Page Learning Log 3 Introduction 5 Section 1: Concept and Process of Marketing 6 The Marketing Concept 7 Marketing Process Overview 14 Costs and Benefits 23 Section 2: Segmentation, Targeting and Positioning 30 Macro-Environment 31 Micro-Environment 43 Buyer Behaviour 47 Segmentation 56 Section 3: The Marketing Mix 67 Products Place Price Promotion 68 77 88 104 Section 4: Different Marketing Segments and Contexts 119 Consumer Markets 120 Organisational Markets 124 Services 132 International Markets 141 Contents Trainer Bubble Ltd. 2011 3 33 3
Learning Log
Study Aid Page: Key Learning Point: Trainer Bubble Ltd. 2011 4 44 4
Trainer Bubble Ltd. 2011 5 55 5
The aim of the Marketing Principles unit is To provide students with a foundation for the analysis of marketing within organisations including decision making processes, segmentation, the role of information and the marketing information system, the marketing mix, internal and external influences affecting strategy, competitor analysis and positioning.. This self study aid acts as an introduction to the subject and will also help with your revision. However, we recommend that you study the subject in more depth. The recommended text for this unit is the Business Essentials course book Marketing published by BPP Learning Media (ISBN 978-0-7517-4473-6) as this covers the subject in much more detail. On pages 3 and 4 of this study aid you will find a learning log. You can use this to note key learning points or points you would like to study further. This will help you when you revise the subject for your examination. At the end of this Unit, students will be able to: 1. Understand the marketing environment and the scope of tasks undertaken in marketing in the context of different organizational situations in which marketing is applied.
2. Understand the decision making processes within consumer and organizational buying situations explain the ways in which market segments are defined and recognise the importance of information in decisions concerning customers and markets.
3. Assess the role of the marketing mix within the context of marketing decision making.
4. Examine various marketing strategies used within different organizations and competitive situations.
Introduction Trainer Bubble Ltd. 2011 6 66 6
Section 1
Concept and Process of Marketing
Trainer Bubble Ltd. 2011 7 77 7
This section will help you to develop an understanding of the concept of marketing. This includes how marketing has evolved and how it fits into todays businesses.
To understand how marketing has evolved it is also necessary to understand a little about the history of markets. This chart gives a very brief overview and students would benefit from conducting research to learn about this in more detail.
People lived in family and tribal units. They were mainly self sufficient and only limited trading took place People started to specialise and trade their skills. For example, a toolmaker may have traded tools for food. The invention of money meant that people no longer needed to barter directly for what they needed Agricultual and industrial revolutions led to the development of technology and techniques that in turn led to mass production Marketing techniques devoloped as competition and consumer choice increased New technologies and the use of social media have led to developments in marketing techniques
The Marketing Concept
Evolution of Marketing Early human history System of bartering Development of markets and early advertising Advertising through billboards, newspapers, television, etc Developing products that met the needs of consumers Use of the Internet to engage with consumers Trainer Bubble Ltd. 2011 8 88 8 Marketing as we know it is a relatively new discipline and emerged around the 1960s. This coincided with increases in the range of products available, increased competition, greater consumer choice and more disposable income. No longer could businesses manufacture their products hoping that they would sell. This led to a change in approach where businesses tried to identify the requirements of customers and to manufacture products and services to meet those requirements see the definition below.
Marketing is the management process which identifies, anticipates and supplies customer requirements profitably. Chartered Institute of Marketing
There are two main types of business orientation to consider.
Product Orientation Market Orientation The business focuses on its products. This means paying attention to the skills, knowledge and systems needed to produce products.
The risk is that by not focusing on the needs of the customer the business produces products that do not meet customer needs.
However, this approach is important for ensuring the quality and safety of the products sold. The business focuses on the needs and wants of its customers. Its products, services and activities are aimed at meeting these needs.
Market research is carried out to ensure that products and services meet the needs and wants of customers.
In reality, many businesses successfully combine both orientations (e.g. Coca Cola, Gillette, etc). Business Orientations Trainer Bubble Ltd. 2011 9 99 9 Sales Orientation There are still a number of successful businesses that adopt a sales orientation. Unlike a marketing orientation products are not tailored to the needs of consumers. Aggressive sales and advertising techniques may be used leading to a bad reputation for the industry concerned (e.g. energy companies, companies selling double glazing, etc).
Selling focuses on the needs of the seller; marketing on the needs of the buyer. Theodore Levitt
Marketing is customer orientated. In theory this means that there is less need for expensive selling because the needs of customers are being identified and met.
Competitor Orientation The philosophy behind a true competitor orientation is to beat your competitors. The danger with this is that it can be at the exclusion of everything else including profits. However, without going to these extremes, it is sensible to keep an eye on competitors and to take account of them in any marketing campaign.
Customer and Competitor Orientation The marketing concept means putting the customer first.
Customer orientation is a part of the culture of the business.
The aim is to satisfy customer requirements at a profit.
Products and services are produced to meet customer requirments. Trainer Bubble Ltd. 2011 10 10 10 10
It is also important to consider how competitors are likely to react to any marketing campaigns you are proposing to conduct.
Critics of the marketing concept say that it encourages people to want things they dont need. It is also possible that it may create a desire for products that are bad for customers or society as a whole. Examples may include: Cigarettes and alcohol which have the potential to cause health problems
Instant win scratch cards which can appeal to poorer members of society who cant really afford to buy them
Motor vehicles with high fuel consumption can have a bad effect on the environment
Many firms now understand the importance of corporate social responsibility and have a marketing orientation to support this. This makes sense because many potential customers are influenced by the way in which a business behaves. What choices are available to customers? What supply and demand exists? What is the size and strength of competitors? How many competitors exist in the market? What substitute products and services exist? Are there any changes in competitor attitudes? Societal Issues and Emergent Philosophies Trainer Bubble Ltd. 2011 11 11 11 11 A good example is the environment. Many consumers want to buy environmentally friendly products and businesses that meet these requirements can be very successful. There are many examples of this. Here are just a few that have been influenced by consumers. Reduction in packaging used for food products in supermarkets
Use of sustainable materials in manufacturing processes
Use of recycled materials in manufacturing
Fuel efficient vehicles developed by car manufacturers
Responsible disposal of waste
Many modern consumers are also concerned with the ethics of the business. For example, they may not be willing to buy from firms who exploit low paid workers in third world countries.
An effective marketing strategy must be linked to all of the functions of the business. In fact, they must be interdependent. A key reason for this is so that all marketing efforts and activities across the organisation align with its goals. It is worth noting that efficient and effectiveness are not the same things. For example sending letters to a thousand customers to tell them about a new product may be efficient but it is not effective if the wrong customers are targeted and it does not result in any sales. One way of achieving effectiveness is to pay attention to the marketing mix. Originally, there were four elements to the marketing mix. These are commonly known as the 4 Ps.
Efficiency and Effectiveness Product What are the features and appearance of your product and how does it benefit potential customers? Promotion How are customers informed about your product? Place Where will you sell your product and how will you get it to your customers? Price How much will customers pay for yor product and service and will it be profitable at this price? The 4 Ps Trainer Bubble Ltd. 2011 12 12 12 12 The Service Sector In recent years times there has been a huge growth in the service sector which offers no tangible products. This has led to three more elements being added to the marketing mix for service products, giving 7 Ps in total:
Process: Are the systems for buying and selling the service efficient, effective and user- friendly? Physical Evidence: As services are intangible products there needs to be some way of creating and maintaining the desire of customers to buy the service. How will you do this? For example, could you use regular newsletters, customer testimonials, etc? People: Your staff provide the service to your customers? Are they well motivated and trained to do this well?
Although there are many reasons to adopt the marketing concept it also has a number of disadvantages that need to be considered. These include: Identifying the needs/wants of customers and this requires extensive market research.
There can be delays bringing products to market because the marketing approach can be expensive and time consuming.
To avoid carrying out their own research and development competitors may copy your products and undercut your costs.
Consumer behaviour is not always consistent. This means that market research is not always right by the time a product comes to market. This is a particular problem in markets where trends and fashions are changeable.
There is a danger of market research leading to a narrow focus and missed opportunities as a result. Limitations of the Marketing Concept Trainer Bubble Ltd. 2011 13 13 13 13
1. Online marketing witnessed a substantial growth in the last decade. Explain with examples how is it contributing to the marketing activities as a whole in an industry of your choice.
2. Explain what you understand by the term marketing concept and how is it different from the sales concept and the production concept?
3. In services marketing, what is Physical Evidence, People and Process? Explain with examples
4. Using an example of your choice,
a. explain the advantages of a marketing orientation. b. explain the limitations of a marketing orientation.
5. When should a company use the 7 Ps of the Marketing Mix and why is it so important? Explain, using a company of your choice.
6. What is societal marketing and how do companies use this concept to achieve competitive advantages?
7. a. Define the term the marketing concept. b. Discuss briefly, using the marketing concept, an organisation that has taken into account this concept, and one that has not. End of Chapter Test Questions Trainer Bubble Ltd. 2011 14 14 14 14
This section considers marketing strategy and how this links to overall corporate strategy. It also covers strategic planning and how strategies are formed.
The changes brought about by advances in Information Technology mean that a lot more information is readily available to customers than ever before. This means that an integrated marketing communications plan is essential if an organisation wants some control over the messages received by customers and potential customers.
Marketing Process Overview Integrated Marketing What is integrated marketing? A management concept designed to make all aspects of communication work together. Does this mean that advertising, sales promotion and public relations should all be aligned with each other? Thats right. Everything needs to be interlinked to increase the effectiveness of your marketing campaigns. Trainer Bubble Ltd. 2011 15 15 15 15
It is vital that marketing objectives are aligned with the corporate and functional objectives of the business. Corporate Objectives Functional Objectives
These set out the overall goals for the organisation and will usually be stated in terms of profit, returns on investment, growth, earnings, etc Examples of strategic objectives: We aim for a 15% return on investment
We aim to achieve an operating profit of 5 million on sales of at least 50 million
Functional marketing objectives must support the corporate objectives of the organisation. They must also be aligned to the objectives of all the other areas of the business. Examples of functional objectives:
We aim to build our database of customers across the UK to at least 200,000 within the next 12 months
We aim to achieve a market share of at least 12.5% within the next 12 months
It is important to set meaningful objectives and one approach to this is to set them using Marketing Objectives S Specific - the objective should state exactly what is to be achieved. M Measurable - an objective should be capable of measurement so that it is possible to determine whether it has been achieved A Achievable - the objective should be realistic . This includes taking account of the circumstances in which the business is operating and the resources available to the business. R Relevant - objectives should be relevant to the buisness and to the people given responsibility for achieving them. T Time Bound - objectives should have a time-frame. These are effecively deadlines so thay also need to be achievable. Trainer Bubble Ltd. 2011 16 16 16 16 what are known as SMART criteria.
A marketing audit is a systematic analysis and evaluation of an organisations marketing position and performance. A full audit will focus on all marketing activities but there are three areas of particular importance.
All businesses are affected by external forces. This means that they need to understand the ever changing environment in which they operate. This includes the technological, social, economic and political environment, as we will see later in this guide. Environmental analysis involves gathering information (intelligence) and then evaluating it. Marketing Capabilities To identify which aspects of the company's marketing are strengths and weaknesses. Competitve Effectiveness Analysis of the company's competitive advantages. and their sources. Performance Evaluation To establish the actual achievements of the company's marketing activities. Environmental Analysis Marketing Audit Trainer Bubble Ltd. 2011 17 17 17 17 Fortunately, there are many different sources of intelligence available to a business. Sources of Intelligence Examples Market Intelligence Competitor Intelligence
Business and Financial Newspapers and Magazines Trade Journals Academic Journals Conferences, Exhibitions and Trade Fairs Feedback from the sales force and other employees Networking (online and offline) Monitoring competitors Trade Associations Primary and secondary research The Internet
Financial statements Customers and suppliers Former employees of competitors Analysis of competitor products Competitors product and job advertisements
All of this information needs to be compiled and catalogued so that it can be found easily. It is also usual for it to be presented in the form of monthly reports.
SWOT analysis is a technique for analysing an organisation and its environment. It stands for Strengths, Weaknesses, Opportunities and Threats.
Strengths and Weaknesses are factors that are internal to the business. Opportunities and Threats are external factors.
A SWOT analysis helps with strategic planning. One approach is to formulate plans aimed at using the strengths of the business to take advantage of the opportunities that exist. SWOT Analysis Trainer Bubble Ltd. 2011 18 18 18 18 Another alternative is to recognise weaknesses and to formulate plans to overcome them and ideally to turn them into strengths.
Strengths These are characteristics that give a business advantages over its competitors and/or will help it to meet its objectives. For example, well trained and experienced staff may be a strength.
Weaknesses These are characteristics that places a business at a disadvantage in relation to its competitors and/or will make it more difficult for it to meet its objectives. For example, out of date machinery and equipment may be a weakness.
Opportunities These are factors in the external environment that may be advantageous to the business. For example, a competitor may go out of business.
Threats These are factors in the external environment that may be to the disadvantage of the business. For example, an increase in the cost of raw materials.
Any marketing campaign needs to have a clear focus and this is one reason why clear objectives are so important. It is also important for the organisation to make the right choices when setting its competitive strategy.
Will the business compete across the entire market or only in certain segments? An example might be an insurance company selling motor insurance which may decide on a marketing strategy focusing on mature drivers with good driving records.
Another option is to compete on price or to differentiate on the product range. The cruise holiday market is a good example of this. A cruise line could opt to sell holidays at the luxury end of the market or offer a standard quality to large numbers of passengers at a lower price. Options Trainer Bubble Ltd. 2011 19 19 19 19
Possible Choices
Cost Leadership This approach involves trying to control the market on price by being a low cost producer. Differentiation This approach is all about differentiating on the product itself or by providing a better service than competitors. Focus/Niching With this approach the focus is on a particular part of the market (e.g. wealthy people). Market Penetration The business aims to sell more of its existing products in its existing markets. Market Development The aim is for the business to sell more of its products in new markets, perhaps by selling abroad. Product Development The business continues to operate in its existing markets by developing and selling modified versions of existing products. Diversification This can be a risky straegy and involves developing new products in new markets. Possible Growth Strategies Trainer Bubble Ltd. 2011 20 20 20 20
There are constraints on any business and these must be taken into account.
Internal constraints will include the budget available to the marketing department and may affect what it can or cannot do. The quality and skills of management and employees will also need to be taken into account.
There are also a number of external factors that may place constraints upon a business and how it markets itself. For example, the business may be subject to regulatory controls as well as those that arise because of the nature of the market in which it operates.
