Marketing Research
By the end of this chapter you will be able to:
Explain the importance of different types of marketing research and its importance to
organisations
Distinguish between different types of marketing research:
Describe primary and secondary data
Identify the strengths and weaknesses of different types of marketing research
Explain the uses of different types of marketing research
Describe different types of primary research
Explain how different types of marketing research can be used in different
business situations.
In order to do this we will cover the following sections of work:
Introduction
Types of Marketing Research
Questionnaire Design
Sampling
Scope of a Marketing Research Project
Learner Guide Instructions
4.1 Introduction
Marketing Research is a method and a series of tools and techniques that help businesses make decisions that are right for their markets and their business operations both online or offline. It can help to:
identify potential traditional and e-markets
meet customer requirements
create satisfied customers through finding out customers wants and needs and
creating the right marketing mix, ie the right product, in the right place, at the right
price with the right promotion.
Marketing Research is necessary because of the uncertainty which surrounds most business decision-making and it can provide a large quantity of reliable information and so reduce risk.
Marketing Research attempts to provide answers to the ‘Who?’, ‘When?’, ‘How?’ and ‘Why?’ of consumer and industrial buying behaviour and of the business environment.
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4.2 Types of Marketing Research
There are three major types of research which can be undertaken depending upon the information you require. They are:
Exploratory Research
Descriptive Research
Causal/Predictive Research.
Exploratory Research is usually carried out to gather preliminary information which will help to determine the research objective rather than solve the problem.
Descriptive Research will help to gain a clearer understanding of the problem in more detail.
Causal/Predictive Research entails testing a “cause and effect” association in order to determine possible outcomes, for example if the price of a product was increased by x sales may decrease by y.
There are two main sources of marketing research data:
Secondary
Secondary Research
Secondary, or ‘desk’ research uses existing information, collected originally for some other purpose and now being used a second time. Typically carried out in libraries and online, it can provide large amounts of information quickly and cheaply but it is not always relevant enough to the problem under investigation to provide a complete answer and so some primary research is usually needed as well. The secondary data may be too old or not quite specific enough to meet the research needs.
Secondary research is always started first so that only the missing information has to be collected using the more expensive time-consuming primary research. Secondary research may well, however be ongoing during the whole of the investigation.
Both primary research and secondary data can be obtained from internal (inside the organisation) and external (outside the organisation) sources.
Primary Research
Primary research, also known as field research consists of obtaining information that previously did not exist. It is obtained by going out into the marketplace (the ‘field’) and carrying out some sort of investigation there. Sampling of large populations is the norm and typically some sort of questionnaire is used with the results collated and analysed statistically in order to draw conclusions from the responses. Although the results obtained from primary research will fill the information gap, the main drawbacks are expense and time taken to carry out the research.
Primary research can also be categorised further into either:
Qualitative
Qualitative
Qualitative research concerns the gathering of information which can be interpreted in a number of ways, for example people’s views and attitudes. With this type of research the goal is not to simply look at statistics. This type of research cannot be quantified in numerical terms and this is not the objective of it anyway – but to analyse opinion, beliefs and attitudes of individuals. The main qualitative research techniques used are:
Group Discussions
Focus Groups
In-Depth Interviews.
Group Discussions can produce a great deal of information, usually not statistical -more opinions and individuals’ thoughts. These are often used in the early stages of research into new product development. They are also useful if there is a problem with the way a product is being used.
A Focus Group is a selected set of people who are brought together to test and evaluate a concept or product. There is usually a facilitator who will run the group and steer them round to talking about the product in question. (Usually those taking part do not know what product they will discuss so that there can be no preconceptions). On many occasions focus groups are videoed.
In-Depth Interviews take place on a personal level – usually the interviewer and the respondent are face-to-face. Whether the interview is completely structured or allows for some flexibility depends on the nature of the research. This type of research usually gives much more qualitative information (letting the respondent give his/her opinions, etc) rather than hard quantitative data (which is best obtained through other means such as telephone/postal surveys).
Quantitative
Quantitative research on the other hand seeks to establish statistical information about the subject matter. This type of research tends to require a larger amount of research to be undertaken in order to be deemed as valid. The main research techniques include:
Observation
Experimental Research
Observation: people are either watched to observe their actions. They could be filmed by hidden researchers or else simply counted. A traffic count of this kind can be particularly useful to estimate passing trade for a shop or restaurant.
Experimental Research includes examples such as:
Mock-ups of supermarkets which can be used to assess customers’ reactions to
price or packaging changes
Before general release, advertisements can be shown in cinemas and reactions
Other tools used on consumers in experimental situations include the use of word association, sentence or story completion, cartoon titling, eye-blink test, lie detector and role playing.
A survey of the relevant population is the commonest of all methods. A representative or random sample of the population is chosen and each respondent is asked a series of questions. The results can then be analysed using a variety of statistical tests, and conclusions drawn about the whole population. The survey can be carried out by face-to-face or telephone interviewing or by posting out questionnaires for self-completion and return by the addressee. This last method has the worst rate of response. Let’s look at each of these in a little more detail:
Face-to-Face – this has already been discussed above in the section ‘In-depth Interviews’
Telephone Surveys – used to reach a large number of respondents quickly. Can be used for a variety of research purposes including establishing market trend information, market share and customer satisfaction. However it is worth noting that telephone surveys have limitations in terms of the amount of time you can spend keeping a respondent interested, as well as ensuring you get through to the right person. Ensuring that the respondent’s answers are recorded accurately is also a concern (although there are now software packages which can help with this).
Postal Surveys – these are a lot easier to ignore than telephone surveys and response rates tend to be low – even if you do offer some kind of incentive for the respondent to send it back. The main advantage of this method is the wide coverage it can give as well as the relatively low cost compared to the other methods.
One important point to note here is that the result you obtain through marketing research is only as good as the respondents you have identified. In other words, when conducting research it is vital that you obtain the relevant information from the appropriate people or your research may not be accurate and the effect of this could be devastating.
Although the above section regarding research activities has been split into Qualitative and Quantitative techniques there is some cross-over on the use of these depending on your research objectives.
4.3 Questionnaire Design
There are three types of questionnaire which can be used to find information.
The Mail Questionnaire
The questionnaires are sent through the post to selected individuals who complete and return them (but make sure you provide a stamped addressed envelope!).
The Interview Questionnaire
The questionnaire filled in by a trained interviewer, who uses the verbal responses of the respondent to complete the questionnaire.
The Distributed Questionnaire
The questionnaire is distributed to a pre-selected sample of people and collected after completion at a prearranged time.
The questionnaire is a quick, cheap and reasonably effective means of collecting statistical information or of gauging attitudes or opinions.
Each questionnaire should be designed specifically for the topic being investigated and should also satisfy five general functions in order to be effective.
In order to maintain the respondent’s (the person answering the questionnaire)
cooperation and involvement, the questionnaire must not be boring or exhausting.
This can be achieved by restricting the length and sequencing so that questions
which are mundane or need greater thought are spaced between more interesting
Make sure that the questions are clear and easily understood. Avoid ambiguity,
unnecessary complexity and vague or abstract concepts
Help the respondent with his/her answers: allow boxes for yes/no type answers or
multiple choice answers.
Make the questionnaire simple – use a clear layout, large legible type and as
simple a structure as possible.
Make sure that you can tally the responses easily.
The Form of the Questionnaire
Here are some general rules to follow when compiling a questionnaire:
Always use an introductory paragraph explaining the purpose of the
questionnaire and asking for the co-operation of the respondent. Not only is
it polite, it is also useful as you can give instructions directing the respondent
on how to answer. For example:
Tick the appropriate box
Delete as applicable
Please answer in the space provided.
Make the questionnaire as short as possible, otherwise readers will lose
interest and answer the later questions carelessly or miss them out
The questions should not deal with too much information, or they will confuse
the reader.
Avoid leading questions – questions which don’t give genuine freedom in
answering such as :(‘Do you agree that…?’ might suggest that the answer is
‘yes’)
Where possible, questions should not be open-ended – provide a series of
possible answers or it will be difficult to quantify the responses.
Always phrase questions in language familiar to the reader – avoid technical
language or jargon.
Easily answered questions, non-controversial questions should be placed
An example would be:
‘Do you have a cat?’
Questions like this relax the respondent. More personal and possibly embarrassing questions can be answered later. Follow-on questions must always be placed after the original questions.
Always try to sequence the questions in a logical order to avoid confusion.
Pre-Testing the Questionnaire
It is useful to pre-test the questionnaire on a colleague to see:
how effective it is
if there are any ambiguous/confusing questions
All of the above points should be carefully considered when compiling a questionnaire which you intend to be effective and reliable.
Types of Question
The type of question you decide to use in a questionnaire depends on the type of information you wish to find out. You don’t need to use the same type of question throughout the questionnaire.
The three main types of question are as follows:
Open-Ended Questions
This type of question allows the respondents to give their own opinions in their words. A blank space should be left for suitable answers.
eg What is your opinion of the present government?
Two-Ended Questions
This type of question allows the respondents to make a choice between two extremes such as yes/no, good/bad etc.
eg Do you drink coffee? Yes/no
Multiple Choice Questions
This type of question supplies all possible answers in summarised form and allows the respondent to choose from these.
eg How often do you walk your dog?
Once a day
Twice a day
More than twice a day
Never
Don’t have a dog.
Pros and Cons of Types of Question
Open-ended questions may take more time to answer and compile. There will also be problems in tallying responses.
With two-ended questions respondents must be able to fit their answer into one choice or the other. It is therefore vital that the choices given are researched and well thought through.
With multiple choice questions you must ensure that all possible responses are covered and that the meaning is clear, covering a range of extremes.
Types of Answer
The type of question chosen will govern the type of answer required. However it is useful to guide the respondent by supplying suitable instructions. For example:
Open-ended questions should have sufficient space for respondents to answer
and give instructions, such as ‘please answer here’.
For two-ended and multiple choice questions, supply instructions such as:
Delete as applicable Please tick the box Please cross the box Circle the correct response Underline the correct response
The task of tallying the responses will be made simpler and speedier if the questions are answered in a uniform manner.
Preparation of Questionnaires
Before even compiling a questionnaire you must decide on the topic that you need answers for. For example it could be ‘who are my customers and how often will they need my product/service.’ Once you have decided on the topic, the next step is to decide on the areas you want to investigate and the information you want to find out.
Having decided on the type of questions, draft specific questions on these areas, bearing in mind that some areas might require more than one question.
Revise and redraft the questions after reading the questionnaire checklist below! Draft an introductory paragraph and instructions on how to fill the questionnaire. Read over and then rewrite/type neatly.
Checklist for Questionnaires
Is each question clear, brief and unambiguous?
Does it use any technical or long words which may be unfamiliar to some
respondents?
Is each question concerned with only one factor?
Is the respondent provided with a suitable choice of answers where necessary?
Does the question ask too much of the respondent? ie ask for
calculations/recall/lengthy writing?
Are all the possible answers allowed for?
Is the respondent given an explanation of the purposes of the questionnaire?
Is the respondent given instructions on how to fill in the questionnaire?
Is the question a leading question?
Is each question relevant to the purpose of the survey?
4.4 Sampling
As you will be aware, when conducting marketing research it would be impossible to research the needs and wants of every individual consumer. However, it is vital that the research covers a representative sample of the population in the target market being researched.
Now you have completed Activity 24 we will now look at how researchers can be sure that the number of respondents questioned is actually indicative of the whole of that marketplace?
Brassington and Pettit, Principles of Marketing, 3rd Edition shows stages in the sampling process which are based on those from Tull and Hawkins (1990).
The main stages are:
Defining the population
Develop the sample frame
Specify the sampling unit
Select the sampling method
Determine the sample size.
Defining the Population
The population must be defined in terms of the target market. If this is a consumer market being researched, the marketer may use variables such as geographic location, age or even lifestyle to define the population needing researched. If a business market is being researched then the variables looked at may be based on organisation size and characteristics as well as location and markets served.
Develop the Sample Frame
A ‘sample frame’ is a list from which names/organisations can be taken to form the group being researched. It could be from an organisation’s internal database of customers, or from a list bought from a specialised directory company.
Specify the Sampling Unit
The ‘sampling unit’ is the specific person that marketers want the research response to come from. This stage is easier to determine in consumer markets than in organisational markets as organisations have more than one person involved in the decision-making process and the marketer must ensure that he/she reaches the right person.
Select the Sampling Method
Exactly which individuals or organisations will be researched? There are two ways to determine this:
Probability sampling
Non-probability sampling.
Probability Sampling can also be called random sampling. It means that each member of the group being researched has an equal chance of being picked. For example, a retailer may wish to research customers and so
decides to approach every twentieth customer at the checkouts at different times of the day and week.
Non-probability Sampling is also known as non-random sampling. The two
main methods of non-random sampling are:
Judgemental Sampling: where researchers intentionally choose subjects to
be part of the research process as they are perhaps thought to give better
more informed information which will help the research process
Quota Sampling: researchers may decide that a percentage of the sample
should consist of respondents with certain characteristics. For example, if
carrying out research into working women, it may be prudent to look at how
many are full-time and how many in the sample should be part-time. It is
then decided how many of each category should take part in the research to
represent a reasonable sample size.
