Marketing

I

INTRODUCTION

Marketing, the process by which a product or service originates and is then priced, promoted, and distributed to consumers. In large corporations the principal marketing functions precede the manufacture of a product. They involve market research and product development, design, and testing.

Marketing concentrates primarily on the buyers, or consumers. After determining the customers’ needs and desires, marketers develop strategies that are designed to educate customers about a product’s most important features, persuade them to buy it, and then to enhance their satisfaction with the purchase. Where marketing once stopped with the sale, today businesses believe that it is more profitable to sell to existing customers than to new ones. As a result, marketing now also involves finding ways to turn one-time purchasers into lifelong customers.

Marketing includes planning, organizing, directing, and controlling the decision-making regarding product lines, pricing, promotion, and servicing. In most of these areas marketing has overall authority; in others, as in product-line development, its function is primarily advisory. In addition, the marketing department of a business firm is responsible for the physical distribution of the products, determining the channels of distribution that will be used, and supervising the profitable flow of goods from the factory or warehouse.

II

TAILORING THE PRODUCT

Merchandise that is generally similar in style or design, but may vary in such elements as size, price, and quality is collectively known as a product line. Most marketers believe that product lines must be closely correlated with consumer needs and wants.

Firms tend to change product items and lines after a period of time to gain a competitive advantage, to respond to changes in the economic climate, or to increase sales by encouraging consumers to buy a new model. For example, if the economy weakens, a manufacturer might use cheaper parts to make a product more affordable. Sometimes, however, manufacturers will alter the style rather than the quality of the item. Hemlines on dresses, for example, might go up or down, or the appearance or functionality of an automobile might be altered. The practice of changing the appearance of goods or introducing inferior parts or poor workmanship in order to motivate consumers to replace products is known as planned obsolescence. Some people object that this practice leads to waste or can be unethical. Manufacturers reply that consumers are conditioned to expect such changes and welcome the variety they offer, or they deny that poor quality was intentional.

The popularity of all products eventually wanes. In fact, successful products go through what is called a product life cycle, which describes the course of a product’s sales from its introduction and growth through maturity and decline. Some fad products such as Beanie Babies go through all four stages in a very short period. For others, such as phonograph records, the stages extend over decades.

Because products are always aging and sales of even the most successful products eventually decline, firms must continually develop and introduce new items. One study found that over 13,000 new products are introduced each year. But despite the millions of dollars that United States and Canadian companies invest in product research and consumer testing, it is estimated that more than 30 percent of new products fail at launch and 60 percent are never fully accepted by consumers and disappear after a few years. The high failure rate influences the pricing of successful products because profits from these products must help cover the development costs of products that fail.

III

PRICING THE PRODUCT

The two basic components that affect product pricing are costs of manufacture and competition in selling. It is unprofitable to sell a product below the manufacturer’s production costs and unfeasible to sell it at a price higher than that at which comparable merchandise is being offered. Other variables also affect pricing. Company policy may require a minimum profit on new product lines or a specified return on investments, or discounts may be offered on purchases in quantity.

Attempts to maintain resale prices were facilitated for many years in the United States under federal and state fair trade laws. Since 1975, however, these laws have been nullified, thereby prohibiting manufacturers from controlling the prices set by wholesalers and retailers. Such control can still be maintained if the manufacturers wish to market directly through their own outlets, but this is seldom feasible except for the largest manufacturers.

Attempts have also been made, generally at government insistence, to maintain product-price competition in order to minimize the danger of injuring small businesses. Therefore, the legal department of a marketing organization reviews pricing decisions.

IV

PROMOTING THE PRODUCT

Advertising, personal (face-to-face) or direct selling, sales promotion, and relationship building are the primary methods companies use to promote their products.

V

ADVERTISING

Advertising is often used to make consumers aware of a product’s special low price or its benefits. But an even more important function of advertising is to create an image that consumers associate with a product, known as the brand image. The brand image goes far beyond the functional characteristics of the product. For example, a soft drink may have a particular taste that is one of its benefits. But when consumers think of it, they not only think of its taste, but they may also associate it with high energy, extreme action, unconventional behavior, and youth. All of those meanings have been added to the product by advertising. Consumers frequently buy the product not only for its functional characteristics but also because they want to be identified with the image associated with the brand.

