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Chapter 12: Setting Product Strategy

At the heart of a great brand is a great product. Product is a key element in the market offering. To achieve market leadership,
firms must offer products and services of superior quality that provide unsurpassed customer value.
A product is anything that can be offered to a market to satisfy a want or need, including physical goods, services, experiences,
events, persons, places, properties, organizations, information, and ideas.
Marketing planning begins with formulating an offering to meet target customers needs or wants. In this chapter we focus on
product strategies.
Components of the market offering
product features and quality, services mix and quality, and price

Five Product Levels

Each level adds more customer value, and the five constitute a customer-value hierarchy. The fundamental level is the core
benefit: the service or benefit the customer is really buying. At the second level, the marketer must turn the core benefit into a
basic product. At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally
expect when they purchase this product. At the fourth level, the marketer prepares an augmented product that exceeds customer
expectations. In developed countries, brand positioning and competition take place at this level. At the fifth level stands the
potential product, which encompasses all the possible augmentations and transformations the product or offering might undergo
in the future.

Product Classification Schemes

Use (consumer or industrial)
Marketers classify products on the basis of durability, tangibility, and use (consumer or industrial). Each type has an appropriate
marketing-mix strategy.
Durability and Tangibility
Nondurable goods
Durable goods
Products can be classified as goods and/or services and as durable or nondurable. Nondurable goods are tangible goods
normally consumed in one or a few uses, such as beer and shampoo. Because these goods are purchased frequently, the
appropriate strategy is to make them available in many locations, charge only a small markup, and advertise heavily to induce
trial and build preference. Durable goods are tangible goods that normally survive many uses: refrigerators, machine tools, and
clothing. Durable products normally require more personal selling and service, command a higher margin, and require more
seller guarantees. Services are intangible, inseparable, variable, and perishable products that normally require more quality
control, supplier credibility, and adaptability. Examples include haircuts, legal advice, and appliance repairs.
Consumer Goods Classification
When we classify the vast array of consumer goods on the basis of shopping habits, we distinguish among convenience,
shopping, specialty, and unsought goods. The consumer usually purchases convenience goods frequently, immediately, and with
minimal effort. Examples include soft drinks, soaps, and newspapers. Staples are convenience goods consumers purchase on a
regular basis. Impulse goods are purchased without any planning or search effort, like candy bars and magazines. Emergency
goods are purchased when a need is urgentumbrellas during a rainstorm, boots and shovels during the first winter snow.
Shopping goods are those the consumer characteristically compares on such bases as suitability, quality, price, and style.
Examples include furniture, clothing, and major appliances. Homogeneous shopping goods are similar in quality but different
enough in price to justify shopping comparisons. Heterogeneous shopping goods differ in product features and services that
may be more important than price. Specialty goods have unique characteristics or brand identification for which enough buyers
are willing to make a special purchasing effort. Examples include cars, stereo components, and mens suits. Unsought goods are
those the consumer does not know about or normally think of buying, such as smoke detectors.
Industrial Goods Classification
Materials and parts
Capital items
Supplies/business services
We classify industrial goods in terms of their relative cost and how they enter the production process: materials and parts,
capital items, and supplies and business services. Materials and parts are goods that enter the manufacturers product
completely. They fall into two classes: raw materials, and manufactured materials and parts. Raw materials fall into two major
groups: farm products (wheat, cotton, livestock, fruits, and vegetables) and natural products (fish, lumber, crude petroleum, iron
ore). Manufactured materials and parts fall into two categories: component materials (iron, yarn, cement, wires) and component
parts (small motors, tires, castings). Capital items are long-lasting goods that facilitate developing or managing the finished
product. They include two groups: installations and equipment. Installations consist of buildings (factories, offices) and heavy
equipment (generators, drill presses, mainframe computers, elevators). Equipment includes portable factory equipment and
tools (hand tools, lift trucks) and office equipment (personal computers, desks).

Product Differentiation
Product form
Many products can be differentiated in formthe size, shape, or physical structure of a product. Most products can be offered
with varying features that supplement their basic function. Marketers can differentiate products by customizing them. Most
products occupy one of four performance levels: low, average, high, or superior. Performance quality is the level at which the
products primary characteristics operate. Buyers expect a high conformance quality, the degree to which all produced units are
identical and meet promised specifications. Durability, a measure of the products expected operating life under natural or
stressful conditions, is a valued attribute for vehicles, kitchen appliances, and other durable goods. Buyers normally will pay a
premium for more reliable products. Reliability is a measure of the probability that a product will not malfunction or fail within
a specified time period. Repairability measures the ease of fixing a product when it malfunctions or fails. Style describes the
products look and feel to the buyer. It creates distinctiveness that is hard to copy.
Service Differentiation
Ordering ease
Customer training
Customer consulting
Maintenance and repair
The main service differentiators are ordering ease, delivery, installation, customer training, customer consulting, and
maintenance and repair. Ordering ease refers to how easy it is for the customer to place an order with the company. Delivery
refers to how well the product or service is brought to the customer. It includes speed, accuracy, and care throughout the
process. Installation refers to the work done to make a product operational in its planned location. Customer consulting includes
data, information systems, and advice services the seller offers to buyers. Maintenance and repair programs help customers
keep purchased products in good working order.
We can think of product returns in two ways:
Controllable returns result from problems or errors by the seller or customer and can mostly be eliminated with improved
handling or storage, better packaging, and improved transportation and forward logistics by the seller or its supply chain
Uncontrollable returns result from the need for customers to actually see, try, or experience products in person to determine
suitability and cant be eliminated by the company in the short run through any of these means.
As competition intensifies, design offers a potent way to differentiate and position a companys products and services. Design is
the totality of features that affect how a product looks, feels, and functions to a consumer. Design offers functional and aesthetic
benefits and appeals to both our rational and emotional sides.
The Product Hierarchy


The product hierarchy stretches from basic needs to particular items that satisfy those needs. The text describes the six levels of
the product hierarchy, using life insurance as an example.
The need family is the core need that underlies the existence of a product family. Security is an example.
The product family refers to all the product classes that can satisfy a core need with reasonable effectiveness. Examples are
savings and income.
The product class is the group of products within the product family recognized as having a certain functional coherence, also
known as a product category. Financial instruments are an example.
The product line is a group of products within a product class that are closely related because they perform a similar function,
are sold to the same customer groups, are marketed through the same outlets or channels, or fall within given price ranges. Life
insurance is an example.
The product type is a group of items within a product line that share one of several possible forms of the product. Term life
insurance is an example.
An item (also called stock-keeping unit or product variant) is a distinct unit within a brand or product line distinguishable by
size, price, appearance, or some other attribute.
Product Systems and Mixes
A product system is a group of diverse but related items that function in a compatible manner. For example, the extensive iPod
product system includes headphones and headsets, cables and docks, armbands, cases, power and car accessories, and speakers.
A product mix (also called a product assortment) is the set of all products and items a particular seller offers for sale.
A product mix consists of various product lines. NECs (Japan) product mix consists of communication products and computer
products. Michelin has three product lines: tires, maps, and restaurant- rating services.
Product-Item Contributions to a Product Lines Total Sales and Profits
In offering a product line, companies normally develop a basic platform and modules that can be added to meet different
customer requirements and lower production costs. Product-line managers need to know the sales and profits of each item in
their line to determine which items to build, maintain, harvest, or divest. They also need to understand each product lines
market profile. Figure 12.3 shows a sales and profit report for a five-item product line. The first item accounts for 50 percent of
total sales and 30 percent of total profits. The first two items account for 80 percent of total sales and 60 percent of total profits.
If these two items were suddenly hurt by a competitor, the lines sales and profitability could collapse. These items must be
carefully monitored and protected. At the other end, the last item delivers only 5 percent of the product lines sales and profits.
The product-line manager may consider dropping this item unless it has strong growth potential.

Product Map for a Paper-Product Line

The product-line manager must review how the line is positioned against competitors lines. Consider paper company X with a
paperboard product line. Two paperboard attributes are weight and finish quality. Paper is usually offered at standard levels of
90, 120, 150, and 180 weights. Finish quality is offered at low, medium, and high levels. Figure 12.4 shows the location of the
various product-line items of company X and four competitors, A, B, C, and D. The product map shows which competitors

items are competing against company Xs items. For example, company Xs low-weight, medium quality paper competes
against competitor Ds and Bs papers, but its high weight, medium-quality paper has no direct competitor. The map also
reveals possible locations for new items. No manufacturer offers a high-weight, low-quality paper. If company X estimates a
strong unmet demand and can produce and price this paper at low cost, it could consider adding this item to its line. Another
benefit of product mapping is that it identifies market segments. Figure 12.4 shows the types of paper, by weight and quality,
preferred by the general printing industry, the point-of-purchase display industry, and the office supply industry. The map shows
that company X is well positioned to serve the needs of the general printing industry but less effective in serving the other two

Line Stretching
Down-market stretch
Up-market stretch
Two-way stretch
Company objectives influence product-line length. One objective is to create a product line to induce up-selling. A different
objective is to create a product line that facilitates cross-selling. Every companys product line covers a certain part of the total
possible range. Line stretching occurs when a company lengthens its product line beyond its current range, whether downmarket, up-market, or both ways.
Product-Mix Pricing
Product-line pricing
Optional-feature pricing
Captive-product pricing
Two-part pricing
By-product pricing
Product-bundling pricing
Marketers must modify their price-setting logic when the product is part of a product mix. In product-mix pricing, the firm
searches for a set of prices that maximizes profits on the total mix. Pricing is difficult because the various products have
demand and cost interrelationships and are subject to different degrees of competition. We can distinguish six situations calling
for product mix pricing: product-line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product
pricing, and product-bundling pricing. Companies normally develop product lines rather than single products and introduce
price steps. Many companies offer optional products, features, and services with their main product. Some products require the
use of ancillary or captive products. Service firms engage in two-part pricing, consisting of a fixed fee plus a variable usage fee.
The production of certain goodsmeats, petroleum products, and other chemicalsoften results in by-products that should be
priced on their value. Sellers often bundle products and features. Pure bundling occurs when a firm offers its products only as a

Ingredient Branding
Marketers often combine their products with products from other companies. In co-branding, two or more well known brands
are combined into a joint product or marketed together in some fashion. One form of co-branding is same-company cobranding, as when General Mills advertises Trix cereal and Yoplait yogurt. Another form is joint-venture co-branding, such as
General Electric and Hitachi lightbulbs in Japan. There is multiple-sponsor co-branding. Finally, there is retail co-branding,
such as jointly owned Pizza Hut, KFC, and Taco Bell restaurants.
Ingredient branding is a special case of co-branding. It creates brand equity for materials, components, or parts that are
necessarily contained within other branded products.
DuPont has introduced d ingredient. a number of innovative products such as Corian solid-surface material, for use in markets
ranging from apparel to aerospace. Many, such as Lycra and Stainmaster fabrics, Teflon coating, and Kevlar fiber,
became household names as ingredient brands in consumer products manufactured by other companies.
What is the Fifth P?
Packaging, sometimes called the 5th P, is all the activities of designing and producing the container for a product.
Many marketers have called packaging a fifth P, along with price, product, place, and promotion. Most, however, treat
packaging and labeling as an element of product strategy. Warranties and guarantees can also be an important part of the
product strategy and often appear on the package.
Factors Contributing to the Emphasis on Packaging
Consumer affluence
Company/brand image
Innovation opportunity
Various factors contribute to the growing use of packaging as a marketing tool.
An increasing number of products are sold on a self-serve basis. In an average supermarket, which may stock 15,000 items, the
typical shopper passes some 300 products per minute. Given that 50 percent to 70 percent of all purchases are made in the store,
the effective package must perform many sales tasks: attract attention, describe the products features, create consumer
confidence, and make a favorable overall impression.
Rising affluence means consumers are willing to pay a little more for the convenience, appearance, dependability, and prestige
of better packages.
Packages contribute to instant recognition of the company or brand. In the store, they can create a billboard effect, such as
Garnier Fructis with its bright green packaging in the hair care aisle.
Unique or innovative packaging such as resealable spouts can bring big benefits to consumers and profits to producers.
Packaging Objectives
1. Identify the brand.
2. Convey descriptive and persuasive information.
3. Facilitate product transportation and protection.
4. Assist at-home storage.
5. Aid product consumption.
To achieve these objectives and satisfy consumers desires, marketers must choose the aesthetic and functional components of
packaging correctly. Aesthetic considerations relate to a packages size and shape, material, color, text, and graphics.
Functions of Labels
A label performs several functions. First, it identifies the product or brandfor instance, the name Sunkist stamped on oranges.
It might also grade the product; canned peaches are grade-labeled A, B, and C. The label might describe the product: who made
it, where and when, what it contains, how it is to be used, and how to use it safely. Finally, the label might promote the product
through attractive graphics.

