science 27 (2008), pp.
585–99.
38. Louis Columbus, “Lessons Learned in Las Vegas: Loyalty Programs
Pay,” CRM Buyer, July 29, 2005; Oskar Garcia, “Harrah’s Broadens
Customer Loyalty Program; Monitors Customer Behavior,” Associated
Press, September 27, 2008; Dan Butcher, “Harrah’s Casino Chain Runs
Mobile Coupon Pilot,” Mobile Marketer, November 19, 2008; Michael
Bush, “Why Harrah’s Loyalty Effort Is Industry’s Gold Standard,”
Advertising Age, October 5, 2009, p. 8; Emily Steel, “Marketers Find
Web Chat Can Be Inspiring,” Wall Street Journal, November 23, 2009;
Liz Benston, “MGM Mirage, Harrah’s Finding Revenue in Rewards
Programs,” Las Vegas Sun, May 10, 2010; Karl Taro Greenfield, “How to
Survive in Vegas,” Bloomberg Businessweek, August 9, 2010, pp. 70–75.
39. Michael Lewis, “Customer Acquisition Promotions and Customer Asset
Value,” Journal of Marketing Research 63 (May 2006), pp. 195–203;
see also Romana Khan, Michael Lewis, and Vishal Singh, “Dynamic
Customer Management and the Value of One-to-One Marketing,”
Marketing Science 28 (November–December 2009), pp. 1063–79.
40. V. Kumar and Bharath Rajan, “The Perils of Social Coupon
Campaigns,” MIT Sloan Management Review 53 (Summer 2012), pp.
13–14; Karen E. Klein, “Small Businesses See Red over Daily Deals,”
Bloomberg Businessweek, December 3, 2012, pp. 53–54.
41. Hamish Pringle and Peter Field, “Why Customer Loyalty Isn’t as
Valuable as You Think,” Advertising Age, March 23, 2009, p. 22.
42. Werner Reinartz, Jacquelyn S. Thomas, and V. Kumar, “Balancing
Acquisition and Retention Resources to Maximize Customer
Profitability,” Journal of Marketing 69 (January 2005), pp. 63–79.
17. Although for moderating factors, see Kathleen Seiders, Glenn B.
Voss, Dhruv Grewal, and Andrea L. Godfrey, “Do Satisfied Customers
Buy More? Examining Moderating Influences in a Retailing Context,”
Journal of Marketing 69 (October 2005), pp. 26–43.
18. See, for example, Christian Homburg, Nicole Koschate, and Wayne
D. Hoyer, “Do Satisfied Customers Really Pay More? A Study of the
Relationship between Customer Satisfaction and Willingness to Pay,”
Journal of Marketing 69 (April 2005), pp. 84–96.
19. Thomas O. Jones and W. Earl Sasser Jr., “Why Satisfied Customers
Defect,” Harvard Business Review, November–December 1995,
pp. 88–99.
20. Companies should also note that managers and salespeople can
manipulate customer satisfaction ratings. They can be especially
nice to customers just before the survey. They can also try to exclude
unhappy customers. Another danger is that if customers know the
company will go out of its way to please them, some may express high
dissatisfaction in order to receive more concessions.
21. Timothy L. Keiningham, Lerzan Aksoy, Alexander Buoye, and Bruce
Cooil, “Customer Loyalty Isn’t Enough. Grow Your Share of Wallet,”
Harvard Business Review, October 2011, pp. 29–31.
22. Eugene W. Anderson and Claes Fornell, “Foundations of the American
Customer Satisfaction Index,” Total Quality Management 11 (September
2000), pp. S869–82; Claes Fornell, Michael D. Johnson, Eugene W.
Anderson, Jaaesung Cha, and Barbara Everitt Bryant, “The American
Customer Satisfaction Index: Nature, Purpose, and Findings,” Journal of
Marketing 60 (October 1996), pp. 7–18.
23. For a thorough and insightful review, see Vikas Mittal and Carly
Frenna, “Customer Satisfaction: A Strategic Review and Guidelines
for Managers,” Fast Forward Series, (Cambridge, MA: Marketing
Science Institute, 2010). See also Claes Fornell, Sunil Mithas, Forrest
V. Morgeson III, and M. S. Krishnan, “Customer Satisfaction and Stock
Prices: High Returns, Low Risk,” Journal of Marketing 70 (January 2006),
pp. 3–14. See also Thomas S. Gruca and Lopo L. Rego, “Customer
Satisfaction, Cash Flow, and Shareholder Value,” Journal of Marketing
69 (July 2005), pp. 115–30; Eugene W. Anderson, Claes Fornell, and
Sanal K. Mazvancheryl, “Customer Satisfaction and Shareholder Value,”
Journal of Marketing 68 (October 2004), pp. 172–85.
24. For an empirical comparison of different methods to measure
customer satisfaction, see Neil A. Morgan and Lopo Leotto Rego,
“The Value of Different Customer Satisfaction and Loyalty Metrics in
Predicting Business Performance,” Marketing Science 25 (September–
October 2006), pp. 426–39.
25. James C. Ward and Amy L. Ostrom, “Complaining to the Masses:
The Role of Protest Framing in Customer-Created Complaint Sites,”
Journal of Consumer Research 33 (September 2006), pp. 220–30; Kim
Hart, “Angry Customers Use Web to Shame Firms,” Washington Post,
July 5, 2006.
26. “Basic Concepts,” ASQ, www.asq.org/glossary/q.html, January 16,
2014. For a thorough conceptual discussion, see Peter N. Golder,
Debanjan Mitra, and Christine Moorman, “What Is Quality? An Integrative
Framework of Processes and States,” Journal of Marketing 76 (July
2012), pp. 1–23.
27. For influential, classic research, see Robert D. Buzzell and Bradley
T. Gale, “Quality Is King,” The PIMS Principles: Linking Strategy to
Performance (New York: Free Press, 1987), pp. 103–34. (PIMS stands
for Profit Impact of Market Strategy.)
28. British Airways, www.britishairways.com.
29. Lerzan Aksoy, Timothy L. Keiningham, and Terry G. Vavra, “Nearly
Everything You Know about Loyalty Is Wrong,” Marketing News,
October 1, 2005, pp. 20–21; Timothy L. Keiningham, Terry G. Vavra,
Lerzan Aksoy, and Henri Wallard, Loyalty Myths (Hoboken, NJ: John
Wiley & Sons, 2005).
Z02_KOTL2621_15_GE_NOTE.INDD 7 3/10/15 2:57 PM
E8 Endnotes
M. Muniz Jr. and Hope Jensen Schau, “Religiosity in the Abandoned
Apple Newton Brand Community,” Journal of Consumer Research 31
(2005), pp. 412–32; Robert Kozinets, “Utopian Enterprise: Articulating
the Meanings of Star Trek’s Culture of Consumption,” Journal of
Consumer Research 28 (June 2001), pp. 67–87; John W. Schouten
and James H. McAlexander, “Subcultures of Consumption: An
Ethnography of New Bikers,” Journal of Consumer Research 22 (June
1995), pp. 43–61.
62. Albert M. Muniz Jr. and Thomas C. O’Guinn, “Brand Community,”
Journal of Consumer Research 27 (March 2001), pp. 412–32.
63. Susan Fournier and Lara Lee, “The Seven Deadly Sins of Brand
Community ‘Management,’” Marketing Science Institute Special
Report 08-208, 2008; see also Mark Bubula, “The Myth about Brand
Communities,” Admap, November 2012.
64. Harley-Davidson USA, www.hog.com, accessed May 20, 2014; Joseph
Weber, “Harley Just Keeps on Cruisin’,” BusinessWeek, November 6,
2006, pp. 71–72; Robert Klara, “Tweeters of the Pack,” Adweek, March
5, 2012, p. 12; “Harley Davidson Tackles Stereotypes in New Advertising
Campaign,” PRNewswire, March 1, 2012; Raine Devries, “Harley-
Davidson Embraces Social Media to Tackle Stereotypes,” www.examiner.
com, March 1, 2012; Robert Klara, “A Whole Different Hog,” Adweek,
July 23, 2012, p. 40.
65. Christina Chaey, “How to Create Community,” Fast Company,
February 2012, p. 16.
66. http://growyourbiz.kodak.com/growyourbiz/, accessed May 20, 2014.
67. www.pb.com/social/user-forums-and-user-groups/index.shtml.
68. Puneet Manchanda, Grant Packard, and Adithya Pattabhiramaiah,
“Social Dollars: The Economic Impact of Consumer Participation in a
Firm-Sponsored Online Community,” working paper, January 2012,
University of Michigan.
69. Scott A. Thompson and Rajiv K. Sinha, “Brand Communities and New
Product Adoption: The Influence and Limits of Oppositional Loyalty,”
Journal of Marketing 72 (November 2008), pp. 65–80.
70. Susan Fournier and Lara Lee, “Getting Brand Communities Right,”
Harvard Business Review, April 2009, pp. 105–11.
71. Mavis T. Adjei, Charles H. Noble, and Stephanie M. Noble, “Enhancing
Relationships with Customers through Online Brand Communities,”
MIT Sloan Management Review, Summer 2012, pp. 22–24.
72. Jacquelyn S. Thomas, Robert C. Blattberg, and Edward J. Fox,
“Recapturing Lost Customers,” Journal of Marketing Research 61
(February 2004), pp. 31–45.
73. Werner Reinartz and V. Kumar, “The Impact of Customer Relationship
Characteristics on Profitable Lifetime Duration,” Journal of Marketing
67 (January 2003), pp. 77–99; Werner Reinartz and V. Kumar, “The
Mismanagement of Customer Loyalty,” Harvard Business Review, July
2002, pp. 86–97.
74. For a comprehensive set of articles from a variety of perspectives on
brand relationships, see Deborah J. MacInnis, C. Whan Park, and
Joseph R. Preister, eds., Handbook of Brand Relationships (Armonk,
NY: M. E. Sharpe, 2009).
75. For a study of the processes involved, see Werner Reinartz, Manfred
Kraft, and Wayne D. Hoyer, “The Customer Relationship Management
Process: Its Measurement and Impact on Performance,” Journal of
Marketing Research 61 (August 2004), pp. 293–305. For a thorough
examination of the practical issues involved, see Peter Fader,
Customer Centricity: Focus on the Right Customers for Strategic
Advantage (Philadelphia, PA: Wharton Digital Press, 2012).
76. Peter C. Verhoef and Katherine N. Lemon, “Customer Value
Management: Optimizing the Value of the Customer’s Base,” Fast
Forward Series (Cambridge, MA: Marketing Science Institute, 2011).
77. Nora A. Aufreiter, David Elzinga, and Jonathan W. Gordon, “Better
Branding,” The McKinsey Quarterly 4 (2003), pp. 29–39.
78. Joe Light, “With Customer Service, Real Person Trumps Text,” Wall
Street Journal, April 25, 2011. See also Wagner A. Kamakura, Vikas
Mittal, Fernando de Rosa, and Jose Afonso Mazzon “Assessing the
Service-Profit Chain,” Marketing Science 21 (Summer 2002),
pp. 294–317.
43. “Service Invention to Increase Retention,” CMO Council, August 3,
2009, www.cmocouncil.org.
44. Frederick F. Reichheld, “Learning from Customer Defections,” Harvard
Business Review, March–April 1996, pp. 56–69.
45. Frederick F. Reichheld, Loyalty Rules (Boston: Harvard Business
School Press, 2001); Frederick F. Reichheld, The Loyalty Effect
(Boston: Harvard Business School Press, 1996).
46. Michael D. Johnson and Fred Selnes, “Diversifying Your Customer
Portfolio,” MIT Sloan Management Review 46 (Spring 2005), pp.
11–14; Crina O. Tarasi, Ruth N. Bolton, Michael D. Hutt, and Beth A.
Walker, “Balancing Risk and Return in a Customer Portfolio,” Journal
of Marketing 75 (May 2011), pp. 1–17.
47. Wendy Liu and David Gal, “Bringing Us Together or Driving Us Apart:
The Effect of Soliciting Consumer Input on Consumers’ Propensity
to Transact with an Organization,” Journal of Consumer Research 38
(August 2011), pp. 242–59.
48. Tom Ostenon, Customer Share Marketing (Upper Saddle River, NJ:
Prentice Hall, 2002); Alan W. H. Grant and Leonard A. Schlesinger,
“Realize Your Customer’s Full Profit Potential,” Harvard Business
Review, September–October 1995, pp. 59–72.
49. Denish Shah and V. Kumar, “The Dark Side of Cross-Selling,” Harvard
Business Review, December 2012, pp. 21–23; Denish Shah, V. Kumar,
Yingge Qu, and Sylia Chen, “Unprofitable Cross-buying: Evidence
from Consumer and Business Markets,” Journal of Marketing 76 (May
2012), pp. 78–95.
50. Gail McGovern and Youngme Moon, “Companies and the Customers
Who Hate Them,” Harvard Business Review, June 2007, pp. 78–84.
51. Elisabeth A. Sullivan, “Just Say No,” Marketing News, April 15, 2008,
p. 17.
52. Sunil Gupta and Carl F. Mela, “What Is a Free Customer Worth,”
Harvard Business Review, November 2008, pp. 102–9.
53. Leonard L. Berry and A. Parasuraman, Marketing Services:
Computing through Quality (New York: Free Press, 1991), pp. 136–42.
For an academic examination in a business-to-business context,
see Robert W. Palmatier, Srinath Gopalakrishna, and Mark B.
Houston, “Returns on Business-to-Business Relationship Marketing
Investments: Strategies for Leveraging Profits,” Marketing Science
25 (September–October 2006), pp. 477–93. See also Irit Nitzan and
Barak Libai, “Social Effects on Customer Retention,” Journal of
Marketing 75 (November 2011), pp. 24–38.
54. Adam M. Grant, “How Customers Can Rally Troops,” Harvard Business
Review, June 2011, pp. 96–103.
55. Frederick F. Reichheld, “Learning from Customer Defections,” Harvard
Business Review, March 3, 2009, pp. 56–69.
56. Mike White and Teresa Siles, e-mail message, July 14, 2008.
57. Ben McConnell and Jackie Huba, “Learning to Leverage the Lunatic
Fringe,” Point, July–August 2006, pp. 14–15; Michael Krauss, “Work to
Convert Customers into Evangelists,” Marketing News, December 15,
2006, p. 6; “Ask Maxine Clark,” Inc., July 1, 2008; “How Maxine Clark
Built Build-a-Bear,” Fortune, March 19, 2012.
58. Utpal M. Dholakia, “How Consumer Self-Determination Influences
Relational Marketing Outcomes: Evidence from Longitudinal Field
Studies,” Journal of Marketing Research 43 (February 2006), pp.
109–20.
59. Joseph C. Nunes and Xavier Drèze, “Feeling Superior: The Impact
of Loyalty Program Structure on Consumers’ Perception of Status,”
Journal of Consumer Research 35 (April 2009), pp. 890–905; Joseph
C. Nunes and Xavier Drèze, “Your Loyalty Program Is Betraying You,”
Harvard Business Review, April 2006, pp. 124–31.
60. Peter Burrows, “Apple vs. Google,” BusinessWeek, January 25, 2010,
pp. 28–34.
61. James H. McAlexander, John W. Schouten, and Harold F. Koenig,
“Building Brand Community,” Journal of Marketing 66 (January 2002),
pp. 38–54. For some notable examinations of brand communities,
see René Algesheimer, Uptal M. Dholakia, and Andreas Herrmann,
“The Social Influence of Brand Community: Evidence from European
Car Clubs,” Journal of Marketing 69 (July 2005), pp. 19–34; Albert
Z02_KOTL2621_15_GE_NOTE.INDD 8 3/10/15 2:57 PM
Endnotes E9
Firm Value and What Can Firms Do? The Case of Media Critics and
Professional Movie Reviews,” Journal of Marketing 75 (September
2011), pp. 116–34.
97. Candice Choi, “Bloggers Serve Up Opinions,” Associated Press,
March 23, 2008.
98. Elisabeth Sullivan, “Consider Your Source,” Marketing News,
February 15, 2008, pp. 16–19; Mylene Mangalindan, “Web Stores Tap
Product Reviews,” Wall Street Journal, September 11, 2007; Jonah
Berger, Alan T. Sorensen, and Scott J. Rasmussen, “Positive Effects
of Negative Publicity: When Negative Reviews Increase Sales,”
Marketing Science 29, no. 5 (2010), pp. 815–27; Venessa Wong,
“How to Cope with a Terrible Review,” Bloomberg Businessweek,
November 16, 2012.
99. Piyush Sharma, Roger Marshall, Peter Alan Reday, and WoonBong
Na, “Complainers vs. Non-Complainers: A Multi-National
Investigation of Individual and Situational Influences on Customer
Complaint Behaviour,” Journal of Marketing Management 26
(February 2010), pp. 163–80.
100. Stephen S. Tax and Stephen W. Brown, “Recovering and Learning
from Service Failure,” Sloan Management Review 40 (Fall 1998), pp.
75–88.
101. Andrew McMains, “Airline Lost Your Luggage? Tell It to Twitter,”
Adweek, February 20, 2012, p. 12.
102. Christian Homburg and Andreas Fürst, “How Organizational
Complaint Handling Drives Customer Loyalty: An Analysis of the
Mechanistic and the Organic Approach,” Journal of Marketing 69
(July 2005), pp. 95–114.
103. Philip Kotler, Kotler on Marketing (New York: Free Press, 1999), pp.
21–22; Jochen Wirtz, “How to Deal with Customer Shakedowns,”
Harvard Business Review, April 2011, p. 24.
104. Lea Dunn and Darren W. Dahl, “Self-threat and Product Failure:
How Internal Attributions of Blame Impact Consumer Complaining
Behavior,” Journal of Marketing Research 49 (October 2012),
pp. 670–81.
105. Julie Jargon, Emily Steel, and Joann S. Lublin, “Taco Bell Makes
Spicy Retort to Suit,” Wall Street Journal, January 31, 2011.
106. Felix Gillette, “It’s Getting Tougher to Bully Brands,” Bloomberg
Businessweek, August 6, 2012, pp. 20–22.
Chapter 6
1. Seth Stevenson, “Like Cardboard,” Slate, January 11, 2010; Ashley M.
Heher, “Domino’s Comes Clean with New Pizza Ads,” Associated Press,
January 11, 2010; Bob Garfield, “Domino’s Does Itself a Disservice by
Coming Clean about Its Pizza,” Advertising Age, January 11, 2010;
Domino’s Pizza, www.pizzaturnaround.com,
accessed May 20, 2014; Anna-Louise Jackson and Anthony Feld,
“Domino’s ‘Brutally Honest’ Ads Offset Slow Consumer Spending,”
Bloomberg Businessweek, October 17, 2011; Mark Brandau, “A Look
behind Domino’s Marketing Strategies,” Nation’s Restaurant News,
January 13, 2012.
2. Michael R. Solomon, Consumer Behavior: Buying, Having, and Being,
10th ed. (Upper Saddle River, NJ: Prentice Hall, 2013).
3. Leon G. Schiffman and Leslie Lazar Kanuk, Consumer Behavior, 10th
ed. (Upper Saddle River, NJ: Prentice Hall, 2010).
4. For some classic perspectives, see Richard P. Coleman, “The
Continuing Significance of Social Class to Marketing,” Journal of
Consumer Research 10 (December 1983), pp. 265–80; Richard P.
Coleman and Lee P. Rainwater, Social Standing in America: New
Dimension of Class (New York: Basic Books, 1978).
5. Leon G. Schiffman and Leslie Lazar Kanuk, Consumer Behavior, 10th
ed. (Upper Saddle River, NJ: Prentice Hall, 2010).
6. Michael Trusov, Anand Bodapati, and Randolph E. Bucklin,
“Determining Influential Users in Internet Social Networks,” Journal of
Marketing Research 47 (August 2010), pp. 643–58.
7. Jacqueline Johnson Brown, Peter M. Reingen, and Everett M. Rogers,
Diffusion of Innovations, 4th ed. (New York: Free Press, 1995); Peter
79. Nancy Trejos, “British Airways Gets More Personal,” USA Today, July
8, 2012; “Know Your Customers: Case Studies from BA, The Guardian,
and Milka,” MarketingWeek, July 11, 2012; Tim Hume, “BA Googles
Passengers: Friendlier Flights or Invasion of Privacy,” www.cnn.com,
August 22, 2012; Kashmir Hill, “British Airways Won’t Be Google
Image Stalking You Unless You’re a V.I.P.,” Forbes, July 9, 2012; Alex
Williams, “British Airways Borders on Creepy With ‘Know Me’ Google
Identity Check,” www.techcrunch.com, July 5, 2012. See also Robert
McGarvey, “Mind Readers,” Executive Travel Magazine, November/
December 2012, pp. 60–65.
80. Joann Muller, “The Bespoke Auto: BMW’s Push for Made-to-Order
Cars,” Forbes, September 27, 2010.
81. Jennifer Cirillo, “Custom Made,” Beverage World, June 2012, pp.
14–15.
82. Seth Godin, Permission Marketing: Turning Strangers into Friends,
and Friends into Customers (New York: Simon & Schuster, 1999).
See also Susan Fournier, Susan Dobscha, and David Mick,
“Preventing the Premature Death of Relationship Marketing,”
Harvard Business Review, January–February 1998, pp. 42–51.
83. Rob Walker, “Amateur Hour, Web Style,” Fast Company, October 2007,
p. 87.
84. Doc Searls, “The Customer as a God,” Wall Street Journal, July 20,
2012.
85. Martin Mende, Ruth N. Bolton, and Mary Jo Bitner, “Decoding
Customer–Firm Relationships: How Attachment Styles Help Explain
Customers’ Preferences for Closeness, Repurchase Intentions, and
Changes in Relationship Breadth,” Journal of Marketing Research 50
(February 2013), pp. 125–42.
86. Carolyn Heller Baird and Gautam Parasnis, From Social Media to
Social CRM, (Somers, NY: IBM Corporation, 2011).
87. Christine Birkner, “How I Do It: Christine Birkner,” Marketing News,
September 15, 2011, p. 46. For some behavioral perspectives on
recommendations and reviews, see Min Zhao and Jinhong Xie,
“Effects of Social and Temporal Distance on Consumers’ Responses
to Peer Recommendations,” Journal of Marketing Research 48
(May 2011), pp. 486–96 and Rebecca Walker Naylor, Cait Poynor
Lamberton, and David A. Norton, “Seeing Ourselves in Others:
Reviewer Ambiguity, Egocentric Anchoring, and Persuasion,” Journal
of Marketing Research 48 (May 2011), pp. 617–31.
88. Amy Farley, “Hotel Handbook,” Travel + Leisure, June 2012, p. 168;
“Wyndham Worldwide’s CEO Discusses Q1 2012 Results—Earnings
Call Transcript,” www.seekingalpha.com, April 25, 2012.
89. “300 Million People View TripAdvisor Content on Sites Other than
TripAdvisor Each Month,” PRNewswire, December 13, 2012;
“TripAdvisor,” www.crunchbase.com, January 2, 2013; “TripAdvisor,”
www.wikipedia.com, January 2, 2013; Josh Constine, “Lost among
Its 60 Million Travel Tips? TripAdvisor Highlights Reviews by Friends
of Friends,” www.techcrunch.com, April 11, 2012; Josh Constine,
“TripAdvisor Aims to Beat Yelp with Social, Revives Restaurant ‘Local
Picks’ Facebook App,” www.techcrunch.com, June 20, 2012; Jordan
Crook, “TripAdvisor Acquires Wanderfly to Continue Social Travel
Push,” www.techcrunch.com, October 2, 2012.
