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Unformatted text preview: Marketing Management 1 4e Global Edition PHILIP KOTLER Northwestern University KEVIN LANE KELLER Dartmouth College Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Editor in Chief: Eric Svendsen Executive Editor: Melissa Sabella Senior Acquisitions Editor, Global Edition: Steven Jackson Development Editor: Elisa Adams Director of Editorial Services: Ashley Santora Editorial Project Manager: Kierra Bloom Editorial Assistant: Elizabeth Scarpa Director of Marketing: Patrice Lumuba Jones Senior Marketing Manager: Anne Fahlgren Marketing Manager, International: Dean Erasmus Senior Managing Editor: Judy Leale Production Project Manager: Ann Pulido Senior Operations Supervisor: Arnold Vila Creative Director: John Christiano Senior Art Director: Blair Brown Text Designer: Blair Brown Cover Designers: Blair Brown and Jodi Notowitz Lead Media Project Manager: Lisa Rinaldi Editorial Media Project Manager: Denise Vaughn Full-Service Project Management: Sharon Anderson/BookMasters, Inc. Cover Printer: Lehigh-Phoenix Color/Hagerstown Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: © Pearson Education Limited 2012 The rights of Philip Kotler and Kevin Lane Keller to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Authorised adaptation from the United States edition, entitled Marketing Management, 14th Edition, ISBN: 978-0-13-210292-6 by Philip Kotler and Kevin Lane Keller, published by Pearson Education, publishing as Prentice Hall © 2012. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text. ISBN 13: 978-0-273-75336-0 ISBN 10: 0-273-75336-3 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 Typeset in 9.5/11.5, Minion by Integra Printed and bound by Courier/Kendallville in The United States of America The publisher s policy is to use paper manufactured from sustainable forests. 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 About the Authors srohtuA Philip Kotler Philip Kotler is one of the world s leading authorities on market- 4 ing. 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 behavioral 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: Ten Deadly Marketing Sins; and Corporate Social Responsibility. In addition, he has published more than one hundred 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. 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, and the University of Economics and Business Administration in Vienna. 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. keting academics of the last 25 years. He 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 marketing management and strategic brand management and lectures in executive programs on those topics. Previously, Professor Keller was on the faculty of the Graduate School of Business at Stanford University, where he also served as the head of the marketing group. Additionally, he has been on the marketing faculty at the University of California at Berkeley and the University of North Carolina at Chapel Hill, 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 over ninety published papers, his research has been extensively cited and has received numerous awards. Professor Keller is acknowledged as one of the international leaders in the study of brands and branding. His textbook on those subjects, Strategic Brand Management, has been adopted at top business schools and leading firms around the world and has been heralded as the bible of branding. Actively involved with industry, he has worked on a host of different types of marketing projects. He has served as a 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 s, Colgate, Eli Lilly, ExxonMobil, General Mills, GfK, Goodyear, Intuit, Johnson & Johnson, Kodak, L.L.Bean, Mayo Clinic, 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. A popular and highly sought-after speaker, he has made speeches and conducted marketing seminars to top executives in a variety of forums. Some of his senior management and marketing training clients have included such diverse business organizations as Cisco, Coca-Cola, Deutsche Telekom, GE, Google, IBM, Macy s, Microsoft, Nestle, Novartis, 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. 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 Dwight Twilley and Tommy Keene. Additionally, he is the Principal Investor and Marketing Advisor for Second Motion Records. He is also on the Board of Directors for The Doug Flutie, Jr. Foundation for Autism 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. Kevin Lane Keller Kevin Lane Keller is widely recognized as one of the top mar- 5 Brief Contents Preface 16 PART 1 Understanding Marketing Management Chapter 1 Chapter 2 Defining Marketing for the 21st Century 24 Developing Marketing Strategies and Plans 54 PART 2 Capturing Marketing Insights Chapter 3 Chapter 4 Collecting Information and Forecasting Demand Conducting Marketing Research 118 24 88 PART 3 Connecting with Customers Chapter Chapter Chapter Chapter 88 Creating Long-term Loyalty Relationships 144 Analyzing Consumer Markets 172 Analyzing Business Markets 204 Identifying Market Segments and Targets 234 5 6 7 8 144 PART 4 Building Strong Brands 262 Chapter 9 Chapter 10 Chapter 11 Creating Brand Equity 262 Crafting the Brand Positioning Competitive Dynamics 320 PART 5 Shaping the Market Offerings Chapter 12 Chapter 13 Chapter 14 Setting Product Strategy 346 Designing and Managing Services 376 Developing Pricing Strategies and Programs PART 6 Delivering Value Chapter 15 Chapter 16 Designing and Managing Integrated Marketing Channels Managing Retailing, Wholesaling, and Logistics 468 296 346 404 436 436 PART 7 Communicating Value Chapter 17 Designing and Managing Integrated Marketing Communications 496 Managing Mass Communications: Advertising, Sales Promotions, Events and Experiences, and Public Relations 524 Managing Personal Communications: Direct and Interactive Marketing, Word of Mouth, and Personal Selling 556 Chapter 18 Chapter 19 496 PART 8 Creating Successful Long-term Growth Chapter 20 Chapter 21 Chapter 22 Introducing New Market Offerings 588 Tapping into Global Markets 616 Managing a Holistic Marketing Organization for the Long Run Appendix: Sonic Marketing Plan A1 Endnotes E1 Glossary G1 Image Credits C1 Name Index I1 Company, Brand, and Organization Index Subject Index I14 6 I4 588 642 C ontents Preface PART 1 CHAPTER 1 16 Understanding Marketing Management 24 Defining Marketing for the 21st Century 24 The Importance of Marketing 25 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 32 Offerings and Brands 32 Value and Satisfaction 32 Marketing Channels 33 Supply Chain 33 Competition 33 Marketing Environment 33 The New Marketing Realities 34 Major Societal Forces 34 New Company Capabilities 36 Marketing in Practice 37 MARKETING INSIGHT Marketing in an Age of Turbulence 38 Company Orientation toward the Marketplace 39 The Production Concept 40 The Product Concept 40 The Selling Concept 40 The Marketing Concept 40 The Holistic Marketing Concept 40 MARKETING MEMO Marketing Right and Wrong 41 Relationship Marketing 42 Integrated Marketing 42 Internal Marketing 43 Performance Marketing 44 Updating the Four Ps 47 Marketing Management Tasks 48 Developing Marketing Strategies and Plans 48 Capturing Marketing Insights 48 MARKETING MEMO Marketers Frequently Asked Questions 48 Connecting with Customers 49 Building Strong Brands 49 Shaping the Market Offerings 49 Delivering Value 49 Communicating Value 49 Creating Successful Long-Term Growth Summary 50 Applications 50 CHAPTER 2 49 Developing Marketing Strategies and Plans 54 Marketing and Customer Value 55 The Value Delivery Process 55 The Value Chain 56 Core Competencies 57 A Holistic Marketing Orientation and Customer Value 58 The Central Role of Strategic Planning 58 Corporate and Division Strategic Planning 59 Defining the Corporate Mission 60 Establishing Strategic Business Units 61 Assigning Resources to Each SBU 64 Assessing Growth Opportunities 64 Organization and Organizational Culture 67 Marketing Innovation 67 MARKETING INSIGHT Creating Innovative Marketing 68 Business Unit Strategic Planning The Business Mission 70 SWOT Analysis 70 Goal Formulation 72 Strategic Formulation 72 69 MARKETING MEMO Checklist for Performing Strengths/Weaknesses Analysis 74 Program Formulation and Implementation 75 Feedback and Control 75 Product Planning: The Nature and Contents of a Marketing Plan 76 MARKETING MEMO Marketing Plan Criteria 77 The Role of Research 77 The Role of Relationships 77 From Marketing Plan to Marketing Action 77 Summary 78 Applications 78 Sample Marketing Plan: Pegasus Sports International 82 7 PART 2 Capturing Marketing Insights 88 CHAPTER 3 Collecting Information and Forecasting Demand 88 Components of a Modern Marketing Information System 89 Internal Records 92 The Order-to-Payment Cycle 92 Sales Information Systems 92 Databases, Data Warehousing, and Data Mining 93 Marketing Intelligence 93 The Marketing Intelligence System 93 Collecting Marketing Intelligence on the Internet 94 Communicating and Acting on Marketing Intelligence 95 Analyzing the Macroenvironment 96 Needs and Trends 96 Identifying the Major Forces 96 The Demographic Environment 97 MARKETING INSIGHT Finding Gold at the Bottom of the Pyramid 98 The Economic Environment 99 The Sociocultural Environment 100 The Natural Environment 102 The Technological Environment 103 MARKETING INSIGHT The Green Marketing Revolution 104 The Political-Legal Environment 106 Forecasting and Demand Measurement 107 The Measures of Market Demand 107 A Vocabulary for Demand Measurement 108 Estimating Current Demand 110 Estimating Future Demand 112 Summary 114 Applications 114 CHAPTER 4 Conducting Marketing Research 118 The Marketing Research System 119 The Marketing Research Process 121 8 Step 1: Define the Problem, the Decision Alternatives, and the Research Objectives 121 Step 2: Develop the Research Plan 122 MARKETING MEMO Conducting Informative Focus Groups 124 MARKETING MEMO Questionnaire Dos and Don ts 126 MARKETING INSIGHT Getting into the Heads of Consumers 128 MARKETING INSIGHT Understanding Brain Science 130 Step 3: Collect the Information 132 Step 4: Analyze the Information 133 Step 5: Present the Findings 133 Step 6: Make the Decision 133 MARKETING INSIGHT Bringing Marketing Research to Life with Personas 134 Overcoming Barriers to the Use of Marketing Research 134 Measuring Marketing Productivity 136 Marketing Metrics 136 Marketing-Mix Modeling 138 Marketing Dashboards 138 MARKETING INSIGHT Marketing Dashboards to Improve Effectiveness and Efficiency 139 Summary 140 Applications 141 PART 3 Connecting with Customers 144 CHAPTER 5 Creating Long-term Loyalty Relationships 144 Building Customer Value, Satisfaction, and Loyalty 145 Customer Perceived Value 146 Total Customer Satisfaction 150 Monitoring Satisfaction 150 MARKETING INSIGHT Net Promoter and Customer Satisfaction 151 Product and Service Quality 153 Maximizing Customer Lifetime Value 154 Customer Profitability 155 Measuring Customer Lifetime Value 156 Cultivating Customer Relationships 156 Purchase Decision 192 Postpurchase Behavior 194 Moderating Effects on Consumer Decision Making 195 Behavioral Decision Theory and Behavioral Economics 196 Decision Heuristics 196 MARKETING MEMO Calculating Customer Lifetime Value 156 MARKETING INSIGHT Predictably Irrational 198 Customer Relationship Management 157 Attracting and Retaining Customers 161 Building Loyalty 163 Win-Backs 165 Customer Databases and Database Marketing 165 Customer Databases 165 Data Warehouses and Data Mining 165 The Downside of Database Marketing and CRM 167 Framing 198 Summary 199 Applications 200 MARKETING MEMO Marketing and Total Quality 154 MARKETING INSIGHT The Behavioral Targeting Controversy 168 Summary 169 Applications 169 CHAPTER 7 Analyzing Business Markets 204 What Is Organizational Buying? 205 The Business Market versus the Consumer Market 205 Buying Situations 207 Systems Buying and Selling 209 Participants in the Business Buying Process 210 The Buying Center 210 Buying Center Influences 211 Targeting Firms and Buying Centers 212 MARKETING INSIGHT Big Sales to Small Businesses 213 CHAPTER 6 Analyzing Consumer Markets 172 What Influences Consumer Behavior? 173 Cultural Factors 173 Social Factors 175 MARKETING MEMO The Average U.S. Consumer Quiz 177 Personal Factors 177 Key Psychological Processes 182 Motivation: Freud, Maslow, Herzberg 182 Perception 183 Learning 185 Emotions 185 Memory 185 MARKETING INSIGHT Made to Stick 187 The Buying Decision Process: The Five-Stage Model 188 Problem Recognition 189 Evaluation of Alternatives 190 The Purchasing/Procurement Process 215 Stages in the Buying Process 217 Problem Recognition 218 General Need Description and Product Specification 218 Supplier Search 218 Proposal Solicitation 220 Supplier Selection 220 MARKETING MEMO Developing Compelling Customer Value Propositions 221 Order-Routine Specification 223 Performance Review 223 Managing Business-to-Business Customer Relationships 223 The Benefits of Vertical Coordination 224 MARKETING INSIGHT Establishing Corporate Trust, Credibility, and Reputation 225 Business Relationships: Risks and Opportunism 225 9 New Technology and Business Customers 226 Institutional and Government Markets Summary 229 Applications 230 CHAPTER 8 MARKETING INSIGHT The Brand Value Chain 277 227 Identifying Market Segments and Targets 234 Bases for Segmenting Consumer Markets 236 Geographic Segmentation 236 Demographic Segmentation 238 MARKETING INSIGHT Trading Up, Down, and Over 240 Psychographic Segmentation 247 Behavioral Segmentation 249 Bases for Segmenting Business Markets Market Targeting 253 Effective Segmentation Criteria 253 Evaluating and Selecting the Market Segments 254 262 What Is Brand Equity? 263 The Role of Brands 264 The Scope of Branding 265 Defining Brand Equity 265 Brand Equity Models 267 MARKETING INSIGHT Brand Bubble Trouble 270 Building Brand Equity 271 Choosing Brand Elements 272 Designing Holistic Marketing Activities 273 Leveraging Secondary Associations 274 Internal Branding 275 Brand Communities 275 Measuring Brand Equity 277 10 Summary 290 Applications 291 CHAPTER 10 Crafting the Brand Positioning 296 Developing and Establishing a Brand Positioning 297 Determining a Competitive Frame of Reference 298 Identifying Optimal Points-of-Difference and Points-of-Parity 302 Choosing POPs and PODs 305 Brand Mantras 306 Establishing Brand Positioning 308 Building Strong Brands 262 Creating Brand Equity MARKETING MEMO Twenty-First-Century Branding 289 MARKETING INSIGHT High Growth Through Value Innovation 300 Summary 258 Applications 259 CHAPTER 9 Managing Brand Equity 280 Brand Reinforcement 280 Brand Revitalization 281 Devising a Branding Strategy 282 Branding Decisions 283 Brand Portfolios 284 Brand Extensions 285 Customer Equity 289 252 MARKETING INSIGHT Chasing the Long Tail 257 PART 4 MARKETING INSIGHT What Is a Brand Worth? 279 MARKETING MEMO Constructing a Brand Positioning Bull s-eye 309 Differentiation Strategies 311 Alternative Approaches to Positioning Positioning and Branding a Small Business 315 Summary 316 Applications 316 CHAPTER 11 Competitive Dynamics 320 Competitive Strategies for Market Leaders 321 MARKETING INSIGHT When Your Competitor Delivers More for Less 322 313 Expanding Total Market Demand 323 Protecting Market Share 324 Increasing Market Share 326 Other Competitive Strategies 327 Market-Challenger Strategies 327 Market-Follower Strategies 329 Market-Nicher Strategies 330 MARKETING MEMO Niche Spet Roles 331 Product Life-Cycle Marketing Strategies 332 Product Life Cycles 332 Style, Fashion, and Fad Life Cycles 333 Marketing Strategies: Introduction Stage and the Pioneer Advantage 334 Marketing Strategies: Growth Stage 335 Marketing Strategies: Maturity Stage 335 Marketing Strategies: Decline Stage 336 MARKETING INSIGHT Managing a Brand Crisis 338 Evidence for the Product Life-Cycle Concept 338 Critique of the Product Life-Cycle Concept 339 Market Evolution 339 Marketing in an Economic Downturn 340 Explore the Upside of Increasing Investment 340 Get Closer to Customers 340 Review Budget Allocations 341 Put Forth the Most Compelling Value Proposition 341 Fine-tune Brand and Product Offerings 342 Summary 342 Applications 343 PART 5 Shaping the Market Offerings 346 CHAPTER 12 Setting Product Strategy 346 Product Characteristics and Classifications 347 Product Levels: The Customer-Value Hierarchy 348 Product Classifications 349 Product and Services Differentiation 350 Product Differentiation 351 Services Differentiation 352 Design 354 Product and Brand Relationships 355 MARKETING INSIGHT Marketing Luxury Brands 356 The Product Hierarchy 358 Product Systems and Mixes 358 Product Line Analysis 359 Product Line Length 361 MARKETING INSIGHT When Less Is More 361 Product Mix Pricing 364 Co-Branding and Ingredient Branding 366 MARKETING MEMO Product-Bundle Pricing Considerations 366 Packaging, Labeling, Warranties, and Guarantees 368 Packaging 368 Labeling 370 Warranties and Guarantees 371 Summary 371 Applications 372 CHAPTER 13 Designing and Managing Services 376 The Nature of Services 377 Service Industries Are Everywhere 378 Categories of Service Mix 378 Distinctive Characteristics of Services 380 The New Services Realities 383 A Shifting Customer Relationship 384 Achieving Excellence in Services Marketing 387 Marketing Excellence 387 Best Practices of Top Service Companies 388 Differentiating Services 390 MARKETING INSIGHT Improving Company Call Centers 391 Managing Service Quality 392 MARKETING MEMO Recommendations for Improving Service Quality 394 11 Managing Customer Expectations 395 Incorporating Self-Service Technologies (SSTs) 397 Managing Product-Support Services 397 Identifying and Satisfying Customer Needs 398 MARKETING MEMO Assessing E-Service Quality 398 Postsale Service Strategy Summary 400 Applications 400 399 CHAPTER 14 Developing Pricing Strategies and Programs 404 Understanding Pricing 405 A Changing Pricing Environment 406 MARKETING INSIGHT Giving It All Away 406 How Companies Price 408 Consumer Psychology and Pricing 408 Setting the Price 411 Step 1: Selecting the Pricing Objective 411 Step 2: Determining Demand 412 Step 3: Estimating Costs 414 Step 4: Analyzing Competitors Costs, Prices, and Offers 417 Step 5: Selecting a Pricing Method 417 Step 6: Selecting the Final Price 424 MARKETING INSIGHT Stealth Price Increases 425 Adapting the Price 425 Geographical Pricing (Cash, Countertrade, Barter) 426 Price Discounts and Allowances 426 Promotional Pricing 427 Differentiated Pricing 428 Initiating and Responding to Price Changes 429 Initiating Price Cuts 429 Initiating Price Increases 430 Responding to Competitors Price Changes 431 Summary 432 Applications 432 12 PART 6 Delivering Value 436 CHAPTER 15 Designing and Managing Integrated Marketing Channels 436 Marketing Channels and Value Networks The Importance of Channels 438 Hybrid Channels and Multichannel Marketing 438 Value Networks 439 The Role of Marketing Channels 440 Channel Functions and Flows 440 Channel Levels 442 Service Sector Channels 443 Channel-Design Decisions 444 Analyzing Customer Needs and Wants Establishing Objectives and Constraints 445 Identifying Major Channel Alternatives Evaluating Major Channel Alternatives Channel-Management Decisions 449 Selecting Channel Members 449 Training and Motivating Channel Members 450 Evaluating Channel Members 451 Modifying Channel Design and Arrangements 451 Channel Modification Decisions 451 Global Channel Considerations 452 Channel Integration and Systems 453 Vertical Marketing Systems 453 437 444 446 448 MARKETING INSIGHT Channel Stewards Take Charge 454 Horizontal Marketing Systems 455 Integrating Multichannel Marketing Systems 455 Conflict, Cooperation, and Competition 457 Types of Conflict and Competition 457 Causes of Channel Conflict 458 Managing Channel Conflict 458 Dilution and Cannibalization 460 Legal and Ethical Issues in Channel Relations 460 E-Commerce Marketing Practices 460 Pure-Click Companies 461 Brick-and-Click Companies 462 M-Commerce Marketing Practices 463 Summary 464 Applications 464 CHAPTER 16 Managing Retailing, Wholesaling, and Logistics 468 Retailing 469 Types of Retailers 470 The New Retail Environment Marketing Decisions 475 Channels 476 473 MARKETING MEMO Helping Stores to Sell 480 Private Labels 481 Role of Private Labels 482 Private-Label Success Factors 482 MARKETING INSIGHT Manufacturer s Response to the Private Label Threat 483 Wholesaling 483 Trends in Wholesaling 485 Market Logistics 486 Integrated Logistics Systems 486 Market-Logistics Objectives 487 Market-Logistics Decisions 488 Organizational Lessons 491 Summary 491 Applications 492 PART 7 Communicating Value 516 MARKETING MEMO How Integrated Is Your IMC Program? 518 Summary 519 Applications 519 CHAPTER 18 Managing Mass Communications: Advertising, Sales Promotions, Events and Experiences, and Public Relations 524 496 CHAPTER 17 Designing and Managing Integrated Marketing Communications 496 The Role of Marketing Communications 498 The Changing Marketing Communications Environment 498 MARKETING INSIGHT Don t Touch That Remote 498 Marketing Communications, Brand Equity, and Sales 500 The Communications Process Models 502 Developing Effective Communications 504 Identify the Target Audience 504 Determine the Communications Objectives 504 Design the Communications 506 MARKETING INSIGHT Celebrity Endorsements as a Strategy 508 Select the Communications Channels Establish the Total Marketing Communications Budget 510 Deciding on the Marketing Communications Mix 512 Characteristics of the Marketing Communications Mix 512 Factors in Setting the Marketing Communications Mix 514 Measuring Communication Results Managing the Integrated Marketing Communications Process 516 Coordinating Media 517 Implementing IMC 518 508 Developing and Managing an Advertising Program 526 Setting the Objectives 526 Deciding on the Advertising Budget 527 Developing the Advertising Campaign 528 MARKETING MEMO Print Ad Evaluation Criteria 531 Deciding on Media and Measuring Effectiveness 532 Deciding on Reach, Frequency, and Impact 533 Choosing among Major Media Types Alternate Advertising Options 534 534 MARKETING INSIGHT Playing Games with Brands 538 Selecting Specific Media Vehicles 538 Deciding on Media Timing and Allocation 539 Evaluating Advertising Effectiveness 540 Sales Promotion 541 Objectives 541 Advertising versus Promotion 541 Major Decisions 542 Events and Experiences 546 13 Events Objectives 546 Major Sponsorship Decisions Creating Experiences 548 547 MARKETING MEMO Measuring High Performance Sponsorship Programs 548 Public Relations 549 Marketing Public Relations 549 Major Decisions in Marketing PR 550 Summary 552 Applications 552 CHAPTER 19 Managing Personal Communications: Direct and Interactive Marketing, Word of Mouth, and Personal Selling 556 PART 8 Direct Marketing 557 The Benefits of Direct Marketing 558 Direct Mail 560 Catalog Marketing 561 Telemarketing 561 Other Media for Direct-Response Marketing 561 Public and Ethical Issues in Direct Marketing 562 Interactive Marketing 562 Advantages and Disadvantages of Interactive Marketing 562 Interactive Marketing Communication Options 563 MARKETING MEMO How to Maximize the Marketing Value of E-mails 565 MARKETING MEMO Segmenting Tech Users 567 Word of Mouth 568 Social Media 568 Buzz and Viral Marketing 571 Opinion Leaders 573 MARKETING INSIGHT Major Account Management 577 14 Creating Successful Longterm Growth 588 CHAPTER 20 Introducing New Market Offerings 588 New-Product Options 589 Make or Buy 589 Types of New Products 590 Challenges in New-Product Development 590 The Innovation Imperative 590 New-Product Success 591 New-Product Failure 592 Organizational Arrangements 592 Budgeting for New-Product Development 593 Organizing New-Product Development 594 Managing the Development Process: Ideas 595 Generating Ideas 595 MARKETING MEMO Ten Ways to Find Great New-Product Ideas 596 MARKETING MEMO How to Start a Buzz Fire 574 Measuring the Effects of Word of Mouth 574 Designing the Sales Force 575 Sales Force Objectives and Strategy Sales Force Structure 577 Sales Force Size 578 Sales Force Compensation 578 Managing the Sales Force 578 Recruiting and Selecting Representatives 578 Training and Supervising Sales Representatives 579 Sales Rep Productivity 579 Motivating Sales Representatives 580 Evaluating Sales Representatives 581 Principles of Personal Selling 582 The Six Steps 583 Relationship Marketing 584 Summary 584 Applications 585 MARKETING INSIGHT P&G s New Connect * Develop Approach to Innovation 596 MARKETING MEMO Seven Ways to Draw New Ideas from Your Customers 598 576 MARKETING MEMO How to Run a Successful Brainstorming Session 599 Using Idea Screening 600 Managing the Development Process: Concept to Strategy 601 Concept Development and Testing 601 Marketing Strategy Development 604 Business Analysis 605 Managing the Development Process: Development to Commercialization 607 Product Development 607 Market Testing 607 Commercialization 610 The Consumer-Adoption Process 611 Stages in the Adoption Process 611 Factors Influencing the Adoption Process 611 Summary 612 Applications 613 CHAPTER 21 Tapping into Global Markets 616 Competing on a Global Basis 617 Deciding Whether to Go Abroad 619 Deciding Which Markets to Enter 619 How Many Markets to Enter 620 Developed versus Developing Markets Trends in Marketing Practices 643 Internal Marketing 645 Organizing the Marketing Department 645 MARKETING MEMO Characteristics of Company Departments That Are Truly Customer Driven 646 Relationships with Other Departments Building a Creative Marketing Organization 650 649 MARKETING INSIGHT The Marketing CEO 650 Socially Responsible Marketing 651 Corporate Social Responsibility 652 MARKETING INSIGHT The Rise of Organic 655 620 MARKETING INSIGHT Spotlight on Key Developing Markets 622 Evaluating Potential Markets 624 Deciding How to Enter the Market 625 Indirect and Direct Export 625 Licensing 626 Joint Ventures 627 Direct Investment 627 Deciding on the Marketing Program 628 Global Similarities and Differences 628 Marketing Adaptation 629 MARKETING MEMO The Ten Commandments of Global Branding CHAPTER 22 Managing a Holistic Marketing Organization for the Long Run 642 630 Global Product Strategies 630 Global Communication Strategies 632 Global Pricing Strategies 633 Global Distribution Strategies 635 Country-of-Origin Effects 636 Building Country Images 636 Consumer Perceptions of Country of Origin 636 Deciding on the Marketing Organization 638 Export Department 638 International Division 638 Global Organization 638 Summary 639 Applications 639 Socially Responsible Business Models Cause-Related Marketing 656 656 MARKETING MEMO Making a Difference: Top 10 Tips for Cause Branding 659 Social Marketing 660 Marketing Implementation and Control 662 Marketing Implementation 662 Marketing Control 663 Annual-Plan Control 663 Profitability Control 664 Efficiency Control 664 Strategic Control 665 The Future of Marketing 665 MARKETING MEMO Major Marketing Weaknesses 669 Summary 670 Applications 670 Appendix Tools for Marketing Control 674 Appendix Sonic Marketing Plan A1 Endnotes E1 Glossary G1 Image Credits C1 Name Index I1 Company, Brand, and Organization Index Subject Index I14 I4 15 Preface What s New in the 14th Edition The overriding goal of the revision for the 14th edition of Marketing Management was to create as comprehensive, current, and engaging MBA marketing textbook as possible. Where appropriate, new material was added, old material was updated, and no longer relevant or necessary material was deleted. Marketing Management, 14th edition, allows those instructors who have used the 13th 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 been preserved, as well as 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 companies or issues, and the Marketing Insight and Marketing Memo boxes that provide in-depth conceptual and practical commentary. Significant changes to the 14th 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. The end-of-chapter section now includes two Marketing in Action mini-cases highlighting innovative, insightful marketing accomplishments by leading organizations. Each case includes questions that promote classroom discussion and analysis. Dramatic changes in the marketing environment have occurred in recent years in particular, the economic, natural, and technological environments. Throughout the new edition, these three areas are addressed, sometimes via new subsections in chapters, with emphasis on marketing during economic downturns and recessions, the rise of sustainability and green marketing, and the increased development of computing power, the Internet, and mobile phones. These new marketing realities make it more important than ever for marketers to be holistic in what they do, the overriding theme of this text. Chapter 19, on personal communications, received a significant update with much new material to reflect the changing social media landscape and communications environment. Forecasting has been moved to Chapter 3 where it fits well with the material on the marketing environment. Chapter 5 was re-titled as Creating Long-Term Loyalty Relationships to better reflect its stronger area of emphasis. Chapters 10 and 11 were reorganized and material swapped. Chapter 11 was also re-titled as Competitive Dynamics to acknowledge the significant material added on marketing in an economic downturn. 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 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 16 even part of the marketing vocabulary then. Marketing Management continues to reflect the changes in the marketing discipline over the past 40 years. Firms now sell goods and services through a variety of direct and indirect channels. Mass advertising 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 measuring 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 department 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 who 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; production 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 recognize 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 specifically addresses the following tasks that constitute modern marketing management in the 21st century: 1. Developing marketing strategies and plans 2. Capturing marketing insights and performance 3. Connecting with customers 4. Building strong brands 5. Shaping the market offerings 6. Delivering and communicating value 7. Creating successful long-term growth 17 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 upto-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 14th 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 analyzing 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. Student Supplements mymarketinglab Mymarketinglab gives you the opportunity to test yourself on key concepts and skills, track your progress through the course and use the personalized study plan activities all to help you achieve success in the classroom. Features include: * 18 Personalized Study Plans Pre- and post-tests with remediation activities directed to help you understand and apply the concepts where you need the most help. * * * Interactive Elements A wealth of hands-on activities and exercises let you experience and learn actively. Current Events Articles Concise, highly relevant articles about the latest marketing related news with thought provoking short essay questions. Critical Thinking Challenge Question These questions measure core critical-thinking skills through the context of marketing applications. To answer these questions, you will need to recognize assumptions, evaluate arguments, identify relevant issues, draw inferences, spot logical flaws, and recognize similarities between arguments. Knowledge of marketing content picked up through the text and the class will help you zero in on the correct issues, but you will still need to exercise critical judgment in order to get the correct answer. Marketing Management Video Gallery Make your classroom newsworthy. Pearson Education has updated the Marketing Management video library for the 14th edition. A full library of video segments accompany this edition featuring issue-focused footage such as interviews with top executives, objective reporting by real news anchors, industry research analysts, and marketing and advertising campaign experts. A full video guide, including synopses, discussion questions, and teaching suggestions, is available (online) to accompany the video library. The Marketing Plan Handbook, 4th edition, with Marketing Plan Pro Marketing Plan Pro is a highly rated commercial software program that guides you through the entire marketing plan process. The software is totally interactive and features 10 sample marketing plans, step-by-step guides, and customizable charts. Customize your marketing plan to fit your marketing needs by following easy-to-use plan wizards. Follow the clearly outlined steps from strategy to implementation. Click to print, and your text, spreadsheet, and charts come together to create a powerful marketing plan. The new The Marketing Plan Handbook, by Marian Burk Wood, supplements the in-text marketing plan material with an in-depth guide to what student marketers really need to know. A structured learning process leads to a complete and actionable marketing plan. Also included are timely, real-world examples that illustrate key points, sample marketing plans, and Internet resources. 19 Acknowledgments T he 14th 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 is my former Dean, Donald P. Jacobs, and my current Dean, Dipak Jain, both of whom have provided generous support for my research and writing. Several former faculty members of the marketing department had a great influence on my thinking when I first joined the Kellogg marketing faculty, specifically Richard M. Clewett, Ralph Westfall, Harper W. Boyd, and Sidney J. Levy. 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 management 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 specialized 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, 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, Jackie Luan, Peter Golder, Ellie Kyung, 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 14th edition, I received some extremely helpful research assistance from two former Tuck MBAs Jeff Davidson and Lowey Sichol 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. 20 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 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 21 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 The talented staff at Pearson Education deserves praise for their role in shaping the 14th edition. We want to thank our editor, Melissa Sabella, for her contribution to this revision. We also want to thank our project manager, Kierra Bloom, for making sure everything was moving along and falling into place in such a personable way, both with regard to the book and supplements. 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 want to acknowledge the fine production work of Ann Pulido, the creative design work of Blair Brown, and the editorial assistance of Elizabeth Scarpa. We thank Denise Vaughn for her work on the media package. We also thank our marketing manager, Anne Fahlgren. 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 22 Pearson wishes to thank and acknowledge the following people for their work on the Global Edition: Dr. Naila Aaijaz, Faculty of Entrepreneurship and Business, University Malaysia Kelantan, Malaysia John Allee, Senior Lecturer Marketing, The American University of Sharjah, United Arab Emirates Dr. Samar M. Baqer, Assistant Professor, Department of Management and Marketing, Kuwait University, Kuwait Dr. Mohsen A. Bagnied, Associate Professor, Division of Business and Economics, American University of Kuwait, Kuwait Professor Richard Beswick, Lecturer, University of Applied Sciences, Switzerland Dr. Yoosuf A. Cader, Associate Professor (Marketing), Researcher in Marketing and Knowledge Management, College of Business, Zayed University, Abu Dhabi, United Arab Emirates Dr. Efthymios Constantinides, Assistant Professor, School of Management and Governance University of Twente, The Netherlands Professor Dr. Mohamed Dahlan Bin Ibrahim, Faculty of Entrepreneurship & Business, University Malaysia Ketalan, Malaysia Jan Møller Jensen, Associate Professor, Department of Marketing and Management, University of Southern Denmark, Denmark K. Raja Kumar K. Kathiravelu, Lecturer, Department of Marketing, University Tunku Abdul Rahman, Malaysia Winnie Leow Chye Huang, Senior Lecturer, Marketing and Retail, Singapore Polytechnic Business School, Singapore Leung Chi-hong, Teaching Fellow, Department of Management and Marketing, The Hong Kong Polytechnic University, Hong Kong Dr. Leung Lai-cheung, Leo, Senior Teaching Fellow, Department of Marketing and International Business, Lingnan University, Hong Kong Gary Lin Guo Xin, School of Business, Temasek Polytechnic, Singapore Sue Lou, School of Business, Temasek Polytechnic, Singapore Maha Mourad, Assistant Professor of Marketing, School of Business, American University in Cairo, Egypt Reena Ng Su Eng, School of Business, Temasek Polytechnic, Singapore Huldan Dereli, Assistant Professor, School of Advanced Vocational Studies, Istanbul Bilgi University, Turkey Steven Ng Chee Kuen, School of Business, Temasek Polytechnic, Singapore Dr. Frances Ekwulugo, Senior Lecturer, Westminster Business School, The University of Westminster, UK Christian D. Pentz, Lecturer, Department of Business Management, Stellenbosch University, South Africa Prof. Dr. Michael A. Grund, Head of Center for Marketing, HWZ University of Applied Sciences in Business Administration Zurich, Switzerland Susan Scoffield, Senior Lecturer in Marketing, Department of Business & Management, Manchester Metropolitan University, UK Ali Zakaria El Hallak, Interactive Manager - Nokia KSA & Yemen, Wundermann Middle East Philip Siow Khing Shing, School of Business, Temasek Polytechnic, Singapore Dr. Hooi Den Huan, Director, Nanyang Technopreneurship Center, Nanyang Technological University, Singapore Dr. Joseph A. Sy-Changco, Assistant Professor, Faculty of Business Administration, University of Macau, China Bhooma Janakiramanan, Research Associate, Centre for Applied Research, SIM University Singapore Yeong Wai Mun, Mandy, University Tunku Abdul Rahman, Malaysia Peter B. Mason, Instructor of Marketing, School of Business and Management, American University of Sharjah, United Arab Emirates Dr. Che Aniza Binti Che Wel, Senior Lecturer, Faculty of Economics and Management, University Kebangsaan Malaysia, Malaysia 23 PART 1 Understanding Marketing Management Chapter 1 | Defining Marketing for the 21st Century Chapter 2 | Developing Marketing Strategies and Plans ter p ha C 1 In This Chapter, We Will Address the Following Questions 1. Why is marketing important? 2. What is the scope of marketing? 3. What are some core marketing concepts? 4. How has marketing management changed in recent years? 5. What are the tasks necessary for successful marketing management? One of the key factors in Barack Obama s victory in the 2008 U.S. presidential election was a well-designed and well-executed marketing program. Defining Marketing for the 21st Century Formally or informally, people and organizations engage in a vast number of activities we could call marketing. Good marketing has become increasingly vital for success. But what constitutes good marketing is constantly evolving and changing. The election of Barack Obama as the 44th President of the United States was attributed, in part, to the adoption of new marketing practices. The Obama for America presidential campaign combined a charismatic politician, a powerful message of hope, and a thoroughly integrated modern marketing program. The marketing plan needed to accomplish two very different goals: expand the electorate via broader messages while targeting very specific audiences. Multimedia tactics combined offline and online media, as well as free and paid media. When research showed that the more voters learned about Obama, the more they identified with him, the campaign added long-form videos to traditional print, broadcast, and outdoor ads. The Obama team aided by its agency GMMB also put the Internet at the heart of the campaign, letting it serve as the central nervous system for PR, advertising, advance work, fund-raising, and organizing in all 50 states. Their guiding philosophy was to build online tools to help people selforganize and then get out of their way. Technology was a means to Good marketing is no accident, but a result of careful empower people to do what they were interested in doing in the first planning and execution using state-of-the-art tools and place. Although social media like Facebook, Meetup, YouTube, and techniques. It becomes both an art and a science as marketers Twitter were crucial, perhaps Obama s most powerful digital tool was a strive to find creative new solutions to often-complex massive 13.5 million name e-mail list. What were the results of these challenges amid profound changes in the 21st century online efforts? About $500 million (most in sums of less than $100) marketing environment. In this book, we describe how top was raised online from 3 million donors; 35,000 groups organized marketers balance discipline and imagination to address these through the Web site,; 1,800 videos posted to new marketing realities. In the first chapter, we lay the YouTube; the creation of Facebook s most popular page; and, of foundation by reviewing important marketing concepts, tools, frameworks, and issues. course, the election of the next President of the United States.1 The Importance of Marketing The first decade of the 21st century challenged firms to prosper financially and even survive in the face of an unforgiving economic environment. Marketing is playing a key role in addressing those challenges. 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. 25 26 PART 1 U NDERSTANDING MARKETING MANAGEMENT Marketing s broader importance extends to society as a whole. Marketing has helped introduce and gain acceptance of new products that have eased or enriched people s lives. It can inspire enhancements in existing products as marketers innovate to improve their position in the marketplace. Successful marketing builds demand for products and services, which, in turn, creates jobs. By contributing to the bottom line, successful marketing also allows firms to more fully engage in socially responsible activities.2 CEOs recognize the role of marketing in building strong brands and a loyal customer base, intangible assets that contribute heavily to the value of a firm. Consumer goods makers, health care insurers, nonprofit organizations, and industrial product manufacturers all trumpet their latest marketing achievements. Many 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).3 Making the right marketing decisions isn t always easy. One survey of more than a thousand senior marketing and sales executives revealed that although 83 percent felt that marketing and sales capabilities were a top priority for their organization s success, in rating their actual marketing effectiveness, only 6 percent felt that they were doing an extremely good job.4 Marketers must decide what features to design into a new product or service, what prices to set, where to sell products or offer services, and how much to spend on advertising, sales, the Internet, or mobile marketing. They must make those decisions in an Internet-fueled environment where consumers, competition, technology, and economic forces change rapidly, and the consequences of the marketer s words and actions can quickly multiply. Domino s When two employees in Conover, North Carolina, posted a YouTube video showing themselves preparing sandwiches while putting cheese up their noses and violating other health-code standards, Domino s learned an important lesson about PR and brand communications in a modern era. Once it found the employees who claimed the video was just a gag and the sandwiches were never delivered the company fired them. In just a few days, however, there had been more than a million downloads of the video and a wave of negative publicity. When research showed that perception of quality for the brand had turned from positive to negative in that short time, the firm aggressively took action through social media such as Twitter, YouTube, and others.5 After a distasteful video was posted online by two employees, Domino s Pizza learned a valuable lesson about the power of social media. As Domino s learned, in an era of connectivity, it is important to respond swiftly and decisively. While marketers were coming to grips with this increasingly wired world, the economic recession of 2008 2009 brought budget cuts and intense pressure from senior management to make every marketing dollar count. More than ever, marketers need to understand and adapt to the latest marketplace developments. At greatest risk are firms 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. Skillful marketing is a never-ending pursuit. Consider how some top firms drive business: * * * OfficeMax promoted a new line of products by professional organizer Peter Walsh with Web videos and in-store events featuring local experts demonstrating his OfficeMax-branded organizing system. eBay promoted its Let s Make a Daily Deal holiday promotion by recreating the famous 1970s TV game show Let s Make a Deal in Times Square, adding an online component so people outside New York City could play. Johnson & Johnson launched to help new parents. Its success is thought to have contributed to subscription slumps experienced by parenting magazines. Good marketers are always seeking new ways to satisfy customers and beat competition.6 D EFINING MARKETING FOR THE 21ST CENTURY The Scope of Marketing To prepare 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 eBay recognized that people were unable to locate some of the items they desired most, it created an online auction clearinghouse. When IKEA noticed that people wanted good furnishings at substantially lower prices, it created knockdown furniture. These two firms demonstrated marketing savvy and turned a private or social need into a profitable 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.7 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. 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, a leading management theorist, puts it this way: 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.8 When Nintendo designed its Wii game system, when Canon launched its ELPH digital camera line, and when Toyota introduced its Prius hybrid automobile, these manufacturers were swamped with orders because they had designed the right product, based on doing careful marketing homework. What Is Marketed? Marketers market 10 main types of entities: goods, services, events, experiences, persons, places, properties, organizations, 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 70 30 services-to-goods mix. 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 both companies and fans. | CHAPTER 1 27 28 PART 1 U NDERSTANDING MARKETING MANAGEMENT The Rolling Stones have done a masterful job of marketing their rebellious form of rock and roll to audiences of all ages. EXPERIENCES By orchestrating several services and goods, a firm can create, stage, and market experiences. Walt Disney World s Magic Kingdom allows customers to visit a fairy kingdom, a pirate ship, or a haunted house. There is also a market for customized experiences, such as a week at a baseball camp with retired baseball greats, a four-day rock and roll fantasy camp, or a climb up Mount Everest.9 PERSONS Artists, musicians, CEOs, physicians, high-profile lawyers and financiers, and other professionals all get help from celebrity marketers.10 Some people have done a masterful job of marketing themselves David Beckham, Oprah Winfrey, and the Rolling Stones. Management consultant Tom Peters, 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.11 Place marketers include economic development spets, real estate agents, commercial banks, local business associations, and advertising and public relations agencies. The Las Vegas Convention & Visitors Authority succeeded with its provocative ad campaign, What Happens Here, Stays Here, portraying Las Vegas as an adult playground. In the recession of 2008, however, convention attendance declined. Concerned about its potentially out-of-step racy reputation, the Authority took out a full-page BusinessWeek ad to defend its ability to host serious business meetings. Unfortunately, the 2009 summer box office blockbuster The Hangover, set in a debauched Las Vegas, likely did not help the city position itself as a choice business and tourist destination.12 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 Organizations work to build a strong, favorable, and unique image in the minds of their target publics. In the United Kingdom, Tesco s Every Little Helps marketing program reflects the food marketer s attention to detail in everything it does, within the store and in the community and environment. The campaign has vaulted Tesco to the top of the UK supermarket chain industry. Universities, museums, performing arts organizations, corporations, and nonprofits all use marketing to boost their public images and compete for audiences and funds. INFORMATION The production, packaging, and distribution of information are major industries.13 Information is essentially what books, schools, and universities produce, market, and distribute at a price to parents, students, and communities. The former CEO of Siemens Medical D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 29 For a city like Las Vegas that thrives on tourism, good marketing is essential. Solutions USA, Tom McCausland, says, [our product] is not necessarily an X-ray or an MRI, but information. Our business is really health care information technology, and our end product is really an electronic patient record: information on lab tests, pathology, and drugs as well as voice dictation. 14 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 are busy promoting 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. One of the most important areas of marketing is the work that social marketers do to promote socially desirable behaviors. 30 PART 1 U NDERSTANDING MARKETING MANAGEMENT Marketers are skilled at stimulating demand for their products, but that s a limited view of what they do. Just as production and logistics professionals are responsible for supply management, marketers are responsible for demand management. They seek to influence the level, timing, and composition of demand to meet the organization s objectives. Eight demand states are possible: 1. 2. 3. 4. 5. 6. 7. 8. Negative demand Consumers dislike the product and may even pay to avoid it. Nonexistent demand Consumers may be unaware of or uninterested in the product. Latent demand Consumers may share a strong need that cannot be satisfied by an existing product. Declining demand Consumers begin to buy the product less frequently or not at all. Irregular demand Consumer purchases vary on a seasonal, monthly, weekly, daily, or even hourly basis. Full demand Consumers are adequately buying all products put into the marketplace. Overfull demand More consumers would like to buy the product than can be satisfied. 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, 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 use the term market to cover various groupings of customers. They view sellers as constituting the industry and buyers as constituting the market. They talk about need markets (the diet-seeking market), product markets (the shoe market), demographic markets (the youth market), and geographic markets (the Chinese market); or they extend the concept to cover voter markets, labor markets, and donor markets, for instance. Figure 1.2 shows the relationship between the industry and the market. Sellers and buyers are connected by four flows. Sellers send goods and services and communications such as ads and direct mail to the market; in return they receive money and information such as customer attitudes and sales data. The inner loop shows an exchange of money for goods and services; the outer loop shows an exchange of information. |Fig. 1.1| Resources Resources Resource markets Money Structure of Flows in a Modern Exchange Economy Services, money Manufacturer markets Taxes, goods Money Services, money Taxes Government markets Taxes, goods Services Services, money Taxes, goods Money Money Goods and services Consumer markets Intermediary markets Goods and services D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 Communication |Fig. 1.2| Goods/services A Simple Marketing System Market (a collection of buyers) Industry (a collection of sellers) Money 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 spend a great deal of time establishing a strong brand image by developing a superior product and packaging, ensuring its availability, and backing it with engaging communications and reliable service. Business Markets Companies selling business goods and services often face well-informed professional buyers skilled at evaluating competitive offerings. Business buyers buy goods to make or resell a product to others at a profit. Business marketers must demonstrate how their products will help achieve higher revenue or lower costs. Advertising can play a role, but the sales force, the price, and the company s reputation may play a greater one. Global Markets Companies in the global marketplace must decide which countries to enter; how to enter each (as an exporter, licenser, joint venture partner, contract manufacturer, or solo manufacturer); how to adapt product and service features to each country; how to price products in different countries; and how to design communications for different cultures. They face different requirements for buying and disposing of property; cultural, language, legal and political differences; and currency fluctuations. Yet, the payoff can be huge. 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. Lower selling prices affect the features and quality the seller can build into the offering. Much government purchasing calls for bids, and buyers often focus on practical solutions and favor the lowest bid in the absence of extenuating factors.15 MARKETPLACES, MARKETSPACES, AND METAMARKETS The marketplace is physical, such as a store you shop in; the marketspace is digital, as when you shop on the Internet.16 Northwestern University s Mohan Sawhney has proposed the concept of a metamarket to describe a cluster of complementary products and services closely related in the minds of consumers, but spread across a diverse set of industries. Metamarkets are the result of marketers packaging a system that simplifies carrying out these related product/service activities. The automobile metamarket consists of automobile manufacturers, new and used car dealers, financing companies, insurance companies, mechanics, spare parts dealers, service shops, auto magazines, classified auto ads in newspapers, and auto sites on the Internet. A car buyer will engage many parts of this metamarket, creating an opportunity for metamediaries to assist him or her in moving seamlessly through them. Edmund s ( lets a car buyer find the stated features and prices of different automobiles and easily click to other sites to search for the lowest-price dealer for financing, accessories, and used cars. Metamediaries also serve other metamarkets, such as home ownership, parenting and baby care, and weddings.17 Core Marketing Concepts To understand the marketing function, we need to understand the following core set of concepts. 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 31 32 PART 1 U NDERSTANDING MARKETING MANAGEMENT when they are directed to specific objects that might satisfy the need. A U.S. consumer needs food but may want a Philly cheesesteak and an iced tea. A person in Afghanistan needs food but may want rice, lamb, and carrots. 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 are able to buy one. Companies must measure not only how many people want their product, but also how many are willing and able to buy it. These distinctions shed light on the frequent criticism that marketers create needs or marketers get people to buy things they don t want. Marketers do not create needs: Needs preexist marketers. Marketers, along with other societal factors, influence wants. They might promote the idea that a Mercedes would satisfy 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 that they cannot articulate. What does it mean when the customer asks for a powerful lawn mower or a peaceful hotel? The marketer must probe further. We can distinguish five types of needs: 1. 2. 3. 4. 5. Stated needs (The customer wants an inexpensive car.) Real needs (The customer wants a car whose operating cost, not initial price, is low.) Unstated needs (The customer expects good service from the dealer.) Delight needs (The customer would like the dealer to include an onboard GPS navigation system.) 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.18 Consumers did not know much about cellular phones when they were first introduced, and Nokia and Ericsson fought 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, college, or movie. Therefore, marketers start by dividing the market into segments. They identify and profile distinct groups of buyers who might prefer or require varying product and service mixes by examining demographic, psychographic, and behavioral differences among buyers. After identifying market segments, the marketer decides which present the greatest opportunities which are its target markets. For each, the firm develops a market offering that it positions in the minds of the target buyers as delivering some central benefit(s). Volvo develops its cars for buyers to whom safety is a major concern, positioning its vehicles as the safest a customer can buy. 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 McDonald s carries many associations in people s minds that make up its image: hamburgers, cleanliness, convenience, courteous service, and golden arches. All companies strive to build a brand image with as many strong, favorable, and unique brand associations as possible. 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 to her. 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 the performance falls short of expectations, the customer is disappointed. If it matches expectations, the customer is satisfied. If it exceeds them, the customer is delighted. D EFINING MARKETING FOR THE 21ST CENTURY 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, 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. Marketers are increasingly adding dialogue channels such as e-mail, blogs, and toll-free numbers to familiar monologue channels such as ads. The marketer uses distribution channels to 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, wholesalers, 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. Supply Chain The supply chain is a longer channel stretching from raw materials to components to finished products carried to final buyers. The supply chain for coffee may start with Ethiopian farmers who plant, tend, and pick the coffee beans, selling their harvest to wholesalers or perhaps a Fair Trade cooperative. If sold through the 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 developing world where it can sell it directly or via retail channels. Each company 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. 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 minimill such as Nucor at a cost savings, or it can buy aluminum for certain 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 would be thinking too narrowly about its competition if it thought only of other integrated steel companies. In the long run, U.S. Steel is more likely to be hurt by substitute products than by other steel companies. Marketing Environment TerraCycle The marketing environment consists of the task environment and the broad environment. The task environment 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, transportation companies, and telecommunications companies. Distributors and dealers include agents, brokers, manufacturer 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 environment. 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. Here are two good examples. TerraCycle After finding that some of his friend s indoor herbal plants flourished with a fertilizer made by feeding table scraps to red wiggler worms in a composting bin, TerraCycle founder Tom Szaky came up with an idea for a business. TerraCycle is devoted to upcycling, finding new ways to use nonrecyclable waste materials. Plastic bags become sturdy | CHAPTER 1 33 PART 1 U NDERSTANDING MARKETING MANAGEMENT totes, yogurt cups become plant holders, and cookie wrappers become notebook covers, all distributed by major retailers such as Home Depot, Whole Foods, and Walmart. The firm also has partnerships with Kraft, Target, Honest Tea, Stonyfield Farms, and others. Schools, churches, wineries, and nonprofits provide space to store donated used bottles, corks, and candy wrappers. For each item collected, TerraCycle makes a donation to a charity (typically 2 cents).19 34 has cooked up a winning online formula by blending recipes posted by individuals with those provided by corporations promoting their own products like Kraft cheese or Campbell s Soup. After almost a 50 percent increase in site visits and unique visitors in 2009, the Web site overtook the Food Network s recipe site as the market leader. With tens of thousands of posted recipes, it thrives on people s willingness to share recipes and the satisfaction they feel if their recipe becomes popular with others. The viral nature of the site s success is obvious it doesn t spend any money on advertising! Users tend to think of it as their site not something with a big company behind it.20 The New Marketing Realities We can say with some confidence that the marketplace isn t what it used to be. It is dramatically different from what it was even 10 years ago. Major Societal Forces Today, major, and sometimes interlinking, societal forces have created new marketing behaviors, opportunities, and challenges. Here are 12 key ones. * * * * * * * Network information technology. The digital revolution has created an Information Age that promises to lead to more accurate levels of production, more targeted communications, and more relevant pricing. Globalization. Technological advances in transportation, shipping, and communication have made it easier for companies to market in, and consumers to buy from, almost any country in the world. International travel has continued to grow as more people work and play in other countries. Deregulation. Many countries have deregulated industries to create greater competition and growth opportunities. 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, such as the massive telecom company Telefónica CTC in Chile and the international airline British Airways in the United Kingdom. Heightened competition. Intense competition among domestic and foreign brands raises marketing costs and shrinks profit margins. Brand manufacturers are further buffeted by powerful retailers that market their own store brands. Many strong brands have become megabrands and extended into a wide variety of related product categories, presenting a significant competitive threat. Industry convergence. Industry boundaries are blurring as companies recognize new opportunities at the intersection of two or more industries. The computing and consumer electronics industries are converging, for example, as Apple, Sony, and Samsung release a stream of entertainment devices from MP3 players to plasma TVs and camcorders. Digital technology fuels this massive convergence.21 Retail transformation. Store-based retailers face competition from catalog houses; directmail firms; newspaper, magazine, and TV direct-to-customer ads; home shopping TV; and e-commerce. In response, entrepreneurial retailers are building entertainment into D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 35 Modern retailers increasingly emphasize in-store experiences for their customers, as does Dick s Sporting Goods. * * * * * their stores with coffee bars, demonstrations, and performances, marketing an experience rather than a product assortment. Dick s Sporting Goods has grown from a single bait-andtackle store in Binghamton, New York, into a 300-store sporting goods retailer in 30 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.22 Disintermediation. The amazing success of early dot-coms such as AOL,, Yahoo!, eBay, E*TRADE, and others created disintermediation in the delivery of products and services by intervening in the traditional flow of goods through distribution channels. These firms struck terror into the hearts of established manufacturers and retailers. In response, traditional companies engaged in reintermediation and became brick-and-click retailers, adding online services to their offerings. Some became stronger contenders than pure-click firms, because they had a larger pool of resources to work with and established brand names. Consumer buying power. In part, due to disintermediation via the Internet, consumers have substantially increased their buying power. From the home, office, or mobile phone, they can compare product prices and features and order goods online from anywhere in the world 24 hours a day, 7 days a week, bypassing limited local offerings and realizing significant price savings. Even business buyers can run a reverse auction in which sellers compete to capture their business. They can readily join others to aggregate their purchases and achieve deeper volume discounts. Consumer information. Consumers can collect information in as much breadth and depth as they want about practically anything. They can access online encyclopedias, dictionaries, medical information, movie ratings, consumer reports, newspapers, and other information sources in many languages from anywhere in the world. Personal connections and user-generated content thrive on social media such as Facebook, Flickr (photos), (links), Digg (news stories), Wikipedia (encyclopedia articles), and YouTube (video).23 Social networking sites such as Dogster for dog lovers, TripAdvisor for ardent travelers, and Moterus for bikers bring together consumers with a common interest. At auto enthusiasts talk about chrome rims, the latest BMW model, and where to find a great local mechanic.24 Consumer participation. Consumers have found an amplified voice to influence peer and public opinion. In recognition, companies are inviting them to participate in designing and even marketing offerings to heighten their sense of connection and ownership. Consumers see their favorite companies as workshops from which they can draw out the offerings they want. Consumer resistance. Many customers today feel there are fewer real product differences, so they show less brand loyalty and become more price- and quality-sensitive in their search for value, and less tolerant about undesired marketing. A Yankelovich study 36 PART 1 U NDERSTANDING MARKETING MANAGEMENT found record levels of marketing resistance from consumers; a majority reported negative opinions about marketing and advertising and said they avoid products they feel are overmarketed.25 New Company Capabilities These major societal forces create complex challenges for marketers, but they have also generated a new set of capabilities to help companies cope and respond. * * * * Sammy Stephen s viral video helped his flea market receive unprecedented attention. Marketers can use the Internet as a powerful information and sales channel. The Internet augments marketers geographical reach to inform customers and promote products worldwide. A Web site can list products and services, history, business philosophy, job opportunities, and other information of interest. In 2006, a Montgomery, Alabama, flea market gained national popularity when owner Sammy Stephens s rap-style advertisement spread virally through the Internet. Created for $1,500, the advertisement was viewed more than 100,000 times on YouTube and landed Stephens on T he Ellen DeGeneres Show . Stephens now sells T-shirts, ring tones, and other branded merchandise through his Web site, advises retailers about advertising, and hosts hundreds of visitors from all over the world at his store each month.26 Marketers 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 netted an extra 30 million shoppers and $12 billion a year in revenue across 4,000 stores.27 Marketers can tap into social media to amplify their brand message. Marketers can feed information and updates to consumers via blogs and other postings, support online communities, and create their own stops on the Internet superhighway. Dell Corporation s @DellOutlet Twitter account has more than 600,000 followers. Between 2007 and June 2009, Dell took in more than $2 million in revenue from coupons provided through Twitter, and another $1 million from people who started at Twitter and went on to buy a new computer on the company s Web site.28 Marketers can facilitate and speed external communication among customers. Marketers can also create or benefit from online and offline buzz through brand advocates and user D EFINING MARKETING FOR THE 21ST CENTURY * * * * * * communities. Word-of-mouth marketing agency BzzAgent has assembled a nationwide volunteer army of 600,000 consumers who join promotional programs for products and services they deem worth talking about.29 In 2005, Dunkin Donuts hired BzzAgent to help launch a new espresso beverage, Latte Lite. Three thousand trained volunteers (called BzzAgents) in 12 test markets experienced the Latte Lite, formed their opinions, engaged in natural conversations about the product, and reported back to BzzAgent via the company s reporting interface. After four weeks, product sales had increased by more than 15 percent in test markets.30 Marketers can send ads, coupons, samples, and information to customers who have requested them or given the company permission to send them. Micro-target marketing and two-way communication are easier thanks to the proliferation of special-interest magazines, TV channels, and Internet newsgroups. Extranets linking suppliers and distributors let firms send and receive information, place orders, and make payments more efficiently. The company can also interact with each customer individually to personalize messages, services, and the relationship. Marketers can reach consumers on the move with mobile marketing. Using GPS technology, marketers can pinpoint consumers exact location and send them messages at the mall with coupons good only that day, a reminder of an item on their wish list, and a relevant perk (buy this book today and get a free coffee at the bookstore s coffee shop). Locationbased advertising is attractive because it reaches consumers closer to the point of sale. Firms can also advertise on video iPods and reach consumers on their cell phones through mobile marketing.31 Companies can make and sell individually differentiated goods. Thanks to advances in factory customization, computer technology, and database marketing software, customers can buy M&M candies, TABASCO jugs, or Maker s Mark bottles with their names on them; Wheaties boxes or Jones soda cans with their picture on the front; and Heinz ketchup bottles with customized messages.32 BMW s technology allows buyers to design their own car models from among 350 variations, with 500 options, 90 exterior colors, and 170 trims. The company claims that 80 percent of the cars bought in Europe and up to 30 percent bought in the United States are built to order. 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. Retailer Patagonia has joined Walt Disney, General Motors, and McDonald s in embracing corporate blogging to communicate with the public and employees. Patagonia s The Cleanest Line posts environmental news, reports the results of its sponsored athletes, and posts pictures and descriptions of employees favorite outdoor locations.33 Companies can facilitate and speed up internal communication among their employees by using the Internet as a private intranet. Employees can query one another, seek advice, and download or upload needed information from and to the company s main computer. Seeking a single online employee portal that transcended business units, General Motors launched a platform called mySocrates in 2006 consisting of announcements, news, links, and historical information. GM credits the portal with $17.4 million in cost savings to date.34 Companies can improve their cost efficiency by skillful use of the Internet. 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. Marketing in Practice Not surprisingly, these new marketing forces and capabilities have profoundly changed marketing management. In theory, the marketing planning process consists of analyzing marketing opportunities, selecting target markets, designing marketing strategies, developing marketing programs, and managing the marketing effort. | CHAPTER 1 37 Companies are increasingly allowing customers to customize their products, such as with personalized messages on the front labels of Heinz ketchup bottles. 38 PART 1 U NDERSTANDING MARKETING MANAGEMENT In practice, however, in the highly competitive marketplaces that are more often the norm, marketing planning is more fluid and is continually refreshed. Companies must always be moving forward with marketing programs, innovating products and services, staying in touch with customer needs, and seeking new advantages rather than relying on past strengths. This is especially true of incorporating the Internet into marketing plans. Marketers must try to balance increased spending on search advertising, social media, direct e-mail, and text/SMS marketing efforts with appropriate spending 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. Marketing Insight: Marketing in an Age of Turbulence offers some recommendations for adjusting to new marketing realities. 4. Marketing Insight Marketing in an Age of Turbulence The severe economic recession of 2008 2009 caused marketers to rethink best practices of management. Philip Kotler and John Caslione see management entering a new Age of Turbulence in which chaos, risk, and uncertainty characterize many industries, markets, and companies. According to them, turbulence is the new normal, punctuated by periodic and intermittent spurts of prosperity and downturn including extended downturns amounting to recession, or even depression. They see many new challenges in the foreseeable future, and unlike past recessions, there may be no assurance that a return to past management practices would ever be successful again. According to Kotler and Caslione, marketers should always be ready to activate automatic responses when turbulence whips up and chaos reigns in. They recommend marketers keep these eight factors in mind as they create chaotics marketing strategies. 1. Secure your market share from core customer segments. This is not a time to get greedy, so get your core customer segments firmly secured, and be prepared to ward off attacks from competitors seeking your most profitable and loyal customers. 2. Push aggressively for greater market share from competitors. All companies fight for market share, and in turbulent and chaotic times, many have been weakened. Slashing marketing budgets and sales travel expenses is a sure sign a competitor is buckling under pressure. Push aggressively to add to your core customer segments at the expense of your weakened competitors. 3. Research customers more now, because their needs and wants are in flux. Everyone is under pressure during times of turbulence and chaos, and all customers even those in your core segments whom you know so well are changing. Stay close to 5. 6. 7. 8. them as never before. Research them more than ever. Don t find yourself using old, tried-and-true marketing messages that no longer resonate with them. Minimally maintain, but seek to increase, your marketing budget. With your competitors aggressively marketing to your core customers, this is the worst time to think about cutting anything in your marketing budget that targets them. In fact, you need to add to it, or take money away from forays into totally new customer segments. It s time to secure the home front. Focus on all that s safe and emphasize core values. When turbulence is scaring everyone in the market, most customers flee to higher ground. They need to feel the safety and security of your company and your products and services. Do everything possible to tell them that continuing to do business with you is safe, and to sell them products and services that keep making them feel safe. Drop programs that aren t working for you quickly. Your marketing budgets will always be scrutinized, in good times and bad times. If anyone is to cut one of your programs, let it be you, before anyone else spots any ineffective ones. If you re not watching, rest assured someone else is, including your peers whose budgets couldn t be protected from the axe. Don t discount your best brands. Discounting your established and most successful brands tells the market two things: your prices were too high before, and your products won t be worth the price in the future once the discounts are gone. If you want to appeal to more frugal customers, create a new brand with lower prices. This lets value-conscious customers stay close to you, without alienating those still willing to pay for your higher-priced brands. Once the turbulence subsides, you may consider discontinuing the value product line or not. Save the strong; lose the weak. In turbulent markets, your strongest brands and products must become even stronger. There s no time or money to be wasted on marginal brands or products that lack strong value propositions and a solid customer base. Appeal to safety and value to reinforce strong brands and product and service offerings. Remember, your brands can never be strong enough, especially against the waves of a turbulent economy. Source: Based on Philip Kotler and John A. Caslione, Chaotics: The Business and Marketing in the Age of Turbulence (New York: AMACOM, 2009) pp. 151 153. D EFINING MARKETING FOR THE 21ST CENTURY THE NEW CMO The rapidly changing marketing environment is putting even greater demands on marketing executives. A well-publicized survey revealed that the average CMO tenure at U.S. companies is about 28 months, well below the average tenure of CEOs (54 months) or other C-level positions. One explanation is that the role of marketing and thus management expectations varies widely among firms. Harvard s Gail McGovern and John Quelch find tremendous variability in CMO responsibilities and job descriptions.35 Another challenge CMOs face is that the success factors for top marketers are many and varied. CMOs must have strong quantitative skills but also well-honed qualitative skills; they must have an independent, entrepreneurial attitude but also work in close harmony with other departments such as sales; and they must capture the voice and point of view of consumers yet have a keen bottomline understanding of how marketing creates value within their organization.36 One survey asked 200 senior-level marketing executives which innate and learned qualities were most important; here are their answers:37 Innate Qualities Risk taker Willingness to make decisions Problem-solving ability Change agent Results-oriented Learned Qualities Global experience Multichannel expertise Cross-industry experience Digital focus Operational knowledge Perhaps the most important role for any CMO is to infuse a customer perspective and orientation in business decisions affecting any customer touch point (where a customer directly or indirectly interacts with the company in some form). The CMO of lodging franchisor Choice Hotels International, Chris Malone, is responsible for directing virtually all customer-facing efforts for the firm, including:38 Advertising, loyalty programs, and direct response; Guiding the company s central reservations systems, including its call centers, Web site, and relationships with outside travel vendors such as Travelocity and Orbitz; and Heading up the company s global group sales efforts with organizations such as AAA, AARP, and professional sports teams. MARKETING IN THE ORGANIZATION Although an effective CMO is crucial, increasingly marketing is not done only by the marketing department. Because marketing must affect every aspect of the customer experience, marketers must properly manage all possible touch points store layouts, package designs, product functions, employee training, and shipping and logistics methods. Marketing must also be influential in key general management activities, such as product innovation and new-business development. To create a strong marketing organization, marketers must think like executives in other departments, and executives in other departments must think more like marketers.39 As the late David Packard of Hewlett-Packard observed, Marketing is far too important to leave to the marketing department. Companies now know that every employee has an impact on the customer and must see the customer as the source of the company s prosperity. So they re beginning to emphasize interdepartmental teamwork to manage key processes. They re emphasizing the smooth management of core business processes, such as new-product realization, 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? Increasingly, marketers operate consistent with the holistic marketing concept. Let s first review the evolution of earlier marketing ideas. | CHAPTER 1 39 40 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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 production efficiency, low costs, and mass distribution. This orientation makes sense in developing countries such as China, where the largest PC manufacturer, Legend (principal owner of Lenovo Group), and domestic appliances giant Haier take 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.40 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. 