Market Segmentation:

PEST analysis is an examination of the uncontrollable factors; Political (e.g. taxation, tourism policy), Economic (e.g. inflation, unemployment and fuel costs), Social (e.g. workforce change, lifestyle, values, education) and Technological (e.g. new systems like reservations, home technology) changes which may affect the company and the market.

PEST analysis also includes;

The above information should be gathered on the basis of how it affects the company.

Threats and Opportunities; identifies the major threats (negative impacts from the external environment that could decrease the company’s sales and profits) and opportunities (positive impacts from the external environment that a company could use to increase its sales and profits).

The company should try to eliminate the negative impacts of the threats and use the opportunities in the best way. But the development of opportunities involve risk, that is why, managers must decide whether the expected returns justify the risks or not.

Strengths and Weaknesses; is the analysis of the company’s internal environment which identifies the strengths (strong areas of the company relative to its competitors) and weaknesses (weak areas of the company relative to its competitors).

The company should try to emphasize its strengths and correct weaknesses to use the opportunities.

o      Early adopters: are the next 13.5 percent, who are

§         opinion leaders in their communities and

§         adopt new ideas early but carefully.

o      Early majority: are

§         rarely leaders but

§         adopting new ideas before the average person.

o      Late majority:

§         adopt an innovation only after a majority of   people have tried it.

o      Laggards: are

§         suspicious of changes and

§         adopt the innovation only when it has become tradition.

Adopter categorization on the basis of relative time of adoption of innovations

Influence of Product Characteristics on Rate of Adoption

• The characteristics of the new product affect its rate of adoption. Some products catch on almost overnight e.g. Frisbees; but some take a long time to be accepted e.g. personal computers.  Five characteristics are important in influencing an innovation’s rate of adoption;

• Relative advantage: the degree to which the innovation is seen as superior relative to existing products.
• Compatibility: the degree to which the innovation fits the values and lifestyles of potential consumers. 
• Complexity: the degree to which the innovation is difficult to understand or use.
• Divisibility: the degree to which the innovation may be tried on a limited basis. (price may influence the divisibility)
• Communicability: the degree to which the results of using the innovation can be observed or described.

CHAPTER 4

Market Segmentation, Targeting, and Positioning for Competitive Advantage

Objective: explaining how companies segment, target and position for maximum competitive advantage

Markets

n      Originally, a market is a physical place where buyers and sellers gather to exchange goods and services.

n      In marketing, a market is the set of all actual and potential buyers of a product or service.

n      As marketing evolves in time, companies used different philosophies in their approaches to a market.  Their thinking about serving a market passed through three stages;

n      Mass marketing: here, the seller mass produces, mass distributes, and mass promotes one product to all buyers.  In the very beginning, McDonald’s offered just one type of hamburger to everyone. Mass marketing leads to lowest costs and prices and create the largest potential market.

n      Product-variety marketing: here, the seller produces two or more products that have different features, styles, qualities, sizes… Later, McDonald’s produced Big Mac to offer variety to buyers rather than appealing to different market segments. Product-variety marketing supports that consumers seek variety and change over time.

n      Target marketing: here, the seller identifies market segments, selects one or more of them, and develops products and marketing mixes for each. Today, McDonald’s offers different menus for different markets.

Micromarketing

n      Today companies are using target marketing instead of mass marketing and product-variety marketing. 

n      Even, today, target marketing is taking the form of micromarketing - designing the companies marketing programs to the needs and wants of narrowly defined segments, often called niche marketing.  “There will be no market for products that everybody likes a little, only for products that somebody likes a lot”.

Steps in Target Marketing

Market segmentation; dividing a market into distinct groups of buyers with different needs, characteristics or behaviors who might require separate products or marketing mixes. 

2. Market targeting; evaluating each market segment’s attractiveness and selecting one or more of the market segments to enter.

3. Market positioning; setting the competitive positioning (difference) for the product and creating a detailed marketing mix.

Bases for Segmenting Consumer Markets

n      There are various ways to segment a market.  A marketer has to try different segmentation variables, alone and in combination to understand the structure of the market in the best way. The major variables are;

• geographic segmentation

•  demographic segmentation

• psychographic segmentation

•  behavioral segmentation

Geographic Segmentation

n      Companies may divide the market into different geographic units such as nations, countries, regions, cities…

n      A company may decide to operate in one or more geographic locations but it must pay attention to the geographical differences in needs and wants.

n      E.g. McDonald’s serve corn soup in Japan, pasta salads in Rome, wine in Paris...

Demographic Segmentation

n      Companies divide the market into groups based on;

n      age and life-cycle: needs and wants change with age, that is why, a company may use different marketing approaches for different age and life-cycle groups. Lewi’s 501 and Pepsi “generation next” are mainly targeted to the young people.

n      gender: is mainly used in clothing, cosmetics, and magazines. Coca Cola Light is targeted to women, whereas Pepsi Max is to men.

n      income: is mainly used for automobiles, boats, clothing, cosmetics, financial services, and travel.  Credit cards are offered as ordinary, gold, platinum cards for different income groups; Holiday Inn offers upscale properties “Crowne Plaza”, economy properties “Hampton Inn”, luxury “Embassy Suites”; Vakko and Beymen target the high income group whereas Tiffany & Tomato to low income.

Psychographic Segmentation

n      Companies may divide the market into different groups based on;

n      social class: has a strong effect on preferences in cars, clothes, home furnishings, leisure activities… Sports International, Bilkent and Or-an are targeted to people at higher social class.

n      lifestyle: Mezzaluna targets to a business lifestyle, whereas the rest of the restaurants in Ankuva to a student lifestyle. 

n      personality: mainly used for cosmetics, cigarettes, and liquor.  Marlboro is targeted to the macho man with its macho Cowboy image.

Behavioral Segmentation

n      Companies may divide buyers into groups based on their knowledge, attitudes, uses or responses to a product. 

n      occasions: buyers can be grouped according to occasions when they buy or use an item.  Coca Cola is for “Always”

n      benefit sought: buyers can be grouped according to the benefits that they seek from the product. In the toothpaste market, benefit segments are - economic, medicinal, cosmetic, and taste; detergent market - cleanliness, cost; chewing gum - healthy teeth, fresh breath…

n      user status: markets can be segmented into groups of nonusers, ex-users, potential users, first-time users and regular users of a product. Potential users and regular users may require different kinds of marketing appeal from each other.

n      usage rate: markets also can be segmented into light-, medium-, and heavy- user groups. Most beer companies target the heavy beer drinker.

n      loyalty status: a market can also be segmented by consumer loyalty. Consumers can be loyal to brands (Alo), stores (Vakko), and companies (BMW) Consumer may be completely loyal (buy one brand all the time), somewhat loyal (favor one brand, sometimes buying others), no loyalty (each time they buy a different product)    

Segmenting International Markets

n      Large companies e.g. Coca Cola, Sony… sell products in many different countries which vary in their economic, cultural and political make up.  That is why international firms need to group their world markets into segments with distinct buying needs and behaviors.

n      Several variables can be used to segment international markets;

n      Geographic location; grouping countries by regions e.g. Europe, Middle East.

n      Economic factors; grouping by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs, therefore, the marketing opportunities that it offers.

n      Political and legal factors; grouping by the type of

§         stability of government,

§         receptiveness to foreign firms,

§         monetary regulations,

§         amount of bureaucracy.

