INTRODUCTION TO
MARKETING

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Lars Perner, Ph.D.
Assistant Professor of Clinical Marketing
Department of Marketing
Marshall School of Business
University of Southern California
Los Angeles, CA 90089-0443, USA
(213) 740-7127

 


Lars Perner
Popovich Hall

Lars Perner, Ph.D.
Assistant Professor of Clinical Marketing
Department of Marketing
Marshall School of Business
University of Southern California
Los Angeles, CA 90089-0443, USA
(213) 740-7127


INTRODUCTION TO MARKETING

Background

Marketing. Several definitions have been proposed for the term marketing. Each tends to emphasize different issues. Memorizing a definition is unlikely to be useful; ultimately, it makes more sense to thinking of ways to benefit from creating customer value in the most effective way, subject to ethical and other constraints that one may have. The 2006 and 2007 definitions offered by the American Marketing Association are relatively similar, with the 2007 appearing a bit more concise. Note that the definitions make several points:

Delivering customer value. The central idea behind marketing is the idea that a firm or other entity will create something of value to one or more customers who, in turn, are willing to pay enough (or contribute other forms of value) to make the venture worthwhile considering opportunity costs. Value can be created in a number of different ways. Some firms manufacture basic products (e.g., bricks) but provide relatively little value above that. Other firms make products whose tangible value is supplemented by services (e.g., a computer manufacturer provides a computer loaded with software and provides a warranty, technical support, and software updates). It is not necessary for a firm to physically handle a product to add value—e.g., online airline reservation systems add value by (1) compiling information about available flight connections and fares, (2) allowing the customer to buy a ticket, (3) forwarding billing information to the airline, and (4) forwarding reservation information to the customer.

It should be noted that value must be examined from the point of view of the customer. Some customer segments value certain product attributes more than others. A very expensive product—relative to others in the category—may, in fact, represent great value to a particular customer segment because the benefits received are seen as even greater than the sacrifice made (usually in terms of money). Some segments have very unique and specific desires, and may value what—to some individuals—may seem a “lower quality” item—very highly.

Some forms of customer value. The marketing process involves ways that value can be created for the customer. Form utility involves the idea that the product is made available to the consumer in some form that is more useful than any commodities that are used to create it. A customer buys a chair, for example, rather than the wood and other components used to create the chair. Thus, the customer benefits from the specialization that allows the manufacturer to more efficiently create a chair than the customer could do himself or herself. Place utility refers to the idea that a product made available to the customer at a preferred location is worth more than one at the place of manufacture. It is much more convenient for the customer to be able to buy food items in a supermarket in his or her neighborhood than it is to pick up these from the farmer. Time utility involves the idea of having the product made available when needed by the customer. The customer may buy a turkey a few days before Thanksgiving without having to plan to have it available. Intermediaries take care of the logistics to have the turkeys—which are easily perishable and bulky to store in a freezer—available when customers demand them. Possession utility involves the idea that the consumer can go to one store and obtain a large assortment of goods from different manufacturers during one shopping occasion. Supermarkets combine food and other household items from a number of different suppliers in one place. Certain “superstores” such as the European hypermarkets and the Wal-Mart “super centers” combine even more items into one setting.

The marketing vs. the selling concept. Two approaches to marketing exist. The traditional selling concept emphasizes selling existing products. The philosophy here is that if a product is not selling, more aggressive measures must be taken to sell it—e.g., cutting price, advertising more, or hiring more aggressive (and obnoxious) sales-people. When the railroads started to lose business due to the advent of more effective trucks that could deliver goods right to the customer’s door, the railroads cut prices instead of recognizing that the customers ultimately wanted transportation of goods, not necessarily railroad transportation. Smith Corona, a manufacturer of typewriters, was too slow to realize that consumers wanted the ability to process documents and not typewriters per se. The marketing concept, in contrast, focuses on getting consumers what they seek, regardless of whether this entails coming up with entirely new products.

The 4 Ps—product, place (distribution), promotion, and price—represent the variables that are within the control of the firm (at least in the medium to long run). In contrast, the firm is faced with uncertainty from the environment.


The Marketing Environment

Elements of the environment. The marketing environment involves factors that, for the most part, are beyond the control of the company. Thus, the company must adapt to these factors. It is important to observe how the environment changes so that a firm can adapt its strategies appropriately. Consider these environmental forces:

Some articles of possible interest:

Coffee, Lipsticks, and the Economy
The 2008 Tax Rebate and Consumer Behavior
Gasoline Prices and ConsumerBehavior


Strategic Planning

Plans and planning. Plans are needed to clarify what kinds of strategic objectives an organization would like to achieve and how this is to be done. Such plans must consider the amount of resources available. One critical resource is capital. Microsoft keeps a great deal of cash on hand to be able to “jump” on opportunities that come about. Small startup software firms, on the other hand, may have limited cash on hand. This means that they may have to forego what would have been a good investment because they do not have the cash to invest and cannot find a way to raise the capital. Other resources that affect what a firm may be able to achieve include factors such as:

Plans are subject to the choices and policies that the organization has made. Some firms have goals of social responsibility, for example. Some firms are willing to take a greater risk, which may result in a very large payoff but also involve the risk of a large loss, than others.
Strategic marketing is best seen as an ongoing and never-ending process. Typically:

Levels of planning and strategies. Plans for a firm can be made at several different levels. At the corporate level, the management considers the objectives of the firm as a whole. For example, Microsoft may want seek to grow by providing high quality software, hardware, and services to consumers. To achieve this goal, the firm may be willing to invest aggressively.

Plans can also be made at the business unit level. For example, although Microsoft is best known for its operating systems and applications software, the firm also provides Internet access and makes video games. Different managers will have responsibilities for different areas, and goals may best be made by those closest to the business area being considered. It is also more practical to hold managers accountable for performance if the plan is being made at a more specific level. Boeing has both commercial aircraft and defense divisions. Each is run by different managers, although there is some overlap in technology between the two. Therefore, plans are needed both at the corporate and at the business levels.

Occasionally, plans will be made at the functional level, to allow managers to specialize and to increase managerial accountability. Marketing, for example, may be charged with increasing awareness of Microsoft game consoles to 55% of the U.S. population or to increase the number of units of Microsoft Office sold. Finance may be charged with raising a given amount of capital at a given cost. Manufacturing may be charged with decreasing production costs by 5%.

The firm needs to identify the business it is in. Here, a balance must be made so that the firm’s scope is not defined too narrowly or too broadly. A firm may define its goal very narrowly and then miss opportunities in the market place. For example, if Dell were to define itself only as a computer company, it might miss an opportunity to branch into PDAs or Internet service. Thus, they might instead define themselves as a provider of “information solutions.” A company should not define itself too broadly, however, since this may result in loss of focus. For example, a manufacturer of baking soda should probably not see itself as a manufacturer of all types of chemicals. Sometimes, companies can define themselves in terms of a customer need. For example, 3M sees itself as being in the business of making products whose surfaces are bonded together. This accounts for both Post-It notes and computer disks.

A firm’s mission should generally include a discussion of the customers served (e.g., Wal-Mart and Nordstrom’s serve different groups), the kind of technology involved, and the markets served.
Several issues are involved in selecting target customers. We will consider these in more detail within the context of segmentation, but for now, the firm needs to consider issues such as:

The Boston Consulting Group (BCG) matrix provides a firm an opportunity to assess how well its business units work together. Each business unit is evaluated in terms of two factors: market share and the growth prospects in the market. Generally, the larger a firm’s share, the stronger its position, and the greater the growth in a market, the better future possibilities. Four combinations emerge:

Firms are usually best of with a portfolio that has a balance of firms in each category. The cash cows tend to generate cash but require little future investment. On the other hand, stars generate some cash, but even more cash is needed to invest in the future—for research and development, marketing campaigns, and building new manufacturing facilities. Therefore, a firm may take excess cash from the cash cow and divert it to the star. For example, Brother could “harvest” its profits from typewriters and invest this in the unit making color laser printers, which will need the cash to grow. If a firm has cash cows that generate a lot of cash, this may be used to try to improve the market share of a question mark. A firm that has a number of promising stars in its portfolio may be in serious trouble if it does not have any cash cows to support it. If it is about to run out of cash—regardless of how profitable it is— is becomes vulnerable as a takeover target from a firm that has the cash to continue running it.

A SWOT (“Strengths, Opportunities, Weaknesses, and Threats”) analysis is used to help the firm identify effective strategies. Successful firms such as Microsoft have certain strengths. Microsoft, for example, has a great deal of technology, a huge staff of very talented engineers, a great deal of experience in designing software, a very large market share, a well respected brand name, and a great deal of cash. Microsoft also has some weaknesses, however: The game console and MSN units are currently running at a loss, and MSN has been unable to achieve desired levels of growth. Firms may face opportunities in the current market. Microsoft, for example, may have the opportunity to take advantage of its brand name to enter into the hardware market. Microsoft may also become a trusted source of consumer services. Microsoft currently faces several threats, including the weak economy. Because fewer new computers are bough during a recession, fewer operating systems and software packages.

Rather than merely listing strengths, weaknesses, opportunities, and threats, a SWOT analysis should suggest how the firm may use its strengths and opportunities to overcome weaknesses and threats. Decisions should also be made as to how resources should be allocated. For example, Microsoft could either decide to put more resources into MSN or to abandon this unit entirely. Microsoft has a great deal of cash ready to spend, so the option to put resources toward MSN is available. Microsoft will also need to see how threats can be addressed. The firm can earn political good will by engaging in charitable acts, which it has money available to fund. For example, Microsoft has donated software and computers to schools. It can forego temporary profits by reducing prices temporarily to increase demand, or can “hold out” by maintaining current prices while not selling as many units.

Criteria for effective marketing plans. Marketing plans should meet several criteria:


Social Responsibility in Marketing

Ethical responsibilities and constraints. Businesses and people face some constraints on what can ethically be done to make money or to pursue other goals. Fraud and deception are not only morally wrong but also inhibit the efficient functioning of the economy. There are also behaviors that, even if they are not strictly illegal in a given jurisdiction, cannot be undertaken with a good conscience. There are a number of areas where an individual must consider his or her conscience to decide if a venture is acceptable. Some “paycheck advance” loan operators charge very high interest rates on small loans made in anticipation of a consumer’s next paycheck. Depending on state laws, effective interest rates (interest rates plus other fees involved) may exceed 20% per month. In some cases, borrowers put up their automobiles as security, with many losing their only source of transportation through default. Although some consider this practice unconscionable, others assert that such loans may be the only way that a family can obtain cash to fill an immediate need. Because of costs of administration are high, these costs, when spread over a small amount, will amount to a large percentage. Further, because the customer groups in question tend to have poor credit ratings with high anticipated rates of default, rates must be high enough to cover this.

Sustainability. Sustainability is a notion that proposes that socially responsible firms will somehow financially outperform other less responsible firms in the long run. This might result from customer loyalty, better employee morale, or public policy favoring ethical conduct. Empirical results testing this hypothesis are mixed, neither suggesting that more responsible firms, on the average, have a clear financial advantage nor a large burden. Thus, a useful approach may be to determine (1) specific circumstances under which a firm may actually find the more responsible approach to be more profitable, (2) under which circumstances responsible behavior can be pursued without an overall significant downside, and (3) the ethical responsibilities that a firm faces when a more responsible approach may be more costly.