Chapter 13: Designing and Managing Services

As product companies find it harder and harder to differentiate their physical products, they turn to service differentiation.
Many in fact find significant profitability in delivering superior service, whether that means on-time delivery, better and faster
answering of inquiries, or quicker resolution of complaints. Top service providers know these advantages well and also how to
create memorable customer experiences. Because it is critical to understand the special nature of services and what that means
to marketers, in this chapter we systematically analyze services and how to market them most effectively.
A service is any act of performance that one party can offer another that is essentially intangible and does not result in the
ownership of anything; its production may or may not be tied to a physical product.
Services are an important part of the economy. The Bureau of Labor Statistics reports that the service-producing sector will
continue to be the dominant employment generator in the economy, adding about 14.6 million jobs through 2018, or 96 percent
of the expected increase in total employment. By 2018, the goods-producing sector is expected to account for 12.9 percent of
total jobs, down from 17.3 percent in 1998 and 14.2 percent in 2008. Manufacturing lost 4.1 million jobs from 1998 through
2008 and expected to lose another 1.2 million jobs between 2008 and 2018.3 These numbers and others have led to a growing
interest in the special problems of marketing services.
The government sector, with its courts, employment services, hospitals, loan agencies, military services, police and fire
departments, postal service, regulatory agencies, and schools, is in the service business. The private nonprofit sector
museums, charities, churches, colleges, foundations, and hospitalsis in the service business. A good part of the business
sector, with its airlines, banks, hotels, insurance companies, law firms, management consulting firms, medical practices, motion
picture companies, plumbing repair companies, and real estate firms, is in the service business. Many workers in the
manufacturing sector, such as computer operators, accountants, and legal staff, are really service providers. In fact, they make
up a service factory providing services to the goods factory.And those in the retail sector, such as cashiers, clerks,
salespeople, and customer service representatives, are also providing a service.
Categories of Service Mix
Pure tangible good
Good with accompanying services
Service with accompany goods
Pure service
The service component can be a minor or a major part of the total offering. We distinguish five categories of offerings.
A pure tangible good is a tangible good such as soap, toothpaste, or salt with no accompanying services.
A tangible good with accompanying services is a tangible good, like a car, computer, or cell phone, accompanied by one or
more services.
A hybrid is an offering, like a restaurant meal, of equal parts goods and services.
A major service with accompanying minor goods and services refers to a major service, like air travel, with additional services
or supporting goods such as snacks and drinks. This offering requires a capital-intensive goodan airplanefor its realization,
but the primary item is a service.
A pure service is primarily an intangible service, such as babysitting, psychotherapy, or massage.
Service Distinctions
Equipment-based or people-based
Service processes
Clients presence required or not
Personal needs or business needs
Objectives and ownership
The range of service offerings makes it difficult to generalize without a few further distinctions. Services vary as to whether
they are equipment based (automated car washes, vending machines) or people based (window washing, accounting services).
People-based services vary by whether unskilled, skilled, or professional workers provide them. Service companies can choose
among different processes to deliver their service. Some services need the clients presence. Brain surgery requires the clients
presence, a car repair does not. If the client must be present, the service provider must be considerate of his or her needs.

Services may meet a personal need (personal services) or a business need (business services). Service providers differ in their
objectives (profit or nonprofit) and ownership (private or public). These two characteristics, when crossed, produce four quite
different types of organizations.
Continuum of Evaluation for Different Types of Products

Customers cannot judge the technical quality of some services even after they have received them. Figure 13.1 shows various
products and services according to difficulty of evaluation. At the left are goods high in search qualitiesthat is, characteristics
the buyer can evaluate before purchase. In the middle are goods and services high in experience qualities characteristics the
buyer can evaluate after purchase. At the right are goods and services high in credence qualitiescharacteristics the buyer
normally finds hard to evaluate even after consumption. Because services are generally high in experience and credence
qualities, there is more risk in their purchase, with several consequences. First, service consumers generally rely on word of
mouth rather than advertising. Second, they rely heavily on price, provider, and physical cues to judge quality. Third, they are
highly loyal to service providers who satisfy them. Fourth, because switching costs are high, consumer inertia can make it
challenging to entice business away from a competitor.
Distinctive Characteristics of Services
Four distinctive service characteristics greatly affect the design of marketing programs: intangibility, inseparability, variability,
and perishability. Intangibility means that it is difficult to evaluate services unless we have tangible cues and physical evidence
to use. Inseparability means that we cannot separate the service from the experience of the customer. Variability means that
services tend to vary from experience to experience. Perishability means that we cannot inventory services.
Physical Evidence and Presentation
Service companies can try to demonstrate their service quality through physical evidence and presentation. Suppose a bank
wants to position itself as the fast bank. It could make this positioning strategy tangible through any number of marketing
1. PlaceThe exterior and interior should have clean lines. The layout of the desks and the traffic flow should be planned
carefully. Waiting lines should not get overly long.

2. PeopleEmployees should be busy, but there should be a sufficient number to manage the workload.
3. EquipmentComputers, copy machines, desks and ATMs should look like, and be, state of the art.
4. Communication materialPrinted materialstext and photosshould suggest efficiency and speed.
5. SymbolsThe banks name and symbol could suggest fast service.
6. PriceThe bank could advertise that it will deposit $5 in the account of any customer who waits in line more than five
Dimensions of Brand Experience

Whereas physical goods are manufactured, then inventoried, then distributed, and later consumed, services are typically
produced and consumed simultaneously. A haircut cant be storedor produced without the barber. The provider is part of the
service. Because the client is also often present, providerclient interaction is a special feature of services marketing. Buyers of
entertainment and professional services are very interested in the specific provider. Several strategies exist for getting around
the limitations of inseparability. The service provider can work with larger groups. The service provider can work faster and see
more clients. The service organization can train more service providers and build up client confidence, as H&R Block has done
with its national network of trained tax consultants. Such a tactic could be a good approach for Chapman-Kelly, as shown in the
Because the quality of services depends on who provides them, when and where, and to whom, services are highly variable.
Some doctors have an excellent bedside manner; others are less empathic.
Increasing Quality Control

To reassure customers, some firms offer service guarantees that may reduce consumer perceptions of risk. Here are three steps
service firms can take to increase quality control.
1. Invest in good hiring and training procedures. Recruiting the right employees and providing them with excellent training is
crucial, regardless of whether employees are highly skilled professionals or low-skilled workers.
2. Standardize the service-performance process throughout the organization. A service blueprint can map out the service
process, the points of customer contact, and the evidence of service from the customers point of view. Figure 13.2 shows a
service blueprint for a guest spending a night at a hotel.
3. Monitor customer satisfaction. Employ suggestion and complaint systems, customer surveys, and comparison shopping.
Customer needs may vary in different areas, allowing firms to develop region-specific customer satisfaction programs.
Services cannot be stored, so their perishability can be a problem when demand fluctuates.
Matching Demand and Supply
Demand or yield management is criticalthe right services must be available to the right customers at the right places at the
right times and right prices to maximize profitability. Several strategies can produce a better match between service demand and
On the demand side:
Differential pricing will shift some demand from peak to off-peak periods.
Nonpeak demand can be cultivated.
Complementary services can provide alternatives to waiting customers.
Reservation systems are a way to manage the demand level.
On the supply side:
Part-time employees can serve peak demand.
Peak-time efficiency routines can allow employees to perform only essential tasks during peak periods.
Increased consumer participation frees service providers time.
Shared services can improve offerings.
Facilities for future expansion can be a good investment.
New Service Realities
Many firms like Singapore Airlines and Jet Blue are leveraging the new realities of services marketing. These include a shift in
the relationship brands have with customers, more empowered customers, and customer coproduction. Customer coproduction
refers to the joint fulfillment of a service by customer and company.
Root Causes of Customer Failure


Figure 13.3 displays the four broad causes of customer failures. Solutions come in all forms, as these examples show:
1. Redesign processes and redefine customer roles to simplify service encounters. One of the keys to Netflixs success is that it
charges a flat fee and allows customers to return DVDs by mail at their leisure, giving customers greater control and flexibility.
2. Incorporate the right technology to aid employees and customers. Comcast, the largest cable operator by subscribers in the
United States, introduced software to identify network glitches before they affected service and to better inform call-center
operators about customer problems. Repeat service calls dropped 30 percent as a result.
3. Create high-performance customers by enhancing their role clarity, motivation, and ability. USAA reminds enlisted
policyholders to suspend their car insurance when they are stationed overseas.
4. Encourage customer citizenship so customers help customers. At golf courses, players can not only follow the rules by
playing and behaving appropriately, they can encourage others to do so.
Solutions to Customer Failures
Redesign processes and redefine customer roles to simplify service encounters
Incorporate the right technology to aid employees and customers
Create high-performance customers by enhancing their role clarity, motivation, and ability
Encourage customer citizenship where customers help customers
Types of Marketing in Service Industries


Marketing excellence with services requires excellence in three broad areas: external, internal, and interactive marketing as
shown in Figure 13.4.
External marketing describes the normal work of preparing, pricing, distributing, and promoting the service to customers.
Internal marketing describes training and motivating employees to serve customers well. The most important contribution the
marketing department can make is arguably to be exceptionally clever in getting everyone else in the organization to practice
Interactive marketing describes the employees skill in serving the client. Clients judge service not only by its technical
quality (Was the surgery successful?), but also by its functional quality.
Best Practices
Strategic Concept
Top-Management Commitment
High Standards
Self-Service Technologies
Monitoring Systems
Satisfying Customer Complaints
Satisfying Employees
In achieving marketing excellence with their customers, well-managed service companies share a strategic concept, a history of
top-management commitment to quality, high standards, profit tiers, and systems for monitoring service performance and
customer complaints.
Importance-Performance Analysis


We can judge services on customer importance and company performance. Importance-performance analysis rates the various
elements of the service bundle and identifies required actions. Table 13.2 shows how customers rated 14 service elements or
attributes of an automobile dealers service department on importance and performance. For example, Job done right the first
time (attribute 1) received a mean importance rating of 3.83 and a mean performance rating of 2.63, indicating that customers
felt it was highly important but not performed well. The ratings of the 14 elements are divided into four sections in Figure 13.5.
Quadrant A in the figure shows important service elements that are not being performed at the desired levels; they include
elements 1, 2, and 9. The dealer should concentrate on improving the service departments performance on these elements.
Quadrant B shows important service elements that are being performed well; the company needs to maintain the high
Quadrant C shows minor service elements that are being delivered in a mediocre way but do not need any attention.
Quadrant D shows that a minor service element, Send out maintenance notices, is being performed in an excellent manner.
Factors Leading to Customer Switching Behavior
Core Service Failure
Service Encounter Failures
Response to Service Failure
Ethical Problems
Involuntary Switching
Service outcome and customer loyalty are influenced by a host of variables. One study identified more than 800 critical
behaviors that cause customers to switch services. These behaviors fall into eight categories explained further in Table 13.3 in
the book.
Improving Service Quality
There are 10 key things companies can do to improve service quality. These are detailed further in the marketing memo.
Basic service
Service design
Surprising customers


Fair play
Employee research
Servant leadership

Service-Quality Model

The service-quality model in Figure 13.6 highlights the main requirements for delivering high service quality. It identifies five
gaps that cause unsuccessful delivery:
1. Gap between consumer expectation and management perceptionManagement does not always correctly perceive what
customers want. Hospital administrators may think patients want better food, but patients may be more concerned with nurse
2. Gap between management perception and service-quality specification Management might correctly perceive customers
wants but not set a performance standard. Hospital administrators may tell the nurses to give fast service without specifying it
in minutes.
3. Gap between service-quality specifications and service deliveryEmployees might be poorly trained, or incapable of or
unwilling to meet the standard; they may be held to conflicting standards, such as taking time to listen to customers and serving
them fast.
4. Gap between service delivery and external communicationsConsumer expectations are affected by statements made by
company representatives and ads. If a hospital brochure shows a beautiful room but the patient finds it to be cheap and tacky
looking, external communications have distorted the customers expectations.
5. Gap between perceived service and expected serviceThis gap occurs when the consumer misperceives the service quality.
Determinants of Service Quality
Based on this service-quality model, researchers identified five determinants of service quality, in this order of importance.
1. ReliabilityThe ability to perform the promised service dependably and accurately.
2. ResponsivenessWillingness to help customers and provide prompt service.
3. AssuranceThe knowledge and courtesy of employees and their ability to convey trust and confidence.
4. EmpathyThe provision of caring, individualized attention to customers.
5. TangiblesThe appearance of physical facilities, equipment, personnel, and communication materials.


Customer Worries
Failure frequency
Out-of-Pocket Costs
Traditionally, customers have had three specific worries about product service:
They worry about reliability and failure frequency. A farmer may tolerate a combine that will break down once a year, but not
two or three times a year.
They worry about downtime. The longer the downtime, the higher the cost. The customer counts on the sellers service
dependabilitythe sellers ability to fix the machine quickly or at least provide a loaner.
They worry about out-of-pocket costs. How much does the customer have to spend on regular maintenance and repair costs?
A buyer takes all these factors into consideration and tries to estimate the life-cycle cost, which is the products purchase cost
plus the discounted cost of maintenance and repair less the discounted salvage value.