Such factors can play a crucial role in a company’s choice of which countries to enter and how.

n      Cultural factors; grouping markets according to common languages, religions, values and attitudes, customs and behavioral patterns.

n      Some companies do not prefer to segment the international markets on the basis of geographic, economic, political, cultural, and other factors.  Instead they prefer to do intermarket segmentation in which companies form segments of consumers who have similar needs and buying behavior even though they are located in different countries.  E.g. teenagers live surprisingly parallel lives all around the world e.g. drink Coke, eat Big Macs, surf on the Net, wear blue jeans.  Recently Pepsi introduced its sugar-free Pepsi Max in 16 countries with a single ad for teenagers who like to be on the wild side.

Market Targeting
 Evaluating Market Segments

n      After segmenting the whole market, the firm has to evaluate these segments and decide how many and which ones to target. The company should enter segments only where it can offer superior value and gain advantages over competitors.

n      In evaluating different market segments, a firm must look at three factors:

n      segment size and growth; companies try to select the segment with “right size and growth” for themselves.  Some companies prefer to target segments with large current sales, a high growth rate, and a high profit margin. But smaller companies may find these large segments too competitive and may find themselves having lack of skills and resources, therefore, prefer to target smaller segments

n      Segment structural attractiveness; a segment may have the right size, but not offer attractive profits if there are;

1.      many strong competitors, (with large share of the market)

2.      many actual or potential substitute products - may limit prices and profits,

3.      buyers with power - buyers may have strong bargaining power relative to sellers so that they may force prices down, demand more services, set competitors against one another-all at the expense seller profitability

4.      Powerful suppliers who can control prices, reduce the quality or quantity of ordered goods and services may make a segment less attractive.

n      Company objectives and resources; a segment may have the right size and growth and be structurally attractive but it may not suit the long-run objectives and resources of the company in which case the company will not be successful.

Selecting Market Segments

n      The company must decide which and how many segments to serve, in other words, the company must decide which market-coverage strategy to adopt.

n      There are three market-coverage strategies:

n      undifferentiated marketing

n      differentiated marketing

n      concentrated marketing

 Undifferentiated Marketing

Undifferentiated

Differentiated Marketing

 Concentrated Marketing

Undifferentiated Marketing

n      A market-coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer.

n      Here, the offer focuses on what is common in the needs of consumers rather than on what is different. 

n      The company designs a product and a marketing program that appeal to largest number of buyers. It relies on mass advertising and a superior image in people’s minds. E.g. Levis 501.

n      Provides cost effectiveness because of its low production, inventory, transportation, advertising, marketing research costs.

n      Have difficulties in

1.      developing a product or brand that satisfies all consumers;

2.      keeping a strong place in the market and making profit, when several firms follow this strategy heavy competition develops;

3.      satisfying smaller segments

Differentiated Marketing

n      A coverage strategy in which a firm decides to target several market segments and designs separate offers for each. E.g. Nike offers athletic shoes for different sports such as running, aerobics, cycling, baseball, basketball, tennis…

n      These companies hope for

1.      higher sales;

2.      a strong place within each market segment;

3.      more loyal customers because the firm’s offerings match each segment’s desires better.

n      Creates better total sales, but increases the costs - developing separate marketing plans for the separate segments requires extra marketing research, sales analysis, promotional planning, channel management. 

n      Because of the high costs involved in this approach, the company must compare increased sales with increased costs when deciding to use differentiated marketing strategy. 

Concentrated Marketing

n      A market-coverage strategy in which a firm goes after a large share of one or a few submarkets.

n      Suitable for smaller companies to achieve a strong market place in the segments (or niches) that it serves because of its greater knowledge of the segment’s needs.

n      Involves higher-than-normal risks because the target may not respond or larger competitors may decide to enter the same market with greater resources (but offers operating economies because of specialization in production, distribution, and promotion.)

Choosing a Market-Coverage Strategy

n      Factors needed to be considered when choosing a market-coverage strategy are;

n      company resources; when the firm’s resources are limited, concentrated marketing is the better.

n      product variability; for uniform products e.g. grapefruit or steel, undifferentiated marketing is more suitable. But for products that vary in design e.g. cameras or automobiles, differentiated or concentrated is more suitable.

n      product’s stage in the life cycle; when the product is new, it is better to produce only one version of the product - undifferentiated or concentrated marketing. For mature products, differentiated marketing makes more sense.

n      market variability; when buyers have the same tastes and react the same way to marketing efforts, undifferentiated marketing is suitable.

n      competitor’s marketing strategies; when competitors use segmentation, undifferentiated marketing can be suicidal. On the contrary, when competitors use undifferentiated marketing, a firm can gain an advantage by using differentiated or concentrated marketing.

Positioning for Competitive Advantage

n      Once a company has decided which segments to enter, it must decide what “positions” it wants to occupy in those segments.

n      A product’s position is the place the product has in consumer’s minds relative to competing products. In other words, a product’s position is the set of perceptions, impressions, and feelings that consumers hold for the product compared with competing products. E.g. Toyota is positioned on economy, Mercedes and Cadillac on luxury and Porsche and BMW on performance, Volvo on safety.

n      Consumers simplify the buying process by categorizing products in their minds. Marketers do not leave their products’ positions to chance. They must plan positions that will give their products the greatest advantage in selected target markets.

Positioning Strategies

n      Marketers can position (differentiate) their products on;

n      product: a company can differentiate its physical product from the competitors e.g. product feature - Volvo provides safety, Delta Airlines offers wider seating and free in-flight telephone use; product performance - Vestel Washing Machine offers express washing, Rinso offers better whiteness; style and design - Porsche offers unique look; atmosphere - Hard Rock Café is special with its

interior design, Ciragan Palace with its building; place -  Swiss Hotel offers the best Bosphorus view...

n      service: a product can be differentiated by its speedy, convenient or careful service delivery e.g. Akbank offers full banking services at home, Garanti offers service during the lunch time, Osmanli Bank offers branches in supermarkets, Migros offers home delivery, McDonald’s offer training for its franchisees…

n      personnel: a company can hire better people than competitors do e.g. Singapore Airlines is well known with its beautiful flight attendants, IBM’s people are professional, McDonald’s people are polite…

n      image: a company may establish an image different from the competitors e.g. Motorola “quality”. Symbols, famous people and sponsorship can be used to create image.

n      benefits: a product’s benefit can be differentiated e.g. Nazar chewing gum protects from the devil eyes, Orbit offers teeth protection, Colgate offers better taste...     

n      usage occasions: a product’s position can be positioned according to the time of using the product e.g. Hilton “when American business take the family along, American business stays at Hilton”...

n      user category: a product can be positioned for some people e.g. Johnson&Johnson’s baby shampoo, Pepsi Max for adventurous men…

n      against another product: this approach can be named as competitive advertising where the company positions itself directly against one competitor e.g. Avis “we try harder” against Hertz, Wendy’s “where is the beef?” against McDonald, Sabah against Milliyet; Burger King against McDonald; Sheraton against Hilton…

n      product class dissociation: a product may also be positioned away from all competitors e.g. Sprite has positioned itself against the “cola” products, Yapi Kredi claims to be giving the best services…

n      price: a product can be differentiated by using its price.  The product would be having the lowest price in the market e.g. Alo.

n      After the company selects the right position for itself, it must communicate and deliver the chosen position with promotions.

CHAPTER 5 / (8)

Product and Services Strategy

Objectives:

• To define products
• To classify products,
• To discuss the decisions that marketers make regarding products.

