Market Definition

In marketing, the term market refers to the group of consumers or organizations

that is interested in the product, has the resources to purchase the product, and
is permitted by law and other regulations to acquire the product. The market
definition begins with the total population and progrssively narrows as shown in
the following diagram.

Market Definition
Conceptual Diagram

Beginning with the total population, various terms are used to describe the
market based on the level of narrowing:

• Total population
• Potential market - those in the total population who have interest in
acquiring the product.
• Available market - those in the potential market who have enough money
to buy the product.
• Qualified available market - those in the available market who legally are
permitted to buy the product.
 • Target market - the segment of the qualified available market that the firm
has decided to serve (the served market).
• Penetrated market - those in the target market who have purchased the
product.

In the above listing, "product" refers to both physical products and services.

The size of the market is not necessarily fixed. For example, the size of the
available market for a product can be increased by decreasing the product's
price, and the size of the qualified available market can be increased through
changes in legislation that result in fewer restrictions on who can buy the product.

Defining the market is the first step in analyzing it. Since the market is likely to be
composed of consumers whose needs differ, market segmentation is useful in
order to better understand those needs and to select the groups within the
market that the firm will serve.

Ansoff Matrix

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix

that focused on the firm's present and potential products and markets
(customers). By considering ways to grow via existing products and new
products, and in existing markets and new markets, there are four possible
product-market combinations. Ansoff's matrix is shown below:

Ansoff Matrix

Existing Products New Products

Existing Product Development

Markets Market Penetration

New
Markets Market Development Diversification

Ansoff's matrix provides four different growth strategies:

• Market Penetration - the firm seeks to achieve growth with existing

products in their current market segments, aiming to increase its market
share.
 • Market Development - the firm seeks growth by targeting its existing
products to new market segments.
• Product Development - the firms develops new products targeted to its
existing market segments.
• Diversification - the firm grows by diversifying into new businesses by
developing new products for new markets.

Selecting a Product-Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of the
firm's existing resources and capabilities. In a growing market, simply maintaining
market share will result in growth, and there may exist opportunities to increase
market share if competitors reach capacity limits. However, market penetration
has limits, and once the market approaches saturation another strategy must be
pursued if the firm is to continue to grow.

Market development options include the pursuit of additional market segments

or geographical regions. The development of new markets for the product may
be a good strategy if the firm's core competencies are related more to the
specific product than to its experience with a specific market segment. Because
the firm is expanding into a new market, a market development strategy typically
has more risk than a market penetration strategy.

A product development strategy may be appropriate if the firm's strengths are

related to its specific customers rather than to the specific product itself. In this
situation, it can leverage its strengths by developing a new product targeted to its
existing customers. Similar to the case of new market development, new product
development carries more risk than simply attempting to increase market share.

Diversification is the most risky of the four growth strategies since it requires
both product and market development and may be outside the core
competencies of the firm. In fact, this quadrant of the matrix has been referred to
by some as the "suicide cell". However, diversification may be a reasonable
choice if the high risk is compensated by the chance of a high rate of return.
Other advantages of diversification include the potential to gain a foothold in an
attractive industry and the reduction of overall business portfolio risk.

The BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce

Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four
categories based on combinations of market growth and market share relative to
the largest competitor, hence the name "growth-share". Market growth serves as
a proxy for industry attractiveness, and relative market share serves as a proxy
for competitive advantage. The growth-share matrix thus maps the business unit
positions within these two important determinants of profitability.

BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in
an increase in the generation of cash. This assumption often is true because of
the experience curve; increased relative market share implies that the firm is
moving forward on the experience curve relative to its competitors, thus
developing a cost advantage. A second assumption is that a growing market
requires investment in assets to increase capacity and therefore results in the
consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units
could be obtained from the firm's other business units that were at a more mature
stage and generating significant cash. By investing to become the market share
leader in a rapidly growing market, the business unit could move along the
experience curve and develop a cost advantage. From this reasoning, the BCG
Growth-Share Matrix was born.

The four categories are:

• Dogs - Dogs have low market share and a low growth rate and thus
neither generate nor consume a large amount of cash. However, dogs are
cash traps because of the money tied up in a business that has little
potential. Such businesses are candidates for divestiture.
• Question marks - Question marks are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do
not generate much cash. The result is a large net cash comsumption. A
 question mark (also known as a "problem child") has the potential to gain
market share and become a star, and eventually a cash cow when the
market growth slows. If the question mark does not succeed in becoming
the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks
must be analyzed carefully in order to determine whether they are worth
the investment required to grow market share.
• Stars - Stars generate large amounts of cash because of their strong
relative market share, but also consume large amounts of cash because
of their high growth rate; therefore the cash in each direction
approximately nets out. If a star can maintain its large market share, it will
become a cash cow when the market growth rate declines. The portfolio of
a diversified company always should have stars that will become the next
cash cows and ensure future cash generation.
• Cash cows - As leaders in a mature market, cash cows exhibit a return on
assets that is greater than the market growth rate, and thus generate more
cash than they consume. Such business units should be "milked",
extracting the profits and investing as little cash as possible. Cash cows
provide the cash required to turn question marks into market leaders, to
cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to
shareholders. Because the cash cow generates a relatively stable cash
flow, its value can be determined with reasonable accuracy by calculating
the present value of its cash stream using a discounted cash flow
analysis.

Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined
soley by whether it had become the market leader during the period of high
growth.

While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for
resource allocation among products within a single business unit. Its simplicity is
its strength - the relative positions of the firm's entire business portfolio can be
displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from
popularity as more comprehensive models have been developed. Some of its
weaknesses are:

• Market growth rate is only one factor in industry attractiveness, and

relative market share is only one factor in competitive advantage. The
 growth-share matrix overlooks many other factors in these two important
determinants of profitability.
• The framework assumes that each business unit is independent of the
others. In some cases, a business unit that is a "dog" may be helping
other business units gain a competitive advantage.
• The matrix depends heavily upon the breadth of the definition of the
market. A business unit may dominate its small niche, but have very low
market share in the overall industry. In such a case, the definition of the
market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple
tool for viewing a corporation's business portfolio at a glance, and may serve as a
starting point for discussing resource allocation among strategic business units.

Here is the ' Seven Steps to Brand-Led Marketing ' that we promised you...

Step 1: Become truly 'Marketing Minded'

When many people think of marketing they think of meeting customers needs.
Understanding and responding to changing customer needs is essential, but
there is another dimension. Brand-led marketing ensures that you meet customer
needs in a way that is different from your competitors . If you can't find this point
of difference you're in danger of becoming a price-based commodity.

Ask yourself:
Do my customers really see me as different from my closest competitors?
How/Why?
What can I do to make my business more distinctive and appealing to help
secure them as long-term and profitable customers?

Step 2: Monitor the Changing Environment

We live in a rapidly changing world of many threats and opportunities. Few
business managers take adequate time out to stop, look around, and reflect on
how these changes might have an impact. As a result, most companies die
young.

Ask yourself, at least once a quarter :

What are the changing consumer trends, competitor activity, legislation,
economic trends or technology developments that might have an impact on my
business?

Step 3: Have a Meaningful Vision for your Business and your Brand
A business Vision (or Mission ) has a number or roles: most important of which
are to inspire and guide. Too many business Visions include words like 'leader',
'best', 'preeminent', 'most successful'. Words like this can mean many different
things to different people. Because of that they are of limited help in inspiring or
guiding the behaviour of the business team. Brand Visions have just the same
function. Make sure that you have a written Vision for your brand that is strong
enough to inspire and guide behavior.

Ask yourself :
Do I have a brand Vision that everyone understands and has bought into?
How might I improve my brand Vision, so it is a stronger inspiration and guide?

Step 4: Build Your Brand 'From the Inside Out '

Building a brand is not just about advertising or 'marketing communications'. Nor
is it just about your 'product' or 'service'. Your brand is really what your
customers think of you, and how much trust they have in you. To build a strong
brand you have to have a clear idea of how you want to be thought of, and then
consider everything that you say and do.

In everything that you say and do, ask yourself :

Will this get me closer to where I want to be in the mind of my customers?

Step 5: Plan for Success

There is a phrase: " If you don't know where you want to go, any road will get you
there ". This is true in life, and it is true in business. If you want to succeed you
have to have clear, measurable objectives - you have to know where you want to
get to!

Ask yourself :
Do I have a brand plan with clear, measurable objectives? (And am I measuring
the things that are really important!).

Step 6: Become a 'Learning Business'

Continuously improving your brand-led effectiveness is essential to long-term
success. The best way to achieve this is to ensure that you take a little time to
become a 'Learning Business' by building learning into your processes.

For every marketing initiative you undertake, ask yourself :

How can I build learning into this, so that I can find out what works and what
doesn't, and do it better next time?

Step 7: Be Prepared to Change

What worked in the past may not work in the future. If you can achieve steps 1 -
6 that's great, but you have to go one step further. You have to be prepared to
change. Don't just do the same things better, look around for new ways of
pursuing your vision and your desired brand. Explore, experiment and anticipate.
 Generic Strategies - Michael Porter (1980)

Generic strategies were used initially in the early 1980s, and seem to be even
more popular today. They outline the three main strategic options open to
organization that wish to achieve a sustainable competitive advantage. Each of
the three options are considered within the context of two aspects of the
competitive environment:

Sources of competitive advantage - are the products differentiated in any way, or

are they the lowest cost producer in an industry? Competitive scope of the
market - does the company target a wide market, or does it focus on a very
narrow, niche market?

The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus.

1. Cost Leadership

The low cost leader in any market gains competitive advantage from being able
to many to produce at the lowest cost. Factories are built and maintained, labor is
recruited and trained to deliver the lowest possible costs of production. 'cost
advantage' is the focus. Costs are shaved off every element of the value chain.
Products tend to be 'no frills.' However, low cost does not always lead to low
price. Producers could price at competitive parity, exploiting the benefits of a
bigger margin than competitors. Some organization, such as Toyota, are very
good not only at producing high quality autos at a low price, but have the brand
and marketing skills to use a premium pricing policy.

