Marketing 5e

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Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries. Published in South Africa by Oxford University Press Southern Africa (Pty) Limited Vasco Boulevard, Goodwood, N1 City, Cape Town, South Africa, 7460 P O Box 12119, N1 City, Cape Town, South Africa, 7463 © Oxford University Press Southern Africa (Pty) Ltd 2015 The moral rights of the author have been asserted. Fourth Edition published 2000 Fifth Edition published in 2015 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press Southern Africa (Pty) Ltd, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographic rights organisation, DALRO, The Dramatic, Artistic and Literary Rights Organisation at [email protected]. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press Southern Africa (Pty) Ltd, at the above address. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Marketing 5e Print ISBN: 978-0-199079-92-6 ePub ISBN: 978-0-199075-78-2 Typeset in Utopia Std Regular 9.5pt on 12pt Acknowledgements Publishing manager: Alida Terblanche Publisher: Janine Loedolff

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Editor: Sarah Floor Designer: Cindy Armstrong Indexer: Michel Cozien Typesetter: Barbara Hirsch The authors and publisher gratefully acknowledge permission to reproduce copyright material in this book. Every effort has been made to trace copyright holders, but if any copyright infringements have been made, the publisher would be grateful for information that would enable any omissions or errors to be corrected in subsequent impressions. Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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This edition of Marketing is dedicated to all the health care practitioners across the globe who have devoted their professional careers to finding a cure for diabetes mellitus. Christo Boshoff Opgedra aan my seuns Nicol en Dorfling Nic S. Terblanche

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Abridged Table of Contents

PART ONE Introduction to marketing CHAPTER 1:

An overview of marketing

CHAPTER 2:

Analysing the external environment’s influence on marketing

CHAPTER 3:

Understanding consumer decisionmaking

CHAPTER 4:

Analysing the competitive situation

CHAPTER 5:

Information for marketing decision-making and marketing research

CHAPTER 6:

Segmenting and targeting markets

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CHAPTER 7:

Positioning the firm and its products

PART TWO Implementing marketing mix strategies CHAPTER 8:

Product decisions

CHAPTER 9:

Developing and managing products

CHAPTER 10:

Marketing channels and the role of intermediaries

CHAPTER 11:

Marketing communication strategy

CHAPTER 12:

Implementing marketing communication mix strategies

CHAPTER 13:

Pricing concepts and setting the right price

CHAPTER 14:

Putting it all together: The strategic marketing plan

PART THREE Specialised marketing CHAPTER 15:

Marketing in specialised markets

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CHAPTER 16:

Sustainable marketing

Index

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Table of Contents PART ONE Introduction to marketing CHAPTER 1: An overview of marketing Introduction What is marketing? Customer satisfaction Measuring customer satisfaction Customer satisfaction or customer dissatisfaction? The benefits of customer satisfaction and loyalty The concept of exchange Marketing management philosophies Production orientation Product orientation Sales orientation Consumer orientation Societal marketing orientation "****** DEMO - www.ebook-converter.com*******"

Relationship marketing orientation Differences between sales and consumer orientations A word of caution Implementing the marketing concept in existing firms Changes in authority and responsibility The importance of new opportunities The firm’s business The importance of a competitive advantage The marketing process The position and role of marketing in the firm Why are there critics of marketing? Why study marketing? Marketing plays an important role in society Marketing is important to businesses Marketing offers outstanding career opportunities Marketing influences your life every day Looking ahead Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 2: Analysing the external environment’s influence on marketing Introduction "****** DEMO - www.ebook-converter.com*******"

The marketing environment Marketing’s interaction with the internal and external environment Understanding the external environment Opportunities and threats Environmental management Identifying opportunities and threats Social factors Consumer values The changing influence of families and gender Is it a new social trend or a fad? Today’s pre-teens: Born to shop Teenagers: Demanding and opinionated Generation Y Generation X America’s baby boomers and South Africa’s prime timers Older consumers: Not just grandparents The Black diamonds Survivors Demographic factors Universal Living Standards Measure Using LSM and other demographic factors to understand markets Education and literacy Language Economic factors "****** DEMO - www.ebook-converter.com*******"

Inflation Recession Technological factors Political factors Self-regulatory agencies Legal factors Central government legislation Provincial government legislation International agreements The marketing implications of legislation Competitive factors Physical forces Climate change Pollution Scarce resources Recycling and non-wasteful packaging Environmentally-friendly ingredients Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 3: Understanding consumer decisionmaking Introduction "****** DEMO - www.ebook-converter.com*******"

The importance of understanding consumer behavior A model of consumer behavior The consumer decision-making process Problem recognition Information search Evaluation of alternatives and purchase Post-purchase behavior Types of consumer buying decisions and consumer involvement Factors determining the level of consumer involvement The marketing implications of consumer involvement Individual factors influencing consumer buying decisions Perception Motivation Learning Values, beliefs and attitudes Personality, self-concept and lifestyle Social factors influencing consumer buying decisions Culture Subculture Reference groups Opinion leaders Family Social class The influence of the purchase situation on buying decisions Buying ‘new-to-the-world’ products "****** DEMO - www.ebook-converter.com*******"

Buying behaviour and technology Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 4: Analysing the competitive situation Introduction Identifying competitors Approaches to identifying competitors Using the strategic-group approach to identify competitors Defining the competitive arena The four industry structures The competitive structure of an industry Threat of new entrants Threat of substitute products Threat of buyers’ growing bargaining power Threat of suppliers’ growing bargaining power Threat of intense segment rivalry Analysing key competitors Understanding current competitors Size, growth and profitability Image and positioning strategy Competitor objectives and commitment The current and past strategies of competitors "****** DEMO - www.ebook-converter.com*******"

Competitor culture Cost structure Exit barriers Understanding potential competitors Entry barriers Evaluating competitors’ strengths and weaknesses Step 1: Identify key success factors in the industry Step 2: Rate the firm and competitors on each KSF Step 3: Consider the implications for competitive strategy Anticipating competitors’ actions Likely reaction patterns of competitors Direct rivalry among competitors Deciding which competitors to attack and which to avoid Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 5: Information for marketing decisionmaking and marketing research Introduction The need for managerial information Marketing decision support systems Database marketing and micro-marketing The importance of database marketing "****** DEMO - www.ebook-converter.com*******"

The role of marketing research The functions of marketing research The relationship between marketing research and DSS Management uses of marketing research Improving the quality of decision-making Identifying problems Understanding the market Fostering customer value and quality The steps in a marketing research project Step 1: Define the marketing problem Step 2: Exploratory research by collecting secondary data Step 3: Formulate the research objectives Step 4: Planning the research design Step 5: Collecting the data Step 6: Analysing the data Step 7: Preparing and presenting the report When should marketing research be conducted? The characteristics of good research Why is marketing research criticised? Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 6: Segmenting and targeting markets "****** DEMO - www.ebook-converter.com*******"

Introduction The nature of market segmentation The importance of market segmentation The criteria for successful segmentation Bases for segmenting consumer markets Behavioural segmentation Geographic segmentation Demographic segmentation Psychographic segmentation Benefit segmentation Qualifying and determining bases for segmentation Steps in segmenting a market Strategies for selecting target markets Undifferentiated targeting Concentrated targeting Multi-segment targeting Contrasting target marketing strategies Positioning Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 7: Positioning the firm and its products Introduction "****** DEMO - www.ebook-converter.com*******"

Planning a positioning strategy The nature of positioning The consequences of failing to select a position Differentiation – the cornerstone of positioning Classifying industries according to their potential for differentiation and competitive advantage Bases for differentiation Product differentiation Differentiation based on services accompanying the product Personnel differentiation Image differentiation Bases for positioning products The process of positioning a new product or brand Repositioning a product or brand The repositioning process Repositioning in the maturity phase of the product life cycle Development of a positioning strategy Typical positioning errors Tools and approaches to facilitate positioning Looking back Summary Discussion and writing questions Key concepts References

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PART TWO Implementing marketing mix strategies CHAPTER 8: Product decisions Introduction What is a product? Product levels Classifying consumer products Types of consumer products Convenience products Shopping products Speciality products Unsought products Product items, lines and mixes Organising related items into product lines Adjustments to product items, lines and mixes Branding Benefits of branding Features of effective brand names Branding strategies Generic products versus branded products Manufacturers’ brands versus private brands Individual brands versus family brands Conditions favourable to branding Co-branding Levels of brand familiarity "****** DEMO - www.ebook-converter.com*******"

Trademarks Packaging Packaging functions Containing and protecting products Promoting products Facilitating storage, use and convenience Facilitating recycling and reducing environmental damage Labelling Universal product codes Product warranties Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 9: Developing and managing products Introduction The importance of new products Categories of new products The new-product development process Idea generation Creativity Idea screening Concept development and testing Business analysis "****** DEMO - www.ebook-converter.com*******"

The development stage Test marketing Commercialisation Why some new products succeed and others fail Organising for new-product development New-product committees and departments Venture teams and ‘intrapreneurs’ Simultaneous product development The product life cycle Stages of the product life cycle Strategies during the product life cycle Strategies during the introductory stage Strategies during the growth stage Strategies during the maturity stage Strategies during the decline stage Evaluating the product life cycle concept The market acceptance of new products Diffusion of innovation Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 10: Marketing channels and the role of intermediaries "****** DEMO - www.ebook-converter.com*******"

Introduction The benefits of marketing channels Providing specialisation and division of labour Overcoming discrepancies Providing contact efficiency The functions of a marketing channel Marketing channel structures Utilising alternative marketing channel arrangements Factors that influence marketing channel strategies Market factors Product factors Producer factors Levels of distribution intensity Intensive distribution Selective distribution Exclusive distribution Potential channel conflict Horizontal conflict Vertical conflict Power in the distribution channel Reward power Coercive power Legitimate power Referent power Expert power "****** DEMO - www.ebook-converter.com*******"

Channel leadership Manufacturers as channel captains Retailers as channel captains Wholesalers as channel captains The importance of physical distribution The nature of physical distribution subsystems Warehousing Materials handling Order processing Transportation Retailing and wholesaling intermediaries The classification of retail operations Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 11: Marketing communication strategy Introduction The role of marketing communication in the marketing mix The elements of the marketing communication mix Advertising Public relations and publicity Personal selling Sales promotion "****** DEMO - www.ebook-converter.com*******"

The marketing communication process Elements of the communication process The communication process and the marketing communication mix Integrated marketing communications The objectives and tasks of marketing communication Informing Persuading Reminding AIDA and the hierarchy of effects The hierarchy of effects and the marketing communication mix Factors affecting the marketing communication mix Push and pull strategies Steps in developing the marketing communication plan Analysing the market Identifying the target audience Setting marketing communication objectives Developing a marketing communication budget Deciding on a marketing communication mix Looking back Summary Discussion and writing questions Key concepts References "****** DEMO - www.ebook-converter.com*******"

CHAPTER 12: Implementing marketing communication mix strategies Introduction Steps in creating an advertising campaign Formulating campaign objectives Making creative decisions Identifying product benefits Developing and evaluating advertising appeals Executing the message Deciding which advertising media to use Media evaluation and selection considerations Media scheduling Evaluating the advertising campaign Pre-tests Post-tests Public relations Public relations tools Managing unfavourable publicity Sales promotion The objectives of sales promotion Tools for consumer sales promotion Tools for trade sales promotion Personal selling Contrasting personal selling with other forms of marketing communication Sales tasks "****** DEMO - www.ebook-converter.com*******"

Steps in the personal-selling process Sales management Defining sales objectives and the sales process Designing the sales organisation Developing the sales force Directing the sales force Evaluating the sales force Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 13: Pricing concepts and setting the right price Introduction The importance of price to marketing managers Pricing objectives Profit-orientated pricing objectives Sales-orientated pricing objectives Status quo pricing objectives The demand determinant of price The nature of demand How demand and supply determine prices Elasticity of demand The cost determinant of price Mark-up pricing "****** DEMO - www.ebook-converter.com*******"

Profit maximisation pricing Break-even pricing Other determinants of price Stages in the product life cycle The competition Distribution strategy Marketing communication The relationship between price and quality How to set a price on a product Formulating pricing objectives Estimate demand, costs and profits Choose a price strategy The legality and ethics of price strategies Tactics for fine-tuning the base price Relationships between products Pricing during difficult economic times Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 14: Putting it all together: The strategic marketing plan Introduction The nature of strategic planning "****** DEMO - www.ebook-converter.com*******"

The strategic marketing plan The value of a strategic marketing plan The elements of a marketing plan Defining the business mission Strategic marketing objectives Identifying opportunities to utilise Conducting a situation analysis Assessing the competitive environment Strategic windows Assessing the corporate culture Opportunity-utilisation strategies Strategic management tools Competitive advantage Setting marketing-strategy objectives Formulating the marketing strategy Implementation, evaluation and control of the marketing plan Writing the marketing plan Effective strategic planning Looking back Summary Discussion and writing questions Key concepts References

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PART THREE Specialised marketing CHAPTER 15: Marketing in specialised markets Introduction Services marketing How services differ from physical products Marketing mixes for services Sports marketing and marketing through sport The special characteristics of sport The sports product Licensed and branded sports products Marketing through sport Non-business marketing Factors contributing to the acceptance of marketing by nonprofit organisations The dual role of marketing in non-profit organisations Sources of competition faced by non-profit organisations The unique aspects of non-business marketing strategies Business-to-business marketing Business-to-business customers Classification of business and government markets Differences between business-to-business and consumer markets Types of business-to-business products The business-to-business purchase process "****** DEMO - www.ebook-converter.com*******"

Travel and tourism marketing The main sectors of the travel and tourism industry The special characteristics of travel and tourism services The marketing mix in travel and tourism Looking back Summary Discussion and writing questions Key concepts References

CHAPTER 16: Sustainable marketing Introduction The concept of sustainable marketing Green marketing Social marketing The origins of sustainable marketing Green consumer segments Key sustainability issues Consumer social responsibility and the move towards sustainability The role of marketing in sustainability The impact of sustainable marketing on the product life cycle Making the marketing mix more sustainable Product Price Promotion "****** DEMO - www.ebook-converter.com*******"

Distribution People Processes Physical evidence The disadvantages of a sustainable marketing approach Implementing sustainability Summary Discussion and writing questions Key concepts References

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Introduction This is the fifth South African edition of the adaptation of the popular American textbook Marketing. Like the first four editions, it adopts a modular approach in terms of the structure of content, which is supported by discussions of contemporary marketing strategy issues, South African case studies and analyses of marketing challenges that are unique to the South African business environment. The South African adaptation of this leading marketing text was guided by the following principles: •

• •

•

To reflect a South African and southern African perspective (through the use of examples, case studies and readings) without losing the international focus of the original text To take into consideration the requirements of the South African higher-education environment To build on and expand the strategy component of the original text to permit the use of the book at both university- and university of technology-level courses To retain the user-friendliness and ease of reading of the original text.

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Today’s marketers face a market environment that is becoming simultaneously more competitive, more specialised, more globalised and more technology-driven. To succeed in today’s changing environment, successful marketing requires – now more than ever – a balance of creativity and knowledge. Marketing is a dynamic discipline that changes often and rapidly. Furthermore, it is exciting because, sometimes without realising it, we are all involved in marketing, both as marketers and customers. You may ask yourself, ‘Why should I study marketing?’ or ‘What is in it for me?’ There are several important reasons for studying marketing. One is that marketing offers many diverse career opportunities, such as sales, marketing research, advertising, retailing, product and brand management and sports marketing, to name but a few. In addition, marketing is of particular importance not only to business firms, but also to non-profit organisations. Marketing also contributes significantly to the effective functioning of a country’s economy by ensuring the efficient distribution of products and services to consumers. Marketing can be studied from a variety of different perspectives. To pursue them all would be unmanageable and unfeasible. To simplify matters, in this textbook, we focus on several key perspectives of marketing. First, the text concentrates mainly on the marketing of products, particularly consumer products (goods that consumers buy for their own consumption). It is true that services, ideas, causes and even political parties can be "****** DEMO - www.ebook-converter.com*******"

marketed, but our emphasis is on the marketing of products. This does not mean that services or non-profit organisations, such as the Red Cross or World Vision, cannot be marketed. Most of the marketing principles discussed in this book also apply to such organisations. The marketing of services and non-profit organisations, however, also requires some specialised approaches that students will encounter in the future if they continue their studies in marketing. In this book, we concentrate on marketing from the perspective of firms that function with the intention of generating a profit for their owners. Second, this book views marketing from a management perspective. This means we explore how firms can realise their objectives by means of effective management. In other words, we study marketing tasks, activities and decisionmaking from a managerial point of view. The goal is to equip students with the necessary skills and knowledge to become marketing managers. To this end, the emphasis is on those aspects or instruments that marketing managers can utilise to realise the marketing function’s objective and thus also fulfil the objectives of the firm. Third, the book introduces readers to the theoretical nature of the marketing discipline, the marketing process, marketing activities, the environment in which marketing operates and marketing instruments (i.e. promotion, pricing, product decisions and distribution). However, the theoretical principles are supplemented with frequent references to strategy options. In other words, we try to answer such questions as: Given the circumstances, what can I as a marketer "****** DEMO - www.ebook-converter.com*******"

do? Which marketing strategies can I use? What are the implications of these options? Which strategies can I use in a particular context? You will see that potential strategy options are discussed under the strategy icon:

>> Strategy We also believe that aspiring marketers can learn a lot from experienced practitioners – both the good and the bad. Therefore, we frequently refer to both local and international examples of marketing situations, decisions and activities under the example icon:

EXAMPLE >> Real-world examples are a rich source of learning for all marketers, and we supplement theoretical discussions with several ‘readers’ to illustrate the practical implementation of key marketing concepts. The book is divided into three parts: ‘Introduction to marketing’, ‘Implementing marketing mix strategies’ and ‘Marketing specialised markets’. Part 1 provides a broad, global perspective of marketing and marketing strategies. Part 2 concentrates on the implementation of those strategies. Part 3 considers the unique demands of marketing in specialised markets, such as services, businessto-business markets and tourism markets. "****** DEMO - www.ebook-converter.com*******"

Special features The fifth South African edition of Marketing contains a number of key features that serve as valuable learning aids for students exploring the exciting world of marketing. • Opening examples preview each chapter: Each chapter begins with a high-interest, real-life example designed to introduce students to the chapter’s content. Each opening reader (entitled ‘Marketing in practice’) is based on a South African company’s marketing activities. Each reader concludes with questions that draw attention to the key issues to be discussed in the chapter. Examples of these questions include: Why have brands such as Lion Lager and the VW Kombi been discontinued? What can be done to revive ailing brands such as Barbie and Nedbank? Why is Cell C struggling to penetrate the cellular market? Why does Nando’s use humour in its advertising? What can the Post Office do to survive as competing services, such as private couriers and email, increasingly contest its traditional markets? • Students will discover the answers to these questions and much more as they cover each chapter. A special section before the chapter summary, called ‘Looking back’ answers the teaser questions posed in the opening reader and helps illustrate how the chapter material relates to the real world of marketing. • Fully integrated learning system: The text is organised around the learning outcomes that appear at the beginning of each chapter, providing lecturers and students alike with an easy-to-use, integrated learning system. "****** DEMO - www.ebook-converter.com*******"

LO

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Learning outcomes: Chapter learning outcomes are the linchpin of the integrated learning system. Numbered LO icons, like the one shown alongside, clearly identify the material relating to the learning outcomes in each chapter. They provide a structure for lecture plans and study sessions, which lecturers and students need to ensure complete coverage of each outcome. Text pedagogy that adds value and reinforces learning: Pedagogical features are meant to reinforce learning, but they need not be boring. We have supplied a number of teaching tools within the text that will stimulate students’ interest and enhance teaching. Chapter summaries: Each chapter ends with a summary that extracts the essential points of the chapter. Chapter summaries are organised around the learning outcomes so that students can use them to quickly check on their mastery of the learning outcomes. Discussion and writing questions: To help students improve their writing skills, we have included writing exercises at the end of each chapter. The discussion and writing questions are designed to be brief so that students can accomplish writing assignments in a short time. Strategy readers: Each chapter concludes with a strategy reader – a brief case study of a South African firm’s marketing strategies or activities. Each strategy reader poses a number of questions that link the case study with the theory discussed in the chapter. Key concepts: Key concepts appear in italics in the text.

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•

An alphabetical list of key concepts appears at the end of each chapter as a study checklist. Website: The website inserts direct students to relevant websites where they can further their marketing research on a given subject.

To summarise, the fifth edition of Marketing offers the following special features: • A unique South African perspective without loss of an international or global focus • An outcomes-based orientation • A sensible combination of both theory and practice, suitable for university and technikon undergraduates alike • A contemporary orientation, with case studies and examples currently found in the • South African context • A modular structure for ease of use as stand-alone modules or combined in a semester course • A strong marketing strategy component integrated with the relevant theory • An enhanced emphasis of the role of technology in modern-day marketing. We hope and trust your journey exploring the intricacies of marketing will be an enjoyable one. Finally, we would like to welcome two esteemed co-authors to the author team. Professor H.B. Klopper (Monash University) and Professor Roger Elliot of the University of Fort Hare are experienced marketing academics whose "****** DEMO - www.ebook-converter.com*******"

expertise has enhanced the quality of this text. Our gratitude also goes to Michele van der Merwe of the University of Pretoria who again has made a wonderful contribution in preparing the supplementary material accompanying the book. Christo Boshoff and Nic Terblanche

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PART

01 Introduction to marketing

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CHAPTER

01

An overview of marketing

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2

Define the term ‘marketing’. Explain the nature and relevance of customer satisfaction and loyalty in a marketing context by emphasising the need to measure customer satisfaction. 3 Explain the concept of exchange in marketing terms. 4 Describe six marketing-management philosophies and their role in the evolution of marketing thought. 5 Differentiate between sales and consumer orientations to marketing. 6 Discuss the nature and implementation of the marketing concept. 7 Explain how the pursuit of new opportunities can contribute to the realisation of a firm’s goals and objectives. 8 Explain why an appropriate definition of a firm’s business is important, and describe the pitfalls associated with an inadequate definition. 9 Describe the importance of a competitive advantage in marketing and how this advantage can be established and maintained. 10 Describe the marketing process. 11 Briefly review the role of marketing in the firm. 12 Critically evaluate the criticism often levelled against marketing and suggest arguments that can be used to justify marketing’s "****** DEMO - www.ebook-converter.com*******"

role in the economy. 13 Describe several reasons for studying marketing. 14 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 15 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Customer satisfaction still the key ingredient Whether travelling for business or pleasure, an airport experience can set the tone for the rest of a trip, says Dawn Nathan-Jones, CEO of Europcar. She says this is why Europcar ensures that customer service remains at the core of its business and why the company commits to making each customer’s travelling experience easy, personal and enjoyable. According to Europcar, domestic passenger numbers have increased by 5 per cent to 10 per cent at OR Tambo, Cape Town and King Shaka airports over the past nine months. Nathan-Jones says that the company has had to ensure that its employees are properly skilled and equipped with the right product knowledge to ensure that customers are on the road as quickly and as efficiently as possible. The company has seen an increase in the demand for its ready service where "****** DEMO - www.ebook-converter.com*******"

customers receive their keys in hand within 30 seconds without having to complete any paperwork or having to wait in queues. Once registered, all that’s needed is appropriate identification to get the car. ‘Customers want their airport experience, including collection of their rental vehicles, to be seamless and quick and we understand this,’ says Nathan-Jones. With a 30-year track record in the industry, Europcar constantly measures its customer satisfaction index to ensure that it always meets customer needs. ‘Each day, more than 10 per cent of our customers are surveyed, bringing all touch points into the mix. We believe that if the customer experience is easy, personal and enjoyable, a recommendation will undoubtedly be made, and 98 per cent of our customers advise they would recommend us to a friend or family member, which is a score that Europcar is proud of. We aim to exceed customer expectations at every touchpoint in the business.’ SOURCE: James, A. Customer satisfaction still the key ingredient. Business Day, 17 November 2011, p. 8

QUESTIONS 1 2 3

Why is customer satisfaction important to business firms? What are the dimensions on which the customers of car rental firms base their assessment of customer satisfaction? What role do expectations play in an assessment of customer satisfaction

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1. Introduction Let’s pretend that you are a budding young entrepreneur who has decided to take the plunge and start your own business with a few friends. As you are all keen cyclists, you decide to open a cycling shop. What do you do to get started? You may have completed a first-year business management course, and recall something about the factors of production: natural resources, human resources (labour), capital and entrepreneurship. You also learnt about the typical business functions, such as the production, finance, purchasing and marketing functions. As the expert marketer in the management team, however, you have to address a few important marketing-related issues before you attend the first management meeting. These include the following: • • • • • • • • • •

What are the needs of people buying bicycles? Do they all have the same needs? If not, how can we satisfy their different needs? What do we know about the business environment? How many people in South Africa buy bicycles every year? Do they buy at specific times of the year? Who are our competitors? How many are there? And how strong are they? How can we differentiate our bicycles from those marketed by competitors? Are there different groups of cyclists who prefer specific types of bicycles? How should we design the bicycles?

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• • • • • •

Should we develop our own branding? Will we be able to physically get our bicycles to potential buyers? What is an acceptable market price for different bicycles? Can we be profitable selling at that price? How we are going to tell potential buyers of our shop and products? How are we going to communicate with them and what are we going to say?

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Once you have addressed these questions you should know: •

What the objectives, and in particular what the marketing objectives of the business will be? • What the business’ strengths, weaknesses, opportunities and threats are (SWOT analysis)? "****** DEMO - www.ebook-converter.com*******"

• • • •

•

What the businesses’ competitive advantage would be? Which markets will be targeted? How will the business be positioned against major competitors? What will be the features of the product, how will it be priced and distributed and how will you communicate with the markets you are targeting (the marketing mix)? Who will be responsible for planning and executing our marketing plan?

Using the figure in the margin may be a useful way of structuring your first management meeting. All these questions and activities are related to a process called marketing. Marketing links production (in this example, of bicycles) with a market consisting of potential buyers. The primary function of marketing is to provide need-satisfying products to potential buyers – at a profit. To realise the objectives of satisfying consumer needs at a profit questions like the ones above must be addressed before the business is established. This is normally done in the form of a formal marketing plan (see Figure 14.1 in Chapter 14). Part of the marketing plan will be devoted to a marketing strategy. The marketing strategy will consist of a market segmentation strategy, a market targeting strategy and a positioning strategy (some refer to it as STP) on which the product, distribution, marketing communication (sometimes referred to as the promotion strategy) and pricing strategies (collectively known as the 4Ps) will be based. But before you attend the first management meeting you "****** DEMO - www.ebook-converter.com*******"

need to explain to your fellow business partners what marketing is all about.

2. What is marketing?

LO1

What does the term ‘marketing’ mean? Many people think marketing means selling. Others think marketing is just another word for advertising. Others believe marketing has something to do with making products available in shops, arranging product displays and maintaining inventories for future sales. In reality, marketing includes all of these activities – and much more. Marketing has two facets: •

•

It is a philosophy, an attitude, a perspective and a management orientation that stresses customer satisfaction Marketing is also a set of activities used to implement this philosophy.

The American Marketing Association’s definition encompasses both perspectives: ‘Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners and society at large.’1 Marketing, therefore, means anticipating and satisfying consumer needs by means of mutually beneficial exchange processes, and doing so profitably and more effectively than competitors by means of efficient "****** DEMO - www.ebook-converter.com*******"

managerial processes. The key phrase here is ‘satisfying consumer needs’. Without satisfying consumer needs, no firm or organisation, either profit-driven or not, can survive in the long term. Customer satisfaction can be described, therefore, as the primary goal of marketing.

3. Customer satisfaction When maximising customer satisfaction is the goal, the firm needs to know how well it is meeting customer expectations. Customer satisfaction is the feeling that a product has met or exceeded the customer’s expectations and can be explained in terms of the so-called Disconfirmation Paradigm (Figure 1.1). Figure 1.1 shows that meeting or exceeding customer expectations both lead to customer satisfaction, but dissatisfaction results if performance (such as product performance or employee performance) falls short of those expectations.

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Figure 1.1 the Disconfirmation Paradigm

SOURCE: Adapted from Smith, R.A. & Houston, M.J. 1983. Script-based evaluations of satisfaction with services. In Berry, L.L., Shostack, G.L. & Upah, G.D. (eds). Emerging Perspectives on Services Marketing. Chicago: American Marketing Association, Proceeding Series, pp. 59–62

Customer satisfaction, therefore, is a customer response (a judgement) to a product or service in terms of the extent to which consumption meets the customer’s expectations. Meeting and exceeding customer expectations and thus sustaining customer satisfaction is not an easy task. In fact, a survey of 700 private firms in South Africa has identified customer satisfaction as their ‘key performance area’ – even more important than profitability, market share and turnover.2 As a result many firms in South Africa cultivated very high levels of satisfaction amongst their customers. It is not surprising because these firms emphasise market research and marketing as the tools to explore what customers want. Knowing what your customer wants then "****** DEMO - www.ebook-converter.com*******"

makes it possible to tailor everything you do to pleasing them such as providing the goods that they want, in the packaging that they desire, in retail outlets that are convenient to use and easy to access. No firm, however, can rely on customers to take the initiative to make their feelings of satisfaction or dissatisfaction known. Therefore, firms have to set out to measure the customer satisfaction levels of their customers.

3.1 Measuring customer satisfaction A programme to measure customer satisfaction should be a permanent, ongoing process that translates what customers want (their needs and expectations) into information that can be used in managerial decision-making. A customersatisfaction programme should define, in their own words, what customers want (their expectations) in respect of products and services, in terms of product attributes and quality level. Telkom, for example, measures its customer satisfaction levels annually in terms of customer expectations, quality of service, quality of products and image. Customer satisfaction measurement should also provide insight into factors that are important to customers or specific to a certain industry or firm, such as the price perceptions of customers, the reliability of a service or the image of a brand. Current customers, lost customers and potential customers should all be included in a customersatisfaction measurement programme. Information about customer satisfaction can be collected "****** DEMO - www.ebook-converter.com*******"

in a variety of ways, including: • •

•

Formal research surveys (mail; telephone; personal interviews; focus groups; Internet surveys) Analysis of customer-complaint data (customercomplaint boxes, letters of complaint, monitoring Internet discussions) and interviewing staff (especially those who interact directly with customers) Collecting information about customer needs and expectations from intermediaries such as retailers, sales agents and wholesalers.

Measuring customer satisfaction can, therefore, be both formal and informal, and can be either qualitative or quantitative in nature.

EXAMPLE >> British Airways/Comair collects customer satisfaction information from a variety of sources. Customers participate in a global British Airways customer satisfaction survey called the Global Performance Monitor, which benchmarks British Airways/Comair against international standards. This information is augmented with more qualitative interviews it conducts with its Executive Club members (frequent flyers) during focus-group meetings called ‘Listening forums’. Another source of information is comment cards that are sent to the airline by passengers.

>> Strategy Another example of a comprehensive customersatisfaction measurement programme and how it can assist managerial decision-making is that of the California Department of Parks and Recreation (DPR) "****** DEMO - www.ebook-converter.com*******"

in America. Customer satisfaction surveys form a key component of DPR’s quality improvement process. Data collected from 9 000 questionnaires sent out four times per year at the 268 California state parks enable park management to continually fine-tune their service strategies. For instance, based on feedback from concerned visitors, park officials began collecting data on boating and jet-ski accidents. The results revealed that over a five-year period there were 480 accidents and most of them involved drivers between 23 and 33 years of age. Before the survey, staff believed that the accidents were alcohol-related, and were ready to ban alcohol at the lake. However, the data revealed that the major cause of accidents was inexperienced operators. This insight led park officials to shift their focus to boating safety education. This change in strategy led to a 31 per cent drop in boat accidents. 3 Like the California Department of Parks and Recreation, in order to begin improving customer satisfaction, a firm needs to be able to clearly identify the attributes that convey value to the customer. To identify these attributes it needs to measure customer expectations and perceptions of performance – as well as perceptions of importance for each value component, such as product, service and price. However, a good customer-satisfaction measurement programme generates more than just empirical data about customers’ expectations and perceptions. It also captures qualitative inputs that do not typically result from traditional marketing research, allowing the customer to become an "****** DEMO - www.ebook-converter.com*******"

integral part of a firm’s learning and decision making processes. For example, a series of focus group interviews with small groups of customers may provide valuable insights into how a firm could improve product features, delivery times and enhance customer service – or whatever is important to customers. If you still wonder why business firms should do research to assess the satisfaction of their customers, ask yourself the question: what do consumers do if they are dissatisfied with a firm? Dissatisfied customers often complain to other sources (such as other consumers or consumer bodies, like the South African National Consumer Union (http://www. sancu.co.za/) or the Ombudsman (visit http://ombudsman.ombudsmen.co.za/find-anombudsman/ to find a specific ombudsman in an industry, in the case of life-insurance problems); or they buy less and less; or they stop buying from the offending firm altogether. Even worse, they simply switch to a competitor (see Reader 1 ‘Unwelcome at Telkom’ below). In addition, access to modern technology allows consumers to complain in a manner that can cause serious harm to a firm’s brand and reputation. For instance, a disgruntled Cell C customer erected a giant banner bearing the Cell C logo outside a shopping centre in Boksburg reading: The most useless service provider in SA – Cell C Sandton.4 Firms that fail to retain their customers – that is, keep them loyal by keeping them satisfied – pay a heavy price in monetary terms for their inability to keep their customers satisfied. Satisfied customers, on the other hand, tell others how happy they are with a firm (positive word-of-mouth); "****** DEMO - www.ebook-converter.com*******"

they buy more and more, and, in this way, increase sales and profits; and are often prepared to pay a price premium, further increasing sales and profits. Keeping customers satisfied, therefore, leads to customer loyalty, which ensures the survival and prosperity of the firms who get it right.

READER 1 >> Unwelcome at Telkom I have to agree that Telkom must be the leading contender for the worst customer service in history. I recently tried to arrange a Telkom e-mail connection for my father. Telkom was advertising the ‘first three months free’ so I thought I would take advantage of this offer. The first bill was a dog’s breakfast and failed to correctly reflect my father as a pensioner. Then, after three months, they just cut the service off. This is astounding as they are in the business of selling services and we are willing buyers. Despite our efforts, the service is still not up and running six weeks later. I’ve found that the only way to contact the Telkom call centre was to use our spare office phone on speaker as one had to hold on for over an hour before they answered. Then the Telkom staff behaved arrogantly and were uninformed, unhelpful and often rude. In the interest of sanity I’ve decided to try another service provider and aim to have as little to do with Telkom as possible. SOURCE: Letter published in the Financial Mail, 27 January 2013.

3.2 Customer satisfaction or customer dissatisfaction? When designing customer-satisfaction measurement programmes, firms need to understand the two-factor model of customer satisfaction. This model suggests that the "****** DEMO - www.ebook-converter.com*******"

same factors that contribute to satisfaction may not necessarily contribute to dissatisfaction. One category of factors is called hygiene factors. Hygiene factors are factors that contribute to customer dissatisfaction. The second category is called satisfiers. Satisfiers are factors that contribute to customer satisfaction. Customers can tell firms why they are satisfied or dissatisfied with a product or service. The absence (or poor performance) of some product attributes may quickly lead to dissatisfaction, even though high performance on those same attributes may contribute very little to high levels of customer satisfaction. Conversely, the factors that cause customer satisfaction may not be identified as factors whose absence results in customer dissatisfaction. In other words, poor performance on attributes leading to high satisfaction does not necessarily result in customer dissatisfaction. It is important to note that hygiene and satisfier factors may vary among different groups of customers. Customer-satisfaction research can be designed to determine which factors customers perceive as belonging in the hygiene category and which they perceive as being satisfiers. If a firm performs at a very high level in delivering the hygiene attributes, customers will rate their satisfaction with the product or service as being acceptable, but not exceptional. Hygiene attributes collectively constitute a minimum level of satisfaction, and failure to meet that minimum will cause customers to become dissatisfied. Performing at a very high level on hygiene attributes may yield the customer response: ‘So what? You’re expected to do that.’ "****** DEMO - www.ebook-converter.com*******"

For example, customers expect a hotel room to be clean – a hygiene factor. If the room is not clean when they arrive, they will be dissatisfied. It will not matter if the bed is comfortable, the decor of the room is impressive or whether the bathroom is big and luxurious. Failure to deliver on the hygiene attribute of cleanliness will lead to customer dissatisfaction. Yet if the room is clean, customers probably will not even notice it, because cleanliness is what they expect as a basic minimum. Therefore, cleanliness (a hygiene factor) does not have as strong an effect on satisfaction as it does on dissatisfaction. The hygiene attributes must thus be delivered at an acceptable level of performance before the satisfiers become important. Once the customer’s expectations on hygiene factors have been met, then the satisfiers have the potential to create higher levels of customer satisfaction. In the hotel example, if the room is clean, then the comfortable bed, soothing colours, a large luxurious bathroom and a splendid view of the sea may each contribute to higher satisfaction levels. When measuring customer satisfaction, both the hygiene factors and the satisfiers that are important to customers should be identified and evaluated. Therefore, management needs to ask the right questions to ensure customer satisfaction and customer loyalty.

3.3 The benefits of customer satisfaction and loyalty

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It is unfortunately true that many firms lose up to half of "****** DEMO - www.ebook-converter.com*******"

their customers in five years. Keeping customers satisfied by offering them superior value increases the chances that they will become loyal customers, ensuring the firm’s long-term survival and growth. Satisfied – and consequently loyal – customers are more profitable to firms than those who are not loyal. The favourable economic outcomes of customer loyalty include: •

Lower acquisition cost. Acquisition cost is the cost of recruiting new customers, and includes the cost of advertising, sales calls, public relations and promotional expenditure. Although these costs may be the same per customer for loyal and non-loyal customers, the overall acquisition costs will eventually be lower for a firm with a large, loyal customer base because it needs to generate fewer new customers to sustain its profitability. The direct retailer Home Choice, for instance, estimates that 42 per cent of its sales are made to existing customers, dramatically lowering the need to generate new sales by recruiting new customers. The retailer Edgars has found that 55 per cent of its sales are to existing, loyal customers. In the case of Clicks its 77 per cent. According to a new global survey better branding, loyalty programs and social media are responsible for this trend. But the report also shows that fears about the security of personal data shared online prevent some consumers from making online purchases. WEBSITE For additional reading refer to the article: Online consumers show greater loyalty to

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fewer retailers. (https://www.internetretailer. com/2014/02/24/online-consumersshow-greater-loyalty-fewer-retailers) (24 February 2014)

•

Base profit. All customers buy some product or service and pay a price higher than the firm’s costs. This profit on basic purchases, unaffected by time, loyalty, efficiency, or other considerations, is called base profit. The longer a firm keeps a customer, the longer it will earn this base profit. WEBSITE As technology has developed loyalty cards have become a rich source of data for the companies that offer them, but many questions are asked about its true value to consumers. For additional reading refer to the article: Are loyalty cards really worth it? (http://www.theguardian.com/ news/datablog/2013/oct/31/ areloyalty-cards-really-worth-it)

•

Revenue growth. In most businesses, customer spending tends to accelerate over time. In retailing, for example, customers who buy clothing eventually notice that the shop carries other products, such as shoes or jewellery, and begin to purchase these other products as well which increases the firm’s revenue. Customers may use a travel agent only for local travel, but when they get the opportunity to travel overseas, they may make use of the same travel agent. Clicks has found that its Club Card holders spend three times more than its other

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customers. Therefore, per customer, revenues grow if firms can retain the loyalty of their customers. • Cost savings. As customers get to know a business, they learn to be more efficient. Informed customers do not waste time requesting products or services the firm does not provide, nor are they as dependent on employees for information and advice. For instance, financial planners spend about five times as many hours on a first-year client as they do on a repeat customer. Over time, collaborative learning between the customer and firm creates productivity advantages that directly translate into lower costs. • Referrals. Satisfied customers tend to recommend a firm or brand to others – behaviour referred to as word-ofmouth. Positive word-of-mouth is a very powerful source of ‘advertising’ for any firm and is often regarded as a more credible source of information than advertising by many consumers. • Price premium. Loyal customers who feel they are getting superior value tend to be less price-sensitive than non-loyal customers. In other words, very satisfied customers are less likely to respond to a competitor’s lower prices, special offers or discounts, and will in many cases be prepared to pay a price premium to continue enjoying the use of the superiority offered by the firm. A Mercedes-Benz is not the cheapest motor vehicle on the market, yet it is a very successful firm. Absa emerged from a recent Afriforum survey as the bank with the highest bank charges in South Africa. Yet Absa is a successful bank whose customers are more than willing to pay the higher fees for what they believe is a superior "****** DEMO - www.ebook-converter.com*******"

service compared with what they would get elsewhere. It must be pointed out, however, that customer satisfaction may not ensure customer loyalty at all times, or ensure profitability, but it is a necessary condition for building loyalty among customers. Therefore, the initial exchange between buyer and seller must be a satisfactory one as a starting point to build long-term customer loyalty.

4. The concept of exchange

LO3

Exchange is one of the key terms in the definition of marketing. Yet it is quite a simple concept. It means that a person (a buyer) gives up something of value to a seller to receive something in turn that he would rather have. Normally we think of money as the medium of exchange. A buyer ‘gives up’ money to ‘get’ the products and services wanted from a seller, who, in turn, ‘gives up’ the products or services to ‘get’ money. Exchange does not necessarily depend on money, however. Two persons may barter or trade items such as books or paintings. A student who ‘swaps’ her bicycle for a textbook has been involved in barter trade – a form of exchange without money changing hands. Five conditions must be satisfied for any kind of exchange to take place: WEBSITE A popular local website where retailers or

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consumers can swop goods can be accessed at http://www.swapkit.co.za/index.html. Similarly one can also swop many products on Barterquest (www. barterquest.com/) or OLX (www.olx.co.za). Recently Swop.com launched a mobile application that allows users to swap items that they do not use for products they do need.

• • •

• •

There must be at least two parties (a buyer and a seller) Each party must have something the other party values Each party must be able to communicate with the other party and deliver the goods or services sought by the other trading party Each party must be free to accept or reject the other’s offer Each party must want to deal with the other party. 5

It is important to note that exchange will not necessarily take place even if all these conditions exist. They are necessary, however, for exchange to be possible. For example, you may place an advertisement in your local newspaper stating that your used motor vehicle is for sale at a certain price. Several people may call you to enquire about the car, some may even test-drive it, and one or more may even make you an offer. All five conditions have thus been met, but unless you reach an agreement with a buyer and actually sell the car, an exchange has not taken place. Also note that marketing can occur even if an exchange does not take place. In the example of the car just described, you would have engaged in marketing even if no one bought your vehicle. Marketing, therefore, does not guarantee successful exchange. "****** DEMO - www.ebook-converter.com*******"

Successful exchange demands, however, that a number of prerequisites are first met, as listed above. Exchange takes place within what is described as a market, which consists of people and organisations with needs and wants, who have the means to pay for a product and the willingness to buy. Needs are the basic (often physiological) forces that motivate people to behave in a certain manner. We cannot, however, create needs. Hunger, thirst and the need for shelter, for example, cannot be created. We can, however, create wants. Wants are needs that have been learnt over time. Consumers can learn that a Wimpy breakfast tastes delicious and is good value for money. Marketers cannot make consumers hungry, but they can certainly help them associate the need (hunger) with the benefits of a Wimpy breakfast (a want) – for example, by advertising, which is just one of the many communication tools available to the marketer. The exchange of value (buying and selling), therefore, leads to benefits for both parties: income for the seller and need satisfaction for the buyer. And the firm’s reward for creating a satisfied customer is profit. Now you should understand what marketing is. How marketing has been conducted over the ages, however, has changed as the discipline has developed and adapted to new influences over time. Several developmental phases can be identified, and specific philosophies have dominated marketing thought and practices during different periods.

5. Marketing management philosophies "****** DEMO - www.ebook-converter.com*******"

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Six competing philosophies can influence a firm’s marketing activities. These philosophies are commonly referred to as production, product, sales, consumer, societal and relationship marketing orientations. Although they all still manifest themselves in marketing thinking and activities to this day, each one of them was the dominant paradigm during a specific time in the historical development of the discipline of marketing.

5.1 Production orientation A production orientation is a philosophy that focuses on the internal production or manufacturing capabilities of the firm rather than on the desires and needs of consumers. The production era culminated in the Industrial Revolution – a period in history when the world made significant progress in improving production processes and started moving towards mass production. A production orientation means that management assesses its internal resources and asks questions such as: ‘What can we do best?’; ‘What can our engineers design?’; and ‘What is easy to produce with our equipment?’ In the case of a service firm, managers ask, ‘What services are most convenient for the firm to offer?’ and ‘Where do our talents lie?’ Some have referred to this orientation as a ‘Field of Dreams’ marketing strategy, referring to the famous line from this movie, ‘If we build it, they’ll come.’ There is nothing wrong with assessing a firm’s internal capabilities. In fact, such assessments are major considerations in strategic marketing planning (see "****** DEMO - www.ebook-converter.com*******"

Chapter 14). However, focusing a firm’s marketing efforts on its internal production capabilities only and ignoring customer needs can create problems in the long term. A production orientation does not necessarily doom a firm to failure, especially not in the short term. Sometimes a firm is very fortunate and what it can best produce is exactly what consumers (the market) want at the time. For example, when personal computers first came on the market, most DOS-based software programmes were not particularly user-friendly. Yet the marketers of word-processing software programs such as MultiMate were very successful – for a while. Why? Because the word-processing programmes at the time used production technologies that were a huge improvement on the old electric typewriters, and competition was weak. Despite their user-unfriendliness, consumers still bought these programmes because they offered considerable advantages over the competing products, such as electric typewriters. When competition is weak or demand exceeds supply, a production-orientated firm can survive and even prosper.

EXAMPLE >> When Xerox introduced the first plain paper copier, it had a production capability that was unique. Because of this unique technology Xerox was very successful – mostly because it did not face serious competition for several years after the launch. While competition was weak and fragmented Xerox prospered despite its production orientation. But things soon changed. Once the competition (especially from Japanese firms) gained access to the copier technology and improved on it, especially in the areas of product quality and customer satisfaction, Xerox rapidly lost market share. Most of the firms that succeed in competitive markets have a "****** DEMO - www.ebook-converter.com*******"

clear understanding that they must first determine what customers want and then produce it, rather than focus on what managers think should be produced. The banking group Absa now defines its business as ‘meeting customers’ personalised financial needs’ as opposed to ‘an institution that stores money’ because they realised that a production orientation will not serve them well in the modern-day banking environment where consumer needs are changing.6 The Visa card is no longer a card brand, but ‘a provider of a large number of payment solutions’. In other words, a production orientation is inadequate because it does not consider whether the goods and services that the firm produces most efficiently meet the needs of consumers.

5.2 Product orientation The product orientation era started once most firms had sorted out their production-related problems (that is, introduced some form of mechanisation) and consequently shifted their attention from improving production processes to improving product features and product quality. Firms with a product-orientation philosophy believe that they will be successful if they manufacture good-quality products, regardless of the impact of other influences. Superior-quality products and special product features are the focus of these firms, and they assume that these attributes are all consumers are interested in. They do not conduct research to understand what consumers want in a product or try to involve customers in the design process. These types of firms do not pay much attention to the "****** DEMO - www.ebook-converter.com*******"

activities of their competitors either. They are so fixated on the products they manufacture and their features, that all else pales in significance. The problem with a product orientation is that ignoring customer needs is often fatal. Consumers buy products to satisfy their needs. If products are manufactured with features that are impressive, but the products do not satisfy needs, consumers will simply not buy them. Consider the example of PPG Industries:

EXAMPLE >> Throughout the 1980s, researchers at PPG spent considerable time, effort and money developing a bluish motor vehicle windscreen that would let in filtered sunlight but block out the heat. Scientists were convinced that this new product would be significantly better than existing windscreens. However, when the new windscreen was introduced, the motor vehicle manufacturers refused to buy it. They didn’t like the colour or the price. ‘We developed a great mousetrap, but there were no mice’, said Gary Weber, vice president for science and technology at PPG at the time.7 PPG paid a heavy price for thinking in terms of its product’s features instead of the needs of its customers. But even if the windscreen had enjoyed success, PPG would soon enough have come up against another problem associated with a product orientation: product features are often easily copied by competitors. So what is new and impressive now may not be so for long before competitors are marketing products with similar features. For example, the security firm Maxidor was hugely successful when it first produced security doors with its unique ‘slam lock’. This door locked itself when slammed shut. The advantage was soon lost, however, when it was copied by other security firms, such as Trellidor. Another South African firm that quickly realised that a product orientation was bound to fail was Nando’s (the Portuguese flame-grill fast-food chain). Nando’s strategist, Josi McKenzie, says the focus has shifted from marketing Portuguesestyle peri-peri chicken to what customers really wanted – ‘the Nando’s "****** DEMO - www.ebook-converter.com*******"

experience’.8 Another example is Nedbank’s retail division which been is disarray for many years and the reason is believed to be that fact that Nedbank is ‘too product focused’.9

5.3 Sales orientation The sales orientation era started when business firms improved their production capabilities and increased their production capacity to such an extent that they ended up with surplus goods they could not sell – the result of mass production. So buyers had to be found for the mounting inventory in many warehouses. A sales orientation is based on the idea that people will buy more goods and services if aggressive sales techniques are used, and that high sales volumes result in high profits. Not only are sales to the final buyer emphasised, but intermediaries, such as retailers, are also encouraged (even pressurised) to push manufacturers’ products more aggressively. To sales-orientated firms, marketing means selling things and collecting money. Johann Rupert, chairman of Richemont says: ‘We’ve got to sell. If we do not sell the cost kills us and that’s what keeps me awake at night’. 10 Insurance salespeople sometimes exhibit a sales orientation by using ‘hard sell’ techniques. Alexander Forbes is a case in point. The group has been described as ‘aggressive’ sellers. Its former group CEO, Graeme Kerrigan, said that this is a deliberate strategy. He is quoted as saying: ‘We employ people with enthusiasm, energy and excitement. And we encourage a bit of hard sell.’ 11 "****** DEMO - www.ebook-converter.com*******"

A firm that blames its current hardship on being too salesorientated is the financial services firm Liberty Holdings. ‘Historically, Liberty was a sales-led company and as a result certain systems, processes and remuneration practices [of sales consultants] emphasised sales rather than retention [of customers]’, says CEO of Liberty Holdings, Bruce Hemphill. ‘We have lost touch with our customers’, he says. 12 The fundamental problem with a sales orientation, as with a production and product orientation, is a lack of understanding of the needs and wants of consumers. Salesorientated firms often find that despite the quality of their sales force, they cannot convince people to buy goods or services that are neither wanted nor needed. The business publication Financial Mail’s sales steadily declined from about 33 000 per week in the middle of 2000 to about 26 000 by the beginning of 2004. The reason? Management admitted that it had concentrated too much on circulation figures and had lost track of the needs of its readers. Sales targets can never replace satisfying customer needs.

5.4 Consumer orientation A consumer orientation, which is the foundation of contemporary marketing philosophy, is based on an understanding that a sale depends not simply on excellent production facilities or on an aggressive sales force, but instead on a thorough understanding of consumers’ needs. A consumer orientation assumes that consumers do not buy products for the sake of having them, but because of the need-satisfying properties that the products have. Some buy "****** DEMO - www.ebook-converter.com*******"

a motor vehicle to get from A to B. Others buy the same vehicle to impress their friends. Still others buy the same vehicle for racing purposes. They all buy a motor vehicle, but they do so to satisfy different needs. The basis of a consumer orientation is identifying, understanding and satisfying the needs of consumers. Consumer orientation is based on a philosophy referred to as the marketing concept. The marketing concept is simple and comprises an intuitively appealing approach to marketing. It suggests that the social and economic justification for a firm’s existence is the satisfaction of consumer needs and wants – while meeting the firm’s objectives. The marketing concept is based on three ‘pillars’: • • •

First and foremost, customer satisfaction – by focusing on customer needs and wants Integrating all the firm’s activities, including production, to satisfy these needs and wants Realising long-term goals, such as sustained profitability, by satisfying customer needs and wants legally and responsibly

The marketing concept is based on the recognition that customer-need satisfaction is the key to successful marketing. The importance of need satisfaction is acknowledged in the majority of definitions of marketing. Without need-satisfying characteristics, no sale will occur, which suggests unsuccessful marketing. In short, a firm must provide what the customer wants – not what the firm thinks customers want or should want. The second pillar of the marketing concept is the "****** DEMO - www.ebook-converter.com*******"

integration of all the firm’s activities to ensure customer satisfaction. This requirement implies that customer satisfaction is not the sole responsibility of the marketing department. In other words, everyone in the firm has to work towards the goal of customer satisfaction, and the entire firm’s people, processes, leadership and, indeed, its culture, must be geared towards this primary goal. The third pillar of the marketing concept is an acknowledgement that firms cannot survive and prosper if their marketing activities are illegal or unethical. One can extend this line of thinking by arguing that business firms should make a positive contribution to ensure the enhancement of the business environment in which it does business. Although the philosophy of the marketing concept is simple and intuitively appealing, it is often surprisingly difficult to implement. Some firms have unfortunately learnt this the hard way.

EXAMPLE >> Afribrand, a firm that used to specialise in marketing products to street hawkers, was mystified when the new biscuits it supplied were simply not bought. After a while, the reason became clear. Street hawkers traditionally bought broken, rejected biscuits from biscuit factories, so the new, whole, unscathed biscuits did not satisfy their needs. As a result, they simply did not buy them. To be able to sell their biscuits, Afribrand had to break them before selling them to the street hawkers! In other words, Afribrand realised that for exchange (sales) to take place, they had to satisfy the needs of their customers. Customer satisfaction is a positive reaction to a purchase decision or product after purchase. In other words, it is the result of a purchase, and is in essence an assessment of need "****** DEMO - www.ebook-converter.com*******"

satisfaction. The objective of all marketers ought to be customers who are satisfied with their purchase(s) because that will show that the firm has successfully implemented the marketing concept. Today, most types of firms, at least in theory, subscribe to the marketing concept. For example, Spar has become one of the leading retailers in South Africa by focusing on what most grocery shoppers want: good-quality products, reasonable prices, a clean and spacious environment and quick service. While accepting the philosophy of the marketing concept, marketers have realised over time that there are two additional requirements for successful long-term marketing. The first is that marketing must be executed in such a manner that the society in which the firm operates benefits from the firm’s activities. The second requirement is that marketing should not be a once-off activity: instead, it ought to lead to a long-term relationship and mutual loyalty between the firm and the customer. These requirements have led to two further developments in marketing thought, namely a societal marketing orientation and a relationship marketing orientation.

5.5 Societal marketing orientation One reason a marketing-orientated firm may choose not to deliver the benefits sought by consumers is that these benefits may not be beneficial to individuals or society. There is obviously demand for products such as cannabis and unlicensed firearms, but they are illegal. Other products "****** DEMO - www.ebook-converter.com*******"

are legal but are subject to ethical constraints. This important refinement of the marketing concept, called the societal marketing concept, acknowledges that a firm exists not only to satisfy consumer needs and wants, and to meet the firm’s objectives, but also to preserve or enhance individuals’ and society’s long-term best interests.

Marketing ‘environmentally friendly’ products and packaging, for instance, is consistent with a societal marketing orientation. Absa Bank’s sponsorship of some of the initiatives of the Kruger National Park is one such example. Absa says: ‘We’re always ready to lend a hand by investing in the preservation of the environment in which we all live, which will continue to make our country a better place. This comes as second nature to us.’ Vital, a marketer of health products, donates one Rand from the price of every "****** DEMO - www.ebook-converter.com*******"

pack of Vital vitamins sold in South Africa to a fund fighting the scourge of women and child abuse. Acceptance of the societal marketing orientation is an acknowledgement by marketers that business firms do not do business in isolation and must make a contribution to the society in which they function. A more recent manifestation of societal marketing is socalled ‘green marketing’. The retailer Woolworths, for instance, has launched its ‘Farming-for-the-future’ project to help farmers who supply them with fresh produce to reduce their dependence on artificial chemical fertilisers (and use compost and organic fertilisers instead), and pesticides and herbicides. Healthy soil requires less irrigation because it retains water better, mitigates the effects of global warming and reduces the loss of topsoil to erosion. Julian Novak, who heads Woolworth’s food group, says: ‘In our trial we have seen crop yields increase, we have seen indigenous wildlife and birdlife return. The environment is returning to health.’13 In a similar vein, the bread manufacturer Albany has launched South Africa’s first biodegradable bread bags.

READER 2 >> Bottled Water: Not an environmentally friendly product? Traditionally bottled water has been considered a bland commodity and it is therefore surprising that there is such huge growth predicted for this market. To illustrate this point, consider that in 2006 the value of bottled water sold globally reached a value of US$60 938 million which comprised a volume of 115 393,5 million litres. In spite of these impressive figures, the bottled water "****** DEMO - www.ebook-converter.com*******"

market is forecast to increase by 2011 (from 2006) in value by some 41,8 per cent to US$86 421,2 million and in volume by 51 per cent to 174 286,6 million litres. There have, however, been a number of criticisms levelled at the manufacturers of bottled water and these are mostly surrounding the impact that this industry is having on the environment. A major concern is the material which is used to package the water, much of which is not recycled and ends up as litter or goes into landfill sites. Similarly, recent concerns about the carbon footprint associated with the harvesting, bottling and transportation of water has resulted in a consumer backlash against the consumption of bottled water. For example, in the small rural Australian town of Bundanoon, residents were angry about the plans of a company to build a water extraction plant in the town, transport the water to a bottling plant 150 km away for processing and then selling it back to them. The residents responded by banning the sale of bottled water in the town. This incident has been regarded by some environmental activists as indicative of a worldwide trend. SOURCES: Australian town bans bottled water. Guardian.co.uk, 9 July 2009; http://www.theguardian.com/environment/2009/jul/09/australian-bottled-water-ban http://en.wikipedia.org/wiki/Web_2.0; King, M. 2008. Bottled Water - Global Industry Guide, PRinside.com, 7 July 2008

5.6 Relationship marketing orientation The realisation that customer loyalty is an important consideration in long-term marketing success has been the most recent refinement of the marketing concept. Enlightened marketers have realised that they need to focus on building long-term relationships with their customers rather than on short-term transactions. The relationship marketing philosophy emphasises forging long-term "****** DEMO - www.ebook-converter.com*******"

partnerships with customers. Firms build relationships with customers by offering value and providing satisfaction on a consistent basis. Firms that successfully implement relationship marketing benefit from repeat sales (loyalty) and referrals, which lead to increases in sales, market share and profits. Costs fall because it is less expensive to serve existing customers than to attract new ones. Keeping a customer costs about a quarter of what it costs to attract a new customer, and the probability of retaining a customer is more than 60 per cent, whereas the probability of attracting a new customer is often less than 30 per cent.14 Customers also benefit from stable relationships with business firms. For example, a bank teller who knows her clients’ needs is surely in a better position to provide a quicker, more efficient, more personalised and needsatisfying service than a bank teller who serves a stranger whom she does not know at all.

EXAMPLE >> Airlines’ frequent-flyer programmes (such as South African Airways’ Voyager programme) are an example of financial incentives offered to consumers in exchange for their continued loyalty. After flying a certain number of miles or flying a specified number of times, the frequent-flyer programme participant earns a free flight or some other award, such as free accommodation. Frequent-flyer programmes encourage customers to become loyal to specific airlines and reward them for this behaviour. The banking group First Rand’s eBucks programme (First National Bank and RMB Private Bank) is arguably one of the most successful loyalty programmes in South Africa (it has more than 1 million members). First Rand customers earn eBucks when they use their credit, debit or cheque accounts and can spend the rewards (they get 10 eBucks for every rand they spend) on a variety of products and services. "****** DEMO - www.ebook-converter.com*******"

Many firms acknowledge the importance of long-term relationships, and convey this orientation in their advertising. Mutual and Federal says: ‘There is nothing short term about our relationship with our policyholders.’ A sense of well-being occurs when one establishes an ongoing relationship with a firm or service provider, such as a retailer, doctor, bank teller, hairdresser or accountant. The "****** DEMO - www.ebook-converter.com*******"

social bonding that takes place between provider and customer ensures personalisation and customisation of the relationship. Firms can enhance these bonds by, for instance, being reliable, referring to customers by name and providing continuity of service through the same employee, such as a personal banker. Although different marketing orientations have predominated at different times, this does not mean that nowadays all business firms actually implement the latest thinking in their daily marketing activities. Unfortunately, in South Africa the ideal of a consumer orientation based on need satisfaction, long-term customer relationship-building and due regard for the environment is often a pipe dream. One has only to read the letter columns of magazines and newspapers to find confirmation of that. A letter writer recently wrote: ‘The saga of poor service from the Post Office continues. The Post Office is costing us a fortune through late deliveries of accounts and payments.’ A regular moviegoer recently said that he has stopped going to movies because of ‘the movie starting out of focus, booking the ideal seat only to find it broken, inadequate legroom, poor sound quality, continual latecomers, cellphones ringing, doors left open letting in noise and light and patched screens painfully visible’. Successfully implementing the marketing concept is easier said than done. Unfortunately, the focus is too often on sales rather than on customer satisfaction and building relationships with customers.

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5.7 Differences between sales and consumer LO5 orientations As noted at the beginning of this chapter, many people confuse the terms ‘sales’ and ‘marketing’. These orientations are substantially different, however. Table 1.1 compares them in terms of five characteristics: the firm’s focus, the firm’s business, the firm’s primary objective, the tools the firm uses to achieve its objectives and those at whom the product is directed. Table 1.2 demonstrates the differences between the two types of orientations by using actual examples of three firms.

5.7.1 The firm’s focus Table 1.1 shows that the staff of sales-orientated firms tend to be inward-looking, focusing on selling what the firm makes rather than making what the market wants (an outward or external focus). Many of the historic sources of competitive advantage – technology, innovation, economies of scale – allowed firms to focus their efforts internally and to prosper. The accounting profession or the computer software industry are good examples of this reality. Today, most successful firms have shifted to an external, consumerorientated focus. This focus acknowledges that no amount of technical superiority will bring success in the long term unless customer needs are satisfied. As Alex Trotman, ex-chairman of Ford Motor Company, once said, ‘The customer, not Ford, determines how many vehicles we sell.’ 15 Raymond Ackerman, the chairman of Pick n Pay, refers to ‘the supremacy of the customer’. 16 He "****** DEMO - www.ebook-converter.com*******"

has coined the phrase ‘Treat the customer like a queen and she will make you a king’ to illustrate Pick n Pay’s marketing philosophy. 17 A decision on the firm’s focus leads to the question ‘What business are we in?’ This question is discussed in more detail when we discuss this topic under the heading ‘The firm’s business’ of this chapter.

5.7.2 The firm’s primary goal As Table 1.1 illustrates, a sales-orientated firm pursues profitability by growing sales volume and tries to convince potential customers to buy, even if it knows that the customer’s needs and the product’s benefits may be mismatched. Sales-orientated firms place a higher premium on making a sale than on developing a long-term relationship with a customer. By contrast, the ultimate goal of most consumer-orientated firms is to make a profit by creating customer value, ensuring customer satisfaction and building long-term relationships with customers.

5.7.3 Tools the firm uses to realise its goals Sales-orientated firms try to generate sales volume by using intensive promotional activities, mainly personal selling and advertising. By contrast, consumer-orientated firms recognise that promotion decisions are only one of several basic marketing-strategy decisions that have to be made. These include decisions on the so-called four ‘P’s: product decisions, place (or distribution) decisions, promotion (marketing communication) decisions, and pricing decisions. Chapters 8 to 12 focus on these topics. A "****** DEMO - www.ebook-converter.com*******"

consumer-orientated firm recognises each of these four components as important. On the other hand, salesorientated firms view advertising and promotion as the primary means of realising their goals. Table 1.1 Differences between sales and consumer orientations

Table 1.2 Illustrating the differences between product and consumer orientated approaches Company

Product orientated

Consumer orientated

Revlon

We make cosmetics

We sell lifestyle and self-expression; success and status; memories; hopes and dreams.

Xerox

We make copying, fax and other ofice machines

We make business more productive by helping them scan, store, retrieve, revise, distribute, print and publish documents.

RitzCarlton Hotels

We rent rooms

We create the Ritz-Carlton experience – one which enlivens the senses, instills well-being, and fulfills even the unexpressed wishes and needs of our guests.

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5.7.4 Those at whom the product is directed A sales-orientated firm targets its products at ‘everybody’ or ‘the average customer’. A consumer-orientated firm targets specific groups of people. The fallacy of developing products targeted at the ‘average’ user is that relatively few average users actually exist. Typically, populations are characterised by diversity. An average is simply a mid-point in some set of characteristics. Because most potential customers are not ‘average’, they are not likely to be attracted to an average product marketed to the average customer – often by a below-average marketer! Consider, for example, the market for shampoo. There are shampoos for consumers with oily hair, dry hair and for those suffering from dandruff. There are shampoos for permed hair, coloured hair, heat-damaged hair. Some shampoos enhance the hair’s colour. Special shampoos are marketed for infants and elderly people. There are frequentuse, all-in-one and family shampoos – but nowhere will you find a shampoo that admits to catering for the ‘average’ customer. A consumer-orientated firm recognises that different customer groups exist and that their needs are different. It may, therefore, need to develop different goods, services and promotional appeals for different customer groups. A consumer-orientated firm carefully analyses the market and divides it into groups of people who are fairly similar in terms of selected characteristics (referred to as market segmentation). Then the firm develops marketing strategies that will bring about mutually satisfying exchanges with one "****** DEMO - www.ebook-converter.com*******"

or more of those groups or segments. Caxton Magazines, for instance, has a very good idea who reads its different magazines (such as Bona, Style, South African Country Life, Living and Loving, Garden and Home and Farmer’s Weekly) and knows what their needs are. Paying attention to the customer is not exactly a new concept. Back in the 1920s, General Motors Corporation helped write the book on customer satisfaction by designing cars for every lifestyle and pocket. This consumer-orientated approach was a breakthrough for an industry that had been largely driven by production needs ever since Henry Ford promised consumers they could have any car colour they wanted as long as it was black. Chapter 6 explores the topic of analysing markets and selecting and focusing on those segments that appear to offer the most promising opportunities.

6. A word of caution This comparison of sales and consumer orientations is not meant to belittle the role of marketing communication or personal selling in the marketing mix. In fact, consumers cannot buy products of which they are unaware. Marketing communication (some prefer the term ‘promotion’) is the means by which firms communicate with present and prospective customers about the merits and characteristics of their firm and products. Effective marketing communication is an essential part of effective marketing. Salespeople who work for consumer-orientated firms are "****** DEMO - www.ebook-converter.com*******"

generally perceived by their customers to be problemsolvers and important links to supply sources and new products.

7. Implementing the marketing concept in LO6 existing firms In an established firm, changing to a consumer-driven organisational culture must occur gradually. Furthermore, middle-level managers alone cannot effect a change in corporate culture; they must have the total support of the CEO and other top executives. According to Thomas J. Pritzker, former president of Hyatt Hotels, the notion that a customer orientation can just be turned on is a fallacy: ‘Management has to set a tone and then constantly push, push, push.’ 18

EXAMPLE >> The success of Nordstrom, an American retailer, illustrates the results of strong management support for customer-orientated service. Nordstrom employees will do almost anything to satisfy shoppers. One story, which the firm does not deny, tells of a customer who got his money back on a car tyre, even though Nordstrom doesn’t sell tyres. It is therefore not surprising that Nordstrom received the highest overall customer satisfaction rating from 2 000 shoppers who participated in a study ranking convenience and quality of offerings.19

7.1 Changes in authority and responsibility "****** DEMO - www.ebook-converter.com*******"

Changing from a product or sales orientation to a consumer orientation often requires major revisions in relationships within the firm. Non-marketing employees, such as production managers who have been making marketing decisions, may suddenly lose their authority. Staff in such areas as marketing research may find that they have gained considerable authority. One way of winning acceptance for implementing the marketing concept is to get everyone who will be affected by the change to participate in the planning process. It is important to remember, however, that during a period of change, some problems relating to human relations are inevitable. Implementing the marketing concept slowly rather than in a revolutionary fashion will smooth this transition.

EXAMPLE >> Saki Macozoma, the ex-managing director of Transnet, said converting Transnet into a consumer-orientated firm was difficult: ‘Previously the mindset was that “we run a train service between Johannesburg and Cape Town and if you want to, you can put your goods aboard.”’ He acknowledged that Transnet was highly competent technically, but that there was ‘no business culture’. Today, Transnet regards its core business as ‘bulk freight transportation’.20 Namibian Breweries acknowledges that it has been a sales-orientated firm up to now. Its whole marketing effort has been focused on its distributors (retail sales outlets such as liquor stores, supermarkets, restaurants and shebeens) instead of on its consumers. To compete with South African Breweries in the mass beer market, Namibian Breweries had to convert to a market-driven firm, said the then general manager of Namibian Breweries in South Africa, André Homann. ‘Without a consumer we have no business,’ he added.21

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7.2 The importance of new opportunities

LO7

It was pointed out earlier that the marketing concept is based on three ‘pillars’, one of which was customer satisfaction achieved by focusing on customer needs and wants, and – more importantly – anticipating and satisfying customer needs and wants. To realise this objective, the firm must constantly scan the environment for potential opportunities that it can utilise (environmental scanning is discussed in more detail in Chapter 2), and then decide whether and how to utilise the potential opportunity. There are many examples of firms whose market and strategic planning processes and culture are strongly market-focused. General Electric, Wal-Mart, Sony, Toyota, Honda, and Microsoft are a few examples. All of these firms have track records of driving market focus toward opportunities where they can create both wide buyer choice and high cash flows. They also share the ability to quickly exit ventures that cannot create high, long-run net cash flow. A different story is that of GM whose historical financial metrics have focused on growing market share and revenue, rather than on creating and sustaining positive net cash flow. However, the loss of market focus on the scale and scope of GM’s, in the long run, inevitably lead to huge cash losses. As a result General Motors is running out of cash, desperately seeking government support to survive. 22 Although there are other considerations, such as the objectives of the firm and its strengths and weaknesses (these are discussed in more detail in Chapter 14), there are three very important steps in evaluating new opportunities. "****** DEMO - www.ebook-converter.com*******"

The questions that must be addressed are: • • •

What business are we in? Does this apparent opportunity fall inside or outside the scope of our business? If we pursue this opportunity will we have a sustainable competitive advantage?

It is very important that firms are constantly on the lookout for new opportunities to ensure that they survive in a competitive environment and that competitors do not steal a march on them by being first with, say, a new product. For instance, Langeberg allowed Royco to be the first firm in the market with a ‘potato bake’ product, which allowed Royco to capture a significantly larger market share. Langeberg now has to play ‘catch-up’. Media24, on the other hand, was quick to spot the opportunities offered by the growing home improvement and do-it-yourself market and launched Tuis magazine in Afrikaans and Home in English to fill the gap in the market. The second step (considering whether the firm should pursue the opportunity) involves several decisions about an appropriate marketing strategy, marketing plans and marketing programmes and we will return to them later. First we have to consider the question: ‘What business are we in?’

7.3 The firm’s business

LO8

How a firm perceives the business it is in often reflects the "****** DEMO - www.ebook-converter.com*******"

degree of its commitment to the marketing concept. As Table 1.1 shows, a sales-orientated firm defines its business (or mission) in terms of goods and services. A consumerorientated firm defines its business in terms of the benefits its customers seek. Consumers who spend their money, time and energy expect to receive benefits, not just goods and services. This distinction has enormous implications. There are two ways of defining a firm’s business, or the market in which it competes, namely in generic terms or in product-market terms. Defining the firm’s business as competing in a product market involves answering four questions: 23 • • • •

What? (product type) To meet what? (the customer need satisfied) For whom? (customer types) Where? (geographic area)

Consumers in a product market will have very similar needs, and competing firms will offer close substitutes to satisfy those needs. If Ster Kinekor defines its business as ‘supplying films to film theatres to satisfy the film-watching needs of private individuals in South Africa’ it is a productmarket definition. The definition implies that consumer needs are very much the same (watching films) and all competitors will do exactly the same – supply films to film theatres. It is also a very narrow definition, because it does not allow for options other than supplying films. The danger here is that too narrow a definition may result in the firm missing market opportunities to serve customers whose wants could be met by a wider range of alternative product "****** DEMO - www.ebook-converter.com*******"

offerings such as videos, DVDs and videos on demand (via the Internet). Instead, it has defined its business in generic market terms – ‘We are in the entertainment business.’ A generic definition implies a wider range of competitors (in this case any provider of any form of entertainment), but also opens up a wider range of potential opportunities to satisfy the needs of consumers. Most importantly, however, a generic definition of a firm’s business focuses on customer needs and the benefits customers seek. As Charles Revson, the founder of Revlon, says: ‘In the factory we make cosmetics. In the store we sell hope.’ The telecommunications firm Neotel says they are ‘in the business of connecting enterprises and people’. Malcolm Searle, the brand-development manager of the food manufacturer Tiger Brands, the owners of, among others, the Tastic rice brand, says: ‘People are not buying a set of ingredients. They ask, “What are we going to have for dinner tonight?” not “What rice am I going to eat?” We are not in the rice business but in the business of understanding what people consume at mealtimes. We thought we were in the peanut butter and jam business. But we are in the spreads and toppings business, competing with honey, fish paste and cheese spreads.’24 How a firm defines its business consequently also impacts on the competition it faces. A firm describing its market in generic terms would then refer to a personal expression market rather than a Christmas card market, a home-decorating market rather than a paint market, a family-security market rather than an insurance policy market and a transportation market rather "****** DEMO - www.ebook-converter.com*******"

than a motor vehicle market. Answering the question ‘what is this firm’s business?’ in terms of the benefits customers seek instead of goods and services has at least three important advantages: 1

2

3

It ensures that the firm keeps focusing on customers’ needs and avoids becoming preoccupied with the physical attributes and features of its products, or with the firm’s own internal needs. It encourages innovation and creativity by reminding people that there are many ways to satisfy customer needs and wants. It stimulates an awareness of changes in customer needs, wants and preferences, so that product offerings are more likely to be adapted to remain relevant.

EXAMPLE >> An example of a firm that did not get the definition of its business right is Encyclopedia Britannica. In 1990, Encyclopedia Britannica earned more than R240 million after taxes. Just four years later, however, after three consecutive years of losses, the sales force had collapsed. How did this respected firm sink so low? Its managers saw that competitors were beginning to use CD-ROMs to store huge masses of information, but chose to ignore the new computer technology25 because they thought of themselves as being in ‘the bookpublishing business’. It is not hard to see why parents would rather give their children an encyclopedia on a compact disc than a printed one. A full set of the Encyclopedia Britannica costs a minimum of R9 000, weighs 269 kilograms, and takes up almost 2 metres of shelf space.26 The CD versions sold by other publishers cost less than R2 400. If Britannica had defined its business in generic terms as ‘providing information’ instead of ‘publishing books’, it might not have suffered such a precipitous fall. In desperation the firm now gives its content away on its web site for free and hopes to make some money by selling "****** DEMO - www.ebook-converter.com*******"

advertising space. Another example is Kodak. Its demise can be attributed to the fact that it saw its business as ‘we make films’ instead of regarding its business as ‘we create storage possibilities for memories’. Marketing myopia is the term used to describe management’s failure to recognise the scope of its business. Defining the scope of business too narrowly can lead to lost opportunities. Defining the scope of business too broadly, on the other hand, can lead to the sub-optimal use of resources as the firm gets involved in business it should not.

EXAMPLE >> The mass retailer Massmart is very conscious of the problems that marketing myopia can cause. Massmart has made it clear that it will not pursue marketing opportunities outside the African continent, outside fashion markets, in micro-marketing activities (as opposed to mass marketing) or where credit has to be extended to customers.27 By redefining its business as ‘document solutions’, Xerox has been able to use cutting-edge technology, digital hardware and sophisticated software to exploit new opportunities in documentflow management to solve its customers’ need for efficient document distribution, despite fierce competition. Firms that have not evaluated apparent opportunities appropriately in terms of their business definitions have paid a heavy price. The construction firm Stocks and Stocks became insolvent in 2000 and had to be delisted from the Johannesburg Securities Exchange. The reason? Stocks and Stocks got involved in property development and management (Kwa Maritane resort near Sun City and Brookes Hill in Port Elizabeth, among others), which is outside their traditional business, namely building construction. What appeared to be an opportunity turned "****** DEMO - www.ebook-converter.com*******"

out to be a disaster as the firm got deeper and deeper into debt in pursuit of ‘wrong markets’ that ‘eroded its focus’.28 Sun International, on the other hand, has remained tightly focused on its core business despite apparent opportunities elsewhere. The managing director of Sun International, Peter Bacon, says: ‘We do not want to become a rag-tag of dissimilar operations. We have to make the fullest possible use of the company’s impressive bank of skills, professional knowledge and capability and develop operations within the broad range of our facilities … [We do not] want to become an operator of limited-service hotels. Our role is to stay inside our proven area of ability – and that is to operate high-quality, full-service resorts in prime, highdemand locations.’ 29 Failure to adapt to a focus on customer needs and on the way customers define their business may have serious consequences for many firms. The retailer Woolworths is a firm that has often paid the price for not adequately aligning its business with its customers’ needs. A customer once wrote: ‘… the reason Woolworths lost clothing shoppers is that it lost the plot, in particular in its women’s range. Woolworths was where we shopped for good-quality and competitively priced basics: the well-cut blazer, quality shirt, plain black shoes. Truworths and Edgars were where we went for “in today, out tomorrow” fashion items. Today, Woolworths is a mishmash of everything and nothing. We still support Woolworths food halls, but until it loses the imitation snakeskin shoes and high-fashion blouses, we will shop elsewhere for clothes.’ 30 "****** DEMO - www.ebook-converter.com*******"

However, the firm has done a lot to become more consumer orientated (see the Reader 3 ‘Concerns are noted’).

READER 3 >> Concerns are noted Sir – I wish to respond to Tim Anderson’s letter (Keep shelves stocked, May 14). We appreciate Mr Anderson’s continued feedback to Woolworths and regret that we have not entirely met his expectations. As a customer, his feedback is vital and we have work to do to overcome the shortfalls he has highlighted. Our customers expect to find the product they want, when they want it, in our stores. I would like to acknowledge Mr Anderson’s concern that some fresh produce is not available when he needs it. Improving availability is a high priority in our business. We work very closely with our suppliers, whether they are based locally, in neighbouring countries or abroad, and we deal only with suppliers that meet our quality, environmental and ethical standards. If the products do not meet our standards, they will not make it to our shelves. Through our dedicated head-office team, improvements are being made to planning and distribution systems and we believe that some customers are already seeing improvement. We have also investigated and addressed Mr Anderson’s concerns about the fruit he bought in our store. We rely on customers such as Mr Anderson to make sure the right products and services are available to meet customers’ needs. Woolworths is making every effort to improve the concerns Mr Anderson has raised. SOURCE: Letter to the Editor of Business Day from Paula Disberry, Woolworths Group Director, Retail Operations. Business Day, 21 May 2014, p. 8

The marketing concept and the idea of focusing on consumer needs and wants do not mean that consumers will always receive everything they want. It is not possible, "****** DEMO - www.ebook-converter.com*******"

for example, to profitably manufacture and market for R50 each car tyres that will last for 100 000 kilometres. Furthermore, customers’ preferences must be mediated by sound professional judgement as to how to deliver the benefits they expect. As one adage suggests, ‘People don’t know what they want – they only want what they know.’ In other words, consumers have a limited set of experiences. They are unlikely to request or expect anything beyond those experiences because they are not aware of benefits they may gain from other potential market offerings. For example, before Henry Ford started building motor vehicles, people knew they wanted quicker, more convenient transportation, but could not express their need for an affordable family car. In what is probably an urban legend of sorts Ford allegedly said: ‘Had I asked them what they want, they would have said a faster horse’. Similarly, if researchers had asked housewives years ago,31 many would have been able to say that a speedier way to cook meals and warm-up and defrost food would be very convenient. No one would, however, have been able to say: ‘What I need is a microwave oven.’ The ability to utilise new opportunities by anticipating consumer needs ahead of competitors can yield an important competitive advantage for business firms.

7.4 The importance of a competitive advantage

LO9

Once a firm has identified a potential opportunity, and decided that this opportunity falls within its scope of business, the next step is to consider whether it can establish "****** DEMO - www.ebook-converter.com*******"

a competitive advantage in the market it hopes to target. Most industries and sectors in South Africa are fairly competitive. Of course, there are industries that are dominated by large (often public sector) organisations, such as electricity (Eskom), fixed telephone lines (Telkom) and airports (the Airports Company). In the private sector, South African Breweries dominates the beer market, for example. Although these dominant firms do not face much direct competition, they often have to contend with indirect competitors. For instance, if you are thirsty, you do not have to drink a beer produced by South African Breweries. You may prefer a Coke or a bottle of mineral water. Similarly, you can use gas instead of electricity, a cellphone rather than a fixed-line telephone, or send an e-mail message rather than post a letter using ‘snail mail’. In most other South African industries, competition is often vigorous. Examples are banking, car rental, retailing and airline travel. Competition has an important bearing on marketing decision-making, especially in a competitive environment where it is easy for firms to copy each other’s product offerings. For instance, the first video machine manufacturer to market a remote control found that it was not long before all the other manufacturers had copied the feature and they all had remote controls. In such an environment it is difficult to have something special to offer potential buyers. Given the level of competition, consumers make a buying decision based on some rational decision. They select a Volkswagen Polo above a Toyota Yaris for a reason. They buy from Woolworths rather than from Pick n Pay for a "****** DEMO - www.ebook-converter.com*******"

reason. They travel with British Airways rather than South African Airways for a reason. That reason is known as a competitive advantage. A competitive advantage is something a firm or product has that competing firms or products do not have (also called a unique selling proposition, or USP).

EXAMPLE >> The managing director of Nu-World Industries (a firm "****** DEMO - www.ebook-converter.com*******"

marketing electrical appliances such as kettles, stoves and video machines), Michael Goldberg, says his firm’s competitive advantages are the sales force’s knowledge of their products, brands that range from low-cost, entry-level products to luxury items, and low prices due to effective stock (inventory) management.32 The shampoo manufacturer Organics saw the need to develop a mousse for coloured hair. Its Colour Active mousse shampoo is the first mousse shampoo for coloured hair. The competitive advantage? ‘To keep your hair colour fresher for longer.’ In a highly competitive environment firms must offer something special to prospective buyers – something that no other firm offers. This ‘reason for buying’ is a way of differentiating the firm and its products from those offered by competitors – a competitive advantage. Ideally, a competitive advantage must be sustainable over time and it must be based on dimensions or features (such as durability, user-friendliness or quality) that are important to consumers. Because high cholesterol levels is a health concern for many consumers Flora emphasises that using its margarine will lower users cholesterol levels between 7 and 10 per cent (see the Flora advertisement). Trying to use a dimension that is not important to consumers as a means of establishing a competitive advantage will simply not work. A tyre manufacturer using glossy black rather than a dull black for its tyres may find that many potential customers simply do not care. In the UK, a new red wine is now marketed that is claimed to be ‘good for heart health’. The wine has exceptionally high levels of antioxidants (32 per cent more antioxidants than comparable red wine), which protect the human body against the harmful effects of free radicals. "****** DEMO - www.ebook-converter.com*******"

Only time will tell whether this feature is a sustainable competitive advantage. Sometimes firms struggle to differentiate themselves from competitors, especially when they enter a market relatively late. Many of the cellphone operator Cell C’s financial woes are attributed to its inability to properly differentiate itself from competitors Vodacom and MTN. 33 Even in industries where it may appear to be difficult to establish a competitive advantage, some firms have come up with novel ways to differentiate themselves. Examples are new methods of processing milk to enhance its shelf life in the refrigerator and a car tyre that cannot puncture (Goodyear’s claim). There are many ways in which firms can differentiate themselves to establish a competitive advantage. We will refer to them throughout this book. In this chapter, we will discuss a few of these ways, namely service quality, creating customer value, maintaining customer satisfaction, having customer-orientated employees, superior training of employees, empowerment and teamwork.

7.4.1 Service quality as competitive advantage In industries where physical products form the core of the market offering – such as electrical appliances, motor vehicles, computers, groceries, sports goods, and the like – it is difficult to establish a competitive advantage that can be sustained. Remote controls on a video machine were a competitive advantage – for a while. A small, fuel-efficient car was a competitive advantage – for a while. User-friendly computer software was a competitive advantage until all "****** DEMO - www.ebook-converter.com*******"

competitors made their software user-friendly. As business consultant Terry Behan says, ‘… very few companies have a genuine technical competitive advantage or a unique selling proposition. And even if it is the case, without an optimal service delivery none of that matters’. 34 As services are delivered by people, their quality is intangible – and, therefore, a lot more difficult to copy. Many believe that service quality is the only competitive advantage that is sustainable over the long term. Firms such as British Airways have realised that many international airlines also offer safe, reliable air transport with a wide selection of international routes and destinations. British Airways argued, however, that although many airlines can offer the core, basic product (that is, what they offer), not all airlines will offer it in the same manner (how it is offered). British Airways has decided to differentiate itself by means of how its product is offered – excellent service quality. No one can argue that they have not been successful! Besides being difficult to copy, service is an excellent means of establishing a competitive advantage because it is an important buying consideration for consumers. Research done by Caltex, for instance, has shown that their customers ‘want fast, friendly service at the pump’,35 and Caltex tries to compete with other petroleum companies’ service because they know that that is important to consumers. Sadly, in South Africa, service quality is often of a low standard.36 The poor level of service offered by many government departments has been acknowledged by the Department of Public Service Administration. In an attempt to rectify the situation, a programme called Batho Pele "****** DEMO - www.ebook-converter.com*******"

(Sotho for ‘people first’) has been introduced in an attempt to improve service delivery. South African firms also tend to perform poorly on the dimensions of service quality that are relatively important to consumers, such as reliability in service delivery, but perform well on dimensions that are not important to consumers, such as tangibles (the physical appearance of employees and facilities).37 Establishing a competitive advantage based on service excellence offers a huge opportunity to many South African firms. WEBSITE

Read how the Durban harbour has addressed the needs of exporters to decrease the time, cost, and red tape when shipping to international markets. As such South Africa’s competitive advantage in the developing world has improved substantially. (http://www.mediaclubsouthafrica.com/economy/3676 south-africa-s-competitive-advantage-inthe-developing-world) (Accessed on 31 January 2014).

7.4.2 Customer value as competitive advantage Customer value is the ratio of benefits to the sacrifice necessary to obtain those benefits. The customer determines the value of both the benefits and the sacrifices. The sacrifices customers make include monetary costs (how much I pay), time costs (how long I take to get there, or how long I have to wait) and energy costs, and customers typically try to minimise these sacrifices. The benefits customers pursue could be product-related (e.g. a fast car), service-related (e.g. reliable after-sales service) or image"****** DEMO - www.ebook-converter.com*******"

related (e.g. I drive a BMW). The customer tries to minimise the sacrifices and maximise the benefits and in so doing maximise the value he or she will get. In any buying situation the customer compares the sacrifices with the likely benefits and decides whether the value proposition is sufficient for him or her to buy. The marketer also tries to maximise the value the customer receives and can do so by either lowering the customer’s costs (e.g. we will deliver for you; or if you buy two we will give you a discount) or by increasing the benefits (e.g. improved product design; more options; more legroom in the case of British Airways). However, marketers are constrained in many ways. The value a marketer offers cannot exceed the cost of the product, for instance. Some firms think a bit broader about what constitutes value to a customer. Michael Dell build a very successful computers business by allowing customers to ‘design’ their own computers online. Toyota has cottoned on this idea and also allows customers to design their own cars on a web site or at a terminal inside a showroom by selecting from a menu of on-screen options. Once designed the order is sent straight to the factory.

7.4.3 Customer satisfaction as competitive advantage As pointed out earlier, customer satisfaction is the feeling that a product has met or exceeded the customer’s expectations. Many authors refer to the so-called Disconfirmation Paradigm when describing customer satisfaction (see Figure 1.1, p. 5). According to this paradigm, consumers have pre-purchase expectations and "****** DEMO - www.ebook-converter.com*******"

then they evaluate the actual buying experience (a performance evaluation). If the pre-purchase expectations are met or exceeded, the customer is likely to be satisfied. If performance is below expectations, dissatisfaction will be the result.

Customer satisfaction is a critical requirement for successful marketing, and successful firms the world over have got it down to a fine art. They make sure that they know what their customers want (by doing research) and they then make sure that they satisfy those needs well. These "****** DEMO - www.ebook-converter.com*******"

firms do not pursue once-off transactions, however. They cultivate long-term relationships by ensuring sustained customer satisfaction, and customer-orientated personnel play a key role in realising this objective.

>>Strategy Paper producer Sappi drives customer satisfaction through technology and innovation, which they regard as a fundamental driver of competitive advantage. They focus on extracting value from existing and new technology to develop new products, markets and processes; and generate greater returns in all aspects of our business. Research and development (R & D) takes place at technology centres in each region of the respective countries they do business in. 38

7.4.4 Customer-orientated employees as competitive advantage For a firm to be focused on customers, employees’ attitudes and actions, it must be customer-orientated. An employee may be the only contact a particular customer has with the firm. In that customer’s eyes, the employee is the firm. Any person, department or division that is not customerorientated weakens the positive image of the entire firm. For example, a potential customer who is treated discourteously may well assume that the employee’s attitude represents that of the whole firm. Firms that allow that type of behaviour are violating the integration principle of the "****** DEMO - www.ebook-converter.com*******"

marketing concept.

EXAMPLE >> Marriott International Hotels says: ‘Our basic philosophy is to make sure our associates (employees) are very happy and that they work to go the extra mile – take care of customers and have fun doing it.’39 Every employee is cross-trained to handle all major guest services. Many other successful firms are making sure their employees focus on customers’ needs. Pick n Pay, for instance, acknowledges the central role of employees in its customersatisfaction efforts by using the slogan ‘Our people make the difference’ in its advertising.

7.4.5 Well-trained employees as competitive advantage Leading marketers recognise the role of employee training in customer service. For example, all new employees at Disneyland and Walt Disney World must attend Disney ‘university’, a special training programme for Disney employees. They must first pass Traditions 1, a daylong course focusing on the Disney philosophy and operational procedures. Then they go on to specialised training.

EXAMPLE >> Pick n Pay has made use of the Disney facility and can vouch for its effectiveness. Similarly, McDonald’s has Hamburger University. Nando’s also has a ‘university’ where line employees and managers learn how to treat customers, because, as managing director, Brian Sacks, says, ‘people are the make-or-break factor in any service industry’.40 There is an extra pay-off for firms such as Disney, McDonald’s and Nando’s that train their employees to be customer-orientated. When employees make their customers happy, the employees are more likely to derive satisfaction from their own jobs. Having contented staff who are committed to their jobs leads to better customer service and greater employee retention. "****** DEMO - www.ebook-converter.com*******"

7.4.6 Employee empowerment as competitive advantage In addition to training, many consumer-orientated firms are giving employees more authority to solve customer problems on the spot without having to get permission from a manager to solve the problem. The term used to describe this delegation of authority is empowerment. The American firm Federal Express’s customer-service representatives are trained and empowered to resolve customer problems quickly. Although the average Federal Express transaction in America costs only $16, the customer service representatives are empowered to spend up to $100 to resolve a customer problem. 41 The benefits of employee empowerment are: 42 • • • •

Quicker response to customer needs Employees experiencing a higher sense of job satisfaction It translates into a source of information about customer needs Improved customer satisfaction.

Nedbank uses the empowerment of its staff as a competitive advantage. Its AskOnce campaign says: ‘No matter who you are, or where you bank, it’s frustrating to be pushed from pillar to post to get a response. This is why Nedbank has introduced AskOnce: our commitment that the person you speak to will take responsibility for your request and ensure that the matter gets resolved.’ Empowerment gives customers the feeling that their concerns are being addressed, and gives employees the feeling that their expertise matters. The result is greater satisfaction for both employees and customers – an "****** DEMO - www.ebook-converter.com*******"

excellent competitive advantage if properly executed.

7.4.7 Teamwork as competitive advantage Many firms that are frequently noted for delivering superior customer value and providing high levels of customer satisfaction – such as British Airways and Toyota – assign employees to teams and teach them team-building skills. Teamwork entails collaborative efforts to accomplish common objectives. Job performance, company performance, product value and customer satisfaction all improve when people in the same department or work group begin supporting and assisting each other, and emphasising co-operation.43

EXAMPLE >> Johnson Control Automotive Ltd, and Uitenhage-based car-seat manufacturer, has become the first firm in South Africa to have been awarded the sought-after German VDA 6.1 Quality Management System Certification, QS 9000 Certification and an ‘A’ rating in accordance with VDA 6.1 simultaneously. The firm manufactures car seats for the Volkswagen factory in Uitenhage and this achievement was due entirely to teamwork, according to the plant manager, Ian Dickerson. ‘Everyone worked very hard to achieve this. The commitment shown by the people was phenomenal’, he said.44 On the other hand, it took the Dutch beer brewer Heineken six years to get to the point that Heineken beer was available in cans. What was the reason for the long delay? The production and marketing departments were practically at war at the time. An ex-editor of the newspaper the Sunday Times, Mike Robertson, once admitted that continuous conflict between the editorial and advertising departments at the newspaper harmed the newspaper’s performance: ‘Once we accepted our interdependence things improved and we … enjoyed the most profitable financial year in the newspaper’s history.’45 "****** DEMO - www.ebook-converter.com*******"

Performance is enhanced when people in different areas of responsibility, such as production and sales, or sales and service, practise teamwork, with the ultimate goal of delivering superior customer value and satisfaction. In other words, it implies integrating the firm’s customer needsatisfying activities, as called for by the marketing concept. The above is not an exhaustive list of strategies that can be used to establish and maintain a competitive advantage. The list is endless, but the following can also be considered: •

Cost – Shoprite Checkers competes in the grocery market on price, which implies keeping its own costs as low as possible. • Quality – A strategy used by Woolworths and MercedesBenz, among others. • Flexibility – Some will argue that taxis in South Africa offer a flexible transport service – unaffected by bus schedules, rigid bus-stop locations or even traffic rules! • Location – A retail location in an area of high customer traffic, such as the Waterfront in Cape Town, or a Shell Ultra City can be a significant competitive advantage. Most spaza shops compete successfully for business with much larger competitors owing to their favourable location. • Safety – Mercedes-Benz advertising often suggests that it is a particularly safe vehicle to drive. • Image – A strategy used by many firms, including RayBan sunglasses and Mont Blanc pens. • Product – A strategy used by firms that believe they have a superior product. Doom insect killer is an example. • Design – Schick advertising for its Protector razor says: "****** DEMO - www.ebook-converter.com*******"

•

‘The only razor with micro-fine safety wires between you and the blades, protecting you from nicks, cuts and skin irritation’. Distribution – Pick n Pay has enhanced the quality and freshness of the fruit and vegetables in its Gauteng stores by improving its distribution. The time it takes to move fresh fruit and vegetables from the farm to the shelf has been reduced by 50 per cent, thanks to this new distribution system.

Once a firm has identified a potential opportunity, decided that the opportunity falls within the scope of the firm’s business and determined that it will be possible to establish a competitive advantage that is both sustainable and important to the target market, then the marketing process can be initiated.

8. The marketing process

LO10

Marketing is not a one-night stand – it is a process. Marketing managers are responsible for a variety of activities that together represent the marketing process. These include: • • •

Understanding the firm’s business and mission and the role marketing plays in realising that mission Setting marketing objectives Collecting, analysing and interpreting information about the firm’s situation, including its strengths and

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•

• • •

weaknesses, as well as opportunities and threats in the environment Developing a marketing strategy by deciding exactly which wants and whose wants the firm will try to satisfy (target-market strategy), how the firm wants to be positioned relative to competing firms and by developing appropriate marketing activities (the marketing mix) to satisfy the desires of selected target markets. The marketing mix combines product, distribution, marketing communication and pricing strategies in a way that creates exchanges that satisfy consumers’ and the firm’s needs Implementing the marketing strategy Designing marketing performance measures Periodically evaluating marketing efforts and making changes if needed.

These activities and their relationships with each other form the foundation on which the rest of this book is based. An important concept to grasp at this stage is the marketing strategy. In broad terms, a marketing strategy is formulated to pursue a marketing opportunity. The marketing strategy will consist of an objective, a description of the market that will be targeted, the competitive advantage of the product, brand or firm, how the product, brand or firm will be positioned and how the marketing mix elements – or four ‘P’s (product, place/distribution, promotion/ communication and pricing strategies) – will be combined to achieve the objective of the marketing strategy. A marketing plan, on the other hand, consists of a marketing strategy, but has the added dimensions of "****** DEMO - www.ebook-converter.com*******"

allocating resources and responsibility for implementation. Control measures (how performance will be evaluated) and a time scale are also included. Another important distinguishing feature is that a marketing plan is a written document. A marketing programme is a combination of several marketing plans. Unilever SA may, for instance, have a marketing plan for each of its skincare brands – Dawn, Pond’s and Vaseline – but also a combined marketing programme for skincare products as a whole. To implement the process of marketing effectively the position and role of marketing in the firm must be considered.

9. The position and role of marketing in LO11 the firm The marketing function is one of eight business functions (or departments) typically found in medium-sized and large firms (the others being production, finance, purchasing, public relations, information management, human resources and general management). Although some would argue that marketing is the most important function of all because of its intimate involvement with the market and consumers, the eight functions are typically (but not always) given equal status in an organisational chart, and all of them have to contribute to realising the firm’s objectives. It is important to understand, however, that regardless of the "****** DEMO - www.ebook-converter.com*******"

nature of the organisational structure, the tasks that the marketing function or department is expected to perform will remain the same. Assuming that you accept that marketing is all about satisfying consumer needs at a profit based on an integrated approach while ensuring that societal well-being is enhanced, we now turn our attention to the management tasks of marketing. Marketing will not happen by itself. To play its due role in the firm all marketing activities must be properly managed. We thus turn our attention to the four basic tasks of management, namely planning, organising, leading and control. •

Planning refers to: > identifying marketing opportunities, e.g. Afribrand saw supplying products to street hawkers as an opportunity > setting marketing objectives, e.g. Volkswagen may set itself the objective to be the market leader in the passenger vehicle market, or to raise profitability to 20 per cent return on investment > deciding how to use the marketing instruments (the four ‘P’s), e.g. Volkswagen decided to use product and price as key components in its strategy when it marketed the Polo Playa as a relatively inexpensive vehicle (price) without compromising quality (product) • Leading refers to providing leadership in planning and the implementation of marketing strategies • Control (evaluation) refers to an objective assessment of the marketing strategy against the background of the "****** DEMO - www.ebook-converter.com*******"

marketing objectives. In other words, did we achieve what we set out to achieve? To summarise, marketing will not happen by itself. It needs to be managed by means of effective planning, organising, leading and control.

10. Why are there critics of marketing? LO12 As with most other things in life, marketing is not beyond criticism. Much of this criticism has been targeted at the role of intermediaries (retailers and wholesalers) in marketing, and on the role of advertising. Critics argue that intermediaries simply add costs to a final product without adding any value to the process of getting products to consumers. Advertising is criticised for making consumers buy products they do not really need, and for often being misleading and untruthful. For instance, more than a third of the complaints received by the Advertising Standards Authority of South Africa (for additional reading refer to http://www.asasa.org.za/) accuse advertisers of misleading claims. Others have argued that packaging and labelling are often deceptive and that packaging pollutes the environment. Those who do appreciate the value of marketing in an economy respond by pointing out that marketing creates utility for consumers. Utility refers to the value being created by marketers by satisfying consumer needs that would not otherwise have been possible. They also point out that "****** DEMO - www.ebook-converter.com*******"

marketers overcome a number of discrepancies and separations (or gaps) in an economic system, leading to further value creation. These discrepancies and gaps are: 46 •

•

•

Discrepancy of quantity. To realise the benefits of economies of scale in production, producers produce products in large quantities. A bicycle factory may produce batches of 400 units at a time, but consumers obviously cannot buy them all at once. They want to buy one at a time. To overcome this discrepancy, wholesalers and retailers buy in bulk from manufacturers, which they ‘break down’ into the smaller units consumers prefer to buy. Discrepancy of assortment. Producers normally produce a narrow assortment of products. A producer of golf clubs may produce only golf clubs. Golf players, however, need more than that to play a round of golf. They also need special shoes, gloves, balls, a carry bag, and so on. Retailers, in this case, sports shops, buy different products from a variety of producers and suppliers and combine them all into a combination that consumers desire. Spatial separation. Producers produce where production cost is at its lowest but consumers are widely dispersed. A farmer produces milk on his farm, but the consumers who drink it are far from the farm. The farmer needs to get the milk to within reach of those who want to consume it. Intermediaries (wholesalers and retailers) overcome this spatial separation through the transport function. Marketers, therefore, create place utility for consumers by making products available where they are

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needed. • Separation in time. Consumers are not always ready to consume products when they have been produced, and production may exceed demand. Excess products or surpluses, therefore, have to be stored – a function that intermediaries perform for consumers. For example, a farmer produces mealies that are harvested during the winter. Consumers, however, do not eat porridge only during the winter. To ensure that they can eat porridge all year round, marketers have to overcome the separation in time. By using their storage facilities, marketers create time utility for consumers. • Separation of information. Consumers are often not aware that products exist that may satisfy their needs. In other words, they lack information because of an information gap. Marketers attempt to overcome the information gap by providing consumers with information on need-satisfying products by using, among others, advertising (information utility). • Separation in ownership. Most consumers do not own all the products to satisfy all their needs. In other words, there is a gap between what they want (‘I want my own car’) and what they have (‘I do not own a car’). Marketers try to overcome this gap by selling need-satisfying products to consumers. By overcoming the separation gap and giving consumers the opportunity to use or consume products, marketers create possession utility. • Separation in value. Consumers often disagree on the value of a product. For example, a consumer may say that R20 for a two-litre Coke is too expensive, and she will not buy it. In other words, the buyer and the seller "****** DEMO - www.ebook-converter.com*******"

disagree about the value of the product. Marketers have to convince buyers that their products represent value (or value for the money spent), otherwise buyers simply will not buy. Also, by using the pricing mechanism, marketers establish a monetary value for a product that will recover the manufacturer’s production cost while also representing a realistic price that the target market will be prepared to pay. In other words, marketers establish equilibrium between manufacturers (who want as high a price as possible for their products) and buyers (who want to pay as little as possible). Marketers also create two other forms of utility. By ensuring that they interpret consumer needs correctly, marketers help to ensure that need-satisfying products are manufactured by the firm’s production department or factory. Therefore, marketers play a role in creating form utility. Additionally, task utility is created by marketers who perform certain functions on behalf of consumers. A motor mechanic who repairs a car for a customer creates task utility. In summary, those who want to defend the role of marketing in a firm or an economy will point to the value the marketing function creates for consumers by overcoming several gaps that would be impossible or prohibitively expensive for consumers to overcome themselves. Therefore, marketing creates utility for consumers by performing activities or functions of value on their behalf.

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11. Why study marketing?

LO13

Now that you understand the meaning of the term marketing, why it is important to adopt a marketing orientation and how firms implement this philosophy, you may be asking, ‘What’s in it for me?’ or ‘Why should I study marketing?’ These are important questions regardless of whether you are majoring in a business field other than marketing (such as accounting, finance or management information systems) or a non-business field (such as journalism, economics or education). There are several important reasons to study marketing: marketing plays an important role in society; marketing is important to businesses; marketing offers outstanding career opportunities; and marketing affects your life every day.

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11.1 Marketing plays an important role in society The University of South Africa’s Bureau for Market Research estimates the total population of South Africa at about 52 million. Consider how many transactions are needed each day to feed, clothe and shelter a population of this size. "****** DEMO - www.ebook-converter.com*******"

The number is huge. And yet it all works quite well, partly because our well-developed economic system is reasonably efficient at distributing the output of farms and factories to consumers. A typical family can consume up to 2,5 tonnes of food a year. Marketing makes food available when we want it, in desired quantities, at accessible locations and in sanitary and convenient packages and forms (such as instant and frozen foods).

11.2 Marketing is important to businesses The fundamental objectives of most firms are survival, profits and growth. Marketing contributes directly to realising these objectives (see the Reader 4 ‘Marketing seen as key to profitability’, below). Marketing includes the following activities, which are vital to business firms: assessing the needs, wants and satisfaction of present and potential customers; designing and managing product offerings; determining prices and pricing policies; developing distribution strategies; and communicating with present and potential customers. All businesspeople, irrespective of their specialisation or area of responsibility, need to be familiar with the terminology and fundamentals of accounting, finance, management and marketing. People in all business areas need to be able to communicate with specialists in other areas. Furthermore, marketing is not just a job done by people in a marketing department. Marketing is a part of the job of everyone in the firm. As David Packard of Hewlett Packard puts it: ‘Marketing is too important to be left to the "****** DEMO - www.ebook-converter.com*******"

marketing department.’ 47 Pierre van Tonder, the managing director of the Spur Group, describes the importance of marketing as follows: ‘The importance of marketing to a company should never be underestimated. Nor should one make the mistake of thinking that marketing is just about expensive and flashy advertising and public relations campaigns – there is a marketing aspect to almost everything any company does.’48 Therefore, a basic understanding of marketing is important to all employees and all businesspeople.

READER 4 >> Marketing seen as key to profitability European pharmaceutical firms could add up to 10 per cent to their pre-tax profits by investing in key marketing and sales operations, according to a new study by Accenture, a management consultant firm. The report, based on interviews with 77 executives from 20 Europe-based drug groups, found that marketing and sales play a crucial part in the financial success of firms. They account for 70 per cent of the difference in the return on sales between the firms studied, Accenture concludes. The study concludes that firms should focus on just four key marketing and sales functions in order to improve their financial performance: obtaining information about doctors’ needs; developing a good relationship with them; improving sales-force effectiveness by linking rewards to performance; and having a good mix of drugs to sell. The study calculated that an average European pharmaceutical firm with annual sales of $300 million (£210 million) could add $43 million to operating revenues and up to 10 per cent in profits by improving these four marketing functions. Of the four, having effective information on doctors’ needs is the most important. An improvement in this field can add up to $19 million to the operating revenues of the average European drug group. "****** DEMO - www.ebook-converter.com*******"

Doctor relationships came a close second, with $13 million; the performance of the workforce could add $8 million; and the right mix of products $3 million. SOURCE: Guera, F. 2001. Marketing seen as key to profitability. Financial Times, 13 August 2001, p. 14

11.3 Marketing offers outstanding career opportunities A cursory glance at the job advertisements in the Sunday Times will show that marketing offers great career opportunities in such areas as professional selling, marketing research, advertising, retail buying, distribution management, product or brand management, merchandising, product development and wholesaling. Marketing career opportunities also exist in a variety of nonprofit organisations, including hospitals, museums, universities, the armed forces and various government and social-service agencies. As global markets become more challenging, South African firms of all sizes are going to have to become better marketers as more and more overseas firms enter the South African market. For instance, in the mid-eighties there were only 7 motor vehicle brands available in South Africa. By 1995 there were 15 and by 2006 there were 26 brands. Today there are 58 different motor vehicle brands competing in the South African market.49 The number of bottled water brands increased from zero to 140 in just a few years. At least 12 foreign international banks entered the South African "****** DEMO - www.ebook-converter.com*******"

market in recent years. As the levels of foreign competition increase, South Africans will have to become better marketers and marketing will become a highly valued skill, which will enhance the career prospects of those who possess those skills.

11.4 Marketing influences your life every day Marketing plays a major role in your everyday life. You participate in the marketing process as a consumer of goods and services every day. About half of every rand you spend pays for marketing costs, such as marketing research, product development, packaging, transportation, storage, advertising and sales expenses. By developing a better understanding of marketing, you will become a betterinformed consumer. You will also better understand the buying process (including your own) and be able to negotiate more effectively with sellers. Moreover, you will be better prepared to demand satisfaction when the goods and services you buy do not meet the standards promised by the manufacturer or the marketer.

LOOKING AHEAD >>> This book is divided into 16 chapters, organised into three major parts. All the chapters are written from the marketing manager’s perspective, as our ultimate goal is to equip you with the required skills to become an effective marketing manager. Each chapter begins with a brief list of learning outcomes followed by a short extract (‘Marketing in "****** DEMO - www.ebook-converter.com*******"

practice’) about a current marketing situation faced by a firm or industry. At the end of each of these opening readers, thought-provoking questions link the story to the material discussed in the chapter. End-of-chapter materials include a final comment on the opening reader, a summary of the major topics examined, a list of the key concepts introduced in the chapter and discussion and writing questions. All these features are intended to help you develop a more thorough understanding of marketing and add to your enjoyment of the learning process.

FNB’s RB Jacobs: Avatar or Bot? One of the key drivers of customer satisfaction is customer service and while technology can often contribute to improving the effectiveness of a company’s response to customer complaints and queries, it has its limitations. For example where portion (or the whole) of the customer service function is automated by the use of Internet robots (better known as ‘bots’) this could result in inappropriate or irrelevant responses, where bots are programmed to give predefined responses to certain keywords. On the other hand, the value of automating elements of the customer service function is that one can be assured of the consistency of responses and eliminate the unpredictability of humans. • First National Bank in South Africa (FNB) has embraced the social media as a tool to improve their customer service through the use of an avatar known as ‘RB Jacobs’. If you raise a query on the Face book page of FNB, "****** DEMO - www.ebook-converter.com*******"

•

• •

•

‘RB’ responds, and gives appropriate advice. Although ‘RB’ has a Twitter account and a profile on LinkedIn, there was some conjecture as to whether ‘RB’ was ‘man or machine’, but recent events seem to point to the fact that ‘RB’ is unequivocally human (or probably more correctly a number of human beings)…there are blunders that only humans can make. It all began when Stuart Gormley – @gormleystuart – asked the bank where ‘Steve’ – the central character of a long-standing advertising campaign – was. ‘RB’ responded by saying, ‘He’s somewhere in Afghanistan, putting a bomb under a wheelchair and telling the cripple to run for it!’ See below: A shocked Gormley responded: ‘This is a highly offensive and inappropriate response. I am reporting this to the highest level at @fnb.’ FNB’s Twitter avatar, ‘RB Jacobs’, responded by tweeting: ‘Pls accept my apology it certainly was not my intention to cause any offense I will promptly remove my response’, which ‘RB’ promptly did. However, notwithstanding this apology (and others from FNB), the comment went viral and clients responded with outrage. While FNB has been innovative by the use of the avatar, ‘RB Jacobs’, as a way of humanising their customer service (and brand), a failure to put proper strategies in place to manage this unique approach to customer service has resulted in customer dissatisfaction and consequently damaged their brand image.

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SOURCE: Watson, A. 2014. Twitter bomb backfires on First National Bank, The Citizen electronic edition, 23 April 2014, (http://citizen.co.za/164424/twitter-bomb-backfires-on-first-national-bank/) (Accessed on 12 June 2014)

QUESTIONS 1 2

What do you think about FNB’s strategy to use the avatar ‘RB Jacobs’ to deal with queries on the social media? What strategies could FNB have put in place to prevent the crisis discussed in the case occurring?

KEY CONCEPTS Customer satisfaction: the feeling that a product has met or exceeded the customer’s expectations. Customer value: the ratio of benefits to the sacrifice necessary to obtain those

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benefits. Empowerment: delegation of authority and responsibility to solve customers’ problems quickly – usually by the first person whom the customer notifies regarding a problem. Exchange: the idea that people give up something to receive something else they would rather have. Marketing: the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy consumers’ and the firm’s objectives. Marketing concept: the idea that the social and economic justification for a firm’s existence is the satisfaction of customer needs and wants while meeting the firm’s objectives. Marketing (or consumer) orientation: the philosophy that assumes that a sale does not depend on an aggressive sales force, but instead on a customer’s decision to purchase a product. Marketing programme: a combination of several marketing plans. Product orientation: a belief that ‘good’ product features and product quality will lead to success regardless of other influences. Production orientation: a philosophy that focuses on the internal capabilities of the firm rather than on the desires and needs of the consumers. Relationship marketing: a strategy that entails forging long-term partnerships with customers. Sales orientation: the notion that people will buy more goods and services if aggressive sales techniques are used, and that high sales result in high profits. Societal marketing concept: the idea that a firm exists not only to satisfy customer needs and wants and to meet the firm’s objectives, but also to preserve or enhance individuals’ and society’s long-term best interests. Teamwork: collaborative efforts of people to accomplish common objectives. Utility: the value created for consumers by marketers by satisfying their needs.

REFERENCES 1 2 3 4 5

American Marketing Association. Online. www.marketingpower.com (accessed 8 August 2013). Leonardi, C. 2007. Business prioritises customer satisfaction. Real Business, supplement to Business Day, January 2007, p. 1. California State Parks listen to customers. Quality Digest, May 1996, p. 9. Nel, J. 2014. Ontevredenheid op banier gelug. Die Burger, 8 November, p. 6. Annualrd Kotler, P. 1996. Marketing management (9th edition). Englewood Cliffs:

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6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

21 22

23 24 25 26 27

Prentice Hall, p. 11. Eades, J. 2001. Free for all. Future company, supplement to Financial Mail, 23 February 2001, p. 7. Baker, S. 1995. A new paint job at PPG. Business Week, 13 November 1995, pp. 74, 78. Nando’s Corporate Report, supplement to Financial Mail, 10 April 1998, p.16. Mittner, M. 2011. Nedbank revs up retail. Financial Mail, 4 February, p. 20. Hasenfuss, M. 2012. Furiously flogging frocks, Finanacial Mail, November 23-28, p. 66. Cranston, S. 2000. Going for the gaps. Financial Mail, 8 December 2000, p. 96. Finweek, 20 August 2000, pp. 20–21. Sherry, S. 2009. Chemical independence. Financial Mail, 13 November 2009, p. 52. Clancy, K.J & Shulman, R.S. 1995. Marketing – The ten fatal flaws. The Retailing Issues Letter, November 1995, p. 4. Zino, K. 1995. Want to keep you satisfied. Parade Magazine, 1 October 1995, p. 9. Pick n Pay Corporate Report, supplement to Financial Mail, 30 May 1997, p. 6. Ibid. p. 10. King customer, Business Week, 12 March 1990, p. 90. Miller, C. 1993. Nordstrom is tops in survey. Marketing News, 15 February 1993, p. 12. Sikhakhane, J. 1998. In search of a metamorphosis. Financial Mail, 10 July 1998, p. 32; Phasiwe, K. 2005. Unbundled SAA set to fly solo from end of year. Business Day electronic edition, 11 May 2005. Namibian Breweries in SA. Food & Beverage Reporter Online, July/August 2001, p. 32. More, R. 2009. How General Motors lost its focus – and its way. Strategy, May/June (http://iveybusinessjournal.com/topics/strategy/how-generalmotors-lost-its-focus-and-its-way#) (Accessed on 20 March 2014) McCarthy, E.J. & Perreault, W.D. 1996. Basic marketing (12th edition). Chicago: Irwin, p. 89. Koenderman, T. 2001. A new breed of tiger. Financial Mail, 21 September 2001, pp. 83–84. Samuels, G. 1994. CD-Rom’s first big victim. Forbes, 28 February 1994, pp. 42–44. Ibid., p. 42. Holcim Re-sellers Conference, Hilton Hotel, Johannesburg, 11 April 2005.

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28 Mthimkhulu, P. 2000. Brick by brick, proceeds will be thrown on a debt pile. Financial Mail, 18 February 2000, pp. 70–71. 29 Sun International Corporate Report, supplement to Financial Mail, 18 January 2000, p. 6. 30 Linda Barron and friends, Letters to the editor. Financial Mail, 7 September 2001, p. 11 31 Boshoff, C. 2000. Unpublished research. 32 Nu-World Corporate Report, supplement to Financial Mail, 31 October 1997, p. 4. 33 Mwanza, C. Herdber’s hard talk. Finweek, 29 March 2007, p. 62. 34 Customer-focused companies will shine, Bizcommunity, 25 October 2007. 35 Caltex Corporate Report, supplement to Financial Mail, 3 October 1997, p. 17. 36 IMD World Competitiveness Yearbook, 1997. Lausanne: IMD. 37 Boshoff, H.C. 1990. Perceptions of service quality in three selected service industries. Unpublished PhD dissertation, University of Pretoria. 38 Driving customer satisfaction through technology and innovation. (http://sappi.investoreports.com/ sappi_sdr_2009/prosperity/drivecustomer-satisfaction/) (Accessed 28 March 2014). 39 Malcolm Fleschner with Gerhard Gschwandtner, The Marriott Miracle. Personal Selling Power, September 1994, p. 25. 40 Nando’s Corporate Report, supplement to Financial Mail, 10 April 1998, p. 24. 41 Berry, L.L. & Parasuraman, A. 1991. Marketing services. New York: The Free Press, p. 49. 42 Bowen, D.E. & Lawler, E.E. 1992. The empowerment of service workers: What, why, how and when? Sloan Management Review, spring, pp. 31–38. 43 Customer comes first with ‘bank that cares’. Business Times, 12 July 1998, p. 8. 44 Sundstrom, K. 1998. A deep-seated commitment to quality. Business Post, 11 July, p. 1. 45 Team effort propels Sunday flagship. Adfocus, supplement to Financial Mail, 24 May 2002, p. 106. 46 McCarthy, E.J. & Perreault, W.D. 1996. Basic marketing (12th edition). Chicago: Irwin, p. 23. 47 Kotler, P. 1996. Marketing management (9th edition). Englewood Cliffs: Prentice Hall, p. 22. 48 The role of marketing in growing a business. Business Day, 10 August 2007, p. 16. 49 Kruger, C. 2014. Presentation at the 26nd Annual Conference of the Institute of Management Sciences, Riverside Sun Resort, 15 September.

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CHAPTER

02

Analysing the external environment’s influence on marketing

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5 6 7 8 9

Discuss the nature of marketing’s external environment and explain how it can affect the marketing efforts of a firm. Discuss the methods and information sources typically used for environmental scanning. Describe the nature of market opportunities and threats. Illustrate your understanding of the importance of identifying opportunities and threats in the external marketing environment. Identify examples of potential opportunities and threats for South African firms. Describe the potential impact of social factors on marketing in South Africa. Analyse the impact of demographic trends on marketing in South Africa. Describe the value of the Living Standards Measurement (LSM) for South African marketing decision-makers. Discuss the relevance of the economic environment for marketing decision-making.

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10 Explain how marketers can utilise or overcome the opportunities or threats associated with inflationary and recessionary economic conditions. 11 Discuss the relevance of the technological environment for marketing decision-making. 12 Elaborate on the likely impact of the Internet on marketing practices now and in the future. 13 Analyse the role that variables in the political environment can play on marketing decision-making. 14 Describe the attitude firms should exhibit towards legislation. 15 Identify South African legislation that can have an impact on marketing decision-making. 16 Explain what impact the formal trade agreements to which South Africa is a signatory will have on marketers. 17 Discuss the relevance of the competitive environment and physical forces for marketing decision-making. 18 Illustrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 19 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Video on demand With the introduction of PVRs (Personal Video Recorders) the way in which TV viewers decide which shows to watch, and when they watch them, is changing radically. South Africa’s first video-on"****** DEMO - www.ebook-converter.com*******"

demand (VOD) service, DStv BoxOffice, allows subscribers to rent and view digital copies of movies without leaving their homes. The satellite-based VOD service lets you rent up to 15 movies from about 150 available movies at R25 each (including HD movies) for 48 hours. DStv has set 15 movies as a maximum ‘due to storage limitations on the PVRs’. PVRs let audiences create their own schedules, tailored to their mood. It also allows consumers to eliminate commercials with the push of a fast forward button, which necessitates a fresh approach to advertising. The service is available only to DStv Premium subscribers who have PVR decoders. They can download movies and store them on their PCs. To avoid piracy, the movie will automatically be deleted after 48 hours. Movies will be available on the same day as the official DVD launch in SA. One can prepay or pay by credit card or debit order. SOURCE: Adapted from Muthelwana, M. Video on demand. Financial Mail, 5 August, p. 30

QUESTIONS 1 2 3

What are the implications of DStv’s entry into the video market? Who will benefit from the decision? What impact does PVRs have on the media and advertising environment?

1. Introduction "****** DEMO - www.ebook-converter.com*******"

In Chapter 1 we emphasised the importance of identifying opportunities that entrepreneurs and firms can utilise. When an entrepreneur starts a new business it is usually an attempt to take advantage of a market opportunity. In other words, there are consumer needs that are not adequately satisfied – or, as some people would describe it, a ‘gap in the market’ (see Reader 5 ‘Doing the shuttle shuffle’). Mark Zuckerman founded Facebook when he realised that many people have a need to communicate electronically with several people simultaneously (and almost constantly). Riaan Stassen spotted a gap in the banking market for consumers who want a simple, uncomplicated banking service at a reasonable price and founded the remarkably successful Capitec Bank. Existing firms also have to be on the lookout for new opportunities to realise their objectives. For example, Media24 spotted a gap in the magazine market for a magazine focusing on makeovers featuring ‘before-andafter’ stories and pictures of women whose appearances have been improved and launched You-Makeovers. Such an opportunity for an existing firm is crucial to ensure their long-term survival. Long-term survival is the most fundamental goal of any firm, and can only be realised if it is profitable. Other objectives that business firms typically pursue include growth objectives, sales or market-share objectives, productivity objectives and socio-economic objectives. To survive in the long term, a firm must, at the very least, perform some useful activities. In other words, it must add value – for instance, by satisfying needs. To that end, the "****** DEMO - www.ebook-converter.com*******"

firm needs to organise itself by creating an organisational structure geared towards need satisfaction and survival. If properly executed, a proper organisational structure ought to lead to profitability. Without profitability, no firm can survive in the long term. Business firms formulate goals and objectives at different levels. The overall goals of the firm, sometimes called corporate goals – such as being a market leader, earning 20 per cent return on investment or achieving 75 per cent occupancy of hotel rooms – are supported by functional objectives (marketing objectives, financial objectives, production objectives, and so on). The marketing department will refine the marketing objectives (for instance ‘to be the market leader we need to gain 35 per cent market share’) and set objectives for each of the four ‘P’s. Examples could include: •

•

• •

Promotion (marketing communication) – ‘to be the market leader we need to increase brand awareness to 50 per cent in the target market’ Place – ‘to be the market leader we need to ensure product availability at all computer retailers in South Africa’ Price – ‘to be the market leader we need to offer the best value for money products on the market’ Product – ‘to be the market leader we need to market the most user-friendly software on the market’.

The opportunities to realise these, and other, objectives are found in the firm’s external environment. This chapter analyses the elements of the external environment and more "****** DEMO - www.ebook-converter.com*******"

specifically the macro-environment, and how they influence the marketing activities of a firm. Figure 2.1 provides an overview of the place of a firm’s marketing environment in the external environment. Two of these elements, however, are worthy of special attention, and a whole chapter is devoted to each of them namely consumers and their buying behaviour (Chapter 3) and competitors and their activities (Chapter 4).

READER 5 >> Doing the shuttle shuffle Valerie Graunke was working as an administrator at a nursery school in Fourways when she first had the idea of starting a lifting service for school children whose parents worked. ‘More than 60 per cent of the mothers were working mothers who were battling to pick up their children from school’, she says. Graunke bought a second-hand minibus, trained a driver and kicked off school link shuttle service in 2004. Seven years later it has grown into a business transporting more than 600 children a day, with a fleet of more than 18 minibuses serving around 50 schools across Johannesburg. ‘The number of working mothers has increased and more children need transport to and from school’, she says. ‘Making use of this service allows parents to continue the work day uninterrupted. The success of the business has been ensuring that drivers are properly trained and that each bus has a female assistant to allow the driver to focus on driving. Our busses are all satellite tracked and parents receive a notification of their children’s drop off.’ She says one of the most challenging aspects of running the business is the logistical complexity of working out bus routes in different areas. In areas where parents can afford the service, the return on investment can be very good, she says. SOURCE: Pile, J. 2011. Doing the shuttle shuffle. Financial Mail, July 1, p. 27

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2. The marketing environment The environment in which marketing managers must make decisions can be divided into an external environment and an internal environment (Figure 2.1). It is here where the threats that marketers try to avoid as well as the opportunities they pursue, can be found. Marketing managers create a unique marketing mix by combining product, distribution (place), marketing communication (promotion) and price strategies. The marketing mix is controlled by the firm and is designed to appeal to a specific group of potential buyers – the target market. A target market is a defined, fairly homogeneous group of consumers that marketing managers feel are most likely to buy a firm’s product or products. Over time, marketing managers are often required to alter the marketing mix because of changes in the environment in which consumers – and particularly those who make up the target market – live, work and make purchasing decisions. For example, until the mid-1970s, motor vehicle manufacturers produced mainly large passenger vehicles. The small-vehicle market was almost totally ignored. During those days, petrol was cheap. How economical a car was in terms of petrol consumption was of little interest to most potential buyers and therefore also to vehicle manufacturers. The oil crisis of the mid-1970s changed all that. Together with the decreasing value of the rand, petrol became very expensive in South Africa. As a result, a demand for smaller, fuel-efficient cars developed almost overnight. To satisfy this demand, marketing managers "****** DEMO - www.ebook-converter.com*******"

competing in the motor vehicle market have been forced to change their marketing mix completely.

READER 6 >> Fuel-efficient luxury cars Forward-thinking vehicle manufacturers such as Audi has risen to the challenge to manufacture more cost efficient cars with a host of innovations and cutting edge advancements geared towards ultra-efficient driving. Every aspect of a vehicle is designed with fuel efficiency in mind. Construction materials, engines and electronic equipment are optimised and even reimagined in the creation of fuel efficient luxury cars. Cutting down on vehicle weight can go a long way towards fuel efficiency. Innovative vehicle manufacturers have tapped into the potential of lightweight design through a combination of steel and aluminium. Engineers are able to make front casings for a suspension unit out of die cast aluminium before thermoformed steel is combined to provide hardness and sturdiness that far surpasses that of conventional high-strength steel. Luxury vehicle bodies that are far lighter than previous models are the result of this ground breaking process. The lowered vehicle weight means that there is a marked reduction in fuel consumption. These innovative and forward thinking vehicle manufactures have made great strides towards designing the most economical vehicles today’s roads have ever seen. From lightweight aluminium construction materials to cutting edge efficiency technologies and precisely harnessed engine power, fuel efficient luxury cars are the very essence of sustainable mobility.

SOURCE: Adapted from http://www.audi.co.za/za/brand/en/company/additional_information/fuel_efficient_ Whereas luxury and comfort were a competitive advantage during the pre-oil crisis days, economy and cost efficiency are now the dominating factors. Not only the "****** DEMO - www.ebook-converter.com*******"

product itself (i.e. smaller, fuel-efficient, entry-level models, such as the Opel Corsa and Ford Focus), but also vehicle manufacturers’ pricing, distribution and promotion strategies have changed as a result of uncontrollable developments in the external marketing environment. Failure to adapt the marketing strategy when environmental conditions demand it can be disastrous. Consider the impact technology has had on Switzerland’s domination of the international watch-making market. Conventional Swiss watchmakers dominated the watch market for many years. Then all of a sudden a new technology emerged and microchips could be manufactured quickly and cheaply. Some entrepreneurs spotted the opportunity to use the new technology to manufacture digital watches while the Swiss watchmakers were looking the other way. Very quickly Switzerland’s share of the global market had dropped from 80 per cent to about 10 per cent. During 2014 Google introduced a new version of its Android operating system software made for smartwatches, amid speculation that Apple was also set to enter the wrist wars soon with a product that industry followers have already dubbed the iWatch. Growing interest in smartwatches by consumers and technology companies might seem a perfect opening for the industry that really knows watches: the makers of fine Swiss timepieces. It seems that Swiss watchmakers may again miss out on yet another opportunity as they are not committed thus far to combining diamond bezels with digital bits. Another example of the effects of environmental developments on business firms is the impact of digital-camera technology on the imaging industry (see Reader 7 ‘Digital cameras kill "****** DEMO - www.ebook-converter.com*******"

photo shop’). The film company Kodak has made a loss in six of the last seven years and has filed for bankruptcy protection. Kodak was five years too late in shifting from traditional film cameras to digital cameras. Given its poor grasp of the impact of digitisation Kodak also did not capitalise on opportunities to expand its product range to digital printers. This delay opened the door for competitors such Canon and Hewlett-Packard to take over its market. 1

2.1 Marketing’s interaction with the internal and external environment Marketing’s involvement in the environment can be described at two levels (see Figure 2.1): The internal environment: • •

Direct control and responsibility (the marketing environment) No control, but limited influence (the business environment).

The external environment: •

Neither influence nor control (the external environment which can be divided into the market environment and the macro-economic environment, see Figure 2.1).

The internal environment can again be divided into the marketing environment and the business environment. In the internal marketing environment, marketing managers "****** DEMO - www.ebook-converter.com*******"

can control (and are, indeed, responsible for) decisions relating to the marketing function (department), such as the formulation of the objectives of the department, planning and executing the marketing process and managing the marketing mix. In the rest of the internal environment (i.e. the internal business environment), marketing cannot control elements such as the firm’s mission statement or goals and strategic objectives or any decisions relating to the other business functions, such as finance, human resources, purchasing and production management. Marketing can, however, attempt to influence decisionmaking in these areas. For instance, a marketing manager cannot force production managers to change production processes in order to add a new feature to a product, but can try to persuade them to do so. Likewise, the human resources manager may be persuaded (but not forced) to expand the sales force.

READER 7 >> Digital cameras kill photo shop The aggressive growth of digital technology forced the closure of one of Port Elizabeth’s oldest and most respected photography firms. Color 2000 Photo Lab closed down after nearly three decades in the film-developing and printing business. ‘Digital photography has just killed the market’, according to the owner, Ms Cader-Begg. In the old days, people would buy a roll of film, take the 36 pictures, and have them all processed. Now, digital cameras take pictures by the thousands. People keep them on their computers and choose perhaps only one or two for printing. It’s the end of an era. A chapter has closed.’ Digital cameras were first marketed to consumers about fifteen years ago. Since then, digital camera sales have skyrocketed. Market research firm, GFK "****** DEMO - www.ebook-converter.com*******"

Marketing, recorded a 152 per cent rise in digital camera sales two years ago, compared with a drop in film camera sales. SOURCE: Adapted from Cooper, B. 2004. Digital cameras kill photo shop. Eastern Province Herald electronic edition, 27 July The external environment can also be divided into two components namely the market environment and the macro environment (Figure 2.1). In the market environment, uncontrollable variables (such as competition and the economy) may affect not only the firm, but also the target market. New suppliers may enter the market or the needs of a market may change. In the so-called market environment, the marketing manager can at least try to influence consumers, suppliers and intermediaries (such as wholesalers and retailers), and shape and reshape the marketing mix to influence the target market (consumers), but the marketing manager’s influence in the market environment is limited. From a marketing perspective, the macro-environment contains factors that are completely uncontrollable. These include social factors, demographic factors, economic factors, technological factors, political factors, legal factors and competitors. For example, marketers who perceive the Internet as a threat to their business (such as travel agents) cannot make it disappear. The manufacturers of photographic film could do little to stop the decline of demand for their product to less than 5 per cent of what is was in 2000. Similarly, marketers cannot remove governments or change laws: these are uncontrollable elements to which marketers can only respond. All the elements shown in Figure 2.1 continually "****** DEMO - www.ebook-converter.com*******"

evolve and have an impact on the target market. Skillful marketers study, track and anticipate these potential and actual changes by changing the firm’s marketing strategies (and in particular the 4Ps) to optimally satisfy the target market’s needs. Figure 2.1 The firm’s internal and external environment

SOURCE: Adapted from Geel, F.C. & Tait, M. Unpublished lecture notes, Nelson Mandela Metropolitan University (used with permission).

3. Understanding the external environment

LO1

Unless marketing managers understand the external environment, firms cannot successfully identify opportunities and effectively plan for the future. Therefore, many firms assemble a team of specialists to continually "****** DEMO - www.ebook-converter.com*******"

collect and evaluate environmental data and information, a process called environmental scanning. The purpose of collecting environmental data is to detect and assess factors and trends that may influence the firm or its target markets, and identify future market opportunities (mostly unmet market needs) and potential threats early. As Bill Gates, the chairman of Microsoft once said, ‘The culture of our company is never to miss these things that are coming along. We were one of those things that came along.’ Nokia was once the dominant cell phone maker controlling more than 50 per cent of the global market – until Apple’s iPhone and Google’s Android came along and today Nokia is not even amongst the top five cellular phone companies in the world. The focus of this environmental-scanning process is the external environment – the variables and forces outside the firm’s sphere of direct influence that may have an impact on its marketing decision-making and eventual success. These variables and forces often represent trends that influence marketing management’s ability to develop and implement marketing strategies. They can be broadly classified as either a threat or an opportunity. An opportunity can be described as a consumer need that a firm can take advantage of profitably. A threat, on the other hand, is a challenge posed by an unfavourable trend or development that would, in the absence of preventative or remedial action, harm the firm, such as a deterioration in sales and profitability.

EXAMPLE >> For instance, South Africa’s first video-on-demand "****** DEMO - www.ebook-converter.com*******"

service, offered by DStv BoxOffice allows DStv subscribers to rent and view digital copies of movies without leaving their homes. This new service presents a serious threat to the business of the traditional video store. Many property developers are refusing to develop commercial properties in South Africa due to obstacles posed by incompetent municipal officials and corruption leading to lost investment and job losses. Due to threats posed by these risks property developers are utilising opportunities in Ghana, Mozambique and Europe instead.2 The trend of downloading music and movies from the Internet (iTunes recorded $10,2 billion worth of sales in 2014)3 has had a negative impact on the sales of most music retailers, including that of Musica. In the industry as a whole, sales have declined from R1,1 billion in 2007 to R650 million in 2011. Between 2013 and 2014 Musica’s sales of CDs dropped by a further 13,8 per cent and DVDs by 9,4 per cent.4 Another threat looming on the horizon for music retailers is Spotify’s online music streaming. These are all examples of threats in the external environment that had a significant influence on the decision-making of marketing managers. Early detection of threats by means of environmental scanning is an important prerequisite to avoid the negative impact of potential threats (see Reader 8 on Encyclopaedia Brittanica).

READER 8 >> Your tome is up… Encyclopaedia Britannica ends its print edition after 244 years as it fully embraces digital age As the march of the iPad and Kindle continues unabated, the oldest manufacturer of encyclopaedias has become one of the first major book publishing casualties of the digital age by cutting out its entire print operation. The Encyclopaedia Britannica, which has been in continuous print since it was "****** DEMO - www.ebook-converter.com*******"

first published in Edinburgh in 1768, said today that it will continue with digital versions currently available online. The final set of the 32-volume printed edition remains available for sale on the company’s website for £890 (R16 000). Encyclopaedia Britannica is the longest-running manufacturer of printed encyclopaedias, with its first edition printed in Scotland in 1768, but the title will live on as Britannica produces digital versions available online. Sales of hard copied have declined from 120 000 in copies in 1990 to 40 000 in 1996 to 8 500 in 2012. ‘Britannica was one of the first companies to really feel the full impact of technology, maybe 20 years ago, and we have been adapting to it, though it is very difficult at times,’ he said. While Encyclopaedia Britannica has continued to operate, he expected ‘many trade publishers will not survive – and any content development company will have to be thinking about how they are going to fill the gap.’ As to whether print editions of books will be viable products in the future, Mr Cauz predicted, ‘print may not completely vanish from the market, but I think it is going to be increasingly less important’. With its scholarly, reliable reputation, Mr Cauz said Encyclopaedia Britannica had not been affected by the popularity of Wikipedia. Mr Cauz told CNN: ‘The print set is an icon. But it’s an icon that doesn’t do justice to how much we’ve changed over the years’. The death of the print edition of Britannica echoes the rise of the techno-savvy consumer. In terms of space-saving, practicality and cost, there is much to be said for e-books – something independent bookstores would dispute, as they are fast becoming endangered species. Although digital books have been around for more than two decades, it is only in recent times that the long-predicted explosion in electronic reading has come to take hold. In 2010, e-books accounted for 6 per cent of all books sold in the UK, with sales more than doubling every year. And in the US, Amazon now sells more e-books than hardbacks and paperbacks combined. SOURCE: Nick Enoch, N. Your tome is up… Encyclopaedia Britannica ends its print edition after 244 years as it fully embraces digital age. Daily Mail online, 14 March 2012.

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LO2

Environmental scanning ought to be an ongoing, rolling process, but with specific time frames, such as one year, three years, five years, ten years and twenty years. The planning horizon is, therefore, constantly adjusted over time, and the importance of environmental trends in terms of marketing decision-making should be constantly impressed upon marketing managers. Environmental scanning techniques are by nature qualitative and subjective. Activities associated with environmental scanning include: • •

• •

• • •

Studying current events by attending seminars and conferences Analysing the speeches of political leaders such as the minister of Finance and the Governor of the Reserve Bank Reading the analyses of management consulting firms, futurists and financial institutions Collecting and analysing data from government departments such as the Reserve Bank and the Department of Trade and Industry Analysing national trade figures Following discussions on social media and relevant blogs Collecting information on economic indicators.

EXAMPLE >> Examples of internal sources of information are a firm’s own records (sales figures, accountancy records, etc.), research reports, in-house "****** DEMO - www.ebook-converter.com*******"

experts and experienced staff members. External sources of information are trade associations, such as the South African Chamber of Commerce and Industry; government departments, such as the Department of Trade and Industries and Statistics SA; advertising agencies; consultants; and syndicated reports, such as the South Africa Business Forecast report. Several commercial banks also publish reports on economic indicators and conditions. An example is Absa Bank’s Quarterly Economic Monitor. How these data are analysed and interpreted, however, is the real challenge. Some firms build long-term, alternative scenarios (called scenario planning) and then formulate contingency plans for each of them. Another technique that is often used is the Delphi Technique whereby, after a series of iterations, an attempt is made to reach some degree of consensus among a group of experts on potential future events and their impact on the firm. Despite its speculative nature, the advantage of environmental scanning is that it encourages marketing managers to think long term, to translate vague ‘gut feelings’ into clear strategic issues and to think strategically about potential opportunities and threats in the external environment.5

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4. Opportunities and threats Every

firm’s

marketing

environment

LO3 has

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many

opportunities. For example, anyone in South Africa who can find alternative energy sources to generate affordable electrical power, or a cure for degenerative diseases such as HIV/Aids, Alzheimer’s and diabetes, or to desalinate seawater will exploit the most shining of opportunities.

EXAMPLE >> Marketers must be continually on the lookout to take advantage of any opportunities that come their way. In 1996 only 58 per cent of the South African population had access to electricity. Today it is 85 per cent. Eskom’s electrification programme has given 5 million new households access to electricity. The electrification programme is opening up tremendous opportunities for manufacturers of electrical products, such as kettles, televisions, fridges and stoves. However, the same programme has been a threat to the marketers of samp and beans. Access to electricity and electrical appliances has changed the eating habits of traditionally poorer households who no longer eat ‘umngqusho’ (samp and beans) prepared on fires as they take too long to cook.6 Similarly, convenience is a consumer need that often offers opportunities to business firms. Today, we have firms that deliver pizzas to our front door (mrdelivery.com), or mow the lawn for us while we are at work; we can buy clothes (naartjie.co.za; spree.co.za) and groceries (pnponline.co.za) online, and do our banking from the comfort of a computer at home. These are all examples of actions by firms who view consumers’ need for convenience as an opportunity that must be seized. Clicks is another South African firm that has capitalised on consumers’ need for convenience. ‘Shoppers are reluctant to walk long distances’, says Clicks development director, Chris Roesstorff. As a result, Clicks now opens more – but smaller – shops, that are conveniently located, "****** DEMO - www.ebook-converter.com*******"

rather than just a few in large shopping malls.7 Clicks now boasts that no potential customer is ever more than 7km away from a Clicks store.8 Similarly, Daily Buzz is a mobile coffee bar with collapsible wings that fit into an elevator to sell coffee at the desks of employees in large corporate buildings. Evolving lifestyles, changing attitudes and new technological developments are all outside the direct control of most firms, but they offer the type of opportunities that many firms have successfully (and profitably) utilised. Many firms have successfully capitalised on the trend of consumers’ time poverty. Examples include firms like Served Fresh (servdfresh. co.za) to prepared meals, DontQ (dontq.co.za) - a firm that handles applications, such as passport applications, birth registrations and vehicle licensing on behalf of individuals, Woolworths (woolworths.co.za) and Pick n Pay’s (pnponline.co.za) online shopping ranging from food to clothes. These firms have identified trends in the market environment, decided that they offer opportunities that could be profitably utilised and have done a great job of satisfying the convenience and poverty-of-time needs of their customers. Sometimes, however, the changing environment can pose a threat. When it does, the challenge to marketing managers is to convert the threat into an opportunity. For years, research conducted by the All-Media & Product Survey (AMPS) has shown that South Africans are reading less and less.9 This decline in the population’s reading habits has occurred mainly among relatively "****** DEMO - www.ebook-converter.com*******"

affluent market segments, and this trend (i.e. the decline in the reading habit) is an obvious threat to the marketers of newspapers, magazines and books. The potential threat of decreasing readership, however, can be turned into an opportunity. Marketing more specialised publications, such as Business Day and Student Life, is potentially one way of doing that. Marketing on the Internet or digitising content to be readable using electronic devices such as a Kindle or an iPad may be another way of responding to the threat of declining readerships. WEBSITE Read more about the reading culture in South Africa on http://www.southafricaweb.co.za/article/readingculture-south-africa.

>> Technology in action Bookly changes the reading game Technology has been the ‘agent of change’ that has created many opportunities for entrepreneurs in the 21st century. We are all familiar with the success of the social media applications such as Facebook, Twitter, Instagram, YouTube as well as the South African developed ‘app’, Mixit. Another characteristic of the ‘digital marketplace’ is how developers have ‘reconfigured’ many traditional products and in so doing allowing consumers to access existing products in new and innovative channels and formats. For "****** DEMO - www.ebook-converter.com*******"

example, consumers can download books and read them at their leisure rather than follow the traditional method of purchasing a physical copy at a bricks and mortar shop. However, while the cost of downloading a book might be relatively inexpensive, compared to buying a hard copy, buying a device such as a Kindle, iPad or tablet is not affordable for the vast majority of South Africans. As a result digital agency Native launched an application known as Bookly which allows users to download and read e-books (through Mixit) on their mobile phones. Levon Rivers, Native’s head of inventions, says the company chose to develop the application for Mxit because of the reach the platform, both in terms of the number of users of the service and the range of mobile phones supported – it works on phones with the most basic of features, not only smart phones. At present consumers can download certain free books using Bookly (because they are no longer copyright protected) but in addition, two commercial publishers are offering selected titles to consumers, via Bookly, for a fee. Users can purchase books one chapter at a time or all at once with the average rate for a chapter around R1,50 and whole books priced around R30. Native is also interested in adding textbooks to Bookly, but this will require working with academic publishers and government. Perhaps in a few years you will be reading this textbook on your phone! SOURCE: Wilson, C. 2013. Bookly brings e-books to Mxit, Techcentral

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electronic edition, 30 May 2013. Available from: http://www.techcentral.co.za/ bookly-brings-e-books-to-mxit/40720/ (Accessed 25 June 2014)

There are a number of methods and techniques available that marketers can use to assess environmental variables and trends that appear to be opportunities or threats. These will be discussed in detail in Chapter 14. One is called the Boston Consulting Group Matrix. Another is the so-called SWOT analysis (SWOT stands for strengths, weaknesses, opportunities, threats). A SWOT analysis considers four basic questions: is this environmental variable or trend (such as declining readership or the need for convenience): • •

An opportunity (O)? A threat (T)?

How can we deal with it? • •

Do we have the strengths required to utilise the opportunity or overcome the threat (S)? What are our weaknesses if we do attempt to utilise the opportunity or overcome the threat (W)?

Opportunities and threats are normally (but not always) found in the external environment (see Figure 2.1), whereas assessing strengths and weaknesses generally takes the form of an internal assessment (the internal environment in Figure 2.1). Sometimes firms identify environmental variables or trends (such as increased use of the Internet, or increased "****** DEMO - www.ebook-converter.com*******"

consumer demand for safer products, or a new law) and decide to do nothing because they do not represent opportunities or threats to the firm. On other occasions, environmental variables or trends may indeed represent an opportunity. If so, the firm must then consider whether it has the required strengths and resources to utilise the identified opportunity. For instance, will the firm be able to establish a clear competitive advantage that is sustainable? Does it have the required resources (skills, expertise, experience, financial resources, capacity, etc.)? What are the firm’s weaknesses? Does it know enough about its customers’ needs? Does it know enough about likely competitive responses? LO4

If the firm identifies potential threats to its survival, similar questions need to be asked. If the Internet is a threat to its business (as it is for travel agencies and book publishers), can it overcome this threat? Does it have the resources to overcome it? Two key issues to consider when evaluating each potential opportunity are: Does it fit in with the firm’s goals and objectives and is it part of our business? If not, it may not be an opportunity at all. (In Chapter 1 we considered the question of a market definition and the dangers associated with too narrow or too broad a definition of a firm’s market.) When Clicks entered the retail pharmacy market in 2004, it clearly thought that medicines closely fitted with its current business and products, such as cosmetics and health care products. In considering its competitive "****** DEMO - www.ebook-converter.com*******"

advantage Clicks probably argued that it could source cheaper pharmaceutical products (because of its bulkbuying power), and offer consumers more convenient retail locations, than independent pharmacies. Now, 10 years later, Clicks manages over 330 pharmacies across the country, and its footprint continues to grow. A key ingredient to Clicks Pharmacy’s success is the quality of its pharmacy staff, which is why the group has invested heavily in their professional development. Every year the Pharmacy Healthcare Academy has 350 to 400 learners enrolled for its pharmacist assistant qualifications. The group also runs an on-going pharmacist intern programme and funds bursaries for about 100 pharmacy students a year. As more people are challenged to meet the cost of healthcare, the pharmacist plays a bigger role in counselling and assisting with affordable medication in South Africa – an opportunity wellutilised by Clicks. 10 The next assessment question is: can the firm establish a sustainable competitive advantage? A competitive advantage can take a variety of forms, such as cost, quality, flexibility, location, safety, image, product design and distribution (several sources of competitive advantages were discussed in Chapter 1). For instance, in competing with iPad in the electronic book market, Kindle has focused on easing the complaint of tiring eyestrain as a competitive advantage. By using electronic ink, rather than a backlit screen, Kindle allows readers to read for long periods without eyestrain.

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5. Environmental management No single firm is large or powerful enough to create major changes in the external environment on its own. Therefore, marketing managers are more often than not adapters to change rather than agents of change in the external environment. Despite their huge size, American motor vehicle manufacturers such as General Motors, Ford and Chrysler have not been able to stem the competitive push by the Japanese for an ever-growing share of the US vehicle market. Similarly, South African dairy producers are facing increasing competition from foreign competitors, such as producers from New Zealand, which harms local dairy firms (such as Parmalat) and the industry’s profitability. Competition is basically an uncontrollable element in the external environment.

EXAMPLE >> However, a firm is not always completely at the mercy of the external environment. Sometimes external events can be influenced. During 2013 The South African Poultry Organisation lobbied the South African government for import protection against what they referred to as cheap imports from abroad. Based on the argument that cheap, subsidised imports of chicken products harm their markets and profitability and that that will lead to job losses, the Department of Trade and Industry granted them a 8,75 per cent average tariff increase on some categories of imported chicken.11 Similarly, the Retail Motor Industry (RMI), which represents the organised motor retail sector, recently asked the Minister of Trade and Industry for protection for car dealers from their suppliers (vehicle manufacturers). The RMI alleged that vehicle manufacturers were abusing their power in their supply relationships with dealers. Dealers said they had been pressured into deals that allow manufacturers to close their dealerships down with as little as 30 days’ notice in some cases.12 The South "****** DEMO - www.ebook-converter.com*******"

African clothing industry has also successfully lobbied the government for protection against importing what they regard as cheap clothing from China. As a result, the government has placed import restrictions on South African retailers’ clothing imports from China.

5.1 Identifying opportunities and threats

LO5

When a firm implements strategies to respond to the environment within which it operates, this is known as environmental management. This process can identify a variety of potential sources of opportunities or threats, such as: •

•

Technology – the increased use of the Internet is potentially a threat to travel agents, publishers, the Post Office and vehicle dealerships. Kalahari.com has recently added seven new product categories to its offer, including baby products, homeware, pet products, outdoor products, tools and appliances.13 Using technology, Internet retailers such as Kalahari.com and Takealot.com are a direct threat to many conventional ‘bricks-and-mortar’ retailers. Legislation – the new Consumer Protection Act gives consumers more legal clout by raising the risk of product liability damages claims, and, as a result, firms can expect to pay higher insurance claims because of the greater risk of lawsuits involving product liability. This law could have a detrimental effect on smaller businesses that may not be able to afford insurance premiums and may be squeezed out of the market. 14 The

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•

Department of Health has proposed a law that will prohibit the advertising of alcohol – which is an obvious threat to wineries who may not be permitted to have wine tastings or participate in wine festivals. Government plans to ban all smoking in all public areas will not only hurt cigarette manufacturers, but also places such as restaurants and coffee shops. 15 International competition – as more and more global players enter the South African market, many firms and even industries will suffer, including the retail industry (Walmart entering the South African market is an example; the Spanish clothing retailer Zara is another), automotive industry (both Indian and Korean manufacturers such as Kia and Daewoo are now marketing their products here), the dairy industry, the clothing industry, the fast food industry (Burger King has entered an already crowded market) and the financial services industry.

The factors within the external environment are important to marketing managers because they can represent both opportunities and threats and these can be classified as social, demographic, economic, technological, political and legal, competitive and physical.

6. Social factors

LO6

Social change is perhaps the most difficult external variable for marketing managers to forecast, influence or integrate "****** DEMO - www.ebook-converter.com*******"

into marketing plans. Social factors include our attitudes, values and lifestyles. Social factors influence the products people buy, the prices they are prepared to pay, the effectiveness of specific promotions and how, where and when consumers purchase products.

6.1 Consumer values Today’s consumers are demanding, inquisitive and discriminating. They are no longer willing to tolerate products that break down, and they insist on high-quality products that are healthy or save time and energy. In South Africa, demanding customers are becoming an increasingly evident trend. The business publication, Financial Mail recently reported: ‘South African consumers, long secondclass citizens of the world shopping scene, are growing more demanding. Travelling abroad more, shoppers like what they see in foreign stores. Shoppers want good service and high-quality products, or they go elsewhere. Retailers have little choice: become more competitive or lose business.’ 16 Many of today’s shoppers are also conscious of the impact that their consumption patterns have on the environment, but many firms have been slow to respond to consumers’ views of the environment. The growing sensitivity to environmental issues will increasingly impact on marketing decision-making. Some firms will view this trend as a threat, whereas others will see it as an opportunity to gain a competitive advantage. Nedbank, for instance, is positioning itself as ‘an environmentally-sensitive bank’ with advertising slogans "****** DEMO - www.ebook-converter.com*******"

such as ‘Keeping it green is a big deal’. Motor manufacturers (such as Toyota with their hybrid Prius model) have made huge strides in manufacturing environmentally-friendly models. Renault (in association with Nissan) hope to have 1,5 million electric passenger vehicles on the roads by 2016. 17

Another growing social trend is that fewer consumers consider expensive cars, designer clothes, pleasure trips and gold credit cards necessary components of a happy life. Instead, they increasingly value non-material accomplishments, such as having control over their lives and being able to take a day off when they wish. 18 Dualcareer families suffer from time poverty, with few hours to do anything other than work and commute to work, handle pressing family situations, do housework, shop, sleep and eat. Even French restaurateurs complain that, in an attempt to save time and money, the French no longer eat threecourse meals in restaurants. Only four per cent of restaurant meals now include the traditional starter, main course and dessert and diners spend only 32 minutes on average at the table compared to 90 minutes in 1975. 19 There is a sense that the relaxed lifestyle of earlier eras – the weekday golf foursome, bridge games, gardening, long lunches, chats across the fence – is fast disappearing. Work consumes a huge portion of people’s days. This productivity pressure is exacerbated by the explosion in the number of double-income households, putting further pressure on the available time of many consumers. Furthermore, in the age of the ‘virtual office’ (i.e. working at home with a computer and modem), it has become increasingly difficult for many professionals to separate the time they spend on work and "****** DEMO - www.ebook-converter.com*******"

leisure. These people have special needs to help them cope with their time poverty, and their needs are increasingly centred on convenience and time saving.

6.2 The changing influence of families and gender Component lifestyles have evolved because consumers can choose from a growing number of goods and services, and most have the money to exercise more options. Rising purchasing power has resulted from the growth of doubleincome families. As women’s earnings grow, so do their levels of expertise, experience and authority. Working-age women are not the same group that businesses targeted 30 years ago. They expect different things in life – from their jobs, from their spouses and from the products and services they buy – and marketers who can assess and satisfy their needs can make the most of a major opportunity.

EXAMPLE >> The automotive industry is one that has finally begun to realise the power and influence of women in vehicle purchase decisions. Female buyers account for almost 44 per cent of new car sales in South Africa. Women are also increasingly purchasing more typically ‘male’ products. Cigar Aficionado magazine recently published an article on women and cigars. Some cigar makers plan to introduce special shapes designed for women. The new cigars will be large enough to provide full flavour, but tapered at the ends to make them easier to light and more comfortable for the smaller female hand. The growth in the number of working women has meant an increase in dual-career families. Although dual-career "****** DEMO - www.ebook-converter.com*******"

families typically have greater household incomes, they have less time for family activities. Their purchasing roles in the family (which define the items traditionally bought by the husband or wife) are changing, as are their purchasing patterns. Consequently, new marketing opportunities are being created. For example, small businesses that cater to the needs of dual-career households by offering specialised goods and services are opening daily. With more women than ever working full time, there is a special demand for new convenience and time-saving household products and services – such as gardening services, home deliveries (e.g. Bread-on-Wheels), fast food and childcare. Examples of products targeted at dual-career families are Royco Cup-ASoup and many ready-to-microwave foods. Elite Cheese markets its grated cheese to ‘the busy bee’; John West markets a tuna ‘lunch-to-go’; and Estée Lauder markets a ‘one-minute make-up’ for the busy woman – ‘your best face in a minute’.

6.3 Is it a new social trend or a fad? The ability to distinguish between a new social trend and a fad at an early stage can create many marketing opportunities, and prevent a firm from investing money in the wrong product. However, being first to act on a new trend can create a powerful advantage over the competition. As cost and competitive pressures on universities increase (trends), some of them such as North-West University and the University of Stellenbosch have identified "****** DEMO - www.ebook-converter.com*******"

distance education through the use of technology (telematic teaching) as a means of establishing a competitive advantage. They were the first to use this new channel and have established themselves as leaders in the field. On the other hand, firms that miss a trend will spend their time trying to catch up with the competition. Many motor vehicle manufacturers have spent decades paying the cost of ignoring the early signs that consumers wanted cars to be smaller, higher in quality and more fuel-efficient. Correctly identifying a fad, on the other hand, has its own benefits. Alert marketers can make a lot of money by reaping the short-term rewards of a fad and abandoning it just as it begins to lose its impact. Do you remember the children’s Tamagotchi toy that was so popular in the late 1990s? Are you old enough to recall the citizen-band radio craze of the early 1980s? They were fads that were profitably exploited by a few savvy marketers. More conservative firms prefer to ignore a short-lived fad (such as reality TV, tattoos and electronic cigarettes) and concentrate on opportunities with longer-term potential. A social trend that has had a significant impact on marketing across the globe is that of healthier lifestyles. Many people try to eat more healthily and exercise regularly. Many products and services have been created in response to this trend. Examples include sugar-free diet soft drinks such as Coke Zero, Royco Lite Cup-A-Soup, Mrs Balls lowcalorie chutney, and artificial sweeteners such as Canderel. Nestlé SA will be building two new factories to manufacture healthier foods (breakfast foods in particular) to take advantages of this growing trend. The trend has also sparked the emergence of retailers such as Kauai, Melissa’s and "****** DEMO - www.ebook-converter.com*******"

Tashas. A social trend of enormous importance to South African marketers is the rapid growth in the number of people who are reported as HIV-positive. Although commentators differ somewhat in respect of their estimates of the prevalence of HIV/Aids, the general consensus is that between 25 and 30 per cent of the South African population is HIV-positive. From a business point of view, the HIV infection rate is an extremely important social trend, because most victims will be in the economically active age group (18–45), resulting in a dramatic loss of skills and productivity in addition to its impact on traditional family structures and family life. The impact of Aids in South Africa will offer opportunities to some firms (such as funeral parlours), but will be an enormous threat to others. From a marketing perspective, the significance of the HIV pandemic is the question of how it will impact on consumer spending patterns. A study by Unisa’s Bureau of Market Research found that affected families are likely to cut back first on durable goods, such as televisions and cars, and to a lesser extent on semi-durable goods, such as footwear, clothing and textiles. At the same time, families will take children out of school to care for the ill, or because they can no longer afford school fees, uniforms and books. Ultimately, families adapt by eating less and curtailing their spending on essentials such as food. For example, it has been estimated that, in the short term, about R7 billion less will be spent on grain products than if the pandemic did not exist, and about R4,6 billion less on bakery products. Spending on meat products is projected to be R14 billion less than in the absence of HIV/Aids, and "****** DEMO - www.ebook-converter.com*******"

spending on fruit and vegetables will shrink by R7,8 billion. The Unisa model predicts that the fast-moving consumer goods sector is most vulnerable because up to 35 per cent of the households that constitute that market have family members who are HIV-positive. 20 It is difficult to assess the precise impact of HIV/Aids on marketing activities and how to manage its impact. Firms in the life insurance industry are particularly vulnerable. Southern Life, for instance, offers, among other things, lower premiums to people under 45 who have HIV tests every five years.

6.4 Today’s pre-teens: Born to shop Pre-teen children often have a greater discretionary income (i.e. disposable income, or money that can be used beyond the purchase of necessities and paying taxes) than many university students and therefore represent an opportunity to utilise. Parents give pre-teens considerable amounts to spend as they wish. In addition, these children also influence household purchases, such as breakfast cereals and holidays. Almost without thinking about it, parents are creating the next generation of spenders. Many marketers recognise the importance of reaching the children’s market early. In some countries, Volkswagen donates vehicles to universities for their driver training and many banks have financial packages for children and students.

6.5 Teenagers: Demanding and opinionated "****** DEMO - www.ebook-converter.com*******"

Teenagers influence household spending in four familiar ways. Firstly, when teenagers accompany their parents to a shop, their parents often let them add some ‘gimmes’ to the trolley. Secondly, teenagers influence their parents even when they are not with them by encouraging them to buy preferred brands. Either the teen specifically requests a brand, or parents know that if they don’t buy exactly what the teen wants (such as Black Cat peanut butter, for example), the purchase may go to waste. Thirdly, teens influence adult purchases when parents actively solicit their opinion. Parents buying a cellphone may be a good example. Teens often know more about certain products than their parents – think of cellphones, computers, running shoes or the latest brand of designer jeans. Finally, teens influence parent purchasing when they ask for gifts. Teens are rarely shy about letting their parents know what they want for a birthday or other special occasions.21 The quality of ‘cool’ is of paramount importance to teens when they evaluate brands. Quality in itself may not sell a product to teens, but it is the fundamental criterion of a ‘cool’ brand. The brands that teens consider to be the ‘coolest’ – such as Quicksilver or Billabong – are perceived by teens to be of high quality. After quality, the most common ‘cool’ qualifier is that it is ‘for people my age’. Teens seem to prefer things that are specifically for them, whether it’s language, fashion, advertising or brands.

6.6 Generation Y People born between 1977 and 1994 are referred to as "****** DEMO - www.ebook-converter.com*******"

‘Generation Y’. In America Generation Y has been described as both the children of the baby boomers and as ‘digital natives’ because they have always known the Internet and electronic devices such as cellphones. As a result, it is not surprising that they are also known as the ‘net generation’, the ‘dot-com generation’, ‘millennials’, and also as the ‘echo boomers’ (because they are the children of the baby boomers). Generation Y makes up 26 per cent in the United States (72 million people), 28 per cent of Australia’s adult population and 34 per cent of the Chinese population. They regard wireless communication as an essential part of daily life, were the first to use text messaging and are the primary users of applications such as Mxit, Facebook and Twitter. They are used to instant access to information. Mxit is a South African-created mobile social network. It has 4,9 million monthly active users in South Africa. It works on over 8 000 different handsets and mobile devices, including tablets. Mxit also embraces the capabilities of each platform to offer an immersive chat experience that feels native to each one. By acting as a gateway to functions not otherwise available on feature phones, Mxit affordably bridges the gap between feature and smart phones.22 All those who make up Generation Y have now entered the workplace and most of them are in early to midadulthood. This is an important market for marketers because this is the stage in life when people start forming their brand preferences that could last a lifetime. However, Generation Y needs to be approached with circumspection because they are concerned about global issues, ethical behavior and trends and are often skeptical about glib marketing messages. There is a new generation of South "****** DEMO - www.ebook-converter.com*******"

Africans born into a new South Africa – the so-called ‘born free’ generation of mostly black South Africans who have grown up in a different world, and in particular a country that is very different to what their parents knew. The oldest of these Gen-Y’s are already grown up and many have already, or are just about to enter the world of work, and it is certainly a New World of Work. For South African businesses, and marketers in particular, it is important to realise that these future employees, customers, entrepreneurs and leaders are different and that they bring a different set of values into play. 23

6.7 Generation X Americans refer to people born between 1965 and 1976 as Generation X. In the United States, approximately 17 million consumers fall into this age category. It is the first generation of ‘latchkey’ children who came home from school to empty homes who largely had to look after themselves during their later childhood – the products of dual-career households or, in roughly half the cases, of divorced or separated parents. American Generation Xers began entering the workforce in the era of downsizing and downturn, so its members are more likely than the previous generation to be unemployed, underemployed and depending on their parents for financial support.24 In South Africa, Generation X can be loosely defined as all those young people old enough to remember apartheid and be judged by history to have been part of it, and yet not quite old enough to have been involved in any form of struggle against (or on the side of) "****** DEMO - www.ebook-converter.com*******"

apartheid. In South Africa the Xers birth years range from 1970 to 1990. They are expected to grow up quickly. Teenagers are now expected to confront life and its challenges with the maturity once expected only of the middle-aged. High schools, which were once the setting for a unique teenage culture and language, have become miniatures of the adult community.25 Yet, as a generation that has been bombarded by multiple media since their cradle days, they are savvy and cynical consumers.

6.8 America’s baby boomers and South Africa’s prime timers In the United States, people born between 1946 and 1964 are referred to as the baby boomers. Almost 78 million babies were born in the United States in that post World Warperiod, which created a huge market for almost all products and services.26 The oldest baby boomers are now approaching their 70s, but they cling to their youth. This group cherishes convenience, which has resulted in a growing demand for home delivery of items such as large appliances, furniture and groceries. In addition, the spreading culture of convenience explains the tremendous appeal of prepared takeaway food and the ‘necessity’ of PVRs, cellphones and overseas holidays. Post-World War II affluence allowed baby boomers’ parents to indulge their children as never before. They invested in their children’s skills development by sending them to university. They encouraged their children to succeed in a job market that rewarded competitive drive "****** DEMO - www.ebook-converter.com*******"

more than co-operative spirit and individual skills more than teamwork. In turn, the sheer size of the generation encouraged businesses to promote to the emerging individuality of baby boomers. Even before the oldest baby boomers started earning their own living more than three decades ago, astute businesspeople saw the profits that could come from giving millions of young people what they wanted. Firms offered individualistic baby boomers a growing array of customised products and services – houses, cars, furniture, appliances, clothes, holidays, jobs, leisure time and even beliefs. 27

READER 9 >> South Africa’s Prime Timers UCT Unilever Institute of Strategic Marketing has launched its latest study on the ‘Prime Time’ generation which shows that South African marketers, unlike their European and American counterparts commonly known as the Baby Boomers, are ignoring one of the most lucrative markets around. The findings of the Prime Time Study show that 6 per cent of South Africans account for nearly 20 per cent of South African spend! According to the report, a ‘golden seam’ of South Africa’s biggest spenders are often ignored by marketers, these urban 40 plusses, while only a small percentage have a combined income amounting to nearly R300 billion – which marketers aren’t reaching to. The study further revealed that nearly half of 50-plusses, who are LSM7+, are debt free – so surely worth attention to marketers. Considering that 22 per cent of over 40s and 65 per cent of over 60s are bond-free, one can see why. Prime Timers have the time and the finances to enjoy life and they know what they want and when they want it. And what they want is quality and lifestyle. SOURCE: Scher, M. 2008. Baby boomers ignored by South African marketers. Bizcommunity, 15 August 2008 "****** DEMO - www.ebook-converter.com*******"

6.9 Older consumers: Not just grandparents As mentioned above, the oldest baby boomers have already crossed the 60-year-plus threshold that many demographers use to define the ‘senior-citizen market’ or the ‘grey market’. And today’s mature consumers are wealthier, healthier and better educated than those of earlier generations.28 Many marketers have yet to tap the full potential of the huge and lucrative grey market. For example, the most critical factor in determining car-owner loyalty is age. The oldest consumers (aged 65 and more) are twice as loyal to their make of car as the youngest customers.29 Marketers who want to actively pursue the grey market must understand its intricacies. Ageing consumers create some obvious opportunities. Some medical doctors recommend that older people take half an aspirin per day to help control their blood pressure. Has this opportunity been utilised yet? Some clothes manufacturers use Velcro-fastened clothing for people with arthritis or other ailments who may have difficulty with zips or buttons. Wheaton Medical Technologies markets a pill bottle that has a tiny batteryoperated clock that registers the time the container was last opened to take out a pill.30

6.10 The Black diamonds ‘Black diamonds’ are defined as the recently enfranchised black (as opposed to Asian or mixed-race) middle class in South Africa. Although research about the black diamonds is in its infancy, this group has immense growth potential, as it "****** DEMO - www.ebook-converter.com*******"

comprises well-educated and wealthy/salaried individuals. The black diamond identity is complex and, in a sense, a ‘work-in-progress’. However, it has distinct characteristics that set it apart from other groups. The economic potential of this group is enormous. This target market, however, is very complex due to a number of sub-segments with significant differences in behaviour, attitudes and media consumption. Nevertheless, if firms can position themselves (or their products) so that this nascent market segment adopts their products as part of their culture, then they will have a substantial and sustainable competitive advantage in respect of this potentially lucrative market segment. 31 This market segment has more than doubled in size in less than a decade and the black middle class has overtaken the white middle class in both size and spending power. 32

6.11 Survivors At the opposite end of the income spectrum to that of Black Diamonds is what is termed the Survivors. This group is ‘uniquely South African’ and while it is the biggest market segment by number, it is the most misunderstood. Nevertheless it is becoming increasingly important to businesses in South Africa as the more affluent markets become saturated. Survivors are defined as people who live in households with an income of R5 000 per month (or less) and while this modest income may not suggest a feasible market opportunity, this is a somewhat myopic view of this market segment. This is because disposable income does not always "****** DEMO - www.ebook-converter.com*******"

correlate with actual income. For example, households earning a far higher income may spend a greater percentage on items such as rates and taxes, bond repayments, cars, petrol etc., expenses that your typical survivor household would not have to bear. In other words, households with far greater actual income (than R5 000) may in fact have less disposable income than survivor households because of the additional costs that they have to bear in managing their household expenditure. While it is arguable that other developing nations have a similar (survivor-like) market segment, South Africa is unique in that many (about 38 per cent) survivor households depend on social grants for their primary source of income, suggesting a more stable source of income than many other developing nations. In addition, compared with survivors of most developing countries, South African survivors are relatively better off in terms of income but do not have assets that they can sell or use as collateral to raise finance. Compounding this problem is that many (at least 3,5 million, but it could be as many as 5 million) survivors have ‘impaired credit records’ meaning that it will be difficult for them to raise finance to buy durable goods such as furniture and motor vehicles. 33

7. Demographic factors

34

LO7

Demographic factors – another uncontrollable variable in the external environment – are extremely important to marketing managers. Demography is the study of people’s "****** DEMO - www.ebook-converter.com*******"

vital statistics, such as their age, ethnicity and location. Demographics are significant because the basis for any market is people. Demographic characteristics are strongly related to consumer buying behaviour and are good predictors of how the target market will respond to a specific marketing mix. In fact, demographic considerations have a particularly important influence on marketing in South Africa. Variables such as the size and distribution of the country’s population are of importance to marketers in identifying marketing opportunities and planning marketing strategies. WEBSITE For more information of various other useful break downs of the Census data visit http://www.southafrica.info/about/ people/population.htm#.U4ZGovmSySo.

Other demographic statistics and trends that are often of value to South African marketers are the following: 35 • • • • • •

Gross Domestic Product (GDP), considered a measure of standard of living, has risen by 31 per cent since 1994 The population growth is slowing and will start declining in 2030 The average life expectancy is 53 years for men and 55 years for women Approximately 52 per cent (approximately 26,07 million) of the population is female The infant mortality rate is 47 per 1 000 births Fertility has declined from 2,86 children per women in

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•

• •

•

2001 and is expected to decline even further in the future About 25 per cent of South Africans live in shacks or informal dwellings and about 20 per cent in a standard suburban house 54 per cent of the South African population lives in urban areas, whereas 46 per cent live in rural areas Gauteng comprises the largest share of the South African population. Approximately 11,3 million people (22,4 per cent) live in this province. KwaZulu-Natal is the province with the second largest population, with 10,8 million people (21,4 per cent) living in this province. With a population of approximately 1,10 million people (2,2 per cent), Northern Cape remains the province with the smallest share of the South African population Nearly one-third (31,3 per cent) of the population is aged younger than 15 years and approximately 7,7 per cent (3,9 million) is 60 years or older. Of those younger than 15 years, approximately 23 per cent (3,66 million) live in KwaZulu-Natal and 19,4 per cent (3,07 million) live in Gauteng.

Interesting as these statistics may be, their value lies in the ability of marketers to interpret the data and information, ascertain what they imply for the firm and base marketing strategies on those likely implications.

7.1 Universal Living Standards Measure

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The South African Advertising Research Foundation (SAARF) has introduced a non-racial measurement to "****** DEMO - www.ebook-converter.com*******"

describe the South African consumer market called the Living Standards Measure (LSM). LSM attempts to group similar people together and distinguishes between different groups of people in South Africa in terms of social class, or living standard, regardless of ethnicity, income or education. Instead of approaching social class from the point of view of obvious demographic differences, the LSM quantifies the ownership of certain durable goods, access to services, and the like, to provide a composite measure of social class. The LSM methodology is thus based on the premise that the consumption behaviour of South Africans is largely determined by their social class as measured by ownership of durable goods and consumption of services. The variables used to define the LSM measures are:36 • •

• •

Access to hot running water and a flush toilet Ownership of products such as a fridge or freezer, microwave oven, VCR, vacuum cleaner or floor polisher, washing machine, personal computer; (PC), electric stove, TV, tumble dryer, home telephone, radio, hi-fi or music centre, built-in kitchen sink, home security service, motor vehicle, DVD player, home theatre, cellphones Utilisation of services such a domestic worker, M-Net or DStv subscription, security services Where people lived: house/cluster house, town house, living in rural areas outside of Gauteng or Western Cape or metropolitan dweller.

The presence, or otherwise, of these variables for each respondent in the All Media Products Survey (AMPS), is "****** DEMO - www.ebook-converter.com*******"

coded. A formula is then applied to yield a score for each respondent, the value of which determines his or her LSM group membership. The LSM model originally had eight groups when it was conceptualised in the late 1980s. This was later expanded to ten universal LSM groups, ranging from group 10, which has the highest standard of living, to group 1, with the lowest. In 2008, it was argued by some stakeholders that there was not enough precision in the higher LSM groups, and that a finer tool was needed to examine this end of the market. Consequently, the four top groups (the existing LSM groups 7–10) were split into a high and low measure. These new divisions are not new LSM groups, but rather subsets of the existing LSM 7–10, and can be added back together into the original groups.

7.1.1 LSM 1 This group comprises 3,5 per cent of the total adult South African population, and consists of mainly females, living in huts, 16 to 24 years of age or over 50. They are rural-based with some primary-school education. Their average household income is R1 269 per month. Because of their lack of electricity, ownership of durables is very low, except for radios. They are heavy users of essential commodities. They have minimal access to basic services. Radio is a major communication channel, particularly the radio stations of the African Languages Services.

7.1.2 LSM 2 This group comprises 7,3 per cent of the total adult South African population. They are rural, mainly 16 to 24 years of "****** DEMO - www.ebook-converter.com*******"

age or over 50 and have completed some primary-school education. They typically live in ‘matchbox’-type houses. Unemployment is high and their average monthly household income is R1 475. They have on-site water with minimal ownership of durables except for radios and stoves. They listen to the radio stations of the African Languages Services.

7.1.3 LSM 3 This group makes up 7,8 per cent of the total adult South African population. The people in this group are rural, mainly 16 to 24 years of age and some (15,6 per cent) have matric. Unemployment in this group is high and their average monthly household income is R2 267. About 73 per cent live in conventional ‘matchbox’ houses and have access to on-site electricity and water with minimal ownership of durables except for radios and stoves. They spend limited amounts of money on non-essential items, such as takeaway meals and lottery tickets. They listen to the radio stations of the African Languages Services. They are also viewers of SABC 1 and are exposed to some outdoor advertising.

7.1.4 LSM 4 This group contains 14,2 per cent of the total adult South African population. The group contains a fairly even spread of the various age groups, with many achieving some highschool level. The average monthly household income is R2 424. They have access to on-site electricity and water with flush toilets. They typically own TVs, hi-fis or radios, stoves and fridges. They spend some money on non-essential "****** DEMO - www.ebook-converter.com*******"

items, such as lottery tickets and takeaway food. Cellphone ownership is 59,7 per cent. They listen to the radio stations of the African Languages Services, Metro FM and YFM. They are regular viewers of SABC 1 and 2, and are exposed to outdoor advertising.

7.1.5 LSM 5 This group comprises 15,2 per cent of the total adult South African population. They are largely urbanised, mainly 25 to 49 years of age, and about 30 per cent have completed high school up to grade 12. About 82 per cent live in a conventional dwelling and their average monthly household income is R3 462. They use electricity, water and flush toilets. They own TVs, hi-fi or radio sets, stoves and fridges. They exercise, paint the interior of their houses, buy lottery tickets, fast food and DVDs. Almost 47 per cent have a savings account. They listen to all radio stations of the African Languages Services, Metro FM and YFM. They are viewers of SABC 1, 2 and 3 and e-tv, and are exposed to outdoor advertising. Unlike LSM 4, they regularly read weekly newspapers and magazines.

7.1.6 LSM 6 This group comprises 19,5 per cent of the total adult South African population. They are urbanised, mainly 25 to 49 years of age, with up to a post-school qualification, but not necessarily a university education. Their average monthly household income is R5 755. They have access to electricity, hot running water and flush toilets. They are typically owners of a number of durables (TVs, hi-fi or radio sets, "****** DEMO - www.ebook-converter.com*******"

stoves and fridges), including cellphones. More than half of them have a savings account and over a third have some form of insurance product. They participate in a wide variety of outdoor activities and listen to a wide range of commercial radio stations, including community radio. They are regular viewers of SABC 1, 2, and 3 and e-tv, and are exposed to outdoor advertising. They regularly read daily and weekly newspapers and magazines, and go to the cinema.

7.1.7 LSM 7 This group makes up 10,2 per cent of the total adult South African population, with LSM 7 Low forming 5,2 per cent of this group, and LSM 7 High making up the balance with 5,0 per cent. They are urbanised, predominantly male, above 25 years of age and with grade 12 and higher-education qualifications. Their average monthly household income is R10 044 (LSM 7 High) and R9 242 (LSM 7 Low), and they live in houses or flats. They have full access to all services. They own all household durables and often a motor vehicle. They actively participate in a range of outdoor activities, such as holidays in South Africa. They typically listen to a wide range of commercial radio stations and community radio. They are regular viewers of SABC 1, 2 and 3, e-tv and M-Net, and are exposed to outdoor advertising. They access the Internet at least four times per week. They regularly read daily and weekly newspapers and magazines, and go to the cinema.

