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Marketing Principles

An ICM Study Aid





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Page
Learning Log 3
Introduction 5
Section 1: Concept and Process of Marketing 6
The Marketing Concept 7
Marketing Process Overview 14
Costs and Benefits 23
Section 2: Segmentation, Targeting and Positioning 30
Macro-Environment 31
Micro-Environment 43
Buyer Behaviour 47
Segmentation 56
Section 3: The Marketing Mix 67
Products
Place
Price
Promotion
68
77
88
104
Section 4: Different Marketing Segments and Contexts 119
Consumer Markets 120
Organisational Markets 124
Services 132
International Markets 141
Contents
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Learning Log

Study Aid Page: Key Learning Point:
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The aim of the Marketing Principles unit is To provide students with a foundation for the
analysis of marketing within organisations including decision making processes,
segmentation, the role of information and the marketing information system, the marketing
mix, internal and external influences affecting strategy, competitor analysis and positioning..
This self study aid acts as an introduction to the subject and will also help with your revision.
However, we recommend that you study the subject in more depth. The recommended text
for this unit is the Business Essentials course book Marketing published by BPP Learning
Media (ISBN 978-0-7517-4473-6) as this covers the subject in much more detail.
On pages 3 and 4 of this study aid you will find a learning log. You can use this to note key
learning points or points you would like to study further. This will help you when you revise
the subject for your examination.
At the end of this Unit, students will be able to:
1. Understand the marketing environment and the scope of tasks undertaken in
marketing in the context of different organizational situations in which marketing is
applied.

2. Understand the decision making processes within consumer and organizational
buying situations explain the ways in which market segments are defined and
recognise the importance of information in decisions concerning customers and
markets.

3. Assess the role of the marketing mix within the context of marketing decision
making.

4. Examine various marketing strategies used within different organizations and
competitive situations.



Introduction
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Section 1











Concept and Process of Marketing



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This section will help you to develop an understanding of the concept of marketing. This
includes how marketing has evolved and how it fits into todays businesses.



To understand how marketing has evolved it is also necessary to understand a little about
the history of markets. This chart gives a very brief overview and students would benefit
from conducting research to learn about this in more detail.


People lived in family and tribal units. They were mainly
self sufficient and only limited trading took place
People started to specialise and trade their skills. For
example, a toolmaker may have traded tools for food.
The invention of money meant that people no longer
needed to barter directly for what they needed
Agricultual and industrial revolutions led to the
development of technology and techniques that in turn
led to mass production
Marketing techniques devoloped as competition and
consumer choice increased
New technologies and the use of social media have led
to developments in marketing techniques

The Marketing Concept

Evolution of Marketing
Early human history
System of bartering
Development of markets and early advertising
Advertising through billboards, newspapers, television, etc
Developing products that met the needs of consumers
Use of the Internet to engage with consumers
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Marketing as we know it is a relatively new discipline and emerged around the 1960s. This
coincided with increases in the range of products available, increased competition, greater
consumer choice and more disposable income.
No longer could businesses manufacture their products hoping that they would sell. This
led to a change in approach where businesses tried to identify the requirements of
customers and to manufacture products and services to meet those requirements see the
definition below.

Marketing is the management process which identifies, anticipates and supplies customer
requirements profitably.
Chartered Institute of Marketing




There are two main types of business orientation to consider.

Product Orientation Market Orientation
The business focuses on its products.
This means paying attention to the
skills, knowledge and systems needed
to produce products.

The risk is that by not focusing on the
needs of the customer the business
produces products that do not meet
customer needs.


However, this approach is important for
ensuring the quality and safety of the
products sold.
The business focuses on the needs and
wants of its customers. Its products,
services and activities are aimed at
meeting these needs.

Market research is carried out to ensure
that products and services meet the
needs and wants of customers.


In reality, many businesses successfully combine both orientations (e.g. Coca Cola, Gillette,
etc).
Business Orientations
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Sales Orientation
There are still a number of successful businesses that adopt a sales
orientation. Unlike a marketing orientation products are not tailored to
the needs of consumers. Aggressive sales and advertising techniques may
be used leading to a bad reputation for the industry concerned (e.g. energy
companies, companies selling double glazing, etc).

Selling focuses on the needs of the seller; marketing on the needs of the buyer.
Theodore Levitt




Marketing is customer orientated. In theory this means that there is less need for expensive
selling because the needs of customers are being identified and met.








Competitor Orientation
The philosophy behind a true competitor orientation is to beat your competitors. The
danger with this is that it can be at the exclusion of everything else including profits.
However, without going to these extremes, it is sensible to keep an eye on competitors and
to take account of them in any marketing campaign.

Customer and Competitor Orientation
The marketing concept means
putting the customer first.

Customer orientation is a part
of the culture of the business.

The aim is to satisfy customer
requirements at a profit.

Products and services are
produced to meet customer
requirments.
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It is also important to consider how competitors are likely to react to any marketing
campaigns you are proposing to conduct.




Critics of the marketing concept say that it encourages people to want things they dont
need. It is also possible that it may create a desire for products that are bad for customers
or society as a whole. Examples may include:
Cigarettes and alcohol which have the potential to cause
health problems

Instant win scratch cards which can appeal to poorer
members of society who cant really afford to buy them


Motor vehicles with high fuel consumption can have a bad effect on the
environment

Many firms now understand the importance of corporate social responsibility and have a
marketing orientation to support this. This makes sense because many potential customers
are influenced by the way in which a business behaves.
What choices are available to
customers?
What supply and demand
exists?
What is the size and strength
of competitors?
How many competitors exist
in the market?
What substitute products and
services exist?
Are there any changes in
competitor attitudes?
Societal Issues and Emergent Philosophies
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A good example is the environment. Many consumers want to buy environmentally friendly
products and businesses that meet these requirements can be very successful. There are
many examples of this. Here are just a few that have been influenced by consumers.
Reduction in packaging used for food products in
supermarkets

Use of sustainable materials in manufacturing processes


Use of recycled materials in manufacturing

Fuel efficient vehicles developed by car manufacturers


Responsible disposal of waste

Many modern consumers are also concerned with the ethics of the business. For example,
they may not be willing to buy from firms who exploit low paid workers in third world
countries.



An effective marketing strategy must be linked to all of the functions of the business. In fact,
they must be interdependent. A key reason for this is so that all marketing efforts and
activities across the organisation align with its goals.
It is worth noting that efficient and effectiveness are not the same things. For example
sending letters to a thousand customers to tell them about a new product may be efficient
but it is not effective if the wrong customers are targeted and it does not result in any sales.
One way of achieving effectiveness is to pay attention to the marketing mix. Originally,
there were four elements to the marketing mix. These are commonly known as the 4 Ps.








Efficiency and Effectiveness
Product
What are the features and
appearance of your product and how
does it benefit potential customers?
Promotion
How are customers informed about
your product?
Place
Where will you sell your product and
how will you get it to your customers?
Price
How much will customers pay for yor
product and service and will it be
profitable at this price?
The 4 Ps
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The Service Sector
In recent years times there has been a huge growth in the service sector which offers no
tangible products. This has led to three more elements being added to the marketing mix
for service products, giving 7 Ps in total:

Process: Are the systems for buying and selling the service efficient, effective and user-
friendly?
Physical Evidence: As services are intangible products there needs to be some way of
creating and maintaining the desire of customers to buy the service. How will you do this?
For example, could you use regular newsletters, customer testimonials, etc?
People: Your staff provide the service to your customers? Are they well motivated and
trained to do this well?




Although there are many reasons to adopt the marketing concept it also has a number of
disadvantages that need to be considered. These include:
Identifying the needs/wants of customers and this requires extensive market
research.

There can be delays bringing products to market because the marketing approach
can be expensive and time consuming.


To avoid carrying out their own research and development competitors may copy
your products and undercut your costs.

Consumer behaviour is not always consistent. This means that market research is not
always right by the time a product comes to market. This is a particular problem in
markets where trends and fashions are changeable.

There is a danger of market research leading to a narrow focus and missed
opportunities as a result.
Limitations of the Marketing Concept
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1. Online marketing witnessed a substantial growth in the last decade. Explain with
examples how is it contributing to the marketing activities as a whole in an industry
of your choice.



2. Explain what you understand by the term marketing concept and how is it different
from the sales concept and the production concept?



3. In services marketing, what is Physical Evidence, People and Process? Explain with
examples



4. Using an example of your choice,

a. explain the advantages of a marketing orientation.
b. explain the limitations of a marketing orientation.



5. When should a company use the 7 Ps of the Marketing Mix and why is it so
important? Explain, using a company of your choice.


6. What is societal marketing and how do companies use this concept to achieve
competitive advantages?

7.
a. Define the term the marketing concept.
b. Discuss briefly, using the marketing concept, an organisation that has taken
into account this concept, and one that has not.
End of Chapter Test Questions
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This section considers marketing strategy and how this links to overall corporate strategy. It
also covers strategic planning and how strategies are formed.




















The changes brought about by advances in Information Technology mean that a lot more
information is readily available to customers than ever before. This means that an
integrated marketing communications plan is essential if an organisation wants some
control over the messages received by customers and potential customers.



Marketing Process Overview
Integrated Marketing
What is
integrated
marketing?
A management
concept designed to
make all aspects of
communication work
together.
Does this mean that
advertising, sales
promotion and
public relations
should all be aligned
with each other?
Thats right. Everything
needs to be interlinked
to increase the
effectiveness of your
marketing campaigns.
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It is vital that marketing objectives are aligned with the corporate and functional objectives
of the business.
Corporate Objectives Functional Objectives

These set out the overall goals for the
organisation and will usually be stated in
terms of profit, returns on investment,
growth, earnings, etc
Examples of strategic objectives:
We aim for a 15% return on investment

We aim to achieve an operating profit
of 5 million on sales of at least 50
million



Functional marketing objectives must
support the corporate objectives of the
organisation. They must also be aligned to
the objectives of all the other areas of the
business. Examples of functional objectives:

We aim to build our database of
customers across the UK to at least
200,000 within the next 12 months

We aim to achieve a market share of at
least 12.5% within the next 12 months


It is important to set meaningful objectives and one approach to this is to set them using
Marketing Objectives
S
Specific - the objective should state exactly what is to be achieved.
M
Measurable - an objective should be capable of measurement so that it is possible to
determine whether it has been achieved
A
Achievable - the objective should be realistic . This includes taking account of the
circumstances in which the business is operating and the resources available to the
business.
R
Relevant - objectives should be relevant to the buisness and to the people given
responsibility for achieving them.
T
Time Bound - objectives should have a time-frame. These are effecively deadlines so
thay also need to be achievable.
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what are known as SMART criteria.


A marketing audit is a systematic analysis and evaluation of an organisations marketing
position and performance. A full audit will focus on all marketing activities but there are
three areas of particular importance.








All businesses are affected by external forces. This means that they need to understand the
ever changing environment in which they operate. This includes the technological, social,
economic and political environment, as we will see later in this guide.
Environmental analysis involves gathering information (intelligence) and then evaluating it.
Marketing Capabilities
To identify which aspects of
the company's marketing are
strengths and weaknesses.
Competitve Effectiveness
Analysis of the company's
competitive advantages.
and their sources.
Performance Evaluation
To establish the actual
achievements of the
company's marketing
activities.
Environmental Analysis
Marketing Audit
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Fortunately, there are many different sources of intelligence available to a business.
Sources of Intelligence Examples
Market Intelligence Competitor Intelligence

Business and Financial Newspapers and
Magazines
Trade Journals
Academic Journals
Conferences, Exhibitions and Trade
Fairs
Feedback from the sales force and
other employees
Networking (online and offline)
Monitoring competitors
Trade Associations
Primary and secondary research
The Internet


Financial statements
Customers and suppliers
Former employees of competitors
Analysis of competitor products
Competitors product and job
advertisements

All of this information needs to be compiled and catalogued so that it can be found easily. It
is also usual for it to be presented in the form of monthly reports.




SWOT analysis is a technique for analysing an organisation and its environment. It stands
for Strengths, Weaknesses, Opportunities and Threats.

Strengths and Weaknesses are factors that are internal to the business.
Opportunities and Threats are external factors.

A SWOT analysis helps with strategic planning. One approach is to formulate plans aimed at
using the strengths of the business to take advantage of the opportunities that exist.
SWOT Analysis
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Another alternative is to recognise weaknesses and to formulate plans to overcome them
and ideally to turn them into strengths.

Strengths
These are characteristics that give a
business advantages over its competitors
and/or will help it to meet its objectives.
For example, well trained and experienced
staff may be a strength.


Weaknesses
These are characteristics that places a
business at a disadvantage in relation to its
competitors and/or will make it more
difficult for it to meet its objectives. For
example, out of date machinery and
equipment may be a weakness.


Opportunities
These are factors in the external
environment that may be advantageous to
the business. For example, a competitor
may go out of business.



Threats
These are factors in the external
environment that may be to the
disadvantage of the business. For example,
an increase in the cost of raw materials.





Any marketing campaign needs to have a clear focus and this is one reason why clear
objectives are so important. It is also important for the organisation to make the right
choices when setting its competitive strategy.

Will the business compete across the entire market or only in certain segments? An example
might be an insurance company selling motor insurance which may decide on a marketing
strategy focusing on mature drivers with good driving records.

Another option is to compete on price or to differentiate on the product range. The cruise
holiday market is a good example of this. A cruise line could opt to sell holidays at the luxury
end of the market or offer a standard quality to large numbers of passengers at a lower
price.
Options
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Possible Choices














Cost Leadership
This approach involves trying
to control the market on price
by being a low cost producer.
Differentiation
This approach is all about
differentiating on the product
itself or by providing a better
service than competitors.
Focus/Niching
With this approach the focus
is on a particular part of the
market (e.g. wealthy people).
Market Penetration
The business aims to sell more of its
existing products in its existing markets.
Market Development
The aim is for the business to sell more of
its products in new markets, perhaps by
selling abroad.
Product Development
The business continues to operate in its
existing markets by developing and selling
modified versions of existing products.
Diversification
This can be a risky straegy and involves
developing new products in new markets.
Possible Growth
Strategies
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There are constraints on any business and these must be taken into account.

Internal constraints will include the budget available to the marketing department and may
affect what it can or cannot do. The quality and skills of management and employees will
also need to be taken into account.

There are also a number of external factors that may place constraints upon a business and
how it markets itself. For example, the business may be subject to regulatory controls as
well as those that arise because of the nature of the market in which it operates.








Constraints
Size of the market
You cannot make sales unless there are
customers out there.
Demand of the Market
It is important to understand the
requiremets of your customers by
conducting market research.
Strength of the Competition
What is the strength of the competition
and can your business postion itself to
limit the effect of that competition?
Availabiity of Supply
If your businss depends on supplies, is
there enough supply out there to satisfy
your needs if your business increases?
External Constraints
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Marketing plans follow a logical approach

Company Mission Statement


Statement of Objectives


Situational Analysis


Strategy Development


Specific Plans


Implementation


Control



Marketing Planning
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1. What is integrated marketing and why is an integrated communications marketing plan
considered to be essential?



