10-1 Visit UMT online at © 2005 UMT MGT100 Version: 09-13-05 INTRODUCTION TO BUSINESS University of Management and Technology 1901 N. Fort.

10-1Visit UMT online at www.umtweb.edu© 2005 UMT MGT100Version: 09-13-

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INTRODUCTION TO INTRODUCTION TO BUSINESSBUSINESS

University of Management and Technology1901 N. Fort Myer Drive

Arlington, VA 22209 USAPhone: (703) 516-0035

Fax: (703) 516-0985Website: www.umtweb.edu


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PART 3PART 3

UNDERSTANDING PRINCIPLES UNDERSTANDING PRINCIPLES OF MARKETINGOF MARKETING


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Chapter 10:Chapter 10:Understanding Marketing Understanding Marketing Processes and Consumer Processes and Consumer BehaviorBehavior

Griffin, R. W. & Ebert, R. J. Business (7th ed.)

© 2004 Prentice Hall.

10-4Visit UMT online at www.umtweb.edu© 2005 UMTMGT100

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Learning ObjectivesLearning Objectives

Upon successful completion, the student will be able to:Define What Is Marketing?

Describe The Target Marketing and Market Segmentation

Define Marketing Research

Understanding Consumer Behavior

Understand The Organizational Marketing and Buying Behavior

Define International Marketing Mix

Describe Small Business and the Marketing Mix


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What Is Marketing?What Is Marketing?

You have been the target of marketing since you were a child.

You probably have become accustomed to many of the common marketing techniques

Advertisements and testimonials,

Product displays placed in strategic locations,

Discounts and coupons,

Rebates and giveaways, and of course,

New and Improved!

These are sales techniques that represent a small fraction of what marketing is.

Marketing requires considerable effort in research, development, planning and implementation to develop a new product, set its price, get it to consumers, and convince them to buy it.


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What Is Marketing?What Is Marketing?

Marketing, as defined by the American Marketing Association, is planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

However, in laymen’s terms, marketing is quite simply finding a need and filling it.


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Providing Value and SatisfactionProviding Value and Satisfaction

What attracts buyers to one product instead of another? While our desires for the many goods and services available to us may be unbounded, limited financial resources force most of us to be selective.

Accordingly, consumers buy products that offer the best value when it comes to meeting their needs and wants.


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Values, Benefits, and Values, Benefits, and SatisfactionSatisfaction

Value is the relative comparison of a products benefits versus its costs.

The benefits of a high-value product are much greater than its costs.

Benefits include the functions of the product and the emotional satisfactions associated with owning, experiencing or possessing it.

The satisfied buyer perceives the benefits derived from the purchase to be greater than its costs:

BenefitsValue

Costs


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The marketing strategies of leading firms focus on increasing value for customers.

Marketing resources are deployed to add value to products in order to satisfy customer’s needs and wants.

Satisfying customers may mean developing an entirely new product that performs better (provides greater benefits) than existing product.

Or it may entail keeping a store open extra hours during busy season (adding the benefit of greater shopping convenience).

Some firms simply offer price reductions (the benefits of lower prices).


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Utility is the value to the customer that is added by the marketer. In other words, utility is the ability of a product to satisfy a human want or need.

There are four types of utility:Time utility is making the product available when the customer wants it.

Place utility is making the product available where consumers want it.

Ownership utility is the customer value created when someone takes ownership of a product. Marketers create ownership utility by facilitating the transaction.

Form utility refers to the characteristics of the product such as its shape, size, color, function, and style.


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Goods, Services and IdeasGoods, Services and Ideas

The influence of marketing permeates everyday life, applying to goods, services, and ideas.

Marketing applies to tangible and intangible goods and includes:

Consumer Goods—products purchased by consumers for personal use.

Industrial Goods—products purchased by companies to produce other products.

Services—intangible products, such as time, expertise, or an activity, that can be purchased.

Ideas—intangibles such as the merit of giving to the Salvation Army vs. the Red Cross.


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Goods, Services and IdeasGoods, Services and Ideas

Marketing is a difficult concept.

One concrete and relevant example is the marketing efforts of the U.S. government.