Chapter 14: Developing Pricing Strategies and Programs

Synonyms for Price
Price is not just a number on a tag. It comes in many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls,
retainers, wages, and commissions are all the price you pay for some good or service.
Special assessment
The Internet Changes the Pricing Environment By Providing Information
A combination of environmentalism, renewed frugality, and concern about jobs and home values forced many U.S. consumers
to rethink how they spent their money. Here is a short list of how the Internet allows sellers to discriminate between buyers, and
buyers to discriminate between sellers.
Buyers can get instant price comparisons from thousands of vendors, name their price and have it met, and get products free.
Sellers can monitor customer behavior and tailor offers to individuals and give certain customers access to special prices.
Both buyers and sellers can negotiate prices in online auctions and exchanges or even in person.
Common Pricing Mistakes
Determine costs and take traditional industry margins
Failure to revise price to capitalize on market changes
Setting price independently of the rest of the marketing mix
Failure to vary price by product item, market segment, distribution channels, and purchase occasion
Executives complain that pricing is a big headacheand getting worse by the day. Many companies do not handle pricing well
and fall back on strategies such as: We determine our costs and take our industrys traditional margins. Other common


mistakes are not revising price often enough to capitalize on market changes; setting price independently of the rest of the
marketing program rather than as an intrinsic element of market-positioning strategy; and not varying price enough for different
product items, market segments, distribution channels, and purchase occasions.
Consumer Psychology and Pricing
Reference prices
Price-quality inferences
Price endings
Price cues
Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to benot on
the marketers stated price. Customers may have a lower price threshold below which prices signal inferior or unacceptable
quality, as well as an upper price threshold above which prices are prohibitive and the product appears not worth the money.
Although consumers may have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices.
When examining products, however, they often employ reference prices, comparing an observed price to an internal reference
price they remember or an external frame of reference such as a posted regular retail price. Many consumers use price as an
indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and
designer clothing. Many sellers believe prices should end in an odd number. Customers see an item priced at $299 as being in
the $200 rather than the $300 range; they tend to process prices left-to-right rather than by rounding. Price encoding in this
fashion is important if there is a mental price break at the higher, rounded price.
Possible Consumer Reference Prices
Fair price
Typical price
Last price paid
Upper-bound price
Lower-bound price
Competitor prices
Expected future price
Usual discounted price
All types of reference prices are possible as you can see in Table 14.1, and sellers often attempt to manipulate them. For
example, a seller can situate its product among expensive competitors to imply that it belongs in the same class. Department
stores will display womens apparel in separate departments differentiated by price; dresses in the more expensive department
are assumed to be of better quality. Marketers also encourage reference-price thinking by stating a high manufacturers
suggested price, indicating that the price was much higher originally, or pointing to a competitors high price.
Tiers in Pricing
Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands or variations of
brands for different price points: Marriott Vacation ClubVacation Villas (highest price), Marriott Marquis (high price),
Marriott (high-medium price), Renaissance (medium-high price), Courtyard (medium price), TownePlace Suites (medium-low
price), and Fairfield Inn (low price). Firms devise their branding strategies to help convey the price-quality tiers of their
products or services to consumers
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing Objective
Maximum current profit


Maximum market share

Maximum market skimming
Product-quality leadership

The company first decides where it wants to position its market offering. The clearer a firms objectives, the easier it is to set
price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and
product-quality leadership. Companies pursue survival as their major objective if they are plagued with overcapacity, intense
competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in
business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction. Many
companies try to set a price that will maximize current profits. Some companies want to maximize their market share. They
believe a higher sales volume will lead to lower unit costs and higher long-run profit. Companies unveiling a new technology
favor setting high prices to maximize market skimming. Market skimming makes sense under the following conditions: (1) A
sufficient number of buyers have a high current demand; (2) the unit costs of producing a small volume are high enough to
cancel the advantage of charging what the traffic will bear; (3) the high initial price does not attract more competitors to the
market; (4) the high price communicates the image of a superior product. A company might aim to be the product-quality leader
in the market.
Step 2: Determining Demand
Price sensitivity
Estimate demand curves
Price elasticity of demand
Each price will lead to a different level of demand and have a different impact on a companys marketing objectives. The
normally inverse relationship between price and demand is captured in a demand curve as shown in Figure 14.1 on the next
slide. The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward.
Most companies attempt to measure their demand curves using several different methods. For example, surveys can explore
how many units consumers would buy at different proposed prices. Price experiments can vary the prices of different products
in a store or charge different prices for the same product in similar territories to see how the change affects sales. Statistical
analysis of past prices, quantities sold, and other factors can reveal their relationships.
Inelastic and Elastic Demand

The demand curve shows the markets probable purchase quantity at alternative prices. It sums the reactions of many
individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity.
Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price
sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are
slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total
cost of obtaining, operating, and servicing the product over its lifetime.


Factors Leading to Less Price Sensitivity

The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
Expenditure is a smaller part of buyers total income
Expenditure is small compared to the total cost
Part of the cost is paid by another party
Product is used with previously purchased assets
Product is assumed to have high quality and prestige
Buyers cannot store the product
Step 3: Estimating Costs
Types of costs
Accumulated production
Activity-based cost accounting
Target costing
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a
price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet
when companies price products to cover their full costs, profitability isnt always the net result.
Cost Per Unit at Different Levels of Production

To price intelligently, management needs to know how its costs vary with different levels of production. Take the case in which
a company such as TI has built a fixed-size plant to produce 1,000 hand calculators a day. The cost per unit is high if few units
are produced per day. As production approaches 1,000 units per day, the average cost falls because the fixed costs are spread
over more units. Short-run average cost increases after 1,000 units, however, because the plant becomes inefficient. Workers
must line up for machines, getting in each others way, and machines break down more often. This is shown in Figure 14.2a. If
TI believes it can sell 2,000 units per day, it should consider building a larger plant. The plant will use more efficient machinery
and work arrangements, and the unit cost of producing 2,000 calculators per day will be lower than the unit cost of producing
1,000 per day. This is shown in the long-run average cost curve (LRAC) in Figure 14.2b. In fact, a 3,000-capacity plant would
be even more efficient according to Figure 14.2b, but a 4,000-daily production plant would be less so because of increasing
diseconomies of scale: There are too many workers to manage, and paperwork slows things down. Figure 14.2b indicates that a
3,000-daily production plant is the optimal size if demand is strong enough to support this level of production.
Cost Terms and Production
Fixed costs


Variable costs
Total costs
Average cost
Cost at different levels of production

A companys costs take two forms, fixed and variable. Fixed costs, also known as overhead, are costs that do not vary with
production level or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on regardless of
output. Variable costs vary directly with the level of production. For example, each hand calculator produced by Texas
Instruments incurs the cost of plastic, microprocessor chips, and packaging. These costs tend to be constant per unit produced,
but theyre called variable because their total varies with the number of units produced. Total costs consist of the sum of the
fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals
total costs divided by production. Management wants to charge a price that will at least cover the total production costs at a
given level of production. To price intelligently, management needs to know how its costs vary with different levels of
Cost per Unit as a Function of Accumulated Production

Figure 14.3 shows, is that average cost falls with accumulated production experience. Thus the average cost of producing the
first 100,000 hand calculators is $10 per calculator. When the company has produced the first 200,000 calculators, the average
cost has fallen to $9. After its accumulated production experience doubles again to 400,000, the average cost is $8. This decline
in the average cost with accumulated production experience is called the experience curve or learning curve. Now suppose three
firms compete in this industry, TI, A, and B. TI is the lowest-cost producer at $8, having produced 400,000 units in the past. If
all three firms sell the calculator for $10, TI makes $2 profit per unit, A makes $1 per unit, and B breaks even. The smart move
for TI would be to lower its price to $9. This will drive B out of the market, and even A may consider leaving. TI will pick up
the business that would have gone to B (and possibly A). Furthermore, price-sensitive customers will enter the market at the
lower price. As production increases beyond 400,000 units, TIs costs will drop still further and faster and will more than
restore its profits, even at a price of $9. TI has used this aggressive pricing strategy repeatedly to gain market share and drive
others out of the industry. Experience-curve pricing nevertheless carries major risks. Aggressive pricing might give the product
a cheap image. It also assumes competitors are weak followers. The strategy leads the company to build more plants to meet
demand, but a competitor may choose to innovate with a lower cost technology. The market leader is now stuck with the old
Target Costing
Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers,
engineers, and purchasing agents to reduce them through target costing. Market research establishes a new products desired
functions and the price at which it will sell, given its appeal and competitors prices. This price less desired profit margin leaves
the target cost the marketer must achieve. The firm must examine each cost elementdesign, engineering, manufacturing, sales
and bring down costs so the final cost projections are in the target range. When ConAgra Foods decided to increase the list
prices of its Banquet frozen dinners to cover higher commodity costs, the average retail price of the meals increased from $1 to
$1.25.When sales dropped significantly, management vowed to return to a $1 price, which necessitated cutting $250 million in


other costs through a variety of methods, such as centralized purchasing and shipping, less expensive ingredients, and smaller
Analyzing Competitors Costs
Although the natural cleaner market was pioneered by Seventh Generation and method cleaning products, Clorox Green Works
now commands 42 percent market share. The Green Works product line consists of 10 natural cleaners using biodegradable
ingredients, packaged in recyclable materials, and not tested on animals The first major new Clorox brand in more than 20
years, it doubled the size of the natural cleaning category with its strategy of delivering a line of affordable products that are
good for consumers, good for retailers, and good for the environment. The company charges only a 10 percent to 20 percent
premium over conventional cleaners, versus the premium of 40 percent or more charged by other natural cleaners.
The Three Cs Model for Price-Setting
Given the customers demand schedule, the cost function, and competitors prices, the company is now ready to select a price.
Figure 14.4 summarizes the three major considerations in price setting: Costs set a floor to the price. Competitors prices and
the price of substitutes provide an orienting point. Customers assessment of unique features establishes the price ceiling.
Step 5: Selecting a Pricing Method
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
The most elementary pricing method is to add a standard markup to the products cost. In target-return pricing, the firm
determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on
investment, often use this method. An increasing number of companies now base their price on the customers perceived value.
Perceived value is made up of a host of inputs, such as the buyers image of the product performance, the channel deliverables,
the warranty quality, customer support, and softer attributes such as the suppliers reputation, trustworthiness, and esteem.
Companies must deliver the value promised by their value proposition, and the customer must perceive this value. In recent
years, several companies have adopted value pricing: They win loyal customers by charging a fairly low price for a high-quality
offering. In going-rate pricing, the firm bases its price largely on competitors prices. In oligopolistic industries that sell a
commodity such as steel, paper, or fertilizer, all firms normally charge the same price. Auction-type pricing is growing more
popular, especially with scores of electronic marketplaces selling everything from pigs to used cars as firms dispose of excess
inventories or used goods.
Break-Even Chart for Determining Target-Return Price and Break-Even Volume

The manufacturer will realize this 20 percent ROI provided its costs and estimated sales turn out to be accurate. But what if
sales dont reach 50,000 units? The manufacturer can prepare a break-even chart to learn what would happen at other sales
levels (see Figure 14.5). Fixed costs are $300,000 regardless of sales volume. Variable costs, not shown in the figure, rise with
volume. Total costs equal the sum of fixed and variable costs. The total revenue curve starts at zero and rises with each unit


sold. The total revenue and total cost curves cross at 30,000 units. This is the break-even volume. We can verify it by the
following formula:
Break-even volume = fixed cost (price - variable cost) = $300,000
$20 - $10 = 30,000
The manufacturer, of course, is hoping the market will buy 50,000 units at $20, in which case it earns $200,000 on its $1
million investment, but much depends on price elasticity and competitors prices.
Dollar Store Pricing
Once-unfashionable dollar stores such as Dollar General, Family Dollar Stores, Big Lots, and Dollar Tree are gaining
popularity, partly fueled by an economic downturn. In 2008, these four biggest players in the category generated $26 billion in
sales with 20,000 stores and gross margins of 35 percent to -40 percent. These ultra discounters are not dollar stores in a strict
sense of the wordthey sell many items over $1, although most are under $10. They have, however, developed a simple,
successful formula for drawing shoppers from Target and even Wal-Mart. Their answer is to build small, easy-to-navigate stores
in expensive real estate locations with parking handy; keep overhead low by limiting inventory to mostly inexpensive
overstocks, odd lots, and buyouts; and spend sparingly on store dcor and get free word-of-mouth publicity.
Auction-Type Pricing
These are the three major types of auctions and their separate pricing procedures. English auctions (ascending bids) have one
seller and many buyers. On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise the offer price until
the top price is reached. The highest bidder gets the item. English auctions are used today for selling antiques, cattle, real estate,
and used equipment and vehicles. Dutch auctions (descending bids) feature one seller and many buyers, or one buyer and many
sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder
accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest
price. Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. government
often uses this method to procure supplies.
Step 6: Selecting the Final Price
Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties
Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must
consider additional factors, including the impact of other marketing activities, company pricing policies, gain-and-risk-sharing
pricing, and the impact of price on other parties. Here we will examine several price-adaptation strategies: geographical pricing,
price discounts and allowances, promotional pricing, and differentiated pricing.
Geographical Pricing
In geographical pricing, the company decides how to price its products to different customers in different locations and
countries. Should the company charge higher prices to distant customers to cover the higher shipping costs, or a lower price to
win additional business? How should it account for exchange rates and the strength of different currencies? Another question is
how to get paid. This issue is critical when buyers lack sufficient hard currency to pay for their purchases. Many buyers want to
offer other items in payment, a practice known as countertrade. U.S. companies are often forced to engage in countertrade if
they want the business. Countertrade may account for 15 percent to 20 percent of world trade and takes several forms.
Barter means the buyer and seller directly exchange goods, with no money and no third party involved.
A compensation deal involves the seller receives some percentage of the payment in cash and the rest in products. A British
aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee.
Price Discounts and Allowances
Quantity discount


Functional discount
Seasonal discount

This slide lists many types of discounts. A discount is a price reduction to buyers who pay bills promptly. A typical example is
2/10, net 30, which means that payment is due within 30 days and that the buyer can deduct 2 percent by paying the bill
within 10 days.
A quantity discount is a price reduction to those who buy large volumes. A functional or trade discount is offered by a
manufacturer to trade channel members if they will perform certain functions, such as selling, storing, and record keeping.
Manufacturers must offer the same functional discounts within each channel. A seasonal discount is a price reduction to those
who buy merchandise or services out of season.
An allowance is an extra payment designed to gain reseller participation in special programs. Trade-in allowances are granted
for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and
sales support programs.
Promotional Pricing Tactics
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
Companies can use several pricing techniques to stimulate early purchase.
Loss-leader pricing means that supermarkets and department stores often drop the price on well-known brands to stimulate
additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader
Special event pricing means that sellers will establish special prices in certain seasons to draw in more customers. Special
customer pricing means sellers will offer special prices exclusively to certain customers. Cash rebates mean that auto
companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers products
within a specified time period. Low-interest financing means that instead of cutting its price, the company can offer customers
low interest financing. Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower
the monthly payments. Companies can promote sales by adding a free or low-cost warranty or service contract. Using
psychological discounting is a strategy that sets an artificially high price and then offers the product at substantial savings; for
example, Was $359, now $299.
Differentiated Pricing
Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following
Customer segment pricing means that different customer groups pay different prices for the same product or service. Product
form pricing means that different versions of the product are priced differently, but not proportionately to their costs. Evian
prices a 48 ounce bottle of its mineral water at $2.00 and 1.7 ounces of the same water in a moisturizer spray at $6.00. Some
companies price the same product at two different levels based on image differences. Channel pricing means charging a
different price depending on where the consumer buys the product. Location pricing means the same product is priced
differently at different locations even though the cost of offering it at each location is the same. Time pricing means that prices
are varied by season, day, or hour.


