Newmarketingethics

Marketing EthicsMarketing Ethics

Parvesh Aghi

»Marketing is a key functional area and critical for organic growth of a business

» Plays a central role is in creating and sustaining value for an organization.

»Marketing helps a firm in creating value by better understanding the needs of its customers and providing them with innovative products and services.

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»Marketing ethics is viewed as important because of marketing’s interface with many diverse stakeholders.

»Marketing is a key functional area in the business organization that provides a visible interface with not only customers, but other stakeholders such as the media, investors, regulatory agencies, channel members, trade associations, as well as others

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DEFINITION OF MARKETING ETHICS

»For marketers, ethics in the workplace refers to rules (standards, principles) governing the conduct of organizational members and the consequences of marketing decisions.

»Ethical marketing is defined as “practices that emphasize transparent, trustworthy, and responsible personal and organizational marketing policies and actions that exhibit integrity as well as fairness to consumers and other stakeholders

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Marketing

What is marketing?

Marketing Definition

“Marketing is 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.”

-American Marketing Association (AMA)

INTRODUCTION

» Conducting ethical transactions is of paramount importance because it effects a firms ability to build and maintain consumer trust .

»Once consumer trust is lost it is very difficult to regain.

»Firms must profit to survive but using profit as the sole guiding principle can lead to short term actions that may cause the firm to lose customers in the long run.

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»Marketing ethics refers to ethical issues specific to domain of marketing.

»The marketing profession is often singled out among business disciplines as the root cause of a host of ethical concerns .

»Anyone involved in marketing activities must recognise the ethical implications of their actions.

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CREATING AN ETHICAL CLIMATE

1. VALUES : Set of values within the marketing division that guides decision making and behavior.

2. RULES :set of explicit rules that govern all of the firm’s transactions

3. CONTROLS : system that rewards good behavior and punishes bad behavior

Top management must commit to establishing an ethical climate and employees throughout firm must also be dedicated

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Frameworks of analysis for marketing ethics

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»Value-oriented framework, analyzing ethical problems on the basis of the values which they infringe (e.g. honesty, autonomy, privacy, transparency).

»Stakeholder-oriented framework, analysing ethical problems on the basis of whom they affect (e.g. consumers, competitors, society as a whole).

»Process-oriented framework, analysing ethical problems in terms of the categories used by marketing specialists (e.g. research, price, promotion, placement).

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ETHICAL ISSUES IN MARKATING

. PACKAGING AND BRANDING

PRICING

MARKET RESEARCH

MARKET AUDIENCE

ADVERTISING AND PROMOTION

PACKAGING AND BRANDING

»Four aspects of packaging involve ethical issues

1.Label information

2.Packaging graphics

3.Packaging safety

4.Environmental implication of packaging.

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Label information

»Label information on packages can mislead consumers by providing exaggerated information or by unethically suggesting that a product contains more of desired attributes (for instance nutrition) or less of undesired attributes (such as trans fat) than is actually the case.

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Packaging graphics

»Packaging graphics are unethical when the picture on a package is not a true representation of product contents (as when a children’s toy is made to appear much bigger on the packge than it actually is). Another case of potentially unethical packaging is when a store brand is packaged so that it looks virtually identical to a well known national brand.

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Packaging safety

»Unsafe packaging problems are particularly acute when packaging is not tamperproof and contains dangerous products that are unsafe for children

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Environmental implication of packaging.

»Packaging information is misleading and unethical when it suggests environmental benefits that cannot be delivered.

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PRICING

» Pricing should offer value for the money, although it does not necessarily need to represent the lowest price on the market .Price structure is based on a number of elements, customers should understand the total cost they pay. There should be no “hidden extras.

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Unethical pricing practices.

»Price fixing

»Price skimming

»Predatory pricing

»Price war

»Dumping (pricing policy)

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Price Fixing

»Price fixing is an agreement between business competitors to sell the same product or service at the same price. In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to profits for all the sellers.

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Price skimming

»Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination /yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.

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Predatory pricing

»Predatory pricing (also known as destroyer pricing) is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors.

» If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business.