The individual, the firm, and society. Different individuals vary in their ethical convictions. Some are willing to work for the tobacco industry, for example, while others are not. Some are willing to mislead potential customers while others will normally not do this. There are, however, also broader societal and companywide values that may influence the individual business decision maker. Some religions, including Islam, disfavor the charging of interest. Although different groups differ somewhat in their interpretations of this issue, the Koran at the very least prohibits usury—charging excessive interest rates. There is some disagreement as to whether more modest, fair interest rates are acceptable. In cultures where the stricter interpretation applies, a firm may be unwilling to set up an interest-based financing plan for customers who cannot pay cash. The firm might, instead, charge a higher price, with no additional charge for interest. Some firms also have their own ethical stands, either implicitly or explicitly. For example, Google has the motto “Do no evil.” Other firms, on the other hand, may actively encourage lies, deception, and other reprehensible behavior. Some firms elect to sell in less developed countries products that have been banned as unsafe in their own countries.

Making it profitable for the tobacco industry to “harvest.” Many see the tobacco industry as the “enemy” and may not want to do anything that can benefit the industry. However, in principle, it may actually be possible to make it profitable for the tobacco industry to “harvest”—to spend less money on brand building and gradually reduce the quantities sold.  The tobacco industry is heavily concentrated, with three firms controlling most of the market. Some other industries are exempt from many antitrust law provisions. If the tobacco companies were allowed to collude and set prices, the equilibrium market price would probably go up, and the quantity of tobacco demanded would then go down. It is been found that among teenagers, smoking rates are especially likely to decrease when prices increase. The tobacco companies could also be given some immediate tax breaks in return for giving up their trademarks some thirty years in the future. This would reduce the incentive to advertise, again leading to decreased demand in the future. The tax benefits needed might have to be very high, thus making the idea infeasible unless the nation is willing to trade off better health for such large revenue losses.

“Win-win” marketing. In some cases, it may actually be profitable for companies to do good deeds. This may be the case, for example, when a firm receives a large amount of favorable publicity for its contributions, resulting in customer goodwill and an enhanced brand value. A pharmacy chain, for example, might pay for charitable good to develop information about treating diabetes. The chain could then make this information on its web site, paying for bandwidth and other hosting expenses that may be considerably less than the value of the positive publicity received.

“Sponsored Fundraising.” Non-profit groups often spend a large proportion of the money they take in on fundraising. This is problematic both because of the inefficiency of the process and the loss of potential proceeds that result and because potential donors who learn about or suspect high fundraising expenses may be less likely to donor. This is an especially critical issue now that information on fundraising overhead for different organizations is readily available on the Internet.

An alternative approach to fundraising that does not currently appear to be much in use is the idea of “sponsored” fundraising. The idea here is that some firm might volunteer to send out fundraising appeals on behalf of the organization. For example, Microsoft might volunteer to send out letters asking people to donate to the American Red Cross. This may be a very cost effective method of promotion for the firm since the sponsor would benefit from both the positive publicity for its involvement and from the greater attention that would likely be given a fundraising appeal for a group of special interest than would be given to an ordinary advertisement or direct mail piece advertising the sponsor in a traditional way.

One issue that comes up is the potential match between the sponsor and sponsee organization. This may or may not be a critical issue since respondents are selected for the solicitation based on their predicted interest in the organization. Microsoft—directly or indirectly through the Bill and Melinda Gates Foundation—has been credited with a large number of charitable ventures and has the Congressional Black Caucus as one of its greatest supporters. In many cases, firms might volunteer for this fundraising effort in large part because of the spear heading efforts of high level executives whose families are affected by autism.

Commercial Comedy. Another win-win deal potential between industry and non-profit groups involves the idea of commercial comedy. Many non-profit groups are interested in finding low cost, high quality entertainment for fundraising events. After all, money spent on buying entertainment reduces the net proceeds available for the organization’s program. Firms, on the other hand, have difficulty getting current and potential customers to give attention to advertising in traditional media. If firms were able to create some high quality entertainment involving their mascotss—e.g., the Energizer Bunny, the Pillsbury Doughboy, and the AFLAC Duck—the audience at a fundraising event would give attention for an extended period of time. Good will would also be generated, and it is likely that the act would receive considerable media coverage.


Segmentation, Targeting, and Positioning 

Segmentation, targeting, and positioning together comprise a three stage process.  We first (1) determine which kinds of customers exist, then (2) select which ones we are best off trying to serve and, finally, (3) implement our segmentation by optimizing our products/services for that segment and communicating that we have made the choice to distinguish ourselves that way.

Segmentation, targeting, and positioning

Segmentation involves finding out what kinds of consumers with different needs exist.  In the auto market, for example, some consumers demand speed and performance, while others are much more concerned about roominess and safety.  In general, it holds true that “You can’t be all things to all people,” and experience has demonstrated that firms that specialize in meeting the needs of one group of consumers over another tend to be more profitable.

Generically, there are three approaches to marketing.  In the undifferentiated strategy, all consumers are treated as the same, with firms not making any specific efforts to satisfy particular groups.  This may work when the product is a standard one where one competitor really can’t offer much that another one can’t.  Usually, this is the case only for commodities.  In the concentrated strategy, one firm chooses to focus on one of several segments that exist while leaving other segments to competitors.  For example, Southwest Airlines focuses on price sensitive consumers who will forego meals and assigned seating for low prices.  In contrast, most airlines follow the differentiated strategy:  They offer high priced tickets to those who are inflexible in that they cannot tell in advance when they need to fly and find it impractical to stay over a Saturday.  These travelers—usually business travelers—pay high fares but can only fill the planes up partially.  The same airlines then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over.

Note that segmentation calls for some tough choices.  There may be a large number of variables that can be used to differentiate consumers of a given product category; yet, in practice, it becomes impossibly cumbersome to work with more than a few at a time.  Thus, we need to determine which variables will be most useful in distinguishing different groups of consumers.  We might thus decide, for example, that the variables that are most relevant in separating different kinds of soft drink consumers are (1) preference for taste vs. low calories, (2) preference for Cola vs. non-cola taste, (3) price sensitivity—willingness to pay for brand names; and (4) heavy vs. light consumers.  We now put these variables together to arrive at various combinations.
Several different kinds of variables can be used for segmentation. 

In the next step, we decide to target one or more segments.  Our choice should generally depend on several factors.  First, how well are existing segments served by other manufacturers?  It will be more difficult to appeal to a segment that is already well served than to one whose needs are not currently being served well.  Secondly, how large is the segment, and how can we expect it to grow?  (Note that a downside to a large, rapidly growing segment is that it tends to attract competition).  Thirdly, do we have strengths as a company that will help us appeal particularly to one group of consumers?  Firms may already have an established reputation.  While McDonald’s has a great reputation for fast, consistent quality, family friendly food, it would be difficult to convince consumers that McDonald’s now offers gourmet food.  Thus, McD’s would probably be better off targeting families in search of consistent quality food in nice, clean restaurants.

Positioning involves implementing our targeting.  For example, Apple Computer has chosen to position itself as a maker of user-friendly computers.  Thus, Apple has done a lot through its advertising to promote itself, through its unintimidating icons, as a computer for “non-geeks.”  The Visual C software programming language, in contrast, is aimed a “techies.”

Segmentation, targeting, and positioning

Michael Treacy and Fred Wiersema suggested in their 1993 book The Discipline of Market Leaders that most successful firms fall into one of three categories:

Treacy and Wiersema suggest that in addition to excelling on one of the three value dimensions, firms must meet acceptable levels on the other two.  Wal-Mart, for example, does maintain some level of customer service.  Nordstrom’s and Intel both must meet some standards of cost effectiveness.  The emphasis, beyond meeting the minimum required level in the two other dimensions, is on the dimension of strength.
Repositioning involves an attempt to change consumer perceptions of a brand, usually because the existing position that the brand holds has become less attractive.  Sears, for example, attempted to reposition itself from a place that offered great sales but unattractive prices the rest of the time to a store that consistently offered “everyday low prices.”  Repositioning in practice is very difficult to accomplish.  A great deal of money is often needed for advertising and other promotional efforts, and in many cases, the repositioning fails.

To effectively attempt repositioning, it is important to understand how one’s brand and those of competitors are perceived.  One approach to identifying consumer product perceptions is multidimensional scaling.  Here, we identify how products are perceived on two or more “dimensions,” allowing us to plot brands against each other.  It may then be possible to attempt to “move” one’s brand in a more desirable direction by selectively promoting certain points.  There are two main approaches to multi-dimensional scaling.  In the a priori approach, market researchers identify dimensions of interest and then ask consumers about their perceptions on each dimension for each brand.  This is useful when (1) the market researcher knows which dimensions are of interest and (2) the customer’s perception on each dimension is relatively clear (as opposed to being “made up” on the spot to be able to give the researcher a desired answer).  In the similarity rating approach, respondents are not asked about their perceptions of brands on any specific dimensions.  Instead, subjects are asked to rate the extent of similarity of different pairs of products (e.g., How similar, on a scale of 1-7, is Snicker’s to Kitkat, and how similar is Toblerone to Three Musketeers?)  Using a computer algorithms, the computer then identifies positions of each brand on a map of a given number of dimensions.  The computer does not reveal what each dimension means—that must be left to human interpretation based on what the variations in each dimension appears to reveal.  This second method is more useful when no specific product dimensions have been identified as being of particular interest or when it is not clear what the variables of difference are for the product category.


Consumer Behavior

Note: The issues discussed below are covered in more detail at consumer behavior section of this site.

Consumer behavior involves the psychological processes that consumers go through in recognizing needs, finding ways to solve these needs, making purchase decisions (e.g., whether or not to purchase a product and, if so, which brand and where), interpret information, make plans, and implement these plans (e.g., by engaging in comparison shopping or actually purchasing a product).

Sources of influence on the consumer.  The consumer faces numerous sources of influence. 

Influences on Consumer Behavior

Often, we take cultural influences for granted, but they are significant.  An American will usually not bargain with a store owner.  This, however, is a common practice in much of the World.  Physical factors also influence our behavior.  We are more likely to buy a soft drink when we are thirsty, for example, and food manufacturers have found that it is more effective to advertise their products on the radio in the late afternoon when people are getting hungry.  A person’s self-image will also tend to influence what he or she will buy—an upwardly mobile manager may buy a flashy car to project an image of success.  Social factors also influence what the consumers buy—often, consumers seek to imitate others whom they admire, and may buy the same brands.   The social environment can include both the mainstream culture (e.g., Americans are more likely to have corn flakes or ham and eggs for breakfast than to have rice, which is preferred in many Asian countries) and a subculture (e.g., rap music often appeals to a segment within the population that seeks to distinguish itself from the mainstream population).   Thus, sneaker manufacturers are eager to have their products worn by admired athletes.  Finally, consumer behavior is influenced by learning—you try a hamburger and learn that it satisfies your hunger and tastes good, and the next time you are hungry, you may consider another hamburger.

Consumer Choice and Decision Making: Problem Recognition.  One model of consumer decision making involves several steps. The first one is problem recognition—you realize that something is not as it should be.  Perhaps, for example, your car is getting more difficult to start and is not accelerating well.    The second step is information search—what are some alternative ways of solving the problem?  You might buy a new car, buy a used car, take your car in for repair, ride the bus, ride a taxi, or ride a skateboard to work.  The third step involves evaluation of alternatives.  A skateboard is inexpensive, but may be ill-suited for long distances and for rainy days.   Finally, we have the purchase stage, and sometimes a post-purchase stage (e.g., you return a product to the store because you did not find it satisfactory).  In reality, people may go back and forth between the stages.  For example, a person may resume alternative identification during while evaluating already known alternatives.

Consumer involvement will tend to vary dramatically depending on the type of product.  In general, consumer involvement will be higher for products that are very expensive (e.g., a home, a car) or are highly significant in the consumer’s life in some other way (e.g., a word processing program or acne medication).