2. Using examples, explain the difference between corporate and functional objectives.
Why do marketing objectives need to be aligned to them?



3. Explain what a marketing audit is and what it involves.



4. What options are open to a business when setting its competitive strategy?






End of Chapter Test Questions
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Weve seen in an earlier section that most successful businesses focus on marketing rather
than selling. This is a shift in attitude that has been taking place from the late 20
th
Century.
This means that the focus is on meeting the requirements of the customer. The aim is to
meet customer requirements by providing the right product at the right place and time and
in the right way.






















Costs and Benefits
Benefits of Building Customer Satisfaction
Why is it so
important to
focus on the
customer?
Building customer
satisfaction is the
only way to achieve
a sustainable
advantage over our
competitors.
That sounds like a
lot of jargon to me.
What does it
actually mean?
Well, the big risk is that
you will lose
dissatisfied customers
to your competitors.
However, there are
also many positive
benefits to having
satisfied customers.
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What satisfied customers will do




Remember that it is more expensive to find new customers than to keep the people who
already buy from you. Costs involved in generating new customers may include advertising,
sales staff time, cost of credit checks, agents commission, initial discounts, etc.



Every time a business has contact with customers it has an opportunity to build its
reputation with them. This is important because it leads to loyal customers and this
increases the prospects of making further sales to them and to the people they recommend
you to.
This means that it makes good business sense for companies to pay attention to the service
and the care it offers to its customers.
The reputation of a business does not depend solely on how well its products meet the
needs of its customers. Many other factors also come into play.






Service and Customer Care
Buy from you
again
Recommend
you to friends
and family
Buy different
and possibly
more
expensive
items from you
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Relationship marketing is about building a learning relationship with the customer. The aim
is to build a long term relationship with the customer and to build a clear understanding of
the preferences of that customer.


Howards Favourite Beer

Howard is a regular customer in a local hostelry. He
visits it every evening and likes to relax with his
favourite beer after work.

Over time the bartender realised that Howard always
ordered the same beer. From his position behind the
bar he could see Howard crossing the road on his
way for his early evening drink.

Knowing that Howard always ordered the same drink the bartender started pouring it as
soon as he caught sight of Howard. This meant that Howard did not even have to order
his drink and it was waiting for him, freshly poured, as soon as he arrived.

Howard considered this to be excellent service and carried on using the hostelry for many
years and also recommended it to many friends who also became regular customers.

The bartender had learned Howards preferences and had adapted his service to meet
them. And, of course, the bartender would not have taken this approach if he had
learned that Howard was unhappy to have his drink poured in this way.

Although this may be quite a crude example of relationship marketing it does illustrate
what large organisations aim to do on a much larger scale.



Relationship Marketing
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The problem with having profitable customers is that your competitors want them. This
means that organisations will try to identify their most profitable customers and adopt
strategies to retain them. An approach that incorporates relationship marketing and works
towards delivering quality from the perspective of the customer helps here.
Relationship marketing is seen as the key to customer retention. There are two basic types
of relationship with the customer.


Individual Transaction Relationship Approach
The customer pays for a product or service
which is provided by the organisation. No
attempt is made to build a relationship with
the customer and repeat custom may or
may not happen.
The sale is seen as the start of the
relationship with the customer. In its
simplest form the customer may receive a
phone call to check whether the he or she
is satisfied with his/her purchase.


Customer Retention
Many organisations use
customer relationship
software to help manage
customer relationships
Meeting customer
preferences
increases customer
satisfaction and
minimises problems
All customer
contacts with are
used as an
opportunity to
collect information
and to understand
their preferences
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Possible Levels of Customer Relationship




There is little doubt that it is more profitable to keep existing customers than to spend
money acquiring new ones. It has been suggested that a 5% increase in customer retention
could lead to an increase in operating profits as high as 50% in some businesses.











Customer Profitability
Why are loyal
customers
profitable?
Don't have to
be acquired
Buy a wider
range of
products
Will
recommend
you to others
Over time
they are less
sensitive to
price
Familiar with
the business
so they cost
less to service
Pertnership - Work with the customer to ensure that all aspect
of the relationship work well for both paties.
Proactive - Regular contact with customers to keep infromed
about their current and future requirements.
Accountable - Customer are contacted to find out if there are
any problems with the product or service and to get ideas for
future improvements.
Reactive - Custtomers are encouraged to call if there is any
problem with the product or service required.
Basic - Once the sale is complete there is no further contact
with the customer.
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Quality control has always been important to organisations. In the past this was mainly for
the benefit of the organisation itself. One of the key reasons for this is that improves quality
and reduces waste which in turn minimises wasted money.

With the recent trend towards a marketing approach quality is increasingly being seen from
the perspective of the customer.


















Internal Customers
Anybody you provide a service to in your organisation is described as an internal customer.
For example, front line staff learning about customer service will be the internal customers
of the training department.
Total quality marketing requires that you have a good working relationship with your
internal customers and provide them with the service that they require in the way that they
need it so that they can do their jobs effectively. The concept is that this has a positive
effect on the running of your company and the service that is provided to the external
customers of the business.
Many organisations ignore this and dont identify the requirements of internal customers
and this is to the detriment of the business.
Total Quality Marketing
The needs of the
customer are
identified and met
Meeting the needs
of the customer is
the key to being
competitive
advantage.
The aim of total quality marketing is to
ensure that every activity carried out
within the organisation combines to
deliver products and services which
meet customer expectations.
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1 a) What is meant by the term relationship marketing?
b) Explain the FIVE different levels of the customer relationship.



2. a) Why do marketing oriented companies view consumer loyalty as an important
element for the success of their businesses?
b) Discuss how cultural factors (culture/subculture/social class) may affect
consumer buying behaviour



3. a) What is meant by the term relationship marketing relationship marketing relationship marketing relationship marketing?
b) Discuss both the stages and content of a customer care strategy



End of Chapter Test Questions
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Section 2











Segmentation, Targeting & Positioning





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The macro environment refers to major external factors that affect a business. These are
outside of the control of the business but need to be tracked and understood as they will
influence the organisations decision making, and affect its performance and strategies.

These factors include economic factors; demographics; legal, political and social conditions;
technological changes; and natural forces.




It is vital that organisations constantly scan and understand the environment in which they
operate.


Environmental scanning involves collecting and analysing market intelligence. Possible
sources of intelligence include:
Business and financial newspapers and magazines
Academic and trade journals
Courses, conferences, exhibitions and trade fairs
Feedback from own employees (especially sales staff)
Trade associations
Networking (building a network of personal contacts)
Monitoring the competition
Macro-Environment
Environment Scanning
Reasons for
environmental
scanning
To exploit
opportunities
arising from
changing market
conditions
To minimise
threats arising
from changing
market conditions
To target markets
effectively
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Market Research
Organisations will also need to carry out market research. There are two main types.

Primary Research Secondary Research

Primary research is necessary when
there is no existing data available or
when data is needed for the specific
purposes of the organisation.

Time needs to be spent designing
questionnaires, collecting data from
respondents and analysing the
results.


The main disadvantage of primary
research is that it is time consuming
and potentially very expensive.



Secondary research makes use of
data that is already available.
Sources include publications or
reports like newspapers or annual
company reports.

The researcher does not need to
start from scratch and uses
information already available from
other organisations or publications .

The main disadvantage of secondary
research is that the data was
originally collected for other
purposes and may not suit the
needs of the organisation.


It helps to categorise environmental factors when anaylsing them. The PESTEL model
(sometimes called PESTLE) helps with this. The model distinguishes between these factors:

Political
Economic
Socio- Cultural
Technological
Ecological
Legal
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This refers to government policy and the decisions made by the government.
To what degree does the government intervene in the
economy?
What goods and services does the government want to
promote?
To what extent does it believe in subsidising firms?
What are its priorities in terms of business support?
What are its social policies (e.g. education and health)?
What are its tax policies?
What are its policies on business regulation?
These and many other political decisions can have a big effect on the business environment.
In the UK and other democracies policy can change dramatically if the government changes
following an election.
Organisations operating in European Union (EU) countries will also be affected by its
political decisions.
The EU has done a lot to make the sale of goods and the movement of capital and labour
within its borders easier. Here are some examples.









There are also rules relating to government contracts. When the government of an EU
company needs to buy something then companies from any EU country are given an equal
opportunity to bid for the contract. They must not favour a business from their home
country.
Political Factors
Common standards on food
labelling and hygiene

Common standards for
information technology

Capital movements liberalised
(e.g. its easier for UK
investors to invest in other EU
countries)
Removal of rules limiting
access to financial services

Mutual recognition of
professional qualifications (e.g.
allowing a UK lawyer to
practice law in Spain).
All EU citizens given the right
to work anywhere in the EU.

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Rate of growth
The rate of increase in
economic activity
Measured as Gross National
Product
More people buy products
during times of growth
Rate of
inflation
The rate at which prices are
rising
Affects the costs of the
business
Some prices fluctuate (e.g.
price of oil)
Levels of
employment
In consumer markets this is
particularly important
Unemployed people do not
go shopping
During periods of high
employment it may be
difficult to find staff
Volatile Regions
Some parts of the world are more volatile than others. For example, unrest in the Middle
East early in 2011 has already led to the fall of governments and to civil war. At the time of
writing the outcome is in this part of the world is very uncertain. However, there is sure to
be political change that will have great effects on businesses operating in or trading within
these countries.




These are the main economic factors that have major impacts on how businesses operate
and on the decisions they make.
















Economic Factors
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Most businesses are also affected by global markets so there are three additional factors for
them to consider.









Balance of Payments
This is the difference between
the cost of imports and
exports. A country that is
selling more abroad than it
buys is said to be in surplus
but is in deficit when it is
buying more.
If the balance of payments is
in surplus this is generally
good for importers as prices
tend to reduce. Exporters
tend to benefit when there is
a deficit.
Economies of other Countries
What is the state of the
economy in other countries?
Countries with strong
economies may be good to
export to.
Barriers to Trade
Some countries may prevent or
restrict trading in certain
products to protect their local
markets.

Interest Rates
Most businesses borrow
money (overdrafts or long
term loans)
Interest rates affect the cost
of borrowing
High interest rates can be
damaging for businesses
Tax and Tax
Policy
This affects businesses and
their customers
High taxes affect spending
Levels of
savings
If people are saving money
they are not spending it
High levels of savings mean
that there is more money
available to invest in business
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Changes in social factors have an effect on the demand for products and the way in which a
company operates.
Culture
There are three interdependent elements in a cultures society.












Demographic Factors
Demography is the study of the trends and characteristics of the population.




Socio-cultural Factors
How many people in the
population?
What is the mix of people?
(e.g. ages, proportion of men
and women, etc.)
Is the population growing or
declining?
What is the age distribution of
the population nationally and
regionally?
Where do people live? (e.g. in
towns or in the country)
Ideas, values, beliefs,
ways of reasoning

Government,
companies, families,
social clubs
The skills, arts and
crafts that enable us
to make things

The Ideological
System
The
Organisational
System
The
Technological
System
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These factors all have an effect on a business. For example the trend is towards an aging
population in the UK. This will affect the products that people require. It also affects
employment. Older people may have more experience and skills to bring to the workforce
but may be less willing to go out to work unless they are paid very well.


Standard Classifications

Analysis of the population can be helped by the use of standard classifications. There are a
number of classifications and the theory is that people falling within a particular category
have similar behaviours and buying habits.
The use of socio economic groupings is particularly helpful for marketing purposes.



This chart is an example of socio economic grouping developed by the UK Registrar General.
In a later chapter we will look at a more sophisticated classification approach known as
ACORN (A Classification Of Residential Neighbourhoods)

Managerial and Professional (e.g. Lawyers,
Doctors, Company Directors)
Intermediate managerial and prfoessional (e.g.
Teachers, Managers)
Supervisory and clericaltaff (e.g. Foremen, Call
Centre Employees, Shop Assistants
Skilled Manual Workers (e.g. Electricians,
Plumbers, Carpenters)
Semi Skilled and Unskilled Manual Workers (e.g.
Cleaners, Machine Operaters)
People not working (e.g. Pensioners)
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When considering technological factors it can be helpful to understand some terminology.
Technology The use of tools to make things.
New Technology This generally refers to technology that comes from recent scientific
research and often relates to the use of computers.
High Tech This refers to the most advanced technologies currently available
(e.g. computer technology).
Low Tech This is the opposite of high tech and refers to simpler technology
such as child proof tops on cleaning products
Invention The outcome of research and development work
Innovation The ability to make commercial use of invention.

Rapid changes in technology present many challenges to businesses. Those that make the
right decisions about technology early will have an advantage over their competitors.
However, the opposite is also true.

Effects of technology




Technological Factors
Products constant
development and
improvement of new
and existing products
Delivery e.g. the
internet has led to a
growth in home
shopping
Quality Automated
processes and
systems reduce
human error
Manufacturing
methods changing
and improving (e.g.
robots in factories)
Availability Point of
sale technology has
improved stock
control and ordering
Databases enables
monitoring of
customer behaviours
Employees
technology changes
how they work
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It is worth remembering that the use of computer technology has given a lot of power to
businesses. This has led to concerns about customer rights and the need to treat them fairly.
To some extent this is dealt with by laws such as the Data Protection Act and by voluntary
codes of practice that exist in many industries.



There is a growing awareness of the impact businesses have on our environment. This is
having an increasing effect on how companies operate and on the products and services
they offer. New markets are being created as a result of this (e.g. solar and wind power
industries) and old markets are diminishing or are disappearing altogether (e.g. the coal
industry in the UK).

Green Marketing
Green or Environmental Marketing is still aimed at meeting the requirements of customers
but with the minimal detrimental impact on the natural environment. With this in mind it
has been suggested that the 4 Ps of marketing are replaced by the four Ss.










Ecological Factors
Satisfaction of customer needs
Safety of products and the way
they are produced
Social Acceptability of the
product or service and the way
in which it is produced.
Sustainability of the product
and its production and all of the
other activities of the company
The 4 Ss of Green
Marketing
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Green Marketing Process Checklists
Green marketing is similar to conventional marketing because there are internal and
external factors to consider. These factors have been described as the Green Ps which can
be used as a checklist to assess how well a company is achieving its green objectives.





The Internal Ps

.









Products How safe are
they and what are their
environmental
consequences?
Promotion Are
reliable and accurate
green messages being
used?
Providing Information
Is this related to
environmental
performance?
Price Do the prices for
green products reflect
differences in the
demand for them?
Policies Are they
designed to monitor and
react to environmental
performance?
Place Are the
products being
distributed using green
methods?
Processes How much
energy is being used
and how much waste is
being produced?
People Do the
employees know how
environmental issues
relate to the business?
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The External Ps




Note that in some versions of PESTEL ecological factors are referred to as environmental
factors.