7.1.8 LSM 8 This group comprises 7,5 per cent of the total adult South "****** DEMO - www.ebook-converter.com*******"

African population, with LSM 8 Low making up 3,9 per cent of this group, and LSM 8 High making up the balance with 3,6 per cent. They are predominantly male, urbanised (mainly based in Gauteng and the Western Cape), over 35 years of age, have completed grade 12 and have a higherlevel qualification. Their average monthly household income is R14 017 (LSM 8 High) and R12 068 (LSM 8 Low), and the vast majority own their own houses. They have full access to all basic services. They have full ownership of all household durables, including a PC and a satellite dish. They participate in a range of outdoor activities. They listen to a wide range of commercial radio stations and community radio. They are regular viewers of SABC 1, 2 and 3, e-tv, M-Net and DStv, and are exposed to outdoor advertising. They access the Internet at least four times per week, read daily and weekly newspapers and magazines, and go to the cinema.

7.1.9 LSM 9 This group comprises 8,4 per cent of the total adult South African population, equally split between LSM 9 Low and LSM 9 High, with 4,2 per cent in each subset. They are urbanised, predominantly male, over 35 years of age, have completed grade 12 and achieved a higher-level qualification. Their average monthly household income is R19 453 (LSM 9 High) and R15 853 (LSM 9 Low). They have full access to basic services and most own their own homes. They have full ownership of all household durables, including a PC at home and a satellite dish. About twothirds own their own vehicle and air travel is common. They "****** DEMO - www.ebook-converter.com*******"

listen to a wide range of commercial radio stations and community radio. They are regular viewers of SABC 1, 2 and 3, e-tv, M-Net, DStv and DVDs, and are exposed to outdoor advertising. They typically access the Internet at least four times per week. They read daily and weekly newspapers and magazines, and go to the cinema.

7.1.10 LSM 10 This group comprises 6,3 per cent of the total adult South African population, with LSM 10 Low making up 3,2 per cent of this group, and LSM 10 High making up the balance, with 3,1 per cent. They are urbanised, over 35, have completed grade 12 and achieved a higher-level qualification. They live in conventional housing, which they usually own, and their average monthly household income is R28 467 (LSM 10 High) and R22 043 (LSM 10 Low). They have full access to all basic services, including a PC at home, a satellite dish, their own vehicle and a microwave oven. They are participants in a wide range of activities, such as exercising, and use both local and international air travel. They listen to a wide range of commercial radio stations, including community radio. They are regular viewers of SABC 1, 2 and 3, e-tv, M-Net and DStv, and are exposed to outdoor advertising. They access the Internet at least four times per week. They read daily and weekly newspapers and magazines, and go to the cinema. Patterns along the continuum of LSM groups can be identified in order to better understand the consumers in the various categories and the buying behaviour of these groups. Many South African firms use the LSM measurement to refine their target market strategies. South "****** DEMO - www.ebook-converter.com*******"

African Breweries, for instance, makes use of LSM groupings to target the markets for its beers. Premium beers, such as Peroni, are targeted at LSM 8 to 10. Mainstream brands, such as Castle, are targeted at LSM 6 to 8 and Carling Black Label at LSM 1 to 4.

7.2 Using LSM and other demographic factors to understand markets Besides SAARF’s Living Standards Measure (LSM) there are also other demographic variables that can be used to assess a market in demographic terms. These are particularly useful when they are combined with LSM groups.

7.2.1 Monthly household income Table 2.1 shows the number of people in each LSM group and their average monthly household income, and we can see that the LSM groups do not differ significantly with respect to gender distribution. Table 2.1 also shows that the bulk of the South African population is to be found in LSM groups 1 to 6 and that the average monthly income increases substantially as one moves up the LSM ladder, with the average income of those in LSM group 10 (High) being R28 467 per month. Table 2.1 shows that in terms of the adult population, LSM groups 1–6 represent nearly 70 per cent of the total adult population. However, LSM 1 to LSM 6 account for only 33 per cent of the total income. Conversely, LSM groups 7–10 earn 67 per cent of the total income, although they represent only 31 per cent of the total adult population. Although not shown in Table 2.1, LSM 1 spends "****** DEMO - www.ebook-converter.com*******"

37 per cent of their income on food and LSM 10 only 15 per cent. In other words, relatively poor people (lower LSM groups) spend a higher proportion of their total budget on food than wealthier households.

Table 2.1 Number of people per LSM group, gender distribution, average household income and percentage of population

SOURCE: Eighty20 data bases, eighty20.com (used with permission)

7.2.2 Shopping patterns People in households across all the LSM groups were asked where they do their main shopping for food and groceries (including meat, vegetables, bread, milk, cleaning materials and toiletries). The majority of LSM 1 and LSM 2 households "****** DEMO - www.ebook-converter.com*******"

patronise Shoprite, a spaza or tuck shop, a small local shop, trading store or general dealer, a local café and a hawker or street vendor. At the other end of the continuum, LSM 9 and LSM 10 respondents indicated that they regularly shop at Pick n Pay supermarkets, family shops, Woolworths, Pick n Pay hypermarkets and petrol stations or garage convenience stores. Therefore, there is a relationship between the LSM groupings of consumers and their retail shop patronage.

7.3 Education and literacy The reports of no attendance at school is high in LSM 1 (26 per cent) and decreases gradually until it is virtually nil in LSM 10 (0,1 per cent). Likewise, in the category ‘postmatric’, there are relatively few in LSM 1 (0,6 per cent), rising to 40,2 per cent in LSM 10, the highest proportion. Thus, the higher the level of education, the higher the LSM category.

7.4 Language English is the language best understood by the South African population (76 per cent), followed by isiZulu (49 per cent), Afrikaans (44 per cent) and isiXhosa (35 per cent). The most frequently spoken first official language in South Africa is isiZulu (23,5 per cent), followed by isiXhosa (17,6 per cent) and then Afrikaans (13,7 per cent). The least spoken official languages are Tshivenda (2,8 per cent), isiSwati (2,5 per cent) and isiNdebele (1,5 per cent). Marketers can also assess the media consumption "****** DEMO - www.ebook-converter.com*******"

behaviour of different LSM groups to better target their advertising. Table 2.2 shows that LSM 5 and 6 are more likely to read Drum magazine while Afrikaans-speakers in LSM 9 are most likely to read Huisgenoot and Englishspeakers in those groups are more likely to read YOU magazine. Depending on what LSM groups marketers target, this type of information is useful in planning advertising strategies. A marketer of, say, a computer tablet is thus more likely to advertise in Huisgenoot or YOU than in Drum.

Table 2.2 Magazine exposure to three magazines per LSM group

SOURCE: Eighty20 data bases, eighty20.com (used with permission)

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Marketers can also assess their market shares or identify major competitors in different LSM groups. Table 2.3 shows the sales figures for women’s clothing per LSM groups for different retailers. An analysis of LSM 10 shows that Woolworths has a 23,6 per cent market share but faces considerable competition from Edgars (24,4 per cent) at the top end of the market and from Mr Price (19,0 per cent) at the lower end of the market. Table 2.3 Retail clothing buying per LSM group

SOURCE: Eighty20 data bases, eighty20.com (used with permission)

8. Economic factors

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It is not only social and demographic factors that marketing managers must understand and react to, but also the economic environment. The general economic conditions prevailing in a country should be the starting point of an assessment of opportunities or threats in a market. The prevailing economic conditions also determine consumers’ "****** DEMO - www.ebook-converter.com*******"

spending patterns. During periods of economic growth, fewer people are unemployed (during the period of economic growth in 2005–2006, 30 000 new jobs were created each month) and interest rates are often low. As a result, people have more money to spend, referred to as disposable income. However, marketers will regard favourable economic conditions as an opportunity to execute their marketing plans, but economic conditions are not always favourable. The economic conditions of greatest concern to most marketers are inflation and recession, as well as the impact of interest rates and currency fluctuations on prices and consumer demand.

8.1 Inflation

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Inflation manifests itself in a general rise in prices without a corresponding increase in wages, which results in decreased purchasing power for consumers. Fortunately, South Africa has enjoyed the advantages of a relatively low rate of inflation in recent years. At one stage in the mid-1980s, the inflation rate was around 25 per cent, which made life very difficult for marketing managers. Low inflationary conditions benefit marketers, because real wages, and hence purchasing power, increase when inflation is low. A significant increase in inflation almost always depresses real wages and, consequently, consumers’ ability to buy more goods and services, which is a huge challenge to marketers. In times of high inflation, businesses seeking to increase their profit margins can do so only by increasing their "****** DEMO - www.ebook-converter.com*******"

efficiency. If they significantly increase prices, fewer consumers will purchase their goods or services. The South African airline Comair is a shining example. Although inflation in South Africa reached 10,9 per cent in May 2008, the airline kept its fares competitive and still made an attributable profit of R32,63 million (a three per cent increase on the previous year) as a result of its ‘strong focus on cost containment’.37 In South Africa, the value of the Rand has an important influence on inflation. For instance, when the value of the Rand relative to other currencies such as the European Dollar or the American Dollar increases, the cost of imported products declines, exerting downward pressure on retail prices and, therefore, inflation. During 2005 and 2006, when the Rand strengthened to unprecedented levels, the prices of imported goods such as electronics and motor vehicles were unusually low for South Africans. Conversely, during times when the value of the Rand declines in value against other currencies (as happened in the beginning of 2014), the opposite is, of course, true. Then imported goods in particular products such as petrol, motor vehicles and electronic goods, become expensive, which depresses retail sales. In response to the prevailing economic circumstances the National Association of Automobile Manufacturers of SA (NAAMSA) issued the following statement: ‘Domestically, 2014 new vehicle sales were likely to experience head winds as a result of above inflation average new vehicle price increases, the slowdown in the economy and, more recently, rising interest rates. As a result, NAAMSA anticipated a difficult domestic new vehicle trading environment characterised by consolidation in sales numbers at best around levels "****** DEMO - www.ebook-converter.com*******"

recorded last year’.38 When prices increase over a prolonged period, wage demands and wage increases are often too high and interest rates start rising, which curbs consumer spending even further. For instance, during difficult economic times in 2011-2012 Pick ‘n Pay profits dropped by 34,4 per cent. The declining profits were attributed to ‘… high levels of household debt and further increases in inflation [that] continue to put pressure on consumers’ disposable income’.39 In order to cope in inflationary times, a number of pricing strategies can be implemented (see Chapter 13). But in general, marketers must be aware that inflation causes consumers either to build up or to diminish their brand loyalty. Inflationary pressures also force consumers to make more economical purchases. However, most consumers try hard to maintain their standard of living during periods of inflation. Therefore, marketers can try to encourage brand loyalty with loyalty programmes (Pick n Pay introduced its new loyalty programme during tough economic times in 2011-2012), by emphasising value-for-money positioning, keeping prices as low as possible and making sure that all price increases are well justified. In formulating marketing strategies to cope with inflation, managers must realise that, despite what happens to the seller’s cost, the buyer will not pay more for a product than the subjective value that he or she places on it. No matter how compelling the justification may be for a 10 per cent price increase, marketers must always examine its impact on demand. In inflationary circumstances, many "****** DEMO - www.ebook-converter.com*******"

marketers try to postpone price increases for as long as possible. In 2104 the Bureau of Economic Research concluded that SA firms have not fully passed on cost increases (mainly electricity and labour costs) to the consumer ‘because they are afraid it will kill off demand.’40 Business firms deal with inflationary conditions differently. To maintain sales of its sweets, Tiger Brands changed its packaging to sell sweets in smaller packages.41 Owing to a fall of 10 per cent in demand for airline travel in 2009, many airlines saved costs by reducing their seating capacity by six per cent by selling unused aircraft.

8.2 Recession

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A recession is a period of economic activity when income, production and employment tend to fall – all of which reduce demand for goods and services. From a marketing perspective it is important to realise that during recessionary conditions, consumers change their consumption patterns. For example, attendance at South Africa’s several arts festivals (such as The Grahamstown Arts Festival and Aardklop) has shown to be sensitive to prevailing economic conditions. In a climate in which people are more inclined to tighten their belts they will cut back on what could be considered a luxury.42 During the recessionary period in 2013 one market analyst reported: ‘Clearly higher priced goods are not flying out of the store… so, “value for money” is what the middle income consumer is after.’43 During periods of recession, consumers switch to buying "****** DEMO - www.ebook-converter.com*******"

basics rather than luxuries, and generally become more price-sensitive. During recessionary times in 2008–2009 many South Africans switched in large numbers from more expensive staples, such as rice, to more affordable maize. As a result, food company Tiger Brands reported sharp falls in sales of its Tastic Rice and Aunt Caroline brands. Consumers also bought less chocolate and more jellies during this period. Sales of luxury brands, such as Renown spreads, Enterprise crumbed pork and Like-it-Lean viennas, fell by 17 per cent as people switched to cheaper proteins, such as pilchards and beans.44 During these periods, retailers often capitalise by aggressively marketing their house brands (also referred to as a private label) as ‘value for money’. During the recent recession Clicks expanded its house brands from 18 per cent to 25 per cent of its total product offering. Motor vehicle dealers respond to recessionary pressures by offering financing deals such as no interest paid in the first year or a year’s free insurance. During recessionary times in 2003, the National Automobile Dealers’ Association asked the Minister of Trade and Industry to change the law (the Credit Agreements Act) that prescribed a minimum ten per cent deposit and a maximum 54-month repayment period for individuals who buy a new motor vehicle. The change would have allowed individuals, for the first time, to lease a motor vehicle. The idea was to stimulate new vehicles sales which were in a slump at the time. The problems of inflation and recession go hand in hand, yet recession requires different marketing strategies. The following are examples:

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>> Strategy •

•

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Improve existing products and introduce new ones. Using this approach, the objective is to reduce production hours, waste and the cost of materials. Recession increases the demand for goods and services that are economical, efficient and offer value. A recession, therefore, forces firms to streamline their operating practices and procedures and improve customer service. Maintain and expand customer services. In a recession, many firms and organisations postpone the purchase of new equipment and materials. For instance, South African Airways postponed replacing some of its aircraft in the period 2000–2003. Under similar circumstances, many individuals will postpone the purchase of big-ticket items, such as motor vehicles, TVs, fridges and other electronic equipment. Sales of replacement parts and other services (such as repairs) may become an important source of income for firms such as vehicle manufacturers during such times. Some firms add additional services. During a recent recession, the business publication Financial Mail added a homedelivery service that had not been offered previously. Emphasise product value. Customers with less to spend will demand quality, value for money, durability, satisfaction and the capacity to save time and money before they will buy. During recessionary periods Pick n Pay heavily advertises its no-name

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•

•

range of products to ‘make your money go further’. Use special offers to stimulate demand. In 2008 motor vehicle manufacturer, Daihatsu, offered buyers R10 000 worth of free accessories, a free three-year factory warranty plus a three-year service plan with every purchase of a 4x4 Terios. Target new market segments. Traditionally, Japanese men do not buy much chocolate because they still see themselves as Samurai warrior macho males, and chocolate packaging generally appeals to women and children. Now Japanese chocolate marketers, facing a recession, have made renewed attempts to penetrate the male market segment by changing their packaging to appeal to males.

Marketers of luxury products, such as jewellery and motor vehicles, almost inevitably face declining demand during periods of recession. As consumers trade down during these periods, firms such as Pep Stores and Mr Price, which appeal to more price-sensitive consumers, may prosper. One other economic variable of considerable importance to marketers is interest rates. High general interest rates reduce consumers’ disposable income (also known as discretionary income), as they have to pay more for their home loans, credit card purchases and hire purchases. Higher interest rates, therefore, reduce consumer demand for goods and services. Clearly marketers prefer an environment of low interest rates because a higher level of disposable income increases sales and, therefore, profitability. "****** DEMO - www.ebook-converter.com*******"

9. Technological factors

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Few environmental factors can have such a pervasive influence on business firms as technological developments. Failure to analyse the technological environment can be disastrous. Motorola discovered this when Nokia and Ericsson first made use of digital technology. Motorola had been the market leader at one stage, but the use of analogue technology in its cellphones allowed Nokia and Ericsson to overtake the once-dominant Motorola. Moreover, the rate at which new technological developments are commercialised is increasing exponentially. New scientific knowledge, research results, inventions and innovative thinking, which often lead to new products, surface almost daily. Few business leaders ten years ago would have been able to predict the use and impact of information technology and business tools, such as cellular phones, electronic mail, the Internet and social media, which are in common use today, on consumer markets and marketing practices. Business firms can simply not afford to ignore technological developments, such as computer technology in general and information technology in particular. Smart firms have not viewed technological developments with scepticism or as a potential threat, but have used them as opportunities to create value for their customers and to gain a competitive advantage.

EXAMPLE >> Airlines are increasingly using self-check-in facilities via the Internet and in airport lounges to enhance the convenience of travellers. The use of technology will, it is hoped, reduce customer waiting time in queues and "****** DEMO - www.ebook-converter.com*******"

provide a better service. Both Standard Bank (see Reader 10 on Standard Bank’s SnapScan) and Absa Bank are testing technology that will allow consumers to use their cell phones to make payments for anything from taxi fares to big ticket items such as cars. The Sunday newspaper Sunday Times, acknowledging the growing trend of using electronic readers, has introduced three electronic versions of their newspaper: a desktop edition, an editor’s choice edition and an e-edition. Another example of a firm using technology to enhance its need-satisfying efforts and establish a competitive advantage is the American firm Frito-Lay. Every Frito-Lay route-delivery person now has a hand-held computer terminal. When the salesperson visits a shop, and inventory is updated, information is entered in the hand-held terminal. At the end of the day, the data are transferred back to the central office. That night, the information from all the different salespeople is aggregated, analysed and summarised in reports. By the next morning, the product manager knows what is selling where and in what quantities. Another example is the Limited retail chain in the United States, which specialises in women’s fashions. It tracks consumer preferences every day through point-of-sale computers. Based on immediate analysis of what is selling, new product designs are sent via satellite to suppliers in the United States, and to Hong Kong, South Korea and Singapore. Within days, clothing produced to these designs flows from these points in Asia and collects in Hong Kong. About four times a week a chartered jet takes the clothing to the Limited’s distribution centre in Ohio, where items are priced and then shipped to the specific shops within 48 hours.45

READER 10 >> Standard Bank rolls out mobile payments to 10 000 merchants in South Africa Standard Bank, one of South Africa’s largest financial services groups, has launched a service that allows small merchants to accept mobile payments by simply placing a QR code (Quick Response Code) at their point of sale, with no Point of Sale (POS) terminal required. Consumers can make payments "****** DEMO - www.ebook-converter.com*******"

using the SnapScan app at 10 000 merchants across the country, including Motherland in Johannesburg and The House of Machines in Cape Town. The service is available to all consumers, regardless of whether they are Standard Bank customers or not, and transactions are free of charge. Merchants sign up for the service online to receive a unique QR code that they can then print out and place at their point of sale. Consumers need to download the app and register their details along with a nominated Visa or MasterCard. To make a payment, they scan the merchant’s unique QR code, enter the amount due and confirm the payment using their PIN number. The merchant then receives an SMS notification from Standard Bank to confirm the transaction is complete. Merchants with a business bank account can have their SnapScan receipts paid directly into their bank, while small traders without an account can request a voucher that they can redeem at any Spar outlet or at a Standard Bank ATM. For small businesses, this is a real-time retail payment solution that allows business owners safe, secure and convenient payment methods for their customers. Having SnapScan also minimises potential loss due to the lack of a POS system, essentially creating another sales stream. SOURCE: Boden, R. 2014. Standard Bank rolls out mobile payments to 10 000 merchants in South Africa. Available from http://www.nfcworld.com (Accessed 22 May 2014) Another example of a technological threat for some firms is the one offered by speech recognition software (you talk and your PC types it for you). Many firms and individuals offering secretarial and typing services may lose business if this software is widely adopted. In general, it is fair to say that most forms of technology offer a variety of opportunities to create value for customers. One application is the use of customer databases and improved customer-relations management using sophisticated software. As Richard Came, ex-marketing director of Dimension Data, says with "****** DEMO - www.ebook-converter.com*******"

regard to the merging of computing and telephony: ‘Business can move from mass marketing to mass customisation and can assume the role of the small proprietor, once again doing business with individuals – though hundreds of thousands of them – one at a time.’46 LO12

Technology and the Internet in particular will continue to have a particularly significant and growing impact on consumer markets and marketing practices in general. It is estimated that the volume of Internet trade has already exceeded R30 billion a year. The growth of this technology has exceeded the growth rate of any other communication medium or consumer electronics technology, including the personal computer. Firms belonging to the Wooltru group, such as Makro, Shield, Dion and CNA – and their approximately 75 suppliers – already send about a million transactions amongst themselves on the Internet each week. The Internet provides access to almost limitless information about the external environment. It is also a means of communicating with consumers while simultaneously receiving quick and reliable feedback from customers. Twitter is a good example. Besides the advantages already mentioned, smaller firms in particular will be able to utilise the Internet by making their products more accessible – even globally. It is a medium with an incredibly wide reach, is relatively inexpensive and fairly simple to utilise. Other firms may see the Internet as a serious threat. Because potential travellers can now book hotel rooms on web sites such as Booking.com and airline seats on the "****** DEMO - www.ebook-converter.com*******"

Internet (Tripadvisor) from the comfort of their homes, some travellers may no longer require the services of travel agents. The ability to purchase short-term insurance on the Internet may similarly be a threat to some insurance brokers. But consumers benefit because the Internet makes wider distribution possible, and makes comparisons with competitors – particularly price comparisons – easier for those who want to shop around. Typical examples of popular websites where South Africans can compare prices are PriceCheck.co.za (where one can compare prices, read product and retailer reviews, or charge directly to the checkout page, knowing that you found the best deal on the net) and Travelstart.co.za (where you can search for the cheapest flights online). WEBSITE See the ease with which a hotel room can be booked internationally at www.booking.com

10. Political factors

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Political factors refer to the factors influencing the political situation in a country. Marketers, like most businesspeople, prefer a situation of relative political stability. Most westernised democracies enjoy the benefits of prolonged political stability, which makes it relatively easy to plan and execute marketing strategies. Other countries often find themselves in periods of political turmoil. In many of these "****** DEMO - www.ebook-converter.com*******"

countries, the lead-up to elections contributes to this undesirable situation. If governments change regularly – with each new government introducing new economic policies, such as increased government involvement in the economy, which the next government reverses again – the frequent changes contribute to political instability. If, before an election, the government in power pursues a free-market system, whereas the newly elected government introduces socialist policies, this instability will be seen as a threat by many marketing firms. A major consideration for marketers entering foreign markets is the attitude of the government in power towards the economic freedom of its citizens. Some countries (such as Cuba) still have a socialist government in power. Others (such as Russia and Khazakstan and many Eastern European and African countries, including Zambia and Tanzania) are moving towards free-market economic systems. In foreign markets in particular, marketers tend to believe they have little influence on the political environment, and refrain from challenging the political dogma of the host country. By ensuring that no major transgressions occur, international firms avoid punitive legislation. For instance, a firm with oil refineries in Angola will try to ensure that no major oil spillage or pollution occurs that could jeopardise relations with local government officials. Sometimes legislation is passed in response to the pressure created by consumers – for example, in response to those who have fallen foul of ethical business practice, such as some pyramid schemes. Other consumer groups, such as "****** DEMO - www.ebook-converter.com*******"

the Housewives League and the National Council Against Smoking, are organised in formal structures to protect consumers’ rights. Another example is the financial services ombudsman, a regulatory body set up to protect consumer rights in the financial services sector. The Media Monitoring Group is another example of a consumer group protecting the rights of consumers. It frequently complains to TV stations about the violent content of its news bulletins. Consumer rights organisations base their campaigns on the four basic consumer rights, namely the right to safety, the right to be informed, the right to choose and the right to be heard. The International Charter of Consumer Rights, endorsed by the Department of Trade and Industry, has expanded these basic consumer rights to eight:47 •

•

•

•

The right to basic needs. The right to the basic goods and services that guarantee survival, including adequate food, clothing, shelter, healthcare, education and sanitation The right to safety. The right to be protected against products, production processes and services that are hazardous to health or life The right to be informed. The right to be given the facts needed to make an informed choice or decision. This right implies protection from misleading or inaccurate publicity material, whether included in advertising, labelling, packaging or by any other means The right to choose. The right to have access to a variety of products and services at competitive prices and, in the case of monopolies, to have an assurance of satisfactory quality and service at a fair price

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•

• •

•

The right to be heard. The right to advocate consumers’ interests with a view to receiving full and sympathetic consideration in formulating and executing economic and other policies The right to redress. The right to fair settlement of just claims due to misrepresentation The right to consumer education. The right to acquire the knowledge and skills to be informed consumers throughout life The right to a healthy environment. The right to a physical environment that will enhance the quality of life.

The movement to protect consumer rights is known as consumerism. Pressure from consumer groups often leads to industries setting up self-regulatory agencies.

10.1 Self-regulatory agencies

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Some industries regulate themselves rather than wait to be subjected to governmental laws and regulations. One of the best examples is the Advertising Standards Authority of South Africa (ASA), which self-regulates the South African advertising industry.48 The ASA is an independent body, set up and paid for by the advertising industry, to administer the industry’s system of self-regulation. The ASA works closely with government, industry and consumer bodies to set and maintain the highest standards in advertising.

10.1.1 Advantages of self-regulation "****** DEMO - www.ebook-converter.com*******"

Self-regulation is internationally accepted as the ideal system of regulating advertising, as it is faster and less expensive than government legislation, more flexible and ensures the speedy resolution of disputes. Self-regulation also generates greater moral adherence than a law would because codes and guidelines are voluntarily developed and adopted by industry members. Such members agree to obey not only the letter, but also the spirit of self-imposed rules and to abide by the decisions of their peers.

10.1.2 The Code of Advertising Practice ASA members support, and are obliged to adhere to, a code of conduct. To keep abreast of socio-economic change, this code is updated annually by a Code Revision Committee appointed by the industry. While the code sets out the advertising standards pertaining to a wide range of industries, its basic principles may be summarised as follows: • • • • • • • • • •

Stay within the law Claim only what you can prove Do not mislead Do not disparage Compete fairly Act with responsibility Do not offend Do not steal Do not exploit the vulnerable Consider your neighbour.

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10.1.3 Fair adjudication The ASA directorate investigates complaints that the code has been breached, giving both parties a fair and equal opportunity to state their point of view before the ASA adjudicates on the matter. Members of ASA committees are elected by their industry bodies to serve on ASA committees and to make decisions on behalf of the industry. They are, therefore, elected on the basis of their knowledge, experience and standing in the industry. If an advertiser fails to co-operate with the ASA, all ASA media members (including newspapers, magazines, television, radio, cinema and members of the Printing Industries Federation) have agreed, in the public interest, not to accept advertising that contravenes the Code of Advertising Practice from the advertiser in question. When an advertiser is found to be negligent, wilful or a regular contravener of the code, a preclearance requirement (all new advertising must be approved by ASA before it may be used) may be imposed on the advertiser. A selection of complaints that the ASA has had to deal with recently include: •

Pick n Pay Hypermarket’s claim of being ‘always cheaper’ (ruled in favour of Pick ‘n Pay) • Chicken Licken using a character parodying rival KFC’s Colonel Saunders (discontinued voluntarily) • Duracell battery’s claim of ‘lasts up to six times longer than ordinary zinc-carbon batteries’ (ruled in favour of Duracell) • Artificial sweetener brand Canderel complaining that a competitor, Selati, copied the packaging of its Sucralose sweetener sticks (ruled in favour of Selati) "****** DEMO - www.ebook-converter.com*******"

• •

Both Parrot’s Restaurant and Steakhouse boasting the best steaks in the East Rand (ruled against Parrott’s) Dis-Chem’s claim to be ‘SA’s favourite pharmacy’ (ruled in favour of Dis-Chem as they submitted research information to support the claim).

11. Legal factors The legal system of a country can exert a profound influence on how business in general and marketing in particular are conducted. Legislation affecting marketing activities can be divided into three main categories: •

•

•

Laws promoting competition – such as the Competition Act, which prohibits restrictive trading practices, such as price collusion Laws limiting competition – such as the laws providing Telkom and the Post Office (Postal Services Act [No 124 of 1998]) with legal protection against competition Laws protecting consumer rights – such as the Consumer Protection Act (2011), the National Credit Act (No 34 of 2005) and the Usury Act (No 73 of 1968). Business needs government regulation to protect innovators of new technology, to promote the interests of society in general, to protect one business from another and to protect consumers. In turn, governments want business to flourish, because trade generates taxes that are used to support public efforts to educate our youth and defend our shores, and so on. The private sector also serves as a

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counterweight to government. The decentralisation of power inherent in a private-enterprise system places some restriction on a government so essential for the survival of a democracy. Every aspect of the marketing mix is subject to laws and restrictions. It is the duty of marketing managers or their legal experts to understand the implications of these laws and conform to them because failure to comply with regulations can have major consequences for a firm. Sometimes just sensing trends and taking corrective action before a government agency intervenes can help avoid legal action against a firm. However, the purpose should not simply be to keep the marketing department out of trouble, but also to help it implement creative new programmes to realise marketing objectives. It is all too easy for a marketing manager or sometimes a lawyer to say no to a marketing innovation that in reality entails little risk. For example, an overly cautious lawyer may hold up the launch of a desirable new product by warning that the package design could prompt a copyright infringement lawsuit. Therefore, it is important to have a thorough understanding of the laws of the central government, provincial governments and regulatory agencies to regulate marketing-related issues. Laws and regulations can be a threat or an opportunity to different firms. One firm that benefits from legal protection is Telkom. The Telecommunications Regulatory Authority ruled, after complaints from Telkom, that all callback operators that competed with Telkom in the international market had to cease operations. Another example of the "****** DEMO - www.ebook-converter.com*******"

effect of legislation is the opportunities that opened up for firms selling cellphone car kits. Legislation that bans drivers from using hand-held phones has doubled the sales of many cellphone car-kit installers. Another firm that has exploited a new law profitably is Mitsubishi. When the Receiver of Revenue ruled that four-door, double-cab vehicles will no longer be deemed to be used for business purposes (meaning that businesspeople could no longer claim back the 14 per cent VAT paid on them), sales of Mitsubishi’s twodoor double-cab brand, Clubcab, nicknamed ‘a cab and a half’, soared.

11.1 Central government legislation

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In South Africa marketers have recently had to deal with a deluge of new legislation at both central and provincial government level. The following sections provide examples.49

11.1.1 Privacy and data protection Some years ago, the South African Law Reform Commission began to investigate the desirability of introducing privacy and data-protection legislation. The commission investigated all aspects related to the protection of the right to privacy of a person in relation to the processing in any way of his or her personal information by the state or another person. The Protection of Personal Information Act (POPI) provides for comprehensive regulation of all aspects of the collection, use, disclosure, storage of and access to personal information. The act prohibits any firm from using "****** DEMO - www.ebook-converter.com*******"

information supplied by a customer for any purpose other than for which it was supplied. The act thus provides a legal framework for the use of consumers’ private information and preventing the indiscriminant use of such information. A specific target is the regulation of direct marketing practices and preventing the undesirable practice of ‘spam’ marketing (unsolicited emails and sms messages). One implication will be that a magazine publisher may then not sell its subscribers’ list to, say, a marketing research firm or direct marketing company. Such a law may be a serious threat to firms using customer databases (such as catalogue sellers) to conduct their business. Measures to protect privacy may also be perceived as a cost to business and an unjustified constraint on the right of a firm to conduct its business affairs as it wishes. On the other hand, greater protection for the privacy of customers may promote electronic commerce because customers who do buy online will perceive lower risk in transacting online and will feel better protected. Firms using better-targeted niche advertising rather than mass advertising will, however, be affected by the law, as would firms exchanging information about clients – as Nedbank, Wooltru, Didata and Old Mutual were at one stage planning to do. The cellular telephone industry, which does an automatic credit check on its clients every three months, will also be affected by the new law. The proponents of the expected law contend that its purpose is to protect the privacy of consumers, whereas firms that oppose the law argue that consumers who provide confidential information should have the right to receive "****** DEMO - www.ebook-converter.com*******"

information not necessarily related directly to that transaction. In most other countries in the world where similar legislation is in place, consumers have the right to indicate whether or not their personal details can be passed on to third parties or not.

11.1.2 The Consumer Protection Act As the name suggests the purpose of the Consumer Protection Act is to protect consumers by promoting a fair, accessible and sustainable market for consumer products and services and by specifying national norms and standards relating to consumer protection. Failure to do so may have serious consequences. After analysing more than 500 complaints received by the National Consumer Commission cell phone firms and time-share firms are being investigated for alleged abuse of consumer rights. The act is based on eight principles: equality in the consumer market; privacy; choice; disclosure and information; fair and responsible marketing; fair and honest dealing; fear, just and reasonable terms and conditions; fair value, good quality and safety. It requires businesses to reconsider many traditional business practices to ensure that all their dealings with consumers are fair, reasonable and honest. The act holds producers, importers, distributors and retailers – even if they weren’t negligent – jointly and severally liable for damages caused by unsafe products, product failures, defects or hazards in goods or inadequate instructions or warnings. The act will force many business firms to review their business models, strategies and service delivery methods in order to satisfy the requirements of the "****** DEMO - www.ebook-converter.com*******"

act. WEBSITE You can read more about the Consumer Protection Act on http://www.acts.co.za/consumerprotection-act-2008/

11.1.3 The Tobacco Products Control Act The Tobacco Products Control Act controls, among other things, the advertising of tobacco products; the use of tobacco trademarks, logos, brand names or company names when promoting, for example, sporting, cultural or educational events; the sampling of tobacco products; accessibility to cigarette vending machines; the placement of a cigarette name or trademark on anything other than a cigarette package; and the placing of any other information on tobacco packaging except for health warnings, trademarks and trade names. Due to these restrictions tobacco firms have had to find alternative ways to market their products. The Tobacco Products Control Act was introduced in South Africa in 1993, after smoking was rated the second highest health concern, after HIV/AIDS. This act has been amended several times during the past decade and today South Africa has some of the strictest tobacco control measures ever adopted by the government of a developing country. It is estimated that cigarette consumption has fallen dramatically since the early 1990s while the percentage of adult smokers in the country has dropped from 32 to 26,5 percent. 50 "****** DEMO - www.ebook-converter.com*******"

11.1.4 The Competition Act The Competition Act prohibits any ‘agreement’ that may reduce competition in an industry, including agreements to fix prices, production quotas, or to restrict investment, innovation, or divide markets by allocating customers, suppliers or territories. It also prohibits collusive tendering and vertical relationships in the same distribution channel (for example a producer owning both a wholesaler and a retailer). Several firms in South Africa, including fishing firm Oceana (who had to pay a R35m fine) and construction firms such as Murray and Roberts have fallen foul of this law. An example of ensuring competition is when the Competition Commission blocked Pick n Pay’s attempt to buy the Fruit and Veg City retail chain ‘because the transaction would limit competition in the market’. WEBSITE You can read more about the Competition Act on http://www.acts.co.za/competition-act1998/

11.1.5 The Electronic Communications and Transactions Act The Electronic Communications and Transactions Act regulates online trading and stipulates, among other things, that: •

•

Consumers must have the opportunity to withdraw from an online transaction at any time before placing a final order The seller must accept responsibility for the protection of

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•

•

buyers’ confidential information The buyer is entitled to cancel any online transaction without reason within seven days of receipt of the goods (certain product categories are exempt) Consumers have the right to request not to be included on the firm’s mailing list. WEBSITE You can read more about the Electronic Communications and Transactions Act on http://www.acts.co.za/electroniccommunications-and-transactions-act2002

11.1.6 The National Credit Act The National Credit Act regulates the credit market in South Africa by introducing the concepts of over-indebtedness and preventing the reckless granting of credit. Overindebtedness is a situation where a consumer is unable to meet all of his or her obligations in respect of credit agreements entered into in a timely manner. If a court determines that a consumer is over-indebted, it may extend the period of the credit agreement, reduce payments, postpone payments, or re-calculate the consumer’s obligations. In other words, a debt rearrangement can be sanctioned by the court. The National Credit Act ensures that consumers are not drawn into applying for and agreeing to the provision of credit when they will not be in a position to service that credit line in the future. If credit is granted on a reckless basis, the court may suspend the credit agreement or set aside all or part of the consumer’s obligations in terms "****** DEMO - www.ebook-converter.com*******"

of such credit agreement. The ‘financial means, prospects and obligations test’ will be applied when assessing individuals for credit. This test will encompass an assessment of the consumer’s income and right to receive such income, the regularity of such income and the financial means of any adult person within that consumer’s household (such as that person’s spouse). The ultimate objective of this act is the protection of the indigent, illiterate consumer and to protect consumers who do not understand the terms of credit agreements. The act requires credit agreements to be set out in plain and understandable language and if requested, credit providers have to provide information (both written and oral) to consumers in the preferred language of the consumer.51 From a marketing perspective, the National Credit Act will limit and constrain the amount of credit granted by banks and retailers (such as furniture and clothing retailers), which will dampen demand and, therefore, sales. WEBSITE You can read the National Credit Act on http://www.acts.co.za/national-creditact-2005

11.2 Provincial government legislation In South Africa, a provincial legislature is the legislative branch of the government of a province, as provided for in the Constitution of South Africa. The legislature is empowered to pass legislation within its functional areas, as well as a constitution for the province should it wish to do "****** DEMO - www.ebook-converter.com*******"

so.52 Provincial governments also pass their own laws that have an impact on firms. Gauteng, for instance, has consumer courts that allow consumers whose consumer rights have been violated access to legal recourse.

11.3 International agreements

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International business and trading agreements that the government has entered into can also influence a firm’s marketing initiatives. South Africa is a signatory to several international trade agreements. Three of the most prominent ones are worthy of further consideration.

11.3.1 World Trade Organisation (General Agreement on Trade and Tariffs) South Africa is a signatory to GATT (General Agreement on Trade and Tariffs), a worldwide agreement aimed at increasing free trade among member countries by limiting the role of trade barriers, such as import duties, subsidies and tariff protection. The responsibility for managing the implementation of the agreement now rests with the World Trade Organisation (WTO). In other words, although there is sometimes confusion, the essence of GATT still exists under the umbrella of the WTO, albeit under another name. Membership of the WTO means that South African firms can no longer be protected by the government by means of trade barriers, and existing trade barriers must be phased out. One casualty of the agreement is the General Export Incentive Scheme, which has subsidised South African exports to the "****** DEMO - www.ebook-converter.com*******"

tune of R10 billion since 1990.

11.3.2 Southern African Customs Union South Africa is also a member of the Southern African Customs Union (SACU), whose objective is also to promote free trade between the member countries, South Africa, Botswana, Lesotho, Namibia and Swaziland.

EXAMPLE >> Several firms have recently felt the uncomfortable heat of foreign competition as a result of reduced protection flowing from the freetrade agreements. Kelvinator tried to persuade the Board of Tariffs and Trade to apply tariffs to cheap imports of white goods (stoves, fridges, etc.) from Fridgemaster in Swaziland.53 The standard argument is that cheap imports destroy the South African manufacturing base and, therefore, jobs. The counterargument is that South African consumers should have access to the cheapest products possible and that consumers cannot be expected to subsidise inefficient firms and poor labour productivity. Dairy producers have also expressed concern about possible cuts in import tariffs on dairy products, as this will lead to an increase in imports from countries such as New Zealand and Australia. Dairy farmers complain that the competition caused by imports put the profit margins of dairy producers under pressure because they cannot get price increases to match production costs.54 Potato SA, the organisation looking after the interests of the potato industry (including farmers, wholesalers and exporters) recently complained about the import of cheap processed potatoes from France.

11.3.3 Southern African Development Community55 South Africa is part of the Southern African Development Community (SADC) agreement that was established in 1992. The SADC’s purpose is to turn this economic bloc into the African economic engine by creating a common market and "****** DEMO - www.ebook-converter.com*******"

eliminating trade barriers. It has 14 members at present. In the past, the GDP of the SADC countries often grew at a faster rate than that of the rest of Africa. About threequarters of South Africa’s trade is with SADC countries. SADC membership implies free trade and, therefore, stronger competition, but also more exporting opportunities for South African firms.

11.4 The marketing implications of legislation Government interference in business through legislation will always raise the cost of doing business and will inevitably increase prices to consumers. The cost of business compliance with the new Consumer Protection Act is estimated to be R1 billion and for compliance with the new Companies Act R3 billion. To comply with the Consumer Protection Act Vodacom points out that it will have to re-train all frontline staff, revise contract terms and conditions and re-engineer some of its business processes.56 Telkom executives recently told Parliament that ‘compliance with a host of new laws would add considerably to the cost of doing business, which would directly contribute to inflation, as consumers would have to pay for them’.57 Legislation and laws can obviously hamper business activities and marketing initiatives. The departing chairman of Woolworths recently said the following about the impact that laws and regulation have on business: ‘The over-emphasis on corporate governance is killing business activity in South Africa. Too much focus and time had to be devoted to complying with corporate "****** DEMO - www.ebook-converter.com*******"

governance rules and regulations instead of creating lasting relationships with customers and ensuring that they are supplied with the right products.’58 The previous CEO of 1Time airline recently said that the government’s red tape and taxes are largely to blame for the airline’s financial woes.59

READER 11 >> Obeying new laws will add to costs, says Telkom Compliance with a host of new laws would add considerably to the cost of doing business, which would indirectly contribute to inflation, as consumers would have to pay for them, Telkom executives have warned. The executives briefed Parliament’s communications committee yesterday on the group’s annual report, business conditions and future plans. The committee heard that the group’s capital expenditure in future would be driven more by regulatory requirements than by business imperatives. Group executive for regulatory and government relations, Victor Moche, cited the Regulation of Interception of Communications and Provision of Communication-Related Information Bill, Promotion of Access to Information Act, State Information Technology Agency (SITA) Amendment Bill, the Electronic and Communication Transactions Act and Electronic Communications Security Bill as laws that would create substantial additional costs. These higher costs would make it hard for Telkom to be profitable in the long term, and would contribute to higher consumer costs and, ultimately, inflation. The interception legislation would oblige Telkom to collect an enormous amount of consumer information and create a huge administrative burden for the corporation. The Promotion of Access to Information Act would also require the establishment of special units and the keeping of information, while the SITA legislation would create a monopoly and contribute to inefficiency in the economy. "****** DEMO - www.ebook-converter.com*******"

Moche also said the verification procedures required by the Electronic and Communication Transactions Act and Electronic Communications Security Bill would dampen business growth. SOURCE: Adapted from Ensor, L. 2002. Obeying new laws will add to costs, says Telkom. Business Day electronic edition, 23 October 2002

12. Competitive factors

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The competitive environment encompasses the number of competitors a firm must face, their relative size and their degree of interdependence within the industry. Management has little control over the competitive environment confronting a firm. Yet the marketing mix, particularly pricing, depends on the type and extent of competition. After years of relative isolation from international competitors, South African marketers have been forced to adapt to escalating levels of foreign competition lately. In some cases, competitive considerations (or the lack thereof) can present an opportunity. The number of courier firms that have sprung up and prospered in recent years has been made possible by the Post Office’s inability to satisfy the needs of consumers. The competitive environment is indeed challenging. The firm’s organisational culture and its perceptions of possible risks and returns will, to a large extent, determine how occurrences, trends and potential opportunities and threats are handled. Micro-lenders (sometimes cruelly referred to "****** DEMO - www.ebook-converter.com*******"

as ‘loan sharks’) spotted an opportunity in the financial services market that the large established banks were not interested in. Sometimes new competition emerges from unexpected sources. Technology companies such as Google (PayPal) and Apple are developing payment solutions that will be a serious threat to conventional banks. Similarly, Vodacom has applied for a financial services license and already holds a short- and long term insurance license allowing it to sell, amongst other things, funeral cover. Some firms (such as large commercial banks) are often conservative and will avoid what they regard as unacceptable risks or developments they may not be familiar with. Other firms – such as Capitec Bank and Rand Merchant Bank – are more innovative and entrepreneurial and will pursue opportunities others may prefer to stay clear of. Capitec’s unsecured lending business is an example. This culture will also influence perceptions of the likely risks and returns (profitability) of a new venture.

13. Physical forces

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Physical forces are becoming an increasingly relevant issue in the marketing environment. A generation ago, physical forces would not have merited much consideration by marketing managers. However, awareness by consumers and regulatory authorities of the impact of human activities on the natural environment has made the physical environment an important macro-environmental force that impacts on marketing decisions. In South Africa, the "****** DEMO - www.ebook-converter.com*******"

physical forces that are relevant for marketing managers are climate change, pollution, scarce resources, recycling and non-wasteful packaging, and the use of environmentallyfriendly ingredients.60

13.1 Climate change The impact of climate change on our physical environment is possibly the greatest challenge facing the world this century. Many argue that the depletion of the ozone layer by such human activities as burning fossil fuels and the slashand-burn approach to harvesting timber from rainforests (particularly in the developing world) has had a profound negative impact on our climate. There have been numerous attempts to regulate the activities of nations (and businesses) in order to limit the impact of industrial activity on the climate. A start to achieving global consensus on this controversial topic was reached in 1997 in Kyoto, Japan. The objective of the Kyoto Protocol is to articulate a strategy to stabilise the emission of greenhouse gases to prevent the hazardous interference with the climate system. The Kyoto Protocol was adopted by South Africa in 2002. A controversial issue, however, is how to reach a balance between development and climate goals. Developed and developing nations have different priorities and, accordingly, opposing viewpoints as to what would constitute a fair compromise, as there will obviously be costs involved in implementing any agreement. Although South Africa, because it is a developing country, does not have to reduce its omissions under the Kyoto "****** DEMO - www.ebook-converter.com*******"

Protocol, the country has set itself voluntary targets, which will hopefully see emissions peaking between 2020 and 2025 and then decline. This target is important because climate change has the potential to have a serious negative impact on South Africa’s economy. For example, tourism contributes as much as ten per cent to the South African GDP and 36 per cent of tourists to South Africa cite the country’s natural resources (such as wildlife) as the primary reason for visiting the country. Climate change may result in a loss of habitats and biodiversity due to changes in temperature and humidity, and an increased malaria risk, resulting in a decrease in tourism-generated revenue.61

13.2 Pollution Pollution can be described as the unwelcome concentration of harmful substances detrimental to the environment. Pollution can take the form of carbon emissions from factories or combustion engines, chemicals, sewerage and even an excessive concentration of fertilisers. More than 200 000 tons of tyres become waste every year and only 5 per cent are recycled. All 11 million tyres are dumped illegally or burnt to salvage the wire inside. The government’s Recycling and Economic Development Plan is trying to address this situation.62 Although pressure from government and consumer groups can compel industries and local authorities to reduce pollution, in some cases there are positive financial benefits associated with a pollution-free environment. For example, Gonubie Beach near East London has been awarded Blue "****** DEMO - www.ebook-converter.com*******"

Flag status, an internationally recognised symbol which is awarded to beaches that are clean and meet international environmental standards. This award means that tourists are assured of certain physical environmental standards when visiting the beach, which results in an increased number of visitors to the area and, consequently, increased revenue for local businesses.

13.3 Scarce resources We have always lived in a world of finite resources – although we may not always have appreciated this reality. For example, in the past, manufacturers (and consumers) were not too concerned about exhausting the world’s natural resources and hence the expression ‘there are plenty more fish in the sea’. This generations-old adage has proved to be false, and we have found that, unless properly managed, fish stocks can be depleted to the extent that certain species of fish are now in danger of extinction. Fortunately, fish stocks, if properly managed, like wood, paper and leather, and harvested at a rate less than or equal to their natural replenishment, are a renewable resource. One of the biggest technological challenges in the world today is finding sources of renewable energy to replace the current reliance on oil and coal for generating much of the world’s electricity and powering its transport. Even if one concedes that global warming may be part of a natural cycle rather than a consequence of excessive carbon emissions, these resources are finite. It follows that governments and firms marketing energy need to find other sources of energy. "****** DEMO - www.ebook-converter.com*******"

As a result, much of the effort of firms has turned to the harvesting of what are known as ‘perpetual resources’, such as the sun, tides, winds, sea currents and hydroelectricity. These resources are in no danger of being exhausted and will provide a sustainable and clean source of energy for generations. As with any crises, there lies an opportunity and it is estimated that as many as 1,2 million direct or indirect jobs could be created in South Africa in the renewable energy sector.63 Innovative firms, such as Nedbank, respond to these concerns. The bank has designed the first branch, located in Lansdowne Corner in Cape Town, which will be fully powered by renewable energy sources.

13.4 Recycling and non-wasteful packaging Although South Africa is behind the developed world in its effort to implement recycling of materials and encourage the use of environmentally-friendly packaging, it has recognised this activity as an important national priority. To this end the South African government introduced legislation to force businesses to charge customers for the supply of plastic shopping bags (and to make them more durable), prompting a 90 per cent reduction in the use of plastic bags.

13.5 Environmentally-friendly ingredients The trend towards using environmentally-friendly ingredients as a component of, or in the manufacture of products, is pervasive in all sectors of our economy. The "****** DEMO - www.ebook-converter.com*******"

wine industry in South Africa is one that has embraced environmentally-friendly practices. This is a systemic approach and embraces all aspects of the winemanufacturing process, from cultivating grapes in the vineyard to bottling the wine.64 Even something as innocuous as the traditional disposable baby’s nappy can have a profound impact on the environment. One baby, using disposable nappies, can produce up to two tonnes of solid waste during its lifetime, which can take up to 500 years to decompose. Consequently, manufacturers of nappies are investigating the use of more environmentallyfriendly (biodegradable) components. Similarly, manufacturers of personal computers and allied products are investigating ways to limit the use of non-recyclable components and harmful substances in their products. In this area, one proposal being considered is to use corn starch rather than plastic in printers.65 To summarise: the environmental occurrences and trends that may represent opportunities and threats to business firms, and that determine and shape the long-term well-being of these firms are found within the marketing environment. Once identified, the marketer has to evaluate them and then decide how to respond to them. These two considerations are discussed in detail in Chapters 4 and 14. The competitive environment is so important in marketing that we devote an entire chapter to this topic (Chapter 4).

Retailers urged to shift to innovative ‘feel-good’ trading "****** DEMO - www.ebook-converter.com*******"

Retailers can take advantage of the recession by offering value for money, and bundling feel-good items that are still cost-effective. Gwen Morrison, CEO of The Stores said last week that there had been a shift in the way consumers shopped, with down-trading being evident and, in some cases, people opting out of shopping. Morrison told businesspeople in Johannesburg last week that travel by plane, for example, was being replaced by video conferencing. She said companies needed to be innovative and creative in the economic environment. Consumers faced a lack of credit, no spending power and some products were starting to see deflation. Discount was king, and companies that were trading on price and value were reaping the rewards. Morrison said some people were spending only in the first ten days of the month. As a result, retailers in countries where the credit crunch had hit hard were being forced to rethink their strategies – lessons South African companies could learn. Consumers wanted to be able to cut costs without necessarily having to cut back on their lifestyle, Morrison said. They wanted high value for low price. Morrison said, however, that cutting prices could affect the credibility of the brand, and consumers might wonder whether the initial price point had been set too high, even though sales might ‘clear shelves’. She said retailers should look at a form of retail therapy that did not break the bank, but did uplift spirits. For example, Morrison said, retailers in the United States were starting to promote products that made consumers feel happier, and indicated that retailers – and suppliers – were trying to show they were on the side of the consumer. SOURCE: Adapted from Mawson, M. 2009. Retailers urged to shift to innovative ‘feel-good’ trading. Business Day electronic edition, 20 April

QUESTIONS 1 2

Do you think that the proposed ‘feel-good’ retailing strategy will be effective? Justify your response. Suggest alternative strategies.

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KEY CONCEPTS Baby boomers: people born between 1946 and 1964. Competitive market: a large number of sellers marketing a standardised product to a group of buyers who are well informed about the marketplace. Demography: the study of people’s vital statistics, such as their location, age, race and ethnicity. Discretionary income (disposable income): money for purchases other than necessities and taxes. Environmental management: when a firm implements strategies that attempt to shape the external environment within which it operates. Generation X: consumers born between 1965 and 1976. Generation Y: consumers born between 1977 and 1994. Inflation: a general rise in prices without a corresponding increase in wages, which results in decreased purchasing power among consumers. Monopoly: an industry in which one firm controls the output and price of a product for which there are no close substitutes. Recession: a period of economic activity when income, production and employment tend to fall – all of which reduce demand for goods and services. Target market: a defined group most likely to buy a firm’s product. Time poverty: lack of time to do anything but work, commute to work, handle pressing family situations, do housework, shop, sleep and eat.

REFERENCES 1 2 3 4 5 6

History becomes a liability for Kodak. Business Day, 20 January, 2012, p. 9 (sourced from Bloomberg). Mokopanela, T. 2012. Property developers’ capital flee incompetence and corruption. Business Day, 11 June 2012, p. 14. http://www.cnet.com/news/apple-reveals-drop-in-sales-of-itunes-music/ (accessed 13 November 2014) http://www.clicksgroup.co.za/IRDownloads/AnnualReport2011/commentary/oper accessed 13 November 2014). Thompson, A.A. & Strickland, A.J. 1998. Strategic management (10th edition). London: Irwin, p. 90. Friedland, R. 1999. A question of power. Financial Mail, 26 February 1999, p. 49; Eskom website (2003); Vecchiatto, P. 2013. Electrification causing

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7 8 9

10

11 12 13 14 15

16 17 18 19 20 21 22

23 24

traditional samp and beans to disappear, Business Day, 15 November 2013, p. 3. Clicks Corporate Report, supplement to Financial Mail, 21 November 1997, p. 8. Vallie, A. 2011. Clicks stores boost group’s earnings. Business Day, 15 April 2011, p. 1. Koenderman, T. 1997. Reading habit is on the decline. Financial Mail, 8 August 1997, p. 63; Harber, A. 2011. Zulu papers escape trend of falling circulation. Business Day, 31 August 2011, p. 11. Clicks pharmacy celebrates its 10-year anniversary (Available from: http://www.supermarket.co.za/news_articles.asp?ID=4492) Accessed on 15 April 2014); Makholwa, A. 2014. Plenty left to do, Financial Mail, October 30 – November 5, p. 42. Ensor, L. 2013. Rob Davies raises chicken import tariffs. Business Day Live, 30 September 2013. Claasen, B. 2002. Retail motor sector seeks protection from state. Business Day, 16 October 2002. Vallie, A. 2012. Consumers take online shopping to a higher level. Business Day, 5 September 2012, p. 2. Temkin, S. 2009. Tough consumer law adds to costs. Business Day electronic edition, 4 May 2009. Magubane, K. and Goko, C. 2012. Move to ban smoking at all workplaces. Business Day, 15 June 2012, p. 1; Smoking. (Available from http://www.southafrica.net/za/en/travel-tips/entry/travel-tip-smoking) Accessed 27 April 2014. Joubert, M. 2000. Better in the old days. Financial Mail, 25 February 2000, p. 64. Murdoch, W. 2011. The green horizon. Financial Mail, December, p. 52. Will consumers ever buy again? Brand Week, 27 July 1992, p. 36. Au revoir to the long lunch, Sunday Times Lifestyle magazine, 3 October 2010, p. 17 (sourced from The Times, London). Rademeyer, A. 2002. RGN skat wittes met MIV te laag sê kenner. Die OosKaap Burger, 12 December 2002, p. 19. The material on teenagers is taken from Zollo, P. 1995. Talking to teens. American Demographics, November 1995, pp. 23–28. Mxit is a South African-created mobile social network. 2014. Available from http://www.tedxcapetown.org/sponsor/mxit (Accessed on 6 November 2014) Smith, C. 2010. Black to the Future – South Africa’s Gen-Y. Available from http://www/tomorrowtoday.co.za (Accessed on 12 May 2014). Marketing to Generation X. Advertising Age, 6 February 1995, p. 27. Nusair,

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25

26 27

28 29 30 31 32 33

34 35

36 37 38 39 40 41

K.K., Parsa H.G. and Cobanoglu, C. 2011. Building a model of commitment for Generation Y: An empirical study of e-travel retailers. Tourism Management, 32(4): 833–843. Counselling Information Centre. Understanding teenagers and the young people of Generation X. Available from http://www.blaauwberg.net/cic/articles/childrens_issues/understanding_generatio (Accessed on 29 April 2014). The baby boom turns 50. American Demographics, December 1995, pp. 2–27. Thomson Learning. N.D. The marketing environment and ethics. Chapter 2. Available from http://www.swlearning.com/pdfs/chapter/0324113900_2.PDF (Accessed on 6 November 2014). Russel, C. 1993. The master trend. American Demographics, October 1993, pp. 28–37. Major, M. 1990. Promoting to the mature market. Promo, November 1990, p. 7. Schewe, C. & Meredith, G. 1995. Digging deep to delight the mature adult customer. Marketing Management, winter, pp. 21–34. University of Cape Town, Unilever Institute of Strategic Marketing. 2008. Black diamonds presentation. Cape Town: University of Cape Town. University of Cape Town, Unilever Institute of Strategic Marketing. 2013. 4 Million and Rising presentation. Cape Town: University of Cape Town. University of Cape Town, Unilever Institute of Strategic Marketing. 2012. The Majority Report presentation. Cape Town: University of Cape Town.37 Unless otherwise stated this section is based on data supplied by Statistics SA and Twenty 20. Unless otherwise stated this section is based on information supplied by Statistics SA and Twenty 20. Partially based on Naidoo, P. 2011. Death rate gains on births. Financial Mail, 4 February 2011, p. 44. Primary information sourced from Statistics South Africa. www.saarf.co.za (accessed 25 June 2010). Baumann, J. 2010. Comair keeps flying high in falling market. Business Day Companies section, 17 February 2010, p. 1. http://www.naamsa.co.za/flash/press.html (accessed 3 February 2014). Moorad, Z. 2013. Pick n Pay expects earnings to plummet. Business Day, 22 April, p. 12. Bisseker, C. 2014. Hike inevitable. Financial Mail, 31 January – 5 February 2014, p. 22. Bleby, M. 2009. Tiger Brands gains from cheaper choices. Business Day Companies section, 25 November 2009, p. 1.

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42 Schoeman, L. 1998. Festival shows take big knock. Eastern Province Herald, 7 July 1998, p. 1. 43 Moorad, Z. 2013. Festive shopper will be discerning. Business Day, p. 18. 44 Bleby, M. 2009. Tiger Brands gains from cheaper choices. Business Day Companies section, 25 November 2009, p. 1. 45 Perreault, W.D. 1978. The shifting paradigm in marketing research. Journal of the Academy of Marketing Science, 20(4), pp. 367–375. 46 Bidoli, M. 1998. Customer service rules. Financial Mail, 1 August 1998, p. 65. 47 Adapted from an advertisement by the Department of Trade and Industry published in the Sunday Times, 15 March 1998, p. 15. 48 This section is based on information supplied by the Advertising Standards Authority. 49 This section is based on Hazelhurt, E. 1998. With kid gloves, not a sledgehammer, Financial Mail, 29 May 1998, pp. 42–43; De Bruin, P. 2003. Privaatheid van burgers gou beskerm. Die Burger, 2 September 2003, p. 5; and Tait, M. Unpublished lecture notes. 2003, Faculty of Law, Vista University. 50 Thompson, V. 2012. The dangers of smoking. Available from http://www.looklocal.co.za/looklocal/content/en/north-east-joburg/northeast-joburg-news-municipal?oid=5690567&sn=Detail&pid=490274&Thedangers-of-smoking (Accessed on 3 May 2014). 51 Werkmans attorneys, available: www.werkmans.com (Accessed on 25 June 2010). 52 The Constitution of South Africa. 1996. Available from http://www.acts.co.za/constitution-of-the-republic-of-south-africa-act1996/ (Accessed on 5 May 2014). 53 Leshilo, T. 1997. Kelvinator calls for tariffs on imports. Business Times, 12 July 1997, p. 1. 54 Robertson, D. 1998. Imports threaten SA dairy industry. Business Times, 12 July 1998, p. 4. 55 Lourens, C. 1998. Engineering News, July 17–28 1998, p. 25. 56 Naidoo, P. 2011. High-Wired Act. Financial Mail, 20 May 2011, pp. 30–37. 57 Ensor, L. 2002. Obeying new laws will add to cost, says Telkom. Business Day, 23 October 2002. 58 Ensor, L. 2002. Hall hits at high price of ‘mad’ governance. Business Day, 22 November 2002, p. 21. 59 Barron, C. 2011. No country for bold men. Sunday Times, 18 September, p. 7. 60 Jobber, D. & Fahy, J. 2009. Foundations of marketing (third edition). Berkshire: McGraw-Hill. 61 Turpie, J., Winkler, H., Spalding-Fecher, R. & Midgley, G. 2002. Economic impacts of climate change in South Africa: A preliminary analysis of

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62 63

64 65

unmitigated damage costs. Southern Waters Ecological Research and Consulting & Energy and Development Research Centre, University of Cape Town. Blaine, S. 2012. Tyre industry challenges Molewa’s plan. Business Day, 5 September, p. 2. Earthlife Africa Johannesburg/Oxfam. 2009. Climate change, development and energy problems in South Africa: Another world is possible. Available www.earthlife.org.za/wordpress/wp-content/…/02/cc2_single_pages.pdf (Accessed 25 June 2010). Greenspan, M. 2009. The new ‘green revolution’. Wine Business Monthly 16(2), pp. 94–97. Harvey, F. 2004. PC makers set to face costs of recycling. Financial Times, 4 February 2004, p. 3.

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CHAPTER

03

Understanding consumer decision-making

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 Explain why marketing managers should understand consumer behaviour in general and decision-making in particular. 2 Analyse the components of the consumer decision-making process. 3 Explain the consumer’s post-purchase evaluation process. 4 Suggest strategies to overcome post-purchase dissonance. 5 Identify the types of consumer buying decisions and discuss the significance of consumer involvement. 6 Describe the factors that will determine the level of consumer involvement. 7 Describe the marketing implications of consumer involvement. 8 Identify and describe the individual factors that affect consumer buying decisions. 9 Critically evaluate the role of perception and processes of perception in consumer behaviour. 10 Justify the study of motivation, learning, values and beliefs as consumer behaviour variables. 11 Evaluate the process of changing beliefs and attitudes to influence consumer buyer behaviour. "****** DEMO - www.ebook-converter.com*******"

12 Discuss the role of personality, self-concept and lifestyle in consumer behaviour. 13 Relate social factors to consumer buying behaviour. 14 Explain the relevance of cultural influences on consumer behaviour, particularly in the South African market environment. 15 Expand on the significance of reference groups and opinion leaders in understanding consumer behaviour. 16 Describe the role of family membership, the family life cycle and social class in understanding consumer behaviour. 17 Describe the role that a purchase situation can play in buyer behaviour. 18 Identify the steps in the adoption process. 19 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 20 Provide a marketing-management solution related to any of the above outcomes.

>>Marketing in practice James goes shopping James Bryant is a ten-year-old boy living in Pretoria. He is a very enthusiastic tennis player. In fact, he is mad about tennis. He thinks Rafael Nadal is the greatest tennis player ever to walk this earth. He has posters of Nadal on his bedroom walls and his autograph on a shirt that a friend brought back from Wimbledon. He recently told his dad that because he has grown so fast, he needs a new tennis racquet. James is very excited "****** DEMO - www.ebook-converter.com*******"

about this possibility because this will be his first fullsize racquet. He is not sure what brand of racquet Nadal plays with, but he is determined to get the same one as his hero. ‘I’ll ask one of the first-team players at school tomorrow’, he thinks. Over the next few days he gets conflicting advice. He learns that Nadal plays with a Wilson, but a tennis magazine his uncle gave him suggests that Slazenger is the best for non-professional players. He remembers seeing an advertisement for a Kennex racquet in a Sunday newspaper recently, but can’t quite recall what it said. He also phones his cousin, who is a provincial player, for his opinion. His dad, who used to play with a Head racquet, thinks that it is the best brand. James can recall once having a hit with both a Head and a Slazenger at a tennis tournament in Cape Town, but remembers them being very heavy and not well balanced. That Saturday, just before James and his dad set off to their local sports shop, he notices a Wilson advertisement in the morning newspaper. James studies the advertisement in detail. After much agonising, he decides to settle on a Wilson. He could not be prouder when he gets into the car with his new racquet safely tucked under his arm. After trying it out that afternoon he phones Chris, one of his friends, to tell him of his new racquet. ‘I don’t think you made the right choice’, Chris says. ‘My Dunlop hits the ball a lot harder, and it has a larger “sweet spot” than the Wilson.’ "****** DEMO - www.ebook-converter.com*******"

‘That is not true’, says James. ‘I saw an advertisement this morning that said the Wilson hits the ball the hardest and that it is the best-quality racquet on the market.’ Lying in bed that night, James has a bit of a hollow feeling in his stomach. ‘I hope I did not make the wrong choice’, he thinks. ‘It will be a long time before I’ll be able to afford a new tennis racquet again.’

QUESTIONS 1 2 3 4

What made James aware that he needs a new racquet? Which factors influenced James’s choice of a racquet? Which sources of information did he consult? What can you say about James’s feelings after the purchase?

1. Introduction Having read the opening reader about James Bryant, you may ask the question, why do we have to study consumer behaviour? The answer is that to be able to implement the marketing concept, we need to understand consumer needs and wants. How consumers respond to a firm’s marketing strategies is the ultimate test of its success. If consumers respond favourably and buy its products in sufficient quantities, then the firm has done a good job in formulating a successful marketing strategy that appeals to the target market’s needs. Information about consumers, and in particular how and why they make buying decisions, helps marketers define the market they want to serve and identify "****** DEMO - www.ebook-converter.com*******"

opportunities and threats. The discussion of consumer behaviour in this chapter is based on the premise that we are dealing with rational buyers. Based on economic buyer theory, we assume that buyers: • • •

Within reason, know all the relevant facts Logically compare alternative choices in terms of cost and value Do not have enough money to buy everything they want, so they try to make their money stretch as far as possible – that is, they pursue maximum satisfaction at the lowest cost.

2. The importance of understanding consumer behavior

LO1

Consumers’ product and service preferences and buying patterns are constantly changing. In order to address this constant state of flux and create a proper marketing mix for a well-defined market, marketing managers must have a thorough knowledge and understanding of consumer behaviour. Consumer behaviour describes how consumers make purchase decisions and how they use and dispose of the purchased goods or services. The study of consumer behaviour also includes an analysis of factors that influence purchase decisions and product usage. Research conducted in South Africa has revealed that when small-business "****** DEMO - www.ebook-converter.com*******"

owners buy electronic gadgets, such as cellphones and other mobile devices, ease of use is the most important buying criterion followed by dependability and product quality. Price is only the fifth most important criterion.1 This is the type of information marketing managers need to base their decisions and marketing strategies on. Understanding how consumers make purchase decisions can help marketing managers in several ways. For example, if the management of a motor vehicle manufacturer knows that petrol consumption is the most important attribute for a certain target market, they can redesign the product to meet that need. If the firm cannot change the design in the short run, it can use promotion in an effort to change consumers’ decision-making criteria. For example, the manufacturer may advertise the vehicle’s maintenance-free features or sporty European style while downplaying petrol consumption. In addition, consumers may differ in their media preferences in terms of sourcing their information before buying. For example, younger consumers prefer electronic media sources such as the Internet to collect their pre-purchase information while older consumers may choose traditional sources such as magazines and newspapers. In other words, marketers can change attitudes and influence consumers’ buying decisions if they are knowledgeable about consumer behaviour, and buying behaviour in particular. The purpose studying consumer behaviour by marketers is therefore not only to understand consumer behavior but also to predict consumer behaviour given a set of circumstances and, finally, to influence consumers’ buying "****** DEMO - www.ebook-converter.com*******"

behaviour. In this quest to understand consumer behaviour, marketers rely heavily on the rich reservoir of literature generated by the social sciences over many years. Years of dedicated research by the world’s psychologists, sociologists and industrial psychologists have equipped marketers with an array of concepts, models and techniques to help study and understand consumer behaviour.

READER 12 >> South African shopping behaviour unique? While South Africans are embracing online and mobile shopping, the in-store experience is as important as ever. About 46 per cent of local shoppers, according to a worldwide Accenture survey, still lean towards purchasing instore and carrying home – 25 per cent are buying online or via mobile and shipping home. This is the converse of global shoppers, 37 per cent of whom prefer online over 28 per cent who favour in-store purchasing. This could be because online shopping in South Africa is less developed than in other countries – delivery constraints, slow and expensive broadband and disparate online and in-store offerings have been an e-commerce inhibitor in South Africa. Where local respondents are using online shopping, the primary reason is convenience, which is aligned with the global response. However, South African shoppers lean towards using online to check product availability before wasting a trip to the store and to compare prices between retailers. ‘South African shoppers find purchasing via online and mobile more difficult than other markets. Consequently, after stores close, most shoppers will wait for the store to open the next morning to purchase from their retailer rather than buy online at that retailer’s website,’ Accenture said. Also, South Africans are more interested in using their mobile phone while shopping instore than the other markets – wanting to gather loyalty points, receive real "****** DEMO - www.ebook-converter.com*******"

time promotions and scan products while shopping. SOURCE: Moorad, Z. 2014. In-store experience still trumps online buying in SA. Business Day Live, 11 July. Available from http://www.bdlive.co.za/business/retail/2014/07/11/in-store-experience-stilltrumps-online-buying-in-sa (Accessed 24 July 2014)

3. A model of consumer behavior Buyer behaviour is influenced by three sets of variables: • • •

Individual factors Social factors The prevailing purchase situation.

All three are external variables that influence the consumer’s decision-making process (an internal process), which will again determine whether or not a consumer buys a product, as shown in Figure 3.1. Figure 3.1 forms the basis of our discussion of consumer behaviour in this chapter.

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Figure 3.1 A model of consumer behaviour

SOURCES: Adapted from Lamb, C.W., Hair, J.H. & McDaniel, C. 1998. Marketing. International Thomson Publishing, p. 160; Perreault, W.D. & McCarthy, E.J. 1996. Basic marketing. Chicago: Irwin, p. 216

Figure 3.2 The consumer decision-making process

We will follow a bottom-up approach in our study of consumer behaviour by first considering the consumer "****** DEMO - www.ebook-converter.com*******"

buying decision-making process (see Figure 3.2). The reason why consumers (potential buyers really) go through this process is that they want to satisfy a need or a want. Figure 3.2, therefore, describes the buying process itself (i.e. the steps a buyer typically goes through when buying something). Figure 3.1, on the other hand, identifies the external variables or factors that influence the buying decision-making process that culminates in the decision to buy or not to buy. First we will consider the buying process itself and the associated steps in the process, as illustrated in Figure 3.2.

4. The consumer decision-making process

LO2

When buying products, consumers generally follow the consumer decision-making process shown in Figure 3.2, namely: 1 2 3 4 5

Problem recognition of an unfulfilled need Information search Evaluation of alternatives Purchase Post-purchase behaviour.

These five steps represent a general process which moves the consumer from recognition of an unfulfilled need to the evaluation of a purchase after the event. This process is a guideline for studying how consumers make decisions. "****** DEMO - www.ebook-converter.com*******"

It is important to note that this guideline does not assume that consumers’ decisions will proceed in an inflexible order through all of the steps of the process under all circumstances. The consumer may end the process at any time. In fact, the consumer may not even make a purchase. Explanations as to why a consumer’s progression through these steps may vary are offered in the section on the types of consumer buying decisions. Before addressing this issue, each step in the process (as depicted in Figure 3.2) will be described in greater detail.

4.1 Problem recognition The first stage in the consumer decision-making process is problem recognition – that is, realising that an unfulfilled need exists. A swimmer has a cut on her finger and wants to keep it dry and hygienic while swimming has a unfulfilled need (see Elastoplast advertisement on page 86). Problem recognition occurs when consumers are faced with a discrepancy between an actual state (I do not have a car) and a desired state (I want my own car). For example, do you often feel thirsty after strenuous exercise? Has a television commercial for a new sports car ever made you wish you could own it? Problem recognition is triggered when a consumer is exposed to either an internal or external stimulus. Hunger and thirst are internal stimuli. The brand name of a motor vehicle mentioned by a friend, the design of a package, a television programme featuring the latest model of a sports car, a new magazine shown to you by a friend, an advertisement on the radio, or the scent of the "****** DEMO - www.ebook-converter.com*******"

perfume worn by a stranger, for example, are all considered to be external stimuli.

>> Strategy A marketing manager’s objective is to get consumers to recognise a discrepancy between their present state and their preferred state. For example, marketers of motor vehicles are now attempting to create consumer demand for added features. Car manufacturers are developing car seats with built-in stereo speakers; under-seat storage space, electronic temperature control and more comfortable seat belts.2 Marketers want consumers to feel that they have to have these features in their new vehicles. Volkswagen, for instance, is advertising its new seat belts used in the Jetta, which accommodate the female figure. The advertisement says: ‘Fuller breasts and bulky clothing are the most common causes of seat belt slack, which in an accident can cause severe backlash and extensive bruising. This most typically occurs with ordinary inertia-reel seat belts …’ Volkswagen has replaced these with a device called a ‘pyrotechnic pre-tensioner’ to solve the problem and is using advertising to make potential female buyers aware of this unfulfilled need. Marketers cannot create needs, such as hunger or thirst – but they can create consumer wants (e.g. a want for a hamburger, a cooldrink or a house). A want exists when someone has an unfulfilled need and has established that a "****** DEMO - www.ebook-converter.com*******"

particular product or service will satisfy the need. Different people have different wants. Young children might want toys, ice cream and rugby balls. Teenagers may want fashionable T-shirts, the ‘right’ brand of sunglasses and a smartphone. A want can be for a specific product, for a certain attribute or feature of a product or for a specific brand. For instance, older consumers typically want goods and services that offer convenience, comfort and security. Remotecontrol appliances, home deliveries, speakerphones and motorised golf carts are all designed to satisfy the need for comfort and convenience. Likewise, a transmitter that can call an ambulance or the police if the person wearing it has an emergency offers security for older consumers. Wants can also be related to specific brands – and that is the ultimate objective of marketers. If a teenager wants a Billabong T-shirt rather than any old T-shirt, a McDonald’s hamburger rather than a home-made hamburger, or a Coke rather than a Fanta, the marketer knows that he has succeeded. Consumers recognise unfulfilled wants in various ways. The two most common ways occur when a current product is not performing properly or when the consumer is about to run out of something that is generally kept on hand. Consumers may also recognise unfulfilled wants if they hear about or see a product whose features make it seem superior to the one currently used. Wants are usually created by advertising, salespeople or other promotional activities. For example, a young teenager may develop a strong desire for a new Billabong T-shirt after seeing it on display in a retail "****** DEMO - www.ebook-converter.com*******"

store.

EXAMPLE >> Marketers selling their products in global markets must carefully observe the needs and wants of consumers in various regions. General Motors recently researched Japan’s new-car buyer market to determine what they could do to make their Cavalier sedan more appealing to Japanese consumers. What they discovered was that, to the Japanese car buyer, how a car looks inside and outside is more important than how it drives. Since Japan’s typical small "****** DEMO - www.ebook-converter.com*******"

homes cannot accommodate many material possessions, many Japanese regard their cars as their primary status symbol. Even for low-end models, Japanese expectations are incredibly high. The exterior must be flawless, with narrow, perfectly uniform sheet-metal seams and mirror-like paintwork. Cloth interiors rival the finest of living room furniture. Plush pile carpeting is a basic requirement. Owing to Japan’s narrow streets, the Japanese also prefer fold-up wing mirrors. In addition, self-regulating airconditioning systems, computerised compasses and top-notch stereos are often a must for them.3

4.2 Information search After recognising a discrepancy, need or want, consumers search for information about the various alternatives available to satisfy their wants. An information search may occur internally, externally or both internally and externally. An internal information search is the process of recalling information stored in the consumer’s memory. This stored information stems largely from previous experience with a product. For instance, while shopping you encounter a brand of cake mix that you tried some time ago. By searching your memory, you can probably remember whether it tasted good, pleased guests and was easy to prepare. By contrast, an external information search collects information from the outside environment. There are two basic types of external information sources: non-marketingcontrolled and marketing-controlled. A non-marketingcontrolled information source is not associated with marketers promoting a product. A friend, for example, might "****** DEMO - www.ebook-converter.com*******"

recommend a Dell personal computer because he or she bought one and likes it. Non-marketing-controlled information sources include personal experience (e.g. trying or observing a new product, such as test-driving a car); personal sources (family, friends, acquaintances and coworkers); public sources, such as advisers; magazine articles (not advertising); consumer information provided by the media (such as Matthew Lester’s column in the Sunday Times); product evaluations published in the media, such as road reports of newly launched cars in Car Magazine; product comparisons in columns such as Fair Lady’s ‘Test House’ column; and industry experts (various publications offer financial and investment advice in newspapers and magazines). Blogs are other examples of non-marketing controlled information. In Table 3.1, Car Magazine compares three 4x2 vehicles in terms of price, power torque, fuel consumption and other criteria consumers may base a buying decision on – a wonderful source of independent (non-marketingcontrolled) information for prospective 4x2 buyers. A marketing-controlled information source, on the other hand, is by definition biased because it originates with marketers promoting that product. Marketing-controlled information sources include mass-media advertising (radio, newspaper, television and magazine advertising), sales promotions (contests, displays, premiums and so forth), salespeople, product labels and packaging. Some consumers are sceptical and wary about the information they receive from marketing-controlled sources, arguing that most marketing campaigns stress the attributes and the "****** DEMO - www.ebook-converter.com*******"

benefits of the product but don’t mention its limitations. When buying a motor vehicle, Car Magazine (or its online version, www.cartoday.com) would be regarded as a nonmarketing-controlled source of information, whereas a Toyota advertisement or the Toyota website (www.toyota.co.za) would be regarded as a marketingcontrolled source of information. The extent to which individuals conduct an external search depends on their perceived risk, knowledge, prior experience and level of interest in the product or service. Generally, as the perceived risk of the purchase increases, so the consumer enlarges the scope of the search and considers more alternative brands. For instance, assume you want to buy a new car. The decision is a relatively risky one, mainly because of the high cost, so you are motivated to search for information about different models and attributes, such as petrol consumption, durability and passenger capacity. You may also decide to collect information about more models because the trouble and time expended in finding the information are minimal compared with the cost of buying the wrong car. By contrast, you are less likely to expend great effort in searching for the right kind of bath soap. If you make the wrong selection, the cost is minimal and you will have the opportunity to make another selection in a short period of time. A study of the effect of consumers’ level of perceived risk in the search for information on computer mail-order shopping found that those who perceive higher risk with a purchase expend more effort in an external information search and consult a greater number of different types of "****** DEMO - www.ebook-converter.com*******"

information sources than those who perceive lower levels of risk.4 Information searches, therefore, reduce risk. A consumer’s knowledge about the product or service will also affect the extent of an external information search. If the consumer is knowledgeable and informed about a potential purchase, he or she is less likely to need to search for additional information. In addition, the more knowledgeable the consumer, the more efficiently he or she will conduct the search process, thereby requiring less time to search. Another closely-related factor that affects the extent of a consumer’s external search is confidence in one’s decisionmaking ability. A confident consumer not only has plenty of stored information about the product, but also feels selfassured about making the right decision. People lacking this confidence will continue an information search even when they know a great deal about the product. Consumers with prior experience in buying a certain product will perceive less risk than inexperienced consumers. They will, therefore, spend less time searching and limit the number of products that they would consider buying. A third factor influencing the external information search is product experience. Consumers who have had a positive previous experience with a product are more likely to limit their search to only those items related to the positive experience. For example, many consumers are loyal to Honda cars, which enjoy low repair rates and high customer satisfaction. For these consumers the information search will be very short, if not completely unnecessary. Finally, the extent of the search undertaken is positively "****** DEMO - www.ebook-converter.com*******"

related to the amount of interest a consumer has in a product. That is, a consumer who is more interested in a product will spend more time searching for information and alternatives. For example, suppose you are a dedicated runner who reads jogging and fitness magazines and catalogues. In searching for a new pair of running shoes, you may enjoy reading about the new brands available and spend more time and effort than other buyers in deciding on the right shoe. Table 3.1 Example of comparative information for consumers

SOURCE: http://www.car-specs.za.net

>> Technology in action The marketspace We have all heard about the value of the Internet for business and the influence it has had on the behaviour of consumers. But what is so special about the Internet? Why has it had such a huge impact on the way we live "****** DEMO - www.ebook-converter.com*******"

and go about our daily business? Commentators have pointed out that the Internet changes business in three fundamental ways. Firstly, the content of the transaction is different: information about the physical product replaces the products themselves. In other words, if we want to find out information about a second-hand car, we need not visit a number of second-hand car dealers to find out information about what cars are available, their condition and their price because this information is readily available on our home computer via the Internet. Secondly, the context in which the transaction occurs is different: an electronic, on-screen transaction replaces a face-toface transaction with the car salesman. Thirdly, the infrastructure that enables the transaction to occur is different: computers and communication lines replace the shop floor or, in our example, the second-hand car dealership. No doubt you will immediately point out that mailorder companies (where one typically orders a product from a printed catalogue or brochure) have been following a similar business model for years. Indeed, the value of a mail-order company and an online shopping facility both add value by virtue of their ability to separate information about a product from the product itself. However, the Internet allows information to be modified quickly and to be distributed at a very low marginal cost, which makes it relatively easy for a business to satisfy an almost unlimited demand for information in real time. This virtual marketplace has also been described as the "****** DEMO - www.ebook-converter.com*******"

‘marketspace’, and allows for lower costs, convenience and a potential market that comprises every user of the Internet. SOURCES: Rayport, J.F. & Sviokla, J.J. 1995. Exploiting the virtual value chain. Harvard Business Review 73(6), pp. 75–85; Pitt, L., Berthon, P. & Berthon, J-P. 1999. Changing channels. The impact of the Internet on Distribution Channels. Business Horizons, March–April 1999, pp. 19–28

The consumers’ information search should yield a group of brands – sometimes called the buyer’s evoked set (also called a consideration set) – that are the consumer’s preferred alternatives and that will be seriously considered before a purchase. From this set, the buyer will further evaluate the alternatives and make a choice. Consumers do not consider all the brands available in a product category, but they do seriously consider a much smaller set. For example, there are more than 1 500 types of motor vehicles to choose from in South Africa, yet most potential buyers seriously contemplate only two or three models when faced with a purchase decision. An information search tool of increasing importance to many consumers is the Internet. Companies such as Toyota (www.toyota.co.za) and Volkswagen (www.vw.co.za) offer a wealth of information on their websites, such as product and model information, where to find dealers, vehicle prices, information on motor sports and even the option to calculate monthly repayments. Many firms that have established an online presence for online buying – particularly travel agents, airlines, hotels and car dealers – have found that most consumers are still "****** DEMO - www.ebook-converter.com*******"

reluctant to buy online, but use their sites to collect prepurchase information. WEBSITE Visit the Car Magazine website at www.carmag.co.za and see how it makes information available for the potential buyer of used motor vehicles (click on ‘Autocollector’).

4.3 Evaluation of alternatives and purchase After collecting information and compiling an evoked set (those brands that the consumer seriously considers before making a purchase) of alternative products, the consumer is ready to make a decision. They will use the information stored in their memories and obtained from outside sources to develop a set of decision-making criteria. These criteria, or standards, help the consumer evaluate and compare alternatives. One way to begin narrowing the number of choices in the evoked set is to pick an important product attribute and then to exclude all products in the set that do not have that attribute.

READER 13 >> The role of recommendation and review sites in online consumer behaviour One of the significant outcomes of the ‘powerful consumer’ phenomenon is the role of personal recommendation as part of the marketing process. Wordof-mouth is an important form of communication and the influence of individuals’ comments has also become increasingly important online. Web "****** DEMO - www.ebook-converter.com*******"

businesses have emerged that specialise in providing a platform for consumer reviews – for example, TripAdvisor (travel and tourism industry) and Amazon have facilities for feedback and comments on products and customer service. According to some research, 70 percent of Internet shoppers find the personal ratings and reviews section on a retail website the most useful to them, particularly when both positive and negative reviews of a product are shown. Amazon has an interesting take on personal reviews, in that it encourages other customers to say if they found particular reviews useful. The reviews that are found to be most useful are found nearer the top of the list of reviews (whether positive or negative). TripAdvisor provides easy access worldwide to leading online travel agencies including Expedia, Orbitz, Travelocity, hotels.com, Priceline, Booking.com, and more. TripAdvisor branded sites make up the largest travel community in the world, reaching nearly 260 million unique monthly visitors, and more than 150 million reviews and opinions covering more than 4 million accommodations, restaurants, and attractions. The sites operate in 41 countries worldwide, including South Africa. TripAdvisor, however, leads the way in the use of personal customer reviews, with over 41,6 million users a month and 40 million reviews on hotels, cities, airlines and even excursions. Reviews by previous travellers have been found to influence future consumer purchasing behaviour. TripAdvisor is growing at a rate of 21 new reviews per minute, which can lead to information overload for wary travellers. The implication for marketing managers is not only that they have to produce excellent products that people want to buy, but they also must manage online reviews, as poor reviews that people trust can have a significant impact on consumer decision-making. SOURCES: Adapted from http://www.kwikchex.com (Accessed June 2014); Cohrane.K. 2011. Why TripAdvisor is getting a bad review. The Guardian, 25 January, p. 6. (Available from www.theguardian.com (Accessed June 2014); TripAdvisor: Fact Sheet. Available from http://www.tripadvisor.com/PressCenter-c4-Fact_Sheet.html (Accessed June 2014)

The objective of the marketing manager is to determine "****** DEMO - www.ebook-converter.com*******"

which attributes are most important in influencing a consumer’s choice. Several factors may collectively influence a consumer’s evaluation of products. A single attribute, such as price, may not adequately explain how consumers form their evoked set.5 Moreover, attributes thought to be important by the marketer may not be very important to the consumer. For example, one study found that motor vehicle warranty coverage was the least important factor in a consumer’s purchase of a motor vehicle.6 Another example to illustrate the above is a cellphone buyer who searched for information on smartphones and ends up with a decision between the iPhone and Samsung S5 (the evoked set). The person believes that buying an iPhone would result in a significant cost saving and that both models are virtually identical on other attributes (e.g. reliability, design and speed). Cost savings are very important to this person and so are thus a very good attribute to possess. The buyer, therefore, has a more favourable attitude toward the iPhone. The Internet has made evaluation very easy and convenient for certain product categories. In addition to detailed information about its own products, Honda’s website (www.honda.com) also provides its visitors with a facility to do a detailed comparison with competing vehicle models to help them make an informed decision when buying a motor vehicle. Following the evaluation of alternatives, the consumer decides which product to buy or decides not to buy a product at all. If he or she decides to make a purchase, the next step in the process is an evaluation of the product after "****** DEMO - www.ebook-converter.com*******"

the purchase. WEBSITE Visit the Vodacom website at www.vodacom.co.za, and click on ‘cellphone’ under the ‘shopping’ button to compare different cellphone models on a variety of different criteria. The same comparison can also be done on tablets, by click the ‘tablet’ button instead of the ‘cellphone’ button.

>>Technology in action Comparison websites The evaluation of the different alternatives and the decision to buy a product can often be a trying and time-consuming (and perhaps confusing) process. Most consumers have limited resources (money) and are confronted with many choices. In this respect, the Internet is a paradox. On the one hand, the web is a source of almost limitless information and opinions about products (which could confuse purchasers even more), but on the other hand, the Internet offers a solution to deal with the overwhelming amount of information. It is known as comparison websites. A comparison website is like a ‘virtual salesperson’ that asks the individual to enter details about their needs, and then offers a number of solutions to allow the shopper to make an informed decision. One such website is www.Travelocity.com, which focuses on the "****** DEMO - www.ebook-converter.com*******"

tourism sector and offers consumers choices about products such as holiday packages, flights, hotels and cruises. On the basis of the information provided online, the website presents different options to the consumer who can purchase the product online. A similar service is offered by www.Pricecheck.co.za, whose stated purpose is to ‘find and compare products from established online shops catering for Internet purchases in South Africa …’ The focus of www.Pricecheck.co.za is fairly broad, incorporating products as diverse as electronic items, wine, sporting goods, used cars and properties. Although comparison websites may be useful for some products, there are doubts whether they can be considered as a universal panacea for bargain hunters. For example, they may be useful for comparing prices on products such as electronic goods where the specifications of the product are easily evaluated, but their value is less certain when it comes to items such as houses. It may be difficult to express many of the intangible (and subjective) factors, such as the condition of the neighbours’ property and proposed new developments in the area, which may affect the price of a property using this medium. Similarly, many financial products, such as life insurance, car insurance and endowments, are complicated, and it may therefore be difficult to convey the key decision-making criteria in a simplistic website.

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4.4 Post-purchase behavior

LO3

When buying products, consumers expect certain outcomes or benefits to accrue from the purchase. How well these expectations are met determines whether the consumer is satisfied or dissatisfied with the purchase. For example, when Colleen bought a used car, she had somewhat low expectations of its actual performance. To her surprise, the car turns out to be one of the best she has ever owned. So Colleen’s satisfaction is high because her fairly low expectations were exceeded (see Figure 1.1 in Chapter 1). On the other hand, Eleanor, who bought a brand-new car, expects it to perform particularly well. If it turns out to be a flop, she will be very dissatisfied because her high expectations have not been met. Price often creates high expectations. A buyer of a R1,3m Toyota Lexus LS 460 will certainly have higher expectations of his future driving experiences than a buyer of a R125 000 KIA Picanto. A subscriber who pays about R8 000 a year for M-Net’s DStv service will certainly have higher expectations than one who pays the SABC R500 a year to use its TV service.

4.4.1 Post-purchase dissonance

LO4

For the marketing manager, one important element of any post-purchase evaluation is lingering doubts whether the purchase decision was sound. When people recognise inconsistency between their values or opinions and their behaviour, they tend to feel an inner tension or anxiety called cognitive dissonance (or post-purchase doubt). "****** DEMO - www.ebook-converter.com*******"

For example, suppose a consumer spends half his monthly salary on a new high-tech music system. If he stops to think how much he has spent, he will probably feel dissonance. Dissonance occurs because the person knows the purchased product has some disadvantages as well as advantages. In the case of the music system, the disadvantage of the cost clashes with the advantage of technological superiority. In other words, dissonance is post-purchase uncertainty or anxiety. Typically, consumers who experience this dissonance or anxiety try to reduce this unpleasant feeling by justifying their decision to themselves. They might seek new information that reinforces positive ideas about the purchase (confirming that it was the right decision), avoid information that contradicts their decision or revoke the original decision by returning the product to the retailer. People who have just bought a new car often read more advertisements of the car that they have just bought than for other cars in order to reduce dissonance and reinforce the correctness of the decision. In some instances, they deliberately try to find contrary information in order to refute it themselves and in this way reduce their dissonance. Dissatisfied customers sometimes rely on word-of-mouth to reduce cognitive dissonance by letting friends and family know they are displeased with their own buying decision. Marketing managers can help reduce dissonance using effective communication with purchasers. For example, a customer-service manager may slip a note inside the package congratulating the buyer on making a wise decision. Post-purchase letters sent by motor vehicle "****** DEMO - www.ebook-converter.com*******"

manufacturers and dissonance-reducing statements in instruction booklets may help new car buyers feel at ease with their purchase. Advertising that displays the product’s superiority over competing brands and guarantees can also help relieve the possible dissonance of someone who has already bought the product. Nissan has an advertisement that says: ‘Experience the luxury and peace of mind of owning a Maxima and knowing you’ve made the right decision.’ Some car dealers, for example, offer refunds to new car buyers within three days of their purchase if they decide they are dissatisfied.

EXAMPLE >> Another example is the winemaker Zonnebloem’s advertisement, which says: ‘Do you typically leave the bottle store with a good wine or with sour grapes? When leaving a bottle store, people often wonder if they’ve just bought an average bottle of wine or spent too much money. Or both. But if you’re leaving with a Zonnebloem you’re taking away over fifty years of award-winning craftsmanship in every bottle.’ In the South African life insurance industry, buyers of insurance policies have a 21-day cooling-off period during which a buyer of an insurance policy can cancel it without penalty. When buying a house, the cooling-off period is five days. The chain store Game has a policy of refunding the difference if any buyer can prove that they could have bought a product more cheaply elsewhere. Similarly, Morkels calls itself ‘the two-year guarantee store’. All these are strategies used by marketers to reduce post-purchase dissonance.

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Good marketing means that the firm needs to monitor and manage customer’s post-purchase behaviour by, amongst others, monitoring social media sites such as Facebook and Twitter and video-sharing sites such as YouTube, to identify problems and by responding rapidly to complaints. "****** DEMO - www.ebook-converter.com*******"

5. Types of consumer buying decisions and LO5 consumer involvement All consumer buying decisions generally fall along a continuum of three broad categories: routine response behaviour, limited decision-making and extensive decisionmaking (see Table 3.2). The placement of goods and services in these three categories can best be described in terms of five factors: • • • • •

The level of consumer (or buyer) involvement The length of time a buyer takes to make a decision The cost of the product or service The degree of information search the buyer does The number of alternatives the buyer considers before actually buying.

The level of consumer involvement is perhaps the most significant determinant in classifying buying decisions. Involvement is the amount of time and effort a buyer invests in the search, evaluation and decision processes of consumer behaviour. Frequently purchased, low-cost goods and services are generally associated with routine response behaviour. These products and services can also be called low-involvement products because consumers spend little time on researching the decision before making the purchase. Usually, buyers are familiar with several different brands in the product category, but stick with one brand. Consumers engaged in routine response behaviour do not normally "****** DEMO - www.ebook-converter.com*******"

experience problem recognition until they are exposed to advertising or see the product displayed in a shop – they buy first and evaluate later (the reverse is true for extensive decision-making). A parent, for example, will not stand at the breakfast cereal shelf in a supermarket for 20 minutes thinking about which brand of breakfast cereal to buy for the children. Instead, he or she will walk to the shelf, find the family’s usual brand, and put it into the trolley – i.e. low involvement. To illustrate, it has been found that grocery buyers spend only about ten seconds on average in front of a grocery shelf for a specific item before moving on.7 Products and services that are purchased regularly and are not considered expensive are generally associated with limited decision-making. These are also associated with low levels of involvement (although higher than routine decisions), because consumers do expend moderate effort in searching for information or in considering various alternatives. Suppose the children’s usual brand of breakfast cereal, Kellogg’s Corn Flakes, is unavailable. With no cereal at home, the parent now must select another brand. Before making a final selection, he or she may pull from the shelf several brands similar to Kellogg’s Corn Flakes to compare their nutritional value and calories and to decide whether the children will like the new cereal. Consumers engage in extensive decision-making when buying an unfamiliar, expensive product or an infrequently bought item. This process is the most complex type of consumer buying decision and is associated with high involvement on the part of the consumer. Extensive decision-making closely resembles the model outlined in "****** DEMO - www.ebook-converter.com*******"

Figure 3.1. These consumers want to make the right decision, so they want to know as much as they can about the product category and available brands. People usually experience cognitive dissonance only when buying highinvolvement products because of the higher costs associated with the purchase and the consequent higher risk. Buyers involved in extensive decision-making use several criteria for evaluating their options and spend much more time collecting information. Buying a home, a car or an overseas holiday, for example, calls for extensive decisionmaking. The type of decision-making that consumers use to purchase a product does not necessarily remain constant. For instance, if a routinely purchased product no longer satisfies their needs, consumers may engage in limited or extensive decision-making to switch to another brand. People who first use extensive decision-making may then use limited or routine decision-making for future purchases. For example, a new mother may at first extensively evaluate several brands of disposable nappies before selecting one. Provided she is satisfied, subsequent purchases of baby nappies will then become routine decisions. Converting potential buyers from using extensive decision-making to routine decision-making for future purchases depends heavily on how effective the branding of the product is. The more effective the brand building the lower the risk for the buyer and the more likely it becomes that repeat purchases will take place. Branding thus simplifies the decisionmaking process as the potential buyer does not have to rethink their options every time a need arises. "****** DEMO - www.ebook-converter.com*******"

5.1 Factors determining the level of consumer involvement

LO6

The level of involvement in the purchase depends on five factors: previous experience, interest, perceived risk, situation and social visibility. •

•

•

Previous experience. When consumers have had previous experience with a product or service, the level of involvement typically decreases. After repeated product trials, they learn to make quick choices. Because they are familiar with the product and know whether it will satisfy their needs, consumers become less involved in the purchase over time. For example, people with pollen allergies typically continue buying the sinus medicine that has relieved their symptoms in the past. Interest. Involvement is directly related to consumer interests, such as motor vehicles, music, movies, bicycles or electronics. Naturally, these areas of interest vary from one individual to another. Although some people have little interest in nursing homes, a person with elderly parents in poor health may be highly interested. Those who regard a motor vehicle as no more than a means of getting from A to B will not be involved in a purchasing decision for a vehicle to the same extent as those who eat, sleep and live cars. Perceived risk of negative consequences. As the perceived risk in purchasing a product increases, so does a consumer’s level of involvement. The types of risks that concern consumers include financial risk, social risk and

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psychological risk. First, financial risk is associated with exposure to loss of wealth or purchasing power. Because high risk is associated with high-priced purchases, consumers tend to become extremely involved when products are expensive. Therefore, price and involvement are usually directly related: as price increases, so does the level of involvement. For example, someone who is thinking of buying a house will normally spend a great deal of time and effort to find the right one. Second, consumers take social risks when they buy products that may affect other people’s social opinions of them (examples include driving an old, run-down car or wearing old-fashioned clothes). Third, buyers undergo psychological risk if they feel that making the wrong decision might cause some concern or anxiety. For example, should a working parent employ a babysitter or enrol the child in a day-care centre? Therefore, the higher the perceived risk, the higher the level of involvement in the purchasing decision. • Situation. The circumstances of a particular purchase may temporarily transform a low-involvement decision into a high-involvement one. High involvement occurs when the consumer perceives risk in a specific situation. For example, an individual might routinely buy lowpriced brands of liquor and wine. However, when the boss is invited for dinner, the consumer might make a high-involvement decision and buy a more prestigious brand. The prevailing situation may, therefore, necessitate higher (or lower) involvement in a purchasing decision. • Social visibility. Involvement also increases as the social "****** DEMO - www.ebook-converter.com*******"

visibility of a product increases. Products often on social display include clothing (especially designer labels, such as Pierre Cardin), jewellery, motor vehicles, and furniture (e.g. a leather lounge suite). All these items make a statement about the purchaser and, therefore, carry a social risk. To avoid the social risk, consumers become more involved in the purchasing decision. Table 3.2 Continuum of consumer buying decisions

5.2 The marketing implications of consumer LO7 involvement The marketing strategy that a marketing manager uses will depend on the level of involvement associated with the product. For high-involvement product purchases, marketing managers have several responsibilities. First, communication with the target market should be extensive and informative. A good advertisement gives consumers the information they need for making the purchase decision as well as specifying the benefits and unique advantages of owning the product. For example, when ACDelco launched the first ‘truly maintenance-free’ car battery it clearly highlighted the features that distinguish the product from "****** DEMO - www.ebook-converter.com*******"

competing batteries. These include the fact that it never needs water, and it has a heat-sealed cover, liquid gas separators, recessed terminals, calcium expanded grids and envelope separators to prevent shorting. With low-involvement product purchases, consumers may not recognise their wants until they are in a shop. Therefore, in-store advertising is an important tool when advertising low-involvement products. Marketing managers have to focus on package design so that the product will be eye-catching and easily recognised on the shelf. Examples of products that take this approach are yoghurts and soft drinks.

>> Strategy In-store displays often stimulate the sales of lowinvolvement products. A good display can explain the product’s purpose and encourage prompt recognition of a want. Displays of health and beauty items in supermarkets and department stores have been known to increase sales many times above normal. Coupons, ‘cents-off’ deals and ‘two-for-the-price-of-one’ offers also effectively promote low-involvement items. Linking a product to a higher-involvement issue is another tactic that marketing managers can use to increase the sales of a low-involvement product. For example, many food products are no longer just nutritious, but are also low in fat or cholesterol. Although packaged food may normally be a lowinvolvement product, reference to health issues raises "****** DEMO - www.ebook-converter.com*******"

the involvement level. Special K cereal takes advantage of today’s interest in health and low-fat foods by advertising that its cereal contains no fat. Likewise, Rice Krispies promotes the fact that its formula is low in sugar, and Jungle Oats claims that it is an excellent source of oat bran. Kellogg’s raises the level of consumer involvement when people buy breakfast cereal by linking its hi-fibre brand to the prevention of colon cancer. As was pointed out earlier in our model of consumer behaviour (Figure 3.1), buyer behaviour is influenced by three sets of variables: • • •

Individual factors Social factors The prevailing purchase situation.

The impact of each of these sets of variables on consumers’ buying decisions is considered in the following sections.

6. Individual factors influencing consumer LO8 buying decisions The consumer decision-making process does not occur in a vacuum. On the contrary, several individual and social factors strongly influence the decision-making process. These factors have an effect from the time a consumer "****** DEMO - www.ebook-converter.com*******"

becomes aware of an unfulfilled need or is exposed to a stimulus (such as an advertisement or another consumer’s word-of-mouth) through to post-purchase behaviour. The individual factors that affect consumer behaviour are unique to each person. These factors include perception, motivation, learning, values, beliefs, attitudes, personality factors, self-concept and lifestyle.

6.1 Perception The world is full of stimuli. A stimulus is any unit of input affecting the five senses: sight, smell, taste, touch and hearing. The process by which we select, organise and interpret these stimuli into a meaningful and coherent picture is called perception. It is a means of making sense of the world around us and determines how we recognise that we have a consumption ‘problem’ (discrepancy). People cannot perceive and internalise every stimulus in their environment. Therefore, they use selective exposure to decide which stimuli to take note of and which to ignore. A typical consumer is exposed to more than 150 advertising messages a day, but notices only between 11 and 20. The familiarity of an object, contrast, movement, intensity (such as increased sound volume or number of exposures) and smell are cues that influence perception. Consumers use these cues to identify and define products and brands. The shape of a product’s packaging, such as Coca-Cola’s signature contour bottle, for instance, can influence consumers’ perception. Why? Because most consumers are familiar with this shape following years of effective brand "****** DEMO - www.ebook-converter.com*******"

building. Colour is another cue and plays a key role in consumers’ perceptions. An advertisement for a type of medicine featuring a medical doctor in a black overall will influence consumers’ perceptions. Marketers use colours creatively and make sure they avoid others. Would you buy meat in a green package? Would the green colouring of packaged meat influence your perception of its freshness? The same applies to smells. Chemists, Italian restaurants and bakeries are examples of types of business that use smells to influence consumers’ perceptions. In a study that has illustrated the role of colour in perception, university students were given three different ‘flavours’ of chocolate pudding that were, in reality, all vanilla pudding with tasteless food colouring added to varying degrees. The students rated the dark brown pudding as having the best chocolate flavour and the two lighter puddings as being creamier. Not one of the students indicated that he or she had tasted a flavour of pudding other than chocolate. Thus, colour proved to be a critical cue for judging chocolate pudding despite the fact that the three puddings were exactly the same in terms of taste.8 A similar study found that when wine drinkers are presented with two glasses of wine from exactly the same bottle of wine but are told that the wine in glass number one is very expensive and the wine in glass number two is cheap wine, they consistently report that the more expensive wine tastes better. Therefore, the price of the wine influences their perceptions.9 Another important aspect of perception that marketers "****** DEMO - www.ebook-converter.com*******"

must keep in mind is that not all consumers perceive stimuli in the same way. Toyota once had to withdraw an advertisement featuring a pig in mud because of objections from the Muslim community. Some perceived it as a humorous advertisement. The Muslim community perceived it as something totally different. Similarly CocaCola had to cut out a section of their ‘Brrr’ TV advertisement when Indian consumers in South Africa complaint about stereotyping. What is perceived by consumers may also depend on the stimulus’ vividness or shock value. Graphic warnings of the hazards associated with a product’s use are perceived more readily and remembered more accurately than less vivid warnings, or warnings that are written in text (such as those found on cigarette packaging).

EXAMPLE >> The TV advertisements used by the Arrive Alive campaign featuring a car accident scene with screaming, injured children lying on the road is a good example of the use of vividness or shock value. ‘Sexier’ advertisements excel at attracting the attention of younger consumers. Brands like Calvin Klein and Dolce & Gabbana perfume use sensuous ads to ‘cut through the clutter’ of competing ads and other stimuli to capture the attention of the target audience. Similarly, Benetton ads use shock value to cut through the clutter by portraying taboo social issues, such as racism and homosexuality. Two other concepts closely related to selective exposure are selective distortion and selective retention. Selective distortion occurs when consumers change or distort information that conflicts with their feelings or beliefs. For example, suppose a consumer buys a motor vehicle such as a Corsa. After the purchase, if the consumer receives new "****** DEMO - www.ebook-converter.com*******"

information about a similar alternative brand, such as a Ford Focus, he or she may distort the information to make it more consistent with the prior view that the Corsa is better than the Ford. In a similar vein, business travellers who fly frequently may distort or discount information about airline crashes because they have no choice – they need to use air travel regularly in their jobs. And people who smoke and have no plans to stop smoking may distort information from medical reports about the link between smoking and lung cancer. Selective retention is remembering only information that supports existing personal feelings or beliefs. The consumer forgets all information that may be inconsistent with those prior feelings and beliefs. After reading a pamphlet that contradicts one’s political beliefs, for instance, a person may forget many of the points outlined in it because the reader wants to remember what he or she wants to remember. Which stimuli will be perceived and internalised often depends on the individual. People can be exposed to the same stimuli under identical conditions but perceive them very differently (see Reader 14 ‘Different perceptions of dance show quality’, below). For example, two people viewing a television commercial may have different interpretations of the advertising message. One person may be thoroughly engrossed by the message and become highly motivated to buy the product. However, 30 seconds after the advertisement ends, the second person may not be able to recall the content of the message or even the product that was advertised. For instance, can you remember which firms sponsored the 2010 World Cup in South Africa? Some "****** DEMO - www.ebook-converter.com*******"

will be able to identify them all – others will not be able to name one of them.

READER 14 >> Different perceptions of dance show quality Dance show of quality From John Gerryts, Port Elizabeth Bravo Opera House! On Saturday night, Port Elizabeth was treated to a dance show of outstanding quality by ten dancers from the State Theatre Dance Company. What an experience! Those who saw the international gem ‘Dedale’ at the Grahamstown Festival must have felt proud when realising that we have the talent and flair to put on a similarly creative show, though on a smaller scale. The excellent and accurate review by Ann Knight in the Herald on Monday told the story to those who missed it. Well done, Olga Hafner and the Opera House! We look forward to more to come. Yes, but was it dancing? From E. Moffat, Walmer, Port Elizabeth I refer to the State Theatre Dance Company’s performance at the Opera House on Saturday night: Perhaps Ann Knight had been given inside information on ‘Sur les ailes de Sue’, but to my family and [me] it was totally disjointed, confusing and repetitive. And what was the story? The young people in the company are very fit, athletic and agile, but their contortions, gyrations and acrobatic feats to my mind are never dancing. The first part of the show, ‘Cicadas’, was at least understandable, but again I could never describe it as dancing. The ear-splitting music throughout the show was so untuneful and mournful I was glad when it all came to an end. I do not think I was the only one who had this view. SOURCE: Letters to the Eastern Province Herald, 16 February 2000, p. 4

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6.1.1 The marketing implications of perception

LO9

Marketers must recognise the influence of cues, or signals, on consumers’ perceptions of products. They should first identify the important attributes, such as price or quality, that the targeted consumers want in a product and then design signals (or cues) to communicate the existence of these attributes to them. For example, consumers will pay more for chocolate wrapped in expensive-looking foil packages. However, shiny labels on wine bottles signify less expensive wines while dull labels indicate more expensive wines. Using price as a cue to influence perceptions, the American beer brewer Anheuser-Busch raised the price of many of its less expensive beers to make its premier brand, Budweiser, more attractive to consumers.10 South African Breweries market their premium brands, such as Castle Lite, in green bottles. Marketers often use product warranties as a signal to consumers that the product is of a higher quality than competing products. Consumers who perceive these warranties as credible generally perceive the product to be of higher quality.11 To convey the message that its tyres are of a superior quality Firestone markets its Firehawk brand by emphasising its guarantee under the slogan ‘Whatever the damage – Whatever the cause. It’s free – Can you afford to be without it?’.

EXAMPLE >> Brand names also send signals to consumers and influence their perceptions. The brand names of Close-Up toothpaste, Duracell batteries and Frigidaire appliances, for example, identify important product "****** DEMO - www.ebook-converter.com*******"

qualities. Brand names that incorporate numbers or letters, such as Mazda RX-7 or WD-40, invoke images of masculine, high-tech products.12 Consumers also associate quality and reliability with certain brand names. Most firms watch their brand identity closely, largely because a strong link has been established between perceived brand value and consumer loyalty, especially when the brand is ‘cool’. Among young people in South Africa the coolest brands are:13 • BMW • Coca-Cola • Nike • Samsung • Apple.

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Naming a product after a place can also add perceived value by association. Names such as Western Province Cellars and Gautrain sometimes add credibility to a brand name. Tabac after-shave lotion is marketed under the caption ‘German classic’. Marketing managers are also interested in the threshold "****** DEMO - www.ebook-converter.com*******"

level of perception, which is the minimum difference in a stimulus that the consumer will notice. This concept is sometimes referred to as the just-noticeable difference. For example, how much would Sony have to drop the price of a DVD player before consumers recognised it as a bargain? R100? R200? More? One study found that the just-noticeable difference in a stimulus is about a 20 per cent change. For example, consumers are significantly more likely to notice a 20 per cent price decrease in price than a 15 per cent decrease. Mango airlines has increased the legroom on its aeroplanes by 7,5 cm to improve passenger comfort. Will passengers notice the difference? This marketing principle can be applied to other marketing variables as well, such as package size or the loudness of a broadcast advertisement.14 Besides changing stimuli such as price, package size, and volume, marketers can change the product. For example, how many sporty features will Volkswagen have to add to the Polo before consumers begin to perceive the model as a sports car? How many new services will a discount store need to add before consumers perceive it as a full-service department store? Marketing managers who intend to do business in global markets should be aware of how foreign consumers perceive their products. For instance, in Japan, product labels are often written in English or French even though they may not translate into anything meaningful. Nevertheless, many Japanese associate foreign words on product labels with the exotic, and with expensive high-quality items. When the world’s soccer governing body, FIFA, started marketing tickets for the 2010 Soccer World Cup it was "****** DEMO - www.ebook-converter.com*******"

frustrated by the slow tempo of sales. South Africans are not used to buying sports tickets months in advance and prefer to buy over the counter. They are not used to buying tickets by completing forms or on the Internet. ‘We have come to accept that South Africa is very different from what we are used to’, FIFA marketing Director, Thierry Weil, said. FIFA, therefore, had to change its sales strategy to incorporate over-the-counter sales.15 Whatever the cue (brand, price, product feature) that forms or influences a person’s perception, it is important to realise that a short-term perception, over time, ‘decays’ into a long-term attitude towards the object. Marketers must carefully consider, therefore, the impact that all cues that are open to interpretation may have on consumers’ perceptions – and eventually on their attitude towards the product or brand. These cues can influence a consumer’s perceptions, and those perceptions will determine an attitude. If that attitude is negative, consumers are unlikely to buy the firm’s products. South African winemakers, for instance, struggle to overcome negative perceptions about Africa and South Africa in the American market. Charles Back of the Fairview estate says: ‘The result is that winemakers have to put a bottle of wine worth US$15 on the market for $10 to offset those perceptions.’16

6.2 Motivation

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By studying motivation, marketers can analyse the major forces that influence whether consumers buy or do not buy products. When you buy a product, you usually do so to "****** DEMO - www.ebook-converter.com*******"

satisfy some kind of need. These needs become motives when aroused sufficiently. For instance, suppose this morning you were so hungry before going to lectures that you needed to eat something. In response to that need, you stopped at a Wimpy for breakfast. In other words, you were motivated by hunger to stop at the Wimpy. Motives are the driving forces that cause a person to take action to satisfy specific needs. Why are people driven by particular needs at particular times? One popular theory that addresses this question is Maslow’s hierarchy of needs, illustrated in Figure 3.3, which arranges needs in order of importance. These needs are ranked in categories: physiological (the most basic needs), safety, social, esteem, and self-actualisation (the highest level needs). According to Maslow, as a person satisfies one need, a higher-level need becomes more important. Figure 3.3 Maslow’s hierarchy of needs

According to Maslow’s theory, the most basic human needs are physiological – that is, needs for food, water and shelter. Because they are essential to survival, these needs "****** DEMO - www.ebook-converter.com*******"

must be satisfied first. Advertisements showing a juicy hamburger or a road runner gulping down Energade after a marathon exemplify the use of appeals to satisfy physiological needs. Many advertisements are based on a sexual appeal, another example of a physiological need. An example is Wonderbra’s ‘Nights in black satin’ campaign, featuring a pretty blonde woman wearing a black bra. Safety needs include security and freedom from fear, pain and discomfort. Marketers often exploit consumers’ fears and anxieties about safety to sell their products. A few years ago, Mercedes-Benz used an actual incident during which a Mercedes-Benz owner survived a crash on Chapman’s Peak near Cape Town as the basis of a television advertising campaign. The basic message was that the safety features offered by the Mercedes-Benz ensured the survival of the occupant – a clear appeal to safety needs. Today a Volkswagen Golf advertisement says: ‘Its roadholding is legendary.’ Llumar, a company that sells protective film to be applied to windows, says ‘Protect your loved ones …’.

EXAMPLE >> Consumer demand for products containing Vitamin E has been soaring following several scientific studies that suggest the vitamin inhibits agents that attack cells and cause deterioration. Marketers have promoted other studies that conclude that Vitamin E may also help ward off degenerative ailments, such as heart disease and cancer, and some symptoms of ageing.17 Another example of an advertisement using a security appeal is one used by Police sunglasses. It proclaims: ‘Get police protection. Total UV protection.’ Maslow suggested that after physiological and safety needs have been satisfied, social needs, especially love and a sense of belonging, become the focus. Love includes acceptance "****** DEMO - www.ebook-converter.com*******"

by one’s peers and friendship, as well as romantic love. Marketing managers probably appeal more to this need than to any other. Advertisements for clothes, cosmetics and holiday packages suggest that buying the product can bring love. The need to belong is also a favourite appeal used by of marketers. Love is acceptance without regard to one’s contribution. Esteem is acceptance based on one’s contribution to the group. Self-esteem needs include self-respect and a sense of accomplishment. Esteem needs also include prestige, fame and recognition of one’s accomplishments. Mont Blanc pens, Mercedes-Benz cars and clothing boutiques all appeal to esteem needs. Imperial Car Rental appeals to esteem needs by offering ‘a range of luxury cars’ to a very specific segment. In an advertisement the firm says: ‘Nobody goes further to recognise your success. Status cars – elevating you to greater heights.’ L’oréal advertisements say ‘Because you’re worth it.’ According to Maslow, the highest human need is selfactualisation. This is reflected in the need for finding selffulfilment and self-expression, reaching the point in life at which people are what they feel they should be, or the feeling that one has achieved something. Fun, freedom and relaxation are also needs that can be classified under selfactualisation. Many advertisements focus on this type of need. For example, American Express advertisements convey the message that acquiring its card is one of the highest attainments in life. Barron, a company that sells corporate gifts, says ‘Ambitious? Successful? Look the part.’

EXAMPLE >> Purity advertises its baby food with the slogan ‘No "****** DEMO - www.ebook-converter.com*******"

preservatives’, which obviously appeals to a mother’s safety needs. A social need is probably the need Hallmark appeals to when it advertises its cards under the slogan, ‘When you care enough to send the very best’. An example of an appeal to esteem needs is Oude Molen’s 100 Reserve Brandy advertisement, ‘Why settle for less when you can have 100?’, suggesting that someone of your status should not be satisfied with anything less than the very best. Alfred Dunhill appeals to the need for self-actualisation when it uses the slogan ‘Luxury accessories [pens, wristwatches, etc.] for the discerning gentleman’.

6.3 Learning

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Almost all consumer behaviour results from learning, which is the process that creates changes in behaviour through experience and practice. It is not possible to observe learning directly, but we can infer from a person’s action that learning has taken place. For example, suppose you see an advertisement for a new, improved medicine for colds. If you go to a chemist that day and buy that remedy, we can infer that you have learnt something about the cold medicine. There are two types of learning: experiential and conceptual. Experiential learning occurs when an experience changes your behaviour. For example, if you try the new cold medicine when you get home and it does not relieve your symptoms, you may not buy that brand again. Experiential learning has led to this decision. Conceptual learning, on the other hand, is not learned through direct experience. Assume, for example, that you are standing in front of a cooldrink vending machine and notice a new diet "****** DEMO - www.ebook-converter.com*******"

cooldrink with an artificial sweetener. But someone has told you that diet beverages using artificial sweeteners leave an aftertaste, so you choose a different drink. You have learnt that you would probably not like this new diet drink without even trying it. This is an example of conceptual learning. Reinforcement and repetition enhance learning. Reinforcement can be positive or negative. If you see a shop selling frozen yoghurt (stimulus), buy it (response) and find the yoghurt to be quite refreshing (reward), your behaviour has been positively reinforced. On the other hand, if you buy a new flavour of yoghurt and it does not taste good (negative reinforcement), you will not buy that flavour of yoghurt again. Without positive or negative reinforcement, a person will not be motivated to repeat the behaviour pattern or to avoid it. Therefore, if a new brand (such as Virgin Cola) evokes neutral feelings, some marketing activity – such as a price change or an increase in promotion – may be required to induce further consumption. Learning theory is helpful in reminding marketers that concrete and timely actions are what reinforce desired consumer behaviour. Repetition is a key strategy in marketing communication campaigns because it can lead to increased learning. South African Airways uses repetitive advertising so consumers will learn that SAA provides ‘Africa’s warmest welcome’. Generally, to heighten learning, advertising messages should be spread over time rather than concentrated in a short period of time. A related learning concept useful to marketing managers is stimulus generalisation. In theory, stimulus generalisation occurs when one response is extended to a second stimulus "****** DEMO - www.ebook-converter.com*******"

similar to the first. Marketers often use a successful, wellknown brand name for a family of products because it gives consumers familiarity with and knowledge about each product in the family. Such brand-name families spur the introduction of new products and facilitate the sale of existing items.

EXAMPLE >> Examples of brand-name families are Colgate marketing shampoos after the successful marketing of its Colgate soap, and Nashua adding cellular phones to its range of office products using the same brand name. When StaSoft added a new peach fragrance to its existing line of fabric softeners, it used exactly the same shaped bottle and labelling used for all the other versions in the product line. Why? Because StaSoft wanted potential buyers to associate the new product with its existing brands (stimulus generalisation) and, therefore, overcame the risk and consumer resistance typically associated with buying new, unknown products. Sometimes, however, marketers do not want new products to be associated with any existing product or brand. They prefer a clear differentiation not influenced by any existing associations. This is referred to as stimulus discrimination, the direct opposite of stimulus generalisation.

EXAMPLE >> When Coca-Cola introduced Powerade to compete with Energade in the energy drink market, Powerade was never associated with the Coca-Cola brand at all. It was not marketed as ‘Coca-Cola Powerade’ – just as Powerade. The marketers of Powerade wanted the brand to stand alone and did not want any consumer association with the Coca-Cola brand. This is an example of stimulus discrimination. Marketers, therefore, either use the learning process so that "****** DEMO - www.ebook-converter.com*******"

consumers learn to associate certain things with their products and brands – or not to. These associations are ways in which they differentiate their products or brands from those of competitors. With some types of products, such as aspirin, petrol, bleach and paper towels, marketers rely on marketing communication to point out brand differences that consumers would otherwise not recognise. This process, called product differentiation, is sometimes based on superficial differences. For example, Bayer tells consumers that it is the aspirin ‘doctors recommend most’.

6.4 Values, beliefs and attitudes

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Learning helps people shape their value systems. In turn, values help shape a person’s self-concept, personality and even lifestyle. A value is an enduring belief that a specific mode of conduct is personally or socially preferable to another mode of conduct. People’s value systems exert considerable influence on their buyer behaviour. Consumers with similar value systems tend to react alike to marketing-related stimuli, such as advertisements, prices and product packaging. Values are also related to consumption patterns. In other words, what and where people buy is influenced by their value systems. For instance, people who want to protect the environment try to buy only products that don’t harm it, and some firms have responded by marketing environmentally friendly products. Values can also influence consumers’ TV viewing habits, the magazines they read or the radio stations they listen to. Many Christians in South Africa listen to radio stations "****** DEMO - www.ebook-converter.com*******"

such as Radio Pulpit and Radio Kingfisher. Others who strongly object to violence avoid shows on television that depict a lot of crime. Likewise, people who object to public displays of nudity do not buy Playboy magazine.

EXAMPLE >> Value systems can vary quite a bit across cultures and subcultures. For example, leisure time is valued in South Africa. Consumers spend a considerable amount of time and money on sports events, outdoor activities such as mountain-biking, movies, restaurants, holidays and amusement parks. South African workers traditionally expect eight-hour days, five-day work weeks and holiday leave. Japanese workers, on the other hand, typically work 12-hour days and often work on Saturdays as well. Only half of Japanese workers use all their leave. One reason most Japanese do not take more time off is that they do not want to burden their colleagues by leaving early or taking a holiday. Traditional Japanese workers also feel that their work will suffer if they put effort into other things. These Japanese values contrast sharply with the values of some South Africans, who regard sick leave as a fringe benefit that ought to be fully utilised. The personal values of target consumers often have important implications for marketing managers. Beliefs and attitudes are closely linked to values. A belief is an organised pattern of knowledge that an individual holds as true about his or her world. A consumer may believe that Sony’s video camera makes the best home videos, tolerates heavy use and is reasonably priced. These beliefs may be based on own experience, faith or hearsay. Consumers tend to develop a set of beliefs about a product’s attributes and then, through these beliefs, form a brand image – a set of beliefs about a particular brand. In turn, the brand image shapes consumers’ attitudes towards the product. "****** DEMO - www.ebook-converter.com*******"

Attitudes tend to be more enduring and complex than beliefs because they consist of clusters of interrelated beliefs. An attitude is a learnt tendency to respond consistently to a given object, such as a brand. Attitudes also encompass an individual’s value system, which represents personal standards of good and bad, right and wrong, and so forth. From a marketing perspective, the objective is to cultivate a positive attitude towards a firm, product or brand. Consider the different attitudes of consumers around the world towards the habit of purchasing on credit. Americans have long been enthusiastic about charging goods and services to a credit card and are willing to pay high interest rates for the privilege of postponing payment. But to many European consumers, doing what amounts to taking out a loan – even a small one – to pay for anything seems absurd. Germans especially are reluctant to buy on credit. Italy has a sophisticated credit and banking system well suited to handling credit cards, but Italians prefer to carry cash – often huge wads of it. Most Japanese consumers have credit cards, but card purchases amount to less than 1 per cent of all consumer transactions. The Japanese have long looked down on credit purchases, but acquire cards to use while travelling abroad.18 If a product or service is meeting its profit goals, positive attitudes towards the product merely need to be reinforced. However, if the brand is not succeeding, the marketing manager must strive to change target consumers’ attitudes towards it. This change can be accomplished in three ways: changing beliefs about the brand’s attributes, changing the "****** DEMO - www.ebook-converter.com*******"

relative importance of these beliefs and adding new beliefs.

6.4.1 Changing beliefs about attributes

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The first technique is to turn neutral or negative beliefs about product attributes into positive ones. For example, pork was losing sales to chicken because consumers thought pork was fatty and unhealthy. To counter this belief, pork producers launched the ‘Pork: the other white meat’ campaign to reposition their product in the minds of consumers. The campaign tells consumers that pork is leaner, lower in calories, and lower in saturated fat than they think. It took wine makers a long time to convince wine lovers that screw caps are better at preserving wine than cork. It will probably take just as long to convince them that wine in marketed polyethylene terephthalate (or PET) bottles similar to those soft drinks are sold in, will not affect the quality or taste of wine.

EXAMPLE >> When South African red meat faced negative attitudes, the South African Feedlot Association launched the ‘Beef it up’ campaign to convince consumers of the hygiene and wholesomeness of South African beef. Likewise, in America, BMW is continuing its efforts to reposition itself as a safe, affordable vehicle for the entire family and to steer away from its image as a yuppie statement. Its new television advertising concentrates on safety features, such as traction control; its print advertisements show children for the first time. BMW also hopes the campaign will convince consumers that the cars are not as expensive as they might think.19 The South African Sugar Association launched an advertising campaign to try and change the belief that sugar is fattening. In the campaign they pointed out that: "****** DEMO - www.ebook-converter.com*******"

• • • •

Sugar is a natural carbohydrate The sugar consumed by the average South African only contributes about 60 calories to his/her diet A tomato sandwich contains 240 calories and a teaspoon of sugar contains 15 calories A human body will burn away 15 calories during 15 minutes of sleep.

When margarine was first marketed in South Africa, marketers had a tough time convincing consumers that margarine was healthier than butter and not a cheap substitute for those who could not afford butter.

6.4.2 Changing the importance of beliefs The second approach to modifying attitudes is to change the relative importance of beliefs about an attribute. For years, consumers have known that bran cereals are high in natural fibre. The primary belief associated with this attribute is that the fibre tends to act as a mild, natural laxative. Today, however, cereal marketers promote the high fibre content of bran cereals as a possible factor in preventing certain types of cancer, vastly increasing the importance of this attribute in the minds of consumers.

>> Strategy General Electric (GE) has tried to change Japanese consumers’ beliefs about the attributes that are most important to them in a refrigerator. Japanese manufacturers believe that Japanese consumers prefer stylish and feature-studded appliances that domestic "****** DEMO - www.ebook-converter.com*******"

makers sell in small sizes. A typical Japanese-made refrigerator is a nine-cubic-foot $1 300 model with three doors and a compartment for raw fish. Larger Japanese models have six doors and sell for around $3 200. GE discovered, however, that many Japanese would gladly trade these characteristics for larger, simpler and cheaper models. Since more Japanese women work after marriage and cannot shop for food on a daily basis as their mothers did, big, inexpensive, two-door refrigerators suddenly make sense. As a result, GE quickly increased sales in the Japanese market with its modest $800 model.20 Research done by the marketers of the cordial drink Oros to understand their declining sales revealed that many mothers were concerned about the quality of some concentrated beverages. Product quality is important to them and Oros’s image and positioning as ‘fun for the kids’ and affordability were not enough. Pure fruit juices were viewed as being good quality and recognised for their ‘goodness’. To stop the slide in sales, the marketers of Oros believed it needed to reassure mothers about its quality, while retaining and enhancing children’s enjoyment of Oros. The marketers decided to embark on an advertising campaign to change the importance of mothers’ beliefs. The campaign objectives were to reassure mothers about Oros’s goodness and quality, so they would feel they were doing the right thing when buying Oros for their children.21 Whirlpool has tried to change European consumers’ "****** DEMO - www.ebook-converter.com*******"

beliefs about the attributes that are most important to them in a washing machine. European manufacturers believe that European consumers prefer washing machines that are narrow and load from the top owing to the limited space available in most European homes. Whirlpool’s research, however, indicates that Europeans prefer machines with superior overall performance – a reliable machine that cleans well, is easy to use and economises on water, detergent and energy. Whirlpool contends that if all these criteria are met, other features – such as where the machine opens and how big it is – become less important to consumers. Whirlpool used this information to change its marketing strategies in Europe.

6.4.3 Adding new beliefs The third approach to transforming attitudes is to add new beliefs. Although changes in consumption patterns often come slowly, the marketers of rooibos tea are trying to convince consumers that rooibos is more than just an everyday beverage. They want to convince consumers that rooibos tea also has some medicinal properties – including its curative effect for colicky babies, insomnia and allergies – and that it can be used as a flavouring ingredient in baking and cooking.22 Similarly, some breakfast cereal producers promote eating the cereal straight from the box as a snack. Makers of chewing gum are also attempting to add new beliefs about the uses of their products. Advertisements tout chewing gum as an alternative to smoking or as a way to remove food residue from one’s teeth. For example, Trident "****** DEMO - www.ebook-converter.com*******"

sugarless gum advertises that it ‘actually helps fight cavities when you chew it after meals’.23

>> Strategy Adding new beliefs is not easy. For example, when the American beer brewer Anheuser-Busch, owner of the Budweiser brand, first introduced Bud Dry beer, consumers were confused because the word ‘dry’ is commonly used to describe wines or cider. Nevertheless, many consumers have since added the new belief that beer, too, can be described as dry. Volvo faced a similar problem in introducing its sporty 850 model. For over a quarter of a century, Volvo has successfully crafted an image of being the safest car on the road. Indeed, Volvo did such a good job of driving home its safety message that consumers had a hard time imagining a Volvo as anything other than an unglamorous, boxy, steel-reinforced tank. When Procter & Gamble first introduced disposable nappies in Japan, interest was limited. Research suggested that price and health concerns were a sticking point, as was the product fit. The nappies leaked because the design was too large for most Japanese babies. From a production vantage point, these were problems that could be solved quite easily. However, another powerful cultural force was also at work. At that time, most Japanese mothers were expected to dedicate themselves to caring for their babies. Many women who could afford the "****** DEMO - www.ebook-converter.com*******"

convenience of disposable nappies felt guilty using them. Furthermore, it was often a woman’s mother-inlaw who aggressively kept that guilt burning. Although fathers were typically uninvolved in caring for babies, it was the Japanese mother-in-law’s traditional role to oversee how the mother cared for the grandchild. And, by tradition, caring mothers always sacrificed their own convenience for the baby’s well-being. Japanese firms that entered the market later used advertising to emphasise that disposable nappies were best for the baby. That appeal relieved the mother’s guilt and simultaneously helped with the mother-in-law problem. Even so, it took time for basic attitudes to change.24 Firms attempting to market their goods overseas may need to help consumers add new beliefs about a product in general. Many hygiene practices common in South Africa, for example, are unheard of in foreign countries. In rural India, most Indians have never handled such products as a toothbrush or a tube of toothpaste. For generations, they have used charcoal powder and indigenous plants to clean their teeth. To educate Indians on the benefits of toothpaste, ColgatePalmolive sends marketers to rural villages on market days equipped with a half-hour ‘infomercial’ featuring Colgate toothpaste. A story of a couple on their wedding night sends Colgate’s message: Colgate is good for your breath, teeth and love life. The infomercial ends with a dentist explaining that the traditional oral-hygiene methods, such as charcoal powder, are less effective. Free samples are handed out "****** DEMO - www.ebook-converter.com*******"

while a Colgate marketer demonstrates how to use the Colgate toothpaste and toothbrush.25

6.5 Personality, self-concept and lifestyle

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Each consumer has a unique personality. Personality is a broad concept that can be thought of as a way of organising and grouping the consistencies of an individual’s reactions to situations. Thus, a person’s personality is a combination of his/her psychological make-up and environmental forces. Personality includes people’s underlying dispositions, especially their most dominant characteristics. Some marketers believe that personality influences the types and brands of products purchased. For instance, the type of car, clothes or jewellery that a customer buys may reflect one or more personality traits. Personality characteristics, such as autonomy, aggressiveness, dominance, sociability and selfconfidence, may be used to describe a consumer’s personality. Self-concept, or self-perception, is how consumers perceive themselves. Self-concept includes attitudes, perceptions, beliefs and self-evaluations. Although selfconcept may change, the change is often gradual. Through self-concept, people define their identity, which, in turn, constitutes consistent and coherent behaviour. Self-concept combines the ideal self-image (the way an individual would like to be) and the real self-concept (how an individual actually perceives himself or herself). Generally, we try to raise our real self-image towards our "****** DEMO - www.ebook-converter.com*******"

ideal self-image (or at least narrow the gap). Consumers seldom buy products that jeopardise their self-image. For example, someone who sees himself as a trendsetter would not buy clothing (such as a safari suit) that does not project a contemporary image. Human behaviour depends largely on self-concept. Because consumers want to protect their identity as individuals, the products they buy, the stores they patronise and the credit cards they carry support their self-image. Men’s and women’s fragrances, for example, tend to reflect the self-images of their wearers. Chanel’s Egoïste is ‘for the man who has everything and knows it’. Likewise, Elizabeth Taylor’s White Diamonds perfume is ‘the fragrance dreams are made of’, for all those women who strive for legendary beauty.26 By influencing the degree to which consumers perceive goods or a service to be self-relevant, marketers can influence their motivation to learn about, shop for and buy a certain brand. Marketers also consider self-concept important because it helps explain the relationship between individuals’ perceptions of themselves and their buying behaviour. An important component of self-concept is body image – how one perceives the attractiveness of one’s own physical features. For example, individuals who have plastic surgery often experience significant improvements in their overall body image and self-concept. Moreover, a person’s perception of body image can be a stronger reason for weight loss than either good health or other social factors.27 "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> Sales of at-home hair colour to ageing baby boomers in the United States have substantially increased as more middle-aged men and women colour their hair in order to ‘age gracefully’.28 GNC is capitalising on consumers’ desire for quick fixes by marketing pills that should produce ‘quick energy’.29 In South Africa a whole category of lifestyle-enhancing treatments has developed over recent years. These include Celebra for arthritis, Detrol for incontinence, Evista for osteoporosis, Propecia for hair loss and Sonata for sleep enhancement.30 Likewise, health clubs and gymnasiums, such as Virgin Active, exercise-equipment manufacturers, such as Energym, and diet plans, such as WeighLess, target consumers who want to improve their self-concept by exercising and losing weight. A person’s personality and self-concept are reflected in their lifestyle. A lifestyle is a mode of living as identified by a person’s activities, interests and opinions (see the Jeep advertisement below). Psychographics is the analytical technique often used by marketers to examine consumer lifestyles and categorise consumers. Unlike personality characteristics, which are hard to describe and measure, lifestyle characteristics are useful in segmenting and targeting consumers. Many industries now use psychographics to analyse and better understand their market segments (see Chapter 6). For example, the motor vehicle industry has a psychographic segmentation scheme for classifying car buyers into one of six groups according to their attitudes towards cars and the driving experience. At one extreme are ‘gearheads’, true car enthusiasts who have petrol in their veins and who enjoy driving and working on their cars themselves. At the other extreme are the ‘negatives’ – those who view cars as a necessary evil that they would have liked "****** DEMO - www.ebook-converter.com*******"

to do without. Mobil Corporation has used psychographics to classify petrol buyers into five groups: road warriors, true blues, generation F3, homebodies and price shoppers.31 These groups vary in their brand loyalty, amount purchased, method of payment, location preference and usage of convenience stores. Psychographics and lifestyle segmentation schemes are discussed in more detail in Chapter 6. Suffice to say at this stage that people with different personalities and lifestyles buy different products at different shops. As marketers, we need to understand the reasons for their behaviour.

7. Social factors influencing consumer buying decisions

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The second major group of factors that influence consumer decision-making are social factors (see Figure 3.1). Social factors include all effects on buyer behaviour that result from interactions between a consumer and the external environment. Social factors include factors such as culture and subcultures, reference groups, opinion leaders, family life-cycle, as well as the consumer’s social class.

7.1 Culture Culture is the set of values, norms and attitudes that shape human behaviour, as well as the artefacts, or products, of "****** DEMO - www.ebook-converter.com*******"

that behaviour as they are transmitted from one generation to the next. Culture is environmentally orientated. The nomads of Finland have developed a culture for Arctic survival. Similarly, people who live in the Brazilian jungle have created a culture suitable for tropical living, as have the San for the conditions prevailing in the Kalahari Desert. The warmer climate in Africa has contributed to behaviour such as outdoor cooking, which is uncommon in colder countries, such as Norway and Sweden.

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Human interaction creates values and prescribes acceptable behaviour for each culture. By establishing common expectations, culture gives order to society. Sometimes these expectations are encoded as laws. For example, drivers in Western culture are expected to stop at a red traffic light. As long as a value or belief meets the society’s needs, it remains part of the culture. If it is no longer functional, it fades away. Large families, for example, were valued in the "****** DEMO - www.ebook-converter.com*******"

19th and early 20th centuries. Children were considered an asset because they could help with the farm work and look after the parents in their old age – an attitude that probably still exists in most African countries. Today, in an industrial economy, large families are not necessary, and in some countries (such as Germany), the population growth rate is close to zero. It is important that marketers realise that culture is dynamic. It adapts to changing needs and an evolving environment. The rapid growth of technology in this century has accelerated the rate of cultural change. Television has changed entertainment patterns and family communication, and heightened public awareness of political and other news events. Automation has increased the amount of leisure time we have and, in some ways, has changed the traditional work ethic. Cultural norms will continue to evolve because of our need for social patterns that solve problems. Without understanding a culture, a firm has little chance of selling products to that cultural group. Colours, for example, may have different meanings in overseas markets from those at home. In China, white is the colour of mourning, and brides wear red; in South Africa, black is for mourning, and brides wear white. Pepsi had a dominant market share in Southeast Asia until it changed the colour of its coolers and vending equipment from deep regal blue to light ice-blue. In that part of the world, light blue is associated with death and mourning. Language is another important aspect of culture that global marketers must deal with. They need to take care "****** DEMO - www.ebook-converter.com*******"

when translating product names, slogans and promotional messages into foreign languages so as not to convey the wrong message.

EXAMPLE >> Consider the following examples of blunders made by marketers when sending their messages to non-English-speaking consumers: when Kentucky Fried Chicken introduced its brand in China their ‘finger-lickengood’ slogan came out ‘eat your fingers off’; the brewery Coors encouraged its English-speaking customers to ‘Turn it loose’, but the phrase in Spanish means ‘suffer from diarrhoea’; and when the American slogan for Salem cigarettes (Salem – Feeling free) was translated into Japanese it came out as ‘When smoking Salem, you feel so refreshed that your mind seems to be free and empty.’

>> Strategy McDonald’s had to adapt its marketing approach in the UK when research revealed that the firm was perceived as loud, brash, uncaring, insensitive, insincere and arrogant by the British. Owing to the cultural gap between the two countries, McDonald’s had to make radical changes to the way it served its customers. To succeed in the UK, McDonald’s had to adapt to the needs of its customers, who wanted warmth, helpfulness, time to think before ordering a meal, friendliness and advice. As more firms expand their operations globally, the need to understand the cultures of foreign countries becomes more important – as the above firms soon found out. Marketers "****** DEMO - www.ebook-converter.com*******"

should become familiar with the culture and adapt to it. What works well in Bloemfontein could be a flop in Durban if marketers are not sensitive to the nuances of the local culture.

7.1.1 Cultural values in South Africa32

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South Africa can today be classified as a developing country, a contrast of First World technology and ideas and Third World roots and reality. Because its population represents a multicultural, heterogeneous society, change in values and lifestyles is an ongoing process. Major changes among urban whites during the past decade have been a decline in the role of hierarchical authority and the Protestant ethic, an increase in the need for self-expression and an acceptance of political reform. Among black consumers, there is also a shift to a more ambitious outlook on life, a move away from being conservative and traditional to becoming selfmotivated, with a drive for self-improvement and education. The emergence of churches such as the Rhema Church and Christian Harvest Church shows that South Africans’ values are also becoming more religion-orientated – albeit not necessarily as members of the traditional mainstream churches. More people are seeking spiritual guidance to deal with immorality, violence and crime, despite the fact that – in political terms – South Africa is now a secular state. Although we have religious freedom, no mention is made of God in the new constitution. Yet religious values create a sense of equality and justice. The need for cultural synergy is also emphasised by many leaders in South Africa today. The common assumption that "****** DEMO - www.ebook-converter.com*******"

only one cultural tradition matters is wrong, because one culture is not something in which all people should or could share. Any dominant culture would inhibit freedom, as it would reject the value of other cultures, thereby making it impossible for people to express their deepest selves in an open and accepting environment. The primary belief underlying Afrocentricity is the concept of ubuntu. This concept means a person can be a person only through other people. It can be defined as: ‘A person is a person through other human beings’ or ‘I am because you are; you are because we are’. Ubuntu emphasises supportiveness, co-operation, cohesion of family and community, and group solidarity. A disadvantage of ubuntu, from a Eurocentric viewpoint, is that the group does not always recognise, value or support individual performance, achievement or success.33 Firms who wish to capitalise on the collectivist values of segments of the market that underwrite these values will typically use advertising that shows groups of people (families, sports teams, and so on) rather than individuals – as illustrated by the Amante Bridalwear advertisement on page 111. Eurocentric, westernised values, by contrast, focus on individualism, materialism, a strong work ethic and individual achievement and success. Individualism places a high value on being oneself. Self-reliance, self-interest, selfconfidence, self-esteem and self-fulfilment are popular expressions of individualism, implying a rejection of dependency on others.34 In the South African context, privacy is part of this value, strengthened by the drive for security of one’s property, vehicles and other possessions "****** DEMO - www.ebook-converter.com*******"

against crime. Materialism reflects the accumulation of wealth and objects. It demonstrates personal comfort, the ‘good life’, and symbolises material success and status in society. Some subcultures’ work ethic and achievement can be traced to the Protestant work ethic, which considers hard work to be wholesome, spiritually rewarding and an appropriate end in itself. Many South Africans cherishing westernised values today do not feel guilty about their achievements or wealth because they feel they have worked hard for them. Some are critical of this value system. Former-president Thabo Mbeki recently criticized what he termed ‘conspicuous material consumption’. Referring to the objective of personal enrichment, Mbeki says: ‘Cecil Rhodes and other successful businesspeople after him came to represent the very epitome of human success, which all of us had to emulate. Today, the best South African is the person, whether black or white, who is dressed in the most expensive clothes. He or she owns the most expensive car and lives in the most luxurious house. He or she consumes the most exotic products and spends holidays at the most expensive locations in South Africa and the rest of the world. He or she will have the most expensive coffin and funeral. Anybody who questions this value system is a moegoe or a mampara.’35 South African marketers must be particularly sensitive to cultural differences. Despite these differences in values held by South Africans, the country is on the path of developing shared values. Evidence of this is seen in joint support for our sports stars, musicians and national symbols, and the "****** DEMO - www.ebook-converter.com*******"

realisation that we need a team-building effort as a nation to create a united South African loyalty and pride. Shared values are developed by: • • •

Adopting the demonstrated values of people we admire Using experience to evolve a set of values that work well for us Responding to social influences from people with whom we mix.36

Cultural values that are often used in advertising are: • • • • •

Wisdom – knowledge, expertise Practicality – effectiveness, durability, convenience Family – nurturing a family, happy home, getting married Health – fitness, vigour, athleticism Sexiness – good appearance, glamorousness.

7.2 Subculture A culture can be divided into subcultures on the basis of demographic characteristics, geographic regions, political beliefs, religious beliefs, national and ethnic background, and the like. A subculture is a homogeneous group of people who share elements of the overall culture as well as cultural elements unique to their own group. Within subcultures, people’s attitudes, values and purchase decisions are even more similar than within the broader culture. Subcultural differences may result in considerable variation within a culture in terms of what, how, when and where people buy "****** DEMO - www.ebook-converter.com*******"

goods and services.

>> Strategy If marketers can identify subcultures, they can then design special marketing strategies to serve their needs. The US firm Kraft recently launched a brand of fastmelting white cheese and rich cream called Valle Lindo, Spanish for ‘beautiful valley’, especially for Hispanic consumers. Advertisements for the products are in Spanish and are aired on Spanish-language television and radio stations. Kraft is also expanding its Spanish-language advertising for existing brand products popular among Hispanic consumers.37 Similarly, Simon & Schuster is launching a line of Spanish-language books, including translations of popular American titles.38

7.2.1 Subcultures in South Africa As pointed out earlier, a subculture is a distinct cultural group that exists as an identifiable segment within a larger, more complex society. Members of a subculture possess beliefs, values and customs that set them apart from other members of the same society.39 Subcultures can be identified by age, geography, ethnic identity and activities (see Reader 15 ‘The Harley-Davidson legend lives on’). In South Africa there is a debate over whether there really is such thing as a ‘black market’. In the 1990s it was argued that certain products were bought predominantly by black "****** DEMO - www.ebook-converter.com*******"

consumers. Examples given were sorghum beers, such as King Korn and iJuba; foods such as mealie meal, samp and sour milk; and personal products, such as skin lighteners, hair straighteners and laxatives.40 There is also evidence that black people’s physical features differ from other market segments. Many black women do not fit into the average white woman’s evening gown or bikini, and black men need special styles of suits more often than non-black men.41 The jeans brand Levi Straus has adapted its marketing strategy for this market segment. Nuholt Huisamen, their marketing manager says: ‘The black middle class will be a key part of our growth. Their shopping behaviours are different and branded companies will have to communicate differently through their marketing campaigns.’42 Other cultures found in South Africa include the Protestant, white Anglo-Saxon Protestant (WASP), Jewish, Catholic and Muslim subcultures. These so-called subcultures often differ in terms of the products they buy and do not buy, where they buy them and when they buy them. Retail shops that target Muslims often experience demand up to four times higher than normal after the fasting period associated with holy month of Ramadan. Christians spend three times more in December (the Christmas period) than in any other month of the year.

READER 15 >> The Harley-Davidson legend lives on A Harley-Davidson motorcycle is a special kind of investment. A man – or, occasionally, a woman – who buys a Harley is buying into a tradition, a fellowship, a global family, a way of life – all those things that draw "****** DEMO - www.ebook-converter.com*******"

aficionados to Harley-Davidson rallies by the hundreds of thousands every year. During World War II, Harleys were used by allied troops all over the world, and many thousands of soldiers learnt to ride, maintain and love them. After the war, a new breed of biker emerged, the antisocial nonconformists disillusioned with the American way of life. They made Harley-Davidson motorbikes, stripped and modified into choppers, a symbol of rebellion and freedom from the norm. This trend was epitomised in the films The Wild One and Easy Rider, both influential among the youth of their time. Out of the rebels’ habit of modifying their bikes to suit themselves grew the phenomenon of customising bikes, today a full-scale industry. The archetypal roughneck biker became part of the Harley heritage and helped it to attain cult status, which endured even after the rebels reached middle age and were reabsorbed into society. The image of the Harley rider evolved into that of the long-haired, bearded, beer-bellied older individual. Nowadays – in South Africa at least – he is a respectable suburbanite with a social conscience, with an average age of 44. And his nostalgia for the classic old-style machines is greater than ever. After seven decades, the business was still run by Harleys and Davidsons and the machines were still being partially hand-assembled by lifelong employees in the time-honoured way. SOURCE: Innes, G. 2000. Me and my Harley. Personal Wealth, supplement to the Financial Mail, third quarter, pp. 39–40

In South Africa, ethnic subcultures are often based on language, religion and race. As far as religious subcultures are concerned, South Africa has various religious groups, of which Catholics, Protestants, Jews, Muslims and Hindus form the major groups. Besides religious subcultures, many other subcultures can be identified. Some are concentrated geographically. People belonging to the Muslim religion are found mainly in and around Cape Town. The majority of South Africans of "****** DEMO - www.ebook-converter.com*******"

Indian origin is located in Durban and its surrounds. Many artists have converged on areas such as Melville in Johannesburg, Knysna and, more recently, Darling in the Western Cape. Many wave surfers converge on Jeffreys Bay, and fly-fishermen on Dullstroom. Other subcultures are geographically more dispersed. Christians, for instance, are found almost anywhere in South Africa, as are many Xhosaspeaking people. All subcultures have identifiable attitudes and values that distinguish them from the larger culture. The fact that South Africa has eleven different official languages makes the home language an important factor to be considered when distinguishing among subcultures. For instance, Afrikaans-speaking citizens generally used to be more conservative and religion-orientated, whereas English-speakers were more liberal and adaptable to change. These stereotypes, however, may no longer apply in the ‘new’ South Africa. The same argument goes for geographical location as a basis to distinguish among subcultures – particularly between urban and rural people. For example, although a large proportion of the poorer sectors of the population still reside in the rural areas, it would be a gross generalisation to state that these people have stronger moral convictions or are slower to adapt to a changing environment than urban dwellers. Subcultures can also be grouped around lifestyle choices. The gay community in urban centres or youth groups in the townships are examples. Research carried out in Soweto in the early 1990s identified nine different subcultures among township teenagers – Pantsulas, Mshosas, Ivys, Rastas, Punks, Cats, Hippies, Comrades and Inkatha. Each of these "****** DEMO - www.ebook-converter.com*******"

groups had distinctly different lifestyles, wore different clothes and spoke a township lingua franca that was difficult for the ordinary citizen to understand.

7.3 Reference groups

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All the formal and informal groups that influence the buying "****** DEMO - www.ebook-converter.com*******"

behaviour of an individual are that person’s reference groups. Consumers may use products or brands to identify with, or become a member of, a group. They learn from observing how members of their reference groups consume, and they use the same criteria to make their own consumer decisions. Reference groups and opinion leaders alike possess what is known as social power – the power to influence the actions of others. Generally, four bases of power can be distinguished: •

•

•

•

Information power – the power that emanates from superior knowledge. Your university professor or medical doctor has information power over students (to study for an exam) or patients (to take medication) owing to their superior knowledge Legitimate power – the power accorded to someone by virtue of their connection with some legitimate structure, such as the law. Police officers and judges derive their power from legal structures, such as laws Referent power – the power accorded to a group or person who is admired and emulated. An actress or sports star may have the power to influence teenagers’ buying behaviour Expert power – the power derived from possessing a specific skill or expertise.

Reference groups can be categorised very broadly as either direct or indirect (see Figure 3.4). Direct reference groups are face-to-face membership groups that touch people’s lives directly. They can be either primary or secondary. "****** DEMO - www.ebook-converter.com*******"

Primary membership groups include all those with which people interact regularly in an informal, face-to-face manner, such as family, friends and co-workers. By contrast, people associate with secondary membership groups less consistently and more formally. These groups may include sports clubs, professional groups and religious groups. Figure 3.4 Types of reference groups

Consumers are also influenced by many indirect, nonmembership reference groups that they do not belong to. Aspirational reference groups are those that a person would like to join. An example is the aspiration to become a professional cricketer. To join an aspirational group, a person must at least conform to the norms of that group. (Norms are the values and attitudes deemed acceptable by the group.) Thus, a person who wants to be elected to public office may begin to dress more conservatively, as other politicians do. He or she may go to many of the restaurants and social engagements that city and business leaders attend and try to play a role that is acceptable to voters and other influential people. A teenager, on the other hand, may dye his hair, experiment with body-piercing and tattoos, and listen to alternative music to fit in with the ‘in’ group. "****** DEMO - www.ebook-converter.com*******"

Similarly, a student who has just qualified as a chartered accountant is likely to exchange his earring for the customary grey suit in an attempt to conform to the norms of his chosen profession. Some firms try to position their products or services in a way that makes consumers aspire to be a client. Products or services using a status appeal are typical examples. There are at least seven financial institutions that provide private banking to wealthy South African clients. Absa private bank says: ‘Private banks want to maintain a discreet mystique – they’re aspirational.’43 Non-aspirational reference groups, or dissociative groups, influence our behaviour when we try to maintain distance from these groups. A consumer may avoid buying some types of clothing or cars, going to certain restaurants or stores, or buying a home in a certain neighbourhood in order to avoid being associated with a particular group. Some people may deliberately not drink Black Label from a quart bottle, smoke Lucky Strike cigarettes or wear a white vest with holes in public. However, others will do exactly these things because they identify with a certain reference group. The activities, values and goals of reference groups directly influence consumer behaviour. For marketers, reference groups have three important implications: they serve as information sources and influence perceptions; they affect an individual’s aspiration levels; and their norms either constrain or stimulate consumer behaviour. For example, more than 40 per cent of Americans seek the advice of family and friends when shopping for doctors, "****** DEMO - www.ebook-converter.com*******"

lawyers and car mechanics,44 and South Africans are no different. Individuals are also likely to solicit others’ advice when selecting a restaurant for a special occasion or deciding which movie to see.

7.4 Opinion leaders

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Reference groups frequently include individuals known as group leaders or opinion leaders. These are people who influence others. A school career-guidance teacher who helps a high-school pupil with the choice of a career is an example of an opinion leader. Obviously, it is important for marketing managers to persuade such people to purchase their products or services. Many products and services that are integral parts of our lives today got their initial boost from influential opinion leaders. For example, when tablet computers were first introduced they were embraced by opinion leaders well ahead of the general public. Opinion leaders were also among the first to turn 4x4s into the ‘family vehicle’ of the 1990s.45

>> Strategy When Swedish liquor firm Facile entered the overcrowded vodka market in the UK with its ‘seriously’ brand (spelt with a lower-case ‘s’), it had very little money to spend on advertising and promotion. Facile’s research, however, showed that 43 per cent of people who approach a bar counter have not made up their "****** DEMO - www.ebook-converter.com*******"

mind what drink they are going to order. People behind bars, therefore, have tremendous influence over the buying decisions of their patrons. Facile decided that the barmen in the 12 000 licensed outlets in the UK should be turned into opinion leaders who could recommend their brand to potential buyers. This they did by giving bar owners a financial stake in the success of the ‘seriously’ brand by offering them a 16,7 per cent share in the company.46 Opinion leaders are often the first to try new products and services out of pure curiosity. They are typically activists in their communities, on the job and in the marketplace. Furthermore, opinion leaders tend to be self-indulgent, which makes them more likely to explore new, unproven – but intriguing – products and services. This combination of curiosity, activism and self-indulgence makes opinion leaders trendsetters in consumer markets.47 Opinion leadership is a casual, face-to-face phenomenon and is usually very inconspicuous, so locating opinion leaders can be difficult. As a result marketers, often try to create opinion leaders. They may use high-school cheerleaders to model new summer fashions or civic leaders to promote insurance, new cars and other merchandise. On a national level, firms sometimes use movie stars, sports figures and other celebrities to promote products, hoping they are appropriate opinion leaders. The marketers of sports goods in South Africa give free equipment, such as tennis racquets and cricket bats, to teachers who double up as coaches of sports teams, because they know they can influence the buying "****** DEMO - www.ebook-converter.com*******"

behaviour of school children. Other examples are Ryk Neethling (Tag Heuer watches), Trevor Immelman (Rolex), Lucas Radebe (Aquafresh), Charlize Theron (Dior) and David Beckham (Pepsi). The effectiveness of celebrity endorsements depends largely on how credible and attractive the spokesperson is and how familiar people are with him or her. Endorsements are most likely to succeed if an association between the spokesperson and the product can be established. For example, comedian Bill Cosby failed as an endorser for financial products, but succeeded with such fun products as Kodak cameras. Consumers could not mentally link Bill Cosby with serious investment decisions, but could associate him with leisure activities and everyday consumption. The use of Daryll Cullinan (a former professional cricketer) to advertise Vicotops – ‘the complete mobile office solution’ – may be questioned on similar grounds. Similarly, celebrities’ actions or words can sometimes undermine a brand’s values. For example, when actress Sharon Stone said that an earthquake in China was ‘karma’ for the way the country had treated Tibet, Dior was forced to issue an apology and pull all advertisements in China featuring Sharon Stone. Similarly, the consulting giant Accenture ended its six-year relationship with Tiger Woods following news of his extramarital affairs, stating ‘the company has determined that he is no longer the right representative for its advertising’. Additionally, in the selection of a celebrity endorser, marketers must consider the broader meanings associated with the endorser. Although the endorser may have certain "****** DEMO - www.ebook-converter.com*******"

attributes that are desirable for endorsing the product, he or she may also have other attributes that are inappropriate. A marketing manager can also try to use opinion leaders through group sanctioning or referrals. For example, Mentadent-P toothpaste is ‘recommended by dentists’, and manufacturers such as Hella automotive products refer in their advertising to the fact that they are holders of the South African Bureau of Standards’ ISO 9002 Quality Management System award. Marketers sometimes use endorsements from a variety of organisations rather than from individuals. The sports drink Powerade is marketed as the ‘official sports drink of the Olympic Games’, and MTN is the ‘official supplier of the South African cricket team’. Seeking an endorsement is a form of group opinion leadership. Flora margarine, for instance, claims it is endorsed by the Heart Foundation. Salespeople often ask to use opinion leaders’ names as a means of cultivating greater personal influence in a sales presentation.

7.5 Family The family is the most important social institution for many consumers. The family strongly influences values, attitudes, self-concept and buying behaviour. For example, a family that strongly values good health will have a grocery list that is distinctly different from that of a family that views every dinner as a gourmet event. Moreover, the family is responsible for the socialisation process, the passing down of cultural values and norms to children. Children learn by "****** DEMO - www.ebook-converter.com*******"

observing their parents’ consumption patterns, and will tend to shop in a similar pattern and buy similar products. Decision-making roles among family members tend to vary significantly, depending on the type of item purchased. Family members assume a variety of roles in the purchase process. Initiators are the ones who initiate, suggest or plant the seed for the purchase process. The initiator can be any member of the family. For example, sister might initiate the product search by asking for a new bicycle as a birthday present. Influencers are those members of the family whose opinions are valued. In our example, Mom might function as a price-range watchdog, an influencer whose main role is to veto or approve price ranges. Brother may give his opinion on certain styles and brands of bicycles. The decision-maker is the member of the family who actually makes the decision to buy or not to buy. For example, Dad may choose the final brand and model of bicycle to buy after collecting further information from sister about cosmetic features, such as colour, and imposing additional criteria of his own, such as durability and safety. The purchaser (probably Dad or Mom) is the one who actually exchanges money for the product. Finally, the consumer is the actual user – sister, in the case of the bicycle. Marketers should consider family purchase situations along with the distribution of the consumer and decisionmaker roles among family members. Ordinary marketing views the individual as both decision-maker and consumer. Family marketing adds three other possibilities: sometimes more than one decision-maker is involved; sometimes more than one consumer is involved; and sometimes the "****** DEMO - www.ebook-converter.com*******"

decision-maker and the consumer are different people. Children today can have considerable influence over the purchase decisions of their parents (see Chapter 2). In many families, with both parents working and with limited time available, children may be encouraged to participate in decision-making. In addition, children in single-parent households become more involved in family decisionmaking at an earlier age than children in two-parent households. Children are especially influential in decisions about food. Children often help decide where the family goes for fast food, provide input into the kinds of food the family eats at home, and many even influence the specific brands that their parents buy. Finally, children influence purchase decisions for toys, clothes, holidays, recreation and motor vehicles – even though they are usually not the actual purchasers of such items.

7.5.1 Family life cycle The life cycle stage of a family can also have a significant impact on consumer behaviour. The family life cycle is an orderly series of stages through which consumers’ attitudes and behavioural tendencies evolve, through maturity, experience and changing income and status. Marketers often define their target markets in terms of family life cycle. For instance, young singles spend more than average on electronic devices such as cell phones and computers, education and entertainment. New parents typically increase their spending on healthcare, clothing, housing and food, whereas they decrease their spending on "****** DEMO - www.ebook-converter.com*******"

their own education, entertainment and transport. Households with older children spend more on food, entertainment (such as holidays), personal-care products and their children’s education, as well as cars and petrol. After their children leave home, spending by older couples on travelling, vehicles, women’s clothing, healthcare and long-distance phone calls typically increases. Marketers should also be aware of the many non-traditional life cycle paths that are common today, which provide insights into the needs and wants of such consumers as divorced parents, lifelong singles and childless couples.

7.6 Social class

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A social class is a group of people who are considered nearly equal in status or community esteem, who regularly socialise among themselves both formally and informally and who share behavioural norms. South Africa, like other societies in the rest of the world, has a social class system. In some countries, the class system is fairly rigid. In Japan, for instance, people of unequal status do not sit together during meetings, and the Japanese language contains expressions to be used only when addressing those of a higher status. The UK is a highly class-conscious country, and consumption patterns are often preordained by family background and one’s inherited position. The upper classes have typically tended go to educational establishments such as Oxford, Cambridge and Eton. Wealthy young men are referred to as ‘Hooray Henrys’ and like to engage in expensive pastimes, such as playing polo. "****** DEMO - www.ebook-converter.com*******"

A number of techniques have been used to measure social class, and a number of criteria have been used to define it. One view of the contemporary status structure in the United States is discussed below: •

•

Upper class: The upper class consists of the very rich and the well-to-do. Upper-class individuals seem to think of themselves as nice-looking people and are concerned with personal appearance. They are more confident, outgoing and culturally orientated than people of other social classes. They also seem a bit more permissive and are willing to tolerate alternative views. The upper social classes are more likely than other classes to try to contribute something to society – for example, by volunteer work for charitable organisations, or active participation in civic affairs. In terms of consumer buying patterns, the affluent are more likely to own their own home, purchase new cars and 4x4s, and are less likely to smoke. The very rich typically spend more on owned holiday homes, overseas holidays, housekeeping and gardening services than other social classes.48 Middle class: Middle-class consumers have a particular perspective on life. Attaining goals and achieving status and prestige are important. Compared with the lower classes, members of the middle classes have a stronger orientation towards society in general, and towards peers in particular. Apparently, the middle-class lifestyle is more dynamic than the relatively static lifestyle of the lower classes. Educational attainment seems to have the biggest impact on a person’s social and economic status.

"****** DEMO - www.ebook-converter.com*******"

•

•

People who fall into the middle class live in the gap between the haves and have-nots. They aspire to the lifestyle of the more affluent, but are constrained by the economic realities and cautious attitudes that they share with the working class.49 Working class: This group is a distinct subclass of the middle class. The working-class person depends heavily on relatives and the community for economic and emotional support. Members of this social subclass rely on relatives for tips on job opportunities, for advice on purchases and for help in times of trouble. The emphasis on family ties is one sign of this group’s intensely local view of the world. For instance, working-class people prefer the local news far more than middle-class audiences, who show greater enthusiasm for national and international coverage. Working-class people also holiday closer to home and are more likely to stay with relatives when they do go on holiday. Lower class: Lower-class members typically fall at or below the poverty level. This social class has the highest unemployment rate, and many individuals or families are subsidised through the welfare system. Many are illiterate, with little or no formal education. Lower-class members also have poorer physical and mental health and a shorter lifespan than members of other classes. Compared with more affluent consumers, lower-class consumers have poorer diets and typically purchase staple of foods when they shop.

Lifestyle distinctions between the social classes are greater than the distinctions within a given class. The most "****** DEMO - www.ebook-converter.com*******"

significant separation among the classes is between the middle and lower classes. It is here that the biggest gap in lifestyles is evident. Marketers do not believe that any class is superior to another, but are interested in social class for a number of reasons. Different social classes have different buying and consumption patterns. Marketers must, therefore, market products and services differently to the different class groups. For instance, social class often indicates which medium to use for advertising. Suppose an insurance firm wants to sell its policies to middle-class families. It may advertise during the local evening news because middleclass families tend to watch more television than other classes. However, if the firm wishes to sell more insurance policies to individuals in higher social classes, it may instead place a print advertisement in a business publication, such as the Financial Mail, or an upmarket magazine, such as Elle, which are read by more educated, affluent people. Social class can also indicate to marketers where certain types of consumers shop. Wealthy, upper-class shoppers tend to frequent expensive stores, such as Woolworths, for food and boutiques for clothing – places where members of the other classes may feel uncomfortable. Marketers also know that middle-class consumers regularly visit large shopping centres. Therefore, marketers with products to sell to the middle class may decide to distribute their products through large shopping centres, such as Tyger Valley and Canal Walk in Cape Town, and Eastgate in Bedfordview, Johannesburg. Although social class is becoming less of an indicator of "****** DEMO - www.ebook-converter.com*******"

purchase behaviour in some markets, in many overseas markets social class has become a key determinant. Russia’s transition to a market economy, for instance, has created a distinct class structure with upper-, middle- and lower-class markets. While the super-rich who capitalised on the emerging market’s opportunities appeared almost instantly, lately there have been a surprising number of Russians who, despite high inflation and a weak currency, are working harder, earning more and living better. These middle-class Russians buy consumer goods ranging from televisions to automatic breadmakers, and are bolstering Russia’s political and economic stability. At the core of Russia’s new middle class are its young professionals and small-business owners in the big cities. Russia’s middle class has become the prime target for consumer goods marketers, such as Sony Corporation of Japan, which views Russia as one of its prime growth markets for colour televisions.50

8. The influence of the purchase situation LO17 on buying decisions Individual consumers’ buying behaviour is affected by the purchase situation they find themselves in at the time of purchasing (see Figure 3.1). Three variables that can play a role are purchase reason, time influences, and physical surroundings: •

Purchase reason affects buying. Why a consumer makes a purchase can affect buying behaviour. For "****** DEMO - www.ebook-converter.com*******"

•

•

example, a person buying a watch to wear during longdistance running will buy a different type of watch as a gift for his mother’s 70th birthday. Time affects buying. Time influences a purchase situation. When consumers make a purchase, and the time that they have available for shopping, both influence their behaviour. A Valentine’s Day dinner (see Reader 17 ‘Valentine’s Day sales expected to soar’) is different from a quick meal before a rugby match. Physical surroundings can affect buying behaviour. The excitement of an auction may stimulate impulse buying, for example. And surroundings may discourage buying too. For example, some people don’t like to stand in a checkout queue in a supermarket where others can see what they are buying – even if the other shoppers are complete strangers. In the case of medical services, and when applying for a loan at a bank, the physical environment ought to provide privacy. If not, many consumers will simply walk away.

Needs, benefits sought, attitudes, motivation and even how a consumer selects certain products all vary depending on the purchase situation. So different purchase situations may require different marketing mixes – even when the same target market is involved.

READER 16 >> Online shopping means no impulse buying For consumers, one of the great things about shopping online is bypassing the "****** DEMO - www.ebook-converter.com*******"

queue to check out. For producers of the candy, magazines and drinks often sold there, it’s a problem. In Britain, the country where e-commerce is most popular, about 13 percent of people do all or most of their grocery shopping online. Yet this only accounts for 5 percent of overall spending, suggesting consumers spend more when they visit a store. That is because online shoppers search for what they need, usually sticking close to their shopping lists. They don’t spontaneously buy magazines they opened while waiting to pay, or chocolate to eat on the go. Elizabeth Clark, a 40-year-old teacher in Liverpool, England now does most of her shopping on the Internet, and says she ends up buying fewer sweets, newspapers, toys and wine. ‘In the supermarket, obviously you walk past it and you see a special offer and you think “Oh, I’ll have that”,’ she said. Even though retailers try to do the same thing by flagging special offers at online check-out, it doesn’t usually work. ‘I always just press ‘next, next, next, next’ without even reading them, deliberately, because I don’t want to be tempted.’ Companies most at risk are Mondelez International, Mars Inc and Nestle, the top three candy makers, soda makers like Coca-Cola and PepsiCo, and magazine publishers like Time Warner and Hearst Corp. The latest survey of European shoppers by IRI found that 73 percent spent more time planning shopping in order to avoid non-essential purchases amid the economic slowdown. ‘Shoppers are reducing their impulse purchasing,’ said Cristina Lazzaroni, who monitors the confectionary market for IRI in Italy, where online shopping is less of a habit. And when they do buy chocolate at stores, more Italian shoppers are buying larger take-home tablets instead of single-serve snacks, Lazzaroni said, noting that the shift can hurt the bottom line as smaller packages often carry higher margins. SOURCE: Adapted from Geller, M. and Thomasson, E. 2013. Online shopping means no impulse buying. Business Day, 28 April, p. 19

READER 17 >> Valentine’s Day sales expected "****** DEMO - www.ebook-converter.com*******"

to soar Tough times and mounting personal debt will not deter enthusiastic lovers celebrating Valentine’s Day on Thursday from saying ‘I love you’ in style. ‘There are 30 to 40 per cent more customers than last year this time,’ e-commerce firm Netflorist MD Ryan Bacher said on Tuesday. Netflorist sends bouquets, arrangements, gifts, perfumes and a range of jewellery to ‘loved ones, friends and associates both locally and around the world’. Over the next two days the company will deliver more than 18 000 orders nationally. ‘The standard bouquet of red roses is still the most popular and costs R399. There are more men using Netflorist than women, but women are buying the more expensive gift hampers for their men,’ Mr Bacher said. Wednesday and Thursday is so busy that the company had hired an extra 800 temporary workers to cope with delivery, he said. And for those who still prefer to talk the talk, cards are still big. Hallmark expects to sell 145-million cards and 151-million to change hands globally. The company reportedly has 1 400 variations of Valentine’s Day greeting cards. SOURCE: C. Goko. 2014. Valentine’s Day sales expected to soar. Business Day, 13 February 2014, p. 5

9. Buying ‘new-to-the-world’ products

LO18

When consumers buy brand-new products that have not been on the market before (e.g. an iPod Touch), a buying process is used which is slightly different from the one described earlier in the chapter (based on Figure 3.1). It is called the adoption process, and consists of six basic steps, namely: "****** DEMO - www.ebook-converter.com*******"

• • • • • •

Awareness – the consumer becomes aware of the new product, but does not have any details Interest – if interested, the consumer will start collecting general information on an informal basis Evaluation – a mental trial follows to assess its possible need-satisfaction properties Trial – experimental use, such as a test drive Decision – the consumer adopts or rejects the product Confirmation – the adopter continues to rethink the decision. Was it the right decision?

These steps are discussed in more detail in Chapter 9.

10. Buying behaviour and technology

51

Lastly, we have to consider the impact of modern technology on consumer behaviour. Some argue that technology is breeding a new type of consumer. Empowered by the Internet, consumers are increasingly taking control of the buying process. It is already commonplace for a consumer to walk into a computer shop and pull out his phone, connect to the Internet, compare the price with the price in another shop (using a website such as Takealot.com) and instantly order the other shop’s merchandise. That, says McCann-Erickson’s Don Dillon, is one of the ways in which technology is ‘creating a world unlike any we have ever known’. According to Dillon, the new reality is a consequence of the connectivity of the Web: "****** DEMO - www.ebook-converter.com*******"

‘Information can now be transferred and turned into knowledge instantly from everywhere. There are few competitive technologies, tools, product insights or knowledge areas in London or New York that are not available in Buenos Aires or Bangkok. Because so many companies have access to this technology, the speed at which they need to compete has dramatically increased. But the central motivation of the purchasing model remains the same. Consumers are drawn to value. This has always been a value based on cost, quality and convenience. But technology has driven the perception of value to embrace new dimensions. Consumers want to buy now. We’ve never before dealt with such powerful consumers. And because they have more control, they expect more personal attention.’

Multicultural marketing in South Africa South Africa is described as the ‘rainbow nation’ in an effort to reflect the diversity of its people. Multicultural marketing is used in South Africa as a means of improving the effectiveness of marketing communication programmes by simultaneously targeting a number of different South African cultural groups. However, effective execution of this strategy requires an indepth understanding of cross-cultural differences and similarities, as well as socio-cultural values. Compounding this challenge for marketers is that, in many instances, there are different languages spoken by the diverse cultural groups in South Africa. One trait that advertisers feel is generic amongst all South Africans is their sense of humour. However, what can be funny to one cultural group may be offensive to another. Consider, for example, the Castrol advertisement where a white man places Castrol cans under his bed as protection against the mythical creature in Xhosa culture, the Tokoloshe. Although white viewers found this advertisement funny, many Xhosa people found the image inappropriate (the Tokoloshe mainly attacks women and not men) and perceived the advertiser as poking fun at their culture. It follows that marketers also need to be careful in their use of language and make sure that cultural groups are not alienated by what they perceive to be the offensive use of their language. However, this is no easy task, as language is a dynamic medium in South Africa. In addition to the 11 official languages, a ‘12th language’ is emerging known as ‘Scamto’. This ‘language’ (formerly known as "****** DEMO - www.ebook-converter.com*******"

‘tsotsi taal ’) comprises a mix of languages, with nicknames for beer, cars and weapons, and has become the language of choice for South Africa’s black urban youth. For example in ‘Scamto’ the latest word for a Mercedes-Benz is a ‘TY’ (Tony Yengeni) and for a 3 Series BMW, a ‘G-string’ (because of the look of the front grill). SOURCE: http://www.iol.co.za (accessed 25 June 2010)

QUESTIONS 1 2

Why is it important to take into consideration cultural influences when designing advertising strategies? Can you list examples when South African firms or brands suffered reputational damage due to their failure to take cognisance of cultural perspectives of advertising?

KEY CONCEPTS Aspirational reference group: a group that someone would like to join. Attitude: a learned tendency to respond consistently to a given object, such as a brand. Belief: an organised pattern of knowledge that an individual holds as true about his or her world. Cognitive dissonance: inner tension that a consumer experiences after recognising an inconsistency between behaviour and values or opinions. Consumer behaviour: the study of how consumers make purchase decisions and how they use and dispose of the purchased goods or services. Consumer decision-making process: the step-by-step process used by consumers when buying goods or services. Culture: the set of values, norms, attitudes and other meaningful symbols that shape human behaviour, as well as the artefacts, or products, of that behaviour as they are transmitted from one generation to the next. Evoked set (consideration set): a group of brands resulting from an information search, from which a buyer can choose. Extensive decision-making: the most complex type of decision-making exhibited by consumers buying unfamiliar, expensive or infrequently bought items; requires use of several criteria for evaluating options and much time for

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seeking information. External information search: seeking information in the outside environment. Ideal self-image: the way an individual would like to be. Internal information search: the process of recalling information stored in the memory. Involvement: the amount of time and effort a buyer invests in the search, evaluation and decision processes of consumer behaviour. Learning: the process that creates changes in behaviour through experience and practice. Lifestyle: a mode of living identified by a person’s activities, interests and opinions. Limited decision-making: the type of decision-making exhibited by consumers buying regularly purchased, inexpensive goods and services; requires moderate search and decision time. Marketing-controlled information source: a product information source that originates with marketers promoting the product. Maslow’s hierarchy of needs: a popular theory of motivation that arranges needs in ascending order of importance – physiological, safety, social, esteem and self-actualisation. Motive: the driving force that causes a person to take action to satisfy specific needs. Non-aspirational reference groups: groups that influence people’s behaviour when they try to maintain distance from them; also known as dissociative groups. Non-marketing-controlled information source: a product information source that is not associated with advertising or promotion. Norms: the values and attitudes deemed acceptable by a particular group. Opinion leaders: group leaders who influence others. Perception: the process by which we select, organise and interpret stimuli into a meaningful and coherent picture. Personality: ways of organising and grouping the consistencies of an individual’s reactions to situations. Personality reflects a person’s traits, attitudes and habits. Primary membership groups: all groups with which people interact regularly in an informal, face-to-face manner, such as family, friends and co-workers. Problem recognition: result of an imbalance or discrepancy between actual and desired states. Real self-image: how an individual actually perceives himself or herself. Reference groups: all formal and informal groups that influence the buying behaviour of an individual. Routine response behaviour: a type of decision-making exhibited by consumers

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buying frequently purchased, low-cost goods and services; requires little search and decision time. Secondary membership groups: groups with which people associate less consistently and more formally, such as clubs, professional groups and religious groups. Selective distortion: the phenomenon whereby consumers change or distort information that conflicts with their feelings or beliefs. Selective exposure: the process whereby a consumer notices certain stimuli and ignores other stimuli. Selective retention: remembering only information that supports personal feelings or beliefs. Self-concept: how consumers perceive themselves (self-perception). Social class: a group of people who are considered nearly equal in status or community esteem, who regularly socialise among themselves both formally and informally and who share behavioural norms. Socialisation process: passing down cultural values and norms to children. Stimulus: any unit of input affecting the five senses. Stimulus discrimination: learning to differentiate among similar products. Stimulus generalisation: a learning process that occurs when one response is extended to a second stimulus similar to the first. Subculture: a relatively homogeneous group of people who share elements of the overall culture and cultural elements unique to their own group. Value: an enduring belief that a specific mode of conduct is personally or socially preferable to another. Want: an unfulfilled need that someone has determined will be satisfied by a particular product or service.

