Chapter 9 Marketing: Providing Value to Customers

Identifying Your Market

How do marketers identify target markets? First, they usually identify the overall market for their product—the individuals or organizations that need a product and are able to buy it. As Figure 9.2 "Marketing Strategy" shows, this market can include either or both of two groups:

1. A consumer marketBuyers who want a product for personal use.—buyers who want the product for personal use
2. An industrial marketBuyers who want a product for use in making other products.—buyers who want the product for use in making other products

You might focus on only one market or both. A farmer, for example, might sell blueberries to individuals on the consumer market and, on the industrial market, to bakeries that will use them to make muffins and pies.

Segmenting the Market

The next step in identifying a target market is to divide the entire market into smaller portions, or market segmentsGroup of potential customers with common characteristics that influence their buying decisions.—groups of potential customers with common characteristics that influence their buying decisions. You can use a number of characteristics to narrow a market. Let’s look at some of the most useful categories in detail.

Demographic Segmentation

Figure 9.3

Maybelline and Cover Girl use segmentation strategies to target their predominant consumers: women.

© 2010 Jupiterimages Corporation

Demographic segmentationProcess of dividing the market into groups based on such variables as age and income. divides the market into groups based on such variables as age, marital status, gender, ethnic background, income, occupation, and education. Age, for example, will be of interest to marketers who develop products for children, retailers who cater to teenagers, colleges that recruit students, and assisted-living facilities that promote services among the elderly. The wedding industry, which markets goods and services to singles who will probably get married in the near future, is interested in trends in marital status. Gender and ethnic background are important to TV networks in targeting different audiences. Lifetime Television for Women targets female viewers; Spike TV targets men; Telemundo networks target Hispanic viewers. If you’re selling yachts, you’ll want to find people with lots of money; so income is an important variable. If you’re the publisher of Nurses magazine, you want to reach people in the nursing profession. When Hyundai offers recent (and upcoming) college graduates the opportunity to buy a new car with no money down, the company’s marketers have segmented the market according to education level.Hyundai Motor America, “Special Programs: College Graduate Program,” http://www.hyundaiusa.com/financing/specialoffers/collegegraduate.aspx (accessed October 13, 2011).

Geographic Segmentation

Geographic segmentationProcess of dividing a market according to such variables as climate, region, and population density.—dividing a market according to such variables as climate, region, and population density (urban, suburban, small-town, or rural)—is also quite common. Climate is crucial for many products: try selling snow shovels in Hawaii or above-ground pools in Alaska. Consumer tastes also vary by region. That’s why McDonald’s caters to regional preferences, offering a breakfast of Spam and rice in Hawaii, tacos in Arizona, and lobster rolls in Massachusetts.“McDonald’s Test Markets Spam,” Pacific Business News, June 11, 2002, http://www.bizjournals.com/pacific/stories/2002/06/10/daily22.html (accessed October 13, 2011). Outside the United States, menus diverge even more widely (you can get seaweed burgers or, if you prefer, seasoned seaweed fries in Japan).“The Super McDonalds,” Halfbakery, http://www.halfbakery.com/idea/The_20Super_20McDonalds (accessed October 13, 2011); “Interesting Menu Items from McDonalds in Asia,” Weird Asia News, http://www.weirdasianews.com/2010/03/23/blank-interesting-menu-items-mcdonalds-asia/ (accessed October 14, 2011).

Likewise, differences between urban and suburban life can influence product selection. As exhilarating as urban life can be, for example, it’s a hassle to parallel park on crowded city streets. Thus, Toyota engineers have developed a product especially for city dwellers (at least in Japan). The Japanese version of the Prius, Toyota’s hybrid gas-electric car, can automatically parallel park itself. Using computer software and a rear-mounted camera, the parking system measures the spot, turns the steering wheel, and swings the car into the space (making the driver—who just sits there—look like a master of urban survival skills).“Coolest Inventions 2003: Parking-Space Invader,” Time (Online Edition), http://www.time.com/time/2003/inventions/invprius.html (accessed October 13, 2011). After its success in the Japanese market, the self-parking feature was brought to the United States. So if you ever see a car doing a great job parallel parking without the driver touching the wheel, it is likely a self-parking Prius“2010 Toyota Prius Self Park In-car Demo,” YouTube video, 2:41, posted by “htmlspinnr,” March 4, 2009, http://www.youtube.com/watch?v=kxTAYqs5bTY (accessed October 13, 2011). (I wonder if you could use one of these cars in a driving test).

Behavioral Segmentation

Dividing consumers by such variables as attitude toward the product, user status, or usage rate is called behavioral segmentationProcess of dividing consumers by behavioral variables, such as attitude toward the product, user status, or usage rate.. Companies selling technology-based products might segment the market according to different levels of receptiveness to technology. They could rely on a segmentation scale developed by Forrester Research that divides consumers into two camps: technology optimists, who embrace new technology, and technology pessimists, who are indifferent, anxious, or downright hostile when it comes to technology.Rob Rubin and William Bluestein, “Applying Technographics,” Forrester Research, http://www.kaschassociates.com/417web/417modahlmaster.htm (accessed October 13, 2011).

Some companies segment consumers according to user status, distinguishing among nonusers, potential users, first-time users, and regular users of a product. Depending on the product, they can then target specific groups, such as first-time users. Credit-card companies use this approach when they offer frequent flyer miles to potential customers in order to induce them to get their card. Once they start using it, they’ll probably be segmented according to usage. “Heavy users” who pay their bills on time will likely get increased credit lines.

Psychographic Segmentation

Psychographic segmentationProcess of classifying consumers on the basis of individual lifestyles as reflected in people’s interests, activities, attitudes, and values. classifies consumers on the basis of individual lifestyles as they’re reflected in people’s interests, activities, attitudes, and values. If a marketer profiled you according to your lifestyle, what would the result be? Do you live an active life and love the outdoors? If so, you may be a potential buyer of athletic equipment and apparel. Maybe you’d be interested in an ecotour offered by a travel agency. If you prefer to sit on your couch and watch TV, you might show up on the radar screen of a TiVo provider. If you’re compulsive or a risk taker, you might catch the attention of a gambling casino. If you’re thrifty and uncomfortable with debt, Citibank might want to issue you a debit card.