What is a product?

n      A product is anything that can be offered to a market for attention, acquisition, use, or consumption that might satisfy a want or need.

n      Products include more than just tangible goods but intangible services e.g. banking, home repair, consultancy as well as ideas, persons, places, organizations and events or mixes of these entities.

n      Product is the key element in the overall marketing offering. Marketing mix begins with formulating an offering that brings value to customers. This offering includes both tangible goods and intangible services. The offer at one extreme may include purely physical goods and at the other extreme only services. In between there will be combination of both.

Levels of Products and Services

Product planners consider product and services on three levels: the core product, actual product, and augmented product;

n      Core product: is the basic problem-solving benefit that consumers seek when they buy a product. E.g. a woman buying a lipstick buys more than lip color but hopes as well. (in the factory we make cosmetics, in the store we sell hope-to look more beautiful. Similarly a person buying a mobile phone is buying freedom and on-the-go connectivity to people and resources).That is why, when designing products, marketers first define the core benefit that the product will provide to consumers.

n      Actual product: At second level product planner turns the core benefit into an actual product. Actual product may have five characteristics;

• a quality level,

•  features,

•  design,

• brand name,

•  packaging. 

n      Augmented product: offers additional consumer services and benefits.  E.g. after-sale services, warranty, installation, delivery and credit.

Product and Services Classification

n      Products are divided into two major categories: consumer products and industrial products:

n      Consumer products; are those bought by final consumers for personal consumption. 

Consumer products include;

• convenience products,
• shopping products,
• specialty products,
• unsought products. 

These products differ in the way how consumers buy and how marketers market them.

n      Convenience products: are

•  Frequently purchased

•  minimum comparison and effort

•  usually low priced and

•  widely distributed.

E.g. soap, candy, newspapers... 

Shopping products: are

• less frequently purchased,

• compared carefully on quality, price, style, suitability

• less distributed but given more sales support

E.g. furniture, clothing, used car.

n      Specialty products: have

•  unique characteristic and

• brand identification for some consumers who spend special effort to purchase

e.g. specific brands and types of cars, high-priced photographic equipment, custom-made men’s suits… e.g. Rolls Royce buyers do not compare specialty products, they only invest the time needed to reach the sellers.

n      Unsought products: are not known by the consumers or not normally thought to be bought e.g. life insurance, blood donation …they require a lot of promotions and marketing efforts

n      Industrial products; are those purchased for further processing or for use in conducting a business.  There are three groups of industrial products: materials and parts, capital items, supplies and services.

n      Materials and parts: include raw materials (farm products-wheat, cotton, fruits and natural products-iron coal), manufactured material (steel, cement, wires)  sold directly to industrial users.  Price and service are the major marketing factors rather than advertising.

n      Capital items: are industrial products that aid in the buyer’s production or operations including building installation and accessory e.g. factory buildings, fax machines, desk…

n      Supplies and services: supplies include e.g. paper, pencils.. Services include e.g. window cleaning, computer repair, legal consultancy … are usually supplied under contract.

n      A third category of products: Organizations, Persons, Places and Ideas.

• Organization marketing: consists of activities to sell organization itself. Organization marketing consists of activities undertaken to create, maintain or change attitudes and behavior of target customers toward an organization through PR or corporate image advertising campaigns.
• Person marketing: people can also be thought of as products. Person marketing consists of activities undertaken to create, maintain or change attitudes or behavior toward particular people such as presidents, entertainers, sports figures, and professionals. In addition to these people businesses, charities, and other organizations use well-known personalities to help sell their products or causes. (E.g. golf superstar Tiger Woods)
• Place marketing: activities undertaken to create, maintain or change attitudes and behavior toward a particular place such as countries, cities, destinations are called places marketing. There are two basic types of Place marketing:

• business site marketing and
• tourism marketing.

Ø      Business site marketing involves developing, selling, or renting sites for factories, stores etc.

Ø      Tourism marketing involves attracting vacationers to tourist locations and organizations (E.g. I Love New York Campaign, tourism destination marketing campaigns)

• Ideas can also be marketed. Generally called as social marketing, it involves the use of commercial marketing concepts and tools in programs designed to influence individual’s behavior to improve their well-being and that of society.

Social marketing programs include

o         Public health campaigns (smoking, alcoholism, drug abuse)

o         Environmental campaigns

o         Family planning

o         Human rights and racial equality

Product and Service Decisions

Marketers make product and service decisions at three levels:

·      Individual product decisions

·      Product line decisions

·      Product mix decisions

Individual Product Decisions

n      There are five important decisions to be made in the development and marketing of individual products;

• product attributes

• branding

• packaging

• labeling

• product-support services

Product and Service Attributes

n      The benefits that the product will offer would be communicated and delivered by product attributes such as (1) quality, (2) features, and (3) style and design.

n      Product Quality (moving from “freedom from defects” concept to “creating customer value and satisfaction”) Total Quality Management: an approach in which all company’s people are involved in constantly improving the quality of products, services and business processes

Product quality (customer value) has two dimensions - level and consistency. Companies must choose a quality level that matches target market needs and the quality level of competing products (performance quality). Consistency refer to delivering the same quality consistently-consistency in delivering a targeted level of performance – conformance quality.  

n      Product Features

Features are a competitive tool for differentiation of the company’s product from competitor’s products.  In order to add new features to its products, companies can survey its customers.

n      Product Style & Design

Product design contributes to a product’s usefulness and appearance. Good design can attract attention, improve product performance, cut production costs and give the product a strong competitive advantage. (Swiffer CarpetFlick)

Branding (the most distinctive skill of professional marketers is their ability to build and manage brands). Brands represent consumers’ perceptions and feelings about a product and its performance.

n      A brand is a name, term, sign, symbol or design or a combination of all these to identify the goods and services of one seller or group of sellers and to differentiate them from those of competitors. There is hardly anything in the market without a brand name, including even most convenient goods.

n      For the consumers; brand names help consumers identify products, get an idea about the product quality and promise consistency in quality.

n      For the producers; brand names provide legal protection for unique product features and prevent them to be copied by competitors. Plus, helps the seller to segment markets.

n      Brand Equity

Brand equity is the value of a brand. Brands vary in the amount of power and value that they have in the marketplace. A powerful brand has high brand equity. If the brand has higher brand loyalty, name awareness, perceived quality; the brand is assumed to be having strong brand equity.

n      Branding Decisions

            Major branding decisions are:

§         Selecting the brand name,

§         Finding a brand sponsor,

§         Identifying the brand strategy,

§         Repositioning the brand.

n      Brand Name Selection: A good brand differentiates the product, communicates its benefits and suits the target market and marketing strategies.

n      Brand Sponsor: A producer has four sponsorship options. The product may be sold;

1.      as a manufacturer’s (producer’s) brand,

2.      to a reseller (middleman) who give it a private brand (who create and own the brand),

3.      as a licensed brand (a company may be licensed to sell its products under another company’s brand), or

4.      as a co-brand (two companies combine their brands and create a new one).

n      Brand strategy: A company has four choices;

n      line extension; using a successful brand name to introduce additional items in an existing product category under the same brand name, such as new flavors, forms, colors, added ingredients, or package sizes. Meets consumer desires for variety, works best when it decreases competition.

n      brand extension; using a successful  brand name to launch a new product in a new category. Helps the

company to introduce new product categories more easily, provides instant recognition and acceptance, decreases advertising costs.  But it may prove dangerous in case of failure, because it may tarnish the company’s whole image.   

n      Multi-brands; a strategy under which a seller develops two or more brands in the same product category. Offers a way to establish different features and appeal to different types of buyers, therefore, may increases the market share of the company.

n      New brands; introducing new brand names in new product categories. Demands lot of company resources, that is why, nowadays some companies use mega-brand strategies - spending resources only on brands that can achieve the number one or two market share position in their categories and dropping the weaker brands. 