2. Differentiation

Differentiated goods and services satisfy the needs of customers through a

sustainable competitive advantage. This allows companies to desensitize prices
and focus on value that generates a comparatively higher price and a better
margin. The benefits of differentiation require producers to segment markets in
order to target goods and services at specific segments, generating a higher than
average price. For example, British Airways differentiates its service. The
differentiating organization will incur additional costs in creating their competitive
advantage. These costs must be offset by the increase in revenue generated by
sales. Costs must be recovered. There is also the chance that any differentiation
could be copied by competitors. Therefore there is always an incentive to
innovated and continuously improve.

3. Focus or Niche strategy

The focus strategy is also known as a 'niche' strategy. Where an organization

can afford neither a wide scope cost leadership nor a wide scope differentiation
strategy, a niche strategy could be more suitable. Here an organization focuses
effort and resources on a narrow, defined segment of a market. Competitive
advantage is generated specifically for the niche. A niche strategy is often used
by smaller firms. A company could use either a cost focus or a differentiation
focus. With a cost focus a firm aims at being the lowest cost producer in that
niche or segment. With a differentiation focus a firm creates competitive
advantage through differentiation within the niche or segment. There are
potentially problems with the niche approach. Small, specialist niches could
disappear in the long term. Cost focus is unachievable with an industry
depending upon economies of scale e.g. telecommunications.

The danger of being 'stuck in the middle.'

Make sure that you select one generic strategy. It is argued that if you select one
or more approaches, and then fail to achieve them, that your organization gets
stuck in the middle without a competitive advantage.

Market Segmentation

Market segmentation is the identification of portions of the market that are

different from one another. Segmentation allows the firm to better satisfy the
needs of its potential customers.

The Need for Market Segmentation

The marketing concept calls for understanding customers and satisfying their
needs better than the competition. But different customers have different needs,
and it rarely is possible to satisfy all customers by treating them alike.

Mass marketing refers to treatment of the market as a homogenous group and

offering the same marketing mix to all customers. Mass marketing allows
economies of scale to be realized through mass production, mass distribution,
and mass communication. The drawback of mass marketing is that customer
needs and preferences differ and the same offering is unlikely to be viewed as
optimal by all customers. If firms ignored the differing customer needs, another
firm likely would enter the market with a product that serves a specific group, and
the incumbant firms would lose those customers.

Target marketing on the other hand recognizes the diversity of customers and
does not try to please all of them with the same offering. The first step in target
marketing is to identify different market segments and their needs.

Requirements of Market Segments

In addition to having different needs, for segments to be practical they should be

evaluated against the following criteria:

• Identifiable: the differentiating attributes of the segments must be

measurable so that they can be identified.
• Accessible: the segments must be reachable through communication and
distribution channels.
• Substantial: the segments should be sufficiently large to justify the
resources required to target them.
• Unique needs: to justify separate offerings, the segments must respond
differently to the different marketing mixes.
• Durable: the segments should be relatively stable to minimize the cost of
frequent changes.

A good market segmentation will result in segment members that are internally
homogenous and externally heterogeneous; that is, as similar as possible within
the segment, and as different as possible between segments.

Bases for Segmentation in Consumer Markets

Consumer markets can be segmented on the following customer characteristics.

• Geographic
• Demographic
• Psychographic
• Behavioralistic

Geographic Segmentation

The following are some examples of geographic variables often used in

segmentation.

• Region: by continent, country, state, or even neighborhood

• Size of metropolitan area: segmented according to size of population
 • Population density: often classified as urban, suburban, or rural
• Climate: according to weather patterns common to certain geographic
regions

Demographic Segmentation

Some demographic segmentation variables include:

• Age
• Gender
• Family size
• Family lifecycle
• Generation: baby-boomers, Generation X, etc.
• Income
• Occupation
• Education
• Ethnicity
• Nationality
• Religion
• Social class

Many of these variables have standard categories for their values. For example,
family lifecycle often is expressed as bachelor, married with no children (DINKS:
Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Some of
these categories have several stages, for example, full-nest I, II, or III depending
on the age of the children.

Psychographic Segmentation

Psychographic segmentation groups customers according to their lifestyle.

Activities, interests, and opinions (AIO) surveys are one tool for measuring
lifestyle. Some psychographic variables include:

• Activities
• Interests
• Opinions
• Attitudes
• Values

Behavioralistic Segmentation

Behavioral segmentation is based on actual customer behavior toward products.

Some behavioralistic variables include:

• Benefits sought
• Usage rate
 • Brand loyalty
• User status: potential, first-time, regular, etc.
• Readiness to buy
• Occasions: holidays and events that stimulate purchases

Behavioral segmentation has the advantage of using variables that are closely
related to the product itself. It is a fairly direct starting point for market
segmentation.

Bases for Segmentation in Industrial Markets

In contrast to consumers, industrial customers tend to be fewer in number and

purchase larger quantities. They evaluate offerings in more detail, and the
decision process usually involves more than one person. These characteristics
apply to organizations such as manufacturers and service providers, as well as
resellers, governments, and institutions.

Many of the consumer market segmentation variables can be applied to industrial

markets. Industrial markets might be segmented on characteristics such as:

• Location
• Company type
• Behavioral characteristics

Location

In industrial markets, customer location may be important in some cases.

Shipping costs may be a purchase factor for vendor selection for products having
a high bulk to value ratio, so distance from the vendor may be critical. In some
industries firms tend to cluster together geographically and therefore may have
similar needs within a region.

Company Type

Business customers can be classified according to type as follows:

• Company size
• Industry
• Decision making unit
• Purchase Criteria

Behavioral Characteristics

In industrial markets, patterns of purchase behavior can be a basis for

segmentation. Such behavioral characteristics may include:
 • Usage rate
• Buying status: potential, first-time, regular, etc.
• Purchase procedure: sealed bids, negotiations, etc.

The Marketing Concept

The marketing concept is the philosophy that firms should analyze the needs of
their customers and then make decisions to satisfy those needs, better than the
competition. Today most firms have adopted the marketing concept, but this has
not always been the case.

In 1776 in The Wealth of Nations, Adam Smith wrote that the needs of producers
should be considered only with regard to meeting the needs of consumers. While
this philosophy is consistent with the marketing concept, it would not be adopted
widely until nearly 200 years later.

To better understand the marketing concept, it is worthwhile to put it in

perspective by reviewing other philosophies that once were predominant. While
these alternative concepts prevailed during different historical time frames, they
are not restricted to those periods and are still practiced by some firms today.

The Production Concept

The production concept prevailed from the time of the industrial revolution until
the early 1920's. The production concept was the idea that a firm should focus on
those products that it could produce most efficiently and that the creation of a
supply of low-cost products would in and of itself create the demand for the
products. The key questions that a firm would ask before producing a product
were:

• Can we produce the product?

• Can we produce enough of it?

At the time, the production concept worked fairly well because the goods that
were produced were largely those of basic necessity and there was a relatively
high level of unfulfilled demand. Virtually everything that could be produced was
sold easily by a sales team whose job it was simply to execute transactions at a
price determined by the cost of production. The production concept prevailed into
the late 1920's.

The Sales Concept

By the early 1930's however, mass production had become commonplace,

competition had increased, and there was little unfulfilled demand. Around this
time, firms began to practice the sales concept (or selling concept), under which
companies not only would produce the products, but also would try to convince
customers to buy them through advertising and personal selling. Before
producing a product, the key questions were:

• Can we sell the product?

• Can we charge enough for it?

The sales concept paid little attention to whether the product actually was
needed; the goal simply was to beat the competition to the sale with little regard
to customer satisfaction. Marketing was a function that was performed after the
product was developed and produced, and many people came to associate
marketing with hard selling. Even today, many people use the word "marketing"
when they really mean sales.

The Marketing Concept

After World War II, the variety of products increased and hard selling no longer
could be relied upon to generate sales. With increased discretionary income,
customers could afford to be selective and buy only those products that precisely
met their changing needs, and these needs were not immediately obvious. The
key questions became:

• What do customers want?

• Can we develop it while they still want it?
• How can we keep our customers satisfied?

In response to these discerning customers, firms began to adopt the marketing

concept, which involves:

• Focusing on customer needs before developing the product

• Aligning all functions of the company to focus on those needs
• Realizing a profit by successfully satisfying customer needs over the long-
term

When firms first began to adopt the marketing concept, they typically set up
separate marketing departments whose objective it was to satisfy customer
needs. Often these departments were sales departments with expanded
responsibilities. While this expanded sales department structure can be found in
some companies today, many firms have structured themselves into marketing
organizations having a company-wide customer focus. Since the entire
organization exists to satisfy customer needs, nobody can neglect a customer
issue by declaring it a "marketing problem" - everybody must be concerned with
customer satisfaction.
The marketing concept relies upon marketing research to define market
segments, their size, and their needs. To satisfy those needs, the marketing
team makes decisions about the controllable parameters of the marketing mix.

The Marketing Mix (The 4 P's of Marketing)

Marketing decisions generally fall into the following four controllable categories:

• Product
• Price
• Place (distribution)
• Promotion

The term "marketing mix" became popularized after Neil H. Borden published his
1964 article, The Concept of the Marketing Mix. Borden began using the term in
his teaching in the late 1940's after James Culliton had described the marketing
manager as a "mixer of ingredients". The ingredients in Borden's marketing mix
included product planning, pricing, branding, distribution channels, personal
selling, advertising, promotions, packaging, display, servicing, physical handling,
and fact finding and analysis. E. Jerome McCarthy later grouped these
ingredients into the four categories that today are known as the 4 P's of
marketing, depicted below:

The Marketing Mix

These four P's are the parameters that the marketing manager can control,
subject to the internal and external constraints of the marketing environment. The
goal is to make decisions that center the four P's on the customers in the target
market in order to create perceived value and generate a positive response.

Product Decisions

The term "product" refers to tangible, physical products as well as services. Here
are some examples of the product decisions to be made:

• Brand name
• Functionality
• Styling
• Quality
• Safety
• Packaging
• Repairs and Support
• Warranty
• Accessories and services

Price Decisions

Some examples of pricing decisions to be made include:

• Pricing strategy (skim, penetration, etc.)

