Marketing
Management,
Millenium Edition
Philip Kotler

Custom Edition for
University of Phoenix

Excerpts taken from:
A Framework for Marketing Management,by Philip Kotler
Copyright © 2001by Prentice-Hall, Inc.
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Marketing Management Millenium Edition, Tenth Edition,
by Philip Kotler
Copyright © 2000 by Prentice-Hall, Inc.
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SECTION ONE

Understanding Marketing Management

Marketing in the
Twenty-First
Century
We will address the following questions:■ What are the tasks of marketing?
■ What are the major concepts and tools of marketing?
■ What orientations do companies exhibit in the marketplace?
■ How are companies and marketers responding to the new challenges?

Change is occurring at an accelerating rate; today is not like yesterday, and tomorrow will be different from today. Continuing today’s strategy is risky; so is turning
to a new strategy. Therefore, tomorrow’s successful companies will have to heed threecertainties:➤

Global forces will continue to affect everyone’s business and personal life.

➤

Technology will continue to advance and amaze us.

➤

There will be a continuing push toward deregulation of the economic sector.

These three developments—globalization, technological advances, and deregulation—spell endless opportunities. But what is marketing and what does it have to dowith these issues?
Marketing deals with identifying and meeting human and social needs. One of
the shortest deﬁnitions of marketing is “meeting needs proﬁtably.” Whether the marketer is Procter & Gamble, which notices that people feel overweight and want tasty
but less fatty food and invents Olestra; or CarMax, which notes that people want morecertainty when they buy a used automobile and invents a new system for selling usedcars; or IKEA, which notices that people want good furniture at a substantially lower
price and creates knock-down furniture—all illustrate a drive to turn a private or social
need into a proﬁtable business opportunity through marketing.

MARKETING TASKS
A recent book, Radical Marketing, praises companies such as Harley-Davidson for succeeding by breaking all of the rules of marketing.1 Instead of commissioning expensive
marketing research, spending huge sums on advertising, and operating large market-

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

ing departments, these companies stretch their limited resources, live close to their customers, and create more satisfying solutions to customers’ needs. They form buyers
clubs, use creative public relations, and focus on delivering quality products to win
long-term customer loyalty. It seems that not all marketing must follow the P&G model.
In fact, we can distinguish three stages through which marketing practice might
pass:
1.

Entrepreneurial marketing: Most companies are started by individuals who visualize an
opportunity and knock on every door to gain attention. Jim Koch, founder of Boston
Beer Company, whose Samuel Adams beer has become a top-selling “craft” beer,
started out in 1984 carrying bottles of Samuel Adams from bar to bar to persuade bartenders to carry it. For 10 years, he sold his beer through direct selling and grassroots
public relations. Today his business pulls in nearly $200 million, making it the leader
in the U.S. craft beer market.2

2.

Formulated marketing: As small companies achieve success, they inevitably move toward
more formulated marketing. Boston Beer recently began a $15 million television
advertising campaign. The company now employs more that 175 salespeople and has
a marketing department that carries on market research, adopting some of the tools
used in professionally run marketing companies.

3.

Intrepreneurial marketing: Many large companies get stuck in formulated marketing,poring over the latest ratings, scanning research reports, trying to ﬁne-tune dealer
relations and advertising messages. These companies lack the creativity and passionof the guerrilla marketers in the entrepreneurial stage.3 Their brand and productmanagers need to start living with their customers and visualizing new ways to add
value to their customers’ lives.

The bottom line is that effective marketing can take many forms. Although it iseasier to learn the formulated side (which will occupy most of our attention in thisbook), we will also see how creativity and passion can be used by today’s and tomorrow’s marketing managers.

The Scope of Marketing
Marketing people are involved in marketing 10 types of entities: goods, services, experiences, events, persons, places, properties, organizations, information, and ideas.
Goods. Physical goods constitute the bulk of most countries’ production andmarketing effort. The United States produces and markets billions of physicalgoods, from eggs to steel to hair dryers. In developing nations, goods—
particularly food, commodities, clothing, and housing—are the mainstay of theeconomy.
Services. As economies advance, a growing proportion of their activities arefocused on the production of services. The U.S. economy today consists of a
70–30 services-to-goods mix. Services include airlines, hotels, and maintenanceand repair people, as well as professionals such as accountants, lawyers,
engineers, and doctors. Many market offerings consist of a variable mix ofgoods and services.
Experiences. By orchestrating several services and goods, one can create, stage,
and market experiences. Walt Disney World’s Magic Kingdom is an experience;
so is the Hard Rock Cafe.
Events. Marketers promote time-based events, such as the Olympics, tradeshows, sports events, and artistic performances.

Marketing Tasks

Persons. Celebrity marketing has become a major business. Artists, musicians,
CEOs, physicians, high-proﬁle lawyers and ﬁnanciers, and other professionals
draw help from celebrity marketers.4
Places. Cities, states, regions, and nations compete to attract tourists, factories,
company headquarters, and new residents.5 Place marketers include economic
development specialists, real estate agents, commercial banks, local businessassociations, and advertising and public relations agencies.
Properties. Properties are intangible rights of ownership of either real property(real estate) or ﬁnancial property (stocks and bonds). Properties are bought
and sold, and this occasions a marketing effort by real estate agents (for realestate) and investment companies and banks (for securities).
Organizations. Organizations actively work to build a strong, favorable image inthe mind of their publics. Philips, the Dutch electronics company, advertises
with the tag line, “Let’s Make Things Better.” The Body Shop and Ben & Jerry’s
also gain attention by promoting social causes. Universities, museums, andperforming arts organizations boost their public images to compete more
successfully for audiences and funds.
Information. The production, packaging, and distribution of information is oneof society’s major industries.6 Among the marketers of information are schools
and universities; publishers of encyclopedias, nonﬁction books, and specialized
magazines; makers of CDs; and Internet Web sites.
Ideas. Every market offering has a basic idea at its core. In essence, products andservices are platforms for delivering some idea or beneﬁt to satisfy a core need.

A Broadened View of Marketing Tasks
Marketers are skilled in stimulating demand for their products. However, this is too
limited a view of the tasks that marketers perform. Just as production and logistics professionals are responsible for supply management, marketers are responsible fordemand management. They may have to manage negative demand (avoidance of a
product), no demand (lack of awareness or interest in a product), latent demand (astrong need that cannot be satisﬁed by existing products), declining demand (lower
demand), irregular demand (demand varying by season, day, or hour), full demand (asatisfying level of demand), overfull demand (more demand than can be handled), or
unwholesome demand (demand for unhealthy or dangerous products). To meet theorganization’s objectives, marketing managers seek to inﬂuence the level, timing, andcomposition of these various demand states.

The Decisions That Marketers Make
Marketing managers face a host of decisions in handling marketing tasks. These range
from major decisions such as what product features to design into a new product, howmany salespeople to hire, or how much to spend on advertising, to minor decisions
such as the wording or color for new packaging.
Among the questions that marketers ask (and will be addressed in this text) are:How can we spot and choose the right market segment(s)? How can we differentiate ouroffering? How should we respond to customers who press for a lower price? How can wecompete against lower-cost, lower-price rivals? How far can we go in customizing ouroffering for each customer? How can we grow our business? How can we build stronger
brands? How can we reduce the cost of customer acquisition and keep customers loyal?
How can we tell which customers are more important? How can we measure the payback

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURYfrom marketing communications? How can we improve sales-force productivity? How
can we manage channel conﬂict? How can we get other departments to be more customer-oriented?

Marketing Concepts and Tools
Marketing boasts a rich array of concepts and tools to help marketers address the decisions they must make. We will start by defining marketing and then describing its
major concepts and tools.

Deﬁning Marketing
We can distinguish between a social and a managerial definition for marketing.
According to a social deﬁnition, marketing is a societal process by which individuals
and groups obtain what they need and want through creating, offering, and exchanging products and services of value freely with others.
As a managerial definition, marketing has often been described as “the art ofselling products.” But Peter Drucker, a leading management theorist, says that “theaim of marketing is to make selling superﬂuous. The aim of marketing is to know andunderstand 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.”7
The American Marketing Association offers this managerial definition:
Marketing (management) is the process of planning and executing the conception,
pricing, promotion, and distribution of ideas, goods, and services to create exchanges
that satisfy individual and organizational goals.8
Coping with exchange processes—part of this deﬁnition—calls for a considerable amount of work and skill. We see marketing management as the art and scienceof applying core marketing concepts to choose target markets and get, keep, and growcustomers through creating, delivering, and communicating superior customer value.

Core Marketing Concepts
Marketing can be further understood by deﬁning the core concepts applied by marketing managers.
Target Markets and Segmentation
A marketer can rarely satisfy everyone in a market. Not everyone likes the same softdrink, automobile, college, and movie. Therefore, marketers start with market segmentation. They identify and proﬁle distinct groups of buyers who might prefer or requirevarying products and marketing mixes. Market segments can be identiﬁed by examining demographic, psychographic, and behavioral differences among buyers. The ﬁrmthen decides which segments present the greatest opportunity—those whose needs
the ﬁrm can meet in a superior fashion.
For each chosen target market, the firm develops a market offering. The offering
is positioned in the minds of the target buyers as delivering some central benefit(s).
For example, Volvo develops its cars for the target market of buyers for whom automobile safety is a major concern. Volvo, therefore, positions its car as the safest a customer can buy.
Traditionally, a “market” was a physical place where buyers and sellers gathered
to exchange goods. Now marketers view the sellers as the industry and the buyers as
the market (see Figure 1-1). The sellers send goods and services and communications(ads, direct mail, e-mail messages) to the market; in return they receive money andinformation (attitudes, sales data). The inner loop in the diagram in Figure 1-1 showsMarketing Tasks

Communication
Industry(a collectionof sellers)

Goods/services
Money

Market(a collectionof buyers)

Information

Figure 1-1 A Simple Marketing Systeman exchange of money for goods and services; the outer loop shows an exchange of
information.
A global industry is one in which the strategic positions of competitors in major
geographic or national markets are fundamentally affected by their overall global positions. Global ﬁrms—both large and small—plan, operate, and coordinate their activities and exchanges on a worldwide basis.
Today we can distinguish between a marketplace and a marketspace. The marketplace is physical, as when one goes shopping in a store; marketspace is digital, as when
one goes shopping on the Internet. E-commerce—business transactions conducted
on-line—has many advantages for both consumers and businesses, including convenience, savings, selection, personalization, and information. For example, on-line
shopping is so convenient that 30 percent of the orders generated by the Web site of
REI, a recreational equipment retailer, is logged from 10 P.M. to 7 A.M., sparing REI the
expense of keeping its stores open late or hiring customer service representatives.
However, the e-commerce marketspace is also bringing pressure from consumers forlower prices and is threatening intermediaries such as travel agents, stockbrokers,
insurance agents, and traditional retailers. To succeed in the on-line marketspace,marketers will need to reorganize and redeﬁne themselves.
The metamarket, a concept proposed by Mohan Sawhney, describes a cluster ofcomplementary products and services that are closely related in the minds of consumers but are spread across a diverse set of industries. 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. Car buyers can get
involved in many parts of this metamarket. This has created an opportunity for metamediaries to assist buyers to move seamlessly through these groups. One example is
Edmund’s (www.edmunds.com), a Web site where buyers can ﬁnd prices for different
cars and click to other sites to search for dealers, financing, and accessories.
Metamediaries can serve various metamarkets, such as the home ownership market,
the parenting and baby care market, and the wedding market.9
Marketers and Prospects
Another core concept is the distinction between marketers and prospects. A marketer
is someone who is seeking a response (attention, a purchase, a vote, a donation) fromanother party, called the prospect. If two parties are seeking to sell something to eachother, both are marketers.

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

Needs, Wants, and Demands
The successful marketer will try to understand the target market’s needs, wants, anddemands. Needs describe basic human requirements such as food, air, water, clothing,and shelter. People also have strong needs for recreation, education, and entertainment. These needs become wants when they are directed to speciﬁc objects that mightsatisfy the need. An American needs food but wants a hamburger, French fries, and asoft drink. A person in Mauritius needs food but wants a mango, rice, lentils, and beans.
Clearly, wants are shaped by one’s society.
Demands are wants for speciﬁc products backed by an ability to pay. Many people
want a Mercedes; only a few are able and willing to buy one. Companies must measure
not only how many people want their product, but also how many would actually bewilling and able to buy it.
However, marketers do not create needs: Needs preexist marketers. Marketers,
along with other societal inﬂuences, inﬂuence wants. Marketers might promote theidea that a Mercedes would satisfy a person’s need for social status. They do not, however, create the need for social status.
Product or Offering
People satisfy their needs and wants with products. A product is any offering that cansatisfy a need or want, such as one of the 10 basic offerings of goods, services, experiences, events, persons, places, properties, organizations, information, and ideas.
A brand is an offering from a known source. A brand name such as McDonald’s
carries many associations in the minds of people: hamburgers, fun, children, fast food,
golden arches. These associations make up the brand image. All companies strive tobuild a strong, favorable brand image.
Value and Satisfaction
In terms of marketing, the product or offering will be successful if it delivers value andsatisfaction to the target buyer. The buyer chooses between different offerings on thebasis of which is perceived to deliver the most value. We deﬁne value as a ratio between
what the customer gets and what he gives. The customer gets beneﬁts and assumes costs,
as shown in this equation:
Functional beneﬁts ⫹ emotional beneﬁts
Value ⫽ Beneﬁts ⫽Costs
Monetary costs ⫹ time costs ⫹ energy costs ⫹ psychic costs
Based on this equation, the marketer can increase the value of the customer offering by(1) raising beneﬁts, (2) reducing costs, (3) raising beneﬁts and reducing costs, (4) raising beneﬁts by more than the raise in costs, or (5) lowering beneﬁts by less than the
reduction in costs. A customer choosing between two value offerings, V1 and V2, will
examine the ratio V1/V2. She will favor V1 if the ratio is larger than one; she will favor V2
if the ratio is smaller than one; and she will be indifferent if the ratio equals one.
Exchange and Transactions
Exchange, the core of marketing, involves obtaining a desired product from someone
by offering something in return. For exchange potential to exist, ﬁve conditions mustbe satisﬁed:
1.

There are at least two parties.

2.

Each party has something that might be of value to the other party.

3.

Each party is capable of communication and delivery.

Marketing Tasks
4.

Each party is free to accept or reject the exchange offer.

5.

Each party believes it is appropriate or desirable to deal with the other party.

Whether exchange actually takes place depends upon whether the two parties canagree on terms that will leave them both better off (or at least not worse off) than
before. Exchange is a value-creating process because it normally leaves both parties
better off.
Note that exchange is a process rather than an event. Two parties are engaged in
exchange if they are negotiating—trying to arrive at mutually agreeable terms. When an
agreement is reached, we say that a transaction takes place. A transaction involves at least
two things of value, agreed-upon conditions, a time of agreement, and a place of agreement. Usually a legal system exists to support and enforce compliance among transactors. However, transactions do not require money as one of the traded values. A bartertransaction, for example, involves trading goods or services for other goods or services.
Note also that a transaction differs from a transfer. In a transfer, A gives a gift, a
subsidy, or a charitable contribution to B but receives nothing tangible in return.
Transfer behavior can also be understood through the concept of exchange. Typically,
the transferer expects something in exchange for his or her gift—for example, gratitude or seeing changed behavior in the recipient. Professional fund-raisers provide
beneﬁts to donors, such as thank-you notes. Contemporary marketers have broadened
the concept of marketing to include the study of transfer behavior as well as transaction
behavior.
Marketing consists of actions undertaken to elicit desired responses from a target audience. To effect successful exchanges, marketers analyze what each party
expects from the transaction. Suppose Caterpillar, the world’s largest manufacturer ofearth-moving equipment, researches the beneﬁts that a typical construction company
wants when it buys such equipment. The items shown on the prospect’s want list in
Figure 1-2 are not equally important and may vary from buyer to buyer. One ofCaterpillar’s marketing tasks is to discover the relative importance of these different
wants to the buyer.
As the marketer, Caterpillar also has a want list. If there is a sufﬁcient match oroverlap in the want lists, a basis for a transaction exists. Caterpillar’s task is to formulate an offer that motivates the construction company to buy Caterpillar equipment.
The construction company might, in turn, make a counteroffer. This process of negotiation leads to mutually acceptable terms or a decision not to transact.
Relationships and Networks
Transaction marketing is part of a larger idea called relationship marketing.
Relationship marketing aims to build long-term mutually satisfying relations with key parties—customers, suppliers, distributors—in order to earn and retain their long-term
preference and business.10 Effective marketers accomplish this by promising and delivering high-quality products and services at fair prices to the other parties over time.
Relationship marketing builds strong economic, technical, and social ties among theparties. It cuts down on transaction costs and time. In the most successful cases, transactions move from being negotiated each time to being a matter of routine.
The ultimate outcome of relationship marketing is the building of a unique company asset called a marketing network. A marketing network consists of the company andits supporting stakeholders (customers, employees, suppliers, distributors, university scientists, and others) with whom it has built mutually proﬁtable business relationships.
Increasingly, competition is not between companies but rather between marketing
networks, with the proﬁts going to the company that has the better network.11

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

Construction Co. Want List
1. High-quality, durable equipment
2. Fair price
3. On-time delivery of equipment
4. Good financing terms
5. Good parts and service
Caterpillar(marketer)

Construction Co.
(prospect)
Caterpillar Want List
1. Good price for equipment
2. On-time payment
3. Good word of mouth

Figure 1-2 Two-Party Exchange Map Showing Want Lists of Both Parties
Marketing Channels
To reach a target market, the marketer uses three kinds of marketing channels.
Communication channels deliver messages to and receive messages from target buyers.
They include newspapers, magazines, radio, television, mail, telephone, billboards,
posters, ﬂiers, CDs, audiotapes, and the Internet. Beyond these, communications areconveyed by facial expressions and clothing, the look of retail stores, and many othermedia. Marketers are increasingly adding dialogue channels (e-mail and toll-free numbers) to counterbalance the more normal monologue channels (such as ads).
The marketer uses distribution channels to display or deliver the physical productor service(s) to the buyer or user. There are physical distribution channels and service
distribution channels, which include warehouses, transportation vehicles, and various
trade channels such as distributors, wholesalers, and retailers. The marketer also uses
selling channels to effect transactions with potential buyers. Selling channels include
not only the distributors and retailers but also the banks and insurance companies
that facilitate transactions. Marketers clearly face a design problem in choosing thebest mix of communication, distribution, and selling channels for their offerings.
Supply Chain
Whereas marketing channels connect the marketer to the target buyers, the supply chain
describes a longer channel stretching from raw materials to components to ﬁnal products that are carried to ﬁnal buyers. For example, the supply chain for women’s purses
starts with hides, tanning operations, cutting operations, manufacturing, and the marketing channels that bring products to customers. This supply chain represents a value
delivery system. Each company captures only a certain percentage of the total value generated by the supply chain. When a company acquires competitors or moves upstream
or downstream, its aim is to capture a higher percentage of supply chain value.
Competition
Competition, a critical factor in marketing management, includes all of the actual andpotential rival offerings and substitutes that a buyer might consider. Suppose an automobile company is planning to buy steel for its cars. The car manufacturer can buy
from U.S. Steel or other U.S. or foreign integrated steel mills; can go to a minimill such

Marketing Tasks

as Nucor to buy steel at a cost savings; can buy aluminum for certain parts of the car tolighten the car’s weight; or can buy some engineered plastics parts instead of steel.
Clearly U.S. Steel would be thinking too narrowly of competition if it thought
only of other integrated steel companies. In fact, U.S. Steel is more likely to be hurt in
the long run by substitute products than by its immediate steel company rivals. U.S.
Steel also must consider whether to make substitute materials or stick only to those
applications in which steel offers superior performance.
We can broaden the picture by distinguishing four levels of competition, basedon degree of product substitutability:
1.

Brand competition: A company sees its competitors as other companies that offer similar products and services to the same customers at similar prices. Volkswagen mightsee its major competitors as Toyota, Honda, and other manufacturers of mediumprice automobiles, rather than Mercedes or Hyundai.

2.

Industry competition: A company sees its competitors as all companies that make thesame product or class of products. Thus, Volkswagen would be competing against allother car manufacturers.

3.

Form competition: A company sees its competitors as all companies that manufacture
products that supply the same service. Volkswagen would see itself competing against
manufacturers of all vehicles, such as motorcycles, bicycles, and trucks.

4. Generic competition: A company sees its competitors as all companies that compete forthe same consumer dollars. Volkswagen would see itself competing with companies
that sell major consumer durables, foreign vacations, and new homes.

Marketing Environment
Competition represents only one force in the environment in which all marketers
operate. The overall marketing environment consists of the task environment and thebroad environment.
The task environment includes the immediate actors involved in producing, distributing, and promoting the offering, including the company, suppliers, distributors,
dealers, and the target customers. Material suppliers and service suppliers such as marketing research agencies, advertising agencies, Web site designers, banking and insurance companies, and transportation and telecommunications companies are includedin the supplier group. Agents, brokers, manufacturer representatives, and others who
facilitate ﬁnding and selling to customers are included with distributors and dealers.
The broad environment consists of six components: demographic environment, economic environment, natural environment, technological environment, political-legal environment, and social-cultural environment. These environments contain forces that can havea major impact on the actors in the task environment, which is why smart marketers
track environmental trends and changes closely.
Marketing Mix
Marketers use numerous tools to elicit the desired responses from their target markets.
These tools constitute a marketing mix:12 Marketing mix is the set of marketing toolsthat the ﬁrm uses to pursue its marketing objectives in the target market. As shown in
Figure 1-3, McCarthy classiﬁed these tools into four broad groups that he called the four
Ps of marketing: product, price, place, and promotion.13
Marketing-mix decisions must be made to inﬂuence the trade channels as well as
the ﬁnal consumers. Typically, the ﬁrm can change its price, sales-force size, and advertising expenditures in the short run. However, it can develop new products and modify its distribution channels only in the long run. Thus, the ﬁrm typically makes fewer

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

Marketing Mix

Product

Place

Product variety
Quality
DesignFeatures
Brand name
Packaging
Sizes
Services
Warranties
Returns

Channels
Coverage
Assortments
Locations
Inventory
Transport

Target market

Price

Promotion

List price
Discounts
Allowances
Payment period
Credit terms

Sales promotion
Advertising
Sales force
Public relations
Direct marketing

Figure 1-3 The Four P Components of the Marketing Mix
period-to-period marketing-mix changes in the short run than the number of marketing-mix decision variables might suggest.
Robert Lauterborn suggested that the sellers’ four Ps correspond to the customers’ four Cs.14
Four Ps
Product
Price
Place
Promotion

Four Cs
Customer solution
Customer cost
Convenience
Communication

Winning companies are those that meet customer needs economically and conveniently and with effective communication.

COMPANY ORIENTATIONS TOWARD THE MARKETPLACE
Marketing management is the conscious effort to achieve desired exchange outcomeswith target markets. But what philosophy should guide a company’s marketing efforts?
What relative weights should be given to the often conﬂicting interests of the organization, customers, and society?
For example, one of Dexter Corporation’s most popular products was a profitable grade of paper used in tea bags. Unfortunately, the materials in this paper
accounted for 98 percent of Dexter’s hazardous wastes. So while Dexter’s product was
popular with customers, it was also detrimental to the environment. Dexter assigned
an employee task force to tackle this problem. The task force succeeded, and the company increased its market share while virtually eliminating hazardous waste.15

Company Orientations Toward the Marketplace

Clearly, marketing activities should be carried out under a well-thought-out philosophy of efﬁcient, effective, and socially responsible marketing. In fact, there are ﬁvecompeting concepts under which organizations conduct marketing activities: production concept, product concept, selling concept, marketing concept, and societal marketing concept.
The Production Concept
The production concept, one of the oldest in business, holds that consumers preferproducts 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, where consumers
are more interested in obtaining the product than in its features. It is also used whena company wants to expand the market. Texas Instruments is a leading exponent of
this concept. It concentrates on building production volume and upgrading technology in order to bring costs down, leading to lower prices and expansion of the market.
This orientation has also been a key strategy of many Japanese companies.
The Product Concept
Other businesses are guided by the product concept, which holds that consumers
favor those products that offer the most quality, performance, or innovative features.
Managers in these organizations focus on making superior products and improving
them over time, assuming that buyers can appraise quality and performance.
Product-oriented companies often design their products with little or no customer input, trusting that their engineers can design exceptional products. A General
Motors executive said years ago: “How can the public know what kind of car they wantuntil they see what is available?” GM today asks customers what they value in a car andincludes marketing people in the very beginning stages of design.
However, the product concept can lead to marketing myopia.16 Railroad management thought that travelers wanted trains rather than transportation and overlooked
the growing competition from airlines, buses, trucks, and automobiles. Colleges,
department stores, and the post ofﬁce all assume that they are offering the public theright product and wonder why their sales slip. These organizations too often are looking into a mirror when they should be looking out of the window.

The Selling Concept
The selling concept, another common business orientation, holds that consumers andbusinesses, if left alone, will ordinarily not buy enough of the organization’s products.
The organization must, therefore, undertake an aggressive selling and promotion
effort. This concept assumes that consumers must be coaxed into buying, so the company has a battery of selling and promotion tools to stimulate buying.
The selling concept is practiced most aggressively with unsought goods—goods
that buyers normally do not think of buying, such as insurance and funeral plots. The
selling concept is also practiced in the nonproﬁt area by fund-raisers, college admissions ofﬁces, and political parties.
Most ﬁrms practice the selling concept when they have overcapacity. Their aim is
to sell what they make rather than make what the market wants. In modern industrial
economies, productive capacity has been built up to a point where most markets arebuyer markets (the buyers are dominant) and sellers have to scramble for customers.
Prospects are bombarded with sales messages. As a result, the public often identiﬁes
marketing with hard selling and advertising. But marketing based on hard selling carries
high risks. It assumes that customers who are coaxed into buying a product will like it;

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

and if they don’t, that they won’t bad-mouth it or complain to consumer organizations
and will forget their disappointment and buy it again. These are indefensible assumptions. In fact, one study showed that dissatisﬁed customers may bad-mouth the productto 10 or more acquaintances; bad news travels fast, something marketers that use hardselling should bear in mind.17

The Marketing Concept
The marketing concept, based on central tenets crystallized in the mid-1950s, challenges the three business orientations we just discussed.18 The marketing concept
holds that the key to achieving organizational goals consists of the company being
more effective than its competitors in creating, delivering, and communicating customer value to its chosen target markets.
Theodore Levitt of Harvard drew a perceptive contrast between the selling and marketing concepts: “Selling focuses on the needs of the seller; marketing on the needs of thebuyer. 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 andthe whole cluster of things associated with creating, delivering and ﬁnally consuming it.”19
The marketing concept rests on four pillars: target market, customer needs, integrated marketing, and proﬁtability. The selling concept takes an inside-out perspective. It
starts with the factory, focuses on existing products, and calls for heavy selling and promoting to produce proﬁtable sales. The marketing concept takes an outside-in perspective. It starts with a well-deﬁned market, focuses on customer needs, coordinates
activities that affect customers, and produces proﬁts by satisfying customers.
Target Market
Companies do best when they choose their target market(s) carefully and prepare tailored marketing programs. For example, when cosmetics giant Estee Lauder recognized
the increased buying power of minority groups, its Prescriptives subsidiary launched an“All Skins” line offering 115 foundation shades for different skin tones. Prescriptives
credits All Skins for a 45 percent sales increase since this product line was launched.
Customer Needs
A company can carefully deﬁne its target market yet fail to correctly understand thecustomers’ needs. Clearly, understanding customer needs and wants is not always simple. Some customers have needs of which they are not fully conscious; some cannot
articulate these needs or use words that require some interpretation. We can distinguish among ﬁve types of needs: (1) stated needs, (2) real needs, (3) unstated needs,(4) delight needs, and (5) secret needs.
Responding only to the stated need may shortchange the customer. For example, if a customer enters a hardware store and asks for a sealant to seal glass windowpanes, she is stating a solution, not a need. If the salesperson suggests that tape would
provide a better solution, the customer may appreciate that the salesperson met her
need and not her stated solution.
A distinction needs to be drawn between responsive marketing, anticipative marketing,and creative marketing. A responsive marketer ﬁnds a stated need and ﬁlls it, while ananticipative marketer looks ahead to the needs that customers may have in the near
future. In contrast, a creative marketer discovers and produces solutions that customers
did not ask for, but to which they enthusiastically respond. Sony exempliﬁes a creative
marketer because it has introduced many successful new products that customers neverasked for or even thought were possible: Walkmans, VCRs, and so on. Sony goes beyond
customer-led marketing: It is a market-driving ﬁrm, not just a market-driven ﬁrm. Akio
Morita, its founder, proclaimed that he doesn’t serve markets; he creates markets.20

Company Orientations Toward the Marketplace

Why is it supremely important to satisfy the needs of target customers? Because acompany’s sales come from two groups: new customers and repeat customers. One
estimate is that attracting a new customer can cost ﬁve times as much as pleasing an
existing one.21 And it might cost 16 times as much to bring the new customer to thesame level of proﬁtability as that of the lost customer. Customer retention is thus more
important than customer attraction.
Integrated Marketing
When all of the company’s departments work together to serve the customers’ interests, the result is integrated marketing. Integrated marketing takes place on two levels.
First, the various marketing functions—sales force, advertising, customer service,product management, marketing research—must work together. All of these functions must be coordinated from the customer’s point of view.
Second, marketing must be embraced by the other departments. According toDavid Packard of Hewlett-Packard: “Marketing is far too important to be left only tothe marketing department!” Marketing is not a department so much as a companywide orientation. Xerox, for example, goes so far as to include in every job description
an explanation of how each job affects the customer. Xerox factory managers knowthat visits to the factory can help sell a potential customer if the factory is clean andefficient. Xerox accountants know that customer attitudes are affected by Xerox’s
billing accuracy.
To foster teamwork among all departments, the company must carry out internalmarketing as well as external marketing. External marketing is marketing directed atpeople outside the company. Internal marketing is the task of hiring, training, and motivating able employees who want to serve customers well. In fact, internal marketingmust precede external marketing. It makes no sense to promise excellent service
before the company’s staff is ready to provide it.
Managers who believe the customer is the company’s only true “proﬁt center”
consider the traditional organization chart—a pyramid with the CEO at the top, management in the middle, and front-line people and customers at the bottom—obsolete.
Master marketing companies invert the chart, putting customers at the top. Next inimportance are the front-line people who meet, serve, and satisfy the customers;
under them are the middle managers, who support the front-line people so they canserve the customers; and at the base is top management, whose job is to hire and support good middle managers.
Proﬁtability
The ultimate purpose of the marketing concept is to help organizations achieve theirobjectives. In the case of private ﬁrms, the major objective is proﬁt; in the case of nonproﬁt and public organizations, it is surviving and attracting enough funds to perform
useful work. Private ﬁrms should aim to achieve proﬁts as a consequence of creatingsuperior customer value, by satisfying customer needs better than competitors. For
example, Perdue Farms has achieved above-average margins marketing chicken—acommodity if there ever was one! The company has always aimed to control breeding
and other factors in order to produce tender-tasting chickens for which discriminating
customers will pay more.22
How many companies actually practice the marketing concept? Unfortunately,
too few. Only a handful of companies stand out as master marketers: Procter &Gamble, Disney, Nordstrom, Wal-Mart, Milliken & Company, McDonald’s, Marriott
Hotels, American Airlines, and several Japanese (Sony, Toyota, Canon) and European
companies (IKEA, Club Med, Nokia, ABB, Marks & Spencer). These companies focus
on the customer and are organized to respond effectively to changing customer

13

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY

needs. They all have well-staffed marketing departments, and all of their other departments—manufacturing, ﬁnance, research and development, personnel, purchasing—
accept the customer as king.
Most companies do not embrace the marketing concept until driven to it by circumstances. Various developments prod them to take the marketing concept to heart,
including sales declines, slow growth, changing buying patterns, more competition,and higher expenses. Despite the beneﬁts, ﬁrms face three hurdles in converting to amarketing orientation: organized resistance, slow learning, and fast forgetting.
Some company departments (often manufacturing, ﬁnance, and research anddevelopment) believe a stronger marketing function threatens their power in the organization. Resistance is especially strong in industries in which marketing is being introduced
for the ﬁrst time—for instance, in law ofﬁces, colleges, deregulated industries, and government agencies. In spite of the resistance, many companies manage to introduce somemarketing thinking into their organization. Over time, marketing emerges as the major
function. Ultimately, the customer becomes the controlling function, and with that view,
marketing can emerge as the integrative function within the organization.

The Societal Marketing Concept
Some have questioned whether the marketing concept is an appropriate philosophy
in an age of environmental deterioration, resource shortages, explosive population
growth, world hunger and poverty, and neglected social services. Are companies thatsuccessfully satisfy consumer wants necessarily acting in the best, long-run interests ofconsumers and society? The marketing concept sidesteps the potential conflicts
among consumer wants, consumer interests, and long-run societal welfare.
Yet some ﬁrms and industries are criticized for satisfying consumer wants at society’s expense. Such situations call for a new term that enlarges the marketing concept.
We propose calling it the societal marketing concept, which holds that the organization’s task is to determine the needs, wants, and interests of target markets and todeliver the desired satisfactions more effectively and efﬁciently than competitors in a
way that preserves or enhances the consumer’s and the society’s well-being.
The societal marketing concept calls upon marketers to build social and ethicalconsiderations into their marketing practices. They must balance and juggle the often
conﬂicting criteria of company proﬁts, consumer want satisfaction, and public interest. Yet a number of companies have achieved notable sales and proﬁt gains by adopting and practicing the societal marketing concept.
Some companies practice a form of the societal marketing concept called causerelated marketing. Pringle and Thompson deﬁne this as “activity by which a company
with an image, product, or service to market builds a relationship or partnership witha ‘cause,’ or a number of ‘causes,’ for mutual beneﬁt.”23 They see it as affording an
opportunity for companies to enhance their corporate reputation, raise brand awareness, increase customer loyalty, build sales, and increase press coverage. They believethat customers will increasingly look for demonstrations of good corporate citizenship. Smart companies will respond by adding “higher order” image attributes thansimply rational and emotional beneﬁts. Critics, however, complain that cause-related
marketing might make consumers feel they have fulﬁlled their philanthropic duties bybuying products instead of donating to causes directly.

HOW BUSINESS AND MARKETING ARE CHANGING
We can say with some confidence that “the marketplace isn’t what it used to be.” It ischanging radically as a result of major forces such as technological advances, globalization, and deregulation. These forces have created new behaviors and challenges:

How Business and Marketing are Changing

Customers increasingly expect higher quality and service and some customization.
They perceive fewer real product differences and show less brand loyalty. They canobtain extensive product information from the Internet and other sources, permitting
them to shop more intelligently. They are showing greater price sensitivity in theirsearch for value.
Brand manufacturers are facing intense competition from domestic and foreign
brands, which is resulting in rising promotion costs and shrinking profit margins.
They are being further buffeted by powerful retailers who command limited shelf
space and are putting out their own store brands in competition with national brands.
Store-based retailers are suffering from an oversaturation of retailing. Small retailers are succumbing to the growing power of giant retailers and “category killers.”
Store-based retailers are facing growing competition from direct-mail firms; newspaper, magazine, and TV direct-to-customer ads; home shopping TV; and the Internet.
As a result, they are experiencing shrinking margins. In response, entrepreneurial
retailers are building entertainment into stores with coffee bars, lectures, demonstrations, and performances, marketing an “experience” rather than a productassortment.

Company Responses and Adjustments
Given these changes, companies are doing a lot of soul-searching, and many highly
respected ﬁrms are adjusting in a number of ways. Here are some current trends:➤

Reengineering: From focusing on functional departments to reorganizing by key
processes, each managed by multidiscipline teams.

➤

Outsourcing: From making everything inside the company to buying more products
from outside if they can be obtained cheaper and better. Virtual companies outsource
everything, so they own very few assets and, therefore, earn extraordinary rates ofreturn.

➤E-commerce: From attracting customers to stores and having salespeople call onofﬁces to making virtually all products available on the Internet. Business-tobusiness purchasing is growing fast on the Internet, and personal selling canincreasingly be conducted electronically.

➤

Benchmarking: From relying on self-improvement to studying world-class performers
and adopting best practices.

➤

Alliances: From trying to win alone to forming networks of partner ﬁrms.24➤

Partner–suppliers: From using many suppliers to using fewer but more reliablesuppliers who work closely in a “partnership” relationship with the company.

➤

Market-centered: From organizing by products to organizing by market segment.

➤

Global and local: From being local to being both global and local.

➤

Decentralized: From being managed from the top to encouraging more initiative and“intrepreneurship” at the local level.

Marketer Responses and Adjustments
As the environment changes and companies adjust, marketers also are rethinking
their philosophies, concepts, and tools. Here are the major marketing themes at thestart of the new millennium:➤

Relationship marketing: From focusing on transactions to building long-term,
proﬁtable customer relationships. Companies focus on their most proﬁtablecustomers, products, and channels.

15

16

CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY➤

Customer lifetime value: From making a proﬁt on each sale to making proﬁts bymanaging customer lifetime value. Some companies offer to deliver a constantly
needed product on a regular basis at a lower price per unit because they will enjoy
the customer’s business for a longer period.

➤

Customer share: From a focus on gaining market share to a focus on building customer
share. Companies build customer share by offering a larger variety of goods to their
existing customers and by training employees in cross-selling and up-selling.

➤

Target marketing: From selling to everyone to trying to be the best ﬁrm serving welldeﬁned target markets. Target marketing is being facilitated by the proliferation of
special-interest magazines, TV channels, and Internet newsgroups.

➤

Individualization: From selling the same offer in the same way to everyone in thetarget market to individualizing and customizing messages and offerings.

➤

Customer database: From collecting sales data to building a data warehouse of
information about individual customers’ purchases, preferences, demographics,
and proﬁtability. Companies can “data-mine” their proprietary databases to detect
different customer need clusters and make differentiated offerings to each cluster.

➤Integrated marketing communications: From reliance on one communication tool suchas advertising to blending several tools to deliver a consistent brand image tocustomers at every brand contact.

➤

Channels as partners: From thinking of intermediaries as customers to treating themas partners in delivering value to ﬁnal customers.

➤

Every employee a marketer: From thinking that marketing is done only by marketing,sales, and customer support personnel to recognizing that every employee must be
customer-focused.

➤

Model-based decision making: From making decisions on intuition or slim data tobasing decisions on models and facts on how the marketplace works.

These major themes will be examined throughout this book to help marketers and companies sail safely through the rough, but promising, waters ahead. Successful companies
will change their marketing as fast as their marketplaces and marketspaces change, sothey can build customer satisfaction, value, and retention, the subject of Chapter 2.

EXECUTIVE SUMMARY
All marketers need to be aware of the effect of globalization, technology, and deregulation. Rather than try to satisfy everyone, marketers start with market segmentation and develop a market offering that is positioned in the minds of the target market. To satisfy the target market’s needs, wants, and demands, marketers create a
product, one of the 10 types of entities (goods, services, experiences, events, persons, places, properties, organizations, information, and ideas). Marketers mustsearch hard for the core need they are trying to satisfy, remembering that their products will be successful only if they deliver value (the ratio of benefits and costs) tocustomers.
Every marketing exchange requires at least two parties—both with somethingvalued by the other party, both capable of communication and delivery, both free toaccept or reject the offer, and both ﬁnding it appropriate or desirable to deal with theother. One agreement to exchange constitutes a transaction, part of the larger idea ofrelationship marketing. Through relationship marketing, organizations aim to build
enduring, mutually satisfying bonds with customers and other key parties to earn andretain their long-term business. Reaching out to a target market entails communica-

Notestion channels, distribution channels, and selling channels. The supply chain, which
stretches from raw materials to the ﬁnal products for ﬁnal buyers, represents a value
delivery system. Marketers can capture more of the supply chain value by acquiring
competitors or expanding upstream or downstream.
In the marketing environment, marketers face brand, industry, form, andgeneric competition. The marketing environment can be divided into the task environment (the immediate actors in producing, distributing, and promoting the product offering) and the broad environment (forces in the demographic, economic, natural, technological, political-legal, and social-cultural environment). To succeed,
marketers must pay close attention to the trends and developments in these environments and make timely adjustments to their marketing strategies. Within these environments, marketers apply the marketing mix—the set of marketing tools used to pursue marketing objectives in the target market. The marketing mix consists of the fourPs: product, price, place, and promotion.
Companies can adopt one of ﬁve orientations toward the marketplace. The production concept assumes that consumers want widely available, affordable products;
the product concept assumes that consumers want products with the most quality, performance, or innovative features; the selling concept assumes that customers will not
buy enough products without an aggressive selling and promotion effort; the marketing concept assumes the ﬁrm must be better than competitors in creating, delivering,and communicating customer value to its chosen target markets; and the societal marketing concept assumes that the ﬁrm must satisfy customers more effectively and efﬁciently than competitors while still preserving the consumer’s and the society’s wellbeing. Keeping this concept in mind, smart companies will add “higher order” image
attributes to supplement both rational and emotional beneﬁts.
The combination of technology, globalization, and deregulation is inﬂuencing
customers, brand manufacturers, and store-based retailers in a variety of ways.
Responding to the changes and new demands brought on by these forces has caused
many companies to make adjustments. In turn, savvy marketers must also alter theirmarketing activities, tools, and approaches to keep pace with the changes they will face
today and tomorrow.

NOTES
1. Sam Hill and Glenn Rifkin, Radical Marketing (New York: HarperBusiness, 1999).
2. “Boston Beer Reports Barrelage Down, But Net Sales Stable,” Modern Brewery Age, March 1,
1999, accessed on www.hoovers.com.
3. Jay Conrad Levinson and Seth Grodin, The Guerrilla Marketing Handbook (Boston:
Houghton Mifﬂin, 1994).
4. See Irving J. Rein, Philip Kotler, and Martin Stoller, High Visibility (Chicago: NTC
Publishers, 1998).
5. See Philip Kotler, Irving J. Rein, and Donald Haider, Marketing Places: Attracting Investment,
Industry, and Tourism to Cities, States, and Nations (New York: Free Press, 1993).
6. See Carl Shapiro and Hal R. Varian, “Versioning: The Smart Way to Sell Information,”
Harvard Business Review, November–December 1998, pp. 106–14.
7. Peter Drucker, Management: Tasks, Responsibilities, Practices (New York: Harper & Row,
1973), pp. 64–65.
8. Dictionary of Marketing Terms, 2d ed., ed. Peter D. Bennett (Chicago: American Marketing
Association, 1995).
9. From a lecture by Mohan Sawhney, faculty member at Kellogg Graduate School ofManagement, Northwestern University, June 4, 1998.

17

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CHAPTER 1 MARKETING IN THE TWENTY-FIRST CENTURY
10. See Regis McKenna, Relationship Marketing (Reading, MA: Addison-Wesley, 1991); Martin
Christopher, Adrian Payne, and David Ballantyne, Relationship Marketing: Bringing Quality,
Customer Service, and Marketing Together (Oxford, UK: Butterworth-Heinemann, 1991); andJagdish N. Sheth and Atul Parvatiyar, eds., Relationship Marketing: Theory, Methods, andApplications, 1994 Research Conference Proceedings, Center for Relationship Marketing,Roberto C. Goizueta Business School, Emory University, Atlanta, GA.
11. See James C. Anderson, Hakan Hakansson, and Jan Johanson, “Dyadic Business Relationships
Within a Business Network Context,” Journal of Marketing, October 15, 1994, pp. 1–15.
12. See Neil H. Borden, The Concept of the Marketing Mix, Journal of Advertising Research,
4 ( June): 2–7. For another framework, see George S. Day, “The Capabilities of MarketDriven Organizations,” Journal of Marketing, 58, no. 4 (October 1994): 37–52.
13. E. Jerome McCarthy, Basic Marketing: A Managerial Approach, 13th ed. (Homewood, IL:
Irwin, 1999). Two alternative classiﬁcations are worth noting. Frey proposed that all
marketing decision variables could be categorized into two factors: the offering (product,
packaging, brand, price, and service) and methods and tools (distribution channels,
personal selling, advertising, sales promotion, and publicity).
14. Robert Lauterborn, “New Marketing Litany: 4Ps Passe; C-Words Take Over,” AdvertisingAge, October 1, 1990, p. 26. Also see Frederick E. Webster Jr., “Deﬁning the New Marketing
Concept,” Marketing Management 2, no. 4 (1994), 22–31; and Frederick E. Webster Jr.,
“Executing the New Marketing Concept,” Marketing Management 3, no. 1 (1994): 8–16. See
also Ajay Menon and Anil Menon, “Enviropreneurial Marketing Strategy: The Emergenceof Corporate Environmentalism as Marketing Strategy,” Journal of Marketing 61, no. 1( January 1997): 51–67.
15. Kathleen Dechant and Barbara Altman, “Environmental Leadership: From Compliance toCompetitive Advantage,” Academy of Management Executive 8, no. 3 (1994): 7–19. Also see
Gregory R. Elliott, “The Marketing Concept: Necessary, but Sufﬁcient? An Environmental
View,” European Journal of Marketing 24, no. 8 (1990): 20–30.
16. See Theodore Levitt’s classic article, “Marketing Myopia,” Harvard Business Review,
July–August 1960, pp. 45–56.
17. See Karl Albrecht and Ron Zemke, Service America! (Homewood, IL: Dow Jones-Irwin,1985), pp. 6–7.
18. See John B. McKitterick, “What Is the Marketing Management Concept?” The Frontiers ofMarketing Thought and Action (Chicago: American Marketing Association, 1957), pp. 71–82;
Fred J. Borch, The Marketing Philosophy as a Way of Business Life, The Marketing Concept: Its
Meaning to Management, Marketing series, no. 99 (New York: American Management
Association, 1957), pp. 3–5; and Robert J. Keith, “The Marketing Revolution,” Journal ofMarketing, January 1960, pp. 35–38.
19. Levitt, “Marketing Myopia,” p. 50.
20. Akio Morita, Made in Japan (New York: Dutton, 1986), ch. 1.
21. See Patricia Sellers, “Getting Customers to Love You,” Fortune, March 13, 1989, pp. 38–49.
22. Suzanne L. MacLachlan, “Son Now Beats Perdue Drumstick,” Christian Science Monitor,
March 9, 1995, p. 9; Sharon Nelton, “Crowing over Leadership Succession,” Nation’s
Business, May 1995, p. 52.
23. See Hanish Pringle and Marjorie Thompson, Brand Soul: How Cause-Related Marketing
Builds Brands (New York: John Wiley & Sons, 1999). Also see Marilyn Collins, “Global
Corporate Philanthropy—Marketing Beyond the Call of Duty?” European Journal ofMarketing 27, no. 2 (1993): 46–58.
24. See Leonard L. Berry, Discovering the Soul of Service (New York: Free Press, 1999), especially ch. 7.

Winning Markets
Through Strategic
Planning,
Implementation,
and Control
We will address the following questions:■ How is strategic planning carried out at the corporate, division, and business-unit levels?
■ What are the major steps in planning the marketing process?
■ How can a company effectively manage the marketing process?

H

ow do companies compete in a global marketplace? One part of the answer is acommitment to creating and retaining satisﬁed customers. We can now add a second part: Successful companies know how to adapt to a continuously changing marketplace through strategic planning and careful management of the marketing
process.
In most large companies, corporate headquarters is responsible for designing a
corporate strategic plan to guide the whole enterprise and deciding about resource
allocations as well as starting and eliminating particular businesses. Guided by the corporate strategic plan, each division establishes a division plan for each business unit
within the division; in turn, each business unit develops a business unit strategic plan.
Finally, the managers of each product line and brand within a business unit develop amarketing plan for achieving their objectives.
However, the development of a marketing plan is not the end of the marketing
process. High-performance firms must hone their expertise in organizing, implementing, and controlling marketing activities as they follow marketing results closely,
diagnose problems, and take corrective action when necessary. In today’s fast-paced
business world, the ability to effectively manage the marketing process—beginning toend—has become an extremely important competitive advantage.

39

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROLCORPORATE AND DIVISION STRATEGIC PLANNING
Marketing plays a critical role in corporate strategic planning within successful companies. Market-oriented strategic planning is the managerial process of developing
and maintaining a viable ﬁt among the organization’s objectives, skills, and resources
and its changing market opportunities. The aim of strategic planning is to shape thecompany’s businesses and products so that they yield target profits and growth andkeep the company healthy despite any unexpected threats that may arise.
Strategic planning calls for action in three key areas. The ﬁrst area is managing acompany’s businesses as an investment portfolio. The second area involves assessing
each business’s strength by considering the market’s growth rate and the company’s
position and fit in that market. And the third area is the development of strategy, agame plan for achieving long-term objectives. The complete strategic planning, implementation, and control cycle is shown in Figure 1-4.
Corporate headquarters starts the strategic planning process by preparing statements of mission, policy, strategy, and goals, establishing the framework within which thedivisions and business units will prepare their plans. Some corporations allow their business units a great deal of freedom in setting 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 get involved heavily in the individual business unit strategies.1 Regardlessof the degree of involvement, all strategic plans are based on the corporate mission.

Deﬁning the Corporate Mission
An organization exists to accomplish something: to make cars, lend money, provide anight’s lodging, and so on. Its speciﬁc mission or purpose is usually clear when the business starts. Over time, however, the mission may lose its relevance because of changed market conditions or may become unclear as the corporation adds new products and markets.
When management senses that the organization is drifting from its mission, it
must renew its search for purpose. According to Peter Drucker, it is time to ask somefundamental questions.2 What is our business? Who is the customer? What is of value to thecustomer? What will our business be? What should our business be? Successful companies
continuously raise these questions and answer them thoughtfully and thoroughly.

Figure 1-4 The Strategic Planning, Implementation, and Control Process
Planning

Implementing

Controlling

Corporate planning

Organizing

Measuring results

Division planning

Implementing
Diagnosing results

Business planning
Product planning

Taking corrective
actionCorporate and Division Strategic Planning

A well-worked-out mission statement provides employees with a shared sense of
purpose, direction, and opportunity. It also guides geographically dispersed employees to work independently and yet collectively toward realizing the organization’s
goals. The mission statement of Motorola, for example, is “to honorably serve theneeds of the community by providing products and services of superior quality at a fair
price to our customers; to do this so as to earn an adequate proﬁt which is required forthe total enterprise to grow; and by so doing provide the opportunity for our employees and shareholders to achieve their reasonable personal objectives.”
Good mission statements focus on a limited number of goals, stress the company’s major policies and values, and define the company’s major competitive scopes.
These include:➤

Industry scope: The industry or range of industries in which a company will operate.
For example, DuPont operates in the industrial market; Dow operates in theindustrial and consumer markets; and 3M will go into almost any industry where it
can make money.

➤

Products and applications scope: The range of products and applications that acompany will supply. St. Jude Medical aims to “serve physicians worldwide with highquality products for cardiovascular care.”➤Competence scope: The range of technological and other core competencies that acompany will master and leverage. Japan’s NEC has built its core competencies incomputing, communications, and components to support production of laptop
computers, televisions, and other electronics items.

➤

Market-segment scope: The type of market or customers a company will serve. For
example, Porsche makes only expensive cars for the upscale market and licenses its
name for high-quality accessories.

➤

Vertical scope: The number of channel levels from raw material to ﬁnal product anddistribution in which a company will participate. At one extreme are companies
with a large vertical scope; at the other extreme are ﬁrms with low or no vertical
integration that may outsource design, manufacture, marketing, and physicaldistribution.3➤

Geographical scope: The range of regions or countries in which a company will
operate. At one extreme are companies that operate in a speciﬁc city or state. At theother extreme are multinationals such as Unilever and Caterpillar, which operate inalmost every one of the world’s countries.

A company must redefine its mission if that mission has lost credibility or nolonger deﬁnes an optimal course for the company.4 Kodak redeﬁned itself from a ﬁlm
company to an image company so that it could add digital imaging;5 Sara Lee redeﬁned itself by outsourcing manufacturing and becoming a marketer of brands. The
corporate mission provides direction for the ﬁrm’s various business units.

Establishing Strategic Business Units
A business can be deﬁned in terms of three dimensions: customer groups, customer needs,
and technology.6 For example, a company that deﬁnes its business as designing incandescent lighting systems for television studios would have television studios as its customer group; lighting as its customer need; and incandescent lighting as its technology.
In line with Levitt’s argument that market definitions of a business are superior
to product definitions,7 these three dimensions describe the business in terms of acustomer-satisfying process, not a goods-producing process. Thus, Xerox’s product

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL

definition would be “We make copying equipment,” while its market definition
would be “We help improve office productivity.” Similarly, Missouri-Pacific Railroad’s
product definition would be “We run a railroad,” while its market definition would
be “We are a people-and-goods mover.”Large companies normally manage quite different businesses, each requiring
its own strategy; General Electric, as one example, has established 49 strategic business units (SBUs). An SBU has three characteristics: (1) It is a single business or collection of related businesses that can be planned separately from the rest of thecompany; (2) it has its own set of competitors; and (3) it has a manager responsible
for strategic planning and profit performance who controls most of the factors
affecting profit.

Assigning Resources to SBUs
The purpose of identifying the company’s strategic business units is to develop separate strategies and assign appropriate funding to the entire business portfolio. Senior
managers generally apply analytical tools to classify all of their SBUs according to
proﬁt potential. Two of the best-known business portfolio evaluation models are the
Boston Consulting Group model and the General Electric model.8
The Boston Consulting Group Approach
The Boston Consulting Group (BCG), a leading management consulting ﬁrm, developed and popularized the growth-share matrix shown in Figure 1-5. The eight circles
represent the current sizes and positions of eight business units in a hypothetical company. The dollar-volume size of each business is proportional to the circle’s area. Thus,
the two largest businesses are 5 and 6. The location of each business unit indicates its
market growth rate and relative market share.
The market growth rate on the vertical axis indicates the annual growth rate of themarket in which the business operates. Relative market share, which is measured on thehorizontal axis, refers to the SBU’s market share relative to that of its largest competitor in the segment. It serves as a measure of the company’s strength in the relevantmarket segment. The growth-share matrix is divided into four cells, each indicating a
different type of business:➤

Question marks are businesses that operate in high-growth markets but have low
relative market shares. Most businesses start off as question marks as the company
tries to enter a high-growth market in which there is already a market leader. A
question mark requires a lot of cash because the company is spending money onplant, equipment, and personnel. The term question mark is appropriate because thecompany has to think hard about whether to keep pouring money into this business.

➤

Stars are market leaders in a high-growth market. A star was once a question mark,but it does not necessarily produce positive cash ﬂow; the company must still spend
to keep up with the high market growth and ﬁght off competition.

➤

Cash cows are former stars with the largest relative market share in a slow-growthmarket. A cash cow produces a lot of cash for the company (due to economies ofscale and higher proﬁt margins), paying the company’s bills and supporting its
other businesses.

➤

Dogs are businesses with weak market shares in low-growth markets; typically, thesegenerate low proﬁts or even losses.

After plotting its various businesses in the growth-share matrix, a company must
determine whether the portfolio is healthy. An unbalanced portfolio would have too manyCorporate and Division Strategic Planning

Stars

Question Marks

20%
4

18%

1

Market Growth Rate

16%

3

14%

2

12%

5

10%

Dogs

Cash Cow

8%
6%
6

4%

7

2%

8
0.1x

0.2x

0.5x
0.4x
0.3x

1x

2x
1.5x

4x

10x

0
Relative Market Share

Figure 1-5 The Boston Consulting Group’s Growth-Share Matrix
dogs or question marks or too few stars and cash cows. The next task is to determine what
objective, strategy, and budget to assign to each SBU. Four strategies can be pursued:
1.

Build: The objective here is to increase market share, even forgoing short-term earnings to achieve this objective if necessary. Building is appropriate for question marks
whose market shares must grow if they are to become stars.

2.

Hold: The objective in a hold strategy is to preserve market share, an appropriate strategy for strong cash cows if they are to continue yielding a large positive cash ﬂow.

3. Harvest: The objective here is to increase short-term cash ﬂow regardless of long-term
effect. Harvesting involves a decision to withdraw from a business by implementing a
program of continuous cost retrenchment. The hope is to reduce costs faster thanany potential drop in sales, thus boosting cash ﬂow. This strategy is appropriate forweak cash cows whose future is dim and from which more cash flow is needed.
Harvesting can also be used with question marks and dogs.
4.

Divest: The objective is to sell or liquidate the business because the resources can bebetter used elsewhere. This is appropriate for dogs and question marks that are dragging down company proﬁts.

Successful SBUs move through a life cycle, starting as question marks and becoming stars, then cash cows, and ﬁnally dogs. Given this life-cycle movement, companies
should be aware not only of their SBUs’ current positions in the growth-share matrix(as in a snapshot), but also of their moving positions (as in a motion picture). If an
SBU’s expected future trajectory is not satisfactory, the corporation will need to workout a new strategy to improve the likely trajectory.

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROLThe General Electric Model
An SBU’s appropriate objective cannot be determined solely by its position in thegrowth-share matrix. If additional factors are considered, the growth-share matrix canbe seen as a special case of a multifactor portfolio matrix that General Electric (GE)pioneered. In this model, each business is rated in terms of two major dimensions—market attractiveness and business strength. These two factors make excellent marketing
sense for rating a business. Companies are successful to the extent that they enterattractive markets and possess the required business strengths to succeed in those markets. If one of these factors is missing, the business will not produce outstanding
results. Neither a strong company operating in an unattractive market nor a weakcompany operating in an attractive market will do well.
Using these two dimensions, the GE matrix is divided into nine cells, as shown in
Figure 1-6. The three cells in the upper-left corner indicate strong SBUs suitable forinvestment or growth. The diagonal cells stretching from the lower left to the upper
right indicate SBUs of medium attractiveness; these should be pursued selectively andmanaged for earnings. The three cells in the lower-right corner indicate SBUs low inoverall attractiveness, which the company may want to harvest or divest.9
In addition to identifying each SBU’s current position on the matrix, management should also forecast its expected position over the next 3 to 5 years. Making thisdetermination involves analyzing product life cycle, expected competitor strategies,

Figure 1-6 Market-Attractiveness Portfolio Strategies(a) Classification(b) Strategies

BUSINESS STRENGTH

BUSINESS STRENGTH

Strong5.00

MediumWeak

High

JointsHydraulicpumps
MARKET ATTRACTIVENESS
MediumStrongAerospacefittings

3.67

BUILD SELECTIVELY

Clutches

LIMITED EXPANSION OR
HARVEST• Look for ways to expand
without high risk;otherwise, minimize
investment and rationalize
operations

MANAGE FOR EARNINGS• Protect position in mostearnings
profitable segments• Concentrate on attractive • Upgrade product line
• Minimize investment
segments• Defend strengths

DIVEST• Sell at time that will
maximize cash value• Cut fixed costs and avoid
investment meanwhile

attractive segments• Build up ability tocounter competition• Emphasize profitability

2.33

by raising productivity

Low

Reliefvalves1.00
3.67
Invest/grow

2.33
Selectivity/earnings

Weak

SELECTIVITY/MANAGE
FOR EARNINGS• Protect existing program• Concentrate investments
in segments where
profitability is good andrisks are relatively low• Invest heavily in most

Fuel
pumps
Flexible
diaphragms

5.00

MediumPROTECT POSITIONINVEST TO BUILD
BUILD SELECTIVELY• Challenge for leadership • Specialize around• Invest to grow at
maximum digestible rate • Build selectively on
limited strengths• Concentrate effort on• Seek ways to overcome
strengths• Reinforce vulnerable areas weaknesses
maintaining strength• Withdraw if indications ofsustainable growth
are lacking

1.00
Harvest/divest

PROTECT AND REFOCUS• Manage for current

Corporate and Division Strategic Planning

new technologies, economic events, and so on. Again, the purpose is to see where
SBUs are as well as where they appear to be headed.
Critique of Portfolio Models
Both the BCG and GE portfolio models have a number of benefits. They can help
managers think more strategically, better understand the economics of their SBUs,
improve the quality of their plans, improve communication between SBU and corporate management, identify important issues, eliminate weaker SBUs, and strengthen
their investment in more promising SBUs.
However, portfolio models must be used cautiously. They may lead a firm tooveremphasize market-share growth and entry into high-growth businesses or toneglect its current businesses. Also, the models’ results are sensitive to ratings andweights and can be manipulated to produce a desired location in the matrix. Finally,
the models fail to delineate the synergies between two or more businesses, whichmeans that making decisions for one business at a time might be risky. There is a danger of terminating a losing SBU that actually provides an essential core competence
needed by several other business units. Overall, though, portfolio models have
improved managers’ analytical and strategic capabilities and allowed them to makebetter decisions than they could with mere impressions.10

Planning New Businesses, Downsizing Older Businesses
Corporate management often desires higher sales and proﬁts than indicated by the
projections for the SBU portfolio. The question then becomes how to grow much
faster than the current businesses will permit. One option is to identify opportunities
to achieve further growth within the company’s current businesses (intensive growth
opportunities). A second option is to identify opportunities to build or acquire businesses that are related to the company’s current businesses (integrative growth opportunities). A third option is to identify opportunities to add attractive businesses that are
unrelated to the company’s current businesses (diversiﬁcation growth opportunities).
➤

Intensive growth. Ansoff has proposed the product–market expansion grid as a frameworkfor detecting new intensive growth opportunities.11 In this grid, the company ﬁrst
considers whether it could gain more market share with its current products incurrent markets (market-penetration strategy) by encouraging current customers to buy
more, attracting competitors’ customers, or convincing nonusers to start buying its
products. Next it considers whether it can ﬁnd or develop new markets for its current
products (market-development strategy). Then it considers whether it can develop new
products for its current markets (product-development strategy). Later it will also review
opportunities to develop new products for new markets (diversiﬁcation strategy).

➤

Integrative growth. Often a business’s sales and proﬁts can be increased throughbackward integration (acquiring a supplier), forward integration (acquiring a
distributor), or horizontal integration (acquiring a competitor).

➤

Diversiﬁcation growth. This makes sense when good opportunities exist outside thepresent businesses. Three types of diversiﬁcation are possible. The company could
seek new products that have technological or marketing synergies with existingproduct lines, even though the new products themselves may appeal to a different
group of customers (concentric diversiﬁcation strategy). Second, the company mightsearch for new products that appeal to its current customers but are technologicallyunrelated to the current product line (horizontal diversiﬁcation strategy). Finally, thecompany might seek new businesses that have no relationship to the company’s
current technology, products, or markets (conglomerate diversiﬁcation strategy).

45

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROLOf course, companies must not only develop new businesses, but also prune, harvest, or divest tired, old businesses in order to release needed resources and reduce
costs. Weak businesses require a disproportionate amount of managerial attention;
managers should therefore focus on growth opportunities rather than wasting energy
and resources trying to save hemorrhaging businesses.

BUSINESS STRATEGIC PLANNING
Below the corporate level, the strategic-planning process for each business or SBU
consists of the eight steps shown in Figure 1-7. We examine each step in the sections
that follow.

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 “The company aims to target major television studios and become their vendor
of choice for lighting technologies that represent the most advanced and reliable studio lighting arrangements.”

SWOT Analysis
The overall evaluation of a business’s strengths, weaknesses, opportunities, and threatsis called SWOT analysis. SWOT analysis consists of an analysis of the external andinternal environments.
External Environment Analysis
In general, a business unit has to monitor key macroenvironment forces (demographiceconomic, technological, political-legal, and social-cultural) and microenvironment
actors (customers, competitors, distributors, and suppliers) that affect its ability to earn
proﬁts (see Chapter 4 for more detail). Then, for each trend or development, management needs to identify the associated marketing opportunities and threats.
A marketing opportunity is an area of buyer need in which a company can perform profitably. Opportunities can be classified according to their attractiveness andtheir success probability. The company’s success probability depends on whether its busi-

Figure 1-7 The Business Strategic-Planning Process
External
environment(opportunity &threat) analysis
Businessmission

SWOT analysis
Internal
environment(strengths/
weaknesses) analysis

Goalformulation

Strategy
formulation

Programformulation

Implementation

Feedback
andcontrolBusiness Strategic Planningness strengths not only match the key success requirements for operating in the target
market, but also exceed those of its competitors. Mere competence does not constitute a competitive advantage. The best-performing company will be the one that cangenerate the greatest customer value and sustain it over time.
An environmental threat is a challenge posed by an unfavorable external trend
or development that would lead, in the absence of defensive marketing action, to deterioration in sales or profit. Threats should be classified according to seriousness andprobability of occurrence. Minor threats can be ignored; somewhat more serious threats
must be carefully monitored; and major threats require the development of contingency plans that spell out changes the company can make if necessary.
Internal Environment Analysis
It is one thing to discern attractive opportunities and another to have the competencies
to succeed in these opportunities. Thus, each business needs to periodically evaluate its
internal strengths and weaknesses in marketing, ﬁnancial, manufacturing, and organizational competencies. Clearly, the business does not have to correct all of its weaknesses, nor should it gloat about all of its strengths. The big question is whether thebusiness should limit itself to those opportunities in which it possesses the required
strengths or consider better opportunities to acquire or develop certain strengths.
Sometimes a business does poorly because its departments do not work together
well as a team. It is therefore critically important to assess interdepartmental working
relationships as part of the internal environmental audit. Honeywell, for example, asks
each department to annually rate its own strengths and weaknesses and those of theother departments with which it interacts. The notion is that each department is a “supplier” to some departments and a “customer” of other departments. If one department
has weaknesses that hurt its “internal customers,” Honeywell wants to correct them.

Goal Formulation
Once the company has performed a SWOT analysis of the internal and external environments, it can proceed to develop speciﬁc goals for the planning period in a process
called goal formulation. Managers use the term goals to describe objectives that are specific with respect to magnitude and time. Turning objectives into measurable goals
facilitates management planning, implementation, and control.
To be effective, goals must (1) be arranged hierarchically to guide the businesses inmoving from broad to speciﬁc objectives for departments and individuals; (2) be statedquantitatively whenever possible; (3) be realistic; and (4) be consistent. Other important
trade-offs in setting goals include: balancing short-term proﬁt versus long-term growth;balancing deep penetration of existing markets with development of new markets; balancing proﬁt goals versus nonproﬁt goals; and balancing high growth versus low risk.
Each choice in this set of goal trade-offs calls for a different marketing strategy.

Strategy Formulation
Goals indicate what a business unit wants to achieve; strategy describes the game plan
for achieving those goals. Every business strategy consists of a marketing strategy plus
a compatible technology strategy and sourcing strategy. Although many types of marketing strategies are available, Michael Porter has condensed them into three generictypes that provide a good starting point for strategic thinking: overall cost leadership,differentiation, or focus.12➤

Overall cost leadership: Here the business works to achieve the lowest production anddistribution costs so that it can price lower than competitors and win more market

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL
share. Firms pursuing this strategy must be good at engineering, purchasing,
manufacturing, and physical distribution; they need less skill in marketing. Texas
Instruments uses this strategy. The problem is that rivals may emerge with still lower
costs, hurting a ﬁrm that has rested its whole future on cost leadership.
➤

Differentiation: Here the business concentrates on achieving superior performance inan important customer beneﬁt area, such as being the leader in service, quality,
style, or technology—but not leading in all of these things. Intel, for instance,
differentiates itself through leadership in technology, coming out with new
microprocessors at breakneck speed.

➤

Focus: Here the business focuses on one or more narrow market segments, getting
to know these segments intimately and pursuing either cost leadership or
differentiation within the target segment. Airwalk shoes, for instance, came to fameby focusing on the very narrow extreme-sports segment.

Firms that do not pursue a clear strategy—“middle-of-the-roaders”—do theworst. International Harvester fell upon hard times because it did not stand out as lowest in cost, highest in perceived value, or best in serving some market segment.
Middle-of-the-roaders try to be good on all strategic dimensions, but because strategic
dimensions require different and often inconsistent ways of organizing the ﬁrm, theseﬁrms end up being not particularly excellent at anything.
Strategy formulation in the age of the Internet is particularly challenging. The
chemical company Solutia, a Monsanto spinoff, copes by creating four different, possible short-term scenarios for each strategy. This allows the ﬁrm to act quickly when it seesa scenario unfolding. Sun Microsystems holds a weekly meeting with the ﬁrm’s top decision makers to brainstorm strategies for handling new threats. By revisiting strategicplans frequently, both companies are able to stay ahead of environmental changes.13

Program Formulation
Once the business unit has developed its principal strategies, it must work out detailed
supporting programs. Thus, if the business has decided to attain technological leadership, it must plan programs to strengthen its R&D department, gather technologicalintelligence, develop leading-edge products, train the technical sales force, anddevelop ads to communicate its technological leadership.
After these marketing programs have been tentatively formulated, the marketingpeople must estimate their costs. Questions arise: 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 (ABC) accounting should beapplied to each marketing program to determine whether it is likely to produce sufﬁcient results to justify the cost.14

Implementation
A clear strategy and well-thought-out supporting programs may be useless if the ﬁrm
fails to implement them carefully. Indeed, strategy is only one of seven elements,
according to McKinsey & Company, that the best-managed companies exhibit.15 In
the McKinsey 7-S framework for business success, strategy, structure, and systems are
considered the “hardware” of success, and style (how employees think and behave),skills (to carry out the strategy), staff (able people who are properly trained andassigned), and shared values (values that guide employees’ actions) are the “software.”
When these software elements are present, companies are usually more successful at
strategy implementation.16 Implementation is vital to effective management of themarketing process, as discussed later in this chapter.

The Marketing Process

Feedback and Control
As it implements its strategy, the ﬁrm needs to track the results and monitor new developments in the internal and external environments. Some environments are fairly stable from year to year. Other environments evolve slowly in a fairly predictable way. Stillother environments change rapidly in significant and unpredictable ways.
Nonetheless, the company can count on one thing: The marketplace will change. And
when it does, the company will need to review and revise its implementation, programs, strategies, or even objectives.
A company’s strategic ﬁt with the environment will inevitably erode because themarket environment changes faster than the company’s 7-Ss. Thus a company mightremain efﬁcient while it loses effectiveness. Peter Drucker pointed out that it is more
important to “do the right thing” (effectiveness) than “to do things right” (efﬁciency).
The most successful companies excel at both.
Once an organization fails to respond to a changed environment, it has difﬁculty
recapturing its lost position. This happened to the once-unassailable Motorola when it
was slow to respond to the new digital technology used by Nokia and others, and kept
rolling out analog phones.17 Similarly, Barnes & Noble did not immediately recognize
the threat posed by Amazon.com’s Internet-based book retailing model; then, as alatecomer to e-commerce, it had more of a struggle establishing itself. Clearly, the key
to organizational health is the firm’s willingness to examine the changing environment and to adopt appropriate new goals and behaviors. High-performance organizations continuously monitor the environment and use flexible strategic planning tomaintain a viable ﬁt with the evolving environment.

THE MARKETING PROCESS
Planning at the corporate, division, and business levels is an integral part of planningfor the marketing process. To understand that process fully, we must ﬁrst look at how
a company deﬁnes its business.
The task of any business is to deliver value to the market at a proﬁt. There are atleast two views of the value-delivery process.18 The traditional view is that the ﬁrm makes
something and then sells it (Figure 1-8). In this view, marketing takes place in the second half of the value-delivery process. The traditional view assumes that the company
knows what to make and that the market will buy enough units to produce proﬁts forthe company.
Companies that subscribe to this traditional view have the best chance of succeeding in economies marked by goods shortages in which consumers are not fussy
about quality, features, or style. But the traditional view of the business process will notwork in more competitive economies in which people face abundant choices. The“mass market” is actually splintering into numerous micromarkets, each with its own
wants, perceptions, preferences, and buying criteria. The smart competitor therefore
must design the offer for well-deﬁned target markets.

The Value-Delivery SequenceThis belief is at the core of the new view of business processes, which places marketingat the beginning of the planning process. Instead of emphasizing making and selling,
companies see themselves involved in a three-phase value creation and delivery
sequence (Figure 1-8).
The first phase, choosing the value, represents the strategic “homework” thatmarketing must do before any product exists. The marketing staff must segment themarket, select the appropriate market target, and develop the offer’s value position-

49

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL(a) Traditional physical process sequence
Make the Product
Designproduct

ProcureSell the Product
Make

Price

Advertise/promoteSell

Distribute

Service(b) Value creation and delivery sequence
Choose the Value
Customersegmentation

Marketselection/
focus

Provide the Value
Value
positioning

Product
development

Servicedevelopment

Communicate the Value
Sourcing Distributing

Pricing

MakingStrategic marketing

Servicing

Sales force

Sales
promotion

Advertising

Tactical marketing

Figure 1-8 Two Views of the Value-Delivery Process
ing. In the second phase, providing the value, marketers detail the product’s speciﬁcations and services, set a target price, then make and distribute the product.
Developing speciﬁc product features, prices, and distribution occurs at this stage andis part of tactical marketing. The task in the third phase is communicating the value.
Here, further tactical marketing occurs in utilizing the sales force, sales promotion,
advertising, and other promotional tools to inform the market about the product.
Thus, as Figure 1-8 shows, the marketing process actually begins before there is a product and continues while it is being developed and after it becomes available.

Steps in the Marketing Process
The marketing process consists of analyzing market opportunities, researching andselecting target markets, designing marketing strategies, planning marketing programs, and organizing, implementing, and controlling the marketing effort. The four
steps in the marketing process are:1.

Analyzing market opportunities. The marketer’s initial task is to identify potential longrun opportunities given the company’s market experience and core competencies.
To evaluate its various opportunities, assess buyer wants and needs, and gauge market
size, the ﬁrm needs a marketing research and information system. Next, the ﬁrm studies consumer markets or business markets to ﬁnd out about buying behavior, perceptions, wants, and needs. Smart ﬁrms also pay close attention to competitors and look
for major segments within each market that they can proﬁtably serve.

2.

Developing marketing strategies. In this step, the marketer prepares a positioning strategy
for each new and existing product’s progress through the life cycle, makes decisions
about product lines and branding, and designs and markets its services.

3.

Planning marketing programs. To transform marketing strategy into marketing programs, marketing managers must make basic decisions on marketing expenditures,
marketing mix, and marketing allocation. The ﬁrst decision is about the level of marketing expenditures needed to achieve the ﬁrm’s marketing objectives. The second

The Marketing Process

Demographic/
economic
environment

MarketingIntermediaries

Place
M ar

in
k e t y stsgc

em o ntrolTargetPricecustomers
Promotion

Publicsrg
tat a n iz a
io n ti o n
syste
m

Mark
etin
g
sys i
t
Suppliers

Product

Mark
etin
sys
t

ning
lan
gp m
e

ion
mat
fn or
em

Political/
legal
environment

Technological/
physicalenvironmentoti n g e n
M a r k e ple mand imCompetitors

Social/culturalenvironment

Figure 1-9 Factors Inﬂuencing Company Marketing Strategy
decision is how to divide the total marketing budget among the various tools in themarketing mix: product, price, place, and promotion.19 And the third decision is how toallocate the marketing budget to the various products, channels, promotion media,
and sales areas.
4.

Managing the marketing effort. In this step (discussed later in this chapter), marketersorganize the firm’s marketing resources to implement and control the marketingplan. Because of surprises and disappointments as marketing plans are implemented,
the company also needs feedback and control.

Figure 1-9 presents a grand summary of the marketing process and the factorsthat shape the company’s marketing strategy.

The Nature and Contents of a Marketing Plan
The marketing plan created for each product line or brand is one of the most important
outputs of planning for the marketing process. A typical marketing plan has eight sections:➤Executive summary and table of contents: This brief summary outlines the plan’s main
goals and recommendations; it is followed by a table of contents.

➤

Current marketing situation: This section presents relevant background data on sales,
costs, proﬁts, the market, competitors, distribution, and the macroenvironment,
drawn from a fact book maintained by the product manager.

➤

Opportunity and issue analysis: This section identiﬁes the major opportunities andthreats, strengths and weaknesses, and issues facing the product line or brand.

➤

Objectives: This section spells out the ﬁnancial and marketing objectives to be achieved.

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL➤

Marketing strategy: This section explains the broad marketing strategy that will be
implemented to accomplish the plan’s objectives.

➤

Action programs: This section outlines the broad marketing programs for achieving
the business objectives. Each marketing strategy element must be elaborated toanswer these questions: What will be done? When will it be done? Who will do it?
How much will it cost?

➤

Projected proﬁt-and-loss statement: Action plans allow the product manager to build a
supporting budget with forecasted sales volume (units and average price), costs(production, physical distribution, and marketing), and projected proﬁt. Onceapproved, the budget is the basis for developing plans and schedules for material
procurement, production scheduling, employee recruitment, and marketing
operations.

➤Controls: This last section outlines the controls for monitoring the plan. Typically,
the goals and budget are spelled out for each month or quarter so senior
management can review the results each period. Sometimes contingency plans forhandling speciﬁc adverse developments are included.

No two companies handle marketing planning and marketing plan content exactly
the same way. Most marketing plans cover one year and vary in length; some ﬁrms taketheir plans very seriously, while others use them as only a rough guide to action. The mostfrequently cited shortcomings of marketing plans, according to marketing executives, arelack of realism, insufﬁcient competitive analysis, and a short-run focus.

MANAGING THE MARKETING PROCESSIn addition to updating their marketing plans, companies often need to restructurebusiness and marketing practices in response to major environmental changes such as
globalization, deregulation, computer and telecommunications advances, and market
fragmentation. Against this dynamic backdrop, the role of marketing in the organization must change as well. Now that the enterprise is fully networked, every functional
area can interact directly with customers. This means that marketing no longer hassole ownership of customer interactions; rather, marketing needs to integrate all thecustomer-facing processes so that customers see a single face and hear a single voice
when they interact with the ﬁrm. To accomplish this requires careful structuring of themarketing organization.

Organization of the Marketing Department
Modern marketing departments take numerous forms. The marketing department
may be organized according to function, geographic area, products, or customer markets. Global organization is another consideration for ﬁrms that market goods or services in other countries.
Functional Organization
The most common form of marketing organization consists of functional specialists(such as the sales manager and marketing research manager) who report to a marketing vice president, who coordinates their activities. The main advantage of a functional marketing organization is its administrative simplicity. However, this form loses
effectiveness as products and markets increase. First, a functional organization often
leads to inadequate planning for speciﬁc products and markets because products thatare not favored by anyone are neglected. Second, each functional group competes

Managing The Marketing Processwith the other functions for budget and status. Therefore, the marketing vice president constantly has to weigh the claims of competing functional specialists and faces a
difﬁcult coordination problem.
Geographic Organization
A company selling in a national market often organizes its sales force (and sometimes
other functions, including marketing) along geographic lines. The national sales manager may supervise four regional sales managers, who each supervise six zone managers, who in turn supervise eight district sales managers, who supervise 10 sales people. Several companies are now adding area market specialists (regional or local
marketing managers) to support the sales efforts in high-volume, distinctive markets.
For example, McDonald’s now spends about 50 percent of its advertising budget
regionally, and Anheuser-Bush has subdivided its regional markets into ethnic anddemographic segments, with different ad campaigns for each.
Product- or Brand-Management Organization
Companies that produce a variety of products and brands often establish a product(or brand-) management organization as another layer of management within themarketing function. A product manager supervises product category managers, whoin turn supervise speciﬁc product and brand managers. A product-management organization makes sense if the ﬁrm’s products are quite different, or if the sheer numberof products is beyond the ability of a functional marketing organization to handle.
In both consumer and industrial markets, product and brand managers are
responsible for product planning and strategy; preparing annual marketing plans andsales forecasts; working with advertising and merchandising agencies to create programs and campaigns; stimulating support among sales reps and distributors; ongoing
research into product performance, customer and dealer attitudes, opportunities andthreats; and initiating product improvements to meet changing market needs.
The product-management organization allows the product manager to concentrate on developing a cost-effective marketing mix for each product, to react more
quickly to marketplace changes, and to watch over smaller brands. On the other hand,it can lead to conﬂict and frustration when product managers are not given enoughauthority to carry out their responsibilities effectively. In addition, product managers
become experts in their product but rarely achieve functional expertise. And appointing product managers and associate product managers for even minor products canbloat payroll costs. Finally, brand managers normally move up in a few years to anotherbrand or transfer to another company, leading to short-term thinking that plays havocwith long-term brand building.
To counter these disadvantages, some companies have switched from productmanagers to product teams. For example, Hallmark uses a triangular marketing teamconsisting of a market manager (the leader), a marketing manager, and a distribution
manager; 3M uses a horizontal product team consisting of a team leader and representatives from sales, marketing, laboratory, engineering, accounting, and marketing
research.
Another alternative is to introduce category management, in which a company focuseson product categories to manage its brands. Kraft has changed from a classic brand-management structure, in which each brand competed for resources and market share, to acategory-based structure in which category business directors (or “product integrators”)
lead cross-functional teams of representatives from marketing, R&D, consumer promotion, and ﬁnance. These category teams work with process teams dedicated to each product category and with customer teams dedicated to each major customer.20 Still, category

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management is essentially product-driven, which is why Colgate recently moved frombrand management (Colgate toothpaste) to category management (toothpaste category)to a new stage called “customer-need management” (mouth care). This last step ﬁnallyfocuses the organization on a basic customer need.21
Market-Management Organization
Many companies sell their products to a diverse set of markets; Canon, for instance,sells fax machines to consumer, business, and government markets. When customers
fall into different user groups with distinct buying preferences and practices, a market
management organization is desirable. A markets manager supervises several market
managers (also called market-development managers, market specialists, or industry
specialists). The market managers draw upon functional services as needed or may
even have functional specialists reporting to them.
Market managers are staff (not line) people, with duties similar to those of product managers. This system has many of the same advantages and disadvantages of product management systems. Its strongest advantage is that the marketing activity is organized to meet the needs of distinct customer groups. This is why Xerox converted fromgeographic selling to selling by industry, as did IBM, which recently reorganized its
employees into 14 customer-focused divisions. In fact, several studies have conﬁrmed
the value of market-centered organization: Slater and Narver found a substantial positive effect of market orientation on both commodity and noncommodity businesses.22
Product-Management/Market-Management Organization
Companies that produce many products that ﬂow into many markets tend to adopt amatrix organization. Consider DuPont, a pioneer in developing the matrix structure. Its
textile ﬁbers department consists of separate product managers for rayon and otherﬁbers plus separate market managers for menswear and other markets. The productmanagers plan the sales and proﬁts for their respective ﬁbers, each seeking to expand
the use of his or her fiber; the market managers seek to meet their market’s needs
rather than push a particular fiber. Ultimately, the sales forecasts from the market
managers and the product managers should add to the same grand total.
A matrix organization would seem desirable in a multiproduct, multimarket
company. However, this system is costly and often creates conﬂicts as well as questions
about authority and responsibility. By the early 1980s, a number of companies hadabandoned matrix management. But matrix management has resurfaced and is again
ﬂourishing in the form of “business teams” staffed with full-time specialists reporting
to one team boss. The major difference is that companies today provide the right context in which a matrix can thrive—an emphasis on flat, lean team organizations
focused around business processes that cut horizontally across functions.23
Corporate-Divisional Organization
As multiproduct-multimarket companies grow, they often convert their larger productor market groups into separate divisions with their own departments and services. This
raises the question of what marketing services and activities should be retained at corporate headquarters. Some corporations leave marketing to each division; some havea small corporate marketing staff; and some prefer to maintain a strong corporate
marketing staff.
The potential contribution of a corporate marketing staff varies in different
stages of the company’s evolution. Most companies begin with weak marketing in theirdivisions and often establish a corporate staff to bring stronger marketing into the divisions through training and other services. Some members of corporate marketing

Managing The Marketing Process

might be transferred to head divisional marketing departments. As divisions become
strong in their marketing, corporate marketing has less to offer them. Some companies then decide corporate marketing has done its job and proceed to eliminate thedepartment.24
Global Organization
Companies that market internationally can organize in three ways. Those just going
global may start by establishing an export department with a sales manager and a few assistants (and limited marketing services). As they go after global business more aggressively, they can create an international division with functional specialists (including marketing) and operating units structured geographically, according to product, or asinternational subsidiaries. Finally, companies that become truly global organizations have
top corporate management and staff plan worldwide operations, marketing policies,
ﬁnancial ﬂows, and logistical systems. In these organizations, the global operating units
report directly to top management, not to the head of an international division.

Building a Companywide Marketing Orientation
Many companies are beginning to realize that their organizations are not really marketand customer-driven—they are product or sales driven. Companies such as Baxter,
General Motors, and Shell are working hard to reorganize themselves into true marketdriven companies. The task is not easy: it requires changes in job and department deﬁnitions, responsibilities, incentives, and relationships.
To create a market- and customer-focused company, the CEO must: convince
senior managers of the need to be more customer-focused; appoint a senior marketing ofﬁcer and marketing task force; get outside help and guidance; change reward
measurement and system to encourage actions that build long-term customer satisfaction; hire strong marketing talent; develop strong in-house marketing training programs; install a modern marketing planning system; establish an annual marketing
excellence recognition program; consider restructuring as a market-centered organization; and shift from a department focus to a process-outcome focus.
DuPont successfully made the transition from an inward-looking to an outwardlooking orientation when it began building a “marketing community” by reorganizing
divisions along market lines and holding marketing management training seminars
for thousands of managers and employees. The company also established a marketing
excellence recognition program and honored employees from around the world who
had developed innovative marketing strategies and service improvements.25 It takes agreat deal of planning and patience to get managers to accept customers as the foundation and future of the business—but it can be done, as the DuPont example shows.

Marketing Implementation
Organization is one factor contributing to effective marketing implementation, theprocess that turns marketing plans into action assignments and ensures that suchassignments are executed in a manner that accomplishes the plan’s stated objectives.26
This part of the marketing process is critical, because a brilliant strategic marketingplan counts for little if it is not implemented properly. Whereas strategy addresses thewhat and why of marketing activities, implementation addresses the who, where, when,and how. Strategy and implementation are closely related in that one layer of strategy
implies certain tactical implementation assignments at a lower level. For example, top
management’s strategic decision to “harvest” a product must be translated into speciﬁc actions and assignments.

55

56

CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROLBonoma identified four sets of skills for implementing marketing programs:(1) diagnostic skills (the ability to determine what went wrong); (2) identiﬁcation ofcompany level (the ability to discern whether problems occurred in the marketing
function, the marketing program, or the marketing policy); (3) implementation skills(the ability to budget resources, organize effectively, motivate others); and (4) evaluation skills (the ability to evaluate results).27 These skills are as vital for nonproﬁts asthey are for businesses, as the Alvin Ailey Dance Theater has discovered.
Like many nonprofit cultural organizations, the company founded by Alvin
Ailey in 1958 always seemed to be operating in the red—despite its ability to attract
full houses—because of the high costs of mounting a production. But Judith
Jameson, the principal dancer who succeeded Ailey as director after his death, hasbeen able to keep the company in the black, thanks largely to her skill at motivatingothers to carry out marketing efforts. The nonproﬁt implements its marketing plan
through a high-powered board of directors and a group of businesses that want toassociate with the Ailey company for their own marketing purposes. For example,
Healthsouth Corporation provides free physical therapy to the dancers and beneﬁts
from the association when marketing its sports medicine clinics. With an audiencethat is almost half African American and 43 percent of which is between the ages of
19 and 39, Ailey provides access to an important market for its corporate partners,
earning their enthusiastic support.28

Evaluating and Controlling the Marketing Process
To deal with the many surprises that occur during the implementation of marketing
plans, the marketing department has to monitor and control marketing activities continuously. Table 1.1 lists four types of marketing control needed by companies: annualplan control, proﬁtability control, efﬁciency control, and strategic control.

Annual-Plan Control
The purpose of annual-plan control is to ensure that the company achieves the sales,
proﬁts, and other goals established in its annual plan. The heart of annual-plan control is the four-step management by objectives process in which management (1) setsmonthly or quarterly goals; (2) monitors the company’s marketplace performance;(3) determines the causes of serious performance deviations; and (4) takes corrective
action to close the gaps between goals and performance.
This control model applies to all levels of the organization. Top management
sets sales and proﬁt goals for the year that are elaborated into speciﬁc goals for eachlower level. In turn, each product manager commits to attaining specified levels ofsales and costs; each regional district and sales manager and each sales representative
also commits to speciﬁc goals. Each period, top management reviews and interprets
performance results at all levels, using these ﬁve tools:➤

Sales analysis. Sales analysis consists of measuring and evaluating actual sales inrelation to goals, using two speciﬁc tools. Sales-variance analysis measures the relative
contribution of different factors to a gap in sales performance. Microsales analysis
looks at speciﬁc products, territories, and other elements that failed to produce
expected sales. The point of these analyses is to determine what factors (pricing,
lower volume, speciﬁc territories, etc.) contributed to a failure to meet sales goals.

➤

Market-share analysis. Company sales do not reveal how well the company isperforming relative to competitors. To do this, management needs to track its
market share. Overall market share is the company’s sales expressed as a percentage

Managing The Marketing Process

57

Table 1.1 Types of Marketing Control
Type ofControl

Prime
Responsibility

Purpose ofControl

I. Annual-plan control

Top management
Middle management

To examine whether
the planned results
are being achievedMarketingcontroller

To examine where thecompany is making
and losing money■

III. Efﬁciency control

Line and staff
management
Marketingcontroller

To evaluate andimprove the spending
efﬁciency and impact
of marketing
expenditures

Efﬁciency of:■ sales force■ advertising■ sales promotion■ distribution

IV. Strategic control

Top management
Marketing auditor

To examine whether
the company ispursuing its best
opportunities inmarkets, products, andchannels■

II. Proﬁtability control

Approaches
Sales analysis
Market-shareanalysis■ Marketing expenseto-sales analysis■ Financial analysis■ Market-based
scorecard analysis■■

Proﬁtability by:product■ territory■ customer■ segment■ trade channel■ order size

Marketiingeffectiveness review■ Marketing audit■ Marketing
excellence review■ Company ethicaland social
responsibility review

of total market sales. Served market share is its sales expressed as a percentage ofthe total sales to its served market—all of the buyers who are able and willing to buy
the product. Relative market share can be expressed as market share in relation to
the largest competitor; a rise in relative market share means a company is gaining
on its leading competitor. A useful way to analyze market-share movements is interms of customer penetration, customer loyalty, customer selectivity, and priceselectivity.
➤

Marketing expense-to-sales analysis. This is a key ratio because it allows management tobe sure that the company is not overspending to achieve sales goals. Minor
ﬂuctuations in the expense-to-sales ratio can be ignored, but major ﬂuctuations arecause for concern.

58

CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL➤

Financial analysis. Management uses ﬁnancial analysis to identify the factors that
affect the company’s rate of return on net worth.29 The main factors are shown in
Figure 1-10, along with illustrative numbers for a large chain-store retailer. To
improve its return on net worth, the company must increase its ratio of net proﬁts
to its assets or increase the ratio of its assets to its net worth. The company should
analyze the composition of its assets (i.e., cash, accounts receivable, inventory, andplant and equipment) and see if it can improve its asset management.30➤

Market-based scorecard analysis. Companies should also prepare two market-based
scorecards that reﬂect performance and provide possible early warning signals ofproblems. A customer-performance scorecard records how well the company is doing onsuch customer-based measures as new customers, dissatisﬁed customers, lost customers,
target market awareness, target market preference, relative product quality, andrelative service quality. A stakeholder-performance scorecard tracks the satisfaction of
constituencies who have a critical interest in and impact on the company’s
performance: employees, suppliers, banks, distributors, retailers, and stockholders.31

Proﬁtability Control
Successful companies also measure the proﬁtability of their products, territories, customer groups, segments, trade channels, and order sizes. This information helps management determine whether any products or marketing activities should be expanded,
reduced, or eliminated. The ﬁrst step in marketing-proﬁtability analysis is to identify
the functional expenses (such as advertising and delivery) incurred for each activity.
Next, the firm measures how much functional expense was associated with sellingthrough each type of channel. Third, the company prepares a profit-and-loss statement for each type of channel.
In general, marketing-proﬁtability analysis indicates the relative proﬁtability ofdifferent channels, products, territories, or other marketing entities. However, it does
not prove that the best course of action is to drop the unproﬁtable marketing entities,

Figure 1-10 Financial Model of Return on Net WorthProfit margin
1.5%

Financialleverage

Return on assets
Net profits–––––––Net sales

=

4.8%

x

2.6

Rate of returnon net worth

=

12.5%

Asset turnover
3.2
Net sales–––––––
Total assets

Net profits–––––––
Total assets

Total assets–––––––Net worth

Net profits–––––––Net worthManaging The Marketing Process

nor does it capture the likely proﬁt improvement if these marginal marketing entities
are dropped. Therefore, the company must examine its alternatives closely before taking corrective action.
Efﬁciency Control
Suppose a proﬁtability analysis reveals poor proﬁts for certain products, territories, ormarkets. This is when management must ask whether there are more efﬁcient ways tomanage the sales force, advertising, sales promotion, and distribution in connection
with these marketing entities. Some companies have established a marketing controller
position to work on such issues and improve marketing efﬁciency.
Marketing controllers work out of the controller’s office but specialize in themarketing side of the business. At companies such as General Foods, DuPont, andJohnson & Johnson, they perform a sophisticated financial analysis of marketing
expenditures and results, analyzing adherence to proﬁt plans, helping prepare brandmanagers’ budgets, measuring the efﬁciency of promotions, analyzing media production costs, evaluating customer and geographic proﬁtability, and educating marketing
personnel on the ﬁnancial implications of marketing decisions.32
Strategic Control
From time to time, companies need to undertake a critical review of overall marketing
goals and effectiveness. Each company should periodically reassess its strategic approachto the marketplace with marketing-effectiveness reviews and marketing audits.
➤

The marketing-effectiveness review. Marketing effectiveness is reﬂected in the degree towhich a company or division exhibits the ﬁve major attributes of a marketingorientation: customer philosophy (serving customers’ needs and wants), integrated
marketing organization (integrating marketing with other key departments), adequate
marketing information (conducting timely, appropriate marketing research), strategicorientation (developing formal marketing plans and strategies), and operational efﬁciency(using marketing resources effectively and ﬂexibly). Unfortunately, most companies
and divisions score in the fair-to-good range on measures of marketing effectiveness.33➤

The marketing audit. Companies that discover marketing weaknesses should
undertake a marketing audit, a comprehensive, systematic, independent, andperiodic examination of a company’s (or SBU’s) marketing environment, objectives,
strategies, and activities to identify problem areas and opportunities andrecommend a plan of action for improving the company’s marketing
performance.34 The marketing audit examines six major marketing components:(1) the macroenvironment and task environment, (2) marketing strategy,(3) marketing organization, (4) marketing systems, (5) marketing productivity, and(6) marketing function (the 4 Ps).

Highly successful companies also perform marketing excellence reviews and ethicalsocial responsibility reviews to gain an outside-in perspective on their marketing activities.
➤

The marketing excellence review. This best-practices excellence review rates a ﬁrm’s
performance in relation to the best marketing and business practices of highperforming businesses. The resulting proﬁle exposes weaknesses and strengths andhighlights where the company might change to become a truly outstanding player
in the marketplace.

➤

The ethical and social responsibility review. In addition, companies need to evaluate
whether they are truly practicing ethical and socially responsible marketing.
Business success and continually satisfying customers and other stakeholders are

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL
intimately tied to adoption and implementation of high standards of business andmarketing conduct. The most admired companies abide by a code of serving
people’s interests, not only their own. Thus, the ethical and social responsibility
review allows management to determine how the ﬁrm is grappling with ethicalissues and exhibiting a “social conscience” in its business dealings.

Effective control of the marketing process ultimately depends on accurate,
timely, and complete information about markets, demand, and the marketing environment—the subject of the next chapter.

EXECUTIVE SUMMARY
Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit among the organization’s objectives, skills, and resources and itschanging market opportunities. The aim of strategic planning is to shape the company’s businesses and products to yield the targeted proﬁts and growth. Strategic planning takes place at four levels: corporate, division, business unit, and product.
The corporate strategy establishes the framework within which the divisions andbusiness units prepare their strategic plans. Setting a corporate strategy entails deﬁning the corporate mission; establishing strategic business units (SBUs), assigning
resources to each SBU based on its market attractiveness and business strength, andplanning new businesses and downsizing older businesses. Strategic planning for SBUs
entails defining the business mission, analyzing external opportunities and threats,
analyzing internal strengths and weaknesses, formulating goals, formulating strategy,
formulating programs, implementing the programs, and gathering feedback andexercising control.
The marketing process consists of four steps: analyzing market opportunities,
developing marketing strategies, planning marketing programs, and managing marketing effort. 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 themarketing process. It should contain an executive summary and table of contents, an
overview of the marketing situation, an analysis of opportunities and threats, a summary of financial and marketing objectives, an overview of marketing strategy, adescription of action programs, a projected proﬁt-and-loss statement, and a summaryof the controls for monitoring the plan’s progress.
In managing the marketing process, companies can organize the marketing
department according to function, geographic area, products, or customer markets.
Companies that market in other countries can create an export department, an international division, or a global organization. Marketing implementation is the processthat turns marketing plans into action assignments and ensures that such assignments
are executed in a manner that accomplishes the plan’s stated objectives. To manage
the marketing process, companies can apply four types of control: annual-plan control, proﬁtability control, efﬁciency control, and strategic control.

NOTES
1. See “The New Breed of Strategic Planning,” Business Week, September 7, 1984, pp. 62–68.
2. See Peter Drucker, Management: Tasks, Responsibilities and Practices (New York: Harper &Row, 1973), ch. 7.
3. See “The Hollow Corporation,” Business Week, March 3, 1986, pp. 57–59. Also see William H.
Davidow and Michael S. Malone, The Virtual Corporation (New York: HarperBusiness, 1992).

Notes
4. For more discussion, see Laura Nash, “Mission Statements—Mirrors and Windows,”
Harvard Business Review, March–April 1988, pp. 155–56.
5. For more on Kodak’s imaging strategy, see Irene M. Kunii, “Fuji: Beyond Film,” Business
Week, November 22, 1999, pp. 132–38.
6. Derek Abell, Deﬁning the Business: The Starting Point of Strategic Planning (Upper Saddle
River, NJ: Prentice-Hall, 1980), ch. 3.
7. Theodore Levitt, “Marketing Myopia,” Harvard Business Review, July–August 1960,
pp. 45–56.
8. See Roger A. Kerin, Vijay Mahajan, and P. Rajan Varadarajan, Contemporary Perspectives on
Strategic Planning (Boston: Allyn & Bacon, 1990).
9. A hard decision must be made between harvesting and divesting a business. Harvesting abusiness will strip it of its long-run value, in which case it will be difﬁcult to ﬁnd a buyer.
Divesting, on the other hand, is facilitated by maintaining a business in a ﬁt condition inorder to attract a buyer.
10. For a contrary view, however, see J. Scott Armstrong and Roderick J. Brodie, “Effects ofPortfolio Planning Methods on Decision Making: Experimental Results,” International
Journal of Research in Marketing (1994), pp. 73–84.
11. The same matrix can be expanded into nine cells by adding modiﬁed products andmodiﬁed markets. See S. J. Johnson and Conrad Jones, “How to Organize for New
Products,” Harvard Business Review, May–June 1957, pp. 49–62.
12. See Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors(New York: Free Press, 1980), ch. 2.
13. Marcia Stepanek, “How Fast Is Net Fast?” Business Week, November 1, 1999,
pp. EB52–EB54.
14. See Robin Cooper and Robert S. Kaplan, “Proﬁt Priorities from Activity-Based Costing,”
Harvard Business Review, May–June 1991, pp. 130–35.
15. See Thomas J. Peters and Robert H. Waterman, Jr., In Search of Excellence: Lessons from
America’s Best-Run Companies (New York: Harper & Row, 1982), pp. 9–12. The same
framework is used in Richard Tanner Pascale and Anthony G. Athos, The Art of JapaneseManagement: Applications for American Executives (New York: Simon & Schuster, 1981).
16. See Terrence E. Deal and Allan A. Kennedy, Corporate Cultures: The Rites and Rituals ofCorporate Life (Reading, MA: Addison-Wesley, 1982); “Corporate Culture,” Business Week,
October 27, 1980, pp. 148–60; Stanley M. Davis, Managing Corporate Culture (Cambridge,
MA: Ballinger, 1984); and John P. Kotter and James L. Heskett, Corporate Culture andPerformance (New York: Free Press, 1992).
17. Stephen Baker, “The Future Goes Cellular,” Business Week, November 8, 1999, p. 74.
18. Michael J. Lanning and Edward G. Michaels, “Business Is a Value Delivery System,”
McKinsey Staff Paper, no. 41, June 1988 (McKinsey & Co., Inc.).
19. Perrault and McCarthy, Basic Marketing: A Global Managerial Approach, 13th ed. (Burr Ridge,
IL: 1996).
20. Michael George, Anthony Freeling, and David Court, “Reinventing the Marketing
Organization,” The McKinsey Quarterly, no. 4 (1994): 43–62.
21. For further reading, see Robert Dewar and Don Shultz, “The Product Manager, an Idea
Whose Time Has Gone,” Marketing Communications, May 1998, pp. 28–35; “The Marketing
Revolution at Procter and Gamble,” Business Week, July 25, 1988, pp. 72–76; Kevin T. Higgins,“Category Management: New Tools Changing Life for Manufacturers, Retailers,” Marketing
News, September 25, 1989, pp. 2, 19; George S. Low and Ronald A. Fullerton, “Brands, Brand
Management, and the Brand Manager System: A Critical Historical Evaluation,” Journal ofMarketing Research, May 1994, pp. 173–90; and Michael J. Zanor, “The Proﬁt Beneﬁts ofCategory Management,” Journal of Marketing Research, May 1994, pp. 202–13.
22. Stanley F. Slater and John C. Narver, “Market Orientation, Customer Value, and Superior
Performance,” Business Horizons, March–April 1994, pp. 22–28. See also Frederick E.

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CHAPTER 3 WINNING MARKETS THROUGH STRATEGIC PLANNING, IMPLEMENTATION, AND CONTROL
Webster, Market-Driven Management (New York: John Wiley, 1994); John C. Narver andStanley F. Slater, “The Effect of a Market Orientation on Business Proﬁtability, “Journal ofMarketing, October 1990, pp. 20–35; Bernard Jaworski and Ajay K. Kohli, “Market
Orientation: Antecedents and Consequences,” Journal of Marketing, July 1993, pp. 53–70;
and Rohit Deshpande and John U. Farley, “Measuring Market Orientation. “Journal ofMarket-Focused Management 2 (1998): 213–32.
23. Richard E. Anderson, “Matrix Redux,” Business Horizons, November–December 1994,
pp. 6–10.
24. For further reading on marketing organization, see Nigel Piercy, Marketing Organization:
An Analysis of Information Processing, Power and Politics (London: George Allen & Unwin,1985); Robert W. Ruekert, Orville C. Walker, and Kenneth J. Roering, “The Organizationof Marketing Activities: A Contingency Theory of Structure and Performance,” Journal ofMarketing, Winter 1995, pp. 13–25; Tyzoon T, Tyebjee, Albert V. Bruno, and Shelly H.
McIntyre, “Growing Ventures Can Anticipate Marketing Stages,” Harvard Business Review,
January–February 1983, pp. 2–4; and Andrew Pollak, “Revamping Said to be Set at
Microsoft,” New York Times, February 9, 1999, p. C1.
25. Edward E. Messikomer, “DuPont’s ‘Marketing Community,’ ” Business Marketing, October
1987, pp. 90–94. For an excellent account of how to convert a company into a marketdriven organization, see George Day, The Market-Driven Organization: Aligning Culture,
Capabilities, and Conﬁguration to the Market (New York: Free Press, 1989).
26. For more on developing and implementing marketing plans, see H. W. Goetsch,
Developing, Implementing, and Managing an Effective Marketing Plan (Chicago: American
Marketing Association; Lincolnwood, IL: NTC Business Books, 1993).
27. Thomas V. Bonoma, The Marketing Edge: Making Strategies Work (New York: Free Press,
1985). Much of this section is based on Bonoma’s work.
28. Emily Denitto, “New Steps Bring Alvin Ailey into the Business of Art,” Crain’s New YorkBusiness, December, 1998, pp. 4, 33.
29. Alternatively, companies need to focus on factors affecting shareholder value. The goal ofmarketing planning is to increase shareholder value, which is the present value of the future
income stream created by the company’s present actions. Rate-of-return analysis usuallyfocuses on only 1 year’s results. See Alfred Rapport, Creating Shareholder Value, rev. ed. (NewYork: Free Press, 1997).
30. For additional reading on ﬁnancial analysis, see Peter L. Mullins, Measuring Customer andProduct Line Proﬁtability (Washington, DC: Distribution Research and Education
Foundation, 1984).
31. See Robert S. Kaplan and David P. Norton, The Balanced Scorecard (Boston: Harvard
Business School Press,1996).
32. Sam R. Goodman, Increasing Corporate Proﬁtability (New York: Ronald Press, 1982), ch. 1.
Also see Bernard J. Jaworski, Vlasis Stathakopoulos, and H. Shanker Krishnan, “Control
Combinations in Marketing: Conceptual Framework and Empirical Evidence,” Journal ofMarketing, January 1993, pp. 57–69.
33. For further discussion of this instrument, see Philip Kotler, “From Sales Obsession toMarketing Effectiveness,” Harvard Business Review, November–December 1977, pp. 67–75.
34. See Philip Kotler, William Gregor, and William Rodgers, “The Marketing Audit Comes ofAge,” Sloan Management Review, Winter 1989, pp. 49–62.

Gathering
Information andMeasuring Market
DemandWe examine the following
questions:Marketing is becoming more of abattle based on information than
one based on sales power.

■

What are the components of amodern marketing information
system?

■What constitutes good marketing research?

■

How can marketing decision
support systems help marketing
managers make better decisions?

■

How can demand be more accurately measured and forecasted?

The marketing environment is changing at an accelerating rate. Given the followingchanges, the need for real-time market information is greater than at any time in the
past:

From local to national to global marketing: As companies expand their geographical market coverage, their managers need more information more quickly.
From buyer needs to buyer wants: As incomes improve, buyers become more selective intheir choice of goods. To predict buyers’ responses to different features, styles, andother attributes, sellers must turn to marketing research.
From price to nonprice competition: As sellers increase their use of branding, product differentiation, advertising, and sales promotion, they require information on these marketing tools’ effectiveness.
Fortunately, the exploding information requirements have given rise to impressive new
information technologies: computers, microfilm, cable television, copy machines, fax machines, tape recorders, video recorders, videodisc players, CD-ROM drives, the Internet.1
Some firms have developed marketing information systems that provide company management with rapid and incredible detail about buyer wants, preferences, and behavior.
For example, the Coca-Cola Company knows that we put 3.2 ice cubes in a glass, see 69
of its commercials every year, and prefer cans to pop out of vending machines at a temperature of 35 degrees. Kimberly-Clark, which makes Kleenex, has calculated that the average person blows his or her nose 256 times a year. Hoover learned that we spend about
35 minutes each week vacuuming, sucking up about 8 pounds of dust each year and using 6 bags to do so.2 Marketers also have extensive information about consumption patterns in other countries. On a per capita basis within Western Europe, for example, theSwiss consume the most chocolate, the Greeks eat the most cheese, the Irish drink themost tea, and the Austrians smoke the most cigarettes.3
Nevertheless, many business firms lack information sophistication. Many lack a marketing research department. Others have departments that limit work to routine forecasting, sales analysis, and occasional surveys. In addition, many managers complain about notknowing where critical information is located in the company; getting too much information that they can’t use and too little that they really need; getting important information
too late; and doubting the information’s accuracy. In today’s information-based society,companies with superior information enjoy a competitive advantage. The company canchoose its markets better, develop better offerings, and execute better marketing planning.

HE COMPONENTS OF A MODERN MARKETING

T INFORMATION SYSTEM

Every firm must organize a rich flow of information to its marketing managers. Competitive companies study their managers’ information needs and design marketing information systems (MIS) to meet these needs.
■

100

Analyzing
MarketingOpportunities

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.

To carry out their analysis, planning, implementation, and control responsibilities,
marketing managers need information about developments in the marketing environment. The role of the MIS is to assess the manager’s information needs, develop
the needed information, and distribute that information in a timely fashion. The in-formation is developed through internal company records, marketing intelligence activities, marketing research, and marketing decision support analysis.

I

NTERNAL RECORDS SYSTEM

Marketing managers rely on internal reports on orders, sales, prices, costs, inventory
levels, receivables, payables, and so on. By analyzing this information, they can spot
important opportunities and problems.

THE ORDER-TO-PAYMENT CYCLE
The heart of the internal records system is the order-to-payment cycle. Sales representatives, dealers, and customers dispatch orders to the firm. The sales department prepares invoices and transmits copies to various departments. Out-of-stock items areback ordered. Shipped items are accompanied by shipping and billing documents thatare sent to various departments.
Today’s companies need to perform these steps quickly and accurately. Customers
favor those firms that can promise timely delivery. Customers and sales representatives fax or e-mail their orders. Computerized warehouses fulfill these orders quickly.
The billing department sends out invoices as quickly as possible. An increasing number of companies are using electronic data interchange (EDI) or intranets to improve thespeed, accuracy, and efficiency of the order-to-payment cycle. Retail giant Wal-Mart
tracks the stock levels of its products and its computers send automatic replenishment
orders to its vendors.4

SALES INFORMATION SYSTEMS
Marketing managers need up-to-the-minute reports on current sales. Armed with laptop computers, sales reps can access information about prospects and customers andprovide immediate feedback and sales reports. An ad for SalesCTRL, a sales force automation software package, boasts, “Your salesperson in St. Louis knows what Customer Service in Chicago told their customer in Atlanta this morning. Sales managers
can monitor everything in their territories and get current sales forecasts anytime.”
Sales force automation (SFA) software has come a long way. Earlier versions mainly
helped managers track sales and marketing results or acted as glorified datebooks. Recent editions have put even more knowledge at marketers’ fingertips, often throughinternal “push” or Web technology, so they can give prospective customers more information and keep more detailed notes. Here are three companies that are using computer technology to design fast and comprehensive sales reporting systems:■

Ascom Timeplex, Inc. Before heading out on a call, sales reps at this telecommunications equipment company use their laptop computers to dial into thecompany’s worldwide data network. They can retrieve the latest price lists,
engineering and configuration notes, status reports on previous orders, ande-mail from anywhere in the company. And when deals are struck, the laptop computers record each order, double-check the order for errors, and send
it electronically to Timeplex headquarters in Woodcliff Lake, New Jersey.5■

Alliance Health Care Formerly called Baxter, Alliance supplies hospital purchasing departments with computers so that the hospitals can electronicallytransmit orders directly to Alliance. The timely arrival of orders enables Alliance to cut inventories, improve customer service, and obtain better terms
from suppliers for higher volumes. Alliance has achieved a great advantage
over competitors, and its market share has soared.

■

Montgomery Security In 1996, San Francisco–based Montgomery Security
was in a bind. To remain competitive in the financial sector, this Nations
Banks subsidiary had to find a way for more than 400 finance, research, andGathering Informationand Measuring
Market Demand101sales or trading employees to share information about companies whose stockthey were considering taking public. Yet all of the departments at Montgomery had different database formats for their records; some even kept files
on notepads. The company solved the problem with Sales Enterprise Softwarefrom Siebel Systems. It gave Montgomery significant gains in productivity.
With a common database format, everyone could share information and keep
confidential information secure.6
The company’s marketing information system should represent a cross between
what managers think they need, what managers really need, and what is economically feasible. An internal MIS committee can interview a cross-section of marketing
managers to discover their information needs. Some useful questions are:
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 magazines and trade reports would you like to see on a regular basis?
8. What topics would you like to be kept informed of?
9. What data analysis programs would you want?
10. What are the four most helpful improvements that could be made in the present marketing information system?

M ARKETING INTELLIGENCE SYSTEM
Whereas the internal records system supplies results data, the marketing intelligencesystem supplies happenings data.
■

A marketing intelligence system is a set of procedures and sources usedby managers to obtain everyday information about developments in the marketing environment.

Marketing managers collect marketing intelligence by reading books, newspapers, andtrade publications; talking to customers, suppliers, and distributors; and meeting withother company managers. A company can take several steps to improve the qualityof its marketing intelligence.
First, it can train and motivate the sales force to spot and report new developments. Sales representatives are the company’s “eyes and ears”; they are positioned
to pick up information missed by other means. Yet they are very busy and often failto pass on significant information. The company must “sell” its sales force on theirimportance as intelligence gatherers. Sales reps should know which types of information to send to which managers. For instance, the Prentice Hall sales reps who sellthis textbook let their editors know what is going on in each discipline, who is doing exciting research, and who plans to write cutting-edge textbooks.
Second, the company can motivate distributors, retailers, and other intermediaries
to pass along important intelligence. Consider the following example:7■

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Parker Hannifin Corporation A major fluid-power-products manufacturer,
Parker Hannifin has asked each of its distributors to forward to Parker’s marketing research division a copy of all invoices containing sales of its products. Parker analyzes these invoices to learn about end users and shares its
findings with the distributors.

Many companies hire specialists to gather marketing intelligence. Retailers often
send mystery shoppers to their stores to assess how employees treat customers. The cityof Dallas recently hired Feedback Plus, a professional-shopper agency, to see how car-pound employees treat citizens picking up their cars. Neiman Marcus employs thesame agency to shop at its 26 stores nationwide. “Those stores that consistently scorehigh on the shopping service,” says a Neiman Marcus senior VP, “not so coincidentally have the best sales.” The stores will tell salespeople that they’ve “been shopped”
and give them copies of the mystery shopper’s report. Typical questions on the reportare: How long before a sales associate greeted you? Did the sales associate act as if heor she wanted your business? Was the sales associate knowledgeable about products
in stock?8
Third, companies can learn about competitors by purchasing their products; attending open houses and trade shows; reading competitors’ published reports; attending stockholders’ meetings; talking to employees, dealers, distributors, suppliers,and freight agents; collecting competitors’ ads; and reading the Wall Street Journal, the
New York Times, and trade association papers.
Fourth, the company can set up a customer advisory panel made up of representative customers or the company’s largest customers or its most outspoken or sophisticated customers. For example, Hitachi Data Systems holds a three-day meeting with
its customer panel of 20 members every 9 months. They discuss service issues, newtechnologies, and customers’ strategic requirements. The discussion is free-flowing,
and both parties gain: The company gains valuable information about customer needs;
and the customers feel more bonded to a company that listens closely to their comments.9
Fifth, the company can purchase information from outside suppliers such as the
A. C. Nielsen Company and Information Resources, Inc. (see Table 1.2, part D). These
research firms gather and store consumer-panel data at a much lower cost than thecompany could do on its own.
Sixth, some companies have established a marketing information center to collectand circulate marketing intelligence. The staff scans the Internet and major publications, abstracts relevant news, and disseminates a news bulletin to marketing managers. It collects and files relevant information and assists managers in evaluating new
information.

M ARKETING 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. We define marketing research as follows:■

Marketing research is the systematic design, collection, analysis, and reporting of data and findings relevant to a specific marketing situation facing
the company.

SUPPLIERS OF MARKETING RESEARCH
A company can obtain marketing research in a number of ways. Most large companies have their own marketing research departments.10■

Procter & Gamble P&G assigns marketing researchers to each product operating division to conduct research for existing brands. There are two separate in-house research groups, one in charge of overall company advertisingresearch and the other in charge of market testing. Each group’s staff consistsof marketing research managers, supporting specialists (survey designers, statisticians, behavioral scientists), and in-house field representatives to conduct
and supervise interviewing. Each year, Procter & Gamble calls or visits over1 million people in connection with about 1,000 research projects.

■

Hewlett-Packard At HP, marketing research is handled by the Market Research & Information Center (MRIC), located at HP headquarters. The MRIC
is a shared resource for all HP divisions worldwide and is divided into three

Gathering Informationand Measuring
Market Demand103

T A B L E

1.2

A. Internal Sources
Company profit loss statements, balance sheets, sales figures, sales-call reports, invoices, inventory records, and prior research reports.

Secondary-Data Sources

B. Government Publications■

Statistical Abstract of the United States■

County and City Data Book■

Industrial Outlook■

Marketing Information Guide■

Other government publications include the Annual Survey of Manufacturers; Business Statistics; Census of Manufacturers; Census of Population; Census of Retail Trade,Wholesale Trade, andSelected Service Industries; Census of Transportation; Federal Reserve Bulletin; Monthly Labor Review; Survey of Current Business; and Vital Statistics Report.

C. Periodicals and Books■

Business Periodicals Index■

Standard and Poor’s Industry■

Moody’s Manuals■

Encyclopedia of Associations■

Marketing journals include the Journal of Marketing, Journal of Marketing Research, and Journal of Consumer Research.

■

Useful trade magazines include Advertising Age, Chain Store Age, Progressive Grocer, Sales &Marketing Management, and Stores.

■

Useful general business magazines include Business Week, Fortune, Forbes,The Economist, Inc.,and Harvard Business Review.

D. Commercial Data■

Nielsen Company: Data on products and brands sold through retail outlets (Retail Index Services), supermarket scanner data (Scantrack), data on television audiences (Media ResearchServices), magazine circulation data (Neodata Services, Inc.), and others.

■

MRCA Information Services: Data on weekly family purchases of consumer products (National Consumer Panel) and data on home food consumption (National Menu Census).

■

Information Resources, Inc.: Supermarket scanner data (InfoScan) and data on the impact ofsupermarket promotions (PromotioScan).

■

SAMI/Burke: Reports on warehouse withdrawals to food stores in selected market areas(SAMI reports) and supermarket scanner data (Samscam).

■Simmons Market Research Bureau (MRB Group): Annual reports covering television markets,
sporting goods, and proprietary drugs, with demographic data by sex, income, age, andbrand preferences (selective markets and media reaching them).

■

Other commercial research houses selling data to subscribers include the Audit Bureau of
Circulation; Arbitron, Audits and Surveys; Dun & Bradstreet; National Family Opinion; Standard
Rate & Data Service; and Starch.

groups. The Market Information Center provides background information on
industries, markets, and competitors using syndicated and other information
services. Decision Support Teams provide research consulting services. Regional Satellites in specific locales worldwide support regional HP initiatives.11
Small companies can hire the services of a marketing research firm or conduct research in creative and affordable ways, such as:

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Engaging students or professors to design and carry out projects: One Boston University MBA project helped American Express develop a successful advertising campaign geared toward young professionals. The cost: $15,000.

■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 companies routinely visit their competitors. Tom
Coohill, a chef who owns two Atlanta restaurants, gives managers a food allowance to dine out and bring back ideas. Atlanta jeweler Frank Maier Jr., who
often visits out-of-town rivals, spotted and copied a dramatic way of lighting displays.12

Companies normally budget marketing research at 1 percent to 2 percent of company sales. A large percentage is spent buying the services of outside firms. Marketing research firms fall into three categories:■

Syndicated-service research firms: These firms gather consumer and trade information, which they sell for a fee. Examples: Nielsen Media Research, SAMI/Burke.

■

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 researchservices. The best example is the field-service firm, which sells field interviewing
services to other firms.

THE MARKETING RESEARCH PROCESS
Effective marketing research involves the five steps shown in Figure 1-11. We will illustrate these steps with the following situation:
American Airlines is constantly looking for new ways to serve its passengers. One
manager came up with the idea of offering phone service. The other managers got
excited about this idea. The marketing manager volunteered to do some preliminary
research. He contacted a major telecommunications company to find out the costof providing this service on B747 coast-to-coast flights. The telecommunications
company said that the equipment would cost the airline about $1,000 a flight. The
airline could break even if it charged $25 a phone call and at least 40 passengers
made calls during the flight. The marketing manager then asked the company’s marketing research manager to find out how air travelers would respond to this newservice.

Define theproblem andresearch
objectives

Develop theresearch plan

Collect the
information

Analyze theinformation

Present thefindings

F I G U R E

1-11

The Marketing Research Process

Step 1: Define the Problem and Research Objectives
Management must not define a problem too broadly or too narrowly. A marketing
manager who tells the marketing researcher, “Find out everything you can about air
travelers’ needs,” will collect a lot of unnecessary information. Similarly, a marketing
manager who says, “Find out if enough passengers aboard a B747 flying between the
East Coast and West Coast would be willing to pay $25 to make a phone call so that
American Airlines would break even on the cost of offering this service,” is taking too
narrow a view of the problem. To get the information she needs, the marketing researcher could say: “Why does a call have to be priced at $25? Why does American
have to break even on the cost of the service? The new service might attract enoughnew passengers to American so that even if they don’t make enough phone calls,
American will make money out of attracting new passengers.”
In discussing the problem, American’s managers discovered another issue. If the
new service were successful, how fast could other airlines copy it? Airline marketing
competition is replete with examples of new services that were so quickly copied bycompetitors that no airline gained a competitive advantage. How important is it tobe first and how long could the lead be sustained?
The marketing manager and marketing researcher agreed to define the problem asfollows: “Will offering an in-flight phone service create enough incremental preference and profit for American Airlines to justify its cost against other possible investments American might make?” They then agreed on the following specific research
objectives:

Gathering Informationand Measuring
Market Demand105

1. What are the main reasons that airline passengers place phone calls while
flying?

M A R K E T I N G

memo

2. What kinds of passengers would be the most likely to make calls?
3. How many passengers are likely to make calls, given different price levels?

Secondary Sources ofData On-Line

4. How many extra passengers might choose American because of this newservice?

The number of on-line governmentand business information sources is truly
overwhelming. Here is a sample of several
that should prove useful when conducting
on-line market research,and many offer information for free or a reasonable fee. Notethat because the Web is changing at such a
rapid rate, the addresses may change.
Associations■ American Marketing Association(www.ama.org/hmpage.htm)■ The American Society of Association
Executives (www.asaenet.org)■ CommerceNet—industry association
for Internet commerce (www.commerce.net)■ Gale’s Encyclopedia of Associations(www.gale.com)

5. How much long-term goodwill will this service add to American Airlines’ image?

Business Information
A Business Compass (ABC)—selectively describes and links to key business sites on the Web(www.abcompass.com)■ A Business Researcher’s Interests—
provides links to business directories,
media sites, marketing-related resources, and much more(www.brint.com)■ Bloomberg Personal—timely news
and financial services(www.bloomberg.com)■ C/Net—journalistic coverage of hightechnology, computers, and the Internet (www.cnet.com)■ Company Link—free basic directorydata, press releases, stock prices, and
SEC data on 45,000 U.S. firms andmore information available to subscribers (www.companylink.com)■ EDGAR—public company financial filings (www.sec.gov/edgarhp.htm)■ Hoover’s—directory of company information (www.hoovers.com)(continued)■

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6. How important is phone service relative to improving other factors such as
flight schedules, food quality, and baggage handling?
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 ascertain certain magnitudes, suchas how many people would make an in-flight phone call at $25 a call. Some researchis causal—its purpose is to test a cause-and-effect relationship. For example, would
passengers make more calls if the phone were located next to their seat rather thanin the aisle near the lavatory?

Step 2: Develop the Research Plan
The second stage of marketing research calls for developing the most efficient planfor gathering the needed information. The marketing manager needs to know the costof the research plan before approving it. Suppose the company estimates that launching the in-flight phone service would yield a long-term profit of $50,000. The manager believes that doing the research would lead to an improved pricing andpromotional plan and a long-term profit of $90,000. In this case, the manager should
be willing to spend up to $40,000 on this research. If the research would cost morethan $40,000, it is not worth doing.13 Designing a research plan calls for decisions on
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 gathered for a specific purpose or for a specific research
project.
Researchers usually start their investigation by examining secondary data to see
whether their problem can be partly or wholly solved without collecting costly primary data. (Table 1.2 shows the rich variety of secondary-data sources available in the
United States.)14 Secondary data provide a starting point for research and offer the advantages of low cost and ready availability.
The Internet, or more particularly, the World Wide Web, is now the greatest repository of information the world has seen. In an incredibly short span of time, the Web
has become a key tool for sales and marketing professionals to access competitive information or conduct demographic, industry, or customer research. See the Marketing Memo “Secondary Sources of Data On-line” for a minidirectory of sites where you
can conduct free or at least inexpensive market research.
When the needed data do not exist or are dated, inaccurate, incomplete, or unreliable, the researcher will have to collect primary data. Most marketing research
projects involve some primary-data collection. The normal procedure is to interview
some people individually or in groups to get a sense of how people feel about the
topic in question and then develop a formal research instrument, debug it, and carryit into the field.
When stored and used properly, the data collected in the field can form the backbone of later marketing campaigns. Direct marketers such as record clubs, credit-card
companies, and catalog houses have long understood the power of database marketing.
■

A customer or prospect database is an organized collection of comprehensive data about individual customers, prospects, or suspects that is current, accessible, and actionable for marketing purposes such as lead

generation, lead qualification, sale of a product or service, or maintenance ofcustomer relationships.
Some techniques that are becoming increasingly popular are data warehousing
and data mining—but they are not without risks. See the Marketing for the Millennium box, “Companies Turn to Data Warehousing and Data Mining: Exercise Care.”Research Approaches. Primary data can be collected in five ways: observation,
focus groups, surveys, behavioral data, and experiments.
■

Observational research: Fresh data can be gathered by observing the relevant actors and settings. The American Airlines researchers might meander around airports, airline offices, and travel agencies to hear how travelers talk about thedifferent carriers. The researchers can fly on American and competitors’ planes toobserve the quality of in-flight service. This exploratory research might yieldsome useful hypotheses about how travelers choose air carriers.

■

Focus-group research: A focus group is a gathering of six to ten people who are invited to spend a few hours with a skilled moderator to discuss a product, service,organization, or other marketing entity. The moderator needs to be objective,knowledgeable on the issue, and skilled in group dynamics. Participants are normally paid a small sum for attending. The meeting is typically held in pleasantsurroundings and refreshments are served.
In the American Airlines research, the moderator might start with a broad
question, such as “How do you feel about air travel?” Questions then move to
how people regard the different airlines, different services, and in-flight telephone service. The moderator encourages free and easy discussion, hoping thatthe group dynamics will reveal deep feelings and thoughts. At the same time,the moderator “focuses” the discussion. The discussion, recorded through notetaking or on audiotape or videotape, is subsequently studied to understand consumer beliefs, attitudes, and behavior.
Focus-group research is a useful exploratory step. Consumer-goods companies
have been using focus groups for many years, and an increasing number ofnewspapers, law firms, hospitals and public-service organizations are discovering(continued)■ National Trade Data Bank—free accessto over 18,000 market research reports
analyzing trends and competition inscores of industries and for hundreds ofproducts (www.stat-usa.gov)■ Public Register’s Annual Report Service—allows searches of 3,200 publiccompanies by company name or industry and offers annual reports via
e-mail (www.prars.com/index.html)■ Quote.Com—access to a wide rangeof business wires, companies’ directories, and stock quotes(www.quote.com)
Government Information
Census Bureau (www.census.gov)■ FedWorld—a clearinghouse for over
100 federal government agencies(www.fedworld.gov)■ Thomas—indexes federal government sites (thomas.loc.gov)■ Trade/Exporting/business:Stat-USA(www.stat-usa.gov)■ US Business Advisor(www.business.gov)■

International Information
CIA World Factbook—a comprehensive statistical and demographic directory covering 264 countries around theworld (www.odic.gov/cia/publications)■ The Electronic Embassy (www.embassy.org)■ I-Trade—free and fee-based information services for firms wishing to dobusiness internationally (www.itrade.com)■ The United Nations (www.un.org)■

Sources: Based on information from Robert I. Berkman, Find It Fast: How to Uncover Expert Information
on Any Subject in Print or Online (New York:HarperCollins, 1997); Christine Galea, “Surf City: The Best
Places for Business on the Web,” Sales & Marketing
Management,January 1997,pp.69–73;David Curle,“Out-of-the-Way Sources of Market Research on theWeb,”Online,January–February 1998,pp.63–68.Seealso Jan Davis Tudor,“Brewing Up:A Web Approach toIndustry Research,”Online,July–August 1996,p.12.

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M A R K E T I N GF O RMILLENNIUM

Companies Turn to Data Warehousing andData Mining: Exercise Care
Companies are using data mining, a set of methods that extracts
patterns from large masses of data organized in what is calleda data warehouse. Banks and credit-card companies, telephonecompanies, catalog marketers, and many other companies havea great deal of information about their customers, including not
only their addresses but also their transactions and enhanced
data on age, family size, income, and other demographic information. By carefully mining this data, a company could benefit
in several ways:■

Knowing which customers may be ready for a product upgrade offer■

Knowing which customers might buy other products of thecompany■

Knowing which customers would make the best prospects
for a special offer■

Knowing which customers have the most lifetime value andgiving them more attention and perks■

Knowing which customers might tend to exit and taking
steps to prevent thisSome observers believe that a proprietary database can provide a company with a significant competitive advantage. It s nowonder that at a secret location in Phoenix,security guards watch
over American Expresss 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.

Here are some examples of the uses of database marketing:■

MCI Communications Corporation, the long-distance carrier,sifts through 1 trillion bytes of customer phoning data to
craft new discount calling plans for different types of customers.a■Marriott s Vacation Club International has managed to reduce
its volume of mail and yet increase its response rate by developing a model showing which customers in its databaseare most likely to respond to specific vacation offerings.

■

Tesco, the British supermarket chain, notifies different groups,
such as wine buyers or cheese buyers, when there will be a
special sale of wine or cheese.

■Lands End can tell which of its 2 million customers should
receive special mailings of specific clothing items that would
fit their wardrobe needs.

These benefits don t come without heavy cost, not only incollecting the original customer data but also in maintaining it
and mining it. Yet when it works, it yields more than it costs. A
1996 study by DWI estimated that the average return on investment for a data warehouse over the course of three years ismore than 400 percent. The data has to be in good condition,and the discovered relationships must be valid. Mistakes are always possible: British Columbia Telecom wanted to invite 100 of
its best customers to a Vancouver Grizzlies basketball game andselected customers who were heavy 900-number users. The invitations were already at the printer when the marketing staff
discovered that heavy 900-number users included sex-line enthusiasts.They quickly added other criteria to mine for a new listof guests.

John Verity, A Trillion-Byte Weapon, Business Week, July 31, 1995, pp. 80 81.
Sources: Peter R. Peacock, Data Mining in Marketing: Part 1, Marketing Management, Winter l998, pp. 9 18, and Data Mining in Marketing: Part 2, Marketing Management,
Spring l998, pp. 15 25; Ginger Conlon, What the !@#!*?!! Is a Data Warehouse? Sales & Marketing Management, April 1997, pp. 41 48; Skip Press, Fool s Gold? As Companies Rush to Mine Data, They May Dig Up Real Gems or False Trends, Sales & Marketing Management, April 1997, pp. 58, 60, 62.

atheir value. However, researchers must avoid generalizing the reported feelings ofthe focus-group participants to the whole market, because the sample size is too
small and the sample is not drawn randomly.15
With the development of the World Wide Web, many companies are now conducting on-line focus groups:16

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Janice Gjersten of WPStudio, an on-line entertainment company, found that on-line
focus-group respondents could be much more honest than those in her traditional
in-person focus groups. Gjersten contacted Cyber Dialogue, which provided focusgroup respondents drawn from its 10,000-person database. The focus group washeld in a chat room that Gjersten “looked in on” from her office computer. Gjersten
could interrupt the moderator at any time with flash e-mails unseen by the respondents. Although the on-line focus group lacked voice and body cues, Gjersten says
she will never conduct a traditional focus group again. Not only were respondents
more honest, but the cost for the on-line group was one third that of a traditional
focus group, and a full report came to her in one day, compared to four weeks.

■Survey research: Surveys are best suited for descriptive research. Companies
undertake surveys to learn about people’s knowledge, beliefs, preferences,and satisfaction, and to measure these magnitudes in the general population. American Airlines researchers might want to survey how many people know American, have flown it, prefer it, and would like telephoneavailability.

■

Behavioral data: Customers leave traces of their purchasing behavior in store
scanning data, catalog purchase records, and customer databases. Much canbe learned by analyzing this data. Customers’ actual purchases reflect revealed preferences and often are more reliable than statements they offer tomarket researchers. People often report preferences for popular brands, andyet the data show them actually buying other brands. For example, grocery
shopping data show that high-income people do not necessarily buy themore expensive brands, contrary to what they might state in interviews;
and many low-income people buy some expensive brands. Clearly American Airlines can learn many useful things about its passengers by analyzing
ticket purchase records.

■

Experimental research: The most scientifically valid research is experimental
research. The purpose of experimental research is to capture cause-and-effectrelationships by eliminating competing explanations of the observed findings. To the extent that the design and execution of the experiment eliminate alternative hypotheses that might explain the results, the research andmarketing managers can have confidence in the conclusions. It calls for selecting matched groups of subjects, subjecting them to different treatments,
controlling extraneous variables, and checking whether observed response
differences are statistically significant. To the extent that extraneous factors
are eliminated or controlled, the observed effects can be related to the variations in the treatments.

American Airlines might introduce in-flight phone service on one of its regularflights from New York to Los Angeles at a price of $25 a phone call. On the same
flight the following day, it announces the availability of this service at $15 a phonecall. If the plane carried the same number and type of passengers on each flight, andthe day of the week made no difference, any significant difference in the number ofcalls made could be related to the price charged. The experimental design could be
elaborated further by trying other prices, replicating the same prices on a number offlights, and including other air routes in the experiment.

Gathering Informationand Measuring
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T A B L E

1.3

Types of Questions

A. Closed-end Questions
Name

Description

ExampleDichotomous

A question with two
possible answers.

In arranging this trip, did you personallyphone American?
Yes
No

Multiple choice

A question with three ormore answers.

With whom are you traveling on this flight?
䡺 No one
䡺 Spouse䡺 Spouse and children䡺 Children only䡺 Business associates/friends/relatives
䡺 An organized tour group

Likert scale

A statement with which the
respondent shows theamount of agreement/
disagreement.

Small airlines generally give better
service than large ones.
Strongly Disagree Neither
Agreedisagreeagree nordisagree
1__
2__
3__
4__

Semantic
differential

A scale connecting two
bipolar words.The respondent selects the point that
represents his or her
opinion.

American Airlines
Large__ __ __ __ __ __ __ Small
Experienced__ __ __ __ __ __ __Inexperienced
Modern__ __ __ __ __ __ __Old-fashioned

Importance scale

A scale that rates the importance of some attribute.

Airline food service to me is
Extremely Very
Some
important impor- whattant
important
1___
2___
3___

Rating scale

A scale that rates some
attribute from poor to
excellent.

Americans food service is
Excellent
Very Good Good
1___
2___
3___

Intention-to-buy
scale

A scale that describes the
respondent s intention tobuy.

If an in-flight telephone were available on along flight, I would
Definitely Probably Not Probably Definitely
buy
buy
sure not buy not buy
1___
2___
3___ 4___
5___

Stronglyagree
5__

Not very
importantNot
at allimportant
5___

4___
Fair
4___

Poor
5___

(continued)

Research Instruments. Marketing researchers have a choice of two main research instruments in collecting primary data: questionnaires and mechanical devices.
■

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Questionnaires: A questionnaire consists of a set of questions presented to respondents for their answers. Because of its flexibility, the questionnaire is by
far the most common instrument used to collect primary data. Questionnaires need to be carefully developed, tested, and debugged before they areadministered on a large scale.
In preparing a questionnaire, the professional marketing researcher carefully chooses the questions and their form, wording, and sequence. The formof the question asked can influence the response. Marketing researchers distinguish between closed-end and open-end questions. Closed-end questions
prespecify all the possible answers. Open-end questions allow respondents toanswer in their own words. Closed-end questions provide answers that areeasier to interpret and tabulate. Open-end questions often reveal more because they do not constrain respondents’ answers. Open-end questions areespecially useful in exploratory research, where the researcher is looking for
insight into how people think rather than in measuring how many people
think a certain way. Table 1.3 provides examples of both types of questions.

B. Open-end Questions
Name

Description

ExampleCompletely
unstructured

A question that respondents
can answer in an almost
unlimited number of ways.

What is your opinion of American Airlines?

Word association

Words are presented, one ata time, and respondents
mention the first word thatcomes to mind.

What is the first word that comes to yourmind when you hear the following?
Airline __________________________
American __________________________
Travel __________________________

Sentencecompletion

An incomplete sentence ispresented and respondents
complete the sentence.

When I choose an airline, the most important consideration in my decision
is _______________________________

Story completion

An incomplete story ispresented, 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 thefollowing thoughts and feelings. . . . Now complete the story.

PictureA picture of two charactersis presented, with one
making a statement. Respondents are asked to
identify with the other andfill in the empty balloon.

Thematic
Apperception
Test (TAT)

A picture is presented andrespondents are asked tomake up a story about
what they think is happening or may happen
in the picture.

T A B L E

1.3 (continued)

Types of Questions

Finally, the questionnaire designer should exercise care in the wording
and sequencing of questions. The questionnaire should use simple, direct,
unbiased wording and should be pretested with a sample of respondents
before it is used. The lead question should attempt to create interest. Difficult or personal questions should be asked toward the end so that respondents do not become defensive early. Finally, the questions should flow ina logical order.
■

Mechanical Instruments: Mechanical devices are occasionally used in marketing research. Galvanometers measure the interest or emotions aroused byexposure 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 agiven item, and so on. An audiometer is attached to television sets in participating homes to record when the set is on and to which channel it istuned.17

Sampling Plan. After deciding on the research approach and instruments, themarketing researcher must design a sampling plan. This plan calls for three decisions:
1. Sampling unit: Who is to be surveyed? The marketing researcher must define
the target population that will be sampled. In the American Airlines survey,
should the sampling unit be business travelers, vacation travelers, or both?
Should travelers under age 21 be interviewed? Should both husbands andwives be interviewed? Once the sampling unit is determined, a sampling

Gathering Informationand Measuring
Market Demand111

frame must be developed so that everyone in the target population has anequal or known chance of being sampled.
2. Sample size: How many people should be surveyed? Large samples give more reliable results than small samples. However, it is not necessary to sample theentire target population or even a substantial portion to achieve reliable results. Samples of less than 1 percent of a population can often provide good
reliability, given a credible sampling procedure.
3. Sampling procedure: How should the respondents be chosen? To obtain a representative sample, a probability sample of the population should be drawn. Probability sampling allows the calculation of confidence limits for sampling error. Thus
one could conclude after the sample is taken that “the interval 5 to 7 trips per
year has 95 chances in 100 of containing the true number of trips taken annually by air travelers in the Southwest.” Three types of probability sampling aredescribed in Table 4.3, part A. When the cost or time involved in probability
sampling is too high, marketing researchers will take nonprobability samples.
Table 4.3, part B, describes three types of nonprobability sampling. Some marketing researchers feel that nonprobability samples are very useful in many circumstances, even though they do not allow sampling error to be measured.
Contact Methods. Once the sampling plan has been determined, the marketing researcher must decide how the subject should be contacted: mail, telephone, personal, or on-line interviews.
The mail questionnaire is the best 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, theresponse rate is usually low or slow. Telephone interviewing is the best method for gathering information quickly; the interviewer is also able to clarify questions if respondents do not understand them. The response rate is typically higher than in the caseof mailed questionnaires. The main drawback is that the interviews have to be shortand not too personal. Telephone interviewing is getting more difficult because of answering machines and people becoming suspicious of telemarketing.
Personal interviewing is the most versatile method. The interviewer can ask morequestions and record additional observations about the respondent, such as dress andbody language. Personal interviewing is the most expensive method and requires moreadministrative planning and supervision than the other three. It is also subject to interviewer bias or distortion. Personal interviewing takes two forms. In arranged interviews, respondents are contacted for an appointment. Often a small payment or
incentive is offered. Intercept interviews involve stopping people at a shopping mall orbusy street corner and requesting an interview. Intercept interviews have the drawT A B L E

1.4

Probability and Nonprobability
SamplesA. Probability Sample
Simple random sample

Every member of the population has an equal chance of selection.

Stratified random sample

The population is divided into mutually exclusive groups (suchas age groups), and random samples are drawn from eachgroup.

Cluster (area) sample

The population is divided into mutually exclusive groups (suchas city blocks), and the researcher draws a sample of thegroups to interview.

B. Nonprobability Sample

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Convenience sample

The researcher selects the most accessible population members.

Judgment sample

The researcher selects population members who are goodprospects for accurate information.

Quota sample

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

back of being nonprobability samples, and the interviews must not require too muchtime.
There is increased use of on-line interviewing. A company can include a questionnaire at its Web page and offer an incentive to answer the questionnaire. Or it canplace a banner on some frequently visited site inviting people to answer some questions and possibly win a prize. Or the company can enter a target chat room and seek
volunteers for a survey. In collecting data on-line, however, the company must recognize the data’s limitations. The company cannot assume that the data are representative of a target population, because the respondents are self-selected. People in
the target market who do not use the Internet or who don’t want to answer a questionnaire can bias the results. Still the information can be useful for exploratory research in suggesting hypotheses that might be investigated in a more scientificsubsequent survey.
Many companies are now using automated telephone surveys to solicit market research information. MetroHealth Systems in Cleveland used to have a dismal return
rate of 50 percent on its paper patient-satisfaction surveys. Then the company teamed
up with Sprint Healthcare systems of Overland Park, Kansas, to deliver an interactive
phone survey. Under the pilot project, patients who left the hospital received a phonecard with a toll-free number. When they dialed, a recording asked them several questions about their hospital experience. Results that once took months to sort now cameback in a few days, and more patients completed the survey.18
And how do you provide incentives for customers to answer your automated survey? One popular approach is to use prepaid phone cards as an incentive. A survey
is programmed into an interactive call system that not only administers the survey
but also sorts the results virtually any way the client wants them. Then the client distributes the calling cards to its selected market segment. When the call users place
their free calls, a voice prompt asks them if they would like to gain additional minutes by taking a short survey. NBC, Coca-Cola, and Amoco are some of the companies that have used prepaid phone cards to survey their customers.19

Step 3: Collect the Information
The data collection phase of marketing research is generally the most expensive andthe most prone to error. In the case of surveys, four major problems arise. Some respondents will not be at home and must be recontacted or replaced. Other respondents will refuse to cooperate. Still others will give biased or dishonest answers. Finally,some interviewers will be biased or dishonest.
Yet data collection methods are rapidly improving thanks to computers andtelecommunications. Some research firms interview from a centralized location. Professional interviewers sit in booths and draw telephone numbers at random. Whenthe phone is answered, the interviewer reads a set of questions from a monitor andtypes the respondents’ answers into a computer. This procedure eliminates editing
and coding, reduces errors, saves time, and produces all the required statistics. Other
research firms have set up interactive terminals in shopping centers. Persons willing
to be interviewed sit at a terminal, read the questions from the monitor, and type in
their answers. Most respondents enjoy this form of “robot” interviewing.20
Several recent technical advances have permitted marketers to research the sales
impact of ads and sales promotion. Information Resources, Inc. recruits a panel ofsupermarkets equipped with scanners and electronic cash registers. Scanners readthe universal product code on each product purchased, recording the brand, size,and price for inventory and ordering purposes. Meanwhile, the firm has recruiteda panel of these stores’ customers who have agreed to charge their purchases witha special Shopper’s Hotline ID card, which holds information about household characteristics, lifestyle, and income. These same customers have also agreed to let their
television-viewing habits be monitored by a black box. All consumer panelists receive their programs through cable television, and Information Resources controls
the advertising messages being sent to their houses. The firm can then capture
through store purchases which ads led to more purchasing and by which customers.21

Gathering Informationand Measuring
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113

Step 4: Analyze the Information
The next-to-last step in the marketing research process is to extract findings from thecollected data. The researcher tabulates the data and develops frequency distributions.
Averages and measures of dispersion are computed for the major variables. The researcher will also apply some advanced statistical techniques and decision models in
the hope of discovering additional findings. (Techniques and models are describedlater.)

Step 5: Present the Findings
As the last step, the researcher presents the findings to the relevant parties. The researcher should present major findings that are relevant to the major marketing decisions facing management.
The main survey findings for the American Airlines case show that:
1. The chief reasons for using in-flight phone service are emergencies, urgent
business deals, and mix-ups in flight times. Making phone calls to pass thetime would be rare. Most of the calls would be made by businesspeople on
expense accounts.
2. About 20 passengers out of every 200 would make in-flight phone calls at a
price of $25 a call; about 40 would make calls at $15. Thus a charge of $15
would produce more revenue (40 ⫻ $15 ⫽ $600) than $25 (20 ⫻ $25 ⫽ $500).
Still, this is far below the in-flight break-even cost of $1,000.
3. The promotion of in-flight phone service would win American about two extra passengers on each flight. The net revenue from these two extra passengers would be about $400, and the airline would be able to break even.
4. Offering in-flight service would strengthen the public’s image of American
Airlines as an innovative and progressive airline. American would break evenand gain some new passengers and customer goodwill.
T A B L E

1.5

1. Scientific method:

Effective marketing research uses the principles of the scientificmethod: careful observation, formulation of hypotheses, prediction, and testing.

2. Research creativity:

At its best, marketing research develops innovative ways to solvea problem: a clothing company catering to teenagers gave several young men video cameras, then used the videos for focus
groups held in restaurants and other places teens frequent.

3. Multiple methods:

Good marketing researchers shy away from overreliance on any
one method.They also recognize the value of using two or threemethods to increase confidence in the results.

4. Interdependence ofmodels and data:

Good marketing researchers recognize that data are interpreted
from underlying models that guide the type of information
sought.

5. Value and cost of
information:

Good marketing researchers show concern for estimating thevalue of information against its cost. Costs are typically easy todetermine, 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:

Good 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:Good marketing research benefits both the sponsoring company and its customers. The misuse of marketing research canharm or annoy consumers. Increasing resentment at what consumers regard as an invasion of their privacy or a sales pitch has
become a major problem for the research industry.

