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CHAPTER ONE
INTRODUCTION TO MARKETING

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Provide a comprehensive definition of marketing

Identify and understand the concepts, functions and philosophies of marketing
Differentiate what exchange, transaction and relation marketing are
Recognize the types of demand and their marketing implications
Take in knowledge of the stages of customer development

1.1 Introduction

Today’s successful companies have one thing in common. They are strongly customer focused
and heavily committed to marketing. These companies share a passion for understanding and
satisfying customer needs in well-defined target markets. They motivate everyone in the
organization to help build lasting customer relationships based on creating value. Customer
relationships and value are especially important today. It is more important than ever to build
strong customer relationships based on real and enduring value. We encounter the word
marketing in our everyday language. A layman views it more or less equivalent to the term
selling and advertising. In fact not only a layman that considers it this way but also there are
some companies that considers marketing as a business function whose responsibility area is to
dispose of whatever products the firm decided to produce. However, in today’s turbulent and
competitive business environment, selling and advertising are only part of marketing.

Dear learner, this chapter introduces you to the basic concepts of marketing. Simply put,
marketing is managing profitable customer relationships. The aim of marketing is to create value
for customers and capture value from customers in return.

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1.2. Marketing Definitions, Scope and Features

There are a number of ways to define marketing. For example, American marketing association
defined marketing as follows:
Marketing is an organization function and a set of processes for creation, communication and
delivering value to customers and for managing customer relationships in ways that benefit the
organization and its stakeholders.
Marketing can also be defined as a total system of business activities designed to plan, price,
promote and distribute want satisfying products to target markets in achieving organizational
objectives. It is process of planning and executing, consumption, pricing, promotion and
distribution of ideas, goods and services to create an exchange that can satisfy individual and
organization needs.
There are four key constituents for marketing:
1. Customers
2. Employees
3. Marketing partners (channels, suppliers, distributors, dealers, agencies)
4. Members of the financial community (stakeholders, investors, analysts)

Marketing Management is the art and science of choosing target markets and getting, keeping
and growing customers through creating, delivering and communicating superior value.
Marketing management is the analysis, planning, implementation and control of programs
designed to create, build and maintain beneficial exchange with the target market for the purpose
of achieving organization objectives.

Social Definition of Marketing

Marketing is a social process by which individuals and groups obtain what they need and want
through creating, offering and freely exchanging products and services of value with each other.

Managerial Definition of Marketing

The aim of marketing is to know and understand the customer so will that the product and
service fits him and to make the product and service available.

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1.3. Core Concepts and Philosophies of Marketing

Needs, Wants And Demand

Needs are the basic requirements of humans such as food, air, water, clothing and shelter. There
are five types of needs namely stated needs, real needs, unstated needs, delight needs and secret
needs.
Wants are desires for specific satisfiers of needs. For example a person can satisfy his need for
food by consuming ether burger, sandwich or pizza; also a person can choose to travel by bus,
plane or train. Wants are shaped by one’s society.
Demands are wants for specific products baked by an ability to pay. Companies must measure
not only how many people want their product, but also how many people would actually be
willing and able to buy it.

Product
Product is anything offered to satisfy a need or a want. Products can be:
a. Goods: Constitute the bulk of most countries’ production and marketing effort.
b. Services: are acts or performances offered by one party to another.
c. Events: include trade shows, artistic performances, global sporting events such as the
Olympics and world cup.
d. Experiences: visits, vacations, camping
e. Persons: artists, musicians, athletes and other celebrities
f. Places: cities, states, regions and whole nations compete actively to attract tourists,
factories, company headquarters etc…
g. Properties: are intangible rights of ownership of real property (real estate) or financial
property (stocks and bonds).
h. Organizations: actively work to build a strong, favorable and unique image in the minds
of target publics.
i. Ideas: include business proposals. Products and services are platforms for delivering
some ideas

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Value: reflects the perceived tangible and intangible benefits and costs to customers.
Customer Satisfaction: is a measure of a product’s perceived performance in relation to
the customer’s expectation. When performance of the product is below the customer’s
expectation, the result will be satisfaction; when performance meets expectation,
satisfaction; and when performance exceeds expectation, delight.

Target Market and Segmentation

Segments: are distinct groups of buyers that have demographic, psychographic and behavioral
differences among them.
Target market: is the segment that presents the greatest opportunity.
Market is the collection of potential and actual buyers showing a particular need or want and
who might be willing and able to exchange. There are two parties in the market, marketers and
prospects. Marketers are persons or organizations who strongly seed one or more individuals or
organizations that might engage in an exchange of value. Prospects are parties whom the market
identifies as potentially willing and able to engage in exchange of value. Both sellers and buyers
can be marketers or prospects.
Market place: is the physical store or shop the buyer goes to.
Market space: is when one goes shopping digitally through the internet.
Meta market: is a cluster of complementary products and services that are closely related in the
minds of customers but are spread across a diverse set of industries.

Exchange, Transaction And Relationship Marketing

Exchange and Transaction
Exchange: is the process of obtaining a desired product form someone by offering something in
return.
Conditions that must be fulfilled for an exchange to occur:
1. There are at least two parties.
2. Each party is capable of communication and delivery.
3. Each party is capable of communication and delivery.
4. Each party is free to accept or reject the exchange offer.
5. Each party believes it is appropriate or desirable to deal with the other party.

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Transaction takes place when the two parties reached at an agreement.

Transaction: is a trade of values between two or more parties. There are two types of
transaction; Monetary Transaction – a transaction that transacts money with something of
value: and Barter Transaction – which trades goods or services for goods or services.

Relationship marketing
Relationship marketing has the aim of building satisfying long-term relationships with key
parties such as customers, suppliers and distributors in order to earn and retain their business.
The ultimate outcome of relationship marketing is marketing network.

Marketing Network
A marketing network consists of the company and its supporting stakeholders (customers,
employees, suppliers, distributors, retailers, advertising agencies, etc.) with whom it has built
mutually profitable business relationship.

Marketing Channel
Marketing channel describes a channel staring form raw material and spare parts to final
products that are carried to final buyer. There are three kinds of marketing channels:
(1) Communication Channels: send and receive message to and from target buyers.
E.g. TV and radio advertisements;
(2) Distribution Channels: display, sell or deliver the product or service; and
(3) Service Channels: warehouses, banks and insurance companies.
Competitors: are all the existing rival products and substitutes that a buyer might
consider to buy.
Marketing Environment: comprises Task environment (suppliers, distributors, etc.) and
Broad Environment (economic, natural, technological political, legal and Socio-cultural
environment)
Marketing program: is a set of marketing decisions that can be implemented in
different situations.

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1.4. Marketing Philosophy towards the Market Place

Marketing management philosophies show the relative weight given by a company to the
interests of the society and the consumer. There are five competing marketing management
philosophies or orientations that are;
Production concept
Product concept
Selling concept
Marketing concept
Societal marketing concept

1. The Production Concept

The production concept is one of the oldest in business and the most traditional marketing
philosophy. It was developed during the industrial revolution (1865-1920’s). it holds that
customers prefer products that are widely available and inexpensive. Managers of production
oriented companies focus on mass production, i.e. making the product at large quantity, and on
mass distribution or making the product available in very store production concept can be
effective when demand is greater than supply, large quantity of production is required to
minimize the unit cost of a product. This concept caused the economic depression of 1929-33
because of over production.

2. The Product Concept

This concept asserts that consumers will favor those products that offer the most quality,
performance and innovative features, managers following this philosophy focus on making high
quality products and improving them continually. The major limitation of this concept is the
tendency to create Marketing Myopia (management shortsightedness). In this situation, the
marketer over emphasizes on research and development, designs the product with little or no
customer input and advocates the self-admiration.

3. The selling concept

The selling concept assumes that consumers, if left alone, are reluctant (unwilling) to buy enough
of the company’s products. The company must therefore try to stimulate them through

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aggressive selling and promotion. This concept was developed during WW II. The concept can
be effective under three conditions :(1) if the firm has over capacity; (2) if supply greater than
demand; and (3) if the product is unsought good ( a good that buyers normally do not think of
buying). The problem of this concept is that customers who were manipulated to buy the product
will like it, bad-mouth it or complain to consumer organizations.

4. Marketing Concept
It emerged in the mid- 1950s. The concept assumes that the success of the firm depends on:
The ability of the firm to determine the target market and understand its needs and
wants.
The ability of the firm to deliver desired customer satisfaction more effectively and
efficiently than competitors.
A market oriented firm is preoccupied with idea of satisfying the customer by means of goods
and services that consumers want to by rather than what the firm wants to make. In general, this
concept is customer-centered philosophy.
Pillars of the Marketing Concept
Target market: it is a selected segment of customers.
Customer needs: some customers have needs of which they are not fully conscious.
Integrative marketing: says that all departments of the company should work together.
Profitability

The Difference between Selling Marketing Concepts

Selling Marketing
Starts with Factory Target market
Focuses on Product Consumer needs
Means Selling and promoting Integrated marketing
Ends Profit through sales volume Profit through customer satisfaction

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Exercise1.1.

In our country, is there any company who follows the marketing concept?

5. The Societal Marketing Concept

This concept holds that the company must not only provide what people want, but also must take
into account the long-run societal welfare. Thus, the company must offer environmental friendly
products, focus on economical resource utilization and offer health protective products. This
concept calls up on marketers to build social and ethical considerations into their marketing
practices.

1.5. Marketing and Demand Management

Since marketing management involves influencing the level, timing and composition of demand
for the company’s product, sometimes it is also known as demand management. Demand
management serves what customers look for no matter when.
There are 8 different types of demand
Negative demand
No demand
Latent demand
Falling (declining) demand
Irregular demand
Full demand
Over-full demand
Unwholesome demand

a. Negative Demand: it is a situation where the buyer does not like the product and may even
pay a price to avoid it.
Marketing Task: converting the negative demand to positive demand
Marketing Situation: conversional marketing

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Marketing Strategies: positive promotion, continuous advertising, reduction in price

and redesigning the product
b. No Demand (Non- Existent Demand): in this case, consumers neither like nor dislike the
product. They are indifferent towards the company’s offer. Consumers may be unaware of or
uninterested in the product.
Marketing Task: Creating demand (connect the benefits of the product with the
customers’ natural need and wants)
Marketing Situation: Creative marketing
Marketing Strategies: Effective communication and incentives for buying
c. Latent Demand: This is when consumers are not satisfied with existing products and are
looking for new products.
Marketing Task: Develop demand (develop effective goods and services that would
satisfy the demand)
Marketing Situation: Developmental marketing
Marketing Strategies: Conduct intensive and extensive research to develop new
products, determine the size of the potential market and create and maintain long-term
relationship with customers.
d. Falling (Declining) Demand: It is a condition where demand is declining due to weak
marketing program, high completion, high price, etc…
Marketing Task: Reverse demand
Marketing Situation: Creative re-marketing
Marketing Strategies: Lowering the price, offering additional incentives and building
favorable product image.
e. Irregular Demand: Is a demand that varies on a seasonal, daily or hourly basis. For
example, the demand for umbrella and rain jackets will be high during the rainy season and
the number of customers in restaurants increases at lunch time.
Marketing Task: Synchronize demand (varying the level of output and time allotted
to render the service)
Marketing Situation: Synchro marketing
Marketing Strategies: Set high price and increase advertisement during peak period
and set lower price and frequently advertise during slack period.

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f. Full Demand: it is a state where demand and supply are equal. The company is pleased with
its volume of business. Customers are adequately buying all products put in to market place.
Marketing Task: Maintain demand
Marketing Situation: Maintenance marketing
Marketing Strategies: Continuously monitor the marketing environment and make
some necessary adjustments so that the trend will continue.
g. Over-full Demand: is a demand greater than the supply capacity of the company.
Marketing Task: Reduce demand
Marketing Situation: De-marketing marketing
Marketing Strategies: Increase price, decrease incentives and decrease advertising

h. Unwholesome Demand: it is a state where some part of the society like the product and
others are against it. Products that have undesirable social consequences such as cigarette,
hard drugs, x-rated movies and hand guns are normally considered as harmful.
Marketing Task: Destroy Demand
Marketing Situation: Counter Marketing (Social Marketing )
Marketing Strategies: Set high price, earning, and cautionary labels such as “tobacco
damages health” and communicate the negative impact of the product.

Activity 1.1.
1. Given examples from your local condition for each demand states
2. Which state of demand mostly occurs in your local areas? What marketing task must be
taken for the demand identified?

1.6. Stages of Customer Development

a. Suspects: are individuals who might be thinking about buying the company’s product.
b. Protects: are individuals who are willing and able to buy the product.
c. Disqualified prospects: adder those whom the company rejects because they would be
unprofitable.

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d. First time (trial) customers: are those who are buying the company’s products of the
first time.
e. Repeat customers: are buyers who consume both the company’s products and
competing (rival) brand simultaneously.
f. Clients: are people who buy only from the company with respect to a specific product.
g. Advocates: are customers who praise the company and strongly encourage others to buy
from it.
h. Partners: are customers who actively work together with the company.
i. In-active (Ex-Customers):- are customers who quit their relationship with the company.
It is possible to convert ex-customers to customers.

Suspects

First time Repeat

Prospects Clients Advocates Partners
customers customers

Disqualified
prospects Inactive or ex-
customers

1.7. Marketing Functions

The universal functions for marketing are:

1. Buying Function: means looking for and evaluating goods and services. A manufacturer
buys the raw material for production; a wholesaler buys goods to sell them, to retailer. A
retailer sells goods to consumer- buying involves transfer of ownership of goods.
2. Selling Function: involves promoting the product with the use of personal selling. The
profit making objective of a business concern is achieved only through the sale of goods.
After industrial revolution and increase of machinery, mass production has become
possible which in its turn requires mass selling of goods. This function involves creation
of demand, market research, selection of channel of distribution etc

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3. Transportation: means the movement of goods from one place to another. Marketing
system requires an economical and effective transportation system. It resulted in the
extent of markets, regular supply, lower price and improved services to the consumers.
4. Storing function: when production is seasonal, but consumption is perennial or when
production is continuous but consumption is seasonal- storage is essential. It involves
holding and preserving goods between the time of production and time of their
consumption. It will adjust the supply to demand and holds the price line. That is
equalization. It creates time and place utilities.
5. Standardization and grading: Standardization is the process of setting up standards and
manufacturing products in conformity with those standards and includes the process by
which this conformity is assured. Thus, it ensures the uniformity of size, shape, design,
color and physical properties of the product. Grading is a part of the process of
standardization. It is the process of storing out goods into a number of grades or classes
according to some characteristics such as quality and size. It helps not only the producer
but the sellers and consumers also.
6. Financing: provides the necessary cash and credit to produce. Transport, store, promote,
sell and buy products. It is very difficult to carry on marketing activities smoothly
without the availability of adequate and cheap finance. Commercial banks, co-operative
banks, credit societies, and Government agencies arrange for short-term, medium-term
and long-term finances. Trade credit is also one of the importance sources of finance.
7. Risk taking: involves bearing the uncertainties that are part of the marketing process. :
Marketing of goods involves innumerable risks due to theft, deterioration, accidents,
change in fashion, and change in habits of consumers, natural calamities, and competition
in the market.
8. Market information function: Decisions on marketing are based on information
regarding market conditions. It involves the gathering, analysis and distribution of the
information needed to plan, carryout and control marketing activities. In fact, market
research has now become and independent branch of marketing.

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1.8. Responsibilities of the Marketing Manager

Marketing manager is the person responsible for the performance of marketing activities which
include a number of functions such as marketing research, strong, transportation, advertising,
selling, distribution, promotion etc. He is accountable, like other departmental heads, to the chief
executive of company. There are several operating managers working under him who are
responsible for performing successfully particular activities, such as product development,
marketing research, advertising and physical distribution, etc, The marketing manager has to
control and co-ordinate their activities, Besides it, the responsibilities of marketing manager
may be summarized as under:
(1) Market Analysis: The main aim of marketing management is to cause the sale of company
products. The sale of the product is possible only when the product is matched with the market.
For it, the marketing manager has to make study of the various environmental factors that affect
the demand of the products. This analysis is done through market research. In market research he
undertakes the study of economic and social conditions of the people, of change pattern in the
human needs and subsequently in the demand of products and of technological factors, etc.
(2) Determining Market Goals: After analysis of the market, marketing manager lays down the
marketing goals to be achieved. The long term goal of the marketing activities is to earn suitable
return on the sources employed in the business. On the other hand, the sholrt0term goal may be
fixed in terms of sales volume to be achieved in different market segments or the market share of
the company in the total industry sales. As far as possible, these goals must be verifiable and
comparable
(3) Organizing the Marketing Activities: The third responsibility of the marketing managers is
to develop an internal organization to achieve the goals laid down. Organizing function includes
the following:
a. Determining the total marketing activities to be performed in the light of the analysis
of market conditions.
b. Grouping of the activities.
c. Assigning the grouped activities to individuals and department.
d. Delegating them authority.
e. Exacting responsibility from them.

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The activities of the marketing department can be organized on the basis of products, sales areas,
types of customers, specific marketing functions or a combination of all these.
(4) Assembling: After determining goals and organizing the marketing activities he has to
procure necessary resources such as personnel to man the various positions in marketing
department, money to finance the various marketing operations, etc. In a small organization, a
single person performs these functions; but in a large organization, marketing manager through
the various departmental managers procures these resources. For example, personnel for
marketing division are selected and trained by the personnel department but in consultation with
marketing manager.
(5) Product Management: Though production is the responsibility of the market enables him to
exercise considerable influence on the development and planning of product. The decisions to
add, drop or modify the products are taken in consultation with the marketing manager.
Marketing manager helps a lot in the matter of pricing, packaging, standardizing, branding and
grading. He has also to take decisions as regards advertising media, distribution channels, storage
facilities, transportation and minimum product stock, etc.
(6) Controlling Marketing Activities: The marketing manager is a member of the top
management team. He has to control the various activities of his department. Successful
performance of marketing activities cannot be ensured unless these activities are properly
controlled. Control involves the determination to standards of performance, measurement of
actual performance, comparison of actual performance with the standards and correcting
deviations, if any. Hence, it is also an important responsibility of the marketing manager.

Qualities of Marketing Manager

1. Enthusiasm, patience, timing and judgment
2. Liaison with his own departments, his own distributors, with other agencies
3. Thinking objectively
4. Loyalty towards company
5. Sympathetic towards all persons working under him.

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Summary

There are several definitions of marketing. A definition given by American Marketing

Association says that marketing is organizational function and set of processes for creating,
communicating and delivering value to customers and for handling customer relationships for the
mutual benefit of the organization and its stakeholders. The core concepts of marketing are
needs, wants, demands, products, markets, value, satisfaction, etc. needs are the basic human
requirements; wants are the ways people satisfy their needs and they are shaped by culture and
individual personality. When backed by buying power, wants become demands. People satisfy
their needs, wants and demands with products. A product is anything that can be offered to a
market to satisfy a need, want or demand. It can include goods, services and entries such as
persons, places, organizations and ideas. Marketing had evolved through production, product,
and selling, marketing and most recently societal concepts. Companies face eight different kinds
of demands for their products and each type of demand pose a need for separate marketing tasks
and strategies to deal with.