It is important to consider the consumer’s motivation for buying products.  To achieve this goal, we can use the Means-End chain, wherein we consider a logical progression of consequences of product use that eventually lead to desired end benefit.  Thus, for example, a consumer may see that a car has a large engine, leading to fast acceleration, leading to a feeling of performance, leading to a feeling of power, which ultimately improves the consumer’s self-esteem.  A handgun may aim bullets with precision, which enables the user to kill an intruder, which means that the intruder will not be able to harm the consumer’s family, which achieves the desired end-state of security.  In advertising, it is important to portray the desired end-states.  Focusing on the large motor will do less good than portraying a successful person driving the car.

Decision Making

Information search and decision making.  Consumers engage in both internal and external information search.  Internal search involves the consumer identifying alternatives from his or her memory.  For certain low involvement products, it is very important that marketing programs achieve “top of mind” awareness.  For example, few people will search the Yellow Pages for fast food restaurants; thus, the consumer must be able to retrieve one’s restaurant from memory before it will be considered.  For high involvement products, consumers are more likely to use an external search.  Before buying a car, for example, the consumer may ask friends’ opinions, read reviews in Consumer Reports, consult several web sites, and visit several dealerships.  Thus, firms that make products that are selected predominantly through external search must invest in having information available to the consumer in need—e.g., through brochures, web sites, or news coverage.

Internal vs. External Search

A compensatory decision involves the consumer “trading off” good and bad attributes of a product.  For example, a car may have a low price and good gas mileage but slow acceleration.  If the price is sufficiently inexpensive and gas efficient, the consumer may then select it over a car with better acceleration that costs more and uses more gas.  Occasionally, a decision will involve a non-compensatory strategy.  For example, a parent may reject all soft drinks that contain artificial sweeteners.   Here, other good features such as taste and low calories cannot overcome this one “non-negotiable” attribute.

The amount of effort a consumer puts into searching depends on a number of factors such as the market (how many competitors are there, and how great are differences between brands expected to be?), product characteristics (how important is this product?  How complex is the product?  How obvious are indications of quality?), consumer characteristics (how interested is a consumer, generally, in analyzing product characteristics and making the best possible deal?), and situational characteristics (as previously discussed).

Two interesting issues in decisions are:

A number of factors involve consumer choices.  In some cases, consumers will be more motivated.  For example, one may be more careful choosing a gift for an in-law than when buying the same thing for one self.  Some consumers are also more motivated to comparison shop for the best prices, while others are more convenience oriented.  Personality impacts decisions.  Some like variety more than others, and some are more receptive to stimulation and excitement in trying new stores.  Perception influences decisions.  Some people, for example, can taste the difference between generic and name brand foods while many cannot.  Selective perception occurs when a person is paying attention only to information of interest.  For example, when looking for a new car, the consumer may pay more attention to car ads than when this is not in the horizon.  Some consumers are put off by perceived risk.  Thus, many marketers offer a money back guarantee.  Consumers will tend to change their behavior through learning—e.g., they will avoid restaurants they have found to be crowded and will settle on brands that best meet their tastes.  Consumers differ in the values they hold (e.g., some people are more committed to recycling than others who will not want to go through the hassle).  We will consider the issue of lifestyle under segmentation.

The Family Life Cycle. Individuals and families tend to go through a "life cycle:" The simple life cycle goes from

  FLC

For purposes of this discussion, a "couple" may either be married or merely involve living together. The breakup of a non-marital relationship involving cohabitation is similarly considered equivalent to a divorce.

In real life, this situation is, of course, a bit more complicated. For example, many couples undergo divorce. Then we have one of the scenarios:

FLC

Single parenthood can result either from divorce or from the death of one parent. Divorce usually entails a significant change in the relative wealth of spouses. In some cases, the non-custodial parent (usually the father) will not pay the required child support, and even if he or she does, that still may not leave the custodial parent and children as well off as they were during the marriage. On the other hand, in some cases, some non-custodial parents will be called on to pay a large part of their income in child support. This is particularly a problem when the non-custodial parent remarries and has additional children in the second (or subsequent marriages). In any event, divorce often results in a large demand for:

Divorced parents frequently remarry, or become involved in other non-marital relationships; thus, we may see

       FLC

Another variation involves

       Single

Here, the single parent who assumes responsibility for one or more children may not form a relationship with the other parent of the child.

Integrating all the possibilities discussed, we get the following depiction of the Family Life Cycle:

FLC

Generally, there are two main themes in the Family Life Cycle, subject to significant exceptions:

Note that although a single person may have a lower income than a married couple, the single may be able to buy more discretionary items.

Note that although a single person may have a lower income than a married couple, the single may be able to buy more discretionary items.
Family Decision Making: Individual members of families often serve different roles in decisions that ultimately draw on shared family resources. Some individuals are information gatherers/holders, who seek out information about products of relevance. These individuals often have a great deal of power because they may selectively pass on information that favors their chosen alternatives. Influencers do not ultimately have the power decide between alternatives, but they may make their wishes known by asking for specific products or causing embarrassing situations if their demands are not met. The decision maker(s) have the power to determine issues such as:

Note, however, that the role of the decision maker is separate from that of the purchaser. From the point of view of the marketer, this introduces some problems since the purchaser can be targeted by point-of-purchase (POP) marketing efforts that cannot be aimed at the decision maker. Also note that the distinction between the purchaser and decision maker may be somewhat blurred:

It should be noted that family decisions are often subject to a great deal of conflict. The reality is that few families are wealthy enough to avoid a strong tension between demands on the family’s resources. Conflicting pressures are especially likely in families with children and/or when only one spouse works outside the home. Note that many decisions inherently come down to values, and that there is frequently no "objective" way to arbitrate differences. One spouse may believe that it is important to save for the children’s future; the other may value spending now (on private schools and computer equipment) to help prepare the children for the future. Who is right? There is no clear answer here. The situation becomes even more complex when more parties—such as children or other relatives—are involved.
Some family members may resort to various strategies to get their way. One is bargaining—one member will give up something in return for someone else. For example, the wife says that her husband can take an expensive course in gourmet cooking if she can buy a new pickup truck. Alternatively, a child may promise to walk it every day if he or she can have a hippopotamus. Another strategy is reasoning—trying to get the other person(s) to accept one’s view through logical argumentation. Note that even when this is done with a sincere intent, its potential is limited by legitimate differences in values illustrated above. Also note that individuals may simply try to "wear down" the other party by endless talking in the guise of reasoning (this is a case of negative reinforcement as we will see subsequently). Various manipulative strategies may also be used. One is impression management, where one tries to make one’s side look good (e.g., argue that a new TV will help the children see educational TV when it is really mostly wanted to see sports programming, or argue that all "decent families make a contribution to the church"). Authority involves asserting one’s "right" to make a decision (as the "man of the house," the mother of the children, or the one who makes the most money). Emotion involves making an emotional display to get one’s way (e.g., a man cries if his wife will not let him buy a new rap album).


The Means-End Chain. Consumers often buy products not because of their attributes per se but rather because of the ultimate benefits that these attributes provide, in turn leading to the satisfaction of ultimate values. For example, a consumer may not be particularly interested in the chemistry of plastic roses, but might reason as follows:

Means-End Chain


The important thing in a means-end chain is to start with an attribute, a concrete characteristic of the product, and then logically progress to a series of consequences (which tend to become progressively more abstract) that end with a value being satisfied. Thus, each chain must start with an attribute and end with a value. An important implication of means-end chains is that it is usually most effective in advertising to focus on higher level items. For example, in the flower example above, an individual giving the flowers to the significant other might better be portrayed than the flowers alone.

Attitudes.  Consumer attitudes are a composite of a consumer’s (1) beliefs about, (2) feelings about, (3) and behavioral intentions toward some “object”—within the context of marketing, usually a brand, product category, or retail store.  These components are viewed together since they are highly interdependent and together represent forces that influence how the consumer will react to the object.

Beliefs.  The first component is beliefs.  A consumer may hold both positive beliefs toward an object (e.g., coffee tastes good) as well as negative beliefs (e.g., coffee is easily spilled and stains papers).  In addition, some beliefs may be neutral (coffee is black), and some may be differ in valance depending on the person or the situation (e.g., coffee is hot and stimulates--good on a cold morning, but not good on a hot summer evening when one wants to sleep).  Note also that the beliefs that consumers hold need not be accurate (e.g., that pork contains little fat), and some beliefs may, upon closer examination, be contradictory.

Affect.  Consumers also hold certain feelings toward brands or other objects.  Sometimes these feelings are based on the beliefs (e.g., a person feels nauseated when thinking about a hamburger because of the tremendous amount of fat it contains), but there may also be feelings which are relatively independent of beliefs.  For example, an extreme environmentalist may believe that cutting down trees is morally wrong, but may have positive affect toward Christmas trees because he or she unconsciously associates these trees with the experience that he or she had at Christmas as a child.

Behavioral intention.  The behavioral intention is what the consumer plans to do with respect to the object (e.g., buy or not buy the brand).  As with affect, this is sometimes a logical consequence of beliefs (or affect), but may sometimes reflect other circumstances--e.g., although a consumer does not really like a restaurant, he or she will go there because it is a hangout for his or her friends.

Changing attitudes is generally very difficult, particularly when consumers suspect that the marketer has a self-serving “agenda” in bringing about this change (e.g., to get the consumer to buy more or to switch brands).  Here are some possible methods:

One-sided vs. two-sided appeals.  Attitude research has shown that consumers often tend to react more favorably to advertisements which either (1) admit something negative about the sponsoring brand (e.g., the Volvo is a clumsy car, but very safe) or (2) admits something positive about a competing brand (e.g., a competing supermarket has slightly lower prices, but offers less service and selection).  Two-sided appeals must, contain overriding arguments why the sponsoring brand is ultimately superior—that is, in the above examples, the “but” part must be emphasized. 

Perception. Our perception is an approximation of reality.  Our brain attempts to make sense out of the stimuli to which we are exposed.  This works well, for example, when we “see” a friend three hundred feet away at his or her correct height; however, our perception is sometimes “off”—for example, certain shapes of ice cream containers look like they contain more than rectangular ones with the same volume.

Subliminal stimuli.  Back in the 1960s, it was reported that on selected evenings, movie goers in a theater had been exposed to isolated frames with the words “Drink Coca Cola” and “Eat Popcorn” imbedded into the movie.  These frames went by so fast that people did not consciously notice them, but it was reported that on nights with frames present, Coke and popcorn sales were significantly higher than on days they were left off.  This led Congress to ban the use of subliminal advertising.  First of all, there is a question as to whether this experiment ever took place or whether this information was simply made up.  Secondly, no one has been able to replicate these findings.  There is research to show that people will start to giggle with embarrassment when they are briefly exposed to “dirty” words in an experimental machine.  Here, again, the exposure is so brief that the subjects are not aware of the actual words they saw, but it is evident that something has been recognized by the embarrassment displayed.

Organizational buyers.  A large portion of the market for goods and services is attributable to organizational, as opposed to individual, buyers.  In general, organizational buyers, who make buying decisions for their companies for a living, tend to be somewhat more sophisticated than ordinary consumers.  However, these organizational buyers are also often more risk averse.  There is a risk in going with a new, possibly better (lower price or higher quality) supplier whose product is unproven and may turn out to be problematic.  Often the fear of running this risk is greater than the potential rewards for getting a better deal.  In the old days, it used to be said that “You can’t get fired for buying IBM.” This attitude is beginning to soften a bit today as firms face increasing pressures to cut costs.         

Organizational buyers come in several forms.  Resellers involve either wholesalers or retailers that buy from one organization and resell to some other entity.  For example, large grocery chains sometimes buy products directly from the manufacturer and resell them to end-consumers.  Wholesalers may sell to retailers who in turn sell to consumers.  Producers also buy products from sub-manufacturers to create a finished product.  For example, rather than manufacturing the parts themselves, computer manufacturers often buy hard drives, motherboards, cases, monitors, keyboards, and other components from manufacturers and put them together to create a finished product.  Governments buy a great deal of things.  For example, the military needs an incredible amount of supplies to feed and equip troops.  Finally, large institutions buy products in huge quantities.  For example, UCR probably buys thousands of reams of paper every month.

