PART 2: MARKETING MIX This section explores the marketing mix (product, pricing, place, and promotion), as well as marketing strategies, which are some of the best techniques a company can use to achieve overall marketing goals and objectives. A good marketing strategy includes integrating each aspect of the marketing mix and another key element—the distribution channel. Profit is directly affected by the distribution channel. The marketing mix is instrumental in creating an effective marketing strategy. It helps create brand value and convey multiple meanings and perceptions about the product because it helps establish the suitability of a product and brand image. The product should meet specific consumer needs and demand. A product's price should not be too high or too low and should represent a skillful balance. The price should convey the product has a high value and is quality. The goal is for the consumer to perceive the product is worth his or her time and effort, critical factors that may affect revenue. The place (location) of the product is a key part of the distribution channel. Where the product is located helps to assess the best options for distribution. The promotion of the product refers to using the most effective advertising and public relations methods to employ to reach the maximum number of consumers. The goal is to not only promote the product, but to also enlarge the overall product portfolio. Effectively promoting the product helps with new product development strategies to potentially expand in new markets or improve existing products. Using the marketing mix will help a company differentiate its product from the competition, improve consumer relations, and keep the company informed about consumer buying habits. Marketing Mix: Why It Matters Why learn about the marketing mix? Why did Red Bull sponsor Felix Baumgartner’s record-breaking free fall from outer space? Why does Anheuser-Busch pay millions of dollars for a 30-second television during the Super Bowl? Why does Verizon Wireless put its name on sports and other event centers around the country? Think about these three examples and how appropriate the strategy is to the target markets. Energy drinks and skydiving are a great matchup, and many people like to drink a beer or two while watching a football game. What about cell phones and concerts? Think about who uses cell phones the most—teenagers and young adults. These companies are following marketing strategies that will give them the highest return on their marketing investment to reach their target customers most effectively. Using an appropriate marketing mix helps businesses meet their sales goals. S0urce UMGC 2020) Marketing Mix: Why It Matters Retrieved 7/03/2020 from https://learn.umgc.edu/d2l/le/content/535125/viewContent/18690699/View Product Marketing What you’ll learn to do: Explain common product marketing strategies and how organizations use them Often when we hear the word marketing, we think about promotion or, perhaps, only advertising. However, product is the core of the marketing mix. It is what will be priced, promoted, and distributed. If you are able to create and deliver a product that provides exceptional value to your target customer, the rest of the marketing mix is easier to manage. A successful product makes every aspect of a marketer’s job easier—and more fun. Learning Outcomes • • • • • • Distinguish common consumer product categories Explain the elements and benefits of branding Identify common branding strategies Explain the product life cycle Discuss marketing considerations through the product life cycle Differentiate the stages of the new-product development process Defining Product A product is a bundle of attributes (features, functions, benefits, and uses) that a person receives in an exchange. In essence, it is anything, tangible or intangible, that an organization offers to satisfy a customer. Thus, a product may be an idea (recycling), a physical good (a pair of sneakers), a service (banking), or a combination of any of these (American Marketing Association, 2018). Broadly speaking, products fall into one of two categories: consumer or business (also called B2B or industrial goods). Retail products are a type of consumer good. Raw materials, component parts, or tools used to produce other products are examples of B2B or industrial goods. A computer is an example of a product that is both a consumer good and a business product, depending on who purchases and uses it. The product is the core of an exchange. So, does it provide the features, functions, benefits, and uses that the target customer expects and desires? Throughout our discussion of product we will focus on the target customer. Often companies become excited about their capabilities, technologies, and ideas—but they forget the customer’s perspective. This leads to investments in product enhancements or new products that don’t provide value to the customer. As a result, these new products or product improvements are unsuccessful. Consumer Product Categories Consumer products are often classified into four groups related to different kinds of buying decisions: convenience, shopping, specialty, and unsought products. Convenience Products A convenience product is an inexpensive product that requires a minimal amount of purchasing effort. Examples of convenience products are bread, soft drinks, pain reliever, and coffee; also, headphones, power cords, and other items that are easily misplaced. From the consumer’s perspective, little time, planning, or effort go into buying convenience products. Often product purchases are made on impulse, so availability is important. Consumers have come to expect a wide variety of products to be conveniently located at their local supermarkets. They also expect easy online purchase options and low-cost, quick shipping for convenience purchases. Convenience items are also found in vending machines and at kiosks. The primary marketing strategy for convenience products is extensive distribution. Products must be available in every conceivable outlet and easily accessible within them. The products’ unit value is typically low, and the product is usually highly standardized. Therefore, marketers may rely on a high level of brand awareness and recognition—accomplished through mass advertising, sales promotion devices like coupons and point-of-purchase displays, and packaging. Yet, the key is convincing wholesalers and retailers to carry the product. If it’s not available when, where, and how the consumer desires, a convenience product will fail. Shopping Products Shopping products are those that consumers want to be able to compare. They are usually more expensive than convenience products, and they are purchased only occasionally. The consumer is more likely to compare a number of options to assess quality, cost, and features. Although many shopping goods are nationally advertised like convenience products, the marketing strategy often relies on the retailer’s ability to differentiate itself to generate the sale. For example, if you decide to buy a TV at Best Buy, then you are more likely to evaluate the range of options and prices there. It becomes important for Best Buy to provide a knowledgeable and effective salesperson and have the right pricing discounts to offer you a competitive deal. Best Buy might also offer you an extended warranty or in-store service options. While shopping at Best Buy, consumers can easily check prices and options for online retailers, which places even greater pressure on the conventional store to provide the best total value. If the retailer can’t make the sale, product turnover is slower, and a great deal of capital is tied up in inventory. There is a distinction between heterogeneous and homogeneous shopping products. Heterogeneous shopping products are unique. Think about shopping for clothing or furniture. There are many style differences, and the shopper is trying to find the best style match at the right price. The purchase decision with heterogeneous shopping products is more likely to be based on finding the right fit than on price alone. In contrast, homogeneous shopping products are very similar. Take refrigerators, for example. Each model has certain features available at different price points, but the basic functions of all models are very similar. A typical shopper will look for the lowest price available for the features desired. Speciality Products Specialty goods are the third product classification. From the consumer’s perspective, these products are so unique that it’s worth it to go to great lengths to find and purchase them. Almost without exception, price is not the principal factor affecting sales of specialty goods. Although these products may be custom-made or one-of-a-kind, it is also possible that the marketer has been very successful in differentiating the product in the consumer’s mind. Blizzcon attendees, 2014 For example, some consumers feel a strong attachment to their hairstylist or barber. They are more likely to wait for an appointment than schedule time with a different stylist. Another example is the annual Blizzcon event produced by Blizzard Entertainment. Tickets sell out minutes after they are released, and can be resold at a premium. The event is an opportunity to learn about new video games and to play games that have not yet been released. Attendees can also purchase limited-edition promotional items. Blizzard’s customers are paying for a specialty product that is a massive marketing event. It is generally desirable for a marketer to lift a product from the shopping to the specialty category—and keep it there. With the exception of price-cutting, the entire range of marketing activities is needed to accomplish this transition. Unsought Products Unsought products are those the consumer never plans or hopes to buy. These are either products that the customer is unaware of or products consumers hope they will not need. For example, most consumers hope to never purchase pest control services and try to avoid purchasing funeral plots. Unsought products have a tendency to draw aggressive sales techniques, as it is difficult to get the attention of a buyer who is not seeking the product. Elements of Brand Brands are interesting, powerful concoctions of the marketplace that create tremendous value for organizations and for individuals. Because a brand serves several functions, we can define it as follows: • • • identifier—a name, sign, symbol, design, term, or some combination that identifies an offering and helps simplify choice for the consumer promise—what a company or offering will provide to the people who interact with it asset—a reputation in the marketplace that can drive price premiums and customer preference for goods from a particular provider • • set of perceptions—everything individuals believe, think, see, know, feel, hear, and experience about a product, service, or organization mind share—the unique position a company or offering holds in the customer’s mind, based on his or her past experiences and expectations A brand consists of all the features that distinguish the goods and services of one seller from another, including name, term, design, style, symbols, and customer touch points. Together, all elements of a brand work as a psychological trigger—a stimulus—that causes an association with all the other thoughts a consumer has about it. Brands are a combination of tangible and intangible elements: • • • visual design elements—logo, color, typography, images, tagline, packaging distinctive product features—quality, design sensibility, personality intangible aspects—included in the customer experience with a product or company, reputation The act of creating or building a brand may take place at multiple levels: company brands, individual product brands, or branded product lines. Any entity that works to build consumer loyalty can also be considered a brand, such as celebrities (Lady Gaga), events (Susan G. Komen Race for the Cure), and places (Las Vegas). Brands Create Market Perceptions A successful brand is much more than just a name or logo. As suggested previously, brand is the sum of perceptions