The law has a big effect on any business and can impact it in a number of ways. We wont be
able to look at this in detail here but it is worth noting four areas where it has an effect.
Legal Factors
Paying Customers
What are their needs for
green products and what
information do they get?
Problems What
environmental problems
has the business had in
the past?

Providers How green
are the suppliers used by
the business?
Pressure Groups How
may the business be
affected by green
pressure groups?
Politicians How attuned
is the business to the
green politics?
Predictions What
environmental problems
are expected in the
future?
Partners How green are
our business partners?

Customers
Sales of goods and services, advertising,
trade descriptions and some opening hours
are covered by the law
Employees
Employers must comply with employment
law and trade union law protecting
employee rights
Shareholders
In heUK this is governed by the Companies
Acts which set out the rules on publishing
accounts and the paymnt of dividends to
shaeholders.
Criminal Law
Some criminal law applies to companies
which are regarded as legal persons distinct
from their directors and employees.
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1. a) Explain with examples the difference between secondary and primary data.
b) Explain what the macro-environment is and the importance of its four factors for
marketers. Use examples to support your answer.


2. a) What is meant by the term green marketing?
b) In relation to the green marketing process what are the SEVEN green Ps that
need to be addressed from outside the company


3. Developments in technology have a strong impact on businesses and marketing
practices. Explain the impact of technology in connection with:
a) the type and quality of products offered by companies
b) availability and delivery of goods to customers
c) promotion of products and services



4. Explain at least THREE methods of collecting primary data and highlight the
advantages and disadvantages of EACH one of them. Give examples where possible.






End of Chapter Test Questions
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The micro-environment consists of stakeholder groups that a firm has regular dealings with.
The relationship of the business with these stakeholders can affect the overall success of a
business.
Unlike the macro environment the micro environment can b influenced or controlled by the
business.


The micro environment




Components of the
Micro Environment
Customers
Competitors
Interest
Groups
Suppliers
Intermediaries
Micro-Environment
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There are three main types of stakeholder for any organisation.

It is important for an organisation to identify who its stakeholders are and to understand
their interests.
Common Interests

This is where different stakeholders have similar interests. For example, employees and
shareholders have a common interest in the success of the business. For shareholders this is
likely to increase the value of their shares and dividends. For employees, a successful
business improves job security and may lead to higher wages.

Conflicting Interests

With so many potential stakeholders it is inevitable that there will also be many conflicting
interests. For example, growth of a business may be good for shareholders but may not be
good for the local community especially if their environment is affected.

Stakeholder Risks
Stakeholders will want to defend their interests in an organisation. For example, a bank that
lends money to a business will want to ensure that the loan and interest is repaid. Suppliers
to the business will also want to ensure that they are paid for the goods they supply.

In the case of the bank they may protect their interests by securing the debt against
property or perhaps charging high interests rates. The supplier, on the other hand, may
refuse credit unless satisfied they will definitely be paid.

Internal Stakeholders
(e.g. management,
employees)
External
Stakeholders
(e.g. the
community,
government,
pressure groups)
Connected
Stakeholders
(e.g. shareholders,
customers,
suppliers,
financiers)
Stakeholders
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All businesses face competition and they have to contend with both direct and indirect
competitors. An example that is often used to explain this is the fast food industry.

Direct Competitors

A direct competitor is anyone who offers a similar product and aims
it at the same target market. So companies like McDonalds and
Burger King and indeed anyone else offering a similar product are
direct competitors with each other.

Indirect Competitors

Indirect competitors are people who offer substitute products that
could be used by your target market. So a company like Dominos
Pizza, who sell a different product may be indirect competitors to
McDonalds.





Porter's Five Forces is a framework that can be used to help a business develop its strategy.
It was developed by Michael E Porter of Harvard Business School in 1979.

Porter makes the case that a firms strategy is a way of creating and sustaining a profitable
position in the market environment in which it operates (Competitive Strategy 1996). This
simplified diagram shows how the marketing strategy of an organisation is linked to the five
competitive forces identified by Porter.









Direct and Indirect Competitors
Porters Competitive Forces
Marketing strategy
Bargaining power of
suppliers
Competition from
substitute products
New Entrants in the
Market
Bargaining power of
consumers
Bargaining power of
suppliers
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1. A companys marketing environment consists of the micro environment (forces close
to the company) and the macro environment (larger societal forces).

a. List FOUR key components of the micro environment.
b. Explain how each microenvironment component may have an impact on the
operation of a business.


2. There are broadly three types of stakeholder. Who are these stakeholders, and what
interests do they seek to defend?



3. Porter (1996) identifies FIVE competitive forces that influence the state of
competition in an industry. Select TWO of these forces and discuss with examples
what these mean.











End of Chapter Test Questions
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Understanding buyer behaviour is crucial to any business. In this chapter we will examine
the key aspects of this.



There are five mental processes that a consumer goes through when deciding to purchase a
product.
Need Recognition The buyer recognises a need or a problem triggered by internal
stimuli (such as hunger or thirst) or external stimuli (such as social
esteem).
Information Search The consumer searches for products to satisfy the need identified.
This divides into two levels.
1. Heightened Attention (the consumer becomes more receptive
to information about appropriate products)
2. Active Information Search (where the consumer searches for
information about appropriate products using various sources)
Evaluation of
Alternatives
The consumer evaluates alternative products and brands and is
seeking one that meets his or her requirements.
Branding can be very important here as consumers will choose the
brand that they perceive is best for them.
Purchase Decision At this stage the consumer may have made a decision to buy a
particular product but there are still factors that could change this:
1. The attitude of others (e.g. the opinion of a friend)

2. Unexpected change in circumstances (e.g. redundancy)
Post Purchase
Decision
The consumers experience of the product will influence whether he
or she buys it again and whether he or she recommends it to other
people.

Buyer Behaviour
Dimensions of Buyer Behaviour
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Personal factors play a big part in our buying decisions. These factors include age,
occupation, financial circumstances and lifestyle and all of these variables change over time.



Age

Individuals buy different products according to their age. This is particularly relevant to
certain products such as clothing and recreation.

Age not only affects the products people buy but where they will buy them and the brands
they choose. It also affects their attitude to advertising and how susceptible they are to it.
Consider this portrait of the youth market described by Charles Watt in B&T Weekly
(5/7/02) which is an Australian marketing and advertising magazine.














The youth market




Life Cycle

Buying patterns are not only influenced by age but also by the stage in a family life cycle in
which an individual falls.

How do you think that the buying behaviour of these three 27 year old men
might differ?

Unmarried male
Married male with no children
Married male with a young child
Personal Variables
Media Savvy

Distrustful of advertising

Marketers must use SMS
and the internet
Desire to be accepted

Want cutting edge
products
Fear of not belonging

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Financial Circumstances


Financial or economic circumstances will also affect what an individual will buy.
















Occupation

Occupations also affect the buying behaviour of people. For example, somebody who works
in the building trade may need to buy his or her own tools. Another person working in a job
that involves meeting customers will need to buy appropriate clothing.

Lifestyle

Our buying habits will also be determined by what we do during our time away from work.
For example, a keen golfer will buy products associated with the sport.






Consumers also make buying decisions based on environmental factors and influences. Very
simplistically, you would expect some differences between city dwellers and people who
live in the countryside to be reflected in what they buy?

There is also greater awareness of how we affect the environment in
which we live and more and people take account of this when making
purchases.

For example, we have recently witnessed a growing demand for organic
produce as intensive farming methods have come under increased
criticism by celebrity chefs and others.
Spendable Income -
What level of income?
Over what time period?
How sustainable is it?
Savings and assets -
What level of savings and
how accessible is this
money?
Borrowing - What is the
borrowing power and
credit worthiness of the
individual?

Spending What is the
attitude of the individual
towards spending as
opposed to saving?
Environmental Factors
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A number of social factors have a direct effect on buyer behaviour. For example an
individuals social role or social status effect the products and brands he or she chooses.


Two of the most important social factors are reference groups and the family.


Reference Groups

These are groups of people that individuals identify with.






One of the tasks of the marketer is to identify the reference groups that individuals identify
with. It is also helpful to identify the individuals who lead opinion in these groups. For
example the local shop steward is a likely opinion leader in a trade union.





Social Factors
Primary Membership Groups
These are usually informal groups that
people belong to. Examples include family,
friends, neighbours and work colleagues.
Secondary Memebership Groups
These tend to be more formal than primary
membership groups and there tends to be
less interaction between members. Examples
include trade unions, professional societies,
religious groups, etc.
Aspirational Groups
These are groups that an individual wants to
belong to. An example, may be the local golf
club or tennis club which may influence
buying behaviour even beforeh he or she is a
member.
Dissociative Groups
These are groups that an individual does not
want to join and whose behaviour and values
he or she rejects.
Four types of reference
group
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The Family

Families are a major influence on buying decisions. Research suggests that there are three
main patterns of decision making within families.






















Three are four main psychological factors that affect buyer behavior:

1. Motivation
2. Perception
3. Learning
4. Beliefs and Attitudes

1. Motivation

Motivation has been defined as an inner state that energises, activates or moves that
directs or channels behavior towards goals (Assael). This arises from perceived needs of
which there are two main types


Biogenic Physiological factors such as hunger, thirst, discomfort, etc

Psychogenic Psychological factors such as the need for recognition, belonging,
esteem, etc.
Psychological Stimuli
Typical buying decions will include life
assurance, cars and television
Husband
dominated
Typical buying decisions will include
washing machines, carpets, kitchen
equipment and non living room furniture.
Wife dominated
Some decisons tend to be made jointly
and thse include living room furniture,
holidays, housing and entertainment.
Equal
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There are many theories of motivation but we will concentrate on Maslows Heirarchy of
Needs as it is probably the most widely used by marketers. However, students may also find
it useful to study Freuds theory of motivation and Herzbergs Two Factor Theory.























According to Maslow the lowest level of need that is unsatisfied is dominant. Only when
that is satisfied does the next one up become dominant.

So, if we are hungry our need for food will be dominant and only when this is satisfied will
we look to our security and only when that is satisfied will we look to satisfying our need to
belong, etc.

Marketers are able to adapt the hierarchy of needs to help with market segmentation. This
is so that they target their advertising at the needs of as many people as possible. Similarly,
they aim to position their product and brand so that it is perceived to satisfy a particular
category of need in Maslows hierarchy.


Perception

Peoples perceptions also have a big influence on their buying behavior. These perceptions
are driven by their own motives, expectations, past experiences, personality, etc.

We are, of course, all unique and this means that our perceptions are personal to us which
in turn means that we have different attitudes to different products and brands.
Fulfilment of personal
potential
Status, independence,
respect, recognition, etc
Food, water, shelter,
comfort
Self
Actualisation
Esteem Needs
Love/Social Needs
Safety Needs
Physiological Needs
Security, order, free from
threat, predictability
Relationships, affections
and belonging
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Beliefs and attitudes are important as they determine how people react and behave
towards brands and products.

These are often deeply ingrained in people and are not easily changed. This means that the
marketer would be well advised to ensure that their products fit within the beliefs and
attitudes of their existing and potential customers. Trying to change those beliefs and
attitudes would be very unwise.





There are many differences between organisational and consumer markets.



Organisations make buying decisions in a different way to individual consumers. A key
difference is that it is rare for a single person to make a buying decision on behalf of an
organisation.

This means that sellers need to be aware of all people involved in the buying process (the
Decision Making Unit) and their relative importance in the decision.
Organisational
Buyers
Smaller
number of
buyers
Closer
relationship
with sellers
May
Require
customsied
products
Greater
buying
powers
Attitudes
Organisational Buying
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Possible Make Up of a Decision Making Unit

























Users: May initiate the
buying process and help
to define product
requirements
Influencers: Play a part
in defining requirements
and evaluating
alternative products
Deciders: Decide on the
product and supplier

Approvers: Give final
authority following the
decisions of the buyers
and deciders
Buyers: Have the
authority to select
suppliers and negotiate
terms with them
Gatekeepers: Control
the flow of information
and may be able to stop
sellers contacting
decision makers direct
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1. What are the main influences of consumer behaviour and why does it differ from
one individual to another? Explain, using examples.




2.
a. Define the term consumer buying behaviour using an example of your
choice.

b. Explain the general stages in the buying process.




3. What are Porters Five Competitive Forces and how do they apply to an airline
company of your choice?























End of Chapter Test Questions
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Market segmentation is important because it allows businesses to make the best of the
opportunities that exist in the market.

Segmentation involves breaking the market down into smaller groups (segments) based on
common characteristics and variables. These segments are then targeted according to the
marketing objectives of the organisation.

However, effective segmentation requires a lot of information which means that good
market research is essential.

Definition: Segmentation is the subdividing of a market into distinct and increasingly
homogenous subgroups of customers, where any subgroup can conceivably be selected as a
target market to be met with a distinct making mix. (Kotler 1994)





Market selection targets segments of the market that have been identified by segmentation
rather than trying to target the entire market.

There are two main factors to consider and these are the attractiveness of the market
segment and how it fits with the resources, capabilities and objectives of the business.
















Segmentation
Process of Market Selection
Attractiveness of the market
segment
- size of thet segment
- growing or contractiing?
- what is the competition?
- what market share is attainable?
- how profitable is it likely to be?
How the segment fits with the
business
-can the business serve this
segment?
-How will serving this segment
affect its image?
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One of the most common models used to segment markets is based on two steps. These are
macro-segmentation and micro-segmentation.


Macro-Segmentation

This divides a market into broad characteristics. For
example, car manufacturers may divide its markets
geographically and/or by age of potential customers.

This is relatively easy to do as there is plenty of information
readily available. However, it does have limitations.

Retuning to our example of the car manufacture one
marker segment may be the 25-35 age group. In reality it is
extremely unlikely that everyone in that segment will have
the same requirements when buying a car.


Micro-Segmentation

Micro segments are homogenous groups of buyers within
macro segments. The aim is to find out who makes buying
decisions and what drives those decisions.

Returning to our example of the car manufacturer the 25 to
35 age group is a very large segment. Within that group
buying decisions will vary because of a number of factors
such as lifestyle, attitudes, preferences, etc. Understanding
this will helps with marketing strategy.






Macro and Micro Segmentation
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There are a number of ways in which customers differ and these include geographical,
demographic, psychographic and behavioural factors. Each of these can be used to segment
markets.


Geographic

Geographic segmentation is particularly important for multi- national and global businesses
but is also useful for companies that operate in just one country. This is because companies
can vary their marketing and advertising programmes according to different geographic
areas.

There are many different ways of segmenting markets geographically. Here are some
examples:















Climate may also be used as the basis or segmentation (e.g. Northern, Southern regions of a
country).