Constraints Size of the market You cannot make sales unless there are customers out there. Demand of the Market It is important to understand the requiremets of your customers by conducting market research. Strength of the Competition What is the strength of the competition and can your business postion itself to limit the effect of that competition? Availabiity of Supply If your businss depends on supplies, is there enough supply out there to satisfy your needs if your business increases? External Constraints Trainer Bubble Ltd. 2011 21 21 21 21
1. What is integrated marketing and why is an integrated communications marketing plan considered to be essential?
2. Using examples, explain the difference between corporate and functional objectives. Why do marketing objectives need to be aligned to them?
3. Explain what a marketing audit is and what it involves.
4. What options are open to a business when setting its competitive strategy?
End of Chapter Test Questions Trainer Bubble Ltd. 2011 23 23 23 23
Weve seen in an earlier section that most successful businesses focus on marketing rather than selling. This is a shift in attitude that has been taking place from the late 20 th Century. This means that the focus is on meeting the requirements of the customer. The aim is to meet customer requirements by providing the right product at the right place and time and in the right way.
Costs and Benefits Benefits of Building Customer Satisfaction Why is it so important to focus on the customer? Building customer satisfaction is the only way to achieve a sustainable advantage over our competitors. That sounds like a lot of jargon to me. What does it actually mean? Well, the big risk is that you will lose dissatisfied customers to your competitors. However, there are also many positive benefits to having satisfied customers. Trainer Bubble Ltd. 2011 24 24 24 24 What satisfied customers will do
Remember that it is more expensive to find new customers than to keep the people who already buy from you. Costs involved in generating new customers may include advertising, sales staff time, cost of credit checks, agents commission, initial discounts, etc.
Every time a business has contact with customers it has an opportunity to build its reputation with them. This is important because it leads to loyal customers and this increases the prospects of making further sales to them and to the people they recommend you to. This means that it makes good business sense for companies to pay attention to the service and the care it offers to its customers. The reputation of a business does not depend solely on how well its products meet the needs of its customers. Many other factors also come into play.
Service and Customer Care Buy from you again Recommend you to friends and family Buy different and possibly more expensive items from you Trainer Bubble Ltd. 2011 25 25 25 25
Relationship marketing is about building a learning relationship with the customer. The aim is to build a long term relationship with the customer and to build a clear understanding of the preferences of that customer.
Howards Favourite Beer
Howard is a regular customer in a local hostelry. He visits it every evening and likes to relax with his favourite beer after work.
Over time the bartender realised that Howard always ordered the same beer. From his position behind the bar he could see Howard crossing the road on his way for his early evening drink.
Knowing that Howard always ordered the same drink the bartender started pouring it as soon as he caught sight of Howard. This meant that Howard did not even have to order his drink and it was waiting for him, freshly poured, as soon as he arrived.
Howard considered this to be excellent service and carried on using the hostelry for many years and also recommended it to many friends who also became regular customers.
The bartender had learned Howards preferences and had adapted his service to meet them. And, of course, the bartender would not have taken this approach if he had learned that Howard was unhappy to have his drink poured in this way.
Although this may be quite a crude example of relationship marketing it does illustrate what large organisations aim to do on a much larger scale.
The problem with having profitable customers is that your competitors want them. This means that organisations will try to identify their most profitable customers and adopt strategies to retain them. An approach that incorporates relationship marketing and works towards delivering quality from the perspective of the customer helps here. Relationship marketing is seen as the key to customer retention. There are two basic types of relationship with the customer.
Individual Transaction Relationship Approach The customer pays for a product or service which is provided by the organisation. No attempt is made to build a relationship with the customer and repeat custom may or may not happen. The sale is seen as the start of the relationship with the customer. In its simplest form the customer may receive a phone call to check whether the he or she is satisfied with his/her purchase.
Customer Retention Many organisations use customer relationship software to help manage customer relationships Meeting customer preferences increases customer satisfaction and minimises problems All customer contacts with are used as an opportunity to collect information and to understand their preferences Trainer Bubble Ltd. 2011 27 27 27 27 Possible Levels of Customer Relationship
There is little doubt that it is more profitable to keep existing customers than to spend money acquiring new ones. It has been suggested that a 5% increase in customer retention could lead to an increase in operating profits as high as 50% in some businesses.
Customer Profitability Why are loyal customers profitable? Don't have to be acquired Buy a wider range of products Will recommend you to others Over time they are less sensitive to price Familiar with the business so they cost less to service Pertnership - Work with the customer to ensure that all aspect of the relationship work well for both paties. Proactive - Regular contact with customers to keep infromed about their current and future requirements. Accountable - Customer are contacted to find out if there are any problems with the product or service and to get ideas for future improvements. Reactive - Custtomers are encouraged to call if there is any problem with the product or service required. Basic - Once the sale is complete there is no further contact with the customer. Trainer Bubble Ltd. 2011 28 28 28 28
Quality control has always been important to organisations. In the past this was mainly for the benefit of the organisation itself. One of the key reasons for this is that improves quality and reduces waste which in turn minimises wasted money.
With the recent trend towards a marketing approach quality is increasingly being seen from the perspective of the customer.
Internal Customers Anybody you provide a service to in your organisation is described as an internal customer. For example, front line staff learning about customer service will be the internal customers of the training department. Total quality marketing requires that you have a good working relationship with your internal customers and provide them with the service that they require in the way that they need it so that they can do their jobs effectively. The concept is that this has a positive effect on the running of your company and the service that is provided to the external customers of the business. Many organisations ignore this and dont identify the requirements of internal customers and this is to the detriment of the business. Total Quality Marketing The needs of the customer are identified and met Meeting the needs of the customer is the key to being competitive advantage. The aim of total quality marketing is to ensure that every activity carried out within the organisation combines to deliver products and services which meet customer expectations. Trainer Bubble Ltd. 2011 29 29 29 29
1 a) What is meant by the term relationship marketing? b) Explain the FIVE different levels of the customer relationship.
2. a) Why do marketing oriented companies view consumer loyalty as an important element for the success of their businesses? b) Discuss how cultural factors (culture/subculture/social class) may affect consumer buying behaviour
3. a) What is meant by the term relationship marketing relationship marketing relationship marketing relationship marketing? b) Discuss both the stages and content of a customer care strategy
End of Chapter Test Questions Trainer Bubble Ltd. 2011 30 30 30 30
Section 2
Segmentation, Targeting & Positioning
Trainer Bubble Ltd. 2011 31 31 31 31
The macro environment refers to major external factors that affect a business. These are outside of the control of the business but need to be tracked and understood as they will influence the organisations decision making, and affect its performance and strategies.
These factors include economic factors; demographics; legal, political and social conditions; technological changes; and natural forces.
It is vital that organisations constantly scan and understand the environment in which they operate.
Environmental scanning involves collecting and analysing market intelligence. Possible sources of intelligence include: Business and financial newspapers and magazines Academic and trade journals Courses, conferences, exhibitions and trade fairs Feedback from own employees (especially sales staff) Trade associations Networking (building a network of personal contacts) Monitoring the competition Macro-Environment Environment Scanning Reasons for environmental scanning To exploit opportunities arising from changing market conditions To minimise threats arising from changing market conditions To target markets effectively Trainer Bubble Ltd. 2011 32 32 32 32 Market Research Organisations will also need to carry out market research. There are two main types.
Primary Research Secondary Research
Primary research is necessary when there is no existing data available or when data is needed for the specific purposes of the organisation.
Time needs to be spent designing questionnaires, collecting data from respondents and analysing the results.
The main disadvantage of primary research is that it is time consuming and potentially very expensive.
Secondary research makes use of data that is already available. Sources include publications or reports like newspapers or annual company reports.
The researcher does not need to start from scratch and uses information already available from other organisations or publications .
The main disadvantage of secondary research is that the data was originally collected for other purposes and may not suit the needs of the organisation.
It helps to categorise environmental factors when anaylsing them. The PESTEL model (sometimes called PESTLE) helps with this. The model distinguishes between these factors:
Political Economic Socio- Cultural Technological Ecological Legal Trainer Bubble Ltd. 2011 33 33 33 33
This refers to government policy and the decisions made by the government. To what degree does the government intervene in the economy? What goods and services does the government want to promote? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? What are its social policies (e.g. education and health)? What are its tax policies? What are its policies on business regulation? These and many other political decisions can have a big effect on the business environment. In the UK and other democracies policy can change dramatically if the government changes following an election. Organisations operating in European Union (EU) countries will also be affected by its political decisions. The EU has done a lot to make the sale of goods and the movement of capital and labour within its borders easier. Here are some examples.
There are also rules relating to government contracts. When the government of an EU company needs to buy something then companies from any EU country are given an equal opportunity to bid for the contract. They must not favour a business from their home country. Political Factors Common standards on food labelling and hygiene
Common standards for information technology
Capital movements liberalised (e.g. its easier for UK investors to invest in other EU countries) Removal of rules limiting access to financial services
Mutual recognition of professional qualifications (e.g. allowing a UK lawyer to practice law in Spain). All EU citizens given the right to work anywhere in the EU.
Trainer Bubble Ltd. 2011 34 34 34 34 Rate of growth The rate of increase in economic activity Measured as Gross National Product More people buy products during times of growth Rate of inflation The rate at which prices are rising Affects the costs of the business Some prices fluctuate (e.g. price of oil) Levels of employment In consumer markets this is particularly important Unemployed people do not go shopping During periods of high employment it may be difficult to find staff Volatile Regions Some parts of the world are more volatile than others. For example, unrest in the Middle East early in 2011 has already led to the fall of governments and to civil war. At the time of writing the outcome is in this part of the world is very uncertain. However, there is sure to be political change that will have great effects on businesses operating in or trading within these countries.
These are the main economic factors that have major impacts on how businesses operate and on the decisions they make.
Most businesses are also affected by global markets so there are three additional factors for them to consider.
Balance of Payments This is the difference between the cost of imports and exports. A country that is selling more abroad than it buys is said to be in surplus but is in deficit when it is buying more. If the balance of payments is in surplus this is generally good for importers as prices tend to reduce. Exporters tend to benefit when there is a deficit. Economies of other Countries What is the state of the economy in other countries? Countries with strong economies may be good to export to. Barriers to Trade Some countries may prevent or restrict trading in certain products to protect their local markets.
Interest Rates Most businesses borrow money (overdrafts or long term loans) Interest rates affect the cost of borrowing High interest rates can be damaging for businesses Tax and Tax Policy This affects businesses and their customers High taxes affect spending Levels of savings If people are saving money they are not spending it High levels of savings mean that there is more money available to invest in business Trainer Bubble Ltd. 2011 36 36 36 36
Changes in social factors have an effect on the demand for products and the way in which a company operates. Culture There are three interdependent elements in a cultures society.
Demographic Factors Demography is the study of the trends and characteristics of the population.
Socio-cultural Factors How many people in the population? What is the mix of people? (e.g. ages, proportion of men and women, etc.) Is the population growing or declining? What is the age distribution of the population nationally and regionally? Where do people live? (e.g. in towns or in the country) Ideas, values, beliefs, ways of reasoning
Government, companies, families, social clubs The skills, arts and crafts that enable us to make things
The Ideological System The Organisational System The Technological System Trainer Bubble Ltd. 2011 37 37 37 37 These factors all have an effect on a business. For example the trend is towards an aging population in the UK. This will affect the products that people require. It also affects employment. Older people may have more experience and skills to bring to the workforce but may be less willing to go out to work unless they are paid very well.
Standard Classifications
Analysis of the population can be helped by the use of standard classifications. There are a number of classifications and the theory is that people falling within a particular category have similar behaviours and buying habits. The use of socio economic groupings is particularly helpful for marketing purposes.
This chart is an example of socio economic grouping developed by the UK Registrar General. In a later chapter we will look at a more sophisticated classification approach known as ACORN (A Classification Of Residential Neighbourhoods)
Managerial and Professional (e.g. Lawyers, Doctors, Company Directors) Intermediate managerial and prfoessional (e.g. Teachers, Managers) Supervisory and clericaltaff (e.g. Foremen, Call Centre Employees, Shop Assistants Skilled Manual Workers (e.g. Electricians, Plumbers, Carpenters) Semi Skilled and Unskilled Manual Workers (e.g. Cleaners, Machine Operaters) People not working (e.g. Pensioners) Trainer Bubble Ltd. 2011 38 38 38 38
When considering technological factors it can be helpful to understand some terminology. Technology The use of tools to make things. New Technology This generally refers to technology that comes from recent scientific research and often relates to the use of computers. High Tech This refers to the most advanced technologies currently available (e.g. computer technology). Low Tech This is the opposite of high tech and refers to simpler technology such as child proof tops on cleaning products Invention The outcome of research and development work Innovation The ability to make commercial use of invention.
Rapid changes in technology present many challenges to businesses. Those that make the right decisions about technology early will have an advantage over their competitors. However, the opposite is also true.
Effects of technology
Technological Factors Products constant development and improvement of new and existing products Delivery e.g. the internet has led to a growth in home shopping Quality Automated processes and systems reduce human error Manufacturing methods changing and improving (e.g. robots in factories) Availability Point of sale technology has improved stock control and ordering Databases enables monitoring of customer behaviours Employees technology changes how they work Trainer Bubble Ltd. 2011 39 39 39 39
It is worth remembering that the use of computer technology has given a lot of power to businesses. This has led to concerns about customer rights and the need to treat them fairly. To some extent this is dealt with by laws such as the Data Protection Act and by voluntary codes of practice that exist in many industries.
There is a growing awareness of the impact businesses have on our environment. This is having an increasing effect on how companies operate and on the products and services they offer. New markets are being created as a result of this (e.g. solar and wind power industries) and old markets are diminishing or are disappearing altogether (e.g. the coal industry in the UK).
Green Marketing Green or Environmental Marketing is still aimed at meeting the requirements of customers but with the minimal detrimental impact on the natural environment. With this in mind it has been suggested that the 4 Ps of marketing are replaced by the four Ss.
Ecological Factors Satisfaction of customer needs Safety of products and the way they are produced Social Acceptability of the product or service and the way in which it is produced. Sustainability of the product and its production and all of the other activities of the company The 4 Ss of Green Marketing Trainer Bubble Ltd. 2011 40 40 40 40
Green Marketing Process Checklists Green marketing is similar to conventional marketing because there are internal and external factors to consider. These factors have been described as the Green Ps which can be used as a checklist to assess how well a company is achieving its green objectives.
The Internal Ps
.