about a company or product in the minds of consumers. Effective brand building can create and sustain a strong, positive, and lasting impression that is difficult to displace. If they are developed and managed properly, brands provide external cues to taste, design, performance, quality, value, or other desired attributes. Brands convey positive or negative messages about a company, product, or service. Brand perceptions are a direct result of past advertising, promotion, product reputation, and customer experience. A brand can convey multiple levels of meaning, including the following: • • • • • • attributes—specific product features. The Mercedes-Benz brand, for example, suggests expensive, well-built, well-engineered, durable vehicles. benefits—attributes translated into functional and emotional benefits. Mercedes automobiles suggest prestige, luxury, wealth, reliability, and self-esteem. values—company values and operational principles. The Mercedes brand evokes company values around excellence, high performance, and power. culture—cultural elements of the company and brand. Mercedes represents German precision, discipline, efficiency, and quality. personality—a set of distinctive characteristics that go beyond features. The Mercedes brand personality combines luxury and efficiency, precision and prestige. user—the types of consumers who buy and use the product. Mercedes drivers might be perceived and classified differently from, for example, the drivers of Cadillacs, Corvettes, or BMWs. As an automobile brand, the Mercedes-Benz logo suggests high prestige. Brands Create an Experience Effective branding encompasses everything that shapes the perception of a company or product in the minds of customers. Names, logos, brand marks, trade characters, and trademarks are commonly associated with brand, but these are just part of the picture. Branding also addresses virtually every aspect of a customer’s experience with a company or product: visual design, quality, distinctiveness, purchasing experience, customer service, and so forth. Branding requires a deep knowledge of customers and how they experience a company or product. Brand-building requires long-term investment in communicating about and delivering the unique value embodied in a company’s brand. This effort can bring long-term rewards. In consumer and business-to-business markets, branding can influence whether consumers will buy the product and how much they are willing to pay. Branding can also help in new product introduction by creating meaning, market perceptions, and differentiation where they didn’t exist. When companies introduce a new product using an existing brand name (a brand extension or a branded product line), they can build on consumers’ positive perceptions of the established brand to create greater receptivity for the new offering. Brands Create Value Brands create value for consumers and organizations in a variety of ways. The Dunkin’ Donuts logo, which includes an image of a cup of coffee, makes it easy to spot. The coffee is known for being a good value. Value for the Consumer Brands help simplify consumer choices. They help create trust and an expectation. Effective branding enables the consumer to easily identify a desirable company or product because the features and benefits have been communicated effectively. Positive, well-established brand associations increase the likelihood that consumers will select, purchase, and consume the product. Dunkin’ Donuts, for example, has an established logo and imagery familiar to many consumers. The vivid colors and image of a cup are easy to recognize and distinguish from competitors, and many associate the brand with tasty donuts, good coffee, and reasonable prices. Value of Branding for Companies The Starbucks brand is associated with premium, high-priced coffee. For companies and other organizations, branding helps create loyalty. It decreases the risk of losing market share by establishing a competitive advantage over the competition that customers can count on. Strong brands often command premium pricing, because consumers are willing to pay more for a product they know, trust, and perceive as a good value. Branding can be a great vehicle for effectively reaching target audiences and positioning a company relative to the competition. Branding helps guide choices around messaging, visual design, packaging, marketing, communications, and product strategy. For example, Starbucks’ loyal fan base values and pays premium prices for its coffee. Starbucks’ choices about beverage products, neighborhood shops, the buying experience, and corporate social responsibility all help build its brand and communicate its value to a global customer base. Value of Branding for the Retailer Branding has enabled national retailers like Target and Walmart, and regional grocers like Wegmans and Aldi, to differentiate themselves, build customer loyalty and expand. Retail brand building may focus on the in-store or online shopping environment, product selection, prices, convenience, personal service, customer promotions, product display, and other considerations. Retailers also benefit from carrying the branded products customers want. For example, a customer who hears about a particular allergen-free or organic product may visit a retailer just to purchase those goods. The same could be said of designer labels at a department store. Managing a Strategic Asset As organizations establish and build strong brands, they can pursue a number of strategies to continue developing them and extending their value to stakeholders like customers, retailers, supply chain and distribution partners, and the organization itself. Brand Ownership Steve Jobs, co-founder and CEO of Apple Who owns the brand? The legal owner is generally the individual or entity whose name is on the legal registration. But in practice, all of those who work for a company need to take ownership of its brand. Brand ownership is about building and maintaining a brand that reflects your principles and values. Brand building is about effectively persuading customers to believe in and purchase your product or service. Iconic brands, such as Apple and Disney, often have a history of visionary leaders who champion the brand, evangelize about it, and build it into the organizational culture and operations. Branding Strategies A branding strategy helps establish a product within the market and build a brand that will grow and mature. Making smart branding decisions up front is crucial since a company may have to live with its decisions for a long time. The following are commonly used branding strategies: House Brand Strategy A house brand applies to a range of products under one name—typically the company’s (for example, Mercedes-Benz or Stanley Black & Decker) or a range of subsidiary brands (such as Cadbury Dairy Milk). The primary focus and investment is in a single, dominant brand. This approach can be simpler and more cost effective in the long run when it is aligned well with broader corporate strategy. House of Brands Strategy Kool-Aid Man In contrast to companies practicing the house brand strategy, a company investing in building out a variety of individual, product-level brands is using a house of brands strategy. Each brand has its own name, which may not be associated with the parent company name at all. These brands may even be in de facto competition with other brands from the same company. For example, Kool-Aid and Tang are powdered beverage products that are both owned by Kraft Foods. The house of brands strategy is well suited to companies that operate across many product categories. They can introduce products within the same category aimed at different types of consumers without diluting brand perceptions. Private-Label Branding Also called store branding, private-label branding has become increasingly popular. If the retailer has a particularly strong identity, the private label may be able to compete well with even the most well-known brands, and may outperform similar products that are not strongly branded. Wegmans’ brand strategy includes economical store brands as well as higher-priced specialty goods and in-store experiences. No-Brand Branding A number of companies successfully pursue no-brand strategies by creating packaging that imitates generic-brand simplicity. Despite the term, no-brand branding is a type of branding, since the product is made conspicuous by the absence of a brand name. Tapa Amarilla, or Yellow Cap, is a brand name that also describes the color of the tops on the company’s cleaningrelated products. Personal and Organizational Branding Personal and organizational branding are strategies for developing a brand image and marketing around individual people or groups. Personal branding applies to an individual and his or her career, which can be projected to target audiences. Organizational branding promotes the mission, goals, and work of a group being branded. The music and entertainment industries provide many examples of personal and organizational branding. From Justin Bieber to George Clooney to Kim Kardashian, virtually any celebrity is a personal brand. Likewise, bands, orchestras, and other artistic groups typically cultivate an organizational (or group) brand. Faith branding is a variant of this brand strategy, which treats religious figures and organizations as brands seeking to increase their following. Mission-driven organizations such the Girl Scouts of America, Sierra Club, National Rifle Association, and others pursue organizational branding to expand their membership, resources, and impact. Place Branding The developing fields of place branding and nation branding work on the assumption that places compete with other places to win over people, investment, tourism, economic development, and other resources. With this in mind, public administrators, civic leaders, and business groups may team up to brand their city, region, or nation and promote it to target audiences. Depending on the goals they are trying to achieve, targets for these marketing initiatives may be real-estate developers, employers and business investors, tourists and tour operators. While place branding may focus on any geographic area or destination, nation branding aims to measure, build, and manage the reputation of countries. The city-state of Singapore is an early example of successful nation branding. Co-Branding Co-branding is an arrangement in which two established brands collaborate to offer a single product or service that carries both brand names. In these relationships, generally both parties contribute something of value to the new offering that neither would have been able to achieve independently. Effective co-branding builds on the complementary strengths of the existing brands. It can also allow both brands an entry point into markets where they would not be credible players separately. The following are some examples of co-branded offerings: • • • • Airlines and retailers offer co-branded credit cards with customer rewards. Home furnishings company Pottery Barn and paint manufacturer Benjamin Moore co-brand seasonal color palettes for interior paints. Fashion designer Liz Lange designs a ready-to-wear clothing line co-branded with and sold exclusively at Target stores. Automaker Fiat and toy maker Mattel teamed up to celebrate Barbie’s fiftieth anniversary with a pink Fiat 500 Barbie car. Fiat 500 Barbie Automobile Co-branding is a common brand-building strategy, but it can present difficulties. There is always risk around how well the market will receive new offerings, and sometimes, despite the best-laid plans, co-branded offerings fall flat. Also, these arrangements often involve complex legal agreements that are difficult to implement. Co-branding relationships may be uneven: Partners may have different visions for their collaboration or they may prioritize the co-branded venture differently. One partner may hold significantly more power than the other in their working relationship. Because co-branding impacts the existing brands, the partners may struggle with how to protect their current brands while introducing something new