Traps in Price Cutting Strategies

Low-quality trap
Fragile-market-share trap
Shallow-pockets trap
Price-war trap
Should We Raise Prices?

It can be worthwhile to raise prices. A successful price increase can raise profits considerably. If the companys profit margin is
3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. This situation is
illustrated in Table 14.6. The assumption is that a company charged $10 and sold 100 units and had costs of $970, leaving a
profit of $30, or 3 percent on sales. By raising its price by 10 cents (a 1 percent price increase), it boosted its profits by 33
percent, assuming the same sales volume.
A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit
margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost
increase, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing.
Methods for Increasing Prices
Delayed quotation pricing
Escalator clauses
Reduction of discounts
Another factor leading to price increases is overdemand. When a company cannot supply all its customers, it can raise its
prices, ration supplies, or both. It can increase price in the following ways, each of which has a different impact on buyers.
Delayed quotation pricing means that the company does not set a final price until the product is finished or delivered. This
pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment.
Escalator clauses are used when the company requires the customer to pay todays price and all or part of any inflation
increase that takes place before delivery. An escalator clause bases price increases on some specified price index. Unbundling
means the company maintains its price but removes or prices separately one or more elements that were part of the former offer,
such as free delivery or installation. Car companies sometimes add higher-end audio entertainment systems or GPS navigation
systems as extras to their vehicles. Reduction of discounts means that the company instructs its sales force not to offer its
normal cash and quantity discounts.
Brand Leader Responses to Competitive Price Cuts
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line

Chapter 15: Designing and Managing Integrated Marketing Channels


Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of
their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the
whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final
consumers. Companies are looking at their suppliers suppliers upstream and at their distributors customers downstream. They
are looking at customer segments and considering a wide range of new and different means to sell, distribute, and service their
offerings. Companies today must build and manage a continuously evolving and increasingly complex channel system and
value network. In this chapter, we consider strategic and tactical issues with integrating marketing channels and developing
value networks.
A marketing channel system is the particular set of interdependent organizations involved in the process of making a product
or service available for use or consumption.
Some intermediariessuch as wholesalers and retailersbuy, take title to, and resell the merchandise; they are called
merchants. Othersbrokers, manufacturers representatives, sales agentssearch for customers and may negotiate on the
producers behalf but do not take title to the goods; they are called agents. Still otherstransportation companies, independent
warehouses, banks, advertising agenciesassist in the distribution process but neither take title to goods nor negotiate
purchases or sales; they are called facilitators. Red Envelope is a retailer.
Channels and Marketing Decisions
A push strategy uses the manufacturers sales force, trade promotion money, and other means to induce intermediaries
to carry, promote, and sell the product to end users
A pull strategy uses advertising, promotion, and other forms of communication to persuade consumers to demand the
product from intermediaries
In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A push strategy
uses the manufacturers sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell
the product to end users. A push strategy is particularly appropriate when there is low brand loyalty in a category, brand choice
is made in the store, the product is an impulse item, and product benefits are well understood. In a pull strategy the
manufacturer uses advertising, promotion, and other forms of communication to persuade consumers to demand the product
from intermediaries, thus inducing the intermediaries to order it. Pull strategy is particularly appropriate when there is high
brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when
they choose the brand before they go to the store.
REI Employs Hybrid Channels
Todays successful companies typically employ hybrid channels and multichannel marketing, multiplying the number of go-tomarket channels in any one market area. Hybrid channels or multichannel marketing occurs when a single firm uses two or
more marketing channels to reach customer segments. HP has used its sales force to sell to large accounts, outbound
telemarketing to sell to medium-sized accounts, direct mail with an inbound number to sell to small accounts, retailers to sell to
still smaller accounts, and the Internet to sell specialty items. Companies that manage hybrid channels clearly must make sure
their channels work well together and match each target customers preferred ways of doing business. Outdoor supplier REI has
been lauded by industry analysts for the seamless integration of its retail store, Web site, Internet kiosks, mail-order catalogs,
value-priced outlets, and toll-free order number. If an item is out of stock in the store, all customers need to do is tap into the
stores Internet kiosk to order it from REIs Web site.
Buyer Expectations for Channel Integration
Ability to order a product online and pick it up at a convenient retail location
Ability to return an online-ordered product to a nearby store
Right to receive discounts based on total online and offline purchases
Table 15.1 Channel Member Functions
Gather information
Develop and disseminate persuasive communications
Reach agreements on price and terms
Acquire funds to finance inventories
Assume risks


Provide for storage

Provide for buyers payment of their bills
Oversee actual transfer of ownership

A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and
possession gaps that separate goods and services from those who need or want them. Members of the marketing channel
perform a number of key functions as identified in Table 15.1.
Some of these functions (storage and movement, title, and communications) constitute a forward flow of activity from the
company to the customer; other functions (ordering and payment) constitute a backward flow from customers to the company.
Still others (information, negotiation, finance, and risk taking) occur in both directions.
Figure 15.1 Marketing Flows in the Marketing Channel for Forklift Trucks

Five flows are illustrated in Figure 15.1 for the marketing of forklift trucks. If these flows were superimposed in one diagram,
we would see the tremendous complexity of even simple marketing channels.
Marketing Channel Levels
A zero-level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the final customer.
The major examples are door-to-door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and
manufacturer-owned stores.
Figure 15.2 Consumer Markets


The producer and the final customer are part of every channel. We will use the number of intermediary levels to designate the
length of a channel. Figure 15.2a illustrates several consumer goods marketing channels of different lengths. A one-level
channel contains one selling intermediary, such as a retailer. A two-level channel contains two intermediaries. In consumer
markets, these are typically a wholesaler and a retailer. A three-level channel contains three intermediaries. In the meatpacking
industry, wholesalers sell to jobbers, essentially small-scale wholesalers, who sell to small retailers. In Japan, food distribution
may include as many as six levels. Obtaining information about end users and exercising control becomes more difficult for the
producer as the number of channel levels increases.
Figure 15.2 Industrial Markets

Figure 15.2b shows channels commonly used in B2B marketing. An industrial-goods manufacturer can use its sales force to sell
directly to industrial customers; or it can sell to industrial distributors who sell to industrial customers; or it can sell through


manufacturers representatives or its own sales branches directly to industrial customers, or indirectly to industrial customers
through industrial distributors. Zero-, one-, and two-level marketing channels are quite common.
Reverse-Flow Channels
Channels normally describe a forward movement of products from source to user, but reverse-flow channels are also important:
(1) to reuse products or containers (such as refillable chemical-carrying drums); (2) to refurbish products for resale (such as
circuit boards or computers); (3) to recycle products (such as paper); and (4) to dispose of products and packaging. Reverseflow intermediaries include manufacturers redemption centers, community groups, trash collection specialists, recycling
centers, trash-recycling brokers, and central processing warehousing. Many creative solutions have emerged in this area in
recent years, such as Greenopolis.
Designing a Marketing Channel System
Analyze customer needs
Establish channel objectives
Identify major channel alternatives
Evaluate major channel alternatives
To design a marketing channel system, marketers analyze customer needs and wants, establish channel objectives and
constraints, and identify and evaluate major channel alternatives.

Figure 15.3 What European Consumers Value

One study of 40 grocery and clothing retailers in France, Germany, and the United Kingdom found that they served three types
of shoppers: (1) Service/quality customers who cared most about the variety and performance of products and service; (2)
Price/value customers who were most concerned about spending wisely; and (3) Affinity customers who primarily sought stores
that suited people like themselves or groups they aspired to join. As Figure 15.3 shows, customer profiles differed across the
three markets: In France, shoppers stressed service and quality, in the United Kingdom, affinity, and in Germany, price and


value. Even the same consumer, though, may choose different channels for different functions in a purchase, browsing a catalog
before visiting a store or test driving a car at a dealer before ordering online.
Service Outputs of Channels
Lot size
Waiting and delivery time
Spatial convenience
Product Variety
Service backup
Channels produce five service outputs:
1. Lot size is the number of units the channel permits a typical customer to purchase on one occasion. In buying cars for its
fleet, Hertz prefers a channel from which it can buy a large lot size; a household wants a channel that permits a lot size of one.
2. Waiting and delivery time is the average time customers wait for receipt of goods. Customers increasingly prefer faster
delivery channels.
3. Spatial convenience is the degree to which the marketing channel makes it easy for customers to purchase the product.
4. Product variety is the assortment provided by the marketing channel. Normally, customers prefer a greater assortment
because more choices increase the chance of finding what they need, although too many choices can sometimes create a
negative effect.
5. Service backup is the add-on services (credit, delivery, installation, repairs) provided by the channel. The greater the service
backup, the greater the work provided by the channel.
Identifying Channel Alternatives

Types of intermediaries
Number of intermediaries
Terms and responsibilities

Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and responsibilities of
each. Consider the channel alternatives identified by a consumer electronics company that produces satellite radios. It could sell
its players directly to automobile manufacturers to be installed as original equipment, auto dealers, rental car companies, or
satellite radio specialist dealers through a direct sales force or through distributors. It could also sell its players through
company stores, online retailers, mail-order catalogs, or mass merchandisers such as Best Buy. It will need to decide on the
number of ntermediaries (discussed further on the next slide) and on what each channel member will be responsible for (also
discussed further).
Number of Intermediaries
Three strategies based on the number of intermediaries are exclusive distribution, selective distribution, and intensive
distribution. Exclusive distribution means severely limiting the number of intermediaries. Its appropriate when the producer
wants to maintain control over the service level and outputs offered by the resellers, and it often includes exclusive dealing
arrangements. By granting exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling.
Selective distribution relies on only some of the intermediaries willing to carry a particular product. Intensive distribution
places the goods or services in as many outlets as possible. This strategy serves well for snack foods, soft drinks, newspapers,
candies, and gumproducts consumers buy frequently or in a variety of locations.
Terms and Responsibilities of Channel Members
Price policy
Condition of sale
Distributors territorial rights
Mutual services and responsibilities


Each channel member must be treated respectfully and given the opportunity to be profitable. The main elements in the traderelations mix are price policies, conditions of sale, territorial rights, and specific services to be performed by each party. Price
policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as
equitable and sufficient. Conditions of sale refers to payment terms and producer guarantees. Most producers grant cash
discounts to distributors for early payment. They might also offer a guarantee against defective merchandise or price declines,
creating an incentive to buy larger quantities. Distributors territorial rights define the distributors territories and the terms
under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in
their territory, whether or not they did the selling. Mutual services and responsibilities must be carefully spelled out, especially
in franchised and exclusive- agency channels.
Figure 15.4 The Value-Adds versus Costs of Different Channels
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. Each channel alternative will
produce a different level of sales and costs. Figure 15.4 shows how six different sales channels stack up in terms of the value
added per sale and the cost per transaction. For example, in the sale of industrial products costing between $2,000 and $5,000,
the cost per transaction has been estimated at $500 (field sales), $200 (distributors), $50 (telesales), and $10 (Internet). A Booz
Allen Hamilton study showed that the average transaction at a full-service branch costs the bank $4.07, a phone transaction
costs $.54, and an ATM transaction costs $.27, but a typical Web-based transaction costs only $.01.