Organizational buying usually involves more people than individual buying.  Often, many people are involved in making decisions as to (a) whether to buy, (b) what to buy, (c) at what quantity, and (d) from whom.  An engineer may make a specification as to what is needed, which may be approved by a  manager, with the final purchase being made by a purchase specialist who spends all his or her time finding the best deal on the goods that the organization needs.  Often, such long purchase processes can cause long delays.  In the government, rules are often especially stringent—e.g., vendors of fruit cake have to meet fourteen pages of specifications put out by the General Services Administration.  In many cases, government buyers are also heavily bound to go with the lowest price.  Even if it is obvious that a higher priced vendor will offer a superior product, it may be difficult to accept that bid.


Consumer Research Methods

Market research is often needed to ensure that we produce what customers really want and not what we think they want.

Primary vs. secondary research methods.  There are two main approaches to marketing.  Secondary  research involves using information that others have already put together.  For example, if you are thinking about starting a business making clothes for tall people, you don’t need to question people about how tall they are to find out how many tall people exist—that information has already been published by the U.S. Government.  Primary research, in contrast, is research that you design and conduct yourself.  For example, you may need to find out whether consumers would prefer that your soft drinks be sweater or tarter.

Research will often help us reduce risks associated with a new product, but it cannot take the risk away entirely.  It is also important to ascertain whether the research has been complete.  For example, Coca Cola did a great deal of research prior to releasing the New Coke, and consumers seemed to prefer the taste.  However, consumers were not prepared to have this drink replace traditional Coke.

Secondary Methods.  For more information about secondary market research tools and issues, please see http://buad307.com/PDF/Secondary.pdf .

Primary Methods. Several tools are available to the market researcher—e.g., mail questionnaires, phone surveys, observation, and focus groups.  Please see http://buad307.com/PDF/ResearchMethods.pdf for advantages and disadvantages of each.

Surveys are useful for getting a great deal of specific information.  Surveys can contain open-ended questions (e.g., “In which city and state were you born? ____________”) or closed-ended, where the respondent is asked to select answers from a brief list (e.g., “__Male ___ Female.”  Open ended questions have the advantage that the respondent is not limited to the options listed, and that the respondent is not being influenced by seeing a list of responses.  However, open-ended questions are often skipped by respondents, and coding them can be quite a challenge.  In general, for surveys to yield meaningful responses, sample sizes of over 100 are usually required because precision is essential.  For example, if a market share of twenty percent would result in a loss while thirty percent would be profitable, a confidence interval of 20-35% is too wide to be useful.

Surveys come in several different forms.  Mail surveys are relatively inexpensive, but response rates are typically quite low—typically from 5-20%.  Phone-surveys get somewhat higher response rates, but not many questions can be asked because many answer options have to be repeated and few people are willing to stay on the phone for more than five minutes.  Mall intercepts are a convenient way to reach consumers, but respondents may be reluctant to discuss anything sensitive face-to-face with an interviewer.

Surveys, as any kind of research, are vulnerable to bias.  The wording of a question can influence the outcome a great deal.  For example, more people answered no to the question “Should speeches against democracy be allowed?” than answered yes to “Should speeches against democracy be forbidden?”  For face-to-face interviews, interviewer bias is a danger, too.  Interviewer bias occurs when the interviewer influences the way the respondent answers.  For example, unconsciously an interviewer that works for the firm manufacturing the product in question may smile a little when something good is being said about the product and frown a little when something negative is being said.  The respondent may catch on and say something more positive than his or her real opinion.  Finally, a response bias may occur—if only part of the sample responds to a survey, the respondents’ answers may not be representative of the population.

Focus groups are useful when the marketer wants to launch a new product or modify an existing one.  A focus group usually involves having some 8-12 people come together in a room to discuss their consumption preferences and experiences.  The group is usually led by a moderator, who will start out talking broadly about topics related broadly to the product without mentioning the product itself.  For example, a focus group aimed at sugar-free cookies might first address consumers’ snacking preferences, only gradually moving toward the specific product of sugar-free cookies.  By not mentioning the product up front, we avoid biasing the participants into thinking only in terms of the specific product brought out.   Thus, instead of having consumers think primarily in terms of what might be good or bad about the product, we can ask them to discuss more broadly the ultimate benefits they really seek.  For example, instead of having consumers merely discuss what they think about some sugar-free cookies that we are considering releasing to the market, we can have consumers speak about their motivations for using snacks and what general kinds of benefits they seek.  Such a discussion might reveal a concern about healthfulness and a desire for wholesome foods.  Probing on the meaning of wholesomeness, consumers might indicate a desire to avoid artificial ingredients.  This would be an important concern in the marketing of sugar-free cookies, but might not have come up if consumers were asked to comment directly on the product where the use of artificial ingredients is, by virtue of the nature of the product, necessary.

Focus groups are well suited for some purposes, but poorly suited for others.  In general, focus groups are very good for getting breadth—i.e., finding out what kinds of issues are important for consumers in a given product category.  Here, it is helpful that focus groups are completely “open-ended:” The consumer mentions his or her preferences and opinions, and the focus group moderator can ask the consumer to elaborate.  In a questionnaire, if one did not think to ask about something, chances are that few consumers would take the time to write out an elaborate answer.  Focus groups also have some drawbacks, for example:

Personal interviews involve in-depth questioning of an individual about his or her interest in or experiences with a product.  The benefit here is that we can get really into depth (when the respondent says something interesting, we can ask him or her to elaborate), but this method of research is costly and can be extremely vulnerable to interviewer bias.

To get a person to elaborate, it may help to try a common tool of psychologists and psychiatrists—simply repeating what the person said.  He or she will often become uncomfortable with the silence that follows and will then tend to elaborate.  This approach has the benefit that it minimizes the interference with the respondent’s own ideas and thoughts.  He or she is not influenced by a new question but will, instead, go more in depth on what he or she was saying.

Personal interviews are highly susceptible to inadvertent “signaling” to the respondent.  Although an interviewer is looking to get at the truth, he or she may have a significant interest in a positive consumer response.  Unconsciously, then, he or she may inadvertently smile a little when something positive is said and frown a little when something negative is said.  Consciously, this will often not be noticeable, and the respondent often will not consciously be aware that he or she is being “reinforced” and “punished” for saying positive or negative things, but at an unconscious level, the cumulative effect of several facial expressions are likely to be felt.  Although this type of conditioning will not get a completely negative respondent to say all positive things, it may “swing” the balance a bit so that respondents are more likely to say positive thoughts and withhold, or limit the duration of, negative thoughts.

Projective techniques are used when a consumer may feel embarrassed to admit to certain opinions, feelings, or preferences.  For example, many older executives may not be comfortable admitting to being intimidated by computers.   It has been found that in such cases, people will tend to respond more openly about “someone else.”  Thus, we may ask them to explain reasons why a friend has not yet bought a computer, or to tell a story about a person in a picture who is or is not using a product.  The main problem with this method is that it is difficult to analyze responses.

Projective techniques are inherently inefficient to use.  The elaborate context that has to be put into place takes time and energy away from the main question.  There may also  be real differences between the respondent and the third party.  Saying or thinking about something that “hits too close to home” may also influence the respondent, who may or may not be able to see through the ruse.

Observation of consumers is often a powerful tool.  Looking at how consumers select products may yield insights into how they make decisions and what they look for.  For example, some American manufacturers were concerned about low sales of their products in Japan.  Observing Japanese consumers, it was found that many of these Japanese consumers scrutinized packages looking for a name of a major manufacturer—the product specific-brands that are common in the U.S. (e.g., Tide) were not impressive to the Japanese, who wanted a name of a major firm like Mitsubishi or Proctor & Gamble.  Observation may help us determine how much time consumers spend comparing prices, or whether nutritional labels are being consulted.

A question arises as to whether this type of “spying” inappropriately invades the privacy of consumers.   Although there may be cause for some concern in that the particular individuals have not consented to be part of this research, it should be noted that there is no particular interest in what the individual customer being watched does.  The question is what consumers—either as an entire group or as segments—do.  Consumers benefit, for example, from stores that are designed effectively to promote efficient shopping.  If it is found that women are more uncomfortable than men about others standing too close, the areas of the store heavily trafficked by women can be designed accordingly.  What is being reported here, then, are averages and tendencies in response.  The intent is not to find “juicy” observations specific to one customer.

The video clip with Paco Underhill that we saw in class demonstrated the application of observation research to the retail setting.  By understanding the phenomena such as the tendency toward a right turn, the location of merchandise can be observed.  It is also possible to identify problem areas where customers may be overly vulnerable to the “but brush,” or overly close encounter with others.  This method can be used to identify problems that the customer experiences, such as difficulty finding a product, a mirror, a changing room, or a store employee for help.

Online research methods.  The Internet now reaches the great majority of households in the U.S., and thus, online research provides new opportunity and has increased in use.

One potential benefit of online surveys is the use of “conditional branching.”  In conventional paper and pencil surveys, one question might ask if the respondent has shopped for a new car during the last eight months.  If the respondent answers “no,” he or she will be asked to skip ahead several questions—e.g., going straight to question 17 instead of proceeding to number 9.  If the respondent answered “yes,” he or she would be instructed to go to the next question which, along with the next several ones, would address issues related to this shopping experience.  Conditional branching allows the computer to skip directly to the appropriate question.  If a respondent is asked which brands he or she considered, it is also possible to customize brand comparison questions to those listed.  Suppose, for example, that the respondent considered Ford, Toyota, and Hyundai, it would be possible to ask the subject questions about his or her view of the relative quality of each respective pair—in this case, Ford vs. Toyota, Ford vs. Hyundai, and Toyota vs. Hyundai.

There are certain drawbacks to online surveys. Some consumers may be more comfortable with online activities than others—and not all households will have access.  Today, however, this type of response bias is probably not significantly greater than that associated with other types of research methods.  A more serious problem is that it has consistently been found in online research that it is very difficult—if not impossible—to get respondents to carefully read instructions and other information online—there is a tendency to move quickly.  This makes it difficult to perform research that depends on the respondent’s reading of a situation or product description.

Online search data and page visit logs provides valuable ground for analysis.  It is possible to see how frequently various terms are used by those who use a firm’s web site search feature or to see the route taken by most consumers to get to the page with the information they ultimately want.  If consumers use a certain term frequently that is not used by the firm in its product descriptions, the need to include this term in online content can be seen in search logs.  If consumers take a long, “torturous” route to information frequently accessed, it may be appropriate to redesign the menu structure and/or insert hyperlinks in “intermediate” pages that are found in many users’ routes.

Scanner data.  Many consumers are members of supermarket “clubs.”  In return for signing p for a card and presenting this when making purchases, consumers are often eligible for considerable discounts on selected products.

Researchers use a more elaborate version of this type of program in some communities.  Here, a number of consumers receive small payments and/or other incentives to sign up to be part of a research panel.  They then receive a card that they are asked to present any time they go shopping.  Nearly all retailers in the area usually cooperate.  It is now possible to track what the consumer bought in all stores and to have a historical record.

The consumer’s shopping record is usually combined with demographic information (e.g., income, educational level of adults in the household, occupations of adults, ages of children, and whether the family owns and rents) and the family’s television watching habits.  (Electronic equipment run by firms such as A. C. Nielsen will actually recognize the face of each family member when he or she sits down to watch).

Consumer Behavior

It is now possible to assess the relative impact of a number of factors on the consumer’s choice—e.g.,

A “split cable” technology allows the researchers to randomly select half the panel members in a given community to receive one advertising treatment and the other half another.  The selection is truly random since each household, as opposed to neighborhood, is selected to get one treatment or the other.  Thus, observed differences should, allowing for sampling error, the be result of advertising exposure since there are no other systematic differences between groups.