After the September 11th terrorist attacks, the United States swore-in a new Undersecretary of State for Public Diplomacy and Public Affairs.

Her mission was to use her advertising background to craft and market a message to “sell” the U.S. response to terrorism, and our country’s core beliefs and values.


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Relationship MarketingRelationship Marketing

Relationship Marketing emphasizes lasting relationships with customers and suppliers.

Purchase incentives and customer loyalty programs are some of the ways in which firms try to promote these relationships.

Commercial banks, for example, offer economic incentives to encourage longer-lasting relationships.

Customers who purchased more of the bank’s products (for example, making deposits into checking accounts, savings accounts, or taking out loans) accumulate credits toward free or reduced-price services, such as free traveler’s checks or television sets.


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The Marketing EnvironmentThe Marketing Environment

The powerful forces of the external marketing environment heavily influence marketing programs by posing opportunities and threats.Political and legal environment: From taxes to regulations to laws, the political and legal environment has a profound impact on marketing. This is especially true for certain industries, such as telecommunications, automobiles, and tobacco. Social and cultural environment: Trends in this arena, present enormous opportunities for companies that are both farsighted and flexible. Issues and changes include increasing diversity in the U.S., more single-parent families, a rapidly growing senior population, etc.


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Technological environment: New technologies create new goods and services, but also make some existing products obsolete (e.g., the growing dominance of DVDs).

In recent years, the emergence of the Internet has had the greatest impact on marketing.

Economic environment: Inflation, interest rates, recession, and recovery-both in the U.S. and abroad have a dramatic influence on every element of the marketing mix.

Competitive environment: Creating a competitive advantage is a fundamental goal of marketing that can only be accomplished by carefully and continually monitoring every element of the competitive environment.


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The figures is illustrating every marketing program must recognize the factors in a company’s external environment.

The External Marketing Environment


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The competitive environment drives many marketing decisions.

By studying the competition, marketers determine how best to position their own products.

Knowing the alternatives available to your customers, who your competitors are and what they offer is as vital to success as watching for the next big food or fashion craze or technological innovation.


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Competitive EnvironmentCompetitive Environment

There are three specific types of competition: Substitute product competition: Products that are dissimilar from those of competitors, but can fulfill the same need

TVs and computer games are very different from one another, but both fulfill the need for entertainment.

Brand competition: Occurs between similar products Zest bar soap vs. Irish Spring bar soap

International competition: Matches the products of domestic marketers against those of foreign competitors

Neutrogena vs. L'Oreal skin

Heineken vs. Budweiser).


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Strategy: The Marketing MixStrategy: The Marketing Mix

A company’s marketing managers are responsible for planning and implementing all the activities that result in the transfer of goods or services to its customer and, in return, the transfer of cash to the company.

These activities culminate in the marketing plan—a detailed strategy for focusing marketing efforts on consumer needs and wants.

Therefore, marketing strategy begins when a company identifies a consumer need and develops a product to meet it.


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In planning and implementing strategies, marketing managers develop the four basic components (often called the “Four P’s”) of the marketing mix.

In this section, we describe each of those components:Product

Pricing

Place

Promotion


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ProductThe product is the good, service, or idea that is to be marketed to fill consumer wants and needs.

Improving existing products and developing new products are among the marketer's most important tasks.

Product differentiation is important.Even commodity products seek to build differentiation

100% Pure Angus Beef

Differentiation results in creation of a product or product image that differs enough from existing products to attract consumers.

Differentiation is a source of competitive advantage.

Combinations of physical goods and services can be sources of differentiation.


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PricingSelecting the most appropriate price at which to sell a product is as much art as science.

Lower prices generally lead to higher sales volume, while higher prices generally lead to higher profits per unit.

Market-based pricing is wide-spread strategy, but suffers from the logical fallacy that the market somehow knows what your profit is worth (remember the value equation).

Cost-based pricing suffers from the fallacy that all firms have the same cost basis.

Whatever the strategy of pricing may be, the prices must support a variety of costs, including operations, administration, and research costs, and marketing costs.