Four Brand Strategies

                                                                       Product Category

Packaging

n      The activities of designing and producing the container or wrapper for a product.

n      There are three packages - the product’s primary container; a secondary package that is thrown away when the product is about to be used; and the shipping package to ship and store the product.

n      Packaging decisions are based on cost and production.

n      Packages attract attention, describe the product and make the sale. (in an average supermarket there are between 15-17.000 items, a typical shopper passes by 300 items per minute and 60% of all purchases are made on impulse)

Labeling

n      Labels may range from tags attached to products to graphics that are part of the package.

n      Labels may

1.      identify, (Sunkist Oranges, Washington or Yafa oranges)

2.      grade,

3.      describe, (who made it, where & when it was made, its content and how to use it safely)

4.      promote (through attractive graphics) the product or brand and support its positioning.

n      Labels can mislead customers, fail to describe important ingredients or fail to include important safety warnings. That is why, laws regulate labeling in

§         unit pricing,

§         shelf life, and

§         nutritional value

Product-Support Services

n      The product-support services that augment the actual product, can help the product to gain a competitive advantage and create customer loyalty.

n      The company should periodically survey its customers to assess its customers’ satisfaction and to get new ideas for product improvements.

n      E.g. services to handle complaints, credits, maintenance, technical issues, customer information.

Product Line Decisions

n      A product line is a group of products that are;

·        closely related because they function in a similar manner,

·        sold to the same customer groups,

·        marketed through the same types of outlets

·        fall within given price range. E.g. Nike produces several lines of athletic shoes.

n      In developing product line strategies, marketers decide on;

n      product line length; the number of items in the product line. Product line length is influenced by company objectives. If the company wants to position itself as a full-line company or wants to have high market share and growth, it will be logical to prefer to carry a longer line. Product lines tend to lengthen over time. However, such line increases raise the costs of design, inventory, production, promotion. That is why, pruning the budget is inevitable.

n      increasing the length of the product line; there are two ways - by stretching and filling. 

·        Product line stretching occurs when a company lengthens (downward, upward or both ways) its product line beyond its current range. E.g. Xerox, Marriott Hotels... 

·        On the other hand, product line filling occurs when a company adds more items within the present range of the line. Reasons are; reaching for extra profit, trying to satisfy dealers, use excess capacity, be the leading full-line company and plug holes to keep out competitors. E.g. Sony solar-powered and waterproof Walkman.

Product Mix Decisions

n      A product mix (or product assortment) includes all the product lines and items that a particular seller offers for sale. E.g. Avon’s product mix includes cosmetics, jewelry, fashion each with sub-lines such as lipstick, eyeliner…

n      A company’s product mix has four dimensions: width, length, depth, and consistency.

n      Width; refers to the number of different product lines the company carries. E.g. Procter & Gamble has a product mix of six lines as detergents, toothpaste, bar soap, deodorants, fruit juice, and lotions.

n      Length; refers to the total number of items that the company carries.  E.g. P&G has 42 different products under its six lines.

n      Depth; refers to the number of versions offered of each product in the line. E.g. one of the products of P&G may have different sizes and formulations.

n      Consistency; refers to how closely related the various product lines are. E.g. P&G products are consistent in the way that they are all consumer products, but inconsistent in the way that they perform different functions for buyers.

Services Marketing

n      Service industries are quite varied: governmental services - courts, hospitals, police, fire departments, postal services, schools etc; private nonprofit organizations - museums, colleges, hospitals etc; business organizations - airlines, hotels, restaurants, advertising, real estate etc.

Nature and Characteristics of a Service

n      Service intangibility; means that services cannot be seen, tasted, felt, heard or smelled before they are bought. That is why, buyers look for “signals” for service quality from the place, people, price, equipment and communications that they can see.

n      Service inseparability; means that services cannot be separated from their providers. If a service employee provides the service, then the employee is part of the service. Both the provider and the customer affect the service outcome.

n      Service variability; means that the quality of services depends on who provides them, plus, when, where, and how they are provided. E.g. within a given Marriott hotel, one reception desk agent may be cheerful and efficient, another would be unpleasant and slow. Service providers’ service quality depends on his energy and his frame of mind at the time of each customer encounter.

n      Service perishability; means that services cannot be stored for later sale or use. E.g. the demand for public transportation during the rush-hour.  Service perishability is a serious problem when demand fluctuates. Here, the marketer needs to design strategies for producing better match between demand and supply. E.g. hotels charge lower rates in the off-season to attract more guests; restaurants hire part-time employees to serve during peak periods; tour operators and airline companies have last-minute sales.

Marketing Strategies for Service Firms

n      Services are different than tangible products. That is why, additional marketing approaches are needed to market services.

n      In service businesses, the customer and front-line service employees interact.  Service providers must interact effectively with customers to satisfy them. That is why companies take care of their employees to make profit. Because they believe that it is only satisfied and productive service employees that can create satisfied and loyal customers.

n      Internal marketing; means that the service firm must effectively train and motivate its customer-contact employees to provide customer satisfaction.

n      Interactive marketing; means that service quality depends on the quality of the buyer-seller interaction during the service encounter.

n      In order to increase the profit margin, there are three major marketing tasks for service companies;

1. Managing Service Differentiation

n      Differentiated offer, delivery and image are the keys for the solution to price competition.

n      The offer can provide innovative features like e.g. in-flight movies, advance seating, frequent-flyer award programs in an airlines. British Airways offers a sleeping compartment and hot showers.

n      The delivery can be differentiated by having better customer-contact people, developing a superior physical environment, or by designing a superior deliver process like e.g. home banking can be provided as a better way to deliver banking services.

n      The image can differentiate the service company through symbols and branding.

2. Managing Service Quality

n      A service firm can also differentiate itself by delivering consistently higher quality than its competitors do.

n      Service quality will always vary, depending on the interactions between employees and customers. A company cannot always prevent service problems but can recover them. A good service recovery can turn angry customers into loyal ones. Companies empower front-line service employees (giving authority to do whatever it takes to keep customers happy) to recover problems.

n      Good service companies also communicate their qualities to employees and provide performance feedback.

3. Managing Service Productivity

n      Service productivity can be increased by;

n      training the employees better or hiring new  and better employees

n      industrializing the service with equipment and standardized production as in McDonald’s

n      using technology to save time and money

n      Trying to increase the productivity would reduce quality and diminish customer service. That is why, some service providers accept to have lower productivity levels.

International Product and Service Marketing

International product and service marketers must;

n      first; figure out what products and services to introduce and in which countries

n      second; decide how much to standardize or adapt their products and services

n      Standardization helps a company to build a consistent worldwide image, reduces production, research and development, advertising and product design costs.

n      Adoption helps a company to develop its product offering in a way that satisfies customers with different attitudes, buying behaviors and cultures.

CHAPTER 6 (9)

New-Product Development and Product Life-Cycle Strategies

Objective:

• Finding and developing new products
• Managing them successfully over their life cycle.

New-Product Development Strategy

Because of the rapid changes in;

• consumer tastes,
• technology, and
• competition,

companies must develop new products and services.

A firm can obtain new products in two ways;

·        Through acquisition; buying a whole company, a patent, or a license.

·        Through new-product development;

§         developing original products,

§         product improvements,

§         product modification,

§         creating new brands

New-product Development Process

In order to find and develop successful products, the marketers must go through the following stages;

• idea generation

• idea screening

• concept development and testing

• marketing strategy

•  business analysis

• product development

• test marketing

• commercialization

Idea Generation

·        New product development starts with idea generation - the systematic search for new-product ideas.