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Self Assessment Questions (SAQs)

1. Which of the following is not true about human needs?

A. It is a state of felt deprivation of some basic needs
B. It is requirement for few things that are useful for survival
C. They are created by the society but not by marketers
D. They exist in the very texture of human biology
E. B and C
2. Which of the following is not the way in which people can obtain products they want?
A. Exchange
B. Self Production
C. Begging
D. Stealing
E. None
3. Which of the following combination of state of demand and marketing task is a wrong?
A. No demand- Conversational Marketing
B. Latent demand – Developmental Marketing
C. Negative Demand – Simulation Marketing
D. Full demand – Maintenance Marketing
E. A and C
F. A and D
4. The environmental factor which has an influence on a specific organization where the
organization doesn’t have the capacity to control it is called.
A. Micro external Environment
B. Macro external environment
C. Internal environment
D. A and C
E. None
5. Which one of the following offer represents tradeshows, artistic performance, Olympic
and world cup?
A. Events
B. Persons
C. Experience
D. Service
E. None

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CHAPTER TWO
THE MARKETING ENVIRONMENT

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Answer what are the forces in the company’s micro and macro environment
Comprehend the steps followed in analyzing competitors
Aware yourselves about strategic business units and the models available in
managing them
Uncover the kinds of opportunities that exist in the marketing strategy planning
process

2.1. Introduction

Organizations operate not in a vaccum rather in a complex and changing environment. Regarding
this, other actors in the environment such as suppliers, competitors, intermidiaries, customers etc
may work with or against the company. Likewise, major forces in the economic , demographic,
natural, technological etc environment may shape opportunities or pose threats, and hence affect
the organization’s ability to serve customers and develope lasting relationship with them.
Similarly, the company’s differnt departments, resources etc may act as a source of its weakness
and strength. To this end, organizations need to identify and then respond to numereous
environmental forces that may have implication on the different activities the organization is
engaged. The marketing environment is made up of micro and macro environment

2.2. Forces in the Company’s Micro Environment (Task Environment)

These are forces in the immediate environment of marketing and directly affect the marketing
manager’s ability to create relationship between his target market and to serve his customers and
achieve his marketing objectives. Some of the actors in the micro environment are:

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1. The company
2. Suppliers
3. Marketing intermediaries
4. Customer
5. Competitors
6. Publics

1. The company (Other Departments of the company)

In designing marketing plans, the marketing manager must take other departments into account
to make the marketing activity successful. A company’s internal environment includes:
Top Management: the marketing manager must make decisions within the plan made
by top management and marketing plans must be approved by top management
before they can be implemented.
Finance Department: it allocates funds to carryout marketing plans.
Research and Development: focuses on designing safe and attractive products (up-to-
date and differentiated products).
Procurement Department: does the purchasing and quality inspection for suppliers
and raw materials.
Manufacturing Department: produces the desired quality and quantity of products.
Accounting Department: measures revenues and costs.

2. Suppliers

They are firms that provide the resources (material, Labour, technology, service, etc.) needed by
the company to produce its goods and services.

3. Marketing intermediaries (Marketing Channel Firms)

Marketing intermediaries are independent firms that help the company in selling, promoting,
financing and distributing/shipping its goods and services. Intermediaries operate between a
company and its markets and between a company and its suppliers. Intermediaries include two
types of institutions: (a) resellers and (b) facilitating organizations. Resellers, also know as

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middlemen, help the company find final customers. Wholesalers and retailers can be examples of
such companies. Whereas, facilitating organizations include physical distribution firms
(transportation and warehousing), financial intermediaries (banks, credit associations, insurance
companies, micro financing institutions etc.) and marketing service agencies (market research
firms advertising agencies and marketing consulting agencies).

4. Customers (Markets)

There are five types of customers

a. Consumer markets: consist of individuals and households that buy goods and services
for personal consumption.
b. Business markets: buy goods and services for further processing for use in their
production process.
c. Reseller markets: buy goods and services to resell at profit.
d. Government markets: are made up of government agencies that buy goods and services
to produce public services or transfer to those who need them.
e. International markets: comprise of consumers, producers, resellers and governments in
other countries.

5. Competitors

Competitors are firms/rivals that produce and sell substitute/similar goods and services or firms
that use similar inputs. A company must provide greater value and satisfaction than its
competitors.

6. Publics

Public is any group that has an actual or potential interest in or impact on an organization’s
ability to achieve its objectives. Parties of this sort include.
Media public: they make some news about the company and promote the company’s
products. They include newspapers, magazines, Radio and TV.
Financial public: financial intermediaries facilitate transaction, while financial public
grant loan. Firms in this category include banks, investment house and stockholders.

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Government public
General public: includes the general public’s attitude towards the company.

2.3. Forces in the company’s Macro Environment (Broad Environment)

The macro environment consists of the large societal forces that affect the whole micro
environment. It includes.
1. Demographic environment
2. Economic environment
3. Technological environment
4. Natural environment
5. Political and legal environment
6. Social –cultural environment

1. Demographic environment

Demographic is the study of human population in terms of size, density, location, age, gender,
race, occupation (profession) and other variables. The demographic environment is the major
interest to marketers because it involves people and markets are made up of people.
Demographic environment is concerned about:
a. Age mix of the population: a population can be divided into six age groups
Preschool
School –age children
Teens
Young adults (25-40)
Middle aged adults (40-65)
Older adults (65 and above)

For marketers, the most populated group shapes the marketing environment. For example, in
Mexico, where there is a very young population, a marketer would
Concentrations on products like milk, diapers, school suppliers and toys; and in a country with a
very old population such as Japan; attention would be given to adult products.

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b. Educational Level

Purchase decision of markets is dependent upon past experience, awareness and knowledge of
the buyers. The population in any society falls into five educational groups
Literate
High school dropouts
High school diplomas
College degree
Professional degree

The higher the number of educated people, the higher the demand for quantity books, magazines
and high supply of skill will be.

c. Gender Composition

In areas where the number of females is greater than the number of males, marketing would be
focused on apparels (clothing) and beauty kit (equipment), and if males dominate the population,
automobile and real estate.

d. Population Size, Growth rate and Density

Population size is the total number of people. Population growth determines future population
size. A growing population does not mean growing markets unless these markets have sufficient
purchasing power. Population density is a settlement per area (Km2, Mile2). The most densely
populated area costs less promotion and distribution cost.

e. Ethnic Composition

Ethnic groups have certain specific wants and buying habits. Within each ethnic group there are
consumers who are quite different from each other.

f. Geographic Movement/Shift of population

For example, agricultural input and output markets move following the direction of farmers.

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2. Economic Environment

Markets require purchasing power of people. Purchasing power depends on distribution of

income, the business cycle and savings
a. Distribution of Income: is determined by level of economic development. It is advisable
to refer to market segments’ income rather than nation wide margin of earnings.
b. The business Cycle: economic growth, such as that of Q tar, China and Dubai, attracts
foreign companies. Recession (economic slowdown) occurs when a highly growing
economy slows its pace.
c. Saving: it bears both positive and negative conditions for the company. The positive
condition is that the more customers save, the more amount of money companies get to
their investment. However, is the interest rate is high; the opportunity to borrow money
will be less.

There are four types of industrial structure (levels of economic development)

i. Subsistence Economies: these are economies that consume what they produced
and few opportunities exist for marketers.
ii. Raw-Material-Exporting Economies: they have good market for equipment,
tools, supplies and luxury goods for the rich
iii. Industrializing economies: new rich class and growing middle class therein
demand new type of goods.
iv. Industrial Economies: are rich markets for all sorts of goods.

3. Technological Environment

Technology is the total body of knowledge available for use in developing, manufacturing and
marketing products. Technological innovations can affect a business enterprise in three ways.
i. By influencing the process or method of producing goods and service.
ii. By affecting the existing products. (alteration, adjustment and upgrading)
iii. By forcing creation of new products.

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The most obvious impact of the technological environment on marketing is providing

opportunities for new product development. New technologies that provide superior value in
satisfying needs stimulate investment and economic activity.

4. Natural Environment

Natural environment involves the natural resources that are needed as inputs by marketers or that
are affected by marketing activities. Marketers need to be aware of the threats and opportunities
with four trends in the natural environment.
a. Shortage of Raw Materials: raw materials can be group into three; infinite resources (air
and water), finite renewable resources (forest) and finite non-renewable resources (oil,
platinum, silver, gold and the like). Firms making products out of scarce minerals must
develop substitute materials, for instance plastic pipeline for steel ore.
b. Increased Energy costs: due to the soaring energy cost, companies are making use of
solar, nuclear, wind and other forms of energy.
c. Increased Pollution Levels: some industrial activity will damage the natural
environment. Marketers must choose the least harmful materials, cut hazardous waste,
reduce energy use and improve product recycling.
d. Changing Role of Governments: in many countries, government bodies design
environmental friendly standards.

5. Political and Legal environment

This environment is composed of laws, government agencies, and pressure groups that influence
and limit various organizations and individuals. Important factors of this environment:
a. Business Legislation: it has three main purposes: to protect companies from unfair
competition, to protect consumers from unfair business practices and to protect the whole
society from unfair business behaviour. Marketers must have a good working knowledge
of the major laws protecting competition, consumers and society.
b. The influence of Special Interest (Influence) Groups

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6. Social – Cultural Environment

The society in which people grow up shapes their beliefs, values and norms that define their tests
and preferences (purchase decision).
Peoples’ View of Themselves (Me-Society): People vary in the relative emphasis
they place on self- gratification.
People’ View of Others (We Society): people are concerned about creating long-
lasting relationship with others. This trend calls for products and services that
promote direct relations between human beings such as health clubs.
People’ View of organizations: Most people are willing to work for organizations,
but there has been an overall decline in organizational loyalty that resulted in
company downsizing and corporate accounting scandals.

Exercise 2.1.
1. Discus the factors that affects a specific organization
2. Discuss the factors that affect the industry as a whole.
3. What is the difference between micro and macro external environmental factors?

2.4. Competitors Analysis

Competitor Analysis is the process of identifying key competitors, assessing their objectives,
strategies, strengths and weakness and reaction patterns, and selecting each competitor to attack
or avoid.
1. Identifying Competitors

The key method of identifying is to focus on industry and market concept of completion. Based
on concept of competition, competition can be of two kinds.
a. Industry Concept of Competition: An industry is a group of firms that offer a product or
class of products that are closely substitutes for one another. Example, Coca-Cola and
Pepsi.
b. Market Concept of Competition: According to this concept, competitors are companies
that satisfy the same customer need. For example, Coca-Cola, Coffee bars and fresh-fruit-
juice all satisfy the need for drink. Market concept of competition reveals broader set of

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actual and potential competitors. A company’s closest competitors are those seeking to
satisfy the same customer needs and make similar offer.

A firm may occupy one of the six competitive positions.

i. Dominant: Controls the behaviour of the competitors and has a wide choice of strategic
options.
ii. Strong: Can take independent action without endangering its long-term position and can
maintain its long-term position regardless of competitors’ action.
iii. Favourable: has an exploitable strength and more than average opportunity to improve
its position
iv. Tenable: Performs at a satisfactory level but has a less than average opportunity to
improve its position.
v. Weak: Has unsatisfactory performance but opportunity exists for improvement.
vi. Nonviable: Has unsatisfactory performance and no opportunity for improvement.

2. Assessing Competitor’s Objectives, Strategies, Strength and Weakness

Once a company identifies its primary competitors, it must ascertain their strategies objectives,
strengths and weaknesses.
a. Strategies: A group of firms following the same strategy in a given target market is
called a strategic group. The level of entry barriers differs for each group. If the company
successfully enters a group, the members of that group become its key competitors.
b. Objectives: They can be either of short or long term.

The objective of accompany can be:

Profit Maximization
Market –Share Growth
Cash Flow
Quality leadership
Technological Leadership (Technological Upgrading or Introduction)
Expansion
Service Leadership (Specialization)
Or, Mix of all these

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c. Strengths and weaknesses: we have to see the competitors’:

Resource Condition
Market Share
Product Availability
Technical Assistance
Sales Force
Profit
Reputation (its place in the customer’s mind)

3. Identifying Reaction Pattern

A company’s reaction pattern towards any movement of its competitors falls in one of the four
categories.
a. Laid-Back Competitor: is a competitor that does not react quickly or strongly; in other
words, that is slow or ignorant to the movement of rivals.
b. Selective Competitor: A competitor which reacts only to a certain types of attacks
(change) by rivals ignoring the others. To illustrate, it might respond to price cuts not to
an advertising expenditure increase.
c. Tigers: are competitors that react quickly and strongly to any change in the environment.
d. Stochastic Competitors: show no predictable reaction pattern.

4. Designing the Competitive Intelligence System

Competitive intelligence system is a system of obtaining information about competitive

environment so that effective competitive strategies can be designed by a manager. Steps in
designing competitive intelligence system:
a. Setting-Up the System: involves identifying important types and best sources of
competitive information and assigning a person to manage the system.
b. Collecting the data: some of the sources of information include.
Advertisement of the competitor
Salespersons of the competitor
Suppliers and resellers

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Marker research
Internet
c. Evaluating and Analyzing the Data: The data are checked for accuracy, validity and
reliability.
d. Disseminating Information and Responding: It is the distribution of the information to
the concerned departments.

5. Identifying Competitors’ Strategies

We can classify firms by the role they play in the target market.
a. Market Leader: is a company which may be a pioneer, particularly in new and growing
markets. It has the dominant market share. It leads the other firms in price changes, new
product introduction, distribution coverage and promotion spending. Competitors focus
on the market leader as a company to challenge, imitate or avoid.
b. Market Challengers: They can challenge the leader and other competitors in an
aggressive effort for mote market share. They design offensive strategies that are means
of attacking so that they take the position of the leader.
c. Market Followers: They can learn from the leader’s experience and copy or improve on
the leader’s products and programs usually with much less investment.
d. Market Nicher: These firms specialize in serving market niches (suitable markets)
instead of pursuing the whole market.

6. Selecting Competitors to Attack or Avoid

a. Strong Vs Weak: Based on strength on resources like finance, man power and raw
material. Most companies attack their weak competitors because this requires fewer
resources. Yet, the firm should also compete with strong competitors to keep with the
best.
b. Close Vs Distant: Based on product similarity likeliness of strategies and objectives.
Most companies compete with competitors who resemble them most. E.g. Chevrolet
competes with fords, not with Ferrari. Yet, companies should also recognize distant
competitors. Therefore, competition also exists between different industries like the

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case of a steel manufacture competing with plastic and aluminum products, and
museums with parks and malls.
c. Good Vs Bad (Friendly-Aggressive, well Behaved-Disruptive): Based on rules of
industry. A company should support its good competitors and attack its bad
competitors.
Good Competitors: play by the industry’s rule make realistic assumptions about
industry’s growth potential, set reasonable prices, favour a healthy industry and accept
the general level of their share and profits.
Bad Competitors: Take large risk, invest in overcapacity and upset industrial
equilibrium.

2.5. Establishing Strategic Business Groups

Many large companies operate several businesses. Strategic business units are different
businesses of the company, each requiring its own strategy. For example MIDROC technology
group incorporates Moha Soft Drinks Factory, ELICO, KOSPI, National Motors, MIDROC
Construction, MIDROC Gold, etc. An SBU has three characteristics: it has a single business or a
collection of related businesses that can be planned separately; it has its own set of competitors;
and it has a manager who is responsible for strategic planning, performance and control.
The collection of SUBs that make up the company is known as business portfolio. There are
two models in managing SBUs. They are generally known as portfolio matrix.

a. The Boston Consulting Group (BCG) Portfolio Matrix

b. The General Electric Model (Market Attractiveness- Business Strength Matrix)

a. The Boston Consulting Group (BCG) Portfolio Matrix

There are two factors that measure the SBU’s strength and weakness.
i. Market Growth Rate: is a yearly rate of growth of a market where the SBU operates.
ii. Market Share: Measures the competitive position (strength) of the SBU in its market.

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Depending on these two factors, SBUs can be subcategorized as Stars, Question Marks Cash
Cows and Dogs.
High Low

High Stars Question Marks

Market Growth
Cow Cash Dogs
Low

Market share (Relative market position)

1. Stars: SUBs with high market share in high growth market. They may incure loss, but
they dominate the market.
2. Cash Cows: SBUs with high market share in low growth market. They can help as
financial sources for stars and question marks. Management should design strategies to
gain large amount of revenue and expand for new markets for the product.
3. Question Marks: are SBUs with low market share in high growth market. They usually
convert to star businesses.
4. Dogs: SBUs with low market share in low growth market. They are sources of loss their
costs exceed their profits.

There are four market Strategies according to BCG.

BUILD: refers to investing to grow or expand market share. It is applicable especially for
Question Marks if they are to become stars.
HOLD: it is maintaining the market share. It is appropriate for stars and strong Cash Cows.
HARVEST/MILKING the business: has the objective to increase short- term cash flow
regardless of long-term effect. It is appropriate for weak Cash Cows, Question marks and Dogs.
DIVEST: it is either selling or liquidating (close down the business and devide its assets
between creditors) SBUs which are non-profitable because resources can be better used
elsewhere. It is appropriate for Dogs and Question Marks.

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b. The General Electric Model (Market Attractiveness-Business Strength Matrix)

In measuring an SBU’s performance, GE business model depends on the industry attractiveness

to the external investors and the business strength.

The GE Matrix

BULID Invest to BULID to challenge Selectively BULID for

grow Defend the leader growth or expansion
High position DIVEST
Market BULID for further Selectively BULID
Attractiveness growth Focus on and focus on HARVEST
Medium or
more profitable profitable SBUs for
DIVEST
business better earning
Selectively BULID Generate positive
Low
and focus on better cash flow or DIVEST DIVEST
earning

Weak Strong Average

Business Strength

2.6. Marketing Strategy Planning

Marketing strategy planning means that finding attractive opportunities and developing
profitable marketing strategies. Marketing Strategy specifies a target market and a related
marketing mix. Target Market is a fairly homogenous group of customers to whom the
company wishes to appeal. Marketing Mix includes the controllable variables, namely product,
place, promotion and price, that the company put together to satisfy that target group.
In the marketing strategy planning process, marketers may find four broad kinds of
opportunities. But, some firms pursue more than one type of opportunity at the same time. The
opportunities are:
a. Market Penetration
b. Market Development

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c. Product Development, and

d. Diversification

a. Market Penetration: means trying to increase sales of a firm’s present products in its
present markets. In order to do so, the firm may try to develop closer relationship with
customers so that they will be loyal. The firm may also try to attract competitors’ customers
or current non- users. The firm may need to add more stores in present areas for greater
convenience and may issue short-term price cuts.

Ansof’s Product/Market Expansion Grid

Present Products New Products

Present Market Penetration Product Development

Markets

Market Development Diversification

New
Markets

b. Market Development: a company may seek to find new customers or new market for its
existing products. It needs to advertise in different media to reach new target customers and
add channels of distribution or new stores in new areas. For example, MacDonald’s has
opened outlets in Airports. Zoos and Military Bases.
c. Product Development: means offering new or improved products for present markets.
Example: - Nike beyond shoes and sport wear, offered its athletic target market a running
watch, digital audio player and even a portable heart- rate monitor.
d. Diversification: means moving into entirely different product and markets. Resources will
be concentrated on different products in different markets with different technology
application.

2.7. Marketing Information System (MIS)

Marketing information system consists of people, equipment and procedures to gather, sort
analyze, evaluate and distribute needed, timely and accurate information to marketing decision

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makers. MIS is developed form internal company records, marketing intelligence activities and
marketing research
1. Internal Company Records (reports on orders, sales, prices, costs, inventory level,
receivables, payables and so on)
2. Marketing Intelligence Activities

Marketing Intelligence System: is a set of procedures and sources managers use to obtain
everyday information about developments in the marketing environment marketing managers
collect marketing intelligence by; reading books, newspapers and trade publications; talking to
customers, suppliers and distributors; and meeting with other company managers. The company
with superior information can choose its markets better; develop better offerings and execute
better marketing planning.

Summary

The marketing environment is made up of the forces that exist external to the firm’s marketing
department that could have positive and negative impacts on the activities of marketing
managers. The marketing environment divides into micro and macro environments. The different
departments of the company, suppliers, distributors, customers, competitors and the general
public form the micro environment, and the macro environment consist of demographic,
economic, technological, natural, political and legal and social-cultural forces. One of the forces
in the company’s internal environment is competitors. They can be companies producing and
selling similar or substitute products or companies striving to satisfy the same customer need
even if are from a different industry. Companies need to their competitors at the starting point of
competitor analysis. Then they will assess the objectives, strategies, strength and weakness of the
competitor, identifying their reaction patter, design competitive intelligence system, identifying
competitors’ strategies and at last selecting competitors to attack or avoid. Many companies
maintain several businesses known as strategic business units that can be a single business,
planned separately, having their own managers and set of competitors. There are four types of
strategic business units: question marks, stars, cash cows and dogs and they can be treated with
strategies of building, holding, harvesting or divesting depending on their situation. Marketers

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can find four opportunities in the marketing strategy planning process that are market
penetration, market development, product development and diversification.