Products How safe are they and what are their environmental consequences? Promotion Are reliable and accurate green messages being used? Providing Information Is this related to environmental performance? Price Do the prices for green products reflect differences in the demand for them? Policies Are they designed to monitor and react to environmental performance? Place Are the products being distributed using green methods? Processes How much energy is being used and how much waste is being produced? People Do the employees know how environmental issues relate to the business? Trainer Bubble Ltd. 2011 41 41 41 41
The External Ps
Note that in some versions of PESTEL ecological factors are referred to as environmental factors.
The law has a big effect on any business and can impact it in a number of ways. We wont be able to look at this in detail here but it is worth noting four areas where it has an effect. Legal Factors Paying Customers What are their needs for green products and what information do they get? Problems What environmental problems has the business had in the past?
Providers How green are the suppliers used by the business? Pressure Groups How may the business be affected by green pressure groups? Politicians How attuned is the business to the green politics? Predictions What environmental problems are expected in the future? Partners How green are our business partners?
Customers Sales of goods and services, advertising, trade descriptions and some opening hours are covered by the law Employees Employers must comply with employment law and trade union law protecting employee rights Shareholders In heUK this is governed by the Companies Acts which set out the rules on publishing accounts and the paymnt of dividends to shaeholders. Criminal Law Some criminal law applies to companies which are regarded as legal persons distinct from their directors and employees. Trainer Bubble Ltd. 2011 42 42 42 42
1. a) Explain with examples the difference between secondary and primary data. b) Explain what the macro-environment is and the importance of its four factors for marketers. Use examples to support your answer.
2. a) What is meant by the term green marketing? b) In relation to the green marketing process what are the SEVEN green Ps that need to be addressed from outside the company
3. Developments in technology have a strong impact on businesses and marketing practices. Explain the impact of technology in connection with: a) the type and quality of products offered by companies b) availability and delivery of goods to customers c) promotion of products and services
4. Explain at least THREE methods of collecting primary data and highlight the advantages and disadvantages of EACH one of them. Give examples where possible.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 43 43 43 43
The micro-environment consists of stakeholder groups that a firm has regular dealings with. The relationship of the business with these stakeholders can affect the overall success of a business. Unlike the macro environment the micro environment can b influenced or controlled by the business.
The micro environment
Components of the Micro Environment Customers Competitors Interest Groups Suppliers Intermediaries Micro-Environment Trainer Bubble Ltd. 2011 44 44 44 44
There are three main types of stakeholder for any organisation.
It is important for an organisation to identify who its stakeholders are and to understand their interests. Common Interests
This is where different stakeholders have similar interests. For example, employees and shareholders have a common interest in the success of the business. For shareholders this is likely to increase the value of their shares and dividends. For employees, a successful business improves job security and may lead to higher wages.
Conflicting Interests
With so many potential stakeholders it is inevitable that there will also be many conflicting interests. For example, growth of a business may be good for shareholders but may not be good for the local community especially if their environment is affected.
Stakeholder Risks Stakeholders will want to defend their interests in an organisation. For example, a bank that lends money to a business will want to ensure that the loan and interest is repaid. Suppliers to the business will also want to ensure that they are paid for the goods they supply.
In the case of the bank they may protect their interests by securing the debt against property or perhaps charging high interests rates. The supplier, on the other hand, may refuse credit unless satisfied they will definitely be paid.
All businesses face competition and they have to contend with both direct and indirect competitors. An example that is often used to explain this is the fast food industry.
Direct Competitors
A direct competitor is anyone who offers a similar product and aims it at the same target market. So companies like McDonalds and Burger King and indeed anyone else offering a similar product are direct competitors with each other.
Indirect Competitors
Indirect competitors are people who offer substitute products that could be used by your target market. So a company like Dominos Pizza, who sell a different product may be indirect competitors to McDonalds.
Porter's Five Forces is a framework that can be used to help a business develop its strategy. It was developed by Michael E Porter of Harvard Business School in 1979.
Porter makes the case that a firms strategy is a way of creating and sustaining a profitable position in the market environment in which it operates (Competitive Strategy 1996). This simplified diagram shows how the marketing strategy of an organisation is linked to the five competitive forces identified by Porter.
Direct and Indirect Competitors Porters Competitive Forces Marketing strategy Bargaining power of suppliers Competition from substitute products New Entrants in the Market Bargaining power of consumers Bargaining power of suppliers Trainer Bubble Ltd. 2011 46 46 46 46
1. A companys marketing environment consists of the micro environment (forces close to the company) and the macro environment (larger societal forces).
a. List FOUR key components of the micro environment. b. Explain how each microenvironment component may have an impact on the operation of a business.
2. There are broadly three types of stakeholder. Who are these stakeholders, and what interests do they seek to defend?
3. Porter (1996) identifies FIVE competitive forces that influence the state of competition in an industry. Select TWO of these forces and discuss with examples what these mean.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 47 47 47 47
Understanding buyer behaviour is crucial to any business. In this chapter we will examine the key aspects of this.
There are five mental processes that a consumer goes through when deciding to purchase a product. Need Recognition The buyer recognises a need or a problem triggered by internal stimuli (such as hunger or thirst) or external stimuli (such as social esteem). Information Search The consumer searches for products to satisfy the need identified. This divides into two levels. 1. Heightened Attention (the consumer becomes more receptive to information about appropriate products) 2. Active Information Search (where the consumer searches for information about appropriate products using various sources) Evaluation of Alternatives The consumer evaluates alternative products and brands and is seeking one that meets his or her requirements. Branding can be very important here as consumers will choose the brand that they perceive is best for them. Purchase Decision At this stage the consumer may have made a decision to buy a particular product but there are still factors that could change this: 1. The attitude of others (e.g. the opinion of a friend)
2. Unexpected change in circumstances (e.g. redundancy) Post Purchase Decision The consumers experience of the product will influence whether he or she buys it again and whether he or she recommends it to other people.
Personal factors play a big part in our buying decisions. These factors include age, occupation, financial circumstances and lifestyle and all of these variables change over time.
Age
Individuals buy different products according to their age. This is particularly relevant to certain products such as clothing and recreation.
Age not only affects the products people buy but where they will buy them and the brands they choose. It also affects their attitude to advertising and how susceptible they are to it. Consider this portrait of the youth market described by Charles Watt in B&T Weekly (5/7/02) which is an Australian marketing and advertising magazine.
The youth market
Life Cycle
Buying patterns are not only influenced by age but also by the stage in a family life cycle in which an individual falls.
How do you think that the buying behaviour of these three 27 year old men might differ?
Unmarried male Married male with no children Married male with a young child Personal Variables Media Savvy
Distrustful of advertising
Marketers must use SMS and the internet Desire to be accepted
Financial or economic circumstances will also affect what an individual will buy.
Occupation
Occupations also affect the buying behaviour of people. For example, somebody who works in the building trade may need to buy his or her own tools. Another person working in a job that involves meeting customers will need to buy appropriate clothing.
Lifestyle
Our buying habits will also be determined by what we do during our time away from work. For example, a keen golfer will buy products associated with the sport.
Consumers also make buying decisions based on environmental factors and influences. Very simplistically, you would expect some differences between city dwellers and people who live in the countryside to be reflected in what they buy?
There is also greater awareness of how we affect the environment in which we live and more and people take account of this when making purchases.
For example, we have recently witnessed a growing demand for organic produce as intensive farming methods have come under increased criticism by celebrity chefs and others. Spendable Income - What level of income? Over what time period? How sustainable is it? Savings and assets - What level of savings and how accessible is this money? Borrowing - What is the borrowing power and credit worthiness of the individual?
Spending What is the attitude of the individual towards spending as opposed to saving? Environmental Factors Trainer Bubble Ltd. 2011 50 50 50 50
A number of social factors have a direct effect on buyer behaviour. For example an individuals social role or social status effect the products and brands he or she chooses.
Two of the most important social factors are reference groups and the family.
Reference Groups
These are groups of people that individuals identify with.
One of the tasks of the marketer is to identify the reference groups that individuals identify with. It is also helpful to identify the individuals who lead opinion in these groups. For example the local shop steward is a likely opinion leader in a trade union.
Social Factors Primary Membership Groups These are usually informal groups that people belong to. Examples include family, friends, neighbours and work colleagues. Secondary Memebership Groups These tend to be more formal than primary membership groups and there tends to be less interaction between members. Examples include trade unions, professional societies, religious groups, etc. Aspirational Groups These are groups that an individual wants to belong to. An example, may be the local golf club or tennis club which may influence buying behaviour even beforeh he or she is a member. Dissociative Groups These are groups that an individual does not want to join and whose behaviour and values he or she rejects. Four types of reference group Trainer Bubble Ltd. 2011 51 51 51 51
The Family
Families are a major influence on buying decisions. Research suggests that there are three main patterns of decision making within families.
Three are four main psychological factors that affect buyer behavior:
1. Motivation 2. Perception 3. Learning 4. Beliefs and Attitudes
1. Motivation
Motivation has been defined as an inner state that energises, activates or moves that directs or channels behavior towards goals (Assael). This arises from perceived needs of which there are two main types
Biogenic Physiological factors such as hunger, thirst, discomfort, etc
Psychogenic Psychological factors such as the need for recognition, belonging, esteem, etc. Psychological Stimuli Typical buying decions will include life assurance, cars and television Husband dominated Typical buying decisions will include washing machines, carpets, kitchen equipment and non living room furniture. Wife dominated Some decisons tend to be made jointly and thse include living room furniture, holidays, housing and entertainment. Equal Trainer Bubble Ltd. 2011 52 52 52 52
There are many theories of motivation but we will concentrate on Maslows Heirarchy of Needs as it is probably the most widely used by marketers. However, students may also find it useful to study Freuds theory of motivation and Herzbergs Two Factor Theory.
According to Maslow the lowest level of need that is unsatisfied is dominant. Only when that is satisfied does the next one up become dominant.
So, if we are hungry our need for food will be dominant and only when this is satisfied will we look to our security and only when that is satisfied will we look to satisfying our need to belong, etc.
Marketers are able to adapt the hierarchy of needs to help with market segmentation. This is so that they target their advertising at the needs of as many people as possible. Similarly, they aim to position their product and brand so that it is perceived to satisfy a particular category of need in Maslows hierarchy.
Perception
Peoples perceptions also have a big influence on their buying behavior. These perceptions are driven by their own motives, expectations, past experiences, personality, etc.
We are, of course, all unique and this means that our perceptions are personal to us which in turn means that we have different attitudes to different products and brands. Fulfilment of personal potential Status, independence, respect, recognition, etc Food, water, shelter, comfort Self Actualisation Esteem Needs Love/Social Needs Safety Needs Physiological Needs Security, order, free from threat, predictability Relationships, affections and belonging Trainer Bubble Ltd. 2011 53 53 53 53
Beliefs and attitudes are important as they determine how people react and behave towards brands and products.
These are often deeply ingrained in people and are not easily changed. This means that the marketer would be well advised to ensure that their products fit within the beliefs and attitudes of their existing and potential customers. Trying to change those beliefs and attitudes would be very unwise.
There are many differences between organisational and consumer markets.
Organisations make buying decisions in a different way to individual consumers. A key difference is that it is rare for a single person to make a buying decision on behalf of an organisation.
This means that sellers need to be aware of all people involved in the buying process (the Decision Making Unit) and their relative importance in the decision. Organisational Buyers Smaller number of buyers Closer relationship with sellers May Require customsied products Greater buying powers Attitudes Organisational Buying Trainer Bubble Ltd. 2011 54 54 54 54 Possible Make Up of a Decision Making Unit
Users: May initiate the buying process and help to define product requirements Influencers: Play a part in defining requirements and evaluating alternative products Deciders: Decide on the product and supplier
Approvers: Give final authority following the decisions of the buyers and deciders Buyers: Have the authority to select suppliers and negotiate terms with them Gatekeepers: Control the flow of information and may be able to stop sellers contacting decision makers direct Trainer Bubble Ltd. 2011 55 55 55 55
1. What are the main influences of consumer behaviour and why does it differ from one individual to another? Explain, using examples.
2. a. Define the term consumer buying behaviour using an example of your choice.
b. Explain the general stages in the buying process.
3. What are Porters Five Competitive Forces and how do they apply to an airline company of your choice?
End of Chapter Test Questions Trainer Bubble Ltd. 2011 56 56 56 56
Market segmentation is important because it allows businesses to make the best of the opportunities that exist in the market.
Segmentation involves breaking the market down into smaller groups (segments) based on common characteristics and variables. These segments are then targeted according to the marketing objectives of the organisation.
However, effective segmentation requires a lot of information which means that good market research is essential.
Definition: Segmentation is the subdividing of a market into distinct and increasingly homogenous subgroups of customers, where any subgroup can conceivably be selected as a target market to be met with a distinct making mix. (Kotler 1994)
Market selection targets segments of the market that have been identified by segmentation rather than trying to target the entire market.
There are two main factors to consider and these are the attractiveness of the market segment and how it fits with the resources, capabilities and objectives of the business.
Segmentation Process of Market Selection Attractiveness of the market segment - size of thet segment - growing or contractiing? - what is the competition? - what market share is attainable? - how profitable is it likely to be? How the segment fits with the business -can the business serve this segment? -How will serving this segment affect its image? Trainer Bubble Ltd. 2011 57 57 57 57
One of the most common models used to segment markets is based on two steps. These are macro-segmentation and micro-segmentation.
Macro-Segmentation
This divides a market into broad characteristics. For example, car manufacturers may divide its markets geographically and/or by age of potential customers.
This is relatively easy to do as there is plenty of information readily available. However, it does have limitations.
Retuning to our example of the car manufacture one marker segment may be the 25-35 age group. In reality it is extremely unlikely that everyone in that segment will have the same requirements when buying a car.
Micro-Segmentation
Micro segments are homogenous groups of buyers within macro segments. The aim is to find out who makes buying decisions and what drives those decisions.
Returning to our example of the car manufacturer the 25 to 35 age group is a very large segment. Within that group buying decisions will vary because of a number of factors such as lifestyle, attitudes, preferences, etc. Understanding this will helps with marketing strategy.
There are a number of ways in which customers differ and these include geographical, demographic, psychographic and behavioural factors. Each of these can be used to segment markets.
Geographic
Geographic segmentation is particularly important for multi- national and global businesses but is also useful for companies that operate in just one country. This is because companies can vary their marketing and advertising programmes according to different geographic areas.
There are many different ways of segmenting markets geographically. Here are some examples:
Climate may also be used as the basis or segmentation (e.g. Northern, Southern regions of a country).
Bases for Segmenting Markets Regions - in the UK these might be England, Scotland, Wales, Northern Ireland. Countries -These could be classified by size or perhaps by being part of a geographic region. Cities/Towns - These may be segmented according to population size. Population Density - For example: urban, suburban region, rural, semi-rural Trainer Bubble Ltd. 2011 59 59 59 59 Psychographic or Behavioural
Psychographic segmentation groups markets according to customer lifestyles. This is sometimes known as behavioural segmentation. This works on the basis that there are many possible influences on the behaviour of buyers. These include the attitudes, expectations and activities of customers. Knowing these enables a business to customise its products and marketing campaigns to appeal directly to what its customers want.