and, possibly, risky. Licensing Campbell’s Star Wars Soup Source: http://www.campbells.com/star-wars/ Brand licensing is the process of leasing or renting the right to use a brand in association with a product or set of products for a defined period and within a defined market, geography, or territory. Through a licensing agreement, a licensor provides a tangible or intangible asset to a licensee, and grants the right to use the licensor’s brand name and related brand assets in return for payment. The licensee obtains a competitive advantage, while the licensor obtains inexpensive access to a market. Licensing can be extremely lucrative for the brand owner, as other organizations pay for permission to produce products carrying a licensed name. The Walt Disney Company was a pioneer in brand licensing (Mickey Mouse) and remains a leader. Toy manufacturers pay millions of dollars and vie for the rights to produce and sell products affiliated with Disney movies. Line and Brand Extensions Organizations use line extensions and brand extensions to leverage and increase brand equity. Diet Coke is a line extension of the Coke brand. A company creates a line extension when it introduces a new offering within the same product category. A food company might add new flavors, package sizes, nutritional content, or products containing special ingredients. Line extensions aim to provide more variety and, hopefully, capture more of the market within a given category. More than half of all new products introduced each year are line extensions. For example, M&M candy varieties like peanut, pretzel, peanut butter, and dark chocolate are all line extensions of the M&M brand. Diet Coke is a line extension of the parent brand Coke. While the varieties have distinct attributes, they are in the same product category. A brand extension moves an existing brand name into a new product category, with a new or modified product. In this scenario, a company uses the strength of an established product to launch a product in a different category, hoping the popularity of the original brand will increase receptivity of the new product. An example of a brand extension is Jell-O pudding pops, an extension from the original product, Jell-O gelatin. This strategy increases awareness of the brand name and increases profitability from offerings in more than one product category. Line extensions and brand extensions are important tools for companies: They reduce the financial risk associated with new-product development by leveraging the equity in the parent brand name to enhance consumers’ perceptions and receptivity toward new products. With the established success of the parent brand, consumers will have instant recognition of the product name and be more likely to try the new line extension. The Product Life Cycle A company has to be good at both developing new products and managing them in the face of changing tastes, technologies, and competition. Products generally go through a life cycle with predictable sales and profits. Marketers use the product life cycle to follow this progression and identify strategies to influence it. The product life cycle (PLC) starts with the product’s development and introduction, then moves toward withdrawal or eventual demise. This progression is shown in the graph below. The five stages of the PLC are: 1. 2. 3. 4. 5. Product development Market introduction Growth Maturity Decline The Table below shows charactersitics of each stage. Product Stages • Investment is made. • Sales have not begun. Development Market introduction Growth • New product ideas are generated, operationalized, and tested. • • • • • Costs are very high. Sales volumes are low. There is little or no competition. There is no demand; customers have to be prompted to try the product. Profits are low. • • • • • Cost are reduced with economies of scale. Sales volume increases significantly. Profitability begins to rise. Public awareness increases. Competition begins to increase, with a few new players in establishing market. Product Stages • Investment is made. • Sales have not begun. Development Maturity • • Increased competition leads to price decreases. • • • • • Costs are lowered as a result of increasing production volume. Sales volume peaks and market saturation is reached. New competitors enter the market. Prices tend to drop with the proliferation of competing products. Brand differentiation and feature diversification are emphasized to maintain or increase market share. Profits decline. • Decline New product ideas are generated, operationalized, and tested. • • • • Sales volume declines. Costs increase as economies of scale are lost. Prices and profitability diminish. Profit becomes more a challenge of production and distribution efficiency than increased sales. Planning and Limitations The product life cycle can be a useful tool in planning for the life of the product, but it has a number of limitations. Not all products follow a smooth and predictable growth path. Some are tied to specific business cycles or have seasonal factors that impact growth. For example, enrollment in higher education tracks closely with economic trends. When there is an economic downturn, more people lose jobs and enroll in college to improve their job prospects. When the economy improves and more people are fully employed, college enrollments drop. This does not necessarily mean that education is in decline, only that it is in a down cycle. Furthermore, evidence suggests that the PLC framework holds true for industry segments but not necessarily for individual brands or projects, which are likely to experience greater variability (Mullor-Sebastian, 1983). Of course, changes in other elements of the marketing mix can also affect the life cycle of a product. Change in the competitive situation during any stage may have a much greater impact on the marketing approach than the PLC itself. An effective promotional program or a dramatic price reduction may improve the sales picture during the decline period, at least temporarily. Usually the improvements brought about by non-product tactics are relatively short-lived. Basic alterations to product offerings provide longer benefits. Whether one accepts the S-shaped curve shown in the graph as a valid sales pattern or as a pattern that holds only for some products, the PLC concept is a useful framework for dealing systematically with product marketing issues and activities. The marketer needs to be aware of the generalizations that apply to a given product as it moves through various stages. Marketing through the PLC Common marketing considerations are associated with each stage of the PLC. The marketing mix and the blend of promotional activities—also known as the promotion mix—should reflect a product’s life-cycle stage and progress toward market adoption. It’s not a formula to guarantee success, but can guide thinking about budget, objectives, strategies, tactics, and potential opportunities and threats. Market Introduction Stages Think of the market introduction stage as the product launch. This phase of the PLC requires a significant marketing budget, since the market is not yet aware of the product or its benefits. Introducing a product involves convincing consumers that they have a problem or need that the new offering can uniquely address. At its core, messaging should convey, “This product is a great idea! You want this!” Usually a promotional budget is needed to create broad awareness and educate the market about the new product. To achieve these goals, often a product launch includes promotional elements such as a new website (or significant update to an existing site), a press release and media campaign, and a social media campaign. Investment in developing the distribution channels and related marketing support are also needed. For a B2B product, this often requires training the sales force, and developing sales tools and materials for direct and personal selling. In a B2C market, it might include training and incentivizing retail partners to stock and promote the product. Prices in the introduction phase are generally set fairly high, as there are fewer competitors in the market, but they may be offset by discounts and promotions. Google Glass Smart Glasses Launches look different, depending on whether the product is a completely new innovation. If it is, education as well as awareness-building are needed. In 2013 when Google launched Google Glass—an eyeglass-mounted computer display—it had to not only spread the word about the product but also help prospective buyers understand how it might be used. Google initially targeted tech-savvy audiences most interested in novelty and innovation. By creating media fanfare and limiting the product’s availability, Google’s promotional strategy ignited demand among these market segments. Tech bloggers and insiders blogged and tweeted about their Google Glass adventures, and word-of-mouth spread rapidly. You can imagine how this was different from the launch of Wheat Thins Spicy Buffalo crackers, an extension of an existing product line targeting different audiences with promotional activities that fit the product’s marketing and distribution channels. The Google Glass launch was also different from the launch of Tesla’s home battery. In that case Tesla offered a new line of home products from the company that had previously sold only automobiles. Breaking into new product categories and markets is challenging even for a wellknown company like Tesla. As you might expect, the greater the difference in new products from a company’s existing offerings, the greater the complexity and expense of the introduction stage. One other consideration is the maturity of a product. Sometimes marketers will choose to be conservative during marketing introduction, when a product is not yet fully developed or proven, or when the distribution channels are not well established. This might mean initially introducing the product to only one market segment, doing less promotion, or limiting distribution (as with Google Glass). This approach allows for early customer feedback but reduces the risk of product issues during the launch. While we often think of an introduction or launch as a single event, it can last several years. Generally a product moves out of the introduction stage when it begins to see rapid growth, but the growth curve varies significantly based on the product and the market. Growth Stage Once rapid growth begins, the product or industry has entered the growth stage. When a product category begins to demonstrate significant growth, the market usually responds. New competitors enter the market, and larger companies acquire high-growth companies and products. These emerging competitive threats drive new marketing tactics. Marketers who have been seeking to build broad market awareness through the introduction phase must now differentiate their products from competitors’, emphasizing unique features that appeal to target customers. The central thrust of market messaging and promotion during this stage is “This brand is the best!” Pricing also becomes more competitive and must be adjusted to align with the differentiation strategy. Often in the growth phase the marketer must pay significant attention to distribution. With a growing number of customers seeking the product, more distribution channels are needed. Mass marketing and other promotional strategies—to reach more customers and segments—start to make sense for consumer-focused markets during the growth stage. In business-to-business markets, personal selling and sales promotions often help open doors to broader growth. Marketers often must develop and support new distribution channels to meet demand. Through the growth phase, distribution partners will become more experienced selling the product and may require less support over time. The primary challenges during the growth phase are to identify a differentiated position in the market that allows the product to capture a significant portion of the demand, and to manage distribution to meet it. Maturity Stage When growth begins to plateau, the product has reached maturity. To achieve strong business results