Determine the Sample Size
The researcher must now determine what size of sample is required. Obviously the larger the sample the more representative it may be, but there is no point in wasting resources researching a larger sample than is necessary. What it comes down to is not about the 4.5 Scope of a Marketing Research Project
A Marketing Research Project of any type will typically have several stages.
Define the problem and specify the objectives of the investigation
Initial ‘desk’ research to identify the primary research necessary
Plan the investigation, decide on the methods to be used and design and pilot the
research instruments (usually questionnaires)
Carry out the primary research and any further secondary research that is required
Collate and analyse the results of both primary and secondary research
Draw conclusions from the analysed results
Make recommendations based on the conclusions drawn
Produce the report for management.
Before commissioning any research investigation, it is important to ask three questions. The answers to these questions will help determine the shape of the project, its extent and its time-scale.
Exactly what information do I need?
How accurate does the answer have to be?
How much is the answer worth – in terms of time and money?
Typically, the more accurate an answer has to be, the more it will cost to obtain and the longer an organisation will have to wait for it.
Consumer and Industrial Marketing Research
Both Consumer and Industrial Market Research Projects use the same investigation and reporting format, carry out both primary and secondary research, use internal and external sources of information and set up routine, continuous and ad hoc research. They differ, however, in the types of investigation they carry out and in the methods they use when carrying out their investigations.
Industrial Market Research
So far the research techniques we have considered mainly relate to the consumer market place. Let’s now turn to the industrial marketplace.
Although there are many similarities between consumer and industrial market research there are also some important differences in their aims and methods.
sample size, but the risk of ‘sampling error’ that the researchers are prepared to tolerate.
A survey usually refers to a whole project or piece of work as in, ‘A survey of The UK Market for PVCu’. PVCu is a white type of plastic used specifically in the double glazing industry as a window frame. It can also be used for roofline products. Such a survey would typically contain:
a description and comparison of present products and alternatives by price and
quality
a description and comparison of present suppliers’ selling methods and service
quality
an estimation of market size by end use and geographical region an estimation of market shares held by current suppliers an assessment of users’ attitudes to present products and suppliers an assessment of future trends and technical changes conclusions and recommendations.
For an industrial survey, desk research can be a lengthy stage. A fair amount of initial background reading on the relevant technologies will be needed as the researcher will need to obtain an appreciation of the products and processes involved before starting work on the survey itself. The search for published information can involve a very wide range of possible sources. As discussed earlier, these could include the national and trade press, government publications, research institute papers, trade associations’ publications and company sales records.
Even on an international scale, an industrial market often comprises quite a manageable number of customers or potential users. It is common for a handful of companies to dominate the market and relatively rare for the number of outlets to be so large that sampling becomes necessary. Asking the right questions of the right people is vital but the method is likely to be personal interviews and telephone conversations rather than set questionnaires.
The researcher will normally carry out all phases of the survey personally although sometimes specialised technical help is needed for interviewing. Data can usually be tabulated without the use of a computer. Much of the information is qualitative and requires personal judgement on how it influences the overall findings.
There is a great emphasis on future trends, largely because of the great timescale needed to bring an industrial product to market. Forecasting techniques are used to provide anticipated market size three, five, ten or more years into the future.
Industrial market research is mainly carried out by the companies themselves, although there are some agencies which specialise in the industrial side.
Conclusion
Marketing Research has a vital role to play in the success of both traditional and e-business. Whatever medium an organisation is using to sell its products through -online or offline, it is essential to:
understand customers’ buying behaviours
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identify and keep track of all competitors
constantly review your product portfolio to ensure that it is meeting customers’
Only through marketing research can a business keep close to customers and fully understand the marketplace within which it operates so it can make informed decisions as well as identify potential new business opportunities.
Products and Services
By the end of this chapter you will be able to:
Describe the different types of product which can be the object of the marketing
process
Explain the reasons for branding and the benefits to the consumer and the
organisation
Describe the main methods of branding and the differences between generic and
branded products
Identify and explain the differences between goods and services
Identify the various types and levels of packaging
Discuss the Product Life Cycle is and the limitations of its use as a marketing tool
Explain product mix decisions:
Explain product decisions in terms of product items and product lines
Explain the importance of product positioning decisions
Explain the stages in the product life cycle
Explain the process of new product development
Explain why so many new products fail.
In order to do this we will cover the following sections of work:
Introduction
Different Levels of Product
Product Classification
Consumer Products
Industrial or Business Products
Product Range
Branding
Packaging – Product and Promotion
Product Positioning
The Product Life Cycle
New Product Development
So How do you Develop a New Product?
The Nature of Services
Characteristics of Services
Service and the 7Ps
Learner Guide Instructions
5.1 Introduction
The American Marketing Association defines a product as:
‘anything which can be offered to a market for attention, acquisition, or consumption including physical objects, services, personalities, organisations and desires, and that might satisfy a want or need.’
As you will remember from earlier on in this unit, a product can be:
Physical Objects – a tin of baked beans, aircraft engines etc
Services – hairdressing, management consultancy
Persons – pop groups, Michael Jackson
Places – holiday resorts, capital cities
Organisations – major charities such as ‘Save the Children’ and ‘OxfanY
Ideas – patents, public health messages (smoking)
And mixes of all of the above.
5.2 Different Levels of Product
Products can be broken down into different levels:
Core Product
Tangible (or Actual) Product
Augmented Product.
Core Product is what the consumer is really buying in order to solve a problem. In other words, the main reason for the product’s existence. The core benefit of buying the product could be:
Functional: For example, what is the main reason a consumer would purchase
washing up liquid? The answer is to be able to wash the dishes effectively
Such as the reason a female may buy lipstick – in order to feel good.
Tangible (Actual) Product refers to the product’s actual characteristics such as its quality, design, the colours and perhaps sizes it is available in. It also includes the brand name and the actual packaging.
Augmented Product offers added benefits and services. For example, this could be any warranties and guarantees that come with a product. They are not an essential part of the product but may enhance the overall product’s attractiveness and therefore assist in the buying process.
So it is apparent that a product is much more than just a set of features but is viewed, perhaps unconsciously, by consumers as benefits which will ultimately satisfy their needs.
Most competition tends to take place at the augmented level where many companies aim to not only satisfy but delight their customers. For example, some hotels will put chocolates on a guest’s pillow or a bowl of fruit in their room on arrival. This is lovely, however once this level of service has been experienced once, the guest will come to expect it the next time and are disappointed if it doesn’t happen. Augmented benefits soon become expected benefits. Organisations must continually explore new features and benefits in order to set themselves apart from their competitors.
5.3 Product Classification
Products can be classified by who is using them – consumer products and industrial products.
Let’s look at these in more detail.
5.4 Consumer Products
Consumer products are usually bought by consumers for personal use/consumption. Consumer products are usually classified further into:
Convenience Products: routine purchases of products bought on a regular basis,
usually with little or no thought at all. Examples include milk, bread, chocolate,
magazines and cigarettes. Consumers tend to be experienced in buying these
products and if their usual brand is not available they may well substitute it with
This type of product tends to be readily available in many outlets from
supermarkets to corner shops, petrol forecourts and vending machines
Shopping Products: consumers tend to spend quite a bit more time researching
and comparing these types of products before they actually purchase. Information
may be gained from sales assistants, friends, promotional material and of course the
Internet has many good comparison websites now too. Products which fall into this
category include furniture, holidays and electrical appliances such as hi-fi’s and
Items such as major electrical appliances appear to many consumers to
be similar in quality but different enough in price to merit comparisons. When it
comes to products such as clothes or furniture it may be that product features such
as brand or product guarantees are more important overall than the price
Speciality Products: this group of products includes luxury goods such as fine
crystal, luxury cars or watches. These products have unique characteristics and
branding which many consumers are prepared to pay a premium for as well as make
a special effort to purchase. In this situation consumers are unlikely to accept
substitute brands and products
Unsought products: these are products which consumers need to purchase in an
emergency situation. Examples include a replacement for a flat tyre or emergency
plumbing in the case of a burst pipe. It can also be used to describe products which
consumers would not normally consider without aggressive sales pitches. Examples
here include time-share properties and home improvements such as new kitchens
and double glazing.
5.5 Industrial or Business Products
These products are primarily used in business whether they be:
raw materials, or components purchased to become part of the end product
equipment and machinery used to manufacture the products themselves
the ‘products’ such as staplers, chairs, desks and other office equipment which all
contribute to the successful running of an organisation.
The buying process for these products varies greatly. Raw materials will tend to be bought on a very frequent basis and will require little thought at all. In fact there may even be an agreement with a supplier to supply on a regular basis.
In contrast, more expensive products such as industrial machinery may involve a lot more effort sourcing suppliers and comparing costs and perhaps even additional benefits such as warranties and so on.
Office supplies tend to be more routine unless for example, an organisation was having a complete refit and needed a vast number of desks or computer equipment. As this may constitute a serious outlay (in comparison with a box of pencils!) this would tend to be a more complex decision-making process with more than one person being involved in the process.
5.6 Product Range
Very few organisations today only sell one product. Most sell a range of products aimed at different segments of the marketplace. This is more commonly known as a product mix.
Product Mix
Brassington and Pettit, ‘Principles of Marketing’, 3rd Edition, defines the product mix as: ‘the total sum of all the products and variants offered by an organisation’.
Car manufacturers offer wide product mixes, producing many different models targeted at different parts of the market. Another example of an organisation with a huge product mix would be the food manufacturer Nestle. It produces a varied product mix selling items such as baby milk, confectionery and coffee.
An organisations’ product mix is dependent on the different product lines sold by a company. See the table below as a illustration:
Trademark
Category
Contac
Ecotrin
Fenbid
Panadol
Solpadeine
Abreva
Hinds
Lactacyd
Oxy
Zovirax
Citrucel
Eno
Gaviscqn
Taqamet
Turns
Committed Quitters
NiQuitin CQ/Nicoderm CQ/Nicabate
Nicorette
Horlicks
Lucozade
Ribena
Aqu afresh
Astriginsol
Binaca/Corsodyl/lodosan
Dr. Best
Macleans
Odol
Polident 5 Minute
Poligrip Ultra
Sensodyne
analgesics and respiratory tract
analgesics and respiratory tract
analgesics and respiratory tract
analgesics and respiratory tract
analgesics and respiratory tract
dermatological
dermatological
dermatological
dermatological
dermatological
gastrointestinal
gastrointestinal
gastrointestinal
gastrointestinal
gastrointestinal
nicotine replacement therapy
nicotine replacement therapy
nicotine replacement therapy
nutritional healthcare
nutritional healthcare
nutritional healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
oral healthcare
Abtei
Alluna
Cetebe
Eunova
Oscal
Scott’s Emulsion
vitamins and vitamins and vitamins and vitamins and vitamins and vitamins and
naturals naturals naturals naturals naturals naturals
Source: http://www.gsk.com/products/consumerhealthcare.isp?choice=category
As you can see from the table above, the multinational organisation GlaxoSmithKline has a varied product mix for consumer healthcare products. The product mix includes the following categories:
vitamins and naturals
oral healthcare
nutritional healthcare
nicotine replacement therapy
gastrointestinal
dermatological
analgesics and respiratory tract.
Product Line
According to Philip Kotler, Principles of Marketing 3rd European Edition, a product line is:
‘a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlet, or fall within given price ranges.’
There are many decisions that an organisation has to make when it comes to product lines. How many different product lines should it carry (and still remain profitable). To whom should each of the product lines be targeted.
As you can see from the GlaxoSmithKline table, the number of product lines equals -seven. Oral Healthcare is a product line which has product items in it. The product items are as follows:
Aquafresh
Astriginsol
Binaca/Corsodyl/lodosan
Best
Macleans
Odol
Polident 5 minute
Poligrip Ultra
So the product line length is seven. There are seven product items in the Oral Healthcare Product Line.
There are four main dimensions to an organisations’ product mix:
Length: this refers to the total number of product items the company carries (as
above)
Width: this refers to the number of different product lines the company
carries. GlasxoSmithKline carries seven different product lines:
vitamins and naturals
oral healthcare
nutritional healthcare
nicotine replacement therapy
gastrointestinal
dermatological
analgesics and respiratory tract.
Depth: this refers to the number of products in each line (number of different
versions) For example, Sensodyne toothpaste may come in different sizes, flavours and methods of delivery (tube or pump)
Consistency: this refers to how closely related the various product lines are in terms of usage, production, distribution, etc
5.7 Branding
In simple terms a brand can be defined as a name, sign or symbol or a mixture of these which is used to distinguish one product/service/organisation from another and to differentiate then from their competitors.
A product needs a name as a means of identification in the marketplace and that is the basic purpose of the brand label. The brand has been developed as a marketing tool and it now carries out several roles for the product. In particular, the brand is used as a statement of style and culture creating a character for the product that is easily identified but not easily copied.