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Self Assessment Questions (SAQs)

1. Identify the wrong statement about technological environment.
A. It influences the process or method of producing product
B. It affects the existing product through alteration, adjustment and upgrading
C. Forcing the creation of new products
D. None of the above
2. A firm’s competitive position with exploitable strength and more than average
opportunities to improve its position refers to:
A. Favourable position
B. Dominant position
C. Weak position
D. Tenable position
3. The reaction pattern of competitors that react quickly and strongly to any change in the
environment represents:
A. Selective competitors
B. Laid-back competitors
C. Tiger competitors
D. Stochastic competitors
4. __________ is refers a fairly homogeneous group of customers to whom the company
wishes to appeal
A. Marketing strategy
B. Target market
C. Marketing mix
D. Diversification
5. Product development means offering new or improved products for present markets.
A. True
B. False

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CHAPTER THREE
CONSUMER BUYING BEHAVIOUR

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Determine the factors affecting consumer buying behavior

Identify the types of buying decision behavior
Specify the buying decision process of consumers
Distinguish the characteristics of business markets
Specify the stages in the business buying decision process

3.1. Consumer Buying Behaviours

The consumer markets consist of all individuals and households who buy or acquire goods and
services for personal consumption. A consumer’s buying behaviour is influenced by cultural,
social, personal and psychological factors. Cultural factors exert the broadest and deepest
influence.

3.2. Factors affecting buying behaviour

1. Cultural Factors: include culture, sub-culture and social class.

a. Culture: us the fundamental determinant of a person’s wants and behaviour. Culture is a

set of learned beliefs, Values, attitudes, habits and forms of behaviour that are shared by
society and are transmitted from generation to generation within that society. Culture is
the whole set of beliefs, attitudes and ways of doing things of a reasonably homogeneous
set of people.

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b. Sub- Cultures: Each culture consists of smaller subcultures that provide more specific
identification and socialization for their members. Subcultures include religion,
nationality, racial group and geographical regions such as urban and rural distribution. A
specific product or attribute may mean different things to different subcultures. So,
companies often design specialized marketing program to serve them.

c. Social classes: are relatively homogeneous and enduring (lasting ) divisions in a society,
which are hierarchically ordered (stratifies), and whose members share similar clues,
interests and behaviour.

Characteristics of Social Classes

1. Persons within the same social class tens to behave alike.
2. Persons are ranked as occupying inferior or superior position according to their social
class.
3. Social class is not indicated by any single variable but is measured as a function of one’s
occupation, income, wealth, education, value orientation and so on.
4. Individuals can move into a higher social class or drop into a lower one.

2. Social factors

A consumer’s behaviour is influenced by such social factors as reference groups, family and
social roles and statues.
a. Reference Groups: are the people to whom an individual looks when forming attitudes
about a particular topic. People normally have several reference groups.
Membership Group: have direct influence on a person. Some membership group are
primary group such as family, neighbours and co-workers. And other membership group
are secondary groups such as religious, professional and trade-union groups.
Aspiration Groups: are those to whom a person does not belong but hopes to become a
member.
Dissociative Groups: are those to whose values or behaviour an individual rejects.

Reference groups influence people in at least three ways:

They expose an individual to new behaviours and lifestyles.

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They influence attitude and self – concept.

They create pressures for conformity that may affect actual product and brand choices

Opinion Leader is a person who influences others by offering advice or information about a
specific product or product category. If opinion leaders are not satisfied in a product, they are
likely to talk about it and negatively influence others.

b. Family: exerts the strongest and most enduring (lasting) influence on our perception and
behaviour. We can distinguish between two families in a buyer’s life.
Family of Orientation: consists of parents and siblings (brothers and sisters).
Family of procreation: consists of one’s marriage partner and children.

The dominance of each member has different effects on the purchase of goods and services. For
example, in wife dominated families purchase of households and furniture would be higher and
in husband dominated families, attention would be on car, vacation or housing.

c. Roles and Statuses

The person’s position in every group can be defined in terms of role and status. Role consists of
the activities a person is expected to perform. Each role carries a status. Status is the position a
person assumes in his/her society. For example, a company manager drives Mercedes, wear
expensive suits and drink expensive wines.

3. Personal factors

Personal factors include the buyer’s age and stage in the life cycle; occupation and economic
circumstances; personality and self- concept.

a. Age and stage in the life Cycle

The types of good and cloth people need change with age. A family life cycle that involves
marital status, presence and absence of children and their age, also affect buying decision.

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b. Occupation and self-concept (self-mage)

Product choice is greatly affected by economic circumstances; income, savings and assets,
borrowing power, and attitudes toward spending and savings. A blue-collar worker (a labourer –
a person employed to do unskilled work) will buy work clothes, work shoes and lunch boxes.

c. Personality and self-concept (self image)

Personality describes the person’s distinguishing character, traits, attitudes and habits.
Personality is often described in terms of such traits as self-confidence, dominance, autonomy,
defence, sociability, defensiveness and adaptability. A person can be creative or conventional,
active or passive etc.
The attitude or mental picture of a person towards himself is called Self-concept or self –Image.
Thus, people buy product which fits their assumed self-image.
Brands also have personalities. Brand Personality is the specific mix of human traits that may be
attributes to (associated with) a particular brand. Jennifer Anker of Stanford’s identified the
following five traits:
Sincerity (down-to- Earth, Honest, Wholesome, Cheerful )
Excitement (Daring, Spirited, Imagination, UP- To-Date)
Competence (reliable , Intelligent, Successful)
Sophistication (Upper-Class, Charming)
Ruggedness (Outdoorsy, Tough)

4. Psychology factors

The psychology factors that influence the buying behaviour of an individual are motivation,
perception, learning and beliefs and attitudes.

a. Motivation

A person has many needs; some are biogenic (arise from physiological states of tension such as
hunger, thirst or discomfort). Others are psychogenic (arise from psychological state of tension
such as the need for recognition, esteem or belonging). A need becomes a motive when it is

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aroused to sufficient level of intensity. A motive is a need strong enough to drive the person to
act. A drive is a strong stimulus that encourages action to reduce a need.

Motivational conflict: happens because of two forces acting in opposite direction there are three
motivational conflicts.

Approach-Avoidance Motivational conflict

This occurs when a consumer is considering both positive and negative features of a single
alternative. For example, a person may wish to enjoy the different functions of a high-tech cell
phone but wishes to avoid the risks of performance and theft associated with it.

Approach-Approach Motivational Conflict

A consumer faces a difficult choice between two attractive alternatives, for example, celebrating
one’s vacation by going to recreational centers (such as parks and historical places) or by visiting
one’s families.

Avoidance-Avoidance Motivational Conflict

This is a situation where the consumer faces a choice between two undesirable alternatives as in
the case where the consumer wishes to avoid having dental problem but also wishes to avoid the
risk of going to a dentist.

There are three best known theories of human motivation

1. Maslow’s Theory

Maslow described motivation as involving five driving needs: physiological, safety, social,
esteem and self- actualization needs. He believed the people will try to satisfy their most
important needs first and then try to satisfy the next- most – important need. We do return to
satisfy a need at a lower level if that becomes important.

2. Freud’s Theory

Freud assumed that our behaviour is influenced not only by our conscious but also by our
unconscious self. Our conscious self is the part of our inner being of which we are aware, such as
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thoughts and feelings. We are unaware of the forces within our unconscious self but they can still
influence us.
3. Herzberg’s Theory

Herzberg developed a two factors theory that distinguishes dissatisfiers – factors that cause
dissatisfaction and satisfiers – factors that cause satisfaction. For instance, a computer that does
not have warranty (satisfier) will be a dissatisfier. Yet, the warranty would not be a satisfier
unless the computer is easy to use (satisfier).

b. Perception

Perception is the process by which an individual selects, organizes and interprets information
inputs to create a meaningful picture of the world. Two individuals may perceive the same thing
differently that in turn results in difference in the buying attitudes and buying decision.

c. Learning

Learning involves changes in an individual’s behaviours resulting from previous experience.

Most human behaviour is learned. The learning experience that man has acquired in the similar
conditions or different circumstances affect the buying decision of the person.

d. Beliefs and Attitudes

A belie is a descriptive thought that a person holds about something. It may depend on real
knowledge, opinion or faith. An attitude involves a person’s enduring emotional feelings or
action tendencies toward some object or idea. People have attitudes toward such things as
clothes, music and food that result in liking and disliking, moving toward or away from them. A
company is advised to fit its product into existing attitudes rather than to try to change attitudes.

Exercise 3.2.

1. Discus briefly factors that influence buyer behaviour

2. Explain briefly the roles played by different persons in consumer buying process

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3.3. Types of Buying Decision Behaviour

Based on the buyer involvement and differentiation among brands, there are four buying
behaviours:
Complex buying behaviour
Dissonance – reducing buying behaviour
Habitual buying behaviour
Variety – seeking buying behaviour

1. Complex Buying Behaviour

When the product is expensive, risky, purchased infrequently and highly self-expressive,
consumers may be highly involves. The consumers perceive significant difference among
brands. Attitude change and formation is based on careful, rational consideration of most
important product or service information. Marketers should provide customers with the
necessary brand knowledge and must give sufficient time to evaluate the brand in detail.

2. Dissonance – Reducing Buying Behaviour

When consumers are highly involved with an expensive, rare or risky purchase, but see little
difference among brands, they might experience post- purchase dissatisfaction. The reason is
they may recognize defects through process of usage or people criticize them for doing so.
Marketers must contact buyers after purchase their bad feeling.

3. Habitual Buying Behaviour

When products are low- cost and frequently purchased and in conditions of absence of
significant bran differences, the purchase behaviour is going to be habitual. This is a purchase
that has little importance or relevance for the customer. Consumers have low involvement. They
buy products out of irrational reasons and it can be impulsive purchase.
Attitude formation or change involves comparatively much less though. Frequent advertising
repetition, a beloved celebrity endorser, attractive packaging or vigorous personal relation, an
appealing promotion might help the marketer develop brand familiarity. The manager should

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manage the shelf- space properly with a variety of related but different product versions and by
avoiding out-of-stock conditions.
Techniques to convert a low – involvement product into one of higher involvement
Link the product to some involving issue
Link the product to some personal situation
Design advertising to trigger strong emotions related to personal situation
Add an important feature

4. Variety – Seeking Buying Behaviour

This buying situation is characterized by low involvement but significant brand differences.
Variety seekers switch from a brand to another for the sake of variety rather than dissatisfaction.
A consumer chooses a brand without much evaluation and evaluates the product during
consumption. The marketer may offer lower prices, free samples, coupons and advertising that
present reasons for trying something new.

3.4. The Buying Decision Process of Consumers

The buying decision process is a problem solving approach consisting five stages. But consumers
do not always pass through all five stages. They may withdraw at any stage or skip stages.
Recognition of unsatisfied need
Identification of alternatives
Evaluation of alternatives
Purchase decision
Post- purchase behaviour

Stage 1: Recognition of Unsatisfied Need

The buying process stars when the buyers recognize a problem or need. The need can be aroused
internally (hunger, thirst) or externally (TV advertisement or sight of the product). Marketers
need to identify the circumstances that trigger a particular need.

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Stage 2: Identification of Alternatives

Once a need has been recognized, both product and brand alternatives must be identified
different products amt satisfy a certain need. For example, a person may choose between red
wine, Beer, Whiskey, draft or Champagne to have a drink. If he chose a beer, he still has to
choose among several brands such as [Link], Bati, Dashen or Meta.

Preconditions to the search for alternative:

a. Resource, time, priority, approval by family and reference group
b. The information the customer has acquired

Major information sources:

Personal :- (family, friends, neighbours, acquaintances) they perform a legitimizing
or evaluation function.
Commercial :- (advertising web-sites, Salesperson, dealers, packaging displays)
normally perform an information function. The consumer receives the most
information about the product from commercial sources.
Public: - (mass media, consumer – rating organization) they are independent
authorities.
Experiential: - handling, examining, using the product.

The most effective information often comes from personal sources or public sources each source
performs a different function in influencing the buying decision.

c. The amount of the perceived risk

A consumer’s purchase decision is heavily influenced by perceived risks. Some risks include:
Functional risk: the product does not perform up to expectations
Physical risk: the product threats the physical well- being of the consumer.
Financial risk: the products are not worth the price paid.
Social risk: the product embarrasses the consumer.
Psychological risk: the product affects the mental well- being of the consumer.
Time risk: a failed product alternative results in an opportunity cost of finding another
alternative

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Stage 3: Evaluation of Alternatives

After reasonable alternatives have been identified, the consumer has to evaluate each alternative
with respect to certain attributes such as shape, color, effectiveness, comfort, cost, size, operation
system, etc. Consumers vary in the importance they attach to each product attributes.

Stage 4: Purchase Decision

Once the alternatives are evaluated, the consumer from preferences among the alternatives and
an intention to buy the most preferred brand alternative. In making a purchase decision, the
consumer decides about; brand (what), dealer (from whom), quantity (how much), timing (when)
and payment method (how).

There are two general factors that can intervene between the purchase decisions.
a. Attitude of Others: the more intense the other person’s negative attitude and the closer
the other person is to the consumer, the more the consumer will adjust his purchase
decision.
b. Unanticipated (Unexpected) situational Factors: such as attractive store appearance,
positive treatment and service when the consumer is about to act.

Stage 5: Post –Purchase Behaviour

After purchasing the product, the consumer will experience some level of satisfaction or
dissatisfaction. If the consumer is satisfied, he will show a higher probability of purchasing the
product again. And he will also tend to say good things about the brand to others. Dissatisfied
customers mat abandon or return the product, may complain to the company, a lawyer or other
group, and warn others not to buy the product. The marketer’s job therefore does not end with
the purchase. Marketers must monitor post-purchase behaviour of consumers.

Activity 3.1.
If you are working as marketing manager of a given company, you are responsible for
handling your customers. Is it possible to handle the customer without knowing their
buying behaviour? Why or why not.

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Exercise 3.1.

1. What is consumer buying behaviour?

2. Discuss the consumer buying process (stages)

3.5. Organizational Buying Behaviour

Business/ organizational markets consist of all the organizations that buy goods and services for
resale or to produce other goods and services. Major industries forming the business market are
agriculture, mining, manufacturing, construction, transportation, communication, banking and
insurance, and service.

Some characteristics of business markets

Fewer, larger buyers
Close supplier- Customer Relationship: - business buyers always select suppliers who
also buy from them.
Professional Purchasing:- business goods are often purchased by trained purchasing
agents. This means business marketers must have to provide greater technical data about
their product.
Derived Demand: - the demand for business goods is derived from the demand for
consumer goods.
Direct Purchasing: - business buyers often buy directly from manufactures than through
intermediaries.

Activity 3.2.
Are you employed in any organization? If not, ask anyone who is employed and discuss
the purchasing process and behaviour of organization.

Participants in the business buying process

Many organizations rely on purchasing managers- buying specialists – to ensure that purchases
are handled properly. However, other people can take part in the purchasing process. The buying
center is composed of all individual and groups who participate in the purchasing-decision-

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making process. Some of the participants in the purchasing process include the production
manager and staff, new product committee, company laboratory, marketing department and the
department for marketing development.

Members of the buying center may play any of the following roles:
Initiators :- those who suggest that something be purchased
Users: - those who will use the product or service.
Influencers:- especially technical personnel, who provide specifications and information
for evaluating alternatives
Deciders: - people who decide on product requirements or on supplier.
Approvers: - authorize the proposed purchase.
Buyers: - are responsible for selecting vendors and negotiating.
Gatekeepers:- control the flow of information within the organization.

Several individuals can occupy a given role and an individual may occupy multiple roles. The
typical buying center has a minimum of five to six members and often has many.

Buying Situations:
1. Straight Re-buy: the purchasing department reorders on a routine basis. The business
buyer makes the fewest decisions. Suppliers make an effort to maintain product and
service quality and automatically fulfill orders to save time.
2. Modified Re-buy: the buyer wants to modify product specifications, prices, delivery
requirements or other terms.
3. New-Task: a purchaser buys a product or service for the first time. The business buyer
makes the most decisions in the new-task situation. New–task buying situation passes
through stages of awareness, interest evaluation, trial and adoption. Over time, new buy
situations become straight re-buy and routine purchase behaviour.

3.6. Stage in the industrial Buying Process

There are eight general in the business buying decision which are known as buy phases
Problem Recognition
General Need Description

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Product Specification
Supplier Search
Proposal Solicitation
Supplier Selection
Performance Review

1. Problem Recognition

Problem recognition can be caused internally of externally.

Internally: Occurs when the company decides to develop a new product and needs new
equipment and materials; when a machine breaks down and requires new parts; when
purchased materials turns out to be unsatisfactory or when the need to obtain lower
prices or better quality.

Externally: The buyer may get new ideas at a trade show, see an advertisement or
receive a call from a sales representative who offers a better product or a lower price.

2. General Need Description

Next the buyer determines the needed item’s general characteristics and required quantity
(characteristics like reliability, durability and price).

3. Product Specification

In developing the item’s technical specifications, often, the company will assign a product –
value – analysis engineering team product Value Analysis (PVA) is an approach to cost in which
components are studied to determine if they can be redesigned or standardized or made by
cheaper methods of production.

4. Supplier Search

The buyer tries to identify the most appropriate suppliers through trade directories, contacts with
other companies, trade shows and over the internet.

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5. Proposal Solicitation

The buyer invites qualified suppliers to submit proposals. After evaluating the proposals, the
buyer will invite a few suppliers to make formal presentation. Written proposals should describe
the values and benefits of the product. Oral presentation should inspire confidence of the buyer
over the supplier. Business marketers must be skilled in researching, writing and presenting
proposals.

6. Supplier Selection

Before selecting a supplier, the buying center will specific desired supplier attributes such as
delivery reliability, price, supplier reputation, technical service, supplier flexibility, product
reliability and service reliability. Buying centers must also decide how many suppliers to use.
Some companies rely on a single supplier to lower the supply price. They expect their supplier to
work closely with them during product development. Whereas others use multiple sources in fear
of becoming too comfortable in the relationship and lose their competitive position.

7. Order –Routine Specification

After selecting suppliers, the buyer negotiates the final order, listing the technical specifications,
the quantity needed, the expected time and delivery, return policies warranties and so on.

8. Performance Review

The buyer periodically reviews the performance of the chosen suppliers. The performance
review may lead the buyer to continue, modify or end a supplier relationship.