through maturity, the company must take advantage of economies of scale. This is usually a period in which marketers manage budget carefully, often redirecting resources toward products that are earlier in their life cycle and have higher revenue potential. At this stage, organizations are trying to extract as much value from an established product as they can, typically in a very competitive field. Marketing messages and promotions seek to remind customers about a great product, differentiate it from competitors, and reinforce brand loyalty: “Remember why this brand is the best.” As mentioned in the previous section, this late in the life cycle, promotional tactics and pricing discounts are likely to provide only short-term benefits. Changes to a product have a better chance of yielding more sustained results. In the maturity stage, marketers often focus on niche markets, using promotional strategies, messaging, and tactics designed to capture new market share. Since there is no new growth, the emphasis shifts from drawing new customers to the market to winning more of the existing market. The company may extend a product line, adding new varieties that have greater appeal to a smaller segment of the market. Often, distribution partners will reduce their emphasis on mature products. A sales force will shift its focus to new products with more growth potential. A retailer will reallocate shelf space. When this happens, the manufacturer may need to take on a stronger role in driving demand. This has been a common tactic in the soft drink industry. As the market has matured, the number of different flavors of large brands like Coke and Pepsi has grown significantly. Decline Stage Once a product or industry has entered decline, the focus shifts almost entirely to eliminating costs. Little if any marketing spending goes into products in this stage, because the marketing investment is better spent on other priorities. For goods, distributors will seek to eliminate inventory by cutting prices. For services, companies will reallocate staff to ensure that delivery costs are in check. Where possible, companies may initiate planned obsolescence. Technology companies will announce to customers that they will not continue to support a product after a set obsolescence date. Often a primary focus for marketers during this stage is to transition customers to newer products that are earlier in the product life cycle and have more favorable economics. Promotional activities and marketing communications, if any, typically focus on making this transition successful among brand-loyal segments who still want the old product. A typical theme of marketing activity is “This familiar brand is still here, but now there’s something even better.” New-Product Development There are probably as many varieties of new-product development systems as there are types of companies, Most share the same basic steps or stages, but they are executed in different ways. One way to look at new-product development is eight stages grouped into three phases. Many of the activities are performed repeatedly throughout the process, but they become more concrete as the product idea is refined and more data is gathered. For example, at each stage the product development team asks, “Is this a viable product concept?” The answer changes as the product is refined and more market perspectives are added to the evaluation. New-Product Development: Eight Stages in Three Phases Phase I: Generating and Screening Ideas Phase II: Developing New Products Phase III: Commercializing New Products Stage 1: Generate new product ideas Stage 4: Analyze business case Stage 6: Perform test marketing Stage 2: Screen product ideas Stage 5: Focus on technical and market development Stage 7: Launch Stage 3: Develop and test concept Stage 8: Evaluate Stage 1: Generate New Product Ideas Generating new product ideas is a creative task. Coming up with ideas is easy, but generating good ideas is another story. Companies use a range of internal and external sources to identify new product ideas. A SWOT analysis might suggest strengths in existing products that could be the basis for new products or market opportunities. Research might identify market and customer trends. A competitive analysis might expose a hole in the company’s product portfolio. Customer focus groups or the sales team might identify an unmet customer need. Many amazing products are also the result of lucky mistakes—product experiments that don’t meet the intended goal but turn out to have an interesting application. For example, 3M scientist Spencer Silver invented Post-It Notes in a failed experiment to create a super-strong adhesive (Wikipedia). The key to the idea-generation stage is to explore possibilities, knowing that most will not result in products that go to market. Stage 2: Screen Product Ideas The second stage of the product development process is idea screening. This is the first of many screening points. At this stage, there are many unknowns about the market opportunity. Still, product ideas that do not meet the organization’s objectives should be rejected. If a poor product idea is allowed to pass the screening stage, it wastes effort and money in later stages until it is abandoned. On the other hand, screening out a worthwhile idea can squander a significant market opportunity. For this reason, this early screening stage allows many ideas to move forward that ultimately may not go to market. The screening process may include ratings gathered internally, with employees scoring products using a set of criteria and only the highest-ranked products moving forward. Stage 3: Develop and Test Concept Today, it is increasingly common for companies to run a small concept test in a real marketing setting. The product concept is a synthesis or description of a product idea that reflects the core element of the proposed product. Marketing tries to have the most accurate and detailed product concept possible so that the reactions of target buyers will be accurate. The reactions can then be used to inform the final product, the marketing mix, and the business analysis. New tools for technology and product development are available that support the rapid development of prototypes that can be tested with potential buyers. When concept testing can include an actual product prototype, the early test results are much more reliable. Concept testing helps companies avoid investing in bad ideas while helping them capture outstanding ones. Stage 4: Analyze the Business Case Before companies make a significant investment in a product’s development, they need to be sure that it will bring a sufficient return. These are some questions the company seeks to answer: 1. What is the market opportunity for this product? 2. What are the costs to bring this product to market? 3. What are the costs through the stages of the product life cycle? 4. Where does this product fit in the product portfolio and how will it impact existing product sales? 5. How does this product impact the brand? 6. How does this product impact other corporate objectives, such as social responsibility? The marketing budget and costs are one element of the business analysis, but the full scope includes all revenues, costs, and other business impacts. Stage 5: Focus on Technical and Market Development A product that has passed through screening and business analysis is ready for technical and marketing development. Technical development processes vary greatly according to product type. For a product with a complex manufacturing process, there is a lab phase to create specifications and an equally complex phase to develop the manufacturing process. For a service, there may be new processes requiring new employee skills or the delivery of new equipment. These are only two of many possible examples, but in every case the company must define both what the product is and how it will be delivered to many buyers. While technical development is under way, the marketing department tests the early product with target customers to find the best possible marketing mix. Ideally, marketing uses product prototypes or early production models to understand and capture customer responses and identify how best to present the product to the market. Through this process, product marketing must prepare a complete marketing plan—starting with a statement of objectives and ending with coherent product distribution, promotion, and pricing integrated into a marketing action plan. Stage 6: Perform Test Marketing Test marketing is the final stage before commercialization. The objective is to test all variables in the marketing plan, including elements of the product. Test marketing represents an actual launch of the total marketing program, but it is done on a limited basis. Initial product testing and test marketing are not the same. Product testing is initiated by the producer: He or she selects a sample of consumers, provides them with the test product, and offers them an incentive to participate. In test marketing, the test group represents the full market, and the consumer must make a purchase decision and pay for the product. In addition, the test product must compete with existing products in the actual marketing environment. For these and other reasons, a market test is an accurate simulation of the broader market and serves as a method for reducing risk. It should enhance the new product’s probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale. Stage 7: Launch Finally, the product arrives at the commercial launch stage. The marketing mix comes together to introduce the product to the market. This stage marks the beginning of the product life cycle Stage 8: Evaluate The launch is not an end to the marketing role. To the contrary, after launch the marketer finally has real market data about how the product performs in the real market, outside the test environment. These market data initiate a new cycle of idea generation for improvements and adjustments that can be made within the marketing mix. References American Marketing Association Dictionary. Retrieved from https://www.ama.org/resources/Pages/Dictionary.aspx?dLetter=P#product Mullor-Sebastian, A. (1983). The Product life cycle theory: Empirical evidence. Journal of International Business Studies 14(3) 95–105. Wikipedia. Retrieved from https://en.wikipedia.org/wiki/Post-it_note UMGC 2020) Product Marketing Retrieved 7/03/2020 from https://learn.umgc.edu/d2l/le/content/535125/viewContent/18690702/View Pricing Strategies What you’ll learn to do: Explain common pricing strategies and how organizations use them In this section you’ll learn about specific, standard pricing strategies that organizations use to meet their objectives and address consumer perceptions of value. Rent the Runway Founders Learning Outcomes • • • • Explain pricing from the customer’s viewpoint Describe the objectives businesses hope to achieve with product pricing Explain the cost-plus pricing method Explain the methods businesses use for discounts and allowances Customer Value and Price Introduction Rent the Runway is a company that lets customers borrow expensive designer dresses for a short time at a low price—to wear on a special occasion, for example—and then send them back. Do the customers get a bargain when they can wear a designer dress for a special occasion at 15 percent of the retail price? Does the retail price matter to customers in determining value, or are they only considering the style and price they will pay for the rental? What does value really mean in the pricing equation? The Customer’s View of Price Whether a customer is the ultimate user of the finished product or a business that purchases components of the finished product, the customer seeks to satisfy a need by making a purchase. Customers use several criteria to decide how much they are willing to spend to satisfy a need. They prefer to pay as little as possible. To increase value, a business can either increase the perceived benefits or reduce the perceived costs. Both are important aspects of price. If you buy a Louis Vuitton bag for $600, you perceive that you are getting a beautifully designed, well-made