90. Jonah Bloom, “The New Realities of a Low Trust Marketing World,”
Advertising Age, February 13, 2006.
91. Mylene Mangalindan, “New Marketing Style: Clicks and Mortar,” Wall
Street Journal, December 21, 2007, p. B5.
92. Shrihari Sridhar and Raj Srinivasan, “Social Influence Effect in Online
Product Ratings,” Journal of Marketing 76 (September 2012), pp. 70–88.
93. Shelley Banjo, “Firms Take Online Reviews to Heart,” Wall Street
Journal, July 29, 2012.
94. Noah Davis, “Leading the Conversation,” Fast Company, July/August
2012, p. 33-37.
95. Ron Lieber, “At Angie’s List, the Reviews Are Real (So Is Angie),” New
York Times, March 2, 2012.
96. Nick Wingfield, “High Scores Matter to Game Makers, Too,” Wall
Street Journal, September 20, 2007, p. B1; see also Yubo Chen, Yong
Liu and Jurui Zhang, “When Do Third-Party Product Reviews Affect
Z02_KOTL2621_15_GE_NOTE.INDD 9 3/10/15 2:57 PM
E10 Endnotes
23. Brooks Barnes, “Disney Looking into Cradle for Customers,” New York
Times, February 6, 2011; Lisa Yorgey Lester, “Expectant Parents: Tap
into the Baby Boom,” Target Marketing, September 2008; Melanie
Linder and Lisa LaMotta, “How to Market to the Modern Mom,”
Forbes, January 8, 2009.
24. Stephanie Clifford, “Even Marked Up, Luxury Goods Fly Off Shelves,”
The New York Times, August 3, 2011; “Recession, Reschmession: Let
Them Eat Cake, Buy Prada,” www.cmn.com, March 19, 2012; “Gucci
Performance Withstands Recession,” The New York Times, November
9, 2009.
25. Harold H. Kassarjian and Mary Jane Sheffet, “Personality and
Consumer Behavior: An Update,” Harold H. Kassarjian and Thomas
S. Robertson, eds., Perspectives in Consumer Behavior (Glenview, IL:
Scott Foresman, 1981), pp. 160–80.
26. Jennifer Aaker, “Dimensions of Measuring Brand Personality,” Journal
of Marketing Research 34 (August 1997), pp. 347–56.
27. Jennifer L. Aaker, Veronica Benet-Martinez, and Jordi Garolera,
“Consumption Symbols as Carriers of Culture: A Study of Japanese
and Spanish Brand Personality Constructs,” Journal of Personality and
Social Psychology 81 (March 2001), pp. 492–508.
28. Yongjun Sung and Spencer F. Tinkham, “Brand Personality Structures
in the United States and Korea: Common and Culture-Specific
Factors,” Journal of Consumer Psychology 15 (December 2005),
pp. 334–50.
29. Lucia Malär, Harley Krohmer, Wayne D. Hoyer, and Bettina
Nyffenegger, “Emotional Brand Attachment and Brand Personality:
The Relative Importance of the Actual and the Ideal Self,” Journal of
Marketing 75 (July 2011), pp. 35–52.
30. Timothy R. Graeff, “Image Congruence Effects on Product Evaluations:
The Role of Self-Monitoring and Public/Private Consumption,”
Psychology & Marketing 13 (August 1996), pp. 481–99.
31. Jennifer L. Aaker, “The Malleable Self: The Role of Self-Expression in
Persuasion,” Journal of Marketing Research 36 (February 1999), pp.
45–57.
32. Chip Conley, The Rebel Rules (New York: Fireside, 2001); Tom
Osborne, “What Is Your Band Personality,” Viget Inspire, www.viget.
com, February 2, 2009; Alice Z. Cuneo, “Magazines as Muses: Hotelier
Finds Inspiration in Titles Such as Wired,” Advertising Age, November
6, 2006, p. 10.
33. Kavita Daswani, “Multitasking BB Skin Creams Becoming Popular in
U.S.,” Los Angeles Times, July 15, 2012.
34. Anne D’Innocenzio, “Frugal Times: Hamburger Helper, Kool-Aid in
Advertising Limelight,” Associated Press, Seattle Times, April 29, 2009;
Julie Jargon, “Velveeta Shows Its Sizzle against Hamburger Helper,”
Wall Street Journal, December 29, 2011.
35. Thomas J. Reynolds and Jerry C. Olson, Understanding Consumer
Decision-Making: The Means-Ends Approach to Marketing and
Advertising (Mahwah, NJ: Lawrence Erlbaum, 2001); Brian Wansink,
“Using Laddering to Understand and Leverage a Brand’s Equity,”
Qualitative Market Research 6 (2003).
36. Ernest Dichter, Handbook of Consumer Motivations (New York:
McGraw-Hill, 1964).
37. “Retail Therapy: How Ernest Dichter, an Acolyte of Sigmund Freud,
Revolutionised Marketing,” The Economist, December 17, 2011.
38. Clotaire Rapaille, “Marketing to the Reptilian Brain,” Forbes, July 3,
2006; Clotaire Rapaille, The Culture Code (New York: Broadway
Books, 2007); Douglas Gantebein, “How Boeing Put the Dream
in Dreamliner,” Air and Space, September 2007; Tom Otley, “The
Boeing Dreamliner: A Sneak Preview,” Business Traveller, June 3,
2009.
39. Abraham Maslow, Motivation and Personality (New York: Harper &
Row, 1954), pp. 80–106. For an interesting business application,
see Chip Conley, Peak: How Great Companies Get Their Mojo from
Maslow (San Francisco: Jossey Bass 2007).
40. See Frederick Herzberg, Work and the Nature of Man (Cleveland:
William Collins, 1966); Thierry and Koopman-Iwema, “Motivation and
Satisfaction,” P. J. D. Drenth, H. Thierry, P. J. Willems, and C. J. de
H. Riengen and Jerome B. Kernan, “Analysis of Referral Networks in
Marketing: Methods and Illustration,” Journal of Marketing Research
23 (November 1986), pp. 37–78; Laura J. Kornish and Qiuping Li,
“Optimal Referral Bonuses with Asymmetric Information: Firm-Offered
and Interpersonal Incentives,” Marketing Science 29 (January–
February 2010), pp. 108–21.
8. Malcolm Gladwell, The Tipping Point: How Little Things Can Make a
Big Difference (Boston: Little, Brown & Company, 2000).
9. Terry McDermott, “Criticism of Gladwell Reaches Tipping Point,”
Columbia Journalism Review, November 17, 2009; Clive Thompson,
“Is the Tipping Point Toast?,” Fast Company, February 1, 2008;
Duncan Watts, Six Degrees: The Science of a Connected Age (New
York: W. W. Norton, 2003).
10. Douglas Atkin, The Culting of Brands: When Customers Become True
Believers (New York: Penguin, 2004); Marian Salzman, Ira Matathia,
and Ann O’Reilly, Buzz: Harness the Power of Influence and Create
Demand (New York: Wiley, 2003).
11. Bob Greenberg, “A Platform for Life,” Adweek NEXT, September 14,
2009, p. 38.
12. Natasha Singer, “Secret E-Scores Chart Consumers’ Buying Power,”
New York Times, August 18, 2012; Erin Griffin, “A Million Little
Klouts,” Adweek, December 12, 2011, p. 18; Jon Swartz, “Klout Says
Scoring Parameters Enhanced,” USA Today, August 15, 2012.
13. Ed Keller, “How Influence Works,” Admap, December 2012.
14. Dave Balter and John Butman, “Clutter Cutter,” Marketing Management
(July–August 2006), pp. 49–50; “Is There a Reliable Way to Measure
Word-of-Mouth Marketing?,” Marketing NPV 3 (2006), pp. 3–9; Michael
Trusov, Randolph E. Bucklin, and Koen Pauwels, “Effects of Word-of-
Mouth versus Traditional Marketing: Findings from an Internet Social
Networking Site,” Journal of Marketing 73 (September 2009), pp.
90–102.
15. Elizabeth S. Moore, William L. Wilkie, and Richard J. Lutz, “Passing
the Torch: Intergenerational Influences as a Source of Brand Equity,”
Journal of Marketing 66 (April 2002), pp. 17–37.
16. Kay M. Palan and Robert E. Wilkes, “Adolescent-Parent Interaction in
Family Decision Making,” Journal of Consumer Research 24 (March
1997), pp. 159–69; Sharon E. Beatty and Salil Talpade, “Adolescent
Influence in Family Decision Making: A Replication with Extension,”
Journal of Consumer Research 21 (September 1994), pp. 332–41.
17. Scott I. Rick, Deborah A. Small, and Eli J. Finkel, “Fatal (Fiscal)
Attraction: Spendthrifts and Tightwads in Marriage,” Journal of
Marketing Research 48 (April 2011), pp. 228–37.
18. Valentyna Melnyk, Stijn M. J. van Osselaer, and Tammo H. A. Bijmolt,
“Are Women More Loyal Customers than Men? Gender Differences
in Loyalty to Firms and Individual Service Providers,” Journal of
Marketing 73 (July 2009), pp. 82–96.
19. “YouthPulse: The Definitive Study of Today’s Youth Generation,” Harris
Interactive, www.harrisinteractive.com, January 29, 2010.
20. Deborah Roedder John, “Consumer Socialization of Children: A
Retrospective Look at Twenty-Five Years of Research,” Journal
of Consumer Research 26 (December 1999), pp. 183–213; Lan
Nguyen Chaplin and Deborah Roedder John, “The Development of
Self-Brand Connections in Children and Adolescents,” Journal of
Consumer Research 32 (June 2005), pp. 119–29; Lan Nguyen Chaplin
and Deborah Roedder John, “Growing Up in a Material World: Age
Differences in Materialism in Children and Adolescents,” Journal of
Consumer Research 34 (December 2007), pp. 480–93; Lan Nguyen
Chaplin and Tina M. Lowrey, “The Development of Consumer-Based
Consumption Constellations in Children,” Journal of Consumer
Research 36 (February 2010), pp. 757–77.
21. “Families and Living Arrangements,” U.S. Census Bureau, www.
census.gov/population/www/ socdemo/hh-fam.html, January 29,
2010; “U.S. Census Bureau Reports Men and Women Wait Longer to
Marry,” Newsroom, www.census.gov, November 10, 2010.
22. Rex Y. Du and Wagner A. Kamakura, “Household Life Cycles and
Lifestyles in the United States,” Journal of Marketing Research 48
(February 2006), pp. 121–32.
Z02_KOTL2621_15_GE_NOTE.INDD 10 3/10/15 2:57 PM
Endnotes E11
53. For a comprehensive treatment of how consumers make purchase
decisions in the modern marketing environment, see Todd Powers,
Dorothy Advincula, Manila S. Austin, Stacy Graiko, and Jasper
Snyder, “Digital and Social Media in the Purchase Decision Process: A
Special Report from the Advertising Research Foundation,” Journal of
Advertising Research, December 2012, pp. 479–89.
54. Ellen Byron, “In-Store Sales Begin at Home,” Wall Street Journal,
April 25, 2011; Lauren Coleman-Lochner, “Social Networking Takes
Center Stage at P&G,” Bloomberg Businessweek, March 29, 2012;
Giselle Tsirulnik, “P&G’s CoverGirl Targets Women with Mobile Ads
for LashBlast Mascara,” Mobile Marketer, September 2, 2009; Jack
Neff, “CoverGirl: An America’s Hottest Brands Study,” Advertising Age,
November 16, 2009.
55. For a recent academic examination, see Gerald Häubl, Benedict G. C.
Dellaert, and Bas Donkers, “Tunnel Vision: Local Behavioral Influences
on Consumer Decisions in Product Search,” Marketing Science 29
(May–June 2012), pp. 438–55.
56. Geoffrey Precourt, “How Unilever Uses Online Data to Map the Path to
Purchase,” www.warc.com, April 2012.
57. Janet Schwartz, Mary Frances Luce, and Dan Ariely, “Are Consumers
Too Trusting? The Effects of Relationships with Expert Advisers,”
Journal of Marketing Research 48 (Special Issue 2011), pp.
S163–S174.
58. Min Ding, John R. Hauser, Songting Dong, Daria Dzyabura, Zhilin
Yang, Chenting Su, and Steven Gaskin, “Unstructured Direct Elicitation
of Decision Rules,” Journal of Marketing Research 48 (February 2011),
pp. 116–27; Michaela Draganska and Daniel Klapper, “Choice Set
Heterogeneity and the Role of Advertising: An Analysis with Micro and
Macro Data,” Journal of Marketing Research 48 (August 2011), pp.
653–69; John R. Hauser, Olivier Toubia, Theodoros Evgeniou, Rene
Befurt, and Daria Dzyabura, “Disjunctions of Conjunctions, Cognitive
Simplicity and Consideration Sets,” Journal of Marketing Research 47
(June 2010), pp. 485–96; Erjen Van Nierop, Bart Bronnenberg, Richard
Paap, Michel Wedel, and Philip Hans Franses, “Retrieving Unobserved
Consideration Sets from Household Panel Data,” Journal of Marketing
Research 47 (February 2010), pp. 63–74. For some behavioral
perspectives, see Jeffrey R. Parker and Rom Y. Schrift, “Rejectable
Choice Sets: How Seemingly Irrelevant No-Choice Options Affect
Consumer Decision Processes,” Journal of Marketing Research 48
(October 2011), pp. 840–54.
59. Benedict G. C. Dellaert and Gerald Häubl, “Searching in Choice
Mode: Consumer Decision Processes in Product Search with
Recommendations,” Journal of Marketing Research 49 (April 2012),
pp. 277–88. See also Jun B. Kim, Paulo Albuquerque, and Bart
J. Bronnenberg, “Mapping Online Consumer Search,” Journal of
Marketing Research 48 (February 2011), pp. 13–27.
60. Paul E. Green and Yoram Wind, Multiattribute Decisions in Marketing:
A Measurement Approach (Hinsdale, IL: Dryden, 1973), chapter
2; Richard J. Lutz, “The Role of Attitude Theory in Marketing,”
H. Kassarjian and T. Robertson, eds., Perspectives in Consumer
Behavior (Lebanon, IN: Scott Foresman, 1981), pp. 317–39.
61. This expectancy-value model was originally developed by Martin
Fishbein, “Attitudes and Prediction of Behavior,” Martin Fishbein, ed.,
Readings in Attitude Theory and Measurement (New York: John Wiley
& Sons, 1967), pp. 477–92; for a critical review, see Paul W. Miniard
and Joel B. Cohen, “An Examination of the Fishbein-Ajzen Behavioral-
Intentions Model’s Concepts and Measures,” Journal of Experimental
Social Psychology (May 1981), pp. 309–39.
62. Michael R. Solomon, Consumer Behavior: Buying, Having, and Being,
10th ed. (Upper Saddle River, NJ: Prentice Hall, 2013).
63. For an advanced measurement technique to assess consumers use of
decision heuristics, see Daria Dzyabura and John R. Hauser, “Active
Machine Learning for Consideration Heuristics,” Marketing Science 30
(September–October 2011), pp. 801–19.
64. Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions
about Health, Wealth, and Happiness (New York: Penguin, 2009);
Michael Krauss, “A Nudge in the Right Direction,” Marketing News,
March 30, 2009, p. 20.
Wolff, eds., A Handbook of Work and Organizational Psychology (East
Sussex, UK: Psychology Press, 1984), pp. 141–42.
41. Bernard Berelson and Gary A. Steiner, Human Behavior: An Inventory
of Scientific Findings (New York: Harcourt Brace Jovanovich, 1964),
p. 88.
42. Florida’s Chris Janiszewski has conducted fascinating research
looking at preconscious processing effects. See Chris Janiszewski,
“Preattentive Mere Exposure Effects,” Journal of Consumer Research
20 (December 1993), pp. 376–92, as well as some of his earlier and
subsequent research. For more foundational perspectives, see also
John A. Bargh and Tanya L. Chartrand, “The Unbearable Automaticity
of Being,” American Psychologist 54 (1999), pp. 462–79; and
Gráinne M. Fitzsimons, Tanya L. Chartrand, and Gavan J. Fitzsimons,
“Automatic Effects of Brand Exposure on Motivated Behavior: How
Apple Makes You ‘Think Different,’” Journal of Consumer Research
35 (June 2008), pp. 21–35, as well as the research programs of both
authors.
43. See Timothy E. Moore, “Subliminal Advertising: What You See Is What
You Get,” Journal of Marketing 46 (Spring 1982), pp. 38–47 for an early
classic discussion; and Andrew B. Aylesworth, Ronald C. Goodstein,
and Ajay Kalra, “Effect of Archetypal Embeds on Feelings: An Indirect
Route to Affecting Attitudes?,” Journal of Advertising 28 (Fall 1999),
pp. 73–81 for additional discussion.
44. Jonah Lerner, “The Buzz on Buzz,” Wall Street Journal, October 16,
2010.
45. Jack Neff, “Creativity Marks This Spot: K-C Thrives in Tiny Neenah,”
Advertising Age, June 6, 2011; “U by Kotex Creates a Social
Movement,”Adweek, November 22, 2011.
46. Ed Keller, “Showing Emotion Is the New Black,’ www.
mediabizbloggers.com, October 6, 2011; Jonah Berger and
Katherine L. Milkman, “What Makes Online Content Viral?,” Journal
of Marketing Research 49 (April 2012), pp. 192–205.
47. Jason Feifer, “Axe’s Highly Scientific, Typically Outrageous and Totally
Irresistible Selling of Lust,” Fast Company, September 2012, pp.
104–9; Bruce Horovitz, “Axe Showerpool Promo Raises Eyebrows,”
USA Today, September 17, 2012; “Axe Turns Up the Heat to Marketing
to Young Men,” ABC News Radio, March 25, 2011; Martin Lindstrom,
“Can a Commercial Be Too Sexy for Its Own Good? Ask Axe,” The
Atlantic, October 2011.
48. Scott Berinato, “The Demographics of Cool,” Harvard Business
Review, December 2011, pp. 136–37; Steve Stoute, The Tanning of
America: How Hip-Hop Created a Culture That Rewrote the Rules of
the New Economy (New York: Gotham, 2012).
49. For additional discussion, see John G. Lynch Jr. and Thomas K. Srull,
“Memory and Attentional Factors in Consumer Choice: Concepts and
Research Methods,” Journal of Consumer Research 9 (June 1982), pp.
18–36; and Joseph W. Alba, J. Wesley Hutchinson, and John G. Lynch
Jr., “Memory and Decision Making,” Harold H. Kassarjian and Thomas
S. Robertson, eds., Handbook of Consumer Theory and Research
(Englewood Cliffs, NJ: Prentice Hall, 1992), pp. 1–49.
50. Leonard M. Lodish, Magid Abraham, Stuart Kalmenson, Jeanne
Livelsberger, Beth Lubetkin, Bruce Richardson, and Mary Ellen
Stevens, “How T.V. Advertising Works: A Meta-Analysis of 389 Real
World Split Cable T.V. Advertising Experiments,” Journal of Marketing
Research 32 (May 1995), pp. 125–39.
51. Malcolm Faulds, “Five Tips for Driving Word-of-Mouth—No Matter
What Your Product Is,” Advertising Age, November 28, 2011, p. 17;
Jonah Berger and Eric M. Schwartz, “What Drives Immediate and
Ongoing Word of Mouth?,” Journal of Marketing Research 48 (October
2011), pp. 869–80.
52. Marketing scholars have developed several models of the consumer
buying process through the years. See Mary Frances Luce, James R.
Bettman, and John W. Payne, Emotional Decisions: Tradeoff Difficulty
and Coping in Consumer Choice (Chicago: University of Chicago
Press, 2001); James F. Engel, Roger D. Blackwell, and Paul W. Miniard,
Consumer Behavior, 8th ed. (Fort Worth, TX: Dryden, 1994); and John
A. Howard and Jagdish N. Sheth, The Theory of Buyer Behavior (New
York: John Wiley & Sons, 1969).
Z02_KOTL2621_15_GE_NOTE.INDD 11 3/10/15 2:57 PM
E12 Endnotes
78. Mario Pandelaere, Barbara Briers, and Christophe Lembregts, “How
to Make a 29% Increase Look Bigger: The Unit Effect in Option
Comparisons,” Journal of Consumer Research 38 (August 2011),
pp. 308–22.
79. Mark Scott, “A Stairway to Marketing Heaven,” Bloomberg
BusinessWeek, October 30, 2009. p. 17.
80. See Richard H. Thaler, “Mental Accounting and Consumer Choice,”
Marketing Science 4 (Summer 1985), pp. 199–214 for a seminal piece;
and Richard Thaler, “Mental Accounting Matters,” Journal of Behavioral
Decision Making 12 (September 1999), pp. 183–206 for additional
perspectives. For some diverse applications of the theory, see Robin
L. Soster, Ashwani Monga, and William O. Bearden, “Tracking Costs of
Time and Money: How Accounting Periods Affect Mental Accounting,”
Journal of Consumer Research 37 (December 2010), pp. 712–21;
Jonathan Levav and A. Peter McGraw, “Emotional Accounting:
How Feelings about Money Influence Consumer Choice,” Journal
of Marketing Research 46 (February 2009), pp. 66–80; John Godek
and Kyle B. Murray, “The Effect of Spikes in the Price of Gasoline on
Behavioral Intentions: A Mental Accounting Explanation,” Journal of
Behavioral Decision Making 25 (July 2012), pp. 295–302.
81. Gary L. Gastineau and Mark P. Kritzman, Dictionary of Financial Risk
Management, 3rd ed. (New York: John Wiley & Sons, 1999).
82. Example adapted from Daniel Kahneman and Amos Tversky,
“Prospect Theory: An Analysis of Decision under Risk,” Econometrica
47 (March 1979), pp. 263–91.
83. For some recent academic research, see Abigail B. Sussman and
Adam L. Alter, “The Exception Is the Rule: Underestimating and
Overspending on Exceptional Expenses,” Journal of Consumer
Research 39 (December 2012), pp. 800–14.
Chapter 7
1. Ian Simpson, “Number of U.S. Business Fell in 2010: Census Bureau,”
www.reuters.com, June 26, 2012.
2. Quentin Hardy, “Chambers Challenged,” Forbes, March 14, 2011,
pp. 30–32; Rich Karlgaard, “Cisco’s Disruptive (and Cooler) Rival,”
Forbes, July 18, 2011, p. 21; Rich Karlgaard, “Driving Change: Cisco’s
Chambers,” Forbes, February 13, 2012; “Charlie Rose Talks to Cisco’s
John Chambers,” Bloomberg Businessweek, April 23, 2012, p. 41.
3. For a comprehensive review of the topic, see James C. Anderson
and James A. Narus, Business Market Management: Understanding,
Creating, and Delivering Value, 3rd ed. (Upper Saddle River, NJ:
Prentice Hall, 2009); and Gary L. Lilien and Rajdeep Grewal, eds.,
Handbook of Business-to-Business Marketing (Northampton, MA:
Edward Elgar Publishing, 2012).