Summary

Markets for products are normally classified as consumer and business markets based on the
reason for the purchase of a product. Consumer markets are collections of individuals and
households who buy products for the ultimate purpose of personal consumption. The behaviour
of buyers in the consumer market is generally influenced by cultural, social, personal and

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psychological factors. Culture is a set of learned beliefs, values and attitudes that a person
inherits from the society of his origin and it persists throughout the person’s lifetime influencing
his buying behaviour. Social factors such as reference groups and family exert a strong influence
on a person’s attitude toward buying decision making. Additionally, personal factors such as age,
occupation and personality of an individual have a great bearing on his/her purchase behaviour.
Also, scholars like Maslow, Freud and Herzberg proposed different theories on human buying
psychology. A consumer may exhibit a complex, dissonance-reducing, habitual or variety-
seeking buying behaviours based on involvement in purchase and brand differentiation. Just like
consumer buyers, organizational or business buyers also demonstrate a buying behaviour. Some
of the characteristics of business markets include the existence of fewer but large-volume buyers,
close-supplier-customer relationship, professional purchasing, derived demand and direct
purchase from manufacturers. An organized group of individuals assume the responsibility of
making purchase

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Self Assessment Questions (SAQs)

1. Which one of the following is not a social factor which affects consumers’ buying
behaviour?
A. Reference group
B. Social class
C. Membership group
D. Aspirational group
E. None of the above

2. A person’s distinguishing character, traits, attitude and habit refers to:

A. Self-concept
B. Personality
C. Motivation
D. Belief
E. None of the above

3. _____________is a person who influence others by offering advice or information about

specific product or product category.
A. Family
B. Reference group
C. Opinion leader
D. Membership group
E. None of the above

4. A descriptive thought that a person holds about something is:

A. Belief
B. Perception
C. Attitude
D. Learning
E. None of the above

5. When the product is expensive, risky and highly self-expressive, the buying decision
behaviour will be:
A. Habitual buying behaviour
B. Dissonance-reducing buying behaviour
C. Variety-seeking buying behaviour
D. Complex buying behaviour
E. None of the above

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CHAPTER FOUR
MARKET SEGMENTATION, TARGETING AND
POSITIONING

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Differentiate between market aggregation and market segmentation

To identify the importance of market segmentation
Describe the criteria necessary for effective segmentation
Explain the geographic, demographic, psychographic, and behavioral
approaches to segmenting consumer markets
Identify the steps in the market segmentation process
Define product positioning and dimensions of positioning

4.1. Introduction

In order to identify its potential buyers, an organization chooses to segment or not to segment a
market. An organization that does not segment chooses a mass-market – the same product is
offered to all customers. Marketers segment (divide) a market because different groups within
the market have different needs. To be successful, the chosen segment must be identifiable and
measurable, profitable, economically accessible, and exhibit a relatively homogeneous response
function to the marketing efforts designed for it. Marketers focus their efforts on target
markets, or groups of customers with similar needs, rather than on the entire market.

A company that decides to operate in a broad market recognizes that it cannot appeal to all
buyers in those markets or at least not to all buyers in the same way. Buyers are too numerous,
too widely scattered and too varied in their needs and buying practices. Simply buyer may differ
in their wants, resources, geographical areas, buying attitudes and buying practices that a

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company normally cannot serve all customers in that market with a single product. More over
different companies vary widely in their ability to serve different kinds of customers. Hence,
instead of competing everywhere and in an entire market, sometimes against superior
competitors, it is better for companies to identify the parts of the market that it can best serve (to
identify the market segments that it serves most effectively). To this end today many companies
are moving from mass marketing to target marketing. In target marketing sellers distinguish the
major market segments, target one or more of these segments and develop products and
marketing programs tailored to each segment. Instead of scattering their marketing effort, they
can focus on the buyers whom they have the greatest chance of satisfying.

There are three alternative approaches in defining a market:

Market Aggregation: Market aggregation is the production of single product that is offered to
the entire market. The main advantage of market aggregation is the economics of scale
associated with a large output of a given product, although this advantage diminishes as the firm
comes closed to full utilization of an optimum sized plant. Another advantage is that logistics are
usually simpler and less costly, due to the lower inventories and standardization of packaging
and shipping that result from the use of a single product, or very limited product line. Promotion
may or may not be less expensive that it is with a market segmentation strategy. This will
depend on the difficulty of generalizing the product to a variety of tastes and on how widely the
tastes differ.

Market segmentation: Market segmentation is often refers to a division of the firm’s total
market for the purpose of differentiating process, promotion strategies or production according to
buyers. With respect to the product variable, it means the division of aggregate market into parts
and the product of different goods or service for each part. The segments must be identifiable,
separable and relatively homogeneous and must have significantly different demand functions.
The products are tailored to conform to the preferences of the individual segments. The
advantage of market segmentation is that marketing can be more specialized and promotion
better suited to the characteristics of the buyer. More specialize, hence, presumable more

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efficient media can be used, advertising copy can be less general and personal selling can be
focused on a smaller buyer population.

Composite strategies: A combination strategy, involving both market segmentation and market-
aggregation is common. The aggregate market is first divided into segments, usually by some
single criterion, such as income. The segments are large enough to permit the output of each
different product to approach an optimum level or at least to ensure reasonable economics of
scale. The individual products are then generalized, through promotional or pricing strategy, to
the various sub-markets within each segment. Virtually all large firms and most small ones use a
composite marketing strategy. As we have observed, market segmentation is used to increase
total demand, while market aggregation is used to reduce total cost. The price or an appropriate
composite strategy can often mean the difference between profit and loss of the firm.

Target marketing requires marketers to take three major steps:

1. Market segmentation: Identifying and profile distinct groups of buyers who might require
separate products and/or marketing mixes.
2. Market targeting: Select one or more segments to enter.
3. Market positioning: Establish and communicate the products distinctive benefits in the
market.

4.2. Market segmentation

Marget segmentation means the process of deviding the whole market for a product into several
smaller, internally homogenous groups. I.e. it is dividing a market into distinct groups of buyers
with different needs, characteristics, or behaivior who might require separate products of
marketing mixes. A company that practices market segmentation recognizes that buyers differ in
thier needs perceptions, and buying behaviors. Hence, the company tries to isolate the broad
segments that make up the market and adapts its offers to more closely match the needs of one or
more segments. The esence of segmentation is that the members of each group are similar with
respect to the factors that influence demand. Hence, sometimes the ability to segment markets
effectively is considered as a major element for company sucess.

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Exersise 4.1.
Define market segmentation.
Describe the role of market segementation.

4.2.1 Bases for Segmenting Consumers Markets

There is no a single way to segment a market. A marketer has to try different segmentation
variables, alone and in combination, to find the best way to view the market structure. There are
four commonly used bases for segmenting consumers markets. These are:

A. Geographic Segmentation: Geographic segmentation is dividing of an overall market into

homogeneous groups on the basis of population location. This is the earliest form that served a
base for segmenting markets. It considers current population location and residence (urban or
rural) and future expected shifts. Geographic segmentation is used in order to know regional
variation in customer taste and also determine and supply good appropriate to climate changes.

B. Demographic Segmentation: Demographic segmentation is dividing an overall market into

homogeneous group based upon population characteristics such as age, sex and income level. It
is now the most common approach used for market segmentation. This method uses such
variables as sex, age, income, occupation, education, household size and stage in the family life
cycle. These variables are often used because
a) They are easy to identify
b) They are associated with the sale of many products and services
c) They are typically referred to describing the audiences of advertising media

C. Psychographics: Demographic data are used to segment a market because they are related to
behavior and because they are relatively easy to gather. However, demographics are not in
themselves the causes of behavior. That means demographics are related to behavior but they do
not explain it. But if possible the desirable thing for marketers is to know the rationale why
customers buy a given product. Psychographics segmentation utilizes behavioral profiles
developed from analyses of the activities, opinions, interest and life styles of consumers. The
life-styles of potential consumers may prove important in order to determine their preferences;
life style refers to the mode of lives. Consumer’s life-styles are regarded as a composite of their
individual psychological make-ups their needs, motives perceptions and attitudes. In addition a

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marketer may use personality aspects which are usually described in terms of traits that
influence behavior to divide his market or he may use values: reflection of our needs adjusted
for the realities of the world in which we live.

D. Behavioral Segmentation: Benefit segmentation focuses on product related behavior of

customers. This focuses on such attributes as product usage rates (heavy users, medium users or
light users), the benefits derived from the product (benefit sought), attitude towards the product
(enthusiastic, positive, indifferent, negative, and hostile), buyer readiness stage (unaware,
aware, informed, interested, desirous, and intending to buy), users and non-users etc. The
summary of custom segmentation bases are as shown below in the table.

Exercise 4.2.
Briefly discuss the bases for segmenting consumer markets.
Under what circumstances are marketers most likely to use geographic segmentation?

In addition to the above four, there are also other types of segmentation that include:

Need-oriented or Benefit segmentation: Hence segmentation is done on the basis of needs

or benefits a group seeks from the goods.
Volume segmentation: This means segmentation of market seeing the extent of use such as
heavy, medium, light users and those who do not use the product. Non-users might include
persons who might have used the product or are prospective users.
Qualitative segmentation: Here, emphasis may be placed or repeat purchases by the buyer.
This is the extension of the volume segmentation. However, socio-economic characteristics
cannot be correlated with heavy or light consumption.
Product segmentation: This is directed towards differences among the products that
comprise markets. Product segmentation is a less rational approach than market segmentation
unless there are great differences among the products involved. Differentiated marketing
helps the organization to market demands to satisfy probable market segment demands and
is more proper to satisfy its customer’s needs.
Life-style segmentation: The stresses segmentation on the basis of the distinctive mode of
living of segments involving questions regarding how they spend their time, the nature of
their interests and the basic characteristics like the stages in the life cycle, income, education.

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Activity 4.1.
If you are a marketing manager of a company, what are your bases for segmenting the
market into distinguished parts?

Market segmentation procedures

Step i. Survey stage: The researcher conducts exploratory interviews and focus group
discussion to understand the total market.
Step ii. Analysis Stage: The researcher applies factor analysis and cluster analysis to create
specified number of segments.
Step iii. Profiling stage: Each market segment would be described in terms of its distinguishing
character and given a name based a dominant factor.

Characteristics of market segments

Measurable: the size, purchasing power and the characteristics of the segment can be
measured.
Substantial: the segment is large and profitable enough to serve.
Accessible: the segment can be effectively reached and served.
Differentiable: the segment is conceptually distinguishable and responds differently to
different marketing mix elements and programs.
Actionable: effective marketing programs should be formulated for attacking and serving
the segment.

4.2.1. Importance or Benefits of Market Segmentation

Market Segmentation offers the following advantages:

(1) Increase in Sales Volume: Segmentation recognizes the existence of multiple demand
curves in a market and tailors a product to each one. It presumes that the sum of the individual
demand curves is greater than a single demand curve generalized to the entire market, since the
more a product is tailored to the tastes of a particular buyer or buyer class, the higher is the
probability of sales. If the market is properly segmented, if the buyer’s respective preference

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systems are accurately defined, and if all segment are properly served, the sales volume should
be large than if the same product were offered to all buyers.
(2) Specialized Marketing: Another advantage of Market segmentation is that marketing can be
more specialized, and promotion better suited to the characteristics of the buyers. More
specialized, hence, presumably more efficient media can be used, advertising can be less general,
and personal selling can be focused on a small buyer population. This specialization may
increase marketing efficiency provided it does not bring about large diseconomies of scale.
(3) Sound Marketing Program: On the basis of market segmentation, the manufacturer can
prepare and follow a sound marketing program. It also leads to efficiency and more success in
selling.
(4) Increase in market opportunities: Through segmentation a manufacturer comes closer to a
particular group of customers; hence he becomes more responsive to the changes in the market.
He can modify or develop a new product according to market demand very soon.
(5) Better utilization of market resources: Market segmentation provides opportunities of
better utilization of various marketing resources. It leads the firm in the long-run towards better
profitability and more profits.
(6) Other advantages: Market segmentation provides various, types of information which are
useful in marketing research, product, development, evaluation of marketing activities,
evaluation of facilities of marketing and distribution etc.

Activity 4.2.
You may need a few minutes to ask yourselves why segmentation is needed in today’s
business environment.

4.3. Market Targeting

After a market is segmented, the company must decide which and how many segments to serve.
This is what we call market selection (target marketing). A target market consists of a set of buyers
who share common needs or characteristics that the company decides to serve. In selecting
markets, it is advisable for companies to take into consideration the followings:

First, target markets should be compatible with the organization’s goals and image.

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Second, the segment’s opportunity should commensurate with the company’s resource.
The segment must be profitable.
Fourth, a company ordinarily should seek a market where there are the least and
smallest competitors.

There are five targeting strategies

1. Single segment concentration

Also known as concentrated marketing, single segment concentration is a strategy to direct
resources toward serving a single, big and large market segment. Volkswagen concentrates on
the small-car market. It is usually used by small (with limited resources) and new companies or
companies entering a new geographic area. The firm gains a strong knowledge of the segment’s
need. However, there is a risk that a competitor might invade the segment. For this reason, many
companies prefer to operate in more than one segment.
M1 M2 M3

P1

P2

P3

P= Product, M= Market

2. Selective specialization
It is concerned with selecting limited number of segments and developing separate marketing
programs for each market segment. It has the advantage of diversifying the firm’s risk.

M1 M2 M3

P1

P2

P3

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3. Product specialization
It refers to designing and selling a single product to many numbers of market segments. For
example, a microscope manufacturer makes different microscopes and sells to university,
government and commercial laboratories.
M1 M2 M3

P1

P2

P3

4. Market specialization
The firm sells an assortment of products to a particular segment.

M1 M2 M3

P1

P2

P3

5. Full market coverage

The firm attempts to serve all customer groups with all the products they might need. Only few
large firms such as General Motors (vehicle market) and Coca Cola (non-alcoholic beverage
market) can undertake a full market coverage strategy.

M1 M2 M3

P1

P2

P3

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There are two types of full market coverage:

i. Undifferentiated marketing: The firm ignores segment differences and appeals to the
whole market with single offer. It aims to achieve efficiency and minimize costs of R &
D, production, inventory, transportation, marketing research, advertising and product
management (through standardization, mass production, distribution and advertising). It
was more effective in old marketing concept.

ii. Differentiated marketing: The firm operates in several market segments and designs
different products for each segment. It creates more sales and customer satisfaction.
However, a marketing manager should realize the higher the cost for R & D, and
producing, modifying and managing the various products.

4.4. Product positioning

After a company discovered different segments in the market place and targeted those segments
that it can satisfy in superior way, it should identify different means of differentiating its
offerings from competitors. Product positioning is the process of creating an image, reputation or
perception in the minds of buyers about the organization or its products relative to its
competitors (communicating a set of meaningful differences). Positioning is not what you do to a
product; it is what you do the mind of the prospect.

Exercise 4.3.
Define market targeting and positioning

Dimensions of differentiation

A. Human resource (personnel) differentiation

Through recruiting, selecting and training of competent people, a firm can exalt its advantage in
the sights of consumers. A smiling receptionist and waiter at the door of Hotel and welcoming
and communicable salesperson in auto display room can attract customers.

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B. Product differentiation
Some products are highly standardized and others are highly differentiated. Companies stress on
consistency of a brand features, performance, durability, reliability, style and design and
reparability. Quality image is also affected by packaging, distribution, advertising and
promotion.

C. Service differentiation
Brands can be differentiated on the basis of different service dimensions like order ease,
delivery, installation, customer training, customer consulting and maintenance and repair.

D. Image differentiation
Image is the way the public perceives the company or its products. By using unique names or
symbols, the company can differentiate its products from the competitor’s products. Companies
can also create a strong image by inviting prospects and customers to visit headquarters and
factories.

E. Channel differentiation
Companies can achieve competitive through the way they design their distribution channels’
coverage, expertise and performance.

Summary

A company can either choose to deal with the entire market aggregately or focus its resources
and marketing programs towards a narrow group of customers who share some common
characteristic. The former is what we call market aggregation and the latter is known as market
segmentation. In the case of market aggregation, the company engages in the mass production,
mass promotion and mass distribution of its products. The market is perceived as virtually
homogeneous and it is treated collectively with no or less regard to differences in the behavior of
consumers. On the other hand, market segmentation allows firms to understand and serve the
market better since the market is divided into smaller customer segments. Market segmentation
is prone to increased costs due to the need for developing separate marketing mix programs for
the different segments; but in the modern market, the company’s success largely depends on its
ability to identify the needs and wants of its customers and to deliver satisfaction based on.

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Among the major bases of segmenting a market are geographic, demographic, psychographic
and behavioral variables. The process of selecting an attractive market segment (s) is called
market targeting. Depending on their objectives, strategies and resources, companies can
concentrate on a single segment, selectively specialize on a few segments, specialize on a
product or a market or pursue the entire market. After the company targeted potentially
profitable segments, it will position itself or its products by creating an image, reputation or
perception in the minds of customers. This can be done by differentiating its human resource,
products, services, image and/or channel of distribution.

Answers for selected exercises

Exercise 4.1.
The role of market segmentation is to identify the factors that affect purchase decision and then
group consumers according to the presence and absence of these factors.

Exercise 4.2.
Marketers usually use geographic segmentation when regional preferences exist and when
demand for categories of goods and services vary according geographic region.

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Self Assessment Questions (SAQs)

1. It is one of the bases for segmenting consumer markets that divides the market into groups
based on age, family size, gender and the like.
A. Psychographic segmentation
B. Behavioral segmentation
C. Demographic segmentation
D. Geographic segmentation
2. It is arranging for product to occupy a clear distinctive and desirable place relative to
competing products in the minds of target consumers.
A. Segmentation
B. Positioning
C. Targeting
D. None of the above
3. Among the following, one is different from the others:
A. Religion
B. Family size
C. Occupation
D. Life style
4. One of the characteristics of effective market segment in which the segment is expected to be
large and profitable enough to serve refers to:
A. Substantial
B. Measurable
C. Actionable
D. Accessible
5. _____________refers to a screening of potential market segments on the basis of determinant
factors.
A. Positioning
B. Targeting
C. Segmentation
D. None of the above

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CHAPTER FIVE

PRODUCT DECISIONS

Chapter objectives:

Upon completion of this chapter, you will be able to:

Describe the meaning and levels of product

Distinguish the classifications of products
Become familiar with product system, mix and line
Acquire knowledge about product features
Understand the new product development process
Have an insight on the stages in the product life cycle

5.1. Introduction

Marketing mix is a set of marketing tools: product, price, promotion and place, which the firm
uses to pursue its marketing objectives in the target markets. Marketing mix planning begins
with formulating an offering to meet target customers’ needs and wants. The customer will judge
the offering by three basic features: the product’s features and attributes along with quality, the
offerings price and the availability and accessibility of the product. A product with compatible
attributes and quality but priced unreasonably, positioned inaccurately, advertised
inappropriately, or not available in the right outlets is most probably bound to fail. Accordingly,
a firm should not only produce the right product but also make available the product at the right
time via the right out lets with prices reasonable enough to justify the benefits customers derive
thereof. Likewise, a firm should communicate and inform to the prospective market about the
attributes and qualities its products convey, the price of its brands, the place where it may be
purchased etc in a way compatible to its offers so that customers will set their expectation in
accordance with the firm’s offer.

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Product is anything that can be offered to a market to satisfy a want or a need. A product can be
a physical good (glass), a person (musician), an organization (a privatized firm), an idea
(business plan or proposal), a place (leased land), an ownership right (stock), a service
(medication) or mixes of these elements that are offered in expectation of monetary value.

Exercise 5.1.
Define product.
Define marketing mix.

5.2. Product levels

i. Core benefit/service: the fundamental service or benefit that the customer is really
buying. A hotel guest is buying “rest and sleep.” The purchaser of a drill is buying
“holes.” Marketers must see themselves as benefit providers.
ii. Basic/Generic product: this is the tangible part of the product that delivers the core
benefit or the product actually the buyers receive. Thus, a hotel room includes a bed,
bathroom, desk, dresser and closet.
iii. Expected product: A set of attributes or conditions like quality, color, design, style,
feature, comfort, etc, the buyer normally expects in purchasing a product. For instance,
the hotel guest expects a clean bed, working lamps and a relative degree of quite.
iv. Augmented product: This is the part of the product that exceeds the customer’s
expectations. Delivery and credit, installation, warranty, after-sale-service, these meet the
customers’ desires beyond their expectations. A hotel can augment its product by
including a remote-control television set, fresh flowers, rapid check-in, express check
out, fine dining and room service and so on.
v. Potential product: This is a tendency for further refining the augmented product. Here,
companies search for new ways to satisfy customers and distinguish their offer by
undertaking research and development program. For example, celebrating the birthdays
of guests at the Hotel’s expense.

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5.3. Product classification

Based on the purpose that products are acquired (the types of consumers that use them), products
have traditionally been classified into two broad categories: consumer products and industrial
products.

Consumer products are products bought by the final consumers for personal consumption while
industrial products are products bought by individuals and organizations for further processing or
for use in conducting business. Each of these broad categories is further classified into different
groups.

5.3.1. Consumer products

Based on the shopping habit, consumer products are classified into four groups.

1. Convenience products: are products that consumers usually buy frequently, immediately with a
minimum of comparison and buying effort. E.g. soap, tobacco, fast foods etc. generally, these are
a kind of products with low price and hence are available in many locations by companies to sell
when customers need them. Convenience goods can be further divided.