Bases for Segmenting Markets
Regions - in the UK
these might be
England, Scotland,
Wales, Northern
Ireland.
Countries -These
could be classified by
size or perhaps by
being part of a
geographic region.
Cities/Towns - These
may be segmented
according to
population size.
Population Density -
For example: urban,
suburban region,
rural, semi-rural
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Psychographic or Behavioural

Psychographic segmentation groups markets according to customer lifestyles. This is
sometimes known as behavioural segmentation.
This works on the basis that there are many possible influences on the behaviour of buyers.
These include the attitudes, expectations and activities of customers. Knowing these
enables a business to customise its products and marketing campaigns to appeal directly to
what its customers want.







Lifestyle
Our lifestyle changes as we pass throuh life.
The sagacity lifestyle model is an example:
1. Dependent (living at home with parents
2. Pre family (own household but no children)
3. Family (parents with at least one dependent
child)
4. Late (children have left home or childless
couples)
Opinions, Interests, Hobbies, etc.
This covers areas such as political opinions,
views on the environment, sporting and
recreational activities. All potentially influence
our buying behaviours.
Customer Loyalty
Customers who are loyal to your brand are
valuable to you. Segmenting them by degree
of loyalty allows firms to adapt their
marketing to retain loyal customers.
Occasions
This segments a market according to when
products are purchased. For example, many
customers only buy certain products on
special ocassions (e.g. boxes of chocolates).
Examples of
Psychographic
Segmentation
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Demographic

The total size of the population in which a business operates defines the maximum possible
demand for a product. However, this does not mean that every member of the population
is a potential customer.

Let us take the teenage market as an example. A company that manufactures prams is
unlikely to find a huge market in this age group. On the other hand a company that
produces video games might do well to target this segment of the population.

Factors such as sex or age may be used. Another characteristic that is used a lot is the type
of residence. The best known of system is known as ACORN (A Classification of Residential
Neighbourhoods).








Acorn











Where more than one type of segmentation is used this is known as multivariable
segmentation. This is sometimes necessary because two or more bases of segmentation
may be useful at the same time.

For example a group may be segmented by age, geography and financial circumstances with
different variations of a product being marketed to different sub groups



Multivariable Segmentation and Typologies
Geodemographic -
Combines geographic
location with the type of
neighbourhood and
lifestyle factors.
Segments in the UK -
Small neighbourhoods,
postcodes or consumer
households.

Classifications - Splits
residential areas into 5
categories, 17 groups and
56 types.

The people in each
category share similar
characteristics in terms of
the types of products
they buy.
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Segmentation helps businesses to understand their customers and potential customers.
This helps them to target, acquire, manage and develop profitable relationships.


Practical Benefits





















Segmentation enables a business to use its expertise in that particular part of the market to
solve and prevent problems.

Benefits to Customers
Segmentation also brings benefits to customers.










Benefits of Segmentation
Marketing Opportunities
Through understanding
customer needs in each
segment
Specialism: Specialists
can be appointed to build
each of the firms main
segments
Budgeting : Marketing
budgets can be allocated
according to segments
with the most potential
Precision Marketing: The
approach can be fine
tuned according to each
market segment
Competitive advantage
May result through
specialist knowledge of
particular segments
Product Assortment
Assortments of products
can be refined to appeal
to different segments
Products and services
better match customer
requirements
More product variaitons
are developed meaning
that customers are
offered more choice
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Before deciding whether it is worth working with a market segment a business must first
evaluate it. This means that there are a number of key questions it needs to ask.














Targeting Strategies

Evaluation of Segments and Targeting Strategies
Is the segment
capable of being
measured?
Is the segment big
enough to be
profitable?
Can the segment
be reached by the
business?
Do the identified
segments respond
differently?
Can the segment
be reached
profitably?
Is the segment
stable enough to
be a worthwhile
commitment?
Market Factors
- Size of the segment (is it growing?)
- Stage of industry evalaution
- Predictability
- Price sensitivity and stability
- Bargaining power of customers
- Seasonal factors
Economic & Technological Factors
- Barriers to entry/exit
- Bargaining power of suppliers
- Level of technology
- Investment needed
- Profit margins
Competitive Factors
- How intense is the market?
- What is the quality of the competition?
- What threats from substitute products?
- Degree of differentiation
Environmental Factors
- Exposure to political and legal factors
- Degree of regulation
- Social acceptability
- Is the market subject to economic
fluctuation?
Factors for evaluating
market attractivness
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Once the evaluation is complete the business is ready to choose its target markets. It will
also need to consider its strategy from three main options.








Positioning is the process of designing what the company offers and its image to distinguish
it in the minds of its target customers.

The car industry is a good example of this. Consider who the target markets might be for
these car manufacturers and how their products are designed to meet the needs of those
markets. Why do they offer a range of products?


Rolls Royce
Mercedes
Ferrari
Jaguar
Lexus
Renault
Lexus
Volkswagen
Toyota
Seat
Ford

A single product is produced
The aimis to reach as many customers as possible
This is sometimes called mass marketing
Undifferentiated Marketing
The firmaims to produce ideal products
These are aimed at a single segment of the market
Examples include Aston Martin cars, Mothercare (for
mothers and babies), etc
Concentrated Marketing
The firmproduces different versions of a product
Each version is aimed at a different market segment
For example, the supermarkets sell products packaged in
basic, premiumand quality versions
Differentiated Marketing
Positioning
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Segmentation in industrial markets is similar to consumer market segmentation but can be
more of a challenge. This is because buying processes and buying criteria are often more
complex.
Industrial markets are smaller than consumer markets but may still worth segmenting. A
number of possibilities exist.


















One approach is classification according to the nature of the business. In the UK marketers
can use information from the National Office of Statistics. It produces the Standard
Industrial Classification of Economic Activities (SIC). This is useful to marketers because it
classifies businesses by the type of economic activity in which they are engaged.


Segmenting and Industrial Markets
Industrial Classification
Location - Many business
sectors are located in
particular areas. (e.g. in
England the computer
industry is concentrated
around the M4 corridor)
Size - The turnover of a
company or the number
of employees it has may
affect the products it
needs (e.g. type of
computer system)
Usage Rates - Customers
may be segmented
according to how much
they use a product or
service (e.g. light,
medium or heavy users)
Product Use - Products
may be used in different
ways. For example they
may be for the use of the
buyer or may be sold on
to another customer
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Segmentation is a key function of marketing and if it is done well it will add value to an
organisation by helping to make it more profitable.
























Value
Value based
segmentation
Based on the profit
potential of the
segment
Diferences between
the segments enable
you to design
different offerings
for each of them
Facilitates the
creation of products
and services
Clearly identifiable
criteria make it easy
to seperate the
segments from each
other
Leads to improved
marketing and
pricing decisions
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1.
a. Define the term segmentation

b. Which factors do you think marketers need to take into account to determine the
attractiveness of a segment?





2. Discuss THREE popular methods of market segmentation and give examples of EACH method
as to how it has been used in a company or industry of your choice.



3. Define the following methods of segmenting consumer markets and provide examples on
how each method can be used in the commercial environment:


a. Geographic segmentation
b. Demographic segmentation
c. Psychographic segmentation
















End of Chapter Test Questions
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Section 3












The Marketing Mix





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This is an essential part of the marketing mix as the development and exploitation of
products is vital for any business.





Products

To survive and thrive a business must consistently provide products that provide value and
meet the requirements of its customers. Products must also be attractive to customers.
This means that in a marketing sense it is wrong to think products only as a physical objects.

People buy products because of what they can do. When people buy drills, they want
holes. (Source unknown)

Think of product in terms of their attributes which can be both tangible and intangible.







Tangible Attributes
- Availability and delivery
- Performance
- Price
- Design
Intangible Attributes
- Image
- Perceived value
Products
Products and Brands Features, Advantages & Benefits
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There are a number of layers to the concept of the total product. The
diagram below shows that the core product is about what the product
is designed to do. Therefore, a coffee making machine will make coffee.

However, the actual product will be augmented with additional
elements aimed at building the reputation and trust associated with it.
So, a basic coffee maker may come in various shapes, designs and
colours. It is also likely to come with an after sales service and
guarantee.














The Total Product Concept
Extended Product
After sales service,guarantee,
brand, repairs, training, company
ethics, etc
Actual Product
Features, ingredients, design,
pacckaging, colour, etc
Core Product
Functionality
Key Benefits
Product Augmentation
Building on the benefits of
the core product to increase
attractiveness and customer
satisfaction.
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The product mix sits within the marketing mix and there are a number of factors to
consider.































The marketer is able to use these factors to design a product audit. This is a systematic
examination of the product offerings of the company and it helps the organisation answer
three key questions.


Does the product fit with the goals of the organisation?
How does it compare with the completion?
Does it meet the requirements of the market?



Product Mix
Range of products
Research and
development
Directional Policy
Matrix (Ansoff)
Portfolio Analysis: Boston
Consulting Group Matrix
Product Life Cycle
Value
Packaging
Branding
Differentiation:
Unfulfilled preferences
Unique Selling
Proposition (USP)
Features, Advantages
and Benefits (FAB)
Segmentation and
positioning
New Product
Development
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Most products have a limited life cycle. This means that sales and profitability can be
expected to change over time. This chart is a representation of a typical product life cycle




















The nature of the product will determine how quickly it will progress through the life cycle.
Products such as clothing are subject to fashions and trends and often reach decline very
quickly.

Other factors that affect the lifestyle include technological advances and developments in
competitors products.




-15
-10
-5
0
5
10
15
20
25
30
0 1 2 3 4 5 6 7
Sales
Profit
Product Life-Cycle & Its Effect on Other Elements of the Marketing Mix
+
-
Introduction Growth Maturity Decline Senility
The Product Life Cycle
New products
take time to
be accepted
by customers.
Costs are high
and sales are
low so profit is
unlikely during
this phase.
Sales rise
sharply and
production
increases.
Competitors
start to
emerge.
Normally the
longest phase
in the product
life cycle.
Sales remain
steady but
growth slows.
Most products
go to a decline
phase.
Sales and
profits fall.
The product is
no longer
profitable. The
producer
reacts by
leaving the
market or by
introducing
new products.
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It can be difficult for a business to manage growth so an effective strategy is important. The
Ansoff matrix is a well-known framework that helps with making product and market
decisions.


The Ansoff Matrix



Existing Products New Products





New Existing Markets
Markets







Market Penetration = Increasing the share of existing products in existing markets


Product Development = Developing new products for existing markets


Market Development = Moving into and developing new markets for existing products
(requires a lot of investment so this can be risky)


Diversification = Developing or acquiring a new product to enter into a new market (this
strategy represents the highest risk)









Product Strategy
Market
Penetration
Product
Development
Market
Development
Diversification
Anso
ff
Matr
ix
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New Product Development (NPD) is described as the complete process of bringing a new
product to market.

What do we mean by new products?


New to the World

These products are totally new to everybody and often have a
major effect on buying behaviour (e.g. mobile phones).

New to the
Company

A company may offer existing products or its own version of an
existing product to enter a new market (e.g television companies
now offer telephone and broadband services).


New Improvements

Products are changed significantly affecting how we use them.




Sources of Ideas

Ideas for new products can come in a wide variety of ways and may be generated from
within the company or externally. Here are a few examples.


Internal External

















New Product Development
Customer Complaints
SWOT analysis
Research and Development Department
Suggestion boxes
Sales staff feedback
Focus Groups Market Research
Competitors
Customer Suggestions
Industry Research
Pressure Groups
Inventors
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The NPD Process

The development of new products should follow a logical process.












































Original Concept
This is the initial idea - most ideas do not progress beyond this stage
Screening of Ideas
An initial evaluation of the idea and any obstacles to going ahead with it
Business Analysis
A risk assessment to evaluate the viability of the idea
Concept Definition
Builds on the original idea by defining the criteria needed to meet market needs
market
Product Development
This includes building and testing prototypes
Marketing Mix Issues
This needs careful attention and any issues need to be identified and resolved
Pilot Launch
The product is piloted with a small number of customers before a full roll out
Roll Out Full Launch
The product is launched to the full target market
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Screening of New Product Ideas

This is an important step because the failure rate of new products is as high as seven out of
eight. A business should therefore only take a new product to market if the conditions are
right. There are three factors to balance.




















The adoption process is also known as the diffusion of innovation. It was first described in
1959
1
and describes how different members of a target market accept and purchase a new
product.


1
Bourne, Francis S. "The Adoption Process," reprinted in Michael J. Baker (ed.), Marketing: Critical
Perspectives on Business and Management. Routledge, 2001.
Adoption Process
Is there enough
demand for the
product?
Does the firm
have the
ability to
produce it?
Does the firm
have the
ability to
market it?
Enthusiasts who are eager to try out new things but tend not
to be loyal
Innovators
Enthusiastic about new products but more practical than
innovators can influence the future success of products
Early Adopters
This is the start of entry into the mass market and
respresents up to 33% of customers
Early Majority
Although this group takes a 'wait and see' approach
profits are usually higher when they start to purchase
Late Majority
The last people to adopt something new and are often resistant
to the product
Laggards
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1. Discuss the various stages of the Product Life Cycle and explain how car
manufacturers utilise it to create ongoing and renewable consumer demand.




2.
a. Explain the THREE main reasons for introducing new products and services.

b. Using an example of your choice, describe the SEVEN stages of a new product
development (NPD).



3. Using an example of your choice, explain the Ansoff matrix.





4. Discuss the marketing mix decisions associated with EACH of the Product Life Cycle
stages.




5. Explain in detail the New Product Development (NPD) stages and how a car
manufacturer of your choice could use them to introduce a new product, service or
technology.

End of Chapter Test Questions
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Place is a crucial part of the marketing mix. It may also be referred to as distribution,
delivery systems or marketing channels. To avoid confusion it is worth noting that these
terms are often used interchangeably.


It is vital that a companys distribution policy is well thought out and well managed to make
it easier for customers to buy its products. There are three main strategies that it may
choose from.


Place
The aim is to saturate the market by using
many channels
More distribution outlets equates to more
sales
Often used with brands where there are many
competitors selling acceptable products (e.g.
fizzy drinks)
Intensive Distribution
Limited number of outlets used
The business uses the 'best performing' outlets
Often used if customers have a preference for
the brand (e.g. some electrical goods)
Selective Distributrion
Only one retailer or distributor is used in a
geographic area Exclusive Distribution
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Customers are more likely to buy products if they are convenient and readily available. This
means that any business must pay proper attention to this if it is to be successful. A concept
called The five rights of distribution helps here.



The right product

The product must be what the customer wants, needs or requires



In the right place

Products should be available where the customer wants to buy
them. For example, it would make sense for golfing equipment to be
available for purchase and/or hire at a golf course.



At the right time


It should be supplied when the customer requires it. For example,
seasonal products should be available at the right time of year.
Other products may need to be available for 24 hours a day all year
round.



In the right
quantity


Customers expect to be able to buy products in convenient forms
and in amounts that are convenient to them.



For the right price

Products should be priced so that they meet customers
expectations and provides them with value for their money .