The Seven Characteristics of Good
Marketing Research

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M

A

R

K

E

T

I

N

G

Marketing Researchers Challenge
Conventional Marketing WisdomI

N S I G H T

Kevin Clancy and Robert Shulman charge that too many companies build their marketing plans on marketing myths. Webster s dictionary defines a myth as an ill-founded belief held
uncritically, especially by an interested group. Clancy and Shulman list the following myths that have led marketing managers
down the wrong path:
1. A brand’s best prospects are the heavy buyers in the category. Although most companies pursue heavy buyers, these people
may not be the best target of marketing efforts. Many heavy
users are highly committed to specific competitors, andthose who are not are often willing to switch products whena competitor offers them a better deal.
2. The more appealing a new product is, the more likely it will be a
success. This philosophy can lead the company to give away
too much to the customer and result in lower profitability.

3. The effectiveness of advertising is revealed by how memorable
and persuasive it is. Actually, the best ads, when measured byrecall and persuasion scores, are not necessarily the most effective ads. A much better predictor of an ad s effectivenessis the buyer s attitude toward the advertising specifically,
whether the buyer feels he or she received useful information and whether the buyer liked the advertising.
4. A company is wise to spend the major portion of its researchbudget on focus groups and qualitative research. Focus groups
and qualitative research are useful but the major part of theresearch budget should be spent on quantitative researchand surveys.
Some marketers will undoubtedly present counterexamples
where these myths have actually yielded positive results. Nevertheless, the authors deserve credit for forcing marketers to rethink their basic assumptions.

Source: Kevin J. Clancy and Robert S. Shulman, The Marketing Revolution: A Radical Manifesto for Dominating the Marketplace (New York: HarperBusiness, 1991).

Of course, these findings could suffer from a variety of errors, and management may
want to study the issues further. (See Table 1.5 and the Marketing Insight box, “Marketing Researchers Challenge Conventional Marketing Wisdom.”). But American could
now have more confidence in launching the telephone service.

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, for several reasons:■

A narrow conception of marketing research: Many managers see marketing research
as a fact-finding operation. They expect the researcher to design a questionnaire,choose a sample, conduct interviews, and report results, often without a careful
definition of the problem or of the decision alternatives facing management.
When fact-finding fails to be useful, management’s idea of the limited usefulnessof marketing research is reinforced.

■

Uneven caliber of marketing researchers: Some managers view marketing research as
little more than a clerical activity and reward it as such. Less competent marketing researchers are hired, and their weak training and deficient creativity lead to
unimpressive results. The disappointing results reinforce management’s prejudiceagainst marketing research. Management continues to pay low salaries to its
market researchers, thus perpetuating the basic problem.

■

Late and occasionally erroneous findings by marketing research: Managers want quick
results that are accurate and conclusive. Yet good marketing research takes timeand money. Managers are disappointed when marketing research costs too muchor takes too much time. They also point to well-known cases where the marketing
research predicted the wrong result, as when Coca-Cola introduced the New Coke.

■

Personality and presentational differences: Differences between the styles of line
managers and marketing researchers often get in the way of productive relationships. To a manager who wants concreteness, simplicity, and certainty, aGathering Informationand Measuring
Market Demand115

marketing researcher’s report may seem abstract, complicated, and tentative. Yetin the more progressive companies, marketing researchers are increasingly being
included as members of the product management team, and their influence onmarketing strategy is growing.

M ARKETING DECISION SUPPORT SYSTEM
A growing number of organizations are using a marketing decision support system tohelp their marketing managers make better decisions. Little defines an MDSS as follows:■A marketing decision support system (MDSS) is a coordinated collection of data, systems, tools, and techniques with supporting software andhardware by which an organization gathers and interprets relevant information from business and environment and turns it into a basis for marketing
action.22

Table 1.6 describes the major statistical tools, models, and optimization routinesthat comprise a modern MDSS. Lilien and Rangaswamy recently published Marketing
Engineering: Computer-Assisted Marketing Analysis and Planning, which provides a package of widely used modeling software tools.23
The April 13, 1998, issue of Marketing News lists over 100 current marketing andsales software programs that assist in designing marketing research studies, segmenting markets, setting prices and advertising budgets, analyzing media, and planning
sales force activity. Here are examples of decision models that have been used by marketing managers:
BRANDAID: A flexible marketing-mix model focused on consumer packaged goods
whose elements are a manufacturer, competitors, retailers, consumers, and the general environment. The model contains submodels for advertising, pricing, and competition. The model is calibrated with a creative blending of judgment, historicalanalysis, tracking, field experimentation, and adaptive control.24
CALLPLAN: A model to help salespeople determine the number of calls to make perperiod to each prospect and current client. The model takes into account travel
time as well as selling time. The model was tested at United Airlines with an experimental group that managed to increase its sales over a matched control groupby 8 percentage points.25
DETAILER: A model to help salespeople determine which customers to call on andwhich products to represent on each call. This model was largely developed forpharmaceutical detail people calling on physicians where they could represent nomore than three products on a call. In two applications, the model yielded strong
profit improvements.26
GEOLINE: A model for designing sales and service territories that satisfies three principles: the territories equalize sales workloads; each territory consists of adjacentareas; and the territories are compact. Several successful applications were reported.27
MEDIAC: A model to help an advertiser buy media for a year. The media planningmodel includes market-segment delineation, sales potential estimation, diminishing marginal returns, forgetting, timing issues, and competitor media schedules.28
Some models now claim to duplicate the way expert marketers normally maketheir decisions. Some recent expert system models include:

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PROMOTER evaluates sales promotions by determining baseline sales (what sales
would have been without promotion) and measuring the increase over baseline associated with the promotion.29
ADCAD recommends the type of ad (humorous, slice of life, and so on) to use given themarketing goals, product characteristics, target market, and competitive situation.30

Statistical Tools
1. Multiple regression:

T A B L E
A statistical technique for estimating a best fitting equation
showing how the value of a dependent variable varies with changing values in a number of independent variables. Example: A company can estimate how unit sales are influenced by changes in
the level of company advertising expenditures, sales force size, andprice.

2. Discriminant analysis:

A statistical technique for classifying an object or persons into two
or more categories. Example: A large retail chain store can determine the variables that discriminate between successful and unsuccessful store locations.a

3. Factor analysis:

A statistical technique used to determine the few underlying dimensions of a larger set of intercorrelated variables. Example: A
broadcast network can reduce a large set of TV programs down
to a small set of basic program types.b

4. Cluster analysis:

A statistical technique for separating objects into a specified number of mutually exclusive groups such that the groups are relatively homogeneous. Example: A marketing researcher might want
to classify a set of cities into four distinct groups.

5. Conjoint analysis:

A statistical technique whereby respondents ranked preferences
for different offers are decomposed to determine the persons inferred utility function for each attribute and the relative importance of each attribute.Example: An airline can determine the total
utility delivered by different combinations of passenger services.

1.6

Quantitative Tools Used inMarketing Decision Support
Systems

6. Multidimensional scaling: A variety of techniques for producing perceptual maps of competitive products or brands. Objects are represented as points ina multidimensional space of attributes where their distance fromone another is a measure of dissimilarity. Example: A computer
manufacturer wants to see where his brand is positioned in relation to competitive brands.
Models
1. Markov-process model:This model shows the probability of moving from a current state
to any future state. Example: A branded packaged-goods manufacturer can determine the period-to-period switching and staying rates for her brand and, if the probabilities are stable, thebrand s ultimate brand share.

2. Queuing model:This model shows the waiting times and queue lengths that canbe expected in any system, given the arrival and service times andthe number of service channels. Example: A supermarket can use
the model to predict queue lengths at different times of the day
given the number of service channels and service speed.

3. New-product pretest

This model involves estimating functional relations between
buyer states of awareness, trial, and repurchase based on consumer preferences and actions in a pretest situation of the marketing offer and campaign. Among the well-known models are
ASSESSOR, COMP, DEMON, NEWS, and SPRINTER.cmodels:4. Sales-response models:

Optimization Routines
1. Differential calculus:

This is a set of models that estimate functional relations between
one or more marketing variables such as sales force size, advertising expenditure, sales-promotion expenditure, and so forthand the resulting demand level.
This technique allows finding the maximum or minimum value
along a well-behaved function.
(continued)

Gathering Informationand Measuring
Market Demand117

T A B L E

1.6 (cont.)

Quantitative Tools Used inMarketing Decision Support
Systems

2. Mathematicalprogramming:

This technique allows finding the values that would optimize
some objective function that is subject to a set of constraints.

3. Statistical decision
theory:This technique allows determining the course of action that produces the maximum expected value.

4. Game theory:

This technique allows determining the course of action that will
minimize the decision maker s maximum loss in the face of theuncertain behavior of one or more competitors.

5. Heuristics:

This involves using a set of rules of thumb that shorten the time
or work required to find a reasonably good solution in a complex
system.

S. Sands, Store Site Selection by Discriminant Analysis, Journal of the Market Research Society, 1981, pp. 40 51.
V. R. Rao, Taxonomy of Television Programs Based on Viewing Behavior, Journal of Marketing Research, August 1975, pp.
355 58.
c
See Kevin J. Clancy, Robert Shulman, and Marianne Wolf, Simulated Test Marketing (New York: Lexington Books, 1994).
ab

COVERSTORY examines a mass of syndicated sales data and writes an English-language memo reporting the highlights.31
The first decade of the twenty-first century will undoubtedly usher in further software programs and decision models.

A ND E OMVAENRDV IME EWA SO UF R FE OMRE ENCTA S T I N G A N D
One major reason for undertaking marketing research is to identify market opportunities. Once the research is complete, the company must measure and forecast the size,
growth, and profit potential of each market opportunity. Sales forecasts are used by finance to raise the needed cash for investment and operations; by the manufacturing
department to establish capacity and output levels; by purchasing to acquire the rightamount of supplies; and by human resources to hire the needed number of workers.
Marketing is responsible for preparing the sales forecasts. If its forecast is far off the mark,the company will be saddled with excess inventory or have inadequate inventory.
Sales forecasts are based on estimates of demand. Managers need to define what
they mean by market demand.

THE MEASURES OF MARKET DEMAND
Companies can prepare as many as 90 different types of demand estimates (see Figure 1-12. Demand can be measured for six different product levels, five different spacelevels, and three different time levels.
Each demand measure serves a specific purpose. A company might forecast shortrun demand for a particular product for the purpose of ordering raw materials, planning production, and borrowing cash. It might forecast regional demand for its major
product line to decide whether to set up regional distribution.

WHICH MARKET TO MEASURE?
Marketers talk about potential markets, available markets, served markets, and penetrated markets. Let us start with the definition of market:■

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A market is the set of all actual and potential buyers of a market offer.

The size of a market hinges on the number of buyers who might exist for a particular market offer. The potential market is the set of consumers who profess a sufficientlevel of interest in a market offer.

Spacelevel

Productlevel

F I G U R E

WorldU.S.A.
RegionTerritory
Customer

1-12

Ninety Types of Demand
Measurement (6 ⫻ 5 ⫻ 3)

All sales
Industrysales
Company
sales
Productline sales
Product
form sales
Product
item sales
Short run

Medium run

Long runTime level

Consumer interest is not enough to define a market. Potential consumers musthave enough income and must have access to the product offer. The available market
is the set of consumers who have interest, income, and access to a particular offer.
For some market offers, the company or government may restrict sales to certain
groups. For example, a particular state might ban motorcycle sales to anyone under
21 years of age. The eligible adults constitute the qualified available market—the set of
consumers who have interest, income, access, and qualifications for the particularmarket offer.
A company can go after the whole available market or concentrate on certain segments. The target market (also called the served market) is the part of the qualified available market the company decides to pursue. The company, for example, might decideto concentrate its marketing and distribution effort on the East Coast.
The company will end up selling to a certain number of buyers in its target
market. The penetrated market is the set of consumers who are buying the company’s
product.
These market definitions are a useful tool for market planning. If the company is
not satisfied with its current sales, it can take a number of actions. It can try to attract a larger percentage of buyers from its target market. It can lower the qualifications of potential buyers. It can expand its available market by opening distribution
elsewhere or lowering its price. Ultimately, the company can try to expand the potential market by advertising the product to less interested consumers or ones not previously targeted.
Some retailers have been successful at retargeting their market with new ad campaigns. Consider the case of Target Stores.
■

Target Facing stiff competition from top retailers Wal-Mart and Kmart, Target Stores decided to reach more affluent shoppers and woo them away fromdepartment stores. The midwestern discount retailer ran an unusual advertising campaign in some unusual spots: the Sunday magazines of the New
York Times, the Los Angeles Times, and the San Francisco Examiner. One ad
showed a woman riding a vacuum cleaner through the night sky. The ad simply said “Fashion and Housewares” with the Target logo in the lower righthand corner. With the look of department store ads, these hip spots have
now gained Target Stores a reputation as the “upstairs” mass retailer. It’s theplace where folks who normally shop in a department store wouldn’t feelthey were slumming by purchasing clothing along with staples like housewares, both at good prices.32

Gathering Informationand Measuring
Market Demand119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
As we’ve seen, 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, it can be called the market demand function. The dependence of
total market demand on underlying conditions is illustrated in Figure 1-13. The horizontal axis shows different possible levels of industry marketing expenditure in agiven time period. The vertical axis shows the resulting demand level. The curve represents the estimated market demand associated with varying levels of industry marketing expenditure. Some base sales (called the market minimum, labeled Q1 in the
figure) would take place without any demand-stimulating expenditures. Higher levels of industry marketing expenditures would yield higher levels of demand, first at
an increasing rate, then at a decreasing rate. Marketing expenditures beyond a certain level would not stimulate much further demand, thus suggesting an upper limit
to market demand called the market potential (labeled Q 2 in the figure).
The distance between the market minimum and the market potential shows theoverall 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 its total size by the level of industry marketing expenditures. In terms of Figure 1-13(a), the distance between Q 1 and Q 2 is relatively large. A nonexpansible market—for example, the market for opera—is not muchaffected by the level of marketing expenditures; the distance between Q 1 and Q 2 isrelatively 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 towinning a larger market share for their product (the level of selective demand for thecompany’s product).
It is important to emphasize that the market demand function is not a picture ofmarket demand over time. Rather, the curve shows alternative current forecasts ofmarket demand associated with alternative possible levels of industry marketing effort in the current period.

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 have to visualize the level of market demand resulting from a “veryhigh” level of industry marketing expenditure, where further increases in marketing
effort would have little effect in stimulating further demand.
■

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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 in a period of recession versus a period of prosperity. The market
potential is higher during prosperity. The dependence of market potential on the environment is illustrated in Figure 1-13(b). Market analysts distinguish between the position of the market demand function and movement along it. Companies cannot doMarketpotential, Q2Marketforecast, QF

Marketminimum, Q1

Plannedexpenditure

Market demand in the specific periodMarket demand in the specific period(a) Marketing demand as a function of industry
marketing expenditure (assumes a particularmarketing environment)(b) Marketing demand as a function of industry
marketing expenditure (two different
environments assumed)
Marketpotential(prosperity)

Prosperity

Marketpotential(recession)

Recession

Industry marketing expenditure

Industry marketing expenditureF I G U R E
anything about the position of the market demand function, which is determined by
the marketing environment. However, companies influence their particular locationon the function when they decide how much to spend on marketing.

1-13

Market Demand Functions

Company Demand
We are now ready to define company demand.
■

Company demand is the company’s estimated share of market demand atalternative levels of company marketing effort in a given time period.

The company’s share of market demand depends on how its products, services, prices,
communications, and so on are perceived relative to the competitors’. If other things
are equal, the company’s market share would depend on the size and effectiveness of
its market expenditures relative to competitors. 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.33

Company Sales Forecast
Once marketers have estimated company demand, their next task is to choose a levelof marketing effort. The chosen level will produce an expected level of sales.
■

The company sales forecast is the expected level of company sales basedon a chosen marketing plan and an assumed marketing environment.

The company sales forecast is represented graphically with company sales on the vertical axis and company marketing effort on the horizontal axis, as in Figure 1-13. Toooften the sequential relationship between the company forecast and the company
marketing plan is confused. One frequently hears that the company should develop
its marketing plan on the basis of its sales forecast. This forecast-to-plan sequence isvalid if “forecast” means an estimate of national economic activity or if company demand is nonexpansible. The sequence is not valid, however, where market demandis 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 worth mentioning in relation to the company sales forecast.
■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.

Management sets sales quotas on the basis of the company sales forecast and the psychology of stimulating its achievement. Generally, sales quotas are set slightly higher
than estimated sales to stretch the sales force’s effort.

Gathering Informationand Measuring
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121

■

A sales budget is a conservative estimate of the expected volume of sales
and is used primarily for making current purchasing, production, and cashflow decisions.

The sales budget considers the sales forecast and the need to avoid excessive risk. Sales
budgets are 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 competitors. The absolute limit of company demand is, of course, the market potential. The two would be equal if the company
achieved 100 percent of the market. In most cases, company sales potential is lessthan market potential, even when company marketing expenditures increase considerably relative to competitors’. The reason is that each competitor has a hard core ofloyal buyers who are not very responsive 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 amount of sales that might be available to all
the firms in an industry during a given period under a given level of industry marketing effort and given environmental conditions. A common way to estimate total
market potential is as follows: Estimate the potential number of buyers times the average quantity purchased by a buyer times the price.
If 100 million people buy books each year, and the average book buyer buys threebooks a year, and the average price of a book is $10, then the total market potential
for books is $3 billion (100 million ⫻ 3 ⫻ $10). The most difficult component to estimate is the number of buyers in the specific product or market. One can always startwith the total population in the nation, say 261 million people. The next step is toeliminate groups that obviously would not buy the product. Let us assume that illiterate people and children under 12 do not buy books, and they constitute 20 percentof the population. This means that only 80 percent of the population, or approximately 209 million people, would be in the suspect pool. We might do further research
and find that people of low income and low education do not read books, and they
constitute over 30 percent of the suspect pool. Eliminating them, we arrive at a prospectpool of approximately 146.3 million book buyers. We would use this number of potential buyers to calculate total market potential.
A variation on this method is the chain-ratio method. It involves multiplying a basenumber by several adjusting percentages. Suppose a brewery is interested in estimating the market potential for a new light beer. An estimate can be made by the following calculation:34
Demand for the new light beer ⫽ Population ⫻ personal discretionary income
per capita ⫻ average percentage of discretionary income spent on food ⫻ average percentage of amount spent on food that is spent
on beverages ⫻ average percentage of amountspent on beverages that is spent on alcoholic
beverages ⫻ average percentage of amountspent on alcoholic beverages that is spent onbeer ⫻ expected percentage of amount spent
on beer that will be spent on light beer122

Analyzing
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Area Market Potential
Companies face the problem of selecting the best territories and allocating their marketing budget optimally among these territories. Therefore, they need to estimate themarket potential of different cities, states, and nations. Two major methods of assessing area market potential are available: the market-buildup method, which is usedprimarily by business marketers, and the multiple-factor index method, which is usedprimarily 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. Thismethod 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 togather.
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 lathe in the area. The buyers consist primarily of manufacturing
establishments that have to shape or ream wood as part of their operation, so thecompany could compile a list from a directory of all manufacturing establishmentsin the Boston area. Then it could estimate the number of lathes each industry mightpurchase based on the number of lathes per thousand employees or per $1 millionof sales in that industry.
An efficient method of estimating area market potentials makes use of the Standard Industrial Classification (SIC) System developed by the U.S. Bureau of the Census.
The SIC classifies all manufacturing into 20 major industry groups, each with a twodigit code. Thus number 25 is furniture and fixtures, and number 35 is machinery except electrical. Each major industry group is further subdivided into about 150 industry
groups designated by a three-digit code (number 251 is household furniture, and number 252 is office furniture). Each industry is further subdivided into approximately
450 product categories designated by a four-digit code (number 2521 is wood officefurniture, and number 2522 is metal office furniture). For each four-digit SIC number, the Census of Manufacturers provides the number of establishments subclassified
by location, number of employees, annual sales, and net worth. The SIC System iscurrently being changed over to the new North American Industry Classification System (NAICS), which was developed by the United States, Canada, and Mexico to provide statistics that are comparable across the three countries. It includes 350 new
industries, and it uses 20 instead of the SIC’s 10 broad sectors of the economy, changes
reflecting how the economy has changed. Industries are identified by a six-digit rather
than a four-digit code, with the last digit changing depending on the country. The
first information based on the new system will be published in early 1999 in the new
Economic Census data.35
To use the SIC, the lathe manufacturer must first determine the four-digit SIC
codes that represent products whose manufacturers are likely to require lathe machines. For example, lathes will be used by manufacturers in SIC number 2511 (woodhousehold furniture), number 2521 (wood office furniture), and so on. To get a full
picture of all four-digit SIC industries that might use lathes, the company can use
three methods: (1) It can determine past customers’ SIC codes; (2) it can go throughthe SIC manual and check off all the four-digit industries that, in its judgment, would
have an interest in lathes; (3) it can 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 thenumber of lathes that will be used in each industry. Suppose customer industry sales
are the most appropriate base. For example, in SIC number 2511, ten lathes may be
used for every $1 million worth of sales. Once the company estimates the rate of lathe
ownership relative to the customer industry’s sales, it can compute the market potential.
Table 1.7 shows a hypothetical computation for the Boston area involving two SIC
codes. In number 2511 (wood household furniture), there are six establishments withannual sales of $1 million and two establishments with annual sales of $5 million. It
is estimated that 10 lathes can be sold in this SIC code for every $1 million in customer sales. The six establishments with annual sales of $1 million account for $6
million in sales, which is a potential of 60 lathes (6 ⫻ 10). Altogether, it appears thatthe Boston area has a market potential for 200 lathes.
The company can use the same method to estimate the market potential for other

Gathering Informationand Measuring
Market Demand123

T A B L E

1.7

Market-Buildup Method Using SIC
Codes

SIC
2511
2521

(a)
AnnualSalesin Millions of $1(b)
Numberof
Establishments
6(c)Potential
Number of
Lathe Sales
per $1 Million
Customer
Sales
10

5

2

10

MarketPotential(a ⴛ b ⴛ c)
60
100

1

3

5

15

5

1

5

25

30

200

areas in the country. Suppose the market potentials for all the markets add up to 2,000
lathes. This means that the Boston market contains 10 percent of the total market
potential, which might warrant the company’s allocating 10 percent of its marketing
expenditures to the Boston market. In practice, SIC information is not enough. The
lathe manufacturer also needs additional information about each market, such as theextent of market saturation, the number of competitors, the market growth rate, andthe average age of existing equipment.
If the company decides to sell lathes in Boston, it must know how to identify thebest-prospect companies. In the old days, sales reps called on companies door to door;
this was called bird-dogging or smokestacking. Cold calls are far too costly today. The
company should get a list of Boston companies and qualify them by direct mail ortelemarketing to identify the best prospects. The lathe manufacturer can access Dun’sMarket Identifiers, which lists 27 key facts for over 9,300,000 business locations in the
United States and Canada.
Multiple-Factor Index Method. Like business marketers, consumer companies also have to estimate area market potentials. But the customers of consumer companies are too numerous to be listed. Thus the method most commonly used inconsumer markets is a straightforward index method. A drug manufacturer, for example, might assume that the market potential for drugs is directly related to population size. If the state of Virginia has 2.28 percent of the U.S. population, the company
might assume that Virginia will be a market for 2.28 percent of total drugs sold.
A single factor, however, 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 witheach factor assigned a specific weight.
The numbers are the weights attached to each variable. For example, suppose Virginia has 2.00 percent of the 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 would be
0.5(2.00) ⫹ 0.3(1.96) ⫹ 0.2(2.28) ⫽ 2.04

124

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Thus 2.04 percent of the nation’s drug sales might be expected to take place in Virginia.
The weights used in the buying-power index are somewhat arbitrary. Other weights
can be assigned if appropriate. Furthermore, a manufacturer would want to adjust themarket potential for additional factors, such as competitors’ presence in that market,
local promotional costs, seasonal factors, and local market idiosyncrasies.
Many companies compute other area indexes as a guide to allocating marketing
resources. Suppose the drug company is reviewing the six cities listed in Table 1.8.
The first two columns show its percentage of U.S. brand and category sales in thesesix cities. Column 3 shows the brand development index (BDI), which is the index ofbrand sales to category sales. Seattle, for example, has a BDI of 114 because the brandT A B L E

Territory
Seattle(a)
Percent of
U.S. Brand
Sales
3.09

(b)
Percent of
U.S. Category
Sales
2.71

BDI
(a ⴜ b) ⴛ 100
114

Portland

6.74

10.41

65

Boston

3.49

3.85

91

Toledo

.97

.81

120

Chicago

1.13

.81

140

Baltimore

3.12

3.00

104

1.8

Calculating the Brand Development Index (BDI)

is relatively more developed than the category in Seattle. Portland has a BDI of 65,
which means that the brand in Portland is relatively underdeveloped. Normally, thelower the BDI, the higher the market opportunity, in that there is room to grow thebrand. However, other marketers would argue the opposite, that marketing funds
should go into the brand’s strongest markets—where it might be easy to capture morebrand share.36
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 (which were 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. Marketers have found these data extremely
useful for identifying high-potential retail areas within large cities or for buying mailing lists to use in direct-mail campaigns.

Industry Sales and Market Shares
Besides estimating total potential and area potential, a company needs to know theactual industry sales taking place in its market. This means identifying its competitors and estimating their sales.
The industry’s trade association will often collect and publish total industry sales,
although it usually does not list individual company sales separately. Using this information, each company can evaluate its performance against the whole industry.
Suppose a company’s sales are increasing 5 percent a year, and industry sales are increasing 10 percent. This company is actually losing its relative standing in the industry.
Another way to estimate sales is to buy reports from a marketing research firmthat audits total sales and brand sales. For example, Nielsen Media Research audits retail sales in various product categories in supermarkets and drugstores and sells thisinformation to interested companies. These audits can give a company valuable information about its total product-category sales as well as brand sales. It can compare
its performance to the total industry and/or any particular competitor to see whether
it is gaining or losing share.
Business-goods marketers typically have a harder time estimating industry sales
and market shares than consumer-goods manufacturers do. Business marketers haveno Nielsens to rely on. Distributors typically will not supply information about how
much of competitors’ products they are selling. Business-goods marketers therefore
operate with less knowledge of their market-share results.

ESTIMATING FUTURE DEMAND
We are now ready to examine methods of estimating future demand. Very few products or services lend themselves to easy forecasting. Those that do generally involve

Gathering Informationand Measuring
Market Demand125

a product whose absolute level or trend is fairly constant and where competition isnonexistent (public utilities) or stable (pure oligopolies). In most markets, total demand and company demand are not stable. Good forecasting becomes a key factor
in company success. The more unstable the demand, the more critical is forecast accuracy, and the more elaborate is forecasting procedure.
Companies commonly use a three-stage procedure to prepare a sales forecast. They
prepare a macroeconomic forecast first, followed by an industry forecast, followed by
a company sales forecast. The macroeconomic forecast calls for projecting inflation,
unemployment, interest rates, consumer spending, business investment, government
expenditures, net exports, and other variables. The end result is a forecast of gross national product, which is then used, along with other environmental indicators, toforecast industry sales. The company derives its sales forecast by assuming that it will
win a certain market share.
How do firms develop their forecasts? Firms may do it internally or buy forecasts
from outside sources such as:■

Marketing research firms, which develop a forecast by interviewing customers, distributors, and other knowledgeable parties.

■

Specialized forecasting firms, which produce long-range forecasts of particularmacroenvironmental components, such as population, natural resources, andtechnology. Some examples are Data Resources, Wharton Econometric, andChase Econometric.

■

Futurist research firms, which produce speculative scenarios. Some examples are
the Hudson Institute, the Futures Group, and the Institute for the Future.

All forecasts are built on one of three information bases: what people say, what
people do, or what people have done. The first basis—what people say—involves surveying the opinions of buyers or those close to them, such as salespeople or outside
experts. It encompasses three methods: surveys of buyer’s intentions, composites ofsales force opinions, and expert opinion. Building a forecast on what people do involves another method, putting the product into a test market to measure buyer response. The final basis—what people have done—involves analyzing records of pastbuying behavior or using 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. Because buyer behavior is so important, buyers should be surveyed.
In regard to major consumer durables (for example, major appliances), several research organizations conduct periodic surveys of consumer buying intentions. These
organizations ask questions like the following:
Do you intend to buy an automobile within the next six months?
0.00

0.20

0.40

0.60

0.80

1.00

No chance

Slight possibility

Fair possibility

Good possibility

High probability

CertainThis is called a purchase probability scale. The various surveys also inquire into consumer’s present and future personal finances and their expectations about the economy. The various bits of information are then combined into a consumer sentimentmeasure (Survey Research Center of the University of Michigan) or a consumer confidence measure (Sindlinger and Company). Consumer durable-goods producers subscribe to these indexes in the hope of anticipating major shifts in consumer buying
intentions so that they can adjust their production and marketing plans accordingly.
Some surveys measuring purchase probability are geared toward getting feedbackon specific new products before they are released in the marketplace:126

Analyzing
MarketingOpportunities■

AcuPOLL Cincinnati-based AcuPOLL is one of the nation’s biggest screeners of new products. In 1997 it sifted through more than 25,000 new items,

picking 400 of the most innovative to test on 100 nationally representative
primary grocery store shoppers. The consumers see a photo and brief description and are asked (1) whether they would buy the product and (2)whether they think it is new and different. Products deemed both uniqueand “buys” are dubbed “pure gold.” Products that are just unique but not desired by consumers are dubbed “fool’s gold.” AcuPOLL’s pure gold list in 1997
included “Hair-off Mittens” to remove hair from women’s legs easily, Uncle
Ben’s Calcium Plus rice, and Shout Wipes stain treater towelettes. Fool’s gold
products included Juiced OJ (PLUS) Caffeine, a potent cocktail of caffeinelaced orange juice; Lumident ChewBrush, a toothbrush that can be chewed
like gum; and Back to Basics, a “microbrewed” beer shampoo that starts withmalted barley so you can put a “head” on your head.37
For business buying, various agencies carry out buyer-intention surveys regarding
plant, equipment, and materials. The better-known agencies are McGraw-Hill Researchand Opinion Research Corporation. Their estimates tend to fall within a 10 percent
error band of the actual outcomes. Buyer-intention surveys are particularly useful inestimating demand for industrial products, consumer durables, product purchases
where advanced planning is required, and new products. The value of a buyer-intention survey increases to the extent that the cost of reaching buyers is small, the buyers are few, they have clear intentions, they implement their intentions, and they
willingly disclose their intentions.

Composite of Sales Force Opinions
Where buyer interviewing is impractical, the company may ask its sales representatives to estimate their future sales. Each sales representative estimates how much eachcurrent and prospective customer will buy of each of the company’s products.
Few companies use their sales force’s estimates without making some adjustments.
Sales representatives might be pessimistic or optimistic, or they might go from one
extreme to another because of a recent setback or success. Furthermore, they are often unaware of larger economic developments and do not know how their company’smarketing plans will influence future sales in their territory. They might deliberately
underestimate demand so that the company will set a low sales quota. Or they mightlack the time to prepare careful estimates or might not consider the effort worthwhile.
To encourage better estimating, the company could supply certain aids or incentives to the sales force. For example, sales reps might receive a record of their past
forecasts compared with their actual sales and also a description of company assumptions on the business outlook, competitor behavior, and marketing plans.
Involving the sales force in forecasting brings a number of benefits. Sales reps
might have better insight into developing trends than any other single group. After
participating in the forecasting process, sales reps might have greater confidence intheir sales quotas and more incentive to achieve them.38 Also, a “grassroots” forecasting procedure provides very detailed estimates broken down by product, territory,
customer, and sales reps.

Expert Opinion
Companies can also obtain forecasts from experts, including dealers, distributors, suppliers, marketing consultants, and trade associations. Large appliance companies survey
dealers periodically for their forecasts of short-term demand, as do car companies. Dealer
estimates are subject to the same strengths and weaknesses as sales force estimates. Manycompanies buy economic and industry forecasts from well-known economic-forecasting firms. These specialists are able to prepare better economic forecasts than the company because they 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 a group estimate (group-discussion methods). Or
the experts supply their estimates individually, and an analyst combines them into asingle estimate (pooling of individual estimates). Alternatively, the experts supply individual estimates and assumptions that are reviewed by the company, then revised.
Further rounds of estimating and refining follow (Delphi method).39

Gathering Informationand Measuring
Market Demand127

Past-Sales Analysis
Sales forecasts can be developed on the basis of past sales. Time-series analysis consistsof breaking down past time series into four components (trend, cycle, seasonal, anderratic) and projecting these components into the future. Exponential smoothing consists of projecting the next period’s sales by combining an average of past sales andthe most recent sales, giving more weight to the latter. Statistical demand analysis consists of measuring the impact level of each of a set of causal factors (e.g., income, marketing expenditures, price) on the sales level. Finally, econometric analysis consists ofbuilding sets of equations that describe a system and proceeding to fit the parameters statistically.

Market-Test Method
Where buyers do not plan their purchases carefully or experts are not available or reliable, a direct market test is desirable. A direct market test is especially desirable inforecasting new-product sales or established product sales in a new distribution channel or territory.

S U M M A R Y

128Analyzing
MarketingOpportunities

1. Three developments make the need for marketing information greater now thanat any time in the past: the rise of global marketing, the new emphasis on buyers’
wants, and the trend toward nonprice competition.
2. To carry out their analysis, planning, implementation, and control responsibilities,
marketing managers need a marketing information system (MIS). The MIS’s role is toassess the managers’ information needs, develop the needed information, and distribute that information in a timely manner.
3. An MIS has four components: (a) an internal records system, which includes information on the order-to-payment cycle and sales reporting 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; (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; and (d) a computerized marketing decision support system thathelps managers interpret relevant information and turn it into a basis for marketing action.
4. 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, cost–benefit analysis, healthy skepticism, and an ethical focus.
5. The process consists of defining the problem and research objective, developing
the research plan, collecting the information, analyzing the information, and presenting the findings to management. In conducting research, firms must decide
whether to collect their own data or use data that already exist. They must also decide which research approach (observational, focus-group, survey, behavioral data,or experimental) and which research instrument (questionnaire or mechanical instruments) to use. In addition, they must decide on a sampling plan and contact
methods.
6. One major reason for undertaking marketing research is to discover market opportunities. Once the research is complete, the company must carefully evaluate
its opportunities and decide which markets to enter. Once in the market, it must
prepare sales forecasts based on estimates of demand.
7. 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, or engage in market testing. Mathematical models, advanced statisticaltechniques, and computerized data collection procedures are essential to all typesof demand and sales forecasting.

A P P L I C A T I O N S
C O N C E P T S
1. Each of the following questions appears on a paper questionnaire that respondents
fill out and return to a research firm. Rephrase or reformat each question so thatthe respondent is more likely to provide the research firm with the information it
needs.
a. Which brand do you like best?
b. Can you tell me how many children you have, whether they are girls or boys,
and how old they are?
c. How much say do you have regarding the charities that your church contributes to?
d. With what frequency have you experienced this phenomenon of late?
e. Are auto manufacturers making satisfactory progress in controlling auto emissions?
2. Levi Strauss’s marketing team has determined that the men who buy Levi’s jeans
fall into five categories:■

Utilitarian jeans customer: The Levi loyalist who wears jeans for work and play■

Trendy casual: High-fashion customers who come to life at night■

Price shopper: Buys on the basis of price at department stores and discount stores■

Mainstream traditionalist: Over 45 years old and shops in a department store accompanied by his wife■

Classic independent: Independent buyer, shops alone in specialty stores, and wants
clothes that make him “look right” (the target in this case)

The marketing team wants to develop a product for the “classic independent” segment. Should the Levi name be used on the new product? Can this product bemarketed successfully through Levi’s current channels of distribution? What kinds
of formal market research should the company conduct to help it make a sounddecision on whether to pursue this segment and how?
3. Suggest creative ways to help companies research the following issues:a. A liquor company needs to estimate liquor consumption in a legally dry town.
b. A magazine distribution house wants to know how many people read a specific magazine in doctors’ offices.
c. A men’s hair tonic producer wants to know at least four alternative ways toresearch how men use its products.
4. A children’s toy manufacturer is developing its sales forecast for next year. The
company’s forecaster has estimated sales for six different environment/strategy
combinations (see Table 1.9).
T A B L E

1.9

High
Marketing
BudgetMediumMarketing
BudgetLow
Marketing
BudgetRecession

15

12

10

Normal20

16

14

Sales Forecasts

The forecaster believes that there is an 0.20 probability of recession and an 0.80
probability of normal times. He also believes the probabilities of a high, medium,

Gathering Informationand Measuring
Market Demand

129and low company market budget are 0.30, 0.50, and 0.20, respectively. How might
the forecaster arrive at a single-point sales forecast? What assumptions are being
made?

130

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MarketingOpportunities

N O T E S
1. See James C. Anderson and James A.
Narus, Business Market Management: Understanding, Creating and Delivering Value(Upper Saddle River, NJ: Prentice Hall,
1998), Chap. 2.
2. John Koten, “You Aren’t Paranoid if You
Feel Someone Eyes You Constantly,”
Wall Street Journal, March 29, 1985, pp.

1, 22; “Offbeat Marketing,” Sales & Marketing Management, January 1990, p. 35;
and Erik Larson, “Attention Shoppers:
Don’t Look Now but You Are Being
Tailed,” Smithsonian Magazine, January
1993, pp. 70–79.
3. From Consumer Europe 1993, a publication of Euromonitor, pnc. London: Tel⫹4471 251 8021; U.S. offices: (312) 541-

Gathering Informationand Measuring
Market Demand

131

132

Analyzing
MarketingOpportunities

8024.
4. Donna DeEulio, “Should Catalogers
Travel the EDI Highway?” Catalog Age 11,
no. 2 (February 1994): 99.
5. John W. Verity, “Taking a Laptop on aCall,” Business Week, October 25, 1993,
pp. 124–25.
6. Stannie Holt, “Sales-Force Automation
Ramps Up,” InfoWorld, March 23, 1998,
pp. 29, 38.
7. James A. Narus and James C. Anderson,“Turn Your Industrial Distributors into
Partners,” Harvard Business Review,
March–April 1986, pp. 66–71.
8. Kevin Helliker, “Smile: That Cranky
Shopper May Be a Store Spy,” Wall Street
Journal, November 30, 1994, pp. B1, B6.
9. Don Peppers, “How You Can Help
Them,” Fast Company, October–November 1997, pp. 128–36.
10. See 1994 Survey of Market Research, eds.
Thomas Kinnear and Ann Root
(Chicago: American Marketing Association, 1994).
11. See William R. BonDurant, “Research:
The ‘HP Way,’” Marketing Research, June
1992, pp. 28–33.
12. Kevin J. Clancy and Robert S. Shulman,
Marketing Myths That Are Killing Business,(New York: McGraw-Hill, 1994), p. 58;
Phaedra Hise, “Comprehensive CompuServe,” Inc., June 1994, p. 109; “Business Bulletin: Studying the Competition,” Wall Street Journal, p. A1.5.
13. For a discussion of the decision-theory
approach to the value of research, see
Donald R. Lehmann, Sunil Gupta, andJoel Steckel, Market Research (Reading,
MA: Addison-Wesley, 1997).
14. For an excellent annotated reference tomajor secondary sources of business andmarketing data, see Gilbert A. ChurchillJr., Marketing Research: MethodologicalFoundations, 6th ed. (Fort Worth, TX:
Dryden, 1995).
15. Thomas L. Greenbaum, The Handbook for
Focus Group Research (New York: Lexington Books, 1993).
16. Sarah Schafer, “Communications: Getting a Line on Customers,” Inc. Tech
(1996), p. 102; see also Alexia Parks, “OnLine Focus Groups Reshape Market Research Industry,” Marketing News, May
12, l997, p. 28.
17. Roger D. Blackwell, James S. Hensel,
Michael B. Phillips, and Brian Sternthal,
Laboratory Equipment for Marketing Research (Dubuque, IA: Kendall/Hunt,
1970); and Wally Wood, “The Race to Replace Memory,” Marketing and Media Decisions, July 1986, pp. 166–67. See also
Gerald Zaltman, “Rethinking Market Research: Putting People Back In,” Journalof Marketing Research 34, no. 4 (November 1997): 424–37.
18. Chris Serb, “If You Liked the Food, Press
1,” Hospitals and Health Networks, April5, 1997, p. 99.
19. G. K. Sharman, “Sessions Challenge Status Quo,” Marketing News, November 10,
1997, p. 18; “Prepaid Phone Cards Are
Revolutionizing Market Research Techniques,” Direct Marketing, March l998, p.
12.
20. Selwyn Feinstein, “Computers Replacing
Interviewers for Personnel and Marketing Tasks,” Wall Street Journal, October 9,
1986, p. 35.
21. For further reading, see Joanne Lipman,“Single-Source Ad Research Heralds Detailed Look at Household Habits,” WallStreet Journal, February 16, 1988, p. 39;
Joe Schwartz, “Back to the Source,” American Demographics, January 1989, pp.
22–26; and Magid H. Abraham andLeonard M. Lodish, “Getting the Most
Out of Advertising and Promotions,”
Harvard Business Review, May–June 1990,
pp. 50–60.
22. John D. C. Little, “Decision Support Systems for Marketing Managers,” Journal ofMarketing, Summer 1979, p. 11.
23. Gary L. Lilien and Arvind Rangaswamy,
Marketing Engineering: Computer-Assisted
Marketing Analysis and Planning (Reading,
MA: Addison Wesley, 1998).
24. John D. C. Little, “BRANDAID: A Marketing Mix Model, Part I: Structure; Part
II: Implementation,” Operations Research
23 (1975): 628–73.
25. Leonard M. Lodish, “CALLPLAN: An Interactive Salesman’s Call Planning System,” Management Science, December
1971, pp. 25–40.
26. David B. Montgomery, Alvin J. Silk, andC. E. Zaragoza, “A Multiple-Product
Sales-Force Allocation Model,” Management Science, December 1971, pp. 3–24.
27. S. W. Hess and S. A. Samuels, “Experiences with a Sales Districting Model: Criteria and Implementation,” Management
Science, December 1971, pp. 41–54.
28. John D. C. Little and Leonard M. Lodish,“A Media Planning Calculus,” Operations
Research, January–February 1969, pp.
1–35.
29. Magid M. Abraham and Leonard M.
Lodish, “PROMOTER: An Automated
Promotion Evaluation System,” Marketing Science, Spring 1987, pp. 101–23.
30. Raymond R. Burke, Arvind Rangaswamy,
Jerry Wind, and Jehoshua Eliashberg, “A
Knowledge-Based System for Advertising
Design,” Marketing Science 9, no. 3(1990): 212–29.
31. John D. C. Little, “Cover Story: An Expert System to Find the News in ScannerData,” Sloan School, MIT Working Paper,
1988.
32. Robert Berner, “Image Ads Catch the
Imagination of Dayton Hudson’s Target
Unit,” Wall Street Journal, October 3,
1997, p. B5.
33. For further discussion, see Gary L. Lilien,
Philip Kotler, and K. Sridhar Moorthy,Marketing Models (Upper Saddle River, NJ:
Prentice Hall, 1992).
34. See Russell L. Ackoff, A Concept of Corporate Planning (New York: Wiley-Interscience, 1970), pp. 36–37.
35. For more information on NAICS, checkthe U.S. Bureau of the Census Web site,www.census.gov/epcd/www/naics.html.
36. For suggested strategies related to themarket area’s BDI standing, see Don E.
Schultz, Dennis Martin, and William P.

Brown, Strategic Advertising Campaigns(Chicago: Crain Books, 1984), p. 338.
37. Jeff Harrington, “Juiced-Up Orange
Juice? Yuck, Buyers Say: Today AcuPOLL
releases 10 Best and Six Worst New Products of ’97,” Detroit News, December 7,
1997, p. D3.
38. See Jacob Gonik, “Tie Salesmen’s
Bonuses to Their Forecasts,” Harvard
Business Review, May–June 1978, pp.
116–23.
39. See Norman Dalkey and Olaf Helmer,“An Experimental Application of theDelphi Method to the Use of Experts,”
Management Science, April 1963, pp.
458–67. Also see Roger J. Best, “An Experiment in Delphi Estimation in Marketing Decision Making,” Journal ofMarketing Research, November 1974, pp.

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Market Demand

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SECTION TWO

Scanning theMarketing
Environment
We focus on two questions:

Today you have to run faster to stayin the same place.

■

What are the key methods for
tracking and identifying opportunities in the macroenvironment?

■

What are the key demographic,
economic, natural, technological, political, and cultural developments?

S

uccessful companies take an outside-inside view of their business. They recognize thatthe marketing environment is constantly spinning new opportunities and threats andunderstand the importance of continuously monitoring and adapting to that envi-

ronment. One company that has continually reinvented one of its brands to keep up withthe changing marketing environment is Mattel with its Barbie doll:1■

Mattel Mattel’s genius is in keeping its Barbie doll both timeless and trendy. Since
Barbie’s creation in 1959, the doll has filled a fundamental need that all girls share:
to play a grown-up. Yet Barbie has changed as girls’ dreams have changed. Her aspirations have evolved from jobs like “stewardess,” “fashion model,” and “nurse,”
to “astronaut,” “rock singer,” and “presidential candidate.” Mattel introduces new
Barbie dolls every year in order to keep up with the latest definitions of achievement, glamour, romance, adventure, and nurturing. Barbie also reflects America’s
diverse population. Mattel has produced African American Barbie dolls since 1968—
the time of the civil rights movement—and the company has introduced Hispanicand Asian dolls as well. In recent years, Mattel has introduced the Crystal Barbie doll(a gorgeous glamour doll), Puerto Rican Barbie (part of its “dolls of the world” collection), Great Shape Barbie (to tie into the fitness craze), Flight Time Barbie (a pilot), and Troll and Baywatch Barbies (to tie into kids’ fads and TV shows). Industry
analysts estimate that two Barbie dolls are sold every second and that the average
American girl owns eight versions of Barbie. Every year since 1993, sales of the perkyplastic doll have exceeded $1 billion.
Many companies fail to see change as opportunity. They ignore or resist changes un-til it is too late. Their strategies, structures, systems, and organizational culture grow increasingly obsolete and dysfunctional. Corporations as mighty as General Motors, IBM,and Sears have passed through difficult times because they ignored macroenvironmental
changes too long.
The major responsibility for identifying significant marketplace changes falls to the company’s marketers. More than any other group in the company, they must be the trend
trackers and opportunity seekers. Although every manager in an organization needs to observe the outside environment, marketers have two advantages: They have disciplined
methods—marketing intelligence and marketing research—for collecting information
about the marketing environment. They also spend more time with customers and moretime watching competitors.
We examine the firm’s external environment —the macroenvironment forces that affectit, its consumer markets, its business markets, and its competitors.

A

NALYZING NEEDS AND TRENDS IN THE
MACROENVIRONMENT

Successful companies recognize and respond profitably to unmet needs andtrends. Companies could make a fortune if they could solve any of these problems:a cure for cancer, chemical cures for mental diseases, desalinization of seawater, nonfattening tasty nutritious food, practical electric cars, and affordable housing.
Enterprising individuals and companies manage to create new solutions to unmet
needs. Club Mediterranee emerged to meet the needs of single people for exotic vacations; the Walkman and CD Man were created for active people who wanted to listen to music; Nautilus was created for men and women who wanted to tone theirbodies; Federal Express was created to meet the need for next-day mail delivery.
Many opportunities are found by identifying trends.

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A trend is a direction or sequence of events that have some momentum anddurability.

One major trend is the increasing participation of women in the workforce, which
has spawned the child day-care business, increased consumption of microwavable
foods, and office-oriented women’s clothing.
■

Simplex Knowledge More and more workplaces and child-care centers are
installing monitoring setups such as the “I See You” equipment from Simplex Knowledge in White Plains, New York. Not created to monitor child-careproviders, the system allows parents to see their children at different points
throughout the day. Via still photos taken by a camera in the child-care center and posted on a secure Web site on the Internet, working parents wholong to spend more time with their young ones get reassuring glimpses
throughout the day.2■

Shops at Somerset Square Although shopping malls are in decline, there’s
been a boom in niche malls that cater to the needs of working women. Shops
at Somerset Square in Glastonbury, Connecticut, is one such open-air shopping center. It features a customized retail mix of specialty shops, targeted
promotions, and phone-in shopping, in which shoppers phone ahead withsizes and color preferences while store employees perform a “wardrobing” service. Many of the stores also informally extend hours for working women
who find time to shop only before or after work.3

We can draw distinctions among fads, trends, and megatrends. A fad is “unpredictable, short-lived, and without social, economic, and political significance.”4 A company can cash in on a fad such as Pet Rocks or Cabbage Patch dolls, but this is morea matter of luck and good timing than anything else.
Trends are more predictable and durable. A trend reveals the shape of the future.
According to futurist Faith Popcorn, a trend has longevity, is observable across several market areas and consumer activities, and is consistent with other significant indicators occurring or emerging at the same time.5 (See the Marketing Insight “Faith
Popcorn Points to 16 Trends in the Economy.”)John Naisbitt, another futurist, prefers to talk about megatrends, which are “largesocial, economic, political and technological changes [that] are slow to form, and oncein place, they influence us for some time—between seven and ten years, or longer.”6
Naisbitt and his staff spot megatrends by counting the number of times hard-news
items on different topics appear in major newspapers. The 10 megatrends Naisbitt has
identified are:
1. The booming global economy
2. A renaissance in the arts
3. The emergence of free-market socialism
4. Global lifestyles and cultural nationalism
5. The privatization of the welfare state
6. The rise of the Pacific Rim
7. The decade of women in leadership
8. The age of biology
9. The religious revival of the new millennium
10. The triumph of the individual
Trends and megatrends merit marketers’ close attention. A new product or marketing program is likely to be more successful if it is in line with strong trends
rather than opposed to them. But detecting a new market opportunity does notguarantee its success, even if it is technically feasible. For example, today somecompanies have created portable “electronic books” in which different book disks
can be inserted for reading. But there may not be a sufficient number of people interested in reading a book on a computer screen or willing to pay the required price.
This is why market research is necessary to determine an opportunity’s profit potential.

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M

A

R

K

E

T

I

N

G

Faith Popcorn Points to 16 Trends
in the EconomyI

N S I G H T

Famous trend-watcher Faith Popcorn runs BrainReserve, a marketing consulting firm that monitors cultural trends and advises companies such as AT&T, Black & Decker, Hoffman-LaRoche, Nissan,
Rubbermaid, and many more. Popcorn and her associates haveidentified 16 major cultural trends affecting the U.S.economy.How
many of these trends have you noticed in your own life?
1. Anchoring: The tendency to use ancient practices as anchors or support for modern lifestyles. This trend explains
the widespread popularity of aromatherapy, meditation,yoga, and Eastern religions.
2. Being alive: The desire to lead longer and more enjoyable
lives. Vegetarianism, low-tech medicine, meditation, andother life extenders and enhancers are part of this trend.
Marketers can capitalize on the trend by designing healthier products and services.

5. Cocooning: The impulse to stay inside when the going outside gets too tough and scary. People are turning theirhomes into nests: redecorating, watching TV and rental
movies, ordering from catalogs, and using answering machines to filter out the outside world. Socialized cocoons
gather inside for conversation or a salon. Wandering cocoons are people who hole up in their cars with take-out
foods and their car phones.
6. Down-aging: The tendency for older people to act and feelyounger than their age. They spend more on youthfulclothes and hair coloring, and they engage in more playful behavior, such as buying adult toys, attending adultcamps, or signing up for adventure vacations.
7. Egonomics: The wish to individualize oneself through possessions and experience. Egonomics gives marketers an
opportunity to succeed by offering customized goods, services, and experiences.

3. Cashing out: The desire for a simpler, less hectic lifestyle, as
when an executive suddenly quits a high-profile career, escapes the hassles of big-city life, and turns up in Vermont
running a bed-and-breakfast.The trend is marked by a nostalgic return to small-town values.

8. Fantasy adventure: The need to find emotional escapes tooffset daily routines. People following this trend seek safari
vacations or eat exotic foods. For marketers, this is an opportunity to create fantasy products and services.The trend
will certainly feed the growth of virtual reality throughout
the first decade of the new millennium.

4. Clanning: The growing need to join up with and belong togroups in order to confront a more chaotic world. Marketers are responding with products, services, and programs that help make consumers feel a part of something;for example, Harley-Davidsons Harley Owners Group(HOG).

9. Female think: The recognition that men and women act andthink differently.A strong indicator of female think is the popularity of books such as Men Are from Mars, Women Are from
Venus. Because relationships are powerful motivators for
women,for example,Saturn Car Company has created strong
relationships with its customers, many of whom are women.
(continued)

I

DENTIFYING AND RESPONDING TO THE
MAJOR MACROENVIRONMENT FORCES

Companies and their suppliers, marketing intermediaries, customers, competitors, andpublics all operate in a macroenvironment of forces and trends that shape opportunities and pose threats. These forces represent “noncontrollables,” which the company must monitor and respond to. In the economic arena, companies and consumers
are increasingly affected by global forces. These include:

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The substantial speedup of international transportation, communication, and financial transactions, leading to the rapid growth of world trade and investment,
especially tripolar trade (North America, Western Europe, Far East).

■

The rising economic power of several Asian countries in world markets.

■

The rise of trade blocs such as the European Union and the NAFTA signatories.

■

The severe debt problems of a number of countries, along with the increasingfragility of the international financial system.

■

The increasing use of barter and countertrade to support international transactions.

■

The move toward market economies in formerly socialist countries along with
rapid privatization of publicly owned companies.

■

The rapid dissemination of global lifestyles.

(continued)
10. Icon toppling: The idea that if it s big, it s bad. Marketers are
responding by finding ways to think, act, and look smaller. An
example is Miller s Plank Road Brewery beer, which has thelook and feel of today s popular microbrewery beverages.
11. Mancipation: The emancipation of men from stereotypicalmale roles. Men are no longer required to be macho, distant, and strong.This trend is revealed in ads featuring men
as nurturing dads and concerned husbands.

might eat healthy all week, and then splurge on a pint ofsuperpremium H agen-Dazs ice cream on the weekend, ormight brown bag it for lunch but buy an expensive Starbucks latte and pastries for breakfast.
16. The vigilant consumer: Intolerance for shoddy products andpoor service. Vigilant consumers want companies to be
more aware and responsive, so they act up, boycott, write
letters, and buy green products.

12. 99 lives: The attempt to relieve time pressures by doing
many things at once. People become adept at multitasking, doing many tasks at once,such as talking on a portablephone while surfing the Internet. Marketers can cash in on
the 99 lives trend by creating cluster marketing enterprises all-in-one service stops.
13. Pleasure revenge: The proud and public pursuit of pleasure
as a rebellion against self-control and deprivation. Fed up
with the health kick of the early 1990s, people are consuming more red meat, fats, and sugars and turning awayfrom health-food alternatives.
14. S.O.S. (save our society): The desire to make society more socially responsible with respect to education, ethics, and theenvironment. The best response for marketers is to urge
their own companies to practice more socially responsible
marketing.
15. Small indulgences: A penchant to indulge in small-scale
splurges to obtain an occasional emotional lift. A consumer
Source: This summary is drawn from various pages of Faith Popcorns The Popcorn Report (New York: HarperBusiness, 1992) and Faith Popcorn and Lys Marigold, Clicking(New York: HarperCollins, 1996)■

The gradual opening of major new markets, namely China, India, eastern Europe, the Arab countries, and Latin America.

■

The increasing tendency of multinationals to transcend their locational and national characteristics and become transnational firms.

■

The increasing number of cross-border corporate strategic alliances—for example,
MCI and British Telecom, and Texas Instruments and Hitachi.

■

The increasing ethnic and religious conflicts in certain countries and regions.

■

The growth of global brands in autos, food, clothing, electronics, and so on.

■

Colgate-Palmolive Colgate-Palmolive test-marketed Total, its antibacterial
plaque-fighting toothpaste, in six countries: the Philippines, Australia, Colombia, Greece, Portugal, and the United Kingdom. The team in charge of the
global launch was a veritable corporate United Nations of operations, logistics, and marketing strategists. Their efforts paid off handsomely: Total wassoon a $150 million brand worldwide, selling in 75 countries, with virtually
identical packaging, positioning, and advertising (Figure 2-1).7

Within the rapidly changing global picture, the firm must monitor six major forces:
demographic, economic, natural, technological, political-legal, and social-cultural. Although these forces will be described separately, marketers must pay attention to their

Scanning theMarketing
Environment

139

causal interactions, because these set the stage for new opportunities as well as threats.
For example, explosive population growth (demographic) leads to more resource depletion and pollution (natural environment), which leads consumers to call for morelaws (political-legal). The restrictions stimulate new technological solutions and products (technology), which if they are affordable (economic forces) may actually change
attitudes and behavior (social-cultural).

DEMOGRAPHIC ENVIRONMENT
The first macroenvironmental force that marketers monitor is population because
people make up markets. Marketers are keenly interested in the size and growthrate of population in different cities, regions, and nations; age distribution and ethnic mix; educational levels; household patterns; and regional characteristics andmovements.

Worldwide Population Growth140

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The world population is showing “explosive” growth. It totaled 5.4 billion in 1991
and is growing at 1.7 percent per year. At this rate, the world’s population will reach
6.2 billion by the year 2000.8
The world population explosion has been a source of major concern, for two reasons. The first is the fact that certain resources needed to support this much humanlife (fuel, foods, and minerals) are limited and may run out at some point. First published in 1972, The Limits to Growth presented an impressive array of evidence thatunchecked population growth and consumption would eventually result in insufficient food supply, depletion of key minerals, overcrowding, pollution, and an overall
deterioration in the quality of life.9 One of the study’s strong recommendations is theworldwide social marketing of family planning.10
The second cause for concern is that population growth is highest in countries
and communities that can least afford it. The less developed regions of the world currently account for 76 percent of the world population and are growing at 2 percent
per year, whereas the population in the more developed countries is growing at only
0.6 percent per year. In the developing countries, the death rate has been falling as aresult of modern medicine, but the birthrate has remained fairly stable. Feeding, clothing, and educating their children while also providing a rising standard of living isnearly impossible in these countries.

The explosive world population growth has major implications for business. A
growing population does not mean growing markets unless these markets have sufficient purchasing power. Nonetheless, companies that carefully analyze their markets
can find major opportunities. For example, to curb its skyrocketing population, theChinese government has passed regulations limiting families to one child per family.
Toy marketers, in particular, are paying attention to one consequence of these regulations: These children are spoiled and fussed over as never before. Known in China
as “little emperors,” Chinese children are being showered with everything from candy
to computers as a result of what’s known as the “six pocket syndrome.” As many as
six adults—parents, grandparents, great-grandparents, and aunts and uncles—may be
indulging the whims of each child. This trend has encouraged such companies asJapan’s Bandai Company (famous for its Mighty Morphin’ Power Rangers), Denmark’s
Lego Group, and Mattel to enter the Chinese market.11

Population Age Mix
National populations vary in their age mix. At one extreme is Mexico, a country witha very young population and rapid population growth. At the other extreme is Japan,
a country with one of the world’s oldest populations. Milk, diapers, school supplies,
and toys would be important products in Mexico. Japan’s population would consume
many more adult products.
A population can be subdivided into six age groups: preschool, school-age children,
teens, young adults age 25 to 40, middle-aged adults age 40 to 65, and older adults age
65 and up. For marketers, the most populous age groups shape the marketing environment. In the United States, the “baby boomers,” the 78 million people born between 1946 and 1964, are one of the most powerful forces shaping the marketplace.
Baby boomers are fixated on their youth, not their age, and ads geared to them tend
to capitalize on nostalgia for their past, such as those for the newly redesigned Volkswagen Beetle or the Mercedes-Benz ad featuring the rock music of Janis Joplin. Boomers
grew up with TV advertising, so they are an easier market to reach than the 45 million
born between 1965 and 1976, dubbed Generation X (and also the shadow generation,
twentysomethings, and baby busters). Gen-Xers are typically cynical about hard-sellmarketing pitches that promise more than they can deliver. Ads created to woo thismarket often puzzle older people, because they often don’t seem to “sell” at all:12■■

Miller Brewing Company Instead of the usual macho men, scantily clad
women, beauty shots of beer and mountain vistas, Miller’s new beer ads targeted to 21- to 27-year-olds feature the on-screen legend “It’s time to embrace
your inner idiot” and images of a frenetic, sloppy hot-dog eating contest.13
Diesel Jeans Diesel jeans ads revolve around a celebration of the bizarre,
and they playfully poke fun at mainstream situations. Called “Reasons for
Living,” the ads reverse our code of ethics with images like one of humans
serving a roasted girl to pigs sitting at a dining table laden with exotic foods.14

Finally, both baby boomers and Gen-Xers will be passing the torch to the latest
demographic group, the baby boomlet, born between 1977 and 1994. Now numbering 72 million, this group is almost equal in size to baby boomers. One distinguishing characteristic of this age group is their utter fluency and comfort with computerand Internet technology. Douglas Tapscott has christened them Net-Gens for this reason. He says: “To them, digital technology is no more intimidating than a VCR or a
toaster.” See the Marketing Memo “Tapping into the Internet Generation.”15
But do marketers have to create separate ads for each generation? J. Walker Smith,co-author of Rocking the Ages: The Yankelovich Report on Generational Marketing, saysthat marketers do have to be careful about turning off one generation each time they
craft a message that appeals effectively to another. “I think the idea is to try to bebroadly inclusive and at the same time offer each generation something specificallydesigned for it. Tommy Hilfiger has big brand logos on his clothes for teenagers andlittle pocket polo logos on his shirts for baby boomers. It’s a brand that has a more
inclusive than exclusive strategy.”16

M A R K E T I N G

memo

Tapping into theInternet Generation
Net-Gens already influence adult purchases
more than any preceding generation. The
Alliance for Converging Technologies estimates that American preteens and teensspend $130 billion of their own dollars annually and influence upward of $500 billionof their parents’spending.How do you market to this group? Don Tapscott, author of
Growing Up Digital:The Rise of the Net Generation (www.growingupdigital.com), advises marketers to keep five things in mind:
1. Options are a must—choice is one of
their most deeply held values.
2. Customize to meet their needs. These
are the kids who build their own levels
in video games and write their own
Web pages, and they want things theirway.
3. Let them have the option of changing
their minds. They’re growing up in aworld where fixing mistakes takes astroke of the mouse, and they believethat changing their minds should beequally painless.
4. Let them try before they buy. They’reusers and doers.They reject expert opinions in favor of forming their own.
5. Never forget that they will choose function over form.“Unlike baby boomers,
who witnessed the technological revolution,”Tapscott says,“N-Geners have no
awe of new technology. They havegrown up with computers and treat
them like any other household appliance. This is an audience that cares
about what the technology will do, notthe technology itself.”
Source: Excerpted from Lisa Krakowka,“In the Net,”
American Demographics, August 1998, p. 56.

Scanning theMarketing
Environment141

Ethnic Markets
Countries also vary in ethnic and racial makeup. At one extreme is Japan, where almost everyone is Japanese; at the other is the United States, where people from comevirtually all nations. The United States was originally called a “melting pot,” but there
are increasing signs that the melting didn’t occur. Now people call the United Statesa “salad bowl” society with ethnic groups maintaining their ethnic differences, neighborhoods, and cultures. The U.S. population (267 million in 1997) is 73 percent white.
African Americans constitute another 13 percent, and Latinos another 10 percent. The
Latino population has been growing fast, with the largest subgroups of Mexican (5.4
percent), Puerto Rican (1.1 percent), and Cuban (0.4 percent) descent. Asian Americans constitute 3.4 percent of the U.S. population, with the Chinese constituting thelargest group, followed by the Filipinos, Japanese, Asian Indians, and Koreans, in thatorder. Latino and Asian American consumers are concentrated in the far western andsouthern parts of the country, although some dispersal is taking place. Moreover, there
are nearly 25 million people living in the United States—more than 9 percent of the
population—who were born in another country.
Each group has certain specific wants and buying habits. Several food, clothing,
and furniture companies have directed their products and promotions to one or moreof these groups.17 For instance, Sears is taking note of the preferences of different ethnic groups:■

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Sears If a Sears, Roebuck and Company store has a shopping base that is
at least 20 percent Latino, it is designated as a Hispanic store for the purposeof Sears’s Hispanic marketing program. More than 130 stores in southern California, Texas, Florida, and New York have earned this label. “We make a special effort to staff those stores with bilingual sales personnel, to use bilingualsignage, and to support community programs,” says a Sears spokesperson.
Choosing merchandise for the Latino marketplace is primarily a color andsize issue. “What we find in Hispanic communities is that people tend to besmaller than the general market, and that there is a greater demand forspecial-occasion clothing and a preference for bright colors. In hardlines, there
isn’t much difference from the mainstream market.”Yet marketers must be careful not to overgeneralize about ethnic groups. Withineach ethnic group are consumers who are as different from each other as they are from
Americans of European background. “There is really no such thing as an Asian market,” says Greg Macabenta, whose ethnic advertising agency specializes in the Filipino
market. Macabenta emphasizes that the five major Asian American groups have theirown very specific market characteristics, speak different languages, consume different
cuisines, practice different religions, and represent very distinct national cultures.18

Educational Groups
The population in any society falls into five educational groups: illiterates, high school
dropouts, high school degrees, college degrees, and professional degrees. In Japan, 99
percent of the population is literate, whereas in the United States 10 percent to 15
percent of the population may be functionally illiterate. However, the United States
has one of the world’s highest percentages of college-educated citizenry, around 36
percent. The high number of educated people in the United States spells a high demand for quality books, magazines, and travel.

Household Patterns
The “traditional household” consists of a husband, wife, and children (and sometimes
grandparents). Yet, in the United States today, one out of eight households are “diverse” or “nontraditional,” and include single live-alones, adult live-togethers of one
or both sexes, single-parent families, childless married couples, and empty nesters.
More people are divorcing or separating, choosing not to marry, marrying later, or
marrying without the intention to have children. Each group has a distinctive set ofneeds and buying habits. For example, people in the SSWD group (single, separated,
widowed, divorced) need smaller apartments; inexpensive and smaller appliances, furniture, and furnishings; and food packaged in smaller sizes. Marketers must increasingly consider the special needs of nontraditional households, because they are now
growing more rapidly than traditional households.
The gay market, in particular, is a lucrative one. A 1997 Simmons Market Researchstudy of readers of the National Gay Newspaper Guild’s 12 publications found that,compared to the average American, respondents are 11.7 times more likely to be inprofessional jobs, almost twice as likely to own a vacation home, eight times more
likely to own a computer notebook, and twice as likely to own individual stocks.19
Insurance companies and financial services companies are now waking up to the needs
and potential of not only the gay market but also the nontraditional household market as a whole:■

American Express Financial Advisors, Inc. Minneapolis-based American Express Financial Advisors, Inc., launched print ads that depict same-sex couples planning their financial futures. The ads ran in Out and The Advocate,
the two highest-circulation national gay publications. The company’s director of segment marketing, Margaret Vergeyle, said: “We’re targeting gay audiences with targeted ads and promotions that are relevant to them and saythat we understand their specific needs. Often, gay couples are very concerned
about issues like Social Security benefits and estate planning, since same-sex
marriages often are not recognized under the law.”20■

John Hancock Mutual Life Insurance Company The John Hancock Mutual
Insurance Company has been focusing on single parents and working womenwith two series of ads on cable television channels. The company is focusing
on a very specific segment of women whose financial needs happen to beeven more critical because of their situation. The slogan for the ads: “Insurance for the unexpected. Investments for the opportunities.”21

Geographical Shifts in Population
This is a period of great migratory movements between and within countries. Since
the collapse of Soviet eastern Europe, nationalities are reasserting themselves and forming independent countries. The new countries are making certain ethnic groups

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unwelcome (such as Russians in Latvia or Muslims in Serbia), and many of thesegroups are migrating to safer areas. As foreign groups enter other countries for political sanctuary, some local groups start protesting. In the United States, there has been
opposition to the influx of immigrants from Mexico, the Caribbean, and certain Asian
nations. Yet many immigrants have done very well. Forward-looking companies andentrepreneurs are taking advantage of the growth in immigrant populations and marketing their wares specifically to these new members of the population.
■

1-800-777-CLUB, Inc. When they came to the United States from Taiwan
in the late 1970s, brother and sister Marty and Helen Shih earned a living by
selling flowers on a street corner. They now own an 800-employee telemarketing business, 1-800-777-CLUB, Inc., based in El Monte, California. That
number logs about 1,200 phone calls a day from Asian immigrants seeking
information in six languages: Japanese, Korean, Mandarin and Cantonese Chinese, Tagalog, and English. The callers seek advice on dealing with immigration officials, perhaps, or help in understanding an electric bill. The Shihs
use those calls to add to a database of names, phone numbers, and demographic information that is then used for highly targeted telemarketing. The
Shihs’ great advantage is that their telemarketers talk in their native language
to people who are far from assimilated. A recent Vietnamese immigrant isthrilled to pick up the phone and hear someone speaking Vietnamese. Last
year, the Shihs’ telemarketers sold more than $146 million worth of goods
and services for companies including Sprint Corporation and DHL Worldwide
Express. Their database now has around 1.5 million individual names covering a high percentage of Asian American households and 300,000 businesses.22

Population movement also occurs as people migrate from rural to urban areas, andthen to suburban areas. The U.S. population has now undergone another shift, which
demographers call “the rural rebound.” Nonmetropolitan counties that lost population to cities for most of this century are now attracting large numbers of urban
refugees. Between 1990 and 1995, the rural population has grown 3.1 percent as people from the city have moved to small towns.23■

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Cashing Out Wanda Urbanska and her husband, Frank Levering, moved
from the media grind of Los Angeles to a simpler life in Mount Airy, North
Carolina (population 7,200). Urbanska’s former job as a reporter for the Los
Angeles Herald Examiner and Levering’s former job as a screenwriter for B
movies had taken up so much of their time and energy that they couldn’t
really enjoy the material gains they were making. When Levering’s father hada heart attack, the couple packed up and moved to Mt. Airy to help him withhis fruit orchard. They still help him run the orchard while doing freelance
writing on the side, such as two books about seeking a better life: Simple Living and Moving to a Small Town.24

Businesses with potential to cash in on the rural rebound might be those that caterto the growing SOHO (small office–home office) segment. For instance, makers of RTA(ready to assemble) furniture might find a strong consumer base among all the cashedout former city residents setting up offices in small towns or telecommuting fromthere to larger companies.
Location makes a difference in goods and service preferences. The movement to
the Sunbelt states has lessened the demand for warm clothing and home heating
equipment and increased the demand for air conditioning. Those who live in large
cities such as New York, Chicago, and San Francisco account for most of the sales of
expensive furs, perfumes, luggage, and works of art. These cities also support the opera,
ballet, and other forms of culture. Americans living in the suburbs lead more casual
lives, do more outdoor living, and have greater neighbor interaction, higher incomes,
and younger families. Suburbanites buy vans, home workshop equipment, outdoor
furniture, lawn and gardening tools, and outdoor cooking equipment. There are also

regional differences: People in Seattle buy more toothbrushes per capita than people
in any other U.S. city; people in Salt Lake City eat more candy bars; people from New
Orleans use more ketchup; and people in Miami drink more prune juice.

Shift from a Mass Market to Micromarkets
The effect of all these changes is fragmentation of the mass market into numerous micromarkets differentiated by age, sex, ethnic background, education, geography, lifestyle,and other characteristics. Each group has strong preferences and is reached through increasingly targeted communication and distribution channels. Companies are abandoning the “shotgun approach” that aimed at a mythical “average” consumer and areincreasingly designing their products and marketing programs for specific micromarkets.
Demographic trends are highly reliable for the short and intermediate run. Thereis little excuse for a company’s being suddenly surprised by demographic developments. The Singer Company should have known for years that its sewing machine
business would be hurt by smaller families and more working wives, yet it was slow
in responding. In contrast, think of the rewards marketers reap when they focus ona demographic development. Some marketers are actively courting the home officesegment of the lucrative SOHO market. Nearly 40 million Americans are working outof their homes with the help of electronic conveniences like cell phones, fax machines, and handheld organizers. One company that is shifting gears to appeal to thismicromarket is Kinko’s Copy Centers:■

Kinko’s Copy Centers Founded in the 1970s as a campus photocopying business, Kinko’s is now reinventing itself as the well-appointed office outside thehome. Where once there were copy machines, the 902 Kinko’s stores in thiscountry and abroad now feature a uniform mixture of fax machines, ultrafast color printers, and networks of computers equipped with popular software programs and high-speed Internet connections. People can come to a
Kinko’s store to do all their office jobs: They can copy, send and receive faxes,
use various programs on the computer, go on the Internet, order stationery
and other printed supplies, and even teleconference. And as more and more
people join the work-at-home trend, Kinko’s is offering an escape from theisolation of the home office. Kinko’s, which charges $12 an hour for computer use, is hoping to increase its share of industry revenue by getting people to spend more time—and hence, more money—at its stores. Besides
adding state-of-the-art equipment, the company is talking to Starbucks about
opening up coffee shops adjacent to some Kinko’s. The lettering on the Kinko’s
door sums up the $1 billion company’s new business model: “Your branch
office/Open 24 hours.”25

ECONOMIC ENVIRONMENT
Markets require purchasing power as well as people. The available purchasing powerin an economy depends on current income, prices, savings, debt, and credit availability. Marketers must pay close attention to major trends in income and consumerspending patterns.

Income Distribution
Nations vary greatly in level and distribution of income and industrial structure. There
are four types of industrial structures:
1. Subsistence economies: In a subsistence economy, the vast majority of people
engage in simple agriculture, consume most of their output, and barter the
rest for simple goods and services. These economies offer few opportunities
for marketers.
2. Raw-material-exporting economies: These economies are rich in one or morenatural resources but poor in other respects. Much of their revenue comesfrom exporting these resources. Examples are Zaire (copper) and Saudi Arabia(oil). These countries are good markets for extractive equipment, tools andScanning theMarketing
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supplies, materials-handling equipment, and trucks. Depending on the number of foreign residents and wealthy native rulers and landholders, they arealso a market for Western-style commodities and luxury goods.
3. Industrializing economies: In an industrializing economy, manufacturing begins
to account for 10 percent to 20 percent of gross domestic product. Examples
include India, Egypt, and the Philippines. As manufacturing increases, thecountry relies more on imports of raw materials, steel, and heavy machineryand less on imports of finished textiles, paper products, and processed foods.
Industrialization creates a new rich class and a small but growing middle
class, both demanding new types of goods.
4. Industrial economies: Industrial economies are major exporters of manufactured goods and investment funds. They buy manufactured goods from one
another and also export them to other types of economies in exchange forraw materials and semifinished goods. The large and varied manufacturing
activities of these nations and their sizable middle class make them rich markets for all sorts of goods.
Marketers often distinguish countries with five different 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 Lamborghinis, an automobile costing more than $150,000. The market would be very smallin countries with type 1 or 2 income patterns. One of the largest single markets for Lamborghinis turns out to be Portugal (income pattern 3)—one of the poorer countries inWestern Europe, but one with enough wealthy families to afford expensive cars.
Since 1980, the wealthiest fifth of the U.S. population has seen its income growby 21 percent, while wages for the bottom 60 percent have stagnated or even dipped.
According to Census Bureau statisticians, the 1990s have seen a greater polarizationof income in the United States than at any point since the end of World War II. Thisis leading to a two-tier U.S. market, with affluent people buying expensive goods andworking-class people spending more carefully, shopping at discount stores and factory outlet malls, and selecting less expensive store brands. Conventional retailers
who offer medium-price goods are the most vulnerable to these changes. Companies
that respond to the trend by tailoring their products and pitches to these two very
different Americas stand to gain a lot:26■

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The Gap At Gap’s Banana Republic stores, jeans sell for $58. Its Old Navystores sell a version for $22. Both chains are thriving.

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The Walt Disney Company The Walt Disney Company, which owns therights to A. A. Milne’s Winnie-the-Pooh and his make-believe friends, is marketing two distinct Poohs. The original line-drawn figures appear on finechina, pewter spoons, and expensive kids’ stationery found in upscale specialty and department stores like Nordstrom and Bloomingdales. A plump,cartoonlike Pooh, clad in a red T-shirt and a goofy smile, adorns plastic key
chains, polyester bedsheets, and animated videos. This downscaled Pooh sells
at Wal-Mart and other discount stores.

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The National Basketball Association The National Basketball Association
sells front-row seats in New York’s Madison Square Garden for $1,000 apiece.
Yet, worried they might lose fans who can’t afford the typical $200 for a family night out at a sports event, NBA marketers have launched an array ofmuch more affordable merchandise and entertainment properties such as
traveling basketball exhibitions.

Savings, Debt, and Credit Availability
Consumer expenditures are affected by consumer savings, debt, and credit availability. The Japanese, for example, save about 13.1 percent of their income, whereas U.S.
consumers save about 4.7 percent. The result has been that Japanese banks were able
to loan money to Japanese companies at a much lower interest rate than U.S. banks
could offer to U.S. companies. Access to lower interest rates helped Japanese companies expand faster. U.S. consumers also have a high debt-to-income ratio, which slows
down further expenditures on housing and large-ticket items. Credit is very available
in the United States but at fairly high interest rates, especially to lower-income borrowers. Marketers must pay careful attention to major changes in incomes, cost of living, interest rates, savings, and borrowing patterns because they can have a highimpact on business, especially for companies whose products have high income andprice sensitivity.

NATURAL ENVIRONMENT
The deterioration of the natural environment is a major global concern. In many
world cities, air and water pollution have reached dangerous levels. There is great concern about certain chemicals creating a hole in the ozone layer and producing a “greenhouse effect” that will lead to dangerous warming of the earth. In Western Europe,“green” parties have vigorously pressed for public action to reduce industrial pollution. In the United States, several thought leaders have documented ecological deterioration, whereas watchdog groups such as the Sierra Club and Friends of the Earthcarried these concerns into political and social action.
New legislation passed as a result has hit certain industries very hard. Steel companies and public utilities have had to invest billions of dollars in pollution-control
equipment and more environmentally friendly fuels. The auto industry has had to
introduce expensive emission controls in cars. The soap industry has had to increase
its products’ biodegradability.
Marketers need to be aware of the threats and opportunities associated with four
trends in the natural environment: the shortage of raw materials, the increased costof energy, increased pollution levels, and the changing role of governments.

Shortage of Raw Materials
The earth’s raw materials consist of the infinite, the finite renewable, and the finite
nonrenewable. Infinite resources, such as air and water, pose no immediate problem,
although some groups see a long-run danger. Environmental groups have lobbied fora ban on certain propellants used in aerosol cans because of the potential damage
they can cause to the ozone layer. Water shortages and pollution are already major
problems in some parts of the world.
Finite renewable resources, such as forests and food, must be used wisely. Forestry
companies are required to reforest timberlands in order to protect the soil and to ensure sufficient wood to meet future demand. Because the amount of arable land is

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fixed and urban areas are constantly encroaching on farmland, food supply can also
be a major problem. Finite nonrenewable resources—oil, coal, platinum, zinc, silver—
will pose a serious problem as the point of depletion approaches. Firms making products that require these increasingly scarce minerals face substantial cost increases. They
may not find it easy to pass these cost increases on to customers. Firms engaged inresearch and development have an excellent opportunity to develop substitute materials.

Increased Energy Costs
One finite nonrenewable resource, oil, has created serious problems for the world
economy. Oil prices shot up from $2.23 a barrel in 1970 to $34.00 a barrel in 1982,
creating a frantic search for alternative energy forms. Coal became popular again, andcompanies searched for practical means to harness solar, nuclear, wind, and otherforms of energy. In the solar energy field alone, hundreds of firms introduced firstgeneration products to harness solar energy for heating homes and other uses. Otherfirms searched for ways to make a practical electric automobile, with a potential prizeof billions for the winner.
The development of alternative sources of energy and more efficient ways to use
energy and the weakening of the oil cartel led to a subsequent decline in oil prices.
Lower prices had an adverse effect on the oil-exploration industry but considerably
improved the income of oil-using industries and consumers. In the meantime, thesearch continues for alternative sources of energy.

Increased Pollution Levels
Some industrial activity will inevitably damage the natural environment. Consider
the dangerous mercury levels in the ocean, the quantity of DDT and other chemical
pollutants in the soil and food supply, and the littering of the environment with bottles, plastics, and other packaging materials.
Research has shown that about 42 percent of U.S. consumers are willing to pay
higher prices for “green” products. This willingness creates a large market for pollution-control solutions, such as scrubbers, recycling centers, and landfill systems. It
leads to a search for alternative ways to produce and package goods. Smart companies are initiating environment-friendly moves to show their concern. 3M runs a Pollution Prevention Pays program that has led to a substantial reduction in pollution
and costs. Dow built a new ethylene plant in Alberta that uses 40 percent less energy
and releases 97 percent less wastewater. AT&T uses a special software package to choose
the least harmful materials, cut hazardous waste, reduce energy use, and improve product recycling in its operations. McDonald’s and Burger King eliminated their polystyrene cartons and now use smaller, recyclable paper wrappings and paper napkins.27
New concern over the toxic nature of dry cleaning solvents has opened up opportunities for a new breed of “green cleaners,” although these new businesses face
an uphill battle. See the Marketing for the Millennium “A New Guard of Green Cleaners Vies for Concerned Customers.”

Changing Role of Governments
Governments vary in their concern and efforts to promote a clean environment. For
example, the German government is vigorous in its pursuit of environmental quality, partly because of the strong green movement in Germany and partly because of
the ecological devastation in the former East Germany. Many poor nations are doing
little about pollution, largely because they lack the funds or the political will. It is in
the richer nations’ interest to help the poorer nations control their pollution, but eventhe richer nations today lack the necessary funds. The major hopes are that companies around the world will accept more social responsibility and that less expensive
devices will be invented to control and reduce pollution.

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TECHNOLOGICAL ENVIRONMENTOne of the most dramatic forces shaping people’s lives is technology. Technology has
released such wonders as penicillin, open-heart surgery, and the birth-control pill. It

M A R K E T I N GF O RMILLENNIUM

A New Guard of Green Cleaners Vies forConcerned Customers
You need to get your business suit cleaned for a sales conference in Miami, and your flight leaves in 24 hours. Are you goingto go to the dry cleaner on the corner, which uses environmentally damaging, possibly carcinogenic chemicals? Or are you
going to go across town and use a wet cleaner, who will getyour clothes clean without damaging you or the environment(and make them smell a lot less toxic, too)? If you re like mostconsumers, you ll choose convenience and the quick fix overconcerns about health and environment.
Percloroethylene, or perc, the solvent used by the majorityof dry cleaners, has been labeled a probable human carcinogenby the EPA. More conclusive reports on its damaging effects are
expected soon. Yet when it comes to products that enhancetheir own or their clothings appearance, consumers are notably
indifferent to environmental concerns. In a 1996 survey of 30 dry
cleaners in suburban Pittsburgh, Dan Kovacks asked customers
what they would do if they learned dry cleaning posed a threat
to their well-being. Unable to think up alternatives, most said
they would just get clothes dry-cleaned less frequently.
Yet a new guard of environmentally friendly dry cleaners is
willing to bet that consumers will choose green over toxic ifgreen alternatives are readily available. There are already 6,000
dry cleaning stores using alternative cleaning materials. About
95 percent of those use odorless petroleum-based solvents,
which actually get rid of stains that seemed impervious to perc.
A much smaller group of stores are wet cleaners, going backto soap-and-water basics. All the alternatives with names suchas Cleaner-by-Nature, Eco-Mat, and Greener Cleaner are pricecompetitive with their toxic counterparts. Cleaner-by-Nature,
which opened up smack between two traditional dry cleanersin Denver, broke even only six months after opening. Its owner,
Chris Comfort, plans a second store in Boulder.
Although dry cleaners are the quintessential small business,the green cleaning trend could open up opportunities for giant
multinational corporations.Exxon Corporation has come up witha new petroleum solvent called DF 2000, which is widely usedin Europe. Hughes Environmental Systems, a unit of Raytheon
Corporation, and Global Technologies, Inc., of El Segundo, California, have teamed up to market a new method for cleaning
clothes using liquid carbon dioxide. Procter & Gamble has introduced a perc-free alternative for home use, Dryel, which allows people to do their dry cleaning at home.Yet, as a testimony
to the resistance faced by companies in this burgeoning product category, Procter & Gamble advertises Dryel s convenience,
not its green advantage.

Sources: Jacquelyn Ottman, Innovative Marketers Give New Products the Green Light, Marketing News, March 30, 1998, p. 10; Shelly Reese, Dressed to Kill, American Demographics, May 1998, pp. 22 25; Stacy Kravetz, Dry Cleaners New Wrinkle: Going Green, Wall Street Journal, June 3, 1998, p. B1.

has released such horrors as the hydrogen bomb, nerve gas, and the submachine gun.
It has also released such mixed blessings as the automobile and video games.
Every new technology is a force for “creative destruction.” Transistors hurt the vacuum-tube industry, xerography hurt the carbon-paper business, autos hurt the railroads, and television hurt the newspapers. Instead of moving into the new technologies,
many old industries fought or ignored them, and their businesses declined.
The economy’s growth rate is affected by how many major new technologies are
discovered. Unfortunately, technological discoveries do not arise evenly throughtime—the railroad industry created a lot of investment, and then investment peteredout until the auto industry emerged. Later, radio created a lot of investment, whichthen petered out until television appeared. In the time between major innovations,the economy can stagnate.
In the meantime, minor innovations fill the gap: freeze-dried coffee, combination
shampoo and conditioner, antiperspirant/deodorants, and the like. Minor innovations
involve less risk, but critics argue that today too much research effort is going into
producing minor improvements rather than major breakthroughs.
New technology creates major long-run consequences that are not always foreseeable. The contraceptive pill, for example, led to smaller families, more working
wives, and larger discretionary incomes—resulting in higher expenditures on vacation
travel, durable goods, and luxury items.
The marketer should monitor the following trends in technology: the pace ofchange, the opportunities for innovation, varying R&D budgets, and increased regulation.

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Accelerating Pace of Technological Change
Many of today’s common products were not available 40 years ago. John F. Kennedy
did not know personal computers, digital wristwatches, video recorders, or fax machines. More ideas are being worked on; the time lag between new ideas and theirsuccessful implementation is decreasing rapidly; and the time between introduction
and peak production is shortening considerably. Ninety percent of all the scientists
who ever lived are alive today, and technology feeds upon itself.
The advent of personal computers and fax machines has made it possible for people to telecommute—that is, work at home instead of traveling to offices that may be
30 or more minutes away. Some hope that this trend will reduce auto pollution, bring
the family closer together, and create more home-centered entertainment and activity. It will also have substantial impact on shopping behavior and marketing performance.

Unlimited Opportunities for Innovation
Scientists today are working on a startling range of new technologies that will revolutionize products and production processes. Some of the most exciting work is being done in biotechnology, solid-state electronics, robotics, and materials sciences.28
Researchers are working on AIDS cures, happiness pills, painkillers, totally safe contraceptives, and nonfattening foods. They are designing robots for firefighting, underwater exploration, and home nursing. In addition, scientists also work on fantasy
products, such as small flying cars, three-dimensional television, and space colonies.
The challenge in each case is not only technical but also commercial—to develop affordable versions of these products.
Companies are already harnessing the power of virtual reality (VR), the combination of technologies that allows users to experience three-dimensional, computergenerated environments through sound, sight, and touch. Virtual reality has alreadybeen applied to gathering consumer reactions to new automobile designs, kitchen layouts, exterior home designs, and other potential offerings.

Varying R&D Budgets
The United States leads the world in annual R&D expenditures ($74 billion), but nearly
60 percent of these funds are still earmarked for defense. There is a need to transfer
more of this money into research on material science, biotechnology, and micromechanics. Japan has increased its R&D expenditures much faster than has the UnitedStates and is spending it mostly on nondefense-related research in physics, biophysics,
and computer science.29
A growing portion of U.S. R&D expenditures is going into the development sideof R&D, raising concerns about whether the United States can maintain its lead inbasic science. Many companies are content to put their money into copying competitors’ products and making minor feature and style improvements. Even basicresearch companies such as DuPont, Bell Laboratories, and Pfizer are proceeding
cautiously. Much of the research is defensive rather than offensive. And, increasingly,
research directed toward major breakthroughs is being conducted by consortiums ofcompanies rather than by single companies.

Increased Regulation of Technological Change
As products become more complex, the public needs to be assured of their safety.
Consequently, government agencies’ powers to investigate and ban potentially unsafe
products have been expanded. In the United States, the Federal Food and Drug
Administration must approve all drugs before they can be sold. Safety and health regulations have also increased in the areas of food, automobiles, clothing, electricalappliances, and construction. Marketers must be aware of these regulations when
proposing, developing, and launching new products.

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POLITICAL-LEGAL ENVIRONMENT
Marketing decisions are strongly affected by developments in the political and legal
environment. This environment is composed of laws, government agencies, and pres-sure groups that influence and limit various organizations and individuals. Sometimes
these laws also create new opportunities for business. For example, mandatory recycling laws have given the recycling industry a major boost and spurred the creationof dozens of new companies making new products from recycled materials:■

Wellman In 1993, Wellman introduced Ecospun Post Consumer Recycled(PCR) fiber, made from recycled soda bottles, and sold 800,000 pounds inthat first year alone. Today, Wellman boasts 15 million pounds in sales andis partnering with domestic fabric mills like Milliken & Company, Malden
Mills, and Dybersburg. At the outdoor Retailer Winter Market in 1998,
Wellman introduced its new EcoSpun Squared fiber, which has moisturemanagement properties and was designed specifically for a performanceapparel market anxious to jump aboard the recycling bandwagon.

Legislation Regulating BusinessBusiness legislation has three main purposes: to protect companies from unfair competition, to protect consumers from unfair business practices, and to protect the interests of society from unbridled business behavior. A major purpose of businesslegislation and enforcement is to charge businesses with the social costs created bytheir products or production processes. Legislation affecting business has steadily increased over the years. The European Commission has been active in establishing a
new framework of laws covering competitive behavior, product standards, product liability, and commercial transactions for the 15 member nations of the European
Union. Ex-Soviet nations are rapidly passing laws to promote and regulate an open
market economy. The United States has many laws on its books covering such issues
as competition, product safety and liability, fair trade and credit practices, and packaging and labeling.30 Several countries have gone further than the United States inpassing strong consumer-protection legislation. Norway bans several forms of sales
promotion—trading stamps, contests, premiums—as inappropriate or “unfair” instruments for promoting products. Thailand requires food processors selling national
brands to market low-price brands also so that low-income consumers can find economy brands. In India, food companies need special approval to launch brands that
duplicate what already exists on the market, such as another cola drink or brand of
rice. A central concern about business legislation is: At what point do the costs of regulation exceed the benefits? The laws are not always administered fairly; regulatorsand enforcers may be lax or overzealous. Although each new law may have a legitimate rationale, it may have the unintended effect of sapping initiative and retarding
economic growth.
Marketers must have a good working knowledge of the major laws protecting competition, consumers, and society. Companies generally establish legal review procedures and promulgate ethical standards to guide their marketing managers. As more

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and more business takes place in cyberspace, marketers must establish new parameters for doing business ethically. Although America Online has been hugely successful and is the country’s most popular on-line service provider, it has lost millions ofdollars due to consumer complaints regarding unethical marketing tactics:■

America Online, Inc. In 1998, America Online, Inc., agreed to pay a $2.6
million penalty and revamp some of its business practices to settle deceptivemarketing complaints brought by 44 state attorneys general. In this instance,
AOL failed to clearly notify consumers that the “50 free hours” in its on-line
service’s much-touted trial memberships must be used within a one-month
period and that users would incur subscription fees after the first month. This
was AOL’s third settlement with state regulators in less than two years. Previous settlements dealt with the company’s data network congestion in early
1997 (due to a move to flat rate pricing that gave the company more subscriptions than it had equipment to handle) and efforts in late 1996 to switch
customers to a higher-priced subscription plan. The three agreements not
only cost the company $34 million in total but also created a barrage of negative publicity that AOL had to work hard to counter.31

Growth of Special-Interest Groups
The number and power of special-interest groups have increased over the past three
decades. Political-action committees (PACs) lobby government officials and pressurebusiness executives to pay more attention to consumer rights, women’s rights,
senior citizen rights, minority rights, and gay rights. Many companies have established public-affairs departments to deal with these groups and issues. An important
force affecting business is the consumerist movement—an organized movement of citizens and government to strengthen the rights and powers of buyers in relation to sellers. Consumerists have advocated and won the right to know the true interest costof a loan, the true cost per standard unit of competing brands (unit pricing), the basic ingredients in a product, the nutritional quality of food, the freshness of products,
and the true benefits of a product. In response to consumerism, several companies
have established consumer-affairs departments to help formulate policies and respondto consumer complaints. Whirlpool Corporation is just one of the companies thathave installed toll-free phone numbers for consumers. Whirlpool even expanded thecoverage of its product warranties and rewrote them in basic English.
Clearly, new laws and growing numbers of pressure groups have put more restraints
on marketers. Marketers have to clear their plans with the company’s legal, publicrelations, public-affairs, and consumer-affairs departments. Insurance companies directly or indirectly affect the design of smoke detectors; scientific groups affect thedesign of spray products by condemning aerosols. In essence, many private marketing transactions have moved into the public domain.

SOCIAL-CULTURAL ENVIRONMENT
Society shapes our beliefs, values, and norms. People absorb, almost unconsciously, aworldview that defines their relationship to themselves, to others, to organizations,to society, to nature, and to the universe.
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Views of themselves: People vary in the relative emphasis they place on selfgratification. In the United States during the 1960s and 1970s, “pleasure seekers”
sought fun, change, and escape. Others sought “self-realization.” People bought
products, brands, and services as a means of self-expression. They bought dreamcars and dream vacations and spent more time in health activities (jogging, tennis), in introspection, and in arts and crafts. Today, in contrast, people are
adopting more conservative behaviors and ambitions. They have witnessed
harder times and cannot rely on continuous employment and rising real income.
They are more cautious in their spending pattern and more value-driven in theirpurchases.

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Views of others: Some observers have pointed to a countermovement from a “mesociety” to a “we society.” People are concerned about the homeless, crime andvictims, and other social problems. They would like to live in a more humane
society. At the same time, people are seeking out their “own kind” and avoiding
strangers. People hunger for serious and long-lasting relationships with a few
others. These trends portend a growing market for social-support products andservices that promote direct relations between human beings, such as healthclubs, cruises, and religious activity. They also suggest a growing market for “social surrogates,” things that allow people who are alone to feel that they are not,such as television, home video games, and chat rooms on the Internet.
Views of organizations: People vary in their attitudes toward corporations, government agencies, trade unions, and other organizations. Most people are willing towork for these organizations, although they may be critical of particular ones.
But there has been an overall decline in organizational loyalty. The massive wave
of company downsizings has bred cynicism and distrust. Many people today see
work not as a source of satisfaction but as a required chore to earn money to enjoy their nonwork hours.
This outlook has several marketing implications. Companies need to find
new ways to win back consumer and employee confidence. They need to makesure that they are good corporate citizens and that their consumer messages arehonest. More companies are turning to social audits and public relations to improve their image with their publics.
Views of society: People vary in their attitudes toward their society. Some defend it(preservers), some run it (makers), some take what they can from it (takers), somewant to change it (changers), some are looking for something deeper (seekers),
and some want to leave it (escapers).32 Often consumption patterns reflect social
attitude. Makers tend to be high achievers who eat, dress, and live well. Changers
usually live more frugally, driving smaller cars and wearing simpler clothes. Escapers and seekers are a major market for movies, music, surfing, and camping.
Views of nature: People vary in their attitude toward nature. Some feel subjugatedby it, others feel harmony with it, and still others seek mastery over it. A longterm trend has been humankind’s growing mastery of nature through technology.
More recently, however, people have awakened to nature’s fragility and finite resources. They recognize that nature can be destroyed by human activities.
Love of nature is leading to more camping, hiking, boating, and fishing.
Business has responded with hiking boots, tenting equipment, and other gear.
Tour operators are packaging more tours to wilderness areas. Marketing communicators are using more scenic backgrounds in advertising. Food producers havefound growing markets for “natural” products, such as natural cereal, natural ice
cream, and health foods. Two natural-food grocery stores, Whole Foods Markets
and Fresh Fields, merged in 1997 with sales of $1.1 billion.
Views of the universe: People vary in their beliefs about the origin of the universe
and their place in it. Most Americans are monotheistic, although religious conviction and practice have been waning through the years. Church attendance
has fallen steadily, with the exception of certain evangelical movements thatreach out to bring people back into organized religion. Some of the religious impulse has been redirected into an interest in Eastern religions, mysticism, the occult, and the human potential movement.

As people lose their religious orientation, they seek self-fulfillment and immediate gratification. At the same time, every trend seems to breed a countertrend, as indicated by a worldwide rise in religious fundamentalism. Here are some other culturalcharacteristics of interest to marketers: the persistence of core cultural values, the existence of subcultures, and shifts of values through time.

High Persistence of Core Cultural Values
The people living in a particular society hold many core beliefs and values that tend
to persist. Most Americans still believe in work, in getting married, in giving to charity, and in being honest. Core beliefs and values are passed on from parents to

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children and are reinforced by major social institutions—schools, churches, business,and government. Secondary beliefs and values are more open to change. Believing in
the institution of marriage is a core belief; believing that people ought to get married
early is a secondary belief. Thus family-planning marketers could make some headway arguing that people should get married later rather than that they should not get
married at all. Marketers have some chance of changing secondary values but little
chance of changing core values. For instance, the nonprofit organization Mothers
Against Drunk Drivers (MADD) does not try to stop the sale of alcohol, but it does
promote the idea of appointing a designated driver who will not drink that evening.
The group also lobbies to raise the legal drinking age.

Existence of Subcultures
Each society contains subcultures, groups with shared values emerging from their special life experiences or circumstances. Star Trek fans, Black Muslims, and Hell’s Angels
all represent subcultures whose members share common beliefs, preferences, and behaviors. To the extent that subcultural groups exhibit different wants and consumption behavior, marketers can choose particular subcultures as target markets.
Marketers sometimes reap unexpected rewards in targeting subcultures. For instance, marketers have always loved teenagers because they’re society’s trendsetters infashion, music, entertainment, ideas, and attitudes. Marketers also know that if they
attract someone as a teen, there’s a good chance they’ll keep the person as a customer
in the years ahead. Frito-Lay, which draws 15 percent of its sales from teens, says it
has seen a rise in chip-snacking by grown-ups. “We think it’s because we broughtthem in as teenagers,” says a Frito-Lay marketing director.33

Shifts of Secondary Cultural Values Through Time
Although core values are fairly persistent, cultural swings do take place. The adventin the 1960s of hippies, the Beatles, Elvis Presley, and other cultural phenomena had
a major impact on young people’s hairstyles, clothing, sexual norms, and life goals.
Today’s young people are influenced by new heroes and fads: Pearl Jam’s Eddie Vedder, Michael Jordan, and rollerblading.
Marketers have a keen interest in spotting cultural shifts that might bring newmarketing opportunities or threats. Several firms offer social-cultural forecasts. The
Yankelovich Monitor interviews 2,500 people each year and tracks 35 social trends,
such as “antibigness,” “mysticism,” “living for today,” “away from possessions,” and“sensuousness.” It describes the percentage of the population who share the attitude
as well as the percentage who do not. For example, the percentage of people whovalue physical fitness and well-being has risen steadily over the years, especially inthe under-30 group, the young women and upscale group, and people living in theWest. Marketers of health foods and exercise equipment cater to this trend with appropriate products and communications. In 1995, Taco Bell unveiled a new lower-fat“Border Lights” menu. The Center for Science in the Public Interest, a consumer advocacy group in Washington, praised the new menu as being “more than a marketing gimmick.”34

S U M M A R Y

154Analyzing
MarketingOpportunities

1. Successful companies realize that the marketing environment presents a neverending series of opportunities and threats. The major responsibility for identifying
significant changes in the macroenvironment falls to a company’s marketers. Morethan any other group in the company, marketing managers must be the trend trackers and opportunity seekers.
2. Many opportunities are found 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).

3. Within the rapidly changing global picture, marketers must monitor six major environmental forces: demographic, economic, natural, technological, political-legal,
and social-cultural.
4. 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; large geographic shifts in population; and themove to micromarketing and away from mass marketing.
5. In the economic arena, marketers need to focus on income distribution and levelsof savings, debt, and credit availability.
6. In the natural environment, marketers need to be aware of raw-materials shortages,
increased energy costs and pollution levels, and the changing role of governments
in environmental protection.
7. In the technological arena, marketers should take account of the accelerating paceof technological change, opportunities for innovation, varying R&D budgets, andthe increased governmental regulation brought about by technological change.
8. In the political-legal environment, marketers must work within the many laws regulating business practices and with various special-interest groups.
9. 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 needsof different subcultures within a society.

A P P L I C A T I O N S

C O N C E P T S
1. One of the changes in the demographic environment is the increasing proportionof older adults, who comprise many markets for certain products. Discuss how thisdemographic trend could affect the product features and/or distribution arrangements of the following:a. Minute Maid orange juice
b. Mail-order businessesc. the Social Security office
2. You are a product manager at Minolta. Your boss has just received a copy of The
Popcorn Report (see the Marketing Insight “Faith Popcorn Points to 16 Trends in the
Economy”). Although her background is in engineering, your boss has always beeninterested in the sensory appeal of product features, and this book has aroused her
curiosity about this phenomenon. Prepare a report summarizing the potential impact of each of Popcorn’s 16 trends on Minolta’s product (cameras). Specifically,
how will each trend affect product development, features, and marketing?
3. Budweiser, Calvin Klein, McDonald’s, Coca-Cola, and Chevrolet are examples ofbrands that have become cultural symbols for the United States. Name some brandnames and products that are cultural symbols for the following countries: (a) Japan,(b) Germany, (c) Russia, (d) France, (e) Italy, (f) Ireland, (g) Colombia, (h) Mexico,(i) England, (j) Switzerland, (k) the Middle Eastern nations, (l) Australia.

Scanning theMarketing
Environment155

N O T E S

156

1. Gene Del Vecchio, “Keeping It Timeless,Trendy,” Advertising Age, March 23, l998,
p. 24.
2. Sue Shellenbarger, “‘Child-Care Cams’:
Are They Good News for Working Parents?” Wall Street Journal, August 19,
1998, p. B1.
3. Kelly Shermach, “Niche Malls: Innovation for an Industry in Decline,” Marketing News, February 26, l996, p. 1.
4. Gerald Celente, Trend Tracking (New York:
Warner Books, 1991).
5. See Faith Popcorn, The Popcorn Report(New York: HarperBusiness, 1992).

6. John Naisbitt and Patricia Aburdene,
Megatrends 2000 (New York: Avon Books,
1990).
7. Pam Weisz, “Border Crossings: Brands
Unify Image to Counter Cult of Culture,” Brandweek, October 31, 1994, pp.
24–28.
8. Much of the statistical data in this chapter is drawn from the World Almanac andBook of Facts, 1997 and the Statistical Abstract of the United States, 1997 (Washington, DC: U.S. Bureau of the Census,
1998).

9. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W.
Behrens III, The Limits to Growth (NewYork: New American Library, 1972), p. 41.
10. Philip Kotler and Eduardo Roberto, Social
Marketing: Strategies for Changing Public
Attitudes (New York: Free Press, 1989).
11. Sally D. Goll, “Marketing: China’s (Only)
Children Get the Royal Treatment,” WallStreet Journal, February 8, 1995, p. B1.
12. Bill Stoneman, “Beyond Rocking theAges: An Interview with J. Walker Smith,”
American Demographics, May 1998, pp.
45–49; Margot Hornblower, “Great X,”
Time, June 9, l997, pp. 58–59; Bruce
Horowitz, “Gen X in a Class by Itself,”
USA Today, September 23, 1996, p. B1.
13. Steve Johnson, “Beer Ads for a New Generation of Guzzlers,” Chicago Tribune,
June 5, 1998, p. 1.
14. Jaine Lopiano-Misdom and Joanne deLuca, “Street Scene,” Across the Board,
March 1998, p. 14.
15. David Leonhardt, “Hey Kids, Buy This,”Business Week, June 30, 1997, pp. 62–67;
Lisa Krakowka, “In the Net,” American
Demographics, August 1998, p. 56.
16. J. Walker Smith and Ann Clurman, Rocking the Ages: The Yankelovich Report on
Generational Marketing (New York:
HarperBusiness, 1998).
17. For descriptions on the buying habits andmarketing approaches to African Americans and Latinos, see Chester A. Swenson, Selling to a Segmented Market: The
Lifestyle Approach (Lincolnwood, IL: NTC
Business Books, 1992).
18. Jacquelyn Lynn, “Tapping the Riches of
Bilingual Markets,” Management Review,
March 1995, pp. 56–61.
19. Laura Koss-Feder, “Out and About,” Marketing News, May 25, 1998, pp. 1, 20.
20. Ibid.
21. Dana Canedy, “As the Purchasing Powerof Women Rises, Marketers Start to Pay
More Attention to Them,” New YorkTimes, July 2, 1998, p. 6.

22. Michael Barrier, “The Language of Success,” Nation’s Business, August 1997, pp.
56–57.
23. Brad Edmondson, “A New Era for Rural
Americans,” American Demographics,
September 1997, pp. 30–31. See also Kenneth M. Johnson and Calvin L. Beale,“The Rural Rebound,” The Wilson Quarterly, Spring 1998, pp. 16–27.
24. Robert Kelly, “‘It Felt Like Home’: More
Are Making Move to Small Towns,” St.
Louis Post-Dispatch, April 27, 1997, p. D6.
25. Lauri J. Flynn, “Not Just a Copy Shop Any
Longer, Kinko’s Pushes Its Computer Services,” New York Times, July 6, 1998, p.
D1.
26. David Leonhardt, “Two-Tier Marketing,”
Business Week, March 17, 1997, pp.
82–90.
27. Francoise L. Simon, “Marketing Green
Products in the Triad,” The Columbia Journal of World Business, Fall and Winter1992, pp. 268–85; and Jacquelyn A.
Ottman, Green Marketing: Responding to Environmental Consumer Demands (Lincolnwood, IL: NTC Business Books, 1993).
28. See “White House to Name 22 Technologies It Says Are Crucial to Prosperity,
Security,” Wall Street Journal, April 26,
1991, p. 2.
29. See “R&D Scoreboard: On a Clear Day
You Can See Progress,” Business Week,
June 29, 1992, pp. 104–25.
30. See Dorothy Cohen, Legal Issues on Marketing Decision Making (Cincinnati:
South-Western, 1995).
31. Rajiv Chandrasekaran, “AOL Settles Marketing Complaints,” Washington Post,
May 29, 1998, p. F1.
32. Arnold Mitchell of the Stanford ResearchInstitute, private publication.
33. Laura Zinn, “Teens: Here Comes theBiggest Wave Yet,” Business Week, April
11, 1994, pp. 76–86.
34. Glenn Collins, “From Taco Bell, a Healthier Option,” New York Times, February 9,
1995, p. D4.

Scanning theMarketing
Environment157

Developing New
Market Offerings

Examine thequestions:■

What challenges does a company face in developing new
products?

■

What organizational structures
are used to manage newproduct development?

■

What are the main stages in developing new products, andhow can they be managed
better?

■What factors affect the rate ofdiffusion and consumer adoption of newly launched
products?

Who should ultimately design
the product? The customer,of course.

followingO

nce a company has carefully segmented the market, chosen its target customers,
identified their needs, and determined its market positioning, it is better able to develop new products. Marketers play a key role in the new-product process, by iden-

tifying and evaluating new-product ideas and working with R&D and others in every stageof development.
Every company must develop new products. New-product development shapes thecompany’s future. Replacement products must be created to maintain or build sales. Customers want new products, and competitors will do their best to supply them. Each year
over 16,000 new products (including line extensions and new brands) are introduced into
groceries and drugstores.
A company can add new products through acquisition or development. The acquisition route can take three forms. The company can buy other companies, it can acquire
patents from other companies, or it can buy a license or franchise from another company.
The development route can take two forms. The company can develop new products in
its own laboratories. Or it can contract with independent researchers or new-product-development firms to develop specific new products.
Booz, Allen & Hamilton has identified six categories of new products:1
1. New-to-the-world products: New products that create an entirely new market.
2. New product lines: New products that allow a company to enter an establishedmarket for the first time.
3. Additions to existing product lines: New products that supplement a company’s established product lines (package sizes, flavors, and so on).
4. Improvements and revisions of existing products: New products that provide improved performance or greater perceived value and replace existing products.
5. Repositionings: Existing products that are targeted to new markets or market segments.
6. Cost reductions: New products that provide similar performance at lower cost.
Less than 10 percent of all new products are truly innovative and new to the world.

These products involve the greatest cost and risk because they are new to both the company and the marketplace. Most new-product activity is devoted to improving existingproducts. At Sony, over 80 percent of new-product activity is undertaken to modify andimprove existing Sony products.

C HD EA VL EL EL ON PG ME SE NI TN N E W - P R O D U C T

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Companies that fail to develop new products are putting themselves at great risk.
Their existing products are vulnerable to changing customer needs and tastes, newtechnologies, shortened product life cycles, and increased domestic and foreign competition.
At the same time, new-product development is risky. Texas Instruments lost $660
million before withdrawing from the home computer business, RCA lost $500 million on its videodisc players, Federal Express lost $340 million on its Zap mail, Ford
lost $250 million on its Edsel, DuPont lost an estimated $100 million on a synthetic
leather called Corfam, and the British–French Concorde aircraft will never recover its
investment.2
To get a feel for how much money can be thrown at a product that is destined tofail, consider the fate of the smokeless cigarette.

■

R. J. Reynolds By the late 1980s, R. J. Reynolds Tobacco Company (RJR) had
already spent more than $300 million on the reduced-smoke Premier cigarette. Five months after its introduction in 1988, Premier disappeared fromthe test markets because smokers “didn’t like the taste.” It was also difficult
to light. “Premier gave you a hernia trying to get the smoke through,” said
one tobacco industry analyst. Undeterred by the costly failure of Premier, RJR
went on to spend an additional $125 million on another attempt. In 1997
RJR tested its smokeless Eclipse cigarette in Chattanooga, Tennessee. But smokers say they’re not switching. Eclipse seemed like a good alternative; the cigarette heats the tobacco instead of burning it, resulting in only 10 percent of
the smoke of conventional cigarettes. Only problem is smokers like smoke.
Research shows that smokers enjoy the “security blanket” of being wreathedin smoke, regardless of how much nonsmokers dislike it. So far, nonsmokers
are the only ones who like Eclipse.3

New products continue to fail at a disturbing rate. In 1997, a record 25,261 new
packaged-goods products were launched, and that doesn’t even include products
you won’t find at your local supermarket, like techno-gizmos and software programs.
But equally stunning is the number that fail: Tom Vierhile, general manager of Market Intelligence Service Ltd., a new-product reporting and retrieval firm, estimatesthat 80 percent of recently launched products aren’t around today.4 When you consider that it costs $20 million to $50 million to launch a new product, you wonder
why people continue to innovate at all. Yet product failures can serve one useful
purpose: Inventors, entrepreneurs, and new-product team leaders can learn valuablelessons about what not to do. With this credo in mind, marketing consultant Robert
McMath has collected about 80,000 consumer products, most of them abject flops,
in his New Product Showcase and Learning Center in the rolling hills of Ithaca, New
York. See the Marketing Insight box, “Mr. Failure’s Lessons for Sweet Success: Robert
McMath’s New Product Showcase and Learning Center,” for some insights on product failure.
Why do new products fail?
■A high-level executive pushes a favorite idea through in spite of negative market
research findings.

■

The idea is good, but the market size is overestimated.

■

The product is not well designed.

■

The product is incorrectly positioned in the market, not advertised effectively, or
overpriced.

■

Development costs are higher than expected.

■

Competitors fight back harder than expected.

Several other factors hinder new-product development:■

Shortage of important ideas in certain areas: There may be few ways left to improvesome basic products (such as steel, detergents).

■

Fragmented markets: Keen competition is leading to market fragmentation. Companies have to aim their new products at smaller market segments, and this canmean lower sales and profits for each product.

■Social and governmental constraints: New products have to satisfy consumer safety
and environmental concerns. Government requirements slow down innovationin drugs, toys, and some other industries.

■

Costliness of the development process: A company typically has to generate manyideas to find just one worthy of development. Furthermore, the company often
faces high R&D, manufacturing, and marketing costs.

■

Capital shortages: Some companies with good ideas cannot raise the funds needed
to research and launch them.

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ally require resources and persistence beyond the capabilities of most marketers. Pepsi-Cola led a very precarious existence for decades before establishing itself as the major
competitor to Coca-Cola. More to the point, though, is that
Pepsi is one of the few survivors among dozens of otherbrands that have challenged Coke for more than a century.
Ever hear of Toca-Cola? Coco-Cola? Yum-Yum Cola? French
Wine of Cola? How about King-Cola, the royal drink ? Morerecently, Afri Cola failed to attract African American soda
drinkers, and Cajun Cola pretty well flopped in the land of
gumbo. All things being equal, an established product has
a distinct advantage over any new product that is not radically different from it.

Mr. Failure’s Lessons for Sweet Success:Robert McMath’s New Product Showcaseand Learning Center
Strolling the aisles at Robert McMaths New Product Showcaseand Learning Center is like being in some nightmare version ofa supermarket. Theres Gerber food for adults pureed sweetand-sour pork and chicken Madeira microwaveable ice creamsundaes, parsnip chips, aerosol mustard, Ben-Gay aspirin, andMiller Clear Beer. How about Richard Simmons Dijon Vinaigrette
Salad Spray, garlic cake in a jar, and Farrah shampoo? Most of the
80,000 products on display were flops. Behind each of them aresquandered dollars and hopes, but the genial curator of thisSmithsonian of consumerism, a former marketer for Colgate-Palmolive, believes that even and perhaps, especially failure has
valuable lessons to teach.
The New Product Showcase and Learning Center is a place
where product developers pay hundreds of dollars an hour tovisit and learn from others mistakes. McMaths unusual showcase represents $4 billion in product investment. From it he has
distilled dozens of lessons for an industry that, by its own admission, has a very short memory. For those who can t make thetrip to Ithaca or pay a steep consulting fee, McMath has now
put his unique insights into a book, What Were They Thinking?
Here are a few of the marketing lessons McMath espouses:■

The value of a brand is its good name, which it earns overtime. People become loyal to it. They trust it to deliver a consistent set of attributes. Don t squander this trust by attaching your good name to something totally out of character.
When you hear Ben-Gay aspirin, don t you immediately thinkof the way that Ben-Gay cream sears your skin? Can you imagine swallowing it? Louis Sherry No Sugar Added Gorgonzola
Cheese dressing was everything that Louis Sherry, known for
its rich candies and ice cream, shouldn t be: sugarless, cheese,and salad dressing. Cracker Jack cereal, Smucker s premium
ketchup, and Fruit of the Loom laundry detergent were othermisbegotten attempts to stretch a good name.

■Me-too marketing is the number-one killer of new products. Most such attempts fail. The ones that succeed usu-■

Don t be fooled by the success of the Complete Dummy’s
Guide to . . . line of books. People usually don t buy productsthat remind them of their shortcomings. Gillettes For Oily
Hair Only shampoo flopped because people did not want toconfess that they had greasy hair. People will use productsthat discreetly say for oily hair or for sensitive skin in small
print on containers that are otherwise identical to the regular product. But they do not want to be hit over the headwith reminders that they are overweight, have bad breath,sweat too much, or are elderly. Nor do they wish to advertise
their faults and foibles to other people by carrying such products in their grocery carts.

■

Some products are radically different from the products, services, or experiences that consumers normally purchase. Tooradically different. They fail because consumers don t relate
to them. You can tell that some innovative products aredoomed as soon as you hear their names: Toaster Eggs. Cucumber Antiperspirant spray. Health-Sea Sea Sausage. Other
innovative ideas have been victims of a brand s past success.
For example, Nabiscos Oreo Little Fudgies, a confectionery
product with a chocolate coating meant to compete withcandy, sounds like a natural. But for many years Nabisco has
encouraged people to pull apart Oreo cookies and lick out
the filling. It s very messy to open an Oreo with a chocolate
coating, however; so Oreo Little Fudgies struck a discordantnote with consumers.

Sources: Paul Lukas, The Ghastliest Product Launches, Fortune, March 16, 1996, p. 44; Jan Alexander, Failure Inc. Worldbusiness, May June 1996, p. 46;Ted Anthony, Wheres
Farrah Shampoo? Next to the Salsa Ketchup, Marketing News, May 6, 1996, p. 13; bulleted points are adapted from Robert M. McMath and Thom Forbes, What Were They
Thinking? Marketing Lessons I’ve Learned from Over 80,000 New-Product Innovations and Idiocies (New York: Times Business, 1998), pp. 22 24, 28, 30 31, and 129 30.

■

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Faster required development time: Companies that cannot develop new products
quickly will be at a disadvantage. Companies must learn how to compress development time by using computer-aided design and manufacturing techniques,
strategic partners, early concept tests, and advanced marketing planning. Alert
companies use concurrent new-product development, in which cross-functional
teams collaborate to push new products through development and to market.
Concurrent product development resembles a rubgy match rather than a relay
race, with team members passing the new product back and forth as they headtoward the goal. The Allen-Bradley Corporation (a maker of industrial controls)was able to develop a new electrical control device in just two years, as opposed
to six years under its old system.
■

Shorter product life cycles: When a new product is successful, rivals are quick tocopy it. Sony used to enjoy a three-year lead on its new products. Now Matsushita will copy the product within six months, leaving hardly enough time forSony to recoup its investment.

Given these challenges, what can a company do to develop successful new products?
Cooper and Kleinschmidt found that the number-one success factor is a unique, superior product. Products with a high product advantage succeed 98 percent of thetime, compared to products with a moderate advantage (58 percent success) or minimal advantage (18 percent success). Another key success factor is a well-defined product concept prior to development. The company carefully defines and assesses thetarget market, product requirements, and benefits before proceeding. Other successfactors are technological and marketing synergy, quality of execution in all stages, andmarket attractiveness.5
Madique and Zirger, in a study of successful product launches in the electronics
industry, found eight factors accounting for new-product success. New-product success is greater the deeper the company’s understanding of customer needs, the higher
the performance-to-cost ratio, the earlier the product is introduced ahead of competition, the greater the expected contribution margin, the more spent on announcing
and launching the product, the greater the top management support, and the greater
the cross-functional teamwork.6
New-product development is most effective when there is teamwork among R&D,
engineering, manufacturing, purchasing, marketing, and finance. The product idea
must be researched from a marketing point of view, and a specific cross-functionalteam must guide the project throughout its development. Studies of Japanese companies show that their new-product successes are due in large part to cross-functional
teamwork.

E FA FR ER CA TNI GV EE MOE RN GT AS N I Z A T I O N A L
Top management is ultimately accountable for the success of new products. Newproduct development requires senior management to define business domains, product categories, and specific criteria. For example, the Gould Corporation establishedthe following acceptance criteria:■

The product can be introduced within five years.

■

The product has a market potential of at least $50 million and a 15 percent
growth rate.

■

The product would provide at least 30 percent return on sales and 40 percent on
investment.

■

The product would achieve technical or market leadership.

BUDGETING FOR NEW PRODUCT DEVELOPMENT
Senior management must decide how much to budget for new-product development.
R&D outcomes are so uncertain that it is difficult to use normal investment criteria.
Some companies solve this problem by financing as many projects as possible, hoping to achieve a few winners. Other companies set their budget by applying a conventional percentage of sales figures or by spending what the competition spends.
Still other companies decide how many successful new products they need and work
backward to estimate the required investment.
The U.S. company best known for its commitment to new-product research anddevelopment is Minneapolis-based 3M Company:

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3M Minnesota Mining and Manufacturing (3M) fosters a culture of innovation and improvisation that was evident at its very beginnings: In 1906 thedirectors were faced with a failed mining operation, but they ended up making sandpaper out of the grit and wastage. Today 3M makes more than 60,000
products, including sandpaper, adhesives, computer diskettes, contact lenses,
and Post-it notes. Each year 3M launches scores of new products. This $15
billion company’s immodest goal is to have each of its divisions generate atleast 30 percent of sales from products less than four years on the market.7■

3M encourages everyone, not just engineers, to become “product champions.” The company’s 15 percent rule allows all employees to spend up
to 15 percent of their time working on projects of personal interest.
Products such as Post-it notes, masking tape, and 3M’s microreplication
technology grew from 15 percent-rule activities.

■

Each promising new idea is assigned to a multidisciplinary venture teamheaded by an “executive champion.”■

3M expects some failures and learns from them. Its slogan is “You haveto kiss a lot of frogs to find a prince.”■

3M hands out its Golden Step awards each year to the venture teams
whose new product earned more than $2 million in U.S. sales or $4 million in worldwide sales within three years of its commercial introduction.

Table 2.1 shows how a company might calculate the cost of new-product development. The new-products manager at a large consumer packaged-goods company reviewed the results of 64 new-product ideas. Only one in four ideas, or 16, passed thescreening stage. It cost $1,000 to review each idea at this stage. Half of these ideas,or eight, survived the concept-testing stage, at a cost of $20,000 each. Half of these,or four, survived the product-development stage, at a cost of $200,000 each. Half ofthese, or two, did well in the test market, at a cost of $500,000 each. When these twoideas were launched, at a cost of $5 million each, only one was highly successful.
Thus the one successful idea had cost the company $5,721,000 to develop. In theprocess, 63 other ideas fell by the wayside. The total cost for developing one successful
new product was $13,984,400. Unless the company can improve the pass ratios andreduce the costs at each stage, it will have to budget nearly $14 million for each suc-

Stage1. Idea screening

Numberof Ideas
64

Pass
Ratio
1:4

Cost per
Product
Idea$ 1,000

2. Concept testing

16

1:2

20,000T A B L E
Total
Cost
$ 64,000
320,000

3. Product development8

1:2

200,000

1,600,000

4. Test marketing4

1:2

500,000

2,000,000

5. National launch

2

1:2

5,000,000

10,000,000$5,721,000$13,984,000

2. 1

Estimated Cost of Finding One
Successful New Product (Startingwith 64 New Ideas)

cessful new idea it hopes to find. If top management wants four successful new products in the next few years, it will have to budget at least $56 million (4 ⫻ 14 million)
for new-product development.

ORGANIZING NEW-PRODUCT DEVELOPMENT
Companies handle the organizational aspect of new-product development in several
ways.8 The most common are:■Product managers: Many companies assign responsibility for new-product ideas toproduct managers. In practice, this system has several faults. Product managers
are so busy managing existing lines that they give little thought to new products
other than line extensions. They also lack the specific skills and knowledge
needed to develop and critique new products.

■

New-product managers: Kraft and Johnson & Johnson have new-product managers
who report to category managers. This position professionalizes the new-productfunction. However, like product managers, new-product managers tend to thinkin terms of modifications and line extensions limited to their product market.

■

New-product committees: Many companies have a high-level management committee charged with reviewing and approving proposals.

■

New-product departments: Large companies often establish a department headed
by a manager who has substantial authority and access to top management. The
department’s major responsibilities include generating and screening new ideas,
working with the R&D department, and carrying out field testing and commercialization.

■

New-product venture teams: 3M, Dow, Westinghouse, and General Mills often assign new-product development work to venture teams. A venture team is a groupbrought together from various operating departments and charged with developing a specific product or business. They are “intrapreneurs” relieved of theirother duties and given a budget, a time frame, and a “skunkworks” setting.
Skunkworks are informal workplaces, sometimes garages, where intrapreneurial
teams attempt to develop new products. See the Marketing Insight box, “NewProduct Development Not Just for Engineers: The Wisdom of Cross-Functional
Teams,” for more information on how companies benefit from cross-functional
teamwork when developing new products.

The most sophisticated tool for managing the innovation process is the stage-gate
system used by 3M and a number of other companies.9 The innovation process is divided into several stages. At the end of each stage is a gate or checkpoint. The project leader, working with a cross-functional team, must bring a set of known deliverables
to each gate before the project can pass to the next stage. To move from the businessplan stage into product development requires a convincing market research study of
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New-Product Development Not Just
for Engineers: The Wisdom of
Cross-Functional TeamsI

N S I G H T

In his best-selling book, The Soul of a New Machine, Tracy Kidder
described how a group of engineers in a tightly knit team developed a revolutionary new computer for Data General. These
engineers were part of a long tradition in product development,
in which engineers and scientists worked in isolation, not only
from the outsiders but also from other company departments,
to develop original products. Although relegating new-productdevelopment solely to engineers or scientists often reaped brilliant results, it also produced crushing inefficiencies and marketing myopia engineers driven to create a better mousetrap
when potential customers didn t really need or want a better
mousetrap.
The venerable tradition of engineers working in isolation finally burst apart in the late 1980s and early 1990s with the implementation of cross-functional new-product teams. Underpressure to shrink design cycles, leverage new techniques, andlower product-development costs, manufacturers are transforming product design from a solitary activity handled by engineering to a dynamic process involving the input of multiple
company functions and key suppliers, too. In a survey of DesignNews and Purchasing magazine readers, 80 percent of respondents reported that their companies use cross-functional teams
to develop new products.
Chrysler, now the most profitable automaker in the world,
is a pioneer in the use of these new-product teams. In the late1980s, Chrysler began pairing car designers with cohorts in purchasing. The result: A whole layer of bureaucracy has been cut
from the product-development process. Since instituting crossfunctional design teams, Chrysler has slashed new-vehicle development cycles by over 40 percent and reduced costs
dramatically. For instance, in the late 1980s, development leadtimes for domestic automakers often spanned five years. Today,

Chrysler typically gets new cars or trucks from concept to market in three years or less. Another important benefit of adding
key people from other functions is the creation of more knowledge. Harley-Davidson pairs engineering, purchasing, manufacturing, marketing, and suppliers for the conceptual stage ofdesign. For complex components, such as brake systems, it has
tapped suppliers to lead development. Instead of hiring this expertise in-house, we re relying on the competence that alreadyexists within our supply base, says Leroy Zimdars, Harley-Davidsons director of development purchasing.
For all the benefits that come from the cross-functional design team process, no one should be lulled into thinking that
forming a team and working on one is easy. Don H. Lester, a manager of operations for a Hoechst division, knows this firsthand.
Lester has over 10 years of experience as a new-product venture team leader, and hes developed the following criteria for
staffing new-product venture teams:■

Desired team leadership style and level of expertise: The more
complex the new-product concept, the greater the expertisethat is desirable.

■

Team member skills and expertise: Hoechst staffs its new venture teams with people with skills and expertise in chemistry,engineering, market research, financial analysis, and manufacturing. A different company would choose different functions to be represented.

■

Level of interest in the particular new-product concept: Is thereinterest or, even better, a high level of ownership and commitment (a concept champion )?

■Potential for personal reward: What s in it for me? What motivates individuals to want to participate in this effort?

■

Diversity of team members, in the broadest sense: This includes
race, gender, nationality, breadth of experience, depth of expertise,and personality.The greater the diversity,the greater therange of viewpoints and the teams decision-making potential.

Sources: Don H. Lester, Critical Success Factors for New Product Development, Research Technology Management, January February 1998, pp. 36 43;Tim Minahan, HarleyDavidson Revs Up Development Process, Design News, May 18, 1998, pp. S18 S23; Tim Minahan, Platform Teams Pair with Suppliers to Drive Chrysler to Better Designs,
Purchasing, May 7, 1998, pp. 44S3 44S7; Design Teams Bring Radical Change in Product Development, Design News, May 18, 1998, p. S2; see also Gary S. Lynn, New Product Team Learning: Developing and Profiting from Your Knowledge Capital, California Management Review, Summer 1998, pp. 74 93.

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managers review the criteria at each gate to judge whether the project deserves tomove to the next stage. The gatekeepers make one of four decisions: go, kill, hold, or
recycle.
Stage-gate systems put strong discipline into the innovation process, making its
steps visible to all involved and clarifying the project leader’s and team’s responsibilities at each point. Some of the companies that rely on the stage-gate process are Mobil, 3M, Hewlett-Packard, and Seattle-based Fluke, a pioneer in handheld electronic
instruments. Lego, the Danish toy maker, replaces about one-third of its product line
every year with new products. Since the late 1980s, Lego has been relying on a stagegate new-product process to ensure that everything comes together for rapid productlaunches.10

Layfutureplans
Yes
1.1.Idea
Idea
generation
generation
Is theIs theparticularidea worth
idea worth
considering?
considering?

Yes
2. Idea screening
Is the productidea compatible
with company
objectives,
strategies, andresources?

Yes
3. Concept
development
and testing
Can we find a goodconcept for the
product that
consumers say theywould try?

Yes
4. Marketingstrategydevelopment
Can we find a
cost-effective,
affordable
marketingstrategy?

Yes
5. Business analysis
Will this productmeet our profit
goal?

Yes

Yes

Yes

6. Productdevelopment

7. Market
testing

Have wedeveloped atechnically andcommerciallysound product?

Have productsales met
expectations?

8. Commercialization
Are product sales
meeting
expectations?

No

No

Yes
Yes
No

No

No

No

No

No

Should we send theidea back for productdevelopment?

Would it help tomodify the product ormarketing program?

No

No

DROP

F I G U R E
We will now look at the marketing challenges arising at each of the eight stagesof the development process: idea generation, idea screening, concept development
and testing, marketing strategy development, business analysis, product development,
market testing, and commercialization. A preview of the various steps and decisions
in the process is presented in Figure 2-1.

2-1

The New-Product-Development
Decision Process

M AP NR OA GC EI NS SG : TIHD EE AD SE V E L O P M E N T
IDEA GENERATIONThe new-product development process starts with the search for ideas. Top managers
should define the product and market scope and the new product’s objectives. They
should state how much effort should be devoted to developing breakthrough products, modifying existing products, and copying competitors’ products. New-productideas can come from many sources: customers, scientists, competitors, employees,
channel members, and top management.
The marketing concept holds that customer needs and wants are the logical place
to start the search for ideas. Hippel has shown that the highest percentage of ideas
for new industrial products originate with customers.11 Technical companies can learna great deal by studying their lead users, those customers who make the most advanced
use of the company’s products and who recognize the need for improvements before
other customers do. Many of the best ideas come from asking customers to describe
their problems with current products. For instance, in an attempt to grab a footholdin steel wool soap pads a niche dominated by SOS and Brillo, 3M arranged eight
focus groups with consumers around the country. 3M asked what problems consumers
found with traditional soap pads, and found the most frequent complaint wasthat the pads scratched expensive cookware. This finding produced the idea for thechapter 11
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M A R K E T I N G

memo

Ten Ways to Great
New-Product Ideas
1. Run pizza–video parties, as Kodak
does—informal sessions wheregroups of customers meet with company engineers and designers to discuss problems and needs andbrainstorm potential solutions.
2. Allow time off—scouting time—for
technical people to putter on their own
pet projects.3M allows 15 percent timeoff;Rohm & Haas allows 10 percent.
3. Make a customer brainstorming session a standard feature of plant tours.
4. Survey your customers: Find out
what they like and dislike in your andcompetitors’ products.
5. Undertake “fly-on-the-wall”or “camping out”research with customers,as do
Fluke and Hewlett-Packard.
6. Use iterative rounds: a group of customers in one room,focusing on identifying problems, and a group of yourtechnical people in the next room, listening and brainstorming solutions.The
proposed solutions are then tested immediately on the group of customers.
7. Set up a keyword search that routinely scans trade publications in
multiple countries for new-productannouncements and so on.
8. Treat trade shows as intelligence missions,where you view all that is newin your industry under one roof.
9. Have your technical and marketingpeople visit your suppliers’ labs andspend time with their technical people—find out what’s new.
10. Set up an idea vault, and make it
open and easily accessed.Allow employees to review the ideas and add
constructively to them.
Source: Adapted from Robert Cooper,Product Leadership:Creating and Launching Superior New Products (New York: Perseus Books, 1998).

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Scotch-Brite Never Scratch soap pad. Sales of the new soap pad have now exceeded
3M’s expectations by 25 percent.12
Successful companies have established a company culture that encourages every
employee to seek new ways of improving production, products, and services. Toyota
claims its employees submit 2 million ideas annually (about 35 suggestions per employee), over 85 percent of which are implemented. Kodak and other firms give monetary, holiday, or recognition awards to employees who submit the best ideas.
Companies can also find good ideas by researching their competitors’ products andservices. They can learn from distributors, suppliers, and sales representatives. They
can find out what customers like and dislike in their competitors’ products. They can
buy their competitors’ products, take them apart, and build better ones. Company
sales representatives and intermediaries are a particularly good source of ideas. These
groups have firsthand exposure to customers and are often the first to learn about
competitive developments. An increasing number of companies train and reward sales
representatives, distributors, and dealers for finding new ideas.
Top management can be another major source of ideas. Some company leaders,such as Edwin H. Land, former CEO of Polaroid, took personal responsibility for technological innovation in their companies. On the other hand, Lewis Platt, CEO of
Hewlett-Packard, believes senior management’s role is to create an environment thatencourages business managers to take risks and create new growth opportunities. Under Platt’s leadership, HP has been structured as a collection of highly autonomous
entrepreneurial businesses.
New-product ideas can come from other sources as well, including inventors,
patent attorneys, university and commercial laboratories, industrial consultants, advertising agencies, marketing research firms, and industrial publications. But althoughideas can flow from many sources, their chances of receiving serious attention often
depend on someone in the organization taking the role of product champion. The product idea is not likely to receive serious consideration unless it has a strong advocate.
See the Marketing Memo “Ten Ways to Great New-Product Ideas.”

IDEA SCREENING
Any company can attract good ideas by organizing itself properly. The company should
motivate its employees to submit their ideas to an idea manager whose name andphone number are widely circulated. Ideas should be written down and reviewed eachweek by an idea committee, which sorts them into three groups: promising ideas, marginal ideas, and rejects. Each promising idea is researched by a committee member,
who reports back to the committee. The surviving promising ideas then move into afull-scale screening process. The company should reward employees submitting thebest ideas.
In screening ideas, the company must avoid two types of errors. A DROP-error occurs when the company dismisses an otherwise good idea. It is extremely easy to findfault with other people’s ideas. Some companies shudder when they look back at ideas
they dismissed: Xerox saw the novel promise of Chester Carlson’s copying machine,
but IBM and Eastman Kodak did not. IBM thought the market for personal computers was minuscule. RCA saw the opportunity of radio; the Victor Talking MachineCompany did not. Marshall Field understood the unique market-development possibilities of installment buying; Endicott Johnson did not. Sears dismissed the importance of discounting; Wal-Mart and Kmart did not.13 If a company makes too many
DROP-errors, its standards are too conservative.
A GO-error occurs when the company permits a poor idea to move into development and commercialization. We can distinguish three types of product failures. An
absolute product failure loses money; its sales do not cover variable costs. A partial product failure loses money, but its sales cover all its variable costs and some of its fixed
costs. A relative product failure yields a profit that is less than the company’s target rateof return.
The purpose of screening is to drop poor ideas as early as possible. The rationaleis that product-development costs rise substantially with each successive development
stage. Most companies require new-product ideas to be described on a standard form

that can be reviewed by a new-product committee. The description states the product idea, the target market, and the competition, and roughly estimates market size,
product price, development time and costs, manufacturing costs, and rate of return.
The executive committee then reviews each idea against a set of criteria. Does the
product meet a need? Would it offer superior value? Can it be distinctively advertised?
Does the company have the necessary know-how and capital? Will the new productdeliver the expected sales volume, sales growth, and profit? The surviving ideas canbe rated using a weighted-index method like that in Table 2.2. The first column lists
factors required for successful product launches, and the second column assigns importance weights. The third column scores the product idea on a scale from 0 to 1.0,
with 1.0 the highest score. The final step multiplies each factor’s importance by the
product score to obtain an overall rating. In this example, the product idea scores .69,
which places it in the “good idea” level. The purpose of this basic rating device is topromote systematic product-idea evaluation and discussion. It is not supposed to makethe decision for management.
As the new-product idea moves through development, the company will constantly need to revise its estimate of the product’s overall probability of success, using the following formula:
Overallprobability ofsuccess⫽

Probabilityof technicalcompletion⫻

Probability ofcommercialization
given technicalcompletion⫻

Probability of
economic
success given
commercialization

For example, if the three probabilities are estimated as .50, .65, and .74, respectively,
the company would conclude that the overall probability of success is .24. The company then has to judge whether this probability is high enough to warrant continued development.

M AC ON NA CG EI NP TG TT OH ES TD RE AV TE EL GO YP M E N T P R O C E S S :CONCEPT DEVELOPMENT AND TESTING
Attractive ideas must be refined into testable product concepts. A product idea is a possible product the company might offer to the market. A product concept is an elaborated version of the idea expressed in meaningful consumer terms.

Concept Development
We shall illustrate concept development with the following situation: A large foodprocessing company gets the idea of producing a powder to add to milk to increase
its nutritional value and taste. This is a product idea. But consumers do not buy product ideas; they buy product concepts.
A product idea can be turned into several concepts. The first question is: Who will
use this product? The powder can be aimed at infants, children, teenagers, young or
middle-aged adults, or older adults. Second, what primary benefit should this product provide? Taste, nutrition, refreshment, energy? Third, when will people consume
this drink? Breakfast, midmorning, lunch, midafternoon, dinner, late evening? By answering these questions, a company can form several concepts:■

Concept 1: An instant breakfast drink for adults who want a quick nutritious
breakfast without preparing a breakfast.

■

Concept 2: A tasty snack drink for children to drink as a midday refreshment.

■

Concept 3: A health supplement for older adults to drink in the late evening before they go to bed.

Each concept represents a category concept that defines the product’s competition.
An instant breakfast drink would compete against bacon and eggs, breakfast cereals,

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T A B L E

2.2

Product-Idea Rating Device

Product Success Requirements
Unique or superior product

Relative
Weight(a).40

Product
Score
(b)
.8

Product
Rating(c ⴝ a ⴛ b)
.32

High performance-to-cost ratio

.30

.6

.18

High marketing dollar support

.20

.7

.14

Lack of strong competition

.10

.5

.05

Total

1.00

.69*

*Rating scale: .00 .30 poor; .31 .60 fair; .61 .80 good. Minimum acceptance rate: .61(a) Product-positioning map(breakfast market)
Expensive

Slow

Bacon
and eggs

Cold
cerealPancakes
Hot Instantcereal breakfast

Quick

Inexpensive(b) Brand-positioning map(instant breakfast market)

Concept TestingHigh price per ounce
Brand CLow
incalories

Brand BHigh
incalories

Brand A
Low price per ounce
F I G U R E

2-2

Product and Brand Positioning

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coffee and pastry, and other breakfast alternatives. A tasty snack drink would compete against soft drinks, fruit juices, and other thirst quenchers.
Suppose the instant-breakfast-drink concept looks best. The next task is to show
where this powdered product would stand in relation to other breakfast products. Figure 2-2 uses the two dimensions of cost and preparation time to create a product-positioning map for the breakfast drink. An instant breakfast drink offers low cost andquick preparation. Its nearest competitor is cold cereal; its most distant competitor isbacon and eggs. These contrasts can be utilized in communicating and promoting theconcept to the market.
Next, the product concept has to be turned into a brand concept. Figure 2-2 is a brandpositioning map showing the current positions of three existing brands of instant breakfast drinks. The company needs to decide how much to charge and how calorific tomake its drink. The new brand would be distinctive in the medium-price, medium-calorie market or in the high-price, high-calorie market. The company would not want toposition it next to an existing brand, where it would have to fight for market share.

Concept testing involves presenting the product concept to appropriate target consumers and getting their reactions. The concepts can be presented symbolically or
physically. However, the more the tested concepts resemble the final product orexperience, the more dependable concept testing is. In the past, creating physicalprototypes was costly and time-consuming, but computer-aided design and manufacturing programs have changed that. Today firms can design alternative physicalproducts (for example, small appliances or toys) on a computer, and then produce
plastic models of each. Potential consumers can view the plastic models and give theirreactions.14
Companies are also using virtual reality to test product concepts. Virtual reality
programs use computers and sensory devices (such as gloves or goggles) to simulate
reality. Gadd International has developed a research tool called Simul-Shop, a CDROM virtual reality approach that re-creates shopping situations in which researchers
can test consumer reactions to factors such as product positioning, store layouts, andpackage designs. Suppose a cereal marketer wants to test reactions to a new package
design and store shelf positioning. Using Simul-Shop on a standard desktop PC, test
shoppers begin their shopping spree with a screen showing the outside of a grocery
store. They click to enter the virtual store and are guided to the appropriate store section. Once there, they can scan the shelf, pick up various cereal packages, rotate them,study the labels—even look around to see what is on the shelf behind them. A Gadd’s
research director explains: “Once users move toward the item we want to test, [they]
can look at different packaging, shelf layouts, and package colors. Depending on theactivity, we can even ask users why they did what they did.”15
Many companies today use customer-driven engineering to design new products. Customer-driven engineering attaches high importance to incorporating customer preferences in the final design. Here’s how one company uses the World Wide Web toenhance its customer-driven engineering:■

National Semiconductor Based in Santa Clara, California, National Semiconductor has used “applets”—simple multimedia applications written in
Java—and parametric search technologies to make its entire product databaseavailable on the Web. With the means to track customer searches, National
Semiconductor can determine the performance metrics that are most important to them. Sometimes, says the company’s Web services manager, it’s more
important to know when a customer didn’t find a product than when he did.
That information helps National Semiconductor shrink the time needed to
identify market niches and to develop new products. It’s basically high-quality market research—for free.16

Concept testing entails presenting consumers with an elaborated version of theconcept. Here is the elaboration of concept 1 in our milk example:
Our product is a powdered mixture that is added to milk to make an instantbreakfast that gives the person all the needed nutrition along with good taste
and high convenience. The product would be offered in three flavors (chocolate,vanilla, and strawberry) and would come in individual packets, six to a box, at$2.49 a box.
After receiving this information, consumers respond to the following questions:
Question
1. Are the benefits clear to you andbelievable?

Product Dimension Measured
Communicability and believability. If thescores are low, the concept must be
refined or revised.

2. Do you see this product solving aproblem or filling a need for you?

Need level. The stronger the need, thehigher the expected consumer interest.

3. Do other products currently meet thisneed and satisfy you?

Gap level. The greater the gap, the higher
the expected consumer interest. The needlevel can be multiplied by the gap level toproduce a need-gap score. A high needgap score means that the consumer sees
the product as filling a strong need that is
not satisfied by available alternatives.

4. Is the price reasonable in relation to thevalue?

Perceived value. The higher the perceived
value, the higher the expected consumer
interest.

5. Would you (definitely, probably,probably not, definitely not) buy the product?

Purchase intention. This would be highfor consumers who answered the previous
three questions positively.

6. Who would use this product, and whenand how often will the product be used?

User targets, purchase occasions, andpurchasing frequency.

The respondents’ answers indicate whether the concept has a broad and strong
consumer appeal, what products this new product competes against, and which consumers are the best targets. The need-gap levels and purchase-intention levels can bechecked against norms for the product category to see whether the concept appears
to be a winner, a long shot, or a loser. One food manufacturer rejects any conceptthat draws a definitely-would-buy score of less than 40 percent.

Conjoint Analysis
Consumer preferences for alternative product concepts can be measured through conjoint analysis, a method for deriving the utility values that consumers attach to varying levels of a product’s attributes. Respondents are shown different hypothetical offers
formed by combining varying levels of the attributes, then asked to rank the various
offers. Management can identify the most appealing offer and the estimated market
share and profit the company might realize.

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Green and Wind have illustrated this approach in connection with developing a
new spot-removing carpet-cleaning agent for home use.17 Suppose the new-productmarketer is considering five design elements:A

F I G U R E

B

C

2-3

Samples for Conjoint Analysis■

Three package designs (A, B, C—see Figure 2-3)■

Three brand names (K2R, Glory, Bissell)■

Three prices ($1.19, $1.39, $1.59)■

A possible Good Housekeeping seal (yes, no)■A possible money-back guarantee (yes, no)

Although the researcher can form 108 possible product concepts (3 ⫻ 3 ⫻ 3 ⫻ 2 ⫻2), it would be too much to ask consumers to rank 108 concepts. A sample of, say,
18 contrasting product concepts can be chosen, and consumers would rank them fromthe most preferred to the least preferred.
The marketer now uses a statistical program to derive the consumer’s utility functions for each of the five attributes (Figure 2-4). Utility ranges between zero and one;the higher the utility, the stronger the consumer’s preference for that level of the attribute. Looking at packaging, we see that package B is the most favored, followed by
C and then A (A hardly has any utility). The preferred names are Bissell, K2R, andGlory, in that order. The consumer’s utility varies inversely with price. A Good Housekeeping seal is preferred, but it does not add that much utility and may not be worth
the effort to obtain it. A money-back guarantee is strongly preferred. Putting these results together, we can see that the consumer’s most desired offer would be package
design B, with the brand name Bissell, selling at the price of $1.19, with a Good Housekeeping seal and a money-back guarantee.
We can also determine the relative importance of each attribute to this consumer—
the difference between the highest and lowest utility level for that attribute. The
greater the difference, the more important the attribute. Clearly, this consumer sees
price and package design as the most important attributes followed by money-backguarantee, brand name, and last, a Good Housekeeping seal.
When preference data are collected from a sufficient sample of target consumers,
the data can be used to estimate the market share any specific offer is likely to achieve,
given any assumptions about competitive response. The company, however, may notlaunch the market offer that promises to gain the greatest market share because ofcost considerations. The most customer-appealing offer is not always the most profitable offer to make.
Under some conditions, researchers will collect the data not with a full-profile description of each offer but by presenting two factors at a time. For example, respondents may be shown a table with three price levels and three package types and asked
which of the nine combinations they would like most, followed by which one theywould prefer next, and so on. They would then be shown a further table consistingof trade-offs between two other variables. The trade-off approach may be easier to use
when there are many variables and possible offers. However, it is less realistic in that
respondents are focusing on only two variables at a time.
Conjoint analysis has become one of the most popular concept development andtesting tools. Marriott designed its Courtyard hotel concept with the benefit of conjoint analysis. Other applications have included airline travel services, ethical drug
design, and credit-card features.