Staples: these are goods consumed regularly such as Butter, Teff, Toothpaste,
Salt, Cooking oil
Impulse goods: are goods purchased suddenly, for example, Soft Drinks,
Magazines, etc.
Emergency goods: goods that are purchased in unexpected or urgent needs. For
example, tablets at the time of sickness, and umbrella during a rain storm.

2. Shopping products: are less frequently purchased products. Hence, when they purchase them,
customers compare them carefully on suitability, quality, price, style etc. To this end, when
buying such kind of products, customers spend much time and effort in gathering information
and making comparisons e.g. furniture, clothing, hotel services etc.

3. Specialty products: are products with unique characteristic or brand identification for which a
significant group of buyers is willing to make a special purchase effort. Here, buyers do not

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normally compare specialty products but simply they are willing to invest their time and
resources to reach dealers carrying the wanted products. E.g. cars, photographic equipments and
men’s suit

4. Unsought products: are products that the consumer either does not know or does know but
normally does not think of buying such as life insurance, gravestones, encyclopedias, smoke
detectors and bed nets. On the other hand, new innovations can be considered as unsought goods
until the consumer becomes aware of them through advertisings.

5.3.2. Industrial products

These are also further divided in to three groups.

1. Materials and parts: refer to products that become part of the final product. They are basic
inputs in the production of other products. They fall into two classes.

a. Raw materials: are the major inputs that should be further processed in order to be
parts of the final product.
b. Manufactured materials and parts: these include component materials – that are
further processed and component parts – that enter the finished product without any
physical or chemical change.

2. Capital items: are fixed assets of an organization that facilitate developing or manufacturing the
finished product. They are not part of the finished product. They include two groups:

a. Installations: are long lasting, usually non-movable and expensive assets of the
firm. E.g. factory plants, office buildings, elevators and huge machineries
b. Accessory equipments: are portable equipments and tools (such as hand tools) and
office equipments (PC’s, fax machines and desks)

3. Supplies and services: supplies refer to those products that are consumed in the production
process or operation of buyers. E.g. lubricants, oil, paper, pencil, repair and maintenance items
etc. Services refer to maintenance and repair services that the firm purchases from outsiders or
services supplied by outsiders such as legal, management counseling, advertising etc.

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Activity 5.1.
Have you understood the importance of classifying products into consumer and
industrial products from marketer’s point of view?

5.4. Product systems and mixes

A product system is a group of diverse but related items that function in a compatible manner.
For example, PalmOne handheld and smart phone products come with attachable products
including headsets, cameras, keyboards, projectors, MP3 players and voice recorders. Product
mix (also known as) is “the composite of products offered for sale by a firm or business unit.” It
is the collection of products manufactured or distributed by a given company. A product mix
consists of various product lines. A product line consists of a set of products that are related in
the function they perform, are sold to same customers group, are distributed through the same
marketing channel, or fall into the same price range. Having a broad product-mix spreads the risk
of failure over a great number of product lines. This is an application of the ‘don’t put all your
eggs in one basket’ philosophy that makes considerable sense when one views the rapidity with
which a single product-line can become outmoded or obsolescent and hence unprofitable.
A product mix has width, length, depth and consistency

Product mix width: refers to how many different product lines the company carries.
In other words, width refers to the number of types of models in a given price-quality
class. For instance, a company might carry detergent, toothpaste, bar soap,
disposable, diapers and paper products.
Product mix length: refers to the total number of items in the product mix. Length
pertains to the range and density of the price-quality spectrum whether there are a few
closely priced products, a few widely priced products, a number of products priced
closely together, or a number of products spread over a broad range of process.
Product mix depth: refers to how many variants of each product in the product line
are offered.
Product mix consistency: refers to how closely the various product lines in the
product mix are related in end use, production requirement, distribution channels or

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some other way. An example will illustrate the point. Suppose that a General Electric
Company manufactures fans, bulbs, toasters and coolers. Hence the width of product
line is 4. Now the firm manufactures 3 types of fans, 5 types of bulbs, 3 kinds of
coolers, and one type of cooler. Hence the average length of product line is 4.
Though, the firm has 4 product-lines but there are two similarities in common. All are
electrically operated appliances and the firm sells them through common distribution
network. This is consistency of product line.

Exercise 5.2.
How do marketers typically measure product mixes?

Factors affecting product-mix

No exact number of products to be manufactured and marketed by a firm can be determined.

This number depends upon the product line strategy, cost of production, demand factor, and the
objectives of the marketing department and so on. The following are certain important variables
which influence the product-mix of a firm:
1. Cost of production: A firm may think of adding the new product to its product line which
can be produced easily with the same machinery and production facilities. It will certainly bring
down the cost of production of existing products. Thus, the cost considerations may be tempting
motives behind such diversification.
2. Demand factor: A firm can add to its product line a product which has derived or
complementary demand to its products. For example, a pen manufacturing company can start
the production of nibs and ink also. It will change its product-mix and expand the product line.
3. Advertising and distribution factors: A firm using a wide network of advertising and
distribution channels can think of adding products to its product line as they can be distributed
with the help of the same network. It will lower down their advertising and distribution costs
also.
4. Use of waste: Sometimes use of waste and residual material also can increase product line.
The product can be manufactured as byproduct and it may bring down the cost of main product.
5. Company objectives: To stabilize or increase the profits, to maximize sales or to enter into
new markets may be other company objectives which may motivate the company to add new

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products to its product line. The elimination of obsolete products, to dropping of unsuccessful
product from the product line, simplification and specialization also bring about changes in
product line and product-mix of the companies.

Product line strategies

A. Line stretching: refers to expansion of the product mix. It occurs when the company
lengthens its product line beyond it current price range. There are three ways of line
stretching: upward stretching – adding a product that has a price and quality greater than
the current product; downward stretching – the opposite of upward stretching; and two-
way stretch – companies serving the middle market might decide to stretch their line in
both directions.
B. Line filling: is alteration of the existing product mix. A product can also be lengthened
by adding more items within the present range. A firm may alter its existing product mix
by designing the product-improving the quality, durability and reliability (for industrial
goods), changing the packaging system (for consumer goods), and by changing the usage
of the new materials.
C. Line pulling: it is contraction of the product mix. It is the process of eliminating an
entire line or some products within a product line because of their unprofitable nature or
capacity problem.

Activity 5.2.
Under what scenario do you think the firm decides to delete a product from their line?

5.5. Product features

A product can be offered with varying features to different markets. Feature refers to additional
functions or benefits of a product that supplements the product’s basic function. Hence, they are
competitive tool for differentiating a company’s product from competitors’ products. To this end,
the company should periodically survey customers of a product to find out what additional
benefits they want to be accommodated with the basic function of the product and then the
company should dig to find out ways as to how it can deliver these features in economical way to
customers.

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1. Branding: - refers to a name, term, sign or symbol or a combination of all these that identifies
the maker of a product or seller. In today’s competitive market, branding is one of competitive
forces that give edges for companies to compete. In this regard you can imagine to what extent
the difference will be if Sony sells its television without brand and with brand. In addition, it
provides a legal protection for unique product features that might otherwise be copied by
competitors. Apart from this, it enables the company to segment its market in profitable way.
Branding is not only beneficiary for producer but also for customers. It enables customers to
easily identify products that might benefit them. In addition, it will give them a guarantee that
they will get the same features and benefits and quality each time they buy a given product.

Branding is not an easy task for a marketer. In giving brand name there are some considerations that
good brand name should posses.

1. The name should suggest something about the product’s benefit and its qualities.

2. It should be easy to pronounce recognize and remember the name.

3. It should be distinctive from other brand names.

4. It should be easily translatable to other languages.

Apart from all this, a manufacturer may have three options to launch branding of a product
(sponsor). The product may be launched as manufacturers brand (national brand) or the
manufacturer sell to resellers who will in turn give it a private brand (store or distributor brand) the
company may use licensed brand.

2. Packaging: refers to designing and producing the container or wrapper for a product. It may
take different forms. It may be primary container: a container to be used throughout the life of
the product or secondary container: a container to be thrown away when the product is about to
be used or the shipping package: container necessary to ship or store the product. Traditionally,
the primary function of package was to contain and protect the product. No matter how, in
today’s competitive market environment, packaging concern extended to include issues such as
attracting customers, describing the product, convincing buyers to make sale etc. Developing a
good packaging for a product requires making many decisions. First, the company must
establish the packaging concept, which states what the package should be or do for the product.

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Should it mainly offer product protection, introduce a new dispensing method; suggest certain
qualities about the product or something else? Decision then must be made on specific elements
of the package such as size, shape, materials, color, text etc. All these elements must work
together to support the product’s position and marketing strategy. Additionally, growing
environmental concerns in connection to packaging should also be taken in to consideration.

3. Labeling: refers to printed information appearing on or with the package. It ranges from the
simple tags attached to products to complex graphics on the package or with the package. The
label may include brand name, which made it, where it was made, its contents, how it is to be
used, and how to use it safely.

4. Product design: - refers to the structural organization of the product that determines as to how
the product delivers the desired function including the physical appearance of the product.
Design is a wider concept than style. Style refers to the appearance of a product (eye catching
aspect of the product). But, design is more than skin deep; it goes to the very heart of the
product. Usually, a company can have different design options that provide the product with
varying capacity to deliver the core benefit. Hence, a company should select a design that boosts
the capability of the product in delivering the core benefit.

5. Product support services: customer service is another element of product category. In today’s
competitive market place, a company cannot hinge on only the tangible product or the ultimate
service of the product to succeed rather it should accompany the physical product by the
necessary services that augment the actual product (additional services that customers expect
along with the major offer of the company) for e.g. Sony offers its television along with
maintenance and repair service.

5.6. New product development

A company has to be good at developing and managing new products. Every product seems to go
through a life cycle: it is born, goes through several phases, and eventually dies as newer products
come along that better serve customer needs. This pattern presents two major challenges to a firm.
First, because all products eventually decline, a firm must be good at developing new products to
replace aging ones (the problem of new product). Second, the firm must be good at adapting its

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marketing strategies in the face of changing tastes, technologies, and competition as products passes
through life cycle stages (the problem of product life cycle). Here in this section we shall dwell
upon new product development aspect and in the later part we shall discus about product life cycle.

A firm can obtain new products in two ways: by acquisition- by buying the whole company, patent
or license etc and the other is through new product development. Here by new products we mean
original products, product improvements, product modifications and new brands the firm develops
through its research and development efforts.

A product may be developed by the following three methods:

1. Imitation
2. Adaptation or Improvement and
3. Innovation or Invention.

1. Imitation: It is done by copying the other popular or best-selling products already existing
in the market. For example the introduction of king-size cigarettes.

2. Product Improvement: Product improvement consists of modification and improvement in

the existing quality, size, form or design of the existing, product so that it may look almost a new
product. It involves the following:
a) Improvement in quality
b) Feature improvement
c) Style improvement
d) Packaging improvement.

3. Product Innovation: Product innovation is the development of a new product resulting in an

increase in the product line. It refers to the incoming of an altogether new product which is
based on research and which has been unknown so far. To face market changes, technological
changes, the change in customer’s needs and styles and profitless competition and to reap the
fruits of changes in demand and fashions it is imperative to develop new products. Product
innovation is essential also to diversify the risk of the business.

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There are some sequential steps that companies need to pass through in developing new product.

1. Idea generation: refers to the systematic search for new product ideas. The company should
develop a framework (clearly defining new product development strategy) through which new
product ideas that correlates with its operation can be generated in order to make the search for
ideas systematic. Ideas for new products can come from interacting with various sources and
from using creativity generating sources. It may emanate from customers, scientists,
competitors, employees, suppliers and distributors etc.

2. Idea screening: the purpose of idea generation is to create a large number of ideas. The purpose
of this stage is to reduce that number by accommodating good ideas and dropping poor ones so
that the company can go ahead with the product ideas that will hopefully turn into profitable
products. In screening ideas, the benchmark may be different from company to company but it
is at this stage that companies should make sure the idea is compatible with the firm’s objective,
strategies and resources. Hence, it is desirable to drop those ideas that do not match with the
aforementioned aspects of a company.

3. Concept development and testing: attractive ideas must be developed into a product concept.
A product idea is an idea for a possible product that the company can see itself offering to the
market. A product concept is a detailed version of the idea stated in a meaningful consumer
terms. Then the developed concept should be tested with a group of target consumers to find out
if the concepts have strong consumer appeal.

4. Developing marketing strategy: Following a successful concept test, a company should

develop a preliminary marketing strategy plan for introducing the new product into the market.
The plan consists of three parts. The first part describes the target market’s size, structure and
behavior; the second about product positioning; the third about the sales, market share and profit
goals sought in the first few years.

5. Business analysis: Once management has decided on its product concept and marketing
strategy, it can evaluate the business attractiveness of the proposal. Business analysis involves
reviewing of sales, costs, and profit projections for a new product to find out whether they
satisfy the company’s objectives or not.

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6. Product development: It refers to developing the product concept into a physical product in
order to ensure that the product idea can be turned into a workable product. In this regard, the
company should first produce one or more physical versions of a product as a prototype that
have the required functional features and also capable enough to convey the intended
psychological characteristics.

7. Test marketing: After the product is developed, it is better to test the product along with its
marketing program into more realistic market settings in order to examine how well it will
perform. This eventually enable the company to visualize/asses its all-marketing program of the
product i.e. positioning strategy, advertising, distribution, pricing, branding, packaging and
budget levels.

8. Commercialization: Based on the market test, the management then makes a decision about
whether to launch the new product or to make amendment up on the tested product and its
marketing plans. If the company goes ahead, it will enter into commercialization stage, in which
it faces high costs due to production, advertising, sales promotion and other marketing efforts.
In launching a new product, a firm should first decide when to introduce the product (timing)
and where to launch the new product introduction: in a single location, a region, the national
market or the international market.

5.7. Product life cycle

Once it has offered a given product to the market, a firm should not expect to sell the product
forever as it is. This is so because the market situation, competitors’ position and the test and
interest of customers will go on changing through time and in some cases the need for the
product may drift away after sometime. To this end, the firm should change its positioning and
differentiation strategies according to these and the like factors. Here, in connection to this, we
shall describe the normal changes that a company encounters in the market beginning from
introducing the product for the first time to the market up to a time when the demand for the
product starts to decline and finally in some cases dies. Namely there are four stages that
products pass through: introduction, growth maturity and decline as shown in figure.

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Summary of Product Life Cycle Characteristics, Objectives, and Strategies

Sales

Introduction Growth Maturity Decline

Time

Exercise 5.3.
During which stage or stages are products likely to attract the most new customers?

Characteristics
Introduction Growth Maturity Decline

Sales Law sales Rapidly rising Peak sales Declining sales

sales
Costs High cost per Average cost Low cost per Low cost per
customer per customer customer customer
Profits Negative Rising profits High profits Declining
profits
Customers Innovators Early adopters Middle Laggards
Characteristics

majority
Competitors Few Growing Stable Declining
number number number
beginning to
decline

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Marketing Create product Maximize Maximize Reduce

Objectives awareness market share profit while expenditure
and trial defending and milk
market share the brand
Product Offer a Offer product Diversify Phase out weak
basic product extensions brands and items
service warranty models
Price Charge Price to Price to Cut price
cost-plus penetrate market match or best
competitors
Distribution Build selective Build intensive Build more Go selective:
distribution distribution intensive phase out
distribution unprofitable
Strategies

outlets
Advertising Build product Build Stress brand Reduce to level
awareness awareness differences needed to
among early and interest and benefits retain
adopters and in the mass hard-core
dealers market loyals
Sales Use heavy Reduce to take Increase to Reduce to
Promotion sales advantage of encourage minimal level
promotion to heavy consumer brand
entice trial demand switching

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Introduction: starts when a new product is launched. At this stage customers are not familiar
with the product. Hence, the firm’s objective in the early stage of the product life cycle should be
to stimulate demand for the new product. To this end, huge promotional campaign stressing on
introducing the product to the market should be conducted so as to get customers try the product.
Because the market is not ready, the pioneer company and its competitors produce the basic
version of the product at this stage. The basic features are as listed below:
Customers are hesitant in buying the product
Productivity is low since demand is low
Sales volume is low
High amount of money is placed in advertisement
Expenses are high
Therefore it is the least profitable stage

Growth stage: If the new product satisfies the market it will enter the next stage, in which sales
will start climbing quickly. The early buyers will keep on buying, and latter buyers will start to
follow their lead as the good word of mouth about the product passes across the market. On the
other hand, being attracted by the opportunities for profit, new competitors will enter the market,
which eventually paves the way for the introduction of additional features to the basic product
aspect. Likewise, the increase in the number of competitors will increase the number of
distribution out lets. Here at this stage, companies will keep their promotion spending at the
same level or slightly higher level. But, the beginning of competition will slightly decrease price.
Generally, at this stage educating the market is still the company’s major goal but the company
should meet the competition as well. Generally a company will pursue its marketing strategy in
such a way that it will be able to catch the lion share of the growing market. To this end, the firm
should improve product quality, add new product features and models, and look for new market
segments and new distribution channels. In addition, it may shift its advertising from building
product awareness to convincing buyers to make purchases and also lowering prices if necessary
to secure market share. Generally at this stage a firm should strive to secure a high market share
even if it means losing current benefits (profits), which will be compensated by the long run
benefit (profit). Generally, this stage has the following characteristics:

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This stage has the highest growth rate

Customers are now familiar with the merits and demerits of the product
Accordingly, sales volume increases very rapidly
A proportional rise in profits occurs
In this stages, competitors enter the market bringing about imitation of the
product
Promotional campaign is still very high.

Maturity stage: At some point, the market for a product will saturate and hence the sales growth
starts to slow down (continue to grow at decreasing rate till some time). At this stage, the
slowdown sales growth will results in many producers with many products. This will eventually
add fuel to the syrups of the competition that has started in the previous stage. To out race the
competition, firms will start to cut price, increase their promotion in general and sales promotion
in particular, rise R and D budgets to find better versions of the product. Generally, the stiff
competition may compel some firms to leave the market and eventually the market will contain
only well established competitors at this stage. Generally, the central focus of the firm at this
stage will shift to retaining the existing customers and attracting competitor’s customers rather
than looking for new users of the product. This does not mean that the firm will totally forget
about new users of the product but because the market has saturated (stopped expanding) it will
concentrate up on the existing market not on the potential market. In this regard a firm may
pursue two strategies: increasing the consumption of the current users of the company’s product
and attracting competitors’ customers and new users. This stage can be summarized as
Large number of competitors have entered market
Available products exceed customer demand
Sales increase levels out into a plateau reaching its highest peak.
Reduction in prices may occur in this stage.

Decline stage: In the final stage, shifting consumer preferences or other market forces such as
technological advances or increased competition bring about decline in sales. Eventually sales
may plunge to zero or it may drop to a low level where it continues for many years in such a
way. As sales and profit decline, some firms may withdraw from the market. Those remaining

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may prune their product offerings. They may drop smaller market segments and marginal trade
channels, or they may cut promotion budget and reduce their prices further. Generally such weak
products are disadvantageous to a firm not only for the sake of profit but such products may take
up the attention of the company’s management body, promotional effort etc that otherwise might
be used to other products. In addition it may hurt the firm’s reputation. Hence, companies should
identify products in the decline stage by regularly reviewing sales, market shares, costs and profit
trends. Then management must decide whether to maintain, harvest or drop the product.
Sales show downward trends,
Profits decline, in some cases actually becoming negative,
It necessitates product differentiation, that is having different uses for the
same product,
Or a totally new product may have to be introduced.

Product life cycle assumes that products have their own life stage through which profits assume and go
certain pattern. The length of the life cycle is considerably different from one product to another. A
new fashion may have a total life span of one calendar year, with an introductory stage of two months.
But the automobile has been in maturity stage for more than twenty years. This by no means, means
that all products pass through all these stages. Some products may die right after they are introduced
others may stay mature stage for a long, long time or some enter may enter the decline stage and are
then recycled in to the growth stage through strong promotion or repositioning.