By adding meaning to a product, advertising also adds value. For example, when Philip Morris Companies Inc. purchased Kraft Foods, Inc. in 1988 for nearly $13 billion, Philip Morris paid 600 percent more than Kraft’s factories and inventory were worth. Over 80 percent of the purchase price was for the current and future value of the Kraft brand, a value that was created in large part by advertising. Advertising plays such an important role in promoting products and adding value to brands that most companies spend considerable sums on their advertising and hire specialized firms, known as advertising agencies, to develop their advertising campaigns.

Advertising is most frequently done on television, radio, and billboards; in newspapers, magazines, and catalogs; and through direct mail to the consumers. In recent years, numerous advertising agencies have joined forces to become giant agencies, making it possible for them to offer their clients a comprehensive range of worldwide promotion services. See Advertising.

VI

DIRECT SELLING

Where advertising reaches a mass audience, personal or direct selling focuses on one customer at a time. That kind of individual attention makes direct selling expensive, but it also makes it effective. As the costs of personal selling have risen, the utilization of salespeople has changed. Simple transactions are completed by clerks. Salespeople are now used primarily where the products are complex and require detailed explanation, customized application, or careful negotiation over price and payment plan. But whether the sale involves an automobile or a customized computer network, personal selling involves much more than convincing the customer of the product’s benefits. The salesperson helps the customer identify problems, works out a variety of solutions, assists the buyer in making decisions, and provides arrangements for long-term service. Persuasion is only part of the job. A much more important part is problem solving.

Because the selling process has become much more complicated, most companies now provide extensive training for the sales force. The average length of the initial training program is four months. A training program for new members of the sales force teaches them about such matters as company history, selling and presentation techniques, listening skills, the manufacture and use of the company’s products, and the characteristics of both the industry and its customers. Moreover, because the sales force plays such a critical role in the marketing process, most companies provide on-going training for all members of the sales force to help them deepen their product knowledge and improve their interpersonal and negotiating skills.

With the increasing complexity of business problems and products, effective sales solutions often require more knowledge than any one person can master. As a result many companies now use sales teams to service their largest and most complicated accounts. Such teams might include personnel from sales, marketing, manufacturing, finance, and technical support.

VII

SALES PROMOTION

The purpose of sales promotion is to supplement and coordinate advertising and personal selling; this has become increasingly important in marketing. While advertising helps build brand image and long-term value, sales promotion builds sales volume. Sales promotions are designed to persuade consumers to purchase immediately by providing special incentives such as cash rebates, prizes, extra product, or gifts. Promotions are an effective way to spur sales, but because they involve discount coupons and contests with valuable prizes, they are also expensive and so reduce profits.

VIII

RELATIONSHIP BUILDING

In the past, most advertising and promotional efforts were developed to acquire new customers. But today, more and more advertising and promotional efforts are designed to retain current customers and to increase the amount of money they spend with the company. Consumers see so much advertising that they have learned to ignore much of it. As a result, it has become more difficult to attract new customers. Servicing existing customers, however, is easier and less expensive. In fact, it is estimated that acquiring a new customer costs five to eight times as much as keeping an existing one.

To retain current customers, some companies develop loyalty programs such as the frequent flyer programs used by many airlines. A marketer may also seek to retain customers by learning a customer’s individual interests and then tailoring services to meet them. Amazon.com, for example, keeps a database of the types of books customers have ordered in the past and then recommends new books to them based on their past selections. Such programs help companies retain customers not only by providing a useful service, but also by making customers feel appreciated. This is known as relationship building.

IX

DISTRIBUTING THE PRODUCT

Some products are marketed most effectively by direct sale from manufacturer to consumer. Among these are durable equipment such as computers, office equipment, industrial machinery and supplies, and consumer specialties such as vacuum cleaners and life insurance. The direct marketing of products such as cosmetics and household needs is very important. Formerly common “door to door products,” these are now usually sold by the more sophisticated “house party” technique.

Many types of products and services now use direct mail catalogs or have a presence on the World Wide Web. Because many people are extremely busy, they may find it simpler to shop in their leisure hours at home by using catalogs or visiting Web sites. Comparison shopping is also made easier, because both catalogs and e-commerce sites generally contain extensive product information. For retailers, catalogs and the Web make it possible to do business far beyond their usual trading area and with a minimum of overhead. More than 95 percent of the leading 1,000 companies in the United States sell products over the Internet.