4. Frederick E. Webster Jr. and Yoram Wind, Organizational Buying
Behavior (Upper Saddle River, NJ: Prentice Hall, 1972), p. 2; for
a review of some academic literature on the topic, see Håkan
Håkansson and Ivan Snehota, “Marketing in Business Markets,”
Bart Weitz and Robin Wensley, eds., Handbook of Marketing
(London: Sage Publications, 2002), pp. 513–26; Mark Glynn and
Arch Woodside, eds., Business-to-Business Brand Management:
Theory, Research, and Executive Case Study Exercises in Advances
in Business Marketing & Purchasing series, volume 15 (Bingley, UK:
Emerald Group Publishing, 2009).
5. Shoe Material, www.bata.com, accessed May 20, 2014. See also
www.shoeguide.org/Shoe_Anatomy, accessed May 20, 2014.
6. Philip Kotler and Waldemar Pfoertsch, B2B Brand Management (Berlin,
Germany: Springer, 2006).
7. Anita Raghavan, “No More Excuses,” Forbes, April 27, 2009,
pp. 121–22; Richard Weiss and Benedikt Kammel, “How Siemens
Got Its Geist Back,” Bloomberg Businessweek, January 31, 2011,
pp. 18–20; Piet Levy, “The Right Answer,” Marketing News, September
15, 2011, pp. 19–22.
8. Fred Wiersema, “The B2B Agenda: The Current State of B2B
Marketing and a Look Ahead,” Institute for the Study of Business
Markets, http://isbm.smeal.psu.edu, accessed February 20, 2014.
65. Martin Fishbein, “Attitudes and Prediction of Behavior,” M. Fishbein,
ed., Readings in Attitude Theory and Measurement (New York: John
Wiley & Sons, 1967), pp. 477–92.
66. For a fascinating examination of the use of Consumer Reports, see
Uri Simonsohn, “Lessons from an ‘Oops’ at Consumer Reports:
Consumers Follow Experts and Ignore Invalid Information,” Journal of
Marketing Research 48 (February 2011), pp. 1–12.
67. Tom Long, “‘Ted’ Least Expected Hero of the Summer,” The Detroit
News, August 11, 2012; Ben Fritz, “‘Ted’ Marketing Campaign
Balances Raunch with Heart,” Los Angeles Times, June 22, 2012;
Rachel Dodes, “Twitter Goes to the Movies,” Wall Street Journal,
August 3, 2012.
68. Margaret C. Campbell and Ronald C. Goodstein, “The Moderating
Effect of Perceived Risk on Consumers’ Evaluations of Product
Incongruity: Preference for the Norm,” Journal of Consumer Research
28 (December 2001), pp. 439–49; Grahame R. Dowling, “Perceived
Risk,” Peter E. Earl and Simon Kemp, eds., The Elgar Companion to
Consumer Research and Economic Psychology (Cheltenham, UK:
Edward Elgar, 1999), pp. 419–24; James R. Bettman, “Perceived
Risk and Its Components: A Model and Empirical Test,” Journal of
Marketing Research 10 (May 1973).
69. Richard L. Oliver, “Customer Satisfaction Research,” Rajiv Grover and
Marco Vriens, eds., Handbook of Marketing Research (Thousand Oaks,
CA: Sage Publications, 2006), pp. 569–87.
70. Albert O. Hirschman, Exit, Voice, and Loyalty (Cambridge, MA: Harvard
University Press, 1970).
71. John D. Cripps, “Heuristics and Biases in Timing the Replacement of
Durable Products,” Journal of Consumer Research 21 (September
1994), pp. 304–18.
72. Andrea Rothman and Susanna Ray, “Final Destination: The
Cotswolds,” Bloomberg Businessweek, March 5, 2012, pp. 24–25; Ben
Paytner, “From Trash to Cash,” Fast Company, February 2009, p. 44.
73. Richard E. Petty, Communication and Persuasion: Central and
Peripheral Routes to Attitude Change (New York: Springer-Verlag,
1986); Richard E. Petty and John T. Cacioppo, Attitudes and
Persuasion: Classic and Contemporary Approaches (New York:
McGraw-Hill, 1981).
74. For an overview of some issues involved, see James R. Bettman, Mary
Frances Luce, and John W. Payne, “Constructive Consumer Choice
Processes,” Journal of Consumer Research 25 (December 1998), pp.
187–217; and Itamar Simonson, “Getting Closer to Your Customers
by Understanding How They Make Choices,” California Management
Review 35 (Summer 1993), pp. 68–84. For examples of some classic
studies in this area, see some of the following: Rom Y. Schrift, Oded
Netzer, and Ran Kivetz, “Complicating Choice,” Journal of Marketing
Research 48 (April 2011), pp. 308–26; Dan Ariely and Ziv Carmon,
“Gestalt Characteristics of Experiences: The Defining Features of
Summarized Events,” Journal of Behavioral Decision Making 13 (April
2000), pp. 191–201; Ravi Dhar and Klaus Wertenbroch, “Consumer
Choice between Hedonic and Utilitarian Goods,” Journal of Marketing
Research 37 (February 2000), pp. 60–71; Itamar Simonson and Amos
Tversky, “Choice in Context: Tradeoff Contrast and Extremeness
Aversion,” Journal of Marketing Research 29 (August 1992), pp. 281–
95; Itamar Simonson, “The Effects of Purchase Quantity and Timing
on Variety-Seeking Behavior,” Journal of Marketing Research 27 (May
1990), pp. 150–62.
75. Leon Schiffman and Leslie Kanuk, Consumer Behavior, 10th ed.
(Upper Saddle River, NJ: Prentice Hall, 2010); Wayne D. Hoyer,
Deborah J. MacInnis, and Rik Pieters, Consumer Behavior, 6th ed.
(Mason, OH: South-Western College Publishing, 2013).
76. For a detailed review of the practical significance of consumer
decision making, see Itamar Simonson, “Get Close to Your Customers
by Understanding How They Make Their Choices,” California
Management Review 35 (Summer 1993), pp. 78–79.
77. For some recent research investigations of framing effects, see Eesha
Sharma and Adam L. Alter, “Financial Deprivation Prompts Consumers
to Seek Scarce Goods,” Journal of Consumer Research 39 (October
2012), pp. 545–60.
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Endnotes E13
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31. Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial
Buying and Creative Marketing (Boston, MA: Allyn & Bacon, 1967).
32. Geri Smith, “Hard Times Ease for a Cement King,” BusinessWeek,
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a Business-to-Business Context,” Journal of Marketing 66 (October
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42. Nirmalya Kumar, Marketing as Strategy: Understanding the CEO’s
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43. Ibid.
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accessed February 22, 2014; William Atkinson, “Now That’s
Value Added,” Purchasing, December 11, 2003, p. 26; James A.
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into Partners,” Harvard Business Review, March–April 1986,
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(Australia),” www.marciajedd.com, accessed February 22, 2014.
46. Maria Jobin, “Bringing a Brand to Life: Driving Preference Across
Cultures,” talk given in Lugano, Switzerland, December 6, 2012.
47. Britt Dionne, “Behind the Scenes with NetApp,” The Hub, July/
August 2009; “Close-up with Jay Kidd, CMO, NetApp,” BtoB
Magazine, January 20, 2010; Piet Levy, “It’s Alive! Alive!” Marketing
News, April 30, 2009, p. 8; Ben Burrowes, “NetApp Rides on Social
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2009; Caroline Donnelly, “NetApp Hails Mid-Market Success,” www.
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48. Michael Krauss, “Warriors of the Heart,” Marketing News, February
1, 2006, p. 7; Brian Hindo, “Emerson Electric’s Innovation Metrics,”
BusinessWeek, June 5, 2008; Kate Maddox, “BtoB’s Best Marketers:
Kathy Button Bell,” B to B, October 11, 2010.
49. Bob Lamons, “Branding, B-to-B Style,” Sales and Marketing
Management 157 (September 2005), pp. 46–50; David A. Kaplan,
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December 30, 2009, p. 10.
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10. Michael Collins, “Breaking into the Big Leagues,” American
Demographics, January 1996, p. 24.
11. Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial
Buying and Creative Marketing (Boston: Allyn & Bacon, 1967).
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of Marketing 57 (January 1993), pp. 38–56.
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BusinessWeek, May 4, 2009, p. 24; Steve Hamm and Aaron Ricadela,
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of Business Research 58 (October 2005), pp. 1381–90; R. Venkatesh
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(Upper Saddle River, NJ: Prentice Hall, 1972), p. 6.
17. James C. Anderson and James A. Narus, Business Market
Management: Understanding, Creating, and Delivering Value, 3rd ed.
(Upper Saddle River, NJ: Prentice Hall, 2009); Frederick E. Webster Jr.
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Buying Behavior,” Journal of Marketing 36 (April 1972), pp. 12–19.
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News, February 15, 2006, pp. 12–13.
19. Frederick E. Webster Jr. and Kevin Lane Keller, “A Roadmap for
Branding in Industrial Markets,” Journal of Brand Management 11 (May
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Behavior,” Tom Robertson and Hal Kassarjian, eds., Handbook of
Consumer Behavior (Upper Saddle River, NJ: Prentice Hall, 1991),
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News, June 1, 2006, p. 7.
22. Piet Levy, “Reeling in the Hungry Fish,” Marketing News, May 30,
2009, p. 6; Stephen Baker, Timken Plots a Rust Belt Resurgence,”
BusinessWeek, October 15, 2009; Matt McClellan, “Rolling Along,”
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(Saddle River, NJ: Prentice Hall, 1972), p. 6.
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pp. 38–40.
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Your Customer’s Customer,” MIT Sloan Management Review, Winter
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“Customer Value Proposition in Business Markets,” Harvard
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E14 Endnotes
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Chapter 8
1. Alex Taylor III, “Hyundai Smokes the Competition,” Fortune, January
18, 2010, pp. 62–71; Moon Ihlwan and David Kiley, “Hyundai Gains
with Marketing Blitz, BusinessWeek, September 17, 2009; Christoph
Rauwald, “Hyundai Tracks Silver Arrow through Europe’s ‘Green
Hell,’” www.bloomberg.com, February 13, 2013; Henry Foy and
51. Josh Bernoff, “Why B-to-B Ought to Love Social Media,” Marketing
News, April 15, 2009, p. 20; Elisabeth Sullivan, “A Long Slog,”
Marketing News, February 28, 2009, pp. 15–18.
52. Elisabeth Sullivan, “One to One,” Marketing News, May 15, 2009, pp.
10–12.
53. Christine Birkner, “10 Minutes with Kirsten Watson,” Marketing News,
January 2013, pp. 52–58.
54. Christine Birkner, “Success by Association,” Marketing News, April 30,
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56. Ashlee Vance, “EMC Wants R-E-S-P-E-C-T,” Bloomberg
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Endnotes E15
20. According to the CIA World Factbook (www.cia.gov/library/
publications/the-world-factbook/ index.html), there are 34 developed
countries: Andorra, Australia, Austria, Belgium, Bermuda, Canada,
Denmark, Faroe Islands, Finland, France, Germany, Greece, Holy
See, Iceland, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg,
Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San
Marino, South Africa, Spain, Sweden, Switzerland, Turkey, United
Kingdom, and United States. They note that DCs are similar to the new
International Monetary Fund (IMF) term advanced economies that adds
Hong Kong, South Korea, Singapore, and Taiwan but drops Malta,
South Africa, and Turkey.
21. “Key Emerging Markets Offer Growth,” www.warc.com, October 24,
2012.
22. Sapna Agrawal, “Kraft Aims to Be among Top Food Firms in India,”
Mint, June 30, 2010; Matthew Boyle, “In Emerging Markets, Unilever
Finds a Passport to Profit,” Bloomberg Businessweek, January 3,
2013.
23. “World Population to Exceed 9 Billion by 2050,” press release, United
Nations, www.un.org, March 11, 2009; “2012 World Population Data
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24. Seth Kugel, “Marketing to Brazil’s Emerging Middle Class,” Global Post,
March 30, 2010; Paulo Prada, “For Brazil, It’s Finally Tomorrow,” Wall
Street Journal, March 29, 2010; Laura Snoad, “Breaking into Brazil,”
Marketing Week, February 9, 2012; Claudia Penteado, “Rio Slums
Undergo a Marketplace Makeover,” Advertising Age, June 11, 2012,
p. 18; David Biller and Katerina Petroff, “In Brazil’s Favelas, A Middle
Class Arises,” Bloomberg Businessweek, December 24, 2012.
25. Lyubov Pronina, “Dreams of an iPad Economy for Russia,” Bloomberg
Businessweek, February 7, 2011; “A Bridge to Asia,” The Economist,
September 8, 2012; Julia Ioffe, “In Russia, Facebook Is More than
a Social Network,” Bloomberg Businessweek, January 3, 2011;
“Facebook Aims for Russian Growth,” www.warc.com, October 8,
2012.
26. “Unfinished Journey,” The Economist, March 24, 2012; Nikhil Gulati
and Rumman Ahmed, “India Has 1.2 Billion People but Not Enough
Drink Coke,” Wall Street Journal, July 13, 2012; Vijay Govindrajan
and Gunjan Bagla, “Watch Out for India’s Consumer Market Pitfalls,”
HBR Blog Network, October 19, 2012; “The Other Asian Giant,” The
Economist, August 6, 2011; Naazneen Karmali, “Rough and Ready,”
Forbes, May 9, 2011; “India Brands Go Mobile,” www.warc.com,
May 7, 2012.
27. “The Mystery of the Chinese Consumer,” The Economist, July 2011,
pp. 59–60; Laurie Birkett, “PepsiCo Chips Away at China,” Wall Street
Journal, July 10, 2012; Tom Doctoroff, “What the Chinese Want,” Wall
Street Journal, May 18, 2012; Helen H. Wang, “Five Things Starbucks
Did to Get China Right,” Forbes, August 10, 2012; Julie Cruz, “Playing
Catch-Up in Luxe’s Promised Land,” Bloomberg Businessweek, April
16, 2012; April Rabkin, “The Tao of the Sea Turtle,” Fast Company,
February 2012; Douglas A. McIntyre, “The Most Popular American
Companies in China,” www.247wallst.com, January 3, 2012.
28. “The Price of Freedom: A Special Report on South Africa,” Economist,
June 5, 2010; Frank Aquilla, “Africa’s Biggest Score: A Thriving
Economy,” BusinessWeek, June 28, 2010; “Continental Shift,” Special
Advertising Section, Bloomberg Businessweek, May 23, 2011;
Emma Hall, “Telecoms Vodafone, MTN Fill Banking Breach in Africa,”
Advertising Age, June 11, 2012; Susan Caminiti “Africa’s Moment,”
Special Advertising Section, Fortune, July 23, 2012; “A Continent
Goes Shopping,” The Economist, August 18, 2012; Damian Hattingh,
Bill Russo, Ade Sun-Basorun, and Arend Van Wamelen, “The Rise
of the African Consumer,” McKinsey Quarterly, November 2012;
“Nestlé Positive on Africa,” www.warc.com , December 7, 2012; “GM
Takes New Approach in Africa,” www.warc.com, January 11, 2013;
“Innovation Drives Mobile Use in Africa,” www.warc.com, February 22,
2103. All: CIA World Factbook, www.cia.gov.
29. Louise Lavabre, “Talking with Our Thumbs: Twitter in Indonesia,”
Jakarta Post, September 22, 2010; Peter Geiling, “Will Indonesia Make
It BRICI?,” GlobalPost, July 7, 2009; Arief Budiman, Heang Chhor,
Rohit Razdan, and Ajay Sohoni, “The New Indonesian Consumer,”
Hyunjoo Jin, “Hyundai’s Focus on Quality Risks Emerging Market
Share,” www.reuters.com, November 11, 2012.
2. Jack Schofield, “Samsung Tipped to Lead China’s Mobile Phone
Market,” www.ZDnet.com, July 13, 2012.
3. Alexandra Berzon, “Starwood CEO Moves to China to Grow Brand,”
Wall Street Journal, June 6, 2011.
4. Michael Arndt, “Invasion of the Guatemalan Chicken,” Bloomberg
BusinessWeek, March 22 and 29, 2010, pp. 72–73; Steven Thompson,
“Dallas’ Pollo Campero Tests New Concept Model,” Dallas Business
Journal, June 29, 2012; “Pollo Campero Opens in Lawrence,
Massachusetts,” QSR Magazine, June 14, 2012.
5. Matthew Eyring, “Learning from Tata Motors’ Nano Mistakes,” Harvard
Business Review Blog, January 11, 2011; Mahendra Ramsinghani,
“The Trouble with India’s People Car,” Technology Review, December
6, 2011; Drew Guarini, “Tata Nano: $3,000 Car Coming to U.S.,”
Huffington Post, October 15, 2012; Kartika Trehan, “Tata Motors
Likely to Launch 800cc Nano in 2013,” Economic Times, December
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6. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980),
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9. For a comprehensive treatment, see Philip R. Cateora, Mary C. Gilly,
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10. Leslie Kwoh, “Cinnabon Finds Sweet Success in Russia, Mideast,”
Wall Street Journal, December 25, 2012.
11. “US Export Fact Sheet,” International Trade Administration, www.
trade.gov, February 8, 2013.
12. Jan Johanson and Finn Wiedersheim-Paul, “The Internationalization of
the Firm,” Journal of Management Studies 12 (October 1975),
pp. 305–22.
13. Michael R. Czinkota and Ilkka A. Ronkainen, International Marketing, 9th
ed. (Cincinnati, OH: South-Western Cengage Learning, 2010).
14. For a thorough review of academic research on global marketing, see
Johny K. Johansson, “Global Marketing: Research on Foreign Entry,
Local Marketing, Global Management,” Bart Weitz and Robin Wensley,
eds., Handbook of Marketing (London: Sage, 2002), pp. 457–83.
Also see Johny K. Johansson, Global Marketing, 5th ed. (New York:
McGraw-Hill, 2009). For some global marketing research issues, see C.
Samuel Craig and Susan P. Douglas, International Marketing Research,
3rd ed. (Chichester, UK: John Wiley & Sons, 2005).
15. Marc Gunther, “The World’s New Economic Landscape,” Fortune,
July 26, 2010, pp. 105–6; Sheila Shayon, “Microsoft Unleashes Global
Marketing Blitz for Windows 8, New Devices,” www.brandchannel.
com, October 25, 2012; Bill Rigby, “Windows 8 Sales Steady, Hit 60
Million since October Launch,” Reuters, January 8, 2013.
16. Michael J. Silverstein, Abheek Singhi, Carol Liao, and David Michael,
The $10 Trillion Prize: Captivating the Newly Affluent in China and India
(Boston: Harvard Business School Publishing, 2012).
17. Karen Cho, “KFC China’s Recipe for Success,” Forbes India, October
28, 2009; Staying the Course: Yum! Annual Report 2012, ; Diane Brady,
“KFC’s Big Game of Chicken,” Bloomberg Businessweek, March 29,
2012; Drew Hinshaw, “As KFC Goes to Africa It Lacks Only One Thing:
Chickens,” Wall Street Journal, February 8, 2013; Laurie Burkitt, “Yum
Brands Apologizes amid Chicken Probe, Wall Street Journal, January
10, 2013.
18. Johny K. Johansson, “Global Marketing: Research on Foreign Entry,
Local Marketing, Global Management,” Bart Weitz and Robin Wensley,
eds., Handbook of Marketing (London: Sage, 2002), pp. 457–83.
19. Bernard Condon, “Babble Rouser,” Forbes, August 11, 2008,
pp. 72–77; Elenoa Baselala, Digicel’s New Look,” Fiji Times,
November 4, 2010; “About Digicel,” www.digicel.com, accessed
April 17, 2013.
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E16 Endnotes
47. John Letzing, “Toshiba, Hitachi Reported Consolidating Factories,”
MarketWatch, www.wsj.com, May 13, 2009.
48. “Top 100 Global Franchises 2012,” www.franchisedirect.com, retrieved
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49. Claudia H. Deutsch, “The Venturesome Giant,” New York Times,
October 5, 2007.
50. Vikram Mahidhar, Craig Giffi, and Ajit Kambil with Ryan Alvanos,
“Rethinking Emerging Market Strategies,” Deloitte Review no. 4
(2009).
51. E. J. Schultz, “SABMiller Thinks Globally, but Gets ‘Intimate’ Locally,”
Advertising Age, October 4, 2010; Clementine Fletcher, “This Bud’s for
You, Emerging Markets,” Bloomberg Businessweek, October 3, 2011;
Clementine Fletcher, “SABMiller Tries Selling African Home-Brew,”
Bloomberg Businessweek, March 19, 2012; Michael Barnett, “Why
Global Brands Must Be Part of Local Cultures,” MarketingWeek, April
12, 2012; Jonathan Buck, “Master Brewer Buys a Round,” Barron’s,
October 20, 2012.
52. Johny K. Johansson, “Global Marketing: Research on Foreign Entry,
Local Marketing, Global Management,” Bart Weitz and Robin Wensley,
eds., Handbook of Marketing (London: Sage, 2002), pp. 457–83.
53. Patti Waldmeir, “Oreo Takes the Biscuit for Its China Reinvention,”
Financial Times, 7 March 2012; Bruce Einhorn, “Want Some Milk with
Your Green Tea Oreos?,” Bloomberg Businessweek, May 7, 2012;
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Journal, August 29, 2012.
54. Gail Edmondson, “Skoda Means Quality. Really,” BusinessWeek,
October 1, 2007, p. 46. Other more popular jokes from the past
include: “How do you double the value of a Skoda? Fill up the gas
tank” and “What do you call a Skoda with a sunroof? A dumpster.”
55. For some research method issues in adapting surveys to different
cultures, see Martijn G. de Jong, Jan-Benedict E. M. Steenkamp, and
Bernard P. Veldkamp, “A Model for the Construction of Country-Specific
yet Internationally Comparable Short-Form Marketing Scales,” Marketing
Science 28 (July–August 2009), pp. 674–89.
56. “Field Listing: Median Age,” CIA World Factbook, www.cia.gov,
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57. Barnett, “Why Global Brands Must Be Part of Local Cultures.”
58. Nigel Hollis, The Global Brand (New York: Palgrave Macmillan, 2008);
Nigel Hollis, “Going Global? Better Think Local Instead,” Brandweek,
December 1, 2008, p. 14.
59. “How People Spend Their Time Online,” www.Go-Gulf.com, February
2, 2012.
60. For some recent examples, see Ana Valenzuela, Barbara Mellers,
and Judi Stebel, “Pleasurable Surprises: A Cross-Cultural Study of
Consumer Responses to Unexpected Incentives,” Journal of Consumer
Research 36 (February 2010), pp. 792–805; Tuba Üstüner and Douglas
B. Holt, “Toward a Theory of Status Consumption in Less Industrialized
Countries,” Journal of Consumer Research 37 (June 2010), pp.
37–56; Praveen K. Kopalle, Donald R. Lehmann, and John U. Farley,
“Consumer Expectations and Culture: The Effect of Belief in Karma in
India,” Journal of Consumer Research 37 (August 2010), pp. 251–63;
Carlos J. Torelli, Aysegül Özsomer, Sergio W. Carvalho, Hean Tat Keh,
and Natalia Maehle, “Brand Concepts as Representations of Human
Values: Do Cultural Congruity and Compatibility Between Values
Matter?,” Journal of Marketing 76 (July 2012), pp. 92–108.
