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– Companies have shifted gear from managing product portfolios to managing customer portfolios ie compiling databases on individual customers so that they can understand them better and construct individualised offerings and messages. They are doing less product and service standardisation and more niching and customisation. They are replacing monologues with customer dialogues. They are improving their methods of measuring customer profitability and customer lifetime value. They are intent on measuring the return on their marketing investments and its impact on shareholder value. They are also concerned with the social and ethical implications of their marketing decisions. – Marketing should drive the company’s vision, mission and strategic planning. It is no longer a department charged with a number of tasks. – Marketing decides: ○ Who the company wants as customers ○ Which needs to satisfy ○ What products and services to offer ○ What prices to set ○ What communications to send and receive ○ What channels of distribution to use ○ What partnerships to develop Chapter 1 – Defining marketing for the 21st Century Marketing is everywhere – it is embedded in everything we do. And it has become a key ingredient to business success. Marketing is both an “art” and a “science” and good marketing is no accident. It takes careful planning and execution. The importance of marketing Financial success often depends on marketing ability. Marketing managers need to make big decisions about what features to design into a new product, what prices to offer and where to sell products. The scope of marketing – What is marketing? – Marketing deals with identifying and meeting human and social needs. It is about “meeting needs profitably”. – Marketing is an organisational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organisation and its stakeholders. – Marketing management is the art and science of choosing target markets and getting, keeping and growing customers through creating, delivering and communicating superior customer value. – The aim of marketing is not selling. It is to know and understand the customer so well that products and services fits him and sells itself. Exchanges and Transactions Exchange is a key concept in marketing. It is the process of obtaining a desired product from someone by offering something in return. It is a value creating process because it leaves both parties better off. 5 conditions must be satisfied in this scenario: 1. There must be at least 2 parties 2. Each party has something of value to the other party 3. Each party is capable of communication and delivery 4. Each party believes it is appropriate and desirable to deal with the other party Transactionis a trade of value between 2 or more parties. Transactions need: at least 2 things of value, agreedupon conditions, a time and a place of agreement. This differs from a transfer where A gives to B without anything tangible in return. Marketing consists of actions undertaken to elicit desired responses from a target audience. To be successful in marketing, marketers need to understand what each party expects from the transaction. What is marketed? There are 10 types of entities that can be marketed: 1. Goods – physical goods eg cars, fridges, TVs
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Services – eg airlines, hotels, car rental firms Events – time-based events such as trade shows, Olympics 4. Experiences – Walt Disney’s Magic Kingdom is experiential marketing 5. Persons – celebrity marketing 6. Places – Cities, states & regions are marketed to tourists, business and new residents 7. Properties – eg real estate, stocks and bonds 8. Organisations – Corporate identity ads and unique images in the market 9. Information – eg schools and universities market their information 10. Ideas – eg “Friends don’t let friends drive drunk” Who markets? Marketers – somebody who seeks a response from another party, called the prospect. Marketers are responsible for demand management and there are 8 possible demands states: 1. Negative demand – consumers dislike a product 2. Nonexistent demand – consumers are unaware or uninterested in a product 3. Latent demand – consumers may have a strong need for a product but cannot be satisfied by existing products 4. Declining demand – consumers buy less frequently 5. Irregular demand – consumers purchase seasonally, monthly etc 6. Full demand – consumers are adequately buying the product 7. Overfull demand – more consumers want the product than supply can meet 8. Unwholesome demand – consumers are attracted to products that have undesirable social consequences In each case, the marketer needs to understand the demand state and the underlying cause and determine a plan of action to shift demand to a more desired state. Markets In marketing terms, a market is used to describe the various groupings of customers. Categories of markets include: Product market, demographic market, needs market etc.
Resources Money Taxes, Goods
Resources Money Services, money Taxes
Services Money Goods and services
Money Goods and services
Sellers and buyers are connected by 4 flows:
Goods / s ervices Money Information Communication
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Key customer markets ○ Consumer – selling to the masses ○ Business – selling to business ○ Global – selling in the global marketplace ○ Non-profit and government – selling to churches, universities etc New consumer capabilities (as a result of the digital revolution): – Substantial increase in buying power – Greater variety of goods and services – Great amount of information about practically anything – Greater ease of interacting and placing and receiving orders – An ability to compare notes on products and services Today we differentiate the marketplace (physical) and the marketspace (digital). There is also the concept of the metamarket: cluster of complementary products and services in the minds of a consumer but spread across a diverse industry. How business and marketing are changing ○ Changing technology – Has created an information age that promises to lead to more accurate levels of production, more targeted communications and more relevant pricing. ○ Globalisation – Technological advances make it easier for marketing across countries. ○ Deregulation – creates a greater competition and growth opportunities. ○ Privatisation – Increased efficiency of previously public companies. ○ Customer empowerment – Increased expectations of quality and service and some customization. More information available and less brand loyalty ○ Customisation – Company is able to produce individually differentiated goods. ○ Heightened competition – Rising promotion costs and shrinking profit margins. ○ Industry convergence – Blurring industry boundaries create opportunities at the intersection of the two industries. ○ Retail transformation ○ Disintermediation Company orientation towards the marketplace: There are 5 competing concepts under which organisations conduct marketing activities: 1. Production concept – states that consumers prefer products that are widely available and inexpensive. Therefore focus on high production, low cost and mass distribution. 2. Product concept– Consumer favour quality, performance or innovation. Therefore focus on superior products and constant improvement 3. Selling concept– consumers will not buy enough if left on their own. Therefore focus on aggressive selling and promotion 4. Marketing concept– consumer-centred philosophy. Therefore focus on being more effective than competitors in creating, delivering and communicating superior customer value 5. Holistic marketing concept – going beyond traditional applications of marketing to a more complete and cohesive approach. Focus on multiple marketing approaches that work synergistically ie broad and integrated approach ie relationship, integrated, internal and social responsibility marketing
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Marketing dept Senior Mgmt Other Depts
Communications Products & Services Channels
Social Responsible Marketing Ethics Environment Legal Community
Relationship Marketing Customers Channel Partners
a. Relationship marketing– building mutually satisfying, long-term relationships with key
parties ie customers, channels and partners, in order to earn and retain their business. The ultimate outcome is to build a marketing network(company and its supportive stakeholders). The ability of a company to understand each client individually is greatly enhanced with technology. Operating principle: Build an effective network of relationships with key stakeholders, and profits will follow. b. Integrated marketing – using all components of the marketing mixin a coordinated manner. McCarthy classifies these into the 4 P’s of marketing: Product (diversity, quality, design, features, brand name, packaging, size etc) Price (list price, discounts, allowances, payment period, credit terms) Place (channels, coverage, assortments, locations, inventory, transport) Promotion (sales promotion, advertising, sales force, public relations, direct marketing) Lauterborn says that the 4 P’s correspond with the customers’ 4C’s: Four P’s Four C’s Product Customer solution Price Customer cost Place Convenience Promotion Communication Integrated marketing also looks at the communication mix ie advertising, sales promotion, events and experiences, public relations, direct marketing, personal selling.
c. Internal marketing – The task of hiring, training and motivating able employees who want
to serve customers well. Ensuring that everyone in the organisation embraces appropriate marketing principles. Marketing must become a company orientation. d. Social responsibility marketing– understanding the broader concerns (social welfare) and ethical, environmental, legal and social context of marketing activities and programs. Companies can adopt “cause” marketing where they support a particular cause eg Avon and breast cancer. Holistic marketing happens across the orgarnisation.
• • • Corporate
Market Structure Analysis Customer orientation and advocacy Positioning the firm in the value chain
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Strategic Business Unit
• • •
Market Segmentation and targeting Product positioning/brand positioning Partnerships decisions • Market mix • Managing customer and reseller relationships.