bag that will last for decades. In other words, the value is high enough for you that it can offset the cost. When you buy a parking pass to park in a campus lot, you are buying the convenience of a parking place close to your classes. Both of these purchases provide value at some cost. The perceived benefits are directly related to the price-value equation. Some of the possible benefits are status, convenience, the deal, brand, quality, and choice. Some benefits tend to go hand in hand. For instance, Mercedes-Benz E-Class is a very high-status brand, so buyers expect superb quality to be part of the value equation that would make them willing to pay $100,000 or more. In other cases, there are trade-offs between benefits. Someone living in an isolated mountain community might prefer to pay a lot more for groceries at a local store than drive 60 miles to the nearest Safeway. That person is willing to sacrifice the lowest price for the benefit of greater convenience. When we talk about increasing perceived benefits, we are talking about value added. Identifying and increasing the value-added elements of a product are an important marketing strategy. Consider the Rent the Runway example. The company provides dresses for special occasions. The prices for the dresses are reduced, but the price of a dress can also be considered high, because the customer must return it. There are many value-added elements, though, so that customers accept the price. These include a broad selection of current styles and the option to try a second size at no additional cost. In a very competitive marketplace, the value-added elements become increasingly important, as marketers use them to differentiate the product from other similar offerings. Perceived costs include the actual dollar amount printed on the product, plus a host of other factors. If you learn that a gas station is selling gas for 25 cents less per gallon than your local station, will you automatically buy from the lower-priced gas station? That depends. You will consider a range of other issues. How far do you have to drive to get there? Is it an easy drive or through traffic? Are there long lines that will increase the time it takes to fill your tank? Is the low-cost fuel the grade or brand that you prefer? Inconvenience, poor service, and limited choice are all possible perceived costs. Other common perceived costs are the risk of making a mistake, related costs, lost opportunity, and unexpected consequences, to name but a few. Viewing price from the customer’s point of view pays off in many ways. Most notably, it helps define value—the most important basis for creating a competitive advantage. Pricing Objectives Companies set the prices of their products to achieve specific objectives. Consider the following examples: In 2014 Nike initiated a new pricing strategy. The company determined from a market analysis that its customers appreciated the value that the brand provided, which meant that it could charge a higher price for its products. Nike began to raise its prices 4 to 5 percent a year. Footwear News reported on the impact of the strategy: 'The ability to raise prices is a key long-term advantage in the branded apparel and footwear industry—we are particularly encouraged that Nike is able to drive pricing while most US apparel names are calling for elevated promotional [and] markdown levels in the near-term,' said UBS analyst Michael Binetti. Binetti said Nike’s new strategy is an emerging competitive advantage (Jordan, 2014). Nike’s understanding of customer value enabled it to raise prices and achieve company growth objectives, increasing US athletic footwear sales by $168 million in one year. In 2015 the US airline industry lost $12 billion in value in one day because of concerns about potential price wars. When Southwest Airlines announced that it was increasing capacity by 1 percent, the CEO of American Airlines—the world’s largest airline—responded that American would not lose customers to price competition and would match lower fares. Forbes magazine reported on the consequences: This induced panic among investors, as they feared that this would trigger a price war among the airlines. The investors believe that competing on prices would undermine the airline’s ability to charge profitable fares, pull down their profits, and push them back into the shackles of heavy losses. Thus, the worried investors sold off stocks of major airlines, wiping out nearly $12 billion of market value of the airline industry in a single trading day (Trefis Team, 2015). Common Pricing Objectives Not surprising, product pricing has a big effect on company objectives. (You’ll recall that objectives are essentially a company’s business goals.) Pricing can be used strategically to adjust performance to meet revenue or profit objectives, as in the Nike example above. Or, as the airline-industry example shows, pricing can also have unintended or adverse effects on a company’s objectives. Product pricing impacts each of the hypothetical objectives below: • • • Profit objective: “Increase net profit in 2016 by 5 percent.” Competitive objective: “Capture 30 percent market share in the product category.” Customer: “Increase customer retention.” Of course, over the long run, no company can really say, “We don’t care about profits. We are pricing to beat competitors.” Nor can the company focus only on profits and ignore how it delivers customer value. For this reason, marketers talk about a company’s pricing orientation, or the relative importance of one factor compared to the others. All companies must consider customer value in pricing, but some have an orientation toward profit. We would call this profitoriented pricing. Profit-Oriented Pricing Profit-oriented pricing places an emphasis on the finances of the product and business. A business’s profit is the money left after all costs are covered. Following is the equation: profit = revenue – costs In profit-oriented pricing, the price per product is set higher than the total cost of producing and selling each product to ensure that the company makes a profit on each sale. The benefit of profit-oriented pricing is obvious: The company is guaranteed a profit on every sale. There are real risks to this strategy, though. If a competitor has lower costs, then it can easily undercut the pricing and steal market share. Even if a competitor does not have lower costs, it might choose a more aggressive pricing strategy to gain momentum in the market. Also, customers don’t really care about the company’s costs. Price is a component of the value equation, but if the product fails to deliver value, it will be difficult to generate sales. Finally, profit-oriented pricing is often a difficult strategy for marketers to succeed with, because it limits flexibility. If the price is too high, then the marketer has to adjust other aspects of the marketing mix to create more value. If the marketer invests in the other three Ps—by, say, making improvements to the product, increasing promotion, or adding distribution channels— that investment will probably require additional budget, which will further raise the price. It’s fairly standard for retailers to use some profit-oriented pricing—applying a standard markup over wholesale prices for products, for instance—but that’s rarely their only strategy. Successful retailers will also adjust pricing for some or all products in order to increase the value they provide to customers. Competitor-Oriented Pricing Sometimes prices are set almost completely according to competitor prices. A company simply copies the competitor’s pricing strategy or seeks to use price as one of the features that differentiates the product. That could mean either pricing the product higher than competitive products, to indicate that the company believes its product provides greater value, or lower than competitive products in order to be a low-price solution. This is a fairly simple way to price, especially if product pricing information is easily collected and compared. Like profit-oriented pricing, this strategy also carries some risks. Competitor- oriented pricing doesn’t fully account for the value of the product to the customer vis-à-vis the value of competitive products. As a result, the product might be priced too low—or too high— for the value it provides,. As the airline example illustrates, competitor-oriented pricing can contribute to a difficult market dynamic. If players in a market compete exclusively on price, they will erode their profits and, over time, limit their ability to add value to products. Customer-Oriented Pricing Customer-oriented pricing is also referred to as value-oriented pricing. Given the centrality of the customer in a marketing orientation, it is no surprise that customer-oriented pricing is the recommended pricing approach because its focus is on providing value to the customer. Customer-oriented pricing looks at the full price-value equation and establishes the price that balances the value. The company seeks to charge the highest price that supports the value received by the customer. Customer-oriented pricing requires an analysis of the customer and the market. The company must understand the buyer persona, the value that the buyer is seeking, and the degree to which the product meets customer need. The market analysis shows competitive pricing as well as pricing for substitutes. To try to bring the customer’s voice into pricing decisions, many companies conduct primary market research with target customers. Crafting questions to get at the value perceptions of the customer is difficult, though, so marketers often turn to something called the Van Westendorp price-sensitivity meter. This method uses the following four questions to understand customer perceptions of pricing: 1. At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive) 2. At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap) 3. At what price would you consider the product starting to get expensive, such that it’s not out of the question, but you would have to give some thought to buying it? (Expensive/High Side) 4. At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value) Each of these questions asks about the customer’s perspective on the product value, with price as one component of the value equation. Cost-Oriented Pricing Cost-Plus Pricing Cost-plus pricing, sometimes called gross margin pricing, is perhaps the most widely used pricing method. The manager selects as a goal a particular gross margin that will produce a desirable profit level. Gross margin is the difference between how much the product costs and the actual price for which it sells. This gross margin is designated by a percent of net sales. The percent chosen varies among types of merchandise. This means that one product may have a goal of 48 percent gross margin while another has a target of 33.5 percent. A primary reason that the cost-plus method is attractive to marketers is that they don’t have to forecast general business conditions or customer demand. If sales volume projections are reasonably accurate, profits will be on target. Consumers may also view this method as fair, since the price they pay is related to the cost of producing the item. Likewise, the marketer is sure that costs are covered. A major disadvantage of cost-plus pricing is its inherent inflexibility. For example, department stores often find it hard to meet (and beat) competition from discount stores, catalog retailers, and furniture warehouses because of their commitment to cost-plus pricing. Another disadvantage is that it doesn’t take into account consumers’ perceptions of a product’s value. Finally, a company’s costs may fluctuate, and constant price changing is not a viable strategy. Markups When middlemen use the term markup, they are referring to the difference between the average cost and price of all merchandise in stock, for a particular department, or for an individual item. The difference may be expressed in dollars or as a percentage. For example, a man’s tie costs $14.50 and is sold for $25.23. The dollar markup is $10.73. The markup may be designated as a percent of the selling price or as a