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Place Place was chosen as a P, but it really is meant to indicate the channel of distribution.Place strategy seeks to determine the most effective and efficient way to get products from producers to consumers. Distribution also involves choosing which channels of distribution are most appropriate.Typical channel decisions are:

Direct to consumerTo retailers, who sell direct to consumersTo wholesalers who take large lots and break them into smaller lots for sale to retailers.Brokering, where a person matches your product to a retailer’s or wholesaler’s needs and arrangements the transfer without ever taking ownership of the goods.


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PromotionThese are all of the activities a firm undertakes to communicate and promote its products to the target market.

Promotion is clearly the most visible element of the marketing mix.

Four promotional tools:Advertising

Personal Selling

Sales Promotions

Public Relations


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Target Marketing and Market Target Marketing and Market SegmentationSegmentation

Marketers have long known that products cannot be all things to all people.

Marketers think in terms of target markets—groups of people with similar wants and needs.

Target marketing requires market segmentation—dividing a market into categories of customer types or segments.

Once segments are identified, companies may adopt a variety of strategies to exploit them individually.

Many firms market products to more than one segment simultaneously.


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Identifying Market SegmentsIdentifying Market Segments

Members of a market segment share common traits that affect their purchasing decisions.Four of the most important characteristics:

geographicdemographicpsychographicbehavioral variable

Market segments should not be confused with geographical location, demographics, psychographics or values alone.

In aggregate these characteristics help reinforce and refine market segmentation.

But the ultimate driving force is customer demands: needs backed by purchasing power.


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Geographic segmentation divides markets into certain areas such as regions, cities, counties, or neighborhoods to customize and sell products that meet the needs of specific markets.For example, consider a plan to market down-filled parkas in rural Minnesota.

Demand will be high and price competition intense. Local newspaper ads may be effective.The best retail location may be one that is easily reached from several small towns.

Although the marketability of some products is geographically sensitive, others enjoy nearly universal acceptance.


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Demographics use statistical analysis to subdivide the population according to characteristics such as age, gender, income, race, occupation, and ethnic group.

For example:Several general consumption characteristics can be attributed to certain age groups (18-25, 26-35, 36-45, and so on).

A marketer can thus divide markets into age groups.


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Common Demographic VariablesCommon Demographic Variables


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Psychographics is the analysis of people by psychological makeup.

It includes activities, interests, opinions, and lifestyles (e.g. fashion-consciousness, thrill-seeking).

For example, Burberry www.burberry.com, has repositioned itself as a global luxury brand, like Gucci www.gucci.com and Louis Vuitton www.vuitton.com.

Burberry had been a British “institution” in rain gear since 1856.

The repositioning strategy resulted in a 31% sales increase, by attracting a different type of customer: the top-of-the-line, fashion-conscious individual who shops at such stores as Neiman Marcus and Bergdorf Goodman.


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Behavioral segmentation divides markets according to customers’ knowledge of, attitudes toward, use of, or response to products.

For example, a women’s shoemaker might identify three segments: athletic, casual, and dress shoes.

Each segment is looking for different benefits in a shoe. Buyers of athletic shoe may not care about appearance but may care a great deal about arch support and traction.

Buyers of casual shoes will want it to look good and feel comfortable.

Buyers of dress shoes require specific colors and style and may even accept some discomfort for the sake of fashion.

Consumers who always buy one brand are classified as hard-core loyalists, whereas switchers buy various brands.


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It is common to combine variables to refine segment definitions.

For example, a common type of segmentation is geodemographics.

Geodemographics divides markets into distinct neighborhoods by combining geographic and demographic data.

Claritas Corporation has divided the U.S. into 40 neighborhood types, such as “Blue Blood Estates” and “Old Yankee Rows”.

They use postal codes and census data to define markets in terms of their geographic area and buying characteristics, especially disposable income.


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Selecting the appropriate target markets or target segments to focus on is not an easy task.

Some criteria that are helpful are: size of segment, competition in the segment, sales and profit potential, compatibility with company resources and strengths, costs, growth potential, and risks.

Remember that the largest segment does not always offer the most potential.

Competitors may have control of large segments.

Breaking into a well-defended market is not easy.

Establishing a defensible niche can play a crucial role. A defensible niche is built by targeting a small segment with no or limited current competition, but with high growth potential and the ability to purchase the product at a price that earns a profit.