61. Geert Hofstede, Culture’s Consequences (Beverley Hills, CA: Sage,
1980).
62. For some organizational issues in adaptation, see Julien Cayla and
Lisa Peñaloza, “Mapping the Play of Organizational Identity in Foreign
Market Adaptation,” Journal of Marketing 76 (November 2012),
pp. 38–54.
63. For some in-depth treatments of branding in Asia in particular, see
S. Ramesh Kumar, Marketing & Branding: The Indian Scenario (Delhi:
Pearson Education, 2007); Martin Roll, Asian Brand Strategy: How
Asia Builds Strong Brands (New York: Palgrave MacMillan, 2006);
Paul Temporal, Branding in Asia: The Creation, Development, and
Management of Asian Brands for the Global Market (Singapore: John
Wiley & Sons, 2001).
white paper, www.mckinsey.com, December 2012; “Branding Key
in Indonesia,” www.warc.com, December 24, 2012; “L’Oréal Targets
Indonesia,” www.warc.com, November 7, 2012.
30. Jagdish N. Sheth, “Impact of Emerging Markets on Marketing:
Rethinking Existing Perspectives and Practices,” Journal of Marketing
75 (July 2011), pp. 166–82; Yuval Atsmon, Peter Child, Richard Dobbs,
and Laxman Narasimhan, “Winning the $30 Trillion Decathlon: Going
for Gold in Emerging Markets,” McKinsey Quarterly, August 2012.
31. Adapted from Vijay Mahajan, Marcos V. Pratini De Moraes, and Jerry
Wind, “The Invisible Global Market,” Marketing Management (Winter
2000), pp. 31–35. See also Joseph Johnson and Gerard J. Tellis,
“Drivers of Success for Market Entry into China and India,” Journal
of Marketing 72 (May 2008), pp. 1–13; Tarun Khanna and Krishna
G. Palepu, “Emerging Giants: Building World-Class Companies in
Developing Countries,” Harvard Business Review, October 2006, pp.
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32. Bart J. Bronnenberg, Jean-Pierre Dubé, and Sanjay Dhar, “Consumer
Packaged Goods in the United States: National Brands, Local
Branding,” Journal of Marketing Research 44 (February 2007), pp.
4–13; Bart J. Bronnenberg, Jean-Pierre Dubé, and Sanjay Dhar,
“National Brands, Local Branding: Conclusions and Future Research
Opportunities,” Journal of Marketing Research 44 (February 2007),
pp. 26–28; Bart J. Bronnenberg, Sanjay K. Dhar, and Jean-Pierre
Dubé, “Brand History, Geography, and the Persistence of CPG Brand
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33. Schumpter, “Mammon’s New Monarch’s,” The Economist, January 5,
2013.
34. Tom Doctoroff, What Chinese Want: Culture, Communism and China’s
Modern Consumer (New York: Palgrave Macmillan, 2012).
35. Boyle, “In Emerging Markets, Unilever Finds a Passport to Profit.”
36. Erik Simanis, “Reality Check at the Bottom of the Pyramid,” Harvard
Business Review, June 2012, pp. 120–25.
37. Manjeet Kripalani, “Finally, Coke Gets It Right,” BusinessWeek,
February 10, 2003, p. 47; Manjeet Kripalani, “Battling for Pennies in
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38. Carlos Niezen and Julio Rodriguez, “Distribution Lessons from
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“Modern Retailing Outgrowing Kirana Stores in India,” The Economic
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42. For a thorough examination of the topic, see Nirmalya Kumar and Jan-
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Z02_KOTL2621_15_GE_NOTE.INDD 16 3/10/15 2:57 PM
Endnotes E17
82. Geoffrey Fowler, Brian Steinberg, and Aaron O. Patrick, “Globalizing
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83. Matthew Day, “Swedish Toy Catalogue Goes Gender Neutral,” The
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84. Ray A. Smith and Christina Binkley, “”Israel’s New Year’s Resolution:
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85. See, for example, Haksin Chan, Lisa C. Wan, and Leo Y. M. Shin, “The
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88. John L. Graham, Alma T. Mintu, and Waymond Rogers, “Explorations
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89. Price perceptions may differ too, see Lisa E. Bolton, Hean Tat Keh,
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90. David Pierson, “Beijing Loves IKEA—But Not for Shopping,” Los
Angeles Times, August 25, 2009; Mei Fong, “IKEA Hits Home in China:
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91. Brian Wingfield, “U.S. Boosts Import Duties on Chinese Wind-Energy
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92. Christopher Weaver, Jeanne Whalen, and Benoît Faucon, “Drug
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93. David Blanchard, “Just in Time—How to Fix a Leaky Supply Chain,”
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94. Kersi D. Antia, Mark E. Bergen, Shantanu Dutta, and Robert J. Fisher,
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96. Brian Grow, Chi-Chu Tschang, Cliff Edwards, and Brian Burnsed,
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98. “Egypt Olympic Team Gets ‘Fake’ Nike Kit,” www.aljazeera.com, July
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99. Steve Hargreaves, “Counterfeit Goods Becoming More Dangerous,”
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100. Douglas A. McIntyre, “The Most Popular American Companies in
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Countries; It’s All about Scale,” www.techcrunch.com, April 17, 2013;
Ingrid Lunden, “Amazon Ramps Up Global Expansion, Opens Massive
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67. Leila Abboud, “Philips Widens Marketing Push in India,” Wall Street
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70. Tiffany Hsu, “Dunkin’ Donuts to Return to Southland with 150 stores in
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74. Ralf van der Lans, Joseph A. Cote, Catherine A. Cole, Siew Meng
Leong, Ale Smidts, Pamela W. Henderson, Christian Bluemelhuber,
Paul A. Bottomley, John R. Doyle, Alexander Fedorikhin, Janakiraman
Moorthy, B. Ramaseshan, and Bernd H. Schmitt, “Cross-National Logo
Evaluation Analysis: An Individual-Level Approach,” Marketing Science
28 (September–October 2009), pp. 968–85.
75. F. C. (Frank) Hong, Anthony Pecotich, and Clifford J. Shultz II,
“Language Constraints, Product Attributes, and Consumer Perceptions
in East and Southeast Asia,” Journal of International Marketing 10
(June 2002), pp. 29–45.
76. Marc Fetscherin, Ilan Alon, Romie Littrell, and Allan Chan, “In
China? Pick Your Brand Name Carefully,” Harvard Business Review,
September 2012, p. 706. See also Valentyna Melnyk, Kristina Klein,
and Franziska Völckner, “The Double-Edged Sword of Foreign Brand
Names for Companies from Emerging Countries,” Journal of Marketing
76 (November 2012), pp. 21–37.
77. “Why the Number Four Is Considered Unlucky in Some East Asian
Cultures,” www.todayifoundout.com, January 20, 2011.
78. Thomas J. Madden, Kelly Hewett, and Martin S. Roth, “Managing
Images in Different Cultures: A Cross-National Study of Color
Meanings and Preferences,” Journal of International Marketing
8 (Winter 2000), pp. 90–107; Zeynep Gürhan-Canli and Durairaj
Maheswaran, “Cultural Variations in Country-of-Origin Effects,” Journal
of Marketing Research 37 (August 2000), pp. 309–17.
79. Mark Lasswell, “Lost in Translation,” Business 2.0, August 2004,
pp. 68–70; Richard P. Carpenter and the Globe Staff, “What They
Meant to Say Was . . . ,” Boston Globe, August 2, 1998.
80. For an interesting distinction based on the concept of global consumer
culture positioning, see Dana L. Alden, Jan-Benedict E. M. Steenkamp,
and Rajeev Batra, “Brand Positioning through Advertising in Asia,
North America, and Europe: The Role of Global Consumer Culture,”
Journal of Marketing 63 (January 1999), pp. 75–87.
81. David A. Kaplan, “General Mills’ Global Sweet Spot,” Fortune, May 23,
2011, pp. 194–201.
Z02_KOTL2621_15_GE_NOTE.INDD 17 3/10/15 2:57 PM
E18 Endnotes
Chapter 9
1. E. B. Boyd, “After LinkedIn’s IPO, What Will It Have to Do to Earn Its
$4.3 Billion Valuation,” Fast Company, May 19, 2011; Evelyn M. Rusli,
“LinkedIn Earnings: Profit Soars, but Shares Fall on Weak Outlook,”
Wall Street Journal, May 2, 2013; Sam Grobart, “Why LinkedIn Is
Buying Newsreader App Pulse,” Bloomberg Businessweek, April 18,
2013; Alexandra Chang, “LinkedIn Revamps Mobile Apps to Focus on
Stories, Updates,” Wired, April 18, 2013.
2. Dale Buss, “Brands in the ’Hood,” Point, December 2005, pp. 19–24.
3. By visiting the company’s sponsored site, MyBestSegments.com,
you can enter in a zip code and discover the top five clusters for
that area. Note that another leading supplier of geodemographic
data is ClusterPlus (Strategic Mapping). For background, see
Becky Ebenkamp, “Urban America Redefined,” Brandweek,
October 6, 2003, pp. 12–13.
4. “The PRIZM’s Use in Target Marketing,” www.bizCovering.com, June
8, 2012
5. Max Chafkin, “Star Power,” Fast Company, December 2012/January
2013, pp. 91–96, 126; Rolfe Winkler, “Is It Time Local Site Called for
Yelp?,” Wall Street Journal, January 17, 2013; “How Yelp’s Business
Works,” Business Insider, March 2012; Karen Weise, “A Lie Detector
Test for Online Reviews,” Bloomberg Businessweek, September 29,
2011.
6. “YouthPulse: The Definitive Study of Today’s Youth Generation,” Harris
Interactive, 2009, www.harrisinteractive.com.
7. Gina Chon, “Car Makers Talk ’Bout G-G-Generations,” Wall Street
Journal, May 9, 2006.
8. Cathy Lynn Grossman, “Only Just Begun to Owe,” USA Today, August
10, 2012, pp. 1B–2B.
9. Brooks Barnes and Monica M. Clark, “Tapping into the Wedding
Industry to Sell Broadway Seats,” Wall Street Journal, July 3, 2006.
10. Eric Klinenberg, “The Solo Economy,” Fortune, February 6, 2012.
11. For some consumer behavior findings on gender, see Kristina M.
Durante, Vladas Griskevicius, Sarah E. Hill, Carin Perilloux, and
Norman P. Li, “Ovulation, Female Competition, and Product Choice:
Hormonal Influences on Consumer Behavior,” Journal of Consumer
Research 37 (April 2011), pp. 921–34; Valentyna Melnyk, Stijn M.J.
van Osselaer, and Tammo H. A. Bijmolt, “Are Women More Loyal
Customers than Men? Gender Differences in Loyalty to Firms and
Individual Service Providers,” Journal of Marketing 73 (July 2009),
pp. 82–96; Jane Cunningham and Philippa Roberts, “What Women
Want,” Brand Strategy, December 2006–January 2007,
pp. 40–41; Robert J. Fisher and Laurette Dube, “Gender Differences
in Responses to Emotional Advertising: A Social Desirability
Perspective,” Journal of Consumer Research 31 (March 2005),
pp. 850–58.
12. Dawn Klingensmith, “Marketing Gurus Try to Read Women’s Minds,”
Chicago Tribune, April 19, 2006; Elisabeth Sullivan, “The Mother
Lode,” Marketing News, July 15, 2008, p. 28; Claire Cain Miller,
“Advertising Woman to Woman, Online,” New York Times, August
13, 2008; Eric Newman, “The Mook Industrial Complex,” Brandweek,
January 14, 2008, pp. 21–24.
13. Eric Spitznagel, “It’s Pinterest For Dudes!,” Bloomberg Businessweek,
April 29, 2013.
14. Molly Soat, “Tide Equips Mr. Mom,” Marketing News Exclusives,
January 17, 2013; Jack Neff, “Ogilvyism for New Era? Consumer Is
Not a Moron. He Is Your Husband,” Advertising Age, October 17,
2011; Heather Chaet, “The Manscape,” Adweek, September 24,
2012.
15. “Gillette, Olay Co-Brand Razor,” Chain Drug Review, February 27,
2012, www.gillettevenus.com/en_US/about_venus/index.jsp, accessed
May 4, 2013; Jenn Abelson, “Gillette Sharpens Its Focus on Women,”
Boston Globe, January 4, 2009; A. G. Lafley, interview, “It Was a
No-Brainer,” Fortune, February 21, 2005, p. 96; Naomi Aoki, “Gillette
Hopes to Create a Buzz with Vibrating Women’s Razor,” Boston Globe,
December 17, 2004; Chris Reidy, “The Unveiling of a New Venus,”
Boston Globe, November 3, 2000.
Corporation Headquarters–Subsidiary Relationship,” Journal of
Marketing Research 50 (June 2013), pp. 378–98.
104. Zhilin Yang, Chenting Su, and Kim-Shyan Fam, “Dealing with
Institutional Distances in International Marketing Channels:
Governance Strategies That Engender Legitimacy and Efficiency,”
Journal of Marketing 76 (May 2012), pp. 41–55.
105. Katrijn Gielens, Linda M. Van De Gucht, Jan-Benedict E.M.
Steenkamp, and Marnik G. Dekimpe, “Dancing with a Giant:
The Effect of Wal-Mart’s Entry into the United Kingdom on the
Performance of European Retailers,” Journal of Marketing Research
45 (October 2008), pp. 519–34.
106. Miguel Bustillo, “After Early Errors, Wal-Mart Thinks Locally to Act
Globally,” Wall Street Journal, August 14, 2009; Holman W. Jenkins
Jr., “Wal-Mart Innocents Abroad,” Wall Street Journal, April 25, 2012.
107. Noreen O’Leary, “Infiniti Plays Up Japanese Heritage in Global
Campaign,” Brandweek, February 15, 2010, p. 5.
108. A. Pawlowski, “Hobbit Fever Heats Up New Zealand Tourism,” www.
NBCnews.com, November 14, 2012; Brooks Barnes and Michael
Cieply, “New Zealand’s Hobbit Trail,” New York Times, October 5,
2012.
109. James Kilner, “Borat ‘Has Given Kazakhstan Tourist Boost,’” The
Telegraph, April 23, 2012; “Borat Still Boosting Kazakhstan Tourism,”
Huffington Post, April 23, 2012.
110. Joanna Kakissis, “Vacationers Rethink Greece amid Debt Crisis,”
National Public Radio, www.npr.org, June 22, 2010; Elena Becatoros,
“Greece’s Tourism Industry under Threat,” MSNBC, www.msnbc.
com, June 15, 2010.
111. Gurhan-Canli and Maheswaran, “Cultural Variations in Country-
of-Origin Effects,” pp. 309–17. For some different related issues,
see also Lily Dong and Kelly Tian, “The Use of Western Brands in
Asserting Chinese National Identity,” Journal of Consumer Research
36 (October 2009), pp. 504–23; Yinlong Zhang and Adwait Khare,
“The Impact of Accessible Identities on the Evaluation of Global
versus Local Products,” Journal of Consumer Research 36 (October
2009), pp. 524–37; Rohit Varman and Russell W. Belk, “Nationalism
and Ideology in an Anticonsumption Movement,” Journal of
Consumer Research 36 (December 2009), pp. 686–700.
112. Ellen Byron, “P&G’s Global Target: Shelves of Tiny Stores,” Wall
Street Journal, July 16, 2007; “Not So Fizzy,” Economist, February
23, 2002, pp. 66–67.
113. Douglas B. Holt, John A. Quelch, and Earl L. Taylor, “How Global
Brands Compete,” Harvard Business Review 82, September 2004,
pp. 68–75; Jan-Benedict E. M. Steenkamp, Rajeev Batra, and Dana
L. Alden, “How Perceived Brand Globalness Creates Brand Value,”
Journal of International Business Studies 34 (January 2003), pp.
53–65.
114. Gürhan-Canli and Maheswaran, “Cultural Variations in Country-of-
Origin Effects”; Johny K. Johansson, “Global Marketing: Research on
Foreign Entry, Local Marketing, Global Management,” Barton A. Weitz
and Robin Wensley, eds., Handbook of Marketing (London: Sage,
2002), pp. 457–83.
115. Consumer Reports, “How to Decipher ‘Made in the USA’ Claims,”
Boston Globe, April 7, 2013.
116. Kimberly Weisul, “Why More Are Buying into ‘Buy Local,’” Bloomberg
BusinessWeek, March 1, 2010, pp. 57–60.
117. Jathon Sapsford and Norihiko Shirouzo, “Mom, Apple Pie
and . . . Toyota?,” Wall Street Journal, May 11, 2006.
118. Joel Backaler, “Haier: A Chinese Company That Innovates,” China
Tracker, www.forbes.com, June 17, 2010; Zhang Ruimin, “Voices
from China,” Forbes, September 28, 2009; Ariel Tung, “Home
Appliance Maker Haier. Taking on America,” China Daily, August
3, 2012; Ron Gluckman, “Appliances for Everyone,” Forbes, May
7, 2012; Patti Waldmeir, “Haier Seeks to Boost European Sales,”
Financial Times, June 18, 2012; Atsmon et al., “Winning the $30
Trillion Decathlon.”
119. For additional discussion, see “Strengthening Brand America,” The
Burghard Group, www.strengtheningbrandamerica.com, December 9,
2010.
Z02_KOTL2621_15_GE_NOTE.INDD 18 3/10/15 2:57 PM
Endnotes E19
36. Elaine Wong, “Why Bounty Is a Hit with U.S. Hispanics,” Brandweek,
August 17, 2009, p. 6.
37. Jeff Bercovi, “Latino Love,” Forbes, August 6, 2012, pp. 66–73; Liesse,
“Univision: One for All,” pp. C1–C4.
38. Charlenne Gonzalez, “U.S. Hispanic Consumer: Marketing to the
World’s Ninth Largest Economy,” independent study, May 2013, Tuck
School of Business at Dartmouth College.
39. Piet Levy, “Artistic Expression,” Marketing News, May 15, 2011, p. 10.
40. Laurel Wentz, “Clorox Fraganzia Launch Targets U.S. Hispanic
Consumers,” Advertising Age, July 16, 2012.
41. Elisabeth A. Sullivan, “Speak Our Language,” Marketing News, March
15, 2008, pp. 20–22; Edward Lewine and Malia Wollan, “Latin Lovers,”
Fast Company, July–August 2011, pp. 55–62.
42. Rita Chang, “Mobile Marketers Target Receptive Hispanic Audience,”
Advertising Age, January 26, 2009, p. 18.
43. Brock, “Hispanics Check In,” pp. H1–H4.
44. Vicky Uhland, “Marketing to Asian-American Customers,” Natural Food
Merchandiser, March 2012, p. 62.
45. “The ‘Invisible’ Market,” Brandweek, January 30, 2006.
46. http://stateofthemedia.org/2010/ethnic-summary-essay/asian-
american, accessed May 20, 2014.
47. Bill Imada, “How Wells Fargo Became a Banking Leader in the Asian-
American Market,” Advertising Age, July 26, 2010.
48. “Marketing to Asian-Americans,” Special Supplement to Brandweek,
May 26, 2008.
49. Adele Lassere, “The Marketing Corner: Marketing to African-American
Consumers,” Epoch Times, November 27, 2009; Michael A. Fletcher,
“Advertisers Aren’t Tapping into Strong African American Market,
Report Says,” Washington Post, September 21, 2012.
50. Lisa Sanders, “How to Target Blacks? First You Gotta Spend,”
Advertising Age, July 3, 2006, p. 19; Pepper Miller and Herb Kemp,
What’s Black about It? Insights to Increase Your Share of a Changing
African-American Market (Ithaca, NY: Paramount Market Publishing,
2005); Advertising Age’s In Plain Sight: The Black Consumer
Opportunity, April 23, 2012.
51. Fletcher, “Advertisers Aren’t Tapping into Strong African American
Market, Report Says.” For broader discussion, see Pepper Miller, Black
Still Matters in Marketing: Why Increasing Your Cultural IQ about Black
America Is Critical to Your Company and Brand (Ithaca, NY: Paramount
Market Publishing, 2012).
52. Rieva Lesonsky, “How to Reach African-American Consumers,” www.
networksolutions.com, March 4, 2013.
53. Marissa Fabris, “Special Report on Multicultural Marketing: Market
Power,” Target Marketing, , May 2008.
54. Robert Klara, “Brands New Way of Thinking,” Adweek, November 12,
2012.
55. Sonya A. Grier and Shiriki K. Kumanyika, “The Context for Choice:
Health Implications of Targeted Food and Beverage Marketing to
African-Americans,” American Journal of Public Health 98 (September
2008), pp. 1616–29.
56. Kate Rockwood, “Partnering with Pride,” Fast Company, November
2009, pp. 21–28.
57. Molly Soat, “Brands From JCPenney to NHL Aim to Be More Fan
Friendly,” Marketing News Exclusives, April 18, 2013.
58. Prime Access, Inc, www.primeaccess.net.
59. www.strategicbusinessinsights.com/vals/presurvey.shtml, accessed
May 20, 2014.
60. Daniel Yankelovich and David Meer, “Rediscovering Market
Segmentation,” Harvard Business Review, February 2006, pp. 1–11;
Sharon E. Beatty, Pamela M. Homer, and Lynn R. Kahle “Problems
with VALS in International Marketing Research: An Example from an
Application of the Empirical Mirror Technique,” Advances in Consumer
Research, volume 15, Michael J. Houston, ed. (Provo, UT: Association
for Consumer Research, 1988), pp. 375–80.
61. Andrew Kaplan, “A Fruitful Mix,” Beverage World, May 2006,
pp. 28–36.
16. Charles D. Schewe and Geoffrey Meredith, “Segmenting Global
Markets by Generational Cohort: Determining Motivations by
Age,” Journal of Consumer Behavior 4 (October 2004), pp. 51–63;
Geoffrey E. Meredith and Charles D. Schewe, Managing by Defining
Moments: America’s 7 Generational Cohorts, Their Workplace
Values, and Why Managers Should Care (New York: Hungry Minds,
2002); Geoffrey E. Meredith, Charles D. Schewe, and Janice
Karlovich, Defining Markets Defining Moments (New York: Hungry
Minds, 2001).
17. Burt Helm, “PNC Lures Gen Y with Its ‘Virtual Wallet’ Account,”
BusinessWeek, November 26, 2008; Virtual Wallet by PNC Leading the
Way, www.pncvirtualwallet.com, January 26, 2010; Jeremy Quittner, “At
PNC, Wallet Is Virtual Only to a Point,” American Banker, March 4, 2011;
Daniel Wolfe, “How a Blog Helped PNC Fine-Tune Its Virtual Wallet,
American Banker, June 12, 2012.
18. Christine Barton, Jeff Fromm, and Chris Egan, “The Millennial
Consumer: Debunking Stereotypes,” white paper, Boston Consulting
Group, April 2012.