Branding enables manufacturers to advertise the characteristics and qualities of their products and build brand loyalty. So when consumers go into a shop, they do not just buy clothes or a soft drink they purchase Gucci, Ralph Lauren, Coca Cola, Pepsi or some other favourite brand.
Types of Brand
So far when mentioning branding, the discussion has focused on the branding of manufacturers selling through retailers. Other types of branding include the following:
Family brands
Individual brands
Own brands.
Family Brands: This type of branding strategy is used when an organisation wishes to use the brand name on all the different types of products it sells. For example, Chanel has ranges of clothes, cosmetics and perfume.
Individual Brands: With individual branding, every one of the organisations main products has a separate brand name. Examples include Nestle – Nescafe coffee, Smarties and Kit Kat confectionery.
Own Brands: In recent years there has been a massive growth of own-label brands (those bearing the retailer’s name). Many supermarkets and clothing stores use own brands and now many consumers view own brands as equal to if not better than many individual brands. This has forced many owners of individual brands to respond aggressively to try and hold their market share. Many advertise the fact that they ‘Don’t make products for anyone else’.
Developing a Brand Name
When building a brand name, there are certain qualities that are desirable: A brand should:
Imply something about the product’s quality
Suggest something about the benefits of the product
Be easy to say, easily recognisable and effortlessly remembered
Stand out – be distinctive from the competition
Be able to be legally protected.
As Brassington and Pettit, ‘Principles of Marketing’, 3rd Edition state: ‘ There are four good rules for good brand naming.’ A brand needs to be:
Distinctive: stand out from competitor’s brands
Supportive: of the product’s position
Acceptable: be easily recognised
Available: legally protected.
5.8 Packaging – Product and Promotion
Packaging is sometimes called the fifth ‘P’ along with product, promotion, place and price. It is, in fact, part product, part promotion.
It is part of the product because it adds value to what it contains and because it is part of what the consumer purchases. Sometimes it is the package, which makes it possible for the consumer to use the product. Milk, ready meals, bleach, soap powder are all examples of products whose packaging helps us consume or use them more easily. Even the brand name can be considered as an asset in the mind of the consumer and so bought as part of the product.
Packaging is part promotion because it communicates to customers its brand name, its benefits, its superiority over all the other packages sitting beside it on the supermarket shelves.
The concept of packaging includes all the activities of designing and producing the container or wrapper for a product. This container or wrapper is called the package.
Packaging covers three levels of material:
The primary package is the product’s immediate container and is usually used as a
permanent container for the product. Typically, the product is used directly from its
primary package, eg bottle holding perfume
The secondary package includes all the material that protects the primary package
and is discarded when the product is about to be used, eg the cardboard box
The shipping package covers a wide range of packaging necessary for storage,
identification or transportation. The consumer does not normally see this element of
the packaging but it is an essential aspect for the ease of distribution and the safety
of the product in transport, usually called shipment, whatever means of transport is
used
Labelling is part of packaging and consists of printed information that describes the
product, appearing on or with the package.
Developing an Effective Package
Developing an effective package for a new product requires several decisions. First, there is the packaging concept. This defines what the package should basically ‘be’ or ‘do’ for the particular product. Next, decisions have to be made on every aspect of the package, its size, shape and colour and the materials it will be made from, text or ‘copy’ to be printed on it plus the size and position of the brand mark.
After the packaging is designed it must be tested in various ways.
Engineering tests ensure that the package stands up to the conditions it will meet in practice
Visual tests check that the script is legible, and the colours are visually pleasing
together
Dealer tests to ensure that the dealers find the packages attractive and easy to
handle
Consumer and Dealer tests ensuring favourable consumer response.
In the last decade the various issues of the environment and waste have assumed a much higher profile so companies must pay attention to these environmental concerns about packaging and make decisions that serve society’s interests as well as those of the immediate customer and company objectives.
Packaging and Labelling
Labelling has practical purposes, it:
identifies the product by its brand name
carries information on use/warnings
contains a list of ingredients.
The label is that part of the packaging which contains the pictures, colour and text. Labelling therefore identifies the product or brand. It might also indicate the grade of the product, describe the product and promote it.
Labels are also required by law to contain certain information but legislation is always changing so organisations must ensure that the label contains all that is legally required.
The packaging can be the only thing which distinguishes one brand and provides the reason for choosing that brand. Milk, for example, can be bought in a bottle, carton, sachet or most commonly a plastic jug-type container and it is typical that the example chosen should be of a generic product, as it is in these products that the packaging is most important as a way of distinguishing one brand from another.
Most consumer goods need to have some kind of packaging. Certainly those we buy from the supermarket do and this is because of the self-service way we shop there. If we are to pick things off shelves we need to know what we are choosing and be able to pick things up easily.
5.9 Product Positioning
Product positioning is an extremely useful tool for marketers. Once an organisation has segmented a market (split it up into groups with similar needs and wants) and identified the target market, the next step is how the product will be positioned within the marketplace.
Positioning is all about consumer ‘perception’. In other words, what the consumer thinks about the product in relation to its competitors. As you will remember from Section 5.3 -Consumer Behaviour, each individual will have a different perception of what constitutes value for money, quality and so on. However, there will be similarities too.
A marketer must ask the question ‘What is the position of this product in the mind of the consumer?’
Products and services can be mapped out on what is called a ‘positioning map’ – a marketing tool which will help marketers to compare different product’s perceptions. From this the product can be positioned to best differentiate it from competitor’s offerings.
Positioning Map
A positioning map would have two axis – one would perhaps be labelled ‘Quality’, the other ‘Value for money’. Other variables such as price or comfort could also be used.
Individual products are then mapped. Below is a simple positioning map template taken from http://www.marketingteacher.com/Lessons/lesson positioning.htm
In order to be successful in positioning, Trout and Ries’ suggest that marketers follow a six step framework, answering the following questions:
What position do you currently own?
What position do you want to own?
Whom you have to defeat to own the position you want.
Do you have the resources to do it?
Can you persist until you get there?
Are your tactics supporting the positioning objective you set?
5.10 The Product Life Cycle
In order to be successful a firm must produce a product, goods or a service, which satisfies consumer needs. The product must appeal to customers and serve the purpose for which it is intended. Most firms actually produce not just one but a range of products, many of which are related to each other.
All products have a limited time during which they can earn profits for the company and after which they prove of less and less value as they are of less and less interest to the market.
This idea that all products have a limited period of popularity in the marketplace has been developed into the well-known theory of the Product Life Cycle.
The theory goes that, just as we are born, grow up, mature and eventually become old and die, so products have a similar life cycle which contains the following six stages:
Development
Introduction Growth
Maturity
Saturation Decline
With the help of market research new products are designed. This is the most risky and expensive stage where the costs of research and technical development are incurred but no sales revenue is being earned.
Once it has been developed, the product is advertised and brought to market for sale. Profits may be low since development costs have to be recovered.
If the product is successful sales and the profit contribution will increase rapidly but competitors may well be attracted into the marketplace.
Once established in a market the sales of a product do not grow rapidly. Competition is now fierce and profits level off as a result.
In time sales stop increasing, leading to…
Eventually competition and other new products are likely to result in falling sales and profits. If this continues, the product may be withdrawn from the market.
Changing consumer tastes and expectations, developments in new technology and the introduction of new and improved products can all affect the length of the Life Cycle which clearly will not be the same for all product.
Extending the Product Life Cycle
The Product Life Cycle can be extended using methods such as encouraging more frequent use of product, finding new uses for the product, modifying the product, or increasing the product range to include associated products. However for a firm to remain successful, innovation is essential. New products must be developed which cater for changing markets as consumers’ demand new and better quality products. As sales of one product decline it must be replaced by a new one if the firm is to survive and keep ahead of its competitors.
The Product Life Cycle
Development Introduction Growth
Maturity
Saturation/Decline
The sales revenue curve shown is a generalisation. Curves for particular products may be steeper or flatter and the time scale may be longer or shorter. Today Product Life Cycles are getting shorter especially in the high technology markets.
Product Life Cycles may be extended by modifying/improving the product during its maturity and saturation phases.
Importance of the Product Life Cycle
There are three reasons that the Product Life Cycle is a useful tool to organisations:
It indicates to management the need for development of new products
It indicates to management that profits change throughout the life cycle
It indicates that products require a different strategy at each stage in the life cycle.
The Future
Obviously products must die when demand dies. Because of the pace of change in the twentieth and twenty-first centuries, many products have been overtaken by technological change and others will be overtaken in the future. Yet when products or services cover specific basic needs – a drink, a shop, a cold remedy – it is amazing how things do not change. However, no product is safe, ever, from market pressures.
The Need for New Product Development
Change in the environment is constant – as we have seen from the product life cycle, old or existing products cannot last forever and certainly not in the same form. For any organisation, there are products which have not proved successful enough and should be replaced by new ones, there are technologies which have become obsolete (such as the typewriter) and have been replaced by newer faster machines. As well as this, many factors in the external environment change over time including income levels, consumers’ age, trends, and even prices in raw materials. All of these things mean that there is a constant need for new products.
Organisations must regularly update their existing product ranges – it may be a fatal business mistake not to.
5.11 New Product Development
But how does an organisation find new products? Where does it look for them and who has the job of searching? There are techniques which can help act as a starting point for ideas and at this point all ideas should be considered – at least initially.
There are only three ways in which a company can go about developing new products. It can:
modify an existing product
copy a product from a competitor’s organisation, which has already developed it
(imitation)
develop a new innovation.
Modify an Existing Product
This involves exploring ways of changing your existing product. For example, in the soft drinks market Coca Cola now have many different varieties of the original drink including – Diet Coke, Vanilla Coke, Coke with Lemon and so on.
Develop an Imitation
As we have seen in many industries, one organisation brings out an innovation only for it to be copied by competitors. The personal stereo market was a prime example – Sony was the first to market with their Sony Walkman which was positioned at a premium price. It was immediately copied by many other organisations and undercut on price.
New Innovation
This is probably the most difficult to carry out successfully as it involves finding and meeting a need which is currently not already met in the marketplace. Examples include CD players and personal computers.
5.12 So How do you Develop a New Product?
Organisations do not end up with a portfolio of successful, profitable products by chance. They have to plan, researching the following:
Customer needs
The competition
Assessing the company’s present products and the impact on them of a new one
Determining whether any of the product portfolio should be removed from the
range or developed to provide a new product
Identifying and evaluating new product ideas
Carrying out business analysis into both the developments of existing products and
the ideas for completely new products
Product test
Recommendations in respect of quality standards, design details
Schedule test market, timing and scale of introduction
Evaluate, review and make changes or continue as appropriate into
However the new idea Is generated , to be successful a new product must have a significant price or performance advantage, be significantly different from existing brands or be first in the market place with an innovative idea.
Products will only be successful if they have:
a significant price or performance advantage over their competitors; or
a significant difference from existing products.
In other words all of the new product ideas gathered then have to be evaluated:
How feasible the idea is
Whether it will fit with corporate strategies
Does the organisation have the skills and resources to succeed.
If, at this stage the idea shows positive results, then a prototype or sample will be manufactured to allow additional research and testing to take place. Only then can decisions be taken about whether or not the product is a viable proposition, not only in terms of production resources, but also in terms of the amount of product needed to be sold in order for the company to actually make a profit.
The next stage in new product development is to test market the product. This gives the organisation the experience of marketing the product without the REAL expenditure of a national launch at this stage. The main benefit of test marketing is so that the organisation ensures it sets the right marketing mix, including:
positioning of the product correctly (eg premium product or cheap and cheerful)
advertising strategy
distribution outlets
pricing
how the branding and packaging is perceived.
The main reason for test marketing is to measure consumer reaction to the product in all of the above areas as this will ultimately lead to much more accurate forecasting of product sales and profits.
Obviously the amount of test marketing undertaken is dependent on the costs, time and risks involved of introducing the product.
At the end of the test market, management must make the decision whether to launch the product or not.
Why Do So Many Products Fail?
Even following the steps outline above, many products have failed and will continue to do so.
There are many factors which can cause companies to bring out products that are doomed to fail. When the process of new product development is properly applied an organisation should be able to identify potential failures early enough to prevent them ever getting near the market place. Factors which can cause products to fail include:
Unreal time pressure and fear of competitors getting in before you
Lack of courage to stop development when it’s clear that failure is likely
Product design is not robust enough or not the right quality for the target market
Product is launched at the wrong time
Price may be wrong (too high or low for the particular target market)
Promotion/Advertising is insufficient or ineffective when product is launched
Arrogance when a manager refuses to listen to negative advice
Absorption in the process makes objectivity difficult
Unwillingness to write off large amounts spent in development
Desire to give the product a chance. This is really a reluctance or inability to
understand the implications of abstract, statistical information
Not enough research undertaken to be sure that the product actually fills a gap in
the market and satisfies a need.
5.13 The Nature of Services
A service is any act or performance that one party can offer to 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.
There are four different categories of goods/services that an organisation can offer:
A Pure Tangible Good
The offer consists primarily of a tangible good such as soap, toothpaste or salt. No services accompany the product.