Core marketing concepts The marketer must understand these within the target market: ○ Needs= basic human requirements. There are 5 types: stated, real, unstated, delight, secret needs ○ Wants = needs become wants when they are directed at a specific object that might satisfy needs ○ Demands = wants for a specific product backed by the ability to pay (willing and able) Target market, positioning and segmentation = dividing / segmenting the market into distinct groups of buyers and identifying which presents the greatest opportunity (target market). For each target market, the marketer develops an offering, which is positioned in the minds of the target buyers as delivering some benefits. Offering = value proposition, a set of benefits to satisfy customer needs Brands = an offering from a known source. Associations make up the brand image. Aim is to make the brand strong, favourable and unique. Value = a central marketing concept that reflects perceived tangible and intangible benefits and costs to customers. Value = combination of quality, service and price (customer triad) Satisfaction = reflects a persons comparative judgements resulting from a perceived performance in relation to his/her expectations Marketing channels = connect the marketer to the target market. 3 types of channels to reach customers Communication – deliver and receive messages from target buyers Distribution – to display, sell, or deliver the physical product or service(s) to the buyer or user Service channels – to carry out transactions with potential buyers. Supply chain = channel stretching from the raw materials to the components of the final product. The supply chain is a value delivery system. Competition = actual and potential rivalry offerings and substitutes that a buyer might consider. Marketing environment= consists of a task environment (immediate actors in the production, distribution and promotion of the offering) and the broad environment (demographic, economic, physical, social, technological, political-legal and social-cultural environment). Marketing planning = Logical process to follow eg analysing marketing opportunities, selecting target markets, designing marketing strategies, developing marketing programs and managing the marketing effort. Shifts in marketing management Important trends and forces are eliciting a new set of beliefs and practices in business. Smart companies are moving towards these trends within the marketplace and marketspace: ○ From marketing does the marketing, to everyone does the marketing ○ From organising by product units, to organising by customer segments ○ From making everything, to buying more goods and services from outside ○ From using many suppliers, to working with fewer suppliers ○ From relying on old market positions, to uncovering new ones ○ From emphasising tangible assets, to emphasising intangible assets ○ From building brands through advertising, to building brands through performance and integrated communications ○ From attracting customers through stores and sales people, to making products available online ○ From selling to everyone, to trying to be the best firm servicing well defined target markets ○ From focusing on profitable transactions, to focusing on customer lifetime value ○ From a focus on gaining market share, to focus on building customer share ○ From being local, to being “Glocal” = both local and global ○ From focusing on financial scorecard, to focusing on the marketing scorecard ○ From focusing on shareholders, to focusing on stakeholders
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Marketing management tasks 1. Developing marketing strategies and plans 2. Capturing marketing insights 3. Connecting with customers 4. Building strong brands 5. Shaping the market offering 6. Delivering value 7. Communicating value 8. Creating long-term growth
Chapter 2 – Developing marketing strategies and plans Marketing and customer value Marketing involves satisfying consumer needs and wants. The task of the business is to deliver customer value at a profit. The value delivery process: each phase has cost implications Choosing the value – represents the “homework” marketing must do before any products exist. Providing the value - marketing must determine specific product features, prices and distribution. Communicating the value - through utilisation of sales force, sales promotion, advertising, and other communication tools to announce and promote the product.
Customer Market segmentationselection / focus
Value propositi on
Distributi ng Servicing
Kumar uses the 3 V approach to marketing: – Define the value segment (value definition). – Define the value proposition (value developing process). – Define the value network (value delivering process) Porter’s value chainis a tool to identify ways to create more customer value. The value chain identifies nine strategically relevant activities that create value and cost in a specific business. These nine value creating activities consist of five primary activities and four support activities. Primary activities – inbound logistics, operations, outbound logistics, marketing & sales, and service. Support activities – procurement, technology development, human resource management, and firm infrastructure.
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Core Business Processes The market sensing process – all activities involved in gathering market intelligence, disseminating it within the organisation, and acting on the information. The new offering realisation process – all activities involved in researching, developing, and launching new high quality offerings quickly and within budget. The customer acquisition process – all the activities involved in defining target markets and prospecting for new customers. The customer relationship management process – all activities involved in building deeper understanding, relationships, and offerings to individual customers. The fulfilment management process – all activities involved in receiving and approving orders, shipping the goods on time, and collecting.
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The Generic Value Chain Firm Infrastructure
Human Resource Management Technology Development Procurement
Operations Outbound Marketing Logistics and sales
Primary Activities Core competencies The key is to own and nurture the resources and competencies that make up the essence of the business. A core competency has three distinct characteristics: – Source of competitive advantage ie makes a significant contribution to perceived customer benefit – Has applications in a wide variety of markets – Is difficult for competitors to imitate
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A holistic marketing framework
Collaborative Customer Value Core Competencies Exploration Creation network Delivery Focus
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This framework is designed to address 3 key management questions: 1. Value exploration – How can a company identify new value opportunities? The answer lies in developing a strategy that understands the relationships and interactions between the customer’s cognitive space, the company’s competency space and the collaborator’s resource space (partnerships) 2. Value creation – How can a company efficiently create more promising new value opportunities The answer lies in business realignment to maximise core competencies. This can be done by redefining the business concept, reshaping the business scope and repositioning the company’s brand identity 3. Value delivery – How can a company use its capabilities and infrastructure to deliver the new value offerings more efficiently? This can be done by becoming proficient at customer relationship management, internal resource management and business partner management. The central role of strategic planning Strategic planning is key and calls for action in 3 key areas: – Managing the companies business as an investment portfolio – Assess each businesses’ strengths by considering market share, growth rate and market position – Establishing a strategy ie game plan to achieve long-run objectives The marketing plan must operate at 2 levels within the broader business: – Strategic Marketing Plan: lays out target market and value proposition that will be offered, based on analysis of the best market opportunities. – Tactical Marketing Plan: specifies the marketing tactics including the product features, promotion, merchandising, pricing, sales channels, and service. There are 4 levels within an organisation and strategic planning needs to occur at each level: – Corporate strategic planning AND Division strategic planning Defining the mission A clear, thoughtful mission provides employees with shared sense of purpose, direction and opportunity. Missionstatements should reflect a long term vision for the company. Good mission statements have three characteristics: – focus on limited number of goals – stress the company’s major policies and values – define the major competitive spheres within which the company will operate including the industry in which it will operate, products and applications it will supply, core competence, its market segment, its vertical penetration, and geographical footprint.
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Defining the business A business must be viewed as a customer-satisfying process, not a goods-producing process. Therefore companies should define their businesses in terms of needs, not products. A business can be defined in terms of three dimensions: customer groups, customer needs and technology. Large companies normally manage quite different businesses, each requiring its own strategy, or strategic business unit (SBU). An SBU has three characteristics: – It is single business or collection of related businesses that can be planned separately from the rest of the company. – It has its own set of competitors – It has a manager who is responsible for strategic planning and profit performance and who controls most of the factors affecting profit. The purpose if identifying the company’s strategic business units is to develop separate strategies and assign appropriate funding. Assessing growth opportunities – involves planning new businesses,downsizing, or terminating older businesses. Strategic planning gap – gap between future desired sales and projected sales. Three ways to fill strategic planning gap: 1. Intensive Growth: achieve further growth within current businesses. Management’s first course of action should be a review of opportunities for improving existing businesses.
Ansoff’s model (Product-market expansion grid) is a useful framework for detecting new intensive growth opportunities
Current sales Desired portfolio
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Products Old Market penetration strategy New Market development strategy
Product development strategy
Market expansion strategy (diversification)
Integrative Growth: identify opportunities to build or acquire businesses that are related to current businesses. – Backward integration: acquisition of one or more suppliers to gain more control or generate higher profit – Forward integration: acquisition of wholesalers or retailers, particularly if they are highly successful – Horizontal integration: acquisition of competitors, if legislation permits such action Diversification Growth: makes sense when good opportunities can be found outside the present business. Types of diversification include: – Concentric strategy: new products that have technological or marketing synergies with existing products, even if the new products appeal to different group of customers. – Horizontal strategy: new products that could appeal to current customers even if technologically unrelated to company’s current product line. – Conglomerate strategy: seeking new businesses that have no relationship to its current technology, products, or markets.