Clustering Segments

Typically, marketers determine target markets by combining, or “clustering,” segmenting criteria. What characteristics does Starbucks look for in marketing its products? Three demographic variables come to mind: age, geography, and income. Buyers are likely to be males and females ranging in age from about twenty-five to forty (although college students, aged eighteen to twenty-four, are moving up in importance). Geography is a factor as customers tend to live or work in cities or upscale suburban areas. Those with relatively high incomes are willing to pay a premium for Starbucks specialty coffee and so income—a socioeconomic factor—is also important.

Branding Strategies

Companies can adopt one of three major strategies for branding a product:

1. With private brandingProduct made by a manufacturer and sold to a retailer who in turn resells it under its own name. (or private labeling), a company makes a product and sells it to a retailer who in turn resells it under its own name. A soft-drink maker, for example, might make cola for Wal-Mart to sell as its Sam’s Choice Cola house brand.
2. With generic brandingProduct with no branding information attached to it except a description of its contents., the maker attaches no branding information to a product except a description of its contents. Customers are often given a choice between a brand-name prescription drug or a cheaper generic drug with a similar chemical makeup.

Figure 9.5

Though the generic brand Fluoxetine has the same chemical makeup as Prozac, it has a much lower price tag.

© 2010 Jupiterimages Corporation

3. With manufacturer brandingBranding strategy in which a manufacturer sells one or more products under its own brand names., a company sells one or more products under its own brand names. Adopting a multiproduct-branding approach, it sells all its products under one brand name (generally the company name). Using a multibranding approach, it will assign different brand names to different products. Campbell’s Soup, which markets all its soups under the company’s name, uses the multiproduct-branding approach. Automakers generally use multibranding. Toyota, for example, markets to a wide range of potential customers by offering cars under various brand names (Toyota, Lexus, and Scion).

Building Brand Equity

Wow Wee went with the multibranding approach, deciding to market Robosapien under the robot’s own brand name. Was this a good choice? The answer depends, at least in part, on how the product sells. If customers don’t like Robosapien, its failure won’t reflect badly on Wow Wee’s other products. On the other hand, people might like Robosapien but have no reason to associate it with other Wow Wee products. In this case, Wow Wee wouldn’t gain much from its brand equityValue of a brand generated by a favorable consumer experience with a product.—any added value generated by favorable consumer experiences with Robosapien. To get a better idea of how valuable brand equity is, think for a moment about the effect of the name Dell on a product. When you have a positive experience with a Dell product—say, a laptop or a printer—you come away with a positive opinion of the entire Dell product line and will probably buy more Dell products. Over time, you may even develop brand loyaltyConsumer preference for a particular brand that develops over time based on satisfaction with a company’s products.: you may prefer—or even insist on—Dell products. Not surprisingly, brand loyalty can be extremely valuable to a company. Because of customer loyalty, the value of the Coca-Cola brand is estimated at more than $70 billion, followed by IBM at $65 billion, Microsoft at $61 billion, and Google at $43 billion.“Best Global Brands 2010,” Interbrand, http://www.interbrand.eu/en/best-global-brands/best-global-brands-2008/best-global-brands-2010.aspx (accessed October 13, 2011).

Skimming and Penetration Pricing

Because Wow Wee was introducing an innovative product in an emerging market with few direct competitors, it considered one of two pricing strategies:

1. With skimming pricingPricing strategy in which a seller generates early profits by starting off charging the highest price that customers will pay., Wow Wee would start off with the highest price that keenly interested customers would pay. This approach would generate early profits, but when competition enters—and it will, because healthy profits can be made in the market—Wow Wee would have to lower its price.
2. Using penetration pricingPricing strategy in which the seller charges a low price on a new product to discourage competition and gain market share., Wow Wee would initially charge a low price, both to discourage competition and to grab a sizable share of the market. This strategy might give the company some competitive breathing room (potential competitors won’t be attracted to low prices and modest profits). Over time, as its growing market discourages competition, Wow Wee could push up its prices.

Cost-Based Pricing

Using cost-based pricingPricing strategy that bases the selling price of a product on its cost plus a reasonable profit., Wow Wee’s accountants would figure out how much it costs to make Robosapien and then set a price by adding a profit to the cost. If, for example, it cost $40 to make the robot, Wow Wee could add on $10 for profit and charge retailers $50.

Demand-Based Pricing

Let’s say that Wow Wee learns through market research how much people are willing to pay for Robosapien. Following a demand-based pricingPricing strategy that bases the price of a product on how much people are willing to pay for it. approach, it will use this information to set the price that it charges retailers. If consumers are willing to pay $120 retail, Wow Wee will charge retailers a price that will allow retailers to sell the product for $120. What would that price be? Here’s how we would arrive at it: $120 consumer selling price minus a $60 markup by retailers means that Wow Wee can charge retailers $60.

Target Costing

With target costingPricing strategy that determines how much to invest in a product by figuring out how much customers will pay and subtracting an amount for profit., you work backward. You figure out (again using research findings) how much consumers are willing to pay for a product. You then subtract the retailer’s profit. From this price—the selling price to the retailer—you subtract an amount to cover your profit. This process should tell you how much you can spend to make the product. For example, Wow Wee determines that it can sell Robosapien to retailers for $70. The company decides that it wants to make $15 profit on each robot. Thus, Wow Wee can spend $55 on the product ($70 selling price to the retailer minus $15 profit means that the company can spend $55 to make each robot).

Prestige Pricing

Figure 9.6

Luxury goods, like jewelry and watches, are priced based on a prestige approach.

© 2010 Jupiterimages Corporation

Some people associate a high price with high quality—and, in fact, there generally is a correlation. Thus, some companies adopt a prestige-pricingPractice of setting a price artificially high to foster the impression that it is a product of high quality. approach—setting prices artificially high to foster the impression that they’re offering a high-quality product. Competitors are reluctant to lower their prices because it would suggest that they’re lower-quality products. Let’s say that Wow Wee finds some amazing production method that allows it to produce Robosapien at a fraction of its current cost. It could pass the savings on by cutting the price, but it might be reluctant to do so: What if consumers equate low cost with poor quality?