• Suggested retail price
• Volume discounts and wholesale pricing
• Cash and early payment discounts
• Seasonal pricing
• Bundling
• Price flexibility
• Price discrimination

Distribution (Place) Decisions

Distribution is about getting the products to the customer. Some examples of

distribution decisions include:

• Distribution channels
• Market coverage (inclusive, selective, or exclusive distribution)
• Specific channel members
• Inventory management
• Warehousing
• Distribution centers
• Order processing
• Transportation
 • Reverse logistics

Promotion Decisions

In the context of the marketing mix, promotion represents the various aspects of
marketing communication, that is, the communication of information about the
product with the goal of generating a positive customer response. Marketing
communication decisions include:

• Promotional strategy (push, pull, etc.)

• Advertising
• Personal selling & sales force
• Sales promotions
• Public relations & publicity
• Marketing communications budget

Limitations of the Marketing Mix Framework

The marketing mix framework was particularly useful in the early days of the
marketing concept when physical products represented a larger portion of the
economy. Today, with marketing more integrated into organizations and with a
wider variety of products and markets, some authors have attempted to extend
its usefulness by proposing a fifth P, such as packaging, people, process, etc.
Today however, the marketing mix most commonly remains based on the 4 P's.
Despite its limitations and perhaps because of its simplicity, the use of this
framework remains strong and many marketing textbooks have been organized
around it.

Target Market Selection

Target marketing tailors a marketing mix for one or more segments identified by
market segmentation. Target marketing contrasts with mass marketing, which
offers a single product to the entire market.

Two important factors to consider when selecting a target market segment are
the attractiveness of the segment and the fit between the segment and the firm's
objectives, resources, and capabilities.

Attractiveness of a Market Segment

The following are some examples of aspects that should be considered when
evaluating the attractiveness of a market segment:

• Size of the segment (number of customers and/or number of units)

 • Growth rate of the segment
• Competition in the segment
• Brand loyalty of existing customers in the segment
• Attainable market share given promotional budget and competitors'
expenditures
• Required market share to break even
• Sales potential for the firm in the segment
• Expected profit margins in the segment

Market research and analysis is instrumental in obtaining this information. For

example, buyer intentions, salesforce estimates, test marketing, and statistical
demand analysis are useful for determining sales potential. The impact of
applicable micro-environmental and macro-environmental variables on the
market segment should be considered.

Note that larger segments are not necessarily the most profitable to target since
they likely will have more competition. It may be more profitable to serve one or
more smaller segments that have little competition. On the other hand, if the firm
can develop a competitive advantage, for example, via patent protection, it may
find it profitable to pursue a larger market segment.

Suitability of Market Segments to the Firm

Market segments also should be evaluated according to how they fit the firm's
objectives, resources, and capabilities. Some aspects of fit include:

• Whether the firm can offer superior value to the customers in the segment
• The impact of serving the segment on the firm's image
• Access to distribution channels required to serve the segment
• The firm's resources vs. capital investment required to serve the segment

The better the firm's fit to a market segment, and the more attractive the market
segment, the greater the profit potential to the firm.

Target Market Strategies

There are several different target-market strategies that may be followed.

Targeting strategies usually can be categorized as one of the following:

• Single-segment strategy - also known as a concentrated strategy. One

market segment (not the entire market) is served with one marketing mix.
A single-segment approach often is the strategy of choice for smaller
companies with limited resources.
• Selective specialization- this is a multiple-segment strategy, also known
as a differentiated strategy. Different marketing mixes are offered to
 different segments. The product itself may or may not be different - in
many cases only the promotional message or distribution channels vary.
• Product specialization- the firm specializes in a particular product and
tailors it to different market segments.
• Market specialization- the firm specializes in serving a particular market
segment and offers that segment an array of different products.
• Full market coverage - the firm attempts to serve the entire market. This
coverage can be achieved by means of either a mass market strategy in
which a single undifferentiated marketing mix is offered to the entire
market, or by a differentiated strategy in which a separate marketing mix is
offered to each segment.

The following diagrams show examples of the five market selection patterns
given three market segments S1, S2, and S3, and three products P1, P2, and P3.

Single Selective Product Market Full Market

Segment Specialization Specialization Specialization Coverage

S1 S2 S3 S1 S2 S3 S1 S2 S3 S1 S2 S3 S1 S2 S3
P1 P1 P1 P1 P1
P2 P2 P2 P2 P2
P3 P3 P3 P3 P3

A firm that is seeking to enter a market and grow should first target the most
attractive segment that matches its capabilities. Once it gains a foothold, it can
expand by pursuing a product specialization strategy, tailoring the product for
different segments, or by pursuing a market specialization strategy and offering
new products to its existing market segment.

Another strategy whose use is increasing is individual marketing, in which the

marketing mix is tailored on an individual consumer basis. While in the past
impractical, individual marketing is becoming more viable thanks to advances in
technology.

The Product Life Cycle

A product's life cycle (PLC) can be divided into several stages characterized by
the revenue generated by the product. If a curve is drawn showing product
revenue over time, it may take one of many different shapes, an example of
which is shown below:
 Product Life Cycle Curve

The life cycle concept may apply to a brand or to a category of product. Its
duration may be as short as a few months for a fad item or a century or more for
product categories such as the gasoline-powered automobile.

Product development is the incubation stage of the product life cycle. There are
no sales and the firm prepares to introduce the product. As the product
progresses through its life cycle, changes in the marketing mix usually are
required in order to adjust to the evolving challenges and opportunities.

Introduction Stage

When the product is introduced, sales will be low until customers become aware
of the product and its benefits. Some firms may announce their product before it
is introduced, but such announcements also alert competitors and remove the
element of surprise. Advertising costs typically are high during this stage in order
to rapidly increase customer awareness of the product and to target the early
adopters. During the introductory stage the firm is likely to incur additional costs
associated with the initial distribution of the product. These higher costs coupled
with a low sales volume usually make the introduction stage a period of negative
profits.

During the introduction stage, the primary goal is to establish a market and build
primary demand for the product class. The following are some of the marketing
mix implications of the introduction stage:

• Product - one or few products, relatively undifferentiated

• Price - Generally high, assuming a skim pricing strategy for a high profit
margin as the early adopters buy the product and the firm seeks to recoup
 development costs quickly. In some cases a penetration pricing strategy is
used and introductory prices are set low to gain market share rapidly.
• Distribution - Distribution is selective and scattered as the firm
commences implementation of the distribution plan.
• Promotion - Promotion is aimed at building brand awareness. Samples or
trial incentives may be directed toward early adopters. The introductory
promotion also is intended to convince potential resellers to carry the
product.

Growth Stage

The growth stage is a period of rapid revenue growth. Sales increase as more
customers become aware of the product and its benefits and additional market
segments are targeted. Once the product has been proven a success and
customers begin asking for it, sales will increase further as more retailers
become interested in carrying it. The marketing team may expand the distribution
at this point. When competitors enter the market, often during the later part of the
growth stage, there may be price competition and/or increased promotional costs
in order to convince consumers that the firm's product is better than that of the
competition.

During the growth stage, the goal is to gain consumer preference and increase
sales. The marketing mix may be modified as follows:

• Product - New product features and packaging options; improvement of

product quality.
• Price - Maintained at a high level if demand is high, or reduced to capture
additional customers.
• Distribution - Distribution becomes more intensive. Trade discounts are
minimal if resellers show a strong interest in the product.
• Promotion - Increased advertising to build brand preference.

Maturity Stage

The maturity stage is the most profitable. While sales continue to increase into
this stage, they do so at a slower pace. Because brand awareness is strong,
advertising expenditures will be reduced. Competition may result in decreased
market share and/or prices. The competing products may be very similar at this
point, increasing the difficulty of differentiating the product. The firm places effort
into encouraging competitors' customers to switch, increasing usage per
customer, and converting non-users into customers. Sales promotions may be
offered to encourage retailers to give the product more shelf space over
competing products.

During the maturity stage, the primary goal is to maintain market share and
extend the product life cycle. Marketing mix decisions may include:
 • Product - Modifications are made and features are added in order to
differentiate the product from competing products that may have been
introduced.
• Price - Possible price reductions in response to competition while avoiding
a price war.
• Distribution - New distribution channels and incentives to resellers in order
to avoid losing shelf space.
• Promotion - Emphasis on differentiation and building of brand loyalty.
Incentives to get competitors' customers to switch.

Decline Stage

Eventually sales begin to decline as the market becomes saturated, the product
becomes technologically obsolete, or customer tastes change. If the product has
developed brand loyalty, the profitability may be maintained longer. Unit costs
may increase with the declining production volumes and eventually no more
profit can be made.

During the decline phase, the firm generally has three options:

• Maintain the product in hopes that competitors will exit. Reduce costs and
find new uses for the product.
• Harvest it, reducing marketing support and coasting along until no more
profit can be made.
• Discontinue the product when no more profit can be made or there is a
successor product.

The marketing mix may be modified as follows:

• Product - The number of products in the product line may be reduced.

Rejuvenate surviving products to make them look new again.
• Price - Prices may be lowered to liquidate inventory of discontinued
products. Prices may be maintained for continued products serving a
niche market.
• Distribution - Distribution becomes more selective. Channels that no
longer are profitable are phased out.
• Promotion - Expenditures are lower and aimed at reinforcing the brand
image for continued products.

Limitations of the Product Life Cycle Concept

The term "life cycle" implies a well-defined life cycle as observed in living
organisms, but products do not have such a predictable life and the specific life
cycle curves followed by different products vary substantially. Consequently, the
life cycle concept is not well-suited for the forecasting of product sales.
Furthermore, critics have argued that the product life cycle may become self-
fulfilling. For example, if sales peak and then decline, managers may conclude
that the product is in the decline phase and therefore cut the advertising budget,
thus precipitating a further decline.

Nonetheless, the product life cycle concept helps marketing managers to plan
alternate marketing strategies to address the challenges that their products are
likely to face. It also is useful for monitoring sales results over time and
comparing them to those of products having a similar life cycle.