Interestingly, it has been found that consumers tend to be more influenced by commercials that they “zap” through while channel surfing even if they only see part of the commercial.  This most likely results from the reality that one must pay greater attention while channel surfing than when watching a commercial in order to determine which program is worth watching.

Scanner data is, at the present time, only available for certain grocery item product categories—e.g., food items, beverages, cleaning items, laundry detergent, paper towels, and toilet paper.  It is not available for most non-grocery product items.  Scanner data analysis is most useful for frequently purchased items (e.g., drinks, food items, snacks, and toilet paper) since a series of purchases in the same product category yield more information with greater precision than would a record of one purchase at one point in time.  Even if scanner data were available for electronic products such as printers, computers, and MP3 players, for example, these products would be purchased quite infrequently.  A single purchase, then, would not be as effective in effectively distinguishing the effects of different factors—e.g., advertising, shelf space, pricing of the product and competitors, and availability of a coupon—since we have at most one purchase instance during a long period of time during which several of these factors would apply at the same time.  In the case of items that are purchased frequently, the consumer has the opportunity to buy a product, buy a competing product, or buy nothing at all depending on the status of the brand of interest and competing brands.  In the case of the purchase of an MP3 player, in contrast, there may be promotions associated with several brands going on at the same time, and each may advertise.  It may also be that the purchase was motivated by the breakdown of an existing product or dissatisfaction or a desire to add more capabilities.

Physiological measures are occasionally used to examine consumer response.  For example, advertisers may want to measure a consumer’s level of arousal during various parts of an advertisement.  This can be used to assess possible discomfort on the negative side and level of attention on the positive side.

By attaching a tiny camera to plain eye glasses worn by the subject while watching an advertisement, it is possible to determine where on screen or other ad display the subject focuses at any one time.  If the focus remains fixed throughout an ad sequence where the interesting and active part area changes, we can track whether the respondent is following the sequence intended.  If he or she is not, he or she is likely either not to be paying as much attention as desired or to be confused by an overly complex sequence.  In situations where the subject’s eyes do move, we can assess whether this movement is going in the intended direction.

Mind-reading would clearly not be ethical and is, at the present time, not possible in any event.  However, it is possible to measure brain waves by attaching electrodes.  These readings will not reveal what the subject actually thinks, but it is possible to distinguish between beta waves—indicating active thought and analysis—and alpha waves, indicating lower levels of attention.

An important feature of physiological measures is that we can often track performance over time.  A subject may, for example, be demonstrating good characteristics—such as appropriate level of arousal and eye movement—during some of the ad sequence and not during other parts.  This, then, gives some guidance as to which parts of the ad are effective and which ones need to be reworked.

In a variation of direct physiological measures, a subject may be asked, at various points during an advertisement, to indicate his or her level of interest, liking, comfort, and approval by moving a lever or some instrument (much like one would adjust the volume on a radio or MP3 player).  Republican strategist used this technique during the impeachment and trial of Bill Clinton in the late 1990s.  By watching approval during various phases of a speech by the former President, it was found that viewers tended to respond negatively when he referred to “speaking truthfully” but favorably when the President referred to the issues in controversy as part of his “private life.”  The Republican researchers were able to separate average results from Democrats, Independents, and Republicans, effectively looking at different segments to make sure that differences between each did not cancel out effects of the different segments.  (For example, if at one point Democrats reacted positively and Republicans responded negatively with the same intensity, the average result of apparent indifference would have been very misleading).

Research sequence.  In general, if more than one type of research is to be used, the more flexible and less precise method—such as focus groups and/or individual interviews—should generally be used before the less flexible but more precise methods (e.g., surveys and scanner data) are used.  Focus groups and interviews are flexible and allow the researcher to follow up on interesting issues raised by participants who can be probed.  However, because the sample sizes are small and because participants in a focus group are influenced by each other, few data points are collected.  If we run five focus groups with eight people each, for example, we would have a total of forty responses.  Even if we assume that these are independent, a sample size of forty would give very imprecise results.  We might conclude, for example, that somewhere between 5% and 40% of the target market would be interested in the product we have to offer.  This is usually no more precise than what we already reasonably new.  Questionnaires, in contrast, are highly inflexible.  It is not possible to ask follow-up questions.  Therefore, we can use our insights from focus groups and interviews to develop questionnaires that contain specific questions that can be asked to a larger number of people.  There will still be some sampling error, but with a sample size of 1,000+ responses, we may be able to narrow the 95% confidence interval for the percentage of the target market that is seriously interested in our product to, say, 17-21%, a range that is much more meaningful.

Cautions.  Some cautions should be heeded in marketing research.  First, in general, research should only be commissioned when it is worth the cost.  Thus, research should normally be useful in making specific decisions (what size should the product be?  Should the product be launched?  Should we charge $1.75 or $2.25?)

Secondly, marketing research can be, and often is, abused.  Managers frequently have their own “agendas” (e.g., they either would like a product to be launched or would prefer that it not be launched so that the firm will have more resources left over to tackle their favorite products).  Often, a way to get your way is to demonstrate through “objective” research that your opinions make economic sense. One example of misleading research, which was reported nationwide in the media, involved the case of “The Pentagon Declares War on Rush Limbaugh.”  The Pentagon, within a year of the election of Democrat Bill Clinton, reported that only 4.2% of soldiers listening to the Armed Forces Network wanted to hear Rush Limbaugh.  However, although this finding was reported without question in the media, it was later found that the conclusion was based on the question “What single thing can we do to improve programming?”  If you did not write in something like “Carry Rush Limbaugh,” you were counted as not wanting to hear him.


International Marketing

Note: The issues covered below are discussed in more detail in the International Marketing section of this site.

Scope. A number of issues are involved in marketing internationally and cross-culturally:

International

Protectionism.  Although trade generally benefits a country as a whole, powerful interests within countries frequently put obstacles—i.e., they seek to inhibit free trade.   There are several ways this can be done:

Cultural lessons.  We considered several cultural lessons in class; the important thing here is the big picture.  For example, within the Muslim tradition, the dog is considered a “dirty” animal, so portraying it as “man’s best friend” in an advertisement is counter-productive.  Packaging, seen as a reflection of the quality of the “real” product, is considerably more important in Asia than in the U.S., where there is a tendency to focus on the contents which “really count.”  Many cultures observe significantly greater levels of formality than that typical in the U.S., and Japanese negotiator tend to observe long silent pauses as a speaker’s point is considered.

Product Need Satisfaction.  We often take for granted the “obvious” need that products seem to fill in our own culture; however, functions served may be very different in others—for example, while cars have a large transportation role in the U.S., they are impractical to drive in Japan, and thus cars there serve more of a role of being a status symbol or providing for individual indulgence.  In the U.S., fast food and instant drinks such as Tang are intended for convenience; elsewhere, they may represent more of a treat.  Thus, it is important to examine through marketing research consumers’ true motives, desires, and expectations in buying a product.

Approaches to Product Introduction.  Firms face a choice of alternatives in marketing their products across markets.  An extreme strategy involves customization, whereby the firm introduces a unique product in each country, usually with the belief tastes differ so much between countries that it is necessary more or less to start from “scratch” in creating a product for each market.  On the other extreme, standardization involves making one global product in the belief the same product can be sold across markets without significant modification—e.g., Intel microprocessors are the same regardless of the country in which they are sold.  Finally, in most cases firms will resort to some kind of adaptation, whereby a common product is modified to some extent when moved between some markets—e.g., in the United States, where fuel is relatively less expensive, many cars have larger engines than their comparable models in Europe and Asia; however, much of the design is similar or identical, so some economies are achieved.  Similarly, while Kentucky Fried Chicken serves much the same chicken with the eleven herbs and spices in Japan, a lesser amount of sugar is used in the potato salad, and fries are substituted for mashed potatoes.

There are certain benefits to standardization.  Firms that produce a global product can obtain economies of scale in manufacturing, and higher quantities produced also lead to a faster advancement along the experience curve.  Further, it is more feasible to establish a global brand as less confusion will occur when consumers travel across countries and see the same product.  On the down side, there may be significant differences in desires between cultures and physical environments—e.g., software sold in the U.S. and Europe will often utter a “beep” to alert the user when a mistake has been made; however, in Asia, where office workers are often seated closely together, this could cause embarrassment.

Adaptations come in several forms.  Mandatory adaptations involve changes that have to be made before the product can be used—e.g., appliances made for the U.S. and Europe must run on different voltages, and a major problem was experienced in the European Union when hoses for restaurant frying machines could not simultaneously meet the legal requirements of different countries.  “Discretionary” changes are changes that do not have to be made before a product can be introduced (e.g., there is nothing to prevent an American firm from introducing an overly sweet soft drink into the Japanese market), although products may face poor sales if such changes are not made.  Discretionary changes may also involve cultural adaptations—e.g., in Sesame Street, the Big Bird became the Big Camel in Saudi Arabia.

Another distinction involves physical product vs. communication adaptations.  In order for gasoline to be effective in high altitude regions, its octane must be higher, but it can be promoted much the same way.  On the other hand, while the same bicycle might be sold in China and the U.S., it might be positioned as a serious means of transportation in the former and as a recreational tool in the latter.  In some cases, products may not need to be adapted in either way (e.g., industrial equipment), while in other cases, it might have to be adapted in both (e.g., greeting cards, where the both occasions, language, and motivations for sending differ).   Finally, a market may exist abroad for a product which has no analogue at home—e.g., hand-powered washing machines.

Country of origin effects.  Traditionally, a product’s country of origin has had a considerable impact on how the product is perceived by consumers.  Some countries were thought to be good at making certain things (e.g., the French being famous for wine and cheese with the Germans and Japanese being known for manufacturing excellence).  One country could have a good reputation for one type of product but not for another.  For example, the British might be perceived as a high quality maker of sports automobiles but a poor quality maker of food.  A beer brewer in France and a wine maker in Germany—both being near the border to the other country—deliberately obscured the origin of the products to avoid being judged negatively.  Some firms may engage in the dubiously ethical practice of giving a product an appearance of being associated with—if not being outright manufactured in—a country with a favorable origin impact on the product.  For example, a manufacturer of perfume might print the instructions on the container in French even if there is no intention of exporting the product to—let alone making the product in—France.

Today, the world of manufacturing is more complicated.  Consumers are increasingly aware that products are often not made in the country associated with the brand.  Many Sony products, for example, are produced in countries other than Japan.  Many “Japanese” cars made for the U.S. market are now manufactured in North America.  It is now also recognized that high quality products can be designed and made in countries such as South Korea and even China.  Few people know in which country a particular model of the Apple iPod® has been made.  The country-of-origin effect today, then, is considerably less than it has been in the past.

Measuring country wealth.  There are two ways to measure the wealth of a country.  The nominal per capita gross national income (GNI) refers to the value of goods and services produced per person in a country if this value in local currency were to be exchanged into dollars.  Suppose, for example, that the per capita GDP of Japan is 3,500,000 yen and the dollar exchanges for 100 yen, so that the per capita GDP is (3,500,000/100)=$35,000.  However, that $35,000 will not buy as much in Japan—food and housing are much more expensive there.  Therefore, we introduce the idea of purchase parity adjusted  per capita GNI, which reflects what this money can buy in the country.  This is typically based on the relative costs of a weighted “basket” of goods in a country.  The actual formula is very lengthy and complicated, but as a simple illustration, one might example a weighting based on 35% of the cost of housing, 40% the cost of food, 10% the cost of clothing, and 15% cost of other items.  If it turns out that this measure of cost of living is 30% higher in Japan, the purchase parity adjusted GPD in Japan would then be ($35,000/(130%) = $26,923.