Lifestyle Our lifestyle changes as we pass throuh life. The sagacity lifestyle model is an example: 1. Dependent (living at home with parents 2. Pre family (own household but no children) 3. Family (parents with at least one dependent child) 4. Late (children have left home or childless couples) Opinions, Interests, Hobbies, etc. This covers areas such as political opinions, views on the environment, sporting and recreational activities. All potentially influence our buying behaviours. Customer Loyalty Customers who are loyal to your brand are valuable to you. Segmenting them by degree of loyalty allows firms to adapt their marketing to retain loyal customers. Occasions This segments a market according to when products are purchased. For example, many customers only buy certain products on special ocassions (e.g. boxes of chocolates). Examples of Psychographic Segmentation Trainer Bubble Ltd. 2011 60 60 60 60
Demographic
The total size of the population in which a business operates defines the maximum possible demand for a product. However, this does not mean that every member of the population is a potential customer.
Let us take the teenage market as an example. A company that manufactures prams is unlikely to find a huge market in this age group. On the other hand a company that produces video games might do well to target this segment of the population.
Factors such as sex or age may be used. Another characteristic that is used a lot is the type of residence. The best known of system is known as ACORN (A Classification of Residential Neighbourhoods).
Acorn
Where more than one type of segmentation is used this is known as multivariable segmentation. This is sometimes necessary because two or more bases of segmentation may be useful at the same time.
For example a group may be segmented by age, geography and financial circumstances with different variations of a product being marketed to different sub groups
Multivariable Segmentation and Typologies Geodemographic - Combines geographic location with the type of neighbourhood and lifestyle factors. Segments in the UK - Small neighbourhoods, postcodes or consumer households.
Classifications - Splits residential areas into 5 categories, 17 groups and 56 types.
The people in each category share similar characteristics in terms of the types of products they buy. Trainer Bubble Ltd. 2011 61 61 61 61
Segmentation helps businesses to understand their customers and potential customers. This helps them to target, acquire, manage and develop profitable relationships.
Practical Benefits
Segmentation enables a business to use its expertise in that particular part of the market to solve and prevent problems.
Benefits to Customers Segmentation also brings benefits to customers.
Benefits of Segmentation Marketing Opportunities Through understanding customer needs in each segment Specialism: Specialists can be appointed to build each of the firms main segments Budgeting : Marketing budgets can be allocated according to segments with the most potential Precision Marketing: The approach can be fine tuned according to each market segment Competitive advantage May result through specialist knowledge of particular segments Product Assortment Assortments of products can be refined to appeal to different segments Products and services better match customer requirements More product variaitons are developed meaning that customers are offered more choice Trainer Bubble Ltd. 2011 62 62 62 62
Before deciding whether it is worth working with a market segment a business must first evaluate it. This means that there are a number of key questions it needs to ask.
Targeting Strategies
Evaluation of Segments and Targeting Strategies Is the segment capable of being measured? Is the segment big enough to be profitable? Can the segment be reached by the business? Do the identified segments respond differently? Can the segment be reached profitably? Is the segment stable enough to be a worthwhile commitment? Market Factors - Size of the segment (is it growing?) - Stage of industry evalaution - Predictability - Price sensitivity and stability - Bargaining power of customers - Seasonal factors Economic & Technological Factors - Barriers to entry/exit - Bargaining power of suppliers - Level of technology - Investment needed - Profit margins Competitive Factors - How intense is the market? - What is the quality of the competition? - What threats from substitute products? - Degree of differentiation Environmental Factors - Exposure to political and legal factors - Degree of regulation - Social acceptability - Is the market subject to economic fluctuation? Factors for evaluating market attractivness Trainer Bubble Ltd. 2011 63 63 63 63 Once the evaluation is complete the business is ready to choose its target markets. It will also need to consider its strategy from three main options.
Positioning is the process of designing what the company offers and its image to distinguish it in the minds of its target customers.
The car industry is a good example of this. Consider who the target markets might be for these car manufacturers and how their products are designed to meet the needs of those markets. Why do they offer a range of products?
Rolls Royce Mercedes Ferrari Jaguar Lexus Renault Lexus Volkswagen Toyota Seat Ford
A single product is produced The aimis to reach as many customers as possible This is sometimes called mass marketing Undifferentiated Marketing The firmaims to produce ideal products These are aimed at a single segment of the market Examples include Aston Martin cars, Mothercare (for mothers and babies), etc Concentrated Marketing The firmproduces different versions of a product Each version is aimed at a different market segment For example, the supermarkets sell products packaged in basic, premiumand quality versions Differentiated Marketing Positioning Trainer Bubble Ltd. 2011 64 64 64 64
Segmentation in industrial markets is similar to consumer market segmentation but can be more of a challenge. This is because buying processes and buying criteria are often more complex. Industrial markets are smaller than consumer markets but may still worth segmenting. A number of possibilities exist.
One approach is classification according to the nature of the business. In the UK marketers can use information from the National Office of Statistics. It produces the Standard Industrial Classification of Economic Activities (SIC). This is useful to marketers because it classifies businesses by the type of economic activity in which they are engaged.
Segmenting and Industrial Markets Industrial Classification Location - Many business sectors are located in particular areas. (e.g. in England the computer industry is concentrated around the M4 corridor) Size - The turnover of a company or the number of employees it has may affect the products it needs (e.g. type of computer system) Usage Rates - Customers may be segmented according to how much they use a product or service (e.g. light, medium or heavy users) Product Use - Products may be used in different ways. For example they may be for the use of the buyer or may be sold on to another customer Trainer Bubble Ltd. 2011 65 65 65 65
Segmentation is a key function of marketing and if it is done well it will add value to an organisation by helping to make it more profitable.
Value Value based segmentation Based on the profit potential of the segment Diferences between the segments enable you to design different offerings for each of them Facilitates the creation of products and services Clearly identifiable criteria make it easy to seperate the segments from each other Leads to improved marketing and pricing decisions Trainer Bubble Ltd. 2011 66 66 66 66
1. a. Define the term segmentation
b. Which factors do you think marketers need to take into account to determine the attractiveness of a segment?
2. Discuss THREE popular methods of market segmentation and give examples of EACH method as to how it has been used in a company or industry of your choice.
3. Define the following methods of segmenting consumer markets and provide examples on how each method can be used in the commercial environment:
a. Geographic segmentation b. Demographic segmentation c. Psychographic segmentation
End of Chapter Test Questions Trainer Bubble Ltd. 2011 67 67 67 67
Section 3
The Marketing Mix
Trainer Bubble Ltd. 2011 68 68 68 68
This is an essential part of the marketing mix as the development and exploitation of products is vital for any business.
Products
To survive and thrive a business must consistently provide products that provide value and meet the requirements of its customers. Products must also be attractive to customers. This means that in a marketing sense it is wrong to think products only as a physical objects.
People buy products because of what they can do. When people buy drills, they want holes. (Source unknown)
Think of product in terms of their attributes which can be both tangible and intangible.
There are a number of layers to the concept of the total product. The diagram below shows that the core product is about what the product is designed to do. Therefore, a coffee making machine will make coffee.
However, the actual product will be augmented with additional elements aimed at building the reputation and trust associated with it. So, a basic coffee maker may come in various shapes, designs and colours. It is also likely to come with an after sales service and guarantee.
The Total Product Concept Extended Product After sales service,guarantee, brand, repairs, training, company ethics, etc Actual Product Features, ingredients, design, pacckaging, colour, etc Core Product Functionality Key Benefits Product Augmentation Building on the benefits of the core product to increase attractiveness and customer satisfaction. Trainer Bubble Ltd. 2011 70 70 70 70
The product mix sits within the marketing mix and there are a number of factors to consider.
The marketer is able to use these factors to design a product audit. This is a systematic examination of the product offerings of the company and it helps the organisation answer three key questions.
Does the product fit with the goals of the organisation? How does it compare with the completion? Does it meet the requirements of the market?
Product Mix Range of products Research and development Directional Policy Matrix (Ansoff) Portfolio Analysis: Boston Consulting Group Matrix Product Life Cycle Value Packaging Branding Differentiation: Unfulfilled preferences Unique Selling Proposition (USP) Features, Advantages and Benefits (FAB) Segmentation and positioning New Product Development Trainer Bubble Ltd. 2011 71 71 71 71
Most products have a limited life cycle. This means that sales and profitability can be expected to change over time. This chart is a representation of a typical product life cycle
The nature of the product will determine how quickly it will progress through the life cycle. Products such as clothing are subject to fashions and trends and often reach decline very quickly.
Other factors that affect the lifestyle include technological advances and developments in competitors products.
-15 -10 -5 0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 Sales Profit Product Life-Cycle & Its Effect on Other Elements of the Marketing Mix + - Introduction Growth Maturity Decline Senility The Product Life Cycle New products take time to be accepted by customers. Costs are high and sales are low so profit is unlikely during this phase. Sales rise sharply and production increases. Competitors start to emerge. Normally the longest phase in the product life cycle. Sales remain steady but growth slows. Most products go to a decline phase. Sales and profits fall. The product is no longer profitable. The producer reacts by leaving the market or by introducing new products. Trainer Bubble Ltd. 2011 72 72 72 72
It can be difficult for a business to manage growth so an effective strategy is important. The Ansoff matrix is a well-known framework that helps with making product and market decisions.
The Ansoff Matrix
Existing Products New Products
New Existing Markets Markets
Market Penetration = Increasing the share of existing products in existing markets
Product Development = Developing new products for existing markets
Market Development = Moving into and developing new markets for existing products (requires a lot of investment so this can be risky)
Diversification = Developing or acquiring a new product to enter into a new market (this strategy represents the highest risk)
Product Strategy Market Penetration Product Development Market Development Diversification Anso ff Matr ix Trainer Bubble Ltd. 2011 73 73 73 73
New Product Development (NPD) is described as the complete process of bringing a new product to market.
What do we mean by new products?
New to the World
These products are totally new to everybody and often have a major effect on buying behaviour (e.g. mobile phones).
New to the Company
A company may offer existing products or its own version of an existing product to enter a new market (e.g television companies now offer telephone and broadband services).
New Improvements
Products are changed significantly affecting how we use them.
Sources of Ideas
Ideas for new products can come in a wide variety of ways and may be generated from within the company or externally. Here are a few examples.
Internal External
New Product Development Customer Complaints SWOT analysis Research and Development Department Suggestion boxes Sales staff feedback Focus Groups Market Research Competitors Customer Suggestions Industry Research Pressure Groups Inventors Trainer Bubble Ltd. 2011 74 74 74 74 The NPD Process
The development of new products should follow a logical process.
Original Concept This is the initial idea - most ideas do not progress beyond this stage Screening of Ideas An initial evaluation of the idea and any obstacles to going ahead with it Business Analysis A risk assessment to evaluate the viability of the idea Concept Definition Builds on the original idea by defining the criteria needed to meet market needs market Product Development This includes building and testing prototypes Marketing Mix Issues This needs careful attention and any issues need to be identified and resolved Pilot Launch The product is piloted with a small number of customers before a full roll out Roll Out Full Launch The product is launched to the full target market Trainer Bubble Ltd. 2011 75 75 75 75 Screening of New Product Ideas
This is an important step because the failure rate of new products is as high as seven out of eight. A business should therefore only take a new product to market if the conditions are right. There are three factors to balance.
The adoption process is also known as the diffusion of innovation. It was first described in 1959 1 and describes how different members of a target market accept and purchase a new product.
1 Bourne, Francis S. "The Adoption Process," reprinted in Michael J. Baker (ed.), Marketing: Critical Perspectives on Business and Management. Routledge, 2001. Adoption Process Is there enough demand for the product? Does the firm have the ability to produce it? Does the firm have the ability to market it? Enthusiasts who are eager to try out new things but tend not to be loyal Innovators Enthusiastic about new products but more practical than innovators can influence the future success of products Early Adopters This is the start of entry into the mass market and respresents up to 33% of customers Early Majority Although this group takes a 'wait and see' approach profits are usually higher when they start to purchase Late Majority The last people to adopt something new and are often resistant to the product Laggards Trainer Bubble Ltd. 2011 76 76 76 76
1. Discuss the various stages of the Product Life Cycle and explain how car manufacturers utilise it to create ongoing and renewable consumer demand.
2. a. Explain the THREE main reasons for introducing new products and services.
b. Using an example of your choice, describe the SEVEN stages of a new product development (NPD).
3. Using an example of your choice, explain the Ansoff matrix.
4. Discuss the marketing mix decisions associated with EACH of the Product Life Cycle stages.
5. Explain in detail the New Product Development (NPD) stages and how a car manufacturer of your choice could use them to introduce a new product, service or technology.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 77 77 77 77
Place is a crucial part of the marketing mix. It may also be referred to as distribution, delivery systems or marketing channels. To avoid confusion it is worth noting that these terms are often used interchangeably.
It is vital that a companys distribution policy is well thought out and well managed to make it easier for customers to buy its products. There are three main strategies that it may choose from.
Place The aim is to saturate the market by using many channels More distribution outlets equates to more sales Often used with brands where there are many competitors selling acceptable products (e.g. fizzy drinks) Intensive Distribution Limited number of outlets used The business uses the 'best performing' outlets Often used if customers have a preference for the brand (e.g. some electrical goods) Selective Distributrion Only one retailer or distributor is used in a geographic area Exclusive Distribution Trainer Bubble Ltd. 2011 78 78 78 78
Customers are more likely to buy products if they are convenient and readily available. This means that any business must pay proper attention to this if it is to be successful. A concept called The five rights of distribution helps here.
The right product
The product must be what the customer wants, needs or requires
In the right place
Products should be available where the customer wants to buy them. For example, it would make sense for golfing equipment to be available for purchase and/or hire at a golf course.
At the right time
It should be supplied when the customer requires it. For example, seasonal products should be available at the right time of year. Other products may need to be available for 24 hours a day all year round.
In the right quantity
Customers expect to be able to buy products in convenient forms and in amounts that are convenient to them.
For the right price
Products should be priced so that they meet customers expectations and provides them with value for their money .
In the context of this model the word right has two meanings:
Right Correct or appropriate Right The rights of the customer
Distribution is the means of getting products and/or services to the customer.
All distribution channels fall under one of two main categories.