Odd-Even Pricing

Do you think $9.99 sounds cheaper than $10? If you do, you’re part of the reason that companies sometimes use odd-even pricingPractice of pricing products a few cents (or dollars) under an even number.—pricing products a few cents (or dollars) under an even number. Retailers, for example, might price Robosapien at $99 (or even $99.99) if they thought consumers would perceive it as less than $100.

Selling Directly to Customers

Many businesses, especially small ones and those just starting up, sell directly to customers. Michael Dell, for example, started out selling computers from his dorm room. Tom First and Tom Story began operations at Nantucket Nectars by peddling home-brewed fruit drinks to boaters in Nantucket Harbor. Most service companies sell directly to their customers; it’s impossible to give a haircut, fit contact lenses, mow a lawn, or repair a car through an intermediary. Many business-to-business sales take place through direct contact between producer and buyer. Toyota, for instance, buys components directly from suppliers.

The Internet has greatly expanded the number of companies using direct distribution, either as their only distribution channel or as an additional means of selling. Dell sells only online, while Adidas and Apple sell both on Web sites and in stores. The eBay online auction site has become the channel of choice for countless small businesses. Many of the companies selling over the Internet are enjoying tremendous sales growth. The largest of the online retailers—Amazon—was founded by Jeff Bezos in 1995 as an online bookstore. In its fifteen-plus years in business, the company has experienced tremendous success, generating more than $34 billion in revenues during 2010. With sales soaring by 51 percent, the future looks bright for the company.“Finance,” Yahoo!, http://finance.yahoo.com/q?s=AMZN&ql=1 (accessed October 13, 2011); “Amazon’s Profit Falls 8% Despite 51% Jump in Sales,” Los Angeles Times, July 27, 2011, http://articles.latimes.com/2011/jul/27/business/la-fi-amazon-earnings-20110727 (accessed October 16, 2011).

The advantage of this approach of selling direct to the customer is a certain degree of control over prices and selling activities: you don’t have to depend on or pay an intermediary. On the other hand, you must commit your own resources to the selling process, and that strategy isn’t appropriate for all businesses. It would hardly be practical for Wow Wee to sell directly to individual consumers scattered around the world.

Selling through Retailers

RetailersIntermediaries who buy goods from producers and sell them to consumers. buy goods from producers and sell them to consumers, whether in stores, by phone, through direct mailings, or over the Internet. Best Buy, for example, buys Robosapiens from Wow Wee and sells them to customers in its stores. Moreover, it promotes Robosapiens to its customers and furnishes technical information and assistance. Each Best Buy outlet features a special display at which customers can examine Robosapien and even try it out. On the other hand, selling through retailers means giving up some control over pricing and promotion. The wholesale price you get from a retailer, who has to have room to mark up a retail price, is substantially lower than you’d get if you sold directly to consumers.

Selling through Wholesalers

Selling through retailers works fine if you’re dealing with only a few stores (or chains). But what if you produce a product—bandages—that you need to sell through thousands of stores, including pharmacies, food stores, and discount stores. You’ll also want to sell to hospitals, day-care centers, and even college health centers. In this case, you’d be committing an immense portion of your resources to the selling process. Besides, buyers like the ones you need don’t want to deal directly with you. Imagine a chain like CVS Pharmacy negotiating sales transactions with the maker of every single product that it carries in its stores. CVS deals with wholesalersIntermediaries who buy goods from suppliers and sell them to businesses that will either resell or use them. (sometimes called distributors): intermediaries who buy goods from suppliers and sell them to businesses that will either resell or use them. Likewise, you’d sell your bandages to a wholesaler of health care products, which would, in turn, sell them both to businesses like CVS, Kmart, and Giant Supermarkets and to institutions, such as hospitals and college health care centers.

The wholesaler doesn’t provide this service for free. Here’s how it works. Let’s say that CVS is willing to pay $2 a box for your bandages. If you go through a wholesaler, you’ll probably get only $1.50 a box. In other words, you’d make $0.50 less on each box sold. Your profit marginAmount that a company earns on each unit sold.—the amount you earn on each box—would therefore be less.

While selling through wholesalers will cut into your profit margins, the practice has several advantages. For one thing, wholesalers make it their business to find the best outlets for the goods in which they specialize. They’re often equipped to warehouse goods for suppliers and to transport them from the suppliers’ plants to the point of final sale. These advantages would appeal to Wow Wee. If it sold Robosapien’s to just a few retailers, it wouldn’t need to go through a distributor. However, the company needs wholesalers to supply an expanding base of retailers who want to carry the product.

Finally, intermediaries, such as wholesalers, can make the distribution channel more cost-effective. Look, for example, at Figure 9.8 "What an Intermediary Can Do". Because every contact between a producer and a consumer incurs costs, the more contacts in the process (panel a), the higher the overall costs to consumers. The presence of an intermediary substantially reduces the total number of contacts (panel b).

Figure 9.8 What an Intermediary Can Do

Warehousing

After the robots have been packaged, they’re ready for sale. It would be convenient if they’ve already been sold and only needed to be shipped to customers, but business-to-business (B2B) transactions don’t always work out this way. More often, there’s a time lag between manufacture and delivery. During this period, the robots must be stored somewhere. If Wow Wee has to store a large volume over an extended period (perhaps a month or two right before the holiday season), it will keep unsold robots in a storage warehouseBuilding used for the temporary storage of goods.. On the other hand, if Wow Wee has to hold them only temporarily while they’re en route to their final destinations, they’ll be kept in a distribution centerLocation where products are received from multiple suppliers, stored temporarily, and then shipped to their final destinations..