In general, the nominal per capita GNI is more useful for determining local consumers’ ability to buy imported goods, the cost of which are determined in large measure by the costs in the home market, while the purchase parity adjusted measure is more useful when products are produced, at local costs, in the country of purchase.  For example, the ability of Argentineans to purchase micro computer chips, which are produced mostly in the U.S. and Japan, is better predicted by nominal income, while the ability to purchase toothpaste made by a U.S. firm in a factory in Argentina is better predicted by purchase parity adjusted income.

It should be noted that, in some countries, income is quite unevenly distributed so that these average measures may not be very meaningful.  In Brazil, for example, there is a very large “underclass” making significantly less than the national average, and thus, the national figure is not a good indicator of the purchase power of the mass market.  Similarly, great regional differences exist within some countries—income is much higher in northern Germany than it is in the former East Germany, and income in southern Italy is much lower than in northern Italy.  The relevant figures, then, should generally be based on the segments of interest within the respective country.  For example, if it is estimated that only homes in the upper 30% of income in a given country would be able to afford the product in question, this is the group that should be used for comparison.

U.S. laws of particular interest to firms doing business abroad.


The Marketing Mix: Product

Product Decisions

Products come in several forms. Consumer products can be categorized as convenience goods, for which consumers are willing to invest very limited shopping efforts. Thus, it is essential to have these products readily available and have the brand name well known. Shopping goods, in contrast, are goods in which the consumer is willing to invest a great deal of time and effort. For example, consumers will spend a great deal of time looking for a new car or a medical procedure. Specialty goods are those that are of interest only to a narrow segment of the population—e.g., drilling machines. Industrial goods can also be broken down into subgroups, depending on their uses. It should also be noted that, within the context of marketing decisions, the term product refers to more than tangible goods—a service can be a product, too.

Product Decisions

A firm’s product line or lines refers to the assortment of similar things that the firm holds. Brother, for example, has both a line of laser printers and one of typewriters. In contrast, the firm’s product mix describes the combination of different product lines that the firm holds. Boeing, for example, has both a commercial aircraft and a defense line of products that each take advantage of some of the same core competencies and technologies of the firm. Some firms have one very focused or narrow product line (e.g., KFC does only chicken right) while others maintain numerous lines that hopefully all have some common theme. This represents a wide product mix 3M, for example, makes a large assortment of goods that are thought to be related in the sense that they use the firm’s ability to bond surfaces together. Depth refers to the variety that is offered within each product line. Maybelline offers a great deal of depth in lipsticks with subtle differences in shades while Morton Salt offers few varieties of its product.

Products may be differentiated in several ways. Some may be represented as being of superior quality (e.g., Maytag), or they may differ in more arbitrary ways in terms of styles—some people like one style better than another, while there is no real consensus on which one is the superior one. Finally, products can be differentiated in terms of offering different levels of service—for example, Volvo offers a guarantee of free, reliable towing anywhere should the vehicle break down. American Express offers services not offered by many other charge cards.


NEW PRODUCT DEVELOLOPMENT
New product development tends to happen in stages. Although firms often go back and forth between these idealized stages, the following sequence is illustrative of the development of a new product:

THE PRODUCT LIFE CYCLE
Products often go through a life cycle. Initially, a product is introduced.

PLC

Since the product is not well known and is usually expensive (e.g., as microwave ovens were in the late 1970s), sales are usually limited. Eventually, however, many products reach a growth phase—sales increase dramatically. More firms enter with their models of the product. Frequently, unfortunately, the product will reach a maturity stage where little growth will be seen. For example, in the United States, almost every household has at least one color TV set. Some products may also reach a decline stage, usually because the product category is being replaced by something better. For example, typewriters experienced declining sales as more consumers switched to computers or other word processing equipment. The product life cycle is tied to the phenomenon of diffusion of innovation. When a new product comes out, it is likely to first be adopted by consumers who are more innovative than others—they are willing to pay a premium price for the new product and take a risk on unproven technology. It is important to be on the good side of innovators since many other later adopters will tend to rely for advice on the innovators who are thought to be more knowledgeable about new products for advice.
At later phases of the PLC, the firm may need to modify its market strategy. For example, facing a saturated market for baking soda in its traditional use, Arm & Hammer launched a major campaign to get consumers to use the product to deodorize refrigerators. Deodorizing powders to be used before vacuuming were also created.

It is sometimes useful to think of products as being either new or existing.
Many firms today rely increasingly on new products for a large part of their sales. New products can be new in several ways. They can be new to the market—noone else ever made a product like this before. For example, Chrysler invented the minivan. Products can also be new to the firm—another firm invented the product, but the firm is now making its own version. For example, IBM did not invent the personal computer, but entered after other firms showed the market to have a high potential. Products can be new to the segment—e.g., cellular phones and pagers were first aimed at physicians and other price-insensitive segments. Later, firms decided to target the more price-sensitive mass market. A product can be new for legal purposes. Because consumers tend to be attracted to “new and improved” products, the Federal Trade Commission (FTC) only allows firms to put that label on reformulated products for six months after a significant change has been made.


DIFFUSION OF INNOVATION
The diffusion of innovation refers to the tendency of new products, practices, or ideas to spread among people.

Food Diffusion

Usually, when new products or ideas come about, they are initially only adopted by a small group of people. Later, many innovations spread to other people. The bell shaped curve frequently illustrates the rate of adoption of a new product. Cumulative adoptions are reflected by the S-shaped curve.

Adoptors

The saturation point is the maximum proportion of consumers likely to adopt a product. In the case of refrigerators in the U.S., the saturation level is nearly one hundred percent of households. The figure will almost certainly be well below that for video games that, even when spread out to a large part of the population, will be of interest to far from everyone.

Saturation


Several specific product categories have case histories that illustrate important issues in adoption. Until some time in the 1800s, few physicians bothered to scrub prior to surgery, even though new scientific theories predicted that small microbes not visible to the naked eye could cause infection. Younger and more progressive physicians began scrubbing early on, but they lacked the stature to make their older colleagues follow.

Several forces often work against innovation. One is risk, which can be either social or financial. For example, early buyers of the CD player risked that few CDs would be recorded before the CD player went the way of the 8 track player. Another risk is being perceived by others as being weird for trying a “fringe” product or idea. For example, Barbara Mandrel sings the song “I Was Country When Country Wasn’t Cool.” Other sources of resistance include the initial effort needed to learn to use new products (e.g., it takes time to learn to meditate or to learn how to use a computer) and concerns about compatibility with the existing culture or technology. For example, birth control is incompatible with religious beliefs that predominate in some areas, and a computer database is incompatible with a large, established card file.

Innovations come in different degrees. A continuous innovation includes slight improvements over time. Very little usually changes from year to year in automobiles, and even automobiles of the 1990s are driven much the same way that automobiles of the 1950 were driven. A dynamically continuous innovation involves some change in technology, although the product is used much the same way that its predecessors were used—e.g., jet vs. propeller aircraft. A discontinuous innovation involves a product that fundamentally changes the way that things are done—e.g., the fax and photocopiers. In general, discontinuous innovations are more difficult to market since greater changes are required in the way things are done, but the rewards are also often significant.

Several factors influence the speed with which an innovation spreads. One issue is relative advantage (i.e., the ratio of risk or cost to benefits). Some products, such as cellular phones, fax machines, and ATM cards, have a strong relative advantage. Other products, such as automobile satellite navigation systems, entail some advantages, but the cost ratio is high. Lower priced products often spread more quickly, and the extent to which the product is trialable (farmers did not have to plant all their land with hybrid corn at once, while one usually has to buy a cellular phone to try it out) influence the speed of diffusion. Finally, the extent of switching difficulties influences speed—many offices were slow to adopt computers because users had to learn how to use them.

Some cultures tend to adopt new products more quickly than others, based on several factors:

It should be noted that innovation is not always an unqualifiedly good thing. Some innovations, such as infant formula adopted in developing countries, may do more harm than good. Individuals may also become dependent on the innovations. For example, travel agents who get used to booking online may be unable to process manual reservations.

Sometimes innovations are disadopted. For example, many individuals disadopt cellular phones if they find out that they don’t end up using them much.

BRANDS AND BRANDING
An essential issue in product management is branding. Different firms have different policies on the branding on their products. While 3M puts its brand name on a great diversity of products, Proctor & Gamble, on the opposite extreme, maintains a separate brand name for each product. In general, the use of brand extensions should be evaluated on the basis of the compatibility of various products—can the same brand name represent different products without conflict or confusion? Coca Cola for many years resisted putting its coveted brand name on a diet soft drink. In the old days, available sweeteners such as saccharin added an undesirable aftertaste, implying a clear sacrifice in taste for the reduction in calories. Thus, to avoid damaging the brand name Coca Cola, Coke instead named its diet cola Tab. Only after NutraSweet was introduced was the brand extension allowed. Research shows that consumers are more receptive to brand extensions when (1) the company appears to have the expertise to make the product [McDonald’s was not thought as credible as a photo-finishing service], (2) the products are congruent (compatible), and (3) the brand extension is not seen as being exploitative of a high quality brand name [e.g., one should not use a premium brand name like Heineken to make a trivially easy product like popcorn].

In many markets, brands of different strength compete against each other. At the top level are national or international brands. A large investment has usually been put into extensive brand building—including advertising, distribution and, if needed, infrastructure support. Although some national brands are better regarded than others—e.g., Dell has a better reputation than e-Machines—the national brands usually sell at higher prices than to regional and store brands. Regional brands, as the name suggests, are typically sold only in one area. In some cases, regional distribution is all that firms can initially accomplish with the investment capital and other resources that they have. This means that advertising is usually done at the regional level. This limits the advertising opportunities and thus the effect of advertising. In some cases, regional brands may eventually grow into national ones. For example, Snapple® was a regional beverage. While a regional beverage, it became so successful that it was able to attract investments to allow a national launch. In a similar manner, some brands often start in a narrow niche—either nationally or regionally—and may eventually work their way up to a more inclusive national brand. For example, Mars was originally a small brand that focused on liquor filled chocolate candy. Eventually, the firm was able to expand. Store, or private label brands are, as the name suggests, brands that are owned by retail store chains or consortia thereof. (For example, Vons and Safeway have the same corporate parent and both carry the “Select” brand). Typically, store brands sell at lower prices than do national brands. However, because the chains do not have the external brand building costs, the margins on the store brands are often higher. Retailers have a great deal of power because they control the placement of products within the store. Many place the store brand right next to the national brand and place a sign highlighting the cost savings on the store brand.

Co-branding involves firms using two or more brands together to maximize appeal to consumers. Some ice cream makers, for example, use their own brand name in addition to naming the brands of ingredients contained. Sometimes, this strategy may help one brand at the expense of the other. It is widely believed, for example, that the “Intel inside” messages, which Intel paid computer makers to put on their products and packaging, reduced the value of the computer makers’ brand names because the emphasis was now put on the Intel component.

Certain “peripheral” characteristics of products may “signal” quality or other value to consumers. For some products, packaging accounts for a large part of the total product manufacturing cost. Long warranties often signal to consumers that the product is of good quality since the manufacturer is willing to take responsibility for its functioning.

THE PRODUCT-SERVICE CONTINUUM
There is no clear distinction between a “pure” tangible product and a service. Most products contain some of both. A computer, for example, is a tangible product, but it often comes with a warranty and software updates.


Promotion: Integrated Marketing Communication

Integrated Marketing Communication (IMC) involves the idea that a firm’s promotional efforts should be coordinated to achieve the best combined effects of the firm’s efforts.  Resources are allocated to achieve those outcomes that the firm values the most.
Promotion involves a number of tools we can use to increase demand for our  The most well known component of promotion is advertising, but we can also use tools such as the following:

PROMOTIONAL OBJECTIVES AND EFFECTIVENESS

Generally, a sequence of events is needed before a consumer will buy a product.  This is known as a “hierarchy of effects.”  The consumer must first be aware that the product exists.  He or she must then be motivated to give some attention to the product and what it may provide.  In the next stage, the need is for the consumer to evaluate the merits of the product, hopefully giving the product a try.  A good experience may lead to continued use.  Note that the consumer must go through the earlier phases before the later ones can be accomplished.