Definition of Channels Direct Distribution The business supplies its products direct to the customer without using an intermediary. This is common in many of the service industries such as banking and insurance. However many physical products may also be distributed direct to the customer by a variety of means. Examples include: Own shops and stores Mail Order Telephone selling Door to door sales Computer or television sales Indirect Distribution Products are supplied to customers through intermediaries. This is common in manufacturing where wholesalers and/or retailers are used to sell the products. Another option may be to appoint agents to sell on behalf of the business. This is also seen in service industries. For example an Insurance Company may choose not to sell direct to customers but through Insurance Brokers instead. Trainer Bubble Ltd. 2011 80 80 80 80
Most businesses will make use of indirect channels to bring their products to market. This means making use of third parties known as intermediaries. There are various types of intermediary.
Retailers
Many products are sold through retailers. These can be classified in a number of ways (e.g. types of products sold, size, type of service, location, etc.) They can also be classified according to the type of retailer.
Independent Retailers The best example might be the local corner shop although it is worth bearing in mind that some independent retailers can be very large businesses.
Multiple Chains For example, supermarkets and department stores. They will buy products direct from the producer for re sale to customers. In some cases, these will be sold under the retailers own brand label.
Wholesalers
Wholesalers are intermediaries who buy and hold stock from a number of different suppliers. They may specialise in particular types of products or ranges of products. They then sell these goods on at a profit to retailers or other businesses
Distributors and Dealers
Distributers and dealers have a similar role to wholesalers and retailers but will generally offer a much narrower range of products. For example, car dealerships will usually concentrate on the products of just one manufacturer.
Agents
Unlike distributors, agents do not buy and re sell goods. Instead they sell goods and services for a fee or commission. Examples include travel agents, estate agents and insurance brokers.
Types and Functions of Intermediaries Trainer Bubble Ltd. 2011 81 81 81 81 Functions of Intermediaries
The main function of intermediaries is very simple. They are used by the producers of product and services to distribute them to their customers.
There are a number of reasons why an intermediary may be a more effective distribution channel than attempting to sell direct:.
Selecting the right channels of distribution is important and there are five factors to take into account.
Customers Product Characteristics Distributor Characteristics Channels Used by Competitors Supplier Characteristics
Customers
Customers are a key factor in deciding distribution channels. There are a number of considerations that will influence suppliers.
How many potential customers exist? What are their buying habits? Where do they live?
The product being sold will influence how it is distributed.
Is the product perishable? In which case how can it be got to market quickly?
Is the product customised for buyers? These products are often distributed direct to customers.
Will there be a need for after sales service and/or technical advice? If so, how can this be provided? Will distributors need to be trained to provide this service? Would franchising be the best way of providing this?
Distributor Characteristics
Which distributors have the capability and capacity to carry out the distributive work at the right price?
Channels used by Competitors
It may be necessary to accept that your own products will sell alongside competitor brands. This particularly applies to consumer products.
Is it possible to compete by opening different distribution channels. For example businesses such as Amazon have been particularly successful at distributing products through the internet that were only available through high street stores in the past.
Supplier Characteristics
Does the supplier of the product have the capability and capacity to operate their own distribution channel? A good example of this in the UK is Direct Line Insurance which built a very successful business distributing insurance products direct to its customers.
Trainer Bubble Ltd. 2011 83 83 83 83
To develop an integrated distribution system the supplier not only needs to know the factors that influence distribution but also needs t to be knowledgeable about the merits of various distribution channels.
Reasons to choose direct selling
Reasons to Choose Intermediaries
Integration and Distribution Systems Certain products need an expert sales force who can demonstrate it and provide after sales help Intermediaries may not be willing to sell the product so the supplier has to sell it direct Existing channels may have links with your competitors Intermediaries may not have the capabilities you need (e.g. specialised transport) Direct sales may be best if customers are concentrated in a geographic location The supplier does not have the financial muscle to pay for a large sales force It may be wiser to invest in increased production rather than in marketing
The supplier may not have enough marketing expertise to sell direct
Product quantities and the range of products may not justify employing a sales force The supplier does not have to incur high sales overheads on smaller orders Intermediaries may be better able to serve large numbers of customers spread over a wide geographic area Trainer Bubble Ltd. 2011 84 84 84 84 Multi Channel Decisions In some situations suppliers may choose to use more than one channel. For example, large confectionary manufacturers sell to wholesalers and to large retail groups..
Industrial Distribution Channels
Industrial markets have fewer customers than consumer markets. However, the customers are larger and tend to buy more expensive products. Many products are also custom built.
These characteristics mean that there is more of a tendency towards direct distribution channels. However, this is not always the case and there are also specialist distributors who suppliers might use. A good example is the building trade where building materials are often sold and delivered through distributors.
The physical distribution of products and the logistics involved in this involve some important decisions. This includes selecting the best mode of transport for the product.
Modes of Transport
Road Transport The main advantage of road transport is that suppliers can use it to deliver products direct to the customer. It is flexible and keeps delays and handling to a minimum. However, there are limits to how much can be carried so it can be expensive.
Rail Transport Large loads can be carried over long distances by rail. This helps to minimise costs. However, this method of transport is limited by the physical reach of the rail network. It must also be remembered that there will be transfer costs moving loads to and from the rail network.
Water Transport Where geographic conditions allow transport by sea has similar advantages and disadvantages to rail transport. A major disadvantage is that travel by water is slow which is a problem with perishable items and goods that are needed quickly.
Air Transport This is the most expensive of the four transport options but has the advantage o being quick. Where fast delivery is important products can be priced accordingly especially if they need to be delivered in peak condition (e.g. early season flowers). Physical Distribution Management and Logistics Trainer Bubble Ltd. 2011 85 85 85 85 Logistics Management
This covers management of physical distribution and the management of materials used by the business.
Logistics management has developed for three main reasons.
Just in Time (JIT)
JIT is a system of inventory control that was developed in Japan. It is a control system (usually computerised) that ensures that materials, goods and products are ordered and delivered at the rate at which they are needed.
Customers benefit because they are more likley to get the products they want in the right quantiies and on time. Aligns with moderns trends such as just in time purchasing. Efficiencies lead to cost savings. Outflow of finished Inflow of raw materials Trainer Bubble Ltd. 2011 86 86 86 86
Franchising is becoming an increasingly popular way to grow a business. Many large businesses in the UK operate on this basis. Examples include The Body Shop and Dominos Pizzas.
These companies allow businesses to trade in their name and will charge an initial fee and will also normally take a share of the sales income.
Franchise Authorisation is granted to someone to sell or distribute a company's goods or services in a certain area.
Franchiser The business that grants the franchise.
Franchisee - The business that is granted a franchise to market a company's goods or services in a certain local area
There are a number of ethical considerations because the balance of power in the distribution chain is not always equal.
One of the best ways to explain this is by using the example of the supermarket chains and grocery products.
It is generally accepted that the supermarkets are very powerful and that they have more power than most of their suppliers. If they abuse that power they could make business very difficult for the people who supply them and could even drive them out of business. Ultimately, this would not be in the best interests of the end customer, the suppliers and the supermarkets themselves. This is because of the risk of a reduction in supply and the choices available. This in turn could lead to price rises.
Here are a few examples of how power could be abused in the supply chain:
The retailer is slow to pay its suppliers. This could affect their cash flow and make business difficult for them.
Suppliers could manipulate product availability to influence price. Consider the example of the OPEC countries that are able to manipulate the supply of oil.
The big stores and chains could demand exclusivity of supply from a producer and then over time drive down prices without necessarily passing these reductions on to customers. Ethics in Distribution Franchising Trainer Bubble Ltd. 2011 87 87 87 87
1. What are the various tools and advantages of direct marketing? Explain with examples.
2. a. When setting up a channel of distribution, the supplier has to take into account a number of factors. Describe, with examples, what those factors should be.
b. Which factors favour the use of direct selling?
3. What are the business and environmental circumstances favouring companies to distribute products through:
i. direct selling ii. the use of intermediaries
4. Write notes explaining the following distribution strategies:
i. Intensive distribution ii. Selective distribution iii. Exclusive distribution
5. Explain FIVE basic functions performed by distribution channels.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 88 88 88 88
Pricing is an important strategic element in the marketing mix. However, it never operates in isolation as all of the components of the marketing mix work in together. Nevertheless, there are occasions where price is the predominant component and this appears in markets that are particularly price sensitive. There are three major factors that always need to be kept in mind when considering price: 1. Ensure that all costs are covered 2. Take account of how price affects sales 3. The price should provide a profit
The aim is to set prices which enables the organisation to achieve the sales that it needs to meet its business objectives. However, when setting pricing policy it is also important to take account external considerations including customer perceptions about value. For any product there is a maximum price that buyers are willing to pay. Similarly there is a minimum price below which the supplier will not sell. The selling price will always be somewhere between these two figures. Organisations also realise that customers do not buy the product in isolation. Their perception of whether they are receiving value for money includes factors such as brand, special attributes, the occasion, etc. These factors differ between customers so what represents value for money for one customer may be considered too expensive by another.
Consumer Expectations We are all consumers and we have our own idea of what represents value. We may refer to a product as being expensive or cheap. Customers may be suspicious of products that are offered at a price that seems too low. They may be put off buying if an offer seems to be too good to be true just as much as they would by high prices. Price Perceived Value Trainer Bubble Ltd. 2011 89 89 89 89 Perceived Value Pricing This approach to pricing is sometimes used when a product is perceived to have a high value to the customer. For example, the buyer of made to measure suit of clothes is usually prepared to pay more for it than an off the shelf equivalent.
Pricing needs to be considered carefully and set within the context of the market in which the business operates. There are two elements to this:
The internal needs of the organisation
External market constraints
Business Objectives
As already mentioned, the aim is to set prices to achieve the sales necessary to meet business objectives and these fall into two main categories. Either of these objectives may play a part in setting prices.
Pricing Context and Process Objectives aimed at maximising profits
Objectives aimed at maintaining or increasing market share Trainer Bubble Ltd. 2011 90 90 90 90 Costs and Profit
You will remember from an earlier chapter that a key component of any definition of marketing is to supply customer requirements profitably. This means that prices have to cover the cost of supplying the product and service being sold plus it must provide a profit.
This means taking account of all direct and indirect costs involved. Well cover this in a little more detail later. In the meantime just consider what costs a business might incur just in getting even a simple product to market. Here are just a few:
The price of the each product must take account of all costs involved in supplying it to the customer. The desired profit is then added to this. There must be sufficient profit to enable the business to carry on trading, invest in the future and provide a return for its investors.
Breakeven Analysis
Breakeven analysis is a technique that is used when setting prices. It is used to understand the relationship between cost volume and profit.
Breakeven Point
This is the point at which there are sufficient sales to cover all costs when taking account of fixed and variable costs and revenue. It can be calculated using a simple formula: Breakeven = Fixed Costs Price variable costs Raw Materials Machinery and equipment - buying or hiring Selling costs Production costs Cost of promotion Packing and packaging costs Distribution costs Machinery and equipment - maintaining and repairing Trainer Bubble Ltd. 2011 91 91 91 91 This might be best explained using a simple example. Imagine that you are setting up a market stall to sell flower pots. Your rent for the stall is 100 for the week and you can buy flower pots at 2 each and sell them for 3 100 = 100 3 - 2 In this example you would have to sell 100 pots to break even. Sell more than 100 pots an you start to make a profit.
Breakeven Charts Breakeven charts can help management to plan. By using budgeted variable costs, fixed costs and sales it is possible to see at a glance where the break-even point is. We will stay with our simple example of the flower pot stall to illustrate this. Fixed costs: 100 Variable Costs: 2.00 per pot Sales Price: 3.00 per pot. Using these figures the chart shows that the break even is 300. Of course, by varying any of these the figures the breakeven point changes. For example it will be reached sooner of the sales price is increased and later if it is reduced.
Trainer Bubble Ltd. 2011 92 92 92 92 You will also encounter Profit/Volumes charts. These are a variation of breakeven charts and are designed to show the relationship between costs and profits and the number of sales.
There are limitations to a break even analysis so it does need to be used carefully:
1. It can only be used on a single product or a group of products 2. It assumes that fixed costs remain the same and that variable costs per unit and selling prices do not alter. In reality all may be subject to change.
Economies of Scale
One factor that affects costs is economies of scale. The average cost of producing or buying a product will reduce if high quantities are needed.
Returning to our much simplified flower pots example it is likely that you would be able to negotiate a discounted price from your supplier if you were buying in large volumes.
Inflation
The effects of inflation need to be taken into account when making decisions about pricing.
When costs rise can prices be increased to ensure profit? Can you avoid fixed price long term contracts if you are the seller? How often can you review your prices?
If the inflation rate is high you should review your prices regularly. Will you be able to pass on your cost increases in a competitive market? Can you anticipate future increases in your costs when setting your prices? Trainer Bubble Ltd. 2011 93 93 93 93 Rapid Skimming Slow Skimming Rapid Penetration Slow Penetration
Pricing strategy is a key part of the marketing mix because the ability to manipulate price affects both the demand for a product but also its profitability. However, we have already said that none of components of the marketing mix works alone so pricing strategy must fit within the whole marketing strategy.
It is certainly worth considering how price and promotion work together.
Information to the market (promotion)
High Low
High
Price
Low
This chart shows that a strategy of setting high prices coupled with high promotion is aimed at rapid skimming. If this works this means that high profits may be achieved at a high rate.
Price skimming is a strategy which involves setting a high price for a product or service at first and then lowers the price over time. A good example of this is the market for games consoles where suppliers charge very high prices when a console is first introduced to the market. This takes advantage of the initial high demand when customers are keen to get their hands on the new state of the art technology.
The aim of a strategy involving low prices and high promotion is to achieve high market penetration as quickly as possible.
This is the simplest approach to pricing. The supplier simply adds a percentage to the cost price of the product when selling it to customers. This will often be a standard mark up and means that the price to the customer will fluctuate as the cost to the business changes.
This method of pricing has advantages and disadvantages.
Target Pricing
The business sells at a price aimed at meeting a target profit over a defined period. This is a variation of marginal cost plus pricing which adds a profit margin to a marginal cost. This is sometimes known as markup pricing.
Demand Based Pricing
In theory, demand for a product varies according to its price. This means that it ought to be possible to estimate how much demand there will be at different price levels and to optimise profits. However, it can be difficult to achieve this in practice and requires a lot of time and effort. Some larger organisations see this as being worthwhile and may produce estimated demand curves for their products based on varying prices.
A bus company might want to predict the effect of various levels of fare increases.
What would be the effect on passenger numbers?