MARKETING-STRATEGY DEVELOPMENT
After testing, the new-product manager must develop a preliminary marketing-strategy
plan for introducing the new product into the market. The plan consists of three parts.
The first part describes the target market’s size, structure, and behavior; the planned product positioning; and the sales, market share, and profit goals sought in the first few years:

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The target market for the instant breakfast drink is families with children who
are receptive to a new, convenient, nutritious, and inexpensive form of breakfast. The company’s brand will be positioned at the higher-price, higher-quality end of the instant-breakfast-drink category. The company will aim initiallyPackage Design

Brand Name

0
B

C

2-4

Utility0A

F I G U R E

Utility Functions Based on
Conjoint Analysis

1.0

Utility

1.0

Utility

1.0

Retail Price0
K2R

Glory Bissell

Good Housekeeping Seal?

Money-Back Guarantee?

Utility

1.0

Utility

1.0$1.19 $1.39 $1.59

0

0
No

Yes

No

Yes

to sell 500,000 cases or 10 percent of the market, with a loss in the first year
not exceeding $1.3 million. The second year will aim for 700,000 cases or 14
percent of the market, with a planned profit of $2.2 million.
The second part outlines the planned price, distribution strategy, and marketingbudget for the first year:
The product will be offered in chocolate, vanilla, and strawberry in individual packets of six to a box at a retail price of $2.49 a box. There will be 48
boxes per case, and the case price to distributors will be $24. For the first twomonths, dealers will be offered one case free for every four cases bought, plus
cooperative-advertising allowances. Free samples will be distributed door todoor. Coupons for 20¢ off will appear in newspapers. The total sales-promotional budget will be $2.9 million. An advertising budget of $6 million will be
split 50:50 between national and local. Two-thirds will go into television and
one-third into newspapers. Advertising copy will emphasize the benefit concepts of nutrition and convenience. The advertising-execution concept will revolve around a small boy who drinks instant breakfast and grows strong. During
the first year, $100,000 will be spent on marketing research to buy store audits
and consumer-panel information to monitor market reaction and buying rates.
The third part of the marketing-strategy plan describes the long-run sales and profit
goals and marketing-mix strategy over time:
The company intends to win a 25 percent market share and realize an after-tax return on investment of 12 percent. To achieve this return, productquality will start high and be improved over time through technical research.
Price will initially be set at a high level and lowered gradually to expand themarket and meet competition. The total promotion budget will be boosted
each year about 20 percent, with the initial advertising–sales promotion split

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(a) One-time purchased productof 65:35 evolving eventually to 50:50. Marketing research will be reduced to$60,000 per year after the first year.

BUSINESS ANALYSIS
Sales

After management develops the product concept and marketing strategy, it can evaluate the proposal’s business attractiveness. Management needs to prepare sales, cost,and profit projections to determine whether they satisfy company objectives. If they
do, the product concept can move to the product-development stage. As new information comes in, the business analysis will undergo revision and expansion.
Time(b) Infrequently purchased product

Sales

Replacement
sales

Time
(c) Frequently purchased product

Sales

Repeat purchase
sales

Time
F I G U R E

2-5

Product Life-Cycle Sales for Three
Types of Products

Estimating Total SalesManagement needs to estimate whether sales will be high enough to yield a satisfactory profit. Total estimated sales are the sum of estimated first-time sales, replacement
sales, and repeat sales. Sales-estimation methods depend on whether the product is a
one-time purchase (such as an engagement ring or retirement home), an infrequently
purchased product, or a frequently purchased product. For one-time purchased products, sales rise at the beginning, peak, and later approach zero as the number of potential buyers is exhausted (Figure 2-5). If new buyers keep entering the market, thecurve will not go down to zero.
Infrequently purchased products—such as automobiles, toasters, and industrial
equipment—exhibit replacement cycles dictated by physical wearing out or by obsolescence associated with changing styles, features, and performance. Sales forecastingfor this product category calls for estimating first-time sales and replacement sales separately (Figure 2-5).
Frequently purchased products, such as consumer and industrial nondurables, haveproduct life-cycle sales resembling Figure 2-5. The number of first-time buyers initially
increases and then decreases as fewer buyers are left (assuming a fixed population).
Repeat purchases occur soon, providing that the product satisfies some buyers. The
sales curve eventually falls to a plateau representing a level of steady repeat-purchasevolume; by this time, the product is no longer a new product.
In estimating a new product’s sales, the manager’s first task is to estimate first-time
purchases of the new product in each period. A variety of techniques is available. To estimate replacement sales, management has to research the product’s survival-age distribution—that is, the number of units that fail in year one, two, three, and so on. The low
end of the distribution indicates when the first replacement sales will take place. The actual timing of replacement will be influenced by a variety of factors. Because replacement sales are difficult to estimate before the product is in use, some manufacturers basethe decision to launch a new product solely on the estimate of first-time sales.
For a frequently purchased new product, the seller has to estimate repeat sales aswell as first-time sales. A high rate of repeat purchasing means that customers are satisfied; sales are likely to stay high even after all first-time purchases take place. The
seller should note the percentage of repeat purchases that take place in each repeatpurchase class: those who rebuy once, twice, three times, and so on. Some products
and brands are bought a few times and dropped.18

Estimating Costs and Profits

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After preparing the sales forecast, management should estimate expected costs andprofits. Costs are estimated by the R&D, manufacturing, marketing, and finance departments. Table 2.3 illustrates a five-year projection of sales, costs, and profits for the
instant breakfast drink.
Row 1 shows the projected sales revenue over the five-year period. The company
expects to sell $11,889,000 (approximately 500,000 cases at $24 per case) in the firstyear. Behind this sales projection is a set of assumptions about the rate of market
growth, the company’s market share, and the factory-realized price.
Row 2 shows the cost of goods sold, which hovers around 33 percent of sales revenue. This cost is found by estimating the average cost of labor, ingredients, and packaging per case.
Row 3 shows the expected gross margin, which is the difference between sales revenue and cost of goods sold.

Year 0Year 1

Year 2

Year 3

Year 4

Year 5

1. Sales revenue$0$11,889$15,381$19,654$28,253$32, 491

2. Cost of goods sold

0

3,981

5,150

6,581

9,461

10,8803. Gross margin

0

7,908

10,231

13,073

18,792

21,611⫺3,500

0

0

0

0

0

5. Marketing costs

0

8,000

6,460

8,255

11,866

13,646

6. Allocated overhead

0

1,189

1,538

1,965

2,825

3,249

7. Gross contribution⫺3,500⫺1,281

2,233

2,853

4,101

4,716

0

0

0

0

0

0

4. Development costs

8. Supplementary contribution
9. Net contribution⫺3,500⫺1,281

2,233

2,853

4,101

4,716

10. Discounted contribution (15%)⫺3,500⫺1,113

1,691

1,877

2,343

2,346

11. Cumulative discounted cash flow

⫺3,500⫺4,613⫺2,922⫺1,045

1,298

3,644

T A B L E

Row 4 shows anticipated development costs of $3.5 million, including productdevelopment cost, marketing research costs, and manufacturing-development costs.
Row 5 shows the estimated marketing costs over the five-year period to cover advertising, sales promotion, and marketing research and an amount allocated for sales
force coverage and marketing administration.
Row 6 shows the allocated overhead to this new product to cover its share of thecost of executive salaries, heat, light, and so on.
Row 7, the gross contribution, is found by subtracting the preceding three costs
from the gross margin.
Row 8, supplementary contribution, lists any change in income from other company products caused by the introduction of the new product. It has two components.
Dragalong income is additional income on other company products resulting fromadding this product to the line. Cannibalized income is the reduced income on othercompany products resulting from adding this product to the line.19 Table 2.3 assumes
no supplementary contributions.
Row 9 shows the net contribution, which in this case is the same as the gross contribution.
Row 10 shows the discounted contribution—that is, the present value of each future contribution discounted at 15 percent per annum. For example, the company
will not receive $4,716,000 until the fifth year. This amount is worth only $2,346,000
today if the company can earn 15 percent on its money through other investments.20
Finally, row 11 shows the cumulative discounted cash flow, which is the cumulation of the annual contributions in row 10. Two things are of central interest. The
first is the maximum investment exposure, which is the highest loss that the project
can create. We see that the company will be in a maximum loss position of $4,613,000
in year 1. The second is the payback period, which is the time when the company recovers all of its investment including the built-in return of 15 percent. The payback
period here is approximately three and a half years. Management therefore has to decide whether to risk a maximum investment loss of $4.6 million and a possible payback period of three and a half years.
Companies use other financial measures to evaluate the merit of a new-productproposal. The simplest is break-even analysis, in which management estimates how
many units of the product the company would have to sell to break even with thegiven price and cost structure. If management believes sales could easily reach the
break-even number, it is likely to move the project into product development.
The most complex method of estimating profit is risk analysis. Here three estimates(optimistic, pessimistic, and most likely) are obtained for each uncertain variable

2.3

Projected Five-Year Cash-Flow
Statement (in thousands ofdollars)

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affecting profitability under an assumed marketing environment and marketing strategy for the planning period. The computer simulates possible outcomes and computes
a rate-of-return probability distribution showing the range of possible rates of returns
and their probabilities.21

M DA NE VA EG LI ON PG MTEHNET DT EOV EC LO OMPMME ERNC TI APL RI OZ AC ET SI OS N:
PRODUCT DEVELOPMENT
If the product concept passes the business test, it moves to R&D or engineering to be
developed into a physical product. Up to now it has existed only as a word description, a drawing, or a prototype. This step involves a large jump in investment thatdwarfs the costs incurred in the earlier stages. At this stage the company will determine whether the product idea can be translated into a technically and commercially
feasible product. If it cannot, the accumulated project cost will be lost except for any
useful information gained in the process.
The job of translating target customer requirements into a working prototype ishelped by a set of methods known as quality function deployment (QFD). The methodology takes the list of desired customer attributes (CAs) generated by market researchand turns them into a list of engineering attributes (EAs) that the engineers can use.
For example, customers of a proposed truck may want a certain acceleration rate (CA).
Engineers can turn this into the required horsepower and other engineering equivalents (EAs). The methodology permits measuring the trade-offs and costs of providing the customer requirements. A major contribution of QFD is that it improvescommunication between marketers, engineers, and the manufacturing people.22
The R&D department will develop one or more physical versions of the productconcept. Its goal is to find a prototype that consumers see as embodying the key attributes described in the product-concept statement, that performs safely undernormal use and conditions, and that can be produced within the budgeted manufacturing costs.
Developing and manufacturing a successful prototype can take days, weeks,months, or even years. Designing a new commercial aircraft takes several years of development work, yet sophisticated virtual reality technology is speeding the process.
By designing and testing product designs through simulation, for example, companies achieve the flexibility to respond to new information and to resolve uncertainties by quickly exploring alternatives.
■

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Boeing At Boeing, the all-digital development of the 777 aircraft made useof a computer-generated “human” who would climb inside the three-dimensional design on-screen to show how difficult maintenance access would
be for a live mechanic. Such computer modeling allowed engineers to spot
design errors that otherwise would have remained undiscovered until a person began to work on a physical prototype. By avoiding the time and costassociated with building physical prototypes at several stages, Boeing’s development process has acquired the flexibility to evaluate a wider range ofdesign options than previously thought possible.23

Even developing a new taste formula can take time. Maxwell House discoveredthat consumers wanted coffee that was “bold, vigorous, and deep tasting.” Its laboratory technicians spent over four months working with various coffee blends andflavors to formulate a corresponding taste that turned out to be too expensive to produce. The company cost-reduced the blend to meet the target manufacturing cost.
The change compromised the taste, and the new brand did not sell well in the market.
With the rise of the World Wide Web, there is a need for more rapid prototyping
and more flexible development processes. Michael Schrage, research associate at MIT’sM A R K E T I N G

F O R

T H E

MILLENNIUM

Developing Products on Internet Time:
The Story of Netscape’s Navigator
Traditional [product] development processes . . . are highly structured. A future product is designed, developed, transferred to
production, and rolled out to the market in clearly articulated,sequential phases. . . . In contrast, flexible product development
delays until as late as possible any commitment to a final design configuration.The concept development phase and the implementation phase the translation of concept into
reality thus overlap instead of following each other sequentially. By accepting the need for and reducing the cost ofchanges,companies are able to respond to new information thatarises during the course of a product s development.
When technology, product features, and competitive conditions are predictable or evolve slowly, a traditional development process works well. But in turbulent businessenvironments, a sequential approach . . . is more than inefficient;
it risks creating an obsolete product one that fails to address
customer needs and to make use of the latest technologies.
[Netscape faced just such a turbulent environment when it developed the second generation of its Navigator Web browser.]
Industry giant Microsoft, which had already developed its own
flexible product-development process, was readying a productto compete with Navigator. . . .
Netscape introduced Navigator 2.0 to the market in January of 1996 and immediately thereafter began to develop thenext version of the Web browser, Navigator 3.0, which was to bereleased in August of the same year.The Netscape developmentgroup which included staff from engineering, marketing, andcustomer support produced the first prototype quickly. By
February 14, just six weeks into the project, it had put a beta O
version of the program up on the company s internal project

Web site for testing by the development staff. Although manyof the intended functions were not yet available, the prototype
captured enough of the essence of the new product to generate meaningful feedback from members of the developmentgroup. On February 22, less than two weeks later, the teamposted an updated version, Beta 1, again for internal development staff only. In early March, with major bugs in the productworked out, the first public release, Beta 2, appeared on
Netscapes Internet Web site. Additional public releases followed
thereafter every few weeks until the official release date in August, with gradual refinements appearing in each beta iteration.
The sequence of beta versions was extremely useful to
Netscape because it enabled the development team to react
both to feedback from users and to changes in the marketplace
while the team was still working on the Web browser s design.
Beta users by and large are more sophisticated than Netscapes
broader customer base and therefore are a valuable source of
information. . . . the team also paid careful attention to competing products. Netscape continually monitored the latest beta
versions of Microsoft s competing product, Explorer, to comparefeatures and format.
To facilitate the integration of the vast amounts of information generated during the project, Netscape set up a project
Web site on its Intranet. The site contained the product s development schedule and specifications,each of which was updated
as target dates changed or new features were added. In addition, it contained bulletin boards through which team members
could monitor the evolution of various parts of the design, noting the completion of specific features and logging problems in
the existing version. Once the Navigator moved to public beta
testing, these Intranet features became especially valuable because an increasing amount of information then had to be received, classified, and processed. . . .

Source: Adapted from Marco Iansiti and Alan MacCormack, Developing Products on Internet Time, Harvard Business Review, September October 1997, pp. 108 17.

media lab, has correctly predicted: “Effective prototyping may be the most valuable‘core competence’ an innovative organization can hope to have.”24 This has certainly
been true for software companies such as Microsoft, Netscape, and the hundreds ofSilicon Valley start-ups. Although Schrage says that specification-driven companies require that every “i” be dotted and “t” be crossed before anything can be shown to
the next level of management, prototype-driven companies—such as Yahoo!, Microsoft, and Netscape—cherish quick-and-dirty tests and experiments. See the Marketing for the Millennium box, “Developing Products on Internet Time: The Story of
Netscape’s Navigator.”
Lab scientists must not only design the product’s functional characteristics but
also communicate its psychological aspects through physical cues. How will consumers
react to different colors, sizes, and weights? In the case of a mouthwash, a yellow
color supports an “antiseptic” claim (Listerine), a red color supports a “refreshing”
claim (Lavoris), and a green or blue color supports a “cool” claim (Scope). Marketers

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need to supply lab people with information on what attributes consumers seek andhow consumers judge whether these attributes are present.
When the prototypes are ready, they must be put through rigorous functional tests
and customer tests. Alpha testing is the name given to testing the product within thefirm to see how it performs in different applications. After refining the prototype further, the company moves to beta testing. It enlists a set of customers to use the prototype and give feedback on their experiences. Beta testing is most useful when thepotential customers are heterogeneous, the potential applications are not fully known,several decision makers are involved in purchasing the product, and opinion leadership from early adopters is sought.25 Here are some of the functional tests that products go through before they enter the marketplace:■

Shaw Industries At Shaw Industries, temps are paid $5 an hour to pace up
and down five long rows of sample carpets for up to eight hours a day, logging an average of 14 miles each. One regular reads three mysteries a week
while pacing and shed 40 pounds in two years. Shaw Industries counts walkers’ steps and figures that 20,000 steps equal several years of average wear.

■

Apple Computer Apple Computer assumes the worst for its PowerBook customers and submits the computers to a battery of indignities: It drenches thecomputers in Pepsi and other sodas, smears them with mayonnaise, and bakes
them in ovens at temperatures of 140 degrees or more to simulate conditions
in a car trunk.

■

Gillette At Gillette, 200 volunteers from various departments come to work
unshaven each day, troop to the second floor of the company’s South Boston
manufacturing and research plant, and enter small booths with a sink andmirror. There they take instructions from technicians on the other side of asmall window as to which razor, shaving cream, or aftershave to use, andthen they fill out questionnaires. “We bleed so you’ll get a good shave athome,” says one Gillette employee.26

Companies that position products on the basis of their durability even incorporate functional product testing into their advertising:■346

Developing
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Corelle Dinnerware High durability was the focus of some unusual advertising for Corning’s Consumer Products Division’s Corelle dinnerware. On
five city buses in Phoenix, out-of-home media network TDI constructed a special Plexiglas cage, four feet long by one foot high, that housed a Corelle
plate. Within the cage, the plate was free to roll back and forth as the bus
accelerated, decelerated, and took turns.27

Consumer testing can take a variety of forms, from bringing consumers into a laboratory to giving them samples to use in their homes. In-home placement tests arecommon with products ranging from ice cream flavors to new appliances. When
DuPont developed its new synthetic carpeting, it installed free carpeting in several
homes in exchange for the homeowners’ willingness to report their likes and dislikes
about the carpeting.
When testing cutting-edge products such as electric cars, marketers must be as creative as the product designers and engineers: Rügen, a small island in the Baltic Sea,
has become the testing ground for the cars of the future. Fifty-eight residents of theformer East German island have gone from driving decrepit gas-guzzling cars to sleek
new electric models manufactured by BMW, Daimler Chrysler, and Audi. The Rügen
tests have made the auto manufacturers aware of several problems: Rügen drivers havefound that trips of any length must be carefully mapped out because of the batteries’
limited life. Recharging the batteries can consume anywhere from a half hour to an
entire evening.28
Consumer preferences can be measured in several ways. Suppose a consumer isshown three items—A, B, and C, such as three cameras, three insurance plans, or three
advertisements.

■

The rank-order method asks the consumer to rank the three items in order ofpreference. The consumer might respond with A ⬎ B ⬎ C. Although this method
has the advantage of simplicity, it does not reveal how intensely the consumer
feels about each item nor whether the consumer likes any item very much. It isalso difficult to use this method when there are many objects to be ranked.

■

The paired-comparison method calls for presenting pairs of items and asking theconsumer which one is preferred in each pair. Thus the consumer could be presented with the pairs AB, AC, and BC and say that she prefers A to B, A to C,
and B to C. Then we could conclude that A ⬎ B ⬎ C. People find it easy to state
their preference between two items, and this method allows the consumer to focus on the two items, noting their differences and similarities.

■

The monadic-rating method asks the consumer to rate liking of each product on ascale. Suppose a seven-point scale is used, where 1 signifies intense dislike, 4 indifference, and 7 intense like. Suppose the consumer returns the following ratings: A ⫽ 6, B ⫽ 5, C ⫽ 3. We can derive the individual’s preference order (i.e.,A ⬎ B ⬎ C) and even know the qualitative levels of the person’s preference foreach and the rough distance between preferences.

MARKET TESTING
After management is satisfied with functional and psychological performance, theproduct is ready to be dressed up with a brand name and packaging, and put to amarket test. The new product is introduced into an authentic setting to learn how
large the market is and how consumers and dealers react to handling, using, and repurchasing the product.
Not all companies undertake market testing. A company officer at Revlon, Inc.,
stated: “In our field—primarily higher-priced cosmetics not geared for mass distribution—it would be unnecessary for us to market test. When we develop a new product, say an improved liquid makeup, we know it’s going to sell because we’re familiar
with the field. And we’ve got 1,500 demonstrators in department stores to promoteit.” Most companies, however, know that market testing can yield valuable information about buyers, dealers, marketing program effectiveness, and market potential.
The main issues are: How much market testing should be done, and what kind(s)?
The amount of market testing is influenced by the investment cost and risk on
the one hand, and the time pressure and research cost on the other. High investment–high risk products, where the chance of failure is high, must be market tested;
the cost of the market tests will be an insignificant percentage of the total projectcost. High-risk products—those that create new-product categories (first instant breakfast drink) or have novel features (first fluoride toothpaste)—warrant more market
testing than modified products (another toothpaste brand). Procter & Gamble spent
two years market testing its new no-calorie fat substitute, Olestra. While the Food andDrug Administration approved the new product in 1996, a very small percentage (estimated at 2 percent) of consumers experienced stomach problems and the indelicately named side effect, “anal leakage.” The company made a slight change in theformula, but even after test marketing has proved that this side effect does not occur,
the FDA requires that every package containing food made with Olestra bear a labelthat reads: “This product contains Olestra. Olestra may cause abdominal cramping
and loose stools. Olestra inhibits the absorption of some vitamins and other nutrients. . . . ”29 But the amount of market testing may be severely reduced if the company is under great time pressure because the season is just starting or because
competitors are about to launch their brands. The company may therefore prefer toface the risk of a product failure to the risk of losing distribution or market penetration on a highly successful product.
Next we describe consumer-goods market testing and business-goods testing.

Consumer-Goods Market Testing
In testing consumer products, the company seeks to estimate four variables: trial, first
repeat, adoption, and purchase frequency. The company hopes to find all these variables at high levels. In some cases, it will find many consumers trying the productchapter 11
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but few rebuying it. Or it might find high permanent adoption but low purchase frequency (as with gourmet frozen foods).
Here we describe the major methods of consumer-goods market testing, from theleast to the most costly.
Sales-Wave Research. In sales-wave research, consumers who initially try the
product at no cost are reoffered the product, or a competitor’s product, at slightly reduced prices. They might be reoffered the product as many as three to five times (sales
waves), with the company noting how many customers selected that company’s product again and their reported level of satisfaction. Sales-wave research can also include
exposing consumers to one or more advertising concepts to see the impact of that advertising on repeat purchase.
Sales-wave research can be implemented quickly, conducted with a fair amount of
security, and carried out without final packaging and advertising. However, sales-wave
research does not indicate the trial rates that would be achieved with different salespromotion incentives, because the consumers are preselected to try the product. Nordoes it indicate the brand’s power to gain distribution and favorable shelf position.
Simulated Test Marketing. Simulated test marketing calls for finding 30 to 40
qualified shoppers and questioning them about brand familiarity and preferences ina specific product category. These people are then invited to a brief screening of bothwell-known and new commercials or print ads. One ad advertises the new product,
but it is not singled out for attention. Consumers receive a small amount of money
and are invited into a store where they may buy any items. The company notes how
many consumers buy the new brand and competing brands. This provides a measureof the ad’s relative effectiveness against competing ads in stimulating trial. Consumers
are asked the reasons for their purchases or nonpurchases. Those who did not buy the
new brand are given a free sample. Some weeks later, they are reinterviewed by phone
to determine product attitudes, usage, satisfaction, and repurchase intention and areoffered an opportunity to repurchase any products.
This method has several advantages. It gives fairly accurate results on advertising effectiveness and trial rates (and repeat rates if extended) in a much shorter time and at
a fraction of the cost of using real test markets. Pretests often take only three months
and may cost $250,000.30 The results are incorporated into new-product forecasting models to project ultimate sales levels. Marketing research firms report surprisingly accurate
predictions of sales levels of products that are subsequently launched in the market.31
Controlled Test Marketing. In this method, a research firm manages a panelof stores that will carry new products for a fee. The company with the new productspecifies the number of stores and geographic locations it wants to test. The researchfirm delivers the product to the participating stores and controls shelf position; number of facings, displays, and point-of-purchase promotions; and pricing. Sales results
can be measured through electronic scanners at the checkout. The company can also
evaluate the impact of local advertising and promotions during the test.
Controlled test marketing allows the company to test the impact of in-store factors and limited advertising on buying behavior. A sample of consumers can be interviewed later to give their impressions of the product. The company does not haveto use its own sales force, give trade allowances, or “buy” distribution. However, controlled test marketing provides no information on how to sell the trade on carrying
the new product. This technique also exposes the product and its features to competitors’ scrutiny.
Test Markets. The ultimate way to test a new consumer product is to put it
into full-blown test markets. The company chooses a few representative cities, andthe sales force tries to sell the trade on carrying the product and giving it good shelf
exposure. The company puts on a full advertising and promotion campaign in thesemarkets similar to the one that it would use in national marketing. A full-scale test
can cost over $1 million, depending on the number of test cities, the test duration,and the amount of data the company wants to collect.
Management faces several questions:

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1. How many test cities? Most tests use between two and six cities. The greater
the maximum possible loss, the greater the number of contending marketingstrategies, the greater the regional differences, and the greater the chance of
test-market interference by competitors, the greater the number of cities thatshould be used.
2. Which cities? Each company must develop test-city selection criteria. One
company looks for test cities that have diversified industry, good media coverage, cooperative chain stores, average competitive activity, and no evidenceof being overtested.
3. Length of test? Market tests last anywhere from a few months to a year. The
longer the product’s average repurchase period, the longer the test period
necessary to observe repeat-purchase rates. This period should be cut down ifcompetitors are rushing to the market.
4. What information? Warehouse shipment data will show gross inventory buying but will not indicate weekly sales at the retail level. Store audits will show
retail sales and competitors’ market shares but will not reveal buyer characteristics. Consumer panels will indicate which people are buying which brands
and their loyalty and switching rates. Buyer surveys will yield in-depth information about consumer attitudes, usage, and satisfaction.
5. What action to take? If the test markets show high trial and repurchase rates,
the product should be launched nationally. If the test markets show a hightrial rate and a low repurchase rate, customers are not satisfied and the product should be redesigned or dropped. If the test markets show a low trial rate
and a high repurchase rate, the product is satisfying but more people have to
try it. This means increasing advertising and sales promotion. If trial and repurchase rates are both low, the product should be abandoned.
Test marketing permits testing the impact of alternative marketing plans. ColgatePalmolive used a different marketing mix in each of four cities to market a new soap
product: (1) an average amount of advertising coupled with free samples distributed
door to door, (2) heavy advertising plus samples, (3) an average amount of advertising linked with mailed redeemable coupons, and (4) an average amount of advertising with no special introductory offer. The third alternative generated the best profit
level, although not the highest sales level.
In spite of the benefits of test marketing, many companies question its value today. In a fast-changing marketplace, companies are eager to get to market first. Test
marketing slows them down and reveals their plans to competitors. Procter & Gamble began testing a ready-to-spread Duncan Hines frosting. General Mills took noteand rushed out its own Betty Crocker brand, which now dominates the category. Furthermore, aggressive competitors increasingly take steps to spoil the test markets.
When Pepsi tested its Mountain Dew sport drink in Minneapolis, Gatorade counterattacked furiously with coupons and ads.32
Many companies today are skipping test marketing and relying on faster and more
economical market-testing methods. General Mills now prefers to launch new products in perhaps 25 percent of the country, an area too large for rivals to disrupt. Managers review retail scanner data, which tell them within days how the product is doing
and what corrective fine-tuning to do. Colgate-Palmolive often launches a new product in a set of small “lead countries” and keeps rolling it out if it proves successful.
Nonetheless, managers should consider all the angles before deciding to dispensewith test marketing. In this case, not testing a formula modification before the product launch had disastrous—and soggy—results:■

Nabisco Foods Company Nabisco hit a marketing home run with its Teddy
Grahams, teddy-bear-shaped graham crackers in several different flavors. So, thecompany decided to extend Teddy Grahams into a new area. In 1989, it introduced chocolate, cinnamon, and honey versions of Breakfast Bears Graham Cereal. When the product came out, however, consumers didn’t like the tasteenough, so the product developers went back to the kitchen and modified theformula, but didn’t test it. The result was a disaster. Although the cereal may

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have tasted better, it no longer stayed crunchy in milk, as the advertising on
the box promised. Instead, it left a gooey mess of graham mush on the bottomof cereal bowls. Supermarket managers soon refused to restock the cereal, andNabisco executives decided it was too late to reformulate the product again. So
a promising new product was killed through haste to get it to market.33

Business-Goods Market Testing
Business goods can also benefit from market testing. Expensive industrial goods andnew technologies will normally undergo alpha testing (within the company) and beta
testing (with outside customers). During beta testing, the vendor’s technical people observe how test customers use the product, a practice that often exposes unanticipatedproblems of safety and servicing and alerts the vendor to customer training and servicing requirements. The vendor can also observe how much value the equipment adds
to the customer’s operation as a clue to subsequent pricing. The vendor will ask thetest customers to express their purchase intention and other reactions after the test.
The test customers benefit in several ways: They can influence product design,
gain experience with the new product ahead of competitors, receive a price break inreturn for cooperation, and enhance their reputation as technological pioneers. Vendors must carefully interpret the beta test results because only a small number of test
customers are used, they are not randomly drawn, and the tests are somewhat customized to each site. Another risk is that test customers who are unimpressed withthe product may leak unfavorable reports about it.
A second common test method for business goods is to introduce the new product at trade shows. Trade shows draw a large number of buyers, who view many new
products in a few concentrated days. The vendor can observe how much interest buyers show in the new product, how they react to various features and terms, and how
many express purchase intentions or place orders. Book publishers, for instance, regularly launch their fall titles at the American Booksellers Association convention eachspring. There they display page proofs wrapped in dummy book covers. If a large
bookstore chain objects to a cover design or title of a promising new book, the publisher will consider changing the cover or title. The disadvantage of trade shows isthat they reveal the product to competitors; therefore, the vendor should be ready tolaunch the product soon after the trade show.
New industrial products can be tested in distributor and dealer display rooms,
where they may stand next to the manufacturer’s other products and possibly competitors’ products. This method yields preference and pricing information in the product’s normal selling atmosphere. The disadvantages are that the customers might want
to place early orders that cannot be filled, and those customers who come in might
not represent the target market.
Industrial manufacturers come close to using full test marketing when they givea limited supply of the product to the sales force to sell in a limited number of areasthat receive promotion support and printed catalog sheets. In this way, management
can make a more informed decision about commercializing the product.

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If the company goes ahead with commercialization, it will face its largest costs to date.
The company will have to contract for manufacture or build or rent a full-scale manufacturing facility. Plant size will be a critical decision. The company can build asmaller plant than called for by the sales forecast, to be on the safe side. That is what
Quaker Oats did when it launched its 100 Percent Natural breakfast cereal. The demand so exceeded the company’s sales forecast that for about a year it could not supply enough product to the stores. Although Quaker Oats was gratified with the
response, the low forecast cost it a considerable amount of profit.
Another major cost is marketing. To introduce a major new consumer packaged
good into the national market, the company may have to spend between $20 million and $80 million in advertising and promotion in the first year. In the introduction of new food products, marketing expenditures typically represent 57 percent ofsales during the first year.

In the movie business, it’s not unusual for the cost of marketing a movie to eclipse
the cost of making it, particularly for what Hollywood calls “tentpole” films, those
big summer blockbusters that can carry the rest of the studio’s projects on the strengthof their revenues. In the decade between 1987 and 1997, the average cost of making
a movie went from $20 million to $53 million, but marketing costs zoomed from $6.7
million to $22 million. Here’s a story that illustrates what money and marketing can
do for a new movie—and what it can’t do:■Sony Pictures Entertainment During the summer of 1998, you probably
noticed the giant billboards with the teasing, double entendre, “Size does
matter.” However, you may have already forgotten the movie that the billboards were touting. Sony Pictures spent $125 million to make its summer
blockbuster, Godzilla, and some $200 million to make sure it was a hit. Actually, Sony’s 250 marketing partners, such as Taco Bell, put up $150 millionof that $200 million for licensing rights to Godzilla backpacks, T-shirts, andother scaly paraphernalia. The huge ad campaign infiltrated billboards andbuses, buttons and T-shirts, TV and radio. Yet, for all of Sony’s marketingmuscle, the only truly big thing about Godzilla was that it was a big flop.
Three weeks after it opened, it had grossed only $110 million, about half ofwhat Sony had predicted. Critics panned the movie and audiences agreed.
However, Sony’s claim that “Size does matter” certainly rings true when it
comes to marketing movies. When Sony’s top brass saw the initial screening
and realized Godzilla would be a bomb, they went out and spent even moremoney on marketing. By luring as many moviegoers as possible into theaters
early, Sony’s gamble paid off. It would end up grossing more than the $175
million it spent to make and market Godzilla.34

When (Timing)
In commercializing a new product, market-entry timing is critical. Suppose a company
has almost completed the development work on its new product and learns that a competitor is nearing the end of its development work. The company faces three choices:
1. First entry: The first firm entering a market usually enjoys the “first mover advantages” of locking up key distributors and customers and gaining reputational leadership. But, if the product is rushed to market before it isthoroughly debugged, the product can acquire a flawed image.
2. Parallel entry: The firm might time its entry to coincide with the competitor’sentry. The market may pay more attention when two companies are advertising the new product.
3. Late entry: The firm might delay its launch until after the competitor has entered. The competitor will have borne the cost of educating the market. The
competitor’s product may reveal faults the late entrant can avoid. The company can also learn the size of the market.
The timing decision involves additional considerations. If a new product replaces
an older product, the company might delay the introduction until the old product’s
stock is drawn down. If the product is highly seasonal, it might be delayed until theright season arrives.35

Where (Geographic Strategy)
The company must decide whether to launch the new product in a single locality, aregion, several regions, the national market, or the international market. Most willdevelop a planned market rollout over time. For instance, Coca-Cola launched its newsoda, Citra, a caffeine-free, grapefruit-flavored drink, in about half the United States.
The multistaged rollout, following test marketing in Phoenix, south Texas, and south
Florida, began in January 1998 in Dallas, Denver, and Cincinnati.36 Company size isan important factor here. Small companies will select an attractive city and put on a
blitz campaign. They will enter other cities one at a time. Large companies will introduce their product into a whole region and then move to the next region.

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Companies with national distribution networks, such as auto companies, will launch
their new models in the national market.
Most companies design new products to sell primarily in the domestic market. If
the product does well, the company considers exporting to neighboring countries or
the world market, redesigning if necessary. Cooper and Kleinschmidt, in their studyof industrial products, found that domestic products designed solely for the domestic market tend to show a high failure rate, low market share, and low growth. In contrast, products designed for the world market—or at least to include neighboring
countries—achieve significantly more profits, both at home and abroad. Yet only 17
percent of the products in Cooper and Kleinschmidt’s study were designed with aninternational orientation.37 The implication is that companies should adopt an international focus in designing and developing new products.
In choosing rollout markets, the candidate markets can be listed as rows, and rollout attractiveness criteria can be listed as columns. The major rating criteria are market potential, company’s local reputation, cost of filling the pipeline, cost ofcommunication media, influence of area on other areas, and competitive penetration.
The presence of strong competitors will influence rollout strategy. Suppose McDonald’s wants to launch a new chain of fast-food pizza parlors. Pizza Hut, a formidable competitor, is strongly entrenched on the East Coast. Another pizza chain isentrenched on the West Coast but is weak. The Midwest is the battleground between
two other chains. The South is open, but Shakey’s is planning to move in. McDonald’s faces a complex decision in choosing a geographic rollout strategy.
With the World Wide Web connecting far-flung parts of the globe, competition ismore likely to cross national borders. Companies are increasingly rolling out new
products simultaneously across the globe, rather than nationally or even regionally.
However, masterminding a global launch provides challenges. Autodesk, the world’s
leading supplier of PC design software and multimedia tools, has 3 million customers
in more than 150 countries. Carol Bartz, chairman and CEO, says that the biggest obstacle to a global launch success is getting all the different marketers to agree withthe positioning: “Then the issue is speed—getting the materials out fast enough. We
get them to agree on the look (using one image), and then it’s a matter of putting a
local spin on it. It requires an immense amount of concentration.”38 Coordinating aninternational launch also requires very deep pockets, as was the case with the launchof Iridium’s “world phone.”■

Iridium Inc. It’s a phone the size of a brick with an antenna as thick as astout breadstick. It costs $3,000, but this satellite-linked phone allows users
to communicate from anywhere on earth. Iridium faced countless challenges
in marketing this unwieldy, expensive device to a diverse, globe-trotting market. Brazil expected to presell 46,000 Iridium phones because of the country’s
creaky phone system. Iridium Mideast wanted the phone in hunting-supply
shops, because it was the perfect toy for desert falconry. An executive from
Iridium India planned exclusive parties for rich businessmen who might want
the new status symbol. Eventually, the company relied on APL, a division ofInterpublic Group, to craft a single campaign for what is, arguably, the mostintensive effort ever to build a global brand overnight. The $140 million campaign is running in 45 countries. Direct-mail materials are being translated
into 13 languages. TV ads are scheduled on 17 different airlines. Iridium
booths, where travelers will be able to handle the phones in person, are being set up in executive lounges in airports around the world. Finally, in what
is surely the ultimate symbol of a global launch, APL hired laser specialists
to beam the company’s Big Dipper logo onto the clouds.39

To Whom (Target-Market Prospects)

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Within the rollout markets, the company must target its initial distribution and promotion to the best prospect groups. Presumably, the company has already profiled
the prime prospects, who would ideally have the following characteristics: They would
be early adopters, heavy users, and opinion leaders, and they could be reached at alow cost.40 Few groups have all these characteristics. The company should rate thevarious prospect groups on these characteristics and target the best prospect group.
The aim is to generate strong sales as soon as possible to motivate the sales force andattract further prospects.
Many companies are surprised to learn who really buys their product and why.
Microwave ovens began to enjoy explosive growth only after microwave-oven popcorn was developed. Households dramatically increased their purchase of computerswhen the CD-ROM multimedia feature was introduced.

How (Introductory Market Strategy)
The company must develop an action plan for introducing the new product into therollout markets. With its debut in 1998, the competitively priced iMac represented
Apple Computer’s reentry into the computer PC business after a hiatus of 14 years.
The company staged a massive marketing blitz to launch the new machine.
■

Apple Computer Inc. Apple’s launch of the iMac, the sleek, egg-shaped computer with one-touch Internet access, was dramatic. For starters, the iMac wasa closely guarded secret until May 6, 1998, when Jobs literally unveiled themachine to awestruck reporters. The buzz continued to mount, on-line andoff, until the machine went on sale in August. On the weekend of August 14,
computer retailers prepared Midnight Madness sales featuring 20-foot-highinflatable iMacs flying above the stores. Radio stations across the country began an iMac countdown, topped off with iMac giveaways. Jobs personally
signed five “golden” tickets and placed them in the boxes of five iMacs, withthe winner receiving a free iMac each year for the next five years. Apple augmented these efforts with a $100 million ad campaign, its biggest ever,to promote iMac through TV, print, radio, and billboards. The campaign

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featured images of the iMac alongside slogans such as “Mental Floss” and “I
think, therefore iMac.”41
To coordinate the many activities involved in launching a new product, management can use network-planning techniques such as critical path scheduling. Critical
path scheduling (CPS) calls for developing a master chart showing the simultaneousand sequential activities that must take place to launch the product. By estimating
how much time each activity takes, the planners estimate completion time for theentire project. Any delay in any activity on the critical path will cause the project tobe delayed. If the launch must be completed earlier, the planner searches for ways toreduce time along the critical path.42

T HE CONSUMER-ADOPTION PROCESS

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How do potential customers learn about new products, try them, and adopt or reject
them? (Adoption is an individual’s decision to become a regular user of a product.) The
consumer-adoption process is later followed by the consumer-loyalty process, which is theconcern of the established producer.
Years ago, new-product marketers used a mass-market approach in launching products. They would distribute a product everywhere and advertise it to everyone on theassumption that most people are potential buyers. This approach had two main drawbacks: It called for heavy marketing expenditures, and it involved many wasted exposures to people who are not potential consumers. These drawbacks led to a second
approach, heavy-user target marketing, where the product is initially aimed at heavy users.
This approach makes sense, provided that heavy users are identifiable and are early
adopters. But even within the heavy-user group, consumers differ in interest in new
products and brands; many heavy users are loyal to existing brands. Many new-product marketers now aim at consumers who are early adopters. According to early-adopter
theory:■Persons within a target market differ in the amount of elapsed time between
their exposure to a new product and their trying it.

■

Early adopters share some traits that differentiate them from late adopters.

■

Efficient media exist for reaching early adopters.

■

Early adopters tend to be opinion leaders and helpful in “advertising” the new
product to other potential buyers.

The theory of innovation diffusion and consumer adoption helps marketers identify early adopters.

STAGES IN THE ADOPTION PROCESS
An innovation refers to any good, service, or idea that is perceived by someone as new.
The idea may have a long history, but it is an innovation to the person who sees it
as new. Innovations take time to spread through the social system. Rogers defines theinnovation diffusion process as “the spread of a new idea from its source of invention
or creation to its ultimate users or adopters.”43 The consumer-adoption process focuses on the mental process through which an individual passes from first hearing
about an innovation to final adoption.
Adopters of new products have been observed to move through five stages:
1. Awareness: The consumer becomes aware of the innovation but lacks information about it.
2. Interest: The consumer is stimulated to seek information about the innovation.
3. Evaluation: The consumer considers whether to try the innovation.
4. Trial: The consumer tries the innovation to improve his or her estimate of its
value.
5. Adoption: The consumer decides to make full and regular use of the innovation.
The new-product marketer should facilitate consumer movement through thesestages. A portable electric-dishwasher manufacturer might discover that many consumers are stuck in the interest stage; they do not buy because of their uncertainty
and the large investment cost. But these same consumers would be willing to use anelectric dishwasher on a trial basis for a small monthly fee. The manufacturer should
consider offering a trial-use plan with option to buy. Developers of most general-interest interactive CD-ROM titles found that consumers were stuck in the interest ortrial stage and moved less rapidly to adoption.
■

CD-ROMs In the early 1990s, there seemed to be room in the CD-ROM industry for everyone. Multimedia developers were producing action games andeducational software and moving into a hodgepodge of interactive productsthat ranged from hypertext novels to multimedia music anthologies. Today,
few of these titles are selling well or even on the market. One of the maincauses of the poor sales is the ascendance of the Web. Most CD-ROMs, particularly reference titles, found a more cost-effective home on the Web, amedium that also enables them to keep up-to-date and link to a communityof users. CD-ROMs also faced hundreds of competitors in an extremely fragmented entertainment market. Another problem was the glut of titles withserious quality problems. Although consumers were willing to put up withlower quality, they were not patient with technical glitches. When Disney
was beset by massive store returns of its defective Lion King CD-ROM, the
New York Times promptly claimed that CD-ROMs were dead.44

FACTORS INFLUENCING THE ADOPTION PROCESS
Marketers recognize the following characteristics of the adoption process: differences
in individual readiness to try new products; the effect of personal influence; differing
rates of adoption; and differences in organizations’ readiness to try new products.

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F I G U R E

2-6

Adopter Categorization on theBasis of Relative Time of
Adoption of Innovations
Source: Redrawn from Everett M. Rogers, Diffusion of Innovations (New York: Free Press, 1983).

21/2%
Innovators

131/2%
Early adopters

34%
Early majority

34%
Late majority

16%
Laggards

Time of adoption of innovations

People Differ in Readiness to Try New Products
Rogers defines a person’s innovativeness as “the degree to which an individual is relatively earlier in adopting new ideas than the other members of his social system.”
In each product area, there are consumption pioneers and early adopters. Some people are the first to adopt new clothing fashions or new appliances; some doctors are
the first to prescribe new medicines; and some farmers are the first to adopt new farming methods. Other individuals adopt new products much later. People can be classified into the adopter categories shown in Figure 2-6. After a slow start, an increasing
number of people adopt the innovation, the number reaches a peak, and then it diminishes as fewer nonadopters remain.
Rogers sees the five adopter groups as differing in their value orientations. Innovators are venturesome; they are willing to try new ideas. Early adopters are
guided by respect; they are opinion leaders in their community and adopt newideas early but carefully. The early majority are deliberate; they adopt new ideas
before the average person, although they rarely are leaders. The late majority areskeptical; they adopt an innovation only after a majority of people have tried it.
Finally, laggards are tradition bound; they are suspicious of change, mix with othertradition-bound people, and adopt the innovation only when it takes on a measure of tradition itself.
This classification suggests that an innovating firm should research the demographic, psychographic, and media characteristics of innovators and early adoptersand direct communications specifically to them. For example, innovative farmers arelikely to be better educated and more efficient. Innovative homemakers are more gregarious and usually higher in social status. Certain communities have a high share ofearly adopters. According to Rogers, earlier adopters tend to be younger in age, havehigher social status, and a more favorable financial position. They utilize a greaternumber of more cosmopolitan information sources than do later adopters.45

Personal Influence Plays a Large Role
Personal influence is the effect one person has on another’s attitude or purchase probability. Although personal influence is an important factor, its significance is greaterin some situations and for some individuals than for others. Personal influence ismore important in the evaluation stage of the adoption process than in the otherstages. It has more influence on late adopters than early adopters. It also is more important in risky situations.

Characteristics of the Innovation Affect Rate of Adoption

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Some products catch on immediately (e.g., rollerblades), whereas others take a longtime to gain acceptance (e.g., diesel-engine autos). Five characteristics influence therate of adoption of an innovation. We will consider them in relation to the adoptionof personal computers for home use.

The first is relative advantage—the degree to which the innovation appears superior to existing products. The greater the perceived relative advantage of using a personal computer, say, in preparing income taxes and keeping financial records, themore quickly personal computers will be adopted.
The second is compatibility—the degree to which the innovation matches the values and experiences of the individuals. Personal computers, for example, are highly
compatible with upper-middle-class lifestyles.
Third is complexity—the degree to which the innovation is relatively difficult tounderstand or use. Personal computers are complex and will therefore take a longer
time to penetrate into home use.
Fourth is divisibility—the degree to which the innovation can be tried on a limited basis. The availability of rentals of personal computers with an option to buy increases their rate of adoption.
Fifth is communicability—the degree to which the beneficial results of use are observable or describable to others. The fact that personal computers lend themselvesto demonstration and description helps them diffuse faster in the social system.
Other characteristics that influence the rate of adoption are cost, risk and uncertainty, scientific credibility, and social approval. The new-product marketer has to research all these factors and give the key ones maximum attention in designing thenew-product and marketing program.46

Organizations Also Vary in Readiness to Adopt Innovations
The creator of a new teaching method would want to identify innovative schools. The
producer of a new piece of medical equipment would want to identify innovative hospitals. Adoption is associated with variables in the organization’s environment (community progressiveness, community income), the organization itself (size, profits,pressure to change), and the administrators (education level, age, sophistication).
Other forces come into play when trying to get a product adopted into organizations
that receive the bulk of their funding from the government, such as public schools.
A controversial or innovative product can be squelched by negative public opinion.
This was certainly the case with Christopher Whittle’s Channel One, a television station for secondary schools.
■

Channel One Communications Inc. and K-III Communications Corporation
Do you remember Channel One? This was Christopher Whittle’s grand planto put free television sets in every secondary school. The catch? Teachers
would have to flick on a twelve-minute news broadcast every morning, including two minutes of paid ads. Whittle came across as a slick huckster anddrew protests from parents and teachers who didn’t think commercials had
any place in the school. It also didn’t help that the original Channel One
newscast, with its thumping rock music, looked more like a setting for theads than for news. Whittle’s media empire crumbled in 1994. However, in aninteresting epilogue, and a testimony to the lessons to be learned from product failure, another company has bought Channel One and managed to gain
adoption in enough schools to reach 8 million kids, 40 percent of the nation’s teenagers.
K-III Communications Corporation listened to teachers and parents andmade news programming more serious. There is still paid advertising, but the
public furor had died down, and, as one principal says, “Even the commercials let us talk about how images are constructed.” So maybe Whittle had
the right product idea; he just flubbed the execution.47

S U M M A R Y
1. Once a company has segmented the market, chosen its target customer groups,
identified their needs, and determined its desired market positioning, it is ready todevelop and launch appropriate new products. Marketing should actively participate with other departments in every stage of new-product development.

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2. Successful new-product development requires the company to establish an effective organization for managing the development process. Companies can choose
to use product managers, new-product managers, new-product committees, newproduct departments, or new-product venture teams.
3. Eight stages are involved in the new-product development process: idea generation, screening, concept development and testing, marketing strategy development,
business analysis, product development, market testing, and commercialization.
The purpose of each stage is to determine whether the idea should be dropped or
moved to the next stage.
4. The consumer-adoption process is the process by which customers learn about new
products, try them, and adopt or reject them. Today many marketers are targeting
heavy users and early adopters of new products, because both groups can be reachedby specific media and tend to be opinion leaders. The consumer-adoption process
is influenced by many factors beyond the marketer’s control, including consumers’
and organizations’ willingness to try new products, personal influences, and thecharacteristics of the new product or innovation.

A P P L I C A T I O N S
C O N C E P T S
1. To generate really good new-product ideas you need inspiration, perspiration,and good techniques. Some companies struggle with trying to develop new-product ideas because they place more emphasis on inspiration and perspiration thanthey do on technique. Attribute listing, Alex Osborn’s powerful creative tool, canactivate the creative juices in just about everyone. Identify a product or service
that you are familiar with and list its attributes. Then modify each attribute insearch of an improved product. The following form will be useful in your deliberations. If you are having trouble getting started, consider a famous example

Attribute Listing Worksheet
Attributes

Magnify

MinifySubstitute

Adapt

Rearrange

Reverse

Combine

New Uses

Replaceof attribute alteration and expansion: that of Oreo cookies. From the simple, blackand-white Oreo, Nabisco has developed double-stuff Oreos, chocolate-covered
Oreos, giant-size Oreos, mini-size Oreos, low-fat Oreos, lower-calorie Oreos, different packaging and package sizes, Oreo cookie ice cream, Oreo cookie ice creamcones, Oreo granola bars, Oreo cereal, and Oreo snack treats.

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2. Prepare a list of questions that management should answer prior to developing a
new product or service. Organize the questions according to the following categories: (a) market opportunity, (b) competition, (c) production, (d) patentable features, (e) distribution (for products) or delivery (for services), and (f) finance. Thenanswer each question for a new-product idea you have. Would the development
and testing of a new service differ from those of a new product?

Respondent base*

(1)

(2)

(3)
(4)
Type of Sock

(5)

(6)

(7)
(8)
(9)
Package Size and Price
1 pair1 pair3 pairs
3 pairsat
at
at
at$1.79–$1.99–$4.99–$5.49–$1.99$2.4 9
$5.99
$6.49

Total
Respondents

24-inchTube
Sock

18-inchTube
Sock

Athletic
Sock

Crew
Sock

(185)

(60)

(22)

(34)

(69)

(53)

(42)

(42)

42%

45%

31%

33%

38

40

48

50

16

13

20

19

13

1

4

5

3

4

Definitely would
buy

38%

43%

45%

42%

29%

Probably would buy

44

47

27

35

51

Might or might not buy

14

7

23

15

Probably would not buy

3

3

5

6

Definitely would not buy

2

3

(48)

4
2

*Based on four-week consumer home-use test.
Source: CU Market Research.

3. Before beginning an in-home-use test of Odor-Eater socks, each consumer participant selected the Odor-Eaters sock style he or she preferred. At the end of the test,
the participants summarized how likely they would be to purchase Odor-Eaters in
the future. These data are reported in Table 2.4. What conclusions can you draw
from these data? What type of sock is most popular with consumers? Assumingthat the consumer testers are representative of the market, how price sensitive isthis market? Should the company package Odor-Eaters one to the box (columns 6
and 7), or would multiple packs (columns 8 and 9) be preferable?

T A B L E

2.4

Likelihood of Purchasing
Odor-Eaters

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N O T E S
1. New Products Management for the 1980s(New York: Booz, Allen & Hamilton,
1982).
2. Christopher Power, “Flops,” Business Week,
August 16, 1993, pp. 76–82.
3. “Smokeless Cigarettes Not Catching onwith Consumers,” Marketing News, August
4, 1997, p. 21; Robert McMath, “Smokeless Isn’t Smoking,” American Demographics, October 1996.
4. Erika Rasmussen, “Staying Power,” Sales &Marketing Management, August 1998, pp.
44–46.
5. Robert G. Cooper and Elko J. Kleinschmidt, New Products: The Key Factors in
Success (Chicago: American Marketing Association, 1990).
6. Modesto A. Madique and Billie Jo Zirger,“A Study of Success and Failure in Product Innovation: The Case of the U.S. Electronics Industry,” IEEE Transactions on
Engineering Management, November 1984,
pp. 192–203.
7. Michelle Conlin, “Too Much Doodle?”
Forbes, October 19, 1998, pp. 54–55; Tim
Stevens, “Idea Dollars,” Industry Week,
February 16, 1998, pp. 47–49.
8. See David S. Hopkins, Options in New-Product Organization (New York: Conference
Board, 1974); Doug Ayers, RobertDahlstrom, and Steven J. Skinner, “An Exploratory Investigation of Organizational
Antecedents to New Product Success,”
Journal of Marketing Research, February
1997, pp. 107–16.
9. See Robert G. Cooper, “Stage-Gate Systems: A New Tool for Managing New Products,” Business Horizons, May–June 1990,
pp. 44–54. See also his “The New Prod System: The Industry Experience,” Journal of
Product Innovation Management 9 (1992):
113–27.

10. Robert Cooper, Product Leadership: Creating and Launching Superior New Products(New York: Perseus Books, 1998).
11. Eric von Hippel, “Lead Users: A Source ofNovel Product Concepts,” Management
Science, July 1986, pp. 791–805. Also see
his The Sources of Innovation (New York:
Oxford University Press, 1988); and“Learning from Lead Users,” in Marketingin an Electronic Age, ed. Robert D. Buzzell(Cambridge, MA: Harvard Business
School Press, 1985), pp. 308–17.
12. Constance Gustke, “Built to Last,” Sales& Marketing Management, August 1997,
pp. 78–83.
13. Mark Hanan, “Corporate Growththrough Venture Management,” Harvard
Business Review, January–February 1969,
p. 44. See also Carol J. Loomis, “Dinosaurs?” Fortune, May 3, 1993, pp.
36–42.
14. ”The Ultimate Widget: 3-D ‘Printing’
May Revolutionize Product Design and
Manufacturing,” U.S. News & World Report, July 20, 1992, p. 55.
15. Tom Dellacave Jr., “Curing Market Research Headaches,” Sales & Marketing
Management, July 1996, pp. 84–85.
16. Dan Deitz, “Customer-Driven Engineering,” Mechanical Engineering, May 1996,
p. 68.
17. The full-profile example was taken fromPaul E. Green and Yoram Wind, “NewWays to Measure Consumers’ Judgments,” Harvard Business Review (July–August 1975), pp. 107–17. Copyright © 1975
by the President and Fellows of Harvard
College; all rights reserved. Also see Paul
E. Green and V. Srinivasan, “Conjoint
Analysis in Marketing: New Developments with Implications for Research andPractice,” Journal of Marketing, October1990, pp. 3–19; Jonathan Weiner, “Forecasting Demand: Consumer Electronics
Marketer Uses a Conjoint Approach to
Configure Its New Product and Set the
Right Price,” Marketing Research: A Magazine of Management & Applications, Summer 1994, pp. 6–11; Dick R. Wittnick,Marco Vriens, and Wim Burhenne, “Commercial Uses of Conjoint Analysis in Europe: Results and Critical Reflections,”
International Journal of Research in Marketing, January 1994, pp. 41–52.
18. See Robert Blattberg and John Golanty,“Tracker: An Early Test Market Forecasting and Diagnostic Model for New Product Planning,” Journal of Marketing
Research, May 1978, pp. 192–202; Glen L.
Urban, Bruce D. Weinberg, and John R.
Hauser, “Premarket Forecasting of Really
New Products,” Journal of Marketing, January 1996, pp. 47–60; Peter N. Golder
and Gerald J. Tellis, “Will It Ever Fly?
Modeling the Takeoff of Really New Consumer Durables,” Marketing Science, 16,
no. 3 (1997): 256–70.
19. See Roger A. Kerin, Michael G. Harvey,
and James T. Rothe, “Cannibalism and
New Product Development,” Business
Horizons, October 1978, pp. 25–31.
20. The present value (V) of a future sum (I)to be received t years from today and discounted at the interest rate (r) is given by
V ⫽ It/(1 ⫹ r)t. Thus $4,761,000/(1.15)5 ⫽$2,346,000.
21. See David B. Hertz, “Risk Analysis in Capital Investment,” Harvard Business Review,
January–February 1964, pp. 96–106.
22. See John Hauser, “House of Quality,” Harvard Business Review, May–June 1988, pp.
63–73. Customer-driven engineering is
also called “quality function deployment.” See Lawrence R. Guinta andNancy C. Praizler, The QFD Book: The
Team Approach to Solving Problems and Satisfying Customers through Quality Function
Deployment (New York: AMACOM, 1993);
V. Srinivasan, William S. Lovejoy, andDavid Beach, “Integrated Product Designfor Marketability and Manufacturing,”
Journal of Marketing Research, February
1997, pp. 154–63.
23. Marco Iansiti and Alan MacCormack,“Developing Products on Internet Time,”
Harvard Business Review, September–October 1997, pp. 108–17; Srikant Datar, C.
Clark Jordan, and Kannan Srinivasan,“Advantages of Time Based New ProductDevelopment in a Fast-Cycle Industry,”
Journal of Marketing Research, February
1997, pp. 36–49; Christopher D. Ittner
and David F. Larcker, “Product Development Cycle Time and Organizational Performance,” Journal of Marketing Research,
February 1997, pp. 13–23.

24. Tom Peters, The Circle of Innovation, (NewYork: Alfred A. Knopf, 1997), p. 96.
25. Ibid., p. 99.
26. Faye Rice, “Secrets of Product Testing,”
Fortune, November 28, 1994, pp. 172–74;
Lawrence Ingrassia, “Taming the Monster: How Big Companies Can Change:
Keeping Sharp: Gillette Holds Its Edge byEndlessly Searching for a Better Shave,”
Wall Street Journal, December 10, 1992, p.
A1.
27. Gerry Khermouch, “Plate Tectonics,”
Brandweek, February 12, 1996, p. 1.
28. Audrey Choi and Gabriella Stern, “TheLessons of Rügen: Electric Cars are Slow,
Temperamental and Exasperating,” WallStreet Journal, March 30, 1995, p. B1.
29. John Schwartz, “After 2 Years of Market
Tests, Olestra Products Going National;
Consumer Advocates Still Concerned
About Health Risks,” Washington Post,
February 11, 1998, p. A3.
30. Christopher Power, “Will it Sell in Podunk? Hard to Say,” Business Week, August 10, 1992, pp. 46–47.
31. See Kevin J. Clancy, Robert S. Shulman,
and Marianne Wolf, Simulated Test Marketing: Technology for Launching Successful
New Products (New York: Lexington Books,
1994); and V. Mahajan and Jerry Wind,“New Product Models: Practice, Shortcomings, and Desired Improvements,”
Journal of Product Innovation Management 9(1992): 128–39; Glen L. Urban, John R.
Hauser, and Roberta A. Chicos, “Information Acceleration: Validation and Lessons
from the Field,” Journal of Marketing Research, February 1997, pp. 143–53.
32. Power, “Will It Sell in Podunk,” pp.
46–47.
33. Robert McMath, “To Test or Not to Test
. . . ,” American Demographics, June
1998, p. 64.
34. Corie Brown, “The Lizard Was a Turkey,”
Newsweek, June 15, 998, p. 71; Tim
Carvell, “How Sony Created a Monster,”
Fortune, June 8, 1998, pp. 162–70.
35. For further discussion, see Robert J.
Thomas, “Timing—The Key to Market
Entry,” Journal of Consumer Marketing,
Summer 1985, pp. 77–87; Thomas S.
Robertson, Jehoshua Eliashberg, andTalia Rymon, “New Product Announcement Signals and Incumbent Reactions,”
Journal of Marketing, July 1995, pp. 1–15;
Frank H. Alpert and Michael A. Kamins,“Pioneer Brand Advantages and Consumer Behavior:A Conceptual Framework and Propositional Inventory,”
Journal of the Academy of Marketing Science,
Summer 1994, pp. 244–36.
36. Mickey H. Gramig, “Coca-Cola Unveiling
New Citrus Drink,” Atlanta Journal andConstitution, January 24, 1998, p. E3.

37. See Cooper and Kleinschmidt, New Products, pp. 35–38.
38. Erika Rasmusson, “Staying Power,” Sales& Marketing Management, August 1998,
pp. 44–46.
39. Quentin Hardy, “Iridium’s Orbit to Sell a
World Phone, Play to Executive Fears ofBeing out of Touch: Satellite Consortium
Chooses That Pitch for Bid to Build a
Global Brand Overnight,” Wall Street Journal, June 4, 1998 p. A1; Sally Beatty, “Iridium Is Betting Satellite Phone Will Hook
Restless Professionals,” Wall Street Journal,
June 22, 1998, p. B6.
40. Philip Kotler and Gerald Zaltman, “Targeting Prospects for a New Product,” Journal of Advertising Research, February 1976,
pp. 7–20.
41. Jim Carlton, “From Apple, a New Marketing Blitz,” Wall Street Journal, August
14, 1998, p. B1.
42. For details, see Keith G. Lockyer, Critical
Path Analysis and Other Project Network
Techniques (London: Pitman, 1984). Also
see Arvind Rangaswamy and Gary L.
Lilien, “Software Tools for New ProductDevelopment,” Journal of Marketing Research, February 1997, pp. 177–84.
43. The following discussion leans heavily
on Everett M. Rogers, Diffusion of Innovations (New York: Free Press, 1962).

362

Developing
Marketing
Strategies

Also see his third edition, published in1983.
44. Gillian Newson and Eric Brown, “CDROM: What Went Wrong?” NewMedia,
August 1998, pp. 32–38.
45. Rogers, Diffusion of Innovations, p. 192.
Also see S. Ram and Hyung-Shik Jung,“Innovativeness in Product Usage: A
Comparison of Early Adopters and Early
Majority,” Psychology and Marketing, January–February 1994, pp. 57–68.
46. See Hubert Gatignon and Thomas S.
Robertson, “A Propositional Inventory
for New Diffusion Research,” Journal ofConsumer Research, March 1985, pp.
849–67; Vijay Mahajan, Eitan Muller,
and Frank M. Bass, “Diffusion of New
Products: Empirical Generalizations andManagerial Uses,” Marketing Science, 14,
no. 3, part 2 (1995); G79–G89; Fareena
Sultan, John U. Farley, and Donald R.
Lehmann, “Reflection on ‘A Meta-Analysis of Applications of Diffusion Models,’”
Journal of Marketing Research, May 1996,
pp. 247–49; Minhi Hahn, Sehoon Park,and Andris A. Zoltners, “Analysis of New
Product Diffusion Using a Four-segment
Trial-repeat Model,” Marketing Science, 13,
no. 3 (1994), 224–47.
47. Joshua Levine, “TV in the Classroom,”
Forbes, January 27, 1997, p. 98.

SECTION THREE

Analyzing
Consumer Markets
and Buyer
Behavior
We will address the following questions:■ How do cultural, social, personal, and psychological factors inﬂuence consumer buying
behavior?
■ How does the consumer make a purchasing decision?

T

he aim of marketing is to meet and satisfy target customers’ needs and wants. The
field of consumer behavior studies how individuals, groups, and organizations
select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy theirneeds and desires. Understanding consumer behavior is never simple, because customers may say one thing but do another. They may not be in touch with their deeper
motivations, and they may respond to inﬂuences and change their minds at the lastminute.
Still, all marketers can proﬁt from understanding how and why consumers buy.
For example, Whirlpool’s staff anthropologists go into people’s homes, observe how
they use appliances, and talk with household members. Whirlpool has found that inbusy families, women are not the only ones doing the laundry. Knowing this, the company’s engineers developed color-coded washer and dryer controls to make it easierfor kids and men to pitch in.1
In fact, not understanding your customer’s motivations, needs, and preferences
can lead to major mistakes. This is what happened when Kodak introduced its Advantacamera—a costly bust. The company proudly touted it as a high-tech product, but themarketplace was dominated by middle-aged baby-boomers. In midlife, fancy new technology generally loses its appeal, and simplicity begins to edge out complexity in consumer preferences, so Advanta sales did not skyrocket.
Such examples show why successful marketers use both rigorous scientiﬁc procedures and more intuitive methods to study customers and uncover clues for developing new products, product features, prices, channels, messages, and other marketing-

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mix elements. This chapter explores individual consumers’ buying dynamics; the next
chapter explores the buying dynamics of business buyers.

HOW AND WHY CONSUMERS BUY
The starting point for understanding consumer buying behavior is the stimulusresponse model shown in Figure 3-1. As this model shows, both marketing and environmental stimuli enter the buyer’s consciousness. In turn, the buyer’s characteristics
and decision process lead to certain purchase decisions. The marketer’s task is tounderstand what happens in the buyer’s consciousness between the arrival of outside
stimuli and the buyer’s purchase decisions.
As this model indicates, a consumer’s buying behavior is inﬂuenced by cultural,social, personal, and psychological factors.

Cultural Factors Inﬂuencing Buyer Behavior
Culture, subculture, and social class are particularly important influences on consumer buying behavior.
➤

Culture. Culture is the most fundamental determinant of a person’s wants andbehavior. A child growing up in the United States is exposed to these broad culturalvalues: achievement and success, activity, efﬁciency and practicality, progress,
material comfort, individualism, freedom, external comfort, humanitarianism, andyouthfulness.2➤

Subculture. 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. Many subcultures make up
important market segments, leading marketers to tailor products and marketing
programs to their needs. Latinos, for example, the fastest-growing U.S. subculture,
are targeted by Dallas-based Carnival Food Stores, among other marketers. Dallas is
one of the top 10 cities in terms of Latino population, and when the chain uses
Spanish language promotions, customers are more responsive. Marketers aretargeting another subculture, African Americans, because of its hefty $500 billion inpurchasing power. Hallmark, for instance, created its Mahogany line of 800 greetingcards especially for African Americans. Age forms subcultures, as well; the 75 million
Americans in the 50-plus market are being targeted by marketers such as Pﬁzer,
which airs ads showing how its medications help seniors live life to the fullest.3

Figure 3-1 Model of Consumer Buyer Behavior

How and Why Consumers Buy➤

Social class. Social classes are relatively homogeneous and enduring divisions in asociety. They are hierarchically ordered and their members share similar values,
interests, and behavior (see Table 3.1). Social classes reﬂect income as well as
occupation, education, and other indicators. Those within each social class tend tobehave more alike than do persons from different social classes. Also, within theculture, persons are perceived as occupying inferior or superior positions according
to social class. Social class is indicated by a cluster of variables rather than by any
single variable. Still, individuals can move from one social class to another—up or
down—during their lifetime. Because social classes often show distinct product andbrand preferences, some marketers focus their efforts on one social class. NeimanMarcus, for example, focuses on the upper classes, offering top-quality merchandise
in upscale stores with many personal services geared to these customers’ needs.

Social Factors Inﬂuencing Buyer Behavior
In addition to cultural factors, a consumer’s behavior is inﬂuenced by such social factors as reference groups, family, and social roles and statuses.
Reference Groups
Reference groups consist of all of the groups that have a direct (face-to-face) or indirect inﬂuence on a person’s attitudes or behavior. Groups that have a direct inﬂuence
on a person are called membership groups. Some primary membership groups are family,
friends, neighbors, and co-workers, with whom individuals interact fairly continuously
and informally. Secondary groups, such as professional and trade-union groups, tend
to be more formal and require less continuous interaction. Reference groups expose
people to new behaviors and lifestyles, inﬂuence attitudes and self-concept, and createpressures for conformity that may affect product and brand choices.
People are also inﬂuenced by groups to which they do not belong. Aspirationalgroups are those the person hopes to join; dissociative groups are those whose values or
behavior an individual rejects.
Although marketers try to identify target customers’ reference groups, the level ofreference-group inﬂuence varies among products and brands. Manufacturers of products and brands with strong group inﬂuence must reach and inﬂuence the opinion
leaders in these reference groups. An opinion leader is the person in informal productrelated communications who offers advice or information about a product or productcategory.4 Marketers try to reach opinion leaders by identifying demographic and psychographic characteristics associated with opinion leadership, identifying the preferred media of opinion leaders, and directing messages at the opinion leaders. For
example, the hottest trends in teenage music and fashion start in America’s inner cities,
then spread to youth in the suburbs. As a result, clothing companies that target teens
carefully monitor the style and behavior of urban opinion leaders.
FamilyThe family is the most important consumer-buying organization in society, and it has
been researched extensively.5 The family of orientation consists of one’s parents and siblings. From parents, a person acquires an orientation toward religion, politics, andeconomics as well as a sense of personal ambition, self-worth, and love.6 A more direct
inﬂuence on the everyday buying behavior of adults is the family of procreation—namely,
one’s spouse and children.
Marketers are interested in the roles and relative inﬂuence of the husband, wife,and children in the purchase of a large variety of products and services. These roles
vary widely in different cultures and social classes. Vietnamese Americans, for example,

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Table 3.1 Selected Characteristics of Major U.S. Social Classes
Social Class

Characteristics

Upper Uppers (less than 1 percent of
U.S. population)

The social elite who live on inherited wealth; theygive large sums to charity, maintain more than one
home, and send their children to top schools.This
small group serves as a reference group for othersocial classes.

Lower Uppers (about 2 percent of
U.S. population)

People coming up from the middle class who haveearned high income or wealth through professions
or business; they tend to be active in social andcivic affairs, buy status-symbol products, and aspire
to be accepted in the upper-upper stratum.

Upper Middles (12 percent of U.S.
population)

People without family status or unusual wealth who
are focused on their careers as professionals,
independent business persons, and corporate
managers; they believe in education and are civicminded and home-oriented.

Middle Class (32 percent of U.S.
population)

Average-pay white- and blue-collar workers; theyoften buy popular products to keep up with trends,
and they believe in spending more money onworthwhile experiences for their children andaiming them toward a college education.

Working Class (38 percent of U.S.
population)

Average-pay blue-collar workers and those who
lead a working-class lifestyle; they depend on
relatives for economic and emotional support, job
tips, and assistance, and they tend to maintain sharp
sex-role divisions and stereotyping.

Upper Lowers (9 percent of U.S.
population)

Workers whose living standard is just above
poverty; they perform unskilled work, are poorly
paid, and are educationally deﬁcient.

Lower Lowers (7 percent of U.S.
population)

People on welfare, visibly poverty stricken, andusually out of work; some are uninterested inﬁnding permanent work, and most depend on
public aid or charity for income.

Sources: Richard P. Coleman,“The Continuing Signiﬁcance of Social Class to Marketing,” Journal ofConsumer Research, December 1983, pp. 265–80, and Richard P. Coleman and Lee P. Rainwater, SocialStanding in America: New Dimension of Class (New York: Basic Books, 1978).

are more likely to adhere to the model in which the man makes large-purchase decisions. In the United States, husband-wife involvement has traditionally varied widely by
product category, so marketers need to determine which member has the greater inﬂuence in choosing particular products. Today, traditional household purchasing patterns are changing, with baby-boomer husbands and wives shopping jointly for products traditionally thought to be under the separate control of one spouse or the other.7
For this reason, marketers of products traditionally purchased by one spouse may needto start thinking of the other as a possible purchaser.

How and Why Consumers Buy

Another shift in buying patterns is an increase in the amount of money spentand influence wielded by children and teens.8 Children age 4 to 12 spend an estimated $24.4 billion annually—three times the value of the ready-to-eat cereal market.
Indirect inﬂuence means that parents know the brands, product choices, and preferences of their children without hints or outright requests; direct inﬂuence refers tochildren’s hints, requests, and demands.
Because the fastest route to Mom and Dad’s wallets may be through Junior, manysuccessful companies are showing off their products to children—and soliciting marketing information from them—over the Internet. This has consumer groups and parents up in arms. Many marketers have come under ﬁre for not requiring parental consent when requesting personal information and not clearly differentiating ads fromgames or entertainment.
One company that uses ethical tactics to market to children is Disney, which
operates the popular children’s site Disney Online. Disney clearly states its on-line
policies on its home page and on the home pages of its other sites, including Disney’s
Daily Blast, a subscription-based Internet service geared to children age 3 to 12.
Disney’s on-line practices include alerting parents through e-mail when a child has
submitted personal information to a Web site, whether it be to enter a contest, cast a
vote, or register at a site. Whereas many sites and advertisers use “cookies,” tiny bits ofdata that a Web site puts on a user’s computer to enhance his or her visit, Disney does
not use cookies for promotional or marketing purposes and does not share them withthird parties.9
Roles and Statuses
A person participates in many groups, such as family, clubs, or organizations. The person’s position in each group can be deﬁned in terms of role and status. A role consistsof the activities that a person is expected to perform. Each role carries a status. A
Supreme Court justice has more status than a sales manager, and a sales manager has
more status than an administrative assistant. In general, people choose products that
communicate their role and status in society. Thus, company presidents often drive
Mercedes, wear expensive suits, and drink Chivas Regal scotch. Savvy marketers areaware of the status symbol potential of products and brands.

Personal Factors Inﬂuencing Buyer Behavior
Cultural and social factors are just two of the four major factors that inﬂuence consumer buying behavior. The third factor is personal characteristics, including thebuyer’s age, stage in the life cycle, occupation, economic circumstances, lifestyle, personality, and self-concept.
Age and Stage in the Life Cycle
People buy different goods and services over a lifetime. They eat baby food in the earlyyears, most foods in the growing and mature years, and special diets in the later years.
Taste in clothes, furniture, and recreation is also age-related, which is why smart marketers are attentive to the inﬂuence of age.
Similarly, consumption is shaped by the family life cycle. The traditional family life
cycle covers stages in adult lives, starting with independence from parents and continuing into marriage, child-rearing, empty-nest years, retirement, and later life.
Marketers often choose a speciﬁc group from this traditional life-cycle as their target
market. Yet target households are not always family based: There are also single
households, gay households, and cohabitor households.
Some recent research has identified psychological life-cycle stages. Adults experience certain “passages” or “transformations” as they go through life.10 Leading mar-

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keters pay close attention to changing life circumstances—divorce, widowhood,remarriage—and their effect on consumption behavior.
Occupation and Economic Circumstances
Occupation also inﬂuences a person’s consumption pattern. A blue-collar worker will
buy work clothes and lunchboxes, while a company president will buy expensive suits
and a country club membership. For this reason, marketers should identify the occupational groups that are more interested in their products and services, and consider specializing their products for certain occupations. Software manufacturers, for example,
have developed special programs for lawyers, physicians, and other occupational groups.
In addition, product choice is greatly affected by a consumer’s economic circumstances: spendable income (level, stability, and time pattern), savings and assets (including the percentage that is liquid), debts, borrowing power, and attitude toward spending
versus saving. Thus, marketers of income-sensitive goods must track trends in personal
income, savings, and interest rates. If a recession is likely, marketers can redesign, reposition, and reprice their products to offer more value to target customers.
Lifestyle
People from the same subculture, social class, and occupation may actually lead quite
different lifestyles. A lifestyle is the person’s pattern of living in the world as expressedin activities, interests, and opinions. Lifestyle portrays the “whole person” interactingwith his or her environment.
Successful marketers search for relationships between their products andlifestyle groups. For example, a computer manufacturer might find that most computer buyers are achievement-oriented. The marketer may then aim its brand moreclearly at the achiever lifestyle.
Psychographics is the science of measuring and categorizing consumer lifestyles.
One of the most popular classiﬁcations based on psychographic measurements is SRIInternational’s Values and Lifestyles (VALS) framework. The VALS 2 system classiﬁes
all U.S. adults into eight groups based on psychological attributes drawn from survey
responses to demographic, attitudinal, and behavioral questions, including questions
about Internet usage.11 The major tendencies of these groups are:➤Actualizers: Successful, sophisticated, active, “take-charge” people whose purchases
often reﬂect cultivated tastes for relatively upscale, niche-oriented products.

➤

Fulﬁlleds: Mature, satisﬁed, comfortable, and reﬂective people who favor durability,
functionality, and value in products.

➤

Achievers: Successful, career- and work-oriented consumers who favor established,prestige products that demonstrate success.

➤Experiencers: Young, vital, enthusiastic, impulsive, and rebellious people who spend
much of their income on clothing, fast food, music, movies, and video.

➤

Believers: Conservative, conventional, and traditional people who favor familiar
products and established brands.

➤

Strivers: Uncertain, insecure, approval-seeking, resource constrained consumers who
favor stylish products that emulate the purchases of wealthier people.

➤

Makers: Practical, self-sufﬁcient, traditional, and family-oriented people who favor
products with a practical or functional purpose, such as tools and ﬁshingequipment.

➤

Strugglers: Elderly, resigned, passive, concerned, and resource-constrained
consumers who are cautious and loyal to favorite brands.

How and Why Consumers Buy

Although psychographics is a valid and valued methodology for many marketers,social scientists are realizing that older tools for predicting consumer behavior are notalways applicable to the use of the Internet or on-line services and purchases of technology products. As a result, researchers are coming up with new research methods forsegmenting consumers based on technology types. Forrester Research’s
Technographics system segments consumers according to motivation, desire, and ability to invest in technology; SRI’s iVALS system segments consumers into segments basedon Internet usage.12
Lifestyle segmentation schemes vary by culture. McCann-Erickson London, forexample, has identiﬁed these British lifestyles: Avant-Gardians (interested in change);
Pontiﬁcators (traditionalists); Chameleons (follow the crowd); and Sleepwalkers (contented underachievers). The advertising agency D’Arcy, Masius, Benton & Bowles has
identiﬁed these segments of Russian consumers: “Kuptsi” (merchants), “Cossacks” (ambitious and status seeking), “Students,” “Business Executives,” and “Russian Souls” (passive,
fearful of choices).13
Personality and Self-Concept
Each person has a distinct personality that influences buying behavior. Personality
refers to the distinguishing psychological characteristics that lead to relatively consistent and enduring responses to environment. Personality is usually described in termsof such traits as self-conﬁdence, dominance, autonomy, deference, sociability, defensiveness, and adaptability.14
Personality can be useful in analyzing consumer behavior, provided that personality types can be classiﬁed accurately and that strong correlations exist between certain personality types and product or brand choices. For example, a computer company might discover that many prospects show high self-conﬁdence, dominance, andautonomy, suggesting that computer ads should appeal to these traits.
Self-concept (or self-image) is related to personality. Marketers often try to develop
brand images that match the target market’s self-image. Yet it is possible that a person’s actual self-concept (how she views herself ) differs from her ideal self-concept (howshe would like to view herself) and from her others-self-concept (how she thinks others
see her). Which self will she try to satisfy in making a purchase? Because it is difﬁcult
to answer this question, self-concept theory has had a mixed record of success in predicting consumer responses to brand images.15

Psychological Factors Inﬂuencing Buyer Behavior
Psychological factors are the fourth major inﬂuence on consumer buying behavior (inaddition to cultural, social, and personal factors). In general, a person’s buying
choices are inﬂuenced by the psychological factors of motivation, perception, learning, beliefs, and attitudes.
Motivation
A person has many needs at any given time. Some needs are biogenic; they arise fromphysiological states of tension such as hunger, thirst, 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. A motive is a need that is sufficiently pressing to drive the person to act.
Psychologists have developed theories of human motivation. Three of the best
known—the theories of Sigmund Freud, Abraham Maslow, and Frederick Herzberg—
carry quite different implications for consumer analysis and marketing strategy.

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Freud’s theory. Sigmund Freud assumed that the psychological forces shaping
people’s behavior are largely unconscious, and that a person cannot fully
understand his or her own motivations. A technique called laddering can be used to
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 andappeal.16 In line with Freud’s theory, consumers react not only to the statedcapabilities of speciﬁc brands, but also to other, less conscious cues. Successful
marketers are therefore mindful that shape, size, weight, material, color, and brandname can all trigger certain associations and emotions.

➤

Maslow’s theory. Abraham Maslow sought to explain why people are driven byparticular needs at particular times.17 His theory is that human needs are arranged
in a hierarchy, from the most to the least pressing. In order of importance, theseﬁve categories are physiological, safety, social, esteem, and self-actualization needs.
A consumer will try to satisfy the most important need ﬁrst; when that need issatisﬁed, the person will try to satisfy the next-most-pressing need. Maslow’s theory
helps marketers understand how various products ﬁt into the plans, goals, and livesof consumers.

➤

Herzberg’s theory. Frederick Herzberg developed a two-factor theory that distinguishes
dissatisﬁers (factors that cause dissatisfaction) from satisﬁers (factors that cause
satisfaction).18 The absence of dissatisﬁers is not enough; satisﬁers must be actively
present to motivate a purchase. For example, a computer that comes without awarranty 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 with the computer. Ease of use would, however, be a satisﬁer for acomputer buyer. In line with this theory, marketers should avoid dissatisﬁers thatmight unsell their products. They should also identify and supply the major
satisﬁers or motivators of purchase, because these satisﬁers determine which brandconsumers will buy.

Perception
A motivated person is ready to act, yet how that person actually acts is inﬂuenced byhis or her perception of the situation. Perception is the process by which an individual selects, organizes, and interprets information inputs to create a meaningful picture of the world.19 Perception depends not only on physical stimuli, but also on thestimuli’s relation to the surrounding field and on conditions within the individual.
The key word is individual. Individuals can have different perceptions of the same
object because of three perceptual processes: selective attention, selective distortion,and selective retention.
➤

Selective attention. People are exposed to many daily stimuli such as ads; most of thesestimuli are screened out—a process called selective attention. The end result is thatmarketers have to work hard to attract consumers’ attention. Through research,marketers have learned that people are more likely to notice stimuli that relate to a
current need, which is why car shoppers notice car ads but not appliance ads.
Furthermore, people are more likely to notice stimuli that they anticipate—such as
foods being promoted on a food Web site. And people are more likely to noticestimuli whose deviations are large in relation to the normal size of the stimuli, suchas a banner ad offering $100 (not just $5) off a product’s list price.

➤

Selective distortion. Even noticed stimuli do not always come across the way thatmarketers intend. Selective distortion is the tendency to twist information into

How and Why Consumers Buy
personal meanings and interpret information in a way that ﬁts our preconceptions.
Unfortunately, marketers can do little about selective distortion.
➤

Selective retention. People forget much that they learn but tend to retain informationthat supports their attitudes and beliefs. Because of selective retention, we are likely toremember good points mentioned about a product we like and forget good points
mentioned about competing products. Selective retention explains why marketers
use drama and repetition in messages to target audiences.

Learning
When people act, they learn. Learning involves changes in an individual’s behavior
that arise from experience. Most human behavior is learned. Theorists believe thatlearning is produced through the interplay of drives, stimuli, cues, responses, andreinforcement. A drive is a strong internal stimulus that impels action. Cues are minor
stimuli that determine when, where, and how a person responds.
Suppose you buy an IBM computer. If your experience is rewarding, yourresponse to computers and IBM will be positively reinforced. Later, when you want tobuy a printer, you may assume that because IBM makes good computers, it also makes
good printers. You have now generalized your response to similar stimuli. A countertendency to generalization is discrimination, in which the person learns to recognize
differences in sets of similar stimuli and adjust responses accordingly. Applying learning theory, marketers can build up demand for a product by associating it with strong
drives, using motivating cues, and providing positive reinforcement.
Beliefs and Attitudes
Through doing and learning, people acquire beliefs and attitudes that, in turn, influence buying behavior. A belief is a descriptive thought that a person holds aboutsomething. Beliefs may be based on knowledge, opinion, or faith, and they may or
may not carry an emotional charge. Of course, manufacturers are very interested in
the beliefs that people have about their products and services. These beliefs make up
product and brand images, and people act on their images. If some beliefs are wrong
and inhibit purchase, the manufacturer will want to launch a campaign to correctthese beliefs.20
Particularly important to global marketers is the fact that buyers often hold distinct beliefs about brands or products based on their country of origin. Studies havefound, for example, that the impact of country of origin varies with the type of product. Consumers want to know where a car was made but not where lubricating oil camefrom. In addition, attitudes toward country of origin can change over time; Japan, forinstance, had a poor quality image before World War II.
A company has several options when its products’ place of origin turns off consumers. The company can consider co-production with a foreign company that has abetter name. Another alternative is to hire a well-known celebrity to endorse the product. Or the company can adopt a strategy to achieve world-class quality in the local
industry, as is the case with Belgian chocolates and Colombian coffee.
This is what South African wineries are attempting to do as their wine exports
increase. South African wines have been hurt by the perception that the country’s
vineyards are primitive in comparison to those in other countries and that wine farmers are continuing crude labor practices. In reality, South Africa’s wine farmers have
improved the lives of their workers. “Wine is such a product of origin that we cannot
succeed if South Africa doesn’t look good,” says Willem Barnard, chief executive of the
Ko-operatieve Wijnbouwers Vereniging, the farmers’ co-op that dominates the industry.21

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Attitudes are just as important as beliefs for inﬂuencing buying behavior. An attitude is a person’s enduring favorable or unfavorable evaluations, emotional feelings,
and action tendencies toward some object or idea.22 People have attitudes toward
almost everything: religion, politics, clothes, music, food. Attitudes put them into aframe of mind of liking or disliking an object, moving toward or away from it.
Attitudes lead people to behave in a fairly consistent way toward similar objects.
Because attitudes economize on energy and thought, they are very difﬁcult to change;
to change a single attitude may require major adjustments in other attitudes.
Thus, a company would be well advised to ﬁt its product into existing attitudes
rather than to try to change people’s attitudes. Of course, trying to change attitudes
can pay off occasionally. Look at the milk industry. By the early 1990s, milk consumption had been in decline for 25 years, because the general perception was that milk
was unhealthy, outdated, just for kids, or only good with cookies and cakes. Then the
National Fluid Milk Processor Education Program kicked off a multi-million dollar
print ad campaign featuring milk be-mustached celebrities like Hanson and Tyra
Banks with the tag line “Where’s your mustache?” The wildly popular campaign haschanged attitudes and, in the process, boosted milk consumption. The milk producers
have also established an on-line Club Milk (www.whymilk.com), limiting membershipto people who pledge to drink three glasses of milk a day.23

THE CONSUMER BUYING DECISION PROCESS
Marketers have to go beyond the various influences on buyers and develop an indepth understanding of how consumers actually make their buying decisions.
Speciﬁcally, marketers must identify who makes the buying decision, the types of buying decisions, and the stages in the buying process.

Buying Roles
Marketers can identify the buyer for many products easily. In the United States, men
normally choose their shaving equipment, and women choose their pantyhose. Still,
marketers must be careful, because buying roles can change. After the giant British
chemical firm ICI discovered that women made 60 percent of the decisions on thebrand of household paint, it began advertising its DeLux brand to women.
We can distinguish ﬁve roles that people might play in a buying decision. An initiator ﬁrst suggests the idea of buying the product or service. An inﬂuencer is the person
whose view or advice inﬂuences the decision. A decider actually decides whether to buy,what to buy, how to buy, or where to buy. A buyer makes the actual purchase, while auser consumes or uses the product or service.

Buying Behavior
Marketers also need to be aware that consumer decision making varies with the type ofbuying decision. The decisions to buy toothpaste, a tennis racket, a personal computer, and a new car are all very different. In general, complex and expensive purchases are likely to involve more buyer deliberation and more participants. As shownin Table 3.2, Assael distinguished four types of consumer buying behavior, based on
the degree of buyer involvement and the degree of differences among brands:24➤

Complex buying behavior applies to high-involvement products such as personal
computers. Buyers may not know what attributes to consider in these products, sothey do research. Knowing this, marketers can help educate buyers about product

The Consumer Buying Decision Process

Table 3.2 Four Types of Consumer Buying Behavior
High Involvement

Low Involvement

Signiﬁcant Differences
between Brands

Complex buying behavior—applies when product is
expensive, bought
infrequently, risky, and selfexpressive; buyer ﬁrst
develops beliefs about the
product, then develops
attitudes about it, andﬁnally makes a thoughtful
choice.

Variety-seeking buying
behavior—applies whenbuyer switches brands forthe sake of variety rather
than dissatisfaction; buyer
has some beliefs about the
product, chooses a brandwith little evaluation, andevaluates the productduring consumption.

Few Differences
between Brands

Dissonance-reducing
behavior—applies when the
product is expensive,bought infrequently, andrisky; buyer shops aroundand buys fairly quickly, thenlater experiencesdissonance but stays alert
to information supporting
the purchase decision.

Habitual buying behavior—applies when the productis low-cost and frequently
purchased; buyers do notpass through normal
sequence of belief, attitude,
and behavior but instead
make decisions based onbrand familiarity.

Source: Modified from Henry Assael, Consumer Behavior and Marketing Action (Boston: Kent
Publishing Co., 1987), p. 87. Copyright © 1987 by Wadsworth, Inc. Printed by permission of Kent
Publishing Co., a division of Wadsworth, Inc.

attributes, differentiate and describe the brand’s features, and motivate store
personnel and others to inﬂuence the ﬁnal brand choice.
➤Dissonance-reducing buyer behavior applies to high-involvement products such as
carpeting. Carpeting is expensive and self-expressive, yet the buyer may consider
most brands in a given price range to be the same. After buying, the consumer
might experience dissonance after noticing certain disquieting features or hearing
favorable things about other brands. Marketers should therefore supply beliefs andevaluations that help consumers feel good about their brand choices.

➤

Habitual buying behavior applies to low-involvement products such as salt. Consumers
keep buying the same brand out of habit, not due to strong brand loyalty, because
they are passive recipients of information conveyed by advertising. Ad repetition
creates brand familiarity rather than brand conviction. Marketers of such products canuse price and sales promotions to entice new customers to try their products.

➤

Variety-seeking buying behavior applies to low-involvement products such as cookies. In
this category, consumers switch brands often because they want more variety. The
market leader will therefore try to encourage habitual buying behavior bydominating the shelf space, keeping shelves stocked, and running frequent
reminder ads. Challenger ﬁrms will encourage variety seeking by offering lower
prices, coupons, free samples, and ads that offer reasons for trying something new.

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CHAPTER 5 ANALYZING CONSUMER MARKETS AND BUYER BEHAVIORThe Stages of the Buying Decision Process
In addition to examining buying roles and behavior, smart companies research thebuying decision process involved in their product category. They ask consumers when
they ﬁrst became acquainted with the product category and brands, what their brandbeliefs are, how involved they are with the product, how they make their brandchoices, and how satisﬁed they are after purchase.
Figure 3-2 shows a ﬁve-stage model of the typical buying process. Starting with problem recognition, the consumer passes through the stages of information search, evaluation of alternatives, purchase decision, and postpurchase behavior. As this model demonstrates, the consumer buying process starts long before the actual purchase and has
consequences long afterward.25 Although the model implies that consumers pass sequentially through all ﬁve stages in buying a product, consumers sometimes skip or reverse
some stages. However, we use this model because it captures the full range of considerations that arise when a consumer faces a highly involving new purchase.26
Stage 1: Problem Recognition
The buying process starts when the buyer recognizes a problem or need. This needcan be triggered by internal stimuli (such as feeling hunger or thirst) or external stimuli (such as seeing an ad) that then becomes a drive. By gathering information from anumber of consumers, marketers can identify the most frequent stimuli that sparkinterest in a product category. They can then develop marketing strategies that trigger
consumer interest and lead to the second stage in the buying process.
Stage 2: Information Search
An aroused consumer who recognizes a problem will be inclined to search for more
information. We can distinguish between two levels of arousal. At the milder searchstate of heightened attention, a person simply becomes more receptive to information
about a product. At the active information search level, a person surfs the Internet, talks
with friends, and visits stores to learn more about the product. Consumer information
sources include personal sources (family, friends, neighbors, acquaintances), commercial sources (advertising, Web sites, salespersons, dealers, packaging, displays),
public sources (mass media, consumer-rating organizations), and experiential sources(handling, examining, using the product). The consumer usually receives the mostinformation from commercial (marketer-dominated) sources, although the mostinﬂuential information comes from personal sources.
Through gathering information, the consumer learns more and more about
competing brands. The ﬁrst box in Figure 3-3 shows the total set of brands available tothe consumer. The individual consumer will come to know only a subset of thesebrands (awareness set). Some of these brands will meet initial buying criteria (consideration set). As the person gathers more information, only a few brands will remain as
strong contenders (choice set). The person makes a ﬁnal choice from this set.27

Figure 3-2 Five-Stage Model of the Consumer Buying Process

The Consumer Buying Decision Process

Figure 3-3 Successive Sets Involved in Consumer Decision Making

Figure 3-3 makes it clear that a company must strategize to get its brand into theprospect’s awareness set, consideration set, and choice set. The company must also
identify the other brands in the consumer’s choice set so that it can plan competitive
appeals. In addition, the company should identify the consumer’s information sourcesand evaluate their relative importance so it can prepare a range of effective communications for the target market.
Stage 3: Evaluation of Alternatives
Once the consumer has conducted an information search, how does he or she processcompetitive brand information and make a ﬁnal judgment? There are several evaluation processes; the most current models view the process as being cognitively oriented,
meaning that consumers form judgments largely on a conscious and rational basis.
Some basic concepts underlie consumer evaluation processes. As noted earlier,the consumer is trying to satisfy a need. In seeking certain benefits from the productsolution, the consumer sees each product as a bundle of attributes with varying abilitiesof delivering the beneﬁts to satisfy this need. However, the attributes of interest to buyers vary by product. For example, the attributes sought in a camera might be picture
sharpness, camera size, and price. In addition, consumers vary as to which productattributes they see as most relevant and the importance they attach to each attribute.
Knowing that consumers pay the most attention to attributes that deliver the beneﬁts
they seek, many successful marketers segment their markets according to the attributes that are salient to different consumer groups.
In the course of evaluating alternatives, the consumer develops a set of brand beliefs
about where each brand stands on each attribute. The set of beliefs about a particularbrand, which make up the brand image, will vary with the consumer’s experiences as ﬁltered by the effects of selective perception, selective distortion, and selective retention.
Ultimately, consumers develop attitudes toward various brand alternatives
through an attribute evaluation procedure.28 Suppose, for example, that Linda Brown
has narrowed her choice set to four computers (A, B, C, D) on the basis of four attributes: memory capacity, graphics capability, size and weight, and price. If one computer

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CHAPTER 5 ANALYZING CONSUMER MARKETS AND BUYER BEHAVIOR

dominated the others on all of the criteria, we could predict that Linda would choose
it. But her choice set consists of brands that vary in their appeal. She sees A as having
the best memory capacity, B as having the best graphics capability, C as having the best
size and weight, and D as having the best price.
Like most buyers, Linda is considering several attributes in her purchase decision,and she gives each a particular weight. She has assigned 40 percent of the importanceto the computer’s memory capacity, 30 percent to its graphics capability, 20 percent to
its size and weight, and 10 percent to its price. To ﬁnd Linda’s perceived value for eachcomputer, we multiply her weights by the scores indicating her beliefs about each computer’s attributes. So for computer A, if she assigns a score of 10 for memory capacity, 8
for graphics capability, 6 for size and weight, and 4 for price, the overall score would be:
0.4 (10) ⫹ 0.3 (8) ⫹ 0.2 (6) ⫹ 0.1 (4) ⫽ 8
Calculating the scores for all of the other computers that Linda is evaluating
would show which one has the highest perceived value.29 This is critical, because amanufacturer who knows how buyers evaluate alternatives and form preferences cantake steps to influence buyer decisions. In the case of computers, a manufacturer
might redesign the computer (a technique called real repositioning), alter consumer
beliefs about the brand (psychological repositioning), alter consumer beliefs about competitors’ brands (competitive depositioning), alter the importance weights (to persuadebuyers to attach more importance to the attributes in which the brand excels), callattention to neglected attributes (such as styling), shift the buyer’s ideals (to persuadebuyers to change ideal levels on one or more attributes).30
Stage 4: 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. However,two factors can intervene between the purchase intention and the purchase decision.31
The ﬁrst factor is the attitudes of others. The extent to which another person’s attitude reduces one’s preferred alternative depends on two things: (1) the intensity ofthe other person’s negative attitude toward the consumer’s preferred alternative, and(2) the consumer’s motivation to comply with the other person’s wishes.32 The inﬂuence of others becomes even more complex when several people close to the buyer
hold contradictory opinions and the buyer would like to please them all.
The second factor is unanticipated situational factors that may erupt to change thepurchase intention. A consumer could lose his job, some other purchase might
become more urgent, or a store salesperson may turn him or her off, which is why
preferences and even purchase intentions are not completely reliable predictors ofpurchase behavior.
Just as important, a consumer’s decision to modify, postpone, or avoid a purchasedecision is heavily inﬂuenced by perceived risk.33 The amount of perceived risk varies withthe amount of money at stake, the amount of attribute uncertainty, and the amount ofconsumer self-conﬁdence. Consumers develop routines for reducing risk, such as decision avoidance, information gathering from friends, and preference for national brandnames and warranties. Smart marketers study the factors that provoke a feeling of risk inconsumers and then provide information and support to reduce the perceived risk.
Stage 5: Postpurchase Behavior
After purchasing the product, the consumer moves into the final stage of the consumer buying process, in which he or she will experience some level of satisfaction orThe Consumer Buying Decision Process

dissatisfaction. This is why the marketer’s job does not end when the product isbought. In particular, marketers must monitor postpurchase satisfaction, postpurchase actions, and postpurchase product uses.
Postpurchase Satisfaction The buyer’s satisfaction with a purchase is a function of thecloseness between the buyer’s expectations and the product’s perceived performance.34 If performance falls short of expectations, the customer is disappointed; if itmeets expectations, the customer is satisﬁed; if it exceeds expectations, the customer isdelighted. These feelings of satisfaction inﬂuence whether the customer buys the product again and talks favorably or unfavorably about the product to others.
The importance of postpurchase satisfaction suggests that product claims must
truthfully represent the product’s likely performance. Some sellers might even understate performance levels so that consumers experience higher-than-expected satisfaction with the product.
Postpurchase Actions The consumer’s satisfaction or dissatisfaction with the productafter purchase will inﬂuence subsequent behavior. Satisﬁed consumers will be more
likely to purchase the product again. This has been conﬁrmed by the data on automobile brand choice, which show a high correlation between satisfaction with the last
brand bought and intention to rebuy the brand. One survey showed that 75 percent of
Toyota buyers were highly satisfied and about 75 percent intended to buy a Toyota
again; 35 percent of Chevrolet buyers were highly satisfied and about 35 percent
intended to buy a Chevrolet again. Satisﬁed customers also tend to say good things
about the brand to others, which is why many marketers say: “Our best advertisement
is a satisﬁed customer.”35
Dissatisﬁed consumers, on the other hand, may abandon or return the product;seek information that conﬁrms its high value; take public action by complaining to thecompany, going to a lawyer, or complaining to government agencies and other groups;
or take private actions such as not buying the product or warning friends.36 In thesecases, the seller has done a poor job of satisfying the customer.37
Marketers can use postpurchase communications to buyers as a way to reduce
product returns and order cancellations.38 Computer companies, for example, mighttake a number of actions, including sending e-mail messages to new buyers congratulating them on having selected a ﬁne computer, placing ads showing satisﬁed brandowners, soliciting customer suggestions for improvements, and providing channels for
speedy resolution of customer complaints.
Postpurchase Use and Disposal Marketers should also monitor how buyers use anddispose of the product after purchase. The various options that are open to consumers
are shown in Figure 3-4. If consumers store the product and never use it, the productis probably not very satisfying, and word-of-mouth will not be strong. If they sell ortrade the product, new-product sales will be depressed.
Consumers sometimes ﬁnd new uses for a product, as Avon discovered when its
customers talked about Skin-So-Soft bath oil and moisturizer as an insect repellant.
This prompted Avon to seek and receive Environmental Protection Agency approvalso it could officially tout Skin-So-Soft as a triple-action product that provides insect
repellent, waterproof sunscreen, and moisturizers.39
As Figure 3-4 indicates, getting rid of the product permanently leads to a new setof options. If consumers throw the product away, the marketer needs to consider how
they dispose of it, especially if it can hurt the environment. For example, increased
public awareness of recycling and ecological concerns as well as consumer complaints
about having to throw away beautiful bottles led French perfume maker Rochas to

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CHAPTER 5 ANALYZING CONSUMER MARKETS AND BUYER BEHAVIOR

Figure 3-4 How Consumers Use or Dispose of Products
think about introducing a new, reﬁllable bottle fragrance line. This is a more creative,
satisfying response to an element that could potentially cause dissatisfaction among
buyers.
Just as firms that target consumers must understand how and why consumers
buy, those that target businesses and other organizations must be aware of the differences between consumer and business buying behaviors and the way that businesses
make buying decisions. These topics are covered in the next chapter.

EXECUTIVE SUMMARY
Before developing their marketing plans, marketers need to use both rigorous scientiﬁc procedures and more intuitive methods to study consumer behavior, which is inﬂuenced by four factors: cultural (culture, subculture, and social class), social (referencegroups, family, and social roles and statuses), personal (age, stage in the life cycle, occupation, economic circumstances, lifestyle, personality, and self-concept), and psychological (motivation, perception, learning, beliefs, and attitudes). Research into all ofthese factors can provide clues as to how to reach and serve consumers more effectively.
To understand how consumers actually make their buying decisions, marketersmust identify who makes and inﬂuences the buying decision. People can be initiators,
inﬂuencers, deciders, buyers, or users, and different marketing campaigns might betargeted to each type of person. Marketers must also examine buyers’ levels of involvement and the number of brands available to determine whether consumers are engaging in complex buying behavior, dissonance-reducing buying behavior, habitual buying behavior, or variety-seeking buying behavior.
The ﬁve-stage consumer buying process consists of problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. The marketer’s job is to understand the buyer’s behavior at each stage and what

Notesinfluences are operating. The attitudes of others, unanticipated situational factors,
and perceived risk may all affect the decision to buy, as will consumers’ levels of postpurchase satisfaction, the company’s postpurchase actions, and consumers’ postpurchase use and disposal of the product. Satisﬁed customers will continue to purchase;dissatisfied customers will stop purchasing the product and are likely to spread theword among their friends. For this reason, smart companies work to ensure customer
satisfaction in every stage of the buying process.

NOTES
1. Tobi Elkin, “Product Pampering,” Brandweek, June 16, 1997, pp. 38–40; Tim Stevens,“Lights, Camera, Innovation!” Industry Week, July 19, 1999, www.industryweek.com; Rekha
Balu, “Whirlpool Gets Real with Customers,” Fast Company, December 1999, pp. 74, 76.
2. See Leon G. Schiffman and Leslie Lazar Kanuk, Consumer Behavior, 7th ed. (Upper Saddle
River, NJ: Prentice-Hall, 2000).
3. Carole Radice, “Hispanic Consumers: Understanding a Changing Market,” Progressive Grocer,
February 1997, pp. 109–14; Dana Canedy, “The Courtship of Black Consumers,” New YorkTimes, August 11, 1998, p. D1; Sharon Fairley, George P. Moschis, Herbert M. Myers, andArnold Thiesfeldt, “Senior Smarts: The Experts Sound Off,” Brandweek, August 4, 1997,
pp. 24–25; Candace Corlett, “Senior Theses,” Brandweek, August 4, 1997, pp. 22–23.
4. Ibid.
5. See Rosann L. Spiro, “Persuasion in Family Decision Making,” Journal of Consumer Research,
March 1983, pp. 393–402; Lawrence H. Wortzel, “Marital Roles and Typologies as
Predictors of Purchase Decision Making for Everyday Household Products: Suggestions for
Research,” in Advances in Consumer Research, Vol. 7, ed. Jerry C. Olson (Chicago: American
Marketing Association, 1989), pp. 212–15; David J. Burns, “Husband-Wife Innovative
Consumer Decision Making: Exploring the Effect of Family Power,” Psychology & Marketing,
May–June 1992, pp. 175–89; Robert Boutilier, “Pulling the Family’s Strings,” American
Demographics, August 1993, pp. 44–48. For cross-cultural comparisons of husband–wifebuying roles, see John B. Ford, Michael S. LaTour, and Tony L. Henthorne, “Perception of
Marital Roles in Purchase-Decision Processes: A Cross-Cultural Study,” Journal of the
Academy of Marketing Science, Spring 1995, pp. 120–31.
6. George Moschis, “The Role of Family Communication in Consumer Socialization ofChildren and Adolescents,” Journal of Consumer Research, March 1985, pp. 898–913.
7. Marilyn Lavin, “Husband-Dominant, Wife-Dominant, Joint: A Shopping Typology for Baby
Boom Couples?” Journal of Consumer Marketing 10, no. 3 (1993): 33–42.
8. James U. McNeal, “Tapping the Three Kids’ Markets,” American Demographics, April 1998,
pp. 37–41.
9. Rob Yoegel, “Reaching Youth on the Web,” Target Marketing, November 1997, pp. 38–41.
10. See Lawrence Lepisto, “A Life Span Perspective of Consumer Behavior,” in Advances inConsumer Research, Vol. 12, ed. Elizabeth Hirshman and Morris Holbrook (Provo, UT:
Association for Consumer Research, 1985), p. 47. Also see Gail Sheehy, New Passages:
Mapping Your Life Across Time (New York: Random House, 1995).
11. Arnold Mitchell, The Nine American Lifestyles (New York: Warner Books), pp. viii–x, 25–31;
Personal communication from the VALS™ Program, Business Intelligence Center, SRI
Consulting, Menlo Park, CA, February 1, 1996. See also Wagner A. Kamakura and Michel
Wedel, “Lifestyle Segmentation with Tailored Interviewing,” Journal of Marketing Research 32,
no. 3 (August 1995): 308–17.
12. Paul C. Judge, “Are Tech Buyers Different?” Business Week, January 26, 1998, pp. 64–65, 68;
Andy Hines, “Do you Know Your Technology Type?” The Futurist, September–October

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1997, pp. 10–11; Rebecca Piirto Heath, “The Frontiers of Psychographics,” American
Demographics, July 1996, pp. 38–43; information on iVALS from www.future.sri.com(September 1999).
13. Stuart Elliott, “Sampling Tastes of a Changing Russia,” New York Times, April 1, 1992,
pp. D1, D19.
14. See Harold H. Kassarjian and Mary Jane Sheffet, “Personality and Consumer Behavior: An
Update,” in Perspectives in Consumer Behavior, ed. Harold H. Kassarjian and Thomas S.
Robertson (Glenview, IL: Scott, Foresman, 1981), pp. 160–80.
15. See M. Joseph Sirgy, “Self-Concept in Consumer Behavior: A Critical Review,” Journal ofConsumer Research, December 1982, pp. 287–300.
16. See Thomas J. Reynolds and Jonathan Gutman, “Laddering Theory, Method, Analysis, andInterpretation,” Journal of Advertising Research, February–March 1988, pp. 11–34.
17. Abraham Maslow, Motivation and Personality (New York: Harper & Row, 1954), pp. 80–106.
18. See Frederick Herzberg, Work and the Nature of Man (Cleveland, OH: William Collins,1966); and Henk Thierry and Agnes M. Koopman-Iwerna, “Motivation and Satisfaction,” in
Handbook of Work and Organizational Psychology, ed. P. J. Drenth (New York: John Wiley,
1984), pp. 141–42.
19. Bernard Berelson and Gary A. Steiner, Human Behavior: An Inventory of Scientiﬁc Findings(New York: Harcourt Brace Jovanovich, 1964), p. 88.
20. See Alice M. Tybout, Bobby J. Calder, and Brian Sternthal, “Using Information Processing
Theory to Design Marketing Strategies,” Journal of Marketing Research, February 1981,
pp. 73–79.
21. “International: Old Wine in New Bottles,” The Economist, February 21, 1998, p. 45.
22. See David Krech, Richard S. Crutchﬁeld, and Egerton L. Ballachey, Individual in Society(New York: McGraw-Hill, 1962), ch. 2.
23. Melanie Wells, “Got a Milk Mustache? Campaign’s Popularity Staying Fresh,” USA Today
Ad Track, July 13, 1999, www.usatoday.com; Jill Venter, “Milk Mustache Campaign Is a Hitwith Teens,” St. Louis Post-Dispatch, April 1, 1998, p. E1; Dave Fusaro, “The Milk
Mustache,” Dairy Foods, April 1997, p. 75; Judann Pollack, “Milk: Kurt Graetzer,”
Advertising Age, June 30, 1997, p. S1.
24. See Henry Assael, Consumer Behavior and Marketing Action (Boston: Kent, 1987), ch. 4.
25. Marketing scholars have developed several models of the consumer buying process. See
John A. Howard and Jagdish N. Sheth, The Theory of Buyer Behavior (New York: Wiley, 1969);
and James F. Engel, Roger D. Blackwell, and Paul W. Miniard, Consumer Behavior, 8th ed.
(Fort Worth, TX: Dryden, 1994).
26. See William P. Putsis, Jr. and Narasimhan Srinivasan, “Buying or Just Browsing? The
Duration of Purchase Deliberation,” Journal of Marketing Research, August 1994,
pp. 393–402.
27. See Chem L. Narayana and Rom J. Markin, “Consumer Behavior and Product
Performance: An Alternative Conceptualization,” Journal of Marketing, October 1975,
pp. 1–6. See also Wayne S. DeSarbo and Kamel Jedidi, “The Spatial Representation of
Heterogeneous Consideration Sets,” Marketing Science 14, no. 3, pt. 2 (1995), 326–42; andLee G. Cooper and Akihiro Inoue, “Building Market Structures from Consumer
Preferences,” Journal of Marketing Research 33, no. 3 (August 1996), 293–306.
28. See Paul E. Green and Yoram Wind, Multiattribute Decisions in Marketing: A Measurement
Approach (Hinsdale, IL: Dryden, 1973), ch. 2; Leigh McAlister, “Choosing Multiple Items
from a Product Class,” Journal of Consumer Research, December 1979, pp. 213–24.
29. This expectancy-value model was developed by Martin Fishbein, “Attitudes and Predictionof Behavior,” in Readings in Attitude Theory and Measurement, ed. Martin Fishbein (New York:John Wiley, 1967), pp. 477–92. For a critical review, see Paul W. Miniard and Joel B.

NotesCohen, “An Examination of the Fishbein-Ajzen Behavioral-Intentions Model’s Concepts
and Measures,” Journal of Experimental Social Psychology, May 1981, pp. 309–39.
30. See Harper W. Boyd Jr., Michael L. Ray, and Edward C. Strong, “An Attitudinal Framework
for Advertising Strategy,” Journal of Marketing, April 1972, pp. 27–33.
31. See Jagdish N. Sheth, “An Investigation of Relationships among Evaluative Beliefs, Affect,
Behavioral Intention, and Behavior,” in Consumer Behavior: Theory and Application, eds.
John U. Farley, John A. Howard, and L. Winston Ring (Boston: Allyn & Bacon, 1974),
pp. 89–114.
32. See Fishbein, “Attitudes and Prediction of Behavior.”
33. See Raymond A. Bauer, “Consumer Behavior as Risk Taking,” in Risk Taking and Information
Handling in Consumer Behavior, ed. Donald F. Cox (Boston: Division of Research, Harvard
Business School, 1967); and James W. Taylor, “The Role of Risk in Consumer Behavior,”
Journal of Marketing, April 1974, pp. 54–60.
34. See Priscilla A. La Barbera and David Mazursky, “A Longitudinal Assessment of Consumer
Satisfaction/Dissatisfaction: The Dynamic Aspect of the Cognitive Process,” Journal ofMarketing Research, November 1983, pp. 393–404.
35. See Barry L. Bayus, “Word of Mouth: The Indirect Effects of Marketing Efforts,” Journal ofAdvertising Research, June-July 1985, pp. 31–39.
36. See Albert O. Hirschman, Exit, Voice, and Loyalty (Cambridge, MA: Harvard University
Press, 1970).
37. See Mary C. Gilly and Richard W. Hansen, “Consumer Complaint Handling as a Strategic
Marketing Tool,” Journal of Consumer Marketing, Fall 1985, pp. 5–16.
38. See James H. Donnelly Jr. and John M. Ivancevich, “Post-Purchase Reinforcement andBack-Out Behavior,” Journal of Marketing Research, August 1970, pp. 399–400.
39. Pam Weisz, “Avon’s Skin-So-Soft Bugs Out,” Brandweek, June 6, 1994, p. 4.

105

Analyzing
Business Markets
and Buyer
Behavior
We will address the following questions:■ What is the business market, and how does it differ from the consumer market?
■ How do institutions and government agencies do their buying?
■ What buying situations do organizational buyers face?
■ Who participates in business buying, and what are the inﬂuences on business buying
decisions?
■ How do business buyers make their decisions?

Business organizations do not only sell. They also buy vast quantities of raw materials, manufactured components, plants and equipment, supplies, and business services. Over 13 million business, institutional, and government organizations in the
United States alone—plus millions more in other countries—represent a huge, lucrative buying market for goods and services purchased from both domestic and international suppliers.
Business buyers purchase goods and services to achieve specific goals, such as
making money, reducing operating costs, and satisfying social or legal obligations. For
example, a mini-mill steelmaker like Nucor will add another plant if it sees a chance toboost proﬁts, upgrade its computerized accounting system to reduce operating costs,
and add pollution-control equipment to meet legal requirements.
In principle, a business buyer seeks to obtain for his or her organization the best
package of economic, technical, service, and social benefits in relation to a market
offering’s costs. In reality, a business buyer (like a consumer) will have more incentive
to choose the offering with the highest ratio of perceived beneﬁts to costs—that is, thehighest perceived value. The marketer must therefore provide an offering that delivers superior customer value to the targeted business buyers and be familiar with theunderlying dynamics and process of business buying.

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WHAT IS ORGANIZATIONAL BUYING?
Organizational buying, according to Webster and Wind, is the decision-making
process by which formal organizations establish the need for purchased products andservices and identify, evaluate, and choose among alternative brands and suppliers.1
Just as no two consumers buy in exactly the same way, no two organizations buy inexactly the same way. Therefore, as they do for the consumer market, business sellers
work hard to distinguish clusters of customers that buy in similar ways and then create
suitable marketing strategies for reaching those targeted business market segments.
However, the business market differs from the consumer market in a number of signiﬁcant ways.

The Business Market Versus the Consumer Market
The business market consists of all of the organizations that acquire goods and services
used in the production of other products or services that are sold, rented, or supplied
to other customers. 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; andservices. U.S. marketers can learn more about specific industries by consulting theNorth American Industry Classiﬁcation System (NAICS), a categorized listing of all of
the industries operating in Canada, the United States, and Mexico.
In general, more dollars and items are involved in sales to business buyers thanto 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, whosell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Along the way, each party in the supply chain also has to buy many othergoods and services, which means that every business seller is a business buyer, as well.
From the number and size of buyers to geographical location, demand, and buying behaviors, business markets have a number of characteristics that contrast sharply
with those of consumer markets. These characteristics are described in Table 3.3.
Understanding the impact of these characteristics can help a supplier target
business buyers more effectively. Pittsburgh-based Cutler-Hammer, for example, sells
circuit breakers, motor starters, and other electrical equipment to industrial manufacturers such as Ford Motor. As its product line grew larger and more complex, C-H
developed “pods” of salespeople that focus on a particular geographical region, industry, or market concentration. Each individual brings a degree of expertise about aproduct or service that the other members of the team can take to the customer. This
allows the salespeople to leverage the knowledge of co-workers to sell to increasingly
sophisticated buying teams, instead of working in isolation.2

Specialized Organizational Markets
The overall business market includes institutional and government organizations inaddition to proﬁt-seeking companies. However, the buying goals, needs, and methodsof these two specialized organizational markets are generally different from those ofbusinesses, something ﬁrms must keep in mind when planning their business marketing strategies.
The Institutional Market
The institutional market consists of schools, hospitals, nursing homes, prisons, andother institutions that provide goods and services to people in their care. Many ofTable 3.3 Characteristics of Business Markets
Characteristic Description

ExampleFewer buyers

Business marketers normally deal
with far fewer buyers than do
consumer marketers.

Goodyear Tire Company aims to getorders from buyers for the Big Three
U.S. automakers (General Motors,
Ford, and Daimler-Chrysler).

Larger buyers

Buyers for a few large ﬁrms do mostof the purchasing in many industries.

Major companies are big customers
in industries such as aircraft enginesand defense weapons.

Close suppliercustomer
relationshipWith the smaller customer base andthe importance and power of thelarger customers, suppliers are
frequently required to customize
offerings, practices, and performance
to meet the needs of individual
customers.

Tooling supplier StillwaterTechnologies shares ofﬁce andmanufacturing space with key
customer Motoman, a supplier ofindustrial robots, to minimize delivery
distances and enhance their symbiotic
working relationship.1

Geographicallyconcentrated
buyersMore than half of U.S. business buyers
are concentrated in seven states:
New York, California, Pennsylvania,
Illinois, Ohio, New Jersey, andMichigan, which helps to reduce
selling costs.

Because the Big Three U.S.
automakers have their U.S.
headquarters in the Detroit area,industry suppliers head there on sales
calls.

DeriveddemandDemand for business goods is
ultimately derived from demand for
consumer goods, so businessmarketers must monitor the buying
patterns of ultimate consumers.

The Big Three U.S. automakers areseeing higher demand for steel-bar
products, mostly derived fromconsumers’ demand for minivans andother light trucks, which consume far
more steel than cars.

Inelastic
demandTotal demand for many businessgoods and services is inelastic andnot much affected by price changes,
especially in the short run, because
producers cannot make quick
production changes.

Shoe manufacturers will not buy
much more leather if the price ofleather falls. Nor will they buy muchless leather if the price rises unlessthey can ﬁnd satisfactory substitutes.

Fluctuating
demandDemand for business products tends
to be more volatile than demand for
consumer products.An increase in
consumer demand can lead to amuch larger increase in demand forplant and equipment needed to
produce the additional output.

An increase of only 10% in consumer
demand for computers might result in
a 200% increase in business demand
for related parts, supplies, andservices; a 10% drop in consumer
demand for computers might cause acomplete collapse in business demand.
Continued

109

Table 3.3 Characteristics of Business Markets—Continued
Characteristic Description

ExampleProfessionalpurchasing

Trained purchasing agents follow
organizational purchasing policies,
constraints, and requirements to buy
business products. Many of the buying
instruments—such as proposals andpurchase contracts—are not typicalof consumer buying.

Programs on the Cisco Systems Web
site allow purchasing agents toresearch, select, and price new
networking systems at any hour andobtain speedy online answers about
products, orders, and service.2

Multiple buying
inﬂuences

More people typically inﬂuencebusiness buying decisions. Buying
committees are common in thepurchase of major goods; marketers
have to send well-trained sales reps
and often sales teams to deal withthese well-trained buyers.

Metal supplier Phelps Dodge uses an“account management approach” toreach all the key people who
inﬂuence business buying decisions incustomer organizations.3

Multiple sales
callsWith more people involved in theprocess, it takes multiple sales calls to
win most business orders, and thesales cycle can take years.

In the case of major capital
equipment sales, customers may takemultiple attempts to fund a project,
and the sales cycle—between quoting
a job and delivering the product—isoften measured in years.4

Directpurchasing

Business buyers often buy directlyfrom manufacturers rather than
through intermediaries, especiallyitems that are technically complex or
expensive.

Southwest Airlines,Air Madagascar,and other airlines around the world
buy airplanes directly from Boeing.

Reciprocity

Business buyers often select suppliers
who also buy from them.

A paper manufacturer buys chemicals
from a chemical company that buys aconsiderable amount of its paper.

Leasing

Many industrial buyers lease rather
than buy heavy equipment toconserve capital, get the latest
products, receive better service, andgain tax advantages.The lessor often
makes more proﬁt and sells tocustomers who could not afford
outright purchase.

General Electric leases truck and car
ﬂeets, aircraft, commercial trailers,railcars, and other major equipment
products to business buyers.

Sources for examples: 1John H. Sheridan, “An Alliance Built on Trust,” Industry Week, March 17, 1997,
pp. 66–70; 2Andy Reinhardt, “Meet Mr. Internet,” Business Week, September 13, 1999, pp. 128–40; 3Minda
Zetlin,“It’s All the Same to Me,” Sales & Marketing Management, February 1994, pp. 71–75; 4Michael Collins,“Breaking into the Big Leagues,” American Demographics, January 1996, p. 24.

110

What Is Organizational Buying?

these organizations have low budgets and captive clienteles. For example, hospitals
have to decide what quality of food to buy for their patients. The buying objective here
is not proﬁt, because the food is provided to the patients 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 has to search for institutional food vendors whose quality meets or exceeds acertain minimum standard and whose prices are low. Knowing this, many food vendors set up a separate division to respond to the special needs of institutional buyers.
Thus, Heinz, for example, will produce, package, and price its ketchup differently tomeet the different requirements of hospitals, colleges, and prisons.
Being a supplier of choice for the nation’s schools or hospitals means big businessfor marketers such as Allegiance Healthcare. This ﬁrm has become the largest U.S. supplier of medical, surgical, and laboratory products. Through its stockless inventory program, known as “ValueLink,” Allegiance delivers ordered products to more than 150
hospitals when and where staff members need them. Under the old system, the mostneeded items were inevitably in short supply, while the rarely used items were available
in great number. By using Allegiance’s ValueLink system, hospitals save an average of$500,000 or more yearly and gain faster, easier access to the items they need.3
The Government Market
In most countries, government organizations are a major buyer of goods and services.
The U.S. government, for example, buys goods and services valued at $200 billion,
making it the largest customer in the world. The number of individual purchases isequally staggering: Over 20 million individual contract actions are processed every
year. Although the cost of most items purchased is between $2,500 and $25,000, thegovernment also makes purchases of $25,000 and up, sometimes well into the millionsof dollars.
Government organizations typically require suppliers to submit bids. Normally,
they award the contract to the lowest bidder, although they sometimes take into
account a supplier’s superior quality or reputation for completing contracts on time.
Because their spending decisions are subject to public review, government organizations require considerable documentation from suppliers, who often complain about
excessive paperwork, bureaucracy, regulations, decision-making delays, and shifts inprocurement personnel.
Consider the experience of ADI Technology Corporation. The U.S. government
has always been ADI’s most important client, accounting for about 90 percent of its
nearly $6 million in annual revenues. Yet managers at this professional services company often shake their heads at all of the work that goes into winning the coveted government contracts. A comprehensive bid proposal will run from 500 to 700 pages, and
ADI’s president estimates that the ﬁrm has spent as much as $20,000, mostly in worker
hours, to prepare a single bid proposal.
Fortunately for businesses of all sizes, the federal government has been putting
reforms in place to streamline buying procedures. Now the government is moving allpurchasing on-line, with the use of Web-based technologies such as digital signatures.4
Several federal agencies that act as purchasing agents for the rest of the government
have already launched Web-based catalogs, allowing defense and civilian agencies tobuy everything from medical and ofﬁce supplies to clothing through on-line purchasing. State and local governments are following suit: The city of Fort Collins, Colorado,for example, announces its buying needs, posts requests for proposals, and offers
downloads of standard supplier documents on its Web site. Internet-based purchasing
has enabled Fort Collins to more efficiently buy computers, flooring, and an everwidening range of goods for city use.

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A number of major companies, such as Gateway, Rockwell, Kodak, andGoodyear, make a special effort to anticipate the needs and projects of the government market. In this market, success comes to ﬁrms that participate in the productspeciﬁcation phase, gather competitive intelligence, prepare bids carefully, and produce strong communications to enhance their companies’ reputations.

Business Buying Situations
Business buyers in companies, institutions, and government organizations face manydecisions in the course of making a purchase. The number of decisions depends on
the type of buying situation. Robinson and others distinguish three types of buying situations: the straight rebuy, the modiﬁed rebuy, and the new task.5➤

Straight rebuy: The straight rebuy is a buying situation in which the purchasing
department reorders on a routine basis (e.g., ofﬁce supplies, bulk chemicals). The
buyer chooses from suppliers on an “approved list.” These suppliers make an effort
to maintain product and service quality. They often propose automatic reorderingsystems to help purchasing agents save time. The “out-suppliers” attempt to offer
something new or to exploit dissatisfaction with a current supplier. Out-suppliers try
to get a small order and then enlarge their purchase share over time.

➤

Modiﬁed rebuy: The modiﬁed rebuy is a situation in which the buyer wants to modify
product speciﬁcations, prices, delivery requirements, or other terms. The modiﬁed
rebuy usually involves additional decision participants on both sides. The insuppliers become nervous and have to protect the account; the out-suppliers see anopportunity to gain some business.

➤

New task: The new task is a buying situation in which a purchaser buys a product orservice for the ﬁrst time (e.g., ofﬁce building, new security system). The greater thecost or risk, the larger the number of decision participants and the greater theirinformation gathering—and therefore the longer the time to decision completion.6

New-task buying passes through several stages: awareness, interest, evaluation,
trial, and adoption.7 Communication tools’ effectiveness varies at each stage. Massmedia are most important during the initial awareness stage, salespeople have theirgreatest impact at the interest stage, and technical sources are the most important during the evaluation stage.
The business buyer makes the fewest decisions in the straight-rebuy situation andthe most in the new-task situation. In the new-task situation, the buyer has to 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 can vary. The new-task situation is, therefore, the business marketer’s greatest opportunity and challenge. For this reason, marketers should try to reach as many
key buying influencers as possible and provide helpful information and assistance.
Because of the complicated selling involved in new-task situations, many companies
use a missionary sales force consisting of their best salespeople.

Systems Buying and Selling
Many business buyers prefer to buy a total solution to their problem from one seller.
This practice, called systems buying, originated with government purchases of major
weapons and communication systems. The government solicited bids from prime contractors; the winning contractor then bid out and assembled the system from subcomponents purchased from other contractors. Thus, the prime contractor was providing

Participants in the Business Buying Processa “turnkey solution” that allowed the buyer to, in effect, turn one key and get the job
done.
Sellers have increasingly recognized that buyers like to purchase in this way, andmany have adopted systems selling as a marketing tool. Systems selling can take different forms. For example, many auto parts manufacturers now sell whole systems, suchas the seating system, the braking system, or the door system. A variant on systems selling is systems contracting, in which a single supply source provides the buyer with all
required MRO supplies (maintenance, repair, and operating supplies). This lowers thebuyer’s costs because the seller maintains the inventory, less time is spent on supplierselection, and the buyer enjoys price protection during the life of the contract. The
seller benefits from lower operating costs because of steady demand and reduced
paperwork.
Systems selling is a key industrial marketing strategy in bidding to build largescale industrial projects such as dams, steel factories, and pipelines. Project engineering ﬁrms must compete on price, quality, reliability, and other attributes to win thesecontracts. For example, when the Indonesian government requested bids to build acement factory near Jakarta, a U.S. ﬁrm made a proposal that included choosing thesite, designing the cement factory, hiring the construction crews, assembling the materials and equipment, and turning over the ﬁnished factory to the Indonesian government. The proposal of a Japanese bidder included all of these services, plus hiring andtraining the factory workers, exporting the cement, and using the cement to build
roads and ofﬁce buildings around Jakarta. Although the Japanese proposal was morecostly, it won. This is true system selling: The ﬁrm took the broadest view of its customer’s needs and positioned itself as an economic development agency.

PARTICIPANTS IN THE BUSINESS BUYING PROCESS
Who does the buying of the trillions of dollars’ worth of goods and services needed bybusiness organizations? Purchasing agents are inﬂuential in straight-rebuy and modiﬁedrebuy situations, whereas other department personnel are more inﬂuential in new-buy
situations. Engineering personnel carry the most inﬂuence in selecting product components, and purchasing agents dominate in selecting suppliers.8 These are just some of thepeople who may be part of the buying center.

The Buying Center
Webster and Wind call the decision-making unit of a buying organization the buying
center. The buying center is composed of “all those individuals and groups who participate in the purchasing decision-making process, who share some common goals andthe risks arising from the decisions.”9 The buying center includes organizational members who play any of seven roles in the purchase decision process:10➤

Initiators: People who request that something be purchased, including users orothers.

➤Users: Those who will use the product or service; often, users initiate the buying
proposal and help deﬁne product requirements.

➤

Inﬂuencers: People who inﬂuence the buying decision, including technicalpersonnel. They often help deﬁne speciﬁcations and also provide information forevaluating alternatives.

➤

Deciders: Those who decide on product requirements or on suppliers.

➤

Approvers: People who authorize the proposed actions of deciders or buyers.

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CHAPTER 6 ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR➤

Buyers: People who have formal authority to select the supplier and arrange thepurchase terms, including high-level managers. Buyers may help shape productspeciﬁcations, but their major role is selecting vendors and negotiating.

➤

Gatekeepers: People who have the power to prevent sellers or information fromreaching members of the buying center; examples are purchasing agents,
receptionists, and telephone operators.

There is also a trend toward team-based buying. In one survey, 87 percent of thepurchasing executives at Fortune 1000 companies see more use of teams drawn fromdifferent departments and functions to make buying decisions.11 This trend is leading
to more team selling, as shown in the earlier Cutler-Hammer example.
To target their efforts properly, business marketers have to ﬁgure out: Who are
the major decision participants? What decisions do they inﬂuence? What is their levelof influence? What evaluation criteria do they use? When a buying center includes
many participants, the business marketer will not have the time or resources to reach
all of them. Small sellers concentrate on reaching the key buying inﬂuencers. Larger sellers go for multilevel in-depth selling to reach as many buying-center participants as possible. Their salespeople virtually “live” with their high-volume customers. In general, themost successful companies rely more heavily on communications to reach hidden buying inﬂuences and keep their current customers sold.12
Furthermore, the buying center can be highly dynamic, so business marketersneed to periodically review their assumptions about who is participating. For years,
Kodak sold X-ray ﬁlm to hospital lab technicians, not noticing that buying decisions
were increasingly being made by professional administrators. As sales declined, Kodak
was ﬁnally forced to revise its market targeting strategy.

Major Inﬂuences on Business Buying
Business buyers respond to many inﬂuences when they make their decisions. Whensupplier offerings are similar, buyers can satisfy the purchasing requirements with any
supplier, and they place more weight on the personal treatment they receive. Whensupplier offerings differ substantially, buyers are more accountable for their choices
and pay more attention to economic factors. Business buyers respond to four main
influences: environmental, organizational, interpersonal, and individual13 (Figure3-5); culture is also a factor.
Environmental Factors
Within the macroenvironment, business buyers pay close attention to numerous economic factors, including interest rates and levels of production, investment, and consumer spending. In a recession, business buyers reduce their investment in plant,
equipment, and inventories. Business marketers can do little to stimulate total
demand in recessionary periods; they can only ﬁght harder to increase or maintaintheir share of demand.
Companies that fear materials shortages often buy and hold large inventories
and sign long-term contracts with suppliers to ensure steady availability. In fact,
DuPont, Ford, and other major companies regard long-term supply planning as a major
responsibility of their purchasing managers.
Business buyers also actively monitor technological, political-regulatory, andcompetitive developments. For example, environmental concerns can cause changes
in business buyer behavior. A printing ﬁrm might favor suppliers that carry recycled
papers or use environmentally safe ink. One buyer claimed, “We push suppliers withtechnical expertise to be more socially conscious.”Participants in the Business Buying Process

Figure 3-5 Major Inﬂuences on Business Buying Behavior
Organizational Factors
Every organization has speciﬁc purchasing objectives, policies, procedures, organizational structures, and systems. Business marketers need to be aware of the following
organizational trends in purchasing:➤Purchasing department upgrading. Spurred by competitive pressures, companies are
stafﬁng their purchasing departments with MBAs who aspire to be CEOs—likeThomas Stallkamp, DaimlerChrysler’s recently retired president. In his earlier role
as executive vice president of procurement and supply, Stallkamp was highly
successful in cost-cutting and in streamlining manufacturing processes.14 These new,more strategically positioned “procurement departments” seek out the best value
from fewer and better suppliers. At Caterpillar and other multinationals, purchasing
departments have been elevated into “strategic supply departments” withresponsibility for global sourcing and partnering. In response to this trend, businessmarketers must correspondingly upgrade their sales personnel to match the higher
caliber of the business buyers.

➤

Cross-functional roles. In a recent survey, most purchasing professionals described
their job as more strategic, technical, team-oriented, and involving more
responsibility than ever before. “Purchasing is doing more cross-functional workthan it did in the past,” says David Duprey, a buyer for Anaren Microwave Inc.,
which makes microwave-signal processing devices for communication and defense.
Sixty-one percent of buyers surveyed said the buying group was more involved in
new-product design and development than it was 5 years ago. More than half of thebuyers now participate in cross-functional teams, with suppliers well represented.15➤

Centralized purchasing. In multidivisional companies, most purchasing is carried out
by separate divisions because of their differing needs. Some companies, however,
have recentralized their purchasing, identifying materials purchased by several

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divisions and buying them centrally to gain more purchasing clout. Individual
divisions can buy from other sources if they can get a better deal, but centralizedpurchasing usually produces substantial savings. For the business marketer, thismeans dealing with fewer and higher-level buyers, and using a national accountsales group to deal with large corporate buyers.
➤

Decentralized purchasing of small-ticket items. More companies are decentralizing
selected purchasing operations by empowering employees to purchase small-ticket
items such as special binders and coffee makers. This has come about through theavailability of corporate purchasing cards issued by credit-card ﬁrms. Companies
distribute the cards to supervisors, clerks, and secretaries; the cards incorporate
codes that set credit limits and restrict usage. National Semiconductor’s purchasing
chief says these cards have cut processing costs from $30 an order to a few cents.
“Now buyers and suppliers can spend less time on paperwork, so purchasing
departments have more time for building partnerships.”16➤Internet purchasing. By 2003, business-to-business buying on the Internet is projected
to reach $1 trillion per year (compared with a projected $108 billion for consumer
buying).17 The move to Internet purchasing has dramatic and far-reaching
implications. Companies are not only posting their own Web pages to sell tobusiness buyers, they are establishing Intranets for internal communication andextranets to link with regular suppliers and distributors. So far, most businesses areusing extranets to buy MRO supplies. However, a growing number, such as General
Electric, are preparing to buy nearly all supplies on-line to shave transaction andpersonnel costs, reduce time between order and delivery, and consolidatepurchasing. In fact, GE Information Services is a leader in helping GE internalbusiness units and outside companies use the Internet to buy from and sell to otherbusinesses; its Trading Process Network lets companies buy raw materials,
components, and just about anything else with a few clicks of the mouse. Internet
purchasing can help forge closer relations between partners and buyers, and it
levels the playing ﬁeld between large and small suppliers. At the same time, it canpotentially erode supplier-buyer loyalty and open the door to possible security
disasters.18➤

Long-term contracts. Business buyers are increasingly initiating or accepting long-term
contracts with reliable suppliers. For example, General Motors wants to buy fromfewer suppliers who are willing to locate close to its plants and produce high-quality
components. In addition, business marketers are setting up electronic datainterchange (EDI) systems so their customers such as hospitals and bookstores canenter and transmit purchase orders electronically.

➤

Purchasing-performance evaluation and buyers’ professional development. Many companies
have set up incentive systems to reward purchasing managers for good buying
performance, in much the same way that sales personnel receive bonuses for goodselling performance. These systems are leading purchasing managers to increase
their pressure on sellers for the best terms.

➤

Lean production. Many manufacturers have moved toward lean production, whichenables them to produce a more high-quality product at lower cost, in less time,using less labor. Lean production incorporates just-in-time (JIT) production, stricter
quality control, frequent and reliable supply delivery, suppliers locating closer tocustomers, computerized purchasing, stable production schedules made available tosuppliers, and single sourcing with early supplier involvement. JIT II, the next levelof customer-supplier partnerships, focuses on reducing the costs and time involved
in day-to-day purchasing transactions by locating one or more supplier employees at

The Purchasing/Procurement Process
the customer’s site, in the role of buyer-materials planners. Massachusetts’s Bose
Corporation pioneered this arrangement with G&F Industries, its ﬁrst in-plant
supplier. Says Christ Labonte, a G&F manager, “It’s a fresh, nontraditional
agreement based on trust. After people get comfortable in their partnering, they
start turning up rocks they wouldn’t have turned up and revealing causes that weresacred cows.”19Interpersonal Factors
Buying centers usually include several participants with differing interests, authority,
status, empathy, and persuasiveness. The business marketer is not likely to know whatkind of group dynamics take place during the buying decision process. Therefore, successful ﬁrms strive to ﬁnd out as much as possible about individual buying center participants and their interaction and train sales personnel and others from the marketing organization to be more attuned to the inﬂuence of interpersonal factors.
Individual Factors
Each buyer carries personal motivations, perceptions, and preferences, as inﬂuenced
by the buyer’s age, income, education, job position, personality, attitudes toward risk,
and culture. Moreover, buyers deﬁnitely exhibit different buying styles. For example,
some younger, highly educated buyers are expert at conducting rigorous, computerized analyses of competitive proposals before choosing a supplier. Other buyers are“toughies” from the old school and pit competitors against one another.
Understanding these factors can better prepare marketers for dealing with individuals
within the buying center.
Cultural Factors
Savvy marketers carefully study the culture and customs of each country or region
where they want to sell their products, to better understand the cultural factors that
can affect buyers and the buying organization. For example, in Germany, businesspeople prefer to be introduced by their full, correct titles, and they shake hands at boththe beginning and the end of business meetings. As another example, both Korean
and Japanese businesspeople observe Confucian ethics based on respect for authority
and the primacy of the group over the individual.20 Marketers that sell to firms inother nations must be aware of such cultural attitudes and practices, because they permeate business-to-business transactions.

THE PURCHASING/PROCUREMENT PROCESS
Industrial buying passes through eight stages called buyphases, as identified byRobinson and associates in the buygrid framework shown in Table 3.4.21 In modiﬁedrebuy or straight-rebuy situations, some of these stages are compressed or bypassed.
For example, in a straight-rebuy situation, the buyer normally has a favorite supplieror a ranked list of suppliers. Thus, the supplier search and proposal solicitation stages
are skipped. In the sections that follow, we examine each of the eight stages for a typical new-task buying situation.

Stage 1: Problem Recognition
The buying process begins when someone in the company recognizes a problem orneed that can be met by acquiring a good or service. The recognition can be triggeredby internal or external stimuli. Internally, problem recognition commonly occurs
when a ﬁrm decides to develop a new product and needs new equipment and materi-

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Table 3.4 Buygrid Framework: Major Stages (Buyphases) of the Industrial
Buying Process in Relation to Major Buying Situations (Buyclasses)

Buyphases

New
Task

Buyphases
Modiﬁed
Rebuy

Straight
Rebuy

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Maybe
Maybe
Yes
Maybe
Maybe
Maybe
Maybe
Yes

No
No
Yes
No
No
No
No
Yes

1. Problem recognition
2. General need description
3. Product speciﬁcation
4. Supplier search
5. Proposal solicitation
6. Supplier selection
7. Order-routine speciﬁcation
8. Performance review

Source: Adapted from Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying andCreative Marketing (Boston:Allyn & Bacon, 1967), p. 14.

als, when a machine breaks down and requires new parts, when purchased material
turns out to be unsatisfactory, and when a purchasing manager senses an opportunity
to obtain lower prices or better quality. Externally, problem recognition can occur
when a buyer gets new ideas at a trade show, sees a supplier’s ad, or is contacted by asales representative offering a better product or a lower price. For their part, businessmarketers can stimulate problem recognition by direct mail, telemarketing, effective
Internet communications, and calling on prospects.

Stage 2: General Need Description
Once a problem has been recognized, the buyer has to determine the needed item’s
general characteristics and the required quantity. For standard items, this is not a very
involved process. For complex items, the buyer will work with others—engineers,
users, and so on—to deﬁne the needed characteristics. These may include reliability,
durability, price, or other attributes. In this stage, business marketers can assist buyers
by describing how their products would meet such needs.

Stage 3: Product Speciﬁcation
With a general need description in hand, the buying organization can develop theitem’s technical speciﬁcations. Often, the company will assign a product value analysis(PVA) engineering team to the project. Product value analysis is an approach to cost
reduction in which components are carefully studied to determine if they can beredesigned or standardized or made by cheaper methods of production.
The PVA team will examine the high-cost components in a given product,
because 20 percent of the parts usually account for 80 percent of the costs of manufacturing it. The team will also identify overdesigned product components that last
longer than the product itself, then decide on the optimal product characteristics.
Tightly written speciﬁcations will allow the buyer to refuse components that are too
expensive or that fail to meet the speciﬁed standards. Suppliers, too, can use productvalue analysis as a tool for positioning themselves to win an account. By getting in early
and inﬂuencing buyer speciﬁcations, a supplier can signiﬁcantly increase its chancesof being chosen.

The Purchasing/Procurement Process

Stage 4: Supplier Search
The buyer now tries to identify the most appropriate suppliers, by examining trade
directories, doing a computer search, phoning other firms for recommendations,scanning trade advertisements, and attending trade shows. However, these days themost likely place to look is on the Internet. This levels the playing field, because
smaller suppliers have the same advantages as larger ones and can be listed in thesame on-line catalogs for a nominal fee.
One of the more comprehensive, global on-line catalog libraries is being assembled by Worldwide Internet Solutions Network Inc, better known as WIZ-net (www.wiznet.net). The ﬁrm’s database includes full catalogs from more than 72,000 manufacturers, distributors, and industrial service providers around the world, containing
more than 8 million product specifications. For purchasing managers, this kind of
one-stop shopping can be an incredible time saver (and price saver, because it allows
easier comparison shopping). And it is more convenient: WIZ-Net also offers secure email so buyers can communicate directly with suppliers to ask for bids or to placeorders.22
To get noticed during this buyphase, the supplier should get listed in major online catalogs or services, develop communications to reach buyers who are seeking
new suppliers, and build a good reputation in the marketplace. Suppliers who lackcapacity or have a poor reputation will be rejected, while those who qualify may be visited by buyer’s agents, who will examine their facilities and meet their personnel. Afterevaluating each company, the buyer will end up with a short list of qualiﬁed suppliers.

Stage 5: Proposal Solicitation
In this stage, the buyer is ready to invite qualiﬁed suppliers to submit proposals. Whenthe item is complex or expensive, the buyer will require a detailed written proposal
from each qualiﬁed supplier. After evaluating the proposals, the buyer will invite a few
suppliers to make formal presentations.
Business marketers must thus be skilled in researching, writing, and presenting
proposals. Their written proposals should be marketing documents, not just technicaldocuments. Their oral presentations should inspire confidence, positioning theircompany’s capabilities and resources so that they stand out from the competition.
A supplier’s ﬁrst priority during this stage is to become qualiﬁed or, in some cases,
to become certiﬁed, so it will be invited to submit proposals. Consider the hurdles that
Xerox has set up for suppliers. Only suppliers that meet ISO 9000 international quality
standards can qualify for certification. These suppliers must complete the Xerox
Multinational Supplier Quality Survey, participate in Xerox’s Continuous Supplier
Involvement process, and undergo rigorous quality training and evaluation based on
the Malcolm Baldrige National Quality Award criteria. Not surprisingly, only 176 companies worldwide have become certiﬁed Xerox suppliers.23

Stage 6: Supplier Selection
Before selecting a supplier, the buying center will specify desired supplier attributes(such as product reliability and service reliability) and indicate their relative importance. It will then rate each supplier on these attributes to identify the most attractive one.
At this point, the buyer may attempt to negotiate with preferred suppliers forbetter 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 over price, which remains a key criterion for sup-

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plier selection.24 Marketers can counter a buyer’s request for a lower price in a number of ways. They may be able to show evidence that the “life-cycle cost” of using the
product is lower than that of competitors’ products. They can also cite the value of theservices the buyer now receives, especially where those services are superior to thoseoffered by competitors.
Hewlett-Packard, for example, has worked hard to become a “trusted advisor” toits customers, selling speciﬁc solutions to their unique problems. Along the way, HP
discovered that some companies want a partner and others simply want a product thatworks. Still, the company estimates that the trusted-advisor approach has contributed
to 60 percent growth of its high-end computer business.25
As part of the supplier selection process, buying centers must decide how many
suppliers to use. In the past, many companies preferred a large supplier base to ensure
adequate supplies and to obtain price concessions. Out-suppliers would try to get in
the door by offering an especially low price.
Increasingly, however, companies are reducing the number of suppliers.
Companies such as Ford, Motorola, and AlliedSignal have cut the number of suppliers
anywhere from 20 percent to 80 percent. The suppliers who remain are responsible
for larger component systems, for achieving continuous quality and performance
improvements, and for lowering prices annually by a given percentage.
There is even a trend toward single sourcing, using one supplier. The KnoxvilleNews-Sentinel and the New York Daily News newspapers both rely on a single source for theirnewsprint. This makes it easier to control newsprint inventories and maintain paper consistency to avoid the time and expense of changing presses for different papers.26
Stage 7: Order-Routine Speciﬁcation
After selecting suppliers, the buyer negotiates the final order, listing the technicalspeciﬁcations, the quantity needed, the delivery schedule, and so on. In the case of
MRO 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. Because the seller holds the stock, blanket contracts are sometimes calledstockless purchase plans. The buyer’s computer automatically sends an order to the seller
when stock is needed, and the supplier arranges delivery and billing according to theblanket contract.
Blanket contracting leads to more single-source buying and ordering of more
items from that single source. This system locks suppliers in tighter with the buyer andmakes it difﬁcult for out-suppliers to break in unless the buyer becomes dissatisﬁedwith the in-supplier’s prices, quality, or service.
Stage 8: Performance Review
In the final stage of the buying process, the buyer periodically reviews the performance of the chosen supplier(s). Three methods are commonly used. The buyer may
contact the end users and ask for their evaluations. Or the buyer may rate the supplieron several criteria using a weighted score method. Or the buyer might aggregate thecost of poor supplier performance to come up with adjusted costs of purchase, including price. The performance review may lead the buyer to continue, modify, or end therelationship with the supplier. Therefore, to stay in the running for future purchases,
suppliers should monitor their performance carefully using the same criteria appliedby the product’s buyers and end users. Smart suppliers also analyze the rivals who compete for the same business, as discussed in the next chapter.

