1.1: Forms of Government

1.1.1: Forms of Government

Learning Objective

Compare and contrast the various forms of government

Key Points

• Government is the means by which state policy is enforced, as well as the mechanism for determining the policy of the state. States are served by a continuous succession of different governments.
• Governments with Aristarchy attributes are traditionally ruled by the “best” people. Examples include aristocracy, technocracy and meritocracy.
• Governments with autocratic attributes are ruled by one person who has all the power over the people in a country. Examples include authoritarian, totalitarian and fascist governments.
• Governments with democratic attributes are most common in the Western world and in some countries of the east. In democracies, all of the people in a country can vote during elections for representatives or political parties that they prefer.
• Governments with monarchic attributes are ruled by a king or a queen who inherits their position from their family, which is often called the royal family.
• Governments with oligarchic attributes are ruled by a small group of powerful and/or influential people. These people may spread power equally or not equally.
• Plutocracy defines a society or a system ruled and dominated by the small minority of the wealthiest citizens. Unlike systems such as democracy, capitalism, socialism or anarchism, plutocracy is not rooted in an established political philosophy and has no formal advocates.

Key Terms

government

The body with the power to make and/or enforce laws to control a country, land area, people or organization.

state

A political division of a federation retaining a degree of autonomy, for example one of the fifty United States. See also Province.

Example

• An oligarchy does not have one clear ruler, but several powerful people. Some historical examples of oligarchy are the former Union of Soviet Socialist Republics and Apartheid in South Africa. Fictional oligarchic examples include the dystopian society of Oceania displayed in the book Nineteen Eighty-Four, the stratocracy government of Starship Troopers, and the kritarchic “Street Judges” of Judge Dredd.

Government

Government is the means by which state policy is enforced, as well as the mechanism for determining the policy of the state. A form of government, or form of state governance, refers to the set of political institutions by which a government of a state is organized (synonyms include “regime type” and “system of government”). Governments consist of two broad interplaying elements that generally determine how a government is coded: the power source and the power structure. Power source refers to the individuals and institutions that exercise governing authority over a state and the means by which they obtain their power, while power structure refers to the system by which they are organized.

In the case of its broad definition, government normally consists of legislators, administrators, and arbitrators. Government is the means by which state policy is enforced, as well as the mechanism for determining the policy of the state. States are served by a continuous succession of different governments. Each successive government is composed of a body of individuals who control and exercise control over political decision-making. Their function is to make and enforce laws and arbitrate conflicts. In some societies, this group is often a self-perpetuating or hereditary class. In other societies, such as democracies, the political roles remain, but there is frequent turnover of the people actually filling the positions .

Countries of the World, by Type of Government in 2011

This map shows all the countries of the word, colored according to their type of government. Blue represents full presidential republics, while green and yellow are presidential republics with less powerful presidents. Orange represents parliamentary republics. Red and pink are parliamentary constitutional monarchies, and purple represents absolute monarchies. Brown represents single-party republics, green shows countries where government has been suspended (e.g., military dictatorships), and grey countries do not fit any of the above categories.

Forms of Government

Governments with Aristarchy attributes are traditionally ruled by the “best” people. Aristocracy refers to the rule by elite citizens; a system of governance in which a person who rules in an aristocracy is an aristocrat. It has come to mean rule by “the aristocracy” who are people of noble birth. A meritocracy refers to rule by the meritorious; a system of governance where groups are selected on the basis of people’s ability, knowledge in a given area, and contributions to society. Finally, a technocracy refers to rule by the educated; a system of governance where people who are skilled or proficient govern in their respective areas of expertise in technology would be in control of all decision making. Doctors, engineers, scientists, professionals and technologists who have knowledge, expertise, or skills, would compose the governing body, instead of politicians, businessmen, and economists.

Governments with autocratic attributes are ruled by one person who has all the power over the people in a country. The Roman Republic made Dictators to lead during times of war. In modern times, an Autocrat’s rule is not stopped by any rules of law, constitutions, or other social and political institutions. After World War II, many governments in Latin America, Asia, and Africa were ruled by autocratic governments.

Governments with democratic attributes are most common in the Western world and in some countries of the east. In democracies, all of the people in a country can vote during elections for representatives or political parties that they prefer. The people in democracies can elect representatives who will sit on legislatures such as the Parliament or Congress. Political parties are organizations of people with similar ideas about how a country or region should be governed. Different political parties have different ideas about how the government should handle different problems. Democracy is the government of the people, by the people, for the people.

Governments with monarchic attributes are ruled by a king or a queen who inherits their position from their family, which is often called the “royal family. ” There are at two opposing types of monarchies: absolute monarchies and constitutional monarchies. In an absolute monarchy, the ruler has no limits on their wishes or powers. In a constitutional monarchy a ruler’s powers are limited by a document called a constitution.

Governments with oligarchic attributes are ruled by a small group of powerful and/or influential people. These people may spread power equally or not equally. An oligarchy is different from a true democracy because very few people are given the chance to change things. An oligarchy does not have to be hereditary or monarchic. An oligarchy does not have one clear ruler, but several powerful people. Some historical examples of oligarchy are the former Union of Soviet Socialist Republics and Apartheid in South Africa. Fictional oligarchic examples include the dystopian society of Oceania displayed in the book Nineteen Eighty-Four, the stratocracy government of Starship Troopers, and the kritarchic “Street Judges” of Judge Dredd.

1.1.2: Democratic Governments

Learning Objective

Discuss the central elements of direct and representative democracies

Key Points

• Democracy allows people to participate equally—either directly or through elected representatives—in the proposal, development, and creation of laws. It encompasses social, economic and cultural conditions that enable the free and equal practice of political self-determination.
• A democratic government contrasts to forms of government where power is either held by one, as in a monarchy, or where power is held by a small number of individuals, as in an oligarchy or aristocracy.
• Direct democracy is a form of democracy in which people vote on policy initiatives directly. This is different from a representative democracy, in which people vote for representatives who then vote on policy initiatives.
• Representative democracy is a variety of democracy founded on the principle of elected people representing a group of people. For example, three countries which use representative democracy are the United States of America, the United Kingdom, and Poland.
• The concept of representative democracy arose largely from ideas and institutions that developed during the European Middle Ages, the Age of Enlightenment, and the American and French Revolutions.

Key Terms

direct democracy

Direct democracy is a form of democracy in which people vote on policy initiatives directly, as opposed to a representative democracy in which people vote for representatives who then vote on policy initiatives. Depending on the particular system in use, it might entail passing executive decisions, making laws, directly electing or dismissing officials and conducting trials. Two leading forms of direct democracy are participatory democracy and deliberative democracy.

representative democracy

Representative democracy is a variety of democracy founded on the principle of elected people representing a group of people.

democracy

A government under the direct or representative rule of the people of its jurisdiction.

Example

• According to Freedom House, in 2007 there were 123 electoral democracies – up from 40 in 1972. According to World Forum on Democracy, electoral democracies now represent 120 of the 192 existing countries and constitute 58.2 percent of the world’s population. At the same time liberal democracies—countries Freedom House regards as free and respectful of basic human rights and the rule of law—are 85 in number and represent 38 percent of the global population. In 2010 the United Nations declared September 15 the International Day of Democracy.

Introduction

Democracy is a form of government in which all eligible citizens have an equal say in the decisions that affect their lives. Democracy allows people to participate equally—either directly or through elected representatives—in the proposal, development, and creation of laws. It encompasses social, economic, and cultural conditions that enable the free and equal practice of political self-determination. The term originates from the Greek word: δημοκρατία (dēmokratía), which translates to  “rule of the people”. This term was used around 400 BCE to denote the political systems then existing in Greek city-states, notably Athens.

A democratic government contrasts two forms of government where power is either held by one, as in a monarchy, or where power is held by a small number of individuals, as in an oligarchy or aristocracy. Nevertheless, these oppositions, inherited from Greek philosophy, are now ambiguous because contemporary governments have mixed democratic, oligarchic, and monarchic elements. Several variants of democracy exist, but there are two basic forms, both of which concern how the whole body of citizens executes its will: direct democracy and representative democracy .

French Presidential Election

A woman casts her vote in the second round of the French presidential election of 2007.

Direct Democracy

Direct democracy is a form of democracy in which people vote on policy initiatives directly. This is different from a representative democracy, in which people vote for representatives who then vote on policy initiatives. Depending on the particular system in use, it might entail passing executive decisions, making laws, directly electing or dismissing officials, and conducting trials. Two leading forms of direct democracy are participatory democracy and deliberative democracy.

The earliest known direct democracy is said to be the Athenian Democracy in the 5^th century BCE, although it was not an inclusive democracy; women, foreigners, and slaves were excluded from it. In the direct democracy of Athens, the electorate did not nominate representatives to vote on legislation and executive bills on their behalf (as in the United States Congress), but instead voted on these items in their own right. Participation was by no means open, but the in-group of participants was constituted with no reference to economic class and they participated on a large scale. The public opinion of voters was remarkably influenced by the political satire performed by the comic poets at the theaters.

Also relevant is the history of Roman republic, beginning circa 449 BCE. The ancient Roman Republic’s “citizen lawmaking”—citizen formulation and passage of law, as well as citizen veto of legislature-made law—began about 449 BCE and lasted the approximately 400 years to the death of Julius Caesar in 44 BCE. Modern-era citizen lawmaking began in the towns of Switzerland in the 13^th century CE. In 1847, the Swiss added the “statute referendum” to their national constitution. Currently in Switzerland, single majorities are sufficient at the town, city, and canton level, but at the national level, double majorities are required on constitutional matters. The intent of the double majorities is simply to ensure any citizen-made law’s legitimacy .

Swiss Assemblies

Landsgemeinde, or assembly, of the canton of Glarus, May 7, 2006, Switzerland.

Representative Democracy

Direct democracy was very much opposed by the framers of the United States Constitution and some signatories of the Declaration of Independence. They saw a danger in majorities forcing their will on minorities. As a result, they advocated a representative democracy in the form of a constitutional republic over a direct democracy. For example, James Madison, in Federalist No. 10, advocates a constitutional republic over direct democracy precisely to protect the individual from the will of the majority. Representative democracy is a variety of democracy founded on the principle of elected people representing a group of people. For example, three countries which use representative democracy are the United States of America (a representative democracy), the United Kingdom (a constitutional monarchy) and Poland (a republic). It is an element of both the parliamentary system and presidential system of government and is typically used in a lower chamber such as the House of Commons (UK) or Bundestag (Germany).

Democracy in the Contemporary World

According to Freedom House, in 2007 there were 123 electoral democracies – up from 40 in 1972. According to World Forum on Democracy, electoral democracies now represent 120 of the 192 existing countries and constitute 58.2 percent of the world’s population. At the same time, liberal democracies—countries Freedom House regards as free and respectful of basic human rights and the rule of law—are 85 in number and represent 38 percent of the global population. In 2010 the United Nations declared September 15 the International Day of Democracy.

1.1.3: Non-Democratic Governments: Authoritarianism, Totalitarianism, and Dictatorship

Learning Objective

Discuss the central features and types of undemocratic governments

Key Points

• An authoritarian government is characterized by highly concentrated and centralized power maintained by political repression and the exclusion of potential challengers. It uses political parties and mass organizations to mobilize people around the goals of the regime.
• An autocracy is a system of government in which a supreme political power is concentrated in the hands of one person; by contrast, a single-party state is a type of party system government in which no other parties are permitted to run candidates for election.
• Totalitarianism is an extreme version of authoritarianism – it is a political system where the state holds total authority over the society and seeks to control all aspects of public and private life wherever necessary.
• A dictatorship (government without people’s consent) is a contrast to democracy (government whose power comes from people) and totalitarianism (government controls every aspect of people’s life) opposes pluralism (government allows multiple lifestyles and opinions).
• A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual: a dictator. In contemporary usage, dictatorship refers to an autocratic form of absolute rule by leadership unrestricted by law, constitutions, or other political factors in the state.

Key Term

Autocratic

Of or pertaining to autocracy or to an autocrat; absolute; holding independent and arbitrary powers of government.

Example

• The concept of totalitarianism was first developed in a positive sense in the 1920s by Italian fascists. The concept became prominent in Western anti-communist political discourse during the Cold War era in order to highlight perceived similarities between Nazi Germany and other fascist regimes on the one hand, and Soviet communism on the other.

Introduction

Authoritarianism is a form of social organization characterized by submission to authority as well as the administration of said authority. In politics, an authoritarian government is characterized by highly concentrated and centralized power maintained by political repression and the exclusion of potential challengers. It uses political parties and mass organizations to mobilize people around the goals of the regime. Authoritarianism emphasizes arbitrary law rather than the rule of law, including election rigging and political decisions being made by a select group of officials behind closed doors. Authoritarianism is marked by “indefinite political tenure” of an autocratic state or a ruling-party state.

An autocracy is a system of government in which a supreme political power is concentrated in the hands of one person, whose decisions are subject to neither external legal restraints nor regularized mechanisms of popular control. By contrast, a single-party state is a type of party system government in which a single political party forms the government and no other parties are permitted to run candidates for election. Typically, single-party states hold the suppression of political factions, except as transitory issue oriented currents within the single party or permanent coalition as a self-evident good. The Communist Party of China’s single-party rule of the People’s Republic of China is a prominent contemporary example .

Communist Party of China

XVII Congress of the Communist Party of China held in 2007.

Totalitarianism

Totalitarianismis an extreme version of authoritarianism. Authoritarianism primarily differs from totalitarianism in that social and economic institutions exist free from governmental control. By contrast, totalitarianism is a political system where the state holds total authority over the society and seeks to control all aspects of public and private life wherever necessary. The term ‘an authoritarian regime’ denotes a state in which the single power holder – an individual ‘dictator,’ a committee or a junta or an otherwise small group of political elite – monopolizes political power. However, a totalitarian regime attempts to control virtually all aspects of the social life, including economy, education, art, science, private life, and morals of citizens. The concept became prominent in Western anti-communist political discourse during the Cold War era in order to highlight perceived similarities between Nazi Germany and other fascist regimes on the one hand, and Soviet communism on the other.

Political scientists Carl Friedrich and Zbigniew Brzezinski were primarily responsible for expanding the usage of the term in university social science and professional research, reformulating it as a paradigm for the Soviet Union as well as fascist regimes. For Friedrich and Brzezinski, the defining elements were intended to be taken as a mutually supportive organic entity composed of the following: an elaborating guiding ideology; a single mass party, typically led by a dictator; a system of terror; a monopoly of the means of communication and physical force; and central direction, and control of the economy through state planning. Such regimes had initial origins in the chaos that followed in the wake of World War I, at which point the sophistication of modern weapons and communications enabled totalitarian movements to consolidate power.

Zbigniew Brzezinski (1977)

A number of thinkers, including Zbigniew Brzezinski, have argued that Nazi and Soviet regimes were equally totalitarian.

Dictatorship

A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual: a dictator. In contemporary usage, dictatorship refers to an autocratic form of absolute rule by leadership unrestricted by law, constitutions, or other social and political factors within the state.

For some scholars, a dictatorship is a form of government that has the power to govern without consent of those being governed (similar to authoritarianism), while totalitarianism describes a state that regulates nearly every aspect of public and private behavior of the people. In other words, dictatorship concerns the source of the governing power and totalitarianism concerns the scope of the governing power. In this sense, dictatorship (government without people’s consent) is a contrast to democracy (government whose power comes from people) and totalitarianism (government controls every aspect of people’s life) opposes pluralism (government allows multiple lifestyles and opinions).

The wave of military dictatorships in Latin America in the second half of the twentieth century left a particular mark on Latin American culture. In Latin American literature, the dictator novel challenging dictatorship is a significant genre. There are also many films depicting Latin American military dictatorships.

1.1.4: Non-Democratic Governments: Monarchy, Oligarchy, Technocracy, and Theocracy

Learning Objective

Recognize democratic and non-democratic forms of governance

Key Points

• A monarchy is a form of government in a state is ruled by an individual who typically inherits the throne by birth and rules for life or until abdication.
• Oligarchy is a form of power structure in which power effectively rests with a small number of people. These people could be distinguished by royalty, wealth, family ties, education, corporate, or military control.
• Aristocracy is a form of government in which a few elite citizens rule; this is usually contrasted with democracy, in which all citizens are able to rule.
• Theocracy is a form of government in which religious leaders acting in the place of God rule the state.
• Technocracy is a form of government in which experts in technology would be in control of all decision making. Scientists, engineers, and technologists who have knowledge, expertise, or skills, would compose the governing body, instead of politicians, businessmen, and economists.
• Theocracy is a form of government in which official policy is governed by immediate divine guidance or by officials who are regarded as divinely guided, or is pursuant to the doctrine of a particular religion or religious group.

Key Terms

meritocracy

Meritocracy, in an administrative sense, is a system of government or other administration wherein appointments and responsibilities are objectively assigned to individuals based upon their “merits” and achievements.

oligarchy

a government run by only a few, often the wealthy

technocracy

A system of governance where people who are skilled or proficient govern in their respective areas of expertise. A type of meritocracy based on people’s ability and knowledge in a given area.

junta

The ruling council of a military dictatorship.

Example

• An example of an oligarchy would be the former Soviet Union where only members of the Communist Party were allowed to vote or hold office. Since the collapse of the Soviet Union in 1991, privately owned Russia-based multinational corporations, including producers of petroleum, natural gas, and metal have, in the view of some analysts, become oligarchs. In May 2004, the Russian edition of Forbes identified 36 of these oligarchs as being worth at least $1 billion.

Introduction

Governments tend to fall between traditionally democratic and non-democratic forms. These forms of government are usually distinguished based on who controls the state, how that authority is justified, and in what ways leaders and governments are structurally organized based on these justifications.

Monarchy

A monarchy is a form of government in which sovereignty is actually or nominally embodied in a single individual, the monarch. This is a form of government in which a state or polity is ruled or controlled by an individual who typically inherits the throne by birth and rules for life or until abdication. Monarchs may be autocrats (absolute monarchy) or ceremonial heads of state who exercise little or no power or only reserve power, with actual authority vested in a parliament or other body such as a constitutional assembly .

The decline of monarchy

Postcard of ruling monarchs, taken in 1908 between February (accession of King Manuel II of Portugal) and November (death of Guangxu Emperor).

Monarchs have various titles — king or queen, prince or princess, Malik or Malikah, emperor or empress, duke or grand duke, and Shah . Monarchy is associated with political or sociocultural hereditary rule; most monarchs, both historically and in the modern day, have been born and brought up within a royal family and trained for future duties. However, some monarchies are non-hereditary. In an elective monarchy, the monarch is elected but otherwise serves as any other monarch. Historical examples of elective monarchy include the Holy Roman Emperors and the free election of kings of the Polish–Lithuanian Commonwealth .

Monarchs

This photograph depicts the King of Norway, Bulgaria, Portugal, Greece, Belgium, and Denmark. In a monarchy, the state is controlled by an individual who usually inherits the throne by birth.

Crown Prince & Princess & Emperor Showa & Empress Kojun wedding 1959-4

Japanese Emperor Hirohito, Crown Prince Akihito, Crown Princess Michiko and Empress Nagako, 1959

Monarchies have existed throughout the world, although in recent centuries many states have abolished the monarchy and become republics. Advocacy of republics is called republicanism, while advocacy of monarchies is called monarchism. As of 2010 in Europe, there are twelve monarchies: seven kingdoms, one grand duchy, one papacy, and two principalities, as well as the diarchy of Andorra.

Oligarchy

Oligarchy is a form of power structure in which power effectively rests with a small number of people. These people could be distinguished by royalty, wealth, family ties, education, corporate, or military control. Such states are often controlled by a few prominent families who pass their influence from one generation to the next. Forms of government and other political structures associated with oligarchy usually include aristocracy, meritocracy, plutocracy, military junta, technocracy, and theocracy.

Aristocracy is a form of government in which a few elite citizens rule. In the origins in Ancient Greece, it was conceived of as rule by the best qualified citizens, and contrasted with monarchy. In later times, aristocracy was usually seen as rule by a privileged group, the aristocratic class, and contrasted with democracy. Similarly, plutocracy is rule by the wealthy. Unlike systems such as democracy, plutocracy is not rooted in a political philosophy and has no advocates; the term is only used in a pejorative sense. Examples of plutocracies include the Roman Republic, some city-states in Ancient Greece, the civilization of Carthage, the Italian city-states/merchant republics of Venice, Florence, Genoa, and pre-World War II Empire of Japan zaibatsu.

Other Forms of Governance

Technocracy is a form of government in which experts in technology would be in control of all decision making. Scientists, engineers, and technologists who have knowledge, expertise, or skills, would compose the governing body instead of politicians, businessmen, and economists. In a technocracy, decision makers would be selected based upon how knowledgeable and skillful they are in their field.

Theocracy is a form of government in which official policy is governed by immediate divine guidance or by officials who are regarded as divinely guided, or is pursuant to the doctrine of a particular religion or religious group . Theocracy essentially means rule by a church or analogous religious leadership; a state in which the goal is to direct the population towards God and in which God himself is the theoretical “head of the state”.

Iran’s Theocracy

Iran is an example of a theocracy. Ali Khamenei, depicted here, current holds the position of Supreme Leader in Iran. The Supreme Leader is a religious figure who has arguably the most political power in Iran.

An Islamic state is a state that has adopted Islam, specifically Sharia (Islamic Law), as its foundations for political institutions, or laws, exclusively, and has implemented the Islamic ruling system and is therefore a theocracy. Although there is much debate as to which states or groups operate strictly according to Islamic Law, Sharia is the official basis for state laws in the following countries: Yemen, Afghanistan, Somalia, Sudan, Saudi Arabia, Mauritania, Oman and Iran.

1.2: Functions of Government

1.2.1: Why Politics Matters

From the political economy to political philosophy, politics determines “who gets what, when, and how” for all citizens.

Learning Objective

Recognize the role that power plays in making decisions

Key Points

• As a term, politics is generally applied to the art or science of running governmental or state affairs. It includes behavior within civil governments, but also applies to institutions, fields, and special interest groups.
• Political science is the study of politics. It examines the acquisition and application of power.
• Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs.
• Political philosophy seeks a rationale for politics and an ethic for public behavior.
• Political economy attempts to develop understandings of the relationships between politics and the economy and the governance of the two.
• Public administration examines the practices of governance in institutions.

Key Terms

public policy

The set of policies (laws, plans, actions, behaviors) of a government; plans and methods of action that govern that society; a system of laws, courses of action, and priorities directing a government action.

political science

The systematic study of government and politics.

politics

The profession of conducting political affairs.

Introduction

Politics as a term is generally applied to the art or science of running governmental or state affairs. The term includes behavior within civil governments, but is also applied to institutions, fields, and special interest groups such as the corporate, academic, and religious segments of society. It consists of “social relations involving authority or power” as well as the methods and tactics used to formulate and apply policy.

Political science is the study of politics. It examines the acquisition and application of power. Political scientist Harold Lasswell defined politics as “who gets what, when, and how”. Related areas of study include political philosophy, which seeks a rationale for politics and an ethic of public behavior; political economy, which attempts to develop understandings of the relationships between politics and the economy and the governance of the two; and public administration, which examines the practices of governance.

Pyramid of Capitalist System

IWW poster “Pyramid of the Capitalist System”(c. 1911), depicting an anti-capitalist perspective on statist/capitalist social structures.

Political Science

Political scientists study matters concerning the allocation and transfer of power in decision making, the roles and systems of governance including governments and international organizations, political behavior, and public policies. They measure the success of governance and specific policies by examining many factors including stability, justice, material wealth, and peace. Some political scientists seek to advance theses by analyzing politics. Others advance normative theses by making specificpolicy recommendations.

United Nations Building

UN Building in NYC.

Westminster-Based Government, British Parliament

The British Parliament is a Westminster-based system of government with multiple political parties.

Like all social sciences, political science faces the difficulty of observing human actors who can only be partially observed and have the capacity for making conscious choices unlike other subjects such as non-human organisms in biology or inanimate objects as in physics. Despite the complexities, contemporary political science has progressed by adopting a variety of methods and theoretical approaches to understanding politics. Methodological pluralism is a defining feature of contemporary political science.

Public Policy

Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs. Shaping public policy is a complex and multifaceted process. It involves the interplay of numerous individuals and interest groups competing and collaborating to influence policymakers to act in a particular way. These individuals and groups use a variety of tactics and tools to advance their aims. The tactics include advocating their positions publicly, attempting to educate supporters and opponents, and mobilizing allies on a particular issue.

1.2.2: Defending the Nation

One of the most important functions of the U.S. government is to provide common defense and security for its citizens.

Learning Objective

Identify the main function of the United States National Security Council

Key Points

• Article One, Section Eight of the U.S. Constitution gives Congress certain broad enumerated powers. Among these are the power to lay and collect taxes, provide for the common defense, and provide for the general welfare of the United States.
• The U.S. Armed Forces are the military forces of the United States. They consist of the Army, Navy, Marine Corps, Air Force, and Coast Guard.
• The White House National Security Council is the principal forum used by the President of the United States for considering national security and foreign policy matters with his senior national security advisors and Cabinet officials.
• The U.S. military is one of the largest militaries in terms of the number of personnel. U.S. Defense spending draws its manpower from a large pool of paid volunteers. Although conscription has been used in the past in various times of both war and peace, it has not been used since 1972.

Key Terms

The White House National Security Council

The White House National Security Council in the United States is the principal forum used by the President of the United States for considering national security and foreign policy matters with his senior national security advisors and Cabinet officials.

United States Armed Forces

The United States Armed Forces are the military forces of the United States. They consist of the Army, Navy, Marine Corps, Air Force, and Coast Guard.

Article One, Section Eight

Article One, Section Eight of the U.S. Constitution gives Congress certain broad enumerated powers. Among these are the power to lay and collect taxes and provide for the common defense and general welfare of the United States.

Example

• The United States has the largest defense budget in the world. As of 2011, the United States spends about 550 billion annually to fund its military forces, and appropriates approximately 160 billion to fund Overseas Contingency Operations. Put together, the United States constitutes roughly 43 percent of the world’s military expenditures.

Introduction

Article One of the United States Constitution describes the powers of Congress, which is the legislative branch of the federal government. More importantly, it establishes limits on the powers of Congress as well as the states. Section Eight gives Congress certain broad enumerated powers. Among these are the power to lay and collect taxes and provide for the common defense and general welfare of the United States; to borrow money on the credit of the United States; and to regulate interstate, foreign, and Indian commerce. As stated in the Constitution, “The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States. “

United States Armed Forces

The U.S. Armed Forces are the military forces of the United States. They consist of the Army, Navy, Marine Corps, Air Force, and Coast Guard. The United States has a strong tradition of civilian control of the military. The President is the overall head of the military. The President helps form military policy with the United States Department of Defense. This department is a federal executive department, acting as the principal organ by which military policy is carried out. The United States has the largest defense budget in the world . As of 2011, the United States spends about 160 billion to fund Overseas Contingency Operations. Combined, the United States constitutes roughly 43 percent of the world’s military expenditures.

U.S. Defense Spending (1910 – 2007)

The United States has the largest defense budget in the world.

The U.S. military is one of the largest militaries in terms of the number of personnel. It draws its manpower from a large pool of paid volunteers. However, conscription has been used in the past in various times of both war and peace. It has not been used since 1972 . Historically, defense-related spending in the United States is at its highest inflation-adjusted level since World War II. As of September 2010, 1,430,895 people were on active duty in the military, with an additional 848,000 people in the seven reserve components. The United States military is the second largest in the world, after the People’s Liberation Army of China. The U.S. has troops deployed around the globe.

United States National Security Council

The White House National Security Council is the principal forum used by the President of the United States for considering national security and foreign policy matters with his senior national security advisors and Cabinet officials. The Security Council is part of the Executive Office of the President of the United States . Since its inception under Harry S. Truman, the function of the Council has been to advise and assist the President on national security and foreign policies. The Council also serves as the president’s principal arm for coordinating these policies among various government agencies. The U.S. Council also has counterparts in the national security councils of many other nations.

The National Security Council is chaired by the President. Its regular attendees (both statutory and non-statutory) are the Vice President (statutory), the Secretary of State (statutory), the Secretary of Treasury (non-statutory), the Secretary of Defense (statutory), and the National Security Advisor (non-statutory).

1.2.3: Establishing Justice

As the third branch of government, the judiciary is the system of courts that interprets and applies the law in order to mete out justice.

Learning Objective

Identify the common principles and elements of the justice system in the United States

Key Points

• Justice is a concept of moral rightness based on ethics, rationality, law, natural law, religion, or equity.
• Under the doctrine of the separation of powers, the judiciary generally does not make law or enforce law, but rather interprets law and applies it to the facts of each case.
• The rule of law is the legal doctrine that implies that every citizen, including headz of state and members of government, is subject to the law.
• The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all federal courts and over state court cases involving issues of federal law, and original jurisdiction over a small range of cases.

Key Terms

the judiciary

The judiciary is the system of courts that interprets and applies the law in the name of the state.

The Supreme Court of the United States

The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all federal courts and over state court cases involving issues of federal law, and original jurisdiction over a small range of cases.

rule of law

The doctrine that no individual is above the law and that everyone must answer to it.

Example

• State courts, which try 98% of litigation, may have different names and organization; trial courts may be called “courts of common plea”, appellate courts “superior courts” or “commonwealth courts. “

Introduction

Justice is a concept of moral rightness based on ethics, rationality, law, natural law, religion, or equity. In a world where people are interconnected, but with disagreements, institutions are required to instantiate ideals of justice . These institutions may be justified by their approximate instantiation of justice, or they may be deeply unjust when compared with ideal standards. Another definition of justice is an independent investigation of truth. In a court room, lawyers, the judge, and the jury are supposed to be independently investigating the truth of an alleged crime.

Lady Justice

Lady Justice depicts justice as equipped with three symbols: a sword symbolizing the court’s coercive power; a human scale weighing competing claims in each hand; and a blindfold indicating impartiality.

The Judiciary and Rule of Law

The judiciary is the system of courts that interprets and applies the law in the name of the state. Under the doctrine of the separation of powers, the judiciary generally does not make law or enforce law, but rather interprets law and applies it to the facts of each case. The judiciary also provides a mechanism for the resolution of disputes. This branch of the state is often tasked with ensuring equal justice under law. It usually consists of a court of final appeal, together with lower courts.

The rule of law is a legal doctrine whereby governmental decisions are made by applying known legal principles. Rule of law implies that every citizen is subject to the law . It stands in contrast to the idea that the ruler is above the law, for example by divine right, which the European monarchy routinely invoked to justify its rule. All government officers of the United States, including the President, the Justices of the Supreme Court, and all members of Congress, pledge first and foremost to uphold the Constitution. These oaths affirm that the rule of law is superior to the rule of any human leader

“The Mosaic Law” by Frederick Dielman (1896)

Mosaic representing both the judicial and legislative aspects of law. The woman on the throne holds a sword to chastise the guilty and a palm branch to reward the meritorious. Glory surrounds her head, and the aegis of Minerva signifies the armor of righteousness and wisdom.

United States Court System

In the United States court system, the Supreme Court is the final authority on the interpretation of the federal Constitution and all statutes and regulations created pursuant to it, as well as the constitutionality of the various state laws; in the U.S. federal court system, federal cases are tried in trial courts, known as the U.S. district courts, followed by appellate courts and then the Supreme Court. State courts, which try 98% of litigation, may have different names and organization; trial courts may be called “courts of common plea,” and appellate courts may be “superior courts” or “commonwealth courts. ” The judicial system, whether state or federal, begins with a court of first instance, is appealed to an appellate court, and then ends at the court of last resort.

The Supreme Court of the United States is the highest court in the United States . It has ultimate appellate jurisdiction over all federal courts and over state court cases involving issues of federal law, and original jurisdiction over a small range of cases. The Court, which meets in the United States Supreme Court Building in Washington, D.C., consists of a chief justice and eight associate justices who are nominated by the President and confirmed by the United States Senate. Once appointed, justices have life tenure unless they resign, retire, or are removed after impeachment.

The United States Supreme Court (2010)

The United States Supreme Court, the highest court in the United States, in 2010. Top row (left to right): Associate Justice Sonia Sotomayor, Associate Justice Stephen G. Breyer, Associate Justice Samuel A. Alito, and Associate Justice Elena Kagan. Bottom row (left to right): Associate Justice Clarence Thomas, Associate Justice Antonin Scalia, Chief Justice John G. Roberts, Associate Justice Anthony Kennedy, and Associate Justice Ruth Bader Ginsburg.

1.2.4: Promoting the General Welfare

In many constitutions, the general welfare clause has been used as a basis for promoting the well-being of the governed people.

Learning Objective

Illustrate how the General Welfare clause of the Constitution is applied to public policy

Key Points

• General Welfare clauses are generally interpreted as granting the state broad power to legislate or regulate for the general welfare, independent of other powers specified in the governing document.
• In the popular meaning, the “common good” describes a specific good that is shared and beneficial for all members of a given community.
• The United States Constitution contains two references to “the General Welfare,” one occurring in the Preamble and the other in the Taxing and Spending clause.
• The Taxing and Spending clause is the clause that gives the federal government of the United States its power of taxation.

Key Terms

General Agreement on Tariffs and Trade

a multilateral agreement regulating international trade, signed in 1947 and lasting until 1994, when it was replaced by the World Trade Organization

preamble

A short preliminary statement or remark, especially an explanatory introduction to a formal document or statute.

general welfare

A General Welfare clause is a section that appeared in many constitutions, as well as in some charters and statutes, which provides that the governing body empowered by the document may enact laws to promote the general welfare of the people, sometimes worded as the public welfare.

Common good

the general interest of the population as a whole

taxing and spending clause

The Taxing and Spending clause gives the federal government of the United States its power of taxation.

Example

• Article IV of the Constitution of Massachusetts provides authority for the state to make laws “as they shall judge to be for the good and welfare of this commonwealth. ” The actual phrase “general welfare” appears only in Article CXVI, which permits the imposition of capital punishment for “the purpose of protecting the general welfare of the citizens. “

Introduction

The General Welfare clause is a section of the Constitution– as well as certain charters and statutes– which provides that the governing body empowered by the document may enact laws to promote the general welfare of the people. In some countries, the clause has been used as a basis for legislation promoting the health, safety, morals, and well-being of the people governed by the state. Such clauses are generally interpreted as granting the state broad power to legislate or regulate for the general welfare, remaining independent of other powers specified in the governing document.

The common good is a term that can refer to several different concepts. In the popular meaning, the common good describes a specific “good” that is shared and beneficial for all members of a given community. This is also how the common good is broadly defined in philosophy, ethics, and political science.

General Welfare in the United States

The United States Constitution contains two references to “the General Welfare,” one occurring in the Preamble and the other in the Taxing and Spending clause . The Preamble of the United States Constitution states that the Union was established “to promote the general Welfare. ” The Taxing and Spending Clause is the clause that gives the federal government of the United States its power of taxation. However, The U.S. Supreme Court has upheld that the mention of the clause in the Preamble “has never been regarded as the source of any substantive power conferred on the Government of the United States or on any of its Departments. “

There have been different interpretations of the meaning of the General Welfare clause. The historical controversy over the U.S. General Welfare clause arises from two distinct disagreements: The first concerns whether the General Welfare clause grants an independent spending power or is a restriction upon the taxing power; the second disagreement pertains to what exactly is meant by the phrase “general welfare. “

Individual States

The state of Alabama has had six constitutions. The Preamble of the 1865 Alabama Constitution notes one purpose of the document to be to “promote the general welfare,” but this language is omitted from the 1901 Alabama Constitution. Similarly, Article IV of the Constitution of Massachusetts provides authority for the state to make laws “as they shall judge to be for the good and welfare of this commonwealth. ” The actual phrase “general welfare” appears only in Article CXVI, which permits the imposition of capital punishment for “the purpose of protecting the general welfare of the citizens. “

1.2.5: Resolving Conflicts

The legal system provides a structure for the resolution of many disputes, including litigation, arbitration, mediation, and conciliation.

Learning Objective

Compare and contrast arbitration and mediation as methods of conflict-resolution

Key Points

• Conflict resolution is conceptualized as the methods and processes involved in facilitating the peaceful ending of social conflict.
• The most common form of judicial dispute resolution is litigation, which is initiated when one party files suit against another.
• Arbitration is a legal technique for the resolution of disputes outside the courts, where the parties in a dispute refer it to one or more persons, by whose decision they agree to be bound.
• Mediation is a way of resolving disputes between two or more parties with concrete effects. Typically, a third party, the mediator, assists the parties to negotiate a settlement.
• Conciliation is a process whereby the parties to a dispute agree to utilize the services of a conciliator, who then meets with the parties separately in an attempt to resolve their differences.

Key Terms

mediation

Negotiation to resolve differences conducted by some impartial party.

conciliation

A process whereby the parties to a dispute agree to utilize the services of a conciliator, who then meets with the parties separately in an attempt to resolve their differences.

arbitration

A process through which two or more parties use an arbitrator or arbiter (an impartial third party) in order to resolve a dispute.

litigation

The conduct of a lawsuit.

conflict resolution

Conflict resolution is conceptualized as the methods and processes involved in facilitating the peaceful ending of social conflict.

Example

• Because litigation is such a complex process, it is estimated that about 98 percent of civil cases in the United States federal courts are resolved without a trial.

Introduction

The judiciary is the system of courts that interprets and applies the law in the name of the state. The judiciary also provides a mechanism for the resolution of disputes. Conflict resolution is conceptualized as the methods and processes involved in facilitating the peaceful ending of social conflict. More narrowly, dispute resolution is the process of resolving disputes between parties. The legal system provides a necessary structure for the resolution of many disputes. However, some disputants will not reach agreement through a collaborative process. Some disputes need the coercive power of the state to enforce a resolution.

The Old Bailey

A trial at the Old Bailey in London, as drawn by Thomas Rowlandson and Augustus Pugin, for Ackermann’s Microcosm of London (1808-11).

The most common form of judicial dispute resolution is litigation. Litigation is initiated when one party files suit against another. In the United States, litigation is facilitated by the government within federal, state, and municipal courts. The proceedings are very formal and are governed by rules, such as rules of evidence and procedure, which are established by the legislature. Outcomes are decided by an impartial judge and/or jury, based on the factual questions of the case and the application law. Methods of dispute resolution include: litigation, arbitration, mediation, and conciliation.

Lawsuits

A lawsuit is a civil action brought in a court of law in which a plaintiff, a party who claims to have incurred loss as a result of a defendant’s actions, demands a legal or equitable remedy. The defendant is required to respond to the plaintiff’s complaint. If the plaintiff is successful, judgment will be given in the plaintiff’s favor, and a variety of court orders may be issued to enforce a right, award damages, or impose a temporary or permanent injunction to prevent or compel an act. Generally, the conduct of a lawsuit is called litigation. One who has a tendency to litigate rather than seek non-judicial remedies is called litigious.

Arbitration

Arbitration is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons, by whose decision they agree to be bound. Arbitration can be either voluntary or mandatory, and can be either binding or non-binding. In theory, arbitration is a consensual process; a party cannot be forced to arbitrate a dispute unless he or she agrees to do so. In practice, however, many fine-print arbitration agreements are inserted in situations in which consumers and employees have no bargaining power. Because litigation is such a complex process, it is estimated that about 98% of civil cases in the United States federal courts are resolved without a trial.

Mediation

Mediation is a way of resolving disputes between two or more parties with concrete effects. Typically, a third party, the mediator, assists the parties to negotiate a settlement. Disputants may mediate disputes in a variety of domains, such as commercial, legal, diplomatic, workplace, community, and family matters. The term “mediation” broadly refers to any instance in which a third party helps others reach agreement. More specifically, mediation has a structure, timetable, and dynamics that “ordinary” negotiation lacks. The process is private and confidential, possibly enforced by law. Participation is typically voluntary. The mediator acts as a neutral third party and facilitates rather than directs the process.

Conciliation

Finally, conciliation is a process whereby the parties in a dispute agree to utilize the services of a conciliator, who then meets with the parties separately in an attempt to resolve their differences. Conciliation differs from arbitration in that the conciliation process, in and of itself, has no legal standing, and the conciliator usually has no authority to seek evidence or call witnesses, usually writes no decision, and makes no award.

Conciliation differs from mediation in that the main goal is to conciliate, most of the time by seeking concessions. In mediation, the mediator tries to guide the discussion in a way that optimizes parties’ needs, takes feelings into account, and reframes representations.

1.2.6: Providing Public Services

A public service is a service that is provided by government to people living within its territory and considered essential to modern life.

Learning Objective

Define public services and their relation to government

Key Points

• A public service is a service that is provided by government to people living within its jurisdiction, either directly or by financing private provision of services.
• Public services tend to be those considered as so essential to modern life that for moral reasons their universal provision should be guaranteed.
• A public good is a good that is both non-excludable in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.
• Merit goods are services that may be under-provided by the market, including the provision of food stamps to support nutrition or the delivery of health services to improve quality of life, among others.
• Nationalization is the process of taking a private industry or private assets into public ownership by a national government or state. Nationalization really took off following the World Wars of the first half of the twentieth century.

Key Terms

merit good

Merit goods are services that may be under-provided by the market, including the provision of food stamps to support nutrition or the delivery of health services to improve quality of life, among others.

public service

A service, usually provided by the government, for the general public or its specific section.

public good

A public good is a good that is both non-excludable in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.

Example

• In modern developed nations, the term “public services” includes sectors, such as electricity, fire services, gas, law enforcement, military, environmental protection, public housing, public transportation, etc.

Introduction

A public service is a service that is provided by government to people living within its jurisdiction, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income. Even where public services are neither publicly provided nor publicly financed, for social and political reasons, they are usually subject to regulation that go beyond those public services which apply to most economic sectors.

Public services tend to be those considered as so essential to modern life that for moral reasons their universal provision should be guaranteed. They may be associated with fundamental human rights, such as the right to water or food. For example, the local fire department is an institution with the mission of servicing the community . A service is helping others with a specific need or want. Here, service ranges from a doctor curing an illness, to a repair person, to a food pantry. All of these services are essential to people’s lives. In modern, developed nations, the term “public services” includes sectors, such as electricity, fire services, gas, law enforcement, military, environmental protection, public housing, public transportation, etc.

Public Transportation in the U.S.

Buses are an example of a public good delivered by local governments in the United States. This bus is in Brooklyn, New York.

Fire Brigades

A New South Wales Fire Brigades truck in 2008

Public Goods and Merit Goods

A public service may sometimes have the characteristics of a public good. In economics, a public good is a good that is both non-excludable in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems, and street lighting. However, most public services are merit goods, which are services that may be under provided by the market. Examples of merit goods include the provision of food stamps to support nutrition, the delivery of health services to improve the quality of life and reduce morbidity, subsidized housing and, arguably, education.

Nationalization

Nationalization is the process of taking a private industry or private assets into public ownership by a national government or state. Nationalization really took off following the World Wars of the first half of the twentieth century. Across Europe, because of the extreme demands on industries and the economy, central planning was required to ensure that the maximum degree of efficient production was obtained. Many public services, especially electricity, gas, and public transport were products of this era. Following the World War II, many countries also began to implement universal health care and expand education under the funding and guidance of the state. In the United States, some economists consider the U.S. government’s 2008 takeover of the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association to have been nationalization.

1.3: Who Is American?

1.3.1: Racial and Ethnic Diversity in the United States

The United States is a diverse country, racially and ethnically, with over six races officially recognized by the U.S. Census Bureau.

Learning Objective

Discuss the origins and characteristics of each of the races in the United States

Key Points

• A person of color is a term used primarily in the United States to describe any person who is not white. The term is meant to be inclusive among non-white groups, emphasizing common experiences of racism.
• The majority of the more than 300 million people currently living in the United States consists of White Americans, who trace their ancestry to the original peoples of Europe, the Middle East, and North Africa.
• The African American group is the largest racial minority, as opposed to Hispanics and Latinos, who are the largest ethnic minority.
• Once thought to face extinction in race or culture, there has been a remarkable revival of Native American identity and tribal sovereignty in the 20th century.
• The Hispanic or Latino population is young and fast-growing, due to immigration and higher birth rates: the Census Bureau projects that by 2050 one-quarter of the population will be Hispanic or Latino.

Key Terms

race

A large group of people distinguished from others on the basis of common physical characteristics, such as skin color or hair type.

ethnicity

The common characteristics of a group of people.

person of color

A person of color is a term used primarily in the United States to describe any person who is not white.

Example

• According to the 2010 U.S. Census, White Americans (non-Hispanic/Latino and Hispanic/Latino) are the racial majority, with an 72% share of the U.S. population, per 2010 US Census. Hispanic and Latino Americans compose 15% of the population, making up the largest ethnic minority. Black Americans are the largest racial minority, composing nearly 13% of the population. The White, non-Hispanic or Latino population comprises 66% of the nation’s total.

Introduction

The United States is a diverse country, racially and ethnically. Six races are officially recognized: White, American Indian and Alaska Native, Asian, Black or African American, Native Hawaiian and Other Pacific Islander, and people of two or more races; a race called “Some other race” is also used in the census and other surveys, but is not official. The United States Census Bureau also classifies Americans as “Hispanic or Latino” and “Not Hispanic or Latino”, which identifies Hispanic and Latino Americans as a racially diverse ethnicity that composes the largest minority group in the nation. A person of color is a term used primarily in the United States to describe any person who is not white. The term is meant to be inclusive among non-white groups, emphasizing common experiences of racism.

Racial and Ethnic Categories

In the 2000 Census and subsequent United States Census Bureau surveys, Americans self-described as belonging to following racial groups. White are considered those having origins in any of the original peoples of Europe, the Middle East, or North Africa ; Black or African American are considered those having origins in any of the Black racial groups of Africa ; Native American are considered those having origins in any of the original peoples of North, Central and South America, and who maintain tribal affiliation or community attachment; Asian are considered those having origins in any of the original peoples of the Far East, Southeast Asia, and the Indian subcontinent ; Pacific Islanders are those having origins in any of the original peoples of Hawaii, Guam, Samoa, or other Pacific Islands; see also Pacific Islander American. Finally, multiracial are those who check off or write in more than one race. There is no actual option labeled “Two or more races” or “Multiracial” on the census and other forms; only the foregoing six races appear, and people who report more than one of them are categorized as people of “Two or more races” in subsequent processing.

Asian Americans

Connie Chung, First Asian American national news anchor.

African American boy

An African American boy outside of Cincinnati, Ohio in the 1940s.

The question on Hispanic or Latino origin is separate from the question on race. Hispanic and Latino Americans have origins in the Spanish-speaking countries of Latin America and Spain . Most of the Latin American countries are, like the United States, quite racially diverse . Consequently, no separate racial category exists for Hispanic and Latino Americans, as they do not make up a race of their own; when responding to the race question on the census form, they choose from among the same racial categories as all Americans, and are included in the numbers reported for those races. Self-identifying as Hispanic or Latino and not Hispanic or Latino is neither explicitly allowed nor explicitly prohibited.

Racial Makeup of the U.S. Population

The majority of the more than 300 million people currently living in the United States consists of White Americans, who trace their ancestry to the original peoples of Europe, the Middle East, and North Africa. White Americans are the majority in forty-nine of the fifty states, with Hawaii as the exception. The non-Hispanic White percentage (66% in 2008) tends to decrease every year, and this sub-group is expected to become a plurality of the overall U.S. population after the year 2050.

About 12.4% of the American people are Black or African American. Also known more simply as Black Americans, the Black or African American group is the largest racial minority, as opposed to Hispanics and Latinos, who are the largest ethnic minority. Historically, any person with any sub-Saharan African ancestry, even if they were mostly white, were designated and classified as “Black,” according to the “one drop rule. ” The one-drop rule is a historical colloquial term in the United States for the social classification as black of individuals with any African ancestry; this means any person with “one drop of black blood” was considered black.

A third significant minority is the Asian American population, comprising 13.4 million in 2008, or 4.4% of the U.S. population. California is home to 4.5 million Asian Americans, whereas 495,000 live in Hawaii, where they compose the plurality of the islands’ people – this is their largest share of any state. Asians are by no means a monolithic group. The largest sub-groups are immigrants or descendants of immigrants from the Philippines, China, India, Brunei, Malaysia, Vietnam, Cambodia, Taiwan, South Korea, Japan and Thailand.

Indigenous peoples of the Americas, such as Native Americans and Inuit, made up 0.8% of the population in 2008, numbering 2.4 million. Once thought to face extinction in race or culture, there has been a remarkable revival of Native American identity and tribal sovereignty in the 20^th century.

Hispanic and Latino Americans

“Hispanic or Latino origin” is a self-designation made by 47 million Americans, as of 2008. They have origins in the Spanish-speaking nations of Latin America, chiefly, whereas a small percentage traces their origins to Spain. The Hispanic or Latino population is young and fast-growing, due to immigration and higher birth rates. For decades it has contributed significantly to U.S. population increases, and this is expected to continue for decades. The Census Bureau projects that by 2050 one-quarter of the population will be Hispanic or Latino.

Assimilation of Native Americans

Portraits of Native Americans from the Cherokee, Cheyenne, Choctaw, Comanche, Iroquois, and Muscogee tribes in American attire. Photos date from 1868 to 1924.

1.3.2: Twenty-First-Century Americans

Immigration has been a pivotal source for change in the social, economic and political makeup of the U.S.

Learning Objective

Compare and contrast the different cycles of immigration in U.S. history

Key Points

• American immigration history can be viewed in four epochs: the colonial period, the mid-nineteenth century, the turn of the twentieth century, and post-1965.
• Contemporary immigrants tend to be younger than the native population of the United States, with people between the ages of 15 and 34 substantially over-represented.
• Public attitudes about immigration in the U.S. were heavily influenced in the aftermath of the 9/11 attacks.
• Contemporary immigrants settle predominantly in seven states, California, New York, Florida, Texas, Pennsylvania, New Jersey and Illinois, all of which are large and comprise about 44% of the U.S. population as a whole.
• The Immigration and Nationality Act of 1965, also known as the Hart-Cellar Act, abolished an earlier system that regulated immigration by national-origin quotas.
• In 1990, George H. W. Bush signed the Immigration Act of 1990, which increased legal immigration to the United States by 40%.

Key Terms

immigration act of 1990

The Immigration Act of 1990 increased the limits on legal immigration to the United States and revised the legal grounds for exclusion and deportation. It also authorized temporary protected status to aliens of designated countries, revised and established new, non-immigrant admission categories, revised and extended the Visa Waiver Pilot Program, and revised naturalization authority and requirements.

Immigration and Nationality Act of 1965

Immigration legislation that removed yearly, numerical quotas based on the immigrant’s country of origin and implemented a system of ranking potential immigrants based on skills and family relationships.

Example

• Out of all immigrants to the United States, the highest amount originated in Mexico, India, the Philippines, and China. Between 2000 to 2010, nearly 14 million immigrants entered the United States.

Introduction

Immigration to the United States is a complex demographic phenomenon that has been a major source of population and cultural change throughout much of U.S. history . Immigration has political, social and economic impacts that have led to a variety of controversies regarding ethnicity, economic benefits, jobs for non-immigrants, settlement patterns, upward social mobility, crime, and voting behavior. These issues are exacerbated by the scale at which immigration occurs. In 2006, the United States accepted, as permanent residents, more legal immigrants than all other countries in the world combined. Illegal immigration also occurs, most notably across the Mexico-United States border, but this type of migration is difficult, expensive and dangerous for participants. Out of those who have immigrated to the U.S., the largest amount originated in Mexico, India, the Philippines, and China. Between 2000 and 2010, nearly fourteen million immigrants entered the United States.

2001-2005 Immigration Rate to the United States

Rate of immigration to the United States relative to sending countries’ population size, 2001–2005

History

American immigration history can be viewed in four epochs: the colonial period, the mid-nineteenth century, the turn of the twentieth century, and post-1965.Each period denotes a time when particular national groups, races and ethnicities were migrating to the United States. Historians estimate that fewer than one million immigrants—perhaps as few as 400,000—crossed the Atlantic during the 17^th and 18^th centuries. The peak year of European immigration was in 1907, when 1,285,349 individuals entered the country. By 1910, 13.5 million immigrants were living in the United States.

The Immigration and Nationality Act of 1965 abolished an earlier immigration system that had set quotas on the number of people who could immigrate in a given year from particular countries. By equalizing immigration policies, the act resulted in new immigration from non-European nations, which changed the ethnic make-up of the United States. Immigration doubled between 1965 and 1970, and again between 1970 and 1990. In 1990, George H. W. Bush signed the Immigration Act of 1990. This further increased legal immigration to the United States by 40%.

Contemporary Immigration Patterns

Until the 1930s, most legal immigrants were male. By the 1990s, women accounted for just over half of all legal immigrants. Contemporary immigrants tend to be younger than the native population of the United States, with people between the ages of 15 and 34 substantially over-represented. Immigrants are also more likely to be married and less likely to be divorced than native-born Americans of the same age. In terms of regional patterns, immigrants are likely to move to, and reside in, areas populated by people with similar backgrounds . This phenomenon has held true throughout the history of immigration to the United States.

Chinatown (Manhattan, New York)

Chinatown, Manhattan, New York City 2009 on Pell Street, looking west towards Doyer and Mott.

Public attitudes about immigration in the U.S. were heavily influenced in the aftermath of the 9/11 attacks.According to a 2009 Gallup poll, after the attacks, only 52% of Americans believed that immigration was a good thing overall for the U.S., down from 62% the year before.

Contemporary immigrants settle predominantly in seven states: California New York, Florida, Texas, Pennsylvania, New Jersey and Illinois. These states are large and comprise about 44% of the U.S. population as a whole . As of 2000, the combined immigrant population residing in these seven states accounted for 70% of the total foreign-born population. If current birth rate and immigration rates were to remain unchanged for another 70 to 80 years, the U.S. population would double to nearly 600 million.

May Day Immigration Rally

Immigrant rights march for amnesty in downtown Los Angeles, California on May Day, 2006.

1.4: The Tenets of American Democracy

1.4.1: Liberty

Liberty, the ability of individuals to have control over their lives, is a central aspect of modern political philosophy.

Learning Objective

Compare and contrast positive and negative liberty

Key Points

• Enlightenment thinkers’ conception of liberty was that a free individual is most free within the context of a state which provides stability through its laws.
• John Stuart Mill’s On Liberty was the first work to recognize the difference between liberty as the freedom to act and liberty as the absence of coercion.
• The concept of liberty has long been a central aspect of the political self-definition in the United States.

Key Terms

social contract

An implicit agreement or contract among members of a society that dictates things such as submission of individuals to the rule of law and acceptable conduct.

state of nature

The state of nature is a term in political philosophy used in social contract theories to describe the hypothetical condition that preceded governments.

Liberty is the ability of individuals to have agency, or control over their own lives. There are different conceptions of liberty, which articulate the relationship of individuals to society in varying ways, including some which relate to life under a “social contract” or to existence in a “state of nature,” and some which see the active exercise of freedom and rights as essential to liberty.

Philosophical Foundations

The concept of liberty plays a very important role in social contract theory, particularly in its discussion of sovereignty and natural rights. The thinkers of the Enlightenment reasoned that law governed both heavenly and human affairs, and that law gave the king his power, rather than the king’s power giving force to law. The conception of law as a relationship between individuals, rather than families, came to the fore, and with it the increasing focus on individual liberty as a fundamental reality, given by “Nature and Nature’s God,” which, in an ideal state, would be as expansive as possible. Thus, Enlightenment thinkers’ conception of liberty was that a free individual is most free within the context of a state which provides stability through its laws.

Within the context of social liberty, the British philosopher John Stuart Mill, in his work On Liberty, sought to define the “nature and limits of the power which can be legitimately exercised by society over the individual.” As such, he describes an inherent and continuous antagonism between liberty and authority. The prevailing question thus becomes “how to make the fitting adjustment between individual independence and social control. “

John Stuart Mill

John Stuart Mill, author of On Liberty

Positive and Negative Liberty

On Liberty was the first work to recognize the difference between liberty as the freedom to act and liberty as the absence of coercion.In his book, Two Concepts of Liberty, the British social and political theorist Isaiah Berlin formally framed the differences between these two perspectives as the distinction between two opposite concepts of liberty: positive liberty and negative liberty. The latter designates a negative condition in which an individual is protected from tyranny and the arbitrary exercise of authority, while the former refers to having the means or opportunity, rather than the lack of restraint, to do things.

Liberty in the United States

The concept of liberty has long been a central aspect of the political self-definition in the United States. The founders of the United States were heavily influenced by the writings of John Locke, who had declared in Two Treatises of Government that under natural law, all people have the right to life, liberty, and estate. In addition, under the social contract, the people could instigate a revolution against the government when it acted against the interests of citizens, and replace it with one that would serve the interests of citizens.

In a more modern context, the U.S. Supreme Court decision Griswold v. Connecticut established that liberties relating to personal relationships, such as marriage, have a unique primacy of place in the hierarchy of freedoms.

1.4.2: Equality

Equality refers to a state of affairs in which all people within a specific society or group have the same status.

Learning Objective

Compare and contrast equality of opportunity with the outcome of opportunities

Key Points

• Social equality is a social state of affairs in which all people within a specific society or isolated group have the same status in certain respects.
• Within the United States, the issues of racial and gender equality have been particularly prevalent and the catalyst for much social and political reform through the work of the feminist and civil rights movements.
• Equality of opportunity is often contrasted with equality of outcome, and both concepts remain the topic of contentious debates in American politics.

Key Term

meritocracy

Meritocracy, in an administrative sense, is a system of government or other administration wherein appointments and responsibilities are objectively assigned to individuals based upon their “merits” and achievements.

Social Equality and Equality Before the Law

Social equality is a social state of affairs in which all people within a specific society or isolated group have the same status in certain respects. Social equality must include equal rights under the law, such as security , voting rights, freedom of speech and assembly, property rights, and equal access to social goods and services. However, it may also include concepts of economic equity, such as access to education, health care, and other social securities. Since social equality includes equal opportunities and obligations, it involves the whole of society.

Social equality requires the absence of legally enforced social class or caste boundaries and the absence of unjustified discrimination motivated by an inalienable part of a person’s identity. For example, sex, gender, race, age, sexual orientation, origin, caste or class, income or property, language, religion, convictions, opinions, health or disability must not result in unequal treatment under the law and should not reduce opportunities unjustifiably. Within the United States, racial and gender equality issues have been particularly prevalent and the catalyst for much social and political reform through the work of the feminist and civil rights movements.

Martin Luther King, Jr

Martin Luther King, Jr. was an American clergyman and activist who championed the cause of racial equality.

Equality of Opportunity vs. Outcome

The concepts of equality of opportunity vs. outcome have been the center of much contentious debate within American politics. Equality of opportunity is a state in which all people are treated similarly, unhampered by artificial barriers, prejudices, or preferences, except when particular distinctions are warranted. Equality of opportunity – as an ideal – ensures that important jobs will go to those persons who are most qualified, rather than go to people for arbitrary or irrelevant reasons, such as circumstances of birth, upbringing, friendship ties to whoever is in power, religion, gender, ethnicity, race, caste, or “involuntary personal attributes” such as disability, age, or sexual preferences. Chances for advancement should be open to everybody interested. The concept of equal opportunity has moved beyond employment practices and is now applied to broader areas such as housing, college admissions, and voting rights. In the classical sense, equality of opportunity is closely aligned with the concepts of equality under the law and meritocracy.

Equality of outcome, in contrast, refers to a state in which people have approximately the same material wealth or, more generally, the state in which the general economic conditions of people’s lives are similar. To achieve equality of outcome, it is necessary to reduce or eliminate material inequalities between individuals or households in a society. This can be done through a transfer of income and/or wealth from wealthier to poorer individuals, or adopting other institutions designed to promote equality of condition from the start. Equality of outcome remains a controversial concept, since, for example, striving for equal outcomes might require discriminating between groups to achieve these outcomes; or striving for equal opportunities in some types of treatment might lead to unequal results. Thus, policies that seek an equality of outcome often require a deviation from the strict application of concepts such as meritocracy and legal notions of equality before the law for all citizens.

1.4.3: Democracy

Democracy is a form of government in which all eligible citizens have an equal say in the decisions that affect their lives.

Learning Objective

Discuss the main elements and variants of democracy as a form of government, as well as its relationship with social inclusion in U.S. history

Key Points

• There are two main variants of democracy: direct democracy and representative democracy.
• The term “democracy” is also often used as shorthand for liberal democracy, which may include elements such as political pluralism, equality before the law, civil liberties, and the existence of civil society.
• The term “democracy” first appeared in ancient Greek political and philosophical thought in the city-state of Athens.
• Although not explicitly described as a democracy by the founding fathers, the United States founders also shared a determination to root the American experiment in the principle of natural freedom and equality.

Key Terms

constitution

The formal or informal system of primary principles and laws that regulates a government or other institutions.

due process

The limits of laws and legal proceedings, so as to ensure a person fairness, justice, and liberty.

Democracy is a form of government in which all eligible citizens have an equal say in the decisions that affect their lives. Democracy allows people to participate equally—either directly or through elected representatives—in the proposal, development, and creation of laws, and encompasses social, economic, and cultural conditions that enable the free and equal practice of political determination.

Several variants of democracy exist, but there are two basic forms, both of which concern how the whole body of citizens executes its will. One form of democracy is direct democracy, in which citizens have direct and active participation in the decision making of the government. The other form is representative democracy, where the whole body of citizens remain the sovereign power but political power is exercised indirectly through elected representatives. Most modern democracies are representative democracies, the concept of which arose largely from ideas and institutions that developed during the European Middle Ages, the Enlightenment, and the American and French Revolutions.

Common Understandings of Democracy

While there is no universally accepted definition of “democracy,” equality and freedom have both been identified as important components of democracy since ancient times. These principles are reflected in all citizens being equal before the law and having equal access to legislative processes. For example, in a representative democracy, every vote has equal weight, no unreasonable restrictions can apply to anyone seeking to become a representative, and the freedom of its citizens is secured by legitimized rights and liberties which are generally protected by a constitution.

The term “democracy” is also often used as shorthand for liberal democracy, which is a variant of representative democracy that may include elements such as political pluralism, equality before the law, the right to petition elected officials for redress of grievances, due process, civil liberties, human rights, and the existence of elements of civil society outside the government. In the United States, separation of powers is often cited as a central attribute of democracy. Democracy, however, does not necessarily guarantee a good government.

Another essential part of an “ideal” representative democracy is competitive elections that are fair both substantively and procedurally. Furthermore, freedom of political expression, freedom of speech, and freedom of the press are considered to be essential rights that allow citizens to be adequately informed and able to vote according to their own interests. It has also been suggested that a basic feature of democracy is the capacity of individuals to participate freely and fully in the life of their society.

Ancient Origins

The term “democracy” first appeared in ancient Greek political and philosophical thought in the city-state of Athens. Athenian democracy took the form of a direct democracy, and it had two distinguishing features: the random selection of ordinary citizens to fill the few existing government administrative and judicial offices, and a legislative assembly consisting of all Athenian citizens. All citizens were eligible to speak and vote in the assembly, which set the laws of the city-state. However, Athenian citizenship excluded women, slaves, foreigners, and males under 20 years old.

Democracy in the United States

Although not explicitly described as a democracy by the founding fathers, the United States founders also shared a determination to root the American experiment in the principle of natural freedom and equality. The United States Constitution, adopted in 1788, provided for an elected government and protected civil rights and liberties for some.

The United States is an example of a Presidential Democracy – a Presidential Democracy is a system where the public elects the president through free and fair elections. The president serves as both the head of state and head of government controlling most of the executive powers. By contrast, a parliamentary democracy is a representative democracy where government is appointed by, or can be dismissed by, representatives as opposed to a ‘presidential rule’ wherein the President is both head of state and the head of government and is elected by the voters. Some modern democracies that are predominately representative in nature also heavily rely upon forms of political action that are directly democratic. Examples include Switzerland and some U.S. states, where frequent use is made of referendums and initiatives.

1.4.4: Popular Consent, Majority Rule, and Popular Sovereignty

Popular consent, majority rule, and popular sovereignty are related concepts that form the basis of democratic government.

Learning Objective

Explain the significance of popular sovereignty and the consent of the governed for liberal democracy

Key Points

• “Consent of the governed” is a phrase synonymous with a political theory wherein a government’s legitimacy and moral right to use state power is only justified and legal when derived from the people or society over which that political power is exercised.
• Majority rule is a decision rule that selects alternatives which have more than half the votes, though many argue that such a rule will lead to the “tyranny of the majority”.
• Popular sovereignty is the principle that the legitimacy of the state is created and sustained by the will or consent of its people, who are the source of all political power.

Key Terms

popular sovereignty

the principle that the authority of the government is created and sustained by the consent of its people, who are the source of all political power

divine right of kings

A political and religious doctrine of royal and political legitimacy that asserts that a monarch is subject to no earthly authority, deriving the right to rule directly from the will of God.

supermajority

Any qualified majority, specified in advance of a vote, required for the vote to be passed.

Popular consent (or the consent of the governed), majority rule, and popular sovereignty are related concepts that form the basis of democratic government.

Consent of the Governed

“Consent of the governed” is a phrase synonymous with a political theory wherein a government’s legitimacy and moral right to use state power is only justified and legal when derived from the people or society over which that political power is exercised. This theory of “consent” is historically contrasted to the “divine right of kings” and has often been invoked against the legitimacy of colonialism.

Using thinking similar to that of English philosopher John Locke, the founders of the United States believed in a state built upon the consent of “free and equal” citizens; a state otherwise conceived would lack legitimacy and legal authority. This idea was expressed, among other places, in the 2^nd paragraph of the Declaration of Independence and in the Virginia Bill of Rights, especially Section 6, quoted below:

“That

elections

of members to serve as representatives of the people, in assembly, ought to be free; and that all men, having sufficient evidence of permanent common interest with, the attachment to, the community, have the right of

suffrage

, and cannot be taxed or deprived of their property for publick uses without their own consent, or that of their representatives so elected, nor bound by any law to which they have not, in like manner, assented, for the

public good

. “

John Locke

John Locke was an English philosopher whose writings on the consent of the governed heavily influenced the founders of the United States

Majority Rule

Majority rule is a decision rule that selects the option which has more than half the votes. It is the decision rule used most often in influential decision-making bodies, including the legislatures of democratic nations. Some scholars have recommended against the use of majority rule, at least under certain circumstances, due to an ostensible trade-off between the benefits of majority rule and other values important to a democratic society. Most famously, it has been argued that majority rule might lead to a “tyranny of the majority,” and the use of a supermajority and constitutional limits on government power have been recommended to mitigate these effects. Recently some voting theorists have argued that majority rule is the rule that best protects minorities.

Popular Sovereignty

Popular sovereignty in its modern sense, that is, including all the people and not just noblemen, is an idea that dates to the social contracts school (mid-17th to mid-18th centuries), represented by Thomas Hobbes (1588–1679), John Locke (1632–1704), and Jean-Jacques Rousseau (1712–1778), author of The Social Contract, a prominent political work that clearly highlighted the ideals of “general will” and further matured the idea of popular sovereignty. The central tenet is that legitimacy of rule or of law is based on the consent of the governed. Popular sovereignty is thus a basic tenet of most democracies. Whether men were seen as naturally more prone to violence and rapine (Hobbes) or cooperation and kindness (Rousseau), the idea that a legitimate social order emerges only when the liberties and duties are equal among citizens binds the social contract thinkers to the concept of popular sovereignty. Although Rousseau argues that sovereignty (or the power to make the laws) should be in the hands of the people, he also makes a sharp distinction between the sovereign and the government. The government is composed of magistrates, charged with implementing and enforcing the general will. The “sovereign” is the rule of law, ideally decided on by direct democracy in an assembly.

The American Revolution marked a departure in the concept of popular sovereignty as it had been discussed and employed in the European historical context. With the American Revolution, Americans substituted the sovereignty in the person of King George III, with a collective sovereign—one composed of the people. Thenceforth, American revolutionaries generally agreed and were committed to the principle that governments were legitimate only if they rested on popular sovereignty–that is, the sovereignty of the people. This idea—often linked with the notion of the consent of the governed—was not invented by the American revolutionaries. Rather, the consent of the governed and the idea of the people as a sovereign had clear 17^th and 18^th century intellectual roots in English history.

1.4.5: Individualism

Individualism is a philosophy that stresses the value and rights of the individual vis-a-vis society and government.

Learning Objective

Define individualism as a political philosophy and ideology

Key Points

• Individualists are chiefly concerned with protecting individual autonomy against obligations imposed by social institutions (such as the state or religious morality).
• Civil liberties are rights and freedoms that provide an individual specific rights such as the freedom from slavery and forced labor, freedom from torture and death, the right to liberty and security, the right to a fair trial, and more.
• Because civil libertarianism is collection of views on the specific issues of civil liberties and civil rights, it is compatible with many other political philosophies and found on both the right and left in modern politics.

Key Terms

self-reliance

the capacity to rely on one’s own capabilities, and to manage one’s own affairs; independence not to be dependent.

liberalism

Any political movement founded on the autonomy and personal freedom of the individual, progress and reform, and government by law with the consent of the governed.

anarchism

The belief that proposes the absence and abolition of hierarchy and authority in most forms.

Individualism is the moral stance, political philosophy, ideology, or social outlook that stresses the moral worth of the individual. Individualists promote the exercise of one’s goals and desires and so value independence and self-reliance while opposing external interference upon one’s own interests by society or institutions such as the government.

Individualism, sometimes closely associated with certain variants of anarchism or liberalism, typically takes it for granted that individuals know best and that public authority or society has no right to interfere in a person’s decision-making process, unless a very compelling need to do so arises (and maybe not even in those circumstances). This type of argument can occur in policy debates regarding regulation of industries, as well as in relation to personal choice of lifestyle.

Individualists are chiefly concerned with protecting individual autonomy against obligations imposed by social institutions (such as the state or religious morality). Civil liberties are rights and freedoms that provide an individual specific rights such as the freedom from slavery and forced labor, freedom from torture and death, the right to liberty and security, right to a fair trial, the right to defend one’s self, the right to own and bear arms, the right to privacy, freedom of conscience, freedom of expression, freedom of assembly and association, and the right to marry and have a family.

The Bill of Rights of the United States of American

The U.S. Constitution, seen here, protects civil liberties.

Civil libertarianism is not a complete ideology; rather, it is a collection of views on the specific issues of civil liberties and civil rights. Because of this, a civil libertarian outlook is compatible with many other political philosophies, and civil libertarianism is found on both the right and left in modern politics.

Individualism is often contrasted either with totalitarianism or with collectivism, but in fact there is a spectrum of behaviors at the societal level ranging from highly individualistic societies through mixed societies to collectivist societies.

1.4.6: Religious Freedom

Freedom of religion is a principle that allows an individual or community to manifest religion or belief in teaching, practice, worship, and observance.

Learning Objective

Illustrate the principle of “religious freedom” in the United States to different scenarios

Key Points

• Freedom of religion is considered by many nations to be a fundamental human right.
• In the United States, freedom of religion is a constitutionally guaranteed right provided in the religion clauses of the First Amendment.
• Controversy continues within the U.S. between those who wish to restrict government involvement with religious institutions and remove religious references from government institutions and property, and those who wish to loosen such prohibitions.

Key Term

separation of church and state

The distance in the relationship between organized religion and the nation state.

Freedom of religion is a principle that supports the freedom of an individual or community, in public or private, to manifest religion or belief in teaching, practice, worship, and observance. This concept is generally recognized also to include the freedom to change a religion, leave a religion, or not to follow any religion. Freedom of religion is considered by many nations to be a fundamental human right.

In the United States, freedom of religion is a constitutionally guaranteed right provided in the religion clauses of the First Amendment. Freedom of religion is also closely associated with the separation of church and state, a concept advocated by Thomas Jefferson.

Thomas Jefferson, Founding Father and 3rd President of the United States

Thomas Jefferson, third President of the United States, who advocated for separation of church and states.

Controversy continues within the U.S. between those who wish to restrict government involvement with religious institutions and remove religious references from government institutions and property, and those who wish to loosen such prohibitions. Advocates for stronger separation of church and state emphasize the plurality of faiths and non-faiths in the country, and what they see as the broad guarantees of the Constitution. Their opponents emphasize what they see as the largely Christian heritage and history of the nation (often citing the references to “Nature’s God” and the “Creator” of men in the Declaration of Independence. )

The United States formally considers religious freedom in its foreign relations. The International Religious Freedom Act of 1998 established the United States Commission on International Religious Freedom, which investigates the records of over 200 other nations with respect to religious freedom, and makes recommendations to submit nations with egregious records to ongoing scrutiny and possible economic sanctions. Many human rights organizations have urged the United States to be even more vigorous in imposing sanctions on countries that do not permit or tolerate religious freedom.

1.5: Political Ideology

1.5.1: Conservatism

Conservatism is a social and political philosophy that supports retaining traditional social institutions and has many modern variations.

Learning Objective

Compare and contrast the various strands of conservatism

Key Points

• Variants of conservatism include: liberal conservatism, libertarian conservatism, fiscal conservatism, national conservatism, cultural conservatism, social conservatism, and religious conservatism.
• The meaning of “conservatism” in America has little in common with the way the word is used elsewhere.
• Major movements within American conservatism include economic conservatism, social conservatism, neoconservatism, and paleoconservatism.

Key Terms

Fiscal conservatism

the economic philosophy of prudence in government spending and debt

libertarian conservatism

Describes certain political ideologies within the United States and Canada which combine libertarian economic issues with aspects of conservatism

Liberal conservatism

Ideologies that combine the advocacy of laissez-faire economic principles, such as respect for contracts, defense of private property and free markets with the belief in notions such as natural inequality, the importance of religion and the value of traditional morality through a framework of limited, constitutional, representative government.

Conservatism, taken from the Latin word conservare (“to retain”) is a political and social philosophy that promotes retaining traditional social institutions. Edmund Burke, an Anglo-Irish politician who served in the British House of Commons and opposed the French Revolution , is credited as one of the founders of conservatism in Great Britain and is generally viewed as the philosophical founder of modern conservatism.

Edmund Burke

Edmund Burke, considered to be the philosophical founder of modern conservatism.

Variants of Conservatism

Liberal conservatism is a variant of conservatism that combines conservative values and policies with classical liberal stances. Historically, the term referred to combination of economic liberalism, which champions laissez-faire markets, with the classical conservatism concern for established tradition, respect for authority, and religious values. It contrasted itself with classical liberalism, which supported freedom for the individual in both the economic and social spheres.

Libertarian conservatism describes certain political ideologies within the United States and Canada which combine libertarian economic issues with aspects of conservatism. Libertarian conservatives generally support strict laissez-faire policies such as free trade and oppose any national bank, regulations on businesses, environmental regulation, corporate subsidies, and other areas of economic intervention.

Fiscal conservatism is the economic philosophy of prudence in government spending and debt. Edmund Burke, in particular, argued that a government does not have the right to run up large debts and then throw the burden on the taxpayer.

National conservatism concentrates more on national interests than standard conservatism, and it upholds cultural and ethnic identity. It is heavily oriented towards the traditional family and social stability, and it is in favour of limiting immigration. As such, national conservatives can be distinguished from economic conservatives, for whom free market economic policies, deregulation, and fiscal conservatism are the main priorities.

Cultural conservativism the preservation of the heritage of one nation, or of a shared culture that is not defined by national boundaries.Cultural conservatives hold fast to traditional ways of thinking even in the face of monumental change. They believe strongly in traditional values and politics, and often have an urgent sense of nationalism.

Social conservatism is distinct from cultural conservatism, although there are some overlaps. Social conservatives believe that the government has a role in encouraging or enforcing what they consider traditional values or behaviors. A social conservative wants to preserve traditional morality and social mores, often through civil law or regulation. Social change is generally regarded as suspect.

Religious conservatives principally seek to apply the teachings of particular religions to politics, sometimes by merely proclaiming the value of those teachings, and at other times by having those teachings influence laws.

Conservatism in the United States

The meaning of “conservatism” in America has little in common with the way the word is used elsewhere, since what most Americans consider conservatism is what much of the world considers liberalism or neoliberalism. Since the 1950s conservatism in the United States has been chiefly associated with the Republican Party. Major movements within American conservatism include support for tradition, law-and-order, Christianity, anti-communism, and a defense of “Western civilization from the challenges of modernist culture and totalitarian governments. ” Economic conservatives and libertarians favor small government, low taxes, limited regulation, and free enterprise. Social conservatives see traditional social values as threatened by secularism, so they support school prayer and oppose abortion and homosexuality. Neoconservatives want to expand American ideals throughout the world and show a strong support for Israel. Paleoconservatives, in opposition to multiculturalism, press for restrictions on immigration.

1.5.2: Liberalism

Liberalism is a broad political ideology or worldview founded on the ideas of liberty and equality.

Learning Objective

Discuss the central tenets and principles of liberalism as a political philosophy

Key Points

• Liberalism espouses a wide array of views depending on their understanding of these principles, and can encompass ideas such as free and fair elections, free trade, private property, capitalism, constitutionalism, liberal democracy, free press, and the free exercise of religion.
• Liberalism first became a powerful force in the Age of Enlightenment, rejecting several foundational assumptions that dominated most earlier theories of government, such as nobility, established religion, absolute monarchy, and the Divine Right of Kings.
• John Locke, credited with the creation of liberalism, argued that the rule of law should replace both tradition and absolutism in government; that rulers were subject to the consent of the governed; and that individuals had a fundamental right to life, liberty, and property.
• With the rise of social liberalism in Europe and North America, the meaning of “liberalism” began to diverge. In the U.S., ideas of individualism and laissez-faire economics previously associated with classical liberalism became the basis for right wing libertarian thought.
• The revolutionaries in the American and France used liberal philosophy to justify the armed overthrow of what they saw as tyrannical rule. The nineteenth century saw governments established around liberalist political ideology in nations across Europe, Latin America, and North America.

Key Terms

John Locke

widely known as the Father of Classical Liberalism, he was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. His contributions to classical republicanism and liberal theory are reflected in the United States Declaration of Independence.

liberal internationalism

a foreign policy doctrine that argues that liberal states should intervene in other sovereign states in order to pursue liberal objectives.

Sources of Liberal Thought

Liberalism, from the Latin liberalis, is a broad political ideology or worldview founded on the ideas of liberty and equality. Liberalism espouses a wide array of views depending on their understanding of these principles, and can encompass ideas such as free and fair elections, free trade, private property, capitalism, constitutionalism, liberal democracy, free press, and the free exercise of religion.

Liberalism first became a powerful force during the Enlightenment , when it became popular among philosophers and economists in the Western world. Liberalism rejected the notions, common at the time, of hereditary privilege, state religion, absolute monarchy, and the Divine Right of Kings. The early liberal thinker John Locke, who is often credited with the creation of liberalism as a distinct philosophical tradition, employed the concept of natural rights and the social contract to argue that the rule of law should replace both tradition and absolutism in government; that rulers were subject to the consent of the governed; and that private individuals had a fundamental right to life, liberty, and property .

John Locke

John Locke, often credited for the creation of liberalism as a philosophical tradition.

Liberalism and Revolution

The revolutionaries in the American and France used liberal philosophy to justify the armed overthrow of what they saw as tyrannical rule. The nineteenth century saw governments established around liberalist political ideology in nations across Europe, Latin America, and North America. Liberalist ideas spread even further in the twentieth century, when liberal democracies were on the winning side in both World Wars I and II, and when liberalism survived major ideological challenges from fascism and communism. Today, liberalism remains a political force with varying degrees of power and influence in many countries.

Classical vs. Modern Liberalism

Classical liberalism is a political philosophy and ideology belonging to liberalism in which primary emphasis is placed on securing the freedom of the individual by limiting the power of the government. The philosophy emerged as a response to the Industrial Revolution and urbanization in the 19th century in Europe and the United States. It advocates civil liberties with a limited government under the rule of law, private property, and belief in laissez-faire economic policy.

Both modern American conservatism and social liberalism split from Classical Liberalism in the early 20th century. At that time conservatives adopted the Classic Liberal beliefs in protecting economic civil liberties. Conversely social liberals adopted the Classical Liberal belief in defending social civil liberties. Neither ideology adopted the pure Classical Liberal belief that government exists to protect both social & economic civil liberties. Conservatism shares an ideological agreement on limited government in the area of preventing government restriction against economic civil liberties as embodied in the ability of people to sell their goods, services or labor to anyone they choose free from restriction except in rare cases where society’s general welfare is at stake.

While many modern scholars argue that no particularly meaningful distinction between classical and modern liberalism exists, others disagree. According to William J. Novak, liberalism in the United States shifted in the late 19th and early 20th century from classical liberalism (endorsing laissez-faire economics and constitutionalism) to “democratic social-welfarism” (endorsing such government involvement as seen in the New Deal). This shift included qualified acceptance of government intervention in the economy and the collective right to equality in economic dealings. These theories came to be termed “liberal socialism”, which is related with social democracy in Europe. According to the Encyclopedia Britannica, “In the United States, liberalism is associated with the welfare-state policies of the New Deal program of the Democratic administration of Pres. Franklin D. Roosevelt, whereas in Europe it is more commonly associated with a commitment to limited government and laissez-faire economic policies. ” Consequently in the U.S., the ideas of individualism and laissez-faire economics previously associated with classical liberalism, became the basis for the emerging school of right wing libertarian thought.

Liberalism and Socialism

Some confusion remains about the relationship between social liberalism and socialism, despite the fact that many variants of socialism distinguish themselves markedly from liberalism by opposing capitalism, hierarchy and private property. Socialism formed as a group of related yet divergent ideologies in the 19th century such as Christian socialism, Communism and Social Anarchism. These ideologies — as with liberalism — fractured into several major and minor movements in the following decades. Marx rejected the foundational aspects of liberal theory, hoping to destroy both the state and the liberal distinction between society and the individual while fusing the two into a collective whole designed to overthrow the developing capitalist order of the 19th century.

Social democracy, an ideology advocating progressive reform of capitalism, emerged in the 20th century and was influenced by socialism. Yet unlike socialism, it was not collectivist nor anti-capitalist. It was not against the state; rather it was broadly defined as a project that aims to correct, through government reformism, what it regards as the intrinsic defects of capitalism by reducing inequalities. Several commentators have noted strong similarities between social liberalism and social democracy, with one political scientist even calling American liberalism “bootleg social democracy”.

American Tradition and Liberal Heritage

Many fundamental elements of modern society have liberal roots. The early waves of liberalism popularized economic individualism while expanding constitutional government and parliamentary authority. One of the greatest liberal triumphs involved replacing the capricious nature of royalist and absolutist rule with a decision-making process encoded in written law. Liberals sought and established a constitutional order that prized important individual freedoms, such as the freedoms of speech and association, an independent judiciary and public trial by jury, and the abolition of aristocratic privileges. These sweeping changes in political authority marked the modern transition from absolutism to constitutional rule.

Later waves of liberal thought were strongly influenced by the need to expand civil rights. In the 1960s and 1970s, feminism in the United States was advanced in large part by liberal feminist organizations.Many liberals also have advocated for racial equality, and the civil rights movement in the United States during the 1960s strongly highlighted the liberal crusade for equal rights.

1.5.3: The Traditional Political Spectrum

The traditional political spectrum models different political positions by placing them upon a left-right geometric axis.

Learning Objective

Compare and contrast left-wing and right-wing political ideologies

Key Points

• Most long-standing spectra include a right wing and left wing, which originally referred to seating arrangements in the 18th century French parliament.
• Originally, support for laissez-faire capitalism was expressed by politicians sitting on the left, because these represented policies favorable to capitalists rather than to the aristocracy.
• As capitalist economies developed, the aristocracy became less relevant and were mostly replaced by capitalist representatives.

Key Terms

laissez-faire

an economic environment in which transactions between private parties are free from tariffs, government subsidies, and enforced monopolies with only enough government regulations sufficient to protect property rights against theft and aggression.

affiliation

A club, society, or umbrella organization.

spectrum

A range; a continuous, infinite, one-dimensional set, possibly bounded by extremes.

Background

The traditional political spectrum is a way of modeling different political positions by placing them upon one or more geometric axes symbolizing independent political dimensions. Most long-standing spectra include a right and left, and according to the simplest left-right axis, communism and socialism are usually regarded internationally as being on the left, opposite fascism and conservatism on the right.

Traditional political spectrum

The traditional left-right political spectrum

The terms “right” and “left” refer to political affiliations which originated early in the French Revolutionary era of 1789–1796, and referred originally to the seating arrangements in the various legislative bodies of France. The aristocracy sat on the right of the Speaker (traditionally the seat of honor) and the commoners sat on the Left, hence the terms right-wing and left-wing politics .

Origins of the Political Spectrums

Originally, the defining point on the ideological spectrum was the ancien regime (“old order”). “The Right” thus implied support for aristocratic or royal interests and the church, while “The Left” implied support for republicanism, secularism, and civil liberties. Support for laissez-faire capitalism was expressed by politicians sitting on the left, because these represented policies favorable to capitalists rather than to the aristocracy, but outside of parliamentary politics, these views are often characterized as being on the right.

As capitalist economies developed, the aristocracy became less relevant and was mostly replaced by capitalist representatives. The size of the working class increased as capitalism expanded and began to find expression partly through trade unionist, socialist, anarchist, and communist politics, rather than being confined to the capitalist policies expressed by the original left. This evolution has often pulled parliamentary politicians away from laissez-faire economic policies, although this has happened to different degrees in different countries.

Thus, the word “left” in American political parlance may refer to “liberalism” and be identified with the Democratic Party, whereas in a country such as France these positions would be regarded as relatively more right-wing, and “left” is more likely to refer to socialist positions rather than liberal ones.

Left-wing vs. Right-wing

In left-right politics, left-wing describes an outlook or specific position that accepts or supports social equality, often in opposition to social hierarchy and social inequality. It typically involves a concern for those in society who are perceived as disadvantaged relative to others and an assumption that there are unjustified inequalities that need to be reduced or abolished. In left-right politics, left-wing describes an outlook or specific position that accepts or supports social equality, often in opposition to social hierarchy and social inequality. It typically involves a concern for those in society who are perceived as disadvantaged relative to others and an assumption that there are unjustified inequalities that need to be reduced or abolished.

In left-right politics, right-wing describes an outlook or specific position that accepts or supports social hierarchy or social inequality. Social hierarchy and social inequality is viewed by those affiliated with the Right as either inevitable, natural, normal, or desirable, whether it arises through traditional social differences or from competition in market economies. It typically accepts or justifies this position on the basis of natural law or tradition. Although the term ‘right-wing’ originally designated traditional conservatives and reactionaries, it has also been used to describe neo-conservatives, nationalists, Christian democrats, and classical liberals.