A Tangible Good with Accompanying Services
Here the offer consists of a tangible good accompanied by one or more services to enhance its consumer appeal. For example car manufacturers sell cars with warranties, service and maintenance instructions and so on. It could be argued that the more technologically sophisticated the generic product, the more dependent its sales are on the quality and availability of its accompanying customer services.
A Major Service with Accompanying Minor Goods and Services
Here the offer consists of a major service along with some additional services and/or supporting goods. For example, airline passengers are buying transportation service. They arrive at their destination without anything tangible to show for their expenditure, but the trip includes some tangibles such as food and drinks, a ticket stub and an airline magazine.
A Pure Service
Here the offer consists primarily of a service, for example psychotherapy and massages. The psychoanalyst gives a pure service, with only tangible elements – an office and a couch.
5.14 Characteristics of Services
Intangibility
Unlike physical products, services cannot be seen, tasted, felt, heard or smelled before they are bought. The person getting a ‘face-lift’ cannot see the results before they purchase. To reduce uncertainty the buyer will look for signs or evidence of the service quality. They will draw inferences about the quality of the service from the place, people, equipment, communication, material, symbols and price that they see.
Inseparability
Services are typically produced and consumed at the same time. This is not true of physical goods that are manufactured, distributed through multiple resellers and consumed later. If the service is rendered by a person, then the person is part of the service. Since the client is also present as the service is produced, provider-client interaction takes place – a special feature of services marketing. Both the provider and client affect the service outcome.
Variability
Services are highly variable as they depend on who provides them and when and where they are provided. People typically perform services and people do not always perform consistently so standardisation and quality are extremely difficult to control. Service providers are aware of this variability and frequently talk to others before selecting a service provider. Service firms can take three steps towards quality control:
Invest in good personnel selection and training
Standardise the service performance process throughout the organisation
Monitor customer satisfaction through suggestions and complaint systems,
customer surveys and comparison shopping so that poor service can be detected
and corrected.
Perishability
Services cannot be stored. The perishability of services is not a problem when demand is steady, because it is easy to staff service in advance. When demand fluctuates however, service firms have to try and match ‘rush-hour’ demand as well as catering for the quieter times too. There are several ways of balancing demand and supply:
On the demand side:
Differential pricing will shift some of the demand from peak to off-peak periods
Off-peak demand can be cultivated, eg restaurants serving breakfast, hotels offering
mini-breaks in January and February
Complementary services: can be developed during peak time to provide alternatives
to waiting customers, eg coffee shops, automatic tellers in banks.
On the supply side:
Part-time employees – can be hired to serve peak demand, eg at Christmas time
Part-time Efficiency Routines: employees only perform essential tasks during peak
periods
Increased Consumer Participation, for example filling in own record sheet at the
5.15 Service and the 7Ps
Product
The service product is intangible and so is difficult to understand, advertise or explain. As we have seen, it is also inseparable from the service provider. Marketers therefore have to select, train, motivate and control contact people. Service marketers are really selling long term relationships with their customers as well as performance in the short term.
Promotion
Intangibility means that it is difficult to depict a service in advertising so they have to emphasise tangible cues that will help the consumer understand and evaluate the service. These cues may be physical (eg premises of a restaurant) or some relevant tangible object that symbolises the service itself (eg Legal and General’s umbrella symbol reflecting an image of paternalistic protection).
Inseparability means that contacts with personnel are critical to the perception of quality service. Employees in a service organisation are an important secondary audience for service advertising which can be a tool for motivating, educating and communicating. Because contact personnel interact with potential customers it is important to train them to reduce customer uncertainty and overcome objections.
Consumers also tend to favour ‘word of mouth’ communication rather than company sponsored communications, so service firms should encourage customers to tell their friends about good performance and the firm about bad! They may give customer discounts for introducing friends. Think also about the number of restaurants, hotels, garages, kitchen companies etc that display ‘letters of thanks’ and gratitude from ‘satisfied customers’.
Price
The intangible nature of services means that in the absence of other service quality indicators, price takes on an exaggerated role. Potential customers assume that the price represents the product quality which they cannot see, feel, or touch. Because services are perishable it is important to have a constant match of demand with supply (and price is a major tool used by service marketers to deliver this – video hired during weekdays, lunch menus in restaurants, cheaper cinema seats on Monday evenings and so on).
Place
In the service context, distribution is ‘making services available to prospective users’. Service industries are limited to direct channels of distribution because of the inseparability of customers and service providers. Low contact services such as airlines, car hire companies and hotels use intermediaries (High Street Travel Agencies) to make it more convenient for consumers to obtain their services.
In addition to the 4Ps of the marketing mix (Product, Price, Place and Promotion), the service sector can also differentiate its offer by a further 3Ps:
People
Processes
Physical Evidence.
People
As we have seen, services such as consultancy, hairdressing and doctors’ surgeries are very dependent on the human element to deliver the product. Therefore, in many instances the customer’s satisfaction is intrinsically linked to the service provider.
Processes
This involves looking at the quality controls that need to be in place to ensure consistency of service. Services, unlike physical products, happen ‘on the spot’ and customers like to know what to expect. Examples include processes to reduce the queuing systems and service delivery.
Customer/Market-Based Structure Physical Evidence
Physical evidence is the ‘tangible’ part of the service, for example the actual features of hotel you are staying in – nice decor, room temperature, en-suite bathroom and so on. Or it could be the hairdresser’s premises, or the actual physical aeroplane in which you fly.
5.16 Learner Guide Instructions
Having completed Chapter 5 – Product, please ensure that you:
Know the different types of product which can be the object of the marketing process
Can explain the reasons for branding and the benefits to the consumer and the
organisation
Can describe the main methods of branding and the differences between generic
and branded products
Can identify and explain the differences between goods and services
Can identify the various types and levels of packaging
Understand what the Product Life Cycle is and the limitations of its use as a
marketing tool
Can explain product mix decisions:
Can explain product decisions in terms of product items and product lines
Can explain the importance of product positioning decisions
Can explain the stages in the product life cycle
Can explain the process of new product development
Can explain why so many new products fail
Now move onto Chapter 6 – Price.
6.1 What is Pricing?
Marketers provide products and value added services that satisfy the needs of targeted customers. The customer then pays the marketer for the product or service provided. So price can be defined as the evidence of an agreement about the value of the product between buyer and seller. Price decisions are an essential element of the marketing mix.
In order to illustrate just how sensitive and essential pricing can be, the following example shows the effect of even very small price rises or falls.
Sales turnover of and total costs of Leaving a net profit of
£ (OOO’s)
1,000
920
_8Q
100
92
_8
Consider the impact of a small price increase. Assume that the rise is small enough not to result in a fall in the quantity of the product bought. This is not the case always, so the actual result may not be as extreme.
Increase the average price by 2%.
Sales turnover Total costs Net profit
Before
£ (OOO’s)
1,000 + 2% 920 80
After
%
1020 920 100
Increase
%
2
0
25%
So the price has risen by 2% and the Net Profit has risen from 80 to 100, a 25% increase:
A price increase of 2% produced a Net Profit increase of 25%
The effect on profits of even a 1% reduction in price can be just as dramatic. Again, the
assumption being made is that the lower price will not lead to more of the product being
sold and again, this is not wholly realistic so the true picture is not likely to be as
extreme.
Again assume that the price change will not alter sales.
Sales turnover
£ (OOO’s)
1,000
990
Decrease %
131
Total costs 920 920 p_
Net profit 80 70
So the Net Profit has dropped from 80 to 70, a 12.5% decrease as a result of a mere 1% drop in price. Even very small price alterations can affect profits quite profoundly.
6.2 Pricing Decisions
In a purchase decision a consumer is likely to consider three questions, albeit often unconsciously. These are:
What do I think of the product compared with the alternatives?
How is it priced compared with the alternatives?
How much do I get for my money?
Pricing is a very comparative business. If consumers feel an organisation’s product is better than competitive ones, they will pay more for it, but otherwise they will not.
The reaction of three groups has to be considered before setting or changing a price:
Consumers
The trade
The competition.
6.3 The Three Ps and Pricing Decisions
Pricing decisions should always be made in conjunction with decisions on Products, Place and Promotion. The more efficiently a business invests its resources in these three Ps, the more freedom it will have in pricing the product.
The closer the product matches customer needs, the less persuasion will be needed and the less resistance to price there will be. If the product is conveniently available night or day, when customers need it, they may be willing to pay for this service.
Investment in promotion will build the product’s reputation. If it benefits from a favourable positive image, demand may be less price sensitive and customers will often pay for image and brand credentials.
Price is the only element in the marketing mix which produces revenue: all the other elements represent cost. Price is also one of the most flexible elements of the marketing mix – it can be changed quickly unlike product features and channel strategy (place). At the same time, price competition is the biggest problem facing organisations, and many make common mistakes.
6.4 The Price Expectation Range
An organisation that invests very heavily in the three Ps can in theory charge whatever it likes for its products. However, pricing decisions have to take into account the ‘Price Expectation Range’ which is the approximate price the customer expects to pay. Experience shows that in many markets customers will be relatively indifferent to price changes within a tolerance range around the expected price.
In the UK, for example, how much would you expect to pay for a magazine or a pint of milk? The price expectation range for a magazine could be anything from 50p up to £3.95 – would you pay much more?
For some products this range may be relatively low (plus or minus 5% or less). For others the range is significant, say plus or minus 20%. For example:
If the price expectancy for a product is £100 and the Price Expectation is plus or minus 20% the price that customers would be willing to pay would then usually range between £80 and £120.
If the price goes above £120, customers will ask themselves; “Is the product worth this price?” and they will probably answer “No!”
If the price goes below £80, customers will ask themselves;
‘Could it be reliable at this price?’ ‘Will it be of adequate quality?’ ‘Will after sales service be efficient?’ To all of which they may well answer ‘No!’
6.5 Pricing Freedom in Competitive Markets
In competitive markets, customers have the freedom to buy, and the marketers to sell. But marketers do not have unlimited freedom to price their products and services. Marketers seek to get the best possible price consistent with selling the targeted volume. If they overprice, they will fall short of volume and income targets and if they under-price, they will not earn the return that customers are prepared to give them.
6.6 Product Position Strategy
Before pricing specific products and services a business needs to have a clear idea of its position in the market. The product position can be classified into one of nine different categories, illustrated in the matrix below:
Product Positioning Matrix
t
Least Value
Poor Value
Best of Class
u
Poor
Average
Cheap and
Cheap
and Cheerful
Stiper Value
low
Best of Class, Cheap and Cheerful, Super Value and High Value are all good positions to occupy. However, average, poor and least value and cheap and nasty are all risky strategies.
6.7 Price as an Indicator of Quality
Look at the following quotes:
‘Price is a matter of supply and demand’
‘I pay what I can afford’
‘What goes with cheap? – Nasty!’
‘You get what you pay for’
‘I can’t afford the expensive ones I’d like to buy’
‘Cheap things don’t do what they’re supposed to do’
‘It’s a matter of experience, knowing what a product is worth’
The more you spend on it, the longer it lasts’
It would seem that for most people price is an indicator of quality.
Goods tend to be grouped according to price and quality. A department store may have several ladies-wear departments to reflect differing quality and price. The customer expects to find garments of appropriate quality in the appropriate department. They will suspect the quality of supposedly high quality goods if they are priced below expectations, so a situation can emerge where people won’t buy a product if it is priced too low. They think “low price, low quality”.
__! Another situation emerges where products are sold because of their very high prices. In
these cases the high price of the goods is one of its benefits. Goods like this have
-t ‘snob-appeal’ and are bought to demonstrate wealth.
6.8 How Prices are Set
Philip Kotler, Principles of Marketing 3rd European Edition, states that there are four main objectives when setting prices. They are:
Survival
This strategy may be used when supply outstrips demand or in the face of extreme competition where the need for the organisation to survive is more important than profits. This can only ever be used as a short term objective as the organisation must ultimately profit or go into liquidation.
Profit Maximisation
This involves estimating what consumer demand will be at different prices and then setting the price that will give you the greatest return on investment. Obviously the goal here is to maximise profits and not long-term investment.
Market Share Leadership
The objective here is to set the price as low as possible in order to gain the majority market-share, the idea being that securing the place of market-leader will bring lower costs and higher long-term profits. Also the low price set will deter competitors from entering as they may find it very difficult to compete.
Product Quality Leadership
Consumers perceive that premium price equals high quality product. This pricing strategy involves charging a premium price to indicate the high quality of the product.
6.9 Key Factors Which Impact on Pricing Decisions
There are many factors, both internal to the organisation and external, which have an impact on the pricing process. Let’s look at these now.
According to Brassington and Pettitt, Principles of Marketing 3rd Edition, there are eight key factors which can exert influence on the pricing decision:
Consumers
Demand
Competition
Channels of Distribution
Legal
Marketing Objectives
Organisational Objectives
Consumers
Organisations cannot successfully set a price without considering what the consumer will be prepared to pay for the product and how they will perceive it at a certain price. This price depends on the actual market the organisation operates in as well as the position it wants its product to occupy (premium quality Vs cheap and cheerful). The currency of the brand should also be taken into account – in other words how much brand loyalty will consumers give the product and at what price are they likely to switch to a competitor’s product (if at all).