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-1950s41 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 prepare a perfect computer for its target market. Rather, it provides product platforms on which each person customizes the features he or she desires in the computer. The marketing concept holds that the key to achieving organizational goals is being more effective than competitors 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: 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.42 Several scholars found that companies embracing the marketing concept at that time achieved superior performance.43 The Holistic Marketing Concept Without question, the trends and forces that have defined the first decade of the 21st century are leading business firms to a new set of beliefs and practices. Marketing Memo: Marketing Right and Wrong suggests where companies go wrong and how they can get it right in their marketing. 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 marketing and that a broad, integrated perspective is often necessary. D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 Holistic marketing thus recognizes and reconciles the scope and complexities of marketing activities. Figure 1.3 provides a schematic overview of four broad components characterizing holistic marketing: relationship marketing, integrated marketing, internal marketing, and performance marketing. We ll examine these major themes throughout this book. Successful companies keep their marketing changing with the changes in their marketplace and marketspace. Marketing department Senior management Products & services Other departments Communications |Fig. 1.3| Channels Holistic Marketing Dimensions Integrated marketing Internal marketing Holistic marketing Sales revenue Brand & customer equity Relationship marketing Performance marketing Ethics Community Environment Legal marketing Memo Customers Partners Channel Marketing Right and Wrong The Ten Deadly Sins of Marketing The Ten Commandments of Marketing 1. The company is not sufficiently market focused and customer driven. 2. The company does not fully understand its target customers. 3. The company needs to better define and monitor its competitors. 4. The company has not properly managed its relationships with its stakeholders. 5. The company is not good at finding new opportunities. 6. The company s marketing plans and planning process are deficient. 7. The company s product and service policies need tightening. 8. The company s brand-building and communications skills are weak. 9. The company is not well organized to carry on effective and efficient marketing. 10. The company has not made maximum use of technology. 1. The company segments the market, chooses the best segments, and develops a strong position in each chosen segment. 2. The company maps its customers needs, perceptions, preferences, and behavior and motivates its stakeholders to obsess about serving and satisfying the customers. 3. The company knows its major competitors and their strengths and weaknesses. 4. The company builds partners out of its stakeholders and generously rewards them. 5. The company develops systems for identifying opportunities, ranking them, and choosing the best ones. 6. The company manages a marketing planning system that leads to insightful long-term and short-term plans. 7. The company exercises strong control over its product and service mix. 8. The company builds strong brands by using the most cost-effective communication and promotion tools. 9. The company builds marketing leadership and a team spirit among its various departments. 10. The company constantly adds technology that gives it a competitive advantage in the marketplace. Source: Adapted from Philip Kotler, Ten Deadly Marketing Sins (Hoboken, NJ: John Wiley & Sons, 2004) pp. 10, 145 148. 41 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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.44 Four key constituents for relationship marketing are customers, employees, marketing partners (channels, suppliers, 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. The ultimate outcome of relationship marketing is a unique company asset called a marketing network, consisting 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.45 Thus more companies are choosing to own brands rather than physical assets and 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 information about 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 customer s lifetime. These activities fall under what Columbia Business School professor Larry Selden and his wife and business consulting partner, Yoko Sugiura Selden, call customer centricity. The Seldens offer the Royal Bank of Canada as an example. Royal Bank of Canada Thinking of its business in terms of customer segments rather than product segments, Royal Bank of Canada (RBC) has put each of its roughly 11 million clients into meaningful segments whose profitability it can measure. In the process, it discovered a sizable subsegment of customers hidden within its broader categories of wealth preservers and wealth accumulators. Dubbed snowbirds, these individuals spent a number of months each winter in Florida, where they were experiencing difficulties establishing credit as well as missing their Canadian communities, particularly the familiarity of the French-Canadian accent and fluency in French. To meet their unique needs, RBC created a Canadian banking experience in Florida.46 Royal Bank of Canada 42 Because attracting a new customer may cost five times as much as retaining an existing one, relationship marketing also emphasizes customer retention. Companies build customer share by offering a larger variety of goods to existing customers, training employees in cross-selling and upselling. Marketing must skillfully conduct not only customer relationship management (CRM), but partner relationship 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. 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 from General Electric s Medical Systems division, for instance, it expects good installation, maintenance, and training services to go with the purchase. D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 43 All company communications also must be integrated. Using an integrated communication strategy means choosing communication options that 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 as well as improving the effectiveness of the others. Each must also deliver a consistent brand message at every contact. When BMW launched the modernized MINI Cooper in 2002, it employed an integrated marketing strategy in the United States that included a broad mix of media: billboards, posters, Internet, print, PR, product placement, and grassroots campaigns. 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, was used as seats in a sports stadium, and appeared in Playboy magazine as a centerfold. The imaginative integrated campaign built a six-month waiting list for the MINI Cooper. The company must also 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. Marketers must weigh the trade-off between having too many channels (leading to conflict among channel members and/or a lack of support) and too few (resulting in market opportunities being overlooked). Online marketing activities are increasingly prominent in building brands and sales. Created for $300,000 and no additional promotional expense, the Carnival Connections site made it easy for cruise fans to compare notes on destinations and onboard entertainment from casinos to conga lines. In a few short months, 2,000 of the site s 13,000 registered users planned trips aboard Carnival s 22 ships, generating an estimated $1.6 million in revenue for the company.47 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. It ensures that everyone in the organization embraces appropriate marketing principles, especially senior management. 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. Snowshoe Mountain Snowshoe Mountain in Snowshoe, West Virginia, embarked on a marketing program to better brand the ski resort with a promise of an authentic, rustic and engaging wilderness experience. In launching a branding initiative to define their goals and articulate what they wanted the Snowshoe Mountain To improve its guests experiences, Snowshoe Mountain ski resort engages in a series of internal marketing activities to build its brand promise with employees. 44 PART 1 U NDERSTANDING MARKETING MANAGEMENT brand to represent to visitors, the resort s marketers started inside. They incorporated the new brand promise in a 40-page brand book that contained the history of the resort and a list of seven attitude words that characterized how employees should interact with guests. On-mountain messaging and signs also reminded employees to deliver on the brand promise. All new hires received a brand presentation from the director of marketing to help them better understand the brand and become effective advocates.48 Marketing is no longer the responsibility of a single department it is a company-wide undertaking that drives the company s vision, mission, and strategic planning.49 It succeeds only when all departments work together to achieve customer goals (see Table 1.1): 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 in the right ways. Such interdepartmental harmony can only truly coalesce, however, when 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 department 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. 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. FINANCIAL 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.50 They re employing a broader variety of financial measures to assess the direct and indirect value their marketing efforts create and recognizing that much of their firms market value comes from intangible assets, particularly brands, customer base, employees, distributor and supplier relations, and intellectual capital. Marketing metrics can help firms quantify and compare their marketing performance along a broad set of dimensions. Marketing research and statistical analysis assess the financial efficiency and effectiveness of different marketing activities. Finally, firms can employ processes and systems to make sure they maximize the value from analyzing these different metrics. SOCIAL RESPONSIBILITY MARKETING Because the effects of marketing extend beyond the company and the customer to society as a whole, marketers must consider the ethical, environmental, legal, and social context of their role and activities.51 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. LG Electronics, Toshiba, and NEC Display Solutions D EFINING MARKETING FOR THE 21ST CENTURY TABLE 1.1 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 problems 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. | CHAPTER 1 45 46 U NDERSTANDING MARKETING MANAGEMENT PART 1 TABLE 1.2 Corporate Social Initiatives Type Description Example Corporate social marketing Supporting behavior change campaigns McDonald s promotion of a statewide childhood immunization campaign in Oklahoma Cause marketing Promoting social issues through efforts such as sponsorships, licensing agreements, and advertising McDonald s sponsorship of Forest (a gorilla) at Sydney s Zoo a 10-year sponsorship commitment, aimed at preserving this endangered species Cause-related marketing Donating a percentage of revenues to a specific cause based on the revenue occurring during the announced period of support McDonald s earmarking of $1 for Ronald McDonald Children s Charities from the sale of every Big Mac and pizza sold on McHappy Day Corporate philanthropy Making gifts of money, goods, or time to help nonprofit organizations, groups, or individuals McDonald s contributions to Ronald McDonald House Charities Corporate community involvement Providing in-kind or volunteer services in the community McDonald s catering meals for firefighters in the December 1997 bushfires in Australia Socially responsible business practices Adapting and conducting business practices that protect the environment and human and animal rights McDonald s requirement that suppliers increase the amount of living space for laying hens on factory farms Source: Philip Kotler and Nancy Lee, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause (Hoboken, NJ: Wiley, 2004). Copyright © 2005 by Philip Kotler and Nancy Lee. Used by permission of John Wiley & Sons, Inc. Stonyfield Farm Social responsibility has been at the core of Stonyfield Farm makers of all-natural organic yogurts from the start. Stonyfield s suppliers eschew the productivity practices of agribusiness, including the use of antibiotics, 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 and wind farms. The company dropped 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 makes low-fat versions of its products, and adds cultures or dietary supplements to help the immune system fight off illness. The attitudes and beliefs Stonyfield adopted have not hurt its financial performance as it has become the number-three yogurt brand in the United States.54 Stonyfield Farm Ben & Jerry s triple bottom line business philosophy is based on monitoring the environmental and social effects of its actions in addition to the profits from the sale of its products. offer electronic recycling programs, for instance, often providing consumers with prepaid postage to return old items. Retailers such as Office Depot, Best Buy, and AT&T offer similar programs in their stores. Table 1.2 displays some different types of corporate social initiatives, illustrated by McDonald s.52 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. 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 environmental 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.53 D EFINING MARKETING FOR THE 21ST CENTURY | CHAPTER 1 Updating The Four Ps 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.55 The marketing variables under each P are shown in Figure 1.4. 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 concept, we arrive at a more representative set that encompasses modern marketing realities: people, processes, programs, and performance, as in Figure 1.5. 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 they shop for and 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 appropriate role in all they do. Only by instituting the right set of processes to guide activities and programs can a firm engage in mutually beneficial long-term relationships. Another important set of processes guides the firm in 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. |Fig. 1.4| Marketing mix Product Product variety Quality Design Features Brand name Packaging Sizes Services Warranties Returns Place Channels Coverage Assortments Locations Inventory Transport Price List price Discounts Allowances Payment period Credit terms Marketing Mix Four Ps The Four P Components of the Marketing Mix Promotion Sales promotion Advertising Sales force Public relations Direct marketing Modern Marketing Management Four Ps Product People Place Processes Promotion Programs Price Performance |Fig. 1.5| The Evolution of Marketing Management 47 48 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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 community related). Finally, these new four Ps actually apply to all disciplines within the company, and by thinking this way, managers grow more closely aligned with the rest of the company. Marketing Management Tasks With the holistic marketing philosophy as a backdrop, we can identify a specific set of tasks that make up successful marketing management and marketing leadership. We ll use the following 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 35mm and digital cameras. Although Zeus has a sizable share and is producing revenue, the 35mm market is rapidly declining. 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 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. 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 marketing Memo Marketers Frequently Asked Questions 1. How can we spot and choose the right market segment(s)? 9. How can we keep our customers loyal longer? 2. How can we differentiate our offerings? 10. How can we tell which customers are more important? 3. How should we respond to customers who buy on price? 4. How can we compete against lower-cost, lower-price competitors? 11. How can we measure the payback from advertising, sales promotion, and public relations? 5. How far can we go in customizing our offering for each customer? 12. How can we improve sales force productivity? 6. How can we grow our business? 13. How can we establish multiple channels and yet manage channel conflict? 7. How can we build stronger brands? 14. How can we get the other company departments to be more customer-oriented? 8. How can we reduce the cost of customer acquisition? D EFINING MARKETING FOR THE 21ST CENTURY 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 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 benefits. Atlas will not want to market to all possible customers. It must divide the market into major market segments, evaluate each one, and target those it can best serve (see Chapter 8). Building Strong Brands Atlas must understand the strengths and weaknesses of the Zeus brand as customers see it (see Chapter 9). Is its 35mm film heritage a handicap in the digital camera market? 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, offering 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 also pay close attention to competitors (see Chapter 11), anticipating 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. Shaping the Market Offerings 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 12). To gain a competitive advantage, Atlas may provide leasing, delivery, repair, and training as part of its product offering (see Chapter 13). A critical marketing decision relates to price (see Chapter 14). 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 15). 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, wholesalers, and physical-distribution firms and how they make their decisions (see Chapter 16). 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 contribution of all communication activities (see Chapter 17). Atlas needs to set up mass communication programs consisting of advertising, sales promotion, events, and public relations (see Chapter 18). It also needs to plan more personal communications, in the form of direct and interactive marketing, as well as hire, train, and motivate salespeople (see Chapter 19). Creating Successful Long-Term Growth Based on its product positioning, Atlas must initiate new-product development, testing, and launching as part of its long-term view (see Chapter 20). The strategy should take into account changing global opportunities and challenges (see Chapter 21). | CHAPTER 1 49 50 PART 1 U NDERSTANDING MARKETING MANAGEMENT Finally, Atlas must build a marketing organization capable of implementing the marketing plan (see Chapter 22). 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.56 Summary 1. Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. 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, properties, organizations, information, and ideas. They also operate in four different marketplaces: consumer, business, global, and nonprofit. 3. Marketing is not done only by the marketing department. It needs to affect every aspect of the customer experience. To create a strong marketing organization, 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. These forces have created new opportunities and challenges and changed marketing management significantly as companies seek new ways to achieve marketing excellence. 5. There are five competing concepts under which organizations can choose to conduct their business: the production concept, the product concept, the selling 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 development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies. Holistic marketing recognizes that everything matters in marketing and that a broad, integrated perspective is often necessary. Four components of holistic marketing are relationship marketing, integrated marketing, internal marketing, and socially responsible 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, shaping the market offerings, delivering and communicating value, and creating long-term growth. 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 encourage 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 broad shifts in marketing. Do any themes emerge in them? Can you relate the shifts to the major societal forces? Which force has contributed to which shift? D EFINING MARKETING FOR THE 21ST CENTURY 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 athletes. Founder Philip Knight believed high-tech shoes for runners could be manufactured at competitive prices if imported from abroad. Nike s commitment to designing innovative footwear for serious athletes helped it build a cult following among U.S. consumers. Nike believed in a pyramid of influence in which the preferences of a small percentage of top athletes influenced the product and brand choices of others. From the start its marketing campaigns featured accomplished athletes. Runner Steve Prefontaine, the first spokesperson, had an irreverent attitude that matched the company s spirit. In 1985, Nike signed up then-rookie guard Michael Jordan as a spokesperson. Jordan was still an up-andcomer, but he personified superior performance. Nike s bet paid off the Air Jordan line of basketball shoes flew off the shelves and revenues hit over $100 million 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 featured 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. As Nike began expanding overseas to Europe, it found that its U.S.-style ads were seen as too aggressive. Nike realized it had to authenticate its brand in Europe, so it focused on soccer (known as 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 athletes 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 image in | CHAPTER 1 51 Europe from a sneaker company into a brand that represented emotion, allegiance, and identification. It also helped launch Nike into other international markets over the next decade, and by 2003, overseas revenues surpassed U.S. revenues for the first time. In 2007, Nike acquired Umbro, a British maker of soccer-related footwear, apparel, and equipment. The acquisition helped boost Nike s presence in soccer as the company became the sole supplier of uniforms to over 100 professional soccer teams around the world. Nike focused its efforts on international markets, especially China, during the 2008 Summer Olympics in Beijing. Although Nike s rival, Adidas, was the official sponsor of the Olympic Games, Nike received 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 and 11 of the 12 high-profile members on the United States men s basketball teams. That year, sales in the Asian region grew 15 percent to $3.3 billion and Nike s international divisions grew to 53 percent of the company s revenue. Some believed Nike s marketing strategy during the Olympics was more effective than Adidas s Olympic sponsorship. In addition to expanding the brand overseas, Nike successfully entered new athletic footwear, apparel, and equipment product categories by using endorsements from high-profile athletes and consumer outreach programs. The Nike Golf brand, endorsed by Tiger Woods, has changed the way professional golfers dress. Tiger s powerful influence on the game and his Nike emblazoned style have turned the greens at the majors into golf s fashion runway. In addition, Nike has used the superstar to help build its relationship with consumers. In 2009, it launched a Tiger Web Talkback session at, where fans could ask questions and hear Tiger talk about golf. The session was part of a nationwide Nike Golf consumer experience day, which included equipment demos, long-drive contests, and in-store specials. In tennis, Nike has aligned with 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. Nike teamed up with seven-time Tour de France champion Lance Armstrong not only to sell Nike products but also to help Armstrong s LIVESTRONG campaign. Nike designed, manufactured, and sold over 70 million yellow LIVESTRONG bracelets, netting $80 million for the Lance Armstrong Foundation. It also featured Armstrong s message of survival, willpower, and giving in a series of Nike commercials. To promote its line of basketball shoes and apparel, Nike continues to feature basketball superstars such as Kobe Bryant and LeBron James. In addition, it formed a partnership with Foot Locker to create a new chain of stores, House 52 PART 1 U NDERSTANDING MARKETING MANAGEMENT of Hoops by Foot Locker, which offers only basketball products by Nike brands such as Converse and Jordan. Recently, Nike s lead in the running category has grown to 60 percent market share thanks to its exclusive partnership with Apple. Nike (Plus) technology includes a sensor that runners put into their running shoes and a receiver, which fits into an iPod, iTouch, or iPhone. When the athlete goes for a run or hits the gym, the receiver captures his or her mileage, calories burned, and pace and stores it until the information is downloaded. Nike is now considered the world s largest running club. In 2008 and 2009, Nike hosted the Human Race 10K, the largest and only global virtual race in the world. The event, designed to celebrate running, drew 780,000 participants in 2008 and surpassed that number in 2009. To participate, runners register online, gear up with Nike technology, and hit the road on race day, running any 10K route they choose at any time during the day. Once the data is downloaded from the Nike receiver, each runner s official time is posted and can be compared to the times of runners from around the world. Like many companies, Nike is trying to make its company and products more eco-friendly. However, unlike many companies, Nike does not promote its 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. Today, Nike dominates the athletic footwear market with a 31 percent market share globally and a 50 percent market share in the United States. Swooshes abound on everything from wristwatches to skateboards to swimming caps. The firm s long-term strategy focuses on basketball, running, football, women s fitness, men s training, and sports culture. As a result of its successful expansion across geographic markets and product categories, Nike is the top athletic apparel and footwear manufacturer in the world, with corporate fiscal 2009 revenues exceeding $19 billion. Marketing Excellence environment, strong ethics, and a famous founding credo: Don t be evil. The company has become the market leader for search engines through its business focus and constant innovation. As Google grew into a primary destination for Web users searching for information online, it attracted a host of online advertisers. These advertisers drove Google s revenue by buying search ads, little text-based boxes shown alongside search results that advertisers pay for only when users click on them. Google s search ad program, called AdWords, sells space on its search pages to ads linked with specific keywords. Google auctions off the keyword ads, with prime keywords and page locations going to the highest bidder. Google recently added a program called AdSense, which allows any Web site to display targeted Google ads related to the content of its site. Web site publishers earn money every time visitors click on these ads. In addition to offering prime online real estate for advertisers, Google adds value by providing tools to better target their ads and better understand the effectiveness of their marketing. Google Analytics, free to Google s advertisers, provides a custom report, or dashboard, detailing how Internet users found the site, what ads they saw and/or clicked on, how they behaved while there, and how much traffic was generated. Google client Discount Tire was able >>Google In 1998, two Stanford University PhD students, Larry Page and Sergey Brin, founded a search engine company 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 universally accessible and useful. From the beginning, Google has strived to be one of the good guys in the corporate world, supporting a touchy-feely work 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. D EFINING MARKETING FOR THE 21ST CENTURY to identify where visitors encountered problems that led them to abandon a purchase midstream. After modifying its site and updating its keyword search campaign, Discount Tire measured a 14 percent increase in sales within a week. With its ability to deploy data that enable up-to-theminute improvements in a Web marketing program, Google supports a style of marketing in which the advertising 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. Over the past decade, Google has expanded far beyond its search capabilities with numerous other services, applications, and tools. It creates and distributes its products for free, which in turn provide new opportunities for the firm to sell additional targeted advertising space. Since 97 percent of Google s revenues come from online advertising, new advertising space is critical to the company s growth. Google s wide range of products and services fall into five categories: desktop products, mobile products, Web products, hardware products, and other products. Desktop products include both stand-alone applications such as Google Earth (a virtual globe that uses satellite imagery and aerial photography), Google Chrome (a Web browser), and Google Video/YouTube (Google acquired the video hosting site YouTube in 2006 for $1.65 billion), or desktop extensions such as Google Toolbar (a browser toolbar). Mobile products include all Google products available for mobile devices. Web products are broken down into the following subsets advertising (e.g., AdWorks, DoubleClick, Clickto-Call), communications and publishing (e.g., Google Docs, Google Calendar, Google Gadgets, Wave), development (e.g., Android, Google Code), mapping (e.g., Google Sky, Google Maps), Search (e.g., Google Dictionary, Google Alerts, Google Scholar), and statistics (e.g., Google Trends, Google Analytics). Google s stage of development starts within Google Labs, which lists new products available for testing. It next moves to beta status, where invited users test early prototypes. Once the product is fully tested and ready to be released to the general public, it moves into the gold stage as a core Google product. Google Voice, for example, is in the beta stage. It provides consumers with one Google phone number, which then connects to the user s home, office, and cell numbers. The user decides which phones ring, based on who calls. Due to Google Voice s complexity and popularity, users can sign up only by invitation. Google has not spent a lot of money on traditional advertising. Recent efforts have targeted Microsoft consumers with appeals to use Google s cloud computing applications instead of Microsoft Office or Windows. By | CHAPTER 1 53 Going Google, a user can access all of his or her documents and applications via a Web browser instead of owning the physical infrastructure and software. In addition, in 2009 Google launched its first-ever television commercial for Google Chrome, an alternative to Microsoft s Internet Explorer Web browser. Google is also betting big in the mobile category. With its 2008 launch of Android, a mobile operating system, Google went head-to-head with Apple s iPhone. Although many still prefer Apple s platform, even critics have praised Android s benefits. Most importantly, Android is free, open sourced, and backed by a multimillion-dollar investment. That means Google wants its partners to help build and design Android over the years. In addition, the iPhone is available only through AT&T in the United States, while most of AT&T s competitors support Android phones. If Google influences millions of new consumers to use smart phones, it could make billions in mobile advertising. One analyst stated that Google is trying to get ahead of the curve with these initiatives so when [mobile advertising] becomes mainstream, Google will be one of the major players, and display is a key growth area for Google. Google s goal is to reach as many people as possible on the Web whether by PC or by phone. The more users on the Web, the more advertising Google can sell. Google s new products also accomplish this goal and make the Web a more personalized experience. One program allows users to mark their current position on Google Maps, click the local tab, and receive information about local restaurants, bars, and entertainment venues. Google has enjoyed great success as a company and a brand since its launch. When it experienced an hour-long outage in 2009, worldwide Internet traffic decreased by 5 percent. In 2009, Google held a 65 percent market share in search in the United States, significantly greater than second place Yahoo! s 20 percent market share. Globally, Google held a more dominant lead with 89 percent market share versus Yahoo! s 5 percent and MSN s 3 percent. Google s revenues topped $21 billion in 2008, and the company was ranked the most powerful brand in the world with a brand value of $86 billion. 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 it doing the right thing taking on Microsoft with the concept of cloud computing, and Apple in the fight for smart phones? Sources:; 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, BrandZ Top 100 2008 Report ; 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. 54 PART 1 UNDERSTANDING MARKETING MANAGEMENT a Ch In This Chapter, We Will Address the Following Questions 1. How does marketing affect customer value? 2. How is strategic planning carried out at different levels of the organization? 3. What does a marketing plan include? Yahoo! faces many strategic challenges as it attempts to fend off competition from Google and others. ter p 2 Developing Marketing Strategies and Plans Key ingredients of the marketing management process are insightful, creative strategies and plans that can guide marketing activities. Developing the right marketing strategy over time requires a blend of discipline and flexibility. Firms must stick to a strategy but also constantly improve it. They must also develop strategies for a range of products and services within the organization. Founded in 1994 by Web-surfing Stanford University grad students, Yahoo! grew from a tiny upstart surrounded by Silicon Valley heavyweights to a powerful force in Internet media. Yahoo! worked hard to be more than just a search engine. The company proudly proclaims it is The only place anyone needs to go to find anything, communicate with anyone, or buy anything. Its range of services includes e-mail, news, weather, music, photos, games, shopping, auctions, and travel. A large percentage of revenues comes from advertising, but the company also profits from subscription services such as online personal ads, premium e-mail, and small-business services. Although Yahoo! strives to achieve a competitive advantage over rival Google with its vast array of original content, Google s ascension to the runaway leader in search, e-mail, and related services has made it a darling with advertisers. Yahoo! s acquisition of photo-sharing service Flickr, social bookmark manager, and online video editing site Jumpcut strengthened its capabilities. Yahoo! has also continued to grow globally in Europe and Asia, helped in part by the acquisition of Kelkoo, a European comparisonshopping site, for $579 million, and of 46 percent of Alibaba, a Chinese e-commerce company, for $1 billion in cash. Discussions with Microsoft about a possible merger culminated in a 10-year deal in June 2009 that gave Microsoft full access to the Yahoo! This chapter begins by examining some of the search engine, to be used in future Microsoft projects for its own search strategic marketing implications in creating customer value. engine, Bing. CEO Carol Bartz faced many questions, however, about how We ll look at several perspectives on planning and describe how Yahoo! should best move forward.1 to draw up a formal marketing plan. Marketing and Customer Value The task of any business is to deliver customer value at a profit. In a hypercompetitive economy with increasingly informed buyers faced with abundant choices, a company can win only by finetuning the value delivery process and choosing, providing, and communicating superior value. The Value Delivery Process The traditional view of marketing is that the firm makes something and then sells it, with marketing taking place in the selling process. Companies that subscribe to this view have the best chance of 55 56 PART 1 U NDERSTANDING MARKETING MANAGEMENT succeeding in economies marked by goods shortages where consumers are not fussy about quality, features, or style for example, basic staple goods in developing markets. This traditional view will not work, however, 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 represents the homework marketing must do before any product exists. Marketers must segment the market, select the appropriate 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 determine specific product features, prices, and distribution. The task in the third phase is communicating the value by utilizing the sales force, Internet, advertising, 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. 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. The value chain identifies nine strategically relevant activities five primary and four support activities that 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) marketing, 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 and look for ways to improve it. Managers should estimate competitors costs and performances as benchmarks against which to compare their own. And they should go further and study the best of class practices of the world s best companies. We can identify best-practice companies by consulting customers, suppliers, distributors, financial analysts, trade associations, and magazines to see whom they rate as doing the best job. Even the best companies can benchmark, against other industries if necessary, to improve their performance. To support its corporate goal to be more innovative, 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. All the activities in gathering and acting upon information about the market The new-offering realization process. All the activities in researching, developing, and launching new high-quality offerings quickly and within budget The customer acquisition process. All the activities in defining target markets and prospecting for new customers The customer relationship management process. All the activities in building deeper understanding, relationships, and offerings to individual customers The fulfillment management process. All the activities in receiving and approving orders, shipping the goods on time, and collecting payment Strong companies are reengineering their work flows and building cross-functional teams to be responsible for each process.6 At Xerox, a Customer Operations Group links sales, shipping, installation, service, and billing so these activities flow smoothly into one another. Winning companies excel at managing core business processes through cross-functional teams. AT&T, LexisNexis, and Pratt & Whitney have reorganized their employees into cross-functional teams; cross-functional teams exist in nonprofit and government organizations as well. To be successful, a firm also needs to look for competitive advantages beyond its own operations, into the value chains of suppliers, distributors, and customers. Many companies today have D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 57 Pratt & Whitney employs crossfunctional employee teams to build its products, such as this 4000 series aircraft engine. partnered with specific suppliers and distributors to create a superior value delivery network, also called a supply chain. Sony Sony In May 2009, Sony announced it would cut its number of suppliers in half over the next two years (to 1,200), increasing the volume of parts and materials from each and thus reducing unit costs and overall procurement spending. Some stock analysts received the news positively as evidence of the company s commitment to restructuring. Others were less optimistic, such as Mizuho Investors Securities analyst Nobuo Kurahashi: I m not sure how effective this is because it s just operational streamlining and wouldn t simply push up earnings or bear fruit immediately. 7 Core Competencies Traditionally, companies owned and controlled most of the resources that entered their businesses labor power, materials, machines, information, and energy but many today outsource less-critical resources if they can obtain better quality or lower cost. The key, then, 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 do not manufacture their own products because offshore manufacturers are more competent in this task. Instead, they focus on product design and development 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 applications in a wide variety of markets. (3) It is difficult for competitors to imitate.8 Competitive advantage also accrues to companies that possess 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, he believes tremendous opportunities and threats often begin as weak signals from the periphery of a business.10 He offers a systematic process for developing peripheral vision, and practical tools and strategies for building vigilant organizations attuned to changes in the environment, by asking three questions each related to learning from the past, evaluating the present, and envisioning the future. Competitive advantage ultimately derives from how well the company has fitted its core competencies and distinctive capabilities into tightly interlocking activity systems. Competitors find it hard to imitate Southwest Airlines, Walmart, and IKEA because they are unable to copy their activity systems. 58 PART 1 U NDERSTANDING MARKETING MANAGEMENT Business realignment may be necessary to maximize core competencies. It has three steps: (1) (re)defining the business concept or big idea , (2) (re)shaping the business scope, and (3) (re)positioning the company s brand identity. Consider what Kodak is doing to realign its business. Kodak With the advent of the digital era and the capacity to store, share, and print photos using PCs, Kodak faces more competition than ever, in-store and online. In 2004, after being bumped from the Dow Jones Industrial Average where it had held a spot for more than 70 years, the company started the painful process of transformation. It began by expanding its line of digital cameras, printers, and other equipment, and it also set out to increase market share in the lucrative medical imaging business. Making shifts is not without challenges, however. The company eliminated almost 30,000 jobs between 2004 and 2007 and acquired a string of companies for its graphics communications unit. In 2006, Kodak announced it would outsource the making of its digital cameras. Not only must Kodak convince consumers to buy its digital cameras and home printers, but it also must become known as the most convenient and affordable way to process digital images. So far, it faces steep competition from Sony, Canon, and Hewlett-Packard.11 A Holistic Marketing Orientation and Customer Value Kodak has installed thousands of its Picture Kiosks to allow customers to print digital photos or scan existing photos when, where, and how they want. One view of holistic marketing sees it as integrating the value exploration, value creation, and value delivery activities with the purpose of building long-term, mutually satisfying relationships and coprosperity among key stakeholders. 12 Holistic marketers thus succeed by managing a superior value chain that delivers a high level of product quality, service, and speed. They achieve profitable growth by expanding customer share, building customer loyalty, and capturing customer lifetime value. Holistic marketers address three key management questions: 1. 2. 3. Value exploration How a company identifies new value opportunities Value creation How a company efficiently creates more promising new value offerings Value delivery How a company uses its capabilities and infrastructure to deliver the new value offerings more efficiently The Central Role of Strategic Planning Successful marketing thus requires capabilities such as understanding, creating, delivering, capturing, and sustaining customer value. Only a select group of companies have historically stood out as master marketers (see Table 2.1). These companies focus on the customer and are organized to respond effectively to changing customer needs. They all have well-staffed marketing departments, and their other departments accept that the customer is king. To ensure they select and execute the right activities, marketers must give priority to strategic planning in three key areas: (1) managing a company s businesses as an investment portfolio, (2) assessing each business s strength by considering the market s growth rate and the company s position and fit 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 enterprise; 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 D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 59 Some Examples of Master Marketers TABLE 2.1 Bang & Olufsen Electrolux Progressive Insurance Enterprise Rent-A-Car Ritz-Carlton Barnes & Noble Best Buy BMW Borders Canon Caterpillar Club Med Costco Disney eBay Google Harley-Davidson Honda IKEA LEGO McDonald s Nike Nokia Nordstrom Procter & Gamble Samsung Sony Southwest Airlines Starbucks Target Tesco Toyota Virgin Walmart Whole Foods Planning Implementing Controlling Corporate planning Organizing Measuring results Division planning Implementing Diagnosing results Business planning Product planning Taking corrective action 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 consider planning at each of these four levels of the organization. Corporate and Division Strategic Planning Some corporations give their business units freedom to set their own sales and profit goals and strategies. Others set goals for their business units but let them develop their own strategies. Still others set the goals and participate in developing individual business unit strategies. All corporate headquarters undertake four planning activities: 1. 2. 3. 4. Defining the corporate mission Establishing strategic business units Assigning resources to each strategic business unit Assessing growth opportunities We ll briefly look at each process. |Fig. 2.1| The Strategic Planning, Implementation, and Control Processes 60 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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 take advantage of new opportunities or respond to new market conditions. changed its mission from being the world s largest online bookstore to aspiring to become 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 have to answer. Successful companies continuously raise and answer them. Organizations develop mission statements to share with managers, employees, and (in many cases) customers. A clear, thoughtful mission statement provides a shared sense of purpose, direction, and opportunity. Mission statements are at their best when they reflect 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. 2. 3. 4. 5. They focus on a limited number of goals. The statement We want to produce the highestquality products, offer the most service, achieve the widest distribution, and sell at the lowest prices claims too much. They stress the company s major policies and values. They narrow the range of individual discretion so employees act consistently on important issues. They define the major competitive spheres within which the company will operate. Table 2.2 summarizes some key competitive dimensions for mission statements. They take a long-term view. Management should change the mission only when it ceases to be relevant. They are as short, memorable, and meaningful as possible. Marketing consultant Guy Kawasaki advocates developing three- to four-word corporate mantras rather than mission statements, like Enriching Women s Lives for Mary Kay.14 Compare the rather vague mission statements on the left with Google s mission statement and philosophy on the right: To build total brand value by innovating to deliver customer value and customer leadership faster, better, and more completely than our competition. We build brands and make the world a little happier by bringing our best to you. Google Mission To organize the world s information and make it universally accessible and useful. Google Philosophy Never settle for the best. 1. Focus on the user and all else will follow. 2. It s best to do one thing really, really well. 3. Fast is better than slow. 4. Democracy on the Web works. 5. You don t need to be at your desk to need an answer. 6. You can make money without doing evil. 7. There is always more information out there. 8. The need for information crosses all borders. 9. You can be serious without a suit. 10. Great just isn t good enough.15 D EVELOPING MARKETING STRATEGIES AND PLANS TABLE 2.2 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 is dedicated to developing medical technology and services that put more control in the hands of physicians, and that advance the practice of medicine and contribute 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. At the other extreme are hollow corporations, which outsource the production of nearly all goods and services to suppliers. Metro International prints 34 free local newspaper editions in 16 countries. 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.16 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. Establishing Strategic Business Units 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 customersatisfying 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. Viewing businesses in terms of customer needs can suggest additional growth opportunities. Table 2.3 lists companies that have moved from a product to a market definition of their business. It highlights the difference between a target market definition and a strategic market definition. 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 their thirst, its competition would include noncarbonated soft drinks, bottled water, fruit juices, tea, and coffee. To better compete, Pepsi might decide to sell additional beverages with promising growth rates. A business can define itself in terms of three dimensions: customer groups, customer needs, and technology.17 Consider a small company that defines its business as designing incandescent lighting | CHAPTER 2 61 62 PART 1 U NDERSTANDING MARKETING MANAGEMENT American Apparel is a fully vertically integrated company that conducts all its business from its Los Angeles, California, location. systems for television studios. Its customer group is television studios; the customer need is lighting; the technology is incandescent lighting. The company might want to expand to make lighting for homes, factories, and offices, or it could supply other services television studios need, such as heating, ventilation, or air conditioning. It could design other lighting technologies for television TABLE 2.3 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 Carrier We sell encyclopedias. We make air conditioners and furnaces. We distribute information. We provide climate control in the home. D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 63 The Kate Spade brand allows Liz Claiborne to attract a more youthful customer. studios, such as infrared or ultraviolet lighting or perhaps environmentally friendly green fluorescent bulbs. 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. 2. 3. It is a single business, or a collection of related businesses, that can be planned separately from the rest of the company. It has its own set of competitors. 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 funding. Senior management knows its portfolio of businesses usually includes a number of yesterday s has-beens as well as tomorrow s breadwinners. 18 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). Campbell Soup has out-paced the stock market for close to a decade by developing or keeping only products that ranked number one or number two in the categories of simple meals, baked snacks, and veggie-based drinks and that had a strong emphasis on value, nutrition, and convenience.19 Dubai World Dubai World Home to the world s tallest building and one of the largest shopping malls, Dubai boasts a skyline that rises dramatically from the desert. The United Arab Emirates economy is supported by four sectors: tourism, financial services, international shipping, and real estate. As the leading local developer, Dubai World manages a portfolio of government investments in all four sectors (see Table 2.4). The economic recession of 2008 2009 hit the Emirates hard. Tourism declined and income from real estate plummeted. On the artificial island of Palm Jumeirah, luxury homes that had commanded over $626 per square foot in 2007 were selling for $191 by August 2010. In late 2009 the Dubai government asked creditors to restructure its debt. Tough negotiations with foreign banks followed. By October 2010, there was good news. According to the International Monetary Fund (IMF), Dubai s economy was set to grow by 0.5 percent in 2010. The growth was largely due to an increase in trade and the logistics-related part of Dubai s business, which has traditionally been a source of strength. The ability to negotiate and the strengths of conglomerate diversification may have helped Dubai weather its financial crisis.20 64 PART 1 U NDERSTANDING MARKETING MANAGEMENT Dubai Word Business Units TABLE 2.4 Dubai World is a global holding company that operates in four strategic areas: logistics, marine, urban development, and financial services. Its portfolio includes: DP World international marine terminal (port) operations Drydocks World ship building and repair Dubai Maritime City a multipurpose maritime hub, including yachting and luxury residences (under construction) Economic Zones World worldwide management of free zones and special economic zones Istithmar World global private equity investments in consumer, industrial, financial services, aerospace, and real estate Limitless a real estate development company (combined with Nakheel on July 3, 2010) Nakheel real estate development and tourism Assigning Resources to Each SBU21 Once it has defined SBUs, management must decide how to allocate corporate resources to each. Several portfolio-planning models provide ways to make investment decisions. The GE/McKinsey Matrix classifies each SBU by the extent of its competitive advantage and the attractiveness of its industry. Management can decide to grow, harvest or draw cash from, or hold on to the business. Another model, BCG s Growth-Share Matrix, uses relative market share and annual rate of market growth as criteria to make investment decisions, classifying SBUs as dogs, cash cows, question marks, and stars. Portfolio-planning models like these have 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 (whether it is sold or spun off). 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 major manufacturer of blank compact disks called Musicale (name disguised). The lowest curve projects the expected sales over the next five years from the current business portfolio. 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 |Fig. 2.2| Desired sales growth Diversification Strategic-Planning Gap Integrative growth Sales ($ millions) The Strategic-Planning Gap Intensive growth Current portfolio 0 1 2 3 Time (years) 4 5 D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 65 current businesses (integrative opportunities). The third is to identify opportunities to add attractive unrelated businesses (diversification opportunities). INTENSIVE GROWTH Corporate management s first course of action should be a review of opportunities for improving existing businesses. One useful framework for detecting new intensivegrowth opportunities is a product-market expansion grid. It 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 of potential interest to its current markets with a product-development strategy. Later the firm will also review opportunities to develop new products for new markets in a diversification strategy. Consider how Nespresso has employed growth opportunities. NESPRESSO In 1986, Nestlé launched Nespresso with the aim of enabling anyone to create the perfect cup of espresso coffee. With an average annual growth rate of 30 percent since 2000, Nespresso has become one of the key drivers of Nestlé s success and is now available in 50 countries. Driven by the idea of delivering high-quality espresso coffee at home or at work, Nespresso pioneered the development of a coffee capsule system. There are three main reasons for its success: First, Nespresso uses the highest-quality coffee, selected from the top 1 percent of coffee beans worldwide. Second, it uses excellent machines, fulfilling different customer needs as well as guaranteeing high-quality coffee and ease of use. Third, it provides delightful customer service via the Internet, boutiques, and call centers. More than 7 million members of the Nespresso club keep in touch with the company and are the key for future growth as ambassadors of the brand. Nespresso s growth strategy is supported by a growing product line of seasonal coffee varieties, accessories, and chocolates; B2B partnerships with hotels (e.g. Ritz-Carlton, Kempinski) and airlines (e.g. Lufthansa, Emirates); and a commitment to sustainability through capsule recycling and partnership with a rainforest alliance. And the growth continues: In August 2010 Nespresso opened its 200th boutique worldwide in Shanghai, where revenues were expected to exceed $3 billion in 2010. Every minute, more than 10,000 cups of Nespresso coffee are enjoyed by customers worldwide.22 So how might Musicale 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 compact disks for data storage in addition to music storage. It could try to attract competitors customers if it noticed major weaknesses in their products or marketing programs. Finally, Musicale could try to convince nonusers of compact disks to start using them. How can Musicale use a market-development strategy? First, it might try to identify potential user groups in the current sales areas. If it has been selling compact disks 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. Musicale could develop new features, such as additional data storage capabilities or greater durability. It could offer the CD 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 management must also look for integrative growth opportunities. INTEGRATIVE GROWTH A business can increase sales and profits through backward, forward, or horizontal integration within its industry. Merck has gone beyond developing and selling prescription pharmaceuticals. It formed joint ventures in 1989 with Johnson & Johnson Nespresso pioneered the idea of delivering high quality coffee at home or work and has become one of Nestlé s most successful brands. 66 PART 1 U NDERSTANDING MARKETING MANAGEMENT to sell over-the-counter pharmaceuticals; in 1991 with DuPont to expand basic research, and in 2000 with Schering-Plough to develop and market new prescription medicines. 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 purchased Medco, a mail-order pharmaceutical distributor, in 2003 and Sirna Therapeutics in 2006. Horizontal mergers and alliances don t always work out. The merger between Sears and Kmart didn t solve either retailer s problems.23 Media companies, however, have long reaped the benefits of integrative growth. Here s how one business writer explains the potential NBC could reap from its merger with Vivendi Universal Entertainment to become NBC Universal. Although it s a farfetched example, it gets across the possibilities inherent in this growth strategy:24 [When] the hit movie Fast & Furious 4 (produced by Universal Pictures) comes to television, it would air on Bravo (owned by NBC) or USA Network (owned by Universal), followed by the inevitable bid to make the movie into a TV series (by Universal Television Group), with the pilot being picked up by NBC. The show then begins airing on (owned in part by NBC), and ultimately leads to the creation of a popular amusement-park attraction at Universal Studios. In today s highly integrated media world, NBC Universal may take a successful movie franchise such as Fast & Furious and leverage it across all its businesses, including its Universal Studios theme park. How might Musicale 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, Musicale 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. 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. D EVELOPING MARKETING STRATEGIES AND PLANS Several types of diversification are possible for Musicale. First, the company could choose a concentric strategy and seek new products that have technological or marketing synergies with existing product lines, though appealing to a different group of customers. It might start a laser disk manufacturing operation, because it knows how to manufacture compact discs. Second, it might use a horizontal strategy to search for unrelated new products that appeal to current customers. Musicale might produce compact disc cases, for example, though they require a different manufacturing process. Finally, the company might seek new businesses that have 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 in 2005 spun off American Express Financial Advisors, which provided insurance, mutual funds, investment advice, and brokerage and asset management services (it was renamed Ameriprise Financial). 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 company 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. When Mark Hurd became CEO of HP, one of his goals was to reinvigorate the famous HP Way, a benevolent but hard-nosed corporate culture that rewarded employees amply but expected teamwork, growth, and profits in return.25 A customer-centric culture can affect all aspects of an organization. Sometimes corporate culture develops organically and is transmitted directly from the CEO s personality and habits to the company employees. Mike Lazaridis, president and co-CEO of BlackBerry producer Research In Motion, is a scientist in his own right, winning an Academy Award for technical achievement in film. He has hosted a weekly, innovation-centered Vision Series at company headquarters that focuses on new research and company goals. As he states, I think we have a culture of innovation here, and [engineers] have absolute access to me. I live a life that tries to promote innovation. 26 Marketing Innovation Innovation in marketing is critical. Imaginative ideas on strategy exist in many places within a company.27 Senior management should identify and encourage fresh ideas from three 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. German-based Reckitt Benckiser has been an innovator in the staid household cleaning products industry by generating 40 percent of sales from products under three years old. Its multinational staff is encouraged to dig deep into consumer habits and is well rewarded for excellent performance. Marketing Insight: Creating Innovative Marketing describes how some leading companies approach innovation. Firms develop strategy by identifying and selecting among different views 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.28 Consider the challenges faced by the movie industry. | CHAPTER 2 67 68 PART 1 U NDERSTANDING MARKETING MANAGEMENT Marketing Insight Creating Innovative Marketing When IBM surveyed top CEOs and government leaders about their priorities, business-model innovation and coming up with unique ways of doing things scored high. IBM s own drive for business-model innovation led to much collaboration, both within IBM itself and externally with companies, governments, and educational institutions. CEO Samuel Palmisano noted how the breakthrough Cell processor, based on the company s Power architecture, would not have happened without collaboration with Sony and Nintendo, as well as competitors Toshiba and Microsoft. Procter & Gamble (P&G) similarly has made it a goal for 50 percent of new products to come from outside P&G s labs from inventors, scientists, and suppliers whose new-product ideas can be developed in-house. 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. He cites the success of Walt TABLE 2.5 Disney with theme parks and Walmart with retailing as examples of companies that were successful after having executed against a big idea brilliantly over such a long period of time. Northwestern s Mohanbir Sawhney and his colleagues outline 12 dimensions of business innovation that make up the innovation radar (see Table 2.5) and suggest that business innovation is about increasing customer value, not just creating new things; comes in many flavors and can take place on any dimension of a business system; and is systematic and requires careful consideration of all aspects of a business. Finally, to find breakthrough ideas, some companies find ways to 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 company s center just south of Seoul, Korea, while 50 spets 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 similarly mobilizes spets in engineering, design, production, marketing, purchasing, and finance at its Research and Innovation Center or Project House. 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. The 12 Dimensions of Business Innovation Dimension Definition Offerings (WHAT) Develop innovative new products or services. Gillette MACH3 Turbo Razor Apple iPod music player and iTunes music service Platform Use common components or building blocks to create derivative offerings. Create integrated and customized offerings that solve end-to-end customer problems. General Motors OnStar telematics platform Disney animated movies UPS logistics services Supply Chain Solutions DuPont Building Innovations for construction Customers (WHO) Discover unmet customer needs or identify underserved customer segments. Enterprise Rent-A-Car focus on replacement car renters Green Mountain Energy focus on green power Customer Experience Redesign customer interactions across all touch points and all moments of contact. Washington Mutual Occasio retail banking concept Cabela s store as entertainment experience concept Solutions Examples (Continued) D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 69 * Google paid search * Blockbuster revenue sharing with movie distributors * Toyota Production System for operations * General Electric Design for Six Sigma (DFSS) Value Capture Redefine how company gets paid or create innovative new revenue streams. Processes (HOW) Redesign core operating processes to improve efficiency and effectiveness. Organization Change form, function, or activity scope of the firm. * Cisco partner-centric networked virtual organization * Procter & Gamble front-back hybrid organization for customer focus Supply Chain Think differently about sourcing and fulfillment. * Moen ProjectNet for collaborative design with suppliers * General Motors Celta use of integrated supply and online sales Presence (WHERE) Create new distribution channels or innovative points of presence, including the places where offerings can be bought or used by customers. * Starbucks music CD sales in coffee stores * Diebold RemoteTeller System for banking Networking Create network-centric intelligent and integrated offerings. Brand Leverage a brand into new domains. * Otis Remote Elevator Monitoring service Department of Defense Network-Centric Warfare Virgin Group branded venture capital Yahoo! as a lifestyle brand Source: Mohanbir Sawhney, Robert C. Wolcott, and Inigo Arroniz, The 12 Different Ways for Companies to Innovate, MIT Sloan Management Review (Spring 2006), p. 78. © 2006 by Massachusetts Institute of Technology. All rights reserved. Distributed by Tribune Media Services. Movie Industry The success of Netflix (see Chapter 15) and the ease of watching longer-form entertainment or playing games on broadband Internet helped produce a 6.8 percent decrease in DVD sales one that experts believe will continue. The recent emergence of Redbox and its thousands of kiosks renting movies for $1 a day poses 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 film 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 has emphasized its parent-friendly Disney-branded films, which generate higher DVD sales and are easy to cross-promote at the company s theme parks, on its TV channels, and in its stores. Paramount chose to debut Jackass 2.5 on Blockbuster s site for free to create buzz and interest. Film studios are considering all possible scenarios as they rethink their business model in a world where the DVD no longer will reign as king.29 The easy availability of rentals from Redbox kiosks has film studios rethinking their pricing and distribution strategies. Business Unit Strategic Planning The business unit strategic-planning process consists of the steps shown in examine each step in the sections that follow. Figure 2.3. We 70 PART 1 U NDERSTANDING MARKETING MANAGEMENT External environment (opportunity & threat analysis) Business mission SWOT analysis Goal formulation Strategy formulation Internal environment (strengths/ weaknesses analysis) Program formulation Implementation Feedback and control |Fig. 2.3| The Business Unit Strategic-Planning Process 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 attempt to win business from smaller television studios, offer the lowest price, or venture into nonlighting 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.30 A marketing 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.31 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 often leads to a totally new product or service. 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 that are new to the market. Major cell manufacturers have released phones with digital photo and video capabilities, and Global Positioning Systems (GPS). A company may make a buying process more convenient or efficient. Consumers can use the Internet to find more books than ever and search for the lowest price with a few clicks. A company can meet the need for more information and advice. Angie s List connects individuals with local home improvement contractors and doctors that have been reviewed by others. A company can customize a product or service. Timberland allows customers to choose colors for different sections of their boots, add initials or numbers to their boots, and choose 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. Post Office. 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. D EVELOPING MARKETING STRATEGIES AND PLANS (a) Opportunity Matrix Success Probability Attractiveness High Low High 1 2 Low 3 4 1. Company develops more powerful lighting system 2. Company develops device to measure energy efficiency of any lighting system 3. Company develops device to measure illumination level 4. Company develops software program to teach lighting fundamentals to TV studio personnel (b) Threat Matrix Probability of Occurrence Seriousness High Low High 1 2 Low 3 4 1. Competitor develops superior lighting system 2. Major prolonged economic depression 3. Higher costs 4. Legislation to reduce number of TV studio licenses To evaluate opportunities, companies can use market opportunity analysis (MOA) to ask questions like: 1. 2. 3. 4. 5. Can we articulate the benefits convincingly to a defined target market(s)? Can we locate the target market(s) and reach them with cost-effective media and trade channels? Does our company possess or have access to the critical capabilities and resources we need to deliver the customer benefits? Can we deliver the benefits better than any actual or potential competitors? Will the financial rate of return meet or exceed our required threshold for investment? In the opportunity matrix in Figure 2.4 (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. 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 2.4 (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 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. 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 | CHAPTER 2 |Fig. 2.4| Opportunity and Threat Matrices 71 72 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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 weaknesses. 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.32 On the basis of a SWOT analysis, online mortgage company Loan Bright changed the focus of their marketing efforts to target individual loan officers. Businesses can evaluate their own strengths and weaknesses by using a form like the one shown in Marketing Memo: Checklist for Performing 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. Managers at Texas Instruments (TI) were split between those who wanted to stick to industrial electronics, where TI has clear strength, and those who wanted to continue introducing consumer products, where TI lacks some required marketing strengths. 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 objectives (MBO). For an MBO system to work, the unit s objectives must meet four criteria: 1. 2. 3. 4. 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. 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. Goals should be realistic. Goals should arise from an analysis of the business unit s opportunities and strengths, not from wishful thinking. 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.33 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. D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 73 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.34 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 customer 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 provides a good example of these three strategies: Travelocity is pursuing a differentiation strategy by offering the most comprehensive range of services to the traveler; Lowestfare is pursuing a lowest-cost strategy; and Last Minute is pursuing a niche strategy by focusing on travelers who have the flexibility to travel on very short notice. Some companies use a hybrid approach. According to Porter, firms directing the same strategy to the same target market constitute a strategic group.35 The firm that carries out that 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. Porter defines strategy as 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 Nokia often cannot achieve leadership, either nationally or globally, without forming alliances with domestic or multinational companies that complement or leverage their capabilities and resources. 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 global network. The Star Alliance brings together 21 airlines, including Lufthansa, United Airlines, Singapore Airlines, Air New Zealand, and South Africa Airways, in a huge global partnership that allows travelers to make nearly seamless connections to hundreds of destinations. Many strategic alliances take the form of marketing alliances. These fall into four major categories. 1. 2. 3. 4. 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. Promotional alliances One company agrees to carry a promotion for another company s product or service. McDonald s teamed up with Disney for 10 years to offer products related to current Disney films as part of its meals for children. 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. Pricing collaborations One or more companies join in a special pricing collaboration. Hotel and rental car companies often offer mutual price discounts. Customers can travel virtually anywhere in the world via flights on Star Alliance airlines. 74 PART 1 U NDERSTANDING MARKETING MANAGEMENT marketing Memo Checklist for Performing Strengths/Weaknesses Analysis 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 ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ Finance 13. Cost or availability of capital 14. Cash flow 15. Financial stability ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ Manufacturing 16. Facilities 17. Economies of scale 18. Capacity 19. Able, dedicated workforce 20. Ability to produce on time 21. Technical manufacturing skill ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ Organization 22. Visionary, capable leadership 23. Dedicated employees 24. Entrepreneurial orientation 25. Flexible or responsive ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ 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).36 Both pharmaceutical and biotech companies are starting to make partnership a core competency. It s estimated that nearly 700 such partnerships were formed in 2007 alone.37 After years of growth through acquisition and buying interests in two dozen companies, the world s biggest wireless telecom operator, Vodafone, has looked outside the company for partners to help it leverage its existing assets.38 Vodafone To spur more innovation and growth, 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 D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 75 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 widget with personalized details. With 289 million customers in 27 countries, the $35 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. 