How would this affect their profits? Advantages - Good fr pricing large contracts to ensure sufficient profit margins -Useful if a company cannot estimate demand at different sales prices because it is simple to do Disadvantages - Does not recognise that customer demand is affected by price - Does not account for the need to adjust prices in response to market conditions Trainer Bubble Ltd. 2011 95 95 95 95
Although price does not operate in isolation it is clear that pricing is a crucial factor when aiming for a competitive edge. One reason for this is that buyers can easily compare prices and shop for what they perceive to be the best deal.
Price Wars
Competitor Related Pricing
When pricing products for the market an organisation has to take into consideration the prices being offered by its competitors. When a number of competitors offer exactly the same product the prices they charge will be broadly similar.
The prices that competitors charge cannot be ignored but there are still ways where it is possible to differentiate on price. Examples include:
Different product quality Differences in product design Differences in geographic location
Brand loyalty is also a factor to consider. For example there is a tremendous brand loyalty towards coca cola in the cola market.
Competition Drives down prices
A head to head fight between competitors Price wars are dreaded by businesses Reduces profit margins and may lead to losses Drives smaller companies out of business Ultimately reduces consumer choice so nobody really wins Trainer Bubble Ltd. 2011 96 96 96 96 Competitive Advantage
The concept of competitive advantage was set out by Michael Porter 2 and it is important to have some understanding of it. The basis of this concept is that for a business to thrive in the long term it needs to have a sustainable competitive advantage.
According to Porter there are two main types of competitive advantage and these are cost leadership and product differentiation.
Focus
Businesses also need to consider their focus. Lets take cost leadership and use motor insurance as an example.
An insurance company may decide to become a cost leader for motor insurance. However, this could be very difficult to achieve across the whole market. It is, therefore, more likely to focus on a particular market segment such as middle aged drivers with small family cars.
An alternative strategy may be product differentiation perhaps by insuring quality cars and offering add on services that these customers would perceive to be important. For example these customers might appreciate a free valet of their vehicle as part of the claims service.
2 Competitive Advantage, Michael Porter 1996 The aim is to be the lowest cost producer for a particular product or set of products The products must still be of a standard that is on a par with its competitors as customers will not buy if the quality is perceived to be poor. Cost Leadership The aim is to have the best product or group of products rather than to compete solely on price. The product should have unique features which customers consider to be important. Product Differentiation Trainer Bubble Ltd. 2011 97 97 97 97 Average Price and Lowest Price Strategies
These are two pricing strategies that are based on what competitors charge.
Average Price Strategy Used when products sold by rival firms are similar Price charged is the 'going rate' for the product Customer attitudes may influence this approach Not perceived as being an aggresive approach Low Price Strategy This can be seen as an aggressive strategy Customers may associate this with low quality This may lead to price wars Trainer Bubble Ltd. 2011 98 98 98 98
Economic theory tells us that price is a major factor in determining demand. The lower the price of a product the higher the demand. Conversely, demand drops when prices rise.
In recent times a lot more emphasis has been placed on other factors. This is because competitors can easily copy price changes but it is more difficult to copy unique selling features in the product itself. Market conditions also affect prices.
It is true to say that most British industries operate in an oligopoly. It is difficult to define market power in these circumstances and normal economic theory does not help much. However, a concept known as price elasticity is important
Price elasticity is measured in this way
%Change in Sales Demand % Change in sales price
If price elasticity is greater than 1 a change in price will also change revenue
o Lowering prices will increase revenue because demand will increase o Increasing prices will reduce revenue because demand will fall
If price elasticity is lower than 1 changes in prices will have the opposite effect
o Lowering prices will see a fall in revenue because the increase in customers will not be enough to compensate for this o Increasing prices will increase revenue because the drop in sales will be small Market Conditions Perfect Competition Many buyers and sellers with identical products. The balance of power is more or less equal. Oligopoly A small number of competitive companies dominate the market. Monopoly One seller dominates the market and can use its market power to maximise profits Demand Elasticity Trainer Bubble Ltd. 2011 99 99 99 99
The cost of a product is the total cost of a product built up from all of its cost elements. This means that the total cost of a product is made up of: The cost of raw materials needed to make the product or service The cost of employing staff to produce the product or provide the service being sold The cost of all other expenses (e.g. rent, energy, telephone bills, sub contractors, etc) There are a number of different types of costs to be aware of.
Direct Costs and Indirect Costs
Functional Costs In manufacturing businesses traditional costing models classify costs as: Production or manufacturing costs Administration costs Marketing and/or selling and distribution costs Direct Costs Directly associated with the product or service including - Material costs - Labour costs - Direct expenses Indirect Costs Costs that cannot be directly associated with a product or service (e.g. wages for emplooyees in central functions , insurance, cleaning, etc) Costs Two types of cost Both must be taken into account Trainer Bubble Ltd. 2011 100 100 100 100 Fixed Costs and Variable Costs
Controllable and Uncontrollable Costs
Controllable Costs
These are sometimes known as avoidable costs. They are usually direct costs or variable costs and can be controlled or avoided in the short term.
Uncontrollable Costs
These costs cannot be controlled or avoided in the short term. They are usually the fixed costs incurred by the business such as the cost of renting premises.
Fixed Costs These are costs that do not change regardless of how much the business produces or sells. Examples of fixed costs incude rent, rates and salaries. Variable Costs These cost vary according to how much the business produces or sells. These include the cost of raw materials, packing and packaging and transportation. Both must be taken into account when pricing Trainer Bubble Ltd. 2011 101 101 101 101
Price discrimination exists when identical products or services are sold at different prices by the same supplier. There are a number of ways in which this happens.
One common form of price discrimination in the retail industry is own label pricing. Large retailers often offer own branded products at lower prices than well-known branded products. Discriminatory pricing is sometimes known as differential pricing or multiple pricing.
Some people question whether price discrimination is ethical and there are certainly situations where it can lead to misunderstandings between sellers and buyers. Unethical pricing can come in a number of different forms although these can be difficult to investigate. In the UK government agencies such as the Office of Fair Trading are responsible for establishing whether unethical pricing agreements such as fixed pricing exists between suppliers. Examples of unethical pricing may include: Price fixing Price skimming Price discrimination Price wars Bid rigging Predatory pricing (where suppliers try to earn excessively high profits at the unfair expense of its customers) Discriminatory Ethical Issues Negotiation with individual customers (e.g. discounts may be offered for cash payments) Bulk purchase discounts Product type (e.g. supermarkets charge different prices for basic and premium quality products By time (e.g. railway companies charge different prices for peak time and off peak travel) Location - Some locations attract higher prices than others. Trainer Bubble Ltd. 2011 102 102 102 102
Retail prices are often shown as odd numbers. So, instead of seeing a price expressed as 20 it is more likely to be 19.99. The theory is that this has a psychological impact and affects demand.
There are also suggestions that consumers are so used to seeing prices expressed in this way that anything else looks strange.
There is some disagreement over the effectiveness of odd pricing. Some marketers argue that many modern customers are price savvy and would not necessarily be amenable to this technique.
Psychological Prices expressed in this way suggest that the goods are marked at the lowest possible price Odd pricing may be used when items are divided into price bands to stay within a lower price band Customers ignore the least significant digits and may see this as 19 not 20 Pence may be shown in smaller text so that the emphasis is on the more significant figure Trainer Bubble Ltd. 2011 103 103 103 103
1. What are the differences between price skimming and price penetration? Explain using examples.
2. Provide a concise explanation for EACH of the following price setting strategies: i. Cost-plus pricing ii. Going rate pricing iii. Odd number pricing iv. Differential pricing
3. a. Describe the ways price discrimination can be exercised. b. Describe FIVE ways of discounting.
4. Discuss the different situations that may lead a company to: i. initiate price cuts ii. initiate price increases
5. Highlight TWO pricing strategies and give examples of how and when companies of your choice could use them.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 104 104 104 104
Promotion is the communication element of the marketing mix. It is essentially about communications between the seller and the buyer. Many people make the mistake of thinking that promotion and marketing are one and the same thing. However, we have already seen and will continue to see that it is a part of a much wider mix of activities.
The purpose of promotion could be said to be to build awareness of products and the brand image. There are a number of different activities associated with this. Here are some examples. .
Brochures DVDs/Videos Newsletter Websites
Public Relations Advertising Seminars and Presentations
Promotion Awareness and Image Trainer Bubble Ltd. 2011 105 105 105 105 The AIDA model One way of explaining promotion (especially advertising) is that it is aimed at moving consumers form complete unawareness of a product to regular usage of it. The AIDA model helps to illustrate this approach. You may also hear this referred to as the hierarchy of effects model.
Effective communication involves a number of elements.
Feedback Mechanisim Effective customer feedback enables the organisation to modify its message A Receiver The message must be targeted at the right people (i.e. the decsion makers) Communication Channel or Medium Important to use the right channel for the message (personal or mass communication channels) A sender The organisation sen ding the message May be represented by a sales person A Message Must be clear and easy to understand Words and pictures have to be used effectively Effective Communication Awareness Interest Desire Action Advertising used to create and raise awareness about a product Interest in the product may be developed through public relations Sales promotion used to generate the desire to buy Personal selling encourages customers to buy the product Trainer Bubble Ltd. 2011 106 106 106 106
All promotion activities are designed to influence customers so that they are positive about products or services the organisation offers. The purpose of integrated marketing communications is to ensure a consistent message throughout all communications.
This means that planning is important and a technique known as SOSTAC 3 and 6Ms can be used to help with this. You may encounter SOSTT or SOST and 4MS however the underlying principles remain the same SOSTAC
Situation
The current situation the company finds itself in needs to be defined.
Objectives
The key objectives for the integrated marketing campaign are set out.
Strategy
A strategy for achieving the defined objectives is developed and agreed.
Tactics
What needs to be done to implement the agreed strategy? This details the approach for achieving the stated objectives.
Action
The actions that are needed to implement the agreed strategy are taken by the business. Who will do what and when will they do it?
Control
The actions are monitored and evaluated to establish whether the objectives are being met.
6Ms
3 Planning System created by writer and speaker PR Smith in the 1990s Integrated Communication Process Men: Human Resources Money: Budget Machines: equipment Minutes: time constraints Materials: samples, brochures Measurement: against initial objectives Trainer Bubble Ltd. 2011 107 107 107 107
There are many different ways that a business can communicate with its customers. In the context of promotion this is known s the promotional mix.
The Organisation Customers
Organisations usually select a range of communication methods from the promotional mix to improve the efficiency and effectiveness of their communications with customers.
These are the two main types of promotion strategies used by organisations.
Promotional Mix Elements Push and Pull Strategies Promotional Mix Direct Marketing Sales Promotion Sales Literature Personal Selling Exhibitions Public Relations Advertising Branding Sponsorship Packaging Push Strategy Promotion activities to create consumer demand for a product Personal selling and promotions used to increase demand Producer promotes the product to wholesalers, wholesalers promote it to retailers, retailers promote it to consumers. Pull Strategy Advertising and promotions aim to build up consumer demand If successful, consumers actively sek the product from retailers The aim is for consumers to ask for the brand by name Trainer Bubble Ltd. 2011 108 108 108 108
Below the line and above the line marketing are two different advertising techniques that may be used by a business.
Above the line advertising This is an impersonal type of advertising that makes use of media such as TV, cinema, radio, print, banners and search engines to promote brands, products and services. This is sometimes referred to as conventional advertising.
This advertising technique uses mass media, however growth in the use of the internet has dramatically changed the mass media landscape.
This type of advertising is believed to be more effective when the target audience is very large.
Below the line advertising This focuses on direct means of communication, such as direct mail and e-mail, often using highly targeted lists of names to maximise responses. It also includes public relations activities.
This advertising technique does not rely on mass media and it can be argued that it is more effective as it can be customised to the target audience.
This type of advertising is believed to be more efficient if the target audience is very limited or very specific.
Advertising Above and Below the Line Trainer Bubble Ltd. 2011 109 109 109 109
The original function of packaging was product protection. Nowadays it also has a key role in the marketing mix and promotion campaigns.
Of course, packaging also contains information about the product to help consumers decide whether to buy it.
Public Relations Definition: the planned and sustained effort to establish and maintain goodwill and mutual understanding between an organisation and its public. (Institute of Public Relations)
An even simpler definition is the management of the corporate reputation.
Packaging Public Relations Shelf appeal Product information Brand image and awareness Mail-in offers Money off coupons Internet offers Games and competitions New Product identity Instant winner sweepstakes Logos and slogans Trainer Bubble Ltd. 2011 110 110 110 110 The Public
What do we mean by the public? It is any key group of people that is important to your company or organisation.
These vary according to the organisation but it is clear that identifying who those key groups are is an important first step in any public relations campaign. These people are often referred to as stakeholders and may include any of the following.
The media also fall within the definition of public that a business will want to influence but it is also a communication channel. For example, positive articles about the organisation in the local press is free advertising.
Public Opinion
The role of public relations is to influence public opinion.
Customers Existing, past and potential Members of the public Research bodies Distributors The Financial Public Shareholders, The City, Banks, etc. Pressure groups Opinion leaders Overseas Governments EU Bodies Central and Local Government Bodies Members of Parliament The local community Employees Trade Associations Reinforce favourable opinions Modify or neutralise hostile and negative opinions Transform latent attitudes into positive beliefs Trainer Bubble Ltd. 2011 111 111 111 111 Planning and Control
Public relations activities need to be carefully planned and controlled to be effective. There are seven stages involved in this process.
Maintain Financial Checks Monitoring and control is necessary to ensure that the PR activity is cost effective. Look to the Future What are future trends and will the PR activity need to be changed because of these? Monitor the Effects It is necessary monitor whether the objectives of the PR activity are being met. Select Appropriate Media What are the most effecitve methods and media to reach the public identfied? Identify the Public Who constitutes the public for this particular issue or problem? Conduct Research Develope a clear understanding of the issue or problem and its wider implications. Define the problem or aims What are you trying to achieve and why? Trainer Bubble Ltd. 2011 112 112 112 112
Public Relations Activities
Public relations activities vary from organisation to organisation and may also depend on which areas of the public the business is seeking to influence at the time. However, it is possible to identify some common activities that may be undertaken by public relations officers.
Sponsorship
Sponsorship can potentially be an important form of marketing communication. Certainly, high profile sponsorship of national and international events is a good way of putting an organisations name in front of the public. It can also be very expensive.
However, not all sponsorship is necessarily of such a high profile. For example, a small local business may sponsor a local charity or perhaps just provide shirts for a childrens football team that plays in the local park.