percent of the cost of the merchandise. In this example, the markup is 74 percent of cost ($10.73 / $14.50) or 42.5 percent of the retail price ($10.73 / $25.23). Cost-Oriented Pricing of New Products Certainly costs are an important component of pricing. No company can make a profit until it covers its costs. However, the process of determining costs and setting a price based on costs does not take into account what the customer is willing to pay in the marketplace. This strategy is a bit of a trap for companies that develop products and continually add features to them, thus adding cost. Their cost-based approach leads them to add a percentage to the cost, which they pass on to customers as a new, higher price. Then they are disappointed when their customers do not see sufficient value in the cost-based price. Discounting Strategies In addition to deciding the base price of products and services, marketing managers must also set policies regarding the use of discounts and allowances. There are many different types of price reductions–each designed to accomplish a specific purpose. The major types are described below. Quantity discounts are reductions in base price for a buyer purchasing a predetermined quantity of merchandise. A noncumulative quantity discount applies to each purchase and is intended to encourage buyers to make larger purchases. This means that the buyer holds the excess merchandise until it is used, possibly cutting the inventory cost of the seller and preventing the buyer from switching to a competitor at least until the stock is used. A cumulative quantity discount applies to the total bought over a period of time. The buyer adds to the potential discount with each additional purchase. This policy helps to build repeat purchases. Both Home Depot and Lowe’s offer discounts to trade contractors who buy more than a specific value of goods (Pro Xtra). Seasonal discounts are price reductions on out-of-season merchandise—snowmobiles discounted during the summer, for example. The purpose is to spread demand over the year, allowing fuller use of production facilities and improved cash flow. Seasonal discounts are not always straightforward. It seems logical that gas grills are discounted in September when the summer grilling season is over, and hot tubs are discounted in January when the weather is bad and consumers spend less freely. However, the biggest discounts on large-screen televisions are offered during the weeks before the Super Bowl, when demand is greatest. This strategy aims to drive impulse purchases of the large-ticket item, rather than spurring sales during the off-season. Cash discounts are reductions on base price for paying cash or within a short time period. For example, a 2 percent discount on bills paid within 10 days is a cash discount. The purpose is generally to accelerate the cash flow of the organization and to reduce transaction costs. Generally cash discounts are offered in a business-to-business transaction where the buyer is negotiating a range of pricing terms, including payment terms. You can imagine that if you offered to pay cash immediately instead of using a credit card at a department store, you wouldn’t receive a discount. Trade discounts are price reductions given to middlemen (e.g., wholesalers, industrial distributors, retailers) to encourage them to stock and give preferred treatment to an organization’s products. For example, a consumer goods company might give a retailer a 20 percent discount to place a larger order for soap. The discount might also be used to gain shelf space or a preferred position in the store. Calico Corners offers a discount on fabrics to interior designers. They have paired this with a quantity-discounts program that offers gift certificates for buyers who purchase more than a given amount in a year. Personal allowances are similar strategies aimed at middlemen. Their purpose is to encourage middlemen to aggressively promote a company’s products. For example, a furniture manufacturer may offer to pay some specified amount toward a retailer’s advertising expenses if the retailer agrees to include the manufacturer’s brand name in the ads. Some manufacturers or wholesalers also give retailers a SPIF, or sales promotion incentive fund, payment. This is especially common in the electronics and clothing industries, where “spiffs” are designed to promote new products, slow movers, or high-margin items. When employees in electronics stores recommend a specific brand or product to a buyer they may receive compensation from the manufacturer on top of their wages and commissions from the store. Trade-in allowances also reduce the base price of a product or service. These are often used to help the seller negotiate the best price with a buyer. The trade-in may, of course, be of value if it can be resold. Accepting trade-ins is necessary in marketing many types of products. A construction company with a used grader worth $70,000 probably wouldn’t buy a new model from an equipment company that did not accept trade-ins, particularly when other companies accept them. Price bundling is a very popular pricing strategy. The marketer groups similar or complementary products and charges a total price that is lower than if they were sold separately. Internet, cable and phone companies follow this strategy by combining different products and services for one price. Similarly, Microsoft bundles its office products into one suite of software. The underlying assumption of this pricing strategy is that the increased sales generated will more than compensate for a lower profit margin. It may also be a way of selling a less popular product by combining it with more popular ones. Financial services, telecommunications, and software companies make very effective use of this strategy. References Jordan. (2014, July 14). Nike price hikes drive U.S. sneaker growth. FN by Footwear News. Retrieved from http://footwearnews.com/2014/business/news/nike-price-hikes-drive-u-ssneaker-growth-144128/ Pro Xtra: The Home Depot Pro Loyalty Program. Retrieved from http://www.homedepot.com/c/Pro_Xtra Team, T. (2015, June 11). Airlines’ stocks drop as fear of price war clouds the industry. Forbes. Retrieved from http://www.forbes.com/sites/greatspeculations/2015/06/11/airlines-stocks-dropas-fear-of-price-war-clouds-the-industry/#2715e4857a0b103622d442d5 Place: Distribution Channels What you’ll learn to do: Explain common product distribution strategies and how organizations use them Distribution channels—which is place in the four P's—cover all the activities needed to transfer the ownership of goods and move them from the point of production to the point of consumption. In this section you’ll learn more about distribution channels and some of the common strategies companies use to take advantage of them. Learning Outcomes • • • • • List the characteristics and flows of a distribution channel Describe the partners that support distribution channels Explain the role of wholesale intermediaries Describe the different types of retailers businesses use to distribute products Differentiate between supply chains and distribution channels Evolution of Distribution Channels As consumers, we take for granted that when we go to a supermarket the shelves will be filled with the products we want; that when we are thirsty there will be a Coke machine or drivethrough nearby; and that we can go online and find any product we need with quick delivery. Of course, if we give it some thought, we realize that this magic is not a given and that hundreds of thousands of people plan, organize, and labor long hours to make this convenience possible. It has not always been this way, and is still not this way in many regions of the world. Looking back, the channel structure in primitive culture was virtually nonexistent. The family or tribal group was almost entirely self-sufficient. In these groups were both communal producers and consumers of whatever goods and services could be made available. As economies evolved, people began to specialize in particular aspects of economic activity, like farming, hunting, fishing, or a craft. Eventually their specialized skills produced excess products, which they exchanged or traded for others’ goods. This exchange process, or barter, marked the beginning of formal channels of distribution. These early channels involved a series of exchanges between parties who were producers of one product and consumers of another. Specialization. With the growth of specialization, particularly industrial specialization, and improvements in transportation and communication, channels of distribution have become longer and more complex. Thus, corn grown in Illinois may be processed into corn chips in West Texas, which are then distributed throughout the United States. Or, turkeys raised in Virginia are sent to New York so that they can be shipped to supermarkets in Virginia. Channels do not always make sense. The channel mechanism also operates for service products. In the case of medical care, the channel mechanism may consist of a local physician, specialists, hospitals, ambulances, laboratories, insurance companies, physical therapists, home care professionals, and so on. All of these individuals are interdependent and could not operate successfully without the cooperation and capabilities of all the others. We define a channel of distribution, also called a marketing channel, as sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider. This definition implies several important characteristics of the channel. First, the channel consists of organizations, some under the control of the producer and some outside the producer’s control. Yet all must be recognized, selected, and integrated into an efficient channel arrangement. Second, the channel management process is continuous, requiring ongoing monitoring and reappraisal. The channel operates 24 hours a day and exists in an environment where change is the norm. Finally, channels should have certain distribution objectives guiding their activities. The structure and management of the marketing channel is thus, in part, a function of a firm’s distribution objective. It’s also a part of the marketing objectives—especially the need to make an acceptable profit. Channels usually represent the largest costs in marketing a product. Channel Flows One traditional framework that has been used to express the channel mechanism is the concept of flow. Flows reflect the many linkages that tie channel members and other agencies together in the distribution of goods and services. From the perspective of the channel manager, there are five important flows. • • • • • product—movement of the physical product from the manufacturer through all the parties who take physical possession of the product until it reaches the ultimate consumer negotiation—institutions that are associated with the actual exchange processes ownership—transfer of title through the channel information—individuals who participate in the flow of information either up or down the channel promotion—flow of persuasive communication in the form of advertising, personal selling, sales promotion, and public relations Energy Drinks: From Product to Promotion The figure below maps the channel flows for the Monster Energy drink (and many other energy drink brands). Why is Monster’s relationship with Coca-Cola so valuable? Every single flow passes through bottlers and distributors before before reaching consumers at supermarkets. Coca-Cola explains the importance of the bottlers in the distribution network: While many view our company as simply ‘Coca-Cola,’ our system operates through multiple local channels. Our company manufactures and sells concentrates, beverage bases and syrups to bottling operations, owns the brands and is responsible for consumer brand marketing initiatives. Our bottling partners manufacture, package, merchandise, and distribute the final branded beverages to our customers and vending partners, who then sell our products to consumers. All bottling partners work closely with customers—grocery stores, restaurants, street vendors, convenience stores, movie theaters and amusement parks, among many