NotesEXECUTIVE SUMMARY
Organizational buying is the decision-making process by which formal organizations
establish the need for purchased products and services, and then identify, evaluate,
and choose among alternative brands and suppliers. The business market consists ofall of the organizations that acquire goods and services used in the production ofother products or services that are sold, rented, or supplied to others: proﬁt-seeking
companies, institutions, and government agencies.
Compared to consumer markets, business markets generally have fewer andlarger 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.
Three types of buying situations are the straight rebuy, the modiﬁed rebuy, andthe new task. Systems buying is a practice in which the buyer wants to purchase a totalsolution to its problem from one seller. The buying center is the decision-making unitof a buying organization. It consists of initiators, users, influencers, deciders,approvers, buyers, and gatekeepers.
To inﬂuence the buying center, marketers must be aware of environmental, organizational, interpersonal, individual, and cultural factors. The buying process consistsof eight stages called buyphases: (1) problem recognition, (2) general need description, (3) product speciﬁcation, (4) supplier search, (5) proposal solicitation, (6) supplier selection, (7) order-routine specification, and (8) performance review.
Successful marketers anticipate and provide what buyers are seeking in eachbuyphase, increasing the chances that they will be selected and, ultimately, build along-term relationship with their customers.

NOTES
1. Frederick E. Webster Jr. and Yoram Wind, Organizational Buying Behavior (Upper Saddle
River, NJ: Prentice-Hall, 1972), p. 2.
2. Robert Hiebeler, Thomas B. Kelly, and Charles Ketteman, Best Practices: Building Your
Business with Customer-focused Solutions (New York: Arthur Andersen/Simon & Schuster,1998), pp. 122–24.
3. Hiebeler, Kelly, and Ketteman, Best Practices, pp. 124–26.
4. Laura M. Litvan, “Selling to Uncle Sam: New, Easier Rules,” Nation’s Business, March 1995,
pp. 46–48; Ellen Messmer, “Feds Do E-Commerce the Hard Way,” Network World, April 13,
1998, pp. 31–32; Anna Muoio, “Fast Agency, Slow Government,” Fast Company, December
1999, pp. 344, 346, 348.
5. Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying and Creative
Marketing (Boston: Allyn & Bacon, 1967).
6. See Daniel H. McQuiston, “Novelty, Complexity, and Importance as Causal Determinantsof Industrial Buyer Behavior,” Journal of Marketing, April 1989, pp. 66–79; and Peter Doyle,
Arch G. Woodside, and Paul Mitchell, “Organizational Buying in New Task and Rebuy
Situations,” Industrial Marketing Management, February 1979, pp. 7–11.
7. Urban B. Ozanne and Gilbert A. Churchill, Jr., “Five Dimensions of the Industrial
Adoption Process,” Journal of Marketing Research, August 1971, pp. 322–28.

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8. See Donald W. Jackson Jr., Janet E. Keith, and Richard K. Burdick, “Purchasing Agents’
Perceptions of Industrial Buying Center Inﬂuence: A Situational Approach,” Journal ofMarketing, Fall 1984, pp. 75–83.
9. Webster and Wind, Organizational Buying Behavior, p. 6.
10. Ibid., pp. 78–80.
11. See “ ‘I Think You Have a Great Product, but It’s Not My Decision,’ ” American Salesman,
April 1994, pp. 11–13.
12. Ibid.
13. Webster and Wind, Organizational Buying Behavior, pp. 33–37.
14. Sara Lorge, “Purchasing Power,” Sales & Marketing Management, June 1998, pp. 43–46;
Joann Muller, “The One-Year Itch at Daimler-Chrysler,” Business Week, November 15, 1999,
p. 42.
15. Tim Minahan, “OEM Buying Survey—Part 2: Buyers Get New Roles but Keep Old Tasks,”
Purchasing, July 16, 1998, pp. 208–209.
16. Shawn Tully, “Purchasing’s New Muscle,” Fortune, February 20, 1995; Mark Fitzgerald,“Decentralizing Control of Purchasing,” Editor and Publisher, June 18, 1994, pp. 8, 10.
17. Mohanbir Sawhney and Steven Kaplan, “Let’s Get Vertical,” Business 2.0, September 1999,
p. 85.
18. Robert Yoegel, “The Evolution of B-to-B Selling on the ‘Net,’ ” Target Marketing, August
1998, p. 34; Andy Reinhardt, “Extranets: Log On, Link Up, Save Big,” Business Week, June
22, 1998, p. 134; John Evan Frook, “Buying Behemoth—By Shifting $5B in Spending toExtranets, GE Could Ignite a Development Frenzy,” InternetWeek, August 17, 1998, p. 1;
John Jesitus, “Procuring an Edge,” Industry Week, June 23, 1997, pp. 56–62.
19. Lance Dixon, “JLG Industries Offers JIT II Advice,” Purchasing, January 15, 1998, p. 39.
20. (Germany, Japan) Teresa C. Morrison, Wayne A. Conaway, and Joseph J. Douress, Dun &Bradstreet’s Guide to Doing Business Around the World (New York: Prentice-Hall, 1997);(Korean) “Tips, Tricks and Pitfalls to Avoid when Doing Business in the Tough but
Lucrative Korean Market,” Business America, June 1997, p. 7.
21. Robinson, Faris, and Wind, Industrial Buying and Creative Marketing.
22. John H. Sheridan, “Buying Globally Made Easier,” Industry Week, February 2, 1998,
pp. 63–64.
23. See “Xerox Multinational Supplier Quality Survey,” Purchasing, January 12, 1995, p. 112.
24. Minahan, “OEM Buying Survey—Part 2: Buyers Get New Roles but Keep Old Tasks.” To see
how the Internet is affecting supplier selection, see Kevin Ferguson, “Purchasing in Packs,”
Business Week, November 1, 1999, pp. EB32–38.
25. Rick Mullin, “Taking Customer Relations to the Next Level,” The Journal of Business Strategy,
January-February 1997, pp. 22–26.
26. Donna Del Moro, “Single-Source Newsprint Supply,” Editor & Publisher, October 25, 1997,
pp. 42–45.

Identifying Market
Segments andSelecting Target
Markets
We will address the following questions:■ How and why is segmentation applied to consumer and business markets?
■ How can a company use mass customization to effectively meet the needs of individual
customers?
■ What targeting strategies can a company use to select and enter the most attractive
market segments?

A

company cannot serve everyone in broad markets such as soft drinks (for con sumers) and computers (for businesses), because the customers are too numerous and diverse in their buying requirements. This is why successful marketers look forspecific market segments that they can serve more effectively. Instead of scattering
their marketing efforts (a “shotgun” approach), they will be able to focus on the buyers whom they have the greatest chance of satisfying (a “riﬂe” approach).
The most targeted marketing strategies are built around meeting each customer’s unique requirements. Such mass customization strategies are particularly well
suited to Internet marketing, where leaders such as Dell can maintain an interactive
dialogue with customers and create a unique bundle of goods and services speciﬁcallyfor their individual needs and wants.
Target marketing requires marketers to take three major steps: (1) Identify andproﬁle distinct groups of buyers who might require separate products or marketingmixes (market segmentation); (2) select one or more market segments to enter (market targeting); and (3) establish and communicate the products’ key distinctive beneﬁts in the market (market positioning). This chapter focuses on the ﬁrst two steps; thefollowing chapter will discuss positioning strategy.

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CHAPTER 8 IDENTIFYING MARKET SEGMENTS AND SELECTING TARGET MARKETSUSING MARKET SEGMENTATION
Market segmentation aims to increase a company’s precision marketing. In contrast,
sellers that use mass marketing engage in the mass production, distribution, and promotion of one product for all buyers. Henry Ford epitomized this strategy when heoffered the Model T Ford “in any color, as long as it is black.” Coca-Cola also used mass
marketing when it sold only one kind of Coke in a 6.5-ounce bottle.
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.
However, many critics point to the increasing splintering of the market, which makes
mass marketing more difﬁcult. According to Regis McKenna, “[Consumers] have more
ways to shop: at giant malls, specialty shops, and superstores; through mail-order catalogs, home shopping networks, and virtual stores on the Internet. And they are bombarded with messages pitched through a growing number of channels: broadcast andnarrow-cast television, radio, on-line computer networks, the Internet, telephone services such as fax and telemarketing, and niche magazines and other print media.”1
This proliferation of media and distribution channels is making it difficult topractice “one size ﬁts all” marketing. Some observers even claim that mass marketing
is dying. Therefore, to stay focused rather than scattering their marketing resources,more marketers are using market segmentation. In this approach, which falls midway
between mass marketing and individual marketing, each segment’s buyers are
assumed to be quite similar in wants and needs, yet no two buyers are really alike. To
use this technique, a company must understand both the levels and the patterns ofmarket segmentation.

Levels of Market Segmentation
Regardless of whether they serve the consumer market or the business market—offering either goods or services—companies can apply segmentation at one of four levels:
segments, niches, local areas, and individuals.
Segment Marketing
A market segment consists of a large identifiable group within a market, with similar
wants, purchasing power, geographical location, buying attitudes, or buying habits.
For example, an automaker may identify four broad segments in the car market: buyers who are primarily seeking (1) basic transportation, (2) high performance, (3) luxury, or (4) safety.
Because the needs, preferences, and behavior of segment members are similar
but not identical, Anderson and Narus urge marketers to present ﬂexible market offerings instead of one standard offering to all members of a segment.2 A ﬂexible market
offering consists of the product and service elements that all segment members value,plus options (for an additional charge) that some segment members value. For example, Delta Airlines offers all economy passengers a seat, food, and soft drinks, but itcharges extra for alcoholic beverages and earphones.
Segment marketing allows a ﬁrm to create a more ﬁne-tuned product or service
offering and price it appropriately for the target audience. The choice of distribution
channels and communications channels becomes much easier, and the ﬁrm may ﬁnd
it faces fewer competitors in certain segments.
Niche Marketing
A niche is a more narrowly deﬁned group, typically a small market whose needs are notbeing well served. Marketers usually identify niches by dividing a segment into subseg-

Using Market Segmentation

ments or by defining a group seeking a distinctive mix of benefits. For example, atobacco company might identify two subsegments of heavy smokers: those who are trying to stop smoking, and those who don’t care.
In an attractive niche, customers have a distinct set of needs; they will pay a premium to the ﬁrm that best satisﬁes their needs; the niche is not likely to attract othercompetitors; the nicher gains certain economies through specialization; and the niche
has size, proﬁt, and growth potential. Whereas segments are fairly large and normally
attract several competitors, niches are fairly small and may attract only one or two
rivals. Still, giants such as IBM can and do lose pieces of their market to nichers: Dalgic
labeled this confrontation “guerrillas against gorillas.”3
Some larger ﬁrms have therefore turned to niche marketing. Ramada Franchises
Enterprises, for example, offers lodgings in several niches: Ramada Limited for economy travelers; Ramada Inn as a mid-price, full-service hotel; Ramada Plaza for theupper-mid-price niche; Ramada Hotels for good quality, three-star service; andRamada Renaissance hotels, offering excellent, four-star service. Many German midsize companies are also proﬁting through smart niching: Tetra Food supplies 80 percent of the food for tropical ﬁsh; Hohner holds 85 percent of the world harmonica
market; and Becher has 50 percent of the world’s oversized umbrella market. Theseﬁrms are succeeding in their chosen niches because they are dedicated to their customers, offer superior service, and innovate continuously.4
Now the low cost of marketing on the Internet is making it more proﬁtable forﬁrms—including small businesses—to serve even seemingly minuscule niches. In fact,
15 percent of all commercial Web sites with fewer than 10 employees take in morethan $100,000, and 2 percent ring up more than $1 million. The recipe for Internet
niching success: Choose a hard-to-ﬁnd product that customers don’t need to see andtouch. Consider Steve Warrington’s successful on-line venture selling ostriches andevery product derived from them (www.ostrichesonline.com). Launched for next tonothing on the Web, Warrington’s business generates annual sales of $4 million-plus.
Visitors to the site can buy ostrich meat, feathers, leather jackets, videos, eggshells, andskin-care products derived from ostrich body oil.5
Local Marketing
Target marketing is leading to some marketing programs that are tailored to the needs
and wants of local customer groups (trading areas, neighborhoods, even individualstores). Citibank, for instance, adjusts its banking services in each branch dependingon neighborhood demographics; Kraft helps supermarket chains identify the cheese
assortment and shelf positioning that will optimize cheese sales in low-, middle-, andhigh-income stores and in different ethnic neighborhoods.
Those favoring local marketing see national advertising as wasteful because it
fails to address local needs. On the other hand, opponents argue that local marketing
drives up manufacturing and marketing costs by reducing economies of scale.
Moreover, logistical problems become magniﬁed when companies try to meet varying
local requirements, and a brand’s overall image might be diluted if the product andmessage differ in different localities.
Individual Marketing
The ultimate level of segmentation leads to “segments of one,” “customized marketing,”
or “one-to-one marketing.”6 For centuries, consumers were served as individuals: The
tailor made the suit and the cobbler designed shoes for the individual. Much businessto-business marketing today is customized, in that a manufacturer will customize theoffer, logistics, communications, and financial terms for each major account. Now

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technologies such as computers, databases, robotic production, intranets andextranets, e-mail, and fax communication are permitting companies to return to customized marketing, also called “mass customization.”7 Mass customization is the ability
to prepare individually designed products and communications on a mass basis tomeet each customer’s requirements.
For example, Andersen Windows, a $1 billion Minnesota-based manufacturer ofresidential windows, turned to mass customization after additions to its product line led
to fat, unwieldy catalogs and a bewildering array of choices for homeowners and contractors. Then the ﬁrm equipped 650 showrooms with an interactive computer catalog linked
directly to the factory. Using this catalog, salespeople help customers customize each window, check the design for structural soundness, and generate a price quote. Andersen has
also developed a “batch of one” manufacturing process in which everything is made toorder, thus reducing its ﬁnished parts inventory (a major cost to the company).8
Joseph Pine, author of Mass Customization, says, “Anything you can digitize, you cancustomize.” In fact, the Internet is bringing mass customization to an astonishing array of
products. Mattel’s Barbie.com site invites girls to log on and design their own Barbie Pal
doll by specifying skin tone, eye color, hairdo and hair color, clothes, accessories, andname. CDuctive, a hip, New York-based company, lets customers cut their own CDs online. If a customer likes acid jazz, he can click on the category, see the various titles, listen
to a brief sample of each, and then click to order a CD with his chosen tunes.9 Technology
like this is transforming marketing from “a broadcast medium to a dialog medium,”allowing the customer to actively participate in the design of the product and offer.
Although individual customers are taking more initiative in designing and buying products, marketers still need to inﬂuence the process in a variety of ways. They
need toll-free phone numbers and e-mail addresses to enable buyers to reach themwith questions, suggestions, and complaints; they must involve customers more in the
product-speciﬁcation process; and they need a Web site with complete, updated information about the company’s products, service guarantees, and locations.

Patterns of Market Segmentation
Market segments can be built up in many ways. One common method is to identify
preference segments. Suppose ice cream buyers are asked how much they value sweetness
and creaminess as two product attributes. Three different patterns can emerge:➤

Homogeneous preferences: Figure 3-6 shows a market in which all of the consumers
have roughly the same preference, so there are no natural segments. We predictthat existing brands would be similar and cluster around the middle of the scale inboth sweetness and creaminess.

➤

Diffused preferences: At the other extreme, consumer preferences may be scatteredthroughout the space (Figure 3-6), indicating great variance in consumer
preferences. One brand might position in the center to appeal to the most people;
if several brands are in the market, they are likely to position throughout the spaceand show real differences to reﬂect consumer-preference differences.

➤

Clustered preferences: The market might reveal distinct preference clusters, called
natural market segments (Figure 3-6). The ﬁrst ﬁrm in this market might position in
the center to appeal to all groups, choose the largest market segment (concentrated
marketing), or develop several brands for different segments. If the ﬁrst ﬁrm has only
one brand, competitors would enter and introduce brands in the other segments.

Smart marketers examine such segmentation patterns carefully to better understand the various positions they might take in a market—and the competitive implications.

Segmenting Consumer and Business Markets

Figure 3-6 Basic Market-Preference Patterns

Market-Segmentation Procedure
Marketers use a three-step procedure for identifying market segments:
1.

Survey stage. The researcher conducts exploratory interviews and focus groups to gain
insight into customer motivations, attitudes, and behavior. Then the researcher prepares a questionnaire and collects data on attributes and their importance ratings,
brand awareness and brand ratings, product-usage patterns, attitudes toward the
product category, and respondents’ demographics, geographics, psychographics, andmediagraphics.

2.

Analysis stage. The researcher applies factor analysis to the data to remove highly correlated variables, then applies cluster analysis to create a specified number of maximally different segments.

3.

Proﬁling stage. Each cluster is proﬁled in terms of its distinguishing attitudes, behavior,
demographics, psychographics, and media patterns, then each segment is given a
name based on its dominant characteristic. In a study of the leisure market,
Andreasen and Belk found six segments:10 passive homebody, active sports enthusiast,
inner-directed self-sufficient, culture patron, active homebody, and socially active.
They found that performing arts organizations could sell the most tickets by targeting
culture patrons as well as socially active people.

Companies can uncover new segments by researching the hierarchy of attributes that customers consider when choosing a brand. For instance, car buyers who
first decide on price are price dominant; those who first decide on car type (e.g.,
passenger, sport-utility) are type dominant; those who first decide on brand arebrand dominant. With these segments, customers may have distinct demographics,
psychographics, and mediagraphics to be analyzed and addressed through marketing programs.11

SEGMENTING CONSUMER AND BUSINESS MARKETS
Because of the inherent differences between consumer and business markets, marketers cannot use exactly the same variables to segment both. Instead, they use one
broad group of variables as the basis for consumer segmentation and another broadgroup for business segmentation.

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CHAPTER 8 IDENTIFYING MARKET SEGMENTS AND SELECTING TARGET MARKETSBases for Segmenting Consumer Markets
In segmenting consumer markets, marketers can apply geographic, demographic, andpsychographic variables related to consumer characteristics as well as behavioral variables
related to consumer responses (see Table 3.5). Once the segments are formed, the marketer sees whether different characteristics are associated with each consumerresponse segment. For example, the researcher might examine whether car buyers
who want “quality” versus “low price” differ in their geographic, demographic, and psychographic makeup. This will determine whether the segments are useful for marketing purposes.
Geographic Segmentation
Geographic segmentation calls for dividing the market into different geographical units
such as nations, states, regions, counties, cities, or neighborhoods. The company canoperate in one or a few geographic areas or operate in all but pay attention to local
variations. Some marketers even segment down to a specific zip code. Consider
Blockbuster, which has databases to track the video preferences of its 85 million
members and buys additional demographic data about each store’s local area. As aresult of this segmentation, it stocks its San Francisco stores with more gay-oriented
videos, reﬂecting the city’s large gay population, while it stocks Chicago stores withmore family-oriented videos. Blockbuster can even distinguish between patterns ofEast Dallas and South Dallas customers.12
Demographic Segmentation
In demographic segmentation, the market is divided into groups on the basis of age andthe other variables in Table 3.5. One reason this is the most popular consumer segmentation method is that consumer wants, preferences, and usage rates are often associated with demographic variables. Another reason is that demographic variables areeasier to measure. Even when the target market is described in nondemographic
terms (say, a personality type), the link back to demographic characteristics is neededin order to estimate the size of the target market and the media that should be used toreach it efﬁciently.
Here is how certain demographic variables have been used to segment consumer
markets:➤

Age and life-cycle stage. Consumer wants and abilities change with age, as Gerberrealized when it decided to expand beyond its traditional baby foods line because
the market was growing more slowly due to lower birthrates, babies staying on
formula longer, and children moving to solid foods sooner. The company hopesthat parents who buy its baby food will go on to buy its Graduates foods for 1- to 3year olds.13 However, age and life cycle can be tricky variables. For example, Fordoriginally designed its Mustang automobile to appeal to young people who wanted
an inexpensive sport car. But when Ford found that the car was being purchased by
all age groups, it recognized that the target market was not the chronologically
young, but the psychologically young.

➤

Gender. Gender segmentation has long been applied in clothing, hairstyling,
cosmetics, and magazines. Occasionally other marketers notice an opportunity forgender segmentation. The Internet portal iVillage.com reaped the beneﬁts of gendersegmentation after initially trying to appeal to a broader market of baby boomers.
Noticing that Parent Soup and other offerings for women were the most popular,
iVillage soon evolved into the leading women’s on-line community. Its home pageentreats visitors to “Join our community of smart, compassionate, real women.”14

Table 3.5 Major Segmentation Variables for Consumer Markets
Geographic
RegionCity or metro size

Density
ClimatePaciﬁc, Mountain,West North Central,West South Central, East
North Central, East South Central, South Atlantic, Middle
Atlantic, New England
Under 4,999; 5,000–19,999; 20,000–49,999; 50,000–99,999;
100,000–249,999; 250,000– 499,999; 500,000–999,999;
1,000,000–3,999,999; 4,000,000 or over
Urban, suburban, rural
Northern, southern

Demographic
Age
Family Size
Family life cycle

Gender
IncomeOccupation

Education
Religion
Race
Generation
Nationality
Social class

Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65⫹
1–2, 3–4, 5⫹
Young, single; young, married, no children; young, married,
youngest child under 6; young, married, youngest child 6 orover; older, married, with children; older, married, no children
under 18; older, single; other
Male, female
Under $9,999; $10,000–$14,999; $15,000–$19,999;$20,000–$29,999; $30,000–$49,999; $50,000–$99,999;$100,000 and overProfessional and technical; managers, ofﬁcials, and proprietors;
clerical, sales; craftspeople; forepersons; operatives; farmers;
retired; students; homemakers; unemployed
Grade school or less; some high school; high school graduate;
some college; college graduate
Catholic, Protestant, Jewish, Muslim, Hindu, otherWhite, Black,Asian, Hispanic
Baby boomers, Generation Xers
North American, South American, British, French, German,
Italian, Japanese
Lower lowers, upper lowers, working class, middle class, upper
middles, lower uppers, upper uppers

Psychographic
Lifestyle
Personality

Straights, swingers, longhairs
Compulsive, gregarious, authoritarian, ambitious

Behavioral
OccasionsBeneﬁts
User status
Usage rate
Loyalty status
Readiness stage
Attitude toward product

Regular occasion, special occasion
Quality, service, economy, speed
Nonuser, ex-user, potential user, ﬁrst-time user, regular user
Light user, medium user, heavy user
None, medium, strong, absolute
Unaware, aware, informed, interested, desirous, intending to buy
Enthusiastic, positive, indifferent, negative, hostile

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CHAPTER 8 IDENTIFYING MARKET SEGMENTS AND SELECTING TARGET MARKETS➤

Income. Income segmentation is a long-standing practice in such categories as
automobiles, boats, clothing, cosmetics, and travel. However, income does notalways predict the best customers for a given product. The most economical cars are
not bought by the really poor, but rather by those who think of themselves as poor
relative to their status aspirations; medium-price and expensive cars tend to bepurchased by the overprivileged segments of each social class.

➤

Generation. Each generation is profoundly inﬂuenced by the times in which it grows
up—the music, movies, politics, and events of that period. Some marketers target
Generation Xers (those born between 1964 and 1984), while others target Baby
Boomers (those born between 1946 and 1964).15 Meredith and Schewe haveproposed a more focused concept they call cohort segmentation.16 Cohorts aregroups of people who share experiences of major external events (such as WorldWar II) that have deeply affected their attitudes and preferences. Because membersof a cohort group feel a bond with each other for having shared these experiences,
effective marketing appeals use the icons and images that are prominent in thetargeted cohort group’s experience.

➤

Social class. Social class strongly inﬂuences preference in cars, clothing, homefurnishings, leisure activities, reading habits, and retailers, which is why many ﬁrms
design products for speciﬁc social classes. However, the tastes of social classes canchange over time. The 1980s were about greed and ostentation for the upperclasses, but the 1990s were more about values and self-fulﬁllment. Afﬂuent tastes
now run toward more utilitarian rather than ostentatious products.17

Psychographic Segmentation
In psychographic segmentation, buyers are divided into different groups on the basis oflifestyle or personality and values. People within the same demographic group can
exhibit very different psychographic proﬁles.
➤Lifestyle. People exhibit many more lifestyles than are suggested by the seven social
classes, and the goods they consume express their lifestyles. Meat seems an unlikely
product for lifestyle segmentation, but one Kroger supermarket in Nashville foundthat segmenting self-service meat products by lifestyle, not by type of meat, had a big
payoff. This store grouped meats by lifestyle, creating such sections as “Meals in
Minutes” and “Kids Love This Stuff” (hot dogs, hamburger patties, and the like). By
focusing on lifestyle needs, not protein categories, Kroger’s encouraged habitual
beef and pork buyers to consider lamb and veal as well—boosting sales andproﬁts.18 But lifestyle segmentation does not always work: Nestlé introduced a
special brand of decaffeinated coffee for “late nighters,” and it failed, presumably
because people saw no need for such a specialized product.

➤

Personality. Marketers can endow their products with brand personalities that
correspond to consumer personalities. Apple Computer’s iMac computers, forexample, have a friendly, stylish personality that appeals to buyers who do not wantboring, ordinary personal computers.19➤

Values. Core values are the belief systems that underlie consumer attitudes andbehaviors. Core values go much deeper than behavior or attitude, and determine, ata basic level, people’s choices and desires over the long term. Marketers who use
this segmentation variable believe that by appealing to people’s inner selves, it ispossible to inﬂuence purchase behavior. Although values often differ from culture
to culture, Roper Reports has identiﬁed six values segments stretching across 35
countries: strivers (who focus more on material and professional goals), devouts

Segmenting Consumer and Business Markets(who consider tradition and duty very important), altruists (who are interested insocial issues), intimates (who value close personal relationships and family highly),
fun seekers (who tend to be younger and usually male), and creatives (who areinterested in education, knowledge, and technology).20

Behavioral Segmentation
In behavioral segmentation, buyers are divided into groups on the basis of their knowledgeof, attitude toward, use of, or response to a product. Many marketers believe that behavioral variables—occasions, beneﬁts, user status, usage rate, loyalty status, buyer-readinessstage, and attitude—are the best starting points for constructing market segments.
➤

Occasions. Buyers can be distinguished according to the occasions on which they
develop a need, purchase a product, or use a product. For example, air travel istriggered by occasions related to business, vacation, or family, so an airline canspecialize in one of these occasions. Thus, charter airlines serve groups of people
who ﬂy to a vacation destination. Occasion segmentation can help ﬁrms expand
product usage, as the Curtis Candy Company did when it promoted trick-or-treating
at Halloween and urged consumers to buy candy for the eager little callers. A
company can also consider critical life events to see whether they are accompaniedby certain needs. This kind of analysis has led to service providers such as marriage,
employment, and bereavement counselors.

➤

Beneﬁts. Buyers can be classiﬁed according to the beneﬁts they seek. One study of
travelers uncovered three beneﬁt segments: those who travel to be with family, those
who travel for adventure or education, and those who enjoy the “gambling” and“fun” aspects of travel.21➤

User status. Markets can be segmented into nonusers, ex-users, potential users, ﬁrsttime users, and regular users of a product. The company’s market position also
inﬂuences its focus. Market leaders (such as America Online) focus on attracting
potential users, whereas smaller ﬁrms (such as Earthlink, a fast-growing Internet
service provider) try to lure users away from the leader.

➤

Usage rate. Markets can be segmented into light, medium, and heavy product users.
Heavy users are often a small percentage of the market but account for a highpercentage of total consumption. Marketers usually prefer to attract one heavy user
rather than several light users, and they vary their promotional efforts accordingly.
Repp’s Big & Tall Stores, which operates 200 stores and a catalog business, has
identiﬁed 12 segments by analyzing customer response rates, average sales, and soon. Some segments get up to eight mailings a year, while some get only one to threemailings. The chain tries to steer low-volume catalog shoppers into nearby stores,
and it offers infrequent customers an incentive such as 15 percent off to buy during
a particular period. Repp gets a 6 percent response to these segmented mailings, farmore than the typical 0.5 response rate for nonsegmented mailings.22➤

Loyalty status. Buyers can be divided into four groups according to brand loyalty
status: (1) hard-core loyals (who always buy one brand), (2) split loyals (who are
loyal to two or three brands), (3) shifting loyals (who shift from one brand toanother, and (4) switchers (who show no loyalty to any brand).23 Each market
consists of different numbers of these four types of buyers; thus, a brand-loyal market
has a high percentage of hard-core loyals. Companies that sell in such a market havea hard time gaining more market share, and new competitors have a hard timebreaking in. One caution: What appears to be brand loyalty may actually reﬂect
habit, indifference, a low price, a high switching cost, or the nonavailability of other

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brands. For this reason, marketers must carefully interpret what is behind observedpurchasing patterns.
➤

Buyer-readiness stage. A market consists of people in different stages of readiness tobuy a product: Some are unaware of the product, some are aware, some areinformed, some are interested, some desire the product, and some intend to buy.
The relative numbers make a big difference in designing the marketing program.

➤

Attitude. Five attitude groups can be found in a market: (1) enthusiastic, (2) positive,(3) indifferent, (4) negative, and (5) hostile. So, for example, workers in a political
campaign use the voter’s attitude to determine how much time to spend with that
voter. They may thank enthusiastic voters and remind them to vote, reinforce those
who are positively disposed, try to win the votes of indifferent voters, and spend notime trying to change the attitudes of negative and hostile voters.

Multi-Attribute Segmentation (Geoclustering)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 may distinguish several segments depending on
current income, assets, savings, and risk preferences.
One of the most promising developments in multi-attribute segmentation is geoclustering, which yields richer descriptions of consumers and neighborhoods than does
traditional demographics. Geoclustering can help a firm answer such questions as:
Which clusters (neighborhoods or zip codes) contain our most valuable customers?
How deeply have we already penetrated these segments? Which markets provide thebest opportunities for growth?
Claritas Inc. has developed a geoclustering approach called PRIZM (Potential
Rating Index by Zip Markets), classifying over half a million U.S. residential neighborhoods into 62 lifestyle groupings called PRIZM Clusters.24 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, and cover speciﬁc
geographic areas deﬁned by Zip code, Zip ⫹ 4, census tract, and block group.
Each cluster has a descriptive title, such as American Dreams and Rural Industria.
Within each cluster, members tend to lead similar lives, drive similar cars, have similarjobs, and read similar magazines. The American Dreams cluster, for example, isupscale and ethnic—a big-city mosaic of people likely to buy imported cars, Elle magazine, Mueslix cereal, tennis weekends, and designer jeans. In contrast, Rural Industria
contains young families in heartland ofﬁces and factories whose lifestyle is typiﬁed bytrucks, True Story magazine, Shake n’ Bake, ﬁshing trips, and tropical ﬁsh.25
Geoclustering is an especially valuable segmentation tool because it captures theincreasing diversity of the American population. Moreover, it can help even smallerﬁrms identify microsegments that are economically feasible because of lower database
costs, more sophisticated software, increased data integration, and wider use of theInternet.26

Bases for Segmenting Business Markets
Business markets can be segmented with some variables that are employed in consumer market segmentation, such as geography, beneﬁts sought, and usage rate. Yet
business marketers can also use several other variables. Bonoma and Shapiro proposed segmenting the business market with the variables shown in Table 3.6. The
demographic variables are the most important, followed by the operating variables—
down to the personal characteristics of the buyer.

Segmenting Consumer and Business Markets

Table 3.6 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 fewer services?
Purchasing Approaches
7. Purchasing-function organization: Should we serve companies with highly centralized or
decentralized purchasing organizations?
8. Power structure: Should we serve companies that are engineering dominated, ﬁnanciallydominated, and so on?
9. Nature of existing relationships: Should we serve companies with which we have strong
relationships or simply go after the most desirable companies?
10. General purchase policies: Should we serve companies that prefer leasing? Service
contracts? 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 certain applications of our product rather
than all applications?
14. Size of 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. Attitudes 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).

A company should ﬁrst decide which industries it wants to serve. Then, within a chosen target industry, the company can further segment by company size, possibly setting
up separate operations for selling to large and small customers. Small businesses, inparticular, have become a Holy Grail for business marketers, both on and off theInternet.27 Small businesses are now responsible for 50 percent of the U.S. grossdomestic product, according to the Small Business Administration—and this segment
is growing even faster than the large company segment.

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CHAPTER 8 IDENTIFYING MARKET SEGMENTS AND SELECTING TARGET MARKETSIBM, already successful in marketing to corporate giants, is one of many companies targeting small businesses. Within the segment of U.S. firms with 1,000 or
fewer employees, IBM is further targeting the segment of minority-owned businesses.
IBM’s strategy is to devote some field salespeople exclusively to small and mediumsize businesses, hire executives responsible for targeting subsegments, become more
involved in professional associations frequented by minority small-business owners,
and offer more ﬂexible contact options such as telesales and service.28
Looking beyond small businesses, marketers can be more effective even withinmature commodity industries if they use segmentation for better targeting. For example, Rangan, Moriarty, and Swartz found these four business segments within the steel
strapping industry:29
1.

Programmed buyers: Buyers who see the product as not very important to their operation. This is a very proﬁtable segment: The buyers view the product as a routine purchase item, usually paying full price and receiving below-average service.

2.

Relationship buyers: Buyers who regard the product as moderately important and areknowledgeable about competitive offerings. They get a small discount and a modest
amount of service and prefer the vendor as long as the price is not far out of line. Thisis the second most proﬁtable segment.

3.

Transaction buyers: Buyers who see the product as very important to their operations.
They are price and service sensitive and receive some discounts, but they know thecompetition and will switch for a better price, even at the sacriﬁce of some service.

4.

Bargain hunters: Buyers who see the product as very important and demand low prices
and top service. They know the alternative suppliers, bargain hard, and are ready toswitch if dissatisﬁed. The company needs these buyers for volume purposes, but they
are not very proﬁtable.

Clearly, developing a segmentation scheme for this kind of industry will help abusiness marketer determine where to increase or decrease price and service, sinceeach segment reacts differently.30

Effective Segmentation
Even after applying segmentation variables to a consumer or business market, marketers must realize that not all segmentations are useful. For example, table salt buyers
could be divided into blond and brunette customers, but hair color is not relevant to
the purchase of salt. Furthermore, if all salt buyers buy the same amount of salt eachmonth, believe all salt is the same, and would pay only one price for salt, this market
would be minimally segmentable from a marketing perspective.
To be useful, market segments must be:➤

Measurable: The size, purchasing power, and characteristics of the segments can bemeasured.

➤

Substantial: The segments are large and proﬁtable enough to serve. A segment
should be the largest possible homogeneous group worth going after with a tailoredmarketing program.

➤

Accessible: The segments can be effectively reached and served.

➤

Differentiable: The segments are conceptually distinguishable and respond differently
to different marketing mixes. If two segments respond identically to a particularoffer, they do not constitute separate segments.

➤

Actionable: Effective programs can be formulated for attracting and serving thesegments.

Market Targeting Strategies

MARKET TARGETING STRATEGIES
Once the ﬁrm has identiﬁed its market-segment opportunities, it is ready to initiate
market targeting. Here, marketers evaluate each segment to determine how many andwhich ones to target and enter.

Evaluating Market Segments
In evaluating different market segments, the ﬁrm must look at two factors: (1) the segment’s overall attractiveness, and (2) the company’s objectives and resources. First, theﬁrm must ask whether a potential segment has the characteristics that make it generally attractive, such as size, growth, proﬁtability, scale economies, and low risk.
Second, the ﬁrm must consider whether investing in the segment makes sense
given the ﬁrm’s objectives and resources. Some attractive segments could be dismissed
because they do not mesh with the company’s long-run objectives; some should be dismissed if the company lacks one or more of the competences needed to offer superiorvalue.

Selecting and Entering Market Segments
Having evaluated different segments, the company can consider ﬁve patterns of target
market selection, as shown in Figure 3-7.
Single-Segment Concentration
Many companies concentrate on a single segment: Volkswagen, for example, concentrates on the small-car market, while Porsche concentrates on the sports car market.
Through concentrated marketing, the firm gains a thorough understanding of thesegment’s needs and achieves a strong market presence. Furthermore, the ﬁrm enjoys
operating economies by specializing its production, distribution, and promotion; if it
attains segment leadership, it can earn a high return on its investment.
However, concentrated marketing involves higher than normal risks if the segment turns sour because of changes in buying patterns or new competition. For thesereasons, many companies prefer to operate in more than one segment.
Selective Specialization
Here the ﬁrm selects a number of segments, each objectively attractive and appropriate. There may be little or no synergy among the segments, but each segment

Figure 3-7 Five Patterns of Target Market Selection

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CHAPTER 8 IDENTIFYING MARKET SEGMENTS AND SELECTING TARGET MARKETS

promises to be a moneymaker. This multisegment coverage strategy has the advantage
of diversifying the ﬁrm’s risk.
Consider a radio broadcaster that wants to appeal to both younger and older listeners using selective specialization. Emmis Communications owns New York’s WRKSRM, which describes itself as “smooth R&B [rhythm and blues] and classic soul” andappeals to older listeners, as well as WQHT-FM, which plays hip-hop (urban street
music) for under-25 listeners.31
Product Specialization
Another approach is to specialize in making a certain product for several segments.
An example would be a microscope manufacturer that sells microscopes to university
laboratories, government laboratories, and commercial laboratories. The ﬁrm makes
different microscopes for different customer groups but does not manufacture other
instruments that laboratories might use. Through a product specialization strategy,
the ﬁrm builds a strong reputation in the speciﬁc product area. The downside risk isthat the product may be supplanted by an entirely new technology.
Market Specialization
With market specialization, the ﬁrm concentrates on serving many needs of a particular customer group. An example would be a ﬁrm that sells an assortment of products
only to university laboratories, including microscopes, oscilloscopes, and chemical
ﬂasks. The ﬁrm gains a strong reputation in serving this customer group and becomesa channel for further products that the customer group could use. However, the downside risk is that the customer group may have its budgets cut.
Full Market Coverage
Here a ﬁrm attempts to serve all customer groups with all of the products they mightneed. Only very large ﬁrms can undertake a full market coverage strategy. Examples
include IBM (computer market), General Motors (vehicle market), and Coca-Cola(drink market). Large firms can cover a whole market in two broad ways: throughundifferentiated marketing or differentiated marketing.
In undifferentiated marketing, the firm ignores market-segment differences andgoes after the whole market with one market offer. Focusing on a basic buyer need, it
designs a product and a marketing program that will appeal to the broadest numberof buyers. To reach the market, the ﬁrm uses mass distribution backed by mass advertising to create a superior product image in people’s minds. The narrow product line
keeps down costs of research and development, production, inventory, transportation,marketing research, advertising, and product management; the undifferentiatedadvertising program keeps down advertising costs. Presumably, the company can turnits lower costs into lower prices to win the price-sensitive segment of the market.
In differentiated marketing, the firm operates in several market segments anddesigns different programs for each segment. General Motors does this with its various
vehicle brands and models; Intel does this with chips and programs for consumer,
business, small business, networking, digital imaging, and video markets.32
Differentiated marketing typically creates more total sales than does undifferentiatedmarketing. However, the need for different products and marketing programs also
increases the firm’s costs for product modification, manufacturing, administration,
inventory, and promotion.
Because differentiated marketing leads to both higher sales and higher costs, wecannot generalize regarding this strategy’s proﬁtability. Still, companies should be cautious about oversegmenting their market. If this happens, they may want to use coun-

Market Targeting Strategies

tersegmentation to broaden their customer base. Smith Kline Beecham introduced
Aquafresh toothpaste to attract three beneﬁt segments simultaneously: those seeking
fresh breath, whiter teeth, and cavity protection. Next, the company moved deeper
into countersegmentation by launching ﬂavored toothpastes for children, toothpaste
for people with sensitive teeth, and other toothpaste products.

Targeting Multiple Segments and Supersegments
Very often, companies start out by marketing to one segment, then expand to others.
For example, Paging Network Inc.—known as PageNet—is a small developer of paging systems, and was the first to offer voice mail on pagers. To compete with
Southwestern Bell and other Bell companies, it sets its prices about 20 percent below
rivals’ prices. Initially, PageNet used geographic segmentation to identify attractive
markets in Ohio and Texas where local competitors were vulnerable to its aggressive
pricing. Next, the ﬁrm developed a proﬁle of users for paging services so it could target salespeople, messengers, and service people. PageNet also used lifestyle segmentation to target additional consumer groups, such as parents who leave their children
with a sitter. Finally, PageNet began distributing its pagers through Kmart, Wal-Mart,
and Home Depot, offering attractive discounts in return for the right to keep themonthly service charge revenues on any pagers sold.33
In targeting more than one segment, a company should examine segment interrelationships on the cost, performance, and technology side. A company that is carrying fixed costs, such as a sales force or store outlets, can generally add products toabsorb and share some of these costs. Smart companies know that economies of scope
can be just as important as economies of scale. Moreover, companies should lookbeyond isolated segments to target a supersegment, a set of segments that share some
exploitable similarity. For example, many symphony orchestras target people withbroad cultural interests, rather than only those who regularly attend concerts.
Still, a company’s invasion plans can be thwarted when it confronts blocked markets. This problem calls for megamarketing, the strategic coordination of economic, psychological, political, and public-relations skills to gain the cooperation of a number ofparties in order to enter or operate in a given market. Pepsi used megamarketing toenter India after Coca-Cola left the market. First, it worked with a local business group to
gain government approval for its entry over the objections of domestic soft-drink companies and antimultinational legislators. Pepsi also offered to help India export enoughagricultural products to more than cover the cost of importing soft-drink concentrate
and promised economic development for some rural areas. By winning the support ofthese and other interest groups, Pepsi was ﬁnally able to crack the Indian market.

Ethical Choice of Market Targets
Market targeting sometimes generates public controversy.34 The public is concerned
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. For example, the cereal industry has been criticized for marketing to children. Critics worry that high-powered appeals presented through the mouths of lovable animated characters will overwhelm children’s defenses and lead them to eat too
much sugared cereal or poorly balanced breakfasts.
As another example, R. J. Reynolds was criticized for plans to market Uptown, amenthol cigarette targeted toward low-income African Americans. Recently, internal
documents from R. J. Reynolds and Brown & Williamson Tobacco Corporation (marketer of the Kool brand) have revealed the extent to which these companies target
black youths aged 16 to 25, particularly with menthol brands.35

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Not all attempts to target children, minorities, or other segments draw criticism.
Colgate-Palmolive’s Colgate Junior toothpaste has special features designed to get children to brush longer and more often. Golden Ribbon Playthings has developed ahighly acclaimed and very successful black character doll named “Huggy Bean” to connect minority consumers with their African heritage. Other companies are also
responding to the needs of speciﬁc segments. Black-owned ICE theaters noticed that
although moviegoing by blacks has surged, there is a dearth of inner-city theaters, so it
began opening theaters in Chicago and other cities. ICE partners with the black communities in which it operates, using local radio stations to promote ﬁlms and featuring
favorite foods at concession stands.36
Thus, in the choice of market targets, the issue is not who is targeted, but rather
how and for what purpose. Socially responsible marketing calls for targeting and positioning that serve not only the company’s interests but also the interests of those targeted.37

EXECUTIVE SUMMARY
Companies usually are more effective when they target their markets. Target marketing involves three activities: market segmentation, market targeting, and market positioning. Markets can be targeted at four levels: segments, niches, local areas, and individuals. Market segments are large, identiﬁable groups within a market, with similar
wants, purchasing power, location, buying attitudes, or buying habits. A niche is amore narrowly deﬁned group.
Many marketers localize their marketing programs for certain trading areas,neighborhoods, and even individual stores. The ultimate in segmentation is individual
marketing and mass customization, a trend that is growing as more customers take theinitiative in designing and buying products and brands. In addition, marketers must
analyze the patterns of segmentation in a market to get a sense of their positioning
alternatives and that of the competitors.
Markets are segmented in a three-step procedure of surveying, analyzing, and proﬁling. The major segmentation variables for consumer markets are geographic, demographic, psychographic, and behavioral, to be used singly or in combination. Businessmarketers can use all of these variables along with operating variables, purchasing
approaches, situational factors, and personal characteristics. To be useful, market segments must be measurable, substantial, accessible, differentiable, and actionable.
Once a ﬁrm has identiﬁed its market-segment opportunities, it has to evaluate
the various segments and decide how many and which ones to target. In evaluating
segments, managers look at the segment’s attractiveness indicators and the company’s
objectives and resources. In choosing which segments to target, the company canfocus on a single segment, selected segments, a speciﬁc product, a speciﬁc market, or
the full market; in the full market, it can use either differentiated or undifferentiatedmarketing. It is important for marketers to choose target markets in a socially responsible manner, by ensuring that the targeting serves the interests of the market being
targeted as well as the company.

NOTES
1. Regis McKenna, “Real-Time Marketing,” Harvard Business Review, July–August 1995, p. 87.
2. See James C. Anderson and James A. Narus, “Capturing the Value of Supplementary
Services,” Harvard Business Review, January–February 1995, pp. 75–83.

Notes
3. See Tevﬁk Dalgic and Maarten Leeuw, “Niche Marketing Revisited: Concept, Applications,and Some European Cases,” European Journal of Marketing 28, no. 4 (1994): 39–55.
4. Hermann Simon, Hidden Champions (Boston: Harvard Business School Press, 1996).
5. Paul Davidson, “Entrepreneurs Reap Riches from Net Niches,” USA Today, April 20, 1998,
p. B3.
6. See Don Peppers and Martha Rogers, The One to One Future: Building Relationships One
Customer at a Time (New York: Currency/Doubleday, 1993).
7. B. Joseph Pine II, Mass Customization (Boston: Harvard Business School Press, 1993); B.
Joseph Pine II, Don Peppers, and Martha Rogers, “Do You Want to Keep Your Customers
Forever?” Harvard Business Review, March–April 1995, pp. 103–14.
8. “Creating Greater Customer Value May Require a Lot of Changes,” Organizational
Dynamics, Summer 1998, p. 26.
9. Andy Wang, “CDuctive.com Kicks Off New MP3 Store,” E-Commerce Times, June 2, 1999,
www.ecommercetime.com; Erick Schonfeld, “The Customized, Digitized, Have-It-Your-Way
Economy,” Fortune, September 28, 1998, pp. 115–24; Jim Barlow, “Individualizing Mass
Production,” Houston Chronicle, April 13, 1997, p. e1; Sarah Schafer, “Have It Your Way,”
Inc., November 18, 1997, pp. 56–64.
10. Alan R. Andreasen and Russell W. Belk, “Predictors of Attendance at the Performing Arts,”
Journal of Consumer Research, September 1980, pp. 112–20.
11. For a market-structure study of the hierarchy of attributes in the coffee market, see Dipak
Jain, Frank M. Bass, and Yu-Min Chen, “Estimation of Latent Class Models with
Heterogeneous Choice Probabilities: An Application to Market Structuring,” Journal ofMarketing Research, February 1990, pp. 94–101.
12. Kate Kane, “It’s a Small World,” Working Woman, October 1997, p. 22.
13. Leah Rickard, “Gerber Trots Out New Ads Backing Toddler Food Line,” Advertising Age,
April 11, 1994, pp. 1, 48.
14. Lisa Napoli, “A Focus on Women at iVillage.com,” New York Times, August 3, 1998, p. D6;
Linda Himelstein, “I Am Cyber-Woman. Hear Me Roar,” Business Week, November 15, 1999,
p. 40.
15. For more on generations, see Michael R. Solomon, Consumer Behavior, 3d ed. (Upper
Saddle River, NJ: Prentice-Hall, 1996), ch. 14; and Frank Feather, The Future Consumer(Toronto: Warwick Publishing Co., 1994), pp. 69–75.
16. Geoffrey Meredith and Charles Schewe, “The Power of Cohorts,” American Demographics,
December 1994, pp. 22–29.
17. Andrew E. Serwer, “42,496 Secrets Bared,” Fortune, January 24, 1994, pp. 13–14; Kenneth
Labich, “Class in America,” Fortune, February 7, 1994, pp. 114–26.
18. “Lifestyle Marketing,” Progressive Grocer, August 1997, pp. 107–10.
19. Peter Burrows, “Can Apple Take Its Game to the Next Level?” Business Week, December 20,
1999, p. 52.
20. Tom Miller, “Global Segments from ‘Strivers’ to ‘Creatives,’ ” Marketing News, July 20, 1998,
p. 11.
21. Junu Bryan Kim, “Taking Comfort in Country: After Decade of ’80s Excess, Marketers Tap
Easy Lifestyle as Part of Ad Messages,” Advertising Age, January 11, 1993, pp. S1–S4.
22. Jeff Gremillion, “Can Smaller Niches Bring Riches?” Mediaweek, October 20, 1997,
pp. 50–51.
23. This classiﬁcation was adapted from George H. Brown, “Brand Loyalty—Fact or Fiction?”
Advertising Age, June 1952–January 1953, a series. See also Peter E. Rossi, R. McCulloch,
and G. Allenby, “The Value of Purchase History Data in Target Marketing,” Marketing
Science 15, no. 4 (1996): 321–40.
24. Other leading suppliers of geodemographic data are ClusterPlus (by Donnelly Marketing
Information Services) and C.A.C.I. International, which offers ACORN.

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25. Christina Del Valle, “They Know Where You Live—and How You Buy,” Business Week,
February 7, 1994, p. 89.
26. See Michael J. Weiss, The Clustering of America (New York: Harper & Row, 1988).
27. Jesse Berst, “Why Small Business Is Suddenly Big Business,” ZDNet AnchorDesk, November
29, 1999, www.anchordesk.com; Michele Marchetti, “Dell Computer,” Sales & Marketing
Management, October 1997, pp. 50–53.
28. Geoffrey Brewer, “Lou Gerstner Has His Hands Full,” Sales & Marketing Management, May
1998, pp. 36–41.
29. V. Kasturi Rangan, Rowland T. Moriarty, and Gordon S. Swartz, “Segmenting Customers inMature Industrial Markets,” Journal of Marketing, October 1992, pp. 72–82.
30. For another interesting approach to segmenting the business market, see John Berrigan
and Carl Finkbeiner, Segmentation Marketing: New Methods for Capturing Business (New York:
HarperBusiness, 1992).
31. Wendy Brandes, “Advertising: Black-Oriented Radio Tunes into Narrower Segments,” WallStreet Journal, February 13, 1995, p. B5; “Emmis Reports Record Third Quarter” Emmis, PR
Newswire, December 21, 1999, www.prnewswire.com.
32. Tom Davey, “Intel Reorganization Reﬂects Changing Market,” Information Week Online,
November 25, 1999, www.informationweek.com.
33. See Norton Paley, “Cut Out for Success,” Sales & Marketing Management, April 1994,
pp. 43–44.
34. See Bart Macchiette and Roy Abhijit, “Sensitive Groups and Social Issues,” Journal ofConsumer Marketing 11, no. 4 (1994): 55–64.
35. Barry Meier, “Data on Tobacco Show a Strategy Aimed at Blacks,” New York Times, February
6, 1998, p. A1; Gregory Freeman, “Ads Aimed at Blacks and Children Should Exact a HighPrice,” St. Louis Post-Dispatch, p. B1.
36. Roger O. Crockett, “They’re Lining Up for Flicks in the ‘Hood,’” Business Week, June 8,
1998, pp. 75–76.
37. See “Selling Sin to Blacks,” Fortune, October 21, 1991, p. 100; Martha T. Moore, “Putting
on a Fresh Face,” USA Today, January 3, 1992, pp. B1, B2; Dorothy J. Gaiter, “Black-Owned
Firms Are Catching an Afrocentric Wave,” Wall Street Journal, January 8, 1992, p. B2; andMaria Mallory, “Waking Up to a Major Market,” Business Week, March 23, 1992, pp. 70–73.

Developing,Differentiating, andPositioning
Products Throughthe Life Cycle
We will address the following questions:■ What challenges does a company face in developing and introducing new products?
■ What are the main stages in developing new products, and how can they be better
managed?
■ What factors affect the rate at which consumers adopt new products?
■ What marketing strategies are appropriate at each stage of the product life cycle?
■ How can a company choose and communicate an effective positioning in the market?

Every company, regardless of size, must research and create new products to maintain or build sales. Why? Customers want new products and choices, and competitors will be doing their best to supply them. Over 16,000 new products (including line
extensions and new brands) arrive on grocery and drugstore shelves every year, having
made their way through the new product development process from bright idea totesting to commercialization.
Not every new product catches on, of course, and those that do are adopted bycustomers at different rates. This is why smart marketers target early adopters and use
marketing tactics that will facilitate consumer movement through the various stages in
the adoption process.
Companies normally reformulate their marketing strategy several times during a
product’s life as economic conditions change, competitors launch new assaults, and the
product passes through new stages of buyer interest and requirements. Successful companies plan marketing strategies that are appropriate to each stage in the product’s life
cycle and hope to extend each product’s life and proﬁtability, knowing that no product

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lasts forever. The key to setting one offering apart from competing offers throughout
the life cycle is to select a suitable differentiation strategy and create a distinctive position in the market.

CHALLENGES IN NEW PRODUCT DEVELOPMENT
Companies that fail to develop new products (either goods or services) are putting themselves at great risk. Over time, existing products are vulnerable to changing customer
needs and tastes, new technologies, shortened product life cycles, and increased competition. Yet new-product development also entails considerable risk: Texas Instruments lost
$660 million before withdrawing from the home computer business; RCA lost $500 million on its videodisc players; Federal Express lost $340 million on its Zap mail service; andthe British-French Concorde aircraft will never recover its investment.1
A company can add new products in two ways: through acquisition (buying
another company, buying another ﬁrm’s patent, or buying a license or franchise) or
through development (using its own laboratories, hiring independent researchers, orhiring a new-product-development ﬁrm). Moreover, there is more than one categoryof new product.

Types of New Products
Even though thousands of products are offered for the ﬁrst time each year, less than
10 percent are entirely new and innovative. Booz, Allen & Hamilton has identiﬁed six
categories of new products:2
1.

New-to-the-world products: New, innovative products that create an entirely new market,
such as the Palm Pilot handheld computerized organizer.

2.

New product lines: New products that allow a company to enter an established market
for the ﬁrst time, such as Fuji’s brand of disks for Zip drives.

3. Additions to existing product lines: New products that supplement a company’s established product lines (package sizes, ﬂavors, and so on), such as Amazon.com’s auctions and e-mail greeting cards.
4.

Improvements and revisions of existing products: New products that provide improved performance or greater perceived value and replace existing products, such as Microsoft
Ofﬁce 2000.

5.

Repositionings: Existing products that are targeted to new markets or market segments, such as repositioning Johnson & Johnson’s Baby Shampoo for adults as well
as youngsters.

6.

Cost reductions: New products that provide similar performance at lower cost, such asIntel’s Celeron chip.

The new-to-the-world category involves the greatest cost and risk because theseproducts are new to both the company and the marketplace, so positive customer
response is far from certain. That’s why most new-product activities are improvements
on existing products. At Sony, for example, over 80 percent of new-product activity isundertaken to modify and improve existing Sony products. Even new-productimprovements are not guaranteed to succeed, however.

Why New Products Fail—and Succeed
New products are failing at a disturbing rate; by one estimate, 80 percent of recently
launched products are no longer around.3 Given the high costs—a company can

Managing New Products: Ideas to Strategy

spend $20 million to $50 million to develop and advertise one new product—it is awonder that companies continue to innovate at all. Yet product failures can serve one
useful purpose: Inventors, entrepreneurs, and new-product team leaders can learn
valuable lessons about what not to do.
Some of the reasons for new-product failure are: (1) a high-level executive
pushes a favorite idea through in spite of negative market research ﬁndings; (2) the
idea is good, but the market size is overestimated; (3) the product is not well designed;(4) the product is incorrectly positioned, ineffectively advertised, or overpriced;(5) development costs are higher than expected; or (6) competitors ﬁght back harderthan expected.
What can a company do to develop successful new products? Cooper andKleinschmidt found that new products with a high product advantage succeed 98 percent of the time, compared to products with a moderate advantage (58 percent success) or minimal advantage (18 percent success).4 Madique and Zirger studied successful product launches in the electronics industry and found greater new-productsuccess when the firm: has a better understanding of customer needs; a higher
performance-to-cost ratio; a head-start in introducing the product before competitors;
a higher expected contribution margin; a higher budget for promoting and launching
the product; more use of cross-functional teamwork; and stronger top-management
support.5

MANAGING NEW PRODUCTS: IDEAS TO STRATEGY
The process of developing new products spans eight stages, each with a particular set
of marketing challenges and questions to answer (see Figure 3-8). If the company cannot answer “yes” to the key question at each of the ﬁrst six stages, the new product will
be dropped; in the ﬁnal two stages, the company has the option of further development or modiﬁcation rather than immediately dropping the new product. This section covers the stages from idea to strategy and analysis; the following section covers
the stages from product development through market testing and commercialization.

Idea Generation
The marketing concept holds that customer needs and wants are the logical place to start
the search for new product ideas. Hippel has shown that the highest percentage ofideas for new industrial products originates with customers.6 Many of the best ideas
come from asking customers to describe their problems with current products. For
instance, in an attempt to grab a foothold in steel wool soap pads, 3M organized consumer focus groups and asked about problems with these products. The most frequent
complaint was that the pads scratched expensive cookware. This ﬁnding produced theidea for the highly successful Scotch-Brite Never Scratch soap pad.7 In addition to customers, new-product ideas can come from many sources: scientists, competitors,
employees, channel members, sales reps, top management, inventors, patent attorneys, university and commercial laboratories, industrial consultants, advertising agencies, marketing research ﬁrms, and industry publications.

Idea Screening
Once the ﬁrm has collected a number of new product ideas, the next step is to screenout the weaker ideas, because product-development costs rise substantially with eachsuccessive development stage. Most companies require new-product ideas to be
described on a standard form that can be reviewed by a new-product committee. The

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Figure 3-8 The New-Product-Development Decision Processdescription states the product idea, the target market, and the competition, along witha rough estimate of the market size, product price, development time and costs, manufacturing costs, and rate of return. The new-product committee then reviews eachidea against criteria such as: Does the product meet a need? Would it offer superiorvalue? Will the new product deliver the expected sales volume, sales growth, andprofit? The ideas that survive this screening move on to the concept development
stage.

Concept Development
A product idea is a possible product the company might offer to the market. In contrast, a product concept is an elaborated version of the idea expressed in meaningful
consumer terms. A product idea can be turned into several concepts by asking: Whowill use this product? What primary beneﬁt should this product provide? When will
people consume or use this product? By answering such questions, a company canoften form several product concepts, select the single most promising concept, andcreate a product-positioning map for it. Figure 3-9 shows the positioning of a productconcept, a low-cost instant breakfast drink, compared to other breakfast foods alreadyon the market.
Next, the product concept has to be turned into a brand concept. To transform theconcept of a low-cost instant breakfast drink into a brand concept, the company must
decide how much to charge and how caloriﬁc to make its drink. Figure 3-9 shows abrand-positioning map that reﬂects the positions of three instant breakfast drink brands.
The gaps on this map indicate that the new brand concept would have to be distinctivein the medium-price, medium-calorie market or the high-price, high-calorie market.

Managing New Products: Ideas to Strategy

Figure 3-9 Product and Brand Positioning

Concept Testing
Concept testing involves presenting the product concept to appropriate target consumers and getting their reactions. The concepts can be presented symbolically or
physically. However, the more the tested concepts resemble the ﬁnal product or experience, the more dependable concept testing is. In the past, creating physical prototypes was costly and time-consuming, but computer-aided design and manufacturing
programs have changed that. Today ﬁrms can design a number of prototypes via computer and then create plastic models to obtain feedback from potential consumers.8
Companies are also using virtual reality to test product concepts.
Many companies today use customer-driven engineering to design new products.
Customer-driven engineering attaches high importance to incorporating customer
preferences in the ﬁnal design. National Semiconductor uses the Internet to enhance
its customer-driven engineering by tracking what customers search for on its Web site.
Sometimes, says the company’s Web services manager, it is more important to know
when a customer did not find a product than when he did. That helps National
Semiconductor shrink the time needed to identify market niches and create new
products.9

Marketing Strategy Development
After testing and selecting a product concept for development, the new-product manager must draft a three-part preliminary marketing-strategy plan for introducing thenew product into the market. The ﬁrst part will describe the target market’s size, structure, and behavior; the planned product positioning; and the sales, market share, andprofit goals sought in the first few years. The second part will outline the planned
price, distribution strategy, and marketing budget for the ﬁrst year. The third part will
describe the long-run sales and proﬁt goals and marketing-mix strategy over time. This
plan forms the basis for the business analysis that is conducted before management
makes a ﬁnal decision on the new product.

Business Analysis
In this stage, the company evaluates the proposed new product’s business attractivenessby preparing sales, cost, and proﬁt projections to determine whether these satisfy com-

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pany objectives. If they do, the product concept can move to the product-development
stage. Note that this cannot be a static process: As new information emerges, the business analysis must be revised and expanded accordingly.
Estimating Total SalesFirst, management needs to estimate whether sales will be high enough to yield a satisfactory proﬁt. Total estimated sales are the sum of estimated ﬁrst-time sales, replacement sales, and repeat sales. For one-time purchased products, such as a retirement
home, sales rise at the beginning, then peak, and later approach zero as the numberof potential buyers is exhausted; if new buyers keep entering the market, the curve will
not drop to zero. Infrequently purchased products—such as automobiles and industrial equipment—exhibit replacement cycles that are dictated by physical wearing out
or by obsolescence due to changing styles, features, and performance; sales forecasting calls for estimating ﬁrst-time sales and replacement sales separately.
For frequently purchased products, such as consumer and industrial nondurables like soap, the number of first-time buyers initially increases and thendecreases as fewer buyers are left (assuming a fixed population). Repeat purchases
occur soon, providing that the product satisﬁes some buyers. The sales curve eventually falls to a plateau representing a level of steady repeat-purchase volume; by thistime, the product is no longer a new product.
Estimating Costs and Proﬁts
After preparing the sales forecast, management should analyze expected costs andprofits based on estimates prepared by the R&D, manufacturing, marketing, andfinance departments. Companies can also use other financial measures to evaluate
new-product proposals. The simplest is break-even analysis, in which management estimates how many units of the product the company will have to sell to break even withthe given price and cost structure.
The most complex method of estimating proﬁt is risk analysis. Here, three estimates (optimistic, pessimistic, and most likely) are obtained for each uncertain variable affecting proﬁtability under an assumed marketing environment and marketingstrategy for the planning period. The computer simulates possible outcomes and computes a rate-of-return probability distribution showing the range of possible rates ofreturns and their probabilities.10

MANAGING NEW PRODUCTS: DEVELOPMENT TOCOMMERCIALIZATION
If the product concept passes the business analysis test, it moves on to be developed
into a physical product. Up to now, it has existed only as a word description, drawing,or prototype. This step involves a large jump in investment that dwarfs the costs
incurred in the earlier stages. If the company determines that the product idea cannot
be translated into a technically and commercially feasible product, the accumulated
project cost will be lost—except for any useful information gained in the process.

Product Development
The job of translating target customer requirements into a working prototype ishelped by a set of methods known as quality function deployment (QFD). This methodology takes the list of desired customer attributes (CAs) generated by market research andturns them into a list of engineering attributes (EAs) that the engineers can use. For

Managing New Products: Development to Commercialization

example, customers of a proposed truck may want a certain acceleration rate (CA).
Engineers turn this into the required horsepower and other engineering equivalents(EAs). QFD allows firms to measure the trade-offs and costs of satisfying customer
requirements; it also improves communication among marketing, engineering, andmanufacturing.11
Next, the ﬁrm uses QFD to develop one or more physical versions of the productconcept. The goal is to find a prototype that customers believe embodies the key
attributes described in the product-concept statement, that performs safely under normal use, and that can be produced within the budget. The rise of the World Wide Web
has driven more rapid prototyping and more ﬂexible development; prototype-drivenﬁrms such as Yahoo! and Microsoft cherish quick-and-dirty tests and experiments.12
When the prototypes are ready, they are put through rigorous functional tests andcustomer tests. Alpha testing means testing the product within the ﬁrm to see how it performs in different applications. After reﬁning the prototype further, the company moves
to beta testing, enlisting customers to use the prototype and give feedback on their experiences. Beta testing is most useful when the potential customers are heterogeneous, thepotential applications are not fully known, several decision makers are involved in purchasing the product, and opinion leadership from early adopters is sought.13
Consumer testing can take a variety of forms, from bringing consumers into a laboratory to giving them samples to use in their homes. In-home placement tests are common with products ranging from ice cream ﬂavors to new appliances. For example,
when DuPont developed its new synthetic carpeting, it installed free carpeting in several homes in exchange for the homeowners’ willingness to report their likes and dislikes about the carpeting.

Market Testing
After management is satisfied with functional and psychological performance, theproduct is ready to be dressed up with a brand name and packaging, and put to a market test. The new product is now introduced into an authentic setting to learn how
large the market is and how consumers and dealers react to handling, using, andrepurchasing the product. For example, idealab! is in the business of launching newInternet ventures (eToys was one). Before starting CarsDirect, a Web-based car buying
service, idealab! put up a live Web page and monitored on-line market reaction. In justone evening, the site sold four cars—results that hinted at the product’s potential forstrong market acceptance.14
Consumer-Goods Market Testing
In testing consumer products, the company seeks to estimate four variables: trial, ﬁrst
repeat purchase, adoption, and purchase frequency. The company hopes to ﬁnd all ofthese variables at high levels. In some cases, however, it will ﬁnd many consumers trying the product but few rebuying it. Or it might ﬁnd high permanent adoption but low
purchase frequency (as with gourmet frozen foods).
The major methods of consumer-goods market testing, from the least to themost costly, are:➤Sales-wave research. Consumers who initially try the product at no cost are reoffered
the product, or a competitor’s product, at slightly reduced prices, as many as three
to ﬁve times (sales waves). The company notes how many customers select its
product again and their reported level of satisfaction.

➤

Simulated test marketing. Up to 40 qualiﬁed buyers ﬁrst answer questions about brandfamiliarity and product preferences. These buyers are invited to look at

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commercials or print ads, including one for the new product, then they are given
money and brought into a store where they can make purchases. The company
notes how many people buy the new brand and competing brands as a test of thead’s relative effectiveness against competing ads in simulating trial. Consumers arealso asked why they bought or did not buy; nonbuyers receive a free sample of the
new product and are reinterviewed later to determine product attitudes, usage,
satisfaction, and repurchase intention.15➤

Controlled test marketing. A research ﬁrm manages a panel of stores that will carry new
products for a fee. The company with the new product speciﬁes the number ofstores and geographic locations it wants to test. The research ﬁrm delivers the
product to the participating stores and controls shelf position; number of facings,
displays, and point-of-purchase promotions; and pricing. Sales results can bemeasured through electronic scanners at the checkout. The company can also
evaluate the impact of local advertising and promotions during this test.

➤

Test markets. When full-blown, the company chooses a few representative cities, thesales force tries to sell the trade on carrying the product and giving it good
exposure, and the company unleashes a full advertising and promotion campaign inthese markets. Here, marketers must decide on the number and location of test
cities, length of the test, what to track, and what action to take. Today, many ﬁrms
are skipping extended test marketing and relying instead on faster and more
economical market-testing methods, such as smaller test areas and shorter test
periods.

Business-Goods Market Testing
Business goods can also beneﬁt from market testing. Expensive industrial goods andnew technologies will normally undergo both alpha and beta testing. In addition, newbusiness products are sometimes market-tested at trade shows. Trade shows such as theannual Toy Fair and semiannual Internet World draw a large number of buyers whoview many new products in a few concentrated days. The vendor can observe howmuch interest buyers show in the new product, how they react to various features andterms, and how many express purchase intentions or place orders. The disadvantageof trade shows is that they reveal the product to competitors; therefore, the vendor
should be ready to launch the product soon after the trade show.

Commercialization
If the company goes ahead with commercialization, it will face its largest costs to date.
The company will have to contract for manufacture or build or rent a full-scale manufacturing facility. Plant size will be a critical decision. The company may choose tobuild a smaller plant than called for by the sales forecast, to be on the safe side.
Quaker Oats did this when it launched its 100 Percent Natural breakfast cereal.
Unfortunately, demand so exceeded the company’s sales forecast that for about a year
it could not supply enough product to the stores. Although Quaker Oats was gratiﬁed
with the response, the low forecast cost it a considerable amount of proﬁt.
In addition to promotional decisions, other major decisions during this stage
include:➤When (timing). Marketing timing is critical. If a ﬁrm learns that a competitor isnearing the end of its development work, it can choose: ﬁrst entry (being ﬁrst to
market, locking up key distributors and customers, and gaining reputational
leadership; however, if the product is not thoroughly debugged, it can acquire a
ﬂawed image); parallel entry (launching at the same time as a rival may gain both

The Consumer Adoption Process
products more attention from the market); or late entry (waiting until after acompetitor has entered lets the competitor bear the cost of educating the market
and may reveal problems to avoid).
➤

Where (geographic strategy). The company must decide whether to launch the new
product in a single locality, a region, several regions, the national market, or theinternational market. Smaller companies often select one city for a blitz campaign,entering other cities one at a time; in contrast, large companies usually launchwithin a whole region and then move to the next region, although companies withnational distribution generally launch new models nationally. Firms are increasingly
rolling out new products simultaneously across the globe, which raises newchallenges in coordinating activities and obtaining agreement on strategy andtactics.

➤

To whom (target-market prospects). Within the rollout markets, the company must target
its initial distribution and promotion to the best prospect groups. Presumably, thecompany has already proﬁled the prime prospects—who would ideally be early
adopters, heavy users, and opinion leaders who are able to be reached at a low
cost.16 The company should rate the various prospect groups on thesecharacteristics and then target the best prospect group to generate strong sales assoon as possible, motivate the sales force, and attract further prospects.

➤

How (introductory market strategy). The company must develop an action plan for
introducing the new product into the rollout markets. To coordinate the many
activities involved in launching a new product, management can use networkplanning techniques such as critical path scheduling (CPS), which uses a master chart
to show the simultaneous and sequential activities that must take place to launch
the product. By estimating how much time each activity takes, the planners canestimate the project’s completion time. A delay in any activity on the critical pathwill delay the entire project.17

THE CONSUMER ADOPTION PROCESS
Adoption is an individual’s decision to become a regular user of a product. How dopotential customers learn about new products, try them, and adopt or reject them? In
the past, companies used a mass-market approach to introduce new products, on theassumption that most people are potential buyers. Yet consumers have different levels
of interest in new products and brands. The theory of innovation diffusion and consumer adoption helps marketers to identify and target early adopters—people who
adopt products before the majority of consumers in the market.

Stages in the Adoption Process
An innovation refers to any good, service, or idea that is perceived by someone as new.
The idea may have a long history, but it is an innovation to the person who sees it asnew. Innovations take time to spread through the social system. Rogers defines theinnovation diffusion process as “the spread of a new idea from its source of invention or
creation to its ultimate users or adopters.”18 The consumer-adoption process focuseson the mental process through which an individual passes from ﬁrst hearing about aninnovation to ﬁnal adoption.
Adopters of new products have been observed to move through five stages:(1) awareness (consumer becomes aware of the innovation but has no information
about it); (2) interest (consumer is stimulated to seek information about the innovation); (3) evaluation (consumer considers whether to try the innovation); (4) trial

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CHAPTER 9 POSITIONING PRODUCTS THROUGH THE LIFE CYCLE(consumer tries the innovation to estimate its value; and (5) adoption (consumer
decides to make full and regular use of the innovation).

Factors Inﬂuencing the Adoption Process
As Figure 3-10 shows, people adopt new products at different rates: Innovators are thefirst to adopt something new, while laggards are the last. Rogers defines a person’s
innovativeness as “the degree to which an individual is relatively earlier in adopting
new ideas than the other members of his social system.” Because people differ in theirreadiness to try new products, there are consumption pioneers and early adopters foreach product. After a slow start, an increasing number of people adopt the innovation,
the number reaches a peak, and then it diminishes as fewer nonadopters remain.
Another factor affecting adoption is personal inﬂuence, the effect one person has
on another’s attitude or purchase probability. Although personal inﬂuence is greaterin some situations and for some individuals, it is more important in the evaluation
stage of the adoption process than in the other stages. It generally has more inﬂuence
on late adopters and is more important in risky situations, as well.
Five characteristics inﬂuence the rate of adoption of an innovation: (1) relativeadvantage—the degree to which the innovation appears superior to existing products;(2) compatibility—the degree to which the innovation matches the values and experiences of the individuals; (3) complexity—the degree to which the innovation is relatively difﬁcult to understand or use; (4) divisibility—the degree to which the innovation can be tried on a limited basis; and (5) communicability—the degree to which the
beneﬁcial results of use are observable or describable to others. The new-product marketer has to research and consider all of these factors in designing the new productand its marketing program.19
Finally, organizations vary in their readiness to adopt innovations. Adoption isassociated with variables in the organization’s environment, the organization itself(size, proﬁts, pressure to change), and its managers. Other forces come into play whentrying to get a product adopted into organizations that receive the bulk of their funding from the government. And a controversial or innovative product can be squelchedby negative public opinion.

Figure 3-10 Adopter Categorization on the Basis of Relative Time of Adoptionof Innovation

Marketing Through the Product Life Cycle

MARKETING THROUGH THE PRODUCT LIFE CYCLE
In today’s highly dynamic marketing environment, a company’s marketing strategy
must change as the product, market, and competitors change over time. Here, we
describe the concept of the product life cycle (PLC) and the changes that companies
make as the product passes through each stage of the life cycle.

The Concept of the Product Life Cycle
To say that a product has a life cycle is to assert four things: (1) Products have a limited
life; (2) product sales pass through distinct stages with different challenges, opportunities, and problems for the seller; (3) proﬁts rise and fall at different stages of the
product life cycle; and (4) products require different marketing, ﬁnancial, manufacturing, purchasing, and human resource strategies in each stage. Most product lifecycle curves are portrayed as a bell-shape (Figure 3-11).
This PLC curve is typically divided into four stages:20➤

Introduction: A period of slow sales growth as the product is introduced in themarket. Proﬁts are nonexistent in this stage because of the heavy expenses incurredwith product introduction.

➤

Growth: A period of rapid market acceptance and substantial proﬁt improvement.

➤

Maturity: A period of a slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Proﬁts stabilize or decline because ofincreased competition.

➤

Decline: The period when sales show a downward drift and proﬁts erode.

Table 3.7 summarizes the characteristics, objectives, and strategies associatedwith each stage.

Marketing Strategies: Introduction Stage
Because it takes time to roll out a new product and ﬁll dealer pipelines, sales growthtends to be slow at this stage. Buzzell identified several causes for the slow growth:Figure 3-11 Sales and Proﬁt Life Cycles

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Table 3.7 Summary of Product Life Cycle Characteristics, Objectives, and Strategies
Introduction

GrowthMaturity

DeclineSales

Low sales

Rapidly rising sales

Peak sales

Declining sales

Costs

High cost per
customer

Average cost
per customer

Low cost
per customer

Low cost
per customer

Proﬁts

Negative

Rising proﬁts

High proﬁts

Declining proﬁts

Customers

Innovators

Early adopters

Middle majority

Laggards

Competitors

Few

Growing number

Stable number
beginning to decline

Declining number

Create productawareness and trial

Maximize market
share

Maximize proﬁt
while defending
market share

Reduceexpenditure andmilk the brand

Product

Offer a basic
product

Offer productextensions, service,
warranty

Diversify brands
and items

Phase out weakmodelsPrice

Charge cost-plus

Price to penetrate
marketPrice to match orbest competitors’

Cut price

Distribution

Build selective
distribution

Build intensive
distribution

Build more
intensive
distribution

Go selective:
phase out
unproﬁtable
outlets

Advertising

Build productawareness among
early adopters anddealers

Build awarenessand interest in
the mass market

Stress branddifferences andbeneﬁts

Reduce to levelneeded to retain
hard-core loyals

Sales Promotion

Use heavy sales
promotion to
entice trial

Reduce to takeadvantage of heavy
consumer demand

Increase toencourage brandswitching

Reduce tominimal level

Characteristics

Marketing Objectives

Strategies

Sources: Chester R.Wasson, Dynamic Competitive and Product Life Cycles (Austin,TX: Austin Press, 1978); John A.Weber,“Planning Corporate Growth with Inverted Product Life Cycles,” Long Range Planning, October 1976, pp. 12–29; andPeter Doyle,“The Realities of the Product Life Cycle,” Quarterly Review of Marketing, Summer 1976.

delays in the expansion of production capacity, technical problems (“working out thebugs”), delays in obtaining adequate distribution through retail outlets, and customer
reluctance to change established behaviors.21 Sales of expensive new products are
retarded by additional factors such as product complexity and fewer buyers.
Profits are negative or low in the introduction stage because of low sales andheavy distribution and promotion expenses. Much money is needed to attract distrib-

Marketing Through the Product Life Cycle

utors. Promotional expenditures are high because of the need to (1) inform potential
consumers, (2) induce product trial, and (3) secure distribution. Firms focus their selling on those buyers who are the readiest to buy, usually higher-income groups. Prices
tend to be high because costs are high due to relatively low output rates, technologicalproblems in production, and high required margins to support the heavy promotional
expenditures.
Companies must decide when to enter the market with a new product. Most studies
indicate that the market pioneer gains the most advantage. Such pioneers as Amazon.com,
Cisco, Coca-Cola, eBay, Eastman Kodak, Hallmark, Microsoft, Peapod.com, and Xerox
developed sustained market dominance.
However, the pioneer advantage is not inevitable. Schnaars studied 28 industries
in which the imitators surpassed the innovators and found several weaknesses among
the failing pioneers, including new products that were too crude, were improperly
positioned, or appeared before there was strong demand; product-development costs
that exhausted the innovator’s resources; a lack of resources to compete against entering larger ﬁrms; and managerial incompetence or unhealthy complacency. Successful
imitators thrived by offering lower prices, improving the product more continuously,
or using brute market power to overtake the pioneer.22 As one example, Apple’s
Newton, the ﬁrst handheld personal digital assistant, failed because it could not decipher the handwriting of users consistently. In contrast, imitator Palm Pilot’s smaller,
more advanced product was enormously successful because it allowed users to input
information with a few standardized strokes of the stylus.23
Still, the pioneer knows that competition will eventually enter the market andcharge a lower price, which will force the pioneer to lower prices. As competition andmarket share stabilize, buyers will no longer pay a price premium; some competitors
will withdraw at this point, and the pioneer can then build share if it chooses.24

Marketing Strategies: Growth Stage
The growth stage is marked by a rapid climb in sales, as DVD players are currently
experiencing.25 Early adopters like the product, and additional consumers start buying it. Attracted by the opportunities, new competitors enter with new product features and expanded distribution. Prices remain where they are or fall slightly,
depending on how fast demand increases. Companies maintain or increase their promotional expenditures to meet competition and to continue to educate the market.
Sales rise much faster than promotional expenditures, causing a welcome decline in
the promotion-sales ratio.
Proﬁts increase during this stage as promotion costs are spread over a larger volume and unit manufacturing costs fall faster than price declines owing to the producer
learning effect. During this stage, the ﬁrm uses several strategies to sustain rapid market
growth as long as possible: (1) improving product quality and adding new product features and improved styling; (2) adding new models and ﬂanker products; (3) entering
new market segments; (4) increasing distribution coverage and entering new distribution channels; (5) shifting from product-awareness advertising to product-preference
advertising; and (6) lowering prices to attract the next layer of price-sensitive buyers.

Marketing Strategies: Maturity StageAt some point, the rate of sales growth will slow, and the product will enter a stage ofrelative maturity. This stage normally lasts longer than the previous stages, and poses
formidable challenges to marketing management. Most products are in the maturity stageof the life cycle, and most marketing managers cope with the problem of marketing the mature
product.

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Three strategies for the maturity stage are market modiﬁcation, product modiﬁcation, and marketing-mix modiﬁcation:➤

Market modiﬁcation. The company might try to expand the market for its maturebrand by working to expand the number of brand users. This is accomplished by(1) converting nonusers; (2) entering new market segments (as Johnson & Johnson
did when promoting baby shampoo for adult use); or (3) winning competitors’
customers (the way Pepsi-Cola tries to woo away Coca-Cola users). Volume can also
be increased by convincing current brand users to increase their usage of the brand.

➤

Product modiﬁcation. Managers try to stimulate sales by modifying the product’s
characteristics through quality improvement, feature improvement, or style
improvement. Quality improvement aims at increasing the product’s functional
performance—its durability, reliability, speed, taste. New features build thecompany’s image as an innovator and win the loyalty of market segments that value
these features; this is why America Online regularly introduces new versions of its
Internet software. However, feature improvements are easily imitated; unless there isa permanent gain from being ﬁrst, the feature improvement might not pay off in
the long run.26➤

Marketing-mix modiﬁcation. Product managers can try to stimulate sales by modifying
other marketing-mix elements such as prices, distribution, advertising, sales
promotion, personal selling, and services. For example, Goodyear boosted its
market share from 14 to 16 percent in 1 year when it began selling tires through
Wal-Mart, Sears, and Discount Tire.27 Sales promotion has more impact at this stage
because consumers have reached an equilibrium in their buying patterns, andpsychological persuasion (advertising) is not as effective as ﬁnancial persuasion(sales-promotion deals). However, excessive sales-promotion activity can hurt thebrand’s image and long-run proﬁt performance. In addition, price reductions andmany other marketing-mix changes are easily imitated. The ﬁrm may not gain asmuch as expected, and all ﬁrms might experience proﬁt erosion as they step up
their marketing attacks on each other.

Marketing Strategies: Decline Stage
The sales of most product forms and brands eventually decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased
domestic and foreign competition. All of these factors lead ultimately to overcapacity,
increased price cutting, and proﬁt erosion. As sales and proﬁts decline, some ﬁrms
withdraw from the market. Those remaining may reduce the number of products they
offer. They may withdraw from smaller market segments and weaker trade channels,
and they may cut their promotion budget and reduce their prices further.
In a study of company strategies in declining industries, Harrigan identiﬁed ﬁve
possible decline strategies:
1.

Increasing the ﬁrm’s investment (to dominate the market or strengthen its competitive
position);2.

Maintaining the ﬁrm’s investment level until the uncertainties about the industry are
resolved;

3.

Decreasing the ﬁrm’s investment level selectively, by dropping unproﬁtable customer
groups, while simultaneously strengthening the ﬁrm’s investment in lucrative niches;

4.

Harvesting (“milking”) the ﬁrm’s investment to recover cash quickly; and5.

Divesting the business quickly by disposing of its assets as advantageously as possible.28

Differentiation and Positioning Strategy

The appropriate decline strategy depends on the industry’s relative attractiveness and the company’s competitive strength in that industry. Procter & Gamble has,on a number of occasions, successfully restaged disappointing brands that were competing in strong markets. One example is its “not oily” hand cream called Wondra,
which came packaged in an inverted bottle so the cream would ﬂow out from the bottom. Although initial sales were high, repeat purchases were disappointing.
Consumers complained that the bottom got sticky and that “not oily” suggested it
would not work well. P&G carried out two restagings for this product: First, it reintroduced Wondra in an upright bottle, and later, it reformulated the ingredients so theywould work better. Sales then picked up.
If the company were choosing between harvesting and divesting, its strategies
would be quite different. Harvesting calls for gradually reducing a product’s or business’s costs while trying to maintain its sales. The ﬁrst costs to cut are R&D costs andplant and equipment investment. The company might also reduce product quality,
sales force size, marginal services, and advertising expenditures. It would try to cut
these costs without letting customers, competitors, and employees know what is happening. Harvesting is an ethically ambivalent strategy, and it is also difﬁcult to execute.
Yet harvesting can substantially increase the company’s current cash ﬂow.29

Critique of the Product Life-Cycle Concept
The PLC concept is best used to interpret product and market dynamics. As a planning tool, this concept helps managers characterize the main marketing challenges
in each stage of a product’s life and develop major alternative marketing strategies.
As a control tool, this concept helps the company measure product performanceagainst similar products launched in the past. The PLC concept is less useful as a forecasting tool because sales histories exhibit diverse patterns, and the stages vary induration.
Critics claim that life-cycle patterns are too variable in their shape and duration.
They also say that marketers can seldom tell what stage the product is in: A productmay appear to be mature when it is actually only in a plateau prior to anotherupsurge. One ﬁnal criticism is that the PLC pattern is the result of marketing strategies rather than an inevitable course that sales must follow. For example, when
Borden owned Eagle Brand Sweetened Condensed Milk, its marketing positioned
this mature product as a key ingredient in favorite holiday recipes. When the brandwas sold to Eagle Family Foods, however, the new brand manager was able to boost
sales with an ad campaign educating consumers on the wider range of uses for condensed milk.30 Savvy marketers are therefore careful when using the PLC concept toanalyze their products and markets.

DIFFERENTIATION AND POSITIONING STRATEGY
Companies such as Hewlett-Packard and Priceline.com invest precious resources todevelop and then shepherd their new products through the product life cycle. Yet in
today’s highly competitive global marketplace, a product will not survive—let alone
thrive—without some distinct competitive difference that sets it apart from every
rival product. This is why smart companies rely on differentiation, the act of designing a set of meaningful differences to distinguish the company’s offering from competitors’ offerings. Here we examine how a company can differentiate its market
offering along five dimensions: product, services, personnel, channel, and image(Table 3.8).

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Table 3.8 Differentiation Variables
Product

Services

Personnel

Channel

Image

Form
Features
Performance
Conformance
Durability
Reliability
Repairability
Style
DesignOrdering ease
Delivery
Installation
Customer training
Customer consulting
Maintenance and repair
MiscellaneousCompetence
Courtesy
Credibility
Reliability
ResponsivenessCommunication

Coverage
Expertise
Performance

SymbolsMedia
Atmosphere
Events

Product Differentiation
Physical products vary in their potential for differentiation. At one extreme we ﬁnd
products that allow little variation: chicken, steel, aspirin. Yet even here, some differentiation is possible: Starbucks brands its coffee, and P&G offers several brands oflaundry detergent, each with a separate brand identity. At the other extreme are products that are capable of high differentiation, such as automobiles and furniture. Herethe seller faces an abundance of design parameters, including:31➤

Form. Many products can be differentiated in form—the size, shape, or physicalstructure of a product. Consider the many possible forms taken by products such as
aspirin. Although aspirin is essentially a commodity, it can be differentiated bydosage size, shape, coating, and action time.

➤

Features. Features are the characteristics that supplement the product’s basic
function. Marketers start by asking recent buyers about additional features thatwould improve satisfaction, then determining which would be proﬁtable to add,
given the potential market, cost, and price.

➤

Performance quality. Performance quality is the level at which the product’s primarycharacteristics operate. The Strategic Planning Institute found a signiﬁcantly
positive correlation between relative product quality and return on investment. Yet
there are diminishing returns to higher performance quality, so marketers mustchoose a level suited to the target market and rivals’ performance levels.

➤

Conformance quality. Buyers expect products to have a high conformance quality, whichis the degree to which all of the produced units are identical and meet thepromised speciﬁcations. The problem with low conformance quality is that the
product will disappoint some buyers.

➤

Durability. Durability, a measure of the product’s expected operating life undernatural or stressful conditions, is important for products such as vehicles andkitchen appliances. However, the extra price must not be excessive, and the productmust not be subject to rapid technological obsolescence.

➤

Reliability. Buyers normally will pay a premium for high reliability, a measure of theprobability that a product will not malfunction or fail within a speciﬁed time period.
Maytag, which manufactures major home appliances, has an outstanding reputation
for creating reliable appliances.

Differentiation and Positioning Strategy➤

Repairability. Buyers prefer products that are easy to repair. Repairability is a measureof the ease of ﬁxing a product when it malfunctions or fails. An automobile madewith standard parts that are easily replaced has high repairability. Ideal repairability
would exist if users could ﬁx the product themselves with little cost or time.

➤

Style. Style describes the product’s look and feel to the buyer. Buyers are normallywilling to pay a premium for products that are attractively styled. Aesthetics haveplayed a key role in such brands as Absolut vodka, Apple computers, Montblancpens, Godiva chocolate, and Harley-Davidson motorcycles.32 Style has the advantageof creating distinctiveness that is difﬁcult to copy; however, strong style does notalways mean high performance.

➤

Design. As competition intensiﬁes, design offers a potent way to differentiate andposition a company’s products and services.33 Design is the integrating force thatincorporates all of the qualities just discussed; this means the designer has to ﬁgureout how much to invest in form, feature development, performance, conformance,
durability, reliability, repairability, and style. To the company, a well-designed
product is one that is easy to manufacture and distribute. To the customer, a welldesigned product is one that is pleasant to look at and easy to open, install, use,
repair, and dispose of. The designer has to take all of these factors into account.

Services Differentiation
When the physical product cannot be differentiated easily, the key to competitive success may lie in adding valued services and improving their quality. The main service
differentiators are:➤Ordering ease refers to how easy it is for the customer to place an order with thecompany. Baxter Healthcare has eased the ordering process by supplying hospitals
with computers through which they send orders directly to Baxter; consumers can
now order and receive groceries without going to the supermarket by using Webbased services such as Peapod and NetGrocer.

➤

Delivery refers to how well the product or service is delivered to the customer,
covering speed, accuracy, and customer care. Deluxe Check Printers, Inc., has built
an impressive reputation for shipping out its checks one day after receiving anorder—without being late once in 18 years.

➤

Installation refers to the work done to make a product operational in its planned
location. Buyers of heavy equipment expect good installation service.
Differentiation by installation is particularly important for companies that offer
complex products such as computers.

➤

Customer training refers to how the customer’s employees are trained to use thevendor’s equipment properly and efﬁciently. General Electric not only sells andinstalls expensive X-ray equipment in hospitals, but also gives extensive training tousers of this equipment.

➤

Customer consulting refers to data, information systems, and advising services that theseller offers to buyers. For example, the Rite Aid drugstore chain’s communications
program, called the Vitamin Institute, provides customers with research so they canmake more educated judgments and feel comfortable asking for help. On the Web,
Rite Aid has teamed with drugstore.com to offer even more health-related
information.34➤

Maintenance and repair describes the service program for helping customers keep
purchased products in good working order, an important consideration for many
products.

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Personnel Differentiation
Companies can gain a strong competitive advantage through having better-trained
people. Singapore Airlines enjoys an excellent reputation in large part because of its
ﬂight attendants. The McDonald’s people are courteous, the IBM people are professional, and the Disney people are upbeat. The sales forces of such companies as
General Electric, Cisco, Frito-Lay, Northwestern Mutual Life, and Pfizer enjoy an
excellent reputation.35 Well-trained personnel exhibit six characteristics: competence,
courtesy, credibility, reliability, responsiveness, and communication.36

Channel Differentiation
Companies can achieve competitive advantage through the way they design their distribution channels’ coverage, expertise, and performance. Caterpillar’s success in theconstruction-equipment industry is based partly on superior channel development. Its
dealers are found in more locations, are better trained, and perform more reliably thancompetitors’ dealers. Dell Computers has also distinguished itself by developing andmanaging superior direct-marketing channels using telephone and Internet sales.37

Image Differentiation
Buyers respond differently to company and brand images. Identity comprises the waysthat a company aims to identify or position itself or its product, whereas image is theway the public perceives the company or its products. Image is affected by many factors beyond the company’s control. For example, Nike’s mainstream popularity turns
off 12-to-24-year-olds, who prefer Airwalk and other alternative brands that convey amore extreme sports image.38 An effective image establishes the product’s characterand value proposition; it conveys this character in a distinctive way; and it delivers
emotional power beyond a mental image. For the image to work, it must be conveyed
through every available communication vehicle and brand contact, including logos,
media, and special events.

Developing and Communicating a Positioning Strategy
All products can be differentiated to some extent.39 But not all brand differences aremeaningful or worthwhile. A difference is worth establishing to the extent that it satisﬁes the following criteria:➤

Important: The difference delivers a highly valued beneﬁt to a sufﬁcient number ofbuyers.

➤Distinctive: The difference is delivered in a distinctive way.

➤

Superior: The difference is superior to other ways of obtaining the beneﬁt.

➤

Preemptive: The difference cannot be copied easily by competitors.

➤

Affordable: The buyer can afford to pay for the difference.

➤

Proﬁtable: The company will ﬁnd it proﬁtable to introduce the difference.

Each firm needs to develop a distinctive positioning for its market offering.
Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the target market’s mind. The end result of positioning is the successful creation of a market-focused value proposition, a cogent reason why the target
market should buy the product.
The word positioning was popularized by two advertising executives, Al Ries andJack Trout. They see positioning as a creative exercise done with an existing product:

Executive Summary“Positioning starts with a product. A piece of merchandise, a service, a company, an
institution, or even a person. . . . But positioning is not what you do to a product.
Positioning is what you do to the mind of the prospect. That is, you position the product in the mind of the prospect.”
Ries and Trout argue that well-known products generally hold a distinctive position in customers’ minds; Coca-Cola, for example, holds the position of world’s largest
soft-drink ﬁrm. To compete against this kind of position, a rival can (1) strengthen its
own current position in the consumer’s mind (the way 7-Up advertised itself as the
Uncola), (2) grab an unoccupied position (as Snapple did with its tea-based beverages), (3) deposition or reposition the competition, or (4) promote the idea that it isin the club with the “best.”40
How Many Differences to Promote?
Each company must decide how many differences (e.g., benefits, features) to promote. Ries and Trout favor one consistent positioning message.41 With this approach,each brand is touted as “number one” on a particular attribute, such as “best quality,”“best service,” “lowest price,” or “most advanced technology.” If a company hammers
away at one positioning and delivers on it, it will probably be best known and recalled
for this strength.
Not everyone sticks to single-benefit positioning. Smith Kline Beecham promotes its Aquafresh toothpaste as offering three beneﬁts: anticavity protection, better
breath, and whiter teeth. The company’s challenge is to convince consumers that thebrand delivers all three. Smith Kline’s solution was to create a toothpaste that squeezes
out of the tube in three colors, thus visually conﬁrming the three beneﬁts.
Communicating the Company’s Positioning
Once the company has developed a clear positioning strategy, it must communicatethat positioning effectively through all facets of the marketing mix and every point ofcontact with customers. Suppose a service company chooses the “best-in-quality” strategy. A good example is Ritz Carlton hotels, which signals high quality by training its
employees to answer calls within three rings, to answer with a genuine “smile” in their
voices, and to be extremely knowledgeable about all hotel information.
On the other hand, companies risk confusing the target audience if their marketing tactics run counter to their positioning. For example, a well-known frozen-foodbrand lost its prestige image by putting its products on sale too often. A smart company carefully coordinates its marketing-mix activities and its offer to support its positioning. New products may be the lifeblood of a growing ﬁrm, but they must be clearly
differentiated and properly positioned to be competitive. The ﬁrm also faces numerous decisions in the course of managing product lines and brands, as discussed in thenext chapter.

EXECUTIVE SUMMARY
Once a company has segmented the market, chosen its target customer groups, identiﬁed their needs, and determined its desired market positioning, it is ready to develop
and launch new products. Although the rate of new product failure is disturbingly
high, companies can improve their chances of success by creating new products with ahigh product advantage. Eight stages are involved in the new-product development
process: idea generation, screening, concept development and testing, marketingstrategy development, business analysis, product development, market testing, and

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commercialization. The purpose of each stage is to determine whether the idea
should be dropped or moved to the next stage.
The consumer-adoption process is the process by which customers learn about
new products, try them, and adopt or reject them. The ﬁve stages in this process areawareness, interest, evaluation, trial, and adoption. This process is inﬂuenced by manyfactors beyond the marketer’s control, including consumers’ and organizations’ willingness to try new products, personal inﬂuences, and the characteristics of the new
product or innovation.
Because economic conditions change and competitive activity varies, companies
normally reformulate their marketing strategy several times during the product life
cycle. The introduction stage of this cycle is marked by slow growth and minimal profits as the new product gains distribution. If successful, the product enters a growthstage marked by rapid sales and increasing proﬁts. The company attempts to improve
the product, enter new market segments and distribution channels, and reduce prices
slightly. In the maturity stage, sales growth slows and proﬁts stabilize, causing the ﬁrm
to try to modify the market, the product, or the marketing mix to renew sales growth.
Finally, the product enters the decline stage, when the ﬁrm must decide whether toincrease, maintain, or decrease its investment; harvest the product; or divest as advantageously as possible.
In the competitive global marketplace, the key to competitive advantage is differentiation. A market offering can be differentiated by product, services, personnel,
channel, and image. A difference is worth establishing to the extent that it is important, distinctive, superior, preemptive, affordable, and proﬁtable. Positioning is the actof designing the company’s offering and image to occupy a distinctive place in the target market’s mind. Many marketers advocate positioning according to a single product beneﬁt, although double- and triple-beneﬁt positioning can be successful if usedcarefully.

NOTES
1. Christopher Power, “Flops,” Business Week, August 16, 1993, pp. 76–82.
2. New Products Management for the 1980s (New York: Booz, Allen & Hamilton, 1982).
3. Erika Rasmussen, “Staying Power,” Sales & Marketing Management, August 1998, pp. 44–46.
4. Robert G. Cooper and Elko J. Kleinschmidt, New Products: The Key Factors in Success(Chicago: American Marketing Association, 1990).
5. Modesto A. Madique and Billie Jo Zirger, “A Study of Success and Failure in ProductInnovation: The Case of the U.S. Electronics Industry,” IEEE Transactions on Engineering
Management, November 1984, pp. 192–203.
6. Eric von Hippel, “Lead Users: A Source of Novel Product Concepts,” Management Science,
July 1986, pp. 791–805. Also see his The Sources of Innovation (New York: Oxford University
Press, 1988); and “Learning from Lead Users,” in Marketing in an Electronic Age, ed. Robert
D. Buzzell (Cambridge, MA: Harvard Business School Press, 1985), pp. 308–17.
7. Constance Gustke, “Built to Last,” Sales & Marketing Management, August 1997, pp. 78–83.
8. “The Ultimate Widget: 3-D ‘Printing’ May Revolutionize Product Design and
Manufacturing,” U.S. News & World Report, July 20, 1992, p. 55.
9. Dan Deitz, “Customer-Driven Engineering,” Mechanical Engineering, May 1996, p. 68.
10. See David B. Hertz, “Risk Analysis in Capital Investment,” Harvard Business Review, JanuaryFebruary 1964, pp. 96–106.
11. See John Hauser, “House of Quality,” Harvard Business Review, May-June 1988, pp. 63–73.
Customer-driven engineering is also called “quality function deployment.” See LawrenceNotesR. Guinta and Nancy C. Praizler, The QFD Book: The Team Approach to Solving Problems andSatisfying Customers through Quality Function Deployment (New York: AMACOM, 1993); V.
Srinivasan, William S. Lovejoy, and David Beach, “Integrated Product Design forMarketability and Manufacturing,” Journal of Marketing Research, February 1997, pp. 154–63.
12. See Mark Borden, “Keeping Yahoo Simple—and Fast,” Fortune, January 10, 2000,
pp. 167–68.
13. Ibid., p. 99.
14. Charles Platt, “What’s the Big Idea,” Wired, September 1999, pp. 122–32; Dave Califano,“The Future of the Internet: CarsDirect,” Worth Online, November 1999, www.worth.com.
15. Christopher Power, “Will it Sell in Podunk? Hard to Say,” Business Week, August 10, 1992,
pp. 46–47.
16. Philip Kotler and Gerald Zaltman, “Targeting Prospects for a New Product,” Journal ofAdvertising Research, February 1976, pp. 7–20.
17. For details, see Keith G. Lockyer, Critical Path Analysis and Other Project Network Techniques(London: Pitman, 1984). Also see Arvind Rangaswamy and Gary L. Lilien, “Software Tools
for New Product Development,” Journal of Marketing Research, February 1997, pp. 177–84.
18. The following discussion leans heavily on Everett M. Rogers, Diffusion of Innovations (NewYork: Free Press, 1962). Also see his third edition, published in 1983.
19. See Hubert Gatignon and Thomas S. Robertson, “A Propositional Inventory for New
Diffusion Research,” Journal of Consumer Research, March 1985, pp. 849–67; Vijay Mahajan,
Eitan Muller, and Frank M. Bass, “Diffusion of New Products: Empirical Generalizations
and Managerial Uses,” Marketing Science, 14, no. 3, part 2 (1995): G79–G89; Fareena Sultan,
John U. Farley, and Donald R. Lehmann, “Reﬂection on ‘A Meta-Analysis of Applicationsof Diffusion Models,’ ” Journal of Marketing Research, May 1996, pp. 247–49; Minhi Hahn,
Sehoon Park, and Andris A. Zoltners, “Analysis of New Product Diffusion Using a Foursegment Trial-repeat Model,” Marketing Science, 13, no. 3 (1994): 224–47.
20. Some authors distinguished additional stages. Wasson suggested a stage of competitive
turbulence between growth and maturity. See Chester R. Wasson, Dynamic Competitive
Strategy and Product Life Cycles (Austin, TX: Austin Press, 1978). Maturity describes a stage ofsales growth slowdown and saturation, a stage of ﬂat sales after sales have peaked.
21. Robert D. Buzzell, “Competitive Behavior and Product Life Cycles,” in New Ideas for
Successful Marketing, eds. John S. Wright and Jack Goldstucker (Chicago: American
Marketing Association, 1956), p. 51.
22. Steven P. Schnaars, Managing Imitation Strategies (New York: Free Press, 1994).
23. Arlyn Tobias Gajilan, “The Parents of the Pilot Try for an Encore with Handspring,”
Fortune, November 22, 1999, pp. 374[H], 374[J]; Stephanie Miles, “PalmPilot In, Newton
Out,” CNET News.com, February 27, 1998, www.news.com.
24. John B. Frey, “Pricing Over the Competitive Cycle,” speech presented at the 1982
Marketing Conference, Conference Board, New York.
25. “Explosive Growth in DVD Sales,” ZDNet News, December 9, 1999, www.zdnet.com.
26. Stephen M. Nowlis and Itamar Simmonson, “The Effect of New Product Features on Brand
Choice,” Journal of Marketing Research, February 1996, pp. 36–46.
27. Allen J. McGrath, “Growth Strategies with a ’90s Twist,” Across the Board, March 1995,
pp. 43–46.
28. Kathryn Rudie Harrigan, “Strategies for Declining Industries,” Journal of Business Strategy,
Fall 1980, p. 27.
29. See Philip Kotler, “Harvesting Strategies for Weak Products,” Business Horizons, August
1978, pp. 15–22; and Laurence P. Feldman and Albert L. Page, “Harvesting: The
Misunderstood Market Exit Strategy,” Journal of Business Strategy, Spring 1985, pp. 79–85.
30. Dana James, “Rejuvenating Mature Brands Can Be Stimulating Exercise,” Marketing News,
August 16, 1999, pp. 16–17.

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31. Some of these bases are discussed in David A. Garvin, “Competing on the Eight
Dimensions of Quality,” Harvard Business Review, November-December 1987, pp. 101–9.
32. See Bernd Schmitt and Alex Simonson, Marketing Aesthetics: The Strategic Management ofBrand, Identity, and Image (New York: Free Press, 1997).
33. See Philip Kotler, “Design: A Powerful but Neglected Strategic Tool,” Journal of Business
Strategy, Fall 1984, pp. 16–21. Also see Christopher Lorenz, The Design Dimension (New York:
Basil Blackwell, 1986).
34. Christine Bittar, “The Rite Stuff,” Brandweek, September 14, 1998, pp. 28–29.
35. See “The 25 Best Sales Forces,” Sales & Marketing Management, July 1998, pp. 32–50.
36. For a similar list, see Leonard L. Berry and A. Parasuraman, Marketing Services: Competing
Through Quality (New York: Free Press, 1991), p. 16.
37. Erin Davies, “Selling Sex and Cat Food,” Fortune, June 9, 1997, p. 36.
38. “Four Reasons Nike’s Not Cool,” Fortune, March 30, 1998, pp. 26–27.
39. Theodore Levitt, “Marketing Success through Differentiation—of Anything,” Harvard
Business Review, January-February 1980.
40. Al Ries and Jack Trout, Positioning: The Battle for Your Mind (New York: Warner Books,
1982).
41. Ries and Trout, Positioning.

SECTION FOUR

Managing ProductLines and Brands
We will address the following questions:■ What are the characteristics of products?
■ How can a company build and manage its product mix and product lines?
■ How can a company make better brand decisions?
■ How can packaging and labeling be used as marketing tools?

Product, as successful ﬁrms the world over are keenly aware, is a key element in themarket offering. This holds true whether the product is a television show (offered byArts & Entertainment Network), an Internet access service (offered by AT&T), a hamburger (offered by Wendy’s), a DVD player (offered by Sony), a sweater (offered by
Benetton), or a chocolate bar (offered by Nestlé). No matter where the product originates, no matter which market segment is being targeted, marketing-mix planning
begins with formulating an offering to meet customers’ needs or wants.
Previously, we looked at how companies develop, differentiate, and position
their products throughout the life cycle. Here, we examine the concept of productand product-line decisions. We also explore basic brand decisions and key packaging
and labeling issues. Three elements—product, services, and price—must be meshedinto a competitively attractive offering if a company wants to perform well in the marketplace.

THE PRODUCT AND THE PRODUCT MIX
A product is anything that can be offered to a market to satisfy a want or need.
Products include physical goods, services, experiences, events, persons, places, properties, organizations, information, and ideas. The customer will judge the offering by three basic
elements: product features and quality, services mix and quality, and price appropriateness (Figure 4-1). As a result, marketers must carefully think through the level atwhich they set each product’s features, beneﬁts, and quality.

Product Levels
Marketers plan their market offering at ﬁve levels, as shown in Figure 4-2.1 Each leveladds more customer value, and together the ﬁve levels constitute a customer value hierarchy. The most fundamental level is the core beneﬁt: the fundamental service or beneﬁtthat the customer is really buying. A hotel guest is buying “rest and sleep”; the pur-

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Figure 4-1 Components of the Market Offeringchaser of a drill is buying “holes.” Effective marketers therefore see themselves asproviders of product beneﬁts, not merely product features.
At the second level, the marketer has to turn the core beneﬁt into a basic product. Thus, a hotel room includes a bed, bathroom, towels, and closet. At the thirdlevel, the marketer prepares an expected product, a set of attributes and conditions thatbuyers normally expect when they buy the product. Hotel guests expect a clean bed,
fresh towels, and so on. Because most hotels can meet this minimum expectation, thetraveler normally will settle for whichever hotel is most convenient or least expensive.
At the fourth level, the marketer prepares an augmented product that exceeds customer expectations. A hotel might include a remote-control television set, fresh ﬂowers, and express check-in and checkout. Today’s competition essentially takes place atthe product-augmentation level. (In less developed countries, competition takes
place mostly at the expected product level.) Product augmentation leads the mar-Figure 4-2 Five Product Levels

The Product and the Product Mix

keter to look at the user’s total consumption system: the way the user performs the tasksof getting, using, fixing, and disposing of the product.2 As Levitt notes: “The newcompetition is not between what companies produce in their factories, but between
what they add to their factory output in the form of packaging, services, advertising,customer advice, financing, delivery arrangements, warehousing, and other things
that people value.”3
However, product augmentation adds cost, so the marketer must determine
whether customers will pay enough to cover the extra cost (of remote-control television in a hotel room, for example). Moreover, augmented benefits soon become
expected beneﬁts, which means that competitors have to search for still other featuresand benefits. And as companies raise the price of their augmented product, somecompetitors can offer a “stripped-down” version of the product at a much lower price.
Thus, the hotel industry has seen the growth of ﬁne hotels offering augmented products (Four Seasons, Ritz Carlton) as well as lower-cost lodgings offering basic products(Motel Six, Comfort Inn).
At the ﬁfth level stands the potential product, which encompasses all of the possible augmentations and transformations the product might undergo in the future.
Here, a company searches for entirely new ways to satisfy its customers and distinguishits offer. As one example, Marriott’s TownePlace Suites all-suite hotels represent an
innovative transformation of the traditional hotel product.

Product Classiﬁcations
In addition to understanding a product’s position in the hierarchy, the marketer also
must understand how to classify the product on the basis of three characteristics: durability, tangibility, and consumer or industrial use. Each product classiﬁcation is associated with a different marketing-mix strategy.4➤

Durability and tangibility. Nondurable goods are tangible goods that are normallyconsumed in one or a few uses (such as beer and soap). Because these goods are
consumed quickly and purchased frequently, the appropriate strategy is to makethem available in many locations, charge only a small markup, and advertise heavily
to induce trial and build preference. Durable goods are tangible goods that normallysurvive many uses (such as refrigerators). These products normally require more
personal selling and service, command a higher margin, and require more seller
guarantees. Services are intangible, inseparable, variable, and perishable products(such as haircuts or cell phone service), so they normally require more quality
control, supplier credibility, and adaptability.

➤

Consumer-goods classiﬁcation. Classiﬁed according to consumer shopping habits, theseproducts include: convenience goods that are usually purchased frequently,
immediately, and with a minimum of effort, such as newspapers; shopping goods
that the customer, in the process of selection and purchase, characteristicallycompares on the basis of suitability, quality, price, and style, such as furniture;
specialty goods with unique characteristics or brand identiﬁcation, such as cars, forwhich a sufﬁcient number of buyers are willing to make a special purchasing effort;
and unsought goods that consumers do not know about or do not normally think ofbuying, such as smoke detectors. Dealers that sell specialty goods need not be
conveniently located but must communicate their locations to buyers; unsought
goods require more advertising and personal sales support.

➤

Industrial-goods classiﬁcation. Materials and parts are goods that enter the
manufacturer’s product completely. Raw materials can be either farm products (e.g.,

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wheat) or natural products (e.g., lumber). Farm products are sold throughintermediaries; natural products are generally sold through long-term supply
contracts, for which price and delivery reliability are key purchase factors.
Manufactured materials and parts fall into two categories: component materials (iron)and component parts (small motors); again, price and supplier reliability areimportant considerations. Capital items are long-lasting goods that facilitate
developing or managing the ﬁnished product. They include two groups:
installations (such as factories) and equipment (such as trucks and computers),
both sold through personal selling. Supplies and business services are short-lasting
goods and services that facilitate developing or managing the ﬁnished product.

Product Mix
A product mix (also called product assortment) is the set of all products and items thata particular marketer offers for sale. At Kodak, the product mix consists of two strong
product lines: information products and image products. At NEC (Japan), the product mix consists of communication products and computer products.
The product mix of an individual company can be described in terms of width,
length, depth, and consistency. The width refers to how many different product lines
the company carries. The length refers to the total number of items in the mix. The
depth of a product mix refers to how many variants of each product are offered. The
consistency of the product mix refers to how closely related the various product lines
are in end use, production requirements, distribution channels, or some other way.
These four product-mix dimensions permit the company to expand its businessby (1) adding new product lines, thus widening its product mix; (2) lengthening eachproduct line; (3) deepening the product mix by adding more variants; and (4) pursuing more product-line consistency.

PRODUCT-LINE DECISIONS
Especially in large companies such as Kodak and NEC, the product mix consists of avariety of product lines. In offering a product line, the company normally develops abasic platform and modules that can then be expanded to meet different customer
requirements. As one example, many home builders show a model home to which
additional features can be added, enabling the builders to offer variety while lowering
their production costs. Regardless of the type of products being offered, successful
marketers do not make product-line decisions without rigorous analysis.

Product-Line Analysis
To support decisions about which items to build, maintain, harvest, or divest, productline managers need to analyze the sales and profits as well as the market profile ofeach item:➤

Sales and proﬁts. The manager must calculate the percentage contribution of each item
to total sales and proﬁts. A high concentration of sales in a few items means line
vulnerability. On the other hand, the ﬁrm may consider eliminating items that delivera low percentage of sales and proﬁts—unless these exhibit strong growth potential.

➤

Market proﬁle. The manager must review how the line is positioned against
competitors’ lines. A useful tool here is a product map showing which competitive
products compete against the company’s products on speciﬁc features or beneﬁts.
This helps management identify different market segments and determine how well
the ﬁrm is positioned to serve the needs of each.

Brand Decisions

After performing these two analyses, the product-line manager is ready to consider
decisions on product-line length, line modernization, line featuring, and line pruning.

Product-Line Length
Companies seeking high market share and market growth will carry longer lines; companies emphasizing high proﬁtability will carry shorter lines of carefully chosen items.
Line stretching occurs when a ﬁrm lengthens its product line.
With a downmarket stretch, a firm introduces a lower price line. However, moving downmarket can be risky, as Kodak found out. It introduced Kodak Funtime film
to counter lower-priced brands, but the price was not low enough to match thelower-priced competitive products. When regular customers started buying
Funtime—cannibalizing the core brand—Kodak withdrew Funtime.
With an upmarket stretch, a company enters the high end of the market for
more growth, higher margins, or to position itself as a full-line manufacturer. All of theleading Japanese automakers have launched an upscale automobile: Toyota launched
Lexus; Nissan launched Inﬁnity; and Honda launched Acura. (Note that these marketers invented entirely new names rather than using their own names.)
Companies that serve the middle market can stretch their product lines in both
directions, as the Marriott Hotel group did. Alongside its medium-price hotels, it
added the Marriott Marquis to serve the upper end of the market, the Courtyard toserve a lower segment, and Fairﬁeld Inns to serve the low-to-moderate segment.5 The
major risk of this two-way stretch is that some travelers will trade down after ﬁnding thelower-price hotels have most of what they want. But it is still better for Marriott to capture customers who move downward than to lose them to competitors.
A product line can also be lengthened by adding more items within the present
range. There are several motives for line ﬁlling: reaching for incremental proﬁts, trying
to satisfy dealers who complain about lost sales because of missing items in the line,
trying to utilize excess capacity, trying to be the leading full-line company, and trying
to plug holes to keep out competitors.

Line Featuring and Line Pruning
The product-line manager typically selects one or a few items in the line to feature;
this is a way of attracting customers, lending prestige, or achieving other goals. If one
end of its line is selling well and the other end is selling poorly, the company may use
featuring to boost demand for the slower sellers, especially if those items are produced
in a factory that is idled by lack of demand. In addition, managers must periodicallyreview the entire product line for pruning, identifying weak items through sales andcost analysis. They may also prune when the company is short of production capacity
or demand is slow.

BRAND DECISIONS
Branding is a major issue in product strategy. On the one hand, developing a branded
product requires a huge long-term investment, especially for advertising, promotion,and packaging. However, it need not entail actual production: Many brand-oriented
companies such as Sarah Lee subcontract manufacturing to other companies. On theother hand, manufacturers eventually learn that market power comes from building
their own brands. The Japanese ﬁrms Sony and Toyota, for example, have spent liberally to build their brand names globally. Even when companies can no longer afford to
manufacture their products in their homelands, strong brand names continue to command customer loyalty.

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What Is a Brand?
Perhaps the most distinctive skill of professional marketers is their ability to create,
maintain, protect, and enhance brands.
The American Marketing Association defines a brand as a name, term, sign,
symbol, or design, or a combination of these, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those ofcompetitors.
In essence, a brand identiﬁes the seller or maker. Whether it is a name, trademark, logo, or another symbol, a brand is essentially a seller’s promise to deliver a speciﬁc set of features, beneﬁts, and services consistently to the buyers. The best brands
convey a warranty of quality. But a brand is an even more complex symbol.6 It can convey up to six levels of meaning, as shown in Table 4.1.
The branding challenge is to develop a deep set of positive associations for thebrand. Marketers must decide at which level(s) to anchor the brand’s identity. One
mistake would be to promote only attributes. First, buyers are not as interested in
attributes as they are in beneﬁts. Second, competitors can easily copy attributes. Third,
today’s attributes may become less desirable tomorrow. Ultimately, a brand’s mostenduring meanings are its values, culture, and personality, which deﬁne the brand’s
essence. Smart ﬁrms therefore craft strategies that do not dilute the brand values andpersonality built up over the years.

Table 4.1 Levels of Brand Meaning
Meaning

Description

ExampleAttributes

A brand brings to mind certain
attributes.

Mercedes suggests expensive,well-built, durable, high-prestige
vehicles.

Beneﬁts

Attributes must be translated
into functional and emotional
beneﬁts.

The attribute “durable” could
translate into the functional
beneﬁt “I won’t have to buy
another car for several years.”

ValuesThe brand says something about
the producer’s values.

Mercedes stands for highperformance, safety, andprestige.

CultureThe brand may represent a
certain culture.

Mercedes represents German
culture: organized, efﬁcient, highquality.

Personality

The brand can project a certain
personality.

Mercedes may suggest a nonnonsense boss (person) or areigning lion (animal).

User

The brand suggests the kind ofcustomer who buys or uses the
product.

Mercedes vehicles are more
likely to be bought by 55-yearold top managers than by 20year-old store clerks.

Brand Decisions

Brand Equity
Brands vary in the amount of power and value they have in the marketplace. At one
extreme are brands that are not known by most buyers. Then there are brands forwhich buyers have a fairly high degree of brand awareness. Beyond this are brands witha high degree of brand acceptability. Next are brands that enjoy a high degree of brandpreference. Finally there are brands that command a high degree of brand loyalty. Aaker
distinguished ﬁve levels of customer attitude toward a brand:
1.

Customer will change brands, especially for price reasons. No brand loyalty.

2.

Customer is satisﬁed. No reason to change the brand.

3.

Customer is satisﬁed and would incur costs by changing brand.

4.

Customer values the brand and sees it as a friend.

5.

Customer is devoted to the brand.

Brand equity is highly related to how many customers are in classes 3, 4, or 5. It isalso related, according to Aaker, to the degree of brand-name recognition, perceived
brand quality, strong mental and emotional associations, and other assets such as
patents, trademarks, and channel relationships.7 High brand equity allows a company
to enjoy reduced marketing costs because of high brand awareness and loyalty, gives acompany more leverage in bargaining with distributors and retailers, permits the ﬁrm
to charge more because the brand has higher perceived quality, allows the firm tomore easily launch extensions because the brand has high credibility, and offers somedefense against price competition.
Some analysts see brands as outlasting a company’s speciﬁc products and facilities, so brands become the company’s major enduring asset. Yet every powerful brandreally represents a set of loyal customers. Therefore, the fundamental asset underlying
brand equity is customer equity. This suggests that the proper focus of marketing planning is that of extending loyal customer lifetime value, with brand management serving asa major marketing tool.
Unfortunately, some companies have mismanaged their greatest asset—theirbrands. This is what befell the popular Snapple brand almost as soon as Quaker Oatsbought the beverage marketer for $1.7 billion in 1994. Snapple had become a hit
through powerful grassroots marketing and distribution through small outlets andconvenience stores. Analysts said that because Quaker did not understand the brand’s
appeal, it made the mistake of changing the ads and the distribution. Snapple lost somuch money and market share that in 1997, Quaker ﬁnally sold the company for $300
million to Triarc, which has since revived the ﬂoundering brand.8

Branding Challenges
Branding poses several challenges to the marketer (see Figure 4-3). The first iswhether or not to brand, the second is how to handle brand sponsorship, the third ischoosing a brand name, the fourth is deciding on brand strategy, and the fifth iswhether to reposition a brand later on.

To Brand or Not to Brand?
The ﬁrst decision is whether the company should develop a brand name for its product. Branding is such a strong force today that hardly anything goes unbranded,

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Figure 4-3 An Overview of Branding Decisions
including salt, oranges, nuts and bolts, and a growing number of fresh food products
such as chicken and turkey.
In some cases, there has been a return to “no branding” of certain staple consumer goods and pharmaceuticals. Generics are unbranded, plainly packaged, lessexpensive versions of common products such as spaghetti or paper towels. They offer
standard or lower quality at a price that may be as much as 20 percent to 40 percent
lower than nationally advertised brands and 10 percent to 20 percent lower thanretailer private-label brands. The lower price is made possible by lower-quality ingredients, lower-cost labeling and packaging, and minimal advertising.
Sellers brand their products, despite the costs, because they gain a number ofadvantages: The brand makes it easier for the seller to process orders; the seller’s
brand name and trademark legally protect unique product features; branding allows
sellers to attract loyal, proﬁtable customers and offers some protection from competition; branding helps the seller segment markets by offering different brands with different features for different beneﬁt-seeking segments; and strong brands help build
the corporate image, easing the way for new brands and wider acceptance by distributors and customers.
Distributors and retailers want brands because they make the product easier tohandle, indicate certain quality standards, strengthen buyer preferences, and make iteasier to identify suppliers. For their part, customers ﬁnd that brand names help themdistinguish quality differences and shop more efﬁciently.
Brand-Sponsor Decision
A manufacturer has several options with respect to brand sponsorship. The productmay be launched as a manufacturer brand (sometimes called a national brand), a distributor brand (also called reseller, store, house, or private brand), or a licensed brand
name. Another alternative is for the manufacturer to produce some output under its
own name and some under reseller labels. Kellogg, John Deere, and IBM sell virtually
all of their output under their own brand names, whereas Whirlpool produces bothunder its own name and under distributors’ names (Sears Kenmore appliances).
Although manufacturers’ brands dominate, large retailers and wholesalers havebeen developing their own brands by contracting production from willing manufacturers. Sears has created several names—Diehard batteries, Craftsman tools, Kenmore
appliances—that command brand preference and even brand loyalty. Retailers such as
The Body Shop and Gap sell mostly own-brand merchandise. Sainsbury, Britain’s largest
food chain, sells 50 percent store-label goods, and its operating margins are six times
those of U.S. retailers (U.S. supermarkets average 19.7 percent private-brand sales).

Brand Decisions

Why do middlemen sponsor their own brands? First, these brands are more profitable, since they are produced at a low cost by manufacturers with excess capacity.
Other costs, such as research and development, advertising, sales promotion, andphysical distribution, are also much lower. This means that the private brander cancharge a lower price and yet make a higher proﬁt margin. Second, retailers develop
exclusive store brands to differentiate themselves from competitors.
In years past, consumers viewed the brands in a category arranged in a brand ladder, with their favorite brand at the top and remaining brands in descending order ofpreference. There are now signs that this ladder is being replaced with a consumer
perception of brand parity—that many brands are equivalent.9 Instead of a strongly
preferred brand, consumers buy from a set of acceptable brands, choosing whicheveris on sale that day.
Today’s consumers are also more price sensitive, because a steady barrage of
coupons and price specials has trained them to buy on price. In fact, over time, companies have reduced advertising to 30 percent of their total promotion budget, weakening
brand equity. Moreover, the endless stream of brand extensions and line extensions has
blurred brand identity and led to a confusing amount of product proliferation. Further,
consumers see little difference in quality among brands now that competing manufacturers and retailers are copying and duplicating the qualities of the best brands.
Of course, one of the factors that is changing the entire branding landscape is
the Internet. While some “born digital” companies like America Online (AOL) andAmazon.com have used the Internet to gain brand recognition seemingly overnight,
other companies have poured millions of dollars into on-line advertising with little
effect on brand awareness or preference. For some low-price, low-involvement products, such as soap, the Internet offers little potential as a commerce vehicle. Still, thepackaged-goods powerhouses are trying different approaches to Web marketing.
Procter & Gamble, for example, has put much of its on-line marketing budget
behind brands like Always panty liners, Tampax tampons, and Pampers diapers,
which have narrow target audiences with more personal subject matter. With thisstrategy, the company has turned Pampers.com into Pampers Parenting Institute,reaching out to customers by addressing various issues of concern to new or expectant parents.10
All companies that have powerful brand awareness on the Web have sites that
help customers do something—whether it’s conﬁguring a computer system on-line at
Dell.com or offering customization options for services at Yahoo.com. Yet some of thebiggest superstars of e-commerce conduct most of their branding efforts off-line: Cisco
advertises in business publications, while Dell advertises in tech trade magazines andon television.11
AOL, like many high-tech companies, has been adept at achieving solid brandrecognition through less conventional marketing approaches. Today, over half of all
U.S. households are familiar with AOL brand. That’s because AOL has blanketed thecountry for years with free software and free trial offers. The company has also cut
deals to put its product in some unlikely places: inside Rice Chex cereal boxes, United
Airlines in-ﬂight meals, and Omaha Steaks packages, to name a few. AOL’s marketers
believe that novices need to try the service to appreciate its beneﬁts. Then, once consumers start using AOL, the company reasons that the user-friendly program will lurethem to subscribe. Also on AOL’s side is sheer inertia, which prevents many people
from switching to another Internet service provider.12
Brand-Name Decision
Manufacturers and service companies who brand their products must choose whichbrand names to use. Four strategies are available, as shown in Table 4.2.

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Table 4.2 Brand-Name Strategies
Strategy

ExamplesRationale

Individual names

General Mills (Bisquick,
Gold Medal, Betty Crocker)

The ﬁrm does not tie its
reputation to the product’s; if the
product fails or seems low quality,
the company’s name or image is
not hurt.

Blanket family names

Campbell’s, Heinz, General
Electric

The ﬁrm spends less ondevelopment because there is noneed for “name” research or heavy
ad spending to create brand-namerecognition; also, product sales arelikely to be strong if the
manufacturer’s name is good.

Separate family names
for all products

Sears (Kenmore for appliances,
Craftsman for tools); Bank
One (Bank One for thephysical branches,
WingspanBank.com for theInternet-based bank)Where a ﬁrm offers quite
different products, separate
family names are more
appropriate than one blanket
family name.

Company trade namewith individual productnames

Kellogg (Kellogg’s Rice Krispies,
Kellogg’s Raisin Bran)

The company name legitimizes
while the individual nameindividualizes each product.

Once a company decides on its brand-name strategy, it must choose a speciﬁcbrand name. The company could choose the name of a person (Honda, Estée
Lauder), location (American Airlines, Kentucky Fried Chicken), quality (Safeway,
Duracell), lifestyle (Weight Watchers, Healthy Choice), or an artiﬁcial name (Exxon,
eBay). Among the desirable qualities for a brand name are the following:13➤

It should suggest something about the product’s beneﬁts. Examples: Beauty-rest,
Priceline.com➤

It should suggest product qualities. Examples: Spic and Span, Jiffy Lube➤

It should be easy to pronounce, recognize, and remember. Examples: Tide, Amazon.com➤

It should be distinctive. Examples: Kodak, Yahoo!

➤

It should not carry poor meanings in other countries and languages. Example: Nova is apoor name for a car to be sold in Spanish-speaking countries because it means“doesn’t go.”Many ﬁrms strive to build a unique brand name that eventually will become intimately identiﬁed with the product category. Examples are Frigidaire, Kleenex, Kitty
Litter, Levis, Jell-O, Popsicle, Scotch Tape, Xerox, and Fiberglas. In 1994, Federal
Express ofﬁcially shortened its marketing identity to FedEx, a term that has become asynonym for “to ship overnight.” Yet identifying a brand name with a product category
may threaten the company’s exclusive rights to that name. For example, cellophane

Brand Decisions

and shredded wheat are now in the public domain and are available for any manufacturer to use.
Given the rapid growth of the global marketplace, successful companies and ebusinesses are careful to choose brand names that are meaningful worldwide and pronounceable in other languages. One thing Compaq liked about the name Presario for
its line of home computers is that it conjures up similar meanings in various Latininfluenced languages. In French, Spanish, Latin, or Portuguese, Presario has thesame, or similar, association that it does in English: It suggests an “Impresario,” themagical master of the whirl and fantasy of a stage production.
Brand Strategy Decision
A company has ﬁve choices when it comes to brand strategy. The company can introduce line extensions (existing brand name extended to new sizes or ﬂavors in the existing product category), brand extensions (brand names extended to new-product categories), multibrands (new brand names introduced in the same product category), newbrands (new brand name for a new category product), and co-brands (brands bearing
two or more well-known brand names).
Line Extensions Line extensions introduce additional items in the same product category under the same brand name, such as new ﬂavors, forms, colors, added ingredients, and package sizes. Dannon introduced several Dannon yogurt line extensions,
including fat-free “light” yogurt and dessert flavors such as “mint chocolate creampie.” The vast majority of new products are actually line extensions.
Line extension involves risks and has provoked heated debate among marketing
professionals.14 On the downside, extensions may lead to the brand name losing its
speciﬁc meaning; Ries and Trout call this the “line-extension trap.”15 A consumer asking for a Coke in the past would receive a 6.5-ounce bottle. Today the seller will haveto ask: New, Classic, or Cherry Coke? Regular or diet? With or without caffeine? Bottle
or can? Sometimes the original brand identity is so strong that its line extensions serve
only to confuse and do not sell enough to cover development and promotion costs.
For example, A-1 poultry sauce ﬂopped because people identify A-1 with beef.
However, the success of a new line extension sometimes hurts other items in theline. Although Fig Newton’s cousins Cranberry Newtons, Blueberry Newtons, andApple Newtons all sell well for Nabisco, the original Fig Newton now seems like justanother flavor. A line extension works best when it takes sales away from rivals, notwhen it deﬂates or cannibalizes the company’s other items.
On the upside, line extensions have a much higher chance of survival than dobrand-new products. In fact, some marketing executives defend line extensions as thebest way to build a business. Kimberly-Clark’s Kleenex unit has had great success withline extensions. “We try to get facial tissue in every room of the home,” says one
Kimberly-Clark executive. “If it is there, it will get used.” This philosophy led to 20 varieties of Kleenex facial tissues, including a line packaged for children.
Brand Extensions A company may use its existing brand name to launch new products in other categories. Autobytel.com, a pioneer of Internet-based car sales, usedbrand extensions to introduce automotive ﬁnancing, insurance, and car repairs on its
Web site. A recent trend in corporate brand-building is corporations licensing theirnames to manufacturers of a wide range of products—from bedding to shoes. HarleyDavidson, for example, uses licensing to reach audiences that are not part of its coremarket, with branded armchairs for women and branded a Barbie doll for the future
generation of Harley purchasers.16

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Brand-extension strategy offers many of the same advantages as line extensions—but it also involves risks. One risk is that the new product might disappoint buyers and damage their respect for the company’s other products. Another is that thebrand name may be inappropriate to the new product—consider Bic perfume, a classic failure because buyers did not associate the Bic brand with fragrance products. A
third risk is brand dilution, which occurs when consumers no longer associate a brandwith a speciﬁc product or highly similar products.
Multibrands A company will often introduce additional brands in the same productcategory. Sometimes the ﬁrm is trying to establish different features or appeal to different buying motives. Multibranding also enables the company to lock up more distributor shelf space and to protect its major brand by setting up flanker brands. For
example, Seiko uses one brand for higher-priced watches (Seiko Lasalle) andanother for lower-priced watches (Pulsar) to protect its flanks. Ideally, a company’s
brands within a category should cannibalize the competitors’ brands and not eachother. At the very least, net proﬁts from multibrands should be larger despite somecannibalism.17
New Brands When a company launches products in a new category, it may find thatnone of its current brand names are appropriate. If Timex decides to make toothbrushes, it is not likely to call them Timex toothbrushes. Yet establishing a new
brand name in the U.S. marketplace for a mass-consumer-packaged good can cost
anywhere from $50 million to $100 million, making this an extremely criticaldecision.
Co-brands A rising phenomenon is the emergence of co-branding (also called dual
branding), in which two or more well-known brands are combined in an offer. Eachbrand sponsor expects that the other brand name will strengthen preference or purchase intention. In the case of co-packaged products, each brand hopes it might bereaching a new audience by associating with the other brand.
Co-branding takes a variety of forms. One is ingredient co-branding, as when Volvo
advertises that it uses Michelin tires or Betty Crocker’s brownie mix includes Hershey’s
chocolate syrup. Another form is same-company co-branding, as when General Mills
advertises Trix and Yoplait yogurt. Still another form is joint venture co-branding, as in
the case of General Electric and Hitachi lightbulbs in Japan and the MSNBC Web sitefrom Microsoft and NBC. Finally, there is multiple-sponsor co-branding, as in the case of
Taligent, a technological alliance of Apple, IBM, and Motorola.18
Many manufacturers make components—motors, computer chips, carpet
fibers—that enter into final branded products, and whose individual identity normally gets lost. These manufacturers hope their brand will be featured as part of
the final product. Intel’s consumer-directed brand campaign convinced many people to buy only PCs with “Intel Inside.” As a result, many PC manufacturers buy
chips from Intel at a premium price rather than buying equivalent chips from othersuppliers.
Brand Repositioning
However well a brand is currently positioned, the company may have to reposition it
later when facing new competitors or changing customer preferences. Consider 7-Up,
which was one of several soft drinks bought primarily by older people who wanted a
bland, lemon-ﬂavored drink. Research indicated that although a majority of soft-drink
consumers preferred a cola, they did not prefer it all of the time, and many other consumers were noncola drinkers. 7-Up sought leadership in the noncola market by call-Packaging and Labelinging itself the Uncola and positioning itself as a youthful and refreshing drink, the one
to reach for instead of a cola. Thus, 7-Up successfully established itself as the alternative to colas, not just another soft drink.

PACKAGING AND LABELING
Most physical products have to be packaged and labeled. Some packages—such as the
Coke bottle—are world famous. Many marketers have called packaging a ﬁfth P, alongwith price, product, place, and promotion; however, packaging and labeling are usually treated as an element of product strategy.

Packaging
Packaging includes the activities of designing and producing the container for a product. The container is called the package, and it might include up to three levels of material. Old Spice aftershave lotion is in a bottle (primary package) that is in a cardboard
box (secondary package) that is in a corrugated box (shipping package) containing six
dozen boxes of Old Spice.
The following factors have contributed to packaging’s growing use as a potent
marketing tool:➤Self-service: The typical supermarket shopper passes by some 300 items per minute.
Given that 53 percent of all purchases are made on impulse, an effective package
attracts attention, describes features, creates conﬁdence, and makes a favorable
impression.

➤

Consumer afﬂuence: Rising consumer afﬂuence means consumers are willing to pay alittle more for the convenience, appearance, dependability, and prestige of better
packages.

➤

Company and brand image: Packages contribute to instant recognition of the company
or brand. Campbell Soup estimates that the average shopper sees its red and whitecan 76 times a year, the equivalent of $26 million worth of advertising.

➤

Innovation opportunity: Innovative packaging can bring benefits to consumers andprofits to producers. Toothpaste pump dispensers, for example, have captured 12
percent of the toothpaste market because they are more convenient and lessmessy.

Developing an effective package for a new product requires several decisions.
The ﬁrst task is to establish the packaging concept, deﬁning what the package should
basically be or do for the particular product. Then decisions must be made on additional elements—size, shape, materials, color, text, and brand mark, plus the use of
any “tamperproof” devices. All packaging elements must be in harmony and, in turn,
must harmonize with the product’s pricing, advertising, and other marketing elements. Next come engineering tests to ensure that the package stands up under normal conditions; visual tests, to ensure that the script is legible and the colors harmonious; dealer tests, to ensure that dealers find the packages attractive and easy tohandle; and, ﬁnally, consumer tests, to ensure favorable response.
Tetra Pak, a major Swedish multinational, provides an example of the power ofinnovative packaging and customer orientation. The ﬁrm invented an “aseptic” package that enables milk, fruit juice, and other perishable liquid foods to be distributed
without refrigeration. This allows dairies to distribute milk over a wider area without
investing in refrigerated trucks and facilities. Supermarkets can carry Tetra Pak pack-

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aged products on ordinary shelves, which saves expensive refrigerator space. The
ﬁrm’s motto is “the package should save more than it costs.”

Labeling
Every physical product must carry a label, which may be a simple tag attached to the
product or an elaborately designed graphic that is part of the package. Labels performseveral functions. First, the label identifies the product or brand—for instance, thename Sunkist stamped on oranges. The label might also grade the product, the way
canned peaches are grade labeled A, B, and C. The label might describe the product:
who made it, where it was made, when it was made, what it contains, how it is to be
used, and how to use it safely. Finally, the label might promote the product throughattractive graphics.
Labels eventually become outmoded and need freshening up. The label on Ivory
soap has been redone 18 times since the 1890s, with gradual changes in the size anddesign of the letters. The label on Orange Crush soft drink was substantially changed
when competitors’ labels began to picture fresh fruits, thereby pulling in more sales.
In response, Orange Crush developed a label with new symbols to suggest freshness
and with much stronger and deeper colors.
Legal concerns about labels and packaging stretch back to the early 1900s andcontinue today. The Food and Drug Administration (FDA) recently took action
against the potentially misleading use of such descriptions as “light,” “high ﬁber,” and“low fat.” Meanwhile, consumerists are lobbying for additional labeling laws to require
open dating (to describe product freshness), unit pricing (to state the product cost in
standard measurement units), grade labeling (to rate the quality level), and percentage
labeling (to show the percentage of each important ingredient).
Some tangible products that incorporate packaging and labels also involve some
service component, such as delivery or installation. Therefore, marketers must be skillful not only in managing product lines and brands, but also in designing and managing services—the subject of the next chapter.

EXECUTIVE SUMMARY
Planning the product portion of a market offering calls for coordinated decisions on
the product mix, product lines, brands, and packaging and labeling. The marketer
needs to think through the ﬁve levels of the product: core beneﬁt (the fundamental
beneﬁt or service the customer is really buying), basic product, expected product (aset of attributes that buyers expect), augmented product (additional services andbenefits that distinguish the company’s offer from the competition), and potential
product (all of the augmentations and transformations the product might ultimately
undergo).
Products can be classiﬁed in several ways. In terms of durability and reliability,
products can be nondurable goods, durable goods, or services. In the consumer-goods
category are convenience goods, shopping goods, specialty goods, and unsought
goods. In the industrial-goods category are materials and parts, capital items, and supplies and business services.
A product mix is the set of all products and items offered for sale by the marketer. This mix can be classiﬁed according to width, length, depth, and consistency,
providing four dimensions for developing the company’s marketing strategy. To support product decisions, product-line managers ﬁrst analyze each product’s sales, profits, and market proﬁle. Managers can then change their product-line strategy by line

Notesstretching or line ﬁlling, by featuring certain products, and by pruning to eliminate
some products.
Branding is a major product-strategy issue. High brand equity translates intohigh brand-name recognition, high perceived brand quality, strong mental associations, and other important assets. In creating brand strategy, firms must decide
whether or not to brand; whether to produce manufacturer brands, or distributor or
private brands; which brand name to use, and whether to use line extensions, brandextensions, multibrands, new brands, or co-brands. The best brand names suggest
something about the product’s benefits; suggest product qualities; are easy to pronounce, recognize, and remember; are distinctive; and do not carry negative meanings or connotations in other countries or languages.
Many physical products have to be packaged and labeled. Well-designed packages create convenience value for customers and promotional value for producers.
Marketers start by developing a packaging concept and then testing it functionally andpsychologically to make sure it achieves its desired objectives and is compatible withpublic policy and environmental concerns. Physical products also require labeling for
identiﬁcation and possible grading, description, and product promotion.

NOTES
1. This discussion is adapted from Theodore Levitt, “Marketing Success throughDifferentiation—of Anything,” Harvard Business Review, January-February 1980, pp. 83–91.
The ﬁrst level, core beneﬁt, has been added to Levitt’s discussion.
2. See Harper W. Boyd Jr. and Sidney Levy, “New Dimensions in Consumer Analysis,”
Harvard Business Review, November–December 1963, pp. 129–40.
3. Theodore Levitt, The Marketing Mode (New York: McGraw-Hill, 1969), p. 2.
4. For some deﬁnitions, see Dictionary of Marketing Terms, ed. Peter D. Bennett (Chicago:
American Marketing Association, 1995). Also see Patrick E. Murphy and Ben M. Enis,“Classifying Products Strategically,” Journal of Marketing, July 1986, pp. 24–42.
5. “Fairﬁeld Inn by Marriott to be Positioned in Lower-Moderate Lodging Segment,” PR
Newswire, January 19, 2000.
6. See Jean-Noel Kapferer, Strategic Brand Management: New Approaches to Creating and
Evaluating Brand Equity (London: Kogan Page, 1992), pp. 38 ff; Jennifer L. Aaker,“Dimensions of Brand Personality,” Journal of Marketing Research, August 1997, pp. 347–56.
7. David A. Aaker, Building Strong Brands (New York: Free Press, 1995). Also see Kevin Lane
Keller, Strategic Brand Management: Building, Measuring, and Managing Brand Equity (Upper
Saddle River, NJ: Prentice-Hall, 1998).
8. Margaret Webb Pressler, “The Power of Branding,” Washington Post, July 27, 1997, p. H1;“Triarc Reports Strong Second Quarter 1999 Results With Adjusted EBITDA Up 12
Percent,” Triarc news release, August 19, 1999, www.triarc.com.
9. See Paul S. Richardson, Alan S. Dick, and Arun K. Jain, “Extrinsic and Intrinsic Cue Effects
on Perceptions of Store Brand Quality,” Journal of Marketing, October 1994, pp. 28–36.
10. Saul Hensell, “Selling Soap Without the Soap Operas, Mass Marketers Seek Ways to Build
Brands on the Web,” New York Times, August 24, 1998, p. D1.
11. Jeffrey O’Brien, “Web Advertising and the Branding Mission,” Upside, September 1998,
pp. 90–94; Ellen Neuborne, “Branding on the Net,” Business Week, November 9, 1998,
pp. 76–86.
12. Patricia Nakache, “Secrets of the New Brand Builders,” Fortune, June 22, 1998, pp. 167–70;
John Ellis, “Digital Matters: ‘People Need a Haven from the Web That’s on the Web,’ ” Fast
Company, January-February 2000, pp. 242–46.

197

13. See Kim Robertson, “Strategically Desirable Brand Name Characteristics,” Journal ofConsumer Marketing, Fall 1989, pp. 61–70.
14. Robert McMath, “Product Proliferation,” Adweek (Eastern Ed.) Superbrands 1995 Supplement,
1995, pp. 34–40; John A. Quelch and David Kenny, “Extend Proﬁts, Not Product Lines,”
Harvard Business Review, September–October 1994, pp. 153–60; and Bruce G. S. Hardle,
Leonard M. Lodish, James V. Kilmer, David R. Beatty, et al., “The Logic of Product-Line
Extensions,” Harvard Business Review, November–December 1994, pp. 53–62.
15. Al Ries and Jack Trout, Positioning: The Battle for Your Mind (New York: McGraw-Hill, 1981).
16. Constance L. Hays, “No More Brand X: Licensing of Names Adds to Image and Proﬁt,”
New York Times, June 12, 1998.
17. See Mark B. Taylor, “Cannibalism in Multibrand Firms,” Journal of Business Strategy, Spring
1986, pp. 69–75.
18. Bernard L. Simonin and Julie A. Ruth, “Is a Company Known by the Company It Keeps?
Assessing the Spillover Effects of Brand Alliances on Consumer Brand Attitudes,” Journal ofMarketing Research, February 1998, pp. 30–42.

Designing andManaging Services
We will address the following questions:■ How are services deﬁned and classiﬁed?
■ How can service ﬁrms improve their competitive differentiation, service quality, andproductivity?
■ How can goods-producing companies improve their customer support services?

M

arketing theory and practice developed initially in connection with physicalproducts such as toothpaste, cars, and steel. Yet one of the major megatrends ofrecent years has been the phenomenal growth of services. In the United States, service
jobs now account for 79 percent of all jobs and 74 percent of gross domestic product.
According to the Bureau of Labor Statistics, service occupations will be responsible for
all net job growth through the year 2005.1 These numbers have led to a growing interest in the special challenges and opportunities of services marketing.2
More and more market offerings now contain a service component, both tomeet the needs of the targeted customer segment and to create a distinctive differentiation for competitive reasons. Many manufactured goods are supported by services
such as warranties (formal statements of expected product performance) or guarantees(assurances that the product can be returned if its performance is unsatisfactory). By
judiciously offering one or more service features, a smart marketer can enhance its
image while adding value that, in turn, attracts loyal customers and builds long-term
proﬁts.

THE NATURE OF SERVICES
Service industries are quite varied. The government sector, with its courts, employment
services, hospitals, loan agencies, military services, police and ﬁre departments, postofﬁce, regulatory agencies, and schools, is in the service business. The private nonproﬁt
sector, with its museums, charities, churches, colleges, foundations, and hospitals, is in
the service business. A good part of the business sector, with its airlines, banks, hotels,
insurance companies, Internet service providers, law ﬁrms, management consulting
ﬁrms, medical practices, motion-picture companies, plumbing-repair companies, realestate ﬁrms, and Web-based services, is in the service business. Many workers in the
manufacturing sector, such as computer operators, accountants, and legal staff, are reallyservice providers. In fact, they make up a “service factory” that provides services to the“goods factory.”

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A service is any act or performance that one party can offer to another that isessentially intangible and does not result in the ownership of anything. Its production
may or may not be tied to a physical product.
Services such as banking and other financial services are a mainstay of theInternet. E*Trade, for example, the second-largest U.S. on-line broker, allows customers to quickly buy and sell stocks, bonds, and mutual funds at a low cost through its
Web site. E*Trade’s nearly 2 million accountholders can also use the Web site to locate
research about stocks and bonds, plan their portfolios, and get checking accounts andloans through the ﬁrm’s Telebanc subsidiary. Even noncustomers can access the site’s
free ﬁnancial news, tax and investment tips, and money-related chat rooms.3
Many manufacturers and distributors also use a service strategy to differentiatethemselves. Acme Construction Supply in Portland, Oregon, has invested more than$135,000 in its Night Owl delivery service: Acme personnel deposit orders into lockboxes at construction sites during the nighttime hours, so materials are available ﬁrst
thing in the morning. Says the company’s regional team leader, “People that are very,
very price sensitive don’t do business here. But people who see the overall value we
provide do. And it’s very intimidating to our competition. They have to walk aroundour delivery boxes every day to make their sales calls.”4

Categories of Service Mix
As the previous examples show, services are often part of a company’s total offering in
the marketplace. Five categories of an offering’s service mix can be distinguished:
1.

Pure tangible good: The offering is a tangible good such as soap; no services accompany
the product.

2.