There are a number of potential advantages of sponsorship:
Helps to develop distributor and customer relations
Sponsorship of 'worthy' causes and events is believed to have a positive effect on the attitude of the public towards to the organisation
Demonstrates good corporate citizenship and has a positive effect on employees
Public Relations Activities Protect the corporate identity Establish and maintain two way communications Prevent conflict and misunderstanding Promote mutual respect and social responsibility Promote goodwill with employees, customers and suppliers Analyse and predict future trends and consequences Trainer Bubble Ltd. 2011 113 113 113 113
Sales Promotion Definition: a range of tactical marketing techniques, designed within a strategic marketing framework, to add value to a product or service, in order to achieve a specific sales and marketing objective. (Institute of Sales Promotion)
Sales promotion came to prominence during the 1980s and has been used to good effect in many sectors retail, financial, travel and leisure, automotive and in business to business sectors.
Consumer Sales Promotions
Sales Promotion Price promotions Discount on selling price, two for one offers, etc Cross Brand Promotions: A sample or discount on another product is offered with the purchase Coupons: These give discounts on future purchases and encourage repeat business Gift With Purchase: The customer is given a fee gift with the purchase Competitions: These are prize promotions and are designed to encourage customers to buy. Trade Promotions: Offer incentives to distributors to encourage them to sell more of a product Sales Force Promotions: Sales staff are encouraged to sell more though incentives and competitions. Trainer Bubble Ltd. 2011 114 114 114 114
Direct marketing and Personal selling are often grouped together this is because they are both techniques that allow the seller to have some control.
Personal Selling
It is important to have employees with responsibility for dealing with customers and potential customers. They provide a direct link to buyers and keep them informed about the companys products and the role may also include persuading them to buy. These people form the sales force of the company and it is important that they are supported by all other parts of the business.
There is a stereotypical image of sales representatives that is not always seen as complimentary. However, the reality is that there are many different types of sales roles and these can be classified in the following ways.
Direct Marketing and Personal Selling Gives us the most control over who receives our messages Enables continued interacation with the target audience Gives the most flexibility in tailoring the message Personal Selling Allows us to target our audience by name Some limited interaction with the target audience is possible Enables monitoring and control Diect Marketing 1. Deliverer The role of the sales person is limited to delivering the product to the customer 2. Order Taker The role of the sales person is limted to taking orders from customers 3. Missionary The sales person builds goodwill and educates customers in the use of the product, but is not expected to take orders 4. Technician The sales person applies his or her technical knowledge about a product to act as a consultant to customers 5. Demand Creator The sales person stimulates demand and sells the product to customers Trainer Bubble Ltd. 2011 115 115 115 115 Each of these roles is progressively more difficult and it is generally accepted that the role of demand creator is the most difficult of all.
However, all sales people perform a number of tasks and may include any of the following.
The internet has become increasingly important for marketing purposes and the vast majority of businesses have an online presence these days.
E Mail
On-line Marketing A signature file at the end of all e mails can double up as advertising Instant low cost communication anywhere in the world A useful tool for direct marketing Very flexible means of communication Electronic versions of brochures and other promotional materials can be attached easily Increasingly being used in business to business marketing Prospecting Generate new customers and sales leads
Communicating Inform existing and new customers about products and services Selling Approach customers, present, answer objections, close sales Servicing Consultation, technical help, arrange finance, organise delivery, etc Trainer Bubble Ltd. 2011 116 116 116 116 Viral Marketing
This marketing technique makes uses the internet to meet marketing can be delivered by e mail or social networking sites such Face book and You Tube and by word of mouth. The aim is to creating messages that appeal to people so that they share it with friends.
Viral marketing takes many different forms.
Website Essentials
A well presented and welcoming website is essential. It should be attractive and provide simple and easy ways to communicate with the organisation.
The site also needs to be interesting and interactive.
Potential customers will be easily put off is it is not easy to navigate and use or if it is dull and unimaginative.
It is also vital that customers can trust the security of the site especially if they are asked for personal information or to give payment details online.
Advergames Interactive flash games E Books Online Discussion Groups Audio Clips White papers Video Clips E Mail messages Images Text Messages Trainer Bubble Ltd. 2011 117 117 117 117
A brand has been defined as a name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other. (American Marketing Association).
A brand can take many forms, including a name, sign, logo, symbols slogans and jingles.
Reasons for Branding
Although there are many advantages to branding these do not apply equally to all products and organisations. Large organisations with high volumes of sales are likely to see more benefit from branding. Consequently there is more to gain by them spending the large sums of money involved in developing brands and the associated advertising campaigns. Success Criteria for Branding Branding must be central to strategic planning for products and their promotion. Research suggests that for a brand to be successful t should have certain qualities: Suggest benefits (e.g. Slimline Tonic) Suggest qualities such as action or colour (e.g. iPod Touch) Easy to recognise, pronounce and remember (e.g. Amazon) Be acceptable in all of its markets Be distinctive (e.g. Heinz) Be meaningful to customer Branding It is a form of product differentiation A brand name is needed for advertising Branded goods are more readily accepted by wholesalers and retailers Facilitates self service in stores Competing on price may be less important if the brand os strong Brand loyalty leads to repeat business Other products can benefit from the brand by being added to the range Personal selling becomes easier Facilitates self service in stores Branding can go hand in hand with market segmentation Trainer Bubble Ltd. 2011 118 118 118 118
1. Provide a brief explanation of EACH of the FOUR elements of the promotional mix.
2. The choice of media is as important as choice of tool. Explain how the SIX main media tools could be used to promote a new product of your choice.
3. Write notes on THREE of the following subjects: a. Branding b. Sponsorship c. Merchandising d. Direct mail
4. What is mass communication and how does it differ from personalised communication?
5. What is direct marketing and what are the reasons behind the growth of direct marketing?
6. In advertising campaigns, why do some companies use a variety of Above The Line (ATL) and Below The Line (BTL) communication mediums? Explain with examples the main differences between ATL and BTL and how together they form Integrated Marketing Communication (IMC).
7. a. Using an example of your choice, define the terms push and pull strategies. b. Discuss the main objectives of an advertising campaign.
8. To what extent is online advertising taking over traditional TV advertising and why? Justify your answer with examples where possible.
End of Chapter Test Questions Trainer Bubble Ltd. 2011 119 119 119 119
Section 4
Different Marketing Segments and Contexts
Trainer Bubble Ltd. 2011 120 120 120 120
In this section will be taking a brief look at consumer markets. These are the markets for products and services bought by individuals for their own or family use.
Characteristics of fast moving consumer goods Bought frequently Buyers will accept alternative brands Convenience goods Often sold in supermarkets Usually low priced Consumer Markets Fast-Moving Consumer Goods Trainer Bubble Ltd. 2011 121 121 121 121 Convenience Goods
This includes grocery items which consumers buy regularly. There are two types.
Staple Goods
These are items that people regularly buy as part of their weekly shop. This includes foodstuffs and other household goods such as cleaning products.
Impulse Buys
These are items that people do not necessarily plan to buy but may be tempted into purchasing whilst in the store. This may include products such as chocolate, crisps, alcoholic and non alcoholic drinks.
Brand awareness is considered to be important with fast moving consumer goods. For example, coca cola spend a lot of money advertising so that people think of their brand when buying cola.
Consumer durables are products purchased by consumers and manufactured for long-term use. Furniture found in the home is one of the most common examples of consumer durables. Household electrical goods also fall into this category.
These products often involve a high cost so consumers will often conduct a lot of research before making a purchase.
This means that any promotion activities need to provide consumers with information about the products and the benefits of buying them.
We saw earlier in this guide that marketing activities must be aligned to corporate and functional objectives.
The components of the marketing mix need to be co-ordinated with these objectives and with each other.
Product, price, promotion and place should not be allowed to operate independently of each other.
Strategies need to be developed to co ordinate the elements of the marketing mix so that they complement each other.
A co-ordinated approach helps to maximise the effects of the individual Ps
Product - This must be well designed and must meet the requirements of the target market (consumers). It also needs to be designed with company objectives in mind. Is the aim to produce quality products or basic products aimed at a wider market?
Price - Consumers will only buy products if they perceive that they are value for money so it is important to get the price right. It is also important to keep the company objectives in sight. For example is the aim to maximise profits or to increase market share?
Place -The products must be easily accessible to consumers and/or capable of being delivered to them with the minimum of fuss. If this is not the case they will shop elsewhere no matter how good the product is or how well it is priced. Distribution must also be aligned to the firms objectives. For example, is it intended to sell direct to consumers or to use intermediaries?
Promotion Consumers need to know about the product and why buying it is a benefit to them. If this communication does not happen then the product will not sell well even if the other three elements of the marketing mix are perfect. If consumers do not know about a product they cannot buy it. Once again the firms objectives are important and it is important that communications are aimed at the market segment that it is aiming to develop. Co-ordinated Marketing Mix to Achieve Objectives Product Place Promotion Price Trainer Bubble Ltd. 2011 123 123 123 123
1. a. Describe the features of fast moving consumer goods (FMCGs) b. Define the term consumer goods c. Explain how consumer goods can be classified
2. Explain how the co-ordinated marketing mix can help a firm to achieve its objectives in consumer markets.
End of Section Test Questions Trainer Bubble Ltd. 2011 124 124 124 124
Organisational markets are made up of all the companies and individuals who purchase goods and services for some use other than personal consumption.
There are differences between organisational and consumer markets and we will look at these in a moment. However, it may be useful to first have an understanding of the make up organisational markets.
There is a large difference, in how and why organisations buy goods and services compared to how individuals shop.
Organisational Markets Differences From Consumer Markets Producers Companies and individuals buy goods and services to produce other goods and services to supply to their own customers Resellers Companies and individuals buy goods and services produced by others for resale to their own customers Government All levels of government and its agencies who purchase goods and services so that they can carry out the functions of government Institutions This is made up of institutions such as hospitals and schools who purcahse products and services for the benefit of the people cared for by the institution. Four Components of organisational markets Trainer Bubble Ltd. 2011 125 125 125 125
Consumers Organisations
High numbers of buyers
Smaller number of buyers Usually buy goods and services in small amounts
Often bulk buy goods and services Make purchases for personal use Make purchases to use in their operations or to resell to customers
Usually buy finished products May buy raw materials for manufacturing
Consumers are driven by needs and wants and may be enticed into buying products they dont really need through marketing or peer pressure. Organisations are much less susceptible to buying un-needed products or services especially if purchases are made through a purchasing department.
Consumers generally have more freedom of choice than organisations. Choices may be restricted by budget, conforming with organisation standards, style or approach or by legal reasons (e.g. complying with health and safety regulations).
Marketing Mix Differences
On-time delivery is vital as the buyers business may be dependent on this Partnership approach often adopted to gain long term repeat business Prices are more likely to be negotiable especially if the product is customised Pre sales and after sales service likely to be included Products are often custom built Product Price Place (Distribution) Promotion Trainer Bubble Ltd. 2011 126 126 126 126 Business to Business Distribution Channels
There are a number of different distribution channels that can be used dependent on the type of goods being sold.
Business to business marketing will usually include elements of service in addition to the core product. Indeed, this is expected by most buyers particularly bearing in mind the large sums of money that can be involved.
Examples of Pre Sales Service
.
Manufacturer Business Buyer Manufacturer Agents Business Buyer Manufacturer Business Distributor Business Buyer Manufacturer Agents Business Distributor Business Buyer Adding Value Through Service Consultancy Free Trials Quotations Live Demonstrations Technical Advice Trainer Bubble Ltd. 2011 127 127 127 127 Capital goods are usually purchased for long term use by a business Examples include factories and other buildings and machinery and plant Capital Goods These are generally less expensive items than capital goods and may be used in the medium term Examples may include personal computers and telephones Accessories These are materials that a business will purchase for manufacturing purposes Examples may include wood plastic, metal, etc. Raw Materials
Examples of Post Sales Service
Industrial marketing (business to business marketing) is where a business markets its goods and services to other businesses. The types of goods found in this market vary greatly but can be classified simply.
Industrial Service , Maintenance and upgrades Guarantees Just-in-time delivery Consultancy Technical Advice Products may be made by assembling ready made components For example, car manfacturers buy in many of the parts they need to assemble cars Components All businesses need supplies which are their equivilant of consumables used by individuals Examples include, office stationery and cleanng materials Supplies Companies often buy in services that do not form a part of their core business Examples may include, security, training, consultancy, etc. Business Services Trainer Bubble Ltd. 2011 128 128 128 128 Although there are some similarities with consumer markets it is important to understand that there industrial markets do have particular characteristics.
Buyers are spending money that belongs to the business they are working for.
There are often a number of people involved in the buying decision. This is known as a decision making unit.
The decision to make a purchase can take a long time, especially if there is a lot of money involved.
The customer base is small but is usually easy to identify.
The value of orders is usually much higher than in consumer markets.
It is often important to build personal contacts and relationships with buyers as this can be influential in buying decisions.
Nonprofit organisations (NPO) may also be known as not for profit organisations (NFP).
There are many different types of NFP including charities, trade unions, trade associations and clubs. Although government agencies may fall within the description of an NFP they are usually treated separately.
NFPs dont issue stocks and shares and their aim is not to make a profit for their owners. Nevertheless there is still a need for them to engage in marketing activities and they share many of the characteristics of organisations that exist to make a profit. The importance of marketing can be illustrated by using the example of a school.
Non Profit Making Organisations Schools compete for funding Funding depends on student numbers Parents choose where to send their children Must be able to attract good quality staff A good reputation is essential Effective use of the marketing mix helps get the right message across Trainer Bubble Ltd. 2011 129 129 129 129 Target marketing is different in the not for profit sector. Generally there are no buyers but there are different audiences. Consider the example of a charity.
Most charities and NFPs are involved in providing services far more than they are in the sale of products. This means that the extended marketing mix which includes people, process and physical evidence usually applies to them.
It is also important to understand that NFPs operate within strict budgets. This means that when they are in the market for goods and services they are likely to apply the same standards and approaches as businesses operating for profit.
The government at all levels and its various agencies make up an important market. Many companies rely on government contracts whilst. We only need to think of a few areas in which government operates directly and indirectly to realise how vast the potential market is (e.g. defence, homeland security, health, Education, transport, local government services).
Government is accountable to the public. This means that there is a key difference between government purchases and purchases made by other organisations.
The result of this is that there are often stricter procedures and controls when purchases are made by government agencies. Although this can be frustrating at times it is easy to see why this so called red tape exists.
The rewards that can be involved in selling to government agencies make it worthwhile going through the process and in most other respects it is like selling to any other organisation. Indeed many government agencies are keen to attract new suppliers. Government Target Public - people who have an interest or concern about the charity Donors and volunteers people who may be willing to help the charity Government and Businesses - Lobbied for help and support Client Public - These are the people benefiting from the work of the charity Why is there so much red Trainer Bubble Ltd. 2011 130 130 130 130
In reseller markets individuals or organisations buy goods which they sell or rent at a profit.