Wal-Mart, for example, maintains forty regional U.S. distribution centers at which it receives goods purchased from suppliers, sorts them, and distributes them to 4,400 stores, superstores, and Sam’s Clubs around the country.Wikipedia, s.v. “Walmart,” accessed October 19, 2011, http://en.wikipedia.org/wiki/Walmart#Walmart_Stores_U.S. Its efficiency in moving goods to its stores is a major factor in Wal-Mart’s ability to satisfy customer needs. How major? “The misconception,” says one senior executive “is that we’re in the retail business, but in reality, we’re in the distribution business.”Andres Lillo, “Wal-Mart Gains Strength from Distribution Chain,” Home Textiles Today, March 24, 2003, http://www.hometextilestoday.com/article/495437-Wal_Mart_gains_strength_from_distribution_chain.php (accessed May 21, 2006); “Logistics Careers,” Walmart, http://walmartstores.com/careers/7741.aspx (accessed October 15, 2011); Wikipedia, s.v. “Walmart,” accessed October 15, 2011, http://en.wikipedia.org/wiki/Walmart#Walmart_Stores_U.S.

Materials Handling

Making, storing, and distributing Robosapien entails a good deal of materials handlingProcess of physically moving or carrying goods during production, warehousing, and distribution.—the process of physically moving or carrying goods during production, warehousing, and distribution. Someone (or some machine) needs to move both the parts that go into Robosapien and the partially finished robot through the production process. In addition, the finished robot must be moved into storage facilities and, after that, out of storage and onto a truck, plane, train, or ship. At the end of this leg of the trip, it must be moved into the store from which it will be sold.

Automation

All these activities draw on company resources, particularly labor, and there’s always the risk of losing money because the robot’s been damaged during the process. To sell goods at competitive prices, companies must handle materials as efficiently and inexpensively as possible. One way is by automating the process. For example, parts that go into the production of BMWs are stored and retrieved through automated sequencing centers.David Maloney, “Warehouse of the Month / Destination: Production,” WITRON, August 1, 2003. Cars are built on moving assembly lines made of “skillets” large enough to hold workers who move along with the car while it’s being assembled. Special assistors are used to help workers handle heavy parts. For hard-to-reach areas under the car, equipment rotates the car 90 degrees and sets the undercarriage at waist level. Records on each car’s progress are updated by means of a bar code that’s scanned at each stage of production.“BMW Oxford Plant: The MINI Plant,” Automotive Intelligence, July 10, 2001, http://www.autointell.com/european_companies/BMW/mini/oxford-plant/bmw-oxford-plant-01.htm (accessed October 13, 2011). Also see “BMW Dingolfing (Germany) Virtual Plant Tour,” BMW, http://www.bmw-plant-dingolfing.com/, (accessed October 19, 2011).

Just-in-Time Production

Another means of reducing materials-handling costs is called just-in-time productionSystem for reducing inventories and costs by requiring suppliers to deliver materials just in time to go into the production process.. Typically, companies require suppliers to deliver materials to their facilities just in time for them to go into the production process. This practice cuts the time and cost entailed by moving raw materials into and out of storage.

Supply Chain Management

As you can see in Figure 9.10 "A Simplified Supply Chain", the flow that begins with the purchase of raw materials and culminates in the sale of the Marshmallow Peeps to end users is called the supply chainFlow that begins with the purchase of raw materials and ends in the sale of a finished product to an end user.. The process of integrating all the activities in the supply chain is called supply chain management (SCM)Process of integrating all the activities in the supply chain.. As you can see from our discussion so far, SCM requires a high level of cooperation among the members of the chain. All parties must be willing to share information and work together to maximize the final customer’s satisfaction.Lawrence D. Fredendall and Ed Hill, Basics of Supply Chain Management (Boca Raton, FL: St. Lucie Press, 2001), 8.

Figure 9.10 A Simplified Supply Chain

Managing your supply chain can be difficult, particularly if your company has large seasonal fluctuations.Simone Kaplan, “Easter in November, Christmas in July,” CIO Magazine, November 1, 2001, http://books.google.com/books?id=1wwAAAAAMBAJ&pg=PA96&lpg=PA96&dq=Simone+Kaplan,+%E2%80 %9CEaster+in+November,+Christmas+in+July,%E2%80%9D+CIO+Magazine&source= bl&ots=96IYFzFkX0&sig=Jj2rZWMASZrMPYvUuKzddrc-YZE&hl=en&ei=vJ-XTr 2OOeH u0gHfvaGvBA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CB4Q6AEwAA #v=onepage&q&f=false (accessed October 13, 2011). This is certainly true at Just Born. Even though it has a Marshmallow Peep for every season (heart Peeps for Valentine’s Day, spooky Peeps for Halloween, patriotic Peeps for July Fourth, and so on), the biggest problem rests with the standard yellow Marshmallow Peep that provides a major spike in sales each spring. Without careful supply chain management, there would be either too many or two few yellow Marshmallow Peeps—both big problems. To reduce the likelihood of either situation, the manager of the company’s supply chain works to ensure that all members of the chain work together throughout the busy production season, which begins each fall. Suppliers promise to deliver large quantities of ingredients, workers recognize that they will be busy through February, and dealers get their orders in early. Each member of the chain depends on the others to meet a mutually shared goal: getting the right quantity of yellow Marshmallow Peeps to customers at the right time.

But what if a company has multiple sales spikes (and lulls)? What effect does this pattern have on its supply chain? Consider Domino’s Pizza. Have you ever thought about what it takes to ensure that a piping-hot pizza will arrive at your door on Super Bowl Sunday (Domino’s busiest day of the year)? What about on the average weekend? How about when the weather’s bad and you just don’t want to go out? Clearly, Domino needs a finely tuned supply chain to stay on top of demand. Each year, the company sells about four hundred million pizzas (more than one pizza for every man, woman, and child in the United States). Its suppliers help to make this volume possible by providing the company with about one hundred fifty million pounds of cheese and toppings. Drivers do their part by logging nine million miles a week (the equivalent of 37.5 round trips to the moon every week).

How are these activities managed? Dominos relies on a software system that uses historical data to forecast demand by store; determines, orders, and adjusts supplies; fills staffing needs according to expected sales levels; and facilitates the smooth flow of accurate information among members of the chain. All this coordination is directed at a single goal—satisfying the largest possible number of end users.“Supply Chain Management Helps Domino’s Deliver,” Retail Solutions Online, October 1, 2000, http://www.retailsolutionsonline.com/article.mvc/Supply-Chain-Management-Helps-Dominos-Deliver-0002 (accessed October 13, 2011).