·        Major sources of new-product ideas include;

• Internal sources such as research & development department, executives, salespeople;

• Customers;

• Competitors;

• Distributors and suppliers;

•  Others - trade magazines, seminars, government agencies, new-product consultants, marketing research firms, universities, inventors.

Idea Screening

·        Idea screening reduces the number of new ideas by screening new-product ideas in order to spot good ideas and drop poor ones as soon as possible. (short listing)

·         The following factors are taken into consideration in idea screening;

• market size,

•  product price,

•  product development time and costs,

• production costs,

•  rate of return and

•  type of customers.

Concept Development and Testing

An attractive idea must be developed into a product concept.

• Concept Development; is a detailed version of the new-product idea stated in meaningful consumer terms.
• Several concepts can be developed for a product idea e.g. the idea of developing an electric car may be created in the following product concepts;
• an inexpensive family car;
• a medium cost sporty car for young people;
• an inexpensive car for conscious people who look for basic transportation, low fuel cost, and low pollution. The marketer must test these alternatives.
• Concept Testing; involves testing new-product concepts with target consumers before turning the new ideas into actual new products. The concepts may be presented to consumers symbolically or physically. After being exposed to the concept, consumers may be asked to tell their opinions. The answers will help the company decide which concept has the strongest appeal.

Marketing Strategy Development

• After all the concepts are tested, the company must develop the initial marketing strategy to introduce the best concept to the market. 
• At this stage, the marketing strategy consists of three parts;
• the first part; describes the

•  target market,

•  the planned product positioning, and

• the sales, market share and profit goals for the first year.

• the second part; outlines the product’s planned

•  price,

•  distribution, and

•  marketing budget for the first year.

• the third part; describes the planned long-run

• sales,

•  profit goals, and

•  marketing mix strategy.  

Business Analysis

• Once the product concept and the marketing strategy are decided, the marketer should evaluate the business attractiveness of the proposal.
• Business analysis involves the projections for the sales (by looking at the sales history of similar products and getting the market opinion), costs (by looking at the forecasted sales figures), and profit for the new product to find out whether they satisfy the company’s objectives. If they do, the product can move to the product-development stage. 

Product Development

• Here, the product concept is developed into a physical product (prototype) to understand whether the product idea can be turned into a workable product.
• Prototypes are tested under laboratory and field conditions to make sure that the product performs safely and effectively.

Test Marketing

• After the prototype is tested under the laboratory and field conditions, the next stage is testing the product under more realistic market settings.
• Test marketing allows the company to test the product and its marketing program (e.g. positioning strategy, advertising, pricing, distribution, branding, packaging & budget) before going into the full introduction.
• When introducing a new product requires a big investment, or when management is not sure of the product or marketing program, the companies do a lot of test marketing.

Commercialization

• Commercialization is the introduction of a new product into the market.
• At this stage, the company may need to spend between $10 million and $100 million for advertising and sales promotion in the first year.
• At this stage, the company should decide when and where the product will be introduced.

Product Life-Cycle Strategies

• After launching a new product, management wants it to enjoy a long and happy life, although it does not expect the product to sell forever.
• The product life cycle (PLC) is the course that a product’s sales and profits take over its lifetime. It has five stages;

1.      Product development begins when the company develops a new-product idea. During product development, sales are zero and the company’s investment costs mount.

2.      Introduction is a period of slow sales growth as the product enters in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction.

3.      Growth is a period of rapid market acceptance and increasing profits.

4.      Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition.

5.      Decline is the period when sales fall off and profits drop.

Product Life-Cycle

• The PLC concept is used by the marketers to forecast product performance or to develop marketing strategies.
• But all products do not follow the PLC in the same way. Some products are introduced and die quickly; others stay in the maturity stage for a long time. Some enter the decline stage and are then cycled back into the growth stage through strong promotion or repositioning.

• The major drawbacks of this cycle is that it is difficult
  • to identify which stage of the PLC the product is in,
  • to determine the factors that affect the product’s movement through the stages, to forecast the
    • sales level at each PLC stage,
    • length of each stage,
    • shape of the PLC curve.

Introduction Stage

• The introduction stage starts when the new product is first launched.
• Here, sales growth is slow and profits are negative or low, because of low sales and high distribution and promotion expenses.
• Promotion spending is high to inform consumers of the new product and get them to try it.
• The company and its competitors produce the basic versions of the product because the market is not ready for the different versions of the product yet.

The introduction stage strategies are;

• Rapid-skimming strategy (high price/high promotion); here the company targets the “cream” of the buyers (buyers with high income) so the price of the new product or service is set high.  When the company wants to attract these people rapidly (quickly), it will conduct a heavy promotional campaign for the product.
• Slow-skimming strategy (high price/low promotion); the difference between slow- and rapid-skimming is in the amount spent on promotion.  Here less money is spent on promotion. 
• Rapid-penetration (low price/high promotion); the price level is the key difference between penetration and skimming strategies.  When the market is price sensitive, penetration is a better strategy.  In penetration, prices are set low to capture as many buyers as possible.  When most of the potential buyers are unaware of the product, they use heavy promotion.  Here the risk is attracting heavy competition because a lot of companies may like to copy. 
• Slow-penetration strategy (low price/low promotion); here the new product or service is introduced at a low price with a low level of promotion.  Again, the potential market is large and price sensitive but aware of the new service or product that is why, the level of promotion is low.       

Growth Stage

• If the new product satisfies the market, it will enter a growth stage, in which sales climb quickly.
• Early adopters buy the product.
• New competitors enter the market when they are attracted by the opportunities for profit. They introduce new product features so the market expands.
• Sales increase, prices remain the same or fall slightly, promotional spending stays the same or increase slightly.
• Profits increase as promotion costs are spread over a large volume (sales) and as unit production costs fall.

The growth stage strategies are;

Ø      improving product quality and adding new product features and models

Ø      entering into the new market segments

Ø      entering into the new distribution channels

Ø      shifting some advertising from building product awareness to building product conviction and purchase

Ø      lowering prices at the right time to attract more buyers in order to sustain its rapid growth and meet competition.

• By spending a lot of money on product improvement, promotion, and distribution, the company can gain a dominant position in the market but, as a result of this, it gives up maximum current profit and hopes to make it in the next stage.

Maturity Stage

• At some point, a product’s sales growth will slow down, and the product will enter a maturity stage which lasts longer than the previous stages.
• Here, competition is greater because of the overcapacity. They drop their prices, increase advertising and sales promotions, and increase their R&D budgets to find better products. As a result, profits decrease, weaker competitors leave the market and only the well-established competitors remain.
• The product managers should consider modifying their market, product and marketing mix rather than defending their product. 

• The maturity stage strategies are;
  • In modifying the market,

Ø      the company looks for new users and market segments e.g. Johnson & Johnson Baby Shampoo is marketed to adults,

Ø      the company looks for ways to increase usage among present customers e.g. “Sut için Sut içirin” campaign of Mis Süt.

Ø      Or the company may want to reposition the brand to appeal to a larger or faster-growing segment.

• Or the company may try modifying the product

Ø      by changing its product’s features,

Ø      quality or style to attract new users e.g. Sony adds new styles and features to its Walkman and Discman lines, Algida adds new flavours and ingredients to its current products, Burger King introduces its new Fish Burgers or car manufacturers restyle their cars to attract buyers who want a new look.

• Or the company can try modifying the marketing mix

By changing one or more marketing mix elements to improve sales;

Ø      They can cut prices to attract new users and competitors’ customers.