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 a specific sales contest pay for itself? 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.39 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. In setting these levels, it must not violate any stakeholder group s sense of fairness about the treatment it is receiving relative to the others.40 A dynamic relationship connects the stakeholder groups. A smart company creates a high level of employee satisfaction, 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.41 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 successful at strategy implementation.42 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. Consider KB Toys. Founded in 1922 as a candy wholesaler, the company successfully reinvented itself many times, first by shifting its focus to discounted toys and then by anticipating the growth of shopping malls. The firm became the second-largest toy retailer in the world but ultimately crumbled due to competition from big-box retailers and its failed acquisition of eToys. The company declared bankruptcy in 1994 but reemerged in the late 1990s only to again file bankruptcy and liquidate its assets in late 2008. Vodafone has actively partnered with a number of other firms to help drive its innovation. 76 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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. Product Planning: The Nature and Contents of a Marketing Plan Working within the plans set by the levels above them, product managers come up with a marketing plan for individual products, lines, brands, channels, or customer groups. Each product level, whether product line or brand, must develop a marketing plan for achieving its goals. A marketing plan is a written document that summarizes what the marketer has learned about the marketplace and indicates how the firm plans to reach its marketing objectives.43 It contains tactical guidelines for the marketing programs and financial allocations over the planning period. 44 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. 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 organizational support and resources, no marketing plan can succeed. Marketing plans are becoming more customer- and competitor-oriented, better reasoned, and more realistic. They draw more inputs from all the functional areas and are team-developed. Planning is becoming a continuous process to respond to rapidly changing market conditions. 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 some guideline questions to ask in developing marketing plans.) Although the exact length and layout varies from company to company, most marketing plans cover one year in anywhere from 5 to 50 pages. Smaller businesses may create shorter or less formal marketing plans, whereas corporations generally require highly structured documents. 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 everyone can consult specific sections and collaborate on changes. A marketing plan usually contains the following sections. Executive summary and table of contents. The marketing plan should open with a table of contents and brief summary for senior management of the main goals and recommendations. Situation analysis. This section presents relevant background data on sales, costs, the market, competitors, and the various forces in 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. 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 D EVELOPING MARKETING STRATEGIES AND PLANS marketing Memo CHAPTER 2 Marketing Plan Criteria Here are some questions to ask in evaluating a marketing plan. 1. Is the plan simple? Is it easy to understand and act on? Does it communicate its content clearly and practically? 2. Is the plan specific? Are its objectives concrete and measurable? Does it include specific actions and activities, each with specific dates of completion, specific persons responsible, and specific budgets? 3. 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? 4. Is the plan complete? Does it include all the necessary elements? Does it have the right breadth and depth? Source: Adapted from Tim Berry and Doug Wilson, On Target: The Book on Marketing Plans (Eugene, OR: Palo Alto Software, 2000). * | computer simulates possible outcomes and computes a distribution showing the range of possible rates of returns and their probabilities.45 Implementation controls. The last section outlines the controls for monitoring and adjusting implementation 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. Some organizations include contingency plans. 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 situation, 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 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 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. Marketers must consider all these relationships when developing a marketing plan. From Marketing Plan to Marketing Action Most companies create yearly marketing plans. Marketers start planning well in advance of the implementation date to allow time for marketing research, analysis, 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 contingency plans; marketers must be ready to update and adapt marketing plans at any time. The marketing plan should define how progress toward objectives will be measured. Managers typically use budgets, schedules, and marketing metrics for monitoring and evaluating results. 77 78 PART 1 U NDERSTANDING MARKETING MANAGEMENT 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 actually were. Marketing metrics track actual outcomes of marketing programs to see whether the company is moving forward toward its objectives. Summary 1. The value delivery process includes choosing (or identifying), 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 managing core business processes such as new-product realization, inventory management, and customer acquisition and retention. Managing these core processes effectively means creating 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 distributors. Companies no longer compete marketing networks do. 3. According to one view, holistic marketing maximizes value exploration by understanding the relationships between the customer s cognitive space, the company s competence space, and the collaborator s resource space; maximizes value creation by identifying new customer benefits from the customer s cognitive space, utilizing core competencies from its business domain, and selecting and managing business partners from its collaborative networks; and maximizes value delivery by becoming proficient at customer relationship management, internal resource management, and business partnership management. 4. Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit between the organization s objectives, skills, and resources and its changing market opportunities. The aim of strategic 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. 5. The corporate strategy establishes the framework within 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. 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 programs, 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 marketing process. Applications Marketing Debate What Good Is a Mission Statement? Marketing Discussion Marketing Planning Mission statements are often the product of much deliberation 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 statements rarely provide useful marketing value. Consider Porter s value chain and the holistic marketing orientation model. What implications do they have for marketing planning? How would you structure a marketing plan to incorporate some of their concepts? D EVELOPING MARKETING STRATEGIES AND PLANS Marketing Excellence >>Cisco Cisco Systems is the worldwide leading supplier of networking equipment for the Internet. The company sells hardware (routers and switches), software, and services that make most of the Internet work. Cisco was founded in 1984 by a husband and wife team who worked in the computer operations department at Stanford University. They named the company cisco with a lowercase c, short for San Francisco, and developed a logo that resembled the Golden Gate Bridge, which they frequently traveled. Cisco went public in 1990 and the two founders left the company shortly thereafter, due to conflicting interests with the new president and CEO. Over the next decade, the company grew exponentially, led by newproduct launches such as patented routers, switches, platforms, and modems which significantly contributed to the backbone of the Internet. Cisco opened its first international offices in London and France in 1991 and has opened a number of new international offices since then. During the 1990s, Cisco acquired and successfully integrated 49 companies into its core business. As a result, the company s market capitalization grew faster than for any company in history from $1 billion to $300 billion between 1991 and 1999. In March 2000, Cisco became the most valuable company in the world, with market capitalization peaking at $582 billion or $82 per share. By the end of the 20th century, although the company was extremely successful, brand awareness was low Cisco was known to many for its stock price rather than for what it actually did. Cisco developed partnerships with Sony, Matsushita, and US West to co-brand its modems with the Cisco logo in hopes of building its name recognition and brand value. In addition, the company launched its first television spots as part of a campaign entitled Are | CHAPTER 2 79 You Ready? In the ads, children and adults from around the world delivered facts about the power of the Internet and challenged viewers to ponder, Are You Ready? Surviving the Internet bust, the company reorganized in 2001 into 11 new technology groups and a marketing organization, which planned to communicate the company s product line and competitive advantages better than it had in the past. In 2003, Cisco introduced a new marketing message, This Is the Power of the Network. Now. The international campaign targeted corporate executives and highlighted Cisco s critical role in a complicated, technological system by using a soft-sell approach. Television commercials explained how Cisco s systems change people s lives around the world and an eight-page print ad spread didn t mention Cisco s name until the third page. Marilyn Mersereau, Cisco s vice president of corporate marketing, explained, Clever advertising involves the reader in something that s thought-provoking and provocative and doesn t slam the brand name into you from the first page. The year 2003 brought new opportunities as Cisco entered the consumer segment with the acquisition of Linksys, a home and small-office network gear maker. By 2004, Cisco offered several home entertainment solutions, including wireless capabilities for music, printing, video, and more. Since previous marketing strategies had targeted corporate and IT decision makers, the company launched a rebranding campaign in 2006, to increase awareness among consumers and help increase the overall value of Cisco s brand. The Human Network campaign tried to humanize the technology giant by repositioning it as more than just a supplier of switches and routers and communicating its critical role in connecting people through technology. The initial results were positive. Cisco s revenues increased 41 percent from 2006 to 2008, led by sales increases in both home and business use. By the end of 2008, Cisco s revenue topped $39.5 billion and BusinessWeek ranked it the 18th biggest global brand. With its entrance into the consumer market, Cisco has had to develop unique ways to connect with consumers. One recent development is Cisco Connected Sports, a platform that turns sports stadiums into digitally connected interactive venues. The company already has transformed the Dallas Cowboys, New York Yankees, Kansas City Royals, Toronto Blue Jays, and Miami Dolphins stadiums into the ultimate fan experience and plans to add more teams to its portfolio. Fans can virtually meet the players through Telepresence, a videoconferencing system. Digital displays throughout the stadium allow fans to pull up scores from other games, order food, and view local traffic. In addition, HD flat-screen televisions throughout the stadium ensure that fans never miss a play even in the restroom. 80 PART 1 U NDERSTANDING MARKETING MANAGEMENT Today, Cisco continues to acquire companies including 40 between 2004 and 2009 that help it expand into newer markets such as consumer electronics, business collaboration software, and computer servers. These acquisitions align with Cisco s goal of increasing overall Internet traffic, which ultimately drives demand for its networking hardware products. However, by entering into these new markets, Cisco has gained new competitors such as Microsoft, IBM, and HewlettPackard. To compete against them, it reaches out to both consumers and businesses in its advertising efforts, including tapping into social media such as Facebook, Twitter, and blogs. Questions Marketing Excellence move the Intel brand name outside the PC and into the minds of consumers. In order to execute the new brand strategy, it was essential that the computer manufacturers who used Intel processors support the program. Intel gave them significant rebates when they included the Intel logo in their PC ads or when they placed the Intel Inside sticker on the outside of their PCs and laptops. The company created several effective and identifiable marketing campaigns in the late 1990s to become a recognizable and well-liked ingredient brand name. The Bunny People series featured Intel technicians dressed in brightly colored contamination suits as they danced to disco music inside a processor facility. Intel also used the famous Blue Man Group in its commercials for Pentium III and Pentium IV. In 2003, Intel launched Centrino, a platform that included a new microprocessor, an extended battery, and wireless capabilities. The company launched a multimilliondollar media effort around the new platform called Unwired, which urged the wired world to Unwire. Untangle. Unburden. Uncompromise. Unstress. Unwired helped the company generate $2 billion in revenue during the first nine months of the campaign. As the PC industry slowed in the mid-2000s, Intel sought opportunities in new growth areas such as home entertainment and mobile devices. It launched two new platforms: Viiv (rhymes with five ) aimed at home entertainment enthusiasts, and Centrino Duo mobile. In addition, the company created a $2 billion global marketing campaign to help reposition Intel from a brainy microprocessor company to a warm and fuzzy company that offered solutions for consumers as well. As part of the campaign, Intel s new slogan Leap Ahead replaced the familiar Intel Inside campaign that had become synonymous with the Intel brand, and a new logo was created. >>Intel Intel makes the microprocessors found in 80 percent of the world s personal computers. Today, it is one of the most valuable brands in the world, with revenues exceeding $37 billion. In the early days, however, Intel microprocessors were known simply by their engineering numbers, such as 80386 or 80486. Since numbers can t be trademarked, competitors came out with their own 486 chips and Intel had no way to distinguish itself. Nor could consumers see Intel s products, buried deep inside their PCs. Thus, Intel had a hard time convincing consumers to pay more for its highperformance products. As a result, Intel created the quintessential ingredientbranding marketing campaign and made history. It chose a name for its latest microprocessor introduction that could be trademarked, Pentium, and launched the Intel Inside campaign to build brand awareness of its whole family of microprocessors. This campaign helped 1. How is building a brand in a business-to-business context different from doing so in the consumer market? 2. Is Cisco s plan to reach out to consumers a viable one? Why or why not? Sources: Marguerite Reardon, Cisco Spends Millions on Becoming Household Name. CNET, October 5, 2006; Michelle Kessler, Tech Giants Build Bridge to Consumers. USA Today, March 13, 2006; Marla Matzer, Cisco Faces the Masses. Los Angeles Times, August 20, 1998; David R. Baker, New Ad Campaign for Cisco. San Francisco Chronicle, February 18, 2003; Bobby White, Expanding into Consumer Electronics, Cisco Aims to Jazz Up Its Stodgy Image, Wall Street Journal, September 6, 2006, p. B1; Burt Helm, Best Global Brands BusinessWeek, September 18, 2008; Ashlee Vance, Cisco Buys Norwegian Firm for $3 Billion. New York Times, October 1, 2009; Jennifer Leggio, 10 Fortune 500 Companies Doing Social Media Right. ZDNet, September 28, 2009. D EVELOPING MARKETING STRATEGIES AND PLANS In 2007, Intel created the Classmate PC a small, kidfriendly, durable, and affordable Intel processor based computer intended for children in remote regions of the world. It was part of an initiative called Intel Learning Series, intended to help expand education in technology throughout the world. The following year, Intel launched the Atom processor, the company s smallest processor to date, designed for mobile Internet devices, netbooks, and nettops such as the Classmate PC. Also that year, Intel introduced its most advanced microprocessor, the Intel Core i7, which focused on the needs for video, 3-D gaming, and advanced computer activities. Both processors became an instant hit. The Atom, smaller than a grain of rice, ideally powered the growing market of netbooks mobile, light computers that weighed as little as 13 ounces. Intel sold more than 20 million Atom processors for netbooks in its first year alone and 28 million in its second year. Some analysts predict that when the Atom processor taps into the smart phone and cell phone markets, Intel could sell hundreds of millions of units in a very short amount of time. Intel s most recent ad campaign aimed to improve the company s brand awareness was entitled Sponsors of Tomorrow. The commercials highlighted Intel s role in changing the future of technology and took a humorous tone. In one, a middle-aged man wearing his company ID tag struts through the cafeteria as fellow employees | CHAPTER 2 81 scream, grope, and beg for his autograph. The screen reads, Ajay Bhatt, co-inventor of the U.S.B. as the employee (played by an actor) winks at a fan. The ad ends with the line, Our superheroes aren t like your superheroes. As Intel s superheroes continue to create powerful microprocessors for smaller and more mobile devices, the company s brand value continues to grow, as does its influence on the future of technology. Questions 1. Discuss how Intel changed ingredient-marketing history. What did it do so well in those initial marketing campaigns? 2. Evaluate Intel s more recent marketing efforts. Did they lose something by dropping the Intel Inside tagline or not? Sources: Cliff Edwards, Intel Everywhere? BusinessWeek, March 8, 2004, pp. 56 62; Scott Van Camp, ReadMe.1st, Brandweek, February 23, 2004, p. 17; How to Become a Superbrand, Marketing, January 8, 2004, p. 15; Roger Slavens, Pam Pollace, VP-Director, Corporate Marketing Group, Intel Corp, BtoB, December 8, 2003, p. 19; Kenneth Hein, Study: New Brand Names Not Making Their Mark, Brandweek, December 8, 2003, p. 12; Heather Clancy, Intel Thinking Outside the Box, Computer Reseller News, November 24, 2003, p. 14; Cynthia L. Webb, A Chip Off the Old Recovery?, October 15, 2003; Intel Launches Second Phase of Centrino Ads, Technology Advertising & Branding Report, October 6, 2003; David Kirkpatrick, At Intel, Speed Isn t Everything, Fortune, February 9, 2004, p. 34; Don Clark. Intel to Overhaul Marketing in Bid to Go Beyond PCs, Wall Street Journal, December 30, 2005; Stephanie Clifford, Tech Company s Campaign to Burnish Its Brand, New York Times, May 6, 2009, p. B7; Tim Bajarin, Intel Makes Moves in Mobility, PC Magazine, October 5, 2009. 82 PART 1 U NDERSTANDING MARKETING MANAGEMENT Sample Marketing Plan Pegasus Sports International* 1.0 Executive Summary 2.0 Situation Analysis Pegasus Sports International is a start-up aftermarket inline skating accessory manufacturer. 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 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 opportunity for market growth. Skating is a booming sport. Currently, most of the skating is recreational. There are, however, a growing number 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. Several of Pegasus currently developed products have patents 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 over 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 aftermarket products. Pegasus will sell its products initially through its Web site. This Dell direct-to-the-consumer approach will allow Pegasus to achieve higher margins and maintain a close relationship with the customers, which is essential for producing products that have a true market demand. By the end of the year, Pegasus will have also developed relationships with different skate shops and will begin to sell some of its products through retailers. Pegasus is entering its first year of operation. Its products have been well received, and marketing will be key to the development 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. TABLE 2.1 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 following geographic, demographic, and behavior factors: Geographics * Pegasus has no set geographic target area. By leveraging 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. Target Market Forecast Target M arket Foreca st Potential Customers Growth 2011 2012 2013 2014 2015 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 Total 4% 2,170,000 2,256,800 2,347,072 2,440,955 2,538,593 4.00% 10.48% 31,000,000 34,211,600 37,784,350 41,761,474 46,191,633 10.48% *Compound Annual Growth Rate Source: Adapted from a sample plan provided by and copyrighted by Palo Alto Software, Inc. Find more complete sample marketing plans at Reprinted by permission of Palo Alto Software. D EVELOPING MARKETING STRATEGIES AND PLANS Demographics * There is an almost equal ratio between male and female users. * Ages 13 46, with 48% clustering around ages 23 34. The recreational users tend to cover the widest age range, including young users through active adults. The fitness users tend to be ages 20 40. The speed users tend to be in their late twenties and early thirties. The hockey players are generally in their teens through their early twenties. The extreme segment is of similar age to the hockey players. * Of the users who are over 20, 65% have an undergraduate 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 an intrinsically enjoyable activity in itself. * Users spend money on gear, typically sports equipment. * Users have active lifestyles that include some sort of recreation 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 products 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 industry experience and personal dedication to the sport will provide it with the needed information to produce insightfully designed products. Customer service. Exemplary service is required to build a sustainable business that has a loyal customer base. | CHAPTER 2 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 had slowed down in some markets. The growth statistics for 2007 were estimated to be over 35 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 * 2.1.3 Market Trends Pegasus will distinguish itself by marketing products not previously 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. Therefore, the marketing is being directed toward this group. BladeBoots will enable users to enter establishments without 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 Pegasus 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. 83 Participation within a growing industry * Decreased product costs through economy 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 slump in the economy that could have a negative 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 skatinginduced 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 84 PART 1 U NDERSTANDING MARKETING MANAGEMENT skaters are using, Pegasus is the only brand that is truly designed for and by skaters. The few competitors sails on the market are 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 accessories 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. 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 (notwithstanding seasonal sales patterns). * Achieve a steady increase in market penetration. * Decrease customer acquisition costs by 1.5% per quarter. 3.3 Financial Objectives * Increase the profit margin by 1% 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. 2.5 Keys to Success 3.4 Target Markets The keys to success are designing and producing products that meet market demand. In addition, Pegasus must ensure total customer satisfaction. If these keys to success are achieved, it will become a profitable, sustainable company. With a world skating market of over 31 million that is steadily growing (statistics released by the Sporting Goods Manufacturers Association), the niche has been created. Pegasus 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 Sporting Goods Manufacturers Association survey indicates that skating now has more participation than football, softball, skiing, and snowboarding combined. The breakdown of participation in skating is as follows: 1+% speed (growing), 8% hockey (declining), 7% extreme/aggressive (declining), 22% fitness (nearly 7 million the fastest growing), and 61% recreational (first-timers). Pegasus 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% (or 26 million) of the market in the next five years. 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 satisfaction levels. 3.0 Marketing Strategy 3.5 Positioning The key to the marketing strategy is focusing on the speed, health and fitness, and recreational skaters. Pegasus can cover about 80% of the skating market because it produces 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. Pegasus will position itself as the premier aftermarket skating accessory company. This positioning will be achieved by leveraging Pegasus 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. D EVELOPING MARKETING STRATEGIES AND PLANS | CHAPTER 2 85 3.6 Strategies 4.1 Break-Even Analysis The single objective is to position Pegasus as the premier skating accessory manufacturer, serving the domestic market as well as the international market. The marketing strategy will seek to first create customer awareness concerning the offered products and services and then develop the customer base. 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 products and services. The second marketing method will be advertisements placed in numerous industry magazines. The skating industry is supported by several different glossy magazines designed to promote 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 methods 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. The break-even analysis indicates that $7,760 will be required in monthly sales revenue to reach the break-even point. 3.7 Marketing Program Pegasus marketing program is comprised of the following approaches to pricing, distribution, advertising and promotion, and customer service. * Pricing. This will be based on a per-product retail price. * Distribution. Initially, Pegasus will use a direct-to-consumer distribution model. Over time, it will use retailers as well. TABLE 4.1 Break-Even Analysis 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 4.2 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 2.1) listed all of the potential customers divided into separate groups, the sales forecast 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. Monthly Sales Forecast TABLE 4.2 Sales Forecast * Advertising and promotion. Several different methods will be used for the advertising effort. Sales Forecast * Customer service. Pegasus will strive to achieve benchmarked levels of customer care. Sales 2011 2012 2013 3.8 Marketing Research Recreational $455,740 $598,877 $687,765 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 different skaters that 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. Competitive $ 72,918 $ 95,820 $110,042 Total Sales $528,658 $694,697 $797,807 2011 2012 2013 Recreational $ 82,033 $107,798 $123,798 Competitive $ 13,125 $ 17,248 $ 19,808 Subtotal Cost of Sales $ 95,158 $125,046 $143,606 4.0 Financials This section will offer the financial overview of Pegasus related to marketing activities. Pegasus will address break-even analysis, sales forecasts, expense forecast, and indicate how these activities link to the marketing strategy. Direct Cost of Sales 4.3 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. 86 PART 1 U NDERSTANDING MARKETING MANAGEMENT Milestones TABLE 4.3 Milestones Plan Milestones Start Date Marketing plan completion Web site completion Advertising campaign #1 Advertising campaign #2 Development of the retail channel Totals End Date Budget Manager 1/1/11 1/1/11 1/1/11 3/1/11 1/1/11 2/1/11 3/15/11 6/30/11 12/30/11 11/30/11 $ 0 $20,400 $ 3,500 $ 4,550 $ 0 $28,450 Stan outside firm Stan Stan Stan Monthly Expense Budget Marketing Expense Budget Marketing Expense Budget 2012 2013 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 6.58% 3.60% 4.14% $398,725 $544,652 $621,202 75.42% 78.40% 77.86% Contribution Margin Contribution Margin/Sales 5.0 Controls The purpose of Pegasus 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 New-product development 5.1 Implementation 2011 Percent of Sales Marketing Marketing Marketing Marketing Marketing Customer satisfaction * TABLE 4.4 * Department The following milestones identify the key marketing programs. It is important to accomplish each one on time and on budget. 5.2 Marketing Organization Stan Blade will be responsible for the marketing activities. 5.3 Contingency Planning Difficulties and Risks * Problems generating visibility, a function of being an Internetbased 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 PART 2 Capturing Marketing Insights Chapter 3 | Collecting Information and Forecasting Demand Chapter 4 | Conducting Marketing Research a Ch ter p 3 In This Chapter, We Will Address the Following Questions 1. What are the components of a modern marketing information system? 2. What are useful internal records for such a system? 3. What makes up a marketing intelligence system? 4. What are some influential macroenvironment developments? 5. How can companies accurately measure and forecast demand? The severe economic recession that began in 2008 led many firms to cut their prices and use sales to try to retain customers. Collecting Information and Forecasting Demand Making marketing decisions in a fast-changing world is both an art and a science. To provide context, insight, and inspiration for marketing decision making, companies must possess comprehensive, up-to-date information about macro trends, as well as about micro effects particular to their business. 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. The severe credit crunch and economic slowdown of 2008 2009 brought profound changes in consumer behavior as shoppers cut and reallocated spending. Sales of discretionary purchases like toys, apparel, jewelry, and home furnishings dropped. Sales of luxury brands like Mercedes driven for years by free-spending baby boomers declined by a staggering one-third. Firms are adjusting the way they do business for more Meanwhile, brands that offered simple, affordable reasons than just the economy. Virtually every industry has been solutions prospered. General Mills s revenues from such favorites touched by dramatic shifts in the technological, demographic, as Cheerios, Wheaties, Progresso soup, and Hamburger Helper social-cultural, natural, and political-legal environments. In this rose. Consumers also changed how and where they shopped, and chapter, we consider how firms can develop processes to identify sales of low-priced private label brands soared. Virtually all and track important macroenvironment trends. We also outline marketers were asking themselves whether a new age of prudence how marketers can develop good sales forecasts. Chapter 4 will and frugality had emerged and, if so, what would be the appropriate review how they conduct more customized research on specific marketing problems. response. 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: disciplined methods for collecting information, and 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. 89 90 PART 2 C APTURING MARKETING INSIGHTS DuPont 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 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, as well as to market different levels of softness or firmness.1 Marketers also have extensive information about how consumption patterns vary across and within countries. On a per capita basis, for example, the Swiss consume the most chocolate, the Czechs the most beer, the Portuguese the most wine, and the Greeks the most cigarettes. Table 3.1 summarizes these and other comparisons across countries. Consider regional differences within the United States: Seattle s residents buy more toothbrushes per person than in any other U.S. city, people in Salt Lake City eat more candy bars, New Orleans residents use more ketchup, and people in Miami drink more prune juice.2 TABLE 3.1 A Global Profile of Extremes Highest fertility rate Niger 6.88 children per woman Highest education expenditure as percent of GDP Highest number of mobile phone subscribers Largest number of airports Highest military expenditure as percent of GDP Largest refugee population Highest divorce rate Highest color TV ownership per 100 households Mobile telephone subscribers per capita Highest cinema attendance Kiribati China United States Oman Pakistan Aruba United Arab Emirates Lithuania India 17.8% of GDP 547,286,000 14,951 airports 11.40% of GDP 21,075,000 people 4.4 divorces per 1,000 population 99.7 TVs 138.1 subscribers per 100 people 1,473,400,000 cinema visits Biggest beer drinkers per capita Biggest wine drinkers per capita Highest number of smokers per capita Highest GDP per person Largest aid donors as % of GDP Most economically dependent on agriculture Highest population in workforce Highest percent of women in workforce Most crowded road networks Most deaths in road accidents Most tourist arrivals Highest life expectancy Highest diabetes rate Czech Republic Portugal Greece Luxembourg Sweden Liberia Cayman Islands Belarus Qatar South Africa France Andorra United Arab Emirates 81.9 litres per capita 33.1 litres per capita 8.2 cigarettes per person per day $87,490 1.03% of GDP 66% of GDP 69.20% 53.30% 283.6 vehicle per km of road 31 killed per 100,000 population 79,083,000 83.5 years 19.5% of population aged 20 79 Source: CIA World Fact Book,, accessed July 24, 2009; The Economist s Pocket World in Figures, 2009 edition, COLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 91 A well-researched and well-executed marketing campaign for the state of Michigan increased tourism and state tax revenue. Companies with superior information can choose their markets better, develop better offerings, and execute better marketing planning. The Michigan Economic Development Corporation (MEDC) studied the demographic information of its visitors and those of competing Midwestern cities to create a new marketing message and tourism campaign. The information helped MEDC attract 3.8 million new trips to Michigan, $805 million in new visitor spending, and $56 million in incremental state tax revenue over the period 2004 2008.3 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 internal company records, marketing intelligence activities, and marketing research. We ll discuss the first two components here, and the third one in the next chapter. The company s marketing information system should be a mixture of 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 3.2 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? 92 PART 2 C APTURING MARKETING INSIGHTS 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 departments, 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. Many use the Internet and extranets to improve the speed, accuracy, and efficiency of the order-to-payment cycle. Fossil Group Fossil Group Fossil Group Australia designs and distributes accessories and apparel globally. Its account executives lacked the latest information about pricing and inventory while taking wholesale orders. High demand items were often out of stock, creating problem for retailers. After the firm deployed a mobile sales solution that connected account executives with current inventory data, the number of sales tied up in back orders fell 80 percent. The company can now provide retailers with actual inventory levels and ship orders in hours instead of days.4 Sales Information Systems Marketing managers need timely and accurate reports on current sales. Walmart operates a sales and inventory data warehouse that captures data on every item for every customer, every store, every day and refreshes it every hour. Consider the experience of Panasonic. Panasonic Panasonic makes digital cameras, plasma televisions, and other consumer electronics. After missing revenue goals, the company decided to adopt a vendor-managed inventory solution. Inventory distribution then came in line with consumption, and availability of products to customers jumped from 70 percent to 95 percent. The average weeks that product supply sat in Panasonic s channels went from 25 weeks to just 5 weeks within a year, and unit sales of the targeted plasma television rose from 20,000 to approximately 100,000. Best Buy, the initial retailer covered by the vendor-managed inventory model, has since elevated Panasonic from a Tier 3 Supplier to a Tier 1 Go-To Brand for plasma televisions.5 Panasonic s new vendor-managed inventory system met with marketplace success, including from retailers. 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: A recent survey showed that 49 percent of individuals agreed cookies are important to them when using the Internet. Not only do they not delete cookies, but they also expect customized marketing appeals and deals once they accept them. Companies must carefully interpret the sales data, however, so as not to draw the wrong conclusions. Michael Dell gave this illustration: 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. 6 C OLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 93 Databases, Data Warehousing, and Data Mining Companies organize their information into customer, product, and salesperson databases and then combine their data. The customer database will contain every customer s name, address, past transactions, and sometimes even demographics and psychographics (activities, interests, and opinions). Instead of sending a mass carpet bombing mailing of a new offer to every customer in its database, a company will rank its customers according to factors such as purchase recency, frequency, and monetary value (RFM) and send the offer to only the highest-scoring customers. Besides saving on mailing expenses, such manipulation of data can often achieve a double-digit response rate. Companies make these data easily accessible to their decision makers. Analysts can mine the data and garner fresh insights into neglected customer segments, recent customer trends, and other useful information. Managers can cross-tabulate customer information with product and salesperson information to yield still-deeper insights. Using in-house technology, Wells Fargo can track and analyze every bank transaction made by its 10 million retail customers whether at ATMs, at bank branches, or online. When it combines transaction data with personal information provided by customers, Wells Fargo can come up with targeted offerings to coincide with a customer s lifechanging event. As a result, compared with the industry average of 2.2 products per customer, Wells Fargo sells 4 products.7 Best Buy is also taking advantage of these new rich databases. Best Buy Best Buy has assembled a 15-plus terabyte database with seven years of data on 75 million households. It captures information about every interaction from phone calls and mouse clicks to delivery and rebatecheck addresses and then deploys sophisticated algorithms to classify over three-quarters of its customers, or more than 100 million individuals, into profiled categories such as Buzz (the young technology buff), Jill (the suburban soccer mom), Barry (the wealthy professional guy), and Ray (the family man). The firm also applies a customer lifetime value model that measures transaction-level profitability and factors in customer behaviors that increase or decrease the value of the relationship. Knowing so much about consumers allows Best Buy to employ precision marketing and customer-triggered incentive programs with positive response rates.8 Marketing Intelligence The Marketing Intelligence System A marketing intelligence system is a set of procedures and sources that managers use to obtain everyday information 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 in a variety of different ways, such as by reading books, newspapers, and trade publications; talking to customers, suppliers, and distributors; monitoring social media on the Internet; and meeting with other company managers. Before the Internet, sometimes you just had to go out in the field, literally, and watch the competition. This is what oil and gas entrepreneur T. Boone Pickens did. Describing how he learned about a rival s drilling activity, 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 it would be for his rival to get the oil or gas up to the surface, and this information provided him with an immediate competitive advantage.9 Best Buy uses a massive database to develop profiles with which to classify its customers. 94 PART 2 C APTURING MARKETING INSIGHTS Marketing intelligence gathering must be legal and ethical. In 2006, the private intelligence firm Diligence paid auditor KPMG $1.7 million for having illegally infiltrated it to acquire an audit of a Bermuda-based investment firm for a Russian conglomerate. Diligence s cofounder posed as a British intelligence officer and convinced a member of the audit team to share confidential documents.10 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. Grace, supplies materials and chemicals to the construction and packaging industries. Its sales reps were instructed to observe the innovative ways customers used its products in order to suggest possible new products. Some were using Grace waterproofing materials to soundproof their cars and patch boots and tents. Seven new-product ideas emerged, worth millions in sales.11 Motivate distributors, retailers, and other intermediaries to pass along important intelligence. Marketing intermediaries are often closer to the customer and competition and can offer helpful insights. ConAgra has initiated a study with some of its retailers such as Safeway, Kroger, and Walmart to study how and why people buy its foods. Finding that shoppers who bought their Orville Redenbacher and Act II brands of popcorn tended to also buy Coke, ConAgra worked with the retailers to develop in-store displays for both products. Combining retailers data with its own qualitative insights, 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 seasonal shifts in household needs.12 Hire external experts to collect intelligence. Many companies hire spets to gather marketing intelligence.13 Service providers and retailers send mystery shoppers to their stores to assess cleanliness of facilities, product quality, and the way employees treat customers. Health care facilities use of mystery patients has led to improved estimates of wait times, better explanations of medical procedures, and less-stressful programming on the waiting room TV.14 Network internally and externally. The firm can purchase competitors products, attend open houses and trade shows, read competitors published reports, attend stockholders 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 customers. For example, GlaxoSmithKline sponsors an online community devoted to weight loss and says it is learning far more than it could have gleamed from focus groups on topics from packaging its weightloss pill to where to place in-store marketing.15 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 estimated 304,059,724 people in the United States (as of July 1, 2008). Census marketer Nielsen Claritas cross-references census figures with consumer surveys and its own grassroots research for clients such as The Weather Channel, BMW, and Sovereign Bank. Partnering with list houses that provide customer phone and address information, Nielsen Claritas can help firms select and purchase mailing lists with specific clusters.16 Purchase information from outside research firms and vendors. Well-known data suppliers include firms such as the A.C. Nielsen Company and Information Resources Inc. They collect information about product sales in a variety of categories and consumer exposure to various media. They also gather consumer-panel data much more cheaply than marketers manage on their own. Biz360 and its online content partners, for example, provide real-time coverage and analysis of news media and consumer opinion information from over 70,000 traditional and social media sources (print, broadcast, Web sites, blogs, and message boards).17 Collecting Marketing Intelligence on the Internet Thanks to the explosion of outlets available on the Internet, online customer review boards, discussion forums, chat rooms, and blogs can distribute one customer s experiences or evaluation C OLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 95 to other potential buyers and, of course, to marketers seeking information about the consumers and the competition. There are five main ways marketers can research competitors product strengths and weaknesses online.18 * * * * * Independent customer goods and service review forums. Independent forums include Web sites such as,,, and collects millions of consumer reviews of stores and products each year from two sources: its 1.3 million volunteer members, and feedback from stores that allow to collect it directly from their customers as they make purchases. Distributor or sales agent feedback sites. Feedback sites offer positive and negative product or service reviews, but the stores or distributors have built the sites themselves. offers an interactive feedback opportunity through which buyers, readers, editors, and others can review all products on the site, especially books. is an online professional services provider that allows contractors to describe their experience 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., an online advisor on technology products, offers customer comments and evaluations based on ease of use, features, and stability, along with expert reviews. The advantage is that a product supplier can compare experts opinions with those of consumers. Customer complaint sites. Customer complaint forums are designed mainly for dissatisfied customers. allows customers to voice unfavorable experiences with specific companies. Another site,, lets customers vent their frustrations with particular firms or offerings. Public blogs. Tens of millions of blogs and social networks exist online, offering personal opinions, reviews, ratings, and recommendations on virtually any topic and their numbers continue to grow. Firms such as Nielsen s BuzzMetrics and Scout Labs analyze blogs and social networks to provide insights into consumer sentiment. Communicating and Acting on Marketing Intelligence In some companies, the staff scans the Internet and major publications, abstracts relevant news, and disseminates a news bulletin to marketing managers. The competitive intelligence function works best when it is closely coordinated with the decision-making process.19 Ticket broker StubHub monitors online activity so that when confusion arose over a rainout at a New York Yankees game, for instance, it was able to respond quickly. 96 PART 2 C APTURING MARKETING INSIGHTS Given the speed of the Internet, it is important to act quickly on information gleaned online. Here are two companies that benefited from a proactive approach to online information:20 When ticket broker StubHub detected a sudden surge of negative sentiment about its brand after confusion arose about refunds for a rain-delayed Yankees Red Sox game, it jumped in to offer appropriate discounts and credits. The director of customer service observed, This [episode] is a canary in a coal mine for us. When Coke s 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. Needs and Trends Enterprising individuals and companies manage to create new solutions to unmet needs. 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. 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.21 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 offerings after a wave of bad press: The Today Show called its chicken and artichoke sandwich the calorie equivalent of 16 Fudgesicles, and in its annual list of unhealthy restaurant dishes, Men s Health declared its 1,630 calorie dessert ravioli the worst dessert in America. 22 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. 23 To help marketers spot cultural shifts that might bring new opportunities or threats, several firms offer social-cultural forecasts. The Yankelovich Monitor interviews 2,500 people nationally each year and has tracked 35 social value and lifestyle trends since 1971, such as anti-bigness, mysticism, living for today, away from possessions, and sensuousness. A new market opportunity doesn t guarantee success, of course, even if the new product is technically feasible. Market research is necessary to determine an opportunity s profit potential. Identifying the Major Forces The end of the first decade of the new century brought a series of new challenges: the steep decline of the stock market, which affected savings, investment, and retirement funds; increasing unemployment; corporate scandals; stronger indications of global warming and other signs of deterioration in the national environment; and of course, the rise of terrorism. These dramatic events were accompanied by the continuation of many existing trends that have already profoundly influenced the global landscape.24 Firms must monitor six major forces in the broad environment: demographic, economic, socialcultural, natural, technological, and political-legal. We ll describe them separately, but remember that 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). COLLECTING INFORMATION AND FORECASTING DEMAND The Demographic Environment Demographic developments often move at a fairly predictable pace. The main one marketers monitor is population, including the size and growth rate of population in cities, regions, and nations; age distribution and ethnic mix; educational levels; household patterns; and regional characteristics and movements. WORLDWIDE POPULATION GROWTH World population growth is explosive: Earth s population totaled 6.8 billion in 2010 and will exceed 9 billion by 2040.25 Table 3.3 offers an interesting perspective.26 Population growth is highest in countries and communities that can least afford it. Developing regions of the world currently account for 84 percent of the world population and are growing at 1 percent to 2 percent per year; the population in developed countries is growing at only 0.3 percent.27 In developing countries, modern medicine is lowering the death rate, but the birthrate remains fairly stable. A growing population does not mean growing markets unless there is sufficient purchasing power. Care and education of children can raise the standard of living but are nearly impossible to accomplish in most developing countries. Nonetheless, companies that carefully analyze these markets can find major opportunities. Sometimes the lessons from developing markets are helping businesses in developed markets. See Marketing Insight: Finding Gold at the Bottom of the Pyramid. POPULATION AGE MIX Mexico has a very young population and rapid population growth. At the other extreme is Italy, with 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 ten people worldwide will be 65 or older. In the United States, 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 will be growing faster than the population as a whole in each of the 50 states.28 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 TABLE 3.3 The World as a Village If the world were a village of 100 people: * 61 villagers would be Asian (of that, 20 would be Chinese and 17 would be Indian), 14 would be African, 11 would be European, 8 would be Latin or South American, 5 would be North American, and only one 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. * 18 villagers would be under 10 years of age and 11 would be over 60 years old. There would be an equal number of males and females. * There would be 18 cars in the village. * 63 villagers would have inadequate sanitation. * 32 villagers would be Christians, 20 would be Muslims, 14 would be Hindus, 6 would be Buddhists, 16 would be non-religious, and the remaining 12 would be members of other religions. * 30 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). * 53 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). | CHAPTER 3 97 98 PART 2 C APTURING MARKETING INSIGHTS Marketing Insight Finding Gold at the Bottom of the Pyramid Business writer C.K. Prahalad believes much innovation can come from developments in emerging markets such as China and India. He estimates there are 5 billion unserved and underserved people at the so-called bottom of the pyramid. One study showed that 4 billion people live on $2 or less a day. Firms operating in those markets have had to 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 that has spets focus on their own area. 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. Overseas firms are also finding creative solutions in developing countries. In Brazil, India, Eastern Europe, and other markets, Microsoft launched its pay-as-you-go FlexGo program, which allows users to prepay to use a fully loaded PC only for as long as wanted or needed without having to pay the full price the PC would normally command. When the payment runs out, the PC stops operating and the user prepays again to restart it. Other firms find reverse innovation advantages by developing products in countries like China and India and then distributing them globally. After GE successfully introduced a $1,000 handheld electrocardiogram device for rural India and a portable, PC-based ultrasound machine for rural China, it began to sell them in the United States. 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. 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; Pete Engardio, Business Prophet: How C.K. Prahalad Is Changing the Way CEOs Think, BusinessWeek, January 23, 2006, pp. 68 73; Reena Jane, Inspiration from Emerging Economies, BusinessWeek, March 23 and 30, 2009, pp. 38 41; Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, How GE Is Disrupting Itself, Harvard Business Review, October 2009, pp. 56 65; Peter J. Williamson and Ming Zeng, Value-for-Money Strategies for Recessionary Times, Harvard Business Review, March 2009, pp. 66 74. 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 Japanese; at the other is the United States, where nearly 25 million people more than 9 percent of the population were born in another country. As of the 2000 census, the U.S. population was 72 percent White, 13 percent African American, and 11 percent Hispanic. The Hispanic population has been growing fast and is expected to make up 18.9 percent of the population by 2020; its largest subgroups are of Mexican (5.4 percent), Puerto Rican (1.1 percent), and Cuban (0.4 percent) descent. Asian Americans constituted 3.8 percent of the U.S. population; Chinese are the largest group, followed by Filipinos, Japanese, Asian Indians, and Koreans, in that order. The growth of the Hispanic population represents a major shift in the nation s center of gravity. Hispanics made up half of all new workers in the past decade and will account for 25 percent of C OLLECTING INFORMATION AND FORECASTING DEMAND workers in two generations. Despite lagging family incomes, their disposable income has grown twice as fast as the rest of the population and could reach $1.2 trillion by 2012. From the food U.S. consumers eat, to the clothing, music, and cars they buy, Hispanics are having a huge impact. Companies are scrambling to refine their products and marketing to reach this fastest-growing and most influential consumer group:29 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 emphasize the joy of mother and child playing together with Fisher-Price toys.30 Several food, clothing, and furniture companies have directed products and promotions to one or more ethnic groups.31 Yet marketers must not overgeneralize. Within each ethnic group are consumers quite different from each other.32 For instance, a 2005 Yankelovich Monitor Multicultural Marketing study separated the African American market into six sociobehavioral segments: Emulators, Seekers, Reachers, Attainers, Elites, and Conservers. The largest and perhaps most influential are the Reachers (24 percent) and Attainers (27 percent), with very different needs. Reachers, around 40, are slowly working toward the American dream. Often single parents caring for elderly relatives, they have a median income of $28,000 and seek the greatest value for their money. Attainers have a more defined sense of self and solid plans for the future. Their median income is $55,000, and they want ideas and information to improve their quality of life.33 Diversity 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 Peapod, and for various drugstore chains. EDUCATIONAL GROUPS The population in any society falls into five educational groups: illiterates, high school dropouts, high school diplomas, college degrees, and professional degrees. Over two-thirds of the world s 785 million illiterate adults are found in only eight countries (India, China, Bangladesh, Pakistan, Nigeria, Ethiopia, Indonesia, and Egypt); of all illiterate adults in the world, two-thirds are women.34 The United States has one of the world s highest percentages of college-educated citizens: 54 percent of those 25 years or older have had some college or more, 28 percent have bachelor s degrees, and 10 percent have advanced degrees. The large number of educated people in the United States drives strong demand for high-quality books, magazines, and travel, and creates a high supply of skills. HOUSEHOLD PATTERNS The traditional household consists of a husband, wife, and children (and sometimes grandparents). Yet by 2010, only one in five U.S. households will consist of a married couple with children under 18. Other 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).35 More people are divorcing or separating, choosing not to marry, marrying later, or marrying without intending to have children. Each group 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.36 Nontraditional households are growing more rapidly than traditional households. Academics and marketing experts estimate that the gay and lesbian population ranges between 4 percent and 8 percent of the total U.S. population, higher in urban areas.37 Even so-called traditional households have experienced change. Boomer dads marry later than their fathers or grandfathers did, shop more, and are much more active in raising their kids. To appeal to them, the maker of the high-concept Bugaboo stroller designed a model with a sleek look and dirt bike style tires. Dyson, the high-end vacuum company, is appealing to dads inner geek by focusing on the machine s revolutionary technology. Before Dyson entered the U.S. market, men weren t even on the radar for vacuum cleaner sales. Now they make up 40 percent of Dyson s customers.38 The Economic Environment The available purchasing power in an economy depends on current income, prices, savings, debt, and credit availability. As the recent economic downturn vividly demonstrated, trends affecting purchasing power can have a strong impact on business, especially for companies whose products are geared to high-income and price-sensitive consumers. | CHAPTER 3 99 1 00 PART 2 C APTURING MARKETING INSIGHTS CONSUMER PSYCHOLOGY Did new consumer spending Starwood s Aloft hotel chain blends urban chic with affordable prices. patterns during the 2008 2009 recession reflect short-term, temporary adjustments or long-term, permanent changes?39 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. Others maintained tighter spending reflected a mere economic constraint and not a fundamental behavioral change. Thus, consumers aspirations would stay the same, and spending would resume when the economy improves. Identifying the more likely long-term scenario especially with the coveted 18- to 34-year-old age group would help to direct how marketers spend their money. After six months of research and development in the baby boomer market, Starwood launched a style at a steal initiative to offer affordable but stylish hotel alternatives to its high-end W, Sheraton, and Westin chains. Targeting an audience seeking both thrift and luxury, it introduced two new low-cost chains: Aloft, designed to reflect the urban cool of loft apartments, and Element, suites with every element of modern daily lives, including healthy food choices and spa-like bathrooms.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-distribution 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 Lamborghinis is Portugal (income pattern 3) one of the poorer countries in Western Europe, but with enough wealthy families to afford expensive cars. INCOME, SAVINGS, DEBT, AND CREDIT Consumer expenditures are affected by income levels, savings rates, debt practices, and credit availability. 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 to 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 really not 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 25,000 employees the fast-growing $4 billion company hires every year receive technical, team, and communication training in Infosys s $120 million facility outside Bangalore.41 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. In the United States during the 1960s and 1970s, pleasure seekers sought fun, change, and escape. Others sought self-realization. Today, some are adopting more conservative behaviors and ambitions (see Table 3.4 for favorite consumer leisuretime 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 surrogates like television, video games, and social networking sites. C OLLECTING INFORMATION AND FORECASTING DEMAND TABLE 3.4 Favorite Leisure-Time Activities 1995 Reading TV watching Spending time with family/kids Going to movies Fishing Computer activities Gardening Renting movies Walking Exercise (aerobics, weights) 2008 % 28 25 12 8 10 2 9 5 8 2 % 30 24 20 8 7 7 5 5 6 8 Source: Harris Interactive, Spontaneous, Unaided Responses to: What Are Your Two or Three Most Favorite Leisure-Time Activities? Base: All Adults. * * * * Views of organizations. After a wave of layoffs and corporate scandals, organizational loyalty has declined.42 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.43 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).44 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 simpler 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 producing wider varieties of camping, hiking, boating, 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 the high persistence of core cultural values and the existence of subcultures. Let s look at both. HIGH PERSISTENCE OF 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: the alternative rock band Green Day, the NBA s LeBron James, and snowboarder and skateboarder Shaun White. | CHAPTER 3 101 1 02 PART 2 C APTURING MARKETING INSIGHTS Young people may be influenced by a diverse range of heroes, from basketball player LeBron James to punk-rock band Green Day. EXISTENCE OF 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 grownups. We think it s because we brought them in as teenagers, said Frito-Lay s marketing director.45 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 carry these concerns into political and social action. Environmental regulations hit certain industries hard. Steel companies and public utilities have invested billions of dollars in pollution-control equipment and environmentally 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:46 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 technology high-pressure direct injection that allows diesel engines to run on cleaner-burning liquid natural gas, reducing greenhouse emissions by a fourth. C OLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 103 Actor and environmental activist Ed Begley Jr. examines a solar oven. * Due to millions of rural cooking fires, parts of Southern Asia suffer extremely poor air quality. A person cooking 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. Corporate environmentalism recognizes the need to integrate environmental issues into the firm s strategic plans. Trends in the natural environment 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. (See also Marketing Insight: The Green Marketing Revolution. )47 * * * * 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 substantial 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 It is the essence of market capitalism to be dynamic and tolerate the creative destructiveness of technology as the price of progress. Transistors hurt the vacuum-tube industry, and autos hurt the railroads. Television hurt the newspapers, and the Internet hurt them both. When old industries fight or ignore new technologies, their businesses decline. Tower Records had ample warning that its music retail business would be hurt by Internet downloads of music (as well as the growing number of discount music retailers). Its failure to respond led to the liquidation of all its domestic physical stores in 2006. 104 PART 2 C APTURING MARKETING INSIGHTS Marketing Insight Marketing The Green Marketing Revolution Consumers environmental concerns are real. Gallup polls reveal the percentage of U.S. adults who believe global warming will pose a serious threat during their lifetime has increased from 25 percent in 1998 to 40 percent in 2008. A Mediamark Research & Intelligence study in 2008 found that almost two-thirds of U.S. men and women stated that p reserving the environment as a guiding principle in your life was v ery important. A Washington Post /ABC News/ Stanford University poll in 2007 found that 94 percent of respondents were willing to personally change some of the things you do in order to improve the environment, with 50 percent saying they were very willing. Converting this concern into concerted consumer action on the environment, however, will be a longer-term process. A 2008 TNS survey found that only 26 percent of Americans said they were actively seeking environmentally friendly products. A 2008 Gallup poll found that only 28 percent of respondents claimed to have made major changes in their own shopping and living habits over the past five years to protect the environment. Other research reported that consumers were more concerned with closer to home environmental issues such as water pollution in rivers and lakes than broader issues such as global warming. As is often the case, behavioral change is following attitudinal change for consumers. Nevertheless, as research by GfK Roper Consulting shows, consumer expectations as to corporate behavior with the environment have significantly changed, and in many cases these expectations are higher than the demands they place on themselves. Consumers vary, however, in their environmental sensitivity and can be categorized into five groups based on their degree of commitment (see Figure 3.1). Interestingly, although some marketers assume that younger people are more concerned about the environment than older consumers, some research suggests that older consumers actually take their eco-responsibilities more seriously. In the past, the green marketing programs launched by companies around specific products were not always entirely successful for several possible reasons. Consumers might have thought that the product was inferior because it was green, or that it was not even really green to begin with. Those green products that were successful, however, persuaded consumers that they were acting in their own and society s long-run interest at the same time. Some examples were organic foods that were seen as healthier, tastier, and safer, and energy-efficient appliances that were seen as costing less to run. There are some expert recommendations as to how to avoid green marketing myopia by focusing on consumer value positioning, calibration of consumer knowledge, and the credibility of product claims. One challenge with green marketing is the difficulty consumers have in understanding the environmental benefits of products, leading to many accusations of greenwashing where products are not nearly as green and environmentally beneficial as their marketing might suggest. Although there have been green products emphasizing their natural benefits for years Tom s of Maine, Burt s Bees, Stonyfield Farm, and Seventh Generation to name just a few products offering environmental benefits are becoming more mainstream. Part of the success of Clorox Green Works cleaning products and household cleaning products, launched in January 2008, was that it found the sweet spot of a target market wanting to take smaller steps toward a greener lifestyle |Fig. 3.1| Consumer Environmental Segments Source: GfK Roper Green Gauge® 2007, GfK Roper Consulting, New York, NY. * Genuine Greens (15%): This segment is the most likely to think and act green. Some may be true environmental activists, but most probably fall more under the category of strong advocates. This group sees few barriers to behaving green and may be open to partnering with marketers on environmental initiatives. * Not Me Greens (18%): This segment expresses very pro-green attitudes, but its behaviors are only moderate, perhaps because these people perceive lots of barriers to living green. There may be a sense among this group that the issue is too big for them to handle, and they may need encouragement to take action. * Go-with-the-Flow Greens (17%): This group engages in some green behaviors mostly the easy ones such as recycling. But being green is not a priority for them, and they seem to take the path of least resistance. This group may only take action when it s convenient for them. * Dream Greens (13%): This segment cares a great deal about the environment, but doesn t seem to have the knowledge or resources to take action. This group may offer the greatest opportunity to act green if given the chance. * Business First Greens (23%): This segment s perspective is that the environment is not a huge concern and that business and industry is doing its part to help. This may explain why they don t feel the need to take action themselves even as they cite lots of barriers to doing so. * Mean Greens (13%): This group claims to be knowledgeable about environmental issues, but does not express pro-green attitudes or behaviors. Indeed, it is practically hostile toward pro-environmental ideas. This segment has chosen to reject prevailing notions about environmental protection and may even be viewed as a potential threat to green initiatives. C OLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 105 and matched that with a green product with a very modest price premium and sold through a grassroots marketing program. Environmental concerns are affecting how virtually every major company does their business: Walt Disney Corp. has pledged to reduce its solid waste by 2013, conserve millions of gallons of water, invest in renewable energy, and become completely carbon neutral (reaching 50 percent of that goal by 2012); Best Buy has expanded its recycling program for electronics; Caterpillar announced plans to reduce the GHG emissions of its entire product line by 20 percent by 2020; and Whole Foods, a leader among national supermarket chains in selling certified organic food already, cofounded a partnership to reduce emissions from grocery refrigerators and offsets 100 percent of its electricity use with renewable energy via wind-energy credits. Toyota, HP, IKEA, Procter & Gamble, and Walmart have all been linked to high-profile environmental and sustainability programs. Some other marketers, fearing harsh scrutiny or unrealistic expectations, keep a lower profile. Even though Nike uses recycled sneakers in its soles of new shoes, they chose not to publicize that fact so that they can keep their focus on performance and winning.The rules of the game in green marketing are changing rapidly as both consumers and companies respond to problems and proposed solutions to the significant environmental problems that exist. Sources: Jerry Adler, Going Green, Newsweek, July 17, 2006, pp. 43 52; Jacquelyn A. Ottman, Edwin R. Stafford, and Cathy L. Hartman, Avoiding Green Marketing Myopia, Environment (June 2006): 22 36; Jill Meredith Ginsberg and Paul N. Bloom, Choosing the Right Green Marketing Strategy, MIT Sloan Management Review (Fall 2004): 79 84; Jacquelyn Ottman, Green Marketing: Opportunity for Innovation, 2nd ed. (New York: BookSurge Publishing, 2004); Mark Dolliver, Deflating a Myth, Brandweek, May 12, 2008, pp. 30 31; Winner: Corporate Sustainability, Walt Disney Worldwide, Travel and Leisure, November 2009, p. 106; The Greenest Big Companies in America, Newsweek, September 28, 2009, pp. 34 53; Sarah Mahoney, Best Buy Connects Green with Thrift, Media Post News: Marketing Daily, January 28, 2009; Reena Jana, Nike Quietly Goes Green, BusinessWeek, June 11, 2009. Clorox s Green Works has been a huge market hit by combining environmental benefits with affordability. Major new technologies stimulate the economy s growth rate. Unfortunately, between innovations, an economy can stagnate. Minor innovations fill the gap new supermarket products such as frozen waffles, body washes, and energy bars might pop up but while lower risk, they can also divert research effort away from major breakthroughs. Innovation s long-run consequences are not always foreseeable. The contraceptive pill reduced family size and thus increased discretionary incomes, also raising spending on vacation travel, durable goods, and luxury items. Cell phones, video games, and the Internet are reducing 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 opportunities 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. So is the time between introduction and peak production. Apple ramped up in seven years to sell a staggering 220 million iPods worldwide by September 2009. UNLIMITED OPPORTUNITIES FOR INNOVATION Some of the most exciting work today is taking place in biotechnology, computers, microelectronics, telecommunications, robotics, and designer materials. Researchers are working on AIDS vaccines, safer contraceptives, and nonfattening foods. They are developing new classes of antibiotics to fight ultra-resistant infections, superheating furnaces to reduce trash to raw materials, and building miniature water-treatment plants for remote locations.48 1 06 PART 2 C APTURING MARKETING INSIGHTS VARYING R&D BUDGETS A growing portion of U.S. R&D expenditures goes to the development as opposed to the research side, raising concerns about whether the United States can maintain its lead in basic science. Many companies put their money into copying competitors products and making minor feature and style improvements. Even basic research companies such as Dow Chemical, Bell Laboratories, and Pfizer are proceeding cautiously, and more consortiums than single companies are directing research efforts toward major breakthroughs. INCREASED REGULATION OF TECHNOLOGICAL CHANGE Government has expanded its agencies powers to investigate and ban potentially unsafe products. In the United States, the Food and Drug Administration (FDA) must approve all drugs before they can be sold. Safety and health regulations have increased for food, automobiles, clothing, electrical appliances, and construction. The Political-Legal Environment The political and legal environment consists of laws, government agencies, and pressure groups that influence various organizations and individuals. Sometimes these laws create new business opportunities. Mandatory recycling laws have boosted the recycling industry and launched dozens of new companies making new products from recycled materials. Two major trends are the increase in business legislation and the growth of special-interest groups. Text messaging is profoundly changing how consumers choose to communicate. INCREASE IN BUSINESS LEGISLATION Business legislation is intended to protect companies from unfair competition, protect consumers from unfair business practices, protect society from unbridled business behavior, 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, product liability, and commercial transactions for the 27 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.49 Norway bans several forms of sales promotion trading stamps, contests, and premiums as inappropriate or unfair. Thailand requires food processors selling national brands to market low-price brands also, so low-income consumers can find economy brands. In India, food companies need special approval to launch duplicate brands, such as another cola drink or brand of rice. As more transactions take place in cyberspace, marketers must establish new ways to do business ethically. 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 affect the design of smoke detectors; scientific groups affect the design of spray products. Many companies have established public affairs departments to deal with these groups and issues. The consumerist movement organized citizens and government to strengthen the rights and powers of buyers 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.50 Consumers worry they will be robbed or cheated; that private information will be used against them; that they will be bombarded by solicitations; and that children will be targeted.51 Wise companies establish consumer affairs departments to formulate policies and resolve complaints. C OLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 107 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 company will face excess or inadequate inventory. Since it s based on estimates of demand, managers need to define what they mean by market demand. Although DuPont s Performance Materials group knows DuPont Tyvek has 70 percent of the $100 million market for air-barrier membranes, they see greater opportunity with more products and services to tap into the entire $7 billion U.S. home construction market.52 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 3.2). Each demand measure 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 particular state might ban motorcycle sales to anyone under 21 years of age. Eligible adults constitute the qualified available market the set of consumers who have interest, income, access, and qualifications for the market offer. 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. Space Level |Fig. 3.2| World U.S.A. Region Territory Customer Ninety Types of Demand Measurement (6 * 5 * 3) All sales Industry sales Product Level Company sales Product line sales Product form sales Product item sales Short run Medium run Time Level Long run C APTURING MARKETING INSIGHTS 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 buyers. 