The Value Chain

Supply chain management helps companies produce better products at lower costs and to distribute them more effectively. Remember, however, that effective supply chain management doesn’t necessarily guarantee success. A company must also persuade consumers to buy its products, rather than those of its competitors, and the key to achieving this goal is delivering the most value.

The Customer Value Triad

Today’s consumers can choose from a huge array of products offered at a range of prices through a variety of suppliers. So how do they decide which product to buy? Most people buy the product that gives them the highest value, and they usually determine value by considering the three factors that many marketers call the customer value triadThree factors that customers consider in determining the value of a product: quality, service, and price.: quality, service, and price.Philip Kotler, Marketing Management, 11th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 11. In short, consumers tend to select the product that provides the best combination of these factors.

To deliver high customer value, a company must monitor and improve its value chainEntire range of activities involved in delivering value to customers.—the entire range of activities involved in delivering value to customers.The concept of the value chain was first analyzed by Michael Porter in Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985). Some of these activities arise in the process of supply chain management—obtaining raw materials, manufacturing products, getting finished goods to customers. Others take place outside the supply chain, particularly those associated with marketing and selling products and with providing customer support. In addition, companies need to find ways of creating value by improving the internal operations—procurement, research and development, human resource management, and financial management—that support their primary value-chain activities.

The idea is fairly simple: by focusing on the interrelated links in its value chain, a company can increase product quality, provide better service, and cut prices. In other words, it can improve its quality-service-price mix, thereby making its products more competitive.

Advertising

AdvertisingPaid, nonpersonal communication designed to create an awareness of a product or company. is paid, nonpersonal communication designed to create an awareness of a product or company. Ads are everywhere—in print media (such as newspapers, magazines, the Yellow Pages), on billboards, in broadcast media (radio and TV), and on the Internet. It’s hard to escape the constant barrage of advertising messages; indeed, it’s estimated that the average consumer is confronted by about five thousand ad messages each day (compared with about five hundred ads a day in the 1970s).Caitlin A. Johnson, “Cutting Through Advertising Clutter,” CBS News, February 11, 2009, http://www.cbsnews.com/stories/2006/09/17/sunday/main2015684.shtml (accessed October 20, 2011). For this very reason, ironically, ads aren’t as effective as they used to be. Because we’ve learned to tune them out, companies now have to come up with innovative ways to get through to potential customers. A New York Times articleLouise Story, “Anywhere the Eye Can See, It’s Likely to See an Ad,” The New York Times, January 15, 2007, http://www.nytimes.com/2007/01/15/business/media/15everywhere.html?pagewanted=all. claims that “anywhere the eye can see, it’s likely to see an ad.” Subway turnstyles are plastered with ads for GEICO auto insurance, Chinese food containers are decorated with ads for Continential Airways, parking meters display ads for Campbell’s Soup,Seth Godin, Permission Marketing: Turning Strangers into Friends, and Friends into Customers (New York: Simon & Schuster, 1999), 31. examining tables in pediatricians’ offices are covered with ads for Disney’s Little Einsteins DVDs, school buses play radio ads for children, “Got Milk” billboards at San Francisco bus stops give off the smell of chocolate chip cookies, and U.S. Airways is even selling ads on motion sickness bags (yuck!).Louise Story, “Anywhere the Eye Can See, It’s Likely to See an Ad,” The New York Times, January 15, 2007, http://www.nytimes.com/2007/01/15/business/media/15everywhere.html?pagewanted=all. Even so, advertising is still the most prevalent form of promotion.

Your choice of advertising media depends on your product, your target audience, and your budget. A travel agency selling spring-break getaways to college students might post flyers on campus bulletin boards or run ads in campus newspapers. A pharmaceutical company trying to develop a market for a new allergy drug might focus on TV ads that reach a broad audience of allergy sufferers. A fitness center might purchase a Google ad that appears next to the search results when someone puts in a relevant keyword, such as fitness. A small hot dog and hamburger stand will probably spend its limited advertising budget on ads in the Yellow Pages and local newspapers (or pay a broke college student to stand by the side of the road dressed in a hot dog costume and hold a sign that entices potential customers to “come on in”). The cofounders of Nantucket Nectars found radio ads particularly effective. Rather than pay professionals, they produced their own ads themselves. (Actually, they just got on the radio and started rambling about their product or their lives or anything else that seemed interesting at the time.)Nantucket Allserve, Inc., “Nantucket Nectars from the Beginning,” http://www.juiceguys.com (accessed October 13, 2011). As unprofessional as they sounded, the ads worked, and the business grew.

Personal Selling

Personal sellingOne-on-one communication with customers or potential customers. refers to one-on-one communication with customers or potential customers. This type of interaction is necessary in selling large-ticket items, such as homes, and it’s also effective in situations in which personal attention helps to close a sale, such as sales of cars and insurance policies.

Many retail stores depend on the expertise and enthusiasm of their salespeople to persuade customers to buy. Home Depot has grown into a home-goods giant in large part because it fosters one-on-one interactions between salespeople and customers. The real difference between Home Depot and everyone else, says one of its cofounders, isn’t the merchandise; it’s the friendly, easy-to-understand advice that salespeople give to novice homeowners. Customers who never thought they could fix anything suddenly feel empowered to install a carpet or hang wallpaper.Kevin J. Clancy, “Sleuthing for New Products, Not Slashing for Growth,” Across the Board, September–October 2001, http://www.copernicusmarketing.com/about/docs/new_products.htm (accessed May 21, 2006).

“Congratulations! You can spend two free nights at any Hyatt Hotel in the world! All you have to do is sign up for a Hyatt-branded credit card.”“Hyatt and Chase Launch First Ever Hyatt-Branded Credit Card,” Hyatt Hotels and Resorts, http://www.hyattpressroom.com/content/hyatt/en/news_releases0/2010/Hyatt-And-Chase-Launch-First-Ever-Hyatt-Branded-Credit-Card.html (accessed October 21, 2011). This tactic is a form of sales promotionSales approach in which a company provides an incentive for potential customers to buy something. in which a company provides an incentive for a potential customer to buy something. Most sales promotions are more straightforward than our hotel stay/credit-card offer. Promotional giveaways might feature free samples or money-off coupons. Promotions can involve in-store demonstrations or trade-show displays. They can be cheaper than advertising and can encourage customers to buy something quickly.