Demand
Demand for a product is dependent on two main factors:
whether there are substitute products readily available or not
how quickly and urgently a consumer needs the product.
If there are no substitutes available and the consumer is in desperate need of the product (such as toy fads at Christmas time), then the consumer will be much more willing to pay a premium for the product. However, where there are substitute products in existence, then to raise the price would only result in consumers buying the substitute and ultimately decrease the demand of your product.
Competition
Competitor’s pricing will have a major impact on an organisation’s pricing decision. The number of competitors in the marketplace, the size of these competitors and the type of product sold will all have a major impact on the pricing decision.
Channels of Distribution
When pricing a product, an organisation needs to consider the cost of transportation and the other distribution companies involved. These include warehouses, sales agents and transport companies. Each of the individual distribution companies will have their own profit requirements, which in turn will have an impact on the final price of a product or service.
Legal
When setting or changing a pricing structure it is vital to an organisation’s success that it understands the legal and regulatory framework in the country(ies) it is operating in. The main bodies involved in the UK are the national and local government, the ED (European Union) and various other regulatory bodies such as The Office of Fair Trading.
Marketing Objectives
Marketing objectives influence the pricing decision as they concentrate on positioning products correctly within their target market. Some organisations have various products occupying different positions within one market and different pricing strategies for each. An example would be in the car industry where a manufacturer may produce a car at the bottom end of the scale – cheap and cheerful as well as having another model at the top end.
Organisational Objectives
Examples of organisational objectives include sales volume figures, estimated targets, a plan of where the organisation wants to be, the markets in which it wants to operate and the market share it expects to hold in that specific market place. Pricing decisions will certainly be influenced by these objectives as they can only be reached through the correct marketing mix. Organisational objectives are also concerned with the position the organisation holds in relation to competitors.
Costs
In principle, price is all about what a consumer is willing to pay for a specific product. However, the cost to the organisation of producing this product cannot be disregarded. The bottom line is that the organisation needs to sell the product and make a profit at the same time and if this cannot be done the organisation should seriously question their motives.
There are two main types of cost involved:
Fixed – costs which do not change such as staffing, rent, bills and salaries. These
are fixed no matter how much product you actually sell
Variable – these costs depend on the number of units of product produced/sold etc.
Examples include the cost of raw materials, parts and labour.
6.10 Pricing Methods
When setting prices, an organisation must take into account the fact that if they charge too high a price then demand for it will drop versus charging a price too low as to yield any profit.
According to Philip Kotler, Principles of Marketing 3rd European Edition, organisations set prices by selecting a pricing method that includes the following:
costs
consumer perception
competitors’ prices.
There are several different approaches an organisation may take:
Cost-Based (including cost-plus pricing, break even analysis and target profit
pricing)
Value Based (including perceived value pricing and psychological pricing)
Competition-Based (including going-rate and sealed-bid)
6.11 Cost-Based Pricing Methods
Cost Plus Pricing
This method involves working out the cost required to produce the product and then adding a ‘mark-up’ to that figure which will give you a certain amount of profit margin. For example if it costs £11.00 to manufacture perfume including the packaging and bottle etc, the manufacturer may decide to put a 50% mark up on the product and have the retailer sell it for £22.00.
Although this method is very popular it is not marketing oriented.
Break-even Analysis and Target Profit Pricing
With this method the organisation attempts to establish a price whereby it will breakeven or generate the target profit it desires.
In essence the organisation must work backwards from the desired target profit figure until it finally arrives at:
a price per unit sold and;
a specific volume of product required to be sold in order to generate the specified
target profit.
The organisation explores various prices per unit and different volumes until it comes up with the optimum rate of return. Again, as with the cost-plus approach, all consideration to consumer demand is ignored.
6.12 Value-Based Pricing Methods
This pricing method is based on consumers’ perceptions of a product’s value rather than on cost itself. With this method the price must be considered at the outset along with the other 3Ps, and not decided at the end of the process. Price is not the only element in the marketing mix which can help to determine the perceived value of a product. A product’s position in the marketplace, its branding and promotion also play a vital role in perceived value. The price element then seeks to reinforce that value in the minds of consumers.
6.13 Competition-Based Pricing
The rationale here is that consumers will compare product value based on what competitors charge for similar products. The two main types of competition-based pricing are:
Going-Rate Pricing
Sealed-Bid Pricing.
Going-Rate
This method entails setting prices based mainly on what competitors are charging and not on costs of manufacture or consumer demand.
Sealed-Bid
Many organisations must bid for work against competitors and the trick here is to set a price based on what the organisation thinks the competitor will charge for the same job. However it is worth noting that the firm cannot price itself below a level at which it could financially harm itself and potentially be operating at a loss.
6.14 Pricing Strategies
An organisation does not usually set one single price, but rather a pricing structure that covers different items in its line. This pricing structure changes over time as products move through the product life cycle. As the competitive environment keeps changing, so does the decision whether to initiate price changes or respond to other price changes in the market.
Let’s now look at some pricing strategies in more detail.
New Product Pricing Strategies
As we have seen in previous sections, it is vital to get the right product, in the right place at the right price with the right promotion.
With new product development, the launch price is absolutely vital to the success of the product as it may be very difficult to change successfully after launch.
The question is, does an organisation initially set a high price or a low price? There are two main strategies to consider:
Price Skimming
The organisation sets its initial price high in order to gain short-term profit and perhaps cover any research and development costs.
This strategy is commonly used in hi-tech industries. For example when the DVD player originally came out, the initial price was set high, but as more competitors entered the marketplace with “me-too” products the prices were lowered. This strategy works well for this type of industry as there are no real product substitutes and so the marketplace is not price sensitive – yet!
Penetration Pricing
In order to gain as large a market share in as short a time as possible, an organisation may seek to price its product below the competitor’s offerings. It intentionally sacrifices profit margins for volume in the initial launch in order to entice consumers to buy the product. This strategy will only work in a market that is price elastic (susceptible to price changes).
Product-Mix Pricing
If a product is part of a product range then a pricing strategy must reflect that ensuring that the range of products have a range of prices that make sense in the marketplace.
For example, in a product line of digital cameras, each product in the line will typically offer more benefits and features than the one below it, and so the pricing strategy must reflect this to the consumer, and increments in price must be equally spaced out.
Other options in product-mix pricing strategies include:
Offering the basic product at a specific price and then pricing optional
products separately. A prime example of this type of strategy is in the car
industry where you pay the basic price for the car and extras such as the
sunroof, air conditioning and so on are all optional add-ons. The only
drawback of this strategy for manufacturers is exactly what to include as part
of the basic price and what constitutes the added extras
Many organisations make products which must be used alongside the main
product, for example razor blades must be used with razors, film with
cameras and so on. The organisation has the option of pricing the main
product quite low as it can make a decent return on the products used with
the main product.
Price Adjustment
There are instances where many organisations make the decision to reduce the basic price of its product. According to Philip Kotler, Principles of Marketing 3rd European Edition, there are seven main price-adjustment strategies:
Discount and Allowance Pricing
Many organisations will adjust its prices as it sees fit to reward consumers when they pay bills early, or buy in bulk for example. This is more commonly known as discounts.
Discounts can come in many forms including:
Cash discounts: money off for those who pay punctually
Quantity discounts: to encourage consumers to buy in bulk and
perhaps place bigger orders than they would normally
Trade discounts: where the trade customer receives a discount if he
is prepared to take on some of the marketing (such as displaying
posters and leaflets), selling, providing storage for product
Seasonal discounts: to persuade consumers to place orders out
of season which will help keep production constant throughout the
whole year. Industry examples include gardening equipment,
home improvements and the holiday industry
Trade-In Allowances: a price discount is given if the consumer
trades an old product as part payment for the new one. This is
very common in the car industry.
Segmented Pricing
With this strategy an organisation will essentially charge different customers different prices and the difference in price is not based on differences in costs. There are many examples including:
Museums – charge different rates for entry depending on whether you
are a student, senior citizen or unemployed
Train companies charge different prices for the same journey taken at
different times such as a rush hour or weekend travel
Theatres have different pricing structures depending on where you
are sitting – stalls or dress circle.
Psychological Pricing
Price is an indicator to the consumer about the quality of the product. There have been many studies on the relationship between price and quality and many consumers perceive that the more you pay for a product or service the better the quality is. Also, if a consumer cannot judge quality (perhaps they are buying a product over the internet and cannot physically see, hold or use it) then they tend to use the price of the product as their quality indicator.
Some organisations use odd numbers in making up their price (£99.99 suggests under £100.00, and £699.95 suggests in the £600 price range and not the £700 price range). A price of £347.71 instead of £350.00 suggests that the price has somehow been fairly worked out!
Promotional Pricing
This strategy involves the organisation lowering its prices for a short time in order to increase sales in the short term. Supermarkets may drop the price of a well known brand in order to entice customers into the store -of course the customers will then buy much more than they originally went in for! It may be that there is surplus of a product and so the best way to get inventories down is to offer a promotional discount – perhaps 2 for the price of 1.
Value Pricing
Many organisations have tried to adopt value pricing – quality and service at a reasonable and fair price. A good example is Holiday Inn opening ‘Holiday Express Inns’ which is its version of the budget hotel.
Geographical Pricing
If an organisation operates in various different parts of the world there may be a cost implication in shipping costs depending on where the product is destined. There are quite a few different strategies a firm can adopt including charging all clients the same price to charging them individually based on location. /* lot depends on the nature of the product and the destination(s) it is being shipped to.
International Pricing:
If an organisation sells and markets its products on an international basis, then it must decide what prices to set in different countries. Do you charge different prices or make your price uniform? This will depend on competition, markets and laws and regulations within each country.
6.15 Price Changes
As we have seen throughout this section, prices are rarely static and are subject to change, whether that be a price cut or increase. There are many reasons why an organisation may find it desirable to change the price, but whatever is ultimately decided, possible reactions and outcomes of both consumers and competitors MUST be predicted.
6.16 Price Increases
There are many organisations which have had to increase prices, even though consumers may not like it. However, as we saw at the beginning of this section a small increase in price can result in a large increase in profits. If an organisation openly raises the price of its products it is vital to explain to customers the reason why. Other options which are popular in the confectionery industry is the shrinking of the actual size of the product or the substitution of cheaper ingredients – which ultimately makes the product cheaper to produce and so increases profits but not from the consumer’s pocket.
6.17 Price Cuts
There are various reasons why an organisation may wish to initiate a price cut, however this can be an extremely risky strategy and must be thought through thoroughly.
Reasons include:
excess capacity
aggressive price cutting to poach market share
matching price cuts of aggressive competitors to try and hold onto market share.
Promotion
By the end of this chapter you will be able to:
Identify the elements in the promotional mix and know their strengths and weaknesses
Explain the contribution promotion makes to the marketing mix Identify and explain different promotional methods Explain how marketing differs from advertising and selling Describe factors which affect the promotional mix Describe the various methods of setting promotional budgets.
In order to do this we will cover the following sections of work:
The Communications Process
The Promotional Mix
Sales Promotion
Public Relations
Personal Selling
Factors Involved in Setting the Promotional Mix
Factors in Budget Setting
Learner Guide Instructions
This section on promotion introduces the elements of the promotional mix – advertising, sales promotion, public relations, personal selling, direct mail and personal selling. Each of these elements will be looked at separately.
You will look at the factors involved in setting the promotional mix, including budget setting.
7.1 The Communications Process
Promotion is a form of communication. It is not a new concept, in fact it has been around for a good number of years in different forms. Early examples include universal symbols such as the Red Cross (even on ambulances now) and flags.
How Communication Works
In order to communicate effectively with your target market, it is essential to understand how communication works.
Below is an excellent diagram depicting all the elements involved in the communications process.
t
I
Communications Process/Marketing Communications Process
In total there are nine elements in this simple communications diagram.
The main two elements in communication are the sender and the receiver. In marketing the sender could be the organisation and the receiver, the end user or consumer- individuals within the target audience.
Encoding
Think of a situation whereby you have not met a deadline, and have to tell your boss.
Exactly what would you say and how would you say it? Here are a few examples:
I haven’t met the deadline but I’ll have the work finished by Monday.
I’m really sorry but I haven’t quite finished that piece of work yet. Please can I give it
to you first thing on Monday?
I’ve done the work but have just got to have a final read through and check for any
The above illustrates only a few of the numerous ways that you could broach the subject. You must make the choice as to how you portray your message so that the receiver will understand it.
In promotion, encoding an advert will include whether the target audience needs, for example:
only information (text)
music
bright colour or black and white
entertained
imagery – photographs or graphics.
Message and Media
Now that you have decided what the message is and how you will portray it, the next decision is the media or communication channel which you will use. So, for example, how would you tell your boss? Would you send an email, telephone, see him/her in person?
In promotion, this would equate to television, radio, press advertising, personal selling, sales promotion, public relations, online marketing or direct marketing. Deciding which of these media, or combination of them is most appropriate to reach the target audience.