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 distinguish 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 3.3(a). The horizontal 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 varying 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 marketing expenditures. In terms of Figure 3.3(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 nonexpansible 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 marketpenetration index. A low index indicates substantial growth potential for all the firms. A high index suggests it will be expensive to attract the few remaining prospects. Generally, price competition increases and margins fall when the market-penetration index is already high. (a) Marketing Demand as a Function of Industry Marketing Expenditure (assumes a particular marketing environment) Market potential, Q2 Market forecast, QF Market minimum, Q1 |Fig. 3.3| Planned expenditure Industry Marketing Expenditure Market Demand in the Specific Period PART 2 Market Demand in the Specific Period 1 08 Market Demand Functions (b) Marketing Demand as a Function of Industry Marketing Expenditure (two different environments assumed) Market potential (prosperity) Prosperity Market potential (recession) Recession Industry Marketing Expenditure C OLLECTING INFORMATION AND FORECASTING DEMAND 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.53 Remember the market demand function is not a picture of market demand over time. Rather, it shows alternative 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. The dependence of market potential on the environment is illustrated in Figure 3.3(b). Market analysts distinguish between the position of the market demand function and movement along it. Companies cannot do anything 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. Companies assume that 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. 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.54 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 3.3. 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 got 100 percent of the market. In most cases, company sales potential is less than the | CHAPTER 3 109 1 10 PART 2 C APTURING MARKETING INSIGHTS 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. 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, times 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, 261 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 209 million people, are in the potentials pool. Further research might tell us that people of low income and low education don t buy books, and they constitute over 30 percent of the potentials pool. Eliminating them, we arrive at a prospect pool of approximately 146.3 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 * Population * light beer Average percentage of personal discretionary income per capita spent on food Average Average Average Expected percentage of percentage of percentage of percentage of amount spent amount spent on amount spent amount spent * on food that is * beverages that is * on alcoholic * on beer that spent on spent on alcoholic beverages that will be spent on beverages beverages is spent on beer 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 governments.55 The NAICS classifies all manufacturing into 20 major industry sectors and further breaks each sector into a six-digit, hierarchical structure as follows. C OLLECTING INFORMATION AND FORECASTING DEMAND 51 Industry sector (information) 513 5133 Industry subsector (broadcasting and telecommunications) Industry group (telecommunications) 51332 Industry (wireless telecommunications carriers, except satellite) 513321 National industry (U.S. paging) For each six-digit NAICS number, a company can purchase CD-ROMs of business directories that provide complete company 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 all six-digit NAICS industries that might use lathes, the company can (1) determine 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; (3) mail questionnaires to a wide range of companies inquiring about their interest in wood lathes. The company s next task is to determine 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 since 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 personal income, 1.96 percent of U.S. retail sales, and 2.28 percent of U.S. population, and the respective weights 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 appropriate. 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 reviewing 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 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 Boston 6.74 3.49 10.41 3.85 65 91 Toledo Chicago .97 1.13 .81 .81 120 140 Baltimore 3.12 3.00 104 | CHAPTER 3 111 1 12 PART 2 C APTURING MARKETING INSIGHTS 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. 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.56 After the company decides on the city-by-city allocation of its budget, it can refine each city 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 centers (designed by the U.S. Post Office) 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, or even individual households with ad messages delivered via interactive TV, zoned editions of newspapers, Yellow Pages, outdoor media, and local Internet searches.57 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 performance against the industry s. If a company s sales are increasing by 5 percent a year and industry sales are increasing 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 company 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 information 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, 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 their 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 population, 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 produce speculative scenarios; three such firms are the Institute for the Future, Hudson Institute, and the Futures Group. 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 C OLLECTING INFORMATION AND FORECASTING DEMAND 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 No chance 0.20 Slight possibility 0.40 Fair possibility 0.60 Good possibility 0.80 High possibility 1.00 Certain 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 sentiment 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 buyer interviewing 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 to actual sales. Sales force forecasts 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, territory, 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 them into a single estimate (pooling of individual estimates). Further rounds of estimating and refining follow (the Delphi method).58 PAST-SALES ANALYSIS Firms can develop sales forecasts on the basis of past sales. Timeseries 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 20.) | CHAPTER 3 113 1 14 PART 2 C APTURING MARKETING INSIGHTS Summary 1. 2. 3. 4. 5. 6. To carry out their analysis, planning, implementation, and control responsibilities, marketing managers need a marketing information system (MIS). The role of the MIS is to assess the managers information needs, develop the needed information, and distribute that information in a timely manner. An MIS has three components: (a) an internal records system, which includes information on the order-topayment cycle and sales information systems; (b) a marketing intelligence system, a set of procedures and sources used by managers to obtain everyday information about pertinent developments in the marketing environment; 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. 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). Within the rapidly changing global picture, marketers must monitor six major environmental forces: demographic, economic, social-cultural, natural, technological, and political-legal. 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. 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. They must market products that correspond to society s core and secondary values and address the needs of different subcultures within a society. 8. In the natural environment, marketers need to be aware of the public s increased concern about the health of the environment. Many marketers are now embracing sustainability and green marketing programs that provide better environmental solutions as a result. 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. There are two types of demand: market demand and company demand. 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 computerized data collection procedures are essential to all types of demand and sales forecasting. Applications Marketing Debate Is Consumer Behavior More a Function of a Person s Age or Generation? One of the widely debated issues in developing marketing programs that target certain age groups is how much consumers change over time. Some marketers maintain that age differences are critical and that the needs and wants of a 25-year-old in 2010 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? C OLLECTING INFORMATION AND FORECASTING DEMAND Marketing Excellence >>Microsoft Microsoft is the world s most successful software company. The company was founded by Bill Gates and Paul Allen in 1975 with the original mission of having a computer on every desk and in every home, running Microsoft software. Since then, Microsoft has grown to become the third most valuable brand in the world through strategic marketing and aggressive growth tactics. Microsoft s first significant success occurred in the early 1980s with the creation of the DOS operating system for IBM computers. The company used this initial success with IBM to sell software to other manufacturers, quickly making Microsoft a major player in the industry. Initial advertising efforts focused on communicating the company s range of products from DOS to the launch of Excel and Windows all under a unified Microsoft look. Microsoft went public in 1986 and grew tremendously over the next decade as the Windows operating system and Microsoft Office took off. In 1990, Microsoft launched a completely revamped version of its operating system and named it Windows 3.0. Windows 3.0 offered an improved set of Windows icons and 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 phenomenon in those days. In addition, Windows 3.0 became the first operating system to be preinstalled on certain PCs, marking a major milestone in the industry and for Microsoft. Throughout the 1990s, Microsoft s communication efforts convinced businesses that its software was not only the best choice for business but also that it needed to be upgraded frequently. Microsoft spent millions of dollars in magazine advertising and received endorsements from the top computer magazines in the industry, making Microsoft Windows and Office the must-have software of its time. Microsoft successfully launched Windows 95 in | CHAPTER 3 115 1995 and Windows 98 in 1998, using the slogan, Where Do You Want to Go Today? The slogan didn t push individual products but rather the company itself, which could help empower companies and consumers alike. During the late 1990s, Microsoft entered the notorious browser wars as companies struggled to find their place during the Internet boom. In 1995, Netscape launched its Navigator browser over the Internet. Realizing what a good product Netscape had, Microsoft launched the first version of its own browser, Internet Explorer, later that same year. By 1997, Netscape held a 72 percent share and Explorer an 18 percent share. Five years later, however, Netscape s share had fallen to 4 percent. During those five years, Microsoft took three major steps to overtake the competition. First, it bundled Internet Explorer with its Office product, which included Excel, Word, and PowerPoint. Automatically, consumers who wanted MS Office became Explorer users as well. Second, Microsoft partnered with AOL, which opened the doors to 5 million new consumers almost overnight. And, finally, Microsoft used its deep pockets to ensure that Internet Explorer was available free, essentially cutting off Netscape s air supply. These efforts, however, were not without controversy. Microsoft faced antitrust charges in 1998 and numerous lawsuits based on its marketing tactics, and some perceived that it was monopolizing the industry. Charges aside, the company s stock took off, peaking in 1999 at $60 per share. Microsoft released Windows 2000 in 2000 and Windows XP in 2001. It also launched Xbox in 2001, marking the company s entrance into the multibillion-dollar gaming industry. Over the next several years, Microsoft s stock price dipped by over $40 a share as consumers waited for the next operating system and Apple made a significant comeback with several new Mac computers, the iPod, the iPhone, and iTunes. Microsoft launched the Vista operating system in 2007 to great expectations; however, it was plagued with bugs and problems. As the recession worsened in 2008, the company found itself in a bind. Its brand image was tarnished from years of Apple s successful Get a Mac campaign, a series of commercials that featured a smart, creative, easygoing Mac character alongside a geeky, virus-prone, uptight PC character. In addition, consumers and analysts continued to slam Vista for its poor performance. In response, Microsoft created a campaign entitled Windows. Life Without Walls t o help turn its image around. The company focused on how cost effective computers with its software were, a message that resonated well in the recession. It launched a series of commercials boasting I m a PC t hat began with a Microsoft employee (looking very similar to the PC 1 16 PART 2 C APTURING MARKETING INSIGHTS character from the Apple ads) stating, Hello, I m a PC and I ve been made into a stereotype. The commercials, which highlighted a wide variety of individuals who prided themselves on being PC owners, helped improve employee morale and customer loyalty. Microsoft opened a handful of retail stores similar to Apple stores in 2009. The purpose of opening these stores is to create deeper engagement with consumers and continue to learn firsthand about what they want and how they buy, Microsoft said in a statement. Today, the company offers a wide range of software and home entertainment products. In the ongoing browser wars, Internet Explorer holds a 66 percent market share compared to Firefox s 22 percent and Safari s 8 percent. In 2009, Microsoft launched a new search engine called Bing, which challenges Google s dominant position in the marketplace and claims to give better search results. Microsoft s most profitable products continue to be Microsoft Windows and Microsoft Office, Marketing Excellence >>Ferrero Ferrero is an Italian confectionery company, privately owned by the Ferrero family. Lauded in Reputation Institute s 2009 survey as t he most reputable company in the world, F errero holds 7.3 percent of the world s chocolate market and is the leader in Western Europe with a 13.2 percent share. Its revenue in fiscal year 2008 was $8.2 billion, an 8.2 percent rise from the previous year, and the company employs more than 21,000 people in 18 factories worldwide. which bring in approximately 90 percent of the company s $60 billion in revenue. Questions 1. Evaluate Microsoft s strategy in good and poor economic times. 2. Discuss the pros and cons of Microsoft s most recent I m a PC campaign. Is Microsoft doing a good thing by acknowledging Apple s campaign in its own marketing message? Why or why not? Sources: Burt Helm, Best Global Brands, BusinessWeek, September 18, 2008; 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. 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 production of hazelnuts, and Ferrero s cheaply produced pasta gianduja block, made from readily available ingredients, suitably satisfied consumers cravings for sweet foods. The product was a hit, and by 1951 the Ferrero family 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 now 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 consumable 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 extremely popular. This early understanding of global trends allowed the company to swiftly expand into the 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 customers with unique products of the highest quality and integrity and contributing to the well-being of employers, customers, and the company. C OLLECTING INFORMATION AND FORECASTING DEMAND The firm concentrates on meeting high standards; thus it manufactures only in places where it is sure it can deliver consistent quality and where a secure retail supply chain means it will never let consumers down. Managing Director of Ferrero Australia, Rocco Perna, believes that nothing the company does should compromise its consumer relationships, and that if such a risk does exist, the product should not be made available. He points out that only top-quality, locally sourced ingredients are used in Ferrero s products, with the exception of cacao and hazelnut. Ferrero s focus on consumers is accompanied by its emphasis on quality, integrity, product innovation, and passion. The company strives to understand market 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 testmarketed three products in the Kinder line in Victoria for two years before nationally marketing them. By understanding the insights of the market, Ferrero has ensured constant growth since the 1940s. The company again demonstrated its understanding of consumer markets in its forays into the Indian market. Leading up to the holiday of Deepavali in 2010, the company marketed Ferrero Rocher in gift packs as a lower-calorie alternative to traditional Indian milk sweets in up-market circles. The company also started to use new media strategies in its product development. To promote Tic Tac, Ferrero Australia launched a Facebook page and an iPhone application, which allowed the company to engage with customers online. Based on feedback, Ferrero was able to introduce two new products to the Tic Tac line: the limited edition Bold! and a larger 24-gram pack. These were available in two new flavors: Apple Sour and Mint. Ferrero also used the Internet to reach out to parents and children. In 2003, in addition to the small, collectible figurine inside the Kinder Surprise egg, the company inserted a small slip of paper containing a Magicode that allowed children to play an online Surprise game featuring Kinder characters. In 2010, Ferrero drew attention to its commitment to quality by launching its first boutique store online,, which sells a range of premium gifts priced from $45 to $360 and gift boxes for special occasions. These gift boxes contain chocolates from the Ferrero Rocher line, including the traditional praline chocolate, the dark chocolate Ferrero Rondnoir, and the white chocolate Raffaello. Corporate gifts are also available. Ferrero uses its marketing insights to promote sales. The company s 2010 promotion of Nutella included | CHAPTER 3 117 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. Ferrero also has to think strategically in order to broaden its market share in other ways. In January 2010, Ferrero announced that it did not intend to challenge Kraft Food s takeover of British confectioner Cadbury. Ferrero announced on January 14, 2010 that the debts and job cuts that would have been required to accommodate this move, ostensibly considered in order to improve market reach, were not justified. Instead, the company aimed to introduce fresh products, using newer technologies, in order to improve its reach into South American and Asian markets. By not overdiversifying, Ferrero has maintained its ability to focus on its commitment to a small number of high-quality products. Finally, Ferrero Australia has also engaged in many community programs, such as a food bank that distributes 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 the abolition of child labor and forest conservation methods. 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 Nutella s role in a healthy and wellbalanced breakfast and pledging not to target children in its advertisements. Questions 1. Evaluate Ferrero Australia s decision to open an online boutique. Will this have any impact on the company s other business segments? 2. How can Ferrero use new technology to market its products better? Sources: Klaus Kneale, World s Most Reputable Companies, Forbes, May 6, 2009,; Armorel Kenna, Ferrero Won t Make Takeover Bid for Cadbury to Challenge Kraft, Bloomberg BusinessWeek, January 25, 2010,; Ferrero,; FlowerAdvisor, 118 PART 2 Ch ter ap CAPTURING MARKETING INSIGHTS 4 In This Chapter, We Will Address the Following Questions 1. What constitutes good marketing research? 2. What are the best metrics for measuring marketing productivity? 3. How can marketers assess their return on investment of marketing expenditures? Insightful consumer research helped Kimberly-Clark improve its Huggies diapers and gain share in the market. Conducting Marketing Research Good marketers need insights to help them interpret past performance as well as plan future activities. To make the best possible tactical decisions in the short run and strategic decisions in the long run, they need timely, accurate, and actionable information about consumers, competition, and their brands. Discovering a consumer insight and understanding its marketing implications can often lead to a successful product launch or spur the growth of a brand. A series of novel consumer innovations through the years including Kleenex facial tissues, Kotex feminine napkins, and others have transformed Kimberly-Clark from a paper mill company to a consumer products powerhouse. Among the company s recent successes was Huggies Supreme Natural Fit, named one of the most successful new product launches in 2007. Nearly three years of research and design were invested in the creation of the new diaper. After assembling a sample of new mothers from different parts of the country with different income backgrounds and ethnicities, Kimberly-Clark s marketers conducted inhome interviews and placed motion-activated cameras in homes to learn about diaper-changing routines. Seeing new moms constantly struggle to straighten a squirming baby s legs when putting on a diaper led to the insight that the new diaper also needed to be shaped to better follow the curves of a baby s body. Because mothers said they wanted their older babies to feel like they weren t wearing a diaper, the new diaper also had to be thinner with a closer fit, so new polymers cut the width of the imbedded absorbent by 16 percent and stretch was added to the back waistband. When research also revealed that moms often used the cartoon graphics on another diaper to distract the baby during a diaper change, more active images of Disney-licensed Winnie the Pooh characters were added. The successful launch of the research-inspired innovation boosted Kimberly-Clark s market share by one to two percentage In this chapter, we review the steps in the marketing points and significantly contributed to the company s $4 billion-plus research process. We also consider how marketers can develop 1 effective metrics for measuring marketing productivity. sales in diapers that year. The Marketing Research System Marketing managers often commission formal marketing studies of specific problems and opportunities. They may request 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 into the customer s attitudes and buying behavior. Marketing insights provide diagnostic information about how and why we observe certain effects in the marketplace, and what that means to marketers.2 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 119 1 20 PART 2 C APTURING MARKETING INSIGHTS of makes me feel like a smart shopper, its marketers used those insights to develop their Save Money, Live Better campaign. Gillette s Venus razor has become the most successful female shaving line ever holding more than 50 percent of the global women s shaving market as a result of insightful consumer research that led to product design, packaging, and advertising cues that better satisfied female shaving needs.3 Venus Razor As part of a $300 million budget for the development of its first razor designed solely for women, Gillette conducted extensive consumer research and performed numerous market tests. The razor, called Venus, was a marked departure from previous women s razor designs, which had essentially been colored or repackaged versions of men s razors. After research revealed that women change their grip on a razor about 30 times during each shaving session, Gillette designed the Venus with a wide, sculpted rubberized handle offering superior grip and control, and an oval-shaped blade in a storage case that could stick to shower walls. Research also indicated that women were reluctant to leave the shower in order to replace a dull blade, so the case was made to hold spare blade cartridges. When Gillette research later revealed four distinct segments of women shavers perfect shave seekers (no missed hairs), skin pamperers, pragmatic functionalists, and EZ seekers the company designed Venus products for each of them. Extensive consumer research was crucial to the success of Gillette s Venus series of razors designed exclusively for women. Gaining marketing insights is crucial for marketing success. 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.4 We define marketing research as the systematic design, collection, analysis, and reporting of data and findings relevant to a specific marketing situation facing the company. Spending on marketing research topped $28 billion globally in 2009, according to ESOMAR, the world association of opinion and market research professionals.5 Most large companies have their own marketing research departments, which often play crucial roles within the organization. Procter & Gamble s Consumer & Market Knowledge (CMK) market research function has dedicated CMK groups working for P&G businesses around the world to improve both their brand strategies and program execution, as well as a relatively smaller, centralized corporate CMK group that focuses on a variety of big-picture concerns that transcend any specific line of business. Marketing research, however, is not limited to large companies with big budgets and marketing research departments. 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 affordable ways, such as: 1. 2. 3. 4. Engaging students or professors to design and carry out projects Companies such as American Express, Booz Allen Hamilton, GE, Hilton Hotels, IBM, Mars, Price Chopper, and Whirlpool engage in crowdcasting and are sponsors of competitions such as the Innovation Challenge, where top MBA students compete in teams. The payoff to the students is experience and visibility; the payoff to the companies is a fresh sets of eyes to solve problems at a fraction of what consultants would charge.6 Using the Internet A company can collect considerable information at very little cost by examining competitors Web sites, monitoring chat rooms, and accessing published data. Checking out rivals Many small businesses, such as restaurants, hotels, or specialty retailers, routinely visit competitors to learn about changes they have made. 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. Those partners targeting small or medium-sized businesses may be especially C ONDUCTING MARKETING RESEARCH | CHAPTER 4 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.7 Most companies use a combination of marketing research resources to study their industries, competitors, audiences, and channel strategies. Companies 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. 2. 3. 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. Custom marketing research firms These firms are hired to carry out specific projects. They design the study and report the findings. 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. To take advantage of all these different resources and practices, good marketers adopt a formal marketing research process. The Marketing Research Process Effective marketing research follows the six steps shown in the following situation.8 Figure 4.1. We illustrate them in 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) an Internet connection primarily for e-mail but with some limited access to Web pages, (2) 24 channels of satellite cable TV, and (3) a 50-CD audio system that lets each passenger create a customized in-flight play list. The marketing research manager was assigned to investigate how first-class passengers would rate these services, specifically the Internet connection, and how much extra they would be willing to pay for it. One source estimates revenues of $70 billion from in-flight Internet access over 10 years, if enough first-class passengers paid $25. AA could thus recover its costs in a reasonable time. Making the connection available would cost the airline $90,000 per plane.9 Define the problem and research objectives Develop the research plan Collect the information 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 firstclass air travelers needs, will collect a lot of unnecessary information. One who says, Find out whether enough passengers aboard a B747 flying direct between Chicago and Tokyo would be willing to pay $25 for an Internet connection for American Airlines to break even in one year on the cost of offering this service, is taking too narrow a view of the problem. The marketing researcher might even ask, Why does the Internet connection have to be priced at $25 as opposed to $15, $35, or some other price? Why does American have to break even on the cost of the service, especially if it attracts new customers? Another relevant question to ask 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 offering an in-flight Internet service create enough incremental preference and profit for American Airlines to justify its cost against other possible investments in service enhancements American might make? To help in designing 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 an Internet connection? (2) If so, should we offer the service to first-class only, or Analyze the information Present the findings Make the decision |Fig. 4.1| The Marketing Research Process 121 122 PART 2 C APTURING MARKETING INSIGHTS An airline looking to add in-flight Internet service would need to conduct careful consumer research. include business class, and possibly economy class? (3) What price(s) should we charge? (4) On what types of planes and lengths of trips should we offer the service? Now management and marketing researchers are ready to set specific research objectives: (1) What types of first-class passengers would respond most to using an in-flight Internet service? (2) How many first-class passengers are likely to use the Internet service at different price levels? (3) How many extra first-class passengers might choose American because of this new service? (4) How much long-term goodwill will this service add to American Airlines image? (5) How important is Internet service to first-class passengers relative to other services, such as a power plug or enhanced entertainment? Not all research projects can be this specific. Some research is exploratory its goal is to shed light on the real nature of the problem and to suggest possible solutions or new ideas. Some research is descriptive it seeks to quantify demand, such as how many first-class passengers would purchase in-flight Internet service at $25. Some research is causal its purpose is to test a causeand-effect relationship. Step 2: Develop the Research Plan The second stage of marketing research is where we develop the most efficient plan for gathering the needed information and what that will cost. Suppose American made a prior estimate that launching in-flight Internet service would yield a long-term profit of $50,000. If the manager believes that doing the marketing 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.10 To design a research plan, we need to make decisions about the data sources, research approaches, research 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 for a specific research project. Researchers usually start their investigation by examining some of the rich variety of low-cost and readily available 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 J.D. Power and Associates semiannual Power Auto Online Media Study, a survey that gives insights into who buys specific brands and where on the Web advertisers can find them.11 When the needed data don t exist or are dated, inaccurate, incomplete, or unreliable, the researcher will need to collect primary data. Most marketing research projects do include some primary-data collection. C ONDUCTING MARKETING RESEARCH | CHAPTER 4 123 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 the relevant actors and settings unobtrusively as they shop or consume products.12 Sometimes they equip consumers with pagers and instruct them to write down what they re doing whenever prompted, or they hold informal interview sessions at a café or bar. Photographs can also provide a wealth of detailed information. Ethnographic research is a particular observational research approach that uses concepts and tools from anthropology and other social science disciplines to provide deep cultural understanding of how people live and work.13 The goal is to immerse the researcher into consumers lives to uncover unarticulated desires that might not surface in any other form of research.14 Firms such as Fujitsu Laboratories, Herman Miller, IBM, Intel, Steelcase, and Xerox have embraced ethnographic research to design breakthrough products. Here are three specific examples. Bank of America s ethnographic research that followed female baby boomers at home and while they shopped yielded two insights women rounded up financial transactions because it was more convenient, and those with children found it difficult to save. Subsequent research led to the launch of Keep the Change, a debit card program that rounded purchases up to the nearest dollar amount and automatically transferred the added difference from a checking to a savings account. Since the launch, 2.5 million customers have signed up for the program, opening 800,000 new checking accounts and 3 million new savings accounts in the process.15 To boost sagging sales for its Orville Redenbacher popcorn, ConAgra spent nine months observing families in their homes and assembling their weekly diaries of how they felt about various snacks. In reviewing the results, ConAgra 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. 16 When package design firm 4sight, Inc., was hired by PepsiCo to come up with a new design for Gatorade s 64-ounce package, its team initially assumed the package functioned as a family pack to be used for multiple servings to multiple users in the household. In watching moms in their homes, however, team members were surprised to find them taking the jug out of the refrigerator for example, after a hard workout and chugging it right there on the spot! That insight led to a totally different package design, one that could be easily gripped and grabbed.17 Ethnographic research isn t limited to consumer companies in developed markets. In a business-to-business setting, GE s ethnographic research into the plastic-fiber industry revealed to the firm that it wasn t in a commodity business driven by price, as it had assumed. Instead it was in an artisanal industry, with customers who wanted collaborations at the earliest stages of development. GE completely reoriented the way it interacted with the 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.18 The American Airlines researchers might meander around firstclass lounges to hear how travelers talk about the 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 by researchers based on certain Ethnographic research with female baby boomers helped Bank of America launch its well-received Keep the Change program. 124 PART 2 C APTURING MARKETING INSIGHTS demographic, psychographic, or other considerations and brought together to discuss various topics of interest at length. Participants are normally paid a small sum for attending. A professional research moderator provides questions and probes based on the marketing managers discussion guide or agenda. In focus groups, moderators try to discern consumers real motivations and why they say and do certain things. They typically record the sessions, and marketing managers often remain behind two-way mirrors in the next room. To allow for more in-depth discussion with participants, focus groups are trending smaller in size.19 Focus-group research is a useful exploratory step, but researchers must avoid generalizing from focus-group participants to the whole market, because the sample size is too small and the sample is not drawn randomly. Some marketers feel the research setting is too contrived and prefer to seek other means of collecting information that they believe are less artificial. Marketing Memo: Conducting Informative Focus Groups has some practical tips to improve the quality of focus groups. 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 services, different proposed services, and specifically, Internet service. marketing Memo Conducting Informative Focus Groups Focus groups allow marketers to observe how and why consumers accept or reject concepts, ideas, or any specific notion. The key to using focus groups successfully is to listen and observe. Marketers should eliminate their own biases as much as possible. Although many useful insights can emerge from thoughtfully run focus groups, questions can arise about their validity, especially in today s complex marketing environment. There are many challenges to conducting a good focus group. Some researchers believe consumers have been so bombarded with ads, they unconsciously (or perhaps cynically) parrot back what they ve already heard instead of what they really think. There s always a concern that participants are just trying to maintain their self-image and public persona or have a need to identify with the other members of the group. Participants also may not be willing to acknowledge in public or may not even recognize their behavior patterns and motivations. And the loudmouth or know-it-all problem often crops up when one highly opinionated person drowns out the rest of the group. Getting the right participants is crucial, but it may be expensive to recruit qualified subjects who meet the sampling criteria ($3,000 to $5,000 per group). Even when marketers use multiple focus groups, it may be difficult to generalize the results to a broader population. For example, within the United States, focus-group findings often vary from region to region. One firm specializing in focus-group research claimed the best city to conduct groups was Minneapolis, because there it could get a sample of fairly welleducated people who were honest and forthcoming with their opinions. Many marketers interpret focus groups in New York and other northeastern cities carefully, because the people in these areas tend to be highly critical and generally don t report that they like much. Participants must feel as relaxed as possible and strongly motivated to be truthful. Physical surroundings can be crucial to achieving the right atmosphere. 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 are adapting the look of the room to fit the theme of the topic such as designing the room to look like a playroom when speaking to children. To allow for more interactivity among focus group members, some researchers are incorporating pre-session homework assignments such as diaries, photography, and videography. An area of increasing interest is online focus groups. These may cost less than a fourth of a traditional, in-person focus group. Online focus groups also offer the advantages of being less intrusive, allowing geographically diverse subjects to participate, and yielding fast results. They are useful at collecting reactions to focused topics such as a specific new product concept. Proponents of traditional focus groups, on the other hand, maintain that in-person focus groups allow marketers to be immersed in the research process, get a close-up look to people s emotional and physical reactions, and ensure that sensitive materials are not leaked. Marketers can also make spontaneous adjustments to the flow of discussion and delve deeply into more complex topics, such as alternative creative concepts for a new ad campaign. Regardless of the particular form it takes, the beauty of a focus group, as one marketing executive noted, is that it s still the most costeffective, quickest, dirtiest way to get information in rapid time on an idea. In analyzing the pros and cons, 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: Naomi R. Henderson, Beyond Top of Mind, Marketing Research (September 1, 2005); Rebecca Harris, Do Focus Groups Have a Future? Marketing, June 6, 2005, p. 17; Linda Tischler, Every Move You Make, Fast Company, April 2004, pp. 73 75; Alison Stein Wellner, The New Science of Focus Groups, American Demographics, March 2003, pp. 29 33; Dennis Rook, Out-of-Focus Groups, Marketing Research 15, no. 2 (Summer 2003), p. 11; Dennis W. Rook, Loss of Vision: Focus Groups Fail to Connect Theory, Current Practice, Marketing News, September 15, 2003, p. 40; Sarah Jeffrey Kasner, Fistfights and Feng Shui, Boston Globe, July 21, 2001; Piet Levy, In With the Old, In Spite of the New, Marketing News, May 30, 2009, p. 19. C ONDUCTING MARKETING RESEARCH | CHAPTER 4 125 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 to gather the information it needs, 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 the 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. As we ll discuss in more detail later in this chapter, many marketers are taking their surveys online where they can easily develop, administer, and collect e-mail and Web-based questionnaires. 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, by putting out so many surveys each month, companies may run the risk of creating survey burnout and seeing response rates plummet. Keeping a survey short and simple and contacting customers no more than once a month are two keys to drawing people into the data collection effort. Offering incentives is another way companies get consumers to respond. Both Gap and Jack in the Box offer coupons for discount merchandise or the chance to win a cash prize.20 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 highincome 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. And 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. EXPERIMENTAL RESEARCH The most scientifically valid research is experimental research, designed to capture cause-and-effect relationships by eliminating competing explanations of the observed 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 An important marketing research tool is focus groups. 126 PART 2 C APTURING MARKETING INSIGHTS can eliminate or control extraneous factors, we can relate the observed effects to the variations in the treatments or stimuli. American Airlines might introduce in-flight Internet 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 significant difference in the number of passengers using the service to the different prices 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. Researchers need to carefully develop, test, and debug questionnaires before administering them on a large scale. The form, wording, and sequence of the questions can all influence the responses. Closed-end questions specify all the possible answers and provide answers that are easier to interpret and tabulate. Open-end questions allow respondents to answer in their own words and often reveal more about how people think. They are especially useful in exploratory research, where the researcher is looking for insight into how people think rather than measuring how many people think a certain way. Table 4.1 provides examples of both types of questions; also see Marketing Memo: Questionnaire Dos and Don ts. Qualitative Measures Some marketers prefer more qualitative methods for gauging consumer opinion, because consumer actions don t always match their answers to survey questions. Qualitative research techniques are relatively unstructured measurement approaches that permit a range of possible responses. Their variety is limited only by the creativity of the marketing researcher. Because of the freedom it affords both researchers in their probes and consumers in their responses, qualitative research can often be an especially useful first step in exploring consumers brand and product perceptions. It is indirect in nature, so consumers may be less guarded and reveal more about themselves in the process. Qualitative research does have its drawbacks. Marketers must temper the in-depth insights that emerge with the fact that the samples are often very small and may not necessarily generalize to broader populations. And different researchers examining the same qualitative results may draw very different conclusions. marketing Memo Questionnaire Dos and Don ts 1. Ensure that questions are without bias. Don t lead the respondent into an answer. 8. Avoid hypothetical questions. It s difficult to answer questions about imaginary situations. Answers aren t necessarily reliable. 2. Make the questions as simple as possible. Questions that include multiple ideas or two questions in one will confuse respondents. 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. 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 . . . ? 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 fixedresponse 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. C ONDUCTING MARKETING RESEARCH TABLE 4.1 | CHAPTER 4 127 Types of Questions Name Description Example 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? n No one n Children only n Spouse n Business associates/friends/relatives n Spouse and children n An organized tour group Likert scale A statement with which the respondent shows the amount of agreement/ disagreement Semantic differential A scale connecting two bipolar words. The respondent selects the point that represents his or her opinion. Small airlines generally give better service than large ones. Strongly Disagree Neither Agree Strongly disagree agree nor agree disagree __ 2___ __ 3___ __ 4___ __ 5___ __ 1___ American Airlines ______________________________ Small Large ___ __________________________ Inexperienced Experienced ___ ______________________________ Old-fashioned Modern ___ Importance scale A scale that rates the importance of some attribute Airline in-flight service to me is Extremely Very Somewhat important important important __ 2___ __ 3___ __ 1___ Not very important 4___ __ Not at all important 5___ __ Rating scale A scale that rates some attribute from poor to excellent American in-flight service is Excellent Very Good Good __ 2___ __ 3___ __ 1___ Fair 4___ __ Poor 5___ __ Intention-to-buy scale A scale that describes the respondent s intention to buy If an in-flight telephone were available on a long flight, I would Definitely Probably Not sure Probably Definitely buy buy not buy not buy __ 2___ __ 3___ __ 4___ __ 5___ __ 1___ 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? 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___________________________________ A. Closed-End Questions Word association 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 presented, 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. 128 PART 2 C APTURING MARKETING INSIGHTS Nevertheless, there is increasing interest in using qualitative methods. Marketing Insight: Getting into the Heads of Consumers describes the pioneering ZMET approach. Some other popular qualitative research approaches to get inside consumers minds and find out what they think or feel about brands and products include:21 1. 2. 3. Word 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. The primary purpose of free-association tasks is to identify the range of possible brand associations in consumers minds. Projective techniques Give people an incomplete stimulus and ask them to complete it, or give them an ambiguous stimulus and ask them to make sense of it. One approach is bubble exercises in which empty bubbles, like those found in cartoons, appear in scenes of people buying or using certain products or services. Subjects fill in the bubble, indicating what they believe is happening or being said. Another technique is comparison tasks in which people compare brands to people, countries, animals, activities, fabrics, occupations, cars, magazines, vegetables, nationalities, or even other brands. Visualization Visualization requires people to create a collage from magazine photos or drawings to depict their perceptions. Marketing Insight Getting into the Heads of Consumers Harvard Business School marketing professor Gerald Zaltman, with some of his research colleagues, has developed an in-depth methodology to uncover what consumers truly 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 deep metaphors. Deep metaphors are basic frames or orientations that consumers have toward the world around them. Largely unconscious and universal, they recast everything someone thinks, hears, says, or does. According to Zaltman, there are seven main metaphors: 1. 2. 3. 4. 5. 6. 7. Balance: justice equilibrium and the interplay of elements; Transformation: changes in substance and circumstance; Journey: the meeting of past, present, and future; Container: inclusion, exclusion, and other boundaries; Connection: the need to relate to oneself and others; Resource: acquisitions and their consequences; and 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 administrator 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 profoundly influence marketing actions, as the following three 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 that the product made a woman feel thin, tall, and sexy. The love-hate relationship in these and other pictures suggested a more complicated product relationship than the DuPont marketers had assumed. A ZMET study of Nestlé Crunch revealed that besides the obvious associations to a small indulgence in a busy world, a source of quick energy, and something that just tasted good the candy bar was also seen as a powerful reminder of pleasant childhood memories. When Motorola conducted a ZMET study of a proposed new security system, study participants selected images of what they felt when they were secure. The Motorola researchers were struck by how many images of dogs showed up, suggesting that it might be appropriate to position the product as a companion. Sources: Gerald Zaltman and Lindsay Zaltman, Marketing Metaphoria: What Deep Metaphors Reveal About the Minds of Consumers (Boston: Harvard Business School Press, 2008); Daniel H. Pink, Metaphor Marketing, Fast Company, March/April 1998, pp. 214 29; Brad Wieners, Getting Inside Way Inside Your Customer s Head, Business 2.0, April 2003, pp. 54 55; Glenn L. Christensen and Jerry C. Olson, Mapping Consumers Mental Models with ZMET, Psychology & Marketing 19, no. 6 (June 2002), pp. 477 502; Emily Eakin, Penetrating the Mind by Metaphor, New York Times, February 23, 2002. C ONDUCTING MARKETING RESEARCH 4. 5. | CHAPTER 4 129 Brand personification Ask subjects what kind of person they think of when the brand is mentioned: 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. The brand personality delivers a picture of the more human qualities of the brand. Laddering A series of increasingly more specific why questions can reveal consumer motivation and consumers deeper, more abstract goals. Ask why someone wants to buy a Nokia cell phone. They look well built (attribute). Why is it important 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 (brand essence). The brand makes this person feel like a Good Samaritan, ready to help others. Marketers don t necessarily have to choose between qualitative and quantitative measures, however, and many marketers use both approaches, 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 use test in which the subject is sent a product and told to capture his or her reactions and intentions with both a video diary and an online survey.22 Technological Devices There has been much interest in recent years in various 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. Eye cameras study respondents eye movements to see where their eyes land first, how long they linger on a given item, and so on. Technology has now advanced to such a degree that marketers can use devices such as skin sensors, brain wave scanners, and full body scanners to get consumer responses.23 Some researchers study eye movements and brain activity of Web surfers to see which ads grab their attention.24 Marketing Insight: Understanding Brain Science provides a glimpse into some new marketing research frontiers studying the brain. 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 deciding on 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 only of first-class business travelers, first-class vacation travelers, or both? Should it include travelers under age 18? Both traveler and spouse? Once they have determined the sampling unit, marketers must develop a sampling 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 sampling 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 representative. 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. Using sophisticated equipment and methods, neuroscience researchers are studying how brain activity is affected by consumer marketing. 1 30 PART 2 C APTURING MARKETING INSIGHTS Marketing Insight 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 with names such as NeuroFocus and EmSense are using EEG (electroencephalograph) 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 measure how consumers brains responded to 2006 s Super Bowl advertisements. They found that the 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. One major research finding to emerge from neurological consumer research is that many purchase decisions appear to be characterized less by the logical weighing of variables and more 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. Neurological research has been used to measure the type of emotional response consumers exhibit when presented with marketing stimuli. A group of researchers in England used an EEG to monitor cognitive functions related to memory recall and attentiveness for 12 different regions 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 people than they do when assessing brands. By adding neurological techniques to their research arsenal, marketers are trying to move toward a more complete picture of what goes on inside consumers heads. Although it may be able to offer different insights from conventional techniques, neurological research at this point is very costly, running as much as $100,000 or even more per project. Given the complexity of the human brain, however, many researchers caution that neurological research should not form the sole basis for marketing decisions. These research activities have not been universally accepted. The measurement devices to capture brain activity can be highly obtrusive, such as with skull caps studded with electrodes, creating artificial exposure conditions. Others question whether they offer unambiguous 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 all this 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 between Brand and Person Judgments, Journal of Consumer Research 33 (June 2006), pp. 31 40; Daryl Travis, Tap Buyers Emotions for Marketing Success, Marketing News, February 1, 2006, pp. 21 22; Deborah L. Vence, Pick Someone s Brain, Marketing News, May 1, 2006, pp. 11 13; Martin Lindstrom, Buyology: Truth and Lies About Why We Buy (New York: Doubleday, 2008); Tom Abate, Coming to a Marketer Near You: Brain Scanning, San Francisco Chronicle, May 19, 2008; Brian Sternberg, How Couch Potatoes Watch TV Could Hold Clues for Advertisers, Boston Globe, September 6, 2009, pp. G1, G3. Mail Contacts The mail questionnaire is one way to reach people who would not give personal interviews or whose responses might be biased or distorted by the interviewers. Mail questionnaires require simple and clearly worded questions. Unfortunately, the response rate is usually low 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 over 200 million phone numbers. Marketing research firms are exempt from the ruling, but given the increasingly widespread resistance to telemarketing, it undoubtedly reduces the effectiveness of telephone surveys as a marketing research method in the United States. C ONDUCTING MARKETING RESEARCH | CHAPTER 4 131 In other parts of the world, such restrictive legislation does not exist. Because mobile phone penetration in Africa has risen from just 1 in 50 people in 2000 to almost one-third of the population in 2008, cell phones in Africa are used to convene focus groups in rural areas and to interact via text messages.25 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. At the same time, however, personal interviewing is the most expensive method, is subject to interviewer bias, and requires more administrative planning and supervision. Personal interviewing takes two forms. In arranged interviews, marketers contact respondents for an appointment and often offer a small payment or 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 An approach of increasing importance, the Internet offers many ways to do Local Motors research. A company can embed a questionnaire on its Web site and offer an incentive to answer it, or it can place a banner on a frequently visited site such as Yahoo!, inviting people to answer some questions and possibly win a prize. Online product testing, in which companies float trial balloons for new products, is also growing and providing information much faster than traditional newproduct marketing research techniques. Here is how one small business is using the Internet to conduct research on new-product development. Local Motors The Web site of Local Motors of Wareham, Massachusetts, a small-scale automaker, lets anyone upload design ideas. The site occasionally hosts competitions for cash prizes of up to $10,000 in which registered members who include trained design engineers and transportation experts vote on the designs they like best, or other decisions related to building the autos and running the company. The winning ideas are then incorporated in the cars Local Motors builds. Members remain involved after the competitions, offering criticism and suggestions throughout the cars development. Local Motors has been diligent about building its car design community by marketing the site on other sites that attract design enthusiasts and experts. To make sure outside contributors do not seek compensation if their ideas are adopted, Local Motors requires members of its online community to sign a lengthy legal agreement.26 Marketers can also host a real-time consumer panel or virtual focus group or sponsor a chat room, bulletin board, or blog and introduce questions from time to time. They can ask customers to brainstorm or have followers of the company on Twitter rate an idea. Online communities and networks of customers serve as a resource for a wide variety of companies. Insights from Kraftsponsored online communities helped the company develop its popular line of 100-calorie snacks.27 Here are two other examples. * Del Monte tapped into its 400-member, handpicked online community called I Love My Dog when it was considering 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. Continuing to work with the online community throughout the product development, the company introduced fortified Snausage Breakfast Bites in half the time usually required to launch a new product.28 * InterContinental Hotel Groups uses both surveys and communities to gather data on customer satisfaction. Online surveys provide actionable and speedy results to correct customer service issues; the online community provides a sounding board for more in-depth, longerterm research objectives.29 Online research was estimated to make up 33 percent of all survey-based research in 2006, and Internet-based questionnaires also accounted for nearly one-third of U.S. spending on market In parts of the developing world such as Africa, the widespread penetration of cell phones allows them to be used to conduct marketing research. 1 32 PART 2 C APTURING MARKETING INSIGHTS research surveys in the same year.30 There are many other means to use the Internet as a research tool. The company can learn about individuals who visit its site by tracking how they clickstream through the Web site and move to other sites. It can post different prices, use different headlines, and offer different product features on different Web sites or at different times to learn the relative effectiveness of its offerings. Yet, as popular as online research methods are, smart companies are choosing to use them to augment rather than replace more traditional methods. At Kraft Foods, online research is a supplement to traditional research, said Seth Diamond, director of consumer insights and strategy. Online is not a solution in and of itself to all of our business challenges, he said, but it does expand our toolkit. 31 There are a number of pros and cons to online research.32 Here are some advantages: * * * * Online research is inexpensive. A typical e-mail survey can cost between 20 percent and 50 percent less than what a conventional survey costs, and return rates can be as high as 50 percent. Online research is fast. Online surveys are fast because the survey can automatically direct respondents to applicable questions and transmit results immediately. One estimate says an online survey can generate 75 percent to 80 percent of the targeted response in 48 hours, compared to a telephone survey that can require 70 days to obtain 150 interviews. People tend to be honest and thoughtful online. People may be more open about their opinions when they can respond privately and not to another person whom they feel might be judging them, especially on sensitive topics (such as, how often do you bathe or shower? ). Because they choose when and where they take the survey and how much time to devote to each question, they may be more relaxed, introspective, and candid. Online research is versatile. Increased broadband penetration offers online research even more flexibility and capabilities. For instance, virtual reality software lets visitors inspect 3-D models of products such as cameras, cars, and medical equipment and manipulate product characteristics. Even at the basic tactile level, online surveys can make answering a questionnaire easier and more fun than paper-and-pencil versions. Online community blogs allow customer participants to interact with each other. Some disadvantages include: * * * Samples can be small and skewed. Some 40 percent of households were without broadband Internet access in the United States in 2009; the percentage is even higher among lowerincome groups, in rural areas, and in most parts of Asia, Latin America, and Central and Eastern Europe, where socioeconomic and education levels also differ.33 Although it s certain that more and more people will go online, online market researchers must find creative ways to reach population segments on the other side of the digital divide. One option is to combine offline sources with online findings. Providing temporary Internet access at locations such as malls and recreation centers is another strategy. Some research firms use statistical models to fill in the gaps in market research left by offline consumer segments. Online panels and communities can suffer from excessive turnover. Members may become bored with the company s efforts and flee. Or perhaps even worse, they may stay but only halfheartedly participate. Panel and community organizers are taking steps to address the quality of the panel and the data they provide by raising recruiting standards, downplaying incentives, and carefully monitoring participation and engagement levels. New features, events, and other activities must be constantly added to keep members interested and engaged.34 Online market research can suffer from technological problems and inconsistencies. Problems can arise with online surveys because browser software varies. The Web 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.35 Text messaging 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 the most prone to error. Marketers may conduct surveys in homes, over the phone, via the Internet, or at a central interviewing location like a shopping mall. Four major problems arise in surveys. Some respondents C ONDUCTING MARKETING RESEARCH Leica Surveying and Engineering will be away from home or otherwise inaccessible and must be contacted again or replaced. Other respondents will refuse to cooperate. Still others will give biased or dishonest answers. Finally, some interviewers will be biased or dishonest. Internationally, one of the biggest obstacles to collecting information is the need to achieve consistency.36 Latin American respondents may be uncomfortable with the impersonal nature of the Internet and need interactive elements 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 therefore not be as forthcoming in focus groups as online. Sometimes the solution may be as simple as ensuring the right language is used. Leica Surveying and Engineering When Leica Surveying and Engineering, a global provider of high-end surveying and measurement equipment, sought to gather competitive intelligence in its industry, it initially deployed surveys only in English, because the company s business was typically conducted in English, even across several different European countries. However, the response rate was dismal, even though the sample comprised individuals who had an affinity with the company. Closer review showed that the incountry sales representatives conducted business in their native languages. Consequently, the company redeployed its survey in various languages, such as Spanish and German, and the response rate doubled almost overnight.37 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 advanced statistical techniques and decision models in the hope of discovering additional findings. They may test different 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 findings relevant to the major marketing decisions facing management. Researchers increasingly are being asked to play a more proactive, consulting role in translating data and information into insights and recommendations.38 They re also considering ways to present research findings in as understandable and compelling a fashion as possible. Marketing Insight: Bringing Marketing Research to Life with Personas describes an approach that some researchers are using to maximize the impact of their consumer research findings. The main survey findings for the American Airlines case showed that: 1. 2. 3. Passengers chief reason for using in-flight Internet service would be to stay connected and receive and send e-mails. Some would also pass the time surfing the Web. This entertainment capability would require expensive broadband Internet access, but passengers stated they would be able to charge the cost and their companies would pay. At $25, about 5 out of 10 first-class passengers would use Internet service during a flight; about 6 would use it at $15. 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 investment of $90,000, it would take two years to break even. Offering in-flight Internet service would strengthen the public s image of American Airlines as an innovative and progressive airline. American would gain 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 the in-flight Internet service. If they are predisposed to launching the service, the findings support their inclination. | CHAPTER 4 133 1 34 PART 2 C APTURING MARKETING INSIGHTS Marketing Insight Bringing Marketing Research to Life with Personas To bring all the information and insights they have gained about their target market to life, some researchers are employing personas. Personas are detailed profiles of one, or perhaps a few, hypothetical target market consumers, imagined in terms of demographic, psychographic, geographic, or other descriptive attitudinal or behavioral information. Researchers may use photos, images, names, or short bios to help convey the particulars of the persona. The rationale behind personas is to provide exemplars or archetypes of how the target customer looks, acts, and feels that are as true-to-life as possible, to ensure marketers within the organization fully understand and appreciate their target market and therefore incorporate a target-customer point of view in all their marketing decision making. Consider some applications: Chrysler designed rooms for two fictional characters 28-year-old single male Roberto Moore and 30-year-old pharmaceutical rep Jenny Sieverson and decorated them to reflect the personality, lifestyles, and brand choices of these key targets for the Dodge Caliber and Jeep Compass. 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. Unilever s biggest and most successful hair-care launch, for Sunsilk, was aided by insights into the target consumer the company dubbed K atie. The Katie persona outlined the twenty-something female s hair-care needs, but also her perceptions and attitudes and the way she dealt with her everyday life dramas. Although personas provide vivid information to aid marketing decision making, marketers also have to be careful to not overgeneralize. Any target market may have a range of consumers who vary along a number of key dimensions. To accommodate these potential differences, researchers sometimes employ two to six personas. Best Buy used multiple personas to help redesign and relaunch, the online site of its fast-growing national computer-support service. Using quantitative, qualitative, and observational research, the firm developed five online customer personas to guide its Web redesign efforts: Jill a suburban mom who uses technology and her computer daily and depends on the Geek Squad as an outsourced service akin to a landscape or plumber. Charlie a 50-plus male who is curious about and interested in technology but needs an unintimidating guide. Daryl a technologically savvy hands-on experimenter who occasionally needs a helping hand with his tech projects. 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 critically 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. Rick Roth, Take Back Control of the Purchase, Advertising Age, September 3, 2007, p. 13. Lisa Sanders, Major Marketers Get Wise to the Power of Assigning Personas, Advertising Age, April 9, 2007, p. 36. They may even decide to study the issues further and do more research. The decision is theirs, but rigorously done research provides them with insight into the problem (see Table 4.2).39 Some organizations use marketing decision support systems to help their marketing managers make better decisions. MIT s John Little defines 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 action.40 Once a year, Marketing News lists hundreds of current marketing and sales software programs that assist in designing marketing research studies, segmenting markets, setting prices and advertising budgets, analyzing media, and planning sales force activity.41 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.42 They may not understand what all marketing research is capable of and not provide the C ONDUCTING MARKETING RESEARCH | CHAPTER 4 135 To better understand what people thought of Cheetos snacks, researchers dressed up as the brand s Chester Cheetah character and interacted with consumers in the street. 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 5. Value and cost of information Marketing researchers recognize that data are interpreted from underlying models that guide the type of information sought. 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. researcher the right problem definition and information from which to work. They may also have unrealistic expectations about what researchers can offer. Failure to use marketing research properly has led to numerous gaffes, including the following historic one. 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; he reasoned that viewers, suffering from post-Vietnam hangover, would stay away in droves. The film was Star Wars, which eventually grossed over $4.3 billion in box office receipts alone. What this researcher delivered was information, not insight. He failed to study the 1 36 PART 2 C APTURING MARKETING INSIGHTS script itself, to see that it was a fundamentally human story of love, conflict, loss, and redemption that happened to play out against the backdrop of space.44 Measuring Marketing Productivity Improperly conducted and interpreted consumer research almost killed Star Wars, one of the most successful film franchises of all time. Marketers are facing increased pressure to provide clear, quantifiable evidence to senior management as to how their marketing expenditures help the firm to achieve its goals and financial objectives. 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 even years to manifest themselves. Moreover, a whole host of internal changes within the organization and external changes in the marketing environment may coincide with the marketing expenditures, making it hard to isolate the effects of any particular marketing activity.45 Nevertheless, an important task of marketing research is to assess the efficiency and effectiveness of marketing activities. In one survey, 65 percent of marketers indicated that return on marketing investment was a concern.46 A recent survey of the nation s leading technology Chief Marketing Officers revealed that over 80 percent of the companies surveyed expressed dissatisfaction with their ability to benchmark their marketing program s business impact and value.47 Marketing research can help address this increased need for accountability. 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 affects outcomes. Marketing dashboards are a structured way to disseminate the insights gleaned from these two approaches within the organization. Marketing Metrics Marketers employ a wide variety of measures to assess marketing effects.48 Marketing metrics is the set of measures that helps them quantify, compare, and interpret their marketing performance. Here is how two marketing executives look at marketing metrics to better understand marketing ROI at their companies: 49 The CMO of Mary Kay , Rhonda Shasteen, focuses on four long-term brand strength metrics market awareness, 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 Virgin America VP of marketing, Porter Gale, looks at a broad set of online metrics cost per acquisition, cost per click, and cost per thousand page impressions (CPM). She also looks 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. There are many different marketing measures; marketers choose one or more based on the particular issue they face or the problem they must solve. An advocate of simple, relevant metrics, the University of Virginia s Paul Farris draws an analogy to the way a Boeing 747 jet pilot decides what information to use from the vast array of instruments in the cockpit to fly the plane:50 C ONDUCTING MARKETING RESEARCH 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 suggests that if firms think they are already measuring marketing performance adequately, they should ask themselves five questions:51 1. 2. 3. 4. 5. Do you routinely research consumer behavior (retention, acquisition, usage) and why consumers behave that way (awareness, satisfaction, perceived quality)? Do you routinely report the results of this research to the board in a format integrated with financial marketing metrics? In those reports, do you compare the results with the levels previously forecasted in the business plans? Do you also compare them with the levels achieved by your key competitor using the same indicators? Do you adjust short-term performance according to the change in your marketing-based asset(s)? Ambler says firms must give priority to measuring and reporting marketing performance through marketing metrics. He believes they can split evaluation into two parts: (1) short-term results and (2) changes in brand equity. 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.52 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 measures 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.53 Carefully measuring the effects of a marketing activity or program helps ensure managers make the right decisions going forward. Seeking greater engagement with younger consumers, Servus Credit Union in Alberta, Canada, launched its Young & Free Alberta program featuring a competition to find a youth spokesperson for Alberta. To connect with young Albertans, Kelsey MacDonald, the 2010 winner, works with Servus to create daily blogs, post entertaining and educational videos at, and maintain a Facebook and Twitter presence. 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. Reprinted with permission from Marketing Management, published by the American Marketing Association. | CHAPTER 4 137 1 38 PART 2 C APTURING MARKETING INSIGHTS Kelsey also attends events throughout Alberta where she interacts with the 17- to 25-year-old crowd in order to better understand their financial needs. Research validated the campaign s success, with more than 107 million impressions to the program generated through various forms of media and thousands of new accounts opened.54 Marketing-Mix Modeling Marketing accountability also means that marketers must more precisely estimate the effects of different marketing 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.55 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.56 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.57 Although marketing-mix modeling helps to isolate effects, it is less effective at assessing how different marketing elements work in combination. Wharton s Dave Reibstein also notes three other shortcomings:58 Canada s Servus Credit Union used research to validate the effects of the spokesperson for its Young & Free Alberta Spokester program. Kelsey MacDonald, shown here, was the 2010 contest winner. Marketing-mix modeling focuses on incremental growth instead of baseline sales or longterm 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 m arketing dashboard for synthesis and interpretation. Marketing dashboards are like the instrument panel in a car or plane, visually displaying realtime indicators to ensure proper functioning. They are only as good as the information on which they re based, but sophisticated visualization tools are helping bring data alive to improve understanding and analysis.59 Some companies are also appointing marketing controllers to review budget items and expenses. Increasingly, these controllers are using business intelligence software to create digital versions of marketing dashboards that aggregate data from disparate internal and external sources. 