This market is very similar to industrial markets but buyers look for products and brands that they think will appeal to their own customers. A good example of this is the supermarkets that have specialised buying functions.
Buyers will take into account a number of factors including:
Purchase price
Availability of the product and quantities available
Expected resale price and profit
The likely appeal to customers
Proposed marketing and advertising support
The reputation of the company selling the product
Companies who sell to resellers need to take all of this into account and make sure that their products are attractive to them and to the ultimate consumers.
1. a. Define the term not-for-profit organisation. b. Explain what is meant by the term the extended marketing mix in relation to a charity or a not-for-profit organisation of your choice.
2. Briefly describe the four main components of organsational markets
3. In organisational markets value can be added through service. Explain what this involves in both pre sales and post sales service using an organisation or product of your choice.
End of Section Test Questions Trainer Bubble Ltd. 2011 132 132 132 132
Many businesses do not deal in physical products but provide a service. In other cases physical products often have a service element. In this section we will examine the characteristics of service products and how they are marketed.
There are some basic characteristics of service products that differentiate them from other products. It is important for marketers to be aware of these characteristics
Intangibility Unlike physical products there is nothing of substance. This means that there is nothing to touch feel or smell. This can make service products difficult to market.
Ownership When a person buys a physical product thy own it and it becomes the permanent property of the buyer. Most service products do not work like this. Often the service is provided for a period of time for a particular event. One way in which marketers have tried to overcome this is to provide tangible items alongside the service which customers can keep. These items are usually symbolic and examples may include brochures, programmes, pens, key rings, etc.
Inseparability When a product is sold it can be taken away from the producr. This is not normally the case with services as they cannot usually be separated from service providers. Take the example of hairdressing. You visit your hairdresser (or the hairdresser vists you) and you ask for a haircut. There is likely to be a discussion about the style you require and the hairdresssr provides the serveice you require. The hairdresser is inseperable from this process and has to be present to cut your hair. Services Nature & Characteristics of Service Products Trainer Bubble Ltd. 2011 133 133 133 133 Perishability This is not to be confused with the perishable nature of some physical products but is to do with the fact that most services are time bound. Transport is a good example of this. If you make a journey by air the service you are provided with only lasts for the duration of the flight and cannot be stored for later use.
Variability Every time a service is provided to a customer it is unique and can never be repeated exactly. This is a problem for service providers who are trying to provide consistency in the standard of output. Some variability in the quality of the service is inevitable and this can create problems in managing the operation.
We have seen that it is very difficult to make each service experience identical. For example you may be a regular visitor to a restaurant and it is inevitable that the service quality will differ slightly every time you visit. This means that service providers have systems and procedures to make sure that their service is as consistent as possible. This is partly about having the right culture with an emphasis on three things.
Heterogenity The 7PS Consistency of quality control Effective staff selection, training and motivation Consistency of customer service Trainer Bubble Ltd. 2011 134 134 134 134 This is also an important issue from a marketing point of view. The standard 4Ps approach used in the marketing of products is not thought to be sufficient when a service is involved and is extended to 7 Ps. This is sometimes known as the extended marketing mix and comprises of the following.
Product Price Place Promotion
People Process Physical Evidence
We have already looked at the 4Ps in an early section so we will concentrate on the remaining 3Ps here.
People
People are essential to providing a service to customers Appropriate recruitment and training is essential Customers judge a service on the employees they interact with Good service provides a form of competitive advantage Must have Interpersonal skills, aptitude and knowledge The attitudes of employees must be right Trainer Bubble Ltd. 2011 135 135 135 135 Process It is of little use having excellent people working for you if your systems and procedures stop them from providing the service your customers deserve.
Physical Evidence It is not usually possible to experience a service beofe it is delivered. This means that it can be difficult for customers because they are buying something intangible.The risk involved in this can be reduced by helping customers to see what they are buying.
Do customers have to wait? Are customers kept informed and do they know how to use your service? Is it easy for your customers to contact you? What happens when the service goes wrong? How are payments and refunds dealt with? Is it easy for your employees to provide the service to customers? Case studies and testimonials help to show good service Clean tidy and professional looking premises can help Brochures, catalogues and other documents Is it feasible to provide a free trial so customers can experience the service before buying it? Trainer Bubble Ltd. 2011 136 136 136 136
Weve already mentioned that one of the difficulties with marketing services is that there is no tangible product. There are three potential strategies that may be used to deal with this.
Service quality is a measure of how well a delivered service matches the customers expectations. 4 This means that quality is defined by customers and it is the standards that they set that service providers must meet.
It does seem that customer expectations are rising continually. This means that firms are constantly looking for ways to improve their service.
Two main ways in which service providers benefit by improving their service.
4 Lewsis and Booms 1983 Provide a physical representation or illustration of the product An example is that insurance companies provide documents setting out the cover being bought Provide something tangible The aim is to show potential buyers why the service would be of benefit to them Focus on the benefits of the service The aim is to increase customers perception of the service and value provided This is done through promoting its own values which often include service, quality and value for money Differentiate on service and reputation Strategies Service Quality Higher sales revenue Improved productiviy and reduced costs Trainer Bubble Ltd. 2011 137 137 137 137 Service Quality Model
Grnroos' (19784) Service Quality Model This model suggests that customers compare the service they expect to get with the service they think they are actually getting. Their expectations are influenced by the marketing activities of the firm but also by other sources of information as the model shows. The model also suggests that there are two main components of service quality and both have to meet the expectations of customers.
Perceived Service Quality Expected Service Perceived Service Market Communications Image Word of Mouth Customer Needs Customer Learning Image Technical Quality Functional Quality Technical Quality Functional Quality This is what the customer is left with in when the process is complete
In our earlier example of the hairdresser it is the hair cut
In the example of a school it is the level of attainment by its students
In theory this is easy to measure This is how the customer receives the service
What is the quality of the interactions between the customer and the provider of the service?
This is usually more difficult to measure objectively than technical quality Trainer Bubble Ltd. 2011 138 138 138 138 Ten Determinants of Service Quality 1. Tangibles (physical evidence) 2. Reliability 3. Responsiveness 4. Communication 5. Credibility 6. Security 7. Competence 8. Courtesy 9. Underestanding customer needs 10. Access (e.g. minimising queues)
Methods for Improving Quality Service There are a number of methods that a company can use to help them improve the quality of their service.
Develope a mission statement that focuses on customers. Conduct regular customer stasification research including customer surveys and panels, mystery shopping, analysis of complaints, etc Set standards of customer service and monito results against those standards Establish and maintain an effective system for customer complaints and feedback Encourage employees to participate with ideas, suggestions, innovations and involvement in projects Reward excellent service Trainer Bubble Ltd. 2011 139 139 139 139
Although this chapter concentrates on services it is worth remembering that the purchase of physical products also has a service element. For example, you may go to your local bakery to buy a loaf of bread (the product). The bread may be of perfect quality but the service you receive may determine whether you are a satisfied customer. If you had to queue for a long time and then found the shop assistant to be unfriendly and unhelpful you are unlikely to be satisfied.
Even with pure service products the 4Ps are still important and many of the principles involved in marketing physical products still apply. This is even more important when there is a mix of a physical product and a service when it will be worth considering whether the marketing mix should extend to the 7Ps in much the same way as with a pure service product.
Elements of Physical Product Marketing Trainer Bubble Ltd. 2011 140 140 140 140
1. In services marketing, what is Physical Evidence, People and Process? Explain with examples.
2. When should a company use the 7 Ps of the Marketing Mix and why is it so important? Explain, using a company of your choice as an example.
3. How does Services Marketing differ from Physical Goods Marketing? Explain, using examples where possible.
End of Section Test Questions Trainer Bubble Ltd. 2011 141 141 141 141
In this final section we will take a brief look at the make-up of international markets and the implications from a marketing point of view.
In the second half of the 20 th century the volume of world trade increased substantially. A number of factors have played a part in this including improvements in transportation and communications. The world market place has changed significantly in this time and some of the key changes are shown in this diagram.
A company operating in the global market cannot take it for granted. There are many factors that can affect it. We only need to think about the recent financial crises to realise how flimsy these markets can be. To remain strong businesses need to have effective marketing strategies that provide customers with good products and services that they need and want. Globalisation of business Increased deregulation of business More scrutiny of business by the public and government Changes in customer values and behaviours Mergers, Acquisitions and strategic alliances Advances in science and technology International Markets Globalisation Trainer Bubble Ltd. 2011 142 142 142 142
Products and services that are successful in one country do not necessarily succeed in other countries. There are a number of possible reasons for this.
One of the issues with trying to enter foreign markets is that businesses have to balance two conflicting ideas.
Two Conflicting Ideas
Standardisation Versus Adaption Target marketing and segmentation - identify customer needs and adapt products to the foreign market to maximise targeted segments Standardise Products - It is not possible to have separate prodcuts for every possible market segment and it is more profitable to have standardised products for the larger market Trainer Bubble Ltd. 2011 143 143 143 143 Five Possible Approaches to Adaption
The Case for Standardisation
Involves minimal change to the product or how it is promoted Straight Extension The product is adpated for the local market (e.g. electrical goods adapted to conform with local voltage) Product Adaptation The product is not changed but is marketed to fulfil different needs Communications Adaptation This is a combination of product and communications adaptation Dual Adaptation This is most commonly found in less sophisticated markets for products that are cheap and simple Product Invention Economies of scale - makes more cost effective use of research and development, production and marketing Technological Complexity - Adapting technical products can be hard to do, expensive and difficult to sustain Consumer Mobilty - Many consumers travel across borders and like to find familiar brands Trainer Bubble Ltd. 2011 144 144 144 144
The European Union has the aim of economic union. The benefit of this is that trade within the EU is freer and easier for businesses operating within its borders. However, businesses based outside of its borders will find I more difficult to compete on equal terms because of tariff barriers introduced to protect members of the EU. It is worth noting that the EU is not just a single market but that it has its own elected parliament and also has its own civil service and courts. It is also supported by its own constitution. At the time of writing (September 2011) the EU is in the middle of a debt crisis revolving around Greece and its ability to pay off its loans. Potentially other EU members may be in a similar situation and it is not yet clear how the situation will be resolved. However, this crisis is not only affecting the EU but is also a dominant factor across global financial markets.
The Single European Market The aim is to allow free movement of labour goods and sevices between the member states of the EU.
The EU Physical barriers on goods and services Technical standards harmonised (e.g. safety & quality) Governments cannot discriminate between EU companies when awarding contracts Telecommunications subject to greater competition Providers of financial services able to operate in any EU country Transport services rationalised Free movement of capital within the EU Professional qualifications recognised in one member state recognised in all Consumer protection measures co- ordinated across the EU Trainer Bubble Ltd. 2011 145 145 145 145 Although there has been a lot of progress with harmonization across the EU there are still many areas where little or no progress has been made. Examples include: company taxation ; VAT rates; differences in prosperity; differences in workforce skills, social differences, differences in infrastructure.
Considerations for Businesses
How has the EU market changed and what does this means for our business?
Should we change from being a firm that operates in one country to being a European business operating in the European market?
Will we need to change our scale of operations if we become a European firm?
Will greater competition make us vulnerable in our existing markets?
Do we need to change our management structure to exploit new opportunites and to counter new threats?
Do we need to get invovled in mergers and takeovers to strengthen our market position?
Within our business, who will be reponsible for making key decisions about how to exploit opportunities arising form the Single European Market?
Trainer Bubble Ltd. 2011 146 146 146 146
There is no point in entering foreign markets unless those markets are attractive to your business. There are three main factors that come into play here.
Operating in foreign markets has many potential benefits but there are also a number of risks to consider. Any business planning to operate abroad needs to be aware of these risks and be sure that the benefits outweigh the risks it faces.
Potential Benefits Businesses exist to make profits and the over riding reason for entering into foreign markets is the potential for larger profits. This comes about because of a number of benefits involved in trade internationally. Market Attracitveness - What is the size of the potential market? Is it growing or shrinking? What challenges are involved in exploiting the market? Competition - Who are your competitors?Can you gain a competitive advantage? Do you understand local culture and languages well enough to be able to compete? Risks - For example, is the market policitally stable? Is there a risk of government intervention? Benefits and Risks Market Attractiveness Trainer Bubble Ltd. 2011 147 147 147 147
Potential Risks
Weve only covered a few of the potential risks and benefits of operating in foreign markets. It would be wise for you to give this some thought and to note any others you can think of. Economic Risks - Fluctuations in exchange rates - Diffiiculties enforcing payment by buyers unwilling or unable to pay Political Risks - Import/Export licenses may not be renewed - Risk of action by foreign government (e.g. import ban) - Political instability in some countries Commercial Risks - Your products and services may not sell well in a foreign market - Adaptations may undermine any potential economies of scale Other Risks - Legal protection for breach of contract may be low - Natural risks such as flooding and earthquake - The business environment may be more difficult to predict. Risks Associated with International Markets Increases the potential to grow the business Increased volumes of trade improve economies of scale May need to compete globally to remain competitive in domestic markets Government help and support may be available to encourage exports Operating costs may be lower abroad than at home Profit margins may be higher abroad There may be more opportunities in foreign markets than in home markets Selling abroad may help to level seasonal fluctuations in trade It may be possible to sell excess production abroad The prestige of the business may be improved by trading globally Trainer Bubble Ltd. 2011 148 148 148 148
The marketing strategy for international marketing starts in the same way as it does for domestic markets. This is by clarifying objectives. However, it is important to ensure that there is no conflict between corporate objectives and exploiting opportunities in foreign markets. If a conflict does exist then it will be necessary to modify those objectives and/or the plans for the foreign market.
It is important that the marketing mix aligns with the objectives and plans that the business sets in exactly the same way as with domestic markets. However there are additional strategic decisions to make.
We have already covered this in the chapters dealing with the marketing mix and we recommend reviewing these again with international markets in mind. For example, when considering how to distribute products abroad would it be wise to sell direct when entering the market for the first time? Would it be better to use intermediaries with local knowledge and contacts? Would franchising be the best approach for your firm?
Product Will the approach be product adaption for the local market or will standard products be offered? Place What volumes of the product will be distributed and how will this be done? Price What are the local conditions and what prices can realistically be charged for the product? Promotion What is the local communication infrastructure? How do communications need to be adapted to comply with local culture and to avoid language problems? Examples of decisions to make International Marketing Mix Strategies Trainer Bubble Ltd. 2011 149 149 149 149
1. What are the Marketing Planning steps a marketing manager should take when considering the expansion to a new foreign market?
2. What are the main differences between exporting and franchising as a method of entry to a new market in International Marketing Management? Explain with examples. End of Section Test Questions