REFERENCES 1 Stones, L. 2009. Ease of use trumps price when choosing a cellphone. Business Day, 16 September 2009, p. 17. 2 Henderson, A. 1996. Coming in tomorrow’s car seat: Storage, built-in safety belts and surround sound. Wall Street Journal, 22 January, pp. B1 and B8. 3 Reitman, V. & Stern, G. 1995. Adapting a US car to Japanese tastes. Wall Street Journal, 26 June 1995, pp. B1 and B6. 4 Sundaram, D.S. & Richard, M.D. 1995. Perceived risk and the information acquisition process of computer mail-order shoppers. In Engelland B.T & Smart D.T (eds) 1995. Proceedings of the Southern Marketing Association Conference, pp. 322–326. 5 Bruce, E.D. & Fullerton, S. 1995. Discount pricing as a mediator of the

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6

7 8

9 10 11

12 13 14

15 16 17 18

19

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consumer’s evoked set. In Thompson D.L. & Swift C.O. (eds) 1995. Proceedings of the Atlantic Marketing Association Conference, pp. 32–36. Shuptrine, F.K. 1995. Warranty coverage: How important in purchasing an automobile. In Engelland B.T & Smart D.T. (eds) 1995. Proceedings of the Southern Marketing Association Conference, pp. 300–302. Tiger returns to its basic stripes. Food and Beverage Reporter, January– February 2010, p. 24. Tom, G. 1987. Cueing the consumer: The role of salient cues in consumer perception. Journal of Consumer Marketing, spring, pp. 23–27; Meyers-Levy, J. & Peracchio, L.A. 1995. Understanding the effects of color: How the correspondence between available and required resources affects attitudes. Journal of Consumer Research 22(2), September, pp. 121–138. If the price is right, the wine is too. Cape Times electronic edition, 25 February 2008. Gibson, R. 1994. Anheuser-Busch makes price moves in bid to boost sales of flagship brand. Wall Street Journal, 28 February 1994, p. A7A. Boulding, W. & Kirmani, A. 1993. A consumer-side experimental examination of signaling theory: Do consumers perceive warranties as signs of quality? Journal of Consumer Research, June, pp. 111–123. Pavia, T.M. & Costa, J.A. 1993. The winning number: Consumer perceptions of alpha-numeric brand names. Journal of Marketing, July, pp. 85–98. Media release by Ogilvy Public Relations on the Sunday Times ’Generation Next survey, 30 May 2014. Wilson, E.J. 1987. Using the Dollarmetric Scale to establish the just meaningful difference in price. In Douglas S. et al. (eds), Proceedings of the AMA Educators’ Conference. Chicago: American Marketing Association, p. 107. Ntloko, M. 2009. Slow sales of tickets force FIFA to adapt. Business Day electronic edition, 14 May 2009. Slabber, E. 2009. A tippling good year: Excellent wines for 2009. Indwe, the inflight magazine of SA Express, April 2009, p. 105. Murray, M. 1996. Americans eat up Vitamin E supplies. Wall Street Journal, June 1996, pp. B1 and B8. Lipin, S., Coleman, B. & Mark, J. 1994. Pick a card: Visa, American Express, and MasterCard vie in overseas strategies. Wall Street Journal, 15 February 1994, pp. A1 and A5. Goldman, K. 1994. BMW banks on affordability and safety. Wall Street Journal, 17 January 1994, p. B3; Goldman, K. 1993. BMW shifts gears in new ads by Mullen. Wall Street Journal, 21 May 1993, p. B10. Shirouzu, N. 1995. Flouting rules sells GE fridges in Japan. Wall Street Journal, 31 October 1995, pp. B1 and B2.

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21 Adapted from: Oros targets kids and moms. In ‘Zapping the target market’, supplement to the Financial Mail, 20 November 1998, p. 15. 22 Cant, M. & Machado, R. 1998. Marketing success stories. Cape Town: Oxford University Press Southern Africa. 23 Ono, Y. 1994. Broadening war against smoking proves a blessing to gum makers. Wall Street Journal, 29 March 1994, p. B9. 24 Perreault, W.D. & McCarthy, E.J. 1996. Basic marketing (12th editon). Chicago: Irwin. 25 Jordan, M. 1996. In rural India, video vans sell toothpaste and shampoo. Wall Street Journal, 10 January 1996, pp. B1 and B3. 26 Wilkie, M. 1995. Names that smell. American Demographics, August 1995, pp. 48–49. 27 Rifon, N.J. & Ziske, M.C. 1995. Using weight-loss products: The roles of involvement, self-efficacy and body image. In Stern B.B. & Zinkhan G.M (eds) 1995. Proceedings of the AMA Educator’s Conference. Chicago: American Marketing Association, pp. 90–98. 28 Ono, Y. 1994. Home hair-color sales get boost as baby boomers battle aging. Wall Street Journal, 3 February 1994, p. B6; Hwang, S.L. 1993. To brush away middle-age malaise, male baby boomers color graying hair. Wall Street Journal, 2 March 1993, pp. B1 and B10. 29 Murray, M. 1996. GNC makes ginseng, shark pills its potion for growth. Wall Street Journal, 15 March 1996, pp. B1 and B3. 30 Bisseker. C. 1998. Sorry, you can’t afford to feel that good. Financial Mail, 13 November 1998, p. 42. 31 Sullivan, A. 1995. Mobil bets drivers pick cappuccino over low prices. Wall Street Journal, 30 January 1995, pp. B1 and B4. 32 Du Plessis, P.J & Rousseau, G.G. 1999. Buyer behaviour: A multi-cultural approach. Cape Town: Oxford University Press Southern Africa. 33 Mbigi, L. & Maree, J. 1995. Ubuntu, the spirit of African transformation management. Randburg: Knowledge Resources. 34 Schiffman, L.G. & Kanuk, L.L. 1997. Consumer behavior (sixth edition). New Jersey: Prentice Hall, pp. 426–427. 35 Molebeledi, P. 2003. Smooth Tony’s career hits the skids. Business Day, 6 March 2003. 36 Renton, M. 1996. Corporate values that are more than cosmetic. People Dynamics, November/December, pp. 25. 37 Ono, Y. 1995. Kraft hopes Hispanic market says cheese. Wall Street Journal, 13 December 1995, p. B7. 38 Reilly, P.M. 1995. How do you say ‘bestseller’ in Spanish? Wall Street Journal, 4 January 1995, pp. B1 and B6. 39 Schiffman, L.G.S. & Kanuk, L L. 1997. Consumer behavior (sixth edition). New

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Jersey: Prentice Hall, p. 440. Can South Africa be treated as if it is one market? 1991. The Black Market Report 6(23), September 1991, p. 8. University of Cape Town, Unilever Institute of Strategic Marketing. 2013. 4 Million and Rising presentation. Cape Town: University of Cape Town. Huisman, J. 2014. Levi Strauss sets sights on black middle class. Business Day, 18 November, p. 2. Theobald, S. 2000. Service and offshore flavour are the bait for the super-rich. Financial Mail, 17 November 2000, p. 104. Walker, C. 1995. Word of mouth. American Demographics, July 1995, pp. 38– 44. Maximizing the market with influentials. American Demographics, July 1995, pp. 42–43. Thornhill, J. 2000. Trying to make selling spirits seriously easy. Financial Times, 11 October 2000, p. 10. Maximizing the market with influentials. American Demographics, July 1995, pp. 42–43. Crispell, D. 1994. The very rich are sort of different. American Demographics, March 1994, pp. 11–13. Crispell, D. 1994. Middle Americans. American Demographics, October 1994, pp. 28–35. Liesman, S. 1995. Rising prosperity: More Russians work harder, boost income, enter the middle class. Wall Street Journal, 7 June 1995, pp. A1 and A6. Koenderman, T. 2000. Technology breeds a new consumer. Financial Mail, 2 June 2000, p. 87.

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CHAPTER

04

Analysing the competitive situation

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Distinguish between the four levels at which competitive activity can occur. 2 Differentiate between the customer-based and the strategicgroup approaches to identify competitors. 3 Use customer-based approaches to identify competitors. 4 Use the strategic-group approach to identify competitors. 5 Compare the different competitive situations faced by marketers in terms of the four industry structures. 6 Use the five competitive forces to analyse the competitive structure of an industry. 7 Discuss the value of analysing key competitors. 8 Describe the process of analysing current competitors. 9 Describe the process of analysing potential competitors. 10 Compare a firm with its key competitors using the key success factors of the industry. 11 Highlight the typical reaction patterns of firms in a competitive market. 12 Describe the factors that determine the extent of direct rivalry in a competitive market. "****** DEMO - www.ebook-converter.com*******"

13 Advise a firm on which competitors to attack and which to avoid. 14 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 15 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice The launch of Ariel has sent Unilever into a froth Household goods giants Unilever and Procter & Gamble have gone to war in SA over laundry detergents. Unilever has enjoyed market dominance for years through brands like Omo, Surf and Skip. But now P&G has entered the market aggressively with Ariel and the marketing gloves are off. Since Ariel’s launch Unilever has been forced to shuffle its marketing strategy to protect its market share. ‘In the short time Ariel has been in SA, it has quickly achieved awareness in consumers’ minds,’ says Craig Page-Lee, MD of outdoor media agency Posterscope. Its marketing has been particularly effective in the out-of-home sector, which includes billboards, experiential and brand activations. It is also running a TV campaign. To counter all this, Unilever has had to switch marketing spend from other parts of its marketing budget. Page-Lee says Ariel has won market share through "****** DEMO - www.ebook-converter.com*******"

its distinctive brand identity and resonance with a broader spread of buyers. ‘The power of its green branding is very visible and has made a big impact,’ he says. ‘It has positioned itself to a cross-section of society, not just the lower-income market (Surf and Omo) or the higher segments (Skip).’ Ariel spokesman Khululiwe Mabaso says that in its first three months in SA the product ‘has received very positive feedback’. Justin Aspey, Unilever’s vicepresident for brand building in the homecare division, is coy about the group’s marketing response. He says Unilever will increase its advertising spending, but not on what. It is South Africa’s biggest advertiser, having spent R 1,8bn in 2012. SOURCE: Mokgata, Z. 2013. War of the soaps. Financial Mail, 19–24 July 2013, p. 58

QUESTIONS 1

How do you think Unilever should respond to the competitive threat of Ariel?

1. Introduction In Chapter 1, the importance of identifying and utilising opportunities to ensure the long-term survival and growth of the firm was emphasised. In Chapter 2, we pointed out that these opportunities manifest themselves in the so-called marketing environment. In other words, progressive firms "****** DEMO - www.ebook-converter.com*******"

need to scan the external environment continually in search of opportunities to utilise profitably. Unfortunately, it is not only opportunities that are found in the external environment, but also threats. One of the main threats for any firm is its competitors. As a result of competition or pending competition, a new firm should assess the likely impact of competition before it decides to invest resources in an attempt to utilise an opportunity. By the same token, existing firms also need to continually assess the likelihood of new competitive forces emerging in their industry and markets that may threaten their profitability and survival. Today’s competitive markets are populated by consumers with changing and increasingly diverse needs. The same markets are crowded with competitors whose intensifying rivalry inevitably reduces the overall prospects for profitability for all industry players. Private road hauliers, for instance, have significantly reduced the profitability of Transnet. And private courier firms have harmed the Post Office’s profitability. The competition offered by online music has harmed the profitability of the music retailer Musica to such an extent that it has been forced to close many of its stores. An understanding of competitive forces is critical, therefore, when considering the choice of opportunities to utilise in market segments that offer exceptional profit potential. From a strategic point of view, firms need to be sensitive to and detect, understand, and possibly participate in new forms of competition as they emerge. Unfortunately, the temptation to keep on doing things the way they have always done them is too comforting for many firms, especially if it "****** DEMO - www.ebook-converter.com*******"

has been profitable for a long time. As a result, newer, more innovative, alternatives are often overlooked or ignored. To avoid that trap, one has to be sensitive to new business forms by studying them as they emerge, even if they are small or very different in concept. A regular and thorough competitor analysis provides one vehicle for doing so. This chapter examines the role that competition plays in marketing and marketing planning. It also provides guidelines for a so-called competitive analysis, which ought to be a key component of the strategic marketing plan of all firms (see Chapter 14).

2. Identifying competitors

LO1

It would seem a simple task for a firm to identify its competitors. However, it is not as straightforward as it appears. The range of actual and potential competitors faced by a firm is often far broader than appears to be the case at first sight. Therefore, it is important to acknowledge the difficulties of defining the boundaries of an industry. It is also important to realise that most firms are more likely to be taken by surprise and hit hard by latent competitors than by current competitors whose patterns of marketing behaviour are largely predictable. It is against this background that a firm should view competition operating at four levels, ranging from narrow to broad:1 •

Level 1: Level 1 competition consists only of those firms that offer a similar product or service to the same target

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•

•

•

market (see Reader 18 ‘Lesson in selling’ concerning Zara’s entry into the clothing retail market). These firms are known as direct competitors. For example, Beacon competes directly against Nestlé and Cadbury in the market for chocolate sweets. Vodacom knows that MTN, Cell C and Virgin Mobile are its major competitors, Defy knows that LG is a major competitor, and Apple knows Samsung is a major competitor in the cell phone market. But the range of a firm’s actual and potential competitors is in fact much broader, as illustrated by levels 2 to 4. Level 2: Competition can emanate from all firms operating in the same product or service category. These firms are known as indirect competitors. For example, Beacon also competes against manufacturers of nonchocolate sweets, such as Cadbury’s Endearmints, Chappies or Halls. Level 3: This level of competition consists of all firms that manufacture or supply products and services that satisfy the same need. Chocolate manufacturers also compete against, for example, manufacturers of snacks (Simba), ice cream (Ola) and dried fruit (Safari). In a similar vein, long-distance coach operators compete not just against each other, but also against railways, cars, airlines and motorcycles. Level 4: Competition is made up of all firms competing for the same spending power (e.g. sweets vs soft drinks, tea, coffee or takeaways).

READER 18 >> Lesson in selling "****** DEMO - www.ebook-converter.com*******"

Spanish retailer Zara, a company in the Inditex Group, entered the SA clothing market with a bang when it opened a store in Sandton City’s new Protea Court in November 2011. The 2 700 m2 store is the trendy retailer’s largest worldwide, and sold all its floor stock on debut. As a result, there is definitely ‘a lot of nail biting’ among local players, says Flux Trends trend analyst Dion Chang. Others agree. ‘Zara will clearly have an impact on the retailers,’ says Nedbank Group retail analyst Syd Vianello, adding that it will initially affect the established retailers’ growth more than their profits. The company has a unique business model, using the customer as the main business driver. Customer feedback is used to direct Zara’s 250-strong design team, says Chang. New stock is delivered twice weekly to each store, customised for different cultures, shopping habits, local environments and climates, and the shops are in prime locations in major shopping centres. When it comes to consumer loyalty, Chang says, ‘I don’t think there is much loyalty at all.’ Little wonder that established retailers may be nervous – Zara’s fresh approach to customer care could redefine the market. Chang says the ‘SA consumer has been underestimated’. Decisions about what is or is not too outrageous have been made for shoppers for too long. Evidently, locals have reacted positively to the liberty and respect Zara provides. SOURCE: Gorecki, R. 2011. Lesson is selling. Financial Mail, 22 December 2011

Often a firm is more likely to be hurt by new competition or new kinds of technology than by current, known competitors (see Specsavers advertisement on page 130). In recent years, many businesses have failed, for example, to consider the Internet and the capabilities this medium offers to potential competitors. For instance, a few years ago, the US book store chains Barnes & Noble and Borders were competing to see who could build the most mega-stores, where book browsers could sink into comfortable couches "****** DEMO - www.ebook-converter.com*******"

and sip cappuccino. However, while these massive chains were deciding which books and coffee to stock in their cafés, Jeffrey Bezos was building an online empire called Amazon.com. Bezos’s innovative new cyberstore had the advantage of offering an almost unlimited selection of books without the expense of stocking inventory. Now both Barnes & Noble and Borders are playing catchup in building their own online stores. ‘Competitor myopia’ – focusing on current competitors rather than latent ones – has the very real potential of rendering some businesses and even whole industries extinct.2 This is exactly what a competitor analysis attempts to avoid. The term ‘competition’ defies definition because the view of competition held by many different groups (e.g. economists, government officials and businesspeople) varies. Most firms define competition in crude, simplistic and unrealistic terms; some firms fail to identify the true sources of competition; others underestimate the capabilities and reactions of their competitors.3 When the business climate is stable, a shallow outlook towards the competition might work over the short term, but in an everchanging business environment, marketing strategies must be competitively oriented. A competitor analysis starts by identifying current as well as potential competitors. There are two very different ways of identifying current competitors: the customer-based approach and the strategic-group approach.4

2.1 Approaches to identifying competitors "****** DEMO - www.ebook-converter.com*******"

LO2

The first approach to identifying potential competitors examines the perspective of the potential customer who must make choices among the products, brands or services of competing firms. The customer-based approach, sometimes also referred to as a market perspective of competition,5 groups competitors together according to the degree to which they compete for a buyer’s choice. The second approach, on the other hand, attempts to place competitors in strategic groups on the basis of their competitive strategy.

READER 19 >> Is cycling the new golf? The notion of competition can be implicit in a number of different contexts, one of which is the business of sport. The trendy (and sometimes garish) outfits of spandex-clad cyclists, compared to the traditional and conservative values typically associated with golfers, seem to suggest that these two sports have totally different target markets. However, arguably the fastest-growing sport in South Africa, cycling has taken the nation by storm and many believe it will usurp the prized position long-held by golf as the corporate sport of choice. Conservative estimates put the value of the cycling-as-sport industry in South Africa at R600m. But Stephen Reardon, CEO of More Cycle, which houses Cycle Lab, thinks this figure is around R1bn. ‘The year-on-year growth of this industry is certainly in double-digit figures, while we’ve seen the numbers of registered golfers remain relatively static with participation trends flat lining,’ Reardon says. ‘Our general view is that cycling offers double the opportunity that golf does, if you look at the participants and what they are spending.’ SOURCE: Adapted from Barry, H. 2014. Cycling is the new golf. Money Web, 17 January 2014. http://www.moneyweb.co.za/moneyweb-business-of-sport/cycling-is-the-new-golf (Accessed on 2 August 2014)

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Once competitors have been identified, the analyst must try to understand both the nature of the competitors and their strategies. Particularly important is a critical analysis of the strengths and weaknesses of each competitor or strategic group of competitors.

2.1.1 Using a customer-based approach to identify competitors

LO3

The essence of customer-based approaches5 is that they give full recognition to the broader range of products or services that are capable of satisfying customers’ needs. Customerbased approaches to identifying competitors regard all firms or organisations that satisfy the same customer needs as competitors. Using this approach, a consumer who buys a motor vehicle buys private transport, and all firms that satisfy the need for privately-owned transport are competitors. In other words, firms that market bicycles, scooters and motor bikes are, therefore, regarded as competitors, not just other motor vehicle manufacturers. By contrast, firms operating in the public-transport sector must realise that customers who need transport will consider railways, airlines, bus companies and cars as possible options to satisfy their needs. The definition of competition according to the customer-based approaches to competitor identification is much broader than when using the strategic-group approach to identify competitors – it allows one to distinguish between direct competitors and indirect competitors. In most instances, primary or direct competitors are quite visible and easily identified. In the case of a consumer who buys motor vehicles, it would "****** DEMO - www.ebook-converter.com*******"

include other current and potential motor vehicle manufacturers. Therefore, everyone marketing other forms of private transport can be considered as indirect competitors.

EXAMPLE >> For instance, Coca-Cola competes with Pepsi and with other cola brands, such as Virgin Cola, and some private labels marketed by large retailers. Nedbank competes with ABSA, Standard Bank, First National Bank and other major banks. The SABC competes with etv and M-Net. It is important to cast the proverbial net wider to include in the analysis more than the primary (direct) and conventional competitors. Hotels, for instance, never thought twenty years ago that small bed-and-breakfast establishments in suburban neighbourhoods would present a threat to them. The manufacturers of cameras, such as Canon and Kodak, never thought that one day they would compete with cellphone manufacturers.

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In many markets, however, the nature of competition is changing because consumer needs and requirements are changing (see the section on buying behaviour and technology). Colas are no longer as dominant in the beverages industry as they used to be, as more and more people switch to bottled water and fruit juices. The need for banks to have extensive distribution (branch) networks is diminishing as more and more people are using ATMs, the "****** DEMO - www.ebook-converter.com*******"

Internet and cellphones to conduct their banking business. Because some of the new competitors are small, or appear to be very different, they may not appear to be significant – but that does not make them less dangerous. Following a conceptual basis for identifying competitors using a customer-based approach, a distinction can be drawn between two approaches, namely those based on customer choices and those based on product-use associations. Customer choices One approach to identify competitor sets is to consider competitors from the perspective of the choices customers make. A Nescafé buyer, for example, could be asked what brand of coffee (or refreshment) they would have purchased had Nescafé not been available. A buyer for a nursing-home meal service could be asked what would be substituted for rice if the price of rice quadrupled. Answers to questions such as these can bring new insights into which products and brands make up the consumer’s evoked set. Product-use associations Another approach that provides insight into competition is to analyse the consumers’ specific use contexts or applications associated with certain products. Product users could be asked to identify what they use products for, or when, and in what situations they use them. Some people use Jik to remove mould from windows and shower doors, for example – not the manufacturer’s intended use of Jik. Others use Disprin to lower blood pressure – not the manufacturer’s intended use of Disprin. For each use context, respondents would be asked to name all the "****** DEMO - www.ebook-converter.com*******"

products that are appropriate. Then for each product the respondents would identify appropriate use contexts so that the list of use contexts would be more complete. Another group of respondents would then be asked to indicate how appropriate each product is for each context. A group of consumers could be asked about the use of Vienna sausages. Some may use them as a snack for children; others may use them for making hot dogs; some may use them as a cocktail snack; and yet others may braai them. In all of these areas of use, a firm such as Enterprise has to compete with different competitors. In the case of a snack food for children, Enterprise would be competing with potato chips; in the case of hot dogs, it would be competing with the manufacturers of meat patties; in the case of a cocktail snack, the competition could be olives, feta cheese and savoury biscuits; and when it comes to the roaring braai fire, the competition is the local butchery. Once different uses have been identified, products would be clustered on the basis of the similarities of use they share with other products also considered appropriate for a specific setting or occasion – for example, a braai. Each of the products in a cluster would compete primarily with products similarly perceived by consumers.

READER 20 >> PharmaShop24 The PharmaShop24 concept and design can be found all over Europe, Japan, USA and now in South Africa. The South African team has been actively modifying and adapting this concept since early 2012. This is not a typical vending machine. It is specially designed to dispense health care products, and your daily medical essentials from A-Z at a simple push of a button. The local PharmaShop24 team has vast experience, directly and indirectly within the pharmaceutical industry. They have tailored a sustainable, self-funding solution to recapture the convenience market. This all happens while offering customers a

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discreet 24/7 shopping experience. They want retail stores at garages to enjoy a 24-hour, 7 day a week sales opportunity. Customers must realize that healthcare is available even when the pharmacy is closed.

There are no competitors on the market that can offer the value or service that PharmaShop24 provides. The traditional vending machine does not compete with PharmaShop24 in that they do not have the technological capability to provide real time interaction with the providers, advertisers, or customers.

Source: Company profile: Pharmashop24. Available from http://www.pharmashop24.co.za/companyprofile (Accessed on July 31 July 2014) Reprinted by permission of Pharmashop24 (Pty) Ltd.

Both the customer-choice and product-use approaches suggest a conceptual basis for identifying competitors. These approaches can be utilised by managers even when marketing research is not available. The concept of alternatives from which consumers can choose and the concept of appropriateness for a product-use context can be powerful tools in helping to understand the competitive environment. "****** DEMO - www.ebook-converter.com*******"

2.1.2 Using the strategic-group approach to LO4 identify competitors With this approach, sometimes also referred to as the industry concept of competition,6 almost all competition and competitive activity must be seen in the context of a particular industry, such as the oil industry, the pharmaceutical industry or the beverage industry. The point of departure is that all firms that exist in the same industry are de facto competitors.7 An industry is a group of firms that offer a product or class of products that are close substitutes for each other. Industries are classified according to the number of sellers; the degree of product differentiation; the presence or absence of entry, mobility and exit barriers; the cost structure; the degree of vertical integration; and the degree of globalisation. From an industry point of view, Pepsi might see its competition as Coca-Cola and other softdrink manufactures. From a market point of view, however, the customer really wants a product that is ‘thirst quenching’ – a need that can be satisfied by bottled water, energy drinks, fruit juice, iced tea or other forms of liquid. When analysing an industry, it is important to realise that there are different groups of firms within an industry and that firms are fairly homogeneous within groups, along a set of strategic attributes, and fairly heterogeneous compared with other groups.8 The strategic-group concept is based on the idea that the strategic diversity and complexity of an industry can be simplified by classifying firms into different strategic groups. A group of firms that follow the same strategy in a given target market is called a strategic group. A "****** DEMO - www.ebook-converter.com*******"

strategic group is a group of firms that: •

• •

Over time pursue similar competitive strategies (for example, the use of the same distribution channel, the same type of communication strategies or the same price and quality position) Have similar characteristics (e.g. size, aggressiveness) Have similar assets and competencies (such as brand associations, logistics capability, global presence or research and development).

The strategic-group method is used with the hope that the firms classified into the strategic group will essentially react to the same environmental changes owing to their similarities.

>>Strategy Historically, there have been three strategic groups in the South African clothing industry. One strategic group consists of very large diversified, branded firms, such as Foschini and Truworths. They all distribute their products using mass merchandisers and enjoy economies of scale. At the other extreme is a second strategic group that consists of highly focused, ultrapremium, private-label producers (for example, Jenni Button), and includes boutiques that market exclusive garments for the higher-income group. Their suppliers will not enter distribution channels such as mass merchandisers and supermarkets. The third strategic "****** DEMO - www.ebook-converter.com*******"

group consists of basic producers targeting the lower middle-income and low-income groups. They include retailers such as Pep Stores and Mr Price. Similarly in the major appliance industry, General Electric and Whirlpool belong to the same strategic group. Each produces a full line of medium-price appliances supported by good service. In contrast, Bosch and Miele belong to a different strategic group. They produce a narrower line of higher-quality appliances, offer a higher level of service and charge a premium price. Each strategic group has mobility barriers that inhibit or prevent businesses from moving from one strategic group to another. Each of the strategic clothing groups discussed in the strategy reader above, is protected by entry barriers. The ultra-premium group (i.e. boutiques) has the brand reputation, product and manufacturing knowledge needed to target the upmarket segment, access to the influential opinion leaders and retailers, and a local customer base and close relationships with customers. For Pep Stores and even the likes of Woolworths to start competing with boutiques would take a significant investment of resources.

>> Strategy Consider the personal computer and server markets. Dell and a few others have marketed computers directly to consumers – first by catalogues and telephone, and then via the Internet. They developed a "****** DEMO - www.ebook-converter.com*******"

host of assets and competencies to support their direct channels, including an impressive product-support system. Competitors such as Compaq, Lenovo and HP (which have used indirect channels involving retailers and systems firms), have found it very difficult to shift strategies. Not only is the development of assets and competencies costly and difficult, but their links with their existing channels create significant barriers to change. When Virgin Mobile entered the cellular phone operator market it had to ask: what is our strategic group? This is an important question because the height of the entry barriers differs for each group. The entry barriers to the cellular network industry are much higher than those of the video rental market, for instance. If a firm successfully enters a group, the members of that group become its key competitors. Conceptualising strategic groups can make the process of competitor analysis more manageable. Most industries contain many more competitors than can be analysed individually. Often it is simply not feasible to consider dozens of competitors, to say nothing of hundreds (such as bed-and-breakfast establishments). Reducing this set of potential competitors to a small number of strategic groups makes the analysis more focused, feasible and more usable. For example, in the wine industry, a competitor analysis by a firm like Distell (owners of the Nederburg brand) might examine three strategic groups: boxed wines, popular wines and premium wines. Analysing strategic groups rather than "****** DEMO - www.ebook-converter.com*******"

individual competitors (or brands) should not lead to a loss of insight because firms in a strategic group are affected by and react to industry developments and environmental influences in very similar ways. Therefore, the concept of strategic groups can be helpful when anticipating the future strategies of competitors.

READER 21 >> Battle of the tablets There hasn’t been this much fuss about tablets since Moses walked up a mountainside. On Monday Microsoft took the wraps off Surface, a product line it hopes will help it win market share from Apple’s iPad, which remains king of the tablets. If it’s priced right, a tablet war is in the offing. It had all the hallmarks of an Apple keynote. No-one knew exactly what Microsoft would be announcing in Los Angeles, but the excitement among gadget junkies about a potentially game-changing product from the US software giant was palpable. What Microsoft CEO Steve Ballmer announced in the end was a new line of tablets called Surface that will run the upcoming Windows 8 Pro and Windows RT operating systems. Ballmer was drawing a line in the sand in the company’s protracted war with Apple. The subtext was clear: Microsoft has had enough of the iPad’s dominance and is prepared to do something it hasn’t done before – build its own hardware running Windows, potentially risking the ire of its partners in the PC industry - in an effort to eat into Apple’s market share. Still, outside PC peripherals and the Xbox gaming console, Microsoft’s ventures into the hardware market haven’t exactly flourished. Its last big attempt to tackle Apple head-on at its own game - by developing the Zune MP3 player to take on the iPod - failed. It’s tempting to suggest it’s again coming to the market too late, taking on a product in the iPad that has established its dominance. But that’s the wrong call. Tablets are not yet ubiquitous and business customers are more likely to embrace Windowspowered tablets simply because they’ll play nicely with their IT systems and "****** DEMO - www.ebook-converter.com*******"

allow more granular control. And with Microsoft pushing Metro across all its consumer-facing products it’s building a powerful proposition that plays to its strengths in enterprise IT. If it prices the Surface tablets right, then Apple has a fight on its hands. SOURCE: McLeod, D. 2012. Battle of the tablets. Financial Mail, 22 June, p. 16

Analysing strategic groupings and their competitive behaviour can help refine strategic investment decisionmaking. Instead of considering which industries to invest in, the decision can focus on which strategic group can be considered for investment. Therefore, the current and future profitability of each strategic group must be analysed. Investing in attractive strategic groups in which a firm’s existing assets and competencies can be best utilised to create a competitive advantage should be a strategic objective (see Reader 21 ‘Battle of the tablets’).

3. Defining the competitive arena After the identification of firms within an industry, the next step is to develop descriptive information on the industry and its members. It is important to examine industry structure beyond domestic market boundaries, since international industry developments often affect regional, national and international markets.9 It is possible to distinguish between four industry structure types, namely a monopolistic situation, pure competition, an oligopoly, and monopolistic competition. After considering these four "****** DEMO - www.ebook-converter.com*******"

industry structures, one can then proceed to analyse the competitive structure of an industry.

3.1 The four industry structures

LO5

These four basic models of competition are based mainly on the number of competitors and the nature of the products produced. Table 4.1 summarises the characteristics of the four basic models and the key task of the marketing manager within each form of competition. The type of competition has a considerable effect on a firm’s pricing strategies and ability to set a target price (see Chapter 13). Table 4.1 Types of economic competition

At one extreme of economic competition is a monopoly, in which one firm controls the output and price of a product for which there are no close substitutes. In other words, the firm is the industry, as there are no direct competitors. Parastatals such as the Ports Authority (managing South Africa’s harbours), Eskom (electricity producer) and Telkom (fixed telephone lines) are examples of the most common forms of regulated monopoly in South Africa. Telkom’s competitive situation is slowly changing, however. Some of South Africa’s telecommunication "****** DEMO - www.ebook-converter.com*******"

operators are gaining traction in the market in competition to Telkom SA, using wireless technologies such as CDMA and WiMAX to provide alternatives to Telkom’s copper access network. In addition, the government has created Broadband InfraCo, a national infrastructure firm to provide cheap backbone network capacity to service providers. The major mobile network operators, Vodacom and MTN, are moving into the fixed-line sector under a new converged, service-neutral licensing regime. In May 2014 Vodacom, the country’s largest cellular network, acquired Neotel (the second-largest fixed-line player), which has put the merged firm in a strong position to offer converged services. The combination of Neotel and Vodacom’s networks would improve overall network availability and cut the cost of serving customers. The acquisition of Neotel will help Vodacom to innovate and integrate new solutions to a variety of customer segments. A similar share of network between MTN and Telkom may be concluded soon.10 Not only have these activities signalled the end of the monopolised telecommunications industry, they have also ensured a more competitive environment. The arrival of Seacom as the second international submarine fibre optic cable in South Africa in 2009, for instance brought down the cost of international bandwidth dramatically. Previously, Telkom had been monopolising access to the only major cable serving the country, SAT-3/WASC/SAFE. A few private-sector firms, such as South African Breweries (SAB), have a virtual monopoly – in this case, in the beer market. It must be pointed out, however, that SAB is not protected by any law. It is thus an economic monopoly. "****** DEMO - www.ebook-converter.com*******"

Often a patent right can give a firm monopoly power for a time. Xerox, for example, held the patent on the dry-paper copying process for many years. Not until the patent expired and competitors entered the market did dry-paper copiers fall significantly in price. In a regulated monopoly market the monopoly firm or organisation often charges high prices, does not spend much money on advertising, and its service delivery is often poor. The National Ports Authority, for instance, has been described as ‘topping the inefficiency list’ in South Africa, yet it made a profit after taxation of R1,9 billion in 2013 and has been described as Transnet’s cash cow.11 At the other extreme of the competitive spectrum is pure competition. A purely competitive market is characterised by a large number of sellers marketing a fairly standardised product (difficult to differentiate, such as commodity markets) to a group of buyers who are well informed about the market. Farmers selling wheat to food manufacturers, such as Bokomo, is an example. New competitors can easily enter the market (low entry barriers), but have to sell their wares at the prevailing market price. In a purely competitive market characterised by no or poor differentiation, it would not make sense for one firm to raise the price of a product, because a buyer would simply get the same product at the prevailing market price from a competitor. Because of the absence of a sustainable competitive advantage, firms trading in this kind of market condition (pure competition) often do not even advertise their product(s). A purely competitive market seldom exists in the real world. However, some industries closely mirror the model – most notably, agricultural markets for wheat, cotton, soybeans, "****** DEMO - www.ebook-converter.com*******"

salt and maize. Examples of pure competition can be found on the Internet. Advances in web technology have made markets more competitive. It has reduced barriers to entry for firms wanting to compete with well-established businesses – for example specialist toy retailers such as Toy Zone are better able to battle for market share with the dominant retailers such as ToysRUs and Reggies. One of the most important aspects of the Internet is the ability of consumers to find information about prices for many goods and services. There are several price comparison sites on the Internet covering everything from digital cameras to package holidays, car insurance to CDs and jewellery.12 When a relatively small number of firms dominate the market for goods or a service, the industry is an oligopoly. In South Africa, airlines (South African Airways, British Airways/ Kulula.com, Mango); private healthcare providers (Medi-Clinic, Netcare); and cellular phone operators (Vodacom, MTN, Cell C, Virgin Mobile) compete in oligopolistic markets. Oligopolies can also exist at a lower competitive level. The close relationship among so few competing firms can often lead to collusion and price fixing, which are illegal. Rather than fixing prices, some industries simply follow a price leader. The leader is typically the dominant firm in terms of financial resources, assets, market share or geographic coverage. Marketing managers do not have a lot of pricing flexibility in an oligopoly market. They must be alert to price changes and quickly match price decreases or lose a significant amount of market share. For instance, when Cell-C offered their clients an ‘all day flat rate option’ their competitors, Vodacom and MTN, quickly followed suit with similar offers. To further secure a position "****** DEMO - www.ebook-converter.com*******"

in this type of market, marketing managers should emphasise their competitive advantage – whether it is service, a strong brand, product quality, or any other nonprice form of differentiation. If they are able to establish some sort of ascendancy over competitors on some attribute and succeed in getting significant numbers of customers to prefer their product, they can possibly afford to charge a small price premium – as British Airways has done to some extent in the domestic airline market. Telkom’s changing competition (outlined above) means that it is also moving into an oligopoly-type situation. Monopolistic competition refers to a situation in which a relatively large number of suppliers offer similar, but not identical, products. Examples include fridges, televisions and motor vehicles. Each firm has a comparatively small percentage of the total market, so each has limited control over market price. As competitive pressures increase, input costs rise and available resources become scarcer and most firms then find that they need to work harder to maintain their profits and market share regardless of the form of the competitive market. Recently, the holding company of 7Eleven went bankrupt because it could not withstand the competition from competitors such as Spar and spaza shops. Firms in monopolistic competition industries or markets attempt to differentiate their products and services by using tactics such as brand names, trademarks, packaging, advertising or special product features (see Reader 22 ‘Sony tablet takes aim at Apple iPad’). With monopolistic competition, consumers tend to prefer the products of "****** DEMO - www.ebook-converter.com*******"

specific firms or brands and will be prepared to pay a higher price (a price premium) to get it – within reason. In other words, they tend to think, ‘I like British Airways because its service is better than that of South African Airways. But if the price goes up too much, I know British Airways is not that much better, so I’ll switch to something else if I have to.’ So the seller has some control over price, but only within a limited range. If the marketing manager raises prices too high, the firm could lose some of its market share to competitors. Smaller firms can often survive in highly competitive markets by generating products of exceptional quality or by offering products and services that fulfil distinct needs. Mercedes-Benz South Africa, for example, is a relatively small firm. Yet it is highly successful because of its quality, good service and overall effective marketing focused on satisfying the needs of a specific market segment. The Mercedes-Benz example illustrates that, with a good marketing mix, smaller firms can still compete effectively against the giants. Regardless of the size of the firm, the marketing mix of product, distribution, marketing communication and price represents management’s tools of competition. A competitive situation is seldom static, however. Besides competition from existing competitors, there is always the threat of new competitors entering the market or the emergence of substitute products.

EXAMPLE >> Mercedes-Benz developed a unique product range in order to compete. Woolworths has used product quality to gain and hold market share in a very competitive food retail market. Coca-Cola’s competitive advantage is its highly effective distribution system. Firms like Mr Price and Tempest Car Hire use "****** DEMO - www.ebook-converter.com*******"

price as a primary means of competition. Some firms, like SAB and Toyota, are superior competitors in every aspect of their marketing mix. They have excellent research staff who enable them to bring out the right products, an efficient distribution system involving hundreds of outlets or dealers, aggressive pricing and a very large marketing communication budget. Poor performance often draws new competitors. We have already referred to the emergence of so many courier firms in South Africa. It did not take minibus taxi owners long to spot the inability of many public and even privately-owned bus firms to satisfy the needs of urban commuters for a flexible, reliable and affordable transport service. Although SAB controls about 98 per cent of the beer market in South Africa, it realises very well that it faces strong competition from alternative products, such as wine, soft drinks, fruit juices and bottled water. The marketers of sugar face competition from artificial sweeteners, such as Canderel and Sweetex. Airlines and hotels realise, we hope, that they face competition from such unexpected sources as videoconferencing.

READER 22 >> Sony tablet takes aim at Apple iPad Sony is betting its tablet computers will rival Apple’s iPad by luring buyers with music and movies, even as the Japanese company arrives more than a year late in the booming market for such devices. Since the iPad entered the market there have been about 100 rival versions offered from a host of makers, but few have captured market share. ‘Yes, yes, Apple makes an iPad, but does it make a movie?’ Sony CEO Howard Stringer said in a presentation at Berlin’s annual consumer electronics fair on Wednesday. ‘We will prove that it’s not who makes the tablet first who "****** DEMO - www.ebook-converter.com*******"

counts but who makes it better.’ Sony, which is reeling from three successive years of losses without a hit product, is matching the iPad’s price in Japan and the US. Mr Stringer needs to differentiate the device from those of its rivals by adding the ability to download PlayStation Suite games, movies and music from its subscription services. ‘The tablet has to be significantly better than the iPad for consumers to want to buy it at that price point,’ says Alexander Peterc, an analyst at Exane BNP Paribas. ‘Sony’s big advantage is that they have the content. If they can make it easy to use and hassle-free, they have half a vote from me.’ Neil Mawston, an analyst at Strategy Analytics, says the Sony tablets will need to make these content services as easy to use as Apple’s iTunes music, film, television and application offerings. There was also concern at the shortage of applications (apps). Apple has more than 100 000 while Sony has just a few hundred. Worldwide sales of tablets are set to triple by value to $30,6bn this year, according to Strategy Analytics estimates. Apple will probably dominate with a share of 73 per cent, compared with 88 per cent last year. ‘We will aim to win the Number 1 share in the Android-based tablet market in 2012,’ Akihiro Matsubara, a director at Sony’s marketing unit, said in Tokyo. SOURCE: Kjetland, R. 2011. Sony tablet takes aim at Apple iPad. Business Day, 2 September 2011

4. The competitive structure of an industry

LO6

Different industries have different structures, which results in very different rules of the game when it comes to "****** DEMO - www.ebook-converter.com*******"

competitive behaviour. The competitive structure of an industry and the critical rules of the game set by this structure can be explained by using Michael Porter’s model of competitive forces in an industry.13 The five forces are: • • • • •

The threat of entry from new competitors The threat of substitute products The bargaining power of buyers The bargaining power of suppliers The rivalry between the existing direct competitors.

Each of these five forces identified by Porter consists of a number of elements that combine to determine the strength of each force and its effect on the degree of competition. These competitive forces are discussed next.

4.1 Threat of new entrants A segment’s attractiveness varies with the height of its entry and exit barriers. The most attractive segment is one in which entry barriers are high (provided you have adequate resources) and the exit barriers are low. This means that few new firms can enter the industry because it is so expensive (high entry barriers), and firms that perform poorly can easily exit (low exit barriers). When both entry and exit barriers are high, profit potential is high, but competing firms face more risk because the firms that perform poorly stay in and fight it out. The South African cellphone industry is an example. The barriers to entry – such as capital expenditure, infrastructure, retail distribution network – are high, but those operators that are ‘in’ (Vodacom and MTN) "****** DEMO - www.ebook-converter.com*******"

are very profitable. Those that arrived later (Cell C and Virgin) are struggling, but still fighting. When both entry and exit barriers are low, firms easily enter and leave the industry, and the returns are stable, but low. Opening a video shop does not require much investment (low entry barriers) and to withdraw is relatively easy (low exit barriers). The worst case is when entry barriers are low and exit barriers are high. Then competing firms enter during good times, but find it hard to leave during bad times. The result is chronic overcapacity and poor earnings (profits) for everyone in the industry. The wine industry faces overcapacity, and a firm like Distell has admitted that sales of its brands such as Chateau Libertas and Graça have been harmed by the oversupply. In the investment banking market, for instance, there are about fifty firms offering investment banking services in addition to the competition with global banks such as JP Morgan and Deutsche Bank. Investec has warned that there were too many investment banks competing for a shrinking pool of business in South Africa, and competitors were slashing fees to stay afloat. There is overcapacity in the market at every level and this is taking its toll, says Investec.14 Bank executives acknowledge the threat posed by nontraditional competitors, such as retailers and mobile service providers. With revolutionary technology that lowers barriers to entry, and increased customer migration to electronic products, innovative partnerships between different sectors are also penetrating the market. Examples include partnerships between banks and retailers and banks and mobile service providers. Easy-to-enter markets soon become overcrowded, which "****** DEMO - www.ebook-converter.com*******"

harms the future profit prospects for everyone competing in the industry. One reason is the increased power handed to customers, who can wring concessions from existing suppliers by threatening to go to a competitor or help a new competitor to enter the market. Once the new entrants have established themselves, they frequently go on to assault the entire market and intensify the level of competition. The seriousness of the threat of entry depends on the height of the entry barriers that impose disadvantages on prospective entrants and depress their expectations of profitability. These barriers are created by the following factors:15 •

Factor cost advantages for incumbents are created by lower labour or capital costs, preferred access to raw materials, favourable locations or proprietary technology. Any large international grocery retailer that wishes to compete in South Africa with the likes of Pick n Pay, Shoprite Checkers and Spar will find it difficult because the incumbents have taken all the best available retail sites. Smaller airlines in South Africa, such as British Airways and Mango, have to make do with inferior landing facilities at South African airports compared with those of South African Airways, making it difficult for them to compete effectively. • Economies of scale are a deterrent if incumbents force the prospective entrant to spend heavily on facilities, advertising, sales-force coverage, distribution, and so forth in order to gain cost parity with the incumbents, or to come in at a smaller scale or to suffer a cost disadvantage. The aircraft engine business has very high "****** DEMO - www.ebook-converter.com*******"

•

•

barriers to entry, which severely limits the number of possible competitors in the industry. Concorde, competing with regular airlines, such as British Airways and United Airlines, faced the disadvantage of low economies of scale, which eventually contributed to its demise. Effective differentiation and high switching costs limit the extent of direct competition, but they also deter new entrants from entering the industry. The opposite is also true. Few bottlers of mineral water have succeeded in effectively differentiating their products and brands, and it is easy for consumers to switch brands. As a result, it is a highly competitive market. Channel crowding. Most distribution channels have limited capacity, and channel members, such as retailers and wholesalers, often restrict the number of product lines they will handle. Computer retailers have space for about five manufacturers at a time. Each new line of computers creates additional fixed costs for the retailer, ranging from training staff, to the allocation of shelf space, additional spare parts management, and so forth. To convince distribution channel members to carry new products, marketers often have to pay substantially larger margins to offset the retailers’ extra costs. Sometimes the competing incumbents have blocked potential new entrants through long-run or exclusive distribution arrangements with retailers, forcing the prospective new entrant to face the cost of establishing a completely new distribution channel.

One must never underestimate the threat of new "****** DEMO - www.ebook-converter.com*******"

competitors. Nestlé, with it Nespresso capsules learnt it the hard way, as they no longer have a monopoly on those colorful pods it sells for its fancy coffee machines. Nestlé has tried to maintain its grip on the Nespresso capsule market by means of patents and legal action against some copycat rivals. It has also added small hooks inside its machines, which make some of the generic pods stick, rendering them incompatible.16 Despite these efforts many companies, chasing this highly-profitable market, entered the coffee capsule segment in 2013, after Nestlé (the world’s biggest food and drinks company), lost its patent covering the Nespresso coffee system. 17

4.2 Threat of substitute products A segment’s degree of attractiveness is influenced by whether there are actual or potential substitutes for the product. Substitute products place a limit on prices and, therefore, on the profits that competing firms in a segment can earn. For example, tea and coffee are fairly close substitutes to each other. Raising the price of coffee, therefore, could make tea more attractive. Alert firms monitor the price trends of substitutes closely. If technology advances are imminent or competition increases in these substitute industries, prices and profits in the segment are likely to fall. The South African telecommunications industry is an example. The South African government has tried for years to find a competitor for Telkom’s fixed-line telephone business. One reason is that there are so many substitute products that consumers can use for "****** DEMO - www.ebook-converter.com*******"

communication purposes these days (such as cellular phones, SMSs and e-mails) that fixed-line telecommunications have become an unattractive option for many potential new entrants. With the arrival of Neotel on the scene, the situation may change.

READER 23 >> Coffee to go: The world’s first disposable coffee machine Coffee fans get can their fix anywhere thanks to the world’s first disposable coffee machine. The innovative product works like a teabag for coffee and promises to brew a quality cup just by adding hot water to the bag. The water mixes with ground coffee then drips through a special filter into another chamber, from which is can be poured into cups.

SOURCE: Grower’s Cup ® © 2008-2014 Coffeebrewer Nordic A/S

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Designer Ulrik Rasmussen came up with the idea from studying teabags after running out of coffee filters for his home coffee machine. He has spent nine years developing the product. It all started one morning when he went to make himself a cup of coffee and realised he had run out of filters for his machine. ‘I needed my coffee fix and I was getting annoyed that it was so difficult to make a decent cup of coffee. ‘As I slammed the kitchen drawer shut I noticed some tea bags and I started thinking about why there wasn’t a similar product for coffee. I cut up a few tea bags and put coffee grounds inside them and found there was some potential for a similar product so I started doing research into it.’ SOURCE: Webb, S. 2014. Coffee wars: Tesco launches espresso shot pods to rival Nespresso luxury coffee capsules endorsed by George Clooney. Daily Mail, Available from http://www.dailymail.co.uk/ (Accessed in June 2014)

Consider the impact that a substitute such as facsimile machines has had on the revenue of the Post Office. The ability of facsimile machines to meet buyers’ needs for "****** DEMO - www.ebook-converter.com*******"

immediate delivery of documents had a severe impact on the Post Office. The initial impediments to buyers using these machines fell fast, the prices dropped quickly, and these days there is a huge network of facsimile machines on the receiving end, which, in turn, is threatened by e-mail devices that can deliver scanned documents. A substitute product will have a significant impact on the competitive situation in a market if it offers additional benefits that the consumer perceives and values. These include the following: •

Performance benefits such as saving time, improving output or providing new functions. The electronic cash registers used by large retailers, such as supermarkets, cost more than their mechanical forerunners, but provide extensive benefits, such as online transactions, data that can be used to control inventory costs and improved procurement. • Security benefits that result in improved safety, resistance to burglary or invulnerability to fire damage. The opposite is also true: security concerns about providing financial information online (such as credit card numbers), have severely limited the use of the Internet as a substitute medium for shopping and banking. • Availability benefits gained from the assurance of immediate, reliable delivery, which permits lower inventory levels. • Flexibility benefits that mean the product can be used in a wider variety of situations. Many South African consumers have switched from landline telephones to "****** DEMO - www.ebook-converter.com*******"

cellphones because of the superior flexibility offered by the latter. The incentive to switch varies for different consumers, and depends on how they use and derive value from their present products. The economic value of a new superminicomputer will depend on whether it is substituting a mini- or micro-computer, and on whether it is used for a production-line control, distributed processing or energysaving applications. Thus, whether or not a substitute product enters a market is a question that can be resolved only within a distinct segment of consumers who have similar needs or requirements. The availability of substitutes depresses the profit prospects of the firms in a market when there is a significant economic incentive for consumers to switch and the costs of switching are low. Consumers’ switching from CD’s to storing data or music on flash discs is an example. This threat to profitability is increased if the rivalry among the firms offering the substitute is intense, and leads to rapid declines in the price of the substitute or improvements in its relative performance.

4.3 Threat of buyers’ growing bargaining power A segment is unattractive if the buyers in that market have strong or growing bargaining power. Often buyers will try to force prices down, demand more quality or services and set competitors off against each other, which reduces seller profitability. Buyers’ bargaining power grows when they "****** DEMO - www.ebook-converter.com*******"

become more concentrated or organised; when the product represents a significant portion of the buyers’ costs; when the product is undifferentiated; when the buyers’ switching costs are low; when buyers are price-sensitive because of low profits; or when buyers can integrate upstream. To protect themselves, sellers may select buyers who have the least power to negotiate or switch suppliers. A better defence consists of developing superior offers that strong buyers cannot refuse. Financial institutions such as Liberty, Old Mutual and Sanlam face this type of situation in the business-to-business market when they compete to administer the pension funds of large firms, the government and semi-government corporations (such as Eskom). The buyers all have significant bargaining power when dealing with these financial institutions. The ability of large suppliers to withstand bargaining efforts by their customers (and potential new buyers) depends on: •

Their size in relation to that of the customers. Large suppliers are less likely to succumb to pressure from smaller buyers, especially in a fragmented market. This situation is especially noticeable in the advantages that large textile manufacturers have in relation to their small, dispersed customer base. Similarly, small video shops are increasingly losing out to large convenience chains. • The reliance of the customer on the supplier’s product – either because the customer cannot get the equivalent quality elsewhere, or is contracted to the supplier to the extent that the cost of switching is much greater than any "****** DEMO - www.ebook-converter.com*******"

•

benefits a new supplier can promise. An example of the latter is when large firms consider switching banks. Will the advantage of lower transaction costs or higher daily interest rates by one bank promised to a firm such as Pick n Pay be sufficient to make the switch to a competing bank worthwhile? The credibility of their threats to integrate forward in their value chain and sell directly to the end customer. An example would be if SAB threatened to open its own bars. This threat will blunt aggressive attempts by buyers to get better prices from manufacturers or suppliers. Motor vehicle manufacturers can issue a similar threat to their dealerships, or airlines can set up their own travel agencies to sell tickets directly to large corporate firms.

4.4 Threat of suppliers’ growing bargaining power A segment is unattractive if the firm’s suppliers are able to raise prices or reduce the quantity supplied at will. Suppliers tend to be powerful when they are concentrated or well organised, when there are few substitutes, when the supplied product is an important input to their production process, when the costs of switching suppliers are high and when the suppliers can integrate downstream. The best defense mechanisms are to build win-win relations with suppliers or use multiple sources of supply. A hypothetical example could be users of sugar, such as soft-drink manufacturers (e.g. Coca-Cola) and confectionery manufacturers (e.g. Cadbury and Nestlé). If the producers of sugar (for example, Huletts) become fewer and fewer or "****** DEMO - www.ebook-converter.com*******"

organise themselves into a single selling unit, they (the sugar producers) will increase their bargaining power, perhaps to such an extent that potential entrants would avoid the market. It is for this reason that Coca-Cola has a stated policy that it is never reliant on a single supplier for any of its raw materials.

4.5 Threat of intense segment rivalry A segment is unattractive if it already contains many, strong or aggressive competitors. It is even more unattractive if the segment is not growing or declining, if fixed costs are high, if exit barriers are high or if competitors have high stakes in staying in the segment. These conditions will lead to frequent price wars, advertising battles and new-product introductions, which will make it expensive to compete. The carbonated soft-drinks market is such a market. The sales of carbonated soft drinks in South Africa and worldwide have been declining as more and more consumers adopt healthier lifestyles. Also, the industry is dominated by one or two very dominant competitors globally (Coca-Cola and Pepsi) and in South Africa (Coca-Cola). Any firm wanting to compete with Coca-Cola and its brands (which include Fanta, Sprite and Stoney Ginger Beer) must know that it is taking on a formidable competitor – as Pepsi found out when it first tried to enter the South African market. As seen in the discussion till date, the competitive structure of an industry and the critical rules of the game set by this structure can be explained by using Porter’s model of competitive forces in an industry. As shown, these forces are "****** DEMO - www.ebook-converter.com*******"

the threat of entry from new competitors, the threat of substitute products, the bargaining power of buyers and supplies and the rivalry between the existing direct competitors. The intensity of rivalry between existing competitors in the industry therefore depends on the five factors. The five competitive forces also highlight the existence of vertical and horizontal forms of competition. The intensity of vertical competition is related, in part, to the bargaining power of suppliers and buyers. The location (level) of a firm in its value chain and the extent of its control over the distribution channel, have a major influence on the firm’s marketing strategy. Indeed, a strategic option may be to take action to change the impact of competitive forces on a firm, for example through collaboration and alliance, rather than accepting the existing situation.18 Relations between customers and sellers sometimes range from tight, just-in-time manufacturing systems – such as in the motor industry, where suppliers of motor vehicle parts almost become extensions of the motor vehicle assembling factory – to mass-market encounters. The ability of motor vehicle manufacturers to force down prices by playing suppliers off against each other is legendary – to the detriment of the suppliers’ profitability. Pharmaceutical firms marketing a range of medicines are not as vulnerable to bargaining pressure because their end customers are often not price-sensitive, but they still face aggressive retailers, such as Clicks and Dis-Chem, who control access to the shelves and extract sizeable marketing communications allowances, quantity discounts and other charges for the privilege of having their products on their shelves. The extent of customer power in these and other "****** DEMO - www.ebook-converter.com*******"

situations depends on the credibility of their bargaining leverage and their customers’ sensitivity to price. Bargaining leverage is enhanced by the following scenarios: • When there are few customers making large-volume purchases. A firm making television documentaries in South Africa can sell them to only one of three potential buyers (the SABC, M-Net or etv). Consequently, the supplying firm becomes dependent on one or only a few customers, and faces considerable excess capacity if the relationship is severed. This is also the plight of privatelabel suppliers to large retailers, such as Woolworths. • When there are few constraints on customers to make a switch from one supplier to another. This will be the case when there is little differentiation, the costs of switching are low or there is a cost-effective substitute. If that is the case, loyalty is virtually non-existent, and price becomes the only issue of concern. Whether a large organisation, such as a university or a municipality, buys its stationery from firm A or firm B will in all probability depend on their prices. One stationery seller is not likely to be differentiated from the next – they both sell the same products – and it will be easy to switch if ‘the price is right’. • When a buyer makes realistic threats to manufacture the product themselves rather than buy it. This threat (the so-called ‘make-or-buy’ decision) can and will be used to wring concessions on prices and terms under the guise of making the ‘make’ alternative more attractive than continuing to ‘buy’. In the United States, this threat "****** DEMO - www.ebook-converter.com*******"

•

•

continually hangs over the beverage can manufacturers – more than 25 per cent of all cans are made by the breweries and soft-drink firms themselves. Similarly, large firms whose employees need to travel frequently often contemplate bypassing travel agencies and set up their own travel offices. Some large-liability insurance customers are protesting against the high premiums demanded by insurance firms by self-insuring and spreading the risk among their many operating units. When a customer is knowledgeable enough to know their suppliers’ costs, or have learnt that the supplier badly needs their business to be able to utilise expensive excess capacity. For example, a major newspaper printer whose printing presses are idle for long periods may offer the management of a new magazine bargaining power to negotiate a very good price to print the magazine for them. During periods of high price sensitivity. Price sensitivity refers to how important lower prices are to the customer, and hence the intensity of their demands for price concessions. Price sensitivity is heightened when: > The product or service has little influence on the performance or quality of the end product > The cost of the product is a significant proportion of the customer’s total costs > The customer is suffering poor profitability, and looks to the supplier for help. When survival is at stake the pressure for concessions can be intense.

When these factors describe buyers who perceive little differentiation among the competing suppliers, the pressure "****** DEMO - www.ebook-converter.com*******"

on the demand for lower prices is further intensified.

5. Analysing key competitors

LO7

A key competitor is any firm targeting the same market segment as the firm conducting the analysis. The objective of a key competitor analysis is to be able to predict key competitors’ potential actions, especially those taken in response to the actions of the local business.

EXAMPLE >> In the video-game-console business, the strategies of Microsoft and Sony, which are attempting to dominate next-generation systems, are largely predictable – based on each company’s tangible and intangible assets and current market position. For Sony, which has valuable businesses in consumer electronics and in audio and video content, it is important to establish the PlayStation as the living-room hub, so that any cannibalization of the company’s consumer electronics businesses comes from within. The PlayStation, which plays only Blu-ray disks, is thus one of the company’s most important vehicles in driving demand for Blu-ray gaming, video, and audio content. Microsoft on the other hand has limited hardware and content businesses but dominates personal computers and network software. Establishing the Xbox as the living-room hub would therefore help to protect and extend its software businesses. For Microsoft, it is crucial that the ‘digital living room’ of the future should run on Microsoft software. If an Apple product became the hub of future ‘iHome’ living rooms, Microsoft’s software business might suffer. Sony and Microsoft therefore have different motives for fighting this console battle. Yet the current market positions (existing businesses and economies of scope), tangible assets (patents, cash), and intangible assets (knowledge, brands) of both companies suggest that they will compete aggressively to win. It was predictable that they would produce consoles which, so far, have been far superior "****** DEMO - www.ebook-converter.com*******"

technologically to previous systems and interconnect seamlessly with the Internet, computers, and a wide variety of consumer electronics devices. It was also predictable that both companies would price their consoles below cost to establish an installed base in the world’s living rooms quickly. The competition to win exclusive access to the best third-party developers’ games, as well as consumer mind-share, will also probably continue to be waged more aggressively than it was in previous console generations. For Microsoft and Sony, the resourcebased view of strategy helps us to understand that this battle is about far more than dominance in the video game industry and thus to identify the aggressive strategies both are likely to follow. Nintendo, in contrast, is largely a pure-play video game company and thus an asymmetric competitor to Microsoft and Sony. The resource-based view of strategy explains why Nintendo’s latest console, the Wii, focuses primarily on the game-playing experience and isn’t positioned as a digital hub for living rooms. The Wii’s most innovative feature is therefore a new, easy-to-use controller appealing to new and hardcore gamers alike. The Wii has few of the expensive digital-hub features built into the rival consoles and thus made its debut with a lower retail price. 19 Today, competition is not only rife in most industries, but intensifying every year. Many US, European and Japanese firms are bringing cheaper goods to global markets by setting up production facilities in lower-cost countries, such as China, Malaysia and South Africa. Many of these are in the motor vehicle and related industries, of which Volkswagen’s assembly plant in Uitenhage is an example. These developments explain the importance of ‘competitive intelligence systems’. Because markets have become so competitive, understanding customers only is no longer enough. The competitive environment is also an important consideration given the need to provide superior value to "****** DEMO - www.ebook-converter.com*******"

target customers. However, competition in the online world is incredibly intense. It is not unusual for a firm to develop a clear business plan only to have new competition emerge prior to the launch date. Hence it is critical that existing and emerging competitors are understood and constantly monitored. Competitors must be evaluated in both the online and offline environments. The online environment is distinctive in two respects. First, the degree of competitive intensity is different from the offline world (specifically, in terms of the number of new competitors that are emerging both within the product category and across product categories). Second, it is much easier to analyse competitors given the emergence of Internet sources. Successful firms place a strong emphasis on understanding their competitors. General Electric, for instance, once ran an exercise for its managers called ‘destroyyourbusiness.com’, which forced managers to think about where they were most vulnerable to new-economy competitors.20 Partnerships between banks and non-financial institutions (e.g. retailers, telecom companies and thirdparty platform providers) will be more prevalent in the future as banks attempt to broaden their distribution and reach unbanked segments of the market. South African banks wanting to expand into Africa might also have to consider partnering with local banks in those markets, as local businesses often enjoy advantages in terms of doing business in Africa’s complex environment. As a result, it is important to consider local banks, not only as competitors but also as potential business partners.21 To summarise, a competitor analysis is conducted for the "****** DEMO - www.ebook-converter.com*******"

firms directly competing with each other (i.e. current competitors) and for other firms that management may consider important in strategy analysis (i.e. potential competitors).

6. Understanding current competitors

LO8

It is important to have an understanding of current competitors. Aspects to consider include size, growth and profitability; image and positioning strategy; competitor objectives and commitment; current and past strategies of competitors; competitive culture; cost structures; and exit barriers.

6.1 Size, growth and profitability An understanding of current competitors should start with a thorough analysis and understanding of their broad-based business strategy. Coca-Cola, for instance, wants to offer a ‘total beverage solution’. What does this say about CocaCola’s business strategy? It says it is not going to market only carbonated soft drinks any more. It also means that CocaCola will from now on add non-carbonated drinks, such as mineral water, nutritional beverages, such as Vitingo, and energy drinks, such as Play, to its product mix. The idea is that no matter what a consumer wants to drink, there must be a Coca-Cola product available. The level and growth of sales and market share provide indicators of the success of the business strategy. Obviously, the maintenance of a "****** DEMO - www.ebook-converter.com*******"

strong market position or the achievement of rapid growth usually reflects a strong competitor (or strategic group) and a successful strategy. By contrast, a deteriorating market position can signal financial or organisational strains that may affect the interest and ability of the business to compete. Besides size and growth, the profitability of competitors needs to be assessed. A profitable business will generally have access to capital for investment unless it has been designated by the parent to be ‘milked’ (being milked means the cash that the product or business unit generates is used elsewhere in the business, but the unit receives no or limited resources itself – see Chapter 14). A business that has lost money over an extended time period or has experienced a recent sharp decrease in profitability may find it difficult to gain access to capital either externally or internally, which will weaken its competitive capabilities.

6.2 Image and positioning strategy Often the cornerstone of a business strategy is a mental association consumers have of a product or brand, such as being the most economical dishwasher, the most durable lawnmower, the smallest cellphone or the most effective toothpaste. Mr Price has clear value for money positioning, for instance. In order to develop the firm’s positioning in relation to alternatives, marketers need to study the positioning of competing firms and products. Besides formal research, the promotion and advertising, and packaging and pricing of competing firms will provide clues on their market "****** DEMO - www.ebook-converter.com*******"

positioning (see Chapter 7). When British Airways launched its no-frills airline, Kulula.com, it was careful about its positioning. Kulula is isiZulu for ‘it’s easy’, which is the key focus of Kulula.com. ‘The whole concept of Kulula.com is a departure from the norm in South Africa’s airline industry’, said Gidon Novick, CEO of Kulula.com. ‘To reinforce the fun, easy aspects of the new airline, we have opted for a young, modern look and feel throughout our marketing campaign. The campaign embodies the idea [that] ‘anyone can fly’ and brings in elements of ordinary people becoming superheroes who can fly’, he says. The successful positioning of Kulula.com has contributed significantly to its financial success and contributed to South African Airways’ financial woes in the local market.22

6.3 Competitor objectives and commitment The firm needs to know the relative importance that a competitor places on current profitability, market share growth, cash flow, technological leadership, service leadership and other objectives. Knowing a competitor’s mix of objectives reveals whether the competitor is satisfied with its current situation and how it might react to different competitive systems. For example, a firm that pursues lowcost leadership will react much more strongly to a competitor’s cost-reducing manufacturing breakthrough than to the same competitor’s increased advertising expenditure. A firm should also monitor its competitors’ objectives for clues on which market segments they are "****** DEMO - www.ebook-converter.com*******"

likely to target. If a firm finds that a competitor is targeting a new segment, this may offer a new opportunity. If it finds that competitors plan new moves into segments now served by the firm, it will be forewarned and hopefully forearmed.23 To illustrate, Woolworths is increasingly competing with the bigger supermarkets, particularly targeting both higher and middle-income LSM groups. It has made it clear that it will open more outlets, will increase its product range and continue to add more branded products.24 A statement of this nature would provide a clear indication to competing firms, such as Pick n Pay and Checkers, as to the areas in which they would experience competition from Woolworths. Firms in an industry often differ in the importance they attach to short-term and long-term profits. Most South African firms operate on a short-run profit-maximisation model, largely because their current performance is judged by shareholders and market analysts, who may lose confidence in the firm, sell their shares and cause the firm’s cost of capital to rise if they do not perform well over the short term. Japanese firms, on the other hand, take a longterm view. They use what is called a market-sharemaximisation model. This means that Japanese firms receive much of their funds from banks at a lower interest rate, and in the past the banks have readily accepted lower profits. Clicks, for instance, in its first year of competing in the pharmaceutical market with its in-house pharmacies, made a loss of R38 million, but the firm took the long-term view that profitability would return. Another model or school of thought is that each "****** DEMO - www.ebook-converter.com*******"

competitor pursues some mix of different objectives. The particular mix will depend on a given set of circumstances, such as improving cash flow, market-share growth, technological leadership or service leadership. Knowing the importance each competitor attaches to different objectives will help the firm anticipate their reactions. Many factors shape a competitor’s objectives, including its size, history, current management and financial situation. If the competitor is a division of a larger firm, it is important to know whether the parent firm is running it for growth or milking it. Finally, a firm must monitor its competitors’ expansion plans. In the computer industry, Dell – which is a strong force in selling personal computers to individual users – is also pursuing commercial and industrial buyers, and selling servers. Other incumbents may, therefore, wish to set up mobility barriers to Dell’s expansion into ‘their’ markets.25

6.4 The current and past strategies of competitors Knowledge of current strategies and past strategies also helps one anticipate and understand how competitors behave. Mercedes-Benz has consistently targeted only the top end of the passenger vehicle market. Surprisingly, the firm decided in the 1990s to add the Honda Ballade to its product mix in a classic example of a downward stretch, which was inconsistent with its previous strategy. This decision has since been rescinded. Competitors can, therefore, expect Mercedes-Benz to continue with its niche "****** DEMO - www.ebook-converter.com*******"

strategy of the past.

6.5 Competitor culture Just as current and past strategies are helpful in understanding competitive behaviour, so is knowledge of competitors’ culture. Nando’s organisational culture is epitomised by its advertising strategy of humour and a daredevil, ‘no-holy-cows’ approach. Competitors of Nando’s, such as KFC, know exactly what to expect of Nando’s – anything!

6.6 Cost structure Each industry has a certain cost burden that shapes much of its strategic conduct. For example, steelmaking requires heavy manufacturing and raw-material expenditure, whereas toy manufacturing relies heavily on expensive distribution, and other marketing costs are considerable. Firms will continually try to reduce these costs. The steel firm with the most cost-efficient factory, for instance, will have a great advantage over other steel firms. Another example is Nampak’s decision to invest in a new manufacturing plant in Kliprivier at ‘considerable cost’ to make the Cuddlers nappy brand locally rather than importing it. The firm believes that by manufacturing locally, it can be priced more competitively against the major international brands, such as Huggies and Pampers.26 Also, cost structures change over time. When Cell C launched its bid to become South Africa’s third cellular "****** DEMO - www.ebook-converter.com*******"

phone operator, it estimated its set-up cost at R4,5 billion. The actual cost turned out to be R2,5 billion.27

READER 24 >> Priced to go Despite tough business conditions in 2014 retailer Mr Price has increased its profits by 23%. Why has this ‘cheap and chic’ retailer’s budget-conscious offerings competed so effectively with well-entrenched competitors such as Foschini and Truworths? Mr Price began as a small chain of factory shops, an image that management decided to change to a trendy, value outlet. Though the directors are loath to admit it, the factory shop reputation sticks in the minds of some shoppers. Value retailing has taken time to catch on in South Africa’. The distinction between factory shops and value retailing may seem a fine line. But when a group image is at stake, it’s important. ‘It has taken time to persuade people that lower prices don’t always mean poor quality.’ Until recently, some upmarket shopping malls wouldn’t accommodate Mr Price outlets. This attitude has changed as poor trading conditions have forced many established competitors to close or downsize. Mall managers, seeing Mr Price was thriving even in this trading climate, invited the chain to open outlets. Walk into a Mr Price outlet, and the difference between it and a clothing chain with more luxurious branding and decoration is immediately apparent. Mr Price’s fittings are clearly cheaper, its price signs bolder. Assistants are informally dressed, in keeping with the chain’s weekend gear range. And the shop’s in-house radio fits this atmosphere. ‘We are able to supply competitively priced goods because of the group’s low-cost structure. We don’t have a luxurious head office; the stores have inexpensive fittings.’ But Mr Price is still a volume business. With sales of about R11 300/m², it beats most. Moreover, the chain needs fewer sales assistants per R100 000 worth of sales than many competitors. SOURCE: Adapted from: Moorda, Z. 2014. Mr Price bucks retail sector gloom. Business Day, 18 November, p. 11; Joubert, M. 2000. Priced to go. Financial Mail, 4 February 2000, pp. 48–49

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Knowing the cost structure of firms in an industry provides clues on competing firms’ future pricing options and staying power. When challenged on pricing by cheaper competitors in the past, South African Airways has often responded with an attitude of: ‘We know what it costs to operate an airline in South Africa. We know cheaper fares are not sustainable over the long term. We will wait till the storm blows over.’

6.7 Exit barriers Exit barriers are an important consideration for a firm wanting to withdraw from a market. Firms often face exit barriers, which include legal or moral obligations to customers and creditors; employee-related expenditure, such as contract payments and severance packages; government restrictions; low asset salvage values due to over-specialisation or obsolescence; lack of alternative opportunities; high vertical integration; and emotional barriers – which all make it difficult for a firm to withdraw from a market. Many firms stay in a very competitive industry as long as they cover their variable costs and some (and hopefully later all) of their fixed costs. Their continued presence, however, dampens profits for everyone. When General Motors (GM) disinvested from South Africa in 1986 by selling its operations to the then local management team to become Delta Motor Corporation, GM had $800 million of debt to settle after six years of losses – a considerable exit barrier even in today’s money. Knowing that these factors have an impact on competing firms helps one to understand their competitive activities. "****** DEMO - www.ebook-converter.com*******"

7. Understanding potential competitors

LO9

In addition to current competitors, it is important to consider potential market entrants, such as firms that might engage in the following:28 •

•

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Market expansion: perhaps the most obvious source of potential competitors is firms operating in other geographic regions or other countries entering the firm’s market. Examples are Tata (Indian), Renault and Peugeot (both French) entering the South African motorvehicle market. A Botswana grocery retailer called Choppies (who has 67 stores throughout Botswana) has recently entered the South African retail market and already has 23 store dotted around the country – competing with stores such as Checkers and Shoprite USave. Product expansion occurs when firms add new products to their existing product line. Oros, an orange-squash drink, used to be available only in relatively large bottles in a syrup form that needed to be mixed with water at home. Now Oros has launched the Oros Dinky, a readyto-drink version, packaged in a plastic pouch with a straw, to compete directly with Coca-Cola’s Bibo. Integration can consist of vertical, forward, and backward integration strategies – all sources of potential competition. General Motors bought dozens of manufacturers of components during its formative years (backward integration). Major users of cans, such as tinned soup manufacturer Campbell Soup, have

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integrated backwards – manufacturing their own cans and other containers, thereby making life difficult for many can manufacturers. Vertical integration can, however, create certain disadvantages, such as high costs in certain parts of the value chain and a degree of inflexibility (in this example, because they can only use their own cans). • The export of assets or competencies can occur when a current small competitor with critical strategic weaknesses can turn into a major entrant if it is purchased by another firm that can reduce or eliminate those weaknesses. Predicting such moves can be difficult, but sometimes an analysis of a competitor’s strengths and weaknesses may suggest some possible synergistic mergers. Clicks entered the pharmaceutical market by opening pharmacies in its current retail outlets in the hope that its retail competencies and current health-and-beauty product ranges’ synergy with pharmaceutical products – as well as its higher buying power – will allow it to compete effectively with independent pharmacies. • Retaliatory or defensive strategies can be used by firms that are threatened by a potential or actual move into their market. For example, Microsoft has made several moves (including into the Internet space) in part to protect its dominant software position. CD Warehouse and Musica reacted to the increased competition from the Internet (where songs can be downloaded) by discounting the most popular 20 CDs to ‘encourage music fans to return to the CD as a music-listening format’. "****** DEMO - www.ebook-converter.com*******"

7.1 Entry barriers Entry barriers are an important consideration when analysing potential competitors. Industries differ greatly in respect of ease of entry. It is easy to open a new restaurant, but difficult to enter the aircraft industry. Major entry barriers include high capital requirements, high economies of scale requirements, patents and licensing requirements, scarce locations, raw materials, difficulty in getting access to intermediaries and reputational requirements. Several overseas beer brewers have eyed the South African beer market over the years (including the world’s largest brewer, Anheuser-Busch), but have decided not to take on South African Breweries, mainly because of the high barriers to entry and particularly the investment required to match SAB’s formidable distribution network. Pepsi is again entering the South African market, but is finding the going tough against Coca-Cola’s well-established market position. When satellite network Top TV entered the television market to challenge DStv they knew that they needed deep pockets to overcome the entry barriers – R1,2 billion to be exact.

8. Evaluating competitors’ strengths and LO10 weaknesses A precise understanding of a competitor’s strengths and weaknesses is an important prerequisite for developing a "****** DEMO - www.ebook-converter.com*******"

strategy to compete against it. The critical question is what can our competitors do? Firms normally learn about their competitors’ strengths and weaknesses through secondary data, personal experience and word-of-mouth. They can also conduct primary marketing research with customers, suppliers and dealers. An alternative is to benchmark themselves against other firms, comparing their own products and processes with those of competitors or leading firms in other industries to find ways to improve quality and performance. Benchmarking has become a powerful tool for increasing a firm’s competitiveness.29 In essence, the objective will be to overcome competitors’ strengths and exploit their weaknesses. When benchmarking, firms should also review competitors’ websites, identifying not only best practices, but also worst practices (to be avoided at all costs) and ‘next practices’. Next practices refers to a firm looking beyond its industry sector at what leading Internet firms, such as Amazon (www.amazon.com), are doing. For instance, a firm in the financial services industry could look at what portal sites are providing and see if there are any lessons to be learnt on ways to make information provision easier. When undertaking scanning of competitor websites, the key differences that should be watched out for are new approaches from existing competitors and new firms starting on the Internet. It is also important to be alert to new technologies, design techniques and customer support on their websites, which may give a competitive advantage.30 When TopTV launched it knew that DStv had a lot of capital and a strong brand which will make it a formidable competitor. Based on the analysis of current and potential competitors, discussed in the previous sections, "****** DEMO - www.ebook-converter.com*******"

management needs to decide to what extent elements of information are worth pursuing. One approach that may be used to structure and focus this component of a competitor analysis is that of comparing the firm with its key competitors on the key success factors (KSFs) in the industry. A KSF analysis can be performed using a threestep process.31

8.1 Step 1: Identify key success factors in the industry KSFs can be defined as those characteristics or conditions in a particular industry that have a significant impact on the performance of the firm in that industry (see the section ‘Defining the competitive arena’, p. 118). For individual firms these success factors translate into particular assets, skills or competencies required in order to succeed in the industry. The better the ‘fit’ between the firm’s unique competencies (strengths relative to weaknesses) and the success requirements of the industry, the more successful the firm is likely to be. It is important to restrict the number of KSFs to about six to eight, or else the analysis becomes too complicated. The identification is a matter of managerial judgement, but answers to the following questions may guide the identification of KSFs:32 • •

Why are successful competitors successful and unsuccessful competitors unsuccessful? What are the most important motivators of customers’ choices? What do customers consider as important?

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•

•

Which phase(s) in the production process and supply chain creates the highest added value? The activities that contribute to the highest added value are most likely to be key factors that determine success. What are the entry barriers in the industry and between segments in the market? The factors that make it difficult for a competitor to enter a market or segment are typical KSFs.

Competitors’ sources of success may be functional (e.g. financial strength or flexible production) or more generic (e.g. the ability to respond quickly to customer needs, the quality of innovativeness or the ability to provide after-sales service). Since these factors are critical for success, they should be used to compare the firm with its competitors (see Reader 25 ‘Mugg & Bean – no mug in dealing with the competition’, below).

READER 25 >> Mugg & Bean – no mug in dealing with the competition The light meals and coffee shop brand, Mugg & Bean, was recently awarded the best place to ‘grab a cup of coffee’ at The Times and Sowetan 2009 Retail Awards. This was the pinnacle of the career of veteran restaurateur and CEO of Mugg & Bean Franchising, Ben Filmalter. The award follows the steady, if not stellar, growth of the Mugg & Bean brand since the opening of its first branch at the Victoria and Alfred Waterfront shopping centre in Cape Town in 1996. Competition has always been intense in the coffee-shop market due to low barriers to entry. These difficult trading conditions have been compounded in "****** DEMO - www.ebook-converter.com*******"

recent years by the entry into the South African market by such international giants as Starbucks, and the pressure that the recession has put on discretionary consumer spending. However, Mugg & Bean’s carefully defined focus on a particular niche market (the firm’s website – www.themugg.com – describes the business as a ‘coffee-themed restaurant franchise focused mainly on the shopping market’) has allowed the business to expand to more than 100 locations in South Africa, as well as internationally. In addition, Filmalter further explains why Mugg & Bean has been able to grow, despite the tough economic climate and competitive environment: ‘We have reviewed the value proposition of every dish on the new menu and ensure that it complies with our ethos of generosity. We offer more beautiful food, more plentiful plates, more fresh products and a friendlier atmosphere. This is our secret to rising out of the current challenging economy. ‘The reason for the brand’s world-class success is because of the cutabove quality and extraordinary value for money. We are always more generous with our portions, offer high-quality food and have outstanding signature dishes and baked items. We have meaning in consumers’ lives and will continue during these difficult times to meet the needs of our consumers.’ SOURCES: The Times and Sowetan Expanded 2009 Retail Awards proves sector is highly competitive. Media update online newsletter, http://mediaupdate.co.za/, 9 October 2009; Roberts, C. 2001. Coffee Break. Hotel and Restaurant Magazine online, May 2009

In Table 4.2, the KSFs identified following the above guidelines are listed in the left-hand column. Next it is critical to decide on a relative importance score (relative to each competitor) for each of the KSFs. To do this, weights must be allocated to each KSF to reflect its importance. The different weights allocated to the KSFs must add up to 1. For example – as indicated in Table 4.2 – it may be that product quality, financial strength and the skills and expertise of staff are the most important KSFs for competitive success within "****** DEMO - www.ebook-converter.com*******"

this hypothetical sector, and innovativeness, technical assistance to customers and extensive distribution networks are relatively unimportant.

8.2 Step 2: Rate the firm and competitors on each KSF After weights have been assigned, the marketer must rate the firm and decide on the most threatening competitors on each of the KSFs. This may be on a scale ranging from 1 (very poor) to 5 (very good). As shown in Table 4.2, the marketer can decide which competitors to include in this exercise. In the hypothetical illustration in Table 4.2, three current competitors are included and two future competitors, based on the discussion about benchmarking above. Once the rating is completed, one needs to multiply the rating of each KSF by the weight allocated to it in order to calculate a score for each firm/competitor and each KSF. By adding all the KSF scores for each competitor into a total, one can determine their positions of competitive strength and compare them with each other. From Table 4.2, it is evident that Current Competitor 2 is the market leader, followed by Future Competitor 2, which is ahead of us, Competitor 1, Competitor 3 and Future Competitor 1. Table 4.2 Weighted competition strength assessment

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Note: Rating scale = 1 (very poor) to 5 (very good)

8.3 Step 3: Consider the implications for competitive strategy When one considers Table 4.2, it is evident that this kind of assessment indicates the relative importance of KSFs and the relative strength of each competitor on the basis of these factors. The competitive profiles can now be used to identify possible competitive strategies based on each KSF in relation to those of the competitors. It sometimes also helps to establish the competitive position of a firm in a target market on the basis of its own strengths and weaknesses, as follows:33 •

Dominant: The dominant firm, to some extent at least, controls the behaviour of other competitors and has a wide choice of strategic options. In the South African motor vehicle industry Toyota may be an example in terms of pricing of motor vehicles in South Africa. Similar examples include South African Breweries, CocaCola and South African Airways.

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Strong: This firm can take independent action without endangering its long-term position, and can maintain its long-term position regardless of competitors’ actions. In the South African motor vehicle industry, Volkswagen is an example. In the airline industry, British Airways is an example of a strong firm that can make independent decisions without compromising its long-term prospects. • Favourable: This firm has an exploitable strength and a more-than-average opportunity to improve its position. In the South African motor vehicle industry, Nissan is an example. In the airline industry, Kulula.com is a good example of a firm that can improve its position in the near future. • Tenable: This firm performs at a sufficiently satisfactory level to warrant continuing in business, but is kept back by the dominant firm and has a less-than-average opportunity to improve its position. In the South African motor vehicle industry, General Motors may be an example of a firm that can improve its position in the near future. Cell-C is an example in the telecommunications industry. • Weak: This firm’s performance is unsatisfactory, but there is scope for improvement. The firm must change or else exit the industry. In the South African motor vehicle industry, Volvo may be an example. In the airline industry, Nationwide Airlines and 1Time were unable to improve its competitive situation and had to close down. Mango is a relatively weak competitor in the South African airline industry. • Non-viable: This firm has unsatisfactory performance "****** DEMO - www.ebook-converter.com*******" •

and there is no opportunity for improvement. 1Time faced this situation in the South African airline industry. The advertising agency The Grey Group recently closed its doors after five years of decline.

9. Anticipating competitors’ actions

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The information obtained during the steps of a competitor analysis, outlined above, should be helpful in estimating future trends – although possible strategy shifts by competitors may occur. A major objective of competitor analysis is to predict competitors’ responses to market and competitive changes. This is done by first considering the likely reaction patterns of competitors because these will influence direct rivalry among competitors.

9.1 Likely reaction patterns of competitors How a competitor in an industry or market reacts to a competitive threat will be determined by, among others, its business philosophy, its organisational culture and the values it subscribes to. According to Kotler,34 most competitors’ reactions to competition, based on their reaction profile, fall into one of four categories: •

The laid-back competitor is one that does not react quickly or strongly to a rival’s move. On past occasions, Gillette (manufacturer of toiletries, such as shaving equipment) and Heinz (manufacturer of tinned food

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products, among others) reacted slowly to competitive attacks. There are various reasons for a slow response: laid-back competitors may feel their customers are sufficiently loyal and that they need not worry; the competitor may be milking the business prior to its closure (see Chapter 14); they may be slow in noticing the move; or they may lack the financial resources to react. Rivals must try to assess the reasons for the laidback behaviour of its competitors. Despite its size and dominance SA Breweries are cognisant of competitor activity and the Managing Director Norman Adami says its does not want to fall into the ‘bigness’ trap.35 • The selective competitor is one that reacts only to certain types of attacks. Selective competitors may, for instance, respond only to price cuts, but not to promotions. Knowing what a key competitor reacts to gives its rivals a clue as to the most feasible lines of attack. When Pick n Pay launched its Mini-Market chain, Whitey Basson, CEO of Shoprite said that ‘… [the Shoprite] group will not be going into direct competition with Spar and Pick n Pay, but Shoprite will continue to compete with them on price’.36 • The tiger competitor is one that reacts swiftly and strongly to any competitive threat. In the United States, Procter & Gamble (P & G) does not let a new detergent come onto the market easily. Lever Brothers found this out during its first foray into the so-called ‘ultra’ detergent market. Ultras are more concentrated detergents marketed in smaller bottles. Retailers like the smaller bottles because they take up less shelf space. But when Lever Brothers introduced its ultra-versions of "****** DEMO - www.ebook-converter.com*******"

•

Wisk and Surf, it couldn’t get shelf space for long. P & G vastly outspent Lever on advertising to support its own brands to counteract Lever Brothers’ entry into this market. Unilever has enjoyed market dominance in the South African detergent market with brands such as Omo. Surf and Skip. Now Proctor and Gamble is challenging Unilever by introducing Ariel detergent, supported by a R1,6 billion Rand budget. Justin Aspey, Vice-President of Unilever for brand building says ‘… Unilever will increase its adverting spending…’ in response.37 The stochastic competitor is one that does not exhibit a predictable reaction pattern. There is no way of predicting the competitor’s action on the basis of its economic situation, history – or anything else. Many small businesses are stochastic competitors, competing on various fronts when they can afford it. An example of a stochastic competitor is Facebook that did not respond to competitors such as WeChat and Twitter but was prepared to pay a staggering $19 billion American dollars for a competitor that has only 55 employees – WhatsApp. The idea apparently, was only to get ‘… the mobile competition out of the way’.38

Based on competitors’ capability to respond, the following equation can be of value:39

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>>Technology in action M-Pesa mobile money to be relaunched Vodacom will tempt fate with the relaunch of its MPesa mobile money service, this time promising an improved product armed with more features. This is a bid to revive the service, which has not seen a similar uptake locally compared with other African countries. On offer this time is a partnership with Visa and Bidvest Bank to launch a debit card for withdrawals and deposits at approximately 27 000 ATMs. The telecommunications giant has also bolstered its distribution network, with 8 000 agents at both informal outlets and at major retail partners, to enable users to pay for goods, buy airtime and top up their M-Pesa wallets. The revamped M-Pesa enables a mobile wallet on a cellphone and users can then transfer money from a bank’s Internet banking account to an M-Pesa wallet. Part of the revamp was to make registration for the MPesa simple. Initially, customers would have to present their identity document at limited outlets, but now customers could self-register using a cellphone. This marks an exciting development story for M-Pesa’s journey. According to Herman Singh, managing executive of mobile commerce at Vodacom, they had to launch a product that appeals to everyone …which they believe is going to be a super product. M-Pesa was first launched in Kenya in 2007 and the service is now used "****** DEMO - www.ebook-converter.com*******"

by more than 18 million people across 13 countries for banking and money-transfer services using mobile phones. SOURCE: Adapted from Maklaka, R. 2014. M-Pesa mobile money to be relaunched. The Citizen, 4 August 2014, p. 22

Competitors may continue to pursue future strategies in the direction that they have pursued in the past, particularly if no major external influences necessitate changing their strategies. Nevertheless, to assume that an existing strategy will continue is not wise. Competitors’ current actions may signal probable future threats. The issue of how a competitor is likely to respond in the future has three components:40 •

• •

How is the competitor likely to respond to general changes taking place in the external environment and particularly to changes in the market? How is the competitor likely to respond to competitive moves that competitors might make? How likely is it that the competitor will initiate an aggressive move, and what form might this take?

Building a brand is particularly difficult when the market is dominated by two super-brands, sharing more than 90 per cent of the market. That’s what Sony had to face when it launched its PlayStation against Nintendo and Sega in 1995. So it was forced to approach the market differently. The secret was segmentation and targeting. PlayStation decided to upgrade to an older age group of teenagers and young "****** DEMO - www.ebook-converter.com*******"

adults by making PlayStation socially acceptable to them. Since 1995, Sony has sold millions of consoles, becoming the dominant computer game, and the PlayStation now accounts for 30 per cent of Sony Corp’s profits.41 In South Africa’s telecommunications market Vodacom and MTN have a combined market share of 85 per cent – and Cell-C only 13 per cent. Cell-C’s strategy in the future will be to focus of the demand for data capacity rather than on ‘voice’ demand.42

>>Technology in action VoIP An interesting development in the telecommunications market is the rapid growth in the use of Internet calling. The technology is called ‘voice over Internet protocol’ (VoIP). Improved technology solutions have led to a robust VoIP market in recent years, and this growth is continuing despite the economic downturn because VoIP offers a cheaper alternative. Although security and reliability concerns still need to be resolved, consumers and businesses alike are turning to VoIP in an effort to save costs. Japan, China and the United States continue to be some of the world’s hottest markets for VoIP telephony. Over the last couple years, Europe has also become a prime innovator in VoIP services, whether stand-alone, bundled as a triple play offer, or through fixed-mobile convergence packages. With its relatively well-developed and diverse "****** DEMO - www.ebook-converter.com*******"

infrastructure, South Africa is taking a regional lead role in the convergence of telecommunications and information technologies with the media and entertainment sector, promising reductions in telecommunication costs and better availability of information and services. The legalisation of VoIP telephony in 2005 marked the beginning of a fundamental change in the country’s telecoms landscape. Billions of dollars are being invested in IPbased next-generation networks (NGN) capable of delivering converged services more efficiently. Telecom carriers and ISPs are moving into delivering audio and video content over their networks, while, in turn, the traditional electronic media carriers are discovering the potential of their infrastructure for telecommunications service delivery. Digital media and social media have reached a level of development to foster an associated advertising and marketing industry. Online advertising in South Africa continues to grow at one the fastest rates among countries in the English-speaking world, and the country has as many Twitter users as Spain as well as the largest LinkedIn user base in Africa. SOURCE: South Africa - Convergence - VoIP, NGN & Digital Media. 2010. Paul Budde Communication Pty Ltd (Budde Comm). Available: http://www.budde.com.au (accessed 16 July 2010)

10. Direct rivalry among competitors

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In some markets the direct rivals co-exist comfortably and appear content with their respective market shares. Other "****** DEMO - www.ebook-converter.com*******"

markets are constantly on a war footing as the competitors look for a temporary edge with price cuts, promotional deals, advertising blitzes and aggressive spending on new product development. Others in the market have to match these moves to protect their position, and a wave of price cutting sometimes escalates to the point where everyone suffers damage to their profits. In its eagerness to fill seats to cover fixed costs, the airline industry worldwide has a long history of behaving in this way, despite experience that tells airline operators that cut-price market expansion is short-lived and erodes profits while leaving market shares unchanged.

EXAMPLE >> A classic example of direct rivalry is the global battle between Unilever and Procter & Gamble in the haircare market. When Procter & Gamble launched the shampoo and hair-conditioner brand, Pantene, to compete with Unilever’s Organics, Unilever had spent more than R11,8 million on advertising for Organics hair products, while Procter & Gamble spent more than R1 million in just two months to advertise Pantene. Although retailers are tightlipped about the happenings, industry insiders say the two firms even compete over shelf-space in shops like Clicks and Pick n Pay. Consumers have also gained from loyalty offers, such as buy-one-get-one-free and coupon discounts. Industry expert, Elvin Nadas, says consumers are benefiting from the shampoo war because the rivals are forced to use innovations and bring their international expertise to South Africa: ‘Although there are other players in the industry, the competition between the two is interesting because it involves leading international firms with a lot of money to back their aggressive strategies.’43

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Rumours are rife that FNB is preparing to launch a mobile virtual network operator (MVNO) in South Africa in partnership with mobile operator Cell C. The move seems likely, given Cell C’s desire to offer MVNO service and FNB’s numerous existing plays in the mobile space. MVNO’s – where third parties use an existing mobile operator’s infrastructure to sell their own mobile products and services – have proven both popular and successful in Asia, Europe and the US, but to date have achieved little attraction in the South Africa market. The country’s largest mobile operators (MTN and Vodacom) have been reluctant to offer MVNO facilities after South Africa’s first MVNO, Virgin Mobile, achieved limited success in 2006. However, Cell C, which has faced an uphill battle winning market share from South Africa’s two biggest networks, had indicated its willingness to provide MVNO services and has previously said it was always looking to create partnerships with high profile brands. Cell C currently provides the infrastructure for Virgin Mobile and will be doing likewise for Mr Price’s planned mobile play, Mr Price Mobile, announced in August 2014. That will bring South Africa’s MVNO tally to two, but there’s no reason to think that Cell C isn’t actively pursuing other suitors. Virgin Mobile in turn powers Red Bull Mobile, the energy-branded mobile service that is offered under a brand licensee agreement. Cell C is the only operator that’s demonstrated an appetite for such MVNO arrangements.44

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The prevailing situation in the case of direct rivalry depends on what is known as the industry’s ‘competitive equilibrium’. The following factors may have an impact on the competitive equilibrium in a market and determine whether the direct rivals are in a state of war, peace or perhaps observing an uneasy truce.45 •

•

If competitors are nearly identical and make their living in the same way, then their competitive equilibrium is unstable. Perpetual conflict characterises industries where competitive differentiation is hard to establish and maintain over the long term. Examples are newsprint and retailing. The competitive equilibrium will be upset if any firm lowers its price to reduce the overcapacity that may prevail. Price wars frequently break out in these industries. In the United States, despite there being only two competitors in the otherwise attractive market for industrial lasers – Spectra-Physics and Coherent Radiation – neither is profitable. Deep-seated antagonism between the managers of these implacable rivals often leads them to use their resources to attack and retaliate against each other, with price cutting being a favourite weapon. In South Africa, the airline industry is an example of where price wars often occur when overcapacity becomes a problem, especially as Kulula.com has grown over time, and new entrants, such as Mango compete aggressively with the more established competitors. If a single major factor is the critical factor, the competitive equilibrium is unstable. This is the case in industries where cost-differentiation opportunities exist

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through economies of scale, advanced technology or experience. A firm that achieves a cost breakthrough – such as Dell, which markets its computers only via the Internet – can cut its price and win market share at the expense of other firms, which can defend their market shares only at great cost. Price wars frequently break out in these industries as a result of cost-reduction breakthroughs. • If multiple factors may be critical factors, then it is possible for each competitor to have some advantage and be differentially attractive to some customers. The more factors that may provide an advantage, the more competitors can co-exist. Competitors all have their competitive segment defined by market preferences for what they offer. Multiple factors occur in industries in which firms can be differentiated by factors such as quality, service, convenience, and so on. If customers place different values on these factors, many can co-exist through specialisation and differentiation. What otherwise could be intense rivalry is muted when there are large perceived differences among competing products because customers then develop strong preferences and loyalties that make them more resistant to competing offerings. The long-run equilibrium of such a market is further enhanced when the differences are difficult to imitate. On the other hand, if there are no perceived differences among competing products, the focus soon turns to price, terms, and sales conditions, and, as a result, rivalry intensifies. • The fewer the critical competitive variables, the fewer the competitors. If only one factor is critical to consumers, "****** DEMO - www.ebook-converter.com*******"

then no more than two or three competitors are likely to co-exist. The airline industry is an example once again: safe, reliable transport at affordable prices is what is important to airline travellers and, as a result, there are not many competitors in this market in South Africa. • The measurement of competitive equilibrium. A ratio of 2:1 in market share between any two competitors seems to be the equilibrium point at which it is neither practical nor advantageous for either competitor to increase or decrease market share. At this level, the costs of extra promotion or distribution would outweigh the gains in market share. In other words, when competition is concentrated among a few firms and one competitor clearly dominates, the followers co-exist under the leader’s umbrella, and seldom challenge the price structure for fear of retaliation. This is especially likely when differences in accumulated experience mean the leader has much lower costs than the other firms. • If customer-switching costs are high, equilibrium is more likely. These costs tend to tie buyers to one supplier, who is then protected from raids by others. These costs are high when the product is durable or specialised (for example, IT systems), when the customer has invested a lot of time and energy in learning how to use the product, or has made specialpurpose investments that are useless elsewhere. For instance, a commitment to a computer operating system makes it very difficult for a customer to switch from a PC to an Apple computer, or vice versa, without retraining and general disruption. Another example is the many South African firms that have switched to SAP as their "****** DEMO - www.ebook-converter.com*******"

enterprise resource planning (ERP) software.

11. Deciding which competitors to attack and which to avoid

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No firm can compete with all other firms in an industry. And it is impossible to avoid all competition. Often firms may decide to compete with some competitors in certain market segments, but not in others. General Motors, for instance, has decided that it will compete with Toyota in the bakkie segment of the motor vehicle market, but not in other markets. Also, Wesbank chose not to follow its competitors in taking advantage of what seemed to be an opportunity in the financing of motor vehicles market, which ultimately turned out to be the correct decision. See Reader 26, ‘Drive a new car for R699 a month? Too good to be true?’, below. Most firms will concentrate their efforts on weak competitors, because this requires fewer resources per share point gained. The problem is that defeating a weak competitor will not necessarily enhance the firm’s own position much, not in terms of increased sales or market share and not in terms of enhanced capabilities. Benchmarking and competing with strong competitors (within reason), however, may strengthen the firm’s own capabilities and skills over time, which will prepare it much better for the future. Most firms compete with competitors who resemble them the most. General Motors competes with Volkswagen and not with Mercedes-Benz. At the same time, a firm should avoid trying to destroy its closest competitor. Porter "****** DEMO - www.ebook-converter.com*******"

cites two examples of counterproductive ‘victories’: in the late 1970s, Bausch & Lomb moved aggressively against other soft-contact-lens manufacturers with great success. However, this led each weak competitor to sell out to larger firms, such as Revlon, Johnson & Johnson and ScheringPlough, with the result that Bausch & Lomb then faced much larger competitors.46 In another similar case, a speciality rubber manufacturer attacked another speciality rubber manufacturer and gained share. This led the speciality divisions of large tyre firms to move quickly into speciality rubber markets, using them as a dumping ground for excess capacity. Another potential strategy for managing the competitive landscape is to form coalitions and partnerships with competitors. The argument in favour of this strategy is obvious: if firms are not competing with each other then they cannot lose market share to each other. However, this practice can sometimes be construed as an anti-competitive practice and, as such, firms can face legal sanctions. However, strategic collaboration with partners in the value chain (as opposed to competitors) is usually in the interests of the consumers and can be converted into a competitive advantage for businesses. For example, Dell Computers has strategic partnerships with many of its suppliers, which allow it to compete with its competitors on both price and quality.

READER 26 >> Drive a new car for R699 a month? Too good to be true? "****** DEMO - www.ebook-converter.com*******"

When something seems to be too good to be true, then is probably is, but to thousands of South Africans, the ‘Drive a new car for R699 a month’ deal seemed like the perfect solution to their ‘want a new car but can’t afford it’ dilemma. Essentially the deal allowed buyers to get a new car, with a 100 percent loan from a bank, making the buyer responsible for the full repayment amount every month. However, this was offset with the promise that if the buyer acted as a mobile advertisement, by putting certain stickers on the car (see picture below) they would be able ‘earn’ money from the dealer (Drive Car Sales) which they would be able to set off against the instalment due to the bank. Although most banks participated in the scheme, FirstRand’s WesBank was the only South African bank that refused to have anything to do with it. WesBank CEO Chris de Kock, said that the numbers ‘just did not make sense’ and the business model was just not sustainable. As De Kock predicted, the scheme collapsed. To make matters worse, De Kock said, the agreement customers signed with Just Cars, was ‘the most one-sided agreement you’re ever going to find’. The contract contained all sorts of trivial conditions that, if not meticulously adhered to, disqualified customers from claiming the financial subsidies the scheme promised. Without the subsidies, there was no way that most of the buyers could make their monthly repayments to the banks. ‘It was clear that his model was based on finding ways to get rid of 80 per cent of his customers through these sorts of technicalities,’ says De Kock, ‘Their model relied on 80 per cent of their customers not claiming, or being able to claim, any of this money.’ SOURCES: Adapted from Knowler, W. 2014. ‘R699’ car deal owners in despair. iol motoring. 23 June 2014. Available from http://www.iol.co.za/motoring/industry-news/r699-car-deal-owners-in-despair1.1707476#.U-iQWMuKCP8 (Accessed on 11 August 2014); Barron, C. 2014. R699 cars: ‘We just did the basics and saw it was never going to work’. Sunday Times Business Times (electronic edition), 10 August 2014. Available from http://www.timeslive.co.za/businesstimes/2014/08/10/r699-cars-wejust-did-the-basics-and-saw-it-was-never-going-to-work (Accessed on 11 August 2014)

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The moral of the story is that every industry contains ‘good’ and ‘bad’ competitors. A firm should not condemn its good competitors and should instead attack its bad competitors. Good competitors play by the industry’s rules; they make realistic assumptions about the industry’s growth potential; they set prices in reasonable relation to costs; they favour a healthy industry; they limit themselves to a portion or segment of the industry; they motivate others to lower costs or improve differentiation; and they accept the general level of their share and profits. Bad competitors try to buy share rather than earn it, they take large risks, they invest in overcapacity and they upset industrial equilibrium. The Asian information technology firm, Huawei, operating in South Africa is an example of a ‘bad’ competitor. It is said that the firm is ‘… not afraid to infringe the odd patent [right]’.47 As a result of its questionable strategies, Huawei is highly competitive, with lower R & D costs and cheaper equipment.48 Corporate scandals, such as Masterbond, the Health and Racquet Club, and, more recently, Fidentia, are examples of ‘bad’ competitors.

LOOKING BACK Today’s firms face their toughest competition ever. Understanding customers is an important first step in developing strong customer relationships, but it is not enough. To gain a competitive advantage, firms must use this understanding to design market offers that offer more value than the offers of its competitors. Ariel’s distinctive brand identity and rapid acceptance has forced Unilever to "****** DEMO - www.ebook-converter.com*******"

reconsider its marketing strategy. Unilever has responded by saying that it will increase its spending on advertising – but that may not be enough.

SUMMARY 1

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Analysing actual and potential competitors. A firm can place competitors on a continuum ranging from direct competition (level 1) to indirect competition (level 4). At level 1, competitors offer more or less the same products and services, whereas level 4 competition is more generic in nature. Differentiating between the strategic group and customer-based approaches to identify competition. Sometimes also referred to as the market perspective to competition, this perspective regards all firms or organisations that satisfy the same customer needs as competitors. The strategic-group approach to identify competition is sometimes also referred to as the industry concept of competition. Competitive activity must be seen in the context of an industry. The viewpoint is that all firms that exist in the same industry are de facto competitors. The customer-based approach analyses the choices that consumers make when buying a product or brand. A second alternative is to analyse the usages of the products that consumers buy. The strategic group approach considers competition from a supplier rather than from a consumer perspective.

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The industry structures. Four competitive models can 5 be distinguished: monopoly, monopolistic competition, oligopoly and pure competition. 6 Identifying competitors. Firms should consider direct and indirect competitors through a competitor analysis. A competitor analysis starts with current and potential competitors. It may utilise a customer-based or a strategic-group approach. 7 A key competitor is any firm targeting the same market segment as the firm conducting the analysis. The objective of a key competitor analysis is to be able to predict key competitors’ potential actions, especially those taken in response to the actions of the local business. 8 Understanding current competitors. Understanding competitors and their activities can provide several benefits. Factors that should be taken into account include competitors’ size, growth, profitability, image, objectives, current and past strategies, organisational culture, cost structure, exit barriers and strengths and weaknesses. 9 Understanding potential competitors. It is important to consider the involvement of potential market entrants in market expansion, product expansion and integration, as well as entry barriers. 10 Strengths and weaknesses compared to key success factors. These can be analysed using a three-step approach, during which the firm and its key competitors are compared with each other on the basis of key success factors in the industry. 11 Reaction patterns. How a firm will respond to "****** DEMO - www.ebook-converter.com*******"

competition will be determined by its business philosophy, cultures and values. Most competitors can be divided into one of four categories: the laid-back competitor, the selective competitor, the tiger competitor and the stochastic competitor. 12 Direct rivalry. In some markets rivals co-exist comfortably, but in others they are constantly at war. Competitive equilibrium can be disturbed by a number of factors. 13 Selecting competitors to attack and to avoid. Most firms will compete with the weakest rivals because this requires fewer resources. The problem is that defeating weak competitors will not lead to many gains.

DISCUSSION AND WRITING QUESTIONS 1

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Using Porter’s five forces’ model, suggest why there is intense rivalry between the leading supermarket brands in South Africa. A new low-cost, ‘no-frills’ airline has just announced that it will enter the South African airline industry. Conduct a competitor analysis for the new airline. Assume that Volkswagen has just announced that it will drop all its vehicle prices by 25 per cent from next month. How do you think Toyota will respond? Provide reasons. How do you think an online bank could compete in the South African banking industry? Choose a B2C industry sector such as airlines, book retailers, book publishers, CDs or clothing. Work

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6

individually or in groups to identify the type of information that should be available from websites which will be useful in terms of competitor benchmarking. Once your criteria have been developed, you should then benchmark firms and summarise which you feel is making best use of the Internet. Why is Google standing out from its rivals?

STRATEGY READER >> Success not only breeds success – it also attracts competition Grocery retailer Woolworths has been a particularly successful retailer, generating sales growth and profitability well above those of its direct competitors. But success sometimes attracts competition. The growing size of the LSM 8–10 segment has attracted competition from Fruit and Veg City Group’s Food Lover’s Market. Since its establishment in 2006 ninety Food Lover’s Market stores have been opened and will open another 15 in the next 18 months. Sales have reached R6 billion in 2013 compared to R1,6 billion in 2006. But there is more. Also targeting the top end of the market is Oxford Freshmarket (currently only in Durban), a resurgent Pick ‘n Pay with its Pick ‘n Pay Finest range and Checkers who already has more than 3 m customers in LSM 7–10. SOURCE: Based on Thomas, S. 2013. For the love of food. Financial Mail, 1 – 6 November 2013, pp. 48-49

QUESTIONS 1

How should Woolworths respond to increasing competition at the top-end of the grocery market?

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KEY CONCEPTS Attractive market (or market segment): this market promises returns on investment well above the cost of capital for the firms serving that market. Bargaining power: the ability to positively influence others in a selling situation. Entry barriers: the investment of resources required to compete effectively in a given market. Exit barriers: the factors that hinder a firm from disinvesting in a market in which it has been competing. Industry: a group of firms that offer a product or class of products that are close substitutes for each other. Monopolistic competition: a situation in which a relatively large number of suppliers offer similar, but not identical, products. Monopoly: a market situation in which one firm controls the output and price of a product for which there are no close substitutes. Oligopoly: a market characterised by a relatively small number of firms dominating the market for goods or a service. Price sensitivity: a measure of how important lower prices are to a buyer. Pricing flexibility: the amount of freedom that marketers have to set their own prices in a market independently of competitors. Pure competition: a market characterised by a large number of sellers marketing a fairly standardised product to a group of buyers who are well informed about the market. Stochastic competitor: a competitor that does not exhibit a predictable reaction pattern when faced with a new competitive threat. Strategic group: a group of firms following the same strategy in a given target market.

REFERENCES 1

2 3

4

Wilson, R.M.S. & Gilligan, C. 2005. Strategic marketing management: Planning, implementation and control. London: Elsevier ButterworthHeinemann, p. 231. Kotler, P. Marketing management (10th millennium edition). Prentice Hall, p. 221. Understanding your competition. 2008. Available from http://pinoybusiness.org/2008/04/23/understanding-your-competition/ (Accessed on April 2008). This section is based on Aaker, D.A. 2001. Strategic market management (6th

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5 6 7 8 9 10

11

12

13 14 15 16

17

18 19 20

21

edition). Wiley, pp. 61–66. Kotler, P. & Keller, K.L. 2006. Marketing management (12th edition). Prentice Hall, p. 346. Kotler & Keller op cit, 346. Chen, M. 1996. Competitor analysis and interfirm rivalry: Toward a theoretical integration. The Academy of Management Review 21(1), p. 102. Ibid. Cravens, D.W. & Piercy, N.F. 2006. Strategic marketing (8th edition). New York: McGraw-Hill, p. 83. Mochiko, T. 2014. Vodacom buyout ‘important’ for Neotel. Business Day Live, 27 May 2014. Available from http://www.bdlive.co.za/business/technology/2014/05/27/vodacombuyout-important-for-neotel (Accessed June 2014). Phasiswe, K. 2005. Transnet on way to becoming a lean freight operator. Business Day electronic edition, 27 December 2005; Phasiswe, K. 2007. Cash flow gives Transnet confidence to fund expansion from reserves. Business Day electronic edition, 27 June 2007; Transnet Integrated Report, 2013. Riley. G. 2012. Perfect Competition - Economics of Competitive Markets, 23 September, 2012. Available from http://tutor2u.net/economics/revisionnotes/a2-micro-perfect-competition.html (Accessed on June 2014). Kotler, P. 2002. Marketing management (10th millennium edition). Prentice Hall, pp. 218–219. Investment bankers in scramble for business. Business Day electronic edition, 9 September 2003. Kotler, P. 2002. Marketing management (10th millennium edition). Prentice Hall, pp. 218–219. Daneshkhu, S. 2013. Competition hots up for coffee capsule market smooth operators. Available from http://www.ft.com/cms/s/0/d8c237a4-489c-11e38237-00144feabdc0.html#axzz39KNhsT84 (Accessed June 2014). Webb, S. 2014. Coffee wars: Tesco launches espresso shot pods to rival Nespresso luxury coffee capsules endorsed by George Clooney. Available from http://www.dailymail.co.uk/ (Accessed in June 2014) Cravens, D.W. & Piercy, N.F. 2006. Strategic marketing (8th edition). New York: McGraw-Hill, p. 85. Courtney, H., Horn, J.T. and Kar, J. 2009. Getting into your competitor’s head. Available from http://www. mckinsey.com/ (Accessed June 2014). Mohammed, R.A., Fisher, R.J., Jaworski, B.J. & Paddison, G.J. 2003. Internet marketing: Building advantage in the networked economy (2nd edition). Boston: McGraw-Hill, p. 512. PWC. Shaping the bank of the future South African banking survey 2013. Available from www.pwc.co.za/banking(Accessed June 2014).

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22 Media release published on the McGregor BFA, Moneymax website. 5 July 2001. Available from www. moneymax.co.za. 23 Kotler, P. & Armstrong, G. 2008. Principles of marketing management (12th edition). Upper Saddle River: Prentice Hall, p. 518. 24 Thomas, S. 2013. For the love of food. Financial Mail, 1 – 6 November, p. 48. 25 Kotler, P. 2002. Marketing management (10th millennium edition). Prentice Hall, p. 224. 26 Battle for the bottom line. Financial Mail, 8 December 2000, p. 36. 27 Graham, S. 2002. Cell C plans to hit the business button. Business Times, 14 July 2002, p. 3. 28 This section is based on Aaker, D.A. 2001. Strategic market management (6th edition). Wiley, pp. 57–61. 29 Kotler, P. & Armstrong, G. 2008. Principles of marketing management (12th edition). Upper Saddle River: Prentice Hall, p. 519. 30 Chaffey, D., Ellis-Chadwick, F., Mayer, R. & Johnston, K. 2006. Internet marketing: Strategy, implementation and practice (3rd edition). Harlow: Prentice Hall, p. 85. 31 Jobber, D. 1998. Principles and practice of marketing. London: McGraw-Hill, pp. 497–499. 32 Alsem, K.J. 2007. Strategic marketing: An applied approach. New York: McGraw-Hill, pp. 131–132. 33 Kotler, P. 2002. Marketing management (10th millennium edition). Prentice Hall, p. 225. 34 Kotler op cit, p. 226. 35 Adami, N. 2100. Challenge brewing. Financial Mail, 29 April, p. 14. 36 Claasen, L. 2002. Pick n Pay steps up competition. Business Day, 26 May 2002. 37 Mokgata, Z. 2013. War of the soaps. Financial Mail, 19–24 July, p. 58. 38 Shapshak, T. 2014. Buy and rule. Financial Mail, 28 February – March, p. 36. 39 Chaffey, D., Ellis-Chadwick, F., Mayer, R. & Johnston, K. 2006. Internet marketing: Strategy, implementation and practice (3rd edition). Harlow: Prentice Hall, p. 85. 40 Gilligan, C. & Wilson, R.M.S. 2003. Strategic marketing management. Oxford: Butterworth-Heinemann, p.183. 41 Koenderman, T. 2001. Disrupting the opposition pays off. Financial Mail, 1 June 2001, p. 69. 42 Neethling, T. 2012. Cell C boss plans to gain market share from rivals. Business Day, 29 March, p. 16. 43 Msombi, S. 1999. Global hair-care war reaches SA. Business Times, 3 October 1999, p. 1. 44 Wilson, C. 2014. FNB, Cell C ‘joining hands’. Citizen, 4 August 2014, p. 22. 45 Bruce Henderson, as summarised by Kotler, P. 2002. Marketing management

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(10th millennium edition). Prentice Hall, p. 228. 46 Selecting Competitors to Attack and Avoid. Available from http://lib.znate.ru/docs/index-106622.html?page=100 (Accessed 24 November 2014). 47 Planting, S. 2003. Up and at them. Financial Mail, 21 March 2003, p. 32. 48 Ibid.

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CHAPTER

05

Information for marketing decision-making and marketing research

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Describe the relevance of information for managerial decisionmaking. 2 Explain the nature and purpose of a marketing decision support system. 3 Distinguish between database marketing and micro-marketing. 4 Describe the importance of database marketing. 5 Distinguish between the descriptive, diagnostic and predictive roles of research. 6 Define marketing research and describe the relationship between marketing research and a marketing decision support system. 7 Explain the importance of marketing research in marketing management decision-making. 8 Describe the steps involved in conducting a marketing research project. 9 Demonstrate your ability to plan a marketing research project by preparing a research proposal. 10 Distinguish among the various types of techniques available for "****** DEMO - www.ebook-converter.com*******"

11 12 13

15 16

17

collecting primary data in terms of their nature and advantages and disadvantages. Prepare a set of guidelines for questionnaire development. Critically evaluate the means of measuring consumer perceptions and attitudes. Distinguish between probability and non-probability samples. 14 Explain when marketing research should and should not be conducted. Describe a set of criteria for evaluating research. Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. Provide a marketing management solution related to any of the above outcomes.

>> Marketing in practice Listen and obey Consumer-facing companies must take heed of their customers’ opinions and act on them. Logically this is obvious, yet many SA companies fail to do so, says Aki Kalliatakis, CEO of consumer relationship consultancy The Leadership LaunchPad. Kalliatakis says the message many companies send their customers is: ‘You know nothing and are not worth listening to.’ This conclusion is borne out by surveys conducted by his firm over almost 25 years. ‘It is amazing to see how many companies do not challenge things that make it physically, intellectually and emotionally difficult to do "****** DEMO - www.ebook-converter.com*******"

business with them,’ he says. Customers of some companies have virtually given up expecting a positive response to their needs. Banks are among the worst offenders, he says, pointing to the contrasting success Capitec has achieved by listening to consumers and addressing their needs. ‘A smart brand listens, reinterprets what it hears and presents customers with a solution that meets their needs,’ says Charl Nel, Capitec’s communications head. Applying this approach has helped Capitec grow customer numbers from 1,5m to 3,5m over the past two years. Capitec’s success serves as a warning to companies that ignore their customers, says Kalliatakis. The bottom line is that consumers are becoming more demanding and businesses that respond to their needs are likely to excel. But, he warns: ‘Increasingly customers who do not get the service they expect are likely to go elsewhere.’ SOURCE: Adapted from Thomas, S. 2012. Listen and obey. Financial Mail, 6 July 2012, p. 56

QUESTIONS 1 2

What is the result if a firm has an attitude of: ‘You know nothing and are not worth listening to’ towards its customers? What is the reason for Capitec Bank’s phenomenal success?

1. Introduction In Chapter 3 we pointed out that to be able to implement the "****** DEMO - www.ebook-converter.com*******"

marketing concept, marketers need to understand the needs and wants of their target market. But how do marketers become aware of the needs and wants of consumers? The answer is by collecting and interpreting consumer-related information. This information can be collected by a variety of means. Many of them have already been discussed (see the discussion in the section ‘Methods of environmental scanning’ in Chapter 2) and others will be discussed in this chapter. The most important of these data-collection techniques is marketing research, which is a technique used to collect marketing information to enhance the quality of managerial decision-making.

2. The need for managerial information

LO1

Marketing research can be defined as the systematic and objective process of collecting, recording and analysing data to guide managerial decision-making.1 From a marketing perspective, information is particularly important because firms that do not know and understand consumer needs and wants cannot implement the marketing concept. Ignorance of consumer needs will also stifle efforts to develop new need-satisfying products, and leave the opportunity for competitors to steal a march on the firm. Many firms have made very costly and embarrassing mistakes because they did not have sufficient information at their disposal. Alert, well-informed firms, on the other hand, are able to anticipate consumer-need changes and detect and anticipate what competitors – both existing and potential – "****** DEMO - www.ebook-converter.com*******"

are doing. This way, they ensure that they are not caught off guard. Information is also critical when firms get involved in a new venture – such as launching a new product, entering a new market segment or using a new channel of distribution. Managerial decision-making is almost invariably about the future – and the future is by definition uncertain. The availability of information reduces (but does not eliminate) risk and enhances the quality of decision-making. It leads to more accurate planning and better anticipation of consumer needs and competitive activity, which allows the firm to utilise new opportunities quickly, and to effectively overcome threats.

EXAMPLE >> To anticipate new developments in consumer markets there are a variety of free tools that track the popularity of subjects on certain social media platforms and in so doing help businesses anticipate future trends. For example, a look at WhatTheTrend.com shows that ‘Big Screen Kindle’, at the time of writing, is a topic being discussed on Twitter. The site explains that this subject is prominent because the new Kindle’s large screen is rumoured to be more suitable for newspaper content, which is one step closer to a paperless culture. So for a company like the Times Media Group, which owns several newspapers and electronic media in South Africa, this is important information which might impact on its business in the future.2 But information and marketing research is not a cure for all ills, and certainly does not guarantee success. Three mistakes commonly made by researchers are: • •

Wrong assumptions that are made about the type of information required The wrong research technique is used

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•

The data are misinterpreted.

3. Marketing decision support systems

LO2

Accurate, relevant and timely information that is easily accessible is the lifeblood of marketing decision-making. Good information can help maximise a firm’s sales and assist with the efficient use of scarce resources. Marketing decision support systems have become central in these endeavours. There’s a growing emphasis on the use of analytics software to turn both internal and external data, into insights that can guide managerial decision-making (see Reader 27 ‘Big Brother watches Discovery members’). A number of trends are shaping these developments. The first trend is the near-total digitisation of business processes – and just about everything else. Company systems are now repositories of vast and growing amounts of data, plus client and product information. At Hewlett Packard for instance they can access vast amounts of external data about everything from commodity prices to weather forecasts to geopolitical information.3 To prepare and adjust marketing strategies and plans, managers thus need a system for collecting everyday information about developments in the marketing environment – that is, for collecting marketing intelligence. The system most commonly used these days for collecting and storing marketing intelligence is called a marketing decision support system (DSS).

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>> Strategy The need for information that is accurate, relevant and timely is demonstrated by the view of a manager of the clothing retailer, Edgars. He says: ‘The ability to interpret what was happening in the South African environment and respond to it in a fluid, constantly evolving kind of way is crucial to the success Edgars has enjoyed. As we evolved through our credit business, our merchandise business and our marketing strategy, we realised that fast and accurate information would give us the edge. And so we are using technology far more aggressively. Throughout the Edgars Group, the results of the previous day’s trading are on the computer terminals of its key executives the following morning. They can see the results by region, by store, by department and even by item of merchandise.’4 A marketing decision support system is an interactive, flexible computerised information system that enables managers to obtain and manipulate information as they are making decisions. A DSS bypasses the information-processing specialist and gives managers access to useful data (such as sales figures, advertising expenditure and research results) from their own computers. An effective DSS has the following characteristics: •

Interactivity. For a DSS system to be effective, managers must be able to give simple instructions and see immediate results. The process ought to be under their

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•

•

•

direct control, and the assistance of a computer programmer should not be required. In other words, a DSS system should be user-friendly and managers should not have to wait long for the DSS system to provide the required reports. Flexibility. A DSS should be able to sort, regroup, total, average and manipulate the data in various ways. It will shift gears as the user changes topics, matching information to the problem at hand. For example, the CEO must be able to see highly aggregated figures (such as sales figures), and the marketing analyst must be able to view very detailed breakdowns of the same data (such as sales by region, by product or by salesperson). It is discovery-orientated. Managers must be able to probe for trends, isolate problems and ask ‘what if’ questions. An example would be: what will happen to sales if we reduce the size of our sales force? Accessibility. A DSS must be easy to learn and use by managers who are not skilled computer users. Novice users should be able to choose a standard – or default – method of using the system. They can bypass optional features so that they can work with the basic system right away while gradually learning to use its advanced features.

>>Strategy The US firm Quaker Oats’ DSS, for example, contains some 2 billion facts about products, national trends and competitors. Management credits their DSS with "****** DEMO - www.ebook-converter.com*******"

helping the firm achieve a number-one market share in several product categories, including Quaker Oats cereals and the sports drink Gatorade. More than 400 marketing professionals at Quaker Oats use the DSS daily. They use it for three major tasks: reporting, tracking and running the standard reports; marketing planning, which automates the brand planning and budgeting process by adding ‘what if’ analysis and marketing capabilities; and eliciting people’s immediate answers to spontaneous marketing questions.

READER 27 >> Big Brother watches Discovery members Members of Discovery should know Big Brother is indeed watching them. CEO Adrian Gore spent some time during his presentation on the full-year results to June talking about the power of the data the company collects on its members’ shopping habits, which it is using through its partnerships with Woolworths and Pick n Pay to study the effects of different diets. ‘We track every basket of food our customers buy, we know the demographic, we know their cholesterol reading, their BMI (body mass index) and we can correlate these diets to these readings,’ Mr Gore said. Mr Gore said Discovery had no answers as yet but the data were ‘incredibly rich’. The answers are important to Discovery as it bases its business model on changing behaviour with the aim of reducing claims, whether they are related to health, life cover or car accidents. Discovery has 17 million life years’ worth of behavioural, clinical and actuarial data on the correlations between incentives and behaviour change, as well as between behaviour change and risk. According to Mr Gore, the data show that safer drivers also manage their health better, smokers are worse drivers, and people who manage their health also manage their credit "****** DEMO - www.ebook-converter.com*******"

better. SOURCE: Marrs, D. 2014. Big Brother watches Discovery members. Business Day, 5 November 2014, p. 10

A hypothetical example showing how a DSS can be used is provided by Renee Smith, marketing director and manager of new products for Central Corporation. To evaluate sales of a recently introduced product, Renee can ‘call up’ sales by the week, then by the month, breaking the information up in more detail such as by, say, customer segments or different geographic regions. As she works at her desktop computer, her inquiries can go in several directions, depending on the decision at hand. If her train of thought raises questions about monthly sales last quarter compared with the sales forecasts, she can use her DSS to analyse problems immediately. Renee might see that her new product’s sales were significantly below forecast. Were her forecasts too optimistic? She compares other products’ sales with her forecasts and finds that the targets were very accurate. Was something wrong with the product? Is her sales department getting insufficient sales leads, or is it not putting sales leads to good use? Considering how to examine that question, she checks the ratios of leads converted to sales, product by product. The results disturb her: only 5 per cent of the new product’s leads generated orders compared with the firm’s 12 per cent all-product average. Why? Renee guesses that the sales force is not supporting the new product vigorously enough. Qualitative information from the DSS could perhaps provide more evidence to support that suspicion. But already having "****** DEMO - www.ebook-converter.com*******"

enough quantitative knowledge to satisfy her curiosity, the marketing director acts on her intuition and experience and decides to have a chat with her sales manager.

4. Database marketing and micromarketing

LO3

Perhaps the fastest-growing use of a DSS is for database marketing purposes, which is the creation of a large computerised file of customers’ and potential customers’ profiles (i.e. demographics such as age, gender, marital status, address) and purchase patterns. (What was bought? Where? When? How many?) The DSS is usually the key tool for successful micro-marketing, which relies on very specific information about a market and the individuals who make up a market. More specifically, database marketing can: •

Identify the most profitable and least profitable customers • Identify the most profitable market segments or individuals and target efforts with greater efficiency and effectiveness • Target marketing efforts at those goods, services and market segments that require the most support • Increase revenue by repackaging and repricing products for specific market segments • Evaluate opportunities for offering new products and services • Identify the products and services that are selling well "****** DEMO - www.ebook-converter.com*******"

and are most profitable.

EXAMPLE >> The size of many databases is astounding. In the United States, Ford Motor Company’s database has over 50 million names; Kraft General Foods, 25 million; and Kimberly-Clark (maker of Huggies nappies), 10 million new parents’ names. General Motors now has a database of 12 million GM credit card holders, giving the firm access to a great deal of data on their buying habits. GM also surveys these customers to get information on driving habits and needs. The Clicks Club Card programme has a database of 5 million names and addresses, of which 2,1 million are active. Clicks mails out 6 million promotional packs a year in addition to the Club Card magazine. WEBSITE Consider how the Quaker companies use e-mail to build their databases: www.quakermeal.com www.gatorade.com

>>Technology in action Mining ‘big data’ is new commercial trend ‘Big data’ is increasingly becoming one of the most closely watched technology trends and many companies are already acquiring the required resources to process large amounts of data and content created internally and externally. ‘Big data’ is a phrase that refers to the software tools, processes and procedures that allow companies to create and manage very large data sets that conventional database systems cannot handle. Companies use big-data technologies for insights into new and emerging types of data and "****** DEMO - www.ebook-converter.com*******"

content and related trends, to make their businesses more agile. For example, a company may use big-data-related software to analyse big data in order to monitor customer perceptions and sentiments about its brand on social media websites. The increasing volume and detail of information, the rise of multimedia, social media, and the rise in Internet use and access is fuelling exponential growth in data and making the rapid growth of data more challenging to manage, according to analysts. According to IBM, every day 2,5quintillion bytes of data are created. This data comes from everywhere, such as sensors used to gather climate information, postings to social media sites, digital pictures and videos, purchase transaction records, cellphones and satellite navigation systems, to name a few, says IBM. Companies are spending billions of rands on software related to data management and analytics. SOURCE: Adapted from Mochiko, T. 2012. Mining ‘big data’ is new commercial trend. Business Day, 19 June 2012, p. 12

5. The importance of database marketing LO4 Direct marketing and database marketing are not synonymous, although direct marketers have long led the way in using databases for marketing purposes. With better targeting of prospects for products and promotions and a "****** DEMO - www.ebook-converter.com*******"

greater ability to customise marketing messages and programmes, and so on, database marketing clearly contributes to greater marketing efficiency. When utilised properly, it yields double-digit response rates, compared with 2 to 4 per cent for ‘junk mail’.5 In the 1950s, mass marketers and advertisers began using media such as television and radio to get the same message to a large number of people simultaneously. Database marketing, on the other hand, can get a customised, individual message to everyone simultaneously through direct mail. This is why database marketing is sometimes called micro-marketing. Database marketing can create a computerised form of the old-fashioned relationship that people used to have with the corner grocer, butcher or baker. ‘A database is sort of a collective memory’, says Richard G. Barlow, president of Frequency Marketing, Inc., a consulting firm. ‘It deals with you in the same personalised way as a mom-and-pop grocery store, where they knew customers by name and stocked what they wanted.’6 As Richard Came, then marketing director of Dimension Data, referring to new technology says: ‘Business can move from mass marketing to mass customisation and can assume the role of the small proprietor, once again doing business with individuals – though hundreds of thousands of them – one at a time.’7 (See Reader 28 ‘Science of behavior key to bank loyalty schemes’.)

READER 28 >> Science of behaviour key to bank loyalty "****** DEMO - www.ebook-converter.com*******"

schemes The major banks are increasingly adopting a scientific approach to their loyalty programmes to make them more rewarding, for both banks and consumers. It is all about big data, customer behavioural science and finding ways to stand out from the clutter of the 100 or so loyalty programmes available in South Africa. ‘Ten to 15 years ago, companies had to have a call centre, five to 10 years ago it was a website. Now it’s a loyalty programme,’ he says. Recent research by Value Nett-work found South Africa had almost 100 loyalty programmes, with more than 50 million registered members. The major banks tout their loyalty programmes as essential tools to acquire and retain customers. The banks use the programmes as a means to influence customer behaviour. All the banks, for example, use rewards to entice customers out of branches and into transacting online. They also offer carrots to customers who transact more with their bank. The head of transaction banking and rewards at Absa retail and business banking, James Rheeder, says a rewards programme is not going to make someone change banks. ‘It is about increasing debit and credit card usage and customer loyalty. You want customers to be transaction loyal, which means they deposit their salary in your bank.’ The head of loyalty and rewards at Standard Bank, Faye Elizabeth Foster, says its rewards programme, UCount, has to make a difference to its bottom line. The efforts to ensure loyalty programmes are effective and ultimately drive profitability has seen growing emphasis on behavioural science and using big data in a smarter way. Ms Foster says banks usually have good data on customers, while rewards programmes provide more detailed information, such as what people want to buy with their disposable income or where they go on holiday. ‘You can use data smartly to offer customers a much richer, personalised offering, which will become a big differentiator of loyalty programmes in future,’ she says. This could mean targeting customers in malls with specific offers via their smartphones or social media. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Jones, G. 2014. Science of behaviour key to bank loyalty schemes. Business Day, 18 August 2014, p. 10

Database marketing provides tremendous opportunities for products that can be sold by cross-selling related products. For example, Canon Computer Systems maintains a database of its 1,3 million customers. The firm obtained a 50 per cent response rate in a direct-mail solicitation asking printer owners if they wanted information on a new colour scanner, and buyers of scanners received four free ink cartridges for their printers.

EXAMPLE >> A technique of growing popularity for building a database is the creation of ‘customer clubs’. Kraft (in the United States), for example, has been inviting children to join the Cheese & Macaroni Club. For three proofs of purchase, a small joining fee and a completed membership form with the child’s – and, of course, the mother’s – address, Kraft will send a painter’s cap, bracelet, shoelaces, a book of stickers and other goodies. By requiring customers who respond to offers of free shirts, sleeping bags, or other merchandise to fill out detailed questionnaires, Philip Morris has built a database of about 26 million smokers. The Clicks retail chain has a data base of 5 million and they know that 77 per cent of its sales are to its Club Card users – drastically cutting the need for, and expenditure on, advertising. Woolworths can track 64 per cent of its sales using the data base generated by its WRewards loyalty programme. WEBSITE Digital Fire is an email marketing and digital media specialist that specialises in full service opt-in email marketing, email data rental, email database management and digital media consultancy. Visit their website and see how they can assist firms

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in the above areas. http://www.digitalfire.co.za/

Database marketing is unfortunately a source of concern for many consumers (see Chapter 2) because of the potential for invasion of privacy. A recent study found that 89 per cent of South Africans are very concerned about information privacy.8 Privacy and the use of consumer information is regulated in South Africa by the Electronic Communications and Transactions Act (No 25 of 2002). This act limits the extent to which consumers’ personal information can be utilised for marketing purposes.

6. The role of marketing research Marketing research is the process of planning, collecting and analysing data of relevance to marketing decisions. The results of this analysis are then communicated to management. Marketing research plays a key role in the marketing system. It provides decision-makers with data on the effectiveness of the current marketing mix, and insights for required changes. Furthermore, marketing research is a main data source for management information systems and DSS. To be useful, marketing research information must be readily available, correct and reliable, and relevant. An example of unreliable information is that provided by Statistics South Africa (SSA). A number of years ago, SSA reported that the number of overseas visitors to South Africa had grown by 5 per cent. After this figure was announced, it "****** DEMO - www.ebook-converter.com*******"

was revised to 16 per cent. The following question can now be asked: can the tourism industry rely on SSA information to plan its marketing strategies? (see Reader 29 ‘What lies behind the statistics?’).

READER 29 >> What lies behind the statistics? I am not surprised to read Victor Tharage’s letter (August 24–29). Government employees in the tourism field love to quote official statistics as these numbers make them look good. The reality is that the tourism industry is in bad shape - especially in the rural areas. Hiding behind meaningless statistics is not going to change the fact that most tourism companies are experiencing extremely low occupancies and many have had to retrench. It is the poorest of the poor who are feeling the brunt of these retrenchments. The fact is that our tourism arrival statistics are flawed. One Lesotho shopper who travels to SA 100 times a year can be counted as 100 tourists. One American who is travelling to Botswana/East Africa and so on, can be counted as two tourists – once on arrival from the US and again when travelling back into SA from Africa before flying back home. We have no idea if the 43 000 British ‘tourists’ who visited SA in March 2012 are actually from the UK as we do not accurately measure the country of residence of our arrivals. These are just a few of many issues that distort our tourism arrival numbers and render our arrival statistics ineffective. Tourism statistics should be collected on departure (as they do very successfully in Australia) where key questions are asked and accurate answers gained via an easily read bar-card that delivers accurate statistics within weeks. This will allow all stakeholders to quickly learn who is travelling to SA and why. Once we know these arrival numbers accurately, then SA Tourism and tourism companies can create effective marketing campaigns that deliver real value for the country. SOURCE: Letter to the Financial Mail, 31 August, 2012, p. 8

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7. The functions of marketing research

LO5

Marketing research plays three roles in any firm: descriptive, diagnostic and predictive. Its descriptive role includes collecting and presenting factual statements. For example, what is the historic sales trend in the industry? What are consumers’ attitudes towards a product and its advertising? Its diagnostic role includes explaining data and results. For instance, what was the impact on sales of a change in the design of a product package? Its predictive function is to address ‘what if’ questions. In other words, if we increase our firm’s advertising from R5 million per year to R7 million per year, what impact will it have on our sales and market share?

8. The relationship between marketing research and DSS

LO6

Because marketing research is problem-orientated, managers use it when they need guidance to solve a specific problem. Marketing research has been used, for example, to find out what features consumers want in a new computer. It has also helped product development managers to decide how much milk to add in a new cream sauce for frozen peas. The US Army has used marketing research to develop a profile of the young person most likely to respond to recruitment advertisements. The SABC uses it to assess viewers’ needs and assist with programme scheduling. "****** DEMO - www.ebook-converter.com*******"

Magazines such as Getaway, Cosmopolitan, YOU and Drum regularly survey their readers to assess customer satisfaction and readers’ reading habits, and to adjust their content accordingly. By contrast, DSS continually channels information about environmental changes to the firm. This information is collected from a variety of sources, both inside (internal) and outside the firm (external). One such important information source is marketing research.

9. Management uses of marketing research

LO7

Marketing research can help managers in several ways. It improves the quality of decision-making and helps managers trace problems (see the Sanlam Health strategy extract below). Most importantly, however, sound marketing research helps managers to understand the market better and alerts them to market trends.

>>Strategy The medical scheme Sanlam Health has recently begun capitalising on its data analysis capabilities. Sanlam Health has developed the ability to analyse data in a way not possible previously. A typical example is its use in the analysis of asthma patient data. Sophisticated techniques and models are used to enable medical "****** DEMO - www.ebook-converter.com*******"

schemes to identify which asthma patients would be likely to end up in hospital within the next 12 months. This way, proactive and pre-emptive measures and treatment can be implemented. These types of data give Sanlam Health the ability to examine the efficacy of preventive steps, such as flu injections, measured against members’ claims patterns. It is able to ascertain if such treatment is making a difference, and if so, to what degree. High-risk members are then encouraged to have the injections. All this gives Sanlam Health the ability to act more intelligently and efficiently in the way it manages the health of the scheme’s members. Proficient data analysis capability includes the ability to predict future trends, such as developments in genetic engineering and DNA manipulation, for example, which could have a future bearing on areas of treatment, such as treatment for cancer.9

EXAMPLE >> The SABC regularly analyses what viewers think of their programmes as well as the content of its own television programmes. A recent research report released by Media Monitoring Africa (MMA) which was based on an analysis of SABC television schedules and news bulletins from all the TV stations and some radio stations found that 21 per cent of broadcasting time was filled with repeats of recently aired programmes. When it came to analysis of news bulletins, the researchers found that the SABC was unable to set the news agenda but rather followed the lead of others such as the print media – and that the news was characterised by event-based reporting with political parties dominating news sources. Among the most interesting findings in the research on SABC’s news bulletins are: • Women were grossly under-represented as news sources – only 20 per cent, which is below the global figures of 24 per cent "****** DEMO - www.ebook-converter.com*******"

• • •

Political parties were the most frequently accessed class of news sources – at 21 per cent – while academics and experts were the least (2 per cent) Most news bulletins contained basic, factual information and did not often go further to explain the story in depth. However, many news stories did discuss the cause of an issue and also mentioned relevant legislation Reporting was also generally ethical. 10

>>Strategy Faced with declining circulation figures for both Huisgenoot and YOU magazines a few years ago, management commissioned research that revealed that readers’ most important needs are information on how to save time and money, articles on a good lifestyle and financial advice. It also emerged that the motives of the buyers of the magazines have changed: it is no longer a woman buying a magazine for herself, because the family happens to read it too. Most buyers were working women, it was found, which accounts for the shift in focus towards women, for instance, in food, décor and fashion, and beauty features. Previously, there had been only teen fashion pages. The management of the two magazines then decided that the emphasis would be on practicality and value for money. ‘For the readers we serve, it is completely ridiculous to have an R800 scarf on the fashion pages’, they concluded.11 Finally, marketing research helps managers gauge the perceived value of their goods and services, as well as the "****** DEMO - www.ebook-converter.com*******"

level of customer satisfaction. The motor vehicle manufacturer Toyota does extensive marketing research to measure the effectiveness of its marketing activities. More specifically, Toyota’s objectives are to:12 • • • • • • • • • • •

Improve the accountability of marketing tools and managers Ensure that their marketing activities serve as an earlywarning device Measure top-of-mind brand awareness among consumers Identify and track key attributes for each model range Identify shifts in consumer needs Compare its performance on key attributes with those of its competitors Provide speedy feedback on marketing actions or decision-making Provide information on competitive activity Measure ad wear-out Assist with market segmentation Predict shifts in market share.

9.1 Improving the quality of decision-making Managers can improve their decision-making by using marketing research to explore the desirability of various marketing alternatives.

EXAMPLE >> Some years ago, General Mills decided to expand into fullservice restaurants. Marketing research indicated that the most popular ethnic food category in the United States was Italian, and that interest in pasta and "****** DEMO - www.ebook-converter.com*******"

preference for Italian food would continue to increase. The firm conducted many taste tests to find appropriate spice levels and to create a menu to please target customers. These marketing research studies led to the creation of The Olive Garden Italian restaurants, the fastest-growing and most popular full-service Italian restaurant chain in the United States. In South Africa, Coca-Cola, together with its advertising agency, SMLB, is making a concerted effort to understand the country’s different cultural groups better. ‘We are striving towards the concept of understanding the market, their fears and desires, from an emotional, rather than an intellectual, base’, says account management director, Nandi Scorer. Coca-Cola has done this by adapting its marketing research. Traditional research is now supplemented with more personal observation. ‘By going out into the field and observing consumers we have gained insights that we could not have got any other way.’13 Other examples of research findings that helped South African marketers make better decisions recently are the following: • More than 35 per cent of vehicle owners will buy a different brand from their current one when they buy a vehicle again14 • 42 per cent of adult South Africans do not have access to a bank account15 • More than 70 per cent of South African women have banking accounts but only 27 sought professional financial advice16

9.2 Identifying problems Another use of marketing research is to find out why a product has experienced a drop in sales or why a plan did not work. Was the initial decision incorrect? Did an unforeseen change in the external environment cause the plan to fail? How can the same mistake be avoided in the future?

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>>Strategy When spectator attendances were low during the Pro20 part of the 2009 England cricket tour (fewer than 8 000 spectators attended the second match at Supersport Park), Cricket South Africa commissioned a research firm to identify the reasons behind the poor attendances.17 Reynolds Metals used marketing research to develop a new line of plastic food wrap in transparent shades of red, green, yellow and blue. The research results among women showed that they loved the product. Yet after the product launch, sales were sluggish. Similarly, Reynolds Metals called on marketing research. A telephone survey found that men didn’t really see the point of coloured plastic wraps. Unfortunately, the purchasing staff of most supermarkets are male. Armed with this knowledge, Reynolds crafted a simple plan. It sent samples to the supermarket buyers’ homes, hoping that their wives’ reactions would convince the buyers that the product would sell. The strategy worked and sales soared. Typical problems identified by marketing research have been: •

•

Oros orange squash established that many mothers were concerned about the quality and healthiness of the product Tylenol found that consumers are reluctant to accept

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that a pain killer (Tylenol NightPain) can also be used for insomnia.

9.3 Understanding the market To effectively implement the marketing concept (see Chapter 1) it is important that marketing managers understand the needs, wants, decision-making and behavioural patterns of its target markets. Only then will they be able to develop a marketing mix that can optimally satisfy their needs. Managers also use marketing research to understand the dynamics of the market they are targeting. The Eastern Province Cricket Board (EPCB) recently surveyed a sample of cricket supporters and found that supporters expect more than just a game of cricket. They attend cricket for an experience of which the cricket itself is only a part. As a result of the study, the EPCB now offers a wide range of entertainment, including ball-throwing competitions and mini-cricket for children during lunch or supper breaks, and has improved the catering facilities at the ground. Publics, a leading South African advertising agency, is credited with knowing its market particularly well.18 Publics analyses the market, the brand and its competitors, and consumers – in terms of their habits, attitudes, preferences and rational and emotional needs. Some of the research tools the agency uses are the following: •

A brand preference monitor, which tracks consumer

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• • • • •

usage and preference of brands Market insight – a structured market or brand analysis procedure Context analysis – a technique to predict trends by studying the media Tweens – a continuous study of the characteristics of people aged 12 to 25 Prism – a structured procedure to determine a brand’s added value Mindscapes – a study of consumer perceptions and how they affect consumption patterns.

As you can see, marketing research helps managers develop and optimise the marketing mix by providing insights into the lifestyles, preferences and purchasing habits of target consumers (see Reader 30 ‘Brands get up close and personal’).

READER 30 >> Brands get up close and personal A Chinese woman squats on a low plastic stool, reaches for the shampoo and begins massaging it into her head, fingers working deep into her scalp in a kind of ritual. She is not the only Chinese woman to use conditioner like this – as testified by hundreds of hours of videotape, all filmed in Chinese bathrooms. Perverse? No: this is the Holy Grail of fast-moving consumer goods companies seeking to make products that consumers want. To that end, FMCG groups are earnestly studying human behaviour through focus groups, surveys and, more frequently in recent years, ways that are distinctly up close and personal. ‘Traditional research concentrated on the “what”. Now we are trying to "****** DEMO - www.ebook-converter.com*******"

establish the “why”,’ says Simon Stewart, marketing director at Britvic, the beverages company. ‘We are not asking what they think about products and ideas but focusing on what makes them tick.’ The same dynamics inform L’Oréal’s experimentation in bathroom photography. In similar experiments conducted in other markets, the French cosmetics group discovered that Korean women apply more potions and cosmetics to their faces than anyone else – a total of more than 25 creams and cosmetics at any one time, compared with 20–25 in Japan and more than double the amount used by American or European women. Japanese women may apply more than 50 coatings of mascara at one time, making European women – five to 10 coatings – look mere amateurs. ‘It all starts with observation,’ says Patricia Pineau, who oversees L’Oréal’s consumer insights team, talking about the company’s ‘evaluation centres’, which involve ‘labs’ decked out as bathrooms as well as cameras in people’s homes. ‘Observing is necessary to decode exactly what [women] are trying to get and what they are attracted to. Sometimes it is the gesture that will reveal something that they really want to gain,’ says Ms Pineau. And what gestures. Japanese women spend a full minute massaging in lotions, patting their faces and eyelids. In Brazil, women change their nail polish every day to match their dress – and are wanton with the brush, painting their fingers along with their nails and relying on a cotton bud to mop up afterwards. Back in the labs, scientists respond in turn. Thus Lancôme’s Génifique Youth Activating Concentrate has a stickier consistency in Japan than in Europe or the US, the better to pat in. Lip gloss is lighter in Japan, the better to allow the constant reapplication beloved of Japanese women. Sometimes, however, gestures are not enough. Hence Nestlé’s strategy of embedding researchers in family homes, taking tea with a multigenerational Indian family or sitting cross-legged on the floor pounding pulses with a group of scarved women and their jeans-wearing daughters in Syria. SOURCE: Adapted from Lucas, L. 2010. Brands get close and personal. Business Day, 20 October

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2010, p. 10

9.4 Fostering customer value and quality The environment in which a business operates today is far more competitive and mercurial than it has ever been. Consumers are less tolerant of poor quality and service, less forgiving and less loyal to specific brands. Consumer expectations are moving to the highest level. A good product and a fair price are not enough – and service must be excellent as well. High product quality, good service and a fair price mean value – which is the cornerstone of customer satisfaction. Satisfied customers are more likely to develop long-term relationships with a firm, which helps to create long-term profitability. Dissatisfied customers, on the other hand, move on, as Huisgenoot and YOU magazines have found. Marketing research is often used to identify the reasons for customer dissatisfaction. In a competitive environment, perceived customer satisfaction is the scorecard that tells a firm how well it is doing in delivering value. Marketing research is the vehicle for measuring perceived satisfaction. Today, virtually all large firms, from Toyota to British Airways, measure customer satisfaction. An old management adage says that ‘what gets measured gets done’, and customer satisfaction is no exception.

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10. The steps in a marketing research project

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Virtually all firms that have adopted the marketing concept engage in marketing research because it offers decisionmakers many benefits. Some firms spend millions of rands on marketing research; others, particularly smaller firms, conduct only informal research studies on a limited scale. However, whether a research project costs R20 000 or R4 million, the same general process should be followed. The marketing research process is a scientific approach to decision-making that maximises the chance of getting accurate and meaningful results. Figure 5.1 traces the typical steps in a marketing research process: • • • • • • •

Step 1: Define the marketing problem Step 2: Do some exploratory research by collecting secondary data Step 3: Formulate the research objectives Step 4: Plan the research design Step 5: Collect the data Step 6: Analyse and interpret the data, leading to conclusions Step 7: Prepare and present the report, including recommendations for management on how to solve the problem identified (see Step 1).

These steps are considered in more detail in the sections that follow. "****** DEMO - www.ebook-converter.com*******"

10.1 Step 1: Define the marketing problem The first step in the marketing research process must be to develop a problem statement on which the decision-maker (e.g. the marketing director) and the researcher (the marketing research manager) can both agree. This step is not as easy as it sounds. But it is important because this statement directs the rest of the research project or study. Some situations require only a simple problem statement, whereas others lend themselves to a detailed statement of the purpose of the study, or what the study will hope to achieve. For instance, a firm providing catering services in a factory canteen may define its problem as ‘declining sales’, whereas a women’s fashion retailer such as Foschini’s may decide to identify the most important factors that determine a satisfactory shopping experience. Early in the process the researcher ought to commit the research plan to paper. This is done by means of a research proposal. A research proposal ensures that both the marketing manager and the researcher agree on precisely what ought to be done. The research proposal, therefore, serves not only as a guideline for implementing the research project, but also as a tool to ensure that no misunderstandings arise. The ‘Framework for preparation of a research proposal’ can serve as the guide. One must keep in mind, though, that a research proposal is a planning document. The researcher sets out what he or she wants to do during the project in a research proposal. Most of the considerations and decisions that should be set out in the research proposal will be discussed during the rest of the "****** DEMO - www.ebook-converter.com*******"

chapter; the framework serves a guideline for decisionmaking.

10.2 Step 2: Exploratory research by collecting secondary data Exploratory research is especially important to any researcher dealing with a particular type of problem for the first time. It permits the researcher to become immersed in the problem – to learn about the firm, its products, markets, marketing history, competition, and so forth. In the catering example mentioned above, the researcher may interview the CEO, a few regular customers of the canteen, a few employees who do not eat at the canteen and a few competitors. The researcher may even visit the canteen posing as a real customer to experience the service and the food at first hand – a technique known as ‘mystery shopping’. After collecting this background information and analysing the new insights gained from this exploratory phase, the researcher may need to backtrack and revise the problem statement, if needed. Secondary data are those data previously collected for any purpose other than the current problem at hand. People both inside and outside the firm may previously have collected secondary data to meet their needs, such as IpsosMarkinor’s survey of brand perceptions in South Africa. Another example is TGI South Africa’s database. It has conducted 85 000 interviews with South Africans since 1993 with 11 biannual data release that have been used by over 1 "****** DEMO - www.ebook-converter.com*******"

000 market researchers, brand managers, product managers, media planners and strategists. Included in the survey is information about thousands of brands, together with information about media consumption, lifestyles and attitudes – all linked by a comprehensive set of demographics and geodemographics.19 A more recent innovation in the generation of secondary data is Wolfram Alpha (www.wolframalpha.com) which is a type of search engine, but it does not return a list of pages to be searched (like Google) nor is it a database of information. Wolfram Alpha interprets queries and, in addition to giving basic answers, is able to compute relationships amongst different variables. 20

EXAMPLE >> Another example of secondary information is completed research reports. For instance, Business consulting firm Accenture initiated a research study in 2013 to understand consumer preferences about shopping in different channels and the ability of retailers to offer that seamless experience. The survey evaluated 15 000 consumers across 20 countries to rank their shopping experiences across channels. The research suggests that consumers may be having second thoughts about the benefits of online shopping. Accenture Research also found significant signs of a swing back to shopping in-store. While almost half of all respondents (46 percent) said they plan to purchase more online in the future, 28 percent said they also would be shopping more in-store. Fewer consumers now cite ‘convenience’ as the main reason for shopping online. In fact, an overwhelming majority (91 percent) told them that it’s easier to complete a purchase in-store than either online (57 percent) or by mobile (36 percent). What’s more, when it comes to fulfillment, most told them that scheduling is more important than speed; and about one-third indicated that they are buying more in-store and carrying home compared to a year ago. These findings clearly challenge some commonly held assumptions about what "****** DEMO - www.ebook-converter.com*******"

consumers want. They also indicate that retailers struggling to provide a seamless, cross-channel customer experience may need to re-think key aspects of their marketing approach. 21 Table 5.1 describes other major sources of secondary data. Most research efforts rely at least partly on secondary data, which can usually be obtained quickly and inexpensively. The problem, however, is finding appropriate and relevant secondary data that are reliable. Figure 5.1 The marketing research process

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WEBSITE Visit http://www.mymarketresearchmethods.com/ This website is designed for market research students and professionals. You will find easy to understand lessons and tutorials on the topic of market research, along with a variety of market research tools and resources.

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Secondary data save time and money if they help solve the researcher’s problem. Even if the problem is not solved, secondary data have other advantages. They can help the researcher formulate or refine the problem statement and suggest appropriate research methods and identify other types of data needed for solving the problem. In addition, secondary data can pinpoint the kinds of people to approach and their locations, and serve as a basis of comparison with other data. The disadvantages of secondary data stem mainly from a mismatch between the researcher’s particular problem and the purposes for which the secondary data were originally collected, which are usually different. Framework for preparation of a research proposal Title of study or project Statement of general purpose Exploratory research • Secondary information – sources • Summarises existing knowledge • Identifies the gaps in our knowledge (in the case of academic study) Collecting primary and secondary data • Secondary data: published information, such as company records, previous studies • Primary data: formal and informal interviews with experts, customers, focus groups, and so on Problem statement or definition • Identify and describe the dependent

•

Sampling > Population to be studied > Unit of analysis – who will provide the information? > Sampling frame > Sampling procedure > Sample size • Data collection > Fieldwork > Data-collection technique (personal interviews, mail survey, etc.)

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variable(s) and independent variable(s) Objectives (both primary and secondary) Hypotheses and/or propositions Research design (sometimes a pilot study is done to test the research design and questionnaire)

> Design and test the questionnaire > Type of data (nominal, ordinal, etc.) • Data analysis > Statistical techniques to be used > Interpreting results Reporting the results (how and when) • Who is the audience? Budget Time schedules Appendices • Draft questionnaire and other technical details Provisional list of sources

Table 5.1 Major sources of secondary data

Source Internal information

Description Internal company information may be helpful in solving a particular marketing problem. Examples include sales invoices, other accounting records, data from previous marketing research studies and historical sales data.

Market Firms such as AC Nielsen, Synovate, Ipsos-Markinor, and research SAARF are major sources of secondary data covering market firms share for consumer products, the characteristics of media "****** DEMO - www.ebook-converter.com*******"

audiences and brand perceptions. Trade associations

There are many trade associations, such as the SA Chamber of Business. There are also many regional trade associations, such as Wesgro in the Western Cape and the Gauteng Economic Development Agency in Gauteng, which provide national and local economic data.

University research bureaus; professional associations; foundations

A variety of non-profit organisations (such as Unisa’s Bureau of Market Research) collect and disseminate data of interest to marketing researchers.

Commercial publications

Marketing Mix, Food & Beverage Reporter Online, the Financial Mail and many other commercial publications provide useful research data.

Government data

The government generates some secondary data. Census data, for instance, are available from Statistics South Africa.

Online databases

First search and the South African catalogue via SABINET.

CD-ROM database packages

South African Studies (SAS), ABI Inform and Business Periodicals Index are CD-ROM packages available to access marketing reports and other business-related information.

For example, a major manufacturer of consumer products wanted to determine the market potential for a fireplace log made of coal rather than of compressed wood by-products. "****** DEMO - www.ebook-converter.com*******"

The researcher found plenty of secondary data about the total amount of wood consumed as fuel, the quantities consumed in different areas and the types of wood used. Secondary data were also available about consumer attitudes and purchase patterns of wood by-product fireplace logs. The wealth of secondary data provided the researcher with many insights into the artificial log market. Yet nowhere was there any information that would tell the firm whether consumers would buy artificial logs made of coal if they were available. The quality of secondary data may also pose a problem. Often secondary data sources do not give detailed information that would enable a researcher to assess their quality or relevance. Whenever possible, a researcher needs to address these important questions: who collected the data? Why were the data obtained? What methodology was used? How were classifications (such as heavy users versus light users) developed and defined? When was the information collected? Collecting traditional secondary data is often an arduous task. Researchers write requests for government and trade association data, or other reports, and then wait several weeks for a reply. Frequently, they make trips to the library only to find that the needed reports are out on loan or missing. Today, however, online computerised databases have reduced the drudgery associated with collecting secondary data. An online database is a collection of public information accessible by anyone with the proper computer facilities. With more than 10 000 online databases available, practically any topic of interest to a marketing researcher is "****** DEMO - www.ebook-converter.com*******"

contained in some database. Examples are EBSCO HOST, Web of Science and DIALOG. For an example of how an online database can affect decision-making, consider the experience of Superior, Inc. (not its actual name), a large consumer goods firm. One morning, the CEO woke up to some unpleasant news. A competitor was rumoured to be marshalling its troops for an attack on the market for one of Superior’s personal-care products, worth R10 million in annual sales. Later that day, concerned executives at Superior were already preparing to take a drastic step: slashing the price to defuse the competitive challenge.

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Before taking that step, however, Superior’s executives decided to do a little research. Their online database told them that the competitor had been bought several years earlier by a conglomerate. Next, a check of local business newspaper databases revealed evidence of an advertising agency recruiting new staff to back up the rumoured campaign. Further online searches showed that the parent "****** DEMO - www.ebook-converter.com*******"

company had once tried to sell the unprofitable subsidiary. A business news database revealed that a senior executive of the parent company had recently retired, with no successor named. Other stories noted that two other executives had left, and hinted at turmoil at board level. Superior’s executives decided that what at first appeared to be an aggressive threat was actually no more than a gesture by a paralysed firm unable to take new initiatives. ‘If there is any gold outside’, beamed one Superior executive, ‘it looks like they just don’t have a shovel to pick it up with.’ Result: Superior’s CEO decided to maintain prices and thereby preserve the firm’s profits. Many marketing researchers make use of the services of online database vendors. An online database vendor is an intermediary that acquires databases from database creators. Such vendors offer electronic mail, news, finance, sports, weather, airline schedules, software, encyclopaedias, bibliographies, directories, full-text information and numeric databases. Consequently, a user can go to a single online vendor such as Eighty20 and gain access to a variety of databases. WEBSITE Visit the Eighty20 web site to view the available secondary data offered by this firm www.eighty20.co.za

10.3 Step 3: Formulate the research objectives During this stage, it is important for the researcher to "****** DEMO - www.ebook-converter.com*******"

formulate a series of objectives. These objectives, if realised during the research process, will ensure that the problem statement is addressed. The objectives will also serve as criteria against which to assess the relevance of the questionnaire, or other measuring instrument that will be used, and to assess the empirical results emanating from the data-analysis phase. The following are examples of research objectives: • To calculate the average household expenditure on toothpaste in South Africa • To assess the attitude of South African motorists towards electric cars • To compare the perceptions of males and females with regard to the death penalty. After completing the exploratory study, the researcher compiles a list of all the data required to address the research objectives and then decides on the types of data required for decision-making. Often the researcher will begin with secondary data (data that are available elsewhere, such as in a library, which can be retrieved from a company database) in order to further refine the problem statement or the research objectives.

10.4 Step 4: Planning the research design Good secondary data can help researchers conduct a thorough exploratory study. Armed with secondary data and information, the researcher can list the unanswered "****** DEMO - www.ebook-converter.com*******"

questions and rank them. The researcher must then decide on the exact information required to answer the research questions. Declining sales in the canteen may prove to be only a symptom of a larger problem, rather than the problem itself. The real problem may be poor customer satisfaction due to poor-quality food, an inadequate menu selection and long waiting in queues. The research design specifies which research questions must be answered, how and when the data will be collected and how the data will be analysed. Typically, the project budget is finalised after the research design has been approved. Sometimes research questions can be answered by collecting more secondary data; otherwise, primary data may be needed. Primary data – or information collected for the first time for a specific problem at hand – can be used for solving the particular problem under investigation. The main advantage of primary data is that they will answer a specific research question that secondary data cannot answer. For example, suppose the baking firm Sasko has two new recipes of refrigerated dough for a new biscuit. Which one will consumers prefer? Secondary data will not help to answer this question. Instead, targeted consumers must try each proposed recipe and evaluate the taste, texture and appearance of each biscuit. Moreover, primary data are current and researchers know the source. Sometimes researchers collect the data themselves rather than assigning projects to outside research firms. Researchers also specify the methodology of the research. Secrecy can be "****** DEMO - www.ebook-converter.com*******"

maintained because the information is proprietary. By contrast, most secondary data are available to all interested parties for relatively small fees. Collecting primary data is expensive. Costs can range from a few thousand rands for a limited survey to several hundred thousand for a national study. For instance, in the United States a nationwide, 15-minute telephone interview with 1 000 adult males may cost $50 000 for everything, including the data analysis and report. Because collection of primary data is so expensive, firms commonly cut back on the number of interviews in order to save money. Larger firms that conduct many research projects use another costsaving technique. They ‘piggyback’ studies, or collect data on two different projects using one questionnaire (also called an omnibus survey). The research firm IpsosMarkinor conducts two omnibus studies, namely Khaya bus (face-to-face personal interviews) and Telebus (telephonic interviews). The disadvantage of this approach is that answering questions about, say, dog food and gourmet coffee on the same questionnaire may be confusing to respondents. Piggybacking also requires a longer interview (sometimes half an hour or longer), which many respondents find tiring, and as a result the quality of the answers often declines. However, the disadvantages of primary data collection are usually offset by the advantages. It is often the only way of solving a research problem. And with a variety of techniques available for research – including surveys, observations (such as immersion) and experiments – primary research can address almost any marketing "****** DEMO - www.ebook-converter.com*******"

question. The first data-collection technique we will consider is survey research.

10.4.1 Survey research

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Although there are several techniques or methods available to marketing researchers to collect primary data, we will only discuss three of them, namely surveys (which include personal interviews, shopping mall interviews, telephone surveys, electronic mail surveys, postal mail surveys and focus groups), observation research and experimental studies. The most popular technique for collecting primary data is survey research, in which a researcher interacts with people to obtain facts, ask opinions and record perceptions and attitudes. Table 5.2 summarises the characteristics of the most popular forms of survey research, and identifies the primary advantages and disadvantages associated with each.

Personal interviews In-home, personal interviews often provide high-quality information, but they tend to be very expensive because of the interviewers’ travel time and costs. Therefore, market researchers tend to conduct fewer in-home personal interviews today than in the past. Nevertheless, this form of survey research has some important advantages. The respondent is often interviewed at home, in a natural setting where many consumption decisions are actually made. Also, the interviewer can show the respondent items (for example, package designs or a printed advertisement) or "****** DEMO - www.ebook-converter.com*******"

invite the respondent to taste, use or test a product. An interviewer can also probe when necessary – a technique used to clarify a person’s response. For example, an interviewer might ask, ‘What did you like best about the salad dressing you just tried?’ The respondent might reply, ‘Taste.’ This answer doesn’t provide a lot of information, so the interviewer could probe by saying, ‘Can you tell me a little bit more about the taste?’ The respondent then elaborates: ‘It’s not too sweet, it has the right amount of pepper and I love that hint of garlic.’

>>Strategy MTN recently used face-to-face interviews to investigate the efficacy of advertising on the Icon Media-branded shopping carts among shoppers, with aspects such as brand recall and the influence on purchase decisions coming under the spotlight. The study was conducted at Checkers hyperstores in Benoni, Boksburg, Edenvale and Constantia. A sample of approximately 200 consumers was randomly selected for intensive face-to-face interviews. An incredible 98 per cent of respondents said that their children were more manageable in a shop where the Icon carts were available. Of these parents, 74 per cent said that the advertising reminded them to purchase a product. Brand recall also fared well, with 89 per cent of parents remembering the advertising message of a certain branded cart. Says Storm Ackerman, general manager for Icon Media: ‘It is clear from our research "****** DEMO - www.ebook-converter.com*******"

that our platform is a fantastic shopper marketing tool. The objective is to assist advertisers to make optimal usage of the advertising space available, drawing on consumer insights when fine-tuning design, colour choices and creating competitions, thus ensuring we deliver only the best for our clients.’22

Shopping mall intercept interviews The shopping mall intercept interview is conducted in the common areas of shopping malls or large shopping centres. It is the economy version of the door-to-door interview with personal contact between interviewer and respondent, minus the interviewer’s travel time and costs. One disadvantage is that it is hard to get a representative sample of the population inside a shopping mall. Also, mall intercept interviews must be brief. The researchers often show concepts for new products to the respondents, or they test a new advertisement or have them taste a new food product. Data collected during mall intercept interviews is of a similar overall quality as that collected from telephone interviews. Marketing researchers are increasingly using new technology in mall interviewing. The first technique is computer-assisted personal interviewing. If used, the researcher conducts personal interviews, reads questions to the respondent off a computer screen and directly keys the respondent’s answers into the computer. A second approach is computer-assisted self-interviewing. A mall interviewer intercepts and directs willing respondents to nearby computers. Each respondent reads questions off a "****** DEMO - www.ebook-converter.com*******"

computer screen and directly keys his or her answers into a computer.23 Table 5.2 Characteristics of various types of survey research

Telephone interviews Compared with the personal interview, the telephone interview costs less and may provide the best (i.e. most representative) sample of any survey procedure. Most telephone interviewing is conducted from a speciallydesigned phone room called a central-location telephone (CLT) facility. A phone room has many phone lines, individual interviewing stations, sometimes monitoring equipment and headsets. The use of Wide Area Telephone Service (WATS) lines permits the research firm to interview people nationwide from a single location. Many CLT facilities offer computer-assisted interviewing. The interviewer reads the questions from a computer screen and enters the respondent’s responses directly into the computer as the respondent answers questions. The researcher can stop the survey at any point and immediately print out the survey results. This way, a researcher can get a sense of the project as it unfolds and fine-tune the research "****** DEMO - www.ebook-converter.com*******"

design as necessary. An online interviewing system can also save time and money because data entry occurs as the response is recorded rather than as a separate process after the interview. Hallmark Cards, for instance, found that an interviewer administered a printed questionnaire for its greeting cards in 28 minutes. The same questionnaire administered with computer assistance took only 18 minutes.24

Electronic surveys Telephone surveys have been the backbone of much consumer research during the past several decades because they are a fast, relatively cheap, easy way to collect data. However, answering machines, negative consumer attitudes towards phone surveys (due to misuse by some salespeople making telephone sales calls) and the growing number of unlisted phones have led marketing researchers to look for other media for collecting data. The growing number of South Africans who have access to personal computers and the Internet has opened up new opportunities for data collection and marketing research using electronic techniques. Researchers typically use batch-type electronic mail to send e-mail questionnaires to potential respondents who use e-mail. Respondents key in their answers and send an email reply. The major advantage of e-mail surveys is the rapid response rate. One recent survey had a 23,6 per cent response rate after two days. This is shorter than the time usually required to distribute traditional mail surveys nationwide. After 14 days, the overall response rate was "****** DEMO - www.ebook-converter.com*******"

48,8 per cent, which is quite high compared with most mail or telephone surveys.25 Furthermore, because e-mail is a semi-interactive medium, respondents can enquire about the meaning of specific questions or pose other questions they may have. E-mail surveys still face the problem of the limited number of subscribers online, particularly in South Africa. Other problems encountered when using e-mail surveys include a large number of invalid e-mail addresses and the fact that e-mail questionnaires are easy to ignore and/or delete. Internet-based surveys, in which a questionnaire is placed on a website and the sample’s respondents (taken from a database containing names and e-mail addresses) are e-mailed an invitation to participate in the study (with a link to the website) are gaining in popularity. Examples are Qualtrics and SurveyMonkey. This survey method yields the same advantages and disadvantages as e-mailed surveys, except for one additional advantage: the data are captured directly into a database as the respondents answer the questions. It is not only much quicker than other methods, but overcomes the problem of errors when the data are captured. WEBSITE Visit the Qualtrics web site to see how this data collection method can be used www.qualtrics.com

Mail surveys "****** DEMO - www.ebook-converter.com*******"

Mail surveys have several benefits: relatively low cost; elimination of interviewers and field supervisors; centralised control; and actual or promised anonymity for respondents (which may draw more candid responses). Some researchers feel that mail questionnaires give the respondent a chance to reply more thoughtfully, to check their records, talk to family members, and so forth. However, mail questionnaires usually produce low response rates (sometimes as low as 10 per cent). Low response rates pose a problem because certain elements of the population tend to respond more than others. Therefore, the resulting sample may not represent the surveyed population. For example, the sample may have too many retired people and too few working people. In this instance, answers to a question about attitudes towards old-age pensions may indicate a much more favourable overall view of the system than is actually the case. Another serious problem with mail surveys is that it is not possible to probe respondents to clarify or elaborate on their answers. Mail panels like those used by market research firms such as Synovate and Ipsos-Markinor offer an alternative to the one-shot mail survey. A mail panel consists of a sample of households who have agreed to participate regularly by mail for a given period. Panel members often receive gifts in return for their participation. Essentially, the panel is a sample used several times over. In contrast to one-time mail surveys, the response rates from mail panels are high. Rates of 70 per cent (of those who initially agreed to participate) are not uncommon. WEBSITE "****** DEMO - www.ebook-converter.com*******"

Evaluate the research design for the omnibus survey of the marketing research firm Ipsos-Markinor at www.ipsosmarkinor.co.za (click on omnibus).

Focus groups A focus group is a type of personal interviewing. Often recruited by random telephone screening, seven to ten people with certain desired characteristics (to make them representative of the population being studied) form a focus group. These qualified consumers are usually offered an incentive to participate in a group discussion. The meeting place (sometimes resembling a living room, sometimes featuring a conference table) usually has both audio-taping and videotaping equipment. It is also likely to have a viewing room with a one-way mirror so that interested parties (e.g. clients such as the marketing staff of manufacturers or retailers) may watch the session. During the session, a moderator leads the group discussion. Focus groups are much more than question-and-answer interviews. The distinction is made between ‘group dynamics’ and ‘group interviewing’. The interaction between focus-group members during focus-group meetings is essential to the success of focus-group research. This interaction is the reason for conducting group rather than individual interviews. One of the most important reasons for using group sessions to collect consumer data is that a response from one person may become a stimulus for another, thereby generating an interplay of responses that may yield more insight than if the same number of people had contributed independently. "****** DEMO - www.ebook-converter.com*******"

Focus groups are occasionally used to brainstorm new product ideas or to screen concepts for new products. Ford Motor Company, for example, asked consumers to drive several prototype cars. These ‘test drivers’ were then brought together in focus groups. During the discussions, consumers complained that they were scuffing their shoes because the rear seats lacked foot room. In response, Ford sloped the floor underneath the front seats, widened the space between the seat adjustment tracks, and made the tracks in some models out of smooth plastic instead of metal. The Afrikaans daily newspaper, Die Burger, was redesigned recently on the basis of focus-group research. Focus groups were conducted in Cape Town, Somerset West, Stellenbosch, Port Elizabeth, Humansdorp and George, and, as a result, the publisher of the newspaper has incorporated the following changes:26 •

The newspaper will include more and sharper in-depth analysis of daily news • Greater focus on international news, especially relating to the African continent • More legible typography and accessible layout • Shorter articles, but without sacrificing depth, meaning and relevance • Larger crossword puzzles • TV schedules will include the latest entertainment news • Supplements will be full of relevant and interesting trends and news • The daily ‘fun’ pages will include the most popular comic strip, as voted by readers. "****** DEMO - www.ebook-converter.com*******"

10.4.2 Questionnaire design

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All forms of survey research require a questionnaire. Questionnaires ensure that all respondents will be asked exactly the same series of questions. Questionnaires include three basic types of questions (see Table 5.3): open-ended, closed-ended, and scaled-response questions. An openended question encourages an answer phrased in the respondent’s own words. Researchers get a rich array of information based on the respondent’s frame of reference. By contrast, a closed-ended question asks the respondent to make a selection from a limited list of responses. Traditionally, marketing researchers separate the twochoice question (called dichotomous questions) from the many-item type (often called multiple choice questions). A scaled-response question is a closed-ended question designed to measure the intensity, or scale, of a respondent’s answer. The data (results) generated by closed-ended and scaledresponse questions are easier to tabulate than open-ended questions because response choices are fixed. On the other hand, if the researcher is not careful in designing the closedended question, an important choice might be omitted. For example, suppose this question was asked during a food study: Table 5.3 Types of questions typically found in questionnaires

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‘What, besides meat, do you normally add to a pizza that you have prepared at home?’ ☐ Peppadews ☐ Olives ☐ Cheese ☐ Onions ☐ Mushrooms ☐ Peppers ☐ Tomato ☐ Pineapple ☐ Banana ☐ Bacon The list seems complete, doesn’t it? However, consider the following responses: ‘I always add garlic’; ‘I usually add a green, avocado-tasting hot sauce’; ‘I cut up a mixture of lettuce and spinach’; ‘I’m a vegetarian; I don’t use meat at all.’ How would you code these replies? As you can see, the question needs an ‘other’ category. A good question must also be asked clearly and concisely, and ambiguous language must be avoided. Take, for example, the question ‘Do you live within ten minutes of "****** DEMO - www.ebook-converter.com*******"

here?’ The answer depends on the mode of transport (maybe the person walks), driving speed, perceived time and other factors. Instead, respondents should see a map with certain areas highlighted and be asked whether they live within one of the areas. Poor questions such as the two above will clearly produce invalid results. Clarity also implies using reasonable terminology. A questionnaire is not a vocabulary test. Jargon should be avoided, and language should be geared to the target audience. A question such as, ‘What is the level of efficacy of your preponderant dishwasher powder?’ would probably be greeted by a lot of blank stares. It would be much simpler to say ‘Are you (1) very satisfied, (2) somewhat satisfied, or (3) not satisfied with your current brand of dishwasher powder?’ Other principles of questionnaire design include the following: • • • • • •

Avoid leading questions Do not put the respondent on the defensive Do not identify the sponsor if it can be avoided Ask sensitive questions at the end Do not ask unanswerable questions Response options must be mutually exclusive.

Stating the survey’s purpose at the beginning of the interview also improves clarity. The respondents should understand the study’s intentions and the interviewer’s expectations. Sometimes, of course, to get an unbiased response, the interviewer must disguise the true purpose of "****** DEMO - www.ebook-converter.com*******"

the study. If an interviewer says, ‘We’re conducting an image study for Absa Bank’ and then proceeds to ask a series of questions about the bank, chances are the responses will be biased. Often respondents will try to provide answers that they believe are ‘correct’ or that they think the interviewer wants to hear. A good introduction to a questionnaire can go a long way to ensuring a good response rate. The following also ought to be considered: • • • • • • •

Include brief introductory remarks, and a greeting State the name of the research firm (not the client or sponsor) Make it clear that this is a genuine research study and not a sales attempt Introduce the general topic State the duration of the interview – accurately Provide assurance of confidentiality and, if possible, anonymity Make it clear that there are no right or wrong answers.

To ensure clarity, the interviewer should also avoid asking two questions in one – for example, ‘How did you like the taste and texture of the coffee cake?’ This is known as a ‘double-barreled’ question – it should be divided into two, one question concerning taste and the other texture. A question should be not only clear, but also unbiased. A question such as, ‘Have you purchased any quality Black & Decker tools in the past six months?’ influences respondents to think of the topic in a certain way (in this case, to link quality and Black & Decker tools). Questions can also be "****** DEMO - www.ebook-converter.com*******"

leading: ‘Weren’t you pleased with the good service you received at the Holiday Inn?’ (The respondent is all but instructed to say ‘yes’.) These examples are quite obvious. Unfortunately, bias is usually more subtle. Even an interviewer’s clothing, tone of voice or gestures can lead to biased responses.