In modern parlance, left-right has acquired the added dimension of the balance of governmental power and individual rights, wherein moving left increases the power of government and moving right the rights of individuals. In this view, “reactionary” has the aspect of “anarchy”. This introduces, or exposes, a limitation in this simple binary spectrum, where by social views of left-right, fascists and totalitarian systems are on the far right; whereas by a balance of government to individual power, fascists and totalitarian systems are on the far left.

1.5.4: Issues with the Traditional Political Spectrum

Researchers have frequently noted that a single left-right axis is insufficient to describe the existing variation in political beliefs.

Learning Objective

Identify some of the problems associated with the traditional spectrum of political ideologies

Key Points

• The axes are split between cultural issues and economic issues, each scaling from some form of individualism (or government for the freedom of the individual) to some form of communitarianism (or government for the welfare of the community).
• One alternative spectrum, offered by the conservative American Federalist Journal, accounts for only the “degree of government control” without consideration for any other social or political variable.
• Other proposed axes include the focus of political concern, responses to conflict, the role of the church, foreign policy, and freedom.

Key Term

totalitarianism

A system of government in which the people have virtually no authority and the state wields absolute control, for example, a dictatorship.

Researchers have frequently noted that a single left-right axis is insufficient in describing the existing variation in political beliefs, and often include other axes. Though the descriptive words at polar opposites may vary, often in popular biaxial spectra the axes are split between cultural issues and economic issues, each scaling from some form of individualism (or government for the freedom of the individual) to a form of communitarianism (or government for the welfare of the community). In this context, the contemporary American on the left is often considered individualist (or libertarian ) on social/cultural issues and communitarian (or populist) on economic issues, while the contemporary American on the right is often considered communitarian (or populist) on social/cultural issues and individualist (or libertarian) on economic issues.

Numerous alternatives exist, usually developed by those who feel their views are not fairly represented on the traditional right-left spectrum. One alternative spectrum offered by the conservative American Federalist Journal accounts for only the “degree of government control ” without consideration for any other social or political variable and, thus, places “fascism” (totalitarianism ) at one extreme and “anarchy” (no government at all) at the other extreme.

Other axes include: the focus of political concern (communitarianism vs. individualism), responses to conflict (conversation vs. force), the role of the church (clericalism vs. anticlericalism), foreign policy (interventionism vs. non-interventionism), and freedom (positive liberty vs. negative liberty). The Nolan Chart, created by libertarian David Nolan, shows what he considers as “economic freedom ” (issues like taxation, free trade, and free enterprise) on the horizontal axis and what he considers as “personal freedom” (issues like drug legalization, abortion, and the draft) on the vertical axis. This puts left-wingers in the left quadrant, libertarians in the top, right-wingers in the right, and what Nolan originally named “populists” at the bottom.

The Nolan Chart

An alternative to the traditional political spectrum, the Nolan Chart positions opinions on economic freedom and personal freedom.

17.1: Nonprofit Marketing

17.1.1: Unique Issues in Nonprofit Marketing Strategies

Learning Objective

Explain how the marketing strategies of non-profits differ from those of for-profit organizations

Key Points

• The primary difference between for-profit and non-profit organizations is that for-profit organizations look to maximize wealth, whereas non-profit organizations look to provide a greater good to society.
• The major goal of NPOs is to further their non-financial objectives without focusing on competition or target markets. Creative tensions may develop in the effort to balance mission with revenue.
• While NPOs are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion, or plans.

Key Terms

Non-profit organization

An organization that uses surplus revenues to achieve its goals rather than distributing them as profits or dividends.

competitive advantage

Something that places a company or a person above the competition.

Example

• In the United States, two of the wealthiest nonprofit organizations are the Bill and Melinda Gates Foundation, which has an endowment of $38 billion, and the Howard Hughes Medical Institute (HHMI), which has an endowment of approximately $14.8 billion. Excellent marketing strategies have enabled these two nonprofit organizations to be well known around the world for their efforts. The Bill and Melinda Gates Foundation is known for their humanitarian efforts and their scholarships to fund college educations for underprivileged students. HHMI is known for funding research for top scientists around the country in areas such as cancer research and renewable energy.

Unique Issues in Nonprofit Marketing Strategies

A non-profit organization’s (NPO) business goals tend to focus on the “organizational mission,” which is the basis for the organization’s governmental status or its non-profit, tax-exempt status. However, non-profits may also focus marketing efforts on optimizing revenue. The primary difference between for-profit and non-profit organizations is that for-profit organizations try to maximize wealth, while non-profit organizations look to provide a greater good to society. In non-profit organizations, creative tensions may develop in the effort to balance mission with revenue.

Marketing strategy involves careful scanning of the internal and external environments. Internal environmental factors include the marketing mix, performance analysis, and strategic constraints. External environmental factors include customer analysis; competitor analysis; target market analysis; and evaluation of any elements of the technological, economic, cultural or political/legal environment likely to impact success. A key component of marketing strategy is often to keep marketing in line with a company’s overarching mission statement.

Marketing Strategy Constraints

A marketing strategy can allow an organization to concentrate its resources on the optimal opportunities with the goals of increasing sales and achieving a sustainable competitive advantage. Marketing strategies are designed to fill market needs and reach marketing objectives. Also, plans and objectives are generally tested for measurable results.

However, the major goal of an NPO is to further its non-financial objectives, and NPOs are not necessarily competing with others. Furthermore, the veracity of an NPO’s ability to measure the success of its marketing plan is limited because their measurements are based on more subjective factors. For example, a for-profit business may measure sales, the number of customers, or repeat purchases. On the other hand, NPOs do not have sales, and it is difficult for an organization whose goal is to provide social services or disaster relief to quantify its success. For example, the Red Cross would measure success as the number of lives saved rather than the amount of money raised .

American Red Cross Disaster Relief

The Red Cross is dedicated to saving lives and helping people prepare for and respond to medical emergencies. As a result, any measure of their marketing strategy’s success must use non-financial measurements such as lives helped.

Financial Constraints

NPO’s use surplus revenues to achieve their aims rather than distributing the revenue as profit or dividends. While NPOs are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion, or plans. Designation as a nonprofit and an intent to make money are not related in the United States. The extent to which an NPO can generate surplus revenues may be constrained, or the use of surplus revenues may be restricted.

The downturn in the economy has affected all business, but NPOs started out with limited resources before the recession hit. While NPOs may not generate revenue for the sole purpose of profits, they rely heavily on donations to keep the organization running. NPOs still incur daily expenses, lawyers’ fees, and promotional campaign expenses. Fewer charitable donations means NPOs have less money to spend on websites, advertisements, and benefits that raise money for their causes.

Furthermore, NPOs have to compete with other “worthy causes” for their limited resources; there are over 1.9 million NPOs in the US. How can one say that saving kids in Africa is more important than feeding kids in Atlanta? With the economy down, competition will only increase, as state governments and private foundations cope with resources that have dropped sharply.

Another challenge is that limited budgets, resources, and staff limit the options available to accomplish goals. Some strategies and tactics may be removed, which forces NPOs to come up with more creative solutions.

Formation Constraints

Most countries have laws that regulate the establishment and management of NPOs; these laws require compliance with corporate governance regimes. Most larger organizations are required to publish their financial reports detailing their income and expenditure publicly. They are similar to corporate business entities in many respects, though there are often significant differences. Both not-for-profit and for-profit corporate entities must have board members, steering committee members, or trustees who owe the organization a fiduciary duty of loyalty and trust. A notable exception to this involves churches, which are often not required to disclose finances to anyone, including church members.

As mentioned earlier, external environments, such as the legal environment surrounding NPO’s, can have an effect on marketing strategies, and should be carefully considered.

16.1: Overview of Ethics

16.1.1: Ethics Training

Learning Objective

Explain the role of ethical moral reasoning in the business environment

Key Points

• There are four components of moral behavior: moral sensitivity, moral judgment, moral motivation, and moral character.
• To make moral assessments, one must first know what an action is intended to accomplish and what its possible consequences will be on others.
• Studies have uncovered four skill sets that play a decisive role in the exercise of moral expertise: moral imagination, moral creativity, reasonableness, and perseverance.

Key Terms

goodwill

The ability of an individual or business to exert influence within a community, club, market, or another type of group, without having to resort to the use of an asset (such as money or property).

ethics

The study of principles relating to right and wrong conduct.

Moral reasoning is the process in which an individual tries to determine the difference between what is right and what is wrong in a personal situation by using logic. To make such an assessment, one must first know what an action is intended to accomplish and what its possible consequences will be on others. People use moral reasoning in an attempt to do the right thing. People are frequently faced with moral choices, such as whether to lie to avoid hurting someone’s feelings, or whether to take an action that will benefit some while harming others. Such judgements are made by considering the objective and the likely consequences of an action. Moral reasoning is the consideration of the factors relevant to making these types of assessments.

According to consultant Lynn W. Swaner, moral behavior has four components:

• Moral sensitivity, which is “the ability to see an ethical dilemma, including how our actions will affect others.”
• Moral judgment, which is “the ability to reason correctly about what ‘ought’ to be done in a specific situation.”
• Moral motivation, which is “a personal commitment to moral action, accepting responsibility for the outcome.”
• Moral character, which is a “courageous persistence in spite of fatigue or temptations to take the easy way out.”

The ability to think through moral issues and dilemmas, then, requires an awareness of a set of moral and ethical values; the capacity to think objectively and rationally about what may be an emotional issue; the willingness to take a stand for what is right, even in the face of opposition; and the fortitude and resilience to maintain one’s ethical and moral standards.

Realizing good conduct, being an effective moral agent, and bringing values into one’s work, all require skills in addition to a moral inclination. Studies have uncovered four skill sets that play a decisive role in the exercise of moral expertise.

• Moral imagination: The ability to see the situation through the eyes of others. Moral imagination achieves a balance between becoming lost in the perspectives of others and failing to leave one’s own perspective. Adam Smith terms this balance “proportionality,” which we can achieve in empathy.
• Moral creativity: Moral creativity is closely related to moral imagination, but it centers on the ability to frame a situation in different ways.
• Reasonableness: Reasonableness balances openness to the views of others with commitment to moral values and other important goals. That is, a reasonable person is open, but not to the extent where he is willing to believe just anything and/or fails to keep fundamental commitments.
• Perseverance: Perseverance is the ability to decide on a moral plan of action and then to adapt to any barriers that arise in order to continue working toward that goal.

Example

William LeMesseur designed the Citicorp Building in New York. When a student identified a critical design flaw in the building during a routine class exercise, LeMesseur responded not by shooting the messenger but by developing an intricate and effective plan for correcting the problem before it resulted in drastic real-world consequences.

16.1.2: Defining Ethics

Learning Objective

Define ethics and how it applies to organizations

Key Points

• Ethical behavior is based on written and unwritten codes of principles and values held in society.
• Ethics reflect beliefs about what is right, what is wrong, what is just, what is unjust, what is good, and what is bad in terms of human behavior.
• Ethical principles and values serve as a guide to behavior on a personal level, within professions, and at the organizational level.

Key Terms

behavior

The way a living creature acts.

ethics

The study of principles relating to right and wrong conduct.

values

A collection of guiding principles; what one deems to be correct, important, and desirable in life, especially regarding personal conduct.

Ethics are the set of moral principles that guide a person’s behavior. These morals are shaped by social norms, cultural practices, and religious influences. Ethics reflect beliefs about what is right, what is wrong, what is just, what is unjust, what is good, and what is bad in terms of human behavior. They serve as a compass to direct how people should behave toward each other, understand and fulfill their obligations to society, and live their lives.

While ethical beliefs are held by individuals, they can also be reflected in the values, practices, and policies that shape the choices made by decision makers on behalf of their organizations. The phrases business ethics and corporate ethics are often used to describe the application of ethical values to business activities. Ethics applies to all aspects of conduct and is relevant to the actions of individuals, groups, and organizations.

In addition to individual ethics and corporate ethics there are professional ethics. Professionals such as managers, lawyers, and accountants are individuals who exercise specialized knowledge and skills when providing services to customers or to the public. By virtue of their profession, they have obligations to those they serve. For example, lawyers must hold client conversations confidential and accountants must display the highest levels of honest and integrity in their record keeping and financial analysis. Professional organizations, such as the American Medical Association, and licensing authorities, such as state governments, set and enforce ethical standards.

Example

The concept of corporate social responsibility emphasizes ethical behavior in that it requires organizations to understand, identify, and eliminate unethical economic, environmental, and social behaviors.

16.1.3: Blurring Ethical Lines

Learning Objective

Analyze the gray areas of ethical expectations within the context of corporate decision making and ethical business practice

Key Points

• Identifying the ethical choice can be difficult, since many situations are ambiguous and facts are subject to interpretation.
• In organizations, employees can look to the code of ethics or the statement of values for guidance about how to handle ethical gray areas.
• Individual ethical judgement can be clouded by rationalizations to justify one’s actions.

Key Terms

business ethics

The branch of ethics that examines questions of moral right and wrong arising in the context of business practice or theory.

norms

According to sociologists, social norms are the laws that govern society’s behaviors.

Law and ethics are not the same thing. Both exist to influence behavior, but complying with the law is mandatory, while adhering to an ethical code is voluntary. Laws define what is permissible, while ethics speak to what is right, good, and just. Lawyers and judges are responsible for clarifying the meaning of a law when there is ambiguity or when a matter is subject to interpretation. Where ethics are concerned, that responsibility lies with each individual. In organizations, employees can look to the code of ethics or the statement of values for guidance about how to handle ethical gray areas.

Even when an individual has a clear sense of right and wrong, or good and bad, it can be difficult to know what is ethical in a given situation. Ethical choices involve judgment because they involve weighing the potential consequences of one’s actions for other people. One analyzes ethical issues by asking questions such as: What could happen? How likely is it happen? What might the harm be? Who might be hurt? The answers are not always clear cut.

Individual judgments can be influenced, even clouded, by a number of factors. A study by Professor Robert Prentice suggests that self-image can influence an individual’s decision-making process, making him or her feel justified in taking shortcuts or doing things that could be seen as ethically questionable. In addition, there are times when people believe that the ends justify the means. In other words, if the result of an action is good, then it is okay if the action itself is unethical.

There is a saying that a good person is one who does good deeds when no one is looking. The same goes with ethical decisions. People who are ethical follow their beliefs even when they believe no one will find out about what they have done. In many cases of ethical breaches in organizations, those who acted unethically likely believed that they wouldn’t be discovered. Others may have thought that if the issues were discovered, the actions wouldn’t be traced back to them. They had the opportunity to be ethical but chose not to be.

Business Ethics Around the Globe

Social norms aren’t identical in different countries, and ethical standards can vary as well. A business may operate in a country that permits actions that would be considered unethical under that business’s ethical code. How will employees working in that country handle that situation, especially if something that could be considered unethical in one place is actually thought to be important to business success in the other? For instance, in some cultures it is customary for business partners and customers to be invited to weddings, with the expectation that guests will give a cash gift to the bride and groom. A company might consider the gift an unethical bribe in exchange for a customer’s business, yet it may be essential to enter a new market. Adhering to ethical standards in such instances can be difficult.

This way to ethics

Ethical decisions are not always clear-cut.

Example

American companies are often criticized for the treatment of workers who produce their products in China. However, rules concerning the rights of workers are much more relaxed in China than in the United States. Does an American company have the right to order factory owners in China to change their way of doing business? That is one example of an ethical gray area in today’s globalized economy.

16.1.4: The Manager’s Role in Ethical Conduct

Learning Objective

Explain the role of personal values in influencing behavior in organizations

Key Points

• Personal values provide an internal reference for what is good, beneficial, important, useful, beautiful, desirable, and constructive.
• Personal values take on greater meaning in adulthood as they are meant to influence how we carry out our responsibilities to others.
• To make ethical and moral choices, one needs to have a clear understanding of one’s personal values.

Key Terms

value

A standard by which an individual determines what is good or desirable; a measure of relative worth or importance.

norms

According to sociologists, social norms are the laws that govern society’s behaviors.

Personal values provide an internal reference for what is good, beneficial, important, useful, beautiful, desirable, and constructive. Over time, the public expression of personal values has laid the foundations of law, custom, and tradition. Personal values in this way exist in relation to cultural values, either in agreement with or divergent from prevailing norms.

Personal values are developed in many different ways:

• The most important influence on our values comes from the families we grow up with. The family is responsible for teaching children what is right and wrong long before there are other influences. It is thus said that a child is a reflection of his or her parents.
• Teachers and classmates help shape the values of children during the school years.
• Religion (or a lack thereof) also plays a role in teaching children values.

Personal values take on greater meaning in adulthood as they are meant to influence how we carry out our responsibilities to others. This is true in the workplace, especially for managers and leaders, who are charged with overseeing resources for the benefit of others. Because of their authority structures, social norms, and cultures, organizations can have a powerful influence on their employees. Employers do their best to hire individuals who match match well with the organization’s norms and values. In this way they seek to promote their standards of ethical behavior.

Conversely, conflicts can occur between an individual’s moral values and what she perceives to be those of others in their organization. Since moral judgments are based on the analysis of the consequences of behavior, they involve interpretations and assessments. One might be asked to do something that violates a personal belief but is considered appropriate by others. To make ethical and moral choices, one needs to have a clear understanding of one’s personal values. Without that awareness, it can be difficult to justify a decision on ethical or moral grounds in a way that others would find persuasive.

Example

If you value equal rights for all and you go to work for an organization that treats its managers much better than it does its workers, you may form the attitude that the company is an unfair place to work; consequently, you may not produce well or may even leave the company. It is likely that if the company had a more egalitarian policy, your attitude and behaviors would have been more positive.

16.1.5: Culture and Ethics

Learning Objective

Explain the role of culture in shaping moral and ethical behavior

Key Points

• Culture refers to the outlook, attitudes, values, goals, and practices shared by a group, organization, or society.
• Interpretation of what is moral is influenced by cultural norms, and different cultures can have different beliefs about what is right and wrong.
• According to the theory of cultural relativism, there is no singular truth on which to base ethical or moral behavior, as our interpretations of truths are influenced by our own culture.

Key Terms

norms

Rules or laws that govern a group’s or a society’s behaviors.

moral relativism

Refers to any of several philosophical positions concerned with the differences in moral judgments among different people and across different cultures.

ethnocentric

Of the idea or belief that one’s own culture is more important than, or superior to, other cultures.

Culture describes a collective way of life, or way of doing things. It is the sum of attitudes, values, goals, and practices shared by individuals in a group, organization, or society. Cultures vary over time periods, between countries and geographic regions, and among groups and organizations. Culture reflects the moral and ethical beliefs and standards that speak to how people should behave and interact with others.

Cultural map of the world

This diagram attempts to plot different countries by the importance of different types of values. One axis represents traditional values to secular-rational values, while the other axis accounts for survival values and self-expression values. Different groups of countries can be grouped into certain categories, such as Catholic Europe, English speaking, and Ex-Communist.

Cultural norms are the shared, sanctioned, and integrated systems of beliefs and practices that are passed down through generations and characterize a cultural group. Norms cultivate reliable guidelines for daily living and contribute to the health and well-being of a culture. They act as prescriptions for correct and moral behavior, lend meaning and coherence to life, and provide a means of achieving a sense of integrity, safety, and belonging. These normative beliefs, together with related cultural values and rituals, impose a sense of order and control on aspects of life that might otherwise appear chaotic or unpredictable.

This is where culture intersects with ethics. Since interpretations of what is moral are influenced by cultural norms, the possibility exists that what is ethical to one group will not be considered so by someone living in a different culture. According to cultural relativists this means that there is no singular truth on which to base ethical or moral behavior for all time and geographic space, as our interpretations of truths are influenced by our own culture. This approach is in contrast to universalism, which holds the position that moral values are the same for everyone. Cultural relativists consider this to be an ethnocentric view, as the universal set of values proposed by universalists are based on their set of values. Cultural relativism is also considered more tolerant than universalism because, if there is no basis for making moral judgments between cultures, then cultures have to be tolerant of each other.

Example

The French and Americans have different views on whistle-blowing. Compared to the French, American companies consider it to be a natural part of business. So natural, in fact, that they set up anonymous hotlines. The French, on the other hand, tend to view whistle-blowing as undermining solidarity among coworkers.

16.2: Ethics in Marketing

16.2.1: Issues in Marketing

A company must have ethical marketing policies to guide their pricing, advertising, research, and competitive strategies.

Learning Objective

Identify the common ethical issues associated with products, pricing, promotion and placement within the marketing mix

Key Points

• Each party in a marketing transaction brings expectations regarding how the business relationship will exist. For example, if a consumer wishes to make a purchase from a retailer, their expectations include wanting to be treated fairly by the salesperson and wanting to pay a reasonable price.
• Ethical marketing decisions and efforts should meet and suit the needs of customers, suppliers, and business partners. Unethical behavior such as price wars, selective advertising, and deceptive marketing can negatively impact a company’s relationships.
• Recent trends show that consumers prefer ethical companies. As a result ethics itself is a selling point or a component of a corporate image.

Key Terms

propagation

The dissemination of something to a larger area or greater number.

puffery

A legal term that refers to promotional statements and claims that express subjective rather than objective views, which no “reasonable person” would take literally. An example would be “Red Bull Gives You Wings. “

Ethical Issues in Marketing

Ethical problems in marketing stem from conflicts and disagreements. Each party in a marketing transaction brings a set of expectations regarding how the business relationship will exist and how transactions should be conducted. Each facet of marketing has ethical danger points as discussed below.

Market Research

Some ethical problems in market research are the invasion of privacy and stereotyping. The latter occurs because any analysis of real populations needs to make approximations and place individuals into groups. However, if conducted irresponsibly, stereotyping can lead to a variety of ethically undesirable results.

Market Audience

Selective marketing is used to discourage demand from so-called undesirable market sectors or disenfranchise them altogether. Examples of unethical market exclusion are past industry attitudes to the gay, ethnic minority, and plus-size markets.

Another ethical issue relates to vulnerable audiences in emerging markets in developing countries, as the public there may not be sufficiently aware of skilled marketing ploys.

Ethics in Advertising and Promotion

In the 1940s and 1950s, tobacco used to be advertised as promoting health. Today an advertiser who fails to tell the truth offends against morality in addition to the law. However the law permits puffery (a legal term). The difference between mere puffery and fraud is a slippery slope.

Sexual innuendo is a mainstay of advertising content, and yet is also regarded as a form of sexual harassment. Violence is an issue especially for children’s advertising and advertising likely to be seen by children.

The advertising of certain products may strongly offend some people while being of interest to others. Examples include: feminine hygiene products as well as hemorrhoid and constipation medication. The advertising of condoms has become acceptable in the interests of AIDS-prevention, but are nevertheless seen by some as promoting promiscuity.

Through negative advertising techniques, the advertiser highlights the disadvantages of competitor products rather than the advantages of their own. These methods are especially used in politics.

Delivery Channels

Direct marketing is the most controversial of advertising channels, particularly when approaches are unsolicited. TV commercials and direct mail are common examples. Electronic spam and telemarketing push the borders of ethics and legality more strongly.

Deceptive Advertising and Ethics

Deceptive marketing is not specific to one target market, and can sometimes go unnoticed by the public. There are several ways in which deceptive marketing can be presented to consumers; one of these methods is accomplished through the use of humor. Humor provides an escape or relief from some kind of human constraint, and some advertisers intend to take advantage of this by deceptively advertising a product that can potentially alleviate that constraint through humor.

Anti-competitive Practices

Bait and switch is a form of fraud where customers are “baited” by advertising for a product or service at a low price; second, the customers discover that the advertised good is not available and are “switched” to a costlier product.

Planned obsolescence is a policy of designing a product with a limited useful life, so it will become unfashionable or no longer functional after a certain period of time and put the consumer under pressure to purchase again.

A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public .

Pyramid Scheme

This business practice relies on getting the initial investor or “captain” to enroll others for a fee to them who in turn will also enroll others in order to get paid.

Pricing Ethics

Bid rigging is a form of fraud in which a commercial contract is promised to one party, although for the sake of appearance several other parties also present a bid.

Predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors.

Using Ethics as a Marketing Tactic

Major corporations fear the damage to their image associated with press revelations of unethical practices. Marketers have been quick to perceive the market’s preference for ethical companies, often moving faster to take advantage of this shift in consumer taste. This results in the propagation of ethics itself as a selling point or a component of a corporate image.

Marketing ethics, regardless of the product offered or the market targeted, sets the guidelines for which good marketing is practiced. To market ethically and effectively one should be reminded that all marketing decisions and efforts are necessary to meet and suit the needs of customers, suppliers, and business partners. The mindset of many companies is that they are concerned for the population and the environment in which they due business. They feel that they have a social responsibility to people, places and things in their sphere of influence.

16.3: Corporate Social Responsibility

16.3.1: The Financial Value of Social Responsibility

CSR provides a financial return in the form of lower costs, higher revenue, and returns to investors.

Learning Objective

Discuss the argument that the short-term costs of social responsibility generate long-term revenues exceeding those costs

Key Points

• Evidence links socially responsible business practices to improved financial performance.
• Socially focused investors also see a financial return in socially responsible business practices, pointing to competitive returns for socially responsible indices and to the belief in returns from investing in a company’s long-term potential to compete and succeed.
• The shared value model takes a long-term view on financial return of corporate social responsibility (CSR), maintaining that the competitiveness of a company and the health of the communities around it are mutually dependent.

Key Terms

externalities

Something that indirectly affects something else. In economics, a cost or benefit that is not captured in the price mechanism.

triple bottom line

A means of measuring a company’s success based on its economic returns, its effect on its environment, and its impact on the community.

shared value model

Idea that corporate success and social welfare relate; that a company succeeds and competes in a better society because it needs a healthy, educated workforce and sustainable resources.

Evidence links socially responsible business practices to improved financial performance. This is attributable to lower costs or increased revenue from customers who want to support business that reflects their personal values. An organization’s CSR practices might also increase employee loyalty, which lowers the cost of turnover; it also helps attract potential employees willing to work for less for a company whose values they share. Some CSR actions, such as investing in renewable energy, can provide tax benefits or lead to technology innovations that create competitive advantage.

Harvard professors Michael Porter and Mark Kramer introduced the notion of “creating shared value” (CSV) as a way of thinking about the benefits of corporate social responsibility. CSV is based on an idea that the competitiveness of a company and the health of the communities around it are mutually dependent. By focusing on creating shared value, an organization helps to shape the context in which it competes to its advantage. In this way, the shared value model takes a long-term perspective on the financial benefits of corporate social responsibility.

Other financial benefits from CSR accrue directly to shareholders. Socially conscious investors may prefer to own shares of a company that demonstrates good CSR, which can lead to higher share prices. Some mutual funds have portfolios exclusively made up of companies that rate highly on independent CSR measures. Proponents of these funds point to competitive returns for socially responsible indices, such as the Domini 400 (now the MSCI KLD 400). Similarly, academic studies have shown that excluding stocks from companies with poor CSR records does not adversely effect financial returns of a fund.

Corporate social responsibility

The benefits a company obtains from having a strong community and healthy environment may not generally be expressed in dollars, but these elements do have a financial impact on a business.

16.3.2: Types of Social Responsibility: Sustainability

One type of corporate social responsibility focuses on three key dimensions of sustainability—environmental, social, and economic.

Key Points

• Sustainability generally refers to a company’s capacity to endure over the long term through renewal, maintenance, and sustenance. From an organizational perspective, it includes stewardship for sustaining not just the organization but also its various stakeholders.
• While a universally accepted definition of sustainability remains elusive, according to a common definition, sustainability has three key dimensions: environmental, social, and economic.
• Tracking sustainability measures can be performed through sustainability accounting, in which a corporation discloses its performance with respect to activities directly affect the social, environmental, and economic performance of an organization.
• Environmental aspects can relate to water, land, and atmospheric impact, including energy and chemical use. Social sustainability can include human and worker rights and community issues. Economic aspects can include financial transparency and accountability and corporate governance.

Key Terms

impact

A significant or strong influence; an effect.

stewardship

The act of caring for or improving with time.

Many efforts to show corporate social responsibility, or CSR, focus on environmental, social, and economic sustainability. Sustainability is the capacity to endure over the long term through renewal, maintenance, and sustenance. From an organizational perspective, sustainability is a criteria used to make decisions about business conduct and to evaluate outcomes.

Environmental sustainability involves efforts to protect air, water, and land from any harmful effects. It also encompasses stewardship for natural resources, such as trees and wildlife. Sustainable business practices consider not only the use of resources in production, but also the assurance that those resources can be replenished for future use. Energy is another area of interest in environmental sustainability. Reducing greenhouse gasses harmful to the atmosphere and embracing alternative, renewable fuel sources such as wind and energy are examples of business practices in this area.

The social dimension of sustainability addresses concerns such as peace and social justice. Efforts to improve education, to expand worker rights, to minimize the use of child labor, and to increase the political empowerment of women, especially in developing countries, are examples of social sustainability practices. Reducing poverty by helping people develop the skills to earn their own livelihoods is another example of social sustainability. Projects that provide access to clean water and sanitation are also aimed at improving social sustainability by reducing illness and mortality rates.

Economic sustainability refers to business practices that do not diminish the prospects of future persons to enjoy levels of consumption, wealth, utility, or welfare comparable to those enjoyed in the present. This means companies’ operational practices reduce environmental damage and resource depletion. Efforts to influence business practices toward economic sustainability include pricing mechanisms, such as carbon taxes, that pass on the cost of environmental impact to the users of those resources.

Tracking sustainability measures can be performed using sustainability accounting, in which a corporation discloses its performance with respect to activities that have a direct impact on the societal, environmental, and economic performance of an organization. According to common definitions, sustainability has three key dimensions: environmental, social, and economic. The three pillars—also known as the “triple bottom line”—have served as a common ground for numerous sustainability standards and certification systems in recent years, though a universally accepted definition of sustainability remains elusive.

Triple bottom line

Sustainable design of a business can be an aspect of corporate social responsibility.

16.3.3: Types of Social Responsibility: Ecocentric Management

According to the ecocentric model of CSR, environmental protection and sustainability are more important than economic or social benefits.

Learning Objective

Explain the concept of ecocentric corporate social responsibility and how it relates to other forms of CSR

Key Points

• Ecocentric CSR seeks to protect and improve the quality of the natural environment, regardless of the economic benefits to an organization.
• Ecocentric CSR reflects an organization’s commitment to the environment as the primary core value for conducting business.
• As a core business activity, ecocentric management may also incorporate life-cycle assessment, a technique aimed at assessing the environmental impacts associated with all stages of a product’s life, from raw material extraction to disposal or recycling.

Key Term

ecology

The branch of biology dealing with the relationships of organisms with their environment and with each other.

Corporate social responsibility, also referred to as CSR, can be described as a business’s efforts to assume responsibility for its actions and to encourage a positive impact through its activities on the environment, consumers, employees, communities, and other stakeholders. Ecocentric management is one type of CSR that adopts a deeply ecological view of business.

The ecocentric model differs from more human-centered interpretations of sustainability or responsibility. “Deep” ecology is a form of environmentalism that seeks to protect and improve the quality of the natural environment. It values environmental good above economic or even social benefits. For this reason, ecocentric CSR activities, more than any other type of CSR efforts, are not expected to provide business benefits. Instead, they reflect an organization’s commitment to the environment as the primary core value for conducting business.

Ecocentric supporters believe that low-impact technology and self-reliance are more desirable than technological control over nature. As a result, the ecocentric manager may argue against using ecologically damaging products, such as pesticides and nuclear power, even if these products benefit people. In this way, the ecocentric approach contrasts with that of a more traditional CSR environmental sustainability, which seeks to maintain economic performance while reducing the impact of those products or making parallel investments in alternatives.

Emerging Values: Environmentalism and Green Energy

Image of an energy plant.

Ecocentric CSR activities are typically integrated with business operations. For example, they may incorporate life-cycle assessment, a technique aimed at assessing the environmental impacts associated with all the stages of a product’s life, from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling. The more environmentally harmful stages can be identified and targeted for improvement so that every part of the value chain demonstrates the paramount importance of ecocentric CSR.

16.3.4: Arguments for and against Corporate Social Responsibility

Most arguments both for and against CSR are based on how a company’s attempts to be socially responsible affect its bottom line.

Learning Objective

Contrast the views in favor of and opposing corporate social responsibility

Key Points

• Proponents of corporate social responsibility (CSR) argue that socially responsible practices can have a positive impact on the bottom line.
• While some evidence links CSR to financial performance, its proponents also point to non-financial rewards as well as to benefits to the environment and social welfare.
• Some critics see CSR as unrelated to the primary aim of the business: making a profit for its shareholders.
• Critics may also see some CSR efforts as attempts at public manipulation or greenwashing.

Key Terms

shareholder

One who owns shares of stock in a business.

bottom line

The final balance; the amount of money or profit left after everything has been tallied.

Corporate social responsibility, also referred to as CSR, can be described as embracing responsibility for a company’s actions and encouraging a positive impact through its activities on the environment, consumers, employees, communities, and other stakeholders.

Corporate social responsibility (CSR)

CSR refers to the practice of companies integrating ethical, social, environmental, and other global issues into their business operations and in their interaction with their stakeholders (employees, customers, shareholders, investors, local communities, government).

While some evidence links CSR practices to business performance, most organizations point to the non-financial benefits of their efforts. Proponents of CSR argue that socially responsible practices can have a positive impact on the organization by improving employee recruitment and retention, managing environmental risks by reducing harmful accidents, and differentiating brand to achieve greater consumer loyalty. CSR proponents may also argue for the recognition of a “triple bottom line” performance that includes not only financial returns for owners but also social and environmental benefits for the greater society.

Milton Friedman and other conservative critics have argued against CSR, stating that a corporation’s purpose is to maximize returns to its shareholders (or shareholder value) and that it does not have responsibilities to society as a whole. Part of the critics’ argument is that managers should not select social causes on behalf of a diverse set of owners. Rather, CSR opponents believe that corporations benefit society best by distributing profits to owners, who can then make charitable donations or take other socially responsible actions as they see fit.

Other critics, rather than targeting the concept of CSR, point to examples of weak CSR programs. For example, the term greenwashing refers to instances where businesses have spent significantly more resources advertising being “green“ (that is, operating with consideration for the environment) than investing in the environmentally sound practices themselves. Critics view these as misleading, even cynical, attempts to shape public perception about a company without its actually having to benefit the environment.

16.3.5: Introduction to Corporate Social Responsibility

Corporate social responsibility is a company’s sense of obligation towards social and physical environments in which it operates.

Learning Objective

Explain the purpose and types of corporate social responsibility

Key Points

• Corporate social responsibility (CSR) can be described as embracing responsibility and encouraging a positive impact through the company’s activities related to the environment, consumers, employees, communities, and other stakeholders.
• Corporate social responsibility may include philanthropic efforts, employee volunteering, and core strategies. Companies may benchmark their CSR performance relative to peers and may also report on CSR policies or undergo social audits.
• Proponents of CSR argue that socially responsible practices can have a positive impact on the bottom line and may also argue for the recognition of a “triple bottom line” that rewards social, environmental, and financial returns.
• Critics argue that CSR competes with shareholder value maximization and may be prone to “greenwashing”.

Key Terms

benchmark

A standard by which something is evaluated or measured.

shareholder

One who owns shares of stock in a business.

stakeholder

A person or organization with a legitimate interest in a given situation, action, or enterprise.

Corporate Social Responsibility (CSR), also referred to as corporate citizenship or socially responsible business, is a form of corporate self-regulation integrated into a business model. The interest in CSR has grown with the spread of socially responsible investing, the attention of nongovernmental organizations (NGOs), and ethics training within organizations. Recent incidents of ethics-based corporate scandals have also increased awareness of CSR. Organizations that embrace CSR hold themselves accountable to others for their actions and seek to make a positive impact on the environment, their communities, and the larger society.

Corporate social responsibility may include philanthropic efforts such as charitable donations or programs that encourage employee volunteerism by providing paid time off for such activities. Many organizations seek to have an even greater impact through CSR initiatives that integrate social values into operational and business strategies. For example, to protect scarce natural resources, a firm may make a commitment to use only recycled materials in its packaging of consumer goods.

Many organizations promote their CSR efforts as a way of shaping public perceptions, attracting customers, and building good will with stakeholders. Public companies often report CSR policies and activities in their annual reports; some create separate documents or use their websites to describe and publicize their CSR-related efforts. Organizations and interested external third parties assess CSR performance by comparing, or benchmarking, the activities and their results with competitors or other sets of organizations. Measures include amount of expenditures or investment, degree of executive engagement, impact of implementation, and CSR outcomes relative to objectives.

Green building

This company building in the UK was created from green materials.

The scale and nature of the benefits of CSR to an organization can be difficult to quantify. Those driven by strategic and operational choices may result in higher or lower costs, but directly linking CSR initiatives to revenue increases is not always possible. Many organization use non-financial measures to assess the benefits of CSR. For example, socially responsible practices can improve employee recruitment and retention efforts, be a means of managing risk, and provide brand differentiation. Some business critics of CSR, however, argue that too often it competes with a duty to maximize shareholder value. Others cast the CSR efforts of companies as “greenwashing” efforts to draw attention away from unpopular practices such as polluting the environment or outsourcing jobs overseas.

16.3.6: Types of Social Responsibility: Philanthropy

Philanthropic corporate social responsibility involves donating funds, goods, or services.

Learning Objective

Describe philanthropy through the lens of corporate social responsibility

Key Points

• Philanthropic corporate social responsibility involves donating funds, goods, or services to another organization or cause. For example, the local branch of a bank might donate money to fund the purchase of uniforms for a school sports team, or a health care company might donate to the city opera.
• Some critique organizational philanthropy for not being incorporated directly into an organization’s core business plan. Philanthropic activity is not always tracked as part of social accounting, making it difficult for these efforts to be audited or held accountable to external benchmarks.
• Corporations increasingly hold charities accountable for the use of donations and for measuring performance relative to their mission.

Key Terms

core

The most important part of a thing; the essence.

impact

A significant or strong influence; an effect.

A company that practices corporate social responsibility (CSR) embraces responsibility for its actions and, through its activities, positively affects the environment, society, consumers, employees, communities, and other stakeholders. One type of CSR is philanthropic giving. The roots of corporate philanthropy in the United States date back to the rise of industry in the 19th and early 20th century, when pioneering businessmen like Henry Ford and John D. Rockefeller established a number of philanthropic foundations. Today, corporate philanthropy can involve donating funds, goods, or services to another organization or cause. For example, the local branch of a bank might donate money to fund the purchase of uniforms for a school sports team, or a health care company might donate to the city opera.

Corporate social responsibility

CSR pertains to the positive effects a company’s operations have on the environment, consumers, and society at large.

While individual philanthropists use their own resources to change the world for the better according to their interests, corporate philanthropy directs organizational resources to support a worthy cause or address a societal need. The practice is not without its critics; some complain that philanthropic CSR is not directly related to an organization’s core business. For instance, many large arts organizations receive funding from corporations in completely different industries simply because their executives happen to love music and wish to support a local symphony. Although philanthropic CSR may provide public relations or branding advantages to a business, these benefits are difficult to measure and track.

A business’s philanthropic activity does not occur without oversight. Since the early 2000’s, corporations have sought to hold charities accountable for how they use donations. As a result, many nonprofit groups have adopted business practices for measuring their own performance. In this way, these beneficiaries of philanthropy demonstrate both a responsible use of the funds they have received and evidence of their performance relative to their mission. Companies engaging in philanthropic CSR can then use those results to measure the impact of their own efforts to support social causes.

16.3.7: Social Responsibility Audits

Social responsibility audits are a process of evaluating a corporation’s social responsibility performance.

Learning Objective

Apply the general concept of auditing to the larger framework of social responsibility within organizations

Key Points

• Social responsibility audits rely on a process of accounting known by various names, including social accounting, sustainability accounting, corporate social responsibility (CSR) reporting, environmental and social governance (ESG) reporting, and triple-bottom-line accounting.
• Most social, environmental, and sustainability reports are produced voluntarily by corporations themselves and are not held to the same external standards as financial reporting. The practice of hiring independent social responsibility audit firms, however, is growing.
• Little consensus exists about how to define and use metrics of social performance, making social audits different from financial audits, for which there are generally accepted standards.

Key Terms

responsibility

A duty, obligation, or liability for which someone is held accountable.

audit

An independent review of records and activities to assess system controls, to ensure compliance with established policies and procedures, and to recommend changes in controls, policies, or procedures.

An audit is a systematic independent examination of data, statements, records, operations, and performance (financial or otherwise) of a process or enterprise for a stated purpose. The purpose of an audit is to provide third-party assurance to various stakeholders that the subject matter is free from material misstatement and represents a true and accurate depiction of actions and events. Areas of business that are commonly audited include financial performance, internal controls, quality management, project management, water management, and energy conservation.

Social responsibility audits are a process of reviewing and evaluating a corporation’s social responsibility (CSR) performance. As with financial audits, social responsibility audits involve accounting processes. This type of accounting originated in the early 1990s and is known by various names, including social accounting, sustainability accounting, CSR reporting, environmental and social governance (ESG) reporting, and triple-bottom-line accounting (encompassing social and environmental as well as financial reporting). Social accounting is the process of communicating the social and environmental effects of an organization’s economic actions to particular interest groups within society—including investors, customers, and NGOs—as well as to society at large.

In most countries, existing legislation regulates only a fraction of accounting for socially relevant corporate activity. In consequence, most social, environmental, and sustainability reports are produced voluntarily by corporations themselves and are not held to the same legal standards as financial reporting, for example. Organizations may also hire external firms to conduct CSR audits; these often have more credibility than an internally generated report. Having third-party groups conduct social audits is one way that corporations are held accountable for their CSR performance.

Little consensus exists about the definition and use of metrics to evaluate social impact. The lack of clearly defined standards makes social audits different from financial audits, for which there are generally accepted standards. Environmental-related accounting might address pollution emissions, resources used, or wildlife habitats damaged or re-established. Social aspects considered might include worker conditions or community investment. An audit for economic and governance responsibilities might look at transparency and the use of practices such as independent board members and separation of the roles of CEO and board chairman.

Factory workers in 1920s

One metric that might be tested in a social responsibility audit is worker conditions in the company’s plants.

16.4: Including Ethics in Strategic Planning

16.4.1: Promoting Ethical Behavior through the Planning Process

Building ethics into strategic planning is an important consideration for upper management when setting organizational processes and objectives.

Learning Objective

Recognize and describe the process for building ethics into strategic planning processes

Key Points

• Building consistent values and ethics into an organizational culture starts with effective strategic planning.
• Stakeholder theory is a strong starting point for ethical considerations, as stakeholders such as customers, suppliers, governments, communities, and shareholders are all impacted by organizational processes.
• A code of ethics and ethics officers are a great structural addition to strategic planning to ensure organizational alignment with values.
• Providing all employees and managers with training, and a confidential system of ethical reporting, are key elements in building a strong ethical culture.

Key Term

Code of Ethics

Guidelines adopted by organizations to assist members in understanding the difference between ‘right’ and ‘wrong’ and in applying that understanding to their decisions.

Strategy and Ethics

Setting an organizational strategy, vision, and set of values is the starting point of any new venture. Building in a strong sense of ethics, and an alignment with the well-being of all existing stakeholders (and society at large) is an integral aspect of the strategic planning process. The concept of aligning with the needs, ethics, and well-being of all stakeholders is referred to as Stakeholder Theory.

Stakeholder Theory

All organizations have a wide variety of stakeholders. Basically any group, individual, or organization impacted by operations is considered a stakeholder. This includes governmental bodies, customers, suppliers, employees, shareholders, financiers, communities, economies, and the general ecosystem. A board of directors is often elected to oversee the strategy to ensure alignment with values and ethics.

Stakeholders

This chart underlines a few key stakeholder groups.

This chart underlines a few key stakeholder groups.

Ethical Integration

Building ethical considerations into a business strategy via the planning process is an important element of ethics management. Strategy lays the foundation for how an organization carries out its operations. Building ethics into strategic planning is important to ensure that every facet of the organization is aligned with the ethos and values of the broader organization.

There are four elements strategic planners should develop when considering ethical alignment:

1. Developing a Code of Ethics: This serves as a central point of reference for everyone in the organization. This code of ethics should take stakeholders concerns into consideration, and evolve organically over time as the organization grows.
2. Ethical Training: Investing in training employees and managers in how integrate ethics into their process is a critical aspect of developing a strong ethical culture. Training equips employees and managers with the tools necessary to address ethically complex issues in the workplace.
3. Situational Advice (Ethics Officers): Having ethics officers available for consultation is a great way to handle ethical issues as they arise internally. Employees and managers may encounter ethical dilemmas that the Code of Ethics and ethics training don’t address. In these situations, going to an ethics officer to determine best practices is a great strategic resource. The ethics officer can also use these situations to improve the organization’s ethical strategy.
4. Confidential Reporting System: Not all ethical situations are easy to bring up in a professional setting. As a result, organizations should create an infrastructure for anonymous reporting to allow the organization to address problems as they arise without putting anyone on the spot.

15.1: Introduction to Social Media and Digital Marketing

15.1.1: Defining Social Media

Learning Objective

Describe the common characteristics of social media technologies, and user behaviors that occur on social media websites

Key Points

• Social media are examples of Web 2.0 technologies, which contrast significantly with the more passive, top-down technologies that characterized Web 1.0 web pages.
• Specifically, social media features a rich user experience, dynamic content, scalability, openness and collective intelligence.
• Different types of social media include social networks, weblogs, microblogging, content communities, podcasts and wikis.

Key Terms

trolling

Internet slang for posting inflammatory, extraneous, or off-topic messages in an online community– such as a forum, chat room, or blog– with the primary intention of provoking an emotional response in its readers or otherwise disrupting normal discussion.

collective intelligence

A shared or group intelligence that emerges from the collaboration and competition of many individuals and appears in consensus-decision-making in bacteria [clarification needed], animals, and computer networks.

scalability

The ability of a system, network, or process to handle an increasing amount of work, or its ability to be enlarged in order to accommodate that increase.

What is Social Media?

Social media are interactive platforms where content is created, distributed and shared by individuals on the web. Professors Andreas Kaplan and Michael Haenlein of the ESCP European Business School define social media as “a group of Internet-based applications that build on the ideological and technological foundations of Web 2.0, and that allow the creation and exchange of user-generated content. ” Social media websites and applications allow users to create and exchange user-generated content where people talk, share information, participate and network through technologies such as blogs and social networking sites. Within the last decade, social media has become one of the most powerful sources for news updates, online collaboration, networking, viral marketing and entertainment.

Conversations in Social Media

Consumers intentionally and unintentionally use social media to purchase, evaluate and ultimately influence a brand’s marketing mix.

Characteristics of Social Media

Before the term Web 2.0 was coined in 1999, Internet pages featured mostly static content such as text and graphics. Websites operated on Web 1.0 technologies, where website hosts and owners were the primary content contributors. Online information targeted a mostly passive audience that received rather than contributed content. However, with the introduction of Web 2.0 Internet technologies around the turn of the 21^st century, social media venues such as blogs began to allow users to interact and collaborate with each other in virtual communities. This more open, communal method of social media dialogue contrasted significantly with the top-down approach that characterized the early years of the web.

Specifically, social media began meeting the characteristics of Web 2.0 websites, providing a rich user experience, dynamic content, scalability, openness and collective intelligence. Active social media users could take advantage of various features that allowed them to ‘like,’ create and post images, and upload videos and text. Users could then share this information, either with a select group of friends or publicly across the web. However, this has also opened up social media websites to spamming, trolling and flaming by unscrupulous or less mature users. Nevertheless, social media has grown rapidly in the U.S. and around the world due to its blending of technology and social interaction for the co-creation of value.

Types of Social Media

Some of the most popular current forms of social media are social networking websites such as Facebook, which surpassed over one billion active monthly users in October 2012. There are several types of online platforms classified under the vast umbrella of social media. These categories include:

Social Networks: Social networking websites allow users to build web pages featuring personal portfolios and interests. These pages are used to connect with friends, colleagues and other users in order to share media, content and communications. Examples of social networks include Facebook, LinkedIn, MySpace and Bebo.

Visual social networks are becoming more popular, with Instagram having now surpassed Twitter in its amount of users. Data has shown that a tweet that includes an image has a 150% more chance of being shared. There are also new networks such as Snapchat and Periscope, that are slowly growing in terms of popularity, especially with the younger generations. 

Web blogs: Some of the oldest and most popular forms of social media are blogs. Blogs are often viewed as online journals that order content chronologically, or by date, month, year and category. Users can also maintain “vlogs,” or video blogs, featuring shared or homemade videos. Blogging websites include WordPress, Blogger and Tumblr.

Microblogs: Microblogs are blogging tools that feature short posts, as opposed to journal-style posts. Users are usually restricted to posting a few lines of text, or uploading individual images and videos. Microblogging is particularly common for posting quick updates and distributing content via mobile devices. Notable microblogging sites include Twitter and Tumblr. However, social networks such as Facebook, Google+, LinkedIn and MySpace also have their own microblogging features.

Content Communities: Users on content communities organize, share and comment on different types of content, including images and videos. YouTube, Flickr and scribd are examples of content communities.

Wikis: Wiki websites allow a community of people to add and edit content in a community-based database. One of the best-known wikis is Wikipedia.

Podcasts: Podcasts are audio and video files available through subscription services such as Apple iTunes. The term “podcast” is a neologism derived from “broadcast” and “pod” (as in “iPod”), since Podcasts are often listened to on portable media players.

Other types of social media include the following:

• Rating and review sites (e.g. Yelp)
• Social bookmarking or social tagging features (e.g. Digg; Stumble Upon)
• Forums and discussion boards (e.g. Yahoo! ; Answers)
• Virtual social worlds (e.g. Second Life; World of Warcraft)
• Music and audio sharing (e.g. Spotify; Pandora Radio)

Social media can also be classified by their ability to facilitate certain social functions. These social functions often involve identity, conversation, sharing, presence, relationships, reputation, and groups. Kaplan and Haenlein created a classification scheme using six different types of social media– collaborative projects (e.g. Wikipedia), blogs and microblogs (e.g. Twitter), content communities (e.g. YouTube), social networking sites (e.g. Facebook), virtual game worlds (e.g. World of Warcraft), and virtual social worlds (e.g. Second Life).

15.1.2: Social Media Marketing Communications

Learning Objective

Discuss how social media increases brand awareness and customer engagement in integrated marketing communications

Key Points

• The viral and collaborative nature of social media allows brands to build brand authenticity and loyalty among their users.
• Social media allows brands to refine their segmentation strategy by reaching a narrow target audience.
• Advertisers and PR professionals can use social media to engage audiences, create compelling content, and monitor sentiment about their brand.

Key Terms

semantic analysis

The process of relating syntactic structures, from the levels of phrases, clauses, sentences and paragraphs to the level of the writing as a whole, to their language-independent meanings, removing features specific to particular linguistic and cultural contexts, to the extent that such a project is possible.

virality

The state or condition of being viral; tendency to spread by word of mouth.

earned media

Publicity for political campaigns gained through newspaper articles, TV news stories, web news, letters to the editor, op-ed pieces, and “fast polls” on TV and the web.

Social Media and Integrated Marketing Communications

Some of the post popular tweets are tweeted by companies and businesses. Powerful brands like Coca-Cola and McDonald’s boast Facebook pages with millions of fans. Social media, including social networks, makes it ever more important for companies to ensure their online exposure ties directly to their brand image and messaging. Along with television, radio, and print, social media is part of the communications ecosystem that works as a whole to create an enjoyable and seamless consumer experience across multiple channels. Likewise, integrated marketing communications is increasingly incorporating social media into the promotional mix to reach consumers on the web and on mobile devices.

Facebook Business Page

Social networking sites such as Facebook can serve as lead generators for marketing communications campaigns.

Brand Authenticity

The explosion of social media websites has led to the increasingly important practice of social media marketing. Social media marketing programs usually center on efforts to create content that attracts attention and encourages readers to share it with their social networks. A brand’s corporate message spreads from user to user and presumably resonates because it appears to come from a trusted, third-party source as opposed to from the brand or company itself. Social networking sites and blogs allow individuals to retweet or repost comments written by the creator of the product.

When that individual repeats the message, their connections are able to see it, which means the message reaches more people. Because of the virality of social media, companies frequently use social networking sites for word-of-mouth promotions of products and services. As the information about the brand is broadcasted and repeated across the social network, more traffic is brought to the company’s website. This results in earned media rather than paid media and both serves as a lead generator and creates favorable publicity for the brand.

Consumer Intelligence

Social media allows marketers to refine their segmentation strategy by reaching a narrow target audience. For example, Pinterest, a social bookmarking site with an overwhelmingly female user base, attracts companies that primarily target women.

Social networking sites also reveal vast amounts of information about prospective interest in products and services. Today, new semantic analysis technologies allow marketers to detect buying signals based on shared and posted online content. Understanding these buying signals can help sales professionals target relevant prospects and help marketers run micro-targeted campaigns.

Engagement Advertising and PR

Social media in business allows anyone and everyone to express an opinion or idea somewhere along the company’s path to market. Through social networking sites, brands can have conversations and interactions with individual followers. This personal interaction can instill and strengthen brand loyalty amongst followers and potential customers. Thus, each participating customer informally becomes part of the marketing department, as other customers read their comments or reviews.

Facebook and other social networks are often used to tune into customer conversations and quickly flag customer service issues and concerns. However, these conversations can also be repurposed across other social media and corporate channels. Brands often use social media to transform customer comments and testimonials into relevant and compelling content for personal selling, advertising, and other promotional tactics. Listening to social media “chatter” also helps companies stay in tune with public sentiment about their brand. By tracking and analyzing conversations on social media, public relations professionals can catch problems early and prevent negative publicity from turning into full-blown crises.

This engagement process is fundamental to successfully integrating social media into a company’s marketing communications strategy. Organizations can use social media to cost-effectively increase communications across the promotional mix, fostering brand awareness and, often, improved customer service.

15.1.3: Digital Marketing Characteristics

Learning Objective

Discuss pull versus push digital marketing tactics

Key Points

• Digital marketing consists of pull or push online communication tactics. These tactics can also be referred to as inbound or outbound marketing as well.
• Pull digital marketing is characterized by consumers actively seeking marketing content.
• Push digital marketing occurs when marketers send messages without the consent of the recipients.
• Examples of pull digital marketing include search engines, email newsletters, text messaging, while push digital marketing consists of opt-in subscription services.

Key Term

display advertising

online advertising that typically contains text (i.e., copy), logos, photographs or other images, location maps, and similar items.

Digital Marketing Characteristics

Digital marketing is defined as the use of internet-connected devices such as computers, tablets, smartphones, and game consoles to engage consumers with online advertising. One of the key principles of digital marketing is creating an easy, seamless, and convenient user experience for target audiences. Moreover, eliminating the amount of consumer effort needed to act on digital content helps establish an ongoing, automated relationship between brands and their audience.

Blog website

Digital marketers often incorporate blogs and other social media elements in their corporate websites to encourage web traffic.

Pull Digital Marketing

Pull digital marketing is characterized by consumers actively seeking marketing content. Consumers might use tactics including search engines, email newsletters, text messaging, or web feeds to search for brand information. Push technologies deliver content as it becomes available and are better targeted to consumer demographics. However, microtargeting tends to produce smaller audiences, and results in higher creation and distribution costs.

Websites, blogs, and streaming media (audio and video) are examples of pull digital marketing. In each of these channels, users must navigate to the website to view the content. It is up to marketers to create digital content – text, images, videos, and audio – that is relevant and captivating enough to attract web visitors, increase page views, and improve search engine rankings.

Building online communities on related social media sites such as Facebook and YouTube is another pull tactic used by brands to increase the number of interactions with prospects and customers. Companies frequently use their corporate websites and blogs to build authority and credibility in their field, as well as improve their search engine optimization. Major search engines such as Google often index sites based on the quality and relevancy of their content. Thus, the higher a brand is ranked in Google, the more likely web users will find their website.

Push Digital Marketing

Push digital marketing occurs when marketers send messages with or without the consent of the recipients. These digital marketing tactics include display advertising on websites and blogs. Email, text messaging, and web feeds are also considered push digital marketing when the recipient has not agreed to receiving the marketing message. This practice is also known as spamming. The opposite of spamming is permission marketing, which uses technologies with the prior permission of the recipient. Marketers obtain consumer permission to send communications via subscriptions or written consent.

Subscriptions provide the opportunity to push content to fans and followers, prompting them to visit the brand’s video channel, social media page, or corporate website. Text and video press releases can also be distributed easily through online distribution services. Journalists, bloggers, and other content producers visit these sites for news stories. Brands can gain web traffic from media publications and blogs that use their press releases as information sources.

Other Types of Digital Marketing

A company may not exclusively use pull or push digital marketing strategies, or they might not use these strategies at all. There are other marketing strategies that may involve a variation of push or pull marketing. For instance, multi-channel communications use push and pull message technologies simultaneously.

15.1.4: Types of Internet Advertising

Learning Objective

Give examples of how brands use affiliate marketing, social network advertising, search engine marketing (SEM), and mobile advertising.

Key Points

• Internet advertising provides companies a low cost way to serve personalized ads across web and mobile interfaces.
• Online advertising relies heavily on contextual and behavioral targeting to serve personalized ads to consumers.
• Different mobile advertising tactics include idle screen advertising, app-vertising, and DoubleClick for Advertisers.

Key Term

clickstream

A profile of a user’s activity in a web browser or other software, based on what is clicked.

Types of Internet Advertising

One major benefit of online advertising is the immediate publishing of information that is not limited by geographic or time constraints. Online advertisers can customize advertisements, making consumer targeting more efficient and precise. For example, AdWords, Yahoo! Search Marketing and Google AdSense enable ads to be shown on relevant web pages or alongside related search results. On the other hand, consumers have greater control over the content they see, affecting the timing, placement, and visibility of online advertisements. Within the scope of Internet marketing, online advertising includes display advertising, affiliate marketing, search engine marketing (SEM), and mobile advertising.

Banner Ad

Banner ads are examples of Internet advertising.

Display Advertising

Display advertising is the use of web banners or banner ads placed on a third-party website or blog to drive traffic to a corporate website and increase product awareness. These banners consist of static or animated images, as well as interactive media including audio and video. Display advertising uses demographic and geographic targeting – capturing users’ cookie and browser history to determine demographics, location, and interests – to target appropriate ads to those browsers.

In addition to contextual targeting, online advertising is targeted based on a user’s online behavior. This practice is known as behavioral targeting. For example, if a user is known to have recently visited a number of automotive websites based on clickstream analysis enabled by cookies stored on the user’s computer, that user can then be served auto-related ads when they visit other, non-automotive sites. Semantic analysis techniques are also used to accurately interpret and classify the meaning or context of the page’s content and then populate it with targeted advertisements. Semantic web content is closely linked to advertising to increase viewer interest engagement with the advertised product or service.

Affiliate marketing

Affiliate marketing is a form of online advertising where advertisers place campaigns with a potentially large number of publishers, who are only paid media fees when the advertiser receives web traffic. Web traffic is usually based on a call-to-action or measurable campaign result such as a submitted web form or sale. Today, this is usually accomplished through contracting with an affiliate network.

Social Network Advertising

Social network advertising is a form of online advertising found on social networking sites such as Facebook. Advertising on social media networks can take the form of direct display ads purchased on social networks, self-serve advertising through internal ad networks, and ad serving on social network applications through special social network application advertising networks.

Search Engine Marketing (SEM)

Search engine marketing is a form of marketing that seeks to promote websites by increasing their visibility in search engine result pages (SERPs). SEM tactics include paid placement, contextual advertising, and paid inclusion, or free search engine optimization techniques to drive placement of their ads. Advertisers pay each time users click on their listing and are redirected to their website, rather than for the ad itself. This system allows brands to refine searches and gain information about their market.

Mobile Advertising

Cell phone advertising is the ability for organizations and individuals to advertise their product or service over mobile devices. Mobile advertising is generally carried out via text messages or applications. The obvious benefit of mobile advertising for brands is that mobile devices such as smartphones are usually close to the owner throughout the day. This presents a cost-effective way for brands to deliver targeted advertisements across mobile platforms on a daily basis. Technologies such as location-based advertising also give marketers the ability to deliver ads in close proximity to the physical location of a consumer. Although advertisements appear on a small mobile interface, mobile advertisers have the ability to deliver personalized, and thus effective, messaging.

Different mobile advertising tactics include:

• Idle screen advertising – Cell phone owners enter into a third-party agreement that allows advertisements to run on their screen while their phone is idle in exchange for a discount or other promotion.
• App-vertising – Companies design applications, including games and videos, that heavily promote their brand.
• DoubleClick for Advertisers – A Google service that allows brands to buy certain keywords to increase the position of their ads in mobile search rankings.

Search Engine Optimization (SEO)

Search engine optimization (SEO) is the practice of employing various strategies to allow websites to rank highly in Search Engine Results Pages (SERPs). Paid search engine advertising increases a website’s visibility and reach by displaying links to the website’s landing pages at the top or bottom of a SERP. In contrast, SEO increases a website’s visibility and reach by allowing the website to rank well organically in search results when search engine users search for certain key phrases and terms.

Some SEO strategies include link building, optimization of onsite content with targeted keywords, optimization of meta descriptions with targeted keywords, and optimization of blog content with targeted keywords. Most search engines work to find users websites based on their searches using complex algorithms that assess a website’s authority, using a wide variety of strategies to rate the overall quality and usefulness of a site’s content. SEO strategists aim to boost a site’s authority in the eyes of search engines by creating high quality content that uses relevant key terms which will be linked to by other sites.

Local SEO is an emerging trend in the SEO realm. Local SEO involves creating content that targets a particular geographical demographic. It also includes the use of local listing sites to help establish a website’s presence in search results that are tailored to local users. 

15.1.5: Mobile Marketing

Learning Objective

Discuss the pros and cons of marketing via smartphones, computer tablets and other mobile devices

Key Points

• During the early 2000s, mobile marketing became popular with the use of text messaging in Europe and parts of Asia.
• Mobile marketing promotional tactics include SMS and MMS messaging, push notifications, QR codes, keyword advertising and mobile game marketing.
• Some of the key advantages of mobile marketing are the close proximity of owners’ mobile devices, as well as the habitual nature of using cell phones, smartphones and computer tablets.
• Despite the cost-effectiveness of mobile marketing, brands face challenges around privacy concerns with user data.

Key Terms

MMS

Multimedia Messaging Service – standard way to send messages that include multimedia content to and from mobile phones.

Bluetooth

A proprietary open-wireless technology standard for exchanging data over short distances (using short-wavelength radio transmissions in the ISM band from 2400–2480 MHz) from fixed and mobile devices, creating personal area networks (PANs) with high levels of security.

SMS

A text message sent on a cell phone.

Mobile Marketing

This type of marketing allows marketers and advertisers to promote products and services over mobile devices including cellular phones, smartphones, portable media players and tablets.

According to marketing professor Andreas Kaplan, mobile marketing is, “Any marketing activity conducted through a ubiquitous network to which consumers are constantly connected using a personal mobile device”. Because mobile marketing is conducted using wireless networks, it is also known as “wireless marketing”. Marketing communications on mobile devices is generally carried out via text messages or applications. Since consumers typically carry their mobile devices with them throughout the day, mobile marketing presents a cost-effective way for brands to deliver targeted messaging across different platforms.

QR Code Promotion

These are increasingly being used in mobile advertising campaigns to increase user engagement.

Types of Mobile Marketing

One of the most popular forms of mobile advertising is text messaging. During the early 2000s, marketing through cell phones’ Short Message Service (SMS) became increasingly common in Europe and parts of Asia. Consequently, SMS marketing has become a legitimate advertising channel in both developed and developing economies around the world. On average, it is estimated that SMS messages are read within four minutes after delivery to a mobile device. This makes mobile marketing highly attractive to brands looking for marketing communication channels with high lead-to-conversion rates.

Unlike SMS, Multimedia Message Service (MMS) mobile marketing combines the delivery of images, text, audio and video. Nearly all new phones with a color screen are capable of sending and receiving standard MMS messages. Brands are able to both send and receive rich content through MMS A2P (application-to-person) mobile networks to mobile subscribers. In some networks, brands are also able to sponsor messages sent P2P (person-to-person).

Push notifications have become popular due to their use on smartphones using iOS and Android operating systems. These notifications appear at the top of the device’s screen and serve as efficient mechanisms for communicating directly with end-users. Although it can potentially be viewed as interruptive by the end user, its long-term costs are lower than SMS marketing.

Game mobile marketing provides additional opportunities for brands looking to deliver promotional messaging within mobile games. Some companies sponsor entire games to drive consumer engagement, a practice known as mobile advergaming or ad-funded mobile gaming.

Mobile content advertising schemes provided by the likes of Yahoo! and Google allow brands to purchase keywords specifically for mobile advertisements. Additionally, web forms on web pages can be used to integrate with mobile texting sources for reminders about meetings, seminars and other important events for users who are away from their laptop or desktop computers.

Quick response (QR) codes have also gained in popularity after first being introduced in European and Asian mobile markets. Acting as a visual hyper-link to a page, QR codes enable users to jump to a mobile optimized offer page. QR codes only began to be used in mobile advertising in North America from 2011. Companies recognized the technology as a very powerful tool for initiating consumer engagement at a time when the marketing message is likely triggering its most emotional response — the impulse moment — for the end user.

In addition to QR codes, other tools used by mobile marketers to improve targeted messaging and reduce marketing costs include location-based services, Bluetooth technology, and proximity systems such as Short Message Service – Cell Broadcast (SMS-CB).

Advantages and Disadvantages of Mobile Marketing

Some of the key advantages of mobile marketing are the close proximity of owners’ mobile devices, as well as the habitual nature of using cell phones, smartphones and computer tablets. Distributing promotional and advertising messages customized according to the recipient’s location, geography and personal interests through wireless networks makes mobile marketing highly cost-effective given the potential reach and scope of the audience.

However, mobile marketing practices present challenges around privacy concerns over user data. Push marketing tactics — mobile advertising that is sent without consumers’ required permission – have caused privacy violations. Although mobile advertising has become increasingly popular with the growing use of tablets and smartphones, numerous concerns have emerged due to the personal nature and close proximity of mobile devices to users. Some of the major concerns around privacy include mobile spam, personal identification, location information and wireless security.

Industry bodies including the Interactive Advertising Bureau and Mobile Marketing Association have established guidelines to prevent SPAM messages and the practice of carriers selling member databases to third parties.

However, these self-regulatory rules are also in place to support marketers looking to incorporate mobile marketing into their larger marketing communications strategies.

15.1.6: Social Behavior of Consumers

Learning Objective

Describe how social media aids the study and measurement of consumer behavior

Key Points

• Traditionally, consumer behavior is the study of individuals, groups, or organizations and the processes they use to select, purchase and dispose of products, services, experiences, or ideas.
• The emergence of web technologies such as social media allow more opportunities for consumers, particularly younger generations, to experience more social interactions with people and organizations.
• Brands must recognize the importance of demographic factors such as age and gender when assessing consumers’ social behavior online.
• Companies commonly use behavioral targeting techniques to market to consumers based on their online behavior.

Key Terms

customer relationship management

A widely implemented model for managing a company’s interactions with customers, clients, and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support. Also known by the acronym “CRM. “

behavioral targeting

The range of technologies and techniques used by online website publishers and advertisers which allows them to increase the effectiveness of their campaigns by capturing data generated by website and landing page visitors.

psychographics

the science of using psychology and demographics to better understand consumers

Social Behavior of Consumers

Digital and social media has spurred brands to develop research tactics that hone in on the social behavior of consumers online. Observing and understanding how consumers behave and interact with each other has led to the introduction of new semantic analysis technologies allowing companies to monitor consumer buying patterns based on shared and posted content. The data helps sales and marketing professionals improve segmentation to target prospects and customers.

Web User

Younger generations use web and mobile devices to increase their number of social interactions.

Consumer Behavior

Traditionally, consumer behavior is the study of individuals, groups, or organizations and the processes they use to select, purchase and dispose of products, services, experiences, or ideas. Their purchases are meant to satisfy needs. Research has shown that consumer behavior is difficult to predict, even for experts in marketing communications. Relationship marketing, customer retention, customer relationship management (CRM) and personalization are all tactics used to assess consumer behavior.

However, consumer behavior is also influenced by internal conditions such as demographics, psychographics (lifestyle), personality, motivation, knowledge, attitudes, beliefs, and feelings. Psychological factors include an individual’s motivation, perception, attitude and beliefs, while personal factors include income level, personality, age, occupation and lifestyle.

Types of Buyer Behaviors

Extensive research is often used to understand what appeals to buyers: colors, thought triggers, images and sounds; all of these factors address psychological buying behaviors. Societal buying behavior incorporates identification and suggestion to prompt a specific buyer behavior. When a company hires a spokesperson or personality to promote a product, they are utilizing societal buying behavior to connect buyer actions to that of the spokesperson or the personality involved. Similarly, psychographics are often used that offer insight into the lifestyle and personality traits of buyers.

Situational buying behavior involves a specific scenario or event that pressures a buyer to purchase product. Perhaps it is the fact that peers have bought the same product, or a certain product has become a “status symbol. ” Whatever the reason buyer behavior is often impacted.

Online Behavioral Trends

The advent of social networks and social media provides an easy way for people to connect on the web. People use social networking to meet new friends, find old friends, or locate people with similar problems and interests. The information people post and share, as well as the relationships they build online, often transfer into an offline setting. While some critics have attributed the decline of quality interpersonal communication and human relationships to the growth of social media, others point to web and mobile technologies as a way for younger generations to experience more social interactions.

Age and gender influence how web and mobile devices are used and how decisions are made. While adolescent females and adult women are found to be more active in sending SMS messages, males send and receive more audio calls. Psychologically, research shows that men seem to adopt technology faster and have more incentive to try new features. This might be due to a difference in male and female attitudes towards new technology. Women tend to view technology as a tool, whereas men view it as entertainment.

Recognizing the intersection between social behavior and web technologies is imperative for brands looking to advertise products and services that are relevant to buyers. To implement a viable integrated marketing communications strategy that incorporates these data, companies employ techniques such as behavioral targeting for understanding, collecting and analyzing online and offline consumer information.

Collecting and Analyzing Online Consumer Data

Brands commonly use behavioral targeting techniques to market to consumers based on their online behavior. Brands increase the effectiveness of their campaigns by capturing data on web visitors who visit their website landing pages. Websites identify visitors by assigning a unique ID cookie to each and every visitor to the site. This allows the platform to track users throughout their web journey and make rules-based decisions about what content to serve. However, when behavioral targeting is done without the knowledge of users, it may be considered a breach of browser security and even illegal depending on country privacy, data protection and consumer protection laws. To monitor and measure behavior on social media sites, companies use analytical tools provided by the social media platform or external vendors.

Again, this behavioral data can be combined with known demographic data and a visitor’s past purchase history in order to produce a greater degree of data points that can be used for targeting. Self-learning onsite behavioral targeting systems will monitor visitor response to site content and learn what is most likely to generate a desired conversion event (i.e. consumer purchase). Behavioral targeting can also be used to serve many advertisements across many different sites based on the likely demographic makeup of internet users. For example, a website may assume that an Internet user is male based on the user’s visit to football and male fashion sites.

15.1.7: Types of Consumer-Generated Digital Content

Learning Objective

Discuss the technological factors that have led to the rise of consumer-generated digital content

Key Points

• Examples of consumer-generated digital content include videos, blogs, microblogs, wikis and podcasts.
• Consumer-generated content across digital interfaces has provided brands with insights into consumer behavior.
• In addition to social media, user-generated content may also employ a combination of open source, free software and flexible licensing mechanisms.

Key Terms

discourse

A formal lengthy exposition of some subject, either spoken or written.

widget

Any one of the components of a computer application’s graphical user interface, such as a Cancel button or text input box that a user interacts with.

Types of Consumer Generated Digital Content

The type of digital content created, published and shared by web users varies based on the media and communication technology available. The term “user-generated content” entered mainstream usage during 2005, after its rise in web publishing and new media content production circles. Consumer content is applied in areas including problem processing, news, gossip and research. The proliferation of consumer-generated content, which has coincided with the rise of social media, reflects the expansion of media production through new technologies that are accessible and affordable to the general public.

Twitter for the iPad

Companies employ consumer-generated content across mobile applications such as tablet computers.

Consumer-generated content encourages collaboration and discourse, as well as basic conversation between people and entities of the same interests, concerns or professions. The web’s ability to eliminate geographic and time constraints has opened more doors for increased collaboration and exchange between users and organizations that are physically separated but digitally connected. This has produced a treasure trove of consumer insights for companies looking to increase brand awareness and build customer relationships across multiple interfaces and communication channels.

Blogging, microblogging and social networks are among the most popular forms of user-generated content. However, all digital media technologies are considered “user-generated content.” Examples of these technologies include:

• Question-answer databases (e.g., Yahoo! Answers, Ask.com)
• Digital video (e.g., YouTube, Vimeo)
• Blogs (e.g., Blogger, Weebly)
• Microblogs (e.g., Tumblr, Twitter)
• Podcasting (e.g., iTunes)
• Review-sites (e.g. Yelp, TripAdvisor)
• Social networking (e.g., Facebook, MySpace)
• Wikis (e.g. Wikipedia)

In addition to these digital media, user-generated content may also employ a combination of open source, free software, and flexible licensing or related agreements to further reduce the barriers to collaboration, skill-building and discovery. Social media sites such as Facebook and Google+ include micropost features such as status updates, as well as “Like” and share buttons to encourage interaction between users. Third-party websites and online publications help facilitate the publication and spread of user-generated content by including sidebar widgets on their web pages. These digital icons allow users to link directly to different social media accounts, where they can automatically post and share news stories, images, video and other content from the third-party website.

15.2: Social Media and Technology Trends

15.2.1: Online Consumer Behavior

Web advertisers study online behavior and use the results to increase the effectiveness of their campaigns.

Learning Objective

Explain the relationship between behavioral targeting and online consumer behavior, and how behavioral marketing influences online advertising

Key Points

• The web has become the new ‘zero moment of truth‘, or ZMOT (Google, 2012) for consumers today. Marketers need to understand where their customers are going to research their products/services and what they are doing on the web to help form their purchase decision.
• Site publishers can use the data generated from website pages and the searches made to create defined audience segments based on visitors that have similar profiles. Layering this data with other demographic & psychographic data helps marketers build out personas of their key customer segments.
• Not all consumers behave the same online. Customers’ online behaviors will fall along a technology adoption curve; innovators will be excited by the latest upgrade or feature, while others will resist change. Further, there is a chasm between the early technology adopters & the mainstream market.
• When visitors return to a specific site using the same web browser, profiles generated from data collection can be used to allow advertisers to position their online ads in front of those visitors who exhibit a greater level of interest and intent for the products and services being offered.
• Many online users are concerned about privacy issues around doing this type of targeting. The behavioral targeting industry is trying to contain these concerns through education, advocacy, and product constraints to keep all information non-personally identifiable.

Key Terms

conversion rates

In internet marketing, conversion rate is the ratio of visitors who convert casual content views or website visits into desired actions based on subtle or direct requests from marketers, advertisers, and content creators.

Cookie

Also known as an HTTP cookie, web cookie, or browser cookie, it is usually a small piece of data sent from a website and stored in a user’s web browser while a user is browsing a website.

segments

Market segment — the smaller subgroups comprising a market

Example

• As part of the integration with DoubleClick, Google uses DoubleClick’s DART cookies to improve the way ads are displayed on the Google content network. The list of improvements included in-depths reports for advertisers and preventing ads from being displayed too frequently to the same user. The integration will soon expand since Google intends to offer behavioral targeting or interest-based advertising. The DoubleClick cookie contains a unique ID that is associated with all your visited pages that include ads served by DoubleClick. If you’re visiting a lot of pages related to music, Google will place you in one of the 600 predefined categories (most likely, music enthusiasts) and will use this information to show more ads about music.

Online Consumer Behavior

Introduction

When consumers visit a web site, data is gathered about their online behavior. The site collects information about the visitor that includes the following:

• Pages visited
• Amount of time spent on each page
• Links clicked
• Searches performed
• Components with which they interact

The sites collect the data, along with other factors, and create a profile that links to that visitor’s web browser.

Site publishers can then use this data to create defined audience segments based on visitors that have similar profiles. When visitors return to a specific site or a network of sites using the same web browser, those profiles can be used to allow advertisers to position their online ads in front of those visitors who exhibit a greater level of interest and intent for the products and services being offered.

On the theory that properly targeted ads will fetch more consumer interest, the publisher (or seller) can charge a premium for these ads over random advertising (or ads) based on the context of a site. Behavioral marketing can be used on its own or in conjunction with other forms of targeting based on factors like geography, demographics, or contextual web page content. It’s worth noting that many practitioners also refer to this process as audience targeting.

Behavioral Targeting

On the theory that properly targeted ads will fetch more consumer interest, the publisher (or seller) can charge a premium for these ads over random advertising (or ads) based on the context of a site. Behavioral marketing can be used on its own or in conjunction with other forms of targeting based on factors like geography, demographics, or contextual web page content. It’s worth noting that many practitioners also refer to this process as audience targeting.

Behavioral targeting refers to a range of technologies and techniques used by online website publishers and advertisers that allows them to increase the effectiveness of their campaigns by capturing data generated by website and landing page visitors.

Behavioral targeting techniques may also be applied to any online property on the premise that it either improves the visitor experience or it benefits the online property, typically through increased conversion rates or increased spending levels. Some of the early adopters of this technology/philosophy were among the following:

• Publishing sites such as HotWired
• Online advertising with leading online ad servers
• Retail
• Other e-commerce websites

What about My Privacy?

Many online users and advocacy groups are concerned about privacy issues around doing this type of targeting. This is a controversy that the behavioral targeting industry is trying to contain through education, advocacy, and product constraints to keep all personal, identifiable information from end-users or to obtain permission.

The European Commission has also raised a number of concerns related to online data collection (of personal data), profiling, and behavioral targeting, and is looking to enforce existing regulations. While behavioral targeting is not new and many companies are using it, companies like Google tried to alleviate the worries about profiling users. They won’t create sensitive interest categories, like race or religion and it won’t cross-correlate the data with other information saved in Google accounts.

Internet Usage

This is a basic chart showing online usage. It displays the types of online activity and how long the person was on those types of websites.

15.2.2: Mobile Consumer Behavior

Social media applications for mobile devices are an effective way to advertise to consumers because consumers spend so much time on their mobile devices.

Learning Objective

Describe the four types of mobile social media applications and how they are used in social media marketing

Key Points

• Consumers can receive text messages about sales and promotions at their favorite stores, restaurants, night clubs, etc. Typically, people can click on a link that will direct them to the website of interest.
• There are four types of mobile social media applications, depending on whether the message is location sensitive and/or time sensitive.
• The use of the Internet on a mobile phone has doubled in many countries since 2008.

Key Terms

MMS

Multimedia Messaging Service – standard way to send messages that include multimedia content to and from mobile phones.

SMS

A text message sent on a cell phone.

Example

• Starbucks has made it easier than ever to buy coffee. Consumers enjoy the efficiency and convenience of making purchases with their mobile devices by downloading the Starbucks app. Those who use the app receive discounts, coupons, and other promotional offers, and can find the closest Starbucks.

Mobile Consumer Behavior

Social media applications used on mobile devices are called mobile social media. In comparison to traditional social media accessed on computers, mobile social media display a higher location- and time-sensitivity. One can differentiate between four types of mobile social media applications, depending on whether the message takes account of the specific location of the user (location-sensitivity) and whether it is received and processed by the user instantaneously or with a time delay (time-sensitivity).

1. Space-timers (location and time sensitive): Exchange of messages with relevance for one specific location at one specific point in time (e.g., Facebook Places; Foursquare)
2. Space-locators (only location sensitive): Exchange of messages, with relevance for one specific location, which are tagged to a certain place and read later by others (e.g.,Yelp; Qype)
3. Quick-timers (only time sensitive): Transfer of traditional social media applications to mobile devices to increase immediacy (e.g., posting Twitter messages or Facebook status updates)
4. Slow-timers (neither location, nor time sensitive): Transfer of traditional social media applications to mobile devices (e.g., watching a YouTube video or reading a Wikipedia entry)

Since these social media applications can be used on mobile devices, they are a good target for social media marketing. For example, SMS marketing has become increasingly popular. Consumers can receive text messages about sales and promotions at their favorite stores, restaurants, night clubs, etc. Typically, people can click on a link that will direct them to the website. People are able to make purchases through the convenience of their phones.

MMS mobile marketing can contain a timed slideshow of images, text, audio, and video. Nearly all new phones produced with a color screen are capable of sending and receiving standard MMS messages. Brands are able to both send and receive rich content through MMS A2P (application-to-person) mobile networks to mobile subscribers. In some networks, brands are also able to sponsor messages that are sent P2P (person-to-person). Good examples of mobile-originated MMS marketing campaigns are Motorola’s ongoing campaigns at House of Blues venues, where the brand allows the consumer to send their mobile photos to the LED board in real time, as well as post their images online.

Push notifications were first introduced by Apple with the advent of the iPhone in 2007. They were further popularized with the Android operating system, in which notifications are shown on the top of the screen. It has helped application owners communicate directly with their end users in a simple and effective way. Users can download apps and receive notifications about promotional activities. Clicking on the notification sends the consumer directly to the necessary website, to learn more and perhaps make a purchase.

iPhones and Push Notifications

Push notifications were first introduced to smartphones, specifically the iPhone, as a new way to advertise to customers.

Advertising on web pages specifically meant for access by mobile devices is also an option. The Mobile Marketing Association provides a set of guidelines and standards that provide the recommended format of ads, presentation, and metrics used in reporting. Google, Yahoo, and other major mobile content providers have sold advertising placement on their properties for years. Advertising networks focused on mobile properties and advertisers are also available.

15.2.3: Targeting Consumers Where They Spend Time

The World Wide Web has become a key commercial center, and thus, an increasingly important place where companies target potential customers.

Learning Objective

Describe how the World Wide Web, social media, and mobile devices are transforming the way advertisers target consumers

Key Points

• The Internet, or more specifically, the World Wide Web, has eliminated time and geographic constraints for both consumers and businesses looking to connect regardless of physical location.
• Social media sites such as Facebook have proven to be lucrative channels for user insight and online buying behavior.
• Brands must modify their marketing strategies to reach consumers accessing information from mobile devices, versus desktop or laptop computes.

Key Terms

World Wide Web

Collectively, all of the web pages on the Internet which hyperlink to each other and to other kinds of documents and media.

Market

One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Target Consumers Where they Spend Time

Since an exchange involves two or more people, it is natural to think of the market in terms of people, individuals, or groups. Clearly, without the existence of people or businesses to buy and consume goods, services, and ideas, there would be little reason for marketing. Since people create markets, it is essential to target clusters of people and the locations they visit to better implement marketing strategies. The World Wide Web has become an important, albeit virtual, location where companies are spending more time and money to target and influence consumers .

Shopping Mall

More and more consumers are shopping online, rather than traditional (and physical outlets) such as stores and shopping malls.

The Rise of Social Media

The Internet, or more specifically, the World Wide Web, has eliminated time and geographic constraints for both consumers and businesses looking to connect regardless of physical location. Social media sites have further aggregated user content around similar topics, tasks and people, creating online communities that have proven to be lucrative targets for online advertising. As of December 2012, Facebook boasts over 1 billion active users, with over half accessing the social network via a mobile device. Personal information ranging from birthdays and profession, to family photos and multi-user gaming yield insightful intelligence for marketers looking to improve promotion to niche and hard-to-reach markets.

Targeting Digital Natives and Other Technology Users

Besides the rapid adoption of Internet technologies among consumers and businesses, the world is now seeing a generation of people born after the emergence of the commercial web come into adulthood. Often dubbed, “digital natives,” these individuals have only known a world with the Internet, and are just as or more comfortable interacting with brands in online rather than offline environments. More importantly, they understand the value of digital technology and use it to seek out opportunities, whether to initiate friendships, judge a brand or make a purchase.

Consumers are also increasingly accessing information from mobile devices, versus desktop or laptop computers. Busy and hectic schedules are prompting people to view and access brand messaging on the go from their Smartphones, tablets and gaming consoles. The growing legion of mobile users, as well as the increasing sophistication of online purchasers and their preference for relevant, digital content, will continue to push marketers to produce targeted, messaging for the web.

15.2.4: Making Appropriate Changes to Product, Placement, Promotion, and Pricing

Marketing teams must adjust their marketing mix strategies accordingly to adapt and succeed in a rapidly changing media environment.

Learning Objective

Explain how the World Wide Web has changed the way brands target consumers and position their brand in the marketplace

Key Points

• Although the way new products and services are marketed have changed, the primary aim of business in bringing economic and social values have not.
• Marketing organizations must be ready to alter product features and ingredients based on consumer and media praise, or backlash.
• Brands must ensure that their e-commerce websites work in concert with offline distribution channels such as fulfillment centers and warehouses.
• Pricing–the primary means by which customer judge the attractiveness of a product or service–can also be affected by social media technologies, which offer wider access to customers via online channels.
• Placement refers to providing the product at a place which is convenient for consumers to access. Marketing management must have a clear understanding of the types of distributors, of the trends influencing those distributors, and of how those distributors are perceived by customers.

Key Terms

World Wide Web

Collectively, all of the web pages on the Internet which hyperlink to each other and to other kinds of documents and media.

accountability

The state of being accountable; liability to be called on to render an account; accountableness; responsible for; answerable for.

social media

Interactive forms of media that allow users to interact with and publish to each other, generally by means of the Internet.

Example

• Nintendo Co., Ltd. (NTDOY) provides a good example of a multinational organization that has effectively implemented its marketing strategy.

Making Appropriate Changes to Product, Placement, Promotion, and Pricing

Since its emergence during the 1990s, the World Wide Web has fundamentally changed the way businesses market to end users and consumers. Today, the marketing mix–product, placement, promotion and pricing–must take into account both online and offline buyers; traditional media, and digital media. Social media technologies such as social networking sites, as well as digital platforms including SmartPhones and computer tablets, have changed the way users access and consumer information. Marketing teams must adjust their marketing mix strategies accordingly to adapt and succeed in a rapidly changing media environment .