Television is a potent tool in direct marketing because it facilitates the demonstration of products in use. Direct sale of all kinds of goods to the public via home-shopping clubs broadcasting on cable television channels is gaining in popularity. Some companies also use telephone marketing, called telemarketing, a technique used in selling to businesses as well as to consumers. Most consumer products, however, move from the manufacturer through agents to wholesalers and then to retailers, ultimately reaching the consumer. Determining how products should move through wholesale and retail organizations is another major marketing decision.

Wholesalers distribute goods in large quantities, usually to retailers, for resale. Some retail businesses have grown so large, however, that they have found it more profitable to bypass the wholesaler and deal directly with the manufacturers or their agents. Wholesalers first responded to this trend by changing their operations to move goods more quickly to large retailers and at lower prices. Small retailers fought back through cooperative wholesaling, the voluntary banding together of independent retailers to market a product. The result has been a trend toward a much closer, interlocking relationship between wholesaler and independent retailer.

Retailing has undergone even more changes than wholesaling. Intensive preselling by manufacturers and the development of minimum-service operations, such as self-service in department stores, have drastically changed the retailer’s way of doing business. Supermarkets and discount stores have become commonplace not only for groceries but for products as diversified as medicines and gardening equipment. More recently, warehouse retailing has become a major means of retailing higher-priced consumer goods such as furniture, appliances, and electronic equipment. The emphasis is on generating store traffic, speeding up the transaction, and rapidly expanding the sales volume. Chain stores—groups of stores with one owner—and cooperative groups have also proliferated. Special types of retailing, such as vending machines and convenience stores, have also developed to fill multiple needs. See Retailing.

Transporting and warehousing merchandise are also technically within the scope of marketing. Products are often moved several times as they go from producer to consumer. Products are carried by rail, truck, ship, airplane, and pipeline. Efficient traffic management determines the best method and timetable of shipment for any particular product.

X

SERVICES AND MARKETING

Marketing efforts once focused primarily on the selling of manufactured products such as cars and aspirin. But today the service industries have grown more important to the economy than the manufacturing sector. Services, unlike products, are intangible and involve a deed, a performance, or an effort that cannot be physically possessed. Currently, more people are employed in the provision of services than in the manufacture of products, and this area shows every indication of expanding even further. In fact, more than eight in ten U.S. workers labor in such service areas as transportation, retail, health care, entertainment, and education. In the United States alone, service industries now account for more than 70 percent of the gross national product (GNP, the total of all goods and services produced by a country) and are expected to provide 90 percent of all new jobs by 2012.

Services, like products, require marketing. Usually, service marketing parallels product marketing with the exception of physical handling. Services must be planned and developed carefully to meet consumer demand. For example, in the field of temporary personnel, a service that continues to increase in monetary value, studies are made to determine the types of employee skills needed in various geographical locations and fields of business. Because services are more difficult to sell than physical products, promotional campaigns for services must be even more aggressive than those for physical commodities.

XI

MARKETING RESEARCH

Marketing research helps businesses identify consumer needs and wants so a company can develop and promote products more successfully. Such research also provides the information upon which important advertising and marketing decisions are based.

There are two types of research: qualitative and quantitative. To gain a general impression of the market, consumers, or the product, companies generally start with qualitative research. This approach asks open-ended rather than yes or no questions in order to enable people to explain their thoughts, feelings, or beliefs in detail. One of the most common qualitative research techniques is the focus group in which a moderator leads a discussion among a small group of consumers who are typical of the target market. The discussion usually involves a particular product, service, or marketing situation. Focus groups can yield insights into consumer perceptions and attitudes, but the findings cannot be applied to the whole market, because the sample size is too small. Focus group results, then, are suggestive rather than definitive.

The insights generated by a focus group are often explored further through quantitative research, which provides reliable, hard statistics. This type of research uses closed-ended questions, enabling the researcher to determine the exact percentage of people who answered yes or no to a question or who selected answer a, b, c, or d on a questionnaire. One of the most common quantitative research techniques is the survey in which researchers sample the opinions of a large group of people. If the sample group is large enough and is representative of a particular group, such as executives who use cell phones, statisticians consider the findings statistically valid, which means that if all consumers in that particular category could be surveyed, the findings would still be the same. This means that quantitative findings are conclusive in a way that qualitative findings cannot be.

XII

FORCES AFFECTING MODERN MARKETING

Of all the forces affecting modern marketing, perhaps none is more important than globalization. Since the 1980s, technological advances such as global telephone and computer networks have reduced geographic and even cultural distance. As a result, companies can now buy supplies and produce and sell goods in countries far from their home offices. Products conceived in one country are now being manufactured and then sold in many others. For example, Sony (Japan), Nestlé (Switzerland), Bic (France), and Volkswagen (Germany) have become household words around the world.