Figure 15.5 Break-Even Cost Chart


Firms will try to align customers and channels to maximize demand at the lowest overall cost. Clearly, sellers try to replace
high-cost channels with low-cost channels as long as the value added per sale is sufficient. A North Carolina furniture
manufacturer wants to sell its line to retailers on the West Coast. One alternative is to hire 10 new sales representatives to
receive a base salary plus commissions. The other alternative is to use a manufacturers sales agency that has extensive contacts
with retailers. Its 30 sales representatives would receive a commission based on their sales. The first step is to estimate how
many sales each alternative will likely generate. The next step is to estimate the costs of selling different volumes through each
channel. The cost schedules are shown in Figure 15.5. Engaging a sales agency is less expensive than establishing a new
company sales office, but costs rise faster through an agency because sales agents get larger commissions. The final step is
comparing sales and costs.
As Figure 15.5 shows, there is one sales level (SB) at which selling costs are the same for the two channels. The sales agency is
thus the better channel for any sales volume below SB, and the company sales branch is better at any volume above SB. Given
this information, it is not surprising that sales agents tend to be used by smaller firms, or by large firms in smaller territories
where the volume is low.
Channel-Management Decisions

Selecting channel members

Training channel members
Motivating channel members
Evaluating channel members
Modifying channel members

After a company has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each
channel. It must also modify channel design and arrangements over time. As the company grows, it can also consider channel
expansion into international markets.
Channel Power



Channel power is the ability to alter channel members behavior so they take actions they would not have taken otherwise.
Manufacturers can draw on the following types of power to elicit cooperation:
Coercive power means that the manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail
to cooperate. Reward power includes when the manufacturer offers intermediaries an extra benefit for performing specific acts
or functions. Legitimate power includes the manufacturer requesting a behavior that is warranted under the contract. Expert
power means the manufacturer has special knowledge the intermediaries value. Once the intermediaries acquire this expertise,
however, expert power weakens. Referent power means the manufacturer is so highly respected that intermediaries are proud to
be associated with it.
Channel Integration and Systems

Vertical marketing systems

Corporate VMS
Administered VMS
Contractual VMS
Horizontal marketing systems
Multichannel systems

A conventional marketing channel consists of an independent producer, wholesaler(s), and retailer(s). Each is a separate
business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has
complete or substantial control over other members.
A vertical marketing system (VMS), by contrast, includes the producer, wholesaler(s), and retailer(s) acting as a unified system.
One channel member, the channel captain, owns or franchises the others or has so much power that they all cooperate. An
administered VMS coordinates successive stages of production and distribution through the size and power of one of the
members. Manufacturers of dominant brands can secure strong trade cooperation and support from resellers. A contractual
VMS consists of independent firms at different levels of production and distribution, integrating their programs on a contractual
basis to obtain more economies or sales impact than they could achieve alone. Sometimes thought of as value-adding
partnerships (VAPs), contractual VMSs come in three types: wholesaler-sponsored voluntary chains, retailer cooperatives, and
franchise organizations.
Integrated Marketing Channel System
An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the
strategies and tactics of selling through one or more other channels. Adding more channels gives companies three important
benefits. The first is increased market coverage. Not only are more customers able to shop for the companys products in more
places, but those who buy in more than one channel are often more profitable than single-channel customers. The second
benefit is lower channel costselling by phone is cheaper than personal selling to small customers. The third is more
customized selling such as by adding a technical sales force to sell complex equipment. There is a trade-off, however. New
channels typically introduce conflict and problems with control and cooperation. Two or more may end up competing for the
same customers.
Figure 15.6 The Hybrid Grid


Clearly, companies need to think through their channel architecture and determine which channels should perform which
functions. Figure 15.6 shows a simple grid to help make channel architecture decisions. The grid consists of major marketing
channels (as rows) and the major channel tasks to be completed (as columns). The grid illustrates why using only one channel is
not efficient.
Channel Conflict

What types of conflict arise in channels?

What causes conflict?
What can marketers do to resolve it?

No matter how well channels are designed and managed, there will be some conflict, if only because the interests of
independent business entities do not always coincide. Channel conflict is generated when one channel members actions
prevent another channel from achieving its goal. Channel coordination occurs when channel members are brought together to
advance the goals of the channel, as opposed to their own potentially incompatible goals. Horizontal channel conflict occurs
between channel members at the same level. Vertical channel conflict occurs between different levels of the channel.
Multichannel conflict exists when the manufacturer has established two or more channels that sell to the same market. Its
likely to be especially intense when the members of one channel get a lower price (based on larger-volume purchases) or work
with a lower margin.
Causes of Channel Conflict

Goal incompatibility
Unclear roles and rights
Differences in perception
Intermediaries dependence on manufacturer

Some causes of channel conflict are easy to resolve, others are not. Several causes are listed in the slide. For instance, the
manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work
with high margins and pursue short-run profitability. HP may sell personal computers to large accounts through its own sales
force, but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce
conflict. The manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory.
Dealers may be pessimistic. In the beverage category, it is not uncommon for disputes to arise between manufacturers and their
distributors about the optimal advertising strategy. The fortunes of exclusive dealers, such as auto dealers, are profoundly
affected by the manufacturers product and pricing decisions. This situation creates a high potential for conflict.


Table 15.3 Strategies for Managing Channel Conflict

Strategic justification
Dual compensation
Superordinate goals
Employee exchange
Joint memberships
Legal recourse

There are a number of mechanisms for effective conflict management.

In some cases, a convincing strategic justification that they serve distinctive segments and do not compete as much as they
might think can reduce potential for conflict among channel members. Dual compensation pays existing channels for sales
made through new channels. Channel members can come to an agreement on the fundamental or superordinate goal they are
jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually do this when the
channel faces an outside threat, such as a more efficient competing channel, an adverse piece of legislation, or a shift in
consumer desires. A useful step is to exchange persons between two or more channel levels. Similarly, marketers can encourage
joint memberships in trade associations. Co-optation is an effort by one organization to win the support of the leaders of another
by including them in advisory councils, boards of directors, and the like. When conflict is chronic or acute, the parties may
resort to diplomacy, mediation, or arbitration. Diplomacy takes place when each side sends a person or group to meet with its
counterpart to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two parties interests. In
arbitration two parties agree to present their arguments to one or more arbitrators and accept their decision. If nothing else
proves effective, a channel partner may choose to file a lawsuit.


E-commerce uses a Web site to transact or facilitate the sale of products and services online. Online retailers compete in three
key aspects of a transaction: (1) customer interaction with the Web site, (2) delivery, and (3) ability to address problems when
they occur. We can distinguish between pure-click companies, those that have launched a Web site without any previous
existence as a firm, and brick-and-click companies, existing companies that have added an online site for information or ecommerce.
The widespread penetration of cell phones and smart phonesthere are currently more mobile phones than personal computers
in the worldallows people to connect to the Internet and place online orders on the move. Many see a big future in what is
now called m-commerce (m for mobile). The existence of mobile channels and media can keep consumers connected and
interacting with a brand throughout their day-to-day lives. GPS-type features can help identify shopping or purchase
opportunities for consumers for their favorite brands.

Chapter 16: Managing, Retailing, Wholesaling and Logistics

Retailing includes all the activities in selling goods or services directly to final consumers for personal, non-business use. A
retailer or retail store is any business enterprise whose sales volume comes primarily from retailing.
Any organization selling to final consumerswhether it is a manufacturer, wholesaler, or retaileris doing retailing. It doesnt
matter how the goods or services are sold (in person, by mail, telephone, vending machine, or on the Internet) or where (in a
store, on the street, or in the consumers home).


*Table 16.1 Major Retailer Types

Specialty store (narrow product line)
Department store (several)
Convenience store (24/7)
Discount store (low margin)
Off-price retailer (leftovers)
Superstore (hypermarkets, category killers)
Catalog showroom (high markup, brand name)
This slide lists the major types of retailers.
Specialty stores carry a narrow product line. Department stores carry several product lines. Supermarkets are large, low-cost,
low-margin, high-volume, self-service store designed to meet total needs for food and household products. Convenience stores
are small stores in residential area, often open 24/7, limited line of high-turnover convenience products plus takeout. Drug
stores carry prescription and pharmacies, health and beauty aids, other personal care, small durable, miscellaneous items.
Discount stores are standard or specialty merchandise; low-price, low-margin, high-volume stores. Extreme value or harddiscount store carry a more restricted merchandise mix than discount stores but at even lower prices. Off-price retailers carry
leftover goods, overruns, irregular merchandise sold at less than retail. Superstores are huge selling spaces, routinely purchased
food and household items, plus services. Category killers carry a deep assortment in one category. Hypermarkets are huge
stores that combine supermarket, discount, and warehouse retailing. Catalog showrooms include a broad selection of highmarkup, fast-moving, brand-name goods sold by catalog at a discount.
*Levels of Retail Service
Self service
Self selection
Limited service
Full service
Retailers meet widely different consumer preferences for service levels and specific services. They position themselves as
offering one of four levels of service. Self-service is the cornerstone of all discount operations. Many customers are willing to
carry out their own locate-compare-select process to save money. Self-selection means that customers find their own goods,
although they can ask for assistance. Limited service means these retailers carry more shopping goods and services such as
credit and merchandise-return privileges. With full service, salespeople are ready to assist in every phase of the locatecompare-select process. Customers who like to be waited on prefer this type of store.
*Nonstore Retailing
Direct selling (Tupperware)
Direct marketing (Lands End)
Automatic vending (soft drinks)
Buying service (Staples)
Although the overwhelming bulk of goods and services 97 percentis sold through stores, nonstore retailing has been
growing much faster than store retailing. Nonstore retailing falls into four major categories:
1. Direct selling, also called multilevel selling and network marketing, is a multibillion-dollar industry, with hundreds of
companies selling door-to-door or at home sales parties.
2. Direct marketing has roots in direct-mail and catalog marketing (Lands End, L.L.Bean). It includes telemarketing (1-800FLOWERS), television direct-response marketing (HSN, QVC), and electronic shopping (Amazon.com, Autobytel.com).
3. Automatic vending offers a variety of merchandise, including impulse goods such as cigarettes, soft drinks, and more.
4. Buying service is a storeless retailer serving a specific clienteleusually employees of large organizationswho are entitled
to buy from a list of retailers that have agreed to give discounts in return for membership.
Table 16.2 Major Types of Corporate Retail Organizations
Corporate chain store


Voluntary chain
Retailer cooperative
Consumer cooperative
Franchise organization
Merchandising conglomerate

This slide lists the major types of corporate retail organizations. Corporate chain store refers to two or more outlets owned and
controlled, employing central buying and merchandising, and selling similar lines of merchandise. A voluntary chain is a
wholesaler-sponsored group of independent retailers engaged in bulk buying and common merchandising. Independent Grocers
Alliance (IGA). A retailer cooperative is an independent retailers using a central buying organization and joint promotion
efforts. Consumer cooperative is a retail firm owned by its customers. Members contribute money to open their own store, vote
on its policies, elect a group to manage it, and receive dividends. A franchise organization is a contractual association between a
franchisor and franchisees, popular in a number of product and service areas. A merchandising conglomerate is a corporation
that combines several diversified retailing lines and forms under central ownership, with some integration of distribution and
*Franchising System
The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments
The franchisee pays for the right to be part of the system
The franchisor provides its franchisees with a system for doing business
In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic operations are planned,
directed, and controlled by the operations innovator, called a franchisor. Franchises are distinguished by three characteristics:
1. The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments.
2. The franchisee pays for the right to be part of the system. Start-up costs include rental and lease equipment and fixtures, and
usually a regular license fee. McDonalds franchisees may invest as much as $1.6 million in total start-up costs and fees. The
franchisee then pays McDonalds a certain percentage of sales plus a monthly rent.
3. The franchisor provides its franchisees with a system for doing business.
*Changes in the Retail Environment
New retail forms and combinations
Competition between store-based and non-store-based retailing
Growth of giant retailers
Decline of middle market retailers
Growing investment in technology
Global profile of major retailers
*Retailers Marketing Decisions
Target market
Product assortment
Store atmosphere
Store activities
Store experiences

*Retailer Services Mix

Prepurchase services
Postpurchase services


Ancillary services

Retailers must decide on the services mix to offer customers. Prepurchase services include accepting telephone and mail orders,
advertising, window and interior display, fitting rooms, shopping hours, fashion shows, and trade-ins. Postpurchase services
include shipping and delivery, gift wrapping, adjustments and returns, alterations and tailoring, installations, and engraving.
Ancillary services include general information, check cashing, parking, restaurants, repairs, interior decorating, credit, rest
rooms, and baby-attendant service.
*Store Atmosphere and Experiences
Atmosphere is another element in the store arsenal. Every store has a look, and a physical layout that makes it hard or easy to
move around. some retailers of experiential products are creating in-store entertainment to attract customers who want fun and
excitement. REI, seller of outdoor gear and clothing products, allows consumers to test climbing equipment on 25-foot or even
65-foot walls in the store and to try Gore-Tex raincoats under a simulated rain shower.
*Tips for Increasing Sales in Retail Space
Keep shoppers in the store
Honor the transition zone
Dont make them hunt
Make merchandise available to the reach and touch
Note that men do not ask questions
Remember women need space
Make checkout easy
*Location Decision (anchor stores are typical)
Central business districts
Regional shopping centers
Community shopping centers
Shopping strips
Location within a larger store
The three keys to retail success are often said to be location, location, and location. Department store chains, oil companies,
and fast-food franchisers exercise great care in selecting regions of the country in which to open outlets, then particular cities,
and then particular sites. Retailers can place their stores in the following locations:
Central business districts are the oldest and most heavily trafficked city areas, often known as downtown. Regional shopping
centers are large suburban malls containing 40 to 200 stores, typically featuring one or two nationally known anchor stores,
such as Macys or Lord & Taylor or a combination of big-box stores such as PETCO, Payless Shoes, Borders, or Bed Bath &
Beyond, and a great number of smaller stores, many under franchise operation. Community shopping centers are smaller malls
with one anchor store and 20 to 40 smaller stores. Shopping strips are a cluster of stores, usually in one long building, serving a
neighborhoods needs for groceries, hardware, laundry, shoe repair, and dry cleaning. A location within a larger store may be
used by certain well-known retailers like Starbucks to locate new, smaller units as concession space within larger stores or
operations, such as airports, schools, or department stores. Stand-alone stores are used by some retailers such as Kohls and
JCPenney to avoid malls and shopping centers.
*Private Label Brands
Private labels are ubiquitous
Consumer accepts private labels
Private-label buyers come from all socioeconomic strata
Private labels are not a recessionary phenomenon
Consumer loyalty shifts from manufacturers to retailers
A private label brand (also called a reseller, store, house, or distributor brand) is a brand that retailers and wholesalers develop.
Benetton, The Body Shop, and Marks & Spencer carry mostly own-brand merchandise.