Summary

A product is one of the elements of the marketing mix alongside price, place and promotion. It can
range from tangible goods to intangible goods and even to persons and ideas. The most widely
accepted classifications of products are consumer and industrial products, which are based on the
purpose of the acquisition of the products. Consumer goods are purchased for the personal
consumption of the individual or household buyers and they include convenience, shopping, specialty
and unsought goods. On the other hand, industrial goods are acquired for reprocessing, incorporating
in the production of other products and reselling to a third party. Products of this nature include
manufactured materials and parts, capital items, and supplies and business services. Products have
basic features such as brand, package, label and design. A brand is verbal or non verbal sign, symbol,

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letter or a combination of these that helps to differentiate the product from rivals. A package is the
components used to wrap the basic product. A label is written information about the product that
appears on the package. A company can sells a bundle of products to its customers and this represents
the company’s product mix. A product mix consist of product lines and products that are grouped
under the same product line are similar in their functions, prices, the distribution they are sold through
and the way they are advertised. In some cases, a company may decide to add a new product into its
product mix by imitating the products of its competitors, by improving its present product or by
innovating a totally new product. Under normal circumstances, after a product is introduced to the
market, it passes through growth and maturity stages then eventually declines because of different
factors.

Answers for selected exercises

Exercise 5.2.

The product mix is measured by product width, length and depth.

Exercise 5.3.

Products usually attract the most new customers during the introductory and growth stages.

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Self Assessment Questions (SAQs)

1. A product level in which the product exceeds the customer’s expectation refers to:
A. Potential product
B. Generic product
C. Expected product
D. Augmented product
2. Convenience goods that consumers buy suddenly for personal use:
A. Impulse goods
B. Emergency goods
C. Staples
D. None of the above
3. Which one the following represents the total number of items in the product mix?
A. Product mix depth
B. Product mix width
C. Product mix length
D. Product mix consistency
4. A product feature that carries information about who made it, where it was made, its contents,
how it is to be used, and how to use it safely is called:
A. Packaging
B. Branding
C. Labeling.
D. None of the above
5. In the new product development process, what comes after concept development and testing?
A. Developing marketing strategy
B. Business analysis
C. Product development
D. Idea screening

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CHAPTER SIX
PRICING

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Define price
Identify the various pricing objectives
Determine the relation between price and demand
Identify the methods of pricing namely cost based, value based and competition
based pricing methods
Understand the factors that the company most consider in selecting the final
price
Identify price adaptation strategies

6.1. Introduction

rice is the instrument most generally identified with a market economy. A free-enterprise system
could not flourish without price competition. Price is the universal index of value. It is the best
measure of demand. Price serves to bring the supply of goods and services produced into
equilibrium with the quantity demanded. In a business firm, among various marketing decisions,
the decision relating to pricing of products are the most significant decision because they are the
very basis of survival and growth of the firm. In our day-to-day activities we see the different
pricing as given below:
Rent for Apartments, Tuition for Education, Fee for Physician/dentist, Fare Airlines/taxi, Rate
for Local utilities, Toll for Car parking, Premium for Insurance, Price/salary for Executive,
Commission for Salesmen an etc.
The determination of price is a very important and crucial decision as it affects all the parties
involved in the production, distribution and consumption of goods. Prices affect volume of
production and the amount of profit. Price is a source to income of distributors. Price is
important for consumers because all their buying decision is influenced by prices. A price

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reflects the purchasing power of money. It determines the standards of living of the people. It is
the regulator of production and allocator of resources.
Exercise 6.1.
What is pricing?

6.2. Objectives of price decisions

The following are the objectives of price policy of a firm:

1. Return of Investment: A business organization must have minimum return on its
investment. E.g.10% to 20% after-tax. This rate is to be decided by the management and
followed in pricing policy.
2. Maximization of profit: Pricing policy directly affects the earnings of the concern and,
therefore, its successful functioning. Hence, the first objective of a price policy should be
the maximum of profit for the firm.
3. Acquiring market position: The second objective of price policy is to acquire a position
in the market. Hence a firm should prepare its pricing policies keeping in mind this
objective also.
4. Price stabilization: The price fixed once should be reasonably stabilized as it gives a
continuous income to the firm and brings reputation also. It is possible only when all short
term and long term aspects are taken into account while fixing prices.
5. Charging according to ‘Ability to pay’: The firm should fix its prices in such a manner
that ‘ability to pay’ principle of taxation is followed. It helps in maximization of earnings.
6. Facing the competition: The price policy of a firm should aim at facing the competition
successfully.
7. Long-run welfare of firm: The next objectives of price policy of a firm should be its
long-run welfare.

6.3. Factors affecting pricing strategy

A firm’s pricing strategy is affected by both internal and external factors.

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6.3.1. Internal factors

1. Marketing objectives: -before setting a price, the company must decide on its strategy for the
product. If the company has selected its target market and positioning carefully, then its
marketing mix strategy, including pricing will be fairly strait forward. For e.g. if the company
decided to target high income group, this suggests that the price will be higher or if it positioned
its product as economical this requires low price. In addition, the company’s main objective in
the market may have implication on its price. For e.g. a company may set survival as its major
objective if it is troubled by too much capacity, heavy competition or changing consumer needs.
To keep the plant operating in such circumstance, a company may lower its price, hoping to
increase demand. (Survival should be only a short-term objective and in the long run a firm
should learn how to add value to its product). Otherwise, a company may have current profit
maximization as a major goal. In doing so a company will estimate its demand and cost and
choose the price level that will produce the maximum current profit. Apart from this, a company
may pursue market share leadership objective and hence may charge low price to attract more
customers. Or else a company may want to achieve product quality leadership, which
normally calls for charging higher prices for superior performance. A company may also set its
price low to prevent competition from new entrants.

2. Marketing mix strategy: Price is only one of marketing mix elements that a company uses to
achieve its objectives. Hence, price decision must be coordinated with other marketing mix
decisions (product design, distribution and promotion) to form a consistent and effective
marketing program. Decisions made for other marketing mix variable may affect pricing. For
e.g. a firm using many resellers who are expected to support and promote their products may
have to build larger reseller margins into their prices. On the other hand, the decision on high
performance quality means that the seller must charge a higher price to cover higher costs. Or
else a firm looking for attracting customers through promotional campaign may find cutting
price as a means to attract customers.

3. Costs: costs set the floor for setting price that a company can charge for its product. Most often
under normal circumstances, companies need to charge a price that both covers all its costs for
producing, distributing and selling the product and delivers a fair rate of return for its effort and

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risk. Generally a company’s cost has paramount implication upon the price the company needs
to charge for e.g. a company interested to charge lower prices cannot do so unless it has lower
cost of production.

4. Organizational consideration: Responsibility for setting prices is different from organization

to organization for e.g. in small companies the top management may be involved in setting
prices for products while in the case of large companies this may be the responsibility area of
divisional or product manager. In any case, the organizational setup by itself has implication
upon the pricing aspect.

6.3.2. External factors

1. The market and demand: While cost determines the lower limit of prices, the market and
demand set the upper limit. The sellers’ freedom of setting price varies according to the type of
market for e.g. in a competitive market situation and monopolistic market situation, a
company’s freedom of setting price will not be the same. In the later case, the presence of other
producers means that customers will have other alternatives to satisfy their need, this eventually
makes companies appeal customers through their price and other means. In the first case, the
absence of competitors gives the company greater freedom to the company to set its price. Apart
from all this, the demand of the product by itself has implication up on the price that the
company sets. As we all know according to Economists, demand and price are inversely
related, that is the higher the price is the lower the demand will be and vice versa. Hence, in
setting its price a company should take into consideration the resultant demand it will have for
that price as the sales volume basically emanates from the demand level of the company.

2. Competitor’s costs, prices and offers: A consumer who is considering buying a given
company’s product will evaluate the prices and values of a company against the prices and
values of other companies producing that product. In addition, the company’s pricing strategy
may affect the nature of the competition it faces for e.g. a company pursuing high price, high
margin strategy may change the nature of the competition as compared to a company whose
strategy is low price, low margin. To this end, a company needs to benchmark its costs against
its competitor’s costs to learn whether it is operating at a cost advantage or not. Likewise, it also

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needs to learn the price and quality of its competitors so that it can decide on its offers including
price in relatively attractive (comparable) way than competitors.

3. Other external factors: in setting its price, obviously a company should consider its economic
situation such as inflation, deflation, booming etc as such factors affect both the price of the
company and the perception of consumers about the company’s product value and price. In
addition, a company should consider the effect of its price on other parties in its environment
such as resellers, government, etc. Apart from all these, social concerns may have to be taken
into consideration.

6.4. The process of setting price

Step 1: Determining demand

First step in the pricing of product is the estimation of the total demand for the product. It will
depend upon the expected price. Experienced wholesalers/retailers can evaluate our product. We
can conduct regular survey of potential buyers. We can determine the expected price in a few test
markets, by trying different prices in different test markets and comparing the results with
controlled market in which price is not altered. Once we know the expected prices, we can
compute sales volume at special prices.

Demand determines the ceiling (upper-limit) on price the company charges for its products. In the
normal case, demand and price are inversely related: the higher the price the lower the demand. If
the demand is too high, the level of demand may fall. However, in prestige goods, the reverse might
be true – the demand curve slopes upward. Generally speaking, customers are most sensitive to
products that cost a lot or are bought frequently. Companies, of course, prefer customers who are
less price sensitive.

Step 2: Estimating costs

While demand sets the ceiling on price, cost determines the lower limit of the price. The company
wants to charge a price that covers its cost of producing, distributing and selling the product
including a fair return for its effort and risk. There are two categories of cost.

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a. Variable costs: they vary directly with the level of production. They tend to be
constant per unit but vary the total number of units produced.
b. Fixed costs: also known as overhead costs, these are costs that do not vary with
production or sales revenue.

Step 3: Analyzing competitor’s costs, prices and offers

The third step is anticipating competition. Competition is a crucial factor in price determination.
Sellers do not operate in a vacuum. If the area of operation is easy (i.e., entry of new producers
into the market is easier), profit prospects are immense and it is quite obvious that the threat of
competition is considerable.

By taking competitors’ costs, prices and possible price reactions into account, the firm can decide
whether it can charge more, the same or less than competitors.

Step 4: Selecting the pricing method

A pricing method can be:

Cost based pricing

Value or Demand based pricing
Competition based pricing

I. Cost based pricing

1. Cost plus pricing (mark up price): These are often used by retail traders and in
manufacturing industries where the production is not standardized. The method of pricing is
based on simple arithmetic adding a fixed percentage to the unit cost. Thus the retail price of a
particular product might be the manufacturer’s cost plus gross margin, plus the whole seller’s
gross margin, plus the retailer’s gross margin. Hence it is also known as ‘Sum of Margins
method’.

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Mark up price = Unit Cost Unit cost = variable cost + Fixed cost
(1-Desired return on sales) Unit Sales

Advantages:
1. Where it is difficult to forecast the future demand, this method is appropriate.
2. If there se few buyers of the products, this pricing can be justified.
3. Public utility services like railway, post office, electricity are priced through this method.
4. It is long–term policy.
Disadvantages:
1. The demand and supply forces and competition, the two important forces in fixing the
prices are ignored.
2. This is totally based on cost-concept. But the reality is that costs do not influence the
prices, where as prices influence the cost.
3. The costs of joint products are only estimated; correct cost cannot be calculated.

2. Target pricing: This is invariably adopted by manufacturers who fix a target return on the
total cost or investment. Manufacturers use break even analysis for dividing cost-plus pricing.
This analysis helps to calculate in advance the likely relationship between the cost, volume and
profit over various time periods. It has also proved to be a highly useful technique for the broad
planning of manufacturing facilities.

Target Return Price = Unit cost + (Desired return x Invested capital)

Unit sales

3. Break-even pricing: The break even analysis helps a firm to determine at what level of output
the revenues will equal the costs assuring a certain selling price. For this purpose the cost of
manufactures is also divided into two: fixed (rent, rates, insurance etc) and variable costs (labour,
material) vary with changes in output level. Fixed costs are constant at all levels of output,
theoretically. Fixed costs are naturally decreased per unit when production increases. Variable

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costs, on the other hand change as production varies i.e., no production, no variable cost; more
production, more variable cost.
The break-even point therefore, is a joint where there is neither loss not profit.

Break-even point= Total fixed costs

Contribution
Contribution= (Unit selling price-Unit Variable cost)

Break even analysis helps to establish prices only when the costs of production remain
reasonably constant. Another feature is found in accurately forecasting demand at various prices.

4. Marginal/Incremental cost pricing: In this, method, the price is fixed on the basis of
additional variable cost associated with an additional unit of output. The cost of producing and
selling one more unit, i.e., the last unit is taken as the base for the pricing. This method can be
used where breakeven point has been achieved. It is a short-term policy.

Exercise 6.2.
Suppose SN Company has the following costs and sales expectations:
Variable cost per unit $10
Fixed cost $ 300,000
Expected unit sales 50,000
20% mark up on sales
1. Determine the mark up (cost plus) pricing
2. Assume that SN Company has invested $1,000,000 in the business and wants to earn
a 20 % return on investment (ROI). Determine the target-return price.

II. Value or demand based Pricing:

1. Perceived value pricing

Perceived-value pricing is made up of several elements, such as the buyer’s image of product
performance, the channel deliverables, the warranty quality, customer support and other

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attributes like suppliers’ reputation, trustworthiness and esteem. Companies use advertising and
sales force to communicate and enhance perceived value in buyers’ minds. The key for
perceived-value pricing is to deliver more value than the competitor and to demonstrate this to
prospective buyers.

There is always a segment of buyers who care only about price. The company can try to
determine the value of its offering in several ways such as managerial judgments within the
company, value of similar products, focus groups, surveys, experimentation, and analysis of
historical data and conjoint analysis.

2. Value pricing

In recent years, several companies that have adopted value pricing, won loyal customers buy
charging a fairly low price for high quality offering. In addition to setting lower prices, the
company must reengineer its operations to become a low cost producer without scarifying
quality. The company must also lower prices significantly to attract a large number of value-
conscious customers.

III. Competition based pricing

Most companies set prices after a careful consideration of the competitive price structure.
Deliberate polices may be formulated to sell above, below or generally in line with competition.
One important feature of this method is that there cannot be any rigid relation between the price
of a product and the firm’s own cost or demand. Its own cost or demand may change, but
competitors change theirs, even if its costs or demand has not yet altered

1. Going rate pricing

The firm bases its largely on competitors’ price. The firm might charge the same, more or less than
major competitor (s). In oligopolistic industries, firms normally charge the same price. The smaller
firms “follow the leader”, changing their prices when the market leader’s prices change rather than

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when their own demand or cost change. Where costs are difficult to measure or competitive
response is uncertain, firms feel that the going price is a good solution.

2. Auction-based pricing

The major purpose of auctions is to dispose excess inventories or used goods while they are
functional or can be recycled. There are three types of auctions:

English auctions (ascending bids): there are one seller and many buyers. The seller puts up
an item on auction sites and bidders raise the offer price until the top price is reached.
Dutch auctions (descending bids): there can be one seller and many buyers or vice versa.
In the first kind, an auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts the price. In the reverse situation, the buyer
announces something that he wants to buy and then potential sellers compete to get the sale
by offering the lowest price.
Sealed-bid auctions: would-be suppliers can submit only one bid and cannot know price
offers of other participants as they are sealed in envelope.

Activities:
1. Dear leaner, which pricing method do you think is better than others? Why?
Discuss with your friends.
2. Which type of auction is more appropriate from customers’ point of view? Explain
your stand.

Step 5: Selecting the final price

In selecting the final price, the company must consider additional factors, including:

A. Consumer’s psychology and pricing: consumers may have a lower price threshold below
which prices may signal inferior or unacceptable quality; as well as an upper price threshold
above which prices is prohibitive and seen as not worth the money.

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B. Impact of other marketing activities: the final price must take into account the brand’s
quality and advertising relative to the competition. Studies reveled that brands with high
relative quality and relative advertisements obtained the highest price
C. Company pricing policies: the price must be consistent with companies’ pricing objectives.
D. Gain-and-risk sharing pricing: buyers may resist accepting a seller’s proposal because of
high perceived level of risk. The seller has the option of offering to absorb part or all of the
risk if it does not deliver the full promised value.
E. Impact of price on other parties: management must also consider the reaction of other
parties to the contemplated or proposed price. Marketers need to know the laws regulating
pricing. Sellers must set prices without talking to competitors. Price-fixing is illegal. It is
also forbidden for a company to set artificially high “regular” prices, and then announce a
“sale” at prices close to previous everyday prices.

6.5. Adapting the price

There are several price adaptation strategies.

1. Geographical pricing: refers to the way the company determines different prices for its
products to different customers in different locations and countries.
2. Price discounts: most companies adjust their list price and give discounts and allowances
for different reasons. Many discounts undermine the value perception of the offering. It can
be a mistake for a strong, distinctive brand to plunge into price discounting to respond to
low price attacks. Some companies in an over capacity situation are tempted to give
discount or even supply a retailer with their product at a deep discount.
3. Promotional pricing: companies can use several pricing techniques to stimulate early
purchase.
Loss-leader pricing: it is dropping below the competitor’s price.
Special-event pricing: sellers will establish special price in certain season to draw in
more customers.
Cash rebates: it can help the company clear its inventories within specified time
period without cutting the stated list price.

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Low-interest financing: instead of cutting its price, the company offers customers
credit terms with low interest rate. For example, real estate
Longer payment term: sellers stretch loans over longer periods and thus lower the
monthly payment.
Warranty and service contract: companies can promote sales by adding a free low-
cost warranty or service contract.
Psychological discounting: it involves setting an artificially high price and offering
the product at substantial savings; “was $359, now $299”.
4. Discriminatory pricing: this occurs when a company sells a product or service at two or
more prices that do not reflect a proportional difference in cost.
Customer-segment pricing: different customer groups are charged different prices
for the same product or service. For example, seats in a theater cost different for
children and grown people.
Product-form pricing: different versions of the product are priced differently but
not proportionally to their respective costs.
Image pricing: some companies price the same product at two different levels based
on image differences.
Channel pricing: Coca Cola is priced differently in a fine restaurant, a fast-food
restaurant or a vending machine.
Location pricing: the same product is priced differently at different locations even
though the cost of offering the product at each location is the same. Entrance tickets
in a stadium vary according to audience preferences for different locations.
Time pricing: prices are varied by season, day or hour.

Summary

Price is the exchange value of a product in the market place. Price is not just a number or a tag on
an item, but the total values that an individual exchanges for the benefit of having or using a
product. Price is the only marketing mix element which generates revenue and is the most flexible
one. Companies can hold different objectives in setting the price for their products, amongst are
survival, current profit maximization, market share leadership and product-quality leadership. The
two basic factors that determine a product’s price are demand and cost; one determine the upper

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limit and another the lower limit on price. A company can choose between cost based, value based
or competition based pricing methods to follow. There are factors that a company must consider in
selecting the final price like the consumer’s psychology and pricing, impact of other marketing
activities on price, company pricing policies, gain-and-risk sharing pricing and impact of price on
other parties. Finally, the firm has different price adaptation strategies at its disposal. It can set
different prices for various locations – a strategy known as geographical pricing. Or, it can make
discounts of several forms. Another way is to use pricing techniques that can stimulate early
purchase that is referred to as promotion pricing. Still a company can discriminate between different
customer segments with the price it charges.

Answer for Exercise 6.2.

1. The company’s unit cost is given by:

Unit Cost = Variable Cost + Fixed Cost
Unit Sales

= $ 10 + $ 300,000 = $ 16
50,000

Assume SN Company wants to earn 20 % mark up on sales.