19. Josh T. Saunders, “Vans Sponsors U.S. Open,” Surfer, February 7,
2013; Natasha Singer, “On Campus, It’s One Big Commercial,” New
York Times, September 10, 2011; Piet Levy, “The Quest for Cool,”
Marketing News, February 28, 2009, p. 6; Michelle Conlin, “Youth
Quake,” BusinessWeek, January 21, 2008, pp. 32–36.
20. Karen E. Klein, “The ABCs of Selling to Generation X,” BusinessWeek,
April 15, 2004; M. J. Stephey, “Gen-X: The Ignored Generation?,”
Time, April 16, 2008; Tamara Erickson, “Don’t Treat Them Like Baby
Boomers,” BusinessWeek, August 25, 2008, p. 64.
21. Amy Chozick, “Television’s Senior Moment,” Wall Street Journal,
March 9, 2011.
22. Judann Pollack, “Boomers Don’t Want Your Pity, but They Do Demand
Your Respect,” Advertising Age, October 8, 2007, p. 24.
23. Michelle Barnhart and Lisa Peñaloza, “Who Are You Calling Old?
Negotiating Old Age Identity in the Elderly Consumption Ensemble,”
Journal of Consumer Research 39 (April 2013), pp. 1133–53.
24. Mark Dolliver, “Marketing to Today’s 65-plus Consumers,” Adweek,
July 27, 2009.
25. Stuart Elliott, “The Older Audience Is Looking Better than Ever,” New
York Times, April 19, 2009.
26. Stephanie Schomer, “Bring on the Boomers,” Fast Company, February
2011, pp. 47–51.
27. Marissa Miley, “Don’t Bypass African-Americans,” Advertising Age,
February 2, 2009.
28. Jim Farley, “Lessons from the Leader: Ford,” Advertising Age’s In Plain
Sight: The Black Consumer Opportunity, April 23, 2012, p. 21.
29. “Hispanics Will Top All U.S. Minority Groups for Purchasing Power by
2007,” Selig Center of Economic Growth, Terry College of Business,
University of Georgia, www.selig.uga.edu, September 1, 2006; Jeffrey
M. Humphreys, “The Multicultural Economy 2008,” Selig Center of
Economic Growth, Terry College of Business, University of Georgia,
2008.
30. Jeff Bercovi, “Latino Love,” Forbes, August 6, 2012, pp. 66–73.
31. Julie Liesse, “Univision: One for All,” Special Advertising Supplement
to Advertising Age, April 1, 2013, pp. C1–C4; Jeff Koyen, “The Truth
about Hispanic Consumers,” Hispanic Advertising: Special Advertising
Section to Adweek, March 11, 2012, pp. H1–H4.
32. Stuart Feil, “The Best of Both Worlds,” Hispanic Advertising: Special
Advertising Section to Adweek, March 11, 2012, pp. H11–H14.
33. Laurel Wentz, “With an Ever-Growing Population of ‘Fusionistas,’
Consistency Is Key,” Advertising Age, October 17, 2011, p. 28.
34. Glenny Brock, “Hispanics Check In,” Hispanic Advertising: Special
Advertising Section to Adweek, October 17, 2011, pp. H1–H4. See
also Cynthia Rodriguez Cano and David J. Ortinau, “Digging for
Spanish ‘Gold’: How to Connect with Hispanic Consumers,” Journal of
Advertising Research 52 (September 2012), pp. 322–32.
35. Barbara De Lollis, “At Goya, It’s All in La Familia,” USA Today, March
24, 2008, pp. 1B–2B; Erin Carlyle, “Goya Foods Secret Sauce,”
Forbes, May 27, 2013, p. 50.
Z02_KOTL2621_15_GE_NOTE.INDD 19 3/10/15 2:57 PM
E20 Endnotes
E. Escales and James R. Bettman, “Self-Construal, Reference Groups,
and Brand Meaning,” Journal of Consumer Research 32 (December
2005), pp. 378–89.
80. Sarah Jane Glynn, “Families Need More Help to Care for Their
Children,” white paper, Center for American Progress, August 16,
2012.
81. Caroline E. Mayer, “Nurturing Brand Loyalty; With Preschool Supplies,
Firms Woo Future Customers—and Current Parents,” Washington Post,
October 12, 2003.
Chapter 10
1. Noel Murray, “DirecTV’s Ad Campaign Wants to Make You Hate Cable
as Much as It Does,” www.avclub.com, February 26, 2013; Shalini
Ramachandran and Ben Fox Rubin, “DirecTV Profit Rises on Latin
America Growth,” Wall Street Journal, February 14, 2013; Alex Sherman,
“DirecTV Profit Lags Estimates after First U.S. Customer Loss,”
Bloomberg BusinessWeek, August 2, 2012; Suzanne Vranica, “DirecTV
Plays Offense with NFL Ads,” Wall Street Journal, July 29, 2010.
2. Al Ries and Jack Trout, Positioning: The Battle for Your Mind, 20th
Anniversary Edition (New York: McGraw-Hill, 2000).
3. Michael J. Lanning and Lynn W. Phillips, “Building Market-Focused
Organizations,” Gemini Consulting White Paper, 1991.
4. David A. Aaker, Brand Portfolio Strategy: Creating Relevance,
Differentiation, Energy, Leverage, and Clarity (New York: Free Press,
2004); Rebecca Wright, “The Next Frontier for Nutrition Bars,”
Nutraceuticals World, January/February 2011.
5. Jeff Bercovi, “Poker Shuffles the Deck,” Forbes, December 5, 2011.
6. Robert Klara, “The Tough Sell,” Adweek, July 9, 2012, p. 40.
7. Allan D. Shocker, “Determining the Structure of Product-Markets:
Practices, Issues, and Suggestions,” Barton A. Weitz and Robin
Wensley, eds., Handbook of Marketing (London: Sage, 2002), pp. 106–
25. See also Bruce H. Clark and David B. Montgomery, “Managerial
Identification of Competitors,” Journal of Marketing 63 (July 1999),
pp. 67–83.
8. “What Business Are You In? Classic Advice from Theodore Levitt,”
Harvard Business Review, October 2006, pp. 127–37. See also
Theodore Levitt’s seminal article, “Marketing Myopia,” Harvard
Business Review, July–August 1960, pp. 45–56.
9. Jeffrey F. Rayport and Bernard J. Jaworski, e-Commerce (New York:
McGraw-Hill, 2001), p. 53.
10. For discussion of some of the long-term implications of marketing
activities, see Koen Pauwels, “How Dynamic Consumer Response,
Competitor Response, Company Support, and Company Inertia Shape
Long-Term Marketing Effectiveness,” Marketing Science 23 (Fall 2004),
pp. 596–610; Marnik Dekimpe and Dominique Hanssens, “Sustained
Spending and Persistent Response: A New Look at Long-term
Marketing Profitability,” Journal of Marketing Research 36 (November
1999), pp. 397–412.
11. Kevin Lane Keller, Brian Sternthal, and Alice Tybout, “Three
Questions You Need to Ask about Your Brand,” Harvard Business
Review, September 2002, pp. 80–89.
12. Patrick Barwise, Simply Better: Winning and Keeping Customers by
Delivering What Matters Most (Cambridge, MA: Harvard Business
School Press, 2004). But see Susan M. Broniarczyk and Andrew
D. Gershoff, “The Reciprocal Effects of Brand Equity and Trivial
Attributes,” Journal of Marketing Research 40 (May 2003), pp. 161–75;
Gregory S. Carpenter, Rashi Glazer, and Kent Nakamoto, “Meaningful
Brands from Meaningless Differentiation: The Dependence on
Irrelevant Attributes,” Journal of Marketing Research 31 (August 1994),
pp. 339–50.
13. Elaine Wong, “Method Co-Founder Offers Spin on Viral Video,”
Adweek, January 11, 2010; “Champions of Design: Method,”
Marketing, June 15, 2011, p. 18; Stuart Elliott, “Ads for Method
Celebrate the Madness,” New York Times, March 12, 2012; Lindsay
Riddell, “Method Sold to Belgium Competitor Ecover,” San Francisco
Times, September 4, 2012.
62. Jenni Romaniuk, “Are You Blinded by the Heavy (Buyer) . . . Or Are You
Seeing the Light?,” Journal of Advertising Research, 51 (December
2011), pp. 561–63.
63. This classification was adapted from George H. Brown, “Brand Loyalty:
Fact or Fiction?,” Advertising Age, June 1952–January 1953, a series.
See also Peter E. Rossi, Robert E. McCulloch, and Greg M. Allenby,
“The Value of Purchase History Data in Target Marketing,” Marketing
Science 15 (Fall 1996), pp. 321–40.
64. James C. Anderson and James A. Narus, “Capturing the Value of
Supplementary Services,” Harvard Business Review, January–February
1995, pp. 75–83. But also see Frank V. Cespedes, James P. Dougherty,
and Ben S. Skinner III, “How to Identify the Best Customers for Your
Business,” MIT Sloan Management Review, Winter 2013, pp. 53–59.
65. For a review of many of the methodological issues in developing
segmentation schemes, see William R. Dillon and Soumen Mukherjee,
“A Guide to the Design and Execution of Segmentation Studies,” Rajiv
Grover and Marco Vriens, eds., Handbook of Marketing Research
(Thousand Oaks, CA: Sage, 2006).
66. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980),
pp. 22–23.
67. Estée Lauder, www.esteelauder.com, accessed June 23, 2013.
68. Barry Silverstein, “Hallmark—Calling Card,” www.brandchannel.com,
June 15, 2009; Brad van Auken, “Leveraging the Brand: Hallmark
Case Study,” www.brandstrategyinsider.com, January 11, 2008; www.
hallmark.com/card-collections/, accessed May 15, 2013.
69. Jack Nicas, “Allegiant Air: The Tardy, Gas-Guzzling, Most Profitable
Airline in America,” Wall Street Journal, June 4, 2013; Ilene Aleshire,
“How Allegiant Air Turned a Profit for 39 Consecutive Quarters,”
www.skift.com, November 4, 2012; “Heard of Allegiant Air? Why
It’s the Nation’s Most Profitable Airline,” Fast Company, September
2009; Charisse Jones, “Allegiant Profits from Leisure Fliers,” USA
Today, October 19, 2009.
70. Don Peppers and Martha Rogers, One-to-One B2B: Customer
Development Strategies for the Business-to-Business World (New
York: Doubleday, 2001); Jerry Wind and Arvind Rangaswamy,
“Customerization: The Next Revolution in Mass Customization,”
Journal of Interactive Marketing 15 (Winter 2001), pp. 13–32; Itamar
Simonson, “Determinants of Customers’ Responses to Customized
Offers: Conceptual Framework and Research Propositions,” Journal of
Marketing 69 (January 2005), pp. 32–45.
71. James H. Gilmore and B. Joseph Pine II, Markets of One: Creating
Customer-Unique Value through Mass Customization (Boston: Harvard
Business School Press, 2000); B. Joseph Pine II, “Beyond Mass
Customization,” Harvard Business Review, May 2, 2011.
72. Erik Eliason, “3 Reasons Why Mass Customization Is the Future of
Consumer Products,” Huffington Post, March 21, 2012.
73. Scott Davis, “MINI Cooper, Amazon, and McDonald’s: Are Customers
Lovin’ It?,” Forbes, October 31, 2011.
74. Raquel Laneri, “Mr. Green Jeans,” Forbes, November 7, 2011, pp. 74–
76; Zack O’Malley Greenburg, “Bespoke Unspoken,” Forbes, November
7, 2011, p. 78.
75. Christopher Steiner, “The Perfect Ski,” Forbes, February 28, 2011.
76. Elizabeth Dwoskin, “The Like-Me Election,” Bloomberg Businessweek,
September 26, 2011, pp. 37–38.
77. Don Peppers and Martha Rogers, The One-to-One Manager: Real-
World Lessons in Customer Relationship Management (New York:
Doubleday, 1999); Don Peppers, Martha Rogers, and Bob Dorf, The
One-to-One Fieldbook: The Complete Toolkit for Implementing a One-
to-One Marketing Program (New York: Bantam, 1999); among their other
publications.
78. Nikolaus Franke, Peter Keinz, and Christoph J. Steger, “Testing the
Value of Customization: When Do Customers Really Prefer Products
Tailored to Their Preferences,” Journal of Marketing 73 (September
2009), pp. 103–21.
79. Woo Jin Choi and Karen Page Winterich, “Can Brands Move In
from the Outside? How Moral Identity Enhances Out-Group Brand
Attitudes,” Journal of Marketing 77 (March 2013), pp. 96–111; Jennifer
Z02_KOTL2621_15_GE_NOTE.INDD 20 3/10/15 2:57 PM
Endnotes E21
35. Keith Naughton, “Ford’s ‘Perfect Storm,’” Newsweek, September 17,
2001, pp. 48–50; Byron Pope, “Ford Flex Not Minivan Replacement,
Marketing Chief Says,” WardsAuto, April 16, 2007.
36. Kerry Capell, “Thinking Simple at Philips,” BusinessWeek, December
11, 2006, p. 50; Philips, www.philips.com.
37. Rajendra S. Sisodia, David B. Wolfe, and Jagdish N. Sheth, Firms of
Endearment: How World-Class Companies Benefit Profit from Passion
& Purpose (Upper Saddle River, NJ: Wharton School Publishing, 2007).
38. Melissa Korn, “Wanted: Gurus with Actual Experience,” Wall Street
Journal, July 2, 2013.
39. Randall Ringer and Michael Thibodeau, “A Breakthrough Approach
to Brand Creation,” Verse, The Narrative Branding Company, www.
versegroup.com, accessed March 7, 2014.
40. Patrick Hanlon, Primal Branding: Create Zealots for Your Brand, Your
Company, and Your Future (New York: Free Press, 2006); ThinkTopia,
www.thinktopia.com, accessed May 26, 2014.
41. Douglas Holt, How Brands Become Icons: The Principle of Cultural
Branding (Cambridge, MA: Harvard Business School Press, 2004);
Douglas Holt, “Branding as Cultural Activism,” www.zibs.com; Douglas
Holt, “What Becomes an Icon Most,” Harvard Business Review, March
2003, pp. 43–49; See also Grant McKracken, Culture and Consumption
II: Markets, Meaning, and Brand Management (Bloomington, IN: Indiana
University Press, 2005).
42. Craig Thompson, “Brands as Culturally Embedded Resources,” 43rd
AMA Sheth Foundation Doctoral Consortium, University of Missouri,
June 6, 2008. See also research by John Sherry and Robert Kozinets,
including John F. Sherry Jr., Robert V. Kozinets, Adam Duhachek,
Benét DeBerry-Spence, Krittinee Nuttavuthisit and Diana Storm,
“Gendered Behavior in a Male Preserve: Role Playing at ESPN Zone
Chicago,” Journal of Consumer Psychology 14, nos. 1 & 2 (2004), pp.
151–58; Stephen Brown, Robert V. Kozinets, and John F. Sherry Jr.,
“Teaching Old Brands New Tricks: Retro Branding and the Revival of
Brand Meaning,” Journal of Marketing 67 (July 2003), pp. 19–33.
43. Nick Wreden, Fusion Branding: How to Forge Your Brand for the
Future (Atlanta: Accountability Press, 2002); Fusion Branding, www.
fusionbranding.com, accessed May 26, 2014.
44. Ashley Lutz, “Uniqlo’s Brilliant Strategy Is to Totally Ignore Fashion,”
Business Insider, October 11, 2012; Lydia Dishman, “Uniqlo’s Secret
Brick-and-Mortar Expansion Strategy Is E-commerce,” Forbes,
October 22, 2012; Minter Dial, “Uniqlo: A Well Executed Glocal Digital
and Social Media Market Strategy,” The Myndset, February 10, 2013.
45. Ashlee Vance, “It’s a Doc in a Box,” Bloomberg Businessweek, May
7, 2012, pp. 45–47; Victoria Barret, “Software’s Boy Wonder,” Forbes,
March 4, 2013; Ashlee Vance and Dina Bass, “Microsoft’s New Office
Is Finally Up to Speed,” Bloomberg Businessweek, February 4, p. 201.
46. Daniel Roberts, “The Secrets of See’s Candies,” Fortune, September
3, 2012, pp. 67–72.
47. Jason Ankeny, “Building a Brand on a Budget,” Entrepreneur, May
2010, pp. 48–51.
48. Jefferson Graham, “How to Ride Facebook’s Giant Wave,” USA Today,
May 30, 2013, p. 5B.
49. Roger Yu, “Small Businesses Seek Big Sales from Mobile Ads,” USA
Today, June 10, 2013.
50. Rob Walker, “The Cult of Evernote,” Bloomberg Businessweek,
February 28, 2013.
51. Andrew Ross Sorkin and Andrew Martin, “Coca-Cola Agrees to Buy
Vitaminwater,” New York Times, May 26, 2007.
Chapter 11
1. Jennifer Haderspeck, “Sports and Protein Drinks Share the Glory,”
Beverage Industry, May 2013; Natalie Zmuda, “Why Gatorade
Held Big Play for Second Quarter and Print Is Key to New Push,”
Advertising Age, March 25, 2013; Jason Feifer, “How Gatorade
Redefined Its Audience and a Flagging Brand,” Fast Company, June
2012; Duane Stanford, “Gatorade Goes Back to the Lab,” Bloomberg
Businessweek, November 28, 2010; Kate MacArthur, “Gatorade
14. Dan Slater, “She Drives a Cadillac?,” Fast Company, February 2012,
pp. 26–28.
15. “America Is High on Sugar, Down on Splenda,” www.marketwatch.
com, May 14, 2013.
16. Jennifer Cirillo, “Energy’s MVP,” Beverage World, August 2012,
pp. 35–42.
17. Thomas A. Brunner and Michaela Wänke, “The Reduced and
Enhanced Impact of Shared Features on Individual Brand
Evaluations,” Journal of Consumer Psychology 16 (April 2006),
pp. 101–11.
18. Vanna Le, “Global 2000: The World’s Largest Auto Companies of
2014,” Forbes, May 7, 2014; Hyundai, http://worldwide.hyundai.com.
19. L. Joshua Sosland, “Dunkin’ Donuts’ Strategy,” Food Business News,
May 18, 2011; Chris Barth, “Can Dunkin’s New Deal Brew Enough
Growth to Catch Starbucks,” Forbes, January 4, 2012.
20. Jim Henry, “BMW Still the Ultimate Driving Machine, Not That It Ever
Wasn’t,” Forbes, May 31, 2012; “No Joy Here from BMW Ad Switch,”
Automotive News, April 12, 2010.
21. Michael E. Porter, Competitive Strategy: Techniques for Analyzing
Industries and Competitors (New York: Free Press, 1980).
22. Makiko Kitamura and David Wainer, “Similar but Not the Same,”
Bloomberg Businessweek, March 25, 2013, pp. 19–20.
23. Francis J. Kelly III and Barry Silverstein, The Breakaway Brand (New
York: McGraw-Hill, 2005).
24. Jennifer Cirillo, “Lemon-Lime Bubbly Goes Au Naturel,” Beverage
World, January 2011, p. 14.
25. For a classic analysis of perceptual maps, see John R. Hauser and
Frank S. Koppelman, “Alternative Perceptual Mapping Techniques:
Relative Accuracy and Usefulness,” Journal of Marketing Research
16 (November 1979), pp. 495–506. For some contemporary
perspectives on measurement techniques for positioning, see Sanjay
K. Rao, “Data-Based Differentiation,” Marketing Insights, Spring
2013, pp. 26–32.
26. Brian Sheehan, Loveworks: How the World’s Top Marketers Make
Emotional Connections to Win in the Marketplace (Brooklyn, NY:
powerHouse, 2013).
27. Piet Levy, “Express Yourself,” Marketing News, June 15, 2009, p. 6.
28. Walter Loeb, “Kate Spade Is a Brand Ready to Boom Around the
World,” Forbes, March 22, 2013; Jon Caramanica, “At Jack Spade,
Carefully Appearing Not to Care,” New York Times, September 1,
2010; Meredith Galante, “How Kate Spade New York Uses Social
Media to Sell Handbags,” BusinessInsider, April 17, 2012; Rachel
Lamb, “Kate Spade Tries Global Marketing Via New Partnership,”
Luxury Daily, May 20, 2011.
29. James H. Gilmore and B. Joseph Pine II, Authenticity: What
Consumers Really Want (Cambridge, MA: Harvard Business School
Press, 2007); Lynn B. Upshaw, Truth: The New Rules for Marketing in a
Skeptical World (New York: AMACOM, 2007).
30. Owen Jenkins, “Gimme Some Lovin’,” Marketing News, May 15, 2009,
p. 19.
31. Jack Neff, “Welch’s Local-Sourcing Story Core to Outreach,”
Advertising Age, January 24, 2011.
32. Hamish Pringle and Peter Field, “Why Emotional Messages Beat
Rational Ones,” Advertising Age, March 2, 2009, p. 13; Hamish Pringle
and Peter Field, Brand Immortality: How Brands Can Live Long and
Prosper (Philadelphia: Kogan Page, 2009).
33. Scott Bedbury, A New Brand World (New York: Viking Press, 2002).
34. Stuart Elliott, “Bank Leaves Child’s Play Behind,” New York Times,
September 17, 2010; Dakin Campbell, “Ally’s New Campaign
Replaces Ads That Showed Bankers as Cheaters,” Bloomberg
Business Week, September 20, 2010; “If Advertising Doesn’t Work,
then Why Is ‘Ally’ a Household Word?,” www.thefinancialbrand.
com, November 12, 2010; “Ally Bank Launches New ‘Stages’ Ad
Campaign,” PR Newswire, September 4, 2012; Andrew R. Johnson,
“Ally Ads Take Aim at Enemies,” Wall Street Journal, September 4,
2012.
Z02_KOTL2621_15_GE_NOTE.INDD 21 3/10/15 2:57 PM
E22 Endnotes
Valenzuela, “Brands as Signals: A Cross-Country Validation Study,”
Journal of Marketing 70 (January 2006), pp. 34–49.
13. Scott Davis, Brand Asset Management: Driving Profitable Growth
through Your Brands (San Francisco: Jossey-Bass, 2000); Mary
W. Sullivan, “How Brand Names Affect the Demand for Twin
Automobiles,” Journal of Marketing Research 35 (May 1998),
pp. 154–65.
14. The power of branding is not without its critics, however, some of
whom reject the commercialism associated with branding activities.
See Naomi Klein, No Logo: Taking Aim at the Brand Bullies (New York:
Picador, 2000).
15. For a discussion of the role of brands across different categories and
markets, see Marc Fischer, Franziska Völckner, and Henrik Sattler,
“How Important Are Brands? A Cross-Category, Cross-Country
Study,” Journal of Marketing Research 47 (October 2010),
pp. 823–39.
16. To read about Morgan Spurlock’s documentary on the ubiquity of
brands and brand messages, Pom Wonderful Presents: The Greatest
Movie Ever Sold, see Rick Tetzeli and Ari Karpel, “I’m with the Brand,”
Fast Company, April 2011, pp. 82–92.
17. “Study: Food in McDonald’s Wrapper Tastes Better to Kids,”
Associated Press, August 6, 2007.
18. Xueming Luo, Sascha Raithel, and Michael A. Wiles, “The Impact
of Brand Rating Dispersion on Firm Value,” Journal of Marketing
Research 50 (June 2013), pp. 399–415.