Positioning

In their 1981 book, Positioning: The Battle for your Mind, Al Ries and Jack Trout
describe how positioning is used as a communication tool to reach target
customers in a crowded marketplace. Jack Trout published an article on
positioning in 1969, and regular use of the term dates back to 1972 when Ries
and Trout published a series of articles in Advertising Age called "The Positioning
Era." Not long thereafter, Madison Avenue advertising executives began to
develop positioning slogans for their clients and positioning became a key aspect
of marketing communications.

Positioning: The Battle for your Mind has become a classic in the field of
marketing. The following is a summary of the key points made by Ries and Trout
in their book.

Information Overload

Ries and Trout explain that while positioning begins with a product, the concept
really is about positioning that product in the mind of the customer. This
approach is needed because consumers are bombarded with a continuous
stream of advertising, with advertisers spending several hundred dollars annually
per consumer in the U.S. The consumer's mind reacts to this high volume of
advertising by accepting only what is consistent with prior knowledge or
experience.

It is quite difficult to change a consumer's impression once it is formed.

Consumers cope with information overload by oversimplifying and are likely to
shut out anything inconsistent with their knowledge and experience. In an over-
communicated environment, the advertiser should present a simplified message
and make that message consistent with what the consumer already believes by
focusing on the perceptions of the consumer rather than on the reality of the
product.

Getting Into the Mind of the Consumer

The easiest way of getting into someone's mind is to be first. It is very easy to
remember who is first, and much more difficult to remember who is second. Even
if the second entrant offers a better product, the first mover has a large
advantage that can make up for other shortcomings.

However, all is not lost for products that are not the first. By being the first to
claim a unique position in the mind the consumer, a firm effectively can cut
through the noise level of other products. For example, Miller Lite was not the
first light beer, but it was the first to be positioned as a light beer, complete with a
name to support that position. Similarly, Lowenbrau was the most popular
German beer sold in America, but Beck's Beer successfully carved a unique
position using the advertising,

"You've tasted the German beer that's the most popular in America. Now taste
the German beer that's the most popular in Germany."

Consumers rank brands in their minds. If a brand is not number one, then to be
successful it somehow must relate itself to the number one brand. A campaign
that pretends that the market leader does not exist is likely to fail. Avis tried
unsuccessfully for years to win customers, pretending that the number one Hertz
did not exist. Finally, it began using the line,

"Avis in only No. 2 in rent-a-cars, so why go with us? We try harder."

After launching the campaign, Avis quickly became profitable. Whether Avis
actually tried harder was not particularly relevant to their success. Rather,
consumers finally were able to relate Avis to Hertz, which was number one in
their minds.

Another example is that of the soft-drink 7-Up, which was No. 3 behind Coke and
Pepsi. By relating itself to Coke and Pepsi as the "Uncola", 7-Up was able to
establish itself in the mind of the consumer as a desirable alternative to the
standard colas.

When there is a clear market leader in the mind of the consumer, it can be nearly
impossible to displace the leader, especially in the short-term. On the other hand,
a firm usually can find a way to position itself in relation to the market leader so
that it can increase its market share. It usually is a mistake, however, to
challenge the leader head-on and try to displace it.

Positioning of a Leader

Historically, the top three brands in a product category occupy market share in a
ratio of 4:2:1. That is, the number one brand has twice the market share of
number two, which has twice the market share of number three. Ries and Trout
argue that the success of a brand is not due to the high level of marketing
acumen of the company itself, but rather, it is due to the fact that the company
was first in the product category. They use the case of Xerox to make this point.
Xerox was the first plain-paper copier and was able to sustain its leadership
position. However, time after time the company failed in other product categories
in which it was not first.

Similarly, IBM failed when it tried to compete with Xerox in the copier market, and
Coca-Cola failed in its effort to use Mr. Pibb to take on Dr. Pepper. These
examples support the point that the success of a brand usually is due to its being
first in the market rather than the marketing abilities of the company. The power
of the company comes from the power of its brand, not the other way around.

With this point in mind, there are certain things that a market leader should do to
maintain the leadership position. First, Ries and Trout emphasize what it should
not do, and that is boast about being number one. If a firm does so, then
customers will think that the firm is insecure in its position if it must reinforce it by
saying so.

If a firm was the first to introduce a product, then the advertising campaign
should reinforce this fact. Coca-Cola's "the real thing" does just that, and implies
that other colas are just imitations.

Another strategy that a leader can follow to maintain its position is the multibrand
strategy. This strategy is to introduce multiple brands rather than changing
existing ones that hold leadership positions. It often is easier and cheaper to
introduce a new brand rather than change the positioning of an existing brand.
Ries and Trout call this strategy a single-position strategy because each brand
occupies a single, unchanging position in the mind of the consumer.

Finally, change is inevitable and a leader must be willing to embrace change

rather than resist it. When new technology opens the possibility of a new market
that may threaten the existing one, a successful firm should consider entering the
new market so that it will have the first-mover advantage in it. For example, in the
past century the New York Central Railroad lost its leadership as air travel
became possible. The company might have been able to maintain its leadership
position had it used its resources to form an airline division.

Sometimes it is necessary to adopt a broader name in order to adapt to change.

For example, Haloid changed its name to Haloid Xerox and later to simply Xerox.
This is a typical pattern of changing Name 1 to an expanded Name 1 - Name 2,
and later to just Name 2.

Positioning of a Follower
Second-place companies often are late because they have chosen to spend
valuable time improving their product before launching it. According to Ries and
Trout, it is better to be first and establish leadership.

If a product is not going to be first, it then must find an unoccupied position in

which it can be first. At a time when larger cars were popular, Volkswagen
introduced the Beetle with the slogan "Think small." Volkswagen was not the first
small car, but they were the first to claim that position in the mind of the
consumer.

Other positions that firms successfully have claimed include:

• age (Geritol)
• high price (Mobil 1 synthetic engine lubricant)
• gender (Virginia Slims)
• time of day (Nyquil night-time cold remedy)
• place of distribution (L'eggs in supermarkets)
• quantity (Schaefer - "the one beer to have when you're having more than
one.")

It most likely is a mistake to build a brand by trying to appeal to everyone. There

are too many brands that already have claimed a position and have become
entrenched leaders in their positions. A product that seeks to be everything to
everyone will end up being nothing to everyone.

Repositioning the Competition

Sometimes there are no unique positions to carve out. In such cases, Ries and
Trout suggest repositioning a competitor by convincing consumers to view the
competitor in a different way. Tylenol successfully repositioned aspirin by running
advertisements explaining the negative side effects of aspirin.

Consumers tend to perceive the origin of a product by its name rather than
reading the label to find out where it really is made. Such was the case with
vodka when most vodka brands sold in the U.S. were made in the U.S. but had
Russian names. Stolichnaya Russian vodka successfully repositioned its
Russian-sounding competitors by exposing the fact that they all actually were
made in the U.S., and that Stolichnaya was made in Leningrad, Russia.

When Pringle's new-fangled potato chips were introduced, they quickly gained
market share. However, Wise potato chips successfully repositioned Pringle's in
the mind of consumers by listing some of Pringle's non-natural ingredients that
sounded like harsh chemicals, even though they were not. Wise potato chips of
course, contained only "Potatoes. Vegetable oil. Salt." As a resulting of this
advertising, Pringle's quickly lost market share, with consumers complaining that
Pringle's tasted like cardboard, most likely as a consequence of their thinking
about all those unnatural ingredients. Ries and Trout argue that is usually is a
lost cause to try to bring a brand back into favor once it has gained a bad image,
and that in such situations it is better to introduce an entirely new brand.

Repositioning a competitor is different from comparative advertising.

Comparative advertising seeks to convince the consumer that one brand is
simply better than another. Consumers are not likely to be receptive to such a
tactic.

The Power of a Name

A brand's name is perhaps the most important factor affecting perceptions of it. In
the past, before there was a wide range of brands available, a company could
name a product just about anything. These days, however, it is necessary to
have a memorable name that conjures up images that help to position the
product.

Ries and Trout favor descriptive names rather than coined ones like Kodak or
Xerox. Names like DieHard for a battery, Head & Shoulders for a shampoo,
Close-Up for a toothpaste, People for a gossip magazine. While it is more difficult
to protect a generic name under trademark law, Ries and Trout believe that in the
long run it is worth the effort and risk. In their opinion, coined names may be
appropriate for new products in which a company is first to market with a sought-
after product, in which case the name is not so important.

Margarine is a name that does not very well position the product it is describing.
The problem is that it sounds artificial and hides the true origin of the product.
Ries and Trout propose that "soy butter" would have been a much better name
for positioning the product as an alternative to the more common type of butter
that is made from milk. While some people might see soy in a negative light, a
promotional campaign could be developed to emphasize a sort of "pride of origin"
for soy butter.

Another everyday is example is that of corn syrup, which is viewed by consumers

as an inferior alternative to sugar. To improve the perceptions of corn syrup, one
supplier began calling it "corn sugar", positioning it as an alternative to cane
sugar or beet sugar.

Ries and Trout propose that selecting the right name is important for positioning
just about anything, not just products. For example, the Clean Air Act has a name
that is difficult to oppose, as do "fair trade" laws. Even a person's name impacts
his or her success in life. One study showed that on average, schoolteachers
grade essays written by children with names like David and Michael a full letter
grade higher than those written by children with names like Hubert and Elmer.
Eastern Airlines was an example of a company limited by its name. Air travel
passengers always viewed it as a regional airline that served the eastern U.S.,
even though it served a much wider area, including the west coast. Airlines such
as American and United did not have such a perception problem. (Eastern
Airlines ceased operations in 1991.)

Another problem that some companies face is confusion with another company
that has a similar name. Consumers frequently confused the tire manufacturer
B.F. Goodrich with Goodyear. The Goodyear blimp had made Goodyear tires
well-known, and Goodyear frequently received credit by consumers for tire
products that B.F. Goodrich has pioneered. (B.F. Goodrich eventually sold its tire
business to Uniroyal.)

Other companies have changed their names to something more general, and as
a result create confusion with other similar-sounding companies. Take for
instance The Continental Group, Inc. and The Continental Corporation. Few
people confidently can say which makes cans and which sells insurance.