Observation research In contrast to survey research, observation research does not rely on direct interaction with people. The three types of observation research can be described as people watching people, people watching activity, and machines watching people. There are two types of people-watching-people research: •

•

Mystery shoppers. Researchers posing as customers observe the quality of service offered by retailers. Mystery shoppers usually evaluate salespeople’s courtesy, airline in-flight service, the efficiency of hamburger ordering at fast-food outlets, etc. without the employees knowing that they are not actually dealing with ‘real’ customers. One-way mirror observations. At the Fisher-Price Play Laboratory, children are invited to spend 12 sessions playing with toys. Toy designers watch through one-way mirrors to see how children react to Fisher-Price’s and other makers’ toys. Fisher-Price, for example, had difficulty designing a toy lawnmower that children would play with. A designer, observing behind the mirror, noticed the children’s fascination with soap bubbles. He

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then created a lawnmower that spewed soap bubbles. It sold more than a million units in the first year. People-watching-activity observation research is known as consumer immersion. This is a primary research method which is usually used to complement other types of primarydata-collection techniques. The technique requires a researcher (or a member of the marketing team) to ‘immerse themselves’ in the world of the consumer and in so doing capture a 360 degree view of the consumer’s world insofar as it relates to a particular product. This way, marketers are able to observe the behaviour and the lifestyle of the consumer and explore the factors that are important to the user. For example, Johnson & Johnson changed the top of its baby shampoo from a flip-up lid to a pump-action top. The reason for this was that, following a consumerimmersion day with a young mother, Johnson & Johnson realised that it was difficult for a mother to open up the shampoo bottle (with a flip-up) lid while holding the baby at bath time. With the pump-action top, the mother was able to hold the baby with one hand and operate the pump of the shampoo with the other. Three examples of machines watching people are: • Traffic counters. The most common and most popular form of machine-based observation research relies on machines that measure the flow of vehicles over a stretch of road. Outdoor advertisers rely on traffic counts to determine the number of exposures per day to a billboard. Retailers often use the information to decide on the location of a new shop. Convenience stores, for "****** DEMO - www.ebook-converter.com*******"

example, require a moderately high traffic volume to be profitable. • Videocart. This machine uses infrared sensors in shop ceilings to track shopping trolleys. The new system has spotted a lot of ‘dippers.’ These shoppers park their trolleys at the ends of aisles and then walk down, filling their arms with items from the shelves as they go. Retailers suspect such shoppers probably buy less because they are limited by what they can carry in their arms.27 • Peoplemeter. This is a camera-like device used to measure the size of television audiences. The passive system, packaged to resemble a VCR and placed on top of the TV, will be programmed to recognise faces and record electronically when specific members of a family watch TV. It will note when viewers leave the room and even when they avert their eyes from the screen. Strangers would be listed simply as visitors. Peoplemeters are very useful because television advertisers are demanding more proof of viewership and the TV stations are under pressure to show that advertising is reaching its intended targets. (Ratings are used to help set prices for advertising time.) An AC Nielsen executive has said that a passive system should yield ‘even higher quality, more accurate data because the respondents don’t have to do anything other than be themselves’. Already, however, the TV stations and advertisers are criticising the passive peoplemeter. One executive noted, ‘Who would want or allow one of those things in their bedroom?’ Others claim that the system requires bright light to operate properly. Also, the box "****** DEMO - www.ebook-converter.com*******"

has limited peripheral vision, so it might not sense all the people in a given room.28

EXAMPLE >> A few years ago, Kimberly-Clark Corp saw sales of Huggies baby wipes slip just as the company was preparing to launch a line of Huggies baby lotions and bath products. Focus groups weren’t yielding any compelling insights. Then a senior packaging designer suggested a new approach: a camera mounted on a pair of glasses to be worn by consumers at home, so researchers could see through their eyes. ‘Letting Kimberley-Clark see what consumers see, rather than pointing the camera at them, proved more comfortable for consumers and useful to the company,’ says Becky Walter, innovation and design chief. It didn’t take long to spot the opportunities. While women in groups talked about changing babies at a diaper table, the truth was they changed them on beds, floors, and on top of washing machines in awkward positions. The researchers could see they were struggling with wipe containers and lotions requiring two hands. The company redesigned the wipe package with a push-button one-handed dispenser and designed lotion and shampoo bottles that can be grabbed and dispensed easily with one hand. 29 All observation techniques offer at least two advantages over survey research. Firstly, bias from the interviewing process is eliminated. In other words, it is relatively difficult to lie to a peoplemeter – the people who have to supply information do not have to remember what they did or what they bought. And secondly, observation does not rely on the respondent’s willingness to provide data. Conversely, observation techniques also have two important disadvantages. Firstly, subjective information is limited because motivations, attitudes and feelings are not measured. Secondly, data collection costs may run high unless the observed behaviour patterns occur frequently, briefly or somewhat predictably. "****** DEMO - www.ebook-converter.com*******"

Experiments An experiment is another method a researcher can use to collect primary data. An experiment is conducted in a controlled environment, such as a laboratory-like set-up or artificially created environment. The researcher alters one or more variables, such as price, package design, shelf space, advertising theme and advertising expenditures, while observing the effects of those alterations on another variable (usually sales). The best experiments are those in which all factors are held constant except for the ones being manipulated. The researcher can then observe that changes in sales, for example, result from changes in the shelf location where the product is placed (and are not due to increased advertising, changed packaging or a change in price). Holding all other factors constant in the external environment is a monumental and costly – if not impossible – task. Such factors as competitors’ actions, weather and economic conditions are beyond the researcher’s control. That is why successful experimental studies in a controlled environment can be so valuable. For example, before adding a new sandwich or burger to its menu, McDonald’s might use experiments to test the effects on sales at two different prices. It could introduce the new sandwich at one price in one city and at another price in another city. If the cities are similar and if all other marketing efforts for the sandwich are the same, then differences in sales in the two cities could be attributed to the price difference. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> Mars, the chocolate bar, was losing sales to other brands recently. Traditional surveys showed that the smaller bar was not perceived as good value. The marketers of Mars chocolate bars wondered whether a bigger bar sold at the same price would increase sales enough to offset the higher ingredient costs. The firm then designed an experiment in which the marketing mix stayed exactly the same in different markets but the size of the chocolate bar varied. The substantial increase in sales of the bigger bar quickly proved that the additional costs of a bigger bar would be more than covered by the additional revenue. Mars increased the bar size – and its market share and profits.

10.4.3 Measuring perceptions and attitudes

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The purpose of most consumer research conducted by firms is to measure consumer perceptions and attitudes. The researcher attempts to record the answers to the questions in some sort of format. Two general formats are commonly used: one is qualitative information and the other is quantitative. Qualitative data are not in a numerical format, but in a descriptive form. Qualitative information is very valuable when the researcher is interested in in-depth, detailed information. The researcher uses open-ended questions rather than a structured questionnaire, and probes continuously to try to unearth underlying feelings, emotions, opinions and motivations. A question such as: ‘Why do you prefer All Gold tomato sauce?’ is likely to produce a qualitative response such as: ‘It’s the best-tasting tomato sauce on the market.’ Further probing may produce interesting insights: ‘Who first introduced you to All Gold tomato sauce?’ ‘My mother. Those were wonderful, carefree days on the family farm.’ Further probing may suggest that the choice of a brand of "****** DEMO - www.ebook-converter.com*******"

tomato sauce is not primarily guided by taste, but instead by a nostalgic longing for an era of peace and happiness.

>>Strategy The appliances marketer Whirlpool relies heavily on qualitative research to understand the many international markets it operates in around the world. The firm does business in every corner of the world, including the United States and Canada, and expanding markets in Asia, Europe and Latin America. Whirlpool produces products under 12 brand names in more than 140 countries. How does Whirlpool intend to prosper in these very diverse markets? Whirlpool has invested heavily in cross-cultural market research. By using the expertise of local staff members, qualitative research – in the form of focus groups, depth interviews and various forms of projective techniques – is undertaken around the world. In refrigerator research in Europe, Whirlpool found that British consumers want strong construction, French consumers want fresh fruit and vegetables and the Spanish want fresh meat. For ovens, the research revealed that Italians want childproof features and the Spanish favour accurate timers. Overall, Germans were the only group concerned about environmental features. In Latin America gas ranges are favoured because of high electricity prices. Whirlpool strives to understand cultural factors so that they can take advantage of growing markets. For example, Latin "****** DEMO - www.ebook-converter.com*******"

America’s economy is expected to grow at more than 5 per cent annually in the next decade. Whirlpool is well aware of the different consumer needs from this global qualitative research and is well equipped to compete in a global market.30 Quantitative data, on the other hand, are expressed in a numerical format. Usually exactly the same question is asked of all respondents. Converting perceptions and attitudes into numbers is usually done by means of a scale that permits the data to be summarised as percentages, averages, and so on. Several scales can be used to measure perceptions and attitudes. These can be classified into four groups, namely nominal scales, ordinal scales, interval scales and ratio scales. In this introductory text we will briefly discuss only the first two groups – nominal scales and data and ordinal scales and data. A nominal scale is no more than a descriptive ‘tag’ or label attached to a classification or category. In other words, a nominal scale classifies or identifies a respondent. A respondent is, for instance, classified as a male or a female, or as a Stormers, a Blue Bulls or a Sharks supporter. When a nominal scale is used for identification of each object (such as a male or a female) it has only one number assigned to it. In other words, a respondent can be classified into one group only and there is a number for each respondent (exhaustive). All the respondents in the same category are regarded as equal in respect of that characteristic. In other words, Sharks supporters cannot be ranked above Blue Bulls supporters. "****** DEMO - www.ebook-converter.com*******"

An ordinal scale, on the other hand, implies some sort of rank order relative to others possessing the same characteristic. In other words, an ordinal scale allows the researcher to determine whether a respondent has more or less of a certain characteristic than some other respondent, but not by how much. An ordinal scale indicates relative position. One classification is higher, taller, richer, or faster, and so on, than the next classification. For instance, the higher-income group is richer than the low-income group (but we do not know by how much). Two of the more popular ordinal scales are the Likert-scale and the semantic differential scale.

The Likert scale The Likert scale is a rating scale on which respondents can indicate their agreement or disagreement with a series of statements, ranging from strongly agree to strongly disagree. Table 5.4 Example of a Likert scale questionnaire

The respondent’s answer can then be expressed as a number. For instance, we can report that the mean (average) score of our respondents to the statement ‘Coke is the most enjoyable soft drink’ was 4,14. Alternatively, we can report that the frequency distribution of the statement ‘Coke is the most enjoyable soft drink’ was: "****** DEMO - www.ebook-converter.com*******"

• • • • •

5 – 55% 4 – 20% 3 – 15% 2 – 5% 1 – 5%.

In other words, 55 per cent of those interviewed strongly agreed that ‘Coke is the most enjoyable soft drink’ on the market and only 5 per cent strongly disagreed. Also note that respondents’ alternatives are limited: they can answer only one of five possible answers.

The semantic differential scale The semantic differential scale is slightly different, but allows the researcher to do the same statistical manipulations as those for the Likert scale because it is also an ordinal scale. For example: How would you describe the quality of service at the Pick n Pay outlet you just visited?

Qualitative and quantitative data alike have advantages and disadvantages. Qualitative data are normally of an in-depth nature, providing detailed insight into a problem – but we cannot quantify the responses by saying, for instance, that 95 per cent of the customers of a firm are satisfied with its products. We can only report detailed information about our respondents’ attitudes and perceptions in a non-numerical "****** DEMO - www.ebook-converter.com*******"

fashion. Quantitative data, on the other hand, allow us to make statements such as ‘our customer satisfaction index is 98’, or ‘81 per cent of our customers rate the quality of our services as excellent.’ Which one of the two is the better? The answer is – it depends. It depends on the objectives of the research project. If the objective is to get information about a new product that the firm wants to launch, then qualitative data will be the best. However, if we wish to assess the firm’s level of customer satisfaction, then quantitative data will be the best.

10.4.4 Deciding on the sampling procedure

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Once the researcher has decided on the type of data needed and the questionnaire has been finalised, the next step in the research process is to decide on the sampling procedure. Before a decision on the sampling procedure can be made, a decision needs to be made on who will provide the researcher with the required information. In other words, who or what will be the unit of analysis? Who is to be surveyed, or who will be questioned? Customers, potential customers, firms, CEOs, industry experts and channel members can all be respondents in a survey – the unit of analysis. A related question is sample size. How many respondents are going to be surveyed? Generally, larger samples are preferred because they yield more valid and reliable data. However, provided a credible sampling procedure is used, smaller samples can be equally valid and reliable. Once the researchers have decided how they will collect primary data, "****** DEMO - www.ebook-converter.com*******"

how big the sample will be and how the collected data will be captured (scored), the next step is to select the sampling procedure they will use. A firm is seldom in a position to take a census of all potential users of a new product, or of all customers, and it is not possible to interview them all. Therefore, it has to select a sample of the group to be interviewed. A sample is a subset (usually people, households or firms) selected from a larger population. Several questions must be answered before a sampling plan is chosen. First, the population or universe of interest must be accurately defined. The population is the group from which the sample will be drawn. It should include all the people whose opinions, behaviour, preferences, attitudes, and so on, are of interest to the market researcher. For example, in a study whose purpose is to assess the attitude towards a new canned dog food, the population may be defined to include all current buyers of canned dog food; if a petroleum firm wants to introduce a new brand of petrol, all private vehicle owners may be the study population. After the population has been defined, the next question is whether the sample needs to be representative of the population. If the answer is yes, a probability sample is needed. Otherwise, a non-probability sample might be considered. These types of samples are discussed in the sections that follow. When the Sunday Times conducts its annual Top Brands surveys, it selects a probability sample: a national sample of 3 500 people older than 16, who are representative of the South African population, are interviewed face-to-face (2 "****** DEMO - www.ebook-converter.com*******"

000 urban dwellers and 1 500 rural dwellers).

Probability samples A probability sample is one in which every element in the population (all dog owners, in this case) has a known statistical likelihood of being selected. Its most desirable feature is that scientific rules can be used to ensure that the sample represents the population. In other words, a probability sample allows the researcher to generalise the results of the sample to the entire population, which is a major advantage over non-probability samples. The choice of a probability sample is often influenced by the availability of a sampling frame: a complete list of the population from which the sample (consisting of individual respondents) can be drawn. Depending on how the population is defined, the following are examples of sampling frames: a list of customers, a list of employees, a rate-payers list, a telephone directory or a list of graduates in South Africa. If a sampling frame is not available, researchers are often forced to use a non-probability sample. One type of probability sample is a random sample. A random sample must be arranged in such a way that every element of the population has an equal chance of being selected as part of the sample. For example, suppose a university is interested in getting a cross-section of student opinions on a proposed sports complex to be built using student fees. If the university can acquire an up-to-date list of all the enrolled students, it can draw a random sample by using random numbers from a table (found in most statistics "****** DEMO - www.ebook-converter.com*******"

textbooks) to select students from the list.

Non-probability samples Any sample in which little or no attempt is made to get a representative cross-section of the population can be considered a non-probability sample. The most common form of a non-probability sample is the convenience sample, based on using respondents who are convenient or readily accessible to the researcher – for instance, employees, friends or students. Non-probability samples are acceptable as long as the researcher understands their nonrepresentative nature. In other words, no generalisations can be made about the entire population. The findings are applicable to that sample only. Because of their lower cost, convenience and speed of data collection, non-probability samples are used in many marketing research studies. Common types of probability and non-probability samples are described in Table 5.5. Table 5.5 Types and features of probability and non-probability samples

Sample type

Probability samples

Simple random sample

Every member of the population has a known and equal chance of selection.

Stratified sample

Population is divided into mutually exclusive groups (such as gender or age), then random samples are drawn from each group.

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Cluster sample

Population is divided into mutually exclusive groups (such as geographic areas), then a random sample of clusters is selected. The researcher then collects data from all the elements in the selected clusters or from a probability sample of elements within each selected cluster.

Systematic sample

A list of the population is obtained (e.g. all people with a cheque account at XYZ Bank), and a skip interval is obtained. The skip interval is obtained by dividing the population size by the sample size. If the sample size is 100 and the bank has 1 000 customers, then the skip interval is 10. The beginning number is randomly chosen within the skip interval. If the beginning number is 8, then the skip pattern would be 8, 18, 28 …

Sample type

Non-probability samples

Convenience sample

The researcher selects the easiest population members from whom to obtain information.

Judgement sample

The researcher’s selection criteria are based on personal judgement that the elements (persons) chosen are likely to give accurate information.

Quota sample

The researcher finds a prescribed number of people in several categories (e.g. owners of large dogs versus owners of small dogs). Respondents are not selected on probability sampling criteria.

Snowball sample

The selection of additional respondents is made on the basis of referrals from the initial respondents. This is used when a desired type of respondent is hard to find, e.g. people who

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have taken round-the-world cruises in the last three years. This technique employs the old adage ‘birds of a feather flock together’.

10.5 Step 5: Collecting the data Marketing research often utilises fieldworkers or interviewers to collect primary data. A marketing research manager must ensure that detailed field instructions are developed for every research project in which fieldworkers are used. Nothing should be left to chance. There must be no uncertainties once the fieldwork (interviewing) starts and no interpretation of procedures should be left to fieldworkers. Sometimes the services of outside market research firms are used to do the fieldwork. Besides conducting interviews, field-service firms provide focus-group facilities, mall intercept locations, test-product storage and kitchen facilities to prepare test-food products. After an interview is completed, field-service supervisors validate the survey by recontacting about 15 per cent of the respondents. The supervisors verify that certain responses were recorded properly and that the people were actually interviewed.

10.6 Step 6: Analysing the data After collecting the data, the marketing researcher proceeds to the next step in the research process: data analysis. The purpose of this analysis is to interpret and draw conclusions "****** DEMO - www.ebook-converter.com*******"

from the mass of collected data. The marketing researcher tries to organise and analyse the data by using one or more techniques common to marketing research: one-way frequency counts, cross-tabulations and more sophisticated statistical analysis. Of these three techniques, one-way frequency counts are the simplest. One-way frequency tables record the responses to a question. For example, the answers to the question ‘what brand of chips do you buy most often?’ would provide a one-way frequency distribution. One-way frequency tables are always done in data analysis, at least as a first step, because they provide the researcher with a general picture of the study’s results. A cross-tabulation, or ‘cross-tab’, lets the analyst look at the responses to one question in relation to the responses to one or more other questions. For example, what is the association between gender and the brand of chips bought most frequently? Hypothetical answers to this question are shown in Table 5.6. Table 5.6 Brand choice by gender (hypothetical)

Brand

Male

Female

Simba

50%

50%

Willards

51%

49%

Pringles

30%

70%

Analysing the data in Table 5.6 shows that both the Simba "****** DEMO - www.ebook-converter.com*******"

and the Willards brands are equally popular with both males and females. Women, compared to men, however, strongly prefer Pringles potato chips. Researchers can use many other more powerful and sophisticated statistical techniques, such as correlation analysis and regression analysis to test whether there are relationships among variables of interest (such as between gender and choice of a brand of potato chip in this case). The use of sophisticated statistical techniques depends on the researchers’ objectives and the nature of the data collected. A description of these techniques is beyond the scope of this book, but can be found in any good marketing research textbook. After the data have been analysed, the researcher has to interpret the results. In other words, the question that must be answered is: ‘What do the results say?’ This interpretation is made against the background of the stated objectives and the problem statement, and relies heavily on the data analysis phase of the research. For example, if women prefer Pringles potato chips, what are the reasons for the preference? What can be done to enhance preference among males?

10.7 Step 7: Preparing and presenting the report After data analysis and interpretation have been completed, the researcher must prepare the report and communicate the conclusions and recommendations to management. This is a key step in the research process. If the marketing researcher wants managers to carry out the "****** DEMO - www.ebook-converter.com*******"

recommendations, he or she must convince management that the results are credible, valid, reliable and justified by the data collected. Researchers are usually required to present both written and verbal reports on the project. These reports should be tailored to the audience. They should begin with a clear, concise statement of the research objectives, followed by a complete, but brief and simple, explanation of the research design or methodology used. A summary of the major findings should come next. The conclusion of the report should also present recommendations to management. Most people who enter the marketing profession will become research users rather than research suppliers. So they must know what is required of a research report. As with many other items we purchase, quality is not always readily apparent. Nor does a high price guarantee superior quality. The basis for measuring the quality of a marketing research report is the research proposal. Did the report meet the objectives formulated in the proposal? Was the methodology outlined in the proposal followed? Are the conclusions based on logical deductions from the data analysis? Do the recommendations seem prudent, given the conclusions? Another criterion is the quality of the writing. Is the style crisp and lucid? It has been said that if readers are offered the slightest opportunity to misunderstand, then they probably will. The report should also be as concise as possible. It may be a good idea, a few months after the submission of the research report, to conduct a follow-up exercise. The "****** DEMO - www.ebook-converter.com*******"

researcher should investigate why management did or did not implement the recommendations in the report. Was sufficient decision-making information included? What could have been done to make the report more useful to management? A good rapport between the marketing manager, or whoever commissioned the research project, and the market researcher is essential. Often they must work together on several studies throughout the year. Many small firms do not have the time or money to engage in sophisticated, formal marketing research studies. However, that should not preclude them from doing less complicated forms of research.

11. When should marketing research be LO14 conducted? When managers have several possible solutions to a problem, they should not instinctively call for marketing research. In fact, the first decision to make is whether to conduct marketing research at all. Some firms have been conducting research in certain markets for many years. Such firms understand the characteristics of target customers and their likes and dislikes about existing products. Under these circumstances, further research could be unnecessary and a waste of money.

>>Strategy "****** DEMO - www.ebook-converter.com*******"

In the United States Procter & Gamble, for example, has extensive knowledge of the coffee market. After it conducted initial taste tests with Folgers Instant Coffee, Procter & Gamble went into national distribution without further research. Consolidated Foods Kitchen of Sara Lee followed the same strategy with its frozen croissants, as did Quaker Oats with Chewy Granola Bars. This tactic, however, does not always work. Procter & Gamble’s marketers thought they understood the pain-relief market thoroughly, so they bypassed market research for Encaprin aspirin in capsules. Because it lacked a distinct competitive advantage over existing products, however, the product failed and was withdrawn from the market. Coca-Cola launched soft-drink Bibo and Nestea, a brand of iced tea, in Mozambique in the same type of pouch packaging without any research conducted before the time. Only afterwards did Coca-Cola discover that females, in particular, did not want to buy their iced tea in the same packaging as their children’s drinks, and the launch of Nestea was consequently a flop and Bibo discontinued later. Proper marketing research may very well have prevented these unsuccessful product launches. Not long ago DStv stopped distributing its monthly magazine Dish which ‘infuriated subscribers’ without doing any research on how consumer would respond (see Reader 31 ‘DStv dishes up a problem for subscribers’). Rather embarrassingly they had to rescind the decision later.

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READER 31 >> DStv dishes up a problem for subscribers Multichoice says it will canvass subscribers’ views on its decision to stop printing its schedule in its DStv Dish magazine. From this month the schedule is only accessible from the TV operators website or by scrolling through the menus on DStv. This has infuriated subscribers and newspapers have been inundated with letters and SMSs from viewers complaining about Multichoices decision. Many subscribers said they used to highlight programmes in the magazine as they had no time to surf all the channels and try to juggle program times. Multichoice responded to viewer complaints by saying a survey would ascertain whether subscribers wished to receive the printed version. The survey would ask all subscribers whether they wish to receive a printed version of the listings ‘even though there will still be inaccuracies in the listings’. The best method of resolving the issue will then be determined. SOURCE: Regchand, S. 2012. DStv dishes up a problem for subscribers. Business Times, 17 April, p. 13

Managers rarely have such so much trust in their judgement that they would refuse more information if it were available and free. But they may have enough confidence that they would be unwilling to pay too much for the information or to wait a long time to receive it. The willingness to acquire additional decision-making information depends on managers’ perceptions of its quality, price and timing. Of course, if perfect information were available – that is, the data conclusively showed which alternative to choose – decision-makers would be willing to pay more for it than for information that still left uncertainty. In summary, research should only be undertaken when "****** DEMO - www.ebook-converter.com*******"

the expected value of the information is more than the cost of obtaining it.

12. The characteristics of good research

LO15

Several criteria can be used to judge the value and quality of research projects:31 •

Scientific method: Effective marketing research implements scientific principles, including proper problem formulation; the careful formulation of objectives and hypotheses; the choice of the correct data-collection techniques; proper sampling; appropriate data analysis; and the correct interpretation of the empirical results, leading to meaningful, factuallybased recommendations. • Creativity and originality: Some of the traditional methods of research are no longer of much value, and alternative data-collection techniques need to be considered. • Multiple methods often yield better results than an overreliance on one method. In a recent survey, British bank Lloyds TSB measured the commitment of a sample of its customers using standard market research techniques, and then supplemented that with imputational techniques, which helped it discover the links between the commitment measure and customers’ behaviour patterns. This enabled the bank to apply a measure of "****** DEMO - www.ebook-converter.com*******"

• •

•

commitment to the entire database. The marketing success, as measured by return on investment, has been considerable.32 The value of research must always be seen in relation to the cost of generating the information. Healthy scepticism: Marketing research is only an aid to decision-making and marketing managers must not ignore their own experience and judgement. Marketing research must always be conducted in an ethical manner.

13. Why is marketing research criticised? Like almost all other things in life, marketing research is not beyond criticism. Some criticise the inability of research to accurately predict human behaviour. Consumers’ intentions to buy, for instance, are not always a good predictor of their actual buying behaviour, it is argued. Others believe that research results are often useless and cannot be implemented because of poor communication between the researcher and the user of the research (often the marketing manager). Lastly, research is unfortunately sometimes seen and utilised as a stand-alone, isolated activity, instead of being integrated into the entire marketing process.33 In conclusion, we need to revisit the value and importance of research. Marketers use marketing research to explore the likelihood of the success of future marketing strategies. Research also allows marketing managers to evaluate why particular strategies failed after the event and "****** DEMO - www.ebook-converter.com*******"

minimise the recurrence of the same mistakes in the future. Research also allows managers to analyse the characteristics of specific market segments. Moreover, marketing research allows management to behave proactively rather than reactively by identifying newly emerging patterns in society and the economy. The most important reason why information in general and marketing research in particular are so important is that they enhance the quality and accuracy of managerial decision-making by reducing risk.

>>Technology in action How to Measure Social Media Marketing Success One of the biggest issues in marketing research is how to measure the effectiveness marketing campaigns and although social media has been a ‘game changer’ in respect of marketing communication, it has not changed the importance of assessing the return on investment of marketing spend. However, how businesses assess the success of social media marketing campaign are very different to traditional measures and are mostly available for free. As with traditional (off-line) marketing campaigns, social media marketers need to know the potential reached of their marketing communications. While it is impossible to gauge how many people actually viewed, for example, a post on a businesses’ Facebook page, the number of fans of the page, connections on LinkedIn "****** DEMO - www.ebook-converter.com*******"

and followers on Twitter, should all give a good indication of the extent of the reach. However, of particular interest to marketers is how many people actually engaged with a particular post, in other words were inspired to act as a result of a post in social media. Once again, there is no comprehensive measure, but businesses can look at such metrics such as clicks, comments and shares, all of which indicate that a particular consumer actually read and comprehended the message. Ultimately, though, the goal of any marketing campaign, social media or otherwise, is to get consumers to interact with the business, online or offline. In the social media there are also a number of free tools available in order to track the effectiveness of the conversion from prospect to actual customer. For example, Google Analytics which will allow you to build traceable links for all your social media posts and in addition track online conversion activities, for example downloads, registrations. SOURCE: DeStefano, B. 2014. How to Measure Social Media Marketing Success. Available from http://www.svmsolutions.com/onlinemarketing/how-to-measure-social-media-marketing-success/ (Accessed 1 August 2014)

Facebook – more than just about friends There are a number of facets to marketing research, including finding out "****** DEMO - www.ebook-converter.com*******"

about the specific needs of potential customers, searching for hidden niches and ascertaining the best way to target specific market segments. However, marketing research is often dismissed by small businesses and entrepreneurs as an expensive exercise, way beyond the reach of their limited resources. Nevertheless, small businesses are known for being innovative, flexible and creative in their approach to marketing, which allows them to compete with their larger counterparts. Assume that, as a small-business owner, your target market is young male university students in South Africa (which is an important market segment for products such as the male deodorant, Axe) and that you want to communicate the benefits of your product to this market segment. However, as a typical small business, you have inadequate resources available for marketing, unlike big corporations – such as Unilever, which owns the Axe brand – which are able to employ the services of professionals to conduct their market research and advise them on their advertising strategy. One medium that is often put forward as a cost-effective means for small businesses to reach consumers is the Internet, and, specifically, social networking websites, such as Bebo, Big Tent, Facebook, Hi5, LinkedIn and Twitter. In South Africa, Facebook is one of the most popular social-networking sites for students, and we would expect that many of our target market (young male university students) would be members of Facebook. However, as a small business owner, the research question which you would ask yourself would be: ‘How effective is Facebook in reaching my target market?’ Fortunately, if you are innovative and creative, you can leverage this website’s functions to allow us to do market research into the feasibility of using Facebook to communicate with young people in South Africa. SOURCE: www.saunderslog.com (accessed 21 July 2010)

QUESTIONS Discuss the value of social media as a method of collecting information about the following research problems: "****** DEMO - www.ebook-converter.com*******"

1 2 3

A sporting goods manufacturer wants to identify university students’ brand preferences for tennis racquets, golf clubs and soccer boots. A supermarket chain wants to identify the most effective physical layout for its shops. A manufacturer of male deodorants wants to establish who makes the buying decision on the shop floor.

KEY CONCEPTS Audit: form of observation research that features people examining and verifying the sale of a product. Business research: the systematic and objective process of collecting, recording and analysing data for managerial decision-making. Central-location telephone (CLT) facility: a specially designed phone room used to conduct telephone interviewing. Closed-ended question: interview question that asks the respondent to make a selection from a limited list of options. Computer-assisted personal interviewing: interviewing method in which the interviewer reads the questions from a computer screen and enters the respondent’s responses directly into the computer. Computer-assisted self-interviewing: interviewing method in which a mall interviewer intercepts and directs willing respondents to a nearby computer where the respondent reads questions off a computer screen and directly keys his or her answers into a computer. Convenience sample: a form of non-probability sample using respondents who are convenient, or readily accessible, to the researcher, for example, employees, friends or relatives. Cross-tabulation: a method of analysing data that lets the analyst look at the responses to one question in relation to the responses to one or more other questions. Database marketing: the creation of a large computerised file of customers’ and potential customers’ demographic profiles and purchase patterns. Decision support system (DSS): an interactive, flexible computerised information system that enables managers to obtain and manipulate information as they are making decisions. E-mail surveys: interviewing technique in which researchers use batch-type electronic mail to send surveys. Respondents reply via e-mail.

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Experiment: a research method used to collect primary data in a laboratory-type environment. Field-service firm: firm that specialises in interviewing respondents on a subcontracted basis. Focus group: seven to ten people who participate in a group discussion led by a moderator. Frame error: error that occurs when a sample drawn from a population differs from the target population. Group dynamics: interaction among group members essential to the success of focus-group research. Leading question: a question that is formulated in such a way that the respondent is inadvertently encouraged to respond in a certain manner. Mall intercept interview: survey research method that involves interviewing people in the common areas of shopping malls. Marketing intelligence: everyday information about developments in the marketing environment that managers use to prepare and adjust marketing plans. Marketing research: the process of planning, collecting and analysing data relevant to a marketing decision. Measurement error: an error that occurs when there is a difference between the information desired by the researcher and the information provided by the measurement process. Nominal scale: descriptive label attached to a classification or category. Non-probability sample: any sample in which little or no attempt is made to get a representative cross-section of the population. Observation research: research method that relies on three types of observation: people watching people, people watching activity, and machines watching people. Online database: a collection of public information accessible to anyone with the proper computer facilities. Online database vendor: an intermediary that acquires databases from database creators. Open-ended question: interview question that encourages an answer phrased in the respondent’s own words. Ordinal scale: score that implies some sort of rank order relative to others. Population: the group under study from which a sample will be drawn (also called universe). Primary data: information collected for the first time. Can be used for solving the particular problem under investigation. Probability sample: a sample in which every element in the population has a known statistical likelihood of being selected.

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Random error: error that occurs because the selected sample is an imperfect representation of the overall population. Random sample: sample drawn in such a way that every element of the population has an equal chance of being selected as part of the sample. Research design: the specification for which research questions must be answered, how and when the data will be collected, and how the data will be analysed. The research design ought to be captured on paper in the form of a research proposal. Sample: a subset of a population. Sample frame: a complete list of sample elements. Sampling error: error that occurs when a sample somehow does not represent the target population. Scaled-response question: a closed-ended question designed to measure the intensity of a respondent’s answer. Secondary data: data previously collected for any purpose other than the one at hand. Situation analysis: extensive background investigation into a particular marketing problem. Survey research: the most popular technique for collecting primary data, in which a researcher interacts with people to obtain facts, opinions and attitudes.

REFERENCES 1 2

3 4 5 6 7 8

9

Zikmund, W.G. 1997. Business research methods. New York: The Dryden Press, p. 6. Tracking Social Media Topics, Trends and Traffic. Available from http://www.heavycontent.com/track_social_media.html (Accessed on 11 August 2014). HP enables real-time ‘always on’ decision-making. Available from http://www.itwebinformatica.co.za/ (Accessed on 18 June 2014). Author’s personal notes, 21 July 2000. A potent new tool for selling – Database marketing. Business Week, 5 September 1994, pp. 56–62. Sheth, J. & Sisodia, R. 1995. Feeling the heat – Part 2. Marketing Management, winter 1995, pp. 19–33. Bidoli, M. 1998. Customer service rules. Financial Mail, 1 August 1998, p. 65. Jordaan, Y. 2003. ‘South African consumers’ information privacy concerns: An investigation in a commercial environment’. Unpublished D.Com dissertation, University of Pretoria. Factors in market repositioning. Business Day, 6 April 2001, p. 20.

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10 Moodie, G. 2012. SABC research shows state broadcaster not meeting localcontent requirements. Available from http://grubstreet.co.za/2012/12/11/sabc-research-shows-state-broadcasternot-meeting-local-content-requirements/ (Accessed on 29 June 2014). 11 YOU and Huisgenoot get new look. Business Day, 15 May 2001, p. 11. 12 Jarrard, C. 1998. ‘Managing the brand image through research’. Paper read at the 10th South African Institute of Management Scientists Conference, Mpekweni Sun, July 1988. 13 Emerging to the real thing. Advertising Focus, supplement to Financial Mail, 29 May 1998, p. 69. 14 Owners consider a switch, Business Day, 24 July 2014, p. 6. 15 Finscope. 2005 Survey. www.finscope.co.za (accessed 25 July 2010). 16 Kamhunga, S. 2012. Revealing Visa survey on women. Business Day Company section, 24 October 2012, p. 11. 17 CSA probes reasons for empty stadiums. Business Day, 24 November 2009, p. 28. 18 Six ways to keep tabs on your market. Advertising Focus, supplement to Financial Mail, 29 May 1998, p. 176. 19 Bizcommunity online newsletter, www.bizcommunity.com, 18 October 2004. 20 Who Knows? Wolfram Alpha Knows. Available from http://www.heavycontent.com/track_social_media.html (Accessed on 11 August 2014). 21 Accenture. 2013. The Secrets of Seamless Retailing Success. Available from http://www.accenture.com/microsites/retail-research/Pages/index.aspx (Accessed 14 July 2014). 22 Branded shopping carts come out tops. 2008. Bizcommunity online newsletter, www.bizcommunity.com, 29 April 2008. 23 Dacko, S. 1995. Data collection should not be manual labour. Marketing News, 28 August 1995, p. 31. 24 Pyle, D. 1990. How to interview your customers. American Demographics, December, pp. 44–45. 25 E-mail surveys: Potentials and pitfalls. 1995. Marketing Research, summer 1995, pp. 29–33. 26 Die Burger soon to sport a new look. 2008. Bizcommunity online newsletter, www.bizcommunity.com, 9 July 2008. 27 McCarthy, M. 1993. James Bond hits the supermarkets: Stores snoop on shopper habits to boost sales. Wall Street Journal, 25 August 1993, pp. B1 and B8. 28 Nielsen Schmielsen. 1996. Business Week, 12 February 1996, pp. 38–39. 29 Kiley, D. 2005. Shoot The Focus Group. Available from http://www.businessweek.com/ (Accessed on 24 June 2014).

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30 Jansurak, J. 1997. Whirlpool: US leader pursues global blueprint. Appliance Manufacturer vol. 45(2), p. 921. 31 Kotler, P. 1997. Marketing management: Analysis, planning and control (9th edition). New York: Prentice Hall, p. 125. 32 Higgs, N. 2001. Why marketing research is essential in today’s environment. The Future: Marketing and Business Vision 2(3), p. 54. 33 Stanton, W.J., Etzel, M.J. & Walker, B.J. 1991. Fundamentals of marketing. New York: McGraw-Hill.

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CHAPTER

06

Segmenting and targeting markets

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5

Describe the nature of market segmentation. Explain the importance of market segmentation. Discuss criteria for successful market segmentation. Describe bases commonly used to segment consumer markets. Distinguish between a qualifying and a determining dimension in marketing segmentation terms. 6 Use the conventional steps in market segmentation to segment a consumer market. 7 Elucidate the advantages and disadvantages associated with various strategies for selecting target markets. 8 Contrast the various alternative strategies for selecting target markets. 9 Explain how positioning is related to target marketing and why firms implement positioning strategies. 10 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 11 Provide a marketing management solution related to any of the above outcomes. "****** DEMO - www.ebook-converter.com*******"

>> Marketing in practice Fast-growing and recession-resistant over-40s market presents golden opportunity for South African business South African business could be ignoring the moneyed over-40s market at their peril, says director of the University of Cape Town Unilever Institute for Strategic Marketing, Professor John Simpson. With a combined income of R300 billion, the 1,9 million South Africans who are older than 40 and classified as being between living standards measures (LSM) 7 and 10 are an economic force to be reckoned with. One of the factors that contribute to this market’s prosperity is that many ‘prime timers’ are not as burdened by debt as their younger counterparts, explains Professor Simpson. ‘Our study reveals many South Africans over 40 believe that most marketing messages are aimed at those in their 20s and 30s, and feel alienated by marketing communication, overlooked by product developers and dissatisfied with customer service’, explains Simpson. ‘Traditionally, marketers have focused their marketing communication on the under-40 market. The reality is that the majority of this market has less disposable income than prime timers. ‘Older consumers who are financially in their prime feel alienated by advertisers’ "****** DEMO - www.ebook-converter.com*******"

and marketers’ obsession with youth. This provides a tremendous opportunity for savvy businesses and marketers.’ An opinion often voiced by ‘prime time’ respondents was that firms do nothing to reward brand loyalty. ‘This is regrettable, as it leads to the attrition of businesses’ most valuable customer base.’ Clothing, in particular, was singled out with regard to both sizing and styling: many participants complained that despite having the money to spend on clothing, they found it increasingly difficult to find clothing that fitted them, but was also fashionable. SOURCE: Adapted from Fast-growing and recession-resistant over-40s market presents golden opportunity for SA business. Bizcommunity electronic newsletter, www.bizcommunity.com, 22 July 2008

QUESTIONS 1 2

Why have so many firms ignored the over-40s market? Is this market segment worth pursuing?

1. Introduction Marketers who accept and implement the marketing concept appreciate that not all consumers are the same. Consumers have different needs that can be satisfied in different ways. Some are extremely price-conscious and will not be loyal to any firm or brand. Others are very brand loyal and yet others are concerned only about quality and reliability or convenience. Thanks to research information "****** DEMO - www.ebook-converter.com*******"

(see Chapter 5), marketers are often aware of these different needs and can design products or services to satisfy a variety of needs. This acceptance that need satisfaction is multifaceted spawned the introduction of the concept of market segmentation. Its proponents argue that market segmentation yields benefits such as more accurately defining opportunities to build long-term relationships with customers, and being able to assess the objectives and performance of marketing activities more precisely. It is true that some marketers do not segment their market or markets. Virgin Active, for instance says: ‘We create an environment that welcomes everybody from sixmonths-old babies to senior citizens’.1 They are referred to as ‘mass marketers’, and will point to the disadvantages of segmentation and the perils of targeting relatively small market segments. These include high costs and limited market coverage (see Table 6.4). Mass marketers engage in mass production, mass distribution and mass promotion. Henry Ford became the world’s first mass marketer when he proclaimed that ‘you can have any colour Ford you want as long as it is black’. Mass marketers argue that it is a good approach to marketing because it appeals to the largest market – which, through economies of scale, keeps costs and therefore prices, as low as possible. In this way, profitability is enhanced. However, mass marketing is not a universally-accepted philosophy. The alternative, as we have said, is market segmentation.

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2. The nature of market segmentation

LO1

The term ‘market’ means different things to different people. We are all familiar with terms such as ‘supermarket’, ‘stock market’, ‘labour market’, ‘fish market’ and ‘flea market’. All these types of markets share several characteristics. First, they are composed of people (consumer markets) or firms (business markets). Second, these people or firms have wants and needs that can be satisfied by particular product categories. Third, they have the ability to buy the products they desire. Fourth, they are willing to exchange their resources – usually money or credit – for the desired products. To summarise, a market consists of (1) people or organisations with (2) needs or wants and with (3) the ability and (4) the willingness to buy. A group of people that lacks any one of these characteristics is not a market. Within a market, a market segment is a subgroup of people – or organisations in the case of business-to-business marketing – sharing one or more than one characteristic that causes them to have similar product needs. At one extreme, we can define every individual person and every individual organisation in the world as a market segment because each is unique. At the other extreme, we can define the entire consumer market as one large market segment and the business-to-business market as another large segment. In this case it is assumed that all people have certain similar characteristics and needs, as do all firms. From a marketing perspective, it normally makes sense to describe market segments somewhere between these two "****** DEMO - www.ebook-converter.com*******"

extremes.

The process of dividing a market into meaningful, relatively similar and identifiable segments or groups is called market segmentation. The purpose of market segmentation is to enable the marketer to tailor marketing mixes to meet the "****** DEMO - www.ebook-converter.com*******"

needs of one or more specific segments. The Nedbank advertisement is an acknowledgement by the bank that not all its customers have the same needs. To address the unique needs of different market segments Nedbank divides its business into four major divisions: Nedbank Retail, Nedbank Corporate, Nedbank Capital and Nedbank Wealth. Nedbank’s Retail division is again sub-divided into (1) consumer banking, (2) retail relationship banking, (3) cards and (4) secured lending.

>> Strategy After twenty five years the realisation that not all customers have the same needs offered City Lodge a wonderful business opportunity. In those days all hotels were ‘full-service’ hotels offering spacious rooms, ‘full’ breakfasts, porters, banqueting, room service, in-house bars and restaurants – but they were expensive. City Lodge’s market research revealed that the Monday-to-Friday business traveller did not need all of that and targeted business travellers with a ‘selected service’ offering. Hotels patrons now had a choice, depending on their needs. Breakfast was offered as an optional extra and to reduce costs (and thus room rates), staff were reduced to one employee for every three rooms. To target the more priceconscious business travellers, City Lodge introduced the two-star Town Lodge room which is about 25 per cent smaller than a City Lodge room and has a maxishower but no bath. Later the one-star Road Lodge was "****** DEMO - www.ebook-converter.com*******"

introduced which is one tier lower that the Town Lodge and is also about 25 per cent smaller than a Town Lodge room. The company also did an ‘up-ward stretch’ when introducing the four-star Courtyard brand for the business traveller who expected a little more.2

3. The importance of market segmentation

LO2

Until the 1960s, few firms practised market segmentation. When they did, it was likely to be a haphazard effort rather than a formal marketing strategy. Before 1960, for example, the Coca-Cola Company produced only one beverage and targeted it at the entire soft-drinks market. Today, CocaCola offers more than a dozen different products to a variety of market segments for carbonated soft-drinks based on diverse consumer preferences for drink flavour, calorie and caffeine content, and size.

EXAMPLE >> For example, Coca-Cola markets traditional carbonated soft drinks (Coca-Cola, Fanta, Sprite), and a variety of alternative beverages, such as energy drinks (for example, Powerade), flavoured teas (Nestea), mineral water (BonAqua), fruit drinks (Fruitopia) and fruit juices (Minute Maid). Similarly, Unilever markets a diverse range of products, including fabric-cleaning products (Omo, Surf, Skip), home-care products (Domestos, Handy Andy), dental products (Mentadent P, Close-Up), hair-care products (Timotei, Vibrance, Salon "****** DEMO - www.ebook-converter.com*******"

Selectives), deodorants (Shield, Impulse, Pears) and skincare products (Dawn, Pond’s), to very different market segments. Market segmentation plays a key role in the marketing strategy of almost all successful firms. Market segmentation is a powerful marketing tool for several reasons. When a firm segments a market, it can tailor a marketing mix to a welldefined target market. For example, the BMW 3 series car that targets middle-level managers is a completely different design to the BMW X5, which is targets higher-income couples with children. Most importantly, nearly all markets include groups of people with different product needs and preferences. Market segmentation helps marketers define customer needs and wants more precisely. Because market segments differ in size and profit potential, segmentation helps decision-makers define marketing objectives more accurately and allocate scarce resources to brands and market segments. In turn, performance can be evaluated better when objectives (such as sales targets per product or brand) are more precise. Due to the Internet’s growth and accessibility and the changing demographics of Internet users, market segmentation has become even more important. Internet usage worldwide is about 34 per cent (an estimated 2,4 billion users) of the total world population (estimated at 7,2 billion). In Africa, there are as many as 167 million Internet users. There are an estimated 8,5 million Internet users in South Africa alone.3 Because the Internet eliminates geographic boundaries, firms can communicate and reach segments of customers previously difficult to access. As the base of Internet users continues to grow, change and "****** DEMO - www.ebook-converter.com*******"

become more heterogeneous, there will be an increasing number of marketing opportunities, specifically in Africa.

EXAMPLE >> The high-fashion US furniture chain, Domain, offers an interesting example of how market segmentation can boost sales. Domain learnt that its baby-boomer customers (see Chapter 2) were as concerned about selfimprovement as they were about decorating. To reach this segment, the shop offered a series of in-store seminars that addressed topics such as women’s issues and interior design. The group’s repeat business has increased by 35 per cent since the programme began. Another target segment was retired World War II and postwar customers, for whom the shop offered narrower sofas with more back support, which made getting out of them easier. This segmentation approach allowed Domain to replace newspaper advertising with direct mail, bringing spending on advertisements down by 3 per cent, while sales increased by nearly 40 per cent.4 WEBSITE Visit the Internet World Stats site at (http://www.internetworldstats.com) for the latest statistics

4. The criteria for successful segmentation

LO3

Marketers segment markets for three important reasons. Firstly, segmentation enables them to identify groups of customers with similar needs and analyse the characteristics and buying behaviour of these groups. Secondly, segmentation provides marketers with information to help "****** DEMO - www.ebook-converter.com*******"

them design marketing mixes that specifically match the characteristics and desires of one or more segments. Thirdly, segmentation is consistent with the marketing concept: satisfying customer wants and needs while meeting the firm’s objectives. To be useful, a segmentation scheme must produce segments that meet four basic criteria: 1

Substantiality. A segment must be large enough to warrant developing and maintaining a special marketing mix (see Reader 32 ‘Technology ignoring the needs of left-handers is nothing new’). This criterion does not necessarily mean that a segment must have many potential customers. Marketers of custom-designed homes and business buildings, commercial aeroplanes and large computer systems normally develop marketing strategies tailored to each potential customer’s individual needs. In most cases, however, to make commercial sense a market segment needs many potential customers. Almost all South African banks target segments with mobile banking services. Yet only 6 per cent of all banking transactions are conducted by means of cell-phones, making this segment risky in terms of substantiality. Undoubtedly, the banks believe that this segment will grow in the future. KykNet is a DSTV channel targeting upper-income Afrikaansspeakers. It has access to about 800 000 people out of South Africa’s population of about 52 million – yet is substantial enough to be a highly profitable TV channel. 2 Identifiability and measurability. Segments must be identifiable and their size measurable. Data about the "****** DEMO - www.ebook-converter.com*******"

3

4

population within geographic boundaries, the number of people in various age categories and other social and demographic characteristics are often easy to obtain, and provide fairly concrete measures of segment size. Universities, for instance, have fairly accurate figures of how many pupils matriculate every year, and because they know the size of the market, they can target their market segment(s) accurately. Accessibility. The firm must be able to reach members of targeted segments with customised marketing mixes. Some market segments are difficult to reach – for example, senior citizens (especially those with reading or hearing disabilities), those who don’t speak English and the illiterate. A firm trying to target the San in the Kalahari Desert may have an accessibility problem! Responsiveness. Markets can be segmented using any criteria that seem logical. However, unless one market segment responds to a marketing mix differently from other segments, that segment need not be treated separately. In other words, a market segment must be homogeneous within (more or less similar and with similar needs) but heterogeneous between (significantly different from other market segments). For instance, if all customers are equally price-conscious about a product, there is no need to offer high-, medium- and low-priced versions to different segments.

Despite the popular belief that cats love milk, adult cats are often lactose-intolerant. These cats are unable to digest fullcream cow’s milk and can suffer severe abdominal pain and diarrhoea if milk is fed to them. For this reason, Martin & "****** DEMO - www.ebook-converter.com*******"

Martin, South Africa’s leading brand in pet healthcare, has produced the first lactose-reduced milk for cats. The manufacturer is of the opinion that the owners of lactoseintolerant cats would respond to their marketing of a lactose-reduced milk for cats, that the market segment is accessible and that the market segment is large enough to be profitable.5

READER 32 >> Technology ignoring the needs of lefthanders is nothing new When the iPhone 4 hit shops in 2010, some customers could not use the new Apple device either to call or the surf the Internet. The reason was that holding the device in the left hand could in some cases cover the phone’s antennae, thereby cutting off reception. Apparently, the designers, technicians and testers at Apple did not think about the needs of left-handers, or just ignored them. And that is nothing new, according to Agnes Maria Forsthofer, a member of an association for left-handed people in Germany. ‘There are essentially no devices fitted for left-handers’. Even standard devices like a mouse or keyboard have some pitfalls for left-handed users. The number pad, for example, is difficult to use with your left hand. ‘There are only a few keyboards where the number pad is on the left side,’ said Barbara Sattler, who heads an information centre for left-handers in Germany. But such solutions are only practical in places where the left-hander works alone. Sharing a computer that has such special devices with right-handers is difficult. Ms Sattler suggests left-handers should rather get a separate number pad with a USB connection, like those available for laptops. Most of the time the mouse is located on the right side of the keyboard. SOURCE: Adapted from Hanraths, T. 2012. Technology ignoring the needs of left-handers is nothing new. Business Day, 13 August "****** DEMO - www.ebook-converter.com*******"

5. Bases for segmenting consumer markets

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Marketers use segmentation bases, or variables – namely, characteristics of individuals, groups or organisations – to divide a total market into segments. The choice of segmentation bases is crucial because an inappropriate segmentation strategy may lead to lost sales and missed profit opportunities. The key is to identify bases that will produce substantial, measurable and accessible segments that exhibit different response patterns to different marketing mixes. Markets can be segmented using a single variable, such as age group, or several variables, such as age group, gender and level of education simultaneously. Although it is less precise, single-variable segmentation has the advantage of being simpler and easier to use than multiple-variable segmentation. The disadvantages of multiple-variable segmentation are that it is often harder to use than singlevariable segmentation; usable secondary data are less likely to be available; and as the number of segmentation variables increases, the size of individual segments decreases. Nevertheless, the current trend is towards using more, rather than fewer, variables to segment most markets. Multiple-variable segmentation (e.g. age, gender and level of education all used simultaneously) is clearly more precise than single-variable segmentation (just age, for instance). Consumer-goods marketers commonly use one or more of the following characteristics to segment markets: behaviour, "****** DEMO - www.ebook-converter.com*******"

geography, demographics, psychographics and benefits sought. The following sections provide a more detailed description of some of these segmentation variables.

5.1 Behavioural segmentation If behavioural segmentation is used, potential buyers are divided into segments on the basis of their knowledge of, attitude towards, use of, or response to a product.6 In other words, factors such as usage rate, occasions, and brand familiarity exert an influence on buyer behaviour to such an extent that different marketing approaches are justified for each of them. For example, women buy 90 per cent of all greetings cards.7 Therefore, women are an attractive target market for the marketers of greetings cards, such as Cardies.

5.1.1 Usage-rate segmentation Usage-rate segmentation divides a market by the amount of product bought or consumed. Categories vary with the product, but are likely to include some combination of the following: former users, potential users, first-time users, light or irregular users, medium users and heavy users. Segmenting by usage rate enables marketers to focus their efforts on heavy users or to develop multiple marketing mixes aimed at different segments. Because heavy users often account for a sizeable portion of all product sales, some marketers focus on the heavy-user segment. Most airlines will focus heavily on passengers who fly more frequently (see the British Airways advertisement) because they are not only a lucrative segment, but also have "****** DEMO - www.ebook-converter.com*******"

different needs from those who fly once a year. The 80/20 principle probably holds for the airline industry – that 20 per cent of all customers generate 80 per cent of the demand for air travel. Although the percentages are not exact, the general idea often holds true. For instance, the diamond firm De Beers has found that in the United States 60 per cent of its diamonds are bought by 25 per cent of the population. An airline that uses usage-rate segmentation will need to know more about the needs of its more frequent passengers and then use specific strategies to satisfy those needs. Frequent business passengers may need access to business machines such as telephones, scanners, computers and email at airports. They may also need facilities to meet customers or business associates in private. If that is the case, airlines can establish business centres in airports to satisfy those needs. The most sophisticated segmentation schemes are often used by ‘e-retailers’, who have detailed customer-profiling information and purchase-history data, which they use in order to increase customer lifetime value by encouraging increased use of online services over time. As visitors use online services they can potentially pass through the following seven stages:8

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• First-time visitor • Return visitor • Newly registered visitor • Registered visitor • Purchased once or n times • Purchased (inactive) "****** DEMO - www.ebook-converter.com*******"

•

Purchased (active); e-responsive.

Once firms have defined or categorised their customers according to these stages, they can then deliver personalised messages, either by personalised on-site messaging or by using e-mails that are triggered automatically by different rules. First-time visitors can be identified by whether they have a cookie placed on their PC. Once visitors have registered, they can be tracked as they move through the remaining stages. Two particularly important groups are customers that have purchased once or more than once. For many e-retailers, encouraging customers to move from the first purchase to the second and then on to the third purchase is a key challenge. Specific promotions can be used to encourage further purchases. Similarly, once customers become inactive (i.e. they have not purchased for a defined period – such as three months), further follow-ups are required.

5.1.2 Occasions The demand for certain products is influenced by the occasions they are bought for. Orange juice for breakfast is one example. Hot cross buns and Easter eggs are further examples. Sparkling wine is another: occasions such as birthdays, graduations or Valentine’s Day are often celebrated with sparkling wine. In the late 1990s, the biscuit manufacturer McVites began examining its fundamental approach to the biscuit category. McVites was already supplying a large part of the traditional biscuit category, but it believed that there was little growth "****** DEMO - www.ebook-converter.com*******"

potential in this category. An examination of its consumer profile revealed that its consumers were mainly older people. McVites studied when consumers eat biscuits and realised that biscuits are eaten during certain occasions: lunchtime, teatime, Christmas time – or they are bought as gifts. McVites then adapted its entire marketing strategy to appeal to the needs of consumers during the specific times they consume biscuits.9 During different occasions, buyers may be a lot less pricesensitive, allowing marketers to charge a price premium. Seasonal rates are a well-accepted practice in the tourism industry: airlines and hotels charge higher rates during the holiday season. It may also be possible to change the packaging and labelling of products to reflect the occasion, such as during Easter, Christmas and Valentine’s Day, and, in so doing, appeal to the needs of the occasional buyer.

5.1.3 Brand familiarity Some consumers are well informed about the different brands in a product class and others are extremely brandloyal. Those who are loyal and unlikely to switch brands easily have different marketing strategies targeted at them from those who are ill informed, ignorant or neutral. If the loyalists are identified as a target market, marketers often adapt their promotion strategy to more reminder-type advertising instead of providing ‘new, convincing’ information. The advantages associated with a long-term relationship may be the focus of an advertising campaign. Also, it may be possible to charge a price premium because most consumers are familiar with the available choices and "****** DEMO - www.ebook-converter.com*******"

have remained loyal over time. In a Nielsen Global Survey of New Product Purchase Sentiment, which surveyed more than 29 000 respondents with Internet access from 58 countries, it was confirmed that brand loyalty goes a long way. More than half (60 per cent) of consumers around the world with Internet access prefer to buy new products from a familiar brand than switch to a new brand.10

5.2 Geographic segmentation Geographic Segmentation Refers To Segmenting markets by national region (see the UBank example), world region, market size, market density or climate. Market density refers to the number of people within a unit of land, such as a province. Climate is commonly used for geographic segmentation because of its dramatic impact on residents’ needs and purchasing behaviour. Ice-cream, snowblowers, water, snow skis, air conditioning and heating systems are products whose appeal varies according to the prevailing climate. Consumer-goods firms take a regional approach to marketing for four reasons. Firstly, many firms need to find new ways to generate sales because of sluggish or intensely competitive markets. Western Cape wineries would target the Gauteng area for this reason. Secondly, computerised checkouts with scanners enable retailers to assess accurately which brands sell best in their region. Thirdly, many packaged goods manufacturers are introducing new regional brands intended to appeal to local preferences. A fourth reason for a more regional approach to market "****** DEMO - www.ebook-converter.com*******"

segmentation is that it allows consumer-goods firms to react more quickly to competition. Unilever concentrates on rural areas for some of its product categories. Employees marketing Omo in these regions go on ‘roadshows’ (travelling in a van from one place to the next) to teach people how to use washing powder. They give away soap and bowls so that women can graduate from using laundry soap at the river or communal tap to using cold-water Omo in a bowl.11

>> Strategy An excellent example of geographic segmentation is uBank (previously Teba Bank), the first bank exclusively servicing the rural and mining areas of South Africa. The bank provides micro-financial services to about 4 million low-income earners living in and around mining towns and in rural areas, who have not had access to formal banking services. Only about 20 per cent of rural people have savings accounts, whereas research shows that more than 40 per cent would like to have access to banking facilities. The bank appeals to the need for affordable financial services which give clients a safe place to keep their savings and for mine workers to safely transfer money to family members living in rural areas.12

EXAMPLE >> In South Africa, regional beers are increasingly marketed. Mitchell’s beer is found near Knysna and Cape Town, Birkenhead beer "****** DEMO - www.ebook-converter.com*******"

near Hermanus, Coelacanth beer near Port Alfred, Emerald Vale beer near East London and Nottingham Road beers in the KwaZulu-Natal Midlands. In New Zealand, many regions have their ‘own’ beer. In the south (Otago), for instance, Speights beer is very popular, and Canterbury draught is sold in and around Christchurch.

5.3 Demographic segmentation Marketers often segment markets on the basis of demographic information because it is widely available and often related to consumers’ buying and consumption behaviour. Some common bases of demographic segmentation are age, gender, income, ethnic background and family life cycle.

5.3.1 Age segmentation Children aged 4 to 12 influence a great deal of family consumption of products, such as toys, beverages and movies. The youth market of today is computer literate from an early age and they know how to use hand-held devices such as cellphones and tablets. People between 35 and 44 are likely to have school-age children living with them and spend more than all other age groups on food at home, housing and clothing. Those between 45 and 54 spend more than any other group on eating out, transportation, entertainment, education, personal insurance and pensions. The over-50 group controls most of the financial assets in most countries and is, therefore, a very lucrative market segment to target. Mature consumers are being targeted by many firms as a "****** DEMO - www.ebook-converter.com*******"

powerful and lucrative segment of the investment market. Some 22 per cent of South Africans are over 50 years of age – and the number of mature households is on the increase. In the United States, over-50 households make up 50 per cent of the total discretionary income. Indications are that the more moneyed 50-plus households in South Africa are also substantial. Nedbank is actively targeting the affluent over-70 market with their Prime Club Account (‘When you’ve earned the right to pay less and earn more’ says the slogan). According to its research, banks need to offer more than just attractive financial benefits to maintain the loyalty of their mature customers. These clients insist on personal attention and value-added services which address their social and health needs. Prime Club clients earn higher preferential rates on their investments and savings accounts and free access to Nedbank’s self-service banking channels. Other examples of products targeted at older market segments are Reader’s Digest, Rennies and Vitaforce, for instance, has different dietary supplements for older people and children (Jungle-Vites).

5.3.2 Generational segmentation One of the most common ways to segment an audience is via generational segmentation. The generational segmentation categorisation method is not new; market researchers have been examining the characteristics of different generations for decades. So what are the generations and how are they categorised? "****** DEMO - www.ebook-converter.com*******"

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The Silent Generation (born before 1946), were influenced by two world wars and the depression. Called ‘Silent’ because of a perceived lack of interest in raising issues or speaking publicly for change, they were also cautious, conventional and somewhat fatalistic. Because of the depression and World War II, they are also smaller in number than the Baby Boomers after them. • Baby Boomers (born between 1946 and 1964), grew up in times of great social change and, to some extent, freedom. As a result, they are characterised as experimental, individualistic and social-cause oriented, which is why they are often attracted to associations, charities and not-for-profit firms. They work hard to make their dreams come true. They also tend to be receptive to anything that makes them look younger. • Generation X (born between 1965 and 1980), was the first generation of ‘latch-key’ kids – where both parents were likely to be working full-time. They were also exposed to rising divorce rates and corporate ‘downsizing’, which saw some parents lose their jobs. Generation Xers value their independence, are less loyal to employers, and favour a good work-life balance. They are more entrepreneurial than the previous generations and on average also better educated. • Generation Y (often referred to as Millennials – born between 1981 and 2000), is the technology generation – the first to grow up with the Internet and the age of instant communication. They rely far less on the traditional methods of information dissemination – they have the Internet at their fingertips and are more likely to question the ‘norms’ that have existed in business. They "****** DEMO - www.ebook-converter.com*******"

•

are also more aspirational and, unlike Generation X before them, are attracted to successful brands. 13 Generation Z (today’s tweens and teenagers), is brandconscious, tech-savvy, mature before their years and equipped with generous incomes that are almost entirely discretionary. Generation Z is an increasingly attractive segment for marketers of all kinds of products, ranging from fashion and beauty to digital devices. They are: > Comfortable with and even dependent on technology, having grown up in a digital world where technology was ever-present > Constantly multitasking with a variety of online products and sophisticated electronic devices, and appreciates simple, interactive designs > More socially responsible, due to greater access to a large online information pool they are more acutely aware of modern day challenges such as terrorism and climate change > Always connected, communicating through various social networking channels, often across countries and cultures which significantly influences their decision process.14

Companies targeting Generation Z need to adopt technology-based marketing and sales channels such as text messages (SMS), mobile Internet and social networking portals. It is also important to ‘catch them young’ (especially relevant for technology companies). For this reason marketers must also enhance their virtual world presence with online product information and purchase facility and develop high value-for-money products that are "****** DEMO - www.ebook-converter.com*******"

multifunctional with simple and interactive designs. It also appears that firms must provide ‘green’ products and services or take a proactive stance toward the environment.

5.3.3 Gender segmentation Marketers of products such as clothing, cosmetics, personalcare items, magazines, jewellery and footwear commonly segment markets by gender. When one considers that women in South Africa oversee 80 percent of all spending it becomes apparent why this can be a very important target market. Hotels, for instance, realise that 40 per cent of today’s business travellers are females, and have adapted their marketing accordingly.

>> Strategy The Protea Hotel group is utilising an opportunity in the accommodation market through gender segmentation. It has decided to reserve an entire wing of the President Hotel in Cape Town for females travelling on their own. These guests are met and taken to their rooms by a female manager and only female staff service the rooms. Mineral water, flowers, bath salts in the rooms, and other extras are used to appeal to the needs of female travellers.15 EXAMPLE >> Unilever markets its Brut fragrance to men and Pears to women. 1st For Women offers females 35 per cent lower short-term insurance premiums because ‘women are better drivers.’ Almost 44 per cent of new-car "****** DEMO - www.ebook-converter.com*******"

sales are to women, and General Motors targets this market segment with its Corsa range. Axe deodorant is a product targeted specifically at men. Magazines such as Cosmopolitan and Femina are targeted at the female market. However, brands that have traditionally been marketed to men – such as cigarettes and alcohol – are increasing their efforts to attract women. Women’s products, such as cosmetics, household products and furniture, are also being marketed to men.16 Calvin Klein’s CK One, for instance, is a fragrance described as ‘unisex’. The beer brewer Heineken is targeting the elusive female African drinker with a sweeter, low-alcohol beer made from malt and lemon that it hopes will persuade them to try its other lagers.

READER 33 >> Personal-care industry is getting under men’s skin Global sales of male toiletries other than razors, blades and shaving cream will rise 5% to $17,5bn this year, surpassing the shaving segment for the first time, according to Euromonitor. Unilever, with its Axe and Dove brands, has 26% of the market, more than Proctor & Gamble, Nivea maker Beiersdorf and L’Oréal combined. The male segment’s expansion is fuelled by innovation, marketing, and a growing realisation that men want to do more than just shower, shave and shampoo. ‘The key objective among all the manufacturers is turning a regime that you have to do into a ritual you want to do,’ says Geometry Global European planning director Phil White. ‘They are trying to establish that ritual’. That has not been easy as 90% of men spend a half-hour or less getting ready in the morning, according to researcher Mintel. Ben Voyer, a social psychologist and marketing professor at ESCP Europe business school, says this is due to the perception that men get more attractive as they age, and because men do not worry as much about their looks. Women use "****** DEMO - www.ebook-converter.com*******"

cosmetics ‘to signal beauty and youth, which are the attributes men look for,’ says Prof Voyer. ‘Men, on the other hand, have traditionally signalled status and wealth, the attributes women look for.’ Manufacturers have found clever ways to convince guys to worry about their looks, explaining that their skin is different – thicker, tougher, more oily – and requires specialised products. As a L’Oréal ad once warned: ‘You think you’re ageing well? She thinks you’re letting yourself go.’ Half of American men now use skincare products as part of their daily routine, Mintel has found. SOURCE: Adapted from Boyle, M. 2013. Personal-care industry is getting under men’s skin. Business Day, 26 September, p. 16

WEBSITE Visit the website www.tallgirlshop.com to see how the retailer Tall Girl targets tall women.

5.3.4 Income segmentation Income is a popular demographic variable for segmenting markets because it influences consumers’ wants and determines their buying power. Many markets are segmented by income, including the markets for housing, clothing, automobiles, food and banking. Nedbank unashamedly targets the higher-income market (high net worth individuals) and a basic requirement to become a Nedbank Private Wealth client is a personal income exceeding R1.5 million per annum and an investable assets greater than R5 million (excluding primary residence), or a stockbroking account in excess of R250 000.17 Old Mutual’s Retail Affluent division specifically targets wealthy clients. Considering that there are $28 000 "****** DEMO - www.ebook-converter.com*******"

millionaires in South Africa, it is not surprising that the major banks now all have ‘private banks’ for the well-heeled. Clients who earn R800 000 per year or have investable assets of R3m typically qualify for this special service.19 The Bureau for Market Research estimates that the private banking segment will grow to approximately 500 000 clients by 2016. Nu World, a firm marketing small electrical appliances, uses an income-segmentation targeting strategy. Its JVC brand is targeted at higher-income consumers, Telefunken is aimed at the middle-income group, and Nu Tec is an entry-level brand.18 Pep Stores targets the lower-income market, whereas clothing boutiques target higher-income groups. Lever’s Pond’s facial cream is targeted at the middle-income market and Elizabeth Arden at the higher income market. South African Airways makes use of income segmentation and identifies four segments each with particular benefits, as follows: • • •

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Premium (the most expensive): free lounge access; priority check-in; extra Voyager miles; refundable fares Select: select seat at time of reservation; lounge access at a fee; full Voyager miles; refundable fares Classic (value-for-money economy-class travel): select seat at check-in time; lounge access at a fee; full Voyager miles; cancellation and change fees apply Saver (the lowest economy-class fares): great for travellers who want the best deal and are comfortable with restrictions.

5.3.5 Ethnic segmentation "****** DEMO - www.ebook-converter.com*******"

Ethnic segmentation is based on the premise that consumers who belong to different ethnic groups behave and consume differently. In the United States, researchers have found some differences in consumption patterns between African Americans and other groups. American blacks and whites often have different preferences in taste. Although African Americans drink less coffee than average, this segment of the market is much more likely than other Americans to lace their coffee with large amounts of sugar, cream or non-dairy creamer. Recognising this trend, Coffee-Mate began marketing its product to blacks. It advertised in national magazines like Ebony and Essence, broadcast its message on local black radio stations and used outdoor advertising in black neighbourhoods. The difference between American blacks and whites also shows up in packaging choices. African Americans have a strong preference for larger sizes of non-alcoholic beverages, for example. After the Coca-Cola Company discovered this phenomenon in the early 1970s, it began featuring and promoting 16-ounce bottles instead of the standard 12-ounce size when advertising to the black community.20

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EXAMPLE >>

In South Africa ethnicity is often used as a segmentation variable. Carson is one of the most successful firms in South Africa with its hair-care range of products for black South Africans. South African Breweries specifically targets blacks with its Black Label brand and particularly the large ‘quart’ bottle. The direct marketer Homechoice targets the black urban female market. The cosmetics manufacturer L’Oréal has a range of products aimed at making ‘African men and women feel beautiful’.21 "****** DEMO - www.ebook-converter.com*******"

>> Strategy Ethnic segmentation is often used in the publishing industry. When Mandla Matla launched Illanga Langa Sonto, the first Sunday newspaper for Zulu-speakers, he made use of ethnic segmentation. Sometimes ethnic segmentation is combined with gender segmentation. Media24 targets ‘black women who aspire to better most aspects of their lives’ and targets the LSM 4–6 range with its Move! magazine.22 Two newly launched magazines, iZZiT and Sutra will target the coloured and Indian markets in South Africa respectively.23 The jeans company Levi Strauss is targeting the black middle class. ‘Their shopping behaviours are different and branded companies will have to communicate differently through their marketing campaigns’ says Levi’s manager Nuholt Huisamen.24 While segmenting on the basis of ethnicity may be potentially controversial in South Africa, the burgeoning black middle class in South Africa (as discussed in Chapter 3) is a feasible market segment for businesses as it is (1) substantial (in 2013, for the first time, it exceeded the white middle class both in terms of number and spend), which suggests that it is (2) identifiable and measureable. In addition, this affluent marketing segment is (3) accessible to businesses through most of the contemporary marketing communication tools and because of its unique culture and values, it will (4) respond differently to the elements of the marketing mix than other South African market segments. "****** DEMO - www.ebook-converter.com*******"

Although the black middle class in South Africa is relatively homogenous, there are a number of sub-groups in this market segment. Specifically there seems to be a difference between those who were born into middle class families and those who were not born into middle class families.25 The University of Cape Town Unilever Institute of Strategic Marketing broadly defines the black middle class as comprising black individuals, 18 years old (or older) and living in a household with a monthly income of between R16 000 and R50 000 per month. However for marketing segmentation purposes, the group of individuals falling just outside this threshold, known as Aspirants are included in the definition of black middle class along with three other sub-groups known as Makfikizolos, The Second Wave and Forerunners. These four different sub-groups, making up this market segment, are considered below.26 Aspirants There are 1,9 million consumers in this sub-segment, defined as individuals who live in households with an income of between R10 000 and R16 000. Typically, this subsegment is confronted with a substantial debt burden and a scarcity of jobs, but their potential spending power suggests that business should not ignore them. If brands can build up a relationship with these consumers before their disposable income increases as they enter the middle class, then this loyalty should endure, giving businesses a substantial advantage. Mafikizolos As the name Mafikizolos suggests (it means ‘arrived "****** DEMO - www.ebook-converter.com*******"

yesterday’) this sub-segment have only recently become middle class. Consequently the huge odds that they had overcome and sacrifices they had to make to achieve the status of middle class are fresh in their memories. However, they are not entirely comfortable with confronting the challenges and everyday routines of middle class life and consequently are on a steep learning curve. Nevertheless, as they become familiar with middle class life, their confidence grows but they still have considerable (and perhaps marginally unrealistic) dreams about the quality of life that their new societal status will bring. The Second Wave These consumers are generally younger than the other subsegments and grew up in a middle class environment. Unlike other sub-segments, they had access to good education from a young age and consequently are better educated and their aspirations are realistic, unlike other members of the black middle class. Similarly, because they grew up in a nuclear family rather than an extended family, typical of the African culture, they feel under less pressure, than other in this market segment, to take responsibility for the well-being of relatives beyond their immediate family. The middle class is where they are most comfortable, having grown up in that environment, and consequently do not consider it a realistic scenario that they will end up living as their parents did, in challenging financial circumstances. This is in contrast to the Forerunners, discussed below, who find it difficult to forget the hardships associated with modest income. "****** DEMO - www.ebook-converter.com*******"

Forerunners The Forerunners are the first wave of previously disadvantaged black consumers to move to the middle class. Although they take pride in their achievements, they have very real fear of slipping backward out of the relative comfort and security of middle class living. While this segment believes that anything is possible, unlike the Mafikizolos, their dreams and aspirations are realistic, possibly tempered by the recent recession which has made them realise the value of a prudent lifestyle. As discussed in Chapter 2, LSMs the South African Advertising Research Foundation (SAARF) introduced a non-racial measurement to describe the South African consumer market called the Living Standards Measure (LSM). The LSM methodology is based on the premise that the consumption behaviour is largely determined by their social class as measured by ownership of durable goods and consumption of services. In 2004 black middle class notably absent from top LSMs, with only 10 per cent in LSM 9 and only 5 per cent in LSM 10. However the purchasing of household assets by the black middle class has resulted in a mass ‘migration’ of blacks to the upper LSMs (LSMs 8–10). In other words, the purchasing of durable goods by the black middle class has resulted in them being reclassified into higher LSM groups.27

5.3.6 Family life-cycle segmentation The demographic factors of gender, age and income often do not sufficiently explain why consumer buying behaviour varies. Frequently, differences in consumption patterns "****** DEMO - www.ebook-converter.com*******"

among people of the same age and gender result from their being in different stages of the family life cycle. The family life cycle is a series of stages determined by a combination of age, marital status and the presence or absence of children, and is a valuable basis for segmenting markets. Figure 6.1 illustrates both traditional and contemporary family life-cycle patterns and shows how families’ needs, incomes, resources and expenditures differ at each stage. The horizontal flow shows the traditional family life cycle. The lower part of the figure describes some of the characteristics and purchase patterns of families in each stage of the traditional life cycle. Figure 6.1 also acknowledges that many first marriages end in divorce. When young married couples move into the young divorced stage, their consumption patterns often revert back to those of the young single stage of the cycle. Many divorced persons remarry by middle age and re-enter the traditional life cycle, as indicated by the ‘recycled flow’ shown in Figure 6.1. An interesting approach to family life-cycle segmentation is adopted by the financial services firm Investec. They have a ‘cradle-to-grave’ strategy that implies that they offer financial services that they believe will appeal to their clients regardless of the stage of the life-cycle they find themselves in. Investec argues that ‘without the cradle-to-grave strategy it is hard to acquire the clients when they become higher earners later in life’.

5.4 Psychographic segmentation "****** DEMO - www.ebook-converter.com*******"

Age, gender, income, ethnicity, family life-cycle stage and other demographic variables are usually helpful in developing segmentation strategies, but often don’t paint the entire picture. Because of the limitations of demographics as segmentation variables, psychographics has been suggested as an additional means of segmenting consumer markets. Demographics, some say, provides the skeleton, but psychographics add meat to the bones. Psychographic segmentation is market segmentation on the basis of the following variables: •

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Personality. Personality reflects a person’s traits, attitudes and habits. Porsche Cars North America understood the demographics of the Porsche owner well: a 40-something male university graduate earning over $200 000 per year. However, research revealed that there were five personality types within this general demographic category that more effectively segmented Porsche buyers. These are the ‘top guns’, ‘elitists’, ‘proud patrons’, ‘bons vivants’, and the ‘fantasists’. Porsche refined its marketing as a result of the study, and, after a previous seven-year slump, the firm’s US sales rose by 48 per cent.28 Motive. Marketers of baby products and life insurance appeal to consumers’ emotional motives, namely, to care for their loved ones. Using appeals to economy, reliability and dependability, car makers like Toyota and Volkswagen target customers with rational motives, such as safety and economic petrol consumption. Car makers like Mercedes-Benz and Jaguar appeal to status-related motives.

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Lifestyle. Lifestyle segmentation divides people into groups according to the way they spend their time, the importance of the things around them, their beliefs and socioeconomic characteristics, such as income and education. For example, NPD Market Research identified the following five ‘eating lifestyles’: meat-andpotato eaters; families with kids whose diets feature cooldrinks and sweetened cereal; dieters; natural-food eaters; and ‘sophisticates’: high-income urban families whose diets feature alcohol, Swiss cheese and rye breads. Many cigarette marketers, including Camel and Peter Stuyvesant, use a lifestyle-segmentation approach.

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Figure 6.1 The family life cycle

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Geodemographics. Geodemographic segmentation clusters potential customers into neighbourhood lifestyle categories. It combines geographic, demographic and lifestyle segmentations. Geodemographic segmentation helps marketers practise micro-marketing, which is the development of marketing strategies tailored to prospective buyers who live in small geographic regions, such as

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neighbourhoods, or who have very specific lifestyle and demographic characteristics. Based on the idea that people in the same neighbourhood tend to buy similar things, retailers in densely populated areas, such as Hillbrow, Hatfield and Greenpoint, where most people live in high-rise flats, are less likely to sell products like braaiwood and bicycles than in other suburban areas. Retailers in suburbs where there is a lot of space may find that products like tumble dryers do not sell as well as in areas where space for drying clothes is more limited. Psychographic segmentation can also group consumers according to some combination of three categories of variables: activities, interests and opinions. Typical dimensions used for this purpose are listed in Table 6.1.29 Table 6.1 Dimensions used in psychographic segmentation Activities Work Hobbies Social events Holidays Entertainment Club membership Shopping Sport

Interests Family Home Job Community Recreation Fashion Media Achievements

Opinions Themselves Social issues Politics Business Economics Education Future Culture

A South African firm that uses psychographic and lifestyle "****** DEMO - www.ebook-converter.com*******"

segmentation particularly well to guide its entire marketing strategy is South African Breweries. It has identified seven personality segments (see also Figure 6.2): •

•

•

•

•

•

•

The belongers: The bulk of the beer market consumers who want to conform to the patterns of their peer group. They can be found in the Castle Corners of South Africa’s main sports fields. The reclusives: The opposite of the belongers. They are generally older and poorer consumers with limited resources at their disposal, who either do not or cannot participate in mainstream activities. The intellectuals: More sophisticated consumers who perceive themselves as rational and discriminating in their selection of brands. Strong intrinsic differentiation is important to this group of consumers as a means of purchase justification. They seldom buy on impulse and are often role models for others. The macho braves: Consumers who want to reinforce their manly and macho lifestyles through a brand that reflects these values. The feminists: Generally more up-market females who are independent and confident and who choose brands and products that set them apart from their male counterparts as a statement of their emancipation. They are often entrepreneurs, and are role models for others. The cool egocentrics: Highly badged, status-conscious consumers who are prepared to pay a substantial premium for a label that makes this distinction clear to all. The home makers: Primarily concerned with family

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issues. Social responsibility and moderation are key factors to be considered when dealing with this group. Beers that are aimed at some of these segments are as follows: •

•

•

Castle Lager targets the belongers – > Positioned as a mainstream brand: ‘It all comes together with a Castle’ > Objective is to dominate the mainstream market > Target market: white and black males, 25–35 years, LSM 3–8 Carling Black Label targets the macho braves – > Positioned as ‘refreshment and reward for hard work’ > A stronger beer that rewards strength of character and is a badge of manhood > Target market: black males, 25–45 years, LSM 4–6 Redds targets the feminists and cool egocentrics – > Positioned as ‘when you have to be cool’ and ‘crisp refreshment’ > Apple-flavoured fruit ale > Target market: females, 18–25 years, LSM 8–10. Figure 6.2 South African Breweries’ personality segments

The use of psychographics allows the marketer to move beyond the simple demographic description of a market to a "****** DEMO - www.ebook-converter.com*******"

description that offers more insight into the needs and behaviour of a target market. Psychographic variables can be used individually to segment markets or can be combined with other variables to provide more detailed descriptions of market segments.

5.5 Benefit segmentation Benefit segmentation is the process of grouping customers into market segments according to the benefits they expect of a product. Most types of market segmentation are based on the assumption that this variable and customers’ needs are related. Benefit segmentation is different from other segmentation criteria because it groups potential customers on the basis of their needs or wants rather than on some other characteristic, such as age or gender. The snack-food market, for example, can be divided into six benefit segments, as shown in Table 6.2, namely the nutritional snackers, the weight watchers, the guilty snackers, the party snackers, the indiscriminate snackers and the economical snackers. Table 6.2 is an illustration of how different segmentation criteria, such as lifestyle segmentation and benefit segmentation, can be used to segment a specific market, in this example, the market for snack food. Customer profiles can be developed by examining demographic information associated with people seeking certain benefits. This information can be used to match marketing strategies with selected target markets. For different segments the marketing mix (the 4 ‘P’s) can be adapted to appeal to the needs of that segment. For "****** DEMO - www.ebook-converter.com*******"

instance, for the economical snacker market segment, the price of snacks is important, so marketers have to price the product carefully. In our promotion and advertising, we have to make sure we convey a message of good value for money. For the nutritional snacker, marketers have to use the product component of the marketing mix to appeal to this market segment. Snacks with nutritional ingredients that are tasty, naturally healthy and without artificial ingredients would appeal to the nutritional snacker. The promotion and advertising message should emphasise the goodness of the ingredients even if these benefits come with a price premium. Table 6.2 A multi-variable benefit segmentation of the snack-food market

EXAMPLE >> Cold Water Omo is targeted at people who pursue a very specific benefit – to be able to wash their clothes in cold water. Nashua also has a very clear idea of the benefits a specific market segment seeks when it says: ‘Saving you time. Saving you money.’ Nokia is a firm that uses its product strategy brilliantly to appeal to different need segments. It appeals to those who want no more than functionality (the ‘practical segment’) with the Nokia 105 and Nokia 106. Those who see a cellphone as a fashion accessory or to whom music is "****** DEMO - www.ebook-converter.com*******"

important can buy the Nokia Asha, and businesspeople are targeted with the Nokia Lumia. When Samsung advertises its Ch@t222Plus app it says: ‘Socialize. Entertain. Connect.’

6. Qualifying and determining bases for segmentation

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Some marketers distinguish between a qualifying and a determining basis, or dimension, when considering segmentation.30 A qualifying dimension is a consideration that, as the word suggests, qualifies a consumer for a specific target market. Age, for instance, is a qualifying dimension for the marketers of motor vehicles. If a consumer has not reached the minimum age to qualify for a driver’s licence, he or she does not qualify to be in the target market for the Volkswagen Polo, for instance. Following the Muslim faith is a qualifying dimension in WesBank’s targeting efforts (see Reader 34 ‘Car finance tailored for Muslims’). Many older people are not familiar with modern technology and, in fact, actively avoid products with a high-technology component. So age can be a qualifying dimension for high-tech products, such as computer modems. Having a smartphone is a qualifying dimension for using many of the ‘apps’ on the market today, including QR codes. A determining dimension, on the other hand, is one that will eventually determine a consumer’s buying decision. A determining dimension, therefore, ‘swings’ the final decision and will be related to the seller’s competitive "****** DEMO - www.ebook-converter.com*******"

advantage. For many buyers of computer software, compatibility will be a determining dimension. In other words, if a customer has to buy a newer version of a software package later, will it be compatible with the existing programmes, documents or files? The basis for segmenting markets will naturally change when offline firms begin looking at customers on the Internet. In cases where variables such as geography were of primary importance in the past, the Internet service provider (ISP) domain might now be considered. Alternatively, new variables such as Internet access speed or computing power may become important. Traditional firms that are new to the Internet will find that online segmentation can yield one of the following four different scenarios (depicted in Table 6.3).31 These four scenarios are based on two different dimensions. The first dimension focuses on whether the market size changes and the second dimension focuses on whether the actual criteria to segment markets change when firms move to the Internet. Table 6.3 Segmentation scenarios for firms moving online

>> Technology in action The promised land of marketing – a market segment "****** DEMO - www.ebook-converter.com*******"

of one? As discussed in this chapter, the rationale behind segmenting the market is to identify commonalities among groups of consumers which influence their response to marketing messages. However, although we may share some characteristics with other consumers, we are all unique individuals, so the most effective market segment technique would be to target each individual as a discrete market segment. Although this may have seemed an impossible dream a few years ago, the Internet with its technology allows us to customise the messages for individual tastes and preferences. For example, when Kalahari.com’s customers log onto the website of Kalahari.com, they are usually greeted with a personalised web page which gives them recommendations on goods and services in which they have shown interest on past visits to the site. Although an important benefit of the Internet is its ability to customise a business’s marketing communications to individual tastes, customers are now able to co-create their own products. The customisation of products to individual preferences is the real promise of the Internet. Although large organisations, such as Nike, have facilities which allow consumers to design their own shoes and clothing, smaller businesses focusing on niche markets are also following this trend. For example, Footjoy, a firm based in the United States allows golfers anywhere in the world to design their own golf shoes and have them delivered to them at "****** DEMO - www.ebook-converter.com*******"

their homes. In many respects, this represents a shift in power from the firm, which would traditionally design the products and offer the consumer a number of options, to a world in which the product is co-created. This concept is not new – it has existed for many years in the business-to-business (B2B) world. For example, when Nando’s creates a new marketing campaign, there is a partnership between the firm and the advertising agency whereby the advertisements are cocreated. SOURCES: Mootee, I. 2007. Web 2.0 and the new marketing. Available http://blog.futurelab.net/2007/07 (accessed 28 March 2010); www.kalahari.com (accessed 28 March 2010); www.footjoy.com (accessed 27 March 2010)

•

No change. Firms may find that online segmentation does not reveal any significantly new segments and that the relative compositions and sizes of the online customer segments may generally be the same as the offline segments. A good example would be a firmspecific business-to-business (B2B) site, where there may be a few opportunities to significantly increase the size of the market and the segmentation variables remain approximately the same. In a business-toconsumer (B2C) context, this situation may occur if all or most of a firm’s offline customers are regular Internet users and exhibit many of the same needs and buying behaviours when using the Internet. Moving online for a firm, then, becomes simple in the sense that the online and offline marketing strategies remain largely the same.

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A typical example is Exclusive Books with its online website, www.exclus1ves.co.za. Market expansion. Firms may find that the characteristics of the online segment are the same as the characteristics of the offline segment, but that the segment size changes. For example, a segment may become larger due to the increased reach of the Internet. This may happen if a firm’s offering appeals to many consumers that were previously out of the physical reach of the firm. Carrol Boyes is a good example of such a firm. It started in 1989 and grew rapidly after launching its website (http://www.carrolboyes.co.za). Before the launch of its website, Carrol Boyes’s market was limited to people buying from its retail shops in South African shopping centres. After it established an online presence, it attracted global customers.

Alternatively, segment characteristics might stay the same while the segment size shrinks. This can only happen if a small percentage of a firm’s normal target segment uses the Internet. •

Market reclassification. Online segmentation initiatives could reveal that customer segments are different on the Internet from the non-online markets – either slightly or significantly. This difference may be due to the Internet’s ability to augment a firm’s offering (such as better service delivery or customisability) and hence create online customers that are more demanding or discriminating. Typical examples of this include Pick n Pay online shopping (http://www.pnp.co.za/shop/PnP)

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and the Woolworths online grocery service (http://www.woolworths.co.za). These services allow customers to buy from these retailers online. This convenience is not only a luxury for working people with busy schedules, but also provides the two retailers with a competitive advantage over their competitors. Reclassified expansion. Naturally, it is more likely that firms will experience a combination of the previous two scenarios, so that segments may change both in terms of size and characteristics. This complicated scenario makes Internet marketing strategy all the more important because targeting and positioning play a crucial role in online success. A good example is Dell’s website (http://www.dell.co.za), which allows customers, instead of buying its computers at retailers such as Incredible Connection, to buy online, with the opportunity to customise a computer on the basis of a set of questions and requirements. Allowing customers to take more control of the process of choosing and customising a computer creates a competitive advantage for Dell over other computer manufacturers.

7. Steps in segmenting a market

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The purpose of market segmentation, in both consumer and business markets, is to identify marketing opportunities. Figure 6.3 traces the steps in segmenting a market.

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Figure 6.3 Steps in segmenting a market

1

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3

Select a product category or market for study. Define the overall market or product category to be studied – one in which the firm already competes, a new, but related, market or product category, or a totally new one. For instance, Coca-Cola carefully studied the bottled beverage market before deciding to target sportspeople with its own energy drink, Powerade. The same applies to the mineral water market before it introduced BonAqua. List the potential needs in this market or product category. This is a brainstorming session to identify as many needs as possible. The idea is to identify the reasons why consumers buy the product and can include needs such as money-saving, lower calorie intake, safety and user-friendliness. The list must be as exhaustive as possible, emphasising customer needs, benefits and satisfaction. Choose a basis or bases for segmenting the market. This step requires managerial insight, creativity and market knowledge. There are no scientific procedures for selecting segmentation variables (see the section ‘Bases for segmenting consumer markets’, discussed earlier). These segmentation variables may be behavioural variables, geographic variables, demographic variables or psychographic variables. However, a successful

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segmentation scheme must produce segments that meet the four basic criteria discussed earlier in this chapter: substantial, identifiable, accessible and responsive. 4 Select segmentation descriptors. After choosing one or more bases, the marketer must select the segmentation descriptors. Descriptors identify the specific segmentation variables to use. For example, if a firm selects demographics as a basis of segmentation, it may use age, occupation and income as demographic descriptors. This step ought to lead to segments that are homogeneous within, but heterogeneous among other different segments. 5 Profile and analyse homogeneous segments. The profile of individual segments resulting from Step 4 should include the segments’ size, expected growth, purchase frequency, current brand usage, brand loyalty and long-term sales and profit potential. This information can then be used to rank potential market segments by profit opportunity, risk, consistency with the firm’s mission and objectives and other factors of importance to the firm. Once profiled, the substantial, identifiable, accessible and responsive criteria must again be considered. For instance, the profile must indicate whether the segment is different from other potential segments and will respond to a unique marketing mix compiled to appeal to that segment’s specific needs. The profile must also indicate whether the market segment is large enough to pursue profitably. 6 Identify the determining dimensions. A determining dimension is the dimension that will eventually determine a consumer’s decision to buy or not to buy. A "****** DEMO - www.ebook-converter.com*******"

7

determining dimension is related to the seller’s competitive advantage. A determining dimension must be identified for each potential segment. Fuel consumption and affordability may be the determining dimensions in the economy or bottom end of the passenger vehicle market. The marketer must decide: can we deliver that? Can we compete with other firms that may target the same market segment? Do we have a competitive advantage in this segment? If a firm cannot deliver on the determining dimension(s), then that segment should not be targeted. If Absa, for example, cannot deliver on ‘wealth creation’ then it should not enter the private banking market. This step is the final ‘reality check’ before a market segment is targeted. Name and select target markets. The last step in the segmentation process is to name individual segments. Selecting target markets may not be regarded as part of the segmentation process, but a natural outcome (see the section ‘Strategies for selecting target markets’). This is a major decision that influences, and often directly determines, the nature of a firm’s marketing mix. This topic is examined in greater detail later in this chapter.

READER 34 >> Car finance tailored for Muslims There are about 350 000 Muslim families in SA. Both Wesbank (assetfinancing) and Sanlam (Sanlam Private Investors) target this market segment. WesBank has created an Islamic vehicle-financing product that will meet all the requirements of the Sharia, or Islamic law. In terms of the law, Muslims are not permitted to enter into agreements that involve interest charges, nor are they able to take out insurance cover. They have to pay cash for goods. "****** DEMO - www.ebook-converter.com*******"

The new scheme involves a plan in which the current price of a vehicle and future interest rates and insurance will be factored into a monthly repayment. In effect, it is a rental plan in which the customer owns the vehicle at the end of the repayment period. Chris de Kock, general manager of WesBank marketing, says the product meets the demands of Islamic law as well as those of the South African judicial system. It will create a demand from the Muslim community and others who want to move away from interest-based banking. It is expected that the new product will earn at least R20 million a month in new business. Sanlam expects to generate R1,8bn of new investment from this market segment. SOURCE: Robertson, D. 2005. Car finance tailored for Muslims. Sunday Times business section, 9 May 2005, p. 4: Thomas, S. 2010. Sanlam and Islam, Financial Mail, 13 November, p. 78

After market segmentation the next stage is to design, implement and maintain appropriate marketing mixes. The marketing mix (or 4 P’s) has been described as product, distribution, promotion and pricing strategies intended to bring about mutually satisfying exchange relationships with target markets. Chapters 8 to 13 explore these topics in detail.

8. Strategies for selecting target markets

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So far, this chapter has focused on the market-segmentation process, which is only the first step in deciding which segment to approach in order to market a product. The next "****** DEMO - www.ebook-converter.com*******"

task is to choose one or more target markets. A target market is a group of people for whom the firm designs, implements and maintains a marketing mix intended to meet the needs of that group, resulting in mutually satisfying exchanges. The three general strategies for selecting target markets are undifferentiated targeting, concentrated targeting and multi-segment targeting. Table 6.4 describes the advantages and disadvantages of each targeting strategy. WEBSITE Visit the Spur website at www.spur.co.za. Describe the different market segments targeted by Spur restaurants. How would you describe Spur’s targeting strategy?

8.1 Undifferentiated targeting A firm using an undifferentiated targeting strategy essentially adopts a mass-market philosophy, viewing the market as one big market with no individual segments. The firm then uses one marketing mix for the entire market. In other words, a firm that adopts an undifferentiated targeting strategy assumes that all individual customers have similar needs that can be met with a single marketing mix. An example of undifferentiated marketing is the tap water used daily in South African homes and businesses. The various local city councils do not grade water into high, medium or low grades for use within homes and businesses. If they did, and they varied the price charged for the water depending on its quality, this would be an example of differentiated marketing. Thus a single marketing mix, which serves the "****** DEMO - www.ebook-converter.com*******"

needs of the entire market, is required. Table 6.4 Advantages and disadvantages of target marketing strategies Targeting strategy Undifferentiated targeting

Concentrated targeting

Advantages

Potential savings on production and marketing costs

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Concentration of resources Can better meet the needs of a narrowly defined segment Allows some firms to better compete with larger firms Stronger positioning

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Greater financial success Economies of scale in production and marketing

• •

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• Multi-segment targeting

Disadvantages

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Unimaginative product offerings Firm more susceptible to competition Segments too small, or changing Large competitors may more effectively market to niche segment

High costs Cannibalisation

The first firm to enter an industry (such as Xerox, IBM "****** DEMO - www.ebook-converter.com*******"

and Coca-Cola) often uses an undifferentiated targeting strategy initially. With no competition, the firm may not need to tailor marketing mixes to the preferences of individual market segments. Most online pre-owned carbuying firms (e.g. http://www.autotrader.co.za or http://www.mccarthycallacar.co.za, to name only two) are currently practising a mass-market, or undifferentiated, strategy, because they offer consumers a similar wide choice of second-hand cars and fairly similar services. At one time, Coca-Cola used this strategy with a single product and a single size of its familiar contour bottle. Marketers of commodity products, such as flour and sugar, are also likely to use an undifferentiated targeting strategy. One advantage of undifferentiated marketing is the potential for saving a lot of money on production and marketing costs. Because only one item is produced, the firm should be able to realise economies of scale benefits due to mass production. Also, marketing costs may be lower when there is only one product to promote and a single channel of distribution. Too often, however, an undifferentiated strategy emerges by default rather than by design, reflecting a failure to consider the advantages of a segmented approach. The result is often sterile, unimaginative product offerings that have little appeal to anyone.

>> Strategy Another problem associated with undifferentiated targeting is that it makes the firm more susceptible to competitive inroads. The Holiday Inn group lost a large "****** DEMO - www.ebook-converter.com*******"

share of the hotel market to competitors, such as City Lodge, which successfully targeted the more priceconscious value-for-money market, before it changed to a multi-segment targeting strategy. Using an undifferentiated strategy, a firm, therefore, faces the continuous risk of innovative segmenters ‘chipping away’ at the various segments of the combined target market by offering more attractive marketing mixes to more homogeneous sub-markets. IBM saw this happen very quickly when it launched personal computers. Apple took the segment that wanted an easy-to-use computer. Toshiba took travellers who wanted laptop convenience. Compaq appealed to those who wanted the fastest machines. Dell attracted customers who wanted reliability at a low price. A South African firm that is facing a similar situation is Pick n Pay, which is facing pressure from niche retailers such as Mr Price and Queens Park (clothing), Clicks (cosmetics) and Spar (food) continuously chipping away at Pick n Pay’s market.32 You might think a firm that produces an unexciting product like toilet tissue would adopt an undifferentiated strategy. However, this market has industrial segments and consumer segments. Industrial buyers want an economical, single-ply product sold in boxes of a hundred rolls. The consumer market demands a more versatile product in smaller quantities. Within the consumer market, the product is further differentiated as coloured or white, designer print or no print, cushioned or non-cushioned and "****** DEMO - www.ebook-converter.com*******"

economy-priced or luxury-priced. Selati, a producer of sugar, has differentiated its sugar products into four sub-brands: ‘light brown crystal sugar’, ‘pure white crystal sugar’, ‘pure white icing sugar’ and ‘pure white castor sugar’ to appeal to the different needs of its market.

8.2 Concentrated targeting With a concentrated targeting strategy, a firm selects a market niche (one segment of a market) for targeting its marketing efforts. The financial firm SASFIN uses a concentrating strategy by targeting its financial services exclusively to the SME sector. uBank does the same by targeting ‘industrial workers’.33 Because the firm is appealing to a single segment, it can concentrate on understanding the needs, motives and satisfactions of that segment’s members, and on developing and maintaining a highly specialised marketing mix. Some firms find that concentrating resources and doing a better job of meeting the needs of a narrowly defined market segment is more profitable than spreading resources over several different segments.

>> Strategy For example, Mercedes-Benz competes only in one niche of the motor-vehicle market. Pep Stores targets only the bottom end of the clothing market. In a similar "****** DEMO - www.ebook-converter.com*******"

fashion, Pam Golding targets the top end of the residential property market. Small firms often adopt a concentrated targeting strategy (also called niche marketing) to compete effectively with much larger firms. For example, specialised retailers, such as Sportsman’s Warehouse (sports equipment), Dulce’s (ice cream) and Hi-Fi Corporation (electronic goods), are a growing group of niche retailers. These relatively small, independent operators count on personal service and product selection, rather than on price, to differentiate themselves from large discounters such as Makro and Game. Some firms, on the other hand, use a concentrated strategy to establish a strong position in a desirable market segment. Porsche, for instance, targets a very upmarket vehiclemarket segment – ‘class appeal, not mass appeal’. There are risks, however, associated with a concentrated targeting strategy. Motor-vehicle manufacturers such as Toyota and Volkswagen are well positioned for both good economic conditions (more demand for luxury models, such as the Lexus and the Audi respectively) and poor economic conditions (demand shifting to entry-level cars such as the Yaris and the Polo). Niche manufacturers, however, such as Fiat and Mercedes-Benz (only upmarket, luxury vehicles), are more exposed to the impact of environmental changes, such as the risk of declining disposable income, a severe recession or increasing petrol prices. Concentrated targeting thus violates the old adage, ‘Don’t put all your eggs in one basket.’ If the chosen segment is too small or if it shrinks "****** DEMO - www.ebook-converter.com*******"

because of environmental changes, the firm may suffer negative consequences. A concentrated strategy can also be disastrous for a firm that is not successful in its narrowly-defined target market. Do you remember how many video shops sprang up in South Africa in the mid-1980s? Many of them are not around anymore. In the United States, when Head and Shoulders shampoo was introduced, several small firms were already selling anti-dandruff shampoos. Head and Shoulders was introduced with a large advertising campaign, and the new brand captured more than half the market immediately. Within a year, several of the smaller firms that had been concentrating on this market segment went out of business. The key to successful concentrated targeting, or niche marketing, is specialisation. The firm has to specialise along market, customer, product or marketing-mix lines. The following are several specialist roles open to a niche marketer.34 •

End-use specialist. These firms specialise in serving one type of end-use customer. For example, Reuters provides financial market information and news to professionals, and many private banks in South Africa specialise in providing sophisticated investment advice to wellheeled clients. • Vertical-level specialist. The firm specialises at some level of the production/ distribution cycle. For example, the Dutch-based Anglo-Italian firm, EVC, is Europe’s leading manufacturer of polyvinylchloride (PVC), and Country Homes’ niche is as a middleman between owners of country cottages and people who want to hire "****** DEMO - www.ebook-converter.com*******"

them for holidays. • Customer-size specialist. The firm concentrates on selling to small, medium or large firms. Fuji gained its initial success in the photocopying market by specialising in the needs of small firms neglected by Xerox. Similarly, many regional advertising agencies specialise in serving medium-sized clients that cannot afford the high fees of national advertising agencies. • Specific-customer specialist. The firm limits its selling to one or a few large customers. There are many firms like this in the motor industry, such as Unipart, for example, which devotes most of its time to BMW/Rover. Atlantis Diesel Engines near Cape Town had the state as its almost exclusive customer at one stage. • Geographic specialist. The firm sells only in a certain locality, region or area of the world. uBank provides its financial services almost exclusively in rural and mining communities and Choppies does the same with groceries. • Product or feature specialist. The firm specialises in producing a certain product, product line or product feature. Rolls-Royce, for instance, is the only supplier of tilt-thrust jet engines to airlines. • Quality-price specialist. The firm operates at the low or high end of the market. For example, Hewlett Packard specialises in the high-quality, high-price end of the hand-calculator market, whereas Tring International sells very cheap CDs. • Service specialist. The firm offers one or more services not available from any other firm. An example is the American Space Programme NASA’s ability to recover "****** DEMO - www.ebook-converter.com*******"

and repair satellites. Niche marketing carries a very significant risk, in that the market niche may dry up or be attacked. Porsche was hit by both of these threats when the demand for luxury cars declined in the early 1990s and Honda, Toyota and Mazda all attacked the sports car market.

8.3 Multi-segment targeting A firm that chooses to serve two or more well-defined market segments and develops a distinct marketing mix for each uses a multi-segment targeting strategy. Toyota has a model that appeals to almost every conceivable market segment, ranging from the bottom of the range Yaris to the Lexus for the luxury market. South African Breweries markets a range of nine different locally bottled beers – each one with a different taste and flavour, alcohol content and packaging. Each one is developed for a different target market. Some firms use different promotional appeals, rather than completely different marketing mixes, as the basis for a multi-segment strategy. For example, different target markets are likely to be attracted to Colgate’s various shampoos: for normal hair, for dandruff, for oily hair, for dry hair, etc. Yet the basic marketing strategy (e.g. the shape of the bottle, the distribution strategy, the price strategy) remains the same. Although the basic product may be similar, the names and product attributes are designed to meet different wants. "****** DEMO - www.ebook-converter.com*******"

>> Strategy Tsogo Sun (previously known as Southern Sun) uses the multi-segment strategy very effectively. It competes in different market segments with its Intercontinental Hotels and Resorts and Holiday Inn Crowne Plaza hotels (both in the luxury segment); the Holiday Inn and the Holiday Inn Garden Courts (middle-income markets); the Holiday Inn Express (convenience and value for money); Southern Sun Resorts (hospitality and tourists in search of scenic beauty); and its Formula 1 and Formula Inn hotels compete in the economy-market segment. Multi-segment targeting offers many potential benefits to firms, including higher sales volume, higher profits, larger market share and economies of scale in manufacturing and marketing. Yet multi-segment targeting also involves higher costs. Before deciding to use this strategy, firms should compare the benefits and costs of multi-segment targeting with those of undifferentiated and concentrated targeting. Increases in the following costs need to be taken into account: •

Product design costs. A multi-segment targeting strategy sometimes results in different products for different market segments. It may involve nothing more than a package or labelling change, or it may require a complete redesign of the product itself. An example of a slight modification is packaging Coca-Cola in various

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sizes and types of containers, such as 340 ml cans, 1,5litre bottles and 2-litre plastic bottles. By contrast, Compaq Computer incurred major costs in developing both desktop and laptop computers and will incur even more if they enter the tablet market. Creating different products with unique features sought by different segments of the market can be very expensive. • Production costs. Total production costs mount as a firm develops and markets different products for different market segments. Each manufacturing run may require a retooling of production equipment, during which time expensive production lines are idle. The result is higher costs for the manufacturer, and marketers have to charge their customers higher prices to compensate – which may be hard to do in a very competitive market. • Communication costs. If a firm produces a different product for each market segment it must develop separate marketing communication strategies for each segment. Significant expenditures of human and financial resources are required, as each communication campaign will require unique advertising (TV, radio, print); its own promotional material (pamphlets, coupons); and even the use of different media (more personal selling, for instance), in some cases. South African Breweries, for instance, has a separate marketing communication strategy for each of its brands and even uses a separate advertising agency for each brand. • Inventory costs. The more market segments a firm tries to serve, the higher the inventory costs are likely to be. With inventory costs averaging between 20 and 30 per "****** DEMO - www.ebook-converter.com*******"

•

•

•

cent of inventory sales value, a multi-segment targeting strategy can be very expensive. Firms like Toyota and Volkswagen must spend millions of rands on keeping an adequate inventory for all their models, some of which may not even be on the market any more. Marketing research costs. An effective market segmentation strategy relies on accurate, detailed market information about consumer demographics; consumer reaction to various product designs or advertising appeals; and consumer interests, attitudes and opinions, and so on. Collecting this information can be a time-consuming and expensive process. Management costs. A multi-segment targeting strategy requires extra management time. As the number of segments increases, so does the number of decisions that need to be made. Management must co-ordinate the marketing mix for each targeted market segment. Cannibalisation. Cannibalisation occurs when the sales of a firm’s new product reduce the sales of one of its existing products. For example, when South African Breweries launched Miller Draft it hoped that the new product would expand its sales and grow the beer. If however, Miller drinkers simply switched from the ranks of current drinkers of other SAB brands to Miller, cannibalisation has occurred. M-Net has found that introducing DStv has not really grown its market. Instead, its new DStv subscribers are by and large its existing analogue subscribers.

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9. Contrasting target marketing strategies

LO8

Table 6.5 illustrates that in the target market approach, what the firm decides upon influences all aspects of the firm’s marketing strategies, and the marketing mix (the 4 ‘P’s) in particular. The product strategy for each target market will be different. In the case of an undifferentiated strategy, the product mix will be wider (trying to satisfy many different needs), whereas at the other extreme, namely concentrated targeting, the product mix will be limited to relatively few products or brands. Table 6.5 Contrasting target marketing approaches

The distribution strategies of a firm will also be strongly influenced by the targeting strategy used. Undifferentiated targeting involves intensive distribution (see Chapter 10), which means that almost as many intermediaries (retailers and wholesalers) as are prepared to stock the product are allowed to do so. The distribution is as wide as possible, "****** DEMO - www.ebook-converter.com*******"

necessitating many intermediaries in a wide geographic area. Undifferentiated targeting also means that firms bring their products within easy reach of the target market and, by implication, reduce travelling time, for instance. Concentrated targeting, on the other hand, implies exclusive distribution. The intermediaries are, therefore, limited and potential buyers have to make an effort to reach retail outlets. The product, in such a case, will often be one that carries a price premium. The media that will be used for marketing communication purposes will not be a massmedia approach, but one that offers maximum exposure to the target market. In the case of cameras, for instance, the medium will be camera magazines, such as Camera and Image (Ci), or sponsorship of a photographic club, rather than advertisements in mainstream media, such as YOU and Huisgenoot. Table 6.5 summarises the advantages of segmentation, namely: • • • • •

The ability to define and, therefore, satisfy consumer needs more accurately Better utilisation of scarce resources More opportunities to build long-term relationships with customers More accurate or detailed objectives Enhanced performance assessment?

Proponents of segmentation will, therefore, argue that these benefits all contribute to enhanced profitability. The disadvantage of segmenting is that it can result in limited market coverage, leading to missed opportunities and "****** DEMO - www.ebook-converter.com*******"

limited growth potential. Once a firm has segmented its market and decided on the market segment(s) it will target, the next step is to decide how it wants to be positioned in each targeted market.

10.Positioning

LO8

Positioning follows a firm’s decision about its target market. The term positioning refers to developing a specific marketing mix to influence potential customers’ overall perception of a brand, product line or firm in general. In other words, a position is the place that a product, brand or group of products occupies in consumers’ minds in relation to competing offerings. Positioning assumes that consumers compare products on the basis of important features. Marketing efforts that emphasise irrelevant features are, therefore, likely to misfire. Crystal Pepsi and a clear version of Coca-Cola’s Tab failed in the United States because consumers perceived the ‘clear’ positioning as more of a marketing gimmick than a genuine consumer benefit.35 Effective positioning entails assessing the positions occupied by competing products, identifying the important dimensions underlying these positions and choosing a position in the market where the firm’s marketing efforts will have the greatest impact. Positioning is a crucial concept in marketing. We believe it is such a critical concept that the whole of Chapter 7 is devoted to the concept of positioning and its use as a "****** DEMO - www.ebook-converter.com*******"

competitive strategy.

Firm more susceptible to competition. • Concentrated targeting – > Segments too small or changing > Large competitors may more effectively market to niche segment. • Multi-segment targeting – > High costs > Cannibalisation risk. 8 Alternative strategies for selecting target markets. Marketers select target markets using three different strategies: undifferentiated targeting, concentrated targeting and multi-segment targeting. An "****** DEMO - www.ebook-converter.com*******"

9

undifferentiated targeting strategy assumes that all members of a market have similar needs that can be met with a single marketing mix. A concentrated targeting strategy focuses all marketing efforts on a single market segment. Multi-segment targeting is a strategy that uses two or more marketing mixes to target two or more market segments. How and why firms implement positioning strategies and how product differentiation plays a role. Positioning is used to influence consumers’ perceptions of a particular brand, product line or firm in relation to those of competitors. The term ‘position’ refers to the place that the offering occupies in consumers’ minds. To establish a unique position, firms use product differentiation, which involves emphasising the real or perceived differences between competing offerings. Products may be differentiated on the basis of attribute, price and quality, use or application, product user, product class or competitor. Positioning follows the selection of a target market.

DISCUSSION AND WRITING QUESTIONS 1 2

3

Describe market segmentation in terms of the historical evolution of marketing. Choose magazine advertisements for five different products. For each advertisement, write a description of the demographic and psychographic characteristics of the targeted market. Ask all your classmates to complete the VALS

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4

5

6

questionnaire at www.sri-bi.com/VALS/presurvey.shtml and then to submit their reports to you. Describe the psychographic segments present in your class, including a description of the size of each segment. A Belgian entrepreneur, Henri Thijssen, has developed a ‘robotic lawnmower’.36 Develop a targeting and positioning strategy for his product. Describe the nature of multi-segment targeting. Describe a firm not mentioned in this chapter that uses a multisegment targeting strategy. Identify reasons why Nedbank has abandoned its multisegment strategy.

STRATEGY READER >> How far does the promised land of social media marketing extend? Mark Beard is a Knysna-based entrepreneur who, along with other businesses, has a small, but thriving, car dealership known as Autolink Knysna (http://www.autolinkknysna.co.za/). After some time working in the corporate sector (and in so doing acquiring the skills to run a successful business), Mark purchased Autolink Knysna from the founder of the business in 1997. Mark’s passion for cars and his ability to understand his customers’ needs saw him turn the venture into a successful and – Mark hoped – sustainable business. However, the credit crunch in 2008 and the subsequent recession had a severely negative impact on the motor industry as a whole. Mark realised that if Autolink Knysna was to survive, he would have to reconsider the way he marketed his business. At the ski boat club in Knysna one Friday night, Mark overhead some colleagues talking about the use of the social media for marketing small businesses. This phenomenon was growing – at the end of 2009, Facebook "****** DEMO - www.ebook-converter.com*******"

had more than 350 million accounts; and in South Africa alone 2,6 million people had signed up with Facebook. What concerned Mark though was whether Facebook, although it might be a viable option for large corporations in urban America, was a feasible marketing option for a business selling second-hand cars in a small town near the tip of Africa. Consequently, one breezy Knysna afternoon in March 2010, Mark started researching the possibility of using Facebook as a way to improve the marketing of his products. During his investigation, Mark came across an article entitled ‘One Café chain’s Facebook experiment’, published in Harvard Business Review in March 2010, which argued that Facebook’s fan pages are an effective marketing tool. The study based this conclusion on an experiment in which the customers of Dessert Gallery (DG), a popular US-based café chain, were encouraged to join the fan page of DG. The research found that fans of DG (compared with the non-fan DG customers) made 36 per cent more visits to DG’s cafés each month; spent 45 per cent more of their eating-out dollars at DG; spent 33 per cent more at DG; and had a 14 per cent higher emotional attachment to the DG brand. Although the results seemed promising, Mark was sceptical. First of all, he pointed out (remembering his first-year statistics course) that the results revealed correlations rather than a causal relationship (between the customers joining the fan page of DG and increased marketing effectiveness). Nevertheless, if the Facebook fan page was successful, it would allow Mark to segment his market and allow a more focused marketing strategy. What was also attractive about this option was the fact that, other than the time spent setting up the Facebook fan page, there were no costs associated with this marketing strategy. Always on the lookout for a good deal, Mark set up the Facebook fan page and started his viral marketing campaign by sending invitations to eight friends on Facebook. A month later, Mark looked at the group page and noticed that the number of members of the group had grown to 64. This was exciting, thought Mark, but would it ultimately translate into increased sales "****** DEMO - www.ebook-converter.com*******"

for Autolink Knysna? SOURCE: Dholakia, U.M. & Durham, E. 2010. One Café chain’s Facebook experiment. Harvard Business Review, March 2010, p. 26

QUESTIONS 1 2

Do you think that Mark’s strategy will result in increased returns for Autolink Knysna? What advice would you give Mark about the use of social media as a marketing medium?

KEY CONCEPTS Behavioural segmentation: segmenting a market on the basis of consumers’ knowledge of, attitude towards, use of or response to, a product. Benefit segmentation: the process of grouping customers into market segments according to the benefits they seek from a product. Cannibalisation: a situation that occurs when sales of a new product cut into sales of a firm’s existing products. Concentrated targeting strategy: a strategy used to select one segment of a market for targeting marketing efforts. Demographic segmentation: segmenting markets by age, gender, income, ethnic background and family life cycle. Family life cycle: a series of stages determined by a combination of age, marital status and the presence or absence of children. Geodemographic segmentation: segmenting potential customers into neighbourhood lifestyle categories. Geographic segmentation: segmenting markets by region of the country or world, market size, market density or climate. Lifestyle segmentation: segmenting a market on the basis of how consumers spend their time, their beliefs and their socio-economic characteristics. Market: people or firms with needs or wants and the ability and willingness to buy. Market segment: a subgroup of people or firms sharing one or more characteristics that cause them to have similar product needs. Market segmentation: the process of dividing a market into meaningful, relatively similar, and identifiable segments or groups.

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Micro-marketing: developing a marketing strategy tailored to prospective buyers who live in small geographic regions, such as neighbourhoods, or who have very specific lifestyle and demographic characteristics. Multi-segment targeting strategy: a strategy that chooses two or more welldefined market segments and develops a distinct marketing mix for each. Niche: one segment of a market. Position: the place that a product, brand or group of products occupies in consumers’ minds in relation to competing product offerings. Positioning: developing a specific marketing mix to influence potential customers’ overall perception of a brand, product or firm in general. Psychographic segmentation: market segmentation on the basis of personality, motives, lifestyles and geodemographics. Segmentation bases (variables): characteristics of individuals, groups or firms. Target market: a group of people/businesses for which a firm designs, implements and maintains a marketing mix intended to meet the needs of that group, resulting in mutually satisfying exchanges. Undifferentiated targeting strategy: marketing approach that views the market as one big market with no individual segments and thus requires a single marketing mix. Usage-rate segmentation: dividing a market by the amount of product bought or consumed. 80/20 principle: a principle that holds that 20 per cent of all customers generate 80 per cent of the demand.

REFERENCES 1 2 3 4 5 6 7 8

9

Fontyn, Y. 2010. The perfect fit for all. Financial Mail, 24 September, p. 77. City Lodge Corporate Report, Supplement to the Financial Mail, July 2012. http://www.internetworldstats.com (accessed 22 July 2010). Rice, F. 1995. Making generational marketing come of age. Fortune, 26 June 1995, pp. 110–114. Lactose-intolerant cats. Food & Beverage Reporter Online, May–June 2000, p. 44. Kotler, P. 2000. Marketing management (tenth Millennium edition). London: Prentice Hall, p. 267. x $ = ? Brandweek, 31 January 1994, pp. 18–24. Chaffey, D., Ellis-Chadwick, F., Johnston, K. & Mayer, R. 2006. Internet marketing: Strategy, implementation and practice (third edition). Harlow: Prentice Hall, p. 183. The McVites case study. Food & Beverage Reporter Online, January/February

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10

11 12

13

14

15 16

17

18 19 20 21 22 23 24 25 26

2001, p. 51. Nielsen. 2013. Brand familiarity reigns king around the world consumer. Available from http://www.nielsen.com/us/en/insights/news/2013/brandfamiliarity-reigns-king-around-the-world.html (Accessed 17 July 2014). Unilever SA corporate report. 1998. Supplement to Financial Mail, 23 October 1998, p. 36. Jacobson, C. 2000. Teba Bank opens to look after SA’s rural poor. Sunday Times, 8 October 2000; Theba Bank website, www.tebabank.co.za/index.asp (accessed 19 July 2010). Mainland, B. 2012. Why you should segment your target market by generation. Available from http://www.dynamicbusiness.com.au/ (Accessed on 17 July 2014). Grail Research. 2011. Consumers of Tomorrow: Insights and Observations About Generation Z. Available from http://www.grailresearch.com/pdf/ContenPodsPdf/Consumersof_Tomorrow_Insig (Accessed 17 July 2014). Woman’s wing. Femina, October 1998, p. 148. New Ford Mustang designed to attract more female buyers. Marketing News, 3 January 1994, p. 27; Warner, F. 1994. Midas increases bid to attract women. Brandweek, 14 March 1994, p. 5; Weisz, P. 1994. There is a whole new target market out there: It’s men. Brandweek, 21 February 1994, p. 21. Nedbank: Become a client. 2014. Available from: https://www.nedbankprivatewealth.com/south-africa/become-a-client (Accessed on 10 December 2014). Mateme, M. 2001. Going against the herd. Financial Mail, 23 February 2001, p. 79. It’s raining millionaires. Finweek, 11 October 2007, p. 46; MoneyWeb website (accessed 14 March 2014). Morris, E. 1993. The difference in black and white. American Demographics, January 1993, pp. 44–46. Mwsan, N. 2009. L’Oréal sets its sights on the African woman, Business Day electronic edition, 30 April 2009. Bizcommunity online newsletter, www.bizcommunity.com, 8 February 2005. New segment lifestyle magazines launched. Bizcommunity online newsletter www.bizcommunity.com (accessed 9 October 2008). Huisman, j. 2014. Levi Strauss sets sights on black middle class. Business Day, 18 November, p. 2. University of Cape Town, Unilever Institute of Strategic Marketing. 2013. 4 Million and Rising presentation. Cape Town: University of Cape Town. Mafokomedia. 2014. Quick knowledge. Available from http://www.mafokomedia.co.za/news.html (Accessed on 10 December

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27 28 29 30 31

32 33 34

35 36

2014). Ibid. Taylor, A. 1995. Porsche slices up its buyers. Fortune, 16 January 1995, p. 24. Adapted from Wells, W.D. & Tigert, D.J. 1971. Activities, interests and opinions. Journal of Advertising Research vol. 11 (August), pp. 27–35. Perreault, W.D. & McCarthy, E.J. 1996. Basic marketing. Chicago: McGrawHill, p. 103. Mohammed, R.A., Fisher, R.J., Jaworski, B.J. & Paddison, G.J. 2003. Internet marketing: Building advantage in the networked economy (second edition). Boston: McGraw-Hill, pp. 107–109. Joubert, M. 2000. Better in the old days. Financial Mail, 25 February 2000, p. 65. Cranston, S. 2010. Heading above ground. Financial Mail, 15 October, p. 25. Kotler, P. 2000. Marketing management (tenth Millennium edition). London: Prentice Hall Europe, p. 247; Kotler, P. 1996. Marketing management (ninth edition). Englewood Cliffs: Prentice Hall, pp. 493–494. Triplett, T. 1994. Consumers show little taste for clear beverages. Marketing News, 23 May 1994, pp. 1, 11. Sunday Times, 23 August 2007, p. 9.

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CHAPTER

07

Positioning the firm and its products

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5 6 7 8 9 10 11 12 13

Describe the nature of positioning. Describe the typical undesirable outcomes if a firm fails to position itself or its products properly. Justify the role of differentiation in establishing a competitive advantage and in a positioning strategy. Explain the classification of industry types based on competitive advantages. Discuss the bases for differentiating firms, products and brands. Discuss the bases that can be used to position products. Describe the process of positioning a new product or brand. Justify or provide reasons why a brand may need to be repositioned. Describe the process of repositioning a product or brand. Describe the need for repositioning in the maturity phase of the product life cycle. Describe the development of a positioning strategy. Discuss the typical positioning errors that firms make. Critically evaluate the different tools used in positioning or repositioning.

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14 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 15 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Kulula humour earns its place ‘In case you have two children, choose the one you love the most to help him or her first.’ ‘Ladies and gentlemen, welcome to Cape Town. You can disembark in a moment. Except for the hunk in 13A, who is welcome to stay,’ one flight attendant said upon landing, leaving everyone scouting the plane only to realise there’s no row 13. These are the type of funky, humorous air steward announcements that budget airline Kulula has used to position itself away from its boring, conservative competitors. ‘Humour has been part of Kulula from day one,’ said Heidi Braurer, the airline’s marketing chief. ‘With a tiny budget, we needed to be seen,’ she said. Since launching in 2001 as Africa’s first low-cost carrier, Kulula has become South Africa’s number two carrier, powered by ad campaigns that have costumed ordinary flyers as cape-wearing superheroes, under its slogan ‘Now anyone can fly’. Their planes could be painted with cows, or arrows marking the nose and tail. And they never hesitate to turn to news headlines for inspiration. The airline’s "****** DEMO - www.ebook-converter.com*******"

name means ‘it’s easy’ in Zulu, she said, and the original idea was to make flying simple, at a time when the non-budget SAA dominated routes. Over the last decade, Kulula has claimed 20 percent of the domestic market and transports 2,4 million passengers a year, with several no-frills challengers following it into the skies. The flight crew’s outlandish announcements have become Kulula’s brand, helping passengers forget that they have to pay for their snacks. Last year it offered to pay ‘lobola’, a groom’s traditional wedding gift for his bride’s family, for Prince William to marry Kate Middleton. The question posed to passengers: ‘How many cows do you think Kate is worth?’ SOURCE: Business Report, 26 February 2012

QUESTIONS 1 2

How is Kulula perceived by consumers? How does Kulula differ from other airlines?

1. Introduction The term positioning refers to developing a specific marketing mix to influence potential customers’ overall perception of a firm, product or brand. In marketing terms, positioning refers to the place that a firm, product, or brand occupies in consumers’ minds in relation to competing offerings. Positioning is a particularly valuable strategy for the marketers of consumer products. "****** DEMO - www.ebook-converter.com*******"

The concept of positioning dates back to the late 1960s and early 1970s, referred to as the ‘positioning era’, when it was popularised by a series of articles published by Al Ries and Jack Trout. Positioning was approached from a psychological perspective, with the emphasis that ‘… positioning is not what you do to the product, but what you do to the mind of the prospect’.1 Accordingly, the ultimate marketing battleground was believed to be the mind of the consumer, and the better the understanding of how the mind works, the better the understanding of how positioning works.2 Today, at the start of the 21st century, the consumer’s mind is still the primary battleground, bombarded with information about firms, products, services and brands. In trying to simplify their buying decisions, consumers mentally organise these firms, products, services and brands into categories – in other words, position them in their minds. It is also important to recognise that marketers deal with mainly rational consumers who will try to maximise their satisfaction for any given level of input (expenditure). In other words, consumers will purchase those products and brands that offer them the most satisfaction – that is, the best-positioned products and brands.

2. Planning a positioning strategy Marketers should not leave to chance the positioning of their firms, products or brands. Instead, marketers need to plan unique positions that will afford their products and "****** DEMO - www.ebook-converter.com*******"

brands the maximum advantage in selected target markets. They also have to design marketing mixes to establish and support these planned positions. Thus, marketers plan positions that distinguish their products from competing brands and give them the greatest advantage in that market. In the motor-vehicle market, the Toyota Yaris and Honda Civic are positioned on economy, Mercedes and Audi on luxury, Porsche and BMW on performance. Volvo positions powerfully on safety and Toyota positions its fuel-efficient hybrid Prius as a high-tech solution to the energy shortage. ‘How far will you go to save the planet?’, the Prius promotional material asks. Goodyear tyres are positioned as being prestige tyres with the slogan ‘because not all tyres are the same’. Engen says, ‘with us you are number one’. OUTsurance promises that ‘you will always get something out’ and Tracker Alert says they are ‘taking back tomorrow’. Standard Bank promises to move forward, FNB asks how the bank can help clients, and by contrast, Absa’s ‘Today, Tomorrow, Together’ emphasises nurturing lasting relationships. Unilever markets three brands of margarine: Stork, Flora and Rama. Unilever has to plan a unique position in the minds of consumers for each of them. Stork, for instance, is positioned as a ‘preparation brand’. Unilever wants to inspire people to prepare food from scratch more often (as opposed to buying pre-prepared food), and reminds them that the best ingredient for the job is, of course, Stork. Unilever uses the tagline: ‘Cook from scratch. Create more than food’ to support this positioning.3 South African Breweries (SAB) also carefully plans the "****** DEMO - www.ebook-converter.com*******"

positioning of each of its brands and utilises the marketing mix to support and sustain that positioning. For instance, in 2001, Castle Lager was positioned as ‘the friendship brew’. Every Castle Lager advertisement, be it a television, magazine or newspaper advertisement or a billboard, supported and strengthened its positioning as ‘the friendship brew’. However, in 2004 SAB realised that the slogan had not had as much impact on the market as it had hoped, and starting downplaying the emphasis on ‘the friendship brew’ in its advertisements about Castle Lager in favour of an emotional appeal about what is great about South Africa. Now the slogan is: ‘It all comes together with a Castle.’

3. The nature of positioning

LO1

Positioning assumes that consumers compare products on the basis of important features. Marketing efforts that emphasise irrelevant features are, therefore, likely to fail. For example, Crystal Pepsi and a ‘clear’ version of Coca-Cola’s Tab failed in the United States because consumers perceived the ‘clear’ positioning as more of a marketing gimmick than a genuine consumer benefit.4 Effective positioning necessitates assessing the positions occupied by competing products, identifying the important dimensions underlying these positions and choosing a position in the market where the firm’s marketing efforts will have the greatest impact. If all competitors are marketing large, five-seat passenger vehicles that appeal to luxury "****** DEMO - www.ebook-converter.com*******"

needs, why not build small, economy cars? If major competitors are all stressing low prices, why not introduce a prestige brand? If your major competitors are colas, perhaps emphasise that your product is an ‘uncola’. Hewlett Packard clearly believes that flexibility is a dimension particularly important to consumers and a need that other computer manufacturers fail to satisfy. Hewlett Packard is positioned as the flexible computer because consumers can decide on their own configuration of computer that will best satisfy their needs. Similarly, CocaCola realised that Diet Coke, although not deliberately positioned as a women’s drink, was consumed mostly by females. Although men were equally health-conscious, and interested in a low-calorie drink, their reluctance to consume Diet Coke left a gap in the market. Consequently, Coca-Cola Zero, using essentially the same ingredients as Diet Coca-Cola, was launched and positioned as a ‘Men’s Diet Cola’, in so doing preventing competitors from occupying this position in the market.5 Regardless of how positioning is defined, there is little doubt about its importance. It has been argued that the position of a product is its real source of competitive power and the key to product success, and that an effective positioning strategy is critical in accomplishing the firm’s marketing and business objectives.

3.1 The consequences of failing to select a position

LO2

Failure to select a desired position in the market and to "****** DEMO - www.ebook-converter.com*******"

develop a marketing action plan designed to realise and hold this position may result in one of several undesirable outcomes.

•

•

•

•

In other words, the firm or its products or brands:6 Are pushed into an undesirable position where they face head-on competition from stronger competitors. Lion Lager, before it was taken off the market, was pushed into an undesirable position by the strong Castle Lager brand Are pushed into an undesirable position which nobody else wants, because there is little customer demand there. The retailer Diskom was pushed to a position ‘somewhere between the urban and the rural market’ where nobody wants to be7 Are positioned in a way that is so fuzzy that nobody knows what their distinctive features really are. Fair Lady magazine faced this situation in the late 1990s, before it was repositioned Have no position at all in the market because nobody has heard of them. Namibian Breweries’ Tafel Lager may be facing this situation.

An example of the first problem (facing head-on competition from a stronger competitor) is the situation that South African wines face in the United States. There, South African wines compare well with other wines in terms of taste and price, but images of crime, violence, famine and jungles still loom in the minds of American consumers. As Americans associate wine with romance, they find it hard to believe that South Africa can produce good-quality wine. "****** DEMO - www.ebook-converter.com*******"

Also, South African wine marketers’ failure to position their wines appropriately has led to direct competition with American, French and Chilean wines.8

>>Strategy Another example of poor positioning that led to undesirable direct competition is Woolworths’ experience in the 1990s, when it followed an international upmarket trend by introducing higherpriced, designer-type fashions in its clothing departments. This move, however, was met with unprecedented resistance, particularly from female customers. Many women reasoned that at such high prices, they may as well buy their clothing at more exclusive fashion boutiques. Woolworths experienced a consequent drop in earnings of 38 per cent, losing its competitive positioning as a result of having to compete with fashion boutiques. It could not, however, match the exclusiveness of fashion boutiques. Where the firm in the past took advantage of buying clothing in large quantities, enabling long manufacturing runs, which kept prices affordable but quality high, it now had to contend with high-fashion goods made in short runs with imported materials, which were subject to currency fluctuations. After returning to its previous position of a narrow range of high-quality fashionable clothing at consistently good prices, sales at Woolworths recovered. This experience clearly illustrates that Woolworths needed to find the right "****** DEMO - www.ebook-converter.com*******"

positioning in the mind of the consumer by balancing perceptions of quality, price and fashion to maintain an effective position in the market.9

4. Differentiation – the cornerstone of positioning

LO3

It is true that most profitable strategies are based on differentiation – offering consumers something they value that competitors do not have. This differentiation is normally (but not always) what we have earlier described as a competitive advantage. It is indeed the cornerstone of the positioning strategy. Differentiation is the process of identifying something that is different about a firm or its products. The differentiating variable (price, quality, product attribute or image, to mention but a few) is not necessarily a competitive advantage, however. The differentiating variable has to be evaluated against at least four criteria:

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•

Is the differentiating variable or characteristic desired by consumers? If not, it is not a competitive advantage. Unleaded fuel, for example, is certainly a characteristic many consumers desire. Similarly the success of the iPod was based on the desirable differential advantage of seamless downloading of music from a dedicated store, iTunes, to a mobile player that produced better sound quality than its rivals. • Can we sustain the advantage over an extended period "****** DEMO - www.ebook-converter.com*******"

•

•

of time? If not, it is not a competitive advantage. For instance, in the fuel industry having the only unleaded brand proved to be a competitive advantage that was not sustainable and was soon copied. LG advertises ‘the world’s first curved OLED television’ – but for how long will it be a unique product feature? Can we manufacture and market the product at a price consumers will be prepared to pay? If not, it is not a competitive advantage. Fuel firms have succeeded in marketing unleaded fuel at prices that can be described as affordable. Is it profitable? If not, it is not a competitive advantage.

If the answer to all these questions is yes, then the differentiating variable can be described as a competitive advantage and it can (and should) form the basis of the subsequent positioning strategy. As pointed out earlier, consumers, in their selection of products and services, opt for those that provide them with the most value to maximise their need satisfaction (see the Reader 35 ‘Consuming interest – bottled water’). Therefore, it is particularly important that marketers understand the needs and shopping processes of potential buyers. Marketing research information (see Chapter 5) and a sound grasp of consumer behaviour (see Chapter 3) are, therefore, critical inputs into planning differentiation and consequently the positioning strategy. This information will enable a firm to deliver better value than competitors offer and as a consequence, win over and retain customers. A firm gains a competitive advantage if it succeeds in positioning itself as providing superior value to selected "****** DEMO - www.ebook-converter.com*******"

target markets. The competitive advantage may come about from various sources, such as lower prices than competitors, or superior benefits that justify higher prices. However, it is a prerequisite that if a firm positions its products or services as offering the best quality and service, it must at all times deliver the promised quality and service. Differentiating the firm’s product to such an extent that it will give consumers more value than the competitors’ products is the foundation on which a firm can build its positioning. It is important to realise, however, that a product should not only be different – it should be different in a way that is important to consumers. Competing in a very competitive environment Nedbank has chosen to position themselves as ‘green bank’. Only time will tell whether this positioning is sufficiently important to South African consumers.

READER 35 >> Consuming interest – bottled water How do you even begin to choose when confronted with the selection of bottled water available in South Africa? Your best guarantee of consistent quality is the stamp of the South African National Bottled Water Association (SANBWA). Membership of SANBWA requires that the water meet international hygiene standards: it will have been bottled in hospital-theatre-like conditions and tested regularly to ensure that pH levels and mineral composition are in order. Christine Le Mesurier of the H2O Waterbar in the V&A Waterfront bases her choices on quality, taste and beneficial properties. Water should have a pH of seven or higher (anything much lower will be too acidic). Then there’s the mineral content. Mineral waters are drawn from deep within the ground and contain the minerals of the rock strata through which they filter; spring waters, like Valpré, Caledon and Chamonix, come from near the surface and have a "****** DEMO - www.ebook-converter.com*******"

lower mineral content. ‘Spring waters are good for detoxing as the body doesn’t have to contend with a great deal of mineral absorption’, says Christine. ‘Some people want the energy lift that a high magnesium count gives; others are after the benefits of calcium.’ Waters like Mountain Falls from Hermanus and Paarl’s Aqua d’Or have a balanced mineral content, whereas those like Valvita or Karoo are high in minerals. Heart Foundationendorsed Blue is low in sodium, as is Drakenstein from Paarl. And Franschhoek’s La Vie won the South African Airways’ tender on taste. If this weren’t enough to absorb, oxygenated waters, like Super Aqua, are said to have energy-increasing capabilities. SOURCE: Warrington, J. 2000. Consuming interest: Bottled water. House and Garden, 2000, p. 27

EXAMPLE >> What is important to consumers when they buy a fridge? An advertisement for Whirpool’s fridge/freezer combination says: ‘Listen to forty thousand women telling you what matters most, and you’re bound to come up with the perfect fridge. With rounded lines, smooth contours for easy cleaning, extreme flexibility allowing you to adjust the inside, and a no-frost feature so the freezer never needs defrosting.’ Caltex tries to differentiate itself in the competitive fuel market by positioning its unleaded Vortex brand as a ‘performance-enhancing fuel’. According to Caltex, the differentiation is that Vortex provides maximum power, enhanced acceleration, and better drivability because it prevents foreign deposits going into the car’s fuel intake system. Shell V-Power, on the other hand, differentiates its fuel with Vaporon Combustion Boosters which give enhanced vapour action. This leads to fuel being burned more efficiently, which leads to enhanced performance. Shell V-Power is consequently differentiated by ‘power when you need it’. The question is: are these two brands (Caltex Vortex and Shell V-Power) sufficiently differentiated from each other? A drink such as Energade, for instance, is positioned in such a way that consumers view it very differently from other competitive energy drinks. The product clearly projects an image of not only being a thirst quencher, but also "****** DEMO - www.ebook-converter.com*******"

that it replenishes important minerals and vitamins that the athlete’s body needs for proper functioning and rapid recovery after strenuous exercise.

5. Classifying industries according to their LO4 potential for differentiation and a competitive advantage The opportunities for a firm to differentiate its product(s) or brands and gain a competitive advantage are not always abundant. In some industries it can be very difficult to differentiate a firm’s marketing offer. The Boston Consulting Group identifies four types of industries (Table 7.1 illustrates the four types), which are classified according to the number of competitive advantages and the size of those advantages that are possible in each category, as follows:10 •

Firms in volume industries typically have considerable scope to establish significant competitive advantages. The airline industry is an example of a volume industry. In this industry a firm can strive for low costs (as do Virgin Atlantic and Kulula) or differentiate by means of the quality of the service it offers (as British AirwaysComair does). It is also possible to be a winner on both price and quality. In industries of this nature, profitability is closely related to the firm’s size and market share. It is for this reason that so many major airlines form global alliances to build market share. South African Airways, for instance, is a partner in the

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Star Alliance, which contains 27 full members, including United Airlines and Swissair. Star Alliance competes with two other alliances, namely Sky Team and One World. Most of the industry leaders, such as British Airways and Singapore Airlines, are able to offer both high-quality services and low operating costs. • Products that offer few potential competitive advantages – each of which (if they exist at all) is too small to be of significance – are characteristic of stalemate industries. The established steel and bulk-chemicals industries are examples of stalemate industries. In these industries, it is difficult or even impossible for firms to differentiate their products or have meaningfully lower costs. Firms that compete in low-cost labour markets, such as Asian countries, sometimes succeed in these industries despite the challenges because they are able to lower labour input costs to some extent. The size (and, therefore, volume output and economies of scale) of modern plants in Europe and America is not sufficient to counter their high labour costs, leading to poor differentiation. • Fragmented industries offer many opportunities for differentiation, but each opportunity is small. Service industries are good examples of fragmented industries. Fast-food firms and restaurants are good examples of fragmented industries. International franchised outlets, such as Hard Rock Café, Planet Hollywood, McDonald’s, and KFC, are popular and successful all over the world, but they have a small share of the market relative to market leaders in other industries. And in fragmented industries profitability is not closely related to size or market share. "****** DEMO - www.ebook-converter.com*******"

•

Specialised industries are characterised by many opportunities to differentiate in a way that produces a high return. The pharmaceutical industry is a specialised industry with firms that are highly successful. A large portion of the world’s more successful firms – such as Merck, Pfizer and Norvartis - are market leaders for particular medical treatments. Examples of other specialised industries are publishing and scientific instruments.

A study of successful US firms, called the Profit Impact of Marking Strategy (PIMS) study, found that firms with the lowest return on investment compete in commodity markets where there is no differentiation.11 The coal industry market is an example of such a market. The successful firms are those that offer superior quality in differentiable markets. Car manufacturers such as BMW, Mercedes and Toyota, for instance, are examples of firms that succeed in differentiating their products and brands. Therefore, there is empirical evidence that successful differentiation is profitable. Table 7.1 A classification of industry types based on differentiation and competitive advantage

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SOURCE: Adapted from Kotler, P., Armstrong, G., Saunders, J. & Wong, V. 1996. Principles of marketing (European edition). London: Prentice Hall Europe, p. 40

The opportunities for differentiation are limited in some industries. Creative firms, however, always seem to discover some means of differentiating themselves from the rest. Petrol is a product in a stalemate industry, namely the oil industry. Filling up the car with fuel and attending to tyre pressure and radiator water levels have always been a chore to most people. Recently, however, we have witnessed the transformation of service stations into retail outlets that are not only easy to use, but also pleasant to visit. Service stations have now gone beyond providing ordinary functions and levels of service. The addition of an ATM, a 24-hour convenience shop and, in some cases, a fast-food restaurant, now makes a visit to a service station more pleasant. Competitive advantages (and the positioning on which they are based) may unfortunately have a limited lifespan for any firm. Some differential or competitive advantages are quickly copied or imitated by competing firms. In the financial services industry in particular, successful ideas are quickly replicated by competitors. Examples are the use of computer-aided quotations in the life-insurance industry and telephone selling of short-term insurance. For a firm to retain the initiative that flows from its "****** DEMO - www.ebook-converter.com*******"

competitive advantage, it is necessary to continue identifying new potential advantages for consumers and then introduce them one by one to keep competitors off balance. The idea is thus to introduce a series of advantages that will enhance a firm’s positioning – and, hopefully, market share – over time. Part of the success of market leaders such as Canon, Hewlett Packard, Sony and Gillette can be ascribed to the continuous introduction of new improvements to existing products. Cellphone marketers do the same, continually adding new features, such as video players, voice commands, multi-media messaging services and new ‘apps’. Many of these firms suggest that their true competitive advantage is the market knowledge, technological expertise, creativity and entrepreneurship that allow them to continually and quickly develop new, innovative products, and thus retain their differentiation – their competitive advantage.

6. Bases for differentiation

LO5

As shown earlier, firms need first to find a means of differentiating their product or brand on a sustainable basis and then to base their positioning strategy on that differential, or competitive advantage. A firm can differentiate its product from that of its competitors in a number of ways. The typical bases available to a firm for differentiation are related to the product’s features or attributes, accompanying service(s), personnel and image. "****** DEMO - www.ebook-converter.com*******"

6.1 Product differentiation Product differentiation is a positioning strategy that some firms use to distinguish their products from those of their competitors. Some gymnasiums now target young, professional females by providing them with a social environment where they can both exercise and do business at the same time – similar to what a round of golf is to their male counterparts. These gymnasiums want to move away from the perception that gymnasiums are only for out-ofshape woman of a certain age and negate the negative perception of a gym with heavy, bulky, off-putting equipment ill-suited to their needs. For this reason they have installed elliptical equipment with woman with a smaller stride instead of huge plates and bars and lots of dumbbells, balls, balancing equipment and body-weight exercises. Women are also more likely to prefer group exercise classes, stretching, yoga, boot camps and cardiovascular exercises. Bleaches, aspirin, unleaded petrol and some soaps, however, are differentiated by such relatively trivial means as packaging, colour, smell or ‘secret’ additives. In these cases, the marketer attempts to convince consumers that a particular brand is distinctive and that they should choose it instead of a competing brand. Product differentiation can be difficult for some products. For instance, many consumers do not see much difference in various brands of salt, milk or building sand, for example. A firm has the choice of offering either a standardised product or one that is highly differentiated. Although "****** DEMO - www.ebook-converter.com*******"

standardised products – such as steel and aspirin – are difficult to differentiate, some firms manage to differentiate successfully. The Disprin CV 300 aspirin with platelet aggregation-inhibiting properties is an example of a welldifferentiated aspirin. On the other hand, cars, cellphones, CD players and clothing are products that can be differentiated along a range of characteristics. The major characteristics that are used for product differentiation include features, product performance, durability and reliability.12

6.1.1 Features Features or attributes are product characteristics that enhance the product’s basic function. Most products lend themselves to being offered with various features. A motorvehicle manufacturer, for instance, can offer optional features, such as automatic transmission, air conditioning and leather seats. The key issue here is to decide which features are to be standard and which to make optional. It is possible that a specific feature will appeal to a group of additional buyers who may be persuaded to buy the product provided more than just the standard features are offered. Features are competitive tools that can be used to differentiate a firm’s product. The Japanese have become known for the continuous improvement and addition of new, innovative features to products such as cameras, calculators, video recorders and watches. Cellphone manufacturers have added features such as SMS technology, Internet access and games to their products in recent years. A firm that succeeds in introducing a new feature that "****** DEMO - www.ebook-converter.com*******"

consumers appreciate will gain a competitive advantage – at least in the short term. An example is the sports goods manufacturer Adidas, which claims that its ‘ForMotionTM technology (used in its running shoes) in the Supernova Control (shoe) channels the energy of your heelstrike. It adapts to your individual running style for a smooth transition, keeping the momentum of your running going.’

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Marketing research can play an important role in identifying new features that can be added to a product. Current users of a product, especially recent buyers, can be approached and asked questions such as the following: • •

What has been your experience or use of the product? Are there any shortcomings?

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• •

• •

What do you regard as the best features? What features could be added that would enhance the usefulness of the product and increase the satisfaction you get from the product? How much would you be prepared to pay extra for each feature? How do you feel about the following features that were mentioned by other customers?

The answers to these questions can serve as input into the development of new features that a firm may add to its products. The firm can decide which of the features should receive more attention by calculating the customer value and the cost to the firm of each potential feature. If the customer value exceeds the cost to the firm by a predetermined margin, the feature can be further analysed and researched in respect of market size and related issues (a process similar to new product development – see Chapter 9).

6.1.2 Performance Performance refers to the levels at which a product’s primary characteristics function. A good example is personal computers. If a Mecer has faster processing capabilities and a larger memory than a Hewlett Packard in a specific price class, it could be argued that the Mecer performs better. Buyers of personal computers would normally compare the performance features of different brands and be prepared to pay more for better performance as long as the higher price does not exceed the higher perceived value. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> The advertisement for the Peugeot 206 HDi 2l diesel model says: ‘Over 700 km on a single tank. Winner of the Total Economy Run.’ GlaxoSmithKline has used a performance-based differentiation for its new Aquafresh Flex tooth-and-tongue brush. The firm claims the brush removes five times more bacteria than normal brushing. For its new toothpaste (Aquafresh Extreme Clean) it uses a feature-based differentiation approach by pointing out that the toothpaste has a ‘micro-active foaming action’. When products are introduced to the market for the first time, a firm can decide on a specific performance level, or one of four levels of performance – namely low, average, high and superior. Not all products lend themselves to being marketed at different performance levels, but where it is possible this can serve as a good basis for differentiation. Managing a product’s quality level over time is also closely linked to performance. There are three performancemoderating approaches that can be adopted by a firm: quality improvement, quality maintenance and quality adulteration. Quality improvement is the typical strategy of market leaders, such as BMW and Seiko, which continually improve their products. The second approach is to keep the product at the initial quality level unless obvious opportunities or mistakes occur. The third approach is to reduce product quality over time. With this approach a firm will reduce quality in order to offset rising costs and hope that consumers will not notice the deterioration. A manufacturer of refuse bags that reduces the thickness of the bags by 25 per cent is an example of the latter approach. Another example is bakeries that reduced the weight of their loaves of bread from 800 g to 700 g but kept them the same size by adding more air and yeast to the "****** DEMO - www.ebook-converter.com*******"

bread mix. The loaf size was unchanged, but the quality was reduced.13

6.1.3 Durability Durability is the measure of a product’s expected operating life. The motor vehicle manufacturer Volvo claims that its vehicles have the highest average lifespan of any motor vehicle and that this warrants a premium price. Many consumers, subject to some qualifications, are prepared to pay more for a durable product. The typical qualifications are that the extra price charged must not be excessive and that the product must not be subject to high fashion or technological obsolescence. The Duracell battery is an example of a product that sells at a premium price because it is more durable than competing batteries.

6.1.4 Reliability Reliability is a measure of the probability that a product will not malfunction or fail within a specified time period. A Mercedes-Benz will, therefore, be more reliabile than a Daewoo if its chance of not malfunctioning in some important way within a month is 90 per cent compared with 75 per cent. Many consumers are willing to pay more for a product that has established a reputation of reliability. German cars and Japanese cameras are examples of products that have managed to establish a reputation for reliability over many years. The ACDelco car battery is advertised under the heading ‘absolute reliability’.

6.1.5 Reparability "****** DEMO - www.ebook-converter.com*******"

Reparability is a measure of the probability of being able to fix a product that malfunctions or fails. Products such as motor vehicles, motorbikes, televisions and video players that are made of standard parts that are easily replaced and have high reparability. Ideal reparability refers to a situation where users can fix the product themselves with little or no cost or time lost. In such a situation, a user would simply remove the defective part and replace it with a new part. With certain items of office equipment – such as a photocopier, for instance – it is possible to include a diagnostic feature that allows the service staff of the manufacturer/supplier to fix a breakdown over the phone by advising the user how to fix it.

6.1.6 Style Style is a subjective measure that describes how the product looks and feels to the buyer. Many car buyers are prepared to pay a premium price for a car with an extraordinary appearance. The sports models of BMW and Audi are typical examples. Some firms have outstanding styling reputations – such as Alfa Romeo cars; Bang & Olufsen stereo equipment; Swatch watches; and Gillette shaving equipment. Exceptional styling has the advantage of creating product distinctiveness that makes it hard for competitors to copy. Style is not limited to highly visible products, however. In the market for small kitchen appliances, German and Italian manufacturers have succeeded in creating very appealing products. Packaging is a component of the style of consumer products. Attractive, stylish packaging enhances the "****** DEMO - www.ebook-converter.com*******"

appearance of many food products, cosmetics, toiletries and small consumer appliances. Packaging is a powerful communication tool. It is capable of ‘turning the buyer on or off’ and can have a profound impact on market share and sales. For example, when Appletiser introduced a longer, sleeker, 275 ml bottle with a set of sophisticated pressuresensitive labels, it resulted in a 14 per cent increase in sales volume.14

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6.1.7 Reseller brands Marketing an ‘own brand’ has the advantage of being able to establish a label that ensures continuity at a specific quality level. Woolworths ensures that its clothing fashion brands offer the consumer a fashionable assortment of merchandise at a consistent value-for-money price. An interesting contrast with the advantage of an own brand of "****** DEMO - www.ebook-converter.com*******"

high quality, however, is provided by PEP Stores. This retailer, which supplies the lower end of the market, takes a low-key approach to branding. An exception is PEP Stores’ Student Prince schoolwear brand name, which has been successfully branded as schoolwear of high quality.

6.1.8 Product range The product range offered by a marketer is an important source of differentiation. In the retailing arena, PEP Stores has proved itself virtually recession-proof, thanks to a product range that is basic and low in fashion content. In times of recession, the higher-income segment tends to trade down, increasing the sales of PEP Stores, and in times of economic upswing the lower-income group can afford to buy more at lower prices.15 To summarise: when a product perspective on positioning is taken, it ought to be based on a clear understanding of consumers’ wants and needs. Product positioning encompasses the following meanings of the word ‘position’:16 • • •

Position as place (what place does the product occupy in the market?) Rank (how does the product fare against competitors in various evaluative dimensions?) Mental attitude (what are the consumers’ attitudes towards the given product?)

6.2 Differentiation based on services "****** DEMO - www.ebook-converter.com*******"

accompanying the product The services that accompany a product can also be used to differentiate the product offering. Consider the example of car-rental firms: how can Avis, Hertz, Budget and Imperial differentiate themselves and compete with each other if they use exactly the same vehicles to rent to their customers at more or less the same rates? The answer is by means of superior service delivery. Products that cannot be differentiated by physical means or that have to compete in a fiercely competitive market are especially likely to benefit from differentiation by means of accompanying services, such as delivery and installation.

6.2.1 Delivery Delivery refers to how well a product or service is delivered to a customer. Speed, accuracy and reliability are all part of the delivery process. Some products, such as bigger household appliances (a fridge, for instance), are mostly delivered to the home of the buyer. In such cases, a guaranteed fast delivery service would be a basis for differentiation. Scooters’ promise to deliver pizzas within 39 minutes is an example. Direct retailing firms also offer overnight delivery at a price below the overnight tariffs of couriers in an attempt to differentiate themselves from their competitors. Online customer service is enhanced by facilitating customer feedback by e-mail 24 hours a day – even if telephone operators and customer-service personnel are not available – and the ability to respond more rapidly (in real time) to "****** DEMO - www.ebook-converter.com*******"

customer concerns. Other examples are Pick n Pay and Woolworths who differentiate their services from other traditional food retailers by their online grocery shopping facility. These retailers capitalise on their offline strengths by having added very easy customer online ordering and delivery options. Other online services, such as online banking and stock trading, are differentiated both by the features they offer and the service-consumption experiences.

6.2.2 Installation Installation includes all the activities that have to be undertaken to make a product operational at its place of intended use. Large and heavy equipment, such as lifts, mainframe computers and commercial ovens, are usually marketed with installation costs included in the price. Various consumer products, such as washing machines, dishwashers and audiovisual equipment, as well as products consisting of a number of components that need to be assembled before they can function (such as automatic garage doors), also present the opportunity to offer installation as a basis for differentiation.

6.2.3 Customer training Customer training refers to training the customer or the customer’s employees to use the firm’s equipment properly and efficiently. A firm such as General Electric, for example, not only sells and installs expensive X-ray equipment in hospitals, but also takes responsibility for training the staff who will operate it. Buyers of Elna sewing machines are "****** DEMO - www.ebook-converter.com*******"

offered free training sessions to learn how to use the machines. The marketers of the software program Oracle train new users to help them learn how to use the system, and various microwave manufacturers offer microwave cooking classes to buyers.

6.2.4 Consulting service A consulting service is advice offered to buyers of a product for free or at a low price. Cellphone firms, Internet service providers and firms that sell computer software use this strategy. Most Internet service providers have toll-free telephone numbers that can be used to solicit the advice of their in-house experts. The service is usually available by telephone, e-mail or fax.

6.2.5 Repairs Repairs refer to the quality and variety of repair services available to buyers of the firm’s product. Caterpillar, the manufacturer of heavy construction equipment, such as front-end loaders, claims to provide better and faster repair services anywhere in the world than its competitors. The manufacturers of motor vehicles, domestic appliances, woodwork tools and various other products offer repairs as part of the product guarantee. The backward route that the product follows from the buyer to the manufacturer for repairs is known as the reverse marketing channel.

6.2.6 Miscellaneous services In addition to the services mentioned above, a firm may offer a variety of other services that add value to its products. "****** DEMO - www.ebook-converter.com*******"

Better guarantees or maintenance contracts and patronage awards, such as frequent-flyer programmes or the accumulation of points – such as First National Bank’s eBucks scheme, are examples of differentiation using miscellaneous services. Highly specialised personal services, like ‘do-it-yourself’ websites, allow users to conduct activities such as transferring phone services and making international phone calls online (e.g. Skype). Websites such as iTunes and Microsoft, which offer digital downloads of music and software, build on the desire of users to help themselves.

6.3 Personnel differentiation By carefully selecting and training staff to be more competent than competitors’ staff, firms can gain a competitive advantage. Well-known firms such as McDonald’s and Disney invest a lot in their staff to ensure that they are customer-orientated at all times. Staff working at UShaka entertainment park in Durban are known to be friendly and upbeat. Rovos Rail enjoys an excellent reputation largely because of the grace of its employees. GoldReef City in Johannesburg, Ratanga Junction in Cape Town and UShaka in Durban theme parks all train their staff to ensure that they are competent, courteous and friendly – from the hotel check-in agents to the monorail drivers, to the ride attendants, to the people who sweep the streets. Each employee understands the importance of understanding customers, communicating with them cheerfully and responding quickly to their requests and "****** DEMO - www.ebook-converter.com*******"

problems. Each employee is carefully trained to ‘make people happy’. Research indicates that better-trained personnel exhibit the following six characteristics:17 • • • • • •

Competence: the possession of the required skill and knowledge Courtesy: showing friendliness, respect and consideration Credibility: trustworthiness Reliability: consistency and accuracy in the performance of the service Responsiveness: a quick response to customers’ requests and problems Communication: the ability to understand and communicate clearly with the customer.

Indeed, the importance of people as a source of differentiation to gain competitive advantage is reflected in the business philosophies and annual reports of selected groups of South African retailers:18 • • • •

Edgars – ‘People … are the ones who make the difference in our performance.’ Foschini – ‘Crucial to our continued success is the calibre of our people.’ PEP Stores – ‘We have always recognised that our people are the key to our success.’ Woolworths – ‘We believe in the people that work in Woolworths … employee empowerment … might prove to be our most valuable strategic advantage into the future.’

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•

Specialty Stores – ‘Our real assets are not reflected on our balance sheets. For our real assets are the wonderful people in this group …’

These firms all regard their employees as their key success factor and most valued asset. This acknowledgement also explains the emphasis placed on training, developing the potential of all employees and opportunities for them to share in the firm’s success.

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6.4 Image differentiation Although buyers may regard competing products and their accompanying services as similar, the images they portray may differ. The cigarette market offers a number of examples of image differentiation. Many cigarettes taste the same, and are also sold in the same way. Despite this, Peter "****** DEMO - www.ebook-converter.com*******"

Stuyvesant has created for itself a ‘jet set’ image with the cigarette-smoking public, and is perceived as such all over the world. Tempest Car Hire has carefully cultivated an image as an affordable car-rental firm with its consistent message of ‘ridiculously low rates’ in its advertising campaigns. Ideally, an image should fulfil various roles. In the first instance, it must convey a single message in a distinctive way that establishes a brand’s major characteristic and positioning. A good image sets a brand or a firm apart from competitors’ images. Furthermore, an image must deliver emotional power that appeals to both the hearts and minds of buyers. Castle Lite, for instance, is positioned as a premium beer that appeals to the individualism of a young up-and-coming market. Dedicated creative work over long periods of time is a prerequisite for developing a strong image for a brand or a firm. Most well-known brands have continually established their images over time through the use of all the available marketing communication media and tools. To establish its ‘Just do it’ slogan, Nike used symbols, written and audiovisual media, events sponsorships and sports stars to convey the message to its market. Image is a complex factor and it is defined in a variety of ways. As far back as the 1950s, a shop’s image was described as a force which is ‘… the store personality … the way in which the store is defined in the shopper’s mind, partly by its functional qualities and partly by an aura of psychological attributes’.19 Image can also be described as a set of expectations. A firm may, for example, be seen as innovative "****** DEMO - www.ebook-converter.com*******"

or conservative, specialised or broad-based, discountoriented or upmarket. In the online world, the marketing strategy often revolves around the firm’s image and product information available on the web. As the first Internet book retailer – and one of the pioneer online retailers in any category – Amazon.com captured an early lead in online book sales. The firm has grown substantially since its inception in 1995; today Amazon is recognised as a leader on the web. If a firm is first to provide the product or service, the ‘brand’ can potentially become synonymous with the product as the best online provider. South African online competitors, such as Exclusive Books (http://www.exclus1ves.co.za) find it difficult to a degree to compete with Amazon, since Amazon.com’s brand is known around the world and has become associated with a variety of other products in addition to books. Amazon’s strong image definitely helped the firm attain ‘ownership’ of a product – in this case, online buying. The impressions and images that consumers have about the firm, whether true or false, real or imagined, guide and shape consumer behaviour. Therefore, all firms need to identify the strengths and weaknesses of their image and take action if necessary to improve it, because image represents to the consumer a composite picture of the firm – it is one of the most powerful tools in attracting and satisfying consumers. An image, however, has to be actively managed and continually adapted because markets and consumers’ perceptions are not static, but change over time. The typical elements, media and occasions that a firm has at its disposal in order to develop and build an image are the "****** DEMO - www.ebook-converter.com*******"

following:

•

Symbols. When a firm or a brand has a strong and wellknown image, it is immediately recognised by the audience or people exposed to it. Firms endeavour to design their corporate and brand logos specifically for instant recognition. The Dettol sword shown on the

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packaging and labels projects the protective nature of the product. Sanlam uses a pair of hands and Old Mutual uses anchors to portray the stability and protection offered by their products. The dog on Husky pet food is ‘clever, healthy and active’ as a result of eating Husky dog food. The Mercedes Benz trident and circle is one of the most powerfully positioned symbols, designating quality and safety. • Written and audio or visual media. All advertisements, promotions and publications, including the websites, stationery and business cards of a firm must communicate the personality of the firm or the brand. For instance, the slogan ‘Let your fingers do the walking’ and the walking logo of Yellow Pages have been viewed on television, heard over the radio and seen at sports meetings sponsored by Yellow Pages. • Events. Sponsoring events can result in a very positive image for a firm. Castle Lager is well known for sponsoring cricket and soccer in South Africa. Pick n Pay has generated a great deal of goodwill and a positive image by sponsoring road-safety programmes and the Argus cycling race. Bakers’ mini-cricket development programme helps create an image of community involvement and responsibility for Bakers. • Atmosphere. The physical facility in which the firm manufactures or delivers its products or services can be a very powerful tool for projecting an image. The physical facility in which a service is produced and consumed is known as the ‘servicescape’ and includes exterior attributes, such as signage, parking and landscaping, as well as interior attributes, such as layout, decor, "****** DEMO - www.ebook-converter.com*******"

equipment and lighting. Similarly, a website can be differentiated by providing visitors with a positive environment to visit, search, purchase, and so forth. Visitors want a website that is easy to download, portrays accurate information, clearly shows the products and services offered and is easily navigated. If customers view the home-page and like what they see, they are more likely to view additional pages and ultimately become paying customers. Cape Town’s Two Oceans Aquarium at the Victoria and Alfred Waterfront has created a wonderful atmosphere for its visitors, using layout, decor, equipment and lighting. The atmosphere makes it feel as if you are walking on the bottom of the Atlantic Ocean when you enter the aquarium. Retailers are known to make a big effort to project and create a desired image among customers. A retailer’s image, however, depends on several factors. The type of customer, shop location, price levels, services offered, merchandise mix, advertising and the characteristics of the physical facilities are some of the factors responsible for creating such an image. Generally, the components of retail image ought to be considered on a broad basis. Convenience, for example, means different things to different people. It may relate to a convenient location in relation to one’s home, work or other outlets. Or convenience may relate to parking, accessibility, business hours, internal layout and vertical transport – or even the means of payment. An analysis of the images that various South African clothing retailers wish to project shows that about half of the retailers build their firm’s image on ‘high quality’ and ‘good "****** DEMO - www.ebook-converter.com*******"

value for money’. This is closely followed by the ‘fashionableness of the merchandise’. It is significant that within each retail group different images are projected. For example, in the case of Specialty Stores (consisting of Milady’s, Mr Price and The Hub), an image of ‘fine classic fashion’, ‘no-nonsense fashion’ and ‘good value’ respectively are emphasised by the three retailers. Shop atmosphere has a very important influence on image. Creating and maintaining an image depends heavily on a firm’s atmosphere. For store-based retailers such as clothing retailers, atmosphere is closely linked to the firm’s physical characteristics used in developing its image and in drawing customers to the store. In this sense, atmosphere is also understood to be the psychological feeling the customer experiences when visiting the shop, or even the ‘personality’ of the shop.20 The atmosphere of a building is reflected in its tone or mood, and it can be controlled to create the desired image. If a retailer, for instance, wants to differentiate itself as ‘contemporary and modern’, it is important to choose the appropriate building and interior design, layout, colours, materials and furnishings to reflect these qualities.21 A good example of atmosphere contributing to a specific image is that of Mr Price. The atmosphere at Mr Price outlets has been described as ‘… electric. The decor is simple and honest. Windows are spontaneous, sparking high-voltage looks, attitudes and statements’. The staff are said to be ‘bouncy, creating a buzz, playing cool music, laughing and just oozing atmosphere’.22 The retail atmosphere may further influence consumers’ enjoyment of shopping in "****** DEMO - www.ebook-converter.com*******"

terms of the time spent browsing and examining the retailer’s products, their willingness to converse with staff and to use such facilities as dressing rooms. It can also influence the likelihood of consumers spending more money than originally planned (impulse buying). Image, therefore, is a powerful tool available to a firm and one must remember that when competing products look the same, buyers may perceive a difference based on the image of the firm and its brands.

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7. Bases for positioning products

LO6

In the preceding sections we have seen that firms have many different bases on which to differentiate a marketing offer. This differentiation is the basis on which a positioning strategy is built – differentiation is not positioning in itself. Often, however, firms are restricted in the number of options available to them for positioning a product. Over time, certain bases have been favoured for positioning and may include:23 •

Attribute. A product is normally associated with an attribute or product feature. For example, Windhoek Lager is positioned as a ‘natural beer with no additives or preservatives’ used in the brewing process. Its advertisements refer to ‘made of the right stuff ’and ‘100% pure beer’ to support that positioning. The South African firm Conlog hopes to market a television that is ‘theft-proof’. These are product attributes according to which the product is positioned in a market in relation to its competitors. Another good example is MercedesBenz, which uses product features to support its

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positioning of quality and safety. One of its advertisements says: ‘Why have motoring journalists called our Electronic Stability Programme the biggest breakthrough yet in safety? Well, imagine you were following a heavy-duty truck. Suddenly its tyre bursts. You break and swerve violently to avoid it. Amazingly there is no drama. No skidding. No loss of control. ESP has responded to the emergency by automatically regulating your breaking and engine output. Now, imagine the scenario without this safety feature. Mercedes-Benz drivers need not bother, since we’re the only manufacturer to offer ESP as standard on our entire range.’ Dunhill Light and Kent have chosen to position its cigarettes in terms of their lightness and taste.

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•

Benefit. A consumer benefit is something a consumer gains as a result of a product attribute or product feature. Benefit positioning is generally a stronger basis for positioning than attribute positioning because of its customer orientation in answering the question, what will the product/service do for me? Knorr markets its Light and Tasty soup in the following terms: ‘It’ll fill you up without the [fat] rolls’, and ‘staying in shape has never

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been this tasty’. Bostik emphasises ‘no nails, no screws’ when advertising its Montage brand of glue. Hush Puppies shoes will keep your feet dry in ‘driving rain, pounding hail and anything nature unleashes’. The Polo website focuses on how its products shape an entire lifestyle. Its products are much more than a tie or a jacket – they are designed to help adventure, style and culture. Another example is Annique beauty care products that emphasise the benefits of health and a perfect body. • Price and quality. This positioning base may focus on high price as a signal of quality or emphasise low price as an indication of value. Pierre Cardin clothing, Gino Ginelli ice cream, Alpha Romeo cars and Michel Herbelin watches are all positioned as expensive, but high-quality, products. While Woolworths is known for its high quality garments, Pep Stores and Mr Price are known for unbeatable prices and might become fierce competitors, similar to how Woolworths surpassed Edgars. • Use or application. Focusing on use or application can be an effective means of positioning a product with buyers. Orange juice is often positioned as a breakfast drink, and sparkling wine as a drink for celebrations. Similary, Graca wine is positioned as a wine to be enjoyed at all kinds of fun occasions. Various manufacturers of 4x4 vehicles emphasise the usefulness of their vehicles for discovering otherwise inaccessible outdoor terrains. Epson says its printers can be used for network printing, for printing large volumes and for colour printing. Also think of Campbell’s positioning of soups for cooking purposes, via their Campbell’s "****** DEMO - www.ebook-converter.com*******"

Kitchen. • Product user. This positioning base focuses on a personality or type of user. The retailer Sport ’n Surf is ‘where the real surfers shop’, while Dooleys Lemon Ale is ‘for the elegant woman’. • Product class. The objective here is to position the product as being associated with a particular category of products. An example is to position a margarine brand relative to butter. Margarine is positioned as a lowercost, healthier alternative to butter, whereas butter provides better taste and wholesome ingredients. Canderel sweetener uses this approach to position itself against sugar. Hansa aims to position itself as a pilsener. The marketers of Red Bull say: ‘It’s not a soft drink’, and Vivitar (marketers of cameras) says ‘we’re the point & shoot people’. A museum or planetarium that is traditionally regarded as an educational institution may elect to position itself as a tourist attraction. • Competitor. Positioning against competitors is part of any positioning strategy. The Avis rental car positioning as number two exemplifies positioning against specific competitors. BMW would find it useful to position its cars directly against those of Mercedes Benz, its closest rival in South Africa. PSG Asset Management says: ‘In the race to the top we’ve simply left the rest behind.’ Law firm DLA Cliffe Dekker Hofmeyr positions themselves as the No. 1 law firm for merger and acquisition (M&A) deals (see advertisement on page 247). • Origin. Some firms want to be associated with a certain geographical region or origin. Examples are Scotch whisky, Perrier water (French) and Audi’s Vorsprung "****** DEMO - www.ebook-converter.com*******"

•

durch Technik (German). Technology. Positioning on the basis of technology shows that a firm is on the cutting edge of contemporary developments. First National Bank emphasis the use of technology in their service delivery and has introduced services such as PayPal, Instant Accounting and eWallet. The website of South African Airways offers various tools to allow customers to manage their flight arrangements, access their frequent flier account (SAA Voyager), and do personalised travel planning and their own seat selection when booking overseas flights. In addition, SAA offers flight status notifications via text message, e-mail or voicemail to any receiving device. The manufacturer of electronic products Bosch (see advertisement on page 247) positions their washing machine on technology considerations when it says: ‘Water saving technology to make a splash about. Our new 8 kg washing machine uses exactly the right amount of water for every load. And not a drop more’.

It is not unusual for a marketer to use more than one of these positioning bases simultaneously. Ericsson, for instance, bases the positioning of its cellphones on size (attribute) and ease of use (use/application). The Woolworths food section is based on both price/quality and user (i.e. buyers who want nutritious, convenient, easy-toprepare meals). In addition to the abovementioned bases for positioning, the Internet has also given rise to new positioning choices that are worth examining.24 Table 7.2 shows appropriate online positioning strategies, using the dimensions of "****** DEMO - www.ebook-converter.com*******"

customer similarity and focus of effort. Table 7.2 Positioning strategies for firms moving online

•

•

Blanket positioning. In the first scenario, the target segment does not change and appropriate positioning is fairly simple. A good strategy would probably borrow entirely from existing offline positioning strategies because the objective is to appeal to the same group of customers. Additionally, the offering would be positioned with the added advantage of the Internet, such as convenience and access. Most South African firms follow this approach, which is adopted characteristically by first entrants to the online environment. In this case, firms see a website as an extension of their existing media strategies. The website of retailer Game, for instance, offers nothing extra to the online customer, except easy access to existing promotional material and the contact details of the various shops. Beachhead positioning. In the second scenario, in which the target segment is a subsection of the larger offline segment, the positioning is similar – but may be more focused towards the smaller group. A positioning strategy here might emphasise more of the value-added

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advantages of the Internet. This positioning assumes that the smaller segment puts more value on the Internet’s extended capabilities for convenience and access. The positioning of ExclusiveBooks.com, for instance, is almost the same as for the offline retailer, except that consumers have more control over the purchase function over and above access to all the books offered within the chain. • Bleed-over positioning. The third scenario assumes that the target segment is composed of both existing customers and a new type of customer. This positioning would resemble the offline offering, but also make the online offering attractive to new types of customers. Such a positioning strategy will try to appeal to previously different segments. For example, Standard Bank Internet banking emphasises online beneficiary payments and future-dated payments (appealing to the traditional offline segment) while simultaneously stressing the ability to tailor banking services online through a portal where one can change customer PIN numbers and profile details, and even engage in online investment activities. • New-opportunity positioning. The last scenario repositions the offering entirely, attempting to capture the attention of a completely new target segment. Arguably, such a positioning strategy is more effective if previous offline positioning strategies have not yet affected the new segment’s perception of the offering. This works, for instance, when increased geographic reach allows a firm to communicate with new and different customers over the Internet, giving the firm a "****** DEMO - www.ebook-converter.com*******"

chance to build a new position. A good example of a firm pursuing an opportunity in a new segment that was not previously targeted online is NetFlorist, which has a range of flowers and gifts.

8. The process of positioning a new product or brand

LO7

To position a new product or brand, a firm needs to know two things. Firstly, it must establish which attributes of a product are important to consumers, and, secondly, it has to know how the competing brands are perceived by consumers in terms of those attributes. Westfalia Fruit is entering the edible oil market with its range of avocado oils. Its positioning is based on ‘amazing goodness’. But to be effective, the firm needs to understand how it is perceived relative to other edible oils such as sunflower oil and olive oil in terms of health benefits and usage benefits (cooking, baking, drizzling, dipping, frying and roasting).

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A positioning (or perceptual) map is a means of graphically displaying in two dimensions the location of products, brands, or groups of products in consumers’ minds. Such a map displays the psychological distances between products or brands, and is a very useful tool for developing a positioning strategy. Toothpaste, for instance, may have a number of attributes that are important to different consumers. Some consumers may regard the "****** DEMO - www.ebook-converter.com*******"

plaque-fighting ability of a toothpaste as its most important attribute. Others may prefer a toothpaste that prevents tooth decay or ensures fresh breath. All the consumer preferences must be determined before a firm can proceed with positioning its own product or brand. Let’s assume that a toothpaste manufacturer undertook marketing research and identified the following attributes of toothpaste as the ones that are important to consumers. The sequence of the attributes also indicates their ranking in terms of importance to consumers: • • • • •

Prevention of tooth decay Plaque-fighting ability Fresh breath Ability to whiten teeth Gum protection.

From this list, it can be seen that preventing tooth decay and plaque-fighting ability were found to be the two most important attributes that consumers want in a toothpaste. Consumers can now be asked in a survey to indicate the ideal combination of tooth decay prevention and plaquefighting ability they want in a toothpaste by rating the importance of the two attributes on a five-point scale. The firm now knows what consumers prefer with respect to these two major attributes, and this information can now be used to draft a consumer preference map (see Figure 7.1 (A)).

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Figure 7.1 (A) Consumer preference map

Figure 7.1 (A) illustrates a hypothetical distribution of consumer preferences for the two toothpaste attributes. Each of the dots represents a particular combination of preferences (as expressed by consumers during interviews) for the two attributes. Figure 7.1 (A) shows that there are four distinguishable segments in the toothpaste market, namely: •

Those consumers who want a toothpaste with a high tooth-decay-prevention capability, but do not care at all about plaque fighting – those in quadrant 1 • Those consumers to whom both tooth decay prevention and plaque fighting are important– those in quadrant 2 • Those consumers for whom average tooth-decayprevention capability and average plaque-fighting capability are satisfactory – those in quadrant 3 "****** DEMO - www.ebook-converter.com*******"

•

Those consumers who want a toothpaste with a high plaque-fighting capability, but who do not care at all about tooth-decay-prevention capability – those in quadrant 4.

Next the firm must establish how all the brands of toothpaste currently competing in the market are perceived by consumers in respect of the two attributes. Consumers are asked to rate the prevention of tooth decay and plaquefighting abilities of all the existing brands of toothpaste on a five-point scale. Figure 7.1 (B) is a product-position map that illustrates how existing brands are perceived by consumers in terms of their ability to prevent tooth decay and fight plaque. Figure 7.1 (B) shows that there are three brands competing in this market, namely: •

•

•

Brand A is a toothpaste with a high tooth-decayprevention capability, but is rated low on plaque-fighting capability and is placed in quadrant 1 Brand B is rated low on both tooth-decay-prevention capability and plaque-fighting capability and is placed in quadrant 3 Brand C is rated highly for its plaque-fighting capability but low on its tooth decay prevention capability, and is placed in quadrant 4.

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Figure 7.1 (B) Product/brand position map

It is also important to realise that the ratings in Figure 7.1 (B) are based on consumers’ perceptions of the brands, and not on the objective characteristics of the brands. Once the firm has all the consumer preferences and current product positions, it can compile a map that combines consumer preferences and product positions. Figure 7.1 (C) is an illustration of such a combined map. Figure 7.1 (C) shows that: •

•

Brand A appeals directly to those consumers who want a toothpaste with a high tooth-decay-prevention capability, but do not care at all about plaque fighting – those in quadrant 1 Brand C appeals to those consumers who want toothpaste with a high plaque-fighting capability, but

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•

•

who do not care at all about tooth-decay-prevention capability – those in quadrant 4 Brand B does not quite succeed in satisfying the needs of those consumers for whom average tooth-decayprevention capability and average plaque-fighting capability are satisfactory – those in quadrant 3 There is no brand that attempts to satisfy the needs of those consumers to whom both tooth-decay prevention and plaque fighting are important – those in quadrant 2.

It is now possible to establish which existing products meet consumers’ preferences in respect of the two attributes. The combined map also clearly identifies gaps in the market. For instance, Figure 7.1 (C) shows that there is not a brand that targets the needs of those consumers to whom both toothdecay prevention and plaque fighting are important (those in quadrant 2). In other words, this gap exists because there is a market segment that wants toothpaste with a particular combination of the two attributes, but none of the existing products or brands satisfies such preferences.

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Figure 7.1 (C) Positioning map for toothpaste (hypothetical)

When entering a new market, a firm has one of two positioning options: position close to an existing competitor or away from competitors. In other words, it can decide whether to position its product in a gap where there is no competition or position right next to an existing brand and fight for market share. If the firm decides to go for a gap it must meet three conditions. In the first instance, it must be able to manufacture a product that will be perceived by consumers as having the combination of attributes desired by them. Secondly, the firm must be able to market such a product at a price that the market is willing to pay. The third condition is that the gap must have a sufficient number of consumers to make the strategy profitable. If the firm can succeed in meeting these three conditions, it will offer a product that will satisfy the needs of a hitherto unsatisfied "****** DEMO - www.ebook-converter.com*******"

segment of consumers – which should be profitable. The strategy to position away from existing competitors has the obvious advantage of limited direct competition, but the disadvantage of uncertainty in terms of whether there will be sufficient demand. To some extent, Cell C tried to position itself away from Vodacom and MTN when it entered the cellphone market. Cell C offers packages that are both more flexible and cheaper than those of the two established operators. The retailer Stuttafords, basically the only truly department store left in South Africa, has positioned itself away from other competing retailers. Marco Cicoria, the CEO of Stuttafords says: ‘I can’t be an Edgars, Woolworths or Truworths. I don’t have the [sales] volumes, IT systems or the people. I am not in the [sales] volume game’, he says. ‘I am in the margin game.’ With a chain of only 13 shops, what Stuttafords can afford to have is service. Cicoria plans to introduce old-fashioned service: tailors, corsetiers and a personal dresser are waiting in the wings.25 The alternative for the firm is to position the product close to a competing brand. This approach might work if the firm can convince the market that, for example, its toothpaste brand has the combination of attributes that most dentists recommend, or a similarly convincing appeal. If the firm cannot claim such differentiation or any other important difference, it will compete head-on against the (often dominant) brand currently occupying that position in the market. To be able to compete effectively, the firm must have the financial – and other – resources to fight for market share. In other words, it will have to ‘out-market’ established "****** DEMO - www.ebook-converter.com*******"

competing firms. The footwear firm Converse has decided to position away from its competitors with the slogan ‘Shoes are boring, wear sneakers’. When the bookshop Facts & Fiction launched, it was positioned close to Exclusive Books, but was unable to differentiate itself sufficiently and failed. The advantage of positioning close to the existing products or brands is that the volume of demand is known. However, it is an expensive option because substantial marketing resources have to be committed in order to take on well-established, well-entrenched competitors. Regardless of the strategy option favoured, for a brand to be successfully positioned, it must be perceived as having attributes that a large enough segment of consumers regard as important and desirable, or which are not offered by existing competing products. When a product is positioned successfully, it occupies a clear, distinctive and desirable place in the minds of target customers.