Tangible good with accompanying services: The offering consists of a tangible goodaccompanied by one or more services. General Motors, for example, offers repairs,
maintenance, warranty fulﬁllment, and other services along with its cars and trucks.

3.

Hybrid: The offering consists of equal parts of goods and services. For example, people patronize restaurants for both food and service.

4.

Major service with accompanying minor goods and services: The offering consists of a major
service along with additional services or supporting goods. For example, airline passengers are buying transportation service, but they get food and drinks, as well.

5.

Pure service: The offering consists primarily of a service; examples include baby-sitting
and psychotherapy.

An increasing number of companies that are known for their tangible goods
offerings are now looking to boost proﬁts from services. Consider General Electric,
which built its business on the production of goods such as refrigerators and lightbulbs. These days, its fastest-growing unit is GE Capital, which consists of 28 businesses
ranging from credit cards to truck leasing to insurance. Germany’s Siemens is moving
in the same direction by setting up a ﬁnancial services division as a proﬁt center.5

Characteristics of Services and Their Marketing Implications
Services have four major characteristics that greatly affect the design of marketing programs: intangibility, inseparability, variability, and perishability.
Intangibility
Services are intangible. Unlike physical products, they cannot be seen, tasted, felt,
heard, or smelled before they are bought. The person who is getting a face lift cannot

The Nature of Services

see the exact results before the purchase, just as the patient in the psychiatrist’s ofﬁce
cannot know the exact outcome before treatment.
To reduce uncertainty, buyers will look for signs or evidence of the service quality. They will draw inferences about quality from the place, people, equipment, communication material, symbols, and price that they see. Therefore, the service
provider’s task is to “manage the evidence,” to “tangibilize the intangible.”6 Whereas
product marketers are challenged to add abstract ideas, service marketers are challenged to add physical evidence and imagery to abstract offers. This is why Allstate
uses the slogan “You’re in good hands with Allstate.”
In general, service marketers must be able to transform intangible services into
concrete benefits. Consider Dun & Bradstreet, a $2 billion firm with a database of 11
million U.S. firms that businesses can access to check the creditworthiness of theircommercial customers. D&B’s senior VP of marketing says, “If we’re calling on abank’s credit manager, we’ll research the bank’s portfolio of customers, and using
the information in our database, score them based on their creditworthiness and stability and say, ‘You have X% of customers in the high-risk category and X% in lowrisk.’”7 This translates D&B’s intangible services into tangible benefits for banking
customers.
Inseparability
Services are typically produced and consumed simultaneously, unlike physical goods,
which are manufactured, put into inventory, distributed through resellers, and consumed later. If a person renders the service, then the provider is part of the service.
Because the client is also present as the service is produced, provider-client interaction is a special feature of services marketing—both provider and client affect theoutcome.
Often, buyers of services have strong provider preferences. Several strategies exist
for getting around this limitation. One is higher pricing in line with the provider’s limited time. Another is having the provider work with larger groups or work faster. A third
alternative is to train more service providers and build up client conﬁdence, as H&R
Block has done with its national network of trained tax consultants.
Variability
Because services depend on who provides them and when and where they are provided, they are highly variable. Knowing this, service ﬁrms can take three steps toward
quality control. The ﬁrst is recruiting the right service employees and providing themwith excellent training. This is crucial regardless of whether employees are highly
skilled professionals or low-skilled workers.
For example, the California-based Horn Group handles public relations forhigh-powered Silicon Valley software makers and technology consultants. Founder
Sabrina Horn invests heavily in training her employees and in building morale andenthusiasm. She has developed education programs that include lunchtime seminars
on everything from how to write a press release to how to manage an account.
Employees also receive tuition reimbursement for continuing education.8
The second step is standardizing the service-performance process throughout
the organization. Companies can do this by preparing a ﬂowchart that depicts every
service event and process. Using this ﬂowchart, management can identify potential failpoints and then plan improvements. The third step—taken by Priceline.com andmany other service firms—is monitoring customer satisfaction through suggestionand complaint systems, customer surveys, and comparison shopping.

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Table 4.3 Strategies for Improving the Match between Demand and Supply
Demand-Side Strategies
Use differential pricing to shift demand frompeak to off-peak periods; movie theaters andcar rental ﬁrms do this by lowering prices
during off-peak periods.

Supply-Side Strategies
Hire part-time employees to meet peak demand;
restaurants, stores, and Web-based businesses
often bring in temporary staffers to help out
during holidays and other peak periods.

Cultivate nonpeak demand to build sales during
off-peak periods; hotels do this with theirweekend minivacation packages.

Introduce peak-time efﬁciency routines to keep
productivity high during periods of highdemand; paramedics often assist physicians
during busy periods.

Develop complementary services to provide
alternatives for customers during peak periods;
many banks do this by providing drop-offboxes for deposits and payments.

Increase consumer participation to speedtransactions; this is one reason why
supermarkets are experimenting with selfservice checkouts where shoppers scan andbag their own groceries.

Install reservation systems to better manage
demand levels; airlines, hotels, and physicians
employ such systems extensively.

Plan facilities for future expansion to increase
supply; an amusement park can buy
surrounding land for later development as
demand increases.
Share services with other providers to help
manage demand; hospitals can do this by sharing
medical-equipment purchases and scheduling.

Source: Adapted from W. Earl Sasser, “Match Supply and Demand in Service Industries,” Harvard Business
Review, November-December 1976, pp. 133–40.

Perishability
Services cannot be stored; once an airplane takes off or a movie starts, any unsold
seats cannot be held for future sale. Perishability is not a problem when demand fora service is steady, but ﬂuctuating demand can cause problems. For example, publictransportation companies have to own much more equipment because of higher
rush-hour demand, just as Charles Schwab must have sufﬁcient server capacity to handle its brokerage customers’ on-line trading during peak stock market periods.
Service providers can deal with perishability challenges in a number of ways.
Table 4.3 shows some strategies proposed by Sasser for better matching demand andsupply in a service business.9

MARKETING STRATEGIES FOR SERVICE FIRMS
In addition to the traditional four Ps of marketing, service providers must pay attention to three more Ps suggested by Booms and Bitner for services marketing: people,
physical evidence, and process.10 Because most services are provided by people, theselection, training, and motivation of employees can make a huge difference in customer satisfaction. Ideally, service employees should exhibit competence, a caring attitude, responsiveness, initiative, problem-solving ability, and goodwill.
Companies should also try to demonstrate their service quality through physicalevidence and presentation. Thus, a hotel such as the Four Seasons will develop a lookMarketing Strategies for Service Firms

and observable style of handling customers that embodies its intended customer value
proposition (in this case, luxury accommodations). Finally, service companies canchoose among different processes to deliver their service. For instance, McDonald’s outlets offer self-service, while Olive Garden restaurants offer table service.
A service encounter is affected by both visible and invisible elements (seeFigure 4-4). Consider a customer visiting a bank to get a loan (service X). The customer sees other customers waiting for this and other services. The customer alsosees a physical environment (the building, interior, equipment, and furniture) as
well as bank personnel. Not visible to the customer is a whole “backroom” production process and organization system that supports the visible business. Thus, theservice outcome, and whether or not people will be satisfied and ultimately remain
loyal to a service provider, are influenced by a host of variables.11
In view of this complexity, Gronroos has argued that service marketing requires
not only external marketing, but also internal and interactive marketing (Figure 4-5).12
External marketing describes the normal work to prepare, price, distribute, and promote
the service to customers. Internal marketing describes the work to train and motivate
employees to serve customers well. Berry has argued that the most important contribution the marketing department can make is to be “exceptionally clever in getting everyone else in the organization to practice marketing.”13
Interactive marketing describes the employees’ skill in serving the client. Because
the client judges service not only by its technical quality (e.g., Was the surgery successful?) but also by its functional quality (e.g., Did the surgeon show concern and inspire

Figure 4-4 Elements in a Service Encounter

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Figure 4-5 Three Types of Marketing in Service Industries
conﬁdence?),14 service providers must deliver services that are “high touch” as well as“high tech.”15
Consider how Charles Schwab, the nation’s largest discount brokerage house,
uses the Web to create an innovative combination of high-tech and high-touch services. One of the ﬁrst major brokerage ﬁrms to provide on-line trading, Schwab now
provides millions of investors with Web-based financial and company information,account data, and detailed research. By offering high-tech services, Schwab has takenon the role of on-line investment adviser. Nonetheless, the on-line trading service does
not entirely replace the personal service offered by Schwab in its local branches or via
the telephone.16
In some cases, customers cannot judge the technical quality of a service evenafter they have received it, as shown in Figure 4-6.17 At the left are goods that are highin search qualities—characteristics the buyer can evaluate before purchase. In the middle are goods and services that are high in experience qualities—characteristics the buyer
can evaluate after purchase. At the right are services that are high in credence qualities—
characteristics the buyer normally ﬁnds hard to evaluate even after consumption.18
Because services are generally high in experience and credence qualities, there
is more risk in their purchase. As a result, service buyers tend to rely more on word of
mouth than on advertising when selecting a provider. Second, they rely heavily on
price, personnel, and physical cues to judge quality. Third, they are highly loyal to service providers who satisfy them.
Given these issues, service ﬁrms face three key marketing tasks: increasing competitive differentiation, service quality, and productivity. Although these interact, we will
examine each separately.

Managing Differentiation
Service marketers frequently complain about the difﬁculty of differentiating their services on more than price alone. Price is a major marketing focus in service industries
such as communications, transportation, and energy, which have experienced intenseMarketing Strategies for Service Firms

Figure 4-6 Continuum of Evaluation for Different Types of Products
price competition since deregulation. In a deregulated environment, the continued
expansion of budget-priced airlines like Southwest Airlines indicated that many ﬂiers
care more about travel costs than service. Similarly, the success of E*Trade and otherdiscount Web-based brokerages showed that many customers had little loyalty to moreestablished brokerages when they could save money by trading on-line. To the extent
that customers view a service as fairly homogeneous, they care less about the provider
than the price.
The alternative to price competition in services marketing is to develop a differentiated offer, delivery, or image.
➤

Offer. The service offering can include innovative features. The customer expects
the primary service package; to this secondary service features can be added. Marriott, forexample, offers hotel rooms (primary service package) with connections forcomputers, fax machines, and e-mail (secondary service features). Although mostservice innovations are easily copied, the company that regularly introduces newfeatures will gain a succession of temporary competitive advantages and earn areputation for innovation. Amazon.com has continually expanded its offering toinclude auctions, e-mail greeting cards, and other services, reinforcing the ﬁrm’s
reputation as an Internet pioneer and retaining loyal customers.

➤

Delivery. A service company can hire and train better people to deliver its service(Home Depot, Nordstrom). It can develop a more attractive physical environment
in which to deliver the service (Borders Books and Music stores, Cineplex Odeon
movie theaters). Or it can design a superior delivery process (McDonald’s, eBay).
Delivery thus enhances the ﬁrm’s differentiation.

➤

Image. Service companies can also differentiate their image through symbols andbranding. Prudential uses the Rock of Gibralter as its corporate symbol to signify
strength and stability. Differentiation through branding is a specialty of thecharge-card division of American Express. Worldwide, a record 41.5 million
people “can’t leave home without it.” Yet, now the company needs to reinvent
itself: Credit cards like Visa and MasterCard have eaten into Amex’s turf, and

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customers are flocking to no-fee credit cards with frequent-flier miles and otherbenefits. Fighting back, Amex has launched a walletful of new products,
including the “Blue Card,” aimed at upscale 25- to 35-year-olds. And the firm has
carefully retained all of the positive things its brand stands for, such as good
service, prestige, and value, making them relevant to the young, hip, affluent
consumer.19

Managing Service Quality
Another way for a service ﬁrm to succeed is by delivering consistently higher-quality
service than that of its competitors and by exceeding customers’ expectations. These
expectations are formed by the ﬁrm’s past experiences, word of mouth, and advertising. After receiving the service, customers compare the perceived service with the
expected service. If the perceived service falls below the expected service, customers
lose interest in the provider. If the perceived service meets or exceeds their expectations, they are apt to use the provider again.
Parasuraman, Zeithaml, and Berry formulated a service-quality model that highlights the main requirements for delivering high service quality.20 The model, shownin Figure 4-7, identiﬁes ﬁve gaps that cause unsuccessful service delivery:

Figure 4-7 Service-Quality Model

Marketing Strategies for Service Firms
1.

Gap between consumer expectation and management perception: Management does not always
perceive correctly what customers want. Hospital administrators may think that patientswant better food, but patients may be more concerned with nurse responsiveness.

2.

Gap between management perception and service-quality specification: Management might
correctly perceive the customers’ wants but not set a speciﬁed performance standard.
Hospital administrators may tell the nurses to give “fast” service without specifying it
quantitatively.

3. Gap between service-quality speciﬁcations and service delivery: Service personnel might bepoorly trained, or incapable or unwilling to meet the standard. Or they may be held to
conﬂicting standards, such as taking time to listen to customers and serving them fast.
4. Gap between service delivery and external communications: Customer expectations areaffected by statements made by company representatives and ads. If a hospitalbrochure shows an attractive, modern room, but the patient ﬁnds an older, unappealing room, external communications will have distorted the customer’s expectations.
5.

Gap between perceived service and expected service: This gap occurs when the consumer
misperceives the service quality. The physician may keep visiting the patient to showcare, but the patient may interpret this as an indication that something really iswrong.

In addressing these gaps and pursuing service quality, well-managed service companies share the following common practices: a strategic concept, a history of topmanagement commitment to quality, high standards, systems for monitoring service
performance and customer complaints, and an emphasis on employee satisfaction.
Strategic Concept
Top service companies are “customer obsessed.” These ﬁrms have a clear sense of theirtarget customers and their needs, and they have developed a distinctive strategy forsatisfying these needs. Cleveland-based Progressive Insurance, for example, knows its
customers want to get their auto accident claims processed and paid as quickly as possible. Thus, its service strategy focuses on expediting claims handling. The company
now has a ﬂeet of claims adjusters ready to rush to the scene of any auto accident intheir territory. There, the adjusters record all of the information they need and often
settle claims on the spot.21
Top-Management Commitment
Market-leading companies such as Marriott, Disney, and McDonald’s have thoroughcommitments to service quality. Every month, their management looks not only at
ﬁnancial performance but also at service performance. Top-management commitment
can be demonstrated in various ways. Founder Sam Walton of Wal-Mart required the following employee pledge: “I solemnly swear and declare that every customer that comes
within 10 feet of me, I will smile, look them in the eye, and greet them, so help me Sam.”To reinforce its corporate-wide commitment to service quality, L.L. Bean’s management
has tacked up a “What is a Customer?” poster in every ofﬁce.
High Standards
The best service providers set high service-quality standards. Swissair, for example,
aims at having 96 percent or more of its passengers rate its service as good or superior.
Citibank aims to answer phone calls within 10 seconds and customer letters within 2
days. Still, service standards must be set appropriately high. A 98 percent accuracy
standard may sound good, but it would result in FedEx losing 64,000 packages a day,10 misspelled words on each page, 400,000 misﬁlled prescriptions daily, and unsafe

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drinking water 8 days a year. Companies can be distinguished between those offering“merely good” service and those offering “breakthrough” service aiming at 100 percent defect-free service.22
Monitoring Systems
Top ﬁrms regularly audit service performance, both their own and their competitors’.
They use a number of measurement devices: comparison shopping, ghost shopping,customer surveys, suggestion and complaint forms, service-audit teams, and letters to thepresident. General Electric sends out 700,000 response cards a year asking households
to rate its service people’s performance; Citibank checks continuously on measures ofART (accuracy, responsiveness, and timeliness). RedEnvelope Gifts Online, an on-line
retailer specializing in upscale gifts, analyzes how many of its orders were correctly ﬁlled,
how many were shipped on time, and how many orders were returned by customers.23
When designing customer feedback mechanisms, service marketers need to ask
the right questions, as United Parcel Service (UPS) discovered. UPS always assumed
that on-time delivery was its customers’ paramount concern, and based its deﬁnitionof quality on the results of time-and-motion studies. To get packages to customers
faster, UPS would factor in such details as how long it took elevators to open and how
long it took people to answer their doorbells. Accordingly, UPS’s surveys included
questions about whether customers were pleased with delivery time and whether they
thought the company could be any speedier. Yet, when the company began asking
broader questions about service improvements, it discovered that what customers
wanted most was more face-to-face contact with drivers. If drivers were less hurried andwould answer questions, customers might get practical advice on shipping. UPS has
now taken service a step further, allowing customers to track their UPS shipments anddeliveries through its Web site (www.ups.com), where customers can also order shipping supplies and request parcel pick-up.24
Satisfying Customer Complaints
Studies of customer dissatisfaction show that although customers are dissatisﬁed with
their purchases about 25 percent of the time, only about 5 percent complain. The
other 95 percent either feel that complaining is not worth the effort, or that they don’tknow how or to whom to complain. Of the 5 percent who complain, only about halfreport a satisfactory problem resolution. Yet the need to resolve a customer problem
in a satisfactory manner is critical. On average, a satisﬁed customer tells three people
about a good product experience, but the average dissatisﬁed customer gripes to 11
people. If each of them tells still other people, the number of people exposed to badword of mouth may grow exponentially.
Toys ‘R’ Us found this out recently when it failed to deliver toys ordered throughits Web site (www.toysrus.com) in time for Christmas. Even though the retailer offered$100 gift certiﬁcates to make up for the inconvenience, so many customers were outraged by the delivery problems that the situation made national news and led to aclass-action lawsuit.25
Nonetheless, customers whose complaints are satisfactorily resolved often
become more company-loyal than customers who were never dissatisfied. About 34
percent of customers who register major complaints will buy again from the company
if their complaint is resolved, and this number rises to 52 percent for minor complaints. If the complaint is resolved quickly, between 52 percent (major complaints)
and 95 percent (minor complaints) will buy again from the company.26
Tax and Brown have found that companies that encourage disappointed customers to complain—and also empower employees to remedy the situation on the
spot—achieve higher revenues and greater proﬁts than companies that do not have aMarketing Strategies for Service Firms

systematic approach for addressing service failures.27 They also found that companies
that are effective at resolving complaints:➤

Develop hiring criteria and training programs that take into account employees’service-recovery role.

➤

Develop guidelines for service recovery that focus on achieving fairness andcustomer satisfaction.

➤

Remove barriers that make it difﬁcult for customers to complain, while developing
effective response systems. Pizza Hut prints its toll-free number on all pizza boxes.
When a customer complains, Pizza Hut sends voice mail to the store manager, whomust call the customer within 48 hours and resolve the complaint.

➤

Maintain customer and product databases that let the company analyze types andsources of complaints and adjust its policies accordingly.

Satisfying Both Employees and Customers
Excellently managed service companies believe that employee relations will affect customer relations. In these ﬁrms, management carries out internal marketing and provides employee support and rewards for good performance. In addition, management
regularly audits employee job satisfaction. Rosenbluth and Peters, in The Customer Comes
Second, go so far as to say that the company’s employees, not the company’s customers,
have to be made number one if the company hopes to truly satisfy its customers.28
The Safeway supermarket chain found this out when it instituted a customerfriendly policy that actually caused stress for many of its employees. Its Superior Service
program mandates employee friendliness toward customers, with rules such as: Makeeye contact with all customers, smile, and greet each customer. To ensure compliance,
the store employs “mystery shoppers” who secretly grade workers. Those who are graded“poor” are sent to a training program to learn how to be friendlier. Although surveys
show that customers are pleased with the program, many employees have admitted
being stressed out and several have quit over the plan. Disgruntled workers complainthat they must override their own instincts in favor of the corporate friendliness formula.
For instance, employees are required to greet harried customers whose body language
tells workers that they want to be left alone. The program has set off a spirited debate on
the Internet over false-versus-real friendliness. At one Internet discussion group titled“Forced Smiles at Safeway,” opinion ran 2-to-1 against the program.29

Managing Productivity
Service ﬁrms are under great pressure to keep costs down and increase productivity.
There are seven approaches to improving service productivity:
1.

Have service providers work more skillfully. Top service companies such as Starbucks
go out of their way to hire and foster more skillful workers through better selection
and training.

2.

Increase the quantity of service by surrendering some quality. Doctors working for some
HMOs have moved toward handling more patients and giving less time to each patient.

3.

Industrialize the service by adding equipment and standardizing production. Levitt
recommended that companies adopt a “manufacturing attitude” toward producing
services as represented by McDonald’s assembly-line approach to fast-food retailing,
culminating in the “technological hamburger.”30

4.

Reduce or make obsolete the need for a service by inventing a product solution, theway carpet-cleaning services offer stain-removing products for consumers to use on
their own.

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5.

Design a more effective service. For example, hiring paralegal workers reduces theneed for more expensive legal professionals.

6.

Present customers with incentives to substitute their own labor for company labor.
Customers of iPrint (www.iprint.com) save at least 25 percent by designing, inputting,and proofreading the content of their printing jobs before submitting their orders
through iPrint’s Web site.31

7.

Use technology to give better customer service and make service workers more productive. Companies, such as Cisco Systems, that use their Web sites to empower customers can lessen workloads, capture valuable customer data, and increase the valueof their businesses. Cisco’s on-line Knowledge Base of Frequently Asked Questions(FAQs) allows customers to quickly ﬁnd answers to questions without talking to any
employees. As a result, Cisco cut the number of customer calls by 70 percent or
50,000 calls a month, saving $10 million a month.32

MANAGING PRODUCT SUPPORT SERVICES
Although service industries are an important part of the economy, a growing numberof product-based industries are also offering a service bundle. Manufacturers of equipment such as small appliances, computers, tractors, and airplanes generally have toprovide product support services. In fact, product support service is becoming a major
battleground for competitive advantage. Some equipment companies, such as
Caterpillar Tractor and John Deere, make over 50 percent of their proﬁts from these
services. In the global marketplace, companies that make a good product but provide
poor local service support are seriously disadvantaged. This is why Subaru contracted
to use the Australian Volkswagen dealer network to provide parts and service when it
began selling its autos in that market.
To design the best service support program, a manufacturer must identify andprioritize the services its customers value most. In general, customers worry about
three things:33➤

Reliability and failure frequency. Customers buy with an expectation of reliability. A
farmer may tolerate a combine that breaks down once a year, but not more often.
Similarly, eBay’s on-line auction customers are concerned when the Web site isunavailable or experiencing problems.

➤

Downtime duration. The longer the downtime, the higher the cost, which is why
customers count on the seller’s ability to ﬁx the product (laptop, minivan) quickly
or at least provide a loaner.34➤

Out-of-pocket costs of maintenance and repair. Customers are concerned with the amountthey will have to spend on regular maintenance and repair costs (such as
replacement batteries for laptops).

A buyer considers all of these factors when choosing a vendor. As part of thedecision process, the buyer tries to estimate the life-cycle cost, which is the product’spurchase cost plus the discounted cost of maintenance and repair less the discounted
salvage value. Smart companies therefore consider the costs and the options for diffusing customer worries when designing presale and postsale support services.

Presale Service Strategy
Before any sale can be made, the marketer has to design an appealing and competitive
service offer that will attract customers. In the case of expensive equipment, such as
medical equipment, manufacturers offer facilitating services such as installation, repairs,

Managing Product Support Services

and ﬁnancing. They may also add value-augmenting services. Look at Herman Miller, aleading ofﬁce-furniture company that works hard to understand and then deliver what
its business customers value. Along with quality products, the company offers: (1) 5-year
product warranties; (2) quality audits after installation; (3) guaranteed move-in dates;(4) trade-in allowances on furniture systems products; and (5) easy on-line ordering.
A manufacturer can offer and charge for enhanced product support services indifferent ways. One specialty organic chemical company provides a standard offering
plus a basic level of services. If the customer wants additional services, it can pay extra
or increase its annual purchases to a higher level, in which case additional services
would be included. In a variation on this, Baxter Healthcare offers strategic customers
bonus points (called “Baxter dollars”) in proportion to how much they buy. They can
use the bonus points to trade for different additional services. As another alternative,
companies such as Compaq and IBM sell add-on service contracts in various lengths socustomers can choose the service level they want beyond the basic service package.

Postsale Service Strategy
In providing postsale service, most companies progress through a series of stages.
Manufacturers usually start out by running their own parts and service department,
because they want to stay close to their products and learn about any problems rightaway. They also ﬁnd it expensive and time-consuming to train others. Often, they discover that they can make good money running the parts-and-service business—and, if
they are the only supplier of certain parts, they can charge a premium price. In fact,many equipment manufacturers price their equipment low and compensate bycharging high prices for parts and service. This explains why competitors sometimes
manufacture the same or similar parts and sell them to customers or intermediaries
for less.
Over time, manufacturers—especially those who expand into international markets—switch more maintenance and repair services to authorized distributors anddealers. These intermediaries are closer to customers, operate in more locations, andcan offer quicker service. Manufacturers still make a proﬁt on the parts but leave theservicing proﬁt to their intermediaries. Still later, independent service ﬁrms emerge.
Over 40 percent of auto-service work is now done outside franchised automobile dealerships, by independent garages and chains such as Midas Muffler and Sears.
Independent service organizations have sprung up to service computers, telecommunications products, and other items, typically offering lower price or faster service
than offered by the manufacturer or authorized intermediaries.
Ultimately, some large business customers may prefer to handle their own maintenance and repair services. A company with several hundred personal computers,
printers, and related equipment might ﬁnd it cheaper to have its own service personnel on site. These companies typically press the manufacturer for a lower productprice because they are providing their own services.

Major Trends in Customer Service
Service remains a critical component for product marketers in today’s dynamic, interconnected global marketplace. Lele has noted the following major trends in the customer service area:35
1.

Equipment manufacturers are building more reliable and more easily ﬁxable equipment. One reason is the shift from electromechanical equipment to electronic equipment, which has fewer breakdowns and is more repairable. Companies are adding
modularity and disposability to facilitate self-servicing by customers.

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2.

Customers are becoming more sophisticated about buying product support services
and are pressing for “services unbundling.” They want separate prices for each service
element and the right to select just the elements they want.

3.

Customers increasingly dislike having to deal with a multitude of service providers
that handle different types of equipment. In response, some third-party service organizations have begun servicing a greater range of equipment.36

4.

Service contracts (also called extended warranties), in which sellers agree to provide freemaintenance and repair services for a speciﬁed period of time at a speciﬁed contract
price, may diminish in importance. Some new car warranties now cover 100,000 miles
before servicing. The increase in disposable or never-fail equipment makes customers
less inclined to pay from 2 percent to 10 percent of the purchase price every year fora service.

5.

Customer service choices are increasing rapidly, and this is holding down prices andproﬁts on service. Equipment manufacturers increasingly have to ﬁgure out how tomake money on their equipment independent of service contracts.

Add to these trends the now commonplace use of the Internet to deliver service, advice, and maintenance or repair information at any hour to any customer at
any location—and it is clear that the most successful companies will be those thatmarry high-tech capabilities with customizable, high-touch customer service. Such
top-quality customer service comes at a price, of course; pricing strategies and programs for goods and services will be discussed in the next chapter.

EXECUTIVE SUMMARY
A service is any act or performance that one party offers to another that is essentiallyintangible and does not result in the ownership of anything. Its production may or
may not be tied to a tangible product. As the United States has moved increasingly
toward a service economy, marketers have become more interested in the special challenges involved in marketing services.
Services are intangible, inseparable, variable, and perishable. Each characteristic
poses challenges and requires certain strategies. Marketers must ﬁnd ways to give tangibility to intangibles, to increase the productivity of service providers, to increase andstandardize the quality of the service provided, and to match the supply of services
during peak and nonpeak periods with market demand.
Service marketing strategy covers three additional Ps: people, physical evidence,and process. Successful services marketing calls not only for external marketing, butalso for internal marketing to motivate employees and interactive marketing toemphasize both “high-tech” and “high-touch” elements.
Because services are generally high in experience and credence qualities, there
is more risk in their purchase. The service organization therefore faces three tasks inmarketing: (1) It must differentiate its offer, delivery, or image; (2) it must manage service quality in order to meet or exceed customers’ expectations; and (3) it must manage worker productivity by getting its employees to work more skillfully, increasing thequantity of service by surrendering some quality, industrializing the service, inventing
new product solutions, designing more effective services, presenting customers withincentives to substitute their own labor for company labor, or using technology to savetime and money.
Even product-based companies must provide support services for their customers. To provide the best support, a manufacturer must identify and prioritize theservices that customers value most. The service mix includes both presale services

Notes(such as facilitating services and value-augmenting services) and postsale services (customer service departments, repair and maintenance services).

NOTES
1. Ronald Henkoff, “Service Is Everybody’s Business,” Fortune, June 27, 1994, pp. 48–60.
2. See G. Lynn Shostack, “Breaking Free from Product Marketing,” Journal of Marketing,
April 1977, pp. 73–80; Leonard L. Berry, “Services Marketing Is Different,” Business,
May-June 1980, pp. 24–30; Eric Langeard, John E. G. Bateson, Christopher H. Lovelock,and Pierre Eiglier, Services Marketing: New Insights from Consumers and Managers(Cambridge, MA: Marketing Science Institute, 1981); Karl Albrecht and Ron Zemke,
Service America! Doing Business in the New Economy (Homewood, IL: Dow Jones-Irwin,1986); Karl Albrecht, At America’s Service (Homewood, IL: Dow Jones-Irwin, 1988);
Benjamin Scheider and David E. Bowen, Winning the Service Game (Boston: Harvard
Business School Press, 1995); and Leonard L. Berry, Discovering the Soul of Service (NewYork: Free Press, 1999).
3. Sam Zuckerman, “E-Trade Loses $5.2 Million Despite Late Business Surge,” San Francisco
Chronicle, January 20, 2000, www.sfgate.com.
4. John R. Johnson, “Service at a Price,” Industrial Distribution, May 1998, pp. 91–94.
5. Reed Abelson, “Hints of Change at GE Capital as Financial Companies Lose Favor,” NewYork Times, October 2, 1998, p. D1; Laura Covill, “Siemens the Financial Engineer,”Euromoney, August 1998, pp. 65–66.
6. See Theodore Levitt, “Marketing Intangible Products and Product Intangibles,” Harvard
Business Review, May-June 1981, pp. 94–102; and Berry, “Services Marketing Is Different.”
7. Geoffrey Brewer, “Selling an Intangible,” Sales & Marketing Management, January 1998,
pp. 52–58.
8. Ibid.
9. See W. Earl Sasser, “Match Supply and Demand in Service Industries,” Harvard Business
Review, November-December 1976, pp. 133–40.
10. See B. H. Booms and M. J. Bitner, “Marketing Strategies and Organizational Structures forService Firms,” in Marketing of Services, eds. J. Donnelly and W. R. George (Chicago:
American Marketing Association, 1981), pp. 47–51.
11. Keaveney has identiﬁed more than 800 critical behaviors of service ﬁrms that cause
customers to switch services. These behaviors ﬁt into eight categories ranging from price,inconvenience, and core service failure to service encounter failure, failed employee
response to service failures, and ethical problems. See Susan M. Keaveney, “Customer
Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing, April
1995, pp. 71–82. See also Michael D. Hartline and O. C. Ferrell, “The Management of
Customer-Contact Service Employees: An Empirical Investigation,” Journal of Marketing,
October 1996, pp. 52–70; Lois A. Mohr, Mary Jo Bitner, and Bernard H. Booms, “Critical
Service Encounters: The Employee’s Viewpoint,” Journal of Marketing, October 1994,
pp. 95–106; Linda L. Price, Eric J. Arnould, and Patrick Tierney, “Going to Extremes:
Managing Service Encounters and Assessing Provider Performance,” Journal of Marketing,
April 1995, pp. 83–97.
12. Christian Gronroos, “A Service Quality Model and Its Marketing Implications,” European
Journal of Marketing 18, no. 4 (1984): 36–44. Gronroos’s model is one of the mostthoughtful contributions to service-marketing strategy.
13. Leonard Berry, “Big Ideas in Services Marketing,” Journal of Consumer Marketing, Spring
1986, pp. 47–51. See also Walter E. Greene, Gary D. Walls, and Larry J. Schrest, “InternalMarketing: The Key to External Marketing Success,” Journal of Services Marketing 8, no. 4

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DESIGNING AND MANAGING SERVICES(1994): 5–13; John R. Hauser, Duncan I. Simester, and Birger Wernerfelt, “Internal
Customers and Internal Suppliers,” Journal of Marketing Research, August 1996, pp. 268–80.
14. Gronroos, “A Service Quality Model,” pp. 38–39.
15. See Philip Kotler and Paul N. Bloom, Marketing Professional Services (Upper Saddle River,
NJ: Prentice-Hall, 1984).
16. Laurie J. Flynn, “Eating Your Young,” Context, Summer 1998, pp. 45–47; Louise Lee, “Can
Schwab Hang On to Its Heavy Hitters?” Business Week, January 31, 2000, p. 46; see alsoMark Schwanhausser, “Schwab Evolves in the Web Era,” Chicago Tribune, October 12, 1998,
Business Section, p. 10; and John Evan Frook, “Web Proves It’s Good for Business,” Internet
Week, December 21, 1998, p. 15.
17. See Valarie A. Zeithaml, “How Consumer Evaluation Processes Differ between Goods andServices,” in Donnelly and George, eds., Marketing of Services, pp. 186–90.
18. Amy Ostrom and Dawn Iacobucci, “Consumer Trade-offs and the Evaluation of Services,”
Journal of Marketing, January 1995, pp. 17–28.
19. Suzanne Bidlake, “John Crewe, American Express Blue Card,” Advertising Age International,
December 14, 1998, p. 10; Sue Beenstock, “Blue Blooded,” Marketing, June 4, 1998, p. 14;
Pamela Sherrid, “A New Class Act at AMEX,” U.S. News & World Report, June 23, 1997,
pp. 39–40.
20. A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry, “A Conceptual Model ofService Quality and Its Implications for Future Research,” Journal of Marketing, Fall 1985,
pp. 41–50. See also Susan J. Devlin and H. K. Dong, “Service Quality from the Customers’
Perspective,” Marketing Research: A Magazine of Management & Applications, Winter 1994,
pp. 4–13; William Boulding, Ajay Kalra, and Richard Staelin, “A Dynamic Process Model ofService Quality: From Expectations to Behavioral Intentions,” Journal of Marketing Research,
February 1993, pp. 7–27.
21. Ian C. MacMillan and Rita Gunther McGrath, “Discovering New Points of Differentiation,”
Harvard Business Review, July-August 1997, pp. 133–45.
22. See James L. Heskett, W. Earl Sasser, Jr., and Christopher W. L. Hart, Service Breakthroughs(New York: Free Press, 1990).
23. Dan Brekke, “The Future Is Now—or Never,” New York Times Magazine, January 23, 2000,
pp. 30–33.
24. David Greising, “Quality: How to Make It Pay,” Business Week, August 8, 1994, pp. 54–59.
25. “Hagens Berman Announces Class Action Lawsuit Against Toysrus.com; Class Action Calls
Toysrus.com ‘The E-Grinch Who Stole Christmas,’” Business Wire, January 12, 2000; Wendy
Zellner, “Shop Till the Ball Drops,” Business Week, January 10, 2000, pp. 42–44.
26. See John Goodman, Technical Assistance Research Program (TARP), U.S. Ofﬁce ofConsumer Affairs Study on Complaint Handling in America, 1986; Albrecht and Zemke, Service
America!; Berry and Parasuraman, Marketing Services; Roland T. Rust, Bala Subramanian,and Mark Wells, “Making Complaints a Management Tool,” Marketing Management 1, no. 3(1992): 41–45; Stephen S. Tax, Stephen W. Brown, and Murali Chandrashekaran,“Customer Evaluations of Service Complaint Experiences: Implications for RelationshipMarketing,” Journal of Marketing, April 1998, pp. 60–76.
27. Stephen S. Tax and Stephen W. Brown, “Recovering and Learning from Service Failure,”
Sloan Management Review, Fall 1998, pp. 75–88.
28. See Hal F. Rosenbluth and Diane McFerrin Peters, The Customer Comes Second (New York:
William Morrow, 1992).
29. Kirstin Downey Grimsley, “Service with a Forced Smile; Safeway’s Courtesy Campaign Also
Elicits Some Frowns,” Washington Post, October 18, 1998, p. A1.

Designing Pricing
Strategies andPrograms
We will address the following questions:■ How should a company price a new good or service?
■ How should the price be adapted to meet varying circumstances and opportunities?
■ When should the company initiate a price change, and how should it respond tocompetitive price changes?

All for-profit organizations and many nonprofit organizations set prices on theirgoods or services. Whether the price is called rent (for an apartment), tuition (foreducation), fare (for travel), or interest (for borrowed money), the concept is the same.
Throughout most of history, prices were set by negotiation between buyers and sellers.
Setting one price for all buyers arose with the development of large-scale retailing at
the end of the nineteenth century, when Woolworth’s and other stores followed a“strictly one-price policy” because they carried so many items and had so many
employees.
Now, 100 years later, technology is taking us back to an era of negotiated pricing.
The Internet, corporate networks, and wireless setups are linking people, machines, andcompanies around the globe, connecting sellers and buyers as never before. Web sites
like Compare.Net and PriceScan.com allow buyers to compare products and prices
quickly and easily. On-line auction sites like eBay.com and Onsale.com make it easy forbuyers and sellers to negotiate prices on thousands of items. At the same time, new technologies are allowing sellers to collect detailed data about customers’ buying habits,
preferences—even spending limits—so they can tailor their products and prices.1
In the entire marketing mix, price is the one element that produces revenue; theothers produce costs. Price is also one of the most ﬂexible elements: It can be changed
quickly, unlike product features and channel commitments. Although price competition is a major problem facing companies, many do not handle pricing well. The mostcommon mistakes are these: Pricing is too cost-oriented; price is not revised often
enough to capitalize on market changes; price is set independent of the rest of themarketing mix rather than as an intrinsic element of market-positioning strategy; andprice is not varied enough for different product items, market segments, and purchaseoccasions.

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Figure 4-8 Nine Price-Quality Strategies

SETTING THE PRICE
A ﬁrm must set a price for the ﬁrst time when it develops a new product, introduces its
regular product into a new distribution channel or geographical area, and enters bids
on new contract work. Price is also a key element used to support a product’s quality
positioning, as described in Chapter 9. Because a ﬁrm, in developing its strategy, must
decide where to position its product on price and quality, there can be competition
between price-quality segments (see Figure 4-8).
In setting a product’s price, marketers follow a six-step procedure: (1) selecting
the pricing objective; (2) determining demand; (3) estimating costs; (4) analyzing
competitors’ costs, prices, and offers; (5) selecting a pricing method; and (6) selecting
the ﬁnal price (see Figure 4-9).

Step 1: Selecting the Pricing Objective
A company can pursue any of ﬁve major objectives through pricing:➤

Survival. This is a short-term objective that is appropriate only for companies thatare plagued with overcapacity, intense competition, or changing consumer wants. Aslong as prices cover variable costs and some ﬁxed costs, the company will be able toremain in business.

➤

Maximum current proﬁt. To maximize current proﬁts, companies estimate thedemand and costs associated with alternative prices and then choose the price that
produces maximum current proﬁt, cash ﬂow, or return on investment. However, byemphasizing current proﬁts, the company may sacriﬁce long-run performance by

Figure 4-9 Setting Pricing Policy

Setting the Priceignoring the effects of other marketing-mix variables, competitors’ reactions, andlegal restraints on price.
➤

Maximum market share. Firms such as Texas Instruments choose this objective
because they believe that higher sales volume will lead to lower unit costs andhigher long-run proﬁt. With this market-penetration pricing, the ﬁrms set the lowest
price, assuming the market is price sensitive. This is appropriate when (1) themarket is highly price sensitive, so a low price stimulates market growth;(2) production and distribution costs fall with accumulated production experience;and (3) a low price discourages competition.

➤

Maximum market skimming. Many companies favor setting high prices to “skim” themarket. This objective makes sense under the following conditions: (1) A sufﬁcientnumber of buyers have a high current demand; (2) the unit costs of producing asmall volume are not so high that they cancel the advantage of charging what the
trafﬁc will bear; (3) the high initial price does not attract more competitors to themarket; and (4) the high price communicates the image of a superior product.

➤

Product-quality leadership. Companies such as Maytag that aim to be product-quality
leaders will offer premium products at premium prices. Because they offer top
quality plus innovative features that deliver wanted beneﬁts, these ﬁrms can charge
more. Maytag can charge $800 for its European-style washers—double what mostother washers cost—because, as its ads point out, the appliances use less water andelectricity and prolong the life of clothing by being less abrasive. Here, Maytag’s
strategy is to encourage buyers to trade up to new models before their existing
appliances wear out.2

Nonproﬁt and public organizations may adopt other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover the remaining costs, while a nonproﬁt theater company prices its
productions to ﬁll the maximum number of seats. As another example, a social services agency may set prices geared to the varying incomes of clients.

Step 2: Determining Demand
Each price will lead to a different level of demand and, therefore, will have a different
impact on a company’s marketing objectives. The relationship between alternative
prices and the resulting current demand is captured in a demand curve. Normally,
demand and price are inversely related: The higher the price, the lower the demand.
In the case of prestige goods, however, the demand curve sometimes slopes upward
because some consumers take the higher price to signify a better product. Still, if theprice is too high, the level of demand may fall.
Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative
prices, summing the reactions of many individuals who have different price sensitivities. The ﬁrst step in estimating demand is to understand what affects price sensitivity.
Nagle says there is less price sensitivity when:➤

The product is more distinctive,➤

Buyers are less aware of substitutes,➤

Buyers cannot easily compare the quality of substitutes,➤

The expenditure is a lower part of buyer’s total income,➤The expenditure is small compared to the total cost of the end product,

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DESIGNING PRICING STRATEGIES AND PROGRAMS➤Part of the cost is borne by another party,➤

The product is used in conjunction with assets previously bought,➤

The product is assumed to have more quality, prestige, or exclusiveness, and➤Buyers cannot store the product.3

A number of forces, such as deregulation and instant price comparisons that areavailable over the Internet, have turned products into commodities in the eyes of consumers and increased their price sensitivity. More than ever, companies need to understand the price sensitivity of their target market and the trade-offs that people are willing to make between price and product characteristics. Even in the energy
marketplace, where you would think that a kilowatt is a kilowatt is a kilowatt, some utility companies are buying power, branding it, marketing it, and providing unique services to customers.
Vermont-based GreenMountain.com for example, is working hard to differentiate its energy products. Through extensive marketing research, the energy firm
uncovered a large market of prospects who not only were concerned with the environment, but also were willing to pay more to protect it. Because
GreenMountain.com is a “green” power provider—a large percentage of its power ishydroelectric—customers can help ease the environmental burden by purchasing its
power. This differentiation helps the firm compete against “cheaper” brands that
focus on price-sensitive consumers.4
Estimating Demand Curves
Companies can use one of three basic methods to estimate their demand curves. The
ﬁrst involves statistically analyzing past prices, quantities sold, and other factors to estimate their relationships. However, building a model and fitting the data with theproper techniques calls for considerable skill.
The second approach is to conduct price experiments, as when Bennett andWilkinson systematically varied the prices of several products sold in a discount store
and observed the results.5 An alternative here is to charge different prices in similar
territories to see how sales are affected.
The third approach is to ask buyers to state how many units they would buy at different proposed prices.6 One problem with this method is that buyers might understate their purchase intentions at higher prices to discourage the company from setting higher prices.
In measuring the price-demand relationship, the marketer must control for various factors that will inﬂuence demand, such as competitive response. Also, if the company changes other marketing-mix factors besides price, the effect of the price change
itself will be hard to isolate.7
Price Elasticity of DemandMarketers need to know how responsive, or elastic, demand would be to a change inprice. If demand hardly changes with a small change in price, we say the demand isinelastic. If demand changes considerably, demand is elastic.
Demand is likely to be less elastic when (1) there are few or no substitutes orcompetitors; (2) buyers do not readily notice the higher price; (3) buyers are slow tochange their buying habits and search for lower prices; and (4) buyers think thehigher prices are justified by quality differences, normal inflation, and so on. If
demand is elastic, sellers will consider lowering the price to produce more total revenue. This makes sense as long as the costs of producing and selling more units do notincrease disproportionately.8

Setting the Price

Price elasticity depends on the magnitude and direction of the contemplated
price change. It may be negligible with a small price change and substantial with alarge price change; it may differ for a price cut versus a price increase. Finally, longrun price elasticity may differ from short-run elasticity. Buyers may continue to buy
from their current supplier after a price increase because they do not notice theincrease, or the increase is small, or they are distracted by other concerns, or they ﬁndthat choosing a new supplier takes time. But they may eventually switch suppliers. The
distinction between short-run and long-run elasticity means that sellers will not know
the total effect of a price change until time passes.

Step 3: Estimating Costs
While demand sets a ceiling on the price the company can charge for its product, costs
set the ﬂoor. Every company should charge a price that covers its cost of producing,
distributing, and selling the product and provides a fair return for its effort and risk.
Types of Costs and Levels of Production
A company’s costs take two forms—ﬁxed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue, such as payments forrent, heat, interest, salaries, and other bills that must be paid regardless of output.
In contrast, variable costs vary directly with the level of production. For example,
each calculator produced by Texas Instruments (TI) involves a cost of plastic, microprocessing chips, packaging, and the like. These costs tend to be constant per unit
produced, but they are called variable because their total varies with the number ofunits produced.
Total costs consist of the sum of the ﬁxed and variable costs for any given level ofproduction. Average cost is the cost per unit at that level of production; it is equal tototal costs divided by production. Management wants to charge a price that will at least
cover the total production costs at a given level of production.
To price intelligently, management needs to know how its costs vary with different levels of production. A ﬁrm’s cost per unit is high if only a few units are produced
every day, but as production increases, ﬁxed costs are spread over a higher level of production results in each unit, bringing the average cost down. At some point, however,higher production will lead to higher average cost because the plant becomes inefﬁcient (due to problems such as machines breaking down more often). By calculating
costs for different-sized plants, a company can identify the optimal plant size and production level to achieve economies of scale and bring down the average cost.
Accumulated Production
Suppose TI runs a plant that produces 3,000 calculators per day. As TI gains experience producing calculators, its methods improve. Workers learn shortcuts, materials
ﬂow more smoothly, and procurement costs fall. The result, as Figure 4-10 shows, isthat average cost falls with accumulated production experience. Thus, the average costof producing the ﬁrst 100,000 hand calculators is $10 per calculator. When the company has produced the ﬁrst 200,000 calculators, the average cost has fallen to $9. After
its accumulated production experience doubles again to 400,000, the average cost is$8. This decline in the average cost with accumulated production experience is called
the experience curve or learning curve.
Now suppose TI competes against two other ﬁrms (A and B) in this industry. TI is
the lowest-cost producer at $8, having produced 400,000 units in the past. If all threeﬁrms sell the calculator for $10, TI makes $2 proﬁt per unit, A makes $1 per unit, andB breaks even. The smart move for TI would be to lower its price to $9 to drive B out of

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Figure 4-10 The Experience Curvethe market; even A will consider leaving. Then TI will pick up the business that would
have gone to B (and possibly A). Furthermore, price-sensitive customers will enter themarket at the lower price. As production increases beyond 400,000 units, TI’s costs will
drop even more, restoring its proﬁts even at a price of $9. TI has used this aggressive
pricing strategy repeatedly to gain market share and drive others out of the industry.
Experience-curve pricing is risky because aggressive pricing may give the product a cheap image. This strategy also assumes that the competitors are weak and notwilling to fight. Finally, the strategy may lead the firm into building more plants tomeet demand while a competitor innovates a lower-cost technology and enjoys lower
costs, leaving the leader stuck with old technology.
Differentiated Marketing Offers
Today’s companies try to adapt their offers and terms to different buyers. Thus, a manufacturer will negotiate different terms with different retail chains, meaning the costs
and proﬁts will differ with each chain. To estimate the real proﬁtability of dealing withdifferent retailers, the manufacturer needs to use activity-based cost (ABC) accounting
instead of standard cost accounting.9
ABC accounting tries to identify the real costs associated with serving different
customers. Both the variable costs and the overhead costs must be tagged back to eachcustomer. Companies that fail to measure their costs correctly are not measuring their
proﬁt correctly, and they are likely to misallocate their marketing effort. Identifying
the true costs arising in a customer relationship also enables a company to explain its
charges better to the customer.
Target Costing
We have seen that costs change with production scale and experience. They can alsochange as a result of a concentrated effort by the company’s designers, engineers, andpurchasing agents to reduce them. Many Japanese firms use a method called target
costing.10 First, they use market research to establish a new product’s desired functions,then they determine the price at which the product will sell given its appeal and competitors’ prices. They deduct the desired proﬁt margin from this price, and this leaves
the target cost they must achieve.

Setting the Price

Next, the ﬁrms examine each cost element—design, engineering, manufacturing, sales—and break them down into further components, looking for ways to reengineer components, eliminate functions, and bring down supplier costs. The objective isto bring the ﬁnal cost projections into the target cost range. If they cannot succeed,
they may decide against developing the product because it could not sell for the target
price and make the target proﬁt. When they can succeed, proﬁts are likely to follow.

Step 4: Analyzing Competitors’ Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company
costs, the ﬁrm must take into account its competitors’ costs, prices, and possible pricereactions. If the ﬁrm’s offer is similar to a major competitor’s offer, then the ﬁrm will
have to price close to the competitor or lose sales. If the ﬁrm’s offer is inferior, it will
not be able to charge more than the competitor charges. If the ﬁrm’s offer is superior,it can charge more than does the competitor—remembering, however, that competitors might change their prices in response at any time.

Step 5: Selecting a Pricing Method
The three Cs—the customers’ demand schedule, the cost function, and competitors’
prices—are major considerations in setting price (see Figure 4-11). First, costs set a
ﬂoor to the price. Second, competitors’ prices and the price of substitutes provide anorienting point. Third, customers’ assessment of unique product features establishes
the ceiling price. Companies must therefore select a pricing method that includes one
or more of these considerations. We will examine six price-setting methods: markup
pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and sealed-bid pricing.
Markup Pricing
The most elementary pricing method is to add a standard markup to the product’scost. Construction companies do this when they submit job bids by estimating the total
project cost and adding a standard markup for proﬁt. Similarly, lawyers and accountants typically price by adding a standard markup on their time and costs.
Suppose a toaster manufacturer has the following costs and sales expectations:
Variable cost per unit
Fixed cost
Expected unit sales$
10
300,000
50,000Figure 4-11 The Three Cs Model for Price Setting

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The manufacturer’s unit cost is given by:
Unit cost ⫽ variable cost ⫹ ﬁxed costs ⫽ $10 ⫹ $300,000 ⫽ $16
unit sales
50,000If the manufacturer wants to earn a 20 percent markup on sales, its markup price isgiven by:Markup price ⫽unit cost⫽ $16 ⫽ $20(1 ⫺ desired return on sales) 1 ⫺ 0.2

Here, the manufacturer charges dealers $20 per toaster and makes a proﬁt of $4 perunit. If the dealers want to earn 50 percent on their selling price, they will mark up thetoaster to $40. This is equivalent to a cost markup of 100 percent.
Does the use of standard markups make logical sense? Generally, no. Any pricing
method that ignores current demand, perceived value, and competition is not likely tolead to the optimal price. Markup pricing works only if the marked-up price actuallybrings in the expected level of sales.
Companies that introduce a new product often price it high, hoping to recover
their costs as rapidly as possible. But a high-markup strategy could be fatal if a competitor is pricing low. This happened to Philips, the Dutch electronics manufacturer,
in pricing its videodisc players. Philips wanted to make a profit on each videodisc
player. Meanwhile, Japanese competitors priced low and succeeded in building theirmarket share rapidly, which in turn pushed down their costs substantially.
Markup pricing remains popular for a number of reasons. First, sellers can determine costs much more easily than they can estimate demand. By tying the price tocost, sellers simplify the pricing task. Second, when all ﬁrms in the industry use thispricing method, prices tend to be similar, which minimizes price competition. Third,
many people feel that cost-plus pricing is fairer to both buyers and sellers: Sellers do
not take advantage of buyers when demand becomes acute, and sellers earn a fairreturn on investment.
Target-Return Pricing
In target-return pricing, the ﬁrm determines the price that would yield its target rate of
return on investment (ROI). Target pricing is used by many ﬁrms, including General
Motors, which prices its automobiles to achieve a 15–20 percent ROI.
Suppose the toaster manufacturer in the previous example has invested $1 million and wants to earn a 20 percent return on its invested capital. The target-return
price is given by the following formula:
Target-return price ⫽ unit cost ⫹ desired return ⫻ invested capital
unit sales⫽ $16 ⫹ .20 ⫻ $1,000,000 ⫽ $20
50,000The manufacturer will realize this 20 percent ROI provided its costs and estimated sales
turn out to be accurate. But what if sales do not reach 50,000 units? The manufacturer
can prepare a break-even chart to learn what would happen at other sales levels (Figure4-12). Note that ﬁxed costs remain the same regardless of sales volume, while variable
costs, which are not shown in the ﬁgure, rise with volume. Total costs equal the sum ofﬁxed costs and variable costs; the total revenue curve rises with each unit sold.

Setting the Price

Figure 4-12 Break-Even Chart
According to this break-even chart, the total revenue and total cost curves crossat 30,000 units. This is the break-even volume. It can be veriﬁed by the following formula:
Break-even volume ⫽ﬁxed cost⫽ $300,000 ⫽ 30,000
price ⫺ variable cost
$20⫺10If the manufacturer sells 50,000 units at $20, it earns a $200,000 proﬁt on its $1 million
investment. But much depends on price elasticity and competitors’ prices, two elements that are ignored by target-return pricing. In practice, the manufacturer needs
to consider different prices and estimate their probable impacts on sales volume andprofits. The manufacturer should also search for ways to lower its fixed or variable
costs, because lower costs will decrease its required break-even volume.
Perceived-Value Pricing
An increasing number of companies base price on customers’ perceived value. They see
the buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Then they
use the other marketing-mix elements, such as advertising, to build up perceived value
in buyers’ minds.11
For example, when DuPont developed a new synthetic fiber for carpets, it
demonstrated to carpet manufacturers that they could afford to pay DuPont as muchas $1.40 per pound for the new ﬁber and still make their target proﬁt. DuPont calls the$1.40 the value-in-use price. But pricing the new material at $1.40 per pound would
leave the carpet manufacturers indifferent. So DuPont set the price lower than $1.40
to induce carpet manufacturers to adopt the new ﬁber. In this situation, DuPont used
its manufacturing cost only to judge whether there was enough proﬁt to go ahead with
the new product.
The key to perceived-value pricing is to determine the market’s perception of
the offer’s value accurately. Sellers with an inﬂated view of their offer’s value will overprice their product, while sellers with an underestimated view will charge less thanthey could. Market research is therefore needed to establish the market’s perceptionof value as a guide to effective pricing.12

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Value Pricing
Value pricing is a method in which the company charges a fairly low price for a highquality offering. Value pricing says that the price should represent a high-value offer toconsumers. This is a major trend in the computer industry, which has shifted fromcharging top dollar for cutting-edge computers to offering basic computers at lower
prices. For instance, Monorail Computer started selling PCs in 1996 for as little as $999
to woo price-sensitive buyers. Compaq and others quickly followed suit. More recently,
eMachines began selling its PCs for less than $500 without a monitor, targeting the 55
percent of computerless households with annual incomes of $25,000 to $30,000.13
Value pricing is not a matter of simply setting lower prices on one’s products
compared to those of competitors. It is a matter of reengineering the company’s operations to become a low-cost producer without sacriﬁcing quality, and lowering prices
signiﬁcantly to attract a large number of value-conscious customers. An important typeof value pricing is everyday low pricing (EDLP), which takes place at the retail level.
Retailers such as Wal-Mart and Amazon.com use EDLP pricing, posting a constant,everyday low price with few or no temporary price discounts. These constant prices
eliminate week-to-week price uncertainty and can be contrasted to the “high-low” pricing of promotion-oriented competitors. In high-low pricing, the retailer charges higher
prices on an everyday basis but then runs frequent promotions in which prices aretemporarily lowered below the EDLP level.14
Retailers adopt EDLP for a number of reasons, the most important of which isthat constant sales and promotions are costly and erode consumer conﬁdence in thecredibility of everyday prices. Consumers also have less time and patience for suchtime-honored traditions as watching for specials and clipping coupons. Yet promotions are an excellent way to create excitement and draw shoppers. For this reason,
EDLP is not a guarantee of success. As supermarkets face heightened competition
from store rivals and alternative channels, many are drawing shoppers using a combination of high-low and EDLP strategies, with increased advertising and promotions.15
Going-Rate Pricing
In going-rate pricing, the ﬁrm bases its price largely on competitors’ prices. The ﬁrm
might charge the same, more, or less than its major competitor(s) charges. In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, ﬁrms normallycharge the same price. The smaller firms “follow the leader,” changing their prices
when the market leader’s prices change rather than when their own demand or costschange. Some ﬁrms may charge a slight premium or slight discount, but they typicallypreserve the amount of difference. When costs are difﬁcult to measure or competitive
response is uncertain, ﬁrms feel that the going price represents a good solution, since
it seems to reﬂect the industry’s collective wisdom as to the price that will yield a fairreturn and not jeopardize industrial harmony.
Sealed-Bid Pricing
Competitive-oriented pricing is common when ﬁrms submit sealed bids for jobs. In
bidding, each ﬁrm bases its price on expectations of how competitors will price rather
than on a rigid relationship to the firm’s own costs or demand. Sealed-bid pricing
involves two opposite pulls. The ﬁrm wants to win the contract—which means submitting the lowest price—yet it cannot set its price below cost.
To solve this dilemma, the company would estimate the proﬁt and the probability of winning with each price bid. By multiplying the proﬁt by the probability of winning the bid on the basis of that price, the company can calculate the expected proﬁt
for each bid. For a ﬁrm that makes many bids, this method is a way of playing the odds

Setting the Priceto achieve maximum proﬁts in the long run. However, ﬁrms that bid only occasionallyor that badly want to win certain contracts will not find it advantageous to use theexpected-proﬁt criterion.

Step 6: Selecting the Final Price
The previous pricing methods narrow the range from which the company selects its
ﬁnal price. In selecting that price, the company must consider additional factors: psychological pricing, the inﬂuence of other marketing-mix elements on price, company
pricing policies, and the impact of price on other parties.
Psychological Pricing
Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. A $100 bottle ofperfume might contain $10 worth of scent, but gift givers pay $100 to communicate
their high regard for the receiver. Similarly, price and quality perceptions of cars interact:16 Higher-priced cars are perceived to possess high quality; higher-quality cars are
likewise perceived to be higher priced than they actually are. In general, when information about true quality is unavailable, price acts as a signal of quality.
When looking at a particular product, buyers carry in their minds a reference priceformed by noticing current prices, past prices, or the buying context. Sellers often
manipulate these reference prices. For example, a seller can situate its product among
expensive products to imply that it belongs in the same class. Reference-price thinking
is also created by stating a high manufacturer’s suggested price, by indicating that the
product was priced much higher originally, or by pointing to a rival’s high price.17
Often sellers set prices that end in an odd number, believing that customers who
see a television priced at $299 instead of $300 will perceive the price as being in the$200 range rather than the $300 range. Another explanation is that odd endings convey the notion of a discount or bargain, which is why both toysrus.com and etoys.com
set prices ending in 99. But if a company wants a high-price image instead of a lowprice image, it should avoid the odd-ending tactic.
The Inﬂuence of Other Marketing-Mix Elements
The ﬁnal price must take into account the brand’s quality and advertising relative tocompetition. When Farris and Reibstein examined the relationships among relative
price, relative quality, and relative advertising for 227 consumer businesses, they foundthat brands with average relative quality but high relative advertising budgets wereable to charge premium prices. Consumers apparently were willing to pay higher
prices for known products than for unknown products. They also found that brands
with high relative quality and high relative advertising obtained the highest prices,while brands with low quality and advertising charged the lowest prices. Finally, thepositive relationship between high prices and high advertising held most strongly inthe later stages of the product life cycle for market leaders.18 Smart marketers therefore ensure that their prices ﬁt with other marketing-mix elements.
Company Pricing Policies
The price must be consistent with company pricing policies. To accomplish this, manyﬁrms set up a pricing department to develop policies and establish or approve decisions. The aim is to ensure that the salespeople quote prices that are reasonable to customers and proﬁtable to the company.

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Impact of Price on Other Parties
Management must also consider the reactions of other parties to the contemplated price.
How will distributors and dealers feel about it? Will the sales force be willing to sell at thatprice? How will competitors react? Will suppliers raise their prices when they see the company’s price? Will the government intervene and prevent this price from being charged?
In the last case, marketers need to know the laws regulating pricing. U.S. legislation outlaws price-fixing, so sellers must set prices without talking to competitors.
Many federal, state, and local laws also protect consumers against deceptive pricing
practices. For example, it is illegal for a company to set artificially high “regular”
prices, then announce a “sale” at prices close to previous everyday prices.

ADAPTING THE PRICE
Companies usually do not set a single price, but rather a pricing structure that reﬂects
variations in geographical demand and costs, market-segment requirements, purchasetiming, order levels, delivery frequency, guarantees, service contracts, and other factors. As a result of discounts, allowances, and promotional support, a company rarely
realizes the same proﬁt from each unit of a product that it sells. Here we will examine
several price-adaptation strategies: geographical pricing, price discounts andallowances, promotional pricing, discriminatory pricing, and product-mix pricing.

Geographical Pricing
In geographical pricing, the company decides how to price its products to different
customers in different locations and countries. For example, should the company
charge distant customers more to cover higher shipping costs, or set a lower price to
win additional business? Another issue is how to get paid. This is particularly criticalwhen foreign buyers lack sufficient hard currency to pay for their purchases. Manybuyers want to offer other items in payment in a practice known as countertrade, which
accounts for 15–25 percent of world trade and takes several forms:19➤

Barter: The direct exchange of goods, with no money and no third party involved. For
example, Eminence S.A., a major clothing maker in France, bartered $25 million
worth of U.S.-produced underwear and sportswear to customers in eastern Europe inexchange for transportation, magazine advertising space, and other goods and services.

➤

Compensation deal: The seller is paid partly in cash and partly in products. A British
aircraft manufacturer used this approach to sell planes to Brazil for 70 percent cash
and the rest in coffee.

➤

Buyback arrangement: The seller sells a plant, equipment, or technology to anothercountry and agrees to accept as partial payment products manufactured with the
supplied equipment. As one example, a U.S. chemical ﬁrm built a plant for an
Indian company and accepted partial payment in cash and the remainder inchemicals manufactured at the plant.

➤

Offset: The seller receives full payment in cash but agrees to spend a substantial
amount of that money in that country within a stated time period. For example,
PepsiCo sells its cola syrup to Russia for rubles and agrees to buy Russian vodka at a
certain rate for sale in the United States.

Price Discounts and Allowances
Most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying, as shown in Table 4.4. However, companies must do this carefully or they will ﬁnd that their proﬁts are much less than planned.20

Adapting the Price

Table 4.4 Price Discounts and Allowances
Cash Discounts:

A cash discount is a price reduction to buyers who pay theirbills promptly.A typical example is “2/10, net 20,” which meansthat payment is due within 30 days and that the buyer can
deduct 2 percent by paying the bill within 10 days. Suchdiscounts are customary in many industries.

Quantity Discounts:

A quantity discount is a price reduction to those buyers who
buy large volumes.A typical example is “$10 per unit for lessthan 100 units; $9 per unit for 100 or more units.” Quantity
discounts must be offered equally to all customers and must
not exceed the cost savings to the seller associated withselling large quantities.They can be offered on a
noncumulative basis (on each order placed) or a cumulativebasis (on the number of units ordered over a given period).

Functional Discounts:

Functional discounts (also called trade discounts) are offered by amanufacturer to trade-channel members if they will perform
certain functions, such as selling, storing, and record keeping.
Manufacturers may offer different functional discounts todifferent trade channels but must offer the same functional
discounts within each channel.

Seasonal Discounts:

A seasonal discount is a price reduction to buyers who buy
merchandise or services out of season. Ski manufacturers willoffer seasonal discounts to retailers in the spring and summer
to encourage early ordering. Hotels, motels, and airlines willoffer seasonal discounts in slow selling periods.

Allowances:

Allowances are extra payments designed to gain reseller
participation in special programs. Trade-in allowances are pricereductions granted for turning in an old item when buying a
new one.Trade-in allowances are most common in durablegoods categories. Promotional allowances are payments or pricereductions to reward dealers for participating in advertisingand sales support programs.

Promotional Pricing
Companies can use any of seven promotional pricing techniques to stimulate earlypurchase (see Table 4.5). However, smart marketers recognize that promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them andthey lose their effectiveness. If they do not work, they waste company money that
could have been put into longer impact marketing tools, such as building up productquality and service or strengthening product image through advertising.

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Table 4.5 Promotional Pricing Techniques
TechniqueDescription

ExampleLoss-leader pricing

Stores drop the price on wellknown brands to stimulate
additional store trafﬁc.

Kmart cuts the price of selectedtoys to attract shoppers before
Christmas.

Special-event pricing

Sellers establish special prices
in certain seasons to draw inmore customers.

Staples offers special prices on
stationery items during a backto-school sale.

Cash rebates

Manufacturers offer cash
rebates to encourage purchaseof their products within a
speciﬁed period; this helps
clear inventories without
cutting the stated price.

Mazda advertises cash rebates on
the purchase of selected
previous-year models to clear
these vehicles out of dealer
inventory.

Low-interest
ﬁnancing

Instead of cutting its price, thecompany can offer customers
low-interest ﬁnancing.

Ford offers low- or no-interest
ﬁnancing to encourage thepurchase of selected vehicles.

Longer payment
terms

Sellers stretch loans overlonger periods and thus lower
the monthly payments that
customers pay.

Auto companies and mortgage
banks use this approach because
consumers are more concernedwith affordable payments thanwith the interest rate.

Warranties andservice contracts

Companies can promote sales
by adding a free or low-cost
warranty or service contract.

Real estate brokers offer special
warranties on selected homes to
expedite sales.

Psychologicaldiscounting

Used legitimately, this involves
offering the item at substantial
savings from the normal price.

A jewelry store lowers the priceof a diamond ring and advertises“Was $359, now $299.”

Discriminatory Pricing
Companies often adjust their basic price to accommodate differences in customers,
products, locations, and so on. Discriminatory pricing occurs when a company sells a
product or service at two or more prices that do not reﬂect a proportional differencein costs. Discriminatory pricing takes several forms:➤

Customer-segment pricing: Different customer groups pay different prices for the same
good or service. For example, museums often charge a lower admission fee tostudents and senior citizens.

➤

Product-form pricing: Different versions of the product are priced differently but notproportionately to their respective costs. Evian, for instance, prices a 48-ouncebottle of its mineral water at $2, while its 1.7 ounce moisturizer spray sells for $6.

➤

Image pricing: Some companies price the same product at two different levels basedon image differences. For instance, a perfume manufacturer can put its perfume in
one bottle with a certain name and image priced at $10 an ounce; the same perfume
in another bottle with a different name and image could be priced at $30 an ounce.

Adapting the Price➤

Location pricing: The same product is priced differently at different locations eventhough the costs are the same; for example, theaters often vary seat prices according
to audience preferences for different locations.

➤Time pricing: Prices are varied by season, day, or hour. Public utilities use timepricing, varying energy rates to commercial users by time of day and weekend versus
weekday. A special form of time pricing is yield pricing, which is often used by airlines
to ﬁll as many seats as possible.

Price discrimination works when (1) the market is segmentable and the segments show different intensities of demand; (2) members in the lower-price segment
cannot resell the product to the higher-price segment; (3) competitors cannot undersell the ﬁrm in the higher-price segment; (4) the cost of segmenting and policing themarket does not exceed the extra revenue derived from price discrimination; (5) thepractice does not breed customer resentment and ill will; and (6) the particular formof price discrimination is not illegal (practices such as predatory pricing—selling below
cost with the intention of destroying competition—are against the law).21
Today’s Internet technology helps sellers discriminate between buyers as well as
helping buyers discriminate between sellers. For example, Personify software allows
companies to examine the “clickstream” of an on-line shopper, looking at the way that
individual navigates through a Web site. Based on that behavior, the software caninstantaneously target shoppers for specific products and prices. At the same time,
Web sites such as MySimon are giving buyers instant price comparisons on specificproducts, while Web sites such as Priceline.com allow buyers to name their own pricefor airline tickets, long-distance phone service, hotel rooms, mortgages, groceries, andother goods and services—including an electronic yard sale for personal items.22
These and other Internet innovations clearly signal the return to ﬂuid pricing rather
than the ﬁxed pricing approach that came into acceptance a century ago.

Product-Mix Pricing
Price-setting logic must be modiﬁed when the product is part of a product mix. In thiscase, the firm searches for a set of prices that maximizes profits on the total mix.
Pricing a product line is difﬁcult because the various products have demand and costinterrelationships and are subject to different degrees of competition. We can distinguish six situations involving product-mix pricing:➤

Product-line pricing. Many sellers use well-established price points (such as $200,$350, and $500 for suits) to distinguish the products in their line. The seller’s task isto establish perceived-quality differences that justify the price differences.

➤

Optional-feature pricing. Automakers and many other ﬁrms offer optional products,
features, and services along with their main product. Pricing these options is a sticky
problem because companies must decide which items to include in the standard
price and which to offer as options.

➤

Captive-product pricing. Some products require the use of ancillary, or captive,
products. In the razor industry, manufacturers often price their razors low and set
high markups on their blades. However, there is a danger in pricing the captive
product too high in the aftermarket (the market for ancillary supplies to the main
product). Caterpillar, for example, makes high proﬁts in the aftermarket by pricing
its parts and service high. This practice has given rise to “pirates,” who counterfeit
the parts and sell them to “shady tree” mechanics who install them, sometimes
without passing on the cost savings to customers. Meanwhile, Caterpillar loses
sales.23

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Two-part pricing, which is practiced by many service ﬁrms, consists of a ﬁxed fee plus
a variable usage fee. As an example, telephone users pay a minimum monthly fee
plus charges for calls beyond a certain area. The challenge is how much to charge
for the basic service and how much for the variable usage. The ﬁxed fee should be
low enough to induce purchase; the proﬁt can then be made on the usage fees.

➤

By-product pricing. The production of certain goods—meats, chemicals, and so on—
often results in by-products, which can be priced according to their value tocustomers. Any income earned on the by-products will make it easier for the company
to charge less for the main product if competition forces it to do so. Sometimes
companies do not realize how valuable their by-products are. Until Zoo-Doo Compost
Company came along, many zoos did not realize that one of their by-products—theiroccupants’ manure—could be an excellent source of additional revenue.24➤

Product-bundling pricing. Sellers often bundle their products and features at a set
price. An auto manufacturer, for instance, might offer an option package at lessthan the cost of buying all of the options separately. Because customers may nothave planned to buy all of the components, the savings on the price bundle must be
substantial enough to induce them to buy the bundle.25

INITIATING AND RESPONDING TO PRICE CHANGES
After setting initial prices and creating a pricing structure for their products, firms
may need to cut or raise prices in certain situations. Here we will examine the challenges of initiating price cuts, initiating price increases, reacting to price changes, andresponding to competitors’ price changes. For an overview of strategic pricing options
involving marketing-mix variables, see Table 4.6.

Initiating Price Cuts
Several circumstances might lead a ﬁrm to cut prices. One is excess plant capacity: If the
ﬁrm needs additional business but cannot generate it through increased sales effort orother measures, it may initiate a price cut. In doing so, however, the company risks
triggering a price war. Another circumstance is a declining market share, which may
prompt the firm to cut prices as a way of regaining share. In addition, companies
sometimes initiate price cuts in a drive to dominate the market through lower costs. Either
the company starts with lower costs than those of its competitors or it initiates pricecuts in the hope of gaining market share and lower costs.
When considering price-cutting, marketers need to be aware of three possible
traps: (1) Customers may assume that lower-priced products have lower quality; (2) alow price buys market share but not market loyalty because the same customers will
shift to any lower-price ﬁrm; and (3) higher-priced competitors may cut their prices
and still have longer staying power because of deeper cash reserves.

Initiating Price Increases
A successful price increase can raise profits considerably. For example, if the company’s proﬁt margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume does not drop. In many cases, ﬁrms increase prices justto maintain profits in the face of cost inflation. This occurs when rising costs—
unmatched by productivity gains—squeeze proﬁt margins, leading ﬁrms to regularly
increase prices. In fact, companies often raise their prices by more than the cost
increase in anticipation of further inﬂation or government price controls in a practicecalled anticipatory pricing.

Initiating and Responding to Price Changes

Table 4.6 Marketing-Mix Alternatives
Strategic Options

Reasoning

Consequences

Firm has higher customer
1. Maintain price andperceived quality. Engage loyalty. It is willing to lose
poorer customers toin selective customer
competitors.
pruning.

Smaller market share.
Lowered proﬁtability.

Raise price to cover risingcosts. Improve quality tojustify higher prices.

Smaller market share.
Maintained proﬁtability.

2. Raise price andperceived quality.

3. Maintain price and raise It is cheaper to maintain priceand raise perceived quality.
perceived quality.

Smaller market share. Shortterm decline in proﬁtability.
Long-term increase in
proﬁtability.

4. Cut price partly andraise perceived quality.

Must give customers someprice reduction but stresshigher value of offer.

Maintained market share.
Short-term decline in
proﬁtability. Long-term
maintained proﬁtability.

5. Cut price fully andmaintain perceived
quality.

Discipline and discourage
price competition.

Maintained market share.
Short-term decline in
proﬁtability.

6. Cut price fully andreduce perceived
quality.

Discipline and discourage
price competition andmaintain proﬁt margin.

Maintained market share.
Maintained margin. Reduced
long-term proﬁtability.

7. Maintain price andreduce perceived
quality.

Cut marketing expense tocombat rising.

Smaller market share.
Maintained margin. Reduced
long-term proﬁtability.

8. Introduce an economy
model.

Give the market what it
wants.

Some cannibalization but
higher total volume.

Another factor leading to price increases is overdemand. When a company cannot
supply all of its customers, it can use one of the following pricing techniques:➤With delayed quotation pricing, the company does not set a ﬁnal price until the product isﬁnished or delivered. This is prevalent in industries with long production lead times.

➤

With escalator clauses, the company requires the customer to pay today’s price and allor part of any inﬂation increase that occurs before delivery, based on some speciﬁed
price index. Such clauses are found in many contracts involving industrial projectsof long duration.

➤

With unbundling, the company maintains its price but removes or prices separately
one or more elements that were part of the former offer, such as free delivery or
installation.

➤

With reduction of discounts, the company no longer offers its normal cash andquantity discounts.

Instead of raising prices, companies can respond to higher costs or overdemandin other ways, as shown in Table 4.6.

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Reactions to Price Changes
Any price change can provoke a response from the firm’s stakeholders. Savvy marketers pay close attention to customers’ reactions, because customers often question
the motivation behind price changes.26 Customers are most price sensitive to productsthat cost a lot or are bought frequently; they hardly notice higher prices on low-cost
items that they buy infrequently. Some buyers are less concerned with price than withthe total costs of obtaining, operating, and servicing the product over its lifetime. So aseller can charge more and maintain sales if customers are convinced that total lifetime costs are lower.
Competitors are most likely to react to a price change when there are few ﬁrms
offering the product, the product is homogeneous, and buyers are highly informed.
Anticipating competitive reaction is complicated because each rival may have different
interpretations of a company’s price cut: One may think the company is trying to steal
the market, while another may believe that the company wants the entire industry to
reduce prices to stimulate total demand. Still, a ﬁrm will be unable to interpret competitors’ price changes or other marketing-mix adjustments unless it continuously
monitors and analyzes its rivals’ activities.

Responding to Competitors’ Price Changes
How should a ﬁrm respond to a price cut that is initiated by a competitor? In markets
characterized by high product homogeneity, the firm should search for ways toenhance its augmented product, but if it cannot ﬁnd any, it will have to meet the pricereduction. If the competitor raises its price in a homogeneous product market, theother ﬁrms might not match it, unless the price increase will beneﬁt the industry as awhole. By not matching it, the leader will have to rescind the increase.
In nonhomogeneous product markets, a ﬁrm has more latitude to consider thefollowing issues: (1) Why did the competitor change the price? Is it to steal the market,
to utilize excess capacity, to meet changing cost conditions, or to lead an industrywide
price change? (2) Does the competitor plan to make the price change temporary or
permanent? (3) What will happen to the company’s market share and proﬁts if it does
not respond? Are other companies going to respond? (4) What are the competitor’sand other ﬁrms’ responses likely to be to each possible reaction?
Market leaders often face aggressive price cutting by smaller competitors trying
to build market share, the way Amazon.com has attacked Barnes and Noble. The
brand leader can respond by:➤

Maintaining price and proﬁt margin, believing that (1) it would lose too much proﬁt if
it reduced its price, (2) it would not lose much market share, and (3) it could
regain market share when necessary. However, the risk is that the attacker may get
more conﬁdent, the leader’s sales force may get demoralized, and the leader canlose more share than expected. Then the leader may panic, lower price to regain
share, and ﬁnd that regaining market share is more difﬁcult and costly than
expected.

➤

Maintaining price while adding value to its product, services, and communications.
This may be less expensive than cutting price and operating at a lower margin.

➤

Reducing price to match the competitor’s price, because (1) its costs fall with volume,(2) it would lose market share in a price-sensitive market, and (3) it would be hard
to rebuild market share once it is lost, even though this will cut short-term proﬁts.

➤

Increasing price and improving quality by introducing a new product to bracket theattacking brand.

Notes➤Launching a low-price ﬁghter line or creating a separate lower-price brand to combat
competition. Miller Beer, for example, launched a lower-priced beer brand called
Red Dog.

The best response varies with the situation. Successful ﬁrms consider the product’s stage in the life cycle, its importance in the company’s portfolio, the competitor’s
intentions and resources, the market’s price and quality sensitivity, the behavior of
costs with volume, and the company’s alternative opportunities.

EXECUTIVE SUMMARY
Price is the only one of the four Ps that produces revenue. In setting prices, a company
follows a six-step procedure: (1) Select the pricing objective, (2) determine demand,(3) estimate costs, (4) analyze competitors’ costs, prices, and offers, (5) select a pricing method, and (6) select the ﬁnal price.
Companies do not usually set a single price, but rather a pricing structure thatreﬂects variations in geographical demand and costs, market-segment requirements,
purchase timing, order levels, and other factors. Several price-adaptation strategies areavailable: (1) geographical pricing; (2) price discounts and allowances; (3) promotional pricing; (4) discriminatory pricing, in which the company sells a product at different prices to different market segments; and (5) product-mix pricing, which
includes setting prices for product lines, optional features, captive products, two-part
items, by-products, and product bundles.
After developing pricing strategies, ﬁrms often face situations in which they needto change prices by initiating price cuts or price increases. In these situations, companies need to consider how stakeholders will react to price changes. In addition, marketers must develop strategies for responding to competitors’ price changes. The
ﬁrm’s strategy often depends on whether it is producing homogeneous or nonhomogeneous products. Market leaders who are attacked by lower-priced competitors canchoose to maintain price, raise the perceived quality of their product, reduce price,increase price and improve quality, or launch a low-price ﬁghter line.

NOTES
1. Amy E. Cortese, “Good-Bye to Fixed Pricing?” Business Week, May 4, 1998, pp. 71–84.
2. Steve Gelsi, “Spin-Cycle Doctor,” Brandweek, March 10, 1997, pp. 38–40; Tim Stevens,“From Reliable to ‘Wow,’” Industry Week, June 22, 1998, pp. 22-26.
3. Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing, 2d ed. (Upper
Saddle River, NJ: Prentice-Hall, 1995), ch. 4. This is an excellent reference book formaking pricing decisions.
4. Kevin J. Clancy, “At What Proﬁt Price?” Brandweek, June 23, 1997, pp. 24–28;“GreenMountain.com Begins Supplying Cleaner Electricity to Pennsylvania State
Government,” PR Newswire, January 4, 2000.
5. See Sidney Bennett and J. B. Wilkinson, “Price-Quantity Relationships and Price Elasticity
Under In-Store Experimentation,” Journal of Business Research, January 1974, pp. 30–34.
6. John R. Nevin, “Laboratory Experiments for Estimating Consumer Demand—A Validation
Study,” Journal of Marketing Research, August 1974, pp. 261–68; and Jonathan Weiner,“Forecasting Demand: Consumer Electronics Marketer Uses a Conjoint Approach toConﬁgure Its New Product and Set the Right Price,” Marketing Research: A Magazine ofManagement & Applications, Summer 1994, pp. 6–11.

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7. An excellent summary of the various methods for estimating price sensitivity and demandcan be found in Nagle and Holden, The Strategy and Tactics of Pricing, ch. 13.
8. For summary of elasticity studies, see Dominique M. Hanssens, Leonard J. Parsons, andRandall L. Schultz, Market Response Models: Econometric and Time Series Analysis (Boston:
Kluwer Academic Publishers, 1990), pp. 187–91.
9. See Robin Cooper and Robert S. Kaplan, “Proﬁt Priorities from Activity-Based Costing,”
Harvard Business Review, May-June 1991, pp. 130–35. For more on ABC, see ch. 24.
10. See “Japan’s Smart Secret Weapon,” Fortune, August 12, 1991, p. 75.
11. Tung-Zong Chang and Albert R. Wildt, “Price, Product Information, and Purchase
Intention: An Empirical Study,” Journal of the Academy of Marketing Science, Winter 1994,
pp. 16–27. See also G. Dean Kortge and Patrick A. Okonkwo, “Perceived Value Approachto Pricing,” Industrial Marketing Management, May 1993, pp. 133–40.
12. For an empirical study of nine methods used by companies to assess customer value, seeJames C. Anderson, Dipak C. Jain, and Pradeep K. Chintagunta, “Customer Value
Assessment in Business Markets: A State-of-Practice Study,” Journal of Business-to-Business
Marketing 1, no. 1 (1993): 3–29.
13. Roger Crockett, “PC Makers Race to the Bottom,” Business Week, October 12, 1998, p. 48;
Patricia Fusco, “Emachines, FreePC to Merge,” InternetNews.com, November 30, 1999,
www.internetnews.com.
14. Stephen J. Hoch, Xavier Dreze, and Mary J. Purk, “EDLP, Hi-Lo, and Margin Arithmetic,”
Journal of Marketing, October 1994, pp. 16–27; Rajiv Lal and R. Rao, “Supermarket
Competition: The Case of Everyday Low Pricing,” Marketing Science 16, no. 1 (1997); 60–80.
15. Becky Bull, “No Consensus on Pricing,” Progressive Grocer, November 1998, pp. 87–90.
16. Gary M. Erickson and Johny K. Johansson, “The Role of Price in Multi-Attribute ProductEvaluations,” Journal of Consumer Research, September 1985, pp. 195–99.
17. K. N. Rajendran and Gerard J. Tellis, “Contextual and Temporal Components of Reference
Price,” Journal of Marketing, January 1994, pp. 22–34.
18. Paul W. Farris and David J. Reibstein, “How Prices, Expenditures, and Proﬁts Are Linked,”
Harvard Business Review, November–December 1979, pp. 173–84. See also Makoto Abe,
“Price and Advertising Strategy of a National Brand Against Its Private-Label Clone: A
Signaling Game Approach,” Journal of Business Research, July 1995, pp. 241–50.
19. See Michael Rowe, Countertrade (London: Euromoney Books, 1989); P. N. Agarwala,Countertrade: A Global Perspective (New Delhi: Vikas Publishing House, 1991); andChristopher M. Korth, ed., International Countertrade (New York: Quorum Books, 1987).
20. See Michael V. Marn and Robert L. Rosiello, “Managing Price, Gaining Proﬁt,” Harvard
Business Review, September–October 1992, pp. 84–94. See also Gerard J. Tellis, “Tackling
the Retailer Decision Maze: Which Brands to Discount, How Much, When, and Why?”
Marketing Science 14, no. 3, pt. 2 (1995); 271–99.
21. For more information on speciﬁc types of price discrimination that are illegal, see Henry
R. Cheeseman, Contemporary Business Law (Upper Saddle River, NJ: Prentice-Hall, 2000).
22. Clint Boulton, “Priceline Unleashes Long Distance Service,” E-Commerce News, November 8,
1999, www.internetnews.com; “What Am I Bid for These Old LPs?” Business Week, January
10, 2000, p. 57.
23. See Robert E. Weigand, “Buy In–Follow On Strategies for Proﬁt,” Sloan Management Review,
Spring 1991, pp. 29–37.
24. Susan Krafft, “Love, Love Me Doo,” American Demographics, June 1994, pp. 15–16.
25. See Gerald J. Tellis, “Beyond the Many Faces of Price: An Integration of Pricing Strategies,”
Journal of Marketing, October 1986, p. 155. This excellent article also analyzes andillustrates other pricing strategies.
26. For an excellent review, see Kent B. Monroe, “Buyers’ Subjective Perceptions of Price,”
Journal of Marketing Research, February 1973, pp. 70–80.

SECTION FIVE

Selecting andManaging
Marketing
Channels
We will address the following questions:■ What work is performed by marketing channels?
■ What decisions do companies face in designing, managing, evaluating, and modifying
their channels?
■ What trends are taking place in channel dynamics?
■ How can channel conﬂict be managed?

Decisions about marketing channels, which help producers deliver goods and services to their target markets, are among the most critical facing management—
because the channels that are chosen intimately affect all of the other marketing decisions. For example, the company’s pricing depends on whether it uses a direct Web
presence, discount merchants, or high-quality boutiques. Also, the ﬁrm’s sales force andadvertising decisions depend on how much training and motivation its dealers need.
Another reason why these decisions are so critical is that they involve relatively
long-term commitments to other firms. When an automaker signs up independent
dealers to sell its vehicles, the automaker cannot simply buy them out the next day andreplace them with company-owned outlets. As Corey observed, “A distribution system. . . is a key external resource. Normally it takes years to build, and it is not easilychanged. It ranks in importance with key internal resources such as manufacturing,
research, engineering, and ﬁeld sales personnel and facilities. It represents a signiﬁcant corporate commitment to large numbers of independent companies whose business is distribution—and to the particular markets they serve. It represents, as well, acommitment to a set of policies and practices that constitute the basic fabric on which
is woven an extensive set of long-term relationships.”1
Technology is, of course, having a profound effect on channel decisions and management. In an era when buyers and sellers alike seek speedier sales transactions,marketing-channel technologies (including automated inventory and storage systems)

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and the Internet are adding value by expediting the ﬂow of physical goods, ownership,
payment, information, and promotion. We explore the selection and management ofmarketing channels from the viewpoint of producers of goods and services.

WHAT WORK IS PERFORMED BY MARKETING CHANNELS?
Most producers do not sell their goods directly to the ﬁnal users. Between them stands
a set of intermediaries that perform a variety of functions. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel).
Marketing channels are sets of interdependent organizations involved in theprocess of making a product or service available for use or consumption.2 Why would
a producer delegate some of the selling job to intermediaries? Although delegationmeans relinquishing some control over how and to whom the products are sold, producers gain several advantages by using channel intermediaries:➤

Many producers lack the ﬁnancial resources to carry out direct marketing. For
example, General Motors sells its cars through more than 8,100 dealer outlets inNorth America alone. Even General Motors would be hard-pressed to raise the cash
to buy out its dealers.

➤

Direct marketing simply is not feasible for some products. The William Wrigley Jr.
Company would not ﬁnd it practical to establish retail gum shops or sell gum by
mail order. It would have to sell gum along with many other small products, andwould end up in the drugstore and grocery store business. Wrigley ﬁnds it easier towork through a network of privately owned distribution organizations.

➤

Producers who do establish their own channels can often earn a greater return byincreasing their investment in their main business. If a company earns a 20 percent
rate of return on manufacturing and only a 10 percent return on retailing, it does
not make sense to undertake its own retailing.

Intermediaries normally achieve superior efficiency in making goods widely
available and accessible to target markets. Through their contacts, experience, specialization, and scale of operation, these specialists usually offer the ﬁrm more than it
can achieve on its own. According to Stern and El-Ansary, “Intermediaries smooth theﬂow of goods and services. . . . This procedure is necessary in order to bridge the discrepancy between the assortment of goods and services generated by the producer
and the assortment demanded by the consumer. The discrepancy results from thefact that manufacturers typically produce a large quantity of a limited variety ofgoods, whereas consumers usually desire only a limited quantity of a wide variety ofgoods.”3
As shown in Figure 5-1, working through a distributor as intermediary cuts thenumber of contacts that manufacturers must have with customers. Part (a) shows
three producers, each using direct marketing to reach three customers, for a total ofnine contacts. Part (b) shows the three producers working through one distributor,
who contacts the three customers, for a total of only six contacts. Clearly, working
through a distributor is more efﬁcient in such situations.

Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to consumers, overcoming the time, place, and possession gaps that separate goods and ser-

What Work is Performed by Marketing Channels?

Figure 5-1 How a Distributor Effects Economy of Effort
vices from those who need or want them. Members of the marketing channel perform
a number of key functions:➤

They gather information about potential and current customers, competitors, andother actors and forces in the marketing environment.

➤

They develop and disseminate persuasive communications to stimulate purchasing.

➤

They reach agreement on price and other terms so that transfer of ownership or
possession can be effected.

➤

They place orders with manufacturers.

➤

They acquire the funds to ﬁnance inventories at different levels in the marketing
channel.

➤They assume risks connected with carrying out channel work.

➤

They provide for the successive storage and movement of physical products.

➤

They provide for buyers’ payment of their bills through banks and other ﬁnancial
institutions.

➤

They oversee actual transfer of ownership from one organization or person toanother.

Some functions (physical, title, promotion) constitute a forward ﬂow of activity
from the company to the customer; other functions (ordering and payment) constitute a backward ﬂow from customers to the company. Still others (information, negotiation, ﬁnance, and risk taking) occur in both directions. Five ﬂows are illustrated in
Figure 5-2 for the marketing of forklift trucks. If these ﬂows were superimposed in one
diagram, the tremendous complexity of even simple marketing channels would beapparent.
The question is not whether these channel functions need to be performed—theymust be—but rather who is to perform them. All channel functions have three thingsin common: They use up scarce resources; they can often be performed better
through specialization; and they can be shifted among channel members. If a manu-

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Figure 5-2 Five Marketing Flows in the Marketing Channel for Forklift Trucks
facturer shifts some functions to intermediaries, its costs and prices go down, but theintermediaries will charge more to cover their increased responsibilities. Still, if theintermediaries are more efficient than the manufacturer, the prices to consumers
should be lower. If consumers perform some functions themselves, they should enjoy
still lower prices. In general, changes in channel institutions tend to reﬂect the discovery of more efﬁcient ways to combine or separate the economic functions that provide
assortments of products to target customers.

Channel Levels
The producer and the ﬁnal customer are part of every channel. We will use the number of intermediary levels to designate the length of a channel. Figure 5-3a illustrates
several consumer-goods marketing channels of different lengths, while Figure 5-3b
illustrates industrial marketing channels.
A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly to the ﬁnal customer through Internet selling, door-to-door sales,
home parties, mail order, telemarketing, TV selling, manufacturer-owned stores, andother methods. A one-level channel contains one selling intermediary, such as a retailer.
A two-level channel contains two intermediaries; a three-level channel contains three intermediaries. From the producer’s point of view, obtaining information about end users
and exercising control becomes more difficult as the number of channel levels
increases.
Channels normally describe a forward movement of products. One can also talkabout backward channels, which recycle trash and old or obsolete products no longer
used by customers. Several intermediaries play a role in backward channels, includingWhat Work is Performed by Marketing Channels?

Figure 5-3 Consumer and Industrial Marketing Channels
manufacturers’ redemption centers, community groups, traditional intermediaries
such as soft-drink intermediaries, trash-collection specialists, recycling centers, trashrecycling brokers, and central-processing warehousing.4

Service Sector Channels
The concept of marketing channels is not limited to the distribution of physical goods.
Producers of services and ideas also face the problem of making their output available
and accessible to target populations. For instance, schools develop “educationaldissemination systems” and hospitals develop “health-delivery systems.” These institutions must determine agencies and locations for reaching a population that is spreadout over an area. Similarly, many states face the problem of locating branch campuses
to serve a burgeoning and increasingly well-educated population, just as cities mustﬁnd ways of creating and locating playgrounds children.5
As Internet technology advances, service industries such as banking, travel,and securities trading are putting more emphasis on this fast-growing channel.
Consider the decisions faced by Merrill Lynch, a full-service, full-price brokeragefirm that traditionally sold stocks and bonds through its 17,000 commissioned brokers. After watching discount broker Charles Schwab grab an early—and sizable—
head start in on-line securities trading, Merrill Lynch fought back by launching its
Merrill Lynch Direct Web site (www.mldirect.ml.com). This site allows the firm’s
customers to access financial data and trade securities without their brokers, at fees
well below the firm’s standard commission rates. In embracing this channel, Merrill
Lynch is seeking to retain customers who want to trade electronically; at the sametime, the firm needs to use its Internet presence to bring in new customers without
cannibalizing transactions that otherwise would have been handled by its brokers atfull commission.6

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SELECTING AND MANAGING MARKETING CHANNELSCHANNEL-DESIGN DECISIONS
A new ﬁrm typically starts as a local operation selling in a limited market through existing intermediaries. The problem at this point is not deciding on the best channels, butconvincing the available intermediaries to handle the ﬁrm’s line. If the ﬁrm is successful, it might enter new markets and select different channels in response to the opportunities and conditions in the different markets.
In designing the ﬁrm’s channel system, management must carefully analyze customer needs, establish channel objectives, and identify and evaluate the major channel alternatives.

Analyzing Customers’ Desired Service Output Levels
Because the point of a marketing channel is to make a product available to customers,
the marketer must understand what its target customers actually want. Channels produce ﬁve service outputs:
1.

Lot size: The number of units the channel permits a typical customer to purchase on
one occasion. In buying cars for its ﬂeet, Hertz prefers a channel from which it can
buy a large lot size; a household wants a channel that permits buying a lot size of one.

2.

Waiting time: The average time customers of that channel wait for receipt of the goods.
Customers normally prefer fast delivery channels.

3.

Spatial convenience: The degree to which the marketing channel makes it easy for customers to purchase the product. Chevrolet, for example, offers greater spatial convenience than Cadillac, because there are more Chevrolet dealers.

4.

Product variety: The assortment breadth provided by the channel. Normally, customers
prefer a greater assortment, which increases the chance of ﬁnding what they need.
Relentless expansion of product variety is the special edge that has helped
Amazon.com maintain its lead in Internet retailing.

5.

Service backup: The add-on services (credit, delivery, installation, repairs) provided by
the channel. The greater the service backup, the greater the work provided by thechannel.7

Smart marketers recognize that providing greater service outputs means increased
channel costs and higher prices for customers, just as a lower level means lower costs
and prices. The success of discount stores and Web sites indicates that many consumers will accept lower outputs if they can save money.

Establishing Objectives and Constraints
Once it understands what customers want, the company is ready to establish channel
objectives related to the targeted service output levels. According to Bucklin, undercompetitive conditions, channel institutions should arrange their functional tasks tominimize total channel costs with respect to desired levels of service outputs.8
Producers can usually identify several market segments that desire differing service
output levels. Thus, effective planning means determining which market segments toserve and the best channels to use in each case.
Channel objectives vary with product characteristics. For instance, perishable
products such as Ben & Jerry’s ice cream require more direct channels, whereas
bulkier products such as Owens Corning Fiber Glass insulation require channels thatminimize the shipping distance and the amount of handling in the movement fromproducer to consumer. In contrast, nonstandardized products, such as custom-built
machinery, typically are sold directly by company sales representatives.

Channel-Design Decisions

Channel design must also take into account the limitations and constraints of working with different types of intermediaries. As one example, reps that carry more than one
ﬁrm’s product line can contact customers at a low cost per customer because the total
cost is shared by several clients, but the selling effort per customer will be less intense thanif each company’s reps did the selling. In addition, channel design can be constrained bysuch factors as competitors’ channels, the marketing environment, and country-bycountry legal regulations and restrictions. U.S. law looks unfavorably upon channel
arrangements that tend to substantially lessen competition or create a monopoly.

Identifying Major Channel Alternatives
After a ﬁrm has examined its customers’ desired service outputs and has set channel
objectives, the next step is to identify channel alternatives. These are described by(1) the types of available intermediaries, (2) the number of intermediaries needed,and (3) the terms and responsibilities of each channel member.
Types of Intermediaries
Intermediaries known as merchants—such as wholesalers and retailers—buy, take title
to, and resell the merchandise. Agents—brokers, manufacturers’ representatives andsales agents—search for customers and may negotiate on the producer’s behalf but do
not take title to the goods. Facilitators—transportation companies, independent warehouses, banks, and advertising agencies—assist in the distribution process but neither
take title to goods nor negotiate purchases or sales. The most successful companies
search for innovative marketing channels. The Conn Organ Company, for example,
sells organs through merchants such as department and discount stores, drawing
more attention than it ever enjoyed in small music stores. Similarly, Ohio-based
Provident Bank reaches new mortgage customers by selling through the lendingtree.com Web site, which acts as a facilitator.
Number of Intermediaries
In deciding how many intermediaries to use, successful companies use one of threestrategies:➤

Exclusive distribution means severely limiting the number of intermediaries. Firms
such as automakers use this approach when they want to maintain control over theservice level and service outputs offered by the resellers. Often it involves exclusive
dealing arrangements, in which the resellers agree not to carry competing brands.

➤

Selective distribution involves the use of more than a few but less than all of theintermediaries who are willing to carry a particular product. In this way, theproducer avoids dissipating its efforts over too many outlets, and it gains adequate
market coverage with more control and less cost than intensive distribution. Nike,for example, sells its athletic shoes and apparel through seven types of outlets:(1) specialized sports stores, which carry a special line of athletic shoes; (2) general
sporting goods stores, which carry a broad range of styles; (3) department stores,
which carry only the newest styles; (4) mass-merchandise stores, which focus on
discounted styles; (5) Niketown stores, which feature the complete line; (6) factoryoutlet stores, which stock mostly seconds and closeouts, and (7) the popular Fogdog
Sports site (www.fogdog.com), its exclusive Web retailer.9➤

Intensive distribution consists of the manufacturer placing the goods or services in as
many outlets as possible. This strategy is generally used for items such as tobacco
products, soap, snack foods, and gum, products for which the consumer requires a
great deal of location convenience.

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Terms and Responsibilities of Channel Members
The producer must also determine the rights and responsibilities of participating
members when considering channel alternatives. From an ethical perspective, eachchannel member must be treated respectfully and given the opportunity to be profitable.10 Other key rights and responsibilities include:➤

Price policy. The producer establishes a price list and a schedule of discounts andallowances that intermediaries see as equitable and sufﬁcient.

➤

Conditions of sale. The producer sets payment terms and guarantees for each sale.
Most producers grant cash discounts to distributors for early payment; they may alsooffer guarantees against defective merchandise or price declines.

➤

Territorial rights. The producer defines the distributors’ territories and the terms
under which it will enfranchise other distributors. Distributors normally expect toreceive full credit for all sales in their territory, whether or not they did theselling.

➤

Mutual services and responsibilities. The producer must carefully lay out each party’s
duties, especially in franchised and exclusive-agency channels. McDonald’s provides
franchisees with a building, promotional support, a record-keeping system, training,
and technical assistance. In turn, its franchisees are expected to satisfy company
standards regarding physical facilities, cooperate with new promotional programs,
and buy supplies from speciﬁed vendors.

Evaluating the Major Alternatives
Once the company has identiﬁed its major channel alternatives, it must evaluate eachalternative against appropriate economic, control, and adaptive criteria.
➤

Economic criteria. Each channel alternative will produce a different level of sales andcosts, so producers must estimate the ﬁxed and variable costs of selling different
volumes through each channel. For example, in comparing a company sales force
to a manufacturer’s sales agency, the producer would estimate the variable cost ofcommissions paid to representatives and the ﬁxed cost of rent payments for a salesofﬁce. By comparing its costs at different sales levels, the company can determine
which alternative appears to be the most proﬁtable.

➤

Control criteria. Producers must consider how much channel control they require,since they will have less control over members they do not own, such as outside sales
agencies. In seeking to maximize proﬁts, outside agents may concentrate on
customers who buy the most, but not necessarily of the producer’s goods.
Furthermore, agents might not master the details of every product they carry.

➤

Adaptive criteria. To develop a channel, the members must make some mutualcommitments for a speciﬁed period of time. Yet these commitments invariably leadto a decrease in the producer’s ability to respond to a changing marketplace. In a
volatile or uncertain environment, smart producers seek out channel structures andpolicies that provide high adaptability.

CHANNEL-MANAGEMENT DECISIONS
After a company has chosen a channel alternative, it must select, train, motivate, andevaluate the individual intermediaries. Then, because neither the marketing environment nor the product life cycle remains static, the company must be ready to modify
these channel arrangements over time.

Channel-Management Decisions

Selecting Channel Members
During the selection process, producers should determine what characteristics distinguish the better intermediaries. They will want to evaluate number of years in business, other lines carried, growth and proﬁt record, solvency, cooperativeness, and reputation. If the intermediaries are sales agents, producers will want to evaluate thenumber and character of other lines carried and the size and quality of the sales force.
If the intermediaries are store or Internet retailers that want exclusive distribution, theproducer will want to evaluate locations, brand strength, future growth potential, andtype of clientele.
Selection of channel participants is actually a two-way process: Just as producers
select their channel members, the intermediaries also select their producer partners.
Yet producers vary in their ability to attract qualiﬁed intermediaries. Toyota was able toattract many new dealers when it ﬁrst introduced its Lexus line, but Polaroid initially
had to sell through mass-merchandising outlets when photographic-equipment stores
would not carry its cameras.
Selection can be a lengthy process. Consider the experience of Japan’s Epson
Corporation. A leading manufacturer of computer printers, Epson decided to add
computers to its product line but chose to recruit new distributors rather than sellthrough its existing distributors. The ﬁrm hired a recruiting ﬁrm to ﬁnd candidates
who (1) had distribution experience with major appliances, (2) were willing and able
to set up their own distributorships, (3) would accept Epson’s ﬁnancial arrangements,and (4) would handle only Epson equipment, although they could stock other companies’ software. After the recruiting ﬁrm went to great effort to ﬁnd qualiﬁed candidates, Epson terminated its existing distributors and began selling through the newchannel members. Despite this time-consuming, detailed selection process, Epson
never succeeded as a computer manufacturer.11

Training Channel Members
Companies need to plan and implement careful training programs for their distributors and dealers because the intermediaries will be viewed as the company by end
users. Microsoft, for example, requires third-party service engineers who work with its
software applications to complete a number of courses and take certiﬁcation exams.
Those who pass are formally recognized as Microsoft Certiﬁed Professionals, and they
can use this designation to promote business.
As another example, Ford Motor Company beams training programs and technical information via its satellite-based Fordstar Network to more than 6,000 dealer
sites. Service engineers at each dealership sit at a conference table and view a monitor
on which an instructor explains procedures such as repairing onboard electronics andthen answers questions. Such training initiatives keep employees updated on the latest
product speciﬁcations and service requirements.

Motivating Channel Members
The most successful ﬁrms view their channel members in the same way they view theirend users. This means determining their intermediaries’ needs and then tailoring thechannel positioning to provide superior value to these intermediaries. To improve
intermediaries’ performance, the company should provide training, market research,and other capability-building programs. And the company must constantly reinforce
that its intermediaries are partners in the joint effort to satisfy customers.
More sophisticated companies go beyond merely gaining intermediaries’ cooperation and instead try to forge a long-term partnership with distributors. The manufacturer

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communicates clearly what it wants from its distributors in the way of market coverage,
inventory levels, marketing development, account solicitation, technical advice and services, and marketing information. The manufacturer then seeks distributor agreementwith these policies and may introduce a compensation plan or other rewards for adhering to the policies. For example, Dayco Corporation, a maker of engineered plastics andrubber products, strengthens channel partnerships by running an annual week-longretreat with 20 distributors’ executives and 20 Dayco executives.
Still, too many manufacturers think of their distributors and dealers as customers
rather than as working partners. Up to now, we have treated manufacturers and distributors as separate organizations. But many manufacturers are distributors of related
products made by other manufacturers, and some distributors also own or contract forthe manufacture of in-house brands. JCPenney sells national brands of jeans by manufacturers such as Levi Strauss in addition to a line of jeans under the Original Arizona
Jeans company private label. This situation, which is common in the jeans industry andin many others, complicates the process of selecting and motivating channel members.

Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time,treatment of damaged and lost goods, and cooperation in promotional and training
programs.
A producer will occasionally discover that it is paying too much to particularintermediaries for what they are actually doing. As one example, a manufacturer thatwas compensating a distributor for holding inventories found that the inventories
were actually held in a public warehouse at the manufacturer’s expense. Producers
should therefore set up functional discounts in which they pay speciﬁed amounts forthe trade channel’s performance of each agreed-upon service. Underperformers need
to be counseled, retrained, remotivated, or terminated.

Modifying Channel Arrangements
Channel arrangements must be reviewed periodically and modiﬁed when distribution
is not working as planned, consumer buying patterns change, the market expands,
new competition arises, innovative distribution channels emerge, or the productmoves into later stages in the product life cycle.
Rarely will a marketing channel remain effective over the entire product life
cycle. Early buyers might be willing to pay for high value-added channels, but later
buyers will switch to lower-cost channels. This was the pattern for many products,
including small office copiers, which were first sold by manufacturers’ direct sales
forces, later through ofﬁce-equipment dealers, still later through mass merchandisers,
and now by mail-order ﬁrms and Internet marketers.
Miland Lele developed the grid in Figure 5-4 to show how marketing channels
have changed for PCs and designer apparel at different stages in the product life cycle.
As the grid indicates, new products in the introductory stage of the life cycle enter themarket through specialist channels that attract early adopters. As interest grows,
higher-volume channels appear (dedicated chains, department stores), offering some
services, but not as many as the previous channels. In the maturity stage, where growthis slowing, some competitors move their product into lower-cost channels (mass merchandisers). In decline, even lower-cost channels emerge (mail-order, discount Web
sites, off-price discounters).12

Channel Dynamics

Figure 5-4 Channel Value Added and Market Growth Rate
Adding or dropping an individual channel member requires an incremental
analysis to determine what the firm’s profits would look like with and without thisintermediary. Sometimes a producer considers dropping all intermediaries whose
sales are below a certain amount. For example, Navistar noted at one time that 5 percent of its dealers sold fewer than three or four trucks a year. It cost the company more
to service these dealers than their sales were worth. But dropping these dealers could
have system-wide repercussions. The unit costs of producing trucks would be higher
because the overhead would be spread over fewer trucks, some employees and equipment would be idled, some business in these markets would go to competitors, andother dealers might become insecure. All of these factors have to be taken into
account when changing channel arrangements.
The most difficult decision involves revising the overall channel strategy.13
Distribution channels can become outmoded over time, as a gap arises between theexisting distribution system and the ideal system that would satisfy target customers’(and producers’) requirements. Examples abound: Avon’s door-to-door system forselling cosmetics had to be modified as more women entered the workforce, andIBM’s exclusive reliance on a ﬁeld sales force had to be modiﬁed with the introductionof low-priced personal computers. Dell Computer started out selling PCs by mail toconsumers and businesses, brieﬂy added retail stores as part of an expansion strategy,
then cut out store distribution in favor of the Internet (www.dell.com), a direct channel where customers could more easily order customized PCs.14

CHANNEL DYNAMICS
In the ever-changing marketing environment, distribution channels do not stand still.
New wholesaling and retailing institutions emerge, and new channel systems evolve.
We look next at the recent growth of vertical, horizontal, and multichannel marketingsystems and see how these systems cooperate, conﬂict, and compete.

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Vertical Marketing Systems
One of the most signiﬁcant recent channel developments is the rise of vertical marketing systems. A conventional marketing channel comprises an independent producer,
wholesaler(s), and retailer(s). Each is a separate business seeking to maximize its own
proﬁts, even if this goal reduces proﬁt for the system as a whole. No channel member
has complete or substantial control over other members.
A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a uniﬁed system. One channel member, the channel
captain, owns the others or franchises them or has so much power that they all cooperate. The channel captain can be the producer, the wholesaler, or the retailer. VMSs
arose as a result of strong channel members’ attempts to control channel behavior andeliminate the conﬂict that results when independent channel members pursue theirown objectives. They achieve economies through size, bargaining power, and elimination of duplicated services. VMSs have become the dominant mode of distribution in
the U.S. consumer marketplace, serving between 70 percent and 80 percent of the total
market. There are three types of VMS: corporate, administered, and contractual.
➤

A corporate VMS combines successive stages of production and distribution undersingle ownership. Vertical integration is favored by companies that desire a highlevel of control over their channels. For example, Sears obtains over 50 percent of
the goods it sells from companies that it partly or wholly owns; Sherwin-Williams
makes paint but also owns and operates 2,000 retail outlets.

➤

An administered VMS coordinates successive stages of production and distribution
through the size and power of one of the members. Manufacturers of a dominantbrand are able to secure strong trade cooperation and support from resellers. Thus
Kodak, Gillette, Procter & Gamble, and Campbell Soup are able to command highlevels of cooperation from their resellers in connection with displays, shelf space,promotions, and price policies.

➤

A contractual VMS consists of independent ﬁrms at different levels of production anddistribution integrating their programs on a contractual basis to obtain more
economies or sales impact than they could achieve alone. Johnston and Lawrence
call them “value-adding partnerships” (VAPs).15 Contractual VMSs are of three types:
1. Wholesaler-sponsored voluntary chains organize groups of independent retailers tobetter compete with large chain organizations. Wholesalers such as Drug Guild
work with participating retailers (for Drug Guild, independent pharmacies) to
standardize their selling practices and achieve buying economies so the group cancompete effectively with chain organizations.
2. Retailer cooperatives arise when the stores take the initiative and organize a new business entity to carry on wholesaling and possibly some production. Members ofretail cooperates such as ServiStar concentrate their purchases through theretailer co-op and plan their advertising jointly; proﬁts are passed back to members in proportion to their purchases.
3. Franchise organizations are created when a channel member called a franchisor links
several successive stages in the production-distribution process. Franchises
include manufacturer-sponsored retailer franchises (the way Ford licenses dealers tosell its cars); manufacturer-sponsored wholesaler franchises (the way Coca-Cola licenses
bottlers—who are wholesalers—to buy its syrup concentrate and then bottle andsell it to retailers); and service-firm-sponsored retailer franchises (the way Hertz
licenses participating auto-rental businesses).

Channel Dynamics

Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in which two or more
unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might workwith each other on a temporary or permanent basis or create a joint venture company.
Adler calls this symbiotic marketing.16
Consider the long-standing agreement between Sara Lee Intimates and WalMart, which has enabled the partners to grow their business from an initial $134 million account to a $1 billion partnership over 10 years. Both ﬁrms have merchandise,
operations, MIS, and marketing managers devoted solely to this agreement. They
meet regularly to iron out problems and make plans, requiring the sharing of marketing information, inventory levels, sales history, price changes, and other proprietary
information.17

Multichannel Marketing Systems
In the past, many companies sold to a single market through a single channel.
Today, with the proliferation of customer segments and channel possibilities, morecompanies have adopted multichannel marketing. Multichannel marketing occurs
when a single firm uses two or more marketing channels to reach one or more customer segments.
As one example, the Parker-Hanniﬁn Corporation (PHC) sells pneumatic drills
to the lumber, ﬁshing, and aircraft industries. Instead of selling through one industrial
distributor, PHC has established three separate channels—forestry equipment distributors, marine distributors, and industrial distributors. There appears to be little conﬂict because each type of distributor sells to a separate target segment.
By adding more channels, companies can gain three important benefits. The
first is increased market coverage—companies often add a channel to reach a customer segment that its current channels cannot reach. The second is lower channel
cost—companies may add a new channel to lower the cost of selling to an existing customer group (selling by phone rather than personally visiting small customers). The
third is more customized selling—companies may add a channel whose selling features fit customer requirements better (adding a technical sales force to sell more
complex equipment).
However, new channels typically introduce conﬂict and control problems. First,
different channels may end up competing for the same customers. Second, as the
new channels become more independent, the company may have difﬁculty maintaining cooperation among all of the members. Consider the dilemma faced by insurance ﬁrms that sell home, auto, and life insurance policies through agents. On the
one hand, shopping for insurance via Web sites such as Quotesmith.com andebix.com can save customers both time and money while giving insurers access tomore prospects. On the other hand, using Internet intermediaries could potentiallyalienate the 1.8 million U.S. insurance agents who now sell the bulk of the policies—
and make their living from commissions that can range as high as 20 percent. While
Geico and other insurers that sell directly to customers are moving quickly to open
Internet channels, ﬁrms with established agent networks are moving more cautiously.
Their dilemma is summed up by a spokesperson for the St. Paul Companies, whosays: “We must work to build business on-line in a way that does not disenfranchise
our agents and brokers.”18

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Conﬂict, Cooperation, and Competition
No matter how well channels are designed and managed, there will be some conﬂict,
if for no other reason than the interests of independent business entities do not always
coincide. Here we examine three questions: What types of conﬂict arise in channels?
What causes channel conﬂict? What can be done to resolve conﬂict situations?
Types of Conﬂict and Competition
Vertical channel conﬂict means conﬂict between different levels within the same channel. As one example, General Motors has come into conﬂict with its dealers in trying
to enforce policies on service, pricing, and advertising. As another example, CocaCola came into conﬂict with its bottlers who agreed also to bottle Dr. Pepper.
Vertical channel conﬂict is currently raging in consumer packaged goods, where
power has shifted from producers to retailers. Even as manufacturers continue topump out thousands of new products, retailers seeking maximum productivity fromtheir limited shelf space are able to collect slotting fees from manufacturers for stocking
new products, display fees to cover space costs, ﬁnes for late deliveries and incomplete
orders, and exit fees to cover the cost of returning goods to producers. Trying to regain
power from retailers, manufacturers are expanding into alternative channels, putting
more emphasis on market-leading brands, and developing stronger links with important retailers through value-added distribution systems and programs that beneﬁt all
members of the channel.
Horizontal channel conflict involves conflict between members at the same levelwithin the channel. Horizontal channel conflict erupted, for instance, when some
Pizza Inn franchisees complained about other Pizza Inn franchisees cheating on ingredients, maintaining poor service, and hurting the overall Pizza Inn image.
Multichannel conﬂict exists when the manufacturer has established two or morechannels that sell to the same market. For instance, when Goodyear began selling its
tires through Sears, Wal-Mart, and Discount Tire, the move angered its independent
dealers. Goodyear eventually placated them by offering exclusive tire models thatwould not be sold in other retail outlets.
Causes of Channel Conﬂict
Why does channel conﬂict erupt? One major cause is goal incompatibility. For example,
the manufacturer may want to achieve rapid market penetration through a low-pricepolicy. The dealers, in contrast, may prefer to work with high margins for short-run
proﬁtability. Sometimes conﬂict arises from unclear roles and rights. This is what happened when IBM started selling PCs to large accounts through its own sales force
while its licensed dealers were also trying to sell to large accounts. Territory boundaries and credit for sales often produce conﬂict in such situations.
By adding new channels, a company faces the possibility of channel conﬂict, as theearlier insurance example indicated. Conﬂict can also stem from differences in perception, as
when the producer is optimistic about the short-term economic outlook and wants dealers to carry more inventory, while its dealers are more pessimistic about future prospects.
At times, conﬂict can arise because of the intermediaries’ great dependence on the
manufacturer. The fortunes of exclusive dealers, such as auto dealers, are intimately
affected by the manufacturer’s product and pricing decisions. This creates a highpotential for conﬂict.
Managing Channel Conﬂict
Some channel conﬂict can be constructive and can lead to more dynamic adaptation
in a changing environment. Too much conﬂict can be dysfunctional, however, so theChannel Dynamics

challenge is not to eliminate conﬂict but to manage it better. There are several mechanisms for effective conﬂict management:19➤

Adoption of superordinate goals. Channel members come to an agreement on thefundamental goal they are jointly seeking, whether it is survival, market share, highquality, or customer satisfaction. They usually do this when the channel faces an
outside threat, such as a more efﬁcient competing channel, an adverse piece oflegislation, or a shift in consumer desires.

➤

Exchange persons between channel levels. General Motors executives might work for ashort time in some dealerships, and some dealers might work in GM’s dealer policy
department, as a way of helping participants appreciate each other’s viewpoint.

➤

Cooptation. Cooptation is an effort by one organization to win the support of theleaders of another organization by including them in advisory councils, boards of
directors, trade associations, and the like. As long as the initiating organization treats
the leaders seriously and listens to their opinions, cooptation can reduce conﬂict.

➤

Diplomacy, mediation, arbitration for chronic or acute conﬂict. Diplomacy takes place wheneach side sends a person or group to meet with its counterpart to resolve theconﬂict. Mediation means having a skilled, neutral third party reconcile the twoparties’ interests. Arbitration occurs when the two parties agree to present theirarguments to an arbitrator and accept the arbitration decision.

Legal and Ethical Issues in Channel Relations
For the most part, companies are legally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary
tactics that might keep competitors from using a channel. Here we brieﬂy consider thelegality of certain practices, including exclusive dealing, exclusive territories, tying
agreements, and dealers’ rights.
➤

Exclusive dealing. A strategy in which the seller allows only certain outlets to carry its
products is called exclusive distribution, and when the seller requires that thesedealers not handle competitors’ products, this is called exclusive dealing. Both parties
beneﬁt from exclusive arrangements: The seller obtains more loyal and dependable
outlets, and the dealers obtain a steady source of supply of special products andstronger seller support. Exclusive arrangements are legal as long as (1) they do notsubstantially lessen competition or tend to create a monopoly, and (2) both parties
have voluntarily entered into the agreement.

➤

Exclusive territories. Exclusive dealing often includes exclusive territorial agreements.
The producer may agree not to sell to other dealers in a given area, or the dealer
may agree to sell only in its own territory. The ﬁrst practice increases dealer
enthusiasm and commitment and is perfectly legal—a seller has no legal obligation
to sell through more outlets than it wishes. The second practice, whereby the
producer tries to keep a dealer from selling outside its territory, is a major legal issue.

➤

Tying agreements. The producer of a strong brand sometimes sells it to dealers only ifthey will take some or all of the rest of the line. This practice is called full-line forcing.
Such tying agreements are not necessarily illegal, but they do violate U.S. law if theytend to lessen competition substantially.

➤

Dealers’ rights. Producers are free to select their dealers, but their right to terminate
dealers is somewhat restricted. In general, sellers can drop dealers “for cause.” But
they cannot drop dealers if, for example, the dealers refuse to cooperate in a
doubtful legal arrangement, such as exclusive dealing or tying agreements.

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SELECTING AND MANAGING MARKETING CHANNELSThe next chapter examines the marketing strategies and challenges of retailers
and wholesalers as channel members.

EXECUTIVE SUMMARY
Most producers do not sell their goods directly to ﬁnal users. Between producers andﬁnal users stands one or more marketing channels, a set of marketing intermediaries
performing a variety of functions. Companies use intermediaries when they lack the
ﬁnancial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by going through intermediaries. The use of intermediaries largely boils down to their superior efﬁciency in making goods widely available and accessible to target markets. The most important functions performed byintermediaries are gathering information, handling promotion, handling negotiation,
placing orders, arranging ﬁnancing, taking risks, and facilitating physical possession,
payment, and title.
Manufacturers have many alternatives for reaching a market. They can sell direct
through a zero-level channel or use one-, two-, or three-level channels. Deciding whichtype(s) of channel to use calls for analyzing customer needs, establishing channel
objectives, and identifying and evaluating the major alternatives. The company mustalso determine whether to distribute its product exclusively, selectively, or intensively,
and it must clearly spell out the terms and responsibilities of each channel member.
Effective channel management calls for selecting intermediaries, then training
and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members. Individual members must be evaluated periodicallyagainst preestablished standards, and overall channel arrangements may need to be
modiﬁed over time. Three of the most important trends in channel dynamics are thegrowth of vertical marketing systems, horizontal marketing systems, and multichannelmarketing systems.
All marketing channels have the potential for conﬂict and competition resulting
from such sources as goal incompatibility, poorly deﬁned roles and rights, perceptual
differences, and interdependent relationships. Companies can manage conflict bystriving for superordinate goals, exchanging people among two or more channel levels, coopting the support of leaders in different parts of the channel, and throughdiplomacy, mediation, or arbitration to resolve chronic or acute conﬂict.
Channel arrangements are up to the company, but there are certain legal andethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers’ rights.

NOTES
1. E. Raymond Corey, Industrial Marketing: Cases and Concepts, 4th ed. (Upper Saddle River,
NJ: Prentice-Hall, 1991), ch. 5.
2. Louis W. Stern and Adel I. El-Ansary, Marketing Channels, 5th ed. (Upper Saddle River, NJ:
Prentice-Hall, 1996).
3. Stern and El-Ansary, Marketing Channels, pp. 5–6.
4. For additional information on backward channels, see Marianne Jahre, “Household Waste
Collection as a Reverse Channel—A Theoretical Perspective,” International Journal of
Physical Distribution and Logistics 25, no. 2 (1995): 39–55; and Terrance L. Pohlen and M.
Theodore Farris II, “Reverse Logistics in Plastics Recycling,” International Journal of PhysicalDistribution and Logistics 22, no. 7 (1992): 35–37.

Notes
5. Ronald Abler, John S. Adams, and Peter Gould, Spatial Organizations: The Geographer’s Viewof the World (Upper Saddle River, NJ: Prentice-Hall, 1971), pp. 531–32.
6. Leah Nathans Spiro, “Merrill’s Battle,” Business Week, November 15, 1999, pp. 256–66;“Merrill 4Q Earnings Surge,” CNNfn, January 25, 2000, www.cnnfn.com.
7. Louis O. Bucklin, Competition and Evolution in the Distributive Trades (Upper Saddle River,
NJ: Prentice-Hall, 1972). Also see Stern and El-Ansary, Marketing Channels.
8. Louis P. Bucklin, A Theory of Distribution Channel Structure (Berkeley: Institute of Businessand Economic Research, University of California, 1966).
9. “Fogdog Takes Lead in Holiday Etailing,” Business Journal of San Jose, January 4, 2000,
www.amcity.com; Mark Hyman, “Fogdog Is Eager to Fetch,” Business Week, November 29,
1999, p. 173; Will Anderson, “Vendor Irate at Jersey Decision, Atlanta Journal andConstitution, October 7, 1996, p. R1; William McCall, “Nike Posts $72M Loss,” The AssociatedPress, December 12, 1998; Philana Patterson, “Athletic Shoe Industry Hurt When Buyers
Drag Feet,” Star Tribune, December 26, 1997, p. 7B.
10. For more on relationship marketing and the governance of marketing channels, see Jan B.
Heide, “Interorganizational Governance in Marketing Channels,” Journal of Marketing,January 1994, pp. 71–85.
11. Arthur Bragg, “Undercover Recruiting: Epson America’s Sly Distributor Switch,” Sales andMarketing Management, March 11, 1985, pp. 45–49.
12. Miland M. Lele, Creating Strategic Leverage (New York: John Wiley, 1992), pp. 249–51. This
fact struck the manufacturer of the MicroFridge, a combination minirefrigerator andmicrowave oven.
13. For an excellent report on this issue, see Howard Sutton, Rethinking the Company’s Sellingand Distribution Channels, research report no. 885, Conference Board, 1986, 26 pp.
14. Thomas J. Neff and James M. Citrin, Lessons from the Top (New York: Currency Doubleday,
1999), p. 90; “Focus: Dell Warns Q4 Results to Fall Short, Again,” Reuters, January 26, 2000,
www.hoovers.com.
15. Russell Johnston and Paul R. Lawrence, “Beyond Vertical Integration—The Rise of theValue-Adding Partnership,” Harvard Business Review, July–August 1988, pp. 94–101. See also
Judy A. Siguaw, Penny M. Simpson, and Thomas L. Baker, “Effects of Supplier Market
Orientation on Distributor Market Orientation and the Channel Relationship: The
Distribution Perspective,” Journal of Marketing, July 1998, pp. 99–111; Narakesari
Narayandas and Manohar U. Kalwani, “Long-Term Manufacturer–Supplier Relationships:
Do They Pay Off for Supplier Firms?” Journal of Marketing, January 1995, pp. 1–16.
16. Lee Adler, “Symbiotic Marketing,” Harvard Business Review, November–December 1966,
pp. 59–71; and P. “Rajan” Varadarajan and Daniel Rajaratnam, “Symbiotic Marketing
Revisited,” Journal of Marketing, January 1986, pp. 7–17.
17. Robin Lewis, “Partner or Perish,” WWD Infotracs: Strategic Alliances, February 24, 1997, p. 4.
18. Diane Brady, “Insurers Step Gingerly Into Cyberspace,” Business Week, November 22, 1999,
pp. 160, 162.
19. This section draws on Stern and El-Ansary, Marketing Channels, ch. 6.

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Designing andManaging
Integrated
MarketingCommunications
We will address the following questions:■ What are the major steps in developing effective marketing communications?
■ What steps are involved in developing an advertising program?
■ What explains the growing use of sales promotion, and how are sales-promotion
decisions made?
■ How can companies exploit the marketing potential of public relations and publicity?

Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible. Companies must also communicate with present
and potential stakeholders as well as the general public. For most companies, the question is not whether to communicate but rather what to say, to whom, and how often.
The marketing communications mix consists of advertising, sales promotion,
public relations and publicity, personal selling, and direct marketing, although savvy
marketers know that communication goes beyond these ﬁve methods. The product’s
styling and price, the package’s shape and color, the salesperson’s manner and dress,
the place’s decor—all communicate something to buyers. In fact, every brand contact
delivers an impression that can affect a customer’s view of the company. Therefore,
the entire marketing mix must be integrated to deliver a consistent message andstrategic positioning.
We ﬁrst explore effective marketing communications and the communications
mix, and then look more closely at advertising, sales promotion, and public relations.

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Today there is a new view of communications as an interactive dialogue between the company and its customers that takes place during the preselling, selling, consuming, andpostconsuming stages. Successful companies are asking not only “How can we reach ourcustomers?” but, in a break from the past, are also asking “How can our customers reachus?” Now sellers use a variety of communication platforms to stay in touch with customers,
as shown in Table 5.1. Increasingly, it is the newer technologies, such as the Internet, thathave encouraged more ﬁrms to move from mass communication to more targeted communication and one-to-one dialogue with customers and other stakeholders.
There are eight steps to follow in developing an effective marketing communications program: (1) identify the target audience, (2) determine the communication
objectives, (3) design the message, (4) select the communication channels, (5) establish the total communications budget, (6) decide on the communications mix,(7) measure the communications’ results, and (8) manage the integrated marketing
communication process.

Step 1: Identifying the Target Audience
The ﬁrst step is to identify a clear target audience: potential buyers of the company’s
products, current users, deciders, or influencers; individuals, groups, particularpublics, or the general public. The target audience is a critical inﬂuence on the communicator’s decisions about what to say, how to say it, when to say it, where to say it,
and to whom to say it.

Table 5.1 Common Communication Platforms

Advertising

Sales
Promotion

Print, broadcast, Contests, games,
on-line ads
sweepstakes,
lotteries
Packaging
Motion pictures Premiums, gifts
Sampling
Brochures,booklets
Fairs, tradeshows
Directories
Demonstrations
Billboards,
posters
Coupons
Display signs
Rebates
Point-ofLow-interest
purchaseﬁnancing
displays
Trade-in
Audiovisual
allowancesmaterial
Continuity
Symbols andprograms
logos
Tie-ins
Videotapes
Web sites andbanners

PublicRelations

Personal
Selling

DirectMarketingPress kits
Video news
releases
Speeches
Seminars
Annual reports
Charitable
donations
Sponsorships
Publications
Community
relations
Lobbying
Identity media
Special events

Salespresentations
Sales meetings
Incentive
programs
Fairs and tradeshows

Catalogs
Mailings
Telemarketing
Electronic
shopping
TV shopping
Fax mailE-mailVoice mail

Developing Effective Marketing Communications

Further analysis helps the company assess the audience’s current image of thecompany, its products, and its competitors. Image is the set of beliefs, ideas, andimpressions that a person holds regarding an object. People’s attitudes and actions
toward an object such as a product or service are highly conditioned by that object’s
image. In assessing image, marketers research the audience’s familiarity with the product, then they ask respondents who know the product how they feel about it.
If most respondents have unfavorable feelings toward the product, the organization needs to overcome a negative image problem, which requires great patience
because images persist long after the organization has changed. Once people have acertain image, they perceive what is consistent with that image. It will take highly disconﬁrming information to raise doubts and open their minds—but it can be done.
Wolverine World Wide of Rockford, Michigan, discovered this when its Hush Puppies
brand of casual shoes lost its fashionable image. Then a fashion designer used Hush
Puppies dyed in bright colors, changing the product’s image from stodgy to avant
garde. Once the “new” Hush Puppies were in demand, sales skyrocketed from lessthan 30,000 to millions of pairs sold in just 2 years.1

Step 2: Determining the Communication Objectives
Knowing the target audience and its perceptions, the marketing communicator can
now decide on the desired audience response, seeking a cognitive, affective, or behavioral response. That is, the marketer might want to put something into the consumer’s
mind, change an attitude, or get the consumer to act. The four best-known models of
consumer-response stages are presented in Figure 5-5.

Figure 5-5 Response Hierarchy Models

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DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONSAll of these models assume that the buyer passes through a cognitive, affective,
and behavioral stage, in that order. This “learn-feel-do” sequence is appropriate when
the audience has high involvement with a product category that is perceived to havehigh differentiation, as in purchasing an automobile. An alternative sequence, “do-feellearn,” is relevant when the audience has high involvement but perceives little or no differentiation within the product category, as in purchasing aluminum siding. A third
sequence, “learn-do-feel,” is relevant when the audience has low involvement and perceives little differentiation within the product category, as in purchasing salt. By choosing the right sequence, the marketer can do a better job of planning communications.2

Step 3: Designing the Message
Having defined the desired response, the communicator moves to developing aneffective message. Ideally, the message should gain attention, hold interest, arouse desire,and elicit action (AIDA model—see the ﬁrst column of Figure 5-5). In practice, few messages take the target audience all the way from awareness through purchase, but the
AIDA framework suggests the desirable qualities of any communication. Formulating
the message will require solving four problems: what to say (message content), how to
say it logically (message structure), how to say it symbolically (message format), andwho should say it (message source).
Message Content
In determining message content, management searches for an appeal, theme, idea, or
unique selling proposition. There are three types of appeals:➤

Rational appeals engage self-interest by claiming the product will produce certain
beneﬁts such as value or performance. It is widely believed that industrial buyers aremost responsive to rational appeals because they are knowledgeable about the
product, trained to recognize value, and accountable to others for their choices.
Consumers, when they buy certain big-ticket items, also tend to gather informationand estimate beneﬁts.

➤

Emotional appeals attempt to stir up negative or positive emotions that will motivate
purchase. Marketers search for the right emotional selling proposition. Even when the
product is similar to the competitions’ product, it may have unique associations thatcan be promoted (examples are Harley-Davidson and Rolex). Communicators also
work with negative appeals such as fear, guilt, and shame to get people to do things(brush their teeth) or stop doing things (smoking). In addition, positive emotional
appeals such as humor, love, pride, and joy are often part of the message content.

➤

Moral appeals are directed to the audience’s sense of what is right and proper. These areoften used to exhort people to support social causes. An example is the appeal “Silence⫽ Death,” which is the slogan of Act-Up, the AIDS Coalition to Unleash Power.

Multinational companies wrestle with a number of challenges in developing
message content for global campaigns. First, they must decide whether the product isappropriate for a country. Second, they must make sure the targeted market segment
is both legal and customary. Third, they must decide if the style of the ad is acceptableor customary in all of the countries. And fourth, they must decide whether ads shouldbe created at headquarters or locally. FedEx, the package express carrier, has chosen
to create ads at its U.S. headquarters. Long known for its humorous ads, the company
recently created a campaign that ran in 20 countries with only minor changes, insteadof being customized or created in each local area. This campaign helped FedEx
deliver the message that “we’ve become a global company.”3

Developing Effective Marketing Communications

Message Structure
Message effectiveness depends on structure as well as content. For example, a communicator may think that one-sided presentations that praise a product would be more
effective than two-sided arguments that also mention shortcomings. Yet two-sided messages may be more appropriate, especially when some negative association must be
overcome. In this spirit, Heinz ran the message “Heinz Ketchup is slow good” andListerine ran the message “Listerine tastes bad twice a day.”4 Two-sided messages are
more effective with more educated audiences and those who are initially opposed.5
The order in which arguments are presented is also an important part of message structure.6 In the case of a one-sided message, presenting the strongest argumentﬁrst has the advantage of establishing attention and interest. This is important in newspapers and other media where the audience often does not attend to the whole message. With a captive audience, however, a climactic presentation might be more effective. In the case of a two-sided message, if the audience is initially opposed, thecommunicator might start with the other side’s argument and conclude with thestrongest argument.7
Message Format
The communicator must develop a strong message format. In a print ad, the communicator has to decide on headline, copy, illustration, and color. For radio, the communicator has to choose words, voice qualities, and vocalizations. If the message is to be
carried on television or in person, all of these elements plus body language (nonverbal
clues) have to be planned. If the message is carried by the product or its packaging,the communicator has to pay attention to color, texture, scent, size, and shape. Webbased messages have the ﬂexibility to combine aspects of print, radio, and television
messages with a variety of special effects and interactive features to attract, retain, andreinforce audience interest.
Message Source
Messages delivered by attractive or popular sources achieve higher attention and recall,which is why advertisers often use celebrities as spokespeople. In particular, messages
delivered by highly credible sources are more persuasive, so pharmaceutical companies
have doctors testify about product beneﬁts because doctors have high credibility.
Three factors that underly source credibility are expertise, trustworthiness, andlikability.8 Expertise is the specialized knowledge the communicator possesses to backthe claim. Trustworthiness is related to how objective and honest the source is perceived
to be. Friends are trusted more than strangers or salespeople, and people who are notpaid to endorse a product are seen as more trustworthy than people who are paid.9
Likability describes the source’s attractiveness; qualities like candor, humor, and naturalness make a source more likable. The most credible source would score high on all
three factors.

Step 4: Selecting Communication Channels
Now that the message has been designed, the communicator must select efﬁcient communication channels to carry it. For example, pharmaceutical salespeople can rarely
wrest more than 10 minutes’ time from a busy physician. Because personal selling is
expensive, the industry has added multiple channels: ads in medical journals, direct
mail (including audio and videotapes), sampling, telemarketing, Web sites, conferences and teleconferences, and more. All of these channels are used in the hope ofbuilding physician preference for particular branded drug products. In general, ﬁrms
can use two types of communication channels: personal and nonpersonal.

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Personal Communication Channels
Personal communication channels involve two or more persons communicating
directly with each other face to face, person to audience, over the telephone, or
through e-mail. These channels derive their effectiveness through the opportunities
for individualizing the presentation and feedback. Amazon.com, for example, invites
on-line customers to sign up for e-mailed reviews and recommendations from experts
in their choice of book, music, toy, and home improvement subjects.
Companies can take several steps to stimulate personal influence channels towork on their behalf:➤

Identify inﬂuential individuals and companies and devote extra effort to them:10 In
industrial selling, the entire industry might follow the market leader in adopting
innovations.

➤

Create opinion leaders by supplying certain people with the product on attractive terms: A new
tennis racket might be offered initially to members of high school tennis teams at a
special low price.

➤

Work through community inﬂuentials such as local disk jockeys and heads of civicorganizations: When Ford introduced the Thunderbird, it sent invitations to
executives offering a free car to drive for the day; 10 percent of the respondents
indicated that they would become buyers, and 84 percent said they would
recommend the car to a friend.

➤

Use inﬂuential or believable people in testimonial advertising: This is why sports
equipment and apparel companies hire top athletes such as Tiger Woods as
spokespeople.

➤

Develop advertising that has high “conversation value”: Ads with high conversation value
often have a slogan that becomes part of the national vernacular, such as Nike’s“Just do it.”➤Develop word-of-mouth referral channels to build business: Professionals such asaccountants will often encourage clients to recommend their services.

➤

Establish an electronic forum: Toyota owners who use Internet services such as America
Online can hold on-line discussions to share experiences.

Nonpersonal Communication Channels
Nonpersonal channels include media, atmospheres, and events. Media consist of print
media (newspapers, magazines, direct mail), broadcast media (radio, television), electronic media (audiotape, videotape, CD-ROM, DVD, Web page), and display media(billboards, signs, posters). Most nonpersonal messages come through paid media.
Atmospheres are “packaged environments” that create or reinforce the buyer’s
leanings toward product purchase. Law ofﬁces are decorated with ﬁne rugs and furniture to communicate “stability” and “success;”11 Coca-Cola’s Web (www.cocacola.com)
site is colorful and animated to reinforce the brand’s upbeat image.
Events are occurrences designed to communicate particular messages to target
audiences. Tokyo’s Mitsukoshi Department Store, for example, arranges special cultural events and arts exhibits in the ﬂagship store to maintain a sophisticated, cultured
image in the minds of upscale shoppers.
Although personal communication is often more effective, nonpersonal channels affect personal attitudes and behavior through a two-step ﬂow-of-communication
process. Ideas often ﬂow from radio, television, print, and Internet sources to opinion
leaders and from these to the less media-involved population groups. This two-step ﬂow
has several implications. First, the inﬂuence of nonpersonal channels on public opin-

Developing Effective Marketing Communications

ion is mediated by opinion leaders, people whose opinions are sought or who carry
their opinions to others. Second, the two-step ﬂow shows that people interact primarily within their own social group and acquire ideas from opinion leaders in theirgroup. Third, two-step communication suggests that marketers using nonpersonal
channels should direct messages speciﬁcally to opinion leaders and let them carry themessage to others. This is why many software makers give opinion leaders a preview of
new programs before they are sold to the general public.

Step 5: Establishing the Marketing Communications Budget
Industries and companies vary considerably in how much they spend on promotion;
expenditures might amount to 30–50 percent of sales in the cosmetics industry but
only 5–10 percent in the industrial-equipment industry, with variations from company
to company. How do companies decide on the promotion budget? Here are four common methods:➤

Affordable method. Many companies set the promotion budget at what management
thinks the ﬁrm can afford. However, this method ignores the role of promotion as
an investment and the immediate impact of promotion on sales volume; it also leads
to an uncertain annual budget, making long-range planning difﬁcult.

➤

Percentage-of-sales method. Many ﬁrms set promotion expenditures at a speciﬁed
percentage of sales (either current or anticipated) or of the sales price. Supporters
say this method links promotion expenditures to the movement of corporate sales
over the business cycle; encourages management to consider the interrelationshipof promotion cost, selling price, and unit proﬁt; and encourages stability whencompeting ﬁrms spend approximately the same percentage. On the other hand,
this method views sales as the determiner of promotion rather than as the result,and it provides no logical basis for choosing the speciﬁc percentage.

➤

Competitive-parity method. Some companies set their promotion budget to achieve
share-of-voice parity with competitors. Although proponents say that competitors’
expenditures represent the collective wisdom of the industry and that maintaining
competitive parity prevents promotion wars, neither argument is valid. There are no
grounds for believing that competitors know better what should be spent on
promotion. Company reputations, resources, opportunities, and objectives differ somuch that promotion budgets are hardly a guide. Furthermore, there is noevidence that competitive parity discourages promotional wars.

➤

Objective-and-task method. Here, marketers develop promotion budgets by deﬁning
speciﬁc objectives, determining the tasks that must be performed to achieve theseobjectives, and estimating the costs of performing these tasks. The sum of thesecosts is the proposed promotion budget. This method has the advantage ofrequiring management to spell out assumptions about the relationship among
dollars spent, exposure levels, trial rates, and regular usage.

Step 6: Developing and Managing the Marketing
Communications Mix
Having established a communications budget, companies must decide how to allocate
it over the ﬁve promotional tools. Companies differ considerably in their allocations,even within the same industry. Avon concentrates its promotional funds on personalselling, whereas Cover Girl spends heavily on advertising. Still, because companies arealways searching for more efﬁciency by substituting one promotional tool for another,
they must be careful to coordinate all of their marketing functions.

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Promotional Tools
Each promotional tool has its own unique characteristics and costs.12➤

Advertising. Advertising can be used to build up a long-term image for a product(Coca-Cola ads) or trigger quick sales (a Sears ad for a weekend sale). Advertising
can reach geographically dispersed buyers efﬁciently. Certain forms of advertising(TV advertising) typically require a large budget, whereas other forms (newspaper
advertising) can be done on a small budget. We discuss advertising in more detaillater in this chapter.

➤

Sales promotion. Although sales-promotion tools—coupons, contests, premiums, andthe like—are highly diverse, they offer three distinctive beneﬁts: (1) communication(they gain attention and usually provide information that may lead the consumer tothe product); (2) incentive (they incorporate some concession or inducement thatgives value to the consumer); and (3) invitation (they include a distinct invitation to
engage in the transaction now). Sales promotion can be used for short-run effects
such as dramatizing product offers and boosting sales. Later in this chapter we
discuss sales promotion in more detail.

➤Public relations and publicity. The appeal of public relations and publicity is based on
three distinctive qualities: (1) high credibility (news stories and features are moreauthentic and credible than ads); (2) ability to catch buyers off guard (reach prospects
who prefer to avoid salespeople and advertisements); and (3) dramatization (thepotential for dramatizing a company or product). This underused technique isexamined later in this chapter.

➤

Personal selling. Personal selling has three distinctive qualities: (1) personal
confrontation (it involves an immediate and interactive relationship between two or
more persons); (2) cultivation (it permits all kinds of relationships to spring up,
ranging from a matter-of-fact selling relationship to a deep personal friendship);and (3) response (it makes the buyer feel under some obligation for having listened
to the sales talk).

➤

Direct marketing. All forms of direct marketing—direct mail, telemarketing, Internet
marketing—share four distinctive characteristics: They are (1) nonpublic (themessage is normally addressed to a speciﬁc person); (2) customized (the message canbe prepared to appeal to the addressed individual); (3) up-to-date (a message can beprepared very quickly); and (4) interactive (the message can be changed dependingon the person’s response).

Factors in Setting the Marketing Communications Mix
Companies must consider several factors in developing their promotion mix:➤

Type of product market. As Figure 5-6 shows, promotional allocations vary between
consumer and business markets. Although advertising is used less than sales calls inbusiness markets, it still plays a signiﬁcant role in building awareness andcomprehension, serving as an efﬁcient reminder of the product, generating leads,
legitimizing the company and products, and reassuring customers about theirpurchases. Personal selling can also make a strong contribution in consumer-goods
marketing by helping to persuade dealers to take more stock and display more of
the product, build dealer enthusiasm, sign up more dealers, and grow sales atexisting accounts.

➤

Push-versus-pull strategy. A push strategy involves the manufacturer using sales force
and trade promotion to induce intermediaries to carry, promote, and sell the
product to end users. This is especially appropriate where there is low brand loyalty

Developing Effective Marketing Communications

Figure 5-6 Relative Spending on Promotional Tools in Consumer versus
Business Markets
in a category; brand choice is made in the store; the product is an impulse item; andproduct beneﬁts are well understood. A pull strategy involves the manufacturer using
advertising and consumer promotion to induce consumers to ask intermediaries forthe product, thus inducing the intermediaries to order it. This is especiallyappropriate when there is high brand loyalty and high involvement in the category;people perceive differences between brands; and people choose the brand before
they go to the store.
➤

Buyer-readiness stage. Promotional tools vary in cost effectiveness at different stages ofbuyer readiness, as shown in Figure 5-7. Advertising and publicity play the mostimportant roles in the awareness-building stage. Customer comprehension isaffected primarily by advertising and personal selling, while customer conviction isinﬂuenced mostly by personal selling. Closing the sale is inﬂuenced mostly by
personal selling and sales promotion. Reordering is also affected mostly by personalselling and sales promotion, and somewhat by reminder advertising.

➤

Product-life cycle stage. Promotional tools also vary in cost effectiveness at different
stages of the product life cycle. Advertising and publicity are most cost effective in
the introduction stage; then all the tools can be toned down in the growth stage
because demand is building word of mouth. Sales promotion, advertising, andpersonal selling grow more important in the maturity stage. In the decline stage,
sales promotion continues strong, advertising and publicity are reduced, andsalespeople give the product only minimal attention.

➤

Company market rank. Market leaders derive more beneﬁt from advertising than fromsales promotion. Conversely, smaller competitors gain more by using sales
promotion in their marketing communications mix.

Step 7: Measuring Results
After implementing the promotional plan, the communicator must measure its
impact. Members of the target audience are asked whether they recognize or recall
the message, how many times they saw it, what points they recall, how they felt
about the message, and their previous and current attitudes toward the product

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Figure 5-7 Cost Effectiveness of Different Promotional Tools at Different
Buyer-Readiness Stages
and company. The communicator should also collect behavioral measures of audience response, such as how many people bought the product, liked it, and talked toothers about it.
Suppose that 80 percent of the targeted customers are aware of the brand, 60
percent have tried it, and only 20 percent who have tried it are satisﬁed. This indicatesthat the communications program is effective in creating awareness, but the productfails to meet consumer expectations. However, if 40 percent of the targeted customers
are aware of the brand and only 30 percent have tried it—but 80 percent of those whohave tried it are satisﬁed—the communications program needs to be strengthened totake advantage of the brand’s power.