The No-Name Trap

People tend use abbreviations when they have fewer syllables than the original
term. GE is often used instead of General Electric. IBM instead of International
Business Machines. In order to make their company names more general and
easier to say, many corporations have changed their legal names to a series of
two or three letters. Ries and Trout argue that such changes usually are unwise.

Companies having a broad recognition may be able to use the abbreviated

names and consumers will make the translation in their minds. When they hear
"GM", they think "General Motors". However, lesser known companies tend to
lose their identity when they use such abbreviations. Most people don't know the
types of business in which companies named USM or AMP are engaged.

The same applies to people's names as well. While some famous people are
known by their initials (such as FDR and JFK), it is only after they become
famous that they begin using their initials. Ries and Trout advise managers who
aspire for name recognition to use an actual name rather then first and middle
initials. The reason that initials do not lead to recognition is that the human mind
works by sounds, not by spellings.

Most companies began selling a single product, and the name of the company
usually reflected that product. As the successful firms grew in to conglomerates,
their original names became limiting. Ries and Trout advise companies seeking
more general names to select a shorter name made of words, not individual
letters. For example, for Trans World Airlines, they favored truncating it simply to
Trans World instead removing all words and using the letters TWA.
The Free-Ride Trap

A company introducing a new product often is tempted to use the brand name of
an existing product, avoiding the need to build the brand from scratch. For
example, Alka-Seltzer named a new product Alka-Seltzer Plus. Ries and Trout
do not favor this strategy since the original name already in positioned in the
consumer's mind. In fact, consumers viewed Alka-Seltzer Plus simply as a better
Alka-Seltzer, and the sales of Alka-Seltzer Plus came at the expense of Alka-
Seltzer, not from the market share of the competition.

Some firms have built a wide range of products on a single brand name. Others,
such as Procter & Gamble have selected new names for each new product,
carefully positioning the product in a different part of the consumer's mind. Ries
and Trout maintain that a single brand name cannot hold multiple positions;
either the new product will not be successful or the original product bearing the
name will lose its leadership position.

Nonetheless, some companies do not want their new products to be anonymous

with an unrecognized name. However, Ries and Trout propose that anonymity is
not so bad; in fact, it is a resource. When the product eventually catches the
attention of the media, it will have the advantage of being seen without any
previous bias, and if a firm prepares for this event well, once under the spotlight
the carefully designed positioning can be communicated exactly as intended.
This moment of fame is a one-shot event and once it has passed, the product will
not have a second chance to be fresh and new.

The Line Extension Trap

Line extensions are tempting for companies as a way to leverage an existing

popular brand. However, if the brand name has become near generic so that
consumers consider the name and the product to be one and the same, Ries and
Trout generally do not believe that a line extension is a good idea.

Consider the case of Life Savers candy. To consumers, the brand name is
synonymous with the hard round candy that has a hole in the middle.
Nonetheless, the company introduced a Life Savers chewing gum. This use of
the Life Savers name was not consistent with the consumer's view of it, and the
Life Savers chewing gum brand failed. The company later introduced the first
brand of soft bubble gum and gave it a new name: Bubble Yum. This product
was very successful because it not only had a name different from the hard
candy, it also had the the advantage of being the first soft bubble gum.

Ries and Trout cite many examples of failures due to line extensions. The
consistent pattern in these cases is that either the new product does not
succeed, or the original successful product loses market share as a result of its
position being weakened by a diluted brand name.
When Line Extensions Can Work

Despite the disadvantages of line extensions, there are some cases in which it is
not economically feasible to create a new brand and in which a line extension
might work. Some of the cases provided by Ries and Trout include:

• Low volume product - if the sales volume is not expected to be high.

• Crowded market - if there is no unique position that the product can
occupy.
• Small ad budget - without strong advertising support, it might make sense
to use the house name.
• Commodity product - an undifferentiated commodity product has less
need of its own name than does a breakthrough product.
• Distribution by sales reps - products distributed through reps may not
need a separate brand name. Those sold on store shelves benefit more
from their own name.

Positioning Has Broad Applications

The concept of positioning applies to products in the broadest sense. Services,

tourist destinations, countries, and even careers can benefit from a well-
developed positioning strategy that focuses on a niche that is unoccupied in the
mind of the consumer or decision-maker.

Brand Equity

A brand is a name or symbol used to identify the source of a product. When

developing a new product, branding is an important decision. The brand can add
significant value when it is well recognized and has positive associations in the
mind of the consumer. This concept is referred to as brand equity.

What is Brand Equity?

Brand equity is an intangible asset that depends on associations made by the

consumer. There are at least three perspectives from which to view brand equity:

• Financial - One way to measure brand equity is to determine the price

premium that a brand commands over a generic product. For example, if
consumers are willing to pay $100 more for a branded television over the
same unbranded television, this premium provides important information
about the value of the brand. However, expenses such as promotional
costs must be taken into account when using this method to measure
brand equity.
 • Brand extensions - A successful brand can be used as a platform to
launch related products. The benefits of brand extensions are the
leveraging of existing brand awareness thus reducing advertising
expenditures, and a lower risk from the perspective of the consumer.
Furthermore, appropriate brand extensions can enhance the core brand.
However, the value of brand extensions is more difficult to quantify than
are direct financial measures of brand equity.
• Consumer-based - A strong brand increases the consumer's attitude
strength toward the product associated with the brand. Attitude strength is
built by experience with a product. This importance of actual experience
by the customer implies that trial samples are more effective than
advertising in the early stages of building a strong brand. The consumer's
awareness and associations lead to perceived quality, inferred attributes,
and eventually, brand loyalty.

Strong brand equity provides the following benefits:

• Facilitates a more predictable income stream.

• Increases cash flow by increasing market share, reducing promotional
costs, and allowing premium pricing.
• Brand equity is an asset that can be sold or leased.

However, brand equity is not always positive in value. Some brands acquire a
bad reputation that results in negative brand equity. Negative brand equity can
be measured by surveys in which consumers indicate that a discount is needed
to purchase the brand over a generic product.

Building and Managing Brand Equity

In his 1989 paper, Managing Brand Equity, Peter H. Farquhar outlined the
following three stages that are required in order to build a strong brand:

1. Introduction - introduce a quality product with the strategy of using the

brand as a platform from which to launch future products. A positive
evaluation by the consumer is important.
2. Elaboration - make the brand easy to remember and develop repeat
usage. There should be accessible brand attitude, that is, the consumer
should easily remember his or her positive evaluation of the brand.
3. Fortification - the brand should carry a consistent image over time to
reinforce its place in the consumer's mind and develop a special
relationship with the consumer. Brand extensions can further fortify the
brand, but only with related products having a perceived fit in the mind of
the consumer.

Alternative Means to Brand Equity

Building brand equity requires a significant effort, and some companies use
alternative means of achieving the benefits of a strong brand. For example,
brand equity can be borrowed by extending the brand name to a line of products
in the same product category or even to other categories. In some cases,
especially when there is a perceptual connection between the products, such
extensions are successful. In other cases, the extensions are unsuccessful and
can dilute the original brand equity.

Brand equity also can be "bought" by licensing the use of a strong brand for a
new product. As in line extensions by the same company, the success of brand
licensing is not guaranteed and must be analyzed carefully for appropriateness.

Managing Multiple Brands

Different companies have opted for different brand strategies for multiple
products. These strategies are:

• Single brand identity - a separate brand for each product. For example,
in laundry detergents Procter & Gamble offers uniquely positioned brands
such as Tide, Cheer, Bold, etc.
• Umbrella - all products under the same brand. For example, Sony offers
many different product categories under its brand.
• Multi-brand categories - Different brands for different product categories.
Campbell Soup Company uses Campbell's for soups, Pepperidge Farm
for baked goods, and V8 for juices.
• Family of names - Different brands having a common name stem. Nestle
uses Nescafe, Nesquik, and Nestea for beverages.

Brand equity is an important factor in multi-product branding strategies.

Protecting Brand Equity

The marketing mix should focus on building and protecting brand equity. For
example, if the brand is positioned as a premium product, the product quality
should be consistent with what consumers expect of the brand, low sale prices
should not be used compete, the distribution channels should be consistent with
what is expected of a premium brand, and the promotional campaign should
build consistent associations.

Finally, potentially dilutive extensions that are inconsistent with the consumer's
perception of the brand should be avoided. Extensions also should be avoided if
the core brand is not yet sufficiently strong.
Pricing Strategy

One of the four major elements of the marketing mix is price. Pricing is an
important strategic issue because it is related to product positioning.
Furthermore, pricing affects other marketing mix elements such as product
features, channel decisions, and promotion.

While there is no single recipe to determine pricing, the following is a general

sequence of steps that might be followed for developing the pricing of a new
product:

1. Develop marketing strategy - perform marketing analysis, segmentation,

targeting, and positioning.
2. Make marketing mix decisions - define the product, distribution, and
promotional tactics.
3. Estimate the demand curve - understand how quantity demanded varies
with price.
4. Calculate cost - include fixed and variable costs associated with the
product.
5. Understand environmental factors - evaluate likely competitor actions,
understand legal constraints, etc.
6. Set pricing objectives - for example, profit maximization, revenue
maximization, or price stabilization (status quo).
7. Determine pricing - using information collected in the above steps, select
a pricing method, develop the pricing structure, and define discounts.

These steps are interrelated and are not necessarily performed in the above
order. Nonetheless, the above list serves to present a starting framework.

Marketing Strategy and the Marketing Mix

Before the product is developed, the marketing strategy is formulated, including

target market selection and product positioning. There usually is a tradeoff
between product quality and price, so price is an important variable in
positioning.

Because of inherent tradeoffs between marketing mix elements, pricing will

depend on other product, distribution, and promotion decisions.

Estimate the Demand Curve

Because there is a relationship between price and quantity demanded, it is

important to understand the impact of pricing on sales by estimating the demand
curve for the product.
For existing products, experiments can be performed at prices above and below
the current price in order to determine the price elasticity of demand. Inelastic
demand indicates that price increases might be feasible.