Conversations in Social Media

Consumers intentionally and unintentionally use social media to purchase, evaluate and ultimately influence a brand’s marketing mix.

The Marketing Mix in the Digital Age

The Internet has changed the way business is done in the current world. Consequently, the variables of marketing segmentation, targeting and positioning are addressed differently. Although the way new products and services are marketed have changed, the primary aim of business in bringing economic and social values have not. Indeed, all businesses seek to implement a marketing mix that increases revenues and profit, expands brand awareness, and builds customer bases. Nevertheless, marketers must take into account the following shifts, which will inevitably effect their product, promotional and pricing strategies:

• The shift from media advertising to multiple forms of communication.
• The shift from mass media to more specialized (niche) media, which are centered on specific target audiences.
• The shift from a manufacturer-dominated market to a retailer-dominated, consumer-controlled market.
• The shift from general-focus advertising and marketing to data-based marketing.
• The shift from low agency accountability to greater agency accountability, particularly in advertising.
• The shift from traditional compensation to performance-based compensation (increased sales or benefits to the company).
• The shift from limited Internet access to 24/7 Internet availability and access to goods and services.

Each element of the marketing mix must coordinate with other elements in the marketing program to ensure maximum reach and impact.

The Marketing Mix in Social Media

User-generated content, one of the key features of social media websites, provides a direct communication channel between buyers and sellers. Products and services are meant to satisfy customer wants and needs. Comments, ‘Likes’, and other feedback mechanisms make it even easier for satisfied or disgruntled customers to voice their opinion to not only brands, but also to current and prospective customers.

Product

Marketing organizations must be ready to alter product features and ingredients as dictated by changes in consumer perception, as well as competitive and economic environments. However, product changes can be prompted by social media activity from stakeholders outside a brand’s consumer base. Greenpeace launched an attack on Nestlés use of palm oil in their products and its impact on the climate and natural ecosystems. When Nestlé attempted to respond to the criticism via Facebook, the public backlash was severe. As a result of the viral publicity, Nestlé subsequently increased auditing efforts in its supply chain, and promised to cancel contracts with any firm found to be chopping down rainforests to produce the palm oil used in its products.

Placement

Placement or distribution moves products from the producer to the consumer. With the Internet and social media websites, consumers now have access to more channels than ever to research, purchase and evaluate products. Both small and major brands offer e-commerce websites that allow web users to browse products and share their ‘wish lists’ or purchases with friends across social media websites. Amazon.com, the world’s largest online retailer , allows third-party merchants to advertise their goods on the company’s e-commerce site. This not only allows smaller retailers to take advantage of Amazon.com’s massive audience, but also utilize the Amazon.com fulfillment centers strategically placed near airports.

Pricing

Pricing–the primary means by which customer judge the attractiveness of a product or service–can also be affected due to wider access to customers via online channels. Amazon.com is primarily a retail site with a sales revenue model and generates revenue by taking a small percentage of the sale price of each item that is sold through its website. Amazon also allows companies to advertise their products by paying a fee to be listed as featured products.

Promotion

Promotion is probably the marketing mix element most impacted by social media. In essence, social media acts as a promotional element or communication channel used to reach customers. Promotional activities include advertising (by using different media), sales promotion (sales and trades promotion), and personal selling activities. It also includes sponsorship marketing, direct marketing, database marketing and public relations. Social networking sites can act as secondary or tertiary corporate sites that integrate and link these promotional elements back to the brand’s messaging. Content published by social media users can also feed into various communication channels (e.g. crowdsourcing ideas for a television commercial) and used to further expand a brand’s reach and presence.

15.2.5: Understanding Apps in a Marketing Context

Marketing campaigns can be enhanced through the use of mobile apps, designed to run exclusively on smartphones and tablets.

Learning Objective

Describe how mobile applications are used to increase customer purchases and brand awareness

Key Points

• Allowing your marketing campaign to appear on third party apps is a useful technique. Using existing apps (shown here with target audiences is a good way to get a message out, especially if the target audiences are the same.
• A company can create its own app to promote their own marketing campaigns. Certain features make apps more favorable, such as GPS and mobile coupons. Providing convenience and making the app as user-friendly as possible is the best way to attract consumers.
• Viral marketing refers to a marketing technique that uses pre-existing social networks and other technologies to produce increases in brand awareness. Using apps is a great media to create viral awareness for brands.

Key Term

Mobile application

a software application designed to run on smartphones, tablet computers and other mobile devices. They are available through application distribution platforms, which are typically operated by the owner of the mobile operating system.

Example

• Statigram is a mobile app that social networks such as Facebook use to keep track of certain metrics. It allows them to see what the most popular photos, filters, and links are being used on Instagram (a photo sharing app). Brands with instagram accounts can use these metrics to infer what products are attracting the most “likes” and traffic.

Mobile Apps

A mobile application (or mobile app) is a software application designed to run smartphones, tablet computers, and other mobile devices. They are available through application distribution platforms, which are typically operated by the owner of the mobile operating system, such as the Apple App Store, Google Play, Windows Phone Store and BlackBerry App World. Some apps are free, while others have a minimal price. Usually, they are downloaded from the platform to a target device, such as an iPhone, BlackBerry, Android phone, or Windows Phone. Sometimes they can be downloaded to less mobile computers, such as laptops or desktops.

Mobile apps were originally offered for general productivity and information retrieval, including email, calendar, contacts, stock market, and weather information. However, public demand and the availability of developer tools drove rapid expansion into other categories, such as mobile games, factory automation, GPS and location-based services, banking, order-tracking, and ticket purchases. The explosion in number and variety of apps made discovery a challenge, which in turn led to the creation of a wide range of review, recommendation, and curation sources. These include blogs, magazines, and dedicated online app-discovery services. The popularity of mobile applications has continued to rise, as their usage has become increasingly prevalent across mobile phone users. A May 2012 comScore study reported that during the previous quarter, more mobile subscribers used apps than browsed the web on their devices: 51.1% vs. 49.8% respectively.

Apps and Viral Marketing

Viral marketing is possible through the creation of apps. Viral marketing refers to a marketing technique that uses pre-existing social networks and other technologies to produce increases in brand awareness or to achieve other marketing objectives (such as product sales) through self-replicating viral processes, analogous to the spread of viruses or computer viruses. It can be delivered by word of mouth or enhanced by the network effects of the Internet and mobile networks. Viral marketing may take the form of video clips, interactive Flash games, ebooks, brandable software, images, text messages, email messages, or web pages.

When a celebrity Tweets about the latest and hottest nightclub (which can be viewed by all the followers on an app), many people will see this and re-tweet to their own followers. This creates a viral message. It’s a powerful marketing tool that requires very little effort. All it takes is one person to set the chain and the “virus” is able to spread. This can be replicated for many other products and services. Viral marketing is also possible through marketing on third party apps. Using existing apps with target audiences is a good way to get a message out, especially if the target audiences are the same. Alternatively, a company can create its own app to promote their own marketing campaigns. Certain features make apps more favorable, such as GPS and mobile coupons.

Smartphone Apps

Apps on smartphones such as this one can be used as marketing tools.

15.2.6: Trends in Social Media

Real-time and location-based web are key trends for marketers to understand as they try to develop image, create awareness, and increase sales.

Learning Objective

Give examples of social media companies use for real-time and location-based web marketing

Key Points

• Twitter set the trend for real-time services, wherein users can broadcast to the world what they are doing, or what is on their minds within a 140-character limit. Facebook followed suit with their “Live Feed” where users’ activities are streamed as soon as it happens.
• Foursquare gained popularity as it allowed for users to “check-in” to places that they are frequenting at the moment. Gowalla uses the GPS in phones to create a location-based user experience. Clixtr, though in the real-time space, is also a location-based social networking site.
• Companies such as Monster.com have been steadily developing a more “socialized” feel to their career center sites to harness some of the power of social networking sites.

Key Term

real-time web

A set of technologies and practices that enable users to receive information as soon as it is published by its authors, rather than requiring that they or their software check a source periodically for updates.

Example

• When a company puts “Follow Me” on their website, consumers understand that this request refers to Twitter. Social media allows companies to interact with consumers on multiple levels. Brands like The Gap and Express have Twitter pages where people can read about new designs and sales.

As the increase in popularity of social networking is on a constant rise, new uses for the technology are constantly being devised. At the forefront of emerging trends in social networking sites is the concept of real-time web and location-based web. Real-time allows users to contribute content, which is then broadcast as it is being uploaded, a concept much akin to live radio and television broadcasts.

Twitter set the trend for real-time services, wherein users can broadcast to the world what they are doing, or what is on their minds within a 140-character limit. Facebook soon followed suit with its “Live Feed” where users’ activities are streamed as soon as it happens. While Twitter focuses on words, Instagram, another real-time service, focuses on photo sharing wherein users can update their streams with photos while at an event or after. Facebook, however, remains the largest photo sharing site. In April 2012, the image-based social media network Pinterest had become the third largest social network in the United States.

Foursquare gained popularity as it allowed for users to “check-in” to places that they are frequenting at the moment. Gowalla is another such service that functions in much the same way that Foursquare does, leveraging the GPS in phones to create a location-based user experience. Clixtr, another photo-sharing service based in the real-time space, is also a location-based social networking site, since events created by users are automatically geotagged, and users can view events occurring nearby through the Clixtr iPhone app. Recently, Yelp announced its entrance into the location-based social networking space through check-ins with their mobile app; whether this becomes detrimental to Foursquare or Gowalla is yet to be seen, as it is still considered a new space in the Internet technology industry.

Companies have begun to merge business technologies and solutions, such as cloud computing, with social networking concepts. Instead of connecting individuals based on social interest, companies are developing interactive communities that connect individuals based on shared business needs or experiences. Many provide specialized networking tools and applications that can be accessed via their websites, such as LinkedIn. Others companies, such as Monster.com, have been steadily developing a more “socialized” feel to their career center sites to harness some of the power of social networking sites.

One popular use for this new technology is social networking between businesses. Companies have found that social networking sites such as Facebook and Twitter are great ways to build their brand image. According to Jody Nimetz, author of Marketing Jive, there are five major uses for businesses and social media: create brand awareness, manage their online reputation, recruit employees, learn about new technologies and competitors, and generate leads for potential prospects. These companies are able to drive traffic to their own online sites while encouraging their consumers and clients to have discussions on how to improve or change products or services. These social networking trends create fun ways for consumers and companies to interact with mutually beneficial outcomes. Consumers get better products and companies get the information they need to attract more consumers.

Follow Me on Twitter

“Follow Me” is now used by many brands to attract traffic to their Twitter pages.

15.3: Marketing Research and Consumer-Created Content

15.3.1: Researching Using Digital Media

Digital media technologies are enabling researchers to use increasingly sophisticated tools to collect data via the Internet.

Learning Objective

Discuss how digital media is used to conduct marketing research

Key Points

• Many online research methods are related to existing research methodologies, but re-invent and re-think them within the scope of digital technologies, rules and media associated with the internet.
• Research methods that incorporate digital media include online ethnography, online focus groups, online interviews, online clinical trials, web-based experiments and online questionnaires.
• Although the open and collaborative nature of content communities offer opportunities for research, companies also utilize private online communities focused on individual brands or customer segments.

Key Terms

ethnography

The branch of anthropology that scientifically describes specific human cultures and societies.

Homogeneous

Of the same kind; alike, similar.

Research using Digital Media

The field of Internet research is relatively new and evolving. Online research methods enable researchers to use increasingly sophisticated digital tools to collect data via the Internet. Thus, the practice is also referred to as Internet research, Internet science, or iScience. Many of these online research methods are related to existing research methodologies, but re-invent and re-think them within the scope of digital technologies, rules and media associated with the internet. The growth and rapid adoption of social media technologies has introduced a new level of complexity and opportunity for digital researchers. Inclusion of social media research can provide particularly unique insights into consumer and societal segments.

Digg Website

Social bookmarking sites such as Digg are used to gather research on different target markets.

Application of Digital Media in Research

Digital media including images, videos and audio can prove valuable sources for Internet researchers. Specific types of research methods that incorporate digital media include:

• Online ethnography
• Online focus groups
• Online interviews
• Online questionnaires
• Web-based experiments
• Online clinical trials

Advantages of Digital Research

Market research is increasingly making use of developments in Web 2.0 technologies and online communities. Social media analytics allow brands to efficiently collect and analyze qualitative research on user interaction with images, video, podcasts and other digital media. Although the open and collaborative nature of content communities offer opportunities for research, companies also utilize private online communities focused on individual brands or customer segments. These private communities can engage customer groups or target consumers who might be difficult to reach using traditional offline tactics. Companies are able to collect and aggregate this consumer information to define segments of homogeneous consumers. To supply targeted and relevant product offerings, the data is further segmented using in-house or third-party databases; personalization techniques; or opt-ins from consumers themselves.

Brands also benefit from online communities by having them on-hand to respond to questions, test hypotheses and observe trials in real-time. Digital technologies can quickly adapt to an organization’s research needs, while keeping pace with internal development processes. Social media and digital platforms also produce a consumer feedback loop where brands can continually check new ideas, such as product development, from inception to launch.

15.3.2: Consumer Privacy Issues

Consumer privacy issues revolve around the legal (and illegal) use and extraction of user data on websites and social media platforms.

Learning Objective

Explain how digital technologies expose organizations and consumers to privacy issues

Key Points

• Concern over consumer privacy dates back to the first commercial couriers and bankers, who were obligated to take strong measures to protect customer privacy to maintain competitiveness in the market.
• With the emergence and evolution of telecommunications, companies and organizations have implemented online and offline customer privacy measures to protect confidential customer data from being stolen or abused.
• While web visitors can choose to opt-in or opt-out of behavioral targeting on legitimate corporate sites, website operators that use malware collect sensitive user information without user knowledge.
• Brands are increasingly monitoring and analyzing consumer behavior on social media to refine behavioral and contextual targeting, and encourage viral, word-of-mouth advertising.

Key Term

defamation

Act of injuring another’s reputation by any slanderous communication, written or oral; the wrong of maliciously injuring the good name of another; slander; detraction; calumny; aspersion.

Consumer Privacy Issues

Commercial companies and organizations institute customer privacy measures to ensure that confidential customer data is not stolen or abused. Consumer privacy concerns date back to the first commercial couriers and bankers who were obligated to take strong measures to protect customer privacy to maintain competitiveness in the market. Modern consumer privacy law in its recognizable form originated in the regulation of telecommunication companies, since these businesses potentially had access to unlimited amounts of information regarding customers’ communications habits .

Malware

Some malware programs are designed to gather sensitive information from users without their knowledge.

However, the growing adoption of web and mobile technologies, as well as the pervasiveness of the Internet, has given rise to additional concerns over consumer privacy online. While the web provides a collaborative platform for consumers to perform searches and share and post content, it also exposes them to privacy issues including spam, data tracking, malware, identify theft, and defamation.

Since most organizations have a strong competitive incentive to retain exclusive access to the data and customer trust is a high priority, most companies take some security engineering measures to protect customer privacy. Companies that advertise via corporate websites, social media platforms, and mobile devices must also grapple with implications on the privacy and anonymity of users. Companies that place web banners on its websites, host the banner images on its servers, and uses third-party cookies enables to the company to track browsing habits of users across these sites.

Cookies, Behavioral Targeting and Malware

Most browsers can block third-party cookies using discrete mechanisms to increase privacy and reduce tracking by advertising and tracking companies. Many advertisers have an opt-out option to allow users to remove behavioral targeting advertising from their user experience. Nevertheless, consumer privacy issues abound over both legal and illegal data collection practices on the web. Website owners are obligated to give users the option to revoke permission for contextual and behavioral targeting. The United States Federal Trade Commission proposed a “Do Not Track” mechanism to allow Internet users to opt-out of behavioral targeting in 2011.

Some websites use numerous advertisements like flashing banners to distract users or feature misleading images designed to look like error messages from a user’s operating system rather than advertisements. Websites that unethically use online advertising for revenue frequently do not monitor where their advertisements link on the web. This allows advertisements to lead to sites with malicious software or adult material.

Some sites attach malware to the computers of unsuspecting users. Malware is an external application that alters system settings (like a browser’s home page), spawns pop-ups, and inserts advertisements into non-affiliated web pages. These applications are also referred to as spyware or adware, as they mask questionable activities by performing services such as displaying the weather or providing a search bar. Typically, malware is difficult to remove or uninstall, making it even more difficult for less computer-savvy users to protect themselves from these programs. Malware also makes users vulnerable to the theft of sensitive information including social security numbers and credit card data.

Consumer Privacy Issues on Social Media

Social media sites, particularly social networks, have been defined as the new public sphere where individuals freely discuss societal problems. Thus, the mere existence of social media sites gives access to such discourse. Site mechanisms like comment boxes, wall posts, “Like” buttons, and widgets facilitate the ability to share and post vast amounts of information with multiple users. Brands are increasingly monitoring and analyzing consumer behavior on social media to refine behavioral and contextual targeting and encourage viral, word-of-mouth advertising.

With so many Internet users functioning as content creators and distributors, questions around privacy and anonymity have emerged in court cases throughout the United States. According to the First Amendment of the Constitution of the United States, “Congress shall make no law…abridging the freedom of speech.” Consequently, the U.S. Supreme Court has declared that online speech is entitled to the same constitutional protections as traditional speech offline. Despite consumer willingness to share and post brand-related content, companies that engage in social media advertising must be cognizant of their increased exposure to litigation on social media channels.

15.3.3: Avoiding Potential Fraud

Consumer education, web security tactics, and government legislation are measures used to protect consumers from potential fraud.

Learning Objective

Give examples of online fraudulent techniques, and the consumer tools used to fight them

Key Points

• Phishing and pharming are common techniques used by fraudsters to steal sensitive information from vulnerable online consumers.
• In addition to legislation, user training, public awareness, and technical security measures, several companies specialize in providing consumers with identity theft protection services.
• Erasing hard drives and clearing private data from web browsers are habits individual consumers can practice to protect from potential fraud.
• Some companies attempt to defraud consumers with undisclosed endorsements and other unclear or misleading messaging. 

Key Terms

hacking

Unauthorized attempts to bypass the security mechanisms of an information system or network. See also cracker.

IP

Internet Protocol

Avoiding Potential Fraud

Internet fraud can occur in chat rooms, email, message boards, or on websites. Phishing is an example of a social engineering technique used to deceive users and exploit the poor usability of current web security technologies. Some of these techniques include:

PayPal Checklist

Online merchants such as PayPal often provide security tips to help consumers protect their personal information.

• Communications purporting to be from popular social web sites, auction sites, online payment processors, or IT administrators
• Emails containing links to websites infected with malware, also known as email spoofing
• Instant messaging directing users to enter details at a fake website that has a look and feel almost identical to the legitimate one

Other online fraud, such as pharming, occurs when a hacker redirects website traffic from a legitimate website to the hacker’s fraudulent website by exploiting vulnerabilities in the Domain Name System (DNS). By corrupting a computer’s knowledge of how a site’s domain name maps to its IP address, the attacker causes the victim’s computer to communicate with the wrong server. This technique, which is also known as domain hijacking, uses a fake website posing as a legitimate site. The site typically requests the user’s personal information, allowing the attacker to “phish,” or steal the victim’s passwords, PIN, or bank account number.

In addition to phishing and illegal hacking, online consumers can also fall victim to purchase frauds, car theft (via websites such AutoTrader), real estate fraud (via websites such as Craigslist), illegal wire transfers, online auctions, retail schemes and call tag scams. In a call tag scam, criminals use stolen credit card and tracking information to purchase goods online for shipment to the legitimate cardholder.

Consumer Tools for Fighting Internet Fraud

Attempts to deal with the growing number of reported phishing incidents and other Internet fraud include legislation, user training, public awareness and technical security measures. There are also several companies that specialize in monitoring and alerting users to any activity involving their personal data. If someone attempts to steal the user’s online identity, these companies assist the user with securing their online information and paying for the services needed to help them recover their information and resolve the situation.

Another tactic users employ to avoid fraud is erasing hard drives when throwing away old computers. Computers include a wealth of personal information such as bank account numbers and tax information. Erasing the hard drive can reduce the possibility of identity theft and other forms of fraud. Consumers are repeatedly warned to be cautious when donating computers or cell phones and other digital devices to unknown organizations.

Clearing private data such as individual browsing history can also reduce potential fraud. Internet browsers usually provide a “preferences” dialogue that allows web users to delete all history, including cookies, the Internet cache, saved form data, passwords and Internet downloads.

Regulations Surrounding Disclosure of Paid Relationships

Finally, it’s important to not engage in fraudulent behavior with the intent of deceiving the consumer. There are important Federal Trade Committee regulations around what constitutes adequate disclosure, something to keep in mind when using influencers or celebrities as part of your social media marketing campaign. 

Essentially, anytime product or money changes hands the person conveying the message—usually the celebrity or other individual who is doing the broadcasting—must disclose that they have been paid to post about a topic or product. That’s done so that the audience does not falsely believe the endorsement is “organic” and that the celebrity is promoting the product because he or she uses it. Doing so allows the audience to make an informed decision and not be unduly swayed. 

15.3.4: Digital Media and Intellectual Property Issues

The proliferation of digital assets has created questions about how to apply traditional copyright laws to intellectual property on the web.

Learning Objective

Examine how digital media and computer network technologies have reshaped intellectual property issues

Key Points

• Copyright is a legal concept enacted by most governments to provide creators of original work exclusive rights to the creation for a limited time.
• Intellectual property rights encompass copyrights, trademarks, patents, industrial design rights, and trade secrets depending on the jurisdiction.
• The development of digital media and computer network technologies has prompted the reinterpretation copyright for digital creations and the proposal of Internet copyright laws such as SOPA and PIPA.
• Critics of intellectual property laws cite concerns over monopolistic practices that can harm health, stall progress, and benefit concentrated interests to the detriment of the masses.

Key Terms

patent

A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention; a letter patent.

copyleft

The philosophy of using copyrights to enforce freedom of information, especially software source code.

Trademark

A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products.

Intellectual Property Issues of Digital Media

Copyright is a legal concept enacted by most governments to provide creators of original work exclusive rights to the creation for a limited time. Generally, it is “the right to copy,” but also gives the copyright holder rights including:

Copyright

The widespread sharing and repurposing of online content has led to concerns over copyright issues.

• The right to be credited for the work
• The right to determine who may adapt the work to other forms, who may perform the work, and who may financially benefit from it

It is an intellectual property form (like the patent, the trademark, and the trade secret) applicable to any expressible form of an idea or information that is substantive and discrete. Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights is recognized. Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; discoveries and inventions; and words, phrases, symbols and designs.

Intellectual property rights encompass copyrights, trademarks, patents, industrial design rights and trade secrets depending on the jurisdiction. Although copyright laws protecting intellectual property are considered territorial and restricted to the territory of their origin, most countries are parties to at least one or more international copyright agreement. Most jurisdictions recognize copyright limitations, allowing “fair” exceptions to the creator’s exclusivity of copyright, and giving users certain rights.

Copyrights in the Digital Space

The development of digital media and computer network technologies have prompted reinterpretation of these exceptions. Social media and other digital technologies encouraging the sharing and re-purposing of content across different communication channels have introduced new difficulties in enforcing copyright, and inspired additional challenges to the basic legal philosophy of copyright. To protect their intellectual property both offline and online, businesses that rely heavily on copyright protection laws have advocated the extension and expansion of copyrights to the digital space.

The global entertainment industry in particular has fought diligently against the free use, copying, and distribution of electronic music, videos, and movies. Some critics label the unauthorized distribution and copying of commercial products as piracy, or digital copyright infringement. Laws during the 1990s and 2000s have been passed to update copyright law to extend to digital properties found on the Internet. For example, U.S. legislation, including the Digital Millennium Copyright Act (DMCA), criminalizes the production and dissemination of technology, devices, or services intended to circumvent measures (commonly known as digital rights management, or DRM) that control access to copyrighted works. It also criminalizes the act of circumventing an access control, whether or not there is actual infringement of copyright itself. More recent bills introduced to Congress related to digital copyrights include the Stop Online Piracy Act (SOPA) and PIPA (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act) in 2011.

In addition to protecting the financial incentives of intellectual property, the WIPO treaty and several related international agreements are based on the premise that protecting intellectual property rights is essential to maintaining economic growth. Not only does the protection of intellectual property give statutory expression to individuals and organizations in their creations, it also gives public rights for access to those creations. These protections are also meant to promote creativity, the dissemination and application of the creation, and encourage fair trading to promote economic and social development.

Critics of Intellectual Property Laws

However, critics of intellectual property laws argue that these measures attempt to simplify complex copyright laws by lumping them under a collective term. Copyleft and free software activists have criticized the implied analogy of digital property with physical property such as land or cars. They argue such an analogy fails because physical property is generally rivalrous, while intellectual works are non-rivalrous (that is, if one makes a copy of a work, the enjoyment of the copy does not prevent enjoyment of the original).

Some critics of intellectual property, such as those in the free culture movement, point to intellectual monopoly privilege as harming health, preventing progress, and benefiting concentrated interests to the detriment of the masses. These critics also argue that the public interest is harmed by ever expansive monopolies in the form of copyright extensions, software patents, and business method patents. Some libertarian critics of intellectual property have argued that allowing property rights in ideas and information creates artificial scarcity and infringes on the right to own tangible property.

14.1: Personal Selling

14.1.1: Defining Personal Selling

Learning Objective

Compare and contrast sales and marketing functions within organizations

Key Points

• The personal selling process is a 7 step approach: prospecting, pre-approach, approach, presentation, meeting objections, closing the sale, and follow-up. Each step of the process has sales-related issues, skills, and training needs, as well as marketing solutions to improve each discrete step.
• Marketing and sales differ greatly, but have the same goal. Marketing improves the selling environment and plays a very important role in sales.
• Many companies find it challenging to get marketing and sales on the same page. The two departments, although different in nature, handle very similar concepts and have to work together for sales to be successful.

Key Term

sales process engineering

The systematic application of scientific and mathematical principles to achieve the practical goals of a particular sales process. Selden pointed out that in this context, sales referred to the output of a process involving a variety of functions across an organization, and not that of a “sales department” alone. Primary areas of application span functions including sales, marketing, and customer service.

Introducing Personal Selling

Personal selling is when a company uses salespersons to build a relationship and engage customers to determine their needs and attain a sales order that may not otherwise have been placed. The personal selling process is a seven step approach: prospecting, pre-approach, approach, presentation, meeting objections, closing the sale, and follow-up.

Personal Sales Meeting

Meeting the customer face-to-face to makes the sales process more personalized.

The sales cycle, more generally speaking, turns leads into prospects, suspects into prospects and prospects into customers.

Prospecting is the step where salespeople determine leads or prospects. The pre-approach is used for preparing for the presentation through customer research and goal planning for the presentation. The approach is when the salesperson initially meets with the customer and determines a customer’s wants and needs. Once the salesperson knows the needs, he or she is ready for the presentation that will entice the customer to commit. After the presentation, a salesperson must meet objections or address customer concerns. Gaining commitment comes next. Finally, the salesperson must remember to follow up after the sale is made.

The sales department would aim to improve the interaction between the customer and the sales facility or mechanism and or salesperson. Sales management would break down the selling process and then increase the effectiveness of the discrete processes as well as the interaction between processes. For example, in many out-bound sales environments, each step in the typical process outlined above has sales-related issues, skills, and training needs, as well as marketing solutions to improve each discrete step.

The Relationship of Sales & Marketing

Marketing and sales differ greatly, but have the same goal. Marketing improves the selling environment and plays a very important role in sales. If the marketing department generates a list of potential customers, sales will benefit. The goal of a marketing department is to increase the number of interactions between potential customers and the organization. Achieving this goal may involve the sales team using promotional techniques such as advertising, sales promotion, publicity, creating new sales channels, or creating new products.

The relatively new field of sales process engineering views “sales” as the output of a larger system, not just as the output of one department. The larger system includes many functional areas within an organization. From this perspective, “sales” and “marketing,” among others, represent a number of processes whose inputs and outputs supply one another to varying degrees. In this context, improving an “output” (such as sales) involves studying and improving the broader sales process, as in any system, since the component functional areas interact and are interdependent.

Most large corporations structure their marketing departments in a similar fashion to sales departments and the managers of these teams must coordinate efforts in order to drive profits and business success. For example, an “inbound” focused campaign seeks to drive more customers “through the door”, giving the sales department a better chance of selling their product to the consumer.

Many companies find it challenging to get marketing and sales on the same page. The two departments, although different in nature, handle very similar concepts and have to work together for sales to be successful. Building a good relationship between the two that encourages communication can be the key to success – even in a down economy.

14.1.2: Value of Personal Selling

Learning Objective

Discuss the advantages and disadvantages of personal selling

Key Points

• Since the effects of marketing are difficult to measure, personal selling gives insight into customer habits and responses to a particular marketing campaign or product offer.
• Sales people can tailor their presentations to fit the needs, motives, and behavior of individual customers. As sales people see the prospect’s reaction to a sales approach, they can immediately adjust as needed.
• High cost is the primary disadvantage of personal selling. With increased competition, higher travel and lodging costs, and higher salaries, the cost per sales contract continues to increase.

Key Term

marketing mix

A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.

Personal selling aims to improve the interaction between the customer and the sales facility, and/or salesperson. Since the effects of marketing are difficult to measure, personal selling gives insight into customer habits and responses to a particular marketing campaign or product offer.

Making the Sale

Personal selling allows flexibility in presentation to generate sales.

Advantages of Personal Selling

The most significant strength of personal selling is its flexibility. Salespeople can tailor their presentations to fit the needs, motives, and behavior of individual customers. As sales people see the prospect’s reaction to a sales approach, they can immediately adjust as needed.

Personal selling also minimizes waste effort. Advertisers typically expend time and money to send a mass message about a product to many people outside the target market. In personal selling, the sales force pinpoints the target market, makes a contact, and expends effort that has a strong probability of leading to a sale.

Consequently, an additional strength of personal selling is that measuring effectiveness and determining the return on investment are far more straightforward for personal selling than for other marketing communication tools, where recall or attitude change is often the only measurable effect.

The fourth benefit of personal selling is that a salesperson is in an excellent position to encourage the customer to act. The one-on-one interaction of personal selling means that a salesperson can effectively respond to and overcome objections (customers’ concerns or reservations about the product) so that the customer is more likely to buy. Sales people can also offer many specific reasons to persuade a customer to buy, in contrast to the general reasons that an ad may urge customers to take immediate action.

A final strength of personal selling is the multiple tasks the sales force can perform. For instance, in addition to selling, a sales person can collect payment service or repair products, return products, and collect product and marketing information. In fact, sales people are often best at disseminating negative and positive word-of-mouth product information.

Disadvantages of Personal Selling

High cost is the primary disadvantage of personal selling. With increased competition, higher travel and lodging costs, and higher salaries, the cost per sales contract continues to increase. Many companies try to control sales costs by compensating sales representatives based on commission only, thereby guaranteeing that salespeople get paid only if they generate sales. However, commission-only salespeople may become risk-averse and only call on clients who have the highest potential return. These sales people, then, may miss opportunities to develop a broad base of potential customers that could generate higher sales revenues in the long run.Companies can also reduce sales costs by using complementary techniques, such as telemarketing, direct mail, toll-free numbers for interested customers, and online communication with qualified prospects. Telemarketing and online communication can further reduce costs by serving as an actual selling vehicle. Both technologies can deliver sales messages, respond to questions, take payment, and follow up.

A second disadvantage of personal selling is the problem of finding and retaining high quality people. First, experienced sales people sometimes realize that the only way their income can outpace their cost-of-living increase is to change jobs. Second, because of the push for profitability, businesses try to hire experienced salespeople away from competitors rather than hiring college graduates, who take three to five years to reach the level of productivity of more experienced salespeople. These two staffing issues have caused high turnover in many sales forces.

Another weakness of personal selling is message inconsistency. Many salespeople view themselves as independent from the organization, so they design their own sales techniques, use their own message strategies, and engage in questionable ploys to create a sale. Consequently, it is difficult to find a unified company or product message within a sales force, or between the sales force and the rest of the marketing mix.

A final weakness is that sales force members have different levels of motivation. Sales people may vary in their willingness to make the desired sales calls each day; to make service calls that do not lead directly to sales; or to use new technology, such as a laptop, e-mail, or the company’s Web site. Finally, overzealous sales representatives may tread a thin line between ethical and unethical sales techniques. The difference between a friendly lunch and commercial bribery is sometimes blurred

14.2: The Personal Selling Process

14.2.1: Generating Needs

Prospecting starts with defining a narrow target market, identifying the customer’s wants, and then offering custom solutions.

Learning Objective

Explain tools used in evaluating customer needs

Key Points

• Where the potential market is very wide, there are significant advantages to limiting oneself to just one or two specialized market segments.
• To identify which particular market segment to aim for, a salesperson should analyze the profile of their existing customers, and secure a picture of what their “ideal customer” should look like. The profile should include psycho-demographic characteristics, such as age, sex, jobs, and interests.
• It is important to find out what customers really need, customize products to meet those needs, and make sure your products fit into the customer’s existing world.

Key Term

unique selling proposition

Any aspect of an object that differentiates it from similar objects.

Prospecting for customers is the first step to selling. The entire object of any prospecting must be to find sales leads that can eventually be translated into sales turnover. Effective prospecting requires a systematic methodology. The essential rule is to prospect all the time, and not just when the list of potential people on whom to call runs out.

Narrowing the Target Market and Customer Field

Defining a Target Market

Prospecting in a defined target market that mostly contains characteristics of an ideal customer will help in making the sale.

Where the potential market is very wide, there are significant advantages to limiting oneself to just one or two specialized market segments. First, a salesperson does not have the time to make everyone his customer. Second, there may be some products in a salesperson’s product range that match up better to one industry or market segment than another. If they can tailor their products to secure a unique selling proposition in that particular market segment, they will meet less competition.

By focusing on a particular industry, a salesperson can gradually acquire technical knowledge of his customer’s industry, thus enabling them to develop empathy and talk on equal terms with their customers. To identify which particular market segment to aim for, a salesperson should analyze the profile of their existing customers, and secure a picture of what their “ideal customer” should look like. The profile should include psycho-demographic characteristics, such as age, sex, careers, and interests, since all will impact where or when they buy. If viable, the salesperson should also consider using mail shots and advertising to evaluate their potential market.

Having decided on a specific market, the salesperson should try to limit their prospecting to remain within that market. The ideal customer (i.e., the one who buys as soon as the salesperson talks to them) is probably non-existent, but the closer a salesperson’s prospect matches that ideal customer profile, the fewer sales objections will arise.

Identifying a Customer’s Wants

A process to determine the actual needs of consumers requires the identification of the market factors that produce them. In this process, companies should find real consumption motivators that eventually evolve into product offerings. Furthermore, a correct business definition leads to a natural market orientation; for instance, Charles Revson’s famous quote, “in the factory we make cosmetics; in the drug store we sell hope,” allowed the company to develop cosmetic products based on women’s hopes rather than product features.

Several potential pitfalls should be avoided:

• the natural tendency to impose a personal point of view when launching a new product or entering a new market.
• simple imitation about competitors’ moves.
• lack of sufficient research and market knowledge to produce market-proved ideas.

A framework has been proposed to align customer’s needs and wants with companies capabilities. This framework was introduced by Sherri Dorfman in her 2005 marketing article, entitled “What do Customers Really, Really Want”.

Three Step Process to Develop a Market Orientation

Step 1. Discovery: Finding out What Customer’s Need

Learn about customer needs and priorities to identify opportunities in the company to fulfill these needs, and to create new or enhanced product offerings. These ideas must be incorporated in a market research process involving customers and other clients and suppliers in the Value Chain.

Step 2. Definition: Customizing the Offering to Meet Customer Needs

In this step, Dorfman proposes prioritizing features and benefits identified by clients, suppliers, and customers. Different qualitative research techniques such as in-depth interviews, ethnographies, and focus group sessions permit the identification of the core market needs.

Step 3. Validation: Ensuring Offerings fit within Customer’s World

A salesperson must understand their products thoroughly, and ensure that there is a match between product, benefits, and customer needs. Further communication with consumers validate the final definition of a market-based product or service. This validation takes place as the prototypes are assessed by consumers to identify potential problems and to smooth out design issues.

All these models take into account the so-called end consumer perspective, which implies that consumers buying, using, or recommending the products are the driving force behind successful marketing efforts.

14.2.2: Preapproach

The preapproach is when you gather relevant information regarding the prospect in order to create a customized sales presentation.

Learning Objective

Examine the elements of the sales pre-approach used in personal selling and sales promotion

Key Points

• To create a customized presentation and sales pitch, a salesperson must spend time defining their goals, researching the client’s needs and problems, and asking what information the client needs before choosing to buy the offering.
• The salesperson must ask if the product meet’s the client’s needs, if the client has the finances to make a purchase, and if the audience of the presentation is the actual decision-maker.
• Through careful planning, salespeople can focus on important customer needs and communicate the relevant benefits to the buyer, address potential problem areas prior to the sales presentation, and enjoy the self-confidence that arises after thorough preparation.

Key Terms

preapproach

the stage of the selling process that consists of customer research and goal planning for the presentation

cold call

A sales call either by telephone or personal presence, made without a referral or without preparing the recipient of the call.

After the prospect has been qualified, the salesperson continues to gather information about the prospect. The preapproach can be defined as obtaining as much relevant information as possible regarding the prospect prior to making a sales presentation. The knowledge gained during the preapproach allows the tailoring of the sales presentation to the particular prospect.

Researching the Client

To create a customized presentation and sales pitch, a salesperson must spend time defining their goals researching the client. Several factors including the following must be considered prior to approaching a customer:

1. The objective or objectives of the presentation.
2. What are the buyer’s needs? What is the buying situation? What is the buyer’s problem that can be solved with the salesperson’s offering?
3. The type of presentation to be planned and delivered.
4. What information will the prospect require before they will choose to buy my offering? The salesperson should know the requirements that a potential customer has set for his future, the priorities that he has decided, and in all probability, his financial resources. Failing to analyze a prospect is the main reason for a great deal of wasted prospecting spent on a customer who should have been promptly discarded after due research.

Gather Information from Printed Materials

A salesperson should read all he can about his market, using information that is readily and freely available in libraries, reference books, trade directories, newspapers, and magazines. Local newspapers are full of names, addresses, and occupations of many people in the community, who could use his services.

Researching the Client

Using printed materials can aid in creating a customized sales presentation to a client.

Gather Information from Contacts

A salesperson can use personal and previous business contacts to gather information on new clients and their preferences. Personal contacts can also be a great source for mining information. Aside from friends and family, there are also professionals a salesperson has dealt with in his own life such as neighbors, real estate agents, decorators, and fellow PTA members. By leveraging the established relationships a salesperson has with these contacts, he will find it easier than cold calling to get the inside track on a new customer.

Does Your Product Meet the Buyer’s Needs?

A salesman’s product must be relevant to his prospect. If no one’s requirements seem to match with what he is selling, then he is either moving in the wrong circles or selling the wrong product. The unfortunate truth is that many sales are attempted to prospects who could be eliminated as possibilities by a little research.

Does Your Prospect Have the Finances to Buy?

The salesman must establish on the outset whether the prospect can afford to buy. The information required can generally be established very early in a sales interview through a simple trial close such as, “If I can convince you that…, would you be prepared to consider…..? ‘” You are not asking for a decision, and the prospect, in answering, is merely saying, “You have not convinced me yet, but if you can, I would be prepared to…” Failing to establish this initial willingness or ability to invest will result in endless, unprofitable discussions.

Is Your Prospect the Decision Maker?

It is vital to know who the decision-maker is, so as to save a great deal of time in having to redo yet another sales presentation. It is sometimes necessary to disbelieve someone who says that he is the decision maker. It is possible that someone who does not have the authority may well be reluctant to say so, possibly to pre-screen the salesperson first, before allowing him to meet the actual decision-maker.

Benefits of Careful Planning & Research

Careful planning offers advantages for both the salesperson and the buyer. Through careful planning salespeople can:

1. Focus on important customer needs and communicate the relevant benefits to the buyer.
2. Address potential problem areas prior to the sales presentation.
3. Enjoy self-confidence, which generally increases with the amount of planning done by the salesperson.

In planning the presentation, the salesperson must select the relevant parts of his knowledge base and integrate the selected parts into a unified sales message. For any given sales situation, some of the facts concerning the salesperson’s company, product, and market will be irrelevant, and the challenge is in the task of distilling relevant facts from the total knowledge base.

14.2.3: Approach

How you approach a sales pitch in terms of attitude, prospect knowledge, and customized product will determine your success.

Learning Objective

Describe the characteristics and requirements for a sales approach as part of personal selling and sales promotion

Key Points

• Every salesperson should prepare a customized elevator pitch to quickly entice the customer to view the product offered as the solution to his needs.
• Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. Solution selling is when the salesperson focuses on the customer’s pain and addresses the issue with his offerings.
• First impressions are vital to making a successful sales call. Showing genuine but tempered enthusiasm about the product, making eye contact, and actively listening to whomever you come in contact with are just a few suggestions that will create a good impression.

Key Term

gatekeeper

A person or group who controls access to something or somebody.

Getting in the Door

Every salesperson should prepare a customized elevator pitch to quickly entice the customer to view the product offered as the solution to his needs. The elevator pitch simply defines a product, service, or organization and its value proposition. The term “elevator pitch” reflects the idea that it should be possible to deliver the summary in the time span of an elevator ride, or approximately thirty seconds to two minutes. Other techniques to get a foot in the door include leveraging common contacts or referrals and simply building a relationship through conversation with the gatekeepers to get information on the best way to approach the purchase decision-maker.

Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. Direct selling allows salespersons to present, demonstrate, and sell products and services to consumers in an environment that is comfortable to the client. According to the World Federation of Direct Selling Associations, consumers benefit from direct selling because of the convenience and service it provides, such as the personal demonstration and explanation of products, easy delivery, and generous satisfaction guarantees.

Product Demonstration

Direct selling through product demonstrations can give prospects a chance to try out the product and see if it is a fit for their company.

Solution selling is when the salesperson focuses on the customer’s pain and addresses the issue with his offerings. The resolution of the pain is what constitutes a true “solution. ” A limitation of this approach is that not all customers buy to address a “pain”, and not every need is a problem requiring a solution. Keith M. Eades, author of The New Solution Selling, defines a solution as a “a mutually agreed-upon answer to a recognized problem. In addition, a solution must also provide some measurable improvement. By measurable improvement, I mean there is a before and might be after. Now we have a more complete definition of a solution; It’s a mutually shared answer to a recognized problem, and the answer provides measurable improvement. “

The Importance of First Impressions

First impressions are vital to making a successful sales call. Showing genuine but tempered enthusiasm about the product, making eye contact, and actively listening to whomever you come in contact with are just a few suggestions that will create a good impression. Paying attention to attire is also important. If you are making a sales call to a construction site, you would not wear a full business suit. Attire should be similar to those who you are pitching to, but at least two steps up in terms of clean presentation and apparel.

The average salesperson will also always have a natural negativity toward approaching someone new. Yet it cannot be over-emphasized that, however good his negotiating or closing skills, he will always fail in his selling if he isn’t comfortable approaching new prospects. Since time is a commodity, utilizing the pre-approach company research to create a customized offer will make the client more receptive to hearing about it over a sales call.

14.2.4: Sales Presentation

A well-prepared sales presentation will engage prospects with relevant information and entice them to make a purchase commitment.

Learning Objective

Describe the characteristics of a sales presentation within the context of personal selling and sales promotion

Key Points

• A sales pitch is a planned presentation of a product or service designed to initiate and close a sale. A well-prepared presentation should keep in mind the audience and their needs, as well as be clear and concise in tone and content.
• The first visual and audible impression upon a market or client can appeal to any of the five senses to initiate chemistry between the buyer and the seller.
• Usually the first sentence of a sales pitch is supposed to be either an attention-grabbing statement or a positive statement introducing the best information about the provider of goods or services. A method is usually selected depending on the attention span available from the prospective client.

Key Term

Fast-Moving Consumer Goods

These are products that sell quickly and at a relatively low cost. Examples include non-durable goods such as soft drinks, toiletries, and grocery items. Though the absolute profit made on FMCG products is relatively small, they generally sell in large quantities, so the cumulative profit on such products can be substantial.

A sales pitch is a planned presentation of a product or service designed to initiate and close a sale. A sales presentation is essentially designed to be either an introduction of a product or service to an audience who knows nothing about it, or a descriptive expansion of a product or service that an audience has already expressed interest in. A well-prepared presentation should keep in mind the audience and their needs, as well as be clear and concise in tone and content.

Elements of Sales Presentation

The first visual and audible impression upon a market or client can appeal to any of the five senses to initiate chemistry between the buyer and the seller.

At least a slight modification to what has worked in the past is always required for the pitch to be authentic and effective. Otherwise the tone would not fit the seller’s outfit, which might lead to the candidate deeming him a fake in a critical situation.

For a strikingly good pitch, one must know exactly what the other party wants and doesn’t want. The salesperson should have as much information as possible about the candidate being pitched to. It is important to focus on a virtual balance of the candidate’s needs and wants to maximize one’s leverage when pitching.

A salesperson gets only one chance to make a good first impression. At least two senses must connect: vision and hearing. But the more one can connect at a single point of impact, the better.

Opening Statement

Usually the first sentence of a sales pitch is supposed to be either an attention-grabbing statement or a positive statement introducing the best information about the provider of goods or services. A method is usually selected depending on the attention span available from the prospective client.

In case of consumer categories who have less attention span, the first method of attention-grabbing is usually a question or statement that might surprise or shock the listener. The listener likely turns back for an explanation, and then the remaining sales talk or pep talk happens. Normally ladies with children, shopkeepers, and people in a hurry give less attention. Sellers of low-value, fast-moving consumer goods are usually known to deploy the first method.

In the second strategy, a “positive statement” is adopted in solution selling and in direct selling to corporate and or high value and or capital goods selling. Here, the purpose of the positive statement is to emphasize a particular positive aspect of a provider to brand it according to seller’s situational need.

An effective sales professional must know how to combine effort on sales and marketing to overcome all resistance of a poorly prepared pitch.

Goal of a Presentation

All sales presentations are not designed to secure an immediate sale. Whether the objective is an immediate sale or a future sale, the chances of getting a positive response from a prospect are increased when the salesperson:

1. Makes the presentation in the proper climate.
2. Establishes credibility with the prospect.
3. Ensures clarity of content in the presentation.
4. Controls the presentation within reasonable bounds.

Billy Mays

Billy Mays was famous for his sales pitches on TV for products such as Oxi-Clean. He was energetic and memorable.

14.2.5: Handling Objections

The prospect may object to points made in the presentation, so the salesperson should be prepared to listen and address those concerns.

Learning Objective

Describe the types of buyer’s objections and how to address them

Key Points

• Sales objections can be defined as statements or questions raised by the prospect which can indicate an unwillingness to buy. The objections of customers include objections to prices, products, services, the company, time, or competition.
• Salespeople can overcome objections by following certain guidelines such as viewing objections as selling tools, being aware of the benefits of their product, and creating a list of possible objections and the best answers to them prior to the presentation.
• Respecting the concerns of the buyer demonstrates that the seller is appreciative of his concerns. It is important to not become defensive, as the buyer is not criticizing you the seller, but wants to make sure he makes the best decision for the company.

Key Term

rapport

A relationship of mutual trust and respect.

Expect Objections

During the course of the sales presentation, the salesperson can expect the prospect to object to one or more of the points made. Sales objections can be defined as statements or questions by the prospect which can indicate an unwillingness to buy. Salespeople can learn to handle customer’s objections by becoming aware of the reasons for them.

The objections of customers include objections to prices, products, services, the company, time, or competition. Customers may have gotten into the habit of raising objections, have a desire for more information, or have no need for the product or service.

Meeting Objections

Salespeople can overcome objections by following certain guidelines such as viewing objections as selling tools, being aware of the benefits of their product, and creating a list of possible objections and the best answers to them prior to the presentation. Objections can generally be handled easier through listening, clarifying, respecting, and responding.

Handling Objections

Any presentation of a product or service will raise objections from the prospect. The best way to cope is by anticipating the objections and providing thorough answers.

The purpose of listening to the buyer is to gain as much knowledge as possible about their objection. Showing interest can also show prospects that you want to know their concerns in order to help them. Do not interrupt the buyer while he is speaking, as doing so can quickly close the deal and result in a loss of the sale.

Clarifying the objection can allow you to ask questions to gain more information. Be sure to not overwhelm the buyer with questions. It also allows you to determine if you understand the buyer to ensure there are no misunderstandings.

Respecting the concerns of the buyer demonstrates that the seller is appreciative of his concerns. It is important to not become defensive, as the buyer is not criticizing you the seller, but wants to make sure he makes the best decision for the company.

Responding to the objection is important. The seller does not just want to ignore the buyer and his concerns. It shows they value their buyer-seller relationship and will hopefully not damage the rapport that developed.

14.2.6: Closing the Sale

Closing refers to the achievement of the desired outcome, which may be the exchange of money or the acquiring of a signature.

Learning Objective

Outline “closing the sale” importance, characteristics and types

Key Points

• Closing is distinguished from ordinary practices such as explaining a product’s benefits or justifying an expense. It is reserved for more artful means of persuasion.
• Situations where a closing attempt is logical include when a presentation has been completed and all objections have been answered, or when the buyer indicates an interest in the product by giving a closing signal.
• The assumptive close is one of the most commonly used closing techniques. The salesperson assumes the customer has made the decision to buy, so the salesperson will tell them what they are going to do to complete the sale.

Key Term

assumptive

Forward or presumptuous.

Closing the Sale

Closing is a sales term which refers to the process of making a sale. The term can also be used to refer to the achievement of a desired outcome, such as the exchange of money or the acquiring of a signature . Salespeople are often taught to think of targets not as strangers, but rather as prospective customers who already want or need what is being sold. Such prospects only need to be “closed. “

Closing the Sale

Signing a contract indicates a commitment to buy, so the salesperson is said to have “closed. “

Closing is distinguished from ordinary practices such as explaining a product’s benefits or justifying an expense. It is reserved for more artful means of persuasion, which some compare with conning. For example, a salesman might mention that his product is popular with a person’s neighbors, knowing that people tend to follow perceived trends. This is known as the Jones Theory. Nonetheless, closing is a key part of the sales process.

The evaluation of salespersons is based heavily on their ability to close sales. Certainly, other factors are considered in evaluating performance, but the bottom line for most salespeople is their ability to consistently produce profitable sales volume. Individuals who perform as salespeople occupy a unique role: they are the only individuals in their companies who bring revenue into the company.

There may be several opportunities to attempt to close during a presentation, or opportunity may knock only once. In fact, sometimes opportunities to close may not present themselves at all and the salesperson must create an opportunity to close. Situations where a closing attempt is logical include: when a presentation has been completed without any objectives from the prospect, when the presentation has been completed and all objections and questions have been answered, and when the buyer indicates an interest in the product by giving a closing signal, such as a nod of the head.

Most Common Closing Techniques

Assumptive closing – This technique is most commonly used in cold calling after impulsing a customer. This involves making the assumption that the customer has made the decision to buy. The salesperson will tell them what they are going to do to complete the sale. For instance, the salesperson might say, “Just pass me your credit card and I’ll start the paper work for you. Thanks. “

Direct close: simply ask for the order – Examples of this technique include: “Do I have your authority to proceed with this order? ” / “When would you like delivery? ” / “Would you sign this order form please? ” / “May I confirm your delivery and invoice address are correct for this order? “

The either / or choice close – Examples of this technique include: “Would you like red or green? ” / “Would you like the standard or the enhanced package? “

The half Nelson hold close – This technique is used to “strong arm” a prospect after he or she requests something. For instance, the salesperson might ask, “Will you go ahead if we can provide that? “

Duke Of Wellington close – In the Duke Of Wellington close, you make a list or table of positive and negative points, then take each negative in turn and convert it into a positive. For instance, the salesperson might say, “Yes, it does look expensive, I agree, but if you take into account the reliability of the product, then over time this is actually a much cheaper option than taking the cheap and cheerful rubbish that only…”

Ben Franklin close – Similar to the Duke Of Wellington close, but the prospect lists feelings vs. thoughts. In one column, they write what they feel the benefits of owning the product would be. In the other column, they write what they think could be reasons to not own the product. Very often the list of benefits is somewhat longer than the list of cautions. The combination of personally writing the list and the psychological element of comparing feelings vs. thoughts will often help the prospect see the true value in owning the product.

14.2.7: Following Up

Following-up will build customer satisfaction, maximize long-term sales volume, and if a sale has not been made, it may lead to a sale.

Learning Objective

Identify the basis for and the importance of follow up as part of the personal selling process and sales promotion

Key Points

• The follow-up contributes to the customer’s perception of value purchased.
• A regular follow up is an integral part of customer service and will ensure the customer feels he is still cared for and might make him receptive to purchases down the road.

Key Terms

mediocre

Ordinary: not extraordinary; not special, exceptional, or great; of medium quality;

follow-up

to take further actions remaining after an event; to continue, revisit, or persist; especially, to maintain communication

Follow Up

The post-sale follow-up ensures customer satisfaction and maximizes future and long-term sales volume. Often times, follow up on a lost sale may eventually close the sale and recover the loss. Follow up contributes to the customer’s perception of the value that has been purchased. For example, if a customer is only mildly satisfied with the product, but pleased with the service and experience, he may view the overall sale favorably. However, if the product is mediocre and the service poor, in all likelihood customer follow up will not result in future sales unless the follow up can change the perception of both the product and the services rendered.

Regular follow up is an integral part of good customer service. It tells the customer that he or she continues to matter and this perception might make him receptive to repeat business. Ranging from a simple phone call or thank you note to an office visit for some coffee, the follow up gives the customer a chance to be heard and to engage in a deeper, more meaningful relationship with the salesperson.

Grab a Cup of Coffee Together

The follow-up can be done in a less formalized way that will help develop a better relationship with the client

Follow Up Tips

The level of follow differs according to the product or service sold and the type of customer involved. Critical to the process is the person that does the follow up. The individual should possess a satisfactory level of knowledge and confidence about the product, the sale and the customer that can get the job done. Some customers prefer more follow up while others require little or no follow-up. The type of follow up is also important; a call, a note, a visit or an email.

Invite Customers to Lunch

Show your appreciation for the business, share a meal, make a personal connection.

Follow Up Calls Work

Contact post sale shows that the customer matters and may lead to future and repeat business or referrals

The time frame in which the follow up takes place also impacts the experience. Short term follow up occurs right after the sale has closed while long term follow up may include a card on a birthday or anniversary or a note commemorating a milestone or a thank you card for a referral. Show appreciation that motivates sales teams to do more follow up to facilitate repeat business and referrals.

Try to build a more personal relationship with the client by finding common ground for discussion other than the product or transaction. The salesperson/client relationship can be strengthened and personalized and possibly evolve into a light level of friendship. This can also be achieved by helping the customer with a problem by connecting them with one of your non-competing contacts for help.

14.2.8: CRM and Personal Selling

Customer relationship management is a widely used model for managing a company’s interactions with customers, clients, and sales prospects.

Learning Objective

Illustrate the rationale and use of customer relations management (CRM) as part of personal selling and sales promotion

Key Points

• The CRM uses technology to organize, automate, and synchronize business processes—principally sales activities.
• The goals of CRM are to find and attract new clients, service and retain those the company already has, entice former clients to return, and reduce the costs of marketing and service.
• Information gained through CRM initiatives can support sales development and marketing strategy by growing the organization’s knowledge in customer-oriented areas.

Key Terms

customer relationship management

A widely implemented model for managing a company’s interactions with customers, clients, and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support. Also known by the acronym “CRM. “

stakeholders

A person or organization with a legitimate interest in a given situation, action or enterprise. It can range from employees and investors of a company to the customers purchasing from the company.

sales force automation

A process using software to streamline all phases of the sales process, minimizing the time that sales representatives need to spend on each phase.

Customer relationship management (CRM) is a widely implemented model for managing a company’s interactions with customers, clients, and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support. The overall goals are to find, attract, and win new clients, service and retain those the company already has, entice former clients to return, and reduce the costs of marketing and client service. Customer relationship management describes a company-wide business strategy including customer-interface departments as well as other departments. Measuring and valuing customer relationships is critical to implementing this strategy. The rationale behind using the CRM is to improve services provided directly to customers and to use the information in the system for targeted marketing and sales purposes.

Benefits of Customer Relationship Management

A Customer Relationship Management system may be chosen because it is thought to provide the following advantages:

• Quality and efficiency
• Decrease in overall costs
• Increase Profitability

Challenges

Instances of a CRM attempting to contain a large, complex group of data can become cumbersome and difficult to understand for ill-trained users. The lack of senior management sponsorship can also hinder the success of a new CRM system. Stakeholders must be identified early in the process and a full commitment is needed from all executives before beginning the conversion. But the challenges faced by the company will last longer for the convenience of their customers.

Stakeholders

The picture shows the typical stakeholders of a company. The stakeholders are divided in internal and external stakeholders. All of these stakeholders must be identified and considered, and the ones considered most important to the CRM system must be identified.

Additionally, an interface that is difficult to navigate or understand can hinder the CRM’s effectiveness, causing users to pick and choose which areas of the system to be used, while others may be pushed aside. This fragmented implementation can cause inherent challenges, as only certain parts are used and the system is not fully functional. The increased use of customer relationship management software has also led to an industry-wide shift in evaluating the role of the developer in designing and maintaining its software. Companies are urged to consider the overall impact of a viable CRM software suite and the potential for good or bad in its use.

CRM Uses in Sales & Marketing

Information gained through CRM initiatives can support the development of sales and marketing strategy by developing the organization’s knowledge in areas, such as identifying customer segments, improving customer retention, improving product offerings (by better understanding customer needs), and identifying the organization’s most profitable customers.

Sales Force

Automation

Sales force automation (SFA) involves using software to streamline all phases of the sales process, minimizing the time that sales representatives need to spend on each phase. This allows a business to use fewer sales representatives to manage their clients. At the core of SFA is a contact management system for tracking and recording every stage in the sales process for each prospective client, from initial contact to final disposition. Many SFA applications also include insights into opportunities, territories, sales forecasts, and workflow automation.

Marketing

CRM systems for marketing help the enterprise identify and target potential clients and generate leads for the sales team. A key marketing capability is tracking and measuring multichannel campaigns, including email, search, social media, telephone, and direct mail. Metrics monitored include clicks, responses, leads, deals, and revenue. Alternatively, Prospect Relationship Management (PRM) solutions offer to track customer behavior and nurture them from first contact to sale, often cutting out the active sales process altogether.

In a Web-focused marketing CRM solution, organizations create and track specific web activities that help develop the client relationship. These activities may include such activities as free downloads, online video content, and online web presentations.

14.3: Selling Roles

14.3.1: Proactive Representatives

Proactive representatives tend to fall in to one of two main categories: Hunters and Farmers.

Learning Objective

Compare and contrast sales personalities categorized as Hunters and Farmers

Key Points

• A hunter is often associated with aggressive personalities who use aggressive sales techniques.
• Farmers create sales demand by activities that directly influence and alter the buying process.
• The reality is that most professional sales people have a little of both qualities.

Key Terms

farmer

Someone who creates sales demand by activities that directly influence and alter the buying process.

administration

The act of administering; the government of public affairs; service rendered or duties assumed in conducting affairs; the conducting of any office or employment; direction.

hunter

In terms of sales methodology, a hunter refers to a person whose focus is on bringing in and closing deals.

Example

• Commodity sales like a long distance sales person, shoe sales person, and to a degree a car sales person, are associated with the hunter sales methodology.

Proactive Representation

Introduction

Proactive representatives tend to fall into one of two main categories: Hunters and Farmers.

The Hunters

Hunters are in it for the kill; they always smell fresh prey. They are tracking, sniffing, looking, following their leads, and finding prey. Their thrill comes from the kill .

The Hunter and His Dog

Proactive representatives are sometimes referred to as hunters.

The good ones want to dress their kill and preserve it to get the most meat (revenue) out of it and they work very hard to do that. They follow-up with their customers and stay connected to them. But the minute those customers stop buying, do not look for the hunter to hang around too long. They are always on the hunt, the scent of their next prey always present; if the hunter finds fresh tracks (leads) you can be sure the Hunter will be after it.

The good hunters will close well and take care of the customer, but most hunters are not very good at follow-through. The service after the sale details are not something they generally care about. Hunters don’t stay in one place too long, either. They tend to burn out or move on to fresh territory. The Hunter has many customers and not all of them are high quality.

Based on this description, it is no surprise that a hunter is often associated with aggressive personalities who use aggressive sales techniques. In terms of sales methodology, a hunter refers to a person whose focus is on bringing in and closing deals. This process is called sales capturing. An example is a commodity sale like a long distance sales person, shoe sales person, and to a degree a car sales person. Their job is to find and convert buyers.

The Farmers

Farmers are careful to produce a harvest. They create sales demand by activities that directly influence and alter the buying process.

They focus on the herd and field, and are always looking for the best yield in their harvest . They invest a lot of care in the relationship part of selling and are beloved by their customers. They are trusted. Their customers want to give them all their business, but the buyers have strict policies against that. They nurture and cultivate their customers. They are personally close with their customers and really care about them.

A Bountiful Harvest

Proactive representatives who are farmers work hard to produce a harvest.

The bad Farmers do not close the sale well. They are mostly order-takers. The really bad ones are poor at administration, too.

The great farmers get high quality customers and become the vendor of choice with those customers. The great farmers really look for customers who match a specific profile and seek to develop business intimacy and long term mutually beneficial relationships with them.

The bad farmers think customer service is a substitute for a closing. They will think the customer will come around if they just wait. But if they say that regularly, they have a problem.

Good farmers are intentional and they expect more business and will move on from a beloved customer who is not producing. The farmer has a lot fewer customers, but all good farmers are high producing.

The reality is that most professional sales people possess both qualities.

14.3.2: Passive Representatives

Passive representatives don’t like to sell, but are generally friendly and will take your order if you place one.

Learning Objective

Describe how shopkeepers and repairman are passive sales representatives

Key Points

• Passive sales representatives tend to fall into one of two categories: the shopkeeper or the repairman.
• Shopkeepers are basically order takers.
• The repairman is, in essence, a technical shopkeeper.

Key Term

telemarketing

The business of selling products or services by making unsolicited telephone calls to potential customers.

Introduction to Passive Representation

Passive sales representatives tend to fall into one of two categories:

• The shopkeeper
• The repairman

Here’s a bit more about each type.

The Shopkeeper

The Shopkeeper

Some passive representatives can be classified as shopkeepers.

Shopkeepers are basically order takers.

An inside order taker is the retail sales assistant. The customer has full freedom to choose products without the presence of a salesperson. The sales assistant’s task is purely transactional: receiving payment and passing over the goods. Another type of order taker is the telemarketing sales team, which supports field sales by taking customers’ orders over the telephone.

Delivery salespeople’s tasks are primarily concerned with delivering the product. In the UK, milk, newspapers, and magazines are delivered to the door. However, there is little attempt to persuade the household to increase the milk order or number of newspapers taken; changes in order size are customer driven.

Outside order takers are unlike inside order takers; these salespeople visit the customer but primarily respond to customer requests rather than actively seek to persuade. Unlike delivery salespeople, outside order takers do not deliver.

Outside order takers are a dying breed, and are being replaced by the more cost-effective telemarketing teams.

The Repairman

The repairman is, in essence, a technical shopkeeper. Like the shopkeeper, the repairman loves to help people and may end up making a sale, but with one caveat. The people they are dealing with have to be technical in nature, just like them. Otherwise, the repairman the the customer won’t understand each other because the repairman can only talk “tech talk. “

14.3.3: Consultant

Consultants are problem solvers who ask questions about their prospect’s business in order to meet their needs and close a sale.

Learning Objective

Describe the responsibilities of a sales consultant

Key Points

• As a consultant, your primary aim is to demonstrate to the client that the financial benefit of dealing with you is greater than the cost of what you are selling.
• As a consultant, you continually point out how the customer can achieve more of his or her business goals as the result of following your advice and recommendations.
• it is important to remember to focus more of your selling energies on those prospects who can profit the most rapidly from what you sell.

Key Term

consultative selling

Consultative selling can be defined as meeting customer needs by listening to customers, understanding their problems, paying attention to details, and following through after the sale.

Example

• Large accounts at IBM are handled by sales people who act as consultants and often spend more time at the customer’s site than in their own branch office.

Introduction

Customers of top salespeople describe their consultants as “unpaid members of my own staff.”

The Consultant’s Desk

Consultants often spend so much time at the customer site that they eventually opt to create their own desk.

They say, “He really understands my situation” and “He’s my reliable problem solver. “

As a consultant, this must be your aim as well.

Consultative Selling Defined

Consultative selling can be defined as meeting customers’ needs by listening to customers, understanding their problems, paying attention to details, and following through after the sale.

Your Role as a Consultant

As a sales person who solves problems, you must begin the sales process by asking questions about your prospect’s business, seeking to understand the following:

• how sales and revenues are generated;
• how costs and expenses are incurred; and
• how profits are made.

In consultative selling, you must put yourself in the position of the business owner or executive and try to see yourself as being personally involved in achieving the financial results for which he or she is responsible.

Once you understand how your prospect’s business or department operates, you can then find a way to define what you sell in financial terms. Your primary aim is to demonstrate to the client that the financial benefit of dealing with you is greater than the cost of what you are selling.

For you to sell the company something, you must demonstrate that it will save or make the company 15% or more each year and eventually pay for itself. You have to be able to talk to them about the “time to payback,” or the amount of time that will pass before the company gets 100% of its money back.

You’ll have to answer questions such as,

• “How much does it cost?”
• “How much do I get back in return for my investment?”
• “How fast do I get this amount back?”
• “How sure can I be that your projections are accurate?”

The more vague you are in answering these questions, the harder it is for the customer to make a buying decision. If neither the sales person nor the customer can figure out the rate and speed of return, no sale will take place.

It is crucial for you to know how to answer these questions to prove that you are a reliable problem solver and consultative selling specialist for a company.

As a consultant, you continually point out how the customer can achieve more of his or her business goals as the result of following your advice and recommendations. You position yourself as an unpaid member of the customer’s staff, and as a problem solver, helping him or her to increase sales, reduce costs or boost profits.

While doing this, it is still important to remember to focus more of your selling energies on those clients who can profit the most rapidly from what you sell.

14.3.4: Support Personnel

Support personnel provide after-sales or technical assistance to customers, including functions ranging from engineering to marketing.

Learning Objective

List the common tasks that fall under sales support personnel

Key Points

• In highly technical industries, support personnel like sales engineers are a key part of the sales process.
• The purpose of the sales engineer is to provide both pre-sales and post-sales support.
• Sales engineers also teach customers and help tailor solutions to meet the needs of their customers.

Key Terms

customer relationship management

A widely implemented model for managing a company’s interactions with customers, clients, and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support. Also known by the acronym “CRM. “

white paper

A factual write-up of something, specifically devoid of the appearance of marketing.

supply chain

A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Example

• At large corporations such as IBM, support personnel includes technical specialists who assist or play a key role on customer account teams.

Support Personnel

Support personnel are professionals not directly involved in the sales or revenue generating process, but nonetheless have an important role to play in a company’s success. While support personnel are often seen as those providing after-sales service or technical assistance, the definition of support staff also includes functions such as accounting, finance, human resources, supply chain, etc. Other common support roles that work with sales managers directly or assist clients and customers with product and service issues include sales engineers, technical support specialists, and customer support representatives .

IBM Logo

Highly technical companies like IBM often have technical support salespeople on major account teams.

Support Personnel Responsibilities

Where a product is highly technical and negotiations complex, product and financial specialists may support salespeople, presenting detailed technical information required by customers. In technical support roles, the purpose is to help potential customers understand and compare the solutions that are available for purchase (the pre-sales role); to troubleshoot problems with their implementations—that is, to help ensure that the solutions work successfully once the buying decision has been made (the post-sales role); and to maximize company sales by assisting customers.

It is also common for support personnel to collaborate with their company’s design, production, engineering, or research & development (R&D) departments to determine how products and services could be made or modified to suit customers’ needs.

This may be ongoing as part of a key account team or on a temporary basis, with the specialists being called in to the selling situation when required. In highly technical companies, the technical support salesperson is often a member of a key account team and has the title of sales engineer, professional services specialist, or something similar.

Marketing, advertising, and public relations professionals often support sales and executive teams during the prospecting and evaluation phases of the sales process. This support usually comes in the form of sales collateral, such as product brochures, market surveys, industry white papers, and other marketing research that demonstrates company strengths and product benefits. Marketing teams may also be involved in organizing events for potential and existing customers, or exhibiting at trade shows to promote their brand and generate new leads for salespersons.

The Expanding Role of Support Professionals

Many products and services purchased by large companies and institutions are highly complex. Examples include airliners, weapons systems, and IT systems (such as telecommunications or databases and their dependent applications for purposes like logistics or customer relationship management). Sales support professionals often advise customers on how best to use the products or services provided.

Thus, in such industries, there may be a great overlap in the roles of support and sales personnel. While the latter’s job is to make a sale and maintain customer relationships, support personnel in technical industries advise customers how best to use the products and services before, during, and after the sale is made.

14.4: Types of Selling

14.4.1: Team Selling

Team selling is a group of people representing the sales department and other areas in a firm, all sharing a common goal of increased sales.

Learning Objective

Name the advantages of a team selling approach

Key Points

• Size of the team, reward disbursements and strategic objectives are among the factors to consider when deciding to use the team-selling concept.
• Team selling should be used when there is a chance for high sales and profit.
• Using a team of sellers can help build credibility for small firms.

Key Term

Team Selling

Team selling is a group of people representing the sales department and other areas in a firm, all sharing a common goal of increased sales.

Example

• Team selling is sometimes used in real estate. Before the housing market collapse, it was not unusual to see several agents from the same firm working with the same client. One agent would handle the sale of the client’s home, another would handle financial transactions, and a third would help the client find a new home. After the housing collapse, many real estate agents lost their jobs and thus team selling didn’t make sense. Having one agent to one client was seen as more cost effective.

Team Selling

Team selling is a group of people representing the sales department and other functional areas in the firm. The idea behind the concept is that teamwork and sharing knowledge can benefit the bottom line of a firm. When a company decides to use a team-selling approach, there are several factors to consider:

1. The size and diversity of the team.
2. Rewards for each individual vs. rewards for the team as a whole.
3. Strategic objectives involved with the decision-making process.

Team selling should be used when there is a chance for high sales and profit. Firms must weigh the concept’s pros and cons and base their decision on whether the approach matches the needs of the buyer.

Advantages of Team Selling

1. A team approach allows for “continuous learning,” as team members can work together to identify flaws during the presentation process. They may also identify features that can be added to the sales pitch.
2. When a small company uses multiple salespeople to contact a client it helps the company appear larger than it is. Customers may like this approach, as it gives them multiple people to contact if there’s a problem.
3. Team selling shows clients that a company has more than one person with strong selling capabilities, giving the client a higher comfort level about the company.
4. Effective team selling will lower the cost of sales calls, while the number of people assigned to each sales call will double. This will increase their “batting average,” resulting in an overall increase in productivity.

Real Estate Agency

Some real estate firms use team selling to improve sales and increase customer loyalty.

14.4.2: Relationship Selling

Relationship selling is based on the concept that building long-lasting relationships with people will lead to future sales.

Learning Objective

Discuss the techniques used to establish effective relationship selling

Key Points

• Relationship selling is based on authenticity, genuine concern, and honesty. It’s not a sales technique that can be simulated without possessing those basic qualities. Having these qualities builds customer loyalty.
• The goal of relationship selling is to know a large enough pool of people so that all the sales you need come to you, instead of you having to go out and find them.
• Relationship selling isn’t appropriate for all services or products. If you don’t believe in your product 100% and don’t genuinely care about people and their problems, then you may need to find a different target market, or a different product to sell.

Key Term

Relationship selling

Emphasis is placed on the whole relationship between suppliers and customers. The aim is to provide the best possible customer service and build customer loyalty.

Example

• Lawyers build relationships based on trust with their clients. Clients need to be able to trust their lawyers discretion and knowledge of the law and those who trust their lawyers are more likely to refer their lawyers to family and friends. Similarly, restaurants, such as the one shown here, typically have their regular customers that come in on a certain day of the week, every week, and order the same meal every time. Building relationships with these customers by knowing their first name, what they like to eat, and what wine they prefer will ensure customer loyalty.

Relationship Selling

Relationship selling is a sales tactic in which the seller works on building relationships with people instead of using traditional sales tactics. When enough people in your marketplace know, like, and trust you, sales are the natural result. Relationship selling is based on authenticity, genuine concern, and honesty. It’s not a sales technique that can be simulated without possessing those basic qualities. Building relationships is something we humans do naturally. We talk on the phone, have coffee or lunch, and work or play together. When you need to make a purchase, you call someone you know or go to a trusted store that sells the product you want. If you don’t know anyone who offers that product or service, you ask the people you do know. That’s how most business actually happens. The goal of relationship selling is to know a large enough pool of people so that all the sales you need come to you, instead of you having to go out and find them. Not only is this a more efficient, repeat customers are essential to the longevity of a firm in today’s competing markets.

Relationship selling is effective when the following requirements are met:

1. You have to like the people you want to sell your service or product to. You need to truly enjoy their company–this isn’t something you can fake.
2. You must care about their problems. When you tell them how your product will solve those problems, you are helping them, not selling to them.
3. You have to believe in your product or service 100%. You want your customers to trust you, so that means you have to be honest with them.
4. You must be patient. Relationships take time to grow, and can’t be rushed. You will make sales by building relationships, but you won’t get it tomorrow.
5. You need to have a plan. Building the right relationships won’t happen by accident. If the idea of relationship selling appeals to you, but you don’t meet the first three requirements, there’s only one way to solve the problem. You need to find a different target market, or a different product to sell.

Relationship selling and Restaurants

Restaurants use relationship selling to keep their repeat customers.

14.5: Managing the Sales Force

14.5.1: Creating Sales Force Structure, Territories, and Goals

Creating the proper sales force structure, territoires, and goals leads to customer, sales force and firm satisfaction.

Learning Objective

Explain the components of and rationale behind sales force, territory and sales goal creation

Key Points

• The sales force structure will guide the sales force and impact the company’s bottom line.
• Sales territories are the customer groups or geographic districts for which individual sales people or sales teams hold responsibility.
• The purpose of a sales force coverage (or sales territory) metric is to create balanced sales territories.
• When setting sale quotas, sales managers should compare results to past performance, not forecasts.

Key Terms

buying power

purchasing power

quota

A prescribed number or percentage that may serve as, for example, a maximum, a minimum, or a goal.

Introduction

Sales operations are a set of business activities and processes that help a sales organization run effectively, efficiently, and in support of business strategies and objectives. Sales operations may also be referred to as sales operations, sales support, or business operations. The set of sales operations activities vary from company to company but often include these nine categories:

• Sales strategy: design, planning, execution;
• Measurement of results: reporting, analytics and sales data;
• Compensation, sales quota, policies;
• Technology and tools, including CRM;
• Training and sales communication;
• Sales territory design and optimization;
• Contests/spiffs;
• Lead generation/sales programs; and
• Customer segmentation.

Creating The Sales Force Structure

How will the sales process be structured? The answer to that question, an important one, depends on the company’s strategy. The resulting structure will guide the sales force and their actions and will, therefore, impact the company’s bottom line.

When developing the sales force structure, sales managers must:

• Figure out the right mix of generalists, product, market, or activity specialist with the objective of balancing sales force productivity. What is the right mix? That depends on the company and it’s offerings.
• Design a reporting structure that makes it easy to both coordinate and control the sales process and the activities of the salespeople.
• Help the sales people achieve their goals (and reduce stress) by providing training, coaching, incentives, information support, and performance management.

Designing Territories

Sales territories are the customer groups or geographic districts for which individual sales people or sales teams hold responsibility. Territories can be defined on the basis of geography, sales potential, history, or a combination of factors. Companies strive to balance their territories, because this can reduce costs and increase sales.

Purpose

The purpose of a sales force coverage (or sales territory) metric is to create balanced sales territories.

There are a number of ways to analyze territories. The most common approach is to assess them based on their potential or size.

If there is a large difference between territories, or they change over time, sales people may have either too much or not enough work. Too much work can cause the sales person to neglect some customers, while too little could lead to over-servicing the customers.

Both actions can cost the firm revenue.

In addition, if the sales person thinks that the territory distribution is unfair, they may leave and wind up working for a competitor.

So, balanced territory allocation is important to keep customers, sales people, and the firm, as a whole, satisfied.

“Sales potential forecast” can be used to determine sales targets and to help identify territories worthy of an allocation of limited resources.

A sales potential forecast is a forecast of the number of prospects and their buying power. It does not assess the likelihood of converting “potential” accounts.

Sales potential can be represented in a number of ways. Of these, the most basic is population (i.e., the number of potential accounts in a territory). In a survey of nearly 200 senior marketing managers, 62% responded that they found the “sales potential forecast” metric very useful.

Construction

Before they even begin to design new territories, a sales force manager should determine the workloads of all members of the sales team.

The workload for a territory can be calculated as follows:

Workload (#) = [Current accounts (#) * Average time to service an active account (#)] + [Prospects (#) * Time spent trying to convert a prospect into an active account (#)]

They should also determine the sales potential in a particular territory.

The sales potential in a territory can be determined as follows:

Sales potential ($) = Number of possible accounts (#) x Buying power ($)

A third metric that is just as important as the other two is to compare territories. Managers can look at the respective size of each territory or, more specifically, the travel time (the amount of time needed to reach customers and potential customers).

Creating Sales Quotas

Sales goals are commonly stated in terms of quotas. A sales quota is the minimum sales goal for a set time span. A sales quota may be minimum amount of dollars (monetary value) or product sold (volume). Sales quotas may also be for sales activity, such as number of calls per day. The time span could be set for the day, week, month, or fiscal quarter or year.

Management usually sets the sales quota and the sales territory, but it’s not easy. When setting quotas, successful sales managers tend to:

• Ask for less than they think the sales person can deliver;
• Compare results to past performance, not forecasts; and
• Ensure that the compensation scheme allows the sales force to make money when the company does.

14.5.2: Recruiting and Selecting Salespeople

Salespeople who have the best characteristics, and who fit the company ethos, should be chosen during the recruitment process.

Learning Objective

Examine the rationale and process of recruiting and selecting salespeople

Key Points

• Recruitment can be costly and time consuming. The process must be designed to minimize cost while ensuring a wide pool or suitable candidates are considered.
• Candidates can be chosen internally or externally. Internal recruitment uses less resources and provides for growth within the company. External recruitment involves higher costs, but ensures diversity and fresh thinking.
• A variety of methods can be used to select the ideal candidate, including interviews, various forms, biographical information, and standardized tests.

Key Term

recruitment

The process or art of finding candidates for a post in an organization.

Example

• Some companies, such as Southwest Airlines, prioritize attitude over skill when recruiting. This is because they believe skills can be taught, but attitude cannot be changed. Attitude is especially important in sales jobs, as salespeople are often the first and only point of contact between the company and the customer.

A great deal of recent research has underscored the strategic advantage of managing employees as if they are assets rather than commodities. Making investments in a business’s assets makes a great deal of sense, because these investments will bring a return. A growing number of companies, recognizing that their employees are among their most valuable assets, are backing up that recognition with solid investment.

Recruitment of the Sales Force

Recruitment of talented employees is an essential part of any company’s ability to maintain success and ensure the achievement of standards within an organization. Recruiting sales personnel is no different. Recruiting sales personnel consists of actively compiling a diverse pool of potential candidates which can be considered for employment. In different industries, the constant need for talent creates a highly competitive marketplace for individuals, and it is important for any manager to be aware of these factors as they develop recruitment programs and policies.

Methods of Recruitment: Internal and External

There are two principal ways to recruit workers: internally and externally. Most companies will actively use both methods, ensuring opportunities for existing employees to move up in the organization while at the same time fielding new talent. Internal recruitment is often the most cost effective method of recruiting potential employees, as it uses the existing company resources and talent pool to fill needs.

External recruitment focuses resources on looking outside the organization for potential candidates and expanding the available talent pool. The primary goal of external recruitment is to create diversity among potential candidates by attempting to reach a wider range of individuals unavailable through internal recruitment. Although external recruitment methods can be costly to managers in terms of dollars, the addition of a new perspective within the organization can carry many benefits which outweigh the monetary costs.

Selecting Quality Candidates

After obtaining a large, qualified applicant base, managers need to identify those applicants with the highest potential for success. Selective hiring helps prevent the costly turnover of staff and increases the likeliness of high employee morale and productivity.

To evaluate the fit, it is important for managers to create a list of relevant criteria for each position before beginning the recruitment and selection process. Each job description should be associated with a list of critical skills, behaviors, or attitudes that will make or break job performance. When screening potential employees, managers need to select based on cultural fit and attitude as well as technical skills and competencies. There are some companies, such as Southwest Airlines, based out of the United States, who hire primarily based on attitude because they espouse the philosophy that you hire for attitude, train for skill. According to former CEO Herb Kelleher, “We can change skill levels through training. We can’t change attitude. ” Attitude and personality is especially important for sales positions, as they are often a customer’s first and only point of contact with the company.

Managers must strive to identify the best applicants at the lowest cost. Companies have a variety of processes available to screen potential employees, so managers must determine which system will generate the most accurate results. The methods of selection vary both in levels of effectiveness and in cost of application. In addition to biographical information, companies can conduct personal interviews, perform background checks, and request testing. Because of the costs associated with these measures, companies try to narrow down the number of applicants in each round of hiring.

Interviews

The best interviews follow a structured framework in which each applicant is asked the same questions and is scored with a consistent rating process. Having a common set of information about the applicants upon which to compare after all the interviews have been conducted allows hiring managers to avoid prejudices and all interviewees are ensured a fair chance . Many companies choose to use several rounds of screening with different interviewers to discover additional facets of the applicant’s attitude or skill as well as develop a more well-rounded opinion of the applicant from diverse perspectives.

One-on-One Interview

All jobs will require some sort of interview process to determine if the candidate is suitable for the role. This may be over the phone, one-on-one (above), or part of a group. Interviews determine if the candidates have the characteristics necessary for the job.

Ultimately, the company will hire those who have the necessary skills and qualifications, and best fit the company culture and ethos. Salespeople have a specific set of personality attributes: they should be good listeners and have a keen desire to help people. They need to be trustworthy and honest, yet still be able to quickly perceive what the customer truly wants. They also need to be persistent. Employers will look for these attributes, among others, when hiring salespeople.

14.5.3: Sales Training

In general, training provides many diverse benefits both to the company as well as to the salesperson.

Key Points

• Training employees results in improved performance or error reduction, leading to higher profits. Employees can strengthen their overall skill set and increase their understanding of the organization.
• Different industries and organizations will have different training needs, and will thus need to devise different training systems as a result.
• Different types of training include on the job training, technical training, mentoring systems, and coaching systems among others.

Key Term

training

the activity of imparting and acquiring skills.

Example

• Many large corporations will have an entire department dedicated to training and employee development. Employees will be required to undertake a set of specific training programs per year. Employees will also have the option of other training courses, which they choose according on what they feel they would benefit most from. Completing a certain amount of training can be a job requirement, which forms part of the employee’s evaluation.

Training is generally defined as the act of teaching a skill or behavior. However, what does this mean in business terms? Simply put, training in business is the investment of resources in the employees of a company so that they are better equipped to perform the tasks of their job. The type of resources invested may include time to learn, money to create programs and develop training materials, training effectiveness evaluation systems, etc.

Benefits of Training

Training provides greater skill and knowledge to the employees, which translate into any number of improved job performances. The belief is that providing employees with training will result in increased profits—the improved performance or error reduction of the employees results in cost reduction for the company. For sales personnel, training is especially important, as untrained salespeople interacting with customers may have a negative effect on the company’s reputation.

Both the employee and the company benefit from training. By attending training sessions, employees can deepen their existing skill set, increase their overall skill set and increase their understanding of the organization (see ). Additionally (and perhaps unintentionally on the part of the company), the trained employee becomes more marketable in the event that he or she searches for another job—more and better skills will often lead to better or higher paying jobs. Other benefits that both may enjoy are increased job satisfaction, motivation and morale; increased efficiency, resulting in financial gain; increased capacity to adopt new technologies and methods; increased innovation in strategies and products; reduced employee turnover; and enhanced company image, reputation and customer satisfaction (particularly in the case of salespeople).

Training

Training can be conducted in many ways, such as in a lecture or classroom format (above), online, or any number of ways.

Need for Training

The need for training varies depending on the type of organization that is being discussed; a manufacturing company has different training needs than an insurance firm. But regardless of the type of company being discussed, appropriate training systems can greatly benefit the company. Sales personnel will need different types of specialized training depending on the industry and the company’s unique circumstances.

How does one decide on a training system? The process begins with a training needs assessment. This assessment ought to be a systematic and objective analysis of the training needs in three main areas—organizational, job, and person. Organizational needs deal mostly with the skills the company is looking for, the labor force, etc. whereas the job needs focus on the skills that the company views as necessary for a specific position. Then there are the person needs, and these are the most variable needs. Often these needs arise after a gap is seen in the expected performance compared to the actual performance of the employee. Training can also be a part of a young employee’s “exploration” stage, where training can be used to focus the employee’s interest and development towards a specific area.

Training Methods

Designing and implementing the training systems requires the company to consider a number of things; the method of training, the material the training will deal with, who will provide the training, how to evaluate the effectiveness of the training, etc. On-the-job training relies on the employee to recognize the skills and knowledge he or she will need as they perform their work, and then develop those skills on his or her own. Technical training focuses on a specific need of specific employees. Mentoring systems pair a younger or less experienced employee with an individual that has experience and success within the company who can offer guidance, aid and insight to the younger/less experienced employees. Coaching systems involve the manager offering developmental assistance to the employee through observation, assessment, providing feedback, questioning, etc.

The training of a salesperson who will be working in a country other than his or her own can be broken into three segments—pre-departure, on-site, and repatriation. The pre-departure training consists of formal language training, training with respect to the local culture (culture sensitivity), education about the country (history, geography, government, etc.), and education about the company’s operation in the foreign country. Such training allows for easier assimilation of the employee into the country and the company’s office there. Once on site, training takes the shape of training at any other branch of the company. When the employee abroad returns, a repatriation program designed to reduce culture shock and to integrate the experience abroad is useful.