9. Repositioning a product or brand

LO8

Repositioning is a process whereby product or brand elements are realigned to enhance the satisfaction of the needs and wants of a market or market segments. No matter how well a product or brand is positioned in a market initially, the firm may have to reposition it at a later stage. The purpose of repositioning is mainly to increase the sales volume and profitability of an existing brand or product by matching the needs and wants of the market more "****** DEMO - www.ebook-converter.com*******"

effectively with the product or brand attributes. There are five typical reasons why a product may be in need of repositioning: •

•

•

•

•

The product was originally not positioned correctly – there was a mismatch between product and market (see the example of the Brandy Foundation, below) Competitors positioned products nearby and as a result market share is divided among too many products. Smirnoff Ice is a good example. When Smirnoff Ice was launched in 2002, it revolutionised the ready-to-drink alcoholic beverages market. The brand’s share has since dropped to just 12 per cent of the market and it was taken off the market because ‘there are now about 12 imitators and the clutter is slowing down category growth’26 Customer tastes and preferences shifted and left the firm’s brand with inadequate demand (see the KFC example, below) Factors in the macro-environment (e.g. recession, changing demographics, changing attitudes) that are beyond the control of the firm cause consumers to purchase cheaper versions or reduced quantities of the product. The newspaper the Sowetan had to reposition owing to the changing demography of its readership Research and technology create breakthroughs with profit potential that can be exploited if the firm or product is repositioned. With the Internet, many firms are repositioning themselves, and many have transformed themselves into global firms.

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Repositioning is a useful strategy when a firm needs to change consumers’ perceptions of a brand. Because people are becoming increasingly health-conscious, Kentucky Fried Chicken, for example, is trying to reposition itself to attract more health-conscious customers. The strategy includes gradually changing the franchiser’s name to KFC, reducing dependence on the word ‘fried’, and adding grilled, broiled and baked chicken items to the menu. Changing demographics, declining sales, or changes in the social environment often motivate firms to reposition established brands (see Reader 36 ‘Renamed Teba seeks clients in wider market’). For example, the changing demographics of the primary market for snacks and an eroding market share compelled the US firm Frito-Lay to reposition its top-selling brand, Fritos, after 58 years of successfully targeting all ages. The repositioning effort includes making major changes in the Fritos logo and packaging, focusing on consumers between the ages of 9 and 18, and launching a major new radio and TV advertising campaign.

READER 36 >> Renamed Teba seeks clients in wider market TEBA Bank has changed its name to uBank as the medium-sized lender abandons a 35-year history of serving mainly mine workers and begins to lay siege to the broader market. CEO of uBank, Mark Williams, said on Friday the bank, which has about 500 000 customers, would be expanding its customer base over the next 18 months. The bank, which is owned by a trust jointly managed by the National Union of Mineworkers and the Chamber of Mines, "****** DEMO - www.ebook-converter.com*******"

had been implementing a five-year transformation strategy that recently culminated in the name change, driven by the decision to extend its services beyond the niche traditional market. Mr Williams said uBank would grow its footprint by opening branches and expanding delivery channels to cover the major urban and metropolitan areas. Before, uBank had predominantly focused on local and migrant mine workers. ‘Our expanded customer base is growing every month and we would like to close the gap (with competitors) quite significantly in terms of our numbers. Over the next 18 months we are talking of growing into the millions,’ Mr Williams said. The bank will be competing with rivals – particularly Capitec and African Bank – who are also expanding particularly into the unbanked market, where experts estimate that as many as 10 million people do not have access to banking services. Capitec Bank, with about 2,5 million customers by the end of last month and a branch network of more than 400, is using its low-fee structure and paperless banking to woo customers. The growth of this market is seen as key to the expansion of income for banks once these customers become eligible for such high-fee earning products as vehicle and personal loans. Mr Williams said he was not worried about competition because uBank was not necessarily going ‘head-to-head’ with rivals. It had a different and unique business model more suited to the lower end of the market, including illiterate rural customers. These were customers who would be ‘frightened’ to visit the branches of the larger banks where they felt intimidated, he said. ‘How do we differentiate ourselves? Our customers are our owners because the depositors are the beneficiaries of the trust that owns the bank. There is a balance between serving customers well and getting a reward and deploying that reward to the trust that owns us,’ he said. ‘Our profile is fundamentally different from our competitors’. We have been operating in a worker environment for the past 30 years and we have a significant rural base as our market. Our profile as an institution and being black-owned as well as our products make us uniquely competitive,’ said Mr Williams. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Kamhunga, S. 2010. Renamed Teba seeks clients in wider market. Business Day Companies Section, 11 October, p. 1

In 2009, Carling Black Label managed to topple Castle Lager as South Africa’s top brand of beer as well as becoming the beer with the largest market share in South Africa. Although Carling Black Label was described as South Africa’s favourite beer in the late 1960s and early 1970s, its relevance to the market faded and by the early 1990s, this product’s market share had dropped to single figures. At this point, SAB considered dropping Carling Black Label from its stable of brands. However, SAB accepted a proposal from its advertising agency, Ogilvy & Mather, and the brand was repositioned from the (now irrelevant) icon of its heyday, the cowboy, to a modern, urban blue-collar worker. This repositioning strategy allowed the brand to be revitalised. The reason for the success of this repositioning was that the repositioned brand embraced the new, emerging social changes that took place in South Africa in the 1990s. However, in order to maintain relevance to the mass market, the positioning of the brand has had to be tweaked from time to time, moving the emphasis from the hardworking blue-collar worker to the hardworking (and successful) white-collar worker.27, 28 Research conducted by the Brandy Foundation has shown that brandy has an image of either a ‘get-drunkquickly’ drink; or of ‘rich old men in smoking jackets, lying lazily in reclining chairs and dipping bulbous noses into balloon glasses, in cold castles in Europe’. The Brandy Foundation is determined to change these images and to reposition brandy in the South African market. It wants to "****** DEMO - www.ebook-converter.com*******"

position brandy as a sophisticated, elegant, stylish drink, by (among others) increased barrel maturation and creative packaging. It also wants to emphasise purity and quality in its promotion and will specifically target women during this repositioning campaign.29 Yahoo! is a good example of the need for repositioning during the life cycle of an online business. Yahoo! started life as a network of Internet guides. Soon it sought to attract new customers and keep them coming back to the site, and was perceived as the first place to go when looking for anything online. To accomplish its objective, Yahoo! repositioned itself from online guide to web portal. Now content from Yahoo!’s site and its partners’ can be downloaded by PCs and PDAs and other wireless devices. Furthermore, it invites users to set up customised webpages through My Yahoo! Other features to draw traffic include Yahoo! chat and Yahooligans! Its brand message, distribution arrangements and content partnerships combine to position the site. Yahoo! made the repositioning official in 2004 by changing its tagline from ‘search engine’ to ‘life engine’. Similarly, Amazon has repositioned itself within the last few years. Originally, Amazon was positioned as the world’s largest bookstore. Today, it promises the ‘earth’s biggest selection’ of a variety of products from music to electronics and more. And Facebook, which was not even a player several years ago, has already repositioned by moving away from its ‘social networking for students’ position. Facebook now hosts many business-page profiles and offers a myriad of third-party applications.

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10. The repositioning process

LO9

To reposition a product or brand, a firm has to go through the first two phases of the positioning exercise again – it has to determine what consumer preferences are and how existing products, including its own, are perceived by consumers. The orange-squash drink Oros had to be repositioned recently. Before it repositioned, it had a very good idea of how the market perceived Oros and its competitors’ products: research revealed that mothers were concerned about the quality of Oros. They were looking for quality reassurance – the ‘fun for the kids’ image was not enough. Although Oros had an image of affordability, it could not compete with the quality and goodness associated with pure fruit juice. It was decided that mothers had to be reassured about its quality, while retaining and enhancing children’s enjoyment of Oros. Once the firm has this kind of information, it can decide whether there are positions, or segments, available in which to position its own brand or product. Regardless of which position is available to the firm, the organisation has to consider the following four factors for repositioning: •

•

The first factor is whether the firm is able to manufacture a product that will be perceived by consumers as having the combination of desired attributes The second factor is whether the firm is able to manufacture and market the product at a price that consumers are prepared to pay

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•

•

The third factor is the cost of repositioning the brand to the particular position or segment. The cost of repositioning includes possible changes to the product’s attributes, packaging, advertising, sales promotion and any other costs that may have to be incurred to achieve the repositioning. The repositioning of Diskom cost R24 million. The further a brand needs to be repositioned from its present position, the higher the repositioning costs tend to be. This increase in costs has to do with convincing the target market that the product does possess the new attributes assigned to it. Generally, a greater repositioning distance necessitates a higher level of convincing The fourth factor is the income that the product will earn in the new position. The income to be earned depends on the number of consumers in that particular segment; their usage and purchase rate of the product; the number of competitors and strength of the competition in the segment; and the price that the firm can demand for its product.

If a number of positioning alternatives are available to the firm, every position as mentioned above has to be evaluated. In some instances, a firm may be better off in terms of profits creating a new brand rather than repositioning the present brand.

10.1 Repositioning in the maturity phase of LO10 the product life cycle "****** DEMO - www.ebook-converter.com*******"

Products and brands in the maturity phase of the product life cycle face market conditions typified by increasing competition as new competitors enter the market, with a resultant drop in sales and market share. Therefore, the firm needs to re-establish the product’s differentiation and positioning. Several opportunities for positioning and repositioning products and brands in the maturity phase of the product life cycle have been identified and utilised over time. Some of the better-known examples are as follows: •

•

•

•

Promoting more frequent use of the product by current customers: Orange juice has been successfully re-positioned as a drink for more occasions than just breakfast. Identifying new target markets for the product: Johnson’s baby shampoo was repositioned to appeal to all members of the family. The fuel firm Sasol wants to reposition and rebrand to facilitate international expansion. The arms manufacturer Denel wants to reposition to widen the scope of its business to get involved in the non-defence market, such as airline refurbishing. Identifying new uses for the product: Baking soda has been positioned for a number of new uses in recent years, including its use as an air freshener. Oxo Spread is promoted as a beefy spread that can be used as a spread, in cooking and as a hot drink. Adding new ingredients or removing old ones: The washing-powder market has experienced numerous repositionings of washing powders. Toothpastes have fluoride added to reposition them as products that fight

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tooth decay.As mentioned earlier, positioning is not so much about the actual nature of the product but what the consumer’s think about the product.

READER 37 >> City Lodge ‘refreshes its brands to differentiate offerings’ JSE-listed City Lodge Hotels is undertaking an ‘evolutionary’ brand and logo refreshment exercise, starting with its recently-opened Town Lodge Gaborone. CEO Clifford Ross said the aim of the exercise ‘is to become more relevant and attractive to our existing guests and to attract new guests who can identify more effectively with our offerings’. City Lodge said it had embarked on the exercise to ‘refresh’ its four individual brands – Courtyard, City Lodge, Town Lodge and Road Lodge. The roll-out of the exercise started with the group’s website, stationery and its new Town Lodge Gaborone. City Lodge said its new marketing message, ‘small things that make a difference’, would be communicated across TV, digital mobile and social media marketing platforms, along with the new logos and brand identities. Among the changes was the group’s tree logo, which had been ‘modernised to reflect physical changes made to hotels across the four brands over the years’. The four brand logos were altered to differentiate offerings across the groups ‘and to show the linkage between the individual logos and the ‘new’ City Lodge Hotel group’. ‘For example, it is now “Road Lodge – by City Lodge Hotels” and “Town Lodge – by City Lodge Hotels”’. City Lodge and Courtyard also had their own new-look brand identities with the word ‘hotel’ added, the group said. SOURCE: Nick Hedley, N. 2013. City Lodge ‘refreshes its brands to differentiate offerings’. Business Day, 6 August, p. 12

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•

Rebranding a product: The petroleum firm BP has recently rebranded its products. The firm’s global expansion necessitated reconsidering the brand’s image. After some research, it discovered that the name BP was associated with dirt, as BP was part of the ‘old’ economy "****** DEMO - www.ebook-converter.com*******"

and an oil giant. Management consequently decided to move away from this undesirable image. It repositioned and rebranded the firm as a progressive, global energy group. BP wanted to emphasise that it markets not only petrol and oil, but also other energy products such as natural gas and chemicals. It also wanted to move away from the direct association with Britain and pointed out that it is a global firm with interests in almost every continent in the world. The rebranding of BP also had to support its image as an ethical energy firm. But rebranding is an expensive exercise. Besides the cost of the brand equity destruction, BP spent $7 million on research and development and $100 million on implementation and support. In South Africa Vodacom spent R200m in its re-branding from the earlier blue livery to red (the ‘going red’ campaign). Auditing firm PricewaterhouseCooper’s rebranding can be seen in the advert on the left. For a repositioning exercise to be successful, a number of prerequisites need to be met: • • • • •

A clear vision of the new position All stakeholders must believe in what the brand stands for Management must lead with conviction and commitment Everyone involved must ensure that the brand lives up to its promise There must be a good fit between image and reality.

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READER 38 >> Lafarge South Africa announces new brand positioning In 2013, Lafarge South Africa (a building cement producer) has announced the repositioning of the international Lafarge Group’s global master brand to reflect the increasing shift to urbanisation taking place throughout the world. The new brand signature ‘Building better cities’ pledges Lafarge’s commitment to help create sustainable cities and rural developments that are desirable environments for all people. The new brand signature is more than a slogan: it conveys both the force of the Group’s ambition and of its strategy. It expresses Lafarge’s vision, gives its actions both meaning and clarity, and marks its difference. ‘It is our ambition to contribute to building better cities,’ says Lafarge Industries and Lafarge Mining Chairman, Nonkqubela Mazwai, ‘The solutions we propose contribute to constructing cities that can provide everyone with decent housing, cities that are more compact, cities that are more durable, cities that are better connected, and let’s not forget – cities that are more beautiful!’ concludes Mazwai. The firm is no longer only a producer of materials but also a supplier of solutions, located close to its markets and customers. ‘Building better cities emphasises our position as a solution provider with innovative products, the expertise and the unparalleled technical support of the Group,’ says Lafarge South Africa’s Country CEO, Thierry Legrand. ‘By contributing towards building better cities, we will sustain growth and improve the lives of people. The brand repositioning builds on the firms’ established reputation: it represents a pledge to customers that Lafarge South Africa can be relied on to help provide innovative solutions for the diverse challenges that are continually being presented by construction.’ SOURCE: InfrastructureNews. 2013. Lafarge South Africa announces new brand positioning. Available from http://www.infrastructurene.ws/2013/04/16/lafarge-south-africa-announces-new-brandpositioning/ (Accessed 29 July 2014)

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11. Development of a positioning strategy

LO11

A firm usually has a number of alternative strategies available on which to base its positioning strategy. The problem is usually not one of finding differences to focus on. Instead, the challenge usually lies in identifying brand or product differences that are meaningful or worthwhile to exploit. Another decision, namely how many differences should be promoted, has also been the topic of many positioning debates. Some experts contend that firms should aggressively promote only one benefit to the target market, whereas others maintain that they should position themselves on more than one differentiating factor. The former maintain that if only one attribute – such as quality, price or technology – is chosen, the firm can tout itself as ‘number one’ on that attribute. A firm that focuses on one of these positions, and consistently delivers on it, will probably become best known and remembered for it because buyers tend to remember ‘number one’ better, especially in an over-communicated environment.30 Consider, for example, the low-price positioning of Pep Stores and the quality positioning of Woolworths. Positioning on more than one factor may, however, be necessary if two or more firms are claiming to be the best on the same attribute. For instance, several cigarette brands claim to be ‘light’, including Cartier, Vogue, Dunhill and Benson & Hedges. Positioning on ‘lightness’ is no longer a differentiating factor and, therefore, dubious as a basis for "****** DEMO - www.ebook-converter.com*******"

positioning. As a result, marketers of these brands now also use other positioning variables. Chesterfield Lights are positioned as ‘Classic American taste in a light cigarette’; Cartier Vendôme is positioned as ‘Light with the luxury pearl tip’; and Vogue Luxury Slims as ‘Long and slim for mildness with extra taste’. In a situation where the mass market is fragmented into many small segments, some firms aim to broaden their positioning strategies to appeal to more segments. This strategy is used by the various trading divisions of some of South Africa’s major retailers. Mr Price, for example, sells casual wear mainly on a price basis to the youth market. Milady’s, on the other hand, directs its classic fashion at the working woman, and The Hub is positioned as a family department store. Yet all three of these retailers belong to the Specialty Group. A differentiating factor is worthy of use as a positioning factor when it is: • Important and delivers a highly valued benefit to target buyers • Distinctive, in that competitors do not offer the same differentiating factor, or the firm can offer it in a more distinctive way • Superior to other ways in which customers might obtain the same benefit • Communicable and visible to buyers • Pre-emptive, so that competitors cannot easily copy the difference • Affordable to buyers • Profitable – in other words, the firm can introduce the "****** DEMO - www.ebook-converter.com*******"

difference profitably.31

10.1 Typical positioning errors

LO12

A firm should be careful not to make too many claims for its products or brands: it is possible that the market may not believe the claims. This could lead to the loss of the product’s distinct positioning. Besides the dangers associated with a failure to position described earlier, there are four main positioning errors that firms should avoid when formulating a positioning strategy. These errors are:32 •

•

•

Under-positioning. Under-positioning occurs when buyers do not sense anything special about the difference being promoted. The brand is perceived as just another entry in an already crowded market. Underpositioning occurred when Pepsi introduced its clear Crystal Pepsi in 1993 and customers didn’t see ‘clarity’ as an important benefit in a soft drink. Over-positioning. When consumers have too narrow an image of a brand it can be described as over-positioning. A consumer may have the perception that a retailer such as Woolworths sells only high-priced goods, although it may also offer very affordable goods. Bata Toughees shoes were (almost too well) positioned as school shoes for children. Finding the positioning too restrictive, the firm now tries to convince consumers that Bata Toughees can be used as a normal, everyday shoe. Confused positioning. Buyers have a confused image of a brand (see Reader 39: ‘Mixed brand messages’)

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because the firm makes too many claims for it or changes its positioning too often. Simba’s Lays claims that its potato chip is ‘the world’s number-one, bestselling, most popular, spectacularly thin, unbelievably light, amazingly crispy, impossibly irresistible, real potato chip …’ In the US Miller Genuine Draft suffered as a result of confused positioning (as shown by the ever-changing taglines below), and continued to lose market share (shown in brackets): > 2001 ‘Never miss a genuine opportunity’ (2,6%) > 2002 ‘Pure MGD’ (2,2%) > 2003 ‘Keep what’s good’ (2,2%) > 2004 ‘Good call’ (2,0%) > 2005 ‘Various changes’ (1,8%) > 2006 ‘Beer. Grown up’ (1,6%) > 2007 ‘Experience is golden’ (1,5%).33 Another example of confused positioning happened to Michelob, a US beer brand. In the 1970s, Michelob ran advertisements featuring successful young professionals that confidently proclaimed, ‘Where you’re going, it’s Michelob’. The firm’s next ad campaign trumpeted, ‘Weekends were made for Michelob’. Later, in an attempt to bolster sagging sales, the theme was switched to, ‘Put a little weekend in your week’. In the mid-1980s, managers launched a campaign telling consumers that ‘The night belongs to Michelob’. In 1994, the public was told, ‘Some days are better than others’, which went on to explain that ‘A special day requires a special beer’. That slogan was subsequently changed to ‘Some days "****** DEMO - www.ebook-converter.com*******"

•

were made for Michelob’. Pity the poor consumers! Previous advertising campaigns simply required that they look at their calendars or out of a window to decide whether it was the right time to drink Michelob. By the mid-1990s, they had to figure out exactly what kind of day they were having as well. After receiving so many different messages, consumers could hardly be blamed if they had no idea when they were supposed to drink the beer. Predictably, sales suffered. From a high in 1980 of 8,1 million barrels, sales dropped to just 1,8 million barrels.34 Another example of confused positioning is stationary film CNA (see Reader 39 ‘Mixed brand message’). Doubtful positioning. Buyers may find it hard to believe brand claims in view of the product’s features, price or manufacturer. The firm’s history and its other products may make it difficult to believe that it can produce a product with such attributes. It was pointed out earlier that Americans associate wine with romance and can hardly believe that South Africans can produce goodquality wine. Another example of a doubtful positioning was Avis’s original positioning of ‘Being the best’ which was changed to ‘we try harder’, which was changed in 2012 when the company rolled out a new ad campaign and a new tagline: ‘It’s Your Space,’ targeted at busy business travellers.

It sometimes happens that products or brands ‘loose’ their position due to ill-considered decision-making. Products or brands positioned on the basis of luxury are particularly susceptible to this problem. As Colin Cowie, a marketing "****** DEMO - www.ebook-converter.com*******"

consultant says: ‘Real luxury cannot be purchased on every street corner’. To illustrate how luxury has lost its lustre in recent years he uses the example of Louis Vuitton, which moved production of its bags from France to China and opened its own stores. ‘It made much bigger profits but that affected perceptions of luxury’ he says. ‘Luxury is not mass manufactured. Is there anything luxurious about a Dolce & Gabbana men’s jacket that is sold in hundred countries and heaven knows how many stores and outlets?’ he asks.35 The luxury motor vehicle Ferrari is determined not to fall into this trap. It recently announced that it will cut production by 4 per cent to ‘… to preserve its exclusivity’. Its total production for the year will be less than 7 000 vehicles.36

READER 39 >> Mixed brand message Sir, any time I go into a CNA I am reminded that senior management appears unsure of what business they are in. Is it books? Not really a patch on Exclusive Books. Is it stationary? Mmm, not really that either, Walton’s has a bigger selection, as do Game and Makro. The toy section doesn’t exactly threaten Toys R us either. Now I notice, the till lanes are overflowing with chocolate displays, but not as big a selection as Pick n Pay. CNA management: tell us why we should visit the stores. What does CNA have that can buy greater customer loyalty? Not sure? Well then send me a consulting fee for pointing out the obvious: you need a different product mix and message to own a brand space in the minds of your consumers. SOURCE: Letter to Business Day, 28 February 2012, p. 10

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12. Tools and approaches to facilitate positioning

LO13

The risks involved in positioning or repositioning a product or service can be extremely high. The technique of perceptual mapping (or positioning maps) may be used to substantially reduce those risks (see Figure 7.1(c)). Positioning maps help examine the position of a product in relation to competing products. They help marketing managers to: •

• • • •

Understand how competing products or services are perceived by various consumer groups in terms of strengths and weaknesses Understand the similarities and dissimilarities among competing products and services Understand how to reposition a current product in the perceptual space of consumer segments Position a new product or service in an established market Track the progress of an advertising or marketing campaign on the perceptions of targeted consumer segments.37

It must be kept in mind, however, that a positioning map is no more than an aid to decision-making. It cannot replace the manager or his or her market experience and market knowledge. Marketing managers can use a variety of different approaches to facilitate a positioning or repositioning – in "****** DEMO - www.ebook-converter.com*******"

essence manipulating the marketing mix to realise the positioning objectives. Finally, we have to remind ourselves that positioning assumes that consumers compare products on the basis of important features. Effective positioning requires an assessment of the positions occupied by competing products, determining the important dimensions underlying these positions, and choosing a position in the market where the firm’s marketing efforts will have the greatest impact. As we said, many approaches can be used to facilitate positioning, including advertising, packaging and slogans. Advertising slogans are powerful tools for creating a position in the consumer’s mind. Many South Africans will immediately remember slogans such as Toyota’s ‘everything keeps going right’, which changed to ‘Moving Forward’, Nissan’s ‘life’s a journey, enjoy the ride’ and British Airways’ ‘the world’s favourite airline’.

Sowetan revamped, repositioned The daily newspaper the Sowetan has embarked on a major repositioning exercise. The Sowetan said that it will in future have a new, fresh look and aims for more aspirational content for readers who are ‘in the know’ and on the move. The relaunch initiative was taken after research conducted by the paper confirmed that the contemporary black community’s Living Standards Measurements have moved up and that change is required. The revamped design and content include a different layout design for the front page with all the headline news stories being reflected through the personality involved in "****** DEMO - www.ebook-converter.com*******"

the story. Key changes also include additional shorter articles, more informational news, educational articles aimed at children, more information on technology, coverage on a greater range of sports, respected thought leaders and columnists and a more upmarket and aspirational entertainment section. Enver Groenewald, Avusa Media’s general manager for advertising revenue and strategic communications, said: ‘We are now in the new space to reflect the aspirations, hopes and dreams of our readers. Because we want to be a respectable face of our society and a model of a different kind of journalism, we have done away with the toko-loshes and all that jazz to ensure that our content resonates in the new spectrum of the readers’ minds.’ Sowetan executive editor, Fikile-Ntsikelelo Moya, said: ‘Our readers have evolved from the narrow confines of our previous social and political past. We now want to offer them a newspaper that not only knows where they have been, but to be their co-traveller on their way to the top, where they know they belong.’ SOURCE: Adapted from: Da Silva. 2009. Sowetan revamped, repositioned. Bizcommunity online newsletter, 4 June 2009.

QUESTIONS 1 2

Why did the Sowetan reposition itself? Do you think the reasons for the repositioning are valid?

KEY CONCEPTS Attribute: a product feature. Benefit: something a consumer gains as a result of a product attribute or product feature. Communication: the effort to understand the customer and to be clearly understood by the customer. Competence: the possession of the required skill and knowledge by employees. Competitive advantage: something offered by a firm that is valued by

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consumers and that competitors do not have. Competitor positioning: assessing the positions occupied by competing products and choosing a position in the market where the firm’s marketing efforts will have the greatest impact. Confused positioning: a positioning phenomenon that arises when buyers have a confused image of the brand because the firm makes too many claims or changes the brand’s positioning too often. Consulting service: advice offered to buyers of a product for free or at a low price. Courtesy: friendliness, respect and consideration shown by employees. Credibility: the trustworthiness of employees. Customer training: refers to training the customer or the customers’ employees to use the firm’s equipment properly and efficiently. Delivery: refers to how well the product or service is delivered to a customer. Doubtful positioning: a positioning phenomenon that arises when buyers may find it hard to believe the brand claims in view of the product’s features, price or manufacturer. Durability: a measure of a product’s expected operating life. Features: product characteristics that enhance the product’s basic functioning. Image differentiation: differentiating a firm or product by means of a distinct image or perceptions. Installation: includes all the activities and tasks that have to be undertaken to make a product operational at its place of intended use. Miscellaneous services: in addition to its standard services, a firm may offer a variety of other services that can add value to its products. Origin positioning: a positioning strategy adopted by a firm that wishes to be associated with a certain geographical region or origin. Over-positioning: a positioning phenomenon that occurs when consumers have too narrow an image of a brand. Perceptual map: a positioning tool that displays the psychological distances between products or brands. Perceptual mapping: a means of graphically displaying, in two or more dimensions, the location of products, brands or groups of products in consumers’ minds. Performance: the levels at which a product’s primary characteristics function. Personnel differentiation: differentiating a firm or product on the basis of the superior skills and attitude of its personnel. Positioning: in marketing terms, refers to the place that a firm, product or brand occupies in consumers’ minds in relation to competing offerings. Price and quality positioning: a positioning strategy that focuses on either high price as a signal of quality or emphasises low price as an indication of value.

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Product class positioning: the product is positioned in order to be associated with a particular category of products. Product differentiation: a positioning strategy that some firms use to distinguish their products from those of competitors. The distinctions can be either real or perceived. Product user: positioning base focusing on a personality or type of user. Rank: how the product fares against its competitors in various evaluative dimensions. Rational consumers: consumers who try to maximise their satisfaction for any given level of input (expenditure). Reliability: consistency and accuracy in the performance of a service by employees; also a measure of the probability that a product will not malfunction or fail within a specified time period. Reparability: a measure of the probability of fixing a product that malfunctions or fails. Repairs: the quality and variety of repair services available to buyers of the firm’s product. Repositioning: a process whereby product or brand elements are realigned to enhance the satisfaction of the needs and wants of a market or market segments. Responsiveness: a measure of the speed of employees’ response to customers’ requests and problems. Style: a subjective measure that describes how the product looks and feels to the buyer. Under-positioning: a phenomenon that occurs when buyers do not sense anything special about the difference being promoted. Use or application positioning: a strategy that emphasises uses or applications as a means of positioning a product with buyers.

REFERENCES 1 2 3 4 5

Kotler, P. 1984. Marketing management: Analysis, planning, implementation and control (5th edition). London: Prentice Hall, p. 273. Ries, A. & Trout, J. 1981. Positioning: The battle for the consumer’s mind. New York: McGraw-Hill, p. 2. Lowe Bull cooks up a new image for Stork. Bizcommunity online newsletter, 11 June 2008. Available, www.bizcommunity.com. Triplett, T. 1994. Consumers show little taste for clear beverages. Marketing News, 23 May 1994, pp. 1, 11. Witepski, L. 2008. Zero to look forward to. Journal of Marketing (South Africa) October/November 2008, p. 8.

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6 7 8

9

10

11 12

13 14 15 16

17

18

19 20 21 22

Lovelock, C.H. 1984. Services marketing: Text, cases and readings. New Jersey: Prentice Hall, p. 135. Mathews, C. 2001. New Clicks to rebrand Diskom. Business Day, 10 September 2001. Suein L. & Hwang, L. 1994. Americans may toast new South Africa, but they don’t use South African wine. Wall Street Journal, 27 September 1994, pp. B1 and B11. Ireton, C. 1992. Woolworths returns to its strong points. Sunday Times, 16 August 1992, p. 4; Crotty, A. 1992. Wooltru: Strategy troubled in parts. Finance Week, 20–26 February 1992, pp. 59–61. Adapted from Kotler, P., Armstrong, G., Saunders, J. & Wong, V. 1996. Principles of marketing (European edition). London: Prentice Hall Europe, pp. 401–402; Kotler, P. 2000. Marketing management (10th Millennium edition). London: Prentice Hall, p. 288. Buzzell, R.D. & Gale, B.T. 1987. The PIMS principle: Linking strategy to performance. New York: The Free Press. Adapted from Kotler, P. 2000. Marketing management (10th Millennium edition). London: Prentice Hall, pp. 288–292; Garvin, D.A. 1987. Competing on the eight dimensions of quality. Harvard Business Review November– December 1987, pp. 101–109. Guaranteeing the loaf. Food & Beverage Reporter Online November– December 1999, p. 20. www.appletiser.co.za (Accessed 22 April 2010). What makes Pepkor the largest retailer in Africa? Marketing Mix December 1991, p. 67. Wind, Y.J. 1990. Positioning analysis and strategy. In: G. Day, B. Weitz, R. Wensley (eds). The interface of marketing and strategy. Greenwich: Jai Press, p. 387. Adapted from Parasuraman, A., Zeithaml, V.A. & Berry, L.L. 1985. A conceptual model of service quality and its implications for future research. Journal of Marketing 49 (Fall), pp. 41–50. Edgars Group, 1996 Annual Report, p. 2; Foschini, 1996 Annual Report, p. 7; Pep Stores Limited, 1987 Annual Report, p. 10; Wooltru Limited, 1995 Annual Report, pp. 16, 24; Specialty Stores Limited, 1996 Annual Report, cover. Martineau, P. 1958. The personality of the retail store. Harvard Business Review 36(1), p. 47. Berman, B. & Evans, J.R. 1995. Retail management: A strategic approach (6th edition). Englewood Cliffs: Prentice Hall, p. 550. Lusch, R.F. 1982. Management of retail enterprises. Boston: Kent Publishing, p. 457. Specialty Stores Limited, 1996 Annual Report, p. 26.

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23 These bases for positioning were provided by David W. Cravens, Texas Christian University, Texas, USA. 24 Mohammed, R.A., Fisher, R.J., Jaworski, B.J. & Paddison, G.J. Internet marketing: Building advantage in a networked economy (2nd edition). Boston: McGraw-Hill, p. 112. 25 Planting, S. 2009. Reviving a grande dame. Financial Mail, 12 June 2009, p. 50. 26 Smirnoff Ice taken off the market. Business Day, 15 October 2002. 27 www.themarketingsite com (Accessed 16 April 2010). 28 www.bizcommunity.com (Accessed 20 April 2010). 29 Sinclair, R. 1997. Brandy sheds its hard-drinking image. Financial Mail special report, 16 May 1997, p. 79. 30 www.Mediatoolbox.co.za/pebble, 2006 (Accessed 20 April 2010). 31 Adapted from: Kotler, P. 2000. Marketing management (10th Millennium edition). London: Prentice Hall, p. 298. 32 Adapted from: Kotler, P. 2000. Marketing management (10th Millennium edition). London: Prentice Hall, p. 301. 33 www.brogan.com/blog/pssst-miller-genuine-draft-your-answer-is-not-anew-slogan/ (Accessed 27 August 2008). 34 Keller, K.L. 2000. The Brand Report Card, Harvard Business Review, January, pp. 147–157. 35 Fleeced and loving it. Financial Mail, November 22 – November 27, 2013, p. 63. 36 Clark, J. 2013. Ferrari says bigger is not better as it cuts production. Business Day, 10 May, p. 20. 37 Jain, S.C. 1997. Marketing planning & strategy (5th edition). Cincinnati: South-Western College Publishing, p. 350.

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PART

02 Implementing marketing mix strategies

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CHAPTER

08

Product decisions

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5 6 7 8 9 10

11 12 13 14

Define the term ‘product’. Distinguish between different product levels. Classify consumer products according to a given set of criteria. Describe the nature of different consumer products and relate them to the marketing relevance of each classification. Distinguish between the terms ‘product item’, ‘product line’ and ‘product mix’. Describe the benefits of organising related items into product lines. Distinguish different types of adjustments to product items, lines and mixes. Articulate the value of branding by referring to its objectives and benefits. Identify the features common to effective brand names. Distinguish between the following branding strategies: generic and branded products, between manufacturers’ brands and private brands and between individual brands and family brands. Set out an argument in favour of co-branding. Distinguish between a brand name and a brand mark. Describe the legal implications of branding in South Africa. Explain the marketing-related value of packaging and labelling.

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15 Describe how and why product warranties are important marketing tools. 16 Illustrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 17 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Many boardrooms still don’t understand how brand values work South African brands have a lot of growing up to do if they are to succeed in an increasingly competitive market. Interbrand Sampson chairman Jeremy Sampson says while directors of large companies are starting to take marketing seriously, most fail to understand the value of their brands. ‘Marketers need to communicate more with the other members of the executive suite,’ says Sampson. ‘One of the methods is through measurement and analytics. It makes marketing and the brand accountable, but also educates the rest of the business about the importance of branding and marketing.’ A recent global study by the Interbrand group found that many leading companies around the world owe much of their value to the success of their brands. The same is true of listed SA companies, but directors often "****** DEMO - www.ebook-converter.com*******"

don’t understand this. Local mobile giant MTN recently became the first African brand to make it into Millward Brown BrandZtop 100 brands. Interbrand has also studied MTN. ‘When we valued it, we found that over one-third of its market capitalisation was brand value,’ Sampson says. ‘Often another third is intellectual capital such as patents and copyright, which means that less than one-third is tangible.’ He adds: ‘Twenty years ago people used to measure companies by bricks and mortar, but that’s swung around since the 1990s, when intellectual capital started to come into play.’ SOURCE: Zweli Mogata, Z. 2012. Many boardrooms still don’t understand how brand values work. Financial Mail, 22 June, p. 62

QUESTIONS 1 2

Can the value of an intangible asset such as a brand be measured? How do you interpret the statement: ‘Marketers need to communicate more with the other members of the executive suite. One of the methods is through measurement and analytics. It makes marketing and the brand accountable, but also educates the rest of the business about the importance of branding and marketing.’

1. Introduction The product offering, the heart of a firm’s entire marketing effort, is usually the starting point in creating a marketing mix. A marketing manager cannot set a price, design a marketing communication strategy or create a distribution "****** DEMO - www.ebook-converter.com*******"

channel until the firm has a product to sell. Moreover, an excellent distribution channel, a persuasive marketing communication campaign and a fair price have no value if they are associated with a poor or inadequate product offering. The product is the physical manifestation of the firm’s efforts to satisfy customer needs.

2. What is a product?

LO1

A product may be defined as anything, both favourable and unfavourable, that a buyer receives in an exchange – normally for money. A product may be a tangible product like a pair of shoes, a service like a haircut, an idea like ‘don’t litter’ or ‘drive safely’, or any combination of these three. Packaging, style, colour, options and size are typical examples of product features. Just as important are intangibles, such as service, the seller’s image, the manufacturer’s reputation and the way consumers believe others will view the product that they have bought. To most people, the term ‘product’ means a tangible product. However, from a marketing perspective, services and ideas are also products. The marketing process identified in Chapter 1 is the same whether the entity marketed is a product, a service, an idea or some combination of these. A variety of other entities can also be marketed, from an image to sports stars to politicians. Special efforts are made these days to market countries (Brand SA and Proudly South African) and even cities (Johannesburg is marketed as ‘a world-class African city’). "****** DEMO - www.ebook-converter.com*******"

From a marketing perspective, they are all products.

3. Product levels

1

LO2

In planning a product and product strategy, the marketer needs to think in terms of five levels of the product. Each level adds more customer value than the previous level, and the five levels constitute a customer value hierarchy (see Figure 8.1). The most fundamental level is the core benefit – the fundamental service or benefit that the customer buys. The core benefit is directly linked to the most basic or fundamental need that the buyer wants to satisfy. A car buyer buys ‘private transport’. The purchaser of a Red Bull drink is buying ‘energy’. The buyers of Energade buy ‘rejuvenation and replenishment’. Someone who buys an iPhone or Samsung Galaxy are buying more than a wireless mobile phone, e-mail and web-browsing device, or personal organizer. They are buying freedom and on-the-go connectivity to people and resources. The great marketers of our time understand consumers’ needs and see themselves as benefit providers. At the second level, the marketer has to convert the core benefit into a basic, tangible product. A car buyer – to continue the example – buys a roof, windows, a steering wheel, a colour, etc. At this level, the manufacturing department and the marketing department have to cooperate closely to ensure that the basic tangible product is able to offer the need-satisfaction benefits that consumers want. The mobile phone (iPad or Samsung Galaxy) is the "****** DEMO - www.ebook-converter.com*******"

basic or tangible product. Its name, parts, styling, features, packaging and other attributes have all been combined carefully to deliver the core benefit of staying connected. At the third level, the marketer prepares an expected product – a set of attributes and conditions that buyers normally expect and agree to when they purchase this product. For example, the car buyer expects the car to start when the ignition key is turned, windows that wind down, windscreen wipers that clean the window, and so forth. At the fourth level, the marketer prepares an augmented product that not only meets the customers’ desires and expectations, but sometimes exceeds them. Exceeding expectations is a way of differentiating a product and establishing a competitive advantage. A car manufacturer, for example, augments its product by including a radio, an air conditioner and a warranty. Product augmentation focuses the marketer’s attention on the entire process of how buyers buy and consume products. In other words, it is a holistic assessment of the way a purchaser of a product goes through the buying and consumption process and links this to the satisfaction of specific pre-purchase needs. If done this way, it is likely that the marketer will identify many opportunities to augment its basic product in innovative and competitively effective ways. The marketers of luxury motor vehicles, such as Mercedes-Benz, BMW and Lexus, realise all too well that some people want to be seen to buy ‘the right labels’. Therefore, they try use their marketing activities to link their products to perceptions of status and prestige. Both Apple and Samsung must offer more than just a communication device with the iPhone and Samsung "****** DEMO - www.ebook-converter.com*******"

Galaxy respectively. It must provide consumers with a complete solution to mobile connectivity needs. Thus, when consumers buy one off these brands, the respective firm and its dealers are giving buyers a warranty on parts and workmanship, instructions on how to use the device, quick repair services when needed, and a toll-free telephone number and Web site to use if they have problems or questions. The fifth level deals with the potential product. This level includes all the augmentations and transformations that the product might undergo over time. At this level, the marketer addresses the possible future evolution of its product with a view to increasing customer satisfaction and thereby also differentiating the product from those of competitors. In the future, motor vehicles will increasingly make use of computer technology. Possibly the most exciting thing about smartphone technology is that the field is still wide open. It’s an idea that probably hasn’t found its perfect, real-world implementation yet. Every crop of phones brings new designs and new interface ideas. No one developer or manufacturer has come up with the perfect shape, size or input method yet. The next ‘killer app’ smartphone could look like a flip phone, a tablet PC, a chocolate bar or something no one has conceived of yet. Another thought might be that instead of waiting for handsets to come with higher-capacity batteries, manufacturers might go one step further and design a smartphone that runs on an alternative power source altogether or even technology that allow phone users to hold two phones next to each other and transfer battery power in this way. "****** DEMO - www.ebook-converter.com*******"

The success of the online auctioneering website, eBay, is the result of offering a series of services and service innovations that appeal to a broad customer base, and a thorough understanding of the different product levels. eBay’s core benefit is summarised succinctly in its registered trademark, ‘The world’s largest marketplace’. eBay’s whole marketing strategy rests on the fact that it wants people to think of eBay first when they are in shopping mode. Today, eBay has built its brand around this core benefit, beginning with its basic service and evolving it over time. To leap from a versatile commerce platform to the world’s largest marketplace, eBay provides additional services and constantly develops new and improved products. eBay’s efforts to augment its core service to meet the needs and expectations of a greater spectrum of customers have largely been successful. In general, eBay’s product augmentation falls into two categories: additional features (Buy it Now, Safe Harbor, eBay Direct Pay and Escrow) and additional platforms (eBayMotors, eBayStores, eBay-LiveAuctions, eBayShowrooms and eBayPremier). At the potential product level, eBay can consider pre-sale support by offering functionalities that include comparative shopping, product selection guides or product demonstrations.2 The marketing strategies used for different products often depend on the type of product it is. Marketers therefore classify products into different product classes.

4. Classifying consumer products "****** DEMO - www.ebook-converter.com*******"

LO3

Products can be classified in a variety of ways. One approach is to use durability as a classification variable to distinguish between non-durable products (which include products that are consumed after one or a few uses, such as soft drinks and toothpaste) and durable products (products that allow repeated usage, such as refrigerators and TV sets). Another method of classification employs usage as a classification variable. Using this approach (see Figure 8.2), we can distinguish between consumer products and business products (also called industrial products). The key distinction between the two types of products is their intended use. If the intended use is a business purpose, the product is classified as a business or industrial product. A business product is used to manufacture other products or services, to facilitate a firm’s operations (e.g. a front-end loader or lubricating oil) or to resell to other customers. In other words, the product is bought for use in the firm or to resell, but not for personal consumption. A consumer product is bought to satisfy an individual’s personal wants. In other words, it is bought for consumption purposes. Sometimes, the same item can be classified as either a business or a consumer product depending on its intended use. Examples include light bulbs, pencils and paper, and personal computers. In this book our focus is on consumer products.

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Figure 8.1 The customer value hierarchy

SOURCE: Adapted from Kotler, P. 2000. Marketing management: The International edition. London: Prentice Hall, p. 395

5. Types of consumer products

LO4

Marketers need to know about and understand product classifications because business and consumer products are marketed differently. They are marketed to different target markets and tend to use different distribution, advertising "****** DEMO - www.ebook-converter.com*******"

and pricing strategies. Therefore, it is important to categorise consumer products that can be marketed more or less similarly. Although there are several ways to classify consumer products, the most popular approach includes four types of products (see Figure 8.2): • • • •

Convenience products Shopping products Speciality products Unsought products.

This approach classifies products according to how much effort (collecting information, comparing different products and brands, etc.) is normally expended by consumers to shop for them. Figure 8.2 A usage classification of consumer products

5.1 Convenience products A convenience product is a relatively inexpensive item that merits little shopping effort. Convenience products are usually low-priced and marketers place them in many different shopping locations to make them readily available "****** DEMO - www.ebook-converter.com*******"

when customers need them. Consumers are generally unwilling to shop extensively for such an item. Convenience products are relatively inexpensive: milk, chocolates, soft drinks, chewing gum, combs, headache tablets and small hardware items, such as screws, fall into the convenience product category. Consumers buy convenience products regularly, usually without much pre-purchase planning, information collection or comparison between different brands. Nevertheless, consumers do know the brand names of popular convenience products, such as Coca-Cola, Bayer aspirin tablets and Colgate shampoo. Convenience products normally require good branding, regular advertising and wide retail distribution in order to sell sufficient quantities to be profitable. Convenience products can be subdivided into three subgroupings, namely staples, impulse products and emergency products. This distinction is based on how consumers think about products rather than on the features of individual products. Staples are products that consumers buy routinely and without much shopping effort, such as toothpaste and cigarettes. These products are available in conveniently located purchase points, such as vending machines, cafes and supermarkets. The brand (e.g. Mentadent P toothpaste and Five Roses tea) is important to consumers because they have developed a sense of trust and confidence in it. Repeated customer satisfaction is, therefore, associated with the brand, ensuring repeat purchasing and ease of shopping. Impulse products are bought quickly with little prepurchase effort and without planning. Impulse buying "****** DEMO - www.ebook-converter.com*******"

occurs on sight in response to a strong need that was not anticipated. Buying an ice cream on the beach may be an impulse purchase. Many chocolates, magazines and packets of chewing gum have been bought (unplanned) while shoppers have been waiting in the checkout lines in supermarkets. From a marketing point of view, however, these were not accidental purchases, but, indeed, carefully planned. Retailers know that up to 70 per cent of buying decisions (in certain product categories) are made at the shelf.3 A fridge filled with tempting Magnum ice creams placed near the cash register is there because the marketers of Magnum ice cream know that ice cream is an on-sight, impulse purchase. Distribution (or place) is, therefore, a crucial strategy when marketing impulse products, simply because if the product is not available when needed, the potential sale is lost. Pick n Pay markets its clothing in hypermarkets as impulse products, and even South African Breweries is also making a concerted effort to capitalise on impulse-buying trends. Emergency products are purchased immediately and under duress when a strong and unexpected need exists. For example, there is no time to shop around and compare prices for different car-towing services when you have been involved in a car accident, toothbrushes when you discover at the airport that you left yours at home, or raincoats when you have been caught in a rainstorm on the way to the sports field. Distribution (or place) is, therefore, important to the marketers of emergency products. Price is not particularly "****** DEMO - www.ebook-converter.com*******"

important to consumers in an emergency situation. They need it and they need it now. As a result, marketers satisfying this need are in a position to charge a price premium for making emergency products available. Availability (distribution) is consequently a very important strategy for the successful marketing of emergency goods. Examples include many suburban cafes, convenience stores at petrol stations and retailers in airports stocking emergency items, such as over-the-counter medicines, personal-care products, flowers and gifts. Under these circumstances most customers do not mind paying a bit extra because they see these products as emergency purchases and are pleased to have access to them.

5.2 Shopping products A shopping product is usually more expensive than a convenience product and is found in fewer shops, but provide deeper sales support to help customer in their prepurchase comparisons. Consumers usually buy a shopping product only after comparing several brands or shops in terms of buying considerations or attributes such as style, practicality, reliability, price and lifestyle compatibility (these attributes will differ depending on the product). They are willing to invest a limited amount of effort, such as prepurchase planning and comparisons in this process to get the desired benefits. There are two types of shopping products: homogeneous and heterogeneous. Consumers perceive homogeneous shopping products as basically similar – for example, "****** DEMO - www.ebook-converter.com*******"

dishwashers, tumble dryers, refrigerators and televisions. When considering buying homogeneous shopping products, consumers normally look for the lowest-priced brand that has the product features they want – largely because they do not see much difference between the various brands. In contrast, consumers perceive heterogeneous shopping products as essentially different – for example, furniture, clothing and sports equipment. Consumers often have trouble comparing heterogeneous shopping products because the prices, quality and features (or product attributes) vary so much. The benefit of comparing heterogeneous shopping products is ‘finding the best product or brand for me’ – but, of course, this decision is an individual and highly personal one. Because consumers see very little difference between competing homogeneous shopping products (absence of a competitive advantage) they are typically very priceconscious and not particularly brand-loyal. Marketers are, therefore, likely to compete on price and make every effort to keep costs (and thus prices) to a minimum. Because Pick n Pay markets mainly homogeneous shopping products, it claims to be ‘the lowest-price clothing retailer in South Africa’.4 Being price-competitive is a huge challenge for retailers, in particular for those that are wedged in between profit-driven suppliers and price-sensitive buyers. Marketers of heterogeneous shopping products, on the other hand, have a differential (competitive) advantage that other products do not have. In other words, consumers do not see all products in this category as the same. As a result, "****** DEMO - www.ebook-converter.com*******"

comparisons among non-standardised products are also more difficult and the relative importance of pricing in the mind of consumers is consequently reduced. Other attributes, such as quality, reliability, style, suitability or a specific brand (depending on the nature of the product) are more important. Each of these attributes can be a source of competitive advantage for which consumers are prepared to pay a little extra.

EXAMPLE >> A wine lover may be prepared to pay more for the flavour of a wooded Chardonnay (a competitive advantage) than for a wine that did not mature in a wooden cask. Clients of private banks demand higher levels of service than that provided by ordinary commercial banking, but have to pay higher banking fees. Gino Ginelli and Magnum ice creams are more expensive than many other ice cream brands, but many consumers are prepared to pay more for the special taste. Wine, banking services and ice cream are all heterogeneous shopping products because there are ways in which they can be meaningfully differentiated from similar competing products. In a retail context the buyers of heterogeneous shopping products often expect some assistance from retail personnel or a sales force before buying. Examples include alterations to clothing, the installation of electronic products, such as an exercise treadmill, and usage advice in the case of items such as computer software. Poor differentiation and the absence of a competitive advantage, as we saw in Chapter 7, can lead to some serious problems, including the loss of customers and market share, and eventually the demise of the product.

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>> Technology in action The digitising of content Modern technology, and particularly the Internet, has allowed marketers to convert what used to be shopping products into convenience products by means of digitisation. A product must be ‘digitisable’ for it to be delivered online. This means that any product that can be converted into digital information can be delivered directly to customers over the Internet. Software, music, video and news are examples of informationbased products that can be distributed to customers via the Internet. Virtually any product appearing in print, audio or visual media, as well as software and other sets of digital instructions, can be converted in this manner. Currently, the primary limitation on digitisable products is the amount of bandwidth going into customers’ office or homes. Downloadable music using MP3 technology is a new product form, compared with the traditional CDs or DVDs we are used to. Another product gaining prominence is audiobooks, which are increasing in popularity given the increased use of the iPad and the Kindle. SOURCE: http://www.marketing-schools.org/types-ofmarketing/conversion-marketing.html (Accessed on 10 April 2010).

5.3 Speciality products "****** DEMO - www.ebook-converter.com*******"

When consumers search extensively for a particular item and are extremely reluctant to accept substitutes, that item is known as a speciality product. Fine watches, such as Rolex, Rolls-Royce cars, expensive stereo equipment, gourmet restaurants and highly specialised forms of medical procedures, such as cochlear implants, are generally considered speciality products. A buyer of a speciality product is willing to search to find the desired brand or product. Marketers want their products to be speciality products because loyal customers will not even consider buying a competing alternative or substitute. Importantly, speciality products need not be expensive products. In the eyes of the customer who insists on Pirelli car tyres, or a specific hairdresser or a Duracell battery, these are speciality products. Marketers of speciality products often use selective, status-conscious advertising to maintain their products’ exclusive image. Michel Herbelin’s wristwatch advertising says: ‘Masterpieces for the individual.’ Nedbank’s advertising for its private banking service says: ‘Don’t call us. We’ll call you.’ Distribution of such products is often limited to one or a very few outlets in a geographic area. For example, many medium-sized cities in South Africa will only have one Mercedes-Benz dealership to enhance the image of exclusivity and status. Brand names and quality of service are often very important buying considerations for buyers of speciality products such as cameras, watches and motor vehicles. Branding and cultivating an appropriate image are important strategies for speciality products.

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5.4 Unsought products A product unknown to the potential buyer or a known product that the buyer does not actively seek is referred to as an unsought product. There are two types of unsought products: new unsought products and regularly unsought products. Brand-new products that have not been on the market before fall into the new unsought product category – until advertising and distribution increase their consumer awareness. Initially, consumers are not aware of the benefits these products have to offer. Regularly unsought products are products that we need, but do not like to think about or want to spend money on. Tombstones, funeral policies, fire extinguishers and similar unsought products require aggressive personal selling and highly persuasive advertising to be successful. Salespeople actively seek leads to potential buyers, because buyers will not approach them. Because consumers usually do not seek out this type of product, the firm must go directly to them through a salesperson, direct mail, direct-response or electronic advertising.

6. Product items, lines and mixes

LO5

A firm rarely sells a single product to generate its income; usually it sells a variety of products that appeal to different market segments. Levi’s, for instance, markets a range of jeans that fit different bodily shapes. The Levi’s 545 is described as ‘Super low and sexy’, the Levi’s 557 Eve is "****** DEMO - www.ebook-converter.com*******"

‘TomBoy chic’ and Levi’s 529 is ‘Everyday perfection’ (see the Levi’s advertisement). A product item is a specific version of a product that can be designated as a distinct offering among a firm’s products. A product item is also known as a stock-keeping unit (SKU). Gillette’s Sensor razor is an example of a product item (see Table 8.1). A group of closely-related product items is a product line. For example, the column in Table 8.1 under the heading ‘Blades and razors’ represents one of Gillette’s product lines. Different container sizes and shapes also distinguish items in a product line. The length of a product line is the number of variants in it. Coke Light, for example, is available in cans and various plastic bottles. Each size and each container is a separate product item.

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A firm’s product mix includes all the products it sells. All Gillette’s products – blades, razors, toiletries, writing instruments and lighters – constitute its product mix. Each product item in the product mix may require a separate marketing strategy. In some cases, however, product lines and even entire product mixes share some marketing strategy components. Volkswagen South Africa, for example, promotes all Volkswagen products using the slogan, Das "****** DEMO - www.ebook-converter.com*******"

Auto. This slogan, which literally means ‘the car’, moves away from ‘For the love of people’s cars’ and underlines the group’s vision to be the most innovative volume brand in the world. Global alignment to the German language slogan will uphold and communicate the strength and consistency of the Volkswagen brand throughout the world. Volkswagen makes people’s cars that set standards, and Das Auto articulates this orientation.

Table 8.1 Gillette’s product lines and product mix

6.1 Organising related items into product LO6 lines Marketers derive several benefits from organising related items into product lines. These include the following: •

Advertising economies. Product lines provide economies of scale in advertising. Several products can be advertised under the umbrella of the same product line. The liquor brand Monis often advertises its sherry,

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muscadel and port in the same advertisement. • Package uniformity. A product line can benefit from package uniformity. All packages in the line may have a common look and still keep their individual identities. All Colgate’s shampoos are marketed in the sameshaped bottle, although they are different products with different fragrances targeted at different target markets. • Standardised components. Product lines allow firms to standardise components, thereby reducing manufacturing and inventory costs. For example, Volkswagen uses the same chassis for many of its vehicles. Some parts in the engines of both Volkswagens and Audis are exactly the same. • Efficient sales and distribution. A product line enables the sales staff of firms like Tiger Brands and Unilever to provide a full range of choices to customers. Intermediaries and retailers are often more inclined to stock the firm’s products if it offers a full line. Tiger Brands, for instance, markets whole chickens under the Goldi brand, flavoured chicken (such as sweet and sour or lemon and black pepper) under the County Fair brand, and chicken livers under the Festive brand. Transportation and warehousing costs are likely to be lower for a product line than for a collection of individual items from a variety of different suppliers. When South African Breweries added the Pilsner Urquell brand to its range of products, the increased distribution cost was negligible. • Equivalent quality. Consumers usually expect and believe that all products in a line are about equal in quality. Consumers expect, for example, that all Dulux "****** DEMO - www.ebook-converter.com*******"

•

•

paints (no matter what the colour) and all Revlon cosmetics will be of similar quality. Buying different products in a well-known, established product line is, therefore, less risky than buying a new stand-alone brand. Diversified risk. By not putting all their eggs in one basket, firms reduce their risk. Toyota thus does not rely only on farmers and the agricultural market to buy their bakkies and 4X4’s. It has a range of other products to mitigate the negative impact when this market segment is economically under pressure. Product mix width (or breadth) refers to the number of product lines a firm offers. In Table 8.1, for example, the width of Gillette’s (hypothetical) product mix is four product lines. As shown in Table 8.1, the blades and razors product line consists of 12 product items; the toiletries product line includes ten product items.

Firms increase the width of their product mix to appeal (profitably) to the needs of different market segments and to diversify risk. To generate sales and boost profits, some firms spread risk across many product lines rather than depending on only one or two. Some also widen their product mix to capitalise on an established reputation. For example, SA breweries has widened its product mix by marketing a new flavoured beer – Flying Fish.

EXAMPLE >> Tiger Brands, whose footprint extends across the African continent and beyond, is one of the largest manufacturers and marketers of fast moving consumer goods (FMCG) products in Southern Africa. Tiger Brands has widened its product mix over several decades. Its success is grown and "****** DEMO - www.ebook-converter.com*******"

maintained thanks to the perpetual renovation and innovation of its brands, while its approach to expansion, acquisitions and joint ventures has developed a distribution network that now spans more than 22 African countries. The focus is on the core business of FMCG categories that spread synergy across the value chain – a broad basket of categories that spans food, home and personal care as well as baby products. The wide range of brands are underpinned by comprehensive research and meaningful insights into each of the markets in which Tiger Brands does business.5 Other firms lengthen their product lines to attract buyers with different preferences, to increase sales and profits by further segmenting the market, to capitalise on economies of scale in production and marketing and to even out seasonal sales patterns. For example, the watch manufacturer Timex has increased its wristwatch line from 300 to 1 500 items.6

6.2 Adjustments to product items, lines and mixes

LO7

Over time, firms change product items, lines and mixes to take advantage of new technical or product developments or to respond to changes in the environment. They may adjust by modifying products, repositioning products or extending or contracting product lines.

6.2.1 Product modifications Marketing managers must decide if and when to modify existing products. Product modification includes the "****** DEMO - www.ebook-converter.com*******"

following categories: •

•

Quality modification refers to changes in a product’s dependability or durability. Reducing a product’s quality may allow the firm to lower the price and appeal to target markets unable to afford the original product. On the other hand, enhancing quality can help the firm compete more effectively with rival firms. Increasing quality can also result in increased brand loyalty, greater ability to raise prices or new opportunities for market segmentation. Car safety features such as antilock brakes and airbags are examples of this type of quality modification. Colgate has made a quality modification when it started using rubber bristles in its Massager brand of toothbrushes. These bristles are ‘multi-height’ bristles’ that ‘gently stimulate gums’ and ‘reach deep between teeth to prevent plaque from building up’. Functional modification refers to a change in a product’s versatility, effectiveness, convenience or safety. In response to widespread consumer perceptions that aerosol sprays are harmful to the environment, many manufacturers offer products such as deodorants in trigger-spray versions. As research has shown that most people eat tomato sauce with their hot chips, tomato sauce maker Heinz now markets a frozen potato chip, called Ketchip. In this product there is tomato sauce already inside the chip. Some pharmaceutical firms have revitalised old over-the-counter brands by marketing some medicines in ‘edible film’ format – thin patches that melt instantly on the tongue. The Swiss firm Novartis has used this strategy for cough and cold

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•

medicines, such as Triaminic and Theraflu Thin Strips. A similar functional modification allows Sony to market its Digital 8 as a video recorder that can now record both pictures and sound digitally. It also allows purchasers to play back their old analogue videos digitally. The cellphone manufacturer Sony Ericsson has turned its P 800 model into a ‘cellphone, PDA and digital camera all in one’. Style modification is an aesthetic product change, rather than a quality or functional change. Clothing manufacturers commonly use style modifications to motivate customers to replace products before they are worn out. ‘Planned obsolescence’ is a term commonly used to describe the practice of modifying products so those that have already been sold become obsolete before they actually need replacement. This is an approach frequently used in the motor industry. Some argue that planned obsolescence is wasteful whilst others claim it is unethical. Marketers respond that consumers favour style modifications because they like changes in the appearance of goods like clothing and cars. Marketers also contend that consumers, not manufacturers and marketers, decide when styles are obsolete.

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6.2.2 Product line extension Product line extension occurs when a firm’s management decides to add products to an existing product line in order to compete more broadly in the industry. For instance, Toyota South Africa has added the Lexus to compete in the luxury end of the passenger-vehicle market. Adidas, the sports clothing manufacturer, has added eyewear "****** DEMO - www.ebook-converter.com*******"

(sunglasses) to its product line. Graça has added a rosé to its product line of wines. Airbus has added to its product line the Airbus A380 900 (the world’s largest passenger aircraft, with a capacity of 900 passengers), capable of flying 15 000 km, without refueling. Product line extensions can often be described as an upward stretch, a downward stretch or a two-way stretch. An upward stretch occurs when a firm is competing at the bottom end of the market, but then decides to try to utilise an opportunity at the top end of the market. A downward stretch is the exact opposite: a firm is competing at the top end of the market, but then decides to try to utilise an opportunity at the bottom end of the market.

EXAMPLE >> British Airways/Comair, competing at the top end of the South African airline industry, performed a downward stretch when it introduced its no-frill airline Kulula.com. Sanlam performed a downward stretch when it bought African Life to compete in the ‘entry-level market’. Shoprite Checkers did the same when it launched Usave to target the lower-income market. MultiChoice performed a downward stretch when it launched its DStv Compact service (a reduced bouquet of eleven channel options) for those who cannot afford the full DStv Premium service. MWeb did the same when it launched its Polka ‘value for money’ Internet service. Absa Bank performed an upward stretch when it launched its private bank service and downward stretch when it launched its Transact account. Similarly Capitec Bank is busy with an upward stretch to target the same market the other major retail banks are competing in. A two-way stretch, on the other hand, occurs when a firm competes in the middle of a market and then stretches both upwards and downwards at the same time. Holiday Inn has performed a two-way stretch in South Africa by adding both luxury and very inexpensive accommodation to its range of hotels. "****** DEMO - www.ebook-converter.com*******"

6.2.3 Product line contraction Does the world really need 31 varieties of Head & Shoulders shampoo? Or 52 versions of Crest? The American consumergoods firm Procter & Gamble (P & G) has decided that the answer is ‘no’. P & G is contracting product lines by eliminating unpopular sizes, flavours and other variations to make it easier for customers to find what they are looking for. After decades of introducing new-and-improved this, lemon-flavoured that and extra-jumbo-size the other thing, P & G has decided that its product lines are over-extended.7 When Unilever recently established that of its 1 600 brands marketed worldwide, 1 000 of them generate only 8 per cent of sales. This product line over-extension caused considerable overlap and competition for company resources for brand building. Unilever addressed the product line over-extension by reducing its product mix to the 600 most profitable brands.8 The dairy manufacturer Clover has reduced the number of SKUs (Stock Keeping Units) in its portfolio from 1 700 to 600.9 The food manufacturer Tiger Brands summarises its philosophy towards product-line management as follows: ‘We are either first or second in a category, or we don’t compete. We will know we have arrived when we are no. 1 or 2 in every product category.’10 Symptoms of product line over-extension include the following: •

Some products in the line do not contribute to profits because of low sales, or they cannibalise sales of other items in the line • Manufacturing or marketing resources are "****** DEMO - www.ebook-converter.com*******"

•

disproportionately allocated to slow-moving products Some items in the line are obsolete because of new product entries in the line or new products offered by competitors.

Anglovaal, the owner of the Irvin and Johnson (I & J) brand, recently sold its frozen-goods interests to McCain because the brand did not contribute satisfactorily to profits. Frozen vegetables contributed 40 per cent to sales, but ‘a much smaller proportion to profit’, the firm said.11 Other examples of product line contraction include Unilever’s decision to drop the Toppers brand from its food line, and Volkswagen has dropped the Microbus (Kombi) and the Citi Golf from its product line. The Microbus was dropped because of ‘modest sales’ and the high cost of importing some of its components. Toyota has dropped the Conquest from its product line. The publisher Media24 recently closed its Nova newspaper, targeted at the young and upwardly mobile, blaming ‘flat sales’. Absa Private Bank recently closed its Private Equity Fund. Television stations also continually make product line modifications and drop programmes that lose their popularity. Three major benefits are likely when a firm contracts an over-extended product line. First, resources are focused on the most important products. Second, managers no longer waste resources trying to improve the sales and profits of poorly performing products. Third, new product items have a greater chance of being successful because more financial and human resources are available to manage and support them. "****** DEMO - www.ebook-converter.com*******"

7. Branding

LO8

The success of any business or consumer product depends in part on the target market’s ability to distinguish one product from another. Branding is often the primary tool marketers use to distinguish their products from the competition’s. A brand is a name, term, symbol, design or combination thereof that identifies a seller’s products and differentiates them from competitors’ products. A brand name is that part of a brand that can be verbalised, including letters (MTN, CNA), words (Nando’s, Edgars) and numbers (3M, 7-Eleven). The elements of a brand that cannot be verbalised are called the brand mark – for example, the well-known Mercedes-Benz, Volkswagen and Southern Sun symbols. The late Robyn Putter, former CEO of advertising agency Ogilvy & Mather Rightford, described a brand as a product that has earned a place in a consumer’s life through perceptual experience, beliefs and feelings, to the extent that a relationship of consequence has developed. Whereas an unbranded product is mostly about tangible things, a brand is about intangibles, such as trust, loyalty, friendship and belonging.12 Good branding, therefore, leads to an emotional bond between the consumer and the product. Successful branding can sustain a product for many years because of this bond. Nederburg wines, for instance, date back to 1810 and Mrs Ball’s chutney to 1852. The Barlows brand is 110 years old, All Gold 105 years.13

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READER 40 >> Planned ban on adverts insults the consumer Immediately after the 1917 communist revolution, brand names were banned for all goods produced in the Soviet Union. The effect of the ban was to reduce the quality of goods supplied, as all goods were then unidentifiable from each other. Producers manufacturing indistinguishable products do not have an incentive to develop the reputations that are so important to product branding and consumer welfare. Maize meal is a good example, not only because it is the dominant staple food in South Africa, but also because it is a highly competitive market, with maize futures traded on the South African Futures Exchange. White Star is the most popular brand, with about 8,1 million adults over the age of 15 reporting it as the brand they purchase most often, followed by Ace (5,7 million) and Iwisa (3 million). This year the average price of a 10kg pack of White Star maize meal was R69.27, while Ace was R66.72 and Iwisa was R65.89. The premium for the most consumed brand of maize meal appears to fly in the face of first-year economics teaching, according to which higher demand and unchanged supply is associated with lower, not higher, prices. Some argue that paying higher prices is wasteful and irrational for consumers. But when it is difficult to determine the quality of a product before purchase and the consequences of poor quality for the consumer are significant, it makes economic sense for them to rely on brand names and company reputations. By paying more for a brand-name product in those circumstances, consumers are not acting irrationally. Consumers know that companies with reputations for consistent high quality have more to lose if they do not perform well – the loss of the ability to continue to charge higher prices. SOURCE: Sharp, L. 2014. Planned ban on adverts insults the consumer, Business Day, 13 November, p.11

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7.1 Benefits of branding Branding has three main purposes: product identification, repeat sales (loyalty) and enhancing new-product sales (i.e. new products on the market). The most important purpose, however, is product identification. Effective branding yields advantages both to the marketer and the buyer.

7.1.1 Benefits for marketers Branding allows marketers to distinguish their products from all others. It is a means, therefore, of differentiation and can, over time, become a critical competitive advantage. Effective identification makes shopping easier for buyers (reduced time and effort), which means they rely less on salespeople’s support. Reduced selling time and effort mean cost reductions for the marketer.

>> Strategy To illustrate: to overcome competition from Russia, Angola, Australia and Canada, diamonds producer De Beers has decided to brand its diamonds. The branding plan involves inscribing the De Beers name and an individual security number on the ‘table’ (the largest facet on the crown) of each diamond. The inscription – which will be a few microns deep – will be visible only through a powerful microscope. De Beers is developing and patenting both the inscription technology and the reader device. The purpose is to differentiate a De "****** DEMO - www.ebook-converter.com*******"

Beers diamond from the competition. De Beers spends millions of dollars annually on advertising and promotional campaigns to sell diamonds and it irks the group that the benefits of this expenditure rub off on all diamond producers – including their competitors.14 Effective branding leads to a preference for that brand over other competing brands. In an experimental study in the United States, a group of children were given two chicken nuggets that were exactly the same in every respect except for the fact that one was packaged in a bag that bore McDonalds branding material, and the other was in an unmarked bag. When asked to choose one, the children consistently chose the nuggets in the branded McDonalds packaging rather than the one that came out of the unmarked packaging. This was despite the fact that the nuggets were exactly the same. When asked which one of the two tasted the best, they said the McDonalds nugget tasted the best.15

>> Technology in action Brand communities A brand community is a group of like-minded consumers who identify with a particular brand. The importance of a brand community for businesses is that its members buy more of the brand, remain loyal, and, accordingly, marketing costs are reduced. Good examples of brands that have exploited brand "****** DEMO - www.ebook-converter.com*******"

communities are Harley-Davidson, Apple and Starbucks (an international chain of coffee shops). However, in order for the brand community to be successful as a marketing tool, the brand should be well differentiated and there should be some mechanism for consumers to publicly share their experiences of the brand. Until recently, most brand communities were facilitated by the firms that own the brands. This usually meant setting up technological platforms to allow consumers to interact, but the advent of Web 2.0, has changed the paradigm. Consumers are able to provide much of the content to the Internet by virtue of applications such as blogs, Myspace, Wikis, podcasts and video sharing. Nowadays, brand communities are regularly and spontaneously generated by consumers who wish share their experiences about a particular brand. These ubiquitous applications also allow smaller firms to set up brand communities. For example, Shamwari Game Reserve has set up a Facebook page to allow guests and staff to share experiences and developments about this brand. The dilemma for businesses, however, is deciding on the extent to which they should become involved in the brand groups. Conventional wisdom argues that to unlock the full potential of brand communities, marketers must consider ways to add value to the consumer experience to earn the consumer’s attention outside the context of the purchase or use of the brand. However, a recent study demonstrated that many firms "****** DEMO - www.ebook-converter.com*******"

misconstrue their role in generating value from these organisations. The study maintains that brand communities generate more value when the members control them and in so doing are able to lead the firm in terms of generating ideas for innovative practices and products. It follows, therefore, that brand communities should not be just part of a marketing strategy, but should be integrated into the overall business’s strategy. SOURCES: Muniz, A.M. Jr, & O’Guinn, T.C. 2001. Brand community. Journal of Consumer Research vol. 27, pp. 412–432; Fournier, S. & Lee, L. 2009. Getting brand communities right. Harvard Business Review, April 2009, pp. 105–111

Effective branding also allows firms to charge a price premium for their product if it is properly differentiated. Jet Stores used effective branding of jeans (the No! brand) to do just that. Jet Stores’ MD at the time, Graham Evans, said: ‘One of the purposes of brands is to allow us to make premium margins. It is easier to sell denim with a brand. With bigger [profit] margins on branded items, you have more flexibility with pricing …’16 Effective branding spills over to other products, and particularly new products, leading to faster consumer acceptance. The introduction of Mentadent S toothpaste has certainly benefited from the well-established image of the Mentadent P brand. The same applies to Sta-soft’s introduction of its new Peach-scented Sta-soft. Effective branding can also help the image and positioning of a brand. Brands such as Ray-Ban sunglasses, Nike sportswear, and Calvin Klein clothing have a brand "****** DEMO - www.ebook-converter.com*******"

image associated with them that appeals to and attracts some consumers. Branding is usually protected by legal means, which means brands cannot be copied by competitors. Branding also fosters brand loyalty among consumers. A further advantage of branding is that it leads to advertising synergies. In other words, advertising by Nashua of its photocopier range benefits – in the form of higher levels of awareness and recognition – from the branding of its cellphone range of products.

7.1.2 Benefits for consumers Consumers also benefit from the easy identification that branding makes possible. Besides easier shopping (reduced buying time), branding offers buyers the security and confidence of buying a product they are familiar with in terms of shopping criteria such as reliability and quality. The annual Sunday Times Markinor Top Brands survey listed the ten consumer brands with the highest level of consumer awareness, in descending order, as Coca-Cola, Koo, KFC, Tastic, Nokia, Sunlight, Pick n Pay, Lucky Star, Shoprite and Samsung.17 It must be pointed out, however, that brand awareness (which is often measured by firms and marketing research firms alike) does not necessarily lead to profitability. South African Airways may be a brand that everyone is aware of, but this does not mean that the firm is profitable from a purely commercial point of view. The term brand equity refers to the monetary value of brand names. A brand that has high awareness, perceived "****** DEMO - www.ebook-converter.com*******"

quality and brand loyalty among customers has high brand equity. A brand with strong brand equity is a valuable asset. Tiger Brands, for instance, has bought the Mrs Ball’s brand for R475 million. And they spend millions of rands a day to reinforce the brand equity of their products. Brand Finance in partnership with Brand South Africa and Brand Africa value the most valuable brands in South Africa.18 The top 10 valuable South African brands according to them are: 1 2 3 4 5 6 7 8 9 10

MTN SASOL Vodacom Standard Bank Absa NedBank FNB Mediclinic Investec Woolworths

R56,3 bn R20,8 bn R18,3 bn R16,6 bn R12,8 bn R12,5 bn R11,1 bn R9,6 bn R9,5 bn R9,4 bn

The Interbrand Group, which pioneered professional brand valuation in South Africa, values the top ten global brands as follows:19

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1 2 3 4 5 6 7 8 9 10

Apple Google Coke Cola IBM Microsoft General Electric McDonalds Samsung Intel Toyota

$98 316 m $93 219 m $79 213 m $78 808 m $59 546 m $46 947 m $41 992 m $39 610 m $37 257 m $35 346 m

7.2 Features of effective brand names

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What constitutes a good brand name? Most effective brand names have several of the following features. Effective brand names: •

Are easy to pronounce (by both domestic and foreign buyers) • Are easy to recognise • Are easy to remember • Are short • Are distinctive, unique • Describe the product • Describe product use • Describe product benefits • Have a positive connotation • Reinforce the desired product image • Are legally protectable in home and foreign markets of "****** DEMO - www.ebook-converter.com*******"

interest. Obviously no brand exhibits all of these characteristics. The most important issue is that the brand can be protected for exclusive use by its owner. Some US brands command substantial premiums in many places around the world: Procter & Gamble’s Whisper sanitary napkins sell for ten times more than local brands in China; Johnson & Johnson brands, like Johnson’s Baby Shampoo and Band-Aids, command a 500 per cent premium in China;20 and Gillette disposable razors sell for twice the price of local brands in India. The best generator of repeat sales, however, is satisfied customers.21 Branding helps consumers to identify products they wish to buy again and to avoid those they do not. Brand loyalty, a consistent preference for one brand over all others, is quite high in some product categories. More than half the users in product categories such as cigarettes, toothpaste, coffee, headache remedies, photographic film, bath soap and tomato sauce are loyal to one brand. Brand identity is essential for the development of brand loyalty. Care must thus be taken not to harm the brand with short-term strategies, such as price discounting. In addition to product identification, an important purpose of branding is to facilitate sales, and particularly new-product sales. Company names and brand names are extremely useful when introducing new products or when firms face a very competitive environment. For example, if Sea Harvest were to add a new product (angel fish fillets, for example) to its existing range of seafood products, market acceptance would be a lot quicker than it would have been if "****** DEMO - www.ebook-converter.com*******"

Sea Harvest had not already been a well-established brand name.

7.3 Branding strategies

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Firms often face complex branding decisions. The first decision is whether to brand at all. One of the essential strategies for maintaining and growing a brand is consistency in the brand positioning and the communication of the brand. Some firms use a tool known as a ‘brand key’ or a ‘brand footprint’ to ensure that successive brand managers understand the ‘soul’ of the brand. This technique provides a concrete, functional and tangible way of defining the brand, and in so doing guides the marketing communications to ensure consistency in positioning of the brand in the consumer’s mind. As Figure 8.3 shows, a brand key suggests that eight dimensions can be used to position the brand. These dimensions are: 1 The competitive environment (i.e. the market and the alternative choices available to the consumer) 2 The target market 3 Consumer insight (i.e. what drives the consumer to purchase the product) 4 The benefits of the brand (i.e. the emotional and functional benefits that drive the consumer to purchase the brand) 5 The values, beliefs and personality (i.e. what the brand "****** DEMO - www.ebook-converter.com*******"

6 7 8

stands for and believes in) Reasons to believe (i.e. why consumers should believe that the positioning of the brand is credible The discriminator (i.e. the most important reason why consumers will buy the brand) The brand essence. This last dimension attempts to capture the heart of the brand in a few words. For example, the brand essence of the deodorant Axe could be described as ‘grooming men to seduce’, if one has regard to the risqué Axe advertisements. The brand essence of the VW Jetta is ‘a car you can depend on’.22

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Figure 8.3 Brand key

SOURCE: European Institute of Brand Management, http://www.eurib.org/ (accessed 30 March 2010)

Some firms actually use the lack of a brand name as a selling point. Unbranded products are called generic products (noname brands). An alternative is that firms may decide to brand their products using manufacturers’ brands or private (intermediary) brands, or both. In either case, they must then decide between a policy of individual branding (different brands for different products), family branding "****** DEMO - www.ebook-converter.com*******"

(common names for different products), or a combination of individual branding and family branding (see Figure 8.4). Figure 8.4 Major branding decisions

7.4 Generic products versus branded products A generic product is typically a no-frills, no-brand-name, low-cost product that is simply identified by its product category. (Note that a generic product and a brand name that becomes generic, such as cellophane, are not the same thing.) In South Africa, generic products (also called private brands or private labels) have captured significant market shares in some product categories, such as canned fruits, canned vegetables, paper products and beauty products. For instance about 20 per cent of Clicks’ sales can attributed to their private labels but they want to increase that to 25 per cent. These unbranded products are frequently identified only by plain, simple lettering on white packages. Examples are Pick n Pay’s No Name brand and the Shoprite Checkers Yellow Band brand. The main appeal of generics is their low price. Generic grocery products are usually 30 to 40 per cent cheaper than manufacturers’ brands in the same product category and 20 "****** DEMO - www.ebook-converter.com*******"

to 25 per cent less expensive than retailer-owned brands. Another product category where generics have made inroads is pharmaceuticals. When patents on successful pharmaceutical products expire, low-cost generics rapidly appear on the market. For example, when the patent on Merck’s popular anti-arthritis drug, Clinoril, expired, sales declined by 50 per cent almost immediately as generics entered the market.

READER 41 >> Upping the ante: Value-driven consumers sparking a surge in private labels At the rate at which they’re growing, private labels could become a major contributor to beauty and healthcare retailer Clicks’ sales in the near future. House brands or private labels have become a fast-growing phenomenon and a margins enhancer for retailers as consumers become more value driven. The recession has laid the trend bare, when over the past couple of years branded consumer goods producers such as Tiger Brands were reporting declines in sales while retailers were seeing growth in their private labels. Clicks’ house brand currently constitutes 20 per cent of its sales, which includes both its front shop and dispensary division that’s still largely developing. Otherwise, Clicks’ front shop private label accounted for 25,9 per cent of sales over the six months to February 2011, thanks to a growing product range. CEO David Kneale says it was the first time Clicks had reached the 25 per cent mark. Shoprite has previously said its house brands contribute around 15 per cent to sales; Pick ‘n Pay’s 10 per cent. General merchandise group Massmart hopes to leverage Wallmart’s private label if the intended merger goes through. Kneale says Clicks plans to achieve a private label contribution of 25 per cent across the board. The front shop could go as far as 30 per cent, as the group expands its product range. In developed markets, private labels account for as high as 30 per cent to 40 per cent of retailers’ sales. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Makholwa, A. 2011. Upping the ante: Value-driven consumers sparking a surge in private labels. Finweek, 28 April, p. 27

7.5 Manufacturers’ brands versus private brands The brand name of a manufacturer – such as Samsung or Steinhoff – is called a manufacturer’s brand. Sometimes the term national brand is used as a synonym for a manufacturer’s brand. This term is not always accurate, however, because many manufacturers serve only regional markets. The term ‘manufacturer’s brand’ more precisely defines the brand’s owner. A private brand (sometimes also referred to a store brand or distributor brand), on the other hand, is a brand name owned by a wholesaler or a retailer, for instance Woolworths, Pick n Pay or Shoprite Checkers. Who buys private brands? According to one expert, ‘the young, discerning, educated shopper is the private-label buyer’. These individuals are willing to purchase private brands because they have confidence in their own ability to assess quality and value.23 Table 8.2 identifies key issues that wholesalers and retailers should consider in deciding whether to sell manufacturers’ brands or private brands. Many firms, such as Pick n Pay, Spar, Shoprite Checkers – and now also Woolworths – offer a combination of both. Table 8.2 Comparing manufacturers’ and private brands from the reseller’s perspective

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Key advantages of carrying manufacturers’ brands

Key advantages of carrying private brands

Heavy advertising to the consumer by manufacturers like Unilever.

A wholesaler or retailer can usually earn higher profits on its own brand. In addition, because the private brand is exclusive, there is less pressure to mark the price down to meet competition.

Well-known manufacturers’ brands, such as Five Roses and Fisher-Price, can attract new customers and enhance the dealer’s (wholesaler’s or retailer’s) image.

A manufacturer can decide to drop a brand or a dealer at any time or even become a direct competitor to its dealers.

Many manufacturers offer quick delivery, enabling the dealer to carry less inventory and save costs.

A private brand ties the customer to the wholesaler or retailer. One for instance can only buy Pot O’Gold sauce at certain retailers.

If a dealer happens to sell a manufacturer’s brand of poor quality, the customer may simply switch brands but remain loyal to the dealer.

Wholesalers and retailers have no control over the intensity of distribution of manufacturer’s brands.

7.6 Individual brands versus family brands Many firms use different brand names for different "****** DEMO - www.ebook-converter.com*******"

products. This practice is referred to as individual branding. Most firms use individual brands when their products vary considerably in use, quality or performance. For instance, it would not make sense to use the same brand name for a pair of socks and a cricket bat. Unilever targets different segments of the soap market with different brands such as Dove, Lux, Vinolia, Breeze and Sunlight. On the other hand, a firm that markets several different products under the same brand name is using a family brand. For example, Sony’s family brand includes radios, televisions, stereos and other electronic products. A brand name can be stretched only so far, however. In the United States, Holiday Inn uses the following family brand names: Holiday Inn, Holiday Inn Express, Holiday Inn Select, Holiday Inn Sunspree Resort, Holiday Inn Garden Court and Holiday Inn Hotel & Suites. Some critics believe that because of the overuse of the family brand by Holiday Inn, most travellers cannot distinguish between them anymore.24

7.7 Conditions favourable to branding The benefits of branding described above make a compelling argument in favour of branding. However, sometimes conditions make branding unsuitable. For instance, some products are not brandable because their physical characteristics make them unsuitable. Examples are building sand and nails. Other products do not have a characteristic or attribute that could form the basis of a competitive advantage (eggs could be an example). Besides these requirements, branding works well when there is "****** DEMO - www.ebook-converter.com*******"

sufficient demand to ensure continuity of the brand and to ensure that the benefits of economies of scale are realised.

7.8 Co-branding

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Co-branding or partnering new products is a growing trend in marketing. Combining the branding efforts of two powerful brand names can exponentially enhance the brand awareness and brand equity of both brands. Co-branding arrangements vary, but generally the partners share research and development costs, slotting fees (paid to retailers to get better shelf placement), advertising and promotion budgets. There are different degrees of partnership.

EXAMPLE >> Some arrangements are one-offs, such as when Disney promoted The Lion King by allowing Nestlé to print scenes from the movie on its chocolate bars. Others are more permanent – examples include Simba chips cobranding its chutney-flavoured chips with Mrs Ball’s chutney; Kulula.com and Discovery Life’s Vitality programme; Wimpy and Engen; Shoprite and Computicket; and House of Coffees and Russell Hobbs. Nando’s co-branded with Langeberg All Gold tomato sauce when it launched a hot peri-peri tomato sauce – carrying the brands of both firms. South African Airways has co-branded with MTN in the past. MTN subscribers earn frequent-flyer points towards free flights by using their cellphones. Liqui-Fruit co-brands a Liqui-Fruit ice-cream with Ola, Whirpool cobrands with Omo washing powder and AEG with Handy Andy household cleaner (see the AEG advertisement on page 288). Standard Bank co-brands with Woolworths to demonstrate the benefits of a business partnership with the bank.

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Co-branding may also be used to identify product ingredients or components. The brand name NutraSweet and its familiar brand mark appear on more than 3 000 food and beverage products. Intel, the microprocessor firm, pays microcomputer manufacturers, such as IBM, Dell and Compaq, to include the words ‘Intel inside’ in their advertising, on the computers and on the boxes they are packed in. "****** DEMO - www.ebook-converter.com*******"

As with brand extensions, there are both benefits and disadvantages associated with co-branding. Consumers expect the advantages of both brands to be evident in the product, which is potentially a strong selling point. Combining brand names can also expand product-market boundaries. On the other hand, if the co-branding product fails, then the reputation of the original brand name may suffer. Another potential problem is customer confusion – if the two brands have different images, the customer may not understand the relationship. Finally, there is always the risk of over-exposure.

7.8.1 The risks associated with co-branding25 The most important risk of co-branding is incompatibility of the partners. After a compatible partner has been identified, the risks of the co-branding project must be considered. The following situations could pose serious risks for a participant and should be addressed in the co-operation agreement: • • • • •

The failure of the project because of financial or other strategic objectives not being achieved A change of strategy or withdrawal of products A breach of contract, insolvency or change in control of one of the participants The sudden degeneration of a participant’s previously stainless reputation The unauthorised use of a participant’s trademark.

It is particularly important that appropriate contractual "****** DEMO - www.ebook-converter.com*******"

measures be put in place to ensure that participants retain ownership of, and quality control over, their individual trademarks. This can be accomplished with properly worded, reciprocal trademark licences incorporated into the co-operation agreement. These licences should not only stipulate what constitutes authorised use of the parties’ trademarks, but also which restrictions and limitations apply. A serious risk that all trademark proprietors should guard against is the dilution of their trademarks. Using the trademark on products other than those in respect of which the mark is registered or renowned for will tarnish or damage its distinctive character or reputation. For instance, it is conceivable that Coca-Cola restaurants, Coca-Cola motors, Coca-Cola paint and the like may eventually dilute or destroy this well-known mark. The risk of dilution is inherent in co-branding, and the contract should, therefore, provide a participant with the option to terminate the licence in appropriate circumstances. Co-branding is not to every firm’s liking. It is interesting to note that the motor vehicle manufactuer BMW forms strategic alliances only in exceptional circumstances. However, despite the risks involved, co-branding participants can derive enormous benefits from such an exercise, given the right circumstances. In addition, cobranding should be planned and managed with the necessary care.

7.9 Levels of brand familiarity "****** DEMO - www.ebook-converter.com*******"

Brand acceptance does not come easily, and marketers must work very hard – often over many years – to build up a brand. Brand familiarity refers to the extent to which consumers recognise and accept a firm’s brand. Five levels of brand familiarity can be distinguished:26 •

• •

•

•

Brand rejection means the potential buyer will not buy the product. Some smokers will not buy certain brands, for example Brand non-recognition means potential consumers are simply not aware of the brand Brand recognition means consumers are aware of the brand, but not necessarily buyers. Many smokers will have a substantial evoked set Brand preference is a situation where a consumer regularly buys the brand ahead of others out of sheer habit or because of satisfactory use in the past Brand insistence implies that consumers insist on the brand and are willing to search for it. It means that the firm faces an inelastic demand curve. Brand insistenece is obviously the most desirable position for the marketer.

The marketing of brands with different levels of brand familiarity will differ in terms of advertising and distribution in particular. To encourage brand insistence, for example, marketers will try to enhance brand loyalty using relationship marketing strategies, and use tools such as frequent-flyer programmes (e.g. South African Airway’s Voyager programme) and other loyalty programmes (e.g. Clicks Club Card). "****** DEMO - www.ebook-converter.com*******"

7.10 Trademarks

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A trademark signifies the exclusive right to use a brand or part of a brand. Others are prohibited from using the brand without permission. A trademark that is registered is normally identified by the symbol™ next to the name or mark of a brand.

7.10.1 The relationship between trademarks and brands27 A trademark is a legal concept and a term primarily used by the legal community. It is demarcated by law (common or statutory) and interpreted by the judiciary. By contrast, the concept ‘brand’ is a term used by marketers and consumers. A brand is a broader and less well-defined concept than a trademark. The process used to create and manage a brand is known as branding, which refers to the variety of marketing techniques that integrate a trademark with a business strategy in order to create a unique image for the general public, referred to as the brand. Therefore, trademarks are static in nature, whereas brands are dynamic. This is so because trademarks exist in a supposedly objective environment – the law – whereas brands are subjective in nature because they depend on the public’s perception. Although trademarks and brands both designate the source, brands convey information about the trademark behind the brand, other trademarks supporting the brand, any family of marks, domain names, sub-brands, product packaging, the manufacturer and its trade name, advertising of the product, distribution of the product, celebrity "****** DEMO - www.ebook-converter.com*******"

endorsements and shelf displays at retailers and/or displays on the Internet. This information forms part of the public domain of knowledge associated with a particular product, service or firm, of which certain portions are protectable under trademark law and others not. For example, certain functional elements of a product, like the colour of its packaging, may be unprotectable under trademark law even though it forms an integral part of the brand’s image. This may be because the role of visual images used by brands to communicate information can seldom be empirically proved or disproved. Because trademark represents the legal foundation – or protectable element – of the brand, the line between trademarks and brands often blurs. To summarise, not all brands are trademarks, but most trademarks are brands. This is because a brand needs to be registered according to appropriate law as a trademark in order to be afforded legal protection. As soon as a trademark is registered according to appropriate law, it awards the owner of the registered trademark with a legal monopoly on the trademark. The primary purpose of a legal monopoly provided by the trademark is to preserve a trademark owner’s brand equity. However, owning a trademark for a brand is not an absolute guarantee that the trademark will enjoy unchallenged and unqualified protection. Recent statistics in the United States showed that a trademark holder filing a trademark case has a slightly better than 50 per cent chance of succeeding on the merits of the case, a 55 per cent chance of obtaining an injunction (interdict) if demanded and a 5,5 per cent chance of receiving any damages at all. "****** DEMO - www.ebook-converter.com*******"

At one stage, Cadbury attempted to have Beacon Sweets’ registration of the mark ‘Liquorice Allsorts’ removed from the trademark register. Cadbury wished to deal in Liquorice Allsorts sweets and to describe them as such. The court ruled, however, that the phrase constituted an original descriptive epithet, which was not in ordinary linguistic use and was distinctive of Beacon’s product. Supermarkets that used the trademark did so under license from Beacon.28 In 2004, Weber (manufacturer of the well-known kettle braais) accused Cadac of infringing its trademark. This came as a result of Cadac retailing its own design of charcoal kettle braais under the name ‘Cadac Charcoal Pro’. Cadac argued in court that its barbeques differ substantially from Weber’s and that it does not infringe on the rights of Weber.29

EXAMPLE >> Parts of a brand or other product identification may qualify for trademark protection. These include: • Shapes, such as the Jeep’s front grille and the Coca-Cola bottle. Toblerone has registered the triangular shape of its chocolate to protect it from direct competition. • Ornamental colour or design, such as the decoration on Nike tennis shoes, the black-and-copper colour combination of a Duracell battery and Levi’s small tag on the left side rear pocket of its jeans. • Catchy phrases, such as ‘Everywhere you go’, ‘How can we help you?’, ‘We try harder’, ‘It’s finger-lickin’ good’, ‘No more tears’. • Abbreviations, such as Coke, M-Net and MTN. The Harley-Davidson Motor Company has even applied to the US Patent and Trademark Office to register the distinctive exhaust sound of its motorcycle engines as a trademark. The firm cites several precedents for the Patent "****** DEMO - www.ebook-converter.com*******"

Office awarding a trademark registration for a sound, including the roar of the MGM lion and the ringing of the NBC chimes.30 Media24 is trying to claim the numeral 24 as part of its trademark and has objected to the use of Properties24.co.za by a local entrepreneur competing with its own Property24.com.31 Other examples of unusual attempts ‘trademarks’ are Henkel, the manufacturer of the Pritt glue stick who tried to register the colour red as element of its packaging and Apple Computers who tried to register its store lay out.

7.10.2 The legal implications of branding

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The Trademarks Act (No 194 of 1993) provides for the registration and certification of trademarks. One is able to register a trademark for a period of ten years, but it can be renewed from time to time. A mark means any sign capable of being represented graphically, including a device, name, signature, word, letter, numeral shape, configuration, pattern, ornamentation, colour or container for goods – or any combination of these. The definition of a trademark in the Trademarks Act provides for a mark that is used or to be used for distinguishing any firm’s goods or services from those of competing goods or services. The Intellectual Property Laws Amendment Act (No 38 of 1997) also amended certain clauses of the Trademarks Act to provide, among others, for conformation with international agreements and conventions, such as the Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Berne Convention, which gives global protection to copyright holders. "****** DEMO - www.ebook-converter.com*******"

Marketers planning to introduce new brands, trademarks or packages should consider the following suggestions:32 WEBSITE Test your ability to identify brands on the Brand Logo Quiz with answers on the following website: http://www.greatgroupgames.com/logogame.htm

•

• • •

Check carefully before adopting a trademark or packaging style to make sure you are not infringing on someone else’s distinguishing branding After a thorough search, consider registering your trademark Make your packaging as distinctive as possible Police your trademark.

Firms that fail to protect their trademarks face the problem of their product names becoming generic. A generic product name identifies a product by class or type, and cannot be trademarked. Former brand names that were not sufficiently protected by their owners and were subsequently declared to be generic product names in US courts include aspirin, cellophane, linoleum, thermos, rollerblade and cola. In South Africa, brands such as Tippex, Cellotape, Velcro and Vaseline have become generic names because their trademarks were not properly protected. Other firms like Rolls-Royce, Xerox, Levi’s, Frigidaire and McDonald’s aggressively enforce their trademarks. RollsRoyce, Coca-Cola and Xerox even run newspaper and magazine advertisements stating that their names are "****** DEMO - www.ebook-converter.com*******"

trademarks and should not be used as descriptive or generic terms. Some advertisements threaten lawsuits against competitors that violate trademarks. Despite severe penalties for trademark violations, trademark infringement lawsuits are not uncommon (see Reader 42 ‘Court finds Pepkor did not earn its stripes’). Often the major battle is over a brand name that closely resembles another brand name. The US beer maker Coors Brewing, for example, sued Robert Corr, who produces a line of soft drinks under the name Corr’s Beverages. Hyatt Hotels has blocked Hyatt Legal Services from featuring the term ‘Hyatt’ in its advertising. Probably the most celebrated case in South Africa is South African Breweries’ case against Laugh It Off Promotions (see Reader 43 ‘Supreme Court of Appeal laughs off T-shirt manufacturer’, below). Many firms must also contend with fake or unauthorised brands, such as fake Levi’s jeans, Microsoft software, Rolex watches, and Reebok and Nike footwear. Levi Strauss has spent more than $2 million on more than 600 investigations of counterfeit Levi’s jeans. Other firms, including IBM and Coca-Cola, are very aggressive in trying to identify and eliminate counterfeiters. In South Africa it is estimated that up to 47 per cent of all business software is pirated.33 In Europe, a firm can sue counterfeiters only if its brand, logo or trademark is formally registered. Until recently, formal registration was required in each country in which a firm sought protection.

READER 42 >> Court finds Pepkor did not earn its "****** DEMO - www.ebook-converter.com*******"

stripes The Supreme Court of Appeal has interdicted and restrained Pepkor Group from infringing on the trademarks of global shoe giant Adidas by selling four types of shoes featuring four stripes. The court also interdicted Pepkor from passing off its footwear as that of Adidas, and directed that an inquiry be held to determine the amount of damages to be awarded to Adidas. The judgement, passed on Thursday, made it clear that the rights acquired by Adidas were infringed by unauthorised use of a mark which so nearly resembled the registered mark as to be likely to deceive or cause confusion. The court also ordered Pepkor to remove the infringing marks from its footwear, and, where this was not possible, to deliver the footwear to Adidas. Senior associate at Edward Nathan Sonnenberg’s intellectual property department Rachel Sikwane said Adidas only needed to show that there was a likelihood of confusion. ‘The test for the likelihood of confusion (or deception) is an objective one,’ she said. In about October 2007 Adidas discovered that Ackermans and Pep Stores had been selling trainers and soccer boots featuring two and four parallel stripes. SOURCE: Mabuza, E. 2013. Court finds Pepkor did not earn its stripes. Business Day, 5 March, p. 1

7.10.3 Copyright It is important to distinguish between copyright and trademarks. Copyright is the exclusive legal right to reproduce, publish and sell the matter and form of a literary, musical or artistic work. Copyright is identified by the symbol ©. The copyright of this book you are reading is vested with the publisher (see the back of the title page), and any copying from it without the permission of the publisher violates copyright laws. "****** DEMO - www.ebook-converter.com*******"

READER 43 >> Supreme Court of Appeal laughs off Tshirt manufacturer Laugh it Off Promotions CC (‘Laugh it Off’) is a firm responsible for printing Tshirts featuring ‘puns’ of well-known trademarks used in relation to Carling Black Label beer. Laugh it Off replaced the words ‘Black Label’ and ‘Carling Beer’ with controversial slogans in a similar design and colour combination to that of the Black Label product of South African Breweries (SAB). SAB instituted legal proceedings against Laugh it Off on the basis of trademark infringement. As opposed to the conventional trademark infringement of using a trademark that is identical or confusingly similar to that of a registered trademark of another, the infringement that SAB alleged in this particular case was by way of the dilution of its trademark rights through tarnishment. ‘Tarnishment’ essentially meant that Laugh it Off was, through its conduct, acting to the detriment of the reputation that is vested in the trademark of SAB, and taking unfair advantage of it for its own products and benefit. In the light of the economic value of SAB’s Black Label brand and, in particular, of its reputation and advertising value or selling power, the court weighed up Laugh it Off’s right to freedom of expression against SAB’s right of property and freedom of trade. The court held that Laugh it Off’s reliance on the fundamental right of freedom of expression was misplaced, and that its right of freedom of expression had in fact been abused. The message on the T-shirt was considered to be materially detrimental to the reputation of SAB’s Black Label trademark. The Court of Appeal held that it was not necessary for SAB to prove that it had suffered actual loss. It was sufficient that damage to the reputation of the trademark was likely to be caused. In essence, Laugh It Off was using the reputation of SAB’s wellknown Black Label trademark, which has been established at considerable expense over a lengthy period of time, to the detriment of the trademark and without "****** DEMO - www.ebook-converter.com*******"

justification. Such use and detriment was unfair and, accordingly, constituted trademark infringement. Consequently, the Supreme Court of Appeal confirmed the order prohibiting Laugh It Off from making any further use of the trademarks of SAB. The court also ordered Laugh It Off to pay SAB’s legal costs. SOURCE: Adapted from Norton, R. 2004. Supreme Court of Appeal laughs off T-shirt manufacturer. Bizcommunity online newsletter, www.bizcommunity.com, 19 September 2004

WEBSITE Visit the following website to get a sense of the extent of the global packaging industry: www.dotpackaging.com

8. Packaging

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Packaging has always served a practical function. Packages hold contents together and protect goods as they move through the channel of distribution. Today, however, packaging is also a means of establishing a competitive advantage (see Reader 44 ‘Silent but effective marketing’), a container for promoting the product and a way of making the product easier and safer to use (such as stand-up pouches). It is also an important dimension of an integrated marketing strategy rather than an isolated area of decisionmaking.

8.1 Packaging functions The three most important functions of packaging are to "****** DEMO - www.ebook-converter.com*******"

contain and protect products, promote products and facilitate the storage, use and convenience of products. A fourth function of packaging that is becoming increasingly important is to facilitate recycling and reduce environmental damage.

8.2 Containing and protecting products The most obvious function of packaging is to contain products that are liquid, granular or otherwise divisible. Packaging also enables manufacturers, wholesalers and retailers to market products in specific quantities, such as grams. Physical protection is another obvious function of packaging. Most products are handled several times between the time they are manufactured, harvested, or otherwise produced, and the time they are consumed or used. Many products are shipped, stored and inspected several times between production and consumption. Some, like milk, need to be refrigerated. Some, like beer, are sensitive to light. Others, like medicines and bandages, need to be kept sterile. Packaging protects products from breakage, evaporation, spillage, spoilage, light, heat, cold, infestation and many other conditions.

READER 44 >> Silent but effective marketing If nobody picks up your product, nobody’s going to buy it. So what makes consumers choose to pick up your brand in a sea of alternative options? Your packaging. ‘The fifth ‘P’ of the marketing mix has been playing a much stronger role in the advertising of a product and new product launches’, says "****** DEMO - www.ebook-converter.com*******"

Desiree Gullan, creative director of Guerrilla Marketing. Ten years ago, product manufacturers saw packaging as a way to cut costs, instead of a marketing vehicle to generate product awareness or create some consumer excitement. This trend changed in the 1990s. New start-up firms suddenly hit the market with products featuring head-turning, innovative packaging designs. After a couple of months, they were racking up sales and market share. Brands such as SKYY Vodka leapt into the marketplace with a beautiful cobalt-blue bottle. ‘The packaging created an on-premise buzz and massive product awareness. SKYY didn’t have a huge advertising budget. So they put a priority on packaging design. And caught their competitors off guard’, comments Gullan. ‘Your packaging has to work hard; it not only has to entice consumers to pick it up, it also works hard to inform them of how your product is going to enhance their lives. It encloses and protects your products for distribution, storage, sale and use. It assists with meeting legal and health specifications. It provides security for breakage and theft. It has to work well on shelf displays. A brand’s packaging is a vital component of the marketing matrix’, she adds. SOURCE: Adapted from Bizcommunity online newsletter, www.bizcommunity.com, 7 July 2008

8.3 Promoting products Packaging does more than just identify the brand, list the ingredients, specify features and give user instructions. A package differentiates a product from competing products and may associate a new product with a family of other products from the same manufacturer. Packages use designs, colours, shapes and materials to influence consumers’ perceptions and buying behaviour. Kimberly-Clark and Procter & Gamble recently introduced a "****** DEMO - www.ebook-converter.com*******"

wide array of more appealing boxes for Kleenex and Puffs tissues. The idea is that if boxes are more attractive, people won’t mind displaying them in every room of the house. So far, the strategy appears to be working. Both Willards and Simba are marketing their chips in foil packaging rather than plastic to enhance the freshness of their chips. Woolworths’ ToGo range of products is packaged so that consumers can clearly see the products through the packaging to support Woolworths’ positioning as supplying the freshest, most tempting foods available: fresh, healthy and deliciously appealing. Kaleidoscopic packaging can also enhance the marketing of the product. In kaleidoscopic packaging, certain components of the packaging are changed continually. Breakfast cereal manufacturers, such as Weetbix, use kaleidoscopic packaging, printing images of different animals from time to time on box lids. Kaleidoscopic packaging creates a demand for the product by creating a demand for the packaging. Children are often the target market when kaleidoscopic packaging is used.

8.4 Facilitating storage, use and convenience Wholesalers and retailers prefer packages that are easy to ship, store and stock on shelves. They also like packages that protect products, prevent spoilage or breakage and extend the product’s shelf life. Consumers’ requirements for convenience cover many dimensions. Consumers are interested in items that are easy to handle, open and reseal, although some consumers want packages that are "****** DEMO - www.ebook-converter.com*******"

tamperproof or childproof. They also want reusable and disposable packages. Therefore, packaging can be a means of establishing and sustaining a competitive advantage. Surveys conducted by Sales & Marketing Management magazine revealed that consumers dislike – and avoid buying – leaky ice cream boxes, overly heavy or fat vinegar bottles, immovable pry-up lids on glass bottles, key-opener sardine cans and hard-to-pour cereal boxes. Such packaging innovations as zipper tear strips, hinged lids, tab slots, screw-on tops and pour spouts were introduced to solve these and other problems. Pharmaceutical firm Johnson & Johnson has introduced Tylenol FastCap, a new patented package that will open with a flick of the wrist.34 Some firms use packaging to segment markets. For example, the Tylenol FastCap is targeted to adults over 50 who suffer from arthritis and to households without young children. Different-sized packages appeal to heavy, moderate and light users of the product. Salt is sold in package sizes ranging from a single serving, to picnic size to giant economy size. Campbell’s soup is packaged in singleserving cans targeted at the elderly and singles market segments. Beer and cold drinks are similarly marketed in various package sizes and types. Packaging convenience can increase a product’s utility and, therefore, its market share and profits.

8.5 Facilitating recycling and reducing environmental damage One of the most important packaging issues today is "****** DEMO - www.ebook-converter.com*******"

compatibility with the environment. The ability to recycle is also important. Some firms use their packaging to target market segments that are environmentally concerned. Brocato International, for example, markets shampoo and hair conditioner in bottles that are biodegradable in landfills. Procter & Gamble markets Sure Pro and Old Spice in ‘eco-friendly’ pump-spray packages that do not rely on aerosol propellants.

>> Strategy Packaging can be a very important competitive strategy for many firms – but is often a risky and expensive strategy. Kolosus, the owner of Bull Brand – the leading brand in the corned meat market – recently converted to easy-opening cans. Conversion to easy-opening cans is a move which, judged by consumer convenience, might seem obvious and overdue. But elsewhere in the corned meat industry, which is sticking with the (finger-cutting) tear strip, key-opening feature, the view is that Bull Brand is taking a risky step in a highly traditional, declining, price-sensitive market. Critics of Bull Brand’s new packaging tactic say that corned meat is competing in an ‘easily-substitutable protein’ commodity market in which consumers switch between canned meats, chicken, pilchards and polony largely on the basis of price. Bull Brand’s new easyopening cans are 300 g rectangular cans, whereas the traditional South African tear-strip 200 g corned meat can has a squarer shape.35 "****** DEMO - www.ebook-converter.com*******"

To summarise, the advantages of packaging for the consumer are that it makes products convenient to store and use, and convenient sizes can restrict wastage. Packaging can also make products safer to use. It is important, however, to see packaging as an important dimension of an integrated marketing strategy rather than as an isolated area of decision-making. Some firms, however, fail to do that and miss opportunities not only to satisfy consumer needs, but also to establish a competitive advantage. As a result, packaging is often criticised. Some say that it is often of poor quality (e.g. sugar) and difficult to open (e.g. some coffee tins). Some say that claims about recycling and biodegradability are questionable, that some packaging is dangerous (e.g. bottles breaking easily) and that some packaging is deceptive.

8.6 Labelling

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An integral part of any package is its label. Labelling generally takes one of two forms: persuasive or informational. Persuasive labelling focuses on a promotional theme or logo, and consumer information is secondary. Foodstuffs, such as certain sauces, make use of persuasive labels, with the objective of strengthening brand identity. Note that overused promotional claims such as ‘new’, ‘improved’ and ‘super’ are no longer very persuasive. Consumers have been saturated with ‘newness’ and, therefore, pay very little attention to these claims. Informational labelling, by contrast, is designed to help "****** DEMO - www.ebook-converter.com*******"

consumers make specific product selections (including contents, features, how to care for and use the product and nutritional information) and lower their cognitive dissonance after the purchase. Sears attaches a ‘label of confidence’ to all its floor coverings. This label provides product information such as durability, colour, features, cleanability, care instructions and construction standards. Most major furniture manufacturers affix labels to their wares that explain the product’s construction features, such as type of frame, number of coils and fabric characteristics. The Foodstuffs, Cosmetics and Disinfectants Act (No 54 of 1972), and amendments thereto, controls the sale, manufacture and importation of foodstuffs, cosmetics and disinfectants. This act provides for penalties if a misleading advertisement of any foodstuff, cosmetic or disinfectant is published. The act also provides for offences in respect of a false or misleading label description with regard to any foodstuff, cosmetic or disinfectant’s origin, nature, substance, composition, quality, strength, nutritive value or other properties, or the time, mode or place of its manufacture. A label, in terms of the law, means any brand or mark or any written, pictorial or other descriptive matter appearing on any foodstuff, cosmetic product or disinfectant, or the packages of such products. Guarantees are also subject to a number of prescriptions.

>> Strategy Can something as mundane as product labelling yield a competitive advantage for a firm? Consider the "****** DEMO - www.ebook-converter.com*******"

following two examples. Each Debonair’s pizza has a sticker placed over a hole in the pizza box, which under normal circumstances is black. When a hot pizza is placed in the box the sticker turns red and the words ‘hot & fresh’ become visible. This technique is known as thermochromic labelling, and the only other product using this type of labelling is Castle Lite. In the case of Castle Lite, the label turns blue when the beer is cold enough.36 WEBSITE Visit the website www.tetrapak.com to see how packaging can be used to protect the quality and nutritional value of dairy products, beverages, deserts, and sauce products.

READER 45 >> The influence of the Consumer Protection Act As of 1 March 2012, retailers and manufacturers might have felt that their job descriptions suddenly included publishing. Thanks to the new R146 foodstuffs labelling legislation, issuing product labels has turned from simple product descriptions and price tags into what might seem like a small novel to the untrained eye. New labels are to include a full ingredient declaration in descending order, with special provisions in place for food additives. Terms like ‘sugar free’ are to be replaced with ‘no added sugar’ to minimise confusion for the customer. More transparency in product origin is required by differentiating between ‘product of South Africa’ and ‘produced in South Africa’. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Mack, M. 2012. Driving innovation in packaging and labelling. Supermarket & Retailer, July 2012. Available from http://www.supermarket.co.za/SR_Downloads/S&R%20July%202012%20 Packaging.pdf (Accessed on 12 August 2014)

8.7 Universal product codes The universal product codes (UPCs) that appear on many items in supermarkets and other high-volume outlets were first introduced in 1974. Because the numerical codes appear as a series of thick and thin vertical lines, they are often called bar codes. The lines are read by computerised optical scanners that match codes with brand names, package sizes and prices. They also print information on cash register tapes and help retailers to prepare rapidly and accurately records of customer purchases, control inventories and to track sales. The South African Numbering Association administers the allocation of UPCs in South Africa. Most retailers today refuse to accept products that do not carry a UPC.

8.8 Product warranties

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Just as a package is designed to protect the product, a warranty protects the buyer and gives essential information about the product. A warranty confirms the quality or performance of goods or a service. An expressed warranty is a written guarantee. Expressed warranties range from simple statements such as ‘100 per cent cotton’ (a guarantee of quality) and ‘complete satisfaction guaranteed’ (a statement of performance), to extensive documents written "****** DEMO - www.ebook-converter.com*******"

in technical language. By contrast, an implied warranty is an unwritten guarantee that the item or service is fit for the purpose for which it was sold. The camera manufacturer Unomat says: ‘… all Unomat products carry a one-year warranty against manufacturing defects. If anything goes wrong with your Unomat product, be it a video light, cellphone charger or any other item in the vast range, and the fault is due to manufacturing error, Unomat will repair or replace the item free of charge.’

Beer war now in premium passarounds The beer battle brewing between South African Breweries (SAB) and its rival, Brandhouse, will happen in green 660 ml bottles. In South Africa’s aspirational, growing middle-class market, this is a key product that both the entrenched incumbent (SAB) and its deep-pocketed international rival (Brandhouse) are seeking to tap. In one corner of the ring is SAB with Castle Lite, sold in a green bottle to denote its premium nature. In the other corner is Brandhouse with Amstel. This is not the first time SAB has fought competition on home soil. But it is the hardest fight yet. ‘This is probably the most important one SAB has had to deal with. They’re up against a gigantic and effective global competitor in the form of Heineken’, says Chris Gilmour, an analyst at Absa Investments. It is early days yet. The beer-bottle battle is just starting. Brandhouse – a joint venture between Heineken and UK-based Diageo – only started producing the 660 ml ‘sharing pack’ bottle last month. But now that it is producing locally, Brandhouse can sell its beer in returnable bottles. Using bottles that can be returned for a deposit allows Brandhouse to pit Amstel head-to-head with SAB in a township market that is fast becoming more affluent. The traditional market for returnables is for 750 ml bottles of mainstream brands, such as Castle and Carling Black Label. But the market is expanding upwards into the premium brands. ‘[Beers] like the Peroni 660 ml are seen as the fashionable returnable’, Gilmour says. In a stroke of irony, it is also a "****** DEMO - www.ebook-converter.com*******"

market that SAB largely created – with Amstel. In 1998, SAB began selling Amstel in large returnable bottles to the shebeen market. By 2007, when Heineken did not renew SAB’s right to produce Amstel in South Africa, it was the largest premium brand at 2,4 million hectolitres, and was growing at 26 per cent a year. Amstel left the market, but is now back. And SAB faces losing a market it created. ‘[SAB] started a whole new market of people who would take premium beer and pass it around (sharing the beer). Premium beer did tend to be in small bottles. [SAB] broke the mould. If Amstel is going to be purely returnables, then it may place Amstel at a big advantage’, Gilmour says. SOURCE: Adapted from Bleby, M. 2010. Beer war now in premium pass-arounds. Sunday Times Companies and Market section, 28 March 2010, p. 1

QUESTIONS 1 2 3

Discuss the link between consumer needs and product decisions in this reader. What is SAB’s (Castle Lite) competitive advantage in this beer battle? What is Brandhouse’s (Amstel) competitive advantage in this beer battle?

KEY CONCEPTS Brand: a name, term, symbol, design – or combination of these – that identifies a seller’s products and differentiates them from competitors’ products. Brand equity: the value of company and brand names. Brand loyalty: a consistent preference for one brand over all others. Brand mark: the elements of a brand that cannot be verbalised. Brand name: that part of a brand that can be verbalised, including letters, words and numbers. Business product (industrial product): a product used to manufacture other goods or services, to facilitate a firm’s operations or to resell to other customers. Co-branding: placing two or more brand names on a product or its package. Consumer product: a product bought to satisfy an individual’s personal wants. Copyright: the exclusive legal right to reproduce, publish and sell the matter and form of a literary, musical or artistic work. Expressed warranty: a written guarantee.

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Family brand: marketing several different products under the same brand name. Generic product: a no-frills, no-brand-name, low-cost product that is simply identified by its product category. Generic product name: identifies a product by class or type and cannot be trademarked. Implied warranty: an unwritten guarantee that a product or service is fit for the purpose for which it was sold. Individual branding: using different brand names for different products. Informational labelling: designed to help consumers make proper product selections and lower their cognitive dissonance after the purchase. Kaleidoscopic packaging: where certain components of the packaging are changed continually. Manufacturer’s brand: the brand name of a manufacturer. Persuasive labelling: focuses on a promotional theme or logo; consumer information is secondary. Planned obsolescence: the practice of modifying products so those that have already been sold become obsolete before they actually need replacement. Private brand: a brand name owned by a wholesaler or a retailer. Product: everything, both favourable and unfavourable, that a person receives in an exchange between two parties. Product item: a specific version of a product that can be designated as a distinct offering among a firm’s products. Product line: a group of closely related product items. Product line depth: the variety of sizes, colours and models offered within each product line. Product line extension: adding products to an existing product line in order to compete more broadly in the industry. Product mix: all the products a firm sells. Product mix width: the number of product lines a firm offers for sale. Product modification: changing one or more of a product’s characteristics or attributes. Shopping product: a product that requires comparison shopping, because it is usually more expensive than a convenience product, and found in fewer shops. Speciality product: a particular item for which consumers search extensively and for which they are very reluctant to accept substitutes. Trademark: the exclusive right to use a brand or part of a brand. Universal product code (UPC): a series of vertical lines (bar codes), readable by computerised optical scanners, which represent numbers used to track products. Unsought product: a product unknown to the potential buyer or a known

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product that the buyer does not actively seek. Warranty: confirmation of the quality or performance of goods or a service.

REFERENCES 1

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

This section is based on Kotler, P. 1997. Marketing management: Analysis, planning and control (9th edition). Upper Saddle River: Prentice Hall, p. 431; Levitt, T. 1980. Marketing success through differentiation – of anything. Harvard Business Review, January–February 1980, pp. 83–91. http://global.ebay.com (Accessed 30 March 2010). Harris, L. Point of purchase Special Report. Financial Mail, 26 November, p. 26. Pick n Pay corporate report, supplement to Financial Mail, 30 May 1997, p. 17. About Tiger Brands. 2014. Available from http://www.tigerbrands.co.za/about.php (Accessed July 2014). Roush, C. 1993. At times they’re positively glowing. Business Week, 12 July 1993, p. 141. Make it simple. Business Week, 9 September 1996, p. 96. Food & Beverage Reporter Online no. 43, 10 September 1999. Payne, T. 2010. Clover: Achieving its goals through resetting. Food & Beverage Reporter, January/February 2010, p. 12. Koenderman, T. 2001. A new brand of tiger. Financial Mail, 21 September 2001, p. 83–84. Moodie, G. 2001. Chips are down as Americans gobble up I & J frozen vegetables. Sunday Times business section, 8 July 2001, p. 4. Ogilvy & Mather Rightford corporate report, supplement to Financial Mail, 25 September 1998, p. 7. Benjamin, C. 2010. South Africa has some long-life brands. Business Day, 1 February 2010, p. 5. Adapted from ‘Designer diamonds make their mark’. Financial Mail, 13 March 1998, p. 58. Children’s tastebuds easily swayed by advertising, Business Day health news supplement, 5 September 2007, p. 7. It’s all in the jeans at Jet Stores. Financial Mail, 18 July 1997. ‘Top Brands’, supplement to Sunday Times, 16 August 2013. Kokbokoane, T. 1999. Survey measures Coke’s SA clout. Business Times, 31 January 1999, p. 3. Brand Finance. 2014. South Africa Top 50: The annual report on South Africa’s 50 most valuable brands, July 2104. Available from

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20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

http://www.brandfinance.com/knowledge_centre/reports/brandfinancesouth-africa-top-50-2014 (Accessed 2 August 2014). Jacob, R. 1993. Asia where the big brands are blooming. Fortune, 23 August 1993, p. 55. Heline, H. 1993. Brand loyalty is not dead – but you’re not off the hook. Brandweek, 7 June 1993, pp. 14–15. Model: Brand key, European Institute of Brand Management, http://www.eurib.org (Accessed 30 March 2010). K-mart accelerates private label push. Brandweek, 29 January 1996, p. 6. Orwall, B. 1996. Multiple hotel brand[s] puzzle travellers. Wall Street Journal, 17 April 1996, p. B1. This section is based verbatim on Du Plessis, I. 2005. Name of the game is cobranding. Business Day electronic edition, 12 April 2005. Perreault, W.D. & McCarthy, E.J. 1996. Basic marketing. Chicago: Irwin, pp. 293–294. This section was written by Dr Hanlie Krüger. PE sweet-maker loses bitter fight. Eastern Province Herald, 27 September 1997. Cadac attaches Weber trademarks. Bizcommunity online newsletter, www.bizcommunity.com, 7 November 2007. Harley-Davidson Motor Company. 20 November 1995. Register the rumble. McClachlan, T. 2007. Legal battle over proper use of ‘24’. Business Day electronic edition, 27 March 2007. Bahls, S.C. & Bahls, J.E. 1996. Fighting fakes. Entrepreneur, February, pp. 73– 76. McCleod, D. 1999. Software pirates could sink ship. Financial Mail, 5 February 1999, p. 80. Riddle, J.J. 1993. J & J ready to flip lid on Tylenol. Brandweek, 3 May 1993, p. 3. Food & Beverage Reporter Online. Corned meat can debate. November 2000, pp. 21–22. Payne, T. 2010. Thermochromic labels in SA. Food & Beverage Reporter, January/February 2010, p. 36.

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CHAPTER

09

Developing and managing products

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Explain why developing new products is important to business firms. 2 Describe the nature of the six categories of new products that firms can develop to establish and sustain a competitive advantage. 3 Explain the steps in the new-product development process. 4 Identify potential sources of new-product ideas. 5 Discuss techniques that can be used to generate new-product ideas. 6 Provide arguments for and against the use of thorough test marketing of new products. 7 Identify reasons why some products succeed and others fail. 8 Provide guidelines on how firms can organise internally to facilitate new-product development. 9 Explain the concept of the product life-stage cycle and describe the prevailing circumstances typical of each stage. 10 Provide a thorough overview of strategies a marketer can use during each stage of the product life cycle. 11 Explain the diffusion process through which new products are "****** DEMO - www.ebook-converter.com*******"

adopted. 12 Review the product characteristics that influence the rate of adoption of new products. 13 Illustrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 14 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Inside track: Barbie plans to let down her hair At 55, she retains her youthful, if somewhat improbable, appearance. She has had a number of careers, including astronaut, presidential candidate, fashion model and surgeon. She has had a close friendship with Ken for many years, but there is no sign of marriage or children. If this were your daughter, you would probably be proud of her achievements. You might also worry whether she would ever settle down. But this is Barbie, the world’s most valuable plastic doll, who seems destined for an unsettled life if she is to survive. Recently, the Barbie powerhouse has faltered. Sales of the doll grew steadily during the 1990s, but sales have declined in recent years. Ten years ago Barbie accounted for about 30 per cent of the sales of Mattel, her parent company. Today it is closer to 20 per "****** DEMO - www.ebook-converter.com*******"

cent. The challenge of keeping Barbie fresh and interesting has fallen to Adrienne Fontanella. This is no easy task as Fontella realises that many girls in their target market spend more and more time using iPods and cell phones than playing with dolls. Competitors have also sprung up in international markets and market more ‘local’ dolls. Says Fontanella: ‘You have to be fresh and new – this business is now pretty much like a fashion business and we are having to produce new products all the time. We produce between 12 and 20 key dolls each year. It’s a lot.’ And it is testimony to Barbie’s enduring success. Despite her current difficulties, she is still an exceptional brand in a world where few toys last beyond two Christmas seasons. SOURCE: Killgren, L. 2002. Barbie plans to let down her hair. Financial Times, June 2002, p. 10; Ten things you don’t know about Barbie. Evening Standard, 4 December 2012, p.8

QUESTIONS 1 2

To what would you ascribe Barbie’s falling sales? What advice would you give to Adrienne Fontanella?

1. Introduction In Chapter 8 we referred to the importance of products in the marketing mix. The product is the physical manifestation of the firm’s efforts to satisfy customer needs, "****** DEMO - www.ebook-converter.com*******"

and can be anything that a person receives in an exchange – normally for money. A product may be a tangible, a service, an idea – or any combination of these three. In this chapter, product management is discussed. The focus is on newproduct development, how products progress through a socalled product life cycle and how firms can utilise a variety of strategies to manage the growth process of a product from the introduction stage to its eventual decline.

2. The importance of new products

LO1

How long can a firm survive without introducing new products? ‘On average only about seven years’ says Neil Jacoby, CEO of Futureworld. Business firms do not do business in a vacuum: forces in the rapidly changing environment continually compel them to re-evaluate and reconsider their existing product mix. An evaluation of a product mix may lead to the removal of some products or brands or to the introduction of new products or brands. The following are the typical reasons why new products are important for firms: •

To pursue growth and profitability objectives. A firm’s products may be in various phases of their product life cycle, and consequently contribute in different degrees to the overall profit and growth objectives of the firm. When the existing product mix does not meet these objectives, new products need to be introduced. Figure 9.1 illustrates how a ‘profit gap’ can emerge – in this

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instance in years 3 and 4. New products are needed to fill this gap or the firm’s long-term profitability will decline. Coca-Cola realised a long time ago that it cannot depend on carbonated soft drinks alone to ensure its long-term profitability and survival. As a result, Coca-Cola developed new products, such as Iced Tea and, more recently, a vitamin-enhanced flavoured water under the Glacéau brand. In a similar vein, South African Breweries (SAB) is now marketing a new flavoured beer – Flying Fish. • To replace declining products. The product life cycle (PLC) of products tends to become shorter and shorter and requires new products to replace them. The failure to replace products, brands or models in a product range whose sales are declining can have a serious impact on a firm’s financial position. Apple has been experiencing a fall in sales (for the first time since 2003) and they have not really introduced any new products since the iPhone in 2008 and the iPad in 2010. They are now considering developing wearable computing devices and innovative mobile-payment systems (the eWallet) to stop the declining trend.1 Examples of products that are gradually being replaced are BlueRay players and PVR decoders replacing DVD players. Digitised photography is replacing traditional film photography. Cloud services are replacing flash disks and external hard drives as data-storage devices. • Product obsolescence. The consumer electronics market changes terribly fast. New gadgets are introduced almost every week. Marketers have found ways to convince consumers to buy a new gadget even though "****** DEMO - www.ebook-converter.com*******"

their old gadget is fully or mostly functional. Profit is their motivation: shorter times between sales equal more sales. Selling a cellphone to a single customer every 18 months is more profitable than only selling him one every five years. Therefore, producers are interested in shortening the time between sales. New technology can make a firm’s products obsolete. Word processing on personal computers made the traditional typewriter obsolete. New CD-ROM technology has rendered recording music on vinyl records (and, therefore, marketing vinyl records) obsolete. The scanning and emailing of documents have made fax machines obsolete. Electronic payments such as Internet and mobile banking are making cheques and cheque books obsolete. The Post Office realises that a stamp (its most important source of revenue) is something that, over time, may become obsolete due to the popularity of electronic communication media such as emailing and sms messaging.2 • New products have to be developed to remain competitive. Competitive pressures often shape marketers’ new-product strategies. After the first toothpaste with fluoride was launched, other toothpaste manufacturers had to follow suit as fluoride quickly became a standard ingredient in toothpaste. Apple Computers, after struggling financially for a few years, introduced the iPod, the Apple iPhone and, lately, the iPad, which effectively saved the firm from bankruptcy. Korean firm Samsung spent R400 billion rand in 2012 on new products, particularly new cellphone chips and next-generation displays for phones and TVs. Failure to "****** DEMO - www.ebook-converter.com*******"

•

develop new products have cost firms/brands such as Nokia, Samsung, Blackberry and Kodak dearly. Changing consumer needs open up opportunities for new products. It often happens that a new ‘primary’ product leads to new needs and wants for ‘secondary’ products. The development of the cellphone has led to the development of markets for various cellphone accessories, such as car kits and belt pouches. Knowing that two out of every five pages printed in an office are churned out for a single viewing only, Xerox is developing an ‘erasable paper’ that will display printed images for only one day. After 24 hours, the images will fade and the paper can be reused.3

As illustrated in Figure 9.1, failure to refresh the product mix from time-to-time can lead to a growing gap between a firm’s profit objectives and its actual profits (see the gaps denoted by the X and Y symbols in years 3 and 4). A good example of this situation was the Finnish cellular phone handset manufacturer, Nokia. Up to 2004, it refused to add new models to its product mix. In particular, Nokia stubbornly resisted adding foldaway handsets with big screens to its product mix. But these have become the norm in Asia, Europe and the United States. Competitors began beating Nokia to the market with new designs, and the firm started losing market share. In 2004, Nokia’s share price dropped by 20 per cent as the profit gap grew larger and larger. By the end of 2004, Nokia had realised that its poor product-management decisions were threatening the future existence of the firm and announced that it would introduce 30 new models in an attempt to regain lost ground.4 "****** DEMO - www.ebook-converter.com*******"

However, it was too late and in 2014 Microsoft took over the Nokia brand. Figure 9.1 Profit contribution of individual products over time

3. Categories of new products

LO2

The term ‘new product’ is somewhat confusing because its meaning varies widely. A product can be new to the world, to the market, to the producer or seller, or to some combination of these. Six distinctive categories of new products can be identified:5 •

New-to-the-world products (also called discontinuous innovations) are new in the sense that there were no products before them that were even remotely similar. These products ‘create’ an entirely new market. The telephone, television, computer, fax machine, microwave oven, cellphone and the Internet were once new-to-the-world products. Today, examples of recent new-to-the-world products are gadgets that can spot "****** DEMO - www.ebook-converter.com*******"

cable thieves in the dark, solar energy, 3D printing, electronic cigarettes, fuel cell motor vehicles, electric motor vehicles, virtual wallets, unmanned cargo ships, and waterless car washes. • New product lines. These products, which the firm has not previously offered, allow it to enter an established – but new – market. The dairy firm Parmalat adding fruit juices to its dairy product lines would be an example. The breakfast cereal manufacturer Jungle has added Jungle ready-to-eat cereal bars to its product range. An Internet-based example of a line extension is Amazon’s expansion from books into other product categories. The rationale is to capitalise on an existing strong brand image in new markets. • Additions to existing product lines. This category includes new products that supplement a firm’s established line. Hallmark recently announced the addition of 117 new greeting cards – for pets. According to Hallmark research, 75 per cent of pet owners give Christmas presents to their pets, and 40 per cent celebrate their pets’ birthdays. More than 75 per cent of all new products introduced each year are actually line extensions – new varieties, formulations, sizes and packaging of existing brands.6 Heineken has made renewed attempts to woo the elusive female African beer drinker with its Radler beer – a low-alcohol content, sweeter beer.7 Foschini has added the footwear brand Charles & Keith and the luxury menswear brand Fabiani to its product line-up. • Improvements to or revisions of existing products. The ‘new and improved’ product may be significantly or "****** DEMO - www.ebook-converter.com*******"

slightly changed. Revlon’s ColourStay Lipcolour became the number-one-selling lipstick on the basis of a promise to last all day without smearing.8 South Korean firm LG Electronics has taken refrigeration one step further. Apart from keeping food fresh, its top-end fridge has been transformed into a family entertainment and communications centre for the digital age. It allows you to surf the Internet, send e-mails, shop online, make video calls, listen to music and watch short videos. There’s even a diary for anniversaries, birthdays and other important dates. Its LCD shows the fridge’s temperature and provides recipes and tips on nutrition. And it knows what’s inside the fridge.9 Nokia has introduced the Nokia Lumia cellphone – the pinnacle of its range. It has high-speed 3G capabilities, a five megapixel camera, built-in GPS and a music player. Television sets have become bigger, thinner, offering a cinematic experience. An example is Philips’s highdefinition 3D TVs. Cement manufacturer AfriSam has improved its cement to cure in two days to the same extent that was previously possible in only seven days – an improvement that speeds up the building process. • Repositioned products. South African Breweries has very successfully repositioned Castle Lite as a premium brand. (Repositioning was discussed extensively in Chapter 7). • Lower-priced products. This category refers to products that provide performance similar to competing brands – but at a lower price. Hewlett Packard introduced CopyJet, a combination colour printer and colour copier, at about one-tenth of the price of most conventional "****** DEMO - www.ebook-converter.com*******"

colour copiers.10 The Taiwanese computer manufacturer Asus was the first manufacturer to introduce netbooks – relatively small laptops that can do almost everything that current laptops can do – at a much lower price. Although there are exceptions, the introduction of genuinely new products (i.e. new-to-the-world products) seldom occurs by chance. Almost without fail, they will reach the market as the culmination of a thorough and systematic new-product development process.

4. The new-product development process LO3 In South Africa, more than 10 000 new product items are launched in the FMCG market per year. Unfortunately, many of them are not successful. In the United States, the failure rate of these new products is 80 per cent. Success depends on how the new-product development process is managed. Not all firms are equally progressive and geared for developing new products. The firms most likely to succeed in developing and introducing new products, such as 3M, are those that take the following actions:11 • •

Make the long-term commitment needed to support innovation and new-product development Use a firm-specific approach, driven by the firm’s objectives and strategies, with a well-defined newproduct strategy at its core

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• •

Capitalise on experience to establish and maintain a competitive advantage Establish an environment – a management style, organisational structure and degree of top-management support – conducive to realising firm-specific newproduct and corporate objectives.

Most larger firms follow a formal new-product development process, usually starting with a new-product strategy. The objective is to avoid costly (and often embarrassing) mistakes by identifying potential problems as early as possible and taking corrective action as the process develops. A new-product strategy links the new-product development process with the objectives of the marketing department, the business unit and the firm. A new-product strategy must be compatible with these objectives, and, in turn, the objectives of all three – marketing department, business unit and firm – must be consistent with one another. As a new-product strategy is part of the firm’s overall marketing strategy, it sharpens the focus and provides general guidelines for generating, screening and evaluating new-product ideas. The new-product strategy specifies the roles that new products must play in the firm’s overall plan. In addition, it describes the characteristics of products that the firm wants to offer and the markets it wants to serve. Figure 9.2 illustrates the seven-step process of newproduct development, which is discussed in more detail in the sections that follow. The illustration in Figure 9.2 is funnel-shaped to show that each stage acts as a screen. The purpose is to filter out unworkable ideas and reserve "****** DEMO - www.ebook-converter.com*******"

resources only for those options that have a reasonable chance of success. Figure 9.2 the new-product development process

4.1 Idea generation

LO4

The first step in the new-product development process is generating new ideas. New-product ideas come from many sources – customers, employees, intermediaries, competitors, research and development and consultants. Whether new-product ideas are sought deliberately or not, "****** DEMO - www.ebook-converter.com*******"

an atmosphere conducive to new-product development should always prevail in a firm because of the potential benefits that new products can bring. In other words, there ought to be a formal structure to ensure a continuous flow of new-product ideas that are handled in a systematic manner. •

•

Customers. The marketing concept suggests that customers’ needs and wants should be the springboard for developing new products. Thermos, a vacuum-bottle manufacturer, provides an interesting example of how firms tap customers for ideas.12 The firm’s first step in developing an innovative braai grill was to send ten members of its interdisciplinary new-product team into the field for about a month. Their assignment was to learn all about people’s braaiing needs and to invent a product to meet them. In major cities the team conducted focus groups, visited people’s homes and even video-taped braais to try to understand the needs of people who braai regularly. In a similar vein, the complaints department of a firm and its intermediaries can also be a very useful source of new-product ideas. The healthcare firm Johnson & Johnson has what it calls a ‘customer immersion’ day, when brand managers spend time with their customers in order to understand their customers’ needs. L’Oreal has a ‘consumer insights team’ that video tapes consumers in their bathrooms when using shampoos and cosmetics. Employees. Marketing personnel – advertising and marketing research employees, as well as salespeople – often generate new-product ideas, because they analyse and interact directly with customers. Firms should

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encourage their employees to submit new-product ideas and reward them if their ideas are adopted. The very successful introduction of Post-it notes started with an employee’s idea. In 1974, the research and development department of 3M’s commercial tape division developed and patented the adhesive component of Post-it notes. However, it was a year before an employee of the commercial tape division, who sang in a church choir, identified a use for the adhesive. He had been using paper clips and slips of paper to mark places in his hymn book. But the paper clips damaged his books, and the slips of paper fell out. The solution, as we now all know, was to apply the adhesive to small pieces of paper and sell them in packages. The health care firm Johnson & Johnson has formalised the process of employee involvement in new-idea generation with a website which enables employees to post ideas about potential new products. First National Bank paid out R6m to employees who contributed new product ideas in 2010 and a further R9 m in 2011. Then-CEO Michael Jordaan said: ‘We relentlessly drive the message of innovation throughout the bank. This is not simply and an internal slogan; it is a primary way of working in the bank. We challenge new ideas and seek new ways of banking. Our key driver is to find ideas that are beneficial to our customers, will attract new customers and will enhance our overall business’.13 • Intermediaries. A well-trained sales force routinely asks intermediaries about customer needs that are not being met. Because they are closer to end users, intermediaries are often more aware of customer needs than "****** DEMO - www.ebook-converter.com*******"

manufacturers. Intermediaries such as wholesalers and retailers also handle the products of many other manufacturers and are, therefore, fully informed about the latest trends that may affect a product and its marketing. • Competitors. No firm relies solely on internallygenerated ideas for new products. A major part of any firm’s marketing intelligence system should concern itself with monitoring the performance of competitors’ products. One of the purposes of competitive monitoring is to determine which, if any, of the competitors’ products should be copied. Competitive monitoring may include tracking products bought by a firm’s own customers. For example, Ford Motor Company buys its competitors’ new car models as soon as they are released and strips them down to check for new ideas and innovations. • Research and development (R & D). R & D is carried out in four distinct ways. Basic research is scientific research with the purpose of discovering new technologies. Applied research takes these new technologies and attempts to find useful practical applications for them. Product development goes one step further by converting applications into marketable products. Product modification makes cosmetic or functional changes to existing products. Many newproduct breakthroughs come from R & D activities in the laboratories of commercial firms. • Consultants. Outside consultants are often available to examine a business and recommend product ideas. Traditionally, consultants determine whether a firm has "****** DEMO - www.ebook-converter.com*******"

a balanced portfolio of products and, if not, what newproduct ideas are needed to redress the imbalance. Sometimes new product ideas emanate from unexpected sources, such as suppliers or suggestions from members of the public. For instance, Bull Brand’s tinned pap and meat product, Zadza, was developed from an idea supplied by a vegetable farmer in the Malmesbury district.14

4.2 Creativity

LO5

Creativity is the wellspring of new-product ideas, regardless of who comes up with them. A variety of approaches and techniques have been developed to stimulate creative thinking. The following are some of the more popular and useful approaches for generating new-product ideas: •

•

Attribute listing. Using this technique, the important attributes of an existing product are listed. Thereafter, consideration is given to the possible modification of each attribute, with the objective of ending up with an improved product. The classic example is the screwdriver. The ordinary screwdriver and its attributes are subjected to such questions as: can it be enlarged? can it be made smaller? can electrical power be added to it? can different heads be attached to it? By addressing these attribute-related questions, ideas emerged that resulted in developing the electric power-driven screwdriver with different sizes and shapes of shanks. Forced relationships. This technique focuses on

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•

•

different objects that are used in the same environment. The food processor came about after various kitchen utensils such as those for cutting, shredding, mincing and mixing were combined into one appliance. Brainstorming. The object of brainstorming is to get a group of people to think of unlimited ways to vary a product or solve a problem. Group members avoid criticism of a proposed idea – no matter how ridiculous it may seem. Objective evaluation is postponed at first. The sheer quantity of ideas is what matters initially. Focus groups. An objective of focus-group interviews (see Chapter 5) is to stimulate insightful comments during group interaction. Focus groups usually comprise seven to ten people. Sometimes, consumer focus groups generate excellent new-product ideas. In the industrial market, machine tools, keyboard designs and aircraft interiors have evolved from focus-group suggestions.

Some innovative firms use modern technology to generate new-product ideas. The computer manufacturer Dell invites visitors to its website to suggest new product ideas using a blog where customers can submit stories and bookmark their favourite websites.15 The major objective in the idea-generation phase is to generate as many new product ideas as possible. The more ideas generated, the greater the probability of identifying a profitable idea.

>>Technology in action "****** DEMO - www.ebook-converter.com*******"

Co-creation: The future of product development? The Internet not only impacts on the way we communicate with one another, but also affects the way that business is done. It has allowed previously unfeasible business models to become commercially viable. For example, when developing new products, firms would typically start by identifying the needs of the market and then develop products, which customers would either embrace or reject. However, the Internet has allowed businesses to involve customers in new-product development in a process known as ‘co-creation’. This way, the customer is no longer a passive participant in the new-product development process, but ‘co-creates’ the product. For example, a motor cycle accessories shop based in Cape Town, Leather Forever (www.leatherforever.co.za), allows customers, through the firm’s website, to customise their kevlar (an extremely strong material) jeans ordered online. This value-adding service gives customers the option of going to the shop in Bellville and buying a standard pair of jeans, or entering their personal information and measurements on the website of Leather Forever and buying a customised pair of jeans. Nike followed a similar strategy by giving customers online tools to design their own trainers. Although many businesses have realised for some time the important implication that co-creating products has for the marketing of their business (i.e. it "****** DEMO - www.ebook-converter.com*******"

leads to improved relationships with customers, customer loyalty and positive word-of-mouth), it was only with the advent of enterprise social software that this movement gained momentum. This is because businesses realised that Internet-based social communities are a powerful source of innovation because they allow like-minded communities to share ideas and innovations for the common good. The operating system Linux (and the open source software movement) is a prime example of the power of consumer-led innovation. This ‘freewheeling’ approach to solving business problems and generating new ideas is not new to business. For example, Innocentive offers prizes to people who come up with solutions to problems in such areas as computer science, engineering and business. Similarly, Proctor & Gamble, a large multinational firm, realised that rather than keep the new-product development process internal, it could generate new product ideas more economically by collaborating with suppliers, competitors, scientists and entrepreneurs. In essence, Proctor & Gamble believed that, although it had a clear sense of its customers’ needs, leveraging outside expertise would allow the firm to generate new ideas for developing cheaper and better products. Social network forums are a means of identifying consumer needs, but also allow businesses to monitor and harvest ideas directly from their target market, which is feasible for any business, irrespective of its size. "****** DEMO - www.ebook-converter.com*******"

SOURCES: Prahalad, C.K. & Ramaswamy, V. 2000. Co-opting customer competence. Harvard Business Review, January 2000, pp. 79–87; Huston, L. & Sakkab, N. 2006. Connect and develop: Inside Procter & Gamble’s New Model for Innovation. Harvard Business Review, March 2006, pp. 58–66

4.3 Idea screening After new ideas have been generated, they pass through the first filter in the product development process. This stage, called idea screening, eliminates ideas that are inconsistent with the firm’s new-product strategy or are obviously inappropriate for some other reason.The new-product committee, the new-product department – or some other formally appointed group – performs the screening review. Most new-product ideas are rejected at the screening stage. Questions that need to be addressed even at this early stage are: • • • • • • • •

What is the consumer need that this product will satisfy? Will we be able to establish and sustain a competitive advantage? Will the product contribute to the realisation of the firm’s objectives? Is it our business? Do we have the resources to launch the product? Who and what will we be competing with? Are there any legal implications associated with the product? What are the profitability prospects?

For example, the branded goods firm Unilever had the idea "****** DEMO - www.ebook-converter.com*******"

of developing a weight-loss diet pill based on the hoodia plant, but dropped the idea at the idea-screening stage because of safety concerns.16

4.4 Concept development and testing At this stage, the firm must turn the remaining new-product ideas into a product concept and subject it to a more thorough evaluation. The product concept is what results when the idea is measured against consumer requirements. Typical questions that could be asked at this stage are: • • •

Who will use the product? What is the primary benefit of the product? When will the product be used?

Therefore, a product concept flows from combining unique product attributes and certain consumer needs and actions. Concept tests are often used to rate concept (or product) alternatives. A concept test evaluates a new-product idea, usually before any prototype has been created. Usually, researchers get consumer reactions to verbal descriptions and visual representations (e.g. pictures or computer images) of a proposed product. Besides consumer feedback, it is also advisable to solicit the views of intermediaries (such as retailers and the sales force) at this stage. Intermediaries not only have a thorough knowledge of the market and consumer needs, but will also advise on issues such as packaging and handling.

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>>Strategy A product under concept testing at the moment is cold (also called ambient) Nescafé in a can that needs to be shaken and, after a three-minute wait, the cold beverage can turns into a cup of hot coffee. A few samples of this intriguing new technology, a selfheating can of liquid, have filtered into South Africa from a product trial under way in the UK. The product is called ‘Nescafé Hot When You Want’. Each can contains an internal heat engine, which, when activated, heats the coffee in three minutes. It creates a 210 ml serving of Nescafé at a temperature of about 60°C. The heat engine is activated by pressing a button on the base of the can. Water then mixes with quicklime stored in the heat engine to create a reaction, which, in turn, heats the coffee. The can uses reinforced materials to protect user’s lips and fingers from scalding. The difficulty has been to make efficient, safe and cost-effective packaging. Nescafé’s UK commercial project manager, Graham White, says the commercial market for self-heating cans could be huge. If only 0,5 per cent of the hot drinks consumed in the UK were self-heating cans, sales could be 500 million cans a year. Nescafé claims the self-heating coffee tastes better than most coffee made at home, as it does not use boiling water.17 Concept tests are considered fairly good predictors of "****** DEMO - www.ebook-converter.com*******"

success for line extensions. They have also been relatively precise predictors of success for new products that are not copycat items, for products that are not easily classified into existing product categories and for products that do not require major changes in consumer behaviour. SAB’s testing of the concept of alcoholic fruit beverages before its introduction of the Brutal Fruit brand is an example. However, concept tests are often inaccurate in predicting the success of new products that create completely new consumption patterns and require major changes in consumer behaviour – such as microwave ovens, video cassette recorders and computers years ago. Smart phones and electronic books are more recent examples. Imagine that we have tested cold Nescafé coffee in a can on a group of coffee drinkers, and explained to them first that the canned coffee needed to be shaken in order to turn into a cup of hot coffee three minutes later. Imagine that they said that they liked the idea: would that make ‘Nescafé Hot When You Want’ a guaranteed success?

4.5 Business analysis New-product ideas that survive the initial screening process move to the business analysis stage, in which preliminary, but detailed, figures for demand, cost, sales and profitability are calculated. At this stage, for the first time, costs and revenues are estimated and compared. Depending on the nature of the product and the firm, this process may be simple or complex. The newness of the product, the size of the market and the nature of the competition all affect the "****** DEMO - www.ebook-converter.com*******"

accuracy of revenue projections.18 In an established market, such as carbonated soft drinks, industry estimates of the total market size are available. Forecasting market share for a new entry, such as Nescafé coffee in a can, however, is a bigger challenge. Analysing overall economic trends and their impact on estimated sales are especially important in product categories that are sensitive to fluctuations in the business cycle. If consumers view the economy as uncertain and risky, they will put off buying durable goods, such as major home appliances, motor vehicles and homes. Likewise, business buyers postpone major equipment purchases if they expect a recession. The following questions are commonly asked during the business analysis stage: • •

What is the likely demand for the product? What impact would the product have on total sales, profits, market share and return on investment? • How would the introduction of the product affect existing products? • Would the new product cannibalise existing products? • Would current customers benefit from the product? • Would the product enhance the image of the firm’s overall product mix? • Would the new product affect current employees in any way? • Would it lead to hiring more people or reducing the size of the workforce? • What new facilities, if any, would be needed? • How might competitors respond? "****** DEMO - www.ebook-converter.com*******"

• •

What is the risk of failure? Is the firm willing to take the risk?

Answering these and related questions may require studies of markets, competition, costs (and market prices) and technical capabilities. When Philips tested the DVDR 1000, which was expected to replace the VCR as we know it, it estimated that it would retail at almost R32 000 per unit. The questions Philips then had to answer were ‘what is the likely demand for the product?’ – and all the other typical business analysis stage questions listed above.

EXAMPLE To develop a new vaccine takes about 8–12 years and development costs are typically between $500 million and $800 million. A pharmaceutical firm developing such a vaccine must be sure it can recover its costs before it launches such a product.19 SAB invested R10 million to develop its malt-based nutritional supplement, Rhino Malta, and calculated that the product could be profitable at R3,00 for 250 ml and R9,00 for 1 litre. Potential demand was estimated at 250 000 hectolitres a year. SAB estimated that at that price and at that level of demand, it could proceed with the development of the new product. The pharmaceutical firm Eli Lilly, on the other hand, terminated development of its inhaled insulin for diabetes patients (used instead of injecting insulin) after the firm concluded that the ‘product’s commercial potential [was] not strong’.20 Boeing has similarly dropped plans to build the Boeing 787-3 after Japan Airlines and All Nippon Airways cancelled their orders and the firm decided that proceeding with the product would not be profitable.21 Products that are largely information technology-based have relatively little capital investment requirements (other than software development and hosting of the website). "****** DEMO - www.ebook-converter.com*******"

Consequently, new projects and innovative products are easily launched with minimal financial risk. For example, GoTryItOn (www.GoTryItOn.com) lets users upload digital snapshots of themselves in various outfits and indicate the particular occasion or event for which the outfit is intended. In so doing, users are able to solicit the views of visitors to the website on the appropriateness of the clothing, but before visitors can venture an opinion, they need to ask the wearer where the items making up the outfit can be purchased. To summarise, at the end of the business analysis stage, management should have a good understanding of the product’s market potential. This full understanding is important because costs increase dramatically once a product idea enters the development stage.

4.6 The development stage In the early stage of development, the R & D department or engineering department may develop a prototype of the product. During this stage, the firm should start compiling a preliminary marketing strategy. The marketing department should decide on the product’s packaging, branding, labelling, and so forth. In addition, it should map out preliminary marketing communication, price and distribution strategies. The technical feasibility of manufacturing the product at an acceptable cost should also be thoroughly examined. It is also advisable to assess consumer feedback on a prototype, if available. The development stage can last a long time. "****** DEMO - www.ebook-converter.com*******"

Consequently, it can be very expensive. Bull Brand’s Zadza brand (tinned pap and mealies) took six years to move from an idea to a product on the shelves. Crest toothpaste was in the development stage for ten years. It took 18 years to develop Minute Rice, 15 years to develop the Xerox photocopy machine and 55 years to develop television.22 The development process works best when all the involved areas (R&D, marketing, engineering, production and even suppliers) work together rather than sequentially, a process called simultaneous product development (discussed later in this chapter). Laboratory tests are often conducted on prototype models during the development stage (see the photograph below, which shows the testing of Barbie dolls under water). User safety is an important aspect of laboratory testing, which actually subjects products to much more severe treatment than is expected by end users. At this stage some potentially new products may be abandoned. A company that tested a vaccine for tuberculosis (TB) had to discontinue its efforts after trial tests involving 2 800 babies showed that ‘… it made no real difference to their chances of getting infected with TB’.23 Many products that test well in the laboratory are also tried out in homes or businesses. Examples of product categories well suited for testing include human and pet food products, household cleaning products, medicines and industrial chemicals and supplies. These products are all relatively inexpensive, and their performance characteristics are apparent to users. Most products require some refinement on the basis of the results of laboratory and use tests. A second stage of development often takes place "****** DEMO - www.ebook-converter.com*******"

before test marketing commences.

4.7 Test marketing

LO6

After products and marketing strategies have been developed, products are usually tested in the ‘real world’ – the marketplace. Test marketing is the limited introduction of a product and a marketing strategy to assess the reactions of potential customers in a market situation. Test marketing allows management to evaluate alternative strategies and assess how well the various aspects of the marketing mix fit together. The cities chosen as test sites should reflect market conditions in the new product’s projected market area. However, no ‘magic city’ exists that can universally represent market conditions, and a product’s success in one city doesn’t guarantee that it will be a nationwide hit. When selecting test market cities, researchers should, therefore, "****** DEMO - www.ebook-converter.com*******"

find locations where the demographics and purchasing habits mirror the overall market.

EXAMPLE >> In South Africa, the Johannesburg-Pretoria area and Cape Town are often used as test marketing cities. When Woolworths tested the concept of an in-store pharmacy, the retailer chose its Kloof Street branch in Cape Town and its Athol Square branch in Johannesburg for the tests. When Virgin Active opened its first ‘Classic’ health club as an experiment, it used Melrose Arch in Johannesburg as a ‘test case’. The upmarket club, which offers more features than other Virgin Active clubs, restricts membership numbers and the fees are higher. If the Melrose ‘Classic’ club is successful, Virgin Active would roll it out in the rest of South Africa and even globally.

READER 46 >> Philips tests a device that could prevent heart attacks Although it may not make the headline news very often, heart failure is a serious, chronic disease that affects more than 22 million people worldwide. And the prognosis is frightening: nearly half of all heart failure patients die within four years. One reason is common, and sometimes fatal – a complication called decompensation. But new techniques from Philips Research may help find a way to predict decompensation before it reaches a critical level. Decompensation causes a person’s body and lungs to fill with excess fluid, sometimes so severely that they can hardly move or breathe. It often results in long hospital stays for recovery. And although many heart failure patients use home telemonitoring systems which transmit patient-recorded health measurements to healthcare providers for review, the current systems cannot yet predict a potential decompensation event. This is unfortunate because decompensation, if caught early enough, can be treated with medication instead of hospitalisation. "****** DEMO - www.ebook-converter.com*******"

‘Heart failure patients often experience a gradual deterioration in health status over weeks before ultimately requiring hospitalisation’, notes Sarwat Chaudhry, professor of medicine at Yale University in the United States. ‘A system of frequent monitoring may help clinicians to intervene early and thereby avoid the need for hospitalisation.’ New techniques developed by Philips Research help resolve this issue by predicting decompensation days in advance through home telemonitoring systems, such as Philips Healthcare’s Motiva and TeleHealth. Using highly sensitive textile sensors, patients would be able to measure their breathing patterns, body movement and even electrocardiogram (ECG or EKG) readings at home. Currently, the new techniques are being refined in an observational telemonitoring study with six European university clinics. Results are expected in mid-2010, so it may be a few years before the technology is widely available, but the potential of an early decompensation warning will be worth the wait. SOURCE: www.research.philips.com/newscenter/topics/20100316-myheart.html (Accessed 23 July 2010)

When choosing a test market, many criteria need to be considered, especially the following: • • • • • • • • •

Similarity to planned distribution outlets Relative isolation from other cities Availability of advertising media that will co-operate Diversified cross-section of ages, religions, culturalsocietal preferences, etc. No atypical purchasing habits Representative population size Typical per capita income Good record as a test city, but not overused Not easily ‘jammed’ by competitors

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• • • • •

Stability of year-round sales No dominant television or radio station; presence of several newspapers, magazines and radio stations Availability of retailers that will co-operate Availability of research and audit services Freedom from unusual influences, such as one industry’s dominance, or heavy tourism.

In the online world, marketers can evaluate various product offerings by conducting online marketing experiments. For example, if three different products are under consideration, the firm’s server can randomly present different visitors with these different offerings, then gauge their reactions to the products by tracking the visitors’ click stream. The objective is to be able to draw definitive cause-and-effect insights to determine the potential performance of a new product. These insights become more valuable through careful planning, control and measurement throughout the testing process.

4.7.1 The high costs of test marketing In the United States test marketing normally covers 1–3 per cent of the country and typically takes about 12 to 18 months.24 Some products remain in test markets even longer. McDonald’s spent 12 years developing and testing salads before introducing them. Despite the cost, many firms believe it is a lot better to fail in a test market than in a national introduction. Because test marketing is so expensive, some firms do not test line extensions of well-known brands. For example, "****** DEMO - www.ebook-converter.com*******"

because the Folger’s brand of coffee is so well known in the United States, Procter & Gamble faced little risk introducing its instant decaffeinated version nationally. Consolidated Foods Kitchen of Sara Lee followed the same approach with its frozen croissants. Products that are frequently revised are usually not test marketed. For example, personal computer manufacturers did not test market new processors before introducing them. Many software firms and manufacturers of electronic devices such as cell phones are simply introduced without any test marketing because they were so similar to their predecessors. When Namibian Breweries introduced Amstel Lite there was no need to test market. They knew there was adequate demand for ‘lite’ beers in South Africa and they have enough knowledge and experience of the beer market to proceed without test marketing data. Marketing experience with earlier versions provides the information that would have been collected during a test-marketing exercise. The high cost of test marketing is not only purely financial. One unavoidable problem is that test marketing exposes the new product and its marketing mix to competitors before its introduction. So the element of surprise is lost. The risk with no or very limited test marketing is that potential problems may go undetected. The signal reception problems experienced with Apple’s iPhone4 are, for instance, attributed to inadequate product testing before its launch. Competitors can also sabotage or ‘jam’ a testing programme by introducing their own sales promotion, "****** DEMO - www.ebook-converter.com*******"

pricing or advertising campaign. The purpose is to hide or distort the normal conditions that the testing firm might expect in the market. When PepsiCo tested its Mountain Dew sports drink in the United States, Quaker Oats counterattacked furiously with coupons and advertising for its cooldrink, Gatorade, which seriously compromised the validity of PepsiCo’s test marketing. The time that a product should be subjected to test marketing will vary from product to product and will largely depend on what the manufacturer wishes to achieve with the test marketing. In cases such as medicine, for instance, the type and duration of the testing are prescribed by a regulating body to ensure that certain minimum standards are met.

4.8 Commercialisation The final stage in the new-product development process is known as commercialisation – the decision to market a product. The decision to commercialise the product sets several tasks in motion: ordering production materials and equipment; starting production; building up inventories; shipping the product to field distribution points, such as wholesalers and retailers; training the sales force; announcing the new product to the retail trade; and advertising to potential customers. The time from the initial commercialisation decision to the product’s actual introduction varies. It can range from a few weeks for simple products that use existing equipment to several years for technical products that require "****** DEMO - www.ebook-converter.com*******"

customised manufacturing equipment. The total cost of development and initial introduction can be staggering. US firms spend more than $125 billion each year on research and development, manufacturing and marketing to introduce around 4 250 new brands.25 Gillette alone spent more than $200 million to develop and start manufacturing the Sensor razor, and another $110 million for first-year advertising. A product currently in the commercialisation phase is a new, self-cooling can recently launched in the UK. The ‘chiller’ uses a vacuum to chill beer instantly. The temperature of the drink drops 16,7°C in three minutes and stays cold for up to an hour. It works on the cooling power of evaporation. The beer is surrounded by a watery gel which drains off when the bottom of the can is twisted. The can bottom also contains an insulated heat-absorbing device. This makes the temperature of the beer drop and creates a vacuum which should keep it cold for an hour. The chiller will increase the price of a can of beer by two rand.26

5. Why some new products succeed and others fail

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Associations, trade publications, consultants and statistical bureaus estimate that the new-product failure rate in the United States is in the range of 80 to 90 per cent and costs more than $100 billion each year. Many products fail simply because their manufacturers lack a well-developed "****** DEMO - www.ebook-converter.com*******"

marketing strategy. Moreover, they do not realise the importance of creating a product to meet the consumer’s need (referred to as a ‘consumer orientation’ in Chapter 1), and instead produce ‘what we know best’ (referred to as a ‘product orientation’ in Chapter 1). Failure can be a matter of degree. Absolute failure occurs when a firm cannot recoup its development, marketing and production costs. In other words, the product actually causes the firm to lose money. A relative product failure results when the product returns a profit but does not meet its profit or market share objectives. Relative failures can sometimes be repositioned or improved to become a viable part of a product line. For instance, SAB at one stage considered removing Hansa Pilsener from the product line. But SAB succeeded in increasing its market share from 0,7 per cent in the mid-1990s to 12,9 per cent in 1998, to about 15 per cent in 2003. Four years later, Hansa is SAB’s thirdlargest brand after Black Label and Castle. The premature removal of Hansa would have been a costly mistake! Avusa, the publisher of the Sowetan, wanted to close the newspaper when sales fell below 100 000 newspapers per day after posting sales of more than 250 000 at one stage. Repositioning the newspaper has led to a recovery of sales.27 Despite the high cost and other risks of developing and testing new products, many firms continue to develop and introduce new products. Some new products succeed and some fail. The most important factor in successful newproduct introduction is a good match between the product and market needs – as the marketing concept would predict. The most important factor in product failures is a poor "****** DEMO - www.ebook-converter.com*******"

match between product characteristics and customer needs. New products that fail to offer unique, superior value are often ignored in the market. Other reasons why products fail include overestimation of market size and demand, incorrect positioning, a price that is too high or too low, strong competition, poor planning, slow introduction to the market, inadequate distribution, poor advertising or simply the fact that it is an inferior product compared with those of competitors. Successful new products offer a meaningful and perceptible benefit to a sizeable number of people or firms, and are different in some meaningful way from their intended substitutes. Firms that are successful in new-product introductions tend to share the following characteristics: • • • • • •

A history of carefully listening to customers An obsession with producing the best product possible A vision of what the market will be like in the future Strong leadership A commitment to new-product development A team approach to new-product development.

6. Organising for new-product development

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To cultivate a steady stream of new products in a methodical fashion, an organised structure is essential. Yet in many firms, top managers tend to receive new-product ideas "****** DEMO - www.ebook-converter.com*******"

passively instead of actively soliciting them. Moreover, managers often poorly process the ideas they do receive, and luck determines whether or not these ideas are fully considered. One of the most important requirements for generating new-product ideas and successfully introducing new products is support from top management. In addition, several kinds of groups or structures within a firm can facilitate the development of new products. These include new-product committees and departments, venture teams and ‘intrapreneurs’, and simultaneous product development.

6.1 New-product committees and departments A new-product committee is an ad hoc group of employees whose members manage the new-product development process. The members usually represent functional interests, such as manufacturing, research and development, finance and marketing. Many firms use newproduct committees to screen ideas. A variation on a new-product committee is a newproduct department, which performs the same functions as a new-product committee, but on a full-time basis. Newproduct departments typically recommend new-product objectives and programmes, plan exploratory studies, evaluate concepts and ideas for new products, co-ordinate testing and direct interdepartmental teams. People in the product-development department should ideally communicate regularly with their peers in other functional "****** DEMO - www.ebook-converter.com*******"

departments such as manufacturing, research and development, finance and marketing. Setting up a formal department helps ensure that authority and responsibilities are well-defined and delegated to specific individuals. A separate department with the authority to develop new products can be freed from the undue influence of production, marketing and other groups. A separate department also has the authority to accomplish its tasks. Therefore, the new-product development manager can rely less on people outside his or her sphere of influence to get things done. WEBSITE Visit the Product Development and Management Association’s site at www.pdma.org. What innovations are happening today in new-product development? Which firms are the key innovators?

6.2 Venture teams and ‘intrapreneurs’ A venture team is a market-orientated group staffed by a small number of representatives from different disciplines. Team members from marketing, research and development, finance and other areas focus on a single objective: planning the firm’s profitable entry into new markets with new products. Venture teams are most often used to handle important business and product tasks that do not fit neatly into the existing structure of the firm. They demand more financial resources and longer times to mature than other organisational units can provide, and require creativity that "****** DEMO - www.ebook-converter.com*******"

is neither sheltered nor inhibited by the larger firm. Unlike new-product committees, venture teams require a full-time commitment. In contrast to new-product departments, venture teams form and disband as needed instead of being stable departments within the overall organisational structure. The term ‘intrapreneur’ refers to an entrepreneur working inside a large firm. Many firms eager to foster innovation among employees even have intrapreneurship programmes, and some universities offer ‘corporate entrepreneurship’ courses to develop those skills.

6.3 Simultaneous product development The earlier a product is brought to market, the greater the chance that it will be profitable. Delays inevitably lead to lost sales. Xerox learnt that lesson the hard way: its executives were stunned to discover that Japanese competitors were developing new copier models twice as fast as Xerox and at half the cost. Many US firms, including the ‘big three’ car makers (General Motors, Ford and Chrysler) are trying to find new ways to shorten their development cycles and be the first to market new products such as Hybrids. As a result, a new team-orientated approach to new-product development, called simultaneous product development, emerged. This approach enables firms to shorten the development process and reduce its cost. With simultaneous product development, all relevant functional areas and outside suppliers participate in all stages of the development process. Group members, whom General "****** DEMO - www.ebook-converter.com*******"

Electric calls ‘one coffee pot’ product development teams, perform development tasks together. In this way they avoid, for example, the need for designers to make changes when engineers or manufacturers are unable to meet design specifications.28 Involving key suppliers early in the process enables them to design and develop critical component parts. The Toyota Prius is a good example of a successful hybrid car, but the development process has already taken 20 years.

7. The product life cycle

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The product life cycle concept provides a means to trace the stages of a product’s market acceptance and growth from its introduction (birth) to its decline (death). As Figure 9.3 shows, a product typically progresses through four major stages: introduction, growth, maturity and decline. During these stages many variables change, including consumer needs, the marketing mix and strategies, sales, profitability and competitive activity. Note that the product life cycle illustrated in Figure 9.3 does not refer to any one brand: it refers to the life cycle for a product category, or product class. A product category includes all brands that satisfy a particular type of need. Product categories include, for example, passenger cars, cigarettes, soft drinks and coffee. Figure 9.3 illustrates the typical life cycle of a consumer durable product, such as a washing machine or dryer. The time a product spends in any one stage of the life cycle may vary dramatically. Some products, such as fad items (remember the Tamagotchi toy?), move through the "****** DEMO - www.ebook-converter.com*******"

entire cycle in weeks. Others, such as washing machines and dryers, stay in the maturity stage for decades. For instance, woman’s magazines have been in the maturity phase for more than 50 years. WEBSITE To see Toyota’s Fuel Cell Sedan in motion please go to this YouTube link: http://www.youtube.com/watch? v=98CidXDLuH8 or read more on http://www.toyota.com/fuelcell/

Changes in a product and its uses, image or positioning may extend a product’s life cycle (see Chapter 7). The product life cycle of motor vehicles and soft drinks, for instance, has been extended over many years thanks to marketing actions such as introducing new flavours and new models. The product life cycle concept does not tell managers the length of a product’s life cycle or its duration in any stage. Nor does it dictate marketing strategy. It is simply a tool to help marketers forecast future events and suggest appropriate strategies given a certain set of circumstances prevailing at the time. It is important to realise that the extent to which a product is differentiated (i.e. has a competitive advantage) will, to a large degree, determine the length of the entire product life cycle (as well as its individual stages) and the strategies that are appropriate during the different stages. Products or brands with a sustainable competitive advantage remain in the growth and maturity stages for very long periods of time. Coca-Cola is a classic example of a firm that has succeeded in extending the profitable growth and "****** DEMO - www.ebook-converter.com*******"

maturity phases of its product’s life cycle.

7.1 Stages of the product life cycle 7.1.1 Introductory stage The introductory stage of the product life cycle represents the full-scale launch of a new product. Book-sized portable cinemas; time-release skin patch medicines; 3D printing, voice over Internet protocol (VoIP); solar energy (see Reader 47 ‘The power of little suns’), ‘electronic’ cigarettes – these are all product categories that have recently entered the product life cycle. WEBSITE In what stage of the product life cycle is the Mini? How is the Mini marketed and positioned? Who is the target market? Visit www.mini.co.uk.

Sales are slow during this stage (and losses heavy), as consumers are often reluctant to change their old buying and consumption habits. It is estimated that only 20 per cent of consumers are prepared to try new products. Often production and distribution problems are experienced. In the early phases of the introduction stage, profits are negative because of slow sales and high costs (such as production and advertising costs), but normally no direct competition is experienced (if it is a genuinely ‘new-to-the world’ product). Marketing costs in the introductory stage are normally high for several reasons. High retailer margins "****** DEMO - www.ebook-converter.com*******"

are often needed to obtain adequate distribution at retail level and incentives (such as coupons and samples) are needed to get consumers to try the new product. When the health product Spirulina was first placed on the market, customers were offered a R5 discount to try the new product. Advertising expenses are high because of the need to educate consumers about the new product’s benefits and how to use it (see the Nashua advertisement). Production costs are also often high in this stage, as product and manufacturing flaws are identified and corrected, and efforts are undertaken to develop mass-production economies.

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READER 47 >> The power of little suns Frederik Ottesen has a plan to light up Africa with the sun. Ottesen is the founder of Little Sun, a company which produces solar lamps called ‘Little Sun’. The lamps, which were designed and developed by Ottesen, a mechanical engineer, and Danish artist Olafur Eliasson, use cutting edge technology to provide an evening of light with just five hours of solar charging. The product was initially developed for the Ethiopian market but Ottesen is now taking it global, with a specific focus on people who are not connected to "****** DEMO - www.ebook-converter.com*******"

the power grid. ‘There are 1,6bn people with no access to electricity, and a further 1bn with limited or unreliable electricity. Few companies address this problem. Power companies and governments talk about megawatts but a lot of the customers we are talking to are happy if they can charge their cellphone, get reliable light or power a small radio or television. Their demand is much closer to 10W. Can we deliver 10W at a good price? Yes, in the future we will be able to do so. Right now we can deliver a reliable half watt with this product.’ Little Sun is working on proving itself to the market as a dependable and inexpensive energy provider. The intention is later to offer additional inexpensive power sources. SOURCE: Gebbhart, M. 2013. The power of little suns, Financial Mail, May 31 – Jun 5, pp. 29

As Figure 9.3 illustrates, sales normally increase slowly during the introductory stage of the product life cycle. Profits are usually negative because of high non-marketing costs, such as research and development costs, testmarketing costs, new factory tooling and high introduction costs. The length of the introductory stage is largely determined by the product’s characteristics, such as its competitive advantages over substitute products; the benefits of the product and how these are communicated; the educational effort required to make the product known; and management’s commitment of resources to the new product.

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Figure 9.3 The four stages of the product life cycle

7.1.2 Growth stage If a product category survives the introductory stage, it advances to the growth stage of the product life cycle. Solar energy is in the early growth phase of the product life cycle. It can now ‘stand on its own two feet without government subsidies’ as it can compete on price alone.29 In the growth stage, sales usually grow at an increasing rate, and modest profits in the early phases grow significantly towards the end of this stage despite many new competitors entering the market. This is so because the benefits of economies of scale begin to kick in and advertising expenditure per product sold starts to decline. Often the competitors who enter the market offer only ‘copycat’ products that are not significantly differentiated. Similarly, the Internet search engine business has been in the growth phase for a number of years, allowing high profits for businesses such as Google. The good financial returns in this market have attracted a number of new entrants, such as Zhift.com, Instafound.com and Inkmesh.com, which offer new and original ways of finding information on the World Wide Web.

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WEBSITE Consider how companies can use SMM (Social Media Monitoring) to track their competitors: http://socialmediamonitors.co.za/ http://www.zasocialmedia.com/socialmedia-tools/ (for a list of social media tools to use)

During this stage of the product life cycle, the advertising emphasis switches from promoting primary demand (for example, promoting BlueRay DVD players and HD PVRs in general) to aggressive brand advertising and communicating the differences between brands (for example, promoting Sony versus Panasonic and Samsung). Initially prices are stable, but may start to decline slightly towards the end of the stage if competition intensifies. Towards the end of the growth stage the rate of industry sales growth starts to decline as the market begins to reach saturation. The cellphone industry in South Africa is reaching the end of the growth phase, as demonstrated by Cell C’s inability to grow its market share. Similarly, the micro-lending industry in South Africa initially grew rapidly and incumbent firms were rewarded with huge profits. The returns in this sector attracted the attention of some of the major banks (such as Absa and Nedbank), and consequently profits margins have fallen as the industry approaches maturity. The surf-ski is another good example of a product category in the growth phase of the product life cycle. (A surf-ski is similar to a canoe or kayak, but the paddler sits on top of the boat rather than inside it, allowing the paddler to "****** DEMO - www.ebook-converter.com*******"

remount when in deep water.) The surf-ski industry is driven largely by the consumer trend towards a healthier lifestyle, and a number of manufacturers in South Africa – such as Fenn Kayaks, Red 7 and Epic – have been able to generate good financial returns. This growth has resulted in a number of new entrants to the surf-ski market, such as The Kayak Centre, Knysna Racing Kayaks and Nelo. These manufacturers all produce traditional canoes as well, which are used in rivers as opposed to the surf-ski which is used primarily to surf the wind-generated waves in the ocean. However, the canoe industry is approaching the maturity stage of its life cycle and consequently has limited growth opportunities for the incumbent manufacturers.

7.1.3 Maturity stage A period during which sales increase at a slowing rate signals the beginning of the maturity stage of the product life cycle. During this period industry sales bottom out because new users cannot be added indefinitely, and sooner or later the market approaches saturation. Normally, this is the longest stage of the product life cycle. Many ‘copycat’ competitors begin to drop out of the market as competitive activity often leads to price wars – mainly because many firms’ competitive advantage has been eroded. Many common household appliances are in the maturity stage of their life cycles. In the United States, for example, more than half of the purchases of washers, dryers and refrigerators are replacements for worn-out products rather than purchases by new users. Microwave ovens, personal computers and coffee – and Barbie – are examples of other products in the "****** DEMO - www.ebook-converter.com*******"

maturity stage. The maturity stage can be subdivided into three phases: growth maturity, stable maturity and decaying maturity.30 During growth maturity the rate of sales growth declines and there are no new channels of distribution that can be used to expand market coverage. In South Africa the cellphone industry is now in its early stage of maturity – growth maturity. Only a few laggards now enter the market (e.g. those consumers who finally buy a cellphone). During the stable maturity phase, the market is now completely saturated (represented by the top of the curve in Figure 9.3, which is almost horizontal). Most consumers who want the product have bought it by this stage, and sales are now mainly of a replacement nature (replacing an old TV, for example) or driven by population growth. During the decaying maturity phase, absolute sales start to decline as people increasingly start to switch to other products and substitutes. Switching from the use of fax machines to using e-mail is an example, as is the switch from floppy disks to stiffy disks to flash disks to the ‘cloud’ storage of data.

7.1.4 Decline stage Most products and brands eventually decline – some slowly, others more quickly. A long-run drop in sales signals the beginning of the decline stage as more and more consumers switch to new, innovative products. Increasing competition from new communication technology, such as SMS and email, has pushed postage stamps into the decline stage of their product life cycle. The rate of decline is governed by how rapidly consumer tastes and usage patterns change or "****** DEMO - www.ebook-converter.com*******"

substitute products are adopted. Only the strongest brands now survive (appealing to the most loyal customers), with most competitors dropping out of the market as new, innovative products enter the market. Many convenience products and fad items, like citizen band (CB) radios and certain fashion items, lose their market overnight, leaving large inventories of unsold items. Others die more slowly, such as black-and-white console televisions, pianos and non-electronic watches. The rate of decline is influenced by technological advances, shifts in consumer tastes and increased competition, both domestic and foreign. All these factors lead to over-capacity in an industry, which again results in price cutting and profit erosion.31 Technological developments have meant almost instant death for products such as the electric typewriter, old-fashioned shop cash registers, film-based cameras, cassette tapes and vinyl records. New PVR technology is doing the same to DVD players. Changes in consumer tastes may have forced butter into the decline stage of its product life cycle, and changes in consumer values have forced fur clothing into the decline stage of its product life cycle. Similarly, there is a backlash against the environmental costs of bottling water and this may well force this product into the decline stage of its product life cycle in years to come.

8. Strategies during the product life cycle "****** DEMO - www.ebook-converter.com*******"

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The value of the product life cycle lies in its ability to suggest (not prescribe) appropriate marketing strategies for each stage in the cycle. The product life cycle concept encourages marketing managers to plan so that they can take the initiative as various products move through the product life cycle, instead of reacting to past events that influenced the product. The product life cycle is especially useful as a forecasting tool. Because products pass through fairly distinct stages, it is often possible to estimate their location on the curve using historical data. Profits, like sales, tend to follow a predictable path over a product’s life cycle. A product’s movement through the different stages can help the marketing manager plan different strategies, given the prevailing competitive situation.