Ø      They can launch a better advertising campaign or use heavy sales promotions.

Ø      The company can also move into larger market channels - mass merchandisers.

Ø      Or the company can offer new or improved services to buyers.

Decline Stage

• Most product forms and brands’ sales decline.
• Here, the sales may become zero suddenly or may drop to a low level where they continue for many years.
• As sales and profits decline, firms withdraw from the market.
• The remaining companies prune their product offerings, drop smaller segments or channels, cut the promotion budget or reduce their prices further.
• Here, the company should decide whether to maintain, harvest, or drop its product in the decline stage.

§         Management may decide to maintain its brand without changing it in the hope that the competitors would leave the market. Or management may decide to reposition the brand in the hope of moving it back into the growth stage of the product life cycle.

§         Management may decide to harvest the product by reducing costs (equipment, advertising, sales force) hoping that sales will remain.

§         Or the management may decide to drop the product from the line by selling it to another firm or simply liquidate it at salvage value.

Competitor’s Strategies and Prices

Competitors’ Costs, Prices, and Offers

• Another external factor affecting the company’s pricing decisions is competitors’ costs and prices and reactions to the company’s own pricing moves.
• The company’s pricing strategy may affect the nature of the competition e.g. if a company follows a high-price strategy, it may attract competition. A low-price strategy may stop competitors or drive them out of the market. Here, the company must learn the price and quality of each competitor’s offer and price its offer relative to competition.

Other External Factors

Some other factors must be considered when pricing;

• Economic conditions; such as boom or recession, inflation, and interest rates affect pricing because they affect
  • the costs of production and
  • consumer perceptions of the product’s price and value.
• Resellers; should be considered in pricing because they should get a fair profit so that they help the company to sell its products.
• Government; laws that affect pricing must be known so that the company makes sure that their pricing policies are defensible.
• Social concerns; the company’s sales, market share, profit goals must be viewed by societal considerations.

All these factors indicate that pricing decisions are subject to an incredibly complex set of

• Customer
• Company
• Competitive
• Environmental forces

General Pricing Approaches

• Companies set prices by selecting a general pricing approach that includes one or more of the following factors:

•  product cost,

•  consumer perceptions of the product’s value - demand,

• competitor’s prices and other external and internal factors.

• Following pricing approaches are possible to use;

§         the cost-based approach (cost-plus pricing, break-even analysis, and target profit pricing). This is the simplest pricing method. It involves adding a standard mark-up to the cost of the product

§         the buyer-based approach (value-based pricing). Setting prices based on buyer’s perceptions of value rather than on the seller’s cost

§         the competition-based approach (going-rate and sealed-bid pricing)

Major Considerations in Setting Price

Cost-Based Pricing

1. Cost-plus pricing “mark-up pricing”;

• is the simplest pricing method in which a standard mark-up (profit margin) is added to the cost of the product e.g. the cost of producing a toaster is $16 and the producer wants to make a 25% profit, therefore sets the price at $20.
• the biggest benefits of this approach is that when all the companies use this approach, price competition is minimized.

2.   Break-even pricing or target profit pricing;

• in which the firm tries to determine the price at which it will break even or make the target profit that it wants.
• Target pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels.
• E.g. fixed cost is $6 million; variable costs are $5 per unit. The total revenue curve reflects the price. If the revenue is $12 million on 800.000 units, the price is $15 per unit. At the $15 price, the company must sell at least 600.000 units to break even where the total revenues equal to total costs, $9 million. If the company wants to target $2 million profit, it must sell at least 800.000 units to obtain $12 million total revenue needed to cover $10 million total costs.

• The higher the price, the lower the company’s break-even point. But as the price increases, demand decreases. Although this approach helps the company to determine minimum prices needed to cover its expected costs and profits, they do not take the price-demand relationship into consideration.

Buyer-Based Pricing

• Uses buyer’s perceptions of value as the key to pricing. Here, the marketer set the price based on the consumer’s desires and then design the product and the other marketing-mix variables.
• Cost-based pricing is product driven, but buyer-based pricing is consumer driven. Therefore, it begins with analysing consumer needs and value perceptions. 

Competition-Based Pricing

1. Going-rate pricing;

• in which a firm bases its prices on competitor’s prices. The firm might charge the same, more or less than its competitors.
• Going-rate pricing is popular when elasticity of demand is hard to measure and when the firms do not want harmful price wars.

2.) Sealed-bid pricing;

• in which a firm bases its price on how it thinks that competitors will price. Here, the firm wants to win a contract and winning the contract requires pricing less than other firms.
•  

New-Product Pricing Strategies

• Pricing strategies usually change as the product passes through its life-cycle. At the introduction stage, basically there are two types of products - imitations of existing products and innovative patent-protected product.
• A company with an innovative patent-protected product has two pricing strategies;

§         Market-skimming pricing

§         Market-penetration pricing

Market-Skimming Pricing

• When a new product is introduced, the company charges the highest price that it can to skim (as skimming the cream on the top of the fresh milk) the market. The objective is to earn the highest possible gross profit. As initial sales slow down, and competitors start to introduce similar products, the company must lower its prices.
• Here, the company skim off small but profitable market segments.
• Market skimming makes sense;

1. When the product’s quality and image support its high price and enough buyers want it at that price,

2. When the costs of producing a smaller volume are not so high that they eliminate the advantages of charging more,

3. When competitors do not enter the market easily and cut the prices.

Market-Penetration Pricing

• Market-penetration pricing is that setting a low price for a new product in order to attract a large number of buyers and a large market share.
• The high sales volume results in falling costs which helps the company to cut its price even more.
• Market-penetration makes sense; (1) when the market is price sensitive (2) When production and distribution costs fall as sales volume increases, (3) when the low price keeps the competitors away.

Product-Mix Pricing Strategies

• When the new products are part of product mix, the strategy for setting a product’s price often has been changed. Here, the firm looks for a set of prices that maximizes the profits for the total product mix.
• The product-mix pricing strategies are;

•  product line pricing

• optional-product pricing

•  captive-product pricing

• by-product pricing

•  product-bundle pricing

Product Line Pricing

• Companies usually develop product lines rather than single products e.g. Nike, Kodak have serious of products in the same product category. In product-line pricing, the company must decide on the price steps to set between the various products in the line.
• The price steps should take into account; (1) cost differences between the products, (2) customer evaluations of their different features, (3) competitors’ prices. Here, the marketer’s task is to establish perceived quality differences that support the price differences.

Optional-Product Pricing

• Optional-product pricing offers to sell optional or accessory products along with their main product e.g. nowadays automobile companies like Ford offer a set of popular options such as air conditioning, power windows and door locks, and a rear window defroster at a package price.

Captive-Product Pricing

• Captive-product pricing is setting a price for products that must be used along with a main product.
• Producers of the main products (e.g. computers, cameras...) often price them low but charge more for the supplies e.g. Polaroid prices its cameras low but camera films high where it makes its profit. Or Gillette sells low-prices razors but makes money on the replacement blades.
• This strategy is called two-part pricing. The price of the service is broken down into a fixed fee plus a variable usage rate. E.g. a telephone company charges a monthly rate (the fixed fee) plus charges for extras (the variable usage rate). Amusement parks charge admission plus fees for food, attractions and rides over a minimum number. The fixed amount should be low enough to attract usage of the service; profit is made on the variable fees.

By-Product Pricing

• Setting a price for by-products in order to make the main product’s price more competitive.
• In by-product pricing, the manufacturer looks for a market that would buy the company’s by-products and accepts the price that covers more than the cost of storage and delivery.