Apple Inc. and Starbucks partner to promote the iTunes experience by giving away free iTunes products, including a “Pick of the Week” music download, apps, book samples from the iBookstore, TV shows, and games. The current app giveaway is the Shazam Encore App, a music recognition service that allows users to immediately identify any song that’s playing, see the lyrics, watch the music videos, purchase concert tickets, and buy the track and share it with friends on Facebook and Twitter. The joint promotion benefits both companies: Apple gets to plug its iTunes download and other products, and Starbucks entices customers to come into its stores, enjoy free Wi-Fi, and buy coffee.Kelly B., “Pick of the Week: Apps, Books, TV, Music and More!” Starbucks Blog, August 22, 2011, http://www.starbucks.com/blog/pick-of-the-week-apps-books-tv-music-and-more-/1064 (accessed October 22, 2011).

Publicity and Public Relations

Free publicityForm of promotion that focuses on getting a company or product mentioned in a newspaper, on TV, or in some other news media.—say, getting your company or your product mentioned in a newspaper or on TV—can often generate more customer interest than a costly ad. You may remember the holiday season buying frenzy surrounding a fuzzy red doll named “Tickle Me Elmo.” The big break for this product came when the marketing team sent a doll to the one-year-old son of talk-show host Rosie O’Donnell. Two months before Christmas, O’Donnell started tossing dolls into the audience every time a guest said the word wall. The product took off, and the campaign didn’t cost marketers anything except a few hundred dolls.“Tickle Me Elmo: Using the Media to Create a Marketing Sensation,” Media Awareness Network,, http://www.media-awareness.ca/english/resources/educational/handouts/advertising_marketing/tickle_me_elmo.cfm (accessed October 13, 2011).

Consumer perception of a company is often important to a company’s success. Many companies, therefore, manage their public relationsCommunication activities undertaken by companies to garner favorable publicity for themselves and their products. in an effort to garner favorable publicity for themselves and their products. When the company does something noteworthy, such as sponsoring a fund-raising event, the public relations department may issue a press release to promote the event. When the company does something negative, such as selling a prescription drug that has unexpected side effects, the public relations department will work to control the damage to the company. Each year, the accounting firm of PricewaterhouseCoopers and the Financial Times jointly survey more than a thousand CEOs in twenty countries to identify companies that have exhibited exceptional integrity or commitment to corporate governance and social responsibility. Among the companies circulating positive public relations as a result of a survey were General Electric, Microsoft, Coca-Cola, and IBM.“PwC/Financial Times Survey: ‘World's Most Respected Companies 2005’” PricewaterhouseCoopers and the Financial Times, www.finfacts.ie/biz10/worldsmostrespectedcompanies.htm, (accessed October 13, 2011).

Permission versus Interruption Marketing

Underlying Amazon.com’s success in communicating with customers is the fact that customers have given the company permission to contact them. Companies that ask for customers’ cooperation engage in permission marketingForm of marketing in which companies ask customers or potential customers for permission to contact them or send them marketing materials..Seth Godin, Permission Marketing: Turning Strangers into Friends, and Friends into Customers (New York: Simon & Schuster, 1999), 40–52. The big advantage is focusing on an audience of people who have already shown an interest in what they have to offer. Compare this approach with mass marketingThe practice of sending out messages to a vast audience of anonymous people.—the practice of sending out messages to a vast audience of anonymous people. If you advertise on TV, you’re hoping that people will listen, even though you’re interrupting them; that’s why some marketers call such standard approaches interruption marketingMarketing that interrups people to get their attention (with the hope they will listen to the ad), such as TV advertising..Anthony Bianco, “The Vanishing Mass Market,” Business Week, July 12, 2004, 61–68. Remember, however, that permission marketing isn’t free. Because winning and keeping customers means giving them incentives, Caesars lets high rollers sleep and eat free (or at a deep discount), Norwegian Cruise Line gives members of its past guest program, Latitudes, discounts on sailings, priority check-in, and members-only cocktail parties. Customer-relations management and permission marketing have actually been around for a long time. But recent advances in technology, especially the Internet, now allow companies to practice these approaches in more cost-effective ways.

Mountain Dew (PepsiCo)

When PepsiCo announced it wouldn’t show a television commercial during the 2010 Super Bowl game, it came as a surprise (probably a pleasant one to its competitor, Coca-Cola, who had already signed on to show several Super Bowl commercials). What PepsiCo planned to do instead was invest $20 million into social media marketing campaigns. One of PepsiCo’s most successful social media initiatives was to extend the DEWmocracy campaign, which two years earlier, resulted in the launch of product—Voltage—created by Mountain Dew fans. DEWmocracy 2 was a yearlong marketing campaign designed to create another Mountain Dew drink. The campaign was rolled out nationally in seven stages and engaged a number of social media outlets, including an online community of enthusiastic fans of Mountain Dew, Twitter, USTREAM (a live video streaming website), a 12secondTV.com video contest, and a dedicated YouTube channel.Matthew Yeomans, “Mountain Dew’s Ongoing Dewmocracy—Ripping Up the Book on Campaigns,” SMI, January 29, 2010, http://socialmediainfluence.com/2010/01/29/mountain-dews-ongoing-dewmocracy-ripping-up-the-book-on-campaigns/ (accessed October 28, 2011); Jennifer Cirillo, “DEWmocracy 2 Continues to Buzz,” Beverage World, http://www.beverageworld.com/index.php?option=com_content&view=article&id=37525&catid=34 (accessed October 28, 2011). According to Mountain Dew’s director of marketing, the goal of the campaign was “to engage in a direct dialogue with our consumers. And through this dialogue really start what we like to call a social movement in order to create this innovation.”Jennifer Cirillo, “DEWmocracy 2 Continues to Buzz,” Beverage World, http://www.beverageworld.com/index.php?option=com_content&view=article&id=37525&catid=34 (accessed October 28, 2011). The flavors created through fan input are Whiteout (a citrus flavor that is white), Typhoon (a punch flavor), and Distortion (a hint of lime). All three flavors were launched in the spring of 2010, and it was up to the fans to select the best flavor, which would become a permanent member of Mountain Dew’s offerings. And the winner was Whiteout.“The Winner,” DEWmocracy, http://www.dewmocracy.com (accessed October 28, 2011) In addition to using fans to select the best flavors, the campaign used forums and live chats to allow fans to create the packaging, graphics, and social marketing for the products using viral videos, Twitter, and professional commercials.Jennifer Cirillo, “DEWmocracy 2 Continues to Buzz,” Beverage World, http://www.beverageworld.com/index.php?option=com_content&view=article&id=37525&catid=34 (accessed October 28, 2011).