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Predatory pricing - contd

»The predatory merchant then has fewer competitors or is even a de facto monopoly, and hypothetically could then raise prices above what the market would otherwise bear.

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Price war

»Price war is a term used in business to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reduction.

» One competitor will lower its price, then others will lower their prices to match. If one of them reduces their price again, a new round of reductions starts.

»In the short-term, price wars are good for consumers, who can take advantage of lower prices. Often they are not good for the companies involved. The lower prices reduce profit margins and can threaten their survival.

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Price war

»In the long term, the consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes higher than before the price war started.

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Dumping (Pricing Policy)

»Dumping is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market.

»This is often referred to as selling at less than "fair value." Under the World Trade Organization (WTO) Agreement, dumping is condemned (but is not prohibited) if it causes or threatens to cause material injury to a domestic industry in the importing country.

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Marketing Research

»Most marketing research benefits both the sponsoring company and its consumers.

» Through marketing research, companies learn more about consumers’ needs, resulting in more- satisfying products and services.

» However, the misuse of marketing research can also harm or annoy consumers.

»Two major public policy and ethic issues in marketing research are intrusions on consumer privacy and the misuse of research findings.

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Intrusions on consumer privacy

»A few consumers fear that researchers might use sophisticated techniques to probe their deepest feelings and then use this knowledge to manipulate their buying.

» Or they worry that marketers are building huge data bases full of personal information about customers

»Other consumers may have been taken in by previous research surveys that actually turned out to be attempts to sell them something.

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»The best approach is for researchers to ask only for the information they need, to use it responsibly to provide value, and to avoid sharing information without customers’ permission.

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Misuse of research findings.

Marketing research has been misused to make sales pitches or to generate list of sales prospects in a practice known as sugging

Use of research data in the growing field of data marketing , in which retailers , through credit-card records and other information are able to construct detailed profiles of individuals customers.

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Marketing Audience

»Ethical danger points include:

»Targeting the vulnerable (e.g. children, the elderly).

»Excluding potential customers from the market: selective marketing is used to discourage demand from undesirable market sectors .

»Examples of unethical market exclusion or selective marketing are industry attitudes to the gay, ethnic minority and obese ("plus-size") markets

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»The elderly hold a disproportionate amount of the world's wealth and are therefore the target of financial exploitation.

»In the case of children, the main products are unhealthy food, fashionware and entertainment goods.

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ADVERTISING

»Advertising is a form of communication used in helping sell products and services.

»Typically it communicates a message including the name of the product or service and how that product or service could potentially benefit the consumer.

»However, advertising does typically attempt to persuade potential customers to purchase or to consume more of a particular brand of product or service

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Advertisement -definition

A paid nonpersonal communication about an organisation and its products that is transmitted to a target audience through a mass medium .

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Advertising is widely criticized on following grounds

1. Exaggerated claims and outright false- hoods are most oblivious targets for complaints

2.Lack of taste , irritating repetition and offensive character of many ads

3.Morality of specific kinds of ads (alcohol and tobacco products)

4.Use of excessive violence

5.Creating culture of consumerism

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A Coca-Cola ad from the 1890s

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Ethics in Advertising

»Puffery

»Advertising to Children

»Promoting Unhealthy Products

»Subliminal Advertising

»Deceptive Advertising

»Surrogate Advertisements

»Exploiting Social Paradigms

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Puffery

»Flattering, often exaggerated praise and publicity, especially when used for promotional purposes.

»Puffery is language used in the promotion of a product which is designed to make the product seem more appealing with the use of claims which are usually subjective, bombastic, and difficult to prove.

»For instance, a advertisement promoting the "world's best cup of coffee" would classify as puffery. That claim would be almost impossible to substantiate. Puffery often uses the superlative form of a word, like "best" or "greatest".

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Deceptive Advertising

» Deceptive advertising is the use of false or misleading statements in advertising

»As advertising has the potential to persuade people into commercial transactions that they might otherwise avoid, many governments around the world use regulations to control false, deceptive or misleading advertising

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Unhealthy products

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Deceptive Advertising pictures

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Subliminal Advertising

»A subliminal message is a signal or message embedded in another medium, designed to pass below the normal limits of the human mind's perception. These messages are unrecognizable by the conscious mind, but in certain situations can affect the subconscious mind and can negatively or positively influence subsequent later thoughts, behaviors, actions, attitudes, belief systems and value systems.