Product-Bundle Pricing

• Combining several products and offering the bundle at a reduced price. E.g. season tickets of sports teams are cheaper than the cost of single tickets, hotels’ and agencies’ special priced packages, software packages of computer makers.
• This approach can promote the sales of products that consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.

Price-Adjustment Strategies

Companies adjust their prices according to the differences in customers and changing situations. There are several price adjustment strategies;

• discount and allowance pricing
• segmented pricing
• psychological pricing
• promotional pricing
• geographic pricing
• international pricing

Discount and Allowance Pricing

• Discount is a straight reduction in price on purchases during a stated period of time. There are different types of discounts;

o       Cash discount; is a price reduction to buyers who pay their bills promptly.

o       Quantity discount; is a price reduction to buyers who purchase in large volume.

o       Functional discount (trade discount); is offered by the seller to trade channel members who perform certain functions like selling, storing, record keeping.

o       Seasonal discount; is a price reduction to buyers who purchase merchandise or services out of season.

• Allowances are another type of reduction from the list price.

§         trade-in allowances; are price reductions given for turning in an old item when buying a new one which is common in the automobile industry

§         Promotional allowances; are payments or price reductions to reward dealers for participating in advertising and sales-support programs.

Segmented Pricing

• Adjusting the basic prices to allow differences in customers, products, and locations. In this approach, the company sells a product or service at two or more prices. There are different segmented pricing forms;

• In customer-segment pricing; different customers pay different prices for the same product or service e.g. museums charge students and senior citizens lower.

• In product-form pricing; different versions of the product are priced differently but not according to differences in their costs e.g. the most favorite or top model of the product line may have higher price.
• In location pricing; a company charges different prices for different locations, even though the cost of offering each location is the same e.g. theatres vary their seat prices, universities charge higher tuition for out-of-state students
• In time pricing; a firm varies its price by the season, the month, the day, and even the hour e.g. telephone companies offer lower “off-peak” charges, resorts give seasonal discounts.  

Psychological Pricing

Price says something about the product, especially about its quality.

§         in psychological pricing; sellers consider the psychology of prices rather than economics.

§         E.g. Heublein priced its new vodka brand high against Smirnoff which gave the customers the impression that Heublein is better than Smirnoff, therefore, the sales grow rapidly.

§         The difference between $300 and $299.95 is just five cents but the psychological difference can be much greater. Some consumers will see the $299.95 as a price in the $200 range rather than the $300 range.  

Promotional Pricing

• Temporarily pricing products below list price, and sometimes even below cost, to increase short-run sales. There are several forms;

§         Loss leaders; supermarkets generally price  a few items as loss leaders to attract customers to the store in the hope that they will buy other items at normal markups.

§         Special-event pricing; products are priced low in certain seasons to draw more customers.

§         Cash rebates; are offered to customers who buy the product from dealers within a specified time. Rebates would be offered as low-interest financing, longer warranties, or free maintenance to reduce the consumer’s price. 

§         Discounts; would be offered to reduce the price for the customer. 

Geographic Pricing

• Deciding how to price products for customers located in different parts of the country or world. Here, the company must decide whether to charge the distant customers higher to cover its shipping costs.

§         In FOB-origin pricing (free-on-board); the customer is responsible to pay for the shipping.

§         In uniform delivery pricing; the company charges the same price plus the average shipping cost, regardless of the customer’s location.

§         In zone pricing; the company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

§         In basing-point pricing; the seller selects a given city as a “basing point” and charges all customers the shipping cost from that city to the customer location.

§         In freight (cargo)-absorption pricing; the seller absorbs (covers) all or part of the actual freight (shipping) charges to get some desired customers.

International Pricing

• Companies that market their products internationally must decide what prices to charge in different countries.
• The company either set a uniform price or adjust their prices to reflect local market conditions.
• Factors that influence price adjustment would be;

• economic conditions
• competitive situations
• laws and regulations
• Costs e.g. a pair of Levis is sold for $30 in the US, but $63 in Tokyo and $88 in Paris. Or McDonald’s Big Mac is $2.25 in the US but $5.75 in Moscow.
• Selling strategies and market conditions e.g. a Gucci handbag is $60 in Milan but $240 in the US.

Advantages

•  low cost per contact

• ability to reach customers where and when salespersons cannot

• great scope of creative versatility and dramatization of messages

• ability to create images that salespersons cannot - “institutional advertising” is a form of advertising done to create a favourable image of an organization.

• Non-threatening nature of non-personal presentation

• potential to repeat message several times

•  prestige and impressiveness of mass-media advertising 

Disadvantages

• inability to “close” sales

• advertising “clutter”

• customer’s ability to ignore advertising messages

• difficulty getting immediate response or action

•  difficulty measuring advertising effectiveness

•  relatively high “waste” factor

Possible Advertising Objectives

Advertising aims to;

• inform,
• persuade, or
• remind.

Informative advertising;

•  tells the market about a new product

•  informs the market of a price change

•  explains how the product works

• describes available services

• corrects false impressions

•  reduces consumer’s fears

•  builds a company image

Persuasive advertising;

• builds brand preference
• encourages switching to the brand of the company
• persuades customers to purchase now or make  a sales call
• Reminder advertising;
• keeps the product in customer’s mind during off-season
• maintains the product’s top-of-mind awareness
• remind consumers where to buy the product

Profiles of Major Media Types

·        Newspapers: reach many people but have limited opportunity to reach market segments, have short life time, do not have reproduction quality.

·        Magazines: have many advantages over newspapers like having high-quality reproduction, color availability, prestige, audience selectivity, and long life.  However, they cost more, prepared in a long time, and reduce an advertiser’s ability to repeat ads.

·        Radio: can reach an entire area, specific target markets by matching the radio station and time with the property’s target market. However, if not repeated, they have short life span.

·        Television: television’s main advantage over radio is that it combines sight with sound.  TV commercials can show friendly company staff.  Gets high attention, and remembered as a result.  Commercials can run many times daily and reach many people, and can reach specific audiences by selecting the correct TV shows.  However, they are very expensive.

·        Outdoor Advertising: billboards along highways or in and around large cities are used to remind and attract potential guests about the product. They must be bold, dynamic and graphic so that passersby can get the message at a glance.  They have large circulations, broad reach and low cost but have limited message length.

·        Direct Mail: involves the mailing of the advertising message in brochures, coupons or other formats. It is especially used by clubs and banks for credit card holders and members.  It allows audience selectivity, can be personalized, and easily measured but have high cost of developing and mailing.

Sales Promotion

·        Sales promotions are short-term incentives to make an immediate purchase or sales of a product or service.

·        Advertising offers reasons to buy a product or service, sales promotion offers reasons to buy now.

Advantages

•  generating immediate purchase in a large extent

•  ability to provide quick feedback

•  ability to add excitement to a service or product

•  flexible timing

• efficiency

Disadvantages

•  short-term benefits

•  ineffective in building long-term loyalty for company or “brand”

• inability to be used on its own in the long term without other promotional mix elements

• often misused for just short-term benefits

Profiles of Major Sales Promotions

Consumer-Promotion Tools

·        Couponing: attract potential guests with a special offer such as a free night’s lodging after a special number of credits.  They can be given out personally, included in direct mail advertising or printed in newspapers and magazines.  They can increase off-season business with other sales promotions such as bonus offers or discounting.

·        Product Sampling: introduces new products to the guests, some are free, most effective to introduce a product but most expensive as well, determines whether guests like a new product and encourages them to order the item.