19. Michael A. Wiles, Neil A. Morgan, and Lopo L. Rego, “The Effect
of Brand Acquisition and Disposal on Stock Returns,” Journal of
Marketing 76 (January 2012), pp. 38–58.
20. Natalie Mizik and Robert Jacobson, “Talk about Brand Strategy,”
Harvard Business Review, October 2005, p. 1; Baruch Lev, Intangibles:
Management, Measurement, and Reporting (Washington, DC:
Brookings Institute, 2001). For a detailed examination, see Nigel Hollis,
The Meaningful Brand: How Strong Brands Make More Money (New
York: Palgrave Macmillan, 2013).
21. Danielle Sacks, “The Devil Wears J.Crew,” Fast Company, May 2013.
22. For an academic discussion of how consumers become so strongly
attached to people as brands, see Matthew Thomson, “Human Brands:
Investigating Antecedents to Consumers’ Stronger Attachments to
Celebrities,” Journal of Marketing 70 (July 2006), pp. 104–19.
23. Lara O’Reilly, “Real Madrid Beat Man U to World’s Richest Football
Team Spot,” Marketing Week, April 18, 2013; Agustino Fontevecchia,
“The Team to Top: Real Madrid Overtakes ManU to Become the Most
Valuable Sports Team in the World,” Forbes, April 17, 2013; Tony
Karon, “Why Real Madrid Can’t Beat Barca on The Field, but Leads
Comfortably in the Market,” Time, March 23, 2012.
24. Other approaches are based on economic principles of signaling
(e.g., Tulin Erdem, “Brand Equity as a Signaling Phenomenon,”
Journal of Consumer Psychology 7 (1998), pp. 131–57) or more of a
sociological, anthropological, or biological perspective (e.g., Grant
McCracken, Culture and Consumption II: Markets, Meaning, and Brand
Management (Bloomington: Indiana University Press, 2005)). For a
broad view of consumer psychology perspectives on branding, see
Bernd Schmitt, “The Consumer Psychology of Brands,” Journal of
Consumer Psychology 22 (2012), pp. 7–17.
25. For an overview of academic research on branding, see Kevin Lane
Keller, “Branding and Brand Equity,” Bart Weitz and Robin Wensley,
eds., Handbook of Marketing (London: Sage Publications, 2002),
pp. 151–78; Kevin Lane Keller and Don Lehmann, “Brands and
Branding: Research Findings and Future Priorities,” Marketing Science
25 (November–December 2006), pp. 740–59.
26. Keller, Strategic Brand Management.
27. Kusum Ailawadi, Donald R. Lehmann, and Scott Neslin, “Revenue
Premium as an Outcome Measure of Brand Equity,” Journal of
Marketing 67 (October 2003), pp. 1–17.
28. Jon Miller and David Muir, The Business of Brands (West Sussex, UK:
John Wiley & Sons, 2004).
29. Lara O’Reilly, “Virgin America Bids to Banish ‘Command Culture,’”
Marketing Week, September 20, 2012; Joan Voight, “Where’s the
Execs Focus on Sales Gains as Powerade Gulps More of Sports Drink
Market,” Chicago Business, May 30, 2011.
2. Kevin Lane Keller, Strategic Brand Management, 4th ed. (Upper Saddle
River, NJ: Pearson, 2013). For other foundational work on branding,
see Jean-Noel Kapferer, The New Strategic Brand Management,
5th ed. (London, UK: Kogan Page, 2012); Leslie de Chernatony,
From Brand Vision to Brand Evaluation: The Strategic Process of
Growing and Strengthening Brands, 3rd ed. (Oxford, UK: Butterworth-
Heinemann, 2010); David A. Aaker and Erich Joachimsthaler, Brand
Leadership (New York: Free Press, 2000).
3. Michael J. de la Merced, Nick Bilton, and Nicole Perlroth, “Yahoo to
Buy Tumblr for $1.1 Billion,” New York Times, May 19, 2013; Michael
J. de la Merced, “The Tumblr and Instagram Deals: A Tale of the Tape,”
New York Times, May 19, 2013; Eric Savitz, “Why 2013 Is the Year
You Need to Get Serious about Tumblr,” Forbes, January 24, 2013;
Jeff Bercovici, “Tumblr: David Karp’s $800 Million Art Project,” Forbes,
January 2, 2013; Tomio Geron, “After Backlash, Instagram Changes
Back to Original Terms of Service,” Forbes, December 12, 2012; Dan
Primack, “Breaking: Facebook Buying Instagram for $1 Billion,” CNN,
April 9, 2012; www.instagram.com/about/faq, accessed July 20, 2103.
4. Interbrand Group, World’s Greatest Brands: An International Review
(New York: John Wiley & Sons, 1992). See also Karl Moore and Susan
Reid, “The Birth of Brand,” Business History 50 (2008), pp. 419–32.
5. JoAndrea Hoegg and Joseph W. Alba, “Taste Perception: More than
Meets the Tongue,” Journal of Consumer Research 33 (March 2007),
pp. 490–98.
6. Rajneesh Suri and Kent B. Monroe, “The Effects of Time Pressure on
Consumers’ Judgments of Prices and Products,” Journal of Consumer
Research 30 (June 2003), pp. 92–104.
7. Rosellina Ferraro, Amna Kirmani, and Ted Matherly, “Look at Me!
Look at Me! Conspicuous Brand Usage, Self-Brand Connection, and
Dilution,” Journal of Marketing Research 50 (August 2013), pp. 477–88;
Alexander Chernev, Ryan Hamilton, and David Gal, “Competing for
Consumer Identity: Limits to Self-Expression and the Perils of Lifestyle
Branding,” Journal of Marketing 75 (May 2011).
8. Pankaj Aggrawal and Ann L. McGill, “When Brands Seem Human, Do
Humans Act Like Brands? Automatic Behavioral Priming Effects of
Brand Anthropomorphism,” Journal of Consumer Research 39 (August
2012), pp. 307–23. For some related research, see Nicolas Kervyn,
Susan T. Fiske, and Chris Malone, “Brands as Intentional Agents
Framework: How Perceived Intentions and Ability Can Map Brand
Perception,” Journal of Consumer Psychology 22 (2012), pp. 166–76,
as well as commentaries on that article published in that issue.
9. Matthew Thomson, Jodie Whelan, and Allison R. Johnson, “Why
Brands Should Fear Fearful Consumers: How Attachment Style
Predicts Retaliation,” Journal of Consumer Psychology 22 (2012), pp.
289–98; Shirley Y. Y. Cheng, Tiffany Barnett White, and Lan Nguyen
Chaplin, “The Effects of Self-Brand Connections on Responses to
Brand Failure: A New Look at the Consumer-Brand Relationship,”
Journal of Consumer Psychology 22 (2012), pp. 280–88.
10. Tilde Heding, Charlotte F. Knudtzen, and Mogens Bjerre, Brand
Management: Research, Theory & Practice (New York: Routledge,
2009); Rita Clifton and John Simmons, eds., The Economist on
Branding (New York: Bloomberg Press, 2004); Rik Riezebos, Brand
Management: A Theoretical and Practical Approach (Essex, UK:
Pearson Education, 2003); and Paul Temporal, Advanced Brand
Management: From Vision to Valuation (Singapore: John Wiley & Sons,
2002).
11. Constance E. Bagley, Managers and the Legal Environment: Strategies
for the 21st Century, 3rd ed. (Cincinnati, OH: South-Western College/
West Publishing, 2005); for a marketing academic point of view of
some important legal issues, see Judith Zaichkowsky, The Psychology
behind Trademark Infringement and Counterfeiting (Mahwah, NJ: LEA
Publishing, 2006) and Maureen Morrin, Jonathan Lee, and Greg M.
Allenby, “Determinants of Trademark Dilution,” Journal of Consumer
Research 33 (September 2006), pp. 248–57.
12. Joffre Swait and Tulin Erdem, “Brand Effects on Choice and Choice
Set Formation under Uncertainty,” Marketing Science 26 (September–
October 2007), pp. 679–97; Tulin Erdem, Joffre Swait, and Ana
Z02_KOTL2621_15_GE_NOTE.INDD 22 3/10/15 2:57 PM
Endnotes E23
47. Diana T. Kurylko, “Goofy Ads, Variants Help Mini Rule Its Own Little
World,” Automotive News, May 20, 2013; Micheline Maynard, “BMW’s
Bold Plan to Build Lots More Minis,” Forbes, July 9, 2012; “NOT
NORMAL—Start Of New MINI Brand Campaign,” BMW GROUP,
www.m.miniusa.com, September 26, 2012; “Creative Mini Cooper
Advertising,” www.toxel.com/inspiration, February 16, 2010; Douglas
B. Holt and John A. Quelch, “Launching the New Mini,” HBS Case#
9-505-020, 2004.
48. Dawn Iacobucci and Bobby Calder, eds., Kellogg on Integrated
Marketing (New York: John Wiley & Sons, 2003).
49. Cotton Timberlake, “Is the Party Over for UGGs?,” Bloomberg
Businessweek, December 13, 2012; Patricia Odell, “UGG VP Marketing
on Tom Brady’s Impact on the Brand,” Chief Marketer Network,
November 29, 2012; Giselle Abramovich, “Inside UGG’s Content-
Marketing Strategy,” Digiday, August 21, 2012; Alyssa Abkowitz,
“Decks Finds Its Footing with UGGs,” Fortune, August 19, 2009.
50. Eddie Pells, “Despite Numbers, Burton Still Bullish on Boarding,”
Bloomberg Businessweek, February 12, 2013.
51. Scott Davis and Michael Dunn, Building the Brand-Driven Business
(New York: John Wiley & Sons, 2002).
52. For an interesting application of branding to internal projects, see
Karen A. Brown, Richard E. Ettenson, and Nancy Lea Hyer, “Why
Every Project Needs a Brand (and How to Create One),” MIT Sloan
Management Review, Summer 2011, pp. 61–68.
53. Coeli Carr, “Seeking to Attract Top Prospects, Employers Brush Up on
Brands,” New York Times, September 10, 2006.
54. Tom Beaman, “Chevy Dealers Enroll in Mickey Mouse Courses,”
Wards Auto, September 6, 2012; Brooks Barnes, “In Customer Service
Consulting, Disney’s Small World Is Growing,” New York Times, April
21, 2012.
55. The principles and examples from this passage are based on Colin
Mitchell, “Selling the Brand Inside,” Harvard Business Review,
January 2002, pp. 99–105. For an in-depth discussion of how two
organizations, QuikTrip and Wawa, developed stellar internal branding
programs, see Neeli Bendapudi and Venkat Bendapudi, “Creating the
Living Brand,” Harvard Business Review, May 2005, pp. 124–32.
56. Dale Buss, “Go Further Brand Message Is Aimed at Ford’s Employees,
Too,” Forbes, June 14, 2012.
57. John F. Marshall, “How Starbucks, Walmart And IBM Launch Brands
Internally and What You Can Learn from Them,” Forbes, April 9, 2013.
58. Ibid.
59. Deborah Roedder John, Barbara Loken, Kyeong-Heui Kim, and
Alokparna Basu Monga, “Brand Concept Maps: A Methodology for
Identifying Brand Association Networks,” Journal of Marketing Research
43 (November 2006), pp. 549–63.
60. Jennifer Rooney, “Kellogg’s Completes Major Brand Overhaul,”
Forbes, May 10, 2012; Mark J. Miller, “Kellogg’s Aims to Make Today
Great with Refreshed Verbal and Visual Identity,” Brand Channel, May
14, 2012; “Refreshing an Icon: Kellogg’s Updates Brand to Keep Pace
with Today’s Consumers,” www.newsroom.kelloggcompany.com,
May 14, 2012.
61. “The Best Global Brands,” BusinessWeek, October 2, 2012; the article
ranks and critiques the 100 best global brands using the valuation
method developed by Interbrand. For an academic discussion of
valuing brand equity, see V. Srinivasan, Chan Su Park, and Dae Ryun
Chang, “An Approach to the Measurement, Analysis, and Prediction of
Brand Equity and Its Sources,” Management Science 51 (September
2005), pp. 1433–48. For an interesting comparison of the Interbrand
valuation to a consumer-based brand equity measure, see Johny K.
Johansson, Claudiu V. Dimofte, and Sanal K. Mazvancheryl, “The
Performance of Global Brands in the 2008 Financial Crisis: A Test
of Two Brand Value Measures,” International Journal of Research in
Marketing 29 (September 2012), pp. 235–45.
62. Mark Sherrington, Added Value: The Alchemy of Brand-Led Growth
(Hampshire, UK: Palgrave Macmillan, 2003).
63. For some discussion of what factors determine long-term branding
success, see Allen P. Adamson, Brand Simple (New York: Palgrave
Macmillan, 2006).
Party? At 30,000 Feet Virgin America Marketing Chief: ‘What Would
Richard Do?,’” Adweek, February 5, 2013; Michael Bush, “Virgin
America,” Advertising Age, November 16, 2009, p. 12.
30. Nilofer Merchant, “When TED Lost Control of Its Crowd,” Harvard
Business Review, April 2013, pp. 79–83.
31. Kevin Lane Keller, “Building Customer-Based Brand Equity: A Blueprint
for Creating Strong Brands,” Marketing Management 10 (July–August
2001), pp. 15–19.
32. Natalie Zmuda, “MasterCard’s Priceless Evolution,” Advertising Age,
October 11, 2012; Geoffrey Precourt, “How MasterCard Updated
‘Priceless’ for Post-Crisis Consumers,” www.warc.com, October 2012;
Matthew de Paula, “MasterCard Puts New Premium on Priceless,”
American Banker, September 1, 2011; Avi Dan, “MasterCard Moves
Forward by Going Back,” Forbes, August 25, 2011.
33. For some academic insights, see Matthew Thomson, Deborah
J. MacInnis, and C. W. Park, “The Ties That Bind: Measuring the
Strength of Consumers’ Emotional Attachments to Brands,” Journal
of Consumer Psychology 15 (2005), pp. 77–91; Alexander Fedorikhin,
C. Whan Park, and Matthew Thomson, “Beyond Fit and Attitude: The
Effect of Emotional Attachment on Consumer Responses to Brand
Extensions,” Journal of Consumer Psychology 18 (2008), pp. 281–91;
Jennifer Edson Escalas, “Narrative Processing: Building Consumer
Connections to Brands,” Journal of Consumer Psychology 14 (1996),
pp. 168–79. See also Rajeev Batra, Aaron Ahuvia, and Richard P.
Bagozzi, “Brand Love,” Journal of Marketing 76 (March 2012), pp.
1–16. For some managerial guidelines, see Kevin Roberts, Lovemarks:
The Future beyond Brands (New York: Powerhouse Books, 2004); and
Douglas Atkins, The Culting of Brands (New York: Penguin Books,
2004).
34. Paul Rittenberg and Maura Clancey, “Testing the Value of Media
Engagement for Advertising Effectiveness,” www.knowledgenetworks.
com, Spring–Summer 2006, pp. 35–42.
35. M. Berk Ataman, Carl F. Mela, and Harald J. van Heerde, “Building
Brands,” Marketing Science 27 (November–December 2008), pp.
1036–54.
36. Todd Wasserman, “Why Microsoft Chose the Name ‘Bing,’”
Brandweek, June 1, 2009, p. 33.
37. Jefferson Graham, “General Mills Spoons Up Digital Fun on Cereal
Boxes,” USA Today, January 31, 2013.
38. “No Matter How You ‘Like’ It, 42BELOW Vodka Encourages Everyone
to Celebrate National Coming Out Day,” PR Newswire, October 7,
2011.
39. Alina Wheeler, Designing Brand Identity (Hoboken, NJ: John Wiley &
Sons, 2003).
40. John R. Doyle and Paul A. Bottomly, “Dressed for the Occasion:
Font-Product Congruity in the Perception of Logotype,” Journal of
Consumer Psychology 16 (2006), pp. 112–23; Kevin Lane Keller,
Susan Heckler, and Michael J. Houston, “The Effects of Brand Name
Suggestiveness on Advertising Recall,” Journal of Marketing 62
(January 1998), pp. 48–57; for an in-depth examination of how brand
names get developed, see Alex Frankel, Wordcraft: The Art of Turning
Little Words into Big Business (New York: Crown Publishers, 2004).
41. Eric A. Yorkston and Geeta Menon, “A Sound Idea: Phonetic Effects
of Brand Names on Consumer Judgments,” Journal of Consumer
Research 31 (June 2004), pp. 43–51; Tina M. Lowery and L. J. Shrum,
“Phonetic Symbolism and Brand Name Preference,” Journal of
Consumer Research 34 (October 2007), pp. 406–14.
42. For some interesting theoretical perspectives, see Claudiu V. Dimofte
and Richard F. Yalch, “Consumer Response to Polysemous Brand
Slogans,” Journal of Consumer Research 33 (March 2007), pp. 515–22.
43. Eric Dash, “Citi’s New Slogan Is Said to Be Second Choice,” New York
Times, May 12, 2008.
44. Darren Booth, “Is Avis ‘Trying Hard’ Enough with New Slogan?,” www.
cnbc.com, August 31, 2012.
45. Don Schultz and Heidi Schultz, IMC: The Next Generation (New York:
McGraw-Hill, 2003).
46. Scott Bedbury, A New Brand World (New York: Viking Press, 2002).
Z02_KOTL2621_15_GE_NOTE.INDD 23 3/10/15 2:57 PM
E24 Endnotes
The Moderating Role of Corporate Brand Dominance,” Journal of
Marketing 69 (July 2005), pp. 35–48; Zeynep Gürhan-Canli and Rajeev
Batra, “When Corporate Image Affects Product Evaluations: The
Moderating Role of Perceived Risk,” Journal of Marketing Research 41
(May 2004), pp. 197–205; Gabriel J. Biehal and Daniel A. Sheinin, “The
Influence of Corporate Messages on the Product Portfolio,” Journal of
Marketing 71 (April 2007), pp. 12–25.
79. Vithala R. Rao, Manoj K. Agarwal, and Denise Dalhoff, “How Is
Manifest Branding Strategy Related to the Intangible Value of a
Corporation?,” Journal of Marketing 68 (October 2004), pp. 126–41.
For an examination of the financial impact of brand portfolio
decisions, see Neil A. Morgan and Lopo L. Rego, “Brand Portfolio
Strategy and Firm Performance,” Journal of Marketing 73 (January
2009), pp. 59–74; S. Cem Bahadir, Sundar G. Bharadwaj, and
Rajendra K. Srivastava, “Financial Value of Brands in Mergers
and Acquisitions: Is Value in the Eye of the Beholder?,” Journal of
Marketing 72 (November 2008), pp. 49–64.
80. “Global Urbanization Is Fueling United Technologies’ Growth,”
Forbes, June 3, 2013; Chuck Carnevale, “United Technologies Has
Transitioned Itself for Accelerated Growth,” Forbes, March 22, 2013;
William J. Holstein, “The Incalculable Value of Building Brands,”
Chief Executive, April–May 2006, pp. 52–56.
81. Deborah Roedder John, Barbara Loken, and Christopher Joiner, “The
Negative Impact of Extensions: Can Flagship Products Be Diluted?,”
Journal of Marketing 62 (January 1998), pp. 19–32.
82. Dan Carney, “Taurus, LaCrosse Mark Return of Detroit Sedan,” www.
msnbc.com, January 11, 2009.
83. Vanessa Fuhrmans, “Mercedes Pins Hopes on Sleek S-Class,” Wall
Street Journal, May 16, 2013.
84. David A. Aaker, Brand Portfolio Strategy: Creating Relevance,
Differentiation, Energy, Leverage, and Clarity (New York: Free Press,
2004).
85. Christopher Hosford, “A Transformative Experience,” Sales &
Marketing Management 158 (June 2006), pp. 32–36; Mike Beirne and
Javier Benito, “Starwood Uses Personnel to Personalize Marketing,”
Brandweek, April 24, 2006, p. 9; www.starwoodhotels.com, accessed
July 21, 2013.
86. Michael Krauss, “The Glamour of B-to-B,” Marketing News, February
2013, pp. 22–23.
87. Stuart Elliott, “Lipton Goes Back to Basics with a Tea Bag,” New York
Times, January 9, 2013; Heather Landi, “High Tea,” Beverage World,
July 2011, pp. 18–22; Matthew Boyle, “Weak Tea at Unilever Persists
amid Innovation at Rivals,” Bloomberg, October 24, 2012.
88. Nirmalya Kumar, “Kill a Brand, Keep a Customer,” Harvard Business
Review, December 2003, pp. 87–95.
89. Mark Ritson, “Should You Launch a Fighter Brand?,” Harvard Business
Review, October 2009, pp. 87–94.
90. Alan Oshman, “Toyota’s Tiny Scion iQ Boosts U.S. by 19 Percent,”
Bloomberg Businessweek, April 25, 2012.
91. Jeff Bennett and Joseph B. White, “GM’s New Corvette Begins Brand
Update,” Wall Street Journal, January 13, 2013.
92. Valarie A. Taylor and William O. Bearden, “Ad Spending on Brand
Extensions: Does Similarity Matter?,” Journal of Brand Management
11 (September 2003), pp. 63–74; Sheri Bridges, Kevin Lane Keller,
and Sanjay Sood, “Communication Strategies for Brand Extensions:
Enhancing Perceived Fit by Establishing Explanatory Links,” Journal of
Advertising 29 (Winter 2000), pp. 1–11.
93. Ralf van der Lans, Rik Pieters, and Michel Wedel, “Competitive Brand
Salience,” Marketing Science 27 (September–October 2008), pp.
922–31.
94. Subramanian Balachander and Sanjoy Ghose, “Reciprocal Spillover
Effects: A Strategic Benefit of Brand Extensions,” Journal of Marketing
67 (January 2003), pp. 4–13.
95. Bharat N. Anand and Ron Shachar, “Brands as Beacons: A New
Source of Loyalty to Multiproduct Firms,” Journal of Marketing
Research 41 (May 2004), pp. 135–50.
96. Clementine Fletcher, “With Black Crown, Budweiser Aims to Refresh
the Brand,” Bloomberg Businessweek, January 10, 2013.
64. Nikhil Bahdur and John Jullens, “New Life for Tired Brands,”
Strategy+Business 50 (Spring 2008).
65. Joshua Brustein, “Even Finns Don’t Want Nokia Phones Anymore,”
Business Week, May 29, 2013; Juhana Rossi, “Nokia CEO Sticks
to Company’s Strategy,” Wall Street Journal, May 7, 2013; Adam
Ewing, “Nokia Declines as New Smartphone Disappoints Investors,”
Bloomberg, May 14, 2013; Seth Fiegerman, “Nokia Thought the
iPhone Would Be a Flop because It Couldn’t Hold Up to a 5 Foot Drop
Test,” Business Insider, July 19, 2012; Anton Troianovski and Sven
Grundberg, “Nokia’s Bad Call on Smartphones,” Wall Street Journal,
July 18, 2012; Alexandra Chang, “5 Reasons Why Nokia Lost Its
Handset Sales Lead and Got Downgraded to ‘Junk,’” Wired, April 27,
2012.
66. Natalie Mizik and Robert Jacobson, “Trading Off between Value
Creation and Value Appropriation: The Financial Implications of Shifts
in Strategic Emphasis,” Journal of Marketing 67 (January 2003), pp.
63–76.