In the context of this model the word right has two meanings:

Right Correct or appropriate
Right The rights of the customer





Customer Convenience and Availability
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Distribution is the means of getting products and/or services to the customer.

All distribution channels fall under one of two main categories.









































Definition of Channels
Direct Distribution
The business supplies its products
direct to the customer without using an
intermediary. This is common in many
of the service industries such as
banking and insurance.
However many physical products may
also be distributed direct to the
customer by a variety of means.
Examples include:
Own shops and stores
Mail Order
Telephone selling
Door to door sales
Computer or television sales
Indirect Distribution
Products are supplied to customers
through intermediaries. This is
common in manufacturing where
wholesalers and/or retailers are used
to sell the products.
Another option may be to appoint
agents to sell on behalf of the business.
This is also seen in service industries.
For example an Insurance Company
may choose not to sell direct to
customers but through Insurance
Brokers instead.
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Most businesses will make use of indirect channels to bring their products to market. This
means making use of third parties known as intermediaries. There are various types of
intermediary.







Retailers


Many products are sold through retailers. These can be classified in a
number of ways (e.g. types of products sold, size, type of service,
location, etc.) They can also be classified according to the type of
retailer.

Independent Retailers The best example might be the local corner
shop although it is worth bearing in mind that some independent
retailers can be very large businesses.

Multiple Chains For example, supermarkets and department stores.
They will buy products direct from the producer for re sale to
customers. In some cases, these will be sold under the retailers own
brand label.



Wholesalers


Wholesalers are intermediaries who buy and hold stock from a
number of different suppliers. They may specialise in particular types
of products or ranges of products. They then sell these goods on at a
profit to retailers or other businesses



Distributors and
Dealers


Distributers and dealers have a similar role to wholesalers and retailers
but will generally offer a much narrower range of products. For
example, car dealerships will usually concentrate on the products of
just one manufacturer.



Agents


Unlike distributors, agents do not buy and re sell goods. Instead they
sell goods and services for a fee or commission. Examples include
travel agents, estate agents and insurance brokers.

Types and Functions of Intermediaries
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Functions of Intermediaries

The main function of intermediaries is very simple. They are used by the producers of
product and services to distribute them to their customers.

There are a number of reasons why an intermediary may be a more effective distribution
channel than attempting to sell direct:.





















Selecting the right channels of distribution is important and there are five factors to take
into account.

Customers
Product Characteristics
Distributor Characteristics
Channels Used by Competitors
Supplier Characteristics

Customers

Customers are a key factor in deciding distribution channels. There
are a number of considerations that will influence suppliers.

How many potential customers exist?
What are their buying habits?
Where do they live?

Channel Selection
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Product Characteristics

The product being sold will influence how it is distributed.

Is the product perishable? In which case how can it be got to
market quickly?

Is the product customised for buyers? These products are often
distributed direct to customers.

Will there be a need for after sales service and/or technical
advice? If so, how can this be provided? Will distributors need
to be trained to provide this service? Would franchising be the
best way of providing this?



Distributor Characteristics

Which distributors have the capability and capacity to carry out the distributive work at the
right price?


Channels used by Competitors

It may be necessary to accept that your own products will sell
alongside competitor brands. This particularly applies to consumer
products.

Is it possible to compete by opening different distribution channels.
For example businesses such as Amazon have been particularly
successful at distributing products through the internet that were
only available through high street stores in the past.



Supplier Characteristics

Does the supplier of the product have the capability and capacity to operate their own
distribution channel? A good example of this in the UK is Direct Line Insurance which built a
very successful business distributing insurance products direct to its customers.





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To develop an integrated distribution system the supplier not only needs to know the
factors that influence distribution but also needs t to be knowledgeable about the merits of
various distribution channels.

Reasons to choose direct selling



















Reasons to Choose Intermediaries


















Integration and Distribution Systems
Certain products need an
expert sales force who
can demonstrate it and
provide after sales help
Intermediaries may not
be willing to sell the
product so the supplier
has to sell it direct
Existing channels may
have links with your
competitors
Intermediaries may not
have the capabilities you
need (e.g. specialised
transport)
Direct sales may be best
if customers are
concentrated in a
geographic location
The supplier does not
have the financial muscle
to pay for a large sales
force
It may be wiser to invest
in increased production
rather than in marketing

The supplier may not
have enough marketing
expertise to sell direct

Product quantities and
the range of products
may not justify employing
a sales force
The supplier does not
have to incur high sales
overheads on smaller
orders
Intermediaries may be
better able to serve large
numbers of customers
spread over a wide
geographic area
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Multi Channel Decisions
In some situations suppliers may choose to use more than one channel. For example, large
confectionary manufacturers sell to wholesalers and to large retail groups..

Industrial Distribution Channels

Industrial markets have fewer customers than consumer markets. However, the customers
are larger and tend to buy more expensive products. Many products are also custom built.

These characteristics mean that there is more of a tendency towards direct distribution
channels. However, this is not always the case and there are also specialist distributors who
suppliers might use. A good example is the building trade where building materials are often
sold and delivered through distributors.





The physical distribution of products and the logistics involved in this involve some
important decisions. This includes selecting the best mode of transport for the product.

Modes of Transport



Road Transport
The main advantage of road transport is that suppliers can use it
to deliver products direct to the customer. It is flexible and
keeps delays and handling to a minimum. However, there are
limits to how much can be carried so it can be expensive.



Rail Transport
Large loads can be carried over long distances by rail. This helps
to minimise costs. However, this method of transport is limited
by the physical reach of the rail network. It must also be
remembered that there will be transfer costs moving loads to
and from the rail network.

Water Transport
Where geographic conditions allow transport by sea has similar
advantages and disadvantages to rail transport. A major
disadvantage is that travel by water is slow which is a problem
with perishable items and goods that are needed quickly.



Air Transport
This is the most expensive of the four transport options but has
the advantage o being quick. Where fast delivery is important
products can be priced accordingly especially if they need to be
delivered in peak condition (e.g. early season flowers).
Physical Distribution Management and Logistics
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Logistics Management

This covers management of physical distribution and the management of materials used by
the business.







Logistics management has developed for three main reasons.





Just in Time (JIT)

JIT is a system of inventory control that was developed in Japan. It is a control system
(usually computerised) that ensures that materials, goods and products are ordered and
delivered at the rate at which they are needed.








Customers benefit
because they are more
likley to get the products
they want in the right
quantiies and on time.
Aligns with moderns
trends such as just in
time purchasing.
Efficiencies lead to
cost savings.
Outflow of
finished
Inflow of raw
materials
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Franchising is becoming an increasingly popular way to grow a
business. Many large businesses in the UK operate on this basis.
Examples include The Body Shop and Dominos Pizzas.

These companies allow businesses to trade in their name and will
charge an initial fee and will also normally take a share of the sales
income.

Franchise Authorisation is granted to someone to sell or distribute a company's goods or
services in a certain area.

Franchiser The business that grants the franchise.

Franchisee - The business that is granted a franchise to market a company's goods or
services in a certain local area




There are a number of ethical considerations because the
balance of power in the distribution chain is not always
equal.

One of the best ways to explain this is by using the example
of the supermarket chains and grocery products.

It is generally accepted that the supermarkets are very powerful and that they have more
power than most of their suppliers. If they abuse that power they could make business very
difficult for the people who supply them and could even drive them out of business.
Ultimately, this would not be in the best interests of the end customer, the suppliers and
the supermarkets themselves. This is because of the risk of a reduction in supply and the
choices available. This in turn could lead to price rises.

Here are a few examples of how power could be abused in the supply chain:

The retailer is slow to pay its suppliers. This could affect their cash flow and make
business difficult for them.

Suppliers could manipulate product availability to influence price. Consider the
example of the OPEC countries that are able to manipulate the supply of oil.

The big stores and chains could demand exclusivity of supply from a producer and
then over time drive down prices without necessarily passing these reductions on to
customers.
Ethics in Distribution
Franchising
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1. What are the various tools and advantages of direct marketing? Explain with
examples.




2.
a. When setting up a channel of distribution, the supplier has to take into
account a number of factors. Describe, with examples, what those factors
should be.

b. Which factors favour the use of direct selling?




3. What are the business and environmental circumstances favouring companies to
distribute products through:

i. direct selling
ii. the use of intermediaries





4. Write notes explaining the following distribution strategies:

i. Intensive distribution
ii. Selective distribution
iii. Exclusive distribution





5. Explain FIVE basic functions performed by distribution channels.

End of Chapter Test Questions
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Pricing is an important strategic element in the marketing mix. However, it never operates
in isolation as all of the components of the marketing mix work in together. Nevertheless,
there are occasions where price is the predominant component and this appears in markets
that are particularly price sensitive.
There are three major factors that always need to be kept in mind when considering price:
1. Ensure that all costs are covered
2. Take account of how price affects sales
3. The price should provide a profit



The aim is to set prices which enables the organisation to
achieve the sales that it needs to meet its business objectives.
However, when setting pricing policy it is also important to take
account external considerations including customer perceptions
about value.
For any product there is a maximum price that buyers are willing
to pay. Similarly there is a minimum price below which the
supplier will not sell. The selling price will always be somewhere between these two figures.
Organisations also realise that customers do not buy the product in isolation. Their
perception of whether they are receiving value for money includes factors such as brand,
special attributes, the occasion, etc. These factors differ between customers so what
represents value for money for one customer may be considered too expensive by another.

Consumer Expectations
We are all consumers and we have our own idea of what represents value. We may refer to
a product as being expensive or cheap.
Customers may be suspicious of products that are offered at a price that seems too low.
They may be put off buying if an offer seems to be too good to be true just as much as they
would by high prices.
Price
Perceived Value
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Perceived Value Pricing
This approach to pricing is sometimes used when a product is perceived to have a high value
to the customer. For example, the buyer of made to measure suit of clothes is usually
prepared to pay more for it than an off the shelf equivalent.






Pricing needs to be considered carefully and set within the context of the market in which
the business operates. There are two elements to this:

The internal needs of the organisation

External market constraints





Business Objectives

As already mentioned, the aim is to set prices to achieve the sales necessary to meet
business objectives and these fall into two main categories. Either of these objectives may
play a part in setting prices.














Pricing Context and Process
Objectives aimed at
maximising profits

Objectives aimed at
maintaining or increasing
market share
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Costs and Profit

You will remember from an earlier chapter that a key component of any definition of
marketing is to supply customer requirements profitably. This means that prices have to
cover the cost of supplying the product and service being sold plus it must provide a profit.

This means taking account of all direct and indirect costs involved. Well cover this in a little
more detail later. In the meantime just consider what costs a business might incur just in
getting even a simple product to market. Here are just a few:


















The price of the each product must take account of all costs involved in supplying it to the
customer. The desired profit is then added to this. There must be sufficient profit to enable
the business to carry on trading, invest in the future and provide a return for its investors.


Breakeven Analysis

Breakeven analysis is a technique that is used when setting prices. It is used to understand
the relationship between cost volume and profit.

Breakeven Point

This is the point at which there are sufficient sales to cover all costs when taking account of
fixed and variable costs and revenue.
It can be calculated using a simple formula:
Breakeven = Fixed Costs
Price variable costs
Raw Materials
Machinery and
equipment -
buying or hiring
Selling costs
Production
costs
Cost of promotion
Packing and
packaging costs
Distribution costs
Machinery and
equipment -
maintaining and
repairing
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This might be best explained using a simple example. Imagine
that you are setting up a market stall to sell flower pots. Your
rent for the stall is 100 for the week and you can buy flower
pots at 2 each and sell them for 3
100 = 100
3 - 2
In this example you would have to sell 100 pots to break even. Sell more than 100 pots an
you start to make a profit.

Breakeven Charts
Breakeven charts can help management to plan. By using budgeted variable costs, fixed
costs and sales it is possible to see at a glance where the break-even point is.
We will stay with our simple example of the flower pot stall to illustrate this.
Fixed costs: 100 Variable Costs: 2.00 per pot Sales Price: 3.00 per pot.
Using these figures the chart shows that the break even is 300.
Of course, by varying any of these the figures the breakeven point changes. For example it
will be reached sooner of the sales price is increased and later if it is reduced.

0
100
200
300
400
500
600
700
0 25 50 75 100 125 150 175 200
Fixed Costs
Total Costs
Sales
Breakeven Point

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You will also encounter Profit/Volumes charts. These are a variation of breakeven charts and
are designed to show the relationship between costs and profits and the number of sales.

There are limitations to a break even analysis so it does need to be used carefully:

1. It can only be used on a single product or a group of products
2. It assumes that fixed costs remain the same and that variable costs per unit and
selling prices do not alter. In reality all may be subject to change.



Economies of Scale

One factor that affects costs is economies of scale. The average cost of producing or buying
a product will reduce if high quantities are needed.

Returning to our much simplified flower pots example it is likely that you would be able to
negotiate a discounted price from your supplier if you were buying in large volumes.



Inflation

The effects of inflation need to be taken into account when making decisions about pricing.


















When costs rise can
prices be increased to
ensure profit?
Can you avoid fixed price
long term contracts if you
are the seller?
How often can you
review your prices?

If the inflation rate is high
you should review your
prices regularly.
Will you be able to pass
on your cost increases in
a competitive market?
Can you anticipate future
increases in your costs
when setting your prices?
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Rapid
Skimming
Slow
Skimming
Rapid
Penetration
Slow
Penetration



Pricing strategy is a key part of the marketing mix because the ability to manipulate price
affects both the demand for a product but also its profitability. However, we have already
said that none of components of the marketing mix works alone so pricing strategy must fit
within the whole marketing strategy.

It is certainly worth considering how price and promotion work together.




Information to the market (promotion)

High Low




High



Price




Low




This chart shows that a strategy of setting high prices coupled with high promotion is aimed
at rapid skimming. If this works this means that high profits may be achieved at a high rate.

Price skimming is a strategy which involves setting a high price for a product or service at
first and then lowers the price over time. A good example of this is the market for games
consoles where suppliers charge very high prices when a console is first introduced to the
market. This takes advantage of the initial high demand when customers are keen to get
their hands on the new state of the art technology.

The aim of a strategy involving low prices and high promotion is to achieve high market
penetration as quickly as possible.


Pricing Strategies
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Cost plus pricing

This is the simplest approach to pricing. The supplier simply adds a percentage to the cost
price of the product when selling it to customers. This will often be a standard mark up and
means that the price to the customer will fluctuate as the cost to the business changes.

This method of pricing has advantages and disadvantages.



Target Pricing

The business sells at a price aimed at meeting a target profit over a defined period. This is a
variation of marginal cost plus pricing which adds a profit margin to a marginal cost. This is
sometimes known as markup pricing.


Demand Based Pricing

In theory, demand for a product varies according to its price. This means that it ought to be
possible to estimate how much demand there will be at different price levels and to
optimise profits. However, it can be difficult to achieve this in practice and requires a lot of
time and effort. Some larger organisations see this as being worthwhile and may produce
estimated demand curves for their products based on varying prices.