Step 8: Managing the Integrated Marketing Communications
Process
Given the fragmenting of mass markets into minimarkets, the proliferation of new
types of media, and the growing sophistication of consumers, companies need to use awider range of communication tools, messages, and audiences. To do this most effectively, companies must embrace integrated marketing communications. As deﬁned by
the American Association of Advertising Agencies, integrated marketing communications(IMC) is a concept of marketing communications planning that recognizes the added
value of a comprehensive plan that evaluates the strategic roles of a variety of communications disciplines—for example, general advertising, direct response, sales promotion and public relations—and combines these disciplines to provide clarity, consistency, and maximum communications’ impact through the seamless integration of
discrete messages.
Warner-Lambert, maker of Benadryl, has creatively used IMC to promote its
antihistamine drug. The company used advertising and public relations to increase
brand awareness among allergy sufferers and to promote a toll-free number that

Developing and Managing the Advertising Campaign

provided people with the pollen count in their area. People who called the number
more than once received free product samples, coupons, and materials describing
the product’s benefits. These people also received a newsletter with advice about
coping with allergies.13
Savvy ﬁrms know that IMC produces stronger message consistency and greater
sales impact; it also gives someone responsibility to unify the company’s various brandimages and messages. Properly implemented, IMC will improve the company’s ability
to reach the right customers with the right messages at the right time and in the rightplace.14

DEVELOPING AND MANAGING THE
ADVERTISING CAMPAIGN
Advertising is any paid form of nonpersonal presentation and promotion of ideas,
goods, or services by an identified sponsor.15 Advertisers include not only business
firms but also museums, charitable organizations, and government agencies that
direct messages to target publics. Ads are a cost-effective way to disseminate messages,
whether to build brand preference for Intel computer chips or to educate people
about the dangers of drugs.
In developing an advertising program, successful ﬁrms start by identifying thetarget market and buyer motives. Then they can make ﬁve critical decisions, known as
the five Ms: Mission: What are the advertising objectives? Money: How much can bespent? Message: What message should be sent? Media: What media should be used?
Measurement: How should the results be evaluated? These decisions are summarized in
Figure 5-8 and described in the following sections.

Figure 5-8 The Five Ms of Advertising

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Setting the Advertising Objectives
Advertising objectives can be classiﬁed according to whether their aim is to inform,
persuade, or remind.
➤

Informative advertising ﬁgures heavily in the pioneering stage of a product category,where the objective is to build primary demand. Thus, DVD makers initially had to
inform consumers of the beneﬁts of this technology.

➤

Persuasive advertising becomes important in the competitive stage, where theobjective is to build selective demand for a particular brand. For example, Chivas
Regal attempts to persuade consumers that it delivers more taste and status thanother brands of Scotch whiskey. Some persuasive advertising is comparative
advertising, which explicitly compares two or more brands.16➤

Reminder advertising is important with mature products. Coca-Cola ads are primarily
intended to remind people to purchase Coca-Cola. A related form of advertising isreinforcement advertising, which seeks to assure current purchasers that they havemade the right choice. Automobile ads often depict satisﬁed customers enjoying
special features of their new car.

The advertising objective should emerge from a thorough analysis of the current marketing situation. If the product class is mature, the company is the market leader, andbrand usage is low, the proper objective should be to stimulate more usage. If the product class is new, the company is not the market leader, but the brand is superior to theleader, then the proper objective is to convince the market of the brand’s superiority.

Deciding on the Advertising Budget
Management should consider these ﬁve factors when setting the advertising budget:17
1.

Product life cycle stage: New products typically receive large budgets to build awarenessand to gain consumer trial. Established brands usually are supported with lower budgets as a ratio to sales.

2.

Market share and consumer base: High-market-share brands usually require less advertisingexpenditure as a percentage of sales to maintain their share. To build share by increasing market size requires larger advertising expenditures. On a cost-per-impression basis,
it is less expensive to reach consumers of a widely used brand than to reach consumersof low-share brands.

3.

Competition and clutter: In a market with a large number of competitors and highadvertising spending, a brand must advertise more heavily to be heard. Even simple
clutter from advertisements that are not directly competitive to the brand creates aneed for heavier advertising.

4.

Advertising frequency: The number of repetitions needed to put across the brand’s message to consumers has an important impact on the advertising budget.

5.

Product substitutability: Brands in a commodity class (cigarettes, beer, soft drinks)
require heavy advertising to establish a differential image. Advertising is also important when a brand offers unique beneﬁts or features.

Choosing the Advertising Message
Advertising campaigns vary in their creativity. In the late 1990s, Taco Bell launched aclever television campaign featuring a chihuahua saying, “Yo Quiero Taco Bell,” meaning “I want some Taco Bell.” The campaign struck a chord with the chain’s 18- to 35year-old customers and spawned an impressive array of chihuahua merchandise such

Developing and Managing the Advertising Campaign

as T-shirts, magnets, and talking dolls. Taco Bell’s sales shot up 4.3 percent in the campaign’s ﬁrst year; the ﬁrm now spends $200 million a year on advertising and is keeping the chihuahua in its ad campaigns.18
In developing a creative strategy, advertisers follow four steps: message generation, message evaluation and selection, message execution, and social responsibility
review.
Message Generation
The product’s “beneﬁt” message should be decided as part of developing the productconcept. Yet there is usually latitude for a number of possible messages. Over time, themarketer might want to change the message, especially if customers seek new or different beneﬁts from the product.
Creative people use several methods to generate possible advertising appeals.
Many creative people proceed inductively by talking to consumers, dealers, experts, andcompetitors, while others use a deductive framework. Regardless of the process, howmany alternative ad themes should the advertiser create before choosing? The moreads that are created, the higher the probability of ﬁnding an excellent one. Yet this is abalancing act, because the more time spent on creating alternative ads, the higher thecosts, even with the use of computerized tools to create rough versions of ads.
Message Evaluation and Selection
A good ad normally focuses on one core selling proposition. Twedt suggested thatmessages be rated on desirability, exclusiveness, and believability.19 When the March ofDimes searched for an advertising theme to raise money for its fight against birthdefects, managers brainstormed several messages. They asked a group of young parents to rate each for interest, distinctiveness, and believability, assigning up to 100
points for each. For example, “Seven hundred children are born each day with a birthdefect” scored 70, 62, and 80 on interest, distinctiveness, and believability, whereas“Your next baby could be born with a birth defect” scored 58, 51, and 70. The ﬁrst message outperformed the second on all accounts.20 Smart advertisers conduct market
research to determine which appeal works best with their audiences.
Message Execution
The message’s impact depends not only upon what is said but also on how it is said.
Some ads aim for rational positioning and others for emotional positioning. U.S. ads typically present an explicit feature or beneﬁt with a rational appeal, such as “gets clothes
cleaner,” while Japanese ads tend to be less direct and appeal more to the emotions.
Message execution can be decisive for highly similar products, such as detergents, cigarettes, coffee, and vodka. Consider vodka. Although it is generally viewed as
a commodity product, the amount of brand preference and loyalty in the vodka market is astonishing. Most of it is based on selling an image. The Swedish brand Absolut
became the largest selling imported vodka in the United States by mounting a wellintegrated targeting, packaging, and advertising strategy geared toward sophisticated,
upwardly mobile, affluent drinkers. The distinctively shaped bottle, suggestive of
Swedish austerity, has become an icon—and is used as the centerpiece of every ad,accompanied by puns such as “Absolut Magic.” The ﬁrm also runs short stories about
the brand written by distinguished authors in ads designed to appeal to readers ofsuch magazines as The New Yorker.21
In preparing an ad campaign, the advertiser usually prepares a copy strategy statement describing the objective, content, support, and tone of the desired ad. Creative
specialists must also ﬁnd a cohesive blend of style, tone, words, and format for executing

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the message. Any message can be presented in a number of execution styles: slice oflife, lifestyle, fantasy, mood or image, musical, personality symbol, technical expertise,scientific evidence, and testimonial. For example, testimonial advertising is used by
Rogaine extra-strength for men, which promises to grow back more hair than does its
predecessor. Rogaine television ads feature noted sports ﬁgures such as Utah Jazz basketball star Karl Malone delivering testimonials; in the ads, Malone says he got goodresults after using the product for 5 months.22
The actual words in an ad must be memorable and attention-getting to make an
impression on the audience. The following ad themes (column on left) would have
had much less impact without the creative phrasing (column on right):
Theme
Milk is good for you.
Our technology can help you doalmost anything.
No hard sell, just a good car.
You set the price instead of paying
the regular price.

Creative Copy
Got milk? (Milk industry)
Where do you want to go today?
(Microsoft)
Drivers wanted (Volkswagen)Name your own price. (Priceline.com)

Format elements such as ad size, color, and illustration will affect an ad’s impact
as well as its cost. Yet a minor rearrangement of mechanical elements can improveattention-getting power. Larger-size ads gain more attention, though not necessarily by
as much as their difference in cost. Four-color illustrations increase ad effectiveness aswell as ad cost. Still, by carefully planning the relative dominance of different elements, companies can achieve better message delivery.
Social Responsibility Review
Advertisers and their agencies must be sure their “creative” advertising does not overstep social and legal norms. Most marketers work hard to communicate openly andhonestly with consumers. Still, abuses occur, and public policymakers have developed
a substantial body of laws and regulations to govern advertising. Under U.S. law, forexample, companies must avoid false or deceptive advertising. Also, sellers are legallyobligated to avoid bait-and-switch advertising that attracts buyers under false pretenses.23 And, to be socially responsible, advertisers must be careful not to offend ethnic groups, racial minorities, or special-interest groups. For instance, a commercial forBlack Flag insecticide was altered after a veterans group protested the playing of Taps
over dead bugs.24
Some companies have begun building ad campaigns on a platform of social
responsibility. Look at Ethical Funds, a Canadian mutual fund ﬁrm that will not invest
in corporations that are involved in the production of military weapons, tobacco,
nuclear power, and those with unfair employment practices, poor environmental
records, or companies that support reactionary political regimes. One Ethical Funds
ad shows scenes of child labor and people dying from cancer, presumably caused bysmoking, then asks, “Do you know where your money goes?” Ethical Funds has grownfrom $100 million in assets to more than $2 billion over the last decade.25

Developing Media Strategies
After choosing the message, the next task is to choose media to carry it. The steps here
are deciding on desired reach, frequency, and impact; choosing among major media
types; selecting speciﬁc media vehicles; deciding on media timing; and deciding on
geographical media allocation.

Developing and Managing the Advertising Campaign

Deciding on Reach, Frequency, and Impact
Media selection involves ﬁnding the most cost-effective media to deliver the desired number of exposures to the target audience. What do we mean by the desired number of exposures? Presumably, the advertiser is seeking a certain response from the target audience—for example, a certain level of product trial. The rate of product trial will depend, among
other things, on the level of audience brand awareness. The effect of exposures on audience awareness depends on the exposures’ reach, frequency, and impact:➤

Reach (R): The number of different persons or households that are exposed to aparticular media schedule at least once during a speciﬁed time period.

➤

Frequency (F): The number of times within the speciﬁed time period that an average
person or household is exposed to the message.

➤

Impact (I): The qualitative value of an exposure through a given medium (thus afood ad in Good Housekeeping would have a higher impact than the same ad in the
Police Gazette).

Although audience awareness will be greater with higher reach, frequency, andimpact, there are important trade-offs among these elements. It is the media planner’s
job to ﬁgure out, within a given budget, the most cost-effective combination of reach,frequency, and impact. Reach is most important when launching new products,
ﬂanker brands, extensions of well-known brands, or infrequently purchased brands, orwhen going after an undefined target market. Frequency is most important where
there are strong competitors, a complex story to tell, high consumer resistance, or afrequent-purchase cycle.26
Many advertisers believe that a target audience needs a large number of exposures for the advertising to work. Too few repetitions can be a waste because they will
hardly be noticed. Others doubt the value of high ad frequency. They believe that after
people see the same ad a few times, they either act on it, get irritated by it, or stop
noticing it. Krugman asserted that three exposures to an advertisement might beenough.27 Another factor arguing for repetition is that of forgetting. The higher theforgetting rate associated with a brand, product category, or message, the higher the
warranted level of repetition. But repetition is not enough. Ads wear out and viewers
tune out, so advertisers need fresh executions of the message. For example, Duracell
can choose from more than 40 different versions of its basic ad.
Selecting Media and Vehicles
The media planner has to know the capacity of the major media types to deliver reach,frequency, and impact. The costs, advantages, and limitations of the major media are
proﬁled in Table 5.2.
Media planners choose among these media categories by considering the following variables:➤

Target-audience media habits: For example, radio, television, and the Internet are
effective media for reaching teenagers.

➤

Product: Media types have different potentials for demonstration, visualization,
explanation, believability, and color.

➤

Message: A message announcing a major sale tomorrow will require radio, TV, or
newspaper. A message containing a great deal of technical data might require
specialized magazines or mailings.

➤

Cost: Television is very expensive, whereas newspaper advertising is relatively
inexpensive. What counts is the cost-per-thousand exposures.

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Table 5.2 Proﬁles of Major Media Types
MediumAdvantages

Limitations

Newspapers

Flexibility; timeliness; good local
market coverage; broad acceptance;high believability

Short life; poor reproduction quality;
small “pass-along” audience

Television

Combines sight, sound, and motion;
appealing to the senses; highattention; high reachHigh absolute cost; high clutter;
ﬂeeting exposure; less audience
selectivity

Direct mailAudience selectivity; ﬂexibility; no adcompetition within the same
medium; personalization

Relatively high cost;“junk mail”
image

Radio

Mass use; high geographic anddemographic selectivity; low cost

Audio presentation only; lower
attention than television;
nonstandardized rate structures;
ﬂeeting exposure

Magazines

High geographic and demographic
selectivity; credibility and prestige;
high-quality reproduction; long life;
good pass-along readershipLong ad purchase lead time; somewaste circulation; no guarantee of
position

OutdoorFlexibility; high repeat exposure; low
cost; low competition

Limited audience selectivity; creative
limitations

Yellow Pages

Excellent local coverage; highbelievability; wide reach; low cost

High competition; long ad purchaselead time; creative limitations

Newsletters

Very high selectivity; full control;interactive opportunities; relative
low costs

Costs could run away

Brochures

Flexibility; full control; can dramatize
messages

Overproduction could lead to
runaway costs

Telephone

Many users; opportunity to give a
personal touch

Relative high cost unless volunteers
are used

Internet

High selectivity; interactive
possibilities; relatively low cost

Relatively new media with a low
number of users in some countries

Rust and Oliver see the proliferation of newer media such as the World Wide
Web hastening the death of traditional mass-media advertising as we know it. They also
see a greater amount of direct producer-consumer interaction, with beneﬁts to bothparties. Producers gain more information about their customers and can customize
products and messages better; customers gain greater control because they can choose
whether to receive an advertising message.28
Although Web-based advertising is growing rapidly, many companies are reluctant to spend heavily on banner ads and hotlinks because they have no reliable way ofknowing who sees or clicks on these ads. The Internet is not simply another medium;
it is a profoundly different experience where on-line consumers can pull what theywant out of cyberspace and leave the rest behind. Therefore, advertisers have to becreative enough to make these consumers want to pull in their cybermessages.

Developing and Managing the Advertising Campaign

Given all of these media choices, the media planner must ﬁrst decide on how toallocate the budget to the major media types. Then the media planner searches forthe most cost-effective media vehicles within each chosen media type—relying on
media measurement services for estimates of audience size, composition, and media
cost.
Audiences can be measured according to: (1) circulation, the number of physicalunits carrying the advertising; (2) audience, the number of people exposed to the vehicle (with pass-on readership, a print vehicle will have a larger audience than its circulation ﬁgures suggest); (3) effective audience, the number of people with target audience characteristics exposed to the vehicle; and (4) effective ad-exposed audience, thenumber of people with target audience characteristics who actually saw the ad.
Knowing the audience size, media planners can calculate the cost-per-thousand
persons reached by a vehicle. If an ad in Newsweek costs $100,000 and Newsweek’s estimated readership is 3 million people, the cost of exposing the ad to 1,000 persons isapproximately $33. The same ad in Business Week may cost $30,000 but reach only
775,000 persons—at a cost per thousand of nearly $39. The media planner then rankseach magazine by cost per thousand and favors magazines with the lowest cost per
thousand for reaching target consumers. The magazines themselves often put
together a “reader proﬁle” for their advertisers, summarizing the characteristics of themagazine’s readers with respect to age, income, residence, marital status, and leisureactivities, to help media planners better target their audiences.
Deciding on Media Timing
In choosing media, the advertiser faces a macroscheduling problem and a microscheduling problem. The macroscheduling problem involves scheduling the advertising in
relation to seasons and the business cycle. Suppose 70 percent of a product’s sales
occur between June and September. The ﬁrm can vary its advertising expenditures tofollow the seasonal pattern, to oppose the seasonal pattern, or to be constant throughout the year. Most ﬁrms pursue a seasonal policy, although advertising in the off-season
may boost sales and consumption without hurting seasonal consumption.
The microscheduling problem calls for allocating advertising expenditures
within a short period to obtain maximum impact. Over a given period, advertising
messages can be concentrated (“burst” advertising), dispersed continuously, or dispersed intermittently. The advertiser must also decide whether to leave ad messages
level, increase them, decrease them, or alternate them in the schedule.
In launching a new product, the advertiser can choose among ad continuity,
concentration, flighting, and pulsing. Continuity is achieved by scheduling exposuresevenly throughout a given period. Generally, advertisers use continuous advertisingin expanding market situations, with frequently purchased items, and in tightly
defined buyer categories. Concentration calls for spending all of the advertising dollars in a single period. This makes sense for products with one selling season or holiday. Flighting calls for advertising for some period, followed by a hiatus with noadvertising, followed by a second period of advertising activity. It is used when funding is limited, the purchase cycle is relatively infrequent, and with seasonal items.
Pulsing is continuous advertising at low-weight levels reinforced periodically by wavesof heavier activity.29
Those who favor pulsing feel that the audience will learn the message more thoroughly, and money can be saved. This was Anheuser-Busch’s experience. Its research
indicated that Budweiser could substantially reduce advertising in a particular market
and experience no adverse sales effect for at least a year and a half. Then the company
could introduce a 6-month burst of advertising and restore the previous growth rate.
This analysis led Budweiser to adopt a pulsing advertising strategy.

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Deciding on Geographical Allocation
In allocating media geographically, the company should consider area differences inmarket size, advertising response, media efﬁciency, competition, and proﬁt margins. The
company makes “national buys” when it places ads on national TV or radio networks or innationally circulated publications. It makes “spot buys” when it buys TV or radio time injust a few markets or in regional editions of national publications. The company makes“local buys” when it uses local advertising media. Despite its efﬁciency, however, national(and international) advertising may fail to adequately address differing local situations,such as market-to-market variations in share and competitive standing.

Evaluating Advertising EffectivenessGood planning and control of advertising depend on measures of advertising effectiveness. Yet the amount of fundamental research on advertising effectiveness isappallingly small. Advertisers should try to measure the communication effect of an
ad—that is, its potential effect on awareness, knowledge, or preference—as well as thead’s sales effect:➤

Communication-effect research seeks to determine whether an ad is communicating
effectively. Called copy testing, it can be done before an ad is placed (pretesting) andafter it is placed (posttesting). Advertisers also need to posttest the overall impact of
a completed campaign.

➤

Sales-effect research is complex because sales are inﬂuenced by many factors beyond
advertising, such as product features, price, and availability, as well as competitors’
actions. The sales impact is easiest to measure in direct-marketing situations andhardest to measure in brand or corporate-image-building advertising. One approachis shown in Figure 5-9: A company’s share of advertising expenditures produces ashare of voice that earns a share of consumers’ minds and hearts and ultimately ashare of market. Peckham studied the relationship between share of voice and shareof market for several consumer products over a number of years and found a 1-to-1
ratio for established products and a 1.5–2.0 to 1.0 ratio for new products.30

SALES-PROMOTION STRATEGIESSales promotion, a key ingredient in many marketing campaigns, consists of a diverse
collection of incentive tools, mostly short term, designed to stimulate trial, or quicker
or greater purchase, of particular products or services by consumers or the trade.31
Whereas advertising offers a reason to buy, sales promotion offers an incentive to buy.
Sales promotion includes tools for consumer promotion (samples, coupons, cash refund
offers, prices off, premiums, prizes, patronage rewards, free trials, warranties, tie-in
promotions, cross-promotions, point-of-purchase displays, and demonstrations); trade

Figure 5-9 Formula for Measuring Sales Impact of AdvertisingSales Promotion Strategies

promotion (prices off, advertising and display allowances, and free goods), and businessand sales force promotion (trade shows and conventions, contests for sales reps, and specialty advertising).
In years past, the advertising-to-sales-promotion ratio was about 60:40. Today, inmany consumer-packaged-goods companies, sales promotion accounts for 65–75 percent of the overall promotional budget. Several factors have contributed to this trend,
particularly in consumer markets.32 Internal factors include the following: Promotion
is now more accepted by top management as an effective sales tool, more productmanagers are qualiﬁed to use sales-promotion tools, and product managers are under
greater pressure to increase current sales. External factors include: The number ofbrands has increased, competitors use promotions frequently, many brands are seen as
being similar, consumers are more price-oriented, the trade demands more deals frommanufacturers, and advertising efﬁciency has declined because of rising costs, media
clutter, and legal restraints.
In general, sales promotion seems most effective when used together with advertising. In one study, a price promotion alone produced only a 15 percent increase insales volume. When combined with feature advertising, sales volume increased 19 percent; when combined with feature advertising and a point-of-purchase display, sales
volume increased 24 percent.33

Purpose of Sales Promotion
Sales-promotion tools can be used to achieve a variety of objectives. Sellers use
incentive-type promotions to attract new triers, to reward loyal customers, and toincrease the repurchase rates of occasional users. New triers are of three types—
users of another brand in the same category, users in other categories, and frequent
brand switchers. Sales promotions often attract the brand switchers, because users ofother brands and categories do not always notice or act on a promotion. Brand
switchers are primarily looking for low price, good value, or premiums, so sales promotions are unlikely to turn them into loyal users. Sales promotions used in markets
of high brand similarity produce a high sales response in the short run but little permanent gain in market share. In markets of high brand dissimilarity, however, sales
promotions can alter market shares permanently.
One challenge is to balance short- and long-term objectives when combining
advertising and sales promotion. Advertising typically acts to build long-term brandloyalty, but the question of whether or not sales promotion weakens brand loyalty overtime is subject to different interpretations. Sales promotion, with its incessant prices
off, coupons, deals, and premiums, may devalue the product offering in the buyers’
minds. Therefore, companies need to distinguish between price promotions (which
focus only on price) and added-value promotions (intended to enhance brand image).
Here’s how Toro, a major manufacturer of lawn mowers and snowblowers, used
an added-value promotion to sell its snowblowers in early September: Knowing thatmost people would wait to buy until the ﬁrst snow, Toro offered to include Toro Snow
Insurance, promising a rebate of $50 to each September buyer if it did not snow before
January. This sales promotion did not hurt, and may have helped, Toro’s brand image.
When a brand is price promoted too often, the consumer begins to buy it mainly
when it goes on sale. So there is risk in putting a well-known brand leader on promotion over 30 percent of the time.34 Kellogg, Kraft, and other market leaders are trying
to return to “pull” marketing by increasing their advertising. They blame the heavy useof sales promotion for decreasing brand loyalty, increasing consumer price sensitivity,
brand-quality-image dilution, and a focus on short-run marketing planning.

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Farris and Quelch, however, counter that sales promotion enables manufacturers to adjust to short-term variations in supply and demand, test high list prices, sellmore than they would ordinarily sell at the list price, adapt programs to different consumer segments, induce consumers to try new products, and lead to more varied retail
formats. On the consumer side, sales promotion raises awareness of prices and helps
consumers feel satisﬁed as smart shoppers.35

Major Decisions in Sales Promotion
In using sales promotion, a company must establish its objectives, select the tools,
develop the program, pretest the program, implement and control it, and evaluate theresults.
➤

Establishing objectives. Sales-promotion objectives are derived from broader
promotion objectives, which are derived from more basic marketing objectives thatare developed for the product. The speciﬁc objectives for sales promotion vary withthe target market. For consumers, objectives include encouraging purchase oflarger-size units, building trial among nonusers, and attracting switchers away fromcompetitors’ brands. For retailers, objectives include persuading retailers to carry
new items and higher levels of inventory, encouraging off-season buying, offsettingcompetitive promotions, building brand loyalty, and gaining entry into new retail
outlets. For the sales force, objectives include encouraging support of a new productor model, encouraging more prospecting, and stimulating off-season sales.36➤

Selecting consumer-promotion tools. The main consumer-promotion tools are
summarized in Table 5.3. We can distinguish between manufacturer promotions
and retailer promotions. The former is illustrated by the auto industry’s frequent
use of rebates and gifts to motivate test-drives and purchases; the latter includes
price cuts, retailer coupons, and retailer contests or premiums. We can also
distinguish between sales-promotion tools that are “consumer-franchise building,”
which reinforce the consumer’s brand understanding, and those that are not. The
former imparts a selling message along with the deal, as in the case of coupons that
include a selling message. Sales-promotion tools that are not consumer-franchisebuilding include price-off packs, premiums that are unrelated to a product, contests
and sweepstakes, consumer refund offers, and trade allowances.

➤

Selecting trade-promotion tools. Manufacturers can use a number of trade-promotion
tools, as shown in Table 5.4, to (1) persuade an intermediary to carry the product,(2) persuade an intermediary to carry more units, (3) induce retailers to promote
the brand by featuring, display, and price reduction, and (4) stimulate retailers andtheir salespeople to push the product. The growing power of large retailers has
increased their ability to demand trade promotion at the expense of consumer
promotion and advertising, so manufacturers often spend more on trade promotion
than they would like.37➤

Selecting business- and sales force promotion tools. Companies spend billions of dollars on
business- and sales force promotion tools, shown in Table 5.5, to gather businessleads, impress and reward customers, and motivate the sales force to greater effort.
Companies typically develop budgets for each business-promotion tool that remain
fairly constant from year to year.

➤

Developing the program. In deciding to use a particular incentive, marketers have toconsider: (1) the size of the incentive (a certain minimum is necessary if the promotion
is to succeed; a higher level will produce more sales response but at a diminishingrate); (2) the conditions for participation (whether to offer the incentive to everyone orSales Promotion Strategies

Table 5.3 Major Consumer-Promotion Tools
Samples: Offer of a free amount of a product or service.
Coupons: Certiﬁcates offering a stated saving on the purchase of a speciﬁc product.
Cash Refund Offers (rebates): Provide a price reduction after purchase: Consumer sends a
speciﬁed “proof of purchase” to the manufacturer who “refunds” part of the purchase price by
mail.
Price Packs (cents-off deals): Promoted on the package or label, these offer savings off the
product’s regular price.
Premiums (gifts): Merchandise offered at low or no cost as an incentive to buy a particular
product.
Prizes (contests, sweepstakes, games): Prizes offer consumers the chance to win cash, trips,
or merchandise as a result of purchasing something. A contest calls for consumers to submit anentry to be examined by judges who will select the best entries. A sweepstakes asks consumers to
submit their names for a drawing. A game presents consumers with something every time theybuy—bingo numbers, missing letters—that might help them win a prize.
Patronage Awards: Values in cash or points given to reward patronage of a certain seller.
Free Trials: Inviting prospects to try the product free in the hope that they will buy the
product.
Product Warranties: Explicit or implicit promises by sellers that the product will perform as
speciﬁed or that the seller will ﬁx it or refund the customer’s money during a speciﬁed period.
Tie-in Promotions: Two or more brands or companies team up on coupons, refunds, andcontests to increase pulling power.
Cross-Promotions: Using one brand to advertise another noncompeting brand.
Point-of-Purchase (POP) Displays and Demonstrations: Displays and demonstrations
that take place at the point of purchase or sale.

to select groups); (3) the duration (if the period is too short, many prospects will not beable to take advantage of it—but if it runs too long, it loses some of its “act now” force);(4) the distribution vehicle (each distribution method involves a different level of reach,cost, and impact); (5) the timing (annually, one-time, or some other dates—which must
be communicated and coordinated with other departments); and (6) the total salespromotion budget (including administrative costs and incentive costs).
➤

Pretesting the program. Although most sales-promotion programs are designed on thebasis of experience, savvy marketers use pretests to determine if the tools areappropriate, the incentive size is optimal, and the presentation method is efﬁcient.
Strang maintains that promotions usually can be tested quickly and inexpensively
and that large companies should test alternative strategies in selected market areas
with each national promotion.38➤

Implementing and evaluating the program. Implementation planning must cover leadtime (the time needed to prepare the program before the launch) and sell-in time
(which begins with the launch and ends when approximately 95 percent of the deal
merchandise is in the hands of consumers). After implementation, manufacturers
can measure sales-promotion effectiveness using sales data, consumer surveys, andexperiments.

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Table 5.4 Major Trade-Promotion Tools
Price-Off (off-invoice or off-list): A straight discount off the list price on each casepurchased during a stated time period.The offer encourages dealers to buy a quantity or
carry a new item that they might not ordinarily buy.The dealers can use the buying
allowance for immediate proﬁt, advertising, or price reductions.
Allowance: An amount offered in return for the retailer’s agreeing to feature the
manufacturer’s products in some way.An advertising allowance compensates retailers foradvertising the manufacturer’s product.A display allowance compensates them for carrying a
special product display.
Free Goods: Offers of extra cases of merchandise to intermediaries who buy a certain
quantity or who feature a certain ﬂavor or size. Manufacturers might offer push money orfree specialty advertising items to retailers that carry the company’s name.
Source. For more information, see Betty Spethman, “Trade Promotion Redefined,” Brandweek,
March 13, 1995, pp. 25–32.

Table 5.5 Major Business and Sales Force Promotion Tools
Trade Shows and Conventions: Industry associations organize annual trade shows andconventions where ﬁrms selling products and services to this industry buy space and set up
booths and displays to demonstrate their products. Participating vendors expect several
beneﬁts, including generating new sales leads, maintaining customer contacts, introducing
new products, meeting new customers, selling more to present customers, and educating
customers with publications, videos, and other audiovisual materials.
Sales Contests: A sales contest aims at inducing the sales force or dealers to increase sales
over a stated period, with prizes going to those who succeed. Incentives work best when
they are tied to measurable and achievable sales objectives (such as ﬁnding new accounts orreviving old accounts) for which employees feel they have an equal chance.
Specialty Advertising: Specialty advertising consists of useful, low-cost items (such as
calendars) bearing the company’s name and address, and sometimes an advertising message,
that salespeople give to prospects and customers.

PUBLIC RELATIONS STRATEGIES
Not only must the company relate constructively to customers, suppliers, and dealers,
but it must also relate to a large number of interested publics. A public is any groupthat has an actual or potential interest in or impact on a company’s ability to achieve
its objectives. Public relations (PR) involves a variety of programs that are designed topromote or protect a company’s image or its individual products.
The wise company takes concrete steps to manage successful relations with its
key publics. PR departments typically perform ﬁve functions: (1) press relations (presenting news and information about the organization in the most positive light);(2) product publicity (publicizing speciﬁc products); (3) corporate communication (promoting understanding of the organization through internal and external communica-Public Relations Strategies

tions); (4) lobbying (dealing with legislators and government ofﬁcials to promote or
defeat legislation and regulation); and (5) counseling (advising management aboutpublic issues and company positions and image—and advising in the event of amishap).39

Marketing Public Relations
Many companies are turning to marketing public relations (MPR) to directly support corporate or product promotion and image making. Thus MPR, like financial PR andcommunity PR, serves a special constituency, namely the marketing department.40
MPR plays an important role in:➤Assisting in the launch of new products: The amazing success of toys such as the
Pokemon line owes a great deal to clever publicity.

➤

Assisting in repositioning a mature product: New York City had extremely bad press in
the 1970s until the “I Love New York” campaign began.

➤

Building interest in a product category: Companies and trade associations use MPR torebuild declining interest in commodities such as eggs and expand consumption of
products such as pork.

➤

Inﬂuencing speciﬁc target groups: McDonald’s sponsors special neighborhood events in
Latino and African American communities to build goodwill.

➤

Defending products that have encountered public problems: Johnson & Johnson’s masterly
use of MPR was a major factor in saving Tylenol from extinction following two
incidents in which poison-tainted Tylenol capsules were found.

➤

Building the corporate image in a way that reﬂects favorably on its products: Richard
Branson’s outrageous publicity stunts have created a bold, upstart image for his
U.K.-based Virgin Group.

As the power of mass advertising weakens, marketing managers are turning to
MPR to cost-effectively build awareness and brand knowledge and to reach local communities and specific audiences. The company does not pay for the space or time
obtained in the media; it pays only for a staff to develop and circulate the stories andmanage certain events. A story picked up by the news media could be worth millions ofdollars in equivalent advertising—and would be more credible than advertising.

Major Decisions in Marketing PR
In considering when and how to use MPR, management must follow the same process
as it does for advertising and sales promotion: Establish the marketing objectives,choose the messages and vehicles, implement the plan carefully, and evaluate theresults. The main tools of MPR are described in Table 5.6.41➤

Establishing the marketing objectives. These may include: Build awareness of a product,
service, person, organization, or an idea; add credibility by communicating amessage in an editorial context; boost sales force and dealer enthusiasm; and holddown promotion costs while gaining share of mind. Management needs to set
speciﬁc objectives for each MPR campaign so the results can be evaluated. PR
expert Thomas L. Harris suggests PR and direct-response marketing work together
to build marketplace excitement before media advertising breaks, build a corecustomer base, build a one-to-one relationship with consumers, turn satisﬁed
customers into advocates, and inﬂuence opinion leaders and inﬂuencers.42➤

Choosing messages and vehicles. The MPR expert must identify or develop interesting
stories to tell about the product. If there are few stories, the expert should propose

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Table 5.6 Major Tools in Marketing PR
Publications: Companies rely extensively on published materials to reach and inﬂuencetarget markets, including annual reports, brochures, articles, printed and on-line newslettersand magazines, and audiovisual materials.
Events: Companies can draw attention to new products or other company activities by
arranging special events like news conferences, on-line chats, seminars, exhibits, contests andcompetitions, and sport and cultural sponsorships that will reach the target publics.
News: One of the major tasks of PR professionals is to ﬁnd or create favorable news about
the company, its products, and its people.The next step—getting the media to accept press
releases and attend press conferences—calls for marketing and interpersonal skills.
Speeches: Speeches are another tool for creating product and company publicity andbuilding the company’s image.
Public-Service Activities: Companies can build goodwill by contributing money and timeto good causes.
Identity Media: To attract attention and spark recognition, the ﬁrm’s visual identity is
carried by its logos, stationery, brochures, signs, business forms, business cards,Web site,buildings, uniforms, and dress codes.

newsworthy events to sponsor as a way of stimulating media coverage. For example,
when Anheuser-Busch sponsored a Black World Championship Rodeo in Brooklyn,
the event attracted more than 5,000 spectators.
➤

Implementing and evaluating the plan. PR implementation must be handled with care.
A great story is easy to place, but other stories might not get past busy editors. One of
the chief assets of publicists is their personal relationship with media editors. MPR’s
contribution to the bottom line is difﬁcult to measure because it is used along withother promotional tools. The easiest measure is the number of exposures obtained in
the media, including the audience size and the cost of that space and time ifpurchased at advertising rates. Other measures include changes in product awareness,
comprehension, or attitude resulting from the MPR campaign (after allowing for theeffect of other promotional tools). The most satisfactory measure, however, is salesand-proﬁt impact, allowing the company to determine its return on MPR investment.

EXECUTIVE SUMMARY
Modern marketing calls for more than developing a good product, pricing it attractively, and making it accessible to target customers. Companies must also communicate
with present and potential stakeholders, and with the general public. The marketing
communications mix consists of ﬁve major modes of communication: advertising, sales
promotion, public relations and publicity, personal selling, and direct marketing.
Developing effective marketing communications involves eight steps: (1) Identify
the target audience, (2) determine the communication objectives, (3) design the message, (4) select the communication channels, (5) establish the total communications
budget, (6) decide on the communications mix, (7) measure the communications’
results, and (8) manage the integrated marketing communication process.
Managing the communications process calls for integrated marketing communications (IMC), a concept that recognizes the added value of a comprehensive plan

Notesthat evaluates the strategic roles of a variety of communications disciplines and combines these disciplines to provide clarity, consistency, and maximum communications’impact through the seamless integration of discrete messages.
Advertising is any paid form of nonpersonal presentation and promotion ofideas, goods, or services by an identiﬁed sponsor. Developing an advertising program
involves setting objectives, setting a budget, choosing the advertising message, determining how the message will be generated, evaluating and selecting messages, executing the message, developing media strategies by establishing the ad’s desired reach,frequency, and impact and then choosing the media that will deliver the desired
results, and evaluating the communication and sales effects of the advertising.
Sales promotion consists of a diverse collection of incentive tools, mostly shortterm, that are designed to stimulate trial or quicker or greater purchase of particular
goods or services by consumers or the trade. Sales promotion includes tools for consumer promotion, trade promotion, and business- and sales force promotion. In using
sales promotion, as in using advertising, a company must set its objectives, select thetools, develop the program, pretest the program, implement and control it, and evaluate the results. Although the use of sales promotion is growing—and the techniquetends to increase sales and market share in the short run—it is not generally considered a long-term brand-building technique.
A public is any group that has an actual or potential interest in or impact on acompany’s ability to achieve its objectives. Public relations (PR) involves a variety of
programs designed to promote or protect a company’s image or its individual products. Marketing public relations (MPR) is often used to support corporate or productpromotion and image-building. MPR can affect public awareness at a fraction of thecost of advertising, and is often much more credible. The main tools of PR are publications, events, news, speeches, public-service activities, and identity media.
In considering when and how to use MPR, management must establish the marketing objectives, choose the PR messages and vehicles, implement the plan carefully,
and evaluate the results. Results are usually evaluated in terms of number of exposuresand cost savings; awareness, comprehension, or attitude changes; and sales-and-proﬁt
contribution.

NOTES
1. John Bigness, “Back to Brand New Life,” Chicago Tribune, October 4, 1998; Chris Reidy,“Putting on the Dog to be Arnold’s Job,” Boston Globe, August 28, 1998.
2. See Michael L. Ray, Advertising and Communications Management (Upper Saddle River, NJ:
Prentice-Hall, 1982).
3. “FedEx Will Quit Joking Around Overseas,” Los Angeles Times, January 21, 1997, p. B20.
4. See Ayn E. Crowley and Wayne D. Hoyer, “An Integrative Framework for Understanding
Two-Sided Persuasion,” Journal of Consumer Research, March 1994, pp. 561–74.
5. See C. I. Hovland, A. A. Lumsdaine, and F. D. Shefﬁeld, Experiments on Mass Communication,
vol. 3 (Princeton, NJ: Princeton University Press, 1948), ch. 8; and Crowley and Hoyer, “AnIntegrative Framework.” For an alternative viewpoint, see George E. Belch, “The Effects of
Message Modality on One- and Two-Sided Advertising Messages,” in Advances in Consumer
Research, eds. Richard P. Bagozzi and Alice M. Tybout (Ann Arbor, MI: Association for
Consumer Research, 1983), pp. 21–26.
6. Curtis P. Haugtvedt and Duane T. Wegener, “Message Order Effects in Persuasion: An
Attitude Strength Perspective,” Journal of Consumer Research, June 1994, pp. 205–18; H. Rao
Unnava, Robert E. Burnkrant, and Sunil Erevelles, “Effects of Presentation Order and

295

296

CHAPTER 15

DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONSCommunication Modality on Recall and Attitude,” Journal of Consumer Research, December
1994, pp. 481–90.
7. See Brian Sternthal and C. Samuel Craig, Consumer Behavior: An Information Processing
Perspective (Upper Saddle River, NJ: Prentice-Hall, 1982), pp. 282–84.
8. Herbert C. Kelman and Carl I. Hovland, “Reinstatement of the Communication in Delayed
Measurement of Opinion Change,” Journal of Abnormal and Social Psychology 48 (1953):
327–35.
9. David J. Moore, John C. Mowen, and Richard Reardon, “Multiple Sources in AdvertisingAppeals: When Product Endorsers Are Paid by the Advertising Sponsor,” Journal of the
Academy of Marketing Science, Summer 1994, pp. 234–43.
10. Michael Cafferky has identiﬁed four kinds of people that companies try to reach tostimulate word-of-mouth referrals: opinion leaders, marketing mavens, inﬂuentials, andproduct enthusiasts. For more, see Let Your Customers Do the Talking (Chicago: Dearborn
Financial Publishing, 1995), pp. 30–33.
11. See Philip Kotler, “Atmospherics as a Marketing Tool,” Journal of Retailing, Winter
1973–1974, pp. 48–64.
12. Sidney J. Levy, Promotional Behavior (Glenview, IL: Scott, Foresman, 1971), ch. 4.
13. Paul Wang and Lisa Petrison, “Integrated Marketing Communications and Its Potential
Effects on Media Planning,” Journal of Media Planning 6, no. 2 (1991): 11–18.
14. See Don E. Shultz, Stanley I. Tannenbaum, and Robert F. Lauterborn, Integrated Marketing
Communications: Putting It Together and Making It Work (Lincolnwood, IL: NTC Business
Books, 1992); and Ernan Roman, Integrated Direct Marketing: The Cutting-Edge Strategy for
Synchronizing Advertising, Direct Mail, Telemarketing, and Field Sales (Lincolnwood, IL: NTC
Business Books, 1995).
15. The deﬁnitions of advertising, sales promotion, and public relations are adapted fromPeter D. Bennett, ed., Dictionary of Marketing Terms (Chicago: American Marketing
Association, 1995).
16. See William L. Wilkie and Paul W. Farris, “Comparison Advertising: Problem andPotential,” Journal of Marketing, October 1975, pp. 7–15.
17. See Donald E. Schultz, Dennis Martin, and William P. Brown, Strategic AdvertisingCampaigns (Chicago: Crain Books, 1984), pp. 192–97.
18. “The Best Awards: Retail/Fast-Food,” Advertising Age, May 18, 1998, p S8; Karen Benezra,“Taco Bell Pooch Walks the Merch Path,” Brandweek, June 8, 1998, p. 46; Bob Garﬁeld,“Perspicacious Pooch Scores for Taco Bell,” Advertising Age, March 9, 1998, p. 53;“Consumer 2000: Generation X,” American Demographics, September 1999,
www.mediacentral.com; “No ‘Quiero’ ” in Future Taco Bell Advertising,” Advertising Age,
October 8, 1999, www.adage.com.
19. Dik Warren Twedt, “How to Plan New Products, Improve Old Ones, and Create Better
Advertising,” Journal of Marketing, January 1969, pp. 53–57.
20. See William A. Mindak and H. Malcolm Bybee, “Marketing Application to Fund Raising,”
Journal of Marketing, July 1971, pp. 13–18.
21. James B. Amdorfer, “Absolut Ads Sans Bottle Offer a Short-Story Series,” Advertising Age,
January 12, 1998, p. 8.
22. Yumiko Ono, “Bulletins from the Battle of Baldness Drug—Sports Figures Tout Rogaine
for Pharmacia,” Wall Street Journal, December 19, 1997, p. B1.
23. For further reading, see Dorothy Cohen, Legal Issues in Marketing Decision Making(Cincinnati, OH: South-Western, 1995).
24. Kevin Goldman, “Advertising: From Witches to Anorexics: Critical Eyes Scrutinize Ads for
Political Correctness,” Wall Street Journal, May 19, 1994, p. B1.
25. Adapted from Sandra Cordon, “Where High Road Meets Bottom Line: Ethical Mutual
Funds Avoid Companies Deemed Socially Irresponsible,” The London Free Press, October 9,

Notes1998, p. D3; “Ethical Funds Launches 4 New Mutual Funds,” Ethical Funds, January 17,
2000, www.ethicalfunds.com.
26. Schultz et al., Strategic Advertising Campaigns, p. 340.
27. See Herbert E. Krugman, “What Makes Advertising Effective?” Harvard Business Review,
March-April 1975, p. 98.
28. Roland T. Rust and Richard W. Oliver, “Notes and Comments: The Death of Advertising,”
Journal of Advertising, December 1994, pp. 71–77.
29. See also Hani I. Mesak, “An Aggregate Advertising Pulsing Model with Wearout Effects,”
Marketing Science, Summer 1992, pp. 310–26; and Fred M. Feinberg, “Pulsing Policies forAggregate Advertising Models,” Marketing Science, Summer 1992, pp. 221–34.
30. See J. O. Peckham, The Wheel of Marketing (Scarsdale, NY: printed privately, 1975),
pp. 73–77.
31. From Robert C. Blattberg and Scott A. Neslin, Sales Promotion: Concepts, Methods, andStrategies (Upper Saddle River, NJ: Prentice-Hall, 1990).
32. Roger A. Strang, “Sales Promotion—Fast Growth, Faulty Management,” Harvard Business
Review, July-August 1976 pp. 116–19.
33. See John C. Totten and Martin P. Block, Analyzing Sales Promotion: Text and Cases, 2d ed.
(Chicago: Dartnell, 1994), pp. 69–70.
34. For a good summary of the research on whether promotion erodes the consumer
franchise of leading brands, see Blattberg and Neslin, Sales Promotion.
35. See Paul W. Farris and John A. Quelch, “In Defense of Price Promotion,” Sloan
Management Review, Fall 1987, pp. 63–69.
36. For a model for setting sales promotions objectives, see David B. Jones, “Setting
Promotional Goals: A Communications Relationship Model,” Journal of Consumer Marketing
11, no. 1 (1994): 38–49.
37. See Paul W. Farris and Kusum L. Ailawadi, “Retail Power: Monster or Mouse?” Journal of
Retailing, Winter 1992, pp. 351–69.
38. Strang, Sales Promotion, p. 120.
39. Adapted from Scott M. Cutlip, Allen H. Center, and Glen M. Broom, Effective Public
Relations, 8th ed. (Upper Saddle River, NJ: Prentice-Hall, 1997).
40. For an excellent account, see Thomas L. Harris, The Marketer’s Guide to Public Relations(New York: John Wiley, 1991). Also see Value-Added Public Relations (Chicago: NTC Business
Books, 1998)
41. For further reading on cause-related marketing, see P. Rajan Varadarajan and Anil Menon,“Cause-Related Marketing: A Co-Alignment of Marketing Strategy and Corporate
Philanthropy,” Journal of Marketing, July 1988, pp. 58–74.
42. Material adapted from Thomas L. Harris, “PR Gets Personal,” Direct Marketing, April 1994,
pp. 29–32.

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Managing Advertising,
Sales Promotion,
Public Relations
We will consider thefollowing questions:

The best advertising is done bysatisfied customers.

■

What steps are involved indeveloping an advertisingprogram?

■What explains the growing useof sales promotion, and how aresales-promotion decisions
made?

■

How can companies exploit thepotential of public relations andpublicity?

W

e describe the nature and use of three promotional tools—advertising, sales pro-motion, and public relations. Although their effectiveness is not always easy togauge, they contribute strongly to marketing performance.

D EA VD EV LE OR PT II NS IG N AG N PD R MO GA RN AA MG I N G A N
We define advertising as follows:■

Advertising is any paid form of nonpersonal presentation and promotionof ideas, goods, or services by an identified sponsor.

Advertisers include not only business firms but also museums, charitable organizations, and government agencies that direct messages to target publics. Ads are a costeffective way to disseminate messages, whether to build brand preference for
Coca-Cola or to educate people to avoid hard drugs.
Organizations handle their advertising in different ways. In small companies, advertising is handled by someone in the sales or marketing department, who works
with an advertising agency. A large company will often set up its own advertising department, whose manager reports to the vice president of marketing. The advertising
department’s job is to propose a budget; develop advertising strategy; approve ads andcampaigns; and handle direct-mail advertising, dealer displays, and other forms of advertising. Most companies use an outside agency to help create advertising campaigns
and to select and purchase media.
In developing a program, marketing managers must always start by identifying
the target market and buyer motives. Then they can make the five major decisions
in developing an advertising program, known as the five Ms: Mission: What are theadvertising objectives? Money: How much can be spent? Message: What message should
be sent? Media: What media should be used? Measurement: How should the results beevaluated? These decisions are summarized in Figure 5-10 and described in the following sections.

SETTING THE ADVERTISING OBJECTIVES
The advertising objectives must flow from prior decisions on target market, market
positioning, and marketing mix.
Many specific communication and sales objectives can be assigned to advertising.
Colley lists 52 possible advertising objectives in his Defining Advertising Goals for Measured Advertising Results.1 He outlines a method called DAGMAR (after the book’s title) for turning objectives into specific measurable goals. An advertising goal (orobjective) is a specific communication task and achievement level to be accomplishedwith a specific audience in a specific period of time. Colley provides an example:
To increase among 30 million homemakers who own automatic washers
the number who identify brand X as a low-sudsing detergent and who are
persuaded that it gets clothes cleaner—from 10 percent to 40 percent in one
year.
Advertising objectives can be classified according to whether their aim is to inform, persuade, or remind.

578

part fiveManaging and
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Programs■

Informative advertising figures heavily in the pioneering stage of a product category, where the objective is to build primary demand. Thus the yogurt industry
initially had to inform consumers of yogurt’s nutritional benefits.

■

Persuasive advertising becomes important in the competitive stage, where a company’s objective is to build selective demand for a particular brand. For example,
Chivas Regal attempts to persuade consumers that it delivers more taste and status than other brands of Scotch whiskey. Some persuasive advertising uses comparative advertising, which makes an explicit comparison of the attributes of two

MESSAGE

MONEY
Factors to consider:• Stage in PLC• Market share andconsumer base
• Competition and clutter• Advertising frequency• Product substitutability

MISSION• Sales goals• Advertising objectives• Message generation• Message evaluationand selection• Message execution• Social-responsibility
review

MEASUREMENT

MEDIA• Communication impact• Sales impact• Reach, frequency, impact• Major media types• Specific media vehicles• Media timing• Geographical media
allocation

F I G U R E

5-10

2

or more brands. The Burger King Corporation used comparative advertising for
its attack on McDonald’s (Burger King’s burgers are flame-broiled; McDonald’s are
fried). Schering-Plough claimed that “New OcuClear relieves three times longer
than Visine.” A company should make sure it can prove its claim of superiority
and cannot be counterattacked in a vulnerable area. Comparative advertising
works best when it elicits cognitive and affective motivations simultaneously.3■

The Five Ms of Advertising

Reminder advertising is important with mature products. Expensive four-color
Coca-Cola ads in magazines are intended to remind people to purchase CocaCola. A related form of advertising is reinforcement advertising, which seeks to assure current purchasers that they have made the right choice. Automobile ads
often depict satisfied customers enjoying special features of their new car.

The advertising objective should emerge from a thorough analysis of the current
marketing situation. If the product class is mature, the company is the market leader,and brand usage is low, the proper objective should be to stimulate more usage. If the
product class is new, the company is not the market leader, but the brand is superior
to the leader, then the proper objective is to convince the market of the brand’s superiority.

DECIDING ON THE ADVERTISING BUDGET
How does a company know if it will be spending the right amount? If it spends too
little, the effect will be negligible. If it spends too much, then some of the money
could have been put to better use. Some critics charge that large consumer-packagedgoods firms tend to overspend on advertising as a form of insurance against not spending enough, and that industrial companies underestimate the power of company andproduct image building and tend to underspend on advertising.4
Advertising has a carryover effect that lasts beyond the current period. Althoughadvertising is treated as a current expense, part of it is really an investment thatbuilds up an intangible asset called brand equity. When $5 million is spent on capital equipment, the equipment may be treated as a five-year depreciable asset andonly one-fifth of the cost is written off in the first year. When $5 million is spenton advertising to launch a new product, the entire cost must be written off in thefirst year. This treatment of advertising reduces the company’s reported profit andtherefore limits the number of new-product launches a company can undertake inany one year.

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There are five specific factors to consider when setting the advertising budget:5■

Stage in the product life cycle: New products typically receive large advertising budgets to build awareness and to gain consumer trial. Established brands usually
are supported with lower advertising budgets as a ratio to sales.

■

Market share and consumer base: High-market-share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build
share by increasing market size requires larger advertising expenditures. On a
cost-per-impression basis, it is less expensive to reach consumers of a widely usedbrand than to reach consumers of low-share brands.

■

Competition and clutter: In a market with a large number of competitors and highadvertising spending, a brand must advertise more heavily to be heard. Even
simple clutter from advertisements not directly competitive to the brand createsa need for heavier advertising.

■Advertising frequency: The number of repetitions needed to put across the brand’s
message to consumers has an important impact on the advertising budget.

■

Product substitutability: Brands in a commodity class (cigarettes, beer, soft drinks)
require heavy advertising to establish a differential image. Advertising is also important when a brand can offer unique physical benefits or features.

Marketing scientists have built a number of advertising-expenditure models thattake these factors into account. Vidale and Wolfe’s model called for a larger advertising budget, the higher the sales-response rate, the higher the sales-decay rate (the rate
at which customers forget the advertising and brand), and the higher the untappedsales potential.6 Unfortunately, this model leaves out other important factors, such as
the rate of competitive advertising and the effectiveness of the company’s ads.
John Little proposed an adaptive-control method for setting the advertising budget.7 Suppose the company has set an advertising-expenditure rate based on its mostcurrent information. It spends this rate in all markets except in a subset of 2n markets randomly drawn. In n test markets the company spends at a lower rate, and in
the other n it spends at a higher rate. This procedure will yield information on the
average sales created by low, medium, and high rates of advertising that can be used
to update the parameters of the sales-response function. The updated function can beused to determine the best advertising-expenditure rate for the next period. If this experiment is conducted each period, advertising expenditures will closely track optimal advertising expenditures.8

CHOOSING THE ADVERTISING MESSAGE
Advertising campaigns vary in their creativity. William Bernbach observed: “The facts
are not enough. . . . Don’t forget that Shakespeare used some pretty hackneyed plots,
yet his message came through with great execution.” Consider the following example:■

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part fiveManaging and
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Programs

Taco Bell In 1994, Taco Bell ranked fourth in fast-food chains and its revenues were sagging. Then, in 1997, the chain introduced television spots
with a talking chihuahua. The hungry little dog, who became famous for his
Spanish-language statement, “Yo Quiero Taco Bell,” meaning “I want some
Taco Bell,” struck a chord with the chain’s 18- to 35-year-old customers andspawned an impressive array of chihuahua merchandise such as T-shirts, magnets, hats, and talking dolls—and increased revenues for Taco Bell. The little
pooch pushed Taco Bell’s sales up 4.3 percent in 1997, and the chain ended
the year with $4.5 billion in sales. Taco Bell now spends $200 million a year
on advertising and plans a long life for this popular campaign.9

Clearly, the creativity factor can be more important than the number of dollars
spent. Only after gaining attention can a commercial help to increase brand sales.
However, a warning is in order. Creative advertising may not be enough. This was thecase for Miles Inc.’s Alka-Seltzer tablets:

■Alka-Seltzer Alka-Seltzer antacid tablets have been the beneficiary of someof the most creative advertising in history: In 1969, the company began airing the classic “prison spot” in which 260 jailbirds, led by actor George Raft,rebelled against prison food by banging tin cups on tables while chanting“Alka-Seltzer.” Later the company aired two more classic Alka-Seltzer TV spots:“Honeymoon,” in which the tablets saved a bridegroom after his bride cooked
up such meals as poached oysters and marshmallow meatballs, and ads thatare remembered for the line “That’s a spicy meatball.” The company continued to push out more classic TV commercials for Alka-Seltzer, utilizing suchlines as “Try it. You’ll like it,” “I can’t believe I ate the whole thing,” and“Plop-plop, fizz-fizz, oh, what a relief it is.” Yet over the past few years, theintroduction of products such as Pepsid and Zantac doubled the antacid category’s size, leaving Alka-Seltzer’s market share at only 4.2 percent in 1998,
down from 25 percent in 1968.10

Advertisers go through four steps to develop a creative strategy: message generation, message evaluation and selection, message execution, and social responsibility
review.

Message Generation
The product’s “benefit” message should be decided as part of developing the productconcept. Yet there is usually latitude for a number of possible messages. Over time,the marketer might want to change the message, especially if consumers seek new ordifferent benefits from the product.
Creative people use several methods to generate possible advertising appeals. Many
creative people proceed inductively by talking to consumers, dealers, experts, and competitors. Leo Burnett advocates “in-depth interviewing where I come realistically face
to face with the people I am trying to sell. I try to get a picture in my mind of thekind of people they are—how they use this product and what it is.”11
Some creative people use a deductive framework for generating advertising messages. Maloney proposed one framework.12 He saw buyers as expecting one of fourtypes of reward from a product: rational, sensory, social, or ego satisfaction. Buyers
might visualize these rewards from results-of-use experience, product-in-use experience, or incidental-to-use experience. Crossing the four types of rewards with the three
types of experience generates twelve types of advertising messages. For example, theappeal “gets clothes cleaner” is a rational-reward promise following results-of-use experience. The phrase “real gusto in a great light beer” is a sensory-reward promise connected with product-in-use experience.
How many alternative ad themes should the advertiser create before making a
choice? The more ads that are independently created, the higher the probability offinding an excellent one. Yet the more time spent on creating alternative ads, thehigher the costs. Under the present commission system, the agency does not like to
go to the expense of creating and pretesting many ads. Fortunately, the expense ofcreating rough ads is rapidly falling due to computers. An ad agency’s creative department can compose many alternative ads in a short time by drawing from computer files containing still and video images, type sets, and so on.

Message Evaluation and Selection
A good ad normally focuses on one core selling proposition. Twedt suggested thatmessages be rated on desirability, exclusiveness, and believability.13 For example:■

The March of Dimes The March of Dimes searched for an advertising theme
to raise money for its fight against birth defects. Several messages came outof a brainstorming session. A group of young parents was asked to rate eachmessage for interest, distinctiveness, and believability, assigning up to 100
points for each. For example, “Seven hundred children are born each day witha birth defect” scored 70, 62, and 80 on interest, distinctiveness, and believability, whereas “Your next baby could be born with a birth defect” scored 58,
51, and 70. The first message outperformed the second on all accounts.14

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The advertiser should conduct market research to determine which appeal works
best with its target audience.

Message Execution
The message’s impact depends not only upon what is said but also on how it is said.
Some ads aim for rational positioning and others for emotional positioning. U.S. ads typically present an explicit feature or benefit designed to appeal to the rational mind: “getsclothes cleaner”; “Brings relief faster.” Japanese ads tend to be more indirect and appeal
to the emotions: An example was Nissan’s Infiniti ad, which showed not the car but
beautiful scenes from nature aimed at producing an emotional association and response.
The choice of headlines and copy can make a difference in impact. Lalita Manrai
created two ads for the same car. The first ad carried the headline “A New Car”; thesecond, the headline “Is This Car for You?” The second headline utilized an advertising strategy called labeling, in which the consumer is labeled as the type of person
who is interested in that type of product. The two ads also differed in that the firstad described the car’s features and the second described the car’s benefits. In the test,
the second ad far outperformed the first in terms of overall product impression, reader
interest in buying the product, and likelihood of recommending it to a friend.15
Message execution can be decisive for highly similar products, such as detergents,
cigarettes, coffee, and vodka. Consider the success of Absolut Vodka:■

Absolut Vodka Vodka is generally viewed as a commodity product. Yet theamount of brand preference and loyalty in the vodka market is astonishing.
Most of it is based on selling an image. When the Swedish brand Absolut entered the U.S. market in 1979, the company sold a disappointing 7,000 casesthat year. By 1991, sales had soared to over 2 million cases. Absolut became
the largest selling imported vodka in the United States, with 65 percent of
the market. Sales also skyrocketed globally. Its secret weapon: a targeting,packaging, and advertising strategy. Absolut aims for sophisticated, upwardly
mobile, affluent drinkers. The vodka is in a distinctive, odd-shaped bottle suggestive of Swedish austerity. The bottle has become an icon and is used as
the centerpiece of every ad, accompanied by puns such as “Absolut Magic”
or “Absolut Larceny.” Well-known artists—including Warhol, Haring, Scharf—
designed Absolut ads, and the bottle image always figures in a clever way. Absolut also runs short stories about the brand written by distinguished authors.
These ads are designed to appeal to readers of such magazines as The Atlantic,
The New Yorker, and Vanity Fair.16

In preparing an ad campaign, the advertiser usually prepares a copy strategy statement describing the objective, content, support, and tone of the desired ad. Here is
the strategy statement for a Pillsbury product called 1869 Brand Biscuits:■582

part fiveManaging and
Delivering Marketing
Programs

Pillsbury The advertising objective is to convince biscuit users they can buy
a canned biscuit that’s as good as homemade—Pillsbury’s 1869 Brand Biscuits. The content consists of emphasizing the following product characteristics: They look like, have the same texture as, and taste like homemade
biscuits. Support for the “good as homemade” promise will be twofold: (1)1869 Brand Biscuits are made from a special kind of flour used to make homemade biscuits but never before used in making canned biscuits, and (2) theuse of traditional American biscuit recipes. The tone of the advertising will bea news announcement, tempered by a warm, reflective mood emanating froma look back at traditional American baking quality.

Creative people must also find a cohesive style, tone, words, and format for executing the message.
Any message can be presented in a number of execution styles: slice of life, lifestyle,fantasy, mood or image, musical, personality symbol, technical expertise, scientificevidence, and testimonial. The Marketing Insight, “Celebrity Endorsements as a Strategy,” focuses on the use of testimonials, as does the following example:

M

A

R

K

E

T

I

N

G

I

N S I G H T

Celebrity Endorsements as a Strategy

From time immemorial,marketers have used celebrities to endorse
their products. A well-chosen celebrity can draw attention to a
product or brand, as when Sarah, Duchess of York better known
as Fergie shows how shes slimmed down thanks to Weight
Watchers. Or the celebrity s mystique can transfer to the brandBill Cosby entertains a group of kids while eating a bowl of Jell-O.
The choice of the celebrity is critical. The celebrity shouldhave high recognition, high positive affect, and high appropriateness to the product. The late Howard Cosell had high recognition but negative affect among many groups. Bruce Willis has
high recognition and high positive affect but might not be appropriate for advertising a World Peace Conference. Andy Griffith, Meryl Streep, and Oprah Winfrey could successfully advertisea large number of products because they have extremely highratings for well-knownness and likability (known as the Q factor
in the entertainment industry).
Athletes are a particularly effective group for endorsing athletic products, beverages, and apparel. The premier athlete endorser is Michael Jordan, former star of the Chicago Bulls. By
conservative estimates, Jordan earned about $240 million in endorsement money in the 1990s. Probably best known for his endorsements of Nikes athletic footwear and clothing, Jordan has
garnered revenues of $5.2 billion for Nike. The number of companies whose products MJ has promoted is legion.Among them
are Wilson, Coca-Cola, MCI, Johnson Products, McDonald s,
Quaker Oats, and Rayovac. Not only does Jordans image appear
in ads but the message is multiplied in the sales of T-shirts, toys,
games, and countless additional items. With it all, Jordan is dis-armingly modest. I never really envisioned myself having any
kind of major impact on people, he says. It s fun, but it s also a
lot of responsibility, and I don t take that lightly.
One of advertisers main worries is that their celebrity endorsers will get caught in a scandal or embarrassing situation.
Football hero O. J. Simpson pitched Hertz rental cars for 20 years
until he was charged with murdering his wife in 1994. Pepsi
dropped Michael Jackson in the wake of child molestation
charges. Cybill Shepherd embarrassed the Beef Council when
she admitted she had stopped eating beef.
Insurers are now selling policies to protect advertisers
against such risks. One insurance company offers death, disablement, and disgrace insurance to cover the failings andfoibles of their celebrity endorsers. Alternatively, advertisers canchoose to use spokescharacters. Owens-Corning has used thePink Panther for nearly 20 years to endorse its insulation products, and Metropolitan Life has used the Peanuts gang to promote its insurance policies. Another way advertisers protect
themselves is by using deceased celebrities. Through the wonders of technology, television viewers see screen legends John
Wayne pitching Coors beer and Fred Astaire dancing with a Dirt
Devil vacuum cleaner.
Some celebrities volunteer their endorsements. Recently,
beef critic Oprah Winfrey, junk-food junkie Rosie O Donnell, andportly Today Show weatherman Al Roker endorsed Boca-Burger,
meatless hamburger patties, without pay. After the Food andDrug Administration loosened long-standing restraints on television commercials for prescription drugs, Joan Lunden, former
host of ABC s Good Morning America, appeared in the first TV endorsement of a prescription drug, Claritin.

Sources: See Irving Rein, Philip Kotler, and Martin Scoller, The Making and Marketing of Professionals into Celebrities (Chicago: NTC Business Books, 1997); Roy S. Johnson and
Ann Harrington, The Jordan Effect, Fortune, June 22, 1998, pp. 130 38. Milt Freudenheim, Influencing Doctor s Orders, New York Times, November 17, 1998, p. C1.

■

Rogaine Testimonial advertising is used by Rogaine extra-strength for men,which promises to grow back an average of 45 percent more hair than its predecessor. Noted sports figures deliver testimonials in television ads. For example, Green Bay Packer football coach Mike Holmgren is seen prowling thesidelines during a Packers game, saying, “Every Sunday, I’ve got 60,000 friends
staring at my head.” After sneering at an old picture of himself with a noticeable bald spot, Holmgren adds, “Every hair’s a big win.” The Utah Jazzbasketball star Karl Malone testifies that he used Rogaine extra-strength forfive months and got good results. Manufacturer Pharmacia & Upjohn has increased its advertising budget from $30 million in 1997 to between $50 million and $60 million in 1998.17

The communicator must choose an appropriate tone for the ad. Procter & Gamble is consistently positive in its tone—its ads say something superlatively positive
about the product, and humor is almost always avoided so as not to take attention
away from the message. In contrast, ads for Staples office-supply superstores focus ona humorous situation rather than on the products themselves.
Memorable and attention-getting words must be found. The following themes listedon the left would have had much less impact without the creative phrasing on the right:18583

ThemeCreative Copy

7-Up is not a cola.
Let us drive you in our bus insteadof driving your car.
Shop by turning the pages of thetelephone directory.
We don’t rent as many cars, so wehave to do more for our customers.
Red Roof Inns offer inexpensive
lodging.

“The Un-Cola.”“Take the bus, and leave thedriving to us.”“Let your fingers do the walking.”“We try harder.”“Sleep cheap at Red Roof
Inns.”Creativity is especially required for headlines. There are six basic types of headlines: news (“New Boom and More Inflation Ahead . . . and What You Can Do AboutIt”); question (“Have You Had It Lately?”); narrative (“They Laughed When I Sat Down
at the Piano, but Then I Started to Play!”); command (“Don’t Buy Until You Try All
Three”); 1-2-3 ways (“12 Ways to Save on Your Income Tax”); and how-what-why (“WhyThey Can’t Stop Buying”).
Format elements such as ad size, color, and illustration will affect an ad’s impact
as well as its cost. A minor rearrangement of mechanical elements can improve attention-getting power. Larger-size ads gain more attention, though not necessarily by
as much as their difference in cost. Four-color illustrations increase ad effectivenessand ad cost. By planning the relative dominance of different elements, better delivery can be achieved. New electronic eye movement studies show that consumers canbe led through an ad by strategic placement of dominant elements.
A number of researchers into print advertisements report that the picture, headline,
and copy are important, in that order. The reader first notices the picture, and it must
be strong enough to draw attention. Then the headline must propel the person toread the copy. The copy itself must be well composed. Even then, a really outstand-584

ing ad will be noted by less than 50 percent of the exposed audience. About 30 percent of the exposed audience might recall the headline’s main point; about 25 percent might remember the advertiser’s name; and less than 10 percent will read mostof the body copy. Ordinary ads do not achieve even these results.
An industry study listed the following characteristics for ads that scored above average in recall and recognition: innovation (new product or new uses), “story appeal”(as an attention-getting device), before-and-after illustration, demonstrations, problem solution, and the inclusion of relevant characters that become emblematic of thebrand.19
In recent years critics have bemoaned the spate of bland ads and slogans and, inparticular, the frequent use of the nonreferential “it,” as in “Coke is it”; Nike’s popular “Just do it”; and the most egregious offender, Miller Lite’s short-lived ad proclaiming, “It’s it and that’s that.”20 Why do so many ads look or sound alike? Why
aren’t advertising agencies more creative? Norman W. Brown, former head of the advertising agency of Foote, Cone & Belding, says: “Many ads aren’t creative because
many companies want comfort, not creativity.”Social Responsibility Review
Advertisers and their agencies must be sure their “creative” advertising doesn’t overstep social and legal norms. Most marketers work hard to communicate openly andhonestly with consumers. Still, abuses occur, and public policy makers have developed a substantial body of laws and regulations to govern advertising.
Under U.S. law, companies must avoid false or deceptive advertising. Advertisers
must not make false claims, such as stating that a product cures something when it
does not. They must avoid false demonstrations, such as using sand-covered plexiglass instead of sandpaper to demonstrate that a razor blade can shave sandpaper. It
is illegal in the United States to create ads that have the capacity to deceive, eventhough no one may actually be deceived. For example, a floor wax cannot be advertised as giving six months’ protection unless it does so under typical conditions, anda diet bread cannot be advertised as having fewer calories simply because its slices arethinner. The problem is how to tell the difference between deception and “puffery”—
simple exaggerations not intended to be believed.
Sellers in the United States are legally obligated to avoid bait-and-switch advertising that attracts buyers under false pretenses. Suppose a seller advertises a sewing machine at $149. When consumers try to buy the advertised machine, the seller cannot
then refuse to sell it, downplay its features, show a faulty one, or promise unreasonable delivery dates in order to switch the buyer to a more expensive machine.21
To be socially responsible, advertisers must be careful not to offend ethnic groups,
racial minorities, or special-interest groups. Consider the following examples:22■

A Nynex spot was criticized by animal-rights activists because it showed a rabbit
colored with a blue dye.

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A commercial for Black Flag insecticide was altered after a veterans groupprotested the playing of Taps over dead bugs.

■

Ads for Calvin Klein apparel, featuring the waifish model Kate Moss, have comeunder attack from Boycott Anorexic Marketing.

Some companies have begun to build ad campaigns on a platform of social responsibility:■

Ethical Funds When people buy shares in Ethical Funds, they know thatfund managers won’t invest in corporations involved in the production of
military weapons, tobacco, nuclear power, and those with unfair employment
practices, poor environmental records, or companies that support reactionary
political regimes. A tough-talking advertising campaign for Ethical Funds
shows scenes of child labor and people dying from cancer, presumably causedby smoking. The ad asks, “Do you know where your money goes?”John Linthwaite, president of Vancouver-based Ethical Funds, Inc., says
its emphasis is on research. It digs deep to weed out companies that don’t585

meet its ethical standards while ensuring financially sound investments. Ethical Funds has grown from $100 million in assets to more than $2 billion
over the last decade.23

D EM CE IADSI UN RG I NO GN EMFEFDE ICAT IAVNE DN E S S
After choosing the message, the advertiser’s next task is to choose media to carry it.
The steps here are deciding on desired reach, frequency, and impact; choosing amongmajor media types; selecting specific media vehicles; deciding on media timing; anddeciding on geographical media allocation. Then the results of these decisions need
to be evaluated.

DECIDING ON REACH, FREQUENCY, AND IMPACT■Media selection involves finding the most cost-effective media to deliver
the desired number of exposures to the target audience.

What do we mean by the desired number of exposures? Presumably, the advertiser isseeking a certain response from the target audience—for example, a certain level ofproduct trial. The rate of product trial will depend, among other things, on the levelof audience brand awareness. Suppose the rate of product trial increases at a diminishing rate with the level of audience awareness, as shown in Figure 5-11 the advertiser seeks a product trial rate of (say) T*, it will be necessary to achieve a brandawareness level of A*.
The next task is to find out how many exposures, E*, will produce a level of audience awareness of A*. The effect of exposures on audience awareness depends onthe exposures’ reach, frequency, and impact:■

Reach (R): The number of different persons or households exposed to a particular
media schedule at least once during a specified time period.

■

Frequency (F): The number of times within the specified time period that an average person or household is exposed to the message.

■

Impact (I): The qualitative value of an exposure through a given medium (thus afood ad in Good Housekeeping would have a higher impact than in the Police
Gazette).

Figure 5-11 hows the relationship between audience awareness and reach. Audience awareness will be greater, the higher the exposures’ reach, frequency, and im-

F I G U R E

5-11(a) Relationship between producttrial rate and audienceawareness level586

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Trial

Awareness

Relationship Among Trial,
Awareness, and the Exposure
Function(b) Relationship between audienceawareness level and exposure
reach and frequency

T*

A*

A*

Awareness

Frequency = 5,
Impact = 1.5
Frequency = 5,
Impact = 1
Frequency = 3,
Impact = 1

E * Reachpact. The media planner recognizes important trade-offs among reach, frequency, andimpact. Suppose the planner has an advertising budget of $1,000,000 and the cost per
thousand exposures of average quality is $5. This means the advertiser can buy
200,000,000 exposures ($1,000,000 ⫼ [$5/1,000]). If the advertiser seeks an average
exposure frequency of 10, then the advertiser can reach 20,000,000 people(200,000,000 ⫼ 10) with the given budget. But if the advertiser wants higher-quality
media costing $10 per thousand exposures, it will be able to reach only 10,000,000
people unless it is willing to lower the desired exposure frequency.
The relationship between reach, frequency, and impact is captured in the following concepts:■

Total number of exposures (E): This is the reach times the average frequency; that
is, E ⫽ R ⫻ F. This measure is referred to as the gross rating points (GRP). If a given
media schedule reaches 80 percent of the homes with an average exposure frequency of 3, the media schedule is said to have a GRP of 240 (80 ⫻ 3). If another media schedule has a GRP of 300, it is said to have more weight, but wecannot tell how this weight breaks down into reach and frequency.

■

Weighted number of exposures (WE): This is the reach times average frequency
times average impact, that is WE ⫽ R ⫻ F ⫻ I.

The media planner has to figure out, with a given budget, the most cost-effective
combination of reach, frequency, and impact. Reach is most important when launching new products, flanker brands, extensions of well-known brands, or infrequently
purchased brands, or going after an undefined target market. Frequency is most important where there are strong competitors, a complex story to tell, high consumer
resistance, or a frequent-purchase cycle.24
Many advertisers believe a target audience needs a large number of exposures forthe advertising to work. Too few repetitions can be a waste, because they will hardly
be noticed. Others doubt the value of high ad frequency. They believe that after people see the same ad a few times, they either act on it, get irritated by it, or stop noticing it. Krugman asserted that three exposures to an advertisement might be enough:The first exposure is by definition unique. As with the initial exposure to anything,a “What is it?” type of cognitive response dominates the reaction. The second exposure to a stimulus . . . produces several effects. One may be the cognitive reaction thatcharacterized the first exposure, if the audience missed much of the message the firsttime around. . . . More often, an evaluative “What of it?” response replaces the “Whatis it?” response. . . . The third exposure constitutes a reminder, if a decision to buy
based on the evaluations has not been acted on. The third exposure is also the beginning of disengagement and withdrawal of attention from a completed episode.25
Krugman’s thesis favoring three exposures has to be qualified. He means three actual impressions or advertising exposures—the person sees the ad three times. These exposures should not be confused with vehicle exposures. If only half the magazine readerslook at magazine ads, or if the readers look at ads only every other issue, then the advertising exposure is only half of the vehicle exposures. Most research services estimate vehicle exposures, not ad exposures. A media strategist would have to buy more
vehicle exposures than three to achieve Krugman’s three “hits.”26 Another factor arguing for repetition is that of forgetting. The job of repetition is partly to put the message back into memory. The higher the forgetting rate associated with a brand, productcategory, or message, the higher the warranted level of repetition. But repetition is
not enough. Ads wear out and viewers tune out. Advertisers should not coast on atired ad but insist on fresh executions by their advertising agency. For example, Duracell can choose from more than 40 different versions of its basic ad.

CHOOSING AMONG MAJOR MEDIA TYPESThe media planner has to know the capacity of the major media types to deliver reach,frequency, and impact. The major advertising media along with their costs, advantages, and limitations are profiled in Table 5.7.

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T A B L E

5.7

Profiles of Major Media Types

MediumNewspapers

Advantages
Flexibility; timeliness; good local market coverage; broad acceptance; highbelievability

Limitations
Short life; poor reproduction quality;
small pass-along audience

Television

Combines sight, sound, and motion;
appealing to the senses; high attention; high reachHigh absolute cost; high clutter; fleeting exposure; less audience selectivity

Direct mailAudience selectivity; flexibility; no adcompetition within the same medium;
personalization

Relatively high cost; junk mail image

Radio

Mass use; high geographic and demographic selectivity; low cost

Audio presentation only; lower attention than television; nonstandardized
rate structures; fleeting exposure

Magazines

High geographic and demographic
selectivity; credibility and prestige;
high-quality reproduction; long life;
good pass-along readershipLong ad purchase lead time; somewaste circulation; no guarantee of position

OutdoorFlexibility; high repeat exposure; low
cost; low competition

Limited audience selectivity; creative
limitations

Yellow Pages

Excellent local coverage; high believability; wide reach; low cost

High competition; long ad purchaselead time; creative limitations

Newsletters

Very high selectivity; full control; interactive opportunities; relative low costs

Costs could run away

Brochures

Flexibility; full control; can dramatize
messages

Overproduction could lead to runaway costs

Telephone

Many users; opportunity to give a personal touch

Relative high cost unless volunteers
are used

Internet

High selectivity; interactive possibilities; relatively low cost

Relatively new media with a low number of users in some countries

Media planners make their choice among media categories by considering the following variables:

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Target-audience media habits: For example, radio and television are the most effective media for reaching teenagers.

■

Product: Women’s dresses are best shown in color magazines, and Polaroid cameras are best demonstrated on television. Media types have different potentials
for demonstration, visualization, explanation, believability, and color.

■

Message: A message announcing a major sale tomorrow will require radio, TV, or
newspaper. A message containing a great deal of technical data might require
specialized magazines or mailings.

■

Cost: Television is very expensive, whereas newspaper advertising is relatively inexpensive. What counts is the cost-per-thousand exposures.

Ideas about media impact and cost must be reexamined periodically. For a longtime, television was dominant in the media mix. Then researchers began to notice
television’s reduced effectiveness, which was due to increased commercial clutter (advertisers beamed shorter and more numerous commercials at the audience), increased“zipping and zapping” of commercials, and lower viewing owing to the growth in cable TV and VCRs. Furthermore, television advertising costs rose faster than other media costs. Several companies found that a combination of print ads and televisioncommercials often did a better job than television commercials alone.

Another reason for review is the continuous emergence of new media, such as advertorials and infomercials. Advertorials are print ads that offer editorial content andare difficult to distinguish from newspaper or magazine contents; infomercials are TV
commercials that appear to be 30-minute TV shows but are advertisements for products. Advertisers have substantially increased their spending on outdoor media overthe last decade. Outdoor advertising provides an excellent way to reach important local consumer segments. Cable television now reaches a majority of U.S. households
and produces billions of dollars in advertising revenue a year. Cable systems make iteasier to reach select groups.
Another promising new media site is the store itself. In addition to using older
promotional vehicles, such as displays and special price tags, some supermarkets are
selling space on their floors for company logos, experimenting with talking shelves,and introducing “videocarts,” which contain a computerized screen that carries
consumer-benefit information (“cauliflower is rich in vitamin C”) and advertiser promotions (“20¢ off on White Star Tuna this week”).
Ads also appear in best-selling paperback books, sports arenas, movie theaters, andmovie videotapes. Written material such as annual reports, data sheets, catalogs, andnewsletters increasingly carry ads. Many companies that send out monthly bills areincluding advertising inserts. Some companies mail audiotapes or videotapes that advertise their products to prospects. Here are some other emerging media:■

Digital magazines (or digizines): With names like Trouble & Attitude, Word, andLaunch, the latest magazines are not on the newsstand but are available on theInternet. Digizines are much cheaper to start up and operate than are print magazines. Starting a glossy publication for men aged 18 to 34 today would requireat least $10 million, whereas digizine start-up costs are between $200,000 and$500,000. Still to be worked out, however, is how to price them or earn money
through selling advertising.

■Interactive TV: Combined computer, telephone, and TV hookups have now madeit possible for people to participate in two-way communication with programs orinformation services via their television sets. Whereas home shopping networks
allow customers to call in their orders, interactive TV allows consumers to use acomputer keyboard to communicate directly with sellers on their TV screen. So
far interactive TV technology is only in the testing phase.

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Fax on demand: Used most by business marketers, fax-on-demand technology allows businesses to store information in a fax technology program. Customers
who need information call a toll-free number, and the fax program automatically589

faxes the information to them within 5 minutes. Customers can access the information 24 hours a day, 7 days a week. The service can be set up for as little as$1,000, and business marketers feel that the cost savings in postage alone areworth the investment.
Rust and Oliver see proliferation of new media as hastening the death of traditional mass-media advertising as we know it. They see a greater amount of direct
producer–consumer interaction, with benefits to both parties. Producers gain more information about their customers and can customize products and messages better;customers gain greater control because they can choose whether to receive an advertising message or not.27 See the Marketing for the Millennium “Advertising on the
Web: Companies Grab the Brass Ring.”
Given the abundant media, the media planner must first decide on how to allocate the budget to the major media types. In launching a new biscuit, Pillsbury might
decide to allocate $3 million to daytime network television, $2 million to women’smagazines, $1 million to daily newspapers in 20 major markets, and $50,000 to maintaining its home page on the Internet.

SELECTING SPECIFIC VEHICLESThe media planner must search for the most cost-effective media vehicles within eachchosen media type. The advertiser who decides to buy 30 seconds of advertising on
network television can pay $154,000 for a popular prime-time show such as Law andOrder, $650,000 for especially popular programs like Frasier and ER, or $1.3 million
for an event like the Super Bowl.28 The planner has to rely on media measurement
services that provide estimates of audience size, composition, and media cost.
Audience size has several possible measures:

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Circulation: The number of physical units carrying the advertising.

■

Audience: The number of people exposed to the vehicle. (If the vehicle has passon readership, then the audience is larger than circulation.)■

Effective audience: The number of people with target audience characteristics exposed to the vehicle.

■

Effective ad-exposed audience: The number of people with target audience characteristics who actually saw the ad.

Media planners calculate the cost per thousand persons reached by a vehicle. If a fullpage, four-color ad in Newsweek costs $84,000 and Newsweek’s estimated readership is
3 million people, the cost of exposing the ad to 1,000 persons is approximately $28.
The same ad in Business Week may cost $30,000 but reach only 775,000 persons—at
a cost per thousand of $39. The media planner ranks each magazine by cost per thousand and favors magazines with the lowest cost per thousand for reaching target consumers. The magazines themselves often put together a “reader profile” for theiradvertisers, summarizing the characteristics of the magazine’s readers with respect toage, income, residence, marital status, and leisure activities.
Several adjustments have to be applied to the cost-per-thousand measure. First,
the measure should be adjusted for audience quality. For a baby lotion ad, a magazine
read by 1 million young mothers would have an exposure value of 1 million; if readby 1 million old men, it would have almost a zero exposure value. Second, the exposure value should be adjusted for the audience-attention probability. Readers of Vogue
pay more attention to ads than do readers of Newsweek. Third, the exposure value
should be adjusted for the magazine’s editorial quality (prestige and believability).
Fourth, the exposure value should be adjusted for the magazine’s ad placement policies and extra services (such as regional or occupational editions and lead-time requirements).
Media planners are increasingly using more sophisticated measures of effectiveness and employing them in mathematical models to arrive at the best media mix.
Many advertising agencies use a computer program to select the initial media andthen make further improvements based on subjective factors.29

M A R K E T I N G

F O R

T H E

MILLENNIUM
clients include H&R Block, Reader s Digest, and MCI.Yoyodyne
designs games and contests (with prizes) that drive traffic toclient Web sites. Players must provide an e-mail address andchoose Web sites to visit or ads to view, which helps advertisers learn more about them. Yoyodyne, which was recently
bought by Yahoo!, signed up a million players in 1997.

Advertising on the Web: Companies Grab
the Brass Ring
All signs point to enormous growth in advertising on the Internet. In 1997, on-line advertising revenues reached $906.5 million
and are expected to reach $4.3 billion in the year 2000.The number of Web users has been expanding as well: Today 25 percentof Americans use the Internet daily, and the number is growing.
Web-based advertising will become an important part of acompany s media mix. Numerous companies are committing
large advertising budgets to the Internet. Amazon.com, an online book retailer, signed a $19 million contract with American
Online (AOL) to rent advertising space on AOLs home page.Clickon AOL and you can go directly to Amazon.coms Web site.
Yet many companies are reluctant to commit advertisingdollars to the Web. The reason: There is not yet a reliable way toanswer two fundamental questions: How many people visit a
Web site? and What types of people visit a Web site? With thesequestions unanswered, it is difficult to compare Internet advertising effectiveness relative to broadcast and print media. This
problem is currently being addressed by industry groups suchas the Coalition for Advertising Supported Information and Entertainment (CASIE) and the Interactive Advertising Bureau (IAB).
Why is the Internet becoming so attractive to certain advertisers? Some facts about the Web will help to answer thisquestion.
■

Increasingly, consumers would rather visit cyberspace thansit through a sitcom or watch their team lose again.This trend
directly challenges companies such as Procter & Gamble,
Unilever, Gillette, and many other mass marketers, many ofwhich spend as much as 80 percent of their ad budgets on
television.

■

Instead of an ad coming to a consumer, the consumer goesto the ad. Consider a company called Yoyodyne, whose■

Powerful search engines will soon allow consumers to searchfor products and bargains all across the Web. Junglee andC2B technologies are two e-commerce companies that aredeveloping such search engines. Junglees goal is to enableconsumers to comparison shop on a scale never before envisioned; C2B s shopping platform offers Web shoppers information on nearly a million products and connects themwith hundreds of merchants. What advertiser wouldn t wantto cash in on this bonanza?

■

The Internet allows vendors to build their products on demand, thus keeping inventory to a minimum. Dell Computers gives customers their choice of sound card, videoboard,
video monitor, speakers, and memory capacity from a pulldown menu on its Web site. Today Dell is selling $6 million
worth of products a day via its Web site and expects that 50
percent of its sales will be Web based by the end of 2000.

■

The Internet is not bound by geography: Amazon.com sells
20 percent of its books to foreign destinations, whereas aphysical bookstore serves an area of only a few square miles.

But the Web is not simply another medium; it s a profoundly different experience. It is a place to escape the incessant interruptions of everyday life. On-line advertisers used to talk aboutpush pushing your product through the channel. The Web,
however, is not about push; it s about pull. On-line consumers
can pull what they want out of cyberspace and leave the rest
behind. Web advertisers have to be creative enough to makethese consumers want to pull in their messages.

Sources: Gary Hamel and Jeff Sampler, The E-Corporation: More than Just Web-based, It s Building a New Industrial Order, Fortune, December 7, 1998, p. 80; Kim Cleland,Marketers Want Solid Data on Value of Internet Ad Buys, Advertising Age, August 3, 1998, p. S18; Xavier Dreze and Fred Zufryden, Is Internet Advertising Ready for Prime
Time? Journal of Advertising Research 38, no. 3 (1998): 7 18.

DECIDING ON MEDIA TIMINGIn choosing media, the advertiser faces a macroscheduling problem and a microscheduling problem.
The macroscheduling problem involves scheduling the advertising in relation toseasons and the business cycle. Suppose 70 percent of a product’s sales occur between
June and September. The firm can vary its advertising expenditures to follow the seasonal pattern, to oppose the seasonal pattern, or to be constant throughout the year.
Most firms pursue a seasonal policy. Yet consider this example:
Some years ago, a soft-drink manufacturer put more money into off-season advertising. This resulted in increased nonseasonal consumption of its

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brand, while not hurting seasonal consumption. Other soft-drink manufacturers started to do the same, with the net result that a more balanced consumption pattern occurred. The previous concentration of advertising had
created a self-fulfilling prophecy.
Forrester has proposed using his “industrial dynamics” methodology to test cyclical advertising policies.30 He believes that advertising has a delayed impact on consumer awareness; awareness has a delayed impact on factory sales; and factory sales
have a delayed impact on advertising expenditures. These time-lag relationships canbe studied and formulated mathematically into a computer-simulation model. The
model can simulate alternative timing strategies to assess varying impacts on company sales, costs, and profits. Rao and Miller also developed a lag (delay) model torelate a brand’s share to advertising and promotional expenditures on a market-bymarket basis. They tested their model successfully with 5 Lever brands in 15 districts,
relating market share to dollars spent on TV, print, price-off, and trade promotions.31
Kuehn developed a model to explore how advertising should be timed for frequently purchased, highly seasonal, low-cost grocery products.32 He showed that theappropriate timing pattern depends on the degree of advertising carryover and theamount of habitual behavior in customer brand choice. Carryover refers to the rate at
which the effect of an advertising expenditure wears out with the passage of time. A
carryover of 0.75 per month means that the current effect of a past advertising expenditure is 75 percent of its level in the previous month. Habitual behavior indicates
how much brand holdover occurs independent of the level of advertising. High habitual purchasing, say 0.90, means that 90 percent of the buyers repeat their brandchoice in the next period.
Kuehn found that when there is no advertising carryover or habitual purchasing,the decision maker is justified in using a percentage-of-sales rule to budget advertising. The optimal timing pattern for advertising expenditures coincides with the expected seasonal pattern of industry sales. But if there is advertising carryover or
habitual purchasing, it would be better to time advertising to lead sales. Advertisingexpenditures should peak before sales peak. Lead time should be greater, the higher
the carryover. Furthermore, the advertising expenditures should be steadier, the greater
the habitual purchasing.
The microscheduling problem calls for allocating advertising expenditures withina short period to obtain maximum impact.
Suppose the firm decides to buy 30 radio spots in the month of September. Figure 5-12 shows several possible patterns. The left side shows that advertising messages
for the month can be concentrated (“burst” advertising), dispersed continuously
throughout the month, or dispersed intermittently. The top side shows that the advertising messages can be beamed with a level, rising, falling, or alternating frequency.
The most effective pattern depends upon the communication objectives in relation to the nature of the product, target customers, distribution channels, and othermarketing factors. Consider the following cases:
A retailer wants to announce a preseason sale of ski equipment. She thinks
the target buyers need to hear the message only once or twice. Her objective
is to maximize reach, not frequency. She decides to concentrate the messages
on sale days at a level rate but to vary the time of day to avoid the same audiences. She uses pattern 1.
A muffler manufacturer-distributor wants to keep his name before thepublic. Yet he does not want his advertising to be too continuous because
only 3 to 5 percent of the cars on the road need a new muffler at any given
time. He chooses intermittent advertising. Furthermore, he recognizes that
Fridays are paydays, so he sponsors more messages on Friday. He uses pattern 12.

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The timing pattern should consider three factors. Buyer turnover expresses the rate
at which new buyers enter the market; the higher this rate, the more continuous theadvertising should be. Purchase frequency is the number of times during the period thatthe average buyer buys the product; the higher the purchase frequency, the more con-

F I G U R E
LevelRising

Falling

5-12Alternating

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

Classification of Advertising
Timing Patterns

Concentrated

Continuous

Number ofmessages
per monthIntermittent

Monthtinuous the advertising should be. The forgetting rate is the rate at which the buyer
forgets the brand; the higher the forgetting rate, the more continuous the advertising should be.
In launching a new product, the advertiser has to choose among ad continuity,
concentration, flighting, and pulsing. Continuity is achieved by scheduling exposuresevenly throughout a given period. Generally, advertisers use continuous advertisingin expanding market situations, with frequently purchased items, and in tightly defined buyer categories. Concentration calls for spending all the advertising dollars in asingle period. This makes sense for products with one selling season or holiday. Flighting calls for advertising for some period, followed by a hiatus with no advertising, followed by a second period of advertising activity. It is used when funding is limited,
the purchase cycle is relatively infrequent, and with seasonal items. Pulsing is continuous advertising at low-weight levels reinforced periodically by waves of heavier
activity. Pulsing draws upon the strength of continuous advertising and flights to create a compromise scheduling strategy.33 Those who favor pulsing feel that the audience will learn the message more thoroughly, and money can be saved.
■

Anheuser-Busch Anheuser-Busch’s research indicated that Budweiser could
substantially reduce advertising in a particular market and experience no adverse sales effect for at least a year and a half. Then the company could introduce a six-month burst of advertising and restore the previous growth rate.
This analysis led Budweiser to adopt a pulsing advertising strategy.

DECIDING ON GEOGRAPHICAL ALLOCATION
A company has to decide how to allocate its advertising budget over space as well asover time. The company makes “national buys” when it places ads on national TV
networks or in nationally circulated magazines. It makes “spot buys” when it buys TVtime in just a few markets or in regional editions of magazines. These markets arecalled areas of dominant influence (ADIs) or designated marketing areas (DMAs), and ads
reach a market 40 to 60 miles from a city center. The company makes “local buys”
when it advertises in local newspapers, radio, or outdoor sites. Consider the following example:

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Pizza Hut Pizza Hut levies a 4 percent advertising fee on its franchisees. It
spends half of its budget on national media and half on regional and local
media. Some national advertising is wasted because of low penetration in certain areas. Thus, even though Pizza Hut may have a 30 percent share of the
franchised pizza market nationally, this share may vary from 5 percent insome cities to 70 percent in others. The franchisees in the higher marketshare cities want much more advertising money spent in their areas. But Pizza
Hut doesn’t have enough money to cover the whole nation by region. National advertising offers efficiency but fails to address the different local situations effectively.

EVALUATING ADVERTISING EFFECTIVENESSGood planning and control of advertising depend on measures of advertising effectiveness. Yet the amount of fundamental research on advertising effectiveness is appallingly small. According to Forrester, “probably no more than 1⁄5 of 1% of total
advertising expenditure is used to achieve an enduring understanding of how to spend
the other 99.8%.”34
Most measurement of advertising effectiveness deals with specific ads and campaigns. Most of the money is spent by agencies on pretesting ads, and much less isspent on evaluating their effectiveness. A proposed campaign should be tested in one
or a few cities first and its impact evaluated before rolling it out nationally. One company tested its new campaign first in Phoenix. The campaign bombed, and the company saved all the money that it would have spent by going national.
Most advertisers try to measure the communication effect of an ad—that is, its
potential effect on awareness, knowledge, or preference. They would also like to measure the ad’s sales effect.

Communication-Effect ResearchCommunication-effect research seeks to determine whether an ad is communicating effectively. Called copy testing, it can be done before an ad is put into media and after
it is printed or broadcast.
There are three major methods of advertising pretesting. The direct rating methodasks consumers to rate alternative ads. These ratings are used to evaluate an ad’s attention, read-through, cognitive, affective, and behavior strengths (Figure 5-13). Although an imperfect measure of actual impact, a high rating indicates a potentiallymore effective ad. Portfolio tests ask consumers to view or listen to a portfolio of advertisements, taking as much time as they need. Consumers are then asked to recall
all the ads and their content, aided or unaided by the interviewer. Recall level indicates an ad’s ability to stand out and to have its message understood and remembered. Laboratory tests use equipment to measure physiological reactions—heartbeat,F I G U R E

5-13

Simplified Rating Sheet for Ads(Attention) How well does the ad catch the reader's attention?

(20)(Read-through) How well does the ad lead the reader to read further?

(20)(Cognitive) How clear is the central message or benefit?

(20)(Affective) How effective is the particular appeal?

(20)(Behavior) How well does the ad suggest follow-through action?

(20)
Total

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part fiveManaging and
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020
Poor Ad

40
Mediocre Ad

60
Average Ad

80Good Ad

100
Great Ad

For Print Ads. Starch and Gallup & Robinson, Inc. are two widely used print pretesting services. Test ads are placed in magazines, which are then circulated to consumers. These consumers are contacted later and interviewed. Recall and recognition tests are used to determine
advertising effectiveness. Starch prepares three readership scores: (1) noted, the percentage ofreaders who recall seeing the ad in the magazine; (2) seen or associated, the percentage whocorrectly identify the product and advertiser with the ad; and (3) read most, the percentage
who say they read more than half of the written material in the ad. Starch also furnishes data
showing the average read scores for each product class for the year, and separately for men
and women for each magazine, to enable advertisers to compare their ads to competitors ads.

T A B L E

5.8

Advertising Research Techniques

For Broadcast Ads. In-home tests: A videotape is taken into the homes of target consumers,
who then view the commercials.
Trailer tests: In a trailer in a shopping center, shoppers are shown the products and given an
opportunity to select a series of brands in a simulated shopping situation. Consumers thenview a series of commercials and are given coupons to be used in the shopping center. By
evaluating redemption, advertisers can estimate the commercials influence on purchase behavior.
Theatre tests: Consumers are invited to a theater to view a potential new television series alongwith some commercials. Before the show begins, the consumers indicate their preferred brands
in different categories. After the viewing, consumers are again asked to choose their preferredbrands in various categories. Preference changes are assumed to measure the commercials
persuasive power.
On-air tests: Tests are conducted on a regular TV channel. Respondents are recruited to watch
the program during the test commercial or are selected based on their having viewed theprogram. They are asked questions about commercial recall.

blood pressure, pupil dilation, perspiration—to an ad. These tests measure attentiongetting power but reveal nothing about impact on beliefs, attitudes, or intentions.
Table 5.8 describes some specific advertising research techniques.
Haley, Stafforoni, and Fox argue that current copy-testing methods have become
so familiar and well-established that it is easy to overlook their sizable limitations.
These methods tend to be excessively rational and verbal, and to rely primarily on
respondents’ playback in one form or another. They argue that marketers need totake more account of ads’ nonverbal elements, which can be very strong influenceson behavior.35
Advertisers are also interested in posttesting the overall communication impact of
a completed campaign. If a company hoped to increase brand awareness from 20 percent to 50 percent and succeeded in increasing it to only 30 percent, then the company is not spending enough, its ads are poor, or some other factor has been ignored.

Sales-Effect Research
What sales are generated by an ad that increases brand awareness by 20 percent andbrand preference by 10 percent? Advertising’s sales effect is generally harder to measure than its communication effect. Sales are influenced by many factors, such as the
product’s features, price, and availability, as well as competitors’ actions. The fewer ormore controllable these other factors are, the easier it is to measure effect on sales.
The sales impact is easiest to measure in direct-marketing situations and hardest tomeasure in brand or corporate-image-building advertising.
Companies are generally interested in finding out whether they are overspendingor underspending on advertising. One approach to answering this question is to workwith the formulation shown in Figure 5-14.
A company’s share of advertising expenditures produces a share of voice that earns
a share of consumers’ minds and hearts and ultimately a share of market. Peckham
studied the relationship between share of voice and share of market for several consumer products over a number of years and found a 1-to-1 ratio for established595

Share of
expenditures

products and a 1.5–2.0 to 1.0 ratio for new products.36 Using this information, suppose we observed the following data for three well-established firms selling an almost
identical product at an identical price:(1)
Advertising
Expenditure

(2)
Share
of
Voice

(3)
Share ofMarket(4)
Advertising
Effectiveness(column 3 ⴜcolumn 2)*A$2,000,000

57.1

40.0

70

B

1,000,000

28.6

28.6

100

C

500,000

14.3

31.4

220

Share ofvoice

Share ofmind andheart

Share ofmarketF I G U R E

5-14

Formula for Measuring Sales
Impact of Advertising*Note: An advertising effectiveness rating of 100 means an effective level of advertising expenditure. A rating below 100 meansa relatively ineffective advertising level; a level above 100 indicates a very effective advertising level.

Firm A spends $2 million of the industry’s total expenditures of $3.5 million, so
its share of voice is 57.1 percent. Yet its share of market is only 40 percent. By dividing its share of market by its share of voice, we get an advertising-effectiveness ratioof 70, suggesting that firm A is either overspending or misspending. Firm B is spending 28.6 percent of total advertising expenditures and has a 28.6 market share; theconclusion is that it is spending its money efficiently. Firm C is spending only 14.3
percent of the total and yet achieving a market share of 31.4 percent; the conclusion
is that it is spending its money superefficiently and should probably increase its expenditures.
Researchers try to measure the sales impact through analyzing either historical orexperimental data. The historical approach involves correlating past sales to past advertising expenditures using advanced statistical techniques. Palda studied the effectof advertising expenditures on the sales of Lydia Pinkham’s Vegetable Compound between 1908 and 1960.37 He calculated the short-term and long-term marginal sales
effects of advertising. The marginal advertising dollars increased sales by only $.50 in
the short term, suggesting that Pinkham spent too much on advertising. But the longterm marginal sales effect was three times as large. Palda calculated a posttax marginal rate of return on company advertising of 37 percent over the whole period.
Montgomery and Silk estimated the sales effectiveness of three communication
tools used in the pharmaceutical industry.38 A drug company spent 38 percent of its
communication budget on direct mail, 32 percent on samples and literature, and 29
percent on journal advertising. Yet the sales-effects research indicated that journal advertising, the least-used communication tool, had the highest long-run effectiveness,followed by samples and literature, and then by direct mail.
Other researchers use an experimental design to measure advertising’s sales impact.
Here is an example:■

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DuPont DuPont was one of the first companies to design advertising experiments. DuPont’s paint division divided 56 sales territories into high, average, and low market-share territories. DuPont spent the normal amount foradvertising in one-third of the group; in another third, two and one-half times
the normal amount; and in the remaining third, four times the normal
amount. At the end of the experiment, DuPont estimated how much in extra sales was created by higher levels of advertising expenditure. DuPont foundthat higher advertising expenditure increased sales at a diminishing rate andthat the sales increase was weaker in DuPont’s high-market-share territories.39

In allocating an advertising budget geographically, the company should consider
area differences in market size, advertising response, media efficiency, competition,and profit margins. Urban developed a media allocation model that uses these geographic variables to allocate the advertising budget.40 A growing number of companies are striving to measure the sales effect of advertising expenditures instead ofsettling only for communication-effect measures. Millward Brown International has

conducted tracking studies in the United Kingdom for many years to provide information to help advertisers decide whether their advertising is benefiting their brand.41

A Summary of Current Research
Professional researchers have drawn some general conclusions that are useful to marketers.42■

The impact of advertising on brand switching: Tellis analyzed household purchasesof 12 key brands of a frequently purchased consumer product and concluded
that advertising appears effective in increasing the volume purchased by loyal
buyers but less effective in winning new buyers. Advertising appears unlikely tohave some cumulative effect that leads to loyalty; rather, features, displays, andespecially price have a stronger impact on response than does advertising.43
These findings did not sit well with the advertising community, and several people attacked Tellis’s data and methodology. A set of controlled experiments by
the research firm IRI found advertising’s impact is grossly underestimated when
only a one-year perspective is employed because of lagged effects.

■

The effect of surroundings: Ads may be more effective when their message is congruent with their surroundings. A “happy” commercial placed within an upbeat
television show is more likely to be effective than a downbeat commercial in thesame place.44 In addition, people are more likely to believe a TV or radio ad andto become more positively disposed toward the brand when the ad is placed
within a program they like.45■

The effect of positive versus negative messages: Consumers may sometimes respond
more to negative messages than to positive messages. For example, a credit-card
company contacted customers who did not use the card for three months. To
one group of nonusers it sent a message explaining the benefits of using thecard. To another group it sent a message explaining the losses they could suffer
by not using the card. The impact of the loss-oriented message was muchstronger: The percentage of customers who started to use the card in the loss
condition was more than double and the charges of the former customers weremore than twice that of the positive message receivers.46

S

ALES PROMOTION

Sales promotion is a key ingredient in marketing campaigns. We define it as follows:■

Sales promotion consists of a diverse collection of incentive tools, mostly
short term, designed to stimulate quicker or greater purchase of particular
products or services by consumers or the trade.47

Whereas advertising offers a reason to buy, sales promotion offers an incentive to buy.
Sales promotion includes tools for consumer promotion (samples, coupons, cash refund
offers, prices off, premiums, prizes, patronage rewards, free trials, warranties, tie-in
promotions, cross-promotions, point-of-purchase displays, and demonstrations); tradepromotion (prices off, advertising and display allowances, and free goods); and business- and sales force promotion (trade shows and conventions, contests for sales reps,and specialty advertising).
Sales-promotion tools are used by most organizations, including manufacturers,
distributors, retailers, trade associations, and nonprofit organizations. Churches, forexample, often sponsor bingo games, theater parties, testimonial dinners, and raffles.
A decade ago, the advertising-to-sales-promotion ratio was about 60:40. Today, inmany consumer-packaged-goods companies, sales promotion accounts for 65 to 75
percent of the combined budget. Sales-promotion expenditures have been increasing
as a percentage of budget expenditure annually for the last two decades.
Several factors contribute to the rapid growth of sales promotion, particularly inconsumer markets.48 Internal factors include the following: Promotion is now more597

accepted by top management as an effective sales tool; more product managers are
qualified to use sales-promotion tools; and product managers are under greater pressure to increase current sales. External factors include the following: The number ofbrands has increased; competitors use promotions frequently; many brands are seen
as similar; consumers are more price-oriented; the trade has demanded more deals
from manufacturers; and advertising efficiency has declined because of rising costs,
media clutter, and legal restraints.
The rapid growth of sales-promotion media has created a situation of promotion
clutter similar to advertising clutter. Consumers might start tuning out, in which casecoupons and other promotion media will weaken in their ability to trigger purchase.
Manufacturers will have to find ways to rise above the clutter—for instance, by offering larger coupon-redemption values or using more dramatic point-of-purchase displays or demonstrations.

PURPOSE OF SALES PROMOTION
Sales-promotion tools vary in their specific objectives. A free sample stimulates consumer trial, whereas a free management-advisory service aims at cementing a longterm relationship with a retailer.
Sellers use incentive-type promotions to attract new triers, to reward loyal customers, and to increase the repurchase rates of occasional users. New triers are of three
types—users of another brand in the same category, users in other categories, and frequent brand switchers. Sales promotions often attract the brand switchers, because
users of other brands and categories do not always notice or act on a promotion.
Brand switchers are primarily looking for low price, good value, or premiums. Sales
promotions are unlikely to turn them into loyal users. Sales promotions used in markets of high brand similarity produce a high sales response in the short run but little
permanent gain in market share. In markets of high brand dissimilarity, sales promotions can alter market shares permanently.
Today, many marketing managers first estimate what they need to spend in tradepromotion, then what they need to spend in consumer promotion. Whatever is leftthey will budget for advertising. There is a danger, however, in letting advertising takea back seat to sales promotion because advertising typically acts to build brand loyalty. But the question of whether or not sales promotion weakens brand loyalty is
subject to different interpretations. Sales promotion, with its incessant prices off,
coupons, deals, premiums, and blaring quality, may devalue the product offering in
the buyers’ minds. Buyers learn that the list price is largely a fiction. But before jumping to any conclusion, we need to distinguish between price promotions and addedvalue promotions. These examples show how certain types of sales promotion canactually enhance brand image:598

part fiveManaging and
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The makers of Pine-Sol, a general liquid cleaning agent, ran a “Pine-Sol in Pine
Valley” sweepstakes in which Pine Valley was the habitat of the TV soap opera
All My Children. Sweepstake winners would travel to Los Angeles to meet thestars and watch four days of filming. This association of an ordinary cleaning
agent with glamorous stars enhanced the brand image of Pine-Sol.

■

Toro, a major manufacturer of lawn mowers and snowblowers, wanted to sell its
snowblowers in early September. Knowing that most people would wait to buy
until the first snow, Toro offered to include Toro Snow Insurance: The company
promised to send a rebate of $50 to each September buyer if it didn’t snow before January. This sales promotion did not hurt, and may have helped, Toro’s
brand image.

■

Häagen-Dazs ran a cents-off sales promotion called Sweet Charity where theprice savings would be contributed to support public television. This offer enhanced the Häagen-Dazs image by making Häagen-Dazs “a patron of the arts.”■

Akai, a Japanese manufacturer of stereo equipment and TV sets, managed to become a TV set market leader in India by running value-added sales promotions.
It offered good trade-in value on black-and-white TV sets at the purchase of anew color TV set. At other times, it would offer a free watch, or calculator or radio, along with the purchase of a new TV set. This steady promotion made Akaia very popular brand in India, and competitors such as Sony were not free tocompete in the same way.
But usually, when a brand is price promoted too often, the consumer begins todevalue it and buy it mainly when it goes on sale. So there is risk in putting a wellknown brand leader on promotion over 30 percent of the time.49 Dominant brands
offer deals less frequently, because most deals only subsidize current users. Brown’s
study of 2,500 instant coffee buyers concluded that:■

Sales promotions yield faster and more measurable responses in sales than advertising does.

■

Sales promotions do not tend to yield new, long-term buyers in mature markets
because they attract mainly deal-prone consumers who switch among brands as
deals become available.

■

Loyal brand buyers tend not to change their buying patterns as a result of competitive promotion.

■

Advertising appears to be capable of deepening brand loyalty.50

There is also evidence that price promotions do not build permanent total categoryvolume.
Small-share competitors find it advantageous to use sales promotion, because theycannot afford to match the market leaders’ large advertising budgets. Nor can theyobtain shelf space without offering trade allowances or stimulate consumer trial without offering incentives. Price competition is often used by a small brand seeking toenlarge its share, but it is less effective for a category leader whose growth lies in expanding the entire category.51
The upshot is that many consumer-packaged-goods companies feel they are forced
to use more sales promotion than they wish. Kellogg, Kraft, and other market leaders are trying to return to “pull” marketing by increasing their advertising budgets.
They blame the heavy use of sales promotion for decreasing brand loyalty, increasing
consumer price sensitivity, brand-quality-image dilution, and a focus on short-run
marketing planning.
Farris and Quelch, however, dispute this conclusion.52 They counter that sales promotion provides a number of benefits that are important to manufacturers as well as
consumers. Sales promotions enable manufacturers to adjust to short-term variations
in supply and demand. They enable manufacturers to test how high a list price they
can charge, because they can always discount it. They induce consumers to try new
products instead of never straying from current ones. They lead to more varied retail
formats, such as the everyday-low-price store and the promotional-pricing store. They
promote greater consumer awareness of prices. They permit manufacturers to sell morethan they would normally sell at the list price. They help the manufacturer adapt programs to different consumer segments. Consumers themselves enjoy some satisfaction from being smart shoppers when they take advantage of price specials.

MAJOR DECISIONS IN SALES PROMOTION
In using sales promotion, a company must establish its objectives, select the tools,
develop the program, pretest the program, implement and control it, and evaluate
the results.

Establishing Objectives
Sales-promotion objectives are derived from broader promotion objectives, which arederived from more basic marketing objectives developed for the product. The specificobjectives for sales promotion vary with the target market. For consumers, objectives
include encouraging purchase of larger-size units, building trial among nonusers, andattracting switchers away from competitors’ brands. For retailers, objectives include
persuading retailers to carry new items and higher levels of inventory, encouraging

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M A R K E T I N G

memo

Sales Promotions as
Brand Builders
Building brand awareness is a long-term
process. What a brand does today predicts
what it will do tomorrow.Sales promotions
are short term and temporary,whether they
are a price reduction, a tie-in with anotherbrand, a coupon, or some other incentive.
Here are some tips on how to make a sales
promotion an effective brand-building tool.
■

Make sure the promotion is justified: A
new store opening, a company anniversary, and other kinds of celebrations are all good reasons for runninga promotion.They put the brand namein the forefront. Celebrating spring orback-to-school time are not good reasons to run a promotion; they are too
generic.

■

Tie the promotion to a brand’s image:
Birth dates and anniversaries are good.
For example, Häagen-Dazs could run apromotion on or around July 9 for its
Dulce de Leche ice cream to coincidewith Argentine National Day. (The flavor and name originated in Argentina.)■

Look at every promotion both for thesales job it can do and as a communications tool: A promotion is one of abrand’s many voices; it can help build
brand awareness if it says the rightthings. For example, Bayer aspirin
could run a coupon promotion, thus
offering a price reduction, and use thepromotion to reinforce the name
Bayer.

Source: Adapted from Jacques Chevron,“Branding
and Promotion:Uneasy Cohabitation,”Brandweek,
September 14, 1998, p. 24.

off-season buying, encouraging stocking of related items, offsetting competitive promotions, building brand loyalty, and gaining entry into new retail outlets. For thesales force, objectives include encouraging support of a new product or model, encouraging more prospecting, and stimulating off-season sales.53 See the Marketing
Memo “Sales Promotions as Brand Builders.”

Selecting Consumer-Promotion Tools
The promotion planner should take into account the type of market, sales-promotion
objectives, competitive conditions, and each tool’s cost effectiveness.
The main consumer-promotion tools are summarized in Table 5.9. We can distinguish between manufacturer promotions and retailer promotions. The former are illustrated by the auto industry’s frequent use of rebates, gifts to motivate test-drives
and purchases, and high-value trade-in credit. The latter include price cuts, featureadvertising, retailer coupons, and retailer contests or premiums. We can also distinguish between sales-promotion tools that are “consumer-franchise building,” which
reinforce the consumer’s brand understanding, and those that are not. The former impart a selling message along with the deal, as in the case of free samples, coupons
when they include a selling message, and premiums when they are related to the
product. Sales-promotion tools that are not consumer-franchise building include priceoff packs, consumer premiums not related to a product, contests and sweepstakes,
consumer refund offers, and trade allowances.
Sales promotion seems most effective when used together with advertising. In one
study, a price promotion alone produced only a 15 percent increase in sales volume.
When combined with feature advertising, sales volume increased 19 percent; whencombined with feature advertising and a point-of-purchase display, sales volume increased 24 percent.54
Many large companies have a sales-promotion manager whose job is to help brandmanagers choose the right promotional tool. The following example shows how one
firm determined the appropriate tool:
A firm launched a new product and achieved a 20 percent market sharewithin six months. Its penetration rate (the percentage of the target market
that purchased the brand at least once) is 40 percent. Its repurchase rate (thepercentage of first-time triers who repurchased the brand one or more times)
is 10 percent. This firm needs to create more loyal users. An in-pack coupon
would be appropriate to build repeat purchase. But if the repurchase rate has
been high, say 50 percent, then the company should try to attract more newtriers. Here a mailed coupon might be appropriate.

Selecting Trade-Promotion Tools
Manufacturers use a number of trade-promotion tools (Table 5.10). Surprisingly, ahigher proportion of the promotion pie is devoted to trade-promotion tools (46.9 percent) than to consumer promotion (27.9 percent), with media advertising capturing
the remaining 25.2 percent. Manufacturers award money to the trade for four reasons:
1. To persuade the retailer or wholesaler to carry the brand: Shelf space is so scarcethat manufacturers often have to offer prices off, allowances, buyback guarantees, free goods, or outright payments (called slotting allowances) to get on
the shelf, and once there, to stay on the shelf.
2. To persuade the retailer or wholesaler to carry more units than the normal amount:
Manufacturers will offer volume allowances to get the trade to carry more in
warehouses and stores. Manufacturers believe the trade will work harderwhen they are “loaded” with the manufacturer’s product.

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3. To induce retailers to promote the brand by featuring, display, and price reductions:
Manufacturers might seek an end-of-aisle display, increased shelf facings, or
price reduction stickers and obtain them by offering the retailers allowances
paid on “proof of performance.”Samples: Offer of a free amount of a product or service delivered door to door, sent in themail, picked up in a store, attached to another product, or featured in an advertising offer. Example: Lever Brothers had so much confidence in its new Surf detergent that it distributed
free samples to four out of five U.S. households at a cost of $43 million.

T A B L E

5.9

Major Consumer-Promotion Tools

Coupons: Certificates entitling the bearer to a stated saving on the purchase of a specificproduct: mailed, enclosed in other products or attached to them, or inserted in magazine andnewspaper ads. Redemption rate varies with mode of distribution. Coupons can be effectivein stimulating sales of a mature brand and inducing early trial of a new brand. Example: P&G
broke into the Pittsburgh market with its Folger s brand of coffee by offering a 35 cent discount coupon on a one-pound can mailed to area homes and a coupon in the coffee can for
10 cents off.
Cash Refund Offers (rebates): Provide a price reduction after purchase rather than at theretail shop: consumer sends a specified proof of purchase to the manufacturer who refunds
part of the purchase price by mail. Example: Toro ran a clever preseason promotion on specific snowblower models, offering a rebate if the snowfall in the buyer s market area was below average.
Price Packs (cents-off deals): Offers to consumers of savings off the regular price of a product, flagged on the label or package. A reduced-price pack is a single package sold at a reduced
price (such as two for the price of one). A banded pack is two related products banded together (such as a toothbrush and toothpaste). Example: Air freshener companies sometimes
package several types of air fresheners together: for example, a spray mist, carpet deodorizer,
and solid air freshener.
Premiums (gifts): Merchandise offered at a relatively low cost or free as an incentive to purchase a particular product. A with-pack premium accompanies the product inside or on the
package. The package itself can serve as a premium. A free in-the-mail premium is mailed toconsumers who send in a proof of purchase, such as a box top or UPC code. A self-liquidating
premium is sold below its normal retail price to consumers who request it. Example: Quaker
Oats inserted $5 million in gold and silver coins in bags of Ken-L Ration dog food.
Prizes (contests, sweepstakes, games): Prizes are offers of the chance to win cash, trips, or
merchandise as a result of purchasing something. A contest calls for consumers to submit anentry to be examined by a panel of judges who will select the best entries. A sweepstake asks
consumers to submit their names in a drawing. A game presents consumers with something
every time they buy bingo numbers, missing letters which might help them win a prize.
Example: A British cigarette company included a lottery ticket in each pack providing thechance to win up to $10,000.
Patronage Awards: Values in cash or in other forms that are proportional to patronage of a certain vendor or group of vendors. Example: Most airlines offer frequent flier plans. Marriott hotels
has adopted an honored guest plan that awards points for users of its hotels.
Free Trials: Inviting prospective purchasers to try the product without cost in the hope thatthey will buy the product. Example: Auto dealers encourage free test-drives to stimulate purchase interest; America Online offers free trials of its software.
(continued)

4. To stimulate retailers and their sales clerks to push the product: Manufacturers
compete for retailer sales effort by offering push money, sales aids, recognition programs, premiums, and sales contests.
Manufacturers spend more on trade promotion than they want to spend. The
growing power of large retailers has increased their ability to demand trade promotion at the expense of consumer promotion and advertising.55 These retailers dependon promotion money from the manufacturers. No manufacturer could unilaterally
stop offering trade allowances without losing retailer support.
The company’s sales force and its brand managers are often at odds over trade promotion. The sales force says that the local retailers will not keep the company’s

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T A B L E

5.9 (cont.)

Major Consumer-Promotion Tools

Product Warranties: Explicit or implicit promises by sellers that the product will perform as
specified or that the seller will fix it or refund the customer s money during a specified period.
Example: When Chrysler offered a five-year car warranty, substantially longer than GMs or Ford s,
customers took notice. Searss offer of a lifetime warranty on its auto batteries certainly screams
quality to the buyers.
Tie-in Promotions: Two or more brands or companies team up on coupons, refunds, andcontests to increase pulling power. Multiple sales forces push these promotions to retailers,
giving them a better shot at extra display and ad space. Example: MCI has offered 10 minutesof free long-distance service on cans of Crystal Light powdered soft drinks and Taster s Choicecoffee, and boxes of Keebler cookies and crackers.
Cross-Promotions: Using one brand to advertise another noncompeting brand. Example:
Nabisco cookies might advertise that they contain Hershey chocolate chips, and the box may
even contain a coupon to buy a Hershey product.
Point-of-Purchase (POP) Displays and Demonstrations: POP displays and demonstrations
take place at the point of purchase or sale. Many retailers do not like to handle the hundredsof displays, signs, and posters they receive from manufacturers. Manufacturers are creating better POP materials, tying them in with television or print messages, and offering to set them up.
Example: The L Eggs pantyhose display is one of the most creative in the history of POP materials and has been a major factor in the success of this brand.
Sources: For more information, see Consumer Incentive Strategy Guide, Incentive, May 1995, pp. 58 63; William Urseth,Promos 101, Incentive, January 1994, pp. 53 55; William Urseth, Promos 101, Part II, Incentive, February 1994, pp. 43 45;
Jonathan Berry, Wilma! What Happened to the Plain Old Ad? Business Week, June 6, 1994, pp. 54 58; Kapil Bawa, Srini S.
Srinivasan, and Rajendra K. Srivastava, Coupon Attractiveness and Coupon Proneness: A Framework for Modeling Coupon
Redemption, Journal of Marketing Research, November 1997, pp. 517 25.

products on the shelf unless they receive more trade-promotion money, whereas thebrand managers want to spend the limited funds on consumer promotion and advertising. Because the sales force knows the local market better than do the brandmanagers sitting at headquarters, companies have given substantial funds to the sales
force to handle.
Manufacturers face several challenges in managing trade promotions. First, theyoften find it difficult to police retailers to make sure they are doing what they agreed
to do. Manufacturers are increasingly insisting on proof of performance before paying any allowances. Second, more retailers are doing forward buying—that is, buying
a greater quantity during the deal period than they can sell during the deal period.
Retailers might respond to a 10 percent off-case allowance by buying a 12-week orlonger supply. The manufacturer has to schedule more production than planned andbear the costs of extra work shifts and overtime. Third, retailers are doing more diverting, buying more cases than needed in a region in which the manufacturer offered

T A B L E

5.10

Major Trade-Promotion Tools

Price-Off (off-invoice or off-list): A straight discount off the list price on each case purchased during a stated time period. The offer encourages dealers to buy a quantity or carry a
new item that they might not ordinarily buy. The dealers can use the buying allowance for immediate profit, advertising, or price reductions.
Allowance: An amount offered in return for the retailer s agreeing to feature the manufacturer s products in some way. An advertising allowance compensates retailers for advertising
the manufacturer s product. A display allowance compensates them for carrying a special product display.

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Free Goods: Offers of extra cases of merchandise to intermediaries who buy a certain quantity or who feature a certain flavor or size. Manufacturers might offer push money or free specialty advertising items to retailers that carry the company s name.
Source: For more information, see Betsy SPethman, Trade Promotion Redefined, Brandweek, March 13, 1995, pp. 25 32.

a deal and shipping the surplus to their stores to nondeal regions. Manufacturers aretrying to handle forward buying and diverting by limiting the amount they will sell
at a discount, or producing and delivering less than the full order in an effort tosmooth production.56
All said, manufacturers feel that trade promotion has become a nightmare. It contains layers of deals, is complex to administer, and often leads to lost revenues. Kevin
Price describes trade promotion in the following way:
A decade ago, the retailer was a chihuahua nipping at the manufacturer’s heels—a nuisance, yes, but only a minor irritant; you fed it and it went away. Today it’sa pit bull and it wants to rip your arms and legs off. You’d like to see it roll over,
but you’re too busy defending yourself to even try. . . . Today management of tradepromotions is a president-level issue.57

Selecting Business- and Sales Force Promotion Tools
Companies spend billions of dollars on business- and sales force promotion tools (Table
5.11). These tools are used to gather business leads, impress and reward customers,
and motivate the sales force to greater effort. Companies typically develop budgets
for each business-promotion tool that remain fairly constant from year to year.

Developing the Program
In planning sales-promotion programs, marketers are increasingly blending several
media into a total campaign concept. Kerry E. Smith describes a complete salespromotion program:
A sports trivia game to create pull-through at taverns for a premium beer brandwould use TV to reach consumers, direct mail to incentivize distributors, point-ofpurchase for retail support, telephones for consumer call-ins, a service bureau forcall processing, live operators for data entry, and computer software and hardware

Trade Shows and Conventions: Industry associations organize annual trade shows and conventions. Firms selling products and services to the particular industry buy space and set up
booths and displays to demonstrate their products. Over 5,600 trade shows take place every
year, drawing approximately 80 million attendees. Trade show attendance can range from a
few thousand people to over 70,000 for large shows held by the restaurant or hotel motel industries. Participating vendors expect several benefits, including generating new sales leads,
maintaining customer contacts, introducing new products, meeting new customers, selling
more to present customers, and educating customers with publications, videos, and other audiovisual materials.
Business marketers may spend as much as 35 percent of their annual promotion budget
on trade shows. They face a number of decisions, including which trade shows to participate
in, how much to spend on each trade show, how to build dramatic exhibits that attract attention, and how to follow up effectively on sales leads.

T A B L E

5.11

Major Business- and Sales-Force
Promotion Tools

Sales Contests: A sales contest aims at inducing the sales force or dealers to increase theirsales results over a stated period, with prizes going to those who succeed. A majority of companies sponsor annual or more frequent sales contests for their sales force; top performers
may receive trips, cash prizes, gifts, or points, which the receiver can turn into a variety of prizes.
Incentives work best when they are tied to measurable and achievable sales objectives (suchas finding new accounts or reviving old accounts) where employees feel they have an equalchance.
Specialty Advertising: Specialty advertising consists of useful, low-cost items bearing
the company s name and address, and sometimes an advertising message that salespeople
give to prospects and customers. Common items are ballpoint pens, calendars, and memopads. One survey indicated that over 86 percent of manufacturers supply their salespeople
with specialty items.
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to tie it all together. . . . Companies use telepromotions not only to pull productthrough at retail but also to identify customers, generate leads, build databases anddeliver coupons, product samples and rebate offers.58
In deciding to use a particular incentive, marketers have several factors to consider. First, they must determine the size of the incentive. A certain minimum is necessary if the promotion is to succeed. A higher incentive level will produce more sales
response but at a diminishing rate.
Second, the marketing manager must establish conditions for participation. Incentives might be offered to everyone or to select groups. A premium might be offered
only to those who turn in proof-of-purchase seals or UPC codes. Sweepstakes might
not be offered in certain states or to families of company personnel or to persons under a certain age.
Third, the marketer has to decide on the duration of promotion. If the period is
too short, many prospects will not be able to take advantage of it. If the promotion
runs too long, the deal will lose some of its “act now” force. According to one researcher, the optimal frequency is about three weeks per quarter, and optimal duration is the length of the average purchase cycle.59 Of course, the optimal promotion
cycle varies by product category and even by specific product.
Fourth, the marketer must choose a distribution vehicle. A fifteen-cents-off coupon
can be distributed in the package, in stores, by mail, or in advertising. Each distribution method involves a different level of reach, cost, and impact.
Fifth, the marketing manager must establish the timing of promotion. For example, brand managers develop calendar dates for annual promotions. These dates areused by the production, sales, and distribution departments.
Finally, the marketer must determine the total sales-promotion budget. The budget
can be built from the ground up, with the marketer choosing the individual promotions and estimating their total cost. The cost of a particular promotion consists of
the administrative cost (printing, mailing, and promoting the deal) and the incentive
cost (cost of premium or cents-off, including redemption costs), multiplied by the expected number of units that will be sold on the deal. In the case of a coupon deal,
the cost would take into account the fact that only a fraction of the consumers willredeem the coupons. For an in-pack premium, the deal cost must include the procurement cost and packaging of the premium, offset by any price increase on the
package.
The more common way to develop the budget is to use a conventional percentageof the total promotion budget. For example, toothpaste might get a sales-promotion
budget of 30 percent of the total promotion budget, whereas shampoo might get 50
percent. These percentages vary for different brands in different markets and are influenced by stage of the product life cycle and competitive expenditures on promotion.

Pretesting the Program
Although most sales-promotion programs are designed on the basis of experience,pretests should be conducted to determine if the tools are appropriate, the incentive
size optimal, and the presentation method efficient. Strang maintains that promotions usually can be tested quickly and inexpensively and that large companies should
test alternative strategies in selected market areas with each national promotion.60
Consumers can be asked to rate or rank different possible deals, or trial tests can be
run in limited geographic areas.

Implementing and Controlling the Program

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Marketing managers must prepare implementation and control plans for each individual promotion. Implementation planning must cover lead time and sell-in time.
Lead time is the time necessary to prepare the program prior to launching it: initialplanning, design, and approval of package modifications or material to be mailed or
distributed; preparation of advertising and point-of-sale materials; notification of fieldsales personnel; establishment of allocations for individual distributors; purchasing
and printing of special premiums or packaging materials; production of advance in-ventories in preparation for release at a specific date; and, finally, the distribution to
the retailer.61
Sell-in time begins with the promotional launch and ends when approximately 95
percent of the deal merchandise is in the hands of consumers.

Evaluating Results
Manufacturers can use three methods to measure sales-promotion effectiveness: salesdata, consumer surveys, and experiments.
The first method involves using scanner sales data, which are available from companies such as Information Resources Inc. and Nielsen Media Research. Marketers cananalyze the types of people who took advantage of the promotion, what they bought
before the promotion, and how consumers behaved later toward the brand and otherbrands. Suppose a company has a 6 percent market share in the prepromotion period. The share jumps to 10 percent during the promotion, falls to 5 percent immediately after the promotion, and rises to 7 percent in the postpromotion period. The
promotion evidently attracted new triers and also stimulated more purchasing byexisting customers. After the promotion, sales fell as consumers worked down theirinventories. The long-run rise to 7 percent indicates that the company gained somenew users.
In general, sales promotions work best when they attract competitors’ customers
to try a superior product and these customers switch as a result. If the company’s
product is not superior, the brand’s share is likely to return to its prepromotion level.
The promotion may have covered its costs, but more likely did not. One study ofmore than 1,000 promotions concluded that only 16 percent paid off.62
If more information is needed, consumer surveys can be conducted to learn how
many recall the promotion, what they thought of it, how many took advantage of it,
and how the promotion affected subsequent brand-choice behavior.63 Sales promotions can also be evaluated through experiments that vary such attributes as incentive
value, duration, and distribution media. For example, coupons can be sent to half ofthe households in a consumer panel. Scanner data can be used to track whether the
coupons led more people to buy the product immediately and in the future. This information can then be used to calculate the increase in revenues that stemmed fromthe promotion.
Beyond the cost of specific promotions, management must recognize additionalcosts. First, promotions might decrease long-run brand loyalty by making more consumers deal prone rather than advertising prone. Second, promotions can be more
expensive than they appear. Some are inevitably distributed to the wrong consumers.
Third, there are the costs of special production runs, extra sales force effort, and handling requirements. Finally, certain promotions irritate retailers, who may demand extra trade allowances or refuse to cooperate.64

P UBLIC RELATIONS
Not only must the company relate constructively to customers, suppliers, and dealers, but it must also relate to a large number of interested publics. We define a public as follows:■

A public is any group that has an actual or potential interest in or impact
on a company’s ability to achieve its objectives. Public relations (PR) involves
a variety of programs designed to promote or protect a company’s image or
its individual products.

A public can facilitate or impede a company’s ability to achieve its objectives. PR
has often been treated as a marketing stepchild, an afterthought to more serious promotion planning. But the wise company takes concrete steps to manage successful relations with its key publics. Most companies operate a public-relations department.
The PR department monitors the attitudes of the organization’s publics and distributes

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information and communications to build goodwill. When negative publicity happens, the PR department acts as a troubleshooter. The best PR departments spend timecounseling top management to adopt positive programs and to eliminate questionable practices so that negative publicity does not arise in the first place. They performthe following five functions:
1. Press relations: Presenting news and information about the organization in themost positive light.
2. Product publicity: Sponsoring efforts to publicize specific products.
3. Corporate communication: Promoting understanding of the organization
through internal and external communications.
4. Lobbying: Dealing with legislators and government officials to promote or defeat legislation and regulation.
5. Counseling: Advising management about public issues and company positions
and image. This includes advising in the event of a product mishap.65

MARKETING PUBLIC RELATIONSMarketing managers and PR specialists do not always talk the same language. Marketing managers are much more bottom-line oriented, whereas PR practitioners see
their job as preparing and disseminating communications. But these differences are
disappearing. Many companies are turning to marketing public relations (MPR) to directly support corporate or product promotion and image making. Thus MPR, like financial PR and community PR, serves a special constituency, namely the marketing
department.66
The old name for MPR was publicity, which was seen as the task of securing editorial space—as opposed to paid space—in print and broadcast media to promote or“hype” a product, service, idea, place, person, or organization. But MPR goes beyond
simple publicity and plays an important role in the following tasks:606

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Assisting in the launch of new products: The amazing commercial success of toys
such as Teenage Mutant Ninja Turtles, Mighty Morphin’ Power Rangers, andBeanie Babies owes a great deal to clever publicity.

■

Assisting in repositioning a mature product: New York City had extremely bad pressin the 1970s until the “I Love New York” campaign began.

■

Building interest in a product category: Companies and trade associations have used
MPR to rebuild interest in declining commodities such as eggs, milk, beef, andpotatoes and to expand consumption of such products as tea, pork, and orange
juice.

■

Influencing specific target groups: McDonald’s sponsors special neighborhood
events in Latino and African American communities to build goodwill.

■

Defending products that have encountered public problems: Johnson & Johnson’s
masterly use of MPR was a major factor in saving Tylenol from extinction following two incidents in which poison-tainted Tylenol capsules were found.

■

Building the corporate image in a way that reflects favorably on its products: Iacocca’s
speeches and his autobiography created a whole new winning image for the
Chrysler Corporation.

As the power of mass advertising weakens, marketing managers are turning more
to MPR. In a survey of 286 U.S. marketing managers, three-fourths reported that theircompanies used MPR. They found it particularly effective in building awareness andbrand knowledge, for both new and established products. MPR is also effective inblanketing local communities and reaching specific ethnic and other groups. In several cases, MPR proved more cost effective than advertising. Nevertheless, it must beplanned jointly with advertising. MPR needs a larger budget, and the money might
have to come from advertising.67 In addition, marketing managers need to acquire
more skill in using PR resources. Gillette is a trendsetter here: Each brand manager isrequired to have a budget line for MPR and to justify not using it.

Clearly, creative public relations can affect public awareness at a fraction of thecost of advertising. The company does not pay for the space or time obtained in the
media. It pays only for a staff to develop and circulate the stories and manage certain
events. If the company develops an interesting story, it could be picked up by thenews media and be worth millions of dollars in equivalent advertising. The Body Shop,for example, has spent very little money on advertising; its success has been almost
entirely due to publicity. MPR carries more credibility than advertising. Some experts
say that consumers are five times more likely to be influenced by editorial copy thanby advertising.
Here are two examples of the creative use of MPR:■

Intel and the Pentium Chip When users of Intel’s Pentium computer chipbegan to notice a problem with it in 1994, the company refused to replace
the chip unless the computer users could prove they needed their computers for complex mathematical operations (the only operations affected by theflaw). Following an uproar of consumer dissatisfaction, Intel’s MPR peoplecame to the rescue by using a “one-two punch,” following up intense oneon-one marketing to corporate and retail Pentium users with the introduction of a worldwide network of Pentium-replacement service centers (offering
free replacements on request). Intel tried to reach customers one-on-one,
whether they were large customers or individual users. The company did thisby mobilizing huge numbers of people inside the company, putting them onphone lines to talk to anybody concerned, and by flying marketing teams allover the country to visit corporate accounts and replace Pentium chips. To
reach individual consumers, Intel even placed its own employees inside retail stores in the weeks before Christmas of 1994. As a result of the intense
MPR campaign, Intel was able to rescue its reputation, which had been seriously jeopardized just a few weeks earlier.68■

Microsoft and Windows 95 Microsoft’s campaign launching Windows 95
was an MPR success story. No paid ads for Windows 95 had appeared by August 24, 1995, the launch day. Yet everyone knew about it! The Wall Street
Journal estimated that 3,000 headlines, 6,852 stories, and over 3 million words
were dedicated to Windows 95 from July 1 to August 24. Microsoft teams
around the world executed attention-grabbing publicity. Microsoft hung a
600-foot Windows 95 banner from Toronto’s CN Tower. The Empire State
Building in New York was bathed in the red, yellow, and green colors of theWindows 95 logo. Microsoft paid The London Times to distribute free its entire daily run of 1.5 million copies to the public. By the end of the first week,
U.S. sales alone were $108 million, not bad for a $90 product. The lesson isclear: Good advance PR can be much more effective than millions of dollars
spent on advertising.

MAJOR DECISIONS IN MARKETING PR
In considering when and how to use MPR, management must establish the marketing objectives, choose the PR messages and vehicles, implement the plan carefully,
and evaluate the results. The main tools of MPR are described in Table 5.12.69

Establishing the Marketing Objectives
MPR can contribute to the following objectives:■

Build awareness: MPR can place stories in the media to bring attention to a product, service, person, organization, or idea.

■

Build credibility: MPR can add credibility by communicating the message in an
editorial context.

■

Stimulate the sales force and dealers: MPR can help boost sales force and dealer enthusiasm. Stories about a new product before it is launched will help the sales
force sell it to retailers.

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T A B L E

5.12

Publications: Companies rely extensively on published materials to reach and influence theirtarget markets. These include annual reports, brochures, articles, company newsletters andmagazines, and audiovisual materials.

Major Tools in Marketing PR

Events: Companies can draw attention to new products or other company activities by arranging special events like news conferences, seminars, outings, exhibits, contests and competitions, anniversaries, and sport and cultural sponsorships that will reach the target publics.
News: One of the major tasks of PR professionals is to find or create favorable news about thecompany, its products, and its people. News generation requires skill in developing a story concept, researching it, and writing a press release. But the PR persons skill must go beyond preparing news stories. Getting the media to accept press releases and attend press conferences calls
for marketing and interpersonal skills.
Speeches: Speeches are another tool for creating product and company publicity. Lee Iacoccas charismatic talks before large audiences helped Chrysler sell its cars. Increasingly, company executives must field questions from the media or give talks at trade associations or sales
meetings, and these appearances can build the company s image.
Public-Service Activities: Companies can build goodwill by contributing money and timeto good causes.Large companies typically ask executives to support community affairs.In otherinstances, companies will donate an amount of money to a specified cause. Such cause-related
marketing is used by a growing number of companies to build public goodwill.
Identity Media: In a society marked by sensory overload, companies compete for attention.
They need a visual identity that the public immediately recognizes. The visual identity is carried by company logos, stationery, brochures, signs, business forms, business cards, buildings,
uniforms, and dress codes.

■

Hold down promotion costs: MPR costs less than direct mail and media advertising.
The smaller the company’s promotion budget, the stronger the case for using PR
to gain share of mind.
Specific objectives should be set for every MPR campaign:■

Wine Growers of California The Wine Growers of California hired the public-relations firm of Daniel J. Edelman, Inc., to develop a publicity campaign
to convince Americans that wine drinking is a pleasurable part of good living and to improve the image and market share of California wines. The following publicity objectives were established: (1) Develop magazine stories
about wine and get them placed in top magazines and in newspapers; (2) develop stories about wine’s many health values and direct them to the medical profession; (3) develop specific publicity for the young adult market,
college market, governmental bodies, and various ethnic communities.

Whereas PR practitioners will continue to reach their target publics through themass media, MPR is increasingly borrowing the techniques and technology of directresponse marketing to reach target audience members one to one. PR expert Thomas
L. Harris offers suggestions for how PR and direct-response marketing can work together to achieve specific marketing objectives:70608

part fiveManaging and
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Build marketplace excitement before media advertising breaks: For example, the announcement of a new product offers a unique opportunity for obtaining publicity and for dramatizing the product.

■

Build a core consumer base: Marketers are increasingly recognizing the value ofmaintaining consumer loyalty, because it costs far less to keep a consumer thanto get a new one.

■

Build a one-to-one relationship with consumers: Marketers can use telephone hotlines and 800 numbers, plus the Internet, to build and maintain relationships
with individual consumers.

■Turn satisfied customers into advocates: Customer databases and profiles can yield satisfeid customers who can become role models and spokespeople for the product.

■

Influence the influentials: The influencer may be an authority figure like a teacher,doctor, or pharmacist, but it also can be someone who has a different kind of oneto-one relationship with the consumer, such as a hair stylist or personal trainer.

Choosing Messages and Vehicles
The manager must identify or develop interesting stories to tell about the product.
Suppose a relatively unknown college wants more visibility. The MPR practitioner will
search for possible stories. Do any faculty members have unusual backgrounds, or are
any working on unusual projects? Are any new and unusual courses being taught?
Are any interesting events taking place on campus?
If the number of interesting stories is insufficient, the MPR practitioner should
propose newsworthy events the college could sponsor. Here the challenge is to create
news. PR ideas include hosting major academic conventions, inviting expert orcelebrity speakers, and developing news conferences. Each event is an opportunity todevelop a multitude of stories directed at different audiences.
Event creation is a particularly important skill in publicizing fund-raising drives fornonprofit organizations. Fund-raisers have developed a large repertoire of special
events, including anniversary celebrations, art exhibits, auctions, benefit evenings,
bingo games, book sales, cake sales, contests, dances, dinners, fairs, fashion shows,parties in unusual places, phonathons, rummage sales, tours, and walkathons. No
sooner is one type of event created, such as a walkathon, than competitors spawn
new versions, such as readathons, bikeathons, and jogathons.71
For-profit organizations also use events to call attention to their products and services. Fuji Photo Film Company flew its blimp over the renovated Statue of Liberty
during its massive celebration, outdoing its rival Kodak, which had mounted a permanent photo exhibit at the site. Anheuser-Busch sponsored a Black World Championship Rodeo in Brooklyn, attracting more than 5,000 spectators. P&G chose tosponsor a Barry Manilow concert tour under the names of some of its detergent products, because it wanted to attract the middle-aged women who were Barry Manilow
fans and who were the target market for the detergents.
The best MPR practitioners are able to find or create stories on behalf of even mundane products such as pork (“the other white meat”), garlic, and potatoes. Here is an
example for cat food:■

9-Lives Cat Food One of the top brands of cat food is Star-Kist Foods’ 9Lives. Its brand image revolves around Morris the Cat. The Leo Burnett advertising agency wanted to make Morris more of a living, breathing, real-life
feline to whom cat owners and cat lovers could relate. It worked with a public-relations firm that proposed and carried out the following ideas: (1) Launcha Morris “look-alike” contest in nine major markets; (2) write a book called
Morris, an Intimate Biography; (3) establish a coveted award called the Morris,a bronze statuette given to the owners of award-winning cats at local cat shows;(4) sponsor an “Adopt-a-Cat Month,” with Morris as the official “spokescat”;
and (5) distribute a booklet called “The Morris Method” on cat care. Thesepublicity steps strengthened the brand’s market share in the cat-food market.

Implementing the Plan
Implementing public relations requires care. Consider placing stories in the media: A
great story is easy to place, but most stories are less than great and might not get pastbusy editors. One of the chief assets of publicists is their personal relationship withmedia editors. PR people look at media editors as a market to satisfy so that these editors will continue to use their stories.

Evaluating Results
MPR’s contribution to the bottom line is difficult to measure, because it is used alongwith other promotional tools. If it is used before the other tools come into action, its

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contribution is easier to evaluate. The three most commonly used measures of MPR
effectiveness are number of exposures; awareness, comprehension, or attitude change;
and contribution to sales and profits.
The easiest measure of MPR effectiveness is the number of exposures carried by the
media. Publicists supply the client with a clippings book showing all the media thatcarried news about the product and a summary statement such as the following:Media coverage included 3,500 column inches of news and photographs
in 350 publications with a combined circulation of 79.4 million; 2,500 minutes of air time of 290 radio stations and an estimated audience of 65 million; and 660 minutes of air time on 160 television stations with an estimatedaudience of 91 million. If this time and space had been purchased at advertising rates, it would have amounted to $1,047,000.72
The exposure measure is not very satisfying because it contains no indication of how
many people actually read, heard, or recalled the message and what they thought afterward. Nor does it contain information on the net audience reached, because publications overlap in readership. Because publicity’s goal is reach, not frequency, it
would be more useful to know the number of unduplicated exposures.
A better measure is the change in product awareness, comprehension, or attitude resulting from the MPR campaign (after allowing for the effect of other promotional
tools). For example, how many people recall hearing the news item? How many told
others about it (a measure of word of mouth)? How many changed their minds after
hearing it? In a Potato Board campaign, the board found that the number of people
who agreed with the statement “Potatoes are rich in vitamins and minerals” wentfrom 36 percent before the campaign to 67 percent after the campaign, a significant
improvement in product comprehension.
Sales-and-profit impact is the most satisfactory measure, if obtainable. For example, 9-Lives sales had increased 43 percent by the end of the Morris the Cat PR campaign. However, advertising and sales promotion had also been stepped up, and theircontribution has to be allowed for. Suppose total sales have increased $1,500,000, andmanagement estimates that MPR contributed 15 percent of the total sales increase.
Then the return on MPR investment is calculated as follows:
Total sales increase$1,500,000

Estimated sales increase due to PR (15 percent)

225,000

Contribution margin on product sales (10 percent)

22,500Total direct cost of MPR program
Contribution margin added by PR investment
Return on MPR investment ($12,500/$10,000)⫺10,000$

12,500125%

In the years ahead, we can expect marketing public relations to play a larger rolein the company’s communication efforts.

S U M M A R Y

610part fiveManaging and
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1. Advertising is any paid form of nonpersonal presentation and promotion of ideas,
goods, or services by an identified sponsor. Advertisers include not only business
firms but also charitable, nonprofit, and government agencies that advertise to various publics.
2. Developing an advertising program is a five-step process: (a) Set advertising objectives; (b) establish a budget that takes into account stage in product life cycle, market share and consumer base, competition and clutter, advertising frequency, andproduct substitutability; (c) choose the advertising message, determine how themessage will be generated, evaluate alternative messages for desirability, exclusiveness, and believability; and execute the message with the most appropriate style,tone, words, and format and in a socially responsible manner; (d) decide on themedia by establishing the ad’s desired reach, frequency, and impact and then choosing the media that will deliver the desired results in terms of circulation, audience,
effective audience, and effective ad-exposed audience; and (e) evaluate the communication and sales effects of advertising.
3. Sales promotion consists of a diverse collection of incentive tools, mostly short term,
designed to stimulate quicker or greater purchase of particular products or services
by consumers or the trade.
4. Sales promotion includes tools for consumer promotion (samples, coupons, cash
refund offers, prices off, premiums, prizes, patronage rewards, free trials, warranties,
tie-in promotions, cross-promotions, point-of-purchase displays, and demonstrations); trade promotion (prices off, advertising and display allowances, and free
goods); and business- and sales force promotion (trade shows and conventions,contests for sales reps, and specialty advertising).
5. In using sales promotion, a company must establish its objectives, select the tools,
develop the program, pretest the program, implement and control it, and evaluate
the results. Most people agree that sales promotion works to increase sales and market share in the short run, but does not have much effect in the long run. In addition, marketers face a series of challenges in most forms of sales promotion,
especially the high costs of supporting them.
6. A public is any group that has an actual or potential interest in or impact on a company’s ability to achieve its objectives. Public relations (PR) involves a variety of programs designed to promote or protect a company’s image or its individual products.
Many companies today use marketing public relations (MPR) to support their marketing departments in corporate or product promotion and image making. MPR
can affect public awareness at a fraction of the cost of advertising, and is oftenmuch more credible. The main tools of PR are publications, events, news, speeches,
public-service activities, and identity media.
7. In considering when and how to use MPR, management must establish the marketing objectives, choose the PR messages and vehicles, implement the plan carefully, and evaluate the results. Results are usually evaluated in terms of number of
exposures and cost savings; awareness, comprehension, or attitude changes; andsales-and-profit contribution.