8.1 Strategies during the introductory stage During the introductory stage, the marketer of a genuinely innovative, new product experiences a monopoly market situation. The near absence of direct competition implies a fair amount of price discretion. The objective during this stage is to encourage trial – that is persuading consumers to try the new product. Price and advertising are particularly useful strategies during the introductory stage.32 The advertising focuses on the advantages and benefits of the new product and its need-satisfaction properties. See, for example, the SASKO advertisement where the new SASKOplus+ range is introduced, and the fact that the new bread is ‘soft, delicious and lighter’ is emphasised. By combining price and "****** DEMO - www.ebook-converter.com*******"

advertising, marketing managers can consider four different strategy options: •

A rapid-skimming strategy is a strategy option to launch the product at a high price, but supported by high levels of advertising expenditure. The objective is to recover research and development (R & D) costs as soon as possible and for the product to become profitable as soon as possible. (‘Skimming off’ as much profit as possible as quickly as possible is, therefore, the objective.) High levels of advertising expenditure are required to convince the market of the benefits of the product (accelerate market penetration) and its value despite the relatively high price. A rapid-skimming strategy works well under the following circumstances: the potential market is largely unaware of the product; those who become aware can afford the price and are likely to purchase it; and competitive entry is imminent and the establishment of a brand preference is essential. When Vodacom first launched its cellphones it made use of a rapid-skimming strategy. Neptune Pine, a company that introduced a ‘smart’ wrist watch that has all the functionality of a smart phone and that allows users to make and receive calls, shoot videos, take photos, check emails, browse the web and listen to music will cost more than R4 000 each should it follow a price-skimming strategy.33 When GlaxoSmithKline introduced its cervical cancer vaccine the price was described as ‘hefty’ – R2 100 for three injections. But given the cost of developing new vaccines, the firm had to recover its development cost a s soon as possible.34

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•

A slow-skimming strategy is employed to launch the new product at a high price, but with limited advertising expenditure. The purpose of the high price is to recover R & D costs as soon as possible and making the product profitable as soon as possible, but advertising expenditure is limited to contain costs. A slow-skimming strategy works well when the market is relatively small and well-aware of the product, consumers are willing to

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•

•

pay the relatively high price and are likely to purchase it and the chances of competitive entry are not particularly high. Prestigious property developments (often sold off plan), such as those at Steyn City or golf estates, are suitable for using this strategy. A rapid-penetration strategy involves a low launch price accompanied by heavy advertising. The objective of this strategy is to quickly penetrate the market and to establish a dominant market share. Short-term cash flow and profitability are thus not immediate concerns. A rapid-penetration strategy is likely to be successful in a large market that is unaware of the product, when potential buyers are price-sensitive, when there is strong potential competition and when the firm is likely to benefit from economies of scale implications. Auto & General employed a rapid-penetration strategy when it introduced selling car insurance over the phone by keeping its rates well below those of more traditional insurance firms. A slow-penetration strategy involves a low price level accompanied by a low level of advertising expenditure. The low price attempts to encourage market acceptance, whereas the low advertising expenditure is likely to keep costs down and profits up. A slow-penetration strategy is used when marketers believe that the market is very price-sensitive, but not sensitive to advertising. It works well in a large market that is well aware of the product and when some competition is present. Producers of ordinary consumer products, such as processed meat, milk and margarine, use this strategy.

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The way in which the marketers of new products communicate the benefits of their products will determine, to a large extent, the success of products during the introductory stage of the product life cycle. Marketers of voice-over-Internet protocol (VoIP), for instance, will have to point out that VoIP is more cost-effective than traditional voice and fax services because it reduces line rental and servicing costs. They will also have to point out benefits such as the fact that long-distance call costs are reduced because these calls bypass the public-switched telephone network.35 During the introductory stage, distribution is normally selective – only the retailers that will provide the product with adequate support are allowed to carry the product. Advertising, on the other hand, is primarily aimed at building primary demand (see the B Cure advertisement on the right).

8.2 Strategies during the growth stage During the growth stage, the market conditions can turn to monopolistic competition or an oligopoly as a few direct competitors enter the market. The objectives are to get those who tried the product first to repurchase and to attract new buyers. During the initial phases of the growth phase, early market entrants ‘cash in’ as sales and profits grow. Towards the end of this stage, many competitors are drawn in. To ward off competition, the following strategies may be considered: "****** DEMO - www.ebook-converter.com*******"

•

•

•

•

•

•

Slightly lowering prices to raise the barriers to entry for potential new competitors. It will be interesting to see what Telkom does with its pricing when it faces competition from other suppliers of fixed-line telephone services in the future. The same applies to Vodacom, MTN and Cell C when Telkom enters the mobile phone market. Improvements to the product’s quality by adding new features or new styles. Cellphone, laptop computer and tablet manufacturers are constantly trying to make their products smaller, lighter and increasingly multifunctional. Change package sizes. Many personal-care products, such as shampoos, are also marketed in small travel sizes. Many grocery products, such as soups – Royco, for example – are available in single-serving sizes. Product line extensions. This strategy was used by Nike when it started marketing Nike sports glasses and Nike watches. Cadac no longer markets only gas; you can now also buy Cadac tents and sleeping bags. Selectively expand the distribution network. Some of the products that Verimark markets by direct marketing are also available in its retail outlets. Shift the advertising objective from product awareness to brand insistence. Assuming that all potential consumers are now aware of the product or brand, the emphasis of advertising now shifts to encouraging consumers to insist on a specific brand and to stay loyal to it.

During the growth phase, distribution is still largely "****** DEMO - www.ebook-converter.com*******"

selective, but is gradually expanded. Advertising is directed slowly away from building primary demand by emphasising the product’s competitive advantage. The pricing strategy can be described as ‘meet the competition’.

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The objective now is to find new users (new market segments) or new buyers for the product. The competitive situation is now pure competition, and many competitors concentrate on niche markets. Demand becomes elastic and consumer needs may begin to change, making product modifications a key strategy. It is important to realise, however, that products and brands in the maturity stage of the product life cycle do not necessarily slip directly into decline and then elimination. Several strategies are available to marketing managers to sustain, and even grow, sales of product categories or brands in the maturity stage of the product life cycle (some of these may already have been introduced during the late growth stage). Some of the strategies that can considered are: •

Promote more frequent use of the product by current customers. In the United States, The Florida Orange Growers’ Association successfully used this strategy in its ‘Orange Juice Is Not Just for Breakfast’ campaign. Overall juice consumption rose following TV advertisements which reminded consumers that orange juice is a healthy, refreshing beverage suitable for any time of the day. Because up to 75 per cent of diamond sales are for engagement rings, the South African diamond producer De Beers tries to encourage sales for occasions other than engagements, such as Christmas, wedding anniversaries (10th and 25th), birthdays (particularly the 16th birthday) and the birth of a child.36 Bata Toughees shoes, initially marketed as school shoes, have been repositioned as stylish shoes that can be worn at all "****** DEMO - www.ebook-converter.com*******"

times, not only for school. • Find new target markets for the product. Johnson’s baby shampoo was remarkably successful in adding mothers, sisters and, subsequently, fathers and brothers to the original target market of infants. The new theme (‘It’s mild enough to use every day’) was the only change in the product’s marketing strategy, yet this was enough to expand the target market’s size by several hundred per cent. Clicks have started to use cell phone health care vouchers that can be redeemed at its pharmacies in attempt to reach ‘low and middle income workers who have not patronised its business’ previously.37 • Find new uses for the product. After decades of level sales in the United States, Arm & Hammer baking soda was promoted as a refrigerator freshener, plumbingsystem cleaner, litter-bin freshener – and even a toothpaste. In South Africa, the marketers of Rooibos tea point out that Rooibos is not only a healthy beverage, but can also be used as a cure for insomnia and allergies, to treat colicky babies and as a flavouring agent in baking, cooking and even cocktails.38 Oxo spread is promoted as a product that can be used as a sandwich spread, in cooking and as a hot drink. • Price the product below the market to attract more price-sensitive buyers. Bic pens and Timex watches revolutionised their industries by offering pens and watches at prices below prevailing market prices at the time. Their competitors had not successfully introduced brands of acceptable quality at low prices. Introducing these two brands substantially changed the shape of the product life cycle for ballpoint pens and wristwatches. "****** DEMO - www.ebook-converter.com*******"

When Apple’s iPad entered the electronic book market in the United States the makers of the Kindle dropped its price from $259 to $189 – and their sales tripled. • Develop new distribution channels. For years, Woolite fabric cleaner was sold only in department stores. When American Home Products introduced the brand in supermarkets and grocery stores without changing the product, the price or the advertising appeal, sales tripled in the first year. Coca-Cola and Sasko have also developed creative strategies to deliver directly to the spaza shops found in the predominantly black townships. Service providers such as airlines and hotels have successfully utilised the Internet as a new channel of distribution. • Add new ingredients or eliminate old ingredients. The laundry detergent industry has relied on this strategy to extend the life cycles of brands, adding whiteners, brighteners, bleaches, scents and various other ingredients and attributes to products. The most recent arrival on the washing powder scene is the microgranular version of washing powder (Omo and Surf are popular examples). The marketers of toothpaste added fluoride and triclene. • Make a dramatic (new) guarantee. The marketers of Snowflake flour say it is ‘too fresh to flop’. • Improve quality or add new product features. Duracell batteries are now marketed with a power-testing facility on every battery. Nashua has turned what was only a photocopier into a multi-functional business machine that can also fax, scan, print and store records electronically. Some of Nashau’s business machines "****** DEMO - www.ebook-converter.com*******"

targeted at medical clinics not only store patient records electronically, but can also be programmed to remind patients via SMS to their cellphones to take their medicine. Motor vehicle manufacturers and software manufacturers, such as Microsoft, also regularly add new features to their products – compare the Toyota Corolla of the 1980s with today’s models, for example. SA Breweries has added ‘lite’ to its Castle brand. The artificial sweetener Canderel, initially marketed in tablet form alone, is now available in granular form in sachets. Backjoy has ‘re-invented’ the modest pillow by adding memory foam support and a patented layering system to ‘align head, neck and back to provide a perfect sleep’. • Reposition the product (see Chapter 7 for a detailed discussion). Arguably, the most successful repositioning of a product in the maturity phase of its life cycle was the Citi Golf. Launched in 1978 to replace the Beetle, the Citi Golf was never really positioned on price. Instead, VW developed a lifestyle brand. To keep the brand fresh, the Citi Golf underwent many minor design changes and facelifts, but the basic design remained the same. The red-yellow-blue concept conveyed the brand’s funloving nature and sustained it through the early 1980s. Initially, only 1,3-litre engines were used; then the 1,6 Sport and, two years later, 1,8-litre versions were added. In 1989, the Golf CTI was introduced. In the 1990s, the appeal of the Citi Golf was broadened to appeal to an older age group by emphasising values such as reliability and endurance. In 1995, the Citi Chico was added – the cheapest car in its class. Facing strong competition in 2003, the Citi Golf had new life breathed into it with a "****** DEMO - www.ebook-converter.com*******"

host of fresh innovations, including a new dashboard, doors and rear hatch, among other things. Although initially available only in red, yellow and blue, the Citi Golf became available in a variety of colours. The Citi Golf was then positioned on the proposition ‘Forever young’.39 (Volkswagen has subsequently decided to terminate the production of the Citi Golf). During the maturity stage, distribution is extensive and almost any retailer prepared to stock the product is allowed to do so. The advertising emphasis shifts to brand insistence and customer loyalty. Many of the strategies described above are in response to over-capacity in the industry brought on by intense competitive activity. The response is often to find niche markets (see Chapter 6) that can be profitably exploited. The (originally) odourless deodorant, Mitchum, is an example of a product targeted at a niche market. Other deodorants are mostly available in various scents. Price wars often occur during the maturity stage, or manufacturers enter into deals with retailers to market private brands.

8.4 Strategies during the decline stage The objective during the decline stage is to reduce marketing expenditure to the absolute minimum or to invest resources (such as advertising expenditure) re-establish the product’s market position. During the decline stage, many firms abandon their unprofitable products and shift their resources to the more profitable ones. This is an option that must be considered carefully, however, because some old "****** DEMO - www.ebook-converter.com*******"

products can and have been successfully revived. The example has already been cited of Hansa Pilsener, which was almost dropped from the South African Breweries product mix when it commanded only 0,7 per cent of the market. Hansa has now been able to improve its market share to about 15 per cent.

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© Kodak. Used with permission

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The position of some unprofitable products have to reconsidered when they contribute to the profitability of other products. A regional airline service may be unprofitable on its own, but because it feeds in passengers for the profitable national or international flights, it may be wise to retain it. Sometimes a weak product is retained because managers believe its prospects will improve if the economy improves, or because it is important for the firm, from an image point of view, to be seen as a ‘full line’ firm – of which MTN is an example. One disadvantage of retaining unprofitable products is that they often consume a disproportionate amount of resources in the form of management time and expensive inventory, or necessitate costly sales force attention, short (and thus expensive) production runs and expensive set-up times. Another disadvantage is that they may retard efforts to search for and introduce new products to take their place.40 When faced with a product unable to maintain or increase sales in a declining market, a marketing manager "****** DEMO - www.ebook-converter.com*******"

has three basic options: to hang in, to withdraw or to harvest. A decision to ‘hang in’ implies that management believes that the product’s prospects can be improved – for instance, by improved marketing. Marketing expenditure and effort is at least maintained – or additional resources may even be committed – to try to dominate the market. The second option is to withdraw completely by stopping all marketing and disposing of all assets. The third option is harvesting or ‘milking’. The ‘milking’ decision is taken when there are still pockets of demand that can be profitably exploited. Resources and marketing efforts are gradually and selectively withdrawn (up to a point) to cut costs and ensure profitability. Advertising, for instance, may be reduced to target only the most loyal customers, or even halted. Only selected regions or retailers may be supplied and no new-product development or R & D expenditure is undertaken. Pricing is sharply reduced to encourage demand but high enough to still generate profits. Although some people may think that black-and-white film is not used any more, the Kodak advertisement shows that black-and-white film is still used. Advertising, however, is targeted at professional photographers and serious hobbyists and will appear only in specialist photography magazines such as Camera and Image. Another product which is in the decline stage of the product life cycle is safety razor blades. Nevertheless, they are still popular among consumers who do not have access to running water. They are preferred by this market segment because twin blades clog up if not rinsed regularly – a problem not encountered when using single safety blades. "****** DEMO - www.ebook-converter.com*******"

In fact, the old-fashioned Minora safety razor blades still constitute about a third of the blades sold by Shoprite Checkers.41 Product modification is a strategy that is often used by marketers as a product moves through the various stages of the product life cycle. The modifications can be classified as quality improvements, functional improvements (improving the features of a product by improving its reliability, durability or other important dimension) or style improvements (improving its appearance). Medco SA has made a functional improvement to its bottled water. It is now marketing ‘oxygen-enriched’ water (350 per cent more oxygen than other brands of water), which replaces oxygen that is lost owing to external factors, such as stress, poor diet, smoking or lack of exercise.42 South African Breweries, on the other hand, made an aesthetic modification when it replaced the old ‘dumpy’ bottle with a new-shaped ‘handi bottle’. SAB also make continuous aesthetic changes to both its bottles and its labelling (see ‘Spot the differences’). If a firm is unable to revive the prospects of a product or brand it may have no other choice than to withdraw it. After years of struggling to stay afloat, one of South Africa’s oldest magazines targeting the female market, Femina, has closed shop. The publisher Avusa stopped printing three magazines in 2010, namely Top Huis (an Afrikaans decor magazine), Pursuit (a fashion title) and Computing SA.43 In addition, the publisher closed down the weekend newspaper, The Weekender ‘due to financial difficulties’ – although some seem to suggest it was due to poor marketing. At the same time, the SABC terminated its "****** DEMO - www.ebook-converter.com*******"

international service, Sani, owing to the ‘failure to deliver on projected audiences in line with levels of investments’.44 Table 9.1 briefly summarises some typical marketing strategies used during each stage of the product life cycle.

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Table 9.1 Typical marketing strategies during the product life cycle

9. Evaluating the product life cycle concept There is no doubt that the product life cycle is an interesting and useful concept for marketers. It provides a good framework for product planning and anticipating changing market situations. When using the product life cycle concept, however, the following key points should be kept in mind:45 1

2

The stages of the life cycle, the time span of the entire life cycle and the shape of the cycle (e.g. flat, erratic or sharply inclined) vary by product category and by industry External factors, such as the economy, the rate of inflation and consumer lifestyles may have a major impact on the performance of a product and shorten or lengthen its life cycle

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3

4

5

An individual firm may do better or worse than ‘average’ for its industry at any stage in the product life cycle. Consequently, if the industry is in the growth stage of the life cycle this does not assure the success of every firm in the market, nor does an industry in the decline stage of the life cycle necessarily imply falling sales for every firm A firm may be able to manage the life cycle of a product category or industry, but on the other hand, it may be unable to extend it or reverse a decline. Effective marketing may attract a new market segment, find a new use for the product or generate increased channelmember support Some firms may engage in a self-fulfilling prophecy, whereby they predict that sales will decline and then ensure that this will occur by reducing or removing marketing support. With adequate support, these products might not fail.

10. The market acceptance of new products

LO11

Marketing and product managers have a better chance of guiding a product successfully through its life cycle if they understand how consumers become aware of and adopt new products. The product life cycle and the adoption process go hand-in-hand. A person who buys a new product that has never been on the market before (a ‘new-to-theworld product’) becomes an adopter – a consumer who was "****** DEMO - www.ebook-converter.com*******"

happy enough with his or her trial experience with a product to buy it regularly afterwards.

10.1 Diffusion of innovation An innovation is a product perceived as new by a potential adopter. It makes no difference whether the product is ‘newto-the-world’ or simply new to the individual. Diffusion is the process by which the adoption of an innovation spreads among consumers. Cellphones and tablets, for instance, were adopted very rapidly by South African consumers. Five categories of adopters participate in the diffusion process: •

Innovators: The first 2,5 per cent of all those who adopt the product. Innovators are eager to try new ideas and products, almost as an obsession. In addition to having higher incomes, they are typically more worldly and more active outside their community than noninnovators. They rely less on group norms and are more self-confident. Because they are well educated, they are more likely to get their information from scientific sources and experts. Innovators are characterised as being adventurous. They are the target market during the introductory stage of the product life cycle. Within days of its launch, thousands of people (innovators) had tried Hunter’s Dry, the new dry alternative to Hunter’s Gold, according to the manufacturer.46 Another example is Smirnoff Triple Spin: 57 800 cases were sold during the first week after its launch to innovators who wanted to try the new product.47

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Early adopters: The next 13,5 per cent to adopt the • product. Although early adopters are not the very first, they do adopt early in the product’s life cycle. Compared to innovators, they rely much more on group norms and values. They are also more orientated to the local community, in contrast to the innovator’s worldly outlook. Therefore, they are more reliant on personal sources of information, such as salespeople. Early adopters are more likely than innovators to be opinion leaders because of their closer affiliation with local groups. The respect of others is a dominant characteristic of early adopters. They are the target market during the early stage of the growth phase of the product life cycle. • Early majority: The next 34 per cent to adopt a new product. The early majority carefully weighs the pros and cons before adopting a new product. This group is likely to collect more information and evaluate more brands than early adopters. They rely on the group for information (often influenced by the mass media) but are unlikely to be opinion leaders themselves. Instead, they tend to be the friends, team mates, colleagues and neighbours of opinion leaders. The early majority is an important link in the process of diffusing new products, because they influence the late majority via word-ofmouth. A dominant characteristic of the early majority is planned deliberateness as opposed to the impulsiveness of earlier adopters. They are the target market during the later stages of the growth phase of the product life cycle. • Late majority: the next 34 per cent to adopt, the late majority adopts a new product because most of their "****** DEMO - www.ebook-converter.com*******"

•

friends have already adopted it. Because they also rely on group norms, their adoption stems from pressure to conform (peer pressure). This group tends to be older and below average in income and education. They depend mainly on word-of-mouth communication rather than on the mass media. The dominant characteristic of the late majority is skepticism. They are the target market during the late stage of the maturity phase of the product life cycle. Laggards: the final 16 per cent to adopt. Like innovators, laggards do not rely on group norms. Their independence is rooted in their ties to tradition. Therefore, the past heavily influences their decisions. By the time laggards adopt a new innovative product (late in the maturity phase), it has probably been outmoded and replaced by something else. For example, they may have bought their first cellphone when it was already widely diffused. Laggards have the longest adoption time and the lowest socio-economic status. They tend to be suspicious of new products and alienated from a rapidly advancing society. The dominant value of laggards is tradition. Marketers often ignore laggards, who do not seem to be influenced by advertising or personal selling.

Figure 9.4 shows the relationship between the adopter categories and stages of the product life cycle. Note that the various categories of adopters first buy products in different stages of the product life cycle. Almost all sales in the late maturity and decline stages represent repeat purchasing.

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10.1.1 Product characteristics and the rate of adoption (diffusion)

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Five product characteristics can be used to predict and explain the rate of acceptance and diffusion of a new product: •

Complexity: The degree of difficulty involved in understanding and using a new product. The more complex the product, the slower its diffusion. For instance, before many of their functions were automated, 35 mm cameras were used primarily by hobbyists and professionals. They were just too complex for most people to learn to use, which hampered the rate of adoption. Internet banking adoption among older consumers in particular is slow because of the perceived difficulty in using the service. Complexity thus reduces the rate of adoption. • Compatibility: The degree to which the new product is consistent with existing values and product knowledge, past experiences and current needs. Incompatible products diffuse more slowly than compatible products. For example, the introduction of contraceptives is incompatible in societies in which religious beliefs discourage the use of birth-control techniques. Software manufacturers such as Microsoft go to great lengths to ensure that new versions of products such as Microsoft Word are not only compatible with their own existing products, but also with the products of competitors, such as WordPerfect. Compatibility enhances the adoption of "****** DEMO - www.ebook-converter.com*******"

•

•

•

new products. Relative advantage: The degree to which a product is perceived as superior to existing substitutes. For example, because it reduces cooking time, the microwave oven has a clear relative advantage over a conventional oven and this advantage has enhanced the rate of adoption. Fax machines were a clear improvement over telex machines, and today e-mail has advantages over fax machines. New products with a clear usage advantage are adopted relatively quickly. Observability: The degree to which the benefits or other results of using the product can be observed by others and communicated to target customers. For instance, fashion items and motor vehicles are highly visible and more observable than personal-care items. This observability speeds up their rate of adoption. ‘Trialability’: The degree to which a product can be tried on a limited basis. It is much easier to try a new toothpaste or breakfast cereal than an overseas holiday or a haircut. Demonstrations in showrooms and test drives are different from in-home trial use. To accelerate the rate of adoption, marketers use free samples, tasting displays in shops, small package sizes and coupons. New products with visible ‘trialability’ are adopted far more quickly than those that cannot be tried before purchase.

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Figure 9.4 The relationship between the diffusion process and the product life cycle

10.1.2 The marketing implications of the adoption process Two types of communication can speed up the diffusion process: word-of-mouth communication among consumers (particularly involving those who have already tried the product) and communication from marketers to consumers. Word-of-mouth communication within and across groups (early adopters and potential adopters) speeds up diffusion. Opinion leaders discuss new products with their followers and with other opinion leaders. Marketers must, therefore, ensure that opinion leaders have the types of information desired in the media that they use (through advertising, for instance). Suppliers of some products, such as professional service providers (architects and attorneys) and healthcare services (medical doctors and dentists), rely almost solely on word-of-mouth communication for new business. The second type of communication aiding the diffusion process is communication directly from the marketer to potential adopters. Messages directed towards early adopters would normally use different appeals from messages directed at the early majority, the late majority "****** DEMO - www.ebook-converter.com*******"

and the laggards. Early adopters are more important than innovators because they make up a larger group, are more socially active and are usually opinion leaders. As the focus of a promotional campaign shifts from early adopters to the early majority and the late majority, marketers should study the dominant characteristics, buying behaviour and media characteristics of these target markets. They should then revise messages and media strategies to fit the target market. The diffusion model helps guide marketers in the development and implementation of their marketing communication strategy.

Apple shares show need for new products "****** DEMO - www.ebook-converter.com*******"

Apple’s roster of devices is hitting a sales ceiling, underscoring why it is crucial for CEO Tim Cook to deliver the company’s first new products since 2010 to revive growth. Apple projected that revenue in this period may fall from a year earlier, in what would be the first quarterly sales decline since 2003. Last year, Apple posted its first profit drop in more than a decade. The figures indicate that demand may be ebbing for Apple’s devices – which were once reliable growth engines – as competitors flood in with their own smartphones and tablets. Mr Cook said sales in North America were weaker than the company expected, partly because the less expensive iPhone 5c released last year was not as popular as the higher-end iPhone 5s. The stagnating growth is adding pressure for the firm to release new hit products, be it a wearable computer or a way for paying for things with an iPhone or a television. ‘What we have gotten over the last year or so is impressive products, but they are really enhancements of current products and not necessarily the next new thing,’ said Jack Ablin, chief investment officer with BMO Private Bank. Apple has not introduced an entirely new product since the iPad’s debut in 2010. The iPhone was released in 2007. Besides that, the company has been counting on updates to those existing product lines to fuel demand. SOURCE: Apple shares show need for new products, Business Day, 29 January 2014, p. 13 (sourced from Bloomberg).

QUESTIONS 1 2

Why is there a need for Apple to expand its product range? Why is Apple struggling to grow its sales?

KEY CONCEPTS Adopter: a consumer who was happy enough with his or her trial experience with a product to use it again. Attribute listing: a technique that considers all the major attributes of an existing product for modification, with the "****** DEMO - www.ebook-converter.com*******"

purpose of identifying an improved new product. Brainstorming: getting a group to think of unlimited ways to vary a product or solve a problem. Business analysis: the second stage of the screening process, during which preliminary figures for demand, cost, sales and profitability are calculated. Commercialisation: the decision to market a product. Concept test: a test to evaluate a new-product idea, usually before a prototype has been created. Decline stage: a long-run drop in sales. Development stage: the stage in the product development process in which a prototype is developed and a marketing strategy outlined. Diffusion: the process by which the adoption of an innovation spreads. Forced relationships: a technique that considers several objects that are related to one another in a specific context with the intention of combining the objects into a new product. Growth stage: the second stage of the product life cycle, when sales usually grow at an increasing rate, many competitors enter the market, large firms may start acquiring small pioneering firms and profits are healthy. Innovation: a product perceived as new by a potential adopter. Introductory stage: the full-scale launch of a new product into the marketplace. Maturity stage: a period during which sales increase at a decreasing rate. New product: a product that is new to the world, the market, "****** DEMO - www.ebook-converter.com*******"

the producer, the seller or a combination of these. New-product committee: an ad hoc group whose members manage the new-product development process. New-product department: performs the same functions as a new-product committee, but on a full-time basis. New-product strategy: linking the new-product development process with the objectives of the marketing department, the business unit and the firm. Product category: all brands that satisfy a particular type of need. Product development: a marketing strategy that entails the creation of new products for present markets; the process of converting applications for new technologies into marketable products. Screening: the first filter in the product-development process that eliminates ideas that are inconsistent with the firm’s new-product strategy or are obviously inappropriate for some other reason. Simulated (laboratory) market testing: the presentation of advertising and other promotion materials for several products, including a test product, to members of the product’s target market. Simultaneous product development: a new teamorientated approach to new-product development. Test marketing: the limited introduction of a product and a marketing strategy to determine the reactions of potential customers in a market situation. Venture team: a market-orientated group staffed by a small number of representatives from different disciplines. "****** DEMO - www.ebook-converter.com*******"

REFERENCES 1 2 3 4 5 6 7 8 9 10 11 12 13

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Satariano, A. 2014. Apple shares show need for new products. Business Day, 29 January, p. 13. Stamps taking a licking. Financial Mail, 9 October 2009, p. 45. Xerox plans paper that eats its word. Business Day, 15 February 2007, p. 12. Groom, B. 2004. Nokia’s turn to eat humble pie. Business Day electronic edition, 15 April 2004 (originally published in the Financial Times). New product management in the 1980s. 1982. New York: Booz, Allen & Hamilton, p. 8. Bradley, S. 1996. Hallmark enters $20 billion pet category. Brandweek, 1 January 1996, p. 4. Sulaiman, T. 2013. New bid to whet African women’s appetite for Beer. Business Day, 15 May, p. 13. Ono, Y. 1995. Non-smearing lipstick makes a vivid imprint on Revlon. Wall Street Journal, 16 November 1995, pp. B1 and B3. Bidoli, M. 2001. Now this is truly cool. Financial Mail, 16 November 2001. Clark, D. 1995. HP unveils lower-priced color copier. Wall Street Journal, 2 October 1995, p. B3. New product management in the 1980s. 1982. New York: Booz, Allen & Hamilton, p. 3. Dumaine, B. 1993. Payoff from the new management. Fortune, 13 December 1993, pp. 103–110. Kamhunga, S. 2010. FNB looks to staff for new ideas in innovation. Business Day company section, 6 December 2010; Ndzamela, P. 2012. Innovation is all about customer need. Business Day, 27 March 2012, p. 12. Brand, N. 2004. Boer druk toe pap en vleis in ’n blikkie. Sake Burger, 21 April 2004, p. S16. www.dellideastorm.com (Accessed 23 July 2010). Kahn, T. 2008. Unilever dumps plan for hoodia diet pill. Business Day, 22 December 2008, p. 3. Mathews, C. 2001. New technology brings hot coffee in a trice. Business Day Business section, 14 November 2001, p. 2. Cravens, D.W. 1997. Strategic management (5th edition). Homewood: Irwin, p. 255. Kahn, T. 2008. Hefty price tag on two new cervical cancer vaccines. Business Day, 14 March 2008, p. 4. Eli Lilly drops inhaled insulin program. Available, www.msnbc.msn.com/id23527042 (Accessed 15 March 2008). Ling, C.S. 2010. Boeing to scrap planned 787-3 jet. Business Day electronic

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22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

edition, 3 February 2010. Kerwin, K. 1995. The shape of the new machine. Business Week, 24 July 1995, pp. 60–66. Kahn, T. 2013. Worcester drug trial dashes hope of effective TB jab. Business Day, 5 December, p. 6. Power, C. 1992. Will it sell in Podunk? Hard to say. Business Week, 10 August 1992, pp. 46–47. Power op cit Coolest tin of beer. Food & Beverage Reporter Online. June 2005, p. 56. How Sowetan stopped the rot. Avusa profile, supplement to Sunday Times, 11 May 2008. Blue-sky research comes down to earth. Business Week, 3 July 1995, pp. 78– 80. Blaine, S. 2013. Solar energy soon ‘competitive without subsidies’. Business Day, 13 February, p. 2. Kotler, P. 1997. Marketing management: Analysis planning and control (9th edition). New York: Prentice Hall, p. 355. Ibid., p. 359. This section is based on Kotler, P. 1997. Marketing management: Analysis, planning and control (9th edition). New York: Prentice Hall, p. 351. Mcleod, D. 2013. Wrist watch. Financial Mail, 25 January – 30 January, p. 12. Kahn, T. 2008. Hefty price tag on two new cervical cancer vaccines. Business Day, 14 March 2008, p. 4. Planting, S. 2001. Voice technology not a fairy tale. Financial Mail, November 2001, p. 86. Vermeulen, H. 2000. De Beers, Investec Securities Research Report, M 1991/92, p. 2. Kahn, T. 2012. Clicks set to launch mobile healthcare. Business Day, 12 June, p. 4. Van der Walt, A. & Machado, R. (eds). 1992. Rooibos tea: The tea of Africa. In New marketing success stories. Halfway House: Southern Book Publishers. Dicey, L. 2006. Citi Golf: A uniquely South African success. Journal of Marketing, June/July 2006, pp. 10–11. Kotler, P. op. cit., pp. 359–360. Pincus, D. 1997. Hair today, gone … Financial Mail, 7 March 1997, p. 75. Food & Beverage Reporter Online, May–June 1999, p. 58. Mokgata, Z. 2010. Femina’s demise a long time coming. Business Times (supplement to the Sunday Times), 28 February 2010, p. 7. Pampalone, T. 2010. SABC International goes bust. Mail & Guardian, 5 February 2010. Evans, J.R. & Berman, B. 1992. Marketing (6th edition). New York: Macmillan

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Publishing, p. 371. 46 Food & Beverage Reporter Online, March–April 1999, p. 79. 47 Bubbling success for Brandhouse. Business Day electronic edition, 19 October 2004.

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CHAPTER

10

Marketing channels and the role of intermediaries

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Explain what a marketing channel is and why intermediaries are required to facilitate distribution and marketing. 2 Describe the functions and activities of marketing channel members. 3 Distinguish between alternative channel structures used in marketing. 4 Explain the reasons why marketers make use of the various channel arrangements. 5 Identify the factors that influence channel strategy and justify their importance in the management of channels of distribution. 6 Distinguish between the different levels of distribution intensity. 7 Identify the sources and types of conflict often prevalent among channel members. 8 Describe how channel members deal with channel conflict using various sources of power. 9 Describe the various types of channel leadership. 10 Appreciate the importance of physical distribution in marketing. 11 Link the various subsystems to physical distribution effectiveness. 12 Briefly summarise the nature of the dimensions by which retailers "****** DEMO - www.ebook-converter.com*******"

13 14 15 16

can be classified and provide examples of each classification. Differentiate between the major types of ownership of retail operations. Describe franchising in terms of its salient characteristics and its advantages for both franchisor and franchisee. Evaluate why some retailers use non-shop retailing techniques. Summarise the salient features of different types of firms that perform wholesaling activities, and describe their functions.

>>Marketing in practice Pick n Pay opens distribution hub Pick n Pay opened its second of four planned distribution centres yesterday, this time in Philippi, Cape Town following the opening of its Longmeadow distribution centre in Johannesbreaderurg in 2010. Pick n Pay divisional director of supply chain, Cobus Barnard said the new distribution centre would allow the company to operate more cost-effectively. ‘Benefits from centralised distribution include better on-shelf availability while at the same time holding lower overall inventory levels in stores. This means less congestion at our stores’ receiving centres and importantly lower transport costs in our supply chain,’ Mr Barnard said. ‘The fast-moving consumer goods section of the centre will be fully operational by October, by which time we will be distributing 400 000 cases a week. Currently, Longmeadow Groceries moves 1-million cases a week out to our stores,’ Pick n Pay Deputy CEO Richard van "****** DEMO - www.ebook-converter.com*******"

Rensburg said. Pick n Pay has made significant investment to the tune of R2bn in upgrading and building distribution centres which should be completed by 2017. SOURCE: Adapted from Vallie, A. 2012. Pick n Pay opens distribution hub, Business Day, 8 August, p. 8

QUESTIONS 1 2

Can effective distribution be a competitive advantage? What are the benefits of centralised distribution?

1. Introduction The integrated nature of marketing was alluded to in Chapter 1. The marketing concept dictates that every department and every staff member must contribute to the firm’s attempts to ensure the satisfaction of its customers’ needs. Integration implies that no marketing decision can be made in isolation. Nor can any marketing strategy be executed without due consideration of the influence of other variables. For instance, no matter how good one’s physical product is (product strategy), if it is not within reach of people who want to buy it (distribution strategy), it will not be sold. The role of distribution channel members such as retailers and wholesalers is, therefore, to overcome the spatial separation gap (see Chapter 1) by providing customers with time and place utility. Distribution strategy is very important to all firms if one "****** DEMO - www.ebook-converter.com*******"

considers that a study by the marketing research firm AC Nielsen has shown that up to 50 per cent of consumers will switch brands if their preferred brand is not immediately available when they are ready to buy. Therefore, brand loyalty can be jeopardised by poor and inefficient distribution. This is particularly true in product categories such as snacks, confectionery, soft drinks, canned and packaged food and household products.1 Firms such as Transnet have lost sales and market share because of inadequacies in their distribution networks. Maize farmers complain because they cannot export more than 2,3 Mt of maize a year because the transport infrastructure is inadequate. Another example is the Post Office, which has the widest distribution network of any organisation in South Africa, but has been unable to convert this asset into a competitive advantage. The importance of distribution in a firm’s marketing efforts is illustrated by the extent of expenditure on this activity. On average, South African firms’ distribution costs vary between 14 and 16 per cent of their operational expenditure. Distribution can be very important in sectors and industries where it is difficult to differentiate a brand. For instance, fuel companies, often struggling to convince consumers that their petrol is truly unique, have to make sure that their fuel is available in convenient locations. It is for this reason that Sasol is spending R1 billion to erect 300 new Sasol branded service stations and 270 Exel (a subsidiary of Sasol) service stations to effectively compete with the likes of Caltex, Shell, Total and BP.2 Similarly, Nedbank identified its distribution network as a "****** DEMO - www.ebook-converter.com*******"

weakness and is also spending R1 billion to add 110 new branches to its current 472 and will increase the number of ATMs to 1 800 – a 50 per cent increase.3 Absa wants to service customers in traditionally under-serviced areas, and has expanded its distribution network to 882 outlets by adding an additional 115 in these areas.4 Efficient distribution and logistics have a direct influence on a firm’s profitability. Clothing retailers, facing strong competition from international competitors such as Zara have worked hard to shorten their lead times and thus ensuring that new products are on the shelves more regularly. The availability of such new products increases sales. This chapter considers the various methods of providing consumer access to need- satisfying products by getting products within easy reach of potential buyers. The focus of the chapter is on marketing channels and the role of intermediaries in this distribution process.

2. The benefits of marketing channels

LO1

A marketing channel can be viewed as a large pipeline through which products, their ownership, communication, financing and payment, and accompanying risks flow to the consumer. To use the formal definition, a marketing channel (also called a channel of distribution) is a business structure of independent but interdependent firms, which reaches from the point of product origin (or production) to the final consumer. Products move through marketing "****** DEMO - www.ebook-converter.com*******"

channels by way of physical distribution. Physical distribution (i.e. the physical movement of products) has five distinct subsystems: • • • • •

Warehousing Materials handling and packaging Inventory control Order processing Transportation.

The initial discussion is devoted to the three important needs fulfilled by marketing channels: providing specialisation and division of labour, overcoming discrepancies and providing contact efficiency.

2.1 Providing specialisation and division of labour According to the concept of specialisation and division of labour, breaking down a complex task into smaller, simpler ones and allocating them to specialists creates greater efficiency and lower average production costs. Manufacturers realise economies of scale benefits through the use of efficient equipment capable of producing large quantities of a single product. Likewise, marketing channels can ensure economies of scale through specialisation and division of labour, by aiding producers who lack the motivation, financing, or expertise to market directly to end users or final consumers. In some cases, as with most consumer convenience products, such as soft drinks, the "****** DEMO - www.ebook-converter.com*******"

cost of marketing directly to millions of consumers – taking and shipping individual orders – is prohibitive. For this reason, producers contract other channel members (such as wholesalers and retailers) to do what the producers are not equipped to do – or what channel members are more prepared to do. Channel members can do certain things more efficiently than producers (manufacturers) simply because they have developed specialised skills and expertise over time and have developed good relationships with their customers. Therefore, their specialised expertise enhances the overall performance of the entire distribution channel.

2.2 Overcoming discrepancies Marketing channels also play a role in overcoming discrepancies of quantity, assortment, time and place (see Chapter 1) created by economies of scale in production. For example, assume that a manufacturer of ready-made pizzas can efficiently produce them at a rate of 5 000 units in a typical day. Not even the most enthusiastic pizza eater could consume that amount in a year, never mind a day. The amount produced by manufacturers to lower unit costs (economies of scale) creates a discrepancy of quantity, which is the difference between the amount of product produced and the amount an end user wants to buy. By storing the product and distributing the appropriate amounts as demanded, marketing channels overcome quantity discrepancies by making products available in the quantities that consumers desire. Mass production creates not only discrepancies of "****** DEMO - www.ebook-converter.com*******"

quantity, but also discrepancies of assortment. A discrepancy of assortment occurs when a consumer does not have all of the items needed to ensure full satisfaction from a product. For pizzas to yield maximum satisfaction, several other products are required to complete the assortment. At the very least, most people would want a knife, fork, plate, black pepper and origanum. Others might add a glass of wine, a salad and good music. Therefore, the pizzeria manager buys this assortment from a variety of suppliers to satisfy the customers’ needs. Similarly, for tennis players to be properly equipped they need a racquet, shorts, a shirt, socks, tennis shoes, a sweat band and tennis balls. Sports shops offer all these under one roof, although they may be manufactured by many different suppliers. A temporal discrepancy is created when a product is produced at a time when a consumer is not ready to buy it. Marketing channels overcome temporal discrepancies by maintaining inventories in anticipation of future demand. For example, manufacturers of seasonal merchandise, such as Christmas decorations, are in operation all year even though consumer demand is concentrated during only one month of the year. Figure 10.1 How intermediaries reduce the number of required transactions

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Furthermore, because mass production requires many potential buyers, markets are usually scattered over large geographical areas, creating a spatial discrepancy. Frequently, national – and sometimes global – markets are needed to absorb the production output of mass producers. Marketing channels overcome spatial discrepancies by making products available in locations convenient to consumers. For example, motor vehicle manufacturers (mainly based in the Eastern Cape, Pretoria and Durban) overcome spatial discrepancies by franchising dealerships close to consumers.

2.3 Providing contact efficiency The third need fulfilled by marketing channels is a way to overcome contact inefficiency. Consider consumers’ extra costs if supermarkets, department stores and shopping "****** DEMO - www.ebook-converter.com*******"

centres did not exist. Suppose you had to buy milk at a dairy and meat at an abattoir. Imagine buying eggs and chicken at a hatchery and fruits and vegetables at various farms. You would spend a great deal of time, money and energy shopping for a few groceries. Channels of distribution simplify distribution by reducing the number of transactions required to get products from manufacturers to consumers, and making an assortment of goods available in one location. Consider another example, which is illustrated in Figure 10.1. Four students in your class each want to buy a calculator. Without a retail intermediary like CNA, calculator manufacturers Hewlett Packard, Sharp, Texas Instruments, Citizen and Toshiba would each have to make four contacts to reach the four buyers who are in the target market, totalling 20 transactions. However, each producer has to make only one contact when a retailer such as CNA acts as an intermediary between the producer and consumers by stocking all four brands of calculators, reducing the number of transactions to nine. Each producer sells to one retailer rather than to four consumers. In turn, your classmates buy from one retailer instead of from five producers. This simple example illustrates the concept of contact efficiency. South African manufacturers sell to millions of individuals and families. Using channel intermediaries significantly reduces the number of required contacts. As a result, producers are able to offer their products costeffectively and efficiently to consumers.

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3. The functions of a marketing channel

LO2

Intermediaries in marketing channels perform several essential functions that enable the flow of goods between manufacturer and buyer. The three basic functions that intermediaries perform are summarised in Table 10.1. Transactional functions involve contacting and communicating with prospective buyers to make them aware of existing products and explain their features, advantages and benefits. Logistical functions include sorting out, accumulating, allocating and sorting products into either homogeneous or heterogeneous collections. Grading agricultural products (first grade, second grade, etc.) typifies the sorting-out process. Consolidating many batches of grade-A eggs from different farmers into one batch illustrates the accumulation process. Supermarkets and other retailers perform the sorting function by assembling thousands of different items that match their customers’ needs. The third basic channel function, facilitating, includes research and financing. Research provides information about channel members and consumers by getting answers to questions such as: who are the buyers? Where are they located, and why do they buy? Financing ensures that channel members have the money to keep products moving through the channel to the final consumer. Table 10.1 Marketing channel functions performed by intermediaries

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Types of functions Transactional functions

Description • • •

Logistical functions

• •

Facilitating functions

• •

Contacting and promoting: contacting potential customers, promoting products and soliciting orders. Negotiating: determining how many goods or services to buy and sell, type of transportation to use, when to deliver, and method and timing of payment. Risk-taking: assuming the risk of owning inventory. Physically distributing: transporting and storing goods to overcome temporal and spatial discrepancies. Sorting: overcoming discrepancies of quantity and assortment by: > Sorting: breaking down a heterogeneous supply into separate homogeneous stock. > Accumulation: combining similar stocks into a larger homogeneous supply. > Allocation: breaking a homogeneous supply into smaller and smaller lots (‘bulk breaking’). > Assortment: combining products into collections that buyers want available at one place. Researching: collecting information about other channel members and consumers. Financing: extending credit and other financial services to facilitate the flow of goods through the channel to the final consumer.

EXAMPLE A single firm may provide one, two or all three functions. CocaCola, for instance, performs transactional, logistical and facilitating channel "****** DEMO - www.ebook-converter.com*******"

functions. Coca-Cola’s sales representatives visit local shops and restaurants to negotiate the terms of the sale, possibly giving the customer a discount for large purchases, and make arrangements for delivering the range of beverages that Coca-Cola markets. At the same time, Coca-Cola provides a facilitating function by extending credit to intermediaries, such as retailers. Coca-Cola representatives also help promote the brands on a local level by displaying Coca-Cola promotional material such as logos, signs and posters. Coca-Cola also performs logistical functions by accumulating the many brands of Coca-Cola from the various bottlers and storing them in its refrigerated warehouses. When an order needs to be filled, Coca-Cola then sorts the products or brands into heterogeneous collections for each particular customer. For example, the local spaza shop may order ten cases of Coke, five cases of Sprite, five cases of Fanta and two cases of Powerade. The order will then be loaded onto a refrigerated truck and transported to the spaza shop (a logistical function). Although individual members may be added to or dropped from a distribution channel, someone must still perform these essential functions. They can be performed by manufacturers, end users or consumers, channel intermediaries, such as wholesalers and retailers, and sometimes non-member channel participants. For example, if a manufacturer decides to eliminate its private fleet of trucks, it must still have a way of moving the goods to the wholesaler. This task may be accomplished by the wholesaler, which may have its own fleet of trucks, or by a non-member channel participant, such as an independent trucking firm. The latter example is referred to as outsourcing. Non-members also provide many other essential functions that may at one time have been provided by a channel member. For example, research firms may perform the research function; advertising agencies, the "****** DEMO - www.ebook-converter.com*******"

marketing communication function; transportation and storage firms may perform the physical distribution (logistical) function; and banks, the financing function.

4. Marketing channel structures

LO3

There are many routes a product can take to reach its final consumer. Marketers search for the most efficient channel from the various alternatives available. Marketing a convenience product, such as chewing gum or chocolate, differs from marketing a speciality product, such as a Mercedes-Benz. The two products require substantially different distribution channels. Likewise, the appropriate channel for a major equipment supplier, like Otis (which sells lifts to building contractors), would be unsuitable for an accessory equipment producer like Black & Decker selling electric drills and screwdrivers to do-it-yourself retailers, such as Builder’s Warehouse, Buildit and Hardware Centres. Figure 10.2 illustrates the four ways that manufacturers can transfer products to consumers. At one end of the marketing channel route, manufacturers can use the direct channel to sell directly to consumers. Direct marketing activities – including telemarketing, mail order and catalogue shopping, and forms of electronic retailing, such as online shopping and shop-at-home television networks – are a good example of this type of channel structure. OUTsurance is a South African firm that uses the directmarketing approach (with no intermediaries). International firms such as Avon (cosmetics) and Tupperware (plastic "****** DEMO - www.ebook-converter.com*******"

containers) also use the direct-marketing approach to target South African consumers. Avusa, the media firm that owns publications such as the Sunday Times and Business Day, now sells its advertising space online by means of an auctioning process. At the other end of the spectrum (see Figure 10.2), an agent or broker channel is quite a complicated process. Agent or broker channels are usually used in markets with many small manufacturers and many retailers, who lack the resources to come into direct contact with each other. Agents or brokers bring manufacturers and wholesalers together for negotiations, but do not take title to (in other words, do not own) merchandise. Ownership passes directly to one or more wholesalers and then to retailers. Finally, retailers sell to the final consumer of the product. For example, a food broker represents buyers and sellers of grocery products. The broker acts on behalf of many different manufacturers and negotiates the sale of their products to wholesalers that specialise in foodstuffs. These wholesalers, in turn, sell these products to grocery shops and convenience stores. WEBSITE

Consider the Avon app for your cell phone, following the link on http://www.avon.co.za/PRSuite/howtobuy_landing.page

>>Technology in action Avon head of digital shares secrets to "****** DEMO - www.ebook-converter.com*******"

online success A big lesson for the Avon beauty brand has been to put customer experiences first, rather than the technology and digital platforms. Speaking at the Forrester Summit for Marketing and Strategy Professionals in Sydney, Carl Mogridge took the audience through the beauty retailer’s three-year digital transformation to date, and the launch of its first direct ecommerce offering earlier this year. Describing the journey as the shift from ‘ding dong’ to ‘dot com’, Mogridge said digital represented a game-changing opportunity for the company. But he noted the significant difference between Avon’s longstanding representative sales force model, and the ‘real-time, instant gratification’ consumers it is trying to target today. The company has 6 million representatives worldwide. Each representative is given a personal website URL. Avon teamed up with PayPal on an NFC project to arm Avon sales reps with the ability to transact with customers using mobile devices. In addition, sales reps were provided with and trained on free digital assets around Avon products. Arguably, however, the biggest transformation in Avon’s 127-year history has been creating a direct ecommerce platform. ‘We started with a print brochure and then went to a mobile app, but customer didn’t like interacting with that particular app on that platform, so we built a responsively designed ecommerce site so they had more opportunity to ingest all the digital content,’ Mogridge explained. ‘As the saying goes, good "****** DEMO - www.ebook-converter.com*******"

companies listen, but great companies act. Before you could only purchase through an Avon representative – now you can connect with the company directly or physically, have products posted or delivered directly by your Avon representative. There’s Google Maps integration and all the functionality digital consumers are accustomed to, it looks very social and it’s a nice UX experience, even on mobile.’ One big lesson learnt by Avon so far has been to put customer experiences, rather than the technology and digital platforms, first. ‘We were pushing technology on customers, such as a new app, and expecting them to react and buy from us,’ Mogridge said. ‘What we realised was that we had to ask “what do you want in order to come and purchase from Avon?” Now, customer experience is the starting point and technology is built around those demands.’

SOURCE: Cameron, N. 14 August 2014. Avon head of digital shares secrets to online success. Available from http://www.cmo.com.au/article/552303/avon_head_digital_shares_secrets_online (Accessed 15 August 2014) Figure 10.2 Typical marketing channels for consumer products

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WEBSITE Visit the computer manufacturer Dell’s website at www.dell.co.za and read the Terms and Conditions to determine how they approach delivery of products/software, once order. Would you describe Dell’s distribution strategy as successful?

Most consumer products, however, are sold through distribution channels similar to the other two alternatives: the retailer and wholesale channels. A retailer channel is most common when the retailer is large and can buy in large quantities directly from the manufacturer. If a wholesaler channel is used, the volume must justify the extra expense of using a wholesaler. Car dealers and computer retailers are examples of retailers that often bypass a wholesaler. A wholesaler is used for low-cost items that are frequently purchased, such as sweets, cigarettes and magazines. For example, Cadbury sells chocolate to wholesalers in large quantities. The wholesalers then break these quantities into smaller quantities to satisfy individual retailer orders. The introduction of the Internet as a channel of distribution has forced many firms to develop a strategy with an appropriate balance between the number of intermediaries. Two concepts are of importance in this balancing act: •

Disintermediation refers to the elimination of a channel intermediary. For example, one hallmark of the new economy is a move away from traditional manufacturer"****** DEMO - www.ebook-converter.com*******"

•

retailer-consumer channels to direct online channels that eliminate the retailer. However, the functions that were carried out by the retailer are not eradicated, but instead shifted to the manufacturer. Traditional retailer functions, such as monitoring competitive brands, attracting customers to the website (instead of the retail location), merchandising, order fulfilment, credit checks, and so forth, become the responsibility of the manufacturer. The Internet has become a driving force for disintermediation in many industries because it enables firms to interact at a much lower cost and higher speed than ever before. A good example of disintermediation is the websites of airlines, such as Kulula.com, Mango, South African Airways and British Airways, where one can buy tickets directly from the airline (manufacturer), without using the service of a travel agent (retailer). Reintermediation, the opposite of disintermediation, refers to the reintroduction of channel members. The motivation for this strategy is the added value offered to the customer. Although the distribution channel (e.g. buying airline tickets) becomes longer when using a travel agent (retailer), the retailer can provide added benefits (e.g. advice on accomodation and additional support, like arranging visa applications and airport shuttles).

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5. Utilising alternative marketing channel LO4 arrangements Rarely does a manufacturer use just one type of channel to move its product from manufacturer to final consumer. It usually employs several different or alternative channel arrangements, such as: •

Multiple channels. When a producer selects two or more channels to distribute the same product to target markets, this arrangement is called dual distribution (or multiple distribution). For example, in the United States, Whirlpool sells its washers, dryers and refrigerators directly to the developers of large housing projects, but it also sells these same appliances to retail stores that sell to consumers. Verimark, which has traditionally used direct-mail channels, has now opened its own retail stores. Glomail also sells its products through retailer Game.

>>Strategy While in South Africa we are not yet at the stage of more advanced markets such as Europe or the United States, consumers in South Africa are increasingly shopping across a number of retail channels such as TakeALot. A retailer’s ability to capitalise on the full benefits of multichannel retailing involves much more than simply replicating a traditional in-store product assortment "****** DEMO - www.ebook-converter.com*******"

within a digital format and assuming that consumers will click and buy. Understanding the relationship between the consumer, technology and factors that influence the purchasing decision has become paramount. Retailers need to be ready for the shift towards online. Currently in South Africa, multichannel retail is primarily focused on food, music, books and banking, but we are beginning to see an increasing number of younger customers doing more research using online and digital platforms in relation to fashion, even if they don’t shop online.5 •

Non-traditional channels. Often non-traditional channel arrangements help differentiate a firm’s product from the competition’s. For example, manufacturers may decide to use non-traditional channels, such as the Internet, mail order or farmers’ markets to sell their products instead of going through traditional retailer channels. Although non-traditional channels may limit a product or brand’s coverage, they can provide a manufacturer serving a niche market with a means of gaining market access and customer attention without having to establish channel intermediaries. Nontraditional channels can also provide another avenue of sales for larger firms. For example, McDonald’s is experimenting with selling burgers and chips through kiosks inside some retail outlets, free-standing restaurants at petrol stations, catering services and home delivery. Kellogg’s is exploring vending machines to expand the distribution of its snack-style brands and the

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motor vehicle manufacturer Daewoo is experimenting with alternative channels of distribution by buying space in bicycle shops. First National Bank has developed portable branches (stand-alone, semi-mobile units built from containers, as well as ‘banks-on-wheels’) to serve remote rural areas. Unilever’s distribution strategy in Tanzania using bicycles is a classical example of a nontraditional channel (see Reader 48 ‘Unilever’s bicycle distribution’). • Strategic channel alliances. More recently, manufacturers have formed strategic channel alliances, which use another manufacturer’s already-established channel. Alliances are used most often when the creation of marketing channel relationships may be too expensive and time-consuming. Strategic channel alliances are also developing in less traditional outlets, such as electronic banking. Microsoft Corporation and Visa International have created a system that will enable consumers to pay accounts and utilise other banking functions using a computer network of Visa’s member banks.6 • Reverse channels. Reverse channel distribution refers to when products move in the opposite direction to traditional channels – from consumer back to manufacturer. This type of channel is important for products that require repairs or recycling. For example, motor vehicle dealers generally have a service department to which consumers can bring their cars when they need repairs. A number of producers of hightech products, like Sony, have established a national network of service centres that will repair the "****** DEMO - www.ebook-converter.com*******"

manufacturers’ brands of electronic entertainment equipment. Soft-drink bottlers and breweries use reverse channels to collect and recycle glass bottles. They have also been big promoters of aluminium can recycling, mostly because it makes economic sense. Reverse channels for recycling have become more prevalent as manufacturers realise the importance of limiting the solid waste that is normally dumped in landfills. In the United States, Procter & Gamble has redesigned its plastic bottles and containers to use recycled instead of new plastics. To do this, P & G devised a reverse channel to get discarded plastic containers back for recycling. Now PP & G works with channel intermediaries that collect, sort, shred, clean and ‘pelletise’ discarded plastic containers. The plastic pellets are then shipped back to P & G to become an ingredient in new plastic bottles and containers. Similarly, South Africa’s largest brewer, South African Breweries, sells more than 80 per cent of its beer in returnable bottles, and consequently utilises a reverse channel to collect, clean and then reuse these containers. WEBSITE Visit the website of the toy manufacturer Toys R Us at www.toysrus.com. What channel arrangement does it use?

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6. Factors that influence marketing channel strategies

LO5

Devising a marketing channel strategy requires several critical decisions. Marketing managers must decide what role distribution will play in their overall marketing strategy. In addition, they must be sure that the channel strategy chosen is consistent with product, advertising and pricing strategies. In making these decisions, marketing managers must analyse which factors will influence the choice of channel and what level of distribution intensity will be appropriate. The final choice depends on an analysis of several factors, which often have an impact on each other. These factors can be grouped as market factors, product factors and producer factors.

6.1 Market factors Among the most important market factors affecting the choice of a distribution channel are target customer considerations. Specifically, marketing managers should answer the following questions: • • • • •

Who are the potential customers? What do they buy? Where do they buy? When do they buy? How do they buy?

Additionally, the choice of channel depends on whether the "****** DEMO - www.ebook-converter.com*******"

manufacturer is selling to consumers or to industrial customers (business-to-business). Industrial customers’ buying habits are very different from those of consumers. Industrial customers tend to buy in larger quantities and require more customer service. Consumers usually buy in very small quantities and sometimes do not mind if they get no service at all, as in the case of a discount store such as Game. The geographic location and size of the market are also important when it comes to channel selection. As a rule, if the target market is concentrated in specific areas, then direct selling using a sales force is appropriate. When markets are geographically more widely dispersed, intermediaries are the less expensive option. The size of the market also influences channel choice. Generally, a very large market requires more intermediaries. For instance, firms such as Tiger Brands and Unilever have to reach millions of consumers with their many brands of food and household goods. To make this possible, they need many intermediaries, including wholesalers and retailers. For large clients, such as Pick n Pay or Shoprite, Unilever will appoint a dedicated ‘key account manager’ to manage the relationship with that retailer. However, this option is not feasible in areas such as the rural Eastern Cape, where agents are appointed to manage the distribution of their products to the myriad of small trading stores and spaza shops.

READER 48 >> Unilever’s bicycle distribution "****** DEMO - www.ebook-converter.com*******"

Unilever is bypassing traditional distribution routes to bring its goods to Tanzanian villages, according to a report in the UK’s Financial Times. The report describes a typical Unilever salesman wearing an Omo T-shirt, who cycles to tiny outlets to merchandise, and delivers small amounts of Unilever’s products to shopkeepers. The salesman also urges the shopkeepers to give more shelf prominence to the Unilever products. The report quotes Rajendra Aneja, Unilever Tanzania’s managing director, as saying: ‘The moment you do this, the vendor respects your product because you respect your product.’ It says the new approach is allowing Unilever Tanzania to make impressive inroads into a market where distribution has been dominated by wholesalers. Aneja says the system improved sales fivefold over five months. Some of Unilever’s products have also overtaken other products into market leadership positions. Having gained experience with Unilever in India and South America, Aneja decided to bypass traditional routes and go direct to the outlets. ‘When markets are left to the mercy of the wholesale trade, availability becomes patchy, brands lose their franchise and price indiscipline reigns’, he says. Tanzania has 100 000 retail outlets in 9 000 villages. Consumers buy rice, maize and flour in tiny quantities every day from mini-kiosks in lanes that are too narrow for vehicles. Unilever delivers goods by van to large shops in towns, but had to find an alternative form of distribution for outlets in inaccessible villages. Salesmen are given bicycles with large boxes welded on to the back to transport small packs. Each visits about 20 to 30 shops, following a fixed itinerary. SOURCE: Adapted from Turner, M. 2000. Unilever’s bicycle distribution. Financial Times, 17 August, p. 8

6.2 Product factors Products that are more complex, customised and expensive, such as jewellery, tend to benefit from shorter and more "****** DEMO - www.ebook-converter.com*******"

direct distribution channels. These types of products sell better through a direct sales force. Other examples include pharmaceuticals, scientific instruments, aeroplanes and computer servers. On the other hand, the more standardised a product, the longer its distribution channel can be, and the greater the number of intermediaries that can be involved. For example, the formula for chewing gum is more or less the same from manufacturer to manufacturer, with the exception of flavour and shape. Chewing gum is also inexpensive. As a result, the distribution channel for chewing gum tends to involve many wholesalers and retailers. The product’s life cycle is also an important factor in choosing a distribution channel. In fact, the choice of channel may change over the life of the product. When photocopiers were first available, they were usually sold by a direct sales force. Now, however, photocopiers can be found in several types of outlets, including mass merchandisers, such as Incredible Connection. As products become more common and less intimidating to potential users, producers tend to consider using alternative distribution channels. The energy drink Energade was originally distributed through gyms and fitness clubs only. As the drink became more popular, mainstream supermarket channels were added, followed by convenience stores. Now Energade can be found in cafés and vending machines and even in some fastfood restaurants. Another example is the computer manufacturer Dell, which, as the market matured and a local source of support (from the supplier) became less important, was able to use direct marketing via the Internet to sell computers to consumers. "****** DEMO - www.ebook-converter.com*******"

Another factor in the choice of a distribution channel is the delicacy of the product. Perishable products, such as vegetables, strawberries and milk, have a relatively short lifespan. Fragile products, such as china and crystal, require a minimum of handling. Therefore, a fairly short distribution channel would suit both.

6.3 Producer factors Several factors pertaining to the producer itself are important to the selection of a distribution channel. In general, producers with substantial financial, managerial and marketing resources are better able to use more direct channels. These manufacturers have the ability to hire and train their own sales force, warehouse their own goods and extend credit to their customers. Smaller or weaker firms, on the other hand, must rely on intermediaries to provide these services for them. Most dairy farmers are not able to afford transportation of their fresh milk to dairies. As a result, they have to rely on firms such as Clover to perform the logistical function for them. Clover is able to drive down unit costs because they have vehicles that can transport up to 34 000 litres of milk at a time which yields economies of scale benefits to both farmer and Clover – an eventually the consumer. Compared with producers who only have one or two product lines (such as firm selling only tractors to farmers), producers that sell several products in a related area (a farmer selling dairy product such as yoghurt, cheese and cream in Bloemfontein) are able to choose channels that are more direct. Sales expenses can then be spread over more "****** DEMO - www.ebook-converter.com*******"

products. A manufacturer’s desire to control pricing, positioning, brand image and customer support also tends to influence channel selection.

EXAMPLE Firms that sell products with exclusive brand images, such as designer perfumes (Opium and Chanel No. 5, for example) and clothing (such as Calvin Klein and Jenni Button), usually avoid channels in which discount retailers are present. Manufacturers of upmarket products, such as Gucci handbags and Apple computers, may sell their wares only in expensive shops in order to maintain an image of exclusivity. The Swiss watch manufacturer TAG Heuer has found that it had too many dealers in Europe and Japan, which led to price competition and discounting. ‘A luxury watch should not be discounted’, said the CEO of the firm, Jean-Christophe Babin.7 Consequently, the number of dealers was reduced, as was the case in South Africa.

7. Levels of distribution intensity

LO6

Marketers have three basic distribution options to choose from: intensive distribution, selective distribution and exclusive distribution.

7.1 Intensive distribution The purpose of intensive distribution is maximum market coverage. The marketer attempts to have the product available in every retail outlet where potential customers may want to buy it. If buyers are unwilling to search for a product (as is true of most convenience products, such as "****** DEMO - www.ebook-converter.com*******"

cooldrinks and milk), the product ought to be easily accessible to buyers. Therefore, a low-value product that is purchased frequently may require a lengthy channel of distribution (intensive distribution).

EXAMPLE Chocolate is found in almost every type of retail store imaginable. It is typically sold to retailers in small quantities by a food or sweets wholesaler. Cadbury, for instance, could not afford to sell its different chocolate brands directly to every spaza shop, service station, cafe, supermarket, cafeteria, sports club and discount store. The cost would be too high. Therefore, mass marketers (such as Cadbury) that pursue an intensive distribution strategy sell to a large percentage of the wholesalers willing to stock their products. Retailers’ willingness (or unwillingness) to handle items tends to determine the firm’s ability to ensure intensive distribution. For example, a retailer that already carries ten brands of chewing gum may show little enthusiasm for another brand.

>>Strategy One of the best illustrations of intensive distribution in South Africa is South African Breweries’ distribution. One can imagine how complex its distribution system must be. Given that SAB has more than 500 trucks, more than a thousand trailers, more than 56 distribution depots and thousands of customers (the ‘customers’ referred to here are the intermediaries, such as retailers, liquor stores and restaurants to which SAB supplies its products), the complexity of maintaining an efficient distribution service is immense. According to SAB, the firm focuses on organisational systems and processes, and in particular "****** DEMO - www.ebook-converter.com*******"

the leveraging of technology to ensure that SAB is comparable with the most efficient and customerfocused fast-moving consumer goods (FMCG) firms globally. SAB believes that in order to run efficiently, it has to understand the needs and circumstances of each customer, and to tailor specific packages for them. One of the uses of advanced technology relates to the routing and scheduling of deliveries to SAB’s customers. Right from order placement to the preparation of loads in the warehouse, allocation of vehicles and crew, through to the actual delivery, computer-sourced information enables optimum cost and time efficiency. Managing distribution costs is critical to everything SAB does. When a driver checks in for work each morning, he finds more than a simple list of deliveries for the day. The computer-generated schedule will tell him in which sequence to make his deliveries, which roads to take, the time he should arrive at each outlet, and even, to the minute, what time he should finish unloading. The information also takes into account traffic conditions. The current system also indicates how much fuel the driver should use if he sticks to schedule, tyre wear and countless other cost-measuring criteria. One of the key criteria is the seconds-per-case measure: the amount of time it should take to unload a case of beer. The computer even takes account of delivery circumstances at individual customer sites. For example, if a site has a lift that delays offloading, the information is recorded and stored for future reference.8 "****** DEMO - www.ebook-converter.com*******"

7.2 Selective distribution Selective distribution is based on thorough screening of all potential retailers to eliminate all but a few in any single geographical area. Because only a few retailers are chosen to stock the product, the consumer is expected to actively search for the product. Shopping products and some speciality products are distributed selectively. Maytag, for instance, uses a selective distribution system by choosing a select handful of appliance dealers in a geographic area to sell its line of washers and dryers and other appliances. Likewise, DKNY clothing is sold only in a few carefully selected retail outlets. Several screening criteria are used to identify the appropriate dealers. An accessory equipment manufacturer, such as Pineware, will select only dealers that are able to service its products properly. A television manufacturer, such as Samsung, may insist on service ability and a quality dealer image. If the manufacturer expects to move a large volume of merchandise through each dealer, it will choose only those dealers that are able to handle such volumes and as a result many smaller retailers may not be considered. WEBSITE

Selective distribution system may prevent retailers from reselling their products via Internet channels if selling the products in this way could be said to harm the image of their brand. Read more at http://www.eversheds.com/global/en/what/articles/ind ArticleID=en/Competition_EU_and_Regulatory/Selective practice_Internet_Sales

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7.3 Exclusive distribution The most restrictive form of market coverage is exclusive distribution, which entails only one or a few dealers within a given area. Because buyers may have to search or travel extensively to buy the product, exclusive distribution is usually confined to consumer speciality goods, a few shopping goods and major industrial equipment. Products such as Rolls Royce vehicles and Caterpillar earthmoving equipment are distributed under exclusive arrangements. Sometimes exclusive territories are granted by new firms such as franchisors to ensure adequate market coverage in a particular area. Limited distribution may also serve to project an exclusive image for the product. It is for this reason that you will not find a Magnum ice cream in every cafe in South Africa. Rolex, for instance, uses only eight retail agents to sell its watches in the whole of South Africa. Retailers and wholesalers may be unwilling to commit the time and money required to promote and service a product unless the manufacturer guarantees them an exclusive territory. This arrangement shields the dealer from direct competition and enables it to be the main beneficiary of the manufacturer’s promotion efforts in that geographic area. With exclusive distribution, channels of communication are usually well established because the manufacturer works with a limited number of dealers only. Although exclusivity has its advantages, it can also have its pitfalls. An exclusive network may not be large enough, for instance, if demand is strong. In addition, the "****** DEMO - www.ebook-converter.com*******"

manufacturer’s insistence on exclusivity might put the channel in financial jeopardy during times of weak demand.

>>Strategy Honda’s Acura division in the United States uses an exclusive distribution strategy to create a distinctive image for its high-priced cars. Acura dealers struggled initially because of the car’s small niche market, low resale demand and, ironically, infrequent need for follow-up service and repair. But after several years, Acura dealerships have become very strong competitors by promoting quality and service. All new motor vehicle sales in South Africa are undertaken by way of exclusive distribution arrangements between the manufacturer and selected car dealers. Table 10.2 summarises the differences in the three types of distribution-intensity options available to firms. As one moves from one end of the continuum (exclusive distribution) to the other end (intensive distribution), the profit margin per unit sold decreases, as well as the extent to which the manufacturer can exercise control over the instore treatment of its product or brand by the retailer. Table 10.2 also shows that what consumers expect of the different types of retail outlets differs (e.g. personal attention and service), as well as the importance of price in the buying decision. "****** DEMO - www.ebook-converter.com*******"

8. Potential channel conflict

LO7

In a channel of distribution there are a variety of different concerns that can lead to conflict between members of the channel. Inequitable channel relationships and channel members’ pursuit of conflicting objectives are often the source of channel conflicts. For instance, a manufacturer may want special treatment for its product and brand or to protect its image as an exclusive brand. The retailer, however, may not be concerned about the brand’s image and may be keen to put the product or brand on promotion or on sale, as long as the product sells. However, neither action is conducive to building an image of exclusivity and will not please the manufacturer. (This was the case with the TAG Heuer example highlighted earlier.) Distribution channels must be organised and regarded as systematic, co-operative efforts if operating efficiencies are to be realised. Yet channel members often perform as separate, independent, and even competing, forces – a recipe for disagreement and conflict. Two types of conflict may often occur – horizontal and vertical conflict. Both are hindrances to the effective functioning of distribution channels. Table 10.2 Distribution-intensity strategies

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SOURCE: Adapted from Evans, J.R. & Berman, B. 1994. Marketing (6th edition). New York: Macmillan Publishing, p. 48

8.1 Horizontal conflict Horizontal conflict may develop among channel members at the same level, such as two or more wholesalers or two or more retailers, or among marketing intermediaries of the same type, such as two competing discount shops or several retail florists. More often, however, horizontal conflict occurs among different types of marketing intermediaries that handle similar products. In other words, this type of channel conflict occurs most often when manufacturers use dual or multiple distribution strategies. Considerable horizontal conflict occurred among petrol stations in the 1990s when Pick n Pay started selling petrol at discount prices. Another example is the conflict between South African Airways on the one hand and British Airways on the other. British Airways claimed that South African Airways uses uncompetitive means to ‘persuade’ travel agents to favour them when booking air travel for their customers, "****** DEMO - www.ebook-converter.com*******"

and have complained to the Competition Board.

8.2 Vertical conflict Vertical conflict can occur between channel members at different levels, for example between manufacturers and wholesalers or between wholesalers and retailers (see Reader 49 ‘Fuel wars’). Vertical conflict occurs frequently and is often the more severe form of conflict in the channel. Conflict may occur between manufacturers and retailers when retailers develop private brands to compete with the manufacturers’ brands, or when manufacturers establish their own retail outlets or create mail-order operations that compete with retailers. Another example of vertical conflict is when manufacturers (such as furniture makers) attempt to bypass wholesalers and retailers and sell directly to final consumers. When airlines, such as South African Airways, first started marketing airline seats via the Internet it led to considerable conflict between the airlines and travel agents. Some travel agents threatened not to sell SAA tickets any more. In other instances, wholesalers or retailers may promote competing products to the detriment of other products or brands. If a sports goods retailer, such as Sportman’s Warehouse, promotes Adidas to the detriment of Nike, the latter will certainly not be satisfied.

READER 49 >> Fuel wars: Engine trouble Hundreds of BP and Caltex petrol retailers are up in arms over the oil giants’ implementation in December 2013 of the department of energy’s new "****** DEMO - www.ebook-converter.com*******"

Regulatory Accounting System, which is meant to provide greater transparency in the pricing of petrol. The retailers dispute the way the oil companies have chosen to implement the new revenue formula, and accuse them of unethical behaviour and strong-arm tactics. If the disputes are not resolved soon, the disagreement over revised franchise agreements may lead to retailers forfeiting their investments, with potential job losses amounting to hundreds. Fuel Retailers Association CEO Reggie Sibiya says the conduct of the oil companies is against the spirit of the amended Petroleum Products Act, on which the new calculation of fuel margins is based. He says one of the benefits of the new system is to give retailers an opportunity to make better margins. ‘The behaviour of BP and Caltex means their retailers are being deprived of what is due to them. The revised franchise agreements they are being forced to accept are unfair and do nothing to increase their sustainability,’ says Sibiya. ‘Arbitration is just one way this can be resolved but we are exploring other legal avenues as well. A decision will be made shortly,’ says Sibiya. Meanwhile, BP dealers continue to face pressure from the company to commit to new agreements despite the impending litigation. A BP dealer based in Johannesburg, who declined to be named for fear of victimisation, said the company had informed him that it wanted to increase the forecourt rental fee to a rate he believes amounts to an over-recovery. Contacted for comment, BP SA spokesman Karen Byamugisha said: ‘BP SA is in negotiations with its dealer network on a number of commercial terms governing the contractual relationship’. BP’s retailers dispute that negotiations are taking place, and instead claim they have been issued with letters warning them that if they do not sign new agreements on BP’s terms their rental and franchise agreements could be cancelled and they may be replaced by new retailers. Fearing huge financial losses, some retailers have signed new agreements despite their deep misgivings. ‘What can we do? BP is threatening to terminate our franchise agreements, and many of us have bank loans to repay, so we have no choice but to accept their terms,’ says another dealer. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Zibi, Z. 2014. Fuel wars: Engine trouble, Financial Mail, 13 February, p. 26

EXAMPLE Mittal Steel (formerly ISCOR) seems to be a powerful channel member in the steel industry by virtue of its size (it supplies more than two-thirds of South Africa’s steel). In 2006, it increased the price of its steel products three times in four months, yet imposed harsh payment terms on its suppliers. Without any warning, Mittal Steel decided to reduce payments to suppliers from 30 days after delivery to 90 days after delivery. These decisions obviously created conflict (vertical conflict) in the distribution channel. ‘How do you sustain jobs if there is no income for 90 days?’ asked one supplier.9 Channel conflict is something that regularly occurs in distribution channels. When DaimlerChrysler South Africa wanted to rationalise its dealership network a few years ago it created conflict with its dealership network. In a move unprecedented in South Africa, the strategy was for a single dealer group to be reallocated to each main metropolitan region. DaimlerChrysler created five main metropolitan sales regions: one each for Durban and Cape Town, and three for Johannesburg and Pretoria. The purpose was to improve customer service and create separate brand images for the group’s growing product range. The affected dealers complained bitterly about the ‘one-sided relationship’ with the manufacturer, DaimlerChrysler South Africa.10 British American Tobacco (who dominates the South African cigarette market) has been accused of trying to squeeze small cigarette distributors out of the market – another example of vertical channel conflict.11 How the conflict is dealt with will be strongly influenced by the power wielded by some members in the distribution channel.

9. Power in the distribution channel

12

LO8

For a variety of reasons, including actual or potential "****** DEMO - www.ebook-converter.com*******"

channel conflict, some marketing institutions or members of the channel of distribution must exercise leadership to ensure that it functions efficiently. However, channel leadership is a function of a member’s channel power (i.e. its capacity to control or influence the behaviour of other channel members) within the distribution channel. The extent to which any participant can exercise leadership will be determined by its access to five bases of power (often determined by size and financial muscle) within the distribution channel: reward power, coercive power, legitimate power, referent power and expert power. All of these power bases can be used to establish a position of channel leadership.

9.1 Reward power If channel members can offer some type of reward to another member, they possess reward power. The reward is used to encourage desirable behavior (usually what is in the interest of the entire distribution channel). Examples are granting an exclusive sales territory or franchise, or offering incentives, such as lower wholesale prices or higher discounts. For example, for many years South African Airways has been offering travel agents financial incentives to book travellers on its flights.

9.2 Coercive power The threat of economic punishment is known as coercive power. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE For instance, a manufacturer may threaten an unco-operative retailer with loss of its custom. Car manufacturers such as Toyota and MercedesBenz often threaten car dealerships by threatening to cancel their dealership agreements unless they ‘toe the line’. Another example is large retailers’ strength with their suppliers (examples are Spar and Pick n Pay). A large retailer’s market size is a significant base of power in its distribution channel and that may allow it to ‘punish’ manufacturers in a variety of ways (e.g. by not stocking its products) should it wish to. It is alleged that in 2006, Checkers pressurised wineries in the Western Cape to increase their own cellar prices to the same level that Checkers sold the wines for so that Checkers could rightfully claim to sell wines at ‘cellar prices’. When approached by the media, the wineries did not wish to have their names mentioned out of fear that their business with Checkers would be threatened.13

9.3 Legitimate power Distribution channels that are linked contractually is an example of legitimate power. For example, a franchise might be contractually required to perform such activities as maintaining a common type of outlet, contributing to general advertising and remaining open during specified times – as in the case of McDonald’s and other fast food restaurants.

EXAMPLE Many independent financial intermediaries (agents and brokers) complain that when they owe money to large insurance firms, such as Old Mutual, Sanlam, Liberty Life and others, they are charged interest on those outstanding balances. However, when the insurance firms owe them money, they (the independent intermediaries) cannot, in turn, charge interest.14 Why do these large insurance firms get away with it? It’s simple: the large insurance companies have more power in the distribution channel than the intermediaries. In this case, "****** DEMO - www.ebook-converter.com*******"

the large insurance firms have both coercive power and legitimate power – if you do not pay our interest, we will cancel your licence to sell our financial products, they say. In the case of DaimlerChrysler referred to earlier, a legal adviser to a dealer group says dealer-manufacturer contracts in South Africa offer little protection to dealerships. ‘I don’t know why we’re out of line with the rest of the world’, said a legal adviser. ‘To cancel a dealer’s franchise in the UK, a manufacturer must give two years’ notice and pay compensation and goodwill. There must also be just cause.’ In South Africa, the legal adviser says, manufacturers may unilaterally cancel franchises without compensation with as little as 30 days’ notice, and have done so on at least two occasions. ‘Manufacturers like to keep [franchise termination clauses] hanging over dealers’ heads’, says the adviser. He says there have also been cases of manufacturers fining dealers up to R100 000 for minor misdemeanours, such as selling a vehicle outside the franchise area, and cases where manufacturers have insisted that particular sales managers be fired, regardless of their record.15

9.4 Referent power Agreement among channel members as to what is in their mutual best interests is known as referent power. To illustrate referent power, many manufacturers maintain dealer councils (the motor industry is an example) to help resolve potential problems in distributing a product or service. Both parties have a mutual interest in maintaining effective channel relationships.

9.5 Expert power Knowledge and expertise are the determinants of expert power. An example is the retail chain, Spar, which conducts "****** DEMO - www.ebook-converter.com*******"

a detailed feasibility study for a potential franchise purchaser and assists with all aspects of setting up a new shop, including site selection, shop layout, merchandising and logistics. Spar’s expertise and knowledge of the retail market make it a powerful player in the grocery distribution channel.

10. Channel leadership

LO9

The dominant and controlling member of a channel is called a channel captain. Historically, the channel leadership role was performed by the manufacturer or wholesaler, since retailers tended to be both small and localised. However, large retailers have become very powerful and are increasingly taking on the role of channel captain as these large chains assume traditional wholesaling functions and even dictate product design specifications to manufacturers. The ability of large retailers, such as Pick n Pay, Shoprite Checkers and Spar, to dictate to their suppliers such as grocery manufacturers (for instance) cannot be underestimated.

10.1 Manufacturers as channel captains Because manufacturers typically create new product and service offerings and enjoy the benefits of large-scale operations, they fill the role of channel captains in many marketing channels owing to their size and consequent economic power. Examples of such manufacturers include Coca-Cola, Mittal Steel and Huletts Sugar. In the dairy "****** DEMO - www.ebook-converter.com*******"

industry milk processors such as Clover and Nestlé are the channel captains due to their size and particularly their extensive fleet of milk collecting tankers.

10.2 Retailers as channel captains Retailers are often powerful enough to serve as channel captains in many industries. Large chain operations may bypass independent wholesalers and utilise manufacturers as suppliers of their own private brands at quality levels specified by the retail chains. Major retailers, such as Pick n Pay and Shoprite Checkers, serve as leaders in many of the marketing channels with which they are associated.

10.3 Wholesalers as channel captains Although their relative influence has declined, wholesalers continue to serve as vital members of many marketing channels. Large-scale wholesalers often serve as channel captains because they assist independent retailers to compete with chain outlets. The Spar chain – the holding company, not the franchised retailers – is an example of a wholesaler with considerable power in the grocery channel of distribution. Table 10.3 summarises the potential causes of conflict that can flare up between the manufacturer of a product or brand on the one hand and an intermediary, such as a retailer, on the other. It shows that there is a whole host of potential sources of conflict, ranging from pricing, to advertising support to conflict about branding issues. "****** DEMO - www.ebook-converter.com*******"

In order to deal with channel conflict (in addition to using channel captains) some firms try to gain more control in the channel by means of two strategies known as forward integration and backward integration. These strategies can also be used to take advantage of opportunities that may emerge over time or to overcome a potential threat. Forward integration occurs when a producer or manufacturer buys or establishes its own wholesalers and/or retailers. MercedesBenz taking ownership of its dealership network and Vodacom buying independent service providers, Teljoy Holdings and GSM Direct, would be examples of forward integration. Backward integration is when a retailer buys or establishes a wholesaler, or when an intermediary buys or establishes a production facility. Another possibility is a producer buying out one of its suppliers of raw materials. If Woolworths were to buy a fruit-canning factory or South African Breweries a hops farm, these would be examples of backward integration. The fast food outlet Burger King has bought a meat processor to ensure a constant supply of meat patties for its burgers – another example of backward integration. Table 10.3 Potential causes of channel conflict

Factor

Pricing

Manufacturer’s objective

To establish final price consistent with the product’s image

Distribution intermediary’s objective To establish final price consistent with the intermediary’s image

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Purchase terms

To ensure prompt, accurate payments and minimise discounts

To defer payments as long as possible and secure discounts

Shelf space

To obtain plentiful shelf space with good visibility in order to maximise brand sales

To allocate shelf space among multiple brands in order to maximise total product sales

Exclusivity

To hold down the number of competing brands each intermediary stocks while selling through many intermediaries

To hold down the number of competing intermediaries carrying the same brands while the intermediary sells different brands

Delivery

To receive adequate notice before deliveries are required

To obtain quick service

Advertising support

To secure advertising support from intermediaries

To secure advertising support from manufacturers or service providers

Profitability

To maintain adequate profit margins

To maintain adequate profit margins

Continuity

To receive orders on a regular basis

To receive shipments on a regular basis

Order size

To maximise order size

To have order size conform with consumer demand to minimise inventory investment

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Assortment

To offer a limited variety

To secure a full variety

Risk

To have intermediaries assume risks

To have manufacturers or service providers assume risks

Branding

To sell products under the manufacturer or service provider’s name

To sell products under private brands, as well as manufacturers’ or service providers’ brands

Channel access

To be able to distribute products wherever desirable by the manufacturer or service provider

To carry only those items desired by intermediaries

Importance of account

Not to allow any single intermediary to dominate

Not to allow any single manufacturer or service provider to dominate

Consumer loyalty

To have consumers loyal to the manufacturer or service provider

To have consumers loyal to the intermediary

Channel control

To make the key channel decisions

To make the key channel decisions

SOURCE: Evans, J.R. & Berman, B. 1994. Marketing (6th edition). New York: Macmillan Publishing, p. 492

>>Strategy Some firms do both backward and forward integration. "****** DEMO - www.ebook-converter.com*******"

The furniture manufacturer Steinhoff has not only bought its own forests to supply its timber, but also has its own retail chains (Pennypinchers and Timber City) to sell its finished products. Steinhoff began as a furniture intermediary in 1964 and currently employs 50 000 people, owning 70 factories in 25 countries. Much of Steinhoff’s expansion can be explained by the firm’s backward integration into warehousing, sawmills and forestry businesses, although its recent focus has been on forward integration by means of the acquisition of retail businesses. One Steinhoff subsidiary, PG Bison, describes its strategy as follows: ‘From seedling to lifestyle’ encapsulates the vertical integration philosophy of our company. We own and manage our value chain from the seedlings in the nurseries, through to the forest plantations and on through the timber beneficiation processes and sawmills to the board and decorative laminate plants, through to cutting components and a host of end products.’ 16

11. The importance of physical distribution

LO10

Physical distribution is the element of the marketing mix that enables products to be moved and stored. Physical distribution are those business activities concerned with stocking and transporting materials, parts and finished "****** DEMO - www.ebook-converter.com*******"

inventory so they arrive at the right place when needed and in usable condition – and, increasingly, so that consumer needs can be accommodated. Volkswagen, for instance, builds the Polo using modular production. That means it builds a base car in Uitenhage, but the firm’s logistics system allows customers to choose a wide range of specifications, from the front headlights to details on the tail of the vehicle. A broader term that encompasses physical distribution is logistics, which also includes procuring and managing raw materials and component parts for production. Logistics and physical distribution management include activities such as: • •

•

Managing the movement and storage of raw materials and parts from their sources to the production site Managing the movement of raw materials, semimanufactured products and finished products within and among factories, warehouses and distribution centres Planning and co-ordinating the physical distribution of finished products to intermediaries and final buyers.

In summary, logistics managers are responsible for directing raw materials and parts to the production department and the finished or semi-finished product through warehouses and eventually, as final products, to the intermediary (i.e. wholesaler or retailer) or end user.

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12. The nature of physical distribution subsystems

LO11

The physical distribution system consists of five distinct subsystems. These play several key roles within physicaldistribution management: deciding on warehouse location, number, size and type; setting up a materials-handling and packaging system; maintaining an inventory-control system; setting up procedures for processing orders; and selecting modes of transportation. These five subsystems are shown in Figure 10.3. Although discussed separately in the sections that follow, these five subsystems are, of course, highly inter dependent.

>> Technology in action Marketing and technology: More than just websites The impact of technology on marketing goes beyond the use of websites to sell goods and services to consumers. An equally important aspect of marketing, and one where information technology has had a profound impact, is ensuring that products arrive at the desired destination timeously (to avoid stock-outs), but not too early, which incurs unnecessary inventoryholding costs. Delivering products to the ultimate consumer efficiently and expeditiously reduces the cost "****** DEMO - www.ebook-converter.com*******"

of the product and consequently allows businesses to reduce their price, which, in turn, stimulates demand. For example, Chevron Oil introduced SAP (systems, applications and products) logistics software in 1992 at a cost of $160 million; by 1997, the firm had succeeded in reducing purchasing-related costs by 15 per cent. The Internet has also been used as an interface between businesses to improve efficiency and reduce costs. For example, two truck drivers from Sweden, noticing that a number of trucks had part or empty loads, started a business known as Delego, which allowed trucking businesses to match trucks with spare capacity with cargo that needed to be transported. The transactions were facilitated by entering the details of the cargo that needed to be transported into a website, allowing Delego to match the consignment with empty or unfilled trucks. Similarly, in the United States, CocaCola uses an Internet-based system to link the sellers of Coke to the bottlers so that orders are processed instantly and sales are not lost because retailers do not have stock. This information system also allows managers to track sales in the market, so they can ensure that where promotions are held the retailers have sufficient stock to meet demand. SOURCE: Blythe, J. 2009. Principles and practice of marketing (2nd edition). South Western Cengage Learning, p. 663; www.ecr-sa.co.za (accessed 29 June 2010)

12.1 Warehousing "****** DEMO - www.ebook-converter.com*******"

Distribution managers oversee the constant flow of goods from the manufacturer to the final consumer. However, the final user may not need or want the goods at the same time that the manufacturer chooses to produce and sell them. Products such as grain and canned peaches are produced seasonally, but consumers demand them all year. Other products, such as Christmas cards and swimwear, are produced all year, but consumers do not want them until November or December. Therefore, management must have a storage system to hold these products until they are shipped. Storage is what helps manufacturers manage supply and demand, or production and consumption. It provides time utility to buyers and sellers, which means that the seller stores the product until the buyer wants or needs it. Even when products are used regularly, as opposed to seasonally, many manufacturers store excess products in case the demand surpasses the amount produced at a given time. Storing additional products does have disadvantages, however, including the costs of insurance on the stored products, taxes, obsolescence, spoilage, theft and warehouse-operating costs. Another disadvantage is opportunity costs, which means the lost opportunity of using the money that is tied up in stored products for something else that could have been more productive or profitable.

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Figure 10.3 The subsystems of physical distribution

12.2 Materials handling A materials-handling system moves inventory into, within and out of the warehouse. Materials handling includes the following functions: • • • •

Receiving goods into the warehouse or distribution centre Identifying, sorting and labelling the goods Dispatching the goods to a temporary storage area Recalling, selecting or picking the goods for shipment (may include packaging the product in a protective container for shipping).

The objective of the materials-handling system is to move items quickly and with minimal handling. With a manual, non-automated materials-handling system, a product may be handled more than a dozen times. Each time it is "****** DEMO - www.ebook-converter.com*******"

handled, the cost and risk of damaging it increases. Each time a product is lifted, its packaging is stressed. With automated materials handling, many of these functions are combined and handled by a computerised system.

>>Strategy Pick n Pay utilises a sophisticated computerised materials-handling system to reduce product handling and keep costs to a minimum. This automated system gives Pick n Pay a high degree of control over how orders are handled, placed, picked and sequenced for shipping. Another example is that of Woolworths, who operates a centralised distribution model using three large distribution centres in the Western Cape, Gauteng and KwaZulu-Natal, with a smaller one in the Eastern Cape. This model supports the firm’s retail strategy in terms of scalability and flexibility. The distribution model and infrastructure enables the cost-efficient movement of a wide range of products from a number of sources around the world to a number of different shop formats.

12.2.1 Packaging Packaging the product for shipment is a major function of materials management. Packaging protects transported materials against breakage, spoilage, insects and dirt. Welldesigned packaging restricts the material’s movement. For instance, Waterford/Wedgwood, the distributor of Ireland’s "****** DEMO - www.ebook-converter.com*******"

famed Waterford crystal, uses an adhesive-coated bubble wrap that sticks to the glass to cut down handling time and reduce product damage. Larger products, such as furniture or computer equipment, may be shipped in vehicles that are themselves padded for protection.

12.2.2 Automatic identification and bar-coding Materials handling, like many other subsystems that are part of physical distribution, is driven by the need for fast, accurate information. Automatic identification (known as auto ID), is the use of identification technology to mark and read products as they enter and leave the warehouse or as they are received by a manufacturer or retailer. Auto ID may employ voice identification, radio frequencies or magnetic strips, although bar-coding is the most common method.

12.2.3 Unitisation and containerisation Two important elements of modern materials-handling are unitisation and containerisation. Unitisation, or unitising, is a technique for handling small packages more efficiently. It means grouping boxes on a pallet or skid, which is then moved mechanically by a forklift or conveyor system. Containerisation is the process of putting large quantities of goods in sturdy containers that can be moved from ship to truck to aeroplane to train without repacking. The containers are sealed until delivery, thereby reducing damage and theft. They are essentially miniature mobile warehouses that travel from manufacturing plant to receiving dock. A container, often a special form of truck trailer body, can be reused repeatedly. The average "****** DEMO - www.ebook-converter.com*******"

container lasts ten years and can be repaired if damaged.

12.2.4 Inventory control Another important function of physical distribution is establishing an inventory-control system. An inventorycontrol system develops and maintains an adequate assortment of products to meet customers’ demands. Inventory decisions have a big impact on physicaldistribution costs and the level of physical-distribution service provided. If too many products are kept in inventory, costs increase – as do risks of obsolescence, theft and damage. If too few products are stocked in the warehouse, the firm risks product shortages, angry customers and lost sales. Therefore, the objective of inventory management is to keep inventory levels as low as possible while maintaining an adequate supply of goods to meet customer demand.

12.2.5 Just-in-time inventory management Originally a Japanese management approach, just-in-time (JIT) inventory management was conceived to redesign and simplify manufacturing and to reduce warehousing costs. For the manufacturer, JIT means that raw materials arrive at the assembly line in guaranteed working order ‘just-in-time’ to be installed or processed, and finished products are generally shipped to the customer immediately after completion. For the supplier, JIT means supplying customers with products (in other words, raw materials to be used in the production process) in just a few days before needed, or even a few hours, rather than weeks. More and more manufacturing firms are using JIT inventory"****** DEMO - www.ebook-converter.com*******"

management systems, and more than half of all shipments in the United States are now sent ‘just in time’. The basic assumption of JIT is that carrying excessive inventory is costly because it ties up capital that can be used more productively elsewhere – thus an opportunity cost. With JIT, the purchasing firm can reduce the amount of raw materials and parts it keeps in stock by ordering more often and in smaller amounts. General Motors and other motor vehicle manufacturers, for example, generally maintain just an eight-hour supply of parts. Packard Electric consolidates and distributes car wiring harnesses to several motor vehicle manufacturers. Because the wiring harnesses are scheduled to arrive on the assembly line as they are needed, shipment accuracy is crucial for Packard Electric. JIT inventory management is not without its risks, however. The risks associated with JIT are: implementing JIT principles too quickly, cutting inventory without implementing other JIT principles, increased delivery costs, ‘supplier shock’, employee stress and potential bottlenecks caused by supplier delays. The benefits of JIT inventory management include reduced inventory levels, shorter lead times, improved supplier relations, lower production and storeroom costs, better-quality supplies and reduced paperwork.

EXAMPLE The implementation of JIT is a process of continuous improvement characterised by many small gains in efficiency over a long period. Because of the lower inventory levels, JIT also demands smaller, more frequent, precisely-timed deliveries from suppliers. At Saturn, a US train-manufacturing plant, as many as 850 deliveries may be made by suppliers in a 24-hour period. "****** DEMO - www.ebook-converter.com*******"

Deliveries must be made within a five-minute window to be counted as ‘on time’. Tardy suppliers that cause a production delay face being fined $500 a minute.17 Every BMW 3-series manufactured at the BMW Rosslyn plant near Pretoria is customised according to a consumer’s need. Producing hundreds of different customised cars every day places additional demands on assembly-line suppliers and supply systems, which between them bring more than 60 per cent of the components of each car to the line. JIT supply processes ensure that certain parts of the vehicle arrive on the assembly line just in time to be fitted to the particular vehicle they were made for. The seat supply conveyer, the handling system and the bumper supply area have been upgraded as a result. New JIT supply systems bringing door panels, exhaust systems and front and rear axles to the right point on the assembly line have been added. Using a JIT supply system saves space by minimising stock on the premises. Normally, there is only one and a half hours’ worth of stock on the line at any given time. JIT prevents damage to stock and saves on storage and transport costs.18 Couriers and overnight delivery firms are a critical component in the success of JIT channel strategies. These firms have made possible quick, efficient and dependable distribution of many products. The advantages of overnight delivery include reduced inventory and carrying costs, lower capital investment in warehousing and improved tracking of shipments.

12.3 Order processing Another key activity of physical distribution is order processing. The importance of the role that proper order processing plays in providing good service cannot be overemphasised. "****** DEMO - www.ebook-converter.com*******"

12.3.1 The flow of goods and information As an order enters the system, management must monitor two flows: the flow of goods and the flow of information (see Figure 10.4). Often marketers’ best-laid plans can become entangled in the order-processing system. Obviously, good communication among sales representatives, office staff and warehouse and shipping staff is essential to ensure correct order processing. Shipping incorrect merchandise or partially filled orders can create just as much dissatisfaction among customers as out-of-stock situations or slow deliveries. The flow of goods and information must be continually monitored so that mistakes can be corrected before an invoice is prepared and the merchandise is shipped out. One technology that assists businesses in monitoring the flow of goods is Radio Frequency Identification (RFID) which uses radio waves to communicate between a passive tag (usually put on specific goods or batches of goods) and an active tag. The two tags ‘communicate’ with each other allowing managers to know exactly where a product is located, at any given time, in the supply chain.19 Figure 10.4 The logistics process

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12.3.2 Benefits of automation Like inventory management, order processing is becoming more automated through the use of computer technology known as electronic data interchange (EDI). The basic idea behind EDI is to replace the paper documents that usually accompany business transactions, such as purchase orders and invoices, with electronic transmission of the required information. Firms that use EDI can reduce inventory levels, improve cash flow, streamline operations and increase the speed and accuracy of information transmission. EDI is also believed to facilitate a closer relationship between buyers and sellers. It should not be surprising that retailers have become major users of EDI. For large retailers, such as Pick n Pay, Shoprite Checkers, Spar and others, the speed and accuracy of their logistics systems are crucial competitive tools in a highly competitive retail environment. Many big retailers now insist that their suppliers acquire EDI technology. EDI "****** DEMO - www.ebook-converter.com*******"

assists retailers in their efforts to have the right products on the shelf and in the right styles and colours due to improved inventory, ordering and distribution techniques.20

EXAMPLE An exciting new automation system has been developed by Kiva Systems where hundreds of mobile robots can plug themselves into various shelves and move them around a warehouse. Kiva’s technology tracks incoming orders and co-ordinates robots to sort shelves of inventory items in the time that an order is made. By the time the order has finished being placed, the items are in the shipping department and ready to be sent to the customer, without requiring any human intervention. Companies already using the technology have reported that the efficiency of the robots allows their shipping departments to ship up to four times as many goods within an hour. Kiva has also been adapting the robots to handle other tasks such as moving items to waste compactors and to help with packaging. But at $7 million (about R90 million) per customer, the technology is not cheap and for any business smaller than Kiva’s current large corporate customers (such as Amazon, Toys “R” Us and Timberland) it is probably not a feasible option.21

12.4 Transportation Physical-distribution managers also need to decide which mode of transportation to use to move products from producer to buyer. This decision is, of course, related to all other physical-distribution decisions. The five major modes of transportation are railways, road haulage, pipelines, water transportation and airways. Distribution managers generally choose a mode of transportation on the basis of several criteria (see Table 10.4): •

Cost: The total amount a specific carrier charges to move

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•

•

the product from the point of origin to the destination Transit time: The total time a carrier has possession of goods, including the time required for pickup and delivery, handling and movement between the point of origin and the destination Reliability: The consistency with which the carrier delivers goods on time and in an acceptable condition

Table 10.4 Criteria for ranking modes of transportation

•

• •

Capability: The ability of the carrier to provide the appropriate equipment and conditions for moving specific kinds of goods, such as those that must be transported in a controlled environment (for example, seafood under refrigeration) Accessibility: The carrier’s ability to move goods over a specific route or network Traceability: The relative ease with which a shipment can be located and transferred.

The modes of transportation used depend on the needs of the shipper in terms of the six criteria described above. Generally, air transport is the fastest and most reliable mode, but also the most expensive. Water transport is the slowest and is often unreliable in terms of scheduling, but it is certainly the cheapest form of transport. The construction of a poor physical-distribution system "****** DEMO - www.ebook-converter.com*******"

has serious cost implications for firms. Table 10.5 summarises the symptoms that are often evident in a suboptimal distribution system and indicates what the cost implications may be. For example, poor customer service could be a symptom of warehouses that are poorly located or inventory levels that are not aligned with customer needs. Frequent emergency orders could be due to poor communication or inadequate demand forecasting. Regardless of the symptom, a poorly designed physicaldistribution system will add unnecessary costs that, over the long term, will compromise the firm’s competitive position, and may even lead to its demise. Table 10.5 Selected symptoms of a poor physical distribution system

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Symptom

Cost implications

1

Slowturning and/or too high inventory

Excessive capital is tied up in inventory. The firm must bear high insurance costs, interest expenses and high risks of pilferage and product obsolescence. Merchandise may not be fresh.

2

Poor customer service

Costs are high compared with the value of shipments; warehouses are poorly situated; inventory levels are not tied to customer demand.

3

A large number of interwarehouse shipments

Merchandise transfers increase physical-distribution costs because items must be handled (packed, unpacked, stored and verified) at each warehouse.

4

Frequent use of emergency shipments

Extra charges add significantly to physical-distribution costs.

5

Peripheral hauls and/or limited backhauling

The firm uses its own trucking facilities; however, many hauls are too spread out and trucks may be full only one way.

6

A large number of small orders

Small orders are often unprofitable. Many distribution costs are fixed.

SOURCE: Evans, J.R. & Berman, B. 1992. Marketing (6th edition). New York: Macmillan Publishing, p. 492

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13. Retailing and wholesaling intermediaries

LO12

Retailers and wholesalers are the two most prominent intermediaries in a typical channel of distribution for a physical product. Retailing – all the activities directly related to the sale of goods and services to the ultimate consumer for personal or non-business use – enhances the quality of our daily lives. When we shop for groceries, hair styling, clothes, books and many other products and services, we are involved in retailing. The millions of goods and services provided by retailers mirror the needs, wants and lifestyles of our society.

13.1 The classification of retail operations22 A retail establishment can be classified according to a number of characteristics. The following characteristics are normally used to describe and classify different retailers: • • • • • •

Ownership Merchandise sold Location Market area Type of service rendered Relationship with other businesses.

13.1.1 Types of ownership of retail shops

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Retail shops may be owned in different ways. The most "****** DEMO - www.ebook-converter.com*******"

common is the independent ownership of a single retail shop or outlet like a cafe, toy shop, butchery or spaza shop by a single owner or co-owners. By definition, an independent retailer owns only one shop. Other forms of retail ownership are: • Multiple outlets, such as chain stores, franchising and branches of enterprises. Well-known examples of these are Pick n Pay supermarkets, CNA bookshops, and Markham men’s clothing shops • Retail shops that are owned by manufacturers, such as Queenspark, owned by Rex Trueform, and Pep Stores, owned by the Pepkor group • Shops owned by the state, such as the SANDF shops in military bases. There are also examples of retail shops that are owned by groups of farmers, groups of consumers or utility companies. Most of the retail establishments in South Africa are independently owned. They do not, however, account for a large part of retail sales. The large chain groups that are widely represented account for most of the retail sales. Independent retail establishments are characterised by ease of entry into the market, limited capital requirements and the relatively minor licensing requirements that have to be met (low barriers to entry). A chain retailer is any retail firm that owns, controls and operates several outlets that sell similar merchandise. The scope of activities undertaken by chain shops gives them some definite advantages over other types of retailers. "****** DEMO - www.ebook-converter.com*******"

13.1.2 Types of merchandise sold Retailers may also be classified according to the merchandise sold. For purposes of classification, a distinction is drawn between shops selling a variety of merchandise, a single product line or speciality products. A department store, such as Stuttafords, is an example of a retail store selling a variety of merchandise. Stuttafords sells clothing, food, electrical appliances, toiletries and a variety of other exclusive products. Other shops that offer a variety of merchandise are supermarkets, such as Shoprite Checkers and Woolworths – shops that sell both food and non-food items. Foschini and Russells, who sell women’s clothing and furniture respectively, are typical single-product-line shops. PG Glass and Italtile are examples of shops that sell a small variety of speciality products. PG Glass sells glass products; Italtile sells mainly tiles and related products. Table 10.6 Types of shops and their characteristics

Essentially, this classification distinguishes between shops that sell a wide variety of merchandise and those that sell a limited line of merchandise. Retailers that fit into these categories are listed in Table 10.7. Table 10.7 Classification of retailers according to variety of merchandise

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Wide variety of merchandise

Limited variety of merchandise

Department stores

Speciality stores

Superstores

Fast-food outlets

Hypermarkets

Convenience food stores

Full-line discount stores



Another widely-applied classification according to the type of merchandise sold is one that distinguishes between foodrelated and general merchandise shops. Typical retailers that can be classified on this basis are shown in Table 10.8. Table 10.8 Classification of food-related and general merchandise retailers

Food-related merchandise

General merchandise

Convenience store

Speciality stores

Supermarkets

Department shops

Superstores

Discount stores

Hypermarkets

Catalogue showrooms

Warehouse shops

Factory shops

Box shops



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Food-related retailers A convenience store is a food-orientated shop that sells a limited variety of groceries and impulse goods. It focuses on convenience for the local community. One of the major advantages of convenience shops is the way consumers use them to ‘top up’ when they run out of much-needed products (‘emergency goods’) and do not want to travel to or spend time at a supermarket. To serve their customers effectively these shops are located in easily accessible, hightraffic areas and are open for seven days a week from early in the morning till late at night. The layout of these shops also contributes to ease and speed of shopping. The current trend is for convenience shops to expand their merchandise selection to include meat and bakery items and delicatessen counters. Consumers are prepared to pay for the convenience offered by these shops, and their prices are, therefore, higher than supermarkets, for instance. A further characteristic of convenience shops is the high frequency with which they receive deliveries, owing to their small size and high turnover.

EXAMPLE Well-known convenience shops in South Africa are Kwikspar (smaller version of a Spar supermarket) and 7-Eleven. Recent years have also seen many petrol stations being converted to include a convenience shop. Engen and BP, for instance, have successfully combined petrol stations with convenience shops, and it can be expected that the conventional convenience shopping groups will lose some of their business to shops at petrol stations because of their accessibility and convenience. Woolworths was the first South African retailer entering the convenience retail market by launching its first Woolworths Food Stop on an Engen forecourt in September 2000 (at Cape Town’s Orange Convenience Centre). Capitalising on the changing lifestyles of consumers, "****** DEMO - www.ebook-converter.com*******"

Woolworths is able to reach new and different consumers than previously. In terms of creating value to consumers, Woolworths Food Stops are open 24 hours a day (time utility), in safe and convenient locations (place utility), selling products at the same prices as those in all the other Woolworths Food stores (possession utility) and offering healthy snacks and ready-made meals for consumers on the run (form utility). A supermarket is a large shop that sells a wide range of food products as well as a limited number of non-food items. It is operated on a self-service, low-price and low-margin basis. The typical products offered by a supermarket are dry groceries, fresh meat and fish, fruit and vegetables, dairy products and toiletries. Initially, supermarkets concentrated on food products, but the low profit margins forced them to add more and more non-food items to their product mix. Today, basic food lines are supplemented by a variety of prepared food items offered at delicatessen counters, and non-food items, such as videos, batteries and cigarettes. Because supermarkets are low-margin retailers, they have to generate high sales volumes to make worthwhile profits. To enhance consumer support, supermarkets provide ample parking at convenient locations. The typical shop layout mostly follows a gridiron pattern, and is designed with shoppers’ ease and speed of movement as a priority. Scanning equipment has become standard in supermarkets, and together with bagging and acceptance of all major credit cards, contributes to satisfying consumers’ demand for speed and efficiency in supermarket shopping. Major supermarket retailers in South Africa are Pick n Pay and Shoprite Checkers. The supermarket is also a good example of how retailing responded (by changing product "****** DEMO - www.ebook-converter.com*******"

mix and retailing formats) to forces in the marketing environment (such as the need for speed and convenience). The superstore is bigger than the supermarket. It carries merchandise similar to that of the supermarket, as well as personal-care items, garden supplies, houseware, appliances, wines, bakery products, clothing and other items. Its focus, however, remains on food, although it is more diversified than a supermarket. Most superstores are owned by large retail firms that also own supermarkets. The superstore is an attempt to make one-stop shopping a reality. Pick n Pay owns several superstores in South Africa. The hypermarket is a retail institution of French origin. The first hypermarket, owned by Carrefour, opened in Paris in the early 1960s. This retail format is very successful in Europe, but has failed to make any inroads in US retailing. Pick n Pay opened South Africa’s first hypermarket in Boksburg in 1975. Hypermarkets are in excess of 20 000 square metres in floor area and offer a wide variety of food and an extensive range of non-food items, such as clothing, hardware, sports equipment, appliances, toys and audio equipment. The design and location of hypermarkets are geared towards limiting costs. The design of hypermarket buildings has been described as ‘faceless shoe boxes’. Hypermarkets are situated in highly accessible, decentralised areas where land prices are cheaper than inner-city locations. The parking requirements for hypermarkets are huge: six parking bays totalling 150 square metres are required for every 100 square metres of shopping space. A warehouse shop can be described as a no-frills shop "****** DEMO - www.ebook-converter.com*******"

with spartan fixtures and displays, and limited availability of sales staff. The usual product lines include a wide variety of foodstuffs and hardware in limited assortments. The layout of the shop reflects the warehouse concept very well, and the stock and display areas are the same. Boxes containing products are cut open and left for customers to help themselves. The shop’s location is normally in a low-rent area that is easily accessible. Almost no service is offered, but customers are prepared to accept limited shopping assistance in exchange for very low prices. This retailing concept was tried by the then Checkers group in South Africa, but it proved to be unsuccessful. The box shop is yet another attempt to cut costs in grocery retailing. It offers a limited line of private and national brands. Less than 1 000 items are carried and the shop is open for only a limited number of hours per day. All transactions are cash and customers must do their bagging themselves. This retailing format is not in operation in South Africa yet, but it can be expected to enter the retailing scene at some stage. It will be suitable for locating in black townships, which are often under-supplied in respect of retailing outlets. General merchandise retailers A speciality shop carries a well-defined, narrow merchandise line. These shops are also known as limited-line or singleline retailers. A high level of service accompanies the merchandise offered. The products in which these retailers specialise include just about every type available: clothing (Foschini), jewellery (American Swiss), books (Exclusive Books), furniture (Morkels), shoes (Cuthberts), toys (Toys "****** DEMO - www.ebook-converter.com*******"

“R” Us) and music (Musica) are some of the more popular products in which speciality retailers specialise. These shops focus on a product mix that is narrow but with a deep assortment. In doing so, they appeal to a narrow market – or even a niche one at times. Customers are offered a good selection of products and sales expertise by the sales staff. One finds a broad spectrum of shop designs and layouts of speciality shops. Upmarket clothing shops will offer luxurious and convenient layouts, whereas furniture and sports equipment shops may provide a more spartan warehouse atmosphere. Customer service is crucial for most speciality shops because many of the products offered often require usage instructions and, in some instances, adjustments to meet customers’ demands. Various speciality shops are found in South Africa (see Table 10.9). Department stores are big retail outlets that offer consumers a product mix of a wide variety and deep assortment. Stuttafords is an example of a department store. Department stores have also been described as a selection of speciality shops. It is divided into departments for purposes of merchandising and customer control. Typical departments are men’s clothing, women’s clothing, toys, furniture, sound and video equipment, kitchenware and small appliances. Each department has a specific selling space allocated to it. Such a department also has its own sales staff and cash register. The latest trend in department stores is to lease parts of the shop to independent firms that offer highly specialised products and services, something that might extend the maturity phase of the life cycle of department stores. Cosmetics departments are examples of "****** DEMO - www.ebook-converter.com*******"

this trend. These leased departments are discussed in a later section of this chapter. Department stores were once the main drawcard in retailing and were extensively used as anchor tenants in large shopping centres. Their roles have undergone major changes in recent years as a number of developments have seen them decline in popularity. Most department stores are unable to compete effectively against other retailing formats such as speciality and discount shops. The following are some of the reasons why department stores are unable to compete effectively: •

Many consumers are price-conscious so discount retailers appeal to them • Speciality shops cluster in shopping centres and consequently offer the same opportunity for shopping that once made department stores attractive • Some speciality retailers now offer wider assortments – a combination that was formerly the domain of department stores • Department stores no longer offer brands exclusively. All of the once highly exclusive brands are now available at speciality shops as well • The stock size and variety inherent in department stores make them slow – or even unable – to react quickly to changes in consumer needs • The inventory levels of department stores are high and costly, which prohibits them from competing on price • The vast selling space required by department stores is costly • The number, quality and cost of sales staff result in high "****** DEMO - www.ebook-converter.com*******"

salary costs. Table 10.9 Speciality retailers in South Africa

A discount shop is a general merchandiser that offers wellknown brand name products for sale at low prices. Retailers such as Dions and Game are examples of discount shops. These shops strive for high sales volumes and quick inventory turnover by pricing their products low. Their target market is the economy-minded consumer. They offer a wide variety of merchandise, such as clothing, toys, sports equipment, linen and appliances. Initially, they offered only hardware (such as DIY equipment and electrical appliances), but today soft goods (clothing and shoes) are part of their product mix. A well-known strategy of discount shops is to draw in customers by offering low prices on hard goods in the hope that they will also purchase soft goods. In an effort to reduce costs, limited services are offered. Sales staff are only available in departments where customers are in need of assistance, such as computers, cellphones and audio/video equipment. Initially, discount shops were not successful in South Africa, but this is gradually changing. Catalogue showrooms are retail outlets where customers can select merchandise from a catalogue in a warehouse environment. Catalogue showrooms compete on price. Low prices are the result of low operating costs, which are derived from the following: "****** DEMO - www.ebook-converter.com*******"

• • • • •

The use of products are not explained or demonstrated by sales staff Only a few salespeople are required A delivery service is not offered, which lowers costs Spending on decor is minimal Shrinkage, especially that attributable to shoplifting, is relatively low.

Catalogue showrooms function as follows: customers write down their orders. The order forms are then handed to clerks at a designated check-out area. The merchandise is accumulated in the warehouse section, after which the customer collects it at a delivery point in the shop. The largest part of the shop is devoted to warehousing. This concept in its purest form is not found in South Africa. However, retailers dealing in tiles and bathroom accessories, such as Italtile, apply some of the principles of catalogue showrooms in their shops. The term ‘factory shop’ is one that has been misused to some extent in South Africa. The true factory shop is a manufacturer-owned shop located on or adjacent to the manufacturer’s production facility, and sells goods such as samples, cancelled orders, factory overruns and out-ofseason merchandise. Many retailers, however, have added the words ‘factory shop’ to their names with the intention of creating a low-price image. Manufacturers establish factory shops for the following reasons:23 •

They are profitable because very low operating costs are incurred. Few services (if any), limited displays and shop fixtures and low rent are characteristics of such shops

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• •

They are an effective way of selling merchandise that is discontinued They provide manufacturers with an additional outlet. The increase in the number of retailers’ private (reseller) brands reduces the opportunities for manufacturer brands. The income from factory outlets, to a certain extent, makes up for this lost revenue.

The scale of factory shop operations has increased to such an extent in the United States that they are often grouped together to form shopping centres. Because of their ability to contain input costs (and consequently prices), factory shops are very popular with the public during periods of high inflation and recession.

13.1.3 Shop location Retail stores are located mainly in shopping areas or shopping centres. Shopping areas are sites that have developed spontaneously over a period of time. The bestknown shopping areas are the central and suburban business areas of towns and cities. Ribbon developments occur along busy streets, like Cape Town’s Voortrekker Road in Parow, which is known for its (unplanned) concentration of motor-vehicle dealers. Shopping centres, on the other hand, are planned, developed and managed as a unit to enhance shopping efficiency. The best-known types of shopping centres are: •

Regional shopping centres, such as Eastgate near Johannesburg, Menlyn in Pretoria and Cavendish Square in Claremont "****** DEMO - www.ebook-converter.com*******"

•

•

•

Community centres, such as Bayside Centre in Table View (Cape Town), Zebediela Plaza (Roedtan in Limpopo), Jabulani Mall and the Protea Glen Mall (both in Soweto, Gauteng) Neighbourhood centres, such as Nobel Park in Bellville, Silverwater Crossing (in Meyerspark, Gauteng) and the Bryanston Shopping Centre (in Bryanston, Gauteng) Local centres – a typical combination of, for instance, convenience store, café, post office, greengrocer and butchery found in most residential areas.

A regional shopping centre is the largest of all the shopping centres. These centres are in excess of 20 000 square metres of gross leasable area in size and serve, as the name indicates, the regional population resident within 30 minutes’ driving time from the centre. A regional shopping centre is built around a department store that serves as the major drawcard for shoppers. The department store serves as the anchor tenant and is supported by a supermarket and a wide range of other speciality shops. The speciality shops sell clothing, furniture, toys, books, kitchenware and music. A variety of fast-food outlets, restaurants and coffee shops are often also present. The recreational component of regional shopping centres – such as cinemas, exhibitions and shows – has grown substantially in recent years as a result of consumer demand for entertainment although this may be changing (see Reader 50 ‘Shopping malls adapt to customers’ changing wants’). Several other services, including dentists, medical practitioners, opticians, hairdressers, childcare and beauty parlours are also provided in regional shopping centres. In a "****** DEMO - www.ebook-converter.com*******"

certain sense, the regional shopping centre is a smaller-scale re-creation of shopping opportunities traditionally found in city centres. Regional shopping centres appeal to shoppers because they are easily accessible and provide ample parking. Many regional shopping centres undergo refurbishment from time to time to accommodate changes in consumer preferences. Some of these centres – for example, Sandton City and Eastgate – have been enlarged to the point that they then become mega-malls, in excess of 100 000 square metres of gross leasable area.

READER 50 >> Shopping malls adapt to customers’ changing wants Clothing and gadgets are winning while cinemas and music shops lose as online purchases grow. The landscape of shopping centres in SA is adapting to cater for customers’ changing wants and also how those customers believe those wants will be met. Beyond everyday items like food, South Africans want branded goods such as clothing and gadgets that represent status and are popular in the US and Europe. But mall owners say that though gadgets are still desired, buyers are finding they do not have to go to malls to get their hands on them. These trends are opening the door for more clothing brands to enter South Africa. Hyprop CEO Pieter Prinsloo says he has a long list of multinational clothing stores that want space in Hyprop’s premium malls. ‘Malls have to adapt to what people want. At Hyde Park Corner, for example, we are moving stores around. CNA is getting a smaller space. Some stores will close and be replaced by ones that better suit the market,’ he says. Redefine CEO Marc Wainer says he is concerned about the future of the cinema and music stores in shopping malls. ‘Cinemas take up a lot of space but often struggle to make the rent related to that space. Music shops are also under pressure as people "****** DEMO - www.ebook-converter.com*******"

download music as opposed to buying CDs. Meanwhile, we have plenty of designer-clothes stores knocking on our door. People love to buy clothes’. Consumers do not only want to buy clothes, however. Tech brands such as Apple, with its iconic iPhones and iPads, and Samsung, famous for its phones, televisions and other music products, are still popular. But, while people continue to shop for clothes in physical stores where they can try on items, they are increasingly buying hi-tech gadgets online. So although hi-tech brands will still have a presence in malls – partly because people still go into shops for repairs and advice – they need less space because of changing shopping patterns. The shifting patterns in consumer behaviour include going onto shopping websites while sitting at coffee shops in malls while using WiFi on their laptops, iPads and cellphones. Mr Prinsloo says that customers are using applications on their phones to find products at shops while they are in a centre, and then going to those shops and getting those products. This is changing how mall owners think about attracting people to their malls. SOURCE: Anderson, A. 2014. Shopping malls adapt to customers` changing wants, Business Day Companies and Markets section, 10 March, p. 5

A community centre usually houses a supermarket and provides a range of shops for soft goods, such as clothing or dry-cleaning, as well as shops dealing in hard goods, such as appliances and hardware. The community centre, therefore, offers both shopping and convenience goods to consumers who are within a 10 to 20 minutes’ driving range. The largest shop in a neighbourhood centre is usually a supermarket. Other retailers also commonly found in neighbourhood centres are pharmacies, butchers, drycleaners, liquor stores and bakeries. This centre is normally patronised by consumers within ten minutes’ driving time from the centre. Local centres typically contain shops and businesses such "****** DEMO - www.ebook-converter.com*******"

as a superette, hairdresser and post office. Most customers visiting a local centre live within walking distance of the centre.

13.1.4 Size of the market area Various factors determine the size of a shop’s market area. The most important factor is the size of the shop itself, followed by the product mix offered and the frequency with which the products are bought. A café or Kwikspar that sells, among other things, convenience products, such as cigarettes, newspapers and bread, serves a small market area. Shops specialising in scarce and expensive products, on the other hand, serve a large market area. Consumers who want to buy expensive photographic equipment or crystal glass, for instance, will travel long distances and for long periods of time to get what they want. Generally, a market area’s size will be influenced by the following factors: •

•

•

•

A shop that sells convenience goods will have a market area smaller than that of a shop selling shopping or speciality products The more mobile the consumers in a specific area, the bigger the market area of a shop in that area. Mobility here refers to either ownership of vehicles or access to other forms of transport that can be used to visit shops The bigger the floor area of a shop, the bigger its market area. A bigger floor area can stock deeper and wider assortments of merchandise and, therefore, ‘pull’ customers from wider areas The further a particular shop is from a competing shop,

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the larger the market area of that particular shop.

13.1.5 Type of service rendered Retailers may be classified according to the nature and level of service provided to their customers. Four levels of service rendered by retailers can be distinguised.24 These vary from full service to the other extreme, whereby most of the services are undertaken by the customers themselves, as is the case with self-service shops. •

•

•

Self-service is accepted by customers because they are prepared to search for products in a shop and compare prices themselves, provided a considerably lower price is to be paid. Today many retailers utilise self-service, especially for convenience products, such as groceries, but also for shopping products, such as clothing. Selfservice is very important for discount stores, such as Makro, because the savings in labour costs enable them to offer discount prices to consumers. Self-selection retailing is a variation of self-service. Consumers still undertake the search and comparison processes, but in this case they have at their disposal the staff of the retailer for advice and assistance should they need it. In most transactions the customer interacts with the staff of the retailer only at the end of the shopping process, when payment has to be made. A factory shop selling clothing is an example of a self-selection retailer. Limited-service retailers have more staff available to serve customers than is the case with self-selection. Customers usually need more assistance during the

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•

buying process because of the nature of the product purchased. A limited service is offered by furniture shops, such as Joshua Doore, for example. Full-service retailers sell speciality products, such as jewellery, exclusive clothing and photographic equipment. Customers who buy these products expect advice and information. Services such as delivery, adjustments and manufacture by order are also offered. As one would expect, this level of service is the most expensive offered by retailers.

13.1.6 Relationship with other businesses The relationship between retailers and other firms in a channel of distribution ranges from there being no relationship to a strong relationship between retailers and manufacturers, as in the case of franchise agreements. Between these two extremes one finds retailers that are voluntarily affiliated to other retail traders. The best-known form of such a voluntary relationship is to be found where retailers co-operate by means of a wholesaler-sponsored voluntary chain group, such as the Spar organisation. Another form of voluntary relationship is the retail cooperative group, of which Sentra is an example. All the relationships described so far are part of vertical marketing systems. A vertical marketing system is a centrally programmed, capital-intensive and tightly managed network of vertical layers of firms whose objectives are to realise economies of scale in all areas of their activities so that maximum impact on the market can follow. An administered vertical "****** DEMO - www.ebook-converter.com*******"

marketing system is very similar to a conventional marketing channel, the difference being that one of the channel members takes the initiative and gets other members of the distribution channel to work towards a common objective. Programmed merchandising agreements are one of the mechanisms used for such cooperation. An example of a well-managed and structured vertical marketing system is the Bollywood movie studios in Mumbai, India, which carefully manage the release of their products through a sequence of cinemas, DVD sales and television to maximise their return. A corporate vertical marketing system usually consists of either a retailer that has integrated backwards to ensure supplies or a manufacturer that has integrated forwards to ensure that its products reach the consumer. An example of a South African corporate vertical marketing system is the Pep Group, which owns its own factories and its own retail shops. Contractual vertical marketing systems can take on any of three forms, namely: • Wholesaler-sponsored chains – Spar • Retail co-operative organisations – Sentra • Franchised systems – Spur, Juicy Lucy and Steers.

Franchising

LO14

Franchising is a business model which attempts to combine the benefits associated with a large (and successful) corporate business with the energy and innovativeness of a locally based entrepreneurial small business. Although various definitions of franchising have been developed over "****** DEMO - www.ebook-converter.com*******"

time, the diversity of franchise arrangements makes it difficult to condense it into a single definition. Instead it should be seen as a business concept with the following salient features: •

•

•

•

•

The agreement between the franchisor and the franchisee. The franchisor’s undertaking in the agreement is the contribution of knowledge, skills, patents, recipes, support and any other undertakings on which the parties might agree. The franchisee, in turn, undertakes to adhere strictly to the prescribed manner in which to exploit the franchisor’s knowledge, skills, patents, recipes, and so on, and to pay the franchisor a fee for the benefit that the franchisee derives from the agreement. The objective to be achieved. The objective of a franchise arrangement is to maximise the collective marketing efficiency of the whole organisation (the franchisor and all the franchisees) by continually striving to ensure customer satisfaction. The promotion and entrenchment of an image to be projected. By following standardised procedures and recipes and using specified architectural layouts and decor, the firm’s image is entrenched in the minds of consumers. The support that both parties give one another. The support provided for in a franchise agreement consists of both initial or start-up support and ongoing support over the term of the agreement. The financial arrangements. The main reason for having a franchise arrangement is the financial benefits

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•

that are derived from it by both parties. Up-front and continual payments and contributions are important conditions in franchise arrangements. The reduction of risk. A well-structured and established franchise organisation has proved to be, generallyspeaking, a less risky business venture than an independent new business.

Four types of franchise arrangements can be identified based on the positions that the different parties occupy in the distribution channel: •

•

•

Original service/trademark holder–retailer. Using this arrangement, the franchisee acquires the use of the franchisor’s trademark, architectural designs, logos, operation manual and other business practices. Examples of this arrangement are abundant in the fastfood business, including Spur, McDonalds and Wimpy. Manufacturer–retailer. In this case, a manufacturer enters into an agreement with independent retailers, who undertake to exclusively market its product or products to final consumers. The best-known examples are petrol stations and new-car dealerships. Manufacturer–wholesaler. In this arrangement, a manufacturer sells its product or products to wholesalers, who then sell such a product or products to retailers. Coca-Cola manufactures and sells the softdrink syrup used for the production of Coca-Cola to franchised bottlers such as Coca-Cola Sabco (in the Eastern Cape) and Penbev (in the Western Cape). The franchised bottlers then bottle and distribute the soft

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•

drinks to retailers on their behalf. Wholesaler–retailer. This arrangement specifies that the wholesaler undertakes a range of activities, such as buying, national advertising and advice on shop layout. Although the retailer remains independent, it trades under the name of the wholesaler and benefits from the wholesaler’s bulk buying and promotional programmes. The Spar supermarkets are examples of retailers using this arrangement.

EXAMPLE To be granted the rights to a franchise, a franchisee usually (although not always) pays an initial, once-off franchise fee. The amount of this fee depends solely on the individual franchisor. Famous Brands charges R114 500 for a Steers franchise. In addition to this initial franchise fee, the franchisee is expected to pay weekly, bi-weekly or monthly royalty fees, usually in the range of 3 to 7 per cent of gross revenues. Famous Brands charges Steers franchisees 5 per cent of turnover as a royalty and an additional 5 per cent on turnover as a contribution to cover the cost of advertising and promotional material. In other words, if the total monthly turnover of the Steers franchise is R400 000, the franchisee will be expected to pay Famous Brands a monthly amount of R40 000.25 Similarly, Taste Holdings, the holder company for Maxi’s (the casual dining restaurant) and Scooters Pizza, charge a joining fee, a set-up fee and an annual royalty fee used for promoting the chain nationally. The joining fee for a typical Maxi’s restaurant (size 150–250 m2) begins at R100 000; the set-up cost is between R1,6 million and R2 million; and the annual royalty fee is between 5 and 6 per cent. The joining fee for a Scooters Pizza (size 50–100 m2) is about R75 000; the set-up cost ranges from R0,9 million to R1,1 million; and the annual royalty fee is between 5 and 7 per cent.26 Franchising offers many advantages to people who want to own and manage a business, including: "****** DEMO - www.ebook-converter.com*******"

• • • •

The chance to become an independent businessperson with relatively little capital A product that has already been established in the market Technical training and managerial assistance Quality-control standards enforced by the franchisor, which help the franchisee succeed by ensuring product uniformity throughout the franchise system.

In turn, the franchisor gets wider geographic expansion and growth with a limited investment, motivated owners to make their firms successful and the economies of scale benefits that the bulk purchasing of inventory brings. Franchisors also often rely on franchisees, who are much closer to the consumer than most officials at the chains’ headquarters, to assist in new-product development and help identify trends and new opportunities. WEBSITE Visit the websites http://www. franchisedirect.co.za/ or http://www.fasa.co.za/ (The Franchise Association of South Africa) to investigate franchising opportunities available in various parts of South Africa.

Leased departments As mentioned earlier, a leased department is a portion of a retail shop that is rented to an outside party. It can also be seen as subletting by an existing retailer. Bigger shops, such as department stores and discount shops, are the types of shops that tend to lease out departments. The lessee is "****** DEMO - www.ebook-converter.com*******"

responsible for the fixtures and fittings, decor and other equipment necessary to do business in the shop. In exchange for the right to do business inside an existing shop, the department lessee either pays a fixed amount or a percentage based on sales turnover as rent to the shop owner. Leased departments are used by retailers to broaden their product or service offerings. Examples of products and services offered by leased departments are cosmetics, photographic studios and equipment, photo development, shoe repairs and food. South African examples are photodeveloping services in pharmacies and cosmetics counters in department stores. Steer’s outlets in Spar supermarkets and MTN outlets in Clicks branches are other examples. LO15 Non-shop retailers Retailers whose interaction with customers is mainly by way of telephone, mail, television, newspapers, magazines and computer are known as non-shop retailers. With the exception of vending machines, informal markets and electronic kiosks, the consumer does not physically visit the shop premises to do shopping. Non-shop retailers can be classified according to the extent to which they depend on location, or time available for transactions. A distinction can also be made between traditional non-shop retailers and those that have emerged from the technological developments in electronics. Examples of traditional nonshop retailers are those involved in door-to-door selling, mail-order catalogues and street hawkers. Modern nonshop retailers include those that communicate and sell over the Internet and those that manage electronic kiosks. Direct-selling retailing occurs in two main forms – "****** DEMO - www.ebook-converter.com*******"

canvassing and party-plan selling. Canvassing refers to door-to-door retailing and selling in offices and factories. Door-to-door retailing is the direct selling approach that takes place in the customer’s residence. For the consumer, it offers both place and time convenience. It is also the most personalised form of retailing. Consumers are approached either by a sales representative knocking on the door or by telephone with a request for an appointment. Most door-todoor retailing is initiated by the use of the technique called cold canvassing. The sales force approaches potential buyers about whom little or nothing is known at their homes, and the sales work takes place only after meeting the potential buyer. Door-to-door retailing has encountered resistance from the public in recent years because of heightened safety and security concerns. In party plan selling, a salesperson convinces someone to host a gathering of neighbours, friends or colleagues at their place of residence or workplace. The merchandise is then shown and demonstrated to those in attendance and those who want to buy or place orders with the salesperson. The host is rewarded for the effort of arranging the meeting. The extent of the rewards usually depends on the amount of merchandise bought by invited guests. Other forms of non-shop retailing include: • Telephone retailing, also called tele-retailing, takes place when products or services are sold through telephone contact. It is also involves providing customers with information on available products and services, credit applications and account balances, and follow-up calls are made after transactions to measure "****** DEMO - www.ebook-converter.com*******"

customer satisfaction. • Direct-mail catalogues use the postal services as a channel to communicate with consumers. The offer is usually contained in a letter, brochure and/or catalogue. • Interactive television retailing allows the customer to view merchandise on television and order it without having to leave the comfort of the home. One of the bestknown interactive television systems is Videotex. Consumers who subscribe to Videotex can access a vast amount of shopping and other information. The Videotex information can be displayed either on a television screen or a computer monitor. • Internet retailing allows consumers to visit a ‘virtual’ shop and access departments within the shop. Recent developments have produced sound, animation, threedimensional views and colour, which enhance the Internet’s ability to advertise merchandise (see Technology in Action reader ‘Convenience central to Edcon’s e-commerce strategy’). • Electronic kiosk retailing includes those retailing activities that allow customers to access information and order merchandise with a credit card. Electronic kiosks are also extensively used to provide information in hightraffic areas, such as shopping centres and airports. Some DVD rental firms have begun placing these kiosks in small grocery retailers. Customer swipe their credit cards and select a DVD from a menu and the DVD rolls out – much like a can of Coca-Cola from a vending machine. • Vending machines are direct retail formats in which the sellers have no direct contact with the customers. They "****** DEMO - www.ebook-converter.com*******"

•

are operated with the use of coins or credit cards to purchase mostly convenience goods. The vending machine offers better time and place utility for retailing convenience goods. No sales staff are involved and products can be purchased 24 hours a day. Street hawking is a highly visible non-shop retailing activity, offering just about any conceivable product. WEBSITE Visit the Pick n Pay online shopping site at https://shop.pnp.co.za to see the consumer benefits offered by Pick n Pay.

Wholesaling intermediaries

LO16

Another important member of the channel of distribution is the wholesaler. Wholesalers are firms that facilitate the movement of products and services from the manufacturer to the retailer. Variations in channel structures are due in large part to variations in the numbers and types of wholesaling intermediaries. Overall, there are two main types of wholesalers: merchant wholesalers on the one hand and agents and brokers on the other. Typically, merchant wholesalers take title to the product (ownership rights), unlike agents and brokers, who simply facilitate the sale of a product from producer to end user. Figure 10.5 illustrates the differences between the main types of wholesaling intermediaries. Generally, product characteristics, buyer considerations and market conditions determine which type of wholesaling intermediary the manufacturer should use. Product characteristics that may dictate a certain type of wholesaler "****** DEMO - www.ebook-converter.com*******"

include whether the product is standardised or customised, the complexity of the product and the gross margin of the product. Buyer considerations that affect wholesaler choice include how often the product is purchased and how long the buyer is willing to wait to receive the product. Market characteristics that determine wholesaler type include how many buyers are in the market and whether they are concentrated in a general location or widely dispersed. For example, a manufacturer that produces only a few engines a year for space rockets will probably use an agent or broker to sell its product. In addition, the handful of customers that need the product are most likely concentrated near rocketlaunching sites, again making an agent or broker more practical. On the other hand, a book publisher that prints thousands of books and has many widely dispersed customers with year-round demand for its product will probably use a merchant wholesaler. Figure 10.5 Major types of wholesaling intermediaries

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>>Technology in action Convenience central to Edcon’s ecommerce strategy After the launch of e-commerce platforms for CNA and Red Square, retail group Edcon plans to introduce an online shopping website for its Boardmans chain. The company joins local retailers entering the e-commerce fray, highlighting the growing trend towards capturing online trade in a bid to take market share. In tough economic times a competitive edge can be gained by tailoring businesses according to customers’ demands. With ever greater numbers of time-poor and tech-savvy shoppers, convenience is a key factor. Mr Price Apparel launched its online platform last year. Woolworths also offers online shopping. Edcon CEO Jürgen Schreiber this week said online strategy was important. ‘It offers convenience to customers… For us it’s a step-by-step process. We’re focusing on hard lines and low-queue products. We’re first doing everything outside apparel and at some point in time we will go into the apparel space,’ he said. Edcon e-commerce executive David Gibbons said cosmetics were a ‘great’ category for e-commerce – they were easy to ship and lent themselves to online shopping. ‘Customers often know exactly what they’re looking for and a website can provide them with … a huge range, good product information, customer reviews and insight about new products. They seldom "****** DEMO - www.ebook-converter.com*******"

shop exclusively either on-or off-line, so being multichannel is an important part of the value proposition, and having physical stores where product can be exchanged is seen as a big benefit by consumers,’ Mr Gibbons said. Professional services group PwC says there are several barriers to the development of e-commerce in South Africa. The first is the low Internet penetration and the high cost of broadband. Another is a postal system widely seen as inefficient. Most retailers rely on private couriers for deliveries, which add to costs. SOURCE: Adapted from Moorad, Z. 2013. Convenience central to Edcon’s e-commerce strategy, Business Day 6 June, p. 12

Merchant wholesalers Slightly less than 60 per cent of all wholesale sales in the United States are conducted by merchant wholesalers, but they make up 80 per cent of all wholesaling establishments. A merchant wholesaler is an intermediary that buys goods from manufacturers and resells them to businesses, government agencies, other wholesalers and retailers. All merchant wholesalers take title to the goods they sell. Most merchant wholesalers use one or more warehouses in which they receive goods, store them and later reship them. Customers are mostly small- or medium-sized retailers, but merchant wholesalers also market to manufacturers and institutional clients. Merchant wholesalers can be categorised as either full service or limited service, depending on the number of channel functions they perform. "****** DEMO - www.ebook-converter.com*******"

Full-service merchant wholesalers Full-service merchant wholesalers perform all channel functions. They assemble an assortment of products for their clients, provide credit and offer advertising help and technical advice. In addition, they maintain a sales force to contact customers, store and deliver merchandise and perhaps offer research and planning support. Depending on the product line, full-service merchant wholesalers sometimes also provide installation and repair services. Full service also means ‘going the extra mile’ to meet special customer needs, such as offering fast delivery in emergencies. Limited-service merchant wholesalers As the name implies, limited-service merchant wholesalers perform only a few of the full-service merchant wholesaler’s activities. Generally, limited-service merchant wholesalers carry a limited line of fast-moving merchandise. They do not extend credit or supply market information. Limited-service wholesalers represent just a small part of the merchant wholesaling industry. Agents and brokers Agents and brokers represent retailers, wholesalers or manufacturers and do not take title to the merchandise. Title reflects ownership, and ownership usually implies control. Unlike wholesalers, agents or brokers only facilitate sales and generally have little input into the terms of the sale. They do, however, get a fee or commission based on sales volume. Many perform fewer functions than limitedservice merchant wholesalers. "****** DEMO - www.ebook-converter.com*******"

Timing is everything for Survivors "****** DEMO - www.ebook-converter.com*******"

Survivors are group of consumers in South Africa at the bottom of the of the wealth and income pyramid, defined by the University of Cape Town, Unilever Institute of Strategic Marketing, as individuals that live in households earning less than R5 000 per month. Nevertheless, notwithstanding the importance of this market segment to business (it is the biggest market segment by number in South Africa), these consumers are poorly served by the supply chain. This is probably because contemporary business models do not apply to this complex segment and consequently its buying patterns are poorly understood. Survivors source their goods from both formal as well as informal sectors, unlike other market segments that rely almost exclusively on formal channels of distribution (such as supermarkets). However where survivors purchase their goods and the nature of the goods purchased, can to a large extent be determined by the time of the month. When Survivors receive their salaries or monthly grants or pension payouts, they generally do a ‘big shop’ and buy in bulk from formal outlets (such as supermarkets), because it is generally cheaper than spaza shops and to avoid the additional travelling expenses associated with multiple trips to the shops. However, towards the end of the month the shopping behaviour of this market segment changes. They tend to use informal shopping outlets such as Spaza shops (because they are closer to where they live) and purchase lesser known brands in smaller pack sizes (because they simply do not have the money to do otherwise). Consequently, the University of Cape Town, Unilever Institute of Strategic Marketing concluded in their report on survivors in The Majority Report (2013) that brand loyalty is generally stronger the beginning of the month and that brand loyalty declines as the month progresses. As such marketers should synchronise their marketing with buying patterns remembering that bulk buying dominates at certain days of the month and that convenience and smaller pack sizes are important from the middle to the end of the month. SOURCE: University of Cape Town, Unilever Institute of Strategic Marketing. 2013. The Majority Report presentation. Cape Town: University of Cape Town. "****** DEMO - www.ebook-converter.com*******"

QUESTIONS 1 2

How should marketers communicate with the Survivors market segment? How could businesses reconfigure their supply chain to better serve the Survivors market segment?

KEY CONCEPTS Atmosphere: the overall impression conveyed by a shop’s physical layout, decor and surroundings. Automatic vending: the use of machines to offer goods for sale. Chain stores: stores owned and operated as a group of firms by a single firm (the holding company). Containerisation: the process of putting large quantities of goods in sturdy containers that can be moved from ship to truck to aeroplane to train without repacking. Convenience store: a miniature supermarket, carrying a limited line of highturnover convenience goods. Department store: a store housing several departments under one roof. Direct channel: manufacturers selling directly to consumers. Direct marketing (direct response marketing): techniques used to get consumers to make a purchase from their home, office or other non-retail setting. Direct retailing: representatives selling products door-to-door, office-to-office or at home parties. Discount store: a retailer that competes on the basis of low prices, high turnover and high volume. Discrepancy of assortment: absence of all the items a consumer needs to receive full satisfaction from a product. Discrepancy of quantity: the difference between the amount of product produced and the amount an end user wants to buy. Dual distribution (multiple distribution): two or more channels selected by a producer to distribute the same product to target markets. Electronic data interchange (EDI): computer-based order-processing technology used to replace paper documents that usually accompany business transactions, such as purchase orders and invoices, with electronic transmission of the information. Exclusive distribution: the most restrictive form of market coverage, which entails only one or a few dealers within a given area.

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Factory shop: an off-price retailer that is owned and operated by a manufacturer. Franchise: the right to operate a business or to sell a product. Franchise outlets: retail stores owned and operated by individuals, but licensed by a larger supporting organisation. Franchisee: individual or business that is granted the right to sell another party’s (the franchisor’s) product. Franchisor: originator of a trade name, product, method of operation, etc., which grants operating rights to another party to sell its product. Gross margin: amount of money the retailer earns as a percentage of sales after the cost of goods sold is subtracted. Hypermarket: retail store which combines a supermarket and full-line discount store in a space ranging from 20 000 to 30 000 square metres. Independent retailer: retailer owned by a single person or partnership and not operated as part of a larger retail institution. Intensive distribution: distribution aimed at maximum market coverage. Inventory control system: a system that develops and maintains an adequate assortment of products to meet customers’ demands. Just-in-time (JIT) inventory management: redesigning and simplifying manufacturing by reducing inventory levels and delivering parts just when they are needed on the production line. Logistics: a broad term encompassing physical distribution, including the procurement and management of raw materials and component parts for production. Marketing channel (channel of distribution): a business structure of interdependent firms which reaches from the point of product origin to the consumer. Materials-handling system: moves inventory into, within and out of the warehouse. Non-shop retailing: shopping without visiting a shop. Off-price retailer: retailer that sells at prices 25 per cent or more below traditional department-store prices because it pays cash for its stock and is usually not granted return privileges. Physical distribution: the ingredient in the marketing mix that describes how products are moved and stored. Physical-distribution service: the package of activities performed by a supplier to ensure that the right product is in the right place at the right time. Physical-distribution system: five distinct, interdependent subsystems that play several key roles within physical-distribution management: warehousing, materials handling, inventory control, order processing and transportation. Product offering: the mix of products offered to the consumer by the retailer;

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also called the product assortment or merchandise mix. Regional shopping centre: the largest of all the shopping centres. These centres are in excess of 20 000 square metres of gross leasable area and serve the regional population resident within 30 minutes’ driving time. A regional shopping centre is built around a department store that serves as the major drawcard for shoppers. Retailing: all the activities directly related to the sale of goods and services to the final consumer for personal, non-business use. Retailing mix: combination of the six ‘P’s – product, place, promotion (marketing communication), price, personnel and presentation – to sell goods and services to the end consumer. Reverse channels: when products move in the opposite direction to traditional channels – i.e. from consumer back to producer. Selective distribution: distribution achieved by screening dealers to eliminate all but a few in any single area. Speciality store: a retail store specialising in a given type of merchandise. Strategic channel alliances: producers’ agreement to jointly use one producer’s already established channel. Supermarket: a large, departmentalised, self-service retailer that specialises in food and some non-food items. Superstore: larger and more diversified than a supermarket; carries a wide range of food products as well as personal-care items, garden supplies, houseware, appliances, wine, bakery products, clothing and other items. Its focus, however, remains on food. Telemarketing: the use of the telephone to sell directly to consumers. Temporal discrepancy: difference between when a product is produced and when a consumer is ready to buy it. Unitisation: a technique for handling small packages by grouping boxes on a pallet or skid. Vertical marketing system: a centrally programmed, capital-intensive and tightly managed network of vertical layers of firms whose objective is to achieve economies of scale in all areas of their operations so that maximum impact on the market can be realised. Videologue: a video version of a catalogue that contains relevant information and graphics, and can be developed to appeal directly to a particular market segment. The use of movement, sight and sound makes videologues superior to catalogues.

REFERENCES "****** DEMO - www.ebook-converter.com*******"

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Product and store brand loyalty depend on product availability. Bizcommunity online newsletter, 2 November 2004. Available, www.bizcommunity.com. Robertson, D. 2004. Sasol’s push into retailing picks up speed. Business Times (supplement to the Sunday Times), 24 October 2004, p. 5; Kok, L. 2004. Sasol brei vulstasie-netwerk uit. Sake-Burger, 28 June 2004, p. S12. Whitfield, B. 2006. Nedbank’s big ambition. Finweek, 5 October 2006, p. 49. Nyamakanga, R. 2007. Absa to widen reach with 115 new outlets. Business Day, 1 November 2007, p. 18. Kaplan, B. 4 Feb 2014. Delivering value in a dynamic retail environment. Available from http://www.bizcommunity.com/Article/196/467/109209.html (Accessed 15 August 2014). Microsoft teams up with Visa on system of electronic banking. Wall Street Journal, 15 February 1996, p. B6. Els, F. 2006. How to sell time. Finweek, 16 March 2006, p. 58. South African Breweries corporate report. Financial Mail, 22 October 1999, p. 45. Rose, R. 2006. Outcry over Mittal’s squeeze on suppliers. Business Day electronic edition, 9 October 2006. Furlonger, D. 2002. Köpke deals a new hand. Financial Mail electronic edition, 8 March 2002. Pile, J. 2008. Stubbing out the small man. Financial Mail, 30 May 2008, p.21. This section is based on Chee, H. & Harris, R. 1993. Marketing: A global perspective. Pitman, pp. 137–138. Brand, N. 2006. Checkers ‘druk kelders oor pryse’. Die Burger. Makelaars onder druk van wet. Sake Burger, 13 March 2004, p. S8. Furlonger, D. 2002. Köpke deals a new hand. Financial Mail, 8 March 2002. www.pgibson.co.za (Accessed 29 June 2010). Raia, E. 1995. Saturn – rising star. Purchasing, 9 September 1995, pp. 44–47. BMW website, www bmwplant.co.za/content/production/assemblyline.jsp.htm (accessed 29 June 2010). Upfold, C, and Liu, H. 2010. ‘Radio Frequency Identification (RFID) Adoption in the South African Retail Sector: an Investigation of Perceptions Held by Members of the Retail Sector Regarding the Adoption Constraints’ The Electronic Journal Information Systems Evaluation Volume 13 Issue 1 2010, pp. 87–96. Muler, E.J. 1994. Faster, faster, I need it now. Distribution, February 1994, pp. 30–63. Puttergill R. 2012. Amazon next step forward: Buying a massive robotics

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company, Memeburn: Techsavvy insight and analysis. 20 March 2013. Available from http://memeburn.com/2012/03/amazon-plans-to-buy-kivasystems/ (Accessed 15 August 2014). This section is based on Terblanche, N. 1998. Retail management. Cape Town: Oxford University Press Southern Africa. Berman, B. & Evans, J.R. 1995. Retail management: A strategic approach (6th edition). Englewood Cliffs: Prentice Hall, p. 155. Van der Walt, A., Strydom, J.W., Marx, S. & Jooste, C.J. (eds) 1996. Marketing management (3rd edition). Cape Town: Juta, pp. 286–287. www.fasa.co.za (Accessed 29 June 2010). Taste Holdings annual report, 2009.

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CHAPTER

11

Marketing communication strategy

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Describe the important role marketing communication plays in the marketing mix. 2 Discuss the elements of the marketing communication mix in terms of its nature, benefits and limitations. 3 Explore the relationship between advertising and outcome variables, such as market share, the consumer, brand loyalty and product attributes. 4 Differentiate between the major types of advertising in terms of their nature and the functions they perform. 5 Describe the communication process in marketing terms. 6 Point out why the integration of marketing communication is important. 7 Explain the objectives and tasks of marketing communication. 8 Discuss the concept of the hierarchy of effects and its relationship to the marketing communication mix. 9 Describe the factors that affect the marketing communication mix. 10 Advise a novice on how to create a marketing communication plan. "****** DEMO - www.ebook-converter.com*******"

11 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any principle or concept. 12 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice French revolution French carmaker Peugeot hopes a new marketing and advertising campaign will finally improve its South African brand image. Mainstream ad agency Euro RSCG and a small, specialist marketing consultancy, Duck and Craig, are working with the motor company to turn around consumer perceptions of the brand. It’s been 10 years since Peugeot officially returned to South Africa, after its disinvestment during the apartheid era. For a while it looked like Peugeot would flourish. Within four years, annual sales had grown to 9 000. But Peugeot was so intent on selling cars, it gave little thought to what would happen next. Customer complaints piled up about poor after-sales service and long waits for expensive spare parts. By last year, sales had sunk to barely one-third of peak levels. Peugeot SA MD Francis Harnie says: ‘We still suffer from the perception that we either have no spare parts or that they are very expensive.’ She says Peugeot SA executives have been ‘remarkably honest’ about the brand challenge. Euro RSCG’s advertising will continue "****** DEMO - www.ebook-converter.com*******"

its traditional appeal to people who like French design flair and aesthetics. ‘That’s how we have to position the brand in South Africa’. SOURCE: Furlonger, D. 2012. French revolution, Financial Mail, 2 February, p. 59

QUESTIONS 1 2

Can advertising be used to change consumers’ perceptions and attitudes? What should the objectives of this advertising campaign be?

1. Introduction Few goods, no matter how well developed, priced or distributed, can survive in the market without effective marketing communication. Marketing communication is used by marketers to inform, persuade and remind potential buyers of a product in order to influence their opinion or elicit a response. Marketing communication is thus a particularly important element of the marketing mix. A marketing communication strategy is a plan for making optimal use of the elements of marketing communication: advertising, public relations, personal selling and sales promotion to contribute to the realisation of the firms’ marketing objectives.

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2. The role of marketing communication in LO1 the marketing mix The marketing manager formulates the objectives of the firm’s marketing communication strategy against the background of the firm’s overall marketing objectives (see Figure 11.1). Based on these overall objectives, marketers then combine the elements of the marketing communication strategy (the marketing communication mix) into a coordinated plan. The marketing communication plan then becomes an integral part of the marketing strategy for reaching the target market. The main function of a marketer’s marketing communication strategy is to convince target customers that the goods and services offered provide a differential, or competitive advantage, over the competition. A competitive advantage is the set of unique features of a firm or its products that are perceived by the target market as significant and superior to competitors. Such features may include exceptional product quality, fast delivery, low prices, excellent service or a product feature not offered by the competition. For example, Revlon’s ColourStay Lipcolour promises lipstick that does not smear all day long. By effectively communicating this differential advantage by means of advertising, Revlon can stimulate demand for its smudgefree line of make-up. Duracell claims its batteries last up to 50 per cent longer than normal batteries. Whirlpool believes its microwave ovens perform better than other microwave "****** DEMO - www.ebook-converter.com*******"

ovens and offer extra space and convenience compared with competing microwave ovens. These firms communicate this competitive advantage by means of advertising. Pattex believes its ‘no more nails’ adhesive sticks to virtually anything, and emphasises its instant adhesiveness in its advertising, as well as the fact that it is solvent-free, superstrong, water-resistant, paintable and sandable. Philips wants its target market to know that its kettle is the only one with a full-length filter. Philips communicates this message in an advertisement with the message: ‘The Philips Filterline kettle. Keeps the funny stuff on the outside, not the inside.’ (See the Philips advertisement.) To be of any value, these competitive advantages must be communicated to the target audience or potential buyers. Marketing communication is, therefore, a vital part of the marketing mix, informing consumers of a product’s benefits and, therefore, positioning the product or brand in the minds of consumers.

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Figure 11.1 The role of marketing communication in the marketing mix

3. The elements of the marketing communication mix

LO2

Most marketing communication strategies use several elements, which may include advertising, public relations and publicity, personal selling and sales promotion, to reach the target market. This combination is called the marketing communication mix. The marketing communication mix is that combination of these basic elements that management believes will meet the needs of the target market and realise the firm’s overall objectives. Not all of these elements will be utilised to the same extent in all circumstances. Depending on factors such as the nature of the product, the characteristics of the target market, competitive situation "****** DEMO - www.ebook-converter.com*******"

and the like some marketing managers may spend more on some elements (such as advertising) and less on others.

3.1 Advertising

LO3

Almost all firms selling a product or a service use some form of advertising, be it in the form of a multimillion-rand, multi-media campaign or a simple classified advertisement in a newspaper. Advertising is any form of paid communication in which the sponsor or firm is identified. Traditional communication media, such as television, radio, newspapers, magazines, books, direct mail, billboards and transit cards (advertisements on buses and taxis and at bus stops), are commonly used to transmit advertisements to consumers. Marketers are finding many new, innovative ways to transmit their advertisements, most notably by using electronic means such as the Internet, SMS technology and social networking websites. One of the primary benefits of advertising is its ability to communicate with a large number of people at the same time. Therefore, the cost per contact is typically very low. Advertising has the advantage of being able to reach the masses (for instance, by using national television networks), but it can also be micro-targeted to small groups of potential customers, such as with direct mail to a select group of customers or by placing print advertising in a trade magazine. Although the cost per contact in advertising is very low, the total cost to advertise is normally very high. This hurdle tends to restrict advertising on a national basis to only those firms that are financially able to "****** DEMO - www.ebook-converter.com*******"

do so. For instance, a full-page colour advertisement in the daily newspaper Business Day costs about R450 000. The cost of an advertisement in this newspaper is consequently out of the reach of most smaller, and even medium-sized, firms. WEBSITE

For the rate card of Business Day visit: http://www.businessdayonline.com/NG/images/confere and for the Mail & Guardian at http://cdn.mg.co.za/content/documents/2014/02/13/ card-2014-print-and-events.pdf.

3.1.1 The effects of advertising Advertising is a popular form of marketing communication, especially for consumer packaged goods and services. As a result, advertising is a huge industry. AC Nielsen, which compiles advertising spending figures in South Africa, reported that R34,4bn was spent on advertising in South Africa in the 12 months up to February 20131, compared to the R32,1bn during 2012. This figure does not take into account the advertising done in-house by both large and smaller firms. The amount of money spent annually on advertising by some South African firms is staggering. The top 10 spenders during 2012 were: Unilever SA (R1,29bn), Shoprite (R914m), SABMiller (R816m), Pick n Pay, Telkom, Vodacom, MTN, Standard Bank, Distell and FNB. The retail sector accounts for R8,5bn of the total, while travel, transport and leisure account for R4,3bn, business to business for R4,025bn and banking R4bn. In the cellphone industry, Vodacom continues to be the biggest spender at "****** DEMO - www.ebook-converter.com*******"

R504,9m, but this is 5 per cent less than the company spent last year. MTN followed with R469m, up from the previous year, and Cell C with R196m – down from R373,3m the previous year. Among banks, Standard spent R381,1m, followed by FNB at R372,4m and Absa and Nedbank at R260m. Capitec Bank, the bank making huge inroads at the lower end of the market, spent R77,3m – down from R83,9m the year before.2 South Africa’s online advertising industry is worth R319m at present. The online retail market is dominated by 12 sites, which between them account for more than three quarters of online retail sales in South Africa, according to World Wide Worx3. They are: • • • • • • • •

The three largest online malls: M-Web Shopping, The eBucks Shop and Digital Mall The two largest online grocers: Pick ‘n Pay Home Shopping and Woolworths The two largest online book retailers: Kalahari.com and Exclusive Books The largest online florist: NetFlorist The largest online wine retailer: Cybercellar The largest online electronics store: Digital Planet The largest online health and beauty store: Ascot Direct The largest auction site: Bidorbuy.

Advertising and market share Today’s most successful brands of consumer goods, like Vodacom and Coca-Cola, were built by heavy advertising and marketing investments over a long period of time. The bulk of advertising budgets are spent on maintaining brand awareness and market share. New brands with a small "****** DEMO - www.ebook-converter.com*******"

market share tend to spend proportionately more on advertising and sales promotion than those with a large market share – for two reasons. First, beyond a certain level of spending for advertising and sales promotion, diminishing returns set in. This means that, beyond a certain level, sales or market share do not change no matter how much is spent on advertising and sales promotion. Understanding the advertising response function helps marketers use budgets wisely.

EXAMPLE In the potato-chip market, well-established brands, such as Simba or Willards chips, may spend proportionately (advertising spending as a percentage of sales, say) less on advertising than a relative newcomer, such as Pringles. Pringles spends proportionately more on its brand in an attempt to increase awareness and market share. Simba or Willards, on the other hand, spend only as much as needed to maintain market share, as anything more would reap diminishing benefits. Because Simba and Willards have already captured the attention of the majority of the target market, they only need to remind customers of the product. Well-established brands such as South African Breweries would spend only about 5 per cent of net revenues on advertising because their brands are so well-known. The second reason that new brands tend to require higher spending for advertising and sales promotion is that a certain minimum level of exposure is needed to influence purchasing habits measurably. For example, if a relatively new brand such as Canine Cuisine (a new dog food brand) advertised its dog food in only one or two publications and bought only one or two television advertising spots, it certainly would not realise the exposure needed to penetrate consumers’ perceptual defenses, obtain awareness and "****** DEMO - www.ebook-converter.com*******"

comprehension and ultimately affect their purchasing intentions. Canine Cuisine has in fact spent almost 22% of net sales revenue on marketing in order to promote awareness of their product.

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Advertising’s influence on the consumer Advertising affects everyone’s daily life and influences many purchases. Consumers turn to advertising for its informativeness as well as its entertainment value. The average consumer is exposed to hundreds of advertisements a day from all types of advertising media. In just the television media alone, researchers estimate that the "****** DEMO - www.ebook-converter.com*******"

average American spends more than four hours a day watching TV. With network television airing an average of 18 minutes of commercials during each hour of daytime programming, consumers are certainly influenced in some way by advertising.4 Despite arguments to the contrary, however, advertising cannot manipulate society as much as some may fear, because it cannot change strongly held values. Attitudes and values are deeply rooted within an individual’s psychological make-up. Advertising seldom succeeds in changing an attitude that stems from a person’s basic value system, or moral code, that is strongly supported by his or her culture. Adolescents still in the process of forming their personal value systems, however, may be susceptible to the influences of advertising. The responsible and ethically sound use of advertising is, therefore, a major obligation for advertising managers. It is also for this reason that the advertising industry in South Africa regulates itself via the Advertising Standards Authority. Although advertising may not influence a person’s value system dramatically, it may succeed in transforming a person’s negative attitude towards a product into a positive one. When prior evaluation of the brand is negative, serious or dramatic advertisements are more effective in changing consumers’ attitudes. The television advertisements of the ‘Arrive alive’ campaign are an example. Humorous advertisements, on the other hand, have been shown to be more effective in shaping attitudes when consumers already have a positive image of the advertised brand.5 Nando’s advertising campaigns are an example (see above). Research "****** DEMO - www.ebook-converter.com*******"

has also shown that humour in advertising is more effective in generating a favourable attitude from people whose need for information is low rather than high. That is, consumers specifically looking for information about a product or service don’t find humorous advertisements that funny6. Therefore, marketers have to be sure that they know the needs of their target market before deciding to use humour in their advertising. Marketers also need to ensure that their attempts at humour are not found to be offensive by their target market. For example, Vodacom’s ‘We’ve been having it’ advertisement, featuring a parody of a despotic African leader, was criticised as encouraging the stereotyping of foreigners and in so doing promoting the xenophobia that was prevalent in South Africa at the time. A similar situation occurred in the United States where, in an attempt to be humorous, a Heinz advertisement for one of its products, Deli Mayo (a mayonnaise spread), which featured two men kissing, was withdrawn following complaints from familyrights organisations, who found the advertisement to be offensive.7 Credibility and trust are important factors in advertising. Consumers’ positive or negative attitudes towards an advertiser (firm) can also influence their attitudes towards the advertised product. Research has shown that when consumers believe an advertiser is trustworthy and credible, they are more likely to accept the advertised product’s claim and more likely to change their attitudes and buying behaviour.8 If not they will not respond as the advertiser would hope for. For example, after 30 years of denying the "****** DEMO - www.ebook-converter.com*******"

hazardous effects of smoking, US tobacco firms have lost considerable credibility with the consumer. As a result, consumers are reluctant to believe advertising by some cigarette firms claiming that the effects of passive smoking are not as serious as some people suggest.9

>> Technology in action Nielsen’s global survey of trust in adverting: 2007 vs 2013 Whether it’s advertising via old standbys like TV, newspapers and radio or newer media like mobile and online, earning consumer trust is the holy grail of a successful campaign, according to Nielsen’s latest Trust In Advertising report. The good news for advertisers is that consumers around the globe are more trusting now than they were several years ago. In fact, the study reveals that trust in online advertising is increasing, as is trust in ads on TV, radio and movie screens. Word-of-mouth recommendations from friends and family, often referred to as earned advertising, are still the most influential, as 84 percent of global respondents across 58 countries, according to the Nielsen online survey, said this source was the most trustworthy. Trust in advertising on branded websites increased 9 percentage points to 69 percent in 2013 as the second most trusted format, a jump from fourthplace ranking in 2007. Sixty-eight percent of survey respondents indicated that they trust consumer "****** DEMO - www.ebook-converter.com*******"

opinions posted online, which ranked third in 2013, up 7 percentage points from 2007. See the table below for a summary of the above changes in preference related to consumer’s trust placed in the various forms of advertising. SOURCE: Nielsen. Under the influence: consumer trust in advertising. 17 September 2013. Available from http://www.iagratings.com/us/en/insights/news/2013/under-theinfluence-consumer-trust-in-advertising.html (Accessed 20 August 2014)

Advertising and brand loyalty Consumers with a high degree of brand loyalty are least susceptible to the influences of advertising for competing goods or services. Advertisers, therefore, want their customers to be loyal, and they actively encourage consumers to insist on their brand. For example, a Tuc advertisement says: ‘Accept no substitutes.’ Advertising also reinforces positive attitudes towards brands. When consumers have a neutral or favourable frame of reference towards a product or brand, they are often positively influenced by its advertising. When consumers are already highly loyal to a brand, they may buy more of it when advertising and marketing communication for that brand increase.10 Advertising and product attributes Advertising can affect the way consumers rank a brand’s attributes, such as colour, taste, smell and texture. For example, in the past a shopper may have selected a brand of cold meat on the basis of taste and the variety of cuts "****** DEMO - www.ebook-converter.com*******"

available. But advertising may, over time, persuade that consumer to choose cold meat on the basis of other attributes, such as calories or fat content. In its advertising campaigns, Purity baby foods emphasises the fact that its products do not contain any preservatives. When the marketers of Oros orange squash discovered that mothers were concerned about the quality of some concentrated beverages, the firm started emphasising its ‘real fruit juice and natural sugar ingredients’ in its advertising. When concern was expressed about the safety of South African beef, advertisers assured consumers of the hygiene and wholesomeness of South African beef as well as its health and nutritional value. The advertisers of motor vehicles also understand the influence of advertising on consumers’ rankings of brand attributes. Vehicle advertisements have traditionally emphasised such brand attributes as roominess, speed and low maintenance. Today, however, vehicle marketers have added safety to the list. Safety features such as antilock brakes, power door locks and airbags are now a standard part of the message in many vehicle manufacturers’ advertisements.

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Similarly, some manufacturers emphasise the environmentally-friendly nature of their brands in their advertisements because they are aware that this feature is important to contemporary consumers. For example, even the oil company, BP, who acknowledges that its product contributes to global warming, was able to reposition itself as a socially conscious firm by inve sting heavily in its ‘Beyond petroleum’ advertising campaign.11 However, given the controversy surrounding the oil spill which the firm "****** DEMO - www.ebook-converter.com*******"

caused in the Gulf of Mexico in 2010, it may have some difficulty in maintaining this position.

3.1.2 Major types of advertising

LO4

A firm’s marketing communication objectives determine the type of advertising it uses. If the objective of the marketing communication plan is to enhance the image of the firm or the industry, institutional advertising may be used. By contrast, if the advertiser wishes to enhance the sales of specific products or brands, product advertising is used. Institutional advertising Advertising in South Africa has historically been productorientated. However, many modern firms, such as Tiger Brands, Unilever and Pick n Pay, market multiple products and sometimes need a different type of advertising. Institutional advertising, or corporate advertising, promotes the corporation (the firm) as a whole rather than an individual product or brand and is designed to establish, change or maintain the firm’s identity. This type of advertising does not usually ask the audience to do anything apart from maintain a favourable attitude towards the firm, its products or brands. The purpose of the Barloworld advertisement is to position the firm by referring to its value system and concern for the environment, and not to sell any of its products or services. A form of institutional advertising called advocacy advertising is typically used as a safeguard against negative consumer attitudes and to enhance the firm’s credibility "****** DEMO - www.ebook-converter.com*******"

among consumers who already favour its position.12 Often, firms use advocacy advertising to express their views on controversial issues. At other times, firms’ advocacy campaigns react to criticism or blame, some in direct response to criticism by the media. Other advocacy campaigns may attempt to ward off increased regulation or damaging legislation such as the government’s threat to ban all liquor advertising in the future. The Commercial Speech Trust, perhaps fearing government regulation of the advertising industry, regularly publishes advertisements defending the consumer’s commercial freedom and right to choose (see the Commercial Speech Trust advertisement). Product advertising Unlike institutional advertising, product advertising promotes the benefits of a specific product or service. Xerox, for instance, uses the advertising slogan ‘space-saving and money-saving’ to communicate the benefits of its photocopiers. The product’s stage in its life cycle often determines which type of product advertising is used: pioneering advertising, competitive advertising or comparative advertising. Pioneering advertising Pioneering advertising is intended to stimulate primary demand for a new product or product category. Heavily used during the introductory stage of the product life cycle, pioneering advertising offers consumers in-depth information about the benefits of the product class. Pioneering advertising also tries to create interest. Anglo "****** DEMO - www.ebook-converter.com*******"

Platinum does not sell motor vehicles or cancer treatments – instead it promotes the use of platinum in its pioneering advertising by creating interest in the metal. Its advertising says: ‘Platinum can save the planet. Imagine if a metal was that useful. Platinum is used in catalytic converters, which help reduce harmful emissions from automobiles, lowering the harm to our planet. Platinum is key in new technologies. It’s used in cancer treatment and in pacemakers to keep hearts beating. Imagine the possibilities of Platinum – a metal for the future.’ Competitive advertising Firms use competitive, or brand, advertising when a product enters the growth phase of the product life cycle and other firms begin to enter the market. Instead of building demand for the product category, the purpose of competitive advertising is to influence demand for a specific brand. Often marketing communication becomes less informative and appeals more to the consumer’s emotions during this phase. For instance, Simonsvlei winery uses the following emotional appeal in its print advertising campaign: ‘You laugh, you cry, you live, you die – and in between, if you are fortunate, you experience life.’ During the growth phase of the product life cycle, advertisements may begin to stress subtle differences between brands, with heavy emphasis on building the recall of a brand name and creating a favourable attitude towards the brand. Motor vehicle advertising has long used very competitive messages, drawing distinctions between competing brands based on such factors as quality, performance and image. Lawnmowers are another example. "****** DEMO - www.ebook-converter.com*******"

The marketers of Wolf lawnmowers emphasise reliability and quality. John Deere lawnmowers also claim to be reliable and durable, but add that their high-torque engine is particularly effective when mowing thick, heavy grass. Comparative advertising A controversial trend in product advertising is the use of comparative advertising (see the Barilla advertisement).

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Comparative advertising directly or indirectly compares two or more competing brands on one or more specific attributes. Products experiencing sluggish growth or those entering the market against strong competitors are more likely to use comparative claims in their advertising. When the Italian brand Barilla entered the highly competitive pasta market, a Barilla advertisement stated: ‘Not all pasta is created equal. Some other pastas can quickly become sticky. "****** DEMO - www.ebook-converter.com*******"

Barilla pasta remains firm and will not stick or lump.’ Mecer computers’ advertising says: ‘Fact: Apple is America’s favorite pie. Fact: Mecer is South Africa’s favourite PC.’ Mutual and Federal, in a thinly veiled reference to shortterm insurance firms that conduct their business over the telephone, asks: ‘Did your parents not warn you not to talk to strangers over the telephone?’ Until recently, comparative advertising was not allowed in South Africa. The Advertising Standards Authority’s rules prohibit advertisers from falsely describing competitors’ products and allow competitors recourse if advertisements show their products or mention their brand names in an incorrect or false manner. These rules also apply to advertisers making false claims about their own products. Is comparative advertising worth the trouble? Much research suggests that comparative advertising is no more effective at increasing purchase intentions than noncomparative advertising. Marketers also risk brand misidentification and confusion when comparing different brands in advertising. However, on the positive side, research has produced these findings:13 •

Direct comparisons in advertisements attract attention and may thereby enhance purchase intentions • Consumers perceive comparative messages as being more relevant than similar non-comparative advertisements and are able to recall more message points from the comparative advertisements • Comparative advertisements for relatively unknown brands can increase the association of those unknown brands with well-known brands with which they are "****** DEMO - www.ebook-converter.com*******"

•

•

compared Comparative advertisements comparing objective brand attributes can generate more positive attitudes than comparative advertisements focusing on subjective brand attributes. For example, the claim that car ‘A’ has 8 per cent more boot space than car ‘B’ (objective) is potentially more effective than the claim that soup ‘X’ is tastier than soup ‘Y’ (subjective) When comparative advertisements for a new brand are personally relevant and use a brand with high credibility for comparison, they have a more positive effect on purchase intentions than non-comparative advertisements.

Chapter 12 examines the advertising element of the marketing communications mix in greater detail.

4. Public relations and publicity Concerned about how they are perceived by their target markets, many firms often spend large sums of money to build a positive public image by means of what is known as public relations. Public relations is the marketing communication function that evaluates public attitudes, identifies areas within the firm that the public may be interested in and executes a programme of action to earn public understanding and acceptance. Public relations helps a firm communicate with its customers, suppliers, shareholders, government officials, employees and the "****** DEMO - www.ebook-converter.com*******"

community in which it does business, using methods other than advertising. Marketers use public relations and publicity not only to maintain a positive image, but also to educate the public about the firm’s goals and objectives, introduce new products and help support the sales effort. A solid public-relations programme can generate favourable publicity. Publicity is public information about a firm, its goods or services appearing in the mass media as a news item. Sometimes a particular firm is not identified as the source of the information. For example, the wine industry received favourable publicity after several medical studies found a link between good health and the consumption of red wine. Sales of red wine in the United States jumped dramatically after the report.14 This incident underscores a peculiar reality of marketing: no matter how many millions are spent on advertising, nothing sells a product better than free publicity. As an organiser of the Oscars event says: ‘You can’t underestimate the value of celebrity association. If you own a jewellery company, of course you want Halle Berry to walk down the red carpet wearing your bracelet, and of course you want her to be seen in the lobby of the hotel. That’s worth hundreds of thousands of dollars of advertising. You can’t put a price on it.’15 (See Reader 51 ‘Celebrity endorsements: A risky business?’ for an alternative view).

READER 51 >> Celebrity endorsements: A risky business? Celebrity endorsements can be used to boost attendance at an event, or take "****** DEMO - www.ebook-converter.com*******"

the form of a celebrity becoming a spokesperson for an organisation or brand (also known as a brand ambassador) to help raise its profile. When they are successful, it is often because of strong synergies between the brand and the celebrity – the celebrity’s behaviour, performance and reputation in their professional and personal lives correspond with the brand’s values. Buying a product that a famous person wears or uses or speaks positively of connects customers to the celebrity’s status and fame. Customers may also believe that a celebrity had input into the development of the product or service they are associated with, thus enhancing its credibility and appeal. However, as humans celebrities’ are fallible and errors of judgement can negatively impact the brand. Celebrities such as Tiger Woods, Lance Armstrong and Oscar Pistorius are all celebrity sportsmen who have all made terrible mistakes in their professional and personal lives. Pistorius, who had been getting about $2 million (about R21,3 million) per year from various brands, had two of his main sponsors (Nike and Oakley) suspend their sponsorship when he was charged with the murder of Reeva Steenkamp. Nike was also a sponsor of Lance Armstrong (a seven times Tour de France winner) and when he confessed to taking drugs to enhance his performance, they withdrew their sponsorship of about $10 million (about R106,5 million) per year. However, Nike stuck with Tiger Woods after news broke of his extramarital affairs in 2009, but consulting company Accenture cancelled its six year long, $10 million a year sponsorship deal. Although the celebrities suffered significant losses as their sponsors rushed to distance themselves from their ‘brand ambassadors’, the damage to the brands cannot be quantified emphasising the risk associated with using celebrities as part of a brand’s marketing strategy. SOURCES: Celebrity endorsements: should small businesses get in on the action? 2011, Simplybiz, 11 Oct 2011. Available from http://simplybiz.co.za/interact/blogs/celebrity-endorsements-should-smallbusinesses-get-action (Accessed 25 August 2014); Matthews, D. 2013. How to make celebrity endorsements work. Available from http://esellermedia.com/2013/02/22/how-to-make-celebrityendorsements-work/ (Accessed 25 August 2014); Fottrell, Q. 2014. 10 endorsement deals gone bad, Yahoo Finance. August 4, 2014. Available from http://finance.yahoo.com/news/10-endorsement-dealsgone-bad-122150062.html (Accessed 25 August 2014)

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Although a firm does not pay for this kind of mass-media exposure, publicity should not be viewed as free. Preparing media releases and persuading media staff to print or broadcast them cost money. Generating good publicity can, therefore, be expensive. For example, winemakers wishing to capitalise on the results of the scientific studies (which they are not allowed to use in advertising) are sponsoring workshops and conferences that discuss the findings and their benefits to wine drinkers in the hope that this information will be picked up by the media. Unfortunately, unfavourable publicity can also cost a firm millions. Through the mass media, the world quickly learns when a firm pollutes a stream or the ocean (as happened to the oil company BP when one of its oil drills spilt oil in the Gulf of Mexico in 2010, leading to serious pollution), produces a defective product (Toyota’s reputation has been harmed by negative publicity about defects in its vehicles), employs executives engaged in corruption (HP Billiton had employees arrested in China on charges of corruption) or is accused of other undesirable acts. Negative consumer reactions may cost the firm dearly in lost sales. The firms involved in the Gulf of Mexico oil rig disaster have lost billions of dollars in market capitalisation since the explosion and sinking of the previously-mentioned oil rig that sent a massive oil spill towards the Gulf coast. BP’s market capitalisation declined to $157,13 billion from about $189,3 billion within a few days. In addition its share price has fallen by 50 per cent as a result of the accident.16

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5. Personal selling Personal selling is a situation in which two people communicate in an attempt to influence each other in a purchase situation. In this two-sided encounter, the buyer and seller have contrasting objectives they wish to accomplish. The buyer may need to minimise cost or gain assurance of a quality product, for instance, whereas the salesperson may need to maximise revenue and profits. Traditional methods of personal selling include a planned presentation to one or more prospective buyers for the purpose of making a sale. Whether it takes place face-to-face or over the telephone, personal selling attempts to persuade the buyer to accept a point of view or to take some action. For example, a car salesperson may try to persuade a car buyer that a particular model is superior to a competing model in certain features, such as petrol consumption, roominess and interior styling. Once the buyer is somewhat convinced, then the salesperson may attempt to elicit some action from the buyer, such as a test drive or a purchase. Frequently, in this traditional view of personal selling, the objectives of the salesperson are at the expense of the buyer, creating a win-lose outcome. More recent notions on the subject of personal selling emphasise the relationship that develops between a salesperson and a buyer. Relationship selling emphasises a win-win outcome and the accomplishment of mutual objectives that benefit both buyer and salesperson in the long term. The purpose of relationship selling is neither a quick sale nor a temporary increase in sales. Instead, it "****** DEMO - www.ebook-converter.com*******"

attempts to create involvement and loyalty by building a lasting bond with the customer.17 Personal selling and relationship selling are discussed in more detail in Chapter 12.

6. Sales promotion Sales promotion consists of all marketing activities – other than personal selling, advertising and public relations – that stimulate consumer purchasing and dealer effectiveness. Sales promotion is generally a short-run tool used to stimulate immediate increases in demand. Sales promotions can be targeted at final consumers, trade customers or a firm’s employees. Sales promotion activities include free samples, contests, bonuses, trade shows, prizes and coupons. A large marketing communication campaign might use several of these sales promotion tools simultaneously. When Gillette launched the SensorExcel, it sent free SensorExcel razors to 1,4 million 18-year-olds in the United States with a note, ‘For your eighteenth birthday … a gift from Gillette.’ The giveaway included a razor, shaving gel and $2 in coupons for replacement razor blades. When Gillette launched the SensorExcel in the UK it gave away some 15 million SensorExcels, hanging them on the doors of houses.18 Often marketers use sales promotion to improve the effectiveness of other elements of the marketing communication mix, especially advertising and personal "****** DEMO - www.ebook-converter.com*******"

selling. Sales promotion is discussed in more detail in Chapter 12.