Promotional objectives that are appropriate differ across the Product Life Cycle (PLC).  Early in the PLC—during the introduction stage—the most important objective is creating awareness among consumers.  For example, many consumers currently do not know the Garmin is making auto navigation devices based on the global position satellite (GPS) system and what this system can do for them.  A second step is to induce trial—to get consumers to buy the product for the first time.  During the growth stage, important needs are persuading the consumer to buy the product and prefer the brand over competing ones.  Here, it is also important to persuade retailers to carry the brand, and thus, a large proportion of promotional resources may need to be devoted to retailer incentives.  During the maturity stage, the firm may need to focus on maintaining shelf space, distribution channels, and sales. 

Different promotional approaches will be appropriate depending on the stage of the consumer’s decision process that the marketer wishes to influence.  Prior to the purchase, the marketer will want to establish a decision to purchase the product and the specific brand.  Here, samples might be used to induce trial.  During the purchase stage, when the consumer is in the retail store, efforts may be made to ensure that the consumer will choose one’s specific brands.  Paying retailers for preferred shelf space as well as point of purchase (POP) displays and coupons may be appropriate.  After the purchase, an appropriate objective may be to induce a repurchase or to influence the consumer to choose the same brand again.  Thus, the package may contain a coupon for future purchase.

There are two main approaches to promoting products.  The “push” strategy is closely related to the “selling concept” and involves “hard” sell and aggressive price promotions to sell at this specific purchase occasion.  In contrast, the “pull” strategy emphasizes creating demand for the brand so that consumers will come to the store with the intention of buying the product.  Hallmark, for example, has invested a great deal in creating a preference for its greeting cards among consumers.

There are several types of advertising.  In terms of product advertising, the “pioneering” ad seeks to create awareness of a product and brand and to instill an appreciation among consumers for its possibilities.  The competitive or persuasive ad attempts to convince the consumer either of the performance of the product and/or how it is superior in some way to that of others.  Comparative advertisements are a prime example of this.  For instance, note the ads that show that some trash bags are more durable than others.  Reminder advertising seeks to keep the consumer believing what other ads have already established.  For example, Coca Cola ads tend not to provide new information but keep reinforcing what a great drink it is.

 

DEVELOPING AN ADVERTISING PROGRAM

Developing an advertising program entails several steps:

It is essential to pretest advertisements to see how effective they actually are in influencing consumers.  An ad may have to be redesigned if it is found not be to be as effective as targeted.  Note that selecting advertisements is often a “numbers game” where a lot of advertisements are created and the ones that “test” best are selected.

ADVERTISING STRATEGIES

          Depending of the promotional objectives sought by a particular firm, different advertising strategies and approaches may be taken.  The following are some content strategies commonly used.

 

ADVERTISING AND ATTITUDE CHANGE

A significant objective of advertising is attitude change.  A consumer’s attitude toward a product refers to his or her beliefs about, feeling toward, and purchase intentions for the product.  Beliefs can be both positive (e.g., for McDonald’s food:  tastes good, is convenient) and negative (is high in fat).  In general, it is usually very difficult to change deeply held beliefs. Thus, in most cases, the advertiser may better off trying to add a belief (e.g., beef is convenient) rather than trying to change one (beef is really not very fatty).
Consumer receptivity to messages aimed at altering their beliefs will tend to vary a great deal depending on the nature of the product.  For unimportant products such as soft drinks, research suggests that consumers are often persuaded by having a large number of arguments with little merit presented (e.g., the soda comes in a neat bottle, the bottle contains five percent more soda than competing ones).  In contrast, for high involvement, more important products, consumers tend to scrutinize arguments more closely, and will tend to be persuaded more by high quality arguments.

Celebrity endorsements are believed to follow a similar pattern of effectiveness.  The Elaboration Likelihood Model (ELM) suggests that or trivial products, a popular endorser is likely to be at least somewhat effective regardless of his or her qualifications to endorse (e.g., Bill Cosby endorses Coca Cola and Jell-O without having particular credentials to do so).  On the other hand, for more important products, consumers will often scrutinize the endorser’s credentials. 

ELM

For example, a basket ball player may be perceived as knowledgeable about athletic shoes, but not particularly so about life insurance.  In practice, many celebrities do not appear to have a strong connection to the products they endorse.  Tiger Woods might be quite knowledgeable about golf carts, it is not clear why he has any particular qualifications to endorse Cadillac automobiles.

 

ADVERTISING EFFECTIVENESS AND EVALUATION

The effectiveness of advertising is a highly controversial topic.  Research suggests that in many cases advertising leads to a relatively modest increase in sales.  One study suggests, for example, that when a firm increases its advertising spending by 1%, sales go up by 0.05%.   (The same research found that, in contrast, if prices are lowered by 1%, sales tend to increase by 2%).  In general, it appears that advertising is more effective in selling durable goods (e.g., stereo systems, cars, refrigerators, and furniture) than for non-durable goods (e.g., restaurant meals, candy bars, toilet paper, and bottled water).  Also, advertising appears to be more effective for new products.  This suggests that advertising is probably most effective for providing information (rather than persuading people).  Note that many advertising agencies make a large part of their money on commissions on advertising sold.  Thus, they have a vested interest in selling as much advertising as possible, and may strongly advise clients to spend excessive amounts on advertising.

Research suggests that advertising effectiveness follows a sort of “S-“ shaped curve:

Advertising Curve

Very small amounts of advertising are too small to truly register with consumers.  At the medium level, advertising may be effective.  However, above a certain level (labeled “saturation point” on the chart), additional adverting appears to have a limited effect.  (This is comparable to the notion of “diminishing returns to scale” encountered in economics).

There are several potential ways to measure advertising effectiveness.   Two main categories include:

 

PUBLIC RELATIONS

Consumers will often perceive what they perceive to be “independent” media news stories as more credible than paid advertising.  Therefore, getting favorable media coverage can be quite valuable.  One downside, of course, is that the marketer does not get to control what the media will say.  This type of coverage is not necessarily less expensive than traditional advertising, either, since a lot of labor is often needed to generate media interest.

News releases should generally be brief.  Ordinarily, these should not exceed two double spaced pages in length although additional information can be made available.  The media will generally react negatively to “advertising” or sensational language such as “revolutionary” or “breakthrough.”  There is generally a preference for precise, factual information although a human interest story may also be of interest.  It is important to quote actual people—whether customers, neutral experts, or employees of the firm.  This may mean “drafting” a quote and asking the appropriate person for permission to quote him or her saying this.

 

Pricing

Background.  Pricing decisions are extremely important for the firm.  Some of the reasons:

Conceptualizing price. A logical examination suggests that price should be defined as

                                           Price

That is, we need to consider the quantity you receive as well as the amount of money you have to fork out.  To say that gasoline costs $1.29 is meaningless outside the context that this cost is per gallon. 

WAYS TO CHANGE PRICE

The above conceptualization suggests that the marketer has several ways available to change price:

 

PRICING STRATEGIES

Pricing strategies can be categorized based on several different variables.  One variable of interest relates to the consistency of the prices.  Some retailers today attempt to follow a strategy of "everyday low pricing."  Although few firms tend to practice this method with perfect consistency, certain retailers like Wal-Mart tend to focus on providing constant low prices without any real sales.  Other retailers instead feature prices which, when not discounted, are somewhat higher.  To compensate, periodic sales feature price reductions.  Sales can be implemented either with a predictable pattern (e.g., a product is put on sale every fourth week) or in a random manner (e.g., in any given week, there is a 25% chance that the product will offered on sale).  (See chart on overheads).

Note that "high-low" and "everyday low price" strategies are intended to take advantage of different price elasticities across people.  Some consumers are price sensitive and will tend to buy only during sales; other people, in contrast, will buy all the time.  Thus, people who are not willing to switch brands will have to pay full price for your products when they are not on sale; while they are on sale, a large number of "switchers" are attracted and sales volumes are increased.

Another dimension of interest in pricing the price introductory strategy.  The "skimming" strategy entails offering a product first at a relatively high price.

Supply and Demand

Consider, for example, what we can do when there is a large degree of price elasticity—i.e., when some consumers are willing to pay more than others.  In the chart above, we see that some consumers are willing to pay a lot of money to get a new product quickly, while others are not willing to pay as much.  This often happens, for example, with new computer chips.  It may be possible, then, to charge the first segment more money, and then lower the price enough so that the next segment will buy it.  The process continues until all segments that can be profitably served have bought. In the chart below, we introduce the product at price P1. This means that we will only sell a limited quantity--Q1. Later, we reduce the price to P2, enabling us to sell a quantity of Q2. Eventually, we lower to P3, selling Q3.

Skimming

Since consumers differ in how much they are willing to pay for a product, it is possible to make large margins on the price inelastic segment.  For example, Intel tends to charge high prices for its most recent chips, gradually lowering prices as a new generation is introduced.

Alternatively, firms may choose to use the "penetration" pricing strategy.  This strategy also takes advantage of price elasticity and attempts to dramatically boost the number of units sold by offering the product at a low price. 

Penetration Pricing

Since costs of production tend to go down as cumulative production increases, this strategy may be effective.  Penetration pricing is also useful when a firm wishes to establish a large market share early on, and it may be useful to develop a market for accessories to products.  For example, a manufacturer of a new computer system may want to increase sales volumes in order to encourage the development of compatible software so that the computer brand will become more competitively attractive.

Note that "skimming" and penetration pricing involve tradeoffs.  A clearly preferred strategy may not be obvious, and managers may need to engage in some serious consideration to arrive at a desired strategy.  Both strategies involve some level of risk.  The main risk to "skimming" is the attraction of aggressive competitors who see an opportunity to make large profits by entering.  Penetration pricing, in contrast, gambles on the possibility that sales volumes will in fact increase with lower prices.

Two other concepts are worth noting.  A "cost-plus" pricing strategy entails marking up the estimated cost of producing a product by a certain, fixed percentage.  We will discuss deficiencies of this approach later.  In contrast, pricing based on consumer perceived value keeps the firm in closer proximity to the market.

Several objectives can be pursued in pricing.  One is product line pricing.  In some cases, it may be useful to settle for small margins on some members of the product line in order to assure the success of others.  For example, Avery, the maker of adhesive labels, sells relatively inexpensive software for printing on the labels in order to stimulate demand for the higher margin labels.  Two-tier pricing involves an attempt to entice the consumer into buying a product at a low price with the expectation that he or she will buy accessories later.  For example, makers of razor blades tend to sell the razors at low prices so that the consumer has an incentive to go with the same brand of blades later on.  Tying, which is often illegal in the U.S. when it is based on unreasonable exercise of monopoly power by a dominant firm in a market, involves requiring the consumer to buy a less desirable product in order to be able to buy a more desired one.  Back when Xerox was the dominant manufacturer of copy machines, for example, a court case forced the company to abandon its policy of including service of the copiers with machine purchase; consumers were now free to seek out any cheaper third party service available.  For a more contemporary example, let's imagine that rap singer Joyoys J has two albums on the market:  A Rated X-Mas and X-Mas Gift 'rappin'.  If market research suggests that X-Mas Gift 'rapping' will be received as a mediocre album while A Rated X-mas is likely to reach Platinum status,  Joyoys J might refuse to sell A Rated X-Mas without a simultaneous purchase of the less desirable product.  The legal issues here are complex, in part because there are often serious questions about the extent to which it is reasonable for the customer to be able to buy only one product when most customers would want to buy the combination.  It is probably not reasonable, for example, to insist on being allowed to buy only pink M&Ms® since most customers appear to prefer a mix of colors. 