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Marketing ResearchMarketing Research

Marketing Research is the process of gathering data about marketing issues and transforming that raw data into meaningful information that can improve decisions and reduce risks.

Market research can help with nearly every phase of marketing from setting goals for market share to developing new products to monitoring the program’s effectiveness.

Marketing research also includes monitoring the competition, tracking industry trends, and measuring customer satisfaction.

Marketing research can occur at any point in the value chain.


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Marketing ResearchMarketing Research

The relationship of marketing research to the overall marketing process is shown in the figure.

Ultimately, its role is to increase the firm’s competitiveness by clarifying the interactions among a firm’s stakeholders (including consumers), marketing variables, environmental factors, and marketing decisions.

Market Research and Market Research and the Marketing the Marketing ProcessProcess


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The Research ProcessThe Research Process

Market research can occur at almost any point in a product’s life cycle.

Typically, it is used most heavily early in the life cycle to help develop new products or define ways to alter existing products to gain new sales.


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The Research ProcessThe Research Process

These are the five steps in performing research:Study the current situation. What is the need and what is being done to meet it?Select a research method. There are many methods. Marketers must consider the cost-effectiveness of different options.Collect data. There are two types of research data.

Primary data are developed through new researchSecondary data are already available from previous research

Analyze the data. Data are of no use until organized into information.Report findings. This report should sum up the methods and findings. It should identify alternative solutions and, where appropriate, make recommendations for action.


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Research MethodsResearch Methods

There are four basic methods of market research:

1. ObservationInvolves simply watching and recording consumer behavior.

While it may be the oldest form of market research, it has been brought up to date with such tools as electronic scanners that allow managers to see what is selling without having to check shelves or inventory.

2. SurveyThis technique uses a questionnaire that is either mailed to individuals or used as the basis of interviews.

Surveys can be expensive and vary widely in accuracy; finding representative groups of respondents can be challenging.


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Research MethodsResearch Methods

3. Focus GroupThis technique uses a small group of people who are gathered together to review a product and discuss it in depth. Focus groups can address complex issues and can help stimulate creative solutions. The small number of participants (usually from 6 to 15) means a single group may not represent the larger market well. Conducting large numbers of focus groups is very expensive.Focus groups are often used as a first step, leading to some other form of research.

4. ExperimentationThis is a formal technique that allows researcheers to compare the responses of people under different circumstances. Experimentation is very expensive, but it can supply answers to questions that surveys and focus groups cannot.


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Data Warehousing and Data Data Warehousing and Data MiningMining

Database marketing is the process of recording and analyzing information about the interactions with customers.

Two components include Data Warehousing and Data Mining.

Data warehousing is the process of collecting, storing, and retrieving data in electronic files.

Data Mining uses electronic technologies for searching, sifting through, and reorganizing date in order to collect marketing information and target products in the marketplace


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The underlying principle of database marketing is that all customers share certain common needs and characteristics, but each has his or her own twist.

If you develop composites of target customers, you can customize messages to them and deepen their loyalty.

Database marketing allows companies to monitor changes in customer purchase patterns.

Companies can monitor repeat purchase patterns to gauge the success of new product launches and to reward repeat buyers.

The biggest benefit of databases is that they can be used in strategic marketing planning and decision-making.


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Ask yourself if the marketer’s right to develop and use databases outweighs the customers’ right to privacy.YES

Marketers have the right to inform people about their products. Freedom of speech is guaranteed by the Constitution. The Census is public information. Telemarketing and mail marketing create jobs. Customers called by telemarketers can always say “No” or sign the “Do not Call” registry.

NO Individuals have the right to privacy. Buying and selling databases has become big business and the consumer is a victim. Using a credit card for a purchase should not make private information available to marketers. Telemarketing is an invasion of privacy and harasses homeowners.


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Understanding Consumer Understanding Consumer BehaviorBehavior

Understanding Consumer Behavior Marketers study consumer buying behavior to learn what makes individuals buy one product instead of another.

Consumer markets consist of individuals or households that purchase goods and services for personal use.