7. The marketing communication process

LO5

Marketing communication strategy is closely related to the process of communication. As humans, we assign meaning to feelings, ideas, facts, attitudes and emotions. Communication is the process by which we exchange or share meanings through a common set of symbols. When a firm develops a new product, changes an old one, or simply tries to increase sales of an existing product or service, it must communicate its selling message to potential customers. Marketers communicate information about the firm and its products to the target market and various audiences through its marketing communication programmes. Communication can be divided into two major categories: interpersonal communication and mass communication. Interpersonal communication is direct, face-to-face communication between two or more people. When communicating face-to-face, people see the other person’s reaction and can respond almost immediately. A salesperson speaking directly to a customer is an example of marketing communication that is interpersonal. Mass communication, on the other hand, refers to communicating "****** DEMO - www.ebook-converter.com*******"

to large audiences. A great deal of marketing communication is directed at consumers as a whole, usually through a mass medium, such as television or newspapers. For example, when a firm advertises, it generally does not personally know the people with whom it is trying to communicate. Furthermore, the firm is unable to respond immediately to consumers’ reactions to its message. Instead, the marketing manager must wait to see whether people react positively (such as buying the product) or negatively (not buying the product) to the masscommunicated marketing communication. It must also be kept in mind that clutter from competitors’ messages or other distractions in the environment can reduce the effectiveness of the mass-communication effort.

7.1 Elements of the communication process Marketers are both senders and receivers of messages. As senders, marketers attempt to inform, persuade and remind the target market to adopt courses of action compatible with the need to promote the purchase of goods and services. As receivers, marketers attune themselves to the target market in order to develop the appropriate messages, adapt existing messages and spot new communication opportunities. This way, marketing communication is a two-way, rather than a one-way, process.19 The two-way nature of the communication process is illustrated in Figure 11.2.

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Figure 11.2 The communication process

7.1.1 The sender and encoding The sender is the originator of the message in the communication process. In an interpersonal conversation, the sender may be a parent, a friend or a salesperson. In the case of an advertisement or media release, the sender is the firm itself. Coca-Cola, for example, would be the sender of a message introducing its new iced-tea brand, Nestea. Encoding is the conversion of the sender’s ideas and thoughts into a message, usually in the form of words or signs. Coca-Cola may encode its message into an advertisement, or a Coca-Cola salesperson in a supermarket may encode the marketing communication message as a sales presentation. A basic principle of encoding is that what matters is not what the source says, but what the receiver hears. One way of conveying a message that the receiver will hear properly is to use concrete words and pictures. Jeyes Fluid uses a pair of arms like those of a body builder, with bulging muscles and veins, to help convey the message that "****** DEMO - www.ebook-converter.com*******"

this product is indeed ‘the strong one’.

7.1.2 Message transmission Transmission of a message requires a channel, for example, a voice, radio, newspaper or other communication medium. A facial expression or gesture can also serve as a channel. Reception occurs when the message is detected by the receiver and enters his or her frame of reference. In a two-way conversation, such as a sales pitch given by a Coca-Cola sales representative to Shoprite Checkers supermarket managers, for example, reception is normally high. By contrast, the desired receivers may or may not receive or comprehend Coca-Cola’s message when it is mass-communicated (a national television advertisement, for instance). This can occur because most media channels are cluttered by ‘noise’. Noise is anything that interferes with, distorts or slows down the transmission of information. In some media, overcrowded with advertisers, such as newspapers and television, the noise level is high and the reception level is low (see Reader 52 ‘Bathroom advertising’). For example, advertising by Vodacom and MTN of their special offers may hamper reception of Cell C’s introductory offer advertisements. When Cell C was launched, there was also heavy advertising by Lotto, the national lottery game. This ‘noise’ would have hampered the reception of Cell C’s launch and introductory offers. Transmission can also be hindered by situational factors, such as the physical surroundings – light, sound, location, weather, and so on; the presence of other people; or the temporary moods consumers may bring to the situation. "****** DEMO - www.ebook-converter.com*******"

Mass communication may not even reach all the correct consumers. Some members of the target audience may be watching television when Cell C offers are advertised, but others may not be.

7.1.3 The receiver and decoding Mass advertisers such, as Vodacom, Volkswagen, South "****** DEMO - www.ebook-converter.com*******"

African Breweries and Coca-Cola, communicate their messages through a channel to customers or receivers, who will decode the messages. Decoding is the interpretation of the language and symbols sent by the source through a channel. Common understanding between two communicators, or a common frame of reference, is required for effective communication. Therefore, marketing managers must ensure a proper match between the message to be conveyed and the target market’s attitudes and ideas. Even though a message has been received, it will not necessarily be properly decoded because receivers of the message may selectively expose, distort and retain the message (refer to Chapter 3). Even when people receive a message, they tend to manipulate or modify the message to reflect their own biases, needs, knowledge and culture. Factors that can lead to miscommunication include differences in age, social class, education, culture and ethnicity. A study of US army recruitment advertisements confirmed that the target audience – young men between the ages of 18 and 24 – received both intended and unintended messages. One television commercial showed the firing of a cannon in order to symbolise teamwork. But the target audience interpreted the image as representing a skill that would have little value in civilian life, and that was not what the advertiser had intended.20 Because people don’t always listen or read carefully, they can easily misinterpret what is said or written. Indeed, researchers have found that a large proportion of both printed and televised communications is misunderstood by consumers. Bright colours and bold graphics have been "****** DEMO - www.ebook-converter.com*******"

shown to increase consumers’ comprehension of marketing communication. However, even these techniques are not foolproof. A classic example of miscommunication occurred when Lever Brothers mailed out samples of its new dishwashing liquid, Sunlight, which contains real lemon juice. The package clearly stated that Sunlight was a household cleaning product. However, many people saw the word sunlight, the large picture of lemons and the phrase ‘with real lemon juice’, and thought the product was lemon juice.

7.1.4 Feedback During interpersonal communication, the receiver’s response to a message is direct feedback to the source. Feedback may be verbal, as in saying ‘I agree’, or nonverbal, as in nodding, smiling, frowning or gesturing. Because mass communicators like Coca-Cola are often cut off from direct feedback from consumers of their products, they have to rely on market research or analyses of sales trends for indirect feedback. Measurements such as the percentage of radio listeners or magazine readers who recognise, recall or state that they have been exposed to an advertisement are often used as feedback. Indirect feedback enables mass communicators to decide whether to continue, modify or discontinue an advertisement.

7.2 The communication process and the marketing communication mix The four elements of the marketing communication mix "****** DEMO - www.ebook-converter.com*******"

differ in their ability to affect the target audience. For instance, marketing-communication-mix elements may communicate with the consumer directly or indirectly. The message may flow one way or two ways. Feedback may be fast or slow, a little or a lot. Likewise, the communicator may have varying degrees of control over message delivery, content and flexibility. Table 11.1 outlines differences among the marketing-communication-mix elements with respect to the mode of communication, marketers’ control over the communication process, the amount and speed of feedback, the direction of message flow, marketers’ control over the message, identification of the sender, the speed in reaching large audiences and message flexibility. From Table 11.1, we can see that most elements of the marketing communication mix are indirect and impersonal when used to communicate with a target market, and provide only one direction of message flow. For example, advertising, public relations and sales promotion are generally impersonal, one-way means of mass communication. Because they provide no opportunity for direct feedback, they cannot adapt easily to consumers’ responses, changing preferences, individual differences and personal objectives. Personal selling, on the other hand, is a personal, two-way means of communication. The salesperson is able to receive immediate feedback from the consumer and adjust the message in response. Personal selling, however, is very slow in dispersing the marketer’s message to large audiences. Because a salesperson can communicate only with one person or a small group of people at one time, it is a poor choice if the marketer wants to send a message to many potential buyers. "****** DEMO - www.ebook-converter.com*******"

READER 52 >> Bathroom advertising – a captive audience As advertising has expanded beyond traditional media channels, public utilities became a sought-after platform for message transmission, pitching the message to people during their most private of moments. Marketing expert HB Klopper says bathroom advertising does work in some instances, but warns against the potential for what he calls ‘advertising wearout’. ‘You have a captive audience,’ he says, ‘[But] if you bore people you will miss the power of the advertising.’ Klopper believes that a boring or static advertisement constitutes a missed opportunity, suggesting that video screens are perhaps a better format than poster ads. Alternatively, Klopper theorises that a more copy-heavy and information-packed advertisement could provide greater insights to consumers. This in contrast to an advert with a short slogan, which he says may be quickly forgotten. He recommends that advertisers be sensitive to their target market and ask themselves two key questions: ‘Is there a natural fit between the consumer and the product? Will the washroom actually support the brand?’ An example is the eye-catching campaign for Baby Soft toilet tissue below (see advertisement on the left). A more radical approach is the hard hitting road safety campaign in night club bathrooms emphasizing the possible consequences of driving under the influence of liquor (see advertisement on the right).

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SOURCE: Pienaar, J. & De Waal, M. What do you view in the loo? Journal of Strategic Marketing. IMM. June-July 2014, pp.18-20 Table 11.1 Characteristics of the elements in the marketing communication mix

8. Integrated marketing communications LO6 So far, the communications process and the four types of "****** DEMO - www.ebook-converter.com*******"

marketing-communication-mix elements that marketers may use to communicate their message to consumers have been discussed, namely, advertising, public relations, personal selling and sales promotion. Ideally, marketing communications using each marketing mix element should be integrated. That is, the message reaching the consumer should be the same regardless of whether it is from an advertisement, a salesperson in the field, a magazine article or a coupon in a newspaper insert. First National Bank’s ‘Hello Steve/Beep Bank’ campaign is a good example. Whether it was on radio, TV or in print, the message was the same: FNB does banking better and more conveniently and non-FNB clients should switch to them and their innovative new services. As a result of the campaign FNB registered 1.3 million new accounts in 12 months.21 A firm’s communication messages, from the consumer’s perspective, are already integrated. Typical consumers do not think in terms of advertising, sales promotion, public relations or personal selling as separate entities. To the consumer, everything is an ‘ad’. The only people who can disentangle these communication elements are marketers themselves. Unfortunately, many marketers neglect this fact when planning marketing communication messages and fail to integrate their communication efforts from one marketing communication element to the next. More often than not, the underlying reason for disparate messages is that different departments and individuals within an organisation have responsibility for advertising, public relations, personal selling and sales promotion. Managers of these different functional areas may not communicate effectively or they may disagree on marketing "****** DEMO - www.ebook-converter.com*******"

communication messages or objectives. The largest rift that continually hampers integrated marketing communication is usually found between the sales force and the advertising department. On the other hand, all too often, messages delivered via advertising and sales promotion are in synch, yet the managers of these functional areas fail to keep the sales department abreast of the latest marketing communication campaign. The result is conflicting messages and, ultimately, confusion for the consumer. For example, banks have been notorious for departmentalising their communications efforts. As a result, television advertisements look nothing like their direct-mail pamphlets and even less like the signage at branch level. This fragmentation of messages is also prevalent in many South African provinces that try to market themselves as a tourist destination. For example, in the Eastern Cape province, although the Office of the Premier is responsible for the overall marketing of the province, other organisations, such as the Eastern Cape Tourism Board and the Eastern Cape Development Corporation, also try to market the province as a tourism and investment destination, without any regard for messages being conveyed about the province by other marketing agencies. This poorly integrated, disjointed approach to marketing communication has compelled more firms to adopt the concept of integrated marketing communications (IMC). IMC is the method of carefully coordinating all marketing communication activities – media advertising, sales promotion, personal selling, public relations, direct marketing, packaging and other forms of marketing "****** DEMO - www.ebook-converter.com*******"

communication, such as websites – to produce a consistent, unified message that is customer-focused.22 Following the concept of IMC, marketing managers carefully work out the roles that the various marketing communication elements will play in the marketing mix. Timing of marketing communication activities is coordinated and the results of each campaign are carefully monitored to improve future use of the marketingcommunication-mix tools. Typically, a marketing communications manager is appointed who has overall responsibility for integrating the firm’s marketing communications.

>>Strategy A firm that has successfully implemented IMC in the United States is Hewlett Packard. With 100 000 employees, more than 2 000 different products and hundreds of marketing managers within the firm with different specialities and agendas, internal integration of marketing communications at Hewlett Packard was an ambitious objective. The firm began by integrating its advertising and media campaigns, and not long after found itself focusing on its entire marketing effort. That meant integrating all of its field-sales operations, product-line teams, geographic marketing operations and its corporate marketing division, so that all elements were communicating together and sending out the same messages to consumers. To realise its objective, Hewlett Packard created ‘marketing councils’ "****** DEMO - www.ebook-converter.com*******"

within the firm to bring together representatives of all its marketing divisions. Through meetings and conferences, the marketing councils create a strategy by which all marketing messages flow for both current campaigns and new product launches. Once the councils outline strategies, various ‘marketing centres’ within Hewlett Packard implement those strategies using either more global messages that can be used broadly, or very specific messages tailored to individual customer groups. Now, when Hewlett Packard introduces a new computer product, for instance, a coordinated plan helps ensure that salespeople, product-line teams, and the marketing communications department all work together.23

9. The objectives and tasks of marketing communication

LO7

People communicate with one another for many reasons. They communicate for amusement reasons, ask for help, give assistance or instructions, provide information and express ideas and thoughts. Marketing communication, on the other hand, attempts to modify behaviour and thoughts in some way. Advertisers, for instance, may try to persuade consumers to buy Quality Street chocolates rather than Beacon’s chocolates. Marketing communication also strives to reinforce existing behaviour by, for instance, getting consumers to continue to dine at Steers once they have "****** DEMO - www.ebook-converter.com*******"

switched from a competing fast-food restaurant. The source (the seller) hopes to project a favourable image, encourage brand loyalty or to motivate a purchase of the firm’s goods and services. Marketing communication can perform one or more of the three following tasks: to inform the target audience, to persuade the target audience and to remind the target audience. Often a marketer will attempt to accomplish two or more of these tasks at the same time. Table 11.2 lists the three tasks of marketing communication and includes some examples of each.

9.1 Informing Informative marketing communication may attempt to convert an existing consumer need into a want or to stimulate interest in a new product. Information-type advertising is generally more prevalent during the early stages of the product life cycle. Consumers typically will not buy a product or service, or support a non-profit organisation, until they know its purpose and its benefits to them. Marketers of the energy drink Red Bull do just that when they say that it ‘replenishes the body with readily available energy needed for recovery from exercise or mental activity’. Informative messages are important for promoting complex and technical products, such as motor vehicles, computers and investment services. Informative marketing communication is also important for a ‘new’ brand being introduced into an ‘old’ product class. "****** DEMO - www.ebook-converter.com*******"

Table 11.2 Examples of marketing communication tasks

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Informing •

•

• • • • • • •

Increasing the awareness of a new brand or product class Informing the market of new product attributes Suggesting new uses for a product Reducing consumers’ anxieties Telling the market of a price change Describing available services Correcting false impressions Explaining how the product works Building a firm’s image

Persuading • • •

•

Building brand preference Encouraging brand switching Changing customers’ perceptions of product attributes Influencing customers to buy now

Reminding •

• • •

Reminding customers that the product may be needed in the near future Reminding consumers where to buy the product Keeping the product in consumers’ minds during off-peak times Maintaining consumer awareness

A new brand of tea (such as Manhattan Ice Tea) entering "****** DEMO - www.ebook-converter.com*******"

the well-established tea product category dominated by well-known brands, such as Joko, Five Roses and Glen, cannot establish itself against more mature products unless potential buyers are aware of it, understand its benefits and understand its positioning in the market.

9.2 Persuading Persuasive marketing communication is designed to stimulate a purchase or an action – for example, to drink more Lemon Twist or to try a Cornetto ice cream. Persuasion normally becomes the main marketing communication objective when the product enters the growth stage of its life cycle. By this time, the target market should have general product awareness and some knowledge of how the product can fulfil their wants. Therefore, the primary emphasis of the marketing communication task switches from informing consumers about the product category to persuading them to buy the firm’s brand rather than that of the competitor. At this stage, the marketing communication message emphasises the product’s real and perceived competitive advantages. The Duracell Ultra advertisement encourages potential buyers to buy its batteries that are ‘the best Duracell battery for today’s high-tech appliances’. Often (but certainly not always), persuasive appeals are based on emotional needs such as love, belonging, self-esteem and ego-satisfaction. Persuasion can also be an important objective for very competitive, mature product categories, such as many "****** DEMO - www.ebook-converter.com*******"

household items (e.g. fridges and stoves), soft drinks, cellphones, holiday destinations and banking services. In a market characterised by many competitors, the marketing communication message often encourages brand switching and attempts to convert some buyers into loyal users. For example, to persuade new customers to switch their cheque accounts, a bank’s marketing manager may offer lower transaction fees, or a car dealer may offer a year’s free insurance.

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9.3 Reminding Reminder marketing communication is used to keep the product and brand name in the public’s mind. This type of marketing communication prevails during the maturity stage of the life cycle. It assumes that the target market has already been persuaded of the product’s merits. Its purpose "****** DEMO - www.ebook-converter.com*******"

is simply to trigger a memory. Avis Rent-a-Car, Mercedes Benz, KFC, Parker pens, and many other consumer products, often use reminder marketing communication to good effect. Amazon.com is now a well-established brand, but its managers still spend 25 per cent of the firm’s income on marketing communication. An excellent example of reminding is the billboard advertisement below from Eskom, reminding consumer to use electricity wisely. As can been seen in the advertisement, they themselves use electricity wisely, by shining the light on the bill board during evenings, only on the message reminding us all to use electricity wisely.

10. AIDA and the hierarchy of effects

LO8

The ultimate objective of marketing communication is to persuade someone to buy a product or service – or, in the case of non-profit organisations, to take some action (for instance, to donate blood). A classic theoretical model for addressing marketing communication objectives is the AIDA concept.24 The acronym stands for attention, interest, desire and action – which denote the stages of consumer involvement with a marketing communication message. The AIDA model proposes that consumers respond to marketing messages in a cognitive (thinking), affective (feeling, emotions) and conative (action, doing) sequence. First, the marketing communication manager attracts a person’s attention by a greeting and approach (in the case of personal selling) or loud volume, unusual contrasts, bold headlines, movement, bright colours, humour, and so on (in "****** DEMO - www.ebook-converter.com*******"

the case of advertising and sales promotion). Next, a good sales presentation, demonstration or advertisement creates interest in the product and then illustrates how the product’s features will satisfy the consumer’s needs – desire. Finally, a special offer or a strong closing sales pitch may be used to obtain purchase action. An expanded version of the AIDA concept is the hierarchy of effects model25 (see Figure 11.3). This advertising model also proposes that consumers follow a cognitive–affective–conative (i.e. thinking → liking → doing) sequence in responding to marketing communication messages. It assumes that marketing communication propels consumers along the following six steps in the purchase-decision process: •

Awareness. The advertiser must first ensure awareness in the target market. A firm cannot sell something if the market does not know that the product or brand exists. Imagine that Acme Company, a pet-food manufacturer, is introducing a new brand of cat food called Stripes, especially formulated for finicky cats. To increase the general awareness of its new brand, Acme heavily publicises the introduction and places several advertisements on TV and in consumer magazines. • Knowledge. Simple awareness of the availability of a brand seldom leads to a sale. The next step is to inform the target market about the product’s characteristics and how they would succeed in satisfying consumer needs. Print advertisements for Stripes cat food should detail the ingredients ‘that cats love’ – real tuna, chicken or turkey – as well as the product’s nutritional benefits. "****** DEMO - www.ebook-converter.com*******"

•

Liking. After the target market learns about the product, the advertiser must generate a favourable attitude. A print advertisement or TV commercial cannot actually tell pet owners whether their cats will like Stripes. Therefore, Acme may compile a list of cat owners in several major cities and send each a sample of the new cat food. Alternatively they can set up a small staff counter inside a pet shop and interact face-to-face with cat owners who enter the shop. Acme hopes to establish liking (by the cats as well as their owners) for the new brand. • Preference. Even though owners (and their cats) may like Stripes, they may not see any advantage over competing brands, especially if owners are brand-loyal. Therefore, Acme must create brand preference by explaining the product’s differential advantage over the competition. Acme has to convince owners that Stripes is distinctly better than other cat foods in some respect. Specifically, Acme has to show that cats want to eat nothing else. Advertising at this stage claims that Stripes will satisfy ‘even the pickiest of the litter’. • Conviction. Although pet owners may come to prefer Stripes to other brands, they may not yet have developed the conviction (or an intention) to buy the new brand. At this stage, Acme might offer the consumer additional reasons to buy Stripes, such as easy-to-open, zip-lock packaging that keeps the product fresh, additional vitamins and minerals that healthy cats need or feline taste-test results that demonstrate the superiority of Stripes. • Purchase. Some members of the target market may now "****** DEMO - www.ebook-converter.com*******"

be convinced to buy Stripes, but have yet to make the purchase. Displays in grocery shops, coupons, premiums and trial-size packages can often persuade the reluctant shopper to try the new product. Most buyers involved in high-involvement purchase situations pass through these six stages of the hierarchy of effects on the way to making a purchase. The marketer’s task is to determine where on the purchase ladder most of the target consumers are located and design a marketing communication plan to meet their needs (see Figure 11.3). For instance, if Acme has determined that about half its buyers are in the preference or conviction stage, but have not bought Stripes cat food for some reason, the firm may mail cents-off coupons to cat owners to prompt them to buy. Figure 11.3 AIDA and the hierarchy of effects

The hierarchy of effects model does not explain how all marketing communications influence purchase decisions. The model suggests that marketing communication effectiveness can be measured in terms of consumers’ progress from one stage to the next. However, the order of "****** DEMO - www.ebook-converter.com*******"

stages in the model – as well as whether consumers actually go through all the steps – has been much debated. For example, purchase may occur without liking or preference, perhaps when a low-involvement product is bought on impulse. Regardless of the order of the stages or consumers’ progression through these stages, the hierarchy of effects model helps marketers by suggesting which marketing communication strategy will be most effective at different stages.26

10.1 The hierarchy of effects and the marketing communication mix Although advertising does have much impact in the later stages of the hierarchy of effects, it is most useful in creating awareness and knowledge about goods or services. By contrast, personal selling reaches fewer people at first. Salespeople are more effective at developing customer preferences for merchandise than at gaining conviction. For example, advertising may help a potential computer purchaser gain knowledge and information about competing brands, but the salesperson in an electronics shop may be the one who actually encourages the buyer to decide a particular brand is the best choice. The salesperson also has the advantage of having the computer physically there to demonstrate its capabilities to the buyer. Samsung Electronics SA reckons that salespeople selling products such as TVs, hi-fis and radios can switch prospective buyers from their preferred brands in 80 per cent of cases.27 Pierre van der Hoven, chief executive of Three Blind Mice, a firm "****** DEMO - www.ebook-converter.com*******"

that specialises in in-house TV advertising, quotes a similar figure. He says that research shows that 70 per cent of purchase decisions are made in-store and offer a wonderful opportunity for skillful retail marketers. Like advertising, a good sales promotion can build awareness of a new product. Sales promotion can also stir strong purchase intent. For example, coupons and other price-off marketing communications are techniques used to persuade customers to buy new products. Frequent-buyer sales promotion programmes, which allow consumers to accumulate loyalty points (such as First National Bank’s eBucks or the Clicks Club Card) or other monetary rewards, such as cash-back vouchers that can later be redeemed for goods, tend to increase purchase intent as well as encourage repeat purchases. Frequent-buyer customer cards for products and services, such as the Clicks Club Card, are popular (Clicks has a database of 5 million names and addresses, of which 2,1 million are active members), especially among women, the affluent and young people aged 25 to 34. Most of these consumers say that the availability of frequent-customer cards often influences their shopping decisions. Clicks, for instance, has found that almost half of all its sales are to Club Card holders.28 Retailers are increasingly using incentive programmes to cultivate consumer loyalty and encourage repeat purchases. The idea behind the introduction of loyalty cards is that they increase the profitability of the businesses. This is because an increase in customer retention reduces overhead costs29 (see Chapter 1). However, loyalty cards "****** DEMO - www.ebook-converter.com*******"

have also come under some criticism as simply adding to the costs of doing business and as such adding to the price that the consumer will ultimately pay for the firm’s products. Critics also point out that the introduction of a loyalty system will probably result in no more than a temporary advantage for the firm because it is more than likely that competitors will respond by introducing a similar innovation.

10.2 Factors affecting the marketing communication mix

LO9

Marketing communication mixes vary a great deal from one product and one industry to the next. Normally, advertising and personal selling are used to promote goods and services, supported and supplemented by sales promotions. Public relations help develop a positive image for the firm and the product or brand. Nevertheless, a firm may choose not to use all four marketing communication elements in its marketing communication mix, or it may choose to use them in varying degrees. Firms such as Tupperware, Amway and Golden Products rely heavily on personal selling for marketing communication purposes, but Colgate relies more on mass advertising. The particular marketing communication mix chosen by a firm for a product depends on several factors: the nature of the product, the stage in the product’s life cycle, the target market characteristics, the type of buying decision, funds available for marketing communication and the use of either a push or a pull strategy. "****** DEMO - www.ebook-converter.com*******"

10.2.1 Nature of the product The characteristics of the product itself can influence the marketing communication mix. For instance, a product can be classified as either a business product or a consumer product (see Chapter 8). As business products are often custom-made to the buyer’s exact specifications, they are often not well suited to mass marketing communication. Therefore, producers of most business products, such as computer systems, farming equipment or industrial machinery, rely more heavily on personal selling than on advertising. Informative personal selling is common for industrial installations, accessories and component parts and materials. However, advertising still serves a purpose in promoting business products. Advertisements in trade media may be used to create general buyer awareness and interest. Moreover, advertising can help to locate potential customers for the sales force. For example, print media advertising often includes coupons inviting the potential customer to ‘complete this for more detailed information’. On the other hand, because consumer products are generally not custom-made, they do not require the selling efforts of a sales representative who can tailor them to the user’s needs. Therefore, consumer products are promoted mainly by means of advertising to create brand familiarity. Broadcast advertising, newspapers and consumerorientated magazines are used extensively to promote consumer products, especially non-durables. Sales promotion, the brand name and the product’s packaging are about twice as important for consumer products as for business products. Persuasive personal selling is important "****** DEMO - www.ebook-converter.com*******"

at the retail level for shopping products, such as motor vehicles and electrical appliances. The costs and risks associated with a product also influence the marketing communication mix. As a general rule, when the costs or risks of using a product increase, personal selling becomes more important. Items that are a small part of a firm’s budget (supply items such as stationary, for instance) or of a consumer’s budget (e.g. convenience products such as newspaper) do not require a salesperson to close the sale. In fact, inexpensive items, such as sugar and pencils, cannot support the cost of a salesperson’s time and effort unless the potential volume is high. On the other hand, expensive and complex machinery, new buildings, cars and new homes represent a considerable investment. A salesperson must assure buyers that they are spending their money wisely and not exposing themselves to undue financial risk. Social risk is an issue as well. Many consumer products are not products of great social importance because they do not reflect a social position. People do not experience much social risk in buying a loaf of bread or a chocolate bar. However, buying some shopping products and many specialty products, such as jewellery and clothing, does involve a social risk. Under these circumstances many consumers depend on sales personnel for guidance and advice in making the ‘proper’ choice.

10.2.2 Stages in the product life cycle The product’s stage in its life cycle is a major factor when it comes to designing a marketing communication mix (see "****** DEMO - www.ebook-converter.com*******"

Figure 11.4). During the introductory stage, the basic objective of marketing communication is to inform the target audience that the product is available. Initially, the emphasis is more on the general product class – for example, the concept of green tea – to build primary demand. This emphasis gradually changes to awareness of specific brands, such as Manhattan Tea. Normally, both extensive advertising and public relations inform the target audience of the new product class or brand and heighten awareness levels (see Reader 53 ‘Marketing communication and the arts’). Sales promotion encourages early trials of the product, and personal selling motivates retailers to carry the product.

READER 53 >> Marketing communication and the arts Understanding the value and contribution of different marketing communication elements in the communication mix are important to all firms, including small firms and those which market the arts. Relating his experience of promoting theatre plays, the well-known playwright Deon Opperman says that, in the case of The Sound of Music, R1,5 million was spent directly on promotions and publicity, compared with the R6 million which went for production costs. Radio advertisements contributed significantly to the sharp increase of sales and are by far the most effective advertisement medium for productions of this nature, according to Opperman. He believes that although billboards have a constant presence and make a difference over the long term, they don’t really have an impact on daily ticket sales. Similarly, in his experience, newspaper advertisements do not really have a direct impact on ticket sales. And posters do not help either. They only serve a purpose at the ticket sales offices and theatres themselves where they act as reminders to theatregoers. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Translated and adapted from ‘Marketing communications and the arts’. Finweek, 29 June 2006, p. 95

When the product reaches the growth stage of the life cycle, the marketing communication mix may change. Often, a change is necessary because different types of potential buyers are targeted. Although advertising and public relations continue to be major elements of the marketing communication mix, sales promotion can be reduced because consumers need fewer incentives to purchase. The marketing communication strategy then emphasises the product’s advantage over the competition (competitive advantage). Persuasive marketing communication is used to build and maintain brand loyalty to support the product during the growth stage. By this stage, personal selling has usually succeeded in attaining adequate distribution for the product. Figure 11.4 The product life cycle and the marketing communication mix

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As the product reaches the maturity stage of its life cycle, competition becomes fiercer, and persuasive and remindertype advertising are used more often. Sales promotion comes back into focus as product sellers try to increase their market share. All marketing communication, especially advertising, is reduced as the product enters the decline stage. Nevertheless, personal selling and sales promotion efforts may be maintained, particularly at the retail level.

10.2.3 Target market characteristics A target market characterised by widely scattered potential customers, well-informed buyers, and brand-loyal repeat purchasers generally requires a marketing communication mix with more advertising and sales promotion and less personal selling. Sometimes, however, personal selling is required even when buyers are well informed and geographically dispersed. Although industrial installations and component parts may be sold to very competent people with extensive knowledge and work experience, salespeople are still required to explain the product and work out the details of the purchase agreement. For example, salespeople from Agrilek (a division of Eskom) who sell electricity packages to farmers will do a detailed analysis of the electricity needs and consumption of the farmer and recommend ways of optimising the use of electricity. Often firms sell goods and services in markets where potential customers are hard to locate. Print advertising (such as brochures) can be used to find them. The reader is invited to call for more information or to mail in a reply card for a detailed brochure. As the calls or cards are received, "****** DEMO - www.ebook-converter.com*******"

salespeople are sent to visit the potential customers.

10.2.4 Types of buying decisions The marketing communication mix also depends on the type of buying decision – for example, whether it is a routine decision or a complex decision (extensive decision-making). For routine consumer decisions, such as buying toothpaste or a soft drink, the most effective marketing communication calls attention to the brand or reminds the consumer about the brand. Advertising and, especially, sales promotion are the most productive marketing communication tools to use for routine decisions. If the decision is neither routine nor complex, advertising and public relations help establish awareness of the product. For example, suppose someone is looking for a bottle of wine to serve to his dinner guests. Being a teetotaller, he is not familiar with wines. Yet he has seen advertising for Nederburg wine and has also read an article about Nederburg wines and home entertainment in Garden and Home. Consequently, he may be more likely to buy a Nederburg wine because he is already aware of it. By contrast, consumers making complex buying decisions, such as investing in a money market unit trust or getting someone to set up a home page on the Internet, are more extensively involved. They rely on large amounts of information to help them reach a purchase decision. Personal selling is most effective in helping these consumers make a decision. For example, a consumer thinking about buying a motor vehicle or a computer, for the first time in particular, usually depends on a salesperson to provide the "****** DEMO - www.ebook-converter.com*******"

information they need to reach a decision. Print advertising and the Internet may also be used for high-involvement purchase decisions, as they can often provide a large amount of information to the consumer relatively easily and quickly.

10.2.5 Available funds Money, or the lack of it, is often the most important factor in deciding on the nature and composition of the marketing communication mix. A small, under-capitalised manufacturer may rely heavily on free publicity if its product is unique. If the situation warrants a sales force, a financially-strained firm may turn to manufacturers’ agents, who work on a commission basis with no advances or expense accounts. Even well-capitalised firms may not be able to afford the advertising rates of publications like Cosmopolitan, YOU and Reader’s Digest. The price of a highprofile advertisement in these media could pay the salary of a salesperson for a year! When funds permit a mix of marketing communication elements, a firm will generally try to optimise its return on marketing communication spending while minimising the cost per contact, or the cost of reaching one member of the target market. In general, the cost per contact is very high for personal selling, public relations and sales promotions, such as sampling (see Reader 54 ‘Sampling campaign reaches over a million’) and demonstrations. On the other hand, for the number of people national advertising reaches, it has a very low cost per contact. Often there is a trade-off between the funds available, the "****** DEMO - www.ebook-converter.com*******"

number of people in the target market, the quality of communication needed and the relative costs of the marketing communication elements. For instance, a firm may have to forgo a full-page colour advertisement in Femina or Garden and Home in order to pay for a personalselling effort at a trade fair, for instance. Although the magazine advertisement will reach more people than personal selling, the high cost of the magazine space may be a problem.

10.3 Push and pull strategies The last factor that affects the marketing communication mix is whether a push or a pull marketing communication strategy will be used. Manufacturers may use aggressive personal selling and trade advertising to convince a wholesaler or a retailer to carry and sell their merchandise. This approach is known as a push strategy (see Figure 11.5). The wholesaler, in turn, must often push the merchandise forward by persuading (or even pressurising) the retailer to stock the goods. The retailer then uses advertising, displays and other forms of marketing communication to convince the consumer to buy the ‘pushed’ products.

READER 54 >> Sampling campaign reaches over a million More than one million South African consumers have received a taste of the newly reformulated Coca-Cola Light, thanks to a high-visibility sampling campaign that has been running over the past few months. The Coca-Cola "****** DEMO - www.ebook-converter.com*******"

Light relaunch commenced at the beginning of July 2006, following extensive quantitative research, during which local consumers indicated a preference for the fresh packaging graphics and improved taste. This is the second time that the Coca-Cola Light formula has been changed since the brand was first introduced to the South African market as Diet Coke in the mid-1980s. To kick off, promotional teams distributed more than 220 000 cans to commuters in Johannesburg, Durban, Pietermaritzburg, Bloemfontein, Port Elizabeth and Cape Town. Activations were planned twice a day during peak traffic periods in areas where Coca-Cola Light billboards were most visible. To support this programme, the brand acquired nearly 100 separate outdoor sites across the country, with a combined square meterage of well over 1 500 m2. Branded trucks, banners and promoters contributed to a distinctive on-street presence. During the workday, the sampling crews didn’t rest and targeted major office parks in all the key centres. A further 64 000 cans were sampled this way. Consumers who missed the intersection and ‘at work’ sampling were able to try the new-look, better-taste Coca-Cola Light when they made a purchase at one of the 30 Boardmans shops nationwide. Some 245 000 people were reached through this channel. The balance of nearly 500 000 cans was sampled at 186 selected supermarkets and hypermarkets, as well as lifestyle events, such as the International Fashion Sale and Decorex. SOURCE: Bizcommunity online newsletter, www.bizcommunity.com, 19 October 2006

At the other extreme is a pull strategy, which stimulates consumer demand to obtain product distribution. Instead of trying to sell to the wholesaler, the manufacturer using a pull strategy focuses its marketing communication efforts on end, or final, consumers. As they begin demanding the product, the retailer orders the merchandise from the wholesaler. The wholesaler, confronted with rising demand, "****** DEMO - www.ebook-converter.com*******"

then places an order for the ‘pulled’ merchandise from the manufacturer. In other words, consumer demand ‘pulls’ the product through the channel of distribution (see Figure 11.5). Heavy sampling, introductory consumer advertising, cents-off campaigns and couponing all create demand from final consumers and form part of a pull strategy. Rarely does a firm use a pull or a push strategy exclusively. Instead, the marketing communication mix will frequently contain both ‘pull’ and ‘push’ components depending on decisions such as the media selected for the communication campaign. Figure 11.5 Push versus pull strategies

>>Strategy The pharmaceutical firm Marion Merrell Dow uses a push strategy using personal selling and trade advertising to promote its Nicoderm patch nicotinewithdrawal therapy to doctors. Sales presentations and advertisements in medical journals give doctors the detailed information they need to prescribe the therapy to their patients who want to stop smoking. Marion Merrell Dow supplements its push marketing "****** DEMO - www.ebook-converter.com*******"

communication strategy with a pull strategy targeted directly at potential patients using advertisements in consumer magazines and on television. The advertisements illustrate the pull strategy in action: Marion Merrell Dow directs consumers to ask their doctors about the Nicoderm patch.

11. Steps in developing the marketing communication plan

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A marketing communication plan is a carefully arranged sequence of marketing communications steps designed around a common theme and geared to specific objectives. Because marketing communication is something of an art, developing a marketing communication plan can be a demanding task. Despite many specific suggestions and guidelines, creativity still plays a key role in this process. Effective planning of a marketing communication plan significantly stimulate sales. Ineffective planning, on the other hand, can waste millions of rands and actually harm the image of the firm and its products (see Reader 55 ‘Incorrect media planning is costly’). The marketing communication plan consists of several distinct steps: • Analysing the market • Identifying the target audience • Setting marketing communication objectives "****** DEMO - www.ebook-converter.com*******"

• •

Developing a marketing communication budget Choosing the marketing communication mix.

READER 55 >> Incorrect media planning is costly Successful advertising depends on several aspects. Among them are appealing creative concepts, proper execution, and delivery. If one part of the chain is broken, the advertising will lose the effectiveness and the money is wasted. The point I want to emphasise is the delivery of the message. This part is called media planning and buying. The message is wasted when the people who are supposed to hear it do not get to hear it. This is often the result of bad media planning. What is media planning? In simple terms, media planning and buying is a usage of an exact media vehicle to communicate advertising messages with the target market. In Limpopo there is a billboard for the provincial Department of Health with the whole paragraph of 31 words. Can you read that driving past at the 100km/h? On another occasion, I saw billboards for a national retailer of shoes – but they have no store within 150km radius. To compound the problem, though the billboard was in KwaZulu-Natal, the language used on the billboards is Sesotho. Who reads that language in KZN? In a nutshell, for media planning not to result in a waste of money, you should consider the following basic principles: • Who you want to talk to? • Where are they found? • Which media do they consume? • How many are you likely to reach? • How often? When doing the planning you need to understand the background of the brand, what makes the brand relevant to the target market, the association with certain activities and what sort of people participate in those activities. SOURCE: Adapted from Maswanganye, T. 2013. Incorrect media planning is costly, Bizcommunity, 13 January

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11.1 Analysing the market If firms truly accept the marketing concept of satisfying consumer needs and wants, they must conduct research simply to find out what these needs and wants are. With the increasing complexity of the market, proper research is necessary to ensure an effective marketing communication plan. Research identifies the product’s target market. Research also determines the plan’s marketing communication objectives. As noted in Chapter 5, information can be obtained by means of either secondary or primary research. Internal secondary research utilises internal company data, such as sales data or data about the effectiveness of previous advertising efforts, to provide the marketing manager with valuable information for promoting a current brand. External secondary data are available from research firms that continually conduct research and sell the research reports to any firm willing to pay.

>>Strategy Before Standard Bank launched its first integrated global advertising campaign the bank did a six-monthlong research study. The bank sought the views of 50 000 employees across 33 countries using an employee survey called Heartbeat. The bank’s executives hosted 58 roadshows during this process.30 "****** DEMO - www.ebook-converter.com*******"

After the South African Feedlot Association conducted a research project to ascertain how consumers perceive beef, the organisation found it necessary to launch an advertising campaign to change the consumers’ perceptions of this meat. They found that 45 per cent of consumers were eating less beef than two years previously, that 50 per cent of consumers named safety as a primary concern, that females were the consumers mainly moving away from beef consumption and that affordability of beef was a primary issue. The SA Feedlot Association wanted to reposition beef as a healthy and delicious meal option for all occasions domestically. The campaign used broadcast and print advertisements designed to communicate a number of key messages to educate consumers on the versatility, value and superior quality of South African Beef.31 In other cases, primary research, or information collected exclusively for an immediate marketing communication problem, is necessary for proper planning (see Chapter 5). However, market information is usually not available for a new product or a new product category. In that case, primary research might consist of an in-home use test, test marketing or focus-group research. These methods provide valuable insights into potential buyers’ characteristics and help the marketer to shape the marketing communication plan.

11.2 Identifying the target audience "****** DEMO - www.ebook-converter.com*******"

Based on market research, the market segment that the firm wants to reach with a given marketing communication plan should be explicitly defined geographically, demographically, psychographically or behaviourally. Naturally, the target audience should be those most likely to buy the product within a defined period.

EXAMPLE >> Cuthberts targets its marketing communication at ‘… the broad middle market, commercial value-for-money fashion footwear for the whole family’.32 Therefore, Cuthberts will use communication media that reach the whole family, such as YOU and Huisgenoot magazines, or advertise during family TV programmes such as Top Billing. Some innovative marketers have in recent years developed very original media to reach their target markets, provided that the target audience is properly defined. An analysis of the use of outside billboards has shown that:33 • • • • • • •

39% of cellular network sites are in rural/township areas 72% of government advertising is in rural/township areas 80% of canned food advertising is in rural/township areas 68% of margarine advertising is in rural/township areas 85% of sugar advertising is in rural/township areas 86% of car brand advertising is found in urban areas 84% of casinos are advertised in urban areas.

11.3 Setting marketing communication objectives "****** DEMO - www.ebook-converter.com*******"

Objectives are the starting point for any marketing communication plan. Indeed, marketing managers cannot possibly plan a marketing communication programme unless they know what objectives they are trying to realise. The objectives that a marketing manager may pursue include increasing awareness, improving or changing the consumer’s attitude about the product or brand, changing the consumer’s buying behaviour, reminding the consumer of the product or increasing the consumer’s recall of the product. Additionally, marketing managers must understand their current position in terms of each objective before a reasonable goal can be formulated. For an awareness objective, for example, the marketing manager should determine what awareness level the product currently enjoys. Later, the manager will be able to use this benchmark to assess how well the marketing communication effort affected awareness levels. Marketing communication objectives should centre on the consumer’s stage in the hierarchy of effects, or the potential buyer’s current stage in the purchasing process. The role of marketing communication is to change the receiver’s attitudes and intentions towards the product or brand, moving him or her through the hierarchy towards an action (i.e. a sale). At the same time, the consumer’s response to the marketing communication message helps the marketer move to the next step in promoting the product.34 To be effective, marketing communication objectives should meet these four criteria: • Objectives should be measurable • Objectives should be based on sound research and "****** DEMO - www.ebook-converter.com*******"

• •

should identify a well-defined target audience Objectives should be realistic Objectives should reinforce the overall marketing plan and relate to specific marketing objectives.

11.4 Developing a marketing communication budget After identifying the target audience and specifying the marketing communication objectives, the marketing manager can finalise a budget. This is no simple task, nor is there a cookbook approach that will create an ideal marketing communication budget under all circumstances. Theoretically, the marketing communication budget should be set at a level that maximises profitability and return on investment. This theory is not easy to implement, however, because it requires knowledge of the actual monetary benefits resulting from the marketing communication effort.35 The easier techniques for setting budgets are the following: •

Arbitrary allocation and all-you-can-afford. The easiest way to set a marketing communication budget is simply to pick a rand amount. This method is called arbitrary allocation. Many firms use the arbitrary method for setting their marketing communication budgets, even though the budget allocated may or may not be enough to advertise the product effectively. The all-you-canafford approach is a form of arbitrary allocation because determining what is affordable can be based on many

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arbitrary criteria. Perhaps the reason for the popularity of this rather illogical approach to budget setting is the difficulty of measuring the effectiveness of marketing communication and deciding how much money is needed to meet marketing communication objectives. • Competitive parity method. Using this approach, the firm allocates enough money to match the marketing communication expenditures of the competition. Perhaps the biggest problem with this method is that it ignores creativity and media effectiveness. Marketers assume their competitor is spending the appropriate amount on marketing communications, disregarding their own particular situation, opportunities, strengths and weaknesses. One advantage of the competitive parity method is that it forces the firm to examine competitors’ marketing communication actions. Nando’s does not follow the competitive parity method. Whereas competitor KFC spends an estimated R200 million on advertising, Nando’s gets by with R38 million.36 • Percent-of-sales method. This method of setting a marketing communication budget typically uses a percentage of the previous year’s total sales or a forecast of future sales to determine marketing communication expenditures. The percent-of-sales approach can also be based on sales by product, territory or customer group. Nike South Africa uses this method. It allocates 10 per cent of sales to marketing communication activities.37 Reckitt Benckiser, the owner of such well-known brands as Clearasil, Strepsils, Vanish and Mr Min, spends about 12 per cent of its revenue on advertising. Amazon.com "****** DEMO - www.ebook-converter.com*******"

spends about 24 per cent of revenue (or $29 per customer) on marketing communication.38 The inherent weakness of this approach is that the budget becomes a consequence of sales rather than a determinant of sales. As sales decline, the marketing communication budget also falls. Yet, research has shown that advertisers maintaining their marketing communication budgets during slow sales periods to generate better sales than those that do not. The percent-of-sales approach also bears little relationship, if any, to a firm’s marketing communication objectives. However, the appeal of the percent-of-sales approach is its simplicity. It is easy for managers to use and understand because they often view costs in percentage terms. • Market share method. The market share approach to budgeting depends on how much marketing communication is needed to maintain or win a certain market share. If a firm is satisfied with its market share, it may decide to continue spending the same amount or percentage it spent in the past. If the firm plans to increase its market share, it can increase its budget to meet its market share objectives. Like the percent-ofsales approach, however, this method ignores quality and creativity. Who is to say that spending R5 million this year will be more or less effective than the spending of R5 million last year? Moreover, the firm is letting its competition indirectly set its marketing communication budget. Besides recognising the importance of competition for market share, this approach is not much of an improvement over the other methods. • Objective-and-task method. Deciding on the marketing "****** DEMO - www.ebook-converter.com*******"

communication budget has evolved over the years towards more advanced and scientific techniques, the most popular of these being the objective-and-task approach. Although this approach is not as simple as the methods already discussed, its underlying logic for budget setting is significantly more judicious. First, management sets objectives to be realised (such as the number of customers reached or the level of brand awareness attained). Second, it defines the marketing communication activities and tools required to realise those objectives. Then a budget is built by adding up the costs of the planned marketing communication activities required to realise the stated communication objectives. The objective-and-task approach requires that management understand the effectiveness of various marketing communication tools. The approach also assumes that realising the objectives will be worth the costs. The major advantage of the objective-and-task method is that it explicitly incorporates planning into the budgeting process. Marketing communication objectives are defined, alternatives analysed and the costs of each element in the marketing communication plan determined. The objectiveand-task approach has been more readily adopted by large firms and manufacturers of consumer products whose marketing communication budgets are significant.39

EXAMPLE >> A good illustration of the objective-and-task method is the one used by the advertising agency J. Walter Thomson. Brenda Wortley, media director of J. Walter Thomson, says: ‘Because our clients have a high regard for our services, they prefer to tell us up front that a year from now, this is the market "****** DEMO - www.ebook-converter.com*******"

share or volume growth that they want. After a competitive market analysis, we take a task approach to determine the budget and the most appropriate media.’40

11.5 Deciding on a marketing communication mix Finally, marketing managers select the combination of elements – advertising, sales promotion, personal selling and public relations – that will be included in the overall marketing communication plan. Remember that the marketing communication mix depends on such factors as the type of product, its stage in the product life cycle, target market characteristics, type of buying decision, available funds and push versus pull strategies. Managers may choose several different elements for one marketing communication campaign. Different elements are typically chosen to address consumers in different stages of the hierarchy of effects. For example, public relations might be used to create a positive corporate image among target customers. Advertising may focus on developing corporate and product awareness as a complement to personal selling. The function of personal selling might be to interact with customers, amplify and explain the advertising messages, and design the right product to meet customers’ specific needs. Personal selling may also help secure proper distribution for the product. Sales promotion may enter the picture as a special discount to prospective buyers if they purchase right away. Nike South Africa, for instance, spends a third of its "****** DEMO - www.ebook-converter.com*******"

marketing communication budget on above-the-line marketing communications (mainly advertising), a third on sponsorship and a third on in-store marketing communications.41

Padding up: Advertisers are moving onto electronic reading devices Rising print and distribution costs will drive publishers towards electronic "****** DEMO - www.ebook-converter.com*******"

devices, according to media specialists. They say the growing popularity of touch-screen products like the iPad (Apple), Galaxy Tab (Samsung), Kindle (Amazon) and PlayBook (BlackBerry) is a sure sign of the way things are going. Latest audit Bureau of Circulations (ABC) figures for the second quarter of 2011 show many publications continuing to lose readers. Declining print circulation around the world has been linked to online reading. A UK report shows print circulation there has fallen by 25 per cent since 2007. Advertisers have migrated online so quickly that digital has overtaken TV as the biggest advertising spender. Research firm Gartner says annual demand for media tablets will rise from 18m in 2010 to 294m in 2015. A number of South African publishing groups are moving towards the technology. Elan Lohmann, digital MD at the Avusa group, says it is planning a tablet app launch. ‘It is an important space in the future landscape of the media.’ News24 launched its 24.com tablet application (app) last year. GM Greg Cohen says there are more than 15 000 iPads using this app. The latest South African newcomer is the iMaverick app, a tablet version of the news and opinion website Daily Maverick. ‘Tablet apps are a lot closer to print than online,’ he says. ‘There’s a big difference between a tablet publication and an online publication. Though you need the Internet to download the app, it is just a delivery mechanism, a distribution channel.’ Once the edition is downloaded it can be viewed at any time without the need for a web connection. New Media Publication MD Helene Lindsay says there will always be a space for print but tablet apps will continue to grow quickly. ‘New entrants who can’t afford paper or distribution space can now produce high-quality publications at a fraction of the cost.’ SOURCE: Mokgata, Z., 2011. Padding up, Financial Mail, 26 August, p. 56

QUESTIONS 1 2

Do different generations have different preferences when it comes to reading print versus e-books? How important is it to market e-books differently to how one would

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3 4

market traditional paper books and magazines? How likely is it that e-books/magazines will replace traditional books/magazines? What can you do to overcome hurdles to reading e-books, such as does one need special software to read e-books, or can one return an e-book once it has been read or even can I lend my e-book to a friend once I have finished reading it.

DISCUSSION AND WRITING QUESTIONS 1

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What is a marketing communication strategy? Explain the concept of a differential or competitive advantage in relation to a marketing communication strategy. Why is understanding the target market a crucial aspect of the communication process? Discuss the importance of integrated marketing communications. Provide current examples of some firms that practise and some that do not practise integrated marketing communications. Discuss the role of personal selling and advertising in promoting business products. How does their role differ in promoting consumer products? The Tobacco Products Control Act prohibits advertising by tobacco companies. Outline a strategy using alternative communication channels that tobacco companies can use to promote their products Discuss why using the objective-and-task method to determine a product’s marketing communication budget is superior to other budget-setting methods. Choose a partner from class and go together to interview the owner or manager of several small businesses in your city. Ask them what their marketing communication objectives are and why. For example, are they trying to inform, persuade or remind customers to do business with them? Also determine if they believe they have an awareness problem or need to persuade customers to choose their businesses instead of their competitors’. Ask them to list the characteristics of their primary market, the strengths and weaknesses of their direct competitors and how they are positioning their firm to compete. Prepare a report to present in class summarising your findings.

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KEY CONCEPTS Advertising: impersonal, one-way mass communication about a product or firm, paid for by a marketer. AIDA concept: model that outlines the process for achieving marketing communication objectives in terms of stages of consumer involvement with the message. The acronym stands for attention, interest, desire and action. All-you-can-afford approach: method of setting a marketing communication budget that relies on determining how much the marketer can spend. Arbitrary allocation: method of setting a marketing communication budget that picks an amount of money without reference to other factors. Channel: a medium of communication used for transmitting a marketing communication message. Communication: process by which we exchange or share meanings through a common set of symbols. Comparative advertising: form of advertising that compares two or more specifically named or shown competing brands on the basis of one or more specific attributes. Competitive parity: method of setting a marketing communication budget that matches a competitor’s spending. Decoding: interpretation of the language and symbols sent by the source through a channel. Encoding: conversion of the sender’s ideas and thoughts into a message, usually in the form of words, signs or symbols. Feedback: receiver’s response to a message. Hierarchy of effects model: model that outlines the six-stage process by which consumers make purchase decisions: awareness, knowledge, liking, preference, conviction and purchase. Institutional advertising: form of advertising designed to enhance a firm’s image rather than promote a particular product. Integrated marketing communications (IMC): the method of carefully coordinating all marketing communication activities to produce a consistent, unified message that is customer-focused. Interpersonal communication: direct, face-to-face communication between two or more people. Market share approach: method of setting a marketing communication budget that allocates the amount needed to maintain or win a certain market share. Marketing communication: communication by marketers that informs, persuades and reminds potential buyers of a product in order to influence an opinion or elicit a response.

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Marketing communication mix: combination of marketing communication tools, including advertising, public relations, personal selling and sales promotion, used to reach the target market and realise the firm’s overall objectives. Marketing communication plan: carefully arranged sequence of marketing communication efforts designed around a common theme and geared to specific objectives. Marketing communication strategy: plan for the optimal use of the elements of marketing communication – advertising, public relations, personal selling and sales promotion. Mass communication: communication to large audiences. Noise: anything that interferes with, distorts or slows down the transmission of information. Objective-and-task approach: method of setting a marketing communication budget that begins with marketing communication objectives, defines the communication tools required to achieve those objectives and then adds up the costs of the planned activities. Percent-of-sales approach: method of setting a marketing communication budget that allocates an amount equal to a certain percentage of total sales. Personal selling: planned presentation to one or more prospective buyers for the purpose of making a sale. Public relations: marketing function that evaluates public attitudes, identifies areas within the firm in which the public may be interested and executes a programme of action to earn public understanding and acceptance. Publicity: public information about a firm or product appearing in the mass media as a news item. Pull strategy: marketing strategy that stimulates consumer demand to obtain product distribution. Push strategy: marketing strategy that uses aggressive personal selling and trade advertising to convince a wholesaler or a retailer to carry and sell particular merchandise. Receiver: person who decodes a message. Sales promotion: marketing activities, other than personal selling, advertising and public relations, that stimulate consumer buying and dealer effectiveness. Sender: originator of the message in the communication process.

REFERENCES 1

Mokgata, Z. 2013. Huge discount in ad spending harm market. Financial Mail. Available from

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http://www.financialmail.co.za/business/media/2013/07/11/hugediscounts-in-ad-spending-harmmarket">http://www.financialmail.co.za/business/media/2013/07/11/hugediscounts-in-ad-spending-harm-market (Accessed 3 February 2015). Ad spend jumps 11% to 32bn. Business Live. 2012. Available from http://www.fastmoving.co.za/news/retailer-news-16/ad-spend-jumps-11to-r32bn-1511 (Accessed 3 February 2015). Ad spend jumps 11% to 32bn. Business Live. 2012. Available from http://www.fastmoving.co.za/news/retailer-news-16/ad-spend-jumps-11to-r32bn-1511 (Accessed 3 February 2015). Time spent with media. Standard & Poor’s Industry Surveys, 14 March 1996, p. M1; Radio and TV broadcasting: Commercials clog the airways. Standard & Poor’s Industry Surveys, 12 May 1994, p. M35. Chattaopadhyay, A. & Basu, K. 1990. Humor in advertising: The moderating role of prior brand evaluation. Journal of Marketing Research, November, pp. 466–476. Zhang, Y. 1996. Responses to humorous advertising: The moderating effect of need for cognition. Journal of Advertising, spring 1996, pp. 15–34. Sweeney, T. 2008. Heinz pulls ad showing men kissing. Guardian Online, 24 June 2008. Available, http://www.guardian.co.uk/media. Goldberg, M.E. & Hartwick, J. 1990. The effects of advertiser reputation and extremity of advertising claims on advertising effectiveness. Journal of Consumer Research, September 1990, pp. 172–179. Stoff, R. 1994. AD/PR notes: Developments in advertising and public relations of tobacco firms. St. Louis Journalism Review, September 1994, p. 17. Grover, R. & Srinivasan, V. 1992. Evaluating the multiple effects of retail marketing communications on brand loyalty and brand switching segments. Journal of Marketing Research, February 1992, pp. 76–89; see also Raj, S.P. 1982. The effects of advertising on high and low loyalty consumer segments. Journal of Consumer Research, June 1982, pp. 77–89. Kenney, J. 2006. Beyond propaganda. New York Times online edition, 14 August 2006. Available, http://www.nytimes.com. Burgoon, M., Pfau, M. & Birk, T.S. 1995. An inoculation theory explanation for the effects of corporate issue/advocacy advertising campaigns. Communication Research, August 1995, p. 485. For a comprehensive review of academic research on the effectiveness of comparative advertising, see Berry, T.E. 1993. Comparative advertising: What have we learned in two decades? Journal of Advertising Research, March– April 1993, pp. 19–29. Goldman, K. 1994. Winemakers look for more free publicity. Wall Street

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Journal, 29 September 1994, p. B4. Hickey, T. 2003. Booty Call. High Life, March 2003, p. 57. Shore, S. 2010. Oils spill leads to huge drop in market cap of BP and Halliburton. Available, http://www.huffingtonpost.com/2010/05/03/oilspill-leads-to-huge-d_n_561675.html; Karrar-Lewsey, T. 2010. BP gets a lift from Libya. The Wall Street Journal (European edition), 6 July, p.1. Bingham, F.G., Quigley, C.J. & Notarantonio, E.M. 1996. The use of communication style in a buyer-seller dyad: Improving buyer-seller relationships. Proceedings: Association of Marketing Theory and Practice, 1996 Annual Meeting, Hilton Head, South Carolina, March, pp. 188–195. Oliver, S. 1996. Happy birthday, from Gillette. Forbes, 22 April 1996, p. 37. Kitchen, P.J. 1993. Marketing communications renaissance. International Journal of Advertising, 12 (1993), pp. 367–386. Keck, M.G.L. & Meuller, B. 1994. Observations: Intended vs. unintended messages: Viewer perceptions of United States Army television commercials. Journal of Advertising Research, March–April 1994, pp. 70–77. Neethling, T. 2012. Banks taking gloves off in advertising campaigns. Business Day, 30 May, p.4. See Schultz, D.E., Tannenbaum, S.I. & Lauterborn, R.F. 1993. Integrated marketing communications. Lincolnwood: NTC Business Books. Yarbrough, J.F. 1996. Putting the pieces together. Sales & Marketing Management, September 1996, pp. 69–77. AIDA concept based on the classic research of E.K. Strong, Jr., as theorised in The psychology of selling and advertising. 1925. New York: McGraw-Hill; and Theories of selling. Journal of Applied Psychology, 9 (1925), pp. 75–86. The hierarchy of effects model is based on the classic research of Lavidge, R.C. & Steiner, G.A. 1961. A model for predictive measurements of advertising effectiveness. Journal of Marketing, 25 (1961), pp. 59–62. For an excellent review of the AIDA and hierarchy of effects models, see Barry, T.E. & Howard, D.J. 1990. A review and critique of the hierarchy of effects in advertising. International Journal of Advertising, 9, pp. 121–135. Barry, T.E. & Howard, D.J. 1990. A review and critique of the hierarchy of effects in advertising. International Journal of Advertising, 9, p. 131. Koenderman, T. 1997. How Samsung captured SA. Financial Mail, 11 July 1997, pp. 87–88. www.clicks.co.za, (Accessed 25 June 2010). Murphy, J. 1997. The Art of Satisfaction. Financial Times, 23 April 1997; Ad Focus, supplement to the Financial Mail, 23 March 2010. Kamhunga, S. 2009. Standard launches integrated global advertising campaign. Business Day, 20 July 2009, p. 13. SA beef communications campaign attracts international interest.

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Bizcommunity online newsletter. Available, www.bizcommunity.com, 27 October 2004. Edgars annual report, March 1997, p. 44. Warburg, E. 2010. Billboards - a rural vs urban analysis. Bizcommunity, 15 July, citing the Out-of-Home survey of Posterscope. Jones, D.B. 1994. Setting marketing communication goals: A communications relationship model. Journal of Consumer Marketing, 11, pp. 38–49. Danaher, P. & Rust, R.T. 1994. Determining the optimal level of media spending. Journal of Advertising Research, January–February 1994, pp. 28–34. Koenderman, T. 2007. Barking mad. Fin Week, 22 November 2007, p. 66. Penstone, K. 2001. Going for gold. Marketing Mix, 19(11), p. 19. Strauss, J., El-Ansary, A. & Frost, R. 2006. E-marketing (4th edition). Pearson Education. Bigne, E. 1995. Advertising budgeting practices: A review. Journal of Current Issues and Research in Advertising, fall, pp. 17–31. More demand, less commission. Ad Focus, supplement to Financial Mail, 29 May 1998, p. 155. Penstone, K. 2001. Going for gold. Marketing Mix, 19(11), p. 19.

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CHAPTER

12

Impleme​nting marketing commun​ication mix strategies

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5 6 7 8 9 10 11 12 13

Describe the advertising campaign process. Differentiate between the different advertising appeals. Differentiate between the different advertising message-execution styles. Evaluate the advantages and disadvantages of different advertising media. Describe media evaluation and selection techniques. Contrast the four basic types of media scheduling. Evaluate the different techniques that can be used for assessing an advertising campaign’s effectiveness. Provide a justification for including public relations in the marketing communication mix. Elaborate on the nature and objectives of sales promotion. Critically evaluate the most common forms of consumer sales promotions. Describe the most common forms of trade sales promotions. Describe personal selling in terms of its nature and advantages. Identify circumstances when personal selling, advertising or sales promotion would be the most appropriate marketing

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14 15 16 17

18

communication element. Describe in detail the different types of selling tasks. List the steps in the selling process. Describe the functions of sales management. Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice The Internet as advertising medium As with any well-thought-out marketing communication campaign, reaching the target market with an online campaign is key. Online advertising takes this many steps further, offering a variety of additional targeting options, such as location-based targeting, time of day, frequency capping, etc. Sites like Facebook, which require registration and, therefore, have a deeper understanding of their audience, have the ability to offer far more precise targeting, such as by location, age, gender, keywords, education, workplaces, relationship status, interest in men or women, and language. In addition, the following targeting options have recently become available with Facebook: connection retargeting (i.e. targeting members of the advertiser’s groups and fan pages); connection exclusion targeting (i.e. excluding those "****** DEMO - www.ebook-converter.com*******"

who are already connected to the advertiser through groups, etc.); multiple country targeting; birthday targeting; and updated education targeting (e.g. graduation year). Facebook may not be the right environment for everyone. Don’t advertise in this environment for the sake of being there just because it’s the latest buzz. It won’t work for everyone. But, for those with a clear understanding of their target market and objectives, Facebook can achieve great returns. SOURCE: Adapted from Advertising on Facebook. By digiVox. Available at The Marketing Site, http://www.themarketingsite.com (accessed 29 June 2010)

QUESTIONS 1 2

Identify the key success factors for integrating Facebook into a small firm’s marketing strategy. Discuss which products you think could be effectively marketed to university students using Facebook.

1. Introduction The primary objective of all marketing communication is to make potential buyers aware of the existence of a firm, product or brand, with the purpose of leading to a sale – and, indeed, future sales. Advertising helps marketers increase or maintain brand awareness and, subsequently, market share. When consumers are highly loyal to a brand, they may buy more of that brand when advertising is increased. Advertising can also change the importance of a "****** DEMO - www.ebook-converter.com*******"

brand’s attributes to consumers. By emphasising different brand attributes, advertisers can change their appeal in response to consumers’ changing needs or try to establish an advantage over competing brands. In Chapter 11, the nature of all the elements of a typical integrated marketing communication strategy was discussed. In this chapter, the steps required to implement each of these elements are reviewed. In most, but certainly not all, marketing strategies, advertising is the central element of an integrated marketing communications campaign.

2. Steps in creating an advertising campaign

LO1

An advertising campaign is a series of related advertisements focusing on a common theme, slogan and set of advertising appeals. It is a specific advertising effort for a particular product and it lasts for a defined period of time. Managing advertising begins with understanding the steps in developing an advertising campaign and then making the important decisions relating to each step. The advertising campaign process is set in motion by the marketing communication plan (discussed in Chapter 11). As you may recall, the marketing communication planning process involves identifying the target market, determining the overall communication objectives, setting the budget and deciding on the marketing communication mix. Advertising, "****** DEMO - www.ebook-converter.com*******"

which is usually part of the marketing communication mix, is used to encode a selling message to the target audience. The advertisement is then conveyed to the target audience, or receivers of the message, via such advertising message channels as broadcast or print media.

2.1 Formulating campaign objectives The first step in developing an advertising campaign is to formulate the advertising objectives. An advertising objective identifies the specific communication task a campaign should accomplish for a specified target audience during a specified period of time. The objectives of an advertising campaign depend on the overall objectives of the firm, the firm’s marketing objectives and the objectives of the product or brand being advertised. These objectives must all be aligned in an integrated advertising campaign. The DAGMAR approach (‘defining advertising goals for measured advertising results’) is one method of setting objectives. According to this method, all advertising objectives should precisely define the target audience, the desired percentage change in some specified measure of effectiveness (such as sales or brand awareness) and the time frame in which that change is to occur. The objectives of an advertising campaign for a new BMW model, for instance, might be to entice a total of 10 000 potential buyers to test drive the vehicle within the first six months of introduction as a result of mailing video advertisements to a sample of the target audience. When Cell C was launched, the objective of its advertising "****** DEMO - www.ebook-converter.com*******"

campaign was to acquire an active, loyal customer base of one million subscribers within 12 months. Not all campaigns have measurable sales objectives, however. Sometimes the objective is to effect behaviour change, as with the antismoking campaigns in the past or Arrive Alive’s road safety campaigns. Sometimes the objective is merely to buy goodwill from people in order to avoid adverse behaviour such as boycotting the firm or brand. Shell, for instance, does this using advertisements that show how the firm buries the pipelines transporting fuel to ensure that they do not harm the environment.

2.2 Making creative decisions The next step in developing an advertising campaign is to make the required creative and media decisions – normally both at the same time. Creative work cannot be completed without knowing which medium, or message channel, will be used to convey the message to the target audience. However, in this chapter, media decisions are addressed after creative decisions. In many cases, the advertising objectives dictate the communication medium and the creative approach to be used. For example, if the objective is to demonstrate how fast a product operates, or how efficient a product is, then a TV commercial that shows this action may be the best choice. An insect repellent, such as Doom, showing how cockroaches are killed within seconds, would be an example. Many firms use infomercials on TV to demonstrate the effectiveness of products such as car polish, vacuum "****** DEMO - www.ebook-converter.com*******"

cleaners and cookware. Creative decisions include identifying the product’s benefits, developing possible advertising appeals, evaluating the advertising appeals, selecting one with a unique selling proposition (a competitive advantage) and executing the advertising message. An effective advertising campaign follows AIDA or other hierarchy of effects models, which were discussed in Chapter 11.

2.3 Identifying product benefits A well-known rule of thumb in the advertising industry is: ‘Sell the sizzle, not the steak.’ In other words, the goal in advertising is to sell the benefits of the product, not its attributes. An attribute is simply a feature of the product, such as its easy-to-open package or a special fragrance. A benefit is what consumers will receive or achieve by using the product. A benefit should answer the consumer’s question, ‘What’s in it for me?’ Benefits may be such things as convenience, pleasure, savings or pain relief. A quick test to determine whether you are offering attributes or benefits in your advertising is to ask ‘So what?’ Consider this example: •

Attribute: The Gillette SensorExcel razor has twin blades individually mounted on remarkably responsive springs to automatically adjust to the curves and contours of a man’s face • ‘So what?’ • Benefit: So that you’ll get a closer, smoother and safer shave than ever before. "****** DEMO - www.ebook-converter.com*******"

ACDelco car batteries are advertised as ‘truly maintenancefree’. For most parents, keeping their baby’s bottom dry is very important. Pampers has consequently developed a nappy that ‘has a new improved core and super-absorbent topsheet that absorbs wetness faster than ordinary diapers, locking wetness away from your baby’s skin’. L’Oréal’s Elvive shampoo offers ‘protection, nourishment and repair’. Marketing research, experience and intuition are usually used to unearth the perceived benefits of a product and to rank consumers’ preferences for these benefits. Figure 12.1 The advertising campaign decision process

2.4 Developing and evaluating advertising appeals

LO2

An advertising appeal identifies a reason for a person to buy a product. It ought to be linked to the benefits associated with using the product and is often also linked to the product’s competitive advantage and/or positioning. Developing advertising appeals – a challenging task – is usually the responsibility of the creative people in an advertising agency. Advertising appeals typically play on consumers’ emotions, such as fear or love, or address some "****** DEMO - www.ebook-converter.com*******"

need or want that the consumer has, such as a need for convenience, the desire to save money or the need for healthy eating. Knorr, for instance, advertises its Quick Light and Tasty Soup in this way: ‘… staying in shape has never been this easy’. Spec-Savers uses fear as an appeal when it says: ‘Public warning: Ultra-violet radiation is harmful and is known to cause the early onset of cataracts’ in one of its print advertisements. Sanlam uses a fear appeal when one of its advertisements says: ‘It’ll never happen to me… Businessman gunned down on N2’. Both Sun City and the Lost City often base their advertising campaigns on fantasy themes. Advertising campaigns may also utilise more than one advertising appeal simultaneously. Choosing the best appeal from those developed normally requires market research to help make a decision on an appropriate appeal that will resonate with the target audience. Criteria for evaluation include desirability, exclusivity and believability. The appeal chosen must make a positive impression on, and be desirable to, the target audience. It must also be exclusive or unique, and consumers, must be able to distinguish the advertiser’s message from competitors’ messages.

2.4.1 Common advertising appeals Common advertising appeals include the following: •

Profit. Let’s consumers know whether the product will save them money, make them money or keep them from losing money. A Sage Financial Services Fund’s advertisement promises: ‘57 per cent over 12 months.’

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•

• •

•

An O’Brian (an investment firm) advertisement says: ‘Last year our clients experienced phenomenal bottomline growth.’ Health. Appeals to those who are body-conscious or who want to be healthy. An example is Schweppes’s soda water, which is advertised as ‘… a diet drink that contains only half a calorie’. Love or romance. Used often in selling cosmetics, perfumes and chocolates, such as Cadbury’s Milk Tray. Fear. Can centre on social embarrassment, growing old or losing one’s health. Fear appeals are often used to discourage socially undesirable behaviour, such as tax evasion or alcohol abuse. Because of its power, advertisers should exercise caution in the use of fear appeals as they may offend some. Examples of fear appeals are AIDS awareness campaigns, and South African Breweries’ anti-drunk-driving campaign. Admiration. This is the reason that celebrity spokespeople are used so often in advertising. Woolworths and Sales House use the models Candice Swanepoel and Naomi Campbell respectively to advertise their range of products.

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•

•

Convenience. Often used for fast-food restaurants, microwave foods and do-it-yourself products. Bostik advertises its Montage adhesive as a convenient product that eliminates the need for nails and screws. Fun and pleasure. The key to advertising holiday destinations, beer, sporting equipment and many other products. The airline Kulula is renowned for using humour to highlight the airline’s carefree approach to

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•

•

communicating with its customers. From tongue-incheek advertising to the hilarious announcements that are frequently made on board, Kulula continues to find humorous ways of connecting with its passengers without causing offense. This balance of humour and professionalism has made Kulula a household name as South African air travellers increasingly see the airline as a friendly and accessible airline. Vanity and egotism. Used most often for expensive or conspicuous items, such as cars, clothing and cosmetics: Clairol Nice and Easy hair colouring is advertised as: ‘Hair colour so natural, they’d think you were born with it.’ Environmental consciousness or consideration for others. Centres on protecting the environment and being involved in the community. When you opt for a Nedbank Green Affinity bank or investment account or insurance policy, Nedbank donates money on your behalf to The Green Trust to fund environmental and climate change projects, all at no cost to you. For the past 20 years they have donated over R100 million to The Green Trust to fund environmental projects such as saving endangered species like the rhino, conserving water, helping establish community gardens and implementing climate change initiatives.1

An important consideration in the choice of an appeal is that the appeal should be believable. An appeal that makes extravagant claims not only wastes money, but also creates ill will for the advertiser. The advertising appeal selected for the campaign becomes what advertisers call its unique "****** DEMO - www.ebook-converter.com*******"

selling proposition (USP). The USP (or competitive advantage) frequently becomes the campaign’s slogan. Unilever’s Omo washing powder works extremely well in cold water. As a result, it is marketed as ‘cold water Omo’. Effective slogans often become so ingrained that consumers can immediately conjure up images of the product just by hearing the slogan. For example, most consumers can easily name the firms and products behind these memorable slogans, or even hum the jingle that goes along with some of them: • • • • • • • •

I’m loving it (McDonald’s) Lead the way (Toyota) How can we help you? (FNB) Today, Tomorrow, Together (Absa) Moving forward (Standard Bank) Make things happen (Nedbank) So much more (DStv) Just do it (Nike). WEBSITE Go to www.adslogans.co.uk and browse through a database of more than 5 000 advertising slogans used both locally and internationally.

2.5 Executing the message

LO3

Message execution is the way the advertisement portrays its information. In general, the AIDA plan is a good blueprint for executing an advertising message. Any advertisement "****** DEMO - www.ebook-converter.com*******"

should immediately draw the reader’s, viewer’s or listener’s attention. The advertiser must then use the message to hold consumers’ interest, create desire for the product or service and ultimately motivate action: a purchase. The style in which the message is executed is one of the most creative elements of an advertisement. The choice of an executional style often dictates which communication medium is to be used to convey the message. Scientific executional styles (‘the pain reliever most GPs recommend’, for example) lend themselves well to print advertising, where more information can be conveyed. On the other hand, demonstration and musical styles are more likely to be found in broadcast advertising. Injecting humour into an advertisement is a popular and effective executional style (Nando’s advertising is an example). Humorous executional styles are more often used in radio and television advertising than in print or magazine advertising, where humour is less easily communicated. Humorous advertisements are typically used for lower-risk, routine purchases (Klipdrift’s ‘Vriendelike Frikkie – Eish’ campaign, for instance) than for higher-risk purchases or those that are expensive, durable or flamboyant.2

2.5.1 Common executional styles Common executional styles for advertising include the following: •

Slice-of-life. A popular style when household and personal products are advertised. It depicts people in normal, everyday settings, such as at the dinner table.

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Print advertisements for John Deere lawnmowers feature a man doing just that – mowing the lawn. When the fifthgeneration Isuzu KB 4x4 was launched, the firm used a documentary-style advertisement depicting the bakkie’s role in rescuing a beached whale on the Cape coast. • Lifestyle. Shows how well the product will fit in with the consumer’s lifestyle. Print advertising by Body Logic, marketing leotards and other sports clothing to women, features pictures of women exercising in a gymnasium. • Spokesperson/testimonial. May feature a celebrity, company official, or typical consumer making a testimonial or endorsing a product. There are many examples of South African and international celebrities endorsing locally produced or sold brands – for example, cricketer AB de Villiers and Lays Chips, golfer Trevor Immelman and Rolex watches and Trevor Noah and Cell C. Sometimes, however, ‘ordinary people’ are featured in testimonial advertisements, as it is believed that ‘ordinary consumers’ are better able to relate to them. In the Bio-Oil advertisement on page 422 Nicole Petersen provides a testimonial on the success of the product. • Fantasy. Creates a fantasy for the viewer built around using the product. Hunter’s Dry used a fantasy campaign where a thrill-seeker, refreshed from a supply of Hunter’s, sets off in a hurricane from Thailand and before he knows it he is in Australia, being met on the beach by two aboriginals. Another example is the wellknown Bakers Biscuits TV commercials. In one of its commercials, kids are shown through a forest, on a path paved with biscuits towards an old ferry house. • Humour. Advertisers often use humour in their "****** DEMO - www.ebook-converter.com*******"

•

•

•

•

•

advertisements, such as Vodacom’s Player 23 Jan and Elton campaign; and it is present in Nando’s entire advertising strategy. Real or animated product symbols. This execution style involves creating a character that represents the product in advertisements, such as the Energizer bunny, the Baker’s man or the Oros man. An animated symbol is also used very effectively by the advertisers of Mr Min furniture polish. Mood or image. This executional style builds a mood or image around the product, such as peace, love or beauty. Five Roses Tea and Cadbury chocolate often use a love theme in their print advertisements. Demonstration. Shows consumers the expected benefit of a product or service. Many consumer products use this technique. Washing powder firms are well known for demonstrating how their products will clean clothes whiter and brighter. Note how PPC cement demonstrates the benefits of its cement. Musical. Conveys the message of the advertisement through song. Timex advertisements for its Indiglo watch play Frank Sinatra singing Strangers in the Night. Camel’s TV advertisements used to feature music from the film The Good, the Bad and the Ugly. Scientific. Uses research or scientific evidence to give a brand superiority over competitors. Pain relievers, like those produced by Bayer, use scientific evidence in their advertisements.

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2.6 Deciding which advertising media to use

LO4

In South Africa there are about 1 300 magazine titles, 120 radio stations, 425 newspapers and 74 television channels. A decision on which advertising media to utilise is a complex one, and it depends on a number of factors. Each medium has its own advantages and disadvantages. MediaShop has analysed adspend trends covering a fiveyear period from 2008 to 2013 (March to February). They concluded that whilst adspend is growing, the latest data clearly indicates that the positive adspend trend seen in the last couple of years is slowing down. A five year trend shows that the total adspend for the period March 2012 to February 2013 has increased by only 6 per cent to R34,452 million. This is after two years of good growth (18 and 12 per cent).3

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2.6.1 Media types Advertising media are channels that advertisers use for mass communication. The five major advertising media are newspapers, magazines, radio, television and outdoor media (see Table 12.1). In recent years, however, alternative media vehicles (such as the Internet and SMS) have emerged that offer advertisers innovative ways to reach their target audience and avoid advertising clutter. Newspapers "****** DEMO - www.ebook-converter.com*******"

The advantages of newspaper advertising include geographic flexibility and timeliness. Because copywriters (people who write the text used in advertisements) can usually prepare newspaper advertisements quickly and at a reasonable cost, local marketers can reach their target audience almost daily. However, because newspapers are generally a mass-market medium, they may not be the best vehicle for marketers trying to reach a very narrow market segment. For example, local newspapers are not the best media vehicles for reaching purchasers of speciality steel products or even tropical fish. These target consumers make up very small, specialised markets. Newspaper advertising also encounters a lot of distractions from competing advertisements and news stories, and, therefore, a firm’s advertisement in a newspaper may not be particularly noticeable in such a cluttered environment. To demonstrate, South Africa has over 400 newspapers targeted at a variety of different markets and local communities.

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Table 12.1 The advantages and disadvantages of traditional advertising media Medium

Advantages

Disadvantages

Newspapers

Geographic selectivity and flexibility; short-term advertiser commitments; news value and

Little demographic selectivity; limited colour capabilities; low pass-

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immediacy; year-round readership; high individual market coverage; co-op and local tie-in availability; short lead time.

along rate; may be expensive.

Magazines

Good reproduction, especially for colour; demographic selectivity; regional selectivity; local market selectivity; relatively long advertising life; high pass-along rate.

Long-term advertiser commitments; slow audience build-up; limited demonstration capabilities; lack of urgency; long lead time.

Radio

Low cost; immediacy of message; can be scheduled at short notice; relatively no seasonal change in audience; highly portable; short-term advertiser commitments; entertainment carry-over.

No visual treatment; short advertising life of message; high frequency required to generate comprehension and retention; distractions from background and commercial clutter.

Television

Ability to reach a wide, diverse audience; low cost per thousand; creative opportunities for demonstration; immediacy of messages; entertainment carry-over.

Short life of message; some consumer scepticism about claims; high campaign cost; long-term advertising commitments; long lead times required for reproduction; commercial clutter.

Outdoor

Repetition; moderate cost; media flexibility; geographic

Short message; lack of demographic selectivity;

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selectivity.

high ‘noise’ level, which distracts audience.

Newspaper advertisements lend themselves to co-operative advertising. The Alfa Romeo advert alongside is an example of co-operative advertising in the form of a trade exchange. With co-operative advertising, the manufacturer (for instance, Ceres fruit juices) and the retailer (for instance, Pick n Pay) share the costs of advertising the manufacturer’s brand. One reason that manufacturers use co-operative advertising is the impracticality of listing all their dealers in national advertising. Also, co-operative advertising encourages retailers to devote more effort to the manufacturer’s product lines. Magazines Compared with the cost of other media, the cost per contact in magazine advertising is usually high. However, the cost per potential customer may be much lower because magazines are often targeted at specialised audiences and thus reach more potential customers. The most frequent types of products advertised in magazines include branded products, such as personal-care items, motor vehicles, clothing, computers and, previously, cigarettes. One of the major advantages of magazine advertising is its market selectivity. Magazines are published for virtually every market segment in South Africa. For instance, SA Computer Magazine is a leading computer magazine; Living and Loving targets a growing consumer segment; Sports Illustrated is a successful all-round sporting publication; "****** DEMO - www.ebook-converter.com*******"

YOU and Huisgenoot target the family market; Femina, Cosmopolitan and Fair Lady the female market; and Weg the top-end of the outdoor enthusiast, Afrikaans-speaking market; Thandi and Bona target the black market; and Camera and Image magazine is for the professional photographer.

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Radio Radio has several strengths as an advertising medium, such as selectivity and audience segmentation, a large out-ofhome audience, low unit and production costs, timeliness and geographic flexibility. Local advertisers are the most frequent users of radio advertising, contributing more than three-quarters of all radio advertising revenue. Like newspapers, radio also lends itself well to co-operative advertising, and is especially popular with small businesses. Long no more than an afterthought for many advertisers, radio advertising is now enjoying a resurgence in popularity. In total R4 934,5m was spend on radio advertising in 2012 (compared with R4 478,5m in 2011). This figure represents 14,7 per cent of advertising spend in 2012. 4 When commercial and community radio are combined, the penetration of radio is about 90 per cent of the population. As people become more mobile and pressed for time, other media, such as television and newspapers, sometimes struggle to retain viewers and readers. But radio listening has grown in step with population increases,5 mainly because its immediate, portable nature meshes so well with a fast-paced lifestyle. The ability to target specific demographic groups is also a major selling point for radio stations, attracting advertisers that are pursuing narrowly defined audiences that are more likely to respond to certain kinds of advertisements and products. Moreover, radio listeners tend to listen habitually and at predictable times, with the most popular radio listening hours during ‘drive time’, when commuters form a vast captive audience.6 Television "****** DEMO - www.ebook-converter.com*******"

South African firms and organisations spent R15 559,6m on television advertising in 2012 compared to the R14 683,5m spend on television advertising in 2011.7 An important reason for this level of expenditure is that television is an audiovisual medium and provides advertisers with many creative opportunities. It also reaches a wide and diverse market. However, television has its disadvantages. Advertising time on television can be very expensive and even more so during prime time. During the 2015 Super Bowl match in the USA a 30-second television advertisement cost the advertiser $4,5 million (about R50m) but the game was watched by one billion people. In the United States advertisers may spend anywhere from $100 000 to $500 000 or more for a 30-second spot during a network’s prime-time programmes.8 In South Africa a 30second advertisement on SABC 1 can vary from R1 000 (in the midnight to a.m. slot) to R62 000 during the soap opera, Skeem Saam. TV channels in South Africa tie their rates to the size of the audience. M-Net, for instance, charges about R3 500 per rating point (each point equivalent to 1 per cent of the potential audience), whereas SABC charges about R4 500. Television advertising can also involve huge production costs. The production cost for a professionally produced national commercial in South Africa is about R2 million, but it could be well worth it because television has a 79 per cent penetration of the South African market.9 WEBSITE

See http://www.sabc.co.za/wps/portal/SABC/SABCRATECAR for the rate cards of the SABC.

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The television audience in South Africa is becoming increasingly fragmented in the middle class market segment and it is no longer a matter of ‘one size fits all’ for advertisers. Although Digital Satellite Television (DStv) is a ‘must have’ amongst the emerging black middle class, (as it is for the more established white middle class), consumption patterns differ markedly between these two groups.10 Research by the University of Cape Town’s Unilever Strategic Marketing Institute revealed that notwithstanding having access to DStv, the black middle class still favoured SABC1 as opposed to the white middle class, who preferred to watch DStv. This finding suggests that advertisers need to be circumspect about the selection of channels on which they choose to flight their advertisements.11 A relatively new form of television advertising is the infomercial. The otherwise unprofitable mid-morning and late-night slots on radio and television have become the special domain of infomercials. Infomercials are an attractive advertising vehicle for many marketers because of the cheap air time and the relatively low production cost. Advertisers say the infomercial is an ideal way to present complicated information to potential customers or to demonstrate the usage of products, which other advertising vehicles usually do not allow time to do. Fitness and inhome training equipment, such as the Fitness Flyer, and kitchen utensils are examples. Outdoor media Outdoor, or out-of-home, advertising is a flexible, low-cost medium that may take a variety of forms. Examples include "****** DEMO - www.ebook-converter.com*******"

billboards, skywriting, giant inflatables, bus stop shelters, signs in sports arenas, illuminated moving signs in bus terminals and airports, and advertisements attached to the sides of cars, trucks and buses. Outdoor advertising reaches a broad and diverse market. Therefore, it is normally limited to promoting convenience products and selected shopping products, such as cigarettes, business services and motor vehicles. The main advantage of outdoor advertising over other media is that its exposure frequency is very high, yet the amount of clutter from competing advertisements is very low. Outdoor advertising also has the ability to be customised to local marketing needs. For this reason, retailers are often the largest outdoor advertisers. To enhance the effectiveness of billboard advertising, Primedia Outdoor has introduced a large-format scrolling billboard on two sites in Sandton. The marketing manager, Gary Nicholls, says their success lies in an ability to ‘combat site fatigue through movement’. A US survey showed that movement in billboards attracts almost five times more attention than static displays. More than 90 per cent of passers-by retained some impression of the billboard in motion, whereas only 19 per cent took notice of the static advertisements.12 In South Africa, over a typical four-week period, billboards have an 87,6 per cent penetration rate, bus shelters 47,9 per cent and taxis/minibuses 80,3 per cent. In total, R1 546,1m was spent on out of home advertising in 2012 (compared with R11 373,3m in 2011). This figure represents an increase of 4,6 per cent on the outdoor advertising spend in 2012.13 "****** DEMO - www.ebook-converter.com*******"

Some interesting tools have recently been developed to measure the effectiveness of outdoor advertising by recording traffic patterns and measure outdoor-advertising audiences. A company called Postertrack uses a small device installed under the driver’s seat and which is plugged into the lighter socket. The device records the vehicle’s movements and relays the data to a central unit to be analysed. The data are then compared with the location of any outdoor display (e.g. posters, bus shelters, billboards). ‘Hits’ are recorded each time the vehicle passes a site. Where some outdoor displays are visible from one side but not the other, the device can work out whether the driver is likely to view the poster. The system also records information on passengers in the vehicle.14 Alternative media To cut through the clutter of traditional advertising media, advertisers are now exploring new ways to promote their products (see Reader 56 ‘Red Bull’). The alternative vehicles include the use of SMS (short message service) messages, computer screen savers, CD-ROMs, interactive kiosks in department stores, advertisements on rented DVDs, and industrial theatre. However, the most exciting alternative media today are undoubtedly online computer services, such as the Internet and the World Wide Web, and cellphones, SMS technology and social media, such as Facebook. Compared to broadcasting and publishing, online computer services and the Internet are unique in that they facilitate direct communication between individuals and firms, regardless of distance and time. These new media vehicles allow "****** DEMO - www.ebook-converter.com*******"

marketers and advertisers to make available full-colour virtual catalogues and provide on-screen order forms, with the advantage of eliciting customer feedback.15 In the United States, online computer service providers such as America Online, CompuServe and Prodigy, can transmit immediate, personalised advertisements through modems to consumers’ computers. Viewers see teaser advertisements that instruct them to punch a key on their computer keyboard if they want more information. Viewers can then browse through advertisements for almost any product or service imaginable, make airline reservations or check the stock market, order these products or services and conduct banking transactions – all from home. Advertisers pay online providers to have their products or services displayed.

READER 56 >> Red Bull We have all heard of the energy drink Red Bull, which has had incredible growth. The first-ever can of Red Bull went on sale in 1987 in Austria. Twentyfive years on, the product is available in 165 countries with 35 billion cans sold so far. In 2012, the company recorded its best rise in turnover, moving to €4,9billion (about R68,7 billion) with South Africa as the main driving factor behind this (52 per cent increase in sales in 2011). Behind this incredible rise is a story of pioneering marketing strategy and the innovative integration of generating content and then using it to communicate the brand values. Whereas no one will want to spend much time watching videos and photos about a drink, people will want to spend hours engaging with interesting and exciting content of extreme sports. With this in mind, Red Bull has created strong affiliations with extreme sports that strategically generate key content such as photos, video clips and movies. Some of their most prominent "****** DEMO - www.ebook-converter.com*******"

platforms are websites, social media (their main Facebook page has more than 38 million followers and their YouTube channels have amassed over 300 million views), sponsorships (racing car teams and other extreme sports), ownerships (sports teams and extreme events) as well as traditional publishing (their own music label, movies and magazine). Every marketing action and communication is integrated and done with a view of generating ‘content’ that enhances the brand. According to Werner Brell, RBMH managing director, ‘You can show up with some cash and sponsor an event, sure, but audiences won’t admire you for one-off hits. Whenever we did any event, or signed an athlete or executed a project, everything has been put on film or photographed. Stories have been told; it’s part of the DNA of the brand.’ Every action is planned and aimed at the overall story of the brand. Sponsorships and events have a carefully crafted content strategy aimed at creating unique visuals and stories that stay in the online ‘earned’ social system for months and years after the event. SOURCE: Naser, A. 2013. Red Bull gives you…content marketing! Bizcommunity, 11 June 2013. Available from http://www.bizcommunity.com/Article/196/423/94733.html#comments (Accessed on 23 August 2014)

The Internet is essentially a free-for-all computer network of individuals and organisations that are linked together into a ‘web’ via modems and phone lines. Advertisers have flocked in record numbers to produce their own home pages or websites on the Internet in the hope that the information superhighway will become the next mass medium. As an indication of the growing importance of the Internet as an advertising medium, 94 per cent of CEOs of leading South African advertising agencies indicated in a recent survey that they do online advertising for their clients. The penetration of the Internet in South Africa ranges from 51,9 per cent among the white population (in a four-week "****** DEMO - www.ebook-converter.com*******"

period), to 16,3 per cent among the black population.16 In total, R861,5 million was spent on Internet advertising in 2012 compared with R754,2 million in 2011.17 Online media pose a daunting challenge for advertisers because consumers have more control over the marketing relationship than they have with traditional advertising media. With traditional media, consumers passively view commercials during their favourite sitcom or avoid commercials by pushing a button on a remote-control device. Surfers on the Internet, however, generally have to find the marketer rather than vice versa. More importantly, the receivers of the online advertising message are able to respond to advertising via chatrooms and the like as opposed to being passive receivers of information. The relative ease with which electronic media can draw a response from consumers has led to several attempts to ‘spoof’ brands on channels such as YouTube. Another challenge for online and Internet advertisers is measuring the effectiveness of their electronic advertisement or website. Although there are methods already in use that can count the number of visitors to an advertiser’s website, what advertisers don’t know is how their site ranks compared with that of their competition. Also lacking are the kinds of in-depth demographic and psychographic information about web-page users that television, magazines, radio and newspapers provide about their viewers and subscribers.18 A useful tool for understanding online markets is Google Analytics. To start, you set up a profile where you provide the web addresses of the pages or sites you want to track. "****** DEMO - www.ebook-converter.com*******"

You then receive a JavaScript code to paste into each of the pages you want to monitor. You also need to specify the goal for the tracking, for instance, to monitor how many users reach the cash-out point in the products page. More complex monitoring can also be done to include a number of pages to help identify the weak areas in a marketing strategy or sales campaign. After configuration, the pages are left alone for a minimum period of a day and can then be tracked. The longer the statistics are accumulated, the better the overall view of the performance of pages and strategies. When the information is required, you log in and retrieve the specific reports.

>>Technology in action Advertising on Facebook Facebook has not only taken the world by storm, but is also one of the most popular social networking advertising platforms in South Africa today. As with all media environments, however, marketing a brand or service in an environment such as Facebook needs a sound strategy. If not, marketers are at risk of throwing money at something that will yield little or no return. Having a clear understanding of the targeting options available and considering the target market and objectives will go a long way to ensure that the best possible results are achieved. Many comments have been made in the media regarding the failure of advertising campaigns on "****** DEMO - www.ebook-converter.com*******"

Facebook. These comments, however, are based solely on the low click-through rates achieved. It is important to take heed of the fact that one cannot evaluate online campaigns on click-through rates alone, and the following should be considered: what was the objective? Was any additional targeting, such as age, gender and location, implemented? What was the return on investment (e.g. value of business acquired versus marketing investment)? Click-through rates cannot, and do not, determine the success or failure of an online campaign. In the Facebook environment, it is true to say that firms have seen lower click-through rates across their clients’ campaigns. However, returns have proven higher than average. The reason for this is that the cost of advertising on Facebook is generally far lower than comparable environments. The lower cost per ad impression ensures not only greater reach, but, if targeted correctly, should also mean a lower cost of conversion. In addition, carefully thought-out targeting and bidding strategies can make all the difference to the success – success being measured by cost per conversion or return on investment. When analysing the success of any digital campaign, be it web media, mobile, search or social networking, it is of vital importance to assess the whole picture. Facebook currently has close to 1,9 million South Africans users, and represents 0,72 per cent of the global audience. This may not be an impressive percentage at first glance, but considering that the online population in South Africa is just over 6 million, this shows just how "****** DEMO - www.ebook-converter.com*******"

significant the reach is locally. Not only a playground for the young and trendy, the majority of Facebook users are between the ages of 18 and 44, with a slightly female bias. SOURCE: http://www.marketingupdate.co.za/?IDStory=18468 (Accessed 25 June 2010)

WEBSITE For more information, visit Google Analytics: http://www.google.com/analytics.

2.7 Media evaluation and selection considerations

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The advertising objectives and the type of advertising a firm plans to use strongly influence the selection of the advertising media to be used. An important element in any advertising campaign is the media mix, that is, the combination of communication media to be used. Decisions about the media mix are normally based on several factors, the most important being the cost per contact, reach and frequency. Other important factors include target audience considerations, flexibility of the medium, noise level and the lifespan of the medium. Cost per contact is the cost of reaching one member of the target audience. Naturally, as the size of the audience increases, so does the total cost. The standard criterion for comparing media is cost per thousand (abbreviated as CPM "****** DEMO - www.ebook-converter.com*******"

– ‘M’ is the Roman numeral for 1 000). Advertisers calculate CPM by dividing the price of using the medium by the size of the audience, in thousands. For example, if the price of a television spot is R50 000 and the projected audience size is five million viewers, then the CPM is R10. CPM enables an advertiser to compare media channels, such as television versus radio or magazine versus newspaper – or more specifically the Sunday Times versus Rapport. An advertiser who is considering whether to spend money on local advertising on either TV or radio spots would consider the CPM of each. The advertiser may then pick the communication channel with the lowest CPM to maximise advertising punch for the cost. Reach refers to the number of different target consumers who are exposed to an advertisement at least once during a specific period, usually four weeks. If 60 000 out of 100 000 radio listeners hear a commercial for the VW Polo in Cape Town at least once during a four-week period, the commercial’s reach would be 60 per cent of the total 100 000 listeners. The media plans for product introductions and attempts at increasing brand awareness usually emphasise reach. Nevertheless, high reach levels do not necessarily mean high degrees of brand awareness or advertising recall. It is not unusual to find that a campaign has achieved 90 per cent reach, but that only 25 per cent of the target audience remembers the advertisement. Reach is a measurement of potential. That is, a 90 per cent reach means that 90 per cent of an audience has an opportunity to see or hear a message. Frequency is the number of times an individual is exposed to a message. Average frequency is used by advertisers to "****** DEMO - www.ebook-converter.com*******"

measure the intensity of a specific medium’s coverage. For example, Estée Lauder might want an average exposure frequency of three for its Nutritious moisturiser radio advertisements. In other words, among all the radio listeners who heard the advertisement, they each heard it an average of three times. Because the typical advertisement is short-lived and because only a small portion of an advertisement may be perceived at one time, advertisers regularly repeat them. They want consumers to remember the message. Retention tends to peak somewhere between the third and fifth message perceived by the receiver. Additional exposures (over-exposure) tend to be screened out and may create a negative reaction. The advertisement then loses its effectiveness.

>>Strategy Media selection also concerns itself with matching the advertising medium with the product’s target market. If marketers are attempting to reach teenage females, they might select Blush magazine. If they are trying to reach female consumers over 50, they might choose Garden and Home. In between these age groups, magazines such as Cosmopolitan (with a readership likely to be under 30 years of age) would be appropriate. If young mothers are the target market, Living and Loving may be most effective. A communication medium’s ability to reach a precisely defined market is its audience selectivity. Some "****** DEMO - www.ebook-converter.com*******"

communication media like newspapers and television, appeal to a wide cross-section of the population. Others – such as Brides and Homes, SA Golf Digest, SA Cricket Action, Architectural Digest and Radio Pulpit – appeal to very specific groups and, therefore, have a high degree of audience selectivity. The flexibility of a medium can be extremely important to an advertiser. In the past, because of printing schedules, paste-up requirements, and so on, some magazines required final advertising copy several months before publication. Therefore, magazine advertising has not been able to adapt as rapidly as audio and audiovisual media to changing market conditions. Although this is no longer the case thanks to electronic advertising images and desk-top publishing, the lead time on magazines is still considerably longer. Radio, on the other hand, provides maximum flexibility. Usually, the advertiser can change the advertisement on the day it is aired, if necessary. Noise level refers to the level of distraction to the target audience in a medium. For example, to understand a televised promotional message, viewers must watch and listen carefully. But they often watch television with others, who may well provide distractions. Noise can also be created by competing advertisements, as when a street is lined with too many billboards or when a television programme is cluttered with competing advertisements. Nielsen estimates total television advertising spent for soccer events programming in 2010 was about $265 million. By 2013, it jumped 43 per cent to $378 million,19 suggesting high levels of noise and clutter. By contrast, direct mail is a private medium with a low noise level. No other advertising "****** DEMO - www.ebook-converter.com*******"

media or news stories compete for direct-mail readers’ attention. Communication media have either a short or a long lifespan. Lifespan means that messages can either quickly fade or persist as tangible copy to be carefully studied. For example, a radio commercial may last less than a minute. However, listeners can’t replay the commercial. One way advertisers overcome this problem is by repeating radio advertisements regularly. On the other hand, a consumer magazine has a relatively long lifespan. A person may read several articles, put the magazine down, and pick it up a week later to continue reading. In addition, magazines and catalogues often have a high pass-along rate, which refers to when one person reads the publication and then gives it to someone else to read.

2.8 Media scheduling

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After choosing the media for the advertising campaign, advertisers must schedule the advertisements. A media schedule designates the medium or media to be used (such as magazines, television or radio), the specific vehicles (such as YOU magazine, the Top Billing TV show or the Top 20 Countdown radio show) and the insertion dates of the advertising. There are four basic types of media schedules: •

Products in the latter stages of the product life cycle, which are typically advertised on a reminder basis, use a continuous media schedule. A continuous schedule allows the advertising to run regularly throughout the

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advertising period. With a flighted media schedule, the advertiser may schedule the advertisements heavily every other month or every two weeks to maximise its impact with an increased frequency and reach at specific times. For example, Ster Kinekor might schedule television advertising on Wednesday and Thursday nights, when moviegoers are deciding which films to see that weekend. A third option is a variation on the pulsing media schedule that combines continuous scheduling with flighting. With this method, continuous advertising is heavier during the best sale periods. For instance, a retail department store may advertise on a year-round basis, but place more advertising during holiday sale periods, such as Easter, Christmas and back-to-school times. Certain times of the year call for a seasonal media schedule. Seasonal products, like Vicks Medinite and Coppertone suntan lotion, which are used more during certain times of the year, tend to follow a seasonal strategy.

Advertisers will also schedule their advertising differently when unusual events may interfere with the impact of their advertising. In the three months leading up to the 2010 Soccer World Cup, many advertisers cut back on advertising expenditure owing to ‘clutter’. A reason cited for the cutback included the fact that ‘there will be too much noise from the main sponsors and our message will get diluted’.20 Unfortunately, many firms do not always get their scheduling right. Ornica Media estimates that up to 14 per "****** DEMO - www.ebook-converter.com*******"

cent of television commercials in South Africa are incorrectly flighted (i.e. they are scheduled in the wrong time slot, the wrong channel or are not flighted at all), resulting in an estimated R650 million of wastage each year.

2.9 Evaluating the advertising campaign

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Evaluating an advertising campaign can be the most demanding task facing advertisers. How do advertisers know whether a campaign led to an increase in sales or market share, or raised awareness of the product? The advertising agency Ogilvy South Africa claims to have increased Volkswagen’s market share from 9 per cent to 20,9 per cent, increased sales of Ever Fresh milk and Castrol GTX by 16 per cent and 35 per cent respectively and turned Carling Black Label into South African Breweries’ number-one brand. Dulux believes that its ‘Any colour you can think of’ campaign increased sales by 8,2 per cent in a paint market that was declining by 3 per cent at the time. KFC’s milkshake campaign featuring little Amy increased sales of its milkshakes by 500 per cent. First National Bank’s ‘Steve/Beep bank’ campaign led to the opening of 1.3 million new bank accounts in 2012. Most advertising campaigns attempt to create an image for a product or service rather than expecting consumer action, so their real effect is often unknown. So many variables shape the effectiveness of an advertisement that, in many cases, advertisers must guess whether their money has been well spent. Despite this uncertainty, however, marketers spend a considerable amount of time studying "****** DEMO - www.ebook-converter.com*******"

advertising effectiveness and its probable impact on sales, market share and awareness. Testing advertising effectiveness can be done either before or after the campaign.

2.10 Pre-tests Before a campaign is launched, marketing managers use pre-tests to identify the best advertising appeal, layout and media vehicle. Common pre-tests include the following: •

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Consumer jury tests. The consumer jury test, or focusgroup interview, uses a panel of consumers from the target market. They preview several advertisements and examine the unfinished advertisements, or storyboards. Next, panel members rank the advertisements by perceived effectiveness and explain their rankings and their reactions to each advertisement. Focus groups may also play an important role in developing the advertising appeal and selecting an appropriate slogan. Portfolio or unfinished-rough tests. The purpose of the portfolio test is to evaluate print advertising. Before marketing managers select a final advertising appeal and layout, they let a sample of consumers read several dummy magazines, complete with stories and different versions of the advertisement. Next, the consumers are asked which advertisements they remember (unaided recall). Then they respond to questions about specific advertisements (aided recall). Similarly, an unfinishedrough test measures the effectiveness of proposed

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television commercials. An unfinished rough, such as a rough videotape of a TV commercial, is shown to consumers, who are then asked to recall the message. Physiological tests. To avoid the bias sometimes encountered in other tests, some marketers have turned to physiological testing. Consumers have involuntary physical reactions to advertisements, such as increased heart rates, changing pupil sizes and breathing. Physiological tests measure these human responses, using galvanic skin-response tests, eye-movement experiments and pupil-dilation measurements as indicators of awareness and interest in advertisements (see Reader 57 ‘Eye-tracking your advertisements’).

2.11 Post-tests After advertisers have run a campaign, they often conduct tests to measure its effectiveness. Several monitoring techniques can be used to assess whether the campaign has met its original objectives. Even if a campaign has been highly successful, advertisers still typically conduct a postcampaign analysis. They consider how the campaign could have been made more effective and what factors contributed to its success. The effectiveness of a campaign is usually assessed using one of the following tests: •

Recognition tests. Recognition (or readership) tests are normally used to measure the effectiveness of magazine advertising. Consumers are asked about their advertising readership and then grouped into three categories: those who noted the advertisement, those who can link the "****** DEMO - www.ebook-converter.com*******"

firm’s name with it and those who read at least 50 per cent of it.

READER 57 >> Eye-tracking your advertising – balance creativity with effectiveness TV is the most expensive medium in which to advertise, although at the same time potentially one of the most successful … if the advertising campaign is properly noticed and understood, of course! With the aid of eye-tracking analysis, a viewer’s perception of a TV commercial can be objectively measured and optimised. Understanding how the consumer interacts with your advertising is critical in ensuring its success. Yet traditional forms of testing tell only part of the story. The ability to measure eye gaze adds value to behavioural research and analysis because human behaviour and thought are reflected in where people look. It is also a precise and robust method for defining the exact position of a person or the presence of eyes. Eye-tracking is a general term for techniques that measure the point of gaze – where you are looking – or determine the eye/head position. Modern eye-tracking methodology allows researchers to measure advertisements’ ability to break through clutter, gain consideration and hold attention. By tracking exactly where consumers look as they watch a programme or read an advert for the first time, a wealth of new information becomes accessible, including the following: what does the customer pay attention to in the advertisement? Is the customer distracted by other elements? Are there differences in perception among different target groups? Do they pay attention to the graphics? How long do they focus on a specific segment? What do they ignore? The key feature of this methodology is the capacity to capture details that otherwise would be lost without compromising the integrity of the research. SOURCE: Matlali, L. 2008. Eye-tracking your advertising – balance creativity with effectiveness. Available, http://promptresearchinsights.com (accessed 29 June 2010)

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Recall tests. A recall test can be used with advertisements presented using almost any medium, from television to billboards. Unlike recognition tests, recall tests do not show respondents the advertisement. Instead, to measure unaided recall, respondents are asked to remember the commercial or advertisement. This measure indicates how much information the target consumers learnt. Aided recall provides cues about the advertisement to jog interviewees’ memories. An implied assumption of recall tests is that consumers who can recall a specific product’s advertisement are more likely to buy the product. An advertiser should not completely rely on this assumption, however. Consumers may recall an advertisement because of its style, yet have no intention of ever using the product. Advertisement recall research has shown that many brands with the best-remembered commercials do not necessarily lead to higher sales.21 • Attitude measures. Often attitude measures are incorporated into recall and recognition tests. Interviewers may ask consumers whether a promotion seems believable, convincing, dull, imaginative, informative, funny, realistic, and so on. They may also ask to what degree, if any, the advertisement affects the interviewee’s desire to use or purchase the product. • Audience size measures. Audience measures are generally done by the same research firms that gauge advertising effectiveness. Organisations such as AMPS, SAARF, the Audit Bureau of Circulations and Nielsen Media Research audit the circulation figures of "****** DEMO - www.ebook-converter.com*******"

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magazines and newspapers and measure radio and television audience sizes. Sales and market share changes. The impact of an advertising campaign on a firm’s sales and market share is another method used to assess the success of a campaign. However, one has to keep in mind that factors other than the campaign itself may also influence sales, such as changes in economic conditions (e.g. interest rates) and competitive activity. In both the 2009 and 2014 elections, the highest-reported television spender was the IEC, which between January and May 2014 had R24 million allocated to promoting the fair election process. This was followed by the Democratic Alliance with R16 million (up nearly 400 per cent from 2009) and the ANC, with R15 million (up 190 per cent from 2009).22 In a first major study by Nielsen, linking radio advertising to retail sales, data revealed that for every dollar spent on advertising, there was an average sales return of $6 for those who were exposed to the ads in the prior 28-day period. Another key finding was that radio delivers a strong consumer sales response close to the time of purchase – the closer the exposure to purchase, the higher the response. For example, a snack food brand’s ad delivered the day before purchase increased the brand share by 9 percent while messages delivered 28 days prior to purchase increased share by only 3.4 percent.23 This example suggests that advertising is a very potent tool at the disposal of the marketing manager.

WEBSITE "****** DEMO - www.ebook-converter.com*******"

Visit the Audit Bureau of Circulations website, www.abc.org.za, to gain a better understanding of its methodology in measuring the circulation of published titles.

>>Technology in action The digital revolution rewrites the advertising fairytale As consumers embrace a new digital world, with its plethora of exciting channels of interaction and entertainment, ranging from social networking and instant messaging to video on demand, businesses are being forced to find new ways to keep their advertising and brand communication relevant. Advertising group Ogilvy refers to a new ‘age of engagement’ supplanting the ‘age of interruption’. Whereas the old paradigm was characterised by 30-second advertisements interrupting evening television viewing, the new digital era sees the consumer in control and, therefore, calls for creating relationships and engaging in more meaningful dialogue. Speaking at the Ogilvy Verge Digital Africa Conference held in Johannesburg in 2008, Patou Nuytemans, OgilvyOneWorldwide’s digital director for Europe, Africa and the Middle East, said the digital revolution had put the consumer in control. ‘Digital technology has revolutionised every aspect of our lives, from how we behave, to how we communicate, to how we maintain relationships, and, "****** DEMO - www.ebook-converter.com*******"

ultimately, how we view the world’, she said, adding that the percentage of people embracing digital technology is increasing. ‘While, for example, five years ago 40 per cent of Europeans were apprehensive about new technology, today 85 per cent of them are keen to provide themselves with the latest innovations.’ She added that, with a blog created every half second, ‘we have lost track of just how big the Internet is’. In addition, free voice-over-Internet-protocol application Skype now has a user base of more than 100 million, she said. ‘[Skype] is already responsible for 7 per cent of the world’s long-distance minutes.’ The upsurge in digital technology means that consumers are now given more media options in an increasingly media-centred life. ‘It is the consumer who decides whether he gets his news by reading his favourite newspaper, or maybe checking out his blog, or going to a news website, or flipping through his RSS feed or even downloading the news podcast and listening on his MP3 player’, she said. ‘It is the consumer who decides. It is the consumer who is in control.’ Firms that want to promote their brands also have to face the reality that, for many audiences, the reign of television has come to an end, with a digital technology-embracing public watching video on websites such as YouTube. In addition, technology such as TiVo in the United States and MultiChoice’s PVR decoder in South Africa allows TV viewers not only to skip ads (with US viewers expected to be skipping through $27 billion worth of ads by the end of 2009, according to Nuytemans), but also to watch what they "****** DEMO - www.ebook-converter.com*******"

want at the time of their own choosing, thus undermining the very concept of prime-time TV. New web and IPTV offerings are having a similar effect. ‘The PVR certainly shows that when the consumer is in control, it becomes increasingly hard for media and advertisers to reach them’, Nuytemans commented. However, research has shown that the advent of the PVR in South Africa (and other countries) does not necessarily mean the slow death of television advertising, contrary to what Nuytemans suggests. Notwithstanding that consumers fast forward (known as ‘zapping’) through an advertisement, they still retain a fair amount of the advertisement’s message, but the extent of this recall is determined by a number of factors such as whether they have seen the advert before and the nature of the advertisement. Also, what may affect the propensity of consumers to ‘zap’ an advert would be the nature of the programmes, with South Africans preferring to watch the news and soap operas live, and therefore less likely to zap the advertisements. This suggests that marketers need to consider the nature of the programmes during which the advertisement is aired in planning their communications strategy. SOURCE: Adapted from Scott, I. 2010. Customer is king. Available, http://www.iweek.co.za (accessed 29 June 2010); Beneke, J., De Lame, S., Simpson, V. and van der Merwe, K. 2011. Marketing in the PVR era - An exploratory study into changes in viewing habits and brand recognition of young adults in South Africa. International Marketing Review, Volume 7 Issue 1, pp 54-71; O’Connell, A. 2010. Advertisers: Learn to Love the DVR. Harvard Business Review, April 2010, p. 22; Du Plessis, E. 2009. Digital Video Recorders and Inadvertent Advertising Exposure. Journal of

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Advertising Research 49 (June 2009), pp 236-239.

3. Public relations

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Public relations (often referred to as PR) is the element in the marketing communication mix that evaluates public attitudes, identifies issues that may elicit public concern and executes programmes to enhance public understanding and encourage acceptance. Like advertising and sales promotion, public relations is a vital link in a progressive firm’s marketing communication mix. Marketing managers plan solid public relations campaigns that fit into their overall marketing plans and focus on targeted audiences. These campaigns strive to maintain a positive image of the firm in the eyes of the public. Before launching public relations programmes, managers evaluate public attitudes and the firm’s actions. Then they create programmes to capitalise on the factors that enhance the firm’s image and minimise the factors that could generate a negative image. Many people associate public relations with publicity. Publicity is the effort to capture media attention – for example, through articles or editorials in publications or through human-interest stories on radio or television programmes. Most firms usually initiate publicity by using a media release to further their public relations plans. For instance, in response to negative publicity on the impact of bottled water on the environment, SA National Bottled Water Association published the following information: "****** DEMO - www.ebook-converter.com*******"

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Bottled water as a consumer product in South Africa constitutes only 1,3% of the total beverage industry (by volume) Bottled water represents less than one-tenth of 1% of an average consumer’s overall environmental footprint Consumption of water of all types (both bottled and tap) accounts for 41% of beverage consumption, while producing only 12% of the associated impact on climate change in comparison, the combination of milk, coffee, beer, wine and juice provide just 28% of the volume of beverages consumed, but are associated with 58% of the climate change impact Water – in all its forms – is the best beverage option for the environment. Tap is best, and bottled water has the lightest environmental footprint of all packaged beverages – and one that can be reduced by 25 per cent simply by recycling the bottle.

A firm that is about to introduce a new product or open a new shop (Swedish retailer H&M, for instance, plans to enter the South African market) may send media releases to the media in the hope that the story will be published or broadcast. Public relations departments may perform some or all of the following functions: •

Press relations. Placing positive, newsworthy information in the news media by means of media releases to draw attention to a product, a service, or a person associated with the firm or institution. When a university appoints a new vice-chancellor, it will send

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out a media release to various members of the media ‘introducing’ the new appointee to the media and their readers. Product publicity. Publicising specific products or services. Corporate communication. Creating internal and external messages to promote a positive image of the firm or institution. Public affairs. Building and maintaining national or local community relations. Lobbying. Attempting to influence legislators and government officials to promote or oppose legislation and regulation. Before the advertising of tobacco products was banned, the tobacco industry tried to prevent the legislation by means of lobbying. Employee and investor relations. Maintaining cordial relationships with employees, shareholders and others in the financial community. When firms have to deal with striking workers, for example, they often issue media reports so that the public and investors have some understanding of what is happening during negotiations. Crisis management. Responding to unfavourable publicity or a negative event. The petroleum company BP was forced into crisis management when one of its oil drills exploded off the Gulf of Mexico in 2010, which led to an oil spill that caused severe environmental damage.

3.1 Public relations tools Several tools are commonly used by public relations "****** DEMO - www.ebook-converter.com*******"

professionals, including new-product publicity, product placement, customer-satisfaction phone lines, consumer education, event sponsorship and issue sponsorship. A relatively new tool employed by public relations professionals in increasing numbers is Internet websites. Three public relations tools – new-product publicity, event sponsorship and issue sponsorship – will be examined more closely.

3.1.1 New-product publicity Publicity is instrumental in introducing new products and services. Publicity can help advertisers explain what’s different about their new products by prompting free news stories or positive word-of-mouth about them. During the introductory period, an especially innovative new product often needs more exposure than conventional, paid advertising affords. Public relations professionals write media releases in an effort to generate news about their new product. They also jockey for exposure of their product or service at major events, such as the Rand Easter Show or on popular television and news shows. For instance, sports captains of sport teams often wear the cap of the team’s sponsor when they are interviewed on television.

3.1.2 Event sponsorship Public relations managers can sponsor events or community activities that are sufficiently newsworthy to ensure media coverage. At the same time, these events also reinforce brand identification. Pick n Pay sponsors the Red Cross Children’s Hospital Fund; Steinhoff sponsors university "****** DEMO - www.ebook-converter.com*******"

rugby; First National Bank sponsors schools rugby; and Oceana Fishing sponsors the National Sea Rescue Institute, Absa sponsors the Klein Karoo National Arts Festival. Sport, music and arts events remain the most popular categories for event sponsors. It is estimated that South African firms spend about R7 billion on various sponsorships per year of which about 80 per cent goes to sport and only 10 per cent to music events. For instance Standard Bank sponsors the Joy of Jazz festival and MTN the SA Music Awards.24 As these figures suggest sports sponsorship is particularly popular in South Africa. Despite the impact of the global economic downturn on sports sponsorship, the local industry still reported higher growth in 2013 than the international sector. South Africa’s sports sponsorship investment weighed in at R7,5 billion in 2013, what pundits call a ‘relatively conservative period’. The number included direct sponsorship of teams and events, as well as broadcast rights and leverage. Based on research by BMi the company forecasted the sector to grow to R4,9 billion in direct spend on rights fees in 2013, but that growth in the sector was higher than expected and, at 8,6 per cent, better than the previous two years. ‘If they include the R2,5 billion-plus sponsors also spent on leveraging their sponsorships (this includes all expenditures sponsors incur to promote, advertise and stage their sponsorship/events), the overall market was worth over R7,5 billion in 2013,’ according to BMi’s research.25

3.1.3 Issue sponsorship Firms can also build public awareness and loyalty by "****** DEMO - www.ebook-converter.com*******"

supporting their customers’ favourite issues. Education, healthcare and social programmes are the íssues’ that get the largest share of corporate sponsorship. Firms often donate a percentage of their sales or profits to a worthy cause that their target market is likely to favour. For example, Oceana Fishing sponsors the Animal Rescue Organisation, which provides veterinary services in communities that do not have permanent animal hospitals or clinics. Regardless of the nature of the sponsorship, it is important that it is integrated with other promotional activities, particularly advertising (see Reader 58 ‘Secrets of sponsorship’).

READER 58 >> Secrets of sponsorship So you’ve invested R10 million in sponsorship rights to a major event. You can now sit back and bask in the goodwill created, right? Wrong! The rule of thumb at MasterCard, a world leader in sponsorship, is that you have to spend three to four times as much on advertising and promoting your sponsorship as you do buying the sponsorship rights. ‘If you can’t do that, you need to think carefully about whether you should be in it’, says MasterCard International’s Anna Zanghi. The MasterCard philosophy is ‘fewer, bigger, better. We want a handful of global sponsorships that align themselves with our brand.’ MasterCard has exclusive rights in its category to World Cup soccer and sponsors the Jordan Formula One motor-racing team. These two events are alongside the Olympics as the three biggest global sponsorship events. Sponsorship is treated as a solid business opportunity with three primary objectives: building brand preference from the card and reinforcing brand awareness; creating a business-building platform for member banks and merchants; providing cardholders with added value – the ‘priceless experience’, which is reinforced in the worldwide advertising campaign. "****** DEMO - www.ebook-converter.com*******"

‘We have a global budget for the properties, and each region contributes to this. Then regionally we decide how to leverage the international events as well as local events. We think global and act local’, says Zanghi. The results show a card usage (brand preference) and new-card acquisition. ‘Most people have more than one card. We want them to use ours.’ SOURCE: Secrets of sponsorship. Financial Mail, 16 March 2001

3.2 Managing unfavourable publicity Although most marketers try to avoid unpleasant situations, crises do happen. Intel, for example, faced this reality after consumers became aware of an obscure flaw in its Pentium chip. A while ago, Pick n Pay had to admit that some products on some of its shelves had been tampered with. New Zealand firm Fonterra was embarrassed by revelations that bacteria were found in some of its products sold in China. In South Africa’s free-press environment, publicity is not easily controlled, especially in a crisis. Crisis management is the co-ordinated effort to handle the effects of unfavourable publicity, ensuring fast and accurate communication in times of emergency. Good public relations staff is perhaps more important in bad times than in good (see Reader 59 ‘Response to disaster can compound or alleviate it’). For example, critics chastised Malaysian Air recently when one of its planes disappeared, saying the airline was slow and uncooperative with family members who wanted information about survivors, and that calls from the media went unanswered. The airline’s chief executive was also late in reassuring families and the public that his airline was doing all it could. "****** DEMO - www.ebook-converter.com*******"

All public relations professionals learnt a valuable lesson from this blunder: a firm must have a communication policy firmly in place before a disaster occurs, because timing is uncontrollable. After the BP oil spill in the Gulf of Mexico in 2010, US President Barack Obama criticised the firms involved for not accepting responsibility for the accident. He said they were ‘publicly trading blame … executives of BP and Transocean and Halliburton [suppliers to BP were] falling over each other to point the finger of blame to somebody else’.26 How should firms at the wrong end of negative publicity respond? A rapid response to a crisis can generally minimise the damage to the firm’s image. For major threats to reputational damage, marketers are urged not to waste critical time that could be spent addressing and ending the problem. Some general guidelines for handling a crisis situation are: •

•

Start early. The worst damage to a firm’s or product’s reputation tends to occur immediately after the problem becomes public knowledge Establish credibility with the public. The spokesperson during a crisis should be a senior executive, preferably the chief executive officer

READER 59 >> Response to disaster can compound or alleviate it General Motors (GM) and Malaysia Airlines are both in trouble, but one is giving a lesson on how to handle a fatal crisis while the other is offering a "****** DEMO - www.ebook-converter.com*******"

master class on how not to. There is a glaring contrast in the behaviour, and ability to cope with public criticism, of Mary Barra, GM’s CE, and Ahmad Jauhari Yahya, the CE of Malaysia Airlines – although Ms Barra has a simpler task. Both face the most critical corporate challenge – how to respond when your customers die because they used your product or service. The GM accident victims were a dozen drivers or passengers of faulty compact cars. In Malaysia Airlines’ case, the presumed victims are the 239 people on board missing flight MH370. Ms Barra, who took over as GM’s boss in January, has so far reacted in an exemplary manner. She has stepped up to take personal responsibility, admitted that GM is to blame and apologised; emphasised her sorrow ‘as a mom with a family of my own’ and promised not only to make amends but to use the crisis as a turning point for GM. Mr Ahmad oversaw the blunder in which some families were informed of deaths by text message. Having emphasised in a statement that he responded ‘as parent, as brother, as a son’, he relapsed into defensive corporate-speak in a BBC Radio interview. Describing the criticism as ‘unfair’, he insisted that his airline had ‘given beyond … what I call the standard scenario’. ‘Thanks a bunch’ would be the mildest response of anyone who has lost a loved one in what was far from a ‘standard scenario’. SOURCE: Gapper, J., 2014. Response to disaster can compound or alleviate it, Business Day, 1 April, p. 8 WEBSITE

See how GEPF handles unfounded rumours about pension payments (http://www.gepf.gov.za/index.php/pressreleases/articl of-benefits-rumour-hoax).

• •

Avoid the ‘no comment’ response Make a team effort. Rely on senior management, public

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relations professionals, attorneys, quality-control experts and manufacturing and marketing personnel. No single approach will work for every crisis, but outlining some type of crisis management plan before problems arise will help minimise the damage.

4. Sales promotion

LO9

In addition to using advertising, public relations and personal selling, marketing managers can use sales promotion to increase the effectiveness of their promotional efforts. Sales promotions are those marketing communication activities, other than advertising, personal selling and public relations, in which a short-term incentive, such as a lower price or added value, motivates consumers or members of the distribution channel to purchase a product or service immediately. Advertising offers the consumer a reason to buy; sales promotion offers an incentive to buy. Both are important, but sales promotion is usually cheaper than advertising and easier to measure. A major national TV advertising campaign may cost more than R1 million to create, produce and place. However, a newspaper coupon campaign or promotional contest may cost only about half as much. It is hard to establish exactly how many people buy a product as a result of seeing a TV advertisement. With sales promotions, however, marketers often know the precise number of coupons redeemed or the number of competition entries processed. For instance Spur’s Bottomless Ribs and "****** DEMO - www.ebook-converter.com*******"

Buffalo Wings’ promotion increased its sales by 16,5 percent.27 Another good example of a very successful promotion is one conducted by the seafood restaurant chain Ocean Basket. To celebrate its fifteenth birthday, Ocean Basket put its signature dish – ‘feesh and chips’ – on the menu at its 1995 price: R9,99. Advertising agency Joe Public flighted a commercial 80 times the previous day, placed an ad in the Sunday Times and got Tweeting to galvanise customers. The results surpassed all expectations, as 76 000 people jammed the chain’s 133 outlets.28 Sales promotion is usually targeted at either of two distinctly different markets. Consumer sales promotion is targeted at the ultimate consumer market. Trade sales promotion, on the other hand, is directed at members of the marketing channel, such as wholesalers and retailers. WEBSITE Standard Bank says: ‘Access our website and experience true banking convenience.’ Is that true? See http://www.standardbank.co.za

4.1 The objectives of sales promotion Sales promotion usually works best in affecting behaviour, not attitudes. Immediate purchase (or at least trial) is the purpose of a sales promotion, regardless of the form it takes. Therefore, it seems to make more sense when planning a sales promotion campaign to target consumers according to their general behaviour. For instance, is the consumer loyal to your product or to your competitor’s? Does the consumer "****** DEMO - www.ebook-converter.com*******"

switch brands readily in favour of the best deal? The objectives of a promotion depend on the general behaviour of target consumers. For example, marketers who are targeting loyal users of their product do not want to change these consumers’ behaviour. Instead, they try to reinforce existing behaviour or increase product usage. An effective tool for strengthening brand loyalty is frequentbuyer programmes that reward consumers for repeat purchases, such as the Clicks Club Card or First National Bank’s e-Bucks. Other types of promotions are more effective with customers who tend to switch brands or with those who are loyal to a competitor’s product. Money-off coupons, free samples or eye-catching displays in a shop will often entice shoppers to try a different brand.

4.2 Tools for consumer sales promotion

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Marketing managers must decide which consumer sales promotion tools to use in a specific campaign. The tools and methods chosen must suit the objectives of the promotion to ensure the success of the overall marketing communication plan. Popular tools for consumer sales promotion are coupons, premiums, loyalty marketing programmes, competitions, samples and point-of-purchase displays.

4.2.1 Coupons A coupon is a certificate that entitles consumers to an immediate price reduction when they buy the product (see the Glad advertisement). Consumers receive coupons by direct mail; through the media, as in a free-standing insert in "****** DEMO - www.ebook-converter.com*******"

newspapers; on the product’s package; through co-operative advertising, which presents a manufacturer’s coupon that can be redeemed only at a particular retailer; and through coupon-dispensing machines in shops. Coupons are a particularly good way to encourage product trial and repurchase. Nestlé used coupons that offered a R2 discount to stimulate trial of its new Encore brand, for instance. When Glad first introduced its non-stick baking and cooking paper, it offered a R1 discount coupon to buyers.

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4.2.2 Premiums A premium is an extra item offered to the consumer, usually in exchange for some proof that the promoted product has been purchased. Premiums reinforce the consumer’s purchase decision, increase consumption and may persuade non-users to switch brands. Premiums like free cellphones and umbrellas are often available when consumers buy products such as motor vehicles and banking services. Premiums can also include more of the product but at the usual price, such as two-for-the-price-ofone and bonus packs or packages that include more of the product – an approach often used by the marketers of cosmetics, grocery items and magazines.

4.2.3 Loyalty marketing programmes The objective of loyalty marketing programmes is to build long-term, mutually beneficial relationships between a firm and its key customers. Popularised by the airline industry using frequent-flyer programmes, loyalty marketing enables firms to strategically invest sales promotion money in activities designed to capture greater profits from customers already loyal to the product or firm.29 A study concluded that if a firm retains only an additional 5 per cent of its customers each year, profits will increase by at least 25 per cent. What’s more, improving customer retention by a mere 2 per cent can reduce costs by as much as 10 per cent. The MD of Rapp Collins, Brian Hopkins, relates his experience with loyalty marketing programmes as follows: ‘At the beginning of 1996, 10 per cent of our business was retention-based; now it’s 85 per cent. So we have [more "****** DEMO - www.ebook-converter.com*******"

than] doubled our income in a year and have fewer, better clients. Most companies lose 20 to 25 per cent of their customers each year. But 90 per cent of profits come from loyal customers. So 90 per cent of adspend goes on external media [other than direct marketing] to recruit new customers, but most won’t be profitable.’30

4.2.4 Competitions Competitions are generally designed to create interest in a product or service, often to encourage brand switching. They are promotions in which participants use their skill or ability to compete for prizes. A consumer competition usually requires entrants to answer questions, complete sentences or write a paragraph about the product and submit proof of purchase. Crosse & Blackwell mayonnaise sponsored a competition in which contestants had to do no more than complete the phrase: ‘… & Blackwell’. When setting up a competition, sales promotion managers must make sure that the award or prize will appeal to the target market and adhere to legislative requirements.

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4.2.5 Samples Consumers generally perceive a certain amount of risk when trying new products they had not bought before. Many are afraid of trying something they may not like (such as a new food item) or spending too much money and getting little reward. Samples allow the customer to try a product, such as "****** DEMO - www.ebook-converter.com*******"

shampoo or a new blend of coffee, without the risk factor. However, from a firm’s perspective, samples can be very expensive. As a general rule, then, free samples of a product should be offered only when two conditions exist. First, the benefits of the new product must be clearly superior to those of existing products. Second, the item must have a unique new attribute that the consumer must be able to experience (e.g. superior taste). Sampling can be accomplished by mailing the sample directly to the customer, delivering the sample door-todoor, demonstrating or sampling the product at a retail outlet, or packaging the sample with another product. Sampling at special events is a popular, effective and highprofile promotional method that permits marketers to piggyback onto fun-based consumer activities – such as sports events, fairs and festivals, and beach events.

4.2.6 Point-of-purchase displays A point-of-purchase display is a promotional display set up in-store to build traffic, advertise a product or induce impulse buying. One major advantage of point-of-purchase displays is that they offer manufacturers a captive audience in shops. Research by the Point-of-Purchase Advertising Institute indicates that more than 70 per cent of purchase decisions are made in-store.31 Therefore, point-of-purchase displays work better for impulse products – those products bought without prior decision by the consumer – than for planned purchases.

4.3 Tools for trade sales promotion "****** DEMO - www.ebook-converter.com*******"

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Whereas consumer promotions pull a product through the channel by creating and stimulating demand, trade promotions push a product through the distribution channel (see Chapters 10 and 13). When selling to members of the distribution channel, manufacturers use many of the same sales promotion tools used in consumer promotions – such as competitions, premiums and point-of-purchase displays. Several trade sales promotion tools, however, are peculiar to manufacturers and intermediaries: •

•

•

Trade allowances. A trade allowance is a price reduction offered by manufacturers to intermediaries, such as wholesalers and retailers. The price reduction or rebate is given in exchange for doing something specific, such as allocating shelf space for a new product or buying something during special periods. For example, a local retailer, such as Spar, may receive a special discount for running its own promotion on Liquifruit juice. Push money. Intermediaries receive push money as a bonus for pushing the manufacturer’s brand through the distribution channel. Often the push money is directed towards a retailer’s salespeople. For example, the manufacturer may offer R500 ‘push money’ to an electronics store’s sales force for every television of its brand sold. This practice, however, may foster more loyalty to the manufacturer than to the retailer. When Coca-Cola launches a new product, such as Play, the firm may pay waiters a certain amount for each unit sold in a certain period. Training. Sometimes a manufacturer will train an intermediary’s staff if the product is rather complex – as

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•

•

•

frequently occurs in the computer and telecommunications industries. For example, if a large department store purchases an NCR computerised cashregister system, NCR may provide free training so that the salespeople can learn how to use the new system. Free merchandise. Often a manufacturer offers retailers free merchandise in lieu of quantity discounts. For example, a breakfast cereal manufacturer may throw in one case of free cereal for every 20 cases ordered by the retailer. In-store demonstrations. Manufacturers can also arrange with retailers to perform an in-store demonstration. For example, food manufacturers often send representatives to grocery stores and supermarkets to let customers sample a product, such as a new cold meat or sausages, while shopping. Cosmetics firms also send their representatives to department stores and even airports to promote their beauty aids by performing facials and makeovers for customers. Trade promotions are popular among manufacturers for many reasons. Trade sales promotion tools help manufacturers gain recruit intermediaries for their products, obtain wholesaler and retailer support for consumer sales promotions, build or reduce dealer inventories and improve trade relations. Car manufacturers, for example, annually sponsor dozens of car shows for their dealers.

5. Personal selling "****** DEMO - www.ebook-converter.com*******"

LO12

Personal selling is the final element of a typical integrated marketing communication mix. It is a form of direct communication between a sales representative and one or more prospective buyers in an attempt to guide them to a purchase situation. It offers several advantages over other elements of the marketing communication mix: •

•

•

•

Personal selling has the capacity to provide a detailed explanation or demonstration of the product. This is especially important for complex or new products and services. The sales message can be varied according to the motivations and interests of each prospective customer. Moreover, when the prospect (potential buyer) has questions or raises objections, the salesperson is there to respond immediately by providing explanations and information. Personal selling costs can be controlled by adjusting the size of the sales force (and resulting expenses) in oneperson increments. Advertising and sales promotion, however, must often be purchased in fairly large amounts. Perhaps the most important advantage is that personal selling is considerably more effective than other forms of promotion in obtaining a sale and gaining a satisfied customer.

5.1 Contrasting personal selling with other forms of marketing communication "****** DEMO - www.ebook-converter.com*******"

LO13

Given certain customer and product characteristics, personal selling might work better than other forms of marketing communication. Generally speaking, personal selling becomes more important as the number of potential customers decreases, as the complexity of the product increases and as the value of the product grows (see Table 12.2). When there are relatively few potential customers, the time and travel costs incurred by personally visiting each potential buyer are justifiable. Of course, the product or service that is being sold must be of sufficient value to absorb the expense of a sales call – a mainframe computer, a management consulting project or the construction of a new building are good examples. For highly complex products, such as business jets or private communication systems, a salesperson is needed to assess the prospective customer’s needs, explain the product’s basic advantages and propose the exact features and accessories that will meet the client’s needs. Conversely, advertising and sales promotion more effectively and economically promote a product when the number of potential buyers is large, the product is less complex, the buyers are dispersed and the product is low in value and highly standardised (for instance, toothpaste or tea).

5.2 Sales tasks

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Personal sales tasks are generally classified into three basic categories: order getting, order taking and sales support. Order getters, who actively seek prospective buyers and try to persuade them to buy, may be members of a firm’s sales "****** DEMO - www.ebook-converter.com*******"

force or independent sellers. Order takers handle either inside ordering or field ordering. Inside order takers take orders over the counter, on the sales floor, over the telephone or by mail. Field order takers, on the other hand, visit clients to service accounts, check inventory, take new orders and deliver and stock merchandise for customers. Sales support positions include missionary sales representatives, technical specialists and selling teams. Missionary sales representatives provide a variety of promotional services to support company sales efforts. Technical specialists help the sales force by describing, designing and installing products. Marketers that practise relationship selling have begun to form sales teams to meet their clients’ needs. A selling team is a combination of sales and non-sales staff whose primary objective is to establish and maintain strong customer relationships. Table 12.2 Personal selling and advertising/sales promotion: A comparison

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Personal selling is more effective if:

Advertising or sales promotion is more effective if:

•

The product has a high value

•

The product has a low value

•

It is a custom-made product

•

It is a standardised product

•

There are few customers

•

There are many customers

•

The product is technically complex

•

The product is simple to understand

•

Customers are concentrated in one area

•

Customers are geographically dispersed

Examples: Insurance policies; photocopiers; aeroplane engines

Examples: Soap; T-shirts; tinned tuna

5.3 Steps in the personal-selling process

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Although personal selling may sound like a relatively simple task, completing a sale actually requires several steps. The sales process, or sales cycle, is simply the series of steps a salesperson goes through to sell a particular product or service. This sales process or cycle may be unique for each product or service, depending on the product/service’s features, the characteristics of the customer segments and the internal processes in place within the firm, such as how sales leads are generated. Some sales take only a few minutes, but others may take "****** DEMO - www.ebook-converter.com*******"

months or even years to complete, especially when customised products or services are involved. Irrespective of whether a salesperson spends a few minutes or a few years on a sale, the following are the seven basic steps in the personal selling process: • • • • • • •

Step 1: Generating sales leads Step 2: Qualifying sales leads Step 3: Doing a needs assessment Step 4: Developing and proposing solutions Step 5: Handling objections Step 6: Closing the sale Step 7: Following up.

Like other forms of promotion, these steps of selling follow the AIDA concept (see Chapter 11). Once a salesperson has identified a prospect with the required authority and financial means to buy, he or she tries to get the prospect’s attention. A thorough needs assessment should be turned into an effective sales proposal, and the presentation should generate interest. After developing the customer’s initial desire (preferably during the presentation of the sales proposal), the salesperson seeks action in the closing stage (step 6) by trying to get an agreement to buy. Follow-up after the sale, the final step in the selling process, not only lowers cognitive dissonance (see Chapter 3), but may also open up opportunities to discuss future sales. Effective follow-up will also lead to repeat business, whereupon the process may start all over again from the needs-assessment step. Traditional selling and relationship selling follow these same basic steps. What is different between the two selling "****** DEMO - www.ebook-converter.com*******"

methods is the relative importance placed on key steps in the process. Traditional selling efforts focus on generating as many leads as possible, making presentations and closing sales – that is, getting the customer’s signature on the order form. Minimal effort is placed on asking questions to identify customer needs and wants or matching these needs and wants to the benefits of the product or service. By contrast, salespeople practising relationship selling emphasise their up-front investment in the time and effort needed to uncover each customer’s specific needs and wants, and match them as closely as possible to the product or service offering. By doing his or her homework up front, the salesperson creates the conditions necessary for a relatively straightforward close of the sale.32 Let’s analyse each step of the selling process. These steps apply both to the selling of consumer goods, such as televisions, and to business-to-business selling.

5.3.1 Generating leads Initial groundwork must precede communication between the potential buyer and the salesperson. Lead generation, or prospecting, is the identification of those firms and people most likely to buy the seller’s product. These firms or people become ‘sales leads’ or ‘prospects’. Naturally, not everyone is a prospect for a firm’s product, nor are all prospects equally likely to buy. It is important for the relationship salesperson to attract the right kind of customer for the relationship. Sales leads are secured in several different ways: "****** DEMO - www.ebook-converter.com*******"

•

Advertising and other media are the most effective ways of securing leads. • Internet websites. Many sales professionals secure valuable leads from their firms’ websites. Web surfers who visit a firm’s site often have the opportunity to submit a request to have a salesperson follow up with more information about the firm’s products or services. • Favourable publicity also helps create leads. Readers often call or write to publications and television stations to enquire about products or firms they have read about in the media. • Direct-mail and telemarketing programmes have become popular ways of generating sales leads. This type of lead generation usually starts with a list of potential clients with desirable characteristics, such as a particular occupation. For instance, if a medical-equipment manufacturer is trying to sell a new piece of equipment used in heart surgery, the sales process may start with a list of all cardiologists in South Africa. The manufacturers may send direct-mail letters or brochures, usually with a detachable coupon to be returned or a toll-free number to be called for more information, or an email address to send enquiries to. • Cold calling is a form of lead generation whereby the salesperson approaches potential buyers without any prior knowledge of the prospects’ needs or financial status. This method is usually used with consumer-type goods, such as encyclopaedias. • Referrals and networking are ways to generate a lead is through a referral – a recommendation from a customer or business associate. Networking is the method of using "****** DEMO - www.ebook-converter.com*******"

•

•

friends, business contacts, co-workers, acquaintances and fellow members in professional and civic organisations to find out about potential clients. For example, an insurance agent may rely heavily on networking with neighbours, members of his or her church or members of community organisations to identify new prospects. Trade shows and conventions are another good source of leads. Because these events are designed around the interests of a specific product or industry, most of the leads generated are very likely prospects. The firm’s internal records of past client purchases are another excellent source of leads.

5.3.2 Qualifying sales leads When a prospect shows interest in learning more about a product, the salesperson has the opportunity to follow up, or qualify, the lead. Personally visiting unqualified prospects wastes the salesperson’s valuable time and the firm’s resources. Lead qualification, which is particularly important in business-to-business selling situations, means assessing whether the prospect has three things:33 •

•

A recognised need. The most basic criterion for determining whether or not someone is a prospect for a product is whether there is a need that is not being satisfied. Preliminary interviews and questioning can often provide the salesperson with enough information to determine if there is a need. Buying power. Buying power involves both the authority

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•

to make the purchase decision and access to funds to pay for it. To avoid wasting time and money, the salesperson needs to identify the purchasing authority before making a presentation. An organisation chart can provide valuable clues. In some cases, purchasing authority rests with a committee. The salesperson must then identify the most influential committee members. In other situations, buying authority may rest with regional or headquarters management, who may be located elsewhere. Receptivity and accessibility. The prospect must be willing to see and be accessible to the salesperson. Some prospects simply refuse to meet with salespeople. Others, because of their stature in their organisation, will only deal with a salesperson or sales manager with a similar standing.

5.3.3 Doing a needs assessment The salesperson’s ultimate goal in a needs assessment is to find out as much as possible about the prospect’s situation. The salesperson should decide how to maximise the fit between what he or she can offer and what the prospective customer wants. As part of the needs assessment, the consultative salesperson must know everything there is to know about:34 •

The product or service. Product knowledge is the cornerstone for conducting a successful needs assessment. In other words, the consultative salesperson must be an expert on his or her product or service. How

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and where is it made? What are the technical specifications and do they meet the customer’s requirements? What are the product’s features and benefits, and what benefits can they provide the customer? What are the pricing and billing procedures? What kinds of warranty and service support are provided? How does the product’s performance compare with the competition’s product? • The customers and their needs. When it comes to customers, the salespeople should know more about them than they know about themselves. That’s the secret to relationship and consultative selling: the salesperson acts not only as a supplier of products and services, but also as a trusted consultant and adviser. The professional salesperson doesn’t just sell products. He or she brings to each client business-building ideas and solutions to problems. For the customer, consulting a professional salesperson is like having another vital person on the team at no cost. • The competition. Who are the competitors and what is known about them? What are their products and services like and how do they compare? What are their advantages and disadvantages? What are their strengths and weaknesses? Salespeople must know as much about their competitors’ products as they know about their own. • The industry. Knowing the industry involves active research on the part of the salesperson. This means attending industry and trade-association meetings, reading articles published in industry and trade journals, keeping track of legislation and regulation that affect the "****** DEMO - www.ebook-converter.com*******"

industry, being aware of product alternatives and innovations from domestic and foreign competition and having a feel for economic and financial conditions that may have an impact on the industry.

5.3.4 Developing and proposing solutions Once the salesperson has collected the appropriate information about the customer’s needs and wants, the salesperson then develops a solution, or possibly several solutions, in which the salesperson’s product or service solves the customer’s problems or meets a specific need. These solutions are normally presented to the customer in the form of a sales proposal given at a sales presentation. A sales proposal is a written document or professional presentation that outlines how the firm’s product or service will meet or exceed the customer’s needs. The sales presentation is the formal meeting in which the salesperson has the opportunity to present the sales proposal. Because the salesperson often has only one opportunity to present a sales proposal, the quality of both the sales proposal and the presentation can make or break the sale. The salesperson must be able to present the proposal and handle any customer objections confidently and professionally. Prospects take note of body language, voice patterns, dress and body type. In fact, they are more likely to remember how salespeople physically present themselves than what they actually say.35

5.3.5 Handling objections Rarely does a prospect say ‘I’ll buy it’ immediately after a "****** DEMO - www.ebook-converter.com*******"

presentation. Often, there are objections raised or perhaps questions about the proposal and the product. One of the first lessons that every salesperson learns is that objections to the product should not be taken personally or as an insult. Instead, a salesperson should view objections as requests for information. A good salesperson handles objections calmly and considers them a legitimate part of the purchase decision. Anticipating specific objections, such as concerns about price, is the best way to prepare for them. WEBSITE How do J. Crew and Lands’ End use the Internet in the order-taking process? www.jcrew.com www.landsend.com

5.3.6 Closing the sale At the end of the presentation, the salesperson should ask the customer how he or she would like to proceed. If the customer shows signs that he or she is ready to purchase and that all questions have been answered and objections met, then the salesperson can try to close the sale. Closing requires courage and skill. Naturally, the salesperson wants to avoid rejection, and asking for a sale carries with it the risk of a negative answer. A salesperson should keep an open mind when asking for the sale and be prepared for either a yes or a no. Often, if the salesperson has developed a strong relationship with the customer, only minimal efforts are needed to close a sale.

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5.3.7 Following up Unfortunately, many salespeople have the attitude that making the sale is all that’s important. Once the sale is made, they can forget about their customers. If salespeople believe that, they are wrong. Their responsibilities do not end with making the sales and placing the orders. One of the most important aspects of their jobs is follow-up. They must ensure that delivery schedules are met, that the goods or services perform as promised, and that the buyers’ employees are properly trained to use the products. Most businesses depend on repeat sales, and repeat sales depend on thorough and continued follow-up by the salesperson. Finding a new customer is far more expensive than retaining an existing one. When customers feel abandoned, cognitive dissonance surfaces (see Chapter 1) and repeat sales decline.

6. Sales management

LO16

There is an old adage in business that nothing happens until a sale is made. Without sales there is no need for accountants, production workers – or even a CEO. Sales management is one of marketing’s most critical specialities. Effective sales management stems from a highly successorientated sales force that accomplishes its mission economically and efficiently. Poor sales management can lead to unmet profit objectives or even to the bankruptcy of the firm. Although the sales manager’s basic job is to maximise sales at a reasonable cost and simultaneously "****** DEMO - www.ebook-converter.com*******"

maximise profits, he or she also has many other important responsibilities and decisions to make. The tasks of sales management are to: • • • • •

Define sales objectives and the sales process Design the sales organisation Develop the sales force Direct the sales force Evaluate the sales force.

The following sections analyse each of these tasks in more detail.

6.1 Defining sales objectives and the sales process Effective sales management begins by formulating sales objectives. Management is also responsible for prescribing the process salespeople follow to realise the desired sales objectives most efficiently.

6.1.1 Setting strategic sales objectives Like any marketing objective, sales objectives should be stated in clear, precise and measurable terms and should always specify a time frame for their fulfilment. Overall sales objectives are usually stated in terms of the desired sales volume (in rands), market share or profit level. For example, a life-insurance firm may have an objective to sell R10m worth of new life insurance policies annually, to attain a 12 per cent market share or to generate R5 million in profits. "****** DEMO - www.ebook-converter.com*******"

Individual salespeople are also assigned objectives in the form of targets. A sales target is simply a statement of the salesperson’s sales objectives, which is usually based on sales volume alone, but sometimes includes key accounts (those with greatest potential), new accounts, repeat sales and specific products. In addition, quotas can be based on activity or on financial objectives. A sales representative for a cellphone firm, for example, may have a sales quota of R5 000 worth of equipment or five new cellular systems per week, or she may have the objective of completing a certain number of sales calls per week. See Table 12.3 below for Woolworths’ strategic objectives and indicators for 2013, as linked to sales targets. The Woolworth’s strategy is crafted around seven objectives in support of their vision: to be a world leader in retail brands that appeal to people who care about quality, innovation and sustainability.

6.1.2 Defining the sales process Without a keen understanding of the sales process, a sales manager will never be successful – no matter how well defined the sales objectives or how good the sales representatives are. Having talented and hard-working salespeople are not enough. Managers must put systems in place to help them win. An important responsibility of the sales manager, therefore, is to identify the most effective and efficient sales process to follow in selling each different product, brand and service. A sales manager should formally define the specific procedures that salespeople go through to do their jobs – what they need to do to get from step-to-step in making a sale. Without a formal sales process "****** DEMO - www.ebook-converter.com*******"

to follow, sales representatives are often reactionary, rather than proactive, to customer needs.

6.2 Designing the sales organisation Because personal selling is so costly, no sales department can afford to be disorganised. Therefore, structuring the sales department or sales force and determining the size of the sales force are essential prerequisites for successful selling.

6.2.1 Designing the sales force structure Sales departments are most commonly organised into the following five types, or combinations of them: • Geographic organisation. A common method for organising the sales force is assigning a salesperson to a particular geographic area called a sales territory – for instance, a region, province, city or other trading area. A consumer-product firm (for example, Unilever or National Brands) with a large number of closely related, non-technical products may use this type of structure. Geographically structured sales departments are most appropriate when customers are widely dispersed or when there are large regional differences in customer buying behaviour. For example, sales of sea-rescue equipment in Gauteng would not warrant the creation of separate sales territories, but they would in coastal regions. Table 12.3 Woolworths’ strategic objections and indicators "****** DEMO - www.ebook-converter.com*******"

SOURCE: Woolworths Holdings Limited 2013 Integrated Report, p. 4

•

Product organisation. Another common method is structuring the sales organisation by the product or brand that the salesperson sells. Structuring the sales force in this manner is most appropriate when products are complex, the differences between them are great and the products or product groups are important enough to justify special attention. A sales force organised by product has greater knowledge of and expertise in specific product categories. Pharmaceutical firms are a good example of this structuring method. For instance, Adcock Ingram may allocate responsibility for all its generic medicines to a certain section of the sales force and all critical-care products – such as intravenous solutions – to another section.

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Functional organisation. A sales department organised by function focuses on needed sales activities, such as account development or account maintenance. This structure offers specialisation and efficiency in performing selling activities and is best for firms selling only a few, or very similar, products to relatively few target markets. Eskom’s sale of electricity to municipalities is an example. • Market organisation. Using this approach, the sales force is divided by customer groups, or target markets. A market organisation is most appropriate when customer needs and product purchases vary considerably from one target group to another. This method is also used when there is a specific need to identify and solve different customer problems. Pharmaceutical firms are a good example of this structuring method. For instance, the pharmaceutical firm Aspen may structure its sales force into three divisions for three different customer groups: one for pharmacies, one for hospitals and one for general practitioners. Eastman Kodak reorganised its sales force after realising it was over-extending its sales representatives. Required to be familiar with more than 60 types of film for commercial laboratories, wedding and portrait labs and professional resellers, Kodak representatives found it difficult to call on such diverse groups of customers with such diverse needs. After careful analysis, Kodak realigned its sales force into nine distinct groups based on market segments: three for commercial services and six for portrait/wedding and photographers’/resellers’ accounts. Salespeople were then assigned territories "****** DEMO - www.ebook-converter.com*******" •

•

based on the technical knowledge and marketing skills that would be required for different market segments. Being able to focus on one type of customer means that sales representatives can pay more attention to market trends and help solve customer problems.36 Key account organisation. Many firms have taken the market-orientated structure one step further, to an individual client or account level. This trend has occurred in conjunction with the increased emphasis on relationship selling. Using this method, the firm normally assigns one salesperson or a team of salespeople to a client to provide better, more personalised customer service. By reorganising the sales force around customers, many firms hope to improve customer service, encourage collaboration with other departments in the firm and unite salespeople into customer-focused sales teams. Telkom sells most of its services to a few large customers, such as the government, parastatals and a few large corporate customers – key accounts to which special salespeople may be assigned to offer a specialised service.

6.2.2 Deciding on the size of the sales force When it comes to designing the sales organisation, another task is to decide on the ideal size of the sales force. Sales managers use several methods to determine the number of salespeople needed. Using the workload approach, the sales manager divides the total time required to cover a particular sales territory by the selling time required by each salesperson. The major advantage of the workload approach "****** DEMO - www.ebook-converter.com*******"

to decide on the size of the sales force is its simplicity. Successful application of the technique depends, however, on the sales manager’s ability to estimate the ideal frequency of calls and the number of potential customers. Another disadvantage is that the workload approach fails to consider either the cost of increasing the sales force or the costs and profits associated with each sales call. A second method for deciding on the optimal size of the sales force is the incremental productivity approach. According to this method, a manager should increase the number of salespeople as long as the additional sales increase is greater than the additional increase in the selling cost. Firms with good internal records know the cost of training a salesperson. This cost, plus field expenses and the salary of a new sales employee, can be compared with the revenue generated by the additional sales activities.

EXAMPLE >> Avon cosmetics uses a direct-marketing approach and employs a sales force of 8 000 sales representatives, but wants to increase that to 40 000 to ensure proper market coverage.37 It is interesting to note the differences between life assurance firms when it comes to the size of their sales forces. Old Mutual has a sales force of about 5 460, whereas Sanlam’s sales force is about 2 500. Liberty Life is converting its intermediaries to franchises, while Momentum relies entirely on independent brokers for its business.38

6.3 Developing the sales force 6.3.1 Recruiting the sales force Sales force recruitment should be based on an accurate, "****** DEMO - www.ebook-converter.com*******"

detailed description of the sales task. The sales manager should then develop the job description to match the sales force objectives. From the job description, the sales manager should build a profile of the ideal candidate for the job. The profile may include such things as the candidate’s level of education, employment background, level of experience, stability of employment history, ability to work unsupervised and to travel, knowledge of sales techniques and previous sales training, level of verbal and written communication skills, organisational skills and previous remuneration. Aside from the usual characteristics specified in the candidate profile, what traits should sales managers look for in applicants? What traits help ensure that a recruit will become an effective salesperson? The most important quality of top performers is that they are driven by their own goals. That is, they usually set personal goals higher than those set for them by management. Moreover, they are achievement-orientated, they talk about their sales accomplishments and they are self-confident. Effective salespeople are also self-competitive: they keep close tabs on their own performance and compare it with their previous performance. They are optimistic, highly knowledgeable about the products they sell and are assertive. They also know how to listen to customers and are team players who support their colleagues.

6.3.2 Training the sales force After the sales recruit has been hired and given a brief orientation, training begins. A new salesperson generally "****** DEMO - www.ebook-converter.com*******"

receives instruction in five major areas: company policies and practices; selling techniques; product knowledge; industry and customer characteristics; and non-selling duties, such as compiling market information reports. A good training programme boosts confidence, improves morale, increases sales and builds better customer relations. Classroom instruction may last several days to allow the trainee to study the firm’s policies, and several weeks or months for actual sales techniques. Trainees are taught everything from how to prospect for new potential clients to how to service the account after the sale. Firms that sell complex products, such as medical imaging equipment and pharmaceutical products, generally offer the most extensive training programmes.

6.4 Directing the sales force Directing the sales force requires the special skills of the sales manager. The ideal sales manager must possess analytical skills while also playing the role of motivator and cheerleader. Although the sales manager’s job in reality will include many more duties than discussed in this section, directing the sales force generally encompasses remuneration planning, motivating salespeople to reach their goals and effective leadership.

6.4.1 Remuneration planning Only good planning will ensure that remuneration attracts, motivates and retains good salespeople. Remuneration needs to be competitive enough to attract and motivate the "****** DEMO - www.ebook-converter.com*******"

best salespeople. The three basic payment methods for salespeople are commission, salary and combination plans. A typical commission plan gives salespeople a specified percentage of their sales revenue. However, if the plan is a straight-commission system, the salesperson receives no pay at all until a sale is made. As a result, management often lack control over sales representatives who are paid a straight commission. In addition, straight-commission salespeople normally have little loyalty to the firm and are reluctant to perform non-selling activities that do not generate commissions. Firms with limited resources and those selling high-priced items usually use commission plans for at least part of the remuneration package. As its name suggests, a straight-salary system remunerates salespeople with a fixed salary regardless of their productivity. Whereas compiling information reports, servicing accounts, calling on smaller customers and performing other non-selling tasks are undesirable to the commissioned salesperson, the salaried salesperson can tolerate these tasks. A straight-salary plan works effectively when customers require an extensive amount of post-sale service or the firm is focused on relationship-selling techniques. In addition, in the case of firms that use a team approach or rely on missionary sales representatives, it may be hard to tell who actually closed a sale. Although it offers maximum control, a disadvantage of the straight-salary system is that it may give salespeople little incentive to produce new sales. To have the best of both worlds, most firms offer a combination system that offers a salesperson a base salary "****** DEMO - www.ebook-converter.com*******"

plus an incentive – usually a commission or a bonus. Combination systems have benefits for both the sales manager and the salesperson. The salary portion of the plan helps the manager control the sales force while the incentive provides motivation. For the salesperson, a combination plan offers an incentive to excel while minimising the wide swings in earnings that may occur when the economy surges or contracts.39 WEBSITE Visit the McCarthy Motor Holding website, www.mccarthy.co.za. Do you think the site will be of assistance to vehicle salespeople?

6.4.2 Motivating the sales force with effective sales leadership Perhaps the most critical, and often most difficult, component of the sales manager’s job is to be an effective leader and teacher to his or her sales force. Successful sales representatives are not necessarily born: more often they are made, sculpted, moulded and shaped under the careful tutelage and direction of their sales manager. An effective sales manager inspires his or her salespeople to realise their goals by means of clear and enthusiastic communication. He or she has a clear vision and commitment to the mission of the firm and the ability to instill pride and earn the respect of his or her employees. Effective sales leaders continuously increase their knowledge and skills base, and encourage others to do the same. Devoting time to honing sales skills and learning new techniques is strongly advocated. "****** DEMO - www.ebook-converter.com*******"

6.5 Evaluating the sales force The final task for sales managers is evaluating the effectiveness and performance of the sales force. To evaluate the sales force, the sales manager needs feedback, namely regular information from salespeople. Call-record reports or real-time information fed into a central database from individual sales representatives’ automation software can give managers a fairly good idea of activities, such as the number of sales proposals presented and the number of accounts closed. Such information helps the sales manager to monitor a salesperson’s progress through the sales cycle and identify where breakdowns may be occurring. By knowing the number of prospects an individual salesperson has in each step of the sales cycle process and identifying where prospects are falling out of the sales cycle, a manager can evaluate how effective a salesperson may be at lead generation, needs assessment, proposal generation, presenting, closing the sale and following up. Knowledge of where a salesperson is losing prospects tells a manager what sales skills may need to be reassessed or where retraining is required. For example, if a sales manager notices that a salesperson has many interested prospects at the beginning of the sales cycle, but seems to get few past the needs assessment stage, he or she may recommend that the salesperson brush up on listening or information-collection skills. Likewise, if a salesperson seems to be letting too many prospects fall by the wayside after presenting proposals, he or she may need to help with "****** DEMO - www.ebook-converter.com*******"

developing proposals, handling objections or closing sales. Managers can also evaluate salespeople using performance measures such as sales volume, contribution to profit, calls per order, sales or profits per call or the percentage of calls achieving specific goals (such as sales of products that the firm is heavily promoting). Qualitative, or subjective, methods may also be used to evaluate the sales force. Examples of subjective criteria include the salesperson’s knowledge of the firm and its products, customers and competitors, and his or her sales tasks.

Customer is king Sports-shoe maker Nike has created a prime example of the new kind of advertising, which is not only driven by the rise of digital technology, but also embraces it. In the traditional advertising sense, Nike markets shoes. In the new paradigm, Nike has created the world’s biggest running club. Nike Techlab general manager, Michael Tchao, says the Nike+iPod idea started when the question was asked: ‘How do we turn information into inspiration? Because we are at our best when we maximise that emotional connection we have with the consumer.’ He adds that much sports technology over the past "****** DEMO - www.ebook-converter.com*******"

ten years ‘has all the glamour and excitement of an electrocardiogram linked with Microsoft Excel’. However, Nike saw an increasing number of its users engaging in the digital community. The company considered how to connect physical activity to digital communities, and how to build deeper relationships. After a survey indicated that mobile music was important to many runners (75 per cent of respondents ran with music, while 45 per cent would not run without music), Nike+iPod was born. Nike and iPod manufacturer, Apple, teamed up to create a connection between the two products. A sensor in the Nike+ shoe communicates with an iPod nano to record all details of a run or walk, including distance, average speed, total time, calories burnt, and so on. The details are then uploaded onto the Nike+ community website and displayed in graphic form, where past runs are also stored so that progress can be monitored. Users can also set up personal goals, challenge other users around the world and participate in forum discussions. The concept has even allowed people to participate virtually in world-famous marathons without being present physically. Ultimately, while Nike is still in the business of selling shoes and Apple is still in the business of selling hardware, the new way of marketing means their customers are buying into a ‘running club’ with a virtual personal trainer. SOURCE: Scott, I. 2010. Customer is king. Available from http://www.iweek.co.za (accessed 29 June 2010)

QUESTIONS 1

Describe how social media can be used to create virtual communities.

KEY CONCEPTS Advertising appeal: reason for a person to buy a product. Advertising campaign: series of related advertisements focusing on a common theme, slogan and set of advertising appeals. Advertising objective: specific communication task that a campaign should

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accomplish for a specified target audience during a specified period. Advertising response function: phenomenon in which spending for advertising and sales promotion increases sales or market share up to a certain level, but then produces diminishing returns. Advocacy advertising: form of advertising in which a firm expresses its views on controversial issues or responds to media attacks. Audience selectivity: ability of an advertising medium to reach a precisely defined market. Cold calling: form of lead generation in which the salesperson approaches potential buyers without any prior knowledge of their needs or financial status. Competitive advertising: form of advertising designed to influence demand for a specific brand. Consumer sales promotion: sales promotion activities targeted at the ultimate consumer. Continuous media schedule: media scheduling strategy used for products in the latter stages of the product life cycle, in which advertising is run steadily throughout the advertising period. Co-operative advertising: arrangement in which the manufacturer and the retailer split the costs of advertising the manufacturer’s brand. Cost per contact: cost of reaching one member of the target market. Cost per thousand (CPM): standard criterion for comparing media, computed by dividing the price of a single advertisement by the audience size in thousands. Coupon: certificate that entitles consumers to an immediate price reduction when they buy the product. Crisis management: co-ordinated effort to handle the effects of unfavourable publicity or of an unexpected, unfavourable event. Field order taker: someone who visits existing customers regularly, checks inventory, writes up new orders and then delivers and stocks the product for customers. Flighted media schedule: media scheduling strategy in which advertisements are run heavily every other month or every two weeks to achieve a greater impact with an increased frequency and reach at those times. Follow-up: final step of the selling process, in which the salesperson ensures that delivery schedules are met, the goods or services perform as promised and the buyers’ employees are properly trained to use the products. Frequency: number of times an individual is exposed to a given message during a specific period. Frequent-buyer programme: loyalty programme in which loyal consumers are rewarded for making multiple purchases of a particular product or service. Incremental productivity approach: method of determining the optimal sales force size in which salespeople are added as long as the total sales increase is

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greater than the increase in selling cost. Infomercial: advertisement of 30 minutes or longer that more closely resembles a TV talk show than a sales pitch. Inside order taker: someone who takes orders from customers over the counter, on the sales floor, over the telephone or by mail. Lead generation (prospecting): identifying those firms and people most likely to buy the seller’s offerings. Lead qualification: determining a sales prospect’s authority to buy and ability to pay for the product or service. Loyalty marketing programme: promotional programme designed to build long-term, mutually beneficial relationships between a firm and its key customers. Media mix: combination of media to be used for a promotional campaign. Media schedule: designation of the media, the specific publications or programmes and the insertion dates of advertising. Medium: channel used to convey a message to a target audience. Needs assessment: determining the customer’s specific needs and wants and the range of options a customer has for satisfying them. Networking: process of finding out about potential clients from friends, business contacts, co-workers, acquaintances and fellow members in professional and civic organisations. Order getter: someone who actively seeks buyers for a product. Personal selling: direct communication between a sales representative and one or more prospective buyers in an attempt to influence each other in a purchase situation. Pioneering advertising: form of advertising designed to stimulate primary demand for a new product or product category. Point-of-purchase display: promotional display set up at the retailer’s location to build traffic, advertise the product or induce impulse buying. Product advertising: form of advertising that touts the benefits of a specific product or service. Pulsing media schedule: media scheduling strategy that uses continuous scheduling throughout the year coupled with a flighted schedule during the best sales periods. Push money: money offered to channel intermediaries to encourage them to ‘push’ products – i.e. to encourage other members of the channel to sell the products. Quota (sales target): statement of the individual salesperson’s sales objectives, usually based on sales volume. Reach: number of target consumers exposed to a commercial at least once during a specific period, usually four weeks.

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Referral: recommendation to a salesperson from a customer or business associate. Relationship selling (consultative selling): sales practice of building, maintaining and enhancing interactions with customers in order to develop long-term satisfaction through mutually beneficial partnerships. Sales presentation: face-to-face explanation of the sales proposal to a prospective buyer. Sales process (sales cycle): the steps a salesperson goes through to sell a particular product or service. Sales promotion: offer of a short-term incentive in order to induce the purchase of a particular product or service. Sales proposal: a formal written document or professional presentation that outlines how the salesperson’s product or service will meet or exceed the prospect’s needs. Sales territory: particular geographic area assigned to a salesperson. Sampling: promotional programme that allows the consumer the opportunity to try the product or service for free. Seasonal media schedule: media scheduling strategy that runs advertising only during times of the year when the product is most likely to be used. Straight commission: method of remuneration in which the salesperson is paid a certain percentage of sales. Straight salary: method of remuneration in which the sales-person receives a salary regardless of sales productivity. Trade allowance: price reduction offered by manufacturers to intermediaries, such as wholesalers and retailers. Trade sales promotion: sales promotion activities targeted at a channel member, such as a wholesaler or retailer. Unique selling proposition: desirable, exclusive and believable advertising appeal selected as the theme for a campaign. Workload approach: method of determining the optimal sales force size in which the total time required to cover the territory is divided by the selling time available to one salesperson.

REFERENCES 1

2

The quarterly review of sustainability in South Africa. 2011. Available from http://www.trialogue.co.za/wp-content/uploads/2013/03/3.4.2.3SR_Issue6_Complete.pdf (Accessed 25 August 2014). Weinberger, M.G., Spotts, H., Campbell, L. & Parsons, A.L. 1995. The use and effect of humor in different advertising media. Journal of Advertising

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3

4 5 6 7

8

9 10 11 12 13

14 15

16

17 18 19

20 21

Research, May–June, pp. 44–56. Adspend declines in real terms. 8 May 2013. Available from http://www.bizcommunity.com/Article/196/12/93049.html (Accessed 25 August 2014). Ibid. AMPS figures on South African Advertising Research Foundation. Available, www.saarf.co.za (Accessed 29 June 2010). Radio: No longer an advertising afterthought. 1995. Standard & Poor’s Industry Surveys, 20 July 1995, p. M36. OMD. The future of Media. Blueprint 2013. Available from http://www.omd.co.za/media_facts/FOM029_Blueprint_OMD_mediafacts2013.pdf (Accessed 16 February 2015). Killoran, E. 2014. Super Bowl Ads 2014: What does $4 million really buy you. Available from http://www.ibtimes.com/super-bowl-ads-2014-what-does-4million-really-buy-you-1551884 (Accessed 15 February 2015). See http://www.sabc.co.za/wps/portal/SABC/SABCRATECARDTV#; University of Cape Town, Unilever Institute of Strategic Marketing. 2013. 4 Million and Rising presentation. Cape Town: University of Cape Town. Ibid. In your face. 2002. Ad Focus, supplement to Financial Mail, 24 May 2002, p. 116. The Future of Media. Blueprint. 2013. Available from http://www.omd.co.za/media_facts/FOM029_Blueprint_OMD_mediafacts2013.pdf (Accessed 25 August 2014). Postertrack provides many answers. Business Day, 5 June 2001, p. 6 Berthon, P., Pitt, L.F. & Watson, R.T. 1996. The World Wide Web as an advertising medium: Toward an understanding of conversion efficiency. Journal of Advertising Research, January/February 1996, pp. 43–54. The Future of Media. Blueprint. 2013. Available from http://www.omd.co.za/media_facts/FOM029_Blueprint_OMD_mediafacts2013.pdf (Accessed 25 August 2014). Ibid. Freeman, L. 1996. Internet visitors: Traffic jam makes buyers Web wary. Advertising Age, 22 July 1996, pp. S14–15. Steinberg, B. As World Cup Popularity Grows, So Does U.S. 11 June 2014. Interest In Soccer. Available from http://variety.com/2014/tv/news/asworld-cup-popularity-grows-so-does-u-s-interest-in-soccer-1201218306/ (Accessed 25 August 2014). Naidoo, S. 2010. Spenders sit it out. Financial Mail, 14 May 2010, p. 22. Bird, L. 1994. Loved the ad. May (or may not) buy the product. The Wall Street Journal, 7 April 1994, p. B1.

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22 Lives, M. Politics & TV: 2014 election ad spend and ratings. 27 June 2014. Available from http://grubstreet.co.za/2014/06/27/politics-tv-2014-electionad-spend-and-ratings/ (Accessed 25 August 2014). 23 Wood, L. Is Radio the New Black? How Big Data Is Giving Traditional Media New Power. Available from http://www.marketingmagnified.com/2014/June/feature#bio (Accessed 25 August 2014). 24 da Silva, I.S. 2011. Sport sponsorship: Is it worth it? Is it overpriced? Bizcommunity, 25 August; Mokgata, Z. 2010. Music volume going up. Financial Mail, 10 December, p. 54. 25 Nevill, G. Weighing in on sports sponsorship. 16 April 2014. Available from http://themediaonline.co.za/2014/04/weighing-in-on-sports-sponsorship/ (Accessed 25 August 2014). 26 Obama slams oil companies. Sunday Times business section, 16 May 2010, p. 1. 27 Moorad, Z. 2013. Spur’s profit leaps 35.3% as aggressive promotions pay off. Business Day, 8 March, p. 17. 28 More fishy business. Finweek, 16 September 2010, p. 50. 29 Lacek, M. 1995. Loyalty marketing no ad budget threat. Advertising Age, 23 October 1995, p. 20. 30 Conlon, G. 1996. True romance. Sales and Marketing Management, May 1996, pp. 85–90. 31 Badham, D. 2012. Point of purchase: New Sell Point. Special Report, Financial Mail, 30 November – 5 December, p. 96. 32 Brooksbank, R. 1995. The new model of personal selling: Micromarketing. Journal of Personal Selling & Sales Management, spring, pp. 61–66; Jackson, D.W. Jr. 1994. Relationship selling: The personalization of relationship marketing. Asia-Australia Marketing Journal, August 1994, pp. 45–54. 33 Jolson, M.A. & Wotruba, T.R. 1992. Selling and sales management in action: Prospecting: a new look at this old challenge. Journal of Personal Selling & Sales Management, fall, pp. 59–66. 34 Adapted from Kimball, B. 1994. Successful selling. American Marketing Association. 35 Cohen, A. 1994. Delivering the right pitch. Sales & Marketing Management, September 1994, p. 44; Brewer, S. 1994. How to present so prospects listen. Personal Selling Power, April 1994, p. 75. 36 Campanelli, M. 1995. Managing territories: A new focus. Sales & Marketing Management, September 1995, pp. 56–58. 37 Koenderman, T. 1997. The Avon Lady comes calling in SA too. Financial Mail, July 11 1997, pp. 87–88. 38 Accent on keeping customers satisfied and coming back. Financial Mail, 5

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March 1999, p. 140. 39 Head, R.G. 1992. Restoring balance to sales compensation. Sales & Marketing Management, August 1992, pp. 48–53.

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CHAPTER

13

Pricing concepts and setting the right price

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Discuss the importance of pricing decisions to the economy and to the individual firm. 2 List and explain various pricing objectives. 3 Explain the role of demand in price determination. 4 Contrast the different cost-orientated pricing strategies. 5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, and perceptions of quality can affect price. 6 Illustrate the procedure for setting the right price. 7 Consider the legality and ethics of certain pricing strategies. 8 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price. 9 Critically evaluate the use of product-line pricing. 10 Explain the role of pricing during periods of inflation and recession. 11 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 12 Provide a marketing-management solution related to any of the "****** DEMO - www.ebook-converter.com*******"

above outcomes.

>>Marketing in practice If the price is right, the wine is too To demonstrate the power of marketing, researchers in California showed you can increase a person’s enjoyment of wine by just sticking a higher price on it, according to a study by the California Institute of Technology. Economics professor, Antonio Rangel, and his team asked 21 volunteers to sample five different bottles of Cabernet Sauvignon and rate their taste preferences. All they were told was the price of the wine. The researchers also presented two of the wines twice, once with the true price tag, and again with a fake one. The tasters passed off a $90 bottle of Cabernet Sauvignon as a $10 bottle, and a $5 bottle as one worth $45. Subjects were given brain scans during the tests to see how the brain was reacting to the taste. The study found that inflating the wine price genuinely boosted a person’s experience of drinking it, as shown by the neural activity. They consistently said the ‘pricier’ wines tasted better and the brain scans backed them up. SOURCE: If the price is right, the wine is too. Cape Times electronic edition, 25 February 2008

QUESTIONS "****** DEMO - www.ebook-converter.com*******"

1 2

Why do consumers rate more expensive wine as ‘tastier’? Is the conclusion true in other product categories as well? In other words, do consumers generally associate higher-priced products with higher quality?

1. Introduction In Chapter 1 we referred to the value-adding activities that marketers typically perform. We said that marketing creates utility by overcoming certain ‘gaps’. One such gap is the gap between what a seller and a buyer may see as value, known as ‘separation in value’. Buyers and sellers often disagree about the value of a product. Manufacturers want to sell their products at the highest possible price and the buyers want to pay as little as possible. Consequently, marketers have to convince buyers that their products represent value (or value for the money spent), otherwise they will not buy. Using the pricing mechanism, marketers establish a monetary value for a product that will recover the manufacturer’s production cost plus some profit margin, while also representing a realistic price that the target market will be prepared to pay. In other words, marketers establish an equilibrium price between manufacturers (who want as high a price as possible for their products) and buyers (who want to pay as little as possible). Pricing decisions have an important impact on a firm’s revenue and profitability and, therefore, its survival prospects. If a firm charges too high a price it may lose the sale. On the other hand, excessive discounting reduces "****** DEMO - www.ebook-converter.com*******"

profitability. In addition, too low a price is often interpreted as a sign of poor quality. Price means one thing to the consumer and another to the seller. To the consumer, it is the cost of something. To the seller, price is revenue, the primary source of profits. In its broadest sense, price allocates resources in a free-market economy. With so many ways of looking at price, it’s no wonder that marketing managers find the task of setting prices a demanding one.

2. The importance of price to marketing managers

LO1

Price is what is given up in an exchange to acquire a product or service. Normally, price is the money exchanged for the product or service, but price can relate to anything with perceived value, not just money. When products and services are exchanged for something other than money, it is called barter trade. For example, if you exchange this book you are reading for an economics textbook at the end of the semester, you have engaged in a barter exchange. The price you paid for the economics book was this textbook. Price is the key to revenue, which, in turn, is the key to a firm’s profit. Revenue is the price charged to customers, multiplied by the number of units sold. Revenue is what pays for every activity of the firm: production, finance, sales, distribution and so on. What’s left over (if anything) is profit. Managers usually strive to charge a price that will earn the "****** DEMO - www.ebook-converter.com*******"

firm a fair profit. To earn a profit, managers must choose a price that is not too high or too low – a price that equals the perceived value to target consumers. If a price is set too high in consumers’ minds, the perceived value will be less than the cost and sales opportunities will be lost. Therefore, marketing managers cannot ignore the perceptions of consumers created by the other elements of the marketing mix, i.e. the product, communication and distribution components. Pricing cannot be viewed in isolation and should be blended with the other elements of the marketing mix to create a perception of exceptional value.

EXAMPLE >> A good example of price perceptions is the beer market, in which the proliferation of brands available is indicative of the increasingly discerning and demanding tastes of South Africans. Local consumers are no longer prepared merely to accept the brand which has ‘stood the test of time’. Many new, predominantly European and Irish beers, in addition to what is known as craft beers, are sold at a significant premium to the local brand leaders. Although niche market segments remain relatively small, the profitability is disproportionately high and provides marketers with further proof of the increasing complexity of pricing. Many purchasers of cars, sports goods, CDs, tools, wedding gowns and computers are buying used, or ‘pre-owned’, items because they believe these goods offer them better value for their money. Pricing a new product too high may give a potential buyer an incentive to consider alternatives, such as pre-owned products, or they may simply not buy at all. At one stage, two of South Africa’s biggest fleetmanagement firms, for instance, said that they do not buy "****** DEMO - www.ebook-converter.com*******"

Ford cars anymore because they do not represent value. ‘Residual values are lousy, spare parts are expensive and dealer service is not the best’, they said.1 Lost sales mean lost revenue. Conversely, if a price is too low, although it may be perceived as great value for the consumer, the firm loses the revenue it could have earned. Setting prices too low may not even attract as many buyers as managers may think. One study surveyed more than 2 000 shoppers at national chains in the United States and found that more than 60 per cent intended to buy full-price items (non-discounted) only.2 Therefore, retailers that place too much emphasis on discounts may not be able to meet the expectations of customers who prefer full-price items. From a marketing perspective, the most important aspect of pricing is that it is an important means of differentiating and positioning a product. In other words, pricing is a means of building a competitive advantage. In many industries – such as grocery retailing – pricing is the most important means of building a competitive advantage, particularly where products are very similar and other means of differentiation are difficult or simply not possible. Setting the ‘right price’ is one of the most demanding, yet most significant, tasks of the marketing manager. In recent years, this function has become even more demanding with new technology driving down costs, increasing price transparency, the impact of e-commerce and globalisation. Importantly, it is no longer adequate for managers to follow trends in their local markets because South African consumers are becoming increasingly globally aware and "****** DEMO - www.ebook-converter.com*******"

accessible to foreign firms (as well as other new entrants into the market). For example, in South Africa, Kulula and Mango entered the airline market with a low-cost business model, capturing much of the leisure travel market, which led to losses for South African Airways.