67. Jessica Dubois-Maahs, “Sears’ Failure to Adapt Disillusions Shoppers,
Shareholders,” Medill Report, March 12, 2013; Michael Brush, “Why
Sears Is on Its Last Legs,” MSN Money, April 17, 2012; Chris Morran,
“Sears Is Failing because It Spends Next-to-Nothing to Maintain
Stores,” Consumerist, July 30, 2012; Andrea Billups, “Sears, Kmart
Failed to Anticipate Their Customers’ Needs,” The Washington Times,
December 29, 2011.
68. Larry Light and Joan Kiddon, Six Rules for Brand Revitalization: Learn
How Companies Like McDonald’s Can Re-Energize Their Brands
(Wharton School Publishing, 2009).
69. Rick Newman, “Cadillac: An American Luxemobile Comes Roaring
Back,” Yahoo! Finance, June 3, 2013; Jeff Bennett and Joseph B.
White, “Can the New Cadillac Catch Up to BMW?,” Wall Street
Journal, March 27, 2013; Matthew de Paula, “Cadillac’s Comeback: It’s
for Real,” Forbes, April 30, 2011.
70. Jonathan R. Copulsky, Brand Resilience: Managing Risk and Recovery
in a High Speed World (New York: Palgrave Macmillan, 2011).
71. Evan West, “Smells Like a Billion Bucks,” Fast Company, May 2009,
pp. 44–46.
72. Rebecca J. Slotegraaf and Koen Pauwels, “The Impact of Brand
Equity and Innovation on the Long-Term Effectiveness of Promotions,”
Journal of Marketing Research 45 (June 2008), pp. 293–306.
73. Joyce Hooi, “A 130 Year Old TCM Heritage—Eu Yan Sang,” The
Business Times, August 8, 2009; Christine Tan, See Kit Tang,
“Century-old Singapore firm eyes billion-dollar goal,” CNBC,
September 18, 2014; Eu Yan Sang, www.euyansang.com.
74. Yuxin Chen and Tony Haitao Cui, “The Benefit of Uniform Price for
Branded Variant,” Marketing Science 32 (January–February 2013), pp.
36–50.
75. Bradford Wernie, “Ford Licensing Staffer’s Job: Protect the Brand,”
Automotive News, June 11, 2012; Dale Buss, “Ford Has Built $1.5B
Business Licensing Blue Oval, Products,” Forbes, May 24, 2012; “Top
100 Global Licensors,” License! Global, April 1, 2009; Jean Halliday,
“Troubled Automakers’ Golden Goose,” AutoWeek, August 14, 2006.
76. Jing Lei, Niraj Dawar, and Jos Lemmink, “Negative Spillover in Brand
Portfolios: Exploring the Antecedents of Asymmetric Effects,” Journal
of Marketing 72 (May 2008), pp. 111–23.
77. For comprehensive corporate branding guidelines, see James R.
Gregory, The Best of Branding: Best Practices in Corporate Branding
(New York: McGraw-Hill, 2004). For some international perspectives,
see Majken Schultz, Yun Mi Antorini, and Fabian F. Csaba, eds.,
Corporate Branding: Purpose, People, and Process (Denmark:
Copenhagen Business School Press, 2005); Mary Jo Hatch and Majken
Schultz, Taking Brand Initative: How Companies Can Align Strategy,
Culture, and Identity through Corporate Branding (San Francisco, CA:
Jossey-Bass, 2008). For some B-to-B applications, see Atlee Valentine
Pope and Ralph Oliva, “Building Blocks: Ten Key Roles of B-to-B
Corporate Marketing,” Marketing Management, Winter 2012,
pp. 23–28.
78. Guido Berens, Cees B. M. van Riel, and Gerrit H. van Bruggen,
“Corporate Associations and Consumer Product Responses:
Z02_KOTL2621_15_GE_NOTE.INDD 24 3/10/15 2:57 PM
Endnotes E25
108. Robert C. Blattberg, Gary Getz, and Jacquelyn S. Thomas, Customer
Equity: Building and Managing Relationships as Valuable Assets
(Boston: Harvard Business School Press, 2001).
109. Much of this section is based on Robert Leone, Vithala Rao, Kevin
Lane Keller, Man Luo, Leigh McAlister, and Rajendra Srivatstava,
“Linking Brand Equity to Customer Equity,” Journal of Service
Research 9 (November 2006), pp. 125–38. This special issue is
devoted to customer equity and has a number of thought-provoking
articles.
110. Niraj Dawar, “What Are Brands Good For?,” MIT Sloan Management
Review (Fall 2004), pp. 31–37. For an insightful analysis of the relationship
between brand equity and CLV, see Florian Stahl, Mark Heitmann,
Donald R. Lehmann, and Scott A. Neslin, “The Impact of Brand Equity on
Customer Acquisition, Retention, and Profit Margin,” Journal of Marketing
76 (July 2012), pp. 44–63.
Chapter 12
1. Vanessa Mock, “UPS to Appeal EU’s Blocking of TNT Merger,” Wall
Street Journal, April 7, 2013; Betsy Morris, “UPS, FedEx Escalate
Holiday Shipping War,” Wall Street Journal, December 13, 2012; Bob
Sechler, “FedEx, UPS Get a Toehold in China’s Express Delivery,”
Wall Street Journal, September 10, 2012; Aaron Karp, “Big Brown’s
Big Deal,” Air Transport World. September 2012; Jeff Berman, “UPS,
FedEx Receive Limited Domestic Delivery Licenses in China,” Logistics
Management, September 11, 2012; John T. Bowen Jr., “A Spatial
Analysis of FedEx and UPS: Hubs, Spokes, and Network Structure,”
Journal of Transport Geography, September, 2012; Rob Martinez,
“Forecasting Critical Changes in the Carrier Market,” Multichannel
Market, December 1, 2010; Jennifer Levitz, “UPS Leaves ‘Brown’ for
New Love,” Wall Street Journal, September 13, 2010.
2. Philip Kotler and Milton Kotler, Market Your Way to Growth: 8 Ways to
Win (Hoboken, NJ: John Wiley & Sons, 2013).
3. Matt Townsend, “Under Armour Finds Feminine Side to Go Beyond
$2 Billion,” Bloomberg, February 15, 2013; Molly Soat, “Moving
Beyond Shrink It & Pink It,” Marketing News, February 2013,
pp. 33–36; John Kell, “Under Armour Arrives on Global Stage,”
Wall Street Journal, June 3, 2012, p. B2; Daniel Roberts, “Under
Armour Gets Serious,” Fortune, October 2011; Jeremy Mullman,
“Protecting This Brand while Running Ahead,” Advertising Age,
January 12, 2009, p. 16; Elaine Wong, “Under Armour Makes
a Long-Run Calculation,” Brandweek, January 19, 2009, p. 28;
Stephanie N. Mehta, “Under Armour Reboots,” Fortune,
February 2, 2009, pp. 29–33.
4. Evan Hirsh and Kasturi Rangan, “The Grass Isn’t Greener,” Harvard
Business Review, January–February 2013, pp. 21–23.
5. David Taylor, Grow the Core: How to Focus on Your Core Business for
Brand Success (West Sussex, UK: John Wiley & Sons, 2012).
6. Shivani Shinde, “Aegis Eyes Organic Growth to Turn into a $2-bn
Company by 2015,” Business Standard, June 22, 2012; Maiseis
McCabe, “Aegis Reports Organic Revenue Growth of 8% in Q1,”
Campaign, April 27, 2012.
7. Robert Stockdill, “Levi’s Asian Folly,” Inside Retailing, October 12, 2012.
8. Alex Letourneau, “Organic Growth to Lead Fortuna Silver Production
Higher: President,” Forbes, October 25, 2012.
9. Juro Osawa, “Lenovo Turns to Phones as PC Industry Declines,” Wall
Street Journal, June 19, 2013.
10. William M. Bulkeley, “Xerox Tries to Go Beyond Copiers,” Wall
Street Journal, February 24, 2009, p. B5; Nanette Byrnes and Roger
O. Crockett, “An Historic Succession at Xerox,” BusinessWeek,
June 8, 2009, pp. 18–22; Geoff Colvin, “An Interview with Ursula
Burns,” Fortune, May 3, 2010, pp. 96–102; “Xerox Focuses on
Personalization,” Direct Marketing News, July 12, 2010; Ellen McGirt,
“Fresh Copy,” Fast Company, December 2011/January 2012,
pp. 130–38; Christa Carone “Xerox’s Brand Repositioning Challenge,”
Advertising Age, March 12, 2013.
11. Starbucks, www.starbucks.com/aboutus/overview.asp, December 1,
2009.
97. For consumer processing implications, see Huifung Mao and H.
Shanker Krishnan, “Effects of Prototype and Exemplar Fit on Brand
Extension Evaluations: A Two-Process Contingency Model,” Journal
of Consumer Research 33 (June 2006), pp. 41–49; Byung Chul Shine,
Jongwon Park, and Robert S. Wyer Jr., “Brand Synergy Effects
in Multiple Brand Extensions,” Journal of Marketing Research 44
(November 2007), pp. 663–70.
98. Al Ries and Jack Trout, Positioning: The Battle for Your Mind, 20th
Anniversary Edition (New York: McGraw-Hill, 2000).
99. David A. Aaker, Brand Portfolio Strategy: Creating Relevance,
Differentiation, Energy, Leverage, and Clarity (New York: Free Press,
2004).
100. Vanessa Fuhrmans, “Is Porsche Still a Sports Car Maker?,” Wall Street
Journal, May 29, 2013.
101. Mary W. Sullivan, “Measuring Image Spillovers in Umbrella-Branded
Products,” Journal of Business 63 (July 1990), pp. 309–29.
102. See also Franziska Völckner and Henrik Sattler, “Drivers of Brand
Extension Success,” Journal of Marketing 70 (April 2006), pp. 1–17.
For some recent research, see Eric A. Yorkston, Joseph C. Nunes,
and Shashi Matta, “The Malleable Brand: The Role of Implicit Theories
in Evaluating Brand Extensions,” Journal of Marketing 74 (January
2010), pp. 80–93; Tom Meyvis, Kelly Goldsmith, and Ravi Dhar, “The
Importance of the Context in Brand Extension: How Pictures and
Comparisons Shift Consumers’ Focus from Fit to Quality,” Journal
of Marketing Research 49 (April 2012), pp. 206–17; Alokparna Basu
Monga and Zeynep Guhan-Canli, “The Influence of Mating Mind-Sets
on Brand Extension Evaluation,” Journal of Marketing Research 49
(August 2012), pp. 581–93; Susan Spiggle, Hang T. Nguyen, and Mary
Caravella, “More than Fit: Brand Extension Authenticity,” Journal
of Marketing Research 49 (December 2012), pp. 967–83; Pragya
Mathur, Shailendra P. Jain, and Durairaj Maheswaran, “Consumers’
Implicit Theories about Personality Influence Their Brand Personality
Judgments,” Journal of Consumer Psychology 22 (2012), pp. 545–57;
Keisha M. Cutright, James R. Bettman, and Gavan J. Fitzsimons,
“Putting Brands in Their Place: How a Lack of Control Keeps Brand
Contained,” Journal of Marketing Research 50 (June 2013),
pp. 365–77.
103. For more relevant research on extension evaluations, see Alokparna
Basu Monga and Deborah Roedder John, “Cultural Differences in
Brand Extension Evaluation: The Influence of Analytical versus Holistic
Thinking,” Journal of Marketing Research 33 (March 2007), pp. 529–
36; James L. Oakley, Adam Duhachek, Subramanian Balachander,
and S. Sriram, “Order of Entry and the Moderating Role of
Comparison Brands in Extension Evaluations,” Journal of Consumer
Research 34 (February 2008), pp. 706–12; Junsang Yeo and Jongwon
Park, “Effects of Parent-Extension Similarity and Self Regulatory
Focus on Evaluations of Brand Extensions,” Journal of Consumer
Psychology 16 (2006), pp. 272–82; Catherine W. M. Yeung and Robert
S. Wyer, “Does Loving a Brand Mean Loving Its Products? The Role
of Brand-Elicited Affect in Brand Extension Evaluations,” Journal of
Marketing Research 43 (November 2005), pp. 495–506; Huifang Mao
and H. Shankar Krishnan, “Effects of Prototype and Exemplar Fit on
Brand Extension Evaluations: A Two-Process Contingency Model,”
Journal of Consumer Research 33 (June 2006), pp. 41–49; Rohini
Ahluwalia, “How Far Can a Brand Stretch? Understanding the Role of
Self-Construal,” Journal of Marketing Research 45 (June 2008),
pp. 337–50.
104. Pierre Berthon, Morris B. Holbrook, James M. Hulbert, and Leyland F.
Pitt, “Viewing Brands in Multiple Dimensions,” MIT Sloan Management
Review (Winter 2007), pp. 37–43.
105. Andrea Rothman, “France’s Bic Bets U.S. Consumers Will Go for
Perfume on the Cheap,” Wall Street Journal, January 12, 1989.
106. Roland T. Rust, Valerie A. Zeithaml, and Katherine A. Lemon,
“Measuring Customer Equity and Calculating Marketing ROI,” Rajiv
Grover and Marco Vriens, eds., Handbook of Marketing Research
(Thousand Oaks, CA: Sage Publications, 2006), pp. 588–601.
107. Robert C. Blattberg and John Deighton, “Manage Marketing by the
Customer Equity Test,” Harvard Business Review, July–August 1996,
pp. 136–44.
Z02_KOTL2621_15_GE_NOTE.INDD 25 3/10/15 2:57 PM
E26 Endnotes
Businesses,” Los Angeles Times, January 28, 2011; Melissa Born
and Ilan Brat, “Global Finance: Sara Lee to Split into Two Public
Companies,” Wall Street Journal, January 19, 2011.
32. “P&G Completes Sale of Pringles to Kellogg,” Business Wire, May 31,
2012.
33. E.J. Schultz, “Kraft’s New Grocery Company Plans Marketing Boost
in Search of ‘Renaissance,” Advertising Age, September 7, 2012;
Heidi Stevens, “The Many Meanings of Mondelez,” Chicago Tribune,
May 24, 2012; Candice Choi, “Mondelez, Kraft’s New Name, Elicits
Jokes from All Corners,” Huffington Post, May 21, 2012; Paul Ziobro,
“Kraft Defends Split,” Wall Street Journal, September 8, 2011; Duane
Stanford and Jeffrey McCracken, “Kraft Foods Chief Rosenfeld Says
More Acquisitions Possible after Spinoff,” Bloomberg, August 4, 2011;
Jonathan Burr, “Why the Kraft Split Makes Sense,” Daily Finance,
August 5, 2011.
34. J. Scott Armstrong and Kesten C. Green, “Competitor-Oriented
Objectives: The Myth of Market Share,” International Journal of
Business 12 (Winter 2007), pp. 115–34; Stuart E. Jackson, Where
Value Hides: A New Way to Uncover Profitable Growth for Your
Business (New York: John Wiley & Sons, 2006).
35. Nirmalya Kumar, Marketing as Strategy (Cambridge, MA: Harvard
Business School Press, 2004); Philip Kotler and Paul N. Bloom,
“Strategies for High-Market-Share Companies,” Harvard Business
Review, November–December 1975, pp. 63–72.
36. Robert D. Buzzell and Frederick D. Wiersema, “Successful Share-
Building Strategies,” Harvard Business Review, January–February
1981, pp. 135–44.
37. “Fairpoint Meets Broadband Commitment in Maine,” Associated
Press, January 27, 2011; John Downey, “FairPoint Struggles with
Merger, Declining Stock,” Charlotte Business Journal, March 19, 2009;
John Downey, FairPoint Faces Enduring Debt, Service Headaches,”
Charlotte Business Journal, September 15, 2009.
38. Neeru Paharia, Anat Keinan, Jill Avery, and Juliet B. Schor, “The
Underdog Effect: The Marketing of Disadvantage and Determination
through Brand Biography,” Journal of Consumer Research 37
(February 2011), pp. 775–90; Anat Keinan, Jill Avery, and Neeru
Paharia, “Capitalizing on the Underdog Effect,” Harvard Business
Review, November 2010, p. 32.
39. Venkatesh Shankar, Gregory Carpenter, and Lakshman Krishnamurthi,
“Late-Mover Advantage: How Innovative Late Entrants Outsell
Pioneers,” Journal of Marketing Research 35 (February 1998), pp.
54–70; Gregory S. Carpenter and Kent Nakamoto, “The Impact
of Consumer Preference Formation on Marketing Objectives and
Competitive Second-Mover Strategies,” Journal of Consumer
Psychology 5 (1996), pp. 325–58.
40. Adam Morgan, “How Market Leaders Can Become Challenger Brands
Once More,” Market Leader, Fall 2009; Adam Morgan, “Strategies from
a New Generation of Challenger Brands,” Market Leader, Winter 2009.
41. Lance Whitney, “Large Carriers Losing Prepaid Phone Sales to Smaller
Players,” CNET News, November 15, 2012.
42. Michael V. Copeland, “These Boots Really Were Made for Walking,”
Business 2.0, October 2004, pp. 72–74.
43. Katrina Booker, “The Pepsi Machine,” Fortune, February 6, 2006, pp.
68–72.
44. Theodore Levitt, “Innovative Imitation,” Harvard Business Review,
September–October 1966, p. 63. Also see Steven P. Schnaars,
Managing Imitation Strategies: How Later Entrants Seize Markets from
Pioneers (New York: Free Press, 1994).
45. Amir Efrati, “Clone Wars Roil App World,” Wall Street Journal, March 4,
2013; Ben Rooney, “Rise of a Cloner Draws VC Fans and Critics,” Wall
Street Journal, May 17, 2012; Brian Caulfield, “The Predator,” Forbes,
March 12, 2012.
46. www.ralstonfoodservice.com/ralstonbrands.html, accessed June 23,
2013.
47. Claire Ruckin, “RLPC-Distressed Debt Investors Eye Spain’s
Telepizza—Bankers,” Reuters. March 8, 2013.
48. Felix Gillette, “Inside Big Pharma’s Fight against the $75 Billion
Counterfeit Drug Business,” Bloomberg Businessweek, January 17,
2013.
12. “Daimler Takes Balanced Approach,” www.warc.com, November 28,
2012.
13. Priya Raghubir and Eric A. Greenleaf, “Ratios in Proportion: What
Should the Shape of the Package Be?,” Journal of Marketing 70 (April
2006), pp. 95–107; and Valerie Folkes and Shashi Matta, “The Effect
of Package Shape on Consumers’ Judgments of Product Volume:
Attention as a Mental Contaminant,” Journal of Consumer Research 31
(September 2004), pp. 390–401.
14. Sarah Nassaur, “The Psychology of Small Packages,” Wall Street
Journal, April 15, 2013.
15. Andrew Adam Newman, “Too Much Holiday Food? This Campaign’s
for You,” New York Times, November 29, 2011.
16. John D. Cripps, “Heuristics and Biases in Timing the Replacement
of Durable Products,” Journal of Consumer Research 21 (September
1994), pp. 304–18.
17. “Creative New Monroe Marketing Campaign Reminds Consumers to
Replace Worn Shocks and Struts,” www.monroe.com, March 18, 2013.
Monroe is a registered trademark of Tenneco Automotive Operating
Company Inc.
18. George Stalk Jr. and Rob Lachanauer, “Hardball: Five Killer Strategies
for Trouncing the Competition,” Harvard Business Review, April
2004, pp. 62–71; Richard D’Aveni, “The Empire Strikes Back:
Counterrevolutionary Strategies for Industry Leaders,” Harvard
Business Review, November 2002, pp. 66–74.
19. Kyle B. Murray and Gerald Häubl, “Why Dominant Companies Are
Vulnerable,” MIT Sloan Management Review, Winter 2012, pp. 12–14.
20. Nirmalya Kumar, Lisa Sheer, and Philip Kotler, “From Market Driven to
Market Driving,” European Management Journal 18 (April 2000),
pp. 129–42.
21. Much of the remaining section on proactive marketing is based on an
insightful book by Leonardo Araujo and Rogerio Gava, The Proactive
Enterprise: How to Anticipate Market Changes (Hampshire, UK:
Palgrave Macmillan, 2012).
22. “New Trends Worth $4.5tr,” www.warc.com, January 25, 2013.
23. Jonathan Glancey, “The Private World of the Walkman,” Guardian,
October 11, 1999.
24. Kristin Jones, “Lululemon’s Product Chief to Exit,” Wall Street
Journal, April 3, 2013; Alli McConnon, “Lululemon’s Next Workout,”
BusinessWeek, June 9, 2008, pp. 43–44; Danielle Sacks, “Lululemon’s
Cult of Selling,” Fast Company, March 2009; Bryant Urstadt, “Lust for
Lulu,” New York Magazine, July 26, 2009.
25. For some contemporary perspectives on defense strategies, see
Timothy Calkins, Defending Your Brand: How Smart Companies Use
Defense Strategy to Deal with Competitive Attacks (New York: Palgrave
Macmillan, 2012).
26. These six defense strategies, as well as the five attack strategies,
are taken from some classic work by Philip Kotler and Ravi Singh,
“Marketing Warfare in the 1980s,” Journal of Business Strategy (Winter
1981), pp. 30–41.
27. Kevin P. Coyne, “Predicting Your Competitor’s Reactions,” Harvard
Business Review, April 2009, pp. 90–97.
28. Michael E. Porter, Market Signals, Competitive Strategy: Techniques
for Analyzing Industries and Competitors (New York: Free Press,
1998), pp. 75–87; Jaideep Prabhu and David W. Stewart, “Signaling
Strategies in Competitive Interaction: Building Reputations and Hiding
the Truth,” Journal of Marketing Research 38 (February 2001), pp.
62–72.
29. Halah Touryalai, “ATMs Not the Only Things Disappearing at Bank Of
America, It’s Closed the Most Branches Too,” www.forbes.com, July
26, 2012.
30. Yuhong Wu, Sridhar Balasubramanian, and Vijay Mahajan, “When
Is a Preannounced New Product Likely to Be Delayed?,” Journal of
Marketing 68 (April 2004), pp. 101–13; Barry L. Bayus, Sanjay Jain,
and Ambar G. Rao, “Truth or Consequences: An Analysis of Vaporware
and New-Product Announcements,” Journal of Marketing Research 38
(February 2001), pp. 3–13.
31. Marshall Eckblad, “Sara Lee No More: A Hillshire Is Born,” Wall Street
Journal, June 6, 2012; Emily Bryson York, “Sara Lee to Split into Two
Z02_KOTL2621_15_GE_NOTE.INDD 26 3/10/15 2:57 PM
Endnotes E27
66. Glen L. Urban et al., “Market Share Rewards to Pioneering Brands: An
Empirical Analysis and Strategic Implications,” Management Science
(June 1986), pp. 645–59; William T. Robinson and Claes Fornell, “Sources
of Market Pioneer Advantages in Consumer Goods Industries,” Journal
of Marketing Research 22 (August 1985), pp. 305–17.
67. Gregory S. Carpenter and Kent Nakamoto, “Consumer Preference
Formation and Pioneering Advantage,” Journal of Marketing Research
26 (August 1989), pp. 285–98.