Calculate Costs

If the firm has decided to launch the product, there likely is at least a basic
understanding of the costs involved, otherwise, there might be no profit to be
made. The unit cost of the product sets the lower limit of what the firm might
charge, and determines the profit margin at higher prices.

The total unit cost of a producing a product is composed of the variable cost of
producing each additional unit and fixed costs that are incurred regardless of the
quantity produced. The pricing policy should consider both types of costs.

Environmental Factors

Pricing must take into account the competitive and legal environment in which
the company operates. From a competitive standpoint, the firm must consider the
implications of its pricing on the pricing decisions of competitors. For example,
setting the price too low may risk a price war that may not be in the best interest
of either side. Setting the price too high may attract a large number of
competitors who want to share in the profits.

From a legal standpoint, a firm is not free to price its products at any level it
chooses. For example, there may be price controls that prohibit pricing a product
too high. Pricing it too low may be considered predatory pricing or "dumping" in
the case of international trade. Offering a different price for different consumers
may violate laws against price discrimination. Finally, collusion with competitors
to fix prices at an agreed level is illegal in many countries.

Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal
pricing. Common objectives include the following:

• Current profit maximization - seeks to maximize current profit, taking

into account revenue and costs. Current profit maximization may not be
the best objective if it results in lower long-term profits.
• Current revenue maximization - seeks to maximize current revenue with
no regard to profit margins. The underlying objective often is to maximize
long-term profits by increasing market share and lowering costs.
• Maximize quantity - seeks to maximize the number of units sold or the
number of customers served in order to decrease long-term costs as
predicted by the experience curve.
 • Maximize profit margin - attempts to maximize the unit profit margin,
recognizing that quantities will be low.
• Quality leadership - use price to signal high quality in an attempt to
position the product as the quality leader.
• Partial cost recovery - an organization that has other revenue sources
may seek only partial cost recovery.
• Survival - in situations such as market decline and overcapacity, the goal
may be to select a price that will cover costs and permit the firm to remain
in the market. In this case, survival may take a priority over profits, so this
objective is considered temporary.
• Status quo - the firm may seek price stabilization in order to avoid price
wars and maintain a moderate but stable level of profit.

For new products, the pricing objective often is either to maximize profit margin
or to maximize quantity (market share). To meet these objectives, skim pricing
and penetration pricing strategies often are employed. Joel Dean discussed
these pricing policies in his classic HBR article entitled, Pricing Policies for New
Products.

Skim pricing attempts to "skim the cream" off the top of the market by setting a
high price and selling to those customers who are less price sensitive. Skimming
is a strategy used to pursue the objective of profit margin maximization.

Skimming is most appropriate when:

• Demand is expected to be relatively inelastic; that is, the customers are

not highly price sensitive.
• Large cost savings are not expected at high volumes, or it is difficult to
predict the cost savings that would be achieved at high volume.
• The company does not have the resources to finance the large capital
expenditures necessary for high volume production with initially low profit
margins.

Penetration pricing pursues the objective of quantity maximization by means of

a low price. It is most appropriate when:

• Demand is expected to be highly elastic; that is, customers are price

sensitive and the quantity demanded will increase significantly as price
declines.
• Large decreases in cost are expected as cumulative volume increases.
• The product is of the nature of something that can gain mass appeal fairly
quickly.
• There is a threat of impending competition.

As the product lifecycle progresses, there likely will be changes in the demand
curve and costs. As such, the pricing policy should be reevaluated over time.
The pricing objective depends on many factors including production cost,
existence of economies of scale, barriers to entry, product differentiation, rate of
product diffusion, the firm's resources, and the product's anticipated price
elasticity of demand.

Types of Pricing Strategies

An organisation can adopt a number of pricing strategies. The pricing strategies

are based much on what objectives the company has set itself to achieve.

Penetration pricing: Here the organisation sets a low price to increase sales
and market share. Once market share has been captured the firm may well then
increase their price.

Skimming pricing: The organisation sets an initial high price and then slowly
lowers the price to make the product available to a wider market. The objective is
to skim profits of the market layer by layer.

Competition pricing: Setting a price in comparison with competitors. Really a

firm has three options and these are to price lower, price the same or price
higher.

Product Line Pricing: Pricing different products within the same product range
at different price points. An example would be a DVD manufacturer offering
different DVD recorders with different features at different prices eg A HD and
non HD version.. The greater the features and the benefit obtained the greater
the consumer will pay. This form of price discrimination assists the company in
maximising turnover and profits.

Bundle Pricing: The organisation bundles a group of products at a reduced

price. Common methods are buy one and get one free promotions or BOGOF's
as they are now known. Within the UK some firms are now moving into the
realms of buy one get two free can we call this BOGTF i wonder?

Psychological pricing: The seller here will consider the psychology of price and
the positioning of price within the market place. The seller will therefore charge
99p instead £1 or $199 instead of $200. The reason why this methods work, is
because buyers will still say they purchased their product under £200 pounds or
dollars, even thought it was a pound or dollar away. My favourite pricing strategy.

Premium pricing: The price set is high to reflect the exclusiveness of the
product. An example of products using this strategy would be Harrods, first class
airline services, Porsche etc.
Optional pricing: The organisation sells optional extras along with the product to
maximise its turnover. This strategy is used commonly within the car industry as i
found out when purchasing my car.

Cost Based Pricing: The firms takes into account the cost of production and
distribution, they then decide on a mark up which they would like for profit to
come to their final pricing decision.

Cost Plus Pricing: Here the firm add a percentage to costs as profit margin to
come to their final pricing decisions. For example it may cost £100 to produce a
widget and the firm add 20% as a profit margin so the selling price would be
£120.00

Pricing Methods

To set the specific price level that achieves their pricing objectives, managers
may make use of several pricing methods. These methods include:

• Cost-plus pricing - set the price at the production cost plus a certain
profit margin.
• Target return pricing - set the price to achieve a target return-on-
investment.
• Value-based pricing - base the price on the effective value to the
customer relative to alternative products.
• Psychological pricing - base the price on factors such as signals of
product quality, popular price points, and what the consumer perceives to
be fair.

In addition to setting the price level, managers have the opportunity to design
innovative pricing models that better meet the needs of both the firm and its
customers. For example, software traditionally was purchased as a product in
which customers made a one-time payment and then owned a perpetual license
to the software. Many software suppliers have changed their pricing to a
subscription model in which the customer subscribes for a set period of time,
such as one year. Afterwards, the subscription must be renewed or the software
no longer will function. This model offers stability to both the supplier and the
customer since it reduces the large swings in software investment cycles.

Price Discounts

The normally quoted price to end users is known as the list price. This price
usually is discounted for distribution channel members and some end users.
There are several types of discounts, as outlined below.

• Quantity discount - offered to customers who purchase in large

quantities.
 • Cumulative quantity discount - a discount that increases as the
cumulative quantity increases. Cumulative discounts may be offered to
resellers who purchase large quantities over time but who do not wish to
place large individual orders.
• Seasonal discount - based on the time that the purchase is made and
designed to reduce seasonal variation in sales. For example, the travel
industry offers much lower off-season rates. Such discounts do not have
to be based on time of the year; they also can be based on day of the
week or time of the day, such as pricing offered by long distance and
wireless service providers.
• Cash discount - extended to customers who pay their bill before a
specified date.
• Trade discount - a functional discount offered to channel members for
performing their roles. For example, a trade discount may be offered to a
small retailer who may not purchase in quantity but nonetheless performs
the important retail function.
• Promotional discount - a short-term discounted price offered to stimulate
sales.

3Cs model (Ohmae)

Three key factors to create a successful business strategy. Explanation of

3C's Model of Ohmae

The 3C's model of Kenichi Ohmae, a famous Japanese strategy guru,

stresses that a strategist should focus on three key factors for success. In the
construction of any business strategy, three main players must be taken into
account:

1. The corporation itself.

2. The customer.
3. The competition.

The Strategic triangle

Only by integrating the three C's (Customer, Corporate, and Competitor) in a

strategic triangle, a sustained competitive advantage can exist. Ohmae refers to
these key factors as the three C's or the strategic triangle.

1: Corporate-based strategies

These strategies aim to maximize the corporation's strengths relative to the

competition in the functional areas that are critical to achieve success in the
industry:
 • Selectivity and sequencing. The corporation does not have to lead in
every function to win. If it can gain a decisive edge in one key function, it
will eventually be able to improve its other functions which are now
mediocre.
• A case of make or buy. In case of rapidly rising wage costs, it becomes a
critical decision for a company to subcontract a major share of its
assembly operations. If its competitors are unable to shift production so
rapidly to subcontractors and vendors, the resulting difference in cost
structure and/or in the company's ability to cope with demand fluctuations
may have significant strategic implications.
• Improving cost-effectiveness. This can be done in three basic ways:
1. Reducing basic costs much more effectively than the competition.
2. Simply to exercise greater selectivity in terms of:
 The orders that are accepted.
 The products that are offered.
 The functions that are performed.

This means cherry-picking operations with a high impact, so that

when other operations are eliminated, functional costs will drop
faster than sales revenues.

3. To share a certain key function with the corporation's other

businesses or even with other companies. Experience indicates
that there are many situations in which sharing resources in one or
more basic sub-functions of marketing can be advantageous.

2: Customer-based strategies

Clients are the basis of any strategy according to Ohmae. There is no doubt that
a corporation's foremost concern ought to be the interests of its customers rather
than that of its stockholders and other parties. In the long run, the corporation
that is genuinely interested in its customers will be interesting for its investors.

Segmentation is advisable:

• Segmenting by objectives. Here, the differentiation is done in terms of

the different ways that different customers use the product. Take coffee,
for example. Some people drink it for waking up or staying alert, while
others view coffee as a way to relax or socialize (coffee breaks).
• Segmenting by customer coverage. This type of strategic segmentation
normally emerges from a trade-off study of marketing costs versus market
coverage. There appears always to be a point of diminishing returns in the
cost-versus-coverage relationship. The corporation's task, therefore, is to
optimize its range of market coverage. Be it geographical or channel. So
that its cost of marketing will be advantageous relative to the competition.
 • Segmenting the market once more. In a fiercely competitive market, the
corporation and its head-on competitors are likely to be dissecting the
market in similar ways. Over an extended period of time, therefore the
effectiveness of a given initial strategic segmentation will tend to decline.
In such a situation it is useful to pick a small group of key customers and
reexamine what it is that they are really looking for.