The company’s mark up is given by:
Mark up Price = Unit Cost___
(1 Desired Return on Sales)
= $ 16_
(1 0.2)
= $ 20

2. The target-return price is given by:

TRP = Unit Cost + Desired Return × Invested Capital

Unit Sales

= $ 16 + 0.2 × $ 1,000,000

50,000

= $ 20

A 20% ROI, = $ 1,000,000 × 0.2 = $ 200,000

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Self Assessment Questions (SAQs)

1. A price adaptation strategy used by a company in the situation of selling its goods and
services at two or more prices that do not reflect a proportional differences in cost is known
as :
A. Promotional pricing
B. Discriminatory pricing
C. Price discounts
D. Geographic pricing
E. None
2. Conditions where market skimming pricing makes sense include:
A. Sufficient number of buyers have a high current demand
B. The high initial price does not attract more competitors of the market
C. The high price communicate the image of a superior product
D. All of the above
E. None of the above
3. A pricing objectives of setting high price at the start and slowly over time is referred to as:
A. Maximize current profit
B. Market skimming pricing
C. Product quality leadership
D. Maximize market share (market penetration)
E. None of the above

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CHAPTER SEVEN

MARKETING CHANNELS

Chapter Objectives:

Upon completion of this chapter, you will be able to:

Aware yourselves about marketing channels
Learn the members of the marketing channel and the functions they perform
Understand the types and levels of marketing channels
Identify the different flows in the marketing channel
Comprehend the intensity of distribution
Acquire knowledge of the variables that determine channel structure

7.1. Introduction

After producing and offering products capable enough to satisfy customers’ needs, a company
should not only promote its products but also should be able to make its offers available to its
ultimate customers in areas where they are in need of so that customers will be able to get access of
the company’s products conveniently, quickly and with a minimum of effort and thus, they will be
satisfied with the company’s performance. In connection to this, the channel of distribution is the
system of institutions used to deliver goods to the final consumers from where they are produced.
Channel decisions must be considered carefully for several reasons. In the first place, customers
need not only the right product but also at the right place (place utility) and time (time utility) with
compatible size (form utility) and they want the enhanced transfer of ownership (possession utility).
If the company fails to do these things successfully, it will most hopefully result in the
dissatisfaction of customers which eventually puts the acceptability of the company at the odd.
Second, it is very expensive and time consuming to set up and maintain a distribution channel.
Third, the channel may provide a competitive edge over rivals. This edge may be a unique location,
efficient inventory, and delivery practices, special selling skills, market monitoring services and so
on. Finally, the selection of channel or channel design will constrain or facilitate the choice and

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implementation of other marketing tact e.g. if the company chooses to have a number of
intermediaries, this may call the company to make sufficient margin in the company’s price to allow
all the involved intermediaries to get profit otherwise the final price that reaches to customers will
be somehow inflated as all intermediaries add their own profit margin on the original product’s
price.

Also known as trade channel or distribution channel, marketing channels are sets of interdependent
organizations involved in the process of making a product or service available for use or
consumption. It is the pathway a product or service follows when it moves to producers to
consumers. Marketing channel is the external contractual organization that management operates
to achieve its distribution objectives. There are four terms in this definition that should be
especially noted.

External: means that the marketing channel exists outside the firm.
Contractual organization: refers to those firms or parties who are involved in buying,
selling and transferring titles to the product.
Operates: it meant to suggest involvement by management in the affairs of the channel.
Distribution objectives: mean that the management has certain distribution objectives in
mind. The marketing channel exists as a means for reaching these objectives.

Producers and consumers made the marketing channel but sometimes intermediaries may involve.
Intermediaries (middlemen) are the independent organizations which involve in moving, selling and
promoting the company’s products. They can be of three types:

a. Merchants: include wholesalers and retailers – they buy, take title to, and resell the
merchandise. Wholesalers and retailers are major sources of information in a market
research.
b. Sales agents: include brokers, manufacturers’ representatives and sales agents that may
reach for customers and may negotiate on the producer’s behalf but do not take title to the
goods.
c. Facilitators: assist the distribution process but neither take title nor negotiate purchases or
sales; they include transportation companies, independent warehouses, banks and
advertising agencies.

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7.2. Functions of marketing channels

i. Information: gathering information about potential and current customers (what are their
needs, what are they buying), competitors, the current economics of the marketing channel,
new entrants, new technology and other actors and forces in the marketing environment.
ii. Promotion: develop and disseminate persuasive communications (about the performance of
the product, special offers) to stimulate purchasing.
iii. Negotiation: reach agreements in price and other terms so that transfer of ownership or
possession can be effected.
iv. Order processing: place order with manufacturers.
v. Financing: acquire funds to finance inventories at different levels in the marketing channel.
vi. Risk taking: assume risks connected with carrying out channel work.
vii. Warehousing: provide for the successive storage and movement of physical products.
viii. Customization: shaping and fitting the offer to the buyer’s needs including manufacturing,
grading, assembling and packaging products (e.g. fish processors) so that customers can
purchase in a customized manner.

7.3. Types of marketing channels

Marketing channels can broadly be divided into two: direct and indirect.

1. Direct marketing channel (Zero-level channel)

Here, the manufacturer sells its products directly to the customer or business buyer without using
any intermediary. Manufacturers of heavy installations like airplanes, ships or generators may use
direct channels where buyers need a lot of service from manufacturers. The most commonly used
methods of direct channels are:

a) Door-to-door selling: the company employs its own salespersons who search for customers,
convince them and bring the product to the doorsteps of the customers.
b) Manufacturer’s sales branches: the manufacturer operates different branches nearer to
customers’ locations.

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c) Direct mail order: means dispatching the product through the mail address of the customer.
It avoids personal contact between the seller and the buyer. The products should not be too
heavy or bulky to be mailed. E.g. newspapers and magazines

2. Indirect channels: the company makes use of at least one intermediary to sell its products.
a) Wholesalers: buy products in large quantities from producers and sell it to retailers. They
do not sell to individual customers.
b) Retailers: they usually buy products from wholesalers and sometimes from producers to sell
directly to final consumers for their personal use.
c) Agents: represent manufacturers on a relatively permanent basis to perform and selling and
other facilitating functions.

7.4. Levels of marketing channels

Levels of marketing channels refer to the type of middlemen the producer uses in selling its product.
Direct channel is the shortest channel a producer can use. It is not commonly used in consumer
markets.

A one-level channel: contains one selling intermediary such as a retailer (super market).
Retailers may sometimes avoid wholesalers to buy products directly from producers.
A two-level channel: contains two intermediaries; these are typically a wholesaler and a
retailer. It is most commonly used in consumer markets.
A three-level channel: contains three intermediaries. It is common in import and export
trade.

7.5. Flows in the marketing channel

The term flow is descriptive of movement and it provides the links that tie channel members and
other agencies together in the distribution of goods and services. Major flows in marketing channel:

1. Product flow (physical flow): refers to the actual physical movement of the product from
the manufacturer through all of the parties who take the physical possession of the product.

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2. Negotiation flow: represents the interplay of the buying and selling function associated with
the transfer of title to the manufacturer’s products.
3. Ownership or title flow: it shows the movement of title to the product.
4. Information flow: refers to the exchange of information by all parties that participate in the
marketing channel.
5. Promotion flow: refers to the flow of persuasive communication in the form of advertising,
personal selling, sales promotion and publicity.
6. Payment flow: refers to buyers’ payment of their bills to the sellers through banks.

Some functions (physical, title, promotion) constitute a forward flow of activity from the company
to the customer; other functions (ordering and payment) constitute a backward flow from customers
to the company. Still others (information, negotiation, finance and risk taking) occur in both
directions.

7.6. Intensity of distribution

Companies have to decide on the number of intermediaries to use at each channel level. Three
strategies are available:

1) Intensive distribution: it is a strategy to use as many outlets (intermediaries) as possible.

This is feasible and advantageous especially for convenience products because the most
important consideration that customers care about is to get the products available in areas
where they are in need of on timely basis with compatible size. So, companies pursuing this
strategy will make their products available in the hands of every possible intermediary.

2) Selective distribution: In some circumstances, companies may not limit the right to
distribute their products to only one or specific intermediary and as well may not allow all
possible and potential intermediaries to distribute their products but limit the right to
distribute their products for intermediaries more than one but fewer than all.

3) Exclusive distribution: By contrast, some producers purposefully may limit the number of
their intermediary in a given region to one intermediary in which the intermediary will have
the exclusive right to distribute the company’s products in the specified region.

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Generally, no matter what system is designed, the firm’s channel of distribution should be designed
in such a manner that it is capable enough to make products available and easily accessible to areas
where customers are in need of effectively and efficiently so as to enhance customer satisfaction.

7.7. Channel design decisions

The design of the channel depends on how consumers make decisions about the particular product,
the number and dispersion of consumers, the amount of goods to be sold and their value, the cost of
various channel options, the task that must be performed and competitive practices. Generally, in
designing their channel, companies need to assess the following sequential steps so that their
channel will be able to address what it is supposed to.

1. Analyze customers’ desired service output levels:

This refers to assessing the level of services that target market customers expect from the
company’s distribution channel. This may take different aspects. For example, the lot sizes (the
number or size of products) that a typical customer wants to buy on one occasion and product
variety: the assortment breadth provided by the marketing channel should be looked in to. In the
same way, the average time (waiting time) that customers should wait for receipt of the goods
should as well be assessed. Likewise, the spatial convenience: the degree to which the marketing
channel should make it easy for customers to purchase the product is also one of the factors to be
considered. The company should also consider if there are possible service backups that customers
may expect from the channel or may attract customers such as delivery, credit, ordering etc.

2. Establish channel objectives and constraints: channel constraints and objectives should be
assessed taking in to account the targeted service output level to customers. The ultimate objective
of channels is to provide products available to targeted customers effectively and efficiently. But in
today’s competitive environment, it may not be enough. In addition to this basic and traditional
purpose, channels may be designed to accommodate additional aspects such as additional services
like transportation, on line ordering etc, risks associated with the transfer of values etc so that the
channel will be more conducive to customers than competitors’ channels do.

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3. Identify major channel alternatives: A company is said to use direct marketing (distribution)
if it uses its own sales force and institutions to distribute its products and indirect distribution if it
uses external parties (intermediaries) to distribute its products. If a company distributes its products
by itself, it may turn out to be advantageous as it enables the company to keep direct interaction
with its customers and the possible price that reaches to final consumers will not be that much
inflated. Contrary to this, even if they may be considered as disadvantageous from the above point
of view, in today’s situation it almost become infeasible for a company to distribute its products by
itself owing to the advantages of intermediaries that outraces their disadvantages. Hence, most
producers do not sell their goods directly to the final users. Between producers and consumers,
stand one or more marketing channels.

4. Evaluate the different alternatives and choose the most conducive one: each of the available
options should be evaluated against economic, control and adaptive criteria. Each channel
alternative will produce a differential level of sales and cost. Hence, each of the options should be
evaluated from the potential sales and cost perspective. Apart from this, control and adaptive
criteria should be seen. Using sales agency possesses a control problem. Intermediaries are
independent parties seeking to maximize their profit. Hence, in some circumstances, these
intermediaries may act against the company’s desire in their effort to capitalize their benefit and this
in turn may put the company’s business at the odd. Hence, the company should also consider to
what extent it can influence and control the activities of its intermediaries before choosing
intermediaries.

7.8. Variables that determine channel structure

Market variables
Product variables
Company variables
Intermediary variables

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A. Market variables

Market variables are the most fundamental variables affecting the channel structure. There are four
basic subcategories of market variables.

Market size: refers to the number of customers making up a market. The general rule about
market size relative to channel structure is: if the market is large the use of intermediary is
more likely to be needed.
Market density: refers to the number of buyers located within Km2 or Mile2. The general
rule is the less dense the market (buyers are widely scattered), the more likely it is that
intermediaries.
Geographic location of the market: refers to the geographical size of markets and their
physical location and distance from the producer. The general rule is the greater the distance
between the producer and its markets, the higher the probability that the use of
intermediaries will be.
Market behavior: refers to the types of buying behavior – that is how, when and where
customers buy and who does the buying.

B. Product variables

Unit value of the product: refers to the price per unit of the product. The lower the unit
value of the product, the longer the channel should be.
Perishability: products subject to rapid physical deterioration or spoilage (such as fish) are
considered to be highly perishable. When products are highly perishable, channel structure
should be shorter to provide for rapid delivery to producer to consumers.
Technicality: refers to the nature of the product (technical versus non-technical). To the
industrial market, a highly technical product such as machinery will be distributed through a
direct channel since the manufacturer provides information about the product’s technical
features, advices and after-sale services to customers.
Newness: in the introductory stage, a shorter channel is generally viewed as an advantage
for gaining product acceptance.

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Degree of standardization: refers to whether products are uniform (standardized) or custom-

made (made according to customer order). Custom-made products go directly from producer
to users; but as products become more standardized the channel will be long.
Bulk and weight: heavy and bulky products have very large handling and shipping costs
relative to their value, so that the channel should be as short as possible – usually direct from
producer to user.

C. Company variables

Financial capacity: in order to directly to consumers, a company needs its own sales force
and support services like retail stores, warehousing and order processing capabilities. The
greater the capital available to a company, the lower its dependence on intermediaries.
Managerial expertise (capabilities and skills): when a company lacks the managerial
expertise to perform distribution tasks, its dependence on intermediaries will be high.
However, as the company gains experience and managerial skills, it may be feasible to
change the structure to reduce the amount of reliance on intermediaries.
Objectives and strategies: if the company has strong desire to control the channel, it may
use direct or short channel.

D. Intermediary variables

Availability: if there are sufficient numbers of middlemen, longer channel may be used.
Attitude of middlemen: if the attitude of middlemen towards the product of the company is
poor, it may try to change the negative attitude or use a direct selling.
Cost: if the cost of using intermediaries is too high as compared to the service performed,
the channel structure is likely to minimize the use of intermediaries.

Summary

Marketing channels represent a set of organizations that operate interdependently to achieve the
company’s distribution objectives which is delivering the right product, at the right time, at the right
condition and to the right user. Marketing channels have two subsectors: commercial and end-user.

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In the commercial subsector there are the manufacturer and distributors. The typical types of
distributors are wholesalers and retailers. There are also what we refer to facilitating agencies which
are firms that are not members of the channel but who nevertheless aid in the distribution process.
Marketing channels perform such functions as information, promotion, negotiation, order
processing and the like. Manufactures can perform all these functions by their own. In other words,
they can sell their products directly without the use of intermediaries. Or, they can delegate some or
all of the functions to intermediaries, that is, they can make the channel indirect. Different flows
take place in the marketing channel including product flow, negotiation flow, ownership or title
flow and etc. The intensity of distribution can be intensive, selective or exclusive. A channel design
decision takes sequential steps of analyzing customers’ desired service output levels, establishing
channel objectives and constraints, identifying major channel alternatives and choosing the most
conducive one. The channel structure is determined by market, product, company and intermediary
variables.

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Self Assessment Questions (SAQs)

1. Which intensity of distribution is more appropriate in the growth stage of the product life
cycle?
A. Intensive
B. Selective
C. Exclusive
D. All of the above
2. A market variable which refers to the number of customers making up a market is:
A. Market density
B. Market size
C. Market variable
D. None of the above
3. Identify the one which is not intermediary variable that determine channel structure
A. Attitude of middlemen
B. Availability of middlemen
C. Cost of middlemen
D. Objectives and strategies of middlemen
4. __________ refers to the type of middlemen the producers uses in selling their product
A. Levels of marketing channel
B. Functions of marketing channel
C. Channel structure
D. None of the above
5. A market variable which focus on how, when and where customers buy and who does the
buying:
A. Market density
B. Market size
C. Market behavior
D. None of the above

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CHAPTER EIGHT

PROMOTION

Chapter objectives:

Upon completion of this chapter, you will be able to:

Describe promotion and its objectives

Explain advertising and the decisions pertaining the development of an
advertising program
Define sales promotion and enlist consumer, trade and business and sales
force promotion tools
Identify the kinds and tools of public relations and the functions of the PR
department
Sort out the types, objectives and processes of personal selling

8.1. Introduction

Promotion is the process of marketing communication involving information, persuasion, and

influence. Promotion has been defined as “coordinated, self-initiated efforts to establish channels
of information and persuasion to facilitate to foster the sale of goods or services, or the
acceptance of ideas or points of view”. Thus, promotion is persuasive communication to inform
potential customers of the existence of products, to persuade them that those products have want-
satisfying capabilities. As such, promotion message has two basic purposes: i) persuasive
communication, ii) tool of competition. Promotion is responsible for awakening and stimulating
consumer demand for the product. After product development, it is introduced in the market and
its demand is created through different promotional activities. Promotion is just like the spark
plug in the marketing-mix of a firm.

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The promotion-mix of a firm includes five ingredients, viz., advertising, publicity, personal
selling, all forms of sales promotion and packaging. (Some treat it as a part of product-mix also).

8.2. Promotion mix

Promotion mix is a blend of communication tools that help to achieve the promotion objectives in
one way or another. It includes advertising, personal selling, sales promotion and publicity.

8.2.1. Advertising

Mass selling is communicating with lager number of customers at the same time. The main form of
mass selling is advertising – any paid form of non personal presentation and promotion of ideas,
goods or services by an identified sponsor.

Advertising has the following qualities:

Pervasiveness: advertising permits the seller to repeat the message many times. It also
allows the buyer to receive and compare the message of various competitors.
Amplified expressiveness: advertising provides opportunities for dramatizing the company
and its products through the artful use of print, sound and color.
Impersonality: the audience does not feel obligated to pay attention or respond to
advertising.

In developing an advertising program, marketing managers must make five major decisions known
as “The five M’s”: Mission: what are the advertising objectives? Money: how much can be spent?
Message: what message should be sent? Media: what media should be used? Measurement: How
should the results be measured?

A. Mission –advertising objectives

An advertising goal or objective is a specific communication task and achievement level to be

accomplished with a specific audience in a specific period of time. Advertising objectives can be
classified according to whether their aim is to inform, persuade, remind or reinforce.

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1. Informative advertising: aims to create brand awareness and knowledge of new products or
new features of existing products. It is usually preferred in the introduction stage of the
product life-cycle.
2. Persuasive advertising: aims to create liking, preference, conviction and purchase of a
product or service. Persuasive advertising is specially used in growth and maturity stages of
the product life cycle where competition is stiff.
3. Reminder advertising: aims to stimulate repeat purchase of products and services. As there
is a threat of competitors, the firm should keep reminding about its products.
4. Reinforcement advertising: aims to assure customers (who bought previously) that they
have made the right choice and to encourage them to purchase again.

B. Money – the advertising budget

In setting an advertising budget, the company must make internal and external considerations.

Internal considerations:

a) Product differentiation: similarity in product offering among firms forces the industry to
spend high advertising budget to show the customers the difference among brands.
b) Stage in the product life cycle: new and modified products typically receive large
advertising budget to build awareness and to gain consumer trial in the introduction stage.
c) Advertising frequency: if the firm plans to advertise often, its advertising budget will be
high.

External consideration:

a) Competition: in a market with a large number of similar or none resembling and high
advertising spending, a company must advertise more heavily to be heard.
b) Market share: high-market-share brands usually require less advertising expenditure. It is
less expensive to reach consumers if a widely used brand than to reach consumers of low-
share brands.
c) Product substitutability: it is somewhat related with competition. Some products stay in the
market with a strong in hold in technology, quality and other distinctive feature.

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There are four methods in establishing the total advertising budget.

1. Affordable method: is assigning a budget at a point where the company can afford. It
ignores the immediate impact of advertising on sales volume. It views advertising as an
investment rather than expenditure.
2. Percentage of sales method: many companies set advertising expenditures at a specific
percentage of sales (either current or expected) or of the sales price. It views sales as the
determiner of advertising rather than the result. It leads to budget set the availability of funds
rather than by market opportunities.
3. Competitive-parity method: is determining an amount equal or approximate to competitors’
spending. However, company reputation, resource, opportunities and objectives differ so
much that advertising budgets rarely become similar.
4. Objective-and-task method: a firm defines a set of objectives to attain, develop tasks
(strategies) of achieving the objectives and finally estimate the total expenditure required for
performing these tasks. The sum of these costs is the proposed promotion budget.