For many manufacturers, retailers are both collaborators and competitors. According to the Private Label Manufacturers
Association, store brands now account for one of every four items sold in U.S. supermarkets, drug chains, and mass
*Wholesaling Functions (2-4%)
Selling and promoting
Buying and assortment building
Bulk breaking
Risk bearing
Market information
Management services and counseling
In general, wholesalers are more efficient in performing one or more of these functions. Wholesalers sales forces help
manufacturers reach many small business customers at a relatively low cost. Wholesalers are able to select items and build the
assortments their customers need, saving them considerable work. Wholesalers achieve savings for their customers by buying
large carload lots and breaking the bulk into smaller units. Wholesalers hold inventories, thereby reducing inventory costs and
risks to suppliers and customers. Wholesalers can often provide quicker delivery to buyers because they are closer to the
buyers. Wholesalers finance customers by granting credit, and finance suppliers by ordering early and paying bills on time.
Wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence. Wholesalers
supply information to suppliers and customers regarding competitors activities, new products, price developments, and so on.
Wholesalers often help retailers improve their operations by training sales clerks, helping with store layouts and displays, and
setting up accounting and inventory-control systems.
Major Wholesaler Types
Brokers and agents
Merchant wholesalers are independently owned businesses that take title to the merchandise they handle. They are full-service
and limited-service jobbers, distributors, mill supply houses.
Full-service wholesalers carry stock, maintain a sales force, offer credit, and make deliveries. Wholesale merchants sell
primarily to retailers: Some carry several merchandise lines, some carry one or two lines, others carry only part of a line.
Industrial distributors sell to manufacturers and also provide services such as credit and delivery. Limited-service wholesalers
are cash and carry wholesalers who sell a limited line of fast-moving goods to small retailers for cash. Truck wholesalers sell
and deliver a limited line of semiperishable goods to supermarkets, grocery stores, hospitals, restaurants, hotels. Drop shippers
serve bulk industries such as coal, lumber, heavy equipment. They assume title and risk from the time an order is accepted to its
delivery. Rack jobbers serve grocery retailers in nonfood items. Delivery people set up displays, price goods, keep inventory
records; they retain title to goods and bill retailers only for goods sold to the end of the year. Producers cooperatives assemble
farm produce to sell in local markets. Mail-order wholesalers send catalogs to retail, industrial, and institutional customers;
orders are filled and sent by mail, rail, plane, or truck. Brokers and agents facilitate buying and selling, on commission of 2
percent to 6 percent of the selling price; limited functions; generally specialize by product line or customer type. Specialized
wholesalers include agricultural assemblers, petroleum bulk plants and terminals, and auction companies.
Supply Chain Management starts before physical distribution and means strategically procuring the right inputs (raw
materials, components, and capital equipment); converting them efficiently into finished products; and dispatching them to the
final destinations.


Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points) and transportation carriers that
will deliver the goods to final destinations in the desired time or at the lowest total cost. Physical distribution has now been
expanded into the broader concept of supply chain management (SCM).
Market Logistics Planning
Market logistics includes planning the infrastructure to meet demand, then implementing and controlling the physical flows of
materials and final goods from points of origin to points of use, to meet customer requirements at a profit. Market logistics
planning has four steps:
1. Deciding on the companys value proposition to its customers.
2. Selecting the best channel design and network strategy for reaching the customers.
3. Developing operational excellence in sales forecasting, warehouse management, transportation management, and
materials management.
4. Implementing the solution with the best information systems, equipment, policies, and procedures.
An integrated logistics system (ILS) includes materials management, material flow systems, and physical distribution, aided
by information technology.
Market Logistics
Sales forecasting
Distribution scheduling
Production plans
Finished-goods inventory decisions
In-plant warehousing
Shipping-room processing
Outbound transportation
Field warehousing
Customer delivery and servicing
The first is sales forecasting, on the basis of which the company schedules distribution, production, and inventory levels.
Production plans indicate the materials the purchasing department must order. These materials arrive through inbound
transportation, enter the receiving area, and are stored in raw-material inventory. Raw materials are converted into finished
goods. Finished-goods inventory is the link between customer orders and manufacturing activity. Customers orders draw down
the finished-goods inventory level, and manufacturing activity builds it up. Finished goods flow off the assembly line and pass
through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and customer
delivery and servicing.
The firm must make four major decisions about its market logistics: (1) How should we handle orders (order processing)? (2)
Where should we locate our stock (warehousing)? (3) How much stock should we hold (inventory)? and (4) How should we
ship goods (transportation)?
Figure 16.1 Determining Optimal Order Quantity


Order-processing costs must be compared with inventory-carrying costs. The larger the average stock carried, the higher the
inventory-carrying costs. These carrying costs include storage charges, cost of capital, taxes and insurance, and depreciation
and obsolescence. Carrying costs might run as high as 30 percent of inventory value. This means that marketing managers who
want their companies to carry larger inventories need to show that the larger inventories would produce incremental gross
profits to exceed incremental carrying costs. We can determine the optimal order quantity by observing how order-processing
costs and inventory- carrying costs sum up at different order levels. Figure 16.1 shows that the order-processing cost per unit
decreases with the number of units ordered because the order costs are spread over more units. Inventory-carrying charges per
unit increase with the number of units ordered, because each unit remains longer in inventory. We sum the two cost curves
vertically into a total-cost curve and project the lowest point of the total-cost curve on the horizontal axis to find the optimal
order quantity Q*
Transportation Factors
Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive,
all of which affect customer satisfaction. In shipping goods to its warehouses, dealers, and customers, the company can choose
rail, air, truck, waterway, or pipeline. Shippers consider such criteria as speed, frequency, dependability, capability, availability,
traceability, and cost. For speed, air, rail, and truck are the prime contenders. If the goal is low cost, then the choice is water or
pipeline. Shippers are increasingly combining two or more transportation modes, thanks to containerization. Containerization
consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback
describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Each
coordinated mode offers specific advantages. For example, piggyback is cheaper than trucking alone yet provides flexibility
and convenience. Shippers can choose private, contract, or common carriers. If the shipper owns its own truck or air fleet, it
becomes a private carrier. A contract carrier is an independent organization selling transportation services to others on a contract
basis. A common carrier provides services between predetermined points on a scheduled basis and is available to all shippers at
standard rates.
Chapter 17: Designing and Integrating Marketing Communications
Marketing Communications are the means by which firms attempt to inform, persuade, and remind consumersdirectly or
indirectlyabout the products and brands they sell. In a sense, marketing communications represent the voice of the company
and its brands; they are a means by which the firm can establish a dialogue and build relationships with consumers. Ocean
Sprayan agricultural cooperative of cranberry growershas used a variety of communication vehicles to turn its sales
fortunes around.
Facing stiff competition, a number of adverse consumer trends, and nearly a decade of declining sales, Ocean Spray COO Ken
Romanzi and Arnold Worldwide decided to reintroduce the cranberry to America as the surprisingly versatile little fruit that
supplies modern-day benefits, through a true 360-degree campaign that used all facets of marketing communications to reach
consumers in a variety of settings. The intent was to support the full range of productscranberry sauce, fruit juices, and dried
cranberries in different formsand leverage the fact that the brand was born in the cranberry bogs and remained there still.
*Modes of Marketing Communications


Sales promotion
Events and experiences
Public relations and publicity
Direct marketing
Interactive marketing
Word-of-mouth marketing
Personal selling

*Table 17.1 Communication Platforms

Print and broadcast ads
Packaging inserts
Motion pictures
Brochures and booklets
POP displays
Sales Promotion
Contests, games, sweepstakes
Trade shows, exhibits
Continuity programs
Events/ Experiences
Factory tours
Company museums
Street activities
Direct Marketing
Electronic shopping
TV shopping
Fax mail
Voice mail
*Figure 17.1 Elements in the Communications Process


Marketers should understand the fundamental elements of effective communications. Two models are useful: a macromodel and
a micromodel. Figure 17.1 shows a macromodel with nine key factors in effective communication. Two represent the major
parties sender and receiver. Two represent the major toolsmessage and media. Four represent major communication
functionsencoding, decoding, response, and feedback. The last element in the system is noise, random and competing
messages that may interfere with the intended communication.
Senders must know what audiences they want to reach and what responses they want to get. They must encode their messages
so the target audience can decode them. They must transmit the message through media that reach the target audience and
develop feedback channels to monitor the responses. The more the senders field of experience overlaps that of the receiver, the
more effective the message is likely to be.
Figure 17.2 Micromodels of Communications

Micromodels of marketing communications concentrate on consumers specific responses to communications. Figure 17.2
summarizes four classic response hierarchy models. All these models assume the buyer passes through cognitive, affective, and
behavioral stages, in that order. This learn-feel-do sequence is appropriate when the audience has high involvement with a
product category perceived to have high differentiation, such as an automobile or house. An alternative sequence, do-feellearn, is relevant when the audience has high involvement but perceives little or no differentiation within the product category,
such as an airline ticket or personal computer. A third sequence, learn-do-feel, is relevant when the audience has low
involvement and perceives little differentiation, such as with salt or batteries. By choosing the right sequence, the marketer can
do a better job of planning communications.


*An Ideal Ad Campaign

To increase the odds for a successful marketing communications campaign, marketers must attempt to increase the likelihood
that each step occurs. For example, the ideal ad campaign would ensure that:
1. The right consumer is exposed to the right message at the right place and at the right time.
2. The ad causes the consumer to pay attention but does not distract from the intended message.
3. The ad properly reflects the consumers level of understanding of and behaviors with the product and the brand.
4. The ad correctly positions the brand in terms of desirable and deliverable points-of-difference and points-of-parity.
5. The ad motivates consumers to consider purchase of the brand, and
6. The ad creates strong brand associations with all these stored communications effects so they can have an impact when
consumers are considering making a purchase.
*Steps in Developing Effective Communications (Return on Advertising Investment)

Identify target audience

Determine objectives
Design communications
Select channels
Establish budget
Decide on media mix
Measure results/manage IMC

Communications Objectives
Category need (to solve a customer problem)
Brand awareness (recall with details)
Brand attitude (+ve to meet current need)
Purchase intention (take action)
There are four key communications objectives identified in this slide. We may try to establish a category need which means
establishing a product or service category as necessary to remove or satisfy a perceived discrepancy between a current
motivational state and a desired emotional state.
We may try to build brand awareness such that the consumers ability to recognize or recall the brand within the category, in
sufficient detail to make a purchase. We may focus on brand attitude to help consumers evaluate the brands perceived ability to
meet a currently relevant need. We may focus on brand purchase intention to move consumers to decide to purchase the brand
or take purchase-related action.
Designing the Communications
Message strategy (what to say)
Creative strategy (how to say)
Message source (who to say)
Formulating the communications to achieve the desired response requires solving three problems: what to say (message
strategy), how to say it (creative strategy), and who should say it (message source).The vision of GEs Smart Grid program is to
fundamentally overhaul the United States power grid, making it more efficient and sustainable and able also to deliver
renewable-source energy such as wind and solar. An integrated campaign of print, TV, and online ads and an online augmentedreality demo was designed to increase understanding and support of the Smart Grid and GEs leadership in solving
technological problems. In its 2009 Super Bowl launch TV spot, the famous scarecrow character from The Wizard of Oz was
shown bouncing along the top of a transmission tower singing, If I Only Had a Brain. A narrator voiced over the key
communication message, Smart Grid makes the way we distribute electricity more efficient simply by making it more
intelligent. One online ad used a flock of birds on electrical wires chirping and flapping their wings in synchronized rhythm to
Rossinis Barber of Seville. Another showed power lines becoming banjo strings for electrical pylons to play O Susannah.
After drawing the audience in, the ads lay out the basic intent of the Smart Grid with links to more information. The
augmented-reality GE microsite PlugIntoTheSmartGrid.com allowed users to create a digital hologram of Smart Grid
technology using computer peripherals and 3D graphics.