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.60 Some executives worry that they ll miss the big picture if they focus too much on a set of numbers on a dashboard. Some critics are concerned about privacy and the pressure the technique places on employees. But most experts feel the rewards offset the risks.61 Marketing Insight: Marketing Dashboards to Improve Effectiveness and Efficiency provides practical advice about the development of these marketing tools. C ONDUCTING MARKETING RESEARCH TABLE 4.4 * * * * * * * * * * * | CHAPTER 4 139 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 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 are pursuing today (see Figure 4.2). Marketing Insight * Marketing Dashboards to Improve Effectiveness and Efficiency * 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 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. |Fig. 4.2| Technically Sound but Ad-hoc Efforts Across Multiple Measurement Silos Marketing Measurement Pathway Customer Metrics Unit Metrics Cash-Flow Metrics Brand Metrics Hierarchy of Effects Product/Category Sales Program and Campaign ROI Brand Imagery & Attributes Satisfaction/ Experience Marketing Cost per Unit Media Mix Models Equity Drivers Attitude/Behavior Segment Migration Margin Optimization Initiative Portfolio Optimization Financial Valuation 100s of Reports but Very Little Knowledge Integration or Learning Synthesis (continued) 1 40 PART 2 C APTURING MARKETING INSIGHTS |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. * * 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 longerterm impact of marketing through brand equity measures that assess both the perceptual health of the brand from customer and prospective customer perspectives as well as 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. A well-constructed dashboard can have a series of tabs that 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 business unit, geography, or customer segment based on the users needs. (See Figure 4.3 for a sample brand metrics page.) Ideally, the number of metrics presented in the marketing dashboard would be reduced to a handful of key drivers over time. 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, Summary 1. Companies can conduct their own marketing research or hire other companies to do it for them. Good marketing research is characterized by the scientific method, creativity, multiple research methods, accurate model building, costbenefit analysis, healthy skepticism, and an ethical focus. 2. The marketing research process consists of defining the problem, decision alternatives; and research objectives; developing the research plan; collecting the information; analyzing the information; presenting the findings to management; and making the decision. 3. 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, 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). C ONDUCTING MARKETING RESEARCH 4. 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 | CHAPTER 4 141 activity affects outcomes. Marketing dashboards are a structured way to disseminate the insights gleaned from these two approaches within the organization. Applications Marketing Debate What Is the Best Type of Marketing Research? Many market researchers have their favorite research approaches or techniques, although 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 quantitative in nature versus The best marketing research is qualitative in nature. Marketing Excellence >>IDEO IDEO is the largest design consultancy firm in the United States. The company has created some of the most recognizable design icons of the technology 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 company has designed household items such as the Swiffer Sweeper and the Crest Neat Squeeze 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 based on a human-centered methodology. The company strives to design products that 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? consumers actively want because they offer a superior experience and solve a problem. In order to achieve these consumer-friendly solutions, IDEO tries to uncover deep insights through a variety of human-centered research methods. These studies help the firm better understand how consumers purchase, interact with, use, and even dispose of products. This customer-focused approach has run counter to the prevailing wisdom of many hightech 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. IDEO employs a number of other observational methods to conduct deep dives into consumer behavior. The company s human factors team 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. Another method is called behavioral mapping, which creates a photographic log of people within a certain area like an airline departure lounge, a hospital waiting room, or a food court at a shopping mall over a period of days to gauge how the experience can be improved. A third method relies on camera journals that participants keep, in which they record their visual impressions of a given product or category. IDEO also invites consumers to use storytelling techniques to share personal narratives, videos, skits, or even animations about their experiences with a product or service. 1 42 PART 2 C APTURING MARKETING INSIGHTS Prototyping has also contributed to IDEO s success. It takes place throughout the design process so individuals can test out, experience, and improve upon 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. AT&T executives, for example, were sent on a scavenger hunt designed to test the company s location software for its mMode mobile phones. The executives soon realized the software was not user-friendly. One resorted to calling his wife so she could use Google to help him find an item on the list. IDEO helped AT&T redesign the interface to be more intuitive for the average user. IDEO helped apparel-maker Warnaco improve sales by having its designers shadow eight women as they shopped for lingerie. The shop-alongs revealed that most consumers had a negative buying experience. They had difficulty locating the lingerie section in the department store and finding the right size in the overcrowded display, and they felt the fitting rooms were too small. IDEO developed a new six-stage merchandising environment that included larger fitting rooms, concierges to give shoppers information, and improved displays. Warnaco implemented this plan with the help of the department stores. In another example, Marriott hired IDEO to help make its Courtyard by Marriott hotels more appealing to younger guests. IDEO 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 activity in the hotel s public places, the lack of technology offered, and the poor food options. As a result, Courtyard by Marriott changed its furniture and decor to be more warm, 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 the breakfast buffets to 24/7 coffee-shop-style cafés, where guests can quickly grab a gourmet coffee drink and healthy bite to eat any time. And Courtyard created new outdoor hangout spots with sound speakers and fire pits. After the renovations, Courtyard by Marriott changed its tagline to Courtyard. It s a New Stay. IDEO s novel consumer-led approach to design has led to countless success stories and awards for its clients and for the firm itself. The most important result for IDEO s designs is that they solve a usability problem for clients. The company goes broad and deep to achieve this goal. Since its founding, it has been issued over 1,000 patents, and in 2008 the company generated $120 million in revenues. Marketing Excellence must be a better way to automate his bill-paying process. For over 25 years, Intuit s mission has been to revolutionize people s lives by solving their important business and financial management problems. Intuit launched its first product, Quicken, in 1984 and struggled to survive during those first years. After some favorable reviews in the trade journals and an effective print advertising campaign, the company got its first break. By 1988, Quicken was the best-selling finance product on the market. In 1992, the company launched QuickBooks, a bookkeeping and payroll software 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, a tax preparation software program. Intuit s products did something for small businesses that more complicated >>Intuit Intuit develops and sells financial and tax solution software for consumers and small to mediumsized 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 Questions 1. Why has IDEO been so successful? What is the most difficult challenge it faces in conducting its research and designing its products? 2. In the end, IDEO creates great solutions for companies that then receive all the credit. Should IDEO try to create 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. C ONDUCTING MARKETING RESEARCH 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 indepth accounting analysis. By 1995, the firm held a 70 percent market share, and Microsoft tried to purchase it for $2 billion. However, the Justice Department blocked the deal as anticompetitive and the buyout collapsed. From 1995 to 1997, Intuit s stock tumbled 72 percent and forced the company to refocus its strategic efforts. It turned to the growing power of the Internet, online banking capabilities, and valuable input from its customers to develop new product versions, which in turn improved the company s stock value and market position throughout the 2000s. Intuit spends a significant amount of time and money approximately 20 percent of net revenues on consumer research each year. It is critical for Intuit to know exactly how customers use and feel about their products due to the fast-paced nature of technology, shifting consumer needs, and the competitiveness of its industry. Intuit conducts several levels of research and invites consumers and businesses to participate in a variety of ways. During a Site Visit, Intuit researchers visit the individual s home or office to observe and learn exactly how its products are used and can be improved in the true work environment. A Lab Study invites consumers to one of Intuit s U.S. research labs to test out 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. The company also conducts an ongoing extensive research study with the Institute for the Future, to learn more about the future trends affecting small businesses. Intuit uses what it learns not only to produce improved versions of its products each year, but also to better understand the next generation of financial and tax software, such as solutions for mobile devices. 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. It promotes its products through a number of marketing efforts including direct mail, Web marketing, print, radio, and television ads. While Intuit s marketing campaigns have evolved over the years, it was clear early on that positive word of mouth and exceptional customer service are its most effective marketing tools. 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 | CHAPTER 4 143 10 customers bought your product because of word-ofmouth 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. Recently, Intuit has increased its presence on social media Web sites such as Twitter, Facebook, and LinkedIn. Just 12 weeks after the firm integrated a small-business Web site with these social networks, sales of QuickBooks increased 57 percent. To measure the viral success of this site, Intuit identified bloggers who either wrote their own stories or picked up stories originally posted by a few influential bloggers who were given a special preview. Intuit classified each blog post according to velocity (whether it took a month or happened in a few days), share of voice (how much talk occurred in the blogosphere), voice quality (what was said and how positive or negative it was), and sentiment (how meaningful the comments were). In 2008, Intuit earned $3.1 billion in revenue, primarily from Quicken, QuickBooks, and TurboTax sales. The company now employs over 8,000 people, mostly in the United States, and is planning to expand internationally. It continues to acquire companies, such as personal finance Web site in 2009, that will help it in growth areas such as solutions for mobile devices. Intuit believes that expanding its mobile solutions will encourage younger consumers to turn to the company for their finance and tax software. Growth will also come from previous Microsoft Money customers. In 2009, Microsoft announced it would discontinue its Money product line after an 18-year battle with Quicken. The victory was a rare win against the software giant and one that should provide great opportunity for Intuit. Questions 1. Elaborate on Intuit s use of customer research. Why did it work so well for the company? 2. Could anything go wrong for Intuit now that it has beaten out Microsoft? Why or why not? 3. How should Intuit gauge the results of its research among younger consumers with mobile devices? Sources: Intuit, 2008 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. PART 3 Connecting with Customers Chapter 5 | Creating Long-term Loyalty Relationships Chapter 6 | Analyzing Consumer Markets Chapter 7 | Analyzing Business Markets Chapter 8 | Identifying Market Segments and Targets a Ch In This Chapter, We Will Address the Following Questions 1. What are customer value, satisfaction, and loyalty, and how can companies deliver them? 2. What is the lifetime value of customers, and how can marketers maximize it? 3. How can companies attract and retain the right customers and cultivate strong customer relationships? 4. What are the pros and cons of database marketing? Harrah s Total Rewards loyalty program has significantly increased customer value to the firm. 144 ter p 5 Creating Long-term Loyalty Relationships Today, companies face their toughest competition ever. Moving from a product-and-sales philosophy to a holistic marketing philosophy, however, gives them a better chance of outperforming the competition. The cornerstone of a well-conceived holistic marketing orientation is strong customer relationships. Marketers must connect with customers informing, engaging, and maybe even energizing them in the process. Customercentered companies are adept at building customer relationships, not just products; they are skilled in market engineering, not just product engineering. A pioneer in customer relationship management techniques is Harrah s Entertainment. In 1997, Harrah s Entertainment, in Las Vegas, launched a pioneering loyalty program that pulled all customer data into a centralized warehouse and provided sophisticated analysis to better understand the value of the investments the casino made in its customers. Harrah s has over 10 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 the predictive analyses. 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). Harrah s dramatically cut back its traditional ad spending, largely replacing it with direct mail and e-mail a good customer may receive as many as 150 pieces in a year. Data from the Total Rewards program even influenced Harrah s decision to buy Caesars Entertainment, when company research revealed that most of Harrah s As Harrah s experience shows, successful marketers customers who visited Las Vegas without staying at a Harrah s-owned are those who carefully manage their customer base. In this hotel were going to Caesars Palace. Harrah s latest loyalty innovation is a chapter, we spell out in detail the ways they can go about winning mobile marketing program that sends time-based and location-based customers and beating competitors. The answer lies largely in doing a better job of meeting or exceeding customer expectations. offers to customers mobile devices in real time.1 Building Customer Value, Satisfaction, and Loyalty Creating loyal customers is at the heart of every business.2 As marketing experts Don Peppers and Martha Rogers say:3 The only value your company will ever create is the value that comes from customers the ones you have now and the ones you will have in the future. Businesses succeed by getting, keeping, and growing customers. Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, or engage in any business activity. Without customers, you don t have a business. 145 C ONNECTING WITH CUSTOMERS |Fig. 5.1| (b) Modern Customer-Oriented Organization Chart Top management CUSTOMERS Middle management Frontline people C Traditional Organization versus Modern CustomerOriented Company Organization (a) Traditional Organization Chart S PART 3 T M S E U R 146 O Middle management O Frontline people U R S C E S T M CUSTOMERS Top management Managers who believe the customer is the company s only true profit center consider the traditional organization 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.4 Successful marketing companies invert the chart as in Figure 5.1(b). At the top are customers; next in importance are frontline people who meet, serve, and satisfy customers; 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 involved in knowing, meeting, and serving customers. Some companies have been founded with the customer-on-top business model, and customer advocacy has been their strategy and competitive advantage all along. With the rise of digital technologies such as the Internet, increasingly informed consumers today 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.5 When Office Depot added customer reviews to its Web site in 2008, revenue and sales conversion increased significantly. The company also incorporated reviewrelated terms to 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.6 Customer Perceived Value Consumers are better educated and informed than ever, and they have the tools to verify companies claims and seek out superior alternatives.7 Dell When certain business decisions led to a deterioration of customer service, Dell s founder Michael Dell took decisive action. 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 the company 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 removed its toll-free service number from its Web site. With customer satisfaction slipping, and competitors matching its product quality and prices and offering improved 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 managing service and quality, Michael Dell confesses.8 C REATING LONG-TERM LOYALTY RELATIONSHIPS How then do customers ultimately make choices? They tend to be value maximizers, within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate which offer they believe for whatever reason will deliver the most perceived value and act on it ( Figure 5.2). Whether the offer lives up to expectation affects customer satisfaction and the probability that the customer will purchase the product again. In one 2008 survey asking U.S. consumers Does [Brand X] give good value for what you pay? the highest scoring brands included Craftsman tools, Discovery Channel, History Channel, Google, and Rubbermaid.9 Customer-perceived value (CPV) is the difference between the prospective customer s evaluation of all the benefits and all the 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 customer offering by raising economic, functional, or emotional benefits and/or reducing one or more costs. The customer choosing between two value offerings, 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, personnel, 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, which consists of more than money. As Adam Smith observed over two centuries ago in The Wealth of Nations, The real price of anything is the toil and trouble of acquiring it. Total customer cost also includes the buyer s time, energy, and psychological costs expended in product acquisition, usage, maintenance, ownership, and disposal. The buyer evaluates these elements together with the monetary 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. 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 perceived value and, therefore, the higher the customer s incentive to purchase. To win the sale, the firm must offer more customer perceived value than Komatsu does.10 Caterpillar is well aware of the importance of taking a broad view of customer value. Caterpillar Caterpillar has become a leading firm by maximizing total customer value in the construction-equipment industry, despite challenges from a number of able competitors such as John Deere, Case, Komatsu, Volvo, and Hitachi. First, Caterpillar produces high-performance equipment known for reliability and durability key purchase | CHAPTER 5 147 Customerperceived Value Total customer benefit Total customer cost Product benefit Monetary cost Services benefit Time cost Personnel benefit Energy cost Image benefit Psychological cost |Fig. 5.2| Determinants of Customer-Perceived Value 1 48 PART 3 C ONNECTING WITH CUSTOMERS Caterpillar s market success is partly a result of how well the firm creates customer value. 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 dealers all carry a complete line of Caterpillar products and are typically better trained and perform more reliably than competitors 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 s biggest challenges are a reenergized Komatsu, which has made a strong push in China, and some supply chain issues in introducing new products.11 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. 2. 3. 4. 5. Identify the major attributes and benefits customers value. Customers are asked what attributes, benefits, 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. 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. Assess the company s and competitors performances on the different customer values against their rated importance. Customers describe where they see the company s and competitors performances on each attribute and benefit. Examine how customers in a specific segment rate the company s performance against a specific major competitor 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. Monitor customer values over time. The company must periodically redo its studies of customer values and competitors standings as the economy, technology, and features change. 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. 2. 3. The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson s task is then to convince the buyer s manager that buying on price alone will result in lower longterm profits and customer value. 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. The buyer enjoys a long-term friendship with the Komatsu salesperson. In this case, Caterpillar s salesperson 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 competitor s offer in order to know how his or her offer rates in the buyer s mind. It also implies that the seller at a disadvantage 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 ownership and maintenance, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty.12 C REATING LONG-TERM LOYALTY RELATIONSHIPS | CHAPTER 5 DELIVERING HIGH CUSTOMER VALUE Consumers have varying degrees of loyalty to specific brands, stores, and companies. Oliver defines loyalty 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. 13 Table 5.1 displays brands with the greatest degree of customer loyalty according to one 2010 survey.14 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 promised 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.15 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.16 TABLE 5.1 Top 25 Brands in Customer Loyalty Brand Category Rankings 2010 2009 Apple iPhone Wireless Handset 1 1 Clairol (hair color) Hair Color 2 NA Samsung Wireless Handset 3 2 Mary Kay Cosmetics (Mass Merchandiser) 4 7 Grey Goose Vodka 5 6 Clinique (cosmetics: Luxury) Cosmetics (Luxury) 6 19 AVIS Car Rental 7 8 Walmart Retail Store (Discount) 8 5 Google Search Engine 9 3 Online Book/Music 10 10 Bing Search Engine 11 NA J. Crew Retail Store (Apparel) 12 23 AT&T Wireless Wireless Phone 13 123 Discover Card Credit Card 14 121 Verizon Wireless Wireless Phone 15 21 Intercontinental Hotels Hotel (Luxury) 16 103 Cheerios Breakfast Cereal: Kids 17 71 Dunkin Donuts Coffee 18 54 Home Depot Retail Store (Home Improvement) 19 192 Domino s Pizza Pizza 20 156 Barilla Pasta Sauce 21 NA Canon MFP Copier 22 44 Nike Athletic Footwear 23 178 Coors Light Beer (Light) 24 63 Acer Computer (Netbook) 25 NA Source: 2010 Brand Keys Customer Loyalty Leaders List, 149 1 50 PART 3 C ONNECTING WITH CUSTOMERS Total Customer Satisfaction Although safety is Volvo s core position, the value proposition the firm offers customers includes other benefits too. In general, satisfaction is a person s feelings of pleasure or disappointment that result from comparing a product s perceived performance (or outcome) to expectations.17 If the performance falls short of expectations, the customer is dissatisfied. If it matches expectations, the customer is satisfied. If it exceeds expectations, the customer is highly satisfied or delighted.18 Customer assessments of product performance depend on many factors, especially the type of loyalty relationship the customer has with the brand.19 Consumers often form more favorable perceptions of a product with a brand they already feel positive about. 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). Also, the company 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 acceptable levels to other stakeholders, given its total resources.20 How do buyers form their expectations? Expectations result from past buying experience, friends and associates advice, and marketers and competitors information and promises. If marketer raise 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).21 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 satisfaction, and changing operations and marketing as a result.22 Wise firms measure customer satisfaction regularly, because it is one key to customer retention.23 A highly satisfied 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 sensitive to price, offers product or service ideas to the company, and costs less to serve than new customers because transactions can become routine.24 Greater customer satisfaction has also been linked to higher returns and lower risk in the stock market.25 The link between customer satisfaction and customer loyalty is not proportional, however. Suppose customer satisfaction is rated on a scale from one to five. At a very low level of satisfaction (level one), customers are likely to abandon the company and even bad-mouth it. At levels two to four, customers are fairly satisfied but still find it easy to switch when a better offer comes along. At level five, 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 satisfied customers.26 The company needs to recognize, however, that customers vary in how they define good performance. 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.27 C REATING LONG-TERM LOYALTY RELATIONSHIPS | CHAPTER 5 151 MEASUREMENT TECHNIQUES Periodic surveys can track customer satisfaction directly and ask additional questions to measure repurchase intention and the respondent s likelihood or willingness to recommend the company and brand to others. One of the nation s largest and most diversified new-home builders, Pulte Homes, wins more awards in J.D. Power s annual survey than any other by constantly measuring how well it s doing with customers and tracking them over a long period of time. Pulte surveys customers just after they buy their homes and again several years later to make sure they re still happy.28 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.29 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 company and competitor sales Marketing Insight 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 suggests only one customer question really matters: How likely is it that you would recommend this product or service to a friend or colleague? According to Reichheld, a customer s willingness to recommend results from how well the customer is treated by frontline employees, which in turn is determined by all the functional areas that contribute to a customer s experience.30 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 2 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 asked to rate their likelihood to recommend on a 0 to 10-point scale. 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 typical 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 include USAA (89 percent), Apple (77 percent), (74 percent), (73 percent), and Google (71 percent). Reichheld is gaining believers. GE, American Express, and Microsoft among others have all adopted the NPS metric, and 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 spets in the field, GE Healthcare s Net Promoter scores jumped 10 to 15 points. BearingPoint found clients who gave it high Net Promoter scores showed the highest revenue growth. Reichheld says he developed NPS in response to overly complicated 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. One comprehensive academic study of 21 firms and more than 15,000 consumers in Norway failed to find any superiority of Net Promoter over other metrics such as the ACSI measure, discussed later in this chapter. Sources: Fred Reichheld, Ultimate Question: For Driving Good Profits and True Growth (Cambridge, MA: Harvard Business School Press, 2006); Jena McGregor, Would You Recommend Us? BusinessWeek, January 30, 2006, pp. 94 95; Kathryn Kranhold, Client-Satisfaction Tool Takes Root, Wall Street Journal, July 10, 2006; Fred Reichheld, The One Number You Need to Grow, Harvard Business Review, December 2003; Timothy L. Keiningham, Bruce Cooil, Tor Wallin Andreassen, and Lerzan Aksoy, A Longitudinal Examination of Net Promoter and Firm Revenue Growth, Journal of Marketing, 71 (July 2007), pp. 39 51; Neil A. Morgan and Lopo Leotte Rego, The Value of Different Customer Satisfaction and Loyalty Metrics in Predicting Business Performance, Marketing Science, 25, no. 5 (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; Timothy L. Keiningham, Lerzan Aksoy, Bruce Cooil, and Tor W. Andreassen, Commentary on The Value of Different Customer Satisfaction and Loyalty Metrics in Predicting Business Performance, Marketing Science, 27, no. 3 (May June 2008), 531 32. 1 52 C ONNECTING WITH CUSTOMERS PART 3 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 provides a tool for 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.31 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.32 Table 5.2 displays some of the 2009 leaders. 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 have communicated that fact. TABLE 5.2 2009 ACSI Scores by Industry Industry Firm Airlines Southwest Airlines 81 Apparel Jones Apparel 84 Automobiles & Light Vehicles Lexus & BMW 87 Banks Wachovia 76 Breweries Molson Coors Brewing 83 Cable & Satellite TV DIRECTV 71 Cellular Telephones Nokia 74 Cigarettes Philip Morris 79 Department & Discount Stores Nordstrom & Kohl s 80 Energy Utilities Sempra Energy 80 Express Delivery FedEx 84 Fixed Line Telephone Service Cox Communications 74 Food Manufacturing H. J. Heinz 89 Health Insurance Blue Cross and Blue Shield 73 Hotels Hilton Hotels 79 Internet Brokerage Fidelity Investments 80 Internet News & Information 76 Internet Portals & Search Engines Google 86 Internet Travel Expedia 77 Life Insurance Prudential Financial 79 Personal Care & Cleaning Products Clorox 87 Personal Computers Apple 85 Soft Drinks Dr Pepper Snapple 87 Supermarkets Publix 82 Wireless Telephone Service Verizon Wireless 74 Source: ACSI LLC, Used with permission. Score C REATING LONG-TERM LOYALTY RELATIONSHIPS 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.33 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 complaint was resolved quickly. Customers whose complaints are satisfactorily resolved tell an average of 5 people about the good treatment they received.34 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. 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 over two-thirds of its product improvement ideas come from listening to customer complaints. Given the potential downside of having an unhappy customer, it s critical that marketers deal with negative experiences properly.35 Beyond that, the following procedures can help to recover customer goodwill:36 1. 2. 3. 4. 5. Set up a 7-day, 24-hour toll-free hotline (by phone, fax, or e-mail) to receive and act on customer complaints. Contact the complaining customer as quickly as possible. The slower the company is to respond, the more dissatisfaction may grow and lead to negative word of mouth. Accept responsibility for the customer s disappointment; don t blame the customer. Use customer service people who are empathic. 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. 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.37 This is clearly a customer-centered definition. 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 quality company, but we need to distinguish between conformance quality and performance quality (or grade). A Lexus provides higher performance quality than a Hyundai: The Lexus rides smoother, goes faster, and lasts longer. Yet both a Lexus and a Hyundai deliver the same conformance quality if all the units deliver their respective 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.38 The drive to produce goods that are superior in world markets has led some countries and groups of 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 experience suffers:39 When Northwest Airlines stopped offering free magazines, pillows, movies, and even minibags of pretzels on domestic flights, it also raised prices and reduced its flight schedule. As one frequent flier noted, Northwest acts low cost without being low cost. Not surprisingly, Northwest came in last of all top U.S. airlines in both the ACS index and J.D. Power s customer satisfaction poll soon thereafter. British Airways also encountered turbulence when it became overly focused on cost cutting. | CHAPTER 5 153 1 54 PART 3 C ONNECTING WITH CUSTOMERS British Airways From 1989 to 1996, British Airways was voted the world s best airline in Business Traveler magazine s survey. In May 1996, British Airways implemented a business efficiency plan that called for cutting costs by eliminating more than 5,000 jobs. It also sold its ground fleet services, in-flight catering operations, and landing-gear overhaul unit and scrapped its Marketplace Performance Unit, which was responsible for getting information about customer perceptions. These measures lowered employee morale and inspired the cabin staff union to go on a 72-hours strike. Customers complained about delays in baggage handling and in getting responses to their complaints. The planes also started to have technical problems, which increased customer dissatisfaction. To improve employee morale and increase customer satisfaction, the operations and customer service departments were combined to improve cooperation between the two areas, and the company put more emphasis on punctuality and baggage handling. It entered into an alliance with other airlines such as Qantas to form one world through which frequent flyer mileage can be accumulated or redeemed, which resulted in cost sharing at airport terminals. In 2009, British Airways was awarded the best airline in the world by Business Traveller.40 After losing its title as the world s best airline in 1996, British Airways experienced a number of problems but they have worked hard to improve their image and earned first place in 2009. Quality is clearly the key to value creation and customer satisfaction. Total quality is everyone s job, just as marketing is everyone s job. Marketing Memo: Marketing and Total Quality outlines the role of marketing in maximizing total quality for the firm. 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 percent to 300 percent of profitability. The least profitable 10 percent to 20 percent, on the other hand, can actually reduce profits between 50 percent to 200 percent per account, with the middle 60 percent to 70 percent breaking even.41 The implication is that a company could improve its profits by firing its worst customers. marketing Memo Marketing and Total Quality Marketers play several roles in helping their companies define and deliver high-quality goods and services to target customers 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. C REATING LONG-TERM LOYALTY RELATIONSHIPS | CHAPTER 5 155 It s not always the company s largest customers, who can demand considerable service and deep discounts, 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 receive 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.42 Marketers can assess customer profitability individually, by market segment, or by channel. Many companies measure customer satisfaction, but few measure individual customer profitability.43 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 base has appalled banks that have succeeded in linking customer transactions. Some report losing money on over 45 percent of their retail customers. CUSTOMER PROFITABILITY ANALYSIS A useful type of profitability analysis is shown in Figure 5.3.44 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; he 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 customers 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 customer the costs of products and services based on the resources they consume. The company estimates all revenue coming from the customer, less all costs. With ABC, the costs should include the cost not only of making and distributing the products and services, but also of taking phone calls from the customer, traveling to visit the customer, paying 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 properly. One time-based solution calculates the cost of one minute of overhead and then decides how much of this cost each activity uses.45 Customers C1 P1 + P2 C2 + Products + |Fig. 5.3| C3 + Highly profitable product Profitable product P3 Unprofitable product P4 Highly unprofitable product High-profit customer Mixed-bag customer Losing customer Customer-Product Profitability Analysis 156 PART 3 C ONNECTING WITH CUSTOMERS Measuring Customer Lifetime Value The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value.46 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 attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between 10 percent 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 into six figures.47 Many methods exist to measure CLV.48 Marketing Memo: Calculating Customer Lifetime Value illustrates one. CLV calculations provide a formal quantitative framework for planning customer investment and help marketers 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. Cultivating Customer Relationships Companies are using information about customers to enact precision marketing designed to build strong long-term relationships.49 Information is easy to differentiate, customize, personalize, and dispatch over networks at incredible speed. marketing Memo Calculating Customer Lifetime Value 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-yetacquired customer: CLV = a T t=0 1pt - ct2rt 11 + i 2t - 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, 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 variables, 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 q t=1 mrt (1 + i ) t =m r (1 + i - r ) 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; Werner J. Reinartz and V. Kumar, On the Profitability of LongLife Customers in a Noncontractual Setting: An Empirical Investigation and Implications for Marketing, Journal of Marketing 64 (October 2000), pp. 17 35. C REATING LONG-TERM LOYALTY RELATIONSHIPS TABLE 5.3 | CHAPTER 5 157 A Hypothetical Example to Illustrate CLV Calculations Year 0 Number of Customers Year 1 100 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 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 Margin per Customer 70 72 75 76 78 79 80 81 82 83 30 38 45 49 52 56 60 61 61 62 2,700 3,040 3,240 2,940 2,496 1,904 1,380 732 Acquisition Cost per Customer Total Cost or Profit 4,000 366 124 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 40 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 But information cuts both ways. For instance, customers now have a quick and easy means of doing comparison shopping through sites such as,, and The Internet also facilitates communication between customers. Web sites such as and enable customers to share information about their experiences with various products and services. Customer empowerment has become a way of life for many companies that have had to adjust to a shift in the power with 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.50 A customer touch point is any occasion on which a customer encounters the brand and product from actual experience to personal or mass communications to casual observation. For a hotel, the touch points include reservations, 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, highpowered employees who understand the needs of sophisticated business travelers, and at least one best-in-region facility, such as a premier restaurant or spa.51 CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. Based on what they know about each valued customer, companies can customize market offerings, services, programs, messages, and media. CRM is important because a major driver of company profitability is the aggregate value of the company s customer base.52 PERSONALIZING MARKETING The widespread usage of the Internet allows marketers to abandon the mass market practices that built brand powerhouses in the 1950s, 1960s, and 1970s for C ONNECTING WITH CUSTOMERS 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 relevant as possible to as many customers as possible a challenge, given that no two customers are identical. Jones Soda Peter van Stolk founded Jones Soda on the premise that Gen Y consumers would be more accepting of a new soft drink brand if they felt they discovered it themselves. Jones Soda initially was sold only in shops that sell surfboards, snowboards, and skateboards. The Jones Soda Web site would encourage fans to send in personal photos for possible use on Jones Soda labels. Although only a small number were picked from tens of thousands of entries, the approach helped create relevance and an emotional connection. Customers could also purchase bottles with customized labels. Famous for unusual flavors such as Turkey and Gravy, Pineapple Upside Down, Berry White (a pun on singer Barry White), Purple Carrot, and Lemon Drop Dead, the company also adds pithy words of wisdom from customers under the bottle cap to create additional relevance and distinctiveness. The approach worked for a number of years revenue grew at 15 percent to 30 percent annually until an ill-fated foray into canned soda and selling through mass market retailers Target and Walmart resulted in some devastating financial losses and a vow to return to the company s personal-touch roots.53 Jones Soda PART 3 An increasingly essential ingredient for the best relationship marketing today is the right technology. GE Plastics could not target its e-mail effectively to different customers if it were not for advances in database software. Dell could not customize computer ordering for its global corporate customers without advances in Web technology. Companies are using e-mail, Web sites, call centers, databases, and database software to foster continuous contact between company and customer. E-commerce companies looking to attract and retain customers are discovering that personalization goes beyond creating customized information.54 For example, the Lands End Live Web site offers visitors the opportunity to talk with a customer service representative. Nordstrom takes a similar approach to ensure online buyers are as satisfied with the company s customer service as in-store visitors. Domino s has put the customer in charge of ordering a pizza delivery every step of the way. Domino s Domino s has introduced a new build-your-own-pizza feature on its Web site that allows customers to watch a simulated photographic version of their pizza as they select a size, choose a sauce, and add toppings. The Web site also shows exactly what the completed pizza would cost in the process. It lets customers track orders from when the pizza enters the oven to when it leaves the store. Domino s also introduced a new point-of-sale system that streamlined the logistics of online and phone orders. This system improved accuracy, increased repeat visits, and boosted revenues and processes.55 Domino s 1 58 Companies are also recognizing the importance of the personal component to CRM and what happens once customers make actual contact with the company. Employees can create strong bonds with customers by individualizing and personalizing relationships. In essence, thoughtful companies turn their customers into clients. Here is the distinction: Customers may be nameless to the institution; clients cannot be nameless. Customers are served as part of the mass or as part of larger segments; clients are served on an individual basis. Customers are served by anyone who happens to be available; clients are served by the professional assigned to them.56 To adapt to customers increased desire for personalization, marketers have embraced concepts such as permission marketing and one-to-one marketing. Permission marketing, the practice of marketing to consumers only after gaining their expressed permission, 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 technique, marketers can C REATING LONG-TERM LOYALTY RELATIONSHIPS develop stronger consumer relationships by respecting consumers wishes and sending messages only when they express a willingness to become more involved with the brand.57 Godin believes permission marketing works because it is anticipated, personal, and relevant. Permission marketing, like other personalization approaches, presumes consumers know what they want. But in many cases, consumers 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. Don Peppers and Martha Rogers outline a four-step framework for one-to-one marketing that can be adapted to CRM marketing as follows:58 1. 2. 3. 4. 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. Differentiate customers in terms of (1) their needs and (2) their value to your company. Spend proportionately 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. 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. 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. With automobiles that can cost over $100,000, Aston Martin engages in one-to-one marketing with a select group of customers. High-end dealerships offer separate owners-only clubroom sections and weekend getaways to test-drive new models.59 CUSTOMER EMPOWERMENT Often seen as the flag bearer for marketing best practices, P&G s former chairman, A.G. Lafley, created shockwaves with his Association of National Advertisers speech in October 2006. The power is with the consumer, proclaimed Lafley, and marketers and retailers are scrambling to keep up with her. Consumers are beginning in a very real sense to own our brands and participate in their creation. We need to learn to let go. In support of his contention, Lafley pointed out how a teenager had created an animated spot for Pringles snacks that was posted on YouTube; how Pantene, the hair care products company, had created a campaign that encouraged women to cut their hair and donate the clippings to make wigs for cancer patients; and how sales of Cover Girl Outlast lipstick increased 25 percent after the firm put mirrored ads in women s restrooms asking, Is your lipstick still on? and ran targeted five-second TV ads with the same theme.60 Other marketers have begun to advocate a bottom-up grassroots approach to marketing, rather than the more traditional top-down approach in which marketers feel they are calling the shots. Burger King has launched attention-getting edgy campaigns in recent years ( Whopper Freakout, Subservient Chicken, and Wake Up With the King ) on consumer-friendly new media such as YouTube, MySpace, video games, and iPods. Allowing the customer to take charge just makes sense for a brand whose slogan is Have It Your Way and whose main rival, McDonald s, already owns the more staid family market. 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 their next flavor. Converse asked amateur filmmakers to submit 30-second short films that demonstrated their inspiration from the iconic sneaker brand. The best of the 1,800 submissions were showcased in the Converse Gallery 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.61 Even business-to-business firms are getting into the action. PAETEC provides telecommunications services to hotels, universities, and other companies. It has grown into a $500 million company in six years, and its growth is due entirely to customer evangelism. PAETEC s primary marketing strategy: Invite current customers and key prospects to dine on PAETEC s tab and meet | CHAPTER 5 159 1 60 PART 3 C ONNECTING WITH CUSTOMERS Burger King s Subservient Chicken marketing campaign reinforced the brand s core promise of putting the customer in charge. one another. No boring PowerPoint presentations here, just customers talking about their telecommunications challenges and their unfiltered experiences being PAETEC customers. Prospects are sold on the company by other customers.62 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 is crucially important. 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 an important role for Internet retailers such as and Online pet food retailer PETCO actually started using consumer product ratings and reviews in e-mails and banner ads, finding the click-through rate increased considerably as a result.63 Brick-and-mortar retailers such as Staples and Cabela s are also recognizing the power of consumer reviews and have begun to display them in their stores.64 Despite consumer acceptance of such reviews, however, their quality and integrity is always in question. In one famous example, over a period of seven years, the cofounder and CEO of Whole Foods Market reportedly posted more than 1,100 entries on Yahoo! Finance s online bulletin board under a pseudonym, praising his company and criticizing competitors. Some sites offer summaries of reviews to provide a range of product evaluations. 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 product 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.65 Bloggers who review products or services have become important 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, BlogPulse, and Technorati. Firms also court the favor of key bloggers via free C REATING LONG-TERM LOYALTY RELATIONSHIPS samples, advance information, and special treatment. Most bloggers disclose when they are given free samples by companies. 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, glutenfree, or vegetarian food bloggers the company tracks. When favorable reviews appeared on these blogs, the company was besieged by e-mails asking where the cereal could be bought.66 Negative reviews actually can be surprisingly helpful. A January 2007 Forrester study of 10,000 consumers of s electronics and home and garden products found that 50 percent found negative reviews helpful. Most consumers purchased the products regardless of negative comments because they felt the comments reflected personal tastes and opinions that differed from their own. Because consumers can better learn the advantages and disadvantages of products through negative reviews, fewer product returns may result, saving retailers and producers money.67 Online retailers often add their own recommendations, If you like that black purse, you ll love this red blouse. One source estimated that recommendation systems contribute 10 percent to 30 percent of an online retailer s sales. Specialized software tools help online retailers facilitate customer discovery or unplanned purchases. When Blockbuster adopted one such system, cancellation rates fell and subscribers nearly doubled the number of movies on their order lists.68 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 lot of baby gifts on, and your personalized recommendations suddenly don t look so personal! E-tailers need to recognize the limitations of online personalization at the same time that they try harder to find technology and processes that really work. Attracting and Retaining Customers Companies seeking to expand their profits and sales must spend considerable time and resources searching for new customers. To generate leads, they develop ads and place them 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.69 Campaigns that target loyal customers by reinforcing the benefits they enjoy often also attract new customers. Two-thirds of the considerable growth spurred by UK mobile communication leader O2 s loyalty strategy was attributed to recruitment of new customers, the remainder from reduced defection.70 REDUCING DEFECTION It is not enough to attract new customers; the company must also keep them and increase their business.71 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 lose 25 percent of their subscribers each year, at an estimated cost of $2 billion to $4 billion. Some of the dissatisfaction defecting customers cite comes from unmet needs and expectations, poor product/service quality and high complexity, and billing errors.72 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 retention. For a college, it could be first- to second-year retention rate, or class graduation rate. | CHAPTER 5 161 Amy s Kitchen sent product samples to carefully selected bloggers to quickly spread the word about its new products. 1 62 PART 3 C ONNECTING WITH CUSTOMERS 2. 3. 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 much can be done about those driven away by poor service, shoddy products, or high prices.73 Compare the lost customer s lifetime value to the costs of reducing the defection rate. As long as the cost to discourage defection is lower than the lost profit, spend the money to try to retain the customer. RETENTION DYNAMICS Figure 5.4 shows the main steps in attracting and retaining customers 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 percentage 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 customer base, the number and value of customers who will do business with the new firm. Consider this data about customer retention:74 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, depending 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. 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, and other factors.75 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. |Fig. 5.4| The Marketing Funnel Target market Aware I have heard of the brand. Open to trial I am open to trying the brand but have not done so. Trier (nonrejecters) I have tried the brand and would use again but have not done so in the past 3 months. Recent user (e.g., Once in past 3 months) I have used the brand in the past 3 months but am not a regular user. Regular user Most (e.g., At least once every often used 2 weeks) 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. Loyal I always use this brand as long as it is available. C REATING LONG-TERM LOYALTY RELATIONSHIPS * * * | CHAPTER 5 Enhancing the growth potential of each customer through share of wallet, cross-selling, and up-selling.76 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 surprising (cologne, dolls, and cell phones). Making low-profit customers more profitable or terminating them. To avoid the direct need for termination, marketers can encourage unprofitable customers to buy more or in larger quantities, forgo certain features or services, or pay higher amounts or fees.77 Banks, phone companies, and travel agencies all now charge for once-free services to ensure minimum revenue levels. Firms can also discourage those with questionable profitability prospects. Progressive Insurance screens customers and diverts the potentially unprofitable to competitors.78 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, however, an important function.79 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 Creating a strong, tight connection to customers is the dream of any marketer and often the key to long-term marketing success. Companies that want to form such bonds should heed some specific considerations (see Figure 5.5). One set of researchers sees retention-building activities as adding financial benefits, social benefits, or structural ties.80 The following sections explain three types of marketing activities companies are using to improve loyalty and retention. INTERACTING WITH CUSTOMERS 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.81 Chicken of the Sea has 80,000 members in its Mermaid Club, a core-customer group that receives special offers, 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. Feedback from club members has helped design the brand s Web site, develop messages for TV advertising, and craft the look and text on the packaging.82 Build-A-Bear Workshop uses a Cub Advisory Board as a feedback and decision-input body. The board is made up of twenty 8- to 12-year-olds who review new-product ideas and give a paws up or down. Many products in the stores are customer ideas.83 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.84 USAA Insurance s legendary quality of service has led to the highest customer satisfaction in the industry. USAA subscribers will often tell stories about how the company looks out for them, even counseling them not * 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 163 1 64 PART 3 C ONNECTING WITH CUSTOMERS Feedback from members of its Mermaid Club has helped Chicken of the Sea improve its marketing and customer appeal. to take out more insurance than they need. With such levels of trust, USAA enjoys high customer loyalty and significant cross-selling opportunities.85 DEVELOPING LOYALTY PROGRAMS Frequency programs (FPs) are designed to reward customers who buy frequently and in substantial amounts.86 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 chains offer price club cards that grant discounts on certain items.87 Typically, the first company to introduce a 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 costs to switching. FPs can also produce a psychological boost and a feeling of being special and elite that customers value.88 Club membership programs 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 clubs are more powerful long-term loyalty builders. Fees and membership conditions prevent those with only a fleeting interest in a company s products from joining. These clubs attract and keep those customers responsible for the largest portion of business. Apple has a highly successful club. Apple Apple Apple encourages owners of its computers to form local Apple-user groups. By 2009, there were over 700, ranging in size from fewer than 30 members to over 1,000. The groups provide Apple owners with opportunities 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.89 C REATING LONG-TERM LOYALTY RELATIONSHIPS CREATING INSTITUTIONAL TIES The company may supply 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. A good example is McKesson Corporation, a leading pharmaceutical wholesaler, which invested millions of dollars in EDI (Electronic Data Interchange) capabilities to help independent pharmacies 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. 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.90 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.91 Customer Databases and Database Marketing Marketers must know their customers.92 And in order to know the customer, the company 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 (products, suppliers, resellers) to contact, transact, and build customer relationships. 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 database 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. The catalog company Fingerhut possesses some 1,400 pieces of information about each of the 30 million households in its massive customer database. Ideally, a business database contains business customers past purchases; past volumes, prices, and profits; buyer team member names (and ages, birthdays, hobbies, and favorite foods); status of current contracts; an estimate of the supplier s 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, patterns, 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 comes into contact with any of their departments, whether it is a customer purchase, a customer-requested service call, an online query, or a mail-in rebate card.93 Banks and credit card companies, telephone companies, catalog marketers, and many other companies have a great deal of information about their customers, including not only addresses and phone numbers, but also transactions and enhanced data on age, family size, income, and other demographic information. | CHAPTER 5 165 1 66 PART 3 C ONNECTING WITH CUSTOMERS These data are collected by the company s contact center and organized into a data warehouse where marketers can capture, query, and analyze them to draw inferences about an individual customer s needs and responses. Telemarketers can respond to customer inquiries based on a complete picture of the customer relationship, and customized marketing activities can be directed to individual customers. dunnhumby dunnhumby British research firm dunnhumby has increased the profitability of struggling retailers by gleaning insights from their loyalty program data and credit card transactions. The firm helped British supermarket giant Tesco tailor 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 destination product for a loyal cohort that would shop elsewhere if it disappeared. Other U.S. clients have included Kroger, Macy s, and Home Depot. 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 what would be popular.94 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.95 See Figure 5.6 for some examples. In general, companies can use their databases in five ways: 1. |Fig. 5.6| Examples of Database Marketing To identify prospects Many companies generate sales leads by advertising their product or service. The ads generally contain a response feature, such as a business reply card or toll-free phone number, and the company builds its database from customer responses. It sorts through the database to identify the best prospects, then contacts them by mail or phone to try to convert them into customers. Qwest Twice a year Qwest sifts through its customer list looking for customers that have the potential to be more profitable. The company s database contains as many as 200 observations about each customer s calling patterns. By looking at demographic profiles, plus the mix of local versus long-distance calls or whether a consumer has voice mail, Qwest can estimate potential spending. Next, the company determines how much of the customer s likely telecom budget is already coming its way. Armed with that knowledge, Qwest sets a cutoff point for how much to spend on marketing to this customer. Royal Caribbean Royal Caribbean uses its database to offer spur-of-the-moment cruise packages to fill all the berths on its ships. It focuses on retired people and single people because they are more able to make quick commitments. Fewer empty berths mean maximized profits for the cruise line. Fingerhut The skillful use of database marketing and relationship building has made catalog house Fingerhut one of the nation s largest direct-mail marketers. Not only is its database full of demographic details such as age, marital status, and number of children, but it also tracks customers hobbies, interests, and birthdays. Fingerhut tailors mail offers based on what each customer is likely to buy. Fingerhut stays in continuous touch with customers through regular and special promotions, such as annual sweepstakes, free gifts, and deferred billing. Now the company has applied its database marketing to its Web sites. Mars Mars is a market leader not only in candy, but also in pet food. In Germany, Mars has compiled the names of virtually every cat-owning family by contacting veterinarians and by advertising a free booklet titled How to Take Care of Your Cat. Those who request the booklet fill out a questionnaire, so Mars knows the cat s name, age, and birthday. Mars now sends a birthday card to each cat each year, along with a new catfood sample or money-saving coupons for Mars brands. American Express It is no wonder that, at its secret location in Phoenix, security guards watch over American Express s 500 billion bytes of data on how its customers have used the company s 35 million green, gold, and platinum charge cards. Amex uses the database to include precisely targeted offers in its monthly mailing of millions of customer bills. C REATING LONG-TERM LOYALTY RELATIONSHIPS 2. 3. 4. 5. 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 send a thank-you note; five weeks later send a new offer; ten weeks later (if customer has not responded) phone and offer a special discount. To deepen customer loyalty Companies can build interest and enthusiasm by remembering customer preferences and sending appropriate gifts, discount coupons, and interesting reading material. 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. 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. The Downside of Database Marketing and CRM Database marketing is most frequently used by business marketers and service providers that normally and easily collect a lot of customer data, like hotels, banks, airlines, and insurance, credit card, and phone companies. Other types of companies in the best position to invest in CRM are those that do a lot of cross-selling and up-selling (such as GE and or whose customers have highly differentiated needs and are of highly differentiated value to the company. Packagedgoods retailers and consumer packaged-goods companies use database marketing less frequently, though some (such as Kraft, Quaker Oats, Ralston Purina, and Nabisco) have built databases for certain brands. Some businesses cited as CRM successes include Enterprise Rent-A-Car, Pioneer Hi-Bred Seeds, Fidelity Investments, Lexus, Intuit, and Capital One.96 Having covered the upside of database marketing, we also need to cover the downside. Five main problems can prevent a firm from effectively using CRM. 1. 2. 3. 4. Some situations are just not conducive to database management. 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 lots of customer churn); (3) the unit sale is very small (a candy bar) so CLV is low; (4) the cost of gathering information is too high; and (5) there is no direct contact between the seller and ultimate buyer. Building and maintaining a customer database requires a large, well-placed investment in computer hardware, database software, analytical programs, communication links, and skilled staff. It s difficult to collect the right data, especially to capture all the occasions of company interaction with individual customers. Deloitte Consulting found that 70 percent of firms found little or no improvement from implementing CRM because the CRM system was poorly designed, it became too expensive, users didn t make much use of it or report much benefit, and collaborators ignored the system. Sometimes companies mistakenly concentrate on customer contact processes without making corresponding changes in internal structures and systems.97 It may be difficult to get everyone in the company to be customer oriented and use 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. Not all customers want a relationship with the company. Some may resent knowing the company has collected 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 | CHAPTER 5 167 1 68 PART 3 C ONNECTING WITH CUSTOMERS 5. growth of database marketing in its 27 member countries. Marketing Insight: The Behavioral Targeting Controversy reviews some privacy and security issues. The assumptions behind CRM may not always hold true.98 High-volume customers often know their value to a company and can leverage it to extract premium service and/or price discounts, so that it may not cost the firm less to serve them. Loyal customers may expect and demand more and resent any attempt to charge full prices. They 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.99 Loyal customers also may not necessarily be the best ambassadors 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. Thus, the benefits of database marketing do not come without significant costs and risks, not only in collecting the original customer data, but also in maintaining and mining them. 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. Marketing Insight 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, which search terms entered, and so on. Most behavioral targeting is carried out by online ad networks owned by large Internet firms such as Google or AOL, as well as by some Internet service providers (ISPs). These online ad networks such as AdBrite, which has more than 70,000 sites in its online marketplace use cookies to track consumers movements through all their affiliated sites. 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 characteristics of the area in which the customer lives, to help advertisers better understand whether, when, and how to contact that customer. Although Microsoft must be careful to preserve consumer privacy the company 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 aged 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, in addition to the auto insurance sites. This practice ensures that ads are readily apparent for a potential customer likely to be in the market. 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 consumers see more relevant ads in this way. Because the ads are more effective as a result, greater ad revenue is available to support free online content. Spending on behavioral targeting is projected to grow to $4.4 billion or 8.6 percent of total online ad spending by 2012. But consumers have significant misgivings about being tracked online by advertisers. In one 2009 U.S. survey, about two-thirds of respondents objected to the practice, including 55 percent of respondents aged 18 to 24. Two-thirds of respondents also believed laws should give people the right to know everything a Web site knows about them. Government regulators wonder whether industry self-regulation will be sufficient or legislation is needed. Proponents of behavioral targeting maintain that many consumers lack full understanding of different tracking practices and would be less concerned if they knew exactly how it worked. Their claims of anonymity and privacy, however, have been weakened by events such as a leak at AOL of online behavioral data in 2006 for 650,000 users and overly aggressive attempts to institute data capture procedures at Facebook and various ISPs. 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; Becky Ebenkamp, Behavior Issues, Brandweek, October 20, 2008, pp. 21 25; Brian Morrissey, Connect the Thoughts, Adweek Media, June 29, 2009, pp. 10 11; 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. C REATING LONG-TERM LOYALTY RELATIONSHIPS | CHAPTER 5 169 Summary 1. Customers are value maximizers. They form an expectation of value and act on it. Buyers will buy from the firm that they perceive to offer the highest customerdelivered 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 perceived performance and the buyer s expectations. Recognizing that high satisfaction leads to high customer loyalty, companies must ensure that they meet and exceed 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 relationship marketing. 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. 7. Customer relationship management often requires building 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. 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 policies 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 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. Marketing Excellence >>Nordstrom Nordstrom is an upscale U.S. department store chain with sales that topped $8 billion in 2009. John W. Nordstrom originally started the company as a shoe store but grew it over the years into a fashion specialty chain store selling top-quality, brand-name clothing, accessories, jewelry, cosmetics, and fragrances. From the beginning, Nordstrom has believed in and stressed the importance of providing the highest level of Marketing Discussion Using CLV Consider customer lifetime value (CLV). Choose a business and show how you would go about developing a quantitative formulation that captures the concept. How would that business change if it totally embraced the customer equity concept and maximized CLV? customer service possible along with top-of-the-line, high-quality merchandise. As a shoe retailer, the company offered a wide range of products to fit most everyone s needs and price point. As it expanded into fashion and apparel, it maintained these goals. Today, Nordstrom sets the standard in customer service and loyalty. In fact, the company is so well-known for this trait that urban legends of unusual acts of customer service still circulate today. One of the best-known tells how in 1975 a customer came into a Nordstrom store after Nordstrom had purchased a company called Northern Commercial Company. The customer wanted to return a 1 70 PART 3 C ONNECTING WITH CUSTOMERS set of tires originally bought at Northern Commercial. Although Nordstrom has never carried or sold tires, it happily accepted the return and instantly provided the customer cash for his purchase. While Nordstrom s no questions asked return policy remains intact today, there are many other examples of its exceptional customer service. Its sales representatives send thank-you cards to customers who shop there and have hand-delivered special orders to customers homes. Nordstrom installed a tool called Personal Book at its registers that allow salespeople to enter and recall customers specific preferences in order to better personalize their shopping experiences. Nordstrom also provides customers with multichannels for shopping, allowing them to buy something online and pick it up at a store within an hour. Nordstrom s customer loyalty program, Fashion Rewards Program, rewards customers on four different levels based on their annual spending. Customers who spend $10,000 annually receive complimentary alterations, free shipping, a 24-hour fashion emergency hotline, and access to a personal concierge service. Customers at the highest rewards level ($20,000 spent annually) also receive private Marketing Excellence >>Harley-Davidson Harley-Davidson, a U.S. brand synonymous with beautiful 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 contact. Knowing customers as individuals and conducting ongoing research to keep up with their changing expectations and shopping trips complete with prestocked dressing rooms in the customers specific size, champagne, and live piano music; tickets to Nordstrom s runway fashion shows; and access to exclusive travel and fashion packages, including red carpet events. This strategic and often costly customer-focus approach has reaped great benefits for the company. Not only has Nordstrom emerged over the past 100+ years as a luxury brand known for quality, trust, and service, but its customers stay loyal even in hard times. During the economic crisis in 2008 and 2009, many customers chose to shop at Nordstrom over its competitors due to their existing relationship and hassle-free return policy. Nordstrom currently operates 112 full-line stores, 69 Nordstrom Rack clearance stores, two Jeffrey Boutiques, and one clearance store, with plans to open 50 new stores over the next 10 years. When a new store opens, Nordstrom connects with the surrounding community by hosting an opening night gala complete with live entertainment, a runway fashion show, and the ultimate shopping experience to help raise money for local charities. As Nordstrom moves forward, the company continues to be flexible and look for new tools and means to help deepen and develop its customer-salesperson relationship. Questions 1. How else can Nordstrom continue to provide exceptional customer service and increase brand loyalty? 2. What are Nordstrom s greatest risks, and who are its biggest competitors? Sources: Annual Reports,; Company History,; Chantal Todé, Nordstrom Loyalty Program Experience, DMNews, May 4, 2007; Melissa Allison and Amy Martinez, Nordstrom s Solid December Showing Suggests Some Shoppers Eager to Spend. Seattle Times, January 7, 2010. experiences helps Harley-Davidson to define their customers needs better. Current customers have told Harley-Davidson s management to keep the identity, look, and sound of the motorcycles because they are unique. Globally, customers accept the U.S. brand image as it stands. When customers views are heard and accepted by management, 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, members can enjoy various discounts and benefits. C REATING LONG-TERM LOYALTY RELATIONSHIPS Examples of events and activities that are sponsored by independent dealerships such as Harley-Davidson of Singapore can range from short rides, major destination rides, or 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 support H.O.G. members and foster positive bonding relationships among members and other dealers. In Singapore, for instance, a community of friends ride Harley-Davidson motorcycles with a passion. We ride em, and we have lots of fun! And we ve been doing 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 and conveys the image of freedom and adventure. Membership of H.O.G. has increased. Now not only men but also women, children, and families have joined H.O.G. s many and varied group outings and activities. Harley-Davidson is a strong brand whose consumers appreciate the image of the brand by experiencing it. The desire to be associated with the Harley-Davidson brand is strong because it is linked to an aspirational life style. For a week in June 2010, the Malaysian Highway was filled by 300 Harley-Davidson bikers from 11 countries in the first Southeast Asia Harley Owners Group (SEA H.O.G.) Rally. The rally, which also included a fund-raising activity, started in Kuala Lumpur and headed to Singapore, and back to Kuala Lumpur City Center for the Harley-Davidson Festival before heading to Krabi in Thailand. Some H.O.G. members around the world ride in rallies every Sunday, rain or shine, displaying a strong sense of loyalty for the Harley-Davidson brand. In Hong Kong, H.O.G. members include professionals like doctors, lawyers, 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 experience | CHAPTER 5 171 with its staff and provides effective communication to its independent dealers. Professional training by members of the Harley-Davidson University in the U.S. encourages consistent service at every dealership. Thus HarleyDavidson s employees around the world can be confident about providing the genuine Harley-Davidson experience. Satisfied employees deliver outstanding services, which generates sustainable customer and brand loyalty, positive word of mouth, and ultimately higher company sales. To remain competitive, Milwaukee-based HarleyDavidson has started to enlarge its customer base and successfully connect with new, younger riders by way of social media applications such as Facebook. Engaging relationships have been established with its young adults who are global fans of its Facebook page. Important feedback that Harley-Davidson s strong brand name remains appealing to the younger audience is encouraging. Harley-Davidson has also made in-person connections with new potential riders at music festivals by using dynamometers to create an interactive experience called Jump Start, which allows novice or non riders an opportunity 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 old 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 motorcycles 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 recognized by older customers. Questions 1. What kinds of things has Harley-Davidson done well with its H.O.G. program to create an extraordinary customer experience that is unique and valuable to its members? 