Decoding
Not only must you ensure that your message reaches the receiver, but that the receiver has understood it. How the receiver interprets the message is dependent on their personality, how they feel towards the sender, their mood and so on.
Taking the second example above:
I’m really sorry but I haven’t quite finished that piece of work yet. Please can I give it to you first thing on Monday?
The receiver could interpret this statement as:
X employee is not hard working and never sticks to deadlines
X usually sticks to deadlines but there is a legitimate problem which he/she is
addressing as quickly as possible
X is honest – please do X a favour.
As we have just seen, the message actually received depends very much on the individual, therefore marketers have a big challenge to ensure that their messages are encoded in such a way that all individuals in the target audience will decode the message appropriately.
Response and Feedback
The response you receive from your boss will be very different depending on the routes and options you choose. It could be anything from, ‘No problem – I’ll get it from you on Monday’, to This really isn’t good enough -what is the problem?’
The response, whatever it is, gives the sender feedback on whether their message has been received, understood, interpreted and acted upon. This might mean that a product has been purchased, or that greater awareness of a brand has successfully been generated.
Noise
This is unplanned activities and influences which can distort the message or distract the receiver. In our previous example, say you send this message via email, your boss sees and thinks, ‘I am rushing to a meeting, I’ll read this email later’. The receiver has been distracted from receiving your message.
In marketing terms, this ‘noise’ could be in the form of other adverts, or the consumer ‘channel hopping’ during the commercial breaks on television. In the case of magazines the distraction could be other features and articles which catch the reader’s attention and takes it away from the advertisement.
7.2 The Promotional Mix
The main promotional tools available to a marketer include:
Advertising
Sales Promotion
Public Relations
Personal Selling
Direct Marketing (including Direct Mail)
Before we look at each of these in turn it is important to understand some definitions: Above-the-Line
You may hear promotional tools described as either being ‘above-the-line or below-the-line’. The above-the-line five main media are: press, posters, cinema, radio and television. Above-the-line harks back to advertising agencies which charged commission for all above-the-line work carried out for a client.
Advertisers receive a standard 15% commission on the buying media space which they keep – the client pays the full price (If the client went direct to the media, they would pay the full price anyway on most occasions). So, for example
Standard Rate of Commission is 15%
Full cost (usually known as Rate Card cost) of an advert is £1000
Recognised agencies get it for discounted price
15% of £1000=
£150 discount: £1000-£150=
£850 – what agencies are billed from the media, but client still pays £1000
The agency is charged £850 but the invoice to the client is for the ‘Rate Card Cost’ of £1000, therefore the agency earns £150.
Below-the-Line
This is billed differently as the agency does not get commission for carrying out this work – they charge a fee. So everything else – sales promotion, public relations, personal selling, sales literature, direct mail, point-of-sale materials, sales catalogues and price lists, brochures and every other form of promotion which does not attract a commission from the five main media, are considered to be “below-the-line”.
Now let’s look at each of the promotional techniques in turn in more detail: Advertising
Philip Kotler, Principles of Marketing 3rd European Edition, defines advertising as:
‘Any paid form of non personal presentation and promotion of ideas, goods or services by an identified sponsor’
Advertisers should always have specific objectives about what they wish to achieve from the advertisement. The objective could be to inform consumers about a new product or service, persuade consumers to buy your product or service; or remind consumers of the organisation, product or service.
Advertising consists of two main components:
The Message
The Medium.
The Message
Not only should you think about wftaf the message will say, but how to say it, in a way that will draw and hold your target audience’s attention. Any message can be conveyed in a number of different ways. For example, television advertisements for drink driving tend to use fear as the main theme – fear of the consequences of drink driving. There are many different themes around which an advert can be based:
Fear
Economic Approach – value for money/labour saving
Sex
Health (scientific evidence needed to use this as a theme)
Happiness
Stories/Serial Stories
Humour
Cartoon
Surprise/Unexpected
Fantasy/Escapism
Usually advertisers tend to link two or three themes together such as humour and serial stories.
The Advertising Medium
The advertiser needs to choose the best medium to reach the target audience. Choices of advertising medium includes television, print (newspapers and magazines including posters), radio, online and cinema.
Example
If the target market was young working males aged 16-24 it would not be wise to advertise on television during the day as most of this age group will be either at school, college, university or working! A better approach would be to target specific magazines for that age group as well as perhaps advertising on television during the high profile football matches, for example.
However, this is an extremely expensive way of reaching your target market, therefore it is crucial that the choice of advertising medium is suited to the advertising budget as well as to the message. In this case, if the budget won’t stretch to cover all of the options, the advertiser may have to choose which medium will most effectively reach the target market.
If the product is highly technical it may be that advertising in magazines, or an online dedicated website may be most effective as there may be a lot of technical information to get across which would make for a boring television or radio advert. Another alternative would be to send out a target mail shot (discussed later in this Section).
Media schedules need to be planned very carefully detailing where and when you will advertise, to the frequency of the advert and how often it will appear over what length of time. The use of directories which list all the current publications, their circulation and other relevant data, can all help plan and execute a successful advertising campaign to the right target market.
Evaluation
your advert, how many people responded to the advert. This can be carried out in a
It is very important to evaluate the success of your advertising, ie how many people saw your advert, how many pi number of ways such as:
Recall Tests: asking people who have seen the advert to recall everything they can
about it ;_ |
Recognition Tests: asking readers of, for example a magazine that they recognise
that they have seen before.
Pros and Cons of Advertising Pros
Reaches masses of consumers, geographically spread out at low cost per exposure
Advertising is viewed by consumers as being legitimate – because of its public nature
The advertiser can repeat its messages many times
A large advertising campaign promotes a positive image of the company about its
success and size.
Cons
Very expensive
Impersonal
The audience does not feel it has to pay attention or respond as the communication
is essentially one-way.
7.3 Sales Promotion
Philip Kotler, Principles of Marketing, 3rd European Edition describes sales promotion as: ‘Short-term incentives to encourage purchase or sales of a product or service’.
Sales promotions can boost sales and encourage a quicker and stronger response in the short term. Whilst advertising offers a reason to buy, sale promotion offers an incentive to buy NOW. Sales promotions can be effective when used both offline (discounts, 3 for 2) and online (vouchers, discounts, promotional discount codes).
There are three types of sales promotion:
Consumer Promotion: intended to encourage consumer purchasing
Trade (Retailer) Promotion: intended to develop reseller support and increase
reseller selling efforts
Sales Force Promotion: intended to motivate the sales forces and make them
more effective in selling.
All sales promotions have three common characteristics:
Communication: try to grab attention and give information which guides the
consumer to the product.
Incentive: add in some dispensation that gives value to the consumer (eg 3 for 2).
Invitation: an invitation to buy NOW! (Offer will only be on for a limited amount of
time)
Sales promotion has grown in recent years as now more than ever there is competition with less products being differentiated from their competitor’s offering. Also advertising is extremely expensive in comparison with sales promotions.
Before starting a sales promotion campaign it is essential to plan:
Incentive size (in monetary terms)
Conditions for participation
What the distribution system will be (eg Coupons – where will the consumer obtain
these coupons – through direct mail, an advert, on the back of the product etc)
Timing of the promotion – how long and at what time of the year?
Total budget for the promotion.
Evaluation of the Results
Evaluation is critical to measure the success of a sales promotion. There are four main methods of evaluation:
Analyse sales data before, during and after a promotion
Interview a consumer panel to analyse the type of people that reacted to the
promotion and if they continued to buy after the promotion had ended
Conduct consumer surveys to see how many people could recall the promotion
and their thoughts on it
Experiment with various characteristics of the sales promotion such as the value of
the incentive or the duration of the promotion.
For a sales promotion to be successful, the objectives must be specifically defined, the most suitable tools chosen, and it should be pre-tested beforehand and evaluated afterwards.
7.4 Public Relations
The definition of public relations (PR) according to Philip Kotler, Principles of Marketing, 3rd European Edition is:
‘Building good relations with the company’s various publics by obtaining favourable publicity, building up a good ‘corporate image’and handling or heading off unfavourable rumours, stories and events.’
Before looking at PR tools in detail, it is important to define the term public in relation to Kotler’s definition.
A public is a group which a firm needs to communicate to. For example a firm’s public might be split as follows:
Commercial Group: anyone who does business with the firm or is in
competition with it
Financial Group: shareholders, banks, investors – any group which has
a financial interest in the firm
Authority Group: Government, trade associations and regulatory bodies
Internal Group: those working for the firm
Media Group: the media
General Public: general public.
Main PR Tools
PR is a valuable tool which can help support a range of marketing activities from the launch of a new product or repositioning a mature product, to defending organisations or products which have come up against public scrutiny.
The main PR tools are:
Media Relations (Press releases, Press Conferences) – generating newsworthy
stories in the news media to draw the attention to a specific person, product or
These sometimes come naturally, or the PR person whether in the
organisation or in the PR firm suggests activities or special events which might be of
interest to the media. This could include speeches at trade associations, or special
events such as news conferences, press tours or multimedia presentations for target
markets.
Corporate Communications – all written materials such as annual reports,
brochures and newsletters. This also includes corporate image and branding –
corporate logo, stationery, business cards
Sponsorship – firms gain exposure to its public through sponsorship of, for
example, charity events, dinners, industry awards and sporting events.
Website – an organisation’s website is an excellent PR medium as it provides both
information and entertainment. This medium is growing rapidly as the number of
firms having a web presence is increasing
Public affairs – developing relations on a local, national and international level
Lobbying – developing relations with legislators and government officials to try and
influence legislation and regulation
Counselling – informing management about public matters and firm positions and
PR costs a lot less than advertising and can have a powerful impact on public awareness.
Main PR Decisions
Some companies employ marketing PR firms to assist them in their PR programs. Other firms handle all PR in-house. Whichever route is chosen, organisations should always ensure that objectives are set for every PR campaign.
Marketing PR can contribute to the following objectives:
Build awareness
PR can place stories in the media to bring attention to a product, service, person or organisation.
Build credibility
PR can add credibility by communicating the message in an editorial context as opposed to an advert that consumers may ignore
Stimulates the salesforce
PR can help boost salesforce and dealer enthusiasm.
Hold down promotion costs
PR costs less than direct mail and media advertising.
Evaluation
PR is difficult to measure as it is used with a combination with other promotion tools. The easiest measure of PR effectiveness is the number of mentions in the media.
PR on the Internet
Public Relations is being conducted on the Internet in the following ways:
Press Releases: The majority of firms that are producing press releases will place
them on their websites, archiving them for reference purposes. Increasingly, press
releases are e-mailed to the media rather than faxed or posted as it is a much
quicker method of reaching journalists
Recruitment: Many firms advertise vacancies online and also receive applications
online
Company Information: A firm’s website is an invaluable tool for gathering marketing
material on products and services
Financial Information: Many firms will have their annual report, quarterly figures
and financial statements online.
7.5 Personal Selling
Personal Selling is defined as an oral presentation in a conversation with one or more prospective purchasers for the purpose of making sales.
Personal selling is essentially two-way communication between buyer and seller, either face-to-face, over the telephone, videoconferencing and webcam equipment or any other two-way communication means.
Personal selling is a lot more effective in a complex selling situation, especially in industry markets.
People who sell have many titles ranging from Sales Rep and Sales Person to Field Representatives. A sales person is someone who acts for a firm in the following ways:
Researching possible new prospects
Communicating with existing customer and/or new prospects about products and
services
Servicing existing customer accounts
Gathering market research and data on customers
Selling products and services.
The role of personal selling varies from firm to firm, for example:
some companies only sell through mail order and have no sales people
sometimes the sales person is the ONLY source of contact with the firm for the
customer and therefore a vital link between the firm and its customers
a sales rep’s role could be to sell to intermediaries such as wholesalers and retailers
– they may never meet the end user
the main thrust of a sales person’s job could be to build new relationships with
prospects, or give information about the firm’s products and/or services.
Sales force structure is also an important consideration. There are three main types of sales force structure:
Territorial Structure: Each sales person has a specific geographical territory to
cover with the full product line
Product Structure. Sales people specialise in selling specific products from the
line
Customer Structure: Sales people sell only to designated customer or
If a firm sells a wide variety of products to many different types of customer over a large geographical area, it is often more practical to combine different structures, for example a double glazing window firm may combine product with territory – conservatory sales reps in the Edinburgh area (a specific area in Scotland). This is known as a complex sales force structure.
There is not one specific structure or combination which offers the best advantage for all companies and situations. Therefore organisations must use sound judgement in choosing the structure that will best serve their target market.
Direct Marketing
Philip Kotler, Principles of Marketing 3rd European Edition defines direct marketing as:
‘Marketing through various advertising media that interact directly with consumers, generally calling for the consumer to make a direct response.’
Direct Marketing includes the following activities:
Direct Mail
Mail Order (Catalogue Marketing)
Face-to-face Selling
Telemarketing
Direct Response Advertising
Online Marketing.