Changes in customer mix:

Such a market segment change occurs where the market forces are altering the
distribution of the user-mix over time by influencing demography, distribution
channels, customer size, etc. This kind of change means that the allocation of
corporate resources must be shifted and/or the absolute level of resources
committed in the business must be changed.

3: Competitor-based strategies

According to Kenichi Ohmae, these strategies can be constructed by looking at

possible sources of differentiation in functions such as: purchasing, design,
engineering, sales and servicing. Ways to do this:

• The power of an image. Both Sony and Honda sell more than their
competitors as they invested more heavily in public relations and
advertising. And they managed these functions more carefully than did
their competitors. When product performance and mode of distribution are
very difficult to differentiate, image may be the only source of positive
differentiation. But the case of the Swiss watch industry shows that a
strategy built on image can be risky and must be monitored constantly.
• Capitalizing on profit- and cost-structure differences. Firstly, the
difference in source of profit might be exploited. For profit from new
product sales, profit from services etcetera. Secondly, a difference in the
ratio of fixed cost and variable cost might also be exploited strategically.
Because a company with a lower fixed cost ratio can lower prices in a
sluggish market. In this way it can win market share. This hurts the
company with a higher fixed cost ratio. The market price is too low to
justify its high fixed cost and low volume operation.
• Tactics for flyweights. If such a company chooses to compete in mass-
media advertising or massive R&D efforts, the additional fixed costs will
absorb a large portion of its revenue. Its giant competitors will inevitably
win. It could however calculate its incentives on a gradual percentage
basis, rather than on absolute volume, thus making the incentives variable
by guaranteeing the dealer a larger percentage of each extra unit sold. Of
course, the big three market players cannot afford to offer such high
percentages across the board to their respective franchised shops; their
profitability would soon be eroded.
Hito-Kane-Mono. A favorite phrase of Japanese business planners is hito-kane-
mono, or people, money, and things (fixed assets). They believe that streamlined
corporate management is achieved when these three critical resources are in
balance without any surplus or waste. For example: cash over and beyond what
competent people can intelligently expend is wasted. Too many managers
without enough money will exhaust their energies and involve their colleagues in
a time-wasting warfare over the allocation of the limited funds. Of the three
critical resources, funds should be allocated last. The corporation should first
allocate management talent, based on the available mono: plant, machinery,
technology, process know-how, and functional strengths. Once these hito have
developed creative and imaginative ideas to capture the business's upward
potential, the kane, or money, should be allocated to the specific ideas and
programs generated by individual managers.

Cosumer Behaviour:

Research suggests that customers go through a five-stage decision-making

process in any purchase. This is summarised in the diagram below:

This model is important for anyone making marketing decisions. It forces the
marketer to consider the whole buying process rather than just the purchase
decision (when it may be too late for a business to influence the choice!)

The model implies that customers pass through all stages in every purchase.
However, in more routine purchases, customers often skip or reverse some of
the stages.

For example, a student buying a favourite hamburger would recognise the need
(hunger) and go right to the purchase decision, skipping information search and
evaluation. However, the model is very useful when it comes to understanding
any purchase that requires some thought and deliberation.
The buying process starts with need recognition. At this stage, the buyer
recognises a problem or need (e.g. I am hungry, we need a new sofa, I have a
headache) or responds to a marketing stimulus (e.g. you pass Starbucks and are
attracted by the aroma of coffee and chocolate muffins).

An “aroused” customer then needs to decide how much information (if any) is
required. If the need is strong and there is a product or service that meets the
need close to hand, then a purchase decision is likely to be made there and then.
If not, then the process of information search begins.

A customer can obtain information from several sources:

• Personal sources: family, friends, neighbours etc

• Commercial sources: advertising; salespeople; retailers; dealers; packaging;
point-of-sale displays
• Public sources: newspapers, radio, television, consumer organisations;
specialist magazines
• Experiential sources: handling, examining, using the product

The usefulness and influence of these sources of information will vary by product
and by customer. Research suggests that customers value and respect personal
sources more than commercial sources (the influence of “word of mouth”). The
challenge for the marketing team is to identify which information sources are
most influential in their target markets.

In the evaluation stage, the customer must choose between the alternative
brands, products and services.

How does the customer use the information obtained?

An important determinant of the extent of evaluation is whether the customer

feels “involved” in the product. By involvement, we mean the degree of perceived
relevance and personal importance that accompanies the choice.

Where a purchase is “highly involving”, the customer is likely to carry out

extensive evaluation.

High-involvement purchases include those involving high expenditure or

personal risk – for example buying a house, a car or making investments.

Low involvement purchases (e.g. buying a soft drink, choosing some breakfast
cereals in the supermarket) have very simple evaluation processes.

Why should a marketer need to understand the customer evaluation

process?
The answer lies in the kind of information that the marketing team needs to
provide customers in different buying situations.

In high-involvement decisions, the marketer needs to provide a good deal of

information about the positive consequences of buying. The sales force may
need to stress the important attributes of the product, the advantages compared
with the competition; and maybe even encourage “trial” or “sampling” of the
product in the hope of securing the sale.

Post-purchase evaluation - Cognitive Dissonance

The final stage is the post-purchase evaluation of the decision. It is common for
customers to experience concerns after making a purchase decision. This arises
from a concept that is known as “cognitive dissonance”. The customer, having
bought a product, may feel that an alternative would have been preferable. In
these circumstances that customer will not repurchase immediately, but is likely
to switch brands next time.

To manage the post-purchase stage, it is the job of the marketing team to

persuade the potential customer that the product will satisfy his or her needs.
Then after having made a purchase, the customer should be encouraged that he
or she has made the right decision.

Loss Leader Pricing Strategies

What it is: Low pricing (often pricing at cost or below cost) on a product or
number of products to bring customers to the storefront (physical or digital).
These customers often buy on price alone.

The pricing strategy assumption is that while the customer is in the store to buy
the very low-priced product, they will look around and will likely buy other
products at regular or higher prices (you can make up the loss on the low pricing
with higher pricing on other items).

For a business-to-business product, you might sell one of your mature or

declining products (in your product life cycle) at a loss leader price and
expect that customers will buy other products or services.

For example, if you are a graphic designer specializing in web site design, you
might offer a below cost price on the website banner design and then expect to
receive a higher price for some of your other services, such as special
interactive form design.
 Why and When to use it: Use this strategy when you have products in the
mature or declining stage of their product life cycle and when you want to
stimulate a renewed interest in that product. This strategy can also be used if
you have high inventory of a product that you want to move quickly.

When NOT to use it: Do not use this strategy if the product will go dramatically
up in price next week or next month - at least don't do this unless you have made
it very clear in all of your promotional efforts that this
is a very special low price (because you have excess inventory, the product has
a short shelf life (e.g. fresh fruits, vegetables, etc.)or will be discontinuing the
product, or it's a seasonal product, etc.).

Do not use this strategy if you are in the introductory or growth stages of your
product's life-cycle. Why: because by selling at a low price you are setting a new
low expectation - customers will expect that that low price is where that product
should be priced and they will not want to buy at a higher price.

Characteristics of loss leaders

• A loss leader may be placed in an inconvenient part of the store, so that

purchasers must walk past other goods which have higher profit margins.
• A loss leader is usually a product that customers purchase frequently—
thus they are aware of its usual price and that a lower price is a bargain.
• Loss leaders are often scarce, to discourage stockpiling. The seller must
use this technique regularly if he expects his customers to come back.
• The retailer will often limit how much a customer can buy.
• Some loss leader items are perishable, and thus can't be stockpiled

Some examples of typical loss leaders include milk, eggs, rice, and other
inexpensive items that grocers wouldn't want to sell without other purchases.

POISE
Profits (desire for)
Offensive (stay) instead of defense
Integrate (with other business functions)
Strategic (be)
Effective (be result oriented)

Selling Vs Marketing:

Many people mistakenly think that selling and marketing are the same - they
aren't. You might already know that the marketing process is broad and includes
all of the following:
 1. Discovering what product, service or idea customers want.
2. Producing a product with the appropriate features and quality.
3. Pricing the product correctly.
4. Promoting the product; spreading the word about why customers should
buy it.
5. Selling and delivering the product into the hands of the customer.

Selling is one activity of the entire marketing process.

Selling is the act of persuading or influencing a customer to buy (actually

exchange something of value for) a product or service.

Marketing activities support sales efforts. Actually, they are usually the most
significant force in stimulating sales. Oftentimes, marketing activities (like the
production of marketing materials and catchy packaging) must occur before a
sale can be made; they sometimes follow the sale as well, to pave the way for
future sales and referrals.

Contrasting the Sales Concept with the Marketing Concept

The concepts surrounding both selling and marketing also differ. There is a need
for both selling and marketing approaches in different situations. One approach is
not always right and the other always wrong - it depends upon the particular
situation.
In a marketing approach, more listening to and eventual accommodation of the
target market occurs. Two-way communication (sometimes between a
salesperson and a customer) is emphasized in marketing so learning can take
place and product offerings can be improved.

A salesperson using the sales concept, on the other hand, sometimes has the
ability to individualize components of a sale, but the emphasis is ordinarily upon
helping the customer determine if they want the product, or a variation on it, that
is already being offered by the company. In the sales approach, not much time is
spent learning what the customer's ideal product would be because the
salesperson has little say in seeing that their company's product is modified.
Furthermore, they aren't rewarded for spending time listening to the customer's
desires unless they have a product to match their desires that will result in a sale.
(Note, however, that sales people aren't restricted to the use of the sales
concept; oftentimes they use the marketing concept instead.)

At the heart of the sales concept is the desire to sell a product that the business
has made as quickly as possible to fulfill sales volume objectives. When viewed
through the marketing concept lens, however, businesses must first and foremost
fulfill consumers' wants and needs. The belief is that when those wants and
needs are fulfilled, a profit will be made.