2. To enlarge its customer base, what kinds of things would you recommend 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, Colloquy,;Shaun Smith, Customer Experience Management Plus: Harley-Davidson, CustomerThink, March 4, 2008; Smith & Co., Customer loyalty Increasing Customer Loyalty; Case Study of Harley Davidson s Business Practices, University of Louisville,,; Evans Smith, MBA Candidate, Posted by Joe Alexander, Harley-Davidson, Master H.O.G.s of Brand Loyalty, BusinessWeek, undergrad_bschool; Harley-Davidson Hong Kong; Harley-Davidson Kuala Lumpur ; Harley-Davidson Singapore ; H.O.G. Singapore,; H.O.G., Garage Party,; Jay WM Wong, Harley-Davidson Kuala Lumpur to Host First South East Asia Hog Rally 2010,, May 12, 2010;; Eric Decker, Harley Reaches out to the Next Generation, Biz Times, harley-reaches-out-to-the-next-generation/; Eric Decker, What should Harley do Now?, Biz Times,; The Experimental Meaning of Harley Davidson, 172 PART 3 CONNECTING WITH CUSTOMERS a Ch In This Chapter, We Will Address the Following Questions 1. How do consumer characteristics influence buying behavior? 2. What major psychological processes influence consumer responses to the marketing program? 3. How do consumers make purchasing decisions? 4. In what ways do consumers stray from a deliberative, rational decision process? LEGO has programs in place to help it stay close to its customers especially the more devoted and loyal ones. ter p 6 Analyzing Consumer Markets The aim of marketing is to meet and satisfy target customers needs and wants better than competitors. Marketers must have a thorough understanding of how consumers think, feel, and act and offer clear value to each and every target consumer. LEGO of Billund, Denmark, may have been one of the first mass customized brands. Every child who has ever had a set of the most basic LEGO blocks has built his or her own unique and amazing creations, brick by plastic brick. When LEGO decided to become a lifestyle brand and launch theme parks; its own lines of clothes, watches, and video games; and products such as Clikits craft sets designed to attract more girls to the brand franchise, it neglected its core market of five- to nine-year-old boys. Plunging profits led to layoffs of almost half its employees as the firm streamlined its brand portfolio to emphasize its core businesses. To better coordinate new product activities, LEGO revamped its organizational structure into four functional groups managing eight key areas. One group was responsible for supporting customer communities and tapping into them for product ideas. LEGO also set up what was later renamed LEGO Design byME, which let Successful marketing requires that companies customers design, share, and build their own custom LEGO products fully connect with their customers. Adopting a holistic using LEGO s freely downloadable Digital Designer 3.0 software. The marketing orientation means understanding customers creations that result can exist and be shared with other enthusiasts gaining a 360-degree view of both their daily lives and the solely online, or, if customers want to build them, the software tabulates changes that occur during their lifetimes so the right products the pieces required and sends an order to LEGO s Enfield, Connecticut, are always marketed to the right customers in the right way. warehouse. Customers can request step-by-step building guide instruc- This chapter explores individual consumer buying dynamics; the next chapter explores the buying dynamics of business buyers. tions and even design their own box to store the pieces.1 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 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 173 1 74 PART 3 C ONNECTING WITH CUSTOMERS TABLE 6.1 American Consumer Almanac Expenditures Average U.S. outlays for goods and services in 2009 $ % $16,920 34.1% Transportation $8,758 17.6% Food $6,133 12.4% Personal insurance and pensions $5,336 10.7% Healthcare $2,853 5.7% Entertainment $2,698 5.4% Apparel and services $1,881 3.8% Cash contributions $1,821 3.7% Education $945 1.9% Miscellaneous $808 1.6% Personal care products and services $588 1.2% Alcoholic beverages $457 .9% Tobacco products and smoking supplies $323 0.7% Reading $118 0.2% Housing Ownership Percentage of households with at least one vehicle owned or leased 77.0% Percentage of households that own homes 67% Percentage of households that own their homes free and clear 23% Time use on an average workday for employed persons ages 25 54 with children in 2008 Working and related activities 8.8 hours Sleeping 7.6 hours Leisure and sports 2.6 hours Caring for others 1.3 hours Eating and drinking 1.0 hours Household activities 1.0 hours Other 1.7 hours Monthly users time spent in hours: Minutes per user aged 2+ years Q1 2009 # of Americans Average minutes per day spent Watching TV in the home 285,574,000 153 minutes Watching time-shifted TV 79,533,000 8 minutes Using the Internet 163,110,000 29 minutes Watching video on the Internet 131,102,000 3 minutes 13,419,000 4 minutes Mobile subscribers watching video on a mobile phone Sources: Bureau of Labor Statistics, Consumer Expenditure Survey,; AC Nielsen, A2 M2 Three Screen Report, 1st Quarter 2009, uploads/2009/05/nielsen_threescreenreport_q109.pdf. A NALYZING CONSUMER MARKETS achievement and success, activity, efficiency 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 existing 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 specialized marketing programs to serve them. Virtually all human societies exhibit social stratification, most often in the form of social classes, relatively homogeneous 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, including clothing, home furnishings, leisure activities, and automobiles. They also differ in media preferences; upper-class consumers often prefer magazines and books, and lower-class consumers often prefer television. Even within a category such as TV, upper-class consumers may show greater preference for news and drama, whereas lower-class consumers may lean toward reality shows and sports. There are also language differences advertising copy and dialogue must ring true to the targeted social class. 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 (faceto-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 product 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 product 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. Clothing companies such as Hot Topic, which hope to appeal to the fickle and fashionconscious youth market, have used music in a concerted effort to monitor opinion leaders style and behavior. Hot Topic With over 600 stores in malls in 49 states and Puerto Rico, Hot Topic has been hugely successful at using anti-establishment style in its fashions. The chain also sells books, comics, jewelry, CDs, records, posters, and other paraphernalia. Hot Topic s slogan, Everything about the music, reflects its operating premise: Whether a teen is into rock, pop-punk, emo, acid rap, rave, or rockabilly or even more obscure musical tastes Hot Topic has the right T-shirt. To keep up with music trends, all Hot Topic staffers, from the CEO to the musicobsessed salespeople (80 percent of whom are under 25), regularly attend concerts by up-and-coming and established bands to scout who s wearing what. Each store looks more like a campus student center | CHAPTER 6 175 1 76 PART 3 C ONNECTING WITH CUSTOMERS than a shop loud music plays and dark walls have bulletin boards displaying concert flyers and staff music picks. Hot Topic also hosts free acoustic shows, called Local Static, showcasing local bands and has created a music-related social network site, Hot Topic can catch trends and launch new hip clothing and hard-to-find pop culture merchandise in six to eight weeks, literally months before traditional competitors using off-shore suppliers.6 FAMILY The family is the most important consumer buying Hot Topic works hard to stay on top of what s new and what matters with its core youth audience especially in music. organization in society, and family members constitute the most influential primary reference group.7 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.8 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, husband wife engagement in purchases has traditionally 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.9 Men and women may respond differently to marketing messages, however.10 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 priority on action.11 Marketers are taking more direct aim at women with new products such as Quaker s Nutrition for Women cereals and Crest Rejuvenating Effects toothpaste. In 2003, Sherwin-Williams launched a Dutch Boy easy-to-use Twist and Pour paint can targeted specifically at women. Priced $2 higher than the same paint in traditional metal containers, the new product helped the company triple its revenue.12 Another shift in buying patterns is an increase in the amount of dollars spent 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 that 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 McDonald s ). Research has shown that more than two-thirds of 13- to 21-year-olds make or influence family purchase decisions on audio/video equipment, software, and vacation destinations.13 In total, these teens and young adults spend over $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.14 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 character pajamas, retro G.I. Joe toys and action figures, Harry Potter backpacks, and High School Musical playsets. By the time children are around 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.15 ROLES AND STATUS We each participate in many groups family, clubs, organizations. Groups often are 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 A NALYZING CONSUMER MARKETS marketing Memo | CHAPTER 6 The Average U.S. Consumer Quiz 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 2009 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.* Percent of Consumers Agreeing Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 177 % Men % Women It s more important to fit in than to be different from other people. Material things like the car I drive and the house I live in are really important to me. Religion doesn t provide the answers to many of today s problems. Businesses care more about selling me products and services that already exist rather than coming up with something that really fits my lifestyle. Most of the time, the service people that I deal with don t care much about me or my needs. I wish there were clearer rules about what is right and wrong. I am comfortable with a certain amount of debt. It is risky to buy a brand you are not familiar with. I try to have as much fun as I can now and let the future take care of itself. No matter how hard I try, I never seem to have enough time to do all the things I need to do. ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ Note: Results are from a nationally representative sample of 4,147 respondents surveyed in 2009. Source: The Futures Company Yankelovich MONITOR (with permission). Copyright 2009, Yankelovich, Inc. *Answers: 1. M = 27%, W = 20%; 2. M = 47%, W = 39%; 3. M = 53%, W = 45%; 4. M = 72%, W = 66%; 5. M = 60%, W = 57%; 6. M = 47%, W = 45%; 7. M = 54%, W = 46%; 8. M = 49%, W = 46%; 9. M = 56%, W = 46%; 10. M = 63%, W = 69% Source: The Futures Company/Yankelovich Monitor. Copyright 2009, Yankelovich, Inc. president of marketing may be seen as having more status than a sales manager, and a sales manager may be seen as having 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 direct 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 average U.S. household size in 2008 was 2.6 persons.16 In addition, psychological life-cycle stages may matter. Adults experience certain passages or transformations as they go through life.17 Their behavior as they go through these passages, such as becoming a parent, is not necessarily fixed but changes with the times. 1 78 PART 3 C ONNECTING WITH CUSTOMERS Marketers should also consider critical life events or transitions marriage, childbirth, illness, relocation, divorce, 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. For example, the wedding industry attracts marketers of a whole host of products and services. Newlyweds 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! 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, distributed 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. 18 OCCUPATION AND ECONOMIC CIRCUMSTANCES Occupation One well-defined and attractive target market for many firms is newlyweds. 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 recession clearly indicated, both product and brand choice are greatly affected by economic circumstances: spendable income (level, stability, and time pattern), savings and assets (including the percentage that is liquid), debts, borrowing power, and attitudes toward spending and saving. Luxury-goods makers such as Gucci, Prada, and Burberry are vulnerable to an economic downturn. If economic indicators point to a recession, marketers 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. Some firms such as Snap Fitness are well-positioned to take advantage of good and bad economic times to begin with. Snap Fitness Although some gym chains struggled in the recession Bally s Total Fitness filed for bankruptcy twice 24-hour Snap Fitness actually expanded the number of its clubs, and its revenue doubled. The franchise chain did all this despite charging members only $35 per month with easy cancellation fees. Its secret? A no-frills approach reinforced by the motto, Fast, Convenient, Affordable. The small gyms only 2,500 square feet typically have five treadmills, two stationary bikes, five elliptical machines, and weight equipment. What s important is what they don t have no classes, spa rooms, on-site child care, or juice bars. Few clubs have showers, and most are staffed only 25 to 40 hours a week. The sweet spot of their target market is married 35- to 55-year-olds with kids who live nearby and are busy enough that they cannot afford more than an hour a day to go to the gym.19 PERSONALITY AND SELF-CONCEPT Each person has personality No-frills Snap Fitness was perfectly positioned to weather the latest economic recession. characteristics that influence his or her buying behavior. 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 selfconfidence, dominance, autonomy, deference, sociability, defensiveness, and adaptability.20 A NALYZING CONSUMER MARKETS Personality can be a useful variable in analyzing consumer brand choices. Brands also have personalities, and consumers are likely to choose brands whose personalities match their own. We define brand personality as the specific mix of human traits that we can attribute to a particular brand. Stanford s Jennifer Aaker researched brand personalities and identified the following traits:21 1. 2. 3. 4. 5. Sincerity (down-to-earth, honest, wholesome, and cheerful) Excitement (daring, spirited, imaginative, and up-to-date) Competence (reliable, intelligent, and successful) Sophistication (upper-class and charming) 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 both in Japan and Spain, and a passion dimension emerged in Spain instead of competence. 22 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.23 Consumers often choose and use brands with a brand personality consistent with their actual self-concept (how we view ourselves), although 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).24 These effects may also be more pronounced for publicly consumed products than for privately consumed goods.25 On the other hand, consumers who are high s elf-monitors that is, sensitive to how others see them are more likely to choose brands whose personalities fit the consumption situation.26 Finally, often consumers have multiple aspects of self (serious professional, caring family member, active fun-lover) that may 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 chain does this.27 Joie de Vivre Joie de Vivre Hospitality operates a chain of boutique hotels, restaurants, and resorts in the San Francisco area. Each property s unique décor, quirky amenities, and thematic style are often loosely based on popular magazines. For example, The Hotel del Sol a converted motel bearing a yellow exterior and surrounded by palm trees wrapped with festive lights is described as kind of Martha Stewart Living meets Islands magazine. The Phoenix, represented by Rolling Stone, is, like the magazine, described as adventurous, hip, irreverent, funky, and young at heart. Joie de Vivre s goal is to stimulate each of the five senses in accordance with the five words chosen for each hotel. The boutique concept enables the hotels to offer personal touches, such as vitamins in place of chocolates on pillows. There s even an online personality matchmaker to help match guests to the most fitting hotels. Joie de Vivre now owns the largest number of independent hotel properties in the Bay Area. LIFESTYLE AND VALUES People from the same subculture, social class, and occupation may lead 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. Here s an example of one of the latest lifestyle trends businesses are targeting. | CHAPTER 6 179 1 80 PART 3 C ONNECTING WITH CUSTOMERS Boutique hotel chain Joie de Vivre uniquely positions each of its properties and then offers an online matchmaker to help consumers find the hotel that best fits their interests. LOHAS LOHAS Consumers who worry about the environment, want products to be produced in a sustainable way, and spend money to advance their personal health, development, and potential have been named LOHAS, an acronym for lifestyles of health and sustainability. One estimate placed 19 percent of the adults in the United States, or 41 million people, in the LOHAS or Cultural Creatives category.28 The market for LOHAS products encompasses organic foods, energy-efficient appliances and solar panels, alternative medicine, yoga tapes, and ecotourism. Taken together, these account for an estimated $209 billion market. Table 6.2 breaks the LOHAS demographic into six segments with estimated size, and product and service interests. Lifestyles are shaped partly by whether consumers are money constrained or time constrained. Companies aiming to serve money-constrained consumers will create lower-cost products and services. By appealing to thrifty consumers, 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 convenient products and services for this group. A NALYZING CONSUMER MARKETS TABLE 6.2 LOHAS Market Segments Personal Health Natural Lifestyles Natural, organic products Indoor & outdoor furnishings Nutritional products Organic cleaning supplies Integrative health care Compact fluorescent lights Dietary supplements Social change philanthropy Mind body spirit products Apparel U.S. Market $118.03 billion U.S. Market $10.6 billion Green Building Alternative Transportation Home certification Hybrid vehicles Energy Star appliances Biodiesel fuel Sustainable flooring Car sharing programs Renewable energy systems U.S. Market $6.12 billion Wood alternatives U.S. Market $50 billion Eco-Tourism Alternative Energy Eco-tourism travel Renewable energy credits Eco-adventure travel Green pricing U.S. Market $24.17 billion U.S. Market $380 million Source: Reprinted by permission of LOHAS, 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 segment. 29 Hamburger Helper 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 strong competition from fast-food drivethrough windows, restaurant deliveries, and precooked grocery store dishes, Hamburger Helper s days of prosperity might seem 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, marketers of Hamburger Helper are always introducing new flavors to tap into changing consumer taste trends. Not surprisingly, the latest economic downturn saw sales of the brand rise 9 percent in 2009.30 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 determine, at a basic level, 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 inner selves, it is possible to influence their outer selves their purchase behavior. | CHAPTER 6 181 PART 3 C ONNECTING WITH CUSTOMERS 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 marketer 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, perception, learning, and memory fundamentally influence consumer responses.31 Motivation: Freud, Maslow, Herzberg 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 intensity 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.32 Motivation researchers often collect in-depth interviews with a few dozen consumers to uncover deeper motives 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.33 Today, motivational researchers continue the tradition of Freudian interpretation. Jan Callebaut identifies different motives a product can satisfy. For example, whiskey can meet the need for social relaxation, status, or fun. Different whiskey brands need to be motivationally positioned in one of these three appeals.34 Another motivation researcher, Clotaire Rapaille, works on breaking the code behind product behavior.35 Chrysler When Chrysler decided to offer a new sedan, it had already done a great deal of traditional market research that suggested U.S. consumers wanted excellent gas mileage, safety, and prices. However, it was only through qualitative research that Chrysler discovered what cultural anthropologist Clotaire Rapaille calls the code the unconscious meaning people give to a particular market offering. First, interviewers took on the role of a visitor from another planet, asking participants to help them understand the product in question. Then, participants told stories about the product, and finally, after a relaxation exercise, they wrote about their first experiences with it. In this way, Chrysler learned that cookie-cutter sedans were off-code, and it used information from the sessions to create the PT Cruiser. With its highly distinctive retro design, this sedan was one of the most successful U.S. car launches in recent history.36 Chrysler 1 82 MASLOW S THEORY Abraham Maslow sought to explain why people are driven by particular needs at particular times.37 His answer is that human needs are arranged in a hierarchy from most to least pressing physiological needs, safety needs, social needs, esteem needs, and self-actualization A NALYZING CONSUMER MARKETS Products & services Price Distribution Communications Motivation Perception Learning Memory Other Stimuli Economic Technological Political Cultural Buying Decision Process Consumer Characteristics Cultural Social Personal CHAPTER 6 183 |Fig. 6.1| Consumer Psychology Marketing Stimuli | Problem recognition Information search Evaluation of alternatives Purchase decision Post-purchase behavior Purchase Decision Model of Consumer Behavior Product choice Brand choice Dealer choice Purchase amount Purchase timing Payment method needs (see Figure 6.2). People will try to satisfy their most important need first and then try to satisfy the next most important. For example, a starving man (need 1) will not take an interest in the latest happenings in the art world (need 5), nor in how 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).38 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 would be a dissatisfier. Yet the presence of a product warranty would not act as a satisfier or motivator of a purchase, because it is not a source of intrinsic satisfaction. Ease of use would be a satisfier. 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, perceptions are more important than reality, because perceptions affect consumers actual behavior. Perception is the process by which we select, organize, and interpret information |Fig. 6.2| 5 Selfactualization Needs (self-development and realization) 4 Esteem Needs (self-esteem, recognition, status) 3 2 1 Social Needs (sense of belonging, love) Safety Needs (security, protection) Physiological Needs (food, water, shelter) 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. 1 84 PART 3 C ONNECTING WITH CUSTOMERS inputs to create a meaningful picture of the world.39 It depends not only on physical stimuli, but also on the stimuli s relationship to the surrounding environment 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 attention, 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 over 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. 2. 3. People are more likely to notice stimuli that relate to a current need. A person who is motivated to buy a computer will notice computer ads and be less likely to notice DVD ads. People are more likely to notice stimuli they anticipate. You are more likely to notice computers than radios in a computer store because you don t expect the store to carry radios. 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 phone, or from a salesperson. Marketers may attempt to promote their offers intrusively in order to bypass selective 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.40 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 with virtually every type of product.41 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, 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. A topic that has fascinated armchair marketers for ages is subliminal perception. They 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 moderately important or strongly held beliefs.43 A NALYZING CONSUMER MARKETS Learning When we act, we learn. Learning induces changes in our behavior arising from experience. Most human behavior is learned, although much learning is incidental. Learning theorists believe learning is produced through the interplay of drives, stimuli, cues, responses, and reinforcement. Two popular approaches to learning are classical conditioning and operant (instrumental) conditioning. 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 computer. If your experience is rewarding, your response to computers and HP will be positively reinforced. Later, when you want to buy a printer, you may assume that because it makes good computers, 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 recognize 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 appealing to the same drives competitors use and by 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 interpretations 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 tendency 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 feelings. A brand or product may make a consumer feel proud, excited, or confident. An ad may create feelings of amusement, disgust, or wonder. Here are two recent examples that recognize the power of emotions in consumer decision making. For years, specialty foam mattress leader Tempur-Pedic famously used infomercials showing that a wine glass on its mattress did not spill even as people bounced up and down on the bed. To create a stronger emotional connection, the company began a broader-based media campaign in 2007 that positioned the mattresses as a wellness brand and the nighttime therapy for body and mind. 44 Reckitt Benckiser and Procter & Gamble launched advertising approaches in 2009 for Woolite and Tide, respectively, that tapped not into the detergents performance benefits but into the emotional connection and challenges of laundry. Based on research showing that one in three working women recognize they ruined some of their clothes in the wash over the last year, Reckitt Benckiser launched an online and in-store Find the Look, Keep the Look style guide for Woolite for finding fashion and keeping it looking fabulous without breaking the bank. Based on the premise that a detergent should do more than clean, P&G positioned new Tide Total Care as preserving clothing and keeping the 7 signs of beautiful clothes, including shape, softness, and finish.45 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.46 For example, the associative network memory model views LTM as a set of nodes and links. Nodes are stored information connected by links that vary in strength. Any type of information can be stored in the memory network, including verbal, visual, abstract, and contextual. | CHAPTER 6 185 186 PART 3 C ONNECTING WITH CUSTOMERS Woolite s style guide focuses on the emotional benefits of choosing and preserving the right look in clothes for women. 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 information (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 strongly enough associated with that node. In this model, we can think of consumer brand knowledge as a node in memory with a variety of linked associations. 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. We can think of marketing as a way of making sure consumers have product and service experiences to 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 brand beliefs for a hypothetical consumer for State Farm insurance. |Fig. 6.3| Hypothetical State Farm Mental Map STATE FARM Auto Life Top-of-the-line insurance Around a long time Safe Fire INSURANCE Conservative Responsive Convenient Good reputation Dependable Reputable Fast settlement Reliable Good home and auto insurance Personal service Red color Agents that are part of my neighborhood Good Neighbors A NALYZING CONSUMER MARKETS | CHAPTER 6 187 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. Marketing Insight: Made to Stick offers some practical tips for how marketers can ensure their ideas inside or outside the company are remembered and have impact. 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 instance) and in what way.47 In general, the more attention we pay to the meaning of information during encoding, the stronger the resulting associations in memory will be.48 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.49 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. Credibility give an idea believability. Indian overnight delivery service Safexpress was able to overcome doubts about its capabilities by describing to a Bollywood film studio how it had flawlessly delivered 69,000 copies of the latest H arry Potter novel to bookstores all over the country by 8 AM on the morning of its release. 5. Emotion help people see the importance of an idea. Research on fact-based versus appeal-to-emotion antismoking ads has demonstrated that emotional appeals are more compelling and memorable. 6. Stories empower people to use an idea through narrative. Research again shows how narratives evoke mental stimulation, and visualization of events makes recall and further learning easier. The Heaths believe great ideas are made, not born, via these traits. One example is the Subway ad campaign starring Jared who lost 100 pounds in three months by eating two subs a day that helped to raise Subway s sales 18 percent in one year. According to the Heaths, the idea scores high on all six dimensions of stickiness. 4. Marketing Insight Made to Stick Picking up on a concept first introduced by Malcolm Gladwell in his Tipping Point book, brothers Chip and Dan Heath set out to uncover what makes an idea sticky and catch on with an audience. Considering a wide range of ideas from diverse sources urban legends, conspiracy theories, public policy mandates, and product design they identified six traits that characterize all great ideas and used the acronym SUCCES to organize them: 1. Simple find the core of any idea. Take an idea and distill it down, whittling away everything that is not essential. Southwest Airlines is THE low-fare airline. 2. Unexpected grab people s attention by surprising them. Nordstrom s customer service is legendary because it unexpectedly exceeds customer s already high expectations by going beyond helping them buy to address their personal situations ironing shirts before meetings, keeping cars warm while they shop, or wrapping presents they actually bought at Macy s. 3. Concrete make sure any idea can be easily grasped and remembered later. Boeing successfully designed the 727 airplane by giving its thousands of engineers a very specific goal the plane had to seat 131 passengers, be able to fly nonstop from New York to Miami, and land on runway 4-22 at LaGuardia, which could not be used by large planes. 1. 2. 3. 4. 5. 6. Simple weight loss Unexpected weight loss by eating fast food Concrete weight loss by eating two Subway subs daily Credibility a documented loss of 100 pounds Emotion a triumph over difficult weight problems Stories a personal account of how eating two Subway Subs lead to an incredible weight loss. Sources: Chip Heath and Dan Heath, Made to Stick: Why Some Ideas Survive and Others Die ... (New York: Random House, 2007); Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference (New York: Little, Brown and Company, 2000); Barbara Kiviat, Are You Sticky? Time, October 29, 2006; Justin Ewers, Making It Stick, U.S. News & World Report, January 21, 2007; Mike Hofman, Chip and Dan Heath: Marketing Made Sticky, Inc, January 1, 2007. 1 88 PART 3 C ONNECTING WITH CUSTOMERS TABLE 6.3 Understanding Consumer Behavior Who buys our product or service? Who makes the decision to buy the product? Who influences the decision to buy the product? How is the purchase decision made? Who assumes what role? What does the customer buy? What needs must be satisfied? Why do customers buy a particular brand? Where do they go or look to buy the product or service? When do they buy? Any seasonality factors? How is our product perceived by customers? What are customers attitudes toward our product? What social factors might influence the purchase decision? Do customers lifestyles influence their decisions? How do personal or demographic factors influence the purchase decision? Source: Based on figure 1.7 from George Belch and Michael Belch, Advertising and Promotion: An Integrated Marketing Communications Perspective, 8th ed. (Homewood, IL: Irwin, 2009). 2. |Fig. 6.4| Five-Stage Model of the Consumer Buying Process Problem recognition Information search Evaluation of alternatives Purchase decision Postpurchase behavior 3. 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.50 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 actual product packaging, the use of in-store mini-billboard displays, and so on. The information they contain and the reminders they provide of advertising or other information already conveyed outside the store will be prime determinants of consumer decision making. The Buying Decision Process: The Five-Stage Model The basic psychological processes we ve reviewed play an important role in consumers actual buying decisions.51 Table 6.3 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 learning, choosing, using, and even disposing of a product.52 Marketing scholars have developed a stage model of the 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.53 Consumers don t always pass through all five stages they may skip or reverse some. When you buy your regular 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 new purchase.54 Later in the chapter, we will consider other ways consumers make decisions that are less calculated. A NALYZING CONSUMER MARKETS | CHAPTER 6 189 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. Information Search Surprisingly, consumers often search for limited amounts of 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. INFORMATION SOURCES Major information sources to which consumers will turn fall into four groups: Personal. Family, friends, neighbors, acquaintances Commercial. Advertising, Web sites, salespersons, dealers, packaging, displays Public. Mass media, consumer-rating organizations Experiential. Handling, examining, using the product The relative amount 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. 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. 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 Total Set Awareness Set Apple Dell Hewlett-Packard Toshiba Compaq NEC . . . Apple Dell Hewlett-Packard Toshiba Compaq Consideration Set Apple Dell Toshiba Choice Set Apple Dell Decision ? |Fig. 6.5| Successive Sets Involved in Consumer Decision Making 1 90 PART 3 C ONNECTING WITH CUSTOMERS information, just a few, the choice set, will remain strong contenders. The consumer makes a final choice from these.55 Marketers need to identify the hierarchy of attributes that guide consumer decision making in order to understand 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 from which they want to buy a car (nation-dominant hierarchy). 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 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.56 Figure 6.5 makes it clear that a company must strategize to get its brand into the prospect s awareness, consideration, 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 which flavors they want first, and then choose the brand name they want for that particular flavor. Australian supermarkets arrange meats by the way they might be cooked, and stores use more descriptive labels, such as a 10-minute herbed beef roast. The result is that Australians buy a greater variety of meats than U.S. shoppers, who choose from meats laid out by animal type beef, chicken, pork, and so on.57 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. 2. 3. Hotels Location, cleanliness, atmosphere, price Mouthwash Color, effectiveness, germ-killing capacity, taste/flavor, price 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.58 People have attitudes toward almost everything: religion, politics, clothes, music, 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 attitudes rather than try to change attitudes. If beliefs and attitudes become too negative, however, more serious steps may be necessary. With a controversial ad campaign for its pizza, Domino s took drastic measures to try to change consumer attitudes. A NALYZING CONSUMER MARKETS | CHAPTER 6 191 Domino s Known more for the speed of its delivery than for the taste of its pizza, Domino s decided to address negative perceptions head on. A major communication program 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 contained biting and vicious comments, such as, Domino s pizza crust to me is like cardboard and The sauce tastes like ketchup. After President Patrick Doyle is shown on camera stating these results were unacceptable, the ads proceeded to show Domino s chefs and executives in their test kitchens proclaiming that its pizza was 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 admission of the company that their number 2 ranked pizza, in effect, had been inferior for years. Others 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 as Most really like it, some don t. And that s OK. 59 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 laptop computers (A, B, C, and D). Assume she s interested in four attributes: memory capacity, graphics capability, size and weight, and price. Table 6.4 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 laptop 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 the expectancy-value model, we multiply her weights by her beliefs about each computer s attributes. This computation leads to the following perceived values: Recognizing consumers solidly entrenched beliefs, Domino s launched a bold ad campaign to transform its image. Laptop A = 0.4(8) + 0.3(9) + 0.2(6) + 0.1(9) = 8.0 Laptop B = 0.4(7) + 0.3(7) + 0.2(7) + 0.1(7) = 7.0 A Consumer s Brand Beliefs about Laptop Computers TABLE 6.4 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. 1 92 PART 3 C ONNECTING WITH CUSTOMERS Laptop C = 0.4(10) + 0.3(4) + 0.2(3) + 0.1(2) = 6.0 Laptop D = 0.4(5) + 0.3(3) + 0.2(8) + 0.1(5) = 5.0 An expectancy-model formulation predicts that Linda will favor laptop A, which (at 8.0) has the highest perceived value.61 Suppose most laptop computer 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 computer. 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 has more quality than it actually has. 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 up to 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 |Fig. 6.6| Steps between Evaluation of Alternatives and a Purchase Decision 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. 1. 2. Purchase decision Attitudes of others Unanticipated situational factors Purchase intention Evaluation of alternatives 3. 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 computer B. With the lexicographic heuristic, the consumer chooses the best brand on the basis of its perceived most important attribute. With this decision rule, Linda would choose laptop computer C. 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 social context (such as the need for justification to a peer or boss) all may affect whether and how we use choice heuristics.63 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 number, 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. 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).64 The first factor is the attitudes of others. The influence of another person s attitude depends on two A NALYZING CONSUMER MARKETS | CHAPTER 6 193 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 services; professional movie, book, and music reviewers; customer reviews of books and music on such sites as; and the increasing number of chat rooms, bulletin boards, blogs, and so on where people discuss products, services, and companies. Consumers are undoubtedly influenced by these external evaluations, as evidenced by the success of a small-budget movie such as Paranormal Activity, which cost only $15,000 to make but grossed over $100 million at the box office in 2009 thanks to a slew of favorable reviews by moviegoers and online buzz at many Web sites.66 The second factor is unanticipated situational factors that may erupt to change the purchase intention. Linda might lose her job, some other purchase might become more urgent, or a store salesperson may turn her off. Preferences and even purchase intentions are not completely reliable predictors of purchase behavior. A consumer s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk:67 1. 2. 3. 4. 5. 6. Functional risk The product does not perform to expectations. Physical risk The product poses a threat to the physical well-being or health of the user or others. Financial risk The product is not worth the price paid. Social risk The product results in embarrassment in front of others. Psychological risk The product affects the mental well-being of the user. 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. Every year there are hit movies, such as Paranormal Activity, that ride a wave of buzz and favorable consumer word of mouth to box-office success. 1 94 PART 3 C ONNECTING WITH CUSTOMERS 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.68 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 dissatisfied; others minimize it and are less dissatisfied.69 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 to other groups (such as business, private, or government agencies). Private actions include deciding to stop buying the product (exit option) or warning friends (voice option).70 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 computer. They can place ads showing satisfied brand owners. They can solicit customer suggestions for improvements and list the location of available services. They can write intelligible instruction booklets. They can send owners a magazine containing articles describing new computer 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 strategy to speed replacement is to tie the act of replacing the product to a certain holiday, event, or time of year. |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. Get rid of it temporarily Rent it Give it away To be (re)sold Lend it Product Trade it To be used Use it to serve original purpose Sell it Direct to consumer Convert it to serve a new purpose Throw it away Through middleman Get rid of it permanently Keep it Store it To middleman A NALYZING CONSUMER MARKETS | CHAPTER 6 195 Oral B has tied toothbrush promotions to the springtime switch to daylight savings time. 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; toothbrushes have color indicators to indicate when the bristles are 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 batteries, beverage containers, electronic equipment, and disposable diapers it can damage the environment. There also may be product opportunities in disposed products: 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; and, unlike the usual potato chip maker, which discards some of the spud, Pringles converts the whole potato into dehydrated potato flakes that are rolled and cut into chips.72 Moderating Effects on Consumer Decision Making The manner or 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, as follows. 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 information; 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 consumers 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 follow 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 Savers takes clothes consumers no longer want and sells them to other consumers who do want them at the right price. 1 96 PART 3 C ONNECTING WITH CUSTOMERS involvement. First, they can link the product to an engaging issue, as when Crest linked its toothpaste to avoiding cavities. 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 dissatisfaction. The market leader and the minor brands in this product category have different marketing strategies. The market leader will try to encourage habitual buying behavior by dominating the shelf space with a variety of related but different 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 6.5 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. 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 issues in three broad areas decision heuristics, framing, and other contextual effects. Marketing Insight: Predictably Irrational summarizes one in-depth treatment of the topic. Decision Heuristics Previously we reviewed some common heuristics that occur with noncompensatory decision making. Other heuristics 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 particular example of an outcome comes to mind. If an example comes to mind too easily, consumers might overestimate the likelihood of its happening. For example, a recent A NALYZING CONSUMER MARKETS TABLE 6.5 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 alternatives 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 consuming 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 (which may explain why Black Jack and other gums have higher sales when availability is limited to several months per year than when they are offered year round). * 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. 2. product failure may lead a consumer to inflate the likelihood of a future product failure and make him more inclined to purchase a product warranty. 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 same product category is that marketers want their products to be seen as representative of the category as a whole. | CHAPTER 6 197 1 98 PART 3 C ONNECTING WITH CUSTOMERS Consumers find the lure of f ree almost irresistible. In one experiment, consumers were offered normally high-priced Lindt chocolate truffles for 15 cents and ordinary Hershey kisses for a penny. Customers had to pick one or the other, not both. Seventy-three percent of the customers went for the truffles. When the prices were cut to 14 cents for the truffles and free for the kisses, however, 69 percent of customers went for the kisses, even though the truffles were actually a better deal. * The optimism bias or positivity illusion is a pervasive effect that transcends gender, age, education, and nationality. People tend to overestimate their chances of experiencing a good outcome (having a successful marriage, healthy kids, or financial security) but underestimate their chances of experiencing a bad outcome (divorce, a heart attack, or a parking ticket). In concluding his analysis, Ariely notes, If I were to distill one main lesson from the research described in this book, it is that we are all pawns in a game whose forces we largely fail to comprehend. * Marketing Insight Predictably Irrational In a new book, Dan Ariely reviews some of his own research, as well as that of others, that shows that although consumers may think they are making well-reasoned, rational decisions, that is not often the case. As it turns out, a host of mental factors and unconscious cognitive biases conspire to result in seemingly irrational decision making in many different settings. Ariely believes these irrational decisions are not random but are systematic and predictable. As he says, we make the same mistake over and over. Some of the thought-provoking research insights he highlights include: * When selling a new product, marketers should be sure to compare it with something consumers already know about, even if the new product is literally new-to-the-world with little direct comparisons. Consumers find it difficult to judge products in isolation and feel more comfortable if they base a new decision at least in part on a past decision. 3. Sources: Dan Ariely, Predictably Irrational (New York: Harper Collins, 2008; Dan Ariely, The Curious Paradox of Optimism Bias, BusinessWeek, August 24 and 31, 2009, p. 48; Dan Ariely, The End of Rational Economics, Harvard Business Review, July August 2009, pp. 78 84; A Managers Guide to Human Irrationalities, MIT Sloan Management Review (Winter 2009), pp. 53 59; Russ Juskalian, Not as Rational as We Think We Are, USA Today, March 17, 2008; Elizabeth Kolbert, What Was I Thinking? New Yorker, February 25, 2008; David Mehegan, Experimenting on Humans, Boston Globe, March 18, 2008. The anchoring and adjustment heuristic Consumers arrive at an initial judgment and then adjust it based on additional information. For services marketers, a strong first impression is critical to establish 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 those phones cost $50. Framing effects are pervasive and can be powerful. 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 structured 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.77 MENTAL ACCOUNTING Researchers have found that consumers use mental accounting when they handle their money.78 Mental accounting refers to 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. 79 A NALYZING CONSUMER MARKETS | CHAPTER 6 199 Consider the following two scenarios: 1. 2. Assume you spend $50 to buy a ticket for a concert.80 As you arrive at the show, you realize you ve lost your ticket. You decide to buy a replacement. Assume you decided 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 would you be 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. According to Chicago s Thaler, mental accounting is based on a set of core principles: 1. 2. 3. 4. 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 industrial product, for example, can make the sum of the parts seem greater than the whole. 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 high price of buying a house. Consumers tend to integrate smaller losses with larger gains. The cancellation principle might explain why withholding taxes from monthly paychecks is less aversive than large, lump-sum tax payments the smaller withholdings are more likely to be absorbed by the larger pay amount. 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. Mental accounting principles help predict whether consumers will or will not go to a concert after having lost a ticket or some money. 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. Summary 1. Consumer behavior is influenced by three factors: cultural (culture, subculture, and social class), social (reference 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 consumer 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 marketing campaigns might be targeted to each type of person. 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. The attitudes of others, unanticipated situational factors, and perceived risk may all affect the decision to buy, as will consumers levels of postpurchase product satisfaction, use and disposal, and the company s actions. 5. Consumers are constructive decision makers and subject to many contextual influences. They often exhibit low involvement in their decisions, using many heuristics as a result. 200 PART 3 C ONNECTING WITH CUSTOMERS 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 marketing programs that target African Americans and other minority groups, claiming they often employ stereotypes and inappropriate depictions. Others counter that targeting and positioning is critical to marketing, and that these marketing programs are an attempt to be relevant to a certain consumer group. Take a position: Targeting minorities is exploitive versus Targeting minorities is a sound business practice. Marketing Excellence >>Disney Few companies have been able to connect with a specific audience as well as Disney has. From its founding in 1923, the Disney brand has always been synonymous with quality entertainment for the entire family. The company, originally founded by brothers Walt Disney and Roy Disney, stretched the boundaries of entertainment during the 20th century to bring classic and memorable family entertainment around the world. Beginning with simple blackand-white animated cartoons, the company grew into the worldwide phenomenon that today includes theme parks, feature films, television networks, theatre productions, consumer products, and a growing online presence. In its first two decades, Walt Disney Productions was a struggling cartoon studio that introduced the world to its most famous character ever, Mickey Mouse. Few believed in Disney s vision at the time, but the smashing success of Marketing Discussion 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? cartoons with sound and the first-ever full-length animated film, Snow White and the Seven Dwarfs, in 1937 led, over the next three decades, to other animated classics including P inocchio, B ambi, 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. By then the company had expanded the Disney brand into film, television, consumer products, and Disneyland in southern California, its first theme park, where families could experience the magic of Disney in real life. After Walt s death, Roy Disney took over as CEO and realized Walt s dream of opening the 24,000 acre Walt Disney World theme park in Florida. By the time of Roy s death in 1971, the two brothers had created a brand that stood for trust, fun, and entertainment that resonated with children, families, and adults through some of the most moving and iconic characters, stories, and memories of all time. The company stumbled for a few years without the leadership of its two founding brothers. However, by the 1980s, The Walt Disney Company was back on its feet and thinking of new ways to target its core familyoriented consumers as well as expand into new areas that would reach an older audience. It launched the Disney Channel, Touchstone Pictures, and Touchstone Television. In addition, Disney featured classic films during The Disney Sunday Night Movie and sold classic Disney films on video at extremely low prices in order to reach a whole new generation of children. The brand continued to expand in the 1990s as Disney tapped into publishing, international theme parks, and theatrical productions that reached a variety of audiences around the world. A NALYZING CONSUMER MARKETS Today, Disney is comprised of five business segments: The Walt Disney Studios, which creates films, recording labels, and theatrical performances; Parks and Resorts, which focuses on Disney s 11 theme parks, cruise lines, and other travel-related assets; Disney 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 Media. Disney s greatest challenge today is to keep a 90year-old brand relevant and current to its core audience 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, Disney has focused on the Disney Difference a value-creation dynamic based on high standards of quality and recognition that set Disney apart from its competitors. Disney leverages all aspects of its businesses and abilities to touch its audience in multiple ways, efficiently and economically. Disney s Hannah Montana provides an excellent example of how the company took a tween-targeted television show and moved it across its various creative divisions to become a significant franchise for the company, including millions of CD sales, video games, popular consumer products, box Marketing Excellence >>IKEA IKEA was founded in 1943 by a 17-year-old Swede named Ingvar Kamprad. The company, which initially sold pens, Christmas cards, and seeds from a shed on Kamprad s family farm, eventually grew into a retail titan in home furnishings and a global cultural phenomenon, what BusinessWeek called a one-stop sanctuary for coolness and the quintessential cult brand. IKEA inspires remarkable levels of interest and devotion from its customers. In 2008, 500 million visitors walked through IKEA stores, which are located all over the world. When a new location debuted in London in 2005, about 6,000 people arrived before the doors opened. A contest in Atlanta crowned five winners Ambassador of Kul (Swedish for fun ) who, in order to collect their | CHAPTER 6 201 office movies, concerts around the world, and ongoing live performances at international Disneyland resorts like Hong Kong, India, and Russia. Disney also uses emerging technologies to connect with its consumers in innovative ways. It was one of the first companies to begin regular podcasts of its television shows as well as release ongoing news about its products and interviews with Disney s employees, staff, and park officials. Disney s Web site provides insight into movie trailers, television clips, Broadway shows, virtual theme park experiences, and much more. And the company continues to explore ways to make Mickey Mouse and his peers more text-friendly and virtually exciting. 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 theatre, or on their computer. Today, Disney is the 63rd largest company in the world with revenues reaching nearly $38 billion in 2008. 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? Sources: Company History,; Annual Reports,; 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. prizes, had to live in the IKEA store for three full days before it opened, which they gladly did. IKEA achieved this level of success by offering a unique value proposition to consumers: leading-edge Scandinavian design at extremely low prices. The company s fashionable bargains include products with unusual Swedish names such as Klippan loveseats for $279, BILLY bookcases for $60, and LACK side tables for $8. IKEA founder Kamprad, who was dyslexic, believed it was easier to remember product names rather than codes or numbers. The company is able to offer such low prices in part because most items come boxed and require the customer to completely assemble them at home. This strategy results in cheaper and easier transportation as well as more efficient use of store shelf space. IKEA s vision is to create a better everyday life for the many people. Its mission of providing value is predicated on founder Kamprad s statement that People have very 2 02 PART 3 C ONNECTING WITH CUSTOMERS thin wallets. We should take care of their interests. IKEA adheres to this philosophy by reducing prices across its products by 2 percent to 3 percent annually. Its focus on value also benefits the bottom line: IKEA enjoys 10 percent margins, higher than its competitors such as Target (7.7 percent) and Pier 1 Imports (5 percent). IKEA sources its products from multiple companies all over the world rather than a handful of suppliers as many furniture retailers do. This ensures the lowest price possible, and savings that are passed on to the consumer. Today, IKEA works with approximately 1,300 suppliers from 53 countries. IKEA s stores are located a good distance from most city centers, which helps keep land costs down and taxes low. The average IKEA customer drives 50 miles roundtrip to visit an IKEA store. Many stores resemble a large box with few windows and doors and are painted bright yellow and blue Sweden s national colors. They save energy with low-wattage lightbulbs and have unusually long hours of operation; some are 24-hour stores. When a consumer walks through an IKEA store, it is a very different experience than most furniture retailers. The floor plan is designed in a one-way format, so the consumer experiences the entire store first, then can grab a shopping cart, visit the warehouse, and pick up the desired items in a flat box. Many IKEA products are sold uniformly throughout the world, but the company also caters to local tastes. In China, it stocked 250,000 plastic placemats with * Year of the Rooster themes, which quickly sold out after the holiday. 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. IKEA managers visited European and U.S. con* sumers in their homes and learned that Europeans generally hang their clothes, whereas U.S. shoppers prefer to store them folded. Therefore, wardrobes for the U.S. market were designed with deeper drawers. * Visits to Hispanic households in California led IKEA to add seating and dining space in its California stores, brighten the color palettes, and hang more picture frames on the walls. IKEA has evolved into the largest furniture retailer in the world with approximately 300 stores in 38 countries and revenues topping *21.5 billion in 2009. Its top countries in terms of sales include Germany, 16 percent; United States, 11 percent; France, 10 percent; United Kingdom, 7 percent; and Italy, 7 percent. Questions 1. What are some of the things IKEA is doing right 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. 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; IKEA, PART 3 Connecting with Customers Chapter 7 | Analyzing Business Markets Chapter 8 | Identifying Market Segments and Targets a Ch ter p 7 In This Chapter, We Will Address the Following Questions 1. What is the business market, and how does it differ from the consumer market? 2. What buying situations do organizational buyers face? 3. Who participates in the business-to-business buying process? 4. How do business buyers make their decisions? 5. How can companies build strong relationships with business customers? 6. How do institutional buyers and government agencies do their buying? From its Redwood Shores headquarters, Oracle introduces innovative marketing programs to satisfy its many business-tobusiness customers. Analyzing Business Markets 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 are roughly 6 million businesses with paid employees in the United States alone. To create and capture value, sellers need to understand these organizations needs, resources, policies, and buying procedures. Business-software giant Oracle became an industry leader by offering a whole range of products and services to satisfy customer needs for enterprise software. Known originally for its flagship database management systems, Oracle spent $30 billion in recent years to buy 56 companies, including $7.4 billion to buy Sun Microsystems, doubling the company s 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 seeks to offer the widest ranges of products in the software industry. It now sells everything from server computers and data storage devices to Some of the world s most valuable brands belong to operating systems, databases, and software for running accountbusiness marketers: ABB, Caterpillar, DuPont, FedEx, GE, ing, sales, and supply-chain management. At the same time, Hewlett-Packard, IBM, Intel, and Siemens, to name a few. Many Oracle has launched Project Fusion to unify its different appliprinciples of basic marketing also apply to business marketers. cations, so customers can reap the benefits of consolidating They need to embrace holistic marketing principles, such as many of their software needs with Oracle. Oracle s market power building strong relationships with their customers, just like any has sometimes raised both criticism from customers and conmarketer. But they also face some unique considerations in cerns from government regulators. At the same time, its many selling to other businesses. In this chapter, we will highlight long-time customers speak to its track record of product innovasome of the crucial similarities and differences for marketing in 1 business markets.2 tion and customer satisfaction. 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.3 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. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. 205 2 06 PART 3 C ONNECTING 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. 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.4 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 Navistar has adjusted its marketing to reflect the economic crisis and a different customer mind-set. Navistar Navistar sells trucks and buses under the International and IC brands. Its diverse customer base includes bookkeepers, truck drivers, insurance people, large retailers, and so on. In recent years, these customers have been trying to cope with the harsh economic realities brought on by higher fuel prices, tougher federal regulation, and increased environmental consciousness. To address these customer concerns, Navistar devised a new marketing strategy and campaign. It introduced a new lineup of trucks and engines, including the first medium-duty hybrid truck and new diesel engines. To support new product development, Navistar launched an extensive multimedia marketing campaign that included an experiential truck stop and key industry event mobile tours, outbound video e-mail, brand advertising, and an outreach program to bloggers. It even shot a short documentary-style film, Drive and Deliver, which showcased three long-haul truckers driving around the country making deliveries using one of Navistar s new long-haul LoneStar truck models.5 Business marketers face many of the same challenges as consumer marketers. In particular, understanding their customers and what they value is of paramount importance to both. A survey of top business-to-business firms identified the following as challenges they faced:6 1. 2. 3. 4. Navistar s innovative LoneStar truck model was featured in a short film directed by an Academy Award nominee. 5. 6. 7. Understanding deep customer needs in new ways; Identifying new opportunities for organic business growth; Improving value management techniques and tools; Calculating better marketing performance and accountability metrics; Competing and growing in global markets, particularly China; Countering the threat of product and service commoditization by bringing innovative offerings to market faster and moving to more competitive business models; and Convincing C-level executives to embrace the marketing concept and support robust marketing programs. Business marketers contrast sharply with consumer markets in some ways, however: Fewer, larger buyers. The business marketer normally deals with far fewer, 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 depends on getting big contracts from just a handful of major automakers. Close supplier customer relationship. 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. Through its Supplier Added Value Effort ($AVE) program, Pittsburgh-based PPG industries challenges its suppliers of maintenance, repair, and operating (MRO) goods and services to deliver on annual value-added/cost-savings proposals equaling at least 5 percent of their total annual sales to PPG. One preferred supplier submitted a suggestion to $AVE that reduced costs for a lighting project by $160,000 by negotiating discounted prices for new fixtures and fluorescent bulbs.7 Business buyers often select suppliers that also buy from them. A paper manufacturer might buy from a chemical company that buys a considerable amount of its paper. A NALYZING BUSINESS MARKETS * * * * * * * * Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow their organizations purchasing policies, constraints, and requirements. Many of the buying instruments for example, requests for quotations, proposals, and purchase contracts are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better. Many belong to the Institute for Supply Management, which seeks to improve professional buyers effectiveness and status. This means business marketers must provide greater technical data about their product and its advantages over competitors products. Multiple buying influences. More people typically influence business buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Business marketers need to send well-trained sales representatives and sales teams to deal with the 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 average industrial sale. In the case of 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 is often measured in years.8 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 ultimate consumers. Pittsburgh-based Consol Energy s coal business largely depends on orders from utilities and steel companies, which, in turn, depend on broader economic demand from consumers for electricity and steel-based products such as automobiles, machines, and appliances. Business buyers must also pay close attention to current and expected economic factors, such as the level of production, investment, and consumer spending and the interest rate. In a recession, they reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of the demand. 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 will they buy much less leather if the price rises unless they can 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 necessary to produce the additional output. 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. Geographically concentrated buyers. For years, more than half of U.S. business buyers have been concentrated 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. Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive such as mainframes 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.9 * Straight rebuy. In a straight rebuy, the purchasing department reorders supplies such as 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-suppliers 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. | CHAPTER 7 207 2 08 PART 3 C ONNECTING WITH CUSTOMERS * * Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become 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.10 The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Over time, new-buy situations become straight rebuys and routine purchase behavior. New-task buying is the marketer s greatest opportunity and challenge. The process passes through several stages: awareness, interest, evaluation, trial, and adoption.11 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 the evaluation stage. 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 brand name recognition will be important in establishing trust and the customer s willingness to consider change.12 The marketer also tries to reach as many key participants as possible and provide helpful 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. Data storage leader EMC successfully acquired a series of computer software leaders to reposition the company to manage and not just store information, often by giving customers customized information.13 Customers considering dropping six or seven figures on one transaction for big-ticket goods and services want all the information they can get. One way to entice 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. Business marketers are also recognizing the importance of their brand and how they must execute well in a number of areas to gain marketplace success. Boeing, which makes everything from commercial airplanes to satellites, implemented the One Company brand strategy to unify all its different operations with a one-brand culture. The strategy was based in part on a triple helix representation: (1) enterprising spirit (why Boeing does what it does), (2) precision performance (how Boeing gets things done), and (3) defining the future (what Boeing achieves as a company).14 NetApp is another good example of the increased importance placed on branding in business-tobusiness marketing. 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. ) for the brand and its new name. Messages emphasized NetApp s superior technology, innovation, and customer-centric get things done culture. Some of the marketing efforts supporting the brand, however, still left some things to be desired. The Web sites were called Frankensites because they had been worked on and modified by so many developers over a 12-year period. Web site makeovers streamlined and organized the company s presentation and made it easier to make changes and updates. The new Web site was estimated to increase sales leads from inquiries by fourfold. Investing heavily in marketing communications despite the recession, NetApp ran print and online ads and tapped into a number of social media outlets communities and forums, bloggers, Facebook, Twitter, and YouTube.15 A NALYZING BUSINESS MARKETS | CHAPTER 7 209 Business-to-business technology leader NetApp has made a concerted effort to build its brand through a variety of marketing communications and activities. 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 solicited bids from prime contractors that, if awarded the contract, would be 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. 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 inventory. 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 protection over the term of the contract. The seller benefits from 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. Customers present potential suppliers with a list of project specifications and requirements. Project engineering firms must compete on price, quality, reliability, and other PART 3 C ONNECTING WITH CUSTOMERS attributes to win contracts. Suppliers, however, are not just at the mercy of customer demands. Ideally, they re active with customers early in the process to influence the actual development of the specifications. Or they can go beyond the specifications to offer additional value in various ways, as the following example shows. Selling to the Indonesian Government 2 10 Selling to the Indonesian Government The Indonesian government 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 outlining 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 proposal involved more money, it won the contract. Clearly, the Japanese viewed the problem as not just 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. 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 department personnel are more influential in new-buy situations. Engineering personnel usually have a major influence in selecting product components, and purchasing agents dominate in selecting suppliers.16 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 common goals and the risks arising from the decisions. 17 The buying center includes all members of the organization who play any of the following seven roles in the purchase decision process. 1. 2. 3. 4. 5. 6. 7. Initiators Users or others in the organization who request that something be purchased. Users Those who will use the product or service. In many cases, the users initiate the buying proposal and help define the product requirements. Influencers People who influence the buying decision, often by helping define specifications and providing information for evaluating alternatives. Technical personnel are particularly important influencers. Deciders People who decide on product requirements or on suppliers. Approvers People who authorize the proposed actions of deciders or buyers. 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. 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 salespersons from contacting users or deciders. Several people can occupy a given role such as user or influencer, and one person may play multiple roles.18 A purchasing manager, for example, often occupies the roles of buyer, influencer, and gatekeeper simultaneously: She can determine 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 A NALYZING BUSINESS MARKETS actually get the business, even though others (deciders) might select two or more potential vendors that can meet the company s requirements. The typical buying center has a minimum of five or six members and often has dozens. Some may be outside the organization, such as government officials, consultants, technical advisors, and other members of the marketing channel. One study found that 3.5 more people on average were engaged in making a business purchase decision in 2005 than in 2001.19 Buying Center Influences Buying centers usually include several participants with differing interests, authority, status, and persuasiveness, 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. Buyers definitely exhibit different buying styles. There are keep-it-simple buyers, own-expert buyers, want-the-best buyers, and w ant-everything-done buyers. Some younger, highly educated buyers are computer experts who 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 purchasing powers-that-be are legendary. Webster cautions that ultimately individuals, not organizations, make purchasing decisions.20 Individuals are motivated by their own needs and perceptions in attempting to maximize the rewards (pay, advancement, recognition, and feelings of achievement) offered by the organization. Personal needs motivate their behavior, but organizational needs legitimate the buying process and its outcomes. Thus, 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 individual 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.21 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 approach to emphasize more emotional appeals and how its product line actually enabled the customer s employees to improve their performance, relieving management of the complications and stress of using components.22 Recognizing these extrinsic, interpersonal influences, more industrial firms have put greater emphasis on strengthening their corporate brand. 