A P P L I C A T I O N S
C O N C E P T S
1. Your company knows that bad publicity could have a lasting negative effect on its
future, yet it wants all levels of management to feel comfortable meeting the presswith both good news and bad news. Individually or with a group, assist the public-relations staff in developing a 10-point media interview checklist. This checklist will be used by all managers who might possibly be questioned by either the
print or electronic media.
Two points to get you started:■

If a reporter calls, determine the reason for the call and the information sought. If you
can’t talk at the time or if you need additional information, promise to call the reporter back before his or her deadline. Then make sure you do it.

■

Don’t expect the news story to be exactly the way you would have reported it or written it. Expect some confusion in the facts, but if the mistakes aren’t major, don’t ask
for a correction.

2. Suppose a brand of aftershave lotion will be marked down $.09 for a limited period. (In other words, the manufacturer will sell the item to retailers or wholesalers
for 9 cents less than its normal price.) The item sells regularly for $1.09, of which$.40 represents a contribution to the manufacturers’ profits before marketing611

expenses. The brand manager expects a million bottles to be sold under this deal.
The administrative costs of the promotion are estimated at $10,000.
a. Determine the total cost of this promotion.
b. Assume that the company expected to sell 800,000 bottles of the lotion without the promotion. Is the promotion worth undertaking?
3. A dog-food manufacturer is trying to choose between medium A and medium B.
Medium A has 10,000,000 readers and charges $20,000 for a full-page ad ($2 per
1,000). Medium B has 15,000,000 readers and charges $25,000 for a full-page ad($1.67 per 1,000). What other information does the dog-food manufacturer need
before deciding which is the better medium?

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N O T E S

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1. See Russell H. Colley, Defining Advertising
Goals for Measured Advertising Results (NewYork: Association of National Advertisers,
1961).
2. See William L. Wilkie and Paul W. Farris,“Comparison Advertising: Problem andPotential,” Journal of Marketing, October
1975, pp. 7–15.
3. See Randall L. Rose, Paul W. Miniard,
Michael J. Barone, Kenneth C. Manning,
and Brian D. Till, “When Persuasion Goes
Undetected: The Case of Comparative Advertising,” Journal of Marketing Research,
August 1993, pp. 315–30; Sanjay Putrevu
and Kenneth R. Lord, “Comparative andNoncomparative Advertising: Attitudinal
Effects under Cognitive and Affective Involvement Conditions,” Journal of Advertising, June 1994, pp. 77–91; Dhruv
Grewal, Sukumar Kavanoor, and James
Barnes, “Comparative Versus Noncomparative Advertising: A Meta-Analysis,”
Journal of Marketing, October 1997, pp.
1–15; Dhruv Grewal, Kent B. Monroe, and
P. Krishnan, “The Effects of Price-Comparison Advertising on Buyers’ Perceptions of Acquisition Value, Transaction
Value, and Behavioral Intentions,” Journal of Marketing, April 1998, pp. 46–59.
4. For a good discussion, see David A. Aaker
and James M. Carman, “Are You Overadvertising?” Journal of Advertising Research,
August–September 1982, pp. 57–70.
5. See Donald E. Schultz, Dennis Martin,and William P. Brown, Strategic Advertising Campaigns (Chicago: Crain Books,
1984), pp. 192–97.
6. M. L. Vidale and H. R. Wolfe, “An Operations-Research Study of Sales Response
to Advertising,” Operations Research, June
1957, pp. 370–81.
7. John D. C. Little, “A Model of Adaptive
Control of Promotional Spending,” Operations Research, November 1966, pp.
1075–97.
8. For additional models for setting the advertising budget, see Gary L. Lilien,
Philip Kotler, and K. Sridhar Moorthy,Marketing Models (Upper Saddle River, NJ:
Prentice Hall, 1992), ch. 6.
9. “The Best Awards: Retail/Fast-Food,” Advertising Age, May 18, 1998, p S8; Karen
Benezra, “Taco Bell Pooch Walks the
Merch Path,” Brandweek, June 8, 1998, p.
46; Bob Garfield, “Perspicacious Pooch
Scores for Taco Bell,” Advertising Age,
March 9, 1998, p. 53.
10. Michael Wilke, “Carville, Matalin Talk
Up Alka-Seltzer Brand,” Advertising Age,
November 23, 1998, p. 26.

11. See “Keep Listening to That Wee, Small
Voice,” in Communications of an Advertising Man (Chicago: Leo Burnett Co.,
1961), p. 61.
12. John C. Maloney, “Marketing Decisions
and Attitude Research,” in Effective Marketing Coordination, ed. George L. Baker Jr.
(Chicago: American Marketing Association, 1961), pp. 595–618.
13. Dik Warren Twedt, “How to Plan New
Products, Improve Old Ones, and Create
Better Advertising,” Journal of Marketing,January 1969, pp. 53–57.
14. See William A. Mindak and H. Malcolm
Bybee, “Marketing Application to Fund
Raising,” Journal of Marketing, July 1971,
pp. 13–18.
15. Lalita Manrai, “Effect of Labeling Strategy in Advertising: Self-Referencing versus Psychological Reactance” (Ph.D.
dissertation, Northwestern University,
1987).
16. James B. Amdorfer, “Absolut Ads Sans
Bottle Offer a Short-Story Series,” Advertising Age, January 12, 1998, p. 8.
17. Yumiko Ono, “Bulletins from the Battleof Baldness Drug—Sports Figures Tout
Rogaine for Pharmacia,” Wall Street Journal, December 19, 1997, p. B1.
18. L. Greenland, “Is This the Era of Positioning?” Advertising Age, May 29, 1972.
19. David Ogilvy and Joel Raphaelson, “Research on Advertising Techniques That
Work—And Don’t Work,” Harvard Business Review, July–August 1982, pp. 14–18.
20. Joanne Lipman, “It’s It and That’s a
Shame: Why Are Some Slogans Losers?”
Wall Street Journal, July 16, 1993, p. A4;
Paul Farhi, “The Wrong One Baby, UhUh: Has Madison Avenue Lost It?” Washington Post, February 28, 1993, p. C5.
21. For further reading, see Dorothy Cohen,
Legal Issues in Marketing Decision Making(Cincinnati, OH: South-Western, 1995).
22. Kevin Goldman, “Advertising: From
Witches to Anorexics: Critical Eyes Scrutinize Ads for Political Correctness,” WallStreet Journal, May 19, 1994, p. B1.
23. Adapted from Sandra Cordon, “Where
High Road Meets Bottom Line: EthicalMutual Funds Avoid Companies DeemedSocially Irresponsible,” The London Free
Press, October 9, 1998, p. D3.
24. Schultz et al., Strategic Advertising Campaigns, p. 340.
25. See Herbert E. Krugman, “What Makes
Advertising Effective?” Harvard Business
Review, March–April 1975, p. 98.
26. See Peggy J. Kreshel, Kent M. Lancaster,and Margaret A. Toomey, “Advertising

613

614

Media Planning: How Leading Advertising Agencies Estimate Effective Reach
and Frequency” (Urbana: University of
Illinois, Department of Advertising, paper no. 20, January 1985). Also see Jack
Z. Sissors and Lincoln Bumba, AdvertisingMedia Planning, 3d ed. (Lincolnwood, IL:
NTC Business Books, 1988), ch. 9.
27. Roland T. Rust and Richard W. Oliver,“Notes and Comments: The Death of Advertising,” Journal of Advertising, December 1994, pp. 71–77.
28. Gene Accas, “Prime Prices Fall with
Shares,” Broadcasting & Cable, September
28, 1998, p. 36; “Hilfilger Hikes Ads to
New Level: First Designer to Go Super
Bowl Route,” Daily News Record 28, no. 7(January 16, 1998): 2.
29. See Roland T. Rust, Advertising Media Models: A Practical Guide (Lexington, MA: Lexington Books, 1986).
30. See Jay W. Forrester, “Advertising: A Problem in Industrial Dynamics,” Harvard
Business Review, March–April 1959, pp.
100–10.
31. See Amber G. Rao and Peter B. Miller,“Advertising/Sales Response Functions,”
Journal of Advertising Research, April 1975,
pp. 7–15.
32. See Alfred A. Kuehn, “How Advertising
Performance Depends on Other Marketing Factors,” Journal of Advertising Research, March 1962, pp. 2–10.
33. See also Hani I. Mesak, “An Aggregate Advertising Pulsing Model with Wearout Effects,” Marketing Science, Summer 1992,
pp. 310–26; and Fred M. Feinberg, “Pulsing Policies for Aggregate Advertising
Models,” Marketing Science, Summer
1992, pp. 221–34.
34. Forrester, “Advertising,” p. 102.
35. Russell I. Haley, James Staffaroni, andArthur Fox, “The Missing Measures of
Copy Testing,” Journal of Advertising Research, May–June 1994, pp. 46–56. (Also
see this May–June 1994 issue of the Journal of Advertising Research for more articles on copy testing.)
36. See J. O. Peckham, The Wheel of Marketing (Scarsdale, NY: privately printed,
1975), pp. 73–77.
37. Kristian S. Palda, The Measurement of Cumulative Advertising Effect (Upper Saddle
River, NJ: Prentice Hall, 1964), p. 87.
38. David B. Montgomery and Alvin J. Silk,“Estimating Dynamic Effects of Market
Communications Expenditures,” Management Science, June 1972, pp. 485–501.
39. See Robert D. Buzzell, “E. I. Du Pont deNemours & Co.: Measurement of Effectsof Advertising,” in his Mathematical Models and Marketing Management (Boston:
Division of Research, Graduate School ofBusiness Administration, Harvard University, 1964), pp. 157–79.
40. See Glen L. Urban, “Allocating Ad Budgets Geographically,” Journal of Advertising Research, December 1975, pp. 7–16.
41. See Nigel Hollis, “The Link Between TV
Ad Awareness and Sales: New Evidence
from Sales Response Modelling,” Journalof the Market Research Society, January
1994, pp. 41–55.
42. In addition to the sources cited below,
see David Walker and Tony M. Dubitsky, “Why Liking Matters,” Journal ofAdvertising Research, May–June 1994,
pp. 9–18; Abhilasha Mehta, “How Advertising Response Modeling (ARM)
Can Increase Ad Effectiveness,” Journalof Advertising Research, May–June 1994,
pp. 62–74; Karin Holstius, “Sales Response to Advertising,” International
Journal of Advertising 9, no. 1, (1990):
38–56; John Deighton, Caroline Henderson, and Scott Neslin, “The Effectsof Advertising on Brand Switching and
Repeat Purchasing,” Journal of Marketing
Research, February 1994, pp. 28–43; Anil
Kaul and Dick R. Wittink, “Empirical
Generalizations About the Impact ofAdvertising on Price Sensitivity andPrice,” Marketing Science 14, no. 3, pt. 1,(1995): G151–60; and Ajay Kalra andRonald C. Goodstein, “The Impact ofAdvertising Positioning Strategies on
Consumer Price Sensitivity,” Journal ofMarketing Research, May 1998, pp.
210–24.
43. Gerald J. Tellis, “Advertising Exposure,Loyalty, and Brand Purchase: A TwoStage Model of Choice,” Journal of Marketing Research, May 1988, pp. 134–44.
Also see “It’s Official: Some Ads Work,”
The Economist, April 1, 1995, p. 52;
Dwight R. Riskey, “How TV Advertising
Works: An Industry Response,” Journalof Marketing Research, May 1997, pp.
292–93.
44. See Michael A. Kamins, Lawrence J.
Marks, and Deborah Skinner, “Television Commercial Evaluation in the Context of Program Induced Mood:
Congruency versus Consistency Effects,” Journal of Advertising, June 1991,
pp. 1–14.
45. See Kenneth R. Lord and Robert E.
Burnkrant, “Attention versus Distraction: The Interactive Effect of Program
Involvement and Attentional Devices
on Commercial Processing,” Journal ofAdvertising, March 1993, pp. 47–60; Kenneth R. Lord, Myung-Soo Lee, and Paul
L. Sauer, “Program Context Antecedentsof Attitude Toward Radio Commercials,”
Journal of the Academy of Marketing Science, Winter 1994, pp. 3–15.

46. See Yoav Ganzach and Nili Karashi, “Message Framing and Buying Behavior: A
Field Experiment,” Journal of Business Research, January 1995, pp. 11–17.
47. From Robert C. Blattberg and Scott A.
Neslin, Sales Promotion: Concepts, Methods, and Strategies (Upper Saddle River, NJ:
Prentice Hall, 1990). This text provides
the most comprehensive and analyticaltreatment of sales promotion to date.
48. Roger A. Strang, “Sales Promotion—Fast
Growth, Faulty Management,” Harvard
Business Review, July–August 1976 pp.
116–19.
49. For a good summary of the research onwhether promotion erodes the consumer
franchise of leading brands, see Blattberg
and Neslin, Sales Promotion.
50. Robert George Brown, “Sales Response to
Promotions and Advertising,” Journal ofAdvertising Research, August 1974, pp.
36–37. Also see Carl F .Mela, Sunil Gupta,
and Donald R. Lehmann, “The LongTerm Impact of Promotion and Advertising on Consumer Brand Choice,” Journalof Marketing Research, May 1997, pp.
248–61; Purushottam Papatla and Lakshman Krishmamurti, “Measuring the Dynamic Effects of Promotions on Brand
Choice,” Journal of Marketing Research,
February 1996, pp. 20–35.
51. F. Kent Mitchel, “Advertising/Promotion
Budgets: How Did We Get Here, andWhat Do We Do Now?” Journal of Consumer Marketing, Fall 1985, pp. 405–47.
52. See Paul W. Farris and John A. Quelch,“In Defense of Price Promotion,” Sloan
Management Review, Fall 1987, pp. 63–69.
53. For a model for setting sales promotions
objectives, see David B. Jones, “Setting
Promotional Goals: A Communications
Relationship Model,” Journal of Consumer
Marketing 11, no. 1 (1994): 38–49.
54. See John C. Totten and Martin P. Block,
Analyzing Sales Promotion: Text and Cases,
2d ed. (Chicago: Dartnell, 1994), pp.
69–70.
55. See Paul W. Farris and Kusum L. Ailawadi,“Retail Power: Monster or Mouse?” Journal of Retailing, Winter 1992, pp. 351–69.
56. See “Retailers Buy Far in Advance to Exploit Trade Promotions,” Wall Street Journal, October 9, 1986, p. 35; Rajiv Lal, J.
Little, and J. M. Vilas-Boas, “A Theory of
Forward Buying, Merchandising, andTrade Deals,” Marketing Science 15, no. 1(1996), 21–37.

part fiveManaging and
Delivering Marketing
Programs

57. “Trade Promotion: Much Ado About
Something,” PROMO, October 1991, pp.
15, 37, 40.
58. Quoted from Kerry E. Smith, “Media Fusion,” PROMO, May 1992, p. 29.

59. Arthur Stern, “Measuring the Effectiveness of Package Goods Promotion Strategies” (paper presented to the Associationof National Advertisers, Glen Cove, NY,
February 1978).
60. Strang, “Sales Promotion,” p. 120.
61. Kurt H. Schaffir and H. George Trenten,
Marketing Information Systems (New York:
Amacom, 1973), p. 81.
62. See Magid M. Abraham and Leonard M.
Lodish, “Getting the Most Out of Advertising and Promotion,” Harvard Business
Review, May–June 1990, pp. 50–60.
63. See Joe A. Dodson, Alice M. Tybout, andBrian Sternthal, “Impact of Deals and
Deal Retraction on Brand Switching,”
Journal of Marketing Research, February
1978, pp. 72–81.
64. Books on sales promotion include Totten
and Block, Analyzing Sales Promotion: Text
and Cases; Don E. Schultz, William A.
Robinson, and Lisa A. Petrison, Sales Promotion Essentials, 2d ed. (Lincolnwood,
IL: NTC Business Books, 1994); John
Wilmshurst, Below-the-Line Promotion(Oxford, England: Butterworth/Heinemann, 1993); and Robert C. Blattberg
and Scott A. Neslin, Sales Promotion: Concepts, Methods, and Strategies (Upper Saddle River, NJ: Prentice Hall, 1990). For an
expert systems approach to sales promotion, see John W. Keon and Judy Bayer,“An Expert Approach to Sales Promotion
Management,” Journal of Advertising Research, June–July 1986, pp. 19–26.
65. Adapted from Scott M. Cutlip, Allen H.
Center, and Glen M. Broom, Effective Public Relations, 8th ed. (Upper Saddle River,
NJ: Prentice Hall, 1997).
66. For an excellent account, see Thomas L.
Harris, The Marketer’s Guide to Public Relations (New York: John Wiley, 1991).
Also see Value-Added Public Relations(Chicago: NTC Business Books, 1998)
67. Tom Duncan, A Study of How Manufacturers and Service Companies Perceive andUse Marketing Public Relations (Muncie,
IN: Ball State University, December1985). For more on how to contrast theeffectiveness of advertising with the effectiveness of PR, see Kenneth R. Lord
and Sanjay Putrevu, “Advertising andPublicity: An Information Processing Perspective,” Journal of Economic Psychology,
March 1993, pp. 57–84.
68. Kate Bertrand, “Intel Starts to Rebuild,”
Business Marketing, February 1995, pp. 1,
32; John Markoff, “In About-face, Intel
Will Swap Its Flawed Chip,” New YorkTimes, December 21, 1994, p. A1; T. R.
Reid, “It’s a Dangerous Precedent to Make
the Pentium Promise,” The Washington
Post, December 26, 1994, p. WBIZ14.

615

69. For further reading on cause-related marketing, see P. Rajan Varadarajan and Anil
Menon, “Cause-Related Marketing: A CoAlignment of Marketing Strategy andCorporate Philanthropy,” Journal of Marketing, July 1988, pp. 58–74.
70. Material adapted from Thomas L. Harris,“PR Gets Personal,” Direct Marketing, April
1994, pp. 29-32.

616

71. See Dwight W. Catherwood and Richard
L. Van Kirk, The Complete Guide to Special
Event Management (New York: John Wiley, 1992).
72. Arthur M. Merims, “Marketing’s Stepchild:
Product Publicity,” Harvard Business Review, November–December 1972, pp.
111–12. Also see Katerine D. Paine, “There
Is a Method for Measuring PR,” Marketing
News, November 6, 1987, p. 5.

Managing theSales Force
We will address the following questions:■ What decisions do companies face in designing a sales force?
■ How do companies recruit, select, train, supervise, motivate, and evaluate a sales force?
■ How can salespeople improve their skills in selling, negotiating, and relationship-building?

Personal selling is a mainstay of nonproﬁt as well as for-proﬁt organizations. College
recruiters are the university’s sales force arm; the U.S. Agricultural Extension
Service uses specialists to sell farmers on new farming methods. On the business side,
no one debates the importance of the sales force in the marketing mix. However, companies are sensitive to the high and rising costs (salaries, commissions, bonuses, travel
expenses, and beneﬁts) of maintaining a sales force. Because the average cost of a personal sales call ranges from $250 to $500, and closing a sale typically requires four
calls, the total cost to complete a sale can range from $1,000 to $2,000.1
Not surprisingly, savvy companies are learning how to substitute other selling
methods—including mail, phone, fax, and e-mail—to reduce ﬁeld sales expenses. They
also are working to increase sales force productivity through better selection, training,supervising, motivation, and compensation. Sales force automation (SFA) is playing an everlarger role in personal selling, as more ﬁrms equip reps with laptop computers, software,and Web access to better manage customer and prospect contacts, display product speciﬁcations and availability, run presentations or demonstrations, and book orders.2

DESIGNING THE SALES FORCE
Personal selling is a key element in promotion, one of the four Ps in the marketingmix. But not all sales representatives do exactly the same kind of selling. In businesssettings, McMurry has distinguished these six types of sales representatives, ranging
from the least to the most creative types of selling:3
1.

Deliverer: A salesperson whose major task is the delivery of a product (milk, bread, orfuel).

2.

Order taker: A salesperson who acts predominantly as an inside order taker (the salesperson standing behind the counter) or outside order taker (the soap salesperson
calling on the supermarket manager).

3.

Missionary: A salesperson whose major task is to build goodwill or to educate theactual or potential user, rather than to sell (the medical “detailer” representing an
ethical pharmaceutical ﬁrm).

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4.

Technician: A salesperson with a high level of technical knowledge (the engineering
salesperson who is primarily a consultant to client companies).

5.

Demand creator: A salesperson who relies on creative methods for selling tangible
products (vacuum cleaners or siding) or intangibles (insurance or education).

6.

Solution vendor: A salesperson whose expertise lies in solving a customer’s problem,
often with a system of the ﬁrm’s goods and services (such as computer and communications systems).

In general, salespeople perform one or more of the following tasks:➤

Prospecting: Searching for prospects, or leads,➤

Targeting: Deciding how to allocate their time among prospects and customers,➤

Communicating: Communicating information about the company’s products andservices,➤

Selling: Approaching, presenting, answering objections, and closing sales,➤

Servicing: Providing various services to customers—consulting on problems,
rendering technical assistance, arranging ﬁnancing, expediting delivery,➤

Information gathering: Conducting market research and doing intelligence work, and➤Allocating: Deciding which customers will get scarce products during shortages.

As this list suggests, the sales representative serves as the company’s personal link
to its customers and prospects while bringing back much-needed information about
customers, markets, and competitors. Therefore, smart companies look carefully at
the design of the sales force, including the development of sales force objectives, strategy, structure, size, and compensation (see Figure 5-15).

Sales Force Objectives and Strategy
Each company needs to define the specific objectives its sales force will achieve.
Increasingly, companies are setting objectives for sales reps based not only on sales volume and proﬁtability targets, but also on their ability to create customer satisfaction.
Consider Tiffany, the famous retailer of expensive jewelry. A purchase in thisstore can be like an investment, so management trains its retail sales staff to be consultants rather than strictly salespeople. Salespeople are trained to offer advice and information about the quality and cut of stones, the suitability of various settings, and the
choices available in various price ranges. Even when selling less expensive items, salespeople know that part of the purchase is the experience and prestige of shopping at
Tiffany. They also know that a satisfied customer is a potential repeat customer. In
addition to its retail sales staff, Tiffany has 155 ﬁeld reps, a catalog, and a Web presence (www.tiffany.com) to serve corporate customers. Training for new corporate sales

Figure 5-15 Designing a Sales ForceDesigning the Sales Forcereps lasts for 6 to 8 weeks, and only when new hires have mastered the skills, knowledge, and products are they allowed to deal with customers.4
To implement the ﬁrm’s sales objectives, a common strategy is for sales representatives to act as “account managers,” arranging fruitful contact among various people in the buying and selling organizations. Selling increasingly calls for teamwork
requiring the support of other personnel, such as top management, especially whennational accounts or major sales are at stake; technical people, who supply technicalinformation and service to the customer before, during, or after product purchase;customer service representatives, who provide installation, maintenance, and otherservices; and an ofﬁce staff, consisting of sales analysts, order expediters, and administrative personnel. An example of a successful sales team orientation is provided by
DuPont. Finding that corn growers needed a herbicide that could be applied lessoften, DuPont appointed a team of chemists, sales and marketing executives, and regulatory specialists to tackle the problem. Working together, they created a product that
captured $57 million in sales during its ﬁrst year.5
Once the company decides on objectives and strategy, it can use either a direct
or a contractual sales force. A direct (company) sales force consists of full- or part-time
paid employees who work exclusively for the company. This sales force includes insidesales personnel, who conduct business from the ofﬁce using the telephone, fax, and email, and receive visits from prospective buyers, and ﬁeld sales personnel, who travel andvisit customers. A contractual sales force consists of manufacturers’ reps, sales agents, andbrokers, who are paid a commission based on sales.

Sales Force Structure
The sales force strategy has implications for the sales force structure. If the company
sells one product line to one end-using industry with customers in many locations, itwould use a territorial sales force structure. If the company sells many products to
many types of customers, it might need a product or market sales force structure.
Table 5.13 summarizes the most common sales force structures.
Major accounts (also called key accounts, national accounts, global accounts, orhouse accounts) are typically singled out for special attention. The largest accounts
may have a strategic account management team consisting of cross-functional personnel
who are permanently assigned to one customer and may even maintain ofﬁces at thecustomer’s facility. For example, Procter & Gamble assigned a strategic account team
to work with Wal-Mart at its Bentonville, Arkansas, headquarters. This arrangement
has saved P&G and Wal-Mart $30 billion jointly through supply chain improvements,
while boosting proﬁt margins by about 11 percent.6
Established companies need to revise their sales force structure as market andeconomic conditions change. IBM, for instance, lost market share in the computing
industry because its marketing and sales organization had lost touch with customers.
The company’s worldwide marketing and sales were organized geographically, withsales reps covering customers in a wide range of industries. Although IBM was known
for educating customers about technology—focusing solely on IBM’s products—its“one-size-ﬁts-all” presentations became a turn-off to increasingly computer-savvy customers. Ultimately, lost market share and the huge cost of maintaining its sales force
made IBM slim down and reorganize its sales force vertically along 14 industry-speciﬁclines, such as ﬁnance, petroleum, retail, and e-businesses.7 This step created a mix ofindustry and product specialists. In another change, IBM sales reps have taken on an
active role as consultant and now seek to create customer solutions, even if doing sosometimes means recommending a competitor’s technology.

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Table 5.13 Sales Force Structures
Territorial: Each sales representative is assigned an exclusive territory.This structure results in aclear deﬁnition of responsibilities and increases the rep’s incentive to cultivate local business andpersonal ties.Travel expenses remain relatively low, because each rep travels within a small area.
Product: The importance of sales reps’ knowing their products, together with thedevelopment of product divisions and product management, has led many companies tostructure their sales forces along product lines. Product specialization is particularly useful for
product lines that are technically complex, highly unrelated, or very numerous. Kodak uses one
sales force for its ﬁlm products that are intensively distributed, and another sales force to sell
complex products that require technical support.
Market: Companies often specialize their sales forces along industry or customer lines. IBM
set up a sales ofﬁce for ﬁnance and brokerage customers in New York, another for GM in
Detroit, and still another for Ford in Dearborn. Market specialization helps the sales force
become knowledgeable about speciﬁc customer needs, but the major disadvantage is that
customers are scattered throughout the country, requiring extensive travel.
Complex: When a company sells a diverse product line to many types of customers over abroad geographical area, it often combines several structures, with sales forces specialized byterritory-product, territory-market, product-market, and so on.A sales representative might thenreport to one or more line and staff managers. Motorola has four types of sales forces: (1) astrategic market sales force composed of technical, applications, and quality engineers and service
personnel assigned to major accounts; (2) a geographic sales force calling on customers in different
territories; (3) a distributor sales force calling on and coaching Motorola distributors; and (4) an
inside sales force handling orders via phone and fax.

Sales Force Size and Compensation
Once the company clariﬁes its sales force strategy and structure, it is ready to consider
sales force size, based on the number of customers it wants to reach. One widely-usedmethod for determining sales force size is the ﬁve-step workload approach: (1) group
customers into size classes by annual sales volume; (2) establish call frequencies, thenumber of calls to be made per year on each account in a size class; (3) multiply the
number of accounts in each size class by the call frequency to arrive at the total yearlysales call workload; (4) determine the average number of calls a sales rep can makeper year; and (5) divide the total annual calls (calculated in step 3) required by theaverage annual calls made by a rep (calculated in step 4) to see how many reps areneeded.
Suppose the company has 1,000 A accounts and 2,000 B accounts; A accounts
require 36 calls a year (36,000 calls yearly), and B accounts require 12 calls a year
(totaling 24,000 calls). The company therefore needs a sales force that can make
60,000 sales calls a year. If the average rep can make 1,000 calls a year, the company
would need 60,000/1,000, or 60 sales representatives.
Many companies are shrinking their sales forces because the sales department iscostly to maintain. Consider the situation of Coca-Cola Amatil, the Australian Cokefranchisee. Amatil used to maintain an army of reps to call on small milk bar (cornerstore) accounts. These reps would often make up to 30 sales calls per day, staying justlong enough to take an order and perhaps show one new product. When Amatil lookedat the costs of sending these reps out to milk bars, it saw a good deal of wasted time andManaging the Sales Forcemoney. Now Amatil contacts these small accounts through a regular schedule of telemarketing, freeing up its ﬁeld reps to concentrate on larger accounts. This move has
resulted in a much lower cost per order and made small accounts ﬁnancially feasible.
The compensation package is a critical element in attracting top-quality sales
reps, starting with the level and components. The level of compensation must bearsome relation to the “going market price” for the type of sales job and required abilities. If the market price for salespeople is well deﬁned, the individual ﬁrm has little
choice but to pay the going rate. However, the market price for salespeople is seldom
well defined. Published data on industry sales force compensation levels are infrequent and generally lack sufﬁcient detail.
The company must next determine the four components of sales force compensation—a fixed amount, a variable amount, expense allowances, and benefits.
The fixed amount, a salary, is intended to satisfy the sales reps’ need for income stability. The variable amount, which might be commissions, a bonus, or profit sharing,is intended to stimulate and reward greater effort. Expense allowances enable sales
reps to meet the expenses involved in travel, lodging, dining, and entertaining.
Benefits, such as paid vacations, sickness or accident benefits, pensions, and life insurance, are intended to provide security and job satisfaction. Fixed compensation
receives more emphasis in jobs with a high ratio of nonselling to selling duties andin jobs in which the selling task is technically complex and involves teamwork.
Variable compensation receives more emphasis in jobs in which sales are cyclical or
depend on individual initiative.
Fixed and variable compensation give rise to three basic types of compensationplans—straight salary, straight commission, and combination salary and commission.
Only one-fourth of all ﬁrms use either a straight-salary or straight-commission method,while three-quarters use a combination of the two, though the relative proportion ofsalary versus incentives varies widely.8
Straight-salary plans provide sales reps with a secure income, make them more
willing to perform nonselling activities, and give them less incentive to overstock customers. From the company’s perspective, they provide administrative simplicity andlower turnover. Straight-commission plans attract higher sales performers, provide
more motivation, require less supervision, and control selling costs.
Combination plans offer the beneﬁts of both plans while reducing their disadvantages. Such plans allow companies to link the variable portion of a salesperson’s
pay to a wide variety of strategic goals. One trend is toward deemphasizing volume
measures in favor of factors such as gross proﬁtability, customer satisfaction, and customer retention. For example, IBM now partly rewards salespeople on the basis of customer satisfaction as measured by customer surveys.9

MANAGING THE SALES FORCE
Effective management of the sales force is needed to implement the company’s chosen sales force design and achieve its sales objectives. Sales force management covers
the steps in recruiting and selecting, training, supervising, motivating, and evaluating
representatives (see Figure 5-16).

Recruiting and Selecting Sales Representatives
At the heart of a successful sales force is the selection of effective representatives. One
survey revealed that the top 27 percent of the sales force brought in over 52 percent of
the sales. Beyond differences in productivity is the great waste in hiring the wrong people. The average annual turnover rate for all industries is almost 20 percent. When a

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Figure 5-16 Managing the Sales Force
rep quits, the costs of ﬁnding and training a new rep, plus the cost of lost sales, can run
into the high ﬁve ﬁgures—and a sales force with many new hires is less productive.10
In selecting sales reps, the company can start by asking customers what traits
they prefer in salespeople. Most customers want honest, reliable, knowledgeable, andhelpful reps. Another approach is to look for traits that are common to successful
salespeople. Charles Garﬁeld concluded that supersales performers exhibit risk taking, a powerful sense of mission, a problem-solving bent, care for the customer, andcareful planning.11 Mayer and Greenberg noted that the effective salesperson has
empathy, the ability to feel as the customer does, and ego drive, a strong personal needto make the sale.12
After management develops suitable selection criteria, the next step is to recruit
applicants by various means, including soliciting names from current sales reps, using
employment agencies, placing print and on-line job ads, and contacting graduatingcollege students. Selection procedures can vary from an informal interview to prolonged testing and interviewing. Although test scores are only one information element in a set that includes personal characteristics, references, past employment history, and interviewer reactions, they are weighted quite heavily by such companies as
IBM, Prudential, Procter & Gamble, and Gillette. Gillette claims that tests have
reduced turnover by 42 percent and have correlated well with the subsequent progressof new reps in the sales organization.

Training Sales Representatives
Today’s customers expect salespeople to have deep product knowledge, offer ideas toimprove customer operations, and be efficient and reliable. These demands haverequired companies to make a much higher investment in training their sales reps.
Companies use training to help sales reps: (1) Know and identify with the company; (2) learn about the company’s products; (3) know customers’ and competitors’
characteristics; (4) make effective sales presentations; and (5) understand sales procedures and responsibilities. Training time varies with the complexity of the selling task
and the type of person recruited into the sales organization. The median training
period is 28 weeks in industrial-products companies, 12 in service companies, and 4 in
consumer-products companies. At IBM, new reps receive extensive initial training andmay spend 15 percent of their time each year in additional training.
Training often involves a variety of methods, including role playing, audio- andvideotapes, CD-ROMs, and Web-based distance learning. For instance, reps at theTandem division of Compaq used to complain that they could not keep up with theprinted information and training materials the company sent them. Now field reps
carry their own miniature training rooms with them—they simply slip a CD-ROM disk
into their laptop computers.13

Managing the Sales ForceSupervising Sales Representatives
New sales representatives need more than a territory, a compensation package, andtraining—they also need proper supervision. Reps paid mostly on commission generally receive less supervision, while those who are salaried and must cover definite
accounts are likely to receive substantial supervision. In the course of supervising sales
reps, successful companies set norms for calls on customers and prospects, and they
help reps make the most efﬁcient use of sales time.
Norms for Customer Calls
In the early 1980s, the average salesperson made ﬁve calls a day; by 1989, that number
had dropped to just 4.2 sales calls a day.14 Today salespeople make even fewer in-person
sales calls because they are using phone, fax, and e-mail to sell. In addition, more ﬁrms
are using automated ordering systems to reduce reliance on sales calls.
How many calls should a company make on a particular account each year?
Research shows that additional calls generally produce more sales, but companies stillneed to determine whether the increase in sales justiﬁes the increase in sales costs.
Some studies—and experiences such as those of Amatil, discussed earlier—suggestthat sales reps may be spending too much time selling to smaller, less profitableaccounts when they should be focusing more of their efforts on selling to larger, more
proﬁtable accounts.15 Therefore, in setting norms, management needs to weigh thecost of a customer sales call against the sales and proﬁt payback for that account.
Norms for Prospect Calls
Knowing the high cost of sales calls, companies often specify how much time reps
should spend prospecting for new accounts. Spector Freight, for instance, wants its
sales representatives to spend 25 percent of their time prospecting and to stop callingon a prospect after three unsuccessful calls. Other companies set prospect and customer norms based on product sales, specifying, for example, that reps spend 80 percent of their time selling established products and 20 percent selling new products.
Companies set up prospecting standards because many reps, left to their own
devices, will spend most of their time with current customers, who are known quantities, rather than with prospects, who might never buy. In general, selling to prospects
tends to be more difficult and more time-consuming than selling to establishedaccounts, yet it is the road to customer base expansion and closing more sales. This is
why some ﬁrms deploy a special missionary sales force to open new accounts.
Using Sales Time Efﬁciently
Not surprisingly, studies conﬁrm that the best sales reps are those who manage theirtime effectively.16 One popular efﬁciency tool is conﬁgurator software to automate theorder preparation process. This type of program is offered by Massachusetts-based
Concentra Corporation, among others. On a sales call, reps can use conﬁgurator software to present product speciﬁcations and pricing information, show customization
options, and handle scheduling. Integrating all of this information, the conﬁgurator
software can virtually write up the order in minutes. This software not only saves time;it also builds goodwill by reducing errors and letting both customer and supplier see
the same information from the same source. Concentra’s customers say this software
has helped them increase sales and reduce cancellations.17
Another tool is time-and-duty analysis, which helps reps understand how they
spend their time and how they might increase their productivity. In general, sales reps
spend time in (1) preparation (getting information and planning call strategy);

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MANAGING THE SALES FORCE(2) travel (which can be more than 50 percent of total time); (3) food and breaks(some portion of every workday); (4) waiting (to see buyers); (5) selling (time spent
with the buyer); and (6) administration (writing reports, billing, attending sales meetings, and so on).
With so many duties, it is no wonder that actual face-to-face selling time canamount to as little as 25 percent of total working time!18 To improve sales force productivity, many companies train their reps in the use of “phone power,” simplify
record-keeping, and use computerized methods to develop call and routing plans andto supply reps with customer and competitive information.
Seeking to reduce the time demands on their outside sales force, many firms
have increased the size and responsibilities of their inside sales force. Inside salespeople are of three types. Technical support people provide technical information andanswers to customers’ questions. Sales assistants provide clerical backup for the outside
reps by conﬁrming appointments, carrying out credit checks, following up on deliveries, and answering customers’ questions. Telemarketers use the phone to ﬁnd new leads,
qualify and sell to them, reactivate former accounts, and give more attention toneglected accounts.
The best sales reps spend time getting to know their customers’ preferences,needs, and buying patterns so they can plan their calls accordingly. Technology speeds
up this process. For example, before telecommunications reps at TimePlex go on a salescall, they use their laptops to dial into the ﬁrm’s data network and retrieve status reportson that account’s previous orders and other background information. When deals are
struck, the reps use their laptops to record each order, double-check for errors, and thentransmit everything electronically to the ﬁrm’s New Jersey headquarters.19
In addition, Internet technology is helping to make prospecting more efﬁcient.
Company Web sites provide an introduction to self-identiﬁed potential customers and,for some businesses, may lead to on-line orders. For more complex transactions, thesite provides a way for the buyer to contact the seller—for example, through a link toan e-mail address. The Pall Corporation, which makes ﬂuid ﬁltration and puriﬁcation
technologies, has all e-mail directed to company headquarters, with leads goingdirectly to the appropriate sales rep. The quality and quantity of leads generated by its
Web site (www.pall.com) has prompted the firm to promote its home page moreaggressively.20
As another example, Lucent Technologies (www.lucent.com) combines e-mailwith Web marketing to generate more qualiﬁed sales leads. A typical campaign starts
with an e-mail inviting prospects to learn more about a particular offer (and qualify fora free gift) by visiting a customized Web page. Once there, prospects answer a few
qualifying questions and can then request information to be sent by mail. Lucent’s
automated system separates these leads based on product needs, and contacts the bestprospects 2 weeks later, offering free, downloadable software for analyzing total product costs. Prospects who choose the download are considered hot leads, so the systemsends Lucent’s sales force complete contact data on these prospects for immediate follow-up. “We never had to pick up the phone, and we’ve already established a relationship with them,” notes Lucent’s senior manager of marketing services.21

Motivating Sales Representatives
Some ambitious sales representatives are self-starters who will put forth their best
effort without any special coaching. The majority of reps, however, require moreencouragement and special incentives. This is especially true of field selling, which
can be frustrating because reps usually work alone, keep irregular hours, are often

Managing the Sales Forceaway from home, frequently lack the authority to do what is necessary to win an
account, and sometimes lose large orders they have worked hard to obtain. Most people, moreover, require incentives, such as ﬁnancial gain or social recognition, to operate at full capacity.
Studying sales rep motivation, Churchill, Ford, and Walker developed a model
indicating that the higher the salesperson’s motivation, the greater his or her effort.22
Greater effort will lead to greater performance, greater performance will lead togreater rewards, greater rewards will lead to greater satisfaction, and greater satisfaction will reinforce motivation. The model thus implies that sales managers must beable to convince salespeople that (1) They can sell more by working harder or by being
trained to work smarter, and (2) the rewards for better performance are worth the extra effort.
According to this research, the most-valued reward was pay, followed by promotion, personal growth, and sense of accomplishment. The least-valued rewards wereliking and respect, security, and recognition. Thus, salespeople seem highly motivatedby pay and the chance to get ahead and satisfy their intrinsic needs, and less motivatedby compliments and security. The researchers also found that the importance of motivators varied with demographic characteristics. Financial rewards were mostly valued
by older, longer-tenured people and those who had large families, while higher-orderrewards such as recognition were more valued by young salespeople who were unmarried or had small families and usually more formal education. However, motivators
can vary across countries. Whereas money is the number-one motivator of 37 percent
of U.S. salespeople, only 20 percent of salespeople in Canada feel the same way.
Salespeople in Australia and New Zealand were the least motivated by a fat paycheck.23
Sales Quotas
Many companies set sales quotas prescribing what reps should sell during the year.
Quotas can be set on dollar sales, unit volume, margin, selling effort or activity, andproduct type. After setting quotas, management often ties salesperson compensation
to degree of quota fulﬁllment.
Sales quotas are developed from the annual marketing plan. As described in
Chapter 3, management first prepares a sales forecast, which becomes the basis forplanning production, workforce size, and ﬁnancial requirements. Then the ﬁrm canestablish sales quotas for regions and territories, often setting the total of all quotas
higher than the sales forecast to encourage managers and salespeople to perform attheir best level. If they fail to make their quotas, the company nevertheless might makeits sales forecast.
In turn, each area sales manager divides that area’s quota to arrive at an individual quota for each sales rep. A common approach to individual quotas is to set theindividual rep’s quota at least equal to the person’s previous year’s sales plus some fraction of the difference between area sales potential and previous year’s sales. The more
the rep reacts favorably to pressure, the higher the fraction should be.
Supplementary Motivators
Companies use additional motivators to stimulate sales force effort. One motivator isthe periodic sales meeting, a social occasion that also serves as an important tool for
education, communication, and motivation. Many companies sponsor sales contests tospur the sales force to a special selling effort above what is normally expected. The
contest should present a reasonable opportunity for enough salespeople to win. At
IBM, about 70 percent of the sales force qualiﬁes for the 100 percent Club; the reward
is a 3-day trip capped off by a recognition dinner and a special pin.

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Whether a sales contest is focused on selling a speciﬁc product or products during a limited time period or is a more general recognition of top revenue earners forthe period, the reward should be commensurate with the achievement. Reps who arewell paid and whose earnings are based in large part on commissions are more likely
to be motivated by a trip, a trophy, or merchandise than by a check of equal value. At
the same time, some ﬁrms are successfully using less conventional rewards to motivate
sales personnel. Ann Machado, founder and owner of Creative Stafﬁng (an employment services ﬁrm), rewards both sales and nonsales employees with expensive dinners, parties, ﬂowers, spa sessions, cooking lessons, and extra vacation time. Her secretis letting people pick the reward they want and outline what they will do to earn it.
Then all she has to do is approve it. “Letting people choose their own rewards andgoals empowers them,” says Machado.24

Evaluating Sales Representatives
We have been describing the feed-forward aspects of sales supervision—how management communicates what sales reps should be doing and motivates them to do it. But
good feed-forward requires good feedback, which means getting regular informationfrom reps to evaluate their performance.
Sources of Information
Management can obtain information about reps in several ways, including sales
reports, personal observation, customer letters and complaints, customer surveys, andconversations with other sales representatives. Many companies require their representatives to develop an annual territory marketing plan in which they outline their program for developing new accounts and increasing business from existing accounts.
This type of report casts sales reps into the role of market managers and proﬁt centers.
Sales managers study these plans, make suggestions, and use them to develop sales
quotas.
Sales reps write up completed activities on call reports and, in addition, submit
expense reports, new-business reports, lost-business reports, and reports on local business and economic conditions. These reports provide raw data from which sales managers can extract key indicators of sales performance: (1) average number of sales calls
per rep per day, (2) average sales call time per contact, (3) average revenue per salescall, (4) average cost per sales call, (5) entertainment cost per sales call, (6) percentage of orders per hundred sales calls, (7) number of new customers per period,(8) number of lost customers per period, and (9) sales force cost as a percentage of
total sales.
Formal Evaluation
Sales reports, along with other observations, supply the raw materials for evaluation.
There are several approaches to conducting evaluations. One type of evaluation compares the rep’s current performance to that individual’s past performance and to overall
company averages on key sales performance indicators. These comparisons help management pinpoint speciﬁc areas for improvement. For example, if one rep’s averagegross proﬁt per customer is lower than the company’s average, that rep could be concentrating on the wrong customers or not spending enough time with each customer.
Evaluations can also assess the rep’s knowledge of the ﬁrm, products, customers,competitors, territory, and responsibilities; relevant personality characteristics; andany problems in motivation or compliance.25 As indicated earlier, an increasing number of companies are measuring customer satisfaction not only with their product andcustomer support service, but also with their salespeople. The sales manager can alsoPrinciples of Personal Sellingcheck that salespeople know and observe the law. For example, under U.S. law, salespeople’s statements must match the product’s advertising claims. In selling to businesses, salespeople may not offer bribes to purchasing agents or others inﬂuencing asale; they may not obtain or use competitors’ technical or trade secrets throughbribery or industrial espionage. Finally, salespeople must not disparage competitors orcompeting products by suggesting things that are not true.26

PRINCIPLES OF PERSONAL SELLING
Personal selling is an ancient art that has spawned many principles. Among these arethree major aspects we will examine here: sales professionalism, negotiation, and relationship marketing (see Figure 5-17).27

Sales Professionalism
In the course of instilling professionalism, all sales-training approaches try to convert
a salesperson from a passive order taker into an active order getter. Order takers operateon the assumption that customers know their own needs, resent attempts to inﬂuencethem, and prefer courteous and self-effacing salespersons. There are two basic
approaches in training salespersons to be order getters—a sales-oriented approach and acustomer-oriented approach. The sales-oriented approach trains the person in the stereotyped high-pressure techniques traditionally used in selling automobiles. This form of
selling assumes that customers are not likely to buy except under pressure, that they
are inﬂuenced by a slick presentation, and that they will not be sorry after signing theorder—or, if they are, that it doesn’t matter.
The customer-oriented approach trains salespeople in customer problem solving.
The rep learns to listen and ask questions in order to identify customer needs andcome up with sound product solutions. This approach assumes that customers havelatent needs that constitute opportunities, that they appreciate constructive suggestions, and that they will be loyal to sales reps who have their long-term interests atheart. Clearly, the professionalism of this customer-orientation is more in keeping withthe marketing concept than are the hard-sell and order-taker approaches.
No approach works best in all circumstances. Yet most professional salestraining programs agree on the major steps involved in any effective sales process(see Figure 5-18).
Here is how these steps are applied in industrial selling:28➤

Prospecting and qualifying. The ﬁrst step in selling is to identify and qualify prospects.
Companies can generate leads by examining data sources (newspapers, directories,
CD-ROMs, Web sites); exhibiting at trade shows to encourage drop-bys; inviting
customers to suggest the names of prospects; cultivating referral sources such as

Figure 5-17 Managing the Sales Force: Improving Effectiveness

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Figure 5-18 Major Steps in Effective Selling
suppliers, dealers, and bankers; contacting trade associations; engaging in speaking
and writing activities that draw attention; using the telephone, mail, and theInternet to ﬁnd leads; and dropping in unannounced (cold canvassing). Companies
can then qualify the leads (by contacting them by mail or phone) to assess theirlevel of interest and ﬁnancial capacity. The hottest prospects are turned over to theﬁeld sales force, while the merely warm prospects are turned over to thetelemarketing unit for follow-up.
➤

Preapproach. The salesperson needs to learn as much as possible about the prospectcompany (what it needs, who is involved in the purchase decision) and its buyers(their personal characteristics and buying styles) by consulting trade and databasesources. The salesperson can then set call objectives: to qualify the prospect, gather
information, make an immediate sale. Another task is to decide on the best
approach, which might be a personal visit, a phone call, or a letter. The best timing
should also be considered because many prospects are busy at certain times. Finally,
the salesperson should plan an overall sales strategy for the account.

➤

Approach. In this step, the salesperson decides how to get the relationship off to agood start. The salesperson might consider wearing clothes similar to what thebuyers typically wear, show courtesy and attention to the buyer, and avoid distracting
mannerisms. When meeting with the prospect, the rep should open with a positive
statement and then concentrate on understanding the buyer’s needs throughcareful questioning and active listening.

➤

Presentation and demonstration. Having listened to the buyer’s needs, the salesperson
now tells the product “story,” being careful not to overemphasize product features(a product orientation) at the expense of a discussion of beneﬁts and value (acustomer orientation). Companies have developed three different styles of sales
presentation. The oldest is the canned approach, a memorized sales talk covering themain points. It is based on stimulus-response thinking; that is, the buyer is passive
and can be moved to purchase by the use of the right stimulus words, pictures, andactions. The formulated approach is also based on stimulus-response thinking but ﬁrst
identiﬁes the buyer’s needs and buying style and then uses an approach formulated
to this type of buyer. The need-satisfaction approach starts with a search for thecustomer’s real needs, after which the salesperson takes on the role of aknowledgeable consultant to help the customer save or make more money.

➤

Overcoming objections. Customers almost always pose objections during thepresentation or when asked for the order. To handle these objections, thesalesperson maintains a positive approach, asks the buyer to clarify the objection,
asks questions that lead the buyer to answer his or her own objection, denies thevalidity of the objection, or turns the objection into a reason for buying. Handlingand overcoming objections is a part of the broader skills of negotiation, which are
discussed in the next section.

Principles of Personal Selling➤

Closing. Now the salesperson attempts to close the sale using one of several closing
techniques. The rep can ask for the order, recapitulate the points of agreement, offer
to help the buyer write up the order, ask whether the buyer wants A or B, get thebuyer to make minor choices such as the color or size, or indicate what the buyer willlose if the order is not placed now. In addition, the rep might offer the buyer an
inducement to close, such as a special price, an extra quantity, or a token gift.

➤

Follow-up and maintenance. Follow-up and maintenance are necessary to ensure
customer satisfaction and repeat business. Immediately after closing, the salesperson
should cement any necessary details on delivery time, purchase terms, and othermatters that are important to the customer. The salesperson should schedule a followup call when the initial order is received to check on proper installation, training, andservicing. The purpose is to detect any problems, assure the buyer of the salesperson’sinterest, and reduce any cognitive dissonance that might have arisen. The salesperson
should also develop a maintenance and growth plan for the account.

Negotiation
Salespeople involved in business-to-business deals, in particular, need negotiatingskills as they work with customers to reach agreement on price and other terms of salewithout making concessions that will hurt proﬁtability. Although price is the most frequently negotiated issue, other issues include contract completion time; quality ofgoods and services; purchase volume; responsibility for ﬁnancing, risk taking, promotion, and title; and product safety.
To be effective in sales negotiation, reps must be well prepared and have planning skill, knowledge of subject matter being negotiated, the ability to think clearly
and rapidly under pressure and uncertainty, the ability to express thoughts verbally, listening skill, judgment and general intelligence, integrity, the ability to persuade others, and patience.29 These attributes come into play when it is appropriate to negotiatewith a customer or prospect—which is not in every situation.
When to Negotiate
According to Lee and Dobler, negotiation is an appropriate procedure for concluding
a sale when (1) many factors bear not only on price, but also on quality and service;(2) business risks cannot be accurately predetermined; (3) a long period of time isrequired to produce the product purchased; (4) production is interrupted often
because of numerous change orders.30
There is an obvious advantage in knowing the other party’s reservation price andin making one’s own reservation price seem higher (for a seller) or lower (for a buyer)
than it really is. The openness with which buyers and sellers reveal their reservation
prices depends upon the bargainers’ personalities, the negotiation circumstances, andexpectations about future relations.
Formulating a Negotiation Strategy
Successful salespeople prepare a strategic plan before meeting their buyers and making
tactical decisions during negotiation sessions. A negotiation strategy is a commitment
to an overall approach that has a good chance of achieving the negotiator’s objectives.
Some negotiators pursue a “hard” strategy, whereas others maintain that a “soft”
strategy yields more favorable results. Fisher and Ury propose a strategy of “principled
negotiation.” In this strategy, the parties (1) actively listen to each other’s viewpoint,(2) focus on their interests rather than on their personal differences or positions,(3) search for options that offer mutual gain, and (4) insist on objective criteria toassess the solution.31

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In line with this strategy, Fisher and Ury offer this advice about negotiation tactics: If the other party is more powerful, the best tactic is to know one’s BATNA—Best
Alternative to a Negotiated Agreement. By identifying the alternatives if a settlement is
not reached, the company sets a standard against which any offer can be measured.
Knowing its BATNA protects the company from being pressured into accepting unfavorable terms from a more powerful opponent.
What should a ﬁrm’s negotiators do when the other side uses a take-it-or-leave-it
tactic or seats them with the sun in their eyes? The ﬁrm’s negotiators should recognize
the tactic, raise the issue explicitly, and question the tactic’s legitimacy and desirability—in other words, negotiate over it. If negotiating fails, the company should resort toits BATNA and terminate the negotiation until the other side ceases to employ thesetactics. Meeting such tactics with defending principles is more productive than counterattacking with tricky tactics.

Relationship Marketing
The principles of personal selling and negotiation thus far described are transactionoriented because their purpose is to close a speciﬁc sale. However, in many cases, thecompany is not seeking an immediate sale but rather to build a long-term suppliercustomer relationship by demonstrating that it has the capabilities to serve the account’s
needs in a superior way over the long run.
More companies today are therefore emphasizing relationship marketing rather
than transaction marketing, as discussed in Chapter 1. This has come about because
larger customers are often global and prefer suppliers that can (1) sell and deliver a
coordinated set of products and services to many locations; (2) quickly solve problems
that arise in different locations; and (3) work closely with customer teams to improve
products and processes.
However, some suppliers are still not set up to meet these requirements; theirproducts are sold by separate sales forces that do not work together easily, and theirtechnical people may not be willing to spend time to educate a customer. To succeed
in winning and maintaining accounts in today’s demanding environment, ﬁrms mustencourage sales teamwork and reward it with appropriate compensation for work onshared accounts. They also need to establish better goals and measures for their sales
force and reinforce the importance of teamwork in their training programs, evenwhile honoring individual initiative.32
When a relationship management program is properly implemented throughout the organization—coordinating company efforts in marketing and sales andbeyond—the organization will begin to focus as much on managing its customers as
on managing its products. At the same time, smart companies realize that while there
is a strong and warranted move toward relationship marketing, it is not effective in all
situations. Ultimately, companies must judge which speciﬁc segments and customers
will respond proﬁtably to relationship management.

EXECUTIVE SUMMARY
Salespeople—the company’s link to its customers—perform one or more of thesetasks: prospecting, targeting, communicating, selling, servicing, information gathering, and allocating. Designing the sales force requires making decisions regarding
objectives, strategy, structure, size, and compensation. Determining objectives andstrategy requires deﬁning the speciﬁc objectives the sales force will achieve and selecting the approaches and type of sales force that will be most effective.

NotesChoosing the sales force structure entails dividing territories by geography, product, or market (or some combination of these). Estimating how large the sales force
needs to be involves estimating the total workload and how many sales hours (andhence, salespeople) will be needed. Compensating the sales force entails determining
what types of salaries, commissions, bonuses, expense accounts, and beneﬁts to give, andhow much weight customer satisfaction should have in determining total compensation.
There are five steps involved in managing the sales force: (1) recruiting andselecting sales representatives; (2) training reps in sales techniques and in the company’s products, policies, and customer-satisfaction orientation; (3) supervising thesales force by establishing norms for customer and prospect calls and helping reps touse their time efﬁciently; (4) motivating the sales force, balancing quotas, monetary
rewards, and supplementary motivators; and (5) evaluating individual and group sales
performance through effective feedback.
Three major aspects of personal selling are sales professionalism, negotiation,and relationship marketing. Most trainers see professional selling as a seven-stepprocess: prospecting and qualifying customers, preapproach, approach, presentationand demonstration, overcoming objections, closing, and follow-up and maintenance.
Especially in business-to-business deals, professional selling requires negotiation, theart of arriving at transaction terms that satisfy both parties. Today’s most successfulﬁrms are deemphasizing transaction-oriented marketing in favor of relationship marketing, which focuses on developing long-term, mutually beneficial relationships
between two parties.

NOTES
1. For estimates of the cost of sales calls, see Sales Force Compensation (Chicago: Dartnell’s 27th
Survey, 1992), and Sales & Marketing Management’s 1993 sales manager’s budget planner(June 28, 1993), pp. 3–75.
2. For more on sales force automation issues, see Doug Bartholomew, “Hard Sell?” Industry
Week, March 1, 1999, www.industryweek.com; James LaVoy, “So, Did You Get What You Paid
For?” Sales & Field Force Automation, February 1999, pp. 48–54.
3. Adapted from Robert N. McMurry, “The Mystique of Super-Salesmanship,” Harvard
Business Review, March–April 1961, p. 114. Also see William C. Moncrief III, “Selling
Activity and Sales Position Taxonomies for Industrial Salesforces,” Journal of Marketing
Research, August 1986, pp. 261–70.
4. Sarah Lorge, “A Priceless Brand,” Sales & Marketing Management, October 1998,
pp. 102–10; “The Wall Street Transcript Publishes Retail Holiday Spending Report,”
PRNewswire, December 30, 1999, www.hoovers.com.
5. Christopher Power, “Smart Selling: How Companies Are Winning Over Today’s Tougher
Customer,” Business Week, August 3, 1992, pp. 46–48.
6. For further reading, see John F. Martin and Gary S. Tubridy, “Major AccountManagement,” in AMA Management Handbook, 3d ed. ed. John J. Hampton (New York:
Amacom, 1994), pp. 3-25–3-27; Sanjit Sengupta, Robert E. Krapfel, and Michael A.
Pusateri, “The Strategic Sales Force,” Marketing Management, Summer 1997, pp. 29–34;
Robert S. Duboff and Lori Underhill Sherer, “Customized Customer Loyalty,” Marketing
Management, Summer 1997, pp. 21–27; Tricia Campbell, “Getting Top Executives to Sell,”Sales & Marketing Management, October 1998, p. 39.
7. Ira Sager, “Inside IBM: Internet Business Machines,” Business Week, December 13, 1999,
pp. EB20–EB38.

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8. Luis R. Gomez-Mejia, David B. Balkin, and Robert L. Cardy, Managing Human Resources(Upper Saddle River, NJ: Prentice-Hall, 1995), pp. 416–18.
9. “What Salespeople Are Paid,” Sales & Marketing Management, February 1995, pp. 30–31;
Christopher Power, “Smart Selling: How Companies Are Winning Over Today’s Tougher
Customer,” Business Week, August 3, 1992, pp. 46–48; William Keenan Jr., ed., The Sales &Marketing Management Guide to Sales Compensation Planning: Commissions, Bonuses & Beyond(Chicago: Probus Publishing, 1994).
10. George H. Lucas Jr., A. Parasuraman, Robert A. Davis, and Ben M. Enis, “An Empirical
Study of Sales Force Turnover,” Journal of Marketing, July 1987, pp. 34–59.
11. See Charles Garﬁeld, Peak Performers: The New Heroes of American Business (New York: Avon
Books, 1986); “What Makes a Supersalesperson?” Sales & Marketing Management, August 23,
1984, p. 86; “What Makes a Top Performer?” Sales & Marketing Management, May 1989; andTimothy J. Trow, “The Secret of a Good Hire: Proﬁling,” Sales & Marketing Management,
May 1990, pp. 44–55.
12. David Mayer and Herbert M. Greenberg, “What Makes a Good Salesman?” Harvard
Business Review, July–August 1964, pp. 119–25.
13. Robert L. Lindstrom, “Training Hits the Road,” Sales & Marketing Management, June 1995,
pp. 10–14.
14. Sales Force Compensation (Chicago: Dartnell’s 25th Survey, 1989), p. 13.
15. Michael R. W. Bommer, Brian F. O’Neil, and Beheruz N. Sethna, “A Methodology for
Optimizing Selling Time of Salespersons,” Journal of Marketing Theory and Practice, Spring
1994, pp. 61–75.
16. See Thomas Blackshear and Richard E. Plank, “The Impact of Adaptive Selling on Sales
Effectiveness Within the Pharmaceutical Industry,” Journal of Marketing Theory and Practice,
Summer 1994, pp. 106–25.
17. “Automation Nation,” Marketing Tools, April 1997; Scott Hample, “Made to Order,”Marketing Tools, August 1997.
18. “Are Salespeople Gaining More Selling Time?” Sales & Marketing Management, July 1986,
p. 29.
19. John W. Verity, “Taking a Laptop on a Call,” Business Week, October 25, 1993, pp. 124–25.
20. Charles Waltner, “Pall Corp. Wins Business with Info-Driven Web Site,” Net Marketing,
October 1996.
21. “The Second Annual SMA Customer Interaction Awards,” Sales and Marketing Automation,
January 2000, www.sma.com.
22. See Gilbert A. Churchill Jr., Neil M. Ford, and Orville C. Walker Jr., Sales Force Management:
Planning, Implementation and Control, 4th ed. (Homewood, IL: Irwin, 1993). Also see Jhinuk
Chowdhury, “The Motivational Impact of Sales Quotas on Effort,” Journal of Marketing
Research, February 1993, pp. 28–41; Murali K. Mantrala, Prabhakant Sinha, and Andris A.
Zoltners, “Structuring a Multiproduct Sales Quota-Bonus Plan for a Heterogeneous Sales
Force: A Practical Model-Based Approach,” Marketing Science 13, no. 2 (1994): 121–44;
Wujin Chu, Eitan Gerstner, and James D. Hess, “Costs and Beneﬁts of Hard-Sell,” Journal ofMarketing Research, February 1995, pp. 97–102.
23. “What Motivates U.S. Salespeople?” American Salesman, February 1994, pp. 25, 30.
24. “A Gift for Rewards,” Sales & Marketing Management, March 1995, pp. 35–36.
25. See Philip M. Posdakoff and Scott B. MacKenzie, “Organizational Citizenship Behaviors
and Sales Unit Effectiveness,” Journal of Marketing Research, August 1994, pp. 351–63.
26. For further reading, see Dorothy Cohen, Legal Issues in Marketing Decision Making(Cincinnati, OH: South-Western, 1995) and Henry R. Cheeseman, Contemporary Business
Law, 3rd edition (Upper Saddle River, NJ: Prentice-Hall, 2000).

Notes
27. For an excellent summary of the skills needed by sales representatives and sales managers,
see Rolph Anderson and Bert Rosenbloom, “The World Class Sales Manager: Adapting to
Global Megatrends,” Journal of Global Marketing 5, no. 4 (1992): 11–22.
28. Some of the following discussion is based on W. J. E. Crissy, William H. Cunningham, andIsabella C. M. Cunningham, Selling: The Personal Force in Marketing (New York: John Wiley,
1977), pp. 119–29.
29. For additional reading, see Howard Raiffa, The Art and Science of Negotiation (Cambridge,
MA: Harvard University Press, 1982); Max H. Bazerman and Margaret A. Neale, Negotiating
Rationally (New York: Free Press, 1992); James C. Freund, Smart Negotiating (New York:
Simon & Schuster, 1992); Frank L. Acuff, How to Negotiate Anything with Anyone Anywhere
Around the World (New York: American Management Association, 1993); and Jehoshua
Eliashberg, Gary L. Lilien, and Nam Kim, “Searching for Generalizations in Business
Marketing Negotiations,” Marketing Science 14, no. 3, pt. 1 (1995): G47–G60.
30. See Donald W. Dobler, Purchasing and Materials Management, 5th ed. (New York: McGrawHill, 1990).
31. Adapted from Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without
Giving In, rev. ed. (Boston: Houghton Mifﬂin, 1992), p. 57.
32. See Frank V. Cespedes, Stephen X. Doyle, and Robert J. Freedman, “Teamwork for Today’s
Selling, Harvard Business Review, March–April 1989, pp. 44–54, 58. Also see Cespedes,
Concurrent Marketing: Integrating Product, Sales, and Service (Boston: Harvard Business School
Press, 1995).

315

SECTION SIX

Designing
Global Market
Offerings
We willexamine the following
questions:Your company does not belong■

What factors should a company
review before deciding to go
abroad?

■How can companies evaluate
and select specific foreign markets to enter?

■

What are the major ways ofentering a foreign market?

■

To what extent must the company adapt its products andmarketing program to each foreign country?

■

How should the company
manage and organize its international activities?

in markets where it can’tbe the best.

T

he world is rapidly shrinking with the advent of faster communication, transportation,and financial flows. Products developed in one country—Gucci purses, Mont Blanc
pens, McDonald’s hamburgers, Japanese sushi, Chanel suits, German BMWs—are find-ing enthusiastic acceptance in other countries. A German businessman may wear an Armani suit to meet an English friend at a Japanese restaurant who later returns home todrink Russian vodka and watch an American soap on TV.
Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000. In fact, these companies today control
one-third of all private-sector assets and enjoy worldwide sales of $6 trillion. International
trade now accounts for a quarter of U.S. GDP, up from 11 percent in 1970.1
True, many companies have conducted international marketing for decades. Nestlé,
Shell, Bayer, and Toshiba are familiar to consumers around the world. But global competition is intensifying: Domestic companies that never thought about foreign competitors suddenly find these competitors in their backyards. Newspapers report on Japanese
victories over U.S. producers in consumer electronics, motorcycles, copying machines,
cameras, and watches; the gains of Japanese, German, Swedish, and Korean car imports
in the U.S. market; and the loss of textile and shoe markets to Third World imports.
Many companies that are thought to be American firms are really foreign firms: Bantam
Books, Baskin-Robbins Ice Cream, Firestone Tires, Dr. Pepper soft drinks, and Pillsbury
cake mixes.
Although some U.S. businesses may want to eliminate foreign competition throughprotective legislation, the better way to compete is to continuously improve products athome and expand into foreign markets. Ironically, although companies need to enter andcompete in foreign markets, the risks are high: shifting borders, unstable governments,
foreign-exchange problems, corruption, and technological pirating.2 But we argue thatcompanies selling in global industries have no choice but to internationalize their operations. To do this, they must make a series of decisions (Figure 6-1).
■

A global industry is an industry in which the strategic positions of competitors
in major geographic or national markets are fundamentally affected by their overall global positions.3 A global firm is a firm that operates in more than one country and captures R&D, production, logistical, marketing, and financial advantages
in its costs and reputation that are not available to purely domestic competitors.
Global firms plan, operate, and coordinate their activities on a worldwide basis. Ford’s“world truck” has a European-made cab and a North American–built chassis, is assembled
in Brazil, and is imported into the United States for sale. Otis Elevator gets its door systems from France, small geared parts from Spain, electronics from Germany, and special
motor drives from Japan, and uses the United States for systems integration. A company
need not be large to sell globally. Small and medium-size firms can practice global nichemanship. Even a sports league can be global:■

The NBA When the NBA season is over, basketball’s big stars don’t head to
Florida for rest and recreation. No, Shaquille O’Neal is off to South Korea, Karl366

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Malone to Hong Kong, Allen Iverson to Chile. Deployed by the NBA and global
sponsors Coca-Cola, Reebok, and McDonald’s, these well-paid traveling salesmenhawk soda, sneakers, burgers, and basketball to legions of young fans. Boys in
China wear Bulls gear because they all want to be like Michael Jordan. The NBA,

which has 105 global staff members, has emerged as the first truly global sports
league. NBA games are televised everywhere, global sponsors have signed up,
and the league and its partners have sold nearly $500 million of NBA-licensed

Deciding whether
to go abroadbasketballs, backboards, T-shirts, and caps outside the United States.4

D ECIDING WHETHER TO GO ABROAD
Most companies would prefer to remain domestic if their domestic market were large
enough. Managers would not need to learn other languages and laws, deal with volatilecurrencies, face political and legal uncertainties, or redesign their products to suit different customer needs and expectations. Business would be easier and safer.
Yet several factors are drawing more and more companies into the international
arena:■

Global firms offering better products or lower prices can attack the company’s
domestic market. The company might want to counterattack these competitors
in their home markets.

■

The company discovers that some foreign markets present higher profit opportunities than the domestic market.

■

The company needs a larger customer base to achieve economies of scale.

■

The company wants to reduce its dependence on any one market.

■

The company’s customers are going abroad and require international servicing.
Before making a decision to go abroad, the company must weigh several risks:■■

The company might not understand foreign customer preferences and fail to offer a competitively attractive product (Table 6.1 lists some famous blunders inthis arena).
The company might not understand the foreign country’s business culture or
know how to deal effectively with foreign nationals. Table 6.2 lists some of themany challenges.

Hallmark cards failed when they were introduced in France. The French dislike syrupy sentimentand prefer writing their own cards.
Philips began to earn a profit in Japan only after it had reduced the size of its coffeemakers to
fit into smaller Japanese kitchens and its shavers to fit smaller Japanese hands.

Deciding whichmarkets toenter

Deciding how
to enter themarketDeciding on
the marketing
program

Deciding on
the marketingorganization

F I G U R E

6-1

Major Decisions in International
Marketing

T A B L E

6. 1

Blunders in International
MarketingCoca-Cola had to withdraw its two-liter bottle in Spain after discovering that few Spaniards
owned refrigerators with large enough compartments to accommodate it.
General Foods Tang initially failed in France because it was positioned as a substitute for orange
juice at breakfast. The French drink little orange juice and almost none at breakfast.
Kelloggs Pop-Tarts failed in Britain because the percentage of British homes with toasters was
significantly lower than in the United States, and the product was too sweet for British tastes.
P&G s Crest toothpaste initially failed in Mexico when it used the U.S. campaign. Mexicans did
not care as much for the decay-prevention benefit, nor did scientifically oriented advertisingappeal to them.
General Foods squandered millions trying to introduce packaged cake mixes to Japanese consumers.The company failed to note that only 3 percent of Japanese homes were equipped withovens. Then they promoted the idea of baking cakes in Japanese rice cookers, overlooking thefact that the Japanese use their rice cookers throughout the day to keep rice warm and ready.
S. C. Johnsons wax floor polish initially failed in Japan. The wax made the floors too slippery, andJohnson had overlooked the fact that Japanese do not wear shoes in their homes.

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T A B L E

6.2

1. Huge foreign indebtedness:

Many countries have accumulated huge foreign debts
on which it is difficult to pay even the interest. Amongthese countries are Indonesia, Mexico, and Russia.

2. Unstable governments:

High indebtedness, high inflation, and high unemployment in several countries have resulted in unstable governments that expose foreign firms to the risks of
expropriation, nationalization, and limits on profit repatriation. Many companies buy political-risk-assessment
reports such as Business International s (BI) Country Assessment Service, BERI, or Frost & Sullivans World Political Risk Forecasts.

3. Foreign-exchange problems:

High indebtedness and economic and political instability decrease the value of a country s currency. Foreign
firms want payment in hard currency with profit-repatriation rights, but these options are not available inmany markets.

4. Foreign-government entry
requirements and bureaucracy:

Governments place many regulations on foreign firms.
For example, they might require joint ventures with the
majority share going to the domestic partner, a highnumber of nationals to be hired, transfer of technology
know-how, and limits on profit repatriation.

5. Tariffs and other trade barriers:

Governments often impose high tariffs to protect theirindustries. They also resort to invisible trade barriers suchas slowing down important approvals and inspections,and requiring costly product adjustments.

6. Corruption:

Officials award business to the highest briber rather thanthe lowest bidder. U.S. managers are prohibited by theForeign Corrupt Practices Act of 1977 from paying bribes,
but competitors from other countries operate under nosuch limitation. The OECD group of leading industrial
countries recently agreed that bribery of foreign officials
by companies should become a criminal offense.

7. Technological pirating:

A company locating its plant abroad worries about foreign managers learning how to make its product andbreaking away to compete openly or clandestinely. Thishas happened in such diverse areas as machinery, electronics, chemicals, and pharmaceuticals.

8. High cost of product andcommunication adaptation:

A company going abroad must study each foreign market carefully, become sensitive to its economics, laws,
politics, and culture, and adapt its products andcommunications to each market s tastes.

9. Shifting borders:National borders are fundamental to marketing because
they dominate and shape economic behavior within the
country s borders.Changing boundaries may mean moving targets for marketers.

Challenges in International
Marketing368

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The company might underestimate foreign regulations and incur unexpected
costs.

■

The company might realize that it lacks managers with international experience.

■

The foreign country might change its commercial laws, devalue its currency, or
undergo a political revolution and expropriate foreign property.

Because of the competing advantages and risks, companies often do not act until some event thrusts them into the international arena. Someone—a domestic exporter, a foreign importer, a foreign government—solicits the company to sell abroad.
Or the company is saddled with overcapacity and must find additional markets for
its goods.

D

ECIDING WHICH MARKETS TO ENTER

In deciding to go abroad, the company needs to define its international marketing
objectives and policies. What proportion of foreign to total sales will it seek? Most
companies start small when they venture abroad. Some plan to stay small. Others
have bigger plans, believing that their foreign business will eventually be equal to, oreven more important than, their domestic business. “Going abroad” on the Internet
poses special challenges; see the Marketing for the Millennium box, “WWW.TheWorldIsYourOyster.com: The Ins and Outs of Global E-Commerce.”
The company must decide whether to market in a few countries or many countries and determine how fast to expand. Consider Tyco:■

Tyco Toys Inc. When Tyco Toys Inc. began expanding into Europe in 1990,
a slew of acquisitions and best-sellers at home had propelled the company tofourth place among U.S. toy makers, from twenty-second place only four years
before. Yet non-U.S. sales still accounted for only 13 percent of total sales,
and the company’s rivals had significant overseas sales. Tyco wanted to close
the gap quickly and better serve global-minded retailers such as Toys “R” Us.
The initial plan was to open one European subsidiary a year, with each expected to turn a profit 12 months later. But the company then speeded up
the pace by starting subsidiaries in Italy, Spain, Germany, and Belgium all in
one year. Tyco also bought Universal Matchbox Group Ltd., a major Hong
Kong producer of die-cast toy vehicles. Tyco’s unusually rapid push abroad,coupled with a domestic sales slump, soon strained the ranks of its senior executives, who knew little about running a far-flung empire. In its 1995 annual report, the company reported its third consecutive year of net losses,
mainly from Europe. To cut its losses, Tyco ended up liquidating the Italiansubsidiary, merging operations in three other countries, and dismissing onethird of its European staff.5

In contrast, consider Amway’s experience:■

Amway Known for its neighbor-to-neighbor direct-selling networks, consumerproduct company Amway expanded into Australia in 1971, a country far awayfrom but similar to the U.S. market. In the 1980s, Amway expanded into 10
more countries, and the pace increased rapidly from then on. By 1997, Amway
had evolved into a multinational juggernaut with a sales force of 2.5 million
hauling in $6.8 billion on doorsteps from Hungary to Malaysia to Brazil. Today, Amway sells products in 43 countries. Its goal: to have overseas markets
account for 80 percent of its sales during the next decade. This is not an unrealistic or overly ambitious goal considering that Amway already gains 70
percent of its $6.8 billion from foreign markets.6

Generally speaking, it makes sense to operate in fewer countries with a deeper
commitment and penetration in each. Ayal and Zif have argued that a company should
enter fewer countries when■

Market entry and market control costs are high.

■Product and communication adaptation costs are high.

■Population and income size and growth are high in the initial countries chosen.

■

Dominant foreign firms can establish high barriers to entry.7

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M A R K E T I N G

F O R

T H E

MILLENNIUM

WWW.TheWorldIsYourOyster.com: The Ins
and Outs of Global E-commerce
Just a few years ago, Cardiac Science was itching to break into
foreign markets, but it didn t know where to start. The company knew there was an overseas market for its medical devices and products, but figuring out how to get to that market
is a challenge for small companies. Fast forward to today: Fully
85 percent of Cardiac s revenue is international.Whereas muchof that business was developed through conventional U.S.
government export assistance channels, a growing number of
Cardiac Science s overseas customers are simply finding thecompany s defibrillators and heart monitors by clicking on
www.cardiacscience.com.
Companies small and large are taking advantage of cyberspaces vanishing national boundaries. Major marketers doing
global e-commerce range from automakers (General Motors) to
direct-mail companies (L.L.Bean and Lands End) to running shoe
giants (Nike and Reebok) to Internet superstars likeAmazon.com, which purchased three European companies tobuild its European book and video sales.
For some, marketing has been a hit or miss affair. They put
up content in English for the American market, and if any international users stumble across it and end up buying something,great. Hyperspace Cowgirls, a three-year-old, New York
City based developer of childrens software, has several European deals in the works even though it has no marketing effort
overseas. We don t advertise overseas at all, says Susan Shaw,

370

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Strategies

president of the company, whose web address is www.hygirls.com. People just find you.
Other marketers have made a strategic decision to become
part of the global cyberbazaar. They re using the Web and online services to reach new customers outside their home countries, to support existing customers who live abroad, to sourcefrom international suppliers, and to build global brand awareness. Some of these companies adapt their Web sites to provide
country-specific content and services to their best potential international markets, ideally in the local language. Reebok has
launched a multilingual European Web site available in English, French, German, Spanish, and Italian in an attempt to increase brand awareness in its individual markets.The site, locatedat www.europe.reebok.com, is aimed at sports and fitness enthusiasts and includes local events in each market. Because of
the expected global e-commerce boom, some enterprising
companies are making Internet transactions between different
countries much easier and effective. For instance, in 1998 Digital Equipment Corporation and Globalink began offering automated e-mail and Web translation.
Yet, before companies have their Web pages automaticallytranslated, they need to find the countries or regions with thelargest potential on-line populations. Right now Europe andJapan are prime targets. Europe had lagged about four years behind the United States, but it s catching up quickly: On-line subscribers are expected to grow from 7 percent of Europes
population in 1998 to 13 percent in 2001. Several factors promise
to quicken that pace. Once telephone deregulation takes hold in(continued)

The company must also decide on the types of countries to consider. Attractiveness is influenced by the product, geography, income and population, political climate, and other factors. The seller might have a predilection for certain countries orregions. Kenichi Ohmae recommends that companies concentrate on selling in the“triad markets”—the United States, Western Europe, and the Far East—because thesemarkets account for a large percent of all international trade.8
Although Ohmae’s position makes short-run sense, it can spell disaster for theworld economy in the long run. The unmet needs of the developing world represent
huge potential markets for food, clothing, shelter, consumer electronics, appliances,and other goods. Many market leaders are now rushing into Eastern Europe, China,
Vietnam, and Cuba where there are many unmet needs to satisfy.
Regional economic integration—trading agreements between blocs of countries—
has intensified in recent years. This development means that companies are more
likely to enter entire regions overseas rather than do business with one nation at atime.

(continued)
Europe, Internet usage will certainly surge. Europeans may also
move faster because they don t have to retrofit systems or go
through a pioneer phase. Europe is slightly ahead of the UnitedStates when it comes to secure transactions.Visa, in fact, has chosen the EC for its largest pilot program to test security. Also, as
European businesses invest some $125 billion to prepare computers for the euro, they are simultaneously putting their businesses on-line.A 150-year-old Italian winemaker,Casa Garcia,now
uses the Internet to replace annual communications traffic of
35,000 faxes and letters between its offices, warehouses, andagents. With the Web, it is extending its network to 60 countries.
Despite encouraging e-commerce developments in Europe
and Asia, Internet marketers sometimes overstate global opportunities. Although Hong Kong alone had more than 90 Internet
service providers, less developed countries in Central and SouthAmerica or Africa have fewer or none at all, forcing users to makeinternational calls to go on-line. Because the backbone for theInternet originates in the United States, response times overseas
can be dismal. Even with acceptable phone lines and PC penetration, high connection costs sharply restrict Internet use. In Europe, Internet subscriptions typically run $75 a month, triple a
U.S. rate that allows unlimited Internet access on free local lines.

In addition, the global marketer may run up against governmental or cultural restrictions. In Germany, a vendor can t accept payment via credit card until two weeks after an order has
been sent. You also can t display a swastika on a computer
screen. So, if Amazon.com has a book on Nazi Germany with aswastika on the cover, is it legally responsible for breaking German law? The issue of who pays sales taxes and duties on global
e-commerce is murkier still.
Finally, businesses need to realize that the Web does not offer complete solutions for transacting global business andprobably never will. Most companies will never cut a final deal
via e-mail. People will still need to see and feel products at international trade shows.The Web will not surmount customs red
tape or local regulations regarding import or export of certain
goods. The Web also can t guarantee that goods will arrive in
perfect condition.
What the Web can do is make foreign customers aware ofones business. The Web has certainly done that for upscale retailer and cataloger The Sharper Image, which now gets a full 25
percent of its on-line business from overseas customers. The
company is thrilled about its global prospects but admits it isstill overwhelmed by the logistical challenges of serving overseas markets, such as language and currency issues.

Sources: Alice LaPlante, Global Boundaries.com, Computerworld, October 6, 1997, pp. G6 G9; Roberta Maynard, Trade Links via the Internet, Nation’s Business, December
1997, pp. 51 53; Michelle V. Rafter, Multilingual Sites Give Companies Access to Global Revenue Sources, Chicago Tribune, May 11, 1998, Business Section, p. 9; Marla Dickerson, Small Business Strategies; Technology; Foreign Concept; All Those Inflated Expectations Aside, Many Firms Are Finding the Internet Invaluable in Pursuing International Trade, Los Angeles Times, October 14, 1998, pp. C2, C10; Stephen Baker, Finally, Europeans Are Storming the Net, Business Week, May 11, 1998, p. 48; Eric J. Adams,
Ready, SET, Go! World Trade, April 1997, pp. 34 35; Reebok Targets Its New Web Site at Euro Markets, Marketing, October 1, 1998, p. 16; Peter Krasilovsky, A Whole New
World, Marketing Tools supplement, American Demographics, May 1996, pp. 22 25; Richard N. Miller, The Year Ahead, Direct Marketing, January 1997, pp. 42 44; Jack Gee;
Parlez-Vous Inter-Net? Industry Week, April 21, 1997, pp. 78 79.

REGIONAL FREE TRADE ZONES
Certain countries have formed free trade zones or economic communities—groups ofnations organized to work toward common goals in the regulation of international
trade. One such community is the European Union (EU). Formed in 1957, the European Union set out to create a single European market by reducing barriers to the freeflow of products, services, finances, and labor among member countries and developing policies on trade with nonmember nations. Today, the European Union is using a common currency, the euro monetary system. In 1998, 11 participating countries
locked their exchange rates together, as a first step in a multiyear plan for a common
currency (Britain, Denmark, and Sweden are the holdouts, so far). The euro coins andbills that will eventually replace member countries’ currencies will not be in circulation until 2002, and businesses and private citizens will not be required to switch before then.
Today, the European Union represents one of the world’s single largest markets.
Its 15 member countries contain more than 370 million consumers and account for
20 percent of the world’s exports. As more European nations seek admission to the
EU in the twenty-first century, it could contain as many as 450 million people in 28
countries.
European unification offers tremendous trade opportunities for U.S. and other nonEuropean firms. However, it also poses threats. As a result of increased unification,

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European companies will grow bigger and more competitive. Witness the competitionin the aircraft industry between Europe’s Airbus consortium and the United States’ Boeing. Perhaps an even bigger concern, however, is that lower barriers inside Europe will
only create thicker outside walls. Some observers envision a “fortress Europe” that heaps
favors on firms from EU countries but hinders outsiders by imposing obstacles such as
stiffer import quotas, local content requirements, and other nontariff (nontax) barriers.
Also, companies that plan to create “pan-European” marketing campaigns directed
to a unified Europe should proceed with caution. Even if the European Union truly
does manage to standardize its general trade regulations and implement the euro, creating an economic community will not create a homogenous market. Companies marketing in Europe face 14 different languages, 2,000 years of historical and culturaldifferences, and a daunting mass of local rules. Consider the experience of the acclaimed Leo Burnett ad agency when it took on the goal of creating a single European campaign for United Distillers’ Johnnie Walker account:■372

part three
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Johnnie Walker It was only after many painful tests and revisions that the
final ad rolled out and achieved success. In an ad with the headline “The Water of Life,” a man attends the running of the bulls in Pamplona and, after
narrowly escaping being trampled, celebrates with a glass of Johnnie Walker
Red Label. In many countries, the Pamplona setting raised hackles because
people said, “The Spanish don’t know anything about whiskey.” The ad wasa total failure in Germany because to Germans it seemed simply reckless.
“Also,” said Jenny Vaughn, worldwide brand director for Johnnie Walker, “because of the German animal rights campaigners, you can’t show a goldfish
in a goldfish bowl on German television, so a bull run was just not on.”9

The most successful pan-European ads are those that are highly visual and symbolic. These ads focus on the product and consumer and are aimed at one of the two
audiences that market researchers really agree are turning into Euroconsumers—theyoung and the rich. One such ad is for TAG Heuer watches in which a swimmer racesa shark, a hurdler leaps over an oversized razor blade, and a relay runner grabs a dynamite baton, all mind games that athletes everywhere use to rev up their performance.
Closer to home, in North America, the United States and Canada phased out tradebarriers in 1989. In January 1994, the North American Free Trade Agreement (NAFTA)
established a free trade zone among the United States, Mexico, and Canada. The agreement created a single market of 360 million people who produce and consume $6.7
trillion worth of goods and services. As it is implemented over a 15-year period, NAFTA
will eliminate all trade barriers and investment restrictions among the three countries. Prior to NAFTA, tariffs on American products entering Mexico averaged 13 percent, whereas U.S. tariffs on Mexican goods averaged 6 percent.
Other free trade areas are forming in Latin America and South America. For example, MERCOSUR now links Brazil, Argentina, Paraguay, and Uruguay. Chile andMexico have formed a successful free trade zone. Venezuela, Colombia, and Mexico—
the “Group of Three”—are negotiating a free trade area as well. It is likely that NAFTA
will eventually merge with this and other arrangements to form an all-Americas free
trade zone.
Although the United States has long regarded Latin America as its backyard, it is
the European nations that have tapped this market’s enormous potential. As Washington’s efforts to extend NAFTA to Latin America have stalled, European countries
have moved in with a vengeance. MERCOSUR’s two-way trade with the EU in 1995
amounted to $43 billion, a total that exceeded trade with the United States by $14
billion. When Latin American countries instituted market reforms and privatized public utilities, European companies rushed in to grab up lucrative contracts for rebuilding Latin America’s infrastructure. Spain’s Telefonica de Espana has spent $5 billion
buying phone companies in Brazil, Chile, Peru, and Argentina. European companies
have moved rapidly into the private sector. In Brazil, seven of the ten largest privatecompanies are European owned, compared to two controlled by Americans. Amongthe notable European companies operating in Latin America are automotive giants
Volkswagen and Fiat, the French supermarket chain Carrefours, and the Anglo-Dutch
personal care products group Gessy-Lever.

As U.S. companies have watched Europeans make inroads in Latin America, they
have pressured Washington to move more quickly on integrating Chile into NAFTA
and toward Free Trade Area of the Americas. MERCOSUL doesn’t represent only a hugedomestic market of 220 million consumers; with its entire Pacific Coast beckoning
toward Asia, MERCOSUL also stands to become an important low-cost platform forworld export. Yet two groups in the United States—labor unions and environmentalists—are skeptical about the benefits of a Free Trade Area of the Americas. Unions feelthat NAFTA has already led to the exodus of manufacturing jobs to Mexico where
wage rates are much lower. Environmentalists point out that companies unwilling toplay by the strict rules of the U.S. Environmental Protection Agency relocate to Mexico, where pollution regulation has been lax.10
Eighteen Pacific Rim countries, including the NAFTA member states, Japan, andChina, have been discussing the possible creation of a pan-Pacific free trade area under the auspices of the Asian Pacific Economic Cooperation forum (APEC). There arealso active attempts at regional economic integration in the Caribbean, Southeast Asia,and parts of Africa.
Yet, however much nations and regions integrate their trading policies and standards, each nation still has unique features that must be understood. A nation’s readiness for different products and services and its attractiveness as a market to foreign
firms depend on its economic, political–legal, and cultural environments.

EVALUATING POTENTIAL MARKETSSuppose a company has assembled a list of potential markets to enter. How does itchoose among them? Many companies prefer to sell to neighboring countries because
they understand these countries better, and they can control their costs better. It is
not surprising that the United States’ largest market is Canada, or that Swedish companies first sold to their Scandinavian neighbors. As growing numbers of U.S. companies expand abroad, many are deciding the best place to start is next door, in Canada.
■

Great American Backrub, Inc. Great American Backrub, Inc., a service business that offers backrubs for stressed-out clients, looked north because it figured Canadians were as tense as Americans. It opened its first foreign locationin Toronto, Ontario. Ricardo Coia, president of the Clearwater, Florida–based
company, reasoned that by their mere proximity to America, Canadians “haveto try to resolve a lot of stress.”11

At other times, psychic proximity determines choices. Many U.S. firms prefer to sellin Canada, England, and Australia—rather than in larger markets such as Germany
and France—because they feel more comfortable with the language, laws, and culture.
In general, a company prefers to enter countries (1) that rank high on market attractiveness, (2) that are low in market risk, and (3) in which the company possesses
a competitive advantage. Here’s how Bechtel Corporation, the construction giant, goes
about evaluating overseas markets.
■

Bechtel Corporation Before Bechtel ventures into new markets, the company starts with a detailed strategic market analysis. It looks at its markets
over the next five to ten years and tries to determine where it should be infour or five years’ time. A management team looks at the big picture and doesa cost–benefit analysis that factors in the position of competitors, infrastructure, regulatory and trade barriers, and the tax situation (both corporate andindividual). Ideally, the new market would be a country with an untapped
need for its products or services; a quality, skilled labor pool capable of manufacturing the product; and a welcoming environment (governmental andphysical).

Are there countries that meet Bechtel’s requirements? Each has its pluses and minuses. For instance, although Singapore has an educated, English-speaking labor force,basks in political stability, and encourages foreign investment, it has a small population.

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Although many countries in central Europe possess an eager, hungry-to-learn laborpool, their infrastructures create difficulties. The team evaluating a new market must
determine whether the company could earn enough on its investment to cover therisk factors or other negatives.12

D ECIDING HOW TO ENTER THE MARKET

Amount of commitment, risk, control, and profit potential

Directinvestment

INDIRECT EXPORT
Joint
ventures

LicensingDirectexportingIndirectexportingF I G U R E

Once a company decides to target a particular country, it has to determine the bestmode of entry. Its broad choices are indirect exporting, direct exporting, licensing, joint
ventures, and direct investment. These five market-entry strategies are shown in Figure6-2. Each succeeding strategy involves more commitment, risk, control, and profit potential.

6-2

Five Modes of Entry into Foreign
Markets

The normal way to get involved in a foreign market is through export. Occasional exporting is a passive level of involvement in which the company exports from time totime, either on its own initiative or in response to unsolicited orders from abroad. Active exporting takes place when the company makes a commitment to expand its exports to a particular market. In either case, the company produces its goods in thehome country and might or might not adapt them to the foreign market.
Companies typically start with indirect exporting—that is, they work through independent intermediaries to export their product. There are four types of intermediaries: Domestic-based export merchants buy the manufacturer’s products and then sellthem abroad. Domestic-based export agents seek and negotiate foreign purchases andare paid a commission. Included in this group are trading companies. Cooperative organizations carry on exporting activities on behalf of several producers and are partly
under their administrative control. They are often used by producers of primary products such as fruits or nuts. Export-management companies agree to manage a company’s
export activities for a fee. Indirect export has two advantages. First, it involves less investment. The firm does not have to develop an export department, an overseas sales
force, or a set of foreign contacts. Second, it involves less risk. Because internationalmarketing intermediaries bring know-how and services to the relationship, the seller
will normally make fewer mistakes.

DIRECT EXPORT
Companies eventually may decide to handle their own exports. The investment andrisk are somewhat greater, but so is the potential return. University Games of
Burlingame, California, has blossomed into a $50-million-per-year international company through careful entry into overseas ventures.
■

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University Games Bob Moog, president and founder of University Games,
says that his company’s international sales strategy relies heavily on thirdparty distributors and has a fair degree of flexibility. “We identify the foreign
markets we want to penetrate,” says Moog, “and then form a business venture with a local distributor that will give us a large degree of control. In Australia, we expect to run a print of 5,000 board games. These we will
manufacture in the United States. If we reach a run of 25,000 games, however, we would then establish a sub-contracting venture with a local manufacturer in Australia or New Zealand to print the games.”13
A company can carry on direct exporting in several ways:■

Domestic-based export department or division: Might evolve into a self-contained
export department operating as a profit center.

■Overseas sales branch or subsidiary: The sales branch handles sales and distribution
and might handle warehousing and promotion as well. It often serves as a display and customer service center.

■

Traveling export sales representatives: Home-based sales representatives are sent
abroad to find business.

■

Foreign-based distributors or agents: These distributors and agents might be given
exclusive rights to represent the company in that country or only limited rights.

Whether companies decide to export indirectly or directly, many companies use
exporting as a way to “test the waters” before building a plant and manufacturing a
product overseas. This strategy worked well for IPSCO, Inc. In the early 1980s, thisSaskatchewan-based steel producer exported its steel pipe and flat steel to the UnitedStates from Canada—despite significant transportation costs. Once the company realized there was a significant U.S. demand for its products, it decided to set up shop
there.14
One of the best ways to initiate or extend export activities is by exhibiting at an
overseas trade show. A U.S. software firm might show its product at an international
software expo in Hong Kong. With the World Wide Web, it may not even be necessary to attend trade shows to show one’s wares to overseas buyers and distributors.
Electronic communication via the Internet is extending the reach of companies, particularly small ones, to worldwide markets. The Internet has become an effective meansof everything from gaining free exporting information and guidelines, conducting
market research, and offering customers several time zones away a secure process forordering and paying for products. See Table 6.3 for five sources of free on-line
exporting help. Then check the Marketing Memo “Making Your Web Site Worldwide
and Worldly Wise” for tips on Web sites that attract, rather than frustrate, overseas
customers.

LICENSING
Licensing is a simple way to become involved in international marketing. The licensor licenses a foreign company to use a manufacturing process, trademark,patent, trade secret, or other item of value for a fee or royalty. The licensor gains
entry at little risk; the licensee gains production expertise or a well-known product or brand name. E-Trade Group, the Palo Alto, California, on-line broker-dealer,
has entered into a licensing agreement with Jerusalem Global Ltd., an Israeli

Finding free information about trade and exporting has never been easier. Here are someplaces to start your search:■

For answers to the most frequently asked questions about trade in general and for market
information on regions and countries:www.ita.doc.gov (the U.S.Department of Commerces
International Trade Administration).

■

For information about obtaining working capital, direct loans, financing guarantees, and export insurance: www.exim.gov (the Export-Import Bank of the United States).

■

For advice about financing exports: www.sba.gov (the U.S. Small Business Administration).

■

To learn about technology products that require special licenses to export:
www.bxa.doc.gov (the Bureau of Export Administration, a branch of the Commerce Department).

■

To get information about thousands of trade shows and conferences around the world:
www.tscentral.com (Trade Show Central, a Wellesley, Massachusetts, company).

Also, check with your states export-promotion office to learn if it has on-line resources and allows businesses to link to its site.
Source: Reprinted from Going Online for Exporting Help, Nation’s Business, December 1997, p. 52.

T A B L E

6.3

Going On-line for Exporting Help

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M A R K E T I N G

memo

Making Your Web
Site Worldwide andWorldly Wise
Many companies that would never dreamof launching an exporting initiative without
careful planning are launching Web sitesthat are actually damaging their image with
global customers. It may be something as
seemingly innocuous as using address fields
that don’t allow for European postal codes
or as major as not providing translation fora site you are aiming at Japanese customers.
Here,then,is a list of do’s and don’ts for creating an export-friendly Web site:376■

Be sure international customers canview your Web page at adequate
speeds: In some countries, Internet access is still limited to 9,600 bps. It may
help to have your Web site hosted or
mirrored overseas.The closer your datais to your customers, the better able
you are to ensure fast, reliable transmission.You should also consider setting up a text-only version. Rather
than forcing overseas customers to
wait for bandwidth-hogging graphics
to download, design a parallel path of
text-based information.

■

Make sure every customer in markets
you are approaching can experience
your Web site and order products in thelanguage, custom, and culture withwhich he or she feels comfortable: Because every country is assigned aunique URL address, you can set up
e-commerce software to autodetect
an international customer the moment
he or she logs on.Then you can automatically set up a dedicated country
page, written in the language of thatcountry. It’s also possible to link yourWeb site to a currency conversion calculator and recalculate prices every
day, every hour, or even with everytransaction in the home currencyof the visitor. Finally, for apparel(continued)
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Strategies

investment banking operation. E-Trade’s agreement with the Israeli firm is part ofa strategy to form licensing agreements and international joint ventures in an effort to bring its brand of no-frills investing to people abroad. E-Trade has alreadycreated E-Trade Australia and has announced plans to form E-Trade Germany and
E-Trade Central Europe.15
Licensing has some potential disadvantages. The licensor has less control over the
licensee than if it had set up its own production and sales facilities. Furthermore, if
the licensee is very successful, the firm has given up profits; and if and when the contract ends, the company might find that it has created a competitor. To avoid this,the licensor usually supplies some proprietary ingredients or components needed in
the product (as Coca-Cola does). But the best strategy is for the licensor to lead in innovation so that the licensee will continue to depend on the licensor.
There are several variations on a licensing arrangement. Companies such as Hyatt and Marriot sell management contracts to owners of foreign hotels to manage thesebusinesses for a fee. The management firm may even be given the option to purchasesome share in the managed company within a stated period.
Another variation is contract manufacturing, in which the firm hires local manufacturers to produce the product. When Sears opened department stores in Mexicoand Spain, it found qualified local manufacturers to produce many of its products.
Contract manufacturing has the drawback of giving the company less control overthe manufacturing process and the loss of potential profits on manufacturing. How-ever, it offers a chance to start faster, with less risk and with the opportunity to forma partnership or buy out the local manufacturer later.
Finally, a company can enter a foreign market through franchising, which is a more
complete form of licensing. The franchiser offers a complete brand concept and operating system. In return, the franchisee invests in and pays certain fees to the franchiser. McDonald’s, KFC, and Avis have entered scores of countries by franchising
their retail concepts.
Along with McDonald’s, Kentucky Fried Chicken (KFC) was one of the first fastfood franchises to break into the semiclosed market of Japan.
■

KFC Corporation Although the initial reception in Japan was great, KFC still
had a number of obstacles to overcome. The Japanese were uncomfortablewith the idea of fast food and franchising. They saw fast food as artificial,
made by mechanical means, and unhealthy. KFC’s ad agency in Japan,
McCann-Erickson Japan, knew that it had to build trust in the KFC brandand flew to Kentucky to do it. There it filmed the most authentic version ofColonel Sanders’s beginnings possible. To show the philosophy of KFC—thesouthern hospitality, old American tradition, and authentic home cooking—the agency first created the quintessential southern mother. With “My Old
Kentucky Home” by Stephen Foster playing in the background, the commercial showed Colonel Sanders’ mother making and feeding her grandchildren KFC chicken made with 11 secret spices. It conjured up scenes of goodhome cookin’ from the deep American South delivered straight to the Japanese people. In the end, the Japanese people could not get enough of this special American chicken made with 11 spices. The campaign was hugely
successful, and in less than 8 years KFC expanded its presence from 400 locations to more than 1,000. Many Japanese now know “My Old Kentucky
Home” by heart.16(continued)
companies, don’t forget to include size
conversion tables so overseas customers can figure out sizes.
■ Avoid alphanumeric fields in forms, andmake address fields internationally
meaningful: It sounds like a tiny detail,but people do get annoyed when registration or order forms refuse to recognize punctuation such as accents.
Also, address fields should accommodate international postal codes. Most
countries don’t have a postal counterpart to a state, so don’t require every
visitor to the site to specify one.
■

Provide enough information about yourcompany, and make contact information prominent: The portion of a Website that provides company information is typically one of the most frequently visited areas. Providing as
much detail as possible about yourcompany’s strengths is a good way toestablish credibility, which is particularly critical for a small business that is
unknown overseas. Also, don’t bury
contact information—names, telephone numbers, or fax numbers—
deep within the site. Make it as clear
and visible as possible.

■

Don’t leave site development to thetechnicians: Involve your marketingpeople so you can ensure that yoursite is consistent with the image youwant to project.You may even want tohave your Web site vetted by an overseas rep or supplier to make sure it
appeals to the foreign market you
wish to reach.

JOINT VENTURES
Foreign investors may join with local investors to create a joint venture company inwhich they share ownership and control. For instance:17■

Coca-Cola and Nestlé joined forces to develop the international market for“ready to drink” tea and coffee, which currently sell in significant amounts onlyin Japan.

■

Procter & Gamble formed a joint venture with its Italian arch-rival Fater to coverbabies’ bottoms in the United Kingdom and Italy.

■

Whirlpool took a 53 percent stake in the Dutch electronics group Philips’s whitegoods business to leapfrog into the European market.

Forming a joint venture may be necessary or desirable for economic or political reasons. The foreign firm might lack the financial, physical, or managerial resources to undertake the venture alone. Or the foreign government might requirejoint ownership as a condition for entry. Even corporate giants need joint venturesto crack the toughest markets. When it wanted to enter China’s ice cream market,
Unilever joined forces with Sumstar, a state-owned Chinese investment company.
The venture’s general manager says Sumstar’s help with the formidable Chinese bureaucracy was crucial in getting a high-tech ice cream plant up and running in just
12 months.18
Joint ownership has certain drawbacks. The partners might disagree over investment, marketing, or other policies. One partner might want to reinvest earnings for
growth, and the other partner might want to declare more dividends. The failure of
the joint venture between AT&T and Olivetti was due to the companies’ inability toagree on strategy. Furthermore, joint ownership can prevent a multinational company
from carrying out specific manufacturing and marketing policies on a worldwide
basis.

Sources: Eric J.Adams,“Electronic Commerce Goes
Global,” World Trade, April 1998, pp. 90–92;
Roberta Maynard, “Creating an Export-Friendly
Site,”Nation’s Business, December 1997,p.51;J.D.
Mosely-Matchett,“Remember;It’s the World Wide
Web,” Marketing News, January 20, 1997, p. 16.

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DIRECT INVESTMENT
The ultimate form of foreign involvement is direct ownership of foreign-based assembly or manufacturing facilities. The foreign company can buy part or full interestin a local company or build its own facilities. If the foreign market appears large
enough, foreign production facilities offer distinct advantages. First, the firm securescost economies in the form of cheaper labor or raw materials, foreign-government investment incentives, and freight savings. Second, the firm strengthens its image inthe host country because it creates jobs. Third, the firm develops a deeper relationship with government, customers, local suppliers, and distributors, enabling it to adapt
its products better to the local environment. Fourth, the firm retains full control overits investment and therefore can develop manufacturing and marketing policies thatserve its long-term international objectives. Fifth, the firm assures itself access to themarket in case the host country starts insisting that locally purchased goods have domestic content. Here is how one firm uses local relationships to advantage in its overseas plants.
■

CPC Internationale CPC, manufacturer of such well-known food brands as
Hellmann’s Mayonnaise and the Knorr’s line of soups, prefers full-scale overseas manufacturing to either foreign product assembly or exporting. So far,the company manufactures in 62 of the 110 countries in which it markets
its products. CPC uses local personnel and managers almost exclusively when
operating overseas, particularly people who understand the markets and who
can compete effectively within them. CPC also hands off marketing to local
managers, figuring that they know their own markets and how to compete
there better than the folks back at the Englewood Cliffs, New Jersey, headquarters do.19

The main disadvantage of direct investment is that the firm exposes a large investment to risks such as blocked or devalued currencies, worsening markets, or expropriation. The firm will find it expensive to reduce or close down its operations,because the host country might require substantial severance pay to the employees.

THE INTERNALIZATION PROCESS
Most countries lament that too few of their companies participate in foreign trade.
This keeps the country from earning sufficient foreign exchange to pay for needed
imports. Many governments sponsor aggressive export-promotion programs to gettheir companies to export. These programs require a deep understanding of how companies become internationalized.
Johanson and Wiedersheim-Paul have studied the internationalization process
among Swedish companies.20 They see firms moving through four stages:
1. No regular export activities
2. Export via independent representatives (agents)
3. Establishment of one or more sales subsidiaries
4. Establishment of production facilities abroad

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The first task is to get companies to move from stage 1 to stage 2. This move is helpedby studying how firms make their first export decisions.21 Most firms work with anindependent agent and enter a nearby or similar country. A company then engages
further agents to enter additional countries. Later, it establishes an export department
to manage its agent relationships. Still later, the company replaces its agents with its
own sales subsidiaries in its larger export markets. This increases the company’s investment and risk but also its earning potential. To manage these subsidiaries, thecompany replaces the export department with an international department. If certain
markets continue to be large and stable, or if the host country insists on local production, the company takes the next step of locating production facilities in thosemarkets, representing a still larger commitment and still larger potential earnings. Bythis time, the company is operating as a multinational company and engaged in optimizing its global sourcing, financing, manufacturing, and marketing.

D ECIDING ON THE MARKETING PROGRAMInternational companies must decide how much to adapt their marketing strategy tolocal conditions. At one extreme are companies that use a globally standardized marketing mix worldwide. Standardization of the product, advertising, and distribution
channels promises the lowest costs. At the other extreme is an adapted marketing mix,
where the producer adjusts the marketing-mix elements to each target market. The
Marketing Insight box, “Global Standardization or Adaptation?” discusses the main
issues.
Between the two extremes, many possibilities exist. Here we will examine potential adaptations that firms might make to their product, promotion, price, and distribution as they enter foreign markets.

PRODUCT
Keegan has distinguished five adaptation strategies of product and promotion to aforeign market (Figure 6-3).22
Straight extension means introducing the product in the foreign market without
any change. Top management instructs its salespeople: “Find customers for the product as it is.” However, the company should first determine whether foreign consumers
use that product. Deodorant usage among men ranges from 80 percent in the UnitedStates to 55 percent in Sweden to 28 percent in Italy to 8 percent in the Philippines.
In interviewing women in one country about how often they used a deodorant, a typical response was “I use it when I go dancing once a year”: hardly grounds for introducing the product.
Straight extension has been successful with cameras, consumer electronics, andmany machine tools. In other cases, it has been a disaster. General Foods introduced
its standard powdered Jell-O in the British market only to find that British consumers
prefer the solid wafer or cake form. Campbell Soup lost an estimated $30 million in
introducing its condensed soups in England; consumers saw expensive small-size cansand did not realize that water needed to be added. Straight extension is tempting because it involves no additional R&D expense, manufacturing retooling, or promotional modification. But it can be costly in the long run.
Product adaptation involves altering the product to meet local conditions or preferences. There are several levels of adaptation. A company can produce a regional version of its product, such as a Western European version. Finnish cellular phone
superstar Nokia customized its 6100 series phone for every major market. Developers
built in rudimentary voice recognition for Asia, where keyboards are a problem andraised the ring volume so the phone could be heard on crowded Asian streets. Or it
can produce a country version. In Japan, Mister Donut’s coffee cup is smaller and lighter
F I G U R E

Promotion

Product
Do Not Change
Product

Adapt
Product

Do Not Change
Promotion

Straight
extension

Product
adaptation

Adapt
Promotion

Communication
adaptation

Dual
adaptation

Develop New
Product

Product
invention

6-3

Five International Product andPromotion Strategies

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M

A

R

K

E

T

I

N

G

I

N S I G H T

Global Standardization or Adaptation?
The marketing concept holds that consumer needs vary andthat marketing programs will be more effective when they are
tailored to each target group. This also applies to foreign markets where economic, political, and cultural conditions vary
widely.
Yet in 1983, in a groundbreaking article in the Harvard Business Review, Harvard Professor Theodore Levitt challenged thisview and supplied the intellectual rationale for global standardization:
The world is becoming a common marketplace in whichpeople—no matter where they live—desire the same
products and lifestyles.Global companies must forget theidiosyncratic differences between countries and culturesand instead concentrate on satisfying universal drives.
Levitt wrote that new communication and transportation
technologies are creating a more homogeneous world market.
His words have proved prophetic.The development of the World
Wide Web, the rapid spread of cable and satellite TV around theworld, and the creation of telecommunications networks linking
previously remote places have all brought Levitt s predictions
closer to fruition. For instance, the disproportionately American
programming beamed into homes in the developing world has
sparked a convergence of consumer appetites, particularly
among youth. A global MTV generation is what Joseph Quinlan,senior economist at Dean,Witter Reynolds,calls these emerging consumers. Says Quinlan, They prefer Coke to tea, Nikes tosandals, and Chicken McNuggets to rice, credit cards to cash.
Fashion trends are moving almost instantly, propelled by TV andInternet chat groups. Buzz on new movies and TV shows can beaccessed anywhere in the world at the ain t.it.cool Web site(www.ain t.it.cool.com). The convergence of needs and wants
has created global markets for standardized products, particularly among the young middle class.
According to Levitt, traditional multinational corporations
don t focus on the convergence of tastes in the global market
but on the differences between specific markets. They produce
a proliferation of highly adapted products. The result is less efficiency and higher prices to consumers.
In contrast, Levitt favors global corporations that try to sell
the same product the same way to all consumers.They focus on
similarities across world markets and sensibly force suitably standardized products and services on the entire globe. These
global marketers achieve substantial economies through standardization of production, distribution, marketing, and management. They translate their efficiency into greater value for
consumers by offering high quality and more reliable products
at lower prices. Coca-Cola, McDonald s, Marlboro, Nike, the NBA,
and Gillette are among the companies that have successfully
marketed global products. Consider Gillette:
Some 1.2 billion people use at least one Gillette productdaily,according to the company’s latest estimates.Gilletterazors—the product from which the company derives 50
percent of its $2.4 billion operating profit—have captured
91 percent of the market in Latin America and 69 percent
in India. Gillette enjoys huge economies of scale by selling a few types of razor blades in every single market.Currently, the company faces challenges when trying to sell
its higher-priced high-tech razors, such as Sensor and the(continued)

to fit the hand of the average Japanese consumer; even the doughnuts are a little
smaller. Kraft blends different coffees for the British (who drink their coffee with milk),
the French (who drink their coffee black), and Latin Americans (who want a chicory
taste). A company can produce a city version of its product—for instance, a beer tomeet Munich tastes or Tokyo tastes. Finally, a company can produce different retailer
versions of its product, such as one coffee brew for the Migros chain store and anotherfor the Cooperative chain store, both in Switzerland.
Although products are frequently adapted to local tastes, in some instances theymust be adapted to local superstitions or beliefs, too. The concept of feng shui is agood example:■

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Hyatt Hotels A practice widely followed in China, Hong Kong, and Singapore, feng shui means “wind and water.” Practitioners of feng shui, or geomancers, will recommend the most favorable conditions for any venture,
particularly the placement of office buildings and the arrangement of desks,
doors, and other items within. To have good feng shui, a building should face
the water and be flanked by mountains. It also should not block the view ofthe mountain spirits. The Hyatt hotel in Singapore was designed without fengshui, and, as a result, had to be redesigned to boost business. Originally the(continued)
newly unveiled Mach3, in countries that underwent currency devaluation. Still, Gillette has no plans to give up its
global focus.
Impressed with the potential savings from global standardization, many companies have tried to launch their version of aworld product. Toyota had built its Corolla on a world platform,and Ford is currently creating a world car, the Focus. Yet, mostproducts require some adaptation. Toyotas Corolla will exhibit
some differences in styling. McDonald s uses chili sauce insteadof ketchup on its hamburgers in Mexico. Coca-Cola is sweeter
or less carbonated in certain countries. Procter & Gamble knowsthat Asian shoppers shy away from the family-size packages so
popular with Americans. Most of the shampoo P&G sells in the
Far East is in single-use sachets.
Whereas companies are justified in seeking standardization
to save some costs, local competitors are always ready to offer
more of what customers in each country want. Even MTV, which
provided the label for the global MTV generation with its largely
global programming, has retrenched along more local lines:
Pummeled by dozens of local music channels in Europe,such as Germany’s Viva, Holland’s The Music Factory,
and Scandinavia’s ZTV, MTV Europe has had to drop its
pan-European programming, which featured a large
amount of American and British pop along with local European favorites. In its place, the division created regional

channels broadcast by four separate MTV stations: MTV
UK, and Northern, Central, and Southern Europe. Each of
the four channels shows programs tailored to musictastes of its local market, along with more traditional
pan-European pop selections and, of course, a healthy
serving of Beavis and Butthead.
Rather than assuming that its domestic product can be introduced as is in another country, the company should review
the following adaptation elements and determine which would
add more revenue than cost:■ Product features ■ Colors■ Advertising themes■ Labeling■ Advertising execution■ Brand name■ Materials■ Packaging■ Sales promotion■ Prices■ Advertising media

One study showed that companies made one or more marketing-mix adaptations in 80 percent of their foreign products
and that the average number of adapted elements was four.
Some host countries require adaptations, whether or not thecompany wants to make them. The French do not allow children to be used in ads; the Germans ban the use of the word
best to describe a product.
So perhaps Levitt s globalization dictum should be
rephrased. Global marketing, yes.
Global standardization, not necessarily.

Sources: Theodore Levitt, The Globalization of Markets, Harvard Business Review, May June 1983, pp. 92 102; Bernard Wysocki Jr., The Global Mall: In Developing Nations,
Many Youths Splurge, Mainly on U.S. Goods, Wall Street Journal, June 26, 1997, p. A1; What Makes a Company Great? Fortune, October 26, 1998, pp. 218 26; Lawrence
Donegan, Heavy Job Rotation MTV Europe Sacks 80 Employees in the Name of Regionalisation. Is This the End for Europop as We Know It, Asks Lawrence Donegan,
The Guardian, November 21, 1997, p. 19; David M. Szymanski, Sundar G. Bharadwaj, and P. Rajan Varadarajan, Standardization versus Adaptation of International Marketing Strategy: An Empirical Investigation, Journal of Marketing, October 1993, pp. 1 17.

front desk was parallel to the doors and road, and this was thought to leadto wealth flowing out. Furthermore, the doors were facing northwest, whicheasily let undesirable spirits in. The geomancer recommended design alterations so that wealth could be retained and undesirable spirits kept out.23
Product invention consists of creating something new. It can take two forms, Backward invention is reintroducing earlier product forms that are well adapted to a foreign country’s needs. The National Cash Register Company reintroduced its
crank-operated cash register at half the price of a modern cash register and sold substantial numbers in Latin America and Africa. (This illustrates a good understandingof the international product life cycle, where countries stand at different stages ofreadiness to adopt a particular product.) Forward invention is creating a new productto meet a need in another country. There is an enormous need in less developed countries for low-cost, high-protein foods. Companies such as Quaker Oats, Swift, andMonsanto are researching these countries’ nutrition needs, formulating new foods,
and developing advertising campaigns to gain product trial and acceptance. Toyota
produces vehicles, such as the Soluna in Thailand and the Toyota Utility Vehicle inIndonesia, the Philippines, and Taiwan, which were specifically designed with thehelp of local employees to suit the tastes of these markets.24 In globalization’s latest

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twist, American companies are not only inventing new products for overseas markets
but also lifting products and ideas from their international operations and bringing
them home. As an example, Häagen-Dazs had developed a flavor for sale solely in Argentina called dulce de leche, named for the caramelized milk that is one of the mostpopular flavors in Argentina. Just one year later, the company rolled out dulce deleche in supermarkets from Boston to Los Angeles to Paris. The co-opted flavor now
does $1 million a month in the United States and is particularly popular in Miami,
where it sells twice as fast as any other flavor.25 Product invention is a costly strategy,
but the payoffs can be great, particularly if you can parlay a product innovation overseas into a new hit at home.
A growing part of international trade is taking place in services. The world market for services is growing at double the rate of world merchandise trade. Large firmsin accounting, advertising, banking, communications, construction, insurance, law,
management consulting, and retailing are pursuing global expansion. Arthur Andersen, American Express, Citicorp, Club Med, Hilton, and Thomas Cook are known
worldwide. United States credit-card companies have streamed across the Atlantic toconvince Europeans of the joys of charge cards. In Britain, industry heavyweights
Citibank and American Express have wrested a lot of business from big British banks
like Barclays and already control 7 percent of the market.26 Many retailers are trying
to make similar inroads. Faced with slowing growth at home in the United States,
Wal-Mart is using cash flow from its domestic business to fuel the growth of its $9billion international division. In November 1997, Wal-Mart acquired German retailer
Wertkauf, adding 21 hypermarkets with annual sales of $1.4 billion. Just two months
earlier, the retailer had purchased its Mexican joint venture partner, CIFRA, making
it the largest retailer in Mexico. Wal-Mart is the leading discount retailer in Canada
and has opened outlets in Argentina, Indonesia, and China. As of 1998, Wal-Mart employed 105,000 international sales associates in 602 international retail units and hadplans to open up 50 to 60 retail units outside the United States that year.27 Brick-andmortar retailers are not the only ones expanding overseas. Cyberretailer Amazon.com
has purchased three European companies—two in Britain, one in Germany—to build
European book and video sales.
At the same time, many countries have erected entry barriers or regulations. Brazil
requires all accountants to possess a professional degree from a Brazilian university.
Many Western European countries want to limit the number of U.S. television programs and films shown in their countries. Many U.S. states bar foreign bank branches.
At the same time, the United States is pressuring South Korea to open its markets to
U.S. banks. The General Agreement of Tariffs and Trade (GATT) is pressing for more
free trade in international services, but the progress is slow.
Retailers, who sell books, videos, or CD-ROMs, and entertainment companies havealso had to contend with a culture of censorship in certain countries, such as China
and Singapore. Consider the case of Borders Books and Music.
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Borders Books and Music Borders expanded into Singapore in late 1997.
Despite the Asian currency crisis and the worst retail sales slump in Singapore’s history, the store was a huge success. Many of its 140,000-odd titles had never been offered before in Singapore. Local bookstores were too
small and none had ever tried to stock the range of titles common in mostbookstores in the West. Yet, Borders had to fall in line with Singapore’s culture of self-censorship. Borders censors its offerings internally and in concert with the Committee on Undesirable Publications (CUP). Borders must
submit potentially “hot” titles to CUP for approval. Inspectors have objected to the Marquis de Sade and William Burroughs’s Naked Lunch. Yet
Borders has managed to push the envelope a little. It has five shelves ofbooks in its sex and fertility section, and it has even managed to get approval to stock academic studies on homosexuality, not available elsewherein the country.28

Clearly, ethics or ideals that are upheld in the home country may sometimes have to
be compromised in order to do business in other countries.

PROMOTION
Companies can run the same advertising and promotion campaigns used in the homemarket or change them for each local market, a process called communication adaptation. If it adapts both the product and the communication, the company engages indual adaptation.
Consider the message. The company can change its message at four different levels.
The company can use one message everywhere, varying only the language, name, andcolors. Exxon used “Put a tiger in your tank” with minor variations and gained international recognition. Colors might be changed to avoid taboos in some countries.
Purple is associated with death in Burma and some Latin American nations; white isa mourning color in India; and green is associated with disease in Malaysia. Evennames and headlines may have to be modified. When Clairol introduced the “MistStick,” a curling iron, into Germany, it found that mist is slang for manure. Few Germans wanted to purchase a “manure stick.” The Dairy Association brought its “gotMilk?” advertising campaign to Mexico only to find that the Spanish translation read,“Are you lactating?” When Coors put its slogan “turn it loose,” into Spanish, it wasread by some as “suffer from diarrhea.” In Spain, Chevrolet’s Nova translated as “itdoesn’t go.” A laundry soap ad claiming to wash “really dirty parts” was translated in
French-speaking Quebec to read “a soap for washing private parts.”29
The second possibility is to use the same theme globally but adapt the copy toeach local market. For example, a Camay soap commercial showed a beautiful woman
bathing. In Venezuela, a man was seen in the bathroom; in Italy and France, only aman’s hand was seen; and in Japan, the man waited outside. Danish beer company,
Carlsberg, goes so far as to adapt copy not to countries but to individual cities andeven neighborhoods within those cities. The 151-year-old Danish beer is available inmore than 140 countries around the world, but because of the competitiveness andmaturity of the U.S. market, it has to take a local tack in its approach to win new customers who aren’t familiar with the brand. All advertisements feature the same single image of the Carlsberg bottle, along with a humorous message about the specificcity. For example, in Manhattan, one headline on an ad reads: “Went all night without hearing car alarm. Celebrate special occasions with Carlsberg.”30
The third approach consists of developing a global pool of ads, from which eachcountry selects the most appropriate one. Coca-Cola and Goodyear use this approach.
Finally, some companies allow their country managers to create country-specific ads—
within guidelines, of course. Kraft uses different ads for Cheez Whiz in different countries, given that household penetration is 95 percent in Puerto Rico, where the cheeseis put on everything; 65 percent in Canada, where it is spread on morning breakfast
toast; and 35 percent in the United States, where it is considered a junk food.
The use of media also requires international adaptation because media availability varies from country to country. Norway, Belgium, and France do not allow cigarettes and alcohol to be advertised on TV. Austria and Italy regulate TV advertising tochildren. Saudi Arabia does not want advertisers to use women in ads. India taxes advertising. Magazines vary in availability and effectiveness; they play a major role in
Italy and a minor one in Austria. Newspapers have a national reach in the United
Kingdom, but the advertiser can buy only local newspaper coverage in Spain.
Marketers must also adapt sales-promotion techniques to different markets. Greece
prohibits coupons, and France prohibits games of chance and limits premiums andgifts to 5 percent of product value. People in Europe and Japan tend to make inquiries
via mail rather than phone—which may have ramifications for direct-mail and othersales-promotion campaigns. The result of these varying preferences and restrictions isthat international companies generally assign sales promotion as a responsibility of
local management.

PRICE
Multinationals face several pricing problems when selling abroad. They must deal withprice escalation, transfer prices, dumping charges, and gray markets.

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When companies sell their goods abroad, they face a price escalation problem. A
Gucci handbag may sell for $120 in Italy and $240 in the United States. Why? Gucci
has to add the cost of transportation, tariffs, importer margin, wholesaler margin, andretailer margin to its factory price. Depending on these added costs, as well as thecurrency-fluctuation risk, the product might have to sell for two to five times as muchin another country to make the same profit for the manufacturer. Because the costescalation varies from country to country, the question is how to set the prices in different countries. Companies have three choices:
1. Setting a uniform price everywhere: Coca-Cola might want to charge 60 centsfor Coke everywhere in the world. But then Coca-Cola would earn quite different profit rates in different countries because of varying escalation costs.
Also, this strategy would result in the price being too high in poor countries
and not high enough in rich countries.
2. Setting a market-based price in each country: Here Coca-Cola would charge what
each country could afford. But this strategy ignores differences in the actual
cost from country to country. Also, it could lead to a situation in whichintermediaries in low-price countries reship their Coca-Cola to high-pricecountries.
3. Setting a cost-based price in each country: Here Coca-Cola would use a standard
markup of its costs everywhere. But this strategy might price Coca-Cola outof the market in countries where its costs are high.
Another problem arises when a company sets a transfer price (i.e., the price that it
charges to another unit in the company) for goods that it ships to its foreign subsidiaries. Consider the following:■

Hoffman-LaRoche Some years ago, the Swiss pharmaceutical company
Hoffman-LaRoche charged its Italian subsidiary only $22 a kilo for Librium
so that it could report high profits in Italy, where corporate taxes were lower.
It charged its British subsidiary more than $100 per kilo for the same Librium so that it could make high profits at home instead of in Britain, where
corporate taxes were high. The British Monopoly Commission sued HoffmanLaRoche for back taxes and won.

If the company charges too high a price to a subsidiary, it may end up paying
higher tariff duties, although it may pay lower income taxes in the foreign country.
If the company charges too low a price to its subsidiary, it can be charged with dumping. Dumping occurs when a company charges either less than its costs or less thanit charges in its home market, in order to enter or win a market. Zenith accused Japanese television manufacturers of dumping their TV sets on the U.S. market. When the
U.S. Customs Bureau finds evidence of dumping, it can levy a dumping tariff on theguilty company. Various governments are watching for abuses and often force companies to charge the arm’s-length price—that is, the price charged by other competitors for the same or a similar product.
Many multinationals are plagued by the gray-market problem. A gray market occurs when the same product sells at different prices geographically. Dealers in the lowprice country find ways to sell some of their products in higher-price countries, thus
earning more. For example:■

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Minolta Because of lower transportation costs and tariffs, Minolta sold its
cameras to dealers in Hong Kong for a lower price than it sold the same cameras to dealers in Germany. The Hong Kong dealers worked on smaller margins than the German retailers, who preferred high markups to high volume.
Minolta’s cameras ended up selling at retail for $174 in Hong Kong and $270
in Germany. Some Hong Kong wholesalers noticed this price difference andshipped Minolta cameras to German dealers for less than they were paying
the German distributor. The German distributor couldn’t sell his stock andcomplained to Minolta.

Very often a company finds some enterprising distributors buying more than they
can sell in their own country and reshipping goods to another country to take advantage of price differences. Multinationals try to prevent gray markets by policing
the distributors, by raising their prices to lower-cost distributors, or by altering the
product characteristics or service warranties for different countries.
In the European Union, the gray market may disappear altogether with the transition to a single currency unit. The adoption of the single currency by 11 countries
will certainly reduce the amount of price differentiation. In 1998, a bottle of Gatorade,for instance, cost 3.5 European currency units (ECU) in Germany but only about 0.9
in Spain. Once consumers recognize price differentiation by country, companies will
be forced to harmonize prices throughout the countries that have adopted the single
currency. Companies and marketers that offer the most innovative, specialized, ornecessary products or services will be least affected by price transparency. For instance,
Mail Boxes, Etc., which has 350 stores in Europe, believes that customers who needto send faxes won’t refuse to do so because it costs more in Paris than in Italy.31
The Internet will also reduce price differentiation between countries. When companies sell their wares over the Internet, price will become transparent as customers
can easily find out how much products sell for in different countries. Take an on-line
training course, for instance. Whereas the price of a classroom-delivered day of training can vary significantly from the United States to France to Thailand, the price ofan on-line-delivered day of training would have to be similar.32
Another global pricing challenge that has arisen in recent years is that countries
with overcapacity, cheap currencies, and the need to export aggressively have pushed
prices down and devalued their currencies. For multinational firms this poses challenges: Sluggish demand and reluctance to pay higher prices make selling in theseemerging markets difficult. Instead of lowering prices, and taking a loss, some multinationals have found more lucrative and creative means of coping:33■

General Electric Company Rather than driving for larger market share, GE’s
power systems unit focused on winning a larger percentage of each customer’s
expenditures. The unit asked its top 100 customers what services were mostcritical to them and how GE could provide or improve them. The answers
prompted the company to cut its response time for replacing old or damaged
parts from twelve weeks to six. It began advising customers on the nuancesof doing business in the diverse environments of Europe and Asia and beganproviding the maintenance staff that customers needed for occasional equipment upgrades. By adding value and helping customers reduce their costs andbecome more efficient, GE was able to avoid a move to commodity pricing
and was actually able to generate bigger margins.

■

Praxair Inc. For Praxair, a Danbury, Connecticut, supplier of industrial gases,
the name of the game was decreasing costs faster than pricing falls. The Praxair purchasing team became every bit as important as sales and marketing.
Praxair formed global procurement teams that use information technology
to coordinate scattered local operations on purchases of telecom equipment
and services, freight fuel, and computer and office supplies. The goal is tobuy more from fewer suppliers to get the best possible volume pricing. Although bottom-line results aren’t in yet, one of five such global teams aims
to reduce its network of suppliers from 1,200 to 300.

PLACE (DISTRIBUTION CHANNELS)
Too many U.S. manufacturers think their job is done once the product leaves thefactory. They should pay attention to how the product moves within the foreigncountry. They should take a whole-channel view of the problem of distributing products to final users. Figure 6-4 shows the three major links between seller and ultimate user. In the first link, seller’s international marketing headquarters, the export
department or international division makes decisions on channels and other marketing-mix elements. The second link, channels between nations, gets the products tochapter 12
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385

SellerSeller's
international
marketingheadquarters

Channels
betweennations

Channels within
foreign nations

Finalbuyersthe borders of the foreign nation. The decisions made in this link include the typesof intermediaries (agents, trading companies) that will be used, the type of transportation (air, sea), and the financing and risk arrangements. The third link, channels within foreign nations, gets the products from their entry point to final buyers
and users.
Within-country distribution channels vary considerably among countries. To sellsoap in Japan, Procter & Gamble has to work through one of the most complicateddistribution systems in the world. It must sell to a general wholesaler, who sells to a
product wholesaler, who sells to a product-specialty wholesaler, who sells to a regional
wholesaler, who sells to a local wholesaler, who finally sells to retailers. All these distribution levels can mean that the consumer’s price ends up double or triple the importer’s price. If P&G takes the soap to tropical Africa, the company might sell to an
import wholesaler, who sells to several jobbers, who sell to petty traders (mostly
women) working in local markets.
Another difference lies in the size and character of retail units abroad. Large-scaleretail chains dominate the U.S. scene, but much foreign retailing is in the hands ofsmall independent retailers. In India, millions of retailers operate tiny shops or sellin open markets. Their markups are high, but the real price is brought down throughhaggling. Incomes are low, and people must shop daily for small amounts and arelimited to whatever quantity can be carried home on foot or on a bicycle. Most homes
lack storage and refrigeration space to keep food fresh. Packaging costs are kept low
in order to keep prices low. In India, cigarettes are often bought singly. Breaking bulk
remains an important function of intermediaries and helps perpetuate the long channels of distribution, which are a major obstacle to the expansion of large-scale retailing in developing countries.

D EM CAIRDKI EN TGI NO GN OT RH GE A N I Z A T I O N
F I G U R E

6-4

Whole-Channel Concept forInternational Marketing

Companies manage their international marketing activities in three ways: through export departments, international divisions, or a global organization.

EXPORT DEPARTMENT
A firm normally gets into international marketing by simply shipping out its goods.
If its international sales expand, the company organizes an export department consisting of a sales manager and a few assistants. As sales increase further, the export
department is expanded to include various marketing services so that the company
can go after business more aggressively. If the firm moves into joint ventures or direct investment, the export department will no longer be adequate to manage international operations.

INTERNATIONAL DIVISION

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Many companies become involved in several international markets and ventures.
Sooner or later they will create international divisions to handle all their international
activity. The international division is headed by a division president, who sets goals
and budgets and is responsible for the company’s international growth.
The international division’s corporate staff consists of functional specialists who
provide services to various operating units. Operating units can be organized in several ways. First, they can be geographical organizations. Reporting to the internationaldivision president might be regional vice presidents for North America, Latin America,
Europe, Africa, the Middle East, and the Far East. Reporting to the regional vice presidents are country managers who are responsible for a sales force, sales branches, distributors, and licensees in the respective countries. Or the operating units may beworld product groups, each with an international vice president responsible for worldwide sales of each product group. The vice presidents may draw on corporate-staff
area specialists for expertise on different geographical areas. Finally, operating unitsmay be international subsidiaries, each headed by a president. The various subsidiarypresidents report to the president of the international division.
Many multinationals shift between types of organization:■

IBM Part of IBM’s massive reorganization strategy has been to put 235,000
employees into 14 customer-focused groups such as oil and gas, entertainment, and financial services. This way a big customer will be able to cut one
deal with a central sales office to have IBM computers installed worldwide.
Under the old system, a corporate customer with operations in 20 countries
had to contract, in effect, with 20 little Big Blues, each with its own pricing
structure and service standards.34

GLOBAL ORGANIZATION
Several firms have become truly global organizations. Their top corporate management and staff plan worldwide manufacturing facilities, marketing policies, financial
flows, and logistical systems. The global operating units report directly to the chief
executive or executive committee, not to the head of an international division. Executives are trained in worldwide operations, not just domestic or international. Management is recruited from many countries; components and supplies are purchased
where they can be obtained at the least cost; and investments are made where theanticipated returns are greatest.
These companies face several organizational complexities. For example, when pricing a company’s mainframe computers to a large banking system in Germany, howmuch influence should be wielded by the headquarters product manager, by the company’s market manager for the banking sector, and by the company’s German country manager? Bartlett and Ghoshal have proposed circumstances under which different
approaches work best. In their Managing Across Borders, they describe forces that favor “global integration” (e.g., capital-intensive production, homogeneous demand)
versus “national responsiveness” (e.g., local standards and barriers, strong local preferences). They distinguish three organizational strategies:35
1. A global strategy treats the world as a single market. This strategy is warranted
when the forces for global integration are strong and the forces for national
responsiveness are weak. This is true of the consumer electronics market, forexample, where most buyers will accept a fairly standardized pocket radio,
CD player, or TV. Matsushita has performed better than GE and Philips inthe consumer electronics market because Matsushita operates in a more globally coordinated and standardized way.
2. A multinational strategy treats the world as a portfolio of national opportunities. This strategy is warranted when the forces favoring national responsiveness are strong and the forces favoring global integration are weak. This is
the situation in the branded packaged-goods business (food products, cleaning products). Bartlett and Ghoshal cite Unilever as a better performer than
Kao and P&G because Unilever grants more decision-making autonomy to its
local branches.
3. A “glocal” strategy standardizes certain core elements and localizes other elements. This strategy makes sense for an industry (such as telecommunications) where each nation requires some adaptation of its equipment but theproviding company can also standardize some of the core components.
Bartlett and Ghoshal cite Ericsson as balancing these considerations better
than NEC (too globally oriented) and ITT (too locally oriented).
One of the most successful “glocal” companies is ABB, formed by a merger between the Swedish company ASEA and the Swiss company Brown Boveri.36■

ABB ABB’s products include power transformers, electrical installations, instrumentation, auto components, air-conditioning equipment, and railroad
equipment. With annual revenues of $31 billion and 219,000 employees, ABB

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is headed by Goeran Lindahl. The company’s motto is “ABB is a global company local everywhere.” It established English—or “broken English,” as Lindahlsays—as the company’s official language (all ABB managers must be conversant
in English), and all financial results must be reported in dollars. ABB aims toreconcile three contradictions: to be global and local; to be big and small; andto be radically decentralized with centralized reporting and control. ABB has
only 170 staff people at headquarters (with about 19 nationalities among them),
compared to the 3,000 who populate Seimens headquarters. The company’s
many product lines are organized into 8 business segments, 65 business areas,
1,300 companies, and 5,000 profit centers, with the average employee belonging to a profit center of around 50 employees. Managers are regularly rotatedamong countries and mixed-nationality teams are encouraged. Depending on
the type of business, some are treated as superlocal businesses with lots of autonomy and others as global businesses with major central control.

S U M M A R Y
1. Companies cannot simply stay domestic and expect to maintain their markets. Despite the many challenges in the international arena (shifting borders, unstable
governments, foreign-exchange problems, corruption, and technological pirating),
companies selling in global industries need to internationalize their operations.
2. In deciding to go abroad, a company needs to define its international marketing
objectives and policies. The company must determine whether to market in a few
countries or many countries. Then it must decide on which types of countries toconsider. In general, the candidate countries should be rated on three criteria: market attractiveness, risk, and competitive advantage.
3. Once a company decides on a particular country, it must determine the best modeof entry. Its broad choices are indirect exporting, direct exporting, licensing, joint
ventures, and direct investment. Each succeeding strategy involves more commitment, risk, control, and profit potential. Companies generally begin with indirectexporting, then proceed through later stages as they gain more experience in theinternational arena.
4. In deciding on the marketing program, a company must decide how much to adapt
its marketing mix (product, promotion, price, and place) to local conditions. At
the two ends of the spectrum are standardized and adapted marketing mixes, withmany steps in between. At the product level, firms can pursue a strategy of straight
extension, product adaptation, or product invention. At the promotion level, firms
may choose communication adaptation or dual adaptation. At the price level, firms
may encounter price escalation and gray markets, and it may be very difficult to
set standard prices. At the distribution level, firms need to take a whole-channel
view of the challenge of distributing its products to the final users. In creating all
elements of the marketing mix, firms must be aware of the cultural, social, political,
technological, environmental, and legal limitations they face in other countries.
5. Depending on the level of international involvement, companies manage their international marketing activity in three ways: through export departments, international divisions, or a global organization. Most firms start with an export
department and graduate to an international division. A few become global companies in which the top management plans and organizes on a global basis.

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C O N C E P T S
1. Because of shrinking domestic markets due to competition, a moderate-size company in the salad-dressing industry is trying to decide “whether to go abroad.”What are some questions concerning political, religious, and cultural factors thatthe company should ask itself before it decides to engage in international business?
Choose a country and answer the questions in Figure 6-1, then decide whether or
not to market salad dressing in that country.
2. Select one of the following countries or regions and prepare a brief (two- to fivepage) report on its marketing institutions and practices. Also discuss the challenges
that face domestic marketers within those countries, as well as the challenges faced
by U.S. marketers who want to do business there.
a. Mexico

d. People’s Republic of Chinab. the European Union

e. Japanc. Ukraine

f. South Africa

3. A U.S. heavy-equipment manufacturer operating in Western Europe has been using Americans as salespeople. The company feels that it could reduce its costs byhiring and training nationals as salespeople. What are the advantages and disadvantages to using Americans versus nationals for selling abroad?

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N O T E S
1. John Alden, “What in the World Drives
UPS?” International Business, April 1998,
pp. 6–7⫹.
2. For more on shifting borders, see Terry
Clark, “National Boundaries, Border
Zones, and Marketing Strategy: A Conceptual Framework and Theoretical Modelof Secondary Boundary Effects,” Journal ofMarketing, July 1994, pp. 67–80.
3. Michael E. Porter, Competitive Strategy(New York: Free Press, 1980), p. 275.
4. Marc Gunther, “They All Want to Be Like
Mike,” Fortune, July 21 1997, pp. 51–53.
5. Joann S. Lublin, “Too Much, Too Fast,”
Wall Street Journal, September 26, 1996,
p. R8.
6. Yumiro Ono, “On a Mission: Amway
Grows Abroad, Sending ‘Ambassadors’ toSpread the Word,” Wall Street Journal,
May 14, 1997, p. A1.
7. Igal Ayal and Jehiel Zif, “Market Expansion Strategies in Multinational Marketing,” Journal of Marketing, Spring 1979,
pp. 84–94.
8. See Kenichi Ohmae, Triad Power (NewYork: Free Press, 1985); and Philip Kotler
and Nikhilesh Dholakia, “Ending Global
Stagnation: Linking the Fortunes of theIndustrial and Developing Countries,”
Business in the Contemporary World,
Spring 1989, pp. 86–97.
9. John Heilemann, “All Europeans Are Not
Alike,” The New Yorker, April 28–May 5,
1997, pp. 174–81.
10. Emeric Lepoutre, “Europe’s Challenge to
the US in South America’s Biggest Market: The Economic Power of the Mercosur Common Market Is Indisputable,”
Christian Science Monitor, April 8, 1997,
p. 19; Ian Katz, “Is Europe Elbowing the
U.S. Out of South America?” Business
Week, August 4, 1997, p. 56.
11. Solange De Santis, “U.S. Companies Increasingly Look to Canada to Make Their
Initial Foray into Foreign Lands,” WallStreet Journal, July 15, 1998, p. A10.
12. Charlene Marmer Solomon, “Don’t Get
Burned by Hot New Markets,” Workforce,
January 1998, pp. 12–22.
13. Russ Banham, “Not-So-Clear Choices,”
International Business, November–December 1997, pp. 23–25.

390

14. Ibid.
15. “In Brief: e-Trade Licensing Deal Gives It
an Israeli Link,” American Banker, Maypart three
11, 1998.
Developing
16. Cynthia Kemper, “KFC Tradition Sold
MarketingJapan on Chicken,” Denver Post, June 7,
Strategies
1998, p. J4.

17. Laura Mazur and Annik Hogg, The Marketing Challenge (Wokingham, England:
Addison-Wesley, 1993), pp. 42–44; Jan
Willem Karel, “Brand Strategy Positions
Products Worldwide,” Journal of Business
Strategy 12, no. 3 (May–June 1991):
16–19.
18. Paula Dwyer, “Tearing Up Today’s Organization Chart,” Business Week, November 18, 1994, pp. 80–90.
19. Banham, “Not-So-Clear Choices.”
20. See Jan Johanson and Finn Wiedersheim-Paul, “The Internationalization of
the Firm,” Journal of Management Studies,
October 1975, pp. 305–22.
21. See Stan Reid, “The Decision Maker andExport Entry and Expansion,” Journal ofInternational Business Studies, Fall 1981,
pp. 101–12; Igal Ayal, “Industry Export
Performance: Assessment and Prediction,” Journal of Marketing, Summer
1982, pp. 54–61; and Somkid Jatusripitak, The Exporting Behavior of Manufacturing Firms (Ann Arbor, MI: Universityof Michigan Press, 1986).
22. Warren J. Keegan, Multinational Marketing Management, 5th ed. (Upper Saddle
River, NJ: Prentice Hall, 1995), pp.
378–81.
23. J. S. Perry Hobson, “Feng Shui: Its Impacts on the Asian Hospitality Industry,”
International Journal of Contemporary Hospitality Management 6, no. 6 (1994):
21–26; Bernd H. Schmitt and Yigang
Pan, “In Asia, the Supernatural Means
Sales,” New York Times, February 19,
1995, pp. 3, 11.
24. ”What Makes a Company Great?” Fortune, October 26, 1998, pp. 218-26.
25. David Leonhardt, “It Was a Hit in Buenos
Aires—So Why Not Boise?” Business
Week, September 7, 1998, pp. 56–58.
26. Charles P. Wallace, “Charge!” Fortune,
September 28, 1998, pp. 189–96.
27. “The Growth of Global Retailers,” The
Journal of Business Strategy, May–June
1998, p. 14.
28. Ben Dolven, “Find the Niche,” Far Eastern Economic Review, March 26, 1998, pp.
58–59.
29. Richard P. Carpenter and the Globe Staff,“What They Meant to Say Was . . . ,”Boston Globe, August 2, 1998, p. M6.
30. Carlos Briceno, “Labatt Believes Going‘Glocal’ Will Melt the Ice for Carlsberg,”
Beverage World, September 30–October
31, 1988, p. 17.
31. Maricris G. Briones, “The Euro Starts
Here,” Marketing News, July 20, 1998, pp.
1, 39.

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32. Elliott Masie, “Global Pricing in an Internet World,” Computer Reseller News,May 11, 1998, pp. 55, 58.
33. Ram Charan, “The Rules Have Changed,”
Fortune, March 16, 1998, pp. 159–62.
34. Dwyer, “Tearing Up Today’s Organization Chart,” pp. 80–90.
35. See Christopher A. Bartlett and Sumantra
Ghoshal, Managing Across Borders (Cambridge, MA: Harvard Business School
Press, 1989).
36. Martha M. Hamilton, “Going Global: A

World of Difference; DaimlerChrysler
Joins Growing List of Titans That Must
Find New Ways to Compete,” Washington Post, May 10, 1998, p. H1; Jeremy
Main, “Globe-zilla,” Working Woman,
October 1998, p. 9; Charles Fleming andLeslie Lopez, “The Corporate Challenge—No Boundaries: ABB’s DramaticPlan to Recast Its Business Structure
Along Global Lines: It May Not Be Easy—or Wise,” Wall Street Journal, September
28, 1998, p. R16.

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Managing Direct
and On-Line
Marketing
We will address the following questions:■ What are the beneﬁts of direct marketing?
■ How can companies use integrated direct marketing for competitive advantage?
■ What public and ethical issues are raised by direct marketing techniques?
■ What channels can direct marketers use to reach individual prospects and customers?
■ What marketing opportunities do on-line channels provide?

Today, the explosion of media is enabling many more companies to sell their products and services directly to customers without intermediaries, using traditional
media (print and broadcast media, catalogs, direct mail, and telephone marketing)plus fax machines, e-mail, the Internet, and on-line services. Innovative marketers are
creatively combining traditional and new media to make direct, individualized offers
to existing customers, to identify their best prospects, to better target their offers, andto measure their results more accurately.
Despite the myriad marketing opportunities, this new-media world has also
increased the level of competitive pressure, forcing small and large companies to battle for customers around the clock and around the world. Long-term customer relationship management is therefore driving the most successful direct and on-line marketing initiatives. Based on the information in their customer databases, companies
can now customize their offers, messages, and media for more effective and efﬁcient
one-to-one marketing. The ultimate goal: stronger, more proﬁtable bonds with targetedcustomers.

THE GROWTH AND BENEFITS OF DIRECT MARKETING
According to the Direct Marketing Association (DMA), direct marketing is deﬁned as
an interactive marketing system that uses one or more advertising media to effect ameasurable response and/or transaction at any location. This deﬁnition emphasizes ameasurable response, typically a customer order. Thus, direct marketing is sometimes
called direct-order marketing.

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Many direct marketers see direct marketing as playing a broader role these days,
that of building a long-term relationship with the customer (direct relationship marketing).1 In building relationships, some direct marketers send out birthday cards, information materials, or small premiums to select customers in their customer base. On
the service side, airlines, hotels, and other businesses are strengthening customer relationships through frequency award programs and club programs.

Growth of Direct Marketing and Electronic Business
Sales produced through traditional direct-marketing channels (catalogs, direct mail,and telemarketing) have been growing rapidly. Whereas U.S. retail sales growaround 3 percent annually, catalog and direct-mail sales are growing about 7 percent
annually. These sales include sales to consumers (53 percent), business-to-businesssales (27 percent), and fundraising by charitable institutions (20 percent). Annual
catalog and direct-mail sales are estimated at over $318 billion, with per capita direct
sales of $630.2
The extraordinary growth of direct marketing is the result of many factors.
Market “demassiﬁcation” has resulted in an ever-increasing number of market niches
with distinct preferences. Higher costs of driving, trafﬁc and parking headaches, lackof time, a shortage of retail sales help, and queues at checkout counters all encourage
at-home shopping, as do 24-hour toll-free telephone order hotlines and Web sites.
Convenient next-day delivery via Federal Express, Airborne, and UPS has made ordering fast and easy. In addition, many chain stores have dropped slower-moving specialty
items, creating an opportunity for direct marketers to promote these items directly tointerested buyers. Also, direct marketers now have the computer power and thedetailed data to cost-effectively single out the best prospects for their products.
Increasingly, business marketers have turned to direct mail and telemarketing as analternative to the rising costs of reaching business markets through the sales force.
Electronic communication is showing explosive growth, with Internet traffic
doubling every 100 days. Millions of Web sites are already open for business, with morecoming on-line every day. Electronic business is the general term for buyers and sellers
using electronic means to research, communicate, and potentially transact with one
another. Electronic markets are sponsored Web sites that (1) describe the products andservices offered by sellers, and (2) allow buyers to search for information, identify
what they need or want, and place orders using a credit card. The product is thendelivered physically (to the customer’s residence or ofﬁce) or electronically (softwareand music can be downloaded to a customer’s computer).