Each of these types of direct marketing will now be examined further:
Direct Mail
Direct mail involves mailings of letters, adverts and samples sent to prospects on mailing lists. The mailing address lists can either be bought in from an external source, or the organisation may have an in-house database of past/current/prospective clients.
A mailing list is a collection of names and addresses of individuals or organisations whereas a database tends to hold a lot more information of a specific nature such as: products and services bought, age, gender, hobbies, spouses name, if invited to any company events and if attended, who the main point of contact in the firm is.
A mailing list may be used cold (i.e. without having been in contact with the consumer/organisation before) or it could be based on various selection criteria based on data held about previous or existing customers, for example, all consumers who enquired but did not buy, in Scotland in the last six months.
A mail shot is only as good as the quality of the data used. Getting the list right is a major challenge as a successful direct mail campaign must be accurately targeted.
Many mail shots use ‘involvement devices’ which try to attract and hold the attention of the prospect to increase the chances of their being opened and read. E.g. a scratch card.
Until recently all direct mail was paper-based, but now organisations have the option of sending direct mail via email. The organisation may have a database of clients’ e-mail addresses through website registration, or through its own in-house database. Another option is ‘opt-in’ mailing lists which can be sourced and purchased through the Internet. It should be noted that it is not good practice to send out unsolicited emails – this is called ‘spam’.
Mail Order (Catalogue Marketing)
Mail order involves selling products through catalogues which are:
mailed out to customers or
available in stores.
Both offline and online catalogues are increasing by being used by retailers as a further medium to encourage sales. For example, there are two types of catalogues:
Non-store Catalogues (no links with a retail store)
Store Catalogues.
Face-to-Face Selling
In this context we are specifically looking at ‘door-to-door’ selling and party plans.
(a) Door-to-door
A prime example of door-to-door selling is Avon cosmetics. This type of organisation has sales people who will knock on doors, leave brochures and collect them.
However, with interactive direct marketing technology, the future of door-to-door salespeople may be in jeopardy of being replaced by telephones, interactive television and PCs.
(a) Party-Plans
A potential consumer hosts a party where a rep from the company goes in and demonstrates the products. This concept originated with the infamous Tupperware parties! (Tupperware sells plastic kitchen storage systems) Now however, many products are sold this way. The Bodyshop and many other cosmetic, kitchenware and lingerie companies have party reps.
Telemarketing
Telemarketing is a verbal and direct approach to reaching the prospective customer over the telephone.
However telemarketing is received, it is still the largest source of business for some firms and research has shown that many people accept these calls and in some cases actually enjoy them! Telemarketing can be used for:
Generating leads for business
Screening leads
Arranging appointments for the sales team
Direct sales
Encouraging cross-selling of products
Servicing existing accounts
Market research.
Direct Response Advertising
This appears in standard television, radio, print advertising, and it differs from normal advertising in that it is designed to elicit a direct response from the consumer.
Here are a few examples of the use of direct response advertising on television:
CDs promotions on satellite music channels – ‘Not available in the shops’
Insurance adverts ‘Call this number free now’ or’ Visit our website’
Claims and debt adverts
Holiday companies freephone number for brochure or free videotape.
Different response mechanisms can be used in direct response advertising such as:
An address to write to
A phone number
Website address
A coupon to fill in and send off for more information
Freephone
Freepost
Online Marketing
Online marketing is treated in this context as another main promotional tool which marketers have at their disposal. It is important to understand that those firms which are trading online very often use both online and offline promotion.
Online Marketing can be defined as: ‘A form of direct marketing conducted through interactive online computer services, which provide two-way systems that link consumers with sellers electronically.’ Philip Kotler, Principles of Marketing 3rd European Edition.
The Internet is a great medium for an organisation to communicate with its target markets. Not only can organisations have their own web presence via a dedicated company website, but they also have the opportunity to advertise online.
Online Marketing Channels
There are four main ways in which an organisation can carry out online marketing:
Electronic storefront
Online advertising
Participating or sponsoring Internet forums, newsgroups and bulletin boards
Using online emailing
Each of these will now be explored in more detail:
Electronic Storefront
Here an organisation has two choices – either ‘rent’ or buy space on a commercial online service such as AOL or MSN, or create its own website.
Online Advertising
It is important to understand that whatever the medium, the principles of advertising are similar. Any messages should be clear and concise, with the intention of grabbing and holding the consumer’s attention.
Forums, Bulletin Boards and Newsgroups
Another way for organisations to gain exposure online is to participate in, or sponsor forums, bulletin boards and newsgroups which appeal to particular groups.
Online Mailing
Organisations may also develop Internet-based electronic mailing lists of customer or prospects who have ‘registered’ at their website. There is also the facility to send adverts and information of promotions via email directly to the desktops of target consumers using email.
7.6 Factors Involved in Setting the Promotional Mix
Remember the promotional mix consists of all the elements involved in promoting an organisation:
Advertising
Sales Promotion
Public Relations
Personal Selling
Direct Marketing (including Direct Mail).
There are many factors which influence the setting of the promotional mix which will now be examined. They include:
Identification of Target Audience
Promotional Objectives
Budget Setting
Other Factors.
Target Audience
The first main question that needs answered before embarking on a promotional campaign is who the target audience is. It is vital that a clear target audience has been defined for the promotional campaign to be successful. The target audience could be potential buyers, existing customers, decision-makers, industrial market, consumer market and so on. The target audience will have a huge impact on the promotional mix as it affects:
What is said
How it will be said
When it will be said
Where it will be said
Who will say it.
Objectives of Communication
The key to defining the communications objective is deciding what response you hope to get from the promotion. In many instances the response desired is purchase!
However, purchase involves a long progression of consumer decision-making and so the marketer must determine exactly whether the target audience is actually ready to buy or not. Every consumer progresses through various steps when adopting a new product or service. Each individual will start at a different step and will advance at different rates. The process of product acceptance is never instantaneous and therefore marketers must understand the stages in new
product adoption to make certain that their products and services will be successful.
A prime example of this concept can be seen in the following illustration:
An organisation launches a new product around a weighty advertising campaign and the product ends up being a failure. What in actual fact may have happened is that the new product may not have had enough time to progress through the early stages of adoption before consumers will eventually purchase it.
BUDGETS
Deciding on the promotional budget is one of the most difficult decisions an organisation has to make. There are four main methods used to establish overall promotional budgets:
Affordable Method
Percentage of Sales Method
Competitive Parity Method
Objective and Task Method.
The first two methods involve some ‘judgement’ and estimating.
Affordable Method
The management decides what the firm can afford to spend on promotional activities. This suggests the budget is set after all other budgets and expenses have been taken care of and there is no linking of the budget with what is actually happening in the marketplace.
Percentage of Sales Method
The budget is set at a particular percentage of past or current sales, or as specific percentage of the past or current sales price. The main downfall of this method is that future promotions are entirely reliant upon past performance. Imagine this:
If a product has not met sales targets in a given year, the promotional budget will be cut. This in turn will cause the product to under-perform the following year resulting in a further budget cut, eventually leading to the product’s demise. Another difficulty arising from this method is deciding exactly what percentage of sales to apply, to arrive at the promotional budget figure.
Competitive Parity Method
Research competitors’ promotional spend and match their budget or exceed it. The idea is that if you are making as much noise as competitors then chances are you’ll be heard. However, sometimes it is not the amount of money spent on promotions that make them successful but rather the quality of the promotion.
Objective and Task Method
For this method, an organisation must work backwards, firstly defining the promotional objectives and determining the tasks which must be performed to achieve these objectives, then estimating the costs of performing these tasks.
The budget arrived at is therefore the amount needed to meet objectives. This method of budget setting is favoured as it ensures that communications objectives are specifically defined at the outset and therefore, that the budget figure arrived at is one that will meet these objectives.
7.7 Factors in Budget Setting
Before setting a promotional budget, there are a few factors which should be taken into account:
Product: How organisations promote products depends on the stage the product is at in the Product Life Cycle. For example, if an organisation is launching a new product then the main objective will be to create awareness of the new product and generate consumer trial. The new product will therefore need a substantial promotional budget to achieve its objectives and succeed in the marketplace. However, a well established product will have a lower budget as the objective may be to remind consumers of the brand.
The Company: How prominent is the organisation in the eyes of its target market and what kind of market share does it currently have versus what it perhaps wants to achieve through this promotional campaign.
Market Share: Products with a high market share will need a smaller promotional budget than those with a small one. Products which have a small market share will be trying to increase it and therefore will need a larger budget if they are to succeed.
Competition: If the market place is highly competitive then a larger budget will be required if the advertising is to be heard above the competition.
7.8 Learner Guide Instructions
Having completed Chapter 7 – Promotion please check that you can:
Identify the elements in the promotional mix and know their strengths and
weaknesses
Explain the contribution promotion makes to the marketing mix
Identify and explain different promotional methods
Explain how marketing differs from advertising and selling
Describe factors which affect the promotional mix
Describe the various methods of setting promotional budgets.
Now move onto Chapter 8 – Place.
Place
By the end of this Chapter you will be able to:
Describe the channels of distribution and their functions, including wholesale,
brokers and agents
Explain what Vertical Marketing Systems are and the various forms they can take
Explain the three different market coverage strategies an organisation can adopt –
intensive, selective and exclusive
Discuss the various levels within a distribution channel
Explain the different factors affecting channel decisions
Describe the various modes of transport available to organisations – truck, rail, sea,
In order to do this we will cover the following sections of work:
Introduction
Channels of Distribution
Wholesalers
Retailers
Other Intermediaries
Channel Levels
Vertical Marketing Systems
Channel Strategy
Factors which Influence Channel Strategy
Physical Distribution
8.1 Introduction
The main function of distribution is getting the product to the customer in the right place at the right time, cost-effectively for the organisation.
Products must be available when they are required by the consumer. This introduces the concept of ‘the right time’ as well as highlighting the need to store goods in the chain of distribution so that there are buffer stocks in the system to replace those goods sold.
Distribution is responsible for both time and place. It also covers the processes of handling, transporting, and storing goods as well as bridging the gap between the point of production and the point of ultimate purchase by the consumer.
Distribution is the process of moving goods and services to the places where they are wanted. It may involve a single step, or any number of steps. For example, a butcher may sell his meat directly to customers whereas a furniture store which supplies Scandinavian chairs may sell products which have passed through a number of distributors and perhaps have been stored two or three times before arriving at the furniture store.
8.2 Channels of Distribution
There are many routes by which a product may reach the consumer, or other end-user.
Philip Kotler, Principles of Marketing 3rd European Edition, describes a marketing/distribution channel as:
‘A set of independent organisations involved in the process of making a product or service available for use or consumption by the consumer or industrial user.’
Therefore the channel of distribution is all of the organisations or ‘channels’ which a product must pass between its point of production and consumption.
The Intermediary’s Function
Intermediaries (or middlemen as they are sometimes known) are independent businesses standing between the household consumer or industrial user. They operate the channels of distribution.
Intermediaries can also add value to both the manufacturer and the consumer in many ways including:
Increasing transaction efficiency (as we saw above)
Being able to offer its clients a larger range of goods through ‘bulk breaking’, and this
choice of goods will ultimately be passed on to the consumer
Transporting the goods further up the distribution chain
Source of information and feedback.
The main reason for using intermediaries is to boost effectiveness and bring down
costs involved in transactions. For example, if you have four manufacturers all dealing with the same four retailers then there would be 16 different contacts, each with different requirements for orders and so on. However, if an intermediary managed each of these links then each manufacturer and retailer would only have to manage and maintain one link – to the intermediary – as you can see in the diagram below:
Manufacturer 1 Manufacturer 2 Manufacturer 3 Manufacturer 4
Retailer 1
Retailer 4
1
J+ Retai
INTERMEDIARY
*–
^-— .
er2
Retailers
There are various types of intermediaries and each performs different functions. Some intermediaries take legal title to the products and some do not, some do not even take physical ownership of them.
Now we will explore the different types of intermediary that exists.
8.3 Wholesalers
Wholesalers do not trade with the end user and usually purchase goods in order to resell them to other intermediaries, typically retailers. Wholesalers legally own the goods they purchase and also physically store and handle the goods.
There are two main types of wholesaler:
Full service wholesaler
Limited service wholesaler.
Full Service Wholesaler
This type of wholesaler offers a wide array of services. These services include sourcing products and ‘bulk breaking’ (which involves buying a large amount of product and breaking it into smaller portions so that small independent retailers can afford to purchase it). They also offer services such as transportation and delivery and financial credit facilities as well as offering advice and assistance to the small manufacturer or retailer who does not have the relevant experience. Full service wholesalers sell mainly to retailers.
Limited Service Wholesaler
This type of wholesaler only offers, as their title suggests a limited service of very clear-cut services in order to keep costs to a minimum. There are various sorts of limited wholesalers, but one of the most common is the cash and carry whose main client is the small independent retailer. The retailer makes use of the cash and carry as a shopper would use a supermarket.