68. William T. Robinson and Sungwook Min, “Is the First to Market the
First to Fail? Empirical Evidence for Industrial Goods Businesses,”
Journal of Marketing Research 39 (February 2002), pp. 120–28.
69. Kurt A. Carlson, Margaret G. Meloy, and J. Edward Russo, “Leader-
Driven Primacy: Using Attribute Order to Affect Consumer Choice,”
Journal of Consumer Research 32 (March 2006), pp. 513–18.
70. Venkatesh Shankar, Gregory S. Carpenter, and Lakshman
Krishnamurthi, “Late Mover Advantage: How Innovative Late Entrants
Outsell Pioneers,” Journal of Marketing Research 35 (February 1998),
pp. 54–70; Elena Reutskaja and Barbara Fasolo, “It’s Not Necessarily
Best to Be First,” Harvard Business Review, January–February 2013,
pp. 28–29.
71. Steven P. Schnaars, Managing Imitation Strategies (New York: Free
Press, 1994). See also Jin K. Han, Namwoon Kim, and Hony-Bom Kin,
“Entry Barriers: A Dull-, One-, or Two-Edged Sword for Incumbents?
Unraveling the Paradox from a Contingency Perspective,” Journal of
Marketing 65 (January 2001), pp. 1–14.
72. Peter N. Golder, “Historical Method in Marketing Research with New
Evidence on Long-term Market Share Stability,” Journal of Marketing
Research 37 (May 2000), pp. 156–72; Peter N. Golder and Gerald J.
Tellis, “Pioneer Advantage: Marketing Logic or Marketing Legend?,”
Journal of Marketing Research 30 (May 1993), pp. 34–46. See also Shi
Zhang and Arthur B. Markman, “Overcoming the Early Advantage: The
Role of Alignable and Nonalignable Differences,” Journal of Marketing
Research 35 (November 1998), pp. 1–15.
73. Peter N. Golder, Julie R. Irwin, and Debanjan Mitra, “Long-term
Market Leadership Persistence: Baselines, Economic Conditions, and
Category Types,” MSI Report 13-110, Marketing Science Institute,
2013.
74. Gerald Tellis and Peter Golder, Will and Vision: How Latecomers Can
Grow to Dominate Markets (New York: McGraw-Hill, 2001); Rajesh K.
Chandy and Gerald J. Tellis, “The Incumbent’s Curse? Incumbency,
Size, and Radical Product Innovation,” Journal of Marketing Research
64 (July 2000), pp. 1–17. See also Dave Ulrich and Norm Smallwood,
“Building a Leadership Brand,” Harvard Business Review, July–August
2007, pp. 93–100.
75. Sungwook Min, Manohar U. Kalwani, and William T. Robinson, “Market
Pioneer and Early Follower Survival Risks: A Contingency Analysis of
Really New versus Incrementally New Product-Markets,” Journal of
Marketing 70 (January 2006), pp. 15–35. See also Raji Srinivasan, Gary
L. Lilien, and Arvind Rangaswamy, “First In, First Out? The Effects of
Network Externalities on Pioneer Survival,” Journal of Marketing 68
(January 2004), pp. 41–58.
76. As reported in Joseph T. Vesey, “The New Competitors: They Think
in Terms of Speed to Market,” Academy of Management Executive
5 (May 1991), pp. 23–33; and Brian Dumaine, “How Managers Can
Succeed through Speed,” Fortune, February 13, 1989, pp. 54–59.
77. Tim Higgins, “GM’s First Mover Disadvantage,” Bloomberg
Businessweek, October 1, 2012.
78. Marty Bates, Syed S. H. Rizvi, Prashant Tewari, and Dev Vardhan, “How
Fast Is Too Fast?,” McKinsey Quarterly no. 3 (2001); See also Stephen
Wunker, “Better Growth Decisions: Early Mover, Fast Follower or Late
Follower?,” Strategy & Leadership 40, no. 2 (2012).
79. Rita Gunther McGrath, “Transient Advantage,” Harvard Business
Review, June 2013, pp. 62–70.
80. Simon Zekaria, “Electrolux Moves to Add Sizzle to Its Brand,”
Wall Street Journal, September 30, 2012; Ola Kinnander and Kim
McLaughlin, “Electrolux Wants to Rule the Appliance World,”
Bloomberg Businessweek, March 28, 2011; Trond Riiber Knudsen,
“Escaping the Middle-Market Trap: An Interview with CEO of
Electrolux,” McKinsey Quarterly (December 2006), pp. 72–79.
49. “Pretty Profitable Parrots,” The Economist, May 12, 2012.
50. Meghan Casserly, “Copycat,” Forbes, February 11, 2013, pp. 74–75.
51. Frank Shyong, “Siracha Hot Sauce Founder Turns Up the Heat,” Los
Angeles Times, April 12, 2103; Caleb Hannan, “Burning Sensation,”
Bloomberg Businessweek, February 21, 2013, pp. 66–69; John T.
Edge, “A Chili Sauce to Crow About,” New York Times, May 19,
2009.
52. Eric K. Clemon, Paul F, Nunes, and Matt Reilly, “Six Strategies for
Successful Niche Marketing,” Wall Street Journal, May 24, 2010.
53. Karsten Strauss, “Sound Judgment,” Forbes, April 15, 2013,
pp. 68–69.
54. Robert Klara, “Burning for You,” Adweek, May 21, 2012; James R.
Hagerty, “Zippo Preps for a Post-Smoker World,” Wall Street Journal,
March 8, 2011; Michael Learmonth, “Zippo Reignites Brand with
Social Media, New Products,” Advertising Age, August 10, 2009, p. 12;
Thomas A. Fogarty, “Keeping Zippo’s Flame Eternal,” USA Today, June
24, 2003; www.zippo.com, accessed May 26, 2014.
55. Some authors distinguished additional stages. Wasson suggested a
stage of competitive turbulence between growth and maturity. See
Chester R. Wasson, Dynamic Competitive Strategy and Product Life
Cycles (Austin, TX: Austin Press, 1978). Maturity describes a stage of
sales growth slowdown and saturation, a stage of flat sales after sales
have peaked.
56. John E. Swan and David R. Rink, “Fitting Market Strategy to Varying
Product Life Cycles,” Business Horizons, January–February 1982,
pp. 72–76; Gerald J. Tellis and C. Merle Crawford, “An Evolutionary
Approach to Product Growth Theory,” Journal of Marketing 45 (Fall
1981), pp. 125–34.
57. William E. Cox Jr., “Product Life Cycles as Marketing Models,” Journal
of Business (October 1967), pp. 375–84.
58. Jordan P. Yale, “The Strategy of Nylon’s Growth,” Modern Textiles
Magazine, February 1964, p. 32. Also see Theodore Levitt, “Exploit the
Product Life Cycle,” Harvard Business Review, November–December
1965, pp. 81–94.
59. Chester R. Wasson, “How Predictable Are Fashion and Other Product
Life Cycles?,” Journal of Marketing 32 (July 1968), pp. 36–43.
60. Ibid.
61. William H. Reynolds, “Cars and Clothing: Understanding Fashion
Trends,” Journal of Marketing 32 (July 1968), pp. 44–49.
62. “Heelys, Inc. Announces Agreement to Be Acquired by Sequential
Brands Group, Inc. for $2.25 per Share,” www.globalnewswire.com,
December 10, 2012; “Heelys Agrees to Sell Operations to Private
Buyer,” Bloomberg Businessweek, October 23, 2012; Jessica Pallay,
“New Heelys CEO in Rebuild Mode,” Footwear News, August 24,
2009.
63. Ryan Perlowin, “Product Line Expansion Will Be Catalyst for Growth
at Crocs,” www.seekingalpha.com, April 12, 2013; David Englander,
“Crocs Strides toward a Comeback,” Barron’s, January 19, 2013;
Jennifer Overstreet, “How Crocs Is Building a Brand Bigger than the
Clog,” National Retail Federation, August 29, 2012; Edward Teach,
“How Crocs Regained Its Footing,” CFO Magazine, May 15, 2012.
64. Rajesh J. Chandy, Gerard J. Tellis, Deborah J. MacInnis, and Pattana
Thaivanich, “What to Say When: Advertising Appeals in Evolving
Markets,” Journal of Marketing Research 38 (November 2001),
pp. 399–414.
65. Brad Tuttle, “Does Selling Out to Avis Represent Success for ZipCar?
Failure? Something Else?,” Time, January 3, 2013; Dennis K.
Berman, “Zipcar: Entrepreneurial Genius, Public-Company Failure,”
Wall Street Journal, January 2, 2013; Trefis Team, “Why Zipcar
Should Focus on U.S. Growth Rather than International,” Forbes,
April 18, 2012; Mark Clothier, “Can Hertz Outrun Zipcar in Hourly
Car Rentals?,” Business Week, March 29, 2012; Trefis Team, “Hertz,
Enterprise Challenge Zipcar’s Car Sharing Dominance,” Forbes, June
8, 2012; Paul Keegan, “The Best New Idea in Business,” Fortune,
September 14, 2009, pp. 42–52; Adam Ashton, “Growth Galore but
Profits Are Zip,” BusinessWeek, September 8, 2008, p. 62; Alex
Frankel, “Zipcar Makes the Leap,” Fast Company, March 2008,
pp. 48–50; Mike Beirne, “Temporary Plates,” Brandweek, July 9,
2007, pp. 30–34.
Z02_KOTL2621_15_GE_NOTE.INDD 27 3/10/15 2:57 PM
E28 Endnotes
105. Burt Heim, “How to Sell Luxury to Penny-Pinchers,” BusinessWeek,
November 10, 2008, p. 60.
106. Lien Lamey, Barbara Deleersnyder, Jan-Benedict E.M. Steenkamp,
and Marnik G. Dekimpe, “The Effect of Business-Cycle Fluctuations on
Private-Label Share: What Has Marketing Conduct Got to Do with It?,”
Journal of Marketing 76 (January 2012), pp. 1–19.
107. Stuart Elliott, “Trying to Pitch Products to the Savers,” New York
Times, June 3, 2009.
108. Luisa Zargani, “Armani Goes Big in Beijing,” WWD, May 31, 2012;
Luisa Zargani, “Giorgia Armani Sees Profit Climb 23%,” WWD, May 24,
2012; Alessandra Galloni, “The Future of Armani,” Wall Street Journal,
May 23, 2012.
109. Andrew Martin, “In Tough Times, Spam Is Suddenly Appealing,”
Boston Globe, November 16, 2008; Marshall Ecklbad, “At Hormel,
Spam Is Small Part of the Buffet,” Wall Street Journal, July 31, 2012.
Chapter 13
1. Michael McCarthy, “Lexus Makes Big ‘Move’ to Regain Crown,”
Advertising Age, June 24, 2013; “Audi, Lexus and BMW Triumph as
Leading High-End Auto Brands by Wealthy U.S. Drivers,” Luxury Institute
Press Release, January 10, 2013; Cheryl Jensen, “Cars More Dependable
than Ever, Lexus Tops the Chart while Land Rover Is Least Reliable,” New
York Daily News, April 16, 2013; Matthew de Paula, “Lexus Pursues Hipper
Crowd with New Ads for Its LS Sedan,” Forbes, October 31, 2012.
2. This discussion is adapted from a classic article: Theodore Levitt,
“Marketing Success through Differentiation: Of Anything,” Harvard
Business Review, January–February 1980, pp. 83–91. The first level,
core benefit, has been added to Levitt’s discussion.
3. Andrew D. Gershoff, Ran Kivetz, and Anat Keinan, “Consumer
Response to Versioning: How Brands’ Production Methods Affect
Perceptions of Unfairness,” Journal of Consumer Research 39 (August
2012), pp. 382–98.
4. Mads Nipper, “Lego Clicks,” The Hub, July/August 2012, pp.
26–30; Yun Mi Antorini, Albert M. Muñiz Jr., and Tormod Askildsen,
“Collaborating with Customer Communities: Lessons from the
Lego Group,” MIT Sloan Management Review 53 (Spring 2012), pp.
73–79; David Robertson and Per Hjuler, “Innovating a Turnaround at
LEGO,” Harvard Business Review, September 2009, pp. 20–21; Kim
Hjelmgaard, “Lego, Refocusing on Bricks, Builds on Image,” Wall
Street Journal, December 24, 2009; Paul Grimaldi, “Consumers Design
Products Their Way,” Knight Ridder Tribune Business News, November
25, 2006.
5. For some definitions, see AMA Dictionary from the American Marketing
Association, www.ama.org/resources/Pages/Dictionary.aspx.
6. Richard McGill Murphy, “Rising Stars,” Fortune, September 6, 2010,
pp. 110–16; since that analyst statement, some legal and cost issues
have muddied the water, see Robert Langreth, “Intuitive Surgical
Declines on Warning Letter from FDA,” Bloomberg, July 20, 2013.
7. Some of these bases are discussed in David A. Garvin, “Competing
on the Eight Dimensions of Quality,” Harvard Business Review,
November–December 1987, pp. 101–9.
8. Marco Bertini, Elie Ofek, and Dan Ariely, “The Impact of Add-On
Features on Product Evaluations,” Journal of Consumer Research
36 (June 2009), pp. 17–28; Tripat Gill, “Convergent Products: What
Functionalities Add More Value to the Base,” Journal of Marketing 72
(March 2008), pp. 46–62; Robert J. Meyer, Sheghui Zhao, and Jin K.
Han, “Biases in Valuation vs. Usage of Innovative Product Features,”
Marketing Science 27 (November–December 2008), pp. 1083–96.
9. Debora Viana Thompson, Rebecca W. Hamilton, and Roland Rust,
“Feature Fatigue: When Product Capabilities Become Too Much of a
Good Thing,” Journal of Marketing Research 42 (November 2005),
pp. 431–42.
10. Sami Haj-Assaad, “Are German Cars Reliable? The Myth of ‘German
Engineering,’” www.autoguide.com, May 10, 2012; Cheryl Jensen,
“Honda Repeats, Ford Surges and Mercedes Tumbles in 2011
Consumer Reports Study,” www.wheels.blogs.nytimes.com, February
28, 2011; Peter Gumbel, “How Dr. Z Plans to Fix Mercedes,” www.
81. Ashlee Vance, “Shutterfly’s Improbably Long Lifespan,” Bloomberg
Businessweek, January 7, 2013, pp. 33–34.
82. “The Paper Chase,” Special Advertising Section, Fortune, January 14,
2013.
83. Emily Glazer, “National Envelope Files for Bankruptcy Protection,” Wall
Street Journal, June 10, 2013; Joann S. Lublin, “Pitney Bowes Readies
21st Century Message,” Wall Street Journal, June 25, 2013.
84. Jorge Cauz, “Encyclopædia Britannica’s President on Killing Off a
244-Year-Old Product,” Harvard Business Review, March 2013, pp.
39–42.
85. Nick Bunkley, “Pontiac Falls from Muscle Car Glory to Graveyard,”
New York Times, October 29, 2010.
86. Rajan Varadarajan, Mark P. DeFanti, and Paul S. Busch, “Brand
Portfolio, Corporate Image, and Reputation: Managing Brand
Deletions,” Journal of the Academy of Marketing Science 34 (Spring
2006), pp. 195–205; Stephen J. Carlotti Jr., Mary Ellen Coe, and Jesko
Perrey, “Making Brand Portfolios Work,” McKinsey Quarterly 4 (2004),
pp. 24–36; Nirmalya Kumar, “Kill a Brand, Keep a Customer,” Harvard
Business Review, December 2003, pp. 86–95.
87. Laurence P. Feldman and Albert L. Page, “Harvesting: The
Misunderstood Market Exit Strategy,” Journal of Business Strategy
(Spring 1985), pp. 79–85; Philip Kotler, “Harvesting Strategies for Weak
Products,” Business Horizons, August 1978, pp. 15–22.
88. Rob Walker, “Can Ghost Brands . . . ,” International Herald Tribune, May
17–18, 2008, pp. 17–18; Peter Carbona, “The Rush to Grab Orphan
Brands,” BusinessWeek, August 3, 2009, pp. 47–48.
89. Stuart Elliott, “Those Shelved Brands Start to Look Tempting,” New
York Times, August 21, 2008.
90. Peter N. Golder and Gerard J. Tellis, “Growing, Growing, Gone:
Cascades, Diffusion, and Turning Points in the Product Life Cycle,”
Marketing Science 23 (Spring 2004), pp. 207–18.
91. Youngme Moon, “Break Free from the Product Life Cycle,” Harvard
Business Review, May 2005, pp. 87–94.
92. Hubert Gatignon and David Soberman, “Competitive Response
and Market Evolution,” Barton A. Weitz and Robin Wensley, eds.,
Handbook of Marketing (London, UK: Sage Publications, 2002), pp.
126–47; Robert D. Buzzell, “Market Functions and Market Evolution,”
Journal of Marketing 63 (Special Issue 1999), pp. 61–63.
93. Philip Kotler and John A. Caslione, Chaotics: The Business and
Marketing in the Age of Turbulence (New York: AMACOM, 2009).
94. Raji Srinivasan, Arvind Rangaswamy, and Gary L. Lilien, “Turning
Adversity into Advantage: Does Proactive Marketing During Recession
Pay Off?,” International Journal of Research in Marketing 22 (June
2005), pp. 109–25.
95. Jon Fine, “Why General Mills Marketing Pays Off,” BusinessWeek, July
27, 2009, pp. 67–68; Matthew Boyle, “Snap, Crackle, Pop at the Food
Giants,” BusinessWeek, October 6, 2008, p. 48.
96. Philip Lay, Todd Hewlin, and Geoffrey Moore, “In a Downturn, Provoke
Your Customers,” Harvard Business Review, March 2009, pp. 48–56.
97. John A. Quelch and Katherine E. Jocz, “How to Market in a Downturn,”
Harvard Business Review, April 2009, pp. 52–62.
98. Maria Bartiromo, “Facetime: Inside a Company Resetting for
Recovery,” BusinessWeek, July 13 and 20, 2009, pp. 15–17.
99. Steve Hamm, “The New Age of Frugality,” BusinessWeek, October 20,
2008, pp. 55–58.
100. Jane Porter and Burt Heim, “Doing Whatever Gets Them in the Door,”
BusinessWeek, June 30, 2008, p. 60.
101. David Taylor, David Nichols, Diego Kerner, and Anne Charbonneau,
“Leading Brands Out of the Recession,” Brandgym Research Paper 2,
www.brandgym.com, September 2009.
102. Todd Wasserman, “Maverick CMOs Try Going without TV,” Brandweek,
January 24, 2009.
103. Maureen Scarpelli, “Dentists Step Up Marketing Efforts as Patients
Scrimp by Skipping Visits,” Wall Street Journal, August 11, 2009.
104. Peter J. Williamson and Ming Zeng, “Value for Money Strategies for
Recessionary Times,” Harvard Business Review, March 2009,
pp. 66–74.
Z02_KOTL2621_15_GE_NOTE.INDD 28 3/10/15 2:57 PM
Endnotes E29
Asutosh Padhi, and Jim Williams, “Designing Products for Value,”
McKinsey Quarterly, October 2012.
32. Ulrich R. Orth and Keven Malkewitz, “Holistic Package Design and
Consumer Brand Impressions,” Journal of Marketing 72 (May 2008),
pp. 64–81.
33. Todd Wasserman, “Thinking by Design,” Brandweek, November 3,
2008, pp. 18–21.
34. Rachel Lamb, “How Will Bang & Olufsen’s Lower-End Product Line
Affect the Brand?,” Luxury Daily, January 12, 2012; Andrew Cave,
“Bang & Olufsen Chief Pumps Up the Volume to Make Another Killing
for Denmark,” The Telegraph, December 2, 2012; Jay Green, “Where
Designers Rule,” BusinessWeek, November 5, 2007, pp. 46–51;
Deborah Steinborn, “Talking about Design,” Wall Street Journal,
June 23, 2008, p. R6; www.bang-olufsen.com; note that the BeoLab
8000 was replaced by the BeoLab 8002 in 2010.
35. Andrew Roberts, “Louis Vuitton Tops Hermes as World’s Most Valuable
Luxury Brand,” Bloomberg Businessweek, May 21, 2012.
36. Thomas Tochterman and Linda Dauriz, “Luxury Lifestyle: Business
Beyond Buzzwords,” McKinsey white paper report, www.mckinsey.
com, June 2012. For recessionary effects on luxury goods, see Wagner
A. Kamakura and Rex Yuxing Du, “How Economic Contractions
and Expansions Affect Expenditure Patterns,” Journal of Consumer
Research, 39 (August 2012), pp. 229–47.
37. Stellene Volande, “The Secret to Hermès’s Success,” Departures,
November–December 2009, pp. 110–12; Cathy Horyn, “Why So
Stodgy, Prada.com?,” New York Times, December 30, 2009.
38. Tricia Carr, “Sub-Zero Pushes Products via Digital Quiz,” Luxury Daily,
April 4, 2012; “Creative Campaigns from Massage Envy, Sub-Zero and
Hoveround,” Direct Marketing News, May 17, 2010; Beth Snyder Bulik,
“Sub-Zero Keeps Its Cool in a Value-Obsessed Economy,” Advertising
Age, May 25, 2009, p. 14.
39. “Patrón Tequila Picks Up Steam, Heads toward 2M Cases,” Shanken
News Daily, April 12, 2012; Elizabeth Behrman, “Staying Ahead, On
and Off the Track,” Tampa Bay Times, March 9, 2012; Christopher
Palmeri, “The Barroom Brawl over Patron,” BusinessWeek, September
17, 2007, p. 72.
40. Ariel Adams, “Montblanc on How to Be a Luxury Brand for Many,”
Forbes, March 14, 2013; Lorna Pappas, “Montblanc CEO Shares Pricing
and Brand Marketing Insights,” Retail Touchpoints, October 19, 2012;
Ken Kamen, “Investors Should Take a Page from Montblanc’s Successful
Strategy,” Forbes, December 20, 2011.
41. Mignon Reyneke, Alexandra Sorokác̆ová, and Leyland Pitt, “Managing
Brands in Times of Economic Downturn: How Do Luxury Brands
Fare?,” Journal of Brand Management 19 (April 2012), pp. 457–66.
42. Christina Binkley, “Like Our Sunglasses? Try Our Vodka! Brand
Extensions Get Weirder, Risking Customer Confusion,” Wall Street
Journal, November 8, 2007.
43. “Luxury Habits Mature in China,” www.warc.com, December 21, 2012;
“China Becomes Biggest Luxury Market,” www.warc.com, December
17, 2012.
44. Andrew Roberts, “Building Luxury Brand Loyalty via Exclusive
Experiences,” Businessweek, January 31, 2013.
45. Brett Berk, “Extreme Test Drive,” Bloomberg Businessweek, May 14,
2012; www.porsche.com/usa/eventsandracing/sportdrivingschool,
accessed June 2, 2014.
46. “Luxury Brands Fall Short on the Web,” www.warc.com, January
21, 2103; “Gucci Sees Mobile Success,” www.warc.com, March
12, 2013; “Fashion Giants Fail on Digital in China,” www.warc.com,
March 22, 2013; “Luxury Apps Fall Short,” www.warc.com, February
21, 2103.
47. Natalie Zmuda, “How the Recession Changed the Luxury-Advertising
Landscape,” Advertising Age, April 25, 2011.
48. “Levi’s Introduces New Waste
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