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Surrogate Advertisements

»Surrogate Advertisements In India alcohol and cigarette advertisements were banned outright some years back. However, alcohol and cigarette companies alike are using the avenue of surrogate advertisements to press forward their case.

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Social Paradigms

»Exploiting Social Paradigms In the hopes of making a fast buck, marketers often resort to exploiting social paradigms typical to certain areas.

»In India, for example, a large multinational corporation ran an ad campaign that depicted a young woman who because of her dark facial complexion was unable to find jobs. But as the ad showed, as soon as the woman started using the facial whiteness cream manufactured by the corporation, she got the job of her choice.

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Thank YouThank You

Ethics in Financial Markets / Services Ethics in Financial Markets / Services

Parvesh Aghi

Financial services

»The financial services industry operates largely through personal selling by :

»Stock Brokers

»Insurance Agents

»Financial Planners & Investment Managers

»Tax Advisors

Personal selling creates innumerable opportunities for abuse , and although finance professionals take pride in the level of integrity in the industry, misconduct still occurs

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Objectionable practices in selling financial products

»Deception

»Churning

» Suitability

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Deception

»The ethical treatment of client requires sales person to explain all of the relevant information truthfully in an understandable ,non misleading manner.

»Promotion material for a mutual fund ,may be accurate but misleading if it emphasizes the strengths of fund and minimizes the weakness .

»Figures of past performance can carefully be selected and displayed in a ways that give misleading impression

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»Deception can also occur when essential information is not revealed

»For example a sale charge is merged into funds annual expenses , which may be substantially higher than competition’s

»In India SEBI regulations 1996 requires the issuer of the security to disclose all material information , which an average prudent investor may require to take decision to invest.

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»The rationale for this provision of the Securities Act is fairness to investors who have right to make decisions with adequate information.

»Some of the provisions of SEBI(mutual fund) regulations with respect to new offerings are as follows :

1 The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision

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2 The offer document and advertisement materials shall not be misleading or contain any statement or opinion which are incorrect or false.

3 No guaranteed return shall be provided in a scheme unless such returns are fully guaranteed by the sponsor or the asset management company

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Churning

»Churning is defined as excessive or inappropriate trading for a client’s account by a broker who has control over the account with the intent to generate commissions rather than to benefit the client.

»The ethical objection to churning is straight forward : It is a breach of fiduciary duty to trade in ways that are not in the client’s interest.

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Suitability

»Brokers ,insurance agents and other sales persons have an obligation to recommend only suitable securities and financial products.

» It is difficult to define suitability but is based on customers financial situation , needs ,time horizon and risk appetite & profile , the agents should recommend suitable investment portfolio.

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Common causes of unsuitability

»Recommending Stocks when bonds would be better fit the investor’s objectives.

»Unsuitable grades of securities , such as selecting lower rated bonds when higher rated ones are more appropriate.

»Unsuitable trading techniques including the use of margins or options , which can leverage an account and create greater volatility and risk.

»Unsuitable liquidity.

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ANATOMY OF A LOSS

»Rs 70,000 crore was the net investment in mutual funds in 2006-7. If 5% of these were mis-sold, the loss works out to Rs 3,500 crore.

»Rs 25,000 crore was the premium for new policies issued in 2006. If 10% of these were mis-sold, the loss works out to Rs 2,500 crore.

»Rs 1,40,000 crore worth of loans disbursed in 2006-7. If in 5% cases, the interest rate was mis-stated, the loss is Rs 1,600 crore.

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»Estimated Rs 16,000 crore of shares traded by retail investors in 2006-7. If even 10% of this was misguided, the loss is Rs 1,600 crore.

»Rs 1,20,000 crore of real estate bought in 2006-7. If 10% of the buyers were given 5% less than promised, the loss is Rs 600 crore.