Issues to be considered are the differences between organizational and consumer markets, the buyer’s decision process, and the factors that affect that decision process.


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Influences on Consumer Influences on Consumer BehaviorBehavior

Consumer behavior is essentially the study of why consumers purchase and consume products.

Four key factors influence consumer behavior:Psychological: Motivations, perceptions, ability to learn, attitudes

Personal: Lifestyle, personality, economic status

Social: Family, opinion leaders, reference groups (e.g. friends, associates)

Cultural: Culture, subculture, social class


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The Consumer Buying Process The Consumer Buying Process

One way to look at the psychology of buying is to understand the decision-making process people go through when making a purchase.

Deciding what to buy is a problem-solving process.

Sometimes consumers become brand loyal to specific products based on the satisfaction they have received from previous purchases.

Nevertheless, consumers decide what to purchase by gathering information to help them make a choice.

The more complex the problem, the more information they are likely to seek.


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Consumer Buying ProcessConsumer Buying Process

Students of consumer behavior have constructed various models to help show how consumers decide to buy products.

The figure presents one such model.


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The Consumer Buying ProcessThe Consumer Buying Process

The steps usually follow this sequence:1. Problem/Need Recognition:

The consumer buying process begins with recognizing a problem or need.

Needs often arise when our personal circumstances change, creating windows of opportunity for marketers (e.g. getting married, entering the workforce, etc.).

2. Information seeking:Sources of information can range from personal sources, to marketing sources, to public sources, to experience.

Depending on the product, information seeking ranges from superficial (e.g. "Where is the soft drink machine?") to extensive (e.g. library research).


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3. Evaluation of alternatives: This step is essentially a matching process: How do the attributes of the products you are considering match with your needs and wants?

The evaluation process can range from brief to protracted.

4. Purchase decision: Purchase decisions are typically based on a combination of rational and emotional motives.

Rational motives are based on logical evaluation of product attributes (e.g. cost, quality, usefulness).

Emotional motives are based on non-objective factors (e.g. "All my friends have 4-inch high heel shoes!").


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5. Post-purchase evaluation: This includes everything that happens after the sale.Most buyers seek come post-purchase confirmation that their decision was correct.Marketers can build on this tendency by providing timely feedback to buyers that informs them they made the correct decision and helps them avoid disconfirming information or buyer’s remorse. Buyer’s remorse is the common psychological reaction that one has

made the wrong decision and cannot go back. The greater the value of the purchased item, the greater the feelings of remorse may be.

Marketers also recognize that satisfied customers are likely to repurchase products they have used and enjoyed, while unhappy customers are not only unlikely to repurchase. Purchasers tend to broadcast negative experiences and keep

positive experiences to themselves, another marketing challenge.


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Organizational Marketing and Organizational Marketing and Buying BehaviorBuying Behavior

Organizational Markets can be divided into three main subgroups:

Industrial/commercial market (companies that buy to produce their own goods and services such as Toyota);

Reseller market such as wholesalers like Ingram Micro, which wholesales computers; retailers such as Ann Taylor

Government and Institutional market including Federal, State and Local governments, hospitals, churches, museums, and charitable organizations.

Products sold to organizational markets include raw materials and highly complex manufactured goods such as printing presses, telecommunications systems, and consulting services.


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Organizational vs. Consumer Organizational vs. Consumer Buying BehaviorsBuying Behaviors

Organizations tend to purchase goods and services through Buyers, who may be:

Professionals: trained in the field of purchasing and negotiating, and they typically use formal contracts.

Specialists: may purchase only a single line of products (e.g. a drug store buyer might specialize in personal care products).

Experts: know the products they are buying in depth.

The buyer-seller relationship with organization buyers often is closer, in part because they develop a long-term connection that is mutually beneficial.


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The International Marketing MixThe International Marketing Mix

Entering foreign markets, a firm must reconsider-and often must adjust-each element of the marketing mix:

Products: Must the products be adapted? Redesigned? Recreated?

Some products can be sold abroad with virtually no changes, while other products need to be adapted to fit the needs of the foreign buyer.

Pricing: Pricing decisions must include all elements considered domestically,

Also, transportation and delivery costs, and exchange rates.