A bus company might want to predict the effect of various levels of
fare increases.

What would be the effect on passenger numbers?

How would this affect their profits?
Advantages
- Good fr pricing large contracts to
ensure sufficient profit margins
-Useful if a company cannot
estimate demand at different sales
prices because it is simple to do
Disadvantages
- Does not recognise that customer
demand is affected by price
- Does not account for the need
to adjust prices in response to
market conditions
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Although price does not operate in isolation it is clear that pricing is a crucial factor when
aiming for a competitive edge. One reason for this is that buyers can easily compare prices
and shop for what they perceive to be the best deal.



Price Wars









Competitor Related Pricing

When pricing products for the market an organisation has to take into consideration the
prices being offered by its competitors. When a number of competitors offer exactly the
same product the prices they charge will be broadly similar.

The prices that competitors charge cannot be ignored but there are still ways where it is
possible to differentiate on price. Examples include:

Different product quality
Differences in product design
Differences in geographic location

Brand loyalty is also a factor to consider. For example there is a tremendous
brand loyalty towards coca cola in the cola market.




Competition
Drives down prices

A head to head fight
between competitors
Price wars are dreaded by
businesses
Reduces profit margins
and may lead to losses
Drives smaller companies
out of business
Ultimately reduces
consumer choice so
nobody really wins
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Competitive Advantage

The concept of competitive advantage was set out by Michael Porter
2
and it is important to
have some understanding of it. The basis of this concept is that for a business to thrive in
the long term it needs to have a sustainable competitive advantage.

According to Porter there are two main types of competitive advantage and these are cost
leadership and product differentiation.






Focus

Businesses also need to consider their focus. Lets take cost leadership and use motor
insurance as an example.

An insurance company may decide to become a cost leader for motor insurance. However,
this could be very difficult to achieve across the whole market. It is, therefore, more likely to
focus on a particular market segment such as middle aged drivers with small family cars.

An alternative strategy may be product differentiation perhaps by insuring quality cars and
offering add on services that these customers would perceive to be important. For example
these customers might appreciate a free valet of their vehicle as part of the claims service.




2
Competitive Advantage, Michael Porter 1996
The aim is to be the
lowest cost producer for a
particular product or set
of products
The products must still be
of a standard that is on a
par with its competitors
as customers will not buy
if the quality is perceived
to be poor.
Cost
Leadership
The aim is to have the
best product or group of
products rather than to
compete solely on price.
The product should have
unique features which
customers consider to be
important.
Product
Differentiation
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Average Price and Lowest Price Strategies

These are two pricing strategies that are based on what competitors charge.
























Average
Price
Strategy
Used when
products
sold by rival
firms are
similar
Price
charged is
the 'going
rate' for the
product
Customer
attitudes
may
influence
this
approach
Not
perceived
as being an
aggresive
approach
Low
Price
Strategy
This can be
seen as an
aggressive
strategy
Customers
may
associate this
with low
quality
This may lead
to price wars
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Economic theory tells us that price is a major factor in determining demand. The lower the
price of a product the higher the demand. Conversely, demand drops when prices rise.

In recent times a lot more emphasis has been placed on other factors. This is because
competitors can easily copy price changes but it is more difficult to copy unique selling
features in the product itself. Market conditions also affect prices.



It is true to say that most British industries operate in an oligopoly. It is difficult to define
market power in these circumstances and normal economic theory does not help much.
However, a concept known as price elasticity is important

Price elasticity is measured in this way

%Change in Sales Demand
% Change in sales price

If price elasticity is greater than 1 a change in price will also change revenue

o Lowering prices will increase revenue because demand will increase
o Increasing prices will reduce revenue because demand will fall

If price elasticity is lower than 1 changes in prices will have the opposite effect

o Lowering prices will see a fall in revenue because the increase in customers will
not be enough to compensate for this
o Increasing prices will increase revenue because the drop in sales will be small
Market
Conditions
Perfect Competition
Many buyers and
sellers with identical
products. The balance
of power is more or
less equal.
Oligopoly
A small number of
competitive
companies dominate
the market.
Monopoly
One seller dominates
the market and can
use its market power
to maximise profits
Demand Elasticity
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The cost of a product is the total cost of a product built up from all of its cost elements. This
means that the total cost of a product is made up of:
The cost of raw materials needed to make the product or service
The cost of employing staff to produce the product or provide the service being sold
The cost of all other expenses (e.g. rent, energy, telephone bills, sub contractors, etc)
There are a number of different types of costs to be aware of.

Direct Costs and Indirect Costs




Functional Costs
In manufacturing businesses traditional costing models classify costs as:
Production or manufacturing costs
Administration costs
Marketing and/or selling and distribution costs
Direct Costs
Directly associated with the
product or service including
- Material costs
- Labour costs
- Direct expenses
Indirect Costs
Costs that cannot be directly
associated with a product or
service (e.g. wages for
emplooyees in central functions ,
insurance, cleaning, etc)
Costs
Two types of
cost
Both must be
taken into
account
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Fixed Costs and Variable Costs



Controllable and Uncontrollable Costs



Controllable Costs


These are sometimes known as avoidable costs. They are usually
direct costs or variable costs and can be controlled or avoided in the
short term.



Uncontrollable
Costs


These costs cannot be controlled or avoided in the short term. They
are usually the fixed costs incurred by the business such as the cost
of renting premises.



Fixed Costs
These are costs that do not change
regardless of how much the
business produces or sells.
Examples of fixed costs incude rent,
rates and salaries.
Variable Costs
These cost vary according to how
much the business produces or
sells. These include the cost of raw
materials, packing and packaging
and transportation.
Both must be
taken into
account
when pricing
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Price discrimination exists when identical products or services are sold at different prices by
the same supplier. There are a number of ways in which this happens.








One common form of price discrimination in the retail industry is own label pricing. Large
retailers often offer own branded products at lower prices than well-known branded
products. Discriminatory pricing is sometimes known as differential pricing or multiple
pricing.



Some people question whether price discrimination is ethical and there are certainly
situations where it can lead to misunderstandings between sellers and buyers.
Unethical pricing can come in a number of different forms although these can be difficult to
investigate. In the UK government agencies such as the Office of Fair Trading are responsible
for establishing whether unethical pricing agreements such as fixed pricing exists between
suppliers.
Examples of unethical pricing may include:
Price fixing
Price skimming
Price discrimination
Price wars
Bid rigging
Predatory pricing (where suppliers try to earn excessively high profits at the unfair
expense of its customers)
Discriminatory
Ethical Issues
Negotiation with
individual customers (e.g.
discounts may be offered
for cash payments)
Bulk purchase discounts
Product type (e.g.
supermarkets charge
different prices for basic
and premium quality
products
By time (e.g. railway
companies charge
different prices for peak
time and off peak travel)
Location - Some
locations attract higher
prices than others.
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Retail prices are often shown as odd numbers. So, instead of seeing a price expressed as
20 it is more likely to be 19.99. The theory is that this has a psychological impact and
affects demand.













There are also suggestions that consumers are so used to seeing prices expressed in this
way that anything else looks strange.

There is some disagreement over the effectiveness of odd pricing. Some marketers argue
that many modern customers are price savvy and would not necessarily be amenable to this
technique.









Psychological
Prices expressed in this
way suggest that the
goods are marked at the
lowest possible price
Odd pricing may be used
when items are divided
into price bands to stay
within a lower price band
Customers ignore the
least significant digits and
may see this as 19 not
20
Pence may be shown in
smaller text so that the
emphasis is on the more
significant figure
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1. What are the differences between price skimming and price penetration? Explain
using examples.


2. Provide a concise explanation for EACH of the following price setting strategies:
i. Cost-plus pricing
ii. Going rate pricing
iii. Odd number pricing
iv. Differential pricing

3.
a. Describe the ways price discrimination can be exercised.
b. Describe FIVE ways of discounting.


4. Discuss the different situations that may lead a company to:
i. initiate price cuts
ii. initiate price increases



5. Highlight TWO pricing strategies and give examples of how and when companies of
your choice could use them.





End of Chapter Test Questions
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Promotion is the communication element of the marketing mix. It is essentially about
communications between the seller and the buyer.
Many people make the mistake of thinking that promotion and marketing are one and the
same thing. However, we have already seen and will continue to see that it is a part of a
much wider mix of activities.



The purpose of promotion could be said to be to build awareness of products and the brand
image. There are a number of different activities associated with this. Here are some
examples.
.





Brochures DVDs/Videos Newsletter Websites





Public Relations Advertising Seminars and Presentations



Promotion
Awareness and Image
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The AIDA model
One way of explaining promotion (especially advertising) is that it is aimed at moving
consumers form complete unawareness of a product to regular usage of it.
The AIDA model helps to illustrate this approach. You may also hear this referred to as the
hierarchy of effects model.












Effective communication involves a number of elements.


Feedback Mechanisim
Effective customer feedback enables the organisation to modify its message
A Receiver
The message must be targeted at the right people (i.e. the decsion makers)
Communication Channel or Medium
Important to use the right channel for the message (personal or mass communication channels)
A sender
The organisation sen ding the message May be represented by a sales person
A Message
Must be clear and easy to understand Words and pictures have to be used effectively
Effective Communication
Awareness Interest Desire Action
Advertising used
to create and
raise awareness
about a product
Interest in the
product may be
developed
through public
relations
Sales promotion
used to generate
the desire to buy
Personal selling
encourages
customers to buy
the product
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All promotion activities are designed to influence customers so that they are positive about
products or services the organisation offers. The purpose of integrated marketing
communications is to ensure a consistent message throughout all communications.

This means that planning is important and a technique known as SOSTAC
3
and 6Ms can be
used to help with this. You may encounter SOSTT or SOST and 4MS however the underlying
principles remain the same
SOSTAC

Situation


The current situation the company finds itself in needs to be
defined.


Objectives


The key objectives for the integrated marketing campaign are set
out.

Strategy


A strategy for achieving the defined objectives is developed and
agreed.

Tactics


What needs to be done to implement the agreed strategy? This
details the approach for achieving the stated objectives.

Action


The actions that are needed to implement the agreed strategy are
taken by the business. Who will do what and when will they do it?

Control


The actions are monitored and evaluated to establish whether the
objectives are being met.

6Ms









3
Planning System created by writer and speaker PR Smith in the 1990s
Integrated Communication Process
Men: Human Resources Money: Budget Machines: equipment
Minutes: time constraints Materials: samples, brochures
Measurement: against initial objectives
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There are many different ways that a business can communicate with its customers. In the
context of promotion this is known s the promotional mix.



















The Organisation Customers






Organisations usually select a range of communication methods from the promotional mix
to improve the efficiency and effectiveness of their communications with customers.





These are the two main types of promotion strategies used by organisations.
















Promotional Mix Elements
Push and Pull Strategies
Promotional Mix
Direct Marketing
Sales Promotion
Sales Literature
Personal Selling
Exhibitions
Public Relations
Advertising
Branding
Sponsorship
Packaging
Push Strategy
Promotion activities to create consumer demand for a product
Personal selling and promotions used to increase demand
Producer promotes the product to wholesalers, wholesalers
promote it to retailers, retailers promote it to consumers.
Pull Strategy
Advertising and promotions aim to build up consumer demand
If successful, consumers actively sek the product from retailers
The aim is for consumers to ask for the brand by name
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Below the line and above the line marketing are two different advertising techniques that
may be used by a business.




Above the line advertising This is an impersonal type of advertising that
makes use of media such as TV, cinema, radio, print, banners and search
engines to promote brands, products and services. This is sometimes referred
to as conventional advertising.

This advertising technique uses mass media, however growth in the use of the
internet has dramatically changed the mass media landscape.

This type of advertising is believed to be more effective when the target
audience is very large.




Below the line advertising This focuses on direct means of communication,
such as direct mail and e-mail, often using highly targeted lists of names to
maximise responses. It also includes public relations activities.

This advertising technique does not rely on mass media and it can be argued
that it is more effective as it can be customised to the target audience.

This type of advertising is believed to be more efficient if the target audience
is very limited or very specific.














Advertising Above and Below the Line
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The original function of packaging was product protection. Nowadays it also has a key role in
the marketing mix and promotion campaigns.









Of course, packaging also contains information about the product to help consumers decide
whether to buy it.










Public Relations Definition: the planned and sustained effort to establish and maintain
goodwill and mutual understanding between an organisation and its public. (Institute of
Public Relations)

An even simpler definition is the management of the corporate reputation.



Packaging
Public Relations
Shelf appeal
Product
information
Brand image and
awareness
Mail-in offers
Money off
coupons
Internet offers
Games and
competitions
New Product
identity
Instant winner
sweepstakes
Logos and
slogans
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The Public

What do we mean by the public? It is any key group of people that is important to your
company or organisation.

These vary according to the organisation but it is clear that identifying who those key groups
are is an important first step in any public relations campaign. These people are often
referred to as stakeholders and may include any of the following.
















The media also fall within the definition of public that a business will want to influence but
it is also a communication channel. For example, positive articles about the organisation in
the local press is free advertising.


Public Opinion

The role of public relations is to influence public opinion.











Customers Existing, past and potential Members of the public
Research bodies
Distributors
The Financial Public Shareholders, The City, Banks, etc.
Pressure groups
Opinion leaders
Overseas Governments
EU Bodies
Central and Local Government Bodies
Members of Parliament
The local community
Employees
Trade Associations
Reinforce
favourable
opinions
Modify or
neutralise
hostile and
negative
opinions
Transform
latent
attitudes into
positive beliefs
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Planning and Control

Public relations activities need to be carefully planned and controlled to be effective. There
are seven stages involved in this process.
















Maintain Financial Checks
Monitoring and control is necessary to ensure that the PR activity is cost effective.
Look to the Future
What are future trends and will the PR activity need to be changed because of these?
Monitor the Effects
It is necessary monitor whether the objectives of the PR activity are being met.
Select Appropriate Media
What are the most effecitve methods and media to reach the public identfied?
Identify the Public
Who constitutes the public for this particular issue or problem?
Conduct Research
Develope a clear understanding of the issue or problem and its wider implications.
Define the problem or aims
What are you trying to achieve and why?
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Public Relations Activities

Public relations activities vary from organisation to organisation and may also depend on
which areas of the public the business is seeking to influence at the time. However, it is
possible to identify some common activities that may be undertaken by public relations
officers.
























Sponsorship

Sponsorship can potentially be an important form of marketing communication. Certainly,
high profile sponsorship of national and international events is a good way of putting an
organisations name in front of the public. It can also be very expensive.

However, not all sponsorship is necessarily of such a high profile. For example, a small local
business may sponsor a local charity or perhaps just provide shirts for a childrens football
team that plays in the local park.