Speaking of professional commercials, all you Super Bowl fans and followers of Super Bowl ads will be glad to hear that PepsiCo reversed its position, and its ads were showcased in the 2011 Super Bowl. It was likely a little jealous of its competitor, Coca-Cola, who was very effective at combining its Super Bowl ads with a social media campaign. Facebook fans who went online and donated $1 to the Boys & Girls Club of America received an image of a Coca-Cola bottle to post on their Facebook page and a twenty-second sneak preview of one of Coca-Cola’s Super Bowl ads.“Coca-Cola Virtual Gifts Trigger Peek at Super Bowl Ads,” Promo, February 4, 2010, http://promomagazine.com/viralmarketing/news/cocacola-virtual-gifts-0204/ (accessed October 28, 2011).

Starbucks

One of most enthusiastic users of social media marketing is Starbucks. Let’s looks at a few of their recent promotions: discount for “Foursquare” mayors, free coffee on Tax Day via Twitter’s promoted tweets, and a free pastry day promoted through Twitter and Facebook.Zachary Sniderman, “5 Winning Social Media Campaigns to Learn From,” Mashable Business, September 14, 2010, http://mashable.com/2010/09/14/social-media-campaigns/ (accessed October 21, 2011).

Social Media Marketing Challenges

The main challenge of social media marketing is that it can be very time consuming. It takes determination and resources to succeed. Small companies often lack the staff to initiate and manage social media marketing campaigns.Susan Ward, “Social Media Marketing,” About.com, http://sbinfocanada.about.com/od/socialmedia/g/socmedmarketing.htm (accessed October 25, 2011). Even large companies can find the management of media marketing initiates overwhelming. A recent study of 1,700 chief marketing officers indicates that many are overwhelmed by the sheer volume of customer data available on social sites, such as Facebook and Twitter.Georgina Prodhan, “Marketers Struggle to Harness Social Media—Survey,” Reuters, October 11, 2011, http://www.reuters.com/article/2011/10/11/socialmedia-ibm-idUSL5E7LA3JO20111011 (accessed October 28, 2011). This is not surprising given that Facebook has more than eight hundred million active users, and two hundred million tweets are sent each day. The marketing officers recognize the potential value of this data but are not capable of using it. A chief marketing officer in the survey described the situation as follows: “The perfect solution is to serve each consumer individually. The problem? There are 7 billion of them.”Georgina Prodhan, “Marketers Struggle to Harness Social Media—Survey,” Reuters, October 11, 2011, http://www.reuters.com/article/2011/10/11/socialmedia-ibm-idUSL5E7LA3JO20111011 (accessed October 28, 2011). In spite of these limitations, 82 percent of those surveyed plan to increase their use of social media marketing over the next 3 to 5 years. To understand what real-time information is telling them, companies will use analytics software, which is capable of analyzing unstructured data. This software is being developed by technology companies, such as IBM, and advertising agencies.

The bottom line: what is clear is that marketing, and particularly advertising, has changed forever. As Simon Pestridge, Nike’s global director of marketing for Greater China, said about Nike’s marketing strategy,“Simon Pestridge From Nike Makes Future Advertising Sound Simple,” Ronnestam.com, March 19, 2010, http://www.ronnestam.com/simon-pestridge-from-nike-make-future-advertising-sound-simple/ (accessed October 28, 2011). “We don’t do advertising any more. We just do cool stuff…but that’s just the way it is. Advertising is all about achieving awareness, and we no longer need awareness. We need to become part of people’s lives and digital allows us to do that.”

Introduction

At this stage, most companies invest in advertising to make consumers aware of a product. If it faces only limited competition, it might use a skimming-pricing approach. Typically, because it will sell only a relatively small quantity of the product, it will distribute through just a few channels. Because sales are low while advertising and other costs are high, the company tends to lose money during this stage.

Growth

As the company focuses on building sales, which are increasing rapidly at this stage, its advertising costs will go up. If competition appears, it may respond by lowering prices and distributing through multiple distribution channels. With sales going up and costs going down, the product becomes more profitable.

Maturity

If a product survives the growth stage, it will probably remain in the maturity stage for a long time. Sales still grow, though at a decreasing rate, and will eventually stabilize. Advertising will be used to differentiate the product from competition. Price wars may occur, but profits will be good because sales volume will remain high. As the product becomes outdated, the company may make changes in keeping with changing consumer preferences.

Decline

In 2004, LEGO was in this stage: demand had declined as more innovative products absorbed the attention of kids. Price competition had become more intense, and profits were harder to come by; in fact, in some years, they had turned into losses. But, unlike most products that enter the decline stage, LEGO avoided its likely demise by reinventing itself. Now, as the Danish phrase leg godt, from which the name LEGO was coined, suggests, children all over the world can take out their LEGOs and “play-well.”

Generation Gaps

Clothiers who target teens and young adults (such as Gap and Abercrombie & Fitch) must estimate the size of both current and future audiences. So must companies that specialize in products aimed at customers in other age brackets—say, young children or retirees. Marketers pay particular attention to population shifts because they can have dramatic effects on a consumer base, either increasing or decreasing the number of potential customers.