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 companies. A new CMO 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. Record sales and stock price highs soon followed.23 SAS is another firm that recognized the importance of its corporate brand. SAS With sales of more than $2.3 billion and a huge fan club of IT customers, SAS, the business analytics software firm, seemed to be in an enviable position in 1999. Yet its image was what one industry observer called a geek brand. In order 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 the kind of people who either didn t have a clue what SAS s software was and what to do with it, or who 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 | CHAPTER 7 211 2 12 PART 3 C ONNECTING WITH CUSTOMERS Like many business-to-business firms, software giant SAS emphasizes its corporate brand in its marketing efforts. business publications 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. Subsequent research showed that SAS had made the transition to a mainstream business decisionmaking support brand and was seen as both user-friendly and necessary. Highly profitable and now one of the world s largest privately owned software companies, more than doubling its revenue stream since the brand change, SAS has met with just as much success inside the company. For 14 years, Fortune magazine has ranked it one of the best U.S. companies to work for; in 2010 the company was number one.24 Targeting Firms and Buying Centers Successful business-to-business marketing requires that business marketers know which types of companies to focus on in their selling efforts, as well as who to concentrate on within the buying centers in those organizations. A NALYZING BUSINESS MARKETS | CHAPTER 7 213 TARGETING FIRMS As we will discuss in detail in Chapter 8, business marketers may divide the marketplace in many different ways to decide on the types of firms to which they will sell. Finding those business sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial, as Timken found out. Timken When Timken, which manufactures bearings and rotaries for companies in a variety of industries, saw its net income and shareholder returns dip compared to 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, the company conducted an extensive market study. It revealed 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, and it also addressed customers 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 bearings 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 of $5.7 billion in 2008.25 It s also true, however, that as a slowing economy has put a stranglehold on large corporations purchasing departments, the small and midsize business markets are offering new opportunities for suppliers. See Marketing Insight: Big Sales to Small Businesses, for more on this important B2B market. * Marketing Insight Big Sales to Small Businesses Small businesses defined as those with fewer than 500 employees represent 99.7 percent of all employer firms and employ about half of all private-sector employees. They have generated 60 percent to 80 percent of net new jobs annually over the past decade. According to the Small Business Administration s Office of Advocacy, nearly 640,000 small businesses opened in the United States in 2007. Those new ventures all need capital equipment, technology, supplies, and services. Look beyond the United States to new ventures around the world and you have a huge and growing B-to-B market. Here s how two top companies are reaching it: * Timken has fine-tuned its marketing activities to sell its specialized bearing and rotary products only to the most promising prospects. IBM counts small to midsize customers as 20 percent of its business and has launched Express, a line of hardware, software services, and financing, for this market. IBM sells through regional reps as well as independent software vendors and resellers, and it supports its small midsize push with millions of dollars in advertising annually, including in publications such as American Banker and Inc. The company has also directly targeted gay business owners with ads in The Advocate and Out and has partnered with nonprofits to reach racial and ethnic minority segments. American Express has been steadily adding new features to its credit card for small business, which some small companies use to cover hundreds of thousands of dollars a month in cash needs. It has also created a small business network called OPEN Forum to bring together various services, Web tools, and discount programs with other giants such as FedEx, JetBlue, Hertz, and Hyatt. With OPEN Forum, American Express not only allows customers to save money on common expenses, it also encourages them to do much of their recordkeeping on its Web site and gain business insights. 214 PART 3 C ONNECTING WITH CUSTOMERS 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 selling 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. Simplicity means having 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 (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 targeted to * * * small and midsize businesses and 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 offer phone or face time. Do provide support after the sale. Small businesses want partners, 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 management 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 help Microsoft employees 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;;; In developing selling efforts, business marketers can also consider their customers customers, or end users, if these are appropriate. Many business-to-business transactions are to firms using the products they purchase as components or ingredients in products they sell to the ultimate end users. A sharper focus on end users helped propel Thomson Reuters to greater financial heights. Thomson Reuters Thomson Reuters Just before it acquired Reuters, global information services giant Thomson Corporation embarked on an extensive research study to better understand its ultimate customers. Thomson sold to businesses and professionals in the financial, legal, tax and accounting, scientific, and health care sectors, but it felt it knew much more about how a financial services manager made purchases for an entire department, for example, than about how individual brokers or investment bankers used Thomson data, research, and other resources to make day-to-day investment decisions for clients. Segmenting the market by these end users, rather than by purchasers, and studying how they viewed Thomson versus competitors allowed the firm to identify market segments that offered growth opportunities. To better understand these segments, Thomson 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.26 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. To target their efforts properly, business marketers need to figure out: Who are the major decision participants? What decisions do they influence? What is their level of influence? 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 this buying decision include the vice president of purchasing, the operating-room administrator, and the surgeons. The vice president of purchasing A NALYZING BUSINESS MARKETS | CHAPTER 7 215 A number of different people play a role in the purchase of hospital products such as surgical gowns; all these people have their own objectives and interests. analyzes whether the hospital should buy disposable gowns or reusable gowns. If the findings favor disposable gowns, then the operating-room administrator compares various competitors products and prices and makes a choice. This administrator considers absorbency, antiseptic 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 particular brand. The business marketer is not likely to know exactly what kind of group dynamics take place during the decision process, although whatever information he or she can obtain about personalities and interpersonal factors is useful. Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multilevel in-depth selling 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.27 Business marketers must periodically review their assumptions about buying center participants. For years Kodak sold X-ray film to hospital lab technicians, but research indicated that professional administrators were increasingly making purchasing decisions. Kodak revised its marketing strategy and developed new advertising to reach out to these decision makers. The Purchasing/Procurement Process In principle, business buyers seek to obtain the highest benefit package (economic, technical, service, and social) in relation to a market offering s costs. To make comparisons, they will try to translate all costs and benefits into monetary terms. A business buyer s incentive to purchase will be a function PART 3 C ONNECTING WITH CUSTOMERS of the difference between perceived benefits and perceived costs.28 The marketer s task is to construct a profitable offering that delivers superior customer value to the target buyers. 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 firm to put its best foot forward. Framing can be as simple as making sure customers realize all the benefits or cost savings afforded by the firm s offerings, or becoming more involved and influential in the thought process behind how customers view the economics of purchasing, owning, using, and disposing product offerings. Framing requires understanding how business customers currently think of and choose among products and services, and then determining how they should ideally think and choose. Supplier diversity is a benefit that may not have a price tag but that business buyers overlook at their risk. As the CEOs of many of the country s largest companies see it, a diverse supplier base is a business imperative. Minority suppliers are the fastest-growing segment of today s business landscape. Pfizer One of the biggest names in pharmaceuticals, Pfizer, views its supplier-diversity program as an essential tool in connecting with customers. Chief Diversity Officer Karen Boykin-Towns directs diversity efforts that include recruitment and talent development inside the company, as well as engaging with customers and suppliers outside the company. For leadership, Pfizer also relies on a diversity and inclusion worldwide council and an infrastructure of ambassadors throughout the company. Pfizer concentrates its diversity efforts on women, LGBT, people with disabilities, Latino/Hispanics, Asian Pacific Islanders, U.S. Caribbeans, and African Americans. The company has spent about $700 million with 2,400 minority and women suppliers. Pfizer has even developed a mentoring program that identifies women and minority suppliers that need help growing, whether it s designing a better Web site or building a better business plan. Pfizer managers meet with the owners, often on-site, to figure out what they need.29 Pfizer 2 16 In the past, purchasing departments occupied a low position in the management hierarchy, in spite of often 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 them to strategic supply departments with responsibility for global sourcing and partnering. At Caterpillar, purchasing, inventory control, production scheduling, and traffic have been combined into one department. Here are 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 from this new arrangement. In many cases, orders are being filled in the suppliers warehouse within minutes of being transmitted, and the supplier is now able to take part in a pay-on-receipt program that has shortened Rio Tinto s payment cycle to around 10 days.30 Mitsui & Co. Ltd is a leading Japanese trading firm that owns more than 850 companies and subsidiaries. When the firm took its purchase orders and payments transactions for one group online, it reduced the cost of purchase transactions by 50 percent and increased customer satisfaction due to greater process efficiencies.31 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.32 The upgrading of purchasing means business marketers must upgrade their sales staff to match the higher caliber of today s business buyers. A NALYZING BUSINESS MARKETS | CHAPTER 7 217 Leading mining and exploration company Rio Tinto has worked with its suppliers to streamline the way they get paid. 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.33 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. TABLE 7.1 Buygrid Framework: Major Stages (Buyphases) of the Industrial Buying Process in Relation to Major Buying Situations (Buyclasses) Buyclasses New Task Straight Rebuy 1. Problem recognition Yes Maybe No 2. General need description Yes Maybe No 3. Product specification Buyphases Modified Rebuy 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 2 18 PART 3 C ONNECTING WITH CUSTOMERS 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, 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 mail, telemarketing, and calling on prospects. 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 reduction that studies whether components can be redesigned or standardized or made by cheaper methods of production w ithout adversely impacting 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 components that are too expensive or that fail to meet specified standards. When HP won ISRI s first Design for Recycling Award through an application of PVA methods, it received this accolade: HP has worked for many years to design products that are easier to recycle. The firm operates several recycling facilities, which allows it to determine the most effective design features to facilitate product recycling. HP has developed standards that integrate clear design guidelines and checklists into every product s design process to assess and improve recyclability. Hewlett-Packard s design process includes: Using modular design to allow components to be removed, upgraded, or replaced; eliminating glues and adhesives by using, for example, snap-in features; marking plastic parts weighing more than 25g according to ISO 11469 international standards, to speed up materials identification during recycling; reducing the number and types of materials used; using single plastic polymers; using recycled plastic; using moulded-in colours and finishes instead of paint, coatings, or plating.34 Suppliers can use product value analysis as a tool for positioning themselves to win an account. Regardless, 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.35 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.36 The move to Internet purchasing has far-reaching implications for suppliers and will change the shape of purchasing for years to come.37 Companies that purchase over the Internet are utilizing electronic marketplaces in several forms: * * * Catalog sites. Companies can order thousands of items through electronic catalogs distributed by e-procurement software, such as Grainger s. 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). allows plastics buyers to search the best prices among thousands of plastics sellers. Pure Play auction sites. Ritchie Bros. Auctioneers is the world s largest industrial auctioneer, with more than 40 auction sites worldwide. It sold $3.5 billion of used and unused equipment at more than 300 unreserved auctions in 2009, including a wide range of heavy equipment, trucks, and other assets for the construction, transportation, agricultural, material handling, mining, forestry, petroleum, and marine industries. While most people prefer to bid in person at Ritchie Bros. auctions, they are also able to bid online in real time at the A NALYZING BUSINESS MARKETS | CHAPTER 7 219 The world s largest industrial auctioneer, Ritchie Bros., sells a wide range of heavy equipment. * * * * Company s multilingual Web site. In 2009, 33 percent of the bidders at Ritchie Bros. auctions bid over the Internet; online bidders purchased $830 million of equipment.38 Spot (or exchange) markets. On spot electronic markets, prices change by the minute. is an online exchange for buyers and sellers of bulk chemicals such as benzene, and it s a B2B success in an arena littered with failed sites. First to market, it is now the biggest online exchange for chemical trading, with 1 million barrels traded daily. Customers such as Vanguard Petroleum Corp. in Houston conduct about 15 percent of their spot purchases and sales of natural gas liquids on ChemConnect s commodities trading site. 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. 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. 2 20 PART 3 C ONNECTING WITH CUSTOMERS 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, centrally 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. Identifying good leads and converting them to sales requires the marketing and sales organizations to take a coordinated, multichannel approach to the role of trusted advisor to prospective customers. Marketing must work together 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.39 Marketing 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.40 To proactively generate 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.41 Suppliers that lack the required production capacity or suffer from a poor reputation will be rejected. Those that qualify may be visited by the buyer s agents, who will examine the suppliers manufacturing facilities and meet their staff. After evaluating each company, the buyer will end up with a short list of qualified suppliers. Many professional buyers have forced suppliers to change their marketing to increase their likelihood of making the cut. Proposal Solicitation The buyer next invites qualified suppliers to submit proposals. If the item is complex or expensive, the proposal will be written and detailed. After evaluating the proposals, the buyer will invite a few suppliers to make formal presentations. Business marketers must be skilled in researching, writing, and presenting proposals. Written proposals should be 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 are often team efforts. Pittsburgh-based Cutler-Hammer developed pods of salespeople focused on a particular geographic region, industry, or market concentration. Salespeople can leverage the knowledge and expertise of coworkers instead of working in isolation.42 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. TABLE 7.2 An Example of Vendor Analysis Attributes Rating Scale Importance Weights Poor (1) Fair (2) Good (3) Excellent (4) Price .30 Supplier reputation .20 Product reliability .30 Service reliability .10 Supplier flexibility .10 Total Score: .30(4) + .20(3) + .30(4) + .10(2) + .10(3) = 3.5 x x x x x ANALYZING BUSINESS MARKETS | CHAPTER 7 221 To develop compelling value propositions, business marketers need to better understand how business buyers arrive at their valuations.43 Researchers studying how business marketers assess customer value found eight different customer value assessment (CVA) methods. Companies tended to use the simpler methods, although the more sophisticated ones promise to produce a more accurate picture of CPV (see Marketing Memo: Developing Compelling Customer Value Propositions ). The choice of attributes and their relative importance varies 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 reliability. For political-problem products that stir rivalries in the organization (such as the choice of a computer system), the most important attributes are price, supplier reputation, product reliability, service reliability, and supplier flexibility. OVERCOMING PRICE PRESSURES The buying center may attempt to negotiate with preferred suppliers for better prices and terms before making the final selection. 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.44 marketing Memo Developing Compelling Customer Value Propositions To command price premiums in competitive B2B markets, firms must create compelling customer value propositions. The first step is to research the customer. Here are a number of productive research methods: 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. 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 value in different applications. 8. Importance ratings Ask customers to rate the importance of different attributes and their suppliers performance on each. 2. Field value-in-use assessment Interview customers about how costs of using a new product compare to 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 newmarket 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. Having done this research, you 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 determined 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 points-ofparity and points-of-difference 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 developing a compelling one. Quaker Chemical conducts training programs for its managers that include a competition to develop the best proposals. Sources: 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. PART 3 C ONNECTING WITH CUSTOMERS Marketers can counter requests for a lower price in a number of ways. They may be able to show evidence that the total cost of ownership, that is, the life-cycle cost of using their product, is lower than for competitors products. They can cite the value of the services the buyer now receives, especially if they are superior to those offered by competitors. 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.45 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.46 Some firms are using technology 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.47 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.48 * * * Cardinal Health set up a bonus-dollars plan and gave points according to how much the customer purchased. 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. Solution selling can also alleviate price pressure and comes in different forms. Here are three examples.49 * * * 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. Lincoln Electric 2 22 Lincoln Electric Lincoln Electric has a decades-long tradition of working with its customers to reduce costs through its Guaranteed Cost Reduction 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 developed a package of 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.50 Risk and gain sharing can offset price reductions that 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 Medline achieves substantially more than promised, 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 agreement 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, they want A NALYZING BUSINESS MARKETS them to achieve continuous quality and performance improvement, and at the same time they want them to 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 as the biggest deterrent to single sourcing. Companies may also fear single suppliers will become too comfortable in the relationship and lose their competitive edge. 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 service, 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. In the case of 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 resupply 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. The buyer s computer automatically sends an order to the seller when stock is needed. This system locks suppliers in tighter with the buyer and makes it difficult for out-suppliers to break in unless the buyer becomes dissatisfied with prices, quality, or service. 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, who 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 in systems called vendor-managed inventory (VMI). These suppliers are privy to the customer s inventory levels and take responsibility for replenishing automatically through 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.51 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, in much the same way sales personnel receive bonuses for good selling performance. These systems lead purchasing managers to increase pressure on sellers for the best terms. Managing Business-to-Business Customer Relationships To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships.52 Closer relationships are driven in part by supply chain management, early supplier involvement, and purchasing alliances.53 Cultivating the right relationships with business is paramount for any holistic marketing program. Business-to-business marketers are avoiding spray and pray approaches to attracting and retaining customers in favor of honing in on their targets and developing one-to-one marketing | CHAPTER 7 223 2 24 PART 3 C ONNECTING WITH CUSTOMERS approaches. They are increasingly using online social media in the form of company blogs, online press releases, and forums or discussion groups to communicate with existing as well as prospective customers. Tellabs Competing with industry giants Alcatel-Lucent and Cisco Systems, Tellabs is a telecommunications equipment design and research company that provides equipment to transmit voice, video, and data across communication networks. To differentiate itself, Tellabs decided to develop a marketing campaign that would focus on tech-savvy end users of products its customers sold. The campaign, Inspire the New Life, targeted telecommunication service providers to show how Tellabs understood the new generation of technology users and provided solutions to meet their needs. After research showed users were five times more likely to listen to an audio podcast than to read a white paper, and twice as likely to watch a video than listen to a podcast, Tellabs decided to use sixminute video technology primers instead of traditional case studies and white papers. Its videos posted on YouTube, Google Video, and the company s Web site were downloaded 100,000 times. Adding a new podcast once or twice a month, the company estimated that the campaign generated three times the exposure, for the cost, than a traditional ad-based Web campaign.54 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 engage in activities that create more value for both parties.55 Building trust is one prerequisite to 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 relationship partner is also an important factor in the strength of interfirm ties.56 A number of forces influence the development of a relationship between business partners.57 Four relevant factors 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:58 Tellabs differentiates itself by its focus on the customers of its customers. 1. 2. 3. 4. 5. 6. Basic buying and selling These are simple, routine exchanges with moderate levels of cooperation and information exchange. Bare bones These relationships require more adaptation by the seller and less cooperation and information exchange. Contractual transaction These exchanges are defined by formal contract and generally have low levels of trust, cooperation, and interaction. Customer supply In this traditional custom supply situation, competition rather than cooperation is the dominant form of governance. Cooperative systems The partners in cooperative systems are united in operational ways, but neither demonstrates structural commitment through legal means or adaptation. Collaborative In collaborative exchanges, much trust and commitment lead to true partnership. A NALYZING BUSINESS MARKETS Marketing Insight 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 for 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 likable, attractive, prestigious, dynamic, and so on. In other words, a credible firm is good at what it does; it keeps its customers best interests in mind and is enjoyable to work with. Trust is the willingness of a firm to rely on a business partner. It depends on a number of interpersonal and interorganizational factors, such as the firm s perceived competence, integrity, honesty, and benevolence. 7. 8. | CHAPTER 7 225 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 employees incentives that are aligned to meet with 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 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 determine the creditworthiness of trading partners. Sources: Bob Violino, Building B2B Trust, Computerworld, June 17, 2002, p. 32; Richard E. Plank, David A. Reid, and Ellen Bolman Pullins, Perceived Trust in Business-to-Business Sales: A New Measure, Journal of Personal Selling and Sales Management 19, no. 3 (Summer 1999), pp. 61 72; 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). Mutually adaptive Buyers and sellers make many relationship-specific adaptations, but without necessarily achieving strong trust or cooperation. Customer is king In this close, cooperative relationship, the seller adapts to meet the customer s needs without expecting much adaptation or change in exchange. Over time, however, relationship roles may shift or be activated under different circumstances.59 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 the supply was important to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate suppliers.60 Another study suggested that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments (described next) are modest.61 Business Relationships: Risks and Opportunism Researchers have noted that establishing a customer supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adaptation (allowing for flexibility for unanticipated events). Vertical coordination can facilitate stronger customer seller ties but at the same time may increase the risk to the customer s and supplier s specific investments. Specific investments are those expenditures tailored to a particular company and value chain 2 26 PART 3 C ONNECTING WITH CUSTOMERS partner (investments in company-specific training, equipment, and operating procedures or systems).62 They help firms grow profits and achieve their positioning.63 Xerox worked closely with its suppliers to develop customized processes and components that reduced its copier manufacturing costs by 30 percent to 40 percent. In return, suppliers received sales and volume guarantees, an enhanced understanding of their customer s needs, and a strong position with Xerox for future sales.64 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 relationship. 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.65 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 manufacturing 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. 66 It may entail blatant self-serving and deliberate misrepresentation that violates contractual agreements. In creating the 1996 version of the Ford Taurus, Ford Corporation chose to outsource the whole process to one supplier, Lear Corporation. Lear committed to a contract that, for various reasons, it knew it was unable to fulfill. According to Ford, Lear missed deadlines, failed to meet weight and price objectives, and furnished parts that did not work.67 A more passive form of opportunism might be a refusal or unwillingness to adapt to changing circumstances. 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 transactions 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.68 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).69 New Technology and Business Customers Top firms are comfortable using technology to improve the way they do business with their businessto-business customers. Here are some examples of how they are redesigning Web sites, improving search results, leveraging e-mails, engaging in social media, and launching Webinars and podcasts to improve their business performance. * * 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.70 Hewlett-Packard launched a Technology at Work e-mail newsletter to focus on retention of its current customers. The newsletter s content and format were based on in-depth research to find out what customers wanted. Hewlett-Packard measures the effects of the newsletter carefully and found that e-mailing product updates helped avoid inbound service calls, saving millions of dollars.71 A NALYZING BUSINESS MARKETS | CHAPTER 7 227 Health care cost-containment service provider Chapman Kelly finds its online marketing efforts have provided bottom-line rewards. Emerson Process Management makes automation systems for chemical plants, oil refineries, and other types of factories. The company blog about factory automation is visited by thousand of readers who like to hear and swap factory war stories. It attracts 35,000 to 40,000 regular visitors each month, generating five to seven leads a week. Given that the systems sell for up to millions, ROI on the blog investment is immense.72 Machinery manufacturer Makino builds relationships with end-user customers by hosting an ongoing series of industry-specific Webinars, producing an average of 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. Makino s database created from Webinar participants has allowed the firm to cut marketing costs and improve its effectiveness and efficiency.73 Acquired by IBM in January 2008, Cognos provides business intelligence and performance management software and services to help companies manage their financial and operational performance. To increase their visibility and improve customer relations, Cognos launched BI radio, an RSS-enabled series of 30-minute podcasts released every six weeks addressing a range of topics such as marketing, leadership, business management, and killer apps. Attracting 60,000 subscribers, the podcasts are thought to have directly or indirectly led to $7 million in deals.74 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 PART 3 C ONNECTING WITH CUSTOMERS 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 minimization 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 stadiums, 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. 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 segment, 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 ARAMARK 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.75 ARAMARK 2 28 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. In some cases, they will make allowance for superior 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. 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 bought goods and services valued at $220 billion in fiscal year 2009, making it the largest and therefore most potentially attractive customer in the world. It is not just the dollar figure that is large, but the number of individual acquisitions. According to the General Services Administration Procurement Data Center, over 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 do not pay enough attention to cost justification, a major activity for government procurement professionals. Companies hoping to be government contractors need to help government agencies see the bottom-line impact of products. Demonstrating useful experience and successful past performance through case studies, especially with other government organizations, can be influential.76 Just as companies provide government agencies with guidelines about how best to purchase and use their products, 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.77 A NALYZING BUSINESS MARKETS | CHAPTER 7 229 Fortunately for businesses of all sizes, the federal government has been trying to simplify the contracting procedure and make bidding more attractive. Reforms place more emphasis on buying off-the-shelf items instead of items built to the government s specs, communicating with vendors online to eliminate the massive paperwork, and giving vendors who lose a bid a debriefing from the appropriate government agency to increase their chances of winning the next time around.78 More purchasing is being done online via Web-based forms, digital signatures, and electronic procurement cards (P-cards).79 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 (, which collects, validates, stores, and disseminates data in support of agency acquisitions.80 In spite of these reforms, for a number of reasons many companies that sell to the government have not used a marketing orientation. Some, though, have pursued government business by establishing separate government marketing departments. Companies such as 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. Summary 1. Organizational buying is the decision-making process by which formal organizations establish the need for purchased 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 to consumer markets, business markets generally have fewer and larger buyers, a closer customer supplier relationship, and more geographically concentrated buyers. Demand in the business market is derived from demand in the consumer market and fluctuates 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 buying organization. It consists of initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. To influence these parties, marketers must be aware of environmental, organizational, interpersonal, and individual factors. 4. The buying process consists of eight stages called buyphases: (1) problem recognition, (2) general need description, (3) product specification, (4) supplier search, (5) proposal solicitation, (6) supplier selection, (7) orderroutine specification, and (8) performance review. 5. Business marketers must form strong bonds and relationships with their customers and provide them added value. Some customers, however, may prefer a transactional relationship. Technology is aiding the development of strong business relationships. 6. The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide 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. 2 30 PART 3 C ONNECTING WITH CUSTOMERS Applications Marketing Debate How Different Is Business-to-Business Marketing? Many business-to-business marketing executives lament the challenges of business-to-business marketing, maintaining that many traditional marketing concepts and principles do not apply. For a number of reasons, they assert that selling products and services to a company is fundamentally different from selling to individuals. 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 concepts and principles apply. Marketing Excellence >>Accenture Accenture began in 1942 as Administrative Accounting Group, the consulting arm of accounting firm Arthur Andersen. In 1989, it launched as a separate business 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 accounting corpo- Marketing Discussion B-to-C & B-to-B Concepts Consider some of the consumer behavior topics for businessto-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 models of choice work? Mental accounting? rate parent. To build its brand and separate itself from the accounting 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 parent, Andersen Consulting was granted its full independence from Arthur Andersen but it had to relinquish the Andersen name. Andersen Consulting was given three months to find a name that was able to be trademarked in 47 countries, effective and inoffensive in over 200 languages, and acceptable to employees and clients and that corresponded with an available URL. The effort that followed was one of the largest and most successful rebranding campaigns in corporate history. As luck would have it, the company s new name came from a consultant at the company s Oslo office, who submitted Accenture as part of an internal namegeneration initiative dubbed Brandstorming. The consultant coined the Accenture name because it rhymed with adventure and connoted an accent on the future. The name also retained the Ac of the original Andersen Consulting name (echoing the Web site), which would help the firm retain some of its former brand equity. On midnight, December 31, 2000, Andersen Consulting officially adopted the Accenture name and launched a global marketing campaign targeting senior executives at A NALYZING BUSINESS MARKETS Accenture s clients and prospects, all Accenture partners and employees, the media, leading industry analysts, potential recruits, and academia. The results of the advertising, marketing, and communications campaigns were quick and impressive. Overall, Accenture s brand equity increased 11 percent, and the number of firms inquiring about its services increased 350 percent. Awareness of Accenture s breadth and depth of services achieved 96 percent of its previous level. Globally, awareness of Accenture as a provider of management and technology consulting services was 76 percent of levels for the former Andersen Consulting name. These results enabled Accenture to successfully complete a $1.7 billion IPO in July 2001. In 2002, Accenture unveiled a new positioning to reflect its new role as a partner to aid execution of strategy, summarized succinctly by the tagline Innovation Delivered. This tagline was supported by the statement, From innovation to execution, Accenture helps accelerate your vision. Accenture surveyed senior executives from different industries and countries and confirmed that they saw inability to execute and deliver on ideas as the number one barrier to success. Accenture saw its differentiator as the ability 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, the business climate changed. After the dot-com crash and the economic downturn, innovation was no longer enough. Executives wanted bottom-line results. As part of its new commitment to helping clients achieve their business objectives, Accenture 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 depended 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 featured golf superstar Tiger Woods as spokesperson. When Accenture sought Woods out, the athlete was at the top of his game the world s best golfer with an impeccable image. What better symbol for high performance? Accenture s message communicated that it could help | CHAPTER 7 231 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 quickly searched for a new concept that not only resonated across the world, translated appropriately into different cultures, but also cut its ties with Woods. The result came after the firm dusted off some previous concepts, tested them with focus groups of business professionals, and launched a $50 million campaign featuring animals and the same slogan, High Performance. Delivered. In one ad, an elephant is pictured surfing alongside copy that reads, Who says you can t be big and nimble? In a later ad, a lizard tries to catch a butterfly by transforming its tongue into the design of a flower. The copy stated, If you innovate, they will come. Today, Accenture continues to excel as a global management consulting, technology services, and outsourcing company. Its clients include 99 of the Fortune Global 100 and more than three-quarters of the Fortune Global 500. The company ended fiscal 2009 with revenues of $21.5 billion. Questions 1. What has Accenture done well to target its B-to-B audience? 2. Has Accenture done the right thing by dropping Tiger Woods as its spokesperson? Discuss the pros and cons of its decision. Sources: Annual Reports,; 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. 232 PART 3 C ONNECTING WITH CUSTOMERS Marketing Excellence >>GE General Electric (GE) is made up of five major divisions that operate in a wide range of industries: Energy (Energy, Oil & Gas, Water and Process Technologies), Technology Infrastructure (Aviation, Enterprise Solutions, Healthcare, Transportation), GE Capital (Commercial Lending & Leasing, Consumer Financing, Energy Financial Services, GE Capital Aviation Services, Real Estate Financing), NBC Commercial (Cable, Film, Networks, Parks & Resorts), and Consumer & Industrial (Appliances, Consumer Electronics, Electrical Distribution, Lighting). As a result, GE sells a diverse array of products and services from home appliances to jet engines, security systems, wind turbines, and financial services. GE s revenues topped $161 billion in 2009, making it so large that if each of its five business units were ranked separately, they all would appear in the Fortune 200. If GE were its own country, it would be the 50th largest in the world, ahead of Kuwait, New Zealand, and Iraq. Thomas Edison originally founded the company as the Edison Electric Light Company in 1878. The company, which soon changed its name to General Electric, became an early pioneer in lightbulbs and electrical appliances and served the electrical needs of various industries, such as transportation, utilities, manufacturing, and broadcasting. GE became the acknowledged pioneer in business-tobusiness marketing in the 1950s and 1960s under the tagline Progress Is Our Most Important Product. 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. Over 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. In 2003, GE and the company s new CEO, Jeffrey Immelt, faced a fresh challenge; how to promote its diversified brand with a unified global message. After extensive consumer research, the company launched a major new campaign called Imagination at Work, which highlighted its renewed focus on innovation and new technology. The award-winning campaign promoted units such as GE Aircraft Engines, GE Medical Systems, and GE Plastics, focusing on the breadth of GE s product offerings. GE initially spent over $150 million on corporate advertising, a significant expenditure but one that created efficiencies by focusing on the core GE brand. The goal was to unify these divisions under the GE brand while giving them a voice. When you re a company like ours, with 11 different businesses, brand is really important in pulling the identity of the company together, said former Chief Marketing Officer Beth Comstock. Integration was important in communicating the brand across the organization and to all of our constituents. The new integrated campaign got results. Research indicates GE is now being associated with attributes such as being high tech, leading edge, innovative, contemporary, and creative, 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 attributes, including trust and reliability. In 2005, the company extended the campaign with its next initiative, Ecomagination, which highlighted the company s efforts to develop environmentally friendly green technologies such as solar energy, lower-emission engines, and water purification technologies. The company leveraged the Imagination tagline again with a 2006 campaign called Health Care Re-Imagined that featured innovative GE health care products for detecting, preventing, and curing diseases. Immelt made some strategic restructuring decisions that helped the company survive the worldwide recession of 2008 and 2009 and also helped shift it even more in the B2B direction. GE moved from 11 divisions to 5 and sold off some of its consumer-focused businesses, including 51 percent of NBC Universal (sold to Comcast). This shift allowed GE to spend more resources on innovation, green initiatives, and its growing businesses such as power generation, aviation, medical-imaging, and cell technologies. GE continued to use the Ecomagination campaign and introduced Healthymagination, which communicated its advances in medical technologies around the world. GE s recent corporate campaigns have united its business units, but its success rests on its ability to understand A NALYZING BUSINESS MARKETS the business market and the business buying process, putting itself in the shoes of its business customers. Consider its approach to pricing its aircraft engines. GE knows that purchasing an aircraft engine is a multimillion-dollar expenditure, and one that doesn t end with the purchase. Customers (the airlines) face substantial maintenance costs to meet FAA guidelines and ensure reliability of the engines. So in 1999, GE pioneered a new pricing option called Power by the Hour. This concept gives 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. This kind of B-to-B marketing savvy has helped GE cement its top position in the Financial Times s World s Most Respected Companies survey for years. Its understanding of the business markets, its way of doing business, and its brand marketing have kept GE s brand | CHAPTER 7 233 equity growing. Indeed, its brand equity was ranked fourth and valued at $48 billion in the 2009 Interbrand/ BusinessWeek ranking of the Top 100 Global Brands. The GE brand is what connects us all and makes us so much better than the parts, Chief Marketing Officer Comstock said. Questions 1. Discuss the importance of B-to-B marketing and a strong B-to-B brand to GE. 2. Have Imagination at Work, Ecomagination, and Healthymagination successfully communicated GE s focus on its newer endeavors? Why or why not? Sources: 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. 234 PART 3 CONNECTING WITH CUSTOMERS a Ch In This Chapter, We Will Address the Following Questions 1. What are the different levels of market segmentation? 2. In what ways can a company divide a market into segments? 3. What are the requirements for effective segmentation? 4. How should business markets be segmented? 5. How should a company choose the most attractive target markets? Club Med has gone upscale to target new market segments. ter p 8 Identifying Market Segments and Targets Companies cannot connect with all customers in large, broad, or diverse markets. But they can divide such markets into groups of consumers or segments with distinct needs and wants. A company then needs to identify which market segments it can serve effectively. This decision requires a keen understanding of consumer behavior and careful strategic thinking. To develop the best marketing plans, managers need to understand what makes each segment unique and different. Identifying and satisfying the right market segments is often the key to marketing success. One of the most famous leisure travel brands in the world, France s Club Méditerranée, better known as Club Med, has targeted several different customer groups through the years. Started in 1950 and long a pioneer in the concept of the all-inclusive resort, Club Med originally used exotic locations, bare-bones accommodations, and the advertising theme The antidote to civilization to target singles, young couples, and others seeking sea, sand, and a good time. Rooms did not have phones, TVs, fans, or locks on the doors. To transcend its hedonistic image and broaden its clientele, Club Med decided to add family-friendly resort locations and services in the 1970s. Depending on location, the resorts, known as villages, offer a wide range of activities, from flying-trapeze clinics to body building to snow skiing. Club Med staff are called GOs, or Gentil Organisateurs ( gracious/nice organizers ); clients are called To compete more effectively, many companies are now GMs, or Gentils Membres ( gracious/nice guests/members ). An embracing target marketing. Instead of scattering their marketing informal atmosphere has GOs and GMs dining, drinking, dancing, efforts, they re focusing on those consumers they have the greatest chance of satisfying. and playing together. Effective target marketing requires that marketers: An attempt to move outside the leisure-travel business to become a broader services company proved ill-fated; a series of urban 1. Identify and profile distinct groups of buyers who differ in bar/restaurants flopped. Combined with a post-9/11 economic retheir needs and wants (market segmentation). cession and increased competition, the failure left Club Med reeling 2. Select one or more market segments to enter (market in 2001 2002. Under the new leadership of Henri Giscard d Estaing targeting). 3. For each target segment, establish and communicate the (son of the former president of France), the company invested hundistinctive benefit(s) of the company s market offering dreds of millions of dollars to move upscale and attract wealthier (market positioning). customers by crafting a more sophisticated image. For the firm s 60th anniversary in 2010, advertising proclaimed that Club Med was This chapter will focus on the first two steps. After reviewing Where Happiness Means the World, which was backed by an some important branding concepts in Chapter 9, Chapter 10 extensive online marketing effort.1 discusses the third step, market positioning. 235 PART 3 C ONNECTING WITH CUSTOMERS 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 try to define segments by looking at descriptive characteristics: geographic, demographic, and psychographic. Then they examine whether these customer 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 try to define segments by looking at behavioral considerations, such as consumer responses to benefits, usage occasions, or brands. The researcher then sees 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 psychographic makeup? Regardless of which type of segmentation scheme we use, the key is adjusting the marketing program to recognize customer differences. The major segmentation variables geographic, Table 8.1. demographic, psychographic, and behavioral segmentation are summarized in 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, such activities concentrate on getting as close and personally relevant to individual customers as possible. Much of Nike s initial success comes 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. Citibank provides different mixes of banking services in its branches depending on neighborhood demographics. Curves, an exercise chain aimed at middleaged women, places paper bags where consumers can place a form asking for more information about Curves in local businesses such as ice cream shops, pizza parlors, and other places where guilt can strike the weight-conscious shopper. Retail firms such as Starbucks, Costco, Trader Joe s, and REI have all found great success emphasizing local marketing initiatives, but other types of firms have also jumped into action.2 Bed Bath & Beyond Home furnishing retailer Bed Bath & Beyond s ability to cater to local tastes has fueled its phenomenal growth. The firm s managers pick 70 percent of their own merchandise, and this fierce local focus has helped the chain evolve from bed linens to the beyond part products from picture frames and pot holders to imported olive oil and designer doormats. In Manhattan stores, for instance, managers are beginning to stock wall paint. You won t find paint in suburban stores, where customers can go to Home Depot or Lowe s. One manager says several customers have been surprised to find out the store is part of a national chain and not a mom-and-pop operation. For Bed Bath & Beyond, that s the ultimate compliment.3 Bed Bath & Beyond 2 36 More and more, regional marketing means marketing right down to a specific zip code.4 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. I DENTIFYING MARKET SEGMENTS AND TARGETS TABLE 8.1 | CHAPTER 8 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 Religion Catholic, Protestant, Jewish, Muslim, Hindu, other Race White, Black, Asian, Hispanic Generation Silent Generation, Baby boomers, Gen X, 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 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 over half a million U.S. residential neighborhoods into 14 distinct groups and 66 distinct lifestyle segments called PRIZM Clusters.5 The groupings take into consideration 39 factors in five broad categories: (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 8.2 has examples of four PRIZM clusters. Marketers can use PRIZM to answer questions such as: Which geographic areas (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? Geoclustering captures the increasing diversity of the U.S. population. 237 2 38 PART 3 C ONNECTING WITH CUSTOMERS TABLE 8.2 Examples of PRIZM clusters Young Digerati. Young Digerati are the nation s tech-savvy singles and couples living in fashionable neighborhoods 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, uppermiddle-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 home owners, 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. Old Milltowns. Once-thriving mining and manufacturing towns have aged as have the residents in Old Milltowns communities. Today, the majority of residents are retired singles and couples, living on downscaled incomes in pre-1960 homes and apartments. For leisure, they enjoy gardening, sewing, socializing at veterans clubs, and eating out at casual restaurants. Source: Nielsen, A number of organizations have applied this service to their marketing. The U.S. Army uses a custom Claritas system to help in recruiting. Sodexho Marriott uses a system to select menu offerings for its nationwide college food program. Wendy s and PETCO rely on Claritas to help decide where to put new stores. When Ace Hardware launched a customer loyalty program called the Helpful Hardware Club a few years ago, it assigned a Claritas cluster code to every one of the 7 million members. When Ace found that 12 clusters generated most of its business, it targeted them with specific promotions.6 Marketing to microsegments has become possible even for small organizations as database costs decline, software becomes easier to use, and data integration increases.7 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 marketing costs by reducing economies of scale and magnifying logistical problems. A brand s overall image might be diluted if the product and message are different in different localities. Demographic Segmentation In demographic segmentation, we divide the market on variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class. One reason demographic variables 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 describe 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 aged 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 decisions.8 I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 239 Nevertheless, age and life cycle can be tricky variables.9 The target market for some products may be the psychologically 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 boomers seeking to stay young, Honda decided the lines between age groups were getting blurred. 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. 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, deciding to buy a new home, and so on. These life stages present opportunities for marketers who can help people cope with their major concerns. GENDER Men and women have different attitudes and behave differently, based partly on genetic makeup and partly on socialization.10 Women tend to be more communal-minded and men more self-expressive and goal-directed; women tend 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 examining how men and women shop 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.11 According to some studies, women in the United States and the United Kingdom control or influence over 80 percent of consumer goods and services, make 75 percent of the decisions about buying new homes, and purchase outright 60 percent of new cars. Gender differentiation has long been applied in clothing, hairstyling, cosmetics, and magazines. Avon, for one, has built a $6 billion plus business selling beauty products to women. Marketers can now reach women more easily via media like Lifetime, Oxygen, and WE television networks and scores of women s magazines and Web sites; men are more easily found at ESPN, Comedy Central, Fuel, and Spike TV channels and through magazines such as Maxim and Men s Health.12 Some traditionally more male-oriented markets, such as the automobile industry, are beginning to recognize gender segmentation and changing the way they design and sell cars.13 Women shop differently for cars than men; they are more interested in environmental impact, care more about interior than exterior styling, and view safety in terms of features that help drivers survive an accident rather than help avoid one.14 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 considered 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 it 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. 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 8 to 10 bras per year, compared with the national average Avon s marketing is laser-focused on women. Lessons learned from its European customers have helped Victoria s Secret to successfully target women in North America and other markets. 2 40 PART 3 C ONNECTING WITH CUSTOMERS of two. To enhance its upscale reputation and glamorous appeal, the brand is endorsed by high-profile supermodels in ads and fashion shows. Through the years, Victoria s Secret has often delivered 25 percent or more annual sales growth, selling through its stores, catalogs, and company Web site, and posted $5.1 billion in revenues in 2008.15 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 these sets than to go to movies and restaurants. Many marketers are deliberately going after lower-income groups, in some cases discovering fewer competitive pressures or greater consumer loyalty.16 Procter & Gamble launched two discount-priced brand extensions in 2005 Bounty Basic and Charmin Basic whose success led to the introduction in 2009 of Tide Basic, although this extension was later withdrawn from the market. At the same time 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 primarily to middle-class shoppers who traded up. Increasingly, companies are finding their markets are hourglass shaped as middle-market U.S. consumers migrate toward both discount and premium products.17 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 introduced premium lines such as Levi s Capital E to upscale retailers Bloomingdales and Nordstrom, and the less-expensive Signature by Levi Strauss & Co. line to mass market retailers Walmart and Target. Marketing Insight: Trading Up, Down, and Over describes the factors creating this trend and what it means to marketers. Old Luxury brand extensions extend historically high-priced brands down-market while retaining their cachet, such as the MercedesBenz C-class and the American Express Blue card. Marketing Insight Trading Up, Down, and Over Michael Silverstein and Neil Fiske, the authors of Trading Up, observed an increasing 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. For example, consumers might trade up to such brands as Starbucks coffee, Aveda shampoo, or Viking ranges, depending in part on the emotional benefits they gain in the trade. Thanks to the trading-up trend, New Luxury goods sell at higher volumes than traditional luxury goods, although priced higher than conventional middle-market items. The authors identify three main types of New Luxury products: Accessible superpremium 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. Masstige goods, such as Kiehl s skin care and Kendall-Jackson wines, are priced between average middle-market brands and superpremium 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 consumer 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. In a subsequent book titled Treasure Hunt, Silverstein notes that 82 percent of U.S. consumers trade down in five or more categories (what he calls treasure hunting ), whereas 62 percent focus on trading up in the two categories that provide the most emotional benefits. This makes the new consumer part martyr and part hedonist, willingly sacrificing on a number of purchases in order to experience enhanced benefits from a handful of others. Silverstein believes successful firms will offer one of two kinds of value: New Luxury or Treasure Hunting. Brands that offer opportunities to trade up, such as Coach, Victoria s Secret, Grey Goose, and Bath & I DENTIFYING MARKET SEGMENTS AND TARGETS Body Works, or to trade down, such as Best Value Inn, Kohl s, Dollar General, and IKEA, are optimally positioned to deliver the value modern consumers seek. The remaining firms, occupying the middle market and lacking the economic, functional, and emotional value modern consumers are searching for, will see their market share shrink as they get trapped in the middle. Traditional grocers and department stores are already suffering, with market share declines of 30 percent and 50 percent, respectively. Market research firm Mintel observes that consumers have also been trading over by switching spending from one category to another, buying a new home theater system, say, instead of a new car. In the recent economic downturn, consumers were making substitutions | CHAPTER 8 241 that work for recession-minded lifestyles while still preserving a desired experience. Mintel cites as examples Starbucks VIA Ready Brew coffee, a new, home-based Starbucks experience that s more affordable than coffee at one of the company s outlets, and Tide TOTALCARE, which enables users to obtain certain dry-cleaning-type results at home with prices below those of professional dry cleaners. Sources: Michael J. Silverstein, Treasure Hunt: Inside the Mind of the New Consumer (New York: Portfolio, 2006); Jeff Cioletti, Movin on Up, Beverage World (June 2006), p. 20; Michael J. Silverstein and Neil Fiske, Trading Up: The New American Luxury (New York: Portfolio, 2003); Linda Tischler, The Price Is Right, Fast Company, November 2003; Sarah Mahoney, Top Consumer Trends: Trust, Control, . . . Playfulness, Marketing Daily, September 4, 2009; David Orgel, Quality Trumps Quantity in New Product Releases, Supermarket News, May 25, 2009. GENERATION Each generation or cohort is profoundly influenced by the times in which it PNC s Virtual Wallet grows up the music, movies, politics, and defining events of that period. Members share the same major cultural, political, and economic experiences and have similar outlooks and values. Marketers often advertise to a cohort by using the icons and images prominent in its experiences. They also try to develop products and services that uniquely meet the particular interests or needs of a generational target. Here is how one bank targeted Gen Y consumers. PNC s Virtual Wallet In early 2007, PNC bank hired design consultants IDEO to study Gen Y defined by PNC as 18- to 34-year-olds and 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), Reserve (backup checking that garners interest), and Grow (savings) with a slick personal finance tool. Customers can drag money from account to account on one screen. Instead of seeing a traditional ledger, they view balances on a calendar that displays estimated future cash flow based on when they are paid, when they pay bills, and their spending habits. Customers also can set a Savings Engine tool to transfer money to savings when they receive a paycheck and get their account balances by text messages. Despite offering subscribers financial returns that were nothing out of the ordinary, PNC was able to sign up 20,000 mostly Gen Y consumers within the first few months.18 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 generation cohorts of consumers, from youngest to oldest.19 Millennials (or Gen Y) Born between 1979 and 1994, Millennials, also called Gen Y, number 78 million with annual spending power estimated at $187 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 market researchers and advertisers are racing to get a bead on Gen Y s buying behavior. Also known as the Echo Boomers, these consumers have been wired almost from birth playing computer games, navigating the Web, downloading music, connecting with friends via instant messaging and mobile phones. They have a sense of entitlement and abundance from growing up during the economic boom and being pampered by their boomer parents. Yet they are highly socially conscious and concerned about environmental issues. They are selective, confident, and impatient. Consumers have been trading over to Tide TOTALCARE to obtain dry-cleaning type results at home. 2 42 PART 3 TABLE 8.3 C ONNECTING WITH CUSTOMERS Profiling U.S. Generation Cohorts Generational Cohort Birth Range Approximate Size Defining Features Millennials (Gen Y) 1979 1994 78 million Raised with relative affluence, technologically plugged in and concerned with the environment and social issues, they also have a strong sense of independence and a perceived immunity from marketing. Gen X 1964 1978 50 million Sometimes seen as falling between the generational cracks, they bridge the technological savvy of Gen Y with the adult realities of the baby boomers. Baby Boomers 1946 1964 76 million Still largely in the prime of their consumption cycle, they embrace products and lifestyles that allow them to turn back the hands of time. Silent Generation 1925 1945 42 million Defying their advancing age, they maintain active lives and products and marketing that help them to achieve that. Sources: Kenneth Gronbach, The 6 Markets You Need to Know Now, Advertising Age, June 2, 2008, p. 21; 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). 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.20 1. 2. 3. 4. Hurley reinforces its strong identification with Gen Y consumers through its sponsorship of the U.S. Open of Surfing. Online buzz 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. 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. Unconventional sports Chick-fil-A sponsored the National Amateur Dodgeball Association, a recreational pursuit for nontraditional sport enthusiasts. Cool events Hurley, which defined itself as an authentic Microphone for Youth brand rooted in surf, skate, art, music, and beach cultures, became the title sponsor of the U.S. Open of Surfing. Other sponsors included Casio, Converse, Corona, Paul Mitchell, and Southwest Airlines. I DENTIFYING MARKET SEGMENTS AND TARGETS 5. 6. 7. | CHAPTER 8 243 Computer games Product placement is not restricted to movies or TV: Mountain Dew, Oakley, and Harley-Davidson all made deals to put logos on Tony Hawk s Pro Skater 3 from Activision. Videos Burton ensures its snowboards and riders are clearly visible in any videos that are shot. Street teams As part of an antismoking crusade, the American Legacy Foundation hires teens as the Truth Squad to hand out T-shirts, bandanas, and dog tags at teen-targeted events. 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 teens and young adults. It was an unflattering image of a disaffected group with short attention spans and little work ethic. These stereotypes slowly disappeared. Gen X was certainly raised in more challenging times, when working 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 accepted and technology rapidly changed the way people lived and worked. Although Gen Xers created new norms 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 feel self-sufficiency and the ability to handle any circumstance are key. 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 or patronizing. Direct appeals where value is clear often works best, especially as Gen Xers become parents raising families.21 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. With many baby boomers moving into their 60s and even the last and youngest wave bearing down on 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. Interestingly, because so many members of the Gen Y Echo Boomers are living with their boomer parents, parents are being influenced by what demographers are calling a boom-boom effect. The same products that appeal to 21-year-olds are appealing to youth-obsessed baby boomers. The multiseason success of MTV s reality show The Osbournes, starring heavy-metal rocker Ozzy Osbourne and his family, was fueled as much by boomer parents as by their MTVloving kids. Contrary to conventional marketing wisdom that brand preferences of consumers over 50 are fixed, one study found 52 percent of boomers are willing to change brands, in line with the total population. Although they love to buy things, they hate being sold to, and as one marketer 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, or 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. One survey found that 60 percent of respondents over 65 said they felt younger than their actual age. A third aged 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.23 Although some saw rock band Nirvana as a defining symbol of Gen X, subsequent portrayals reveal a more complex picture of this cohort. 2 44 PART 3 C ONNECTING WITH CUSTOMERS 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. Emphasizing their roles as grandparents is universally well-received. Many older consumers not only happily spend time with their grandkids, they often provide for their basic needs or at least occasional gifts. The founders of, which sells children s learning toys online, thought their business would be largely driven by young consumers starting families. They were surprised to find that up to 40 percent of their customers were older consumers, mainly grandparents. These customers are very demanding, but also more willing to pay full price than their younger counterparts.24 RACE AND CULTURE Multicultural marketing is an approach recognizing The hit reality show The Osbournes tapped into baby boomers rock-and-roll sensibilities and their parental responsibilities. Members of the oldest generation, the Silent Generation, take much pride in their roles as grandparents. 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.25 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 markets also vary in whether they are first and second (or more) generation, and whether they are immigrants or born and raised in the United States. The norms, language nuances, buying habits, and business practices of multicultural markets need to be factored into the initial formulation of a marketing strategy, rather than added as an afterthought. All this diversity also has implications for marketing research; it takes careful sampling to adequately profile target markets.26 Multicultural marketing can result in different marketing messages, media, channels, and so on. Specialized media exists 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 cultural group can spill over and positively influence others. An ad for Tide in which an African American man wearing a wedding ring was drying his son off after a bath was well regarded by both African Americans and the market as a whole.27 Boost Mobile has leveraged a shared interest in youth culture to create a diverse customer base of young adults made up of 35 percent African Americans, 27 percent Hispanic Americans, and 32 percent Caucasians.28 Next, we consider issues in the three largest multicultural markets Hispanic Americans, African Americans, and Asian Americans. Table 8.4 lists some important facts and figures about them.29 Hispanic Americans Hispanic Americans have become the largest minority in the country with annual purchasing power estimated to be more than $1 trillion in 2010. By 2020, 17 percent of Americans are projected to be of Hispanic origin. The Hispanic American market holds a wide variety of subsegments, with roughly two dozen nationalities including Cuban, Mexican, Puerto Rican, Dominican, and other Central and South American groups, and a mix of cultures, physical types, racial backgrounds, and aspirations.30 To meet these divergent needs, Goya, the United States largest Hispanic food company, sells 1,600 products ranging from bags of rice to ready-to-eat, frozen empanadas. The company sells 38 varieties of beans alone.31 Although Hispanics suffered from greater unemployment and diminished disposable income in the recession, they were still an attractive target because they had lower mortgage and credit card debt, two or more income earners, and a greater propensity to buy advertised brands.32 Companies such as Johnson & Johnson, I DENTIFYING MARKET SEGMENTS AND TARGETS TABLE 8.4 | CHAPTER 8 245 Multicultural Market Profile Hispanic Americans Asian Americans African Americans Estimated population 2007 46.9 million 15.2 million 40.7 million Estimated population 2050 132.8 million 40.6 million 65.7 million Number of minority-owned businesses in 2002 1.6 million 1.1 million 1.2 million Revenue generated by minority-owned businesses in 2002 $222 billion $326 billion $89 billion $38,679 $66,103 $33,916 21.5% 10.20% 24.50% 62% 86% 82% 1,100,000 277,751 2,400,000 Median age in 2008 27.7 35.4 30.3 Percent of population under 18 years old in 2008 34% 26% 30% $863 billion $847 billion $509 billion Median household income in 2007 Poverty rate in 2007 Percentage of those aged >25 with at least a high school education in 2008 Number of veterans of U.S. armed forces Buying power 2008 Sources: and Verizon, and General Mills all significantly increased their advertising investment in the Hispanic market during the last recession. State Farm After trailing its main competitor for years, State Farm decided to make its Hispanic American marketing a priority in 2008. The firm sponsored local Latino community events, soccer matches, the Latin Music Awards, and Univision s highly rated Saturday night variety show, Sabádo Gigante. Perhaps State Farm s most original marketing activity, however, was the support and sponsorship of a new band. Los Felinos de la Noche (The Felines of the Night), as the six men (primarily Hispanic immigrants) are called, play the percussion heavy pop-rock sound of Norteño or Northern Mexico regional music. With State Farm s support, the band recorded singles, shot music videos, and played live concerts to make a name for themselves. State Farm, however, chose a subtle approach to its sponsorship. Although the band s Web site did not display the State Farm logo or contain marketing messages, the band did praise the company for the opportunity it gave them in many of the posted interviews. The color red in the band s uniforms was meant to tie in State Farm s familiar color. Targeting first-generation Hispanics with an emotional appeal showed that State Farm understood the needs of the Hispanic community. Positively received, the campaign has been credited with helping to change opinions of that market.33 Hispanic Americans often share strong family values several generations may reside in one household and strong roots to their original country of origin. They have a need for respect, brand loyalty, and 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 consumers 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 and bathrooms to see which her family liked best.34 State Farm s musical sponsorship of the band Los Felinos de la Noche reflects the company s increased emphasis on Hispanic marketing. PART 3 C ONNECTING WITH CUSTOMERS Marketers are reaching out to Hispanic Americans with targeted promotions, ads, and Web sites but need to be careful to capture the nuances of cultural and market trends.35 The California Milk Processor Board (CMPB) had to change its famed got milk? ad campaign when targeting the Hispanic market. Got Milk? In 2001, Hispanics represented 32.5 percent of California s total population, a number that was growing every year. They were also heavy milk drinkers, spending more on milk than any other demographic segment. Initial consumer testing of the got milk? ads revealed, however, that Spanish-speaking households did not find the commercials funny when translated directly to Spanish. As CMPB Executive Director Jeff Manning explained, We found out that not having milk or rice in Hispanic households is not funny: running out of milk means you failed your family. In addition, got milk? translated in Spanish roughly means Are you lactating? As a result, the CMPB and its Hispanic ad agency, Anita Santiago Advertising, created a series of ads focused on milk as a sacred ingredient, often using the tagline Familia, Amor y Leche (Family, Love, and Milk). When the campaign did use the Got Milk? tagline, it was left untranslated. Awareness rose among the Hispanic population, and in 2002 the CMPB tested its first Spanish-language television spot, featuring La Llorona, a mythical Hispanic character. Hispanic consumers were thrilled that the commercial understood their culture and targeted them specifically.36 Got Milk? 2 46 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. With two-thirds of U.S. Hispanics considered bicultural and comfortable with both Spanish- and English-speaking cultures, most firms choose not to risk alienating the English-speaking audience on national TV and to run Spanish-only ads just on Hispanic networks Univision, Telemundo, and Telefutura. Some marketers such as General Motors and Toyota have used a Spanglish approach in their ads, mixing some Spanish naturally in with English in conversations among Hispanic families.37 Companies such as Continental Airlines, General Mills, and Sears have recently been using mobile marketing to reach Hispanics.38 With a mostly younger population and less access to Internet or landline service, Hispanics are much more likely to consume content on their cell phones than the general market. African Americans African Americans have had a significant economic, social, and cultural impact on U.S. life, influencing inventions, art, music, sports, 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.39 Based on survey findings, African Americans are the most fashion-conscious of all racial and ethnic groups but strongly motivated by quality and selection. They re also more likely to be influenced by their children when selecting a product for purchase, and less likely to buy unfamiliar brands. African Americans watch television and listen to the radio more than other groups, and they buy more DVDs than any other multicultural segment except Hispanics.40 Many companies have successfully tailored products to meet the needs of African Americans. In 1987, Hallmark Cards launched its African American targeted Mahogany line with only 16 greeting cards; today it offers 800 cards and a line of stationery. 