There are a number of potential advantages of sponsorship:

Helps to develop distributor and customer relations


Sponsorship of 'worthy' causes and events is believed to have a positive effect on the
attitude of the public towards to the organisation


Demonstrates good corporate citizenship and has a positive effect on employees

Public Relations
Activities
Protect the corporate
identity
Establish and maintain
two way
communications
Prevent conflict and
misunderstanding
Promote mutual respect
and social responsibility
Promote goodwill with
employees, customers
and suppliers
Analyse and predict
future trends and
consequences
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Sales Promotion Definition: a range of tactical marketing techniques, designed within a
strategic marketing framework, to add value to a product or service, in order to achieve a
specific sales and marketing objective. (Institute of Sales Promotion)

Sales promotion came to prominence during the 1980s and has been used to good effect in
many sectors retail, financial, travel and leisure, automotive and in business to business
sectors.


Consumer Sales Promotions





























Sales Promotion
Price promotions
Discount on selling
price, two for one
offers, etc
Cross Brand
Promotions: A
sample or discount
on another
product is offered
with the purchase
Coupons: These
give discounts on
future purchases
and encourage
repeat business
Gift With
Purchase: The
customer is given a
fee gift with the
purchase
Competitions:
These are prize
promotions and
are designed to
encourage
customers to buy.
Trade Promotions:
Offer incentives to
distributors to
encourage them to
sell more of a
product
Sales Force
Promotions: Sales
staff are
encouraged to sell
more though
incentives and
competitions.
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Direct marketing and Personal selling are often grouped together this is because they are
both techniques that allow the seller to have some control.






















Personal Selling

It is important to have employees with responsibility for dealing with customers and
potential customers. They provide a direct link to buyers and keep them informed about the
companys products and the role may also include persuading them to buy. These people
form the sales force of the company and it is important that they are supported by all other
parts of the business.

There is a stereotypical image of sales representatives that is not always seen as
complimentary. However, the reality is that there are many different types of sales roles
and these can be classified in the following ways.
















Direct Marketing and Personal Selling
Gives us the most
control over who
receives our
messages
Enables
continued
interacation with
the target
audience
Gives the most
flexibility in
tailoring the
message
Personal
Selling
Allows us to
target our
audience by
name
Some limited
interaction with
the target
audience is
possible
Enables
monitoring and
control
Diect
Marketing
1. Deliverer
The role of the sales person is
limited to delivering the
product to the customer
2. Order Taker
The role of the sales person is
limted to taking orders from
customers
3. Missionary
The sales person builds
goodwill and educates
customers in the use of the
product, but is not expected to
take orders
4. Technician
The sales person applies his or
her technical knowledge about
a product to act as a consultant
to customers
5. Demand Creator
The sales person stimulates
demand and sells the product
to customers
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Each of these roles is progressively more difficult and it is generally accepted that the role of
demand creator is the most difficult of all.

However, all sales people perform a number of tasks and may include any of the following.























The internet has become increasingly important for marketing purposes and the vast
majority of businesses have an online presence these days.


E Mail













On-line Marketing
A signature file at
the end of all e
mails can double
up as advertising
Instant low cost
communication
anywhere in the
world
A useful tool for
direct marketing
Very flexible
means of
communication
Electronic versions
of brochures and
other promotional
materials can be
attached easily
Increasingly being
used in business to
business
marketing
Prospecting Generate
new customers and
sales leads

Communicating
Inform existing and
new customers about
products and services
Selling
Approach customers,
present, answer
objections, close sales
Servicing
Consultation, technical
help, arrange finance,
organise delivery, etc
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Viral Marketing

This marketing technique makes uses the internet to meet marketing can be delivered by e
mail or social networking sites such Face book and You Tube and by word of mouth. The aim
is to creating messages that appeal to people so that they share it with friends.

Viral marketing takes many different forms.






Website Essentials

A well presented and welcoming website is essential. It should
be attractive and provide simple and easy ways to communicate
with the organisation.

The site also needs to be interesting and interactive.

Potential customers will be easily put off is it is not easy to
navigate and use or if it is dull and unimaginative.

It is also vital that customers can trust the security of the site
especially if they are asked for personal information or to give
payment details online.





Advergames Interactive flash
games
E Books
Online Discussion
Groups
Audio Clips
White papers
Video Clips
E Mail messages
Images
Text Messages
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A brand has been defined as a name, term, design, symbol, or any other feature that
identifies one seller's good or service as distinct from those of other. (American Marketing
Association).

A brand can take many forms, including a name, sign, logo, symbols slogans and jingles.

Reasons for Branding










Although there are many advantages to branding these do not apply equally to all products
and organisations. Large organisations with high volumes of sales are likely to see more
benefit from branding. Consequently there is more to gain by them spending the large sums
of money involved in developing brands and the associated advertising campaigns.
Success Criteria for Branding
Branding must be central to strategic planning for products and their promotion. Research
suggests that for a brand to be successful t should have certain qualities:
Suggest benefits (e.g. Slimline Tonic)
Suggest qualities such as action or colour (e.g. iPod Touch)
Easy to recognise, pronounce and remember (e.g. Amazon)
Be acceptable in all of its markets
Be distinctive (e.g. Heinz)
Be meaningful to customer
Branding
It is a form of product
differentiation
A brand name is needed
for advertising
Branded goods are
more readily accepted
by wholesalers and
retailers
Facilitates self service in
stores
Competing on price may
be less important if the
brand os strong
Brand loyalty leads to
repeat business
Other products can
benefit from the brand
by being added to the
range
Personal selling becomes
easier
Facilitates self service in
stores
Branding can go hand in
hand with market
segmentation
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1. Provide a brief explanation of EACH of the FOUR elements of the promotional mix.


2. The choice of media is as important as choice of tool. Explain how the SIX main
media tools could be used to promote a new product of your choice.

3. Write notes on THREE of the following subjects:
a. Branding
b. Sponsorship
c. Merchandising
d. Direct mail

4. What is mass communication and how does it differ from personalised
communication?

5. What is direct marketing and what are the reasons behind the growth of direct
marketing?

6. In advertising campaigns, why do some companies use a variety of Above The Line
(ATL) and Below The Line (BTL) communication mediums? Explain with examples the
main differences between ATL and BTL and how together they form Integrated
Marketing Communication (IMC).

7.
a. Using an example of your choice, define the terms push and pull strategies.
b. Discuss the main objectives of an advertising campaign.

8. To what extent is online advertising taking over traditional TV advertising and why? Justify
your answer with examples where possible.


End of Chapter Test Questions
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Section 4











Different Marketing Segments and
Contexts



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In this section will be taking a brief look at consumer markets. These are the markets for
products and services bought by individuals for their own or family use.

















Characteristics of fast
moving consumer
goods
Bought
frequently
Buyers will
accept
alternative
brands
Convenience
goods
Often sold in
supermarkets
Usually low
priced
Consumer Markets
Fast-Moving Consumer Goods
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Convenience Goods


This includes grocery items which consumers buy regularly. There are two types.



Staple Goods


These are items that people regularly buy as part of their weekly
shop. This includes foodstuffs and other household goods such as
cleaning products.



Impulse Buys


These are items that people do not necessarily plan to buy but may
be tempted into purchasing whilst in the store. This may include
products such as chocolate, crisps, alcoholic and non alcoholic
drinks.


Brand awareness is considered to be important with fast moving consumer goods. For
example, coca cola spend a lot of money advertising so that people think of their brand
when buying cola.








Consumer durables are products purchased by consumers and
manufactured for long-term use. Furniture found in the home is one
of the most common examples of consumer durables. Household
electrical goods also fall into this category.

These products often involve a high cost so consumers will often
conduct a lot of research before making a purchase.

This means that any promotion activities need to provide consumers
with information about the products and the benefits of buying
them.











Consumer Durables
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We saw earlier in this guide that marketing activities must be aligned to corporate and
functional objectives.

The components of the marketing mix need to be co-ordinated with these objectives and
with each other.

Product, price, promotion and
place should not be allowed to
operate independently of each
other.


Strategies need to be developed
to co ordinate the elements of
the marketing mix so that they
complement each other.


A co-ordinated approach helps
to maximise the effects of the
individual Ps


Product - This must be well designed and must meet the requirements of the target
market (consumers). It also needs to be designed with company objectives in mind.
Is the aim to produce quality products or basic products aimed at a wider market?

Price - Consumers will only buy products if they perceive that they are value for
money so it is important to get the price right. It is also important to keep the
company objectives in sight. For example is the aim to maximise profits or to
increase market share?

Place -The products must be easily accessible to consumers and/or capable of being
delivered to them with the minimum of fuss. If this is not the case they will shop
elsewhere no matter how good the product is or how well it is priced. Distribution
must also be aligned to the firms objectives. For example, is it intended to sell direct
to consumers or to use intermediaries?

Promotion Consumers need to know about the product and why buying it is a
benefit to them. If this communication does not happen then the product will not
sell well even if the other three elements of the marketing mix are perfect. If
consumers do not know about a product they cannot buy it. Once again the firms
objectives are important and it is important that communications are aimed at the
market segment that it is aiming to develop.
Co-ordinated Marketing Mix to Achieve Objectives
Product
Place
Promotion
Price
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1.
a. Describe the features of fast moving consumer goods (FMCGs)
b. Define the term consumer goods
c. Explain how consumer goods can be classified




2. Explain how the co-ordinated marketing mix can help a firm to achieve its objectives
in consumer markets.




End of Section Test Questions
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Organisational markets are made up of all the companies and individuals who purchase
goods and services for some use other than personal consumption.







There are differences between organisational and consumer markets and we will look at
these in a moment. However, it may be useful to first have an understanding of the make up
organisational markets.





There is a large difference, in how and why organisations buy goods and services compared
to how individuals shop.






Organisational Markets
Differences From Consumer Markets
Producers
Companies and individuals buy goods
and services to produce other goods and
services to supply to their own customers
Resellers
Companies and individuals buy goods and
services produced by others for resale to
their own customers
Government
All levels of government and its agencies
who purchase goods and services so that
they can carry out the functions of
government
Institutions
This is made up of institutions such as
hospitals and schools who purcahse
products and services for the benefit of
the people cared for by the institution.
Four Components of
organisational markets
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Consumers Organisations

High numbers of buyers

Smaller number of buyers
Usually buy goods and services in small
amounts

Often bulk buy goods and services
Make purchases for personal use Make purchases to use in their operations
or to resell to customers

Usually buy finished products May buy raw materials for manufacturing

Consumers are driven by needs and wants
and may be enticed into buying products
they dont really need through marketing or
peer pressure.
Organisations are much less susceptible to
buying un-needed products or services
especially if purchases are made through a
purchasing department.

Consumers generally have more freedom of
choice than organisations.
Choices may be restricted by budget,
conforming with organisation standards,
style or approach or by legal reasons (e.g.
complying with health and safety
regulations).



Marketing Mix Differences


On-time delivery is vital
as the buyers business
may be dependent on
this
Partnership approach
often adopted to gain
long term repeat business
Prices are more likely to
be negotiable especially if
the product is customised
Pre sales and after sales
service likely to be
included
Products are often
custom built
Product Price
Place
(Distribution)
Promotion
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Business to Business Distribution Channels

There are a number of different distribution channels that can be used dependent on the
type of goods being sold.














Business to business marketing will usually include elements of service in addition to the
core product. Indeed, this is expected by most buyers particularly bearing in mind the large
sums of money that can be involved.








Examples of
Pre Sales Service



.






Manufacturer Business Buyer
Manufacturer Agents Business Buyer
Manufacturer
Business
Distributor
Business Buyer
Manufacturer Agents
Business
Distributor
Business Buyer
Adding Value Through Service
Consultancy
Free Trials
Quotations
Live
Demonstrations
Technical
Advice
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Capital goods are usually
purchased for long term
use by a business
Examples include factories
and other buildings and
machinery and plant
Capital
Goods
These are generally less
expensive items than
capital goods and may be
used in the medium term
Examples may include
personal computers and
telephones
Accessories
These are materials that a
business will purchase for
manufacturing purposes
Examples may include
wood plastic, metal, etc.
Raw
Materials









Examples of
Post Sales Service












Industrial marketing (business to business marketing) is where a business markets its goods
and services to other businesses. The types of goods found in this market vary greatly but
can be classified simply.




















Industrial
Service ,
Maintenance
and upgrades
Guarantees
Just-in-time
delivery
Consultancy
Technical
Advice
Products may be made
by assembling ready
made components
For example, car
manfacturers buy in
many of the parts they
need to assemble cars
Components
All businesses need
supplies which are their
equivilant of consumables
used by individuals
Examples include, office
stationery and cleanng
materials
Supplies
Companies often buy in
services that do not form a
part of their core business
Examples may include,
security, training,
consultancy, etc.
Business
Services
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Although there are some similarities with consumer markets it is important to understand
that there industrial markets do have particular characteristics.

Buyers are spending money that belongs to the business they are working for.

There are often a number of people involved in the buying decision. This is known as
a decision making unit.

The decision to make a purchase can take a long time, especially if there is a lot of
money involved.

The customer base is small but is usually easy to identify.

The value of orders is usually much higher than in consumer markets.

It is often important to build personal contacts and relationships with buyers as this
can be influential in buying decisions.




Nonprofit organisations (NPO) may also be known as not for profit organisations (NFP).

There are many different types of NFP including charities, trade unions, trade associations
and clubs. Although government agencies may fall within the description of an NFP they are
usually treated separately.

NFPs dont issue stocks and shares and their aim is not to make a profit for their owners.
Nevertheless there is still a need for them to engage in marketing activities and they share
many of the characteristics of organisations that exist to make a profit. The importance of
marketing can be illustrated by using the example of a school.








Non Profit Making Organisations
Schools compete for
funding
Funding depends on
student numbers
Parents choose where
to send their children
Must be able to attract
good quality staff
A good reputation is
essential
Effective use of the
marketing mix helps
get the right message
across
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Target marketing is different in the not for profit sector. Generally there are no buyers but
there are different audiences. Consider the example of a charity.






Most charities and NFPs are involved in providing services far more than they are in the sale
of products. This means that the extended marketing mix which includes people, process
and physical evidence usually applies to them.

It is also important to understand that NFPs operate within strict budgets. This means that
when they are in the market for goods and services they are likely to apply the same
standards and approaches as businesses operating for profit.





The government at all levels and its various agencies make up an important market. Many
companies rely on government contracts whilst. We only need to think of a few areas in
which government operates directly and indirectly to realise how vast the potential market
is (e.g. defence, homeland security, health, Education, transport, local government services).


Government is accountable to the public. This means
that there is a key difference between government
purchases and purchases made by other organisations.

The result of this is that there are often stricter
procedures and controls when purchases are made by
government agencies. Although this can be frustrating
at times it is easy to see why this so called red tape
exists.

The rewards that can be involved in selling to
government agencies make it worthwhile going
through the process and in most other respects it is like
selling to any other organisation. Indeed many
government agencies are keen to attract new
suppliers.
Government
Target Public - people
who have an interest or
concern about the charity
Donors and volunteers
people who may be
willing to help the charity
Government and
Businesses - Lobbied for
help and support
Client Public - These are
the people benefiting
from the work of the
charity
Why is
there so
much red
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In reseller markets individuals or organisations buy goods
which they sell or rent at a profit.