Finally, foreign markets may not be able to support U.S. prices, so the contribution margin must be carefully considered, not just the sales revenue.


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The International Marketing MixThe International Marketing Mix

Distribution: Gaining a distribution foothold is often expensive and time-consuming.

Purchasing local businesses or forming joint ventures can help in this regard.

Promotion: Elements of promotional messages should be matched to the customs and values of each country. ‘

Many standard U.S. promotional devices do not succeed in other countries.

Marketers must consider differences in language and culture when promoting products abroad.


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Small Business and the Small Business and the Marketing MixMarketing Mix

Small businesses also face special considerations in terms of the marketing mix:

Products: Some new products and firms are doomed at the start because few consumers want or need what they have to offer.

A thorough understanding of what customers want has paid off for many small firms. Is there really a consumer need? How can the products be tailored to better meet the need?

Pricing: Small business owners must accurately forecast operation expenses.

Do prices cover all of the costs of running the business?

Haphazard pricing that is often little more than guesswork can sink even a firm with a good product.

Cash flow problems ruin most small businesses.


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Small Business and the Small Business and the Marketing MixMarketing Mix

Distribution: Perhaps the most important distribution issue for small businesses is location, which can help attract and retain customers. Problems in arranging distribution/location can make or break a small business. Luck counts!

Promotion: Promotional expenses should be considered a necessity. Many small businesses are ignorant when it comes to the methods and costs of promotion. Successful small businesses plan for promotional expenses as part of start-up costs. Targeted promotion (e.g. through trade associations) can be very cost-effective. Mass-market promotion is too expensive for small businesses to even consider.


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SummarySummary

The American Marketing Association defines marketing as the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

Marketing plays an important role in society by helping people satisfy their needs and wants and by helping organizations decide what to produce.

Value compares a product’s benefits with its costs.

Consumers seek products that offer value.

Utility is the value to the customer that is added by the marketer. There are four types of utility: time, place, ownership, and form utility.


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SummarySummary

The external environment consists of the outsides forces that influence marketing strategy and decision making. The political/legal environment includes laws and regulations, both domestic and foreign, that may define or constrain business activities. The social/cultural environment is the context within which people’s values, beliefs, and ideas affect marketing decisions. The technological environment includes the technological developments that affect existing and new products. The economic environment consists of the conditions, such as inflation, recession, and interest rates, that influence both consumer and organizational spending patterns.


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SummarySummary

Market segmentation is the process of dividing markets into categories of customers.

Businesses have learned that marketing is more successful when it is aimed toward specific target markets groups of consumers with similar wants and needs.

Markets may be segmented by geographic, demographic, psychographic, or product use variables.


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SummarySummary

Market research is the study of what buyers need and of the best ways to meet those needs.

This process entails studying the firm’s customers, evaluating possible changes in the marketing mix, and helping marketing managers make better decisions about marketing programs.

The marketing research process involves the selection of a research method, the collection of data, the analysis of data, and the preparation of a report that may include recommendations for action.

The four most common research methods are observation, surveys, focus groups, and experimentation.


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SummarySummary

A number of personal and psychological considerations, along with various social and cultural influences, affect consumer behavior.

When making buying decisions, consumers first determine or respond to a problem or need and then collect as much information as they think necessary before making a purchase.

Post-purchase evaluations are also important to marketers because they influence future buying patterns.


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SummarySummary

The industrial market includes firms that buy goods falling into one of two categories: Goods to be converted into other products and goods that are used up during production.

Farmers and manufacturers are members of the industrial market, Members of the reseller market (mostly wholesalers) are intermediaries who buy and resell finished goods.

Besides governments and agencies at all levels, the government and institutional market includes such nongovernment organizations as hospitals, museums, and charities.


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SummarySummary

There are four main differences between consumer and organizational buying behavior.

First, the nature of demand is different; in organizational markets it is often derived (resulting from related consumer demand) or inelastic (largely unaffected by price changes).

Second, organizational buyers are typically professionals, specialists, or experts.

Third, organizational buyers develop product specifications, evaluate alternatives more thoroughly, and make more systematic postpurchase evaluations.

Finally, they often develop enduring buyer-seller relationships.

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