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. Ad messages must also be seen as relevant. In a campaign for Lawry s Seasoned Salt targeting 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.41 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.42 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 I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 247 (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. The Asian American market has been called the invisible market because, compared to Hispanic Americans and African Americans, it has traditionally received a disproportionally small fraction of U.S. companies total multicultural marketing expenditure.43 Yet it is getting easier and easier to reach this market. The number of media outlets targeting Asian Americans has grown from 200 in the 1980s to between 700 and 800 by 2007. Philadelphia-based Sovereign Bank has been successful targeting Boston s Chinese American community with a 100 percent Chinese American staffed branch. Not only do employees speak Cantonese, they know that in financial planning for Chinese Americans it is appropriate to acknowledge the need to care for elderly parents.44 Traditional packaged-good firms have also been getting in the act. Here is how Kraft got its start. Kraft Kraft s initial Asian American marketing efforts began in 2005 with an integrated marketing campaign featuring in-language ads, in-store product demos/tastings, and a Web site with recipes and tips for healthy living. Kraft s research revealed that Asian American shoppers did not want more Asian-style products from Kraft. Rather, they wanted to learn how to prepare Western-style meals using Kraft products. Kraft s marketing communications used Mandarin and Cantonese, two of the more commonly spoken dialects of Asian immigrants, and targeted immigrant moms as the cultural gatekeepers of their families at home, striking a balance between Western and Eastern cultures. One print ad used the Chinese proverb Life has a hundred flavors to show an array of Kraft products brightly arranged on a platter. To further connect with shoppers, Kraft deployed Chinese-speaking representatives to supermarkets. The reps conducted cooking demos of Western recipes using Kraft products, handed out product samples, and offered suggestions for convenient kid-friendly school lunches. Kraft also launched a Web site ( to promote tips for healthy eating, such as sip your tea for better health benefits.45 Asian Americans tend to be more brand-conscious than other minority groups yet are the least loyal to particular 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.46 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.47 Many firms have recently created initiatives to target this market. American Airlines created a Rainbow Team with a dedicated LGBT staff and Web site that has emphasized community-relevant services such as an event calendar of gay-themed national events. According to one survey of the gay and lesbian community, Absolut, Apple, Levi s, and Bravo and Showtime television networks are seen as among the most gay-friendly businesses.48 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 40 million homes. Increasingly, advertisers are using digital efforts to reach the market. Hyatt s online appeals to the LGBT community targets social sites and blogs where customers share their travel experiences. Some firms, however, worry about backlash from organizations that will criticize or even boycott firms supporting gay and lesbian causes. Although Pepsi, Campbell s, and Wells Fargo have all experienced such boycotts, they continue to advertise to the gay community. Psychographic Segmentation Psychographics is the science of using psychology and demographics to better understand consumers. In psychographic segmentation, buyers are divided into different groups on the basis of Kraft has actively targeted Asian Americans with its brands and products. 2 48 PART 3 C ONNECTING WITH CUSTOMERS |Fig. 8.1| The VALS Segmentation System: An Eight-Part Typology VALSTM Framework Innovators Primary Motivation High Resources High Innovation Ideals Achievement Self-Expression Thinkers Achievers Experiencers Believers Strivers Makers Source: VALS © Strategic Business Insights (SBI), Used with permission. Survivors Low Resources Low Innovation 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, signifying values and lifestyles, classifies U.S. adults into eight primary groups based on responses to a questionnaire featuring 4 demographic and 35 attitudinal questions. The VALS system is continually updated with new data from more than 80,000 surveys per year (see Figure 8.1). You can find out which VALS type you are by going to the SBI Web site.49 The main dimensions of the VALS segmentation framework are consumer motivation (the horizontal dimension) and consumer resources (the vertical dimension). Consumers are inspired by one of three primary motivations: 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 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. The four groups with higher resources are: 1. 2. 3. 4. Innovators Successful, sophisticated, active, take-charge people with high self-esteem. Purchases often reflect cultivated tastes for relatively upscale, niche-oriented products and services. Thinkers Mature, satisfied, and reflective people motivated by ideals and who value order, knowledge, and responsibility. They seek durability, functionality, and value in products. Achievers Successful, goal-oriented people who focus on career and family. They favor premium products that demonstrate success to their peers. Experiencers Young, enthusiastic, impulsive people who seek variety and excitement. They spend a comparatively high proportion of income on fashion, entertainment, and socializing. I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 249 The four groups with lower resources are: 1. 2. 3. 4. Believers Conservative, conventional, and traditional people with concrete beliefs. They prefer familiar, U.S.-made products and are loyal to established brands. Strivers Trendy and fun-loving people who are resource-constrained. They favor stylish products that emulate the purchases of those with greater material wealth. Makers Practical, down-to-earth, self-sufficient people who like to work with their hands. They seek U.S.-made products with a practical or functional purpose. Survivors Elderly, passive people concerned about change and loyal to their favorite brands. Marketers can apply their understanding of VALS segments to marketing planning. For example, Transport Canada, the agency that operates major Canadian airports, found that Actualizers, who desire to express independence and taste, made up a disproportionate percentage of air travelers. Given that segment s profile, stores such as Sharper Image and Nature Company were expected to do well in the firm s airports. Psychographic segmentation schemes are often customized by culture. The Japanese version of VALS, Japan VALS , divides society into 10 consumer segments on the basis of two key concepts: life orientation (traditional ways, occupations, innovation, and self-expression) and attitudes to social change (sustaining, pragmatic, adapting, and innovating). Behavioral Segmentation 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 is a widely used approach because it identifies distinct market segments with clear marketing implications. Constellation Brands identified six different benefit segments in the U.S. premium wine market ($5.50 a bottle and up).50 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, 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 consider. After presenting the alternative choices to his wife, he purchases her preferred model, which ends up being used Constellation Brands has adopted a needs-based market segmentation plan to sell its premium wines. 2 50 PART 3 C ONNECTING WITH CUSTOMERS 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 REAL USER AND USAGE-RELATED VARIABLES Many marketers believe variables related to various aspects of 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 and usage? Included in the potential-user group are consumers who will become users in connection with some life stage or life 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. 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 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. 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, marketers can employ a marketing funnel to break down the market into different 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 8.2 displays a funnel for two hypothetical brands. Compared to Brand B, Brand A performs poorly at converting one-time users to more recent users (only 46 percent convert for Brand A compared to 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. 2. 3. 4. Hard-core loyals Consumers who buy only one brand all the time Split loyals Consumers who are loyal to two or three brands Shifting loyals Consumers who shift loyalty from one brand to another Switchers Consumers who show no loyalty to any brand51 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 I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 251 |Fig. 8.2| Brand A 96 65% Aware Brand B 97 Aware 63 46% 74 Ever Tried 50% 67% 29 Ever Tried 76% 62% 18 61% 12 Occasional User Recent Trial Regular User 75% 71% 6 Most Often Used Example of Marketing Funnel 62% 45 32 24 15 Recent Trial Occasional User Regular User Most Often Used 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. Door-to-door workers in a political campaign use attitude to determine how much time 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 8.3 depicts one possible way to break down a target market by various behavioral segmentation bases. |Fig. 8.3| Target Market Unaware Behavioral Segmentation Breakdown Aware Not tried Negative opinion Neutral Tried Favorable opinion Rejector Not yet repeated Repeated Loyal to other brand Switcher Loyal to brand Light user Regular user Heavy user 2 52 PART 3 C ONNECTING WITH CUSTOMERS Bases for Segmenting Business Markets We can segment business markets with some of the same variables we use in consumer markets, such as geography, benefits sought, and usage rate, but business marketers also use other variables. Table 8.5 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 customers 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 industrial 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: automobile, 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 customers. The second stage consisted of microsegmentation. The TABLE 8.5 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). I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 253 company distinguished among customers buying on price, service, or quality. Because it had a high-service profile, the firm decided to concentrate on the service-motivated segment of the market. Business-to-business marketing experts James C. Anderson and James A. Narus have urged marketers to present flexible market offerings to all members of a segment.52 A flexible market offering consists of two parts: a naked 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. Delta Airlines offers all economy passengers a seat, small snack and soft drinks and charges extra for alcoholic beverages and meals. Market Targeting There are many statistical techniques for developing market segments.53 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 income, assets, savings, and risk preferences. This has led some market researchers to advocate a needs-based market segmentation approach, as introduced previously. Roger Best proposed the seven-step approach shown in Table 8.6. Delta Airlines uses flexible market offerings; it offers some products on board for free, such as soft drinks and small snacks, but charges for other items, such as meals. Effective Segmentation Criteria Not all segmentation schemes are useful. We could divide buyers of table salt into blond and brunette customers, 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 minimally 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 less than four feet tall. Accessible. The segments can be effectively reached and served. TABLE 8.6 Steps in the Segmentation Process Description 1. Needs-Based Segmentation 2. Segment Identification 3. Segment Attractiveness 4. Segment Profitability 5. Segment Positioning 6. Segment Acid Test 7. Marketing-Mix Strategy Group customers into segments based on similar needs and benefits sought by customers in solving a particular consumption problem. For each needs-based segment, determine which demographics, lifestyles, and usage behaviors make the segment distinct and identifiable (actionable). Using predetermined segment attractiveness criteria (such as market growth, competitive intensity, and market access), determine the overall attractiveness of each segment. Determine segment profitability. For each segment, create a value proposition and product-price positioning strategy based on that segment s unique customer needs and characteristics. Create segment storyboard to test the attractiveness of each segment s positioning 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, 5th ed. (Upper Saddle River NJ: Prentice Hall, 2009). ©2009. Printed and electronically reproduced by permission of Pearson Education, Inc. Upper Saddle River, New Jersey. 2 54 PART 3 C ONNECTING WITH CUSTOMERS Differentiable. The segments are conceptually distinguishable and respond differently to different marketing-mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. Actionable. Effective programs can be formulated for attracting and serving the segments. Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or market segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats these forces pose are as follows: 1. 2. 3. 4. 5. 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 segment. These conditions will lead to frequent price wars, advertising battles, and new-product introductions and will make it expensive to compete. The cellular phone market has seen fierce competition due to segment rivalry. Threat of new entrants The most attractive segment is one in which entry barriers are high and exit barriers are low.54 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 industry, and returns are stable but low. The worst case is 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 overcapacity and depressed earnings for all. The airline industry has low entry barriers but high exit barriers, leaving all carriers struggling during economic downturns. 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. 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 potential 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, when buyers are price-sensitive because of low profits, 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. 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 organized, 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 different 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 the segment make sense given the firm s objectives, competencies, and resources? Some attractive segments may not mesh with the company s long-run objectives, or the company may lack one or more necessary competencies to offer superior value. Marketers have a range or continuum of possible levels of segmentation that can guide their target market decisions. As Figure 8.4 shows, at one end is a mass market of essentially one segment; at the other are individuals or segments of one person. Between lie multiple segments and single segments. We describe each of the four approaches 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 I DENTIFYING MARKET SEGMENTS AND TARGETS Full Market Coverage CHAPTER 8 |Fig. 8.4| Multiple Segments Single Segments Possible Levels of Segmentation Individuals as Segments Customization Mass Market 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 broadest 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. 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 marketing 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 consumers; 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.55 Perhaps no firm practises differentiated marketing like Burberry. Burberry Burberry has an authentic British heritage and it is uniquely positioned as a luxury product. Its core values to protect, explore, and inspire influence the company s culture and strategy. The principles of quality, function, and modern classic style are rooted in its globally recognized product portfolio: the trench coat, trademark check, and prorsum (a Latin phrase meaning forward to illustrate the innovative nature of the company) horse logo. Today, Burberry products include women s wear, menswear, nonapparel, and children s wear, with innovative outerwear as the foundation. The company has operations in markets throughout the world. Recent changes in the global market meant that Burberry realized that the concept of traditional is not enough to remain competitive. As a result Burberry decided to benefit from its multi-segmentation by extending its range and re-labeled the casual component of its women s and men s apparel lines as Burberry Brit. This range represents a younger, more laid back look with stylish separates that are perfect for everyday use, not just for formal wear. The new label is loose and unstructured and still retains the elegance of its traditional concept. Burberry also offers the more tailored Burberry London line that allows the company to offer more complete assortments in each segment and to target customers more effectively.56 Burberry | 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. 255 2 56 PART 3 C ONNECTING WITH CUSTOMERS 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-tobe 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. 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 downside risk is that the customer group may suffer budget cuts or shrink in size. Although P&G initially targeted very specific segments with its Crest Whitestrips tooth-whitening product, it later expanded both its product offerings and its target markets. Tom s of Maine has developed a very successful niche with its all-natural personal care products. SINGLE-SEGMENT CONCENTRATION With single-segment concentration, the firm markets to only one particular segment. Porsche concentrates on the sports car market 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 creating unique associations to low cost and convenience in an overlooked niche market, Enterprise has been highly profitable. Niche marketers aim to understand their customers needs so well that customers willingly pay a premium. Tom s of Maine was acquired by Colgate-Palmolive for $100 million in part because its all-natural personal care products and charitable donation programs appeal to consumers turned off by big businesses. The brand commands a 30 percent price premium as a result.57 What does an attractive niche look like? 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 the niche gains certain economies through specialization. As marketing efficiency increases, niches that were seemingly too small may become more profitable.58 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. 59 Today, customers are taking more individual initiative in determining what and how to buy. They log onto the Internet; look up information and evaluations of product or service offerings; conduct dialogue with suppliers, users, and product critics; and in many cases design the product they want. Jerry Wind and Arvind Rangaswamy see a movement toward c ustomerizing the firm.60 Customerization combines operationally driven mass customization with customized marketing in a way that empowers consumers to design the product and service offering of their choice. The firm no longer requires prior information about the customer, nor does it need to own manufacturing. It provides a platform and tools and rents IDENTIFYING MARKET SEGMENTS AND TARGETS Marketing Insight Marketing Chasing the Long Tail The advent of online commerce, made possible by technology and epitomized by, 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, Anderson 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 smaller-selling products adding up to half a firm s revenue. | CHAPTER 8 257 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 support 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 entertainment, 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 products, inventory, stocking, and handling costs can outweigh any financial benefits of such products. 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; 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; John Cassidy, Going Long, New Yorker, July 10, 2006;; Rethinking the Long Tail Theory: How to Define Hits and Niches, Knowledge@Wharton, September 16, 2009. to customers the means to design their own products. A company is customerized when it is able to respond to individual customers by customizing its products, services, and messages on a one-to-one basis.61 Customization is certainly not for every company.62 It may be very difficult to implement for complex products such as automobiles. It can also raise the cost of goods by more than the customer is willing to pay. 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 sales value. In spite of this, customization has worked well for some products. ETHICAL CHOICE OF MARKET TARGETS Marketers must target carefully to avoid consumer backlash. Some consumers resist being labeled. Singles may reject single-serve food packaging because 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 poor people) or promote potentially harmful products.63 The cereal industry has been heavily criticized for marketing efforts directed toward children. Critics worry that high-powered appeals presented through the mouths of lovable animated characters will overwhelm children s defenses and lead them to want sugared cereals or poorly balanced breakfasts. Toy marketers have been similarly criticized. 2 58 PART 3 C ONNECTING WITH CUSTOMERS Another area of concern is the millions of kids under the age of 17 who are online. Marketers have jumped online with them, offering freebies in exchange for personal information. Many have come under fire for this practice and for not clearly differentiating ads from games or entertainment. Establishing ethical and legal boundaries in marketing to children online and offline continues to be a hot topic as consumer advocates decry the commerm they believe such marketing engenders. Not all attempts to target children, minorities, or other special segments draw criticism. ColgatePalmolive s Colgate Junior toothpaste has special features designed to get children to brush longer and more often. Other companies are responding to the special needs of minority segments. Blackowned ICE theaters noticed that although moviegoing by blacks has surged, there were few innercity theaters. Starting in Chicago, ICE partnered with the black communities in which it operates theaters, using local radio stations to promote films and featuring favorite food items at concession stands.64 Thus, the issue is not who is targeted, but how and for what. 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 4 million youngsters attending some kind of organized child care, the potential market including kids and parents is too great to pass up. So in addition to standards such as art easels, gerbil cages, 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 increasing preschool marketing push. Some side with groups such as Stop Commercial Exploitation of Children, whose members feel preschoolers are incredibly 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.65 Summary 1. Target marketing includes three activities: market segmentation, market targeting, and market positioning. Market segments are large, identifiable groups within a market. 2. Two bases for segmenting consumer markets are consumer characteristics and consumer responses. The major segmentation variables for consumer markets are geographic, demographic, psychographic, and behavioral. Marketers use them singly or in combination. 3. Business marketers use all these variables along with operating variables, purchasing approaches, and situational 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, multiple segments, single (or niche) segment, and individuals. 6. A mass market targeting approach is adopted only by the biggest companies. Many companies target multiple segments defined in various ways such as various 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 feasible to many. 8. More companies now practice individual and mass customization. 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 responsible manner at all times. I DENTIFYING MARKET SEGMENTS AND TARGETS | CHAPTER 8 259 Applications Marketing Debate Is Mass Marketing Dead? With marketers increasingly adopting more and more refined market segmentation schemes fueled by the Internet and other customization efforts some claim mass marketing 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. Marketing Excellence >>HSBC HSBC wants to be known as the world s local bank. This tagline reflects HSBC s positioning as a globe-spanning financial institution with a unique focus on serving local markets. Originally the Hong Kong and Shanghai Banking Corporation Limited, HSBC was established in 1865 to finance the growing trade between China and the United Kingdom. It s now the secondlargest bank in the world. Despite serving over 100 million customers through 9,500 branches in 85 countries, the bank works hard to maintain a local presence and local knowledge in each area. Its fundamental operating strategy is to remain close to its customers. As HSBC s former chairman, Sir John Bond, stated, Our position as the world s local bank enables us to approach each country uniquely, blending local knowledge with a worldwide operating platform. Ads for the World s Local Bank campaign have depicted the way different cultures or people interpret the same objects or events. One TV spot showed a U.S. businessman hitting a hole-in-one during a round in Marketing Discussion Marketing Segmentation Schemes Think of various product categories. In each segmentation scheme, to which segment do you feel you belong? How would marketing be more or less effective for you depending on the segment? How would you contrast demographic and behavioral segment schemes? Which one(s) do you think would be most effective for marketers trying to sell to you? Japan with his Japanese counterparts. He is surprised to find that rather than paying for a round of drinks in the clubhouse, as in the United States, by Japanese custom he must buy expensive gifts for his playing partners. In another international TV spot, a group of Chinese businessmen take a British businessman out to an elaborate dinner where live eels are presented to the diners and then served sliced and cooked. Clearly disgusted by the meal, the British businessman finishes the dish as the voice-over explains, The English believe it s a slur on your hosts f ood if you don t clear your plate. H is Chinese host then orders another live eel for him as the voice-over explained, Whereas the Chinese feel that it s questioning their generosity if you do. HSBC demonstrated its local knowledge with marketing efforts dedicated to specific locations. In 2005 it set out to prove to jaded New Yorkers that the Londonbased financial behemoth was a bank with local knowledge. The company held a New York City s Most Knowledgeable Cabbie contest, in which the winning cabbie got paid to drive an HSBC-branded BankCab fulltime for a year. HSBC customers could win, too. Any customer showing an HSBC bank card, checkbook, or bank statement was able to get a free ride in the BankCab. HSBC also ran an integrated campaign highlighting the diversity of New Yorkers, which appeared throughout the city. More than 8,000 miles away, HSBC undertook a two-part Support Hong Kong campaign to revitalize a local economy hit hard by the 2003 SARS outbreak. First, HSBC delayed interest payments for personal-loan customers who worked in industries most affected by SARS (cinemas, hotels, restaurants, and travel agencies). Second, the bank offered discounts and rebates for HSBC credit card users when they shopped and dined out. More than 1,500 local merchants participated in the promotion. 2 60 PART 3 C ONNECTING WITH CUSTOMERS HSBC also targets consumer niches with unique products and services. It found a little-known product area growing at 125 percent a year: pet insurance. The bank now distributes nationwide pet insurance to its depositors through its HSBC Insurance agency. In Malaysia, HSBC offered a smart card and no-frills credit cards to the underserved student segment and targeted high-value customers with special Premium Centers bank branches. In order to connect with different people and communities, HSBC sponsors more than 250 cultural and sporting events with a special focus on helping the youth, growing education, and embracing communities. These sponsorships also allow the company to learn from different people and cultures around the world. The bank pulls its worldwide businesses together under a single global brand with the World s Local Bank slogan. The aim is to link its international size with close relationships in each of the countries in which it operates. HSBC spends $600 million annually on global marketing, consolidated under the WPP group of agencies. In 2006, HSBC launched a global campaign entitled Different Values, which embraced this exact notion of multiple viewpoints and different interpretations. Print ads showed the same picture three times with a different interpretation in each. For example, an old classic car appeared three times with the words, freedom, status symbol, and polluter. Next to the picture reads, 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, HSBC used three different pictures side by side but with the same word. For example, the word accomplishment is first shown on a picture of a woman winning a beauty pageant, then an astronaut walking on the moon, and finally a young child tying his sneaker. The Marketing Excellence >>BMW copy reads, The more you look at the world, the more you realize what really matters to people. 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 confident in helping people with different values achieve what s really important to them. HSBC earned $142 billion in sales in 2009, making it the 21st largest company in the world. It hopes its latest campaign and continued position as the World s Local Bank will improve its $10.5 billion brand value, which placed it 32nd on the 2009 Interbrand/BusinessWeek global brand rankings. Questions 1. What are the risks and benefits of HSBC s positioning itself as the World s Local Bank ? 2. Does HSBC s most recent campaign resonate with its target audience? Why or why not? 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): 47; 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): 10; HSBC Enters the Global Branding Big League, Bank Marketing International (August 2003): 1 2; 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; Press release, The Evolution of Your Point of View. October 20, 2008; Fortune, Global 500; BMW is the ultimate driving machine. Manufactured by the German company, Bayerische Motoren Werke AG, BMW stands for both performance and luxury. The company was founded in 1916 as an aircraft-engine manufacturer and produced engines during World War I and World War 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 *53 billion (about $76 billion) in revenues in 2008. BMW s logo is one of the most distinct and globally recognized 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 features the letters BMW at the top of the outer ring and a blue-and-white checkered I DENTIFYING MARKET SEGMENTS AND TARGETS design in the inner ring, was trademarked in 1917 and meant to show the colors 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. The result: 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 basically the same design in three different sizes. The 1980s was also a time when yuppies made Beemer and Bimmer, slang terms for BMW s cars and motorcycles, popular names that are still used today. At the turn of the century, consumers attitudes toward cars changed. Research showed that they cared 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 segments, which resulted in unique premium-priced cars such as SUVs, convertibles, roadsters, and less expensive compact cars, the 1 Series. In addition, BMW redesigned its 3, 5, and 7 Series cars, making them unique in appearance yet remaining exceptional in performance. BMW s full range of cars now include the 1 Series, 3 Series, 5 Series, 6 Series, 7 Series, X3 SUV, X5 SUV, X6 SUV, Z4 (Roadster), and M. The redesign of the 7 Series, BMW s most luxurious car, targeted a group called upper conservatives. These wealthy, traditional consumers traditionally don t like sportier cars, so BMW added an influx of electronic components such as multiple options to control the windows, seats, airflow, and lights, a pushbutton ignition, and night vision, all controlled by a pointand-click system called iDrive. These enhancements were created to add comfort and luxury and attract consumers away from competitors like Jaguar and Mercedes. BMW successfully launched the X5 by targeting upper liberals who achieved success in the 1990s and had gone on to have children and take up extracurricular activities such as biking, golf, and skiing. These consumers needed a bigger car for their active lifestyles and | CHAPTER 8 261 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 created the lower-priced 1 Series and X3 SUV to target the modern mainstream, a group who are also family-focused and active but had previously avoided BMWs because of the premium cost. The 1 Series reached this group with its lower price point, sporty design, and aspiration to own a luxury brand. The X3 also hit home with its smaller, less expensive SUV design. BMW introduced convertibles and roadsters to target post-moderns, a high-income group that continues to attract attention with more showy, flamboyant cars. 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 but has kept the tagline The Ultimate Driving Machine for over 35 years. During that time, U.S. sales of BMW vehicles have grown from 15,000 units in 1974 to approximately 250,000 in 2009. BMW owners are very loyal to the brand, and enthusiasts 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. Questions 1. What are the pros and cons to BMW s selective target marketing? What has the firm done well over the years and where could it improve? 2. BMW s sales slipped during the worldwide recession in 2008 and 2009. Is its segmentation strategy too selective? Why or why not? Sources: 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,;, Annual Report, Company History, January 22, 2010. PART 4 Building Strong Brands Chapter 9 | Creating Brand Equity Chapter 10 | Crafting the Brand Positioning Chapter 11 | Competitive Dynamics ha C ter p 9 In This Chapter, We Will Address the Following Questions 1. What is a brand, and how does branding work? 2. What is brand equity? 3. How is brand equity built, measured, and managed? 4. What are the important brand architecture decisions in developing a branding strategy? With a unique concept and shrewd grassroots marketing, Lululemon has attracted a loyal customer base and built a strong brand. Creating Brand Equity 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 at its heart is a great product or service. While attending yoga classes, Canadian entrepreneur Chip Wilson decided the cottonpolyester 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 approach to growth that creates a strong emotional connection with its customers. Before it opens a store in a new city, lululemon first identifies Marketers of successful 21st-century brands influential yoga instructors or other fitness teachers. In exchange for a must excel at the strategic brand management process. year s worth of clothing, these yogi serve as ambassadors, hosting Strategic brand management combines the design and 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. After coping with some inventory challenges, the company is looking to expand beyond yoga-inspired athletic apparel and accessories into similar products in other sports such as running, swimming, and biking.1 implementation of marketing activities and programs to build, measure, and manage brands to maximize their value. The strategic brand management process has four main steps: Identifying and establishing brand positioning Planning and implementing brand marketing Measuring and interpreting brand performance Growing and sustaining brand value deals with brand positioning. The latter three topics are discussed in this chapter.2 Chapter 11 reviews important concepts dealing with competitive dynamics. What Is Brand Equity? Perhaps the most distinctive skill of professional marketers is their ability to create, maintain, enhance, and protect brands. Established brands such as Mercedes, Sony, and Nike have commanded a price premium and elicited deep customer loyalty through the years. Newer brands such as POM Wonderful, SanDisk, and Zappos have captured the imagination of consumers and the interest of the financial community alike. The American Marketing Association defines a brand as a name, term, sign, symbol, or design, or a combination 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 intangible related to what the brand represents or means in a more abstract sense. 263 2 64 PART 4 BUILDING STRONG BRANDS Branding has been around for centuries as a means to distinguish the goods of one producer from those of another.3 The earliest signs of branding in Europe were the medieval guilds requirement 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 source or maker of a product and allow consumers either individuals or organizations to assign responsibility for its performance to a particular manufacturer or distributor. Consumers may evaluate the identical product differently depending on how it is branded. 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 complicated, rushed, and time-starved, a brand s ability to simplify decision making and reduce risk becomes invaluable.4 Brands also perform valuable functions for firms.5 First, they simplify product handling or tracing. Brands help to organize inventory and accounting records. A brand also offers the firm legal protection for unique features or aspects of the product.6 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 that satisfied buyers can easily choose the product again.7 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 20 percent to 25 percent more than competing brands.8 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 product experience and marketing activity. In this sense, branding can be a powerful means to secure a competitive advantage.9 Sometimes marketers don t see the real importance of brand loyalty until they change a crucial element of the brand, as the now-classic tale of New Coke illustrates. Coca-Cola Coca-Cola learned a valuable lesson about its brand when it changed its formula without seeking sufficient consumer permission. Battered by a nationwide series of taste-test challenges from the sweeter-tasting Pepsi-Cola, Coca-Cola decided in 1985 to replace its old formula with a sweeter variation, dubbed New Coke. Coca-Cola spent $4 million on market research. Blind taste tests showed that 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 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 withdrew New Coke and reintroduced its century-old formula as Classic Coke, a move that ironically might have given the old formula even stronger status in the marketplace. For better or worse, branding effects are pervasive. One research study that provoked much debate about the effects of marketing on children showed that preschoolers felt identical McDonald s food items even carrots, milk, and apple juice tasted better when wrapped in McDonald s familiar packaging than in unmarked wrappers.10 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. Companies have paid dearly for brands in mergers or acquisitions, often justifying the price premium on the basis of the extra profits C REATING BRAND EQUITY | CHAPTER 9 265 expected and the difficulty and expense of creating similar brands from scratch. Wall Street believes strong brands result in better earnings and profit performance for firms, which, in turn, create greater value for shareholders.11 The Scope of Branding How do you brand a product? Although firms provide the impetus to brand creation through marketing programs and other activities, ultimately a brand resides in the minds of consumers. It is a perceptual entity rooted in reality but reflecting the perceptions and idiosyncrasies of consumers. Branding is 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 attributes 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 desires and creating relevant and appealing images around their products. Marketers can apply branding virtually anywhere a consumer has a choice. It s possible to brand a physical good (Ford Flex automobile, or Lipitor cholesterol medication), a service (Singapore Airlines or Blue Cross and Blue Shield medical insurance), a store (Nordstrom or Foot Locker), a person (actress Angelina Jolie or tennis player Roger Federer), a place (the city of Sydney or country of Spain), an organization (U2 or American Automobile Association), or an idea (abortion rights or free trade).12 Brand Yao Yao Ming, the 7'6" Chinese basketball player on the NBA s Houston Rockets, is a well-known celebrity both on and off the court. He has helped the NBA to open new markets in Asia, reportedly increasing attendance by 55 percent and drawing many Asian fans to Rockets games. Yao has numerous endorsement deals with brands such as Tag Heuer, McDonald s, Reebok, Garmin, and Pepsi, and businesses such as the Yao Yao Restaurant and a line of Yao Monster electronics and lifestyle products leverage his popularity. Yao reportedly earns more than $100 million a year through endorsements alone. His star power in both Asia and the West is evident in the increased sales he has helped to bring in for the brands he promotes. In part because Yao also participates in public service campaigns, the Yao brand embodies qualities such as genuineness, patriotism, humility, and sincerity. These qualities enhance both the star s likability and the brands he endorses. With his surging popularity, the basketball player has a team of professionals, collectively known as Team Yao, to manage his brand. A key challenge faced by Team Yao will be to improve and maintain the Yao brand equity as the star continues to suffer from regular foot injuries which affect his performance.13 Defining Brand Equity Brand equity is the added value endowed on products and services. 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 the brand commands.14 Marketers and researchers use various perspectives to study brand equity.15 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.16 Yao Ming s popularity both on and off the basketball court means that he is a good choice to endorse brands such as Pepsi, Reebok, McDonald s, and Garmin. 2 66 PART 4 BUILDING STRONG BRANDS To reinforce its luxury image, Louis Vuitton uses iconic celebrities such as legendary Rolling Stones rocker Keith Richards in print and outdoor advertising. Customer-based brand equity is thus the differential effect brand knowledge has on consumer response to the marketing of that brand.17 A brand has positive customer-based brand equity when consumers react more favorably 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. 1. 2. 3. Brand equity arises from differences in consumer response. If no differences occur, the brandname product is essentially a commodity, and competition will probably be based on price.18 Differences in response are a result of consumers brand knowledge, all the thoughts, feelings, images, experiences, and beliefs associated with the brand. Brands must create strong, favorable, and unique brand associations with customers, as have Toyota (reliability), Hallmark (caring), and (convenience). Brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a brand. Stronger brands lead to greater revenue.19 Table 9.1 summarizes some key benefits of brand equity. The challenge for marketers is therefore ensuring customers have the right type of experiences with products, services, and marketing programs to create the desired 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.20 TABLE 9.1 Marketing Advantages of Strong Brands Improved perceptions of product performance Greater loyalty Less vulnerability to competitive marketing actions Less vulnerability to marketing crises Larger margins More inelastic consumer response to price increases More elastic consumer response to price decreases Greater trade cooperation and support Increased marketing communications effectiveness Possible licensing opportunities Additional brand extension opportunities Improved employee recruiting and retention Greater financial market returns C REATING BRAND EQUITY | CHAPTER 9 267 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. Brand knowledge dictates appropriate future directions for the brand. A brand promise is the marketer s vision of what the brand must be and do for consumers. 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 for the brand. Virgin America After flying for only a few years, Virgin America became an award-winning airline that passengers adore and that makes money. It is not unusual for the company to receive e-mails from customers saying 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 f lying in an iPod or nightclub. Without a national TV ad campaign, Virgin America has relied on PR, word of mouth, social media, and exemplary customer service to create an extraordinary customer experience and build the brand. As VP-marketing Porter Gale notes, Most of the social-media engagement has been responding, listening and connecting with fans, which is important because it builds loyalty. 21 Brand Equity Models Although marketers agree about basic branding principles, a number of models of brand equity offer some differing 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 almost 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 9.1): Energized differentiation measures the degree to which a brand is seen as different from others, and its perceived momentum and leadership. 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. Energized differentiation and relevance combine to determine brand strength a leading indicator that predicts future growth and value. Esteem and knowledge together create brand stature, a report card on past performance and a current indicator of current value. The relationships among these dimensions a brand s pillar pattern reveal much about a brand s current and future status. Energized brand strength and brand stature combine to form the power grid, depicting stages in the cycle of brand development in successive quadrants (see Figure 9.2). Strong new brands show higher levels of differentiation and energy than relevance, whereas both esteem and knowledge are lower still. Leadership brands show high levels on all pillars. Finally, declining brands show high knowledge evidence of past performance a lower level of esteem, and even lower relevance, energy, and differentiation. By satisfying unmet consumer needs with a little bit of flair, Virgin America has quickly built a strong brand. 2 68 PART 4 BUILDING STRONG BRANDS ENERGIZED DIFFERENTIATION The brand s point of difference Relates to margins and cultural currency |Fig. 9.1| BrandAsset® Valuator Model Source: Courtesy of BrandAsset® Consulting, a division of Young & Rubicam. RELEVANCE How appropriate the brand is to you Relates to consideration and trial BRAND STRENGTH Leading Indicator Future Growth Value 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 BRAND STATURE Current Indicator Current Operating Value 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. A hypothetical $10,000 invested in the top 50 energy-gaining brands grew 12 percent while the S&P 500 index lost nearly 20 percent between December 31, 2001, and June 30, 2009. Some of the latest insights from the BAV data are summarized in Marketing Insight: Brand Bubble Trouble. BRANDZ Marketing research consultants Millward Brown and WPP have developed the BrandZ model of brand strength, at the heart of which is the BrandDynamics pyramid. According to this model, brand building follows a series of steps (see Figure 9.3). For any one brand, each person interviewed is assigned to one level of the pyramid depending on their responses to a set of questions. The BrandDynamics Pyramid shows the number of consumers who have reached each level. * * * * * Presence. Active familiarity based on past trial, saliency, or knowledge of brand promise Relevance. Relevance to consumer s needs, in the right price range or in the consideration set Performance. Belief that it delivers acceptable product performance and is on the consumer s short-list Advantage. Belief that the brand has an emotional or rational advantage over other brands in the category Bonding. Rational and emotional attachments to the brand to the exclusion of most other brands Bonded consumers at the top of the pyramid build stronger relationships with and spend more on the brand than those at lower levels. There are more consumers at the lower levels, so the challenge for marketers is to help them move up. 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 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 response to an intense, active loyalty. C REATING BRAND EQUITY 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. 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. HIGH STRENGTH Energized Differentiation and Relevance Flickr BitTorrent Second Life Schlitz LOW NBA NEW/UNFOCUSED Kia Napster Vespa American Airlines ERODING/DECLINING Finesse Taster´s Choice Efferdent Gerber H&R Block Century 21 Greyhound Prudential Alpo HIGH STATURE Esteem and Knowledge 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. Nothing else beats it Does it offer something better than the others? Can it deliver? Bonding 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. Strong relationship/ High share of category expenditure Source: BrandDynamics Pyramid. Reprinted with permission of Millward Brown. Performance Relevance Do I know about it? Presence |Fig. 9.3| BrandDynamics Pyramid Advantage Does it offer me something? Source: Young & Rubicam BrandAsset Valuator. Midas Dristan Diners Club |Fig. 9.2| Bank of America Sprint Michelob Viacom 269 Bausch & Lomb Denny´s Lacoste Vonage Joost Camper Autotrader Garnier CHAPTER 9 The Universe of Brand Performance 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. Microsoft Pixar Nike Dr. Pepper IKEA Target Ninetendo Wii Apple Wikipedia LG Crocs GE Harley-Davidson AMD Toyota Amazon Mini Cooper iPhone Xerox TiVo Netflix Pom Adidas Tylenol BlackBerry Lindt SanDisk Tazo Verizon DirecTV Glacéau Palm Nikon Burger King Vitamin NICHE/MOMENTUM Lenovo Water Kodak Xbox Method Patagonia LEADERSHIP Advil NASCAR Grameen Bank Staples Silk Soymilk Facebook Blockbuster Nordstrom Zara Moet & Chandon Absolut Shiseido AOL Red Bull | Weak relationship/ Low share of category expenditure 2 70 PART 4 BUILDING STRONG BRANDS Marketing Insight 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 examination 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 are 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 research 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 plummeted. 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., Axe, Facebook, Innocent, IKEA, Land Rover, LG, LEGO, Tata, Nano, Twitter, Whole Foods, and Zappos exhibited notable energized differentiation 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. The authors offer a five-step framework to infuse brands with more energy. 1. Perform an energy audit on your brand. Identify the current sources and level of energy to understand your brand s strengths and weaknesses and how well brand management aligns with the dynamics of the new marketplace. 2. Make your brand an organizing principle for the business. Find an essential brand idea or thought that can serve as a lens through which you define every aspect of the customer experience, including products, services, and communications. 3. Create an energized value chain. Make the organization s goals for the brand real for everyone; all participants must think uniquely from the perspective of the brand and understand how their own actions boost the energy level of the brand and fuel the core. 4. Become an energy-driven enterprise. Stakeholders need to transfer their energy and passion to their business units and functions. Once management s aspirations for the brand and business begin becoming part of the culture, the process of building an energized brand enterprise is nearly complete. 5. Create a loop of constant reinvention. Finally, keep the organization and its brand in a state of constant renewal. Brand managers must be keenly aware of shifts in consumers perception and values and be ready to reshape themselves again and again. Sources: John Gerzema and Ed Lebar, The Brand Bubble: The Looming Crisis in Brand Value and How to Avoid It (New York: Jossey-Bass, 2008); John Gerzema and Ed Lebar, The Trouble with Brands, Strategy+Business 55 (Summer 2009). According to this model, enacting the four steps means establishing a pyramid of six brand building blocks as illustrated in Figure 9.4. 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.22 MasterCard is a brand with duality, because it emphasizes both the rational advantages of the credit card its acceptance at establishments worldwide as well as the emotional advantages, expressed in the award-winning Priceless advertising campaign ( There are some things money can t buy; for everything else, there s MasterCard. ). 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 consumption situations. 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. C REATING BRAND EQUITY Stages of Brand Development Brand Building Blocks 4. Relationships = What about you and me? Branding Objective at Each Stage Intense, active loyalty | CHAPTER 9 271 |Fig. 9.4| Brand Resonance Pyramid Resonance 3. Response = What about you? 2. Meaning = What are you? Judgments Performance 1. Identity = Who are you? Salience 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 engenders.23 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.24 Building Brand Equity Marketers build brand equity by creating the right brand knowledge structures with the right consumers. This process depends on all brand-related contacts whether marketer-initiated or not.25 From a marketing management perspective, however, there are three main sets of brand equity drivers: 1. Feelings The initial choices for the brand elements or identities making up the brand (brand names, URLs, logos, 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 moment of finding what a person is looking for. It is also short, appealing, memorable, active, and effective multiculturally.26 Imagery Positive, accessible reactions Points-of-parity & difference Deep, broad brand awareness MasterCard s Priceless campaign reinforces the emotional rewards of the brand. 272 PART 4 BUILDING STRONG BRANDS 2. 3. The product and service and all accompanying marketing activities and supporting marketing programs Liz Claiborne s fastest-growing label is Juicy Couture, whose edgy, contemporary sportswear and accessories have a strong lifestyle appeal to women, men, and kids. Positioned as an affordable luxury, the brand creates its exclusive cachet via limited distribution and a somewhat risqué name and rebellious attitude.27 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 its 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.28 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 consumers 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. The brand name 42BELOW has both direct product meaning and indirect meaning related to its New Zealand origins. 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. 2. 3. 4. 5. 6. 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. Meaningful Is the brand element credible? Does it suggest the corresponding category and a product ingredient 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 entrees. Likable How aesthetically appealing is the brand element? A recent trend is for playful names that also offer a readily available URL, like Flickr photo sharing, Wakoopa social networking, and Motorola s ROKR and RAZR cell phones.29 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 book seller, 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 wide variety of goods that could be shipped, an important descriptor of the diverse range of products the company now sells. Adaptable How adaptable and updatable is the brand element? The face of Betty Crocker has received more than seven makeovers in 87 years, and she doesn t look a day over 35! Protectable How legally protectable is the brand element? How competitively protectable? Names that become synonymous with product categories such as Kleenex, Kitty Litter, Jell-O, Scotch Tape, Xerox, and Fiberglass should retain their trademark rights and not become generic. DEVELOPING BRAND ELEMENTS Brand elements can play a number of brand-building roles.30 If consumers don t examine much information in making product decisions, brand elements should be easy to recall and inherently descriptive and persuasive. The likability of brand elements may also increase awareness and associations.31 The Keebler elves reinforce home-style baking quality and a sense of magic and fun for their line of cookies; Michelin s friendly tire-shaped Bibendum helps to convey safety for the family. Often, the less concrete brand benefits are, the more important that brand elements capture intangible characteristics. Many insurance firms use symbols of strength for their brands (the Rock of Gibraltar for Prudential and the stag for Hartford), security (the good hands of Allstate and the hard hat of Fireman s Fund), or some combination (the castle for Fortis). C REATING BRAND EQUITY | CHAPTER 9 273 Mountain Dew s Dew Tour is a high-energy sponsorship that reinforces the brand s credentials for the youth market. Like brand names, slogans are an extremely efficient means to build brand equity.32 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, Citi Never Sleeps, Every Kiss Begins with Kay for the jeweler, and We Try Harder for Avis rental cars. But choosing a name with inherent meaning may make it harder to add a different meaning or update the positioning.33 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 telephone 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.34 The company must put as much effort into managing these experiences as into producing its ads.35 As we describe throughout this text, marketing strategy and tactics have changed dramatically.36 Marketers are creating brand contacts and building brand equity through new avenues such as clubs and consumer communities, trade shows, event marketing, sponsorship, factory visits, public relations and press releases, and social cause marketing. Mountain Dew created the multicity Dew Tour in which athletes compete in different skateboarding, BMX, and freestyle motocross events to reach the coveted but fickle 12- to 24-year-old target market.37 Integrated marketing is about mixing and matching these marketing activities to maximize their individual and collective effects.38 To achieve it, marketers need a variety of different marketing activities that consistently reinforce the brand promise. The Olive Garden has become the second-largest casual dining restaurant chain in the United States, with more than $3 billion in sales in 2010 from its more than 700 North American restaurants, in part through establishing a fully integrated marketing program. The Olive Garden The Olive Garden brand promise is the idealized Italian family meal characterized by fresh, simple, delicious Italian food, complemented by a great glass of wine, served by people who treat you like family, in a comfortable homelike setting. To live up to that brand promise, The Olive Garden has sent more than 1,100 restaurant General Managers and team members on cultural immersion trips to Italy, launched the Culinary Institute of Tuscany in Italy to inspire new dishes and teach General Managers and team members authentic Italian cooking techniques, conducts wine training workshops for team members and inrestaurant wine sampling for guests, and is remodeling restaurants to give them a Tuscan farmhouse look. Communications include in-store, employee, and mass media messages that all reinforce the brand promise and ad slogan, When You re Here, You re Family. 39 Olive Garden goes to extraordinary lengths to live up to its brand promise of offering the idealized Italian family meal. 2 74 PART 4 BUILDING STRONG BRANDS 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 may also sponsor events to make sure it is seen as contemporary and up-to-date. 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 9.5). 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 sponsorship), or some other thirdparty sources (through awards or reviews). Suppose Burton the maker of snowboards, ski boots, bindings, clothing, and outerwear decided to introduce a new surfboard called the Dominator. Burton has gained over a third of the snowboard market by closely aligning itself with top professional riders and creating a strong amateur snowboarder community around the country. To support the new surfboard, Burton could leverage secondary brand knowledge in a number of ways: * * It could sub-brand the product, calling it Dominator by Burton. Consumers evaluations of the new product 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. |Fig. 9.5| Secondary Sources of Brand Knowledge Ingredients Company Alliances Extensions Other Brands Employees People BRAND Country of origin Places Endorsers Channels Things Third-party endorsements Events Causes C REATING BRAND EQUITY | CHAPTER 9 275 Burton could sell through popular surf shops in the hope that its 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. 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.40 Internal branding consists of activities and processes that help inform and inspire employees about brands.41 Holistic marketers must go even further and train and encourage distributors and dealers to serve their customers well. Poorly trained dealers 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 communications must be positive.42 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. 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 internal branding are:43 1. 2. 3. 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, Beyond Petroleum, BP found most employees were positive about the new brand and thought the company was going in the right direction. Link internal and external marketing. Internal and external messages must match. IBM s e-business campaign not only helped to change public perceptions of the company in the marketplace, it also signaled to employees that IBM was determined to be a leader in the use of Internet technology. Bring the brand alive for employees. Internal communications should be informative and energizing. Miller Brewing has tapped into its brewing heritage to generate pride and passion and improve employee morale. Brand Communities Thanks to the Internet, companies are interested in collaborating with consumers to create value through communities built around brands. A brand community is a specialized community of consumers and employees whose identification and activities focus around the brand.44 Three characteristics identify brand communities:45 1. 2. 3. A consciousness of kind or sense of felt connection to the brand, company, product, or other community members; Shared rituals, stories, and traditions that help to convey the meaning of the community; and A shared moral responsibility or duty to both the community as a whole and individual community members. Brand communities come in many different forms.46 Some arise organically from brand users, such as the Atlanta MGB riders club, the Apple Newton User Group, and the Porsche Rennlist online discussion group. Others are company-sponsored and facilitated, such as the Club Green Kids (official kids fan club of the Boston Celtics) and the Harley-Davidson Owner s Group (H.O.G.). Successful brands such as Burton Snowboards have to think carefully about how to leverage their strengths with new products and markets, as well as how to borrow equity from other people, places, or things. 2 76 PART 4 BUILDING STRONG BRANDS Harley-Davidson HarleyDavidson Founded in 1903 in Milwaukee, Wisconsin, HarleyDavidson 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 desperately 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 manufacturing processes. It also developed a strong brand community in the form of an owners club, called the Harley Owners Group (H.O.G.), which sponsors bike rallies, charity rides, and other motorcycle events and now numbers 1 million members in over 1,200 chapters. H.O.G. benefits include a magazine called Hog Tales, a touring handbook, emergency road service, a specially designed insurance program, theft reward service, discount hotel rates, and a Fly & Ride program 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, events, and a special members-only section.47 A strong brand community results in a more loyal, committed customer base. Its activities and advocacy can substitute to some degree for activities the firm would otherwise have to engage in, creating greater marketing effectiveness and efficiency.48 A brand community can also be a constant source of inspiration and feedback for product improvements or innovations. To better understand how brand communities work, one comprehensive study examined communities around brands as diverse as StriVectin cosmeceutical, BMW Mini auto, Xena: Warrior Princess television show, 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 TABLE 9.2 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 (e.g., product failure, customizing) and/or for nonbrand-related life issues (e.g., 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 members 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 (e.g., you should sell/should not sell that) or may be directed at the firm through explicit link or through presumed monitoring of the site (e.g., 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. C REATING BRAND EQUITY TABLE 9.3 | CHAPTER 9 277 The Myths and Realities of Brand Communities Myth: Brand community is a marketing strategy. Reality: Brand community is a business strategy. The entire business model must support the community brand. Myth: Brand communities exist to serve the business. Reality: Brand communities exist to serve the people that comprise them. Brand communities are a means to an end, not the ends themselves. Myth: Build the brand, and the community will follow. Reality: Cultivate the community and the brand will grow; engineer the community and the brand will be strong. Myth: Brand communities should be love fests for faithful brand advocates. Reality: Communities are inherently political and this reality must be confronted with honesty and authenticity head-on; smart companies embrace the conflicts that make communities thrive. Myth: Focus on opinion leaders to build a strong community. Reality: Strong communities take care of all of their members; everyone in the community plays an important role. Myth: Online social networks are the best way to build community. Reality: Social networks are one community tool, but the tool is not the strategy. Myth: Successful brand communities are tightly managed and controlled. Reality: Control is an illusion; brand community success requires opening up and letting go; of and by the people, communities defy managerial control. Sources: Susan Fournier and Lara Lee, The Seven Deadly Sins of Brand Community, Marketing Science Institute Special Report 08-208, 2008; Susan Fournier and Lara Lee, Getting Brand Communities Right, Harvard Business Review, April 2009, pp. 105 11. 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 9.2. Building a positive, productive brand community requires careful thought and implementation. Branding experts Susan Fournier and Lara Lee have identified seven common myths about brand communities and suggest the reality in each case (see Table 9.3). Measuring Brand Equity How do we measure brand equity? An indirect approach assesses potential sources of brand equity by identifying and tracking consumer brand knowledge structures.49 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.50 Marketing Insight 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 (see Figure 9.6). 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 product research, development, and design; trade or intermediary support; and marketing communications. Next, we assume customers mind-sets, buying behavior, and response to price will change as a result of the marketing program; the question is how. Finally, the investment community will consider market performance, replacement cost, and purchase price in acquisitions (among other factors) to assess shareholder value in general and the value of a brand in particular. The model also assumes that three multipliers moderate the transfer between the marketing program and the subsequent three value stages. 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 of customers affects market performance. This result depends on competitive superiority (how effective the quantity and quality of the marketing investment of other competing brands are), channel and other intermediary support (how much brand 2 78 PART 4 BUILDING STRONG BRANDS |Fig. 9.6| Brand Value Chain Source: Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008). Printed and electronically reproduced by permission of Pearson Education, Inc. Upper Saddle River, New Jersey. VALUE STAGES Marketing Program Investment Customer Mind-set - Product - Communications - Trade - Employee - Other Brand Performance - Awareness - Associations - Attitudes - Attachment - Activity - Price premiums - Price elasticities - Market share - Expansion success - Cost structure - Profitability Program Multiplier Customer Multiplier - Clarity - Relevance - Distinctiveness - Consistency MULTIPLIERS - Competitive reactions - Channel support - Customer size & profile 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. Shareholder Value - Stock price - P/E ratio - Market capitalization Market Multiplier - Market dynamics - Growth potential - Risk profile - Brand contribution 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, no. 1 (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, forthcoming. 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 consumer-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. Brand-tracking studies collect quantitative data from consumers over time to provide 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 facilitate day-to-day decision making. Marketers should distinguish brand equity from brand valuation, which is the job of estimating the total financial value of the brand. Table 9.4 displays the world s most valuable brands in 2009 according to one ranking.51 In these well-known companies, brand value is typically over 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 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. Marketing Insight: What Is a Brand Worth? reviews one popular valuation approach. C REATING BRAND EQUITY TABLE 9.4 | CHAPTER 9 279 The World s 10 Most Valuable Brands in 2009 Rank Brand 2009 Brand Value (Billions) 1 Coca-Cola $68.7 2 IBM $60.2 3 Microsoft $56.6 4 GE $47.8 5 Nokia $34.9 6 McDonald s $32.3 7 Google $32.0 8 Toyota $31.3 9 Intel $30.6 Disney $28.4 10 Source: Interbrand. Used with permission. Marketing Insight 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 follows five steps (see Figure 9.7 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 variances in the brand s different customer groups. 2. Financial Analysis Interbrand assesses purchase price, volume, 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 earnings before interest and tax (EBIT). It also deducts the appropriate taxes and a charge for the capital employed to operate the underlying 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, then determining the degree to which the brand directly influences each. The Role of Branding assessment is based on market research, client workshops, 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 forecasted Brand Earnings. This step relies on competitive benchmarking 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 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 comprises both the forecast 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. 2 80 PART 4 BUILDING STRONG BRANDS |Fig. 9.7| Market Segments Interbrand Brand Valuation Method Financial Analysis Demand Drivers Competitive Benchmarking Intangible Earnings Role of Branding Brand Strength Brand Discount Rate Brand Earnings Brand Value (net present value of future brand earnings) Managing Brand Equity Because consumer responses to marketing activity depend on what they know and remember about a brand, 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.52 Many brand leaders of 70 years ago remain leaders today Wrigley s, Coca-Cola, Heinz, and Campbell Soup but only 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 products 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.53 NIVEA, one of Europe s strongest brands, has expanded from a skin cream brand to a skin care and personal care brand through carefully designed and implemented brand extensions that reinforce the brand promise of mild, gentle, and caring. Reinforcing brand equity requires that the brand always be moving forward 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 Fila, Oldsmobile, Polaroid, Circuit City have fallen on hard times or gone out of business.54 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. C REATING BRAND EQUITY | CHAPTER 9 Discover Communications In the hypercompetitive marketplace of cable TV channels, having a consistently clear but evolving identity is critical. One of the most successful cable TV programmers, Discovery Communications, operates 13 channels in the United States with such signature shows as Deadliest Catch and MythBusters (Discovery Channel), Whale Wars (Animal Planet), and the once-popular, now-defunct Jon & Kate Plus 8 (TLC). Positioning itself as the number one nonfiction media company in the world, Discovery Communications is dedicated to satisfying curiosity and making a difference in people s lives with the highest quality content, services and products that entertain, engage and enlighten inviting viewers to explore their world. For example, by recognizing that nature and animals harbor mystery and danger, Animal Planet has developed into a more aggressive and compelling brand. New channels in the works include a women s channel with Oprah Winfrey, a kid s channel in partnership with Hasbro, and a possible series of science shows with director Steven Spielberg. Discovery is also increasing its global expansion including China and India and now reaches more than 1.5 billion subscribers in 170 countries, generating a third of the company s revenue from overseas.55 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.56 At some point, failure to reinforce the brand will diminish brand awareness and weaken brand image. 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.57 After some hard times, Burberry, Fiat, and Volkswagen have all turned their brand fortunes around to varying degrees. Often, the first thing to do in revitalizing a brand is to 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. 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. As noted previously, Harley-Davidson regained its market leadership by doing a better job of living up to customer expectations as to product performance. Eu Yan Sang did it by returning to its roots and leveraging key brand assets. Eu Yan Sang Eu Yan Sang, a brand with more than 130 years of history, 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 Deadliest Catch has become a defining program for the Discovery Channel. Eu Yan Sang wanted to appeal to the younger generation so it launched new products and embarked on a marketing campaign involving roadshows and cooking demonstrations. 281 PART 4 BUILDING STRONG BRANDS family business in 1989. Knowing he had to make the brand relevant to younger consumers, Eu leveraged Eu Yan Sang s strong equity as a trusted brand and modernized it by going back to basics. Through 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 is 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. The brand s success in revitalizing itself is evident in the numerous awards it has received. Eu Yan Sang was included in the Best Under a Billion companies list by Forbes Asia and received the Putra Brand Award, Hong Kong s Pride Award, and Singapore Brand Award.58 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. Old Spice One of the first mass market fragrances, Old Spice dates back to 1937. Its classic aftershave and cologne combination with soap on a rope sometimes tossed in for good measure was the classic Father s Day gift for baby boomers to give, but was largely irrelevant by the time Procter & Gamble acquired the brand in 1990. P&G s revitalization strategy was to abandon the old cologne business to focus on deodorants and other male grooming products. Facing tough competition from Unilever s edgy line of Axe products, the firm reverted to its classic one-two punch of product innovation and new communications to target the 12- to 34-year-old male. New product development resulted in the creation of Old Spice High Endurance, Pro Strength, and Red Zone lines of deodorants, body washes, body sprays, and shaving products. Old Spice s latest line, Ever Clear, arose from focus group participants good-bye letters to their current deodorant. A technological breakthrough allowed Ever Clear to promise the protection of a dry solid without the uncomfortable waxy residue that left white streaks on clothing. All Old Spice products were backed by tongue-in-cheek advertising that stressed the brand s experience. 59 Old Spice 282 There is obviously a continuum of revitalization strategies, with pure back to basics at one end, pure reinvention 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. Brand revitalization of almost any kind starts with the product.60 General Motors s turnaround of its fading Cadillac brand was fueled by new designs that redefined its look and styling, such as the CTS sedan, XLR roadster, and ESV sport utility vehicle.61 High-end clothing retailer Paul Stuart introduced its first ever sub-brand, the bolder, sleeker Phineas Cole, to update its conservative image for a hipper, younger demographic.62 Devising a Branding Strategy A firm s branding strategy often called the brand architecture reflects the number and nature of both common and distinctive brand elements. Deciding how to brand new products is especially critical. A firm has three main choices: 1. 2. 3. It can develop new brand elements for the new product. It can apply some of its existing brand elements. 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:63 In a line extension, the parent brand covers a new product within a product category it currently serves, such as with new flavors, forms, C REATING BRAND EQUITY 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 Fruit Blends. 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 companies 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 lowend 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.64 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 multibilliondollar business.65 Jeep s licensing program, which now has 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 they fit the brand s positioning of Life without Limits. Through 400-plus dedicated Jeep shop-in-shops and 80 Jeep freestanding stores around the world, licensing revenue now exceeds $550 million in retail sales. New areas of emphasis include outdoor and travel gear, juvenile products, and sporting goods.66 Branding Decisions ALTERNATIVE BRANDING STRATEGIES Today, branding is suc