The Beneﬁts of Direct Marketing
Direct marketing (on-line and off-) beneﬁts customers in many ways. Shopping fromhome is fun, convenient, and hassle-free; it saves time and introduces consumers to alarger selection of merchandise. Shoppers can compare products and prices easily bybrowsing through mail catalogs and on-line shopping services, then order goods forthemselves or others. Business customers also beneﬁt by learning about available products and services without tying up time meeting with salespeople.
Sellers gain valuable beneﬁts, as well. Direct marketers can buy a mailing list containing the names of almost any group (left-handed people, overweight people, millionaires), then personalize and customize their messages to build a continuous relationship with each customer. Direct marketing can also be timed to reach prospects at
the right moment. The material sent by direct marketers receives higher readershipbecause it is sent to more interested prospects. Direct marketing permits the testing ofalternative media and messages in search of the most cost-effective approach, and it

The Growth and Beneﬁts of Direct Marketing

makes the direct marketer’s offer and strategy less visible to competitors. Finally, direct
marketers can measure responses to determine which campaigns have been the most
proﬁtable.

The Growing Use of Integrated Direct Marketing
Companies are increasingly recognizing the importance of integrating their marketing communications. Some companies are appointing a chief communications ofﬁcer(CCO) to supervise specialists in advertising, sales promotion, public relations, anddirect on-line marketing. The aim is to establish the right overall communication budget and the right allocation of funds to each communication tool. This movement has
been variously called integrated marketing communications (IMC), integrated direct marketing (IDM), and maximarketing.3
How can direct marketing be integrated into campaign planning? Imagine amarketer using a single tool in a “one-shot” effort to reach and sell a prospect. An
example of a single-vehicle, single-stage campaign is a one-time mailing offering acookware item. A single-vehicle, multiple-stage campaign would involve successive
mailings to the same prospect. Magazine publishers, for example, send about four
renewal notices to a household before giving up. A more powerful approach is themultiple-vehicle, multiple-stage campaign. Consider the following sequence:
News campaign about a new product → Paid ad with a response mechanism →Direct mail or e-mail → Outbound telemarketing → Face-to-face sales call →Ongoing communication
For example, Compaq might launch a new laptop computer by ﬁrst arranging
news stories to stir interest. Then the ﬁrm might place media ads as well as Internet
banner ads offering a free booklet on “How to Buy a Computer.” Next, Compaq would
mail the booklet to those who responded, along with an offer to sell the new computerat a special discount before it arrives in retail stores. Suppose 4 percent of those who
receive the booklet order the computer. Compaq telemarketers then phone the 96
percent who did not buy to remind them of the offer. Suppose another 6 percent now
order the computer. Those who do not place an order are offered a face-to-face sales
call or demonstration in a local store. Even if the prospect is not ready to buy, there isongoing communication.

Customer Databases and Direct Marketing
More marketers are harnessing information technology to build sophisticated customer databases and shift from mass marketing to highly targeted, one-to-one marketing (see Table 6.4).4 As discussed in Chapter 4, a customer database is an organized collection of comprehensive data about individual customers or prospects that is current,
accessible, and actionable for such marketing purposes as 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) for the purpose of contacting and transacting.
Database marketing is mostly frequently used by business marketers and service
retailers, although Nabisco and other consumer packaged-goods companies havebeen experimenting with it. Armed with the information in its database, a company
can achieve more target market precision than it can with mass marketing, segment
marketing, or niche marketing. Companies use their databases in four ways:

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Table 6.4 Mass Marketing versus One-to-One Marketing
Mass Marketing

One-to-One Marketing

Average customer
Customer anonymity
Standard product
Mass production
Mass distribution
Mass advertising
Mass promotion
One-way message
Economies of scale
Share of market
All customers
Customer attraction

Individual customer
Customer proﬁleCustomized market offering
Customized production
Individualized distribution
Individualized message
Individualized incentives
Two-way messages
Economies of scope
Share of customer
Proﬁtable customers
Customer retention

Source: Adapted from Don Peppers and Martha Rogers, The One-to-One Future (New York:
Doubleday/Currency, 1993). See their Web site: www.1to1.com/articles/subscribe.html.

1.

To identify prospects: Many companies generate sales leads by advertising their productor offer and building a database from the responses that come in. The ﬁrm can sort
through this database to identify the best prospects and then contact them by mail,phone, e-mail, or personal sales call in an attempt to convert them into customers.

2.

To decide which customers should receive a particular offer: Companies set up criteria
describing the ideal target customer for an offer, then search their customer databases for those most closely resembling the ideal type. Companies such as The
Limited and U S West are also comparing the marketing and servicing costs that go
into retaining each customer versus the revenues he or she represents. Twice a year,
for example, U S West sifts through its database looking for customers with more
profit potential. By looking at demographic profiles, the mix of local versus longdistance calls, and the mix of services used, U S West 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, U S West sets a cutoff
point for marketing spending on this customer.5

3.

To deepen customer loyalty: Companies can build interest and enthusiasm by remembering customer preferences and by sending gifts, coupons, and special information.
Consider Mars, a market leader not only in candy but also in pet food. In Germany,
Mars has compiled the names of virtually every cat-owning German family by contacting veterinarians and by advertising a free cat-care booklet to consumers who ﬁll out
a questionnaire. As a result, Mars knows the cat’s name, age, and birthday. Mars now
sends a birthday card to each cat in Germany each year, along with a new-cat-foodsample or money-saving coupons for Mars brands.

4.

To reactivate customer purchases: Companies can use automatic mailing programs tosend customers birthday or anniversary cards, holiday shopping reminders, off-season
promotions, or other timely offers. For example, Streamline is a Boston-based on-line
delivery service (www.streamline.com) that contracts with local groceries, video
stores, and dry cleaners to ﬁll and deliver orders when customers send in their shop-

Major Channels for Direct Marketing
ping lists. Streamline also keeps a database on what customers buy and when. Basedon each customer’s past behavior, the ﬁrm’s software creates a proﬁle and automatically sends e-mail reorder reminders when a customer is probably low on certain
items. The result: Streamline’s customers, who spend an average $6,000 a year, comeback for more 90 percent of the time.6

Public and Ethical Issues in Direct Marketing
Although direct marketers and their customers usually enjoy mutually rewarding relationships, a darker side occasionally emerges. Key public and ethical issues include:➤

Irritation: Many people ﬁnd the increasing number of hard-sell, direct-marketing
solicitations by phone, television, and e-mail to be a nuisance.

➤

Unfairness: Some direct marketers take advantage of impulsive or less sophisticatedbuyers. Television shopping channels and infomercials—extended-length, directresponse commercials that appear to be television shows demonstrating or
discussing a product—may be the worst culprits. They feature smooth-talking hosts,
elaborate demonstrations, claims of drastic or short-time price reductions, and easypurchasing to capture buyers who have low sales resistance.

➤

Deception and fraud: The Federal Trade Commission receives thousands ofcomplaints annually about scams and frauds. Some direct marketers exaggerateclaims about products and performance, some political fundraisers use
questionable gimmicks such as envelopes that resemble ofﬁcial documents, andsome nonproﬁt organizations pretend to conduct surveys when they are actuallytrying to identify donors.

➤

Invasion of privacy: Critics worry that marketers may know too much about theircustomers’ lives, and that they may use this knowledge to take unfair advantage.
American Express, long regarded as a leader on privacy issues, does not sell
information on speciﬁc customer transactions. However, Amex found itself thetarget of consumer outrage when it announced a deal to make data on 175 million
Americans available to any merchant who accepts AmEx cards. The uproar
prompted Amex to kill the plan. America Online, also targeted by privacy advocates,
wound up junking a plan to sell subscribers’ telephone numbers.7

People in the direct-marketing industry are working on addressing these issues.
They know that, left untended, such problems will lead to increasingly negative consumer attitudes, lower response rates, and calls for stricter government regulation. In
the final analysis, most direct marketers want the same thing that consumers want:honest and well-designed marketing offers targeted only to those consumers who
appreciate hearing about the offer.

MAJOR CHANNELS FOR DIRECT MARKETING
Direct marketers can use a number of channels for reaching prospects and customers.
These include face-to-face selling, direct mail, catalog marketing, telemarketing, television and other direct-response media, kiosk marketing, and on-line channels.

Face-to-Face Selling
The original and oldest form of direct marketing is the field sales call. Today, mostindustrial companies rely heavily on a professional sales force to locate prospects,
develop them into customers, and grow the business. Or they hire manufacturers’ rep-

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resentatives and agents to carry out the direct-selling task. In addition, many consumer
companies use a direct-selling force: insurance agents; stockbrokers; and distributors
working for direct-sales organizations such as Avon, Amway, Mary Kay, andTupperware.

Direct Mail
Direct-mail marketing involves sending an offer, announcement, reminder, or otheritem to a person at a particular address. Using highly selective mailing lists, direct marketers send out millions of mail pieces each year—letters, ﬂyers, foldouts, and other“salespeople with wings.” Some direct marketers mail audiotapes, videotapes, CDs,
and computer diskettes to prospects and customers. The company that produces theNordic Track Cardiovascular Exerciser advertises a free videotape showing the equipment’s uses and health advantages. Ford sends a computer diskette called “Disk Drive
Test Drive” to consumers who respond to its ads in computer publications. The
diskette’s menu provides technical speciﬁcations and attractive graphics about Fordcars and answers frequently asked questions.
Direct mail is a popular medium because it permits target market selectivity, it
can be personalized, it is flexible, and it allows early testing and response measurement. Although the cost per thousand people reached is higher than with mass media,
the people reached are much better prospects. The power of a well-designed directmail piece to garner contributions can be seen in a recent campaign for WFYI, an ailing public TV-radio station in Indianapolis. The results of a pair of startlingly graphic
support pieces, created by the ad agency Young and Laramore for WFYI, outpaced allinternal projections. The capital improvement campaign raised $3.5 million in its ﬁrst
9 months, when the 5-year goal was $5 million. Only 500 pieces were mailed, so theaverage per piece return was $7,000.8
Three newer forms of mail delivery are fax mail, sending announcements ofoffers, sales, and events to fax machines or computers set up to receive faxes; e-mail(short for electronic mail), sending a message, ﬁle, image, or Web page electronicallyfrom one user to the e-mailbox of another individual (or to groups); and voice mail,leaving voice messages on recipients’ voice mailboxes.
In constructing an effective direct-mail campaign, successful direct marketers
follow the ﬁve steps shown in Table 6.5.

Catalog Marketing
Catalog marketing occurs when companies mail product catalogs (full-line merchandise
catalogs, specialty consumer catalogs, or business catalogs in print, on CD, or on-line) toselected mail or electronic addressees. The Direct Marketing Association estimates
there are currently up to 10,000 mail-order catalogs of all kinds. Catalog marketinghas gotten a big boost from the Internet—about three-quarters of catalog companies
also do business on-line. The Lands’ End Web site (www.landsend.com), for example,
gets 180,000 e-mail queries a year, surpassing the ﬁrm’s print-mail response.9
The success of a catalog business depends on the company’s ability to manage its
customer lists so carefully that there is little duplication or bad debts, to control its
inventory carefully, to offer quality merchandise so that returns are low, and to projecta distinctive image. Some companies distinguish their catalogs by adding literary or
information features, sending swatches of materials, sending gifts to their best customers, or donating a percentage of the proﬁts to good causes. Other ﬁrms invite customers to view their Web-based catalogs for more information or to check on productavailability.

Major Channels for Direct Marketing

Table 6.5 Steps in Developing a Direct-Mail Campaign
Step
1. Set objectives

Description
Establish objectives by which campaign success will be measured,
such as producing orders from prospects, generating prospectleads, strengthening customer relationships, and informing andeducating customers for later offers.An order-response rate of
2 percent is considered good for many products.

2. Identify target markets The best customer targets are those who bought most recently,
and prospects
who buy frequently, and who spend the most. Consumer
prospects can be identiﬁed on the basis of such variables as age,sex, income, education, previous mail-order purchases, purchaseoccasions, and lifestyle; business prospects can be identiﬁed on
the basis of buying center role and other variables. Once thetarget market is deﬁned, the direct marketer needs to obtainspeciﬁc names by acquiring mailing lists and building databases.
3. Deﬁne the offer

According to Nash, the offer strategy consists of ﬁve elements:
the product, the offer, the medium, the distribution method, andthe creative strategy. Fortunately, all of these elements can betested. In addition to these elements, the direct-mail marketer has
to decide on ﬁve components of the mailing itself: the outsideenvelope, sales letter, circular, reply form, and reply envelope.

4. Test the elements

Direct marketing allows companies to test, under realmarketplace conditions, the efﬁcacy of different elements, suchas product features, copy, prices, media, or mailing lists.

5. Measure results

By adding up the campaign costs, the ﬁrm can determine inadvance the needed break-even response rate, net of returned
merchandise and bad debts. Even when a speciﬁc campaign fails
to break even, it can still be proﬁtable over the customer
lifetime, because of increased awareness and future intention to
buy.A customer’s ultimate value is not revealed by a purchaseresponse to a particular mailing but by the expected proﬁt madeon all future purchases, net of acquisition and maintenance costs.

Sources: Based, in part, on information in Bob Stone, Successful Direct Marketing Methods, 6th ed.
(Lincolnwood, IL: NTC Business Books, 1996); and Edward L. Nash, Direct Marketing: Strategy,
Planning, Execution, 3d ed. (New York: McGraw-Hill, 1995).

Global consumers in Asia and Europe are also catching on to the catalog craze.
A full 90 percent of L.L. Bean’s international sales, for instance, come from Japan.
One reason why Bean and other American catalog ﬁrms have ﬂourished in Japan isthat they offer high-quality merchandise aimed at speciﬁc groups. Consumer catalog
companies such as Tiffany & Co., Patagonia, and Eddie Bauer are also entering
Europe, as are business catalog ﬁrms such as Viking Ofﬁce Products.10
Of course, by putting their catalogs on the Internet, catalog companies have better access to global consumers than ever before. They also save considerable printing
and mailing costs while being able to offer unique services. In its latest attempt to

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build its brand over the Internet, Seattle-based casual apparel maker Eddie Bauer(www.eddiebauer.com) is letting customers enter a “virtual dressing room.” Although
visitors to Eddie bauer.com will ﬁnd the same apparel that is shown in the catalog andin the stores, the site is more than just an electronic sales flyer: Customers can justclick and drag different items to see how they look together. Because half of the consumers who visit the Web site have never shopped at Eddie Bauer before, their experience on-line is an important ﬁrst contact with the company.11

Telemarketing
Telemarketing describes the use of telephone operators to attract new customers, to contact existing customers to ascertain satisfaction levels, or to take orders. In the case ofroutinely taking orders, it is called telesales. Many customers routinely order goods
and services by telephone. The telephone has also spawned home banking. First Direct,
set up by Britain’s Midland Bank, operates entirely by telephone (as well as fax andInternet at www.ﬁrstdirect.com), with no branches to serve customers.12
Telemarketing has become a major direct-marketing tool, and is responsible forannual sales of $482 billion worth of products and services to consumers and businesses. The average household receives 19 telemarketing calls each year and makes 16
calls to place orders, although businesses are placing and receiving more telemarketingcalls, as well. For example, Raleigh Bicycles uses telemarketing to reduce the amount of
personal selling needed for contacting its dealers. In the ﬁrst year, sales force travel
costs were reduced by 50 percent and sales in a single quarter went up 34 percent.
Effective telemarketing depends on choosing the right telemarketers, training
them well, and providing performance incentives. Telemarketers should have pleasantvoices and project enthusiasm; after initial training with a script, they should movetoward more improvisation. The call should be made at the right time, which is latemorning and afternoon to reach business prospects, and evening hours between 7 and
9 P.M. to reach households. Given privacy issues and the higher cost per contact, precise list selection is critical.

Direct-Response Television Marketing
Although magazines, newspapers, and radio are all used to make direct offers topotential buyers, two forms of direct-response television marketing have become
prominent in recent years:
1.

Direct-response TV advertising: Some companies have been successful with 30- and 60minute infomercials, which resemble documentaries and include testimonials and atoll-free number for ordering or getting further information. One example is the“Chrysler Showcase,” a 30-minute infomercial touting Chrysler’s brand heritage andthe exterior design, performance, handling, and premium features of selected newmodels. This infomercial aired on national cable networks as well as United Airlines
SkyTV. Infomercials generate an estimated $1.5 billion in annual sales.132.

Home shopping channels: Several television channels are dedicated to selling goods andservices. For example, on the 24-hour Home Shopping Network (HSN), hosts offer
bargain prices on such products as jewelry, lamps, collectible dolls, and power tools.
Viewers call in their orders on a toll-free number and receive delivery within 48 hours.

Kiosk Marketing
Some companies have designed “customer-order-placing machines” called kiosks (incontrast to vending machines, which dispense actual products) and placed them inManaging Electronic Commerce and On-Line Marketingstores, airports, and other locations. For example, the Florsheim Shoe Company
includes a machine in selected stores to allow the customer to indicate the type of shoehe or she wants (dress, sport), along with the color and size. Pictures of Florsheim
shoes that meet the criteria appear on the screen. If the particular shoes are not available in that store, the customer can order by dialing an attached phone and typing ina credit-card number and an address where the shoes should be delivered.

MANAGING ELECTRONIC COMMERCE AND
ON-LINE MARKETING
Technology is expanding direct marketing into new electronic arenas. Electronic commerce (e-commerce) describes a wide variety of electronic platforms, such as the sending ofpurchase orders to suppliers via electronic data interchange (EDI); the use of fax ande-mail to conduct transactions; the use of ATMs, electronic point-of-sale terminals, andsmart cards to facilitate payment and obtain digital cash; and the use of the Internet
and on-line services. All of these involve doing business in a “marketspace” as compared
to a physical “marketplace.”14 Although consumer buying over the Internet is growing
rapidly—driven by purchases of computers and related products, books, CDs, toys, andvideos—the volume of business Internet transactions is growing even faster: By 2003,
U.S. business-to-business e-commerce is projected to reach $2.8 trillion.15
Commercial on-line services offer on-line information and marketing services topaid subscribers. The largest and best-known is America Online (AOL), which has 19
million subscribers and holds 50 percent of the market.16 AOL and other on-line services offer proprietary channels featuring information (news, libraries, education,
travel, sports, reference), entertainment (fun and games), shopping services, dialogue
opportunities (bulletin boards, forums, chat rooms), and e-mail capabilities.
The Internet is an international web of computer networks that has made instantaneous and decentralized global communication possible. Internet usage has surged
with the development of the user-friendly World Wide Web and browser programs
such as Netscape Navigator and Microsoft Internet Explorer. Internet users can now
experience fully integrated text, graphics, images, and sound; send e-mail and visit
chat rooms to exchange views; shop for products; and ﬁnd information of all kinds.
To target and reach these Internet users, marketers need to understand the characteristics and behavior of the on-line consumer.

The On-Line Consumer
As a whole, the Internet population is younger, more afﬂuent, and better educatedthan the general population, with an almost equal number of men and women.17 But
as more people ﬁnd their way onto the Internet, the cyberspace population is becoming more mainstream and diverse. Internet users in general place greater value on
information and tend to respond negatively to messages aimed only at selling. They
want to decide what marketing information they will receive about which products
and services and under what conditions. In on-line marketing, it is the consumer, notthe marketer, who gives permission and controls the interaction.
Internet consumers have around-the-clock access to varied information sources,
making them better informed and more discerning shoppers. They can (1) get objective information about multiple brands, including costs, prices, features, and quality,
without relying on manufacturers or retailers; (2) initiate requests for advertising andinformation from manufacturers and retailers; (3) design the offerings they want; and(4) use shopping agents to search for and invite offers from multiple sellers.

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These new on-line buyer capabilities mean that the exchange process has
become largely customer initiated and controlled; marketers must be invited to participate in the exchange. Even after marketers enter the exchange process, customers
deﬁne the rules of engagement, and insulate themselves with the help of agents andintermediaries. Customers define what information they need, what offerings theywant, and what prices they will pay—reversing, in many ways, time-honored marketing
practices.

On-Line Marketing: Advantages and Disadvantages
On-line marketing is popular because it provides three major benefits to potential
buyers:18➤

Convenience. Customers can order 24 hours a day with a few keystrokes. At theLands’ End site (www.landsend.com), for example, buyers register their billing andshipping information only once; after that, whenever they make a purchase, theirdata will appear on the order form automatically.

➤

Information. Customers can quickly and easily ﬁnd comparative information aboutcompanies, products, competitors, and prices. Consumer World(www.consumerworld.org), for example, offers access to dozens of comparisonshopping sites, consumer protection sites, and many other Internet resources tohelp shoppers make more informed buying choices.

➤

Fewer hassles. Customers don’t have to deal with salespeople or wait in line. This is the
special appeal of Autobytel (www.autobytel.com) and similar sites, which offer on-line
car shopping so buyers can avoid haggling with salespeople over price and options.

At the same time, on-line marketing provides a number of beneﬁts to marketers:(1) quick adjustments to market conditions (companies can quickly add products andchange prices or descriptions), (2) lower costs (ﬁrms avoid the costs of maintaining astore and can create digital catalogs for much less than the cost of printing and mailing paper catalogs), (3) relationship building (ﬁrms can dialogue with consumers andinvite them to download useful data or free demos), and (4) audience sizing (marketers
can learn how many people visited their on-line site and how many stopped at particular places on the site).
Furthermore, on-line marketing is affordable for both small and large firms.
There is no real limit on advertising space, in contrast to print and broadcast media,
and information access and retrieval are nearly instantaneous. On-line marketers canreach anyone anyplace in the world, at any time, offering private yet speedy buying for
consumers and business customers alike.19
Consider Wine.com (www.wine.com), the brainchild of master sommelier Peter
Granoff and Silicon Valley engineer Robert Olson. Formerly known as Virtual
Vineyards, this popular site features over 300 wines from 100 wineries plus hundreds
of food and gift items for personal and corporate customers. One way the site adds
value—without extra cost—is by providing detailed information on the characteristics
of each wine, along with suggested food pairings. Customers can also join a wine cluband enjoy the convenience of automatically receiving special wine or champagne
selections to sample every month.20

Conducting On-Line Marketing
Marketers can get involved in on-line marketing by creating an electronic presence on
the Internet; placing ads on-line; participating in forums, newsgroups, bulletin boards,
and Web communities; and using e-mail to targeted audiences.

Managing Electronic Commerce and On-Line Marketing

Electronic Presence
A company can establish an electronic presence on the Web in three ways:
1.

Buying space on a commercial on-line service. This involves renting storage space on theon-line service’s computer or establishing a link from the company’s own computer
to the on-line service’s shopping mall. For example, the retailer JCPenney(www.jcpenney.com) has links to America Online and Prodigy. The on-line services
typically design the storefront for which the company pays an annual fee plus asmall percentage of its on-line sales.

2. Selling through another site. Amazon.com (www.amazon.com) broke new marketing
ground by starting zShops, a special section on its Web site where manufacturers andretailers can sell their products. For less than $10 per month and a small percentage
of on-line revenues, businesses of any size—even competitors—can reach out toAmazon’s 12 million customers.21
3.

Opening its own Web site. On a corporate Web site, the ﬁrm can offer basic information
about its history, mission and philosophy, products and services, and locations; inaddition, it may post current events, ﬁnancial performance data, and job opportunities. One example is McDonald’s (www.mcdonalds.com), which announces new promotions, helps visitors ﬁnd the nearest outlet, posts news about its charitable works,
and generally builds the ﬁrm’s image—even though the site does not actually sell any
food. On a marketing Web site, the ﬁrm seeks to bring prospects and customers closer
to a purchase or other marketing outcome by offering a catalog, shopping tips, andpossibly promotional features such as coupons or contests. The Garden site(www.garden.com), for example, offers a “garden planner” that lets visitors createand save their own ideal garden designs, then buy the plants and tools they need.

Business marketing is actually the driving force behind the e-commerce juggernaut. Major corporations such as Chevron, Ford Motor Company, General
Electric, and Merck have invested millions in Web procurement systems to automate
corporate purchasing. The result: Invoices that used to cost $100 to process now cost
as little as $20. General Electric now requires its partners to join its Web procurement network (www.geis.com), which could save GE as much as $200 million peryear by 2003.
Many companies are also developing “microsites”—small, specialized Web sites
for speciﬁc occasions or products. For instance, the big motion picture studios are setting up separate sites for new ﬁlms rather than sending people to the studios’ main
Web sites. Now other companies are using microsites for new-product launches, promotional campaigns, contests, recruiting, crisis communication, specific productinformation, and media relations. Frito-Lay, for example, has both a corporate Web
site (www.fritolay.com) and a microsite (www.gosnacks.com) where consumers canplace large orders for Cheetos and other snacks in special resealable containers.
Companies should consider developing a microsite for any situation in which speciﬁc,detailed information needs to be made available quickly and easily.22
Advertising On-line
Companies can place on-line ads in three ways: (1) in special sections offered by the
major commercial on-line services; (2) in selected Internet newsgroups that are set up
for commercial purposes; and (3) using ads that pop up while subscribers are surﬁng
on-line services or Web sites, including banner ads, pop-up windows, “tickers” (banners that move across the screen), and “roadblocks” (full-screen ads that users mustclick through to get to other screens).

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Despite the ubiquity of banner ads, the “click-through rate” (the number ofusers who click on an ad to get more information) has plummeted below 1 percent.
However, users who don’t click may still see and absorb the banner ad message, notes
Christopher Escher of Talk City (www.talkcity.com), an on-line community site: “Ourfocus groups tell us that people see our banner ads. Sometimes they click. Sometimes
they don’t. But the banner ads make them more likely to visit at another time.”23
Accustomed to measurement techniques for traditional media, advertisers want bettermeasures of on-line advertising impact. For now, Web advertising is playing a supporting role in the promotion mixes of most advertisers.24
Forums, Newsgroups, Bulletin Boards, and Web Communities
On-line buyers increasingly create product information, not just consume it. They participate in Internet interest groups to share product-related information, with theresult that “word of Web” is joining “word of mouth” as an important buying influence.
To beneﬁt from this trend, companies may participate in or sponsor Internet forums,
newsgroups, and bulletin boards that appeal to special interest groups.
Forums are discussion groups that are usually located on commercial on-line services. A forum may operate a library, a “chat room” for real-time message exchanges,
and even a classified ad directory. Some firms are adding proprietary chat rooms
where visitors can go to discuss that company’s offerings or interact with customer service reps. IGoGolf.com (www.igogolf.com), for example, made a $12,000 sale after acustomer (who logged onto the U.S. site from Egypt) chatted with a customer service
rep who recommended the right golf equipment.25
Newsgroups, the Internet version of forums, are limited to people who post andread messages on a speciﬁed topic. Thousands of newsgroups deal with every imaginable topic: healthy eating, caring for Bonsai trees, exchanging views about the latest
soap opera happenings.
Bulletin board systems (BBSs) are specialized on-line services that center on a speciﬁc topic or group. Over 60,000 BBSs deal with numerous topics, such as vacations
and hobbies. Marketers that participate in newsgroups and BBSs must take care to
avoid a commercial tone in their messages.
Web communities are commercially sponsored Web sites where members congregate on-line and exchange views on issues of common interest. One such community
is Agriculture Online (www.agriculture.com), where farmers and others can ﬁnd commodity prices, recent farm news, and chat rooms of all types.
E-mailThe most targeted method a company can use to communicate directly with prospects
and customers is via e-mail. Using inbound e-mail, the ﬁrm can invite people to e-mailthe ﬁrm with questions, suggestions, and even complaints so customer service reps can
respond and cultivate the relationship. E-savvy companies also develop Internet-based
electronic mailing lists for outbound e-mail, sending out customer newsletters, special
product or promotion offers based on purchasing histories, reminders of service
requirements or warranty renewals, and announcements of special events.
However, in using e-mail as a direct-marketing vehicle, companies must be extra
careful not to develop a reputation as a “spammer.” Spam is the term for unsolicited email. Consumers who are accustomed to receiving junk mail in their real mailboxes
are often enraged to ﬁnd unsolicited marketing pitches in their e-mail boxes. In fact,
several states, as well as the federal government, have proposed legislation to limit orprohibit spam broadcasting.

Managing Electronic Commerce and On-Line Marketing

Despite the possibility of being perceived as a spammer, savvy marketers are racing to take advantage of the potential of e-mail marketing.26 One effective approach ispermission-based marketing, a term coined by Seth Godin to describe the e-mail marketing model in which marketers ask for the customer’s permission before sending e-mailoffers. Amazon.com, for instance, invites customers to receive free newsletters witheditors’ recommendations for books in speciﬁc categories such as business and cooking. Targeted “opt-in marketing messages” are an increasingly important part of online marketing strategy because they can yield impressive response rates of 18–25 percent, compared with the average banner ad’s response rate of 1 percent (or less).27

The Promise and Challenges of On-Line Marketing
On-line marketing is bringing profound changes to various sectors of the economy.
Consumers’ ability to order direct threatens to seriously hurt certain groups, particularly travel agents, stockbrokers, insurance salespeople, car dealers, and bookstore
owners. These middlemen will be disintermediated by on-line services.28 At the sametime, some reintermediation will take place in the form of new on-line intermediaries,
called infomediaries, which help consumers shop more easily and obtain lower prices.29
Consider mySimon (www.mysimon.com), which acts as an intelligent shopping
agent for consumers looking for the best buys in categories such as books, toys, and computers. A shopper seeking a digital camera can go to mySimon, click on cameras, thendigital cameras, scan the listing of makes and models, and locate the merchant offeringa particular camera at the lowest price. Similarly, DealPilot (www.dealpilot.com) helps
buyers compare prices of books, videos, DVDs, and CDs, while Point.com(www.point.com) helps buyers compare cellular phone service offerings.
Among other changes, Quelch and Klein believe that the Internet will lead tothe more rapid internationalization of small- to medium-size enterprises.30 The advantages of scale economies will be reduced, global advertising costs will be less, andsmaller enterprises offering specialized products will be able to reach a much larger
world market.
At the same time, on-line marketers continue to face a number of challenges:➤

Encouraging more buying: The major on-line buyers today are businesses rather than
individual consumers. Web marketers such as Priceline.com (www.priceline.com)
are among the many sites using techniques such as special pricing to encourage
more consumers to buy on-line. At auction sites such as eBay (www.ebay.com), manybuyers return because they like bidding for what they want and getting a bargain.

➤

Skewed user demographics and psychographics: On-line users are more upscale, younger,
and more Web-savvy than the general population, making them ideal prospects forcomputers, electronics, and ﬁnancial services. The challenge now is to expand theon-line market and ﬁnd ways of reaching diverse targeted segments. Eyeing theassets of younger, wealthier investors who frequent on-line brokerage ﬁrms, forexample, Charles Schwab (www.schwab.com) acquired U.S. Trust so it could offer awider range of services, such as private banking, to this attractive segment.31➤

Chaos and clutter: The Internet offers millions of Web sites and a staggering volume
of information. Navigating the Web can be frustrating. Many sites go unnoticed andeven visited sites must capture visitors’ attention within 8 seconds or lose them toanother site.

➤

Security: Consumers worry about the security of credit-card numbers and other data
sent to Internet sites, while companies worry about systems espionage or sabotage.
The Internet is becoming more secure, but the race continues between new security

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measures and new code-breaking measures. To allay users’ fears, Lending Tree
(www.lendingtree.com)—a site that helps consumers shop for mortgages, credit
cards, and other ﬁnancial services—displays seals of approval from Verisign andother ﬁrms that monitor site security.
➤

Ethical concerns: As noted earlier, consumers who buy from direct marketers worry
about companies making unauthorized use of their personal data, such as selling it
to others. Threats of government intervention have spurred an increasing numberof Web marketers to post privacy policies. Travelocity (www.travelocity.com), a onestop-shopping site for travel and vacation-related purchases, is one of many sites thatreassure visitors by displaying a seal of approval from the Better Business Bureau orother organizations and sites that examine Web privacy policies.

➤

Consumer backlash. Just as the Web has shifted power to consumers by giving themmore product information, it has given them a more potent, effective means ofexpressing disgruntlement or even outrage. Rogue Web pages such as “Down with
Snapple,” often launched by irate consumers or former employees, can be seen by
millions. They may contain valid information, but they can also spread unfounded
rumors. Some companies shrug off these pages, but others are concerned enoughto hire ﬁrms to monitor activity at these sites.32

EXECUTIVE SUMMARY
Direct marketing is an interactive marketing system that uses one or more advertising
media to effect a measurable response or transaction at any location. Direct marketing
is now widely used in consumer markets, business-to-business markets, and markets forcharitable contributions. Many companies have begun practicing integrated marketing
communications, also called integrated direct marketing (IDM), using a multimedia
approach to advertising that is generally more effective than single-media programs.
One of the most valuable direct-marketing tools is the customer database, anorganized collection of comprehensive data about individual prospects or customers.
Companies use their databases to identify prospects, decide which customers should
receive an offer, deepen customer loyalty, and reactivate customer purchases.
Direct marketers and their customers usually enjoy mutually rewarding relationships. However, marketers must avoid campaigns that irritate consumers, are perceived as unfair, are deceptive or fraudulent, or invade customers’ privacy.
Today, direct marketers can use a wide variety of channels to reach prospects andcustomers: sales calls; direct-mail marketing (sending an offer, announcement,
reminder, or other item to a person at a particular address); catalog marketing; telemarketing; offers made by radio, magazine, and newspaper, direct-response television
advertising; home shopping channels; kiosks; and on-line channels.
Electronic commerce describes a wide variety of electronic platforms.
Commercial on-line services offer on-line information and marketing services to paid
subscribers; the Internet is an international web of computer networks that makes
instantaneous and decentralized global communication possible. Companies can goon-line by buying space on an on-line service; by selling through another site; by opening their own Web sites; by placing ads on-line; by participating in forums, newsgroups, bulletin boards, and Web communities; and by using e-mail to targeted audiences. Direct e-mailers that want to avoid being perceived as a spammer can use
permission-based marketing, requesting the customer’s permission before sending
any e-mail offers. On-line marketing is leading to disintermediation of certain middlemen, even as infomediaries are starting to establish themselves as new on-line intermediaries.

NotesNOTES
1. The terms direct-order marketing and direct relationship marketing were suggested as subsets ofdirect marketing by Stan Rapp and Tom Collins in The Great Marketing Turnaround (Upper
Saddle River, NJ: Prentice-Hall, 1990).
2. Figures are for 1997, supplied by National Mail Order Association, tel: 612-788-1673.
3. Don E. Schultz, Stanley I. Tannenbaum, and Robert F. Lauterborn, Integrated Marketing
Communications (Lincolnwood, IL: NTC Business Books, 1993); Ernan Roman, Integrated
Direct Marketing: The Cutting Edge Strategy for Synchronizing Advertising, Direct Mail,
Telemarketing, and Field Sales (Lincolnwood, IL: NTC Business Books, 1995); Stan Rapp andThomas L. Collins, The New Maxi-Marketing (New York: McGraw-Hill, 1996), and Beyond
Maximarketing: The New Power of Caring and Daring (New York: McGraw-Hill, 1994).
4. See Don Peppers and Martha Rogers, The One-to-One Future (New York:
Doubleday/Currency, 1993).
5. “What’ve You Done for Us Lately?” Business Week, September 14, 1998, pp. 142–48.
6. Nicole Harris, “Spam That You Might Not Delete,” Business Week, June 15, 1998,
pp. 115–18.
7. Jennifer Tanaka, “Getting Personal,” Newsweek, November 22, 1999, pp. 101–2; Bruce
Horovitz, “AmEx Kills Database Deal After Privacy Outrage,” USA Today, July 15, 1998,
p. B1.
8. Debra Ray, “‘Poor Mouth’ Direct Mail Brochure Nets $3.5 Million in Contributions,” Direct
Marketing, February 1998, pp. 38–39.
9. Bruce Horovitz, “Catalog Craze Delivers Holiday Deals,” USA Today, December 1, 1998,
p. 3B.
10. Mari Yamaguchi, “Japanese Consumers Shun Local Catalogs to Buy American,” Marketing
News, December 2, 1996, p. 12; Cacilie Rohwedder, “U.S Mail-Order Firms Shake Up
Europe—Better Service, Specialized Catalogs Find Eager Shoppers,” Wall Street Journal,
January 6, 1998; Kathleen Kiley, “B-to-B Marketers High on Overseas Sales,” Catalog Age,
January 1997, p. 8.
11. De’Ann Weimer, “Can I Try (Click) That Blouse (Drag) in Blue?” Business Week, November
9, 1998, p. 86.
12. See David Woodruff, “Twilight of the Teller?” Business Week, European Edition, July 20,
1998, pp. 16–17.
13. “Infomercial Offers Multiple Uses,” Direct Marketing, September 1998, p. 11; Tim
Hawthorne, “When and Why to Consider Infomercials,” Target Marketing, February 1998,
pp. 52–53.
14. See Jeffrey F. Rayport and John J. Sviokla, “Managing in the Marketspace,” Harvard
Business Review, November–December, 1994, pp. 75–85. Also see their “Exploiting the
Virtual Value Chain,” Harvard Business Review, November–December 1995, pp. 141–50.
15. “Online Holiday Shoppers to Triple,” CyberAtlas, November 9, 1999,
cyberatlas.internet.com/markets/retailing; “New BCG Study Re-Evaluates Size, Growthand Importance of Business-to-Business E-Commerce,” Boston Consulting Group, December
21, 1999, www.bcg.com/practice/ecommerce/press_coverage_subpage4.asp.
16. Carol Pickering, “The First Online Business,” Business 2.0, January 2000, p. 170.
17. Joanna Glasner, “Gender Gap? What Gender Gap?” Wired Online, November 8, 1999,
www.wired/com/news/ebiz; “Numbers: Who’s Online,” Business 2.0, January 2000,
pp. 251–52.
18. See Daniel S. Janal, Online Marketing Handbook 1998 Edition: How to Promote, Advertise andSell Your Products and Services on the Internet (New York: John Wiley, 1998).
19. Robert Mullins, “E-Mail Marketing Puts Small Firms on Equal Footing with Big Business,”
Milwaukee Business Journal, January 3, 2000, www.amcity.com.

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20. Gerald D. Boyd, “Cyberspace Caters to Wine Buffs,” San Francisco Chronicle, May 8, 1998,
p. 4.
21. Robert D. Hof, “Amazon.com Throws Open the Doors,” Business Week, October 11, 1999,
p. 44.
22. Greg Hansen, “Smaller May Be Better for Web Marketing,” Marketing News, January 19,
1998, pp. 10, 13. For an excellent discussion of ways to attract viewers to Web sites, seeRichard T. Watson, Sigmund Akselsen, and Leyland F. Pitt, “Attractors: Building Mountains
in the Flat Landscape of the World Wide Web,” California Management Review, Winter 1998,
pp. 36–56.
23. “Advertise the Proven Way: Don’t Bad-Mouth the Banner,” PC Computing, January 2000,
pp. 93–94.
24. See George Anders, “Internet Advertising, Just Like Its Medium, Is Pushing Boundaries,”
Wall Street Journal, November 30, 1998, p. 1.
25. “Case Study: Sell More Stuff,” PC Computing, January 2000, p. 108.
26. Jay Winchester, “Point, Click, Sell,” Sales & Marketing Management, November 1998,
pp. 100–101.
27. “Take Advantage of the Free Market: Give Away the Store,” PC Computing, January 2000,
pp. 93, 98; Matthew Mills, “Vital Signs,” PC Computing, August 1999, p. 14.
28. See Joseph Alba, John Lynch, Barton Weitz, Chris Janiszewski, Richard Lutz, Alan Sawyer,
and Stacy Wood, “Interactive Home Shopping: Consumer, Retailer, and Manufacturer
Incentives to Participate in Electronic Marketplaces,” Journal of Marketing, July 1997,
pp. 38–53.
29. See John Ellis, “‘People Need a Haven from the Web That’s on the Web,’” Fast Company,
January–February 2000, pp. 242–46.
30. J. A. Quelch and L. R. Klein, “The Internet and International Marketing,” Sloan
Management Review, Spring 1996, pp. 60–75.
31. Amy Kover, “Schwab Makes a Grand Play for the Rich,” Fortune, February 7, 2000, p. 32.
32. Stephanie Armour, “Companies Grapple with Gripes Posted on Web,” USA Today,
September 16, 1998, p. 5B.

Managing the Total
Marketing Effort

We will answer the following
questions:■

What are the trends in company
organization?

■

How are marketing and salesorganized in companies?

■

What is the marketing department s relation to other departments in the company?

■

What steps can a company taketo build a stronger customerfocused culture?

■

How can a company improve
its marketing-implementation
skills?

■What tools are available to help
companies audit and improvetheir marketing activities?

The marketing organization will haveto redefine its role from managing
customer interactions tointegrating all the company’s
customer-facing processes.

W

e now turn from the strategic and tactical management of marketing to its administration. Our goal is to examine how firms organize, implement, evaluate, andcontrol their marketing activities.

T RENDS IN COMPANY ORGANIZATION
Companies often need to restructure their business and marketing practices in response to significant changes in the business environment, such as globalization,
deregulation, computer and telecommunications advances, and market fragmentation. The main responses of business firms to a rapidly changing environment haveincluded these:■

Reengineering: Appointing teams to manage customer-value building processes andtrying to break down department walls between functions.

■Outsourcing: A greater willingness to buy more goods and services from outside
vendors when they can be obtained cheaper and better this way.

■

Benchmarking: Studying “best practice companies” to improve the company’s performance.

■

Supplier partnering: Increased partnering with fewer but larger value-adding suppliers.

■

Customer partnering: Working more closely with customers to add value to theiroperations.

■

Merging: Acquiring or merging with firms in the same industry to gain
economies of scale and scope.

■

Globalizing: Increased effort to both “think global” and “act local.”■Flattening: Reducing the number of organizational levels to get closer to the customer.

■

Focusing: Determining the most profitable businesses and customers and focusing
on them.

■Empowering: Encouraging and empowering personnel to produce more ideas andtake more initiative.

All these trends will undoubtedly have an impact on marketing organization and practices.
The role of marketing in the organization will also have to change. Traditionally,marketers have played the role of middlemen, charged with understanding customer
needs and transmitting the voice of the customer to various functional areas in theorganization, who then acted upon these needs. Underlying this conception of themarketing function was the assumption that customers were hard to reach and could
not interact directly with other functional areas. But in a networked enterprise, every
functional area can interact with customers, especially electronically. Marketing nolonger has sole ownership of customer interactions; rather, marketing needs to integrate all the customer-facing processes so that customers see a single face and hear asingle voice when they interact with the firm.
Another way to look at these changes in marketing organization and role is throughthe analogy of sports: See the Marketing Insight “Sports Analogies for the Marketing
Organization.”

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Over the years, marketing has grown from a simple sales department into a complex
group of activities. We will examine how marketing departments have evolved in companies, how they are organized, and how they interact with other company departments.

M

A

R

K

E

T

I

N

G

Sports Analogies for theMarketing OrganizationI

N S I G H T

Much has been made about the value of teamwork in accomplishing a company s marketing goals. Michael Hammer, management consultant, uses a football analogy to point out thevalue of a relatively flat organization. Each of the offensive anddefensive players has a particular job, but it is executed by cooperating with teammates. A coach oversees the process of carrying out the teams game plan, assisted by offensive anddefensive coaches. In addition, personal coaches give players individual guidance. To respond to changing circumstances, eachplayer must be responsive to several coaches. Sometimes personal initiative is required. Similarly, the manager in a businesscoaches team members to do their jobs. Managers are not necessarily more capable of performing these tasks than employees, but they are in a position to coordinate the parts of theprocess and, when necessary, offer individual encouragement
and guidance. Like the football team, the effective organizationmust not have too many layers of management. Otherwise top

managers are too far removed from the work processes to offer
any supervision.
Strategy consultant Adrian J. Slywotzky has a different set ofsport analogies. He sees football as descriptive of business in the
1960s and 1970s: The pace of football is fast during plays, but
quiet during the considerable downtime between plays. Similarly, large firms that made successful plays could take time tocatch their corporate breath before the next play. Slywotzky sees
the quicker pace of the 1980s in terms of basketball. Speed ingetting new products to market became a more important consideration,especially for producers of new electronic equipment.
Then came the 1990s, with their chess-like mind games. Eachmove is strategic, but even more important than the next moveis a mastery of patterns of moves. Knowing the possibilities forchanging the position of each piece and having alternative series of moves can enable the player to adjust to changing situations. Today, like the well-rounded athlete who learns the rules
and strategies of each new game and practices new skills, a serious player in the business field develops the moves and muscle to be a winner.

Sources: Michael Hammer,“Beyond the End of Management,” in Rethinking the Future, ed. Rowan Gibson (London: Nicholas Brealey, 1996), pp. 94–105; Adrian Slywotsky, Value Migration: How to Think Several Moves Aheadof the Competition (Boston: Harvard Business School Press, 1996), pp. 7–8, 18–19.

THE EVOLUTION OF THE MARKETING DEPARTMENT
Marketing departments have evolved through six stages. Companies can be found ineach stage.

Stage 1: Simple Sales Department
Small companies typically appoint a sales vice president, who manages a sales force
and also does some selling. When the company needs marketing research or advertising, the sales vice president hires help from the outside (Figure 6-5[a]).

Stage 2: Sales Department with Ancillary Marketing Functions
As the company expands, it needs to add or enlarge certain functions. For example,
an East Coast firm that plans to open in the West will need to conduct marketing
research to learn about customer needs and market potential. It will have to advertise its name and products in the area. The sales vice president will hire a marketing research manager and an advertising manager to handle these activities. He
might hire a marketing director to manage these and other marketing functions (Figure 6-5[b]).

Stage 3: Separate Marketing Department
The continued growth of the company will warrant additional investment in marketing research, new-product development, advertising and sales promotion, and customer service. Yet the sales vice president normally focuses time and resources on thesales force. Eventually the CEO will see the advantage of establishing a separate marketing department headed by a marketing vice president, who reports, along with thesales vice president, to the president or executive vice president (Figure 6-5[c]). At thisstage, sales and marketing are separate functions that are expected to work closely together.

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F I G U R E

6-5

Stages in the Evolution of theMarketing Department(a) Stage 1: Simple Sales Department

President

Sales VP

Sales force

Other marketing
functions(hired fromoutside)(b) Stage 2: Sales Department
with Ancillary Marketing Functions
President

Sales VP

Sales force• Marketing Director• Other marketing
functions (internal
staff and external
support)This arrangement permits the CEO to obtain a more balanced view of company opportunities and problems. Suppose sales start slipping. The sales vice president mightrecommend hiring more salespeople, raising sales compensation, running a sales contest, providing more sales training, or cutting the price so the product will be easier tosell. The marketing vice president will want to analyze the forces affecting the marketplace. Is the company going after the right segments and customers? Do the target customers have a changing view of the company’s and competitors’ products? Are changes
in product features, styling, packaging, services, distribution, or promotion warranted?

Stage 4: Modern Marketing Department
Although the sales and marketing vice presidents should work together, their relationship is often strained and marked by distrust. The sales vice president resents efforts to make the sales force less important in the marketing mix, and the marketing
vice president seeks a larger budget for non-sales force activities.
The marketing manager’s task is to identify opportunities and prepare marketingstrategies and programs. Salespeople are responsible for implementing these programs.
Marketers rely on marketing research, try to identify and understand market segments,
spend time in planning, think long term, and aim to produce profits and gains inmarket share. Salespeople, in contrast, rely on street experience, try to understandeach individual buyer, spend time in face-to-face selling, think short term, and try tomeet their sales quotas.
If there is too much friction between sales and marketing, the company president
might place marketing activities back under the sales vice president, instruct the executive vice president to handle conflicts, or place the marketing vice president incharge of everything, including the sales force. This last solution is the basis of themodern marketing department, a department headed by a marketing and sales executive vice president with managers reporting from every marketing function, including sales management (Figure 6-5[d]).

Stage 5: Effective Marketing Company
A company can have an excellent marketing department and yet fail at marketing.
Much depends on how the other departments view customers. If they point to themarketing department and say, “They do the marketing,” the company has not implemented effective marketing. Only when all employees realize that their jobs are
created by customers does the company become an effective marketer.1

Stage 6: Process- and Outcome-Based Company
Many companies are now refocusing their structure on key processes rather than departments. Departmental organization is increasingly viewed as a barrier to the smooth
performance of fundamental business processes such as new-product development,
customer acquisition and retention, order fulfillment, and customer service. In theinterest of achieving customer-related process outcomes, companies are now appointing process leaders who manage cross-disciplinary teams. Marketing and salespeople are consequently spending an increasing percentage of their time as processteam members. As a result, marketing personnel may have a solid-line responsibility
to their teams and a dotted-line responsibility to the marketing department. Eachteam sends periodic evaluations of the marketing member’s performance to the marketing department. The marketing department is also responsible for training its marketing personnel, assigning them to new teams, and evaluating their overall
performance (Figure 6-5[e]).

ORGANIZING THE MARKETING DEPARTMENT
Modern marketing departments take numerous forms. The marketing department may
be organized by function, geographic area, products, or customer markets.

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part fiveManaging and
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Programs

Functional Organization
The most common form of marketing organization consists of functional specialists
reporting to a marketing vice president, who coordinates their activities. Figure 6-6

shows five specialists. Additional specialists might include a customer-service manager, a marketing-planning manager, and a market-logistics manager.
It is quite a challenge to develop smooth working relations within the marketing
department. Cespedes has urged companies to improve the critical interfaces among
field sales, customer service, and product management groups, because they collectively
have a major impact on customer satisfaction. He has proposed several ways to formtighter links among these three key marketing groups.2
The main advantage of a functional marketing organization is its administrative
simplicity. However, this form loses effectiveness as products and markets increase.
First, a functional organization often leads to inadequate planning for specific products and markets. Products that are not favored by anyone are neglected. Second, eachfunctional group competes with the other functions for budget and status. The marketing vice president constantly has to weigh the claims of competing functional specialists and faces a difficult coordination problem.

Geographic Organization
A company selling in a national market often organizes its sales force (and sometimes
other functions, including marketing) along geographic lines. The national sales manager may supervise four regional sales managers, who each supervise six zone managers, who in turn supervise eight district sales managers, who supervise ten
salespeople.
Several companies are now adding area market specialists (regional or local marketing managers) to support the sales efforts in high-volume, distinctive markets.
One such market might be Miami, where 46 percent of the households are Latino,compared to neighboring Fort Lauderdale, where 6.7 percent of the households are
Latino. The Miami specialist would know Miami’s customer and trade makeup, help
marketing managers at headquarters adjust their marketing mix for Miami, and prepare local annual and long-range plans for selling all the company’s products in
Miami.
Several factors have fueled the move toward regionalization and localization. The
U.S. mass market has slowly subdivided into a profusion of minimarkets along demographic lines: baby boomers, senior citizens, African Americans, single mothers—
the list goes on.3 Improved information and marketing research technologies havealso spurred regionalization. Data from retail-store scanners allow instant tracking ofproduct sales, helping companies pinpoint local problems and opportunities. Retailers themselves strongly prefer local programs aimed at consumers in their cities andneighborhoods. To keep retailers happy, manufacturers now create more local marketing plans.
■

Campbell Soup Campbell has created many successful regional brands. It
sells its spicy Ranchero beans in the Southwest, Creole soup in the South,
and red bean soup in Latino areas. Brands appealing to regional tastes add
substantially to Campbell’s annual sales. In addition, Campbell has divided
its domestic market into 22 regions, each responsible for planning local programs. The company has allocated 15 to 20 percent of its total marketingbudget to support local marketing. Within each region, Campbell’s sales managers and salespeople create advertising and promotions geared to local needs
and conditions.
Adaptation to regional differences is carried out in Campbell’s international marketing as well. A kitchen opened in Hong Kong in 1991 develops
recipes for the Asian market, and soups marketed in Latin America feature
spicy flavors. Packaging and advertising are also geared to regional and national differences. For example, cans are avoided in Japan, where many shoppers carry their groceries on foot. In Mexico, large cans are popular because
families tend to be large. In Poland, where consumption of soup is high andmost of it is homemade, Campbell Soup appeals to working mothers by offering eight varieties of condensed tripe soup that can be prepared quickly
and easily.4

F I G U R E

6-5 (cont.)(c) Stage 3: Separate Marketing
Department
President

Sales VP

Marketing VP

Sales force

Other marketing
functions(d) Stages 4 and 5: Modern/Effective
Marketing Company
President

Executive VPof Marketing and Sales

Sales VP

Marketing VP

Sales force

Other marketing
functions(e) Stage 6: Process- andOutcome-Based Company
Cross-disciplinary teamwith process leader
Marketingdepartment

Marketingpersonnel

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Other companies that have shifted to regional marketing are McDonald’s, which
now spends about 50 percent of its total advertising budget regionally; American Airlines, which realized that the travel needs of Chicagoans and southwesterners are very
different during the winter months; and Anheuser-Busch, which has subdivided its
regional markets into ethnic and demographic segments, with different ad campaigns
for each.
Regionalization may be accompanied by a move toward branchising. Branchisingmeans empowering the company’s districts or local offices to operate more like franchises. IBM told its branch managers to “make it your business.” The branches resemble profit centers and local managers have more strategy latitude and incentive.
Regionalization is also being adopted by multinationals operating across the globe.
Quaker Oats has set up a European headquarters in Brussels, and British Petroleum
has chosen Singapore for managing its operations in Asia and the Middle East.5
Citibank has also innovated here:■

Citibank As a global bank, Citibank has had to figure out how to service its
major global accounts in different parts of the world. Its solution: A parent
account manager (PAM) is appointed for each global account and sits in thecompany’s New York headquarters. Each PAM has built a network of field account managers (FAMs) in the various countries and calls upon them when
the specific account needs service.

Product- or Brand-Management Organization
Companies producing a variety of products and brands often establish a product(or brand-) management organization. The product-management organization does
not replace the functional management organization but rather serves as anotherlayer of management. A product manager supervises product category managers,
who in turn supervise specific product and brand managers. A product-management organization makes sense if the company’s products are quite different, or if
the sheer number of products is beyond the ability of a functional marketing organization to handle. Kraft uses a product-management organization in its Post Division. Separate product category managers are in charge of cereals, pet food, andbeverages. Within the cereal product group, there are separate subcategory managers for nutritional cereals, children’s presweetened cereals, family cereals, andmiscellaneous cereals.
Product and brand managers have these tasks:F I G U R E■

Developing a long-range and competitive strategy for the product■Preparing an annual marketing plan and sales forecast■

Working with advertising and merchandising agencies to develop copy, programs, and campaigns■

Stimulating support of the product among the sales force and distributors■

Gathering continuous intelligence on the product’s performance, customer anddealer attitudes, and new problems and opportunities■

Initiating product improvements to meet changing market needs

6-6
Marketingvice-president

Functional Organization

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Marketingadministration
manager

Advertising andsales-promotion
managerSales
managerMarketingresearch
managerNew-products
manager

These tasks are common to both consumer- and industrial-product managers. However, consumer-product managers typically manage fewer products and spend moretime on advertising and sales promotion. They are often younger and MBA-educated.
Industrial-product managers spend more time with customers and laboratory and engineering personnel, think more about the technical aspects of their product and possible design improvements, and work more closely with the sales force and key buyers.
The product-management organization introduces several advantages. The product manager can concentrate on developing a cost-effective marketing mix for the
product. The product manager can react more quickly to problems in the marketplacethan a committee of functional specialists can. The company’s smaller brands are lessneglected, because they have a product advocate. Product management also is an excellent training ground for young executives, because it involves them in almost every
area of company operations (Figure 6-7).
But a product-management organization has some disadvantages. First, productmanagement creates some conflict and frustration. Typically, product managers are
not given enough authority to carry out their responsibilities effectively. They haveto rely on persuasion to get the cooperation of advertising, sales, manufacturing, andother departments. They are told they are “minipresidents” but are often treated as
low-level coordinators. They are burdened with a great amount of paperwork. They
often have to go over the heads of others to get something done.
Second, product managers become experts in their product but rarely achieve functional expertise. They vacillate between posing as experts and being cowed by real experts. This is unfortunate when the product depends on a specific type of expertise,such as advertising.
Third, the product management system often turns out to be costly. One person
is appointed to manage each major product. Soon product managers are appointed
to manage even minor products. Each product manager, usually overworked, pleads
for an associate brand manager. Later, both overworked, they persuade management
to give them an assistant brand manager. With all these people, payroll costs climb.
In the meantime, the company continues to increase its functional specialists in copy,

F I G U R E

Manufacturing
anddistribution

Advertising
agencyThe Product Manager’s
Interactions

Media

Research anddevelopment

6-7

Promotion
services

Productmanager

Legal

Packaging

FiscalPurchasing
Marketresearch

Publicity
Sales force
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packaging, media, sales promotion, market surveys, and statistical analysis. The company is soon saddled with a large and costly structure.
Fourth, brand managers normally manage a brand for only a short time. Either
they move up in a few years to another brand, or they transfer to another company.
Short-term involvement with the brand leads to short-term marketing planning andplays havoc with building the brand’s long-term strengths.
Fifth, the fragmentation of markets makes it harder to develop a national strategy
from headquarters. Brand managers must please more regional-based trade groups andrely more on the local sales force.
Pearson and Wilson have suggested five steps to make the product management
system work better:6

PM
APM
PA
(a) Vertical product teamPM

1. Clearly delineate the limits of the product manager’s role and responsibility.

R

2. Build a strategy-development-and-review process to provide a framework forthe product manager’s operations.

C

3. Take into account areas of potential conflict between product managers andfunctional specialists when defining their respective roles.

(b) Triangular product team

4. Set up a formal process that forces to the top all conflict-of-interest situations
between product management and functional line management.
5. Establish a system for measuring results consistent with the product manager’s responsibilities.

PM
R

C

S

D

F

E

(c) Horizontal product team

A second alternative is to switch from product managers to product teams. There
are three types of product-team structures in product management (Figure 6-8):
1. Vertical product team: Product manager, associate product manager, and product assistant (Figure 6-8[a]). The product manager is the leader and deals withother managers to gain their cooperation. The associate product manager assists in these tasks and also does some paperwork. The product assistant carries out most of the paperwork and routine analysis.

PM = product manager
APM = associate product manager
PA = product assistantR = market researcher
C = communication specialist
S = sales manager
D = distribution specialist
F = finance/accounting specialist
E = engineer

F I G U R E

2. Triangular product team: Product manager and two specialized product assistants, one who takes care of marketing research and the other, marketing
communications (Figure 6-8[b]). The Hallmark Company uses a “marketingteam” consisting of a market manager (the leader), a marketing manager, anda distribution manager.
3. Horizontal product team: Product manager and several specialists from marketing and other functions (Figure 6-8[c]). 3M has teams consisting of a teamleader and representatives from sales, marketing, laboratory, engineering, accounting, and marketing research. Dow Corning sets up teams of five toeight people; each team manages a specific product, market, and process.

6-8

Three Types of Product Teams

A third alternative is to eliminate product manager positions for minor products
and assign two or more products to each remaining manager. This is feasible where
two or more products appeal to a similar set of needs. A cosmetics company does notneed separate product managers for each product because cosmetics serve one major
need—beauty. A toiletries company needs different managers for headache remedies,
toothpaste, soap, and shampoo, because these products differ in use and appeal.
A fourth alternative is to introduce category management, in which a company focuses on product categories to manage its brands. Here are two examples:■686

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General Motors For General Motors, products are categorized by the makeof car, and each division offers a range of models to appeal to a specific market segment. Cadillacs, of course, are the eponymous status symbol of the industry. Buicks are intended to appeal to professionals such as doctors andlawyers; Pontiacs and Oldsmobiles, to the driver who wants a sporty image;and Chevrolets, to the average driver looking for a practical means of transportation. These distinctions can be traced back to Alfred Sloan’s idea of “acar for every pocketbook.” But over the years, the divisions lost sight of theirindividual target customer as each attempted to develop a full line of mod-els for the entire car-buying market. When Ronald Zarrella was hired as vicepresident for marketing of GM’s North American group in 1994, his mission
was to reestablish the five brand images of the five divisions. Under his leadership, each brand is headed by a brand manager and a vehicle line executive. The brand manager’s responsibility is to know the brand’s market andto ensure that the entire marketing effort—product engineering and design,
advertising, merchandising, and pricing—is directed toward that target. The
vehicle line executive oversees the development of a line of automobiles thatmeets the target customer’s needs. Models that don’t support a division’s image, such as the Buick Skylark and Roadmaster and Chevrolet Caprice, arediscontinued.7■

Kraft Kraft has changed from a classic brand-management structure, inwhich each brand competed for organizational resources and market share,
to a category-based structure in which category business directors (or “product integrators”) lead cross-functional teams composed of representatives
from marketing, R&D, consumer promotion, and finance. The category business directors have both broad responsibility and bottom-line accountability.
No longer viewed solely as marketers, they are as responsible for identifying
opportunities to improve the efficiency of the supply chain as they are fordeveloping the next advertisement. Kraft’s category teams work in conjunction with process teams dedicated to each product category and with customer teams dedicated to each major customer (Figure 6-9).8

Category management is not a panacea. It is still a product-driven system. Colgate recently moved from brand management (Colgate toothpaste) to category management (toothpaste category) to a new stage called “customer-need management”(mouth care). This last step finally focuses the organization on a basic customer need.9

Market-Management Organization
Many companies sell their products to a diverse set of markets. Canon sells its fax
machines to consumer, business, and government markets. U.S. Steel sells its steel tothe railroad, construction, and public-utility industries. When customers fall into different user groups with distinct buying preferences and practices, a market management organization is desirable. A markets manager supervises several market managers(also called market-development managers, market specialists, or industry specialists). The
market managers draw upon functional services as needed. Market managers of important markets might even have functional specialists reporting to them.
Market managers are staff (not line) people, with duties similar to those of product managers. Market managers develop long-range and annual plans for theirF I G U R E
Quality
Operations
finance

Materials
manager

Customercategory
managers

R&D
Engineering

Process
teamleaderMarketinginformation

Categorybusiness
director

Finance

Categorysales
director

Categoryplanner

Consumerpromotion

Retail sales
manager

Customerbusinessmanager

Supplychain
specialist

6-9Managing Through Teams
at Kraft
Source: Michael George, Anthony Freeling, and David
Court, “Reinventing the Marketing Organization,” The
McKinsey Quarterly no. 4, (1994): 43–62.

Space
management
specialist

Plant
managerBrandmanager

Sales
information
specialist

Process teams(dedicated to eachproduct category)Category teams(dedicated to eachproduct category)

Customer teams(dedicated to eachmajor customer)

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markets. They must analyze where their market is going and what new products theircompany should offer to this market. Performance is judged by their market’s growthand profitability. This system carries many of the same advantages and disadvantagesof product management systems. Its strongest advantage is that the marketing activity is organized to meet the needs of distinct customer groups rather than focused onmarketing functions, regions, or products per se.
Many companies are reorganizing along market lines and becoming marketcentered organizations. Xerox has converted from geographic selling to selling by industry, as has IBM, which recently reorganized its 235,000 employees into 14 customer-focused divisions. Hewlett-Packard has set up a structure in which salespeople
concentrate on businesses within individual industries.
Several studies have confirmed the value of market-centered organization. Slater
and Narver created a measure of market orientation and then analyzed its effect on
business profitability. They found a substantial positive effect of market orientation
on both commodity and noncommodity businesses.10

Product-Management/Market-Management Organization
Companies that produce many products flowing into many markets tend to adopt amatrix organization. Consider DuPont.
■

DuPont DuPont was a pioneer in developing the matrix structure (Figure6-10). Its textile fibers department consists of separate product managers forrayon, acetate, nylon, orlon, and dacron; and separate market managers formenswear, women’s wear, home furnishings, and industrial markets. The
product managers plan the sales and profits of their respective fibers. Theiraim is to expand the use of their fiber. They ask market managers to estimate
how much of their fiber they can sell in each market at a proposed price. The
market managers, however, are more interested in meeting their market’s
needs than pushing a particular fiber. In preparing their market plans, theyask each product manager about the fiber’s planned prices and availabilities.
The final sales forecasts of the market managers and the product managers
should add to the same grand total.

Companies like DuPont can go one step further and view their market managers
as the main marketers, and their product managers as suppliers. The menswear market manager, for example, would be empowered to buy textile fibers from DuPont’s
product managers or, if DuPont’s price is too high, from outside suppliers. This system would force DuPont product managers to become more efficient. If a DuPont
product manager cannot match the “arm’s length pricing” levels of competitive suppliers, then perhaps DuPont should not continue to produce that fiber.
A matrix organization would seem desirable in a multiproduct, multimarket company. The rub is that this system is costly and often creates conflicts. There is the cost

F I G U R E

6-10

Market Managers

Product-/Market-Management
Matrix System

Men's wear
Rayon
AcetateProduct
Managers

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Nylon
Orlon
Dacron

Women's wear

Home
furnishings

Industrial
markets

of supporting all the managers. There are also questions about where authority andresponsibility should reside. Here are two of many dilemmas:
1. How should the sales force be organized? Should there be separate sales forces
for rayon, nylon, and the other fibers? Or should the sales forces be organized according to menswear, women’s wear, and other markets? Or should
the sales force not be specialized? (The marketing concept favors organizing
the sales force by markets, not product.)
2. Who should set the prices for a particular product or market? Should the nylon
product manager have final authority for setting nylon prices in all markets?
What happens if the menswear market manager feels that nylon will lose out
in this market unless special price concessions are made? (Product managers
nevertheless should retain the ultimate authority over pricing, in the author’s
opinion.)By the early 1980s a number of companies had abandoned matrix management.
But matrix management has resurfaced and is flourishing today in the form of “business teams” staffed with full-time specialists reporting to one team boss. The majordifference is that companies today provide the right context in which a matrix can
thrive—an emphasis on flat, lean team organizations focused around businessprocesses that cut horizontally across functions.11

Corporate–Divisional Organization
As multiproduct–multimarket companies grow, they often convert their larger product or market groups into separate divisions. The divisions set up their own departments and services. This raises the question of what marketing services and activities
should be retained at corporate headquarters.
Divisionalized companies have reached different answers to this question:■

No corporate marketing: Some companies lack a corporate marketing staff. They
don’t see any useful function for marketing at the corporate level. Each division
has its own marketing department.

■

Moderate corporate marketing: Some companies have a small corporate marketing
staff that performs a few functions, primarily (1) assisting top management withoverall opportunity evaluation, (2) providing divisions with consulting assistanceon request, (3) helping divisions that have little or no marketing, and (4) promoting the marketing concept throughout the company.

■

Strong corporate marketing: Some companies have a corporate marketing staff that,in addition to the preceding activities, also provides various marketing services
to the divisions, such as specialized advertising services, sales-promotion services,marketing research services, sales-administration services, and miscellaneous services.

Do companies tend to favor one of these models? The answer is no. Some companies have recently installed a corporate marketing staff for the first time; others
have expanded their corporate marketing department; others have reduced its sizeand scope; and still others have eliminated it altogether.
The potential contribution of a corporate marketing staff varies in different stagesof the company’s evolution. Most companies begin with weak marketing in their divisions and often establish a corporate staff to bring stronger marketing into the divisions through training and other services. Some members of the corporate marketing
staff might be transferred to head divisional marketing departments. As the divisions
become strong in their marketing, corporate marketing has less to offer them. Somecompanies then decide corporate marketing has done its job and proceed to eliminate the department.12

MARKETING RELATIONS WITH OTHER DEPARTMENTS
In principle, all business functions should interact harmoniously to pursue thefirm’s overall objectives. In practice, however, interdepartmental relations are often

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characterized by deep rivalries and distrust. Some interdepartmental conflict stems
from differences of opinion as to what is in the company’s best interests, some fromreal trade-offs between departmental well-being and company well-being, and somefrom unfortunate stereotypes and prejudices.
In the typical organization, each business function has a potential impact on customer satisfaction. Under the marketing concept, all departments need to “think customer” and work together to satisfy customer needs and expectations. The marketing
department must drive this point home. The marketing vice president has two tasks:(1) to coordinate the company’s internal marketing activities and (2) to coordinate
marketing with finance, operations, and other company functions to serve thecustomer.
Yet there is little agreement on how much influence and authority marketingshould have over other departments. Typically, the marketing vice president must
work through persuasion rather than authority. Other departments often resist bending their efforts to meet the customers’ interests. Inevitably, departments define company problems and goals from their viewpoint. As a result, conflicts of interest are
unavoidable. We will briefly examine the typical concerns of each department.

R&D
The company’s drive for successful new products is often thwarted by weak working
relations between R&D and marketing. In many ways, these groups have different cultures.13 R&D is staffed with scientists and technicians who pride themselves on scientific curiosity and detachment, like to work on challenging technical problems
without much concern for immediate sales payoffs, and prefer to work without muchsupervision or accountability. The marketing–sales department is staffed with business-oriented people who pride themselves on a practical understanding of the marketplace, like to see many new products with promotable sales features, and feelcompelled to pay attention to product cost. Marketers see the R&D people as maximizing technical qualities rather than designing for customer requirements. R&D people see marketers as gimmick-oriented hucksters who are more interested in sales thanin the product’s technical features.
A balanced company is one in which R&D and marketing share responsibility forsuccessful market-oriented innovation. The R&D staff must take responsibility not
only for innovation but also for a successful product launch. The marketing staff musttake responsibility not only for new sales features but also for correctly identifying
customer needs and preferences.
Gupta, Raj, and Wilemon concluded that a balanced R&D–marketing coordination is strongly correlated with innovation success.14 R&D–marketing cooperation canbe facilitated in several ways:15■

Sponsor joint seminars to build understanding and respect for each other’s goals,
working styles, and problems.

■

Assign each new project to functional teams including an R&D person and amarketing person, who work together through the project’s life. R&D and marketing jointly establish the development goals and marketing plan.

■

Encourage R&D participation into the selling period, including involvement in
preparing technical manuals, participating in trade shows, carrying out postintroduction marketing research with customers, and even doing some selling.

■

Work out conflicts by going to higher management, following a clear procedure.
In one company, R&D and marketing both report to the same vice president.

Merck is a company that recognizes the strong connection between marketing and
R&D:

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Merck The description on its Web site reveals the close relationship ofMerck’s departments: “Merck is a worldwide research-intensive company that
discovers and develops, manufactures and markets human and animal healthproducts and services.” The research focus at Merck is on the developmentof prescription drugs—Merck is the world’s largest seller of these products—

and much of its marketing effort involves dissemination of medical and pharmaceutical information. Publications include The Merck Index, a single-volume technical encyclopedia; The Merck Manual, said to be the world’s mostwidely used medical text; The Merck Manual of Medical Information—Home Edition, a plain-English version of The Merck Manual; and The Merck Veterinary
Manual. In addition, articles placed in professional journals provide publicity about Merck’s research activities. Like its competitors, Merck provides advertising brochures and videotapes to doctors and other health professionals,
informing them about the benefits of its drugs. Merck advertises selectively
to consumers, because they do not ordinarily choose their prescription drugs.
Maxalt, a treatment for migraine headaches, is not marketed directly to consumers. However, men who seek a treatment for baldness are encouraged, in
frequent TV commercials, to ask their doctors about Propecia.16

Engineering
Engineering is responsible for finding practical ways to design new products and new
production processes. Engineers are interested in achieving technical quality, costeconomy, and manufacturing simplicity. They come into conflict with marketing executives when the latter want several models produced, often with product features
requiring custom rather than standard components. Engineers see marketers as wanting “bells and whistles” on the products rather than intrinsic quality. They often thinkof marketing people as inept technically, as continually changing priorities, and as
not fully credible or trustworthy. These problems are less pronounced in companies
where marketing executives have engineering backgrounds and can communicate effectively with engineers.17

Purchasing
Purchasing executives are responsible for obtaining materials and components in theright quantities and quality at the lowest possible cost. They see marketing executives
pushing for several models in a product line, which requires purchasing small quantities of many items rather than large quantities of a few items. They think that marketing insists on too high a quality of ordered materials and components. They also
dislike marketing’s forecasting inaccuracy, which causes them to place rush orders at
unfavorable prices or to carry excessive inventories.

Manufacturing
Manufacturing people are responsible for the smooth running of the factory to produce the right products in the right quantities at the right time for the right cost.
They have spent their lives in the factory, with its attendant problems of machine
breakdowns, inventory stockouts, and labor disputes. They see marketers as having
little understanding of factory economics or politics. Marketers complain about insufficient capacity, delays in production, poor quality control, and poor customer service. Yet marketers often turn in inaccurate sales forecasts, recommend features thatare difficult to manufacture, and promise more factory service than is reasonable.
Marketers do not see the factory’s problems, but rather the problems of their customers, who need the goods quickly, who receive defective merchandise, and who
cannot get factory service. The problem is not only poor communication but an actual conflict of interest.
Companies settle these conflicts in different ways. In manufacturing-driven companies, everything is done to ensure smooth production and low costs. The company
prefers simple products, narrow product lines, and high-volume production. Sales campaigns calling for a hasty production buildup are kept to a minimum. Customers onback order have to wait.
In marketing-driven companies, the company goes out of its way to satisfy customers. In one large toiletries company, marketing personnel call the shots and manufacturing people have to fall in line, regardless of overtime costs or short runs. The
result is high and fluctuating manufacturing costs, as well as variable product quality.
Companies need to develop a balanced orientation in which manufacturing andmarketing jointly determine what is in the company’s best interests. Solutions include

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joint seminars to understand each other’s viewpoints, joint committees and liaison
personnel, personnel exchange programs, and analytical methods to determine themost profitable course of action.18
Company profitability depends on achieving effective working relations. Marketersneed to understand the marketing potentials of new manufacturing strategies—theflexible factory, automation and robotization, just-in-time production, and total quality management. Manufacturing strategy depends upon whether the company wants
to win through low cost, high quality, high variety, or fast service. Manufacturing is
also a marketing tool insofar as potential customers may want to visit the factory toassess how well it is managed.

Operations
The term manufacturing is used for industries making physical products. The term operations is used for industries that create and provide services. In the case of a hotel,
for example, the operations department includes front-desk people, doormen, andwaiters and waitresses. Because marketing makes promises about service levels, it isextremely important that marketing and operations work well together. If operations
personnel lack a customer orientation and motivation, negative word of mouth will
eventually destroy the business. Operations staff members may be inclined to focus
on their convenience and give ordinary service, whereas marketers want the staff to
focus on customer convenience and provide extraordinary service. Marketing people
must fully understand the capabilities and mind-set of those delivering the service
and continuously try to improve attitudes and capabilities.

FinanceFinancial executives pride themselves on being able to evaluate the profit implications of different business actions. Marketing executives ask for substantial budgets
for advertising, sales promotions, and sales force, without being able to prove howmuch revenue these expenditures will produce. Financial executives suspect that theforecasts are self-serving. They think marketing people do not spend enough time relating expenditures to results. They think marketers are too quick to slash prices to
win orders, instead of pricing to make a profit. They claim that marketers “know thevalue of everything and the cost of nothing.”
But marketing executives often see financial people as “knowing the cost of everything and the value of nothing.” They see finance as controlling the purse strings tootightly and refusing to invest in long-term market development. They think financial
people see all marketing expenditures as expenses rather than investments and areoverly conservative and risk averse, causing many opportunities to be lost. The solution lies in giving marketing people more financial training and giving financial people more marketing training. Financial executives need to adapt their financial tools
and theories to support strategic marketing.

Accounting
Accountants see marketing people as lax in providing sales reports on time. They dislike the special deals salespeople make with customers because these require special
accounting procedures. Marketers dislike the way accountants allocate fixed-cost burdens to different products in the line. Brand managers may feel that their brand ismore profitable than it looks, the problem being that it is assigned too high an overhead burden. They would also like accounting to prepare special reports on sales andprofitability by segments, important customers, individual products, channels, territories, order sizes, and so on.

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Credit officers evaluate potential customers’ credit standing and deny or limit credit
to the more doubtful ones. They think marketers will sell to anyone, including thosefrom whom payment is doubtful. Marketers, in contrast, often feel that credit standards are too high. They think that “zero bad debts” really means the company losta lot of sales and profits. They feel they work too hard to find customers to hear thatthey are not good enough to sell to.

M A R K E T I N G

memo

Audit: Characteristics of Company Departments That Are Truly Customer Driven
R&D

Purchasing

Manufacturing

Marketing

Sales

Logistics

Accounting
FinancePublic Relations
Other Customer
Contact Personnel__ They spend time meeting customers and listening to their problems.
__ They welcome the involvement of marketing, manufacturing, and other departments on each new project.
__ They benchmark competitors’ products and seek “best of class” solutions.
__ They solicit customer reactions and suggestions as the project progresses.
__ They continuously improve and refine the product on the basis of market feedback.
__ They proactively search for the best suppliers rather than choose only from those who solicit their business.
__ They build long-term relations with fewer but more reliable high-quality suppliers.
__ They don’t compromise quality for price savings.
__ They invite customers to visit and tour their plants.
__ They visit customer factories to see how customers use the company’s products.
__ They willingly work overtime when it is important to meet promised delivery schedules.
__ They continuously search for ways to produce goods faster or at lower costs.
__ They continuously improve product quality, aiming for zero defects.
__ They meet customer requirements for “customization” where this can be done profitably.
__ 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 offerings 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 to meet customers’ needs.
__ They influence all company departments and employees to be customer centered in their thinking and practice.
__ 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.
__ They set a high standard for service delivery time and they meet this standard consistently.
__ They operate a knowledgeable and friendly customer service department that can answer questions, handle complaints, and resolve problems in asatisfactory and timely manner.
__ They prepare periodic “profitability” reports by product, market segment, geographic areas (regions, sales territories), order sizes, and individual customers.
__ They prepare invoices tailored to customer needs and answer customer queries courteously and quickly.
__ They understand and support marketing expenditures (e.g., image advertising) that represent marketing investments that produce long-term customer
preference and loyalty.
__ They tailor the financial package to the customers’ financial requirements.
__ They make quick decisions on customer creditworthiness.
__ They disseminate favorable news about the company and they “damage control” unfavorable news.
__ They act as an internal customer and public advocate for better company policies and practices.
__ They are competent, courteous, cheerful, credible, reliable, and responsive.

STRATEGIES FOR BUILDING A COMPANYWIDEMARKETING ORIENTATION
Many companies are beginning to realize that they are not really market and customer driven—they are product or sales driven. These companies—such as Baxter,
General Motors, Shell, and J. P. Morgan—are attempting to reorganize themselves intotrue market-driven companies. The task is not easy. It won’t happen as a result of the
CEO making speeches and urging every employee to “think customer.” The change
will require a change in job and department definitions, responsibilities, incentives,

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and relationships. The Marketing Memo, “Audit: Characteristics of Company Departments That Are Truly Customer Driven,” shows an audit instrument that can beused to evaluate which company departments are truly customer driven.
What steps can a CEO take to create a market- and customer-focused company?
1. Convince the senior management team of the need to become customer focused:
The CEO personally exemplifies strong customer commitment and rewards
those in the organization who do likewise.
2. Appoint a senior marketing officer and a marketing task force: The task force
should include the CEO; the vice presidents of sales, R&D, purchasing, manufacturing, finance, and human resources; and other key individuals.
3. Get outside help and guidance: Consulting firms have considerable experiencein helping companies move toward a marketing orientation.
4. Change the company’s reward measurement and system: As long as purchasing
and manufacturing are rewarded for keeping costs low, they will resist accepting some costs required to serve customers better. As long as finance focuseson short-term profit, it will oppose major investments designed to build satisfied, loyal customers.
5. Hire strong marketing talent: The company needs a strong marketing vice president who not only manages the marketing department but also gains respectfrom and influence with the other vice presidents. A multidivisional company would benefit from establishing a strong corporate marketing department.
6. Develop strong in-house marketing training programs: The company should design well-crafted marketing training programs for corporate management, divisional general managers, marketing and sales personnel, manufacturingpersonnel, R&D personnel, and others. GE, Motorola, and Arthur Andersen
run these programs.
7. Install a modern marketing planning system: The planning format will require
managers to think about the market environment, opportunities, competitive
trends, and other forces. These managers then prepare strategies and sales
and profit forecasts for specific products and segments and are accountablefor performance.
8. Establish an annual marketing excellence recognition program: Business units that
believe they have developed exemplary marketing plans should submit a description of their plans and results. The winning teams would be rewarded ata special ceremony. The plans would be disseminated to the other business
units as “models of marketing thinking.” Such programs are carried on by
Arthur Andersen, Becton-Dickinson, and DuPont.
9. Consider reorganizing from a product-centered to a market-centered company: Becoming market centered means setting up an organization that will focus on
the needs of specific markets and coordinate the planning and providing of
the company products needed by each segment and major customer.
10. Shift from a department focus to a process–outcome focus: After defining the fundamental business processes that determine its success, the company should
appoint process leaders and cross-disciplinary teams to reengineer and implement these processes.

694part fiveManaging and
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DuPont successfully made the transition from an inward-looking to an outwardlooking orientation. Under CEO Richard Heckert’s leadership, DuPont undertook anumber of initiatives to build a “marketing community.” Several divisions were reorganized along market lines. The company held a series of marketing management
training seminars, which were ultimately attended by 300 senior people, 2,000 middle managers, and 14,000 employees. It established a corporate marketing excellence
recognition program and honored 32 employees from around the world who had developed innovative marketing strategies and service improvements.19 It takes a greatamount of planning and patience to get managers to accept the fact that customers
are the foundation of the company’s business and its future. But it can be done.

M ARKETING IMPLEMENTATION
We now turn to the question of how marketing managers can effectively implement
marketing plans. We define marketing implementation as follows:20■

Marketing implementation is the process that turns marketing plans into
action assignments and ensures that such assignments are executed in a manner that accomplishes the plan’s stated objectives.

A brilliant strategic marketing plan counts for little if it is not implemented properly.
Consider the following example:
A chemical company learned that customers were not getting good service
from any of the competitors. The company decided to make customer service its strategic thrust. When this strategy failed, a postmortem revealed anumber of implementation failures. The customer service department continued to be held in low regard by top management; it was understaffed; andit was used as a dumping ground for weak managers. Furthermore, the company’s reward system continued to focus on cost containment and current
profitability. The company had failed to make the changes required to carryout its strategy.
Whereas strategy addresses the what and why of marketing activities, implementation addresses the who, where, when, and how. Strategy and implementation areclosely related in that one layer of strategy implies certain tactical implementation assignments at a lower level. For example, top management’s strategic decision to “harvest” a product must be translated into specific actions and assignments.
Bonoma identified four sets of skills for implementing marketing programs:
1. Diagnostic skills: When marketing programs do not fulfill expectations, wasthe low sales rate the result of poor strategy or poor implementation? If implementation, what went wrong?
2. Identification of company level: Implementation problems can occur at threelevels: the marketing function, the marketing program, and the marketing
policy level.
3. Implementation skills: To implement programs successfully, marketers needother skills: allocating skills for budgeting resources, organizing skills to develop an effective organization, and interaction skills to motivate others to
get things done.
4. Evaluation skills: Marketers also need monitoring skills to evaluate the resultsof marketing actions.21
The skills needed to implement a marketing plan for nonprofit organizations are
the same as those needed for commercial enterprises, as the Alvin Ailey Dance Theater discovered.
■

Alvin Ailey Like many nonprofit cultural organizations, the company
founded by Alvin Ailey in 1958 always seemed to be operating in the red,
despite its ability to attract full houses. The costs of mounting a production
are, by their nature, greater than the income that can be generated by ticket
sales alone, and Ailey had neither a talent for nor a personal interest in thefund-raising aspects of directing the company. Judith Jamison, the principal
dancer who succeeded Ailey as director at his death in 1989, has managed
to turn the financial picture around. Her success can be attributed in largepart to her skill at motivating others to carry out a marketing effort. A 1993
National Arts Stabilization grant provided matching funds when the company halved its deficit within a year. An executive director and support staff
whose marketing and management expertise matched the company’s artistic professionalism have managed to keep the company in the black sincechapter 22
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then. Two groups of experienced marketers are implementing the plan. One
is the board of directors, many of whose members are executives of major
financial corporations or their spouses. The other group has been recruitedfrom businesses that are using their association with the Ailey company for
their own marketing purposes. For example, Healthsouth Corporation provides free physical therapy to the dancers and benefits from the associationin marketing its chain of sports medicine clinics. Jaguar, the official car of
Alvin Ailey, has made a large donation in exchange for this designation andthe right to use Alvin Ailey in advertising and for access to the its mailinglist. With an audience that is almost half African American and 43 percentof which is between the ages of 19 and 39, Ailey is providing access to an
important market for its corporate partners and earning their enthusiastic
support.22

E VALUATION AND CONTROLTo deal with the many surprises that occur during the implementation of marketing
plans, the marketing department continuously has to monitor and control marketing
activities. In spite of this need, many companies have inadequate control procedures.
This conclusion was reached in a study of 75 companies of varying sizes in different
industries. The main findings were these:■

Smaller companies do a poorer job of setting clear objectives and establishingsystems to measure performance.

■Less than half of the companies studied knew their individual products’ profitability. About one-third of the companies had no regular review procedures for
spotting and deleting weak products.

■

Almost half of the companies fail to compare their prices with those of the competition, to analyze their warehousing and distribution costs, to analyze thecauses of returned merchandise, to conduct formal evaluations of advertising effectiveness, and to review their sales force’s call reports.

■

Many companies take four to eight weeks to develop control reports, which areoccasionally inaccurate.

Table 6.6 lists four types of marketing control needed by companies: annual-plancontrol, profitability control, efficiency control, and strategic control.

ANNUAL-PLAN CONTROL

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The purpose of annual-plan control is to ensure that the company achieves the sales,
profits, and other goals established in its annual plan. The heart of annual-plan control is management by objectives. Four steps are involved (Figure 6-11). First, management sets monthly or quarterly goals. Second, management monitors its performancein the marketplace. Third, management determines the causes of serious performancedeviations. Fourth, management takes corrective action to close the gaps between
goals and performance.
This control model applies to all levels of the organization. Top management sets
sales and profit goals for the year that are elaborated into specific goals for each lower
level of management. Each product manager is committed to attaining specified levels of sales and costs; each regional and district sales manager and each sales representative is also committed to specific goals. Each period, top management reviews
and interprets the results.
Managers use five tools to check on plan performance: sales analysis, market-shareanalysis, marketing expense–to–sales analysis, financial analysis, and market-based
scorecard analysis.

Sales Analysis
Sales analysis consists of measuring and evaluating actual sales in relation to sales
goals. Two specific tools are used in sales analysis.
Sales-variance analysis measures the relative contribution of different factors to a
gap in sales performance. Suppose the annual plan called for selling 4,000 widgets inthe first quarter at $1 per widget, for total revenue of $4,000. At quarter’s end, only
3,000 widgets were sold at $.80 per widget, for total revenue of $2,400. The sales performance variance is $1,600, or 40 percent of expected sales. How much of this underperformance is due to the price decline and how much to the volume decline? The
following calculation answers this question:⫽ ($1.00 ⫺ $.80)(3,000) ⫽ $ 600

37.5%

Variance due to volume decline ⫽ ($1.00)(4,000 ⫺ 3,000) ⫽ $1,000

62.5%$1,600100.0%

Variance due to price decline

Almost two-thirds of the variance is due to failure to achieve the volume target. The
company should look closely at why it failed to achieve expected sales volume.
Microsales analysis looks at specific products, territories, and so forth that failed to
produce expected sales. Suppose the company sells in three territories and expectedsales were 1,500 units, 500 units, and 2,000 units, respectively. The actual sales volume was 1,400 units, 525 units, and 1,075 units, respectively. Thus territory 1 showeda 7 percent shortfall in terms of expected sales; territory 2, a 5 percent improvement
over expectations; and territory 3, a 46 percent shortfall! Territory 3 is causing mostof the trouble. The sales vice president can check into territory 3 to see what explains
the poor performance: Territory 3’s sales representative is loafing or has a personal
problem; a major competitor has entered this territory; or business is in a recession
in this territory.

Goal setting

What dowe want
to achieve?

Performancemeasurement

What ishappening?

Performance
diagnosis

Why
is it
happening?

Corrective
actionWhat should
we do aboutit?

F I G U R E

6-11

The Control Process

Market-Share Analysis
Company sales do not reveal how well the company is performing relative to competitors. For this purpose, management needs to track its market share. Market share
can be measured in three ways: Overall market share is the company’s sales expressed
as a percentage of total market sales. Served market share is its sales expressed as apercentage of the total sales to its served market. Its served market is all the buyers
who are able and willing to buy its product. Served market share is always larger thanoverall market share. A company could capture 100 percent of its served market andyet have a relatively small share of the total market. Relative market share can be expressed as market share in relation to its largest competitor. A relative market shareover 100 percent indicates a market leader. A relative market share of exactly 100 percent means that the company is tied for the lead. A rise in relative market share means
a company is gaining on its leading competitor.
Conclusions from market-share analysis, however, are subject to certain qualifications:■

The assumption that outside forces affect all companies in the same way is often nottrue: The U.S. Surgeon General’s Report on the harmful consequences of cigarettesmoking caused total cigarette sales to falter, but not equally for all companies.

■

The assumption that a company’s performance should be judged against the average
performance of all companies is not always valid: A company’s performance should
be judged against the performance of its closest competitors.

■

If a new firm enters the industry, then every existing firm’s market share might fall: A
decline in market share might not mean that the company is performing any
worse than other companies. Share loss depends on the degree to which the new
firm hits the company’s specific markets.

■

Sometimes a market-share decline is deliberately engineered to improve profits: For example, management might drop unprofitable customers or products to improve
its profits.

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Type ofControl
I. Annual-plancontrol

Prime
Responsibility

Purpose ofControl

Top management
Middle management

To examine whether theplanned results arebeing achieved

Approaches■ Sales analysis■ Market-share analysis■ Marketing expense to sales

analysis■ Financial analysis■ Market-based scorecard analysis

II. Profitability
controlMarketing controller

To examine where thecompany is making
and losing money

Profitability by:■ product■ territory■ customer■ segment■ trade channel■ order size

III. Efficiency
controlLine and staff
management
Marketing controller

IV. Strategic control

T A B L E

To evaluate and improve
the spending efficiency
and impact of marketing
expenditures

Top management
Marketing auditor

Efficiency of:■ sales force■ advertising■ sales promotion■ distribution

To examine whether thecompany is pursuing
its best opportunities
in markets, products,
and channels■ Marketing-effectiveness review■ Marketing audit■ Marketing excellence review■ Company ethical and social

responsibility review

6.6

Types of Marketing Control■

Market share can fluctuate for many minor reasons: For example, market share canbe affected by whether a large sale occurs on the last day of the month or at the
beginning of the next month. Not all shifts in market share have marketing significance.23

Managers must carefully interpret market-share movements by product line, customer type, region, and other breakdowns. A useful way to analyze market-share movements is in terms of four components:
Overallmarketshare⫽

Customer ⫻penetration

Customerloyalty⫻

Customerselectivity

⫻

Price
selectivity

where:

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Customer penetration is the percentage of all customers who buy from the company.

■

Customer loyalty is the purchases from the company by its customers expressed asa percentage of their total purchases from all suppliers of the same products.

■

Customer selectivity is the size of the average customer purchase from the company expressed as a percentage of the size of the average customer purchasefrom an average company.

■

Price selectivity is the average price charged by the company expressed as a percentage of the average price charged by all companies.

Now suppose the company’s dollar market share falls during the period. The overall market-share equation provides four possible explanations: The company lost someof its customers (lower customer penetration); existing customers are buying less fromthe company (lower customer loyalty); the company’s remaining customers are smaller
in size (lower customer selectivity); or the company’s price has slipped relative to competition (lower price selectivity).

Marketing Expense–to–Sales Analysis
Annual-plan control requires making sure that the company is not overspending toachieve sales goals. The key ratio to watch is marketing expense–to–sales. In one company, this ratio was 30 percent and consisted of five component expense-to-sales ratios: sales force–to–sales (15 percent); advertising-to-sales (5 percent); sales
promotion–to–sales (6 percent); marketing research–to–sales (1 percent); and sales administration–to–sales (3 percent).
Management needs to monitor these ratios, which will normally exhibit small
fluctuations that can be ignored. Fluctuations outside the normal range are a cause
for concern. The period-to-period fluctuations in each ratio can be tracked on a control chart (Figure 6-12). This chart shows that the advertising expense–to–sales ratio
normally fluctuates between 8 percent and 12 percent, say 99 out of 100 times. In
the fifteenth period, however, the ratio exceeded the upper control limit. One of two
hypotheses can explain this occurrence: (1) The company still has good expense
control, and this situation represents a rare chance event. (2) The company has lost
control over this expense and should find the cause. If no investigation is made to
determine whether the environment has changed, the risk is that some real change
might have occurred, and the company will fall behind. If the environment is investigated, the risk is that the investigation will uncover nothing and be a waste oftime and effort.
The behavior of successive observations even within the upper and lower control
limits should be watched. Note in Figure 6-8 that the level of the expense-to-sales ratio rose steadily from the ninth period onward. The probability of encountering six
successive increases in what should be independent events is only 1 in 64.24 This unusual pattern should have led to an investigation sometime before the fifteenth observation.

Financial Analysis
The expense-to-sales ratios should be analyzed in an overall financial framework to
determine how and where the company is making its money. Marketers are increasingly using financial analysis to find profitable strategies beyond sales building.

F I G U R EAdvertising expense/Sales ratio

14

6-12

The Control-Chart Model

12

Upper limit

10

Desired level

8

Lower limit

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Time period

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Management uses financial analysis to identify the factors that affect the company’s rate of return on net worth.25 The main factors are shown in Figure 6-9, alongwith illustrative numbers for a large chain-store retailer. The retailer is earning a 12.5
percent return on net worth. The return on net worth is the product of two ratios,
the company’s return on assets and its financial leverage. To improve its return on net
worth, the company must increase the ratio of its net profits to its assets or increase
the ratio of its assets to its net worth. The company should analyze the compositionof its assets (i.e., cash, accounts receivable, inventory, and plant and equipment) and
see if it can improve its asset management.
The return on assets is the product of two ratios, the profit margin and the asset
turnover. The profit margin in Figure 6-13 seems low, whereas the asset turnover ismore normal for retailing. The marketing executive can seek to improve performancein two ways: (1) Increase the profit margin by increasing sales or cutting costs; and(2) increase the asset turnover by increasing sales or reducing the assets (e.g., inventory, receivables) that are held against a given level of sales.26

Market-Based Scorecard Analysis
Most company measurement systems amount to preparing a financial-performance
scorecard at the expense of more qualitative measures. Companies would do well toprepare two 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:
■
■
■
■

■

New customers
Dissatisfied customers
Lost customers
Target market awareness■■Target market preference
Relative product quality
Relative service quality

Norms should be set for each measure, and management should take action when results get out of bounds.
The second measure is called a stakeholder-performance scorecard. Companies needto track the satisfaction of various constituencies who have a critical interest in andimpact on the company’s performance: employees, suppliers, banks, distributors, retailers, stockholders. Again, norms should be set for each group and management
should take action when one or more groups register increased levels of dissatisfaction.27 Consider Hewlett-Packard’s program:F I G U R E

6-13

Financial Model of Return on Net
WorthProfit margin
1.5%

Financialleverage

Return on assets
Net profits–––––––Net sales

=

4.8%

x

2.6

Rate of returnon net worth

=

12.5%

Asset turnover
3.2

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Net sales–––––––
Total assets

Net profits–––––––
Total assets

Total assets–––––––Net worth

Net profits–––––––Net worth■Hewlett-Packard Each division of Hewlett-Packard evaluates its performance on a customer-based scorecard that monitors 18 to 20 “business fundamentals.” Some, such as customer satisfaction and on-time delivery, arerated for all divisions; other indicators are tracked according to the nature of
the division’s business. The company is thus able to gauge the effects of its
marketing strategies on sales and profits and to identify areas where improvements in performance can lead to improved quantitative results.
Focusing on customer-based criteria for evaluating the company’s success
was what led to the development of HP’s global account management (GAM)
program in the 1990s. As the largest international corporations redirected
their purchases of computer-related products and services from the most powerful hardware to the most productive software, and then to the quest forelectronic solutions to problems affecting their global business, HP responded
by becoming a partner and adviser in problem solving. The GAM system develops a relationship between HP’s top managers and the client corporation.
A senior sales executive is assigned as global account manager, providing onsite service at the corporate headquarters of the global account. The customer’schief information officer provides a broad overview of the company’s needs,
and the global account manager helps to develop solutions.28

PROFITABILITY CONTROL
Here are some disconcerting findings from a bank profitability study:
We have found that anywhere from 20 to 40 percent of an individual institution’s products are unprofitable, and up to 60 percent of their accounts generate losses.
Our research has shown that, in most firms, more than half of all customer relationships are not profitable, and 30 to 40 percent are only marginally so. It is frequently a mere 10 to 15 percent of a firm’s relationships that generate the bulk of
its profits.
Our profitability research into the branch system of a regional bank produced
some surprising results . . . 30 percent of the bank’s branches were unprofitable.29
Clearly, companies need to measure the profitability of their products, territories, customer groups, segments, trade channels, and order sizes. This information will help
management determine whether any products or marketing activities should be expanded, reduced, or eliminated.

Marketing-Profitability Analysis
We will illustrate the steps in marketing-profitability analysis with the following example:
The marketing vice president of a lawnmower company wants to determine
the profitability of selling its lawnmower through three types of retail channels: hardware stores, garden supply shops, and department stores. The company’s profit-and-loss statement is shown in Table 6.7.

Sales
Cost of goods sold
Gross margin
Expenses
Salaries
Rent
Supplies
Net profit$60,000
39,000$21,000$9,3003,000
3,500

15,800$ 5,200

T A B L E

6.7

A Simplified Profit-and-Loss
Statement

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T A B L E

6.8

Mapping Natural Expenses into
Functional Expenses

Natural
Accounts
Salaries
Rent
Supplies

Total$ 9,300
3,000
3,500$15,800

Selling$5,100400$5,500Advertising$1,200400
1,500$3,100

Packing and
Delivery$1,4002,000
1,400$4,800Billing andCollecting$1,600600
200$2,400

Step 1: Identifying Functional Expenses Assume that the expenses listed
in Table 6.7 are incurred to sell the product, advertise it, pack and deliver it, and bill
and collect for it. The first task is to measure how much of each expense was incurredin each activity.
Suppose that most salary expense went to sales representatives and the rest went
to an advertising manager, packing and delivery help, and an office accountant. Let
the breakdown of the $9,300 be $5,100, $1,200, $1,400, and $1,600, respectively. Table
6.8 shows the allocation of the salary expense to these four activities.
Table 6.8 also shows the rent account of $3,000 allocated to the four activities. Because the sales reps work away from the office, none of the building’s rent expense isassigned to selling. Most of the expenses for floor space and rented equipment are forpacking and delivery. The supplies account covers promotional materials, packing materials, fuel purchases for delivery, and home office stationery. The $3,500 in this account is reassigned to the functional uses made of the supplies.
Step 2: Assigning Functional Expenses to Marketing Entities The next
task is to measure how much functional expense was associated with selling througheach type of channel. Consider the selling effort. The selling effort is indicated by the
number of sales made in each channel. This number is found in the selling columnof Table 6.9. Altogether, 275 sales calls were made during the period. Because the total selling expense amounted to $5,500 (see Table 6.8), the selling expense per call averaged $20.
Advertising expense can be allocated according to the number of ads addressed tothe different channels. Because there were 100 ads altogether, the average ad cost $31.
The packing and delivery expense is allocated according to the number of orders
placed by each type of channel. This same basis was used for allocating billing andcollection expense.
Step 3: Preparing a Profit-and-Loss Statement for Each Marketing Entity A profit-and-loss statement can now be prepared for each type of channel (Table
6.10). Because hardware stores accounted for half of total sales ($30,000 out of$60,000), this channel is charged with half the cost of goods sold ($19,500 out of$39,000). This leaves a gross margin from hardware stores of $10,500. From this must
be deducted the proportions of the functional expenses hardware stores consumed.
According to Table 6.9, hardware stores received 200 out of 275 total sales calls. At
an imputed value of $20 a call, hardware stores have to be charged with a $4,000 selling expense. Table 6.9 also shows that hardware stores were the target of 50 ads. At

T A B L E

6.9

Bases for Allocating Functional
Expenses to Channels

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ChannelType
HardwareGarden supply
Department stores
Functional expense⫼ No. of Units
EqualsSelling
200
65
10
275

Advertising
50
20
30
100

Packing and
Delivery
50
21
9
80

Billing andCollecting
50
21
9
80

$5,500275$ 20$3,100100$ 31$4,80080$ 60$2,40080$ 30

SalesCost of goods sold
Gross margin
Expenses
Selling ($20 per call)Advertising ($31 peradvertisement)
Packing and delivery($60 per order)
Billing ($30 per order)
Total Expenses
Net profit or loss

Hardware$30,000
19,500$10,500

GardenSupply$10,000
6,500$ 3,500

Dept.
Stores$20,000
13,000$ 7,000

Whole
Company$60,000
39,000$21,000$ 4,000
1,550$ 1,300
620

$

200
930

$ 5,500
3,100

3,000
1,500
$10,050
$ 450

1,260
630
$ 3,810$ (310)540
270$ 1,940$ 5,060

4,800
2,400
$15,800$ 5,200

T A B L E

6.10

Profit-and-Loss Statements for
Channels$31 an ad, the hardware stores are charged with $1,550 of advertising. The same reasoning applies in computing the share of the other functional expenses to charge tohardware stores. The result is that hardware stores gave rise to $10,050 of the total
expenses. Subtracting this from the gross margin, the profit of selling through hardware stores is only $450.
This analysis is repeated for the other channels. The company is losing money inselling through garden supply shops and makes virtually all of its profits through department stores. Notice that gross sales is not a reliable indicator of the net profits foreach channel.

Determining Corrective Action
It would be naive to conclude that the company should drop garden supply shops
and possibly hardware stores so that it can concentrate on department stores. The following questions need to be answered first:■

To what extent do buyers buy on the basis of type of retail outlet versus brand?

■

What are the trends with respect to the importance of these three channels?

■

How good are the company marketing strategies directed at the three channels?
On the basis of the answers, marketing management can evaluate five alternatives:■

Establish a special charge for handling smaller orders.

■Give more promotional aid to garden supply shops and hardware stores.

■

Reduce the number of sales calls and the amount of advertising going to garden
supply shops and hardware stores.

■

Do not abandon any channel as a whole but only the weakest retail units ineach channel.

■

Do nothing.

In general, marketing-profitability analysis indicates the relative profitability ofdifferent channels, products, territories, or other marketing entities. It does not provethat the best course of action is to drop the unprofitable marketing entities, nor doesit capture the likely profit improvement if these marginal marketing entities are
dropped.

Direct versus Full Costing
Like all information tools, marketing-profitability analysis can lead or mislead marketing executives, depending on the degree of their understanding of its methods andlimitations. The lawnmower company showed some arbitrariness in its choice of bases
for allocating the functional expenses to its marketing entities. “Number of sales calls”
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hours” is a more accurate indicator of cost. The former base was used because it involves less record keeping and computation.
Far more serious is another judgmental element affecting profitability analysis.
The issue is whether to allocate full costs or only direct and traceable costs in evaluating a marketing entity’s performance. The lawnmower company sidestepped this problem by assuming only simple costs that fit in with marketing activities. But thequestion cannot be avoided in real-world analyses of profitability. Three types of costs
have to be distinguished:
1. Direct costs: These are costs that can be assigned directly to the proper marketing entities. Sales commissions are a direct cost in a profitability analysis
of sales territories, sales representatives, or customers. Advertising expenditures are a direct cost in a profitability analysis of products to the extent thateach advertisement promotes only one product. Other direct costs for specificpurposes are sales force salaries and traveling expenses.
2. Traceable common costs: These are costs that can be assigned only indirectly,
but on a plausible basis, to the marketing entities. In the example, rent was
analyzed in this way.
3. Nontraceable common costs: These are costs whose allocation to the marketing
entities is highly arbitrary. To allocate “corporate image” expenditures equallyto all products would be arbitrary, because all products do not benefit
equally. To allocate them proportionately to the sales of the various products
would be arbitrary because relative product sales reflect many factors besides
corporate image making. Other examples are top management salaries, taxes,
interest, and other overhead.
No one disputes including direct costs in marketing cost analysis. There is a small
amount of controversy about including traceable common costs, which lump together
costs that would change with the scale of marketing activity and costs that would notchange. If the lawnmower company drops garden supply shops, it will probably continue to pay the same rent. In this event, its profits would not rise immediately by
the amount of the present loss in selling to garden supply shops ($310).
The major controversy concerns whether the nontraceable common costs should beallocated to the marketing entities. Such allocation is called the full-cost approach, andits advocates argue that all costs must ultimately be imputed in order to determine true
profitability. But this argument confuses the use of accounting for financial reportingwith its use for managerial decision making. Full costing has three major weaknesses:
1. The relative profitability of different marketing entities can shift radicallywhen one arbitrary way to allocate nontraceable common costs is replaced byanother.
2. The arbitrariness demoralizes managers, who feel that their performance isjudged adversely.
3. The inclusion of nontraceable common costs could weaken efforts at real cost
control. Operating management is most effective in controlling direct costs
and traceable common costs. Arbitrary assignments of nontraceable common
costs can lead them to spend their time fighting arbitrary cost allocations
rather than managing controllable costs well.

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Companies are showing a growing interest in using marketing-profitability analysis or its broader version, activity-based cost accounting (ABC), to quantify the true profitability of different activities. According to Cooper and Kaplan, ABC “can give
managers a clear picture of how products, brands, customers, facilities, regions, or distribution channels both generate revenues and consume resources.”30 To improve profitability, managers can then examine ways to reduce the resources required to perform
various activities, or make the resources more productive or acquire them at a lower
cost. Alternatively, management may raise prices on products that consume heavy
amounts of support resources. The contribution of ABC is to refocus management’sattention away from using only labor or material standard costs to allocate full cost,
and toward capturing the actual costs of supporting individual products, customers,
and other entities.

EFFICIENCY CONTROL
Suppose a profitability analysis reveals that the company is earning poor profits incertain products, territories, or markets. Are there more efficient ways to manage thesales force, advertising, sales promotion, and distribution in connection with thesemarketing entities?
Some companies have established a marketing controller position to improve marketing efficiency. Marketing controllers work out of the controller’s office but specialize in the marketing side of the business. At companies such as General Foods,
DuPont, and Johnson & Johnson, they perform a sophisticated financial analysis ofmarketing expenditures and results. They examine adherence to profit plans, help prepare brand managers’ budgets, measure the efficiency of promotions, analyze media
production costs, evaluate customer and geographic profitability, and educate marketing personnel on the financial implications of marketing decisions.31

Sales Force Efficiency
Sales managers need to monitor the following key indicators of efficiency in their territory:
■
■
■
■
■

Average number of calls per
salesperson per day
Average sales call time percontact
Average revenue persales call
Average cost per
sales callEntertainment cost per
sales call

■
■
■
■

Percentage of orders per
100 sales calls
Number of new customers
per period
Number of lost customers
per period
Sales force cost as apercentage of total sales

When a company starts investigating sales force efficiency, it often finds areas for
improvement. General Electric reduced the size of one of its divisional sales forces after discovering that its salespeople were calling on customers too often. When a large
airline found that its salespeople were both selling and servicing, they transferred theservicing function to lower-paid clerks. Another company conducted time-and-duty
studies and found ways to reduce the ratio of idle-to-productive time.

Advertising Efficiency
Many managers believe it is almost impossible to measure what they are getting fortheir advertising dollars. But they should try to keep track of at least the following
statistics:■

Advertising cost per thousand target buyers reached by media vehicle■

Percentage of audience who noted, saw or associated, and read most of eachprint ad■Consumer opinions on the ad’s content and effectiveness■

Before and after measures of attitude toward the product■

Number of inquiries stimulated by the ad■

Cost per inquiry

Management can take a number of steps to improve advertising efficiency, including doing a better job of positioning the product, defining objectives, pretesting
messages, using computer technology to guide the selection of media, looking for better media buys, and doing posttesting.

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Sales-Promotion Efficiency
Sales promotion includes dozens of devices for stimulating buyer interest and product trial. To improve sales-promotion efficiency, management should record the costs
and sales impact of each promotion. Management should watch the following statistics:

Management
increases sales
incentives

Sales
fall

Sales
surge

Deliverydelay■

Percentage of sales sold on deal■

Display costs per sales dollar■

Percentage of coupons redeemed■

Number of inquiries resulting from a demonstration

A sales-promotion manager can analyze the results of different sales promotions
and advise product managers on the most cost-effective promotions to use.

Distribution Efficiency
Insufficient production
and distribution
capacity

Perceived needto improvedelivery time

No or lateaction taken
to add capacity

Management needs to search for distribution economies in inventory control, warehouse locations, and transportation modes. One problem is that distribution efficiency
declines when the company experiences strong sales increases. Peter Senge describes
a situation in which a strong sales surge causes the company to fall behind in meeting delivery dates (Figure 6-14).32 This leads customers to bad-mouth the company
and eventually sales fall. Management responds by increasing sales force incentives
to secure more orders. The sales force succeeds but once again the company slips inmeeting delivery dates. Management needs to identify the real bottleneck and invest
in more production and distribution capacity.

STRATEGIC CONTROLF I G U R E

6-14

Dynamic Interactions Between
Sales Orders and Distribution
Efficiency
Source: Adapted from Peter M.Senge, The Fifth Discipline.
© 1990 by Peter M. Senge. Used by permission of Doubleday, a division of Bantam Doubleday Dell PublishingGroup, Inc.

From time to time, companies need to undertake a critical review of overall marketing goals and effectiveness. Each company should periodically reassess its strategic approach to the marketplace with marketing-effectiveness reviews and marketing audits.
Companies can also perform marketing excellence reviews and ethical–social responsibility reviews.

The Marketing-Effectiveness Review
Here is an actual situation.
The president of a major industrial-equipment company reviewed the annual
business plans of various divisions and found several lacking in marketing
substance. He called in the corporate vice president of marketing and said:
I am not happy with the quality of marketing in our divisions. It is very uneven. I
want you to find out which of our divisions are strong, average, and weak in marketing. I want to know if they understand and are practicing customer-oriented marketing. I want a marketing score for each division. For each deficient division, I
want a plan for improving marketing effectiveness over the next several years. I wantevidence next year that each deficient division is improving its capabilities.
The corporate marketing vice president agreed. His first inclination was tobase the evaluation on each division’s performance in sales growth, market
share, and profitability. His thinking was that high-performing divisions had
good marketing leadership and poor-performing divisions had poor marketing leadership.

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But good results could be due to a division’s being in the right place at the righttime. Another division might have poor results in spite of excellent marketing planning.
A company’s or division’s marketing effectiveness is reflected in the degree to which
it exhibits the five major attributes of a marketing orientation: customer philosophy, integrated marketing organization, adequate marketing information, strategic orientation, andoperational efficiency (see the Marketing Memo “Marketing Effectiveness Review Instrument”). Most companies and divisions receive scores in the fair-to-good range.33

M A R K E T I N G

memo

Marketing Effectiveness Review Instrument(Check One Answer to Each Question)

Customer Philosophy
A. Does management recognize the importance of designing the company to serve the needs and wants of chosen markets?
0—Management primarily thinks in terms of selling current and new products to whoever will buy them.
1—Management thinks in terms of serving a wide range of markets and needs with equal effectiveness.
2—Management thinks in terms of serving the needs and wants of well-defined markets and market segments chosen for their long-run growth and profit potential for the company.
B. Does management develop different offerings and marketing plans for different segments of the market?
0—No.
1—Somewhat.
2—To a large extent
C. Does management take a whole marketing system view (suppliers, channels, competitors, customers, environment) in planning its business?
0—No. Management concentrates on selling and servicing its immediate customers.
1—Somewhat. Management takes a long view of its channels although the bulk of its effort goes to selling and servicing the immediate customers.
2—Yes. Management takes a whole marketing systems view, recognizing the threats and opportunities created for the company by changes in any part of the system.

Integrated Marketing Organization
D. Is there high-level marketing integration and control of the major marketing functions?
0—No. Sales and other marketing functions are not integrated at the top and there is some unproductive conflict.
1—Somewhat.There is formal integration and control of the major marketing functions but less than satisfactory coordination and cooperation.
2—Yes.The major marketing functions are effectively integrated.
E. Does marketing management work well with management in research, manufacturing, purchasing, logistics, and finance?
0—No.There are complaints that marketing is unreasonable in the demands and costs it places on other departments.
1—Somewhat.The relations are amicable although each department pretty much acts to serve its own interests.
2—Yes.The departments cooperate effectively and resolve issues in the best interest of the company as a whole.
F. How well organized is the new-product development process?
0—The system is ill defined and poorly handled.
1—The system formally exists but lacks sophistication.
2—The system is well structured and operates on teamwork principles.

Adequate Marketing Information
G. When were the latest marketing research studies of customers, buying influences, channels, and competitors conducted?
0—Several years ago.
1—A few years ago.
2—Recently.
H. How well does management know the sales potential and profitability of different market segments, customers, territories, products, channels, and order sizes?
0—Not at all.
1—Somewhat.
2—Very well.
I. What effort is expended to measure and improve the cost effectiveness of different marketing expenditures?
0—Little or no effort.
1—Some effort.
2—Substantial effort.

Strategic Orientation
J. What is the extent of formal marketing planning?
0—Management conducts little or no formal marketing planning.
1—Management develops an annual marketing plan.
2—Management develops a detailed annual marketing plan and a strategic long-range plan that is updated annually.
K. How impressive is the current marketing strategy?
0—The current strategy is not clear.
1—The current strategy is clear and represents a continuation of traditional strategy.
2—The current strategy is clear, innovative, data based, and well reasoned.
L. What is the extent of contingency thinking and planning?
0—Management does little or no contingency thinking.
1—Management does some contingency thinking but little formal contingency planning.
2—Management formally identifies the most important contingencies and develops contingency plans.
(continued)707

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memo

Marketing Effectiveness Review Instrument (continued)

Operational Efficiency
M. How well is the marketing strategy communicated and implemented?
0—Poorly.
1—Fairly.
2—Successfully.
N. Is management doing an effective job with its marketing resources?
0—No.The marketing resources are inadequate for the job to be done.
1—Somewhat.The marketing resources are adequate but they are not employed optimally.
2—Yes.The marketing resources are adequate and are employed efficiently.
O. Does management show a good capacity to react quickly and effectively to on-the-spot developments?
0—No. Sales and market information is not very current and management reaction time is slow.
1—Somewhat. Management receives fairly up-to-date sales and market information; management reaction time varies.
2—Yes. Management has installed systems yielding highly current information and fast reaction time.

Total Score
The instrument is used in the following way.The appropriate answer is checked for each question.The scores are added—the total will be somewhere between 0 and 30.The following scale shows the level of marketing effectiveness:
0–5 ⫽ None
11–15 ⫽ Fair
21–25 ⫽ Very good
6–10 ⫽ Poor
16–20 ⫽ Good
26–30 ⫽ Superior
Source: Philip Kotler,“From Sales Obsession to Marketing Effectiveness,” Harvard Business Review, November–December 1977, pp. 67–75. Copyright © 1977 by the President and Fellows of Harvard College; allrights reserved.

The Marketing Audit
Companies that discover weaknesses should undertake a thorough study known as amarketing audit.34■

A marketing audit is a comprehensive, systematic, independent, and periodic examination of a company’s—or business unit’s—marketing environment, objectives, strategies, and activities with a view to determining problem
areas and opportunities and recommending a plan of action to improve thecompany’s marketing performance.
Let us examine the marketing audit’s four characteristics:
1. Comprehensive: The marketing audit covers all the major marketing activities
of a business, not just a few trouble spots. It would be called a functional audit if it covered only the sales force, pricing, or some other marketing activity. Although functional audits are useful, they sometimes mislead
management. Excessive sales force turnover, for example, could be a symptom not of poor sales force training or compensation but of weak company
products and promotion. A comprehensive marketing audit usually is more
effective in locating the real source of marketing problems.

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2. Systematic: The marketing audit is an orderly examination of the organization’s macro- and micromarketing environment, marketing objectives andstrategies, marketing systems, and specific activities. The audit indicates themost needed improvements, which are then incorporated into a corrective
action plan involving both short-run and long-run steps to improve overallmarketing effectiveness.
3. Independent: A marketing audit can be conducted in six ways: self-audit, audit
from across, audit from above, company auditing office, company task force
audit, and outsider audit. Self-audits, in which managers use a checklist to

rate their own operations, lack objectivity and independence.35 The 3M Company has made good use of a corporate auditing office, which provides marketing audit services to divisions on request.36 Generally speaking, however,the best audits come from outside consultants who have the necessary objectivity, broad experience in a number of industries, some familiarity with theindustry being audited, and the undivided time and attention to give to theaudit.
4. Periodic: Typically, marketing audits are initiated only after sales have turned
down, sales force morale has fallen, and other problems have occurred. Companies are thrown into a crisis partly because they failed to review their marketing operations during good times. A periodic marketing audit can benefit
companies in good health as well as those in trouble.
A marketing audit starts with a meeting between the company officer(s) and themarketing auditor(s) to work out an agreement on the audit’s objectives, coverage,
depth, data sources, report format, and time frame. A detailed plan as to who is to beinterviewed, the questions to be asked, the time and place of contact, and so on isprepared so that auditing time and cost are kept to a minimum. The cardinal rule inmarketing auditing is: Don’t rely solely on company managers for data and opinion.
Customers, dealers, and other outside groups must also be interviewed. Many companies do not really know how their customers and dealers see them, nor do they
fully understand customer needs and value judgments.
The marketing audit examines six major components of the company’s marketing situation. The major questions are listed in Table 6.11.

The Marketing Excellence Review
Companies can use another instrument to rate their performance in relation to thebest practices of high-performing businesses. The three columns in Table 6.12 distinguish among poor, good, and excellent business and marketing practices. Management
can place a check on each line as to its perception of where the business stands. The
resulting profile exposes the business’s weaknesses and strengths, highlighting where
the company might move to become a truly outstanding player in the marketplace.

The Ethical and Social Responsibility Review
Companies need to evaluate whether they are truly practicing ethical and socially responsible marketing. Business success and continually satisfying the customer andother stakeholders are intimately tied to adoption and implementation of high standards of business and marketing conduct. The most admired companies in the worldabide by a code of serving people’s interests, not only their own. See the Marketingfor the Millennium “Marketing Fair Labor Practices.”
Business practices are often under attack because business situations routinely pose
tough ethical dilemmas. One can go back to Howard Bowen’s classic questions about
the responsibilities of businesspeople:
Should he conduct selling in ways that intrude on the privacy of people, for example, by door-to-door selling . . . ? Should he use methods involving ballyhoo, chances,prizes, hawking, and other tactics which are at least of doubtful good taste? Should
he employ “high pressure” tactics in persuading people to buy? Should he try to hasten the obsolescence of goods by bringing out an endless succession of new models
and new styles? Should he appeal to and attempt to strengthen the motives of materialism, individious consumption, and “keeping up with the Joneses”?37
Clearly the company’s bottom line cannot be the sole measure of corporate performance: Ethical issues must be dealt with in many aspects of its business. There areselling issues such as bribery or stealing trade secrets; advertising issues such as falseand deceptive advertising; channel issues such as exclusive dealing and tying agreements; product issues such as quality and safety, warranties, and patent protection;
packaging issues such as accurate labeling and use of scarce resources; price issues suchas price-fixing, discrimination, and resale price maintenance; and competitive issues
such as barriers to entry and predatory competition.

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T A B L E

6.11

Components of a Marketing Audit

Part I. Marketing Environment Audit
Macroenvironment
Demographic:
What major demographic developments and trends pose opportunities or threats? What actions has the company taken in response?
Economic

What major developments in income, prices, savings, and credit will affect the company? Whatactions has the company been taking in response?

Environmental

What is the outlook for the cost and availability of natural resources and energy needed by thecompany? What about the company s role in pollution and conservation? What steps has thecompany taken?

Technological

What are the major changes in product and process technology? What is the company s position in these technologies?

Political

What changes in laws and regulations might affect marketing strategy and tactics? What is happening in these areas that affects marketing strategy?

CulturalWhat is the public s attitude toward business and toward the company s products? Whatchanges in customer lifestyles and values might affect the company?

Task Environment
Markets

What is happening to market size, growth, geographical distribution, and profits? What are themajor market segments?

Customers

What are customers needs and buying processes? How do customers and prospects rate thecompany and its competitors on reputation, product quality, service, sales force, and price?
How do different customer segments make their buying decisions?

Competitors

Who are the major competitors? What are their objectives, strategies, strengths, weaknesses,
sizes, and market shares? What trends will affect competition and substitutes for the company s products?

Distribution and Dealers

What are the main trade channels for bringing products to customers? What are the efficiency
levels and growth potentials of the different channels?

Suppliers

What is the outlook for the availability of key resources? What are trends among suppliers?

Facilitators and Marketing Firms

What is the outlook for transportation services, warehousing facilities, and financial resources?
How effective are the company s advertising agencies and marketing research firms?

Publics

Which publics represent particular opportunities or problems? What steps has the company
taken to deal effectively with each public?

Part II. Marketing Strategy Audit
Business Mission
Is the business mission clearly stated in market-oriented terms? Is it feasible?
Marketing Objectives and Goals

Are the company and marketing objectives and goals stated clearly enough to guide marketing planning and performance measurement? Are the marketing objectives appropriate?

Strategy

Has management articulated a clear marketing strategy for achieving its objectives? Is the strategy convincing? Is the strategy appropriate to the stage of the product life cycle, competitors strategies, and the state of the economy? Is the company using the best basis for market segmentation? Does it have clear criteria for rating segments and choosing the best ones?
Has it developed accurate profiles of each target segment? Has the company developed an effective positioning and marketing mix for each target segment? Are marketing resources allocated optimally to the major elements of the marketing mix?

Part III. Marketing Organization Audit
Formal Structure
Does the marketing vice president have adequate authority and responsibility for company activities that affect customer satisfaction? Are the marketing activities optimally structured
along functional, product, segment, end-user, and geographical lines?
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Functional Efficiency

Are there good communication and working relations between marketing and sales? Is the
product management system working effectively? Are product managers able to plan profits or only sales volume? Are there any groups in marketing that need more training, motivation, supervision, or evaluation?

Interface Efficiency

Are there any problems between marketing and manufacturing, R&D, purchasing, finance, accounting, or legal that need attention?

Part IV. Marketing Systems Audit
Marketing Information System
Is the marketing intelligence system producing accurate, sufficient, and timely information? Are
company decision makers asking for enough marketing research, and are they using the results? Is the company employing the best methods for market measurement and sales forecasting?
Marketing Planning Systems

Is the marketing planning system well conceived and effectively used? Do marketers have decision support systems available? Does the planning system result in acceptable sales targets and quotas?

Marketing Control System

Are the control procedures adequate to ensure that the annual-plan objectives are being
achieved? Does management periodically analyze the profitability of products, markets, territories, and channels of distribution? Are marketing costs and productivity periodically examined?

New-Product Development
SystemIs the company well organized to gather, generate, and screen new-product ideas? Does thecompany do adequate research and analysis before investing in new ideas? Does the company carry out adequate product and market testing?

Part V. Marketing Productivity Audit
Profitability Analysis
What is the profitability of the company s different products, markets, territories, and channelsof distribution? Should the company enter, expand, contract, or withdraw from any businesssegments?
Cost-Effectiveness Analysis

Do any marketing activities seem to have excessive costs? Can cost-reducing steps be taken?

Part VI. Marketing Function Audit
Products
What are the company s product-line objectives? Is the current product line meeting the objectives? Should the product line be stretched or contracted? Which products should bephased out? Added? What are the buyers knowledge and attitudes toward the company s
and competitors product quality, features, styling, brand names, and so on? What areas ofproduct and brand strategy need improvement?
Price

What are the company s pricing objectives, policies, strategies, and procedures? To what extent
are prices set on cost, demand, and competitive criteria? Do the customers see the company s prices as being in line with the value of its offer? What does management know about
the price elasticity of demand, experience curve effects, and competitors prices and pricing
policies? To what extent are price policies compatible with the needs of distributors anddealers, suppliers, and government regulation?

Distribution

What are the company s distribution objectives and strategies? Is there adequate market coverage and service? How effective are distributors, dealers, manufacturers representatives, brokers, agents, and others? Should the company consider changing its distribution channels?

Advertising, Sales Promotion,
Publicity, and Direct
Marketing

What are the company s advertising objectives? Is the right amount being spent on advertising? What do customers and the public think about the advertising? Are the media wellchosen? Is the internal advertising staff adequate? Is the sales promotion budget adequate?
Is there effective and sufficient use of sales promotion tools such as samples, coupons, displays, and sales contests? Is the company making enough use of direct, on-line, and database marketing?

Sales Force

What are the sales forces objectives? Is the sales force large enough to accomplish the company s objectives? Is the sales force organized along the lines? Are there enough sales managers to guide the field sales representatives? Does the sales force show high morale, ability, and effort? Are procedures adequate for setting quotas and evaluating performance?
How does the company sales force compare to competitors sales forces?
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6.12

The Marketing Excellence Review:
Best Practices

Poor
Product driven

Good
Market driven

ExcellentMarket driving

Mass-market oriented

Segment-oriented

Niche-oriented and customer-oriented

Product offer

Augmented product offer

Customer solutions offer

Average product quality Better than average

Legendary

Average service quality

Legendary

Better than average

End-product oriented

Core-product oriented

Core-competency oriented

Function-oriented

Process-oriented

Outcome-oriented

Reacting to competitors Benchmarking competitors Leapfrogging competitors
Supplier exploitation

Supplier preference

Supplier partnership

Dealer exploitation

Dealer support

Dealer partnership

Price driven

Quality driven

Value driven

Average speed

Better than average

Legendary

Hierarchy

Network

Teamwork

Vertically integrated

Flattened organization

Strategic alliances

Stockholder driven

Stakeholder driven

Societally driven

Raising the level of socially responsible marketing calls for a three-pronged attack.
First, society must use the law to define, as clearly as possible, those practices that are
illegal, antisocial, or anticompetitive. Second, companies must adopt and disseminate
a written code of ethics, build a company tradition of ethical behavior, and hold theirpeople fully responsible for observing ethical and legal guidelines. Third, individual
marketers must practice a “social conscience” in their specific dealings with customers
and various stakeholders.
The new millennium holds a wealth of opportunities for companies. Technological advances in solar energy, on-line computer networks, cable and satellite television,
genetic engineering, and telecommunications promise to change the world as we know
it. At the same time, forces in the socioeconomic, cultural, and natural environments
will impose new limits on marketing and business practice. Companies that are able
to innovate new solutions and values in a socially responsible way are the most likely
to succeed. Consider Working Assets:■

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Working Assets Working Assets long-distance telephone service competes
with AT&T, MCI, and Sprint in the same way the major carriers compete witheach other: low rates, clear transmissions over fiber optic lines, efficient operators, and convenient calling cards. But it adds a unique appeal to its selected market niche. The customers addressed in the advertising line “Wemake your voice heard” are people who identify themselves as supporters ofprogressive causes. On its monthly bills, the company provides information
about two current issues along with the names and phone numbers of influential people the customer is invited to call free of charge. For a fee, thecustomer may have a prepared letter sent to these leaders on his or her behalf. Customers are also invited to vote for the nonprofit organizations thatreceive 1 percent of their monthly charges. Appealing to this target market’sinterest in preserving the environment, Working Assets uses recycled paperand soy-based ink, and it plants 17 trees for every ton of paper it consumes.
In all its business practices, the company has a consistent program of corporate citizenship that matches the ethics of its market. For those who needfurther inducement, Working Assets offers of a year’s worth of monthly
coupons for a free pint of frozen desserts from Ben and Jerry’s, another cor-

M A R K E T I N G

F O R

T H E

MILLENNIUM

Marketing Fair Labor Practices
Globalization is a fact of life in the apparel industry, from manufacturing to marketing of clothing, accessories, and footwear in
all price ranges. Labels bearing the names of U.S.-owned companies may also indicate that the items are produced in othercountries, often less developed nations of Latin America and thePacific Rim. A series of news reports in the mid-1990s brought topublic attention the fact that many of these products were madeby underpaid, overworked, and sometimes underage employeesof sweatshops. Unfavorable stories about the Asian factories thatmade Nike athletic shoes were so much in the news that thecompany formed an independent commission to inspect them.
Many skeptical consumers remained suspicious about the findings of the investigation. In letters to the editors of their hometown newspapers, they objected to paying high prices so thatmillionaire athletes could become even richer from advertisingendorsements while the factory workers earned less than a living wage. A clothing line produced in Honduras brought similar
negative attention to TV talk-show hostess Kathie Lee Gifford.
In August 1996, representatives of 18 organizations, including fashion producers and retailers, unions, and human rights
groups,came together in the White House Apparel Industry Partnership to establish voluntary standards for working conditions
in factories that produced goods for the U.S. apparel industry.
They agreed on a number of provisions, including a ban on hiring forced labor or children under the age of 14, a minimum
wage at least in compliance with the laws of the host country,

a maximum 60-hour work week with at least one day off, protection from harassment and abuse, and recognition of workers
right to form unions and bargain collectively. A monitoringgroup composed of representatives of the producers, unions,and human rights organizations was to ensure compliance, andbusinesses that met the standards would be entitled to carry ano sweat label.
In 1998, a task force of the partnership unveiled a plan toestablish the Fair Labor Association as the oversight agency. But
by the end of the year, the agreement had lost significant support. Some members of the partnership complained that they
were left out of the negotiations detailing the standards andprocedures for monitoring compliance. UNITE, the apparel workers union, withdrew from the partnership in protest. Meanwhile,
the American Apparel Manufacturers Association,impatient withthe progress of the White House partnership, developed its own
program called Responsible Apparel Production (RAP), with similar standards and its own certification agency. A pilot program
began with 30 factories in the United States, Asia, and Latin
America, and factories of both AAMA members and nonmembers were invited to inquire about becoming certified.
Although UNITE and its allies fear that the manufacturers
will make only superficial improvements and that certification
or a no sweat label will be a misrepresentation, the disagreements between the two sides reveal their common convictions:
Labor must be recognized as an important stakeholder in every
employer s business. Fair labor practices are a critical marketing
issue as well as a matter of corporate ethics.

Sources: Vanessa Groce, Chronicle, Earnshaw’s Infants’, Toddlers’, and Girls’ and Boys’ Wear Review, October 1996, p. 36; Steven Greenhouse, Voluntary Rules on Apparel Labor Prove Hard to Set, New York Times, February 1, 1997, pp. A1, A7; No Sweat? Sweatshop Code is just first step to end worker abuse, Solidarity, June July, 1997, p. 9.
See also the Web sites of UNITE, Corporate Watch, and the American Apparel Manufacturers Association.

porate supporter of progressive causes. Working Assets’ corporate idealism has
had a favorable effect on the practical side of its business. For five successive
years, Working Assets has been recognized by Inc. in its list of the fastest growing companies and has been featured in Fortune, Newsweek, the New York Times,
and the Washington Post.

S U M M A R Y
1. The modern marketing department evolved through six stages. In the first stage,companies start out with simply a sales department. In the second stage, they add
ancillary marketing functions, such as advertising and marketing research. In thethird stage, a separate marketing department is created to handle the increased
number of ancillary marketing functions. In the fourth stage, both sales and marketing report to a sales and marketing vice president. In the fifth stage, all of acompany’s employees are market and customer centered. In the sixth stage, marketing personnel work mainly on cross-disciplinary teams.

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2. Modern marketing departments can be organized in a number of ways. Some companies are organized by functional specialization; others focus on geography andregionalization. Still others emphasize product and brand-management or marketsegment management. Some companies establish a matrix organization consistingof both product and market managers. Some companies have strong corporate marketing, others have limited corporate marketing, and still others place marketing
only in the divisions.
3. Effective modern marketing organizations are marked by a strong cooperation andcustomer focus among the company’s departments: marketing, R&D, engineering,purchasing, manufacturing, operations, finance, accounting, and credit.
4. A brilliant strategic marketing plan counts for little if it is not implemented properly. Implementing marketing plans calls for skills in recognizing and diagnosing
a problem, assessing the company level where the problem exists, implementation
skills, and skills in evaluating the implementation results.
5. The marketing department has to monitor and control marketing activities continuously. The purpose of annual-plan control is to ensure that the company achieves
the sales, profits, and other goals established in its annual plan. The main toolsof annual-plan control are sales analysis, market-share analysis, marketing
expense–to–sales analysis, financial analysis, and market-based scorecard analysis.
6. Profitability control seeks to measure and control the profitability of various products, territories, customer groups, trade channels, and order sizes. An importantpart of controlling for profitability is assigning costs and generating profit-and-loss
statements.
7. Efficiency control focuses on finding ways to increase the efficiency of the sales force,
advertising, sales promotion, and distribution.
8. Strategic control entails a periodic reassessment of the company and its strategic approach to the marketplace, using the tools of the marketing-effectiveness review
and the marketing audit. Companies should also undertake ethical–social responsibility reviews.

A P P L I C A T I O N S
C O N C E P T S
1. Rewrite the questions in the Components of a Marketing Audit (Table 6.11) in sucha way that they reflect the individual problems and terminology associated withyour industry. Be as specific and as detailed as you can when writing the questions.
If you are not presently employed, rewrite the questions for either a company you
have worked for or one for which you would like to work in the future.
2. A large manufacturer of industrial equipment has a salesperson assigned to eachmajor city. Regional sales managers supervise the sales representatives in several
cities. The chief marketing officer wants to evaluate the profit contribution of thedifferent cities. How might each of the following costs be allocated to each of thecities: (a) the aggregate costs of sending bills to customers; (b) district sales manager’s expenses; (c) national magazine advertising; and (d) marketing research?

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3. NAPLCO (North American Phillips Lighting Corporation) wanted to put Norelco
bulbs on supermarket shelves as a third national brand (GE had 60 percent of themarket and Westinghouse had 20 percent of the market). Lightbulb purchases had
been slowly declining over the last five years. Lightbulbs were the grocer’s mostprofitable store item per linear foot of goods stocked. NAPLCO concluded that thestrong Norelco name, proven capability at making quality lightbulbs, and profits
for supermarkets would make this project very successful. After conducting consumer research, it created a new and clever gravity-fed display and novel transparent and protective package for the bulbs themselves. The display held 12 of themost popular lightbulb types. (Most supermarkets carried 50 types of lightbulbs,

and double that number constituted a full line.) Norelco decided not to do any
consumer advertising, but to rely more heavily on push money. It also decided touse a broker rather than hire its own sales force. After two and a half years, grosssales of Norelco’s bulbs were $1.1 million against a projected $7.5 million. Why
do you think the project failed from an implementation standpoint?

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1. See Frederick E. Webster Jr., “The Changing Role of Marketing in the Corporation,” Journal of Marketing, October 1992,
pp. 1–17. Also see Ravi S. Achrol, “Evolution of the Marketing Organization: New
Forms for Turbulent Environment,” Jour-nal of Marketing, October 1991, pp. 77–93;
and John P. Workman Jr., Christian Homburg, and Kjell Gruner, “Marketing Organization: An Integrative Framework ofDimensions and Determinants,” Journalof Marketing, July 1998, pp. 21–41.

2. See Frank V. Cespedes, Concurrent Marketing: Integrating Product, Sales, and Service (Boston: Harvard Business School
Press, 1995), and Managing Marketing
Linkages: Text, Cases, and Readings (Upper
Saddle River, NJ: Prentice Hall, 1996).
3. Robert E. Lineman and John L. StantonJr., “A Game Plan for Regional Marketing,” Journal of Business Strategy, November–December 1992, pp. 19–25.
4. Scott Hume, “Execs Favor Regional Approach,” Advertising Age, November 2,
1987, p. 36; “National Firms Find that
Selling to Local Tastes Is Costly, Complex,” Wall Street Journal, February 9,
1987, P. B1; Paul A. Herbig, Handbook of
Cross-Cultural Marketing (New York: International Business Press, 1998), pp.
45–46.
5. “ . . . and Other Ways to Peel the Onion,”
The Economist, January 7, 1995, pp.
52–53.
6. Andrall E. Pearson and Thomas W. Wilson Jr., Making Your Organization Work
(New York: Association of National Advertisers, 1967), pp. 8–13.
7. Dyan Machan, “Soap? Cars? What’s the
Difference?” Forbes, September 7, 1998;
Bill Vlasic, “Too Many Models, Too Little
Focus,” Business Week, December 1, 1997,
p. 148.
8. Michael George, Anthony Freeling, andDavid Court, “Reinventing the Marketing Organization,” The McKinsey Quarterly no. 4 (1994): 43–62.
9. For further reading, see Robert Dewar and
Don Schultz, “The Product Manager, an
Idea Whose Time Has Gone,” Marketing
Communications, May 1989, pp. 28–35;“The Marketing Revolution at Procter &Gamble,” Business Week, July 25, 1988,
pp. 72–76; Kevin T. Higgins, “Category
Management: New Tools Changing Life
for Manufacturers, Retailers,” Marketing
News, September 25, 1989, pp. 2, 19;
George S. Low and Ronald A. Fullerton,“Brands, Brand Management, and theBrand Manager System: A Critical-Historical Evaluation,” Journal of Marketing
Research, May 1994, pp. 173–90; andMichael J. Zenor, “The Profit Benefits ofCategory Management,” Journal of Marketing Research, May 1994, pp. 202–13.
10. Stanley F. Slater and John C. Narver, “Market Orientation, Customer Value, and Superior Performance,” Business Horizons,
March–April 1994, pp. 22–28. See also
Frederick E. Webster, Market-Driven Management: Using the New Marketing Concept
to Create a Customer-Oriented Company(New York: John Wiley, 1994); John C.
Narver and Stanley F. Slater, “The Effectof a Market Orientation on Business Profitability,” Journal of Marketing, October

1990, pp. 20–35; Bernard Jaworski and
Ajay K. Kohli, “Market Orientation: Antecedents and Consequences,” Journal ofMarketing, July 1993, pp. 53–70; and Rohit Deshpandé and John U. Farley, “Measuring Market Orientation,” Journal ofMarket-Focused Management 2 (1998):
213–32.
11. Richard E. Anderson, “Matrix Redux,”Business Horizons, November–December
1994, pp. 6–10.
12. For further reading on marketing organization, see Nigel Piercy, Marketing Organization: An Analysis of Information
Processing, Power and Politics (London:
George Allen & Unwin, 1985); Robert W.
Ruekert, Orville C. Walker, and Kenneth
J. Roering, “The Organization of Marketing Activities: A Contingency Theory ofStructure and Performance,” Journal ofMarketing, Winter 1985, pp. 13–25; Tyzoon T. Tyebjee, Albert V. Bruno, and
Shelby H. McIntyre, “Growing Ventures
Can Anticipate Marketing Stages,” Harvard Business Review, January–February
1983, pp. 2–4; and Andrew Pollack, “Revamping Said to be Set at Microsoft,” NewYork Times, February 9, 1999, C1.
13. Gary L. Frankwick, Beth A. Walker, andJames C. Ward, “Belief Structures in Conflict: Mapping a Strategic Marketing Decision,” Journal of Business Research,
October–November 1994, pp. 183–95.
14. Askok K. Gupta, S. P. Raj, and David Wilemon, “A Model for Studying R&D–Marketing Interface in the ProductInnovation Process,” Journal of Marketing,
April 1986, pp. 7–17.
15. See William E. Souder, Managing New
Product Innovations (Lexington, MA: D. C.
Heath, 1987), ch. 10 and 11; and William
L. Shanklin and John K. Ryans Jr., “Organizing for High-Tech Marketing,” Harvard
Business
Review,
November–
December 1984, pp. 164–71; and Robert
J. Fisher, Elliot Maltz, and Bernard J.
Jaworski, “Enhancing Communication
Between Marketing and Engineering: The
Moderating Role of Relative Functional
Identification,” Journal of Marketing, July
1997, pp. 54–70.
16. David J. Morrow, “Struggling to Spell
R-E-L-I-E-F,” New York Times, December
29, 1998, pp. C1, C18; “JAMA Study
Shows Merck-Medco’s Partners for
Healthy Aging Program Significantly Reduces the Use of Potentially Harmful
Medication by Seniors,” Business Wire,
October 12, 1998.
17. See Robert J. Fisher, Elliot Maltz, andBernard J. Jaworski, “Enchancing Communication Between Marketing and Engineering,” Journal of Engineering, July
1997, pp. 54–70.

chapter 22
Managing the
Total Marketing
Effort717

18. See Benson P. Shapiro, “Can Marketingand Manufacturing Coexist?” Harvard
Business
Review,
September–October
1977, pp. 104–14. Also see Robert W.
Ruekert and Orville C. Walker Jr., “Marketing’s Interaction with Other Functional Units: A Conceptual Frameworkand Empirical Evidence,” Journal of Marketing, January 1987, pp. 1–19.
19. Edward E. Messikomer, “DuPont’s ‘Marketing Community,’” Business Marketing,
October 1987, pp. 90–94. For an excellent account of how to convert a company into a market-driven organization,
see George Day, The Market-Driven Organization: Aligning Culture, Capabilities andConfiguration to the Market (New York:Free Press, 1999).
20. For more on developing and implementing marketing plans, see H. W. Goetsch,
Developing, Implementing & Managing an
Effective Marketing Plan (Chicago: American Marketing Association; Lincolnwood, IL: NTC Business Books, 1993).
21. Thomas V. Bonoma, The Marketing Edge:
Making Strategies Work (New York: Free
Press, 1985). Much of this section is basedon Bonoma’s work.
22. Emily Denitto, “New Steps Bring Alvin
Ailey into the Business of Art,” Crain’s
New York Business, December 7, 1998, pp.
4, 33.
23. See Alfred R. Oxenfeldt, “How to Use
Market-Share Measurement,” Harvard
Business Review, January–February 1969,
pp. 59–68.
24. There is a one-half chance that a successive observation will be higher or lower.
Therefore, the probability of finding six
successively higher values is given by11(ᎏ2ᎏ)6 ⫽ ᎏ6ᎏ4 .
25. Alternatively, companies need to focus
on factors affecting shareholder value. The
goal of marketing planning is to increase
shareholder value, which is the present
value of the future income stream createdby the company’s present actions. Rateof-return analysis usually focuses on only
one year’s results. See Alfred Rapport, Creating Shareholder Value, rev. ed. (NewYork: Free Press, 1997).
26. For additional reading on financial analysis, see Peter L. Mullins, Measuring Customer and Product Line Profitability(Washington, DC: Distribution Researchand Education Foundation, 1984).
27. See Robert S. Kaplan and David P. Norton, The Balanced Scorecard (Boston: Harvard Business School Press, 1996).

718

part fiveManaging and
Delivering Marketing
Programs

28. Richard Whiteley and Diane Hessan, Customer Centered Growth (Reading MA: Addison Wesley, 1996), pp. 87–90; andAdrian J. Slywotzky, Value Migration: How
to Think Several Moves Ahead of the Competition (Boston: Harvard University
Press, 1996), pp. 231–35.
29. The MAC Group, Distribution: A Competitive Weapon (Cambridge, MA: MAC
Group, 1985), p. 20.
30. See Robin Cooper and Robert S. Kaplan,“Profit Priorities from Activity-Based
Costing,” Harvard Business Review,
May–June 1991, pp. 130–35.
31. Sam R. Goodman, Increasing Corporate
Profitability (New York: Ronald Press,
1982), ch. 1. Also see Bernard J. Jaworski,
Vlasis Stathakopoulos, and H. Shanker
Krishnan, “Control Combinations inMarketing: Conceptual Framework andEmpirical Evidence,” Journal of Marketing,January 1993, pp. 57–69.
32. See Peter M. Senge, The Fifth Discipline:
The Art and Practice of the Learning Organization (New York: Doubleday Currency,1990), ch. 7.
33. For further discussion of this instrument,
see Philip Kotler, “From Sales Obsession
to Marketing Effectiveness,” Harvard
Business Review, November–December
1977, pp. 67–75.
34. See Philip Kotler, William Gregor, andWilliam Rodgers, “The Marketing Audit
Comes of Age,” Sloan Management Review,
Winter 1989, pp. 49–62. For an interesting alternative approach, see the Copernican Decision Navigator, available from
Copernican at (617) 630-8705.
35. Useful checklists for a marketing self-audit can be found in Aubrey Wilson,
Aubrey Wilson’s Marketing Audit Checklists(London: McGraw-Hill, 1982); and Mike
Wilson, The Management of Marketing(Westmead, England: Gower Publishing,1980). A marketing audit software program is described in Ben M. Enis andStephen J. Garfein, “The Computer-Driven Marketing Audit,” Journal of Management Inquiry, December 1992, pp.
306–18.
36. Kotler, Gregor, and Rodgers, “The Marketing Audit.”
37. Howard R. Bowen, Social Responsibilitiesof the Businessman (New York: Harper &Row, 1953), p. 215. Also N. Craig Smithand Elizabeth Cooper-Martin, “Ethics
and Target Marketing: The Role of Product Harm and Consumer Vulnerability,”
Journal of Marketing, July 1997, pp. 1–20.

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