others—to execute localized strategies developed in partnership with our company. Customers then sell our products to consumers at a rate of more than 1.9 billion servings a day (Coca-Cola). Revisiting the five channel flows, we find that the bottlers and distributors play a role in each one. Examples of the flows are listed below. Remember, while the consumer is the individual who eventually consumes the drink, the supermarkets, restaurants, and other outlets are CocaCola’s customers. • • • • • Product flow. Bottlers receive and process the bases and syrups. Negotiation flow. Bottlers buy concentrate, sell product, and collect revenue from customers. Ownership flow. Distributors acquire the title of the syrups and own the product until it’s sold to supermarkets. Information flow. Bottlers communicate product options to customers, and communicate demand and needs to Coca-Cola. Promotion flow. Bottlers communicate benefits and provide promotional materials to customers. Marketing Channels While channels can be very complex, there is a common set of channel structures that can be identified in most transactions. Each channel structure includes different organizations. Generally, the organizations that collectively support the distribution channel are referred to as channel partners. The direct channel is the simplest channel. In this case, the producer sells directly to the consumer. The most straightforward examples are producers who sell in small quantities. If you visit a farmers’ market, you can purchase goods directly from farmers and craftsmen. There are also examples of very large corporations using the direct channel effectively, especially for B2B transactions. Services may also be sold through direct channels, and the same principle applies: An individual buys a service directly from the provider who delivers it. Examples of the direct channel include • • • • Etsy.com online marketplace farmers’ markets Oracle’s sales team working with businesses a bake sale Retailers are companies in the channel that focuses on selling directly to consumers. You are likely to participate in the retail channel almost every day. The retail channel is different from the direct channel in that the retailer doesn’t produce the product, but markets and sells goods on behalf of the producer. For consumers, retailers provide tremendous contact efficiency by creating one location where many products can be purchased. Retailers may sell products in a store, online, in a kiosk, or on your doorstep. The emphasis is not the specific location but on selling directly to the consumer. Examples of retailers include • • • • Walmart discount stores Amazon online store Nordstrom department store Dairy Queen restaurant From a consumer’s perspective, the wholesale channel looks very similar to the retail channel, but it also involves a wholesaler. A wholesaler is primarily engaged in buying and, usually, storing and physically handling goods in large quantities, which are then resold (usually in smaller quantities) to retailers, or industrial or business users. The vast majority of goods produced in an advanced economy have wholesaling involved in their distribution. Wholesale channels also include manufacturers operating sales offices to perform wholesale functions, and retailers operating warehouses or engaging in other wholesale activities. Examples of wholesalers include: • • • Christmas-tree wholesalers who buy from growers and sell to retail outlets restaurant food suppliers clothing wholesalers that sell to retailers The broker or agent channel includes one additional intermediary. Agents and brokers are different from wholesalers in that they do not take title to the merchandise. In other words, they do not own the merchandise because they neither buy nor sell. Instead, brokers bring buyers and sellers together and negotiate the terms of the transaction. Agents represent either the buyer or seller, usually on a permanent basis, whereas brokers bring parties together on a temporary basis. Think about a real-estate agent. They do not buy your home and sell it to someone else; they market and arrange the sale of the home. Agents and brokers match buyers with sellers, or add expertise to create a more efficient channel. Examples of brokers include: • • • an insurance broker, who sells insurance products from many companies to businesses and individuals a literary agent, who represents writers and their works to publishers, and theatrical and film producers an export broker, who negotiates and manages transportation requirements, shipping, and customs clearance on behalf of a purchaser or producer It’s important to note that the larger and more complex the flow of materials from the initial design through purchase, the more likely it is that multiple channel partners may be involved, because each channel partner will bring unique expertise that increases the efficiency of the process. If an intermediary is not adding value, they will likely be removed over time, because the cost of managing and coordinating with each intermediary is significant. The Role of Wholesale Intermediaries While the retail channel is the most familiar one, wholesalers play an important role as intermediaries. Intermediaries act as a link in the distribution process, but the roles they fill are broader than simply connecting channel partners. Wholesalers, often called “merchant wholesalers,” help move goods between producers and retailers. Let’s look at each of the functions that a merchant wholesaler fulfills: Purchasing Wholesalers purchase very large quantities of goods directly from producers or from other wholesalers. By purchasing large quantities or volumes, they can secure significantly lower prices. Imagine that a farmer has a very large crop of potatoes. If he sells all of them to a single wholesaler, he will negotiate one price and make one sale. Because this is an efficient process that allows him to focus on farming (rather than searching for additional buyers), he will likely be willing to negotiate a lower price. Even more important, because the wholesaler has such strong buying power, it can force a lower price on every farmer selling potatoes. The same is true for almost all mass-produced goods. When a producer creates a large quantity of goods, it is most efficient to sell all of them to one wholesaler, rather than negotiating prices and making sales with many retailers or an even larger number of consumers. Also, the bigger the wholesaler is, the more likely that it will have significant power in price-setting. Warehousing and Transportation Once the wholesaler has purchased a mass quantity of goods, it needs to get them to a place where they can be purchased by consumers. This is a complex and expensive process. A company might operate eighty distribution centers around the country, each with more than 500,000 square feet. This requires state-of-the art inventory tracking systems. Some wholesalers also operate transportation networks using their own fleet of trucks. Grading and Packaging Wholesalers buy a very large quantity of goods and then break it down into smaller lots. The process of breaking large quantities into smaller lots that will be resold is called bulk breaking. Often this includes physically sorting, grading, and assembling the goods. Returning to our potato example, the wholesaler would determine which potatoes are of a size and quality to sell individually and which will be packaged for sale in five-pound bags. Risk Bearing Wholesalers either take title to the goods they purchase, or they own them. There are two primary consequences of this. First, the wholesaler finances the purchase of the goods and carries the cost of the goods in inventory until they are sold. Because this is a tremendous expense, it drives wholesalers to be accurate and efficient in their purchasing, warehousing, and transportation processes. Second, wholesalers also bear the risk for the products until they are delivered. If goods are damaged in transport and cannot be sold, then the wholesaler is left with the goods and the cost. If there is a significant change in the value of the products between the time of the purchase from the producer and the sale to the retailer, the wholesaler will absorb that profit or loss. Marketing Often, the wholesaler will fill a role in promoting the products distributed. This might include creating displays for the wholesaler’s products and providing the display to retailers to increase sales. The wholesaler may advertise the products that are carried by many retailers. Wholesalers also influence which products the retailer offers. For example, McLane Company was a winner of the 2016 Convenience Store News Category Captains award, recognizing innovations in providing the right products to customers. McLane created unique packaging and products featuring movie themes, college football themes, and other special occasion branding designed to appeal to impulse buyers. They also shifted the transportation and delivery strategy to get the right products in front of consumers at the time they were most likely to buy. Its convenience store customers as well as McLane saw sales growth (Durtschi, 2016). Distribution As distribution channels have evolved, some retailers, such as Walmart and Target, have grown so large that they have taken over aspects of the wholesale function. Still, it is unlikely that wholesalers will ever go away. Most retailers rely on wholesalers: They simply do not have the capability or expertise to manage the full distribution process. Plus, many of the functions that wholesalers fill are performed most efficiently at scale. Wholesalers are able to focus on creating efficiencies for their retail channel partners that are very difficult to replicate on a small scale. Retailers Introduction Retailing comprises all the activities required to market goods and services to consumers seeking to satisfy their individual or families’ needs. By definition, B2B purchases are not included in the retail channel since they are not made for individual or family needs. In practice this can be confusing because many retail outlets—like Home Depot—serve both consumers and business customers. Generally, retailers that have a significant B2B or wholesale business report those numbers separately in their financial statements, acknowledging that they are separate lines of business within the same company. Those with a pure retail emphasis do not seek to exclude business purchasers; they simply focus their offering to appeal to individual consumers, knowing that some businesses may also choose to purchase. When we think of a retail sale, we typically think of a store even though retail sales occur in other places and settings. For instance, they can be made by a Pampered Chef salesperson in someone’s home. Retail sales also happen online, through catalogs, by automatic vending machines, and in hotels and restaurants. Nonetheless, despite tremendous growth in both nontraditional retail outlets and online sales, most retail sales still take place in brick-and-mortar stores. Beyond the distinctions in the products they provide, there are structural differences among retailers that influence their strategies and results. One of the reasons the retail industry is so large and powerful is its diversity. For example, stores vary in size, in the kinds of services that are provided, the assortment of merchandise, and their ownership and management structures. Department Stores Department stores are characterized by their wide product mixes. That is, they carry many different types of merchandise, which may include hardware, clothing, and appliances. The depth of the product mix depends on the store, but department stores’ primary distinction is the ability to provide a wide range of products within a single store. Chain Stores The 1920s saw the evolution of the chain store movement. Because chains were so large, they were able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lowered their cost compared to costs of single unit retailers. As a result, they could set retail prices that were lower than those of their small competitors and thereby increase their