·        Contests: give consumers a chance to win something such as cash, trips, goods by luck or through extra effort, can increase sales, should be cost effective - increased sales should offset the cost of contest promotions and prizes. E.g. Coca-Cola New Year’s prize (a BMW) will be one of the customers who sent the correct amount of Coca-Cola lid.

·        Packages: offer consumers savings off the regular price of a product, have discount price to attract new guests and increase sales.  E.g. a holiday package including lodging, transportation, and food and beverage with a reasonable price.

·        Premiums: they are given to guests who pay the regular prices for certain products or services.  E.g. an upgraded room might be provided or free movie tickets for the restaurant guests. Pizza Hut’s free drinks when a large pizza is ordered. Or when a customer buys one shampoo, he gets the third one free.

·        Gifts or Gift Certificates: free gifts or cash offers, are used by chains or exclusive properties to increase sales. E.g. key chains, T-Shirts…

·        Discounting: straight reduction from the list price of a product during a stated period of time, are used to attract more guests and increase total sales.  E.g. one dinner on the menu might be reduced to 50%. Benetton reduces its prices by 20% during the low season. 

·        Bonus Offers: the consumer buys a product or service at the regular price and then receives a bonus, generally directed to the regular users, E.g. guest buys three dinners at a regular price and the fourth one becomes free. Or when the customer uses his credit card, each time he gets credits, and when he reaches a certain credit     point, he is entitled to get free gifts such as toasters, hair dryers...

Trade-Promotion Tools

·        Discounting: straight reduction from the list price on purchases during a stated period of time encourages dealers to buy in quantity or to carry a new item; dealers can use the discount for immediate profit, for advertising, or for price reductions to their customers.

·        Allowance: promotional money paid by manufacturers to retailers who agree to help promote the manufacturer’s products in some way. E.g. an advertising allowance compensates retailers for advertising the product. A display allowance compensates them for using special displays.

·        Free goods or push money: cash or gifts to dealers or their sales force to “push” the manufacturer’s goods.

·        Specialty advertising items: they carry the company’s name, such as pens, pencils, calendars, paperweights, memo pads, ashtrays...

Public Relations

·        Building good relations with the company’s various public’s by obtaining favourable publicity, building up a good “corporate image” and handling or heading off unfavourable rumors, stories and events.

Advantages

•  low cost

•  effective because they are not seen as commercial messages

• credibility

• prestige and impressiveness of mass-media coverage

• added excitement and dramatization

•  maintenance of “public” presence

Disadvantages

•  difficult to arrange consistently

•  lack of control

Major Public Relations Tools

·        News: PR people find or create favourable news about the company and its products or people. Sometimes news stories occur naturally, and sometimes the PR person suggests events or activities (e.g. X conference, Miss World…) that would create news.

·        Speeches: company executives answer the questions from the media or give talks at trade associations or sales meetings.

·        Special events: ranging from news conferences, receptions, press tours (familiarization trips), grand openings… to reach and interest target publics.

·        Written materials: include press release, annual reports, brochures, articles, company newsletters, magazines… to reach and influence the target markets.

·        Audiovisual materials: such as films, video- and audiocassettes…

·        Corporate-identity materials: help to create a corporate identity that the public immediately recognizes such as logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms, company cars and trucks become marketing tools when they are attractive, distinctive, and memorable.

·        Public-service activities: companies can also improve their goodwill by contributing money and time to public-service activities. E.g. giving donations to street children.

Personal Selling

·        Personal selling involves oral conversations. These are held, either by telephone or face-to-face, between salespersons and prospective customers.

·        The people who do the selling go by many names: salespeople, sales representatives, account executives, sales consultants, sales engineers, agents, district managers, and marketing representatives.

·        The major roles of the sales force are

• representing the company to customers,

•  representing customers to the company,

• producing customer satisfaction and company profits.

Advantages

•  ability to close sales

• ability to hold the customer’s attention

• immediate feedback and two-way communications

•  presentations tailored to individual needs

• ability to target customers precisely

• ability to cultivate relationships

•  ability to get immediate action

Disadvantages

•  high cost per contact

• inability to reach some customers as effectively

The Changing Face of Marketing Communications

Two major factors are changing the face of today’s marketing communications.

1.      First, as mass markets have fragmented, companies are shifting away from mass marketing. Now, they are developing focused marketing programs designed to build closer relationships with customers in more narrowly defined micro-markets.

2.      Second, the improvements in the area of computer and information technology help marketers to reach smaller customer segments more effectively.

Direct Marketing

·        Direct marketing is the new way of marketing communications. Here, the company markets through various advertising media that interact directly with consumers and, generally, encourage the consumer to make a direct response. In other words, direct marketing consists of direct communications with carefully targeted consumers to obtain an immediate response.

There are four major forms of direct marketing are;

1.      direct-mail and catalogue marketing; involves mailing of letters, ads, samples, foldouts… sent to potential customers on mailing lists. The mailing lists are developed from customer lists or obtained from mailing-list houses. Catalogue marketing involves selling through catalogues that are mailed to a select list customers or made available in stores.

2.      telemarketing; using the telephone to sell directly to consumers. Outbound telephone marketing is used directly to consumers and businesses. Inbound too-free 800 numbers are used to receive  orders from television and radio ads, direct mail, or catalogues.

3.      television marketing; takes two major forms. The first is direct-response advertising where marketers air television spots, often 60 to 120 seconds long, that persuasively describe a product and give customers a toll-free number for ordering. Home shopping channels is another form of television direct marketing which are television programs or entire channels dedicated to selling gods and services.

4.      online computer shopping: is conducted through interactive online computer systems which link consumers with sellers electronically. Consumers use a home computer to hook into the system through cable or telephone lines.

Promotion Mix Strategies

Marketers can choose from two basic promotion mix strategies;

·        push promotion; a push strategy involves “pushing” the product through distribution channels to final consumers. Here, the producer directs its promotional activities (primarily personal selling and trade promotion) toward channel members to induce them to carry the product and to promote it t final consumers.

·        pull promotion; the producer directs its promotional activities (advertising and consumer promotion) toward final consumers to induce them to buy the product. If the pull strategy is effective, consumers then will demand the product from channel members.

Companies generally use both of them in combination.

Companies consider the following factors when developing their promotion mix strategies;

§         type of product/market

§         the buyer-readiness stage

§         the product life-cycle stage

Type of Product/Market

The importance of different promotion tools varies between consumer and business markets.

Consumer goods companies;

•  pull more

•  spend more on advertising, then sales promotion, personal selling, and public relations

Industrial goods companies;

 push more

• spend more on personal selling, then sales promotion, advertising, public relations

• Generally, personal selling is used more heavily with expensive and risky goods and in markets with fewer and larger sellers.

Buyer-Readiness Stage

·        The effects of the promotional tools vary for the different buyer-readiness stages.

·        In the awareness and knowledge stages; advertising and public relations play the major role rather than personal selling.

·        In the customer liking, preference and conviction stages; personal selling makes more sense.

·        In the purchase stage (closing the sale stage); sales calls and sales promotions are most effective.

Product Life-Cycle Stage

The effects of different promotion tools also vary with stages of the product life cycle.

·        In the introduction stage; advertising and public relations are good for producing high awareness and sales promotion is useful in promoting early trial. Personal selling must be used to get the trade to carry the product.

·        In the growth stage; advertising and public relations are still powerful but sales promotions can be reduced.

·        In the mature stage; sales promotion again becomes important relative to advertising. Advertising is only needed to remind the consumers of the product.

·        In the decline stage; advertising is kept to remind, public relations may drop, salespeople give up, sales promotions may still be used.