C. Media selection

Media is finding the most cost-effective media to deliver the desired number and type of exposure
to the target audience. There are two categories of media: broadcast and print media. In the
broadcast media, we have TV and Radio while the print media comprises newspapers, direct mail,
magazines and outdoor (billboards and painted bulletins) advertising.

Media Advantages Disadvantages

TV Combines sight, sound and motion; High total cost; less audience
appealing; high reach; repetition of selectivity.
message; mass coverage; flexibility
(the message can vary depending on
necessities)
Radio Low cost; mass use; flexibility and Audio presentation only (no
mobility (updating information is visualization); lower attention
possible); repetition. than TV; no selectivity

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Newspapers Flexibility; timeliness; good local Short life; poor innovative

market coverage; inexpensive; features; a small ‘pass-along’
believable audience
Magazines High geographic and demographic Lack of timeliness; high cost
selectivity; long life; colorful and
artwork presentation
Outdoor, billboard Flexibility; high repeat exposure; No selectivity; creative
and transit low cost; low competition limitation
advertising
Direct mail High audience selectivity; Higher cost per customer
personalized information
presentation; speed flexibility; low
competition

Media timing or media scheduling is an issue to be considered before advertising through selected
media. This is influenced by sales trend, competitors’ activities and repurchase cycles. Based on
media timing, advertising can be:

o Continual: suggests the firm advertise continuously and evenly throughout a given period. It
is used in spending market situations and with frequently purchased items.
o Concentrated: the firm spends the advertising budget in a single period. Example, for
products with one selling season or holiday.
o Fighting: advertise on one period, quit advertising on the next period, and again advertise
on the third period. It is used when the purchase cycle is relatively infrequent and with
seasonal items.
o Pulsing: is continuous advertising at low-weight reinforced periodically waves of heaver
activity. Pulsing draws on the strength of continuous advertising and fight to create
compromise scheduling strategy.

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D. Message

Advertising message is what the advertising attempts to convey about the brand. The message
should be:

Meaningful: pointing out benefits.

Believable: persuading customers that the firm really provides the stated benefits.
Distinctive: depicting the firm is better than competitors.

In developing advertising message, it is important to generate fresh insights and avoid using the
same appeals and positions as others. The firm should also know how to transmit the message. In
such category, format color combination, illustrations and headlines should be there in an attractive
way. To be socially responsible, advertisers must be careful not to offend the general public as well
as any ethnic groups, racial minorities or special-interest groups.

E. Measurement – evaluating the advertising effectiveness

Most advertisers try to measure the communication effect and the sales effect of the advertising.
Communication-effect research seeks to determine whether advertising is communicating
effectively. Advertising sales-effect is generally harder to measure than its communication effect
since sales are influenced by many factors such as features, price and availability as well as
competitors’ actions. But it can be measured by comparing past sales with historical advertising
spending or through experiments by injecting advertising budget in different segments and
observing their respective sales trend. The sales impact is easier to measure in direct-marketing
situations.

8.2.2. Sales promotion

Sales promotion consists of a collection of short term incentives designed to stimulate quicker or
greater purchase of a particular product or service by consumers. Whereas advertising offers a
reason to buy, sales promotion offers an incentive to buy.

The objectives of sales promotion

To stimulate trial purchase

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To enable manufacturers to adjust to short-short term variations in supply and demand

To encourage repurchase
To increase quality of purchase
To support advertising

Sales promotion may be aimed at consumers, middlemen or a firm’s own employees. It includes
tools for consumer promotion, trade promotion and business and sales force promotion.

A. Consumer promotion tools

They are directed toward the ultimate consumer. They include:

1. Samples: are free offers of a product or a service delivered door-to-door, send in the
mail, picked up in a store or attached to another product.

2. Coupons: are certificates that entitle the consumer for the reduction in the selling price of
a specific product (usually for immediate purchase). It can be mailed, enclosed in other
product or attached to them, or instilled in magazine or newspaper advertising.

3. Cash refund offers (cash rebates): the manufacturer refunds the consumer part of the
purchase by mail after the consumer send “proof of purchase”. It is a price reduction after
purchase rather than at the retail shop.

4. Premiums (gifts): are merchandise offered extra to the main product at a relatively low
cost or free as an incentive to purchase a particular product. They are of three types: a
with pack premium – accompanies the product inside or on the package; a free-in-the
mail premium – is mailed to consumers who send a proof purchase; and, a self liquidating
premium – is sold below its normal retail price to consumers who request it.

5. Price packs (cent-off deals): offer consumers certain amount of savings of the regular
price of a product. They are of two types: a reduced price pack – is a single package sold
at a reduced price (such two for the price of one); and, a banded pack – is to related
products banded together (such as toothbrush and toothpaste).

6. Patronage awards: refer to any value, cash or none cash for the loyal users of a firm’s
product or service.

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7. Point-of-purchase (POP) displays and demonstrations: displays or other promotional

activities at the area where consumers purchase the product.

8. Frequency programs: provide awards related to the customer’s frequency and intensity
in purchase the company’s products and services.

9. Prizes (contests, sweepstakes and games): are offers of the chance to win cash, trips or
merchandise as a result of purchasing something. A content calls for consumers to submit
an entry to be examined by a panel of judges who will select the best entries. A
sweepstake asks consumers to submit their names in drawing. A game presents
consumers with something every time they buy – bingo numbers, missing letters – which
might help them to win a price.

10. Free trials: refer to inviting prospective purchasers to try the product without cost in the
hope that they will buy.

11. Product warranties: are explicit or implicit promises by the seller that the seller fixes it
or refund the customer’s money during a specified period.

12. Tie-in promotions: two or more brands team upon coupons, refunds and contest to
increase pulling power.

13. Cross-promotions: using one brand to advertise another competing brand.

B. Trade promotion tools

They are directed to the members of the marketing channels. Manufacturers award money to the
trade: (1) to persuade the retailer or the wholesalers to carry the brand; (2) to persuade the
retailer or the wholesaler to carry more units than the normal amount; (3) induce retailers to
promote the brand; (4) to stimulate retailers and their sales clerks to push the product. Trade
promotion tools include:

1. Price-off (off-invoice or off-list): a straight discount on purchases during a stated time

period.

2. Allowance: an amount paid by manufacturers so that retailers promote its products by

featuring, display and price reductions. An advertising allowance compensates retailers

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for advertising the manufacturer’s product. A display allowance compensates retailers

carrying a special product display.

3. Free goods: offers of extra merchandise to intermediaries who buy certain quantity or
who feature a certain flavor or size.

C. Business And Sales Force Promotion Tools

They are used to gather business leads, impress and reward customers and motivate the sales
force. They include:

2. Tradeshows and conventions: Industry associations organize annual tradeshows and

convections. Participants except several benefits including generating new sales leads,
maintain customer contacts, including new products, meeting new customers, selling
more to present customers, facilitating purchase of ex-users and educating customers
with publications, videos and other audiovisual materials.

3. Sales contests: Aim at including the sales force or dealers to increase their performance
with prizes (money, trips, gifts or points) over a stated period.

4. Specialty advertising: consists of low-cost items bearing the company’s name and
address, logo, symbol and sometimes an advertising message that salespeople give to
prospects and customers. Common items are ballpoint pens, calendars, key chains,
flashlights, tote bags and memo pads.

8.2.3. Public Relations (Publicity)

A public is any group (stockholders and stakeholders) that has an actual or potential interest in or
impact on a company’s ability to achieve its objectives. Public relations, quite known as
publicity, involves a variety of programs and activities designed to promote or protect a
company’s image and its individual products by planning and releasing news or information in
mass-media not paid by the sponsor. It is any unpaid form of non personal presentation of ideas,
goods and services.

Public relations is a marketing function that evaluates public attitudes, identifies areas within the
organization that the public may be interested in and executes a program of action to earn public
understanding and acceptance. Even though activities in PR require minimal cost, publicity in
general is not cost free. There is at least printing and social responsibility cost. And of course,
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publicity people are paid. But they try to attract attention to the firm and its offering without
having to pay media costs. Movie studios for example, try to get celebrities on TV talk shows
because this generates a lot of interest and sells tickets to new movies without the studio paying
for TV time.

Although publicity and advertising both depend on mass media, they differ in several aspects.

Advertising message tend to be informative or persuasive whereas publicity is primarily

informative.

Advertisements are sometimes designed to have an immediate impact on sales while

publicity messages are more subdued.

Publicity releases do not identify sponsors, advertisements do.

The sponsor pays for media time and space for advertising, but not for publicity. I.e. while
advertising must be paid for, publicity is “free”.

Communications through publicity are usually separated from the broadcasts program or
editorial portions of print media so that the audiences or readers can easily recognize (or
ignore) them.

Publicity may have greater credibility than advertising among customers because as a
news story, it appears more objective.

Finally, a firm can use advertising to repeat the same message as many ties as desired;
publicity is generally not subjective to repetition.

Kinds of Publicity

1. News release (Press release): is usually a single page of type written copy containing fewer
than three hundred words. It also gives the firm’s name, its address and phone number, and
the contact person. Automobile companies often use news release to introduce new products.

2. A Feature Article: is a longer manuscript (up to 3000 words) that is usually prepared for
specific publication.

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3. A Captioned Photograph: is a photograph with a brief explaining the picture’s content.

Captioned photographs are especially effective for illustrating a new or improved product
with highly visible features.

4. A Press Conference: is a meeting called to announce major news events. Media personnel
are invited to a press conference and are usually supplied with written materials and
photographs.

A marketer’s choice of specific types of publicity depends on considerations the include the type
of information being transmitted, the characteristics of the target audience, the receptivity of
media personnel, the importance of them to the public and the amount of information that needs
to be transmitted.

Functions of the PR Department

Press relations: presenting news and information about the organization most positive light.

Product publicity: sponsoring efforts to publicize products or building and releasing good
news about a certain product.

Corporate communication: promoting understanding of the organization through internal

and external communication.

Lobbying: dealing with legislators and government officials to promote or defeat legislation
and regulation.

Counseling: advising management about public issues and company positions and image
during good times and bad.

Financial community relationships: maintain good relation with stockholders and any other
financial source.

Major Tools in PR

Publications: are published materials that include annual report, brochures, articles, company
newsletters and magazines and audiovisual materials.

Events: include news conferences, seminars, out goings, trade shows, exhibits, contests and
competitions and anniversaries that will reach the target publics.

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Sponsorships: sports and cultural events and highly regarded causes.

News: about the company, its products and its people.

Speeches: company executives answer question from the media or give talks at trade
associations or sales meetings.

Public-service activities: contributing money and time to good causes.

Identity media: include visual identity of the company that is carried by company logos,
stationary, brochure, signs, business cards, buildings, uniforms and dress codes.

8.2.4. Personal Selling

Personal selling is a direct (personal) spoken communication between sellers and one or more
prospective or potential buyers for the purpose of making presentations, answering questions,
processing orders, making sales and developing relationship between a salesperson and a
potential buyer.

A personal selling usually happens face-to-face, but sometimes the communication occurs over
the telephone or even via video conference over the internet. The use of telephone and call
centers to attract prospects, selling to existing customers and provide service by taking orders
and answering questions is referred to as telemarketing. It helps the company increase revenue,
reduce selling costs and improve customer satisfaction. There are two forms telemarketing:
inbound telemarketing – receiving calls from customers; and, outbound telemarketing – initiating
calls to prospects and customers.

Salespeople get immediate feedback, which helps them to adapt the firm’s marketing mix to each
potential customer. Personal selling builds-up long-term personal relationship with customers
and helps firms customize their offer (if possible economically and technically) according to the
customer demand. Personal selling can be very expensive. So it has to be combined with mass
selling and sales promotion. Personal selling has some unique benefits:

Personal confrontation: helps understand each other’s needs and make immediate
adjustment.

Cultivation: the tendency to create a deep personal friendship.

Response: the buyer feels obliged to listen and respond to the sales talk.

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The communication platforms for personal selling can be sales presentations, sales meetings,
incentive programs, samples and fairs and tradeshows.

Advantages of personal selling

Personal selling is the most important ingredient in the promotion-mix. It is the largest single
selling and distribution cost accounting for 10-15% of net sales revenue in many organizations
the following are the relative advantages of personal selling:

1. A salesman can pinpoint prospect, whereas advertising cannot distinguish precisely a

prospect from a suspect as it is a means of mass communication and not an individual
communication. Hence, there is minimum waste of effort and expenditure in personal
selling.
2. Personal interview in salesmanship assures attention and interest of a prospect. Personal
selling has flexibility. Sales talk and sales presentation can be fitted to the individual needs
and motives of a prospect. This is not possible in advertising.
3. Advertisement has a broad message. It cannot be adjusted to reactions and objec6tions of any
prospect. Salesman can adjust sales presentation on the spot to meet objections and reactions
of his prospect in order to gain action.
4. Advertising can attract attention and arouse interest but usually it is left to the salesman to
close the sale and affect transfer of title.
5. Actual demonstration of the product or its use is recognized as the most powerful means of
convincing and only personal selling provides this opportunity.
6. Personal selling is the best means of two-way communication between company and its
customers. It provides sufficient feedback information useful for management in taking vital
decision such as competition, customer reactions and comments, market trend, dealer
demand, etc.,
7. Personal selling has permanent place in promotion and distribution. In retail trade, we need
personalized services and relations with customers and these can be offered only by
salesmen.

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Types of Personal Selling

1. Order taking: The salesperson (order taker) establishes accounts about the customer during
receiving payments and when the customer visits again, the order taker will service the
customer on a recorder basis.

2. Creative selling: calls for high level of preparation, expertise and close contact with the
buyer. The salesperson usually has specific training in related area (engineering or computer
field). Sales training approaches try to transform a salesperson from a passive order taker
into an active order getter who engages in customer problem solving. An active order getter
learns how to listen and question in order to identify customer’s needs and come up with
sound product solutions. This approach assumes that customers have latent needs that
constitute opportunities and that they will be loyal to sales representatives who can analyze
their needs and who have their long-term interest at heart.

3. Supportive communication: A missionary salesperson will call to customers to insure that

the buyer is satisfied with the firm’s product or service.

Objectives of Personal Selling

Create Differentiated Competitive Advantage: The salesperson must identify what a

buyer values of the product (functional or emotional attributes or related services) and
then demonstrate how the firm’s product’s product and services meet the buyer’s needs
more closely than competitors’ market offering.

Accord uniqueness: the salesperson must treat each buyer as a unique individual buyer
by listening attentively to the buyer.

Control the interview: if the salesperson can control the content and direction of an
encounter, the potential buyer will be able to learn accurately what the firm has to offer.

The personal selling process

1. Preparation

This stage involves gathering relevant information about current customers, potential customers,
product characteristics and applications, corporate support activities (such as advertising), and
competitors’ products and activities.

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2. Prospecting and qualifying

Companies can identify prospects by contacting them by mail or phone or may rely on current
customers to provide names of potential buyers. The leads can be categorized with “hot”
prospects turned over to the field sales force and “warm” prospects turned over to telemarketing
unit for follow-up.

3. Pre approach (initial contact)

The salesperson should set contact objectives to qualify the prospect, gather information and
make an immediate sale. The salesperson needs to decide on the best contact approach, which
might be a personal visit, a phone call or a letter. Information about the product may not be given
to the customer.

4. Presentation and demonstration

The salesperson describes the product to the buyer. There are several philosophies regarding the
way a presentation should be carried out. Sometimes, it will require canned presentation – in
which the salesperson rectifies (nearly verbatim) prepared sales pitch. The advantages of canned
presentation are that it controls the encounter, ensures that important selling points are covered
and can enhance the performance of marginally skilled salespersons. The drawbacks of the
canned pitch are that it undermines the fundamental advantages of personal communication:
tailoring the message for each unique receiver and responding to the buyer’s feedback.

The salesperson may follow the AIDA formula of gaining Attention, holding Interest, arousing
Desire and obtaining Action. The salesperson also uses the FABV approach that describes the
physical characteristics of a market offering (Feature), why the feature provides an advantage to
the customer (Advantage), the economic, social, technical and service benefits delivered by the
offering (Benefit), and the worth (often in monetary terms) of the offering (Value).

5. Overcoming objectives

Customers typically pose objections during the presentation or when asked for order.
Psychological resistance includes resistance to interference, preference to established supply
sources brands, reluctance to giving up something, unpleasant association created by the sales
representative, predetermined ideas, disliking of making decisions and neurotic attitude toward

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money. Logical resistance might consist of objections to the price, delivery schedule or certain
product or company characteristics.

To handle objections, the salesperson asks the buyer to clarify his own objections, allows him to
propose a solution or turns the objection into a reason for buying. When customers demand a
discount, salespeople must recognize value-adding opportunities rather than jumping to price-
cutting opportunities.

6. Closing

After the sales presentation, the time arrives when the buyer must decide whether or not to take
action. This phase typically requires a specification of financing, delivery, installation and a
variety of other particulars. The salesperson might offer the buyer specific inducements to close
such as special price, an extra quantity or a gift. At the end of this stage, the salesperson may
decide to make sales or quit the relationship.

7. Follow-up and maintenance

A salesperson can enhance the satisfaction derived from a purchase through post-purchase
activities. The follow-up will detect any problems, assure the buyer of the salesperson’s interest
and reduce any cognitive dissonance that might have arisen. Salespersons can fulfill this need
through direct communication either written or oral. Successful follow-up can greatly increase
the probability of additional orders (for same or related items) and help a long-term relationship
between buyers and sellers. The salesperson should develop a maintenance and growth plan for
the account.

Summary

The company needs to communicate information about its products and its activities to its
customers and its business partners. The purpose for such communication might be to provide
information, increase demand, differentiate a product, build up company’s good image and so
on. There are different tools of promotion that a company can choose from. The most prevalent
type of promotion is advertising which is defines as a paid form of non personal presentation of
ideas, goods or services by an identified sponsor. Advertising objectives can be aimed at
informing, persuading, reminding or reinforcing customers. A company must consider internal
and external factors in establishing an advertising budget. There are two types of media namely

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broadcast and print media. TV and Radio fall into broadcast media whereas newspaper, direct
mail, magazine and outdoor advertisements are deemed as print media. A company should make
advantage and disadvantage assessment of each medium of communication before selecting the
best. The second type of promotion tool is sales promotion which comprises short incentives in
order to stimulate immediate or greater purchaser of a firm’s goods or services. Sales promotion
might target consumers, middlemen or the firm’s salespeople. Thirdly, a company can promote
or protect its image and its products by designing a variety of programs and activities to be
released in new form via mass media not paid by the sponsor. This concept is known as public
relations or publicity. In industrial setting, companies usually employ direct or personal spoken
communication with buyers to make presentation, answer questions, process orders, make sales
and develop relationship between salesperson and potential buyers.

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Self Assessment Questions (SAQs)

1. The quality of advertising that permits the sellers to repeat a message many times is:
A. Impersonality
B. Amplified expressiveness
C. Pervasiveness
D. None of the above
2. An advertising objective aims to create liking, preference, conviction and purchase of
a product is:
A. Informative advertising
B. Persuasive advertising
C. Reminder advertising
D. Reinforcement advertising
3. Identify the wrong statements about sales promotion objectives
A. It stimulate trial purchase
B. It encourage repurchase
C. It increase quantity of purchase
D. None of the above
4. Any group that has an actual or potential interest in or impact on a company’s ability
to achieve its objectives refers to:
A. Publicity
B. Public
C. Press relations
D. Public relation
5. Advertising message should be:
A. Meaningful
B. Believable
C. Distinctive
D. All of the above

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Answer key for Self -Assessment Questions (SAQs)

No. SAQs(1) No. SAQs(2) No. SAQ(3) No. SAQs(4)
1 E 1 D 1 B 1 C
2 E 2 A 2 B 2 B
3 E 3 C 3 C 3 D
4 B 4 B 4 A 4 A
5 A 5 A 5 D 5 B

No. SAQs(5) No. SAQs(6) No. SAQs(7) No. SAQs(8)

1 D 1 B 1 A 1 C
2 A 2 D 2 B 2 B
3 C 3 B 3 D 3 D
4 C 4 A 4 B
5 A 5 C 5 D

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