Organisational and Organisational Culture
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Changing a company culture is often the key to successfully implementing a new strategy. Senior management should identify and encourage fresh ideas from three groups who tend to be underrepresented in strategy making: – Employees with youthful perspectives – Employees who are far removed from company headquarters – Employees who are new to the industry Each group is capable of challenging company orthodoxy and stimulating new ideas. Strategy must be developed by identifying and selecting among different views of the future – scenario analysis. A scenario analysis consists of developing plausible representations of a firm’s possible future that make different assumptions about forces driving the market and include different uncertainties. Business Unit strategic planning The strategic planning process at this level includes:
1. The Business Mission
Each business unit needs to define its specific mission within the broader company mission. The Business Unit Strategic Planning Process
External Enviroment (Opportunity and threat analysix)
Internal Enviroment (strengths/weaknesses analysis)
Feedback and control Implementation
SWOT analysis It is an overall analysis of a company’s strengths, weaknesses, opportunities and threats. It involves monitoring the external and internal marketing environment. (external environment = opportunities and threats AND internal environment = strengths and weaknesses) Goal formulation After SWOT analysis, company must develop specific goals for the planning period – goal formulation stage. For an MBO (manage by objectives) system to work, the unit’s objectives must meet four criteria :(arrange goals hierarchically; state them quantitatively, make them realistic and be consistent) Strategic formulation (game plan for achieving goals). Porter says there are 3 generic strategies ie overall cost leadership, differentiation, and focus (specialisation). At this stage of the process, strategic alliances (Partner Relationship Management) must also be considered – these fall into four major categories: – Product or service alliances: One company licences another to produce its product, or two companies jointly market their complementary products or a new product. – Promotional alliances: One company agrees to carry a promotion for another company’s product or service. – Logistics alliances: One company offers logistical service for another company’s product. – Pricing collaboration: One or more companies join in a special pricing collaboration. Program formulation and implementation Once business unit has developed its principal strategies, it must work out detailed support programmes. In implementing strategy companies must also not lose sight of their multiple stakeholders (employees, customers, suppliers, distributors, retailers, and
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shareholders) and their needs. A company can aim to deliver satisfaction levels above the minimum for different stakeholders. In setting these levels, a company must be careful not to violate the various stakeholder groups’ sense of fairness about the relative treatment they are receiving. Style, skills, staff, and shared values are four of the seven elements in successful business practice. Style means that the company employees share a common way of thinking and behaving. Skills, means that the employees have the skills necessary to carry out the company’s strategy. Staffing means that the company has hired able people, trained them well, and assigned them the right jobs. Shared values, means that the employees share the same guiding values. The other three practices of successful business include strategy, structure and systems. Feedback and control (keep responding to the changing environment). As company implements strategy, it needs to track the results and monitor the developments. As the marketplace changes, the company needs to review and revise its implementation programmes, strategies, or even objectives. The most successful companies excel at effectiveness (doing the right thing) and efficiency (doing things the right way). One an organisation fails to respond to a changed environment, it becomes increasingly hard to recapture its lost position.
To evaluate opportunities, the marketing opportunity analysis (MOA) can be used to determine the attractiveness and probability of success: 1. Can the benefits be convincingly articulated to the defined target market? 2. Can the target market be reached with cost-effective channels? 3. Does the company have the resources and capabilities to deliver value? 4. Can the company deliver better than the competitors? 5. What is the ROI and does it meet the company threshold? – Product level strategic planning The marketing plan comes in at this level to set plans around products, lines, brands and channels. It contains tactical guidelines and should be customer and competitor oriented. Generally, they are for a one-year period and should be simple, realistic, specific and complete. Contents of a marketing plan: – Executive summary and table of contents – Situation analysis and market summary – SWOT analysis – Competition – Product offering – Keys to success and critical issues – Marketing strategy ○ Mission and objectives ○ Financial objectives ○ Target market ○ Positioning ○ Strategies ○ Marketing mix and marketing research – Financial projections ○ Break-even analysis ○ Sales forecast and expense forecast – Implementation controls Marketing Research System: Marketing Research - systematic design, collection, analysis & reporting of data & findings relevant to a specific marketing situation facing the company. Suppliers of Marketing Research: • Grad student projects • Online info sources • Check out rivals • Syndicated-service firms • Custom marketing firms
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Specialty marketing research firms
The marketing research process: Step 1: Define the problem & agree on research objectives • Required level of detail, how specific? Order of magnitude? • Competitive issues: how easily copied by competitors, etc. Step 2: Develop research plan • What is most efficient plan to obtain info. Step 3: Data sources • Secondary data - collected for other purpose & already exist • Primary data - collected for specific purpose or project ○ Marketing Database - collection of data about customers, prospects, leads, etc. that is actionable for marketing purposes • Research approaches: ○ Observational Research: watch relevant actors & settings ○ Focus group: people invited to discuss/try product ○ Surveys: questionnaire ○ Experimental Research: controlled environment; subjecting groups to a variety of treatments • Research Instruments: ○ Questionnaires: closed end & open-end questions ○ Mechanical Testing Instruments • Sampling plan: ○ Who is to be surveyed? ○ Sample size, how many people? ○ Procedure, how to choose people? • Contact Methods: ○ Mail questionnaire ○ Telephone interviewing ○ Personal interviewing - arranged or intercept people (i.e. the mall) Step 4: Collect the Info • Scanners, computers, data entry Step 5: Analyze the Info - averages, measures of dispersion Step 6: Present the Findings to relevant parties The Characteristics of Good Marketing Research • Scientific Method - careful observation, generate hypothesis, prediction, testing • Research creativity - innovative ways to solve problems • Multiple Methods - shy away from any one method • Interdependence of models & data - data interpreted from underlying models • Value & cost of info. - value/cost considerations • Healthy skepticism - skepticism of assumptions • Ethical Marketing - learn about customers needs to better serve them Overcoming barriers to the Use of Marketing Research: • Narrow conception - many managers see it as only a fact finding mission • Uneven caliber of marketing researchers - perceived as clerical activity • Late & erroneous findings • Personality & presentational differences Marketing Decision Support System (MDSS) - is a coordinated collection of data, system, tools, & techniques with supporting software & hardware by which an organization gathers and interprets relevant info from business & environment & turns it into a basis for marketing action.
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• • •
Models for mgrs to simulate marketing situations A variety of analysis tools (see pg. 128 for list) Neural Networks - "Artificial intelligence system" imitates human mind
An Overview of Forecasting & Demand Measurement • Measures of mkt demand ○ Product levels: all, industry, company, product line, product form, product item sales ○ Space levels: World, USA, Region, Territory, Customer ○ Time levels: Short run, Medium run, Long run • Which Mkt to measure ○ Potential mkt: profess sufficient level of interest in a defined mkt offer ○ Available: consumers who have interest, income, & access to offer ○ Qualified available: have interest, income, access, & qualifications for offer ○ Target: part of qualified mkt the company decides to serve ○ Penetrated mkt: set of consumers who have already purchased the product Mkt - set of all actual & potential customers A Vocabulary for Demand Measurement • Mkt demand - total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program • Demand is not a fixed number, rather a function • Mkt minimum - sales with no stimulation • Mkt sensitivity of demand • Expansible mkt - affected by level of industry expenditures • Non-expansible mkt - not affected by level of industry expenditures • Mkt Forecast - mkt demand corresponding to company marketing expenditures • Mkt potential - max demand as industry expenditures approach infinity • Company demand - estimated share of mkt demand at alternative levels of company marketing effort • Company sales forecast - expected level of company sales based on a chosen marketing plan & an assumed marketing environment • Sales quota - sales goal set for a product line, company division, or sales representative • Sales budget - is a conservative estimate of the expected volume of sale & is used primarily for making current purchasing, production, & cash-flow decisions • Company sales potential - sales limit approached by company demand as company marketing effort increases relative to competitors • Total mkt potential - max amount of sales that might be available to all the firms in an industry during a given period under a given level of industry marketing effort & given environmental conditions Area market potential - select best territories • Market build-up method - identifying all the potential buyers in each mkt & estimating their potential purchases Industry & Market Shares • Company needs to know actual industry sales taking place in its mkt Estimating Future Demand • Three stage procedure to prepare sales forecast ○ macroeconomic forecast ○ industry forecast ○ company sales forecast • Small firms can buy macroeconomic forecasts from ○ marketing research firms ○ specialized forecasting firms ○ futurist research firms
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All forecasts based on: what people say, what people do, what people have done
Survey of buyer's intention: • Anticipate what buyers will do • Purchase probability scale Composite of Sales Force Opinions • Have sales force estimate future sales, then make adjustments
CHAPTER 5:- CREATING CUSTOMER VALUE, SATISFACTION, AND LOYALTY
MARKETING DEBATE—Online Versus Off-Line Privacy As more and more firms practice relationship marketing and develop customer databases, privacy issues are emerging as an important topic. Consumers and public interest groups are scrutinizing- and sometimes criticizing the privacy policies of firms. Concerns are also being raised about potential theft of online credit card information or other potentially sensitive or confidential financial information. Others maintain that the online privacy fears are unfounded and that security issues are every bit as much a concern in the off-line world. They argue that the opportunity to steal information exists virtually everywhere and that it is up to the consumer to protect his or her interests. Take a position: (1) Privacy is a bigger issue in the online world than the off-line world versus privacy is no different online than off-line. (2) Consumers on the whole receive more benefit than risk from marketers knowing their personal information. (1) Pro: Privacy is a larger issue in the online world than the off-line world simply because the information has a greater opportunity to be exposed to more people than off-line transactions. The transmission of private information electronically travels through electronic channels each of which presents opportunity for misdirection or computer “hacking”
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activities. In many of these cases, the person, or firm transmitting this information, redirecting this information receiving this information and storing this information is unknown to the consumer. In the offline world, the consumer has the opportunity to know the company, personnel, or firm receiving this information and has the opportunity to accept or decline sharing their personal information. Con: Transmission of personal information in the off-line world still travels electronically, in many cases. The act of paying with a credit card still involves the transmission of data electronically at some point in the transaction. What differs is the fact that the consumer is initially interfacing with a person (or firm). Although this does not mitigate the risks involved to the consumer, it does present some concrete knowledge of the people, or firm involved in the transaction. (2) Pro: With an active CRM program in place by a firm, consumers can receive more benefit than risks with the marketer knowing their personal information. A firm with an active CRM program can and does allow the consumer to move through the Customer Development Process (from suspects to partners) thus establishing strong ties to the firm and the reception of increased specially designed promotional and service programs unavailable to the general public. This is seen in frequent flyer discounts, member discount, special shopping days, and advance notices of new products, promotions, and reminders for service opportunities (oil change reminders, medical appointment reminders, and others). In today’s fast paced world, consumers stand to benefit from such attention to detail. Con: In current society, the dissemination of one’s personal information is scary and a concern to the public in general as opportunities for misuse of this information abound. The public does not like intrusions into their personal lives, unless invited. Consumers do not feel that the benefits of this sharing of information outweigh the cost of the lost of privacy. The recent “Do Not Call Registry” established to limit the telemarketing industry is an example of consumers revolting in opposition. MARKETING DISCUSSION Consider the lifetime value of customers (CLV). Choose a business and show how you would go about developing a quantitative formulation that captures the concept. How would organizations change if they totally embraced the customer equity oncept and maximized CLV? Suggested Response A) CLV describes the net present value of the stream of future profits expected over the customers’ lifetime purchases. Each student’s example will differ but the main tenets of each report should include the following: 1) Add: a) Profit from a sale (dollar or percent). b) Number of sales per customer per year. c) Average age of a customer. d) Average expected lifespan of a customer. 2) Subtract: a) Appropriate discount rate. b) Costs of attracting one customer. c) Selling one customer. d) Servicing one customer. B) Organizations would change by beginning to take a long-term perspective rather than a short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has to a firm in a language they understand—dollars. Firms
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would begin to customize offerings and messages to each customer, ensure that retention strategies are in place, differentiate customers in terms of needs and value to the company, and build stronger relationships with key customers. Because of a change in the loci of focus for the firm, strategies, and actions based upon which would provide the best return on its marketing investments would be implemented.
Chapter 6 - Analyzing Consumer Markets and Buying Behavior CULTURAL SOCIAL PERSONAL Culture Reference groups Age and life cycle stage Occupation Family Subculture Roles and statuses Social Class The aim of marketing is to meet and satisfy target customers’ needs and wants. The field of customer behavior studies how individuals, groups and organizations select, buy, use and dispose of goods, services, ideas or experiences to satisfy their needs and desires. The following figure summarizes the factors influencing a customer’s buying behavior. Cultural Factors
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PSYCHOLOGICAL Motivation Perception Learning Beliefs and attitudes BUYER
Economic circumstances Lifestyle Personality and self concept
Cultural factors exert the broadest and deepest influence on consumer behavior. The roles played by the buyer’s culture, subculture and social class are particularly important. Culture is the most fundamental determinant of a person’s wants and behavior. The growing child acquires a set of values, perceptions, preferences and behaviors through his or her family or other key institutions. Each culture consists of smaller subcultures that provide specific identification and socialization for its members. Subcultures include nationalities, religions, racial groups, and geographical regions. Many subcultures make up important market segments, and marketers often design products and marketing programs tailored to their needs. Social classes are relatively homogeneous and enduring divisions in a society, which are hierarchically ordered and whose members share similar values, interests and behavior. Social classes do not reflect income alone but also other indicators such as occupation, education, and area of residence. Social classes differ in their dress, speech patterns, recreational preferences and many other characteristics. Social classes have different characteristics. First, persons within each social class tend to behave more alike than persons from two different social classes. Second, persons are perceived as occupying inferior or superior positions according to their social class. Third, a person’s social class is indicated by a cluster of variables for example, occupation, income, wealth, education, and value orientation, rather than by any single variable. Fourth individuals can move from one social class to another, up or down during their lifetime. The extent of this movability varies according to the rigidity of social stratification in a given society. Social classes show distinct product and brand preferences in many areas including clothing, home furnishings, leisure activities and cars. The following table describes the seven social classes identified by social scientists in the US. Upper Uppers (less than 1%) Lower Uppers (about 2%) The social elite who live on inherited wealth and have well-known families. While small as a group, they serve as a reference group for others to the extent that their consumption decisions trickle down and are imitated by the other social classes. Persons who have earned high income or wealth through exceptional ability in the profession or business. The ambition of these is to be accepted in the upper-upper stratum, a status that is more likely to be achieved by their children than themselves. Possess neither family status nor unusual wealth. Are primarily concerned with career. They are the quality market for good homes, clothes, furniture and appliances. They are home oriented and enjoy entertaining friends and clients. Average-pay white- and blue-collar workers who live on the better side of town and try to do the proper things. Often they buy products that are popular to keep up with trends. The middle class believes in spending more money on worthwhile experiences for their children and aiming them toward a college education. Average-pay blue collar workers and those who lead a working-class lifestyle, whatever their income school background or job. Depends heavily on relatives for economic and emotional support, for tips on job
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Upper Middles (12%)
Working Class (38%)
opportunities, for advice on purchases and for assistance in times of trouble. Upper Lowers (9%) Upper lowers are working, not on welfare, although their living standard is just above poverty. Very poorly paid or they are striving toward a higher class. Lower lowers are on welfare, visibly poverty stricken and unusually out of work. some are not interested in finding a permanent job and most are dependent on public aid or charity for income.
Social Factors In addition to cultural factors, a consumer’s behavior is influenced by such social factors as reference groups, family and roles and statuses. A person’s Reference groups consist of all the groups that have a direct or indirect influence on the person’s attitudes or behavior. Groups having a direct influence on a person are called Membership groups. Some membership groups are primary groups, such as family, friends, neighbors, and co-workers with whom the person interacts fairly continuously and informally. People also belong to secondary groups such as religious, professional and trade-union groups which tend to be more formal and require less continuous interaction. People are significantly influenced by their reference groups in at least three ways. 1. They expose an individual to new behaviors and styles. 2. They also influence the person’s attitudes and self-concept. And they create pressures for conformity that may affect the person’s actual product and brand choices. People are also influenced by groups in which they are not members : aspirational groups. A dissociative group is one whose values or behavior an individual rejects. Marketers try to identify their target customers’ reference groups. However, the influence level varies among products and brands. They appear to strongly influence both product and brand choice only in the case of cars, and color TV s, mainly brand choice in furniture and clothing, and product choice in beer and cigarettes. Manufacturers of products and brands where group influence is strong must determine how to reach and influence the opinion leaders in these reference groups. An opinion leader is the person in informal product-related communictions who offers advice or information about a specific product or product category, such as which of several brands is best or how a particular product may be used. Marketers try to reach opinion leaders by identifying demographic and psychographic characteristics associated with opinion leadership, identifying the media read by opinion leaders, and directing messages at the opinion leaders. The family is the most important consumer-buying organization in society. Family members constitute the most influential primary reference group. We can distinguish between 2 types of families. The family of orientation consists of one’s parents and siblings. Even if the buyer no longer interacts with his or her parents, the parents’ influence on the buyer’s behavior can be significant. A more direct influence on everyday buying behavior is one’s family of procreation namely one’s spouse and children. Marketers are interested in the roles and relative influence of the husband, wife and children in the purchase of a large variety of products and services. Often it is the matter of who has more power or expertise. Here are the traditional product patterns. • Husband dominant : Life insurance, cars, TV s • Wife dominant : Washing machines, carpeting, furniture, kitchenware • Equal : Housing, Outside entertainment
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These patterns are gradually changing however, due to the rise in employment of women, especially in nontraditional jobs. Another shift in buying patters is the increasing amount of influence wielded by childrens and teens. Roles and statuses. The person’s position in each group can be defined in terms of role and status. A role consists of the activities that a person is expected to perform. Each role contains a status. People choose products that communicate their role and status in society. Marketers are aware aware of the status symbol potential of products and brands. Personal Factors A buyer’s decisions are also influenced by personal characteristics. These include the buyer’s age and stage in the life cycle, occupation, economic circumstances, lifestyle and personality and self-concept. Age and stage in the life cycle. People buy different goods and services over their lifetime. Consumption is also shaped by the family life cycle. Marketers often choose life-cycle groups as their target market. But it should be added that target households are not always family based. Marketers also target single households, gay households, and cohabitor households. The following table lists 9 stages of the family life cycle.
Stage in Family Life Cycle 1. Bachelor stage : young, single people not living at home. 2. Newly married couples : young, no children 3. Full Nest I : youngest child under six 4. Full Nest II : youngest child six or over 5. Full Nest III : older married couples with dependent children 6. Empty Nest I : older married couples, no children living with them, head of household in labor force
Buying or Behavioral Factors Few financial burdens. Fashion opinion leaders. Recreation oriented. Better off financially than they will be in the near future. Highest purchase rate and highest average purchase of durables. Home purchasing at peak. Liquid assets low. Dissatisfied with financial position and amount of money saved. Interested in new products. Like advertised products. Financial position better. Less influenced by advertising. Financial position still better. Some children get jobs. Hard to influence with advertising. High average purchase of durables. Home ownership at peak. Most satisfied with financial position and money saved. Interested in travel, recreation and selfeducaation. Make gifts and contributions. Not interested in new products.
7. Empty Nest II : older married. No Drastic cut in income. Keep home. children living at home, head of household retired 8. Solitary survivor in labor force 9. Solitary survivor retired Income still good but likely to sell home. Same medical and product needs as other retired group; drastic cut in income.
Some recent work has identified psychological life-cycle stages. Adults experience certain “passages” or “transformations” as they go through life. Marketers pay close
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attention to changing life circumstances - divorce, widowhood, remarriage - and their effect on consumption behavior. Occupation A person’s occupation also influences his or her consumption pattern. Marketers try to identify occupational groups that have above-average interest in their products and services. A company can even specialize its products for certain occupational groups. Economic circumstances People’s economic circumstances consist of their spendable income, savings and assets, debts, borrowing power and attitude toward spending versus saving. Marketers of income-sensitive goods pay constant attention to trends in personal income, savings and interest rates. If economic indicators point to a recession, marketers can take steps to redesign, reposition, and reprice their products so they continue to offer value to target customers. A person’s Lifestyle is the person’s pattern of living in the world as expressed in the person’s activities, interest and opinions. Lifestyle portrays the whole person interacting with his or her environment. Marketers search for relationships between their products and lifestyle groups. Two frameworks that have been used to develop lifestyle classification are the AIO framework and the VALS 2 framework. The AIO Framework. In this approach, respondents are presented with long questionnaires designed to measure their activities, interests and opinions. (AIO). Many of the questions are in the form of agreeing or disagreeing with such statements. Once collected, the data are analyzed to find distinctive lifestyle groups. When developing an advertising campaign, the marketers state the target lifestyle group, and the ad people develop an ad appealing to the AIO characteristics of the group(s). VALS. Introduced in 1978, SRI International’s Values and Lifestyles (VALS) framework has been the only commercially available psychographic segmentation to gain widespread acceptance. VALS 2 focuses more explicitly on explaining and understanding consumer behavior. It classifies all US adults into eight consumer groups based on their answers to 35 attitudinal and 4 demographic questions. The major tendencies of the four groups with greater resources are : • Actualizers - Purchases often reflect cultivated tastes for relatively upscale, niche-oriented products. • Fulfilleds - Favor durability, functionality and value in products. • Achievers - Favor established, prestige products that demonstrate success to their peers. • Experiencers - Spend a comparatively high proportion of their income on clothing, fast food, music, movies and video. The major tendencies of the four groups with fewer resources are : • Believers - Favor familiar products and established brands. • Strivers - Favor stylish products that emulate the purchases of those with greater material wealth. • Makers - Favor only products with a practical or functional purpose. • Strugglers - Cautious consumers who are loyal to favorite brands. VALS 2 combines general personality theory with research on product diffusion. The system identifies persons’ VALS 2 types by scoring responses to the VALS 2 questionnaire, which asks them to agree or disagree. Personality and Self-concept. By personality, we mean a person’s distinguishing psychological characteristics that lead to relatively consistent and enduring responses to his or her environment. Personality is usually described in terms of such traits as self confidence, dominance, autonomy, deference, sociability, defensiveness and adaptability. Personality can be a useful variable in analyzing consumer behavior,
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provided that personality types can be classified accurately and that strong correlations exist between certain personality types and product or brand choices. Related to personality is a person’s self-concept or self-image. Marketers try to develop brand images that match the target market’s self-image. It is possible that the actual self concept (how she views herself)differs from her ideal self-concept (how she would like to view herself) and from her others-self concept (how she thinks others see her). Psychological factors A person’s buying choices are influenced by four major psychological factors ; motivation, perception, learning, and beliefs and attitudes. Motivation A person has many needs at any given time. Some needs are biogenic; they arise from physiological states of tension such as hunger, thirst, discomfort. Other needs are psychogenic; they arise from psychological states of tension such as the need for recognition, esteem or belonging. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive is a need that is sufficiently pressing to drive the person to act. Psychologists have developed theories of human motivation. Three of the best known - the theories of Sigmund Freud, Abraham Maslow, and Frederick Herzberg - carry quite different implications for consumer analysis and marketing strategy. Freud’s Theory of Motivation. Freud assumed that the real psychological forces shaping people’s behavior are largely unconscious. Thus a person cannot fully understand his or her motivations. Motivation researchers collect “in-depth interviews” with a few dozen consumers to uncover deeper motives triggered by a product. They use various “projective techniques” to throw the ego off guard. More recent practicing motivational researchers hold that each product is capable of arousing a unique set of motives in consumers. Maslow’s Theory of Motivation. Abraham Maslow sought to explain why people are driven by particular needs at particular times. Maslow’s answer is that human needs are arranged in a hierarcy, from the most pressing to the least pressing. In their order of importance, there are physiological needs, safety needs, social needs, esteem needs, and self-actualization needs. When a person succeeds in satisfying an important need, that need will cease being a current motivator, and the person will try to satisfy the next-important need. This theory helps marketers understand how various products fit into the plans, goals and lives of potential consumers. Hertzberg’s Theory of Motivation. Frederick Hertzberg developed a two-factor theory of motivation that distinguishes dissatisfiers and satisfiers. The absence of dissatisfiers is not enough ; rather, satisfiers must be actively present to motivate a purchase. This theory has two implications. First, sellers should do their best to avoid dissatisfiers. Second, the manufacturer should identify the major satisfiers or motivators of purchase in the market and then supply them. Perception is the process by which an individual selects, organizes and interprets information inputs to create a meaningful picture of the world. Perception depends not only on the physical stimuli but also on the stimuli’s relation to the surrounding field and on conditions within the individual. People can emerge with different perceptions of the same object because of 3 perceptual processes : selective attention, selective distortion and selective retention. As a result people may not necessarily see or hear the message that marketers want to send. Selective Attention. Because a person cannot possibly attend to all stimuli, most stimuli will be screened out - a process called selective attention. The real challenge is to explain which stimuli people will notice. Here are some findings : • People are more likely to notice stimuli that relate to a current need.
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People are more likely to notice stimuli that they anticipate. People are more likely to notice stimuli whose deviations are large in relation to the normal size of the stimuli. Selective Attention means that marketers have to work hard to attract consumers’ notice. Their messages will be lost on most people who are not in the market for the product. Even people who are in the market may not notice a message unless it stands out from the surrounding sea of stimuli. Selective Distortion is a people’s tendency to twist information into personal meanings and interpret information in a way that will support rather than challenge their preconceptions. Unfortunately, there is not much that marketers can do about selective distortion. Selective Retention. People will forget much that they learn but will tend to retain information that supports their attitudes and beliefs. Selective retention explains why marketers use drama and repetition in sending messages to their target market. Learning involves changes in an individual’s behavior arising from experience. Most human behavior is learned. Learning theorists believe that learning is produced through the interplay of drives, stimuli, cues, responses and reinforcement. A drive is a strong internal stimulus impelling action. The drive becomes a motive when it is directed toward a particular drive-reducing stimulus. Cues are minor stimuli that determine when, where, and how the person responds. Learning theory teaches marketeers that they can build up demand for a product by associating it with strong drives, using motivating cues, and providing positive reinforcement. A new company can enter the market by appealing to the same drives that competitors use and providing similar cue configurations because buyers are more likely to transfer loyalty to similar brands than to dissimilar brands (generalization). Or the company might design its brand to appeal to a different set of drives and offer strong cue inducements to switch (discrimination). Beliefs and Attitudes. A belief is a descriptive thought that a person holds about something. These beliefs make up product and brand images, and people act on their images. If some beliefs are wrong and inhibit purchase, the manufacturer will want to launch a campaign to correct these beliefs. A company has several options when its products are competitively priced but their place of origin turns off consumers. An attitude is a person’s enduring favorable or unfavorable evaluations, emotional feelings, and action tendencies toward some object or idea. People have attitudes toward almost everything : religion, politics, clothes, music, food and so on. Attitudes put them into a frame of mind of liking or disliking an object, moving toward or away from it. Attitudes lead people to behave in a fairly consistent way toward similar objects. A person’s attitudes settle into a consistent pattern, and to change a single attitude may require major adjustments in other attitudes. The Buying Process Marketers must identify who makes the buying decision, the types of buying decisions, and the steps in the buying process. Buying Roles It is easy to identify the buyer for many products. But marketers must be careful in making targeting decisions because buying roles change. We can distinguish 5 roles people might play in a buying decision : • Initiator : A person who first suggests the idea of buying the product or service; • Influencer : A person whose view or advice influences the decision; • Decider : A person who decides on any component of a buying decision whether to buy, what to buy, how to buy, or where to buy;
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• Buyer : The person who makes the actual purchase; • User : A person who consumees or uses the product or service. Buying Behavior Consumer decision making varies with the type of buying decision. Assael distinguished 4 types of consumer buying behavior based on the degree of buyer involvement and the degree of differences among brands.
HIGH INVOLVEMENT Significant Differences Between Brands Few Differences Between Brands Complex buying behavior Dissonance-reducing buying behavior
LOW INVOLVEMENT Variety seeking buying behavior Habitual buying behavior
Complex Buying Behavior. Consumers engage in complex buying behavior when they are highly involved in a purchase and aware of significant differences among brands. This is usually the case when the product is expensive, bought infrequently, risky and highly self-expressive. Typically, the consumer does not know much about the product category and has much to learn. This involves a 3-step process. 1. The buyer develops beliefs about the product 2. Develops attitudes about the product 3. Makes a thoughtful purchase choice The marketer of a high-involvement product needs to develop strategies that assist the buyer in learning about the product’s attributes and their relative importance and that call attention to the high standing of the company’s brand on the more important attributes. Dissonance-Reducing Buying Behavior. Sometimes, the consumer is highly involved in a purchase but sees little difference in the brands. The high involvement is based on the fact the purchase is expensive, infrequent and risky. In this case, the buyer will shop around to learn what is available but will buy fairly quickly, perhaps responding primarily to a good price or to purchase convenience. After the purchase, the consumer might experience dissonance that stems from noticing certain disquieting features of the carpet or hearing favorable things about other carpets. The consumer will be alert to information that justifies his or her decision. Thus marketing communications should aim at supplying beliefs and evaluations that help the consumer feel good about his or her brand choice. Habitual Buying Behavior. Many products are bought under conditions of low consumer involvement and the abscence of significant brand differences. There is good evidence that consumers have low involvement with most low-cost, frequently purchased products. With lowinvolvement products, consumer behavior does not pass through the normal belief/attitude/behavior sequence. Consumers do not search extensively for information about the brands, evaluate their characteristics and make a weighty decision on which brand to buy. Ad repetition creates brand familiarity rather than brand conviction. Consumers do not form a strong attitude toward a brand; rather, they select it because it is familiar. Thus, for low involvement products the buying process begins with brand beliefs formed by passive learning and is followed by
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purchase behavior, which may be followed by evaluation. Marketers find it effective to use price and sales promotions to stimulate product trial, since buyers are not highly committed to any brand. Marketers use 4 techniques to try to convert lowinvolvement product into one of higher involvement. 1. They can link the product to some involving issue. 2. They can link the product to some involving personal issue. 3. They might design their advertising to trigger strong emotions related to personal values or ego defense. 4. They might add an important product feature to a low-involvement product. These strategies at best raise consumer involvement from a low to a moderate level; they do not propel the consumer into highly involved buying behavior. Variety Seeking Buying Behavior. Some buying situations are characterized by low consumer involvement but significant brand differences. Here consumers often do a lot of brand switching. The market leader and the minor brands in this product category have different market strategies. The market leader will try to encourage habitual buying behavior by dominating shelf space, avoiding out-of-stock conditions, and sponsoring frequent reminder advertising. Challenger firms will encourage variety seeking by offering lower prices, deals, coupons, free samples and advertising that presents reasons for trying something new. The Stages of the Buying Decision Process Smart companies research the buying decision process involved in their product category. They can think how they themselves would act (introspective method). They can interview a small number of recent purchases, asking them to recall the events leading to their purchase (retrospective method). They can locate consumers who plan to buy the product and ask them to think out loud about going through the buying process (prospective method). Or they can ask consumers to describe the ideal way to buy the product(prescriptive method). Each method yields a picture of the steps in the consumer buying process. The following figure shows a stage model of the typical buying process. It’s not always the case to pass sequentially through all the five stages in buying a product especially with low-involvement products. Consumers may skip or reverse some stages. Problem Recognition The buying process starts when the buyer recognizes a problem or need. The buyer senses a difference between his or her actual state and a desired state. The need can be triggered by internal or external stimuli. Marketers need to identify the circumstances that trigger a particular need. By gathering information from a number of consumers, marketers can identify the most frequent stimuli that spark an interest in a product category. The marketer can then develop marketing strategies that trigger consumer interest. Information Search An aroused consumer will be inclined to search for more information. We can distinguish between two levels of arousal. The milder search state is heighetened attention; simply more receptive to information. At the next level, is active information search. Of key interest to the marketer are the major information sources to which the consumer will turn and the relative influence each will have on the subsequent purchase decision. Consumer information sources fall into four groups : • Personal sources : Family, friends, neighbors, acquaintances • Commercial sources : Advertising, salespersons, dealers, packaging, displays • Public sources : Mass media, consumer-rating organizations • Experiential sources : Handling, examining, using the product
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Generally speaking, the consumer receives the most information about a product from commercial sources - that is market dominated sources. But the most effective sources comes from personal sources. Through gathering information, the consumer learns about competing sets of brands and their features. At first we have total set of brands available to the consumer. The consumer will come to know only a subset of these brands (awareness set). Some brands will meet the consumer’s initial criteria (consideration set). As the consumer gathers more information, only a few will remain as strong contenders (choice set). The brands in the choice set might all be acceptable. The consumer makes the final choice from this set. A company must strategize to get its brand into the prospect’s awareness set, consideration set, and choice set. The company must also identify the other brands in the consumer’s choice set so that it can plan its competitive appeals. In addition, the company should identify the consumer’s information sources and evaluate their relative importance. Consumers should be asked how they first heard about the brand, what information came in later, and the relative importance of the different information sources. The answers will help the company prepare effective communications for the target market. Evaluation of Alternatives. There is no simple and single evaluation process used by all consumers or by one consumer in all buying situations. There are several decision evaluation processes, the most current models of which see the consumer evaluation process as cognitively oriented. That is, they see the consumer as forming product judgments largely on a conscious and rational basis. Consumers differ as to which product attributes they see as most relevant as well as on the importance of weights they attach to each attribute. They will pay the most attention to the attributes that deliver the sought benefits. The consumer develops a set of brand beliefs about where each brand stands on each attribute. The set of beliefs about a brand make up the brand image. The consumer’s brand image will vary with his or her experiences as filtered by the effects of selective perception, selective distortion and selective retention. The consumer arrives at preferences towards the various brands through an attribute evaluation process. Purchase decision. In the evaluation stage, the consumer forms preferences among the brands in the choice set. The consumer may also form an intention to buy the most preferred brand. However, two factors can intervene between the purchase intention and the purchase decision. The first factor is the attitudes of others. A buyer’s preference for a brand will increase if someone he or she likes favors the same brand strongly. The influence of others become complex when several people close to the buyer hold contradictory opinions and the buyer would like to please them all. The second factor is unanticipated situational factors. These may erupt to change the purchase intention. Thus preferences and even purchase intentions are not completely reliable predictors of purchase behavior. A consumer’s decision to modify, postpone or avoid a purchase decision is heavily influenced by perceived risk. Consumers develop routines for reducing risk, such as decision avoidance, information gathering from friends, and prefernce for national brand names and warranties. In executing a purchase intention, the consumer may make up to five purchase subdecisions. 1. Brand decision 2. Vendor decision 3. Quantity decision 4. Timing decision 5. Payment method decision Postpurchase Behavior.
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After purchasing a product, a consumer may detect a flaw. Some buyers will no longer want the flawed product, others will be indifferent to the flaw, and some may even see the flaw as enhacing the product’s value. The buyer’s satisfaction is a function of the closeness between the buyer’s product expectations and the product’s perceived performance. The larger the gap between expectations and performance, the greater the consumer’s dissatisfaction. The importance of postpurchase satisfaction suggests that sellers must make product claims that truthfully represent the produt’s likely performance. The consumer’s satisfaction or dissatisfaction wit the product will influence subsequent behavior. if the consumer is satisfied, he or she will exhibit a higher probability of purchasing the product again. The satisfied customer will also tend to say good things about the brand to others. Dissatisfied consumers respond differently. They may abandon or return the product. They may seek information that confirms its high value. They may take public action such as by complaining to the company, going to the lawyer or complaining to other groups. Private actions include making a decision to stop buying the product (exit option) or warning friends (voice option). Marketers can and should take steps to minimize the amount of consumer postpurchase dissatisfaction. Marketers should also monitor how the buyers use and dispose of the product. If consumers store the product, in their closet, the product is probably not very satisfying, and word-of-mouth will not be strong. If they sell or trade the product, new product sales will be depressed. If consumers find new uses for the product, marketers should advertise these uses. If consumers throw the product away, the marketer needs to know how they dispose of it, especially if it can hurt the environment.
Chapter 7 - ANALYZING BUSINESS MARKETS AND BUSINESS BUYING BEHAVIOR
What is Organizational Buying ? Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate and choose among alternative brands and suppliers. The Business Market versus the Consumer Market
The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented or supplied to others.
Business markets have several characteristics that constrast sharply with consumer markets.
Fewer buyers. The business marketer normally deals with far fewer buyers than the consumer marketer does. Large buyers. Many business markets are characterized by a high buyerconcentration ratio. A few large buyers do most of the purchasing in such industries as aircraft engines and defense weapons. Close supplier-customer relationship. Because of the smaller customer base and the importance and power of the large customers, we observe close relationships between customers and suppliers in business markets. Suppliers
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are frequently expected to customize their offerings to individual business customer needs. Contracts go to those suppliers who cooperate with the buyer on technical specifications and delivery requirements. • Geographically concentrated buyers. Industries such as petroleum, rubber and steel show an even greater geographical concentration. Most agricultural output comes from relatively few states. This geographical concentration of producers helps to reduce selling costs. At the same time, business marketers need to monitor regional shifts of certain industries. Derived demand. The demand for business goods is ultimately derived from the demand for consumer goods. If the demand for these consumer goods slackens, so will the demand for all the business goods entering into their production. For this reason, the business marketer must closely monitor the buying patterns of ultimate consumers. Inelastic demand. The total demand for many business goods and services is inelastic, that is not much affected by price changes. Demand is especially inelastic in the short run because producers cannot make quick changes in their production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost. However, producers may switch their eyelets supplier in response to price differences. Fluctuating demand. The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. This is especially true of the demand for new plant and equipment. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this effect as the acceleration effect. This sales volatility has led many business marketers to diversify their products and markets to achieve more balanced sales over the business cycle. Professional purchasing. Business goods are purchased by trained purchasing agents who must follow the organization’s purchasing policies, constraints, and requirements. Many of the buying instruments - for example, requests for quotations, proposals, and purchase contracts - are not typically found in consumer buying. Several buying influences. More people typically influence business buying decisions than consumer buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Consequently, business marketers have to send well-trained sales reqpresentatives and often sales teams to deal with the well-trained buyers. Although advertising, sales promotion, and publicity play an important role in the business promotional mix, personal selling usually serves as the main marketing tool. Business marketers also need to remember that women and minorities now account for a significant share of purchase decision makers. Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediaries, especially those items that are technically complex and /or expensive. Reciprocity. Business buyers often select suppliers who also buy from them. Leasing. Many industrial buyers lease their equipment instead of buying it. The lessee gains a number of advantages : conserving capital, getting the
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seller’s latest products, receiving better service, and gaining some tax advantages. The lessor often ends up with a larger net income and the chance to sell to customers who could not afford ouright purchase.
Buying Situations The business buyer faces many decisions in making a purchase. The number of decisions depends on the type of buying situation. Robinson and others distinguish three types of buying situations :
1. Straight rebuy. A buying situation in which the purchasing department reorders on a routine basis. The buyer chooses from suppliers on its “approved list”, giving weight to its past buying satsifaction with the various suppliers. The “in-suppliers” make an effort to maintain product and service quality. They often propose automatic reordering systems so that the purchasing agent will save reordering time. The “out-suppliers” attempt to offer something new or to exploit dissatisfaction with a current supplier. Out-suppliers try to get a small order and then enlarge their purchase share over time. 2. Modified rebuy. A situation in which the buyer wants to modify product specifications, prices, delivery requirements or other terms. Usually involves additional decision participants on both the buyer and seller sides. The insuppliers become nervous and have to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business. 3. New task. A buying situation in which a purchaser buys a product or service for the first time. The greater the cost and/or risk, the larger the number of decision participants and the greater their information gathering - and therefore the longer the time to decision completion. The new-task situation is the marketer’s greatest opportunity and challenge. The marketer tries to reach as many key buying influences as possible and provide helpful information and assistance. Because of the complicated selling involved in the new task, many companies use a missionary sales force consisting of their best salespeople. New-task buying passes through several stages : awareness, interest, evaluation, trial and adoption. Communication tools’ effectiveness varies at each stage. Mass media are most important during the initial awareness stage; salespeople have their greatest impact at the interest stage; and technical sources are the most important during the evaluation stage.
The business buyer makes the fewest decisions in the straight-rebuy situation and the most in the newtask situation. In the latter, the buyer has to determine product specs, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers and the selected supplier.
Systems buying and selling. Many business buyers prefer to buy a total solution to their problem from one seller. Called systems buying, this practice originated with government purchases of major weapons and communication systems. The government would solicit bids from prime contractors, who would assemble the package or system. The contractor who was awarded the contract would be responsible for bidding out and assembling the system’s subcomponents from second-tier contractors. The prime contractor would thus provide a “turnkey solution” so called because the buyer simply had to turn one key to get the job done. Sellers have increasingly recognized that buyers like to purchase in this way and many have adopted systems selling as a marketing tool. A variant on systems selling is systems contracting, where a single supply source provides the buyer with his or her entire requirement of MRO (maintenance, repair, operating) supplies. The customer benefits from reduced costs because the seller maintains the inventory. Savings also result from reduced time spent on supplier selection and from price protection over
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the term of the contract. The seller benefits from lower operating costs because of a steady demand and reduced paperwork.
Participants in the Business Buying Process
Webster and Wind call the decision-making unit of a buying organization the buying center. The buying center is composed of “all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.” The buying center includes all members of the organization who play any of the seven roles in the purchase decision process. 1. Initiators. Those who request that something be purchased. They may be users or others in the organization. 2. Users. Those who will use the product or service. In many cases, the users initiate the buying proposal and help define the product requirements. 3. Influencers. People who influence the buying decision. They often help define specifications and also provide information for evaluating alternatives. 4. Deciders. People who decide on product requirements and/or on suppliers. 5. Approvers. People who authorize the proposed actions of deciders or buyers. 6. Buyers. People who have formal authority to select the supplier and arrange the purchase terms. Buyers may help shape product specifications, but they play their major role in selecting vendors and negotiating. In more complex purchases, the buyers might include high-level managers participating in the negotiations. 7. Gatekeepers. People who have the power to prevent sellers or information from reaching members of the buying center.
To target their efforts properly, business marketers have to figure out : Who are the major decision participants ? What decisions do they influence ? What is their level of influence ? What evaluation criteria do they use ? When a buying center includes many participants, the business marketer will not have the time or resources to reach all of them. Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multi-level in-depth selling to reach as many buying participants as possible. Their salespeople virtually “live” with their high-volume customers. As buying teams become more prevalent, however, salespeople will find it increasingly difficult to locate, much less call on, all of the individuals involved in the purchasing decision. Rather companies will have to rely more heavily on their communications program to reach hidden buying influences and keep their current customers sold. Business marketers must periodically review their assumptions of the roles and influence of different decision participants. Business marketers who work in global markets must also be aware of business buying practices internationally. Major influences on Business Buyers In general, the influences on business buyers can be classified into four main groups : environmental, organizational, interpersonal, and individual.
ENVIRONMENTA L Level of demand Economic outlook ORGANIZATIONA L Objectives INTERPERSONA L
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Interests Authority Status Empathy
INDIVIDUA L Age Income Education Job position Personality BUSINES S BUYER
Rate of Procedures technological change
Political and regulatory developments Competitive developments Social responsibility concerns
Organizational structures Systems
Risk attitudes Culture
Environmental factors. Business buyers are heavily influenced by factors in the current and expected economic environment, such as the level of demand for their product, the economic outlook and the interest rate. In a recession economy, business buyers reduce their investment in plant, equipment and inventories. Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign long-term contracts with suppliers to ensure a steady flow of materials. Business buyers are also affected by technological, political/regulatory, and competitive developments in the environment. The business marketer has to monitor all of these forces, determine how they will affect buyers, and try to turn problems into opportunities. Interestingly, socially responsible buying is rarely initiated by purchasing departments but rather comes about either through the actions of a policy enterpreneur or because the organization is already dedicated to being socially responsible. Buyers in socially responsible organizations will put pressure on suppliers to be socially responsible as well. Organizational factors. Each buying organization has specific objectives, policies, procedures, organizational structures and systems. The business marketer has to be familiar with all of these. Business marekters should be particularly aware of the following organizational trends in the purchasing area : • Purchasing-department upgrading : Recent competitive pressures have led many companies to upgrade their purchasing departments and elevate their administrators to vice-presidential status. These departments have been changed from old-fashioned “purchasing departments” with an emphasis on buying at the lowest cost to “procurement deparments” with a mission to seek the best value from fewer and better suppliers. In addition many companies are looking for top buying talent and offering higher compensation. Centralized purchasing. Headquarters identifies materials purchased by several divisions and buys them centrally, thereby gaining more purchasing bust. The individual divisions can buy from another source if they can get a better deal, but in general centralized purchasing produces substantial savings
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for the company. For the business marketer, this development means dealing with fewer and higher-level buyers. • Decentralized purchasing of small ticket items. At the same time that many companies are centralizing their purchasing processes, they are also decentralizing some purchasing operations by empowering employees to purchase small-ticket items such as duplicate keys, coffee makers or Christmas trees. This revolution has come about through the availability of corporate purchasing cards issued by credit-card organizations. The additional benefit, for both buyers and suppliers, is that with less time to spend on paperwork, purchasing departments have more time for building partnerships. Long-term contracts. Business buyers are increasingly initiating or accepting long-term contracts with reliable suppliers. in addition, business marketers are supplying electronic data interchange (EDI) to their customers. Purchasing-performance evaluation and buyers’ professional development. Many companies have set up incentive systems to reward purchasing managers for good buying performance. These systems are leading purchasing managers to increase their pressure on sellers for the best terms.
The emergence of JIT production systems promises to have a major impact on organizational purchasing policies.
Interpersonal factors. The buying center usually includes several participants with different interests, authority, status, empathy and persuasiveness. The business marketer is not likely to know what kind of group dynamics take place during the buying decision process, although whatever the information he or she can discover about the personalities and interpersonal factors would be useful. Individual factors. Each participant in the buying process has personal motivations, perceptions and preferences. These are influenced by the participant’s age, income, education, job position, personality, attitudes towards risk and culture. Buyers definitely exhibit different buying styles. There are “keep-it-simple” buyers, “ownexpert” buyers, “want-the-best” buyers, and “want-everything-done” buyers. Some younger highly educated buyers are computer experts who conduct rigorous analyses of competitive proposals before choosing a supplier. Even factors that seem consistent across one country or culture can vary drastically in another country or culture.
The Purchasing/Procurement Process
To buy the needed goods, business buyers move through a purchasing/procurement prcess. Robinson et al. have identified eight stages of the industrial buying process and called them buyphases. These stages are : BUY
NEW TASK 1. Problem recognition 2. General need description 3. Product specification 4. Supplier search YES YES YES YES
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CLASSES MODIFIED REBUY MAYBE MAYBE YES MAYBE STRAIGHT REBUY NO NO YES NO
5. Proposal solicitation 6. Supplier selection 7. Order-routine specification 8. Performance review
YES YES YES YES
MAYBE MAYBE MAYBE YES
NO NO NO YES
This model is called the buygrid framework. The eight steps for the typical new-task buying situation are as follows. Problem recognition. The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a good or a service. Problem recognition can occur as a result of internal or external stimuli. Internally, the most common events leading to problem recognition are the following :
• • • • The company decides to develop a new product and needs new equipment and materials to produce this product. A machine breaks down and requires replacement or new parts. Purchased material turns out to be unsatisfactory, and the company searches for another supplier. A purchasing manager senses an opportunity to obtain lower prices or better quality.
Externally, the buyer may get new ideas at a trade show, see an ad, or receive a call from a sales representative who offers a better product or a lower price. Business marketers can stimulate problem recognition by direct mail, telemarketing, and calling on prospects.
General Need Description. Once a need is recognized, the buyer proceeds to determine the needed item’s general characteristics and quantity needed. For standard items, this is not a very involved process. For complex items, the buyer will work with others to define the general characteristics that the product must have. These may include reliability, durability, price and/or other attributes. The business marketer can assist the buyer in this phase by describing how his or her products fit the organization’s general needs. Product Specification. After general needs are identified, the buying organization must develop the item’s technical specifications. Often the company will assign a product-value-analysis (PVA) engineering team to the project. PVA is an approach to cost reduction in which components are carefully studied to determine if they can be redesigned or standardized or made by cheaper methods of production. Suppliers, too can use PVA as a tool for positioning themselves to win an account. By getting in early and influencing buyer specifications, the supplier increases its chances of being chosen in the supplier-selection stage. Supplier Search. Once the product has been specified, the buyer tries to identify the most appropriate suppliers. The buyer can examine trade directories, do a computer search, phone other companies for recommendations, watch trade advertisements, and attend trade shows. The supplier’s task is to get listed in major directories, develop a strong advertising and promotion program, and build a good reputation in the marketplace. Suppliers who lack the required production capacity or suffer from a poor reputation will be rejected. Those who qualify may be visited by the buyer’s agents, who will examine the suppliers’ manufacturing facilities and meet their personnel. After evaluating each company, the buyer will end up with a short list of qualified suppliers.
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Proposal Solicitation. The buyer will now invite qualified suppliers to submit proposals. Where the item is complex or expensive, the buyer will require a detailed written proposal from each qualified supplier. After evaluating the proposals, the buyer will eliminate some suppliers and invite the remaining suppliers to make formal presentations. Business marketers must thus be skilled in researching, writing and presenting proposals. Their written proposals should be marketing documents, not just technical documents. Their oral presentations should inspire confidence, positioning their company’s capabilities and resources so that they stand out from the competition. An important part of any presentation involves not only giving information but also asking questions. Supplier Selection. Before selecting a supplier, the buying center will specify desired supplier attributes and indicate their relative importance. It will then rate suppliers on these attributes and identify the most attractive suppliers. The choice and importance of different attributes varies with the type of buying situation. Delivery reliability, price, and supplier reputation are highly important for routine-order products. For procedural-problem products, such as a copying machine, the three most important attributes are technical service, supplier flexibility and product reliability. For political-problem products that stir rivalries in the organization the most important attributes are price, supplier reputation, product reliability, service reliability and supplier flexibility. The buying center may attempt to negotiate with its preferred suppliers for better prices and terms before making the final selection. Marketers can counter the request for a lower price in a number of ways. They may be able to show evidence that the “life-cycle cost” of using its product is lower than that of competitors’ products. They can also cite the value of the services the buyer now receives, especially where those services are superior to those offered by competitors. Increasingly however companies are reducing the number of suppliers. Furthermore, these companies want each chosen supplier to be responsible for a larger component system. They also often require the chosen suppliers to achieve continuous quality and performance improvement while at the same time lowering the supply price each year by a given percentage. These companies rely on their supplierrs to work closely with them during product development and value their suggestions. Order routine specification. After the suppliers have been selected, the buyer negotiates the final order, listing the technical specifications, the quantity needed, the expected time of delivery, return policies, warranties, and so on. In the case of maintenance, repair and operating items, buyers are increasingly moving toward blanket contracts rather than periodic purchase orders. Writing a new purchase order, each time stock is needed is expensive and time consuming. Nor does the buyer want to write fewer and larger purchase orders because that means carrying more inventory. A blanket contract establishes a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed-upon prices over a specified period of time. Because the stock is held by the seller, blanket contracts are sometimes called stockless purchase plans. The buyer’s computer automatically sends an order to the seller when stock is needed. Blanket contracting leads to more single-source buying and ordering of more items from that single source. This system locks the supplier in tighter with the buyer and makes it difficult for out-suppliers to break in unless the buyer becomes dissatisfied with the in-supplier’s prices, quality or service. Performance review. When all is said and done, the buyer reviews the performance of the chosen supplier(s). Three methods are commonly used. The buyer may contact the end users and ask for their evaluations. Or the buyer may rate the supplier on several
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criteria using a weighted score method. Or the buyer might aggregate the cost of poor supplier performance to come up with adjusted costs of purchase, including price. The performance review may lead the buyer to continue, modify or drop his relationship with the supplier. The supplier should monitor the same variables that are monitored by the product’s buyers and end users. Institutional and Government markets. The institutional market consists of schools, hospitals, nursing homes, prisons and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. The hospital purchasing agent has to search for insitutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. In fact, many vendors set up a separate division to sell to institutional buyers because of these buyers’ special buying needs and characteristics. In most countries, government organizations are a major buyer of goods and services. Government organizations typically required suppliers to submit bids, and normally they award the contract to the lowest bidder. In some cases, the government unit will make allowance for the supplier’s superior quality or reputation for completing contracts on time. Governements will also buy on a negotiated contract basis, primarily in the case of complex projects involving major R&D costs and risks, and in cases where there is little competition. Because their spending decisions are subject to public review, government organizations require considerable paperwork from suppliers, who often complain about excessive paperwork, bureaucracy, regulations, decision-making delays and frequent shifts in procurement personnel.
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