share of the market. Furthermore, chains were able to attract many customers because of their convenient locations made possible by their financial resources and expertise in selecting where to locate. Supermarkets Supermarkets evolved in the 1920s and 1930s. For example, Piggly Wiggly, founded by Clarence Saunders around 1920, introduced self-service and checkout counters. In 2018, there were were 38,571 supermarkets—including large, small and warehouse stores—in the United States (Nielsen, 2018). and the average store now carries nearly 44,000 products in roughly 46,500 square feet of space. The supermarket approach is to offer a large assortments goods at each store at a minimal price. Discount Retailers Discount retailers, like Ross Stores and Grocery Outlet, focus on price as their main sales appeal. Merchandise assortments are generally broad and include both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes. They are usually large, self-service operations with long hours, free parking, and relatively simple decor. Online retailers such as Overstock.com have aggregated products and offered them at deep discounts. Generally, customers sacrifice having a reliable assortment of products to receive deep discounts. Warehouse Retailers Warehouse retailers provide a bare-bones shopping experience at very low prices. They streamline all operational aspects of their business and pass on the savings to customers. Costco generally uses a cost-plus pricing structure and provides goods in large quantities. Franchises The franchise approach brings together national chains and local ownership. When a buyer purchases a franchise, he or she gains the right to use the firm’s business model and brand for a set period of time. Often, the franchise agreement includes well-defined guidance for the owner, as well as training and ongoing support. The owner, or franchisee, builds and manages the local business. Entrepreneur magazine posts a list each year of the 500 top franchises according to an evaluation of financial strength and stability, growth rate, and size. Malls and Shopping Centers Malls and shopping centers provide customers with an assortment of products in different stores, usually with one or more major tenant or anchor store. Strip malls are a common string of stores along major traffic routes, while isolated locations are freestanding sites not necessarily in high- traffic areas. Stores in isolated locations must use promotion or another aspect of their marketing mix to attract shoppers. Online Retailing Online retailing is unquestionably a dominant force in the retail industry, but today it accounts for only a small percentage of total retail sales. Companies like Amazon and Geico complete all or most of their sales online. Many other online sales result from traditional retailers, such as Nordstrom.com. Online marketing plays a significant role in preparing the buyers who shop in stores. In a similar integrated approach, catalogs that are mailed to customers’ homes drive online orders. In a survey on its website, Lands’ End found that 75 percent of customers who were making purchases had reviewed its catalog first (Ruiz, 2015). Estimated US Retail E-Commerce Sales as a Percent of Total Retail Sales First Quarter 2009 through Second Quarter 2018 (Not Adjusted and Adjusted for Seasonal Variation) US Census Bureau (2018) Catalogs Catalogs have long been used to drive phone and in-store sales. As online retailing began to grow, it had a significant impact on catalog sales. Many retailers who depended on catalog sales—Sears, Lands’ End, and J.C. Penney, to name a few—suffered as online retailers and online sales from traditional retailers pulled convenience shoppers away from catalog sales. Catalog mailings peaked in 2009 and saw a significant decrease through 2012. In 2013, there was a small increase in catalog mailings. Industry experts note that catalogs are changing, as is their role in the retail marketing process. Despite significant declines, US households still receive 11.9 billion catalogs each year (Geller, 2012). Nonstore Retailing Beyond those mentioned in the categories above, there are a wide range of traditional and innovative retailing approaches. Although the “Avon lady” largely disappeared at the end of the last century, there are still in-home sales from Arbonne facial products, Cabi women’s clothing, WineShop at Home, and others. Many of these models are based on the idea of women using their personal networks to sell products to friends, and friends of friends, often in a party setting. Also, vending machines and conveniently placed kiosks have long been a popular retail device. Today they are becoming more targeted. Companies now use them in airports to sell sundries to travelers who have forgotten something. Each of these retailing approaches can be customized to meet the needs of the target buyer or combined to include a range of needs. Marketing Channels vs. Supply Chains What Is a Supply Chain? We have discussed the channel partners, the roles they fill, and the structures they create. Marketers have long recognized the importance of managing distribution channel partners. As channels have become more complex and the flow of business has become more global, organizations have recognized that they need to manage more than just the channel partners; they need to manage the full chain of organizations and transactions, from raw materials through final delivery to the customer—in other words, the supply chain. The supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer (Nagurney, 2006). The marketing channel generally focuses on how to increase value to the customer by having the right product in the right place at the right price at the moment when the customer wants to buy. The emphasis is on providing value to the customer, and the marketing objectives usually focus on what is needed to deliver that value. Supply chain management takes a different approach. The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as follows: Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers (CSCMP). Supply Chain vs. Marketing Channels The supply chain and marketing channels can be differentiated as follows: • • • The supply chain is broader than marketing channels. It begins with raw materials and delves deeply into production processes and inventory management. Marketing channels are focused on bringing together the partners who can most efficiently deliver the right marketing mix to the customer in order to maximize value. Marketing channels provide a more narrow focus within the supply chain. Marketing channels are purely customer facing. Supply chain management seeks to optimize how products are supplied, which adds a number of financial and efficiency objectives that are more internally focused. Marketing channels emphasize a stronger market view of customer expectations and competitive dynamics in the marketplace. Marketing channels are part of the marketing mix. Supply chain professionals are specialists in the delivery of goods. Marketers view distribution as one element of the marketing mix, in conjunction with product, price, and promotion. Supply chain management is more likely to identify the most efficient delivery partner. A marketer is more likely to balance the merits of a channel partner against the value offered to the customer. For instance, it might make sense to keep a channel partner who is less efficient but provides an important benefit in the promotional strategy. Successful organizations develop effective, respectful partnerships between the marketing and supply chain teams. When the supply chain team understands the market dynamics and the points of flexibility in product and pricing, they are better able to optimize the distribution process. When marketing has the benefit of effective supply chain management—which is analyzing and optimizing distribution within and beyond the marketing channels—greater value is delivered to customers. References Council of Supply Chain Management Professionals. Retrieved from http://cscmp.org/ Durtschi, S. (2016, February 15). Why McLane is 2016’s General Merchandise Category Captain. Convenience Store News. Retrieved from http://www.csnews.com/industry-news-andtrends/special-features/why-mclane-2016s-general-merchandise-category-captain?nopaging=1 Geller, L. (2012, October 16). Why are printed catalogs still around? Forbes. Retrieved from https://www.forbes.com/sites/loisgeller/2012/10/16/why-are-printed-catalogs-stillaround/#5331b2c079c6 Nielsen TDLinx. (2018, April). Progressive Grocer 85th Annual Report of the Grocery Industry. Progressive Grocer (97)1, 30. Nagurney, Anna (2006). Supply chain network economics: Dynamics of prices, flows, and profits. Cheltenham, UK: Edward Elgar. Ruiz, R. R. (2015, January 25). Catalogs, after years of decline, are revamped for changing times. The New York Times. Retrieved from http://www.nytimes.com/2015/01/26/business/media/catalogs-after-years-of-decline-arerevamped-for-changing-times.html?_r=0 The Coca-Cola System. Retrieved from http://www.coca-colacompany.com/our-company/thecoca-cola-system/ US Census Bureau. (2018, August 17). Quarterly Retail E-Commerce Sales, Second Quarter 2018. U.S. Census Bureau News. Retrieved from https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf Promotion: Integrated Marketing Communication (IMC) What you’ll learn to do: Explain how organizations use integrated marketing communication (IMC) to support their marketing strategies The readings in this section cover seven different marketing communication methods that are commonly used today. They will help you become familiar with common tools associated with each method, and the advantages and disadvantages of each one. Learning Outcomes • • • • Define integrated marketing communication (IMC) Explain the promotion mix Describe common marketing communication methods, including advantages and disadvantages Discuss how organizations use IMC to support their marketing strategies What Is Integrated Marketing Communication? Having a great product available to your customers at a great price has no impact if your customers don’t know about it. That’s where promotion enters the picture: It does the job of connecting with your target audiences and communicating what you can offer them. In today’s marketing environment, promotion involves integrated marketing communication (IMC). In a nutshell, IMC involves bringing together various communication tools to deliver a common message and make a desired impact on customers’ perceptions and behavior. As an experienced consumer, you have almost certainly been the target of IMC activities. (Practically every time you “like” a TV show, article, or a meme on Facebook, you are participating in an IMC effort!) What Is Marketing Communication? Defining marketing communication is tricky because everything an organization does has communication potential. Even a product’s price communicates a specific message. A company that chooses to distribute its products strictly through discount stores sends a distinct message to the market. Marketing communication refers to activities deliberately focused on promoting an offering among target audiences. It includes all the messages, media, and activities an organization uses to communicate with the market and help persuade target audiences to take action. IMC is the process of coordinating activities across different communication methods. Note that a central theme is persuading people to believe something, desire something, or do something. Effective marketing communication is goal directed, and it is aligned with an organization’s marketing strategy. The goal is to deliver a particular message to a specific audience with a targeted purpose of altering perceptions, behavior, or both. IMC makes this marketing activity more efficient and effective because it relies on multiple communication methods and customer touch points to deliver a consistent message in more, and in more compelling, ways. The Promotion Mix: Marketing Communication Methods The promotion mix refers to how marketers combine a range of marketing...
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