Although being able to market goods far from home presents corporations with many new opportunities, it also means they face new competition. Local companies that never even considered international competition now find foreign competitors stocked on shelves right alongside their own products. Some economists argue that local companies should be protected from such competition through legislation that regulates the flow of goods through trade barriers and other measures. Others oppose such regulation, arguing that it only raises prices for consumers. See also Free Trade.

Globalization, however, is only one force changing the way companies market their products or services. Another involves changes in the very interests and desires of consumers themselves. Consumers today are more sophisticated than those of past generations. They attend school for a much longer period of time; they are exposed to newspapers, magazines, motion pictures, radio, television, and travel; and they have much greater interaction with other people. Their demands are more exacting, and their taste changes more volatile. Markets tend to be segmented as each group calls for products suited to its particular tastes. “Positioning” the product—that is, determining the exact segment of the population that is likely to buy a product, and then developing a marketing campaign to enhance the product’s image to fit that particular segment—requires great care and planning. This type of campaign is known as target marketing.

Competition also has sharply intensified, as the number of firms engaged in producing similar products has increased. Each firm tries to differentiate its products from those of its competitors. Profit margins, meaning the profit percentages made by a business per dollar of sales, are constantly being lessened. Although costs continue to rise, competition tends to keep prices down. The result is a narrowing spread between costs and selling prices. An increase in a business’s sales volume is necessary to maintain or raise profit.

Another force affecting modern marketing is the influence of the consumer rights or consumer protection movement. This movement insists on safe, reputable, and reliable products and services. Both consumer groups and government agencies have intensified their scrutiny of products, challenging such diverse elements as product design, length and legitimacy of warranty, and promotional tactics. Warranty and guarantee practices, in particular, have been closely examined. New legislation has generally defined and extended the manufacturer’s responsibility for product performance.

Environmental concerns have also affected product design and marketing, especially as the expense of product modification has increased the retail cost. Such forces, which have added to the friction between producer and consumer, must be understood by the marketer and integrated into a sound marketing program.

Even the way a firm handles itself in public life—that is, how it reacts to social and political issues—has become significant. No longer may a corporation cloak its internal decisions as private affairs. The public’s dissatisfaction with the actions and attitudes of a firm has sometimes led to a reduction in sales; conversely, consumer enthusiasm, generated by a firm’s intentional establishment of a good public image or public relations, has led to increased sales.

XIII

SPECIALIZED MARKETING DEVELOPMENTS

The success of specialized marketing developments has caused many older organizations to revise their operating methods. In recent years, for example, franchise distribution has become an important force in retailing. Under this plan, the retailer is given the right to sell, within a certain area, without competition from another retailer dealing in the same product.

Many consumers now find it more desirable to rent products than to purchase them outright. For example, a homeowner may find it preferable to rent an electric floor polisher when needed, rather than purchase the appliance at the list price, use it only infrequently, and then have to provide storage space within the home. Another item consumers have found easier and less expensive to rent is the automobile. The renting of equipment also figures in large industry. Corporations are finding it to their economic advantage to rent computers and office and industrial machinery, thereby assuring themselves of product servicing and repair and allowing a changeover, without great expense, to newer equipment models as they become available.

Businesses must strive daily to outdo competitors. The methods available to businesses for distinguishing their commodity from others in the market are subject only to their ingenuity. Such methods may include product improvement, a unique promotional campaign, a new twist in servicing, a change in distribution channels, or an enticing price adjustment.

XIV

THE MARKETING PROFESSION

As marketing has become increasingly more complex, a need has arisen for professional marketers trained in the social sciences who also possess statistical, mathematical, and computer backgrounds. Many colleges and universities now have programs designed to train marketing executives. Courses are offered at the undergraduate and the graduate level in such specialized fields as advertising, administrative practices, financial management, production, human relations, retailing, and personnel administration.

In recent years, as many U.S. manufacturing industries such as steel and automobiles have been weakened because of foreign competition, marketing departments have become increasingly responsible for generating profitable sales volume. Thus, their stature in top-level business decision-making has been enhanced. This trend gives every indication of continuing in the foreseeable future. As competition continues to increase and businesses become even more diversified, the marketing profession is likely to provide more personnel in the ranks of top management.