8.4 Retailers
Retailers sell directly to the consumer, but retailers themselves may have purchased the goods from a number of sources such as wholesalers, agents or directly from the manufacturer. A retailer’s main functions are to:
assemble a wide range of goods which will ultimately meet the needs of their target
markets
give consumers help and advice if required
provide transport and storage of goods
persuade consumers to buy in an appropriate environment – their shop!
Retailing covers all the activities involved in purchase decisions where the goods or buyers are the ultimate consumers of the goods or services. Retailing activities usually take place in a store, but exchanges through telephone selling, the Internet, vending machines, and mail-order also occur as we will explore below.
There are many different types of retail outlets according to Brassington and Pettit, Principles of Marketing 3rd Edition. These include:
Department Stores: Typically occupy a prime location in a town or city centre.
Examples include Bloomingdales and Macey’s in the US, and Harrods in London.
They are large stores divided into various different departments from toys to sports,
kitchenware to ladies fashion. A common progression in department stores is the
‘store within a store’ concept where retailers purchase space in the department store
and operate a trading area of its own – examples include Jaeger, and many designer
fashion labels
Variety Stores: These shops tend to be smaller than department stores and offer
narrower product ranges. Examples in UK include Marks & Spencer and British
Home Stores (BHS). They attract mass markets and rely on high volumes of
consumers
Supermarkets: These large self-service stores offer mainly food many including in-
store bakeries, fishmongers and butchers. More recently they offer a selection of
clothing, toys, gardening equipment, homeware as well as electrical goods such as
televisions and DVDs. They are traditionally cheaper than independent shops such
as grocers as they can operate economies of scale and can generally be more
efficient in forecasting and physical goods management through the use of state-of-
the-art technology
Hypermarkets: The only difference between a supermarket and a hypermarket is
the physical size of the shop. A supermarket’s general size ranges from 2500m2 –
5000m2 whereas a hypermarket is anything over 5000m2
Out of Town Speciality Stores: This type of retailer tends to focus on one main
type of product such as electrical goods, furniture or carpets. These retailers are
usually found in out of town retail parks which will typically have car parking facilities
Town Centre Speciality Stores: Examples include bakers, florists, confectionery
shops all concentrating their efforts on a very specific product range
Convenience Stores: There is still a place for convenience stores, especially those
offering groceries, confectionery, etc. Many consumers do not want to visit the
supermarket to purchase one or two items they perhaps forgot, or have run out of, so
the logical choice is to go to the convenience store. The latest development in this
area is the petrol station convenience store – offering everything from breakfasts and
magazines to soup, milk and bread
Discount Stores: Consumers can buy in bulk at very competitive prices. There is minimal service in order to keep costs down and also not nearly as much product choice with only the main brands being stocked
Markets: Many towns and cities have permanent markets which operate on certain days of the week. These types of market typically sell clothing, housewares, toys and some more unusual crafts.
Catalogue Showrooms: Although these stores have actual premises they operate through a catalogue – many catalogues are displayed in the store with only a limited amount of merchandise. If a consumer wishes to purchase anything they fill in a slip and take it to the cashier. Through the sophisticated stock system the order is passed through to the storeroom at the back and the customer waits while the product is brought out. The main advantages of this type of retailer is that they can afford to carry a large range of goods, whilst not having to find the physical space to display them, and therefore offer competitive prices.
In-home Selling: This involves selling to the consumer in their own home. It can be through door-to-door selling where a sales representative calls at the house, or through party plans where a party organiser will organise ‘parties’ in consumers’ homes where guests are invited to look at or try the products and order them too.
Mail Order and Teleshopping: Mail order generally consists of a catalogue
delivered to the consumer’s house. The consumer can then place an order which is delivered to their house either through the use of couriers or the postal service. Teleshopping represents a wider range of activities including shopping by telephone in response to an advertisement shown on television, shopping through one of the many home shopping channels which are now very popular, or interactive shopping via the Internet.
Vending: Vending machines are usually found in workplaces, train stations, factories and staffrooms. They are best suited for small items, frequently purchased and not expensive. Vending machines are ideal for products such as confectionery, tobacco and soft drinks. The main drawback to vending machines is that they need to be regularly restocked and maintained.
8.5 Other Intermediaries
There are various other intermediaries which can form part of the distribution chain:
Agents and Brokers: Do not usually take legal ownership of the goods but will act on the seller’s behalf for a commission-based fee. They are worth using if an organisation is entering a market or country that it does not know very well. However, it is important that the agent or broker is not already acting for a similar company or selling a similar product
Distributors: Usually sell the product to third parties through entering into a legally binding contract with the manufacturer
Franchisees: Have a legally binding contract which states that they can supply specific goods/services to the precise and detailed blueprint of the franchiser. The legal agreement will cover the price, promotion and marketing areas of the product to ensure uniformity of the franchise. A prime example of a successful franchise is McDonalds the fast food hamburger chain.
8.6 Channel Levels
As we have discussed, channel structure is all about moving products from the place of manufacture to the end-user whether that be consumer or industrial. The different routes and numbers of intermediaries that a product may pass through on its way to its final destination will depend on the market being served and product itself. Obviously some routes are much shorter than others. Let’s look at some of the most popular routes to market which is easier if we split the market into consumer and industrial.
Consumer Markets
Direct from the Manufacturer to the End User
The manufacturer supplies goods directly to the consumer. It could be through mail order or the Internet, but no intermediaries are used. Other examples include party plans and door-to-door selling which has been discussed earlier in the section.
Manufacturer to Retailer to End User
As you can see this involves one intermediary – the retailer. This is probably most favoured by larger retailers such as supermarkets that have the power and resources to buy in larger quantities and enjoy the benefits that come with that, such as being able to offer lower prices.
Manufacturer to Wholesaler to Retailer to End User
The chain is getting progressively longer now – using two intermediaries. This type of channel is favoured by the smaller retailers and manufacturers as using a wholesaler allows them to access resources and expertise they themselves do not perhaps possess, as mentioned earlier in this section.
Manufacturer to Agent to Wholesaler to Retailer to End User
One of the longest chains of distribution, the adding of an agent may be vital to the success of the product, especially if the manufacturer has no knowledge of the market it is selling to. The agent can bring specific knowledge and expertise of the best and most cost-effective routes.
Industrial Markets
Instead of products going to the consumer, products are moving from business to business. This can mean entirely different routes to market if the product is to be successful. Products typically sold to other organisations may be high in technical specification or require to be bespoke, with repeat purchase patterns varying greatly. The main distribution channels are:
Manufacturer to the End User Organisation
This direct route straight to the organisation is most suited for products with a technical specification or very expensive products. With this type of distribution channel, buyers are likely to have very specific requirements.
Manufacturer to Distributor to Organisation
The addition of intermediaries tends to happen when the size of business end user becomes smaller. In the building trade many builder’s merchants (distributor) act in the same way a wholesaler does by stocking large quantities of product and ‘breaking bulk’ to allow small builders to buy with a great deal of choice.
Manufacturer to Agent to Organisation
As with the consumer market, a manufacturer may employ an agent as part of the distribution chain if the agent possesses local knowledge and expertise in the specific organisational market.
Manufacturer to Agent to Distributor to Organisation
This is one of the longest channels of distribution in industrial markets and may be used to service markets where the manufacturer has no direct experience such as export markets.
8.7 Vertical Marketing Systems
Although we have discussed each of the intermediaries as separate entities within a distribution channel, it is becoming more and more common for members of the same channel to form close relationships (sometimes contractual) known as vertical marketing systems (VMS). The advantages of these vertical marketing systems is to minimise risks, conflicts and gain maximum benefits from the channel in terms of profit.
There are three main types of vertical marketing systems (VMS):
Corporate VMS
Administered VMS
Contractual VMS.
Corporate VMS
This type of VMS exists when an organisation is the owner of, or runs other levels in the distribution channel – known as vertical integration. This can happen at any level with the wholesaler, retailer or manufacturer acquiring and controlling other levels in the channel.
There are two types of vertical integration:
Backward Integration: either a wholesaler or retailer will acquire and control
another wholesaler or perhaps manufacturer (moving backwards in the distribution
channel)
Forward Integration: manufacturers acquire either wholesalers and/or retailers
(moving forwards in the distribution channel).
The main advantage of a corporate VMS is that the distribution channel is bespoke and perfectly fits the owner’s product as well as meeting the corporate objectives – which, because the owner is in control of the distribution channel, are shared.
Administered VMS
This VMS is typically a traditional channel where one member becomes more dominant than the others. Large supermarkets and retailers tend to have much more control and can exert a lot of influence on this type of VMS as their choice of supplier is vast. The suppliers have little choice but to basically do what is asked of them or face being pushed out of the distribution channel.
Contractual VMS
This type of VMS is the most common form where all members of the distribution channel enter into a contractual agreement which is legally binding. Each member still keeps its independence but the contract means that much of the conflict over who has responsibility for what can be eliminated.
There are three main types of contractual VMS:
Retail Co-operatives: by working as one large group, many retailers find that they
can increase their purchasing power giving small independent retailers access to a
much wider product choice
Wholesaler Voluntary Chains: wholesalers set up contractual arrangements with
independent retailers to help organise activities such as purchasing and promotion
Franchises: as discussed earlier, franchisees have a legally binding contract which
states that they can supply specific goods/services to the precise and detailed
blueprint of the franchiser. The legal agreement will cover the price, promotion and
marketing areas of the product to ensure uniformity of the franchise.
8.8 Channel Strategy
Decisions need to be made regarding all of the functions and responsibilities within a distribution channel, as well as the way in which remuneration will be handled and how alternative routes to market will be assessed. This is called channel strategy. One of the main considerations in channel strategy is market coverage. In other words who is the end consumer and what is the best way to target them and ensure that the product reaches them in the most cost-effective manner. There are three main channel choices:
Intensive
Exclusive
Intensive: This involves the product being stocked and supplied to every available outlet giving a mass market coverage. This strategy is ideal for products such as cigarettes, confectionery and convenience products such as bread and milk.
Exclusive: This strategy is essentially the opposite of Intensive in that the organisation must specifically choose one outlet within a geographic location to stock its product). A prime example of this would be the car industry. This may inconvenience consumers who will have to research and find the product and perhaps even travel some distance in order to view and purchase it. However this strategy does allow the manufacturer to give the product more of a premium price and the exclusive distribution strategy suggests an exclusive product.
Selective: An organisation will choose a certain select number of outlets in which to stock its products. This strategy is somewhere in between Exclusive and Intensive distribution. It may be that the product needs specialised sales people to help sell it, rather than let it sell itself. The perfume industry uses this strategy to portray the product as upmarket and luxurious. However, pressure from high street stores which obtained supplies of perfume and sold them at a lower price has led to much more focus on price in this industry.
8.9 Factors which Influence Channel Strategy
There are various factors which will have an impact on which channel strategy to choose. These include:
Organisational Constraints: any channel strategy chosen must reflect the
organisation’s goals and objectives as well as its resources. It is vital to remember
that objectives and situations may change, which may ultimately result in a change in
channel strategy. For example, there may be a demand for a speedier delivery, or
more geographic locations to supply product to
Marketplace: a major factor in channel decision must be the marketplace in which
an organisation is operating. How competitors take their products to market, the
optimum number and location of outlets, whether it is necessary to deal with
intermediaries or not are all pertinent questions which need answering before a
successful channel strategy can be implemented
The Product: the product itself has a major impact on channel strategy. For
example, questions such as how easy is the product to transport? and what is the
product’s shelf-life (is it perishable or not)? This will have a direct influence on the
channels strategy ultimately chosen
Dynamic Environment: all business environments change over time, whether it’s
new competitors or products entering the market, new technology or new legislation.
All of these factors must be monitored and taken into account when choosing a
channel strategy. Remember back to Section 5.1 – the PEST analysis. It can
highlight serious implications for channel strategy
Buyer Behaviour: it is vital to understand consumer purchasing patterns within your marketplace. How the consumer thinks and acts will play a vital part in the success or indeed failure of your channel strategy.
An organisation should look at all available options open to it regarding channel strategy. This will include looking and comparing costs of delivery with the time it takes to deliver the goods. Before taking a final decision on channel strategy, an organisation should cross-reference this information with client and consumer expectations as well as its own financial and manpower resources.
8.10 Physical Distribution
Physical distribution is concerned with physically moving products from the factory to the consumer in the most cost effective manner. It is an increasingly important area due to increasing costs of labour, transport and storage. Every organisation involved in the movement of goods needs to have a plan for physical distribution which should ‘mesh’ with these of the customers and suppliers.
Physical distribution or marketing logistics involves planning, implementing and controlling the physical flow of materials, final goods and related information from points of origin to points of consumption to meet customers requirements at a profit.
Traditionally physical distribution began with products at the factory and attempted to find low cost solutions to transport them to customers. Marketing Logistics thinking starts with the marketplace and works backwards to the factory.
Physical Distribution also involves coordination of the following:
the activities of suppliers
purchasing agents
marketers
channel members
These activities include forecasting, purchasing, production planning, order processing, inventory management, storage and warehousing, documentation, stock control, customer service and transportation planning.
The main objectives of physical distribution are to decrease costs and transit time while increasing customer service.
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