»Five million new credit cards were issued in 2006-7. If 10% of these had hidden charges and led to penalties, the loss is Rs 200 crore.

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»TOTAL ESTIMATED LOSS TO RETAIL INVESTORS WORKS OUT TO RS 10,000 CRORE

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FINANCIAL MARKETS

»Financial transactions typically takes place in organized markets , such as :

STOCK MARKETS

COMMODITY MARKERTS

CURRENCY MARKETS

BOND MARKETS

FUTURE AND OPTION MARKETS

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»These markets presuppose certain moral rules and expectations of moral behavior .

»The most basic of these is a prohibition against fraud and manipulation.

»There should be fairness and level playing field for all who participate in these markets

»But the level playing field can get tilted by many factors including unequal information, bargaining power and resources.

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Unfair ways of financial markets operation

»Fraud and Manipulation

»Unequal information

»Bargaining power

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Fraud and Manipulation

»Manipulation generally involves the buying and selling of securities for the purpose of creating a false or misleading impression about the direction of their prices so as to induce other investors to buy or sell the securities .

»Fraud is the willful misrepresentation of a material fact that causes harm to a person who reasonably relies on the misrepresentation .

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»Investors – both as buyers and sellers – are vulnerable to fraud because the value of financial instruments depends almost entirely on information that is difficult to verify.

»Fraud and Manipulation are addressed by mandatory disclosures regulations as well as by penalties for false and misleading statements in any information released by a firm.

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Unequal information

»Competition between parties with very unequal information is widely regarded as unfair because the playing field is tilted in favour of a player with superior information.

»That every person should posses the same information is an unrealisable ideal and actual market are characterized by a great information asymmetries .

»The average investor cannot hope to compete on equal terms with a market pro

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»The possession of unequal information is unfair when the information is illegitimately acquired or when its use violates some obligation to others.( for e.g “insider trading” )

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INSIDER TRADING

»Insider trading refers to trading in the securities of a company to take advantage of material "inside" information about the company that is not available to the public.

»Such a trade is motivated by the possibility of generating extraordinary gain with the help of nonpublic information (information not yet made public).

» It gives the trader an unfair advantage over other traders in the same security

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»The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, say, "insider" is any person who, is or was connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information about the stock of that particular company, or who has access to such unpublished price sensitive information.

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How does insider trading work?

»An insider buys the stock (he might also already own it). He then releases price-sensitive information to a small group of people close to him, who buy the stock based on it, and spread the information further. This results in an increase in volumes and prices of the stock. The inside information has now become known to a larger group of people which further pushes up volumes and prices of the stock.

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»After a certain price has been reached, which the insider knows about, he exits, as do the ones close to him, and the stock's price falls. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as, in many cases, the 'tip' reaches him only when the stock is already on a boil.

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»The regular investor gets on the bandwagon rather late in the day as he is away from the buzz with no direct connection to the 'real' source. He buys the overvalued stock due to imbalance in the information flow

» The market regulator has recently come out with a consultative paper on amendments to Sebi (Prohibition of Insider Trading) Regulations 1992.

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Bargaining power

»Generally ,agreements reached by arm’s length bargaining are considered to be fair regardless of the actual outcome.

»A trader who negotiates a future contact that results in a great loss ,for example , has only himself to blame .

»Unequal bargaining power can result from many sources

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»Resources : In most transactions wealth is an advantage. The rich are better able than poor to negotiate over almost all matters .

»Large investors have greater opportunities . They can be better diversified ; they can bear greater risk and there by obtain higher leverage.

»Processing Ability : Even with equal access to information , people vary enormously in their ability to process information and to make informed judgements .

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»Financial markets can be dangerous places for who lack an understanding of the risks involved .

»Securities firm and institutional investors overcome the problem of people’s limited processing ability by employing specialist in different kinds of markets.