Marketers tend to assign most Americans born in the last sixty years to one of three groups: the baby-boom generation (those born between 1946 and 1964), Generation X (1965 to 1975), and Generation Y—also known as “echo baby boomers” or “millenniums” (1976 to 2001).Jessica R. Sincavage, “The Labor Force and Unemployment: Three Generations of Change,” Monthly Labor Review, June 2004, 34. In addition to age, members of each group tend to share common experiences, values, and attitudes that stay with them as they mature. These values and attitudes have a profound effect on both the products they want and the marketing efforts designed to sell products to them. Let’s look a little more closely at some of the defining characteristics of each group.

Baby Boomers

The huge wave of baby boomers began arriving in 1946, following World War II, and marketers have been catering to them ever since. What are they like? Sociologists have attributed to them such characteristics as “individuality, tolerance, and self-absorption.”John Leo, “The Good-News Generation,” U.S. News & World Report, November 3, 2003, http://www.usnews.com/usnews/opinion/articles/031103/3john.htm (accessed October 21, 2011). There are seventy million of them,Ellen Neuborne and Kathleen Kerwin, “Generation Y,” BusinessWeek Online, February 15, 1999, http://www.businessweek.com/1999/99_07/b3616001.htm (accessed May 21, 2006). and as they marched through life over the course of five decades, marketers crowded the roadside to supply them with toys, clothes, cars, homes, and appliances—whatever they needed at the time. They’re still a major marketing force, but their needs have changed: they’re now the target market for Botox, pharmaceutical products, knee surgery, financial investments, cruises, vacation homes, and retirement communities.

Generation X

Because birth rates had declined by the time the “Gen X” babies first arrived in 1965, this group had just one decade to grow its numbers. Thus, it’s considerably smaller (seventeen millionEllen Neuborne and Kathleen Kerwin, “Generation Y,” BusinessWeek Online, February 15, 1999, http://www.businessweek.com/1999/99_07/b3616001.htm (accessed October 21, 2011).) than the baby-boomer group, and it has also borne the brunt of rising divorce rates and the arrival of AIDS. Experts say, however, that they’re diverse, savvy, and pragmaticEllen Neuborne and Kathleen Kerwin, “Generation Y,” BusinessWeek Online, February 15, 1999, http://www.businessweek.com/1999/99_07/b3616001.htm (accessed October 21, 2011). and point out that even though they were once thought of as “slackers,” they actually tend to be self-reliant and successful. At this point in their lives, most are at their peak earning power and affluent enough to make marketers stand up and take notice.

Generation Y

When they became parents, baby boomers delivered a group to rival their own. Born between 1976 and 2001, their sixty millionEllen Neuborne and Kathleen Kerwin, “Generation Y,” BusinessWeek Online, February 15, 1999, http://www.businessweek.com/1999/99_07/b3616001.htm (accessed October 21, 2011). children are sometimes called “echo boomers” (because their population boom is a reverberation of the baby boom). They’re still evolving, but they’ve already been assigned some attributes: they’re committed to integrity and honesty, family oriented and close to parents, ethnically diverse and accepting of differences, upbeat and optimistic about the future (although the troubled economy is lessening their optimism), education focused, independent, and goal oriented.Ellen Neuborne and Kathleen Kerwin, “Generation Y,” BusinessWeek Online, February 15, 1999, http://www.businessweek.com/1999/99_07/b3616001.htm (accessed October 21, 2011); Kari Richardson, “Zell Conference Reveals Next Marketing Wave,” Kellogg World (Kellogg School of Management, Northwestern University, Winter 2002), http://www.kellogg.northwestern.edu/kwo/win02/inbrief/zell.htm (accessed October 21, 2011); Michele Fernandez-Cruz, “Advertising Agencies Target Generation Y,” youngmoney.com, http://www.youngmoney.com/lifestyles/campus_life/031202_01 (accessed May 21, 2006). They also seem to be coping fairly well: among today’s teens, arrests, drug use, drunk driving, and school dropout rates are all down.Bruce Tulgan and Carolyn A. Martin, “Book Excerpt: Managing Generation Y—Part I,” BusinessWeek Online, September 28, 2001, http://www.businessweek.com/smallbiz/content/sep2001/sb20010928_113.htm (accessed October 21, 2011).

Generation Ys are being courted by carmakers. Global car manufacturers have launched a number of 2012 cars designed to cater to the members of Generation Y.Karl Brauer, “The Best Cars for Generation Y,” CNBC, http://www.cnbc.com/id/41172515/The_Best_Cars_for_Generation_Y (accessed October 21, 2011). Advertisers are also busy trying to find innovative ways to reach this group, but they’re finding that it’s not easy. Generation Ys grew up with computers and other modes of high technology, and they’re used to doing several things at once—simultaneously watching TV, texting, and playing games on the computer. As a result, they’re quite adept at tuning out ads. Try to reach them through TV ads and they’ll channel-surf right past them or hit their TiVo remotes.Anthony Bianco, “The Vanishing Mass Market,” Business Week, July 12, 2004, 61–68. You can’t get to them over the Internet because they know all about pop-up blockers. In one desperate attempt to get their attention, an advertiser paid college students fifty cents to view thirty-second ads on their computers.Stephen Baker, “Channeling the Future,” BusinessWeek Online, July 12, 2004, http://www.businessweek.com/magazine/content/04_28/b3891013_mz001.htm (accessed October 21, 2011). Advertisers keep trying, because Generation Y is big enough to wreck a brand by giving it a cold shoulder.

Psychological Influences

Under this category, we can identify at least five variables:

1. Motivation. The internal process that causes you to seek certain goals.
2. Perception. The way you select, organize, and interpret information.
3. Learning. Knowledge gained through experience and study.
4. Attitudes. Your predisposition to respond in particular ways because of learned values and beliefs.
5. Personality. The collection of attributes that characterize an individual.

Social Influences

Here, we find four factors:

1. Family.
2. Reference groups. Friends or other people with whom you identify.
3. Economic or social status.
4. Culture. Your set of accepted values.

It shouldn’t be surprising that marketers are keenly interested in the effect of all these influences on your buying decisions. For instance, suppose the travel agency that sold you your spring-break getaway found that you bought the package because you viewed it as a reward for studying hard and doing well academically. In that case, it might promote student summer-travel programs as rewards for a hard year’s work at school.