Message Strategy
In determining message strategy, management searches for appeals, themes, or ideas that will tie in to the brand positioning and
help establish points-of-parity or points-of-difference. Some of these may be related directly to product or service performance
(the quality, economy, or value of the brand), whereas others may relate to more extrinsic considerations (the brand as being
contemporary, popular, or traditional). Buyers are thought to expect four types of reward from a product: rational, sensory,
social, or ego satisfaction. Buyers might visualize these rewards from results -of -use experience, product-in-use experience, or
incidental-to-use experience. Crossing the four types of rewards with the three types of experience generates 12 types of
messages. For example, the appeal gets clothes cleaner is a rational-reward promise following results-of-use experience. The
phrase real beer taste in a great light beer is a sensory-reward promise connected with product-in-use experience.
Creative Strategy
Informational and transformational appeals
Communications effectiveness depends on how a message is being expressed, as well as on its content. If a communication is
ineffective, it may mean the wrong message was used, or the right one was poorly expressed. Creative strategies are the way
marketers translate their messages into a specific communication. We can broadly classify them as either informational or
transformational appeals. An informational appeal elaborates on product or service attributes or benefits. Examples in
advertising are problem solution ads (Excedrin stops the toughest headache pain), product demonstration ads (Thompson Water
Seal can withstand intense rain, snow, and heat), product comparison ads (DIRECTV offers better HD options than cable or
other satellite operators), and testimonials from unknown or celebrity endorsers (NBA phenomenon LeBron James pitching
Nike, Sprite, and McDonalds). Informational appeals assume strictly rational processing of the communication on the
consumers part. A transformational appeal elaborates on a nonproduct-related benefit or image. It might depict what kind of
person uses a brand (VW advertised to active, youthful people with its famed Drivers Wanted campaign) or what kind of
experience results from use (Pringles advertised Once You Pop, the Fun Dont Stop for years). Transformational appeals
often attempt to stir up emotions that will motivate purchase.
Positive and Negative Appeals
Communicators use negative appeals such as fear, guilt, and shame to get people to do things (brush their teeth, have an annual
health checkup) or stop doing things (smoking, abusing alcohol, overeating). Fear appeals work best when they are not too
strong, when source credibility is high, and when the communication promises, in a believable and efficient way, to relieve the
fear it arouses. Messages are most persuasive when moderately discrepant with audience beliefs. Communicators also use
positive emotional appeals such as humor, love, pride, and joy. Motivational or borrowed interest devicessuch as the
presence of cute babies, frisky puppies, popular music, or provocative sex appealsare often employed to attract attention and
raise involvement with an ad. These techniques are thought necessary in the tough new media environment characterized by
low-involvement consumer processing and competing ad and programming clutter.
Burger King told people that the Whopper was no longer on the menu as a scarcity appeal.
Message Source
Messages delivered by attractive or popular sources can achieve higher attention and recall, which is why advertisers often use
celebrities as spokespeople. Celebrities are likely to be effective when they are credible or personify a key product attribute.
William Shatner is the spokesperson for Priceline.com.
What is important is the spokespersons credibility. The three most often identified sources of credibility are expertise,
trustworthiness, and likability. Expertise is the specialized knowledge the communicator possesses to back the claim.
Trustworthiness describes how objective and honest the source is perceived to be. Friends are trusted more than strangers or
salespeople, and people who are not paid to endorse a product are viewed as more trustworthy than people who are paid.
Likability describes the sources attractiveness. Qualities such as candor, humor, and naturalness make a source more likable.
The most highly credible source would score high on all three dimensions expertise, trustworthiness, and likability.

Select Communication Channels

Selecting an efficient means to carry the message becomes more difficult as channels of communication become more
fragmented and cluttered. Communications channels may be personal and nonpersonal. Within each are many subchannels.
Personal communications channels let two or more persons communicate face-to-face or person-to-audience through a phone,


surface mail, or e-mail. They derive their effectiveness from individualized presentation and feedback and include direct and
interactive marketing, word-of-mouth marketing, and personal selling.
We can draw a further distinction between advocate, expert, and social communications channels. Advocate channels consist of
company salespeople contacting buyers in the target market. Expert channels consist of independent experts making statements
to target buyers. Social channels consist of neighbors, friends, family members, and associates talking to target buyers.
Nonpersonal channels are communications directed to more than one person and include advertising, sales promotions, events
and experiences, and public relations.
*Establish the Budget
Competitive parity
One of the most difficult marketing decisions is determining how much to spend on marketing communications. John
Wanamaker, the department store magnate, once said, I know that half of my advertising is wasted, but I dont know which
half. There are four common methods for setting budgets: the affordable method, the percentage-of-sales method, the
competitive- parity method, and the objective-and-task method.
Some companies set the communication budget at what they think the company can afford. The affordable method completely
ignores the role of promotion as an investment and the immediate impact of promotion on sales volume. Some companies set
communication expenditures at a specified percentage of current or anticipated sales or of the sales price. Some companies set
their communication budget to achieve share-of-voice parity with competitors. The objective-and-task method calls upon
marketers to develop communication budgets by defining specific objectives, determining the tasks that must be performed to
achieve these objectives, and estimating the costs of performing them. The sum of these costs is the proposed communication
Objective-and-Task Method
Establish the market share goal.
Determine the percentage that should be reached.
Determine the percentage of aware prospects that should be persuaded to try the brand.
Determine the number of advertising impressions per 1% trial rate.
Determine the number of gross rating points that would have to be purchased.
Determine the necessary advertising budget on the basis of the average cost of buying a GRP.
Heres an example of using the Objective and Task Method. Suppose Dr. Pepper Snapple Group wants to introduce a new
natural energy drink, called Sunburst, for the casual athlete. Its objectives might be as follows:
The company estimates 50 million potential users and sets a target of attracting 8 percent of the marketthat is, 4 million users.
The advertiser hopes to reach 80 percent (40 million prospects) with its advertising message.
The advertiser would be pleased if 25 percent of aware prospects (10 million) tried Sunburst. It estimates that 40 percent of all
triers, or 4 million people, will become loyal users.
The advertiser estimates that 40 advertising impressions (exposures) for every 1 percent of the population will bring about a 25
percent trial rate.
A gross rating point is one exposure to 1 percent of the target population. Because the company wants to achieve 40 exposures
to 80 percent of the population, it will want to buy 3,200 gross rating points.
To expose 1 percent of the target population to one impression costs an
average of $3,277. Therefore, 3,200 gross rating points will cost $10,486,400 (= $3,277 3,200) in the introductory year.

Characteristics of the Mix

Amplified expressiveness


Sales Promotion
Advertising permits the seller to repeat a message many times. It also allows the buyer to receive and compare the messages of
various competitors. Large-scale advertising says something positive about the sellers size, power, and success. Advertising
provides opportunities for dramatizing the company and its products through the artful use of print, sound, and color. The
advertiser can choose the aspects of the brand and product on which to focus communications.
Companies use sales promotion toolscoupons, contests, premiums, and the liketo draw a stronger and quicker buyer
response, including short-run effects such as highlighting product offers and boosting sagging sales. Sales promotion tools offer
three distinctive benefits: They draw attention and may lead the product. They incorporate some concession, inducement, or
contribution that gives value to the consumer. They include a distinct invitation to engage in the transaction now.
Public Relations and Publicity
High credibility
Ability to catch buyers off guard
Events and Experiences
Marketers tend to underuse public relations, yet a well-thought-out program coordinated with the other communications-mix
elements can be extremely effective, especially if a company needs to challenge consumers misconceptions. The appeal of
public relations and publicity is based on three distinctive qualities: high credibility, ability to reach hard-to-find buyers, and
There are many advantages to events and experiences as long as they have the following characteristics. The events should be
relevant, engaging, and include a soft implicit sell rather than a direct one.
Direct Marketing
Personal Selling
Personal interaction
Word of Mouth Marketing
. Direct and interactive marketing messages share three characteristics. They can be customized, current, and interactive.
Word of mouth also takes many forms both online or offline. Three noteworthy characteristics are the level of influence,
personalization, and timeliness.
Personal selling is the most effective tool at later stages of the buying process, particularly in building up buyer preference,
conviction, and action. Personal selling has three notable qualities. It includes personal interactions. It enables relationship
cultivation. The buyer is given personal choices and encouraged to respond.


*Factors in Setting Communications Mix

Type of product market
Buyer readiness stage
Product life cycle stage

Chapter 18:
Advertising is any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor.
Among the more successful of the 30-second ads estimated to cost over $2.5 million to run during the broadcast of the 2010
Super Bowl was one for Old Spice body wash. Turning a potential negative of being an old brand into a positive of being
experienced, Old Spice has made a remarkable transformation in recent years from your fathers aftershave to a
contemporary mens fragrance brand. In a new strategic move, given their important role in the purchase process, the Super
Bowl spot targeted women as well as men. The tongue-in-cheek ad featured rugged ex-NFL football player Isaiah Mustafa as
The Man Your Man Could Smell Like. In one seamless take, Mustafa confidently strikes a variety of romantic poses while
passing from a shower in a bathroom to standing on a boat to riding a white horse. Uploaded onto YouTube and other social
networking sites, the ad was viewed over 10 million additional times. Old Spices Facebook page included a Web application
called My Perpetual Love, which featured Mustafa offering men the opportunity to be more like him by e-mailing and
tweeting their sweethearts virtual love notes. For its efforts, the ad agency behind the campaign, Wieden+Kennedy, received a
Grand Prix at the Cannes International Ad festival. A follow-up ad in June 2010 showed Mustafa in a new series of perfect
man activities including baking birthday cakes, building a home with his own hands, swan-diving into a hot tub, and, yes,
walking on water.
Figure 18.1 The Five Ms of Advertising

Advertising Objectives
Reminder (stimulate repeat)


Reinforcement (right choice)

Factors to Consider in Setting an Advertising Budget
Here are five specific factors to consider when setting the advertising budget:
1. Stage in the product life cycle. New products typically merit large advertising budgets to build awareness and to gain
consumer trial. Established brands usually are supported with lower advertising budgets, measured as a ratio to sales.
2. Market share and consumer base. High-market-share brands usually require less advertising expenditure as a percentage of
sales to maintain share. To build share by increasing market size requires larger expenditures.
3. Competition and clutter. In a market with a large number of competitors and high advertising spending, a brand must
advertise more heavily to be heard. Even simple clutter from advertisements not directly competitive to the brand creates a need
for heavier advertising.
4. Advertising frequency. The number of repetitions needed to put the brands message across to consumers has an obvious
impact on the advertising budget.
5. Product substitutability. Brands in less-differentiated or commodity-like product classes (beer, soft drinks, banks, and
airlines) require heavy advertising to establish a unique image.

Developing the Advertising Campaign

In designing and evaluating an ad campaign, marketers employ both art and science to develop the message strategy or
positioning of an adwhat the ad attempts to convey about the brandand its creative strategyhow the ad expresses the
brand claims. Advertisers go through three steps: message generation and evaluation, creative development and execution, and
social responsibility review.
Television (selecting media)
Reaches broad spectrum of consumers
Low cost per exposure
Ability to demonstrate product use
Ability to portray image and brand personality
High cost of production
High cost of placement
Lack of attention by viewers
Television is generally acknowledged as the most powerful advertising medium and reaches a broad spectrum of consumers at
low cost per exposure. TV advertising has two particularly important strengths. First, it can vividly demonstrate product
attributes and persuasively explain their corresponding consumer benefits. Second, it can dramatically portray user and usage
imagery, brand personality, and other intangibles. Because of the fleeting nature of the ad, however, and the distracting creative
elements often found in it, product-related messages and the brand itself can be overlooked. Moreover, the high volume of
nonprogramming material on television creates clutter that makes it easy for consumers to ignore or forget ads.
Print Ads
Detailed product information
Ability to communicate user imagery
Ability to segment
Passive medium
Unable to demonstrate product use


Print media offer a stark contrast to broadcast media. Because readers consume them at their own pace, magazines and
newspapers can provide detailed product information and effectively communicate user and usage imagery. At the same time,
the static nature of the visual images in print media makes dynamic presentations or demonstrations difficult, and print media
can be fairly passive. The two main print mediamagazines and newspapersshare many advantages and disadvantages.
Although newspapers are timely and pervasive, magazines are typically more effective at building user and usage imagery.
Newspapers are popular for localespecially retaileradvertising. On an average day, roughly one-half to three-quarters of
U.S. adults read a newspaper, although increasingly that is an online version. Print newspaper circulation fell almost 9 percent
in 2009. Although advertisers have some flexibility in designing and placing newspaper ads, poor reproduction quality and
short shelf life can diminish the ads impact.
Researchers studying print advertisements report that the picture, headline, and copy matter in that order. The picture must be
strong enough to draw attention. The headline must reinforce the picture and lead the person to read the copy. The copy must be
engaging and the brands name sufficiently prominent.
Print Ad Evaluation Criteria
Is the message clear at a glance?
Is the benefit in the headline?
Does the illustration support the headline?
Does the first line of the copy support or explain the headline and illustration?
Is the ad easy to read and follow?
Is the product easily identified?
Is the brand or sponsor clearly identified?
In judging the effectiveness of a print ad, in addition to considering the communication strategy (target market, communications
objectives, and message and creative strategy), marketers should be able to answer yes to the questions presented in the slide
about the ads execution.
Variables in Media Selection
Media selection is finding the most cost-effective media to deliver the desired number and type of exposures to the target
audience. What do we mean by the desired number of exposures? The advertiser seeks a specified advertising objective and
response from the target audiencefor example, a target level of product trial. This level depends on, among other things, level
of brand awareness.
Reach (R) is the number of different persons or households exposed to a particular media schedule at least once during a
specified time period
Frequency (F) is the number of times within the specified time period that an average person or household is exposed to the
Impact (I) is the qualitative value of an exposure through a given medium.
Exposure (E) is the exposure to the ad message. Exposure depends upon Reach, Frequency, and Impact.
Suppose the rate of product trial increases at a diminishing rate with the level of audience awareness, as shown in Figure 18.2
(a). If the advertiser seeks a product trial rate of T *, it will be necessary to achieve a brand awareness level of A*. The next task
is to find out how many exposures, E *, will produce a level of audience awareness of A*. The effect of exposures on audience
awareness depends on the exposures reach, frequency, and impact: Figure 18.2 (b) shows the relationship between audience
awareness and reach. Audience awareness will be greater, the higher the exposures reach, frequency, and impact. There are
important trade-offs here. Suppose the planner has an advertising budget of $1,000,000 and the cost per thousand exposures of
average quality is $5. This means 200,000,000 exposures ($1,000,000 [$5/1,000]). If the advertiser seeks an average exposure
frequency of 10, it can reach 20,000,000 people (200,000,000 10) with the given budget. But if the advertiser wants higherquality media costing $10 per thousand exposures, it will be able to reach only 10,000,000 people unless it is willing to lower
the desired exposure frequency.
Total number of exposures (E) is the reach times the average frequency; that is, E = R F, also called the gross rating points
(GRP). If a given media schedule reaches 80 percent of homes with an average exposure frequency of 3, the media schedule has
a GRP of 240 (80 3). If another media schedule has a GRP of 300, it has more weight, but we cannot tell how this weight
breaks down into reach and frequency.
Weighted number of exposures (WE) is the reach times average frequency times average impact, that is WE = R F I.
Done 2 different ways:


Choosing Among Major Media Types

Target audience and media habits
Product characteristics
Message characteristics
The media planner must know the capacity of the major advertising media types to deliver reach, frequency, and impact. The
major advertising media along with their costs, advantages, and limitations are profiled in Table 18.1. Media planners make
their choices by considering factors such as target audience media habits, product characteristics, message requirements, and
Major Media Types
Direct mail
Yellow Pages
Place Advertising
In recent years, reduced effectiveness of traditional mass media has led advertisers to increase their emphasis on alternate
advertising media. Place advertising, or out-of-home advertising, is a broad category including many creative and unexpected
forms to grab consumers attention. The rationale is that marketers are better off reaching people where they work, play, and, of
course, shop. Popular options include billboards, public spaces, product placement, and point of purchase. Billboards have been
transformed and now use colorful, digitally produced graphics, backlighting, sounds, movement, and unusualeven 3D
images. Advertisers have been increasingly placing ads in unconventional places such as on movie screens, on airplanes, and in
fitness clubs, as well as in classrooms, sports arenas, office and hotel elevators, and other public places. Billboard-type poster
ads are showing up everywhere. Transit ads on buses, subways, and commuter trainsaround for yearshave become a
valuable way to reach working women.Street furniturebus shelters, kiosks, and public areasis another fast-growing
option. Marketers pay product placement fees of $100,000 to as much as $500,000 so their products will make cameo
appearances in movies and on television.
Figure 18.3 Advertising Timing Patterns


In choosing media, the advertiser has both a macroscheduling and a microscheduling decision. The macroscheduling decision
relates to seasons and the business cycle. Suppose 70 percent of a products sales occur between June and September. The firm
can vary its advertising expenditures to follow the seasonal pattern, to oppose the seasonal pattern, or to be constant throughout
the year. The microscheduling decision calls for allocating advertising expenditures within a short period to obtain maximum
impact. Suppose the firm decides to buy 30 radio spots in the month of September. Figure 18.3 shows several possible patterns.
The left side shows that advertising messages for the month can be concentrated (burst advertising), dispersed continuously
throughout the month, or dispersed intermittently. The top side shows that the advertising messages can be beamed with a level,
rising, falling, or alternating frequency. The chosen pattern should meet the communications objectives set in relationship to the
nature of the product, target customers, distribution channels, and other marketing factors. The timing pattern should consider
three factors. Buyer turnover expresses the rate at which new buyers enter the market; the higher this rate, the more continuous
the advertising should be. Purchase frequency is the number of times the average buyer buys the product during the period; the
higher the purchase frequency, the more continuous the advertising should be. The forgetting rate is the rate at which the buyer
forgets the brand; the higher the forgetting rate, the more continuous the advertising should be.
Media Schedule Patterns
In launching a new product, the advertiser must choose among continuity, concentration, flighting, and pulsing.
Continuity means exposures appear evenly throughout a given period. Generally, advertisers use continuous advertising in
expanding market situations, with frequently purchased items, and in tightly defined buyer categories.
Concentration calls for spending all the advertising dollars in a single period. This makes sense for products with one selling
season or related holiday.
Flighting calls for advertising during a period, followed by a period with no advertising, followed by a second period of
advertising activity. It is useful when funding is limited, the purchase cycle is relatively infrequent, or items are seasonal.
Pulsing is continuous advertising at low-weight levels, reinforced periodically by waves of heavier activity. It draws on the
strength of continuous advertising and flights to create a compromise scheduling strategy.
Measuring Sales Impact of Advertising
Share of Expenditures
Share of Voice
Share of Mind and Heart
Share of Market
Companies are generally interested in finding out whether they are overspending or underspending on advertising. One way to
answer this question is to work with the formulation shown in Figure 18.4. A companys share of advertising expenditures
produces a share of voice (proportion of company advertising of that product to all advertising of that product) that earns a
share of consumers minds and hearts and, ultimately, a share of market.
Sales promotion consists of a collection of incentive tools, mostly short term, designed to stimulate quicker or greater purchase
of particular products or services by consumers or the trade.
Sales promotion, a key ingredient in marketing campaigns, consists of a collection of incentive tools, mostly short term,
designed to stimulate quicker or greater purchase of particular products or services by consumers or the trade. Whereas
advertising offers a reason to buy, sales promotion offers an incentive. Sales promotion includes tools for consumer promotion
(samples, coupons, cash refund offers, prices off, premiums, prizes, patronage rewards, free trials, warranties, tie-in promotions,
cross-promotions, point-of-purchase displays, and demonstrations); trade promotion (prices off, advertising and display
allowances, and free goods); and business and sales force promotion (trade shows and conventions, contests for sales reps, and
specialty advertising).
Consumer-Directed Sales Promotion Tactics
Cash refund offers
Price offs
Patronage rewards


Free trials
Tie-in promotions

The promotion planner should take into account the type of market, sales promotion objectives, competitive conditions, and
each tools cost-effectiveness. The main consumer promotion tools are summarized in Table 18.3.
Samples offer of a free amount of a product or service delivered door-to-door, sent in the mail, picked up in a store, attached to
another product, or featured in an advertising offer. Coupons are certificates entitling the bearer to a stated saving on the
purchase of a specific product. Cash Refund Offers (rebates) provide a price reduction after purchase rather than at the retail
shop. Price Packs (cents-off deals) offer to consumers of savings off the regular price of a product, flagged on the label or
package. Premiums (gifts) are merchandise offered at a relatively low cost or free as an incentive to purchase a particular
product. Frequency Programs are programs providing rewards related to the consumers frequency and intensity in purchasing
the companys products or services. Prizes (contests, sweepstakes, games) are offers of the chance to win cash, trips, or
merchandise as a result of purchasing something. Patronage Awards offer values in cash or in other forms that are proportional
to patronage of a certain vendor or group of vendors. Free Trials invite prospective purchasers to try the product without cost in
the hope that they will buy.
Tie-in Promotions are two or more brands or companies team up on coupons, refunds, and contests to increase pulling power.
Trade-Directed Sales Promotion Tactics (to carry, buy more, display, push)
Price offs
Free goods
Sales contests
Trade shows
Specialty advertising
Manufacturers use a number of trade promotion tools (see Table 18.4). Manufacturers award money to the trade (1) to persuade
the retailer or wholesaler to carry the brand; (2) to persuade the retailer or wholesaler to carry more units than the normal
amount; (3) to induce retailers to promote the brand by featuring, display, and price reductions; and (4) to stimulate retailers and
their sales clerks to push the product. Price-Off (off-invoice or off-list) is a straight discount off the list price on each case
purchased during a stated time period. An allowance is an amount offered in return for the retailers agreeing to feature the
manufacturers products in some way. An advertising allowance compensates retailers for advertising the manufacturers
product. A display allowance compensates them for carrying a special product display. Free Goods offers includes extra cases
of merchandise to intermediaries who buy a certain quantity or who feature a certain flavor or size. Trade Shows and
Conventions are industry associations organize annual trade shows and conventions. A sales contest aims at inducing the sales
force or dealers to increase their sales results over a stated period, with prizes (money, trips, gifts, or points) going to those who
succeed. Specialty advertising consists of useful, low-cost items bearing the companys name and address, and sometimes an
advertising message that salespeople give to prospects and customers.
Using Sales Promotions
Establish objectives
Select tools
Develop program
Implement and control
Evaluate results
Daily encounters with brands may also affect consumers brand attitudes and beliefs. Atmospheres are packaged
environments that create or reinforce leanings toward product purchase. Law offices decorated with Oriental rugs and oak
furniture communicate stability and success. A five-star hotel will use elegant chandeliers, marble columns, and other
tangible signs of luxury.
Many firms are creating their own events and experiences to create consumer and media interest and involvement. To promote
its new GE Profile Frontload Washer and Dryer with SmartDispense Technologydesigned to optimize the amount of
detergent used in any one washGE used traditional online and mass media. To create even more buzz, the firm hung 800 feet
of jeans and shirts on a massive clothesline in Times Square to represent the six months worth of washing the new machines


could typically handle before needing more detergent. On one of the traffic islands were 20-foot-high inflatable versions of the
new washer/dryer.
Why Sponsor Events?

To identify with a particular target market or life style

To increase brand awareness
To create or reinforce consumer perceptions of key brand image associations
To enhance corporate image
To create experiences and evoke feelings
To express commitment to community
To entertain key clients or reward employees
To permit merchandising or promotional opportunities

Using Sponsored Events

Choose events
Design programs
Measure effectiveness
Making sponsorships successful requires choosing the appropriate events, designing the optimal sponsorship program, and
measuring the effects of sponsorship. Many marketers believe the marketing program accompanying an event sponsorship
ultimately determines its success. At least two to three times the amount of the sponsorship expenditure should be spent on
related marketing activities. Event creation is a particularly important skill in publicizing fund-raising drives for nonprofit
organizations. Fund-raisers have developed a large repertoire of special events, including anniversary celebrations, art exhibits,
auctions, benefit evenings, book sales, and walkathons. More firms are now using their names to sponsor arenas, stadiums, and
other venues that hold events.
Public Relations Functions
A public is any group that has an actual or potential interest in or impact on a companys ability to achieve its objectives. Public
relations (PR) includes a variety of programs to promote or protect a companys image or individual products. The best PR
departments counsel top management to adopt positive programs and eliminate questionable practices so negative publicity
doesnt arise in the first place. They perform the following five functions:
1. Press relationsPresenting news and information about the organization in the most positive light.
2. Product publicitySponsoring efforts to publicize specific products.
3. Corporate communicationsPromoting understanding of the organization through internal and external communications.
4. LobbyingDealing with legislators and government officials to promote or defeat legislation and regulation.
5. CounselingAdvising management about public issues, and company positions and image during good times and bad.
Tasks Aided by Public Relations
Many companies are turning to marketing public relations (MPR) to support corporate or product promotion and image making.
MPR, like financial PR and community PR, serves a special constituency, the marketing department.
The old name for MPR was publicity, the task of securing editorial spaceas opposed to paid spacein print and broadcast
media to promote or hype a product, service, idea, place, person, or organization. MPR goes beyond simple publicity and
plays an important role in the following tasks:
Launching new products.
Repositioning a mature product.
Building interest in a product category.
Influencing specific target groups.
Building the corporate image in a way that reflects favorably on its products.
Major Tools in Marketing PR


Public Service Activities
Identity Media

These are the major tools used by public relations.

Companies rely extensively on published materials to reach and influence their target markets. These include annual reports,
brochures, articles, company newsletters and magazines, and audiovisual materials. Companies can draw attention to new
products or other company activities by arranging and publicizing special events such as news conferences, seminars, outings,
trade shows, exhibits, contests and competitions, and anniversaries that will reach the target publics. Companies can promote
their brands and corporate name by sponsoring and publicizing sports and cultural events and highly regarded causes. One of
the major tasks of PR professionals is to find or create favorable news about the company, its products, and its people and to get
the media to accept press releases and attend press conferences. Increasingly, company executives must field questions from the
media or give talks at trade associations or sales meetings, and these appearances can build the companys image. Companies
can build goodwill by contributing money and time to good causes. Companies need a visual identity that the public
immediately recognizes. The visual identity is carried by company logos, stationery, brochures, signs, business forms, business
cards, buildings, uniforms, and dress codes.
Decisions in Marketing PR
Establish objectives
Choose message
Choose vehicles
Evaluate results
There are several decisions to make in planning a PR campaign as well. Dreyers is a good example of a PR campaign. Taking
advantage of the 80th anniversary of its introduction of the Rocky Road flavordesigned to cheer people up during the Great
DepressionDreyers launched a celebratory limited edition Red, White and No More Blues flavor. The ice cream combined
rich, creamy vanilla ice cream with swirls of real strawberry and blueberry. The ensuing A Taste of Recovery campaign was
designed to reinforce the feel-good aspects of the brand. A Monster.com-posted contest asked contestants to submit videos
explaining a personal dream they would fulfill if they earned $100,000 for scooping ice cream. The contest drew over 85,000
online visits and more than 14,000 entries. A media blitz greeting the winner helped to contribute to the 46 million media
impressions the campaign enjoyed. Despite tough economic times, sales of Dreyers Slow Churned Limited Editions ice cream
increased over 25 percent from the previous year.