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»Back up slides

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Banking

»INTEREST ON LOANS

»YOU ARE TOLD that the interest rate on the personal loan is a flat 9% per annum. BUT a 9% flat rate of interest works out to a reducing rate of nearly 16.5%.The flat rate is not a true indicator because your outstanding keeps reducing with every EMI repayment. YOU STAND TO LOSE because your interest cost is higher than what had been communicated to you. YOU SHOULD find out the reducing rate of interest

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Banking

»LOCKER FACILITY

»YOU ARE TOLD you will get locker facilities if you buy an insurance policy. BUT banks cannot put such preconditions for offering a facility. YOU STAND TO LOSE because you are forced to block money and buy insurance you don’t need. YOU SHOULD take up the matter with the Banking Ombudsman.

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Banking

»CREDIT CARDS

»YOU ARE TOLD there is no annual fee on the credit card being offered. BUT the annual fee has been waived only for the first year.The next year you will be billed for the annual fee. YOU STAND TO LOSE because you end up paying for something you did not want. YOU SHOULD confirm and get the free for life offer in writing.

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Banking

»DOORSTEP BANKING

»YOU ARE TOLD you get free doorstep banking if you maintain a minimum balance in your savings account. BUT the minimum balance earns very little interest. YOU STAND TO LOSE because the interest lost on the minimum balance more than makes up for the free service. YOU SHOULD opt for Net banking instead.

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»ON IRDA’S EFFORTS TO PREVENT MIS-SELLING:

Irda’s code of conduct reiterates the need to disseminate the requisite information.

Investors now have the option to return the policy within 15 days if they disagree with its terms. Every insurer must have an effective grievance redressal mechanism.

Irda also offers facilities for online registration of complaints.

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»ON STEPS TAKEN TO PREVENT MIS-SELLING: The model code of conduct on illustrations of returns used to sell a product was adopted in 2004. Now sales illustrations can be shown at 6% and 10% returns only. In 2006, Irda issued the Ulip guidelines again keeping the interest of customers in mind. Despite these and many other initiatives, there are a few examples of mis-selling in the industry.While they are declining, it is critical that the customers are aware of what to look for while buying an insurance polic

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Mutual Funds

»NFOs

»YOU ARE TOLD a new fund with an NAV of Rs 10 is cheaper than one priced at Rs 80.BUT NAV does not matter.A fund of Rs 10 and one of Rs 80 invest in the same market at the same time. YOU LOSE because investing in new untested funds may prove costly. YOU SHOULD not invest in NFOs unless they are unique.

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»DIVIDEND PAYMENTS

»YOU ARE TOLD to buy a fund because it has announced a high dividend. BUT dividends do not matter in a mutual fund. It is only your money coming back to you. YOU LOSE if you invest on the basis of dividend payment because high dividend does not always mean good performance. YOU SHOULD focus on equity funds with a good track record.

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»EQUITY FUNDS

»YOU ARE TOLD equities have given 40-50% returns in recent years and you can be sure of 30% returns. BUT returns are market linked and not assured. Future returns may not be as high. YOU LOSE because returns may not be in line with projections. YOU SHOULD choose funds on the basis of performance over a long term.

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»THE MATIC FUNDS

»YOU ARE TOLD that this new fund is going to invest in a novel manner so invest in it. BUT ultimately, a thematic equity fund is only another mutual fund. It invests in promising stocks like any other fund. YOU LOSE if you invest in the new fund by liquidating existing holdings. YOU SHOULD not be swayed by new-fangled themes.

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Marketing Research

»Ethical danger points in market research include:

- Invasion of privacy.

- Stereotyping.

Stereotyping occurs because any analysis of real populations needs to make approximations and place individuals into groups. However if conducted irresponsibly, stereotyping can lead to a variety of ethical undesirable result.

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»Stereotypes often form the basis of prejudice and are usually employed to explain real or imaginary differences due to race, gender, religion, age, weight, ethnicity, socio-economic class, disability, and occupation, among the limitless groups one may be identified with

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»when an organization behaves ethically, customers develop more positive attitudes about the firm, its products, and its services. When marketing practices depart from standards that society considers acceptable, the market process becomes less efficient—sometimes it is even interrupted. Not employing ethical marketing practices may lead to dissatisfied customers, bad publicity, a lack of trust, lost business, or, sometimes, legal action. Thus, most organizations are very sensitive to the needs and opinions of their

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