Do you see the difference? The selling concept, instead of focusing on meeting
consumer demand, tries to make consumer demand match the products it has
produced. Whereas marketing encompasses many research and promotional
activities to discover what products are wanted and to make potential customers
aware of them.

Sandler Insight: Marketing is the role of identifying groups of people or

companies that may be a fit with your product/service before person-to-person
contact is made. Selling is the effort applied to those “possible fits” initiated by
person-to-person contact…

Effective Marketing: Targets many prospects at a time.

Effective Selling: Targets a single company or person.

Effective Marketing: Generates interest in a product/service with one-way

communication (i.e. print, radio, or TV).
Effective Selling: Uses questioning techniques to uncover compelling reasons to
buy in 2-way interactions, allowing the prospect to do most of the talking.

Effective Marketing: Gives something away that is valuable (i.e. coupons, new
concepts, research studies).
Effective Selling: Avoids “unpaid” consulting.

Effective Marketing: Provides generic concepts and solutions to a mass

audience.
Effective Selling: Uncovers the unique benefits that will solve a particular
customer’s problem.

Effective Marketing: Causes the prospect to ask for more information.

Effective Selling: Causes the prospect to make a yes/no decision.

Effective Marketing: Is more effective when repeated many times to a large

prospective audience.
Effective Selling: Attempts to minimize the sales cycle and the number of
follow-ups made with a single prospect.

Sandler Rule: Sell today, educate tomorrow.

There’s nothing wrong with educating customers! The problem arises when
salespeople begin educatingprospects. Marketing is cost-effective because the
advertising medium reaches a large number of people. It becomes prohibitively
 expensive if it only reaches a small number of prospects. Monitor your sales calls
and see if they are turning into marketing to a single prospect.

DIFFERENCES BETWEEN MARKETING & SELLING

Compiled by : Prof.(Dr.) Sameer Sharma, Amity University, NOIDA.

S. S. Sales
No. Marketing No.
1 Marketing starts with the buyer and 1 Selling starts with the seller and is
focuses constantly on buyer’s needs. preoccupied all the time with the seller’s
needs.
2 Seeks to convert “customer needs” into 2 Seeks to convert ‘products’ into “Cash”.
‘products’.
3 Views business as a customer satisfying 3 Views business as a goods producing
process. process.
4 Marketing effort leads to the products that 4 The company makes the product first and
the customers actually want to buy in then figures out how to sell it and make a
their own interest. profit.
5 Marketing communication is looked upon 5 Seller’s motives dominate marketing
as a tool for communicating the benefits/ communication (promotions).
satisfactions provided by the product
6 Consumers determine the price; price 6 Cost determines the price.
determines costs.
7 Marketing views the customer as the very 7 Selling views the customer as the last link
purpose of the business. It sees the in the business.
business from the point of view of the
customer.
Customer consciousness permeates the
entire organization – all departments, all
the people and all the time.
8 ‘Customer satisfaction’ is the primary 8 ‘Sales’ is the primary motive.
motive.
9 External market orientation. 9 Internal company orientation.
10 Marketing concept takes an outside in 10 Selling concept takes an inside-out
perspective perspective.
11 It is a broad composite and worldwide 11 It is a narrow concept related to product,
concept, more so in this era of seller and sales activity.
globalisation.
12 Marketing is more ‘pull’ than ‘push’. 12 Selling involves ‘push’ strategy.
13 Marketing begins much before the 13 Selling comes after production and ends
production of goods and services, i.e. with the delivery of the product and
with identification of customers’ needs. It collection of payment.
continues even after the sale to ensure
customer satisfaction through after sales
services.
14 Marketing has a wider connotation and 14 Selling is a part of marketing.
 includes many activities like marketing
research, product planning &
development, pricing, promotion,
distribution, selling etc.
15 It concerns itself primarily and truly with 15 It over emphasizes “the exchange’ aspect,
the ‘value satisfactions’ that should flow without caring for the ‘value satisfactions’
to the customer from the exchange. inherent in the exchange.
16 It assumes: “Let the seller beware”. 16 It assumes: “Let the buyer beware”.
17 Marketing generally has a matrix type of 17 It has a functional structure.
organizational structure.
18 The main job is to find the right products 18 The main job is to find the customers for
for your customers. your products.
19 The mindset is “What is that we can 19 The mindset is “Hook the customer”.
make here or source from outside to
satisfy the needs of the target
customers”.
20 Conceptual and analytical skills are 20 Selling and conversational skills are
required. required.

THE MARKET ORIENTATION MATRIX

Although Slater and Narver (1994a) found no main effect for customer versus
competitor-focus on market performance, they do recognize that "because businesses
have limited resources to generate market intelligence, trade-offs between customer
and competitor monitoring must necessarily be made" (Slater and Narver 1994, p.47).
Consequently, firms may frequently emphasize one external variable in their
environmental monitoring at the expense of the other, leading to a specific market
orientation profile. By combining these two important external variables, customers
and competitors, a four-cell market orientation matrix emerges as shown in Figure 1.

FIGURE 1 Market Orientation Matrix

Customer Focus
High Low
Competitor High Strategically Marketing
Focus Integrated Warriors

Low Customer Strategically Inept

Preoccupied

Customer Preoccupied
Firms emphasizing customer-focused intelligence gathering activities at the expense of
competitor information may be classified as "customer preoccupied." Because the
marketing concept promotes putting the interests of customers first, many researchers
consider a customer-focus to be the most fundamental aspect of corporate culture
(Deshpande, Farley, and Webster 1993, Lawton and Parasuraman 1980). According to
Slater and Narver (1994a), however, a customer emphasis is most important when the
market is growing and when markets are fragmented and buyer power is low. When
markets are growing, it is important to focus on lead users because they may serve as
reference points for later adopters (Von Hippel 1986). Also, when markets are
fragmented and buyer power is low, customer needs are less well understood, so a
customer emphasis should have a greater impact on performance (Slater and Narver
1994a). In addition, Day and Wensley (1988) suggest that "in dynamic markets with
shifting mobility barriers, many competitors, and highly segmented end-user markets, a
customer-focus is mandatory" (p. 17). As such, the first proposition is suggested.
Proposition 1: Increases in customer-focus lead to increases in market share
performance in growing markets.
Marketing Warriors
Borrowing from the famous warfare analogy proposed by Ries and Trout (1986), firms
with a predominant emphasis on competitors in their external market analyses have
been labeled "marketing warriors." According to Slater and Narver (1994b), a
competitor-focus entails gathering intelligence on three main questions: (1) Who are the
competitors? (2) What technologies do they offer? and (3) Do they represent an
attractive alternative from the perspective of the target customers? Using target rivals
as a frame of reference, competitor-focused firms seek to identify their own strengths
and weaknesses and to keep pace with or stay ahead of the rest of the field (Han, Kim,
and Srivastava 1998). According to Day and Wensley (1988), when market demand is
predictable, the competitive structure is concentrated and stable, and there are few
powerful customers, the emphasis is necessarily on competitors. Moreover, the lesser
the degree of competitive hostility, the greater the positive impact of competitor
emphasis on performance (Slater and Narver 1994a).
Proposition 2: Increases in competitor-focus lead to increases in market share
performance in stable and predictable markets.
Strategically Integrated
Firms characterized as strategically integrated assign equal emphasis to the collection,
dissemination, and use of both customer and competitor intelligence. A focus on both
customers and competitors is important because a complete
Academy of Marketing Science Review Volume 2000 No. 1 Available:
http://www.amsreview.org/articles/heiens01-2000.pdf Copyright © 2000 –
Academy of Marketing Science. Heiens / Market Orientation 3
reliance on either customer-focused or competitor-focused decision making can
often lead to an incomplete business strategy, leaving an organization
handicapped by a reactive posture (Day and Wensley 1988). According to Day
and Wensley (1988, p. 2), focusing primarily on either customers or competitors
could lead to "a partial and biased picture of reality." In examining the impact of
customer versus competitor-focus, Slater and Narver (1994a) found little
empirical support for the effectiveness of different relative emphases within a
market orientation. Consequently, Slater and Narver (1994a) suggest a balance
between the two perspectives is most desirable, and firms should seek to remain
sufficiently flexible to shift resources between customer and competitor emphasis
as market conditions change in the short run. However, due to the high cost of
monitoring both customers and competitors, these firms may sacrifice ROI for
market share.
Proposition 3: Increases in both customer-focus and competitor-focus lead to
increases in market share performance and decreases in ROI.
Strategically Inept
The external analysis is an integral part of strategic planning. According to Kohli
and Jaworski (1990, p. 13), "a market orientation appears to provide a unifying
focus for the efforts and projects of individuals and departments within the
organization." As such, failure to develop an external market orientation may
adversely effect business performance (Deshpande, Farley, and Webster 1993,
Jaworski and Kohli 1993, Ruekert 1992, Slater and Narver 1994a). However, in
some cases, firms may still succeed by concentrating on internal operations,
technological advantages, and the establishment of core competencies. Yet,
firms that fail to orient their strategic decision making to the market environment
without any substantial internal strength may appropriately be labeled as
"strategically inept."
Proposition 4: Shifting resources from external monitoring to internal
operations may lead to increases in ROI in stable and predictable markets.

Businesses can develop new products based on either a marketing

orientated approach or a product orientated approach.

A marketing orientated approach means a business reacts to what customers

want. The decisions taken are based around information about customers’ needs
and wants, rather than what the business thinks is right for the customer. Most
successful businesses take a market-orientated approach.

A product orientated approach means the business develops products based

on what it is good at making or doing, rather than what a customer wants. This
approach is usually criticised because it often leads to unsuccessful products -
particularly in well-established markets.

Most markets are moving towards a more market-orientated

approach because customers have become more knowledgeable and require
more variety and better quality. To compete, businesses need to be more
sensitive to their customers needs otherwise they will lose sales to their rivals.

On the other hand some products are argued to create a need or want in the
customer, especially products with a very high technological content. Mobile
phones have moved from being a business accessory to being a big
consumer brand item, with many additional gadgets, such as pictures, video
and Internet access. Innovations create the need rather than the customer
being able to second-guess how new technology is going to develop.