16.3: Corporate Social Responsibility

16.3.1: The Financial Value of Social Responsibility

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

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

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

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

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

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

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.

15.3: Marketing Research and Consumer-Created Content

15.3.1: Researching Using Digital Media

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

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

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

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.

14.3: Selling Roles

14.3.1: Proactive Representatives

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

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

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

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.

13.3: The Advertising Campaign

13.3.1: Identifying Product Benefits

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

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

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

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

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

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

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

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

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

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.

12.3: The Promotion Mix

12.3.1: Advertising

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

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

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

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

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

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.

11.3: Channel Structures

11.3.1: B2C Channels

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

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

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

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

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

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

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

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.

9.3: Product Line and Product Mix

9.3.1: Adjustments to Products

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

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

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

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.