This market is very similar to industrial markets but buyers
look for products and brands that they think will appeal to
their own customers. A good example of this is the
supermarkets that have specialised buying functions.

Buyers will take into account a number of factors including:

Purchase price

Availability of the product and quantities available

Expected resale price and profit

The likely appeal to customers

Proposed marketing and advertising support

The reputation of the company selling the product


Companies who sell to resellers need to take all of this into account and make sure that
their products are attractive to them and to the ultimate consumers.

Re-Seller
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1.
a. Define the term not-for-profit organisation.
b. Explain what is meant by the term the extended marketing mix in relation to
a charity or a not-for-profit organisation of your choice.



2. Briefly describe the four main components of organsational markets



3. In organisational markets value can be added through service. Explain what this
involves in both pre sales and post sales service using an organisation or product of
your choice.




End of Section Test Questions
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Many businesses do not deal in physical products but provide a service. In other cases
physical products often have a service element. In this section we will examine the
characteristics of service products and how they are marketed.


There are some basic characteristics of service products that differentiate them from other
products. It is important for marketers to be aware of these characteristics

Intangibility
Unlike physical products there is nothing of substance. This means that there is nothing to
touch feel or smell. This can make service products difficult to market.

Ownership
When a person buys a physical product thy own it and it becomes the
permanent property of the buyer. Most service products do not work like
this. Often the service is provided for a period of time for a particular
event.
One way in which marketers have tried to overcome this is to provide
tangible items alongside the service which customers can keep. These items are usually
symbolic and examples may include brochures, programmes, pens, key rings, etc.

Inseparability
When a product is sold it can be taken away from the producr. This is
not normally the case with services as they cannot usually be
separated from service providers. Take the example of hairdressing.
You visit your hairdresser (or the hairdresser vists you) and you ask for
a haircut. There is likely to be a discussion about the style you require
and the hairdresssr provides the serveice you require. The hairdresser
is inseperable from this process and has to be present to cut your hair.
Services
Nature & Characteristics of Service Products
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Perishability
This is not to be confused with the perishable nature of some physical
products but is to do with the fact that most services are time bound.
Transport is a good example of this. If you make a journey by air the
service you are provided with only lasts for the duration of the flight and
cannot be stored for later use.

Variability
Every time a service is provided to a customer it is unique and can never
be repeated exactly. This is a problem for service providers who are
trying to provide consistency in the standard of output. Some variability
in the quality of the service is inevitable and this can create problems in
managing the operation.


We have seen that it is very difficult to make each service experience identical. For example
you may be a regular visitor to a restaurant and it is inevitable that the service quality will
differ slightly every time you visit.
This means that service providers have systems and procedures to make sure that their
service is as consistent as possible. This is partly about having the right culture with an
emphasis on three things.









Heterogenity The 7PS
Consistency of
quality control
Effective staff
selection,
training and
motivation
Consistency
of customer
service
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This is also an important issue from a marketing point of view. The standard 4Ps approach
used in the marketing of products is not thought to be sufficient when a service is involved
and is extended to 7 Ps. This is sometimes known as the extended marketing mix and
comprises of the following.

Product
Price
Place
Promotion

People
Process
Physical Evidence

We have already looked at the 4Ps in an early section so we will concentrate on the
remaining 3Ps here.


People








People are essential to
providing a service to
customers
Appropriate recruitment
and training is essential
Customers judge a
service on the employees
they interact with
Good service provides a
form of competitive
advantage
Must have Interpersonal
skills, aptitude and
knowledge
The attitudes of
employees must be right
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Process
It is of little use having excellent people working for you if your systems and procedures stop
them from providing the service your customers deserve.





Physical Evidence
It is not usually possible to experience a service beofe it is delivered. This means that it can
be difficult for customers because they are buying something intangible.The risk involved in
this can be reduced by helping customers to see what they are buying.






Do customers have to
wait?
Are customers kept
informed and do they
know how to use your
service?
Is it easy for your
customers to contact
you?
What happens when the
service goes wrong?
How are payments and
refunds dealt with?
Is it easy for your
employees to provide the
service to customers?
Case studies and
testimonials help to show
good service
Clean tidy and
professional looking
premises can help
Brochures, catalogues
and other documents
Is it feasible to provide a
free trial so customers
can experience the
service before buying it?
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Weve already mentioned that one of the difficulties with marketing services is that there is
no tangible product. There are three potential strategies that may be used to deal with this.




Service quality is a measure of how well a delivered service matches the customers
expectations.
4
This means that quality is defined by customers and it is the standards that
they set that service providers must meet.

It does seem that customer expectations are rising continually. This means that firms are
constantly looking for ways to improve their service.


Two main ways in which
service providers benefit by
improving their service.


4
Lewsis and Booms 1983
Provide a physical representation or illustration of the
product
An example is that insurance companies provide
documents setting out the cover being bought
Provide
something
tangible
The aim is to show potential buyers why the service
would be of benefit to them
Focus on the
benefits of the
service
The aim is to increase customers perception of the
service and value provided
This is done through promoting its own values which
often include service, quality and value for money
Differentiate
on service and
reputation
Strategies
Service Quality
Higher sales
revenue
Improved
productiviy and
reduced costs
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Service Quality Model









Grnroos' (19784) Service Quality Model
This model suggests that customers compare the service they expect to get with the service
they think they are actually getting. Their expectations are influenced by the marketing
activities of the firm but also by other sources of information as the model shows.
The model also suggests that there are two main components of service quality and both
have to meet the expectations of customers.

















Perceived Service Quality Expected Service Perceived Service
Market
Communications
Image
Word of Mouth
Customer Needs
Customer Learning
Image
Technical Quality Functional Quality
Technical Quality Functional Quality
This is what the customer is
left with in when the process
is complete

In our earlier example of the
hairdresser it is the hair cut


In the example of a school it is
the level of attainment by its
students

In theory this is easy to
measure
This is how the customer
receives the service

What is the quality of the
interactions between the
customer and the provider of
the service?


This is usually more difficult to
measure objectively than
technical quality
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Ten Determinants of Service Quality
1. Tangibles (physical evidence) 2. Reliability
3. Responsiveness 4. Communication
5. Credibility 6. Security
7. Competence 8. Courtesy
9. Underestanding customer needs 10. Access (e.g. minimising queues)

Methods for Improving Quality Service
There are a number of methods that a company can use to help them improve the quality of
their service.







Develope a mission
statement that focuses on
customers.
Conduct regular customer
stasification research
including customer surveys
and panels, mystery
shopping, analysis of
complaints, etc
Set standards of customer
service and monito results
against those standards
Establish and maintain an
effective system for
customer complaints and
feedback
Encourage employees to
participate with ideas,
suggestions, innovations
and involvement in projects
Reward excellent service
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Although this chapter concentrates on services it is worth
remembering that the purchase of physical products also has a
service element. For example, you may go to your local bakery to
buy a loaf of bread (the product). The bread may be of perfect
quality but the service you receive may determine whether you
are a satisfied customer. If you had to queue for a long time and
then found the shop assistant to be unfriendly and unhelpful you
are unlikely to be satisfied.

Even with pure service products the 4Ps are still important and many of the principles
involved in marketing physical products still apply. This is even more important when there
is a mix of a physical product and a service when it will be worth considering whether the
marketing mix should extend to the 7Ps in much the same way as with a pure service
product.














Elements of Physical Product Marketing
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1. In services marketing, what is Physical Evidence, People and Process? Explain with
examples.


2. When should a company use the 7 Ps of the Marketing Mix and why is it so
important? Explain, using a company of your choice as an example.



3. How does Services Marketing differ from Physical Goods Marketing? Explain, using
examples where possible.













End of Section Test Questions
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In this final section we will take a brief look at the make-up of international markets and the
implications from a marketing point of view.


In the second half of the 20
th
century the volume of world trade increased substantially. A
number of factors have played a part in this including improvements in transportation and
communications. The world market place has changed significantly in this time and some of
the key changes are shown in this diagram.

A company operating in the global market cannot take it for granted. There are many
factors that can affect it. We only need to think about the recent financial crises to realise
how flimsy these markets can be. To remain strong businesses need to have effective
marketing strategies that provide customers with good products and services that they need
and want.
Globalisation
of business
Increased
deregulation
of business
More
scrutiny of
business by
the public
and
government
Changes in
customer
values and
behaviours
Mergers,
Acquisitions
and strategic
alliances
Advances in
science and
technology
International Markets
Globalisation
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Products and services that are successful in one country do not necessarily succeed in other
countries. There are a number of possible reasons for this.







One of the issues with trying to enter foreign markets is that businesses have to balance two
conflicting ideas.










Two Conflicting Ideas


Standardisation Versus Adaption
Target marketing and
segmentation - identify
customer needs and adapt
products to the foreign market
to maximise targeted segments
Standardise Products - It is not
possible to have separate
prodcuts for every possible
market segment and it is more
profitable to have standardised
products for the larger market
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Five Possible Approaches to Adaption


The Case for Standardisation


Involves minimal change to the product or how it is promoted
Straight Extension
The product is adpated for the local market (e.g. electrical goods adapted to conform with
local voltage)
Product Adaptation
The product is not changed but is marketed to fulfil different needs
Communications Adaptation
This is a combination of product and communications adaptation
Dual Adaptation
This is most commonly found in less sophisticated markets for products that are cheap and
simple
Product Invention
Economies of scale -
makes more cost effective
use of research and
development, production
and marketing
Technological
Complexity -
Adapting technical
products can be hard
to do, expensive and
difficult to sustain
Consumer Mobilty -
Many consumers
travel across borders
and like to find
familiar brands
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The European Union has the aim of economic union.
The benefit of this is that trade within the EU is freer
and easier for businesses operating within its
borders. However, businesses based outside of its
borders will find I more difficult to compete on equal
terms because of tariff barriers introduced to
protect members of the EU.
It is worth noting that the EU is not just a single
market but that it has its own elected parliament
and also has its own civil service and courts. It is also supported by its own constitution.
At the time of writing (September 2011) the EU is in the middle of a debt crisis revolving
around Greece and its ability to pay off its loans. Potentially other EU members may be in a
similar situation and it is not yet clear how the situation will be resolved. However, this crisis
is not only affecting the EU but is also a dominant factor across global financial markets.

The Single European Market
The aim is to allow free movement of labour goods and sevices between the member states
of the EU.







The EU
Physical barriers on
goods and services
Technical standards
harmonised (e.g.
safety & quality)
Governments cannot
discriminate between
EU companies when
awarding contracts
Telecommunications
subject to greater
competition
Providers of financial
services able to
operate in any EU
country
Transport services
rationalised
Free movement of
capital within the EU
Professional
qualifications
recognised in one
member state
recognised in all
Consumer protection
measures co-
ordinated across the
EU
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Although there has been a lot of progress with harmonization across the EU there are still
many areas where little or no progress has been made. Examples include: company taxation
; VAT rates; differences in prosperity; differences in workforce skills, social differences,
differences in infrastructure.

Considerations for Businesses


How has the EU market changed and what does this means for our business?


Should we change from being a firm that operates in one country to being a
European business operating in the European market?


Will we need to change our scale of operations if we become a European firm?

Will greater competition make us vulnerable in our existing markets?


Do we need to change our management structure to exploit new opportunites
and to counter new threats?


Do we need to get invovled in mergers and takeovers to strengthen our market
position?


Within our business, who will be reponsible for making key decisions about how
to exploit opportunities arising form the Single European Market?




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There is no point in entering foreign markets unless those markets are attractive to your
business. There are three main factors that come into play here.





Operating in foreign markets has many potential benefits but there are also a number of
risks to consider. Any business planning to operate abroad needs to be aware of these risks
and be sure that the benefits outweigh the risks it faces.

Potential Benefits
Businesses exist to make profits and the over riding reason for entering into foreign markets
is the potential for larger profits. This comes about because of a number of benefits
involved in trade internationally.
Market Attracitveness -
What is the size of the
potential market? Is it
growing or shrinking? What
challenges are involved in
exploiting the market?
Competition - Who are
your competitors?Can
you gain a competitive
advantage? Do you
understand local
culture and languages
well enough to be able
to compete?
Risks - For example, is
the market policitally
stable? Is there a risk of
government
intervention?
Benefits and Risks
Market Attractiveness
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Potential Risks

Weve only covered a few of the potential risks and benefits of operating in foreign markets.
It would be wise for you to give this some thought and to note any others you can think of.
Economic Risks
- Fluctuations in exchange rates
- Diffiiculties enforcing payment by
buyers unwilling or unable to pay
Political Risks
- Import/Export licenses may not be
renewed
- Risk of action by foreign government
(e.g. import ban)
- Political instability in some countries
Commercial Risks
- Your products and services may not sell
well in a foreign market
- Adaptations may undermine any
potential economies of scale
Other Risks
- Legal protection for breach of contract
may be low
- Natural risks such as flooding and
earthquake
- The business environment may be more
difficult to predict.
Risks Associated with
International Markets
Increases the
potential to grow the
business
Increased volumes of
trade improve
economies of scale
May need to compete
globally to remain
competitive in
domestic markets
Government help and
support may be
available to
encourage exports
Operating costs may
be lower abroad than
at home
Profit margins may be
higher abroad
There may be more
opportunities in
foreign markets than
in home markets
Selling abroad may
help to level seasonal
fluctuations in trade
It may be possible to
sell excess production
abroad
The prestige of the
business may be
improved by trading
globally
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The marketing strategy for international marketing starts in the same way as it does for
domestic markets. This is by clarifying objectives. However, it is important to ensure that
there is no conflict between corporate objectives and exploiting opportunities in foreign
markets. If a conflict does exist then it will be necessary to modify those objectives and/or
the plans for the foreign market.

It is important that the marketing mix aligns with the objectives and plans that the business
sets in exactly the same way as with domestic markets. However there are additional
strategic decisions to make.



We have already covered this in the chapters dealing with the marketing mix and we
recommend reviewing these again with international markets in mind.
For example, when considering how to distribute products abroad would it be wise to sell
direct when entering the market for the first time? Would it be better to use intermediaries
with local knowledge and contacts? Would franchising be the best approach for your firm?

Product
Will the approach be product adaption
for the local market or will standard
products be offered?
Place
What volumes of the product will be
distributed and how will this be done?
Price
What are the local conditions and what
prices can realistically be charged for the
product?
Promotion
What is the local communication
infrastructure? How do communications
need to be adapted to comply with local
culture and to avoid language problems?
Examples of decisions
to make
International Marketing Mix Strategies
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1. What are the Marketing Planning steps a marketing manager should take when
considering the expansion to a new foreign market?

2. What are the main differences between exporting and franchising as a method of
entry to a new market in International Marketing Management? Explain with
examples.
End of Section Test Questions