14.5.4: Motivating and Compensating Salespeople

Employees are best motivated through effective job design, equitable compensation, and treatment as stakeholders in the company.

Learning Objective

Discuss methods to motivate and compensate salespeople

Key Points

• Participation and influence are important ways to provide motivation to employees. Voice and influence mechanisms allow employees to contribute their expertise to the success of the business.
• Meaningful job design exemplifies the company’s goals and structure, and motivates employees. Without meaningful job design, an organization will never operate to its potential.
• There are many different types of compensation, including bonuses, benefits, and commission. This is especially true for salespeople, whose overall compensation is likely to be directly linked to the quantity and quality of their sales.
• Having internal and external equity in compensation is crucial to employees feeling that they are being adequately valued by the organization. “Matching the market” maximizes the quality of talent while minimizing labor costs.

Key Term

equity

Justice, impartiality or fairness. Internal and external equity relate to a comparative level of pay compared to both internal and external candidates.

Example

• Companies such as GE, HP, and Sun Microsystems use software to directly evaluate the behavior of employees with respect to customer service. This provides an incentive for employees in general and salespeople in particular to make sure that customers are treated with respect. This kind of incentive system is designed to help salespeople focus on their strengths, as well strengthen the customer service element of the business. This should enhance the reputation of a company and, ultimately, its profits.

Employees as Stakeholders

The concept of employees as stakeholders refers to the interest employees have in the success of the company and the fact that actions taken by the organization directly affect the employees. Employees’ stakes in the company are economic in the fact that their livelihood comes from the firm, psychological in that they derive pride from their work, and political in terms of their rights as employees and citizens. To motivate employees and improve firm performance, companies should strive for employee participation and influence.

Voice and influence mechanisms allow employees to give input and to contribute their expertise to the success of the business. These mechanisms allow firms to get the most benefit from the skills of their human capital. Thus, firms with employee influence mechanisms get higher financial return from their employee assets.

Effective Job Design

Job design, defined as the allocation of specific work tasks to individuals and groups, is critical for any organization. Allocating jobs and tasks means specifying the contents, methods, and relationships of jobs to satisfy technological and organizational requirements as well as the personal needs of jobholders. If successful job design is not implemented, then the company’s general strategy and direction will be strongly diverted. Employees, in turn, will be demotivated. Meaningful jobs must exemplify the company’s goals and culture .

Paradigm of diversity

Following the above paradigms can lead to a more motivated and more successful sales team (and workforce in general).

Individuals, including salespeople, need to be compelled and excited to do their work. It is thus essential to design their jobs with the goal of motivating them. Motivation describes the forces within the individual that account for the level, direction, and persistence of effort expended at work. Appropriate resource allocation allows large organizations to foster and develop innovation in their workforce. Reward systems include compensation, bonuses, raises, job security, and benefits. Job design is the base element for producing effective work organizations, so without meaningful job design, an organization will never operate to its potential.

Compensation: Internal Equity

The first consideration for designing a compensation system is that the base pay system needs to be internally equitable. In other words, the pay differentials between jobs need to be appropriate. The amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives.

Compensation: External Equity

The second consideration in creating a base pay system is external equity. This refers to the relationship between one company’s pay levels and the pay levels of competitors. Setting pay levels higher than the competition, in the hope of attracting the best applicants, is called “leading the market.” The risk is that a company’s costs will generally be higher than the costs of its competitors. Other employers can set their pay levels lower than their competition, hoping to save labor costs. This is called “lagging the market. ” The risk is that the company will be unable to attract the best applicants. Most employers set their pay levels the same as their competition. This strategy is called “matching the market” and maximizes the quality of talent while minimizing labor costs.

Types Of Compensation

Cash is one way to compensate employees, but cash alone is rarely enough payment. Benefits and other forms of non-monetary compensation are becoming more appropriate forms of compensation for employees in today’s workplace. In order to attract, retain, and motivate the best employees, benefits and other sources of non-monetary compensation should be considered. If the company has an understanding of what they can offer to employees, benefits can increase a company’s workforce quality and the general morale of employees.

Companies can offer different types of benefits in order to create a positive culture for their employees. These benefits have the ability to promote social interaction among employees, make life easier for working parents, or improve their quality of life. Depending on the industry and job type, benefits may be more attractive than salary figures. This fact could allow companies to pay lower wages, thus reducing the total amount spent on payroll.

Pay for Performance

It is important to design reward systems carefully, taking into consideration base salary and other incentives. This notion applies especially to salespeople. Most compensation systems include “variable pay.” Depending on work performance, many companies reward their employees without affecting the base salary. To reward employees for achieving a set goal, many companies use bonuses. To this point, companies such as GE, HP, and Sun Microsystems use software that directly evaluates the behavior of employees with respect to customer service. Long-term incentives are also a part of reward systems. Stock options and profit-sharing plans are representative of long-term reward systems.

14.5.5: Measuring Sales Force Performance

Appraisals are the common form of measuring how well an employee performed compared to a set of stated objectives; feedback communicates these evaluations.

Learning Objective

Illustrate methods of measuring sales force performance

Key Points

• Appraisals can be conducted according to a number of different critieria, which will vary according to company, industry, job, seniority, etc. Employees will usually have a unique set of criteria that they are evaluated against.
• Appraisals can be a sensitive and difficult process. Managers and employees alike tend to dread appraisals. By conducting the appraisal in a considered and proactive manner, tensions can be reduced.
• Feedback is often seen as synonymous with criticism, even though in the broadest sense, feedback is simply communication between two parties. As such, feedback needs to be delivered carefully, with recognition of the particular employee’s unique circumstances and personality.

Key Term

appraisal

A judgment or assessment of the value of something, especially a formal one. A performance appraisal evaluates how well the salesperson met their prior stated objectives.

Measuring the performance of the sales force within a company is vital to ensuring its success. This can be done through conducting performance appraisals and offering feedback.

(1) Performance Appraisals

Historically, performance appraisals have been used by companies for a variety of different purposes, including salary recommendations, promotion and layoff decisions, and training recommendations. In general, “performance elements tell employees what they have to do and standards tell them how well they have to do it” (United States Department of the Interior, 2004). One key item that is often forgotten during the appraisal process (by managers and employees alike) is that the appraisal is for improvement, not blame.

Numerous methods exist for gauging an employee’s performance, and each provides strengths and weaknesses for given environments. Appraisal methodologies depend greatly on the type of work being done; an assembly worker will require a considerably different appraisal system than a business consultant. Similarly, a salesperson will be appraised very differently than a researcher.

Performing an appraisal can be nerve racking for both parties if the situation is not handled correctly. There are many acts a manager can perform to make the process easier on both parties, and hopefully, mutually beneficial. Many assume that performance appraisals are meant to identify weaknesses to be worked on, and exposing these weaknesses can be painful for employees. Studies show that organizations should be leveraging the strengths of each employee rather than focusing on their weaknesses. Yearly performance reviews are becoming increasingly rare as companies begin to see the benefits of frequent appraisal. Constant fine tuning of performance can be much more effective than annual overhauls.

Appraisal Methods

• Graphic rating scales: This method involves assigning some form of rating system to pertinent traits. Ratings can be numerical ranges (1-5), descriptive categories (below average, average, above average), or scales between desirable and undesirable traits (poor ↔ excellent). This method can be simple to setup and easy to follow, but is often criticized for being too subjective, leaving the evaluator to define broad traits such “leadership ability” or “conformance with standards.”
• 2+2: This method demonstrates how appraisals can be used primarily for improvement purposes. By offering employees two compliments and two suggestions for improvement focused around high-priority areas, organizations can become more productive. If the goal of the performance appraisal is employee improvement, this system can provide significant benefits; however, if the goals are more akin to compensation changes and rankings, the system provides little benefit.

(2) Feedback

In the broadest sense, feedback is simply verbal or nonverbal communication between two or more parties. Feedback should be given in all work situations, good and bad. However, people sometimes think of feedback as being synonymous with criticism when it is given in situations where expectations have not been met. Regardless, we are constantly surrounded by feedback as we see the consequences of our actions and how our actions affect the impressions of those around us, as shown in this feedback diagram .

Feedback

Feedback is an essential part of our personal life and our work environment, making, giving, and receiving feedback successfully is critical.

One common problem that managers overlook when reviewing performance is remembering that feedback is not all about forms. Traditional performance reviews have checklists, ratings, or reports that are used as tools to analyze feedback in the organization. While these forms are useful in documenting and appraising a person’s performance, feedback should not be dictated by the type of form an organization uses. Instead, it should be well thought out and measured according to the individual employee in question, considering their unique circumstances and abilities.

14.6: Sales Promotion

14.6.1: Objectives of a Sales Promotion

The objectives of a sales promotion are to increase consumer demand, stimulate market demand, and improve product availability.

Learning Objective

State the main goals of a sales promotion

Key Points

• Sales promotional tactics include contests, coupons, freebies, loss leaders, point-of-purchase displays, premiums, prizes, product samples, and rebates.
• Sales promotions can be directed to consumers, sales employees, or other retailers.
• To encourage supermarkets and stores to stock and display their products, retailers use sales promotion techniques including deal loaders and trade allowances.

Key Term

couponing

The use or distribution of money-saving coupons.

Objectives of a Sales Promotion

Sales promotion is one of the many tools used in a retailer’s promotional mix. Sales promotional tactics include contests, coupons, freebies, loss leaders, point-of-purchase displays, premiums, prizes, product samples, and rebates. Sales promotion may be referred to as “below the line” or “point of sale. ” For example, price reductions at the cash register or complimentary gifts with purchases all fall under sales promotional tactics. The objectives of a sales promotion is to increase consumer demand, stimulate market demand, to get potential buyers to heed a call to action, increase the size of purchases and improve product availability using media and non-media marketing communications.

Coupons

The distribution of coupons is a common sales promotion tactic to encourage customer sales.

Sales Promotion Techniques

Sales promotions can be directed to consumers, sales employees, or other retailers. Sales and coupons are some of the most common sales promotion tactics to stimulate interest and encourage consumers to purchase products. Reward programs focus on customer retention and repeat purchases, awarding customers points, miles, or credits for purchases and future redemptions. Besides price reduction and loyalty programs, point-of-purchase displays are a common tactic used by brands to prompt “impulse” customer purchases. For example, chewing gum and candy are often placed next to the register to increase sales of those products.

Other promotional tools include coupon booklets, mobile couponing, on-shelf couponing, as well as product signage and packaging, which are strategically placed to encourage immediate customer sales. For new marketing initiatives, brands implement retail “mechanics” such as “Buy One, Get One Free” Or “Three for Two” promotions to encourage consumers to buy new market releases.

Brands also use sales promotion techniques to encourage supermarkets and stores to stock and display their products. Some of these trade promotion activities are:

• Trade allowances – Short-term incentives offered to retailers to stock up on a product.
• Dealer loaders – Incentives used to persuade retailers to purchase and display a product.
• Trade contests – Contests used to reward retailers that sell the largest quantity or highest units of a brand’s product.
• Training programs – Training instructing dealer employees in selling the brand’s product.
• Push money (also known as “spiffs”) – Extra commission paid to retail employees to push products.
• Trade discounts (also called functional discounts) – Payments to distribution channel members for performing certain functions.

14.7: Promotion Methods in Consumer Sales

14.7.1: Coupons

A coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product.

Learning Objective

Show how and why coupons are used as part of sales promotion methods

Key Points

• Coupons gain popularity during tough economic times.
• Coupons are an inexpensive form of marketing.
• Coupons offer marketers both advantages and disadvantages.
• An effective coupon program can be measured and entices consumers to use the coupons.

Key Terms

up-sell

Upselling (sometimes “up-selling”) is a sales technique whereby a seller induces the customer to purchase more expensive items, upgrades, or other add-ons in an attempt to make a more profitable sale.

brand awareness

Brand awareness is the extent to which a brand is recognized by potential customers and is correctly associated with a particular product.

discount store

a type of department store which sells products at prices lower than those asked by traditional retail outlets

Example

• The key to Coca-Cola’s growth was ingenious marketing, which included having the company’s employees and sales representatives distribute complimentary coupons for Coca-Cola.

Introduction

Coupons are hot and the state of the economy has much to do with their popularity. Article after article about saving money mentions using coupons. And consumers are following their advice.

You don’t have to look any further than the Promotion Marketing Association (PMA) Education Foundation, Inc. for proof that coupons work for consumers. Their figures show that in the first half of 2011, consumers saved a whopping $2 billion though the use of coupons.

The NCH Vice President of Marketing backs up this figure. According to him, coupon redemption volume continued to show a marked increase in the first half of 2011.

Why Consumers Love Coupons: It’s in the Definition

A coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. Coupons offer instantly redeemable savings on certain products. That means that consumers get an instant reduction on the price at the point of purchase. They don’t have to send anything to the manufacturer, they don’t have to enter any type of contest. They walk away from the store with the satisfaction that they have saved money.

Origins of Coupons

In 1887, the Coca-Cola Company was incorporated in Atlanta with Asa Candler as one of the partners. He transformed Coca-Cola from an insignificant tonic into a profitable business by using innovative advertising techniques. The key to this growth was Candler’s ingenious marketing, which included having sales representatives distribute complimentary coupons for Coca-Cola.

Coca-Cola Coupon

Believed to be the first coupon ever, this ticket for a free glass of Coca-Cola was first distributed in 1888 to help promote the drink. By 1913, the company had redeemed 8.5 million tickets.

Coupons were mailed to potential customers and placed in magazines. The company gave soda fountains free syrup to cover the costs of the free drinks. It is estimated that between 1894 and 1913 one in nine Americans had received a free Coca-Cola, altogether totaling 8,500,000 free drinks.

Marketers’ Love / Hate Relationship with Coupons

Why would a company let consumers walk away paying less for their product than the displayed price? Peer pressure may be one reason. Coupons are an inexpensive form of marketing. Due to this fact, almost half of all retailers say that they use some type of coupon program. If a company’s competitors are doing it, the company will most likely consider doing it as well.

That’s not the only reason, however. Coupon programs offer a host of benefits. They can:

• Increase the number of new customers – A customer may try a product just because they have a coupon for it and like it enough to continue to buy it.
• Help move a specific product
• Build brand awareness – A consumer sees the brand name on the coupon even when the coupon is not redeemed.
• Reward current customers – Customers are delighted when they receive the gift of savings from the manufacturer of a product that they buy regularly.
• Entice former customers to return
• Create the opportunity for the marketer to up-sell a more profitable product
• Provide the marketer with a highly measurable marketing program

The idea behind a coupon program isn’t simply to get consumers to buy your product. You want them to notice your brand. Well-designed coupon programs accomplish that goal. In addition, retailers will benefit from such programs as it will drive traffic to their store.

Coupons, though, can have both advantages and disadvantages. The optimal scenario for marketers is that coupons create brand awareness without consumers using the coupon. In fact most coupons are never redeemed. This makes marketers happy as there is no reduction in revenue. A reduction of revenue, however, is just one of the disadvantages of a coupon program. Others include:

• Mass-cutting
• Counterfeiting
• Misredemptions.

How Coupons are Distributed

You probably run across coupons on a daily basis. Open your mailbox and you’ll see direct mail containing coupons. Look on the Internet and you’ll see coupons that can be distributed electronically. A product that you buy may actually have a coupon on the package or you might go shopping and be happily surprised to find a pad on the shelf containing product coupons.Creating Effective CouponsEven though marketers may be happy to not have coupons redeemed, that is not the objective of issuing coupons. You do want to lure consumers to redeem the coupon. That’s how you get noticed in the sea of other offers.To accomplish that goal coupons must be created with clear, precise text that shows the:

• Face value
• Product image
• Bar code (if needed)
• Legal copy
• Expiration date
• Company name and address.

Measuring Effectiveness of Coupon Programs

You will not be able to judge the effectiveness of your coupon campaign without testing and measuring it. Tracking codes let retailers know not only who redeemed the coupons, but also where the coupons were found. This data can help you decide which coupon is best for your target audience.

14.7.2: Rebates

A rebate is an amount paid by way of reduction, return, or refund on what has already been paid or contributed.

Learning Objective

Examine the rationale behind and the use of rebates as part of sales promotions

Key Points

• The mail-in rebate (MIR) is the most common type of rebate.
• In some cases, the rebate may be available immediately, in which case it is referred to as an instant rebate.
• New companies that want to break into a market can offer substantial rebate savings on their new product as a means of capturing a customer’s attention.
• Even though rebates provide savings to customers, getting their money back requires a lot of work and may not be worth it to some.

Key Term

mail-in rebate

A MIR entitles the buyer to mail in a coupon, a receipt and barcode in order to receive a check for a particular amount, depending on the particular product, time, and often, place of purchase.

Example

• Personal computer components and electronics seem to have a large portion of rebate sales. For example, an item might be advertised as “$39 on rebate” or “$79 OTD (out-the-door), with a $40 rebate that the customer would need to redeem. The turnaround time is generally four to eight weeks, though some rebates may take eight to twelve weeks.

Introduction

A rebate is an amount paid, by way of reduction, return, or refund on what has already been paid or contributed. It one of the sales incentives promotion marketers use to supplement product sales.

The mail-in rebate (MIR) is the most common.

Rebates are offered by either the retailer or the manufacturer of the chosen product. Large stores often work in conjunction with manufacturers, usually requiring two or even three separate rebates for each item. Manufacturer rebates are sometimes valid only at a single store. Rebate forms and special receipts are sometimes printed by the cash register at time of purchase on a separate receipt, or available online for download.

In some cases, the rebate is available immediately, in which case it is referred to as an instant rebate. Some rebate programs offer several payout options to consumers, including a paper check, a prepaid card that can be spent immediately without a trip to the bank or even PayPal payout.

Rebates are heavily used for advertised sales in retail stores in the United States. In the UK, rebates are less common, with manufacturers and retailers preferring to give discounts at the point-of-sale rather than requiring mail-in or coupons. However rebates are sometimes given in the form of “cashback offers” for mobile phone contracts or other high value retail items sold alongside a credit agreement.

Rationale Behind Rebates

Beer Rebate

Unlike coupons, customers must mail the rebate to the manufacturer to get their money back.

• Rebates are arguably more effective selling tools than sales or instant discounts because with rebates consumers pay the full price for the product up front and associate the higher price product as one of greater quality.
• Rebates are more flexible and can be turned off and on more easily than a sale or instant discount which tends to lower the perceived value of a promoted product.
• The information given in the rebate form, such as name, address, method of payment, can be used for data mining studies of consumer behavior.
• The information can be used as evidence of a pre-existing business relationship for marketing purposes, such as ‘do not call’ lists.
• Rebates offer retailers the benefit of giving customers a temporary discount on an item, to stimulate sales, while allowing it to maintain its current price point.
• Rebates allow companies to “price protect” certain product lines by being selective in which models or brands to be discounted.
• During the turnaround time, the company can earn interest on the money.
• If the turnaround time crosses into the next fiscal year or quarter, a rebate offer can inflate sales in the current period, and not have to be accounted for until the next period and then it could be attributed as a cost reducing sales or expense for the next period.
• Not all buyers will meet the criteria to receive the rebate. Companies often require the original UPC barcode, receipt, and additional information, which a buyer may forget to include when redeeming the rebate. Companies almost always add other caveats to the rebate as well, such as the redemption having to be postmarked by a certain date. It works in the company’s favor if buyers do not act quickly to redeem.
• New companies that want to break into a market can offer substantial rebate savings on their new product as a means of capturing a customer’s attention. Zeus Kerravala, vice president at the Yankee Group, has said “For companies that haven’t been in a particular market, the rebate that essentially refunds the customer’s money is a great way to get people to pay attention to them. This is especially true in consumer electronics, where brand name does matter. It’s a good way to get customers to take a chance on a new brand. “

Benefits and Costs for Consumers

Rebates may seem to offer customers lower pricing. Deal hunter sites frequently tout the benefits of rebates in making technology affordable. According to 2011 research, 47% of consumers submitted a rebate within the past 12 months; whereas similar research conducted in 2009 showed that only 37% of consumers had submitted a rebate in the preceding year. Still, rebates take a certain amount of time and effort from the consumer – figuring out the rules, filling out the forms, preparing and dropping off the mailing, cashing in the check, keeping track of the paperwork while this is being done. Thus, a rebate can be thought of as being paid to do this paperwork and provide one’s personal data to the company. Chances of rebate mailing being lost or failing some criteria may further reduce the expected return on this effort. Consumers who are aware of this, and who value their time, effort and opportunity costs above the value of the rebate, may choose to ignore a non-instant rebate that requires such procedures and assume the out-the-door price when considering the purchase. On the other hand, if the consumer does not mind these obstacles and is more concerned with the price than their time for any reason, the rebate may be seen as a deal.

14.7.3: Premiums

Premiums are prizes, gifts, or other special offers consumer receive when purchasing products.

Learning Objective

Identify the rational, types and use of premiums from a sales promotional and personal selling perspective

Key Points

• Premiums fall into one of two categories: free premiums which only require the purchase of the product and self-liquidating premiums which require consumers to pay all, or some, of the price of the premium.
• Premiums can actually enhance an image and were, in fact, the basis of of the first loyalty marketing programs.
• To insure a successful program, match the premium to a target market by selecting one that reinforces the firm’s product and image. Integrate the premium with other marketing tools such as advertising and POP displays.

Key Terms

In-or On-package Premiums

usually small gifts, such as toys in cereal or candy boxes

Self Liquidating Premiums

require the consumer to pay a designated amount of money for the gift or item.

Free Premiums

a sales promotion that only requires buying the product to receive the free gift or reward.

Example

• The Better Crocker Promotional ExampleIn 1929, Betty Crocker began a series of sales promotions that blended premiums, coupons and a loyalty program; it issued redeemable coupons that could be traded for free flatware and other household wares. In 1937, the coupons were printed on the outside of packages, and later the Betty Crocker points program produced a popular reward catalog from which customers could pick rewards using their points. In 2006, it was announced that the Betty Crocker Catalog was going out of business and that all points needed to be redeemed by December 15, 2006. With it, one of the earliest loyalty programs ended a 77 year tradition.

Introduction

Another form of consumer sales promotion is the premium. Premiums are prizes, gifts, or other special offers received when a consumer purchases a product. When a company presents a premium, the consumer pays full price for the good or service, as opposed to coupons that grant price reductions or to samples, instead of receiving the actually product.

One of the first loyalty marketing programs ever offered was a premium in which proof of purchase was redeemed for prizes or gifts. Some marketing experts believe that coupon over-use damages a brand’s image, while premiums can actually enhance it. The key is to match the right type of premium with the product and a predisposed buyer.

Though not as successful as coupons, premiums can be used to boost sales and remain a valuable consumer promotional tool. In the United States, each year over $4.5 billion is spent on premiums.

Type of Premiums

Premiums fall into one of two categories: free premiums which only require the purchase of the product and self-liquidating premiums which require consumers to pay all, or some, of the price of the premium.

Free Premiums

Free-in-the-mail premiums are gift that individuals receive for purchasing products.

Free In-The-Mail Premium

Such premiums are gifts individuals receive for buying a product.

The marketing objectives of such premiums are to:

• Promote multiple brand(s) purchases;
• Increase brand recognition and customer awareness;
• Encourage new or additional brand use;
• Make brands more user-friendly; and
• Reward loyal consumers.

The benefits of Free-In-The-Mail Premiums are that:

• They add value and are brand related;
• There is no need for elaborate packaging; and
• They allow larger premiums to be offered.

In-or On-package Premiums

are usually small gifts, such as toys in cereal boxes.

The marketing objectives of such premiums are to:

• Increase brand visibility and customer awareness;
• Revitalize a mature brand;
• Promote multiple purchases through continuity premiums;
• Encourage new or additional uses for a brand; and
• Reward customer loyalty.

The benefits of In- or On-Package Premiums are that they:

• Impact at point-of-sale due to their visibility;
• Offer immediate consumer gratification;
• Have no redemption or couponing cost;
• Provide added value.

Store or manufacturer premium are gifts given by either the retail store or the manufacture when the customer purchases a product.

The marketing objectives of such premiums are to:

• Increase brand visibility and customer awareness; and
• Encourage consumers to try a brand.

Marketers benefits from store or manufacture premiums as they add value to their brand.

Self Liquidating Premiums

Self liquidating premiums require the consumer to pay an amount of money for a gift or item.

Getting Double

Self-liquidating premiums require consumers to pay an amount of money for a gift or an item.

The marketing objectives of this type of premium is to attract more customers with low prices.

The benefits to the manufacturer is that they receive additional revenues.

Keys to Successful Premium Programs

Successful premium programs require that marketers:

• Match the premium to the targeted market;
• Carefully select the premium ( avoid fads, try for exclusivity);
• Pick a premium that reinforces the company’s product and image;
• Integrate the premium with other IMC tools ( especially advertising and POP displays); and
• Don’t expect premium to increase short-term profits.

14.7.4: Loyalty Marketing

Loyalty marketing is an approach whereby a company focuses on growing and retaining existing customers through incentives and rewards.

Learning Objective

Discuss the basis, use and impact of loyalty programs as a personal selling and sales promotion tool

Key Points

• Some loyalty marketing industry insiders, such as Fred Reichheld, have claimed a strong link between customer loyalty marketing and customer referral.
• In recent years, a new marketing discipline called “customer advocacy marketing” has been combined with or replaced “customer loyalty marketing”.
• The early part of 2010 saw the rise of Card Linked Offers (CLOs) as a new loyalty marketing technique for brands, retailers and financial institutions, stemming from a rise in popularity of both mobile payment and coupons.
• Many consumers in the US and Europe have become quite accustomed to the rewards and incentives they receive by being a “card carrying” member of an airline, hotel or car rental program.

Key Terms

Card Linked Offers

Card Linked Offers connect offers or discounts directly to a consumer’s credit card or debit card, which can then be redeemed at the point of sale.

customer advocacy

Customer advocacy is a specialized form of customer service in which companies focus on what is best for the customer. It is a change in a company’s culture that is supported by customer-focused customer service and marketing techniques.

Example

• To the general public, many airline miles programs, hotel frequent guest programs and credit card incentive programs are the most visible customer loyalty marketing programs.

Introduction

Loyalty marketing is an approach to marketing, based on strategic management, in which a company focuses on growing and retaining existing customers through incentives.

Various Loyalty Cards

Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behavior.

Branding, product marketing and loyalty marketing all form part of the customer proposition – the subjective assessment by the customer of whether to purchase a brand or not, based on the integrated combination of the value they receive from each of these marketing disciplines.

The discipline of customer loyalty marketing has been around for many years, its value as an advertising and marketing vehicle have made it omnipresent in consumer marketing organizations since the mid- to late-1990s.

Some loyalty marketing industry insiders, such as Fred Reichheld, have claimed a strong link between customer loyalty marketing and customer referral. In recent years, a new marketing discipline called “customer advocacy marketing” has been combined with, or replaced, “customer loyalty marketing. ” To the general public, many airline miles programs, hotel frequent guest programs and credit card incentive programs are the most visible customer loyalty marketing programs.

Modern Consumer Rewards Programs

Frequent Flyers

On May 1, 1981 American Airlines launched the first full-scale loyalty marketing program of the modern era with the AAdvantage frequent flyer program. This revolutionary program was the first to reward “frequent fliers” with reward miles that could be accumulated and later redeemed for free travel. Many airlines and travel providers saw the incredible value in providing customers with an incentive to use a company exclusively and be rewarded for their loyalty. Within a few years, dozens of travel industry companies launched similar programs.

Card Linked Offers

The early part of 2010 saw the rise of Card Linked Offers (CLOs) as a new loyalty marketing technique for brands, retailers and financial institutions, stemming from a rise in popularity of both mobile payment and coupons. CLOs connect offers or discounts directly to a consumer’s credit card or debit card, which can then be redeemed at the point of sale.

To receive and use CLOs, consumers must willingly opt in to a CLO program and provide their credit/debit card information. When consumers see relevant CLO-enabled advertisements and product offers while browsing online, using a mobile device, watching TV, reading a newspaper or magazine or listening to the radio they can click, text or scan a QR code to link the CLO-enabled ad directly to their credit/debit card. After consumers make a purchase at the designated retail location, the savings appeared are credited directly to their bank, credit card or PayPal account. As such, CLOs eliminate point-of-sale integration, mail-in rebates and paper coupons. Offers are typically based upon consumer preferences and previous purchase history.

Prior to 2010, static CLOs existed for many years in the form of bank-issued loyalty offers, such as points or savings on travel purchases.

Consolidated Loyalty Programs

Recently there has been a move away from proprietary loyalty schemes to a more consolidated approach, where a single registered account can link a consumer to any number of participating merchants. The principal advantage of this approach is that it minimizes the number of discrete relationships between consumers and merchants and only requires a one-off registration.

One prominent example is the US-based Punchd, which became part of Google in 2011. Others, like MazeCard, have offered consolidated loyalty marketing schemes in other continents.

Loyalty Marketing Impact

Many loyalty programs have changed the way in which consumers interact with the companies that they purchase products or services from and how much the consumers spend. Many consumers in the US and Europe have become quite accustomed to the rewards and incentives they receive by being a “card carrying” member of an airline, hotel or car rental program. In addition, research from Chris X. Moloney shows that nearly half of all credit card users in the US utilize a points-based rewards program.

In recent years, the competition for high income customers has led many of these loyalty marketing program providers to provide significant perks that deliver value well beyond reward points or miles. Both American’s AAdvantage program and Starwood Hotels’ Preferred Guest program have received industry awards, called “Freddie Awards” by Inside Flyer Magazine and its publisher Randy Petersen for providing perks that customers value highly. These perks have become as important to many travelers as their reward miles, according to research.

In his book, Loyalty Rules!, Fred Reichheld details the value of customer referral on the growth and financial performance of dozens of leading US firms. Reichheld purports that the measurement of company advocates, or promoters, is the strongest single measurable correlation between customers and corporate performance.

Similarly, Chris X. Moloney has presented new findings (Loyalty World London 2006) that showed a magnetic value to a company to promote and measure customer referrals and advocacy via research and marketing.

14.7.5: Contests and Sweepstakes

Contests and sweepstakes are two forms of sales promotions which attract consumers by offering them the chance to win a valuable prize.

Learning Objective

Discuss the characteristics of contests and sweepstakes and how companies benefit from their use

Key Points

• Contests normally require the participant to perform some type of activity and the winner is selected based on who performs the best or provides the most correct answers.
• Sweepstakes entice consumers to submit free entries into drawings of chance (not skill) that are tied to the product or service wherein the featured prizes are given away by sponsoring companies.
• Sweepstakes and contests both allow marketers to interact with and gain a better understanding of their target audience and leave customers with a positive image of the company and its products.

Key Terms

buzz

Major topic of conversation, widespread rumor, or information spread behind the scenes.

sponsor

One that pays all or part of the cost of an event, a publication, or a media program, usually in exchange for advertising time.

Example

• When fashion blogger Scott Schuman, The Sartorialist, kicked off the signing of his book called The Sartorialist: Closer, he ran a contest. To enter, one had to write a story inspired buy three photographs. The winner got to go to the book signing party, stay in a hotel room in New York City, and receive a choice of a bag from Coach.

Introduction

Consumers tend to like sales promotions because they get something for “free. ” If you as a marketer really want to get their attention, however, give a select few of them the chance to receive something with a high value.

Marketers who want to use this type of sales promotion have two options to choose from:

• Contests
• Sweepstakes

Contests

Contests normally require the participant to perform some type of activity. The winner is selected based on who performs the best or provides the most correct answers. No purchase is required to enter a contest and a panel of judges determines the winner. Consumers can enter as many times as they wish, although it is permissible for firms to restrict customers to one entry per visit to the store.

The Best Quote Wins

Contests require skill; sweepstakes generally only reward luck.

Sweepstakes

There is another consumer sales promotion known as a sweepstake (also known by its inflected forms which are both single and plural: sweepstakes and sweeps). These have become associated with marketing promotions targeted toward both generating enthusiasm and providing incentive reactions among customers. A sweepstake entices consumers to submit free entries into drawings of chance (and not skill) that are tied to product or service awareness wherein the featured prizes are given away by sponsoring companies.

Prizes can vary in value from less than one dollar to more than one million U.S. dollars and can be in the form of cash, cars, homes, electronics, and so on. In Australia, New Zealand and the United Kingdom, a sweepstake is known as a competition.

Sweepstakes frequently have eligibility limited by international, national, state, local, or other geographical factors.

Sweepstakes are often referred to by marketing promoters as second-chance sweepstakes when utilized in conjunction with the awarding of unclaimed prizes during instant-win promotions.

General Structure of Winning a Sweepstakes Prize

Almost every sweepstakes in the United States offering prizes valued at 600 dollars or greater will typically follow the following structure:

Sponsor

promotion

• Creating the sweepstakes promotion for a sponsor or sponsors;
• Advertising the sweepstakes, prize structure, and the official rules;
• Opening date for receiving entries;
• Closing date for receiving entries;
• Drawing date to judge winning entries.

Winner notification

• Sweepstakes promotion judges contacting the prize winner;
• Winner filing publicity release with sponsor’s sweepstakes promotion agency;
• Winner filing affidavit of eligibility (compliance with official rules) with sponsor’s sweepstakes promotion agency;
• Winner filling any required federal or state tax forms with sponsor’s sweepstakes promotion agency;
• Winner receives prize.

By law, the sponsors of sweepstakes must not require the prize winners to pay any shipping or handing charges in order to win or receive their prizes.

Sweepers frequently send out SASE (self addressed, stamped envelopes) to receive free game pieces, official entry forms, and copies of the official rules that are unique and pertain to individual sweepstakes promotions.

How Marketers Value from Contests and Sweepstakes

Marketers have a lot to gain from giving away valuable prizes to consumers. Contests and sweepstakes allow them to:

• Create a buzz about the product — With the rise of social media, word-of-mouth marketing can help make or break a product. Exciting events, such as contests and sweepstakes, encourage people to talk about the company and its products. It is a great, cost-effective way to extend your advertising reach.
• Draw traffic to their website or store — Some consumers may never have heard of your company before. So contests and sweepstakes offer these companies an opportunity to build brand awareness with such consumers.
• Build an e-mail list — Marketers usually give contestants a newsletter or mailing list opt-in option when they enter the contest or sweepstake. New names mean new potential customers in the long-run.
• Perform marketing research — Marketers can easily add a survey to a contest or sweepstakes entry form. The information gathered is just as valuable to them as the prize is to the consumer because it can help marketers better understand their target audience. This better understanding can lead to better marketing campaigns.
• Strengthen their relationship with their customers — People buy from people they like. Contests and sweepstakes allow consumers to interact with the company in a fun way and creates a positive image of the company and its products.

14.7.6: Sampling

A free sample is a portion of a product given to consumers at no cost for their trial with the aim of driving product adoption.

Learning Objective

Describe the characteristics and proper methods of sampling

Key Points

• The purpose of a free sample is to acquaint the consumer with a new product.
• Small “trial size” containers of products are also classified as samples.
• Samples may also be loaned to the customer if they are too valuable to be given for free.

Key Term

social graph

The social graph is a term used for sociograms in the Internet context. A sociogram is a graph that depicts personal relations. It has been referred to as “the global mapping of everybody and how they’re related. “

Example

• Paint chips are samples of paint colors that are sometimes offered as free samples.

Introduction

In 2000, best-selling author Seth Godin released a book entitled “The Idea Virus” and then proceeded to give it away for free. Was Seth, who has sold tons of books, suffering from temporary insanity? No, quite the contrary. You see, Seth knew that if he gave the book away for free, people would read it, and if they liked it they would help create a buzz about the book.That’s exactly what happened. In less than a month, 400,000 copies were downloaded for free and even though the downloads were free, people bought the hardcover. The book ended up being #5 on Amazon.com’s best seller list. The promotion strategy Seth Godin used is called sampling and when done correctly it can be one of the most effective ways to market your product.

What is Sampling?

A free sample or “freebie” is a portion of food or other product (for example, beauty products) given to consumers in shopping malls, supermarkets, retail stores, or other venues. Sometimes samples of non-perishable items are included in direct marketing mailings.

The purpose of a free sample is to acquaint the consumer with a new product. It is similar to the concept of a test drive, in that a customer is able to try out a product before purchasing it.

Try it, You’ll Like it.

This free wine tasting allows potential buyers to try, or sample, the wine before making a purchase.

Many consumer product companies now offer free samples through their websites to encourage consumers to regularly use the products and to gather data for mailing lists of potentially interested customers.

Food courts, grocery stores, and companies such as Costco and Sams Club routinely give out free samples to customers to persuade them to buy the product. Paint chips are samples of paint colors that are sometimes offered as free samples.

The expansion of online marketing with regard to promotional giveaways has facilitated the rise of “Freebie sites” that seek to aggregate all promotional free sample offers in one place. These sites will often compile free product samples from all over the web and categorize them by type.

Some product sample offers may require consumers to complete a survey or refer a friend to qualify for the freebies. When all requirements are fulfilled, the product samples are shipped to the consumer.

Additionally, the advent of the social graph and the realization that consumers take more and more cues from each other’s reviews, has opened up a new branch of sampling called social sampling.

History

Soap manufacturer Benjamin T. Babbitt in the 19^th century was one of the first known, though almost certainly not the first ever, people to offer free samples of his products.

Other Samples

It is also possible to purchase products in small “trial size” containers. This is common with toiletries such as shampoo, which are useful for vacations or other travel, where large bottles or other containers would be impractical (or more recently, not permitted for air travel). These are also often provided in hotel and motel rooms for the guests.

Samples may also be loaned to the customer if they are too valuable to be given for free, such as samples of a countertop or of carpet to be used for remodeling, or tasting samples as in the Scream Sorbet stand at a farmers market.

How to Create an Effective Sampling Program

Sampling has been around for ages. So it obviously works. But like other promotional programs, bad implementation will lead to bad results. Here are some tips marketers use to create successful sampling programs:

• Find ways to drive new users to your company: Simply giving samples to people who already love your brand or your product is like preaching to the choir. They’ve already got the message.
• Get permission: You may think that you would never turn down something that is free. But how many free samples of perfume or cologne do you have stuffed in the back of your bathroom cabinet? Taking a sample doesn’t turn people into customers unless you have asked permission to give them the sample.
• Encourage trial: To do this, you need to give your samples as close to the point of need as possible. People who are your target audience, but in the wrong setting, will not pay any attention to your samples.
• Start a conversation: Be like Seth Godwin who gave away free copies of his book “The Idea Virus. ” Create a buzz.
• Measure your results: Sampling results might not be as easy to measure as other promotional strategies, but they can be measured. It would be mistake not to do so. Seth Godin saw the results of his sampling program not in the number of downloads, but in the number of people who bought the hardcover version of his book.

14.7.7: Point-of-Purchase Promotions

Point-of-sale displays are sales promotions that are placed where they can easily draw customer attention and trigger impulse buying.

Learning Objective

Illustrate the rationale and use of point of purchase promotions

Key Points

• In smaller retail outlets, POS displays are supplied by the manufacturer of the products, and are sited, restocked, and maintained by one of their regular salespersons, but this is less common is larger supermarkets.
• Point-of-purchase displays are intended to promote new products, make special offers, and/or capitalize on special events, such as holidays.
• POS displays are usually provided by product manufacturers for smaller stores while larger retail outlet with strong purchasing power , prefer to use sales material designed in-house to keep store layout and corporate themes consistent.

Key Terms

Disposable Displays

Displays made of cardboard or other inexpensive that can be discarded after use.

Impulse Buying

Buying prompted by an emotional reaction to an item that is strategically placed and designed in such a way as to motivate and cause a consumer to take action.

Light Box

A box like point of sale display using florescent bulbs to illuminate a poster inserted from the side or rear of the box.

Example

• Point-of-purchase displays can include shelf edging, dummy packs, display packs, display stands, mobiles, posters, and banners.

Introduction

At some point in your life, you have been motivated and stimulated to buy something on impulse: an unplanned and somewhat emotionally driven purchase. Don’t be ashamed. You aren’t alone. According to research, almost 66% of all decisions to buy something are made while people are in the store shopping. What’s more, 53% of these decisions are classified as impulse buying.

Point of purchase promotions offer marketers one of the most effective sales promotion tools included in the “promotional mix.”

Point-of-Purchase Promotion Defined

Point-of-sale displays (POS) are a specialized form of sales promotion found near, on, or next to a checkout counter (the “point of sale”). They are intended to draw the customers’ attention to products. These may be new products, a special offer, or may promote special events, such seasonal or holiday-time sales.

Point-of-Purchase Display

A point-of-sale display selling products related to the Easter holiday.

POS displays can include:

• shelf edging
• dummy packs
• display packs
• display stands
• mobiles
• posters
• banners.

Note that POS can also refer to systems used to record transactions between the customer and the commerce, such as check-out registers, which are used at the point of sale. Don’t get confused if you see it used in this context.

How It Works

In smaller retail outlets, POS displays are usually supplied by the manufacturer of the products, but sited, restocked, and maintained by in-store salespersons. This is less common in larger retail outlets with strong purchasing power, because they control supplier activities and prefer to use sales material designed in-house to ensure that store layouts and corporate themes are consistent.

Common items that may appear in year-round POS displays are:

• batteries
• soft drinks
• candy
• chewing gum
• magazines
• comics
• tobacco
• writable CDs and DVDs.

POS displays are also useful in outlets with limited floor space, as a way to utilize the much wasted space around counters.

The disposable displays are usually covered with product branding. They are usually made out of cardboard, foam board, or Perspex/Plexiglas stands covered with plastic,and are easily replaceable. Displays are visually appealing because designers are able to make full use of color and special printing processes.

Non-disposable displays may include lighting for more visibility or include a cooler for drinks or ice cream. Some are as simple as a metal baskets that are easy to refill or re-stock, with a price sign and no design on the outside.

Light Boxes

A light box is the advertising industry term for a lighted POS display. These are similar to ones used by photographers, and use fluorescent bulbs to illuminate a poster that has been inserted into the light box from either the side or the rear.

Creating Point-of-Purchase Displays that Work

Setting up a display at a cash register, though simple in theory, requires planning and knowledge in order to deliver desired results. Poor results may be caused by:

• Failure to adhere to retailer’s size/space limitations. Proper fit, within the allotted space, increases chances for success.
• Failure to understand the store’s clientele and their true needs — Your product may have a multitude of benefits, but if the customers don’t need those particular benefits they won’t buy your product.
• Placing the display in the wrong location — Different areas in a store prompt different shopper responses. Not even a great display will stimulate a sale if the product is not in sync with the mind of consumer as the display is approached.
• Over design– Displays should be creative but simple, without encouraging consumer questions or objections.
• Not considering where consumers look when they shop — Displays should be designed with a shopper’s line of sight in mind. They won’t buy what they can’t see.

14.7.8: Online Sales Promotion

Online sales promotion can create personal relationships, channels of communication, and an exchange of information regarding a product.

Learning Objective

Discuss on line sales promotion as a sales promotion method and relative to personal selling and sales promotion

Key Points

• Online offers and giveaways are simple and enable marketers to cultivate and gather valuable sales information such as demographics, statistics, and consumer buying habits.
• The Internet allows sales representatives to reach exponentially more potential buyers.
• Interactivity is the key to site stickiness.

Key Terms

Affiliate Programs

Affiliate programs transform site visitors to business partners by offering rewards for referral business.

search engine optimization

Search engine optimization offers a more organic, natural, and free way to garner a desired ranking on a search results page through the use of keywords.

Search Engine Marketing

Search engine marketing promotes websites by increasing their visibility on the search results page, usually through paid inclusion.

Example

• For software free trials, users often have to give payment or credit card information and other demographics before the download is allowed and the software is functional. This develops a relationship with the potential buyer and turns a “cold” prospect into a warm one.

Introduction

Sales promotion techniques are certainly not new but they have been revitalized through new media and technology, especially as it relates to online usage .

Internet Marketing Plan

Some of the same promotions that work offline also work online.

Online sales promotions are meant to turn site visitors into consumers. The objective is to get the visitor to take action by contacting a sales representative and ultimately buying the offered product. The methods to accomplish this goal are diverse and include:

• Advertising
• Loyalty and rewards programs
• Contests
• Search engine usage and optimization
• Social media
• Email blasts
• Referral marketing
• Affiliate marketing
• Inbound marketing
• Videos
• Coupons, premiums, rebates, and other discounts

Personal Selling – An Integral Part of the Online Experience

The personal touch often makes all the difference when selling. The development of a relationship with a sales representative created by a personal referral often makes the difference between an inquiry and a sale. Interactivity is the key to site stickiness. Through online sales promotion, relationships are developed, channels of communication are opened, and an exchange of information regarding a product’s benefits and a consumer’s needs occurs.

The Internet allows sales representatives to reach exponentially more potential buyers. Emails blasts can reach thousands of potential buyers at one time. Videos posted on websites like YouTube have the potential to go viral. Through content and inbound marketing, a sales representative is capable of offering specific, expert, and personalized information to site visitors. Social media enables a company and its sales team to make contact with like-minded individuals and to convert those who are unfamiliar with the product or service being sold. It adds new meaning to the phrase “cold calling”, which refers to a personal selling technique whereby a sales representative contacts people who are not expecting a call or sales pitch.

Affiliate programs transform site visitors to business partners by offering rewards for referral business.

Search engine marketing (SEM) promotes websites by increasing their visibility on the search results page. Placements can be purchased as “paid inclusions” or the value of website content can be increased by including keywords that are most often searched and used by individuals. The latter, also referred to as search engine optimization (SEO), offers a more organic, natural, and free way to garner a desired ranking on a search results page.

Giveaways

Online offers and giveaways are simple and enable marketers to cultivate and gather valuable sales and demographic information. Personal likes, personal experience, email addresses, payment information, and addresses are needed in order to deliver gifts, product samples, free information, or other “value added” items. Software companies do this all the time when they offer free downloads, stripped down versions of the software, or trial periods.

Look at the Results

Online sales promotions enable you to obtain measurable results. Online sales promotions also enable you to see what the competition is doing. Most importantly, online sales promotions enable you to identify what works and what does not, thereby saving you money and delivering you much more “bang for your buck. “

14.8: Promotion Methods in Trade Sales

14.8.1: Trade Allowances

Trade allowances are price reductions given to middlemen, such as retailers, to encourage them to stock an organization’s products.

Learning Objective

Describe the role of trade discounts and allowances in promotion

Key Points

• Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.
• Trade discounts are most frequent in industries where retailers hold the majority of the power in the distribution channel.
• Some challenges include channel stuffing, which is when manufacturers induce channel members to buy far more products than the can sell in a reasonable period, and diverting, which is when companies sell to channel members at a cheaper rate rather than pass on savings to consumers.

Key Term

Channel stuffing

The business practice where a company, or a sales force within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large.

Example

• A manufacture sells to a retailer at a certain price unit point and beyond that point you give them a discount because they are buying in bulk. For instance, hairdressers can go to the manufacturer to get a discount for buying in bulk. They can get shampoos and other hair products at a cheaper rate and sell them to consumers at full prices. Manufacturers with the best trade allowances will get the best displays in the hair salon.

Trade discounts and allowances are price reductions given to middlemen (e.g. wholesalers, industrial distributors, retailers) to encourage them to stock and give preferential treatment to an organization’s products. For example, a consumer goods company may give a retailer a 20% discount to place a larger order for soap. Such a discount might also be used to gain shelf space or a preferred position in the store. Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.

Trade discounts are most frequent in industries where retailers hold the majority of the power in the distribution channel (referred to as channel captains). Trade discounts are given to try to increase the volume of sales being made by the supplier. The larger the purchase, the larger the discount. It is important that these discounts are fair and offered to all channel members equally to avoid channel conflict. Some challenges include channel stuffing, where manufacturers induce channel members to buy far more products than they can sell in a reasonable period. Another challenge is diverting, which is when companies sell to channel members at a cheaper rate rather than pass on savings to consumers.

A trade rate discount is offered by a seller to a buyer for purposes of trade or reselling, rather than to an end user. For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians’ own patients. A seller supplying both trade or resellers and the general public will have a general list price for anybody, and will offer a trade discount to bona fide trade customers.

Other trade sales promotion methods include trade contests, which are contests that reward retailers that sell the most products, and point-of-purchase displays, which are used to create the urge of “impulse” buying.

Hair Salons and Trade Allowances

Hairdressers can go to the manufacturer to get a discount for buying in bulk. They can get shampoos and other hair products at a cheaper rate and sell them to consumers at full prices.

14.8.2: Training Programs

Effective training and coaching of a firm’s sales force can help it outperform competitors.

Learning Objective

Explain how training programs are used to measure the impacts of personal selling

Key Points

• One of the best ways to get people to practice is to provide encouragement and acceptance for achievement and allow them to develop their strengths.
• Effective training programs includes group role-playing. Employees should take turns pretending to be salespeople and customers to practice various sales tactics.
• Management should take time to train all employees in their product offerings. This includes benefits to using the product, product specs, and competitor information.

Key Term

personal selling

the act of using people to sell products to consumers face-to-face

Example

• Apple has been very active in its promotional endeavors. Its logo has become one of the most recognizable symbols nationwide. Apple extensively uses personal selling. The company’s Apple Stores are home to many young and knowledgeable sales representatives who are trained thoroughly in both product information and customer service. With the release of new products and upgrades, such as this iPod, the company produces every few months or so, it is important for sales representatives to stay abreast of the latest technologies entering the market.

Training Programs

Personal selling is a form of oral communication with potential buyers of a product with the intention of making a sale. The personal selling may focus initially on developing a relationship with the potential buyer, but it will always ultimately end with an attempt to “close the sale. ” It is one of the oldest forms of promotion. Unlike advertising, personal selling has always been task and goal orientated.

Measures other than sales have been integrated to retain highly qualified staff. Training and development is now a key factor used to measure personal selling. Superior sales managers learn that effective training and coaching help their companies outperform their competitors. Training and coaching involve sharing ones knowledge on selling products as well as motivating salespeople to practice what you tell them with customers on the sales floor.

One of the best ways to get people to practice is to provide encouragement and acceptance for achievement and allow them to develop their strengths. It’s much less effective to focus and emphasize a person’s weaknesses because that only acts to help discourage and reduce self-esteem.

Effective training programs includes group role-playing. Employees should take turns pretending to be salespeople and customers to practice various sales tactics. Management should also take time to train all employees in their product offerings. This includes benefits to using the product, product specs, and competitor information. This can easily be done through weekly meetings, which would be necessary to give employees updates on new products, sales, and promotions.

Apple Products

Employees at an Apple store would ideally have been trained in what differentiates the iPod from competing products.

13.1: Types of Advertising

13.1.1: Corporate Advertising

Learning Objective

Distinguish between product-oriented advertising and corporate or institutional advertising techniques

Key Points

• Institutional advertising use the same approaches and techniques that apply to product-oriented advertising: image, branding techniques, clear messaging, a call to action, and selling benefits as opposed to features.
• Corporate advertising can be national, regional or local, aimed at any type of audience, and delivered via any type of media.
• Related to institutional advertising is advocacy advertising. The difference is that in advocacy advertising, the sponsor pushes a point of view that may have nothing to do with selling the product or building an image.

Key Terms

Advocacy Advertising

the sponsor pushes a point of view that may have nothing to do with selling the product or building an image.

Passive Advertising

As it applies to corporate advertising, the call to action is implied, subtle, unconventional and never clearly stated.

Image

an attitude or lifestyle advertisers attempt to link to a product.

Example

• The Gulf Coast BP Oil Spill: BP took an aggressive stance to turn public opinion to their favor after the Gulf Coast oil spill. Beyond the initial campaign to extend help to individuals harmed by the spill, BP used a series of corporate advertisements to highlight its environmental concerns, actions it would take, and how it would donate and support various causes to mitigate loss and prevent future disasters.

Corporate Advertising

The primary purpose of advertising is to sell products or services. The company pays a fee or expense to have a message that simultaneously explains its brand or product distributed to as many people as possible. But sometimes it is designed to do something else: to win an audience over to a point of view. Such advertising is called institutional or corporate advertising.

Advertising can be national or local; it can address itself to any kind of audience; it can use any medium. When designed it often resembles editorial matter in the newspapers and magazines, offering an opinion or point of view. An obvious example of institutional advertising is a full-page ad in the Sunday New York Times urging some political action or appealing for funds. Often such advertising is an exercise in self-praise. It attempts to build a favorable image for its sponsor.

Corporate Advertising

Corporate advertising can be found everywhere and in different forms.

When Wells Fargo Bank in California merged with American Trust Company, company officials were ready to go with the name “American Trust,” but designer Walter Landor convinced them that “Wells Fargo” would give them a more distinct image as the bank of the West. With an easily recognized symbol – a stage coach encased in a diamond shape – and some skillful advertising infused with an Old West flavor, the bank tends to appeal to newcomers, who pick it simply because it seems to come with the territory.

Image is particularly important among organizations whose products or services are relatively uniform. How a company advertises projects that image. The image must be concise, express the mission of the company, and its delivery must be consistent each time it is used.

If an attempt to sell a product creeps into institutional advertising, it does so in a passive voice. It can be aimed at a business, a consumer, or involve two businesses and slanted as a cooperative advertising. No matter its form, corporate advertising is meant to highlight and publicize the actions, products, or services of a company.

Corporate Advertising Techniques

Media such as direct mail, TV, radio, print, and online delivers advertising from corporations and institutions to the public or a targeted consumer group. Conventional ads, such as those seen in newspapers or magazines, banner ads online, and commercials heard and seen on TV and radio, communicate corporate messages to the public in the hopes that the desired action is taken; a sale, an enrollment, an inquiry, etc. Corporate advertising can take the form of advice, offer helpful information in times of crisis, congratulate a public or political figure, or announce a special event or occurrence that is of interest to a well-defined group or demographic. It is passive advertising that guides with an implied called to action that is subtle, unconventional, and never clearly stated, but the desired results is always the same; to get someone to take action or pay attention to something that is advantageous to the corporation or institution.

Institutional advertising use the same approaches and techniques that apply to product-oriented advertising: image, branding techniques, clear messaging, a call to action, and selling benefits as opposed to features. These characteristics are applicable to commercial as well as to social marketing activities. It is part of the “promotional mix” that exists within the discipline of marketing.

Advocacy Advertising

Advocacy advertising is related to institutional advertising. The difference is that in advocacy advertising, the sponsor pushes a point of view that may have nothing to do with selling the product or building an image.

According to Professor Robert Shayon of the University of Pennsylvania Annenberg School of Communications, corporations have taken to advocacy advertising because they feel they are not getting a fair shake from what they believe to be a generally hostile press; and because they are convinced that the business world can make significant contributions to public debate on issues of great importance-energy, nuclear power, conservation, environment, taxation, and free enterprise, among others.

Some state legislatures have drafted laws to restrict this kind of advertising, and the Internal Revenue Service does not regard the advertising as a necessary business expense. However, it is difficult to identify the difference between advocacy advertising and institutional advertising, which is a tax-deductible expense.

13.1.2: Product Advertising

Learning Objective

Define pioneering, competitive, and comparative advertising

Key Points

• Pioneering advertising is heavily used in the introductory stage of product life cycle when a new product is launched.
• The goal of using competitive advertising is to influence demand for a specific brand.
• Comparative advertising compares two or more competing brands on one or more specific attributes, be it directly or indirectly.

Key Term

product life cycle

The stages through which a product or its category passes. From its introduction onto the market, growth, maturity, to its decline or lack of demand in the marketplace.

Example

• Internationally-acclaimed Apple Inc. has effectively utilized its Mac vs PC advertisements as part of its marketing efforts to increase its market share over the years.

Product Advertising

The stage in the Product Life Cycle (PLC) of which a product is in often determines the type of advertising that is used by advertisers. The types of product advertising that marketers can choose from are:

• Pioneering
• Competitive
• Comparative

Product Advertising

The type of product advertising a company chooses depends on where the product is in its life cycle.

Pioneering Advertising

This form of advertising is designed to stimulate primary demand for a new product or product category (McDaniel et al, 2006). It is heavily used in the introductory stage of product life cycle when a new product is launched.

This type of product advertising provides in-depth information of the benefits of using a product or service. It is often used to create interest and to increase the public’s awareness.

Competitive Advertising

The goal of using competitive advertising is to influence demand for a specific brand (McDaniel et al, 2006). The advertisers usually provide information regarding a product’s attributes and benefits which may not available from competing products (Yeshin, 1998). Even when other brands own the same attributes or benefits, advertisers often create an impression that their products are somehow ‘much better’ than other, similar products available in the marketplace.

Comparative Advertising

Comparative advertising compares two or more competing brands on one or more specific attributes, be it directly or indirectly (McDaniel et al, 2006). Comparative advertising gives consumers a logical decision factor as most of them do not want to make decisions (MacArthur and Cuneo, 2007). This way, by comparing one company’s brand with other competing brands in the advertisement, the company most likely helps the consumers to choose which brand they would prefer to use.

13.2: Impacts of Advertising

13.2.1: Market Share

Market share is key metric that helps firms evaluate demand in their market and can be influenced by PR and marketing campaigns.

Learning Objective

Discuss how companies use market share as a key indicator and tool to increase market competitiveness

Key Points

• Market Share metrics, a desired asset among competing firms, enable firms to judge not only total market growth or decline, but also trends in customers’ selections among competitors.
• Losses in market share can signal serious long-term problems that require strategic adjustments. Firms with market shares below a certain level may not be viable and may need to change their advertising tactics or their products.
• Pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers.

Key Terms

selective demand

The demand for a specific product brand.

Market Share

The percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.

primary demand

The demand for an entire product category.

Example

• In 2009, Hyundai advertised that people who bought new cars—such as this 2009 Hyundai Sonata shown here —could return the cars to the dealers at no extra charge to the sticker price. 2009 was a tough year for many people as unemployment skyrocketed due to the recession. Many people were unsure if they would lose their jobs. This safety net allowed Hyundai to gain a larger market share than they would have if they had not offered this deal. Their marketing and advertising appealed to many people and they became a trusted brand that cared about consumers and their welfare. Hyundai’s rankings among other car brands improved as a result of this PR campaign.

Market Share

Increasing market share is one of the most important objectives of business. Market share is a key indicator of market competitiveness—that is, how well a firm is doing against its competitors. This metric, supplemented by changes in sales revenue, helps managers evaluate both primary and selective demand in their market.

Demand

Selective demand refers to demand for a specific brand while primary demand refers to demand for a product category. It enables a company to judge not only total market growth or decline, but also trends in customers’ selections among competitors. Generally, sales growth resulting from primary demand (total market growth) is less costly and more profitable than that achieved by capturing share from competitors. Conversely, losses in market share can signal serious long-term problems that require strategic adjustments. Firms with market shares below a certain level may not be viable. Similarly, within a firm’s product line, market share trends for individual products are considered early indicators of future opportunities or problems.

Strategies to Create Market Share

Research has also shown that market share is a desired asset among competing firms. Management of all firms, large and small, are concerned with an adequate share of the market so that their sales volume will enable the firm to survive and prosper. Pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers. Price is important to marketers because it represents the marketers’ assessment of both the value customers see in the product or service, and how much they are willing to pay for a product or service. Competitors often try to gain market share by reducing their prices. The price reduction is intended to increase demand from customers who are judged to be sensitive to changes in price. Price reduction is often seen in newer brands that have to compete with already existing brands. New brands not only require lower prices to penetrate the target market, but they typically require more investment as well. Advertising improved quality on products is another way market share can be affected. Also, making products and services easier to access can increase a firm’s market share. For example, offering products online with easy payment options can increase sales.

2009 Hyundai Sonata

In 2009, Hyundai released a new PR campaign where people who bought new Hyundai cars could return them if they lost their jobs within a year of buying the car.

13.2.2: Consumer Influence

Consumer influence is a key topic in behavioral economics, where heuristics, framing, and market inefficiencies impact how consumers make decisions.

Learning Objective

Define the concept of heuristics, and recognize the relevance of influences on decision-making

Key Points

• Organizations must understand their target market, most notably how they make decisions and what influences are important to the decision-making process.
• By understanding the consumers’ needs, decision-making processes, and values, an organization can better fill consumer needs and produce products and services that align with what consumers want.
• Even if the organization perfectly fulfills the consumer need, other competitors may do so as well. As a result, understanding heuristics (models for making decisions) is critical to successful advertising.
• Understanding how consumers view (or frame) the organization and the brand based upon external influencers is important to building a strong community that views the organization in a positive light.
• It’s also worth noting that not all consumer decisions are rational or economically efficient. Advertisers must keep in mind that not all decisions are grounded in predictable factors.

Key Term

heuristics

Simple, efficient rules that people often use to form judgments and make decisions.

Advertising

Advertising is largely a process about influencing the decision-making process of a given target market. This influencing of the consumer is a behavior-oriented pursuit, where the business would like the consumer to perform a certain behavior. This behavior will create a relationship between the business and the consumer. Influence is a big part of marketing and advertising, and consumer influences and decision-making processes are central to smart advertising.

Behavioral Economics

Behavioral economics is the study of the psychological, social, emotional, and cognitive inputs that influence a consumer. Consumer influence from the behavioral economics point of view would divide the consumer influence into three categories: heuristics, framing, and market inefficiencies. Of course, there are plenty more perspectives on what influences consumer behavior, but these three concepts are a great starting point for considering consumer influence.

Heuristics

As a field of study, heuristics are one of the more interesting and useful areas to consider when looking at decision making. Heuristics are simple, efficient rules and processes that humans use to form judgments and select between various options. For example, people often use constructs like logic, probability, and rational choice theory to determine the best among many options.

If you think about it, most decisions have an almost infinite number of opportunity costs (i.e. alternative options for the utilization of time and/or capital). As a result, almost every decision will have a high number of potential choices. For example, a health conscious consumer will use logic and rationality to purchase a soft drink that isn’t packed full of sugar. As a soft drink manufacturer with an understanding of the heuristics of this target market, creating an option that is low cost, low sugar would appeal to that particular type of of consumer.

As an organization, particularly as an advertiser, the objective is to identify what is important to a consumer in terms of how they will make a purchasing decision. Filling their decision making needs, and aligning with their process of heuristics, is a task that requires knowledge of key consumers, an understanding of what’s important to them, and the ability to be the  best option among many.

Framing

Framing is another interesting consumer influence. Framing is basically just how people and societies organize, communicate, and perceive reality. Think of it as the consumer’s frame of reference, which is influenced by mass media, friends, family, religion, education, and just about everything else in the social structure.

As an ethical advertiser at an organization, framing is the opportunity to ensure that the stereotypes, perceptions, and assumptions about the organization’s brand are accurate and aligned with what the company strives for and believes in. Red Bull does a lot of work with extreme sports, because they believe that their product and that lifestyle fit together well. They want to be framed within the context of social icons in daring exploits (at least, this is how the person writing this frames Red Bull).

Market Inefficiencies

Finally, there are also market inefficiencies in consumer influence. All this means is that not all decisions are necessarily rational or built on a predictable assumption. Sometimes people make irrational purchasing decisions, and that has to be considered when determining what might (or might not) influence consumer behavior. Other market inefficiencies include intervention from governments, unfair competition (monopolies), and a variety of other unique factors which may render a consumer decision unpredictable.

Conclusion

In order for an organization to have a positive impact on a target market, they must understand what influences the decision-making process of the individuals within that segment. By understanding heuristics, market inefficiencies, and framing, an organization can interact with consumers in an authentic, organic, and relevant way to better inform prospective consumers on the benefits they could receive for purchasing a given product or service.

The Decline of Newspaper Advertising

This image demonstrates an important concept in framing. Understanding what influences decisions in a given segment is critical to speaking in the right formats. Newspapers have declined significantly as a source of influence, and therefore organizations pursuing target markets that don’t read newspapers should refrain from utilizing them as a source of influence.

This image demonstrates an important concept in framing. Understanding what influences decisions in a given segment is critical to speaking in the right formats. Newspapers have decline significantly as a source of influence, and therefore organizations pursuing target markets that don’t consumer newspapers should refrain from utilizing them as a source of influence.

13.3: The Advertising Campaign

13.3.1: Identifying Product Benefits

Identifying product benefits involves finding out what the customer really wants and needs, not just listing a variety of product features.

Learning Objective

Demonstrate the application and use of product benefits in advertising campaigns

Key Points

• Product features include such factors as form, color, size, weight, odor, material, and tactile qualities.
• A benefit answers the question, “So What? “.
• The Voice of the Customer is a market research technique that produces a detailed set of customer wants and needs, organized into a hierarchical structure, and then prioritized in terms of relative importance and satisfaction with current alternatives.

Key Terms

sample

A subset of a population selected for measurement, observation, or questioning, to provide statistical information about the population.

Voice of the customer

Voice of the customer (VOC) is a term used in business and Information Technology (through ITIL, for example) to describe the in-depth process of capturing a customer’s expectations, preferences, and aversions.

Example

• The success of the iPod and iPhone wasn’t related to the innovation of a product that had never previously existed. It was because Apple was able to tap into what consumers saw as benefits as opposed to focusing on product features.

Introduction

It’s one o’clock in the afternoon and you’re starving. You pass by a deli and see various types of ready-made sandwiches in the window. What will make you buy one of them? The whole grain bread? The organic ingredients? While your hunger drives the initial buying behavior (the benefit), there are other, more subtle, components to selecting one sandwich from many (product features). This concept of user needs is layered and complex, and marketers must first identify consumer needs, and then ensure benefits will fulfill those needs and features will drive advantage.

Features and Benefits

You’ve just seen the difference between features and benefits. Features tell you what the product is — a chicken sandwich made with organic ingredients and whole grain bread. The benefit — I’m starving and I need something to satisfy my hunger — is what sells it.

Product features include such factors as form, color, size, weight, odor, material, and tactile qualities. A new car can offer thousands of alternatives when one considers the exterior and interior options. Features are important as they may help back up the benefit. But consumers will not buy the car unless it provides them with a benefit.

A benefit answers the question, “So What? ” While the development of ultra-high-speed photographic film was a research breakthrough, whether consumers perceive this as a benefit can only be answered by them. Profitable products must align the need of the consumer with the benefit of the product.

Second Generation iPods

The iPod wasn’t the first mp3 player, but it was the first one that gave consumers the benefits they were searching for.

In a functional sense, the key question is: “Does the product do what the consumer wants it to do? ” Does it get clothes clean? Does it quench your thirst? Does it save you money? Some of these questions can be answered only through product research, but consumer research provides more answers.

Voice of the Customer

Voice of the customer (VOC) is a term used in business and Information Technology (through ITIL, for example) to describe the in-depth process of capturing a customer’s expectations, preferences, and aversions.This is the type of research that marketers need to perform to find out what their customers really perceive as benefits.

Specifically, the VOC is a market research technique that produces a detailed set of customer wants and needs, organized into a hierarchical structure, and then prioritized in terms of relative importance and satisfaction with current alternatives.

VOC studies typically consist of both qualitative and quantitative research steps. They are generally conducted at the start of any new product, process, or service design initiative to better understand the customer’s wants and needs, and as the key input for new product definition, Quality Function Deployment (QFD), and the setting of detailed design specifications.

Much has been written about this process, and there are many possible ways to gather the information – focus groups, individual interviews, contextual inquiry, ethnographic techniques, and so on. But all involve a series of structured in-depth interviews, which focus on the customers’ experiences with current products or alternatives within the category under consideration. Needs statements are then extracted, organized into a more usable hierarchy, and then prioritized by the customers.

It is critical that the product development core team are highly involved in this process. They must be the ones who take the lead in defining the topic, designing the sample (i.e. the types of customers to include), generating the questions for the discussion guide, either conducting or observing and analyzing the interviews, and extracting and processing the needs statements.

Qualities of Desirable Voice of Customer Metrics

Talking to customers to determine what they see as benefits is just the first step. The next step is making sure that the data you obtain is useful. The metrics you can use to make this determination are:

• Credibility: How widely accepted is the measure? Does it have a good track record of results? Is it based on a scientifically and academically rigorous methodology? Will management trust it? Is there proof that it is tied to financial results?
• Reliability: Is it a consistent standard that can be applied across the customer lifecycle and multiple channels?
• Precision: Is it specific enough to provide insight? Does it use multiple related questions to deliver greater accuracy and insight?
• Accuracy: Is the measurement right? Is it representative of the entire customer base or just an outspoken minority? Do the questions capture self-reported importance or can they derive importance based on what customers say? Does it have an acceptable margin of error and realistic sample sizes?
• Actionability: Does it provide any insight into what can be done to encourage customers to be loyal and to purchase? Does it prioritize improvements according to biggest impacts?
• Ability to predict: Can it project the future behaviors of the customer based on their satisfaction?

13.3.2: Identifying the Target Market

Recognizing the core target market(s) for a given product or service is integral to maximizing advertising spend.

Learning Objective

Explore the process of identifying the target market and how it impacts advertising strategies

Key Points

• In marketing, a target market should provide an organization the best possible return on its investments from an advertising perspective. As a result, identifying the target market is an important aspect of the process.
• The process begins with segmentation. From the entire potential market, the organization must identify its core customers who are most likely to purchase their products. 
• Segmentation should be done on various parameters, such as demographic, geographic, pyschographic, and behavioral ones.
• Once segments are identified, the organization should rank each segment based on their objectives, vision, mission and core competency. This should enable a small number of target markets to be selected.
• Once these target markets are selected, the organization should position the firm competitively to capture that target market.

Key Term

segmentation

The process of identifying various groupings within the broader market.

Target Markets

When developing an advertising campaign, be it organization-wide or product-specific, a critical input is identifying the target market. Creating generic advertising campaigns for the entire population is usually not strategic, both in terms of focus and capital. Advertisers should instead narrow down the population to an ideal segment, based upon various factors. This is called segmentation.

Segmentation

The segmentation process can be summarized in seven simple steps. These steps can fit within three primary categories: segmentation, targeting, and positioning. Combined, these seven steps will demonstrate how to identify a target market through segmentation, and how to capture it through positioning.

Segmenting

1. The first step is identifying the broader market in which the organization operates. For example, a company that sells beer operates in a market of alcohol drinkers over a certain age located within specific regions of production and distribution.
2. Next, the organization must identify, select, and apply parameters that will be used to create the segments. Common examples include demographic data, psychographic data, behavioral metrics, and geographic information. However, there are essentially infinite ways to segment a market, depending on what is best for the organization.
3. Finally, the organization should refine and commit to certain segmentation profiles. These profiles will act as potential strategic options in the targeting and positioning in the next segments.

Targeting

1. Now that each segment has been identified, the organization should evaluate the attractiveness of each profile. Ranking these in some way for potential profitability is a critical component.
2. Once a proper system of prioritization amongst segments is established, it’s fairly easy to let the best segment(s) float to the top. These segments represent the optimal strategic opportunity in regards to target markets. At this point, the target market has been identified.

Positioning

1. However, the marketing work doesn’t stop at identifying the optimal market. The organization must identify the relative competitive role compared to the segment and the competition. What does the organization stand for? How does that differentiate them?
2. Finally, once the ideal markets and positioning are established, the organization is ready to prepare customized marketing material for each specified segment.

Identifying Target Segements (STP Approach)

This image illustrates the process of identifying a target market through a flow chat. It is a useful overview of the general concept behind determining a target market.

This image illustrates the process of identifying a target market through a flow chat. It is a useful overview of the general concept behind determining a target market.

Conclusion

Once an organization understands the broader market, and their relative role within it, targeted advertising should come fairly naturally as marketers experiment and gather data. Firms must pay close attention to their relative position within key markets, and maintain a strong, differentiated presence to achieve competitive advantage.

13.3.3: Defining Campaign Objectives

The hierarchy-of-effects model clarifies the objectives of an advertising campaign and each individual advertisement.

Learning Objective

Examine how campaign objectives are identified for an advertising campaign

Key Points

• The model suggests that there are six steps a consumer or a business buyer moves through when making a purchase.
• It is easier to accomplish ad objectives located at the base of the pyramid than the ones toward the top.
• Many marketers know the hierarchy-of-effects model, but usually by a different name. Some call it AIDA, others the demand chain, still more the purchase funnel.

Key Terms

Maslow’s Hierarchy of Needs

a theory in psychology describing the pattern that human motivations generally move through

hierarchy-of-effects model

It clarifies the objectives of an advertising campaign and for each individual advertisement.

Example

• You may market a certain brand of bottled water. Your target audience may like the water and buy it when other brands are not available, but still prefer others. In this case, the objective of the advertising campaign would be to build consumer preference by promoting the quality of the water.

Introduction

When determining your campaign objectives, you need to consider the state your audience is in and where you want them to be. Among advertising theories, the hierarchy-of-effects model is predominant. It clarifies the objectives of an advertising campaign and for each individual advertisement.

Advertising Campaign

The objectives of a company will depend on the stage the audience is in and where they want to take them.

Even though it is just one of several theoretical frameworks that is useful in developing an advertisement for an advertising campaign, it shows clear steps of how advertising works.

The Hierarchy-of-effects Model

The hierarchy-of-effects model can be explained with the help of a pyramid. The lower level objectives such as awareness, knowledge or comprehension are accomplished first.

Subsequent objectives may focus on moving prospects to higher levels in the pyramid to elicit desired behavioural responses such as associating feelings with the brand, trial, or regularuse.

It is easier to accomplish ad objectives located at the base of the pyramid than the ones toward the top. The percentage of prospective customers will decline as they move up the pyramid toward more action-oriented objectives, such as regular brand use.

Many marketers know the hierarchy-of-effects model, but usually by a different name. Some call it AIDA, others the demand chain, still more the purchase funnel. Whatever the name, it invariably begins with the total potential market for your brand. This pool of potential customers then progress through a series of stages that can include awareness, preference, purchase and, hopefully, loyalty.

The Six Steps

Awareness

If most of the target audience is unaware of the object, the communicator’s task is to build awareness with simple messages repeating the product name. Consumers must become aware of the brand. This isn’t as straightforward as it seems. Capturing someone’s attention doesn’t mean they will notice the brand name. Thus, the brand name needs to be made focal to get consumers to become aware.

Knowledge

The target audience might have product awareness but not know much more, so this stage involves creating brand knowledge. This is where comprehension of the brand name and what it stands for becomes important. What are the brand’s specific appeals, its benefits? In what way is it different than competitor’s brands? Who is the target market? These are the types of questions that must be answered if consumers are to achieve the step of brand knowledge.

Liking

If target members know the product, how do they feel about it? If the audience looks unfavorably toward the product, the communicator has to find out why. If the unfavorable view is based on real problems, a communication campaign alone cannot solve it. It would be necessary to first fix the problem and only afterward communicate its renewed quality.

Preference

The target audience might like the product but not prefer it to others. In this case, the communicator must try to build consumer preference by promoting quality, value, performance, and other features. The communicator can check the success of the campaign by measuring audience preference before and after it.

Conviction

A target audience might prefer a particular product but not develop a conviction about buying it. The communicator’s job is to build conviction among the target audience.

Purchase

Finally, some members of the target audience might have conviction but not quite get around to making the purchase. They may wait for more information or plan to act later. The communicator must get these consumers to take the final step, perhaps by offering the product at a low price, offering a premium, or letting consumers try it out. This is where consumers make a move to actually search out information or purchase.

Advertising is thus thought to work and follow a certain sequence whereby the prospect is moved through a series of stages in succession from unawareness of the brand to purchase of its product.

13.3.4: Informative, Persuasive, and Reminder Advertising

Advertising should always be in line with promotional and marketing objectives, and the business strategy or mission of the organization.

Learning Objective

Explain different types of advertising; informative, persuasive and reminder oriented

Key Points

• Reminder advertising reinforces previous promotional activity by keeping the name of good, service, person, or cause before the public.
• Marketers use persuasive advertising to increase the demand for an existing good, service, or organization.
• Informative advertising is often used when launching a new product or for an updated or relaunched product.

Key Terms

differentiate

To show, or be the distinction between two things.

demand

The desire to purchase goods and services.

advertising objective

the goal of the marketing strategy

Example

• Coca-Cola is a well-established brand that uses reminder advertising to maintain its position in the market. It brings back past packaging as well as advertisements that go back to the beginning of the brand.

Introduction

Advertising objectives should always be in line with promotional and marketing objectives, as well as the business strategy or mission of the organization. Group advertising objectives fall into three categories:

• To Inform
• To Persuade
• To Remind

Informative Advertising

Informative advertising is often used when launching a new product, or for an updated or relaunched product. The objective is to develop initial demand for a good, service, organization, or cause. It is used when a new product is put on the market on when an old product has been re-launched or updated.

Informative advertising will tell the consumer and marketplace about the product, explain how it works, provide pricing and product information, and should build awareness for the product as well as the company. The image of the product and the company should be compatible and complementary. There should be enough information to motivate the consumer to take some sort of action.

Persuasive Advertising

Marketers use persuasive advertising to increase the demand for an existing good, service, or organization. The idea is persuade a target audience to change brands, buy their product, and develop customer loyalty. After the purchase, the quality of the product will dictate whether or not the customer will remain loyal or return to the previous brand.

Persuasive advertising is highly competitive when there are similar products in the marketplace, and products are competing for their share of the market. In this situation, the winning product will differentiate itself from the competition and possess benefits that are superior to, or compete strongly with, the competition. Comparative approaches are common place, either directly or indirectly.

Reminder Advertising

Reminder advertising reinforces previous promotional information. The name of the product, testimonials of past customers, public response, and sales techniques are repeated in the hopes of reminding past customers and garnering new ones. It is used to keep the public interested in, and aware of, a well-established product that is most likely at the end of the product life cycle.

Coca-Cola

Coca-Cola is an established brand which uses reminder advertising.

13.3.5: Focus of an Advertisement

The focus of an advertisement must say to each reader or viewer: Buy this product, and you will get this specific benefit.

Learning Objective

Outline the mindset and rationale of advertisement focus within an advertising campaign

Key Points

• The Unique Selling Point or Proposition (USP) is a marketing concept that was first proposed as a theory to understand a pattern among successful advertising campaigns of the early 1940s. It refers to any aspect that differentiates one object from similar objects.
• Positioning is an attempt to place a product into a certain category in consumers’ minds.
• A Brand Character Statement sets the tone for an entire campaign by defining the target audience and how the product or service will benefit that audience.

Key Terms

Nine-Wheel Logic

the use of specious information in an advertisement when real information is too awkward to use.

USP

A unique selling proposition or unique selling point.

Combination

when two or more benefits are demonstrated in an advertisement.

Example

• A example brand character statement: Advertising will convince artistic types age 18-35 that Apple computers are hip and cool. Support will be two men discussing Macs and PCs. Tone will be humorous.

Introduction

Advertisements make propositions to consumers. They are not just words, product puffery, or window dressing. Each advertisement must say: “Buy this product, and you will get this specific benefit. “

The proposition must be one that the competition cannot or does not offer. It must be unique, relative to the brand, or make a claim not otherwise made in that particular field of advertising. It must differentiate. The proposition must be strong enough to move the masses, pulling new customers to the product. This is known as the “unique selling point or proposition. “

The Unique Selling Point or Proposition

The Unique Selling Point or Proposition (USP) is a marketing concept that was first proposed as a theory to understand a pattern among successful advertising campaigns of the early 1940s. The term was invented by Rosser Reeves of Ted Bates & Company and states that certain campaigns make unique propositions to customers to convinced them to switch brands. Today the term is used in other fields to refer to any aspect that differentiates one object from similar objects.

The term USP has also been largely replaced by the concept known as a Positioning Statement. Positioning determines what place a brand (tangible good or service) should occupy in the consumer’s mind in comparison to its competition. A position is often described as the meaningful difference between the brand and its competitors.

Focus on the USP

When preparing an advertisement, the product’s USP must be defined. To find a USP, ask “How is this product different? ” By making a list of the product’s pros and cons the message that the ad should communicate will become clear.

Positioning is an attempt to place a product into a certain category in consumers’ minds. Types of positioning are Best, Against (Hertz vs. Avis, 7-Up vs. Coke), Niche (a sub-division of a category), New, and Traditional.

Brand Character

A brand character statement sets the tone for an entire campaign. A simple way to start preparing an advertisement is with this statement: “Advertising will (A) (B) that (C) is (D). Support will be (E). Tone will be (F). ” In this case, A is a verb, B is a target demographic, C is the product, D is an adjective or phrase, E is the core of the ad, F is the “attitude. ” For example, “Advertising will convince artistic types age 18-35 that Apple computers are hip and cool. Support will be two men discussing Macs and PCs. Tone will be humorous. “

The next part of this strategy statement is the target audience. Advertisers use many methods to gain information about this group, including demographics, psychographics (how the target thinks), and focus groups.

Next is the product itself. Important questions to ask are “Why would anybody buy this? ” “What is the product’s advantage? ” and “What is the client’s image? ” The last one is important to consider in order to make sure the ad coincides with the public perception the company has created for itself. For example, hip or edgy ads probably won’t go over well with a company that has a public image of being “conservative” and/or “family friendly. “

Support is anything that demonstrates or otherwise backs upthe premise presented in the first sentence. Some examples are facts, images, or a scenario, such as the following:

• Reason Why: How a product delivers a benefit.
• Combination: Two or more benefits are demonstrated.
• Permission to Believe: A clever story or characters make claims that are believable.
• Nine-Wheel Logic: Specious support used when real support would be too awkward.
• Image: An attitude or lifestyle that advertiser attempts to link to product.

Advertising Focus Models

Several models help define the focus of advertisement. The FCB Grid, created by Richard Vaughn, categorizes messages as “thinking” and “feeling”, “low” and “high. “

The FCB Grid

With this model, messages are categorized by “thinking” and “feeling”, “low” and “high”.

• A Low Feel commercial demonstrates the pleasure obtained by using the product. This approach is popular for foods.
• A High Feel commercial emphasizes how the product makes the consumer hip or cool. This approach is popular for advertising products like clothing, shoes, or sports cars.

Tom Harris created the Harris Grid for measuring a product’s level of interest in consumers versus the level of interest in mass media. The Ladder type of advertising messages are arranged in a hierarchical ladder, based on what perspective they use to discuss the product.

The Ladder

Types of advertising messages can be arranged in a hierarchical ladder, based on what perspective they use to discuss the product.

The Harris Grid

The Harris Grid measures a product’s level of interest in consumers versus the level of interest in mass media.

13.3.6: Determining a Budget

Determining a marketing budget requires an understanding of the cost of producing campaigns and the expected (or actual) return from the advertising campaign.

Learning Objective

Differentiate between fixed and variable budgeting strategies in advertising, and recognize the way advertising investments have changed

Key Points

• Advertising is one aspect of the broader marketing strategy, and is funded (and constrained) by the resources available for promotional endeavors. 
• Traditionally, advertising budgets were often fixed and set by upper management based on forecasts and available capital. This type of budgeting specifies how much can be spent on different types of line items.
• In more modern contexts, advertising budgets are set over shorter term intervals and focused on justifying an ROI before investing more capital.
• Advertising budgets should take into account the average cost of acquiring a single paying customer. Once this is understood with statistical certainty, the organization can confidently increase the advertising budget if it’s profitable.

Key Term

impression

An online advertising performance metric representing an instance where an ad is shown once.

Advertising Strategy

Advertising is one aspect of the broader marketing strategy, and is funded (and constrained) by the resources available for promotional endeavors. Advertising budgets can be considered from a wide variety of perspectives, but are more often than not looked at as individual campaigns. Each advertising campaign has a budget constraint placed upon it, including the cost of developing assets (filming a commercial, for example), the cost of distributing this asset, and the overall expected return on investment from this asset.

Advertising Budgets

At its simplest, an advertising budget can be determined based on the expected return from the advertising campaign. If the campaign is expected to return more than it costs, than the budget is appropriate for strategic implementation. However, it’s useful to look at traditional advertising, modern advertising, and some key concepts in how advertising campaigns can be proven effective or ineffective.

Fixed Budgeting

Traditionally, advertising campaigns were funded up front by large organizations. Advertising campaigns were placed on billboards, newspapers, radio shows, and TV. This usually required fairly large budgets just to test advertising campaign ideas, which would be carefully vetted in strategic meetings. As advertising has evolved, the distribution format and up front fixed costs have changed significantly. 

In this situation, determining a budget for an advertising campaign is placing a fixed amount of capital into the advertising budget (annually, or on a per campaign basis) with the expectation that it will add value. Under this form of budgeting, the amount in the budget will  be established based on the cost of creating the desired assets, not specifically on the return on investment that is being obtained. This is a fixed budgeting approach.

Variable Budgeting

With the advent of consistent and easily applied ad tracking, particularly with online media, the justification of advertising budgets has grown increasingly precise and stringent. For the production and placement of an online video commercial, for example, an organization can easily figure out how many people have watched the video, how many viewers have converted to customers, and the average cost per conversion. 

Forecasts and Scaling

Considering the above mentioned factors of modern advertising, advertising campaign budgets are most often created based on an expected return. This is done through creating forecasts. A forecast is simply a prediction of how something will perform, in this situation the advertising campaign. To create a forecast for a campaign, the organization can run small, iterative tests within the target segment on different platforms to see how it performs. Let’s consider a quick example to understand this concept a bit more clearly:

You have a small company. You want to advertise on Facebook to promote it. You sell coffee mugs with goofy pictures and great quotes on them. Each mug costs about $5 to produce. You sell them for $10 each (shipping is paid by the consumer). With taxes and your time and effort, you are likely to make $3 off of each mug sold. That leaves you with $2 per user to spend on getting a sale. Your advertising budget, from a variable point of view, is $2 or less per sale.

On Facebook, you can get your ad seen by 1,000 for $20. That’s, on average, $0.02 per impression (or customer who sees your advertising campaign). Not bad, right? However, seeing an ad isn’t the same as making a purchase. In fact, only about 10% of the people who see your ad end up going to your website. And only 10% of the people who visit your website after the ad make a purchase! That means of the 1,000 people who see your ad, 100 go to your website and 10 make a purchase. As it will cost $20 for those 1,000 views, and you only get 10 purchases, you are paying $2 per purchase. This meets your target (but only barely!). Your average cost may go down if the market is big, and your targeting improves. The average cost could also go up, however, as you saturate your target segment.

As a result, the advertising budget for this campaign can be increased until you begin paying more per average purchase. In this case, an advertising budget is variable and changing over time to take into account learnings in real time. 

Determinants of Advertising Budgets

This image demonstrates the evolution of metrics, which directly relates to how advertising budgets are derived. In short, understanding how many people see, engage with, or act upon an ad will directly impact the budget that advertising campaign will receive.

This image demonstrates the evolution of metrics, which directly relate to how advertising budgets are derived. In short, understanding how many people see, engage with or act upon an ad will directly impact the budget that advertising campaign will receive.

13.3.7: Creating a Media Plan

The standard media plan covers four stages: stating media objectives, evaluating media, selecting and implementing choices, and determining the budget.

Learning Objective

Assemble the components and methodology of creating a media plan

Key Points

• Media objectives are normally stated in terms of three dimensions.
• There are definite inherent strengths and weaknesses associated with each medium so many advertisers rely heavily on the research findings provided by the medium, by their own experience, and by subjective appraisal when deciding which media to use.
• The media planner must make media mix decisions and timing directions, both of which are restricted by the available budget.

Key Terms

factory outlet

a brick and mortar or online retail store in which manufacturers sell their stock directly to the public

A C Nielsen

A.C. Nielsen is a global marketing research firm, with worldwide headquarters in New York City, United States of America.

media

The mass media are all those media technologies that are intended to reach a large audience by mass communication.

Example

• When choosing the media, you not only need to know which media outlets exist, but also which ones suit your product. You probably will not want to contact local business publications if you want to advertise the authors and schedule of the new reading program you are creating. However, if you want to focus on the support of the business community in pulling this off, then this is exactly who you would want to contact.

Developing the Media Plan

Advertising media selection is the process of choosing the most cost-effective media for advertising to achieve the required coverage and number of exposures in a target audience.

Although the media plan is placed later in this process, it is in fact developed simultaneously with the creative strategy. This area of advertising has gone through tremendous changes; a critical media revolution has taken place.

The standard media plan covers four stages: (a) stating media objectives; (b) evaluating media; (c) selecting and implementing media choices; and (d) determining the media budget.

Stating Media Objectives

Media objectives are normally stated in terms of three dimensions:

1. Reach: The number of different persons or households exposed to a particular media vehicle or media schedule at least once during a specified time period.
2. Frequency: The number of times within a given time period that a consumer is exposed to a message.
3. Continuity: The timing of media assertions (e.g., 10% in September, 20% in October, 20% in November, 40% in December and 10% the rest of the year).

Evaluating Media

There are definite inherent strengths and weaknesses associated with each medium. In addition, it would require extensive primary research, either by the sponsoring firm or their advertising agency in order to assess how a particular message and the target audience would relate to a given medium. As a result, many advertisers rely heavily on the research findings provided by the medium, by their own experience, and by subjective appraisal.

Selection and Implementation

The media planner must make media mix decisions and timing directions, both of which are restricted by the available budget. The media mix decision involves putting media together in the most effective manner. This is a difficult task and necessitates quantitatively and qualitatively evaluating each medium and combination thereof.

Unfortunately, there are very few valid rules of thumb to guide this process, and the supporting research is spotty at best. For example, in attempting to compare audiences of various media, we find that A C Nielsen measures audiences based on TV viewer reports of the programs watched, while outdoor audience exposure estimates are based on counts of the number of automobile vehicles that pass particular outdoor poster locations.

The timing of media refers to the actual placement of advertisements during the time periods that are most appropriate, given the selected media objectives. It includes not only the scheduling of advertisements but also the size and position of the advertisement.

Setting the Media Budget

The media budget is a subset of the advertising budget, and the same methods used to create advertising budget will be used to create the media budget.

In general, remember that:

• Media outlets which deliver messages involving multiple senses (sight, sound, touch, and smell) will be more expensive than those involving just one sense (sound).
• The quality expectations of the media outlet will influence the cost. For example, the quality of ads for national television stations tend to be higher than those for local outlets. Creating a text ad on the Internet, however, can be free or cost next to nothing.

13.3.8: Media Types and Scheduling

Marketers must choose the type of media that best suits their budget and message and then choose the best way to schedule their message.

Learning Objective

Compare the types of media and types of scheduling used in advertising campaigns

Key Points

• In terms of overall advertising expenditures, media advertising is still dominated by press and television.
• Scheduling refers to the pattern of advertising timing, represented as plots on a yearly flowchart.
• The classic scheduling models are continuity, flighting, and pulsing.

Key Term

media

The mass media are all those media technologies that are intended to reach a large audience by mass communication.

Example

• Product categories that are sold year round but experience a surge in sales at intermittent periods are good candidates for pulsing. For instance, under-arm deodorants, sell all year, but more during the summer months.

Media Types

In terms of overall advertising expenditures, media advertising is dominated by press and TV. Posters and radio and then cinema follow behind.

Press

Spending is dominated by the national & regional newspapers, the latter taking almost all of classified advertising revenue. The magazines and trade/technical journals are equal in size, but less than half of newspapers.

TV

Normally the most expensive medium and used predominately by major advertisers. Regional contractors offer more affordable packages to their local advertisers. It offers the widest coverage, particularly at peak hours and mostly to family audiences.

TV has the greatest impact, especially for those products or services where a “demonstration” is essential. It combines the virtues of both the “storyteller” and the “demonstrator. ” To be effective, these messages must be simple and able to overcome household distractions.

Radio

Radio advertising has increased greatly in recent years, with the granting of many more licenses. It reaches specific audiences at different times of the day—adults at breakfast, housewives during the day, and commuters during rush hours. Additionally, people listen to the radio when they are stuck in traffic, whereas other listeners may only listen in the evenings. The 24-hour availability makes reach to a variety of customer sub-segments possible. In addition, It is well-established and able to reach rural areas. It is cost-effective since production costs are lower than TV, however, the lack of visual elements may limit the message.

Cinema

Though national audience numbers are down, this may be the most effective medium for reaching younger age groups, since the core audience is age 15 to 35.

Internet Advertising

This rapidly growing marketing force is similar to press advertising, but its interactivity is the most powerful element.

Mobile Advertising

Personal mobile phones are attractive advertising media to network operators and are gaining in power and reach.

Mobile Phones

Mobile phones are a form of media for advertising.

Advertising-free Media

Advertising-free media refers to outlets whose output is not funded or subsidized by the sale of advertising space. It includes entities such as websites, television and radio networks, and magazines.

Out of Home Advertising

Other areas in which a company’s product message intersects with potential buyers occur outside of the home, meaning not via a device owned or operated by the potential buyer such as mobile phones, televisions, radio, computers, etc. Billboards, signage on public transportation, skywriting, blimps and other outdoor advertisements are examples of product messages that reach potential buyers while they are outside of their home, on the go and in public places, waiting in offices, in transit. This medium is in contrast with broadcast, print and internet advertising. There are four types; billboards, street furniture, transit and alternative.

Advertising Media Scheduling

Scheduling refers to the pattern of advertising timing, represented as plots on a yearly flowchart. These plots indicate the pattern of scheduled times that coincide with favorable selling periods. The classic scheduling models are continuity, flighting, and pulsing.

Continuity

This model is primarily for non-seasonal products and some seasonal products. Advertising runs steadily with little variation over a campaign period. There may be short gaps at regular intervals and also long gaps—for instance, one ad every week for 52 weeks, and then a pause. This pattern of advertising is prevalent in service and packaged goods that require continuous reinforcement on the audience for top of mind recollection at point of purchase.

Advantages:

• Works as a reminder.
• Covers the entire purchase cycle.
• Cost efficiencies in the form of large media discounts.
• Positioning advantages within media.
• Program or plan that identifies the media channels used in an advertising campaign, and specifies insertion or broadcast dates, positions, and duration of the messages.

Flighting

In media scheduling for seasonal product categories, flighting involves intermittent and irregular periods of advertising, alternating with shorter periods of no advertising at all. For instance, all of 2000 Target Rating Pioneered in a single month, “going dark” for the rest of the year. Halloween costumes are rarely purchased all year except during the months of September and October.

Advantages:

• Advertisers buy heavier weight than competitors for a relatively shorter period of time.
• Little waste, since advertising concentrates on the best purchasing cycle period.
• Series of commercials appear as a unified campaign on different media vehicles.

Pulsing

Pulsing combines flighting and continuous scheduling by using a low advertising level all year round and heavy advertising during peak selling periods. Product categories that are sold year round but experience a surge in sales at intermittent periods are good candidates for pulsing. For instance, under-arm deodorants, sell all year, but more during the summer months.

Advantages:

• Covers different market situations.
• Advantages of both continuity and flighting possible.

13.3.9: Creating Advertisements

The advertising creative effort can be divided into two elements: the creative strategy and creative tactics.

Learning Objective

Outline the process of how to create advertisements

Key Points

• The creative strategy concerns what you are going to say to the audience.
• Creative tactics outline the means for carrying out the creative strategy.
• The place to begin the creative strategy is to ascertain the proper appeal to employ in the ad.

Key Term

tactics

The achievement of objectives through strategy.

Example

• Offering a product at a reduced price or under some special deal arrangement (e.g. buy-one-get-one-free) may be the only viable appeal in a particular ad.

Developing the Creative Strategy

Once all the relevant facts are gathered and evaluated, the process of actually creating the advertisement is appropriate. This process is very complex and a complete description of it is well beyond the scope of this unit. However, it is possible to highlight the primary parts of this process.

The Creative Process

Once all of the relevant facts have been obtained, one can start creating the ad.

More than likely, the development and approval of advertising creation is the responsibility of the senior advertising manager within the company. If an advertising agency is used, the responsibility belongs to the senior account person, in conjunction with the senior creative person assigned to the account.

The advertising effort can be divided into two elements: the creative strategy and creative tactics.

The creative strategy concerns what you are going to say to the audience. It flows from the advertising objectives and should outline what impressions the campaign should convey to the target audience.

Creative tactics outline the means for carrying out the creative strategy. This includes all the various alternatives available, which will help reach the advertising objective.

The place to begin the creative strategy is to ascertain the proper appeal to employ in the ad. Identifying the appropriate appeal is just the first part of the advertising design process.

The second part is to transform this idea into an actual advertisement. To say that there are a large variety of ways to do this would be a gross understatement. The number of techniques available to the creative strategist are not only vast, but the ability of more than one technique to successfully operationalize the same appeal makes this process even more nebulous.

Primary Advertising Appeals

Service Features of a Product

Many products have such strong technology or performance capabilities that these features can serve as a primary advertising appeal.

Competitive Advantage of a Product

When an advertiser can determine that his product is superior, either in terms of features, performance, supporting services, or image, emphasizing a competitive advantage has proved to make a successful appeal.

Price Advantage of a Product

Offering a product at a reduced price or under some special deal arrangement (e.g. buy-one-get-one-free) may be the only viable appeal in a particular ad.

Popularity of a Product

Although the manner varies, the notion of claiming that a product is “number one” or the most popular is an appeal that has been around for a long time.

Generic Approach

In such advertising, a product or service category is promoted for its own sake, but individual makes or brands of product are not singled out.

News about a Product

When a truly new product is developed, or when an existing product is changed or improved in a substantial manner, highlighting this single element can be the core appeal.

Consumer Service

A popular appeal is to illustrate how the product may be used to best serve the needs of the consumer.

Savings Through Product Use

An opportunity to save time, money, or energy is always very appealing to consumers.

Self-enhancement

Helping us feel better about ourselves (e.g. personal care, clothing, automobiles) is an appeal that many people cannot resist.

Embarrassment or Anxiety

Situations that represent a threatening situation, either physically or socially, can provide the basis for an effective appeal.

Product Trial

When this appeal is used, the advertiser offers a free sample, a price reduction, or some other purchase incentive to encourage consumer use or trial.

Corporate

This type of appeal presents a company or corporation in a favorable light in order to create a favorable impression or image.

13.3.10: Measuring Impact with Metrics

Measuring performance based on previously established objectives is useful in determining the quality of advertising efforts.

Learning Objective

Derive useful data metrics from advertising campaigns, and recognize the importance of establishing advertising objectives

Key Points

• Performance-based advertising has grown in popularity as advertising campaigns have shifted towards online media. These types of advertising campaigns are easily measured by a variety of merics.
• Thinking strategically and planning objectives for each campaign, as well as selecting key metrics to measure along the way, enables performance-based advertising approaches.
• Some metrics will focus on the overall reach, and cost of reach for an advertising campaign. These are referred to as CPI or CPM.
• Other metrics will measure overall clicks, and the costs per clicks, relative to other campaigns. These are measured as CTR, CPC, and CPO.
• GRP will look at overall exposure relative to the market size, which is useful in understanding penetration of key segments.
• When taken in combination, these metrics can paint a clear image of which campaigns are doing well, and which campaigns make financial sense to continue (or discontinue).

Key Term

performance-based advertising

A type of marketing that focuses on paying advertising costs based upon the success of campaigns.

Performance-Based Advertising

When utilizing advertising tools and releasing new campaigns, it is critical that marketers measure the impact to understand what works and what doesn’t. There are many ways to measure an advertising campaigns efficacy, and determining what the objectives are before releasing the campaign is an important step in the process. 

Thinking strategically, tactfully, and proactively offers the best opportunity for accurate and meaningful metrics. This is often referred to as performance-based advertising.

Advertising Metrics

With the massive growth in online activity and potential channels of promotion, the measurement of marketing and advertising efforts consists of more tools and possibilities than ever before. Understanding the opportunities for measurement within the field of performance-based marketing is the first step to accurately planning campaigns which can be measured effectively.

This list of potential metrics is a great starting point for peformance-based marketeers to consider, particularly online marketers:

Cost Per Click (CPC) – Simply put, the organization can look at an online campaign’s overall costs and overall clicks. By dividing the overall cost by the overall quantity of clicks, the advertising team can determine how much each click is worth. Keep in mind, a click is not necessarily a sale! So other metrics may be required to make financial sense of a CPC data point.

Cost Per Impression (CPI) – Also referred to as CPM, the cost per impression is usually measured in the cost per thousand impressions (due to the massive volume of online distribution). If a campaign costs $10,000 and reaches 1,000,000 people, the cost per thousand impressions (CPI) is $10.

Reach – A simple metric, reach determines the overall volume of potential consumers an ad will engage. This is a useful input variable for a variety of other metrics, as well as a viable metric in and of itself.

Gross Rating Point (GRP) – With an understanding of CPI in place, this metric expands on that data point by comparing it to the overall penetration of the target market. That is to say, a GRP is going to measure the total number of impressions relative to the overall size of the target population, or GRPs (%) = 100 * Impressions (#) ÷ Defined population (#).

Click-through Rate (CTR) – The click-through rate (CTR) is related to the CPC and CPI, but measures a relative percentage of impressions to clicks. This is a bit different than the other calculations, as it implies relevance and quality from the eyes of the consumer between advertisements. So if advertising campaign A has a CTR of 2% and advertising campaign B has a CTR of 4%, it would appear that B is twice as relevant when it comes to engaging the target audience. However, this does NOT mean it is more effective financially (although it likely will be).

Cost Per Order (CPO) or Cost Per Purchase (CPP) – Finally, we get to the financial certainties. At a certain point, the organization will need to financially justify advertising campaigns. This is not always easy, as attributing a campaign to a purchase is not always completely clear. however, a CPO or CPP will track and measure users throughout the channel to see which advertising campaigns ultimately result in a purchase. This CPP must be lower than the margin per customer purchase, otherwise the campaign is losing money (at least in the short run).

Advertising Example

This is a good example of a measurable advertising campaign, which would reflect most of the performance-based metrics in this discussion.

This is a good example of a measurable advertising campaign, which would reflect most of the performance-based metrics in this discussion.

13.4: Public Relations

13.4.1: Public Relations Tools

PR is the practice of managing the flow of information between organizations and the public.

Learning Objective

Give examples of communications tools used to develop effective public relations programs

Key Points

• A fundamental technique of public relations is identifying the target audience and tailoring messages to appeal to them.
• Messaging is the process of creating a consistent story around a product, person, company, or service. The goal is to avoid having consumers receive contradictory or confusing information that will make them doubt their purchase or make other decisions that negatively impact the company.
• Social media technology allows companies and organizations to disseminate information without relying solely on mainstream publications. Messages can be communicated directly to the public, customers, and prospects through social networks such as Facebook and Twitter.
• Other common PR activities include speaking at conferences, pursuing industry awards, working with the press, and communicating with employees.

Key Term

Public relations

the practice of managing the flow of information between an individual or an organization and the public

Example

• Pennsylvania State University hired one of the largest PR firms in the world, Edelman, to deal with the negative fallout of the Sandusky sex abuse scandal.

Public Relations Tools

Public relations (PR) is the practice of managing the flow of information between an individual or an organization and the public. The aim is to persuade the public, investors, partners, employees, and other stakeholders to maintain a certain point of view about the company and its leadership, products, or political decisions. Common PR activities include speaking at conferences, seeking industry awards, working with the press, communicating with employees, and sending out press releases.

Public relations may include an organization or individual gaining exposure to an audience through topics of public interest and news items.

The Media in Action

The media is often utilized in PR campaigns.

Building and managing relationships with those who influence an organization’s or individual’s audiences is critical in public relations. When a public relations practitioner is working in the field, they build a list of relationships that become assets, especially in media relations. The ultimate objective of PR is to retain goodwill as well as create it; the procedure to follow to achieve this is to first do good and then take credit for it. The PR program must describe its target audience—in most instances, PR programs are aimed at multiple audiences that have varying points of view and needs.

There are several PR tools firms can utilize to ensure the efficacy of PR programs: messaging, audience targeting, and media marketing.

Messaging

Messaging is the process of creating a consistent story around a product, person, company, or service. Messaging aims to avoid having readers receive contradictory or confusing information that will instill doubt in their purchasing choice or spur them to make other decisions that will have a negative impact on the company. A brand should aim to have the same problem statement, industry viewpoint, or brand perception shared across multiple sources and media.

Audience Targeting

A fundamental technique of public relations is identifying the target audience and tailoring messages to appeal to them. Sometimes the interests of different audiences and stakeholders vary, meaning several distinct but complementary messages must be created.

Stakeholder theory identifies people who have a stake in a given institution or issue. All audiences are stakeholders (or presumptive stakeholders), but not all stakeholders are audiences. For example, if a charity commissions a public relations agency to create an advertising campaign that raises money toward finding the cure for a disease, the charity and the people with the disease are stakeholders, but the audience is anyone who might be willing to donate money.

Media Marketing

Digital marketing is the use of Internet tools and technologies, such as search engines, Web 2.0 social bookmarking, new media relations, blogs, and social media marketing. Interactive PR allows companies and organizations to disseminate information without relying solely on mainstream publications and to communicate directly with the public, customers, and prospects. Online social media platforms such as Facebook and Twitter ensure that firms can get their messages heard directly and quickly. Other forms of media include newspapers, television programs, radio stations, and magazines. Public relations people can use these various platforms and channels to publish press releases. It is important to ensure that the information across all channels is accurate and as complementary as possible.

The amount of money spent on traditional media channels has declined as more and more readers have turned to favor online and social media news sources. As the readership of traditional media shift to online media, so has the focus of many in public relations. The advent and increase of social media releases, search engine optimization, and online content publishing and the introduction of podcasts and video are related trends.

Sponsorship is often used as part of a public relations campaign. A company will pay money to compensate a public figure, spokesperson, or “influencer” to use its logo or products. An example of sponsorship is a concert tour presented by a bank or drink company.

Product placement is basically passive advertising in which a company pays to have its products used prominently in a photograph, film, or video message or during a live appearance. The most common use of product placement is in films where characters use branded products.

Both product placement and sponsorship decisions are based on a shared target market. No matter the public relations vehicle, there must be a common buyer that all parties want to reach.

13.4.2: Handling Unfavorable Publicity

Handling unfavorable publicity means being honest with consumers and putting public interest first.

Learning Objective

List the steps firms can take to implement an effective crisis communication plan

Key Points

• Being prepared for harmful situations is imperative. It is important to map out potential negative scenarios and have a PR plan for each one. It is important to have a crisis management team who can handle these situations.
• Protecting the integrity and reputation of an organization is important, but putting public interest ahead of the organization’s interest is key to gaining consumer trust and loyalty.
• A media reaction plan should include a company media representative as part of the crisis management team. Firms need to show that they are working toward positive resolutions to deflect the negative publicity.

Key Term

Crisis Management Team

A team in an organization that prepares contingency plans in advance, as part of a crisis management plan.

Example

• In 1982, Johnson & Johnson’s Tylenol medication commanded 35% of the US over-the-counter analgesic market and represented 15% of the company’s profits. Unfortunately, one individual succeeded in lacing the drug with cyanide. Seven people died as a result, so a panic ensued about how widespread the contamination might be. By the end of the episode, everyone knew that Tylenol was associated with the scare. The company’s market value fell by $1 billion as a result. When the same situation happened again in 1986, the company had learned its lesson. It quickly ordered that Tylenol be recalled from every outlet, not just those in the state where it had been tampered with. The company also decided that the product would not be re-established on the shelves until something had been done to provide better product protection. As a result, Johnson & Johnson developed the tamperproof packaging that would make it much more difficult for a similar incident to occur in the future.

Crisis communication planning can help a firm deal effectively with unexpected disasters, emergencies, or other unusual events that may lead to unfavorable publicity. Effectively responding to any crisis means both controlling the public narrative and ameliorating any harm done, whether tangibly or to a company’s reputation.

The following principles represent best practices in crisis management: be prepared, do the right thing, communicate quickly and accurately, and follow up.

Be Prepared

Although emergencies are by their very nature unpredictable, it is possible to list and prepare for negative scenarios that might occur. It is also possible to set up a communication system that can be activated in almost any emergency situation.

Do the Right Thing

In any emergency situation, it is imperative that a company put the public interest ahead of the organization’s interest. The company’s first responsibility is to the safety and well-being of the people involved. Once safety has been restored, the company needs to face the public and face the facts. The company should never try to minimize a serious problem or “smooth it over” in the hope that no one will notice. Conversely, don’t blow minor incidents out of proportion or allow others to do so. Social media has accelerated the speed at which information about a crisis can spread; the viral affect of social networks such as Twitter means that stakeholders can break news faster than traditional media, which makes managing a crisis harder. However, a company should not speculate; if they don’t know the facts, they should say so and promise to get back to the media as soon as possible.

Communicate Quickly and Accurately

Positive, assertive communication focuses attention on the most important aspects of the problem and moves the process forward to resolution, even in the face of antagonistic news media. Media representatives have an obligation to provide reliable information to their audiences, and they will get that information whether or not company spokespeople cooperate; if a company will not comment on the situation, someone else will. Serving as one of the major sources of media information in a crisis is a means of maintaining control. If necessary, activate the crisis management team. Act quickly and spare no expense in distributing the information you determine the media and others should have.

Follow Up

It is important to make amends to those affected and then do whatever is necessary to restore the organization’s reputation in the community. It is helpful to perform an act of goodwill during or immediately after a crisis when possible. Internal policies should be changed to minimize a repeat of the crisis situation. The crisis communication plan should be revised based on any new learnings.

Tylenol Medication

Johnson & Johnson’s Tylenol medication was once laced with cyanide. In time, Johnson & Johnson learned to deal with the negative public relations.

13.4.3: Measuring Effectiveness of Public Relations Efforts

Measuring and evaluating the effectiveness of a public relations campaign is necessary to ensure that established objectives are met.

Learning Objective

Explain how organizations can measure and evaluate the effectiveness of the campaign

Key Points

• The most basic level of measuring effectiveness comes from compilations of message distribution and media placement. One elementary form of evaluation is simply to count how many news releases, feature stories, photos, letters, etc. are produced in a given period of time.
• Measuring the effectiveness of public relations involves the measurement of changes in attitudes, opinions, and behavior, which can often be subjective and up to interpretation.
• Social media measurement refers to tracking social content such as blogs, wikis, news sites, and social networking sites such as Twitter and Facebook, as a way to determine the volume and sentiment of online conversation about a brand or topic.

Key Terms

social media

Interactive forms of media that allow users to interact with and publish to each other, generally by means of the Internet.

Evaluation

a systematic determination of a subject’s merit, worth and significance, using criteria governed by a set of standards. It can assist an organization to assess any aim, realizable concept or proposal, or any alternative, to help in decision-making; or to ascertain the degree of achievement or value in regard to the aim and objectives and results of any such action that has been completed.

Example

• Quick Response (QR) codes have become increasingly popular. Users can access the information via QR codes using their mobile devices. However, placing a large QR code on a highway billboard (such as the one seen here on the side of a highway is not a good idea. Encouraging people to use their cell phones to read the QR code while driving at high speeds is an ineffective PR campaign.

Evaluation of a public relations campaigns is the measurement of results against established objectives, which are set during the planning process. The desire to improve results the next time is a major reason for evaluating public relations efforts. Before any public relations program can be properly evaluated, it is important to clearly establish a set of measurable objectives. Public relations personnel and management should agree upfront on the criteria that will be used to evaluate success in attaining objectives, rather than waiting until the end of the program to determine how it will be evaluated.

When establishing objectives and measurement criteria, consider the following questions:

1. Was the activity or program adequately planned?
2. Did the recipients of the message understand it?
3. How could the program strategy have been more effective?
4. Were all primary and secondary audiences reached?
5. Was the desired organizational objective achieved?
6. What unforeseen circumstances affected the success of the program or activity?
7. Did the program or activity fall within its budget?
8. What steps can be taken to improve the success of similar activities in the future?

Sophisticated techniques, including computerized news clip analysis, survey sampling, quasi-experimental designs, and attempts to correlate efforts directly with sales, can be used for measurement. A minimum of three levels of measurement and evaluation include:

• On the most basic level are compilations of message distribution and media placement. One elementary form of evaluation is simply to count how many news releases, feature stories, photos, letters, etc. are produced in a given period of time. This kind of evaluation provides management with the staff’s productivity and output.
• The second level, which requires more sophisticated techniques, measures audience awareness, comprehension, and retention of the message. For example, editors of newsletters should evaluate readership annually to help ascertain reader perceptions, the credibility of the source, and the extent to which the newsletter meets organizational objectives.
• The third level is the most advanced level. It is the measurement of changes in attitudes, opinions, and behavior.

Social media measurementrefers to tracking various social content such as blogs, wikis, news sites, micro-blogs such as Twitter, social networking sites, video/photo sharing websites, forums, message boards, blogs, and other user-generated content to determine the volume and sentiment of online conversation about a brand or topic, and to gain insight on consumer choices. This information indicates what marketing strategies appear to be working and which ones are not.

QR Codes Gone Wrong

Placing large QR codes on billboards on busy streets or highways may not be an effective approach to public relations.

12.1: Introduction to Integrated Marketing Communications

12.1.1: Introduction to Integrated Marketing Communications

Learning Objective

Discuss factors that have prompted the shift from mass communications to integrated marketing communications

Key Points

• Integrated marketing communications is an approach used by organizations to brand and coordinate their marketing efforts across multiple communication channels.
• As marketing efforts have shifted from mass advertising to niche marketing, companies have increasingly used IMC to develop more cost-effective campaigns that still deliver consumer value.
• Typically, communication tools for IMC encompass both traditional and digital media, such as blogs, webinars, search engine optimization, radio, television, billboards, and magazines.

Key Terms

value proposition

The benefit offered by an organization’s product or service.

touch point

Any way a consumer can interact with a business, whether it be person-to-person, through a website, an app, or other form of communication. 

search engine optimization

The use of various techniques to improve a website’s ranking in search engines in the hopes of attracting more visitors.

Introduction to Integrated Marketing Communications

Integrated marketing communications (IMC) is an approach used by organizations to brand and coordinate their communication efforts. The American Association of Advertising Agencies defines IMC as “a comprehensive plan that evaluates the strategic roles of a variety of communication disciplines and combines these disciplines to provide clarity, consistency and maximum communication impact.” The primary idea behind an IMC strategy is to create a seamless experience for consumers across different aspects of the marketing mix. The brand’s core image and messaging are reinforced as each marketing communication channel works together as parts of a unified whole rather than in isolation.

Promotional Tools

IMC unifies promotional tools across all marketing communication channels.

A freezer shelf with different boxes of Blue Bell ice cream bars. Each type of dessert has its own box design.

The Shift from Fragmented to Integrated Marketing Communications

Prior to the emergence of integrated marketing communications during the 1990s, mass communications—the practice of relaying information to large segments of the population through television, radio, and other media—dominated marketing. Marketing was a one-way feed. Advertisers broadcasted their offerings and value propositions with little regard for the diverse needs, tastes, and values of consumers.

Often, this “one size fits all” approach was costly and uninformative due to the lack of tools for measuring results in terms of sales. But as methods for collecting and analyzing consumer data through single-source technology such as store scanners improved, marketers were increasingly able to correlate promotional activities with consumer purchasing patterns. Companies also began to downsize their operations and expand marketing tasks within their organizations. Advertising agencies were also expected to understand and provide all marketing functions, not just advertising, for their clients.

Today, corporate marketing budgets are allocated toward trade promotions, consumer promotions, branding, public relations, and advertising. The allocation of communication budgets away from mass media and traditional advertising has raised the importance of IMC importance for effective marketing. Now, marketing is viewed more as a two-way conversation between marketers and consumers. This transition in the advertising and media industries can be summarized by the following market trends:

• a shift from mass media advertising to multiple forms of communication
• the growing popularity of more specialized (niche) media, which considers individualized patterns of consumption and increased segmentation of consumer tastes and preferences
• the move from a manufacturer-dominated market to a retailer-dominated, consumer-controlled market
• the growing use of data-based marketing as opposed to general-focus advertising and marketing
• greater business accountability, particularly in advertising
• performance-based compensation within organizations, which helps increase sales and benefits in companies
• unlimited Internet access and greater online availability of goods and services
• a larger focus on developing marketing communications activities that produce value for target audiences while increasing benefits and reducing costs

The Tools of Integrated Marketing Communications

The IMC process generally begins with an integrated marketing communications plan that describes the different types of marketing, advertising, and sales tools that will be used during campaigns. These are largely promotional tools, which include everything from search engine optimization (SEO) tactics and banner advertisements to webinars and blogs. Traditional marketing communication elements such as newspapers, billboards, and magazines may also be used to inform and persuade consumers. Marketers must also decide on the appropriate combination of traditional and digital communications for their target audience to build a strong brand-consumer relationship. Regardless of the brand’s promotional mix, it is important that marketers ensure their messaging is consistent and credible across all communication channels.

Benefits of Integrated Marketing Communications

With so many products and services to choose from, consumers are often overwhelmed by the vast number of advertisements flooding both online and offline communication channels. Marketing messages run the risk of being overlooked and ignored if they are not relevant to consumers’ needs and wants.

One of the major benefits of integrated marketing communications is that marketers can clearly and effectively communicate their brand’s story and messaging across several communication channels to create brand awareness. IMC is also more cost-effective than mass media since consumers are likely to interact with brands across various forums and digital interfaces. As consumers spend more time on computers and mobile devices, marketers seek to weave together multiple exposures to their brands using different touch points. Companies can then view the performance of their communication tactics as a whole instead of as fragmented pieces.

The other benefit of integrated marketing communications is that it creates a competitive advantage for companies looking to boost their sales and profits. This is especially useful for small- or mid-sized firms with limited staff and marketing budgets. IMC immerses customers in communications and helps them move through the various stages of the buying process. The organization simultaneously consolidates its image, develops a dialogue, and nurtures its relationship with customers throughout the exchange. IMC can be instrumental in creating a seamless purchasing experience that spurs customers to become loyal, lifelong customers.

12.1.2: The Communication Process

Learning Objective

Explain how communication theory impacts integrated marketing communications

Key Points

• The communications process involves two or more persons attempting to consciously or unconsciously influence each other through the use of symbols or words.
• Our ability to receive, communicate, and process information and external stimuli all play a part in the way we perceive advertising and promotional messages.
• The nature of a person’s role and their environment and personal characteristics both affect the way he or she perceives marketing messages and company brands.

Key Terms

communication

the concept or state of exchanging data or information between entities

stimuli

Something external that influences an activity.

The Communications Process

The most basic form of communication is a process in which two or more persons attempt to consciously or unconsciously influence each other through the use of symbols or words to satisfy their respective needs. Likewise, integrated marketing communications uses this communications process to persuade target audiences to listen and act on marketing messages. Our ability to receive, communicate, and process information from other communicators and outside stimuli enables us to perceive the advertising and promotional messages central to integrated marketing communications.

Two-way Communication

The communications process involves two or more persons exchanging words or symbols.

Audience Roles

People play different roles – friend, parent, boss, client, customer, or employee – depending on the exchange during the communications process. The nature of the role directly affects the nature of communication. Communication theory points to the fact that each communicator is composed of a series of subsystems. The input subsystem permits the communicator to receive messages and stimulus from external sources as well as from other communicators. It involves the reception of light, temperature, touch, sound, and odors via our immediate senses. These stimuli are evaluated and recognized using our ears, eyes, skin, nose, and taste buds. Thus, we input and perceive advertising messages – a television commercial or a salesperson’s pitch – using this process of perception.

Thus, organizations must keep in mind the different subsystems of their target audiences when devising integrated marketing communications strategies. Companies must also consider other consumer stimuli such as past experiences, education, health, and genetics when developing communications for certain target markets. Some people may process the humor in a company advertisement more quickly than others due to factors such as age or culture.

Communication systems also exist within an environment such as a corporate office or school. The environment is everything internal and external to the communication system that can affect the system (family, school, competing advertisements, and so on). Each of the factors within the environment interacts with the communication system to a different degree. As a result, where and when consumers interact with company advertisements and promotional tools will also affect their perception of the brand.

12.1.3: Consumer Perception of Communication

Learning Objective

Explore the concepts of integrated marketing communications from the perspective of the consumer

Key Points

• Marketing has changed significantly in recent times. With more channels, touchpoints, and global markets than ever before, organizations must integrate various marketing communications into one unified strategy.
• Integrating various facets of marketing communications starts with understanding the consumers themselves, including their perception of the brand.
• By actively listening to consumer needs, and restructuring the organization to promote two-way communication between the firm and the consumer, organizations can refine their marketing message for their market.
• The objective of creating a positive, clear, and accurate perception of the organization by consumers is to empower loyalty and engagement between the firm and their customers.

Key Term

Integrated marketing communications (IMC)

The science of aligning a variety of touchpoints between an organization and their consumers in terms of unified and clear messaging.

Integrated Marketing Communications (IMC)

Marketing has evolved significantly, particularly in the recent, technology-driven social media economy. As a marketer in the globally connected economy, integrating marketing communications and branding strategies to deliver a consistent, clear, and concise message to prospective consumers is more important than ever. 

Integrated marketing communications (IMC) pursues this, expanding upon traditional marketing strategies to incorporate broader storytelling across a wider variety (and consistently expanding) series of communication channels between the organization and it’s various stakeholders. From a technical view, this is all about identifying and aligning the vast array of tools in a marketer’s kit (i.e. advertising, blogs, social media, PR, direct selling, etc.). However, another key piece to this puzzle is how the consumer feels about the organization, and how receptive they are to the values and operations of the company.

Touch Point Wheel

Integrated marketing communications revolve around touchpoints, which are places where the potential consumer and the organization have an opportunity to communicate or interact. 

A diagram of the Touch Point Wheel which includes the pre-purchase experience (website, advertising, collateral), the purchase (product/service assortment, point of purchase displays, product performance, parts delivery), and post-purchase (product quality, loyalty programs, billing, customer service).

Consumer Perceptions

Marketing faces a number of challenges in the modern world, mostly revolving around trust, ad blindness, and the assumption by consumers that businesses are “just trying to sell them something.” Consumers are apt to naturally dismiss ads as bias, which traditionally they often were (and are). This is one of the great mistakes of marketing that integrated and iterative communication seeks to solve.

The Outside-in Approach

Through integrating communication strategies and listening carefully to consumer values and perspectives, organizations can evolve to fit their markets and provide users with the type of communication, products, services, and values that are being demanded. This is not about creating ad materials, at least not at first. At this stage, the organization must actively listen to the needs, wants, opinions, beliefs, and perceptions of their core communities (i.e. stakeholders), and strive to become what it is that these stakeholders expect them to be. This is an iterative process, where consumer perceptions are constantly being measured and built back into the organizations operations, products, services, and values. 

The Inside-out Approach

Generally speaking, this approach is inferior to the outside-in approach for the simple reason that outside-in is intrinsically consumer-oriented. The inside-out approach, however, is used by firms with strong values to which they are deeply committed. This approach focuses on identifying and communicating one, single, clear ,and perfectly unified message, and displaying that as the integral brand all consumers encounter. It works best when it is honest, clear, and aligned with the opinions and values of consumers.

Cross-functional Strategic Approach

As IMC continues to evolve, the most common perspective has become the cross-functional strategic approach to consumer perceptions. In this approach, organizations focus on building a customer-centric organization, where all that matters is creating touchpoints and engagement with prospective users. In this model, the entire organization is often restructured to build interconnected and agile channels between the firm and the consumers. Two-way communication and constant iteration is the central dynamic of this model.

Loyalty

The ultimate objective in identifying and building consumer perceptions into an integrated marketing strategy is engagement and loyalty. This means that consumers will identify positively with the brand, and prefer to buy habitually from the organization (as opposed to the competition). This is accomplished through truly integrating a customer-centric strategy.

Loyalty Grid

Customer loyalty encompasses both perception and behavior, represented here in a small grid where relative attitude and patronage are assessed at higher and lower levels.

A grid that shows loyalty where relative attitude and repeat patronage are rated as high or low based on spurious loyalty, no loyalty, loyalty, and latent loyalty.

12.1.4: AIDA Model

Learning Objective

Define the AIDA model and how the system is used to guide integrated marketing communications

Key Points

• AIDA stands for attention, interest, desire, and action.
• The AIDA model can be used by organizations to guide marketers to target a market effectively.
• American advertising and sales pioneer, Elias St. Elmo Lewis, is credited for developing the AIDA model.

Key Terms

pique

To excite someone to action; to stimulate a feeling or emotion.

target market

a group of people whose needs and preferences match the product range of a company and to whom those products are marketed

advertisement

A commercial solicitation designed to sell some commodity or service.

AIDA Model

AIDA stands for attention, interest, desire, and action. It is an acronym used in marketing and advertising, which helps marketing managers develop effective communication strategies and communicate with customers in a way that better responds to their needs and desires. AIDA describes a common list of events that occur when a consumer views an advertisement. Each letter in the acronym stands for the following:

• The “A” represents attention or awareness, and the ability to attract the attention of the consumers.
• The “I” is interest and points to the ability to raise the interest of consumers by focusing on and demonstrating advantages and benefits (instead of focusing on features, as in traditional advertising).
• The “D” represents desire. The advertisement convinces consumers that they want and desire the product or service because it will satisfy their needs.
• The “A” is action, which leads consumers toward taking action by purchasing the product or service.

The system is used to guide marketers to target a market effectively. Naturally, as organizations move through each step of the AIDA model, a percentage of initial prospects are lost throughout the sales cycle.

Car advertisements are prime examples of results stemming from the use of the AIDA model to narrow the target market. Marketers in the automotive industry know their advertisements must grab the attention of consumers, so they use colors, backgrounds, and themes that would appeal to them. Next, automotive marketers pique interest by showing the advantages of owning the car. In the case of the Mini-Cooper, for instance, marketers imply that a small car can get the consumer to open spaces and to fun.

Car Advertisement

Car advertisements are made to grab attention, pique interest, meet desires, and evoke action in consumers.

Third, automotive marketers find what their consumers desire. For Mini-Cooper drivers, it’s the “fun” of driving, while for Prius consumers it may be the fuel economy or the environmentally friendliness. Only after evaluating consumer desires are marketers able to create effective campaigns. Lastly, marketers encourage consumers to take action by purchasing the product or service.

History Of the AIDA Model

American advertising and sales pioneer, Elias St. Elmo Lewis, is largely credited for developing the AIDA model. In one of his publications on advertising, Lewis identified at least three principles that should be present in an advertisement:

• The mission of an advertisement is to attract a reader, so that he will look at the advertisement and start to read it.
• The advertisement must then interest him, so that he will continue to read it.
• Finally, the advertisement must convince him, so that when reads it, he will believe it.

Lewis believed that if an advertisement contained these three qualities, then it was an effective advertisement.

Improvements to the AIDA Model

New phases such as satisfaction (AIDAS) and confidence (AIDCAS) have been added to the original AIDA model. These later models acknowledge the need to satisfy the customer so as to encourage repeat purchases and generate product referrals. Other modifications include the model’s reduction to the three steps known as the CAB model. The steps include cognition (awareness or learning), affect (feeling, interest, or desire) and behavior (action).

Later developments also introduced more flexible uses of the AIDA model such as the reordering of steps for different consumer-to-product relationships. Additionally, as experts have examined the AIDA Model, more defined practices and theories have been developed. These practices include the TIREA scale, which focuses on breaking down the decision-making process into more defined components. The TIREA represents thought, interest (desire), risk (evaluation), engagement, and action.

12.2: Understanding Promotion

12.2.1: Defining Promotion

As a key marketing element, promotion comprises communications tactics used to educate consumers, increase demand, and differentiate brands.

Learning Objective

Describe how promotional tools work together to educate consumers and generate sales

Key Points

• A promotional plan identifies where, when, and how advertising, personal selling, PR, sales promotion, and direct marketing tactics will be used to support sales and branding objectives.
• Promotional tools are used to increase sales, build brand value and recognition, strengthen market positioning, and launch new products.
• Online banner advertisements, store rebates, contests, events, and media placement are all examples of communications tactics used in the promotional mix.

Key Terms

Direct Marketing

Marketing that reaches customers by communications directly addressed to the customer.

publicity

Advertising or other activity designed to rouse public interest in something.

stakeholder

a person or organization with a legitimate interest in a given situation, action, or enterprise

What is Promotion?

Promotion is one of the primary elements used in the marketing mix. Thus, promotional efforts should work in harmony with product marketing, pricing, and distribution actions that target prospects and customers. When assembling a promotional plan, marketers typically employ one or more of the following five promotional subcategories: personal selling, advertising, sales promotion, direct marketing, and publicity (or public relations).

These communication tools serve as tactics within the promotional plan to accomplish objectives such as:

• Increasing sales
• Launching new products
• Creating and building brand equity
• Establishing market positioning
• Retaliating against competition
• Strengthening brand image

As organizations implement their promotional plan, they also seek to educate consumers, increase consumer demand, and differentiate their products and services in the marketplace .

Cingular Rewards Card

Companies use promotional tactics such as reward programs to increase sales and acquire customers.

The Promotional Mix

Increased market segmentation, information technologies, and digital communications have created new ways for promoting products across different media. Today, organizations can create online banner advertisements, social networking websites, blogs, and search engine optimization campaigns to promote their products and services. However, traditional promotional tools such as special events, celebrity endorsements, in-store coupons, and newspapers are also employed to entice customers to purchase goods. For example, retailers often use promotional tactics including discounts, store rebates, free items, contests, and other special offers to drive new sales and repeat purchases.

The promotional tools used to educate customers and generate sales vary depending on the organization’s objective. Because public relations (PR) focuses on influencing and shaping public opinion, PR efforts are useful for building brand value and generating positive stories around products and services. Events, which often generate publicity, can serve long-term objectives for building partnerships with external stakeholders, strengthening customer loyalty and enhancing industry credibility.

However, organizations may choose to use short-term mechanisms such as sales promotions and coupons to generate immediate customer interest and revenue. Direct mailers or email newsletters further support these incentives to prompt customer action and purchases. Print, television, radio, and online advertising can be used to promote all of these activities and drive sales for the organization. These promotional tools are even more effective when built into an integrated marketing communication strategy, since all communications work together simultaneously to multiply consumers’ exposure to brand messaging.

12.2.2: The Many Goals of Persuasion

Promotional tactics are frequently used by companies to persuade consumers to choose their products over competing brands.

Learning Objective

Describe the techniques used to persuade consumers to purchase products over competing brands

Key Points

• To convince consumers to purchase their products over competing brands, companies focus on differentiating their products, building brand awareness and loyalty, and providing consumer education.
• Companies employ a myriad of design techniques to shape consumers’ perception of the physical products displayed in stores, on the street, or in the digital space.
• Some of the promotional tools used to convince and persuade consumers to make purchasing decisions include reward programs, positive consumer reviews, and attractive advertisements.

Key Term

differentiation

The process of distinguishing a product or offering from others to make it more attractive to a particular target market.

The Many Goals of Persuasion

To convince consumers that their products possess advantages over similar brands, companies focus on differentiating their brands using various promotional tactics. Advertising, personal selling, sales promotion, and public relations activities are commonly used to persuade consumers to make a purchase. Brands constantly promote product features and benefits to convince consumers that their products either address the consumer’s needs or solve a particular problem. By promoting their brand in creative and compelling ways, companies hope to create positive esteem and loyalty toward the brand to fuel repeat purchases and customer retention.

T-Mobile Promotion

Companies use special promotions to drive repeat business and brand loyalty.

Product Differentiation

When running promotional programs, companies seek to clearly and effectively market their product’s differential factor. Differentiation sets similar products apart from one another, and creates value for consumers evaluating different brands. Differentiating products allows companies to influence consumers’ perception of their brand in an increasingly crowded marketplace. If the product’s differential factor is compelling enough, companies hope to convince consumers to continually choose their products over competitors.

Companies employ a myriad of techniques to shape consumers’ perception of the physical products displayed in stores or on the street. Common persuasive techniques include:

• Using bright and attractive displays depicting emotions such as excitement, relaxation, or happiness.
• Incorporating prominent and easily recognizable colors in billboards, print ads, and design packaging.
• Strategically placing and arranging products in stores to allow for maximum visibility and purchase opportunities.

Colors and imagery can serve as powerful visuals for quickly conveying a product’s ability to successfully meet consumer needs. For instance, colors such as yellow and orange provoke excitement while blue and green establish trust, cleanliness, and calmness. As more consumers spend their time surfing the Internet on computers and mobile devices, similar strategies are used in online promotions such as banner ads and email communications. Digital communications, like traditional communications, rely on captivating and clever messaging to prompt open rates and click-throughs to advertisers’ landing pages. With social media, companies have the ability to advertise their product’s differential qualities to any person in the world, at any given instant.

Brand Awareness and Loyalty

The primary objective of marketers and advertisers is to present ideas in a manner that is so convincing that consumers will not just purchase a product or service once, but will do so repeatedly over time. Companies must thus remind customers of their product’s unique benefits using messaging that resonates with consumer needs and values. Branding, product marketing, and loyalty marketing all form part of the customer proposition – the subjective assessment by the customer on whether to purchase a brand based on the value they receive from each of these marketing elements.

As companies compete for consumer attention across print, television, radio, and the Internet, promotional tools such as reward and discount programs are repeatedly offered to loyal customers in return for their continued business. The airline industry’s frequent flyer program is a successful example of loyalty marketing. These programs rely on the earned loyalty of current customers to attract new loyalty from future customers. However, exclusive incentive programs must strike a balance between increasing benefits for new customers over any existing loyalty plan they are currently in and keeping existing customers from moving to new plans.

Consumer Education

Companies look to be brand leaders in their industry by providing consumers with relevant information on product pricing, functionality, and availability. Providing consumers and other brand stakeholders with the skills, concepts, and understanding required to achieve maximum satisfaction and utilization of the product can transform consumer needs into perceived wants. Even after a purchase is made, companies devote sales and customer service teams to supporting customers with training and other educational programs. This idea is especially true for highly technical products such as computer software, which regularly release upgrades and new features.

Reviews of products in trade publications and on websites can also help promote or downgrade products. Consumers may include review and rating websites such as yelp.com or consumer reports as part of their education on product features and benefits. These reviews also serve as indirect public relations for the brand, potentially enhancing and strengthening brand value. Outside consumer opinions and expert insight fall under the arsenal of promotional tools that can persuade consumers during the buying decision process.

12.2.3: Identifying Prospects

Organizations must identify prospective customers and understand their needs and wants to improve the odds of making a sale.

Learning Objective

Outline the sales process, and tactics used to target prospects

Key Points

• Personal selling functions as an essential component within a company’s larger integrated marketing communications strategy.
• The first step in identifying a target market is analyzing whether there is a strong correlation between product benefits and customer needs.
• Cold-calling, trade shows, direct mailings, product seminars, webinars, and advertisements are some of the promotional tools used to generate new leads.

Key Terms

bottom line

The final balance; the amount of money or profit left after everything has been tallied.

unique selling proposition

Any aspect of an object that differentiates it from similar objects.

sales pipeline

A visualization of the sales process of a company.

Identify Prospects

Personal selling functions as an essential component within a company’s larger integrated marketing communications strategy. Customer sales are the lifeblood of a business, contributing directly to the company’s bottom line. Before closing a sale or launching promotional activities, organizations must first understand the needs, wants, and habits of their target audience. Identifying these prospects or potential customers early in the sales process is key to keeping a company’s sales pipeline full. Generating a steady flow of prospective customers into this sales pipeline builds consistent revenue streams, ensuring longevity for the organization.

Sales Presentation

Salespersons conduct significant research on their target markets to better market products and services to prospects.

Two men conduct research.

The Importance of Sales Prospecting

Prospecting for customers is the first step in personal selling. Consequently, identifying and maintaining a steady list of prospects is usually a salesperson’s top priority. As a company introduces and markets new products, the number of customers will fluctuate depending on the needs of its target market. It is the salesperson’s job to continually replace these former customers to maintain and increase sales.

Prospects are usually labeled as sales leads, which can eventually be converted into contacts and opportunities. For sales prospecting to be an effective component of integrated marketing communications, organizations implement sales methodologies to qualify and track the conversion rate of sales leads. These systems are also used to map the different marketing communication touchpoints that help funnel leads into the organization’s sales process.

Tactics Used to Identify Prospects

Before an organization begins marketing to prospects, they must conduct extensive research and analysis on their potential market. Ideally, the organization’s salespersons are also working with marketers who are supplying marketing analysis to support sales efforts. Likewise, communications including websites, events, public relations, advertising, and social media are all promotional tools helping to drive prospects towards the organization.

The marketing and sales teams’ market analysis validates if a strong correlation exists between product benefits and customer needs. This entails finding out customers’ requirements, priorities, and budget. Other data companies use to build customer profiles include psycho-demographic characteristics such as age, sex, profession, personal interests, and buying habits. If the potential market is very large, then organizations must decide whether to target specialized segments to save time and money. Companies that are able to tailor their products or services to a specific niche market can develop a unique selling proposition (USP) in that particular market segment. A brand’s USP enables it to enter markets where there is less competition and greater potential to build brand equity and recognition. It can also shorten time to sale. The longer companies spend marketing to prospects, the more people and financial resources are spent to close a sale and generate revenue.

After researching and identifying their target market, organizations use promotional tools including cold-calling, trade shows, direct mailings, product seminars, webinars, and advertisements toward leads generation. Organizations also use these tools to build mailing lists for newsletters and other promotional activities to nurture relationships with prospects and guide them further along the buying process. Organic search engine results and word-of-mouth referrals, particularly through social media and other digital channels, can also be powerful tools for identifying potential customers. Many organizations focus on building a strong web presence using effective search engine optimization, along with both traditional and digital communication channels, to generate new leads.

12.2.4: Encouraging Product Trials

Promotional tactics such as free samples and discounts are often used to encourage consumers to participate in product trials.

Learning Objective

Give examples of incentives used to encourage product trials

Key Points

• Adjusting price, product, and place enhances both the trial offer and appeal of the final product or service for consumers.
• Repackaging the offering so that consumers can test the product allows them to assess whether product benefits outweigh price and other factors during the buying process.
• Radio and television advertisements, public relations events, and mailings comprise some of the tools companies use to promote the availability and appeal of product trials.

Key Term

opt-in

The property of having to choose explicitly to join or permit something; a decision having the default option being exclusion or avoidance; used particularly with regard to mailing lists and advertisement.

Encourage Product Trial

Running a product trial is a common promotional tactic used by brands looking to enter a new market, release a new product, or increase existing sales. It is particularly useful for targeting specific audiences who are loyal to specific brands or are price-conscious. Product trials include free samples, price reductions, or other purchase incentives designed to encourage consumer use during and after the trial.

Free Samples

As part of product trials, companies offer free samples to customers.

A sign that says “free samples.”

Product trials are useful when companies need to adjust parts of their marketing communications strategy to successfully target a market segment. For example, college students may be particularly budget-conscious and choose products based on price rather than quality or popularity. Repackaging the offering so that students can “test drive” the product allows students to assess whether product benefits outweigh price and other factors during the buying process.

Promotional Tactics

To encourage consumers to participate in free trials, brands can bundle their offers with other incentives and discounts. Perks such as free shipping and handling and future coupons can all drive consumers toward making a purchase after the end of the free trial period.

Adjusting these three variables – price, product, and place (distribution or location) – enhances both the trial offer and the appeal of the final product or service. Developing communications for selected audiences most receptive to the brand’s offer, reduces time and money spent on implementing promotional programs.

Some of the promotional tactics companies employ to encourage consumer participation in product trials include:

• Advertising in media that target consumers are most likely to read or listen to.
• Sponsoring or exhibiting at an event related to the target consumers’ interests and following up with press coverage in local and national publications.
• Using an opt-in database to send mail-outs or email newsletters with information on how to take advantage of the product trial and related promotions.
• Promote the product trial online via websites, social media, and paid and non-paid search marketing programs.

12.2.5: Stimulating Demand

For brands to successfully stimulate consumer demand, they must understand consumer needs and motives.

Learning Objective

Discuss the psychological factors that drive consumer demand, and how they play into marketing segmentation

Key Points

• Before a consumer is motivated to purchase a product, there must be a physical, mental, or emotional need for the product or service.
• The source of motivation driving consumer demand can be internal, environmental, or psychological.
• Studies on consumer motivation have led to the development of segmentation or personality profiles that factor traits such as age, sex, income, and lifestyle.
• Companies can tailor their marketing communications strategy based on consumer segmentation to stimulate demand for products and services.

Key Terms

personality

a set of qualities that make a person (or thing) distinct from another

latent

Existing or present but concealed or inactive.

segmentation

The act or an instance of dividing into segments.

value proposition

The benefit (such as profit or convenience) offered by an organization’s product or service.

Stimulate Demand

Factoring consumer wants and needs is an essential component to assembling a successful marketing communications strategy. In the late 19^th and early 20^th centuries, most companies focused on producing products and services with little emphasis on customer needs and wants. Greater attention was given to the product or service, rather than understanding consumer behavior .

Stimulate Demand

To stimulate demand, brands must understand customers’ needs and motives.

Customers shop in a grocery store.

Given the emergence of globalization and information technologies in the last decade, new markets and increased competition have forced marketers to modify the traditional approach to marketing communications. Companies are now increasingly focusing on how to stimulate consumer demand and compete for customer loyalty. For brands to successfully compete, they must understand the consumer needs that lie at the center of marketing communications.

Deconstructing Motivation

For there to be a demand for products and services, there must be consumer need and motivation. The field of psychology defines motive as the inner drive or pressure to take action to satisfy a need. Motives produce goals, which can be positive or negative for the individual. In all cases, the need must be aroused or stimulated to a high enough level so that it can serve as a motive. It is possible and common to have latent needs that do not serve as the motive of behavior. The sources of this arousal may be internal (such as hunger); environmental (viewing a McDonald’s advertisement); or psychological (thoughts about food, which can cause hunger). For motivation to be useful in stimulating demand for products, brands must understand what motives and behaviors are influenced by the specific situation in which consumers engage in goal-directed, problem-solving behavior.

The difficulty of defining motives and dealing with motivation in consumer research accounts for its limited application in marketing. For the most part, the research in motivation involves benefit segmentation and patronage motives. Patronage motives typically concern the consumer’s reasons for shopping at a particular outlet. Benefit segmentation may include consumer labels such as price-conscious, convenience-oriented, service-oriented, or other motivation features. Factors including age, sex, lifestyle, profession, income, educational level, and personal interests have all been used to assemble personality profiles designed to decode consumer motives.

The Psychology Behind Demand

Knowing the basic personality traits of target customers can be useful information for companies when designing and implementing marketing communications campaigns. Promotional tactics such as contests might appeal to suburban moms, but be ignored by single, urban professionals. Nevertheless, marketers have found personality to be difficult to apply in marketing strategy. This is primarily due to the lack of metrics for assessing personality traits. Most available measures were originally developed to identify people with mental problems. These have little value or application for consumers who are mentally healthy. As a result, most marketers have turned to lifestyle analysis.

Lifestyle is one of the newer and increasingly important sets of factors being used to understand consumer behavior behind demand. Lifestyle has been generally defined as the attitudes, interests, and opinions of the potential customer. Such variables as interests in hunting, attitudes toward gender equality, and opinions on the importance of stylish clothing can be used to better understand consumer behavior. Lifestyle segmentation is one tool used by brands to connect their value proposition to the needs of particular individuals rather than large, undefined demographics. As a result, companies can tailor communications and promotional offers that target identifiable groups and stimulate their continued demand for products and services.

12.2.6: Reminding and Retaining Customers

Organizations have shifted to using personalized promotional tactics to retain customers and encourage repeat sales.

Learning Objective

Discuss the strategies and tactics used to retain customers

Key Points

• Personalized promotional tactics via websites and email marketing are particularly useful for customer retention programs.
• Marketing tactics used to remind and retain customers include discounts, offer redemptions, reward programs, and cross-promotions.
• Relationship marketing programs help companies counterbalance new customers and opportunities with current and existing customers to maximize profit.

Key Term

personalization

The act of changing an option of a multi-user software product to change the product’s behavior or style for one user.

Remind and Retain Customers

The promotional activities of an organization continue long after customer acquisition. Incorporating communications tactics that are effective in reminding current customers why they should continue purchasing a brand’s products is just as important as promoting to potential customers. As more brands compete for consumer attention in an increasingly crowded marketplace, organizations must develop marketing communications strategies that address customer challenges, appeal to customer needs, and drive repeat sales.

New Customers

Nurturing customer relationships can lead to customer referrals and new business.

A diagram that shows how businesses acquire new customers – acquisition (awareness, interest, desire, and action), retention (acknowledgment and dialogue), and new acquisition (incentivization and activation).

Promotional Tactics for Driving Repeat Purchases

One method organizations use to show appreciation for existing customers is personalized marketing. This practice had been most useful in online marketing, particularly via websites and email marketing. For example, a website can track a customer’s interests and make suggestions for future purchases. E-commerce sites help customers select and prioritize choices by organizing items based on past online behavior and purchases. Some companies allow for products to be customized using a configuration system.

The emergence of database technology for developing personalized products, ads, and services for specific users with particular profile attributes has helped organizations tailor their offerings for existing customers. Amazon is one company that pioneered the “one-to-one marketing” and personalization tactics that delivered targeted offers and related products to users. Retention strategies that incorporate personalization features may include one or more of the following:

• Product bundling (combining several products or services into one “package” and offering them at a single price)
• Cross-selling (selling related products to current customers), cross promotions (giving discounts or other promotional incentives to purchasers of related products)
• Loyalty programs (giving incentives for frequent purchases or customer referrals)
• Increasing switching costs (adding termination costs, such as mortgage termination fees)
• Integrating computer systems of multiple organizations (primarily in industrial marketing)

Other marketing communications tactics include discounts, offer redemptions, and point systems. The interactivity between brands and consumers occurs through the offer redemptions recorded by the point-of-sale systems, which can then update each individual shopper’s profile. Personalized marketing can be more accurate when based solely upon individual purchasing records due to the simplified and repetitive nature of retailers such as supermarkets.

Retaining Customers Through Relationship Marketing

Authors such as Don Peppers and Martha Rogers discuss the transition from managing products to managing customers, and differentiating customers rather than just products. This transition allows companies to develop economies of scope rather than economies of scale. To retain their customer base and satisfy customer requirements above those of competitors, brands must engage in the following process:

• Identify potential customers.
• Determine their needs and lifetime value to the company.
• Interact with customers and gather data on their requirements and behavior patterns.
• Customize products, services, and communications to individual customers.

Implementing these relationship marketing practices helps companies counterbalance new customers and opportunities with current and existing customers to maximize profit. It also counteracts the theory that new customers must be gained at the expense of losing older customers. Many companies in competing markets will redirect or allocate large amounts of resources toward customer retention, particularly in markets with increasing competition. Lead generation activities geared towards attracting new customers may be more expensive than the money and time spent on promotional tactics to retain existing customers. This idea represents a shift from classic marketing theories, which focus on attracting new customers and creating transactions rather than maintaining current customers.

12.3: The Promotion Mix

12.3.1: Advertising

Advertising communicates a message to a targeted audience and generates feedback in the form of a sale or other action taken by a consumer.

Learning Objective

Summarize the different components that comprise an advertising campaign

Key Points

• Through advertising, a marketer hopes to communicate a message to a targeted consumer group via means including print, electronic (radio and television), the Internet and mobile phones.
• The media plan, developed simultaneously with the creative strategy, schedules how and when consumers see advertisements.
• Effective advertising illustrates the product’s value and gives consumers a reason to take action and/or buy.
• A target audience is defined through information gathered from focus groups, demographics and by understanding how certain consumer groups think.

Key Terms

Image

an attitude or lifestyle advertisers attempt to link to a product.

Brand Character Statement

sets the tone of an advertisement and defines what the targeted consumer group should do or feel when they are exposed to it.

psycho-graphics

understanding how a certain group thinks .

Example

• “Hertz vs. Avis,” “Coke vs. Pepsi,” “American Express” vs. MasterCard.”

Advertising – How Marketers Communicate to Consumers

When a company pays to have a message that defines its goods or services delivered or communicated to as many people as possible, they are said to be advertising. Effective advertising illustrates the product’s value and gives consumers a reason to take action and/or buy. There are a variety of ways to promote a product. These methods are collectively referred to as Marketing Communications (MarCom) Matrix, and include direct marketing, public relations/publicity, new media, and advertising.

Through advertising, a marketer hopes to communicate a message to a targeted consumer group via means including print, electronic (radio and television), the Internet and mobile phones. Advertising generates feedback that is analyzed and measured. Good feedback typically translates into money spent on the product while bad feedback prompts the marketing source to reevaluate its marketing plan.

The Anatomy of an Advertising Campaign

Developing a brand character statement sets the tone of the campaign and defines what the targeted consumer group should do or feel when they are exposed to it. The strategy addresses the message that will be communicated while creative tactics dictate how the strategy is actually implemented.

A target group or audience is defined through information gathered from focus groups, demographics and by psycho-graphics, i.e. statistics illustrating how a certain group thinks and ultimately buys.

The product’s pros and cons are identified so that benefits are sold. How the product differs from its competition or its Unique Selling Position (USP) is also established. Facts, statistics, consumer images and scenarios are used to corroborate a campaign’s premise. Terms like “the best,” “new” and “traditional” position the product within the marketplace.

A campaign must fit the image of the marketer to ensure that its public perception remains intact. It must offer a rationale or “reason why” a product is able to deliver on its claim. Its “aperture,” or the proper timing and placement of an ad, can maximize a campaign’s success.

Developing a Media Plan

The media plan is an integral part of the advertising campaign and is developed simultaneously with the creative strategy. The standard media plan has four stages:

1. Stating objectives like reach or the number of different persons exposed, frequency of times the consumer is exposed to a message, and timing of media assertions over the course of the campaign.
2. Assessing how a particular message and target audience relates to different types of media by analyzing the research findings provided by the media type.
3. Implementation of media choices dictated by available budget or media types most likely to deliver the best results. The placement of advertisements along with their size and positioning are based upon data associated with the targeted consumer group.
4. The media budget is included in the actual advertising budget.

The Advertising Business and New Media

Advertising is often the only method of communication businesses use to speak to prospective consumers. Advertisements must reflect prevailing ideas by tapping into the social, cultural and moral pressures. Emerging advertising agencies often structure their business model to society’s ever changing ideals. Current technology is forcing advertisers to move away from antiquated structure and practices. The growth of interactivity and open sourcing has placed power in the hands of the consumer, giving them control over what they want to see and when they want to see it.

Mar Com Matrix

The building blocks of successful marketing.

A diagram of the Mar Com Matrix that shows how successful marketing is built from an idea (new media, direct marketing, advertising, public relations and publicity, promotion, and event marketing).

Advertising’s value is based upon how often it is viewed, used or shared. If the message is reaching more people, it is achieving the desired results. New media accelerates the process. No longer is a product limited by the scope and time-frame of a conventional advertising campaign. If an advertisement is interesting, entertaining or helpful, the message goes “viral” via social-networking websites and blogs. The once passive consumer has become a part of the process; an active advertising channel who impacts brands and how a product is perceived.

Ad Ladder

The key to successful advertising is to sell benefits, not features.

A diagram of the ad ladder that shows values from more consumer based to more product based (values, consumer benefit, product benefit, product feature, and attribute).

12.3.2: Personal Selling

Marketing impacts personal selling and improves the selling environment by increasing exposure to potential customers.

Learning Objective

Discuss the different elements of personal selling

Key Points

• A successful personal seller must utilize aggressive sales tactics that influence and control the process, presenting it as a mutually beneficial, interpersonal exchange of goods or services for equitable value.
• To be successful in personal sales, the salesperson must understand how to sell to the needs of a customer.
• Selling is defined as an interaction whereby an item of value is exchanged for a different item, which is usually money.

Key Terms

Prospecting

This involves finding and identifying buyers who are most likely to buy the product or service.

Gaining Commitment

This involves closing the deal or making the sale.

Example

• Alternative Close: Which would you prefer: the 36-inch or the 51-inch flat screen TV?

Personal Selling

Selling, the art of persuasion, is defined as a one-on-one interaction whereby a tangible or intangible item of value is exchanged for a different item, usually with money in an amount of equal or greater value of the item being sold. Selling is part of the promotional mix. It is systematic, repetitive, and measurable. When properly analyzed, sales data will offer objections to overcome and help to predict sales patterns and projections.

Personal Selling

The Marketing Hub describes relationships in the promotional mix.

Understanding Customer Needs

To be successful in personal sales, the salesperson must understand how to sell to the needs of a customer. Psychologist Abraham Maslow created a Hierarchy of Needs that offers useful information for personal selling. Maslow outlined five levels of need and as each level is fulfilled, a person progresses to the next one. At the most basic level, physiological and safety needs must be met with food, clothing, and shelter, so a product that meets these basic needs has potential to sell well. However, the basic human need to consume food and liquids should not be confused with wanting a hamburger and a soft drink.

Mid-level hierarchy needs are social in nature and include self-respect, self-esteem, and the esteem of others. They create a powerful internal motivation and drive demand for status-oriented products. Those selling luxury goods cater to esteem needs. When customers flaunt wealth by buying expensive products it is referred to as conspicuous consumption or luxury badging.

The Mechanics of Personal Selling

Sales capturing is defined as bringing in and closing deals. A successful personal seller must utilize aggressive sales technics that influence and control the process, presenting it as a mutually beneficial, interpersonal exchange of goods or services for equitable value.

At the core of personal selling is the human exchange between buyer and seller. The interaction is based upon fulfilling a need or desire with the product or service that is offered and paid for. A systematic approach to successful personal selling includes good prospecting, the salesperson’s in-depth knowledge of the product, and the qualification of potential buyers. Good prospects are predisposed and well-suited to the product or service being offered, allowing the salesperson to facilitate the exchange of value and to guide them through the process with a minimum amount of objections or resistance.

Selling Strategies

The personal selling process has eight steps: The first is prospecting, which involves finding and identifying buyers who are most likely to buy the product or service. There are numerous ways to qualify leads: cold calls by telephone, email, through social networking, or personal referrals. The word “cold” refers to fact that the person receiving the call is not expecting it or has not specifically asked to be contacted by a sales person.

Pre-approach is the next step used to prepare for the presentation. It consists of customer research and goal planning. The next step is the approach or initial meeting between the salesperson and the customer. Following the approach is the need assessment step when the customer’s need for the product is evaluated by the salesperson. During this step, questions are asked to identify the current situation, the source and impact of any problems, the benefits of the product as part of the solution, and the buyer’s level of interest.

Once need is established, the salesperson is ready to present or demonstrate the product. This step is designed to grab the buyer’s attention, ignite interest, create desire, and inspire action (AIDA) by showing the product’s advantages and benefits. At this point, customer objections involving price, value, adequacy, the commitment to buy, or other issues are addressed. Successful salespeople anticipate objections and respond to them respectfully before advancing to gaining commitment, which involves closing the deal or making the sale.

Salespeople use different types of methods to close deals such as the alternative close, the assumptive close, the summary close, or the special-offer close. The last and most crucial step in the process is follow up to ensure customer satisfaction and help establish a relationship.

Other sales strategies include direct sales conducted outside of a retail location, guaranteed, needs-based, persuasive, hard, heart, relationship, target account, priced-based, and solution selling.

The Relationship between Sales and Marketing

Marketing impacts personal selling and improves the selling environment by increasing exposure to potential customers. Marketing campaigns seek to drive potential customers towards sales people.

Though quite different in nature, marketing and sales departments handle similar concepts. It is essential for them to maintain a good working relationship based upon clear and concise communication and interaction.

12.3.3: Sales Promotion

Sales Promotion stimulates market demand, product availability and coordinates public selling, advertising and public relations.

Learning Objective

Explain how sales promotion is used in the promotional mix

Key Points

• Sales Promotions – increase the perceived value of a product and are usually offered for a limited amount of time.
• Consumer Sales Promotions – target the end user or the customer such as coupons or point of purchase displays.
• Trade Sales Promotions – target organizational customers such as dealers, distribution channels or sales teams that stimulate immediate sales such as sales incentive contests or dealer wholesale price discounts.
• Retail Sales Promotions – are devised and initiated by in-store management such as “buy one get one free” programs or “kids eat free” nights.
• Promotional Mix – a marketing plan’s seven components consisting of sales promotion, advertising, personal selling, direct marketing, publicity/public relations, corporate image and exhibition.

Key Terms

Aisle interrupters

product signs that jut into the aisle from the shelf, a point of purchase sales promotion device

Promotion

dissemination of information about a product, product line, brand, or company

sales promotion

media and non-media marketing communication employed for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability

sales promotion device

A type of offer, in the form of a rebate, coupon or price deal that stimulates product sales or prompts a customer to take action

loss leader

a sales promotion device that offers a temporary reduction on a popular product’s price to stimulate sales on other products being offered.

The primary objective of a sales promotion, a catch all marketing function, is to stimulate market demand, improve product availability and to coordinate public selling, advertising and public relations. A successful sales promotion is meant to prompt a targeted consumer group to show interest in the product or service, try it or ideally buy it. They are delivered to targeted groups via media and non-media marketing communications during a pre-determined, limited amount of time. It is a component of a marketing plan’s “promotional mix” that usually includes advertising, personal selling, direct marketing, publicity/public relations, corporate image and exhibition. Sales promotion cannot compensate for a poor product, a declining sales trend, ineffective advertising or can it create strong brand loyalty.

There are two types of sales promotions; consumer and trade. A consumer sales promotion targets the customer while a trade sales promotion focuses on organizational customers that can stimulate immediate sales.

Contests, coupons, giveaways, loss leaders, point of purchase displays, premiums, prizes, product samples and rebates are sales promotion devices. They are delivered via mixed forms of media such as print, digital, electronic (radio and television) and online in various forms of new media.

Sales Promotions Have Purpose

Sales promotions launch new products, especially ones with perceived high risk, they create repeat customer purchase patterns, move large amounts of products quickly, counter the strategy of a competitor and can move marginal customers to make a choice.

Consumer Sales Promotion Techniques

Consumers attract the greatest number of sales promotion devices. Commonplace techniques include price deals that offer a temporary price reduction while cents-off deals offer a brand at a lower price, usual as a percentage marked on the package. Price pack deals offer a certain percentage more of the product for the same price while a loss leader offers a temporary reduction on a popular product’s price in to stimulate sales for other products offered. Reward programs involve collecting points, miles, or credits from purchases and then redeeming them for rewards. The purchase of a product can also enter a buyer in a contests, sweepstakes, or online games.

One of the most common sales promotion techniques involves coupons. They are used to lower prices, for discounts, free goods and value added giveaways. They are dispensed as neckers placed around the ‘neck’ of a bottle, on-shelf meaning available where product is displayed, as a free-standing insert (FSI) or booklet that is delivered inside the local newspaper, at checkout, on-line, and displayed and shown on mobile phones for redemption. Now, by tweeting or posting sale promotions, the circle of communication is wider than ever. Even “cashback” or rebate offers can be redeemed on line instead of through the mail.

Point-of-sale displays are in-store sales promotion techniques. Aisle interrupters or signs jut into the aisle from the shelf, hanging signs called danglers sway with consumer traffic, product dump bins stimulate curiosity, glorifiers elevate products for better visibility, wobblersigns draw attention and lipstickboards convey product information written in crayon.

Other in-store sales promotions include pull-out fact sheets, special lighting and animated displays powered by solar energy and policy promotions such as “ladies nights” or “kids eat free” offers.

Trade Sales Promotion Techniques

Wholesalers, retailers and other organizational groups are offered a wide array of sales promotion devices such as trade allowances or short term incentives to encourage retailer to stock up on a product, dealer loaders incentivizing product purchase and display, trade contests for selling the most product, point-of-purchase displays to create impulse buying and spiffs or bonus commissions on certain products and trade or functional discounts paid to distribution channel members for conducting sales and special events.

Sales Promotion Techniques at the Retail

Retailer sales promotion devices are regularly rolled out for new marketing initiatives. For example “buy one, get one free, three for two, buy quantity and receive a lower price or percentage discounts on specific days of the week.

Price Deals

Co-promotional sales, or price deals, involve two different products.

A sales promotion flier for a deal between Days Inn and American Express.

Sales Promotion

Mail-in or online rebates offer give money back to customers on products or services.

A sales promotion flier that highlights product rebates.

12.3.4: Public Relations

Public relations is the management of a message between an individual or organization and the public.

Learning Objective

Describe the different aspects of public relations and its primary functions within the promotional mix

Key Points

• Public relations is communicated through the media in the form of publicity events, speaking opportunities, press releases including video and audio news releases, newsletters, blogs, social media, press kits, and outbound communication to members of the press.
• The ideal end result of public relations is for the information to serve both the source and the public interest.
• All audiences or publics are stakeholders, groups or individuals that can affect or be affected by the actions of the business as a whole, but not all stakeholders are audiences.

Key Terms

Public

includes people who look, think, and act the same as well as those who do not.

Messaging

to construct a consistent and specific story around a P.R. event or project.

spin

an effect that colors the truth by selectively presenting facts that support a desired position and can sway public opinion.

Core Elements

Public relations is the management of a message between an individual or organization and the public that can be contracted on an hourly, monthly, annual, or “in-house” fee basis. Its primary purpose is to persuade stakeholders to adopt a certain point of view about a project or product. Simply put, public relations manages communication between an organization and the public. It is communicated through the media in the form of publicity events, speaking opportunities, press releases including video and audio news releases, newsletters, blogs, social media, press kits, and outbound communication to members of the press. The media is not paid to publish the information.

There are four core elements to public relations:

• Retain and create goodwill
• First do good, then take credit for it
• Identify and effectively communicate varying points of view and needs to well-defined targets
• It is a planned activity

Who Is the Public?

The public is defined as the totality of a group. The public includes people who look, think, and act the same as well as those who do not. When planning a public relations campaign the marketer should consider who would be most and least likely to interact with the message and what the dialogue would sound like.

What Public Relations Can Do

The response to public relations activities should lend itself to analysis and trending, to predict consequences, to guide executive decisions, and used to trigger planned programs of action. The ideal end results of public relations is for the information to serve both the source and the public interest.

Modern Public Relations

The delivery of public relations messages is shifting from traditional media channels to online media such as social media releases, search engine optimization, content publishing, blogs, microblogs, podcasts, and video. Social media has increased the speed of breaking news and created greater time constraints on response times to current events.

An asymmetrical public relations model allows feedback to flow from the public back to the originating organization, using it as an attempt to persuade the public to change. A symmetrical public relations model means that the organization takes the interests of the public into careful consideration, seeking a balance between the interest of the organization and the public.

The world is in a constant state of change. Communication with an internal as well as external public is essential and has become commonplace with the explosion of one-to-one communication through new technology. Good and bad news travels fast and information goes “viral” with the click of a mouse or tap of a screen.

Edward Bernays

Bernays, known as the “Father of Public Relations,” managed public relations for World War I.

Effective Public Relations

Depending on the message, some public relations must harmonize with state laws and be reviewed by an attorney to ensure compliance. It must follow a plan of action and aim at goals that are clearly defined. It must be clear to be useful. Its administrators must understand their role and responsibilities. It should build strong relationships and partnerships. Its effectiveness should be measurable with established benchmarks to make sure that the program has achieved the desired goal or objective.

Audience Targeting

The public relations program’s target audience must be identified so that the message can be tailored to suit them. Sometimes the interests of differing audiences necessitate the creation of several distinct but complementary messages. All audiences or publics are stakeholders, groups or individuals that can affect or be affected by the actions of the business as a whole, but not all stakeholders are audiences.

Messaging

Messaging constructs a consistent and specific story around a P.R. event or project. It eliminates contradictory or confusing information that will instill doubt in a purchasing choice or other decisions that have an impact on the marketer. Brands aim to have the same problem statement, industry viewpoint, or brand perception shared across sources and mediums.

Spin

Spin polishes and colors the truth by selectively presenting facts that support a desired position and can sway public opinion. It is sometimes seen as a derogatory but is commonly used in public relations campaigns.

Negative PR

Negative public relations, also called dark public relations (DPR), is a process of destroying or discrediting. Dirty secrets, misleading facts, or legitimate claims figure heavily into the equation. Its use can be moral and ethical when the information protects or informs the public of danger.

Business Disciplines and Public Relations

• Financial public relations – communicating financial results and business strategy
• Consumer/lifestyle public relations – gaining publicity for a particular product or service
• Crisis Communications – responding in a crisis
• Internal Communications – communicating within the company itself
• Government Relations – engaging government departments to influence public policy

12.3.5: Social Media

Social media as a marketing tool is versatile, far-reaching, fast, inexpensive, fosters brand awareness, and can improve customer service.

Learning Objective

Illustrate how social media can be used in the promotional mix

Key Points

• As a marketing tool, social media is distinct from industrial or traditional media and is versatile, far-reaching, fast , relatively inexpensive, and fosters brand awareness and improves customer service.
• Social media used as a marketing tool provides useful and valuable measurable data on trends, consumer interaction, feedback, public opinion, brand activity, and customer buying habits.
• The Internet has overtaken television as the largest advertising market of all as banner and pop-up ads showcase a vast array of products and services.

Key Terms

Engagement

Means that both customers and stakeholders are participants rather than passive viewers.

Social Bookmarking

Enables users to add, annotate, edit, and share bookmarked Web documents for future use.

Backlinks

Are clickable and bring traffic back to a company’s website.

Social Media

Social media enables individuals and communities to co-create, share, and modify content in an interactive, Internet-based environment. Social media marketing refers to the process of gaining website traffic through social networking sites. It is driven by word of mouth. Results come from earned, as opposed to paid media. As a marketing tool, social media is distinct from industrial or traditional media, is versatile, far-reaching, fast, relatively inexpensive, fosters brand awareness, and improves customer service.

Different Types of Social Media

Limited only by the imaginations of Internet Web designers, social media offers marketing vehicles, such as magazines, forums or discussion sites, weblogs, social blogs, microblogs, instant messaging, email, crowdsourcing distributed to a specific group of people, photographs or pictures, articles, video, and wikis or collaborated websites allowing additions, modifications, and deletions. Others include social networks, subscribed episodic audio, video, PDF or ePub podcasts downloaded or streamed, online telephonic services, and social bookmarking services that enable users to add, annotate, edit, and share bookmarked Web documents for future use and more.

Social Media Functionality

There are six ways social media functions: a). collaborative–Wikipedia, blogs, and microblogs, such as Twitter; b) content communities (e.g.,YouTube); c) social networking sites (e.g., Facebook); d) virtual game worlds (e.g.,World of Warcraft; e) virtual social worlds (e.g.,Second Life); and f. voice-over IP or online telephone services. All can be consolidated into one profile via aggregation platforms. All can be woven into a marketing plan rich with sales promotions, public relations outlets, advertising, and other elements of the “promotional mix.”

Mobile social media on a wide array of devices, such as tablets, iPods, phones, and other new products, extend and expedite marketing reach.

Search Engine and Keyword Optimization

Search engine ranking, content quality, or the relevancy to search terms, backlinks and links have emerged as effective social media marketing tools.

Backlinks are clickable and bring traffic back to a company’s website. They impact ranking within the search results if positioned properly. In addition, the anchor text used within a link, where it appears on a page and the other content on the page dictates its effectiveness.

The words used in website copy give exposure if they match common search words used in queries. A good social media marketer researches the correct words that people type into search engines so it behooves a business to embed those words in their websites. If a narrower focus is used when selecting keywords, competition within the search results drops dramatically so research using search phrase competition results, and search volume is the foundation of successful Internet marketing.

Strategic and Focused

Social media used as a marketing tool provides useful and valuable measureable data on trends, consumer interaction, feedback, public opinion, brand activity, and customer buying habits. Its reach is precise and easily aimed at a targeted audience. Automated information technologies, that are indigenous to social media platforms, optimize the production of goods and the delivery of services.

In the context of social media, “engagement” means that both customers and stakeholders are participants rather than passive viewers. Each participating customer becomes part of the marketing process, as other customers read comments or reviews.

Social Media Impacts Traditional Advertising

The Internet has overtaken television as the largest advertising market, as banner and pop-up ads showcase a vast array of products and services. QR codes, facilitated by mobile social media, online and in tandem with print advertising deliver extensive product and service information with a simple scan of a cell phone.

Social Media Technology

Social media platforms continue to grow at an astounding rate.

Internet and social media leaks frequently impact traditional advertising as ads often appear online earlier than they are scheduled to premiere and go viral. They are seen more quickly and by more users without the time delays of traditional advertising methods.

Blogging gets a product to the public within minutes and without any technical, production, or print requirements. Most Web space hosts provide a free blogging platform, such as WordPress, for customer use. They are picked up by search engines, are indexed quickly, are interactive, and allow for online dialogue. Blogs are automatically updated with each post and are accessed through a feed. Functionality is expandable through a wide array of plugins.

Social Media and Confidential Information

The speed at which information spreads on the Internet has a downside. In 2010, the top three incidents faced by organizations involved sharing too much information in public forums, loss or exposure of confidential information, and an increased exposure to litigation. Legal damage is capable of devastating a business.

12.3.6: Direct Marketing

Direct marketing goes direct to customers via telephone, mail, fax, TV, radio, online, magazines, newspapers or face-to-face.

Learning Objective

Distinguish direct marketing tactics from mass marketing tactics

Key Points

• Direct marketing targets individual members of defined consumer groups.
• The message is based upon a clear “call to action” delivered directly to predisposed consumers.
• Direct marketing provides valuable and reliable consumer and sales data, as well as clear, quantifiable success metrics for analysis.

Key Terms

community campaign

the use of flyers and brochures that are delivered to homes.

QR Code

a quick response bar code scanned via mobile phone

Example

• An advertisement calling consumers to action: “Just dial 800- 888-8888, place your order and receive your bonus gift! “

Direct marketing allows businesses and nonprofit organizations to advertise and market directly to customers via a variety of print and electronic mediums. Direct marketing campaigns focus on the consumer, statistical data generated via outreach and the accountability of the marketer. The message is based upon a “call to action” delivered directly to predisposed consumers.

Direct Marketing Popularity

In 2010, direct marketing accounted for 8.3% of the total U.S. gross domestic product. The industry employs approximately 1.4 million people directly and another 8.4 million in related jobs and businesses. Commercial and nonprofit businesses spent approximately $150 billion on marketing, accounting for more than half of all U.S. advertising expenditures for the year.

Characteristics of Direct Marketing

Direct marketing targets individual members of defined consumer groups. It distinguishes itself from mass marketing by virtue of the distance between the manufacturer and the ultimate end user, seeking to deliver a specific “call to action” to consumers. Reduced mail cost and the elimination of “brick and mortar” retail stores have helped to decrease the cost of direct marketing campaigns. The practice also attempts to establish a personal relationship with the customer because of direct purchases and customer service on a “first name” basis. Direct marketing has cleared the way for a number of competitors to enter markets on a global level and has increased product offerings to fill niche markets.

Customer Connection

Toll-free 1-800 numbers, loyalty marketing programs, magazine subscription cards, mail order catalogues, and credit card rewards programs laid the foundation for direct marketing’s success. In addition, improvements in traditional delivery techniques and the introduction of new technologies have accelerated this growth. Customers can now buy products without contact from a salesperson. Product information is delivered directly and impersonally. Questions can be answered through toll-free numbers, FAQ pages on websites or via email.

Types of Direct Marketing Tools

There are many different direct marketing tools, including direct mail, telemarketing, couponing, direct response TV and radio, face-to-face selling, community campaigns, and grassroots campaigns.

The Internet provides extraordinary reach. Marketers can use email, along with interactive static banner ads, pop ups, video and floating unit ads. Browser cookie analysis tag special interests and push appropriate products or services on personal websites. Marketers use search engine optimization and pay for prominent placement on query result lists to bring their products to a customer’s attention. Social media reaches out to targeted consumer groups and showcases compatible goods and services.

Mobile technology direct marketing includes SMS-short message service, MMS-multi-media message service, QR Codes, applications, push notifications sent directly to users, and location based messages.

The Benefits and Shortcomings of Direct Marketing Techniques

Direct marketing response is track-able and measurable regardless of the delivery medium. It provides valuable and reliable consumer and sales data, as well as clear, quantifiable success metrics for analysis.

Direct marketing places control in the hands of the consumer, making a poorly written message strategy or improperly compiled demographic database problematic. “Opt-out” lists, variable message printing and well defined demographics help to counteract these problems.

Direct Marketing

Companies can engage in marketing outreach through direct marketing. A mailed letter is an example of direct marketing.

12.4: Selecting the Promotion Mix for a Particular Product

12.4.1: Promotional Objectives

There are three main promotional objectives: inform the market, increase demand, and differentiate a product.

Learning Objective

Explain the objectives and characteristics of a promotion mix

Key Points

• Increase demand: These strategies are used during the product life cycle in order to increase sales.
• Present information about the product: In order for customers and consumers to want the product they need to understand what the product is.
• Differentiate a product: This is especially important if there are multiple competitors in the same market.

Key Terms

marketing mix

A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.

product life cycle

The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.

differentiate

To show, or be the distinction between two things.

Promotion Mix

The promotion mix is an element of the marketing mix. It includes advertising, public relations, personal sales, and sales promotion. Mediums used for promotion include: the Internet, television, advertisements, special events, endorsements, newspapers, and magazines. Different approaches are needed for each medium in order to be successful.

Marketing Mix

The marketing mix includes product, promotion, price, and place.

Promotional Objectives

There are three main objectives of a promotional mix:

1. Increase demand: These strategies are used during the product life cycle in order to increase sales. Eventually a product will reach its saturation point, at which time investing in sales will decrease as the company focuses its attention on a new product.
2. Present information about the product: In order for customers and consumers to want the product they need to understand what the product is and how it benefits them. Information about the product will differ depending on the specific target market.
3. Differentiate a product: This is especially important if there are multiple competitors in the same market. For example, Apple was able to differentiate itself in the computer industry. For many years it was the preferred computer for those who had advanced computing skills. Then Apple did an advertising campaign to show general users how easy it is to use. This took advantage of the complaints the market had over Windows operating software, which came standard with most PCs.

In order for a market to accept a new product they need to know how it address their pain point. Information about the product should address the “what’s in it for me” aspect that is inherent in human nature.

12.4.2: Stages in the Product Life Cycle

There are four stages in the product life cycle: introduction, growth, maturity, and decline.

Learning Objective

Examine the various stages of the product lifecycle

Key Points

• The introduction stage of the product life cycle is where a new product is launched into a market.
• In the growth stage of the product life cycle, the market has accepted the product and sales begin to increase.
• In the maturity stage of the product life cycle, sales will reach their peak.
• In the decline stage of the product life cycle, sales will begin to decline as the product reaches its saturation point.
• There is no set schedule for the stages of a product life cycle.

Key Term

product life cycle

The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.

Stages in the Product Lifecycle

There are four stages in the product life cycle: introduction, growth, maturity, and decline .

Life Cycle

Firms’ products progress through the stages of development, which is indicated by their changing profits over time.

A chart that shows a product’s life cycle based on sales and time on the market (introduction, growth, maturity, and decline).

Introduction

After all research and development has be done it is time to launch the product and begin its lifecycle. The introduction stage of the product life cycle is when the marketing team emphasizes promotion and the product’s initial distribution. Often the product will have little or no competitors at this point. Nonetheless, sales may remain low because it takes time for the market to accept the new product. At this stage of the life cycle, the company usually loses money on the product.

Growth

In the growth stage of the product life cycle, the market has accepted the product and sales begin to increase. The company may want to make improvements to the product to stay competitive. At this point, there are still relatively few competitors.

Maturity

In the maturity stage of the product life cycle, sales will reach their peak. Other competitors enter the market with alternative solutions, making competition in the market fierce. The company that introduced the new product may begin to find it difficult to compete in the market.

Decline

In the decline stage of the product life cycle, sales will begin to decline as the product reaches its saturation point. Most products are phased out of the market at this point due to the decrease in sales and because of competitive pressure. The market will see the product as old and no longer in demand.

There is no set schedule for the stages of a product life cycle. Differences will occur depending on the type of product, how well it is received by the market, the promotional mix of the company, and the aggressiveness of the competition.

12.4.3: Target Market Characteristics

The different characteristics of a target market are geographic, demographic, psychographic, behavioral, and product related.

Learning Objective

Differentiate between different target market characteristics

Key Points

• A geographic target market can be consumers in a city, state, or country.
• A demographic or socioeconomic target market would focus on a specific gender, age group, income level, or education level.
• A psychographic target market would be a market that has similar attitudes, values, or lifestyle.
• The behavioral target market focuses on occasions and degree of loyalty.
• Product-related segmentation describes a target approach for customers who already own a specific product.
• Determining a target market approach to sales has many benefits. It can create a more specific marketing campaign, increase sales, and decrease the number of competitors in the market.

Key Term

target market

a group of people whose needs and preferences match the product range of a company and to whom those products are marketed

Target Market Characteristics:

The different characteristics of a target market are geographic, demographic, psychographic, behavioral, and product related.

Geographic

A geographic target market can be consumers in a city, state, or country. This is often important when it comes to international advertising. Some products may do well in some countries but not in others. For example, in Japan where they don’t have ovens, companies such as Betty Crocker would not focus their products in this geographic target market.

Geographic Target

A geographic target market could be a city, state, or country.

A picture of a street in the United Kingdom.

Demographic/Socioeconomic

A demographic or socioeconomic target market would focus on a specific gender, age group, income level, or education level. For example, Plato’s Closet, a consignment store for young adult clothing, would focus on the teen and young adult demographic. Irish Spring would focus on a male demographic.

Psychographic

A psychographic target market would be a market that has similar attitudes, values, or lifestyle. For example, the televisions station G4 is aimed at men but also gamers in the age 16-34 demographic.

Behavioral

The behavioral target market focuses on occasions and degree of loyalty. Facebook marketing is often focused on loyal customers with specials they can claim by getting a code on Facebook. There are also discount cards available that offer discounts by allowing shoppers to collect points each time they shop at their store.

Product Related Segmentation

Product related segmentation describes a target approach for customers who already own a specific product. For example, accessories for people who own cell phones, tablets, computers, iphones, or gaming systems. Determining a target market approach to sales has many benefits. It can create a more specific marketing campaign, increase sales, and decrease the number of competitors in the market.

12.4.4: Characteristics of the Product

The unique characteristics of a product should be used as inputs in determining the product’s marketing mix.

Learning Objective

Examine how the characteristics of a product impacts the selection of a promotional mix

Key Points

• The characteristics of the product are the features that differentiate it from other products on the market.
• When companies create a product they have specific features in mind. It can be characteristics that improve on an existing product or ones that fill a currently unfilled need. Promoting these features can be a successful approach.
• Characteristics of a product also help to determine the price of a product. Premium features may be able to fetch a premium price.
• It is the combination of demand for a product and its price that help to determine the marketing mix.

Key Terms

price index

A statistical estimate of the price level of some class of goods or services.

target market

a group of people whose needs and preferences match the product range of a company and to whom those products are marketed

marketing mix

A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.

Characteristics of the Product

The characteristics of the product are the features and elements that differentiate it from other products on the market. Product characteristics help determine the marketing mix, potential target market and the pricing of a product.

Characteristics

A product’s characteristics determine its target market and price.

A display of Dewar’s Scottish whiskey.

A product needs to differentiate itself in the market and carry distinct characteristics that separate it from its competitors. Otherwise, there would be no reason for consumers to purchase that product over any other product on the market.

Determining the Marketing Mix

When companies create a product they have specific features in mind. It can be characteristics that improve on an existing product in the market or ones that help with a currently unfilled need. Companies spend a lot of time and money on product research to understand the needs of the market and how their product can fill that need.

Characteristics of a product also help to determine the price of a product. Some high end features will increase the price of the product, while low-end features could decrease the price of the product. This can determine where a product may fall on the price index. It is the combination of demand for a product and its price that help determine the marketing mix.

Different strategies are used for high end, expensive products than are used for low end, less expensive products. In addition, different marketing strategies are used depending on the target market. Some consumers need an Internet marketing approach, while other consumers may be more receptive to television or magazine ads. All of these questions can be answered by understanding the characteristics of the product.

12.4.5: Types of Buying Decisions

Different types of buying decisions can involve logical, impulsive, and emotional motivations.

Learning Objective

Distinguish between a consumer and business buying decision

Key Points

• Buying decisions are based on buying behavior. Consumer behavior and business behavior can differ because their buying processes are different.
• Consumers will often buy on emotion or impulse whereas businesses will buy based on need.
• The type of buying decision impacts the marketing mix and the promotional mix for a product. It will also affect the product life cycle.
• Sometimes the type of product will make a difference in the buying decision. For consumers, large ticket items, such as an appliance, a car, or a home, aren’t impulse items.
• A company needs to know about the features of a product and how it will help fill a specific need. Businesses are also worried about price and return on investment.

Key Term

buyer behavior

the process used to decide whether to purchase a product

Type of Buying Decisions

Different types of buying decisions can include logical, impulsive, and emotional motivations. Buying decisions are based on buyer behavior. Consumer behavior and business behavior can differ because their buying processes are different. Consumers will often buy on emotion or impulse whereas businesses will buy based on need. The type of buying decision impacts the marketing mix and the promotional mix for a product. It will also affect the product life cycle.

Because consumers often buy on emotion, ads can affect the buying decision. Consumer products are often advertised on television in a way that tries to create an emotional tie with the buyer. An example of this are the alcohol ads with beautiful women and people having a good time, or car ads that stir emotions of envy for racing the streets like a race car driver.

Food Market

Buyer behavior shapes buying decisions.

Emotional tactics don’t work well with businesses. A company needs to know about the features of a product and how it will help fill a specific need. Businesses are also worried about price and return on investment.

Sometimes the type of product will make a difference in the buying decision. For consumers, large ticket items, or such as an appliance, a car, or a home, aren’t impulse items. Most people can’t afford to buy a new car when they want one, they need to wait until their current car needs to be replaced. This is why companies can influence what type of car a person will buy, but not when they will buy one.

12.4.6: Funds Available Relative to Costs

Marketing departments need to look at what types of advertising are available that will keep them within budget.

Learning Objective

Review how and why funds are allocated and available relative to costs

Key Points

• Each type of advertising is sold at a different rate and a company has a limited budget in which to promote a product.
• To determine the best type of promotional strategy, a company should look at its target market. Consumers in each type of market will have a preferred form of advertising.
• Other factors that affect the funds available for product promotion include the budget for the overall product launch and the expected length of the introduction phase.

Key Term

budget

An itemized summary of intended expenditure, usually coupled with expected revenue.

Funds Available Relative to Costs

No company has an unlimited promotional budget. Marketing departments need to look at what types of advertising are available that will keep them within budget.

Different Types Of Advertising

There are different types of advertising available. They include Internet marketing, television ads, radio ads, special events, magazine and newspaper ads, billboards, and endorsements. Each type of advertising is sold at a different rate and a company has a limited budget in which to promote a product .

Tram Advertisement

Different forms of advertising charge different rates and can impact the promotional mix budget.

Determining the Promotion Strategy

To determine the best type of promotional strategy, a company should look at its target market. Consumers in each type of market will have a preferred form of advertising. Companies should determine which forms of promotion will reach the most consumers in a specific target market. This strategy will help marketing departments efficiently use their promotional budget.

Other Factors That Can Affect Funds

There are other factors that can affect the funds available for a promotional mix. When a company is looking at launching a new product, they need to consider research, development, production, and marketing. A company may focus more on the research and development of a product, which will affect the amount of money that is available for marketing and production.

Another factor that will affect funds for promotional strategies will be the estimated cost of the product launch. When a product enters the market, it will most likely lose money until it is accepted by consumers. If a product is estimated to have a long introductory phase, it will affect the promotional strategy and the funds that are available for advertising.

12.4.7: Push and Pull Strategies

Push and pull strategies are promotional strategies used to get the product to its target market.

Learning Objective

Differentiate between push and pull strategies as part of a product’s promotional mix

Key Points

• A push strategy places the product in front of the customer to make sure the consumer is aware of the existence of the product. This can work well when manufacturers have an established relationship with customers or when the product is an impulse purchase-type item.
• Push strategies include trade shows, showrooms, getting retailers to stock a product, and creating a supply chain to facilitate distribution.
• A pull strategy motivates customers to actively seek out a specific product and it best for new products or in the case when a manufacturer has a strong and visible brand.
• Pull strategies include mass media advertising, referrals, customer relationship management, and sales promotions.
• Companies usually use a combination of push and pull strategies in a marketing mix.

Key Terms

pull strategy

communication not demanded by the buyer

push strategy

communication demanded by the buyer

customer relationship management

Customer Relations Management (CRM) is concerned with (among other things) the conversion rate: percentage of customers who “try and buy” the product.

Push and Pull Strategies

Push and pull strategies are promotional strategies used to get the product to its target market.

Push Strategy

A push strategy places the product in front of the customer, via a form of advertisement, to make sure the consumer is aware of the existence of the product. This type of strategy works well for low value items and impulse buy items . The different ways a company can use a push strategy to increase awareness of a product include:

Push and Pull Strategies

Push and pull strategies are used to get a product to the target market.

A diagram that shows the push-pull strategy: 1.) technology push – research and development, production, marketing, and need; 2.) market pull – research and development, production, marketing, and expressed marketing need.

• At trade shows and showrooms, businesses can demonstrate the product’s features to potential customers.
• Companies can encourage retailers to stock a product. Sometimes a company has to negotiate with a retailer to stock a specific item because retailers have limited store space and need to stock items they know will sell.
• Companies can create a supply chain so that retailers can obtain the product in sufficient quantities.

Push strategies work best for merchants that already have an established relationship with users. For example, cell phone providers proactively send (i.e. push) advertisements via text or MMS messages to mobile customers regarding promotions and upgrades. This permission-based marketing can be effective if personalized for the user based on personalized preferences, usage and buying behavior. However, push strategies are also effective for building demand for high-priced services (e.g., enterprise software) that are targeted to specific markets.

Pull Strategy

A pull strategy stimulates demand and motivates customers to actively seek out a specific product. It is aimed primarily at the end users. A strong and visible brand is needed to ensure the success of a pull strategy. The different ways a company can use a pull strategy to promote a brand include:

• Advertising strategies that include mass media promotion of a product
• Customer relationship management that makes existing customers aware of new products that will fill a specific need
• Referrals
• Sales promotions and discounts

Using these strategies will create a demand for the product. With that demand, retailers will be encouraged to seek out the product and stock it on their shelves. For instance, Apple successfully uses pull strategies to launch iPhones or iPads. Likewise, music has also fallen under pull strategies due to digitization and the emergence of social networking websites. Music platforms such as iTunes, Grooveshark and Spotify are reflective of the power shift from providers to consumers. Merchants must adapt their strategies to pull in demand, rather than push products–in this case, music–to consumers.

Most businesses will use a combination of push and pull strategies in order to successfully market a product.

12.4.8: Trade vs. Consumer Promotions

Trade promotions are targeted toward retailers while consumer promotions are targeted toward consumers.

Learning Objective

Differentiate between trade and consumer promotions relative to a product’s marketing mix

Key Points

• The purpose of trade promotions is to help companies differentiate a product, increase product visibility, and increase the product purchase rate.
• The purpose of consumer promotions is to increase brand awareness and market acceptance.
• There are various types of trade and consumer promotions.
• Consumer promotion activities include rebates, coupons, premiums, contests, kids eat free programs,reward programs, and free samples.

Key Terms

brand awareness

Brand awareness is the extent to which a brand is recognized by potential customers and is correctly associated with a particular product.

Federal Trade Commission

an independent agency of the United States government that seeks to promote consumer protection and the eliminate and prevent anti-competitive business practices, such as coercive monopoly

trade

Those engaged in an industry or group of related industries.

differentiate

To show, or be the distinction between two things.

Trade versus Consumer Promotions

Trade promotions are targeted toward retailers while consumer promotions are targeted toward consumers.

Promotions

A point of purchase or end cap display can make consumers aware of new products.

Trade Promotions

Trade promotions are marketing activities executed between manufacturers and retailers. Trade promotions help companies differentiate a product, increase product visibility, and increase the product purchase rate. But while there are multiple products on the market, retailers only have a finite space to display items on their shelves. It is therefore sometimes necessary to encourage retailers to stock your item instead of your competitor’s item.

To this point, trade promotions include:

• Trade allowances are incentives used to encourage a retailer to stock a product such as cash discounts or promotional incentives.
• Dealer loaders are incentives given to a dealer to display a product, such as in-store displays, premiums, or rebates.
• Trade contests are used to encourage retailers to sell products, as the retailer who sells the most wins a prize.
• Point of purchase display (POP) is an end cap or center store display where retailers can show the products to customers to increase awareness.
• Training programs teach employees or retailers the benefits and uses of a product.
• Push money is an extra commission paid to encourage the stocking and selling of a product.

Consumer Promotions

Consumer promotions are marketing activities targeted at the consumer to encourage them to buy the product. These are often used at the product launch to increase brand awareness, market acceptance, and sales. Types of consumer promotions can include:

• Price deals are temporary reductions in price, such as 50% off an item.
• Discounts are reductions to a basic price of goods or services.
• Reward programs allow consumers to collect points, miles, or credits for purchases, which they can later redeem for rewards.
• Coupons have become a standard mechanism for sales promotions.
• With rebates, consumers are offered money back if the receipt and barcode are mailed to the producer.
• Some contests or sweepstakes automatically enter the consumer into the event through the purchase of the product.
• Free samples are when a product is given to the consumer so that he or she may try a product before committing to a purchase.
• Discounts are sometimes given to customers who buy in large quantities.
• Kids eat free promotions offer a discount on the total dining bill by offering one free kid’s meal with each regular meal purchased.
• Premiums are promotional items that can be received for a small fee when redeeming the proof of purchase.

Companies will often use a combination of trade and consumer promotions when launching a new product.

12.5: Integrated Marketing Communications

12.5.1: Setting Goals

The ultimate goal of IMC is to unite all aspects of marketing communications so they work together seamlessly and harmoniously.

Learning Objective

State the most common goals of integrated marketing communications campaigns

Key Points

• Integrated Marketing Communication (IMC) is an approach to brand communications where the different modes work together to create a seamless experience for the customer and are presented with a similar tone and style that reinforces the brand’s core message.
• Some of the most common goals of IMC campaigns include increasing brand awareness, generating sales and reinforcing repeat purchases.
• Only changes in the marketplace, new competitive forces, or new promotional opportunities should cause companies to alter strategies and reassess IMC goals.

Key Terms

fragmentation

The act of fragmenting or something fragmented; disintegration.

integrated

composed and coordinated to form a whole

Setting Goals

Integrated Marketing Communication (IMC) is an approach to brand communications where the different modes work together to create a seamless experience for the customer. Customers are presented with a similar tone and style that reinforce the brand’s core message. The ultimate goal is to make all aspects of marketing communication–advertising, sales promotion, public relations, direct marketing, personal selling, online communications and social media–work together as a unified force, rather than in isolation. This synergy between different marketing elements maximizes their cost effectiveness .

Integrated Marketing

Integrated marketing communications can be used to develop brand awareness, increase consumer demand and change beliefs towards a product.

The cost effectiveness of mass media due to fragmentation has forced integrated marketing communications to the forefront of modern marketing. As consumers spend more time online and on mobile devices, the goal for marketing teams should be for all exposures of the brand to tie together so they are more likely to be remembered. Increasingly the strategies of brands cannot be understood by looking solely at their advertising. Instead they can be understood by seeing how all aspects of their communications ecosystem work together and in particular how communications are personalized for each customer and react in real time.

Common IMC Objectives

In addition to considering recent market, consumer and technological shifts, brands must assess their marketing budget and target audience when setting IMC goals. An IMC strategy with a budget of $2 million will be radically different in size, scope and reach than a marketing budget of only $2,000. Thus, smaller businesses with tiny IMC budgets may rely heavily on social media advertising and word-of-mouth networks to increase brand presence and generate new leads, rather than more expensive television and billboard advertising.

Despite varying budgets, product features and benefits, and consumer behaviors, organizations typically set and work towards the following goals when implementing IMC strategies:

• To develop brand awareness
• To increase consumer or business demand for a product category
• To change or influence customer beliefs or attitudes
• To enhance purchase actions
• To encourage repeat purchases
• To build customer traffic to physical stores, websites or other marketing channels
• To enhance firm/brand image
• To increase market share
• To increase sales
• To reinforce purchase decisions

IMC strategies may seek to achieve one, many or all of these objectives throughout the course of a campaign. Once strategies have been implemented, they are not changed unless major new events occur. Only changes in the marketplace, new competitive forces, or new promotional opportunities should cause companies to alter strategies and reassess IMC goals.

12.5.2: Determining a Budget

Marketing budgets aid in the planning of operations by forcing managers to prioritize activities and consider how conditions may change.

Learning Objective

Explain how the components of IMC influence the allocation of funds for a marketing budget

Key Points

• Budgeting also helps coordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments.
• Two big budgeting decisions should be resolved up front: how shall marketing efforts be funded, and who will benefit from the new program?
• Components of IMC include: the foundation, the corporate culture, the brand focus, consumer experience, communications tools, promotional tools, and integration tools.

Key Term

brand

A name, symbol, logo, or other item used to distinguish a product, a service, or its provider.

Determining a Budget

As with all business activities, marketing budgets help the planning of actual operations by forcing managers to prioritize activities and consider how conditions might change. Marketing also encourages managers to take steps now, so they can deal with problems before they arise. It also helps coordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments, which is a key component of integrated marketing. The essential purposes of budgeting include:

• To control resources
• To communicate plans to various responsibility center managers
• To motivate managers to strive to achieve budget goals
• To evaluate the performance of managers
• To provide visibility into the company’s performance

Marketing plans are resource driven and they affect the budget. Therefore, two big budgeting decisions should be resolved up front:

1. How shall these efforts be funded? For example, 70% will be reallocated through cost reductions by consolidating programs and 30% will come from new funding.
2. Who will benefit from the new program? For example, 70% will advance the reputation of the company and 30% will build “steeples” – the critical core themes that make a difference, which are usually only built one at a time.

Integrated Marketing Communication Components

When determining a budget for an integrated marketing plan, it is important for managers to understand the components of IMC in order to allocate funds properly. These include:

Integrated Marketing Budgets

When budgeting a marketing plan, it is important to allocate funds appropriately to the different facets of integrated marketing.

A diagram that shows two facets of integrated marketing for a website as well as the audiences that are reached – email (your friends) and outreach (potential new friends).

• The foundation – This component is based on a strategic understanding of the product and market. This includes changes in technology, buyer attitudes, and behavior, as well as anticipated moves by competitors.
• The corporate culture – Increasingly brands are seen as indivisible from the vision, capabilities, personality, and culture of the corporation.
• The brand focus – This is the logo, corporate identity, tagline, style, and core message of the brand.
• Consumer experience – This includes the design of the product and its packaging, the product experience (for instance in a retail store), and service.
• Communications tools – This includes all modes of advertising, direct marketing, and online communications including social media.
• Promotional tools – This includes trade promotions; consumer promotions; personal selling, database marketing, and customer relations management; public relations and sponsorship programs.
• Integration tools – This is software that enables the tracking of customer behavior and campaign effectiveness. This includes customer relationship management (CRM) software, web analytics, marketing automation, and inbound marketing software.

12.5.3: Measuring Success

Continuous monitoring of performance against predetermined targets is essential in achieving effective & efficient integrated marketing communications.

Learning Objective

List the most important analyses used to measure marketing performance

Key Points

• It is important to put both quantities and timescales into marketing strategies.
• The most important elements of marketing performance include sales analysis, market share analysis, expense analysis, and financial analysis.
• Indirect measures like market research, tracking lost business and tracking customer complaints can also indicate the organization’s performance over a long period of time.

Key Terms

relative share

market share in relation to the market leaders.

segment share

market share in the specific, targeted segment.

Measuring Success

Measuring Success Of Marketing Efforts

It is important for marketing managers to constantly evaluate the performance of their marketing efforts.

The final stage of any marketing planning process is to establish targets or standards so that progress can be monitored. Accordingly, it is important to put both quantities and timescales into marketing objectives and corresponding strategies. – for example, to capture 20 percent by value of the market within two years.

Continuous monitoring of performance against predetermined targets is of utmost importance. More important is the enforced discipline of a regular formal review. As with forecasts, the best or most realistic planning cycle will revolve around a quarterly review. Best of all – at least in terms of the quantifiable aspects of the plans – is a quarterly rolling review. This involves planning one full year ahead each new quarter. While this absorbs more planning resources, it also ensures that plans use the latest information. Moreover, both the plans and their implementation tend to be more realistic.

The most important elements of marketing performance which are normally tracked include:

• Sales Analysis: Sophisticated organizations track sales in terms of “sales variance” – the deviation from the target figures – which allows an immediate picture of deviations to become evident.
• Market Share Analysis: Market share is an important metric to track. Though absolute sales might grow in an expanding market, a firm’s share of the market can decrease, which bodes ill for future sales when the market starts to drop. Market share is tracked through parameters including overall market share, segment share, relative share, annual fluctuation rate of market share, and the specific market sharing of customers.
• Expense Analysis: The key ratio to watch in this area is usually the “marketing expense to sales ratio. ” This may be broken down into elements including advertising to sales and sales administration to sales.
• Financial Analysis: In theory, the “bottom line” of all marketing activities should be net profit. Key ratios include gross contribution to net profit, gross profit to return on investment, and net contribution to profit on sales. There can be considerable benefit in comparing these figures with those achieved by other organizations, especially those in the same industry.

The above performance analyses concentrate on quantitative measures directly related to short-term performance. However, there are a number of indirect measures tracking customer attitudes which can also indicate the organization’s performance over a longer period of time. These include market research, lost business and customer complaints.

12.5.4: The Growing Importance of Word of Mouth

Because of the increased role of sharing – or online “word of mouth” – the way many products and services are marketed has changed.

Learning Objective

Define the growing role of word-of-mouth in integrated marketing communications

Key Points

• Marketing was once seen as a one way relationship, with firms broadcasting their offerings and value proposition.
• The goal of an organization is to create and maintain communication with its own employees and customers.
• To understand new forms of word of mouth marketing involves knowing the right touch points to use to reach consumers and understanding how and where they consume different types of media.

Key Term

Regression analysis

a statistical technique for estimating the relationships among variables.

The Growing Importance of Word of Mouth

The Internet has changed the way business is done. The variables of segmentation, targeting, and positioning are addressed differently. Because of the increased role of sharing – or online “word of mouth” – the way new products and services are marketed has changed, even though the aim of business in bringing economic and social values remain the same. Indeed, the bottom line of increasing revenue and profit are still the same. Marketing has evolved to include more connectedness, due to the new characteristics brought in by the Internet. Marketing was once seen as a one way relationship, with firms broadcasting their offerings and value proposition. Now it is seen more as a conversation between marketers and customers .

Word Of Mouth Marketing

Social media sites that allow sharing have brought about a new word of mouth form of marketing.

The starting point of the integrated marketing communications (IMC) process is the marketing mix that includes different types of marketing, advertising, and sales efforts. Without a complete IMC plan, there is no integration or harmony between client and customers. The goal of an organization is to create and maintain communication with its own employees and customers. Using outside-in thinking, integrated marketing communications is a data-driven approach that focuses on identifying consumer insights and developing a strategy with the right online and offline combination of channels to forge a stronger brand to consumer relationship. This involves knowing the right touch points to use to reach consumers and understanding how and where they consume different types of media. Regression analysis and customer lifetime value are key data elements in this approach.

Several shifts in the advertising and media industry have caused IMC to develop into a primary strategy for marketers:

• From media advertising to multiple forms of communication
• From mass media to more specialized media, which are centered on specific target audiences
• From a manufacturer-dominated market to a retailer-dominated, consumer-controlled market
• From general-focus advertising and marketing to data-based marketing
• From low agency accountability to greater agency accountability, particularly in advertising
• From traditional compensation to performance-based compensation
• From limited Internet access to 24/7 Internet availability and access to goods and services

Moreover, this new “word of mouth” form of marketing can bring benefits to a company; such as:

• It can create competitive advantages, boost sales and profits, while saving money, time, and stress.
• IMC wraps communications around customers and helps them move through the various stages of the buying process. The organization simultaneously consolidates its image, develops a dialogue, and nurtures its relationship with customers.
• This “relationship marketing” cements a bond of loyalty with customers which can protect them from the inevitable onslaught of competition. The ability to keep a customer for life is a powerful competitive advantage.
• IMC also increases profits through increased effectiveness.
• Carefully linked messages also help buyers by giving timely reminders, updated information and special offers which, when presented in a planned sequence, help them move comfortably through the stages of their buying process.
• IMC also makes messages more consistent and therefore more credible. This reduces risk in the mind of the buyer which, in turn, shortens the search process and helps to dictate the outcome of brand comparisons.
• Finally, IMC saves money as it eliminates duplication in areas such as graphics and photography since they can be shared and used in say, advertising, exhibitions, and sales literature.

11.1: Marketing Channels in the Supply Chain

11.1.1: The Significance of Marketing Channels

Learning Objective

Identify the types of institutions that participate in marketing channels, and the three primary functions of these channels

Key Points

• The channel is composed of different institutions that facilitate the transaction and the physical exchange.
• A channel performs three important functions: transactional, logistical, and facilitating.
• Service marketers also face the problem of delivering their product in the form and at the place and time their customer demands.

Key Term

wholesale

The sale of products, often in large quantities, to retailers or other merchants.

Functions of a Channel

The primary purpose of any channel of distribution is to bridge the gap between the producer of a product and the user of it, whether the parties are located in the same community or in different countries thousands of miles apart. The channel of distribution is defined as the most efficient and effective manner in which to place a product into the hands of the customer. The channel is composed of different institutions that facilitate the transaction and the physical exchange.

Institutions in channels fall into three categories:

• The producer of the product: a craftsman, manufacturer, farmer, or other extractive industry producer
• The user of the product:an individual, household, business buyer, institution, or government
• Certain middlemen at the wholesale and/or retail level

A channel performs three important functions. Not all channel members perform the same function. The functions are:

• Transactional functions: buying, selling, and risk assumption
• Logistical functions: assembly, storage, sorting, and transportation
• Facilitating functions: post-purchase service and maintenance, financing, information dissemination, and channel coordination or leadership

These functions are necessary for the effective flow of product and title to the customer and payment back to the producer.

Characteristics of a Channel

Certain characteristics are implied in every channel.

First, although you can eliminate or substitute channel institutions, the functions that these institutions perform cannot be eliminated. Typically, if a wholesaler or a retailer is removed from the channel, its function will either shift forward to a retailer or the consumer, or shift backward to a wholesaler or the manufacturer.

For example, a producer of custom hunting knives might decide to sell through direct mail instead of retail outlets. The producer absorbs the sorting, storage, and risk functions; the post office absorbs the transportation function; and the consumer assumes more risk in not being able to touch or try the product before purchase.

Second, all channel institutional members are part of many channel transactions at any given point in time. As a result, the complexity of all transactions may be quite overwhelming. Consider how many different products you purchase in a single year and the vast number of channel mechanisms you use.

Third, the fact that you are able to complete all these transactions to your satisfaction, as well as to the satisfaction of the other channel members, is due to the routinization benefits provided through the channel.

Routinization means that the right products are most always found in places where the consumer expects to find them (such as catalogues or stores), comparisons among products are possible, prices are marked, and methods of payment are available. Routinization aids the producer as well as the consumer, because it tells the producer what to make, when to make it, and how many units to make.

Fourth, there are instances when the best channel arrangement is direct, from the producer to the ultimate user. This is particularly true when available middlemen are incompetent or unavailable, or the producer feels he or she can perform the tasks better. Similarly, it may be important for the producer to maintain direct contact with customers so quick and accurate adjustments can be made.

Direct-to-user channels are common in industrial settings, as are door-to-door selling and catalogue sales. Indirect channels are more typical and result, for the most part, because producers are not able to perform the tasks provided by middlemen.

Finally, although the notion of a channel of distribution may sound unlikely for a service product (such as health care or air travel), service marketers also face the problem of delivering their product in the form and at the place and time demanded by the customer.

Banks have responded by developing bank-by-mail, Automatic Teller Machines (ATMs), and other distribution systems. The medical community provides emergency medical vehicles, outpatient clinics, 24-hour clinics, and home-care providers. Even performing arts employ distribution channels. In all three cases, the industries attempt to meet the special needs of their target markets while differentiating their product from that of their competition. A channel strategy is evident.

ATM Machines

ATM machines are one of the ways banks responded to channel issues.

11.1.2: Types of Marketing Channels

Learning Objective

Define direct selling, indirect channels, dual distribution, and reverse channels

Key Points

• Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location.
• An intermediary (or go-between) is a third party that offers intermediation services between two trading parties.
• Dual distribution describes a wide variety of marketing arrangements by which the manufacturer or wholesalers use more than one channel simultaneously to reach the end user.
• A reverse channel may go from consumer to intermediary to beneficiary.

Key Terms

marketing channels

A marketing channel is a set of practices or activities necessary to transfer the ownership of goods, and to move goods, from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process.

intermediaries

An intermediary is a third party that offers an intermediation service between two trading parties.

Example

• A reverse channel can be used to refurbish products such as circuit boards and computers.

Introduction

There are basically four types of marketing channels:

• Direct selling;
• Selling through intermediaries;
• Dual distribution; and
• Reverse channels.

Essentially, a channel might be a retail store, a web site, a mail order catalogue, or direct personal communications by a letter, email or text message. Here’s a bit of information about each one.

Direct Selling

Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. Peddling is the oldest form of direct selling.

Modern direct selling includes sales made through the party plan, one-on-one demonstrations, personal contact arrangements as well as internet sales.

A textbook definition is: “The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs. “

Industry representative, the World Federation of Direct Selling Associations (WFDSA), reports that its 59 regional member associations accounted for more than US$114 Billion in retail sales in 2007, through the activities of more than 62 million independent sales representatives.

The United States Direct Selling Association (DSA) reported that in 2000, 55% of adult Americans had at some time purchased goods or services from a direct selling representative and 20% reported that they were currently(6%) or had been in the past(14%) a direct selling representative.

According to the WFDSA, consumers benefit from direct selling because of the convenience and service benefits it provides, including personal demonstration and explanation of products, home delivery, and generous satisfaction guarantees. In contrast to franchising, the cost for an individual to start an independent direct selling business is typically very low, with little or no required inventory or cash commitments to begin.

Most direct selling associations, including the Bundesverband Direktvertrieb Deutschland, the direct selling association of Germany, and the WFDSA and DSA require their members to abide by a code of conduct towards a fair partnership both with customers and salespeople. Most national direct selling associations are represented in the World Federation of Direct Selling Associations (WFDSA).

Direct selling is different from direct marketing in that it is about individual sales agents reaching and dealing directly with clients while direct marketing is about business organizations seeking a relationship with their customers without going through an agent/consultant or retail outlet.

Direct selling often, but not always, uses multi-level marketing (a salesperson is paid for selling and for sales made by people they recruit or sponsor) rather than single-level marketing (salesperson is paid only for the sales they make themselves).

Selling Through Intermediaries

A marketing channel where intermediaries such as wholesalers and retailers are utilized to make a product available to the customer is called an indirect channel.

The most indirect channel you can use (Producer/manufacturer –> agent –> wholesaler –> retailer –> consumer) is used when there are many small manufacturers and many small retailers and an agent is used to help coordinate a large supply of the product.

Dual Distribution

Dual distribution describes a wide variety of marketing arrangements by which the manufacturer or wholesalers uses more than one channel simultaneously to reach the end user. They may sell directly to the end users as well as sell to other companies for resale. Using two or more channels to attract the same target market can sometimes lead to channel conflict.

An example of dual distribution is business format franchising, where the franchisors, license the operation of some of its units to franchisees while simultaneously owning and operating some units themselves.

Reverse Channels

If you’ve read about the other three channels, you would have noticed that they have one thing in common — the flow. Each one flows from producer to intermediary (if there is one) to consumer.

Technology, however, has made another flow possible. This one goes in the reverse direction and may go — from consumer to intermediary to beneficiary. Think of making money from the resale of a product or recycling.

Recycling Containers

Recycling is an example of a reverse marketing channel.

Three public trash cans that are used for recycling.

There is another distinction between reverse channels and the more traditional ones — the introduction of a beneficiary. In a reverse flow, you won’t find a producer. You’ll only find a User or a Beneficiary.

11.1.3: Selecting Marketing Channels

Learning Objective

Identify a number of key considerations when selecting marketing channels

Key Points

• Marketing channels represent the relationship between a producer and the user, usually in the form of a strategic alliance such as a retailer. 
• When selecting which marketing channels to pursue, it’s useful to understand an organization’s target users and their preferences. For example, if it is a technology friendly market it’s important to create digital storefronts.
• Some channels will be more costly than others. Considering the overall margins, desired volume, and opportunity costs can give organizations strong strategic reasons to use or not use some channels.
• For organizations that rely heavily on brand, it can be important to select corresponding partner channels. For example, a high end fashion item would want to carefully select channels to maintain brand equity.
• Localization can be enhanced via strategic channel selection. Entering new markets through local retailers can give exposure and localization to a new market.

The Value of Channels

Before selecting which marketing channels are ideal for a given organization, it’s important to understand the underlying role of channels in marketing strategy. Channels influence:

• The relationship between the producer and the buyers.
• The firm’s pricing strategy.
• The overall product strategy through branding, policies, and willingness to stock.

By selecting the optimal channels, organizations create strategic alliances between the firm and the providers. This has a number of implications, including how a user group will perceive the organization’s brand and how they will be treated when interacting with that brand in a given channel situation (such as a retail outlet). With this in mind, there are a few key considerations organizations will want to keep in mind when selecting channels.

Channel Selection

Consumer Preferences

First and foremost, the consumer’s habits and behaviors determine channel strategy more than anything else. If all of an organization’s consumers love to shop at Walmart, then it may be a smart idea to begin stocking Walmart shelves with products. If consumers have a strong desire to find a given good in a given channel, organizations should strive to make that happen (as long as the opportunity costs down exceed the potential benefits).

Another good example of consumer preferences would be digital storefronts. If a record label manages a few bands, and almost all of those fans are on Spotify, it may be practical to begin using this digital distribution system. If a movie studio knows that the majority of their demographic rents films via iTunes, they may want to create a strategic alliance with Apple.

Cost

Some channels will be more costly than others. Low cost goods function best at low cost retail outlets. Better yet, directly selling eliminates organizations between the user and the producer, and therefore can be even lower cost (albeit, shipping, storing and other logistics must be considered). Wholesalers are willing to buy large shipments of goods, but usually at a significant discount. In many cases, the overall revenue maximizing curve will be a useful tool in determining the optimal volume at the optimal price for a firm to satiate a given market demand. 

Brand

Organizations create strategic alliances to build channels for consumers, and these alliances will reflect on the overall branding initiatives of both partners. If an online retailers stocks a certain type of item, users of that online retailer will equate the two brands together . This can have an impact on how those consumers view both companies.

For example, A premium coffee machine manufacturer may not want to be stocked at a discount retailer, as it will lower the brand’s power in the eyes of the consumer. A high end good being sold on a low-cost distribution channel can cannibalize sales and reduce profitability through offering a price point the producer doesn’t believe matches the quality of the produced good.

Localization

In the current global economy, it is also useful to localize and enter new markets through effective marketing channel selections. A producer of household goods, for example, like laundry detergent could just as easily sell their goods in Europe as in the United States. The question for accomplishing this task is which retailers to work with, and how to localize the brand to be recognized and understood by foreign consumers. Strategic channel selection can greatly improve an organization’s ability to accomplish this goal.

Digital Channels

The modern organization is drowning in potential channels from a digital perspective. 

A diagram that shows different digital channels – search engines, directories, sites and blogs, content sites, reviews and reco’s, social, location-based services, and deals.

11.2: Channel Intermediaries

11.2.1: Functions of Intermediaries

Intermediaries make it possible for a company to deliver its products to the end user without needing to own the whole supply chain.

Learning Objective

Describe the functions of agents, wholesalers, distributors and retailers

Key Points

• Distribution of goods takes place by means of channels, and the intermediaries are the independent groups or organizations within the channel that make the product available for consumption.
• There are four main types of intermediary: agents, wholesalers, distributors, and retailers.
• A firm may have as many intermediaries in its distribution channel as it chooses. It can even have no intermediaries at all, if it practices direct marketing.

Key Term

distribution intermediaries

Independent groups or individuals that provide the channel for a company’s product to reach the end user.

Intermediaries

Intermediaries, also known as distribution intermediaries, marketing intermediaries, or middlemen, are an extremely crucial element of a company’s product distribution channel. Without intermediaries, it would be close to impossible for the business to function at all. This is because intermediares are external groups, individuals, or businesses that make it possible for the company to deliver their products to the end user. For example, merchants are intermediaries that buy and resell products.

There are four generally recognized broad groups of intermediaries: agents, wholesalers, distributors, and retailers.

Agents/Brokers

Agents or brokers are individuals or companies that act as an extension of the manufacturing company. Their main job is to represent the producer to the final user in selling a product. Thus, while they do not own the product directly, they take possession of the product in the distribution process. They make their profits through fees or commissions.

Wholesalers

Unlike agents, wholesalers take title to the goods and services that they are intermediaries for. They are independently owned, and they own the products that they sell. Wholesalers do not work with small numbers of product: they buy in bulk, and store the products in their own warehouses and storage places until it is time to resell them. Wholesalers rarely sell to the final user; rather, they sell the products to other intermediaries such as retailers, for a higher price than they paid. Thus, they do not operate on a commission system, as agents do.

Distributors

Distributors function similarly to wholesalers in that they take ownership of the product, store it, and sell it off at a profit to retailers or other intermediaries. However, the key difference is that distributors ally themselves to complementary products. For example, distributors of Coca Cola will not distribute Pepsi products, and vice versa. In this way, they can maintain a closer relationship with their suppliers than wholesalers do.

Retailers

Retailers come in a variety of shapes and sizes: from the corner grocery store, to large chains like Wal-Mart and Target. Whatever their size, retailers purchase products from market intermediaries and sell them directly to the end user for a profit .

Intermediaries

Retailers sell products to end users. They can be small “mom and pop” stores or huge chains such as Wal-Mart.

A family grocery shopping.

Channel Design

A firm can have any number of intermediaries in its channels. A “level zero” channel has no intermediaries at all, which is typical of direct marketing. A “level one” channel has a single intermediary, usually from the manufacturer to the retailer to the consumer.

11.2.2: Streamlining Distribution

Streamlining distribution involves the planning and efficient use of supply chain resources and may involve working with intermediaries.

Learning Objective

Describe the different elements that help streamline the logistics and distribution process

Key Points

• The scope of the planning of logistics and distribution processes is not limited only to the planning of production, transportation, or distribution.
• In order to optimize the work of the logistics and distribution centers, one should define the criteria according to which the optimization shall be carried out.
• Distribution planning is based on the actual transport costs and requirements that represent single goods locations.

Key Terms

supply chain

A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from their point of origin to the point of consumption for the purpose of satisfying customer requirements.

Example

• One of the main transport planning functions is allowing and performing collective (bundled) transport of goods, and the inclusion of intermodal transport systems into the logistics and distribution processes.

Introduction

Distribution Center

Streamlining decisions go beyond the distribution center itself. It involves all of the elements in the logistics and distribution process.

Streamlining distribution involves the efficient use of all technologies included in the work of logistics and distribution centers. It should be mentioned that the scope of the planning of logistics and distribution processes is not limited only to the planning of production, transportation, or distribution. It covers the entire logistics and distribution process with all the elements.

No doubt the work of logistics and distribution centers greatly influences the entire logistic chain (supply chain), and therefore its optimal functioning is of great significance. In order to optimize the work of the logistics and distribution centers, one should define the criteria according to which the optimization shall be carried out:

• Sales planning
• Stock planning
• Supply chain planning
• Production planning
• Distribution planning
• Transport planning
• Delivery schedule.

Strategic and Long-term Planning

This element provides answers to the following questions:

• Which products do we want to manipulate?
• What market are the products intended for?
• In which manner can we avoid the conflict of the given objectives?
• In what way can we best use the assets and infrastructure in order to achieve maximal profit?

Creation of Supply Chain Network

This element optimizes the use of the necessary means in the current logistic network that includes suppliers, production locations, locations of distribution means, and end users.

Analyses and simulations allow testing of various combinations, i. e., the influence that opening a facility or moving the current infrastructure facilities will have on the total revenue and level of service. By performing various methods of logistic networks planning, the locations of new infrastructure facilities may be determined, which would meet the customers’ needs in an optimal way.

These methods are usually used for decision-making on whether larger quantities of stocks will be kept at one place or whether the transport costs of more frequent deliveries will be increased.

Demand Forecast and Planning

Demand forecast and planning with empirical knowledge (forecasts based on the demand within the previous period) use statistical data and mathematical functions. It may be said that demand forecast is a one-sided process, since forecasts are used as the basis for planning only the possible customers’ demand, rather than the quantity of goods that can be produced over the future period.

Sales planning

Sales planning can be defined as a process in which demand forecast is converted into a feasible operative plan that can be used by producers and salespersons. This process may include the planning of production and/or optimization of supply chains in order to determine the possibility of meeting the demand.

Stock planning

Stock planning allows the optimal level and location of finished products that meet the demand and the level of service of the end users. In principle, stock planning is used to calculate the optimal level of safety stocks at every location.

Supply Chain Planning

Supply chain planning compares the demand forecast with the actual demand in order to develop a “master plan” (schedule), based on the multi-level sources and critical materials. The developed master plan spans the points of production and the distribution destinations, with the goal of synchronizing and optimizing production, distribution, and transportation.

Production Planning

The term production planning means the development of a master plan for single factories (producers). The master plan is based on the availability of materials, factory capacity, demand, and other operation factors.

The production planning cycle represents a complex process that is, in the majority of considerations, represented as the start of the logistics and distribution processes. If these processes are considered from the other side (i. e., for the production of certain products, semi-products and raw materials are needed and are delivered to the factory), they then represent the final products for the factory and the end of one section of the logistics chain.

Distribution Planning

Distribution planning means the development of a feasible and viable plan of distributing end products from the producers (via logistics and distribution centers, warehouses, or crossdocking) to end users. Distribution planning is based on the actual transport costs and requirements that represent single goods locations.

Transport Planning

Transport planning uses current transport prices for the minimization of dispatch costs. In order to minimize the transport costs and maximize the usage of the fleet, transport planning means the optimization of both the external and the internal goods flow. One of the main transport planning functions is allowing and performing collective (bundled) transport of goods, and the inclusion of intermodal transport systems into the logistics and distribution processes.

Delivery Schedule

The function of delivery schedule is to create a feasible (realistic) plan that meets the time requirements for the delivery of the product by the producer. The producer determines the optimal methods and time of delivery, taking into consideration the receiving of orders, the production schedule, and the availability (planning) of transport.

11.3: Channel Structures

11.3.1: B2C Channels

Brick-and-mortar and e-commerce are two main channels of business-to-consumer marketing.

Learning Objective

Define a business-to-consumer market, and the strategies marketers use to target consumers

Key Points

• A business-to-consumer market is the sale of goods and services from individuals or businesses to the end user.
• A brick-and-mortar store allows a consumer to visit the establishment and view the products, while receiving face-to-face customer service.
• E-commerce, or click-and-mortar, is conducting commercial activity via the Internet (online).

Key Terms

brick-and-mortar

Buildings and property for the conduct of business, particularly in the sale of retail goods to the general public. Used to contrast an internet-based sales operation that lacks customer-oriented store fronts and a “traditional” one for which most capital investment might be in the building infrastructure.

wholesale

The sale of products, often in large quantities, to retailers or other merchants.

e-commerce

Commercial activity conducted via the Internet.

A business-to-consumer market, or B2C, is the sale of goods and services from individuals or businesses to the end user. The seller makes its products or purchases them at a wholesale price, then sells them at a higher (or retail) price to the consumer, thus earning a profit. The consumer uses the products for his or her own personal use and is not interested in reselling the product. The types of product features consumers desire include value, convenience, efficiency in operation, dependability in use, and/or improvement in earnings. In B2C marketing situations, the marketer must always:

• successfully match the product or service strengths with the needs of a definable target market
• position and price to align the product or service with its market
• communicate and sell it in the fashion that demonstrates its value effectively to the target market

Business to Consumer Channels

There are two main channels for business-to-consumer selling. The first is the traditional “brick-and-mortar” store – a physical location for consumers to visit. Shopping malls, grocery stores, and restaurants are all examples of brick-and-mortar stores . Usually, a brick-and-mortar establishment offers consumers the chance to see, touch, and/or try the products. It also allows companies to provide face-to-face customer service.

Apple Retail Store

Apple’s retail store in Chicago, Illinois, is an example of a “brick-and-mortar” store.

The other main channel for business-to-consumer selling is e-commerce, or commercial activity conducted via the Internet. Sometimes known as “click-and-mortar,” this channel is rapidly expanding, as more people use the Internet for purchases of both goods and information. Business-to-consumer e-commerce reduces transaction costs by increasing consumer access to information and allowing them to find the most competitive price for a product or service. For companies, developing and maintaining a website is easier and less expensive than building and occupying a brick-and-mortar store. Examples of e-commerce stores are amazon.com, walmart.com, and barnesandnoble.com.

11.3.2: B2B Channels

B2B channels are often the same as B2C channels, but typically there is a greater emphasis on personal touch.

Learning Objective

Distinguish between business-to-business (B2B) and business-to-consumer (B2C)  transactions

Key Points

• Business-to-Business (B2B) marketing describes commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer.
• B2B transactions often involve a large sum of money, and so are often a longer process than a simple business-to-consumer transaction.
• Trade shows are popular ways for companies to engage each other in doing business and are an important part of B2B selling.

Key Terms

trade show

An exhibition organized so that companies in a specific industry can showcase and demonstrate their latest products and services, study activities of rivals and examine recent market trends and opportunities.

logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from their point of origin to the point of consumption for the purpose of satisfying customer requirements.

e-commerce

Commercial activity conducted via the Internet.

Business to Business (B2B) marketing refers to a market where other businesses, not end consumers, are the purchasers of the goods and services.

B2B describes commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer. Usually B2B transactions involve purchasing items that will make up the final product. For example, a chair manufacturer may buy steel for the frame from one company, wood from another, and the fabric from another. All these are considered business to business transactions. B2B marketing is usually quite different from other forms of marketing, particularly business to consumer (B2C)

Business-to-Business Channels

Like Business-to-consumer marketing, business to business also employs different channels, such as e-commerce or physical stores. However, due to the substantial differences in how B2B marketing works compared to B2C, there are additional channels. Many business-to-business transactions involve large sums of money, because generally the business will buy in large quantities. Therefore, it often makes sense to involve a representative from the selling company in developing, cultivating, and maintaining relationships that lead to sales. This person can help the purchaser plan for, set up, and use the B2B product.

Another channel, not as commonly used in business-to-consumer transactions, is that of trade shows . A trade show provides a platform for many different companies in the same general industry to display their products for other businesses to buy. A business will often purchase products at a trade show for use in their own products, making trade shows an important component of Business-to-Business transactions.

B2B Transactions

Trade shows are a common way to conduct B2B transactions.

Two men have a conversation at a trade show.

Business-to-Business E-Commerce

One of the major differences between business-to-business (B2B) transactions and business-to-consumer (B2C) transactions is the type of online (e-commerce) interaction. Typically, a B2C customer will purchase a product or service and, once the transaction has been complete, will have limited continued interaction with the company with regards to that product.

However, in a B2B transaction, the purchaser often expects an ongoing relationship with the seller. This is also reflective of the types of products and services offered in a B2B e-commerce setting, which includes logistics, outsourcing, solutions software, and content management software.

11.3.3: Alternative Arrangements

Business-to-government, consumer-to-consumer, and institutional markets are additional types of marketing channels.

Learning Objective

Outline the characteristics of business-to-government, consumer-to-consumer, and institutional marketing channels

Key Points

• Business-to-government marketing encompasses marketing products and services to various levels of the government, such as federal, state, and local.
• Consumer-to-consumer commerce is the completion of transactions between private individuals or consumers.
• Institutional market consumers are often nonprofit organizations and are not motivated primarily by profits or market share.

Key Terms

Request for Proposal

A formal publicly released document outlining a need and inviting businesses to submit plans to fulfill that need.

nonprofit

An organization that exists for reasons other than to make a profit, such as a charitable, educational, or service organization.

The most common marketing channels are business-to-consumer (B2C) and business-to-business (B2B). However, there are also alternative channels that should be discussed. These include business-to-government, consumer-to-consumer, and institutional markets.

Business-to-government (B2G)

Business-to-government marketing encompasses marketing products and services to various levels of the government, such as federal, state, and local . This is also known as “public sector marketing” and is somewhat similar to business-to-business transactions. However, there usually many more restrictions and strict processes in order to gain government contracts. Usually, government organizations post a request for proposal, and businesses respond to them. Most often, the bid with the lowest cost is accepted.

United States Capitol

B2G transactions involve working with government entities such as federal, state, and local.

Consumer-to-consumer

Consumer-to-consumer commerce is the completion of transactions between private individuals or consumers. The increased use of consumer-to-consumer transactions can be directly related to the growth of electronic, online marketplaces. Craigslist and eBay usually involve consumer-to-consumer transactions. There are also older forms of consumer-to-consumer transactions, such as classified ads and garage sales . Often, these types of transactions are for a lower cost than if they were conducted through a business, as there is some added risk that the product will be defective or otherwise be not as expected.

Garage Sale 

Garage sales are one type of consumer-to-consumer business.

Institutional Markets

Institutional markets are very similar to typical business-to-business markets. However, many institutional markets are considered nonprofits, such as churches . Institutional markets differ from typical businesses in that they are not motivated primarily by profits or market share. Rather, institutions tend to satisfy somewhat esoteric, often intangible, needs. Also, whatever profits exist after all expenses are paid are normally put back into the institution. Marketers must be aware that these institutions have different goals and restrictions than normal businesses.

Institutional Market Consumers

Churches, schools, and hospitals are some examples of institutional market consumers.

11.3.4: Customer Expectations

A customer can expect varying levels of service and product offerings at different consumer channels.

Learning Objective

Name the three product categories, and the types of marketing channels where these products are sold

Key Points

• Retail products are usually classified into three broad categories: food products, hard or durable goods, and soft goods or consumables.
• A customer can generally expect relatively lower customer service and a wide range of products and prices at large consumer markets.
• While a customer may get more personalized service, the range of products is generally lower at smaller retail outlets.

Key Terms

outlet

A shop that sells the products of the manufacturers or suppliers that it does business with.

durable goods

A good that yields services or utility over time rather than being used up when used once.

consumable

A good that is consumed or depleted upon use.

Customer Expectations

Customers expect different things from different types of marketing channels. A department store is, after all, very different from a mom-and-pop store. Retail products are usually classified into three broad categories: food products, hard or durable goods, and soft goods or consumables. Members of a channel of a distribution are also customers of those elsewhere in the channel, and their expectations must also be met.

Durable goods are those that yield services or utility over time rather than being used up when used once. Cars and washing machines are examples of durable goods. Consumable goods are those that are used up when used or otherwise have a limited life, such as clothing .

Clothing

Clothing is generally considered to be a consumable good.

Channel Member Expectations

Channel partners are also customers after all, and their expectations must also be taken into account, to develop and maintain successful relationships with them.

A common issue in channel management is leadership: the role of a channel leader should be understood by all members of the channel so that expectations are managed appropriately. The leader coordinates the goals and efforts of channel members. Some leaders may be positive and open to feedback, while others may be negative and lead based on a system of punishment and strict rules.

It is important to remember that a channel of distribution may be made up of organizations, but those organizations are made up of people. Thus, tending to the “human element” is important. Ideally, a channel member should coordinate their efforts with other members in such a way that the performance of the total distribution system is enhanced. The lack of cooperation that is often apparent is due to the organization structure of many channels, which encourages a channel member to be primarily concerned with channel members immediately adjacent to them, from whom they buy and to whom they sell. Four human dimensions have been incorporated into the study of channel behavior: roles, communication, conflict, and power. It is assumed that an understanding of these behavioral characteristics will increase the effectiveness of the channel.

Warehouse

A distributor, like a warehouse, is part of a channel of distribution. The distributor has to meet customers’ expectations as well as its own.

By ensuring there are no leadership issues and by tackling the human element of the channel of distribution, expectations of the channel members can be effectively met.

Large Retail Outlets

There are many large retail outlets, and most offer a wide variety of products at average prices. Department stores, supermarkets, and warehouse stores are all large retail outlets. Each will have its own feel and come with its own customer expectations. A shopper at a warehouse store, for example, will expect to find low-cost, high-quantity goods, while a customer at a supermarket expects to find groceries and limited non-food items. Large retail outlets have some things in common, however. A customer can generally expect relatively lower customer service and a wide range of products and prices. Products at these stores often require a more involved decision process and post-purchase evaluation. Depending on the type of store, these outlets generally focus on one or two categories. A department store, for example, will sell both durable and consumable goods.

Supermarket

Supermarkets usually offer a wide range of products at average prices.

Smaller Retail Outlets

Mom-and-pop stores, specialty stores, and general stores are all smaller retail outlets. While a customer may get more personalized service, the range of products is generally lower. These stores often focus on a few key categories of products. Conversely, these smaller outlets may offer a wider array of products at low margins, such as a discount store.

11.3.5: Channel Member Characteristics

To maximize sales, a company must carefully consider the fit between its products and the available distribution channels.

Learning Objective

Explain the importance of pairing a brand’s products with the appropriate distribution channel

Key Points

• Distribution channels are how a company will get its products to consumers.
• The selected distribution channel is reflexive of the overall marketing strategy for the product, and answers the place question of the marketing mix (4 P’s).
• There are three basic types of distribution for a marketer to consider: Intensive (the producer’s products are stocked in the majority of outlets), selective (the producer relies on a few intermediaries to carry their product), and exclusive (the producer selects only very few intermediaries).

Key Terms

Intermediary

An intermediary (or go-between) is a third party that offers intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer.

competitive advantage

Something that places a company or a person above the competition.

Just as with the other elements of a firm’s marketing program, distribution activities are undertaken to facilitate the exchange between marketers and consumers. Every company must decide on the correct distribution method for its products. That is, a company must figure out how to get its products to the user. There are many things to consider in this decision, as distribution channels ultimately say a lot about the product itself. Even the best product will fail if it is not sold in the right place. Thus, the channel chosen by a marketer becomes an integral part of the marketing plan.

Marketing Strategy

Marketers must carefully evaluate how their products fit into different distribution channels. There are many types of channels, and the selected channel becomes a function of the overall marketing strategy. A marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. This strategy is reflexive of the 4 P’s of marketing:

• What the product is and how it meets a customer need
• What the price of the product will be
• What promotions will be used to sell the product
• And what place the product will be sold.

The distribution channel is primarily concerned with this last item.

Distribution Channels

It is important for a company to match its products with the characteristics of the distribution channel. The company must decide whether to sell its products through an intermediary (such as a chain store) or attempt to sell its products directly to the customer. Using an intermediary may sometimes lower transaction costs, as much of the burden is shifted from the producer to the intermediary. There are three basic types of distribution for a marketer to consider: Intensive, selective, and exclusive. Intensive distribution means the producer’s products are stocked in the majority of outlets. This strategy is common for basic supplies, snack foods , magazines, and soft drink beverages. Selective distribution means that the producer relies on a few intermediaries to carry their product. Exclusive distribution means that the producer selects only very few intermediaries, such as is often the case with luxury goods.

Candy

Candy uses an intensive distribution channel. It is widely available at a low cost.

A marketer will consider the three types of distribution and select the one that most closely fits the overall marketing strategy. Generally, as one moves from intensive to selective to exclusive distribution channels, the more that company can charge for its products. However, the trade-off is in how widely available the company wants its product. Carefully considering the possible distribution channels will help maximize the potential of a product.

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11.4: Channel Strategy Decisions

11.4.1: Factors Affecting Channel Choice

Channel choice involves understanding the ultimate user and how they prefer to purchase merchandise.

Learning Objective

Discuss the various factors that affect channel choice

Key Points

• Channel choice begins with two questions: to whom shall we sell this merchandise immediately? And, who are our ultimate users and buyers?
• There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy.
• Often, the exchange requirements of manufacturers – e.g., infrequent visits, large order requirements, and stringent credit terms – are the opposite of those desired by retailers.
• Channel objectives are based on the requirements of the purchasers and users, the overall marketing strategy, and the long-run goals of the corporation.
• The channel manager must be very specific in describing channel tasks, and must define how these tasks will change depending upon the situation.

Key Term

wholesaler

a person or company that sells goods wholesale is a middleman that buys its merchandise from a third party supplier and resells the merchandise to retail businesses or the end consumer. A wholesaler normally does not sell to other wholesalers.

Factors Affecting Channel Choice

Whether a firm be a one person operation or one that employs thousands of people and generates billions in sales, all are in business to serve the needs of markets. In order to do this, these firms must be assured that their products are distributed to their intended markets. Most producing and manufacturing firms are not in a favorable position to perform all the tasks that would be necessary to distribute their products directly to their final user markets. In many instances, it is the expertise and availability of other channel institutions that make it possible for a producer/manufacturer to even participate in a particular market. Other channel members can be useful to the producer in designing the product, packaging it, pricing it, promoting it, and distributing it through the most effective channels.

Channel Choice

Managers have many factors to consider when choosing a product distribution channel.

Channel choice begins with two questions: to whom shall we sell this merchandise immediately? And, who are our ultimate users and buyers? The immediate and ultimate customers may be identical or quite separate, depending on the type of product, functions performed in the channel, and location in the channel. There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy. It is best that we first identify the traits of the ultimate user, since the results of this evaluation might determine the other channel institutions we would use to meet these needs. For example, the buying characteristics of the purchaser of a high-end electronics device might be as follows:

1. Purchased only from a well-established, reputable dealer.
2. Purchased only after considerable shopping to compare prices and merchandise characteristics.
3. Purchaser willing to go to some inconvenience (time and distance) to locate the most acceptable brand.
4. Purchased only after extended conversations involving all interested parties – including dealer, users, and purchasers.
5. Purchase may be postponed.
6. Purchased only from a dealer equipped to render prompt and reasonable product service.

Knowing the buying specifications of consumers, the channel planner can decide on the type or types of wholesaler and/or retailer through which a product should be sold. This requires that a manufacturer contemplating distribution through particular types of retailers become intimately familiar with the precise location and performance characteristics of those being considered.

In much the same way that buying specifications of ultimate users are determined, the manufacturers must also discover buying specifications of resellers. Of particular importance is the question, “from whom do my retail outlets prefer to buy? ” The answer to this question determines the type of wholesaler – if any – that the manufacturer should use. Although many retailers prefer to buy directly from the manufacturers, this is not always the case. Often, the exchange requirements of manufacturers – e.g., infrequent visits, large order requirements, and stringent credit terms – are the opposite of those desired by retailers. Such retailers would rather buy from local distributors who have lenient credit terms and offer a wide assortment of merchandise.

Channel choice is also greatly influenced by channel objectives. Channel objectives are based on the requirements of the purchasers and users, the overall marketing strategy, and the long-run goals of the corporation. In cases when a company is just getting started, or an older company is trying to carve out a new market niche, the channel objectives may be the dominant force on channel choice. The following areas encompass the major categories of channel objectives:

1. Growth in sales – by reaching new markets and/or increasing sales in existing markets.
2. Maintenance or improvement of market share – educate or assist channel components in their efforts to increase the amount of product they handle.
3. Achieve a pattern of distribution – structure the channel in order to achieve certain time, place, and form utilities.
4. Create an efficient channel – improve channel performance by modifying various flow mechanisms.

After the distribution objectives are set, it is appropriate to determine the specific distribution tasks or functions to be performed in that channel system. The channel manager must be very specific in describing the tasks, and must define how these tasks will change depending upon the situation. An ability to do this requires the channel manager to evaluate all phases of the distribution network. Tasks must be identified fully, and costs must be assigned to these tasks.

11.4.2: Distribution Intensity

Marketing channel intensity takes into account both the variance and number of channels an organization may use to deliver goods and services to consumers.

Learning Objective

Differentiate between different distribution intensity strategies, incorporating the modern digital storefronts into this consideration

Key Points

• Organizations must understand the competitive environment of the industry, particularly how to use a variety of marketing channels to get their products in front of their core target market at the right time and place.
• Distribution intensity plays a significant role in marketing channel strategy. Firms can opt for intensive, selective, and exclusive strategies.
• Intensive distribution focuses on delivering a firm’s goods to as many storefronts as possible and maximizing the amount of sales to pursue scale economies.
• Selective distribution focuses on utilizing fewer channels to maintain a higher level of strategic control, but still pursues high volume within those select channels.
• Exclusive distribution works off the idea that scarcity can add value. High fashion and other luxury goods focus on being hard to find through limited channels and low volume of production.
• Technology has had a significant impact on marketing channel strategy. Influential digital storefronts are key strategic partners in the modern economy.

Key Term

marketing channel

The way in which a firm sells goods and services to a potential consumer, either directly or through a strategic partner.

Channel Distribution Intensity

As organizations develop their marketing channel strategies, an important question arises regarding distribution intensity. There is some freedom in most industries for a firm to determine which channels they will use, and how much volume each channel will receive. Weighing the pros and cons of various channels, both in terms of the number of channels and the volume within each channel, can have a significant strategic impact on a firm’s position in a market.

Generally speaking, there are three ways to frame the distribution intensity decision:

Intensive

This is the highest in both number of channels and volume within each channel. An intensive distribution approach will take advantage of as many sales outlets, distributors, and direct selling opportunities the organization can identify and justify (at a given volume). This is common for goods such as soda, snacks, household items, and other common low cost goods. In short, many channels and high volume.

Selective 

Selective distribution focuses on narrowing down the number of channels within the distribution strategy, but not the overall volume of goods sold through those channels. This strategy focuses on fewer channels yet retains a desire for higher volumes to capture scale economies in production. Common channels in these circumstances are channels where the firm can maintain strategic control of how the products are sold, at what price, and in which regions.

Exclusive

Finally, some firms opt for a low volume approach with very few channels selected. This is ideal for differentiated organizations with a strong brand and a desire for scarcity. If everyone had the same high fashion item, it would no longer be a high fashion item. If everyone on the road had a beautiful, unique sports car, much of the allure and justification for a high price point would be gone. Exclusive distribution strategies work best for firms that focus on low volume, high margin sales.

Technology and Channels

Technology has disrupted some of the logic behind these channel decisions, as digital storefronts have grown to be highly influential, easily accessible to global markets, and substantially cheaper than retail space. As the rise of digital purchasing continues, and the cost of shipping decreases, globalization will drive organizations more and more towards channel strategies that optimize online exposure.

Considering the vastness of the internet, however, being found by consumers who are not yet aware of your product becomes difficult. This creates an interesting relationship, similar to the retail relationship in traditional channel marketing, whereas certain digital storefronts are highly valuable strategic partners. Amazon, for example, sells a huge number of brands on their website. Being highly rated and promoted on Amazon will greatly increase the efficacy of that particular channel. Understanding how online marketplaces work, and how to build a presence in this new digital age, is a critical skill set for a strategic marketeer looking at channel strategy.

B2B Marketing Roles

This diagram shows marketing channel strategies within a B2B organization. Marketing channels represent one avenue among many in the field of marketing and sales.

A diagram that shows marketing channel strategies in a B2B organization. 1.) design product experience, functionality, packaging, and price; 2.) create awareness, position product, design customer engagement and decision-making experience; 3.) sell the product, design small format and face-to-face engagement experience; and 4.) keep customer engaged, seed repeat business, and make the customer a reference.

11.4.3: Distribution Centers vs. Direct Store Delivery

Depending on customer needs, marketing channel strategies can utilize distribution centers or move products directly to a store.

Learning Objective

Describe the different functions performed by wholesalers in channel distributions

Key Points

• Types of retailers include department stores, chain stores, discount houses, franchises, and non-store retailers. Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in many other respects.
• In order to decide on the types of retailers to include in its marketing channel, a firm must first understand the buying specifications of its consumers and the retailers themselves.
• Wholesaling includes all activities required to market goods and services to businesses, institutions, or industrial users. Wholesalers can provide warehousing, inventory control and order processing, transportation, information, and selling functions.
• Wholesalers can provide warehousing, inventory control and order processing, transportation, information, and selling functions.

Key Terms

franchise

The authorization granted by a company to sell or distribute its goods or services in a certain area.

department store

a large shop containing many different areas, each of which deals in different goods or services

marketing channel

Sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider.

Distribution Centers Versus Direct Store Delivery

Depending on the product being sold and ultimate end user, companies can choose a marketing channel strategy that involves utilizing distribution centers (wholesalers) or moving their products directly to a store, or retailer. There are advantages and disadvantages to both and several different types of each.

Retailers

Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in many other respects. Most stores are small and have weekly sales of only a few hundred dollars. A few are extremely large, having sales of $500,000 or more on a single day. An example of a large retailer would be Wal-Mart shown here

Retailers

Walmart is one of the largest and most successful retailers in history.

There are many different kinds of retailers, including:

• Department Stores – Department stores are characterized by their very wide product mixes. That is, they carry many different types of merchandise that may include hardware, clothing, and appliances.
• Chain Stores – Chain stores are able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lower their cost compared to costs of single unit retailers. As a result, they can set retail prices that are lower than those of their small competitors, and thereby increase their share of the market. Furthermore, chains are able to attract many customers because of their convenient locations, made possible by their financial resources and expertise in selecting locations.
• Discount Houses – Discount houses are characterized by an emphasis on price as their main sales appeal. Merchandise assortments are generally broad, including both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes.
• Franchises – Over the years, large chain store retailers have posed a serious competitive threat to small storeowners. Franchising has come about in response to this trend.
• Non-store Retailing – Non-store retailing describes sales made to ultimate consumers outside of a traditional retail store setting. In total, non-store retailing accounts for a relatively small percentage of total retail sales, but it is growing and very important with certain types of merchandise, such as life insurance, cigarettes, magazines, books, CDs, and clothing. Online vendors, such as Amazon, or a good example of non-store retailers. Vending machines are another type of non-store retailing. This method of retailing is an efficient way to provide continuous service. It is particularly useful with convenience goods.

In order to decide on the types of retailers to include in its marketing channel, a firm must first understand the buying specifications of its consumers. The firm must also understand the buying specifications of the retailers themselves. Although some retailers prefer to buy directly from the manufacturer, others would rather buy from local distributors who have lenient credit terms and offer a wide array of merchandise.

Wholesalers

Wholesaling includes all activities required to market goods and services to businesses, institutions, or industrial users who are motivated to buy for resale or to produce and market other products and services. The vast majority of all goods produced in an advanced economy have wholesaling involved in their marketing. This includes manufacturers who operate sales offices to perform wholesale functions and retailers who operate warehouses or otherwise engage in wholesale activities. Wholesale volume is greater than that of retail because it includes sales to industrial users as well as merchandise sold to retailers for resale. 

Wholesalers

An example of a wholesaler is Optimum Sleep, which sells furniture wholesale.

Wholesalers perform a number of useful functions within the channel of distributions. These may include all or some combination of the following:

1. Warehousing – the receiving, storage, packaging, and the like necessary to maintain a stock of goods for the customers they service.
2. Inventory Control and Order Processing – keeping track of the physical inven­tory, managing its composition and level, and processing transactions to insure a smooth flow of merchandise from producers to buyers and payment back to the producers.
3. Transportation – arranging the physical movement of merchandise.
4. Information – supplying information about markets to producers and information about products and suppliers to buyers.
5. Selling – personal contact with buyers to sell products and service.

By providing this linkage, wholesalers assist both the producer and the buyer. From the buyer’s perspective, the wholesaler typically brings together a wide assortment of products and lessens the need to deal directly with a large number or producers. The wholesaler assists the producer by making products more accessible to buyers. It provides the producer with wide market coverage information about local market trends in an efficient manner.

11.5: Marketing Channel Relationships

11.5.1: Competitive Priorities in Marketing Channels

A marketing channel is a set of practices necessary to transfer the ownership of goods from producer to consumer.

Learning Objective

Describe the different types of marketing distribution channels

Key Points

• When developing distribution strategies, companies assess how marketing channels link producers to buyers, affect advertising and promotion, and influence pricing.
• Alternative terms for marketing channel include ‘distribution channel’ or ‘route-to-market’.
• A marketing channel can be short, extending directly from the vendor to the consumer; or may include several interconnected (usually independent but mutually dependent) intermediaries such as wholesalers, distributors, agents, retailers.
• To sway channel intermediaries to stock their product over other brands, companies engage in promotional tactics including higher profit margins, special deals, premiums and allowances for advertising or display on store shelves.

Key Terms

supply chain

A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

intermediaries

An intermediary is a third party that offers an intermediation service between two trading parties.

Competitive Priorities In Marketing Channels

One of the ways companies gain a competitive advantage in the market is through successful incorporation and management of marketing channels. A marketing channel is a set of practices or activities necessary to transfer the ownership of goods, and to move goods from production to consumption. This process typically consists of all the institutions and marketing activities involved in the promotion and distribution of goods. Management teams must evaluate competitive pressures to assess whether their marketing strategies are effective and profitable, or ineffective and costly to the organization. Sales remains the most popular way to measure performance.

Competition

Rebates and higher profit margins are tactics used by brands to gain favor with channel intermediaries and preference on store shelves.

People shopping in a supermarket isle.

When developing, implementing and measuring the effectiveness of marketing channels, businesses should consider:

• The link from producers to buyers
• Sales, advertising and promotion performance
• The company’s pricing strategy
• Product strategy through branding, policies, willingness to stock
• The Impact the attitudes of channel intermediaries have on the product
• Competition from other intermediaries and other product lines

All of these factors influence the positioning of products against their competitors in the marketplace.

Role and Design in the Marketing Mix

Distribution–one of the primary elements in the marketing mix–is key in determining how and when to respond to competitive pressures in the promotion of goods and services. An alternative term is distribution channel or ‘route-to-market’. It is a path or pipeline through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them flow in the opposite direction (from consumer to the vendor).

A marketing channel can be short, extending directly from the vendor to the consumer; or may include several interconnected (usually independent but mutually dependent) intermediaries such as wholesalers, distributors, agents, retailers. For example, merchants are intermediaries that buy and resell products. Agents and brokers are intermediaries that act on behalf of the producer but do not take title to the products. Each intermediary receives the item at one pricing point, and moves it to the next highest pricing point until it reaches the final buyer. This grouping of organizations is often referred to as the supply chain of a company.

Choosing Marketing Channels

Cost, flexibility and quick adaptation to changing markets and demand are usually the top factors sellers consider when assess and choosing distribution channels. The types vary and heavily depend on product category and target market. These distribution types include:

• Intensive distribution – this channel allows the producer’s products to be stocked in major, mainstream outlets. This strategy is common for basic supplies, snack foods, magazines and soft drink beverages.
• Selective distribution – producers rely on a few intermediaries to carry their product. This strategy is commonly observed for more specialized goods that are carried through specialist dealers. For example, brands of craft tools, or large appliances would fall into this marketing channel.
• Exclusive distribution – producers select only very few intermediaries. Exclusive distribution is often characterized by exclusive dealing where the reseller carries only that producer’s products at the exclusion of other products. This strategy is typical of luxury goods retailers.

Managing and Motivating Marketing Channels

During the marketing planning stage, marketers must choose and incorporate the most suitable channels for the firm’s products, as well as select appropriate channel members or intermediaries. Ensuring these intermediaries are trained and motivated to sell the firm’s products is crucial to a brand’s competitive strategy; i.e., its accessibility and availability to buyers. Monitoring the channel’s performance over time and modifying the channel to enhance performance is also imperative for organizations looking to remain competitive in the market. Promotional tactics are often used by companies use to motivate channel intermediaries to stock their brand over other products. These techniques include higher profit margins, special deals, premiums and allowances for advertising or display on store shelves.

11.5.2: Channel Power, Control, and Leadership

Channels perform better if a party is in charge, providing a level of leadership to coordinate goals and efforts.

Learning Objective

Describe why manufacturers, wholesalers and retailers take the lead in channel partnerships

Key Points

• In a type of business cold war, manufacturers and retailers are constantly trying to match each other in size.
• The manufacturer should lead if the design and redesign of the channel is best done by the manufacturer and if control of the product—merchandising, repair, etc.—is critical.
• The wholesaler should lead where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, financially weak, and lacking in marketing expertise.
• The retailer should lead when product development and demand stimulation are relatively unimportant, and when personal attention to the customer is important.

Key Terms

dictatorial

In the manner of a dictator, usually with callous disregard for others.

retailer

one who purchases goods or products in large quantities from manufacturers directly or through a wholesale, and then sells smaller quantities to the consumer for a profit

Channel Power, Control, and Leadership

Power is our willingness to use force in a relationship. It is often the means by which we are able to control or influence the behavior of another party. In the channel mechanism, power refers to the capacity of a particular channel member to control or influence the behavior of another channel member. For instance, a large retailer may want the manufacturer to modify the design of the product, or perhaps be required to carry less inventory. Both parties may attempt to exert their power in an attempt to influence the other’s behavior. The ability of either of the parties to achieve this outcome will depend upon the amount of power that each can bring to bear.

Channels usually perform better if a party is in charge, providing some level of leadership. Essentially, the purpose of this leadership is to coordinate the goals and efforts of channel institutions. The level of leadership can range from very passive to quite active—verging on dictatorial. The style may range from very negative, based on fear and punishment, to very positive, based on encouragement and reward. In a given situation, any of these leadership styles may prove effective. Given the restrictions inherent in channel leadership, the final question is “who should lead the channel?” Two important trends are worth noting, since they influence the answer.

First, if we look at the early years of marketing, the role of the wholesaler (to bring the producer and consumer together) was most vital. Consequently, during this period, the wholesaler led most channels. This is no longer the case. A second trend is the apparent strategy of both manufacturers and retailers to exert power through size. In a type of business cold war, manufacturers and retailers are constantly trying to match each other in this respect. The result has been some serious warfare to gain channel superiority.

Channel Control

Wholesalers and retailers undertake size competition in order to gain channel control.

Large bundles of products stacked on shelves in a warehouse.

Under which conditions should the manufacturers lead? The wholesaler? The retailer? While the answer is contingent upon many factors, in general, the manufacturer should lead if the design and redesign of the channel is best done by the manufacturer and if control of the product—merchandising, repair, etc.—is critical. The wholesaler should lead where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, financially weak, and lacking in marketing expertise. The retailer should lead when product development and demand stimulation are relatively unimportant and when personal attention to the customer is important.

11.5.3: Channel Partnering

 Channel partners can potentially fulfill needs along an organization’s value chain by enhancing the efficiency of distribution and/or access to new markets.

Learning Objective

Recognize the value channel partners can add via co-branding, distribution and/or efficiency

Key Points

• Channel partnerships are strategic collaborations between organizations that can potentially provide reciprocal value for both organizations.
• Channel partners can add value through fulfilling certain needs along a value-chain, as well as providing unique access to an established market or brand.
• Co-branding is the opportunity for channel partners to represent both of their brands on a given product. In these situations, both organizations can benefit from the brand equity of the other.
• Value-added resellers are another example of a channel partnership. Value-added resellers not only resell the product or service, but also add a unique benefit for potential consumers. This justifies the mark up.
• Overall, the management of channel partnership relationships as well as the acquisition of new partners is critical to success in most industries in the modern economy.

Key Term

co-branding

The combination of two or more well-known brands for marketing purposes, to strengthen one another’s preference or purchase intentions, or to reach a broader audience.

Channel Partners

As organizations build relationships across various channels within the industries in which they operate, the importance of partners within those channels can be a central concern. A channel partner is simply a company that works in collaboration with a organization in a way that assists the sale, distribution, storage, and/or production process. 

As a result of the varying roles a channel partner can play, it’s useful to understand the value chain, co-branding, value-added resellers and the general distribution of marketing channels for a given product or service. 

The Value Chain

Channel partners will fulfill some need along an organization’s value chain. A value chain simply visualizes the process a product or service will go through, from the initial sourcing of raw materials, product design, manufacturing, marketing, selling, paying, distributing and delivering customer support for existing customers. There are a number of critical inputs along the value chain, and most organizations are not equipped to fulfill each role. As a result, channel partners can fulfill a number of key responsibilities in marketing, sales, distribution, storage and customer support.

Value Chain

Porter’s value chain is a useful way to visualize where various channel partners may be in the overall organizational process. 

A diagram that shows Porter’s value chain – primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (firm infrastructure, human resource management, technology, and procurement).

This could be in the form of vertical integration, where a company creates an alliance with an organization that assists in some aspect of the production process (through strategic alliances, such as partnerships, joint ventures, mergers and acquisitions). Whether a formal alliance is established or not, managing the relationships between the organization and the various channel partners along the value chain is an important aspect of controlling costs, communicating to consumers, and building a reliable production channel.

Co-branding

Another useful idea in channel partnerships is the concept of co-branding. To understand co-branding, the easiest thing to do is consider a few examples. Right now, you’re likely reading this on a device. It may be a laptop, where the laptop manufacturer (let’s say Dell, for the sake of discussion) may be co-branded with Intel (for your processor). You’re smartphone may be a Sony, with a built in Google Android OS. This is another example of co-branding.

The idea is fairly simple. Various organizations function better together, and in many situations they may both have strong brands. In these situations, both companies can list their brand on a given product, allowing each organization in the channel partnership to gain access to a new, loyal targeted customer base (i.e. that of their partner). 

Value-added Resellers

Another strong example of a channel partner is a reseller, which should in some way add value in the process. For example, consider the sale of a new tablet with internet connection. More often than not, an individual will go to a mobile device carrier outlet to browse for new devices. When purchasing a tablet from a reseller that also offers mobile data services, a consumer will receive a SIM card that is a value add to the initial tablet. This SIM card will provide data on the go, a nice additional benefit for the user. This reseller is taking a product, adding value to that product, and reselling at a higher price.

Conclusion

Channel partnerships are, in conclusion, essentially a strategic alliance or contract between organizations that enable a producer of a given product or service to access markets and provide value to consumers through collaboration. These collaborations should add value during the distribution process, whether that value is simply access to retail space, shipping resources, digital marketplaces, established brands, or other more specialized examples.

Maintaining a strong relationship with various channel partners, and identifying opportunities in the competitive environment for new partnerships, is a central facet of a modern marketer’s responsibilities. Channel marketing should be at the forefront of most marketing strategies in the digital era, as distribution and simply being noticed by consumers can be greatly enhanced through strategic partnership selection.

11.5.4: Channel Integration

The integration of marketing channels to varying degrees is known either as multi-channel or omni-channel retailing.

Learning Objective

Describe omni-channel marketing as it relates to the retail industry

Key Points

• Omni-channel retailing is concentrated on a seamless approach to the consumer experience through all available shopping channels, like mobile internet devices, computers, bricks-and-mortar, television, catalog, and so on.
• The omni-channel consumer wants to use all channels simultaneously, and retailers using an omni-channel approach will track customers across all channels, not just one or two.
• With omni-channel retailing, marketing is made more efficient with offers that are relative to a specific consumer determined by purchase patterns, social network affinities, website visits, loyalty programs, and other data mining techniques.
• A consistent and convenient brand exposure from an omni-channel retailer will create better top of mind awareness from consumers.

Key Terms

e-commerce

Commercial activity conducted via the Internet.

retailing

selling goods directly to the consumer

Channel Integration

The integration of marketing channels involves a process known as multi-channel retailing. Multi-channel retailing is the merging of retail operations in such a manner that enables the transacting of a customer via many connected channels. Channels include: retail stores, online stores, mobile stores, mobile app stores, telephone sales, and any other method of transacting with a customer. Multi-channel retailing is said to be dictated by systems and processes, when in fact it is the customer that dictates the route they take to transact. Systems and processes within retail simply facilitate the customer journey to transact and be served. The pioneers of multi-channel retail built their businesses from a customer centric perspective and served the customer via many channels long before the term multi-channel was used.

Omni-channel retailing is very similar to, and an evolution of, multi-channel retailing. Omni-channel retailing is concentrated more on a seamless approach to the consumer experience through all available shopping channels like mobile internet devices, computers, bricks-and-mortar, television, catalog, and so on. The omni-channel consumer wants to use all channels simultaneously and retailers using an omni-channel approach will track customers across all channels, not just one or two. Omni-channel retailing with the connected consumer uses all shopping channels from the same database of products, prices, promotions, etc. Instead of perceiving a variety of touch-points as part of the same brand, omni-channel retailers let consumers experience the brand, not a channel within a brand. Merchandise and promotions are not channel specific, but rather consistent across all retail channels. The brick-and-mortar stores become an extension of the supply chain in which purchases may be made in the store, but are researched through other channels of communication. With omni-channel retailing, marketing is made more efficient with offers that are relative to a specific consumer determined by purchase patterns, social network affinities, website visits, loyalty programs, and other data mining techniques.

Omni-Channel Retailing

Omni-channel retailing requires constant integration across all marketing channels.

A move to omni-channel retailing can create a more knowledgeable consumer, so store employees need to be more knowledgeable about merchandise carried and production processes. Omni-channel retailers carry merchandise that is customer-centric and is not specific to any channel(s). Research has shown that omni-channel shoppers spend up to 15% to 30% more than multi-channel shoppers and exhibit strong brand loyalty, often influencing others to patronize a brand. Real-time data may be necessary when moving towards an omni-channel approach. As socially connected consumers move from one channel to another, they expect their stopping point to be bookmarked, allowing them to return through a different channel to finish browsing or purchasing where they left off. A consistent and convenient brand exposure from an omni-channel retailer will create better top of mind awareness from consumers.

Preparing for an omni-channel presence will require a heavy investment of both time and money. Communications between the IT department, marketing department, and sales staff will need to be as smooth as possible with little confusion about goals and strategies. A clear and thorough understanding of the customer, or target market, is required to be able to make appropriate decisions about channel integration and usability. Because brick-and-mortar sales influenced by online search are four times higher than total e-commerce sales, omni-channel retailers need to be informative, personable, always connected, and allow channel transparency.

10.1: Branding

10.1.1: Defining a Brand

Learning Objective

Discuss the characteristics and connotations around branding products and services

Key Points

• The word “brand” is derived from the Old Norse brand meaning “to burn,” which refers to the practice of producers burning their mark (or brand) onto their products.
• During the Industrial Revolution, the production of many household items, such as soap, was moved from local communities to centralized factories where they were branded with a logo or insignia, extending the meaning of “brand” to that of trademark.
• All of a brand’s elements (i.e., logo, color, shape, letters, images) work as a psychological trigger or stimulus that causes an association to all other thoughts we have about a brand.
• Brands provide external cues to taste, design, performance, quality, value, and prestige if they are developed and managed properly.
• Brands convey positive or negative messages about a product. They also indicated the company or service to the consumer, which is a direct result of past advertising, promotion, and product reputation.
• A brand can convey up to six levels of meaning: Attributes, Benefits, Values, Culture, Personality and User.

Key Terms

Trademark

A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities.

watermark

A translucent design impressed on the surface of paper and visible when the paper is held to the light.

brand

A name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers.

Example

• Campbell Soup, Coca-Cola, Juicy Fruit gum, Aunt Jemima, and Quaker Oats were among the first products to be “branded. “

Defining a Brand

A brand consists of any name, term, design, style, words, symbols or any other feature that distinguishes the goods and services of one seller from another. A brand also distinguishes one product from another in the eyes of the customer. All of its elements (i.e., logo, color, shape, letters, images) work as a psychological trigger or stimulus that causes an association to all other thoughts we have about this brand. Tunes, celebrities, and catchphrases are also oftentimes considered brands.

History

The word “brand” is derived from the Old Norse ‘brand’ meaning “to burn,” which refers to the practice of producers burning their mark (or brand) onto their products. Italians are considered among the first to use brands in the form of watermarks on paper in the 1200s. However, in mass-marketing, this concept originated in the 19^th century with the introduction of packaged goods.

During the Industrial Revolution, the production of many household items, such as soap, was moved from local communities to centralized factories to be mass-produced and sold to the wider market. When shipping their items, factories branded their logo or insignia on the barrels used, thereby extending the meaning of “brand” to that of trademark. This enabled the packaged goods manufacturers to communicate that their products should be trusted as much as local competitors. Campbell Soup, Coca-Cola , Juicy Fruit gum, Aunt Jemima, and Quaker Oats were among the first products to be “branded. “

Coca-Cola 

The Coca-Cola logo is an example of a widely-recognized trademark and global brand.

Connotations

A successful brand can create and sustain a strong, positive, and lasting impression in the mind of a consumer. Brands provide external cues to taste, design, performance, quality, value and prestige if they are developed and managed properly. Brands convey positive or negative messages about a product, along with indicating the company or service to the consumer, which is a direct result of past advertising, promotion, and product reputation.

A brand can convey up to six levels of meaning:

• Attributes: The Mercedes-Benz brand, for example, suggests expensive, well-built, well-engineered, durable, high-prestige automobiles.
• Benefits: attributes must be translated into functional and emotional benefits.
• Values: Mercedes stands for high performance, safety, and prestige.
• Culture: Mercedes represents German culture, organized, efficient, high quality.
• Personality: the brand projects a certain personality.
• User: the brand suggests the kind of consumer who buys and uses the product.

Mercedes-Benz

The Mercedes-Benz Logo suggests high-prestige as an automobile brand.

10.1.2: Value of Branding

Learning Objective

Explain why a strong branding strategy is essential to the success of a company

Key Points

• Branding is crucial to the success of any tangible product. In consumer markets, branding can influence whether consumers will buy the product.
• Branding can also help in the development of a new product by facilitating the extension of a product line or mix, through building on the consumer’s perceptions of the values and character represented by the brand name.
• Effective branding of a product enables the consumer to easily identify the product because the features and benefits have been communicated effectively.
• Branding helps the manufacturer create loyalty, decrease the risk of losing market share to the competition by establishing a differential advantage, and allow premium pricing that is acceptable by the consumer because of the perceived value of the brand.
• Branding enables the retailer to benefit from brand marketing support by helping to attract more customers (ideally ones who normally don’t frequent the establishment).

Key Terms

Trademark

A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities.

co-branding

the combination of two or more well-known brands for marketing purposes, to strengthen one another’s preference or purchase intentions, or to reach a broader audience

Branding

This process involves researching, developing, and implementing brand names, brand marks, trade characters, and trademarks.

Example

• Starbucks is a brand known for its premium, oftentimes deemed “over-priced” coffee. Yet Starbucks has a loyal fan base due to its established global branding that communicates value.

“Branding is a way to create an emotional connection with a specific audience. ” – Troika, a network branding company.

What is the Purpose of Branding and Why Is It So Important?

Branding involves researching, developing, and implementing brand names, brand marks, trade characters, and trademarks. It undoubtedly requires a significant contribution from marketing communications and is a long term exercise, but one that reaps long-term profitability.

Branding is crucial to the success of any tangible product. In consumer markets, branding can influence whether consumers will buy the product. Branding can also help in the development of a new product by facilitating the extension of a product line or mix, through building on the consumer’s perceptions of the values and character represented by the brand name.

Benefits of Branding for the Consumer

Effective branding of a product enables the consumer to easily identify the product because the features and benefits have been communicated effectively. This will increase the probability that the product will be accessible and therefore purchased and consumed. Dunkin’ Donuts , for example, is a brand that has an established logo and imagery that is familiar to most consumers. The vivid colors and image of a DD cup are easily recognized and distinguished from competitors.

Dunkin’ Donuts 

The Dunkin’ Donuts logo, which includes an image of a DD cup of coffee, makes it easy to spot anywhere. 

Benefits of Branding for the Manufacturer

Branding helps create loyalty, decreases the risk of losing market share to the competition by establishing a differential advantage, and allow premium pricing that is acceptable by the consumer because of the perceived value of the brand. Good branding also allows for effective targeting and positioning. For example, Starbucks is a brand known its premium coffee. Starbucks has a loyal fan base due to its established global branding that communicates value.

Starbucks 

Starbucks is a brand associated with premium, high-priced coffee.

Benefits of Branding for the Retailer

Branding enables the retailer to benefit from brand marketing support by helping to attract more customers (ideally ones who normally don’t frequent the establishment). For example, a customer who truly values organic brands might decide to visit a Babies R Us to shop for organic household cleaners that are safe to use around babies. This customer might have learned that a company called BabyGanics, which brands itself as making “safe, effective, natural household solutions”, was only available at this particular retailer.

10.1.3: Brand Loyalty

Learning Objective

Describe the conditions that must be met to achieve brand loyalty, and the consumer behaviors associated with brand loyalty

Key Points

• Brand loyalty is not to be characterized exclusively by a consumer’s ability to repurchase a brand.
• Customers’ perceived value, brand trust, satisfaction, repeat purchase behavior, and commitment are found to be the key influencing factors of brand loyalty.
• The benefits of brand loyalty are longer tenure (or staying a customer for longer), and lower sensitivity to price.
• True brand loyalty exists when: a) customers have a high relative attitude toward the brand, which is then exhibited through repurchase behavior; and b) whether the customer is committed to the brand.
• The four patterns of behavior: a) Hardcore Loyals, who buy the brand all the time; b) Split Loyals, loyal to two or three brands; c) Shifting Loyals, moving from one brand to another; and d) Switchers, with no loyalty (possibly ‘deal-prone’ or ‘vanity prone’).
• The benefits of brand loyalty are longer tenure (or staying a customer for longer), and lower sensitivity to price. Recent research found evidence that longer-term customers were indeed less sensitive to price increases.

Key Terms

Andrew Ehrenberg

A statistician and marketing scientist. For over half a century, he made contributions to the methodology of data collection, analysis and presentation, and to understanding buyer behavior and how advertising works.

Loyalty Program

Structured marketing efforts that reward, and therefore encourage, loyal buying behavior — behavior which is potentially beneficial to the firm.

Philip Kotler

An American academic focused on marketing. The author of Marketing Management, among dozens of other textbooks and books, and the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University.

Example

• Some fairly well-known examples of brand loyalty promotions include: My Coke Rewards, Pepsi Stuff, and the Marriott Rewards loyalty programs.

Brand Loyalty

In marketing, brand loyalty refers to a consumer’s commitment to repurchase or otherwise continue using a particular brand by repeatedly buying a product or service.

The American Marketing Association defines brand loyalty as: 1.) “The situation in which a consumer generally buys the same manufacturer-originated product or service repeatedly over time rather than buying from multiple suppliers within the category” (sales promotion definition). 2.) “The degree to which a consumer consistently purchases the same brand within a product class” (consumer behavior definition).

Aside from a consumer’s ability to repurchase a brand, true brand loyalty exists when a.) the customer is committed to the brand, and b.) the customers have a high relative attitude toward the brand, which is then exhibited through repurchase behavior. For example, if Joe has brand loyalty to Company A, he will purchase Company A’s products even if Company B’s products are cheaper and/or of a higher quality.

Brand loyalty is viewed as a multidimensional construct, determined by several distinct psychological processes, such as the customers’ perceived value, brand trust, satisfaction, repeat purchase behavior, and commitment. Commitment and repeated purchase behavior are considered as necessary conditions for brand loyalty, followed by perceived value, satisfaction, and brand trust.

Philip Kotler defines four customer-types that exhibit similar patterns of behavior:

• a) Hardcore Loyals, who buy the brand all the time
• b) Split Loyals, loyal to two or three brands
• c) Shifting Loyals, moving from one brand to another
• d) Switchers, with no loyalty (possibly “deal-prone,” constantly looking for bargains, or “vanity prone,” looking for something different).

Benefits of Brand Loyalty

The benefits of brand loyalty are longer tenure (or staying a customer for longer), and lower sensitivity to price. Recent research found evidence that longer-term customers were indeed less sensitive to price increases.

According to Andrew Ehrenberg, consumers buy “portfolios of brands.” They switch regularly between brands, often because they simply want a change. Thus, “brand penetration” or “brand share” reflects only a statistical chance that the majority of customers will buy that brand next time as part of a portfolio of brands. It does not guarantee that they will stay loyal.

By creating promotions and loyalty programs that encourage the consumer to take some sort of action, companies are building brand loyalty by offering more than just an advertisement. Offering incentives like big prizes creates an environment in which customers see the advertiser as more than just the advertiser. Individuals are far more likely to come back to a company that uses interesting promotions or loyalty programs than a company with a static message of “buy our brand because we’re the best.”

Popular Loyalty Programs

Below are some of the most popular Loyalty Programs that are currently being used by major companies as a means of engaging their customers beyond traditional advertising.

Sweepstakes and Advergames

• Branded digital games that engage consumers with prize incentives

Contests

• Skill tests and user-generated promotions such as video and photo contests

Social

Media

Applications and Management

• Develop promotions and offers within social media channels
• Ongoing management and maintenance of brand Facebook pages and other social media

Customer Rewards Programs

• Online points programs – earn prizes for incremental purchase behavior (e.g., JetBlue’s TrueBlue and American Airlines’s AAdvantage frequet flyer programs)
• My Coke Rewards, Pepsi Stuff, and the Marriott Rewards loyalty programs

Marriott

Marriott is known for its customer rewards program – Marriott Rewards.

The San Diego Marriott Marquis & Marina. It’s one of the highest revenue-generating Marriotts in the nation.

• Promotional auctions – bid for prizes with points earned from incremental purchase behavior

Email Clubs

• Manage overall subscription databases – national and/or segmented by market
• Design, develop, and publish email blasts
• Develop templates specific offers and promotions / delivery

Text

Messaging

/ Mobile Apps / Desktop Apps and

Widgets

• SMS Promotions
• iPhone apps
• Branded web apps

10.1.4: Brand Equity

Learning Objective

List the 10 attributes used to measure brand equity according to marketing professor and brand consultant David Aaker

Key Points

• Brand equity can manifest itself in consumer recognition of logos or other visual elements, brand language associations made by consumers’ perceptions of quality, and value among other relevant brand attributes.
• While many experts have developed tools or metrics to analyze brand equity, there is no universally accepted way to measure it.
• Brand equity can be measured quantitatively using numerical values such as profit margins and market share, but this approach fails to capture qualitative elements such as prestige and mental and emotional associations.
• Brand attributes used to assess a brand’s equity include: differentiation, satisfaction or loyalty, perceived quality, leadership or popularity, perceived value, brand personality, organizational associations, brand awareness, market share, and market price and distribution coverage.
• Other ways that a brand equity can be measured (these can be used individually or in combination): at the firm level, at the product level, and at the consumer level.

Key Terms

David Aaker

He is a consultant and author on the field of marketing, particularly in the area of brand strategy. He is currently the Vice Chairman of Prophet, a global brand and marketing consultancy firm, Professor Emeritus at the Haas School of Business of the University of California, Berkeley, and an advisor to Dentsu, a major Japanese advertising agency. He blogs on Aaker on brands.

Brand Equity

This phrase describes the value of having a well-known brand name, based on the idea that the owner of a well-known brand name can generate more money from products with that brand name than from products with a less well-known name.

brand awareness

The extent to which a brand is recognized by potential customers, and is correctly associated with a particular product. Expressed usually as a percentage of target market, brand awareness is the primary goal of advertising in the early months or years of a product’s introduction.

brand loyalty

where a person buys products from the same manufacturer repeatedly rather than from other suppliers

Example

• For example, Starbucks can sell its coffee at a higher price than solid market competitors because consumers associate the brand with quality and value. This is why brand equity is oftentimes directly correlated with a brand’s profitability.

Brand Equity

In marketing, brand equity refers to the value of a brand that is well-known and conjures positive mental and emotional associations. For any given product, service, or company, brand equity is considered a key asset because it helps it remain relevant and competitive. Brand equity can manifest itself in consumer recognition of logos or other visual elements, brand language associations made by consumers’ perception of quality, and value among other relevant brand attributes.

When consumers trust a brand and find it relevant, they may select the offerings associated with that brand over those of competitors even at a premium price. For example, Starbucks can sell its coffee at a higher price than solid market competitors because consumers associate the brand with quality and value. This is why brand equity is oftentimes directly correlated with a brand’s profitability.

Starbucks

Starbucks sells its coffee at a higher price point, which is justified by its perceived brand value and quality.

Baristas working in the first Starbucks coffee shop in Seattle, Washington.

Measuring Brand Equity

Brand equity is strategically crucial, but also very difficult to quantify. As a result, many experts have developed tools or metrics to analyze this asset, although there is no universally accepted way to measure it. For example, while it can be measured quantitatively using numerical values such as profit margins and market share, this approach fails to capture qualitative elements such as prestige and mental and emotional associations.

According to David Aaker, a marketing professor and brand consultant, there are ten attributes of a brand that can be used to assess its strength:

1. Differentiation
2. Satisfaction or loyalty
3. Perceived quality
4. Leadership or popularity
5. Perceived value
6. Brand personality
7. Organizational associations
8. Brand awareness
9. Market share
10. Market price and distribution coverage

Brand Asset Valuator

Young & Rubicam, a marketing communications agency, has developed the brand asset valuator, a tool to diagnose the power and value of a brand. The agency uses this tool to survey and measure consumers’ perspectives along four dimensions:

• Differentiation: The defining characteristics of the brand and its distinctiveness relative to competitors
• Relevance: The appropriateness and connection of the brand to a given consumer
• Esteem: Consumers’ respect for and attraction to the brand
• Knowledge: Consumers’ awareness of the brand and understanding of what it represents

Other ways that brand equity can be measured (these can be used individually or in combination):

• At the firm level – Brand equity can be studied as a financial asset by making a calculation of a brand’s worth as an intangible asset. For example, a company can estimate brand value on the basis of projected profits discounted to a present value. In turn, the present value can be used to calculate the risk profile, market leadership, stability, and global reach.
• At the product level – The price of an equivalent well-known brand can be compared to that of a no-name or private label product.
• At the consumer level – This measure seeks to map the mind of the consumer to uncover associations with the given brand. For example, projective techniques can be commonly used to identify tangible and intangible attributes, attitudes, and various perceptions about the brand. Under this approach, the brands with the highest levels of awareness and most favorable and unique associations are considered high equity brands.

10.1.5: Types of Brands

Learning Objective

Name the different categories that fall under service brands

Key Points

• The different types of brands include: individual products, product ranges, services, organizations, persons, individuals, groups, events, geographic places, private label brands, media brands, and e-brands.
• The most common type of brand is a tangible, individual product, such as a car or a drink.
• Product brands can also be associated with a range, such as the Mercedes S-class cars or all the varieties of Colgate toothpaste.
• As companies move from manufacturing products to delivering complete solutions and intangible deliverables, service brands are characterized by the need to maintain a consistently high level of service delivery.
• The service category comprises the following: classic service brands (e.g. airlines and banks), pure service providers (e.g. member associations), professional service brands (e.g. advisors of all kinds), agents (e.g. travel agents), and retail brands (e.g. supermarkets, restaurants).
• Events have brands too, whether they are rock concerts, the Olympics, a space-rocket launch, or a town-hall dance.

Key Term

tangible

Touchable; able to be touched or felt; perceptible by the sense of touch; palpable.

Example

• Mercedes and the US Senate are both defined organizations and each have qualities associated with them that constitute their brand.

Types of Brands

The different types of brands include: individual products, product ranges, services, organizations, persons, individuals, groups, events, geographic places, private label brands, media, and e-brands.

The most common type of brand is a tangible, individual product, such as a car or drink. This can be very specific, such as the Kleenex brand of tissues or can comprise a wide range of products.

Product brands can also be associated with a range, such as the Mercedes S-class cars or all varieties of Colgate toothpaste.

A service is another type of brand as companies move from manufacturing products to delivering complete solutions and intangible services. Service brands are characterized by the need to maintain a consistently high level of service delivery. This category comprises the following:

• Classic service brands (such as airlines, hotels, car rentals, and banks).
• Pure service providers (such as member associations).
• Professional service brands (such as advisors of all kinds – accountancy, management consultancy).
• Agents (such as travel agents and estate agents).
• Retail brands (such as supermarkets, fashion stores, and restaurants).

Another type of brand is an organization. This can be a company that delivers products and services. Mercedes and the US Senate are all defined organizations and each have qualities associated with them that constitute their brand. Organizations can also be linked closely with the brand of an individual. For example, the U.S. Democratic party is closely linked with President Barack Obama.

A person can also be considered a brand. It can be comprised of one, as in the case of Oprah Winfrey, or a few individuals, where the branding is associated with different personalities, such as with the American Democratic Party.

Not much higher in detail than an individual is the brand of a group. In particular, when this is a small group and the individuals are known, the group brand and the individual brand overlap. For example, the OWN brand of the Oprah Winfrey Network and the brand of its known members (Oprah and her team) are strongly connected.

OWN Group Brand

The OWN group brand is linked to Oprah Winfrey.

Events have brands too, whether they are rock concerts, the Olympics, a space-rocket launch, or a town-hall dance. Event brands are strongly connected with the experience of the people attending. Product, service and other brands realize the power of event brands and seek to have their brands associated with the event brands. Thus, sponsorship of events is now a thriving big business as one brand tries to get leverage from the essence of the event, such as the excitement and danger of car racing.

Places or areas of the world also have essential qualities that are seen as characterizations and hence also have a brand. These areas can range from countries to states to cities to streets to buildings. Those who govern or represent these geographies will work hard to develop the brand. Cities, for example, may have de facto brands of being dangerous or safe, cultural or bland, which will be used by potential tourists in their decisions to visit and by companies in their decisions on where to set up business.

Private label brands, also called own brands, or store brands, exist among retailers that possess a particularly strong identity (such as Save-A-Lot).

Media brands include newspapers, magazines, and television channels such as CNN .

CNN 

CNN is an example of a media brand.

The primary activity of e-brands is to deliver physical products or services, as in the case of Amazon.com . These online brands focus on delivering a service or experience in the virtual environment.

Amazon.com

Amazon.com is an e-brand that delivers services online. Consumers are able to buy and sell products on its website.

10.1.6: Brand Ownership

Learning Objective

Describe brand ownership and the rights of brand owners.

Key Points

• To really own your Brand, you must have a clear understanding of where your brand stands today and a concrete strategy that outlines how you wish to manage and grow your brand.
• Equally important is understanding what makes your brand different and creating clear and persuasive messaging communication targeting your end consumer.
• When you truly own your brand, your money is spent wisely on marketing that is targeted, sharp and effective because you have a sophisticated understanding of the marketplace, your product/service, your consumer base and your strategy.
• A brand owner may seek to protect proprietary rights in relation to a brand by registering it to become a “Registered Trademark.”
• Also, a firm or licensor can also grant the right to use their brand name, patents or sales knowledge in exchange for some form of payment.
• Brand ownership should also be considered the responsibility of its management and employees.

Key Terms

Brand Name

A term, design, symbol, or any other feature that identifies one seller’s goods or services as distinct from those of other sellers.

Registered Trademark

Designated by ® (the circled capital letter “R”), is a symbol used to provide notice that the preceding mark is a trademark or service mark that has been registered with a national trademark office.

Example

• Steve Jobs was considered a leader in shaping the identity of Apple and a key attribute for the brand, which has helped fuel a very high stock price for the company. His clear vision and leadership attracted the best talent, which then yielded some of mobile technology’s most innovative products to date.

Brand Ownership

Brand ownership is about building, developing and sustaining a brand that reflects your principles and values and which effectively persuades consumers to believe in and purchase your product/service.

In order to really own your brand, you must have a clear understanding of where your brand stands in the marketplace today, and a concrete strategy that outlines how you wish to manage and grow your brand moving forward. Equally important is understanding what makes your brand different. You must also create clear and persuasive messaging communication targeting your end consumer. You should also develop a plan to reach your goals in a realistic and organized fashion.

When you truly own your brand, your money is spent wisely on marketing that is targeted, sharp and effective because you have a sophisticated understanding of the marketplace, your product/service, your consumer base and your strategy. This will translate into disciplined and effective brand management that will enable you to remain relevant in a rapidly-changing [and oftentimes saturated] marketplace.

Brand ownership should also be considered the responsibility of its management and employees. Steve Jobs, for example, was considered a leader in shaping the identity of Apple, which has helped fuel a very high stock price for the company. As a result, the brand image and reputation has attracted some of the world’s best talent which, in turn, has yielded an variety of innovative mobile products that will undoubtedly be marked in the history of popular consumer culture.

A brand owner may seek to protect proprietary rights in relation to a brand by registering the trademark such that it becomes a “Registered Trademark.” Also, a firm or licensor can also grant the right to use their brand name, patents or sales knowledge in exchange for some form of payment.

Registered Trademark

The registered trademark symbol is designated by ® (the circled capital letter “R”).

10.1.7: Naming Brands

Learning Objective

Discuss the purpose of a brand name, and the process of researching and selecting a brand name

Key Points

• Naming a brand is crucial to its reputation, development, and future success because the primary function of the brand (name and image) is to identify the product or service in a way that it differentiates it from those of other competitors.
• A brand name reflects the overall product image, positioning and, ideally, its benefits.
• At its best, a brand can provide a carryover effect when customers are able to associate quality products with an established brand name.
• A successful brand name can enable a product to: be meaningfully advertised and distinguished from competitors, be tracked down by consumers, and be given legal protection.
• The process of naming a brand is key because it requires a systematic effort that includes generating potential brand names, screening them (oftentimes conducting market research to test their potential among consumers), and ultimately selecting the one that holds the most potential.

Key Terms

Market Research

The systematic collection and evaluation of data regarding customers’ preferences for actual and potential products and services.

Brand Name

A term, design, symbol, or any other feature that identifies one seller’s goods or services as distinct from those of other sellers.

Example

• An example of a brand name that is unique, identifiable, and differentiating is Apple’s line of mobile products which all begin with a lower-case “i” (i.e., iPad, iPod, iPhone, iTouch).

A brand is a term, design, or symbol that identifies a commercial product or service as distinct from those of other sellers. A brand name is the part of the brand that can be vocalized. A brand name can also be a name under which a business or company operates. Naming a brand is crucial to its reputation, development, and future success because the primary function of the brand (name and image) is to identify the product or service in a way that it differentiates it from those of other competitors.

Selecting a brand name is one of the most important product decisions a seller will need to make. A brand name reflects the overall product image, positioning and, ideally, its benefits. A successful brand name can enable a product to: be meaningfully advertised and distinguished from competitors, be tracked down by consumers, and be given legal protection. At its best, a brand can provide a carryover effect when customers are able to associate quality products with an established brand name.

For example, Apple has chosen to name all of its mobile products with a lower-case i, as in the case with the iPad and iPod . Another example of a brand name is Starbucks, the coffee company which is globally recognized and chooses to name its coffee sizes in Italian .

Visa Credit Card

Security chips were added to Visa credit cards as an extra security measures to protect against identity theft.

Tang

Tang is an individual brand that competes with Kraft’s other brand (Kool-Aid).

The process of naming a brand is key because it requires a systematic effort that includes generating potential brand names, screening them (oftentimes conducting market research to test their potential among consumers), and ultimately selecting the one that holds the most potential. Brand names are mandatory if the manufacturer or distributor plans to produce mass advertising for their product.

But before this process even begins, a basic branding strategy must be employed where a company or seller must select from among the following three viable options to follow:

1. A strict manufacturer’s branding policy under which a producer can only manufacture merchandise under his own brand
2. An exclusive distributor’s brand policy where a producer does not have a brand of his own but agrees to sell his products only to a particular distributor and carry his brand name (typically employed by private brands)
3. A mixed brand policy, which allows elements of both extremes (options 1. and 2.) and leads to the production of manufacturer’s as well as distributor’s brands

Apple’s iPod Touch

iPod Touch is one of Apple’s mobile products named with the distinctive “i.”

10.1.8: Brands and Brand Lines

Learning Objective

Identify the various ways in which organizations can expand the brand lines to capture opportunities in the market

Key Points

• When strategically executed, a brand extension to a given product line can be an effective tool for growth.
• When an organization grows successfully in a given product line, product extensions often enable the organization to capture new markets. Pepsi and Coca-Cola accomplished this through diet sodas, for example.
• Product line extensions are a common tool for extending brand lines. An extension to a product line may differentiate to capture a niche demographic, create a low cost opportunity, or collaborate with other brands.
• It’s important to keep in mind that any new product offering attached to a given brand creates a brand risk. Any issues that arise with use of the product may damage all of the products across the brand line.

Key Term

spin off

A new product offering utilizing an existing brand.

When understanding the potential in building a brand, it’s useful to recognize the way in which brands can extend. Brand extensions are usually accomplished by expanding the existing product line offerings, or potentially creating new product lines with the same brand (often in complementary markets). 

To provide some context, let’s define a few simple examples of spinning off a brand. Coca-Cola and Pepsi are fairly classic examples of simple product line extensions to expand the brand. Diet Coke fulfills a different need than regular Coke, in that it contains fewer calories. Through extending their product line, they now had the potential to capture health conscious consumers. Car companies are another good example. There are tons of different Toyota automobiles on the market, each catering to slightly different needs, price points, and geographies. Brand lines and product extensions are a key aspect of brand management.

Brands and Product Extensions

This simple chart demonstrates the way in which product extensions and brand lines interact from a sustainability point of view. 

A chart that shows how brand and product extensions (existing and new) interact – line extension, sustainability brand extension, multi-sustainability brands, and new sustainability brand.

Brand Management

To apply concepts of product extensions by adding to the brand line, an understanding of brand management strategies is a useful starting point. Investing in an intangible asset such as a brand can be a difficult process for organizations, as the return on this investment is not realized in the shorter term. However, building a strong repertoire with the target market in a given industry, and catering the product lines to fulfill various broader or niche needs within those markets, is a powerful strategic tool.

Product Extensions

Extending brands is often accomplished through new lines of product, referred to as product extensions. When considering product extensions, it’s important to identify diverse needs that can be filled by the organization through core processes. This means that organizations must understand the needs of the market, and determine if the organization has the ability to fulfill some of these needs.

While there are countless, unique reasons to pursue a brand extension based on which industry is being discussed, there are a few common areas where extensions often occur:

Low Cost

Extending into the lower cost segment is a common move for brands as they gain power and scale in the industry. As successful companies grow in revenue and size, they often attain the ability to produce at higher scale economies. Once this is accomplished, spinning off a cheaper version of a brand is a great way to achieve higher levels of growth. Tesla is a great example of this. Tesla began by selling extremely high end vehicles, with the plan to utilize the return on those sales to begin producing higher quantities of lower cost models, all of which maintain the powerful Tesla brand.

Differentiation

A broad term, which can be applied to a variety of tactics, differentiation is all about identifying a unique need that users are willing to pay a premium for. Consider the beer and wine industry. Microbreweries have seen enormous growth (and, in turn, acquisition by big companies) in recent years. Microbreweries focus on creating a unique, specialized beer which often costs more. Due to the unique experience, local support and potential variety, customers are willing to pay a premium for a differentiated product (compared to the bigger brand names).

Co-branding 

Another interesting example is co-branding. Sometimes co-branding can help an organization spread into new markets. For example, some cars come with built in surround sound systems. These cars are often partnered with strong brands, such as Bose, which provides mutual benefit and enables Bose to enter a new market. In this situation, the Bose brand is noted by car purchasers just as the car brands are considered in the context of good sound systems.

Conclusion

While extending product lines and spinning off the brand into new product formats can be a great opportunity for revenue growth, it also exposes the brand to new market forces and new risks. Careful quality control and brand maintenance is a key consideration in any new extensions to the brand. With proper execution, a brand can be a powerful asset for new product development.

10.1.9: Branding Strategies

Learning Objective

Distinguish between different types of branding strategies

Key Points

• Attitude branding is the choice to represent a larger feeling, which is not necessarily connected with the product or consumption of the product at all.
• Iconic brands are defined as having aspects that contribute to the consumer’s self-expression and personal identity.
• In “no brand” branding, the product is made conspicuous through the absence of a brand name.
• In derived branding, some suppliers of key components may wish to guarantee its own position by promoting that component as a brand in its own right.
• Cannibalization is a particular problem of a multi-brands strategy approach, in which the new brand takes business away from an established one which the organization also owns. This may be acceptable (indeed to be expected) if there is a net gain overall.
• In crowdsourcing branding, brands are created by the people for the business, which is opposite to the traditional method where the business creates a brand.

Key Term

Cannibalization

In marketing strategy, cannibalization refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer.

Example

• Brands whose value to consumers comes primarily from having identity value are said to be “identity brands. ” Some brands have such a strong identity that they become “iconic brands” such as Apple, Nike, and Harley Davidson.

Branding Strategies

A branding strategy helps establish a product within the market and to build a brand that will grow and mature in a saturated marketplace. Making smart branding decisions up front is crucial since a company may have to live with the decision for a long time. The following are commonly used branding strategies:

Company Name

In this case a strong brand name (or company name) is made the vehicle for a range of products (for example, Mercedez Benz or Black & Decker) or a range of subsidiary brands (such as Cadbury Dairy Milk or Cadbury Fingers in the United States).

Individual Branding

Each brand has a separate name, putting it into a de facto competition against other brands from the same company (for example, Kool-Aid and Tang are both owned by Kraft Foods). Individual brand names naturally allow greater flexibility by permitting a variety of different products, of differing quality, to be sold without confusing the consumer’s perception of what business the company is in or diluting higher quality products.

Tang

Tang is an individual brand that competes with Kool-Aid, Kraft’s other brand.

Kool-Aid

Kool-Aid is an individual brand that competes with Tang, Kraft’s other brand.

Attitude Branding and Iconic Brands

This is the choice to represent a larger feeling, which is not necessarily connected with the product or consumption of the product at all. Companies that use attitude branding include: Nike, Starbucks, The Body Shop, and Apple, Inc. Iconic brands are defined as having aspects that contribute to the consumer’s self-expression and personal identity.

Brands whose value to consumers comes primarily from having identity value are said to be “identity brands. ” Some brands have such a strong identity that they become “iconic brands” such as Apple, Nike, and Harley Davidson.

“No-brand” Branding

Recently a number of companies have successfully pursued “no-brand” strategies by creating packaging that imitates generic brand simplicity. “No brand” branding may be construed as a type of branding as the product is made conspicuous through the absence of a brand name. “Tapa Amarilla” or “Yellow Cap” in Venezuela during the 1980s is a prime example of no-brand strategy. It was simply recognized by the color of the cap of this cleaning products company.

Derived Brands

Some suppliers of key components may wish to guarantee its own position by promoting that component as a brand in its own right. For example, Intel, positions itself in the PC market with the slogan (and sticker) “Intel Inside. “

Brand Extension and Brand Dilution

The existing strong brand name can be used as a vehicle for new or modified products. For example, many fashion and designer companies extended brands into fragrances, shoes and accessories, furniture, and hotels. Frequently, the product is no different than what is already on the market, except it has a brand name marking. The risk of over-extension is brand dilution, which is when the brand loses its brand associations with a market segment, product area, or quality, price, or cachet.

Multi-brands Strategy

Alternatively, in a very saturated market, a supplier can deliberately launch totally new brands in apparent competition with its own existing strong brand (and often with identical product characteristics) to soak up some of the share of the market. The rationale is that having 3 out of 12 brands in such a market will give a greater overall share than having 1 out of 10. Procter & Gamble is a leading exponent of this philosophy, running as many as ten detergent brands in the US market. In the hotel business, Marriott uses the name Fairfield Inns for its budget chain.

Cannibalization is a particular problem of a multi-brands strategy approach, in which the new brand takes business away from an established one which the organization also owns. This may be acceptable (indeed to be expected) if there is a net gain overall.

Private Labels

Also called own brands, or store brands, these have become increasingly popular. Where the retailer has a particularly strong identity this “own brand” may be able to compete against even the strongest brand leaders, and may outperform those products that are not otherwise strongly branded.

Individual and Organizational Brands

These are types of branding that treat individuals and organizations as the products to be branded. Personal branding treats persons and their careers as brands. Faith branding treats religious figures and organizations as brands.

Crowdsourcing Branding

These are brands that are created by the people for the business, which is opposite to the traditional method where the business creates a brand. This type of method minimizes the risk of brand failure, since the people that might reject the brand in the traditional method are the ones who are participating in the branding process.

Nation Branding

This is a field of theory and practice which aims to measure, build, and manage the reputation of countries (closely related to place branding).

10.2: Packaging

10.2.1: The Purposes of Packaging

The role of packaging in marketing has become quite significant as it is one of the ways companies can get consumers to notice products.

Learning Objective

Describe the various uses of product packaging within a branding context

Key Points

• Considering the importance placed on the package, it is not surprising that a great deal of research is spent on motivational research, color testing, psychological manipulation, and so forth, in order to ascertain how the majority of consumers will react to a new package.
• A common use of packaging is marketing. The packaging and labels can be used by marketers to encourage potential buyers to purchase the product.
• Packaging is also used for convenience and information transmission. Packages and labels communicate how to use, transport, recycle, or dispose of the package or product.

Key Term

marketing

The process of communicating the value of a product or service to customers.

Example

• In the case of Pringles, made by Procter & Gamble, a package had to be designed that would protect a very delicate product. It also faced the uncertain response of retailers which have never stocked stacked potato chips before.

The Purposes of Packaging

With the increased importance placed on self-service marketing, the role of packaging is becoming quite significant. For example, in a typical supermarket a shopper passes about 600 items per minute, or one item every tenth of a second. Thus, the only way to get some consumers to notice the product is through displays, shelf hangers, tear-off coupon blocks, other point-of-purchase devices, and, last but not least, effective packages. Considering the importance placed on the package, it is not surprising that a great deal of research is spent on motivational research, color testing, psychological manipulation, and so forth, in order to ascertain how the majority of consumers will react to a new package. Based on the results of this research, past experience, and the current and anticipated decisions of competitors, the marketer will initially determine the primary role of the package relative to the product. Should it include quality, safety, distinction, affordability, convenience, or aesthetic beauty?

Packaging

For many drugs, packaging is used to protect the product, distribute information, and provide convenience. 

A box of Risperdal pills that are packaged as convenient individual doses.

Common uses of packaging include:

• Physical protection: The objects enclosed in the package may require protection from, among other things, mechanical shock, vibration, electrostatic discharge, compression, temperature, etc.
• Information transmission: Packages and labels communicate how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some types of information are required by governments. Some packages and labels also are used for track and trace purposes.
• Marketing: The packaging and labels can be used by marketers to encourage potential buyers to purchase the product. Package graphic design and physical design have been important and constantly evolving phenomenon for several decades. Marketing communications and graphic design are applied to the surface of the package and (in many cases) the point of sale display, examples of which are shown here: .
• Convenience: Packages can have features that add convenience in distribution, handling, stacking, display, sale, opening, re-closing, use, dispensing, reuse, recycling, and ease of disposal.
• Barrier protection: A barrier from oxygen, water vapor, dust, etc., is often required. Permeation is a critical factor in design. Some packages contain desiccants or oxygen absorbency to help extend shelf life. Modified atmospheres or controlled atmospheres are also maintained in some food packages. Keeping the contents clean, fresh, sterile and safe for the intended shelf life is a primary function.
• Security: Packaging can play an important role in reducing the security risks of shipment. Packages can be made with improved tamper resistance to deter tampering and also can have tamper-evident features to help indicate tampering. Packages can be engineered to help reduce the risks of package pilferage.

10.2.2: Packaging Considerations

In the package design stages for products, structural design, marketing, and environmental responsibility should all be considered.

Learning Objective

Outline the design, regulatory and environmental requirements that must be addressed during the packaging development process

Key Points

• While the development of a package (or component) can be a separate process, it should be linked closely with the product to be packaged.
• With some types of products, the design process involves detailed regulatory requirements for the package. For example, toxicologists and food scientists need to verify that the packaging materials are permissible under applicable regulations.
• Package development should involve considerations for sustainability, environmental responsibility, and applicable environmental and recycling regulations.

Key Term

new product development

New product development (NPD) is the complete process of bringing a new product to market.

Example

• Andes mints are just one example of excessive packaging used to misrepresent the amount of product inherent in a package, making the package appear to have more product than it actually does. Note, in this picture, the extra paperboard is added to exaggerate the size of the package. This is also an example of wasting natural resources and energy, because paperboard is a natural resource that requires the use of energy to manufacture.

Packaging Considerations

Package design and development are often thought of as an integral part of the new product development process. Alternatively, development of a package (or component) can be a separate process, but must be linked closely with the product to be packaged. Package design starts with the identification of all the requirements: structural design, marketing, shelf life, quality assurance, logistics, legal, regulatory, graphic design, end-use, and environmental. The design criteria, performance (specified by package testing), completion time targets, resources, and cost constraints need to be established and agreed upon. Package design processes often employ rapid prototyping, computer-aided design, computer-aided manufacturing, and document automation.

With some types of products, the design process involves detailed regulatory requirements for the package. With packaging foods, for example, any package components that may contact the food are considered food contact materials. Toxicologists and food scientists need to verify that the packaging materials are permissible under applicable regulations. Packaging engineers need to verify that the completed package will keep the product safe for its intended shelf life with normal usage. Packaging processes, labeling, distribution, and sale need to be validated to comply with regulations and to ensure they have the well-being of the consumer in mind.

Package design may take place within a company or with various degrees of external packaging engineering: independent contractors, consultants, vendor evaluations, independent laboratories, contract packagers, or total outsourcing. Some sort of formal project planning and project management methodology is required for all but the simplest package design and development programs. An effective quality management system and verification and validation protocols are mandatory for some types of packaging and recommended for all.

Environmental Considerations

Package development involves considerations for sustainability, environmental responsibility, and applicable environmental and recycling regulations. It may involve a life cycle assessment which considers the material and energy inputs and outputs to the package, the packaged product (contents), the packaging process, the logistics system, and waste management. It is necessary to know the relevant regulatory requirements for point of manufacture, sale, and use. The traditional “three R’s” of reduce, reuse, and recycle are part of a waste hierarchy which may be considered in product and package development.

Environmental considerations include:

• Prevention – Waste prevention is a primary goal. Packaging should be used only where needed. Proper packaging can also help prevent waste. Packaging plays an important part in preventing loss or damage to the packaged-product (contents). Usually, the energy content and material usage of the product being packaged are much greater than that of the package. A vital function of the package is to protect the product for its intended use: if the product is damaged or degraded, its entire energy and material content may be lost.
• Disposal – Incineration, and placement in a sanitary landfill are needed for some materials. Certain states within the US regulate packages for toxic contents, which have the potential to contaminate emissions and ash from incineration and leachate from landfill. Packages should not be littered.
• Energy recovery – Waste-to-energy and refuse-derived fuel in approved facilities are able to make use of the heat available from the packaging components.
• Minimization – (also known as “source reduction”) The mass and volume of packaging (per unit of contents) can be measured and used as one of the criteria to minimize during the package design process. Usually “reduced” packaging also helps minimize costs. Packaging engineers continue to work toward reduced packaging.

Wasteful Packaging

Extra paperboard is used to exaggerate the size of the package. It’s also an example of wasting natural resources.

A package of Andes mints.

10.2.3: Packaging Strategies

Packaging enables a marketing team to highlight key product attributes, qualifiers, and branding images to capture strategic value.

Learning Objective

Describe the various strategies and objectives a marketing team can employ to capture value through effective packaging

Key Points

• Packaging fulfills a variety of strategy purposes across a number of disciplines, including legal, marketing, and operational objectives.
• From a marketing perspective, there are quite a few useful strategies and outcomes to keep in mind when designing a product’s packaging.
• Communicating the core attributes and value of the product, alongside building brand awareness and brand recognition, helps to manage the expectations of consumers and build brand loyalty.
• Using symbols and icons, particularly from verifying third parties, can be a useful strategy for packaging. 
• Co-branding is also a useful packaging strategy that enables two or more firms to utilize their brand equity to drive behavior on a product to which each firm adds value.

Key Term

Brand Recognition

The ability for a given consumer to associate a product with a brand immediately upon seeing it. 

Packaging is a significant issue from a strategic perspective, with impacts ranging from the first impression consumers will have to environmental policy to cost-cutting. How a firm packages a product is therefore a key topic across various disciplines, with the potential to increase revenues, decrease costs, and maintain alignment with environmental policies and legislation.

Packaging Waste Hierarchy

Through utilizing minimal and reusable packaging, costs can be lowered while consumers receive the value of having less of a negative impact on the environment.

A pyramid diagram that shows the packaging waste hierarchy from least to most favored – disposal, energy recovery, recycling, reuse, minimisation, and prevention.

Packaging Strategies

From the marketing perspective, packaging strategies can have a significant impact on brand awareness, brand recognition, expectations management, and as a conduit of information between the organization and the user. Marketing, branding, and packaging must align on messaging, value proposition, and communication to accomplish the following:

Value Proposition

The primary purpose of packaging from a marketing perspective is to underscore why a user would purchase a given product. This could be extremely simple, such as a description of what the product is. This could also be emotional, communicating what the product stands for. For example, perhaps an informed consumer wants to buy locally sourced food. A smart marketing strategy for organizations focused on local production would be to highlight this in big letters on the package.

Brand Recognition

Another important purpose of packaging for marketers is the capacity for building recognition of the brand. When you see a red can of soda with cursive writing, you almost immediately associate it with Coca-Cola. This is strategic on behalf of the company. It builds recognition, which can lead to loyalty.

Brand Awareness

Slightly different than recognition, building brand awareness is all about the opportunity to be memorable. Creating packaging that will draw the attention of a consumer will increase that brand’s ability to convert the customer both in this instance, and in later instances. For consumers, their attention is a much desired commodity for organizations. Packaging is an opportunity to accomplish this.

Expectations

A key component of effective marketing is ensuring the consumer gets what they expect (and preferably a bit more). This way, the association of the consumer is a positive one when considering the organization, relative to what they had expected. Packaging allows for simple strategies in this regard, such as stating on the package that batteries aren’t included, or that a given accessories isn’t compatible with certain types of smartphones.

Co-branding

Another interesting and useful strategy within packaging is co-branding. Simply put, organizations often collaborate, and can benefit from sharing this collaboration. Ben and Jerry’s ice cream uses a ton of different ingredients, many of which may be another organization’s brand. Heath bar in Ben and Jerry’s, for example, could be co-branded on the package. 

Symbols and Icons

Packaging is a visual representation of a product, and can benefit from established and trustworthy markings of certain attributes. For example, a 100% organic symbol on a box of cereal would indicate to the user that an external third party verified and approved of the cereal manufacturer’s production process. Using recognizable symbols and icons can build trust between the organization and the consumer.

10.2.4: Product Labeling

Labels serve to capture the attention of shoppers as well as provide useful information regarding the product.

Learning Objective

State what information and symbols are generally included on product labels

Key Points

• In some countries, many products, including food and pharmaceuticals, are required by law to contain certain labels such as listing ingredients, nutritional information, or usage warning information.
• Labels are attached on the product package to provide information such as manufacturer of the product, date of manufacture, date of expiry, its ingredients, how to use the product, and its handling.
• Some labels include symbols to show product certifications, trademarks, or proof of purchase. These symbols exist to communicate aspects of consumer use and safety.

Key Term

The Fair Packaging and Labeling Act

The Fair Packaging and Labeling Act is a US law that applies to labels on many consumer products. It requires the label to state:The identity of the product;The name and place of business of the manufacturer, packer, or distributor;The net quantity of contents;The contents statement must include both metric and US customary units.

Labels serve to capture the attention of shoppers. The use of catchy words may cause strolling customers to stop and evaluate the product. The label is likely to be the first thing new customers see and thus offer their first impression of the product.

Labels are Descriptive

A label is a carrier of information about the product. The attached label provides customers with information to aid their purchase decision or help improve the experience of using the product. Labels can include:

• Care and use of the product
• Recipes or suggestions
• Ingredients or nutritional information
• Product guarantees
• Manufacturer name and address
• Weight statements
• Sell by date and expiration dates
• Warnings

Symbols Used in Labels

Many types of symbols for package labeling are nationally and internationally standardized. For consumer packaging, symbols exist for product certifications, trademarks, and proof of purchase. Some requirements and symbols exist to communicate aspects of consumer use and safety. For example, the estimated sign notes conformance to EU weights and measures accuracy regulations. Examples of environmental and recycling symbols include the recycling symbol, the resin identification code, and the “green dot.”

Labeling Laws

In some countries, many products, including food and pharmaceuticals, are required by law to contain certain labels such as ingredients, nutritional information, or usage warning information (FDA). For example, a law label is a legally required tag or label on new items describing the fabric and filling regulating the United States mattress, upholstery, and stuffed article industry. The purpose of the law label is to inform the consumer of the hidden contents, or “filling materials” inside bedding & furniture products. Laws requiring these tags were passed in the United States to inform consumers as to whether the stuffed article they were buying contained new or recycled materials. The recycling logo needed to be displayed on the label. The Fair Packaging and Labeling Act (FPLA) is a law that applies to labels on many consumer products that states the products identity, the company that manufactures it, and the net quantity of contents.

Recycled Material Label

Laws were passed in the United States to inform consumers as to whether the products they were buying contained new or recycled materials.

10.2.5: Product Warranties

Support services, such as product warranties, are a great way for a company to distinguish itself from its competitors.

Learning Objective

Describe how warranties and money-back guarantees act as supporting services for products

Key Points

• Behind every product is a series of supporting services, such as warranties and money-back guarantees. In many instances, such services may be as important as the product itself.
• Warranties are used to mitigate the risks of a malfunctioning product or the risk of making a wrong purchase decision regarding misinformation about a product.
• A money-back guarantee, also know as a “satisfaction guarantee,” is a simple guarantee that if a buyer is not satisfied with a product or service, a refund will be made.

Key Term

Warranty

an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed

Example

• AppleCare, shown here, is the hardware warranty and support service offered by Apple Inc. It comes included as standard with all products, offering limited hardware warranty along with phone/Internet support on its products. Additional purchase of an AppleCare Protection Plan extends both the hardware and support cover, depending on the device it is purchased for.

Behind every product is a series of supporting services, such as warranties and money-back guarantees. In many instances, such services may be as important as the product itself. In fact, at times it is difficult to separate the associated services from the product features.

Companies must constantly monitor the services offered by the company and its competitors. Based on the results of data-gathering devices such as customer surveys, consumer complaints, and suggestion boxes, the product manager can determine the types of services to offer, the form the service will take, and the price charged. For example, consumers are very reluctant to purchase a stereo that can be serviced only by sending it to the factory, and paying the postage and a high service fee. Maytag, however, has been very effective in selling their appliances with service contracts and local repair. Although there are a wide range of supportive services, the following are most prevalent:

Warranty: Warranties are used to mitigate the risks of a malfunctioning product or the risk of making a wrong purchase decision regarding misinformation about a product. There are several types of durable products, retail stores, and even service products for which warranties are expected. These warranties can provide a wide array of restitution, with a very limited warranty at one end of the continuum and extended warranties at the other. An example of the former is a VCR manufacturer that provides a 30-day warranty on the motor drive and no other coverage. The Craftsman tools division of Sears Roebuck reflects the other extreme. A broken shovel will be replaced, no questions asked, after a full summer of use. A good jewelry store has a warranty backing up every diamond ring it sells. A warranty is violated when products do not perform as expected (are defective) at the time the sale occurs. In this case, sellers should honor the warranty by offering a refund or a replacement.

Money-back guarantee: The ultimate warranty is the money-back guarantee, also know as a “satisfaction guarantee. ” Essentially, it is a simple guarantee that if a buyer is not satisfied with a product or service, a refund will be made. To the customer, a money-back guarantee reduces risk almost totally. There are certain market segments (e.g., low risk takers) that perceive this service as very important. This service is effective only if the product is superior and the product will be returned by only a few people. In some case, companies will try to get out of money-back guarantees. There are many ways a customer can take action to pressure a company to stick to its advertised guarantee. The first should always involve contacting the company by means that are recorded, in order to maintain a thorough record of all communications regarding the guarantee. If the company still fails to follow through with its guarantee, the buyer may contact his or her state’s attorney general, the seller’s state attorney general, the Better Business Bureau, or the Federal Trade Commission (FTC).

Warranty

AppleCare covers both global parts and labor repair coverage for the device, along with phone/Internet technical support for questions about Apple hardware and software.

A photo of the pamphlets and CDs that come with an Apple product as part of the warranty.

10.2.6: Problems with Packaging

Many of the problems in packaging can be related to issues regarding labels, graphics, safety, and the environment.

Learning Objective

Discuss the ethical issues that commonly arise in product packaging and labeling

Key Points

• Marketers can use label information to mislead consumers by providing false information to exaggerate the attributes of their product.
• There are many cases in which marketers use pictures in packaging that do not represent the actual product.
• Some marketers label their products as environmentally friendly even though the products don’t actually have environmentally friendly attributes.

Key Term

ethics

The moral principles that guide decision making and strategy.

Problems With Packaging

Packaging is a crucial element in the marketing of a product, as it is essentially the casing that the produt comes in. So after all the advertising and promotion, when customers go to the store and pick up the product, it is only the packaging that they see, smell, and touch. It is thus extremely important for the marketer to ensure that potential customers like what they see. The packaging should be appropriate to the product, and induce customers to buy it.

Unfortunately, ethics play a large role in the problems with packaging and labeling. Many of the ethical issues are related to the environment, labels, graphics, and safety. Packaging needs to provide a certain amount of information to the consumer, depending on the type of product. For instance, a beverage needs to provide information on the product name, its size, and its nutritional content. In contrast, the packaging of a toy needs to provide the age range suitable for children to play with it.

In packaging, the most common issues that arise include:

Problems With Label Information

Sometimes marketers use label information to mislead consumers by providing untrue information to exaggerate the attributes of their product. Labels that display nutrition information like low fat, fat free , cholesterol free, and 100% pure juice are examples.

Misleading Labels

Often, products have words such as “fat free,” “low-fat,” or “organic” on the labels. The labels could mislead the customer into thinking something that may not be the case. 

Cartons of fat free Half&Half.

Problems With Packaging Graphics

There are many cases in which marketers use pictures in packaging that do not represent the actual product. For example, packaging may make a certain product look nice and attractive, but the actual product may not be as good as depicted once opened. In addition, some store brands or other small brands try to imitate the way big brands package their products. This leads to confusion among consumers.

Problems With Packaging Safety

Consumers are concerned with packaging safety issues, especially when it comes to products for children. Marketers should avoid unsafe packaging that uses high ingredients of chemicals that are unsuitable for young children and are not tamper-proof.

Problems With Environmental Issues

Some marketers tend to label their products as environmentally friendly. However, the products actually do not have environmentally friendly attributes. For example, degradable trash bags actually remain intact for decades in a landfill. Packaging and labeling also produce a lot of excess waste that just gets thrown out once the consumer has purchased the product. In addition, the work that goes into producing the packaging and labeling is wasted once the consumer has purchased the product. It goes into the trash and is never seen of or thought of again.

10.2.7: Global Considerations in Branding and Packaging

At the global marketing level, a company needs to launch appropriate marketing plans so results can be achieved across multiple countries.

Learning Objective

Discuss how language, colors, customs, aesthetics, and placement affect global branding and packaging in products

Key Points

• Language differences cause many problems for marketers in designing advertising campaigns and product labels. It is important to double-check the translation of a marketing campaign to make sure the meaning being conveyed in another language is the company’s intended message.
• Colors also have different meanings in different cultures. Marketers should pick country-appropriate colors to make sure the local consumers are not offended or pushed away from the product due to colors used in the packaging.
• All cultures have their own unique set of customs and taboos. It is important for marketers to learn about these so that they will know what is acceptable and what is not for their marketing programs.

Key Terms

dialects

A variety of a language that is a characteristic of a particular group of the language’s speakers. The term is applied most often to regional speech patterns.

economies of scale

The cost advantages that an enterprise obtains due to expansion. As the scale of output is increased, factors such as facility size and usage levels of inputs cause the producer’s average cost per unit to fall.

global marketing

Global marketing is marketing on a worldwide scale, reconciling or taking commercial advantage of global operational differences, similarities and opportunities in order to meet global objectives.

Global Marketing Plans

Ultimately, at global marketing level, a company trying to speak with one voice is faced with many challenges when creating a worldwide marketing plan. Unless a company holds the same position against its competition in all markets (market leader, low cost, etc.), it is impossible to launch identical marketing plans worldwide. When branding and packaging for international products, careful consideration must be placed on factors such as language, colors, customs, aesthetics and placement.

Language

The importance of language differences cannot be overemphasized. There are upwards of 7,000 languages in the world. These differences cause many problems for marketers in designing advertising campaigns and product labels. Language problems become even more serious once the people of a country speak several languages. For example, in Canada, labels must be in both English and French, like this ad for Pepsi in Canada. In India, there are over 200 different dialects, and a similar situation exists in China.

Pepsi Ad in Canada

In Canada, all product labels must appear in both official languages: English and French.

Colors

Colors also have different meanings in different cultures. For example, in Egypt, the country’s national color of green is considered unacceptable for packaging, because religious leaders once wore it. In Japan, black and white are colors of mourning and should not be used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.

Customs and Taboos

All cultures have their own unique set of customs and taboos. It is important for marketers to learn about these so that they will know what is acceptable and what is not for their marketing programs.

Aesthetics

The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase, “Beauty is in the eye of the beholder,” is a very appropriate description for the differences that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy. However, the Japanese do not. These key differences apply to labels and branding as well.

Placement

How the product is distributed is also a country-by-country decision influenced by how the competition is being offered to the target market. Using Coca-Cola as an example, not all cultures use vending machines. In the United States, beverages are sold by the pallet via warehouse stores. In India, this is not an option. Placement decisions must also consider the product’s position in the market place. For example, a high-end product would not want to be distributed via a “dollar store” in the United States. Conversely, a product promoted as the low-cost option in France would find limited success in a pricey boutique.

Effective global advertising techniques do exist. The key is testing advertising ideas using a marketing research system proven to provide results that can be compared across countries. The ability to identify which elements or moments of an ad are contributing to that success is how economies of scale are maximized.

9.1: What Is a Product?

9.1.1: Defining Product

Learning Objective

Break down the different components that make up tangible and intangible products

Key Points

• Products can be goods, services, or ideas, such as intellectual property.
• Products can be tangible or intangible.
• Products can also be classified by use, by brand, or by other classifications as well.

Key Term

product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user.

Example

• A soccer ball is an example of a tangible product. An example of an intangible product is insurance.

What Is a Product?

In general, a product is defined as a “thing produced by labor or effort” or the “result of an act or a process. ” The word “product” stems from the verb “produce”, from the Latin prōdūce(re) “(to) lead or bring forth. ” Since 1575, the word “product” has referred to anything produced.

In marketing, a product is anything that can be offered to a market that might satisfy a want or need. In retail, products are called merchandise. In manufacturing, products are purchased as raw materials and sold as finished goods. Commodities are usually raw materials such as metals and agricultural products, but the term can also refer to anything widely available in the open market. In project management, products are the formal definition of the project deliverables that form the objectives of the project.

Goods, Services, or Ideas

Goods are a physical product capable of being delivered to a purchaser and involve the transfer of ownership from seller to customer.

A service is a non-material action resulting in a measurable change of state for the purchaser caused by the provider.

Ideas (intellectual property) are any creation of the intellect that has commercial value, but is sold or traded only as an idea, and not as a resulting service or good. This includes copyrighted property such as literary or artistic works, and ideational property, such as patents, appellations of origin, business methods, and industrial processes.

Product Classification: Tangible or Intangible

A product can be classified as tangible or intangible.

A tangible product is a physical object that can be perceived by touch such as a building, vehicle, or gadget. Most goods are tangible products. For example, a soccer ball is a tangible product .

Soccer Ball

A soccer ball is an example of a tangible product, specifically a tangible good.

An intangible product is a product that can only be perceived indirectly such as an insurance policy. Intangible data products can further be classified into virtual digital goods (“VDG”), which are virtually located on a computer OS and accessible to users as conventional file types, such as JPG and MP3 files. Virtual digital goods require further application processing or transformational work by programmers, so their use may be subject to license and or rights of digital transfer. On the other hand, real digital goods (“RDG”) may exist within the presentational elements of a data program independent of a conventional file type. Real digital goods are commonly viewed as 3-D objects or presentational items subject to user control or virtual transfer within the same visual media program platform. Services or ideas are intangible.

Product Classification: By Use or By Association

In its online product catalog, retailer Sears, Roebuck and Company divides its products into “departments”, then presents products to potential shoppers according to function or brand. Each product has a Sears item-number and a manufacturer’s model-number. Sears uses the departments and product groupings with the intention of helping customers browse products by function or brand within a traditional department-store structure.

A product line is “a group of products that are closely related, either because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. ” Many businesses offer a range of product lines which may be unique to a single organization or may be common across the company’s industry. In 2002 the US Census compiled revenue figures for the finance and insurance industry by various product lines such as “accident, health and medical insurance premiums” and “income from secured consumer loans. ” Within the insurance industry, product lines are indicated by the type of risk coverage, such as auto insurance, commercial insurance, and life insurance.

9.1.2: Benefits and Solutions

Learning Objective

Review the four levels of product differentiation

Key Points

• The same product may have different core benefits to different users. For example, one user may install a pool for fitness purposes, while another may do so for status.
• Different target markets will have different core products, and it is up to the marketer to discover which markets must be targeted for their particular product.
• Further layers of product benefits are the tangible product, the augmented product, and the promised product. These also affect the buyer’s decision making, and cannot be ignored by the marketer.

Key Terms

core product

The core product identifies what the consumers feel they are getting then they purchase the product.

tangible product

The tangible product is reflected in the quality, features, brand name, styling, and packaging.

augmented product

The supporting services surrounding the product, such as after-sales service for a machine, or parking spaces for a department store.

Example

• A specialized department store selling high-end luxury goods will attract buyers looking to augment their status through the purchase of luxury goods. Goods will need to be displayed to show the tangible benefits, such as their quality and features. The department store will also need ample parking, bathrooms, changing rooms, escalators, elevators, helpful staff, and other augmented benefits. Finally, while the products in the store have a promised benefit – that of status, and of winning the admiration of peers – there is no guarantee that this will hold true.

Benefits & Solutions

The four levels of a product include: core, tangible, augmented, and promised . Core, tangible, augmented and promised products feature characteristics (i.e., the total product concept or offer), which includes everything a consumer evaluates before making a purchase. These factors can include:

Levels of the Product

The four levels of a product include core, tangible, augmented, and promised.

• Price
• Store environment and/or surroundings
• Brand promise/value
• Advertising and marketing activities
• Buyer’s past experience
• Accessibility or convenience
• Brand reputation
• Packaging

We begin with the notion of the core product, which identifies what the consumers feel they are getting when they purchase the product. The core benefits derived when an overweight 45-year-old male purchases a $250 ten-speed bicycle is not transportation–it is the hope for better health and conditioning. In a similar vein, that same individual may install a $16,000 swimming pool in his backyard, not to obtain exercise, but to reflect the status he so desperately desires. Both are legitimate product cores. Because the core product is so individualized, and oftentimes vague, a full-time task of the marketer is to accurately identify the core product for a particular target market.

Once the core product has been indicated, the tangible product becomes important. This tangibility is reflected primarily in its quality level, features, brand name, styling, and packaging. Literally every product contains these components to a greater or lesser degree. Unless the product is one-of-a-kind (e.g. oil painting), the consumer will use at least some of these tangible characteristics to evaluate alternatives and make choices. In addition, the importance of each will vary across products, situations, and individuals. For example, for a 25-year old man, the selection of a particular brand of new automobile (core product = transportation) was based on tangible elements such as styling and brand name (choice = Corvette). In contrast, at age 45, the core product remains the same, but tangible components such as quality level and features become more important (choice = Mercedes).

The next level is the augmented product. Every product is backed up by a host of supporting services. The buyer often expects such services, so they will reject the core-tangible product if these are not available. Examples include restrooms, escalators, and elevators in the case of a department store, and warranties and return policies in the case of a lawn mower. For example, Dow Chemical has earned a reputation as a company that will go the distance to service an account. It means that a Dow sales representative will visit a troubled farmer after-hours in order to solve a serious problem. This extra service is an integral part of the augmented product and a key to their success. In a world with many strong competitors and few unique products, the role of the augmented product is clearly increasing.

The outer ring of the product is referred to as the promised product. Every product has an implied promise. An implied promise is a characteristic that is attached to the product over time. The car industry rates brands by their trade-in value. There is no definite promise that a Mercedes-Benz holds its value better than a BMW. There will always be exceptions. How many parents have installed a swimming pool based on the implied promise that their two teenagers will stay home more or that they will entertain friends more often?

9.1.3: Features and Attributes of a Product

Learning Objective

Discuss how features and attributes factor into the product design process

Key Points

• The design process of products focuses on figuring out what features are required, brainstorming possible ideas, creating mock prototypes, and then generating the product.
• The features and attributes of a product play a role in all three sections of the design process: Analysis,Concept, and Synthesis, which form a continuous feedback loop.
• Feature creep is the ongoing expansion and addition of new features in a product, often to the detriment of the product design process.

Key Terms

attribute

a characteristic or quality of a thing

analysis

In product design, the analysis stage is where designers begin research on how to find a solution to the problem at hand.

feature creep

The tendency of a design project or product cycle to accumulate more and more features or details, rather than to be completed and released at a more basic level.

Example

• The Swiss army knife is an example of a product that has evolved over time as new features and attributes have been added.

Product Design

This is the process of creating a new product to be sold by a business to its customers. It is the efficient and effective generation and development of ideas through a process that leads to new products.

The process of designing a new product (or updating the features of an existing one) is usually completed by a group of people, designers or field experts in the product they are creating, or specialists for a specific component of the product. These people would essentially determine all the features and attributes of the product. The process entails focuses on figuring out what is required, brainstorming possible ideas, creating mock prototypes, and then generating the product. At this point, product designers would still need to execute the idea, making it into an actual product and then evaluating its success and seeing if any improvements are necessary.

Product designers conceptualize and evaluate ideas, turning them into tangible products. Their role is to combine art, science, and technology to create features and attributes of current or new products that other people can use. Their evolving role has been facilitated by digital tools that now give them greater freedom to communicate, visualize, and analyze ideas.

The Design Process

This follows a guideline and involves three main sections: Analysis, Concept, and Synthesis – in a continuous feedback loop. Attributes and features play a role in all three sections.

Analysis: Here, the designers decide on committing to the project and finding a solution to the problem. They pool their resources into deciding how to solve the task most efficiently. Everyone in the team begins research into what the product should look like to satisfy the objective.

Concept: The key issue of the matter is defined. The conditions of the problem become objectives, and restraints on the situation become the parameters within which the new design must be constructed. The concept phase is where ideas for new features are considered.

Synthesis: The designers brainstorm different solutions for their design problem. Once they have narrowed down their ideas to a select few, they can outline their plan to make the product. Prototypes are built, the plan outlined in the previous step is realized and the product starts to become an actual object.

In the evaluation stage, the product is tested, and from there, improvements are made. Although this is the last stage, it does not mean that the process is over. The finished prototype may not work as well as hoped so new ideas may need to be brainstormed.

It is through this process of analysis, concept and synthesis that products are designed, with specific features and attributes added in order to maximize the use value and desirability of the product to the final user.

Example

Different types of products will have varying levels of sophistication when it comes to features. For example, the Swiss army knife. Various models exist, with different tool combinations for specific tasks designed for everyday use. The simplest model sold includes only a single blade, the most complicated model features many extra tools like: a smaller second blade, tweezers, toothpick, corkscrew, can opener, bottle opener, slotted/flat-head screwdriver(s), phillips-head screwdriver, nail file, scissors, saw (regular, wood), file, hook, magnifying glass, ballpoint pen, fish scaler, and so on.

“The Giant” Swiss Army Knifer

Since 2006, Wenger has produced a knife called “The Giant.” It includes every implement the company has ever made. With 87 tools and 141 different functions. Although expansive, it is not as portable as other knives.

Feature Creep

The evolution of the Swiss army knife may be seen as a good example of this phenomenon: the ongoing expansion and addition of new features to a product. Extra features go beyond the basic function of the product and so can result in over-complication rather than maintaining a simple design. Viewed over a longer time period, extra or unnecessary features seem to creep into the system, beyond the initial goals.

The most common cause of feature creep is the desire to provide the consumer with a more useful or desirable product, in order to increase sales or distribution. However, once the product reaches the point at which it does everything that it is designed to do, the manufacturer is left with the choice of adding unneeded features, sometimes at the cost of efficiency, or sticking with the old version, at the cost of a perceived lack of improvement. While feature creep may have positive effects, it can also lead to cost overruns and product cancellations as producers lose sight of the original goal.

9.2: Types of Products

9.2.1: Consumer Products

A consumer product is any tangible product for sale that is used by a person or household for non-business purposes.

Learning Objective

Describe the characteristics of consumer products

Key Points

• Consumer products are defined on a case-by-case basis, under guidelines defined by the US CPSA.
• The production and sale of consumer products is an important component of US GDP and employment.
• The Consumer Product Safety Act, enacted in 1972, established the United States Consumer Product Safety Commission (CPSC) as an independent agency of the United States Federal Government and defined its basic authority.

Key Terms

consumer product

Any tangible product used for personal, family, and household non-business purposes.

durability

Permanence by virtue of the power to resist stress or force.

Consumer Product Safety Act

Act enacted by US Congress in 1972, establishing the Consumer Product Safety Commission as an independent agency of the US Federal Government.

Example

• Examples of consumer products are music players, TVs, smart phones, designer clothing, children’s toys, and handbags.

A consumer product is generally any tangible product for sale that is used for personal, family, household or non-business purposes. To determine whether an item is a consumer product requires a factual finding, on a case-by-case basis. This will vary from one jurisdiction to another.

As an example, The United States Consumer Product Safety Act (CPSA), enacted in 1972 by Congress, has an extensive definition of consumer product: “any article, or component part thereof, produced or distributed (i) for sale to a consumer for use in or around a permanent or temporary household or residence, a school, in recreation, or otherwise, or (ii) for the personal use, consumption or enjoyment of a consumer in or around a permanent or temporary household or residence, a school, in recreation, or otherwise; but such term does not include— (A) any article which is not customarily produced or distributed for sale to, or use or consumption by, or enjoyment of, a consumer”. It then goes on to list eight additional specific exclusions and some further miscellaneous details.

The act also established the United States Consumer Product Safety Commission (CPSC) as an independent agency of the US Federal Government and defined its basic authority. The act gives the CPSC the power to develop safety standards and pursue recalls for products that present unreasonable or substantial risks of injury or death to consumers. It also allows the CPSC to ban a product if there is no feasible alternative.

The CPSC has jurisdiction over more than 15,000 different products; however, the CPSA excludes from the CPSC’s jurisdiction those products that expressly lie in another federal agency’s jurisdiction, for example food, drugs, cosmetics, medical devices, tobacco products, firearms and ammunition, motor vehicles, pesticides, aircraft, and boats. These products may fall under the purview of agencies such as the US Food and Drug Administration, the US Bureau of Alcohol, Tobacco, Firearms and Explosives, the US Department of Agriculture, the US Department of Transportation, the US Environment Protection Agency, the US Federal Aviation Administration, and the US Coast Guard.

Another type of consumer products can be classified as products you don’t need, like candy, luxury goods, and toys . Following WWI, America went into a recession after manufacturing many war products and having to pay off all of its debts to factories and the common people. Under the Coolidge presidency, America started manufacturing consumer products to create more jobs and get people to start spending so the government could raise money.

iPod Classic

The iPod Classic is an example of a consumer product.

Thus, while consumer products may be seen as those not essential to life, they are nonetheless a large and crucial component of the US economy. The production and sale of consumer goods is an important sector of US GDP and creating employment.

Consumer products will generally be less expensive than professional-grade goods, but will lack the durability of the latter product class, and will reach obsolescence quicker.

9.2.2: Shopping Products

Convenience goods are those that require little effort on the part of the buyer, while shopping goods require research and comparison.

Learning Objective

Discuss the characteristics of shopping products as a specific type of product

Key Points

• Since little planning or effort goes into buying convenience goods, markets need to establish a high level of brand awareness and recognition.
• Since shopping goods are highly researched, and product information is evaluated by buyers, a retailer’s ability to differentiate themselves becomes important.
• With shopping goods, retailers attempt to provide strong promotions to sway the buyer. They also expect strong support from manufacturers.

Key Terms

convenience good

a good that requires a minimum amount of effort on the part of the consumer.

shopping good

goods that consumers will want to be able to compare and contrast with others before they make a purchasing decision.

Example

• Cars, houses and laptops are all examples of shopping goods.

Classification of Consumer Goods: Convenience, Shopping and Specialty goods

A classification long used in marketing separates products targeted at consumers into three groups: convenience, shopping, and specialty. In this section, we will differentiate between convenience and shopping goods. Specialty goods will be discussed in the next section.

A convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. Vending machines typically dispense convenience goods. These products are usually of low unit value, are highly standardized, and are frequently nationally advertised. Yet, the key is to convince resellers, i.e. wholesalers and retailers, to carry the product. If the product is not available when, where, and in a form desirable by the consumer, the convenience product will fail.

From the consumer’s perspective, little time, planning, or effort go into buying convenience goods. Consequently, marketers must establish a high level of brand awareness and recognition. This is accomplished through extensive mass advertising, sales promotion devices such as coupons and point-of-purchase displays, and effective packaging. The fact that many of our product purchases are often on impulse is evidence that these strategies work.

Availability is also important. Consumers expect a wide spectrum of products to be conveniently located at their local supermarkets, ranging from packaged goods used daily, such as bread and soft drinks, to products purchased rarely or in an emergency such as snow shovels, carpet cleaners, and flowers.

In contrast, shopping goods are items that consumers want to be able to compare and contrast with others before they make a purchasing decision. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare quality by setting an criteria to judge the product’s specifications, usage, price, and value. Shopping goods do not necessarily have to be distributed widely. Although many shopping goods are nationally advertised, often it is the ability of the retailer to differentiate itself that creates the sale. The differentiation could be equated with a strong brand name, such as Sears Roebuck or Marshall Field, effective merchandising, aggressive personal selling, or the availability of credit.

Discounting, or promotional price-cutting, is a characteristic of many shopping goods because of retailers’ desire to provide attractive shopping values. In the end, product turnover is slower, and retailers have a great deal of their capital tied-up in inventory. This, combined with the necessity to price discount and provide exceptional service means that retailers expect strong support from manufacturers with shopping goods.

Buying a Car

Most buyers invest a lot of time and effort into choosing the right car for them.

An example of a shopping good is a car. Many buyers conduct extensive research into buying a car. Examples of questions that the buyer will ask themselves include: do I want to buy a new or a used car? What is my maximum budget? Do I want an SUV or not? What brand has the best safety features? Which car is fastest? Which has the most storage space? Which has the best service? Which car looks best? There is an entire industry built around helping buyers decide what car is best for them.

9.2.3: Specialty Products

Specialty goods are those considered unique by the buyer, who will go to great lengths to get them.

Learning Objective

Illustrate the characteristics and consumer motivation connected to specialty products

Key Points

• Price is almost never a determining factor in choosing between specialty goods. Consumers instead choose specialty goods primarily based on quality, style, scarcity, or personal preference.
• Sellers of specialty goods need not be conveniently located, because buyers will seek them out, even if it involves considerable effort.
• Some goods may be considered shopping goods by some buyers, and specialty goods by other buyers.

Key Terms

specialty store

small retailers which offer a specific range of merchandise and related items

specialty good

Products that are considered so unique by the consumer that they will go to any length to seek out and purchase them.

Example

• Specialty goods include: men’s suits, women’s bags, and expensive watches.

Speciality Products

Specialty goods represent the third product classification (after convenience and shopping goods). This classification system is based on the definition that convenience and speciality goods are both purchased with a predetermined pattern in mind.

In the case of the convenience good, the pattern is that the most accessible brand will be purchased. In the case of a speciality good, the pattern is that only a specific brand will be purchased. For example, if the customer utilizes an outlet because it is the most accessible, it would be considered, for that customer at least, a convenience store. If consumers shop at a store even if they have to go considerably out of their way to get there, it would be considered a speciality store that sells specialty goods.

From the perspective of consumers, specialty goods are so unique that they will go to great lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods. Although these products may be custom-made (e.g. a hairpiece) or one-of-a-kind (e.g. a statue), it is also possible that the marketer has been very successful in differentiating the product in the mind of the consumer.

For instance, consumers who favor merchandise produced by a certain bag manufacturer will, if necessary, travel considerable distances to purchase that particular brand . Examples of speciality goods include designer clothes, high-end cars, exotic perfumes, famous paintings, fancy foods, hi-fi components, sporting equipment, photographic equipment, and men’s suits. Another example might be the strong attachment some people feel toward a particular hairstylist or barber. A person may wait a long time for that individual and might even move with that person to another hair salon.

Louis Vuiton Flagship Store in Paris, France

People will travel miles to buy a Louis Vuiton bag even though there are plenty of options in their local department store.

In general, it is desirable for marketers to lift their product from the shopping to the specialty class and keep it there. With the exception of price-cutting, the entire range of marketing activities are required to accomplish this goal.

Pricing

Price is not usually the primary factor in consumer choice of speciality goods. Their prices are often higher than those of other articles serving the same basic need, but that lack their special characteristics.

Whether a good is a shopping or a speciality good depends on the consumer’s socioeconomic background. For a daily wage earner at a construction site, a pack of cigarettes might be a speciality good.

A product is a speciality good if customers know what brand they will purchase prior to feeling the need for it. Since a speciality good entails a high degree of customer loyalty, the shopping effort does not involve comparing one brand against another, but finding a store that carries the item in question.

Speciality goods have higher profit margins and higher prices relative to convenience or shopping goods. For the most part, manufacturers of speciality goods sell their products on the basis of product quality, reliability, and image, rather than on the basis of price.

Usually, the person who purchases an expensive speciality item is not as concerned about price as the average consumer. In markets for speciality goods, sellers do not encourage comparisons between options. Additionally, since buyers invest time to reach the stores carrying their desired product, the dealers do not necessarily need to be conveniently located.

9.2.4: Unsought Products

An unsought good is one that is not actively sought out by a consumer, but is instead purchased due to fear, precaution, need, etc.

Learning Objective

Discuss the concept of unsought goods as a type of product

Key Points

• As opposed to convenience, shopping, and luxury goods, consumers do not actively seek out unsought goods.
• Marketers must actively and aggressively market such goods in order to arouse interest in them.
• There are many examples of unsought goods becoming sought goods, either due to increased awareness of their positive aspects by consumers, or by marketers who have successfully changed the consumer psyche.

Key Term

Unsought good

Goods that a consumer does not seek out, but purchases out of fear, precaution, or need.

Example

• Fire extinguishers and encyclopedias are unsought goods. Life insurance is an example of a good that is often seen as a sought good because awareness of its benefits has grown.

Unsought Goods are goods that the consumer does not know about or does not normally think of buying. Purchases of unsought goods may arise due to danger or the fear of danger.

The classic examples of known but unsought goods are funeral services, encyclopedias, fire extinguishers , and reference books. In some cases, even airplanes and helicopters can be cited as examples of unsought goods.

Fire extinguisher

This is a classic example of an unsought good.

The purchase of these goods may not be immediate and can be deferred. Hence, unsought goods require advertising and personal-selling support, and extensive marketing in other areas as well. Marketers have classified products on the basis of durability, tangibility, and use (consumer or industrial).

Converting Unsought Goods to Sought Goods

In the past, new products such as frozen food items were unsought—why buy frozen when you can buy fresh?—until they were advertised extensively in innovative ways. Once the consumer is well-educated about the product, the good goes on to become a sought good.

For example: A new smartphone with exclusive features is an unsought good until the consumer hears about it. Once the smartphone is widely known among customers, it becomes a sought good. A classic example here is the Apple iPhone. Consumers are unaware that they want it unless they are told about it. Another example to note would be life insurance. Even though it is a classic example of an unsought good, it is quickly growing into a sought good. With the conversion of life insurance from just insurance to an investment idea for your future, this good has shifted paradigms.

Sauerkraut, or cabbage prepared in a particular way, was common as food given to American solders during Word War I. However, due to concerns the American public would reject a product with a German name, American sauerkraut makers relabeled their product as “Liberty cabbage” for the duration of the war. This was to prevent the good from becoming an unsought good. A similar case was that of organ meats during World War II: the American public initially rejected hearts, livers, etc., which were required due to food shortages. However, marketers successfully changed the perception of such organ meats, so that they became desirable.

9.2.5: Business Products

Business products are sold to other businesses, as opposed to convenience, shopping, and specialty products, which are sold to consumers.

Learning Objective

Distinguish between the different types of business products

Key Points

• Business products are marketed differently than convenience, shopping and specialty products, due to their different nature as well as the different nature of the prospective buyers.
• A useful way to divide business products is into farm products and manufactured products, as they are marketed differently.
• There are different types of manufactured products, such as semi-manufactured products, parts, raw materials, and machinery.

Key Term

business products

Products that are sold to other businesses as opposed to end consumers, and used to produce other products.

Example

• Business products can be as diverse as crude oil, wood, machinery, photocopiers, and paper.

Business products represent a very important product category, and in the case of some manufacturers, they are the only product sold. These are goods that are sold to other businesses, and used to produce other goods. Industrial products can either be categorized from the perspective of the producer and how they shop for the product, or from the perspective of the manufacturer, how they are produced and how much they cost. The latter criterium offers a more insightful classification for industrial products.

Manufactured products are those that have undergone some processing. The demands for manufactured industrial goods are usually derived from the demands for ultimate consumer goods. There are a number of specific types of manufactured industrial goods. Semi-manufactured goods are raw materials that have received some processing but require some more before they are useful to the purchaser. Lumber and crude oil are examples of these types of products. Since these products tend to be standardized, there is a strong emphasis on price and vendor reliability.

Business Product

Lumber is an example of a business product.

Parts are manufactured items that are ready to be incorporated into other products. For instance, the motors that go into lawn mowers and steering wheels on new cars are carefully assembled when they arrive at the manufacturing plant. Since products such as these are usually ordered well in advance and in large quantities, price and service are the two most important marketing considerations.

Process machinery (sometimes called “installations”) refers to major pieces of equipment used in the manufacture of other goods. This category would include boilers, lathes, blast furnaces, elevators, and conveyor systems. The marketing process incorporates the efforts of a professional sales force, supported by engineers, technicians, and personalized service.

Equipment is made up of portable factory equipment and office equipment (e.g., computers, copier machines). Although these products do not contribute directly to the physical product, they do aid in the production process. These products may be sold directly from the manufacturer to the user, or a middleman can be used in geographically dispersed markets. The marketing strategy employs a wide range of activities, including product quality and features, price, service vendor deals, and promotion.

Supplies and service are consumed in conjunction with making the product. Supplies include paper, pencils, fuel, oil, brooms, soap, etc. These products are normally purchased as convenience products with a minimum of effort and evaluation. Business services include maintenance, repairs, and advisory. Because the need for services tends to be unpredictable, they are often contracted for a relatively long period of time.

9.3: Product Line and Product Mix

9.3.1: Adjustments to Products

Marketers must often make product adjustments in order to keep the product competitive and continue to provide satisfaction to the buyer.

Learning Objective

Discuss strategies for adjusting products in response to changes in consumer taste and the marketplace

Key Points

• There are risks involved with product adjustment: changing the price of the product may price some buyers out, while changing the features may dissuade some from continuing to buy the product.
• Product positioning is both a concept and a process, often requiring extensive market research and involving a conscious change in the promotional message.
• Line extensions occur when a company adds new items in the same market category. This is usually either up-market or down-market, depending on the company’s strategy and desired market growth.

Key Terms

product adjustment

The changing of a product in order to provide superior satisfaction and win over buyers from other brands and products.

product repositioning

Changing the market’s perceptions of a product so that it may better compete in its present market or other market segments.

Example

• The VW Beetle is an example of a product that has been adjusted and repositioned over the years in response to changes in technology, costs, and customer preferences.

Adjustments to Products

As more brands enter the marketplace, winning and holding buyers becomes more difficult. This is a result of:

• changes in consumer tastes; in particular, the size and characteristics of particular market segments
• changes in availability or cost of raw materials and other production or marketing components
• the proliferation of small-share brands that reduce efficiencies in production, marketing, and servicing for existing brands

Because of factors such as these, a decision is made either to identify ways of adjusting the product in order to further distinguish it from others, or to design a strategy that will eliminate the product and make way for new products. The specific strategy to accomplish these aims may be in several general categories, described below.

Product Adjustment/Modification

It is normal for products to be changed several times during their lives. If a change can provide superior satisfaction and win more initial buyers and switchers from other brands, then a change is probably warranted. Yet there are definite risks involved: a dramatic increase in product quality might price the existing target consumer out of the market. Similarly, the removal of a particular product feature might be the one characteristic of the product considered most important by a market segment.

VW Beetle

The VW Beetle has been modified countless times since its original production in 1930s in order to keep it competitive and attractive to consumers. 

A key question the marketer must answer before modifying the product is: “What particular attributes of the product and competing products are perceived as most important by the consumer? ” Factors such as quality, function, price, service, design, packaging, and warranty may all be determinants. This evaluative process requires marketing research studies to learn of improvements buyers might want, evaluate the market reception given to the competitors’s improvements, and evaluate improvements that have been developed within the company.

Also required is a relationship with the product research and development (R&D) department. Ideally, R&D should be able to respond quickly to the marketing department’s requests for product upgrades and should maintain ongoing programs of product improvement and cost reduction.

Product Positioning and Repositioning

Product positioning is a strategic management decision that determines the place a product should occupy in a given market – its market niche. Given this context, the word “positioning” includes several common meanings of position:

• place (what place does the product occupy in its market? )
• rank (how does the product fare against its competitors in various evaluative dimensions? )
• mental attitude (what are consumer attitudes? )
• strategic process (what activities must be attempted in order to create the optimal product position? )

Thus, positioning is both a concept and a process. The positioning process produces a position for the product, just as the segmentation process produces alternative market segments. Positioning can be applied to any type of product at any stage of the lifecycle. Approaches to positioning range from gathering sophisticated market research information on consumers’s preferences and perceptions, to the intuition of the product manager or a member of his or her staff.

Product repositioning involves changing the market’s perceptions of a product or brand so that it can compete more effectively in its present market or in other market segments. Changing market perceptions may require changes in the tangible product or in its selling price. Often, however, the new differentiation is accomplished through a change in the promotional message. To evaluate the position and to generate information about the future positioning strategies, it is necessary to monitor the position over time. A product position may change readily; keeping track and making necessary adjustments is very important.

Product Line Extensions

A product line extension is the use of an established product’s brand name for a new item in the same product category. Line extensions occur when a company introduces additional items in the same product category under the same brand name, such as new flavors, forms, colors, added ingredients, or package sizes. The company can extend its product line down-market, up-market, or in both directions.

Down-Market Stretch: a company positioned in the middle market may want to introduce a lower-priced line for any of three reasons: (a) the company may notice strong growth opportunities as mass retailers such as Wal-Mart attract a growing number of value-seeking shoppers; (b) the company may wish to tie up lower-end competitors who might otherwise try to move up-market; or (c) the company may find that the middle market is stagnating or declining.

Up-Market Stretch: companies may wish to enter the high end of the market for more growth, higher margins, or simply to position themselves as full-line manufacturers. Many markets have spawned surprising upscale segments: Starbucks in coffee, Haagen-Dazs in ice cream, and Evian in bottled water. Leading Japanese auto companies have each introduced an upscale automobile: Toyota’s Lexus, Nissan’s Infiniti, and Honda’s Acura.

9.3.2: Product Line Breadth

The breadth of the product mix consists of all the product lines that the company has to offer to its customers.

Learning Objective

Describe the relationship between product line breadth and the product marketing mix

Key Points

• Product marketers must decide what products will be offered (i.e., the breadth and depth of the product line).
• The product line breadth is one of the four dimensions associated with a company’s product mix.
• The product line breadth is also referred to as the: product width, product assortment width and merchandise breadth.

Key Terms

product mix

The complete set of all products a business offers to a market. The product mix is made up of both product lines and individual products.

depth of the product line

Line depth refers to the number of subcategories a category has.

product line breadth

The breadth of the product mix consists of all the product lines that the company has to offer to its customers.

Example

• If a company has five different product lines: hair products, oral care, soaps and detergents, baby care, and personal care. The product mix breadth is five.

Introduction: Product Marketing Questions

Product marketing in a business addresses five important strategic questions:

• What products will be offered (i.e., the breadth and depth of the product line)?
• Who will be the target customers (i.e., the boundaries of the market segments to be served)?
• How will the products reach those (i.e., the distribution channel and are there viable possibilities that create a solid business model)?
• At what price should the products be offered?
• How will customers be introduced to the products (i.e., advertising)?

In this unit, you’re going to learn about the relationship between the breadth of the product line and the product mix.

Product Line Breadth

The breadth of the product mix consists of all the product lines that the company has to offer to its customers. If we take P&G, for example, the breadth of the major product lines would consists of hair products, oral care, soaps and detergents, baby care, and personal care.

Proctor and Gamble’s Brands

Proctor and Gamble has various product lines.

A diagram that shows all of Proctor and Gamble’s products.

You may also hear the product line breadth referred to as the product width, product assortment width, and merchandize breadth.

Product Line Breadth and the Product Mix

The product mix of a company is generally defined as the complete set of all products a business offers to a market. The product mix (sometimes called “product assortment”) is made up of both product lines and individual products.

A product line is a group of products within the product mix that are closely related, either because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within given price ranges.

An individual product is a particular product within a product line. It is a distinct unit within the product line that is distinguishable by size, price, appearance, or some other attribute. For example, all the courses a university offers constitute its product mix, courses in the marketing department constitute a product line, and the principles of marketing course is a product item.

Now, there are four dimensions associated with a company’s product mix and the product line breadth is one of them. The other three are the length, the depth, and the consistency.

Going back in our P&G example we saw five different product lines: hair products, oral care, soaps and detergents, baby care, and personal care. This means that the product mix breadth is five.

9.3.3: Product Line Depth

Companies employ different strategies to expand their product line depth, which refers to the number of products in a specific product line.

Learning Objective

Describe the different tactics for implementing full-line and limited-line product strategies

Key Points

• Companies with full-line strategies attempt to enhance product line depth through carrying a high number of variations on a similar product in order to satisfy a wide range of different customer desires.
• Companies with limited-line strategies will carry a select few product variations with the highest impact, rather than carrying every conceivable variation of the product.
• Line-filling and line-pruning strategies can take place, depending on whether there is a perceived void in the product line, or whether an existing product in the line becomes obsolete or unprofitable.

Key Term

product line depth

Product line depth refers to the number of products in a company’s specific product line.

Example

• A manufacturer of salad dressings will usually produce a number of different flavors in order to satisfy the widely varying tastes of different customers.

A product line can contain one product or hundreds. The number of products in a product line refer to its product line depth, while the number of separate product lines owned by a company is the product line width (or breadth).

Vending Machine

Soft drink companies tend to produce many variations of a similar products to fill out their product line.

There are two basic strategies that deal with whether the company will attempt to carry every conceivable product needed and wanted by the consumer or whether they will carry selected items. The former is a full-line strategy while the latter is called a limited-line strategy.

Line-filling Strategies

Line-filling strategies occur when a void in the existing product line has not been filled or a new void has developed due to the activities of competitors or the request of consumers. Before considering such a strategy, several key questions should be answered: Can the new product support itself? Will it cannibalize existing products? Will existing outlets be willing to stock it? Will competitors fill the gap if we do not? What will happen if we do not act?

Assuming that the company decides to fill out the product line further, there are several ways of implementing this decision. Three are most common:

1. Product proliferation: the introduction of new varieties of the initial product or products that are similar (e.g. a ketchup manufacturer introduces a hickory-flavored sauce, a pizza-flavored barbecue sauce, and a special hot dog sauce)
2. Brand extension: strong brand preference allows the company to introduce the related product under the brand umbrella (e.g. Jell-O introduces pie filling and diet desserts under the Jell-O brand name)
3. Private branding: producing and distributing a related product under the brand of a distributor or other producers (e.g. Firestone producing a less expensive tire for Kmart)

In addition to the demand of consumers or pressures from competitors, there are other legitimate reasons to engage in these tactics. First, the additional products may have a greater appeal and serve a greater customer base than did the original product. Second, the additional product or brand can create excitement both for the manufacturer and distributor. Third, shelf space taken by the new product means it cannot be used by competitors. Finally, the danger of the original product becoming outmoded is hedged. Yet there is stil serious risk to consider: unless there are markets for proliferation that will expand the brand’s share, the newer forms will cannibalize the original product and depress profits.

Line-pruning Strategies

Line-pruning strategies involve the process of getting rid of products that no longer contribute to company profits. A simple fact of marketing is that sooner or later a product will decline in demand and require pruning. Timex has stopped selling home computers. Hallmark has stopped selling talking cards. A great many of the components used in the latest automobile have replaced far more expensive parts, due to the increased costs in other areas of the process, such as labor.

Using modern robotics technology has halved the manufacturing costs of several products. Through such implementation, Keebler Cookies moved from packaging their cookies totally by hand to 70% automation. Other possible ways a company might become more efficient are by replacing antiquated machinery, moving production closer to the point of sale, subcontracting out part of the manufacturing process, or hiring more productive employees.

9.3.4: Product Lines in Services

By productizing a service it can be managed more like a product and various product lines can be created.

Learning Objective

State the criteria required to productize a service

Key Points

• The service product manager identifies profitable service space, packages services in a productized form, and delivers the same to the market.
• Productizing a service involves the creation of necessary product documentation like executive materials, service product document, technical services document, and service scope.
• Like regular products, service products can be ramped down.

Key Term

productize

To modify something to become suitable as a commercial product.

Example

• In the 1980s IBM productized many services that had previously been free and began selling them for a fee.

Introduction

Consider this scenario: you provide a service, let’s say image consulting. You’ve been in business for quite some time and have been charging an hourly rate. Business has been okay, but you constantly have to defend your rate to clients who benefit from your service but still complain that your rate “seems to be a bit high.” Or maybe they are reluctant to even use your service because they don’t know what they will be getting for that price.

Service providers often have to deal with this problem. There is a solution, however, to productize the service.

How to Productize a Service

Productizing a service means making the service look more like a product so that it is easier for customers to conceive, and thus buy. This involves:

• Giving it a defined scope;
• Putting it into a limited time period;
• Attaching a definite price tag; and
• Giving it a distinctive name.

Going back to the image consulting business, instead of charging an hourly rate, you could productize your service by offering a “One-Day Makeover. ” The product would consist of a:

Productizing

An image consultant can productize their service by offering a package which includes a clothes and accessories shopping trip, beauty salon visit, and make-up application.

A retail store worker dresses mannequins in a store window.

• Wardrobe assessment;
• Shopping trip;
• Beauty salon visit; and
• Make-up application tips.

All of this would be offered for a fixed price. And there’s no need to stop there. An entire product line (or lines) could be produced using the same technique.

If you worked for a large corporation and developed a solution such as this, you would be called a Service Product manager.

The Service Product Management

Service Product Management deals with managing a service product throughout its complete life cycle. This organizational function is equally common in business-to-business as well as business-to-consumer organizations.

A service product, unlike a hardware or software product, is intangible, and manifests itself as pure professional services or as a combination of services with necessary software and/or hardware.

The service product management practice ensures management of a profitable service in the marketplace.

The service product manager identifies a profitable service space, packages services in a productized form and delivers the same to the market. The function is a core service business management function and is a mix of sales and marketing functions. The function interfaces with various organizational groups like strategy, planning, financial controls /management accounting, sales, marketing and communications.

9.4: Product Life Cycles

9.4.1: The Product Life Cycle

Every product goes through the various life cycle phases of introduction, growth, maturity and decline.

Learning Objective

Discuss the rationale behind the marketing concept of product life cycles

Key Points

• Depending on its current stage in the product life cycle, a product will have different marketing, financing, manufacturing, purchasing and human resource requirements.
• In the market introduction stage (following product development), the product is released on to the market.
• Sales are low and costs are high in the market introduction stage, thus, no profits are made. There is little to no competition and demand must be created through heavy promotion.

Key Terms

decline stage

when a product is not predicted to continue to be successful or upgraded

product life cycle

The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.

maturity stage

when a product is no longer in the growth stage, but not yet in the decline stage

Example

• Product development and product life cycles go hand-in-hand. It is important that businesses continually develop new products to replace those that are declining. For example, consider the product development and life cycle of a video game. Often the games take 2 to 4 years to develop. Once they are released on to the market, their product life cycle is usually about 6 months.

Product Life Cycle: Overview

The product life cycle (PLC) describes the life of a product in the market with respect to business/commercial costs and sales measures. It proceeds through multiple phases, involves many professional disciplines and requires a multitude of skills, tools and processes.

This is not to say that product lives cannot be extended – there are many good examples of this – but rather, each product has a ‘natural’ life through which it is expected to pass.

The stages of the product life cycle are:

• Introduction
• Growth
• Maturity
• Decline

PLC management makes these three assumptions:

1. Products have a limited life and, thus, every product has a life cycle.
2. Product sales pass through distinct stages, each of which poses different challenges, problems and opportunities to its parent company.
3. Products will have different marketing, financing, manufacturing, purchasing and human resource requirements at the various stages of its life cycle.

The product life cycle begins with the introduction stage (see ). Just because a product successfully completes the launch stage and starts its life cycle, the company cannot take its success for granted.

Product Development and Product Life Cycle

The Product Life Cycle follows directly after new product development.

A company must succeed at both developing new products and managing them in the face of changing tastes, technologies and competition. A good product manager should find new products to replace those that are in the declining stage of their life cycles; learning how to manage products optimally as they move from one stage to the next.

Product Lifecycle Management Stage 1: Market Introduction

This stage is characterized by a low growth rate of sales as the product is newly launched and consumers may not know much about it. Traditionally, a company usually incurs losses rather than profits during this phase. Especially if the product is new on the market, users may not be aware of its true potential, necessitating widespread information and advertising campaigns through various media.

However, this stage also offers its share of opportunities. For example, there may be less competition. In some instances, a monopoly may be created if the product proves very effective and is in great demand.

Characteristics of the introduction stage are:

• High costs due to initial marketing, advertising, distribution and so on.
• Sales volumes are low, increasing slowly
• There may be little to no competition
• Demand must be created through promotion and awareness campaigns
• Customers must be prompted to try the product.
• Little or no profit is made owing to high costs and low sales volumes

9.4.2: Growth

During the growth stage, the public becomes more aware of the product; as sales and revenues start to increase, profits begin to accrue.

Learning Objective

Identify the conditions that exist when a product is in stage 2, growth of the Product Life Cycle

Key Points

• Initial distribution is expanded as popularity increases, leading to increases in promotion as well.
• The company often looks at introduction improvements and innovations so as to cement their position in this stage, and discourage competitors from having any success in copying the product and selling substitutes.
• Increased competition in this stage may lead to falling prices as the company competes with others to gain and keep hold of market share.

Key Term

growth stage

The stage of the product life cycle where product sales, revenues and profits begin to grow as the product becomes more popular and accepted in the market.

Example

• Mini tablets, such as the iPad mini, Google Nexus 7, or Amazon Kindle Fire, are in the growth stage at the moment. The concept of having a tablet larger than a smart phone but smaller than a full-sized tablet (such as an iPad) is relatively new, and companies such as Amazon and Apple are in the stage where they are attempting to convince users to switch use them. While Apple has often been a market leader in innovations, it has lagged behind in the case of mini tablets, and this may cause it lose out on market leader status and instead play catch up.

The stages of the product life cycle are:

• Introduction
• Growth
• Maturity
• Decline

Product Lifecycle Management Stage 2: Growth

The growth stage is the period during which the product eventually and increasingly gains acceptance among consumers, the industry, and the wider general public. During this stage, the product or the innovation becomes accepted in the market, and as a result sales and revenues start to increase . Profits begin to be generated, though the break even point is likely to remain unbreached for a significant time–even until the next stage, depending on the cost and revenue structures.

Growth Stage

The graph shows the growth stage in the overall product life cycle.

The graph shows where the growth stage is located on the product life cycle (introductory stage, growth stage, maturity stage, and decline stage). The cycle tracks total market sales.

Initial distribution is expanded further as demand starts to rise. Promotion is increased beyond the initially high levels, and word-of-mouth advertising leads to more and more potential customers hearing about the product, trying it out, and–if the company is lucky–choosing to use the product regularly. Repeat orders from initial buyers are also obtained.

If a monopoly was initially created, then it still exists in this stage. Because of this, the manufacturing company can look at ways to introduce new features, alterations, or other types of innovation to the product according to feedback from consumers and from the market in general. This would be done in order to maintain growth in sales and ensure that interest in the product continues to grow and not stagnate, thus maintaining the growth stage. In fact, the growth stage is seen as the best time to introduce product innovations, as it creates a positive image of the product and diminishes the presence of competitors who will be attempting to copy or improve the product, and present their own products as a substitute.

Features of the growth stage:

• Costs reduced due to economies of scale: as production and distribution are ramped up, economies of scale kick in and reduce the per unit costs.
• Sales volume increases significantly: as the product increases in popularity, sales volumes increase.
• Profitability begins to rise: revenues begin to exceed costs, creating profit for the company
• Public awareness increases: through increased promotion, visibility and word of mouth, public awareness grows.
• Competition begins to increase with a few new players in establishing market
• Increased competition leads to price decreases: price wars may erupt, technology may get cheaper, or other factors can ultimately lead to falling prices.

9.4.3: Maturity

During the maturity stage, sales will peak as the product reaches market saturation, and competition will grow increasingly fierce.

Learning Objective

Identify the market conditions of a product in stage 3, maturity of the product life cycle.

Key Points

• As the company will attempt to prolong the maturity phase as long as possible, it will likely introduce alterations and innovations to the product to keep customers interested and stay a step ahead of the competition.
• Advances in technology and changes in consumer taste and demand may also add to the slowing down of sales growth of the product during this phase.
• Prices tend to drop in this phase due to lower costs as well as a high level of competition, and so industrial profits will fall as well.

Key Terms

market saturation

A situation in which a product has become distributed within a market to the fullest possible extent, leaving demand for the product at a minimum. The actual level of saturation can depend on consumer purchasing power, competition, prices, and technology.

maturity

The stage in the product life cycle where sales growth ultimately peaks, then slows as the product reaches widespread acceptance, and competition is fierce.

Example

• Many popular and known products, such as the iPod and the iPhone, are in the maturity phase at the moment. Apple managed to extend the maturity phase of the iPod by introducing the iPod touch, which introduced a touch screen and new features. It also introduced new functionalities such as the use of apps, making it much more versatile and useful than the older iPods; one could argue that the iPod touch should be considered an entirely new product rather than an innovation on earlier iPod models.

The stages of the product life cycle are:

• Introduction
• Growth
• Maturity
• Decline

Product Lifecycle Management Stage 3: Maturity

The maturity stage follows the growth stage in the product’s life cycle (see ).

Maturity Stage

The maturity stage of the product life cycle shows that sales will eventually peak and then slow down.

A graph that shows where the maturity stage is located in the product life cycle (introductory stage, growth stage, maturity stage, and decline stage).

During this stage, sales growth has started to slow down, and the product has already reached widespread acceptance in the market, in relative terms. Ultimately, during this stage, sales will peak. The company will want to prolong this phase so as to avoid decline, and this desire leads to new innovation and features in order to continue to compete with the competition which, by now, has become very established, advanced and fierce. Competitors’ products will begin to cut deeply into the company’s market position and market share. However, despite this, sales continue to grow in the early part of the maturity phase. But, these sales will peak and ultimately decline, as the graph shows.

Demand for the product ultimately decreases due to competition and market saturation, as well as new technologies and changes in consumer tastes. Actions the company takes may include:

• Improving specific features in order to resell the product (for instance, in the case of a car, the manufacturer may include alloy wheels, new colors, sport or hybrid versions, or other changes in order to keep sales going);
• Lowering prices in order to fight off competition;
• Intensifying distribution and promotional efforts;
• Differentiation efforts, in the hope that new customers will start to buy the product.
• Finding a new targeted market.

The stage that lasts the longest in the product life cycle is the Maturity stage. It is at this time that repeat business and purchases take the place of new customer buying. So, during the maturity stage, the following occurs:

• Costs are lowered as a result of production volumes increasing and experience curve effects
• Sales volume peaks and market saturation is reached
• Increase in numbers of competitors entering the market
• Prices tend to drop due to the proliferation of competing products
• Brand differentiation and feature diversification is emphasized to maintain or increase market share
• Industrial profits go down

9.4.4: Decline

During decline, sales growth becomes negative, profits decline, competition remains high, and the product ultimately reaches its ‘death’.

Learning Objective

Identify the characteristics of a product in the decline stage of the product life cycle.

Key Points

• Sales volume declines as competition becomes too strong for the company in question; as well as the fact that changes in consumer tastes and new technologies also erode sales.
• Maintaining profitability increasingly becomes more about efficiency of production and distribution rather than about increasing sales.
• Usually, product termination is not about the end of the business cycle or the entire product class; rather, it is about the termination of a single product or market entrant that can no longer compete as it has reached the end of its life.

Key Term

decline

The stage of the product life style where low/negative sales growth, lower profits, and maximum competition occur, forcing the product into decline and ‘death’.

The stages of the product life cycle are:

• Introduction
• Growth
• Maturity
• Decline

Product Lifecycle Management Stage 4: Decline

The decline stage of the product life cycle is the one where the product ultimately ‘dies’ due to the low or negative growth rate in sales (see ).

Decline Stage

The decline stage of the product life cycle is the terminal stage where sales drop and production is ultimately halted.

The graph shows that the decline stage is the last part of the product life cycle (introductory stage, growth stage, maturity stage, and decline stage).

Profitability will fall, eventually to the point where it is no longer profitable to produce, and production will stop. As a number of companies start to dominate the market, it becomes increasingly difficult for the company in question to maintain its level of sales. Consumer tastes also change, as do new technologies which may make the product become ultimately obsolete (as in the case of CDs and DVDs, and now Blu-Ray).

Features of the decline stage include:

• A decline in sales volume as competition becomes severe, and popularity of the product falls;
• A fall in prices and profitability (the latter ultimately moving in the negative zone);
• A counter-optimal cost structure;
• Profit increasingly becomes a challenge of production/distribution efficiency rather than increased sales.

It is important to note that product termination is not usually the end of the business cycle; rather, it is only the end of a single entrant within the larger scope of an on-going business program.

Example: The Personal Computer (PC)

shows the actual sales and price of the personal computer from 1992 to 2002. The PC was state-of-the-art technology in 1992. Only technologically-advanced individuals would buy one at the very steep price of $1800 (and bear in mind, $1800 in 1992 was worth a lot more than it is today). A large number of companies were competing in the field. As the market grew, businesses learned to be more efficient in producing the PC and prices came down. The drop in prices and improvements in technology made PCs more attractive to other consumers. However, the market became saturated after 2000 and went into decline. PCs started to become obsolete as laptops, net books, tablets, and smart phones started to enter the market, shifting the emphasis from power to portability. The PC is still used all over the world, but its popularity has declined dramatically.

Product life cycle of the personal computer

The chart shows the rise and fall of personal computers.

9.4.5: Product Life-Cycle Curve

Product life cycles are a useful guide to lifetime sales and profits, and can help marketers understand what strategies to deploy & when.

Learning Objective

Discuss characteristics of a product’s life cycle curve

Key Points

• Different products will have differently shaped product life cycle curves. Products like Coke and Pepsi seem to be in a permanent maturity phase, while fads like the Tamagochi have short maturities as well as steep introduction and decline phases.
• Some products have very unpredictable product life cycles owing to high levels of uncertainty and risk. For these, the product life cycle model is less useful.
• During the early stages of the product life cycle, a product will not be highly profitable. Thus, the maturity stage should be extended as long as possible.

Key Term

fad

A phenomenon that becomes popular for a very short time; the product life cycle has a steeply-sloped growth stage, a short maturity stage, and a very steep decline.

Understanding Product Life Cycle Curves

It is important for marketing managers to understand the limitations of the product life cycle model. A rise in sales per se is not necessarily evidence of growth, just as a fall in sales does not typify decline. Some products like Coca Cola and Pepsi may not experience a decline at all.

Differing products possess different product life cycle “shapes. ” A fad product develops as a steeply-sloped growth stage, a short maturity stage, and a steeply-sloped decline stage (for instance, the pet rock phase in the 1970s). A product like Coca-Cola and Pepsi experiences growth, but also a constant level of sales over decades. A given product may hold a unique product life cycle shape such that use of typical product life cycle models are useful only as a rough guide for marketing management.

The duration of each product’s life cycle stage is unpredictable, making it difficult to detect when maturity or decline has begun. Due to these limitations, strict adherence to the product life cycle model can lead a company to misleading objectives and strategy prescriptions.

Rather, the product life cycle model should be used as a rough guide to predict how sales patterns may play out given competitive and economic conditions. All in all, it is a useful model, but not a certainty.

The two charts and demonstrate the break-even point reached during the product life cycle as well as sales and profits in general. They show that the product does not make much profit during early periods of the life cycle, meaning the maturity stage must be extended to maximise profits.

Sales and Profits

The diagram shows the sales and profits of a given product during the course of the product life cycle.

Break Even

The diagram shows when a product is expected to break even once it is introduced into the market.

The diagram shows when a product will break even based on sales and profit.

Examples

Facebook

Facebook is in the mature phase of the product life cycle. Once it became the norm for everyone to have a Facebook account, the growth stage passed. No new or obsoleting technology is expected to appear soon which would put Facebook out of business. While Facebook competes with other social media sites like Google+ and Twitter, it appears to be holding its own. Thus, we can say that Facebook is comfortably in the maturity stage.

iPod

The iPod touch is currently in the mature phase of the product life cycle. This is because the iPod touch is just an evolution of a product that has been around for long time. Competitors like Microsoft’s Zune have just followed Apple’s design and technology, while the iPod has evolved over multiple “generations,” each adding new features and functionalities. Today, the iPod touch is more than just a music player; it plays videos, runs apps and can be used as an organizer. Such a product may be difficult to classify using the product life cycle model – is it the same old iPod, or an entirely new product?

9.4.6: Impact of the Product Life Cycle on Marketing Strategy

The stage of the life cycle of the product affects how it is marketed.

Learning Objective

Summarize marketing strategies that apply to product life cycles

Key Points

• During the introduction stage, the product is promoted to create awareness and develop a market for the product.
• In the growth stage, the firm seeks to build brand preference and increase market share.
• The primary objective during the maturity phase is to defend market share while maximizing profit.
• Firms have several options when deciding how to deal with a product in the decline phase.
• Marketers must take care not to miss opportunities by following strategies based on the product life cycle model too closely.

Key Term

product life cycle

The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.

Introduction

The stages through which individual products develop over time is called commonly known as the “Product Life Cycle.”

Product Life Cycle Stages

The table shows the product life cycle stages and the different marketing characteristics that accompany and identify them.

A table that shows the marketing characteristics (sales, investment cost, competition, advertising, and profit) for the various stages of the product life cycle. Each stage is rated as “high” or “low” for each characteristic.

The product life cycle is a well-known framework in marketing. Products typically go through four stages:

• Introduction
• Growth
• Maturity
• Decline

After a period of development, the product is introduced or launched into the market. It gains more and more customers as it grows and, eventually, the market stabilizes and the product becomes mature. Then after a period of time, the product is overtaken by development and the introduction of superior competitors, goes into decline, and is eventually withdrawn.

At each stage, marketing strategy varies.

Strategies for the Different Stages of the Product Life Cycle

Introduction

The need for immediate profit is not a pressure. The product is promoted to create awareness and develop a market for the product. The impact on the marketing mix and strategy is as follows:

• Product branding and quality level is established and intellectual property protection, such as patents and trademarks are obtained.
• Pricing may be low penetration to build market share rapidly or high skim pricing to recover development costs.
• Distribution is selective until consumers show acceptance of the product.
• Promotion is aimed at innovators and early adopters. Marketing communications seeks to build product awareness and educate potential consumers about the product.

Growth

Competitors are attracted into the market with very similar offerings. In the growth stage, the firm seeks to build brand preference and increase market share.

• Product quality is maintained and additional features and support services may be added.
• Pricing is maintained as the firm enjoys increasing demand with little competition.
• Distribution channels are added as demand increases and customers accept the product.
• Promotion is aimed at a broader audience.

Maturity

Those products that survive the earlier stages tend to spend longest in this phase. At maturity, the strong growth in sales diminishes. Competition may appear with similar products. The primary objective at this point is to defend market share while maximizing profit.

• Product features may be enhanced to differentiate the product from that of competitors.
• Pricing may be lower because of the new competition.
• Distribution becomes more intensive, and incentives may be offered to encourage preference over competing products.
• Promotion emphasizes product differentiation.

Decline

At this point, there is a downturn in the market. For example, more innovative products are introduced or consumer tastes have changed. There is intense price cutting, and many more products are withdrawn from the market. Profits can be improved by reducing marketing spending and cost cutting.

As sales decline, the firm has several options:

• Maintain the product, possibly rejuvenating it by adding new features and finding new uses.
• Harvest the product–reduce costs and continue to offer it, possibly to a loyal niche segment.
• Discontinue the product, liquidating remaining inventory or selling it to another firm that is willing to continue the product.

By imaginatively repositioning their products, companies can change how customers mentally categorize them. They can rescue products struggling in the maturity phase of their life cycles and get them back to the growth phase. And in some cases, they might be able take their new products forward straight into the growth phase.

The Con of Using Product Life Cycles to Direct Strategies

According to Harvard Business School professor Youngme Moon, though the product life cycle concept has been used successfully over the past 40 years, it has made marketers assume that there is only one trajectory for successful products. By viewing the product life cycle in the same way, marketers pursue similar positioning strategies for products and services during each stage of the life cycle. In the process, they miss out on opportunities to differentiate themselves.

9.5: Managing Existing Products

9.5.1: When to Extend Product Lines

A company can extend its product line using a down-market stretch, an up-market stretch, or a move both ways.

Learning Objective

Describe the nature of a product line extension

Key Points

• A line extension should only be considered when the producer can profitably produce a product that compares well with the base product.
• Changing market environmental factors often indicate when the timing suites a product line extension.
• The environmental cues help organizations determine if they should stretch down-market, up-market, or both ways.

Key Term

product line

A product line is the marketing strategy of offering several related products for sale as individual units.

Example

• A company may notice strong growth opportunities as mass retailers such as Wal-Mart, Best Buy, and others attract a growing number of shoppers who want value-priced goods and decide to extend a product line to meet this demand.

Introduction

A product line extension is the use of an established product’s brand name for a new item in the same product platform. Thus, line extension occurs when the company lengthens its product line beyond its current range. The company can extend its product line with a down-market stretch, an up-market stretch, or a move both ways.

Down-Market Stretch

A company positioned in the middle market may want to introduce a lower-priced line for any of the three reasons:

1. The company may notice strong growth opportunities as mass retailers such as Wal-Mart, Best Buy, and others attract a growing number of shoppers who want value-priced goods;
2. The company may wish to tie up lower-end competitors who might otherwise try to move up-market. If the company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end of the market;
3. The company may find that the middle market is stagnating or declining.

Up-Market Stretch

Companies may wish to enter the high end of the market for more growth, higher margins, or simply to position themselves as full-line manufacturers. Many markets have spawned surprising upscale segments:

• Starbucks in coffee;
• Haagen-Dazs in ice cream; and
• Evian in bottled water.

Leading Japanese auto companies have each introduced an upscale automobile:

• Toyota’s Lexus;
• Nissan’s Infiniti; and
• Honda’s Acura.

Note that the companies invented entirely new names rather than using or including their own names

Two-Way Stretch

Companies serving the middle market might decide to stretch their line in both directions. Texas Instruments (TI) introduced its first calculators in the medium-price-medium-quality end of the market. Gradually, it added calculators at the lower end taking the share from Bowmar, and at the higher end to compete with Hewlett-Packard. This two-way stretch won Texas Instruments (TI) an early market leadership in the hand-calculator market.

Examples include:

Take Your Pick

Coca-Cola’s product line offers a variety of Coke flavors.

Different varieties of Coke – regular Coke, Vanilla Coke, Cherry Coke, and Coke Zero Vanilla.

• Zen LXI, Zen VXI;
• Surf, Surf Excel, Surf Excel Blue;
• Splendour, Splendour Plus;
• Coca-Cola, Diet Coke, Vanilla Coke;
• Clinic All Clear, Clinic Plus; and
• Reese’s Peanut Butter Cups, Reese’s Pieces and Reese’s Puff Cereal.

A line extension strategy should only be considered when the producer is certain that the capability exists to efficiently manufacture a product that compares well with the base product. The producer should also be sure of profitable competition in this new market.

9.5.2: When to Modify Products

While the decision to modify products happens ideally at the design stage, products can be changed during any phase of the life cycle.

Learning Objective

Name the external factors that can influence product development

Key Points

• Products are modified to compete more effectively in the market, and appeal to evolving consumer and business demands.
• Multiple stakeholders ranging from employees and customers can influence product modifications.
• Product time, cost, visual appeal, usability and reliability are all factors that influence how and when a product is modified.
• External influences often prompt manufacturers to modify products. These are usually driven by competitive pressures, globalization, new technologies, or unexpected and significant events.

Key Terms

modified rebuy

the repurchase of a good with changes to the details of the order

stakeholders

A person or organization with a legitimate interest in a given situation, action or enterprise. It can range from employees and investors of a company to the customers purchasing from the company.

iterative

Of a procedure that involves repetition of steps (iteration) to achieve the desired outcome; in computing this may involve a mechanism such as a loop.

recall

To withdraw, retract (one’s words etc. ); to revoke (an order).

Example

• Large companies, in particular food producers, will slightly alter a product to attract new attention to it. For example, a soft drink company can produce a limited edition flavor of the product to renew sales levels and give it continuing interest.

When to Modify Products

The product life cycle (PLC) encompasses the multiple phases products pass through during their ‘life’ in the market. Products travel through market introduction, growth, maturity, saturation and decline, posing different challenges, opportunities and problems to manufacturers and sellers depending on industry and target audience. At some point during the life cycle, products may be modified to compete more effectively in the market, and appeal to evolving consumer and business demand .

Phases in the Product Life Cycle

Modification decisions often (but not always) happen before products are introduced to the market.

Product Design Stage

At the design stage, developers and engineers must assess the importance of various requirements from a wide range sources. Stakeholders typically contribute input during product development, demanding something different from the product designer and design process.

Factors that can influence whether products are modified at the design stage include:

• Overall production time and cost
• Price, appearance, and prestige value
• Usability and functionality
• Assembly and reliability

Stakeholders’ needs vary from one another and it is the product designer’s job to incorporate those needs into their design. Product design is an iterative process, and often needs to be modified due to manufacturing constraints or conflicting requirements. Where a customer order fits into the timeline depends on the industry type and whether the products are for example, built to order, engineered to order, or assembled to order.

Market Influences

Although product manufacturers painstakingly consider numerous details and possibilities of what could go wrong, many new designs ultimately fail or become obsolete. These product failures usually go back to the manufacturer for modifications, and are later re-introduced to the market. Other products are never re-introduced and deleted entirely from the product roadmap. Product development can take as many as five to six attempts before achieving success in the marketplace.

Innovation provides much of the competitive impetus for the development of new products, with new technology often requiring a new design interpretation. It only takes one manufacturer to create a new product paradigm to force the rest of the industry to catch up, fueling further innovation. While some products are completely new innovations, others are simply minor modifications to existing products.

New and rapidly changing technologies, evolving trends, increased demand and globalization are all factors that play into the decision to add product features and functionality. Unpredictable forces such as mass contamination can lead to product recalls, and the modification or destruction of large quantities of products. In 2007, millions of toys manufactured in China were recalled due to discoveries of lead paint and fears of lead poisoning in children. Product recalls, which can happen at any stage of a product life cycle, are costly and can severely damage a brand’s reputation if managed poorly.

9.6: New Product Development

9.6.1: The Need for New Products

In dynamic markets companies must constantly introduce new products and services to keep up with changing consumer wants and needs.

Learning Objective

Discuss the common challenges of developing successful new products

Key Points

• A company must establish a series of successful products over time if it wants to maintain a consistent stream of sales, or grow sales over time.
• New product generation involves multiple stages and a high level of financial investment, and has no guarantee of success.
• When a new product is introduced, companies must still convince buyers to adopt them into their routines, in order for sales to be consistent.
• Innovation may be ‘continuous’ or ‘discontinuous’ – the former occurring in established markets, while the latter has the potential to create new markets or consumer behaviors.

Key Terms

planned obsolescence

a policy of deliberately planning or designing a product with a limited useful life, so it will become obsolete or nonfunctional after a certain period

obsolescence

The process of becoming obsolete, outmoded or out of date.

innovation

As used here, innovation describes an idea or product that is new to the company in question.

new product

a good or service that was previously not offered by the company

The marketplace is never static: it is dynamic and fast changing, and demand for products is constantly shifting as needs, wants, and technology all change. As a result, companies must always evaluate their existing product line and look for ways to ensure that it is up to date and in line with consumer desires. Continuous decisions must be made about whether new products should be added (and whether old products should be removed).

For instance, the graph in shows how an organization must establish a series of successful products if it wants to maintain a consistent stream of sales, or grow sales over time. As shown in the graph, no product lasts forever, and sales levels can fluctuate dramatically over time. This fictitious company has marketed eight different products over time.

Company Sales

Sales of individual products and total company sales for a fictitious company with multiple products.

In the past, four of these products have been deleted as they near obsolescence (the products labeled as A, B, C, and F). As a result, the sales level in the most current period depends upon the success of the remaining four products. If the firm has a goal to increase sales in the coming years, then it is imperative for that firm to introduce a new group of successful products.

Organizations invest a lot of money to create new products that perform effectively. Nonetheless, firms often struggle to convince people to try out these products, and to use them on a regular basis (and thus incorporate them into their habits and routines). For example, it took 18 years for microwave ovens to gain acceptance in Greece. The ultimate success of new products depends on consumers accepting them.

Innovation

‘Innovation’ is used here to describe an idea or product that is new to the company. A ‘continuous innovation’ introduces a new entrant into an existing category, and does not challenge established patterns of consumer behavior. An example of this is a new, technologically advanced cell phone. A ‘discontinuous innovation’ may alter existing consumption patterns, and even create new ones. For example, portable audio equipment has evolved from the radio, to the cassette tape player, to the compact disk player, and to the digital audio player – and now, to Cloud-based systems. Discontinuous innovation has the potential to radically shift consumer habits and thus create new demand for a whole category of products and services, but understandably entails more risk for the organization.

9.6.2: Strategy

A good NPDS can help organize research, prioritize customer needs, and reduce cost overruns, to ensure a smooth development process.

Learning Objective

Describe the three common approaches to strategically developing new products

Key Points

• Three common approaches to NPDS are user-centered design, flexible product development, and the phase-gate model. There are many other approaches used as well, and what approach to use depends on the nature of the management, the product, and the market.
• User-centered design emphasizes the wants, desires and limitations of the end-user in designing how to develop the product.
• Flexible product development emphasizes a flexible development process, instead of focusing on users as user-centered design does. By making the process as flexible as possible, necessary changes can take place very late in the development process with minimum disruption.
• The phase-gate model separates the different phases by using “gates”–at each gate, a steering committee uses all available information to decide whether to proceed with the development process or not.

Key Terms

flexible product development

A new product development strategy designed so that changes can be made late in the process without excessive disruption.

user-centered design

A new product development strategy where the needs of the end users are given the most attention.

Phase-gate model

A new product development strategy that is divided into phases, separated by gates.

New Product Development Strategy

A well thought out new product development strategy (NPDS) helps a company avoid wasting time and resources by helping to organize planning and research, understanding customer expectations, and accurately resourcing the project. By avoiding common errors such as overestimating the target market, incorrectly setting the price, and accruing higher than predicted costs, a NPDS helps the product to be developed and launched as planned.

The nature of the business and the product in question will determine the NPDS, and what steps need to be taken. Certain steps may be iterated as needed, and others may be eliminated. To speed up the process, many companies complete several steps at the same time (known as “time to market”). For some more complicated products, a large amount of uncertainty makes it impossible to plan the complete project before starting it, and thus a flexible approach is required.

There are many different ways to approaching NPDS. Some of the more common ways are described below.

User-Centered Design (UCD)

Here, the needs, wants and limitations of end users of a product are given a great deal of attention at each stage of the design process. The main element in this process is that user-centered design tries to optimize the product around how users can, want, or need to use the product, rather than forcing users to change their behaviors to accomodate the product.

Flexible Product Development

Flexible product development is the ability to make changes in the product being developed or in how it is developed, even relatively late in development, without being too disruptive. Flexibility is important because the development of a new product naturally involves change from what came before it. Change can be expected in what the customer wants and how the customer might use the product, in how competitors might respond, and in the new technologies being applied in the product or in its manufacturing process. The more innovative a new product is, the more likely it is that the development team will have to make changes during development.

Flexible development counteracts the tendencies of many contemporary management approaches to plan a project completely at its outset and discourage change thereafter. These include Six Sigma, which aims to drive variation out of a process; Lean, which acts to drive out waste; and traditional project management and phased development systems (including the popular Phase–gate model, discussed next), which encourage upfront planning and following the plan. Although these methodologies have strengths, their side effect is encouraging rigidity in a process that needs flexibility to be effective, especially for truly innovative products. Flexibility techniques must be used with discretion, for instance, only in the portions of a product likely to undergo change, in order to minimize potential disruptions, delays, and cost overruns.

Six Sigma

The symbol for Six Sigma, which is a contemporary management approach.

Phase-Gate Model

In a phase–gate model, also referred to as a phase–gate process, the process is divided into stages or phases, separated by gates. At each gate, the continuation of the process is decided by (typically) a manager or a steering committee. The decision is based on the information available at the time, including the business case, risk analysis, and availability of necessary resources (e.g., money, people with correct competencies). The phase–gate model may also be known as stage-limited commitment or creeping commitment.

9.6.3: Idea Generation

The success of product-driven companies is directly tied to new product development, which is generated through innovative ideas.

Learning Objective

Identify the five primary sources of product innovation

Key Points

• The five main sources of innovation are technological breakthough, non-technological development, environment, serendipity, and purposeful development.
• It is possible to create new ideas and new ways of producing products through non-technical means. This would involve using well-known business models and slightly modifying the production process to appear unique.
• The process of serendipity frequently occurs due to government funding of general and scientific research, causing technological and other spillovers into the commercial realm. These spill over effects generate new ideas for products that would have otherwise not been discovered.

Key Terms

Generation X

the generation of people born after the baby boom that followed World War II, especially those born in the 1960s and 1970s

SWOT Analysis

A structured planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture.

purposeful development

Innovation that occurs in response to a market need that existing product lines cannot satisfy.

Idea Generation

Ideas for new products can be obtained from basic research using a SWOT analysis. Market and consumer trends, R&D departments, competitors, focus groups, etc. may also be used to get an insight into new product lines or product features. New product innovations are responsible for employment, economic growth, technological process, and high standards of living. Innovation is crucial for the development of successful new products. Described below are different sources of innovation that lead to the generation of ideas for new products.

Sources of Innovation that Generate Ideas

While innovation is crucially important to any forward-thinking organization, developing and evaluating innovations is a challenge. Where do innovative ideas come from? Discussed below are five crucial sources of innovation: technical breakthrough, non-technical idea development, environment, serendipity, and purposeful development. These are discussed in turn below (see ).

Different Sources of Innovation

A summary of different sources of innovation, as described in this section. Being innovative is key to generating new ideas in product development.

A table to shows different sources of innovation (technical breakthrough, non-technical idea development, idea from environment, serendipity, and purposeful development).

Technical Breakthroughs

Technical breakthroughs refer to product innovations that result from technical developments. New brands that have emerged from this process include MP3 players, GPS navigation devices, and cell phones. Technological breakthroughs are often born in R&D departments or through government funding of research, which ultimately lends itself to commercial uses.

Non-technical Development

This approach involves finding a niche in the market without making radical changes to the basic product category (i.e., in terms of the underlying technology). “Build a Bear Workshop” provides a good example of this style of innovation: Unlike other conventional stuffed animal manufacturers, the Build a Bear Workshop allows customers to choose their bear’s body, sound, clothing, stuffing, and heart. For example, a customer can choose a lower-priced paper heart with their wish, or they can invest in a higher-priced electronic heart. After customers make choices, they then observe the production process in the shop. In this way, customers create their own custom-designed toy. This business model does not rely on developing new technology, but a modified production process and a unique idea that draws the consumer in.

Environment

Certain ideas developed in one environment or geographical location have the potential to do well when imported into new environments. Good examples of this style of innovation are Wal-mart in China and IKEA in the United States–ideas that proved a big hit outside of the cultures that they were traditionally employed in. Large-retail stores are now achieving success in Asian nations, through importing the idea of economies of scale, which in turn enable one-stop shopping and lower prices. Similarly, IKEA achieved great success in the United States through importing the idea of a warehouse-type retail setting from Europe.

Serendipity

Serendipity plays a role in product innovation. The word serendipity derives from “serendip,” which means “Sri Lanka” in Persian. The fairy tale, The Three Princes of Serendip, tells the story of three men who continuously discover something that is completely unrelated to what they originally set out to find. Thus, the term “serendipity” describes a situation where one accidentally discovers something fortunate, while looking for something else entirely. For example, penicillin was discovered quite by accident when Alexander Fleming discovered that a mold contaminating one of his experiments possessed powerful antibacterial properties. While not exactly a strategy that can be purposefully conducted by companies attempting to come up with a specific product, the process of serendipity frequently occurs due to government funding of general and scientific research, causing technological and other spillovers into the commercial realm.

Purposeful Development

Purposeful development occurs when there is a strong need for certain goods or services. As Plato once said, “Necessity is the mother of invention.” In other words, this type of innovation occurs when existing product lines cannot satisfy current needs or current demand. As a result, organizations are willing to invest considerable funds to create a successful innovation. Thus, purposeful development occurs when there is a need that requires satisfaction, as opposed to when demand creation is required for a new product for which there is no initial desire in the marketplace. A good example of purposeful development is the heavy investment that pharmaceutical firms make to discover new prescription drugs.

9.6.4: Screening

During screening, the company evaluates whether to devote further resources to the development of a product at various stage gates.

Learning Objective

Discuss the benefits and shortcomings of product screening

Key Points

• The company must ask itself a number of questions, such as whether there is a potential market for the product, whether the product will meet the demands of the consumer base, and whether the product can be profitable.
• Two major risks arise during screening: an unviable product may be admitted to the next stage, and a potentially successful product may be rejected.
• Products are often rated on a scale from poor to good on a variety of different criteria in order to determine their viability. This process is taken a step further by assigning weights to the criteria, so as to give more importance to factors considered crucial for a product’s success.

Key Term

screening

A step in the product development process where products are evaluated according to a certain set of criteria on whether they will be successful in the marketplace.

Screening

It is important for businesses to continually devise new products, as products do not last forever. While there are millions of products available to consumers, many more products do not make it to market at all. As it is expensive to bring a product to market, products go through a product development process where they are evaluated at every stage before they are brought to commercialization. For example, of the 5,000 drug ideas that go through the screening process of the Federal Drug Administration, only 10 end up getting approved, and of these only 3 become profitable. With an average cost of $1 billion to bring a drug to market, it would take several billion in sales to recoup the cost .

Screening

This figure illustrates the long process it takes for a drug to enter the market.

Screening Objectives

The objective of the screening stage is to eliminate unsound concepts prior to devoting resources to them. The screeners should ask several questions: Will the customer in the target market benefit from the product? What is the size and growth forecast of the target market? What is the current or expected competitive pressure for the product idea? Is it technically feasible to manufacture the product? Will the product be profitable when manufactured and delivered to the customer at the target price? By answering these questions, the company can get a better idea of the likelihood of a product becoming a commercial success.

The screening step is a critical part of the new product development process. Product ideas that do not meet the organization’s objectives should be rejected. Two problems that may arise during the screening stage are the acceptance of a poor product idea, and the rejection of a viable product idea. In the former case, money and effort are wasted in subsequent stages until the product idea is abandoned. In the latter case, a potential winner never sees the market.

Screening Techniques

There are two common techniques for screening new product ideas. Both involve the comparison of a potential product idea against the criteria for acceptable new products. The first technique is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor, in respect to factors such as value added, sales volume, patent protection, and effect on present products. Unfortunately, it is often very challenging for evaluators to define what is fair or poor in any given category. Also, this system does not address the issue of the time and expense associated with each idea, nor does it provide instructions with regard to the scores.

The second technique goes beyond the first in that the criteria are assigned weights based on their importance. These scores are then multiplied by their respective weights and added to yield a total score for the new product idea.

9.6.5: Concept Testing

Concept testing is important for evaluating consumer responses to a product before market introduction.

Learning Objective

Explain concept testing, its disadvantages, and alternative methods used to evaluate consumer behavior toward new concepts

Key Points

• Concept testing can also be useful in altering existing attitudes towards existing products in the market.
• Concept testing uses qualitative and quantitative methods. Concept generation portions of concept testing are generally qualitative, while evaluations, positioning, and product/concept tests are usually quantitative.
• Traditional methods of concept testing faced many shortfalls, including not providing consistent information on the ranking of consumer preferences. However, newer methods are alleviating such issues and providing more useful information.

Key Term

concept testing

The process of evaluating consumer response to a product idea prior to the introduction of the product to the market.

Concept testing

Concept testing is the process of using quantitative and qualitative methods to evaluate consumer response to a product idea prior to the introduction of a product to the market. It is a vital part of the idea screening stage of new product development. It can also be used to generate communication designed to alter consumer attitudes toward existing products. These methods involve the evaluation by consumers of product concepts having certain rational benefits, such as “a detergent that removes stains but is gentle on fabrics,” or non-rational benefits, such as “a shampoo that lets you be yourself.” Concept testing is often performed using field surveys, personal interviews and focus groups, in combination with various quantitative methods.

Focus Group

Using focus groups to generate user feedback is one method used to perform concept testing.

The concept generation portions of concept testing are generally qualitative. Advertising professionals create concepts and communications of these concepts for evaluation by consumers, on the basis of consumer surveys and other market research, or on the basis of their own experience as to which concepts they believe represent product ideas that are worthwhile in the consumer market.

The quantitative portions of concept testing procedures have generally been placed in three categories: (1) concept evaluations, where concepts representing product ideas are presented to consumers in verbal or visual form and then quantitatively evaluated by consumers by indicating degrees of purchase intent, likelihood of trial, etc., (2) positioning, which is concept evaluation wherein concepts positioned in the same functional product class are evaluated together, and (3) product/concept tests, where consumers first evaluate a concept, then the corresponding product, and the results are compared.

Shortcomings of Traditional Concept Testing

Traditional systems of concept testing generally failed to provide a systematic, proven way of showing consumer preference of one concept over another. The relative importance of the factors responsible for or governing why consumers, markets and market segments reacted differently to concepts presented to them in the concept tests were not demonstrated. Thus, communication of the concept was generally left to the creativity of the advertising agency, with no systematic quantitative method known or employed that could identify the criteria on which consumer choices were made (at least, not with any real accuracy).

Moore and William (1982), in a literature survey and review of concept testing methodology, point out that concept tests have failed to account for changes between the concept tested and the communication describing the benefits of the product which embodies the concept. The paper reports that “no amount of improvement in current concept testing practices can remedy these problems. ” This is reflective of the fact that none of the traditional methods provided a quantitative means for ascertaining the relative importance of the underlying criteria of concept choices as a means for identifying the visual and verbal expressions of the concepts which best communicate the benefits sought by the consumer. Nor did the traditional methods quantify the relationships between concepts and existing products offered in the same consumer market. The ability of a method to ameliorate or overcome the above shortcomings would provide substantial improvement in communication of the concepts identified in testing and offered to the market as a product.

One such method is conjoint analysis and another is choice modeling. In addition, with online retailing becoming increasingly prominent, many online respondents are also online consumers. Thus, they are able to easily place themselves in the mindset of a consumer looking to buy goods or services. Since the arrival of these methods, market researchers have been able to make better, more accurate, suggestions to their clients regarding the decision to move forward, revise, or start over with a product concept. Online choice modeling, for example, can produce detailed econometric models of demand for various attributes of the new product such as feature, packaging and price.

9.6.6: Business Analysis

The output of the business analysis stage is a prediction about whether the product is likely to be profitable or not if ultimately produced.

Learning Objective

Demonstrate knowledge of the components included in the business analysis stage of product development

Key Points

• The first step in the business analysis process is to examine the likely demand for the product, as well as possible licensing of technologies associated with the product.
• A cost appraisal is also carried out, which involves looking at development costs, management costs, operating costs, set-up costs, and marketing costs.
• Based on the above costs, as well as the level of competition and customer feedback, a selling price and break-even point can be identified.

Key Term

Fourt-Woodlock equation

a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year.

Business Analysis

After the initial screening stage, the number of viable proposals available to progress to the next stage will have decreased significantly. However, before the company begins the development of prototypes, there is one more evaluation process that must take place, and this is the business analysis stage. In this stage, additional information is gathered on the remaining innovations in order to decide whether the significant costs that development will require are justified .

Business Analysis

Financial ratio analysis allows an observer to put data provided by a company in context. The observer can gauge the strength of different aspects of the company’s operations.

Stacks of gold coins.

The primary focus of the business analysis stage is to determine whether the product idea will ultimately be profitable or not. However, while this is the primary consideration, it is not the only consideration. Social and environmental issues are frequently considered as well, particularly if there are certain regulations that the company must adhere to in these realms.

The first step in the business analysis process is to examine the projected demand for the product. While the major source of revenue would be product sales, another possible significant source of revenue is the licensing of the technology generated as a byproduct of the given product. Clearly this is not applicable to all products, but for certain classes of products, this can be a very significant source of income .

A complete cost appraisal is also necessary as part of the business analysis. As you can expect, it is difficult to anticipate all the costs that will be involved in product development. However, the following cost items are typical:

• Expected development cost, including both technical and marketing R&D
• Expected set-up costs (production, equipment, distribution)
• Operating costs that account for possible economies of scale and learning curves
• Marketing costs, especially promotion and distribution
• Management cost

Based on these costs, the business analysis stage will estimate the likely selling price. This figure will also depend on the level of competition, as well as customer feedback. Sales volumes must also be estimated based on the size of the market (using, for instance, the Fourt-Woodlock equation). Ultimately, profitability and the estimated break-even point can be derived. Customers base buying decisions on a personal value equation where the value is calculated by weighing the cost versus the benefits. This relates to the viability and feasibility of products that companies are considering to add to their line.

9.6.7: Development

Development involves setting product specifications as well as testing the product with intended customer groups to gauge their reaction.

Learning Objective

Describe the steps involved in the technical and marketing development stages of new product development

Key Points

• Technical development involves creating a prototype to develop exact product specifications.
• The technical development stage also involves getting a good idea for the different methods and costs of making the product in a factory setting.
• The concept test is usually the first stage for the marketing department during the development stage. In addition to the product, elements such as packaging and labeling can also be tested with potential consumers.

Key Terms

development stage

The stage where prototypes are created, and questions of production and marketing are asked.

development

the complete process of bringing a new product to market

Development

Once a potential product has passed the screening and business analysis stages, it goes onto the technical and marketing development stage. This stage includes identifying the target market and the decision maker in the purchasing process, determining what features must be incorporated into the product and the most cost-effective way to produce it, and establishing what the actual cost of production will be.

Technical Development

Technical development involves two steps. The first is the applied laboratory research required to develop exact product specifications. The goal of this research is to construct a prototype model of the product that can be subjected to further study. Once the prototype has been created, manufacturing methods research can be undertaken to plan the best way of making the product in commercial quantities under normal manufacturing conditions. This is an extremely important step, because there is a significant distinction between what an engineer can assemble in a laboratory and what a worker can produce in a factory.

Prototype

A company develops a prototype in order to conduct further testing on a potential product.

A Toyota car prototype on display.

Testing Process

While the laboratory technicians are working on the prototype, the marketing department is responsible for testing the new product with its intended consumers and developing the other elements of the marketing mix.

Concept Test

The testing process usually begins with the concept test. The product concept is a synthesis or a description of a product idea that reflects the core element of the proposed product. For example, a consumer focus group might be assembled and the interview session might begin with the question: “How about something that would do this?”

Consumer Testing

The second aspect of market development involves consumer testing of the product idea. This activity usually follows the construction of the prototype or limited production models. Various kinds of consumer preference can be conducted. The product itself can be exposed to consumer taste or use tests. Packaging, labeling, and other elements in the mix can be similarly studied.

9.6.8: Test Marketing

Test marketing is the final stage before commercialization, and is where all the elements of the marketing plan are tested.

Learning Objective

Discuss the requirements that must be satisfied to conduct successful test marketing of new products and distinguish test marketing from initial product testing

Key Points

• Initial product testing and test marketing are very different. The former involves providing consumers with the test product, and giving them an incentive to participate. The latter involves all the elements of the marketing plan, in a real-world setting meant to simulate the broader market.
• There are risks in test marketing, such as high initial marketing costs, the potential to lose customer goodwill before the official launch, and giving competitors the opportunity to quickly copy the product.
• Variables in the test marketing process include the selection and number of test cities, as well as the ideal sample size to use.

Key Term

test marketing

The stage where all the variables in the marketing plan, as well as the product characteristics, are tested in a real-world setting.

Test Marketing

This is the final step before commercialization. The objective of the this marketing phase is to test all the variables in the marketing plan, including different elements and characteristics of the product. This stage represents the launching of the total marketing program, albeit on a limited basis.

Three questions can be answered through test marketing:

• Is the overall workability of the marketing plan realized as planned?
• Do alternative allocations of the budget need to be evaluated?
• Can we determine whether users are being inspired to switch from their previous brands to the new one, and whether repeat purchases are taking place?

In the end, the test market should include an estimate of sales, market share, and financial performance over the life of the product.

Initial product testing versus test marketing

Initial product testing and test marketing are not the same. Product testing is totally initiated by the producer: he or she selects the sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate.

Test marketing, on the other hand, is distinguished by the fact that the test cities represent the national market. The consumer must make the decision herself, must pay his or her own money, and the test product must compete with the existing products in the actual marketing environment. For these and other reasons, a market test is meant to serve as an accurate simulation of the national market and serves as a method for reducing risk. It should enhance the new product’s probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale.

Risks

Test marketing is not without inherent risks. First, there are substantial costs in buying the necessary productive capacity needed to manufacture the product or locating manufacturers willing to make limited runs. There are also promotional costs, particularly advertising and personal selling . Although not always easy to identify, there are indirect costs as well. For example, the money used to test market could be used for other activities. The risk of losing consumer goodwill through the testing of an inferior product is also very real. Finally, engaging in a test-market might allow competitors to become aware of the new product and quickly copy it.

Test Marketing

Aggressive promotion in a limited geographical area is often a key element of the test marketing phase.

A Red Bull mini truck that’s used for test marketing.

Because of the special expertise needed to conduct test markets and the associated expenses, most manufacturers employ independent marketing research agencies with highly-trained project directors, statisticians, psychologists, and field supervisors. Such a firm would assist the product manager in making the remaining test market decisions.

Variables

• Selection of test market cities: these cities should reflect the norms for the new product in such areas as advertising, competition, distribution system, and product usage.
• Number of test cities: should be based on the number of variations considered (i.e. vary price, package, or promotion), representativeness, and cost.
• Sample size determination: the number of stores used should be adequate to represent the total market.

Even after all the test results are in, adjustments in the product are still made. Additional testing may be required, or the product may be deleted if it does not perform well during this stage, or if it becomes apparent that the product is not likely to become a commercial success.

9.6.9: Commercialization

Commercialization the process of launching a new product; it may involve heavy promotion and filling the distribution networks with the product.

Learning Objective

Describe the three steps that must be implemented during the commercialization of new products

Key Points

• The timing of the launch should coincide with a good economic situation to maximize sales. Cannibalization of existing products should be avoided, and the product should only be launched when no further improvements are foreseeable.
• Companies must decide which location(s) to launch, depending on their target markets, capabilities, and marketing strategy.
• By targeting the primary consumer group (which includes innovators, early adopters, and opinion leaders), the company can ensure adoption by other buyers in the market place during the product growth period.

Key Term

commercialization

The process of introducing a new product into the market.

At last the product is ready to go. It has survived the development process and it is now on the way to commercial success (if all goes well, that is!). ‘Commercialization’ is the process or cycle of introducing a new product or production method into the market. In this stage, the product is launched, advertisements and promotional activity begins and increases heavily, and the distribution pipeline is filled with the product. The actual launch of a new product is the final stage of new product development, and the one where the most money will have to be spent for advertising, sales promotion, and other marketing efforts.

The commercialization process

Commercialization of a product will only take place, if the following three issues are satisfied:

• Timing of launch: When facing the danger of cannibalizing the sales of the company’s other products, if the product can be improved further, or if the economy is down, the launch should be delayed.
• Launch location: It can be in a single location, one or several regions, a national or the international market. This decision will be strongly influenced by the company’s resources, in terms of capital, managerial confidence and operational capacities. Smaller companies usually launch in attractive cities or regions, while larger companies enter a national market at once. Global roll outs are generally only undertaken by multinational conglomerates, since they have the necessary size and make use of international distribution systems (e.g., Unilever, Procter & Gamble). Other multinationals use the “lead-country” strategy: introducing the new product in one country/region at a time.
• Target consumers: The primary target consumer group will have been identified earlier by research and test marketing. This primary consumer group should consist of innovators, early adopters, heavy users and/or opinion leaders. This will ensure adoption by other buyers in the market place during the product growth period.

The company has to decide on an action plan for introducing the product by implementing the above decisions. It has to develop a viable marketing-mix and create a respective marketing budget. When a plan is in place for each of these three issues, then the commercialization process may begin .

Launching a New Product

Whenever Apple launches a new product, there are crowds outside waiting to get their hands on the new product.

9.6.10: Success and Failure: Strategies to Improve Success

Marketers must learn from their own previous failures, and others’ failures, to ensure that they are successful for the next product launch.

Learning Objective

Describe how market structure and business model, culture and communication, political and regulatory, and product/service factors impact a company’s market success and failure

Key Points

• Four areas that marketers must pay attention to in order to maximize the chances of success are: (a) market structure and business model; (b) cultural and communication; (c) politics and regulation; and (d) product/service failure.
• Companies must align their business model to the structure of the market that the product is entering. No business model will work in all situations, and so it must be altered appropriately.
• Any product will run up against certain cultural factors. By understanding these, and avoiding problems (or even making use of such factors), companies can increase their chances of success.
• Companies must be aware of all legal regulations as well as potential political issues that may arise from the release of their product, and act accordingly to negate such issues.

Key Term

cultural factors

Differences in cultures (be they national or corporate cultures) that managers must pay attention to in order to ensure success.

Example

• As we saw in the case study, Wal-Mart came up against all these factors when attempting to launch in Germany. With a finer appreciation of these potential issues, and a plan to counteract them, it would have had more success in the country.

Success and Failure

A product fails when it does not meet the objectives that were established before its release. The following case study describes Wal-Mart’s failure to enter the German market, and highlights many of the problems faced by marketers in making a successful product. By learning from the failures of others (and their own prior failures), marketers may learn how to succeed in future. For a summary of the reasons why products fail as applied to the Wal-Mart case.

Wal-Mart’s Failure in Germany

Marketers face many challenges when making and introducing a successful product.

A chart that summarizes a case study of why Wal-Mart failed in Germany.

Wal-Mart case study

Wal-Mart is the world’s biggest food retailer. In some nations, it is a great success. However, it has failed in some countries (e.g. Germany, South Korea). Here, we will describe Wal-Mart’s failure in Germany, and use its experiences there to illustrate some key principles relating to product failure and deletion.

There is fierce competition in the German grocery industry, and thus, low profitability in the food retail sector; profit margins range from 0.5-1%. The main feature of Wal-Mart’s business model is to continuously cut costs and so offer lower prices than its competitors. Wal-Mart also continuously pressures its suppliers to cut costs.

In 1997-1998, Wal-Mart acquired over 95 stores from existing German supermarket chains, making it the fourth biggest supermarket operator in Germany. The objective was to expand to 500 stores. However, Wal-Mart never grew from the original 95 stores. By 2007, it was bought out by one of Germany’s largest retail groups. Ultimately, Wal-Mart left the German market with a loss of one billion dollars before tax.

There are four key issues related to Wal-Mart’s failure in Germany: (a) market structure and business model; (b) cultural and communication; (c) politics and regulation; and (d) product/service failure.

Market structure and business model

A retailer that wants to follow Wal-Mart’s strategy of low prices needs to expand rapidly. In Germany, there were not enough appropriate locations to support such expansion. Wal-Mart did not build their own stores, but took over existing supermarkets that had a completely different business model – they were very small and had a limited range of goods. They were also located far apart, which resulted in high logistical costs.

With their strategy of “everyday low prices,” Wal-Mart is very successful in the United States and elsewhere. However, due to the extreme competition, Germans are accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart’s low price strategy did not create sufficient competitive advantage.

Culture

and communication

When products are introduced, it is important to consider cultural factors. Wal-Mart decided to operate its German locations from the UK. Thus, its “corporate language” was English. However, many of the older German Wal-Mart managers did not speak English. Some managers did not stay on after the Wal-Mart acquisition. Key business connections were lost, which resulted in the loss of major suppliers. It would have been far better to retain and communicate effectively with the German managers who had know-how about the local market.

Politics and regulation

Wal-Mart’s managers violated German laws repeatedly, simply because they were unfamiliar to them. For example, Wal-Mart always stays union-free, but Germany has a history of strong, politically powerful unions. Ver.di, one of Germany’s biggest unions, sued the company for failing to publish key financial statements in 1999 and 2000. A fine, as well as much negative press, harmed Wal-Mart’s reputation.

After its expansion strategy failed, Wal-Mart began a price war to drive small competitors out of business. One part of the price war was to introduce a private label called “Smart Brand” and sell most of these products below manufacturing costs. The reaction of many competitors was also to decrease their prices, which led to a profit setback for the entire industry. Finally, the Federal Cartel Office interceded and stopped the price war.

Product/service failure

Good customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart’s customer service program was to ensure someone was always there to help. However, customer reaction was negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They found this annoying, and it did not create a reputation for providing good customer service.

Conclusion

Wal-Mart tried to apply its U.S. success formula in an unmodified manner to the German market. As a result, they didn’t have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. The final outcome was that it had to abandon its offerings in Germany. Had Wal-Mart paid careful attention to these issues prior to entering the German market, it could have had a very different outcome.

9.7: Differentiating Factors in Product Design

9.7.1: Quality

Consumers place a value on quality; therefore high quality products may be able to win share and/or command a price premium.

Learning Objective

Identify the attribute of quality at the design stage as a differentiating factor

Key Points

• Quality is considered a non-functional requirement in product design, affecting the execution and evolution of a product.
• The five aspects of quality in a business context include producing, checking, controlling, managing, and assuring quality in products and services.
• Manufacturers often view quality as a driver for productivity, increased revenues, and technological advances.

Key Terms

extensibility

A quality of design that takes possible future advances into consideration and attempts to accommodate them.

ISO

The ISO is the International Organization for Standardization.

conformance

The act of conforming; conformity.

Quality

Quality in business, engineering, and manufacturing has a pragmatic interpretation as the non-inferiority or superiority of something; it is also defined as fitness for purpose. Product quality can vary depending on perception and is considered somewhat subjective since it may be understood differently by different people. When it comes to quality in product design, manufacturers might measure how well products conform to certain requirements or the level of accuracy in products and services following production. Consumers may focus on product features and how well the product compares to competing brands in the marketplace. Support personnel may measure quality in the degree that a product is reliable, maintainable, or sustainable.

Improving Product Quality

Improving product quality in businesses can lead to better productivity and more innovation.

Quality is considered a non-functional requirement in engineering, affecting the execution and evolution of a product. Product qualities can be divided into two main categories:

• Execution qualities, such as security and usability.
• Evolution qualities, such as testability, maintainability, extensibility, portability, and scalability.

Product Quality in Business

During the 1960s, the U.S. military, aerospace, and nuclear industries developed the original versions of the Quality Management System Standards (eventually merged to ISO 9001). These standards were established to produce better products on a consistent basis, while focusing on production, conformance, and quality control mechanisms. Within areas such as product design and manufacturing, five main aspects of quality fall under this scheme. They include:

1. Producing – providing a product or service.
2. Checking – confirming that a product or service has been produced correctly.
3. Quality Control – controlling a process to ensure that the outcomes are predictable.
4. Quality Management – directing an organization so that it improves its performance through analysis and innovation.
5. Quality Assurance – obtaining confirmation (usually from the purchaser or a third-party) that a product or service will be satisfactory.

Managing quality is fundamental to any activity, particularly in the design and manufacturing of consumer and industrial goods. For manufacturers of products, it is commonly stated that “quality drives productivity.” Better productivity is viewed in direct correlation to increased revenues, employee opportunities, and technological advances. Thus, businesses must have a clear understanding of all aspects of product quality, measure product performance, and adapt their market strategy for longevity and growth.

9.7.2: Design and Feature Set

Premium features and design may help differentiate a product to earn it share or a price premium in the marketplace.

Learning Objective

Outline the concept of design and feature sets as differentiating factors in product design

Key Points

• During product design, companies must consider factors such as cost, producibility, quality, performance, reliability, serviceability, and user features.
• Companies must be cognizant of feature creep, which is the ongoing expansion or addition of new features in a product.
• Product design teams can control feature creep by setting strict limits for allowable features or limiting features in some product versions.
• Once products reach the stage of maximum functionality, manufacturers face the choice of adding extraneous functions, sometimes at the cost of efficiency.

Key Terms

feature creep

The tendency of a design project or product cycle to accumulate more and more features or details, rather than to be completed and released at a more basic level.

serviceability

The property of being serviceable, of being useful for some function.

Design and Feature Set

In systems engineering, a requirement (often referred to as a functional requirement) can be a description of what a system must do. Another type of requirement specifies something about the system itself, and how well it performs its functions. Such requirements are often called non-functional requirements, performance requirements. or quality of service requirements. Examples of such requirements include usability, availability, reliability, supportability, testability, and maintainability. These requirements define the characteristics or features of the desired product during the design process .

Product Features

Features must meet usability and reliability requirements before being built into products and systems.

Product Design Process

Product design involves developing a device, assembly, or system into an item for sale using a production manufacturing process. During product design, engineers and designers must consider factors such as cost, producibility, quality, performance, reliability, serviceability, and user features. A product must go through the design and development of its mechanical, electronics, and software components before transitioning to manufacturing for mass production.

For example, the development of digital cameras would include defining the feature set; designing the optics, as well as the mechanical and ergonomic aspects of the packaging; developing the electronics that control the various components; and developing the software that allows users to view and manipulate photos, store them to memory, and download to them to a computer.

Dangers Of Feature Creep

Customer demand for particular features or functionality can result in products tailored to very specific, niche markets. However, manufacturers must be cognizant of feature creep, which is the ongoing expansion or addition of new features in a product. Although providing consumers more useful or desirable products and increasing sales are priorities for most businesses, extra features going beyond product function can result in over-complication.

Once products reach the stage of maximum functionality, manufacturers face the choice of adding extraneous functions, sometimes at the cost of efficiency. On the other hand, the manufacturer must deal with ignoring older versions at the cost of being perceived by the market as stagnant or dated. Nevertheless, introducing a bloated feature set can move the product or system beyond its initial goals, increasing production costs and schedule overruns. Introducing too many requirements into a feature set has often been blamed for endangering and even killing products and projects.

Another major cause of feature creep might be a compromise from a committee which decides to implement multiple, different viewpoints in the same product. As more features are added to support each viewpoint, it might be necessary to have cross-conversion features between the multiple viewpoints, further complicating the total features.

Feature Control In Product Design

To control the number of product features during the design phase, manufacturers set strict limits for allowable features and multiple variations. Excess features are removed or delayed until the later delivery phases of the project. Quality control is also maintained through multiple variations of products, where features are kept limited in some versions. Because the ever-growing, ever-expanding addition of new features might exceed available resources, a minimal “basic” version of a product can be maintained separately to ensure operation in smaller operating environments.

Other companies might use the “80/20 Rule”, where more basic product variations might support the needs of about “80%” of the users. Thus, the bulk of end-users are not subjected to the complexity (or extra expense) of features requested by the remaining 20% of users. These extra features are still available, but may be available in only select versions of the products.

9.7.3: Support and Help

Excellent customer service can help differentiate a product or brand and may lead to increased brand loyalty over time.

Learning Objective

Examine the role of support and help programs as a differentiating factor in product design

Key Points

• Today, most major telecommunications, IT and electronic companies run virtual support and help desks to provide user assistance around the world.
• Virtual product support allows organizations to optimize their overall IT support process and gain competitive advantages when it comes to delivering quick and efficient technical support.
• Companies, especially larger organizations, often offer internal technical support and help desk services to their staff for computer-related problems.
• In addition to virtual help desks, product support and help services are delivered via email, toll-free numbers, or at physical locations.

Key Term

extranet

A private computer network that uses Internet protocols and can be accessed by authorized individuals via the Internet.

Support and Help

Rapid globalization and expansion of technology are quickly making geography irrelevant; eliminating time constraints for customer support and help functions in organizations. Moreover, as more people telecommute from home and work from remote locations, internal information technology (IT) administrators must spend more time troubleshooting and fixing employees’ problems.

Customer Support

In today’s interconnected world, product support and help services are delivered through multiple channels.

An illustration that shows how companies have tried to streamline the customer support process.

This increased demand for technical services requires IT support organizations to be more agile in diagnosing and resolving product issues. Today, most major telecommunications, IT and electronic companies run virtual support and help desks to provide user assistance around the world. As a result, these organizations are able to optimize their overall IT support process and gain competitive advantages when it comes to delivering quick and efficient technical support.

The Role of Product Support and Help Services

Users of mobile phones, televisions, computers, software products, and other electronic or mechanical goods will occasionally need product support services. This service is usually offered in the form of a help desk that acts as an information and assistance resource. Product support professionals attempt to help users solve specific problems with a product—rather than providing training, customization, or other support services.

Most companies offer either free customer support or charge for premium customer support and help services. Companies, especially larger organizations, offer internal technical support and help desk services to their staff for computer-related problems.

Types of Product Support and Help Services

The Internet serves as a primary source for freely available product support. Virtual help desks, which allow organizations to virtually deploy IT technicians on demand to support users can efficiently manage and allocate organizational resources. Product support personnel can access any computer to provide support despite the end users’ or technicians’ location.

Some companies develop extranet sites, or customer websites that allow users to log calls and report incidents. Virtual help desks access these systems through support sessions where they can diagnose and fix computer issues quickly. This eliminates in-person customer service calls and ineffective phone-only tech support sessions, making the help desk more efficient.

However, many organizations still offer support services via email and toll-free numbers. Some companies also offer live support at physical stores and locations. Nevertheless, the Internet has allowed for a new form of product support to develop. Some online communities, which are moderated by product users, have emerged to give support where manufacturer support is lacking. These experienced users may provide advice and assistance with problems, or offer work-arounds to fellow users unable to find solutions on their own or through the vendor.

9.7.4: Deletion

Product deletion, either through product replacement or product elimination, results when products fail to meet company expectations.

Learning Objective

Illustrate the reasons for and the impact of product deletion

Key Points

• Companies are increasingly under pressure to evaluate their existing product line and make continuous decisions about adding new products or deleting existing ones.
• In addition to weak sales and profit, brands delete products that fail to align with marketing strategies or that demonstrate an unfavorable market outlook.
• Product failure rates vary by industry, but it is estimated that failure rates for new packaged goods range anywhere from 75% to 90%.

Key Term

revenue stream

A revenue stream is a method that a company, organization, or individual uses to collect money—often automated—from users of their product or service. In essence, it is a method of earning money and a way to protect it.

Example

• Coca-Cola Vanilla is the limited relaunch of the formerly produced Vanilla Coke soft drink from the early 2000s to compete with Pepsi Vanilla. Doubt was cast over the future of Vanilla Coke and its splinter beverages when the company announced the 2004 sales figures: 35 million unit cases in North America compared to 90 million in 2002; Vanilla Diet Coke dropped from 23 million unit cases in its inaugural year (2003) to 13 in 2004. On November 3, 2005, The Coca-Cola Company announced that Vanilla Coke and its diet counterpart would be discontinued in the United Kingdom and Ireland by early 2006. A day later, it was announced that it would be phased out in North America by the end of 2005.

Deletion

The twenty-first century marketplace is dynamic, fast-changing, and increasingly fickle. More and more businesses realize that no product lasts forever, and that sales levels can fluctuate dramatically over time. As a result, companies are under pressure to evaluate their existing product line and to make continuous decisions about adding new products or deleting existing ones. Brands must task their engineering and design teams to produce successful products that generate a consistent stream of sales for both short-term profit and long-term survival. An organization must establish a series of successful products, if that organization wants to maintain a consistent stream of sales or else grow sales over time. One reason for this pattern is the product life cycle. No product lasts forever, and sales levels can fluctuate dramatically over time.

Factors in Product Deletion

Deletion is the process of removing products that perform below market expectations or fail to meet company objectives. Deletion results in either product replacement or product elimination. Product deletion requires the company to evaluate its entire product mix and pinpoint where organizational resources can be allocated elsewhere to generate consistent revenue streams.

In addition to weak sales and profit, brands delete products that fail to align with marketing strategies, or that demonstrate an unfavorable market outlook. Market trends and consumer tastes often dictate whether products perform well in the long-term or taper off as a passing fad. However, factors including a company’s business model, culture (or local tastes), government politics and/or regulations, and product malfunction can all contribute to the removal of a product.

Failure rates of products vary by industry. Despite significant investment in product development and market research, it is estimated that failure rates for new packaged goods range anywhere from 75% to rates as high as 90% (source: catalinamarketing.com). When considering “innovative” new products, Harvard Professor John T. Gourville estimates that approximately half of all such products fail.

Business Impact of Product Deletion

Once a company eliminates a product from its offering, the brand must decide whether its goal is to maintain or increase sales. To maintain revenues, the company must continue investing in its remaining products and ensure they are competitively positioned in the marketplace. However, if the company seeks to increase sales in the near future, then it must introduce a new group of successful products to generate additional revenue.

Coca-Cola Vanilla

Coca-Cola Vanilla was the limited relaunch of Vanilla Coke from the early 2000s to compete with Pepsi Vanilla. It was phased out in North America by the end of 2005 due to low sales.

9.7.5: Organizational Requirements for Product Development and Management

Product development combined with product marketing make up the product management function within an organization.

Learning Objective

Construct the relationship between product development and product management

Key Points

• Product management spans many activities, from strategic to tactical, and can be shared by other roles, such as product engineering.
• Many interpretations exist for product management roles and functions and vary depending on company size, history and industry.
• Product management often serves an interdisciplinary role, bridging gaps within the company between engineering-oriented teams and commercially oriented teams.
• To facilitate the launch and marketing of new products, product management teams may perform tasks, including research and competitive intelligence, and sales training.

Key Term

lifecycle

the stages through which a product or its category bypass, from its introduction to the marketing, growth, maturity to its decline or reduction in demand in the market.

Organizational Requirements for Product Development and Management

Product management is an organizational lifecycle function within a company dealing with the planning, forecasting, or marketing of a product or products at all stages of the product lifecycle. Product development – the process of bringing new products to the marketplace – combined with product marketing, make up the product management function that oversees the launch of a company’s new products.

Product Launch

Some organizations set up product management teams so that they intersect between marketing and engineering activities.

Product management spans many activities, from strategic to tactical, and varies based on the organizational structure of the company. Product management can be a function separate on its own, or fall under marketing or engineering.

Functional Requirements of Product Management

Depending on the company size and history, product management has a variety of functions and roles, and can be shared across different departments, such as product development or engineering. A product manager investigates, selects, and develops one or more tangible products for an organization. However, product management also deals with intangible products, such as music, information, and services. Many interpretations exist for product management roles and functions and vary depending on company size, history, and industry.

The Intersection between Product Management, Product Development and Marketing

Frequently there is Profit and Loss (P&L) responsibility as a key metric for evaluating product management performance. In some companies, the product management function is the hub of many other business activities around the development and launch of a product. In other organizations, product management is one of several things that need to occur to successfully launch, monitor, and manage a product. Product management often serves an interdisciplinary role, bridging gaps within the company between different sets of expertise.

This intersection most commonly happens between engineering-oriented teams and commercially-oriented teams. Often, product management professionals serve as the middlemen between product development and engineering and marketing and sales teams. They often translate business objectives set for a product by marketing or sales into engineering requirements for product development. Conversely, the product management team may work to explain the finished product’s capabilities and limitations to marketing and sales professionals. This constant exchange between technical and business teams ensures that product benefits and features are accurately communicated to target audiences.

To facilitate this communication process, product management teams will perform activities including customer research, competitive intelligence, industry analysis, and competitive analysis. Likewise, product management works closely with marketing distributing messages, training sales people, developing market strategies, and communicating messages through advertising and public relations channels.

9.8: The Spread of New Products

9.8.1: The Diffusion of Innovation

The diffusion of innovation theory seeks to explain how, why, and at what rate new ideas and technology spread through cultures.

Learning Objective

List the four main elements that influence the spread of new ideas and technologies

Key Points

• Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations.
• Four main elements that influence the spread of a new idea are the innovation, communication channels, time, and the social system.
• Diffusion of innovations manifests itself in different ways in various cultures and fields and is highly subjective to the type of adopters and innovation decision process.
• Marketers are particularly interested in the diffusion process as it determines the success and failure of any new product introduced in the market.

Key Term

innovation

As used here, innovation describes an idea or product that is new to the company in question.

The Diffusion of Innovation

The diffusion of innovation is a theory that seeks to explain how, why, and at what rate new ideas and technology spread through cultures. The origins of the diffusion of innovation theory are varied and span multiple disciplines. Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations. He said diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system. Rogers synthesized research from over 508 diffusion studies and produced a theory for the adoption of innovations among individuals and organizations. Rogers (1962) espoused the theory that there are four main elements that influence the spread of a new idea:

1. The innovation – According to Rogers, an innovation is “an idea, practice, or object that is perceived as new by an individual or other unit of adoption.”
2. Communication channels – These are “the means by which messages get from one individual to another.”
3. Time – Rogers wrote that “the innovation-decision period is the length of time required to pass through the innovation-decision process. The rate of adoption is the relative speed with which an innovation is adopted by members of a social system.”
4. Social system – According to Rogers, a social system is “a set of interrelated units that are engaged in joint problem solving to accomplish a common goal.”

Diffusion of innovations manifest themselves in different ways in various cultures and fields and is highly subjective to the type of adopters and innovation decision process. Marketers are particularly interested in the diffusion process as it determines the success and failure of any new product introduced in the market. They usually look forward to procuring the largest amount of adoption within the shortest period of time. Thus, it is quite important for a marketer to understand the diffusion process so as to ensure proper management of the spread of the new product or service.

Market Share

With successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level.

9.8.2: The Rate of Adoption

The rate of adoption is defined as the relative speed with which members of a social system adopt an innovation.

Learning Objective

Discuss the factors leading to adoption of an innovation, and the strategies for making innovation sustainable

Key Points

• Critical mass is the point within the adoption curve that enough individuals have adopted an innovation such that that the continued adoption of the innovation is self-sustaining.
• The adoption process is an individual phenomenon the describes the series of stages an individual undergoes from first hearing about a product to finally adopting it.
• The diffusion process essentially encompasses the adoption process of several individuals over time.

Key Terms

intrinsic

Innate, inherent, inseparable from the thing itself, essential.

critical mass

A quantity or amount required to trigger a phenomenon.

The Rate Of Adoption

The rate of adoption is defined as the relative speed with which members of a social system adopt an innovation. It is usually measured by the length of time required for a certain percentage of the members of a social system to adopt an innovation. Within the rate of adoption there is a point at which an innovation reaches critical mass. Critical mass is the time in the adoption curve when enough individuals have adopted an innovation so that the continued adoption of the innovation is self-sustaining. Everett Rogers outlines several strategies to help an innovation reach this stage:

Diffusion of Innovation

This graph shows the innovation curve and the tipping point, or critical mass.

1. Have an innovation adopted by a highly respected individual within a social network, creating an instinctive desire for a specific innovation.
2. Inject an innovation into a group of individuals who would readily use an innovation.
3. Provide positive reactions and benefits for early adopters of an innovation.

The adoption process is an individual phenomenon describing the series of stages an individual undergoes from first hearing about a product to finally adopting it. On the other hand, the diffusion process signifies a group of phenomena, which suggests how an innovation spreads among consumers. Overall, the diffusion process essentially encompasses the adoption process of several individuals over time.

Five Adoption Factors

Rogers defines several intrinsic characteristics of innovations that influence an individual’s decision to adopt or reject an innovation:

1. Relative Advantage: How improved an innovation is over the previous generation.
2. Compatibility: The level of compatibility that an innovation has to be assimilated into an individual’s life.
3. Complexity or Simplicity: If the innovation is perceived as complicated or difficult to use, an individual is unlikely to adopt it.
4. Trialability: How easily an innovation may be experimented. If a user is able to test an innovation, the individual will be more likely to adopt it.
5. Observability: The extent that an innovation is visible to others. An innovation that is more visible will drive communication among the individual’s peers and personal networks, and will in turn, create more positive or negative reactions.

9.8.3: Stages of Adopters

The stages of adopters for the diffusion of innovation include knowledge, persuasion, decision, implementation, and confirmation.

Learning Objective

Describe the five stages detailed in Everett Rogers’ adoption process

Key Points

• Diffusion occurs through a series of communication channels over a period of time among the members of a similar social system.
• An individual might reject an innovation at any time during or after the adoption process.
• Previous terminology for the stages of adopters included awareness, interest, evaluation, trial, and adoption.

Key Terms

social system

The interaction of at least two personal systems or two persons acting in their own roles.

diffusion

The act of diffusing or dispersing something, or the property of being diffused or dispersed; dispersion.

Stages of Adopters

Diffusion of an innovation occurs through a five–step process. This process is a type of decision-making. It occurs through a series of communication channels over a period of time among the members of a similar social system. Everett Rogers categorizes the five stages (steps) of adopters as:

1. Awareness
2. Interest
3. Evaluation
4. Trial
5. Adoption

An individual might reject an innovation at any time during or after the adoption process. In later editions of The Diffusion of Innovations, Rogers changes the terminology of the five stages to: knowledge, persuasion, decision, implementation, and confirmation. However the descriptions of the categories have remained similar throughout the editions. The five stages of the adoption process are:

1. Knowledge: In this stage the individual is first exposed to an innovation but lacks information about that innovation. During this stage of the process the individual has not been inspired to find more information about the new idea.
2. Persuasion: In this stage, the individual is interested in the innovation and actively seeks information and details about it.
3. Decision: In this stage, the individual takes the concepts of change (switching cost), weighs the advantages and disadvantages of using the innovation, and decides whether to adopt or reject the innovation. Due to the individualistic nature of this stage, Rogers notes that it is the most difficult stage to acquire empirical evidence.
4. Implementation: In this stage, the individual employs the innovation to a varying degree depending on the situation. During this stage the individual determines the usefulness of the innovation and may search for further information about it.
5. Confirmation: Although the name of this stage may be misleading, in this stage, the individual finalizes his or her decision to continue using the innovation and may end up using it to its fullest potential.

Stages of Diffusion

There are five stages of the diffusion of innovation.

A chart that shows the five stages of decision innovation process – knowledge, persuasion, decision (reject or accept), implementation, and confirmation.

9.8.4: Applying the Diffusion of Innovation Theory

In applying the diffusion of innovation theory, it is important to understand potential adopters and their decision-making process.

Learning Objective

Illustrate how the diffusion of innovation theory influences consumer adoption of products and services

Key Points

• Important factors in decision making include whether the decision is made freely and implemented voluntarily, and who makes the decision.
• Opinion leadership tends to be organized into a hierarchy within a society, with each level having the most influence over other members in the same level, and on those in the level below it.
• Public consequences refer to the impact of an innovation on those other than the actor, while private consequences refer to the impact on the actor itself.
• Direct costs of the diffusion of innovation are usually related to financial uncertainty and the economic state of the actor. Indirect costs may be social, such as social conflict caused by innovation.

Key Terms

horizontal conflict

channel conflict between intermediaries at the same level within a channel

hierarchy

Any group of objects ranked so that every one but the topmost is subordinate to a specified one above it.

vertical conflict

psychological tension or anxiety between two alternatives that are not simply different, but where one is genuinely higher than the other

Applying the Diffusion Of Innovation Theory

In applying the diffusion of innovation theory, it is important to understand potential adopters and their decision-making process. Important factors in decision making include who makes the decision, and whether the decision is made freely and implemented voluntarily. Based on these considerations, three types of innovation decisions have been identified:

1. Optional innovation decision: This is made by an individual who is in some way distinguished from others in a social system.
2. Collective innovation decision: This is made collectively by all individuals of a social system.
3. Authority innovation decision: This is made for the entire social system by a few individuals in positions of influence or power.

There are categories of adopters that serve as a classification of individuals within a social system on the basis of innovativeness. According to Everett Rogers , these categories include:

Categories of Adopters

Categories of innovation adopters include innovators, early adopters, early majority, late majority, and laggards.

A chart that shows that innovators are the first category of adopters.

1. Innovators: Innovators are the first individuals to adopt an innovation. Innovators are willing to take risks, youngest in age, have the highest social class, have great financial liquidity, are very social, and have the closest contact to scientific sources and interaction with other innovators. Risk tolerance has them adopting technologies which may ultimately fail, though their financial resources help them absorb these failures.
2. Early adopters: This is the second fastest category of individuals who adopt an innovation. These individuals have the highest degree of opinion leadership among the other adopter categories. Early adopters are typically younger in age, have a higher social status, have more financial liquidity, possess an advanced education, and are more socially forward than late adopters. They are more discrete in adoption choices than innovators, as they realize that judicious choice of adoption will help them maintain a central communication position.
3. Early majority: Individuals in this category adopt an innovation after a varying degree of time. This time of adoption is significantly longer than with the innovators and early adopters. The early majority tends to be slower in the adoption process, has above average social status, has contact with early adopters, and seldom holds positions of opinion leadership in a system.
4. Late majority: Individuals in this category will adopt an innovation after the average member of the society does. These individuals approach an innovation with a high degree of skepticism. The late majority typically has below average social status, has very little financial liquidity, shares contact with others in the late majority and the early majority, and has very little opinion leadership.
5. Laggards: Individuals in this category are the last to adopt an innovation. Unlike some of the previous categories, individuals in this category show little to no opinion leadership. Laggards typically tend to be focused on “traditions”, are likely to have the lowest social status, have the lowest financial liquidity, be the oldest of all other adopters, and are in contact with only family and close friends.

Research done in the early 1950s at the University of Chicago attempted to assess the cost-effectiveness of broadcast advertising on the diffusion of new products and services. The findings were that opinion leadership tended to be organized into a hierarchy within a society, with each level having most influence over other members in the same level, and on those in the next level below it. The lowest levels were generally larger in numbers, and tended to coincide with various demographic attributes that might be targeted by mass advertising. However, the study found that direct word of mouth were far more influential than broadcast messages, which were only effective if they reinforced the direct influences. This led to the conclusion that advertising was best targeted, if possible, on those next in line to adopt, and not on those not yet reached by the chain of influence.

Consequences Of Adoption

There are both positive and negative outcomes when an individual or organization chooses to adopt a particular innovation. In her article, “Integrating Models of Diffusion of Innovations,” Barbara Wejnert details two categories for consequences: public and private. Public consequences refer to the impact of an innovation on those other than the actor, while private consequences refer to the impact on the actor itself. Public consequences are usually concerned with issues of societal well-being, while private consequences are usually concerned with the improvement of quality of life or the reform of social structures.

Benefits Versus Costs

The benefits of an innovation obviously refer to the positive consequences, while the costs refer to the negative. Direct costs are usually related to financial uncertainty and the economic state of the actor. Indirect costs may be social, such as social conflict caused by innovation.