Product price bundling, generally legal, presents an alternative to outright tying.  Here, the consumer can buy each product separately, but a discount is offered for buying two or more items simultaneously.  In Joyoys J’s case, a  possible pricing schedule might be:

A Rated X-mas                           $20.00
X-Mas Gift 'rapping'                    $10.00
Both for                                    $25.00 (>$20.00+$10.00=$30.00)

In general, simple "cost-plus" pricing is inappropriate because:

Cost should, however, play some role in pricing decisions:

 

CONSUMER PRICE AWARENESS

Research suggests a large segment of consumers does not give much attention to the prices of individual products.  Consumers were found on the average to spend only about 12 seconds between arriving at the site within a store where a frequently purchased product was located and departing; on the average, consumers inspected only 1.2 products.  Only 55.6%, seconds after having selected a product, could specify its price within 5% of accuracy.  Note that this study does not indicate a total lack of consumer price sensitivity since consumers are undoubtedly making some inferences about the overall price levels of a store.  Thus, the store has some incentive to maintain reasonable overall prices.

COMPETITION AND ANTITRUST ISSUES IN PRICING

The United States maintains relatively stringent (by international standards) antitrust laws.  Much of the rest of the World is catching up with us, but traditionally, anti-competitive laws in many European and Asian countries were either non-existent, intended to actively encourage collusion, or not enforced.  In fact, a professor at INSEAD, the premier French business school, reported that his students—who came from countries throughout Europe—actually expected him to teach them how to collude with each other.  Antitrust issues relevant to prices can be categorized into the following main categories:

CONSUMER REFERENCE PRICES

Consumers typically maintain reference prices for products.  These are typically based on prices they have seen or paid in the past or perceived fairness of prices. 

There are two kinds of reference prices:

Research shows that both experience (prices previously paid) and the sale context (prices of competing brands) influence a consumer's internal reference price.

Consumers tend to experience two sources of value for a product.  Acquisition utility refers to the utility of obtaining a product, while transaction utility refers to the difference between a subject's reference price and the featured price.

Traditionally, managers have believed that you need to approach a certain threshold of some 15-20% discount before consumers will respond significantly to sales.  More recent research, however, shows that a large segment of the population will apparently respond to "negligible" discounts.  For example, if a product is reduced in price from $3.98 to $3.96 (a "whopping" one half of one percent price cut!), a large number of consumers will "bite."  A store manager similarly found that just placing a sign saying "EVERYDAY LOW PRICE" randomly among store products increased sales of the affected products by some 20%.

There is some question as to whether "odd" product prices (those ending in "9," "95," or "99) actually increase sales.  Some effect has been found in the U.S., but no effect was found in Germany.  Note, however, that "odd" prices may communicate the idea that you are receiving a bargain, which may nor may not be consistent with the desired positioning of the product.

As some firms have painfully learned, changing the price of a product can be difficult.  Some experimenters tried to introduce a laundry detergent both at a "high" and "low" price in stores.  After eight weeks, the price of the laundry detergent under the "low" intro price condition was changed to match that of the "high" introductory condition. 

Introductory Price

Although sales were higher in the low introductory price condition while the price was low, sales dropped dramatically after the price had been raised—in fact, after sixteen weeks, cumulative sales were higher in those stores where the price had been high all along.  This suggests that consumers started thinking about the product as a "low price" one and had difficulty adjusting when the price was later changed.

There are other cases where changing product prices has proven difficult.  In the 1970s, consumers were reluctant to pay above an effective $2.00 "ceiling" for cereal.  The Coca Cola Company also found it difficult to raise its price above its highly salient 5 cent level.

The "framing" of products tends to dramatically influence consumer response.  The Automobile Club of Southern California, for example, indicates that upgrading to "AAA Plus" service costs "only pennies a day" rather than emphasizing the yearly cost.  Note that this framing effect may also have implications for the practice of sales—when the sale is retracted, consumers may see this as a loss rather than the termination of a gain.

 

MANUFACTURER VS. RETAILER PRICING INTERESTS

Retailers and manufacturers often have conflicting interests since:

 

ADVERTISING:  DOES IT INCREASE OR DECREASE PRICE ELASTICITY?

Economists such as John Kenneth Galbraith have traditionally held that advertising serves to create artificial differentiation among products where few real differences exist and thus allows the firm to charge higher prices.  This effect can be observed on whole-sale prices, where heavily advertised products tend to sell for higher prices.

Research shows, however, that advertising may have the opposite effect on prices at the retail level.  Retailers will often use highly advertised products as loss leaders, and thus advertising may depress retail prices of products.  It has also been found that prices of eye-glasses are lower in those states that allow advertising (containing price information), and after deregulation, air fares were negatively correlated with advertising on the route in question (again making prices more readily comparable).


Distribution: Channels and Logistics

Distribution (also known as the place variable in the marketing mix, or the 4 Ps) involves getting the product from the manufacturer to the ultimate consumer. Distribution is often a much underestimated factor in marketing. Many marketers fall for the trap that if you make a better product, consumers will buy it. The problem is that retailers may not be willing to devote shelf-space to new products. Retailers would often rather use that shelf-space for existing products have that proven records of selling.

Channel Efficiency

Although many firms advertise that they save the consumer money by selling "direct" and “eliminating the middleman,” this is a dubious claim in most instances. The truth is that intermediaries, such as retailers and wholesalers, tend to add efficiency because they can do specialized tasks better than the consumer or the manufacturer. Because wholesalers and retailers exist, the consumer can buy one pen at a time in a store located conveniently rather than having to order it from a distant factory. Thus, distributors add efficiency by:

Many of the cost savings associated with having an efficient system of intermediaries result from specialization. Manufacturers specialize in what they do well—manufacturing products—while others specialize in handling various phases of the distribution path. Some specialize in retailing—usually selling a large assortment of goods in small quantities to a large number of end customers. Wholesalers, in turn, specialize in moving and goods from numerous manufacturers to a large number of retailers.

Channel structures vary somewhat by the nature of the product.

Channel Structures

Jet aircraft are custom made and shipped directly to the airline. Automobiles, because they are difficult to move, are shipped directly to a dealer. Other products are shipped through a wholesaler who can more efficiently handle, and combine, products from many different suppliers. Several layers of wholesalers may exist, depending on the product. Occasionally, agents may also be involved. Agents usually do not handle products, but instead take care of the business aspect of negotiating with distributors, which manufacturers may feel uncomfortable or ill prepared for doing themselves.

"Wheel of Retailing.” An interesting phenomenon that has been consistently observed in the retail world is the tendency of stores to progressively add to their services. Many stores have started out as discount facilities but have gradually added services that customers have desired. For example, the main purpose of shopping at establishments like Costco and Sam’s Club is to get low prices. These stores have, however, added a tremendous number of services—e.g., eye examinations, eye glass prescription services, tire installation, insurance services, upscale coffee, and vaccinations.

Wheel of Retailing


MANUFACTURER DISTRIBUTION PREFERENCES
Most manufacturers would prefer to have their products distributed widely—that is, for the products to be available in as many stores as possible. This is especially the case for convenience products where the customer has little motivation to go to a less convenient retail outlet to get his or her preferred brand. Soft drinks would be an extreme example here. The vast majority of people would settle for their less preferred brand in a vending machine rather than going elsewhere to get their top choice. This is one reason why being a small share brand in certain categories can become a vicious cycle that perpetuates itself.

For most manufacturers, wide distribution is not realistically obtainable. In food product categories, for example, the larger supermarkets can carry a large number of brands. Smaller convenience stores and warehouse stores, however, are likely to carefully pick a few brands. After all, if convenience stores were to carry as many products as supermarkets, the purpose of having a neighborhood store with easy entry and exit would be defeated.
In a very small number of cases, some manufacturers prefer to have their products selectively, or even exclusively, distributed. This is usually the case for high prestige brands (e.g., Estee Lauder) or premium quality image brands (e.g., high end electronic products) that require considerable before and after sales service.

DISTRIBUTION INTERESTS: RETAILERS VS. MANUFACTURERS
Manufacturers of different kinds of products have different interests with respect to the availability of their products. For convenience products such as soft drinks, it is essential that your product be available widely. Chances are that if a store does not have a consumer’s preferred brand of soft drinks, the consumer will settle for another brand rather than taking the trouble to go to another store. Occasionally, however, manufacturers will prefer selective distribution since they prefer to have their products available only in upscale stores.

Parallel distribution structures refer to the fact that products may reach consumers in different ways. Most products flow through the traditional manufacturer - -> retailer --> consumer channel. Certain large chains may, however, demand to buy directly from the manufacturer since they believe they can provide the distribution services at a lower cost themselves. In turn, of course, they want lower prices, which may anger the traditional retailers who feel that this represents unfair competition. Firms may also choose to utilize factory outlet stores. To allay concerns held by conventional stores, however, these factory outlet stores are usually located in areas where they are not easily accessible.

Parallel Distribution

We must consider what is realistically available to each firm. A small manufacturer of potato chips would like to be available in grocery stores nationally, but this may not be realistic. We need to consider, then, both who will be willing to carry our products and whom we would actually like to carry them. In general, for convenience products, intense distribution is desirable, but only brands that have a certain amount of power—e.g., an established brand name—can hope to gain national intense distribution. Note that for convenience goods, intense distribution is less likely to harm the brand image—it is not a problem, for example, for Haagen Dazs to be available in a convenience store along with bargain brands—it is expected that people will not travel much for these products, so they should be available anywhere the consumer demands them. However, in the category of shopping goods, having Rolex watches sold in discount stores would be undesirable—here, consumers do travel, and goods are evaluated by customers to some extent based on the surrounding merchandise.

In general, a brand can expect lesser distribution in its early stages—fewer retailers are motivated to carry it. Similarly, when a product category is new, it will be available in fewer stores—e.g., in the early days, computer disks were available only in specialty stores, but now they can be found in supermarkets and convenience stores as well. Certain products that are not well established may have to get their start on "infomercials," only slowly getting entry into other types out outlets. (Please see PowerPoint chart).
Different parties involved in the marketing of products tend to have different, and often conflicting, interests:

Diversion occurs when merchandise intended for one market is bought up by a distributor that then ships it to a different market. Sometimes, a manufacturer will run a promotion in one region but not in another, and speculators will then buy extra quantity in the promoted area and ship it another area. The speculator will then sell it to local retailers or distributors for a price slightly lower than what is being charged through the regular channel but at a price that still allows a nice profit. Certain products sell for different prices in different countries. As we discussed in the unit of international marketing, a gray market occurs when a product is bought in one country and exported to another where the price is generally higher. Both Louis Vuitton suitcases and golf clubs were imported to Japan, depressing prices there.

Recent retail trends. Over the past decade, there has been considerable growth in both extremes of the continuum from low price, low service to high price, high service retailers. There has been considerably growth both in the Wal-Mart and Nordstrom-type retailers than there has been in between.
For some time, during difficult economic times in the mid 2000s, discount stores like Wal-Mart actually tended to increase sales as consumers seemed to switch their purchases of the same products from higher priced to lower priced stores rather than reducing the quantity and quality bought in the product categories. It appears that consumers have done most of the switching that can be reasonably done this way already. More recently, Wal-Mart has felt more of an effect of weak economic times. Observations have been made that more and more customers seem to be running out of money at the end of the month.
During the last two decades, there has been strong growth in the “category killer” chains which specialize in a moderate assortment of goods. Chains like CompUSA, Best Buy, Staples, Circuit City, Office Depot, and Home Depot—which were rare before the 1990s—have expanded rapidly and have captured a very large share of the market in their respective areas of emphasis. These chains operate from two sources of strength: