The Marketing
Program
CHAPTER
6
G
A
INTRODUCTION
T
With a clearly defined target market in hand, the organization turns its attention
E
toward developing a marketing program that will fulfill the target’s needs and wants
better than the competition. When we say marketing program
S , we are referring to the
strategic combination of the four basic marketing mix elements: product, price, dis,
tribution, and promotion. Although each element is vitally important to the success
of the marketing strategy, the product usually receives the most attention because it
is most responsible for fulfilling the customers’ needs
D and wants. However, since
customers’ needs and wants are multifaceted, we prefer to think of the outcome of
E
the marketing program as a complete “offering” that consists
of an array of physical
(tangible), service (intangible), and symbolic (perceptual)
attributes
designed to satA
isfy customers’ needs and wants. In other words, the best marketing strategy is likely
Nand promotion elements in a
to be one that combines the product, price, distribution,
way that maximizes the tangible, intangible, and perceptual
attributes of the comD
plete offering.
R of the marketing program
Good marketing strategy considers all four elements
and the offering rather than emphasizing a single element.
A We have noted throughout
this text how most firms today compete in rather mature markets characterized by
commoditization. In these cases, the core product (the element that satisfies the
basic customer need) typically becomes incapable of
1 differentiating the offering
from those of the competition. Consequently, most organizations work to enhance
1
the service and symbolic elements of their offerings by changing price, distribution,
or promotion in order to stand out from the crowd.2As described in Beyond the
Pages 6.1, this makes marketing strategy even more challenging for the firm. It also
3
requires that the marketing program be considered holistically rather than sequentially. This means that products must be designed withTan eye toward how they will
be priced, distributed, and promoted. It does a company
S no good to develop a standout product that is not price competitive, difficult to ship or store, and hard to convey in promotional messages. All four elements of the marketing program must be
developed simultaneously.
In this chapter, we examine the four elements of the marketing program in
more detail. Issues such as product design, affordability, distribution convenience,
and product awareness are major considerations in developing an effective marketing program. Problems in any one area can create obstacles that customers may
be unwilling to overlook as they search for the best offering that will fulfill their
needs.
153
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154
Chapter 6 • The Marketing Program
BEYOND THE PAGES 6.1
Can Physical Books Save Barnes &
Noble?1
Like many companies in the Internet economy,
Barnes & Noble is at a crossroads. The largest
U.S. bookstore chain made retailing history
when it opened the first category–killer bookstore in the late 1980s. At that time, the store
was five times the size of a typical bookstore.
Customers flocked to the spacious and comfortable stores that offered a comprehensive inventory of books, music, and DVDs. Most of the
stores also included a café where customers
could have coffee, a snack, and enjoy a good
book. Barnes & Noble had successfully converted the small, mall-based bookstore to a
true destination for book-loving customers.
But that was in the 1980s and 1990s. As the
Internet economy took off in the late 1990s and
into the 2000s, Barnes & Noble was forced to
move online. At the launch of Barnesandnoble.
com in 1997, the company offered a staggering
1 million titles for immediate delivery, plus access
to a nationwide network offering over 30 million
listings from out-of-print, rare, and used book dealers. This move came at roughly the same time as
the launch of an unusual online bookstore called
Amazon.com. Amazon offered a limited selection
and was a pure Internet-based company, so few
people gave the company any chance of succeeding. Plus, Amazon was losing money. At the time,
Barnes & Noble wasn’t worried about Amazon
because their book superstore concept was a
huge success. And, everyone knew that book
lovers preferred to browse in the store, sit in comfortable chairs, and enjoy a coffee. Didn’t they?
Fast-forward to today and we all know that
Amazon has been remarkably successful. So
much so that other book retailers, namely
Borders and Waldenbooks, have since closed.
We also know that Amazon sells more e-books
than physical books. E-readers such as
Amazon’s Kindle and Barnes & Noble’s Nook
(plus a variety of tablets like the iPad and Kindle
Fire) are wildly popular among a variety of target customers, old and young. In addition, other
competitors have entered the market. Apple, for
example, offers e-books through its iBooks app
on the iPad and iPhone. Google now offers free
access to millions of public domain books. The
rapid changes in the book retailing market have
forced Barnes & Noble to adapt, and these
changes now threaten the future of the oncedominant book retailer.
What can Barnes & Noble do to remain relevant and viable in this market? To answer that
question, we need to look at the company’s
current marketing program:
•
G
A
T
E
S
,
D•
E
A
N
D
R•
A
1
1
2
3
T
S
•
Products. Barnes & Noble competes in
a highly commoditized product market.
Books, whether offered in print or as ebooks, are the same no matter where they
are purchased. Barnes & Noble does have
an advantage in the textbook market, but
the differences between its selection and
the selection at Amazon are disappearing
fast. Amazon, on the other hand, offers a
very broad selection of products ranging
from electronics to beauty supplies. Barnes
& Noble offers a much narrower variety of
books, music, movies, and some toys. Both
companies’ e-readers are competitively
matched in terms of features and benefits.
Pricing. Given the commoditized nature
of the market, price would be one logical
place to compete against Amazon and other
competitors. However, there is very little
price differentiation in the book market.
This is especially true with respect to ebooks, where prices are roughly the same
across multiple competitors.
Distribution. Barnes & Noble has invested a
lot of resources into its distribution system.
However, Amazon is also no slouch at supply
chain management. One area where Barnes
& Noble has a distinct advantage is on college campuses. The company operates over
717 college bookstores serving over 4 million
students and 250,000 faculty in all 50 states.
The company’s physical footprint also
includes roughly 650 traditional Barnes &
Noble stores that draw millions of customers
annually. These stores are still destinations
for true book lovers, something that Amazon
cannot copy.
Promotion. It is very hard to build a competitive advantage based on promotion alone, and
neither Barnes & Noble nor Amazon stand out
per se. Both have strong brands and positioning. Both also offer membership programs.
However,
Amazon’s
program—Amazon
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Chapter 6 • The Marketing Program
Prime—beats Barnes & Noble by a wide margin. For a $99 per year fee, Prime members get
free two-day shipping on millions of products,
free instant streaming of thousands of movies
and television programs, and the ability to borrow one Kindle e-book each month. By contrast, Barnes & Noble’s members get free
shipping and small discounts on books and
Nook e-readers.
It is clear that carving out a strong competitive advantage is difficult for any book retailer.
Barnes & Noble has an edge in college campus
distribution and a loyal customer following. Amazon, however, has an edge in terms of the total
digital ecosystem and a loyal following of priceconscious customers. In some ways the two companies compete using different paradigms.
Although the company continues to lose
ground in the digital book market to Amazon,
Barnes & Noble’s saving grace is likely to be
its retail footprint, especially on college campuses. In the college market, Follett leads the
way with 940 campus stores (to 717 for Barnes
& Noble). However, since 53 percent of colleges
and universities still operate their own stores,
the market growth potential in the college market is very large. Barnes & Noble is partnering
with these universities to create academic
superstores that are much larger than a traditional Barnes & Noble store. These superstores
often include larger cafes, more clothing, and
stores-within-a-store such as Clinique or Apple.
G The college store side of Barnes & Noble is so
successful that the company plans to spin it off
A into a separate business in late 2015.
T
E
PRODUCT STRATEGY
S
Of all the strategic decisions to be made in the marketing plan, the design, develop,
ment, branding, and positioning of the product are perhaps
the most critical. At the
heart of every organization lies one or more products that define what the organization does and why it exists. As we stated in Chapter 1, the term “product” refers to
D
something that buyers can acquire via exchange to satisfy a need or a want. This is a
very broad definition that allows us to classify manyEdifferent things as products:
food, entertainment, information, people, places, ideas, etc. An organization’s prodA
uct offering is typically composed of many different elements—usually some combination of tangible goods, services, ideas, image, or N
even people. As we consider
product decisions here, it is important to remember that
D product offerings in and of
themselves have little value to customers. Rather, an offering’s real value comes
R situation or solve a cusfrom its ability to deliver benefits that enhance a customer’s
tomer’s problems. For example, customers don’t buyA
pest control; they buy a bugfree environment. Lexus customers don’t buy a car; they buy luxury, status, comfort,
and social appeal. Students who frequent a local nightclub are not thirsty; they want
to fulfill their need for social interaction. Likewise, companies
do not need compu1
ters; they need to store, retrieve, distribute, network, and analyze data and informa1 product offerings that truly
tion. Marketers who keep their sights set on developing
meet the needs of the target market are more likely to2be successful.
3
Strategic Issues in the Product Portfolio
T
Products fall into two general categories. Products used
S for personal use and enjoy-
ment are called consumer products, while those purchased for resale, to make other products, or for use in a firm’s operations are called business products. Exhibit 6.1
illustrates examples of each type of product category. Although the distinction may
seem simplistic, it is important in a strategic sense because the type of product in question can influence its pricing, distribution, or promotion. For example, marketing strategy for consumer convenience products must maximize availability and ease of
purchase—both important distribution considerations. The strategy associated with
consumer shopping products often focuses more on differentiation through image
and symbolic attributes—both important branding and promotion issues. Marketing
strategies for raw materials are especially challenging because these products are
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156
Chapter 6 • The Marketing Program
EXHIBIT 6.1
Types of Consumer and Business Products.
Consumer Products
Type of Product
Convenience Products
Inexpensive, routinely purchased products that consumers spend little time
and effort in acquiring.
Shopping Products
Products that consumers will spend time and effort to obtain. Consumers
shop different options to compare prices, features, and service.
Specialty Products
Unique, one-of-a-kind products that consumers will spend considerable
time, effort, and money to acquire.
Unsought Products
G
Products that consumers are unaware of or a product that consumers do not
consider purchasing until a need arises.
A
Business Products
T
Raw Materials
Basic natural materials that become part
E of a finished product. They are
purchased in very large quantities based on specifications or grades.
S
,
Component Parts
Finished items that become part of a larger finished product.
They are purchased based on specifications or industry standards.
D
Process Materials
E
Finished products that become unidentifiable upon their inclusion in the
finished product.
A
Maintenance, Repair, and OperatingNProducts
Products that are used in business processes or operations but do not
become part of the finished product. D
R
Accessory Equipment
Products that help facilitate productionA
or operations but do not become part
of the finished product.
1
Installations
Major purchases, typically of a physical
1 nature, that are based on
customized solutions including installation/construction, training, financing,
maintenance, and repair.
2
Business Services
3
Intangible products that support business operations. These purchases often
T
occur as a part of outsourcing decisions.
S
Examples
Soft drinks
Candy and gum
Gasoline
Dry cleaning
Appliances
Furniture
Clothing
Vacations
Sports memorabilia
Antiques
Plastic surgery
Luxury items
True innovations
Repair services
Emergency medicine
Insurance
Iron ore
Chemicals
Agricultural products
Wood pulp
Spark plugs
Computer chips
Pane glass
Hard drives
Food additives
Wood sealants
Paint colorings
Office supplies
Janitorial services
Building security
Bathroom supplies
Tools
Office equipment
Computers
Furniture
Enterprise software
Buildings
Heat and air systems
Legal services
Accounting services
Consulting
Research services
SOURCE: This material is adapted from William M. Pride and O.C. Ferrell, Marketing (Mason, OH: Cengage Learning, 2010), pp. 285–289.
commodities by definition. Here, conformance to exacting product specifications and
low acquisition costs are the keys to effective strategy. Many business products are
also characterized by derived demand, where the demand for the product is derived
from, or dependent upon, the demand for other business or consumer products. For
example, the demand for business products such as glass, steel, rubber, chrome,
leather, and carpeting is dependent upon the demand for automobiles.
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Chapter 6 • The Marketing Program
It is very rare for a company to sell only one product. Most firms sell a variety
of products to fulfill a variety of different needs. In general terms, the products sold
by a firm can be described with respect to product lines and product mixes. A product
line consists of a group of closely related product items. As shown in Exhibit 6.2,
Procter & Gamble sells a number of famous brands in its Fabric and Home Care
line, including Tide, Dawn, and Cascade. Most companies sell a variety of different
product lines. The different product lines at General Motors carry well-known
brand names like Corvette, Chevrolet, Cadillac, and Buick. Likewise, FedEx offers a
number of logistics and supply chain services in its family of brands, such as FedEx
Express, FedEx Ground, and FedEx Freight. A firm’s product mix or portfolio is the total
group of products offered by the company. For example, Procter & Gamble’s entire
product portfolio consists of Beauty, Hair, and Personal Care products; Baby, Feminine, and Family Care products; and Health and Grooming products in addition to
the products in its Fabric and Home Care line.
Decisions regarding product lines and product mixes are important strategic
considerations for most firms. One of these important
G decisions is the number of
product lines to offer, referred to as the width or variety of the product mix. By offerA its risk across a portfolio of
ing a wide variety of product lines, the firm can diversify
product offerings. Also, a wide product mix can be used
T to capitalize on the strength
and reputation of the firm. Sony, for example, enjoys this advantage as it uses its
E and movies. The second
name to stake out a strong position in electronics, music,
important decision involves the depth of each productSline. Sometimes called assortment, product line depth is an important marketing tool. Firms can attract a wide
range of customers and market segments by offering a, deep assortment of products
in a specific line. Each brand or product in the assortment can be used to fulfill
different customer needs. For example, Hilton, Inc. offers 12 different lodging
D
brands—including Hilton, Hilton Garden Inn, Hampton Inn, Conrad, and Embassy
E market.
Suites—that cater to different segments of the hospitality
Although offering a large portfolio of products can make the coordination of
A
marketing activities more challenging and expensive, it also creates a number of
N
important benefits:
•
D lines can create economies
Economies of Scale. Offering many different product
of scale in production, bulk buying, and promotion.R
Many firms advertise using an
umbrella theme for all products in the line. Nike’s “Just Do It” and Maxwell
A The single theme covering
House’s “Good to the Last Drop” are examples of this.
the entire product line saves considerably on promotional expenses.
EXHIBIT 6.2
Product
Mix
Depth
(Assortment)
1
1
Product Mix Width (Variety)
2
Household
Laundry and
Cleaners
Fabric Care
Batteries
3
Mr. Clean
Duracell*
Tide
T
Swiffer
Cheer
S Bounce
Procter & Gamble’s Portfolio of Fabric and Home Care Products.
Dish Washing
Ariel
Dawn
Cascade
Paper
Products
Charmin
Gain
Downy
Dreft
Era
Febreze
Bold
Ace
*At the time of publication, P&G planned to sell Duracell to Berkshire Hathaway for $4.7 billion.
SOURCE: From the Procter & Gamble website (http://www.pg.com/en_US/brands/global_fabric_home_care/index.shtml),
accessed March 29, 2015.
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157
158
Chapter 6 • The Marketing Program
•
•
•
•
Package Uniformity. When all packages in a product line have the same look
and feel, customers can locate the firm’s products more quickly. It also becomes
easier for the firm to coordinate and integrate promotion and distribution. For
example, Duracell batteries all have the same copper look with black and copper
packaging.
Standardization. Product lines often use the same component parts. For example, GM often shares components across its Buick, GM, and Chevrolet product
lines. This greatly reduces GM’s manufacturing and inventory handling costs.
Sales and Distribution Efficiency. When a firm offers many different product
lines, sales personnel can offer a full range of choices and options to customers.
For the same reason, channel intermediaries are more accepting of a product
line than they are of individual products.
Equivalent Quality Beliefs. Customers typically expect and believe that all
products in a product line are about equal in terms of quality and performance.
This is a major advantage for a firm that offers a well-known and respected line
of products. For example,G
Crest’s portfolio of oral care products all enjoys the
same reputation for high quality.
A
A firm’s product portfolio must
T be carefully managed to reflect changes in customers’ preferences and the introduction of competitive products. Product offerings
E or more characteristics that enhance quality, style,
may be modified to change one
or lower the product’s price.SFirms may introduce product line extensions that
allow it to compete more broadly in an industry. The recent trend of flavored soft
, Pepsi Vanilla, and Dr. Pepper Cherry Vanilla, is a
drinks, such as Vanilla Coke, Diet
good example of this. Sometimes, a firm may decide that a product or product line
has become obsolete or is just not competitive against other products. When this
D
happens, the firm can decide to contract the product line, as GM did when it dropped
E divisions.
its Pontiac, Saturn, and Hummer
A
The Challenges of ServiceNProducts
It is important to remember that
D products can be intangible services and ideas as
well as tangible goods. Service firms such as airlines, hotels, hospitals, movie theaRnonprofit organizations, charitable causes, and govters, and hair stylists, as well as
ernment agencies all develop and
A implement marketing strategies designed to match
their portfolio of intangible products to the needs of target markets. Products lie on a
continuum ranging from tangible-dominant goods (salt, soap) to intangible-dominant
services (education, consulting).
1 Firms lying closer to the intangible end of this spectrum face unique challenges in developing marketing strategy. These challenges are
1
the direct result of the unique characteristics of services as shown in Exhibit 6.3.
Obviously, the primary difference
2 between a good and a service is that a service is
intangible. Some services, such as business consulting and education, are almost
3
completely intangible, while others have more tangible elements. The services provided by UPS and FedEx, forTexample, include tangible airplanes, trucks, boxes,
and invoices. Another challenging
S characteristic of services is that they cannot be
stored for future use. This lack of inventory means that service firms experience
major problems in balancing service supply (capacity) and service demand. Likewise, the demand for services is extremely time-and-place dependent because customers must typically be present for service to be delivered. Consider the issues faced
by popular restaurants every Friday and Saturday night. The increased demand
forces restaurant managers to pre-schedule the right amount of food ingredients
and employees to accommodate the increase in guests. And, given that the restaurant’s capacity is fixed, the manager and employees must serve guests efficiently
and effectively in a crowded, noisy atmosphere. This precarious balance is quite
common across most industries in the services sector of our economy.
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Chapter 6 • The Marketing Program
EXHIBIT 6.3
Unique Characteristics of Services and Resulting Marketing Challenges.
Service Characteristics
Intangibility
Simultaneous
Production and
Consumption
Perishability
Heterogeneity
Client-Based
Relationships
Marketing Challenges
It is difficult for customers to evaluate quality, especially before purchase and consumption.
It is difficult to convey service characteristics and benefits in promotion. As a result, the firm is forced to sell a promise.
Many services have few standardized units of measurement. Therefore, service prices are difficult to set and justify.
Customers cannot take possession of a service.
Customers or their possessions must be present during service
delivery.
Other customers can affect service outcomes including service quality
and customer satisfaction.
Service employees are critical because they must interact with customers to deliver service.
Converting high-contact services to G
low-contact services will lower
costs but may reduce service quality.
A
Services are often difficult to distribute.
T use. Therefore, unused service
Services cannot be inventoried for later
capacity is lost forever.
E
Service demand is very time-and-place sensitive. As a result, it is
difficult to balance supply and demand,
S especially during periods of
peak demand.
Service facilities and equipment sit ,idle during periods of off-peak
demand.
Service quality varies across people, time, and place, making it very
D
difficult to deliver good service consistently.
There are limited opportunities to standardize
service delivery.
E
Many services are customizable by nature. However, customization
A of providing the service.
can dramatically increase the costs
Most services live or die by maintaining
N a satisfied clientele over the
long term.
Dfor the service firm’s success.
Generating repeat business is crucial
R
Because of the intangibility of service, it is quite difficult
for customers to evaluA
ate a service before they actually purchase and consume it. Third-party evaluations
and recommendations for services are not as prevalent as they are with respect to
tangible goods. Of course, customers can ask friends1and family for recommendations, but in many cases a good assessment of quality is hard to obtain. This forces
1 provider to perform the sercustomers to place some degree of trust in the service
vice correctly and in the time frame promised or anticipated.
This problem is the rea2
son for the launch of Angie’s List, a membership-based referral and recommendation
service that provides member ratings for local service3providers. One way that companies can address this issue is by providing satisfaction
T guarantees to customers.
For example, Hampton Inn, a national chain of mid-priced hotels, offers guests a
S
free night if they are not 100 percent satisfied with their stay.2 Midas, H&R Block,
and FedEx offer similar guarantees.
Moreover, because most services are dependent upon people (employees, customers) for their delivery, they are susceptible to variations in quality and inconsistency. Such variations can occur from one organization to another, from one outlet
to another within the same organization, from one service to another within the same
outlet, and even from one employee to another within the same outlet. Service quality can further vary from week to week, day to day, or even hour to hour. Also,
because service quality is a subjective phenomenon, it can also vary from customer
to customer, and for the same customer from one visit to the next. As a result,
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160
Chapter 6 • The Marketing Program
standardization and service quality are very difficult to control. The lack of standardization, however, actually gives service firms one advantage: Services can be customized to match the specific needs of any customer. Such customized services are
frequently very expensive for both the firm and its customers. This creates a
dilemma: How does a service firm provide efficient, standardized service at an
acceptable level of quality while simultaneously treating every customer as a unique
person? This dilemma is especially prevalent in the health care industry today, where
care is managed to carefully control both access and cost.
Another major challenge for service marketers is to tie services directly to customers’ needs. Although customers typically have few problems in expressing needs
for tangible goods, they often have difficulty in expressing or explaining needs for
services. In some cases, the need is vague. For example, you may decide that you
need a relaxing vacation, but how do you know which services will best meet your
need? Which is best for relaxation: a trip to the beach, a cruise, or a stay at a bedand-breakfast? The answer depends on how you personally define “relaxing.” Since
different customers have different
G definitions, the vacation provider has a more difficult job in connecting their service offerings to customers’ needs. In other cases, cusA need for a specific service. For example, business
tomers may not understand the
consultants, insurance agents,Tfinancial planners, and wedding consultants often
have to educate customers on why their services are needed. This is a necessary
E these service providers can offer their products as
first hurdle to overcome before
the solution that will best fulfillSthe need.
,
Developing New Products
D strategy deals with the introduction of new proOne of the key issues in product
ducts. The development and commercialization
of new products is a vital part of a
E
firm’s efforts to sustain growth and profits over time. The success of new products
A the firm’s strengths and a defined market opportudepends on the product’s fit with
nity. Market characteristics and
N the competitive situation will also affect the sales
potential of new products. For example, manufacturers such as Garmin, TomTom,
and Magellan are consistently D
developing new GPS devices. However, the future of
standalone GPS devices is unclear
R given that GPS functionality is now an option on
most new cars, and is fully integrated into every smartphone. As these GPS-enabled
A
devices add more features, consumers
are going to be much less likely to purchase
standalone GPS units. This is why many GPS units can now sync with telephones or
serve as music players. Some manufacturers, such as Garmin, have expanded
1 such as wearables (health tracking wristbands),
beyond GPS devices into areas
action cameras, and smartphone
1 apps.3
Many firms base their new product introductions on key themes such as product
2
or technological superiority. New product introductions in the electronics, com3 often take this approach. In other firms and indusputer, and automotive industries
tries, new product introductions may stem from only minor tweaking of current
T
products. This approach is common in packaged goods and household items. Truthfully, what is considered to beS
a new product depends on the point of view of both
the firm and its customers. Although some product introductions are actually new,
others may only be perceived as being new. There are six strategic options related
to the newness of products. These options follow, in decreasing degrees of product
change:
•
New-to-the-World Products (Discontinuous Innovations). These products
involve a pioneering effort by a firm that eventually leads to the creation of an
entirely new market. New-to-the-world products are typically the result of radical thinking by individual inventors or entrepreneurs. For example, Fred Smith’s
idea for an overnight package delivery service gave us FedEx.
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Chapter 6 • The Marketing Program
•
•
•
•
•
New Product Lines. These products represent new offerings by the firm, but
the firm introduces them into established markets. For example, P&G’s launch
of a national chain of car washes is a new product line for the company. New
product lines are not as risky as true innovation, and they allow the firm to diversify into closely related product categories.
Product Line Extensions. These products supplement an existing product line
with new styles, models, features, or flavors. Anheuser-Busch’s introduction of
Budweiser Select and Honda’s launch of the Civic Hybrid are good examples.
Product line extensions allow the firm to keep its products fresh and exciting
with minimal development costs and risk of market failure.
Improvements or Revisions of Existing Products. These products offer customers improved performance or greater perceived value. The common “new
and improved” strategy used in packaged goods and the yearly design changes
in the automobile industry are good examples. Clorox, for example, now offers
“splashless” and “anti-allergen” bleach in addition to its perennial “regular”
G
bleach product. The common “shampoo plus conditioner”
formulas of many
shampoos are another example.
A
Repositioning. This strategy involves targeting existing products at new markets or segments. Repositioning can involve real orTperceived changes to a product. An example is Carnival Cruise Line’s effortEto attract senior citizens to
supplement its younger crowd. Likewise, many design schools have repositioned
S
themselves toward a growing business need for employees
who are well versed
in the art of innovation. As such, these design schools
are
now
competing with
,
top MBA programs around the country.
Cost Reductions. This strategy involves modifying products to offer perforD Book publishers use this
mance similar to competing products at a lower price.
strategy when they convert hardback books to paperbacks
or e-books. Similarly,
E
a firm may be able to lower a product’s price due to improved manufacturing
efficiency or a drop in the price of raw materials.A
For example, many computer
manufacturers offer lower-priced products that use
N standard or slightly dated
technology.
D
The first two options are the most effective and profitable when the firm wants
to significantly differentiate its product offering fromRcompetitors. However, there
are often good reasons to pursue one of the remaining
A four options, particularly if
resource constraints are an issue or if the firm’s management does not want to
expose the firm to increased market risk. The key to new product success is to create a differential advantage for the new product. What1unique benefit does the new
product offer to customers? Although this benefit can be based on real differences or
1
based entirely on image, it is the customers’ perception of differentiation that is critical. For example, despite Consumer Reports tests that2five-blade or battery-powered
razors do not provide a closer shave than traditional three-blade
razors, many consu3
mers believe that they do. This belief is based primarily on the back-and-forth marketing battle between Gillette (Fusion razor) and TSchick (Quattro and Hydro
razors). A number of low-price competitors also existSto serve consumers who do
not buy into the new product hype. Whether five blades are truly better than three
blades is immaterial. In the battle for supremacy in the razor market, customer perceptions are all that matter.
Customer perceptions are also critical in the process of developing new products. Although the new product development process varies across firms, most
firms will go through the following stages:
•
Idea Generation. New product ideas can be obtained from a number of
sources, including customers, employees, basic research, competitors, and
supply chain partners.
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Chapter 6 • The Marketing Program
•
•
•
•
Screening and Evaluation. New product ideas are screened for their match
with the firm’s capabilities and the degree to which they meet customers’ needs
and wants. In some cases, prototype products are developed to further test the
commercial viability of a product concept. New product concepts are also evaluated with respect to projected costs, revenues, and profit potential.
Development. At this stage, product specifications are set, the product design is
finalized, and initial production begins. In addition, the full marketing plan is
developed in order to acquire the resources and collaboration needed for a fullscale launch.
Test Marketing. As a final test before launch, the new product is test marketed
in either real or simulated situations to determine its performance relative to
customer needs and competing products.
Commercialization. In this final stage, the product is launched with a complete
marketing program designed to stimulate customer awareness and acceptance
of the new product.
G
Many firms try to think outside the box in designing new products. Kia, for example, turned to Peter Schreyer,Aa German automotive designer, to reinvigorate the
South Korean company’s brand
T image. When he was hired away from Volkswagen,
Schreyer’s first task was to design two new vehicles—the Kia Forte and the Kia
Soul—to compete against newEdesigns from Nissan and Scion. He then redesigned
Kia’s popular Sorento SUV and
S the midsize Optima sedan. The increase in Kia’s
brand reputation and sales has been impressive.
,
PRICING STRATEGY
D
There is no other component ofEthe marketing program that firms become more infatuated with than pricing. There are at least four reasons for the attention given to pricA
ing. First, the revenue equation is simple: Revenue equals the price times quantity sold.
There are only two ways for aN
firm to grow revenue: increase prices or increase the
volume of product sold. Rarely can a firm do both simultaneously. Second, pricing is
D
the easiest of all marketing variables to change. Although changing the product and its
distribution or promotion can R
take months or even years, changes in pricing can be
executed immediately in real A
time. Real-time price changes are the norm in many
industries, including air travel, hotels, and electronic commerce. As illustrated in
Beyond the Pages 6.2, prices for the same product vary around the world to account
for differences in currencies, taxes/tariffs,
and consumer demand.
1
Third, firms take considerable pains to discover and anticipate the pricing strat1Salespeople learn to read a competitor’s price sheet
egies and tactics of other firms.
upside down at a buyer’s desk.
2 Retailers send “secret shoppers” into competitors’
stores to learn what they charge for the same merchandise. Even buyers spend con3
siderable time comparison shopping
to find the best deal. Finally, pricing receives a
great deal of attention becauseTit is considered to be one of the few ways to differentiate a product in commoditized and mature markets. When customers see all comS
peting products as offering the same features and benefits, their buying decisions are
primarily driven by price.
Key Issues in Pricing Strategy
Given the importance of pricing in marketing strategy, pricing decisions are among
the most complex decisions to be made in developing a marketing plan. Decisions
regarding price require a tightly integrated balance among a number of important
issues. Many of these issues possess some degree of uncertainty regarding the
reactions to pricing among customers, competitors, and supply chain partners.
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Chapter 6 • The Marketing Program
BEYOND THE PAGES 6.2
Pricing Around the World4
If you do much traveling around the world,
you’ll quickly learn that products are not priced
the same in different countries. In fact, despite
widespread American sentiment to the contrary,
the prices we pay in the United States are
among the lowest in the world. In the latest survey done by the Economist Intelligence Unit,
New York, the most expensive U.S. city, ranked
26th on the list of the world’s most expensive
cities. The top 10 cities, shown below, are dominated by Asian and European cities due to their
strong currencies, high consumer confidence,
and low interest rates. Cities at the bottom of
the list are mostly from the Middle East. For
example, Mumbai is the least expensive city in
the survey with an index of 39.
Rank
1
2
3
4
5
6
7
8
9
10
City
Singapore
Paris, France
Oslo, Norway
Zurich, Switzerland
Sydney, Australia
Caracas, Venezuela
Geneva, Switzerland
Melbourne, Australia
Tokyo, Japan
Copenhagen, Denmark
Index
130
129
128
125
120
118
118
118
118
117
Note: Index is based on New York at 100.
Average U.S. Dollar Price of:
Singapore
Paris
Differences in pricing across national
boundaries are also true with respect to typical
purchases. In most cases, the products sold
around the world under the same brand name
are virtually identical. They are even sold using
similar promotional campaigns to the same
types of target markets that consume these products in roughly the same manner. Yet, the
prices set in different markets can vary dramatically. Consider these examples noted below.
In some cases, there are logical differences
in pricing, such as higher costs of transportation
or other extra costs associated with bringing a
G product to market. Other differences are associA ated with currency valuation. The U.S. dollar is
relatively strong compared to other currencies,
T so it buys more in some cases. Other differences
E are based on the tax and tariff structures in each
country. The United States and Britain, for
S example, impose very high taxes on tobacco
, sales. Firms have a great deal of latitude in setting prices, and will often raise prices in some
countries simply because consumers are willing
D to pay the cost to acquire a popular product
few substitutes.
E withGenerally
speaking, average prices will be
A lower in developing countries than in mature,
countries. This is especially true in
N developed
services, which are less expensive to deliver
D due to lower wage rates. The lower cost of
R labor in developing countries has spawned a
groundswell of activity in outsourcing of serA vices to other countries.
Tokyo
Bucharest
Damascus
Mumbai
$1.88
$6.47
$0.78
$0.91
$20.59
$1.21
1
Loaf of bread
$3.36
$8.44
$7.12
$2.07
1
1 bottle wine (750ml)
$25.04
$11.45
$12.53
$4.12
Gas (1 liter)
$1.73
$2.50 2
$1.73
$1.75
3
Note: All prices shown in U.S. dollars.
T
S
These issues are critically important in establishing initial prices, and to modifying
the pricing strategy over time. As we review these issues, keep in mind that they
are interrelated and must be considered in the context of the firm’s entire marketing
program. For example, increases in product quality or the addition of new product
features often come with an increase in price. Pricing is also influenced by distribution, especially the image and reputation of the outlets where the good or service is
sold. Finally, companies often use price as a tool of promotion. Coupons, for example, represent a combination of price and promotion that can stimulate increased
sales in many different product categories. In services, price changes are often used
to fill unused capacity (e.g., empty airline or theater seats) during nonpeak demand.
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164
Chapter 6 • The Marketing Program
The Firm’s Cost Structure
The firm’s costs in producing and marketing a product are an important factor in setting prices. Obviously, a firm that fails to cover both its direct costs (e.g., finished
goods/components, materials, supplies, sales commission, transportation) and its
indirect costs (e.g., administrative expenses, utilities, rent) will not make a profit.
Perhaps the most popular way to associate costs and prices is through breakeven
pricing, where the firm’s fixed and variable costs are considered:
Breakeven in Units ¼
Total Fixed Costs
Unit Price Unit Variable Costs
To use breakeven analysis in setting prices, the firm must look at the feasibility of
selling more than the breakeven level in order to make a profit. The breakeven number is only a point of reference in setting prices, as market conditions and customer
demand must also be considered.
Another way to use the firm’s cost structure in setting prices is to use cost-plus
pricing—a strategy that is quite G
common in retailing. Here, the firm sets prices based
on average unit costs and its planned
markup percentage:
A
Selling Price ¼
T Average Unit Cost
1 Markup Percent ðdecimalÞ
E
Cost-plus pricing is not only intuitive,
but also very easy to use. Its weakness, howS
ever, lies in determining the correct markup percentage. Industry norms often come
,
into play at this point. For example,
average markups in grocery retailing are typically in the 20 percent range, while markups can be several hundred percent or
more in furniture or jewelry stores. Customer expectations are also an important
D
consideration in determining the correct markup percentage.
Although breakeven analysis
E and cost-plus pricing are important tools, they
should not be the driving force behind pricing strategy. The reason is often ignored:
A
Different firms have different cost structures. By setting prices solely on the basis of
costs, firms run a major risk inNsetting their prices too high or too low. If one firm’s
costs are relatively higher thanDother firms, it will have to accept lower margins in
order to compete effectively. Conversely, just because a product costs very little to
R that the firm should sell it at a low price (movie
produce and market does not mean
theater popcorn is a good example).
A Even if the firm covers its costs, the fact is that
customers may not be willing to pay their prices. Hence, market demand is also a
critical factor in pricing strategy. In the final analysis, cost is best understood as an
absolute floor below which prices
1 cannot be set for an extended period of time.
1
Both the firm and its customers2are concerned with value. Value is a difficult term to
5
define because it means different
3 things to different people. Some customers equate
good value with high product quality, while others see value as nothing more than a
T
low price. We define value as a customer’s
subjective evaluation of benefits relative to
costs to determine the worth S
of a firm’s product offering relative to other product
Perceived Value
offerings. A simple formula for value might look like this:
Perceived Value ¼
Customer Benefits
Customer Costs
Customer benefits include everything the customer obtains from the product offering such as quality, satisfaction, prestige/image, and the solution to a problem. Customer costs include everything the customer must give up such as money, time,
effort, and all nonselected alternatives (opportunity costs). Although value is a key
component in setting a viable pricing strategy, good value depends on much more
than pricing. In fact, value is intricately tied to every element in the marketing
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Chapter 6 • The Marketing Program
program and is a key factor in customer satisfaction and retention. We will discuss
the strategic implications of value more fully in Chapter 10.
The Price/Revenue Relationship
All firms understand the relationship between price and revenue. However, firms
cannot always charge high prices due to competition from their rivals. In the face of
this competition, it is natural for firms to see price-cutting as a viable means of
increasing sales. Price cutting can also move excess inventory and generate shortterm cash flow. However, all price cuts affect the firm’s bottom line. When setting
prices, many firms hold fast to these two general pricing myths:6
Myth #1: When business is good, a price cut will capture greater market share.
Myth #2: When business is bad, a price cut will stimulate sales.
Unfortunately, the relationship between price and revenue challenges these
assumptions and makes them a risky proposition for G
most firms. The reality is that
any price cut must be offset by an increase in sales volume just to maintain the
A that a consumer electronics
same level of revenue. Let’s look at an example. Assume
manufacturer sells 1,000 high-end stereo receivers perTmonth at $1,000 per system.
The firm’s total cost is $500 per system, which leaves a gross margin of $500. When
E
the sales of this high-end system decline, the firm decides to cut the price to increase
S who buys a system over
sales. The firm’s strategy is to offer a $100 rebate to anyone
the next 3 months. The rebate is consistent with a 10 percent price cut, but it is in
,
reality a 20 percent reduction in gross margin (from $500 to $400). To compensate
for the loss in gross margin, the firm must increase the volume of receivers sold.
The question is by how much? We can find the answerDusing this formula:
Gross
E Margin %
1
Gross Margin % Price Change %
A
0:50
N
1
0:25 ¼
0:50 0:10
Percent Change in Unit Volume ¼
D sales volume by 25 perAs the calculation indicates, the firm would have to increase
cent to 1,250 units sold in order to maintain the same level
R of total gross margin. How
likely is it that a $100 rebate will increase sales volume by 25 percent? This question
A many instances, the needed
is critical to the success of the firm’s rebate strategy. In
increase in sales volume is too high. Consequently, the firm’s gross margin may actually be lower after the price cut.
1
Rather than blindly use price cutting to stimulate sales and revenue, it is often bet1 and justify the current price,
ter for a firm to find ways to build value into the product
or even a higher price, rather than cutting the product’s price in search of higher sales
2
volume. In the case of the stereo manufacturer, giving customers $100 worth of music
3 a $100 rebate. Video game
or movies with each purchase is a much better option than
manufacturers, such as Microsoft (Xbox One) and Sony
T(PlayStation 4), often bundle
games and accessories with their system consoles to increase value. The cost of giving
S buys them in bulk quanticustomers these free add-ons is low because the marketer
ties. This added expense is almost always less costly than a price cut. And the increase
in value may allow the marketer to charge higher prices for the product bundle.
Pricing Objectives
Setting specific pricing objectives that are realistic, measurable, and attainable is an
important part of pricing strategy. As shown in Exhibit 6.4, there are a number of
pricing objectives that firms may pursue. Remember that firms make money on
profit margin, volume, or some combination of the two. A firm’s pricing objectives
will always reflect this market reality.
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165
166
Chapter 6 • The Marketing Program
EXHIBIT 6.4
Description of Common Pricing Objectives.
Pricing Objectives
Profit-Oriented
Volume-Oriented
Market Demand
Market Share
Cash Flow
Competitive
Matching
Prestige
Status Quo
Description
Designed to maximize price relative to competitors’ prices, the product’s
perceived value, the firm’s cost structure, and production efficiency. Profit
objectives are typically based on a target return, rather than simple profit
maximization.
Sets prices in order to maximize dollar or unit sales volume. This objective
sacrifices profit margin in favor of high product turnover.
Sets prices in accordance with customer expectations and specific buying
situations. This objective is often known as “charging what the market
will bear.”
Designed to increase or maintain market share regardless of fluctuations in
industry sales. Market share objectives are often used in the maturity stage
of the product life cycle.
Designed to maximize
the recovery of cash as quickly as possible. This
G
objective is useful when a firm has a cash emergency or when the product
A
life cycle is expected
to be quite short.
Designed to match
T or beat competitors’ prices. The goal is to maintain the
perception of good value relative to the competition.
E
Sets high prices that are consistent with a prestige or high status product.
Prices are setSwith little regard for the firm’s cost structure or the
competition.
,
Maintains current prices in an effort to sustain a position relative to the
competition.
D
E
Price Elasticity
A
Price elasticity is perhaps the most important overall consideration in setting effecN
tive prices. Simply defined, price elasticity refers to customers’ responsiveness or senD precise definition defines elasticity as the relative
sitivity to changes in price. A more
impact on the demand for a product, given specific increases or decreases in the
R
price charged for that product. Firms cannot base prices solely on price elasticity
calculations because they willA
rarely know the elasticity for any product with great
precision over time. Further, the same product can have different elasticities in different times, places, and situations. Since the actual price elasticity calculation is dif1 often consider price elasticity in regard to differing
ficult to pinpoint precisely, firms
customer behavior patterns or 1
purchase situations. Understanding when, where, and
how customers are more or less sensitive to price is crucial in setting fair and profit2
able prices.
Generally speaking, customers
3 become much more sensitive to price when they
have many different choices or options for fulfilling their needs and wants. Price
T in the following situations:
elasticity is higher (more elastic)
•
•
S Products. When customers can choose among a
Availability of Substitute
number of different substitutes, they will be much more sensitive to price differences. This situation occurs very frequently among name-brand products and in
markets where product offerings have become commoditized (airlines, for
example).
Higher Total Expenditure. As a general rule, the higher the total expense, the
more elastic the demand for that product will be. This effect is actually easier to
see if we look at a low-priced product. A 20 percent increase in the price of a
newspaper, from $1.00 to $1.20 for example, would not have a large impact on
demand. However, if the price of a $20,000 car increases by 20 percent, then
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Chapter 6 • The Marketing Program
•
•
the impact is a much more noticeable $4,000. At that rate of change, some customers will look for a different car or pull out of buying all together.
Noticeable Price Differences. Products having heavily promoted prices tend
to experience more elastic demand. Gasoline is a classic example. An increase
of 3 cents per gallon is only 45 cents more on a 15-gallon fill-up. However, many
customers will drive several miles out of their way to find a lower price (often
spending more in gas consumption than they save). Noticeable price differences
sometimes occur at specific pricing thresholds. Using the gasoline example,
many customers will not notice price increases until gas reaches $4.00 per gallon. At this price, these customers suddenly move from an inelastic mindset to
an elastic mindset. The move from $3.80 to $3.90 may not have an impact on
these customers, but the jump from $3.90 to $4.00 totally changes their mental
framework.
Easy Price Comparisons. Regardless of the product or product category, customers will become more price sensitive if they can easily compare prices
G
among competing products. In industries such as retailing,
supermarkets, travel,
toys, and books, price has become a dominant purchase consideration because
A
customers can easily compare prices. It should come as no surprise that these
T stores to online sales.
industries have also experienced a shift from physical
In general, customers become much less sensitiveEto price when they have few
choices or options for fulfilling their needs and wants. S
Price elasticity is lower (more
inelastic) in these situations:
•
•
•
•
•
,
Lack of Substitutes. When customers have few choices in terms of substitutes,
they will be much less sensitive to price. This situation is common in some
categories, including baking/cooking ingredients,D
add-on or replacement parts,
one-of-a-kind antiques, collectables or memorabilia, unique sporting events, and
E or specialized the product,
specialized vacation destinations. The more unique
the more customers will pay for it.
A
Real or Perceived Necessities. Many products,N
such as food, water, medical
care, cigarettes, and prescription drugs, have extremely inelastic demand
D them. Some product categobecause customers have real or perceived needs for
ries are price inelastic because customers perceiveRthose products as true necessities. It matters little whether a customer truly has a need for a specific product.
A
If that customer perceives the product as a necessity,
then that customer
becomes much less sensitive to price increases for that product.
Complementary Products. Complementary products have an effect on the
1
price sensitivity of related products. If the price of one product falls, customers
1
will become less sensitive to the price of complementary
products. For example,
when the price of a cruise goes down, the price of shore excursions becomes
2
more inelastic. With more travelers on board, and each having more money to
3 less sensitive to the prices
spend, excursion operators realize that travelers are
they charge.
T
Perceived Product Benefits. For some customers, certain products are just
S “expensive but worth it”
worth the price. For these purchases, the phrase
comes to mind. All of us have certain products that we indulge in from time to
time, such as fine wines, gourmet chocolates, imported coffee, or trips to a day
spa. Since these products do not comprise the bulk of our purchasing activities,
customers rarely notice, or simply ignore, price increases.
Situational Influences. The circumstances surrounding a purchase situation
can vastly alter the price elasticity for a product. Many of these situational influences occur because time pressures or purchase risk increase to the point that
an immediate purchase must be made (emergencies, for example). Other common situational influences revolve around purchase risk, typically the social
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167
168
Chapter 6 • The Marketing Program
•
risk involved in making a bad decision. In a general sense, customers tend to be
much less price sensitive when they purchase items for others or for gift giving.
Product Differentiation. Differentiation reduces the number of perceived substitutes for a product. For example, Coke’s differentiation strategy has worked
so well that Coke drinkers will buy the soft drink at $2.49 or $3.49 per six-pack.
Product differentiation does not have to be based on real differences in order to
make customers less price sensitive. Many times the differences are perceptual.
Blindfolded, a person may not know the difference between Coke and Pepsi, but
consumers do not buy or consume soft drinks blindfolded. The look of the can,
the advertising, and prior experiences all come together to differentiate the
product.
In a strategic sense, product differentiation is the best way to ensure that customers are not sensitive to price changes. The ultimate goal of this effort is to differentiate the product so well that customers perceive that no competing product can take
its place. When this happens, customers will become brand loyal and the demand for
G
the product will become very inelastic.
Nike, for example, commands extreme brand
loyalty because the firm has successfully
differentiated its products through technoA
logical innovation, effective advertising, and the ubiquitous swoosh. Likewise, Intel
T
has done a great job using real and perceived differentiation to become the dominant
supplier of processor chips in the
E computer industry.
S
Pricing Service Products ,
When it comes to buying services, customers have a difficult time determining quality prior to purchase. Consequently, service pricing is critical because it may be the
Din advance of the purchase experience. If the service
only quality cue that is available
provider sets prices too low, customers
will have inaccurate perceptions and expecE
tations about quality. If prices are too high, customers may not give the firm a
A becomes more important—and more difficult—
chance. In general, services pricing
when:
N
•
•
•
•
•
•
•
Service quality is hard to detect
D prior to purchase.
The costs associated with R
providing the service are difficult to determine.
Customers are unfamiliar with the service process.
A
Brand names are not well established.
The customer can perform the service themselves.
Advertising within a service
1 category is limited.
The total price of the service
1 experience is difficult to state beforehand.
Setting prices for professional
2 services (lawyers, accountants, consultants, doctors, and mechanics) is especially difficult as they suffer from a number of the condi3 often balk at the high prices of these service
tions in the list above. Customers
providers because they have T
a limited ability to evaluate the quality or total cost
until the service process has been completed. The heterogeneous nature of these serS
vices limits standardization; therefore,
customer knowledge about pricing is limited.
Heterogeneity also limits price comparison among competing providers. The key for
these firms is to be up-front about the expected quality and costs of the service. This
is often done through the use of binding estimates and contractual guarantees
of quality.
Due to the limited capacity associated with most services, service pricing is also
a key issue with respect to balancing supply and demand during peak and off-peak
demand times. In these situations, many service firms use yield management systems
to balance pricing and revenue considerations with their need to fill unfilled capacity. Exhibit 6.5 depicts an example of yield management for a hotel.
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All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240
Chapter 6 • The Marketing Program
EXHIBIT 6.5
Yield Management for a Hypothetical Hotel.
WEEK 35
(Peak Season)
WEEK 5
(Low Season)
100%
100%
Closed for remodeling
Capacity (% rooms)
Business guests
Business guests
Transient guests
Weekend
package
50% Transient guests
50%
Groups and conventions
Airline contracts
Nights:
W/E
package
M
Tu
W
Th
F
S
Su
G
A
T
E
S
,
Groups (no conventions)
Airline contracts
M
Tu
W
Th
F
S
Su
SOURCE: Adapted from Lovelock, Christopher, “Services Marketing: People, Technology, Strategy,” 4th ed., © 2001. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.
D
E
Yield management allows the service firm to simultaneously control capacity
A
and demand in order to maximize revenue and capacity utilization. This is accomN by limiting the available
plished in two ways. First, the service firm controls capacity
capacity at certain price points. Airlines do this by selling
D a limited number of seats
at discount prices three or more weeks prior to a flight’s departure. Southwest AirR Wanna Get Away (the lowlines, for example, sells limited seats in three categories:
est priced seats), Anytime, and Business Select (the highest
priced seats).7 Second,
A
the service firm controls demand through price changes over time and by overbooking capacity. These activities ensure that service demand will be consistent and that
any unused capacity will be minimized. These practices
1 are common in services
characterized by high fixed costs and low variable costs, such as airlines, hotels,
1 Since variable costs in these
rental cars, cruises, transportation firms, and hospitals.
services are quite low, the profit for these firms directly
2 relates to sales and capacity
utilization. Consequently, these firms will sell some capacity at reduced prices in
3
order to maximize utilization.
Yield management systems are also useful in their
T ability to segment markets
based on price elasticity. That is, yield management allows a firm to offer the same
S
basic service to different market segments at different price points. Customers who
are very price sensitive with respect to travel services—vacation travelers and families with children—can get a good deal on a hotel if they book it early. Conversely,
consultants are less price sensitive because their clients reimburse them for
expenses. Likewise, business travelers book flights on the spur of the moment, so
they are more forgiving of the higher prices just prior to departure. Other firms can
reach different market segments with attractive off-peak pricing. Many customers
take advantage of the lower prices at theme parks and beach resorts by traveling
during the off-season. Similar situations occur in lower-priced movie matinees and
lower prices for lunch items at most restaurants.
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Chapter 6 • The Marketing Program
Base Pricing Strategies
Although prices for individual products are made on a case-by-case basis, most firms
have developed a general and consistent approach—or base pricing strategy—to be
used in establishing prices. The relationship between price and other elements of the
marketing program dictates that pricing decisions cannot be made in isolation. In
fact, price changes may result in minor modifications to the product, distribution,
or promotion strategies. As we have discussed, it is not so much the actual price
being charged that influences buying decisions as the way that members of the target
market perceive the price. This reality reminds us that many of the strategic issues
involved in pricing have close ties with customer psychology and information processing: What customers think about prices is what those prices are to them.
A firm’s base pricing strategy establishes the initial price and sets the range of
possible price movements throughout the product’s life cycle. The initial price is critical, not only for initial success, but also for maintaining the potential for profit over
the long term. There are several different approaches to base pricing. Some of the
G
most common approaches include:
•
•
•
•
•
•
A intentionally sets a high price relative to the comPrice Skimming. This strategy
petition, thereby “skimming”
T off the profits early after the product’s launch. Price
skimming is designed to recover the high R&D and marketing expenses associated
E For example, new prescription drugs are priced
with developing a new product.
high initially and only dropS
in price once their patent protection expires.
Price Penetration. This ,strategy is designed to maximize sales, gain widespread market acceptance, and capture a large market share quickly by setting
a relatively low initial price. This approach works best when customers are
price sensitive for the product
D or product category, research and development
and marketing expenses are relatively low, or when new competitors will
E use penetration pricing successfully, the firm must
quickly enter the market. To
have a cost structure andAscale economies that can withstand narrow profit
margins.
N
Prestige Pricing. This strategy sets prices at the top end of all competing products in a category. This isD
done to promote an image of exclusivity and superior
quality. Prestige pricing is a viable approach in situations where it is hard to
R
objectively judge the true value of a product. Ritz-Carlton Hotels, for example,
never compete with other A
hotels on price. Instead, the company competes only
on service and the value of the unique, high-quality experience that they deliver
to hotel guests.
1 Firms that use a value-based pricing approach
Value-Based Pricing (EDLP).
set reasonably low prices, 1
but still offer high-quality products and adequate customer services. Many different types of firms use value-based pricing; however,
2
retailing has widely embraced this approach, where it is known as everyday low
pricing or EDLP. Prices are
3 not the highest in the market, nor are they the lowest. Instead, value-based pricing sets prices so they are consistent with the benT
efits and costs associated with acquiring the product. Many well-known firms
S
use value-based pricing, including
Walmart, Lowe’s, Home Depot, IKEA, and
Southwest Airlines.
Competitive Matching. In many industries, pricing strategy focuses on matching competitors’ prices and price changes. Although some firms may charge
slightly more or slightly less, these firms set prices at what most consider to be
the “going rate” for the industry. This is especially true in commoditized markets
such as airlines, oil, and steel.
Non-Price Strategies. This strategy builds the marketing program around factors other than price. By downplaying price in the marketing program, the firm
must be able to emphasize the product’s quality, benefits, and unique features,
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Chapter 6 • The Marketing Program
as well as customer service, promotion, or packaging in order to make the product stand out against competitors, many of whom will offer similar products at
lower prices. For example, theme parks like Disney World, Sea World, and Universal Studios generally compete on excellent service, unique benefits, and oneof-a-kind experiences rather than price. Customers willingly pay for these
experiences because they cannot be found in any other setting.
Adjusting the Base Price
In addition to a base pricing strategy, firms also use other techniques to adjust or
fine-tune prices. These techniques can involve permanent adjustments to a product’s
price, or temporary adjustments used to stimulate sales during a particular time or
situation. Although the list of potentially viable pricing techniques is quite long, five
of the most common techniques in consumer markets are:
•
•
•
•
•
Discounting. This strategy involves temporary G
price reductions to stimulate
sales or store traffic. Customers love a sale, and that is precisely the main benefit
A
of discounting. Virtually all firms, even those using value-based pricing, will
occasionally run special promotions or sales to T
attract customers and create
excitement. Dillard’s, for example, will hold a quick
Esale early in a selling season,
and then return prices to their normal levels. Near the end of the season,
S markdowns) permanent as
Dillard’s will begin to make these sale prices (or
time draws closer to the end-of-season clearance sale.
,
Reference Pricing. Firms use reference pricing when they compare the actual
selling price to an internal or external reference price. All customers use internal
reference prices, or the internal expectation for what
D a product should cost. As
consumers, our experiences have given us a reasonable expectation of how
E
much to pay for a combo meal at McDonald’s or a gallon of gas. In other cases,
A
the firm will state a reference price, such as “Originally
$99, Now $49.” These
comparisons make it easier for customers to judgeNprices prior to purchase.
Price Lining. This strategy, where the price of a competing product is the referD some customers will always
ence price, takes advantage of the simple truth that
choose the lowest-priced or highest-priced product.RFirms use this to their advantage by creating lines of products that are similar in appearance and functionality,
A price points. For example,
but are offered with different features and at different
Sony can cut a few features off its top-of-the-line Model A1 digital camcorder, and
Model B2 can be on the shelf at $799 rather than the original $999. Cut a few more
1
features and the price can drop to $599 for Model C3. Here, each model in the
Sony line establishes reference prices for the other1models in the line. The same
is true for all competing camcorders from other manufacturers.
2
Odd Pricing. Everyone knows that prices are rarely set at whole, round numbers. The concert tickets are $49.95, the breakfast 3
special is $3.95, and the gallon
of gas is $2.799. The prevalence of odd pricing isTbased mostly on psychology:
Customers perceive that the seller did everything possible to get the price as
fine (and thus as low) as he or she possibly could.STo say you will cut my grass
for $47 sounds like you put a lot more thought into it than if you just said, “I will
do it for $40,” even though the first figure is $7 higher.
Price Bundling. Sometimes called solution-based pricing or all-inclusive pricing, price bundling brings together two or more complementary products for a
single price. At its best, the bundled price is less than if a company sold the products separately. Slow moving items can be bundled with hot sellers to expand
the scope of the product offering, build value, and manage inventory. Allinclusive resorts, including Sandals and Club Med, use price bundling because
many customers want to simplify their vacations and add budget predictability.
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172
Chapter 6 • The Marketing Program
Many of these techniques are also used in business markets to adjust or fine-tune
base prices. However, there are a number of pricing techniques unique to business
markets, including:
•
•
•
•
•
Trade Discounts. Manufacturers will reduce prices for certain intermediaries in
the supply chain based on the functions that the intermediary performs. In general, discounts are greater for wholesalers than for retailers because the manufacturer wants to compensate wholesalers for the extra functions they perform,
such as selling, storage, transportation, and risk taking. Trade discounts vary
widely and have become more complicated due to the growth of large retailers
who now perform their own wholesaling functions.
Discounts and Allowances. Business buyers can take advantage of sales just
like consumers. However, business buyers also receive other price breaks,
including discounts for cash, quantity or bulk discounts, seasonal discounts, or
trade allowances for participation in advertising or sales support programs.
Geographic Pricing. Selling firms often quote prices in terms of reductions or
G
increases based on transportation costs or the actual physical distance between
A most common examples of geographic pricing are
the seller and the buyer. The
uniform delivered pricing (same
T price for all buyers regardless of transportation
expenses) and zone pricing (different prices based on transportation to predefined geographic zones). E
Transfer Pricing. Transfer
Spricing occurs when one unit in an organization sells
products to another unit.
,
Barter and Countertrade. In business exchanges across national boundaries, companies sometimes use products, rather than cash, for payments. Barter involves the
direct exchange of goods or
Dservices between two firms or nations. Countertrade
refers to agreements based on partial payments in both cash and products, or to
Enations to buy goods and services from each other.
agreements between firms or
Another important pricingA
technique used in business markets is price discrimination, which occurs when firms
N charge different prices to different customers.
When this situation occurs, firms set different prices based on actual cost differences
D relative to the costs involved in selling to other
in selling products to one customer
customers. Price discrimination
Ris a viable technique because the costs of selling to
one firm are often much higher than selling to others.
A
SUPPLY CHAIN STRATEGY
Distribution and supply chain 1
relationships are among the most important strategic
decisions for any firm. Walmart,
1 Best Buy, Amazon, and even Starbucks depend on
effective and highly efficient supply chains to provide competitive advantage. Unfor2
tunately, customers rarely appreciate how companies connect to their supply lines
3 the scenes. Customers take supply chain issues
because the processes occur behind
for granted and only notice when supply lines are interrupted. The picture is drastiT
cally different from the firm’s perspective. Today, most companies rank supply chain
concerns at the top of the list S
for achieving a sustainable advantage and true differentiation in the marketplace. Prices can be copied easily, even if only for the short
term. Products can become obsolete almost overnight. Good promotion and advertising in September can easily be passé when the prime selling season in November
and December comes around. The lesson is clear: Supply chain strategy is vital to the
success and survival of every firm.
When we think of supply chain management, we tend to think of two interrelated
components:
•
Marketing channels—an organized system of marketing institutions through
which products, resources, information, funds, and/or product ownership flow
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Chapter 6 • The Marketing Program
•
from the point of production to the final user. Some channel members or
intermediaries physically take possession or title of products (e.g., wholesalers,
distributors, retailers), while others simply facilitate the process (e.g., agents,
brokers, financial institutions).
Physical distribution—coordinating the flow of information and products
among members of the channel to ensure the availability of products in the
right places, in the right quantities, at the right times, and in a cost-efficient manner. Physical distribution (or logistics) includes activities such as customer service/order entry, administration, transportation, storage, and materials handling,
(warehousing) inventory carrying and the systems and equipment necessary for
these activities.
The term supply chain expresses the connection and integration of all members of
the marketing channel. Velocity or the need to speed inventory to and from channel
members requires collaborating with technology, transportation, and other outside
logistics experts. This supply chain process is designed to increase inventory turns,
Gtime maintaining the approand get the right products to the right place at the right
8
priate service and quality standards. The linchpin of effective
supply chain manageA
ment in today’s economy is integration. Through informational, technological, social,
T
and structural linkages, the goal of supply chain integration is to create a seamless
network of collaborating suppliers, vendors, buyers, and
E customers. When done correctly, this level of integration results in an extended enterprise that manages value
S
by coordinating the flow of information, goods, and services toward end users, as
well as reverse flows away from end users. Creating an, extended enterprise requires
investments in and commitment to three key factors:9
•
•
•
Connectivity—the informational and technological
D linkages among firms in the
supply chain network. Connectivity ensures that firms can access real-time
E
information about the flow in the supply chain network.
Community—the sense of compatible goals and A
objectives among firms in the
supply chain network. All firms must be willing to work together to achieve a
N
common mission and vision.
D
Collaboration—the recognition of mutual interdependence
among members of
the supply chain network. Collaboration goes beyond
contractual
obligations to
R
establish principles, processes, and structures that promote a level of shared
A supply chain ahead of their
understanding. Firms learn to put the needs of the
own, because they understand that the success of each firm separately has a
strong connection to the success of other firms, as well as the entire supply
1
chain.
Supply chain integration and creating an extended1enterprise are extremely challenging goals. In the most seamlessly integrated supply
2 chains, the boundaries
among channel members blur to the point where it is difficult to tell where one firm
3
ends and another firm begins. As shown in Exhibit 6.6, this level of integration
requires a tenuous balance of trust, cooperation, interdependence,
and stability in
T
order to create mutual benefits.10
S
Strategic Supply Chain Issues
The importance of the supply chain ultimately comes down to providing time, place,
and possession utility for consumer and business buyers. Without good distribution
and logistics, buyers would not be able to acquire goods and services when and
where they need them. However, the expense of distribution and logistics requires
that firms balance customers’ needs with their own need to minimize total costs.
Exhibit 6.7 provides a breakdown of total logistics costs across key activities. Note
that 49 percent of these expenses are associated with warehousing, storing, and
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173
174
Chapter 6 • The Marketing Program
EXHIBIT 6.6
Factors in Successful Supply Chain Integration.
Stability
Reliability
Consistency
Long-term
Relationships
Interdependence
Shared Technical
Information
Shared Processes
Mutual Goals and
Objectives
Trust
Trustworthiness
Integrity
Reputation
Faith
Mutual Benefit
Strategic Advantages
Customer Satisfaction
Reduced Costs
Better Prices
Reduced Lead Times
G
A
T
E
S
,
Cooperation
Commitment
Sense of Fair Play
Giving Extra Effort
D
E
A
N
D
R
A
1
1
2
carrying inventory—key factors in ensuring product availability for customers. To
manage these costs efficiently,3distribution and logistics strategy must balance the
needs of customers with the needs
T of the firm.
S
Marketing Channel Functions
SOURCE: Adapted from Davis, Edward W., Speckman, Robert E., The Extended Enterprise: Gaining Competitive Advantage through Collaborative Supply
Chains, 1st ed., © 2004. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.
Marketing channels make our lives easier because of the variety of functions performed by channel members. Likewise, channel members, particularly manufacturers, can cut costs by working through channel intermediaries. The most basic
benefit of marketing channels is contact efficiency, where channels reduce the number
of contacts necessary to exchange products. Without contact efficiency, we would
have to visit a bakery, poultry farm, slaughterhouse, and dairy just to assemble the
products necessary for breakfast. Likewise, contact efficiency allows companies
such as Del Monte Foods to maximize product distribution by selling to select
intermediaries. For Del Monte, Walmart stores account for over 31 percent of the
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Chapter 6 • The Marketing Program
EXHIBIT 6.7
Breakdown of Total Logistics Costs.
4%
3%
25%
24%
Customer Service/order entry
Administration
Inventory Carrying
Transportation
Warehousing
44%
G
A
T
E
S
SOURCE: From “Cost as a Percent of Sales” in Establish Davis Logistics Costs and Service 2013, p. 11, © 2013
Establish, Inc. www.establishinc.com (http://www.establishinc.com/wp-content/uploads/2013/11/Establish-Davis-Logistics,
Cost-and-Service-Presentation-2013a.pdf). Reprinted by permission of Establish, Inc., Fort Lee, New Jersey.
D customers account for
company’s sales volume. Del Monte’s next nine largest
another 30 percent of the company’s sales. These percentages
will increase if addiE
tional consolidation among food retailers and growth of mass merchandisers
A
continues.11
Throughout a marketing channel, some firms areN
good at manufacturing, some
are good at transportation or storage, and others are better at selling to consumers.
D
Given the costs involved, it is virtually impossible for a single firm to perform all
channel functions well. As a result, channel intermediaries
R typically attain a level of
specialization in one or more of the following functions:
•
•
•
•
•
A
Sorting. Manufacturers make one or a few products while customers need a
wide variety and deep assortment of different products. By sorting products in
1 of assortment.
the channel, intermediaries overcome this discrepancy
Breaking Bulk. Manufacturers produce large quantities
of a product to gain the
1
benefits of economies of scale. However, customers typically want only one of a
2 intermediaries—particularly
particular item. By breaking bulk in the channel,
retailers—overcome this discrepancy of quantity. 3
Maintaining Inventories. Since manufacturersT cannot make products on
demand, the channel must provide for the storage of products for future purS
chase and use. By maintaining inventories, intermediaries
overcome this temporal (time) discrepancy. Note that this does not apply to services—such as
haircuts or airline flights—where the product is produced and consumed
simultaneously.
Maintaining Convenient Locations. Since manufacturers and customers are
separated geographically, the channel must overcome this spatial discrepancy
by making products available in convenient locations.
Provide Services. Channels add value to products by offering facilitating
services (e.g., insurance, storage, financing) and standardizing the exchange
process (e.g., payment processing, delivery, pricing).
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Chapter 6 • The Marketing Program
With the exception of highly intangible services like consulting, education, or
counseling, the fulfillment of these functions occurs in every marketing channel.
Also, these functions must be fulfilled in order for the channel to operate effectively.
It does not matter which intermediary performs these functions; the fact remains
that they must be performed. For example, Sam’s Club does not break bulk in the
traditional sense. Sam’s customers buy in large quantities and actually break bulk
after purchase. Further, many emerging trends in distribution and supply chain management have blurred the responsibilities of different intermediaries. Today, large
retailers are essentially a one-stop channel of distribution. Due to their immense
size and bulk buying ability, these firms now fulfill virtually all traditional channel
functions.
Marketing Channel Structure
There are many strategic options for the structure of a marketing channel; these
strategies are often complex and
Gvery costly to implement. However, a good distribution strategy is essential for success because once a firm selects a channel and
A
makes commitments to it, distribution
often becomes highly inflexible due to longterm contracts, sizable investments,
and commitments among channel members.
T
There are three basic structural options for distribution in terms of the amount of
E
market coverage and level of exclusivity between vendor and retailer:
•
•
•
S
Exclusive Distribution. Exclusive distribution is the most restrictive type of
, this strategy give one merchant or outlet the sole
market coverage. Firms using
right to sell a product within a defined geographic region.
Selective Distribution. Firms using selective distribution give several merD to sell a product in a defined geographic region.
chants or outlets the right
Selective distribution is desirable
when customers need the opportunity to comE
parison shop, and after-sale services are important.
A
Intensive Distribution. Intensive distribution makes a product available in the
N
maximum number of merchants
or outlets in each area to gain as much exposure and as many sales opportunities
as possible.
D
R
A
1
1
2
3
T
S
Dennis MacDonald/AGE Fotostock
176
Del Monte Foods is a company that uses contact efficiency.
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Chapter 6 • The Marketing Program
Channel structure is clearly linked to other elements in the marketing program
and can be an integral part of both branding strategy and product positioning. For
example, exclusive distribution is commonly associated with prestige products, major
industrial equipment, or with firms that attempt to give their products an exclusive
or prestige image (e.g., BMW, Jaguar, and Mercedes). Firms that pursue exclusive
distribution usually target a single, well-defined market segment. Selective distribution
is used across many product categories, including clothing (Tommy Hilfiger), cosmetics (Clinique), electronics (Bose), franchising (McDonald’s), and premium pet
food (Science Diet). These and other companies carefully screen the image and selling practices of merchants to ensure that they match those of the manufacturer and
its products. Intensive distribution is the best option for most consumer convenience
goods, such as candy, soft drinks, over-the-counter drugs, or cigarettes, and for business office supplies like paper and toner cartridges. To gain this visibility and sales
volume, the manufacturer must give up a good degree of control over pricing and
product display. If a customer cannot find one firm’s products in a given location,
they will simply substitute another brand to fill the need.
G
A
T
True supply chain integration requires a fundamental change in how channel memE
bers work together. Among these changes is a move from a “win–lose” competitive
S there is a common realizaattitude to a “win–win” collaborative approach in which
tion that all firms in the supply chain must prosper. Consider the Toro Company
,
that sells turf maintenance equipment, irrigation systems, landscaping equipment,
Power in the Supply Chain
and yard products to both professional and residential markets. This requires many
different distributors and dealers (many of which are quite
D small), as well as supplying products to large national retailers such as Home Depot. If one of Toro’s products is made available in Home Depot, it is likely to E
have a lower retail price (due
to bulk buying) than the same or similar product at a A
local tractor supply company.
This situation is clearly not in the best interests of the local firm, so it will strive to
N
put its interests ahead of others in the supply chain. However,
the local tractor supply company also understands that it must serviceDToro equipment—no matter
where it was purchased—if it is to remain a certified service facility. For the local
firm, putting the needs of the supply chain ahead of itsRown needs is likely to create
tension and conflict with the Toro Company. In situations
A like this, each firm will
exhibit a different degree of authority or power in managing or controlling the activities within the supply chain. There are five basic sources of power in a supply
chain:12
1
•
•
•
Legitimate Power. This power source is based on1the firm’s position in the supply chain. Historically, manufacturers held most of the legitimate power, but this
2
power balance shifted to retailers in the 1990s. In today’s economy, retailers still
3 in charge.
wield a great deal of power, but consumers are clearly
Reward Power. The ability to help other parties reach
T their goals and objectives
is the crux of reward power. Rewards may come in terms of higher volume sales,
S salespeople at the buyer
sales with more favorable margins, or both. Individual
end of the channel may be rewarded with cash payments, merchandise, or vacations to gain more favorable presentation of a manufacturer’s or wholesaler’s
products.
Coercive Power. The ability to take positive outcomes away from other channel members, or the ability to inflict punishment on other channel members.
For example, a manufacturer may slow down deliveries or postpone the availability of some portions of a product line to a wholesaler or retailer. Likewise, a
retailer can decide not to carry a product, not to promote a product, or to give a
product unfavorable placement on its shelves.
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178
Chapter 6 • The Marketing Program
•
•
Information Power. Having and sharing knowledge is the root of information
power. Such knowledge makes channel members more effective and efficient.
Information power may stem from knowledge concerning sales forecasts, market trends, competitive intelligence, product uses and usage rates, or other critical pieces of information. In many supply chains, retailers hold the most
information power because their close proximity to customers gives them
access to data and information that is difficult to obtain from other sources.
Referent Power. Referent power has its basis in personal relationships and the
fact that one party likes another party. It has long been said that buyers like to do
business with salespeople they enjoy being around. This is still true, but increasingly referent power has its roots in firms wanting to associate with other firms,
as opposed to individual one-on-one relationships. Similar cultures, values, and
even information systems can lead to the development of referent power.
Powerful channel members have the ability to get other firms to do things they otherwise would not do. Depending on how the channel member uses its influence, power
Gor it can make the entire supply chain operate more
can create considerable conflict,
smoothly and effectively. Today,
Adiscount mass merchandise retailers—like Walmart,
Costco, and Target—and category focused retailers (also known as category killers)—
T
such as Best Buy, Barnes & Noble, Office Depot, and AutoZone—hold the power in
most consumer channels. The sheer
E size and buying power of these firms allows them
to demand price concessions from manufacturers. They also perform their own wholeS
saling functions; therefore, they receive trade discounts traditionally reserved for true
, over retail shelf space allows them to dictate when
wholesalers. Likewise, their control
and where new products will be introduced. Manufacturers typically must pay hefty
fees, called slotting allowances, just to get a single product placed on store shelves.
D of customers allows these large retailers to gather
Finally, their closeness to millions
valuable information at the point
E of sale. As mentioned previously, control over information is a valuable commodity and a source of power in virtually all supply chains.
A
N
Trends in Supply Chain Strategy
D chain issues discussed to this point, a number of
In addition to the strategic supply
trends have shaped the structure
R of marketing channels and the ways that supply
chains function. In this section, we examine a number of these trends.
A
Technological Improvements
Significant advancements in information
processing and digital communication have
1
created new methods for placing and filling orders for both business buyers and con1
sumers. The growth of the Internet and electronic commerce is the most obvious sign
of these changes. As business buyers
and consumers more fully embrace these tech2
nologies, the growth of e-commerce will continue to flourish. For example,
3
e-commerce accounted for fewer than 20 percent of transactions in the manufacturing
T is almost 52 percent. In the wholesaling sector,
sector in 2002. Today, that number
e-commerce accounts for roughly
26 percent of all transactions. Conversely,
S
e-commerce accounts for only 5.2 percent of all retail transactions, and only 3.1 percent of transactions in service-based industries. Still, e-commerce in these consumer
markets is growing at roughly 15 percent per year. These statistics show that electronic
commerce still has a great deal of room to grow, especially in consumer markets.13
Another promising technology is radio frequency identification (RFID), which
involves the use of tiny computer chips with radio transmission capability that can be
attached to a product or its packaging. The radio signals reflected from the chip can
be used to track inventory levels and product spoilage, or prevent theft. They can also
be used for instantaneous checkout of an entire shopping cart of items. As addressed in
Beyond the Pages 6.3, large retailers and packaged goods manufacturers have adopted
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