>>Strategy Making mistakes with pricing can be costly. A few years ago, Samcor/Ford cut prices aggressively to increase its market share. Its Mazda and Mitsubishi models gained market share as a result, but the action led to most vehicle manufacturers, including Samcor (owners of the Ford brand), losing millions of rands.3 In 2005 a price war broke out between Ster-Kinekor and Nu Metro which led to heavy losses for both firms, although the reduced prices did result in slightly improved attendance figures. The opposite is also true. SA Breweries’ incredible success in South Africa can be attributed to how it manages its costs, and therefore its prices. It has expanded the beer market continuously by keeping price increases below the inflation rate for more than 25 years.4

3. Pricing objectives

LO2

To survive in highly competitive markets, firms need pricing objectives that are specific, attainable and measurable. "****** DEMO - www.ebook-converter.com*******"

Realistic pricing objectives then require periodic monitoring to assess the effectiveness of the firm’s strategy. For convenience, pricing objectives can be divided into three categories: profit-orientated, sales-orientated and status quo.

3.1 Profit-orientated pricing objectives A profit-oriented pricing strategy involves setting prices for products that will guarantee a profitable sale. The cost of manufacturing each product is calculated and then a percentage for profit is added. There are some strategies and issues you should review before setting prices in this manner. While profits are the goal of any business, setting prices based on profit goals can present some problems, namely (1) customers don’t care about your costs, (2) competitors costs, and (3) what the market will bear. Profitorientated objectives can be subdivided into profit maximisation, satisfactory profits and target return on investment.

3.1.1 Profit maximisation as pricing objective Profit maximisation means setting prices so that total revenue is as high as possible relative to total costs. (A more theoretically precise definition and explanation of profit maximisation appears later in this chapter.) Profit maximisation does not always signify unreasonably high prices, however. Price and profits both depend on the type of competitive environment in which a firm trades, such as a monopoly position (i.e. being the only seller) or selling in a "****** DEMO - www.ebook-converter.com*******"

much more competitive environment (see Chapter 4 for a description of the four types of competitive environments). And keep in mind that a firm cannot charge a price higher than the product’s perceived value. Furthermore, it is unfortunately true that many firms do not have the accounting data available that they need for setting prices at levels to maximise profits. It may appear obvious that a firm should keep producing and selling products or services as long as revenues exceed costs, yet it is often hard to set up an accurate accounting system to determine the exact point of profit maximisation.

3.1.2 Satisfactory profits as pricing objective Satisfactory profits can be described as a reasonable level of profits. Rather than maximising profits, many firms strive for profits that are satisfactory to shareholders and management – in other words, a level of profits consistent with the level of risk the firm faces. In a risky industry (such as micro-lending, for instance), a satisfactory profit may be 35 per cent. However, in a relatively low-risk industry (such as grocery retailing), it may be as low as 7 per cent.

3.1.3 Target return on investment as pricing objective The most common profit objective is target return on investment (ROI), sometimes called the firm’s return on total assets. ROI measures the overall effectiveness of management in generating profits with its available assets. The higher the firm’s return on investment, the more profitable it is. Many firms use target ROI (also called ‘return on equity’) as their main pricing objective. For instance, "****** DEMO - www.ebook-converter.com*******"

South African Airways aims for a profit margin of 7,5 per cent.5 Return on investment (ROI) is calculated as follows:

Assume that in 2015 Crawfords’ Cosmetics had assets of R4,5 million, net profits of R550 000, and a target ROI of 10 per cent. The actual ROI was therefore:

As you can see, the ROI for Crawford’s cosmetics exceeded its target of 10 per cent, which indicates that the firm prospered in 2015. Is this conclusion justified? Comparing the 12,2 per cent ROI with the industry average provides a more meaningful picture. Any ROI needs to be evaluated in terms of the competitive environment, risks in the industry and prevailing economic conditions. Generally speaking, firms pursue ROIs in the 10 to 30 per cent range. For example, most major pharmaceutical firms strive for a 20 per cent ROI. The healthcare group Netcare averages between 19 and 25 per cent.6 In other high volume industries, however, such as the grocery industry, a return of under 5 per cent is common and acceptable. Pick n Pay’s profit margins are sometimes as low as 2,8 per cent for some products. A firm with a target ROI can predetermine its desired "****** DEMO - www.ebook-converter.com*******"

level of profitability. The marketing manager can use the standard, such as 10 per cent ROI, to determine whether a particular price and marketing mix are feasible. In addition, however, the manager must weigh the risk of a given strategy even if the return is in the acceptable range.

3.2 Sales-orientated pricing objectives Sales-orientated pricing objectives are either based on market share, or on rand values or unit sales. When SterKinekor slashed its cinema prices by 50 per cent (to R14) in 2005, it expected cinema attendance to increase from 16,5 million to a staggering 26 million – a sales-orientated objective. The effective marketing manager should be familiar with the following pricing objectives.

3.2.1 Market share Market share is a firm’s product sales as a percentage of total sales for that industry. Tiger Brands is a firm that offers generous trading terms to retailers and combines that with price discounting in product categories such as maize meal (Ace), dog food (Dogmor) and tomato sauce (All Gold) to ‘buy’ market share.7 Sales can be reported in rand values or in units of product. It is very important to know whether market share is expressed in revenue or units because the results may be different. Consider, for example, four firms competing in an industry with 2 million total unit sales and total industry revenue of R4 million (see Table 13.1). Firm A has the largest "****** DEMO - www.ebook-converter.com*******"

unit market share at 50 per cent, but it has only 25 per cent of the revenue market share. By contrast, firm D has only a 15 per cent unit share but the largest revenue share, namely 30 per cent. Usually, market share is expressed in terms of revenue and not units. Many firms believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Larger market shares have indeed often meant higher profits, thanks to greater economies of scale, market power and ability to compensate top-quality management. For example, South African Airways aggressively cut its fares towards the end of 2009 to win back the market share it had lost to carriers such as Mango and Kulula during that year. Conventional wisdom also says that market share and return on investment are strongly related. For the most part they are, but this is not always the case. Some firms with relatively low market shares such as Mercedes-Benz (about 10 per cent) and Kulula (about 20 per cent), however, survive and even prosper despite their low market shares. On the other hand, because of extreme competition in some industries, many market share leaders do not reach their target ROI and can actually lose money. South African Airways, for instance, dominates the local airline market in terms of passenger numbers, yet has lost millions of rands over many years. In fact, it had to be recapitalised by the government several times while other airlines traded profitably.

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Table 13.1 Two ways of measuring market share (units and revenue)

3.2.2 Sales maximisation as pricing objective Rather than striving for market share, sometimes firms try to maximise sales. The objective of maximising sales ignores profits, competition and the marketing environment as long as sales are rising. If a firm is short of funds or faces an uncertain future, it may try to generate a maximum amount of cash in the short run. Management’s task when pursuing this objective is to calculate which price–quantity relationship generates the greatest cash revenue. Sales maximisation can also be effectively used on a temporary basis to sell off excess inventory. It is not uncommon, for example, to find Christmas cards, surfboards and Weber braais discounted at 50 to 70 per cent off retail prices after the holiday season. In addition, management can use sales maximisation for year-end sales to clear out old models before introducing the new ones. Computer software firms and motor vehicle manufacturers use this strategy regularly. The prices of video recorders (VCRs) dropped sharply as new DVD and personal video recorder (PVR) technology became accepted as the recording technologies of choice. However, even this price "****** DEMO - www.ebook-converter.com*******"

reduction has not been able to sustain demand for this product and many manufacturers have stopped producing the VCR as a standalone product. When the sales of international recording artists, such as Beyoncé, Travis and Celine Dion, dropped by almost 11 per cent, Sony South Africa dropped the prices of imported CDs from about R150 to under R100 in an effort to stimulate sales.8 The sales maximisation objective is strongly influenced by the prevailing competition in a market. In short, in a very competitive market sales maximisation may be impossible to realise. Several firms, including Afrihost and iBurst have made life difficult for Telkom in the Internet market. Small ISP Afrihost effectively fired the first shots in 2009 by undercutting per gigabyte ADSL prices, starting the pricing skirmish. In 2009, the average price was R70/GB; Afrihost dropped it to R29/GB and Wireless G was offering R14/GB at the beginning of 2010. Now, like the rest of the world, South Africa can finally enjoy unlimited Internet access – something that is going to have a dramatic impact on the country. In April 2010, iBurst introduced a free three-month trial for current iBurst Wireless subscribers, enabling subscribers to use the Internet for free between midnight and 8 a.m. when all traffic is zero-rated and, therefore, does not count towards customers’ monthly bandwidth allocation. Having free Internet access at these late hours is very useful to people synchronising their online backups, doing large file transfers or for late-night surfing sessions. iBurst has consistently differentiated itself in the wireless market by bringing its pricing down to stay in line with wireline technologies.9 "****** DEMO - www.ebook-converter.com*******"

However, the maximisation of sales should never be a long-term objective because sales maximisation may mean little or no profitability. Without profits, no firm can survive over the long term. WEBSITE Visit the Kraft pantry. What does Maxwell House emphasise in its web advertising, and how? www.kraftfoods.com

3.3 Status quo pricing objectives Status quo pricing is an attempt to maintain existing prices or to meet the competition’s prices. This third category of pricing objectives has the major advantage of requiring little planning. It is essentially a passive policy. These industries usually have fewer price wars than those with direct price competition. Often, firms competing in an industry with an established price leader simply meet the competition’s prices. In other cases, managers regularly visit competitors’ outlets to ensure that their prices are competitive.

EXAMPLE >> Toyota dominates the South African passenger motor vehicle market. Consequently, all other manufacturers follow Toyota’s pricing. No competitor dares announce a price increase unless it is to follow Toyota. Telkom, on the other hand, is finding it increasingly difficult not to charge status quo prices in markets where it faces competition (for example, international calls). And when Cell C entered the cellular phone market, it had to charge fees very similar to those of Vodacom and MTN. These are examples of status quo pricing.

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4. The demand determinant of price

LO3

After marketing managers have established pricing objectives, they must set specific prices to reach those objectives. The price they set for each product depends mostly on two factors: the demand for the product or service and the cost to the seller of that product or service. When pricing objectives are mainly sales-orientated, demand considerations usually dominate. Other factors, such as distribution and promotion strategies, the stage of the product life cycle and perceived quality can also influence pricing decisions. An example of the latter is Glen Carlou Vineyards, which raised the prices of some of its red wines by between 60 and 70 per cent at one stage. ‘We felt our price was far too low for a quality product’, said a spokesperson for Glen Carlou.10 Also, Minute Maid has made it clear that its fruit juices will be ‘… premium-priced to match their consistently premium quality and taste’.11 An excellent illustration of how demand for a product can influence pricing occurred in the building industry. During the recession of 2008 manufacturers of building bricks faced a declining demand, which led to a huge surplus. They responded by selling the stock of bricks below cost and extending their annual production shutdown. The unprecedented surplus was been blamed on the slowdown in the residential building sector. High interest rates, more stringent requirements for credit and economic uncertainty caused a severe drop in building activity. In addition, local authorities passed fewer building plans, all of which were "****** DEMO - www.ebook-converter.com*******"

factors that all lead to the production surplus.12 Another example of the impact of supply and demand on prices was the prevailing price of tea on world markets in 2010. Droughts in India, Sri Lanka and Kenya reduced the supply of tea and, as a result, tea prices jumped from $2,40 to $3,50 per kilogram.13

4.1 The nature of demand Demand is the quantity of a product that will be sold in the market at various prices for a specified period. The quantity of a product that people buy will largely depend on its price. The higher the price, the fewer goods or services consumers will demand. Tiger Brands, a fast-moving consumer goods company, for instance, warned in 2006 that its profits would be lower in 2007 because the firm had to increase its prices because of, among other things, higher fuel prices and above-inflation wage increases. Conversely, the lower the price, the more products or services consumers will demand. Clover, on the other hand, facing declining demand for its milk products, had to lower its prices.

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Figure 13.1 Demand curve for popcorn

READER 60 >> How fuel prices are calculated in South Africa The petrol retail price is regulated by government, and adjusted every month. The calculation of the new price is done by the Central Energy Fund (CEF) on behalf of the Department of Energy (DOE). The petrol pump price is composed of a number of price elements and these can be divided into international and domestic elements. The international element, or Basic Fuel price (BFP), is based on what it would cost a South African importer to buy petrol from an international refinery and to transport the product to South Africa. Components of the BFP include: international petroleum market spot prices, freight cost to bring the product to South African ports, insurance costs, ocean loss allowance, cargo costs, coastal storage, and stock financing cost. To arrive at the final pump price in the different pricing zones (magisterial district zones) certain domestic transport costs, government imposts, taxes and levies, and retail and wholesale margins need to be added to the international price. These include: • Transport costs (Zone differential). Keeping in mind the import principle "****** DEMO - www.ebook-converter.com*******"

• • • • • • •

used, this element recovers the cost of transporting petroleum products from the nearest coastal harbour (Durban, Port Elizabeth, East London, Mossel Bay or Cape Town) to the inland depot serving the area or zone. This is the only element where values differ per pricing zone, and is the reason why the petrol price is not the same for the whole country. Delivery costs (Service differential). This element compensates marketers for actual depot related costs (storage and handling) and distribution costs from the depot to the end user at service stations. Wholesale (Marketing) margin. Money paid to the oil company through whose branded pump the product is sold, to compensate for marketing activities. Retail margin. The retail margin is fixed and is determined on the basis of actual costs incurred by the service station operator in distributing petrol. Equalisation Fund levy. The statutory fund levy is a fixed monetary levy. Fuel tax and Customs and Excise levy. This is tax levied by Government. Road Accident Fund (RAF). The Road Accident Fund receives a fixed value which is used to compensate third party victims in motor accidents. Slate levy. A levy paid by the motorists recovering money ‘owed’ to the oil companies, due to the time delay in the adjustment of the petrol pump price.

SOURCE: South African Petroleum Industry Association (SAIPA). Industry Overview - Fuel Price. Available from http://www.sapia.co.za/industry-overview/fuel-price.html (Accessed on 25 August 2014)

Table 13.2 Demand schedule for popcorn

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Price per packet (R)

Packets demanded per week

3,00

35

2,50

50

2,00

65

1,50

85

1,00

120

This trend is illustrated in Figure 13.1, which graphs the demand per week for popcorn at a local retailer at various prices. This type of graph is called a demand curve. The vertical axis shows different prices of popcorn, measured in rands per package. The horizontal axis measures the quantity of popcorn that will be demanded (D) per week at each price. For example, at a price of R2,50, a total of 50 packets will be sold per week; at R1,00, consumers will demand 120 packets. Table 13.2 shows the demand schedule charted in Figure 13.1. The demand curve in Figure 13.1 slopes downward and to the right, which indicates that the demand for popcorn increases as the price is lowered. In other words, if popcorn manufacturers put a larger quantity on the market, then their hopes of selling all of it will be realised only by selling it at a lower price. One reason why more is sold at lower prices than at higher prices is that lower prices attract new buyers. This "****** DEMO - www.ebook-converter.com*******"

fact might not be so obvious with popcorn, but consider the example of fillet steak. As the price of fillet steak drops lower and lower, some people who have not been buying fillet because it is too expensive will probably start buying it rather than relatively cheaper cuts, such as T-bone steak. It is for this reason that the South African motor industry has seen growth of 64 per cent in the last few years in the entrylevel (relatively cheaper) end of the passenger vehicle market, compared with only 12 per cent for luxury vehicles during the same period. And with each reduction in price, existing customers may buy extra amounts. In other words, if the price of fillet steak falls low enough, some people will buy more than they have bought in the past. Supply is the quantity of a product that will be offered to the market by a supplier or suppliers at various prices for a specified period. Figure 13.2 illustrates the resulting supply curve (S) for popcorn. Unlike the falling demand curve, the supply curve for popcorn slopes upwards and to the right. At higher prices, popcorn manufacturers obtain more resources (corn, flavourings, salt) to produce more popcorn. If the price consumers are willing to pay for popcorn increases, producers can afford to buy more ingredients. Output tends to increase at higher prices because manufacturers can sell more popcorn and earn greater profits. The supply schedule in Table 13.3 shows that at R1,50, suppliers are willing to place 85 packets of popcorn on the market, but that they will offer 140 packets if buyers are prepared to pay R3 for a packet.

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Figure 13.2 Supply curve for popcorn

An alternative approach used by consumers is to trade down – that is, they buy cheaper versions of a product, such as noname brands or cheaper models. Table 13.3 Supply schedule for popcorn Price per packet (R)

Packets demanded per week

3,00

140

2,50

130

2,00

110

1,50

85

1,00

25

4.2 How demand and supply determine prices "****** DEMO - www.ebook-converter.com*******"

Let’s combine the concepts of demand and supply to see how competitive market prices are determined. So far, the premise is that if the price is X, then consumers will purchase Y amount of popcorn. How high or low will prices actually go? How many packets of popcorn will be produced? How many packets will be consumed? The demand curve cannot predict consumption, nor can the supply curve alone forecast production. Instead, we need to consider what happens when supply and demand interact – as shown in Figure 13.3. Figure 13.3 shows that at a price of R3, consumers would demand only 35 packets of popcorn. But suppliers stand ready to place 140 packets on the market at this price (see the data from the demand and supply schedules – Tables 13.2 and 13.3). If they do, they would create a surplus of 105 packets of popcorn. How does a marketer eliminate a surplus? By lowering the price. For example, in 2002 (during the downturn in the airline industry in the aftermath of 9/11) there was an excessive amount of under-utilised capacity in the airline industry. Flights on routes between South Africa and Europe often had large numbers of seats unoccupied. As a result, airfares were very low, and at one stage you could fly to London for as little as R300.

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Figure 13.3 Equilibrium price of popcorn

Figure 13.3 shows that at a price of R1 each, 120 packets would be demanded by the market, but at that low price only 25 packets would be placed on the market. A shortage of 95 units would be created in this way. If a product is in short supply and consumers want it, how do they entice the retailer to part with one unit? They offer more money – that is, they pay a higher price. In other words, a monetary reward is offered to manufacturers and retailers by the market (consumers) as an incentive to place more packets of popcorn on the market. Now let us examine a price of R1,50. At this price, 85 packets are demanded and 85 are supplied. When demand and supply are equal, a state called price equilibrium is reached. A temporary price below equilibrium – say R1 – results in a shortage, because at that price the demand for popcorn is greater than the available supply. Shortages put upward pressure on price. But as long as demand and supply remain the same, temporary price increases or decreases tend to return to equilibrium. At equilibrium, "****** DEMO - www.ebook-converter.com*******"

there is no inclination for prices to rise or fall. An equilibrium price may not be reached quickly, however. Prices may fluctuate during a trial-and-error period as the market for a product or service moves towards equilibrium. But sooner or later, demand and supply will settle into proper balance at a price at which manufacturers are prepared to produce and buyers perceive sufficient value to purchase.

4.3 Elasticity of demand To understand the concept of demand analysis, you must understand the concept of elasticity. Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price. Elastic demand occurs when consumers buy more or less of a product when the price changes. Conversely, inelastic demand means that an increase or a decrease in price will not significantly affect demand for the product. Elasticity (E) over the range of a demand curve can be measured by using this formula:

• • •

If E is greater than 1, demand is elastic If E is less than 1, demand is inelastic If E is equal to 1, demand is unitary.

Unitary elasticity means that an increase in sales exactly offsets a decrease in prices so that total revenue remains the "****** DEMO - www.ebook-converter.com*******"

same. Elasticity can be measured by observing these changes in total revenue: • • • • •

If price goes down and revenue goes up, demand is elastic If price goes down and revenue goes down, demand is inelastic If price goes up and revenue goes up, demand is inelastic If price goes up and revenue goes down, demand is elastic If price goes up or down and revenue stays the same, elasticity is unitary.

Figure 13.4 shows a very elastic demand curve. Decreasing the price of a Sony DVD player from R1 000 to R800 increases sales from 1 200 units to 4 000 units. As a result, revenue increases from R1 200 000 to R3 200 000. The price decrease results in a large increase in sales and revenue. Figure 13.5, on the other hand, shows a completely inelastic demand curve. A local museum dropped its entrance fee from R20 to R10, but visitor figures remained at 400 000 annually. Decreasing the price by 50 per cent did not encourage more people to visit the museum. Demand is, therefore, completely inelastic – not sensitive to price changes. As a result, it also follows that the museum could increase prices (within a reasonable range) without negatively affecting visitor figures.

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Figure 13.4 Elasticity of demand for Sony DVD players

Figure 13.5 Elasticity of demand for museum tickets

Figure 13.6 presents the demand curve and Table 13.4 the demand schedule for Overaltan suntan lotion. Let us follow the demand curve from the highest price to the lowest and examine what happens to elasticity as the price decreases. "****** DEMO - www.ebook-converter.com*******"

Figure 13.6 Demand for Overaltan suntan lotion

Table 13.4 Demand schedule for Overaltan suntan lotion

4.3.1 Inelastic demand The initial decrease in the price of Overaltan (see Table 13.4) from R5 to R2,25 results in a decrease in total revenue of R969 (R5 075 – R4 106). When both price and total revenue fall, demand is inelastic. The decrease in price is much greater than the increase in suntan lotion sales (810 bottles). Demand is therefore not very elastic (flexible) in the price range R5 to R2,25. When demand is inelastic, sellers can raise prices (within reason) and increase total revenue. Often, items that are relatively inexpensive (such as convenience products) tend to have inelastic demand. The increasing complexity of pricing in new niche markets is evident in the growing price sensitivity on basic "****** DEMO - www.ebook-converter.com*******"

commodities and known-value items, whereas price thresholds are less pronounced in other value-added categories. Woolworths food division’s success and its reputation for quality, coupled with the increasing popularity of specialist shops, is an indication of changing consumer lifestyle dynamics, allowing markets to charge a premium price.

4.3.2 Elastic demand In the example of Overaltan suntan lotion, shown in Table 13.4, when the price is dropped from R2,25 to R1, total revenue increases by R679 (R4 785 – R4 106). An increase in total revenue when the price falls indicates that demand is elastic. Let’s measure Overaltan’s elasticity of demand when the price drops from R2,25 to R1 by applying the following formula:

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Because E is greater than 1, the demand for Overaltan can be described as elastic.

4.3.3 Factors that affect elasticity Several factors affect elasticity of demand, including the following: •

•

•

Availability of substitutes. When many substitute products are available, the consumer can easily switch from one product to another, making demand elastic. When substitutes are not available, the opposite is true. Before the launch of Neotel, Telkom could increase the rates on fixed-line telephones almost at will. When Neotel arrived on the scene the situation changed. Even with Vodafone acquiring Neotel recently the importance of substitutes for price-setting in the fixed-line operators is apparent. The impact on demand as a result of this price increase was negligible because there were no direct substitutes that consumers could use. However, as cellphones became popular things changed rapidly. Price relative to purchasing power. If a price is so low that it is an inconsequential part of an individual’s budget, demand will be inelastic. For example, if the price of salt doubles, consumers will not stop putting salt on their eggs, because salt is cheap anyway. The demand for salt is, therefore, inelastic, because it makes up a small part of a household’s budget. Product durability. Consumers often have the option of repairing durable products instead of replacing them, thereby prolonging their useful life. For instance, if a

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•

person had planned to buy a new car and the prices suddenly began to rise, he or she might elect to fix the old car and drive it for another year. In other words, people are sensitive to the price increase, and demand is elastic. A product’s other uses. The greater the number of different uses for a product, the more elastic demand tends to be. If a product has only one use, as may be true of a new medicine, the quantity purchased probably will not vary as price varies. A person will consume only the prescribed quantity, regardless of price. On the other hand, a product like steel has many possible applications. As its price falls, steel becomes more economically viable in a wider variety of other, alternative applications, thereby making demand relatively elastic.

5. The cost determinant of price

LO4

Sometimes firms minimise or ignore the importance of demand and decide to price their products largely or solely on the basis of cost. For instance, South Africa’s largest cement maker, Pretoria Portland Cement (PPC), increased cement prices by 15 per cent in 2009 as high energy costs (fuel and electricity) put pressure on operating margins.14 A problem with cost pricing, however, is that prices determined strictly on the basis of cost may be too high for the target market, thereby reducing or even eliminating sales. Alternatively, cost-based prices may be too low, "****** DEMO - www.ebook-converter.com*******"

causing the firm to earn a lower return than it should. However, costs should generally be part of any price determination, if only as a floor below which a product or service must not be priced in the long run. Budget airline Kulula, for instance, can compete on price because it has succeeded in driving its operating costs down by focusing on a no-frills offering. In price-sensitive markets and industries, such as the aviation industry, costs are of particular importance (see Reader 61 ‘Cheap airlines lose sight of the real cost factors’). Budget airline Kulula, for instance, can compete on price because it has succeeded in driving its operating cost down by 30 per cent by leasing fuel-efficient McDonnell-Douglas MD82 aircraft. Cost as a determinant of selling price may seem simple, but it is actually a multifaceted concept, especially for manufacturers. Variable costs are those costs that change with changes with the level of production. An example of a variable cost is the cost of materials. The more units (motor vehicles, for instance) produced, the greater the material costs (such as steel). By contrast, a fixed cost does not change as output is increased or decreased. Examples include rent and equipment costs. If Firestone leases a machine for R200 000 per month, the cost of the machine is fixed, whether it manufactures one tyre or 300 000 tyres. In order to compare the cost of production with the selling price of a product, it is helpful to calculate costs per unit, or average costs. Average variable cost (AVC) equals total variable costs divided by quantity of output. Average total cost (ATC) equals total costs divided by output. As "****** DEMO - www.ebook-converter.com*******"

plotted on the graph in Figure 13.7, AVC and ATC are basically U-shaped curves. By contrast, average fixed costs (AFC) decline continually as output increases, because total fixed costs are constant. Marginal cost (MC) is the change in total costs associated with a one-unit change in output. Table 13.5 shows that, when output rises from seven to eight units, the change in total cost is from R640 to R750; therefore, MC is R110. All the curves illustrated in Figure 13.7 have definite relationships: • •

• •

•

AVC plus AFC equals ATC MC falls for a while and then turns upwards, in this case when the fourth unit is produced. At that point, diminishing returns set in, meaning that less output is produced for every additional rand spent on variable input MC intersects both AVC and ATC at their lowest possible points When MC is less than AVC or ATC, the incremental cost of producing one more unit will continue to pull the average costs down. Conversely, when MC is greater than AVC or ATC, it pulls the averages up, and ATC and AVC begin to rise The minimum point on the ATC curve is the lowest cost point for a fixed-capacity firm, although it is not necessarily the most profitable point.

Costs can be used to set prices in various ways. The first method discussed here, mark-up pricing, is relatively simple. The other three – profit maximisation pricing, break"****** DEMO - www.ebook-converter.com*******"

even pricing and target-return pricing – make use of the more complicated concepts of cost.

READER 61 >> Cheap airlines lose sight of the real cost factors ‘The quickest way to make a small fortune is to start with a large one’, Richard Branson once said. With an airline price war pending, commentators are questioning how sustainable small airlines might be in South Africa. Linden Birns, a director of consultancy PlaneTalking, says a distinction needs to be made between ‘low-cost’ and ‘low-fare’ airlines. He says there are four main differences: Low-cost operators, such as Southwest Airlines in the United States and EasyJet and Ryanair in Europe, operate from secondary airports situated in densely populated areas, serving a specific catchment area. In South Africa, airports such as these don’t exist, with the exception of Lanseria, which can handle large jets, and Rand Central for smaller jets. Low-cost operators have a high utilisation of equipment with fast turnabout times, ensuring as many flights as possible per aircraft, per day. Low-cost airlines tend to have a lean, flat management structure; ticketing and marketing is by Internet and telephone; they focus on flights of under three hours. To ensure long-term sustainability, operating costs need to be costeffective. Aircraft that are 20–30 years old are not fuel-efficient and have high maintenance costs. Stewart Cochrane, marketing manager of British Airways, which owns Kulula.com, says a huge saving is in airline bookings conducted through the Internet, compared with service carriers’ use of Galileo and Amadeus data software systems. Tony Twine, a senior economist at Econometrix, supported this, saying that the only way to build a sustainable business in airlines is to ‘continuously have cheaper fixed costs and variable costs than one’s "****** DEMO - www.ebook-converter.com*******"

competitor’. One example of continuous innovation is the discount airline Ryanair which has posted stellar profits in recent years, mainly due to their unconventional business model. In addition to cutting costs wherever possible, it has tried the strategy of giving away some of their seats for free – all the passengers would have to pay is airport taxes and other levies. Rather than charge for seats the airline has tried to generate revenue from other sources. For example Ryanair charges for such services as snacks, checked in luggage, drinks and, controversially, even considered charging for the use of the toilet. In addition, the airline generates alternative streams of revenue by selling a variety of goods such as digital cameras and MP3 players during its flights as well as selling advertising space on the inside and outside of its planes. Ryanair also has agreements with car hire companies and accommodation establishments in terms of which the airline earns commission when its passengers make use of their partners services. All of this means that 20 per cent of Ryanair’s turnover is from sources other than the sale of seats. SOURCE: Adapted from Emdon, C. 2004. Cheap airlines lose sight of the real cost factors. Sunday Times (Business Times), 23 November 2004, p. 3; Massey, R. and West, K. 2008. Ryanair offers free tickets, Mail Online. 16 January 2008. Available from: http://www.dailymail.co.uk/travel/article599552/Ryanair-offers-free-tickets.html (Accessed 25 August 2014); Capel, K. 2006. Wal-Mart with Wings, Bloomberg Business Week, 27 November 2006. Available from http://www.businessweek.com/stories/2006-11-26/wal-mart-with-wings (Accessed on 25 August 2014)

Figure 13.7 A hypothetical set of cost curves

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Table 13.5 A hypothetical cost schedule

5.1 Mark-up pricing Mark-up pricing, the most popular method used by wholesalers and retailers to determine a selling price, does not directly analyse the costs of production. Instead, markup pricing is the cost of buying the product from the producer, plus amounts for profit and expenses not otherwise accounted for. The total cost determines the selling price. A retailer, for example, adds a certain percentage to the cost of the merchandise received to arrive at the retail price. An item that costs the retailer R1,80 and is sold for R2,20 carries a mark-up of 40c, which is a mark-up of 22 per cent of the cost (40c ÷ R1,80 × 100%). Retailers tend to discuss mark-up in terms of its percentage of the retail price – in this example, 18 per cent (40c ÷ R2,20 × 100%). The difference between the retailers’s cost and the selling price (40c) is known as the "****** DEMO - www.ebook-converter.com*******"

gross margin.

5.2 Profit maximisation pricing Manufacturers tend to use more sophisticated methods of setting prices than intermediaries, such as wholesalers and retailers. One method is profit maximisation, which occurs when marginal revenue equals marginal cost. You learnt earlier that marginal cost is the change in total costs associated with a one-unit change in output. Similarly, marginal revenue (MR) is the extra revenue associated with selling an extra unit of output. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing and selling the product. Table 13.6 shows the marginal revenues and marginal costs for a hypothetical firm, using the cost data from Table 13.5. The profit-maximising quantity, where MR = MC, is six units. You might ask, ‘If profit is zero, why produce the sixth unit? Why not stop at five?’ In fact, you would be right. The firm, however, would not know that the fifth unit would produce zero profits until it determined that profits were no longer increasing. Economists suggest producing up to the point where MR = MC. If marginal revenue is just one cent greater than marginal costs, it will still increase total profits.

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Table 13.6 Point of profit maximisation

Note: * Profit maximisation occurs between unit quantities 5 and 6

5.3 Break-even pricing Now let’s take a closer look at the relationship between sales and cost. Break-even analysis determines what sales volume must be reached before the firm breaks even (i.e. its total costs equal total revenue) and no profits are earned. Clearly, no firm can earn a lower level of income than what it pays out as expenses for a sustained period of time. During the recession of 2009, international business-class air travel dropped by 20 per cent in Korea, 12 per cent in Japan and 6 per cent in the United States. To survive (over the short term), many airlines dropped their prices to below breakeven point – a situation that was described as ‘unsustainable’. ‘The fall in passenger numbers has led to increased competition for an ever-diminishing pool of travellers, forcing some airlines to sell their tickets at below cost. By December 2009 average premium fares were down 6 per cent’, said the International Air Transport Association "****** DEMO - www.ebook-converter.com*******"

(IATA). ‘With average fares and fuel surcharges now falling significantly, we estimate that revenues from premium passengers were down by at least a quarter in January, wreaking significant damage to network airline yields and profitability.’15 The typical break-even model assumes a given fixed cost and a constant average variable cost. Suppose that the Campus Coffee Shop, a hypothetical firm, has fixed costs of R2 000 and that the cost of labour and materials for each unit (cup of coffee) produced is 50c. Assume that it can sell up to 6 000 units of its product at R1,00 without having to lower its price. Figure 13.8 illustrates Campus Coffee Shop’s break-even point. As Table 13.7 indicates, the Campus Coffee Shop’s average variable costs increase by 50c every time a new unit is produced, and total fixed costs remain constant at R2 000 regardless of the level of output. Therefore, 4 000 units of output give The Campus Coffee Shop R2 000 in fixed costs and R2 000 in total variable costs (4 000 units × 50c), or R4 000 in total costs. Revenue is also R4 000 (4 000 units × R1), giving a net profit of zero at the break-even point of 4 000 units. Note that once the firm gets past the break-even point, the gap between total revenue and total cost gets wider and wider, because both functions (total revenue and total cost) are assumed to be linear. The formula for calculating breakeven quantities is simple:

Fixed cost contribution is the price minus the average "****** DEMO - www.ebook-converter.com*******"

variable cost. Therefore, for the Campus Coffee Shop:

Therefore, the Campus Coffee Shop must sell 4 000 cups of coffee (its break-even quantity) to ensure that it does not make a loss. The advantage of break-even analysis is that it provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is produced. If a firm is operating close to the break-even point, it may want to see what can be done to reduce costs or increase sales. Moreover, in a simple break-even analysis, it is not necessary to compute marginal costs and marginal revenues, because price and average cost per unit are assumed to be constant. And because accounting data for marginal cost and revenue are frequently unavailable, it is convenient not to have to depend on that information. However, break-even analysis is a tool with several major limitations. Sometimes it is hard to know whether a cost is fixed or variable. For example, if an employee has a guaranteed-employment contract, is the resulting expense a fixed cost? Are middle-management salaries fixed costs? More important than cost determination, however, is the fact that simple break-even analysis ignores demand. For example, how does the Campus Coffee Shop know it can sell 4 000 cups of coffee at R1? Could it sell the same 4 000 units at R2 or even R5? Obviously, this information would profoundly affect the firm’s pricing decisions. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> A break-even analysis is a very important tool at the disposal of marketing managers. It often guides their decision-making not only on pricing, but also on product-related decisions. Under pressure from the government, in 2004 South African banks started marketing bank services to ‘the traditionally unbanked’ section of the population. These accounts, known as ‘Mzansi accounts’, however, do not break even. Banks report an average loss of R4,70 per month per active Mzansi account. Consequently, as one might expect, the future of this initiative is ‘uncertain’.16 Figure 13.8 Costs, revenues and break-even point for the Campus Coffee Shop

Table 13.7 Costs, revenues and break-even point for the Campus Coffee Shop

Note: * = break-even point

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6. Other determinants of price

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Other factors in addition to demand and cost can influence price. For example, the stage of the product’s life cycle, the competition, and the product’s distribution strategy, promotion strategy and perceived quality can all affect pricing.

6.1 Stages in the product life cycle As a product moves through its life cycle (see Chapter 9), the demand for the product and the competitive conditions tend to change. These changes have an impact on marketing managers’ pricing decisions: •

•

Introductory stage. Management usually sets prices high during the introductory stage to recover the firm’s development costs as quickly as possible, and then gradually lowers the price. When cellphones were first launched some models cost more than R4 000. Setting the price will, however, depend on the price elasticity of demand. Growth stage. Prices generally begin to stabilise as the product enters the growth stage. There are several reasons for this stabilisation. First, competitors have entered the market, increasing the available supply. Second, the product has begun to appeal to a broader market, often lower-income groups. Finally, economies of scale lower costs, and the savings can be passed on to the consumer in the form of lower prices. As cellphone

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•

•

operators began expanding the market (by offering payas-you-go options), the prices of handsets dropped quite dramatically. Maturity stage. Maturity usually brings further price decreases as competition increases and inefficient, highcost firms drop out of the market. Distribution channels become a significant cost factor, however, because of the need to offer wide product lines for highly segmented markets, extensive service requirements and the sheer number of dealers necessary to absorb high-volume production. The manufacturers that remain in the market towards the end of the maturity stage typically offer similar prices. The prices of comparable televisions today are almost the same regardless of the brand or manufacturer. Decline stage. The final stage of the life cycle may see further price decreases as the few remaining competitors try to salvage the last vestiges of demand. When only one firm is left in the market, prices are fairly static. Usually only the most efficient firms remain, and they have comparable costs. At this stage, price increases are usually cost-initiated, not demand-initiated. Nor do price reductions in the late phase of maturity stimulate much demand. Because demand is limited and manufacturers have similar cost structures, the remaining competitors will probably match price reductions. WEBSITE What are the FAQs (frequently asked questions) for Levi’s? How does Levi’s

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address the price issue? Log on to www.levi.com to find the answers

6.2 The competition Competition varies during the product life cycle, of course, and so at times it may strongly affect pricing decisions. A near-monopoly competitive situation allows higher prices, and vice versa.

EXAMPLE >> Until recently, Telkom had a monopoly in the fixed-line telephone market in South Africa. This situation changed with the introduction of mobile phones and Internet-based services such as Skype. Similarly, the price of broadband and telephony has dropped by as much as 40 per cent (peak-time rates) as competition has intensified. The average selling price of bandwidth on Telkom’s digital subscriber line was about R70 per gigabyte in 2009, but has dropped to less than R10 per gigabyte in 2010 on certain packages.17

>>Strategy For Telkom, pricing is a key element of its value proposition. Telkom’s pricing strategy is aimed at improving its competitiveness in areas where competition is expected to intensify and where arbitrage opportunities exist. Telkom’s strategy to counter pricing pressures is as follows: • Actively offer value-based calling plans and bundles to extend value and savings to its customers • Reduce international and long-distance rates to reduce arbitrage opportunities "****** DEMO - www.ebook-converter.com*******"

• •

Rebalance standard/off-peak local rates, to better align these with international norms and improve its competitive position Reduce and rebalance national and international data prices to improve its competitive position.

6.3 Distribution strategy An effective distribution network can often overcome other minor flaws in the marketing mix. For example, although consumers may perceive a price as being slightly higher than normal, they may buy the product anyway if it is being sold at a convenient retail outlet, such as a KwikSpar. Adequate distribution for a new product can often be attained by offering a larger-than-usual profit margin to intermediaries, which means higher prices.

6.4 Marketing communication Price is often used as a promotional tool to increase consumer interest. The weekly grocery section of the newspaper, for instance, advertises many products with special low prices offered by retailers, such as Shoprite Checkers, Pick n Pay and Spar (see the KwikSpar advertisement, right).

7. The relationship between price and quality In the absence of other cues, consumers tend to rely on a "****** DEMO - www.ebook-converter.com*******"

high price as an indicator of good quality when there is considerable uncertainty involved in the purchase decision. Reliance on price as an indicator of quality seems to exist for most products, but it reveals itself more strongly for certain items than for others. Among the products that benefit from this phenomenon are coffee, aspirin, salt, floor wax, shampoo, clothing, furniture, perfume, whisky and many services. If the consumer obtains additional information – for instance, about the brand or the shop – then reliance on price as an indicator of quality decreases.18 In the absence of other information, consumers usually assume that prices are higher because the products contain better materials, because they are made more carefully, or, in the case of professional services, because the provider has more expertise. In other words, consumers assume that ‘you get what you pay for’. Knowledgeable retailers take these consumer attitudes into account when devising their pricing strategies. Prestige pricing means charging a high price to help promote a high-quality image. Nescafé Gold coffee costs about R80 for a 200-gram jar. However, at that price you can buy three 250-gram tins of Ricoffy. Nescafé Gold coffee is, therefore, nearly three times more expensive than Ricoffy. A successful prestige-pricing strategy requires a retail price that is reasonably consistent with consumers’ expectations. For example, no one who goes shopping at a boutique expects to pay cheap prices. In fact, demand for boutique products would fall drastically at low prices. Nor would a consumer expect to pay less for a Parker pen than for a Bic pen. Similarly, consumers also expect private or generic brands to be cheaper than national brands. "****** DEMO - www.ebook-converter.com*******"

However, if the price difference between a private brand and a nationally distributed manufacturer’s brand is too great, consumers tend to believe that the private brand is inferior. On the other hand, if the savings are not big enough, there is little incentive to buy the private brand. Private brands generally offer retailers better profit margins, but also give a stamp of uniqueness and differentiation to a retail chain, and by building brand loyalty it can build its customer base.

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>>Strategy Clicks has had its own exclusive brands, such as Safeway household appliances, Payless detergents, Flirt tights and Baby Care for many years, and these have become well accepted. More recently, the firm has successfully moved into Clicks branded toiletry products and other categories, such as stationery, and a cosmetic range called Clique. About 18 per cent of all Clicks products are own brands, which significantly reduces costs and enhances Clicks’s profit margins. In the case of Pick n Pay it is 14 per cent19. Discom is following the same route and has a number of its own brands, such as Saveon for cleaning aids, toiletries and household products; Dynamic – small electrical products, such as irons, toasters, kettles and hairdryers; a Universal range of stationery and kitchenware; a Miss Mod cosmetics range; and Razzmatazz tights. About 10 per cent of the products on its shelves are the retailer’s own brands.

EXAMPLE >> To get the price-quality relationship right is very important, but not always easy, as the retailer Woolworths can attest. Woolworths (in terms of its clothing) has had to deal with problems such as pricing perceived as too high; lack of focus on the ‘classic’ customer; too many out-of-stock situations; and being too aggressive with its fashion ranges (in effect, starting to compete with boutiques). When consumers perceive ‘Woolies’ clothing as expensive, what they are really saying is that the quality isn’t commensurate with the price. And Woolworths accepts that at times it has neglected the classic, or traditional, Woolies customer. Many customers believe that Woolworths offers "****** DEMO - www.ebook-converter.com*******"

classic fashions at reasonable prices. Every so often, the offering has included significantly more expensive lines. This alienates the traditional customer. Conversely, customers who like the more expensive items are disappointed when they are withdrawn.20

8. How to set a price on a product

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Setting the right price on a product is a four-step process (see Figure 13.9): 1 2 3 4

Formulate the pricing objectives Estimate demand, costs and profits Choose a price strategy to help determine a base price Fine-tune the base price with pricing tactics.

The first three steps are discussed below and the fourth step is discussed later in the chapter.

8.1 Formulating pricing objectives The first step in setting the right price for a product is to formulate pricing objectives. Keep in mind that pricing objectives can be divided into three categories: profitorientated, sales-orientated and status quo objectives. These objectives are derived from the firm’s overall objectives. A good understanding of the market and of the consumer can sometimes tell a manager very quickly whether an objective is realistic. For example, if firm A’s objective is a 20 per cent target return on investment (ROI), and its product development and implementation costs are R5 million, the "****** DEMO - www.ebook-converter.com*******"

market must be rather large or must support the price required to earn a 20 per cent ROI. In other words, the objective may be unrealistic. Assume that firm B has a pricing objective that all new products must reach at least 15 per cent market share within three years after their introduction. A thorough study of the environment may convince the marketing manager that the competition is too strong and that the market-share objective cannot be met. Figure 13.9 Steps for setting the price of a product

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When Coca-Cola launched Bibo, its flavoured drink for children, it was marketed at R1 per unit. The firm was determined to keep Bibo affordable. However, Coca-Cola soon realised that its ROI objectives would not be reached, and had to increase the price of Bibo. All pricing objectives have trade-offs that managers must consider. A profit-maximisation objective may require a bigger initial investment than the firm can commit to. Reaching the desired market share often means sacrificing short-term profit, because without careful management, long-term profit objectives may not be met. Meeting the competition is the easiest pricing objective to implement. However, can managers really afford to ignore demand and costs, the life-cycle stage and other considerations? When formulating pricing objectives, managers must consider these trade-offs in light of the expected demand from the target market and the environment in which the product or brand will be marketed.

8.2 Estimate demand, costs and profits Total revenue is a function of price and quantity demanded, which depends on elasticity. After establishing pricing objectives, managers should estimate total revenue at a variety of prices. Next, they should determine corresponding costs for each price. They are then ready to estimate how much profit, if any, and how much market share can be earned at each possible price. This information will become the heart of the developing price strategy. Managers can study the options in light of revenues, costs and profits. In "****** DEMO - www.ebook-converter.com*******"

turn, this information can help determine which price can best meet the firm’s pricing objectives.

8.3 Choose a price strategy The basic, long-term pricing framework for a product or service should be a logical extension of the pricing objectives. The marketing manager’s chosen price strategy defines the initial price and gives direction for price movements over the length of the product life cycle. Therefore, the price strategy sets a competitive price in a specific market segment, based on a well-defined positioning strategy. For example, a car maker like Mercedes-Benz sets a base price for each of its models, but each dealer has some freedom or discretion in setting the final selling price. A firm’s freedom in pricing a new product and devising a price strategy depends on the prevailing market conditions and the other elements of the marketing mix. For example, if a firm launches a new item resembling several others already on the market, its pricing freedom will be restricted. To succeed, the firm will probably have to charge a price close to the average market price. By contrast, a firm that introduces a totally new product with no close substitutes and a clear competitive advantage will have considerable pricing freedom.

READER 62 >> The new pricing paradigm? In the music industry where theft (also known as music piracy) is the norm (it "****** DEMO - www.ebook-converter.com*******"

is estimated that South African artists and recording companies lose about R500 million per year) it is strange to think that a feasible pricing strategy is to allow consumers to pay whatever they feel is appropriate. The indie band, Radiohead made waves in 2007 when it bypassed traditional distribution channels and offered its In Rainbows album for whatever fans wanted to pay, known as a ‘pay what you want’ (PWYW) pricing strategy. In Rainbows was downloaded 1,8 million times, generating $2,26 (about R20,20) per album, a turnover of $4,1 million (about R41 million), over the three months over which the special offer ran. Although 60 per cent of the consumers opting for the free download, Radiohead claimed it actually made more money off the release than any other album as it did not have to incorporate costs of production, inventory, shipping or cuts to the middleman into the price. However this strategy has not worked for all bands and Nine Inch Nails’ free provision of its new album, The Slip, resulted in lower revenues from the album’s digital sales. However, PWYW is still alive in the music industry and Mavaru.com is an mp3 marketplace for indie bands where every album is PWYW. Although some industries may feasibly use PWYW pricing model, it is probably only feasible for products which either target a particular niche (such as indie bands), can be digitally downloaded (such as music/games) or services (such as restaurants). It will be very difficult to run a promotion (incorporating a PWYW pricing strategy) with physical goods that carry production, inventory and opportunity cost of giving away product that could be sold to others. SOURCES: Bourreau, M., Dogan, P. and Hong, S., 2014. Making Money by Giving It for Free: Radiohead’s Pre-Release Strategy for In Rainbows, Harvard Kennedy School Faculty Research Working Paper Series., 4 June 2014 Available https://research.hks.harvard.edu/publications/getFile.aspx?Id=1073 (Accessed on 25 August 2014); Bustos, L. 2011. Is Pay-What-You-Wish Pricing Wishful Thinking? Get Elastic, 18th April 2011. Available from http://www.getelastic.com/name-your-own-price/ (Accessed on 25 August 2014); Lephaka P. 2014. On-going piracy battle in the SA music industry, SABC News Electronic version. 25 January 2014. Available from http://www.sabc.co.za/news/a/98e1b80042afbc67b6fefe56d5ffbd92/On-going-piracy-battle-in-theSA-music-industry (Accessed on 25 August 2014)

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The three basic strategies for setting a price on a product or service are price skimming, penetration pricing and status quo pricing.

8.3.1 Price skimming Price skimming denotes a high price in relation to the prices of competing products or brands. The term ‘price skimming’ is derived from the phrase ‘skimming the cream off the top’. Firms often use this strategy for newly-introduced products when the product is perceived by the target market as having unique advantages. In the United States, Radius Corporation produces unique oval-headed toothbrushes made of black neoprene that look like a scuba-diving accessory. Radius uses a skimming strategy, pricing the toothbrushes at five times the price of a normal toothbrush. When Apple delayed the launch of its iPad in South Africa in April 2010 owing to excessive demand in the United States, local importers were retailing the product from R7 599 (for the 16 GB model) to R10 229 (for the 64 GB model), more than double the going price of an iPad in the United States. As a product progresses through its life cycle, the firm may lower its price to penetrate larger market segments successfully. The two dominant cellular phone firms in South Africa have successfully expanded the market by not only lowering the cost of handsets, but also using different pricing packages, such as Vodacom’s Weekender, to reach the more price-sensitive market segments. Another example is Telkom’s ADSL service, which dropped from R800 per month (for business ADSL) when it was first launched to R699 in March 2005, to R477 in August 2005 and to R79 per "****** DEMO - www.ebook-converter.com*******"

month for 1 GB in 2008. More recently Telkom has moved away from this pricing strategy to a pricing strategy designed around high-speed broadband services with different line speed options, ranging from 2Mbps to 40Mbps. The 2 Mbps ASDL will cost you R165 per month, the 4Mbps ASDL will cost you R299 per month, the 10 Mbps ASDL will cost you R425 per month, the 20 Mbps ASDL will cost you R540 per month, while the 40 Mbps ASDL will cost you R795 per month.21 Price skimming works best when the market is willing to buy the product for its unique advantages even though it carries an above-average price – such as when cellphones were initially introduced. Firms can also effectively use price skimming when a product or service is well protected legally, when it represents a technological breakthrough (e.g. high-definition TV) or when it has in some other way blocked entry to competitors (e.g. registered a patent). Marketers may also follow a skimming strategy when production cannot be expanded rapidly because of technological difficulties, shortages or constraints imposed by the skills and time required to produce a product. As long as demand is greater than supply, price skimming is a viable strategy. To summarise, a successful skimming strategy enables management to recover its product development costs quickly because the high price ensures the rapid inflow of cash.

8.3.2 Penetration pricing Penetration pricing is at the other end of the spectrum. "****** DEMO - www.ebook-converter.com*******"

Penetration pricing means charging a relatively low price for a product as a way to reach the mass market as soon as possible. When DStv first introduced its video-on demand service Box Office it was priced at the ‘loss-making price’ of R25. ‘We’ve deliberately priced it at that level to make it attractive’ says DStv Online CEO John Kotsaftis. ‘At the moment we’re sitting at below cost so we can build interest and gain some traction’.22 The low price is designed to capture a large share of a substantial market, resulting in lower production costs. If a marketing manager has determined that the firm’s pricing objective should be to obtain a large market share, then penetration pricing is a logical choice. However, penetration pricing does mean a lower profit per unit. Therefore, to reach the break-even point, it requires higher sales volumes than those required by a skimming strategy. If reaching a high volume of sales takes a long time, then the recovery of product development costs will also be slow. As you might expect, penetration pricing tends to discourage competition because it creates a barrier to entry to those competitors who cannot contain input costs to the same extent. A penetration strategy tends to be effective in a pricesensitive market. Price should decline more rapidly when demand is elastic, because the market can be expanded by charging a lower price. Also, price sensitivity and greater competitive pressure should lead to a lower initial price and a relatively slow decline in the price later.

8.3.3 Status quo pricing "****** DEMO - www.ebook-converter.com*******"

The third basic price strategy a firm may choose is status quo pricing, or meeting the competition. It means charging a price identical or very close to the competition’s price. Many supermarket groups keep a close watch on the prices charged by other groups. Although status quo pricing has the advantage of simplicity, its disadvantage is that the strategy may ignore demand or cost – or both. But meeting the competition may be the safest route to long-term survival if the firm is comparatively small.

8.4 The legality and ethics of price strategies

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Some pricing decisions are subject to government regulation. Before marketing managers decide on a price strategy, they should know whether there are laws that may limit their decision-making. The price of petrol, for instance, is determined by the government (see Reader 60 ‘How fuel prices are calculated in South Africa’). Some pricing practices are illegal (such as price fixing), whereas others, such as bait pricing, may be regarded as unethical. A good example of ethical, responsible behaviour is that of Western Cape Tourism, which used research to support and guide the development of a code of conduct to govern price setting in the tourism industry in the Western Cape. A survey was launched in January 2010 to investigate accommodation booking and pricing trends for the 2010 FIFA World Cup. The survey revealed that most of the Western Cape’s accommodation establishments were charging reasonable rates for accommodation during the event. This independent accommodation survey conducted "****** DEMO - www.ebook-converter.com*******"

by capeinfo.com and endorsed by Cape Town Tourism shows that reports on overpricing are based on perception rather than reality. In January 2010, 31,6 per cent of the respondents were charging the same price as they would in peak season – or less. The figure shifted to 57,3 per cent in February 2010. The survey also revealed that 75,3 per cent of establishments were charging no more than 20 per cent above their peak-season rates (at the time of going to press). On the basis of this information, a tourism code of responsible pricing for Cape Town was drafted. The code calls for a moderate approach to pricing, responsible peakseason rates and mindfulness of tourism sustainability and transparency. Key tourism industry stakeholders, representatives and membership organisations all signed this code.23

8.4.1 Price fixing Price fixing is an agreement between two or more firms on the price they will charge for a product. For example, two or more executives from competing firms may meet to decide how much to charge for a product or to decide which of them will submit the lowest bid on a certain contract. Such practices are illegal under the provisions of the Competition Act (No 89 of 1998). The Competition Commission has found some evidence of alleged price fixing in the motor vehicle manufacturing industry (Toyota SA paid a fine of R12 million), food industry (Pioneer Foods had to pay a R200m fine) and the car security industry (vehicle-tracking firms, manufacturers of gear locks and alarm systems firms). The commission also "****** DEMO - www.ebook-converter.com*******"

outlawed the earlier practice of medical practitioners charging fixed fees (called ‘scale of benefits’), used by the Board of Healthcare Funders as a fee guideline.

8.4.2 Predatory pricing Predatory pricing is the practice of charging a very low price for a product with the intention of driving competitors out of business or out of a market. Once competitors have been driven out, the firm raises its prices. This practice is also illegal under the provisions of the Competition Act (see Reader 63 ‘Media24 accused of predatory pricing’). Although the authors are not saying that Tiger Brands is guilty of predatory pricing, the firm dropped the price of its Fatti’s and Moni’s pasta by as much as 40 per cent when Robertson’s Napolina Pasta entered the market, and the price of Tastic rice by 30 per cent when Uncle Ben’s entered the market. Through these actions Tiger Brands succeeded ‘in forcing both Napolina and Uncle Ben’s out of the market’.24 When the low-cost airline 1Time was first launched, it claimed that Comair, of which Kulula is a subsidiary, was ‘prepared to spend R100 million to knock them out of the market’.25

READER 63 >> Media24 accused of predatory pricing THE Competition Tribunal on Tuesday heard explosive testimony from a former Media24 manager on its aggressive strategies to force competitors in the community newspaper market out of business. Wian Bonthuyzen, former senior manager responsible for community newspapers at Die Volksblad in the Free State, said the strategy was a deliberate one aimed at undercutting opponents "****** DEMO - www.ebook-converter.com*******"

on advertising tariffs until they could no longer sustain their losses. This eventually led to the demise of its fiercest competitor in the Goldfields area, Gold-Net News, in 2009. Gold-Net complained about the conduct that continued during 2004-09 to the Competition Commission, which found that Media24 engaged in predatory pricing – charging prices below average variable cost or below average total costs. Media24 has denied the allegations and is defending itself before the tribunal. The commission found that Media24 used Goudveld Forum, a loss-making community newspaper in the Goldfields area, as a ‘fighting brand’ to undercut Gold-Net News on its advertising rates, causing it to suffer continues financial losses. The strategy was devised to protect Media24’s star brand Vista, a newspaper that, ironically, was founded by the owner of Gold-Net News, Hans Steyl. Mr Bonthuyzen testified that he was astonished by Mr Steyl’s tenacity to remain in a market where he was constantly undercut by Forum for a prolonged period. ‘I said to myself, Hans or Leda could not go on with those rates (that they had to charge to compete with Media24) because they could not make money. We had a big company, so it was possible for us to make losses month in and month out or even year in and year out. They could not do it, so surely they must close down sooner or later.’ Mr Bonthuyzen said he manipulated the costs allocated to Forum to decrease the losses to divert any possible suspicion by the competition authorities that it was engaged in predatory pricing against its biggest opponent. SOURCE: Adapted from: Visser, A. 2013. Media24 accused of predatory pricing, Business Day, 13 November, p. 2

8.5 Tactics for fine-tuning the base price

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After managers understand both the legal and marketing consequences of price strategies, they should set a base price – the general price level at which the firm expects to sell the product or service. The general price level must be in line "****** DEMO - www.ebook-converter.com*******"

with the pricing strategy: above the market (price skimming), at the market (status quo pricing) or below the market (penetration pricing). The final step is to fine-tune the base price. Fine-tuning techniques are short-run approaches that do not change the general price level. They do, however, result in changes within a general price level. These pricing tactics allow the firm to adjust for competition in certain markets, meet ever-changing government regulations, take advantage of special demand situations and meet advertising and positioning objectives. Fine-tuning pricing tactics include various sorts of discounts, geographic pricing and special pricing tactics. WEBSITE Visit Plascon Paints’ ‘paint quality estimates’ page at www.plascon.co.za. Do you think it is a good pricing tactic?

8.5.1 Discounts, allowances and rebates A base price can be lowered by using discounts and the related tactics of allowances and rebates. Marketers use the various forms of discounts to encourage customers to do what they would not ordinarily do, such as paying cash rather than using credit, taking delivery out of season, or performing certain functions within a distribution channel. The following is a summary of the most common tactics: •

Quantity discounts. When buyers get a lower price for buying in multiple units or above a specified amount it is known as a quantity discount. A cumulative quantity "****** DEMO - www.ebook-converter.com*******"

discount is a reduction from list price that applies to the buyer’s total purchases made during a specific period. It is intended to encourage customer loyalty. By contrast, a non-cumulative quantity discount is a deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period. It is intended to encourage orders in large quantities. • Cash discounts. A cash discount is a price reduction offered to a buyer in return for prompt payment. Prompt payment saves the seller carrying finance charges (interest charges, bank fees and so on) and invoicing expenses, and allows the seller to avoid bad debt. • Functional discounts. When distribution channel intermediaries, such as wholesalers or retailers, perform a service or function for the manufacturer, they must be compensated. This compensation, typically a percentage discount from the base price, is called a functional discount (or trade discount). Functional discounts vary greatly from channel to channel, depending on the tasks performed by the intermediary. • Seasonal discounts. A seasonal discount is a price reduction for buying merchandise out of season. It shifts the storage function to the purchaser. Seasonal discounts also enable manufacturers to maintain a steady production schedule throughout the year. • Promotional allowances. A promotional allowance (also known as a trade allowance) is a payment to a retailer for promoting the manufacturer’s products. It is both a pricing tool and a promotional device. As a pricing tool, a promotional allowance is like a functional discount. If, for example, a retailer runs an "****** DEMO - www.ebook-converter.com*******"

•

advertisement for a manufacturer’s product – see the KwikSpar advertisement – the manufacturer may pay half the cost. If a retailer sets up a special display in a supermarket, the manufacturer may include a certain quantity of free goods in the retailer’s next order. Rebates. A rebate is a cash refund given for the purchase of a product during a specific period. The advantage of a rebate over a simple price reduction for stimulating demand is that a rebate is a temporary inducement that can be taken away without altering the basic price structure. A manufacturer that uses a simple price reduction for a short time may meet resistance when trying to restore the price to its original, higher level.

Marketers of prestigious products usually associated with high levels of quality have to be particularly sensitive to the potential impact of any form of price reduction on the perceptions of consumers. Because it was concerned about the image of its brand, Southern Sun (now renamed Tsogo Sun) refused to discount its hotel rates when the market started to ‘buy down’ during the 2009 recession. ‘We’ve maintained our rate strategy, because once you compromise on your rates and start giving away huge discounts, your brand is priced accordingly’, said its managing director, Graham Wood.26 Discounting does not always work, as is the case in cinemas in South Africa. Ster-Kinekor has tried in vain to increase cinema attendance by lowering prices, but the tactic has simply not worked. A two-year price war between Nu Metro and Ster-Kinekor has fizzled out without putting more ‘bums on seats’. ‘Dropping prices to R18 a ticket [in "****** DEMO - www.ebook-converter.com*******"

2001] hasn’t worked. People didn’t perceive that prices had dropped, since not all prices fell to a flat R18’, said Primedia chief operating officer, Ferdi Gazendam. ‘Content and access far outweigh pricing’, he said. This contention was confirmed when a further dramatic drop in prices to R14 a ticket in 2005 had virtually no impact on ticket sales.27

8.5.2 Trade loading Trade loading occurs when a manufacturer temporarily lowers the price to induce wholesalers and retailers to buy more products than can be sold in a reasonable time. Let’s say Coca-Cola offers Powerade at an additional 60c off the normal price to retailers. The Powerade buyer (the retailer) jumps at the bargain and buys a three-month supply. Normally, the retailer will pass along the discount to customers for about a month, but then return to the original price for the last two months, thereby reaping some extra profit.

>>Technology in action Snapscan After a lengthy pilot project, Standard Bank has commercially launched SnapScan, a smartphonebased payments system that removes the need for consumers to carry either cash or bank cards, allowing them to make payments using only their phones. Consumers from any bank, not only Standard Bank, can download and use the app. They provide their "****** DEMO - www.ebook-converter.com*******"

credit or cheque card number (no Pin is required) and this information is securely stored using advanced encryption techniques. When they arrive at a point of sale – at a merchant that supports the platform – users simply scan a Quick Response Code (QR code), a type of matrix barcode (see example) linked to the merchant and enter the amount owing, or they scan a QR code linked to a specific price. When the payment has been successfully concluded, the merchant receives an SMS confirmation. Standard Bank charges merchants a flat fee of 3 per cent per transaction. The platform potentially removes the need for expensive point-of-sale equipment and could prove popular among small vendors that can’t afford or don’t want to operate traditional payment terminals. Merchants aren’t even required to have a bank account, and can elect to receive their payments in the form a Standard Bank Instant Money voucher, which can be redeemed at Spar supermarkets or at the bank’s ATMs.

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SOURCE: Adapted from McLeod, D. 2014. Standard Bank debuts new payments app. TechCentral, 21 May 2014. Available from http://www.techcentral.co.za/standard-bank-debuts-new-paymentsapp/48259/ (Accessed 1 September 2014)

8.5.3 Geographic pricing Because many sellers ship their wares to a nationwide, or even worldwide, market, the cost of freight can greatly affect the total cost of a product. Sellers may use several different geographic pricing tactics to moderate the impact of freight costs on distant customers. The following are the most common methods of geographic pricing: • FOB (free on board). This is a price tactic that requires "****** DEMO - www.ebook-converter.com*******"

the buyer to absorb the freight costs from the shipping point. The further buyers are from sellers, the more the buyer pays for transport, because transportation costs generally increase with the distance merchandise is shipped. • Uniform delivered pricing. If the marketing manager wants total costs, including freight, to be equal for all purchasers of identical products, the firm will adopt uniform delivered pricing. With uniform delivered pricing, the seller pays the actual freight charges and bills every purchaser an identical, flat freight charge, irrespective of where the goods are transported from. • Zone pricing. A marketing manager who wants to equalise total costs among buyers within large geographic areas – but not necessarily all of the seller’s market area – may modify the base price with a zonepricing tactic. Zone pricing is a modification of uniform delivered pricing. Rather than placing the entire country (or its total market) under a uniform freight rate, the firm divides it into segments, or zones, and charges a flat freight rate to all customers in a given zone. For example, everyone in Johannesburg may pay the same freight costs, whereas customers in the Lowveld may pay more for the product. • Freight-absorption pricing. With freight-absorption pricing, the seller pays all or part of the actual freight charges and does not pass them on to the buyer. The manager may use this tactic in intensely competitive areas or as a way to break into new market areas. • Basing-point pricing. With basing-point pricing, the seller designates a location as a basing point and charges "****** DEMO - www.ebook-converter.com*******"

all buyers the freight cost from that point, regardless of the city from which the goods are shipped.

8.5.4 Special pricing tactics Unlike geographic pricing, special pricing tactics are unique and defy neat categorisation. Managers use these tactics for various reasons – for example, to stimulate demand for specific products, to increase store patronage and to offer a wider variety of merchandise at a specific price point. Special pricing tactics include a single-price tactic, flexible pricing, professional-services pricing, price lining, leader pricing, bait pricing, odd-even pricing, price bundling and two-part pricing. A brief overview of each of these tactics follows, along with managerial reasons for using the tactic – or a combination of tactics – to change the base price.

8.5.5 Single-price tactic A firm using a single-price tactic offers all products and services at the same price (or perhaps at two or three prices). This tactic is not yet popular in South Africa, but US retailers using this tactic include One Price Clothing Stores, Dre$$ to the Nine$, Your $10 Store, and Fashions $9,99. One Price Clothing Stores, for example, tend to be small. Their objective is to offer merchandise that would sell for at least $15 to $18 in other shops. The shops carry pants, shirts, blouses, sweaters and shorts for teenagers and large-sized women. The shops do not stock any second-hand or irregular items, and everything is sold for less than $10. Single-price selling removes price comparisons from the buyer’s decision-making process. The consumer just looks "****** DEMO - www.ebook-converter.com*******"

for suitability and the highest perceived quality. The retailer enjoys the benefits of a simplified pricing system and minimal clerical errors. However, continually rising costs are a headache for retailers following this strategy. In times of inflation, they need to raise the selling price frequently. Recessionary circumstances in the United States led to the rapid growth of single-price chains. Service firms often try to remove the uncertainty associated with a price by offering a single price for a ‘fixed menu’ of services (see the Volkswagen advertisement on page 486).

>>Technology in action Gimme: Prices compared It’s become a whole lot easier to compare prices of products available in a store with those charged on popular online retailers’ sites. Price Snap, a free application (app) developed by Cape-based Virtual Mobile Technologies, allows smartphone users to either type in the name of the product they’re searching for or take a picture of its barcode. Once the product is selected, the app shows what it is selling for on Kalahari.com (now owned by Takealot) and on the online classified site e-Bay. Price Snap worked well when we tested it. Its menu is easy to navigate, it has no problem identifying the barcode and it is easily able to find products through a word search. But it does have limitations. For one, it allows price comparisons from two sites only and is available only through Apple’s "****** DEMO - www.ebook-converter.com*******"

iTunes Store. It is unable to compare prices of consumer goods so it’s of little use if you plan to use it for grocery shopping. Even so, it’s useful if you wish to compare certain prices without the hassle of going to the store and then checking on a computer what the online asking price is. SOURCE: Claasen, L. 2012. Gimme: Prices compared. Financial Mail, 24 February, p. 32

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8.5.6 Flexible pricing Flexible pricing (or variable pricing) means that different customers pay different prices for essentially the same merchandise bought in equal quantities. This tactic is often found in the sale of shopping products, speciality products and most industrial products (see Chapter 8). Car dealers, many appliance retailers and manufacturers of industrial "****** DEMO - www.ebook-converter.com*******"

installations, accessories and component parts commonly follow this practice. It allows the seller to adjust for competition by meeting another seller’s price, if needed. Therefore, a marketing manager with a status quo pricing objective might readily adopt this tactic. Flexible pricing also enables the seller to close a sale with price-conscious consumers. If buyers show promise of becoming largevolume shoppers, flexible pricing can be used to lure their business. Internet sellers, such as Takealot and Amazon. com, mine their databases to gauge specific shoppers’ desires, measure their financial means, instantaneously tailor products to fit the shoppers’ behaviour and price products accordingly. Many B2B marketers, such as Dell computers, also monitor inventories, costs and demand at any given moment and adjust their prices instantly based on the size of the order. The obvious disadvantages of flexible pricing are the lack of consistent profit margins, the potential ill will of highpaying purchasers, the tendency for salespeople to lower the price automatically to make a sale and the possibility of price wars among sellers (see Reader 64 ‘Walmart’s Chinese batteries signal retail price war’).

READER 64 >> Walmart’s Chinese batteries signal retail price war The first of many Walmart-branded products has hit the shelves of Massmart stores, signalling the beginning of a price war which analysts say Walmart will win. The US retail giant is flexing its global buying muscle, importing Great Value alkaline batteries from China. It is a private label product that will retail "****** DEMO - www.ebook-converter.com*******"

at 35 per cent less than locally produced battery brands. ‘Walmart has unrivalled scale and buying power; there is no organisation on Earth that can compete. Walmart will win this battle over time,’ Bryan Roberts, director of retail research at Kantar Retail, said on Tuesday. Although Walmart’s Great Value brand is distributed in seven countries and includes products such as frozen foods, baked goods, soups and juices, most of its grocery sourcing would remain local, he said. Last year, before the R16,5bn merger between Massmart and Walmart was approved by the Competition Tribunal, Shoprite CEO Whitey Basson said Africa’s largest supermarket chain was prepared to ‘go to war’ over prices. The company said on Tuesday there were no alkaline battery manufacturers in South Africa. A pack of four locally produced AAA batteries costs about R39, and the Great Value batteries will cost R25. ‘The offer from Walmart was very compelling, especially as batteries in South Africa are priced at a premium thanks to many factors such as pilferage,’ said Ray Abraham, Massbuild private label executive. SOURCE: Adapted from Vallie, A. 2012. Walmart’s Chinese batteries signal retail price war, Business Day, 29 August, p. 1

8.5.7 Price lining When a seller establishes a series of prices for a type of merchandise, it creates a price line. Price lining is the practice of offering a product line with several items at specific price points. Jet Stores, for instance, may offer girls’ dresses at just R60, R90 and R 120, with no merchandise marked at prices between those figures. Price lining reduces confusion for both the salesperson and the consumer. The buyer may be offered a wider variety of merchandise at each established price. Price lines may also enable a seller to reach several market segments. For "****** DEMO - www.ebook-converter.com*******"

buyers, the question of price is made quite simple: all they have to do is find a suitable product at the predetermined price. Moreover, price lining is a valuable tactic for the marketing manager because the firm may be able to carry a smaller total inventory than it could without price lines. The results may include fewer mark-downs, simplified purchasing and lower inventory-carrying costs. Price lines also present drawbacks, however, especially if costs are continually rising. Sellers can offset rising costs in three ways. First, they can begin stocking lower-quality merchandise at each price point. Second, sellers can change the prices, although frequent price line changes confuse buyers. Third, sellers can accept lower profit margins and hold quality and prices constant. This third alternative has short-term benefits, but its long-term limitations may drive some sellers out of business.

8.5.8 Leader pricing Leader pricing (or loss-leader pricing) is an attempt by the marketing manager to attract customers by selling a product near or even below cost, hoping that shoppers will buy other items once they are in the shop. This type of pricing appears weekly in the newspaper advertising of supermarkets, speciality retailers, pharmacies and department stores (see the Shoprite advertisement). Leader pricing is normally used on well-known items that consumers can easily recognise as bargains at the special price. The objective is not necessarily to sell large quantities of leader items, but to try to appeal to customers who might shop elsewhere. "****** DEMO - www.ebook-converter.com*******"

8.5.9 Bait pricing In contrast to leader pricing, which is a genuine attempt to give the consumer a reduced price, bait pricing is deceptive. The purpose of bait pricing is to get the consumer into a shop through false or misleading price advertising and then uses high-pressure selling to persuade them to buy more expensive merchandise. When a potential customer goes in to see the advertised product, a salesperson says that it has just been sold or else shows the prospective buyer a piece of junk no one would buy. Then the salesperson says: ‘But I’ve got a really good deal on this fine new model.’ This is the switch that may cause a susceptible consumer to walk out with an expensive product that they did not initially want to buy.

8.5.10 Odd-even pricing Odd-even pricing (or psychological pricing) means pricing at odd-numbered prices to connote a bargain and pricing at even-numbered prices to imply quality. For years, many retailers have used this tactic to price their products in odd numbers – for example, R99,99 or R49,95 – in order to make customers feel that they are paying a lower price for the product. Some retailers favour odd-numbered prices because they believe that R999,99 sounds less imposing to customers than R1 000,00. Other retailers believe that the use of an oddnumbered price signals to consumers that the price is at the lowest level possible, thereby encouraging them to buy more units. Neither theory has ever been conclusively proved. "****** DEMO - www.ebook-converter.com*******"

Prices valid at all Shoprite stores in South Africa until Sunday 26 January 2014. Vat incl. E & OE. www.shoprite.co.za

8.5.11 Price bundling Price bundling is marketing two or more products in a single "****** DEMO - www.ebook-converter.com*******"

package for a special price. Examples include the sale of maintenance contracts with computer hardware and other office equipment, packages of stereo equipment (a CD player and speakers), packages of options on cars, weekend hotel packages that include a room and several meals and airline packages that including a rental car. South African Airways regularly offers a tariff including the airfare, two nights’ free accommodation in a hotel and special rates on car rental. Microsoft offers ‘suites’ of software that bundle together spreadsheets, word processing, graphics, e-mail, Internet access and groupware for networks of microcomputers. Price bundling can stimulate demand for the bundled items if the target market perceives the price as good value. Bundle pricing is based on the concept that consumers value the price package more than the items individually. Bundle pricing usually also provides a lower total cost to buyers and lower marketing costs to marketers. The grocery retailer Spar bundles three magazines, Country Life, Food & Home, and Garden and Home in a so-called ‘lifestyle’ pack for R56 – a saving of R34 for the buyer compared to when the three magazines are bought individually. A related price tactic is unbundling, or reducing the bundle of services that comes with the basic product. For example, instead of raising the price of hotel rooms, some hotel chains have started charging registered guests for additional services such as parking. And to help keep costs down, some department stores require customers to pay for gift-wrapping.

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8.5.12 Two-part pricing Two-part pricing means establishing two separate charges to consume a single product or service. Sports clubs and health clubs, for example, charge a membership fee and a flat fee each time a person uses certain equipment or facilities, such as playing a game of squash. In other cases they charge a base rate for a certain level of usage, such as ten games per month, and a surcharge for anything over that amount. Consumers sometimes prefer two-part pricing because they are uncertain about the number and the types of activities they may use at places like an amusement park. Also, the people who use a service most often pay a higher total price. Two-part pricing can increase a seller’s revenue by attracting consumers who would not pay a high fee even for unlimited use. For example, a health club may be able to sell only 100 memberships at R 5 000 annually, with unlimited use of facilities, for total revenue of R500 000. But perhaps it could sell 900 memberships at R2 000 with a guarantee of using the facilities ten times a month. Each time members exceed ten uses they would be required to pay a R50 fee. Membership revenue would, therefore, provide a base of R1 800 000, with some additional usage fees coming in throughout the year.

8.5.13 Product-line pricing

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Product-line pricing is setting prices for an entire line of products. A product-line is a group of products that are closely related, such as the different passenger cars marketed by Toyota (Yaris, RunX, Corolla and Avensis). Product-line pricing encompasses broader concerns than "****** DEMO - www.ebook-converter.com*******"

setting the right price on a single product. In the case of product-line pricing, the marketing manager tries to maximise profits or pursues other objectives for the entire line rather than for a single component of the line.

8.6 Relationships between products When using product-line pricing the manager must first determine the type of relationship that exists among the various products in the line: •

•

•

If items are complementary, an increase in the sale of one product causes an increase in demand for the complementary product, and vice versa. For example, the sale of tennis shirts depends on the demand for tennis shorts, making these two items complementary. Two products in a line can also be substitutes for each other. If buyers buy one item in the line, they are less likely to buy a second item in the line. For example, if someone goes to an automotive supply shop and buys paste Turtle Wax for a car, it is very unlikely that he or she will buy liquid Turtle Wax in the near future. A neutral relationship can also exist between two products. In other words, demand for one of the products is unrelated to demand for the other. For instance, SAD Foods markets both dried fruit (Safari) and Wellington’s Worcestershire sauce, but the sale of one of these products has no known impact on demand for the other.

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8.7 Pricing during difficult economic times

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Pricing is always an important aspect of marketing, but it is especially crucial in times of inflation and recession. A firm that does not adjust to economic trends may lose ground to competitors, which it may never make up again.

8.7.1 Inflation When the economy is characterised by high inflation, special pricing tactics are often necessary. These tactics can be subdivided into cost-orientated and demand-orientated tactics. Cost-orientated tactics One popular cost-orientated tactic is culling products with a low profit margin from the product line. However, this tactic may backfire for three reasons: • •

•

A high volume of sales on an item with a low profit margin may still make the entire line highly profitable Eliminating a product from a product line may reduce economies of scale, thereby lowering the margins on other items Eliminating the product may affect the price-quality image of the entire line.

Another popular cost-orientated tactic is delayed-quotation pricing, which is used for industrial installations and many accessory items. Price is not set on the product until the item is either completed or delivered. Long production lead times have forced this policy on many firms during periods of "****** DEMO - www.ebook-converter.com*******"

inflation. Builders of nuclear power plants, ships, airports, office buildings and projects such as The Lost City and the Medupi power station sometimes use delayed-quotation tactics. The final price is determined only once the project is completed. The completion of the Medupi power station will cost R105 billion – R35 billion more than originally estimated. Escalator pricing is similar to delayed-quotation pricing in that the final selling price reflects cost increases incurred between the times when an order is placed and when delivery is made. An escalator clause allows for price increases (usually across the board) based on the cost-ofliving index (the inflation rate) or some other formula. As with any price increase, management’s ability to implement such a policy is based on inelastic demand for the product. About a third of all industrial product manufacturers now use escalator clauses. Often it is used only for extremely complex products that take a long time to produce (like building a dam or a national road), or with new customers. Demand-orientated tactics Demand-orientated pricing tactics use price to reflect changing patterns of demand caused by inflation or high interest rates. Cost changes are considered, of course, but mostly in the context of how increased prices will affect demand. Price shading is the use of discounts by salespeople to increase demand for one or more products in a line. Often, shading becomes habitual and is done routinely without much forethought. Some firms have succeeded in eliminating the practice by telling their salespeople that "****** DEMO - www.ebook-converter.com*******"

there will be no deviation from book price unless authorised by management. To make the demand for products or services more inelastic and to create buyer dependency, a firm can use several tactics. These include: •

Cultivating selected demand. Marketing managers can target prosperous customers who will pay extra for superior quality, convenience or service. Woolworths, for example, emphasises quality. As a result, a luxury retailer can be more lenient with suppliers and their price increases than a discounter, such as Game or Makro. • Creating unique offerings. Marketing managers should study buyers’ needs. If the seller can design distinctive products or services uniquely fitting buyers’ activities, equipment and procedures, a mutually beneficial relationship will evolve. Buyers would incur high changeover costs in switching to another supplier. By satisfying targeted buyers in a superior way, marketing managers can enhance long-term loyalty. Many airlines try to do that by targeting business travellers with the required facilities to allow them to work while travelling. They provide facilities such as business-class lounges, private workstations and services such as fax machines, photo copiers and Internet access. • Changing the package size. Another way some firms pass on higher costs is to shrink product sizes but keep prices the same. A coffee manufacturer switching from a 250- to a 200-gram jar without changing the price would be an example. When informal traders at many of South Africa’s road intersections started selling black refuse "****** DEMO - www.ebook-converter.com*******"

•

bags, you could get 100 for R20. Then it became 80 for R20; now they are down to 20 for R20 in some places. Heightening buyer dependence. Many South African banking clients are dependent on their banks because they provide them with a range of services other than banking, such as insurance and investment advice. As a result they are less price-sensitive to competing offers than they would be if they were not so ‘locked in’.

8.7.2 Recession A recession is a period of slowing economic activity. Reduced demand for products and services, and higher rates of unemployment are common characteristics of a recession. During such times, consumers typically ‘trade down’ and buy less expensive products. Nevertheless, astute marketers can often find opportunities to exploit during recessions. A recession is an excellent time to build market share because some competitors are struggling to make ends meet. During the recession of 2009, Woolworths dropped the prices of many grocery items, organic vegetables and personal-care products, a tactic that grew its market share from 4 to 9 per cent.28 Two effective pricing tactics to hold or build market share during a recession are value pricing and bundling. Value pricing, discussed in the introduction to this chapter, stresses to customers that they are getting good value for their money. Whirlpool, for instance, advertises its microwave ovens as ‘added performance, added space and added convenience’ to support its value positioning and pricing. "****** DEMO - www.ebook-converter.com*******"

Bundling or unbundling can also stimulate demand during a recession. If features are added to a bundle, consumers may perceive the offering as having greater value. For example, suppose that a hotel in Cape Town advertises a ‘great escape’ weekend for R 5 000. The package includes two nights’ accommodation and a continental breakfast. The hotel may add a visit to a vineyard and a dinner for two to create more value for this price. Conversely, firms can unbundle offerings and lower base prices to stimulate demand. A furniture retailer, for example, may start charging separately for design consultation, delivery, credit, set-up and taking away old furniture. Recessions are also a good time for marketing managers to study the demand for individual items in a product line and the revenue they produce. Pruning unprofitable items from the product line can save resources to be better used elsewhere. The examples of Lion Lager, Smirnoff Ice, the Volkswagen Kombi and the Citi Golf have already been discussed. Specific tactics that firms use with suppliers include the following: •

Renegotiating contracts with current suppliers: Sending suppliers letters demanding price cuts and putting out for re-bidding the contracts of those that refuse to cut costs • Offering help: Dispatching teams of experts to suppliers’ plants to help reorganise and suggest other productivityboosting changes; working with suppliers to make parts simpler and cheaper to produce "****** DEMO - www.ebook-converter.com*******"

•

•

Keeping the pressure on: To make sure that improvements continue, setting annual across-theboard cost-reduction targets, often of 5 per cent or more a year Paring down suppliers: To improve economies of scale, slashing the overall number of suppliers, and boosting purchases from those that remain.

When a recession begins to bite, retailers often pressurise manufacturers to lower prices.29 When Iscor increased the price of steel by 19,7 per cent in 2003, the motor vehicle industry objected and insisted on a lower level of increase.30 Research in Motion (RIM), the firm that manufactures the Blackberry was able to squeeze its suppliers to lower its input costs during the 2009 recession. ‘Being a strong growth company in a challenging environment makes you an important customer. That was probably helping RIM to elicit better terms from the companies that made equipment for [our] Blackberry phones’, said CEO, Jim Balsillie. As a result, RIM was able to offer considerable discounts on some of its models.31 During the recession of 2008/09, food retailer Pick n Pay ‘summoned its suppliers to an urgent meeting to discuss high and rising food prices which have continued upwards despite a drop in fuel prices. In a strongly worded letter to 30 of the group’s largest suppliers, Pick n Pay’s then CEO, Nick Badminton, said ‘in many cases we are being asked by our suppliers for considerable price increases’, which he described as ‘untenable’.32 Tough tactics like these help keep many retailing firms afloat during economic downturns. "****** DEMO - www.ebook-converter.com*******"

GMSA’s ‘entries’ 14 per cent less General Motors South Africa (GMSA) has slashed the prices of its entry level range of vehicles. Some of the prices of the Chevrolet Spark Lite and Aveo have been cut by up to 14 per cent. ‘This latest realignment of prices and models in our entry level “A” and “B” segments will significantly ease access to new vehicles,’ GMSA’s sales and marketing vice-president Malcom Gauld said. ‘Ever mindful of the financial pressures exerted by current global economic conditions we have worked together with our vehicle supply partners, General Motors in Korea where the Spark Lite and Aveo are built, to take cost out of vehicles in our entry level range without compromising specification,’ Gauld said. ‘The price of the Spark Lite 1.0 LS is reduced by R12 500 to just R86 200 "****** DEMO - www.ebook-converter.com*******"

including VAT. This represents a saving of 12,7 per cent on the previous recommended retail selling price and only marginally above the price previously asked for the 0,8 litre model,’ Gauld said. ‘Importantly this is achieved without negative impact on the specification,’ he said. ‘The Aveo Hatch range is downsized from three variants to just one - the Chevrolet Aveo 1.6. The recommended retail price of this model is now R117 300 including VAT, a saving of R19 100 or 14 per cent!’ The Aveo 1.6 Hatch is now the lowest priced 1,6 litre passenger car in South Africa. ‘General Motors is conscious of the difficulty faced by first-time vehicle buyers to access affordable new vehicles, especially those from popular brands,’ Gauld said. ‘Chevrolet made its name by providing affordable, reliable and value-formoney vehicles for a large population of buyers … to meet the requirements of the family motorist and this remains true today.’ SOURCE: Cheetam, B. 2012. GMSA’s ‘entries’ 14% less, Eastern Province Herald, 12 June, p. 3

QUESTIONS 1 2

What is the purpose of GM’s pricing strategy? What are the potential pitfalls of this strategy?

KEY CONCEPTS Average total cost (ATC): total costs divided by quantity of output. Average variable cost (AVC): total variable costs divided by quantity of output. Bait pricing: a price tactic that aims to tempt consumers into a shop through false or misleading price advertising and then uses high-pressure selling to persuade them to buy more expensive merchandise. Base price: the general price level at which a firm expects to "****** DEMO - www.ebook-converter.com*******"

sell a product or service. Basing-point pricing: a price tactic that charges freight from a given (basing) point, regardless of the location (e.g. city) from which the products are shipped. Break-even analysis: a method of determining what sales volume must be reached before total revenue equals total costs. Cash discount: a price reduction offered to a consumer, an industrial user, or a marketing intermediary in return for prompt payment. Delayed-quotation pricing: a price tactic used for industrial installations and many accessory items, in which a firm price is not set until the item is either completed or delivered. Demand: the quantity of a product that will be sold in the market at various prices for a specified period. Elastic demand: a situation in which consumer demand is sensitive to changes in price. Elasticity of demand: consumers’ responsiveness or sensitivity to changes in price. Escalator pricing: a price tactic in which the final selling price reflects cost increases incurred between the times when the order is placed and when delivery is made. Fixed cost: cost that does not change as output is increased or decreased. Flexible pricing (variable pricing): a price tactic in which different customers pay different prices for essentially the same merchandise bought in equal quantities. FOB (free on board) origin pricing: a price tactic that requires the buyer to absorb the freight costs from the "****** DEMO - www.ebook-converter.com*******"

shipping point. Freight absorption pricing: a price tactic in which the seller pays all or part of the actual freight charges and does not pass them on to the buyer. Functional discount (trade discount): a discount to wholesalers and retailers for performing channel functions. Inelastic demand: a situation in which an increase or a decrease in price will not significantly affect demand for the product. Marginal cost (MC): the change in total costs associated with a one-unit change in output. Marginal revenue (MR): the extra revenue associated with selling an extra unit of output or the change in total revenue with a one-unit change in output. Market share: a firm’s product sales as a percentage of total sales for that industry. Mark-up pricing: the cost of buying the product from the producer plus an extra sum for profit and expenses not otherwise accounted for. Non-cumulative quantity discount: a deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period. Odd-even pricing (psychological pricing): a price tactic that uses odd-numbered prices to connote bargains and even-numbered prices to imply quality. Penetration pricing: a pricing policy whereby a firm charges a relatively low price for a product initially in order to reach a mass market. Predatory pricing: the practice of charging a very low price for a product with the aim of driving competitors out of "****** DEMO - www.ebook-converter.com*******"

business or out of a market. Prestige pricing: charging a high price to help promote a high-quality image. Price: that which is given up in an exchange to acquire a product or service. Price bundling: marketing two or more products in a single package for a special price. Price equilibrium: the price at which demand and supply are equal. Price fixing: an illegal agreement between two or more firms on the price they will charge for a product. Price lining: the practice of offering a product line with several items at specific price points. Price shading: the use of discounts by salespeople to increase demand for one or more products in a line. Price skimming: a pricing strategy whereby a firm charges a high introductory price, often coupled with heavy promotion. Price strategy: a basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product’s life cycle. Product line pricing: setting prices for an entire line of products. Profit: revenue minus expenses. Profit maximisation: when marginal revenue equals marginal cost. Promotional allowance (trade allowance): payment to a dealer for promoting the manufacturer’s products. Quantity discount: price reduction offered to buyers buying "****** DEMO - www.ebook-converter.com*******"

in multiple units or above a specified amount. Rebate: cash refund given for the purchase of a product during a specific period. Revenue: the price charged to customers multiplied by the number of units sold. Seasonal discount: a price reduction for buying merchandise out of season. Single-price tactic: a policy of offering all products and services at the same price. Status quo pricing: a pricing objective that maintains prices or meets the competition’s prices. Supply: the quantity of a product that will be offered to the market by a supplier at various prices for a specified period. Target return on investment (ROI): a measure of the overall effectiveness of management in generating profits with its available assets. Trade loading: the practice of temporarily lowering the price to induce wholesalers and retailers to buy more goods than can be sold in a reasonable time. Two-part pricing: a price tactic that charges two separate amounts for a single product or service. Unbundling: reducing the bundle of services that comes with the basic product. Uniform delivered pricing: a price tactic in which the seller pays the actual freight charges and bills every purchaser an identical, flat freight charge. Unitary elasticity: a situation in which total revenue remains the same when prices change. Variable costs: costs that vary with changes in the level of output. "****** DEMO - www.ebook-converter.com*******"

Zone pricing: a modification of uniform delivered pricing that divides the country (or the total market) into segments or zones and charges a flat freight rate to all customers in a given zone.

REFERENCES 1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18

Furlonger, D. 1998. Ford attempts to shrug off the ‘Tin Lizzie’ image. Financial Mail, 6 March 1998, p. 54. Retailers are giving profits away. American Demographics, June 1994, p. 14. Furlonger, D. 1998. Ford attempts to shrug off the ‘Tin Lizzie’ image. Financial Mail, 6 March 1998, p. 54. Africa barrels ahead, Financial Mail, 22 June 2012, p. 64. The persistent albatross. Financial Mail, 27 June 2008, p. 38. Pile, J. 2004. Battle of the bedpans. Financial Mail, 6 August 2004. Windsor, C. 2000. Tiger Brands: Can a tiger change its stripes? Investec Securities Research Report, C100/25, pp. 7–8. Brand, N. 2003. Sony verlaag CD-pryse tot onder R100. Die Burger, 3 November 2003, p. S11. iBurst. 1 April 2010. Insomnia rocks! iBurst launches free three-month trial. Available, http://www.iburst.co.za/default.aspx? link=new_latest_news&blogs=162 (Accessed 17 May 2010). Pincus, D. 1998. Price hikes squeeze market. Financial Mail, 6 February 1998, p. 52. Food & Beverage Reporter Online, edition 2/2/99, no. 15. Mpofu, B. 2008. Glut of bricks forces price cuts. Eastern Province Herald electronic edition, 20 November 2008. Sherry, S. 2010. Good time for tea. Financial Mail, 15 January 2010, p. 44. Mpofu, B. 2009. PPC hikes prices as energy costs bite. Business Day electronic edition, 27 January 2009. Baumann, J. 2009. Airline ticket costs are ‘unsustainable’. Business Day electronic edition, 18 March 2009. Mathe, K. 2009. Mzansi accounts fail to bring cheer as banks incur losses. Business Day, 1 April 2009, p. 4. McCleod, D. 2010. Cheaper calls at last. Financial Mail, 12 March 2010, p. 14. Dodds, W., Monroe, K. & Grewal, D. 1991. Effects of price, brand and store information on buyers’ product evaluations. Journal of Marketing Research, August 1991, pp. 307–319.

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19 20 21

22 23

24 25 26 27

28 29

30 31 32

Haw, P. Major revamp to reposition range, Business Day, 29 October 2010, p. 18; Exclusive status, Business Day, 29 October 2010, p. 18. Gilmour, C. 2005. Shoppers still shun the racks. Financial Mail, 1 April 2005, p. 43. Telkom ADSL. Available from http://www.telkom.co.za/sites/athome/productsandservices/internetandbroadban (Accessed 25 August 2014). African barrels ahead, 2012. Financial Mail, 22 June, p. 64. White, T. 2010. Accommodation overpricing is a perception rather than a reality. Cape Town Media. Available, http://www.capetown.travel/media/pressreleases/entry/accommodation_overpricing_is_a_ perception_rather_than_a_reality/ (Accessed 17 May 2010). Windsor, C. 2000. Tiger Brands: Can a tiger change its stripes? Investec Securities Research Report, C100/25, p. 8. Wilson, N. 2004. Air price-war breaks out as Kulula slashes prices. Business Day electronic edition, 26 January 2004. Pile, J. 2009. Young blood. Financial Mail, 29 May 2009, p. 82. Rose, R. 2005. Rob Rose’s Monday Comment: Phoney cinema war a boxoffice bomb. Business Day electronic edition, 22 August 2005; Derby, R. 2006. Ster-Kinekor earnings down despite bid to attract patrons. Business Day electronic edition, 28 February 2006. Shevel, A. 2009. Woolies cuts prices to attract new market. Sunday Times Business section, 8 February 2009, p. 9. Cut costs or else. Business Week, 22 March 1992, pp. 28–29; Roberts, A. 1998. Squeezing the margins till they squeak. Financial Mail, 6 November 1998, p. 18. Claasen, L. 2003. Iscor, car makers try to end steel price row. Business Day, 20 January 2003. Miller, H. 2009. RIM squeezes Blackberry suppliers on price as economy dips. Business Day electronic edition, 14 April 2009. Mawson, N. 2009. Pick n Pay reads riot act to suppliers over prices. Business Day, 26 January 2009, p. 1.

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CHAPTER

14

Putting it all together: The strategic marketing plan

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3 4 5

Understand the nature and importance of strategic planning. Explain the value of compiling a written strategic marketing plan. Formulate an appropriate business mission statement. Conduct a situation analysis using a SWOT analysis. Identify relevant marketing strategies for marketing products under different models of competition. 6 Outline four responses to external influences – in particular, opportunities – that are driven by corporate culture. 7 Describe the four different opportunity-utilisation strategies available to firms. 8 Illustrate the use of the Boston Consulting Group’s (BCG) portfolio matrix and other strategic tools for assessing marketing opportunities. 9 Describe marketing strategies for different strategic business units in the different quadrants of a BCG matrix. 10 Identify the criteria for setting good marketing objectives. 11 Discuss target market and positioning strategies as components of a strategic marketing plan. 12 Describe the elements of the marketing mix strategies as "****** DEMO - www.ebook-converter.com*******"

13 14 15 16

17

components of a strategic marketing plan. Understand why the implementation, evaluation and control of the marketing plan are important to successful marketing. Structure and compile a basic strategic marketing plan. Identify the principles of effective strategic marketing planning. Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice When the game goes wrong In his 2010 review the present chairman of Old Mutual, Patrick O’Sullivan, said the following: ‘This group has an illustrious past, which has been tarnished by some poor strategic decisions during the past 11 years,’ he says. The insurer’s past decade provides one of the best examples of the impact that poor strategic decisions may have on a business and on shareholder wealth. The costs may mount over years, often worsening as management invests more capital and time in trying to make an unwise investment work. It may take years before it becomes clear a company has embarked on an unwise strategy. Or, conditions may change, but management resists retreat. Many other local companies have made questionable and costly strategic choices in the past two decades. Nedbank, "****** DEMO - www.ebook-converter.com*******"

Sappi, Nampak, Sasol (Condea chemicals) and Anglo American (buy-backs and acquisitions) are among them. Strategic errors can occur in forms such as inappropriate market positioning or branding, but the most frequent and destructive errors tend to be linked to acquisitions or large capital investments. Companies pay too much for acquisitions, move out of their areas of competence, find they can bring little competitive advantage, or underestimate market conditions or competition. Old Mutual made most of these errors, particularly overpaying for acquisitions in its early years after listing. Since then it had spent R67,82bn in seven acquisitions and had destroyed shareholder value of about R50bn over 10 years. SOURCE: McNulty, A. 2011. When the game goes wrong. Financial Mail, 6 May, p. 58

QUESTIONS 1 2

What are the causes of poor strategic decision-making? Can proper planning avoid poor decision-making?

1. Introduction Throughout this book we have pointed out that the marketing environment is fraught with risks. Marketing decision-making therefor is by definition risky because it "****** DEMO - www.ebook-converter.com*******"

concerns the future, and the future is unknown. For a firm to survive and prosper, marketers continuously have to be on the lookout for potential opportunities and threats. Failure to do so can have serious consequences. The demise of brands such as African Bank, Nokia, 1Time airline and Blackberry are examples. Abraham Lincoln once said, ‘If I have four hours to chop down a tree, I would spend three of them sharpening my axe.’ Planning is one way in which marketers can reduce the risks associated with decision-making. In Chapter 1 it was stated that one of the objectives of this book is to equip you to become a marketing manager. One of the key responsibilities of a marketing manager is to develop and implement a strategic marketing plan. The focus of this chapter is the strategic marketing plan – a written document that acts as a guide for marketing decision-making and activities.

2. The nature of strategic planning

LO1

Strategic planning is the managerial process of creating and maintaining a fit between the firm’s objectives and resources on the one hand, and developing market opportunities on the other hand. The goal of strategic planning is long-term profitability and growth. This goal can be realised by reducing risk and enhancing the quality of managerial decision-making as a result of proper planning and the optimal allocation of the firm’s scarce resources. As Dwight Eisenhower said: ‘ … planning is indispensable’. "****** DEMO - www.ebook-converter.com*******"

A strategic error, often as a result of poor planning, can threaten a firm’s survival. Several South African firms have made some serious strategic errors in the recent past. Old Mutual chairman Patrick O’Sullivan recently said: ‘This group has an illustrious past, which has been tarnished by some poor strategic decisions during the past 11 years’. These include spending R5,40 billion on a life insurance business in the United Sates in 2001. It recently had to close the business down. African Bank ignored economic developments affecting their customer base and had to be rescued by the Reserve Bank. Before that they made an illadvised investment in furniture retailer Ellerines, which cost them dearly. Banking group Nedbank made poor investments in IT firm Dimension Data and Law firm Edward Nathan & Friedland at high prices.1 On the other hand, a good strategic plan can help protect a firm’s resources against competitive onslaughts. For instance, if the US health foundation March of Dimes had decided to focus only on fighting polio, the organisation would no longer exist. Most of us view polio as a conquered disease. March of Dimes survived by making the strategic decision to switch to fighting birth defects. Denel, the South African arms manufacturer, has realised that, with reduced military conflict in the southern African region, it cannot survive by manufacturing military hardware alone. It has subsequently investigated manufacturing products such as tractors for farming. Strategic marketing management addresses two questions: what is the firm’s main activity at a particular time? And how will it reach its goals? The following are "****** DEMO - www.ebook-converter.com*******"

examples of recent strategic decisions made by large South African firms: • • • • •

Capsule Technologies’ decision to develop a solarpowered desktop computer Coca Cola’s decision to market two new brands: Zico coconut water and Honest Tea Woolworths’ decision to buy back all its franchises Sasol’s decision to branch into gas production PC maker Lenovo’s decision to enter the tablet market.

All these decisions have affected or will affect each firm’s long-term course of action, its allocation of resources and ultimately its financial success. By contrast, an operating decision, such as marketing Koo mayonnaise in sachets, or altering the sweetness of McCain’s peas, probably won’t have a major impact on the allocation of resources or the long-term profitability of the firm. In this chapter the emphasis is on long-term strategic marketing planning rather than short-term planning. How do firms go about strategic marketing planning? How do employees know how to implement the long-term goals of the firm? The answer is with a marketing plan. WEBSITE Visit www-1.obm.com/services/ strategy for some of the most recent contemporary ideas on corporate strategy.

3. The strategic marketing plan "****** DEMO - www.ebook-converter.com*******"

Planning is the process of anticipating events and formulating strategies to realise the firm’s objectives in the future. Marketing planning involves designing activities relating to marketing objectives and the changing marketing environment. It is the basis for all marketing strategies and decisions. Issues such as product lines, distribution channels, marketing communications and pricing are all delineated in the marketing plan. As a written document, it acts as a guidebook of future marketing activities for the marketing manager. In this chapter, you will learn about the importance of writing a marketing plan and study the types of information contained in a marketing plan.

4. The value of a strategic marketing plan

LO2

By specifying objectives and defining the actions required to attain them, a marketing plan provides the basis with which actual and expected performance can be compared. Marketing can be one of the most expensive and complicated business components, but it is also one of the most important business activities. The written marketing plan provides clearly stated objectives that help employees understand and work towards common goals. Compiling a marketing plan allows the marketing manager to examine the marketing environment in conjunction with the inner workings of the firm. Synchronising the external blend of threats and "****** DEMO - www.ebook-converter.com*******"

opportunities on the one hand and the internal capabilities of the firm on the other is a daunting task. Once the marketing plan is written, it serves as a reference point for the success of future activities. The marketing plan also allows the marketing manager to enter the market with an awareness of both the possibilities and the problems that it offers.

5. The elements of a marketing plan Marketing plans must be in written format because details about tasks and activity assignments (i.e. assigning responsibility) may be lost if communicated only verbally. Regardless of the way a marketing plan is presented, there are certain elements that are common to all marketing plans. These include defining the business mission and objectives, performing a situation analysis, identifying a target market and formulating a marketing strategy (the marketing mix). Other elements that ought to be included in a strategic marketing plan are budgets, implementation timetables, required marketing research efforts and elements of advanced strategic planning. Figure 14.1 illustrates the strategic marketing planning process containing all of these elements. The whole process in essence combines every aspect of marketing as discussed in the previous 13 chapters and culminates in the strategic marketing plan. An example of a thumbnail marketing plan is contained in the sample summary marketing plan (see Table 14.1). "****** DEMO - www.ebook-converter.com*******"

Figure 14.1 The strategic marketing planning process

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5.1 Defining the business mission

LO3

The foundation of any marketing plan is first to answer the question, ‘What business are we in and where are we going?’ The answer is the firm’s mission statement. Both the firm’s mission and how it defines the market(s) it serves should guide the compilation of a marketing plan. (You may want to review the Chapter 1 discussion on the firm’s market definition – for example, the central role of a generic versus a product market orientation.) The business mission definition profoundly affects longterm resource allocation, profitability and survival. The mission statement is based on a careful analysis of benefits sought by present and potential customers and an analysis of existing and anticipated environmental conditions. The firm’s long-term vision, embodied in the mission statement, establishes boundaries for all subsequent decisions, objectives and strategies. Let’s consider the mission statement of a hypothetical hotel chain below. It illustrates how a mission statement may provide a clear direction for marketing planning: ‘Sunshine Hotels’ are in business to satisfy customer needs by operating hotels that provide: • • • •

Individuality and first-class facilities Location and convenience Guest service of an excellent standard Value for money.

The Sunshine Hotel mission statement provides direction "****** DEMO - www.ebook-converter.com*******"

for each of the four ‘P’s: product (individuality and first-class facilities); price (value for money); distribution (location and convenience) and, by implication, for marketing communication – conveying the message that you can enjoy individuality, excellent service and first-class facilities at convenient locations at a price that represents value for money if you choose a Sunshine Hotel. Another example is Coca-Cola’s mission statement:2 ‘We exist to create value for our shareowners on a long-term basis by building a business that enhances the Coca-Cola Company’s trademarks. This also is our ultimate commitment. As the world’s largest beverage company, we refresh the world. We do this by developing superior soft drinks, both carbonated and non-carbonated, and profitable non-alcoholic beverage systems that create value for our company, our bottling partners and our customers. In creating value, we succeed or fail based on our ability to perform as stewards of several key assets: •

Coca-Cola, the world’s most powerful trademark, and other highly valuable trademarks • The world’s most effective and pervasive distribution system • Satisfied customers [retailers], who make a good profit selling our products • Our people, who are ultimately responsible for building this enterprise • Our abundant resources, which must be intelligently allocated • Our strong global leadership in the beverage industry in particular and in the business world in general.’ "****** DEMO - www.ebook-converter.com*******"

Table 14.1 Sample summary marketing plan (hypothetical firm)

Business mission

Ultracel is in the business of providing mobile communication.

Marketing objective

To achieve 20 per cent market share, in rand volume, of the personal communications service (PCS) cellular telephone market by the year 2010.

Situation analysis Strengths

Well-funded firm; highly skilled workforce with low labour turnover; excellent relationships with suppliers; product differential; sustainable competitive advantage of patented colour screen.

Weaknesses

Company name not well known; small firm with no manufacturing cost advantages; no long-term contracts with intermediaries; inexperience in the cellular telephone market.

Opportunities

Explosive growth of cellular phone users; worldwide acceptance of cellular technology; newly available digital networks.

Threats

Heavy competition from Motorola, Sony and Nokia; technology is incompatible with current analogue systems; not everyone can afford the systems; potential governmental regulation.

Competitor

Highly competitive; differentiation for different segments is

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analysis

very important.

Competitive advantage

Patented colour screen.

Target market selection

Young, mobile executives in South Africa with incomes over R300 000 per year; frequent travellers; computer enthusiasts (‘techno junkies’).

Positioning

Premium product; superior quality and performance.

Marketing mix Product

PCS cellular telephone. Brand name: Ultracel-2000. Features: simultaneous voice and data communication, Internet access, operation within buildings, link-ups to data subscription and e-mail services, computer data storage, colour screen, lightweight, 48-hour battery, three-year unlimited warranty on parts and labour, 24-hour technical support, leather or titanium carrying case.

Place

Available through cellular telephone retailers, upmarket computer retailers, or via mail-order firm direct. Products transported via aeroplane and temperature-controlled motor carrier.

Promotion

Sales force of fifty manufacturer’s representatives, with 25 per cent commissions. Advertising in print media, television and outdoor billboards. Sales promotion in the form of introductory product rebates, technology trade shows. Public relations efforts to news media and sponsorship of major sporting events.

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Price

Retail price of R1 250 (compared with Nokia at R1 000, Motorola at R900 and Sony at R500). Assuming mild price sensitivity and future price wars.

Implementation First quarter

Complete marketing research on price; design promotional campaign; sign contracts with manufacturers’ representatives.

Second quarter

Public relations campaign; product introduction at trade shows; roll-out of advertising.

Third quarter

Test international markets (Botswana, Kenya and Egypt).

Business definitions and the resultant mission statements that are stated too narrowly suffer from marketing myopia (see Chapter 1). Marketing myopia means that the business is defined in terms of products and services rather than in terms of the benefits that customers want. In this context, myopia means narrow, short-term thinking.3 There are many other examples of broad business definitions. Simba or Willards may, for instance, define their mission as being in the snack-food business rather than in the chips business. The mission of sports teams is not just to play games, but to serve the interests of their supporters by entertaining them. Telkom may say that it does not sell telephones or longdistance services – it markets communications technology to allow consumers to communicate effectively. Business missions should not be stated too broadly. ‘To be a leading consumer-goods manufacturer and marketer’ "****** DEMO - www.ebook-converter.com*******"

is probably too broad a mission statement for any firm. Care must be taken when stating what business a firm is in. The mass grocer Pick n Pay bought a stake in newsagent PNA and in 7-Eleven convenience stores. They have subsequently divested from both ventures, and changed their focus to converting Score shops into Pick n Pay family outlets. If Pick n Pay had had a sound idea in which business it was in, it probably would not have burnt its fingers as it did. The process of converting Score outlets to Pick n Paybranded outlets began in 2008. Thanks to extensive research conducted within the LSM 4–7 target markets (see Chapter 2), Pick n Pay discovered that customers really wanted the Pick n Pay experience and not the Score brand, which it saw as a ‘second-rate’ offering. Add to this the fact that Score shops were underperforming, and the obvious solution was to convert the most suitable Score shops into Pick n Pay franchises. By the middle of 2010, 52 shops had been converted into Pick n Pay franchises, leading to the termination of the Score brand. All in all, a lot of money was wasted due to the absence of a clear mission statement in the first place. By correctly stating the business mission in terms of the benefits that customers want the foundation for the marketing plan is set.

5.2 Strategic marketing objectives The marketer should formulate the firm’s strategic marketing objectives based on the business mission. These objectives are typically very broadly phrased and no "****** DEMO - www.ebook-converter.com*******"

reference is made to specifics. They refer to the firm as a whole rather than to any specific brands or markets.

5.3 Identifying opportunities to utilise Once the firm has decided what business it is in, it will be in a position to consider whether the opportunities and trends identified during the environmental-scanning process (see Chapter 2) can be utilised by considering whether they fall within the firm’s ambit of business. For instance, German Engineering firm Bosch is active in automotive technology, industrial technology, power tools, security systems and solar energy. It now wants to get involved in packaging.4 Does packaging fall inside Bosch’s definition of what business it is in? If the answer is yes, then a situation analysis needs to be conducted.

5.4 Conducting a situation analysis

LO4

Before specific marketing objectives can be defined or marketing activities decided upon, marketers must understand the current and potential environment that the product will be marketed in. A situation analysis is sometimes referred to as a SWOT analysis; that is, the firm should identify its internal strengths (S) and weaknesses (W), and examine external opportunities (O) and threats (T). When examining internal strengths and weaknesses, the marketing manager should focus on the firm’s resources – such as production costs, marketing skills, financial resources, the firm’s or brand’s image, employee "****** DEMO - www.ebook-converter.com*******"

capabilities and available technology. Another issue to consider in this section of the marketing plan is the historical background of the firm, such as its sales and profit history.

EXAMPLE >> When the management of the publishing and printing firm Avusa, conducted a situation analysis recently, it identified threats ranging from piracy, to loss of advertising revenue, to ageing printing presses. Avusa owns the Sunday Times, 50 per cent of BDFM (publisher of Business Day and the Financial Mail), several magazines, Nu-Metro Theatres, Gallo Music Group and Exclusive Books. The first threat the firm identified was the potential loss of licences, such as music labels and magazines titles. Another threat was the loss of key staff, particularly people with experience and knowledge, as was the loss of advertising revenue for various publications. Ageing printing presses, onerous leases at various film theatres, the high levels of theft of cash at retail outlets and currency risk (i.e. changes in the value of the rand) were also identified as threats to Avusa’s marketing plans. South African Breweries (SAB) has pursued a number of opportunities in African countries, such as Zambia Kenya and Nigeria over the last few years. SAB probably considered its years of beer brewing in developing countries as a strength, together with its experience in efficient distribution, all-round marketing skills and financial resources. Potential weaknesses may be a lack of knowledge of local consumer needs and preferences in these foreign markets. When examining external opportunities and threats, marketing managers must analyse aspects of the marketing environment. This process is called environmental scanning (see Chapter 2). Environmental scanning is the collection and interpretation of information "****** DEMO - www.ebook-converter.com*******"

about trends, forces, events and relationships in the external environment that may affect the future of the firm or the implementation of the marketing plan. Environmental scanning helps identify market opportunities and threats, and provides guidelines for the design of a marketing strategy. The six most often studied macro-environmental forces are social, demographic, economic, technological, political and legal, and competitive forces. These forces were examined in detail in Chapter 2. Of these, the competitive environment (Chapter 4) is probably the most important.

5.5 Assessing the competitive environment

LO5

The competitive environment encompasses the number of competitors a firm must face, the relative size and market power of the competitors and the degree of interdependence within the industry. Management has little control over the competitive environment confronting a firm, and yet the marketing mix – particularly pricing – depends on the type and level of competition prevailing in a market (see Chapter 4). Economists recognise four basic models of competition, based mainly on the number of competitors and the nature of the products produced. Table 4.1 in Chapter 4 summarises the characteristics of the four basic models of competition and the key tasks of the marketing manager within each competitive situation. The type of competition prevailing in a market has a considerable impact on pricing strategies and the ability of a firm to set a target price (see "****** DEMO - www.ebook-converter.com*******"

Chapter 13). At one extreme of economic competition is a monopoly, in which one firm controls the output and price of a product for which there are no close substitutes. In other words, the firm is the industry and there are no direct competitors. Parastatals, such as Eskom and the Post Office, are the most common form of monopoly in South Africa. In addition, a patent can give a firm monopoly power for a time. Xerox, for example, held the patent on the dry-paper copying process for many years. Only when the patent expired could competitors enter the market to compete with Xerox and force the prices of photocopiers down. At the other extreme of the competitive spectrum is what is termed pure competition. A purely competitive market is characterised by a large number of sellers marketing moreor-less standardised products to a group of buyers who are well informed about the market. New competitors can easily enter the market and sell their entire output at the prevailing market price. In a purely competitive market there is no competitive advantage for any one firm, and it would therefore not make sense for any firm to increase the price of its product as a potential buyer would simply go elsewhere and purchase the same product at the prevailing (lower) market price. When a relatively small number of firms dominate the market for a particular product or service, the industry is referred to as an oligopoly. In South Africa, cellphone service providers (MTN, Vodacom and Cell C) and airlines compete in oligopolistic markets. Oligopolies also exist at a lower competitive level. If a small town has only three or four "****** DEMO - www.ebook-converter.com*******"

petrol stations, for example, they are competing in an oligopoly. Because they have few competitors, the actions of one firm have a direct impact on the others. This interdependence characterises an oligopoly. The close relationship among firms in an oligopoly makes firms in these types of markets susceptible to collusion and price fixing, which are illegal in South Africa. Instead of fixing prices, some industries simply follow a price leader. The leader is normally the dominant firm in terms of assets, market share or geographic coverage. Marketing managers do not have a lot of pricing flexibility in an oligopoly. They must be alert to price changes and quickly match price decreases or lose a significant amount of market share. To secure a firmer position in an oligopolistic market, marketing managers should stress the firm’s competitive advantage(s), such as good service, exceptional product quality, better distribution or any other form of non-price competition. Monopolistic competition refers to a situation in which a relatively large number of suppliers offer similar, but not identical, products. Examples include laundries, hair stylists, aspirin producers, lawyers and banks. Each firm has a comparatively small percentage of the total market, so each has limited control over the prevailing market price. Competing firms attempt to differentiate their offerings by means of brand names, trademarks, packaging, advertisements and services. With monopolistic competition, consumers tend to prefer the products/services of specific firms and, within limits, will pay a higher price for them. In other words, they tend to "****** DEMO - www.ebook-converter.com*******"

think, ‘I like Magnum ice cream because it’s a little different. But if the price goes up too much, I know Encore is just as nice, so I’ll switch.’ The seller, therefore, has some control over price, but only within a limited range. If the marketing manager raises prices too high, the firm could lose its entire market. Therefore, firms must incorporate information about their competitive environment into the strategic marketing plan. Failure to do so could be disastrous. The Danish toy maker Lego recently reported its first-ever loss as a result of ‘… falling sales and the slow reaction to the computer onslaught’.5 Lego’s experience also suggests that strategic marketing has a timing dimension.

5.6 Strategic windows A technique for timing the utilisation of opportunities is to identify so-called strategic windows. A strategic window is the limited period during which the ‘fit’ between the key requirements of a market and the particular competencies of a firm are at an optimum. For example, the terrorist attacks on New York and Washington in September 2001 opened a window of opportunity for South African tourism. All of a sudden, many international tourists thought that South Africa was a relatively safe place to travel to. The drop in international tourism after September 2001 also resulted in an underutilisation of international carriers’ aircraft, which, in turn, meant that some South African airlines were able to lease aircrafts at a relatively inexpensive rate compared with competitors that had leased aircrafts earlier "****** DEMO - www.ebook-converter.com*******"

in the year. Similarly, the success of the Sharks rugby team provided the Sharks Rugby Union with a window of opportunity to market successfully and profitably a whole range of Sharks merchandise. And when the Bulls, Super 14 leaders and defending champions in 2010, were not able to use their Loftus Versfeld home stadium for the semis or final of the Super 14 series, as it was designated a ‘clean stadium’ for the football World Cup, the Bulls decided to play their last two matches at the Orlando Stadium in Soweto, which not only provided the businesses in Soweto with a tremendous window of opportunity, but also allowed spectators to experience township life.

5.7 Assessing the corporate culture

LO6

Whether a firm seizes the opportunities when the strategic window is open is often determined by its corporate culture. Corporate culture is the term given to a pattern of basic assumptions a firm has adopted to cope with its internal environment and the changing external environment. Internally, corporate culture is concerned with such issues as worker loyalty, the centralisation or decentralisation of decision-making, teamwork, initiative and problem-solving techniques. In terms of the external environment, corporate culture is manifested in the way in which the firm reacts to threats and opportunities. A firm’s response to the external environment is influenced by its corporate culture and can be categorised into four types of responses, as follows: •

Prospector: This type of firm focuses on identifying and

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capitalising on emerging market opportunities, emphasising this through research and communication with the market. Because of its strong external orientation, the prospector tends to build and maintain an excellent information system and new product development programme. A prospector prefers strategic alternatives that tap into new markets or develop new products and services. South African Breweries is a good example of a prospector. Despite dominating the South African beer market, South African Breweries never rests on its laurels and is continuously looking for new opportunities in South Africa, in the rest of Africa and overseas. It was the first brewer to experiment with an ice beer (Dakota); it added Miller’s Genuine Draft, Pilsner Urquell, flavoured beer (Fying Fish) and alternative beverages, such as Brutal Fruit to its product range; it successfully repositioned Hansa Pilsener and Castle Lite; launched a cassava-based beer in Mozambique and it is exploring new ways of increasing beer consumption among women. SAB has also opened breweries and entered into strategic alliances in a host of African countries, including Zambia, Kenya and Nigeria as well as in the United States, China, Russia and Colombia. • Reactor: The opposite of the prospector. Instead of looking for opportunities, the reactor responds to environmental pressures when forced to do so. The reactor is a follower, not a leader, and lacks a strategic focus. The emphasis is on maintaining the status quo despite environmental change. A reactor will avoid any strategic alternative that takes it out of its niche or that calls for bold, risk-taking action. The publisher Caxton "****** DEMO - www.ebook-converter.com*******"

(owner of magazine titles such as Living & Loving) is a reactor. In reference to the Internet as a publishing medium, Caxton says: ‘No publisher can be so bold as to say we are not interested in the Internet. But it’s early days. We’d like someone else to do the breaking in.’6 • Defender: Has a specific market domain and does not search outside that domain for new opportunities. Instead, the defender tries to ‘defend its turf’. A defender looks favourably, however, on any strategic alternative that helps reduce operating costs. The risk, however, is that market changes might go unnoticed. Even if the defender detects such changes, it is usually unable to adjust its business practices quickly in response. The South African Post Office is an example. The advent of fax machines in the 1980s was already a threat to its postal business. Today electronic mail, online banking and payments (instead of mailing cheques) and online marketing (instead of the mailing of marketing material such as sales catalogues) have accelerated the declining demand for the Post Office’s traditional services. This decline has eroded its income and as a result the organisation is not profitable at all. However, despite the danger signs the Post Office has been unable to adapt to the changing circumstances. • Analyser: Tends to be both conservative and aggressive. It usually does business in at least one stable market and tries to defend its position in that market. An analyser also tries to identify emerging opportunities in other markets. Unlike the prospector, the analyser is not an aggressive risk-taker. Usually ‘second in’ to new-product markets, the analyser does have the advantage of "****** DEMO - www.ebook-converter.com*******"

observing and learning from other firms’ new-product problems. General Motors in South Africa may be described as an analyser. It has a dominant position in the bakkie market, which it jealously defends, but it generally does not enter risky market segments.

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Nando’s describes its corporate culture in the following terms: integrity; achievement-driven; autonomy; freedom to operate; environment of openness and challenge; courage to find brave and innovative solutions; we give each other support, laughter and fun; passion for what we do; and pride in our brand and people. What it does not want to be, explains Nando’s, is cookie-cutter, soulless, utilitarian and unemotional. There can be no question that their culture has contributed to its success. Imperial Holding described it culture as ‘entrepreneurial, diversified, decentralized management structure, which empowers exceptional people to develop their business’.7

5.8 Opportunity-utilisation strategies

LO7

To discover a marketing opportunity, marketing management must know how to identify alternatives. One method for developing alternatives is the strategicopportunity matrix, which matches products with markets (see Table 14.2, which provides hypothetical examples). Firms can explore the following four opportunity-utilisation strategies: •

Market penetration. A firm using the market penetration alternative wants to increase its market share among existing customers with its existing range of products, or slight modifications of them. For example, Ina Paarman recently added vegetable stock and steak sauces to its existing range of spices and Nestlé now has

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•

•

•

introduced its own-branded coffee machines in coffee shops. In essence, market penetration means improved marketing to existing target markets. Market development means attracting new customers to existing products. Ideally, new uses for old products stimulate additional sales among existing customers while also bringing in new buyers. The Zimbabwean firm Tulimara, marketing indigenous African foodstuffs, such as marula jelly, in Australia, is an example of market development. Another example is Energade, marketed to segments other than sportspeople. Product development. A product-development strategy entails the creation of new products for present markets. Woolworths, for example, is getting involved in the marketing of furniture. Parmalat has entered the iced-tea market with three flavours: peach, lemon and mixed berry. Diversification is a strategy of increasing sales by introducing new products into new markets. A diversification strategy can be quite risky when a firm is entering unfamiliar markets. On the other hand, it can be very profitable when a firm is entering markets with little or no competition. Cadac used to market gas bottles and gas braais. It now also markets sleeping bags and tents.

When embarking on a new venture selecting which utilisation strategy to utilise depends on the firm’s corporate philosophy and culture. The choice also depends on the tools used to make the decision. Generally, firms adopt one of two different approaches to profits: they either pursue "****** DEMO - www.ebook-converter.com*******"

profits right away or first attempt to increase market share and then pursue profits. In the long run, however, market share and profitability are perfectly compatible goals. Many firms have long followed the credo ‘build market share, and profits will surely follow’. Michelin, the tyre producer, consistently sacrifices shortterm profits in order to grow its market share. Others disagree with this approach. When he took over as CEO of IBM, Lou Gerstner stressed profitability over market share, quality and customer service. One strategic alternative may be viewed entirely differently by firms that have different corporate cultures. A highly desirable alternative for one firm may be completely unattractive to another. Table 14.2 A strategic-opportunity matrix (hypothetical)



Present products

New products

Present market

Bokomo Foods increases the advertising budget of Weet-Bix by 50 per cent

Peck’s adds chicken liver and beef/biltong to its savouryspread product range

New market

South African Breweries opens a brewery in India

Pick n Pay offers financial services in Egypt

5.9 Strategic management tools There are a number of tools that can help managers select a strategic alternative. The most common of these tools are in matrix form. One of these matrix tools, the Boston "****** DEMO - www.ebook-converter.com*******"

Consulting Group (BCG) portfolio matrix, is described in more detail below. A second, which is very similar – the General Electric market attractiveness/company strength matrix – is also briefly mentioned.

5.9.1 The Boston Consulting Group portfolio matrix

LO8

Large diversified firms engaged in strategic planning often create strategic business units (SBUs). For example, the City Lodge Group may regard all its City Lodges, Road Lodges, Town Lodges and Courtyard Suite Hotels as separate SBUs. Likewise, Steers Holdings, the firm that owns brands such as Steers, Debonairs, Wimpy, Juicy Lucy, Whistle Stop, Milky Lane and La Cucina, may regard each brand as a separate SBU. Typically each SBU has its own management team, marketing objectives, competitors, rate of return on investment, growth potential and associated risk – almost like a little business on its own. Corporate management in control of the SBUs must maintain a balance between overall desired growth and profits for the corporation/group and an acceptable level of risk. Some SBUs generate large amounts of cash over and above what is required for operating expenses. Other SBUs need cash to foster growth. The challenge is to balance the firm, corporation or group’s ‘portfolio’ of SBUs to realise the best long-term performance. It must be pointed out, however, that SBUs need not necessarily be large divisions: individual products or brands may also be treated as SBUs. To determine the future cash contributions and cash requirements that can be expected for each SBU, managers can use the BCG portfolio matrix as a planning aid or tool. A "****** DEMO - www.ebook-converter.com*******"

matrix is a self-contained framework within which something originates and develops. The portfolio matrix classifies each SBU by its present or forecasted growth of the market (the X-axis) and market share (the Y-axis). The underlying assumption is that market share and profitability are strongly linked. The measure of market share used in the portfolio approach is relative market share, namely the ratio between the firm’s share and the share of the largest competitor. For example, if firm A has a 50 per cent share and the competitor has 5 per cent, the ratio is 10 : 1. If firm A has a 10 per cent market share and the largest competitor has 20 per cent, the ratio is 0.5 : 1. Figure 14.2 is a hypothetical portfolio matrix for a large computer manufacturer. The size of the circle in each cell of the matrix represents the sales of the SBU relative to the sales of the firm’s other SBUs. The following are the categories used in the matrix: •

Star. A ‘star’ is a market leader that is growing fast in a fast-growing market. For example, computer manufacturers have identified the tablet as a star. Star SBUs usually generate high levels of income, but only moderate profits because they need a lot of cash to finance rapid growth and development. The best marketing tactic for a star is to protect its existing market share by reinvesting earnings in product improvement, better distribution, improved marketing communication and production efficiency. Marketing efforts are focused on capturing most of the new users as they enter the market.

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Figure 14.2 Portfolio matrix for a large computer manufacturer (hypothetical)

•

Cash cow. A ‘cash cow’ is an SBU that usually generates more cash than it needs to maintain its market share. It is in a low-growth market, but the product or brand has a dominant market share and only limited investment is required to maintain the dominance. Laptop computers are categorised as cash cows in Figure 14.2. The basic strategy for a cash cow is to maintain market dominance by being the price leader and making product or technological improvements to ward off potential new competitors. Managers should resist pressure to extend the basic product line unless they can dramatically

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•

•

increase demand. Instead, they should allocate excess cash to the product categories for which growth prospects are the greatest. Question mark. A ‘question mark’ shows rapid growth in a rapidly growing market, but requires a great deal of cash investment to stay competitive. Without cash support, it eventually becomes a ‘dog’. The strategy options are to invest heavily to gain better market share, acquire competitors (takeovers) to ensure the desired market share, or drop the SBU. For the hypothetical computer firm depicted in Figure 14.2, the supercomputer is a question mark. Sometimes a firm can reposition the products of a question mark SBU to move it into the star category. Dog. A ‘dog’ has low growth potential and a small market share. Most dogs eventually leave the market. In the computer manufacturer example, the desktop computer has become a dog. The strategy options for dogs are to harvest or divest.

LO9 Strategies for allocating resources to SBUs After classifying the firm’s SBUs (which may also be products or brands) in the matrix, the next step is to allocate future resources to each. The four basic strategies are as follows:

•

Build. If a firm has an SBU that it believes has the potential to be a star or a cash cow (probably a question mark at present), building would be an appropriate strategy. General Motors (GM) has identified its Isuzu bakkie as a Question mark that it wants to turn into a Star

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by challenging Toyota’s Hilux 1-ton bakkie for market dominance. To do that, GM will invest R500 million in ‘tooling up’ the Isuzu factory in Port Elizabeth. The firm may decide to give up short-term profits and use its financial resources to realise this goal. Procter & Gamble built up Pringles chips from a money-loser to a record profit-maker in the mid-1990s by investing cash in its marketing and turning it into a star. Worldwide, CocaCola has 51 per cent of the carbonated soft drinks market with the Coke brand (a cash cow), whereas it has only 10 per cent of the juice beverage market. Coca-Cola could, therefore, regard its Minute Maid brand as a question mark that could become a star or a cash cow by investing some of the surplus cash generated by the Coke brand in the marketing of Minute Maid. Unilever spent almost R12 million to try to turn its Organics shampoo into a star in the South African shampoo market. Its direct competitor, Procter & Gamble, did the same. It spent millions on advertising alone to try to obtain market dominance for its Pantene brand. • Hold. If an SBU is a very successful cash cow, a key objective would be to hold or preserve market share so that the firm can take advantage of the strong, positive cash flow. For Toyota, the Corolla was a cash cow for many years. For SAB, it is Castle Lager. For Coca-Cola, the Coke brand is its cash cow. The money that cash cows generate is used to support the question marks (such as Powerade in the case of Coke, and Flying Fish in the case of SAB, the Lexus in the case of Toyota), with the intention of growing the market share of the question marks and turning them into cash cows. "****** DEMO - www.ebook-converter.com*******"

•

•

Harvest. This strategy is appropriate for all SBUs except those classified as stars. The basic goal is to increase the short-term cash return without too much concern for the long-term impact. Harvesting is especially worthwhile when more cash is needed from a cash cow with longterm prospects that are unfavourable because of a low market growth rate. For instance, Lever Brothers has been harvesting Lifebuoy soap for a number of years with little promotional support or product development. Independent Newspapers, publisher of the Cape Times, the Star and the Sunday Tribune among others, has not invested in any new printing presses lately and spends nothing on staff training – a classic harvesting strategy. Pick n Pay stopped refurbishing its Score supermarkets while contemplating the chain’s future as part of the group. Subsequently, Pick n Pay decided to terminate the Score brand, that is to divest it. Divest. Getting rid of SBUs with low shares of lowgrowth markets is often appropriate. Question marks and dogs are most suitable for this strategy. Unilever, for instance, dropped its Toppers brand (meat-flavoured soya beans) because of its low growth potential. Times Media used this strategy when it closed the newspaper Sportsday owing to its ‘lower than expected performance’.8 Media 24 also terminated its Nova newspaper as a result of ‘flat sales’.

5.9.2 The General Electric market attractiveness/company strength matrix A second model for selecting strategic alternatives, originally "****** DEMO - www.ebook-converter.com*******"

developed by General Electric, is known as the market attractiveness/company strength matrix. The dimensions used in this matrix – market attractiveness and company strength – are richer and more complete than those used in the BCG portfolio matrix, but are not very different from the BCG approach and will, therefore, not be discussed in detail here. The horizontal axis of a market attractiveness/company strength matrix – the business position – refers to how well positioned the firm is to take advantage of market opportunities: • • • •

Does the firm have the technology it needs to penetrate the market effectively? Are its financial resources adequate? Can manufacturing costs be held below those of the competition? Will the firm have bargaining power over suppliers? Can the firm cope with change?

The vertical axis measures the attractiveness of a market, which is expressed both quantitatively and qualitatively. Some attributes of an attractive market are high profitability, rapid growth, lack of governmental regulation, consumer insensitivity to a price increase, lack of competition and availability of technology. The grid is divided into three overall attractiveness zones for each dimension: high, medium and low. Those SBUs (or markets) that have low overall attractiveness should be avoided if the firm is not already serving them. If the firm is in these markets, it should either harvest or divest the SBUs. The firm should selectively "****** DEMO - www.ebook-converter.com*******"

compete in markets with medium attractiveness. If attractiveness begins to slip, then the firm should consider withdrawing from the market. Regardless of whether the firm uses the Boston Consulting Group or the General Electric matrix to assess its product or brand portfolio, the purpose is to have a wellbalanced portfolio. Kodak, for decades the dominant force in photographic film, discovered that its market had virtually disappeared in front of its eyes as consumers switched to digital photography (it became a ‘dog’ in Kodak’s portfolio). As a result, Kodak has begun harvesting what it can from the photographic film market while investing millions in digital photography (a potential star). At the same time, Kodak’s commercial printing is a cash cow, generating cash to invest in its efforts to dominate the digital printing market. Eventually Kodak did divest from the photographic market.

5.10 Competitive advantage To have a successful marketing plan, one must pursue a competitive or differential advantage over the competition when examining internal strengths and external market opportunities. A competitive advantage is one or more unique aspects of a firm or its products that differentiate it from competitors and that cause target market consumers to buy from the firm rather than from its competitors (see Chapter 1). A competitive advantage may be based on a variety of considerations that are important to consumers, such as a favourable image (Woolworths), unique product "****** DEMO - www.ebook-converter.com*******"

features/characteristics (Apple), a price advantage (Mr Price) or a strong brand (Volkswagen), to name but a few. IBM’s competitive advantage, for example, is its reputation and ability to provide entire business systems solutions. Competitive advantages may also occur in any element of the marketing mix. Superior product quality, for instance, gives a firm such as Hewlett-Packard a competitive advantage over other laser-printer makers by offering customer value. Intel has produced superior advertisements that have made the Intel Pentium computer chip a household name. Formula 1 hotels offer the lowest-priced hotel accommodation in the market. Vodacom and Nando’s have humorous, eye-catching advertising, which has increased their brand awareness. These are all examples of competitive advantage. The two basic sources of competitive advantage are superior skills and superior resources. Superior skills are the managers’ and employees’ special capabilities, which distinguish them from competing firms. For example, Checkers, a once-floundering retail giant, has benefited greatly from the vision and retail expertise of its managing director and chief executive, Whitey Basson. Pep Stores’ superior knowledge of the bottom end of the clothing market has set it apart from all other competitors. Superior resources are a more tangible form of competitive advantage. For example, popular brand names, such as Coke, Nike and Panasonic, have immeasurable value. Sony has large, high-tech manufacturing facilities that cannot easily be matched. The key to having a competitive advantage is the ability to sustain that advantage. A "****** DEMO - www.ebook-converter.com*******"

sustainable competitive advantage is a competitive advantage that cannot be copied by the competition. TopFlite recently introduced the new Strata golf ball. These balls are three times more expensive than normal golf balls, but they are flying off the shelves. Why? The Strata has a patented, three-layer construction that improves handling and increases the distance the ball can travel. The patent offers a sustainable competitive advantage over Titleist, the number-one competitor.9

5.11 Setting marketing-strategy objectives

LO10

Before the details of a marketing strategy can be developed, objectives for the marketing strategy must be stated. Without objectives, there is no basis for measuring the success of marketing-plan activities. For example, in 1996, Microsoft had about a 10 per cent market share in the webbrowser software business. Is this good or bad? Without previously stated objectives, there is no way of knowing. Actually, Microsoft’s objective was to have a 30 per cent market share, so its objective was not met.10 Today it dominates the market and we can conclude that they were very successful. In South Africa, Amalgamated Beverages, the bottlers of Coca-Cola, states its objectives clearly in its annual report. Its objective for return on equity is to ‘ensure the average annual rate of return on equity, over time, exceeds 20 per cent’.11 The marketing-strategy objectives must be distinguished from the marketing-plan objectives. The marketing-strategy "****** DEMO - www.ebook-converter.com*******"

objectives are of a shorter-term nature, are more specific and, unlike the marketing-plan objectives, are not really of a strategic nature. A marketing objective is a statement of what is to be accomplished through marketing activities. To be useful, stated objectives should meet several criteria: •

•

Objectives should be realistic, measurable and timespecific. It is tempting to state the objective in terms of being ‘the best this or that’ or ‘maximising sales’. However, what is ‘best’ for one firm may be sales of R10 million per year, whereas to another firm, ‘best’ may mean a dominant market share. It may also be unrealistic for start-up firms or new products to command a dominant market share, given other competitors in the market. Finally, by what time should the objective be met? A more realistic objective would be to achieve, for example, 10 per cent share in the market within 12 months of product introduction. Objectives must be consistent and indicate the priorities of the firm. Specifically, objectives should flow from the business mission statement to the rest of the marketing plan.

Table 14.3 shows some well-stated and poorly stated objectives. Note how well they meet or fail to meet the preceding criteria. Carefully specified objectives serve several functions. First, they communicate marketing-management philosophies and provide direction for lower-level marketing managers so that marketing efforts are integrated and follow a consistent direction. Next, objectives also serve "****** DEMO - www.ebook-converter.com*******"

as motivators by creating something for employees to strive for. When objectives are attainable and challenging, they motivate those charged with achieving them. Additionally, the process of writing specific objectives forces executives to clarify their thinking. Finally, objectives form a basis for control: the effectiveness of a plan can be gauged in the light of the stated objectives. Table 14.3 Examples of marketing objectives

Poorly stated objectives

Well-stated objectives

Our objective is to be a leader in the industry in terms of new product development.

Our objective is to spend 12 per cent of sales revenue between 2015 and 2016 on research and development in an effort to introduce at least five new products in the year 2017.

Our objective is to maximise profits.

Our objective is to achieve a 10 per cent return on investment in 2016, with a payback on new investments of no longer than four years.

Our objective is to serve customers better.

Our objective is to obtain customer-satisfaction ratings of at least 90 per cent in the 2015 annual customer satisfaction survey and to retain at least 85 per cent of our 2015 customers as repeat purchasers in 2016.

Our objective is to be the best that we can be.

Our objective is to increase market share from 30 per cent to 40 per cent in 2016 by increasing advertising expenditure by 13 per cent.

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5.12 Formulating the marketing strategy Marketing strategy refers to the activities of selecting and describing one or more target markets and developing and maintaining a marketing mix that will produce mutually satisfying exchanges with target markets based on the firm’s competitive advantage and proposed positioning.

5.12.1 The target market strategy

LO11

A market segment is a group of individuals or firms that share one or more common characteristics. Therefore, they have relatively similar product needs. For example, parents of new-born babies need products such as milk formula, nappies and special foods. The target market strategy identifies which market segment or segments to focus on. This process begins with a market opportunity analysis, or MOA. An MOA is the description and estimation of the size and sales potential of market segments that are of interest to the firm, and the assessment of key competitors in these market segments. After the market segments have been described, one or more may be targeted by the firm. There are three general strategies for selecting target markets: appealing to the entire market with one marketing mix, concentrating on one segment and appealing to multiple market segments using multiple marketing mixes. The characteristics, advantages and disadvantages of each strategic option have been examined in Chapter 6. Any market segment that is targeted must be fully described. Demographics, psycho-graphics and buyer behaviour should be assessed. Buyer behaviour was covered "****** DEMO - www.ebook-converter.com*******"

in Chapter 3 and ought to be evaluated against the background of solid market research (see Chapter 5).

5.12.2 The positioning strategy

LO11

Once the firm has identified its target market, it must decide how it will be positioned (see Chapter 7). The firm’s competitive advantage will largely determine the position it wishes to occupy in relation to those of competing products and brands (see Chapter 4).

5.12.3 The marketing mix

LO12

The term ‘marketing mix’ refers to a unique blend of product, distribution, marketing communication (promotion) and pricing strategies designed to produce mutually satisfying exchanges with a target market. Distribution is sometimes referred to as place, and makes up one of the four ‘P’s of the marketing mix: product, place, promotion (marketing communication) and price. The marketing manager can control each component of the marketing mix, but the strategies for all four components must be blended into an integrated whole to ensure optimal results. A marketing mix is only as good as its weakest component. For example, in the United States, the first pump toothpastes were sold on cosmetic counters and failed. Not until pump toothpastes were distributed in the same way as tube toothpastes did they succeed. The best advertising and lowest price cannot save a poor product. Similarly, an excellent product with poor distribution, pricing or advertising will in all probability fail. Variations in marketing mixes seldom occur by chance. "****** DEMO - www.ebook-converter.com*******"

Astute marketing managers devise marketing strategies to gain a competitive advantage over competitors to best serve the needs and wants of a particular target-market segment. By manipulating elements of the marketing mix, marketing managers can fine-tune the customer offering and ensure competitive success. Product strategies Usually the marketing mix starts with the product ‘P’ (see Chapters 8 and 9). The heart of the marketing mix, the starting point, is the product offering and product strategy. It is hard to design a distribution strategy, decide on an advertising campaign or set a price without knowing the product to be marketed. The product includes not only the physical unit, but also its package, warranty, after-sale service, brand name, brand image, value and many other factors. A Godiva chocolate has many product elements: the chocolate itself, a trademark gold gift box, a customersatisfaction guarantee and the prestige of the Godiva brand name. We buy things not only for what they do (benefits), but also for what they mean to us (e.g. status, quality or reputation). Distribution (place) strategies Distribution strategies are concerned with making products available when and where customers want them. Wouldn’t you rather buy a kiwi fruit at the shop within walking distance than have to fly to New Zealand to pick your own? A part of the place ‘P’ is physical distribution, which involves all the business activities concerned with storing and transporting raw materials or finished products. The "****** DEMO - www.ebook-converter.com*******"

purpose of distribution is to make sure products arrive in usable condition at designated places when needed. Distribution strategies are covered in Chapter 10. Marketing communication (promotion) strategies Marketing communication includes advertising, personal selling, sales promotion and public relations. The role of marketing communication in the marketing mix is to bring about mutually satisfying exchanges with target markets by informing, educating, persuading and reminding the target markets about the benefits of a firm or a product. A good communication strategy – like those used by Klipdrift with its ‘Eish’ campaign and First National Banks’s Steve/Beep Bank campaign – can dramatically increase sales. Each element of the marketing communication ‘P’ (some use the term ‘promotion’) should be coordinated and managed with the others to create a communication blend or mix. These integrated marketing communications activities are described in Chapters 11 and 12. Pricing strategies Price is what a buyer must give up to obtain a product. It is often the most flexible of the four elements of the marketing mix, in the sense that it is the quickest element to change. Marketers can raise or lower prices more frequently and easily than changing other marketing mix variables. Price is an important competitive weapon and is fundamentally important to the firm because price multiplied by number of units sold equals total revenue for the firm. Pricing decisions are discussed in Chapter 13. "****** DEMO - www.ebook-converter.com*******"

5.13 Implementation, evaluation and control LO13 of the marketing plan Implementation is the process that turns marketing plans into action assignments and ensures that these assignments are executed in a way that accomplishes the plan’s objectives. Many firms have excellent, elaborate marketing plans, yet end up in the bankruptcy court. Why? The implementation of its planning failed. Implementation activities may involve detailed job assignments, activity descriptions, timelines, budgets and lots of communication. Although implementation is essentially ‘doing what you said you were going to do’, many firms repeatedly experience failures in strategy implementation. Brilliant marketing plans are doomed to fail if they are not properly implemented. These detailed communications may or may not be part of the written marketing plan. If they are not part of the plan, they should be specified elsewhere as soon as the plan has been communicated. After a marketing plan is implemented, it should be evaluated. Evaluation entails gauging the extent to which marketing objectives have been realised during the specified period. Four common reasons for failing to realise a marketing objective are unrealistic marketing objectives, inappropriate marketing strategies in the plan, poor implementation and changes in the environment after the objectives were specified and the strategy was implemented. Once a plan is chosen and implemented, its effectiveness must be monitored. Control provides the mechanisms for evaluating marketing results in light of the plan’s objectives "****** DEMO - www.ebook-converter.com*******"

and for correcting actions that do not help the firm realise those goals within budget guidelines. Firms need to establish formal and informal control programmes to make the entire operation more efficient. Perhaps the broadest control device available to marketing managers is the marketing audit. A marketing audit is a thorough, systematic, periodic evaluation of the goals, strategies, structure and performance of the marketing firm. A marketing audit helps management allocate marketing resources efficiently. A proper marketing audit demonstrates four characteristics: •

•

•

•

Comprehensive. The marketing audit covers all the major marketing issues facing a firm, and not just trouble areas. Systematic. The marketing audit takes place in an orderly sequence and covers the firm’s marketing environment, internal marketing system and specific marketing activities. The diagnosis is followed by an action plan with both short- and long-term proposals for improving overall marketing effectiveness. Independent. The marketing audit can be conducted by either an internal or external party that is both objective and independent enough to have top management’s confidence. Periodic. The marketing audit should be carried out in a regular schedule instead of only in a crisis. Whether it seems successful or is in deep trouble, any firm can benefit from such an audit.

Although the primary purpose of the marketing audit is to "****** DEMO - www.ebook-converter.com*******"

develop a full profile of the firm’s marketing effort and provide a basis for developing and revising the marketing plan, it is also an excellent way to improve communication and raise the level of marketing consciousness within the firm. In other words, it is a useful vehicle for selling the philosophy and techniques of strategic marketing to other members of the firm.

5.14 Writing the marketing plan

LO14

The creation and implementation of a complete marketing plan should allow the firm to realise its marketing objectives and succeed. However, the marketing plan is only as good as the information it contains, and the effort, creativity and thought that went into its creation. A good marketing information system (covered in Chapter 5) is critical to a thorough, accurate situation analysis. The role of managerial intuition and experience is also important in the creation and selection of marketing strategies. Managers must weigh the accuracy of any information they obtain against their own judgement when making a marketing decision. Note that the overall structure of the marketing plan (see Figure 14.1) should not be viewed as a series of sequential planning steps. Many of the elements of the marketing plan are decided upon simultaneously and in conjunction with one another. Similarly, the sample summary marketing plan (Table 14.1) does not begin to cover the intricacies and detail of a full marketing plan. In addition, the content of every marketing plan is different and depends on the firm and its mission, goals, objectives, "****** DEMO - www.ebook-converter.com*******"

target markets and marketing mix components. The marketing plan outline (Table 14.4) is an expanded set of questions that can guide the formulation of a marketing plan. However, this outline should not be regarded as the only correct format for a marketing plan. Many firms have their own distinctive format or terminology used for creating such a plan. Coca-Cola, for instance, distinguishes between customers (those who sell their products, such as retailers and restaurants) and final consumers (those who consume the products). Every marketing plan should be unique to the firm for which it was created. Remember that although the format and order of presentation should be flexible, the same types of questions and topic areas should be covered in all marketing plans. As you can see by the extent of the marketing plan outline, creating a complete marketing plan is not a simple or quick task. However, it can be instructive to create summary marketing plans, such as the sample summary plan in Table 14.1, to get a quick idea of what a firm’s marketing strategy is all about.

6. Effective strategic planning

LO15

Effective strategic planning requires continual attention and creativity, as well as a commitment from management. The following two points are important: • Strategic planning is not an annual exercise in which managers go through the motions and forget about it until the next year. Instead, strategic planning should be "****** DEMO - www.ebook-converter.com*******"

•

an ongoing process because the environment is continually changing and the firm’s resources and capabilities are continually evolving. Sound planning is based on creativity. Managers should challenge assumptions about the firm and the environment, and formulate new strategies. For example, major oil firms developed the concept of the service station in an age when cars needed frequent and rather elaborate servicing. They held onto the fullservice approach, but independents were quick to respond to new realities and moved to lower-cost selfservice and convenience-store operations. Many of the major oil firms took several decades to catch up. Perhaps the most critical element in successful strategic planning is top management’s support and participation.

Table 14.4 Marketing plan outline

1 Business mission • What is the mission of the firm? What business is it in? How well is its mission understood throughout the firm? Five years from now, what business does it wish to be in? • Does the firm define its business in terms of benefits its customers want rather than in terms of products and services? 2 Objectives • Is the firm’s mission statement able to be translated into operational terms regarding the firm’s objectives? • What are the stated objectives of the firm? Are they formally written down? Do they lead logically to clearly stated marketing objectives? Are objectives based on sales, profits or customers? "****** DEMO - www.ebook-converter.com*******"

•

•

Are the firm’s marketing objectives stated in hierarchical order? Are they specific, so that progress towards achievement can be measured? Are the objectives reasonable in the light of the firm’s resources? Are the objectives ambiguous? Do the objectives specify a time frame? Is the firm’s main objective to maximise customer satisfaction or to get as many customers as possible?

3 Situation analysis (SWOT analysis) • Is there a strategic window that must be taken into account? • Have one or more differential advantages been identified in the SWOT analysis? • Are these advantages sustainable against the competition? a) Internal strengths and weaknesses > What is the history of the firm, including sales, profits and corporate philosophies? > What is the nature of the firm and its current situation? > What resources does the firm have (financial, human, time, experience, asset, skill)? > What policies inhibit the achievement of the firm’s objectives with respect to resource allocation, operations, hiring, training, and so on? b) External opportunities and threats > Social: What major social and lifestyle trends will have an impact on the firm? What action has the firm been taking in response to these trends? > Demographic: What impact will expected trends in the size, age, profile and distribution of the population have on the firm? How will the changing nature of the family, the increase in the proportion of women in the workforce and changes in the "****** DEMO - www.ebook-converter.com*******"

>

>

>

> >

ethnic composition of the population affect the firm? What action has the firm taken in response to these developments and trends? Has the firm re-evaluated its traditional products and expanded the range of specialised offerings to respond to these changes? Economic: What major trends in taxation and income sources will have an impact on the firm? What action has the firm taken in response to these trends? Political, legal and financial: What laws are now being proposed at national, provincial and local levels that could affect marketing strategy and tactics? What recent changes in regulations and court decisions affect the firm? What political changes at each government level are taking place? What action has the firm taken in response to these legal and political changes? Competition: Which firms are competing with the firm directly by offering a similar product? Which firms are competing with the firm indirectly by securing its prime prospects’ time, money, energy or commitment? What new competitive trends seem likely to emerge? How effective is the competition? What benefits do competitors offer that the firm does not? Is it appropriate for the firm to compete at all? Technological: What major technological changes are occurring that affect the firm? Ecological: What is the outlook for the cost and availability of natural resources and energy needed by the firm? Are the firm’s products, services and operations environmentally friendly?

4 Competitive advantage • Does the firm or its products have something that is unique? • Is the competitive advantage important to the target market? • Is the competitive advantage sustainable over a reasonably long "****** DEMO - www.ebook-converter.com*******"

period of time? 5 Marketing strategy a) Target market strategy > Are the members of each market homogeneous or heterogeneous with respect to geographic, socio-demographic and behavioural characteristics? > What are the size, growth rate and national and regional trends in each of the firm’s market segments? > Is the size of each market segment sufficiently large or important to warrant a unique marketing mix? > Are market segments measurable and accessible to distribution and communication efforts? > Which are the high- or low-opportunity segments? > What are the evolving needs and satisfactions being sought by target markets? > What benefits does the firm offer to each segment? How do these benefits compare with benefits offered by competitors? > Is the firm positioning itself with a differentiable product? Is the product needed? > How much of the firm’s business is repeat, as opposed to new, business? What percentage of the public can be classified as non-users, light users and heavy users? > How do current target markets rate the firm and its competitors in respect of reputation, quality and price? What is the firm’s image with the specific market segments it seeks to serve? > Does the firm try to direct its products only to specific groups of people or to everybody? > Who buys the firm’s products? How does a potential customer find out about the firm? When and how does a person become a customer? "****** DEMO - www.ebook-converter.com*******"

> > > >

>

What are the major objections given by potential customers as to why they do not buy the firm’s products? How do customers find out about and decide what to purchase? When and where? If so, in which target markets and how vigorously? Could the firm more usefully withdraw from some areas in which there are alternative suppliers and use its resources to serve new, unserved customer groups? Which publics other than target markets (financial, media, government, citizen, local, general and internal) represent opportunities or problems for the firm?

b) Positioning > How can the competitive advantage be used as a basis for positioning? > Will the positioning be close to or away from existing competitors? c) Marketing mix > Does the firm attempt to achieve its objectives mainly through the co-ordinated use of marketing activities (product, distribution, communication and pricing) or only through intensive advertising? > Are the objectives and roles of each element of the marketing mix clearly specified? Product - What are the firm’s main product/service offerings? Do they complement each other or is there unnecessary duplication? - What are the features and benefits of each product offering? "****** DEMO - www.ebook-converter.com*******"

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-

-

Where is the firm and each main product in its life cycle? What are the pressures among various target markets to increase or decrease the range and quality of products? What are the major weaknesses in each product area? What are the major complaints? What goes wrong most often? Is the product name easy to pronounce, spell and recall? Is it descriptive, and does it communicate the benefits the product offers? Does the name distinguish the firm or product from all others? What warranties are offered with the product? Are there other ways to guarantee customer satisfaction? Does the product offer good customer value? How is customer service handled? How is the quality of service assessed?

Place/distribution - Should the firm try to deliver its offerings directly to customers, or can it better deliver selected offerings by involving other firms? What channel(s) should be used to distribute product offerings? - What physical distribution facilities should be used? Where should they be located? What should be their main characteristics? - Are members of the target market willing and able to travel some distance to buy the product? - How good is access to facilities? Can access be improved? Which facilities need priority attention in these areas? - How are facility locations chosen? Is the site accessible to the target markets? Is it visible to the target markets? - Where are the retail establishments located and what is their atmosphere? Do these retailers satisfy customers? "****** DEMO - www.ebook-converter.com*******"

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When are products made available to users (i.e. season, day of week, time of day)? Are these times most appropriate?

Marketing communication (promotion) - How does a typical customer find out about the firm’s products? - Does the message the firm delivers gain the attention of the intended target audience? Does it address the wants and needs of the target market, and does it suggest benefits or a means for satisfying these wants? Is the message appropriately positioned? - Does the communication effort effectively inform, persuade, educate and remind customers about the firm’s products? - Does the firm establish budgets and measure the effectiveness of communication efforts? (i) Advertising ◊ Which media are currently being used? Has the firm chosen the type of media that will best reach its target markets? ◊ Are the types of media used the most costeffective, and do they contribute positively to the firm’s image? ◊ Are the dates and times the ads will appear the most appropriate? Has the firm prepared several versions of its advertisements? ◊ Does the firm use an outside advertising agency? What functions does the ad agency perform for the firm? ◊ What system is used to handle consumer "****** DEMO - www.ebook-converter.com*******"

inquiries resulting from advertising and promotions? What follow-up is done? (ii) Public relations ◊ Is there a well-conceived public relations and publicity programme? Can the programme respond to bad publicity? ◊ How and by whom is public relations normally handled by the firm? Have those responsible nurtured working relationships with media representatives? ◊ Is the firm using all available public relations avenues? Is an effort being made to understand each of the publicity outlets’ needs and provide them with story types that will appeal to their audiences in readily usable forms? ◊ What do the annual reports say about the firm and its products? Who is being effectively reached by this vehicle? Does the benefit of publication justify the cost? (iii) Personal selling ◊ How much of a typical salesperson’s time is spent soliciting new customers, compared with serving existing customers? ◊ How is it determined which prospect will be called on and by whom? How is the frequency of contacts determined? ◊ How is the sales force rewarded? Are there incentives for encouraging more business? ◊ How is the sales force organised and managed? ◊ Has the sales force prepared an approach "****** DEMO - www.ebook-converter.com*******"

tailored to each prospect? ◊ Does the firm match sales personnel with the target-market characteristics? ◊ Is there appropriate follow-up to the initial personal-selling effort? Are customers made to feel appreciated? ◊ Can database or direct marketing be used to replace or supplement the sales force? (iv) Sales promotion ◊ What is the specific purpose of each sales promotion activity? Why is it offered? What does it aim to achieve? ◊ Which categories of sales promotion are being used? Are sales promotions directed at the trade, the final consumer or both? ◊ Is the effort directed at all the firm’s key publics or restricted to just potential customers? Price - What levels of pricing and specific prices should be used? - What mechanisms does the firm have to ensure that the prices charged are acceptable to customers? - How price-sensitive are customers? - If a price change is put into effect, how will the number of customers change? Will total revenue increase or decrease? - Which method is used for establishing a price: the going rate, demand-orientated prices or cost-based prices? - What discounts are offered and with what rationale? - Has the firm considered the psychological dimensions of price? "****** DEMO - www.ebook-converter.com*******"

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6

Have price increases kept pace with cost increases, inflation and competitive levels? How are price promotions used? Do interested prospects have opportunities to sample products at an introductory price? What methods of payment are accepted? Is it in the firm’s best interest to use these various methods?

Implementation, evaluation and control • Is the marketing firm structured appropriately to implement the marketing plan? • What specific activities must take place? Who is responsible for these activities? • What is the implementation timetable? • What other marketing research is necessary? • What will the financial impact of this plan be on a one-year projected income statement? How does projected income compare with expected revenue if the plan is not implemented? • What are the performance standards? • What monitoring procedures (audits) will take place and when? • Does it seem as though the firm is trying to do too much or not enough? • Are the core marketing strategies for achieving objectives sound? Are the objectives being met and are the objectives appropriate? • Are enough resources (or too many resources) budgeted to accomplish the marketing objectives?

Move to stabilise rooibos market "****** DEMO - www.ebook-converter.com*******"

Rooibos tea is brewing up a storm globally, but its Cederberg, Western Capebased growers are stuck in a time warp, preventing the industry from taking full advantage of the demand. ‘Our farmers should start thinking as marketers and leave behind the mind-set of the days before deregulation [of agriculture] in 1994,’ says Willem Engelbrecht, director of cultivation research & producer affairs at the SA Rooibos Council. Engelbrecht believes this uniquely SA tea industry, with a turnover of R600m/year, has failed to adjust. ‘Growers still see their role simply as producers and believe the marketing is someone else’s problem.’ This is one reason for the price volatility of recent years, he adds. The producer price was R16,50/kg in 2004; it plunged to R4,50/kg in 2010. With production costs of R8/kg, many farmers stopped growing it. The resultant shortage drove the price to R11,50/kg. Engelbrecht says more control over rooibos marketing would help stabilise things. ‘A price of R10/kg-R12/kg would sustain the industry. Rooibos can be stored for up to 20 years and though it might be costly, storage and releasing certain amounts to the market would provide greater stability to the industry.’ He says the farmers need more information on areas planted, harvest forecasts and demand. A Dutch-funded project hopes to develop an independent production forecast model and to gauge the potential of direct exports of value-added rooibos products. The 450 rooibos growers and their 5 000 workers produce about 12 000t/year; half is exported. The main destination for bulk exports of rooibos tea is Germany, where value is added to the product and it is resold to other markets in the EU. The council is assessing the potential for direct exports to those markets. Interest in rooibos, says Engelbrecht, is also growing in the US and Japan. An application to trademark the name rooibos will be made next month. SOURCE: SHerry, S, Stabilising rooibos, Financial Mail, 24 May 2012, p. 30

QUESTIONS 1 2

What is Rooibos’ strengths and weaknesses? How would you describe Rooibos’ market opportunity-utilisation

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3

strategy’? What are the potential risks associated with this strategy?

KEY CONCEPTS Cash cow: in the portfolio matrix, a business unit that usually generates more cash than it needs to maintain its market share. Competitive advantage: one or more unique aspects of a firm that cause target consumers to patronise that firm rather than its competitors. Diversification: a strategy of increasing sales by introducing new products into new markets. Dog: in the portfolio matrix, a business unit that has low growth potential and a small market share. Environmental scanning: collecting and interpreting information about forces, events and relationships in the external environment that may affect the future of the firm or the implementation of the marketing plan. Evaluation: gauging the extent to which marketing objectives have been achieved during the specified time period. Four ‘P’s: product, place, marketing communication (promotion) and price, which together make up the marketing mix. Implementation: the process that turns marketing plans into action assignments and ensures that these assignments are executed in a way that accomplishes the plans’ objectives. "****** DEMO - www.ebook-converter.com*******"

Market attractiveness/company strength matrix: a tool for allocating resources to strategic business units on the basis of how attractive a market is and how well the firm is positioned to take advantage of opportunities in that market. Market development: attracting new customers to existing products. Market opportunity analysis: the description and estimation of the size and sales potential of market segments that are of interest to the firm, and the assessment of key competitors in these market segments. Market penetration: a marketing strategy that aims to increase market share among existing customers. Marketing audit: a thorough, systematic, periodic evaluation of the goals, strategies, structure and performance of the marketing firm. Marketing mix: a unique blend of product, distribution, marketing communication and pricing strategies designed to produce mutually satisfying exchanges with a target market. Marketing myopia: a business defined in terms of products and services rather than in terms of the benefits that customers seek. Marketing objective: a statement of what is to be accomplished through marketing activities. Marketing plan: a written document that acts as a guidebook of marketing activities for the marketing manager. Marketing planning: designing activities relating to marketing objectives and the changing marketing environment. "****** DEMO - www.ebook-converter.com*******"

Marketing planning control: provides the mechanisms for evaluating marketing results in light of the plan’s objectives and for correcting actions that do not help the firm reach those objectives within budget guidelines. Marketing strategy: the activity of selecting and describing one or more target markets, and developing and maintaining a marketing mix that will produce mutually satisfying exchanges with target markets based on the firm’s competitive advantage and proposed positioning. Mission statement: the firm’s long-term vision based on a careful analysis of benefits sought by present and potential customers and analysis of existing and anticipated environmental conditions. Planning: the process of anticipating future events and determining strategies to achieve the firm’s objectives. Portfolio matrix: a tool for allocating resources to products or strategic business units on the basis of relative market share and market growth rate. Question mark: in the portfolio matrix, a business unit that produces poor profit margins in a fast-growing market. Star: in the portfolio matrix, a business unit that is a fastgrowing market leader. Strategic business unit (SBU): a subgroup of a single business or products/brands within the larger firm. Strategic planning: the managerial process of creating and maintaining a fit between the firm’s objectives and resources and evolving market opportunities. Strategic window: the limited period during which the fit between the key requirements of a market and the particular competencies of a firm are at an optimum. "****** DEMO - www.ebook-converter.com*******"

Sustainable competitive advantage: a differential advantage that cannot be copied by the competition. SWOT analysis: identifying internal strengths (S) and weaknesses (W), and examining external opportunities (O) and threats (T).

REFERENCES 1 2

McNulty, A. 2011. When the game goes wrong. Financial Mail, 6 May, p. 58. Source: http://www.coca-cola.com/co/mission.html (1998) (Accessed 29 July 2010). 3 Levitt, T. 1960. Marketing myopia. Harvard Business Review, July–August 1960, pp. 45–56. 4 Anderson, A. 2012. Confident Bosch plans SA packaging division. Business Day, 2 November, p. 17. 5 Financial Mail, 21 May 1999, p. 7. 6 Lloyd, T. 2000. A blessing from a supertanker. Financial Mail, 21 January 2000, p. 54. 7 Gebhardt, M. 1014. Lambert gets into driving seat at Imperial. Business Day, 24 February, p. 1. 8 TML closes ailing Sportsday tabloid. Business Day, October 1999. 9 Merritt, J. 1996. The belle of the golf balls. Business Week, 29 July 1996, p. 6. 10 Robello, K. 1996. Inside Microsoft. Business Week, 15 July 1996, pp. 56–57. 11 Amalgamated Beverages Industries Limited. Annual Report for the year ended 31 March 1998, p. 1.

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PART

03 Specialised marketing

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CHAPTER

15

Marketing in specialised market

LEARNING OUTCOMES After studying this chapter, you should be able to:

1

Describe the growing demand for services in westernised economies. 2 Describe the unique characteristics of a service in contrast to a physical product. 3 Explain how the marketing mix of a service firm should be adapted to the unique characteristics of an intangible service. 4 Distinguish between sports marketing and marketing through sport. 5 Identify and describe the particular demands of using sport as a specialised field of marketing. 6 Distinguish between sports products and other products in marketing terms. 7 Distinguish between licensed and branded sports products. 8 Describe the general nature of marketing through sport. 9 Identify and describe the unique demands of non-business marketing. 10 Explain the growing acceptance of the value and importance of marketing by non-profit organisations. 11 Highlight the dual role of marketing for non-profit organisations. 12 Describe the competitive environment that non-profit organizations typically face. "****** DEMO - www.ebook-converter.com*******"

13 Demonstrate how marketing strategies should be adapted for use in a non-business environment. 14 Identify the needs of four customer groupings in the business-tobusiness market. 15 Identify and describe the unique demands of business-tobusiness marketing. 16 Classify government markets using the industrial classification system. 17 Explain the differences between business-to-business and consumer markets. 18 Distinguish between the different types of business-to-business products. 19 Describe the typical steps in the business-to-business purchase process. 20 Identify the main sectors of the travel and tourism industry. 21 Identify and describe the special characteristics of marketing travel and tourism services. 22 Demonstrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 23 Provide a marketing-management solution related to any of the above outcomes.

>> Marketing in practice Sponsorship needs to be there at the start of the race Potential sponsors need to remember the Rolling Stones and the Beatles also struggled once upon a time. "****** DEMO - www.ebook-converter.com*******"

Any company or organisation going into sponsorship in order to position and entrench the brand further in a target community always ends up balancing budget with exposure. This is not as easy as it seems and involvement with a high-profile sport may have to be given up owing to budget constraints. The other decision is whether to spend millions to have a small slice of big sport action or spend less to gain a bigger share or even total ownership of a smaller sport. The debate over what brings bigger returns has been thrown into the limelight by our Olympian swimmer, Roland Schoeman, and his comments in Athens. As a sportsperson, he was obviously lower on the list of priorities than more popular sports. But with the win in the relay, he should be high on the wanted list for large corporate organisations. That is the way it works in theory. However, the South African sponsorship animal does not always dance to that kind of logical thinking. Sponsorship is targeted mostly at sportspeople and entertainers who are already successful. This means that it costs more and competition for exposure is huge. Before the reader despairs and says this is all obvious, my point is that it is cheaper and less competitive to start lower down the ranks. This is quite a challenge, though, as it means a bit more work. The advantages are that a sponsor gains ground with a target market that will support them even further when the sportsperson or band makes it big and other mercenary organisations come running. Rest assured, I "****** DEMO - www.ebook-converter.com*******"

understand the economics behind sponsorship decisions, but any organisation that had spotted the fact that Schoeman was woefully under-sponsored could have earned mega kudos at the games in Athens. SOURCE: Adapted from Clarke, R. 2004. Sponsorship needs to be there at the start of the race. Bizcommunity online newsletter. Available: www.bizcommunity.com

QUESTIONS 1 2

What are the advantages of identifying and sponsoring sportspeople and musicians or events before they have ‘made it big’? What are the dangers associated with such an approach?

1. Introduction Consumer goods became the focus of marketing activities in the 1950s. The 1960s witnessed an increased focus on business-to-business (industrial) markets. The 1970s saw considerable academic and scholarly efforts directed at nonprofit, or societal, marketing. Marketing in the services sector – an area of marketing that had received remarkably little attention at the time, given its importance in the overall economy – received its fair share of attention only in the late 1980s. Since 2000 relationships with customers and firms’ ability to offer products and services that have value for customers have been the overriding concerns for marketing managers. At present, marketing principles and practices are "****** DEMO - www.ebook-converter.com*******"

employed in numerous diverse and specialised markets to communicate and interact with target audiences. For instance, marketing is used for developing and executing both for-profit and non-profit exchanges. The objective of for-profit exchanges is to generate income over and above the costs of the firm – that is, to make profit. A non-profit organisation, on the other hand, may sell products at more than cost price, then use the surplus to cover the organisation’s costs. The Western Cape Blood Transfusion Service sells blood and blood products to help cover the cost of operating the organisation. Persons can be marketed for profit (Justin Bieber, for example) or non-profit purposes, such as political candidates soliciting donations or votes. Places can be marketed for profit, such as Kennedy Space Centre, or for non-profit purposes, such as national parks promoted by a national or provincial government department. The purpose of this chapter is to explore some of the specialised areas of marketing. Issues related to the following specialised fields of marketing are considered: • • • • •

Services marketing Sports marketing and marketing through sport Non-business marketing Business-to-business marketing Travel and tourism marketing.

2. Services marketing "****** DEMO - www.ebook-converter.com*******"

LO1

A service is the result of both human and/or mechanical effort focused on people or objects. Put differently, services are deeds, performances or efforts that cannot be physically possessed. The most important distinguishing characteristic of a service, therefore, is its intangibility. There are many reasons for the growing importance of services in the economies of many westernised countries. Services marketing concepts and strategies – and, in fact, services marketing as a marketing sub discipline, have developed in response to the tremendous growth of service industries, resulting in their increased importance to world economies. The growth in the South African services sector as a percentage of gross domestic product (GDP) was 1 per cent per year for the period 1986–2014. Table 15.1 shows that the relative size of the services sector as a percentage of GDP has grown from about 50 per cent to two-thirds in 28 years. Table 15.1 Services as a percentage of South African GDP

SOURCES: Various Statistics SA publications & South African Reserve Bank (accessed 16 August 2014)

In an advanced economy, such as that of the United States, services contribute even more to GDP. In 2013, services were responsible for 79,4 per cent of US GDP.1 The demand for services is expected to continue to grow in the future. Much of this demand is driven by the demographic changes that are occurring in societies. An ageing population, for "****** DEMO - www.ebook-converter.com*******"

instance, has a growing need for services such as nursing, home healthcare, physical therapy (such as physiotherapy) and social work. Double-income families, on the other hand, need services such as childcare, housecleaning and gardening. The growth of the services sector is to a large extent influenced by the growing demand for information and data which, in turn, creates a need for specialised service providers such as data-mining specialists, computer engineers and systems analysts. Services have also grown into an essential function of manufacturing. During the early phases in the development of services marketing and management, most of the interest and impetus originated from service industries such as banking and airlines. Today manufacturing-based industries, such as the motor and mobile phone industries, also recognise the need to provide ‘good service’ in order to compete effectively. Governments have traditionally regulated large service industries, such as telecommunications, postal services, airlines, electricity and transport. However, the past few decades have witnessed the deregulation of many industries and professional services in various countries. The result is that marketing decisions that used to be tightly controlled by governments are now partially – and in some cases, totally – within the control of individual firms. Providers of professional services (such as dentists, lawyers, accountants, engineers and architects) have also had to re-orientate their businesses, as these industries have become increasingly competitive following deregulation, and the guidelines of many professional bodies now also allow for some degree of "****** DEMO - www.ebook-converter.com*******"

advertising. New technologies have also resulted in the provision of new service concepts in an increasingly competitive market. Fax machines, voicemail, e-mail and cellphones are examples of technology-based services that have substituted traditional methods of communicating. Fax machines and e-mail have, to a large extent, replaced postal mail and phone calls, and cellphones enable phone communication from almost anywhere in the world. In each of these cases marketing has played a role in educating consumers about the service concept (primarily its benefits) and teaching them how to use the new service. The forces described above have led to a realisation among marketers that the marketing and management of services are different from the marketing and management of physical products. The unique characteristics of services and the need for a different marketing mix to market services are the two principal reasons that necessitate an approach that is different to that used in the marketing of products. It is also important to realise that every product is accompanied by some form of service such as delivery, made to the customer’s specifications and so forth.

2.1 How services differ from physical products

LO2

Services have four important characteristics that distinguish them from physical goods, namely intangibility, inseparability, heterogeneity and perishability. "****** DEMO - www.ebook-converter.com*******"

2.1.1 Intangibility The basic difference between services and products is that services are intangible. Because of their intangibility, services cannot be touched, seen, tasted, heard or felt in the same manner in which physical products can be experienced. Services cannot be stored and are often very difficult to duplicate. Moreover, services are seldom based on any hidden technology, and no patent protection exists for services. Evaluating the quality of services before or even after making a purchase is more difficult than evaluating the quality of products because, compared with products, services tend to exhibit fewer search qualities. A search quality is a characteristic that can be easily assessed before purchase, such as the colour of an appliance or a car. At the same time, services tend to exhibit more experience and credence qualities.2 An experience quality is a characteristic that can be assessed only after use, such as the quality of a meal in a restaurant, or the actual experience of a vacation. A credence quality is a characteristic that consumers may have difficulty assessing even after purchase because they do not have the necessary knowledge or experience. Medical services are examples of services that exhibit credence qualities. Even after open-heart surgery, a patient may be unable to assess whether the quality of service received was good or not. These characteristics also make it more difficult for marketers to communicate the benefits of an intangible service than to communicate the benefits of tangible goods. As a result, services marketers often rely on tangible cues to communicate the nature and quality of a service. Sanlam’s use of the ‘protective hands’ imagery and Old Mutual’s use "****** DEMO - www.ebook-converter.com*******"

of the ‘anchor’ symbol help communicate in terms of tangible items the benefit of protection that insurance provides. The facilities that customers visit, or from which services are delivered, are a critical part of the total service offering. For example, Barnes & Noble, a large US bookseller, was founded on the knowledge that shopping is a form of entertainment for many consumers. Its shops were designed to provide a unique shopping experience, using a woody, traditional, soft-coloured, library-like atmosphere that would appeal to book lovers. Additionally, sophisticated modern architecture and graphics and stylish displays were used to support this entertainment-based positioning. The firm’s superstores have cafés and big chairs and tables where people can browse through piles of books. Management also makes sure that the shops’ toilet facilities are always in an impeccable condition.3 Customers’ perceptions of a firm’s service are influenced by tangible cues, such as the decor, the clutter or neatness of service areas and the staff’s demeanour and the way in which they dress. The Walt Disney organisation is one of the best firms in the world at managing tangible cues. Disneyworld and Walt Disney World focus on the set (facility), the cast (personnel) and the audience. Hosts and hostesses (not employees) serve guests (not customers) at attractions and shops (not rides and stores). When cast members are hired, they are given written information about what training they will receive, when and where to report and what to wear. They spend the first day on the job at ‘Disney University’, learning about the Disney "****** DEMO - www.ebook-converter.com*******"

philosophy, management style and history. The cast members also discover how all parts of the organisation work together to provide the highest possible level of guest satisfaction. In the Magic Kingdom, the cast is just as important as the set.

2.1.2 Inseparability Physical products are produced, sold and then consumed. By contrast, however, services are often sold and produced and consumed at the same time and in the same place. In other words, the production and consumption of services are inseparable activities. Inseparability means that, because consumers must be present during the production of services – like haircuts and surgery – they are actually involved in the production of the services they buy. This type of consumer involvement is rare in goods manufacturing. Inseparability also means that services cannot normally be produced in a centralised location and consumed in decentralised locations, in the way that physical products usually are. Services are also inseparable from the perspective of the service provider: the quality of service that firms are able to deliver depends on the training and quality of the employees.

2.1.3 Heterogeneity One of the great strengths of the Burger King fast-food chain is its consistency. Whether customers order a Double Whopper and onion rings in Cape Town, Singapore or Moscow, they know exactly what they are going to get. This is not the case, however, with many service providers. "****** DEMO - www.ebook-converter.com*******"

Heterogeneity means that services tend to be less standardised and uniform than goods. For example, physicians in a group practice or barbers in a barbershop differ within each group in their technical and interpersonal skills. A particular physician or barber’s performance may even vary according to certain factors, such as the time of day, the operative’s physical health or the mood the person is in. Because services tend to be labour-intensive and production and consumption are inseparable, consistency and quality control can be difficult to achieve. Standardisation and training help service providers increase the consistency and reliability of their service delivery. Limited-menu restaurants, like KFC, offer customers high consistency from one visit to the next because of standardised preparation procedures. Another way to increase consistency is to mechanise the process. For example, banks have reduced the inconsistency of teller services by providing automated teller machines and Internet banking; airport X-ray surveillance equipment has replaced manual searching of baggage; and automatic car washes have replaced the variable quality of washing, waxing and drying by hand.

2.1.4 Perishability Perishability means that services cannot be stored, warehoused or inventorised for later consumption. An empty hotel room or vacant aeroplane seat produces no revenue that day – it cannot be stored and the revenue is lost forever. Nevertheless, service firms are often forced to turn away full-price customers during peak periods. Therefore, "****** DEMO - www.ebook-converter.com*******"

one of the most important challenges in many service industries is finding ways to synchronise supply and demand. The philosophy that some revenue is better than none has prompted many hotels to offer big discounts at weekends and during low seasons, and has led to airlines adopting similar pricing strategies during off-peak times. Car-rental agencies, cinemas and restaurants also use discounts to encourage demand during non-peak periods in an attempt to overcome the problems associated with perishability.

2.2 Marketing mixes for services

LO3

The unique characteristics of services – intangibility, inseparability, heterogeneity and per-ishability – make service marketing more challenging than marketing a physical entity. Consequently, elements of the marketing mix for products (product, distribution, promotion and pricing) need to be expanded to meet the special needs created by the characteristics of a service. In addition to the traditional four ‘P’s, the services marketing mix should include strategy components related to people, process and physical evidence. Table 15.2 contains examples of the seven ‘P’s of the services marketing mix.

2.2.1 People The people component of service delivery includes all the people who play a part in the service delivery and in so doing influence the customer’s perceptions of the service firm. These people comprise the firm’s staff, the customer "****** DEMO - www.ebook-converter.com*******"

and other customers in the service environment. The people who deliver a service to a customer are important because they provide cues as to how the customer experiences the delivery of the service. In the provision of certain services, such as consulting, counselling, and other professional relationship-based services, the service provider is extremely important because the provider is the service. In other instances, the contact person may play an apparently relatively small role in service delivery. Examples are maildelivery staff, airline baggage handlers and maintenance staff. However, these staff members all play a critical role in the overall service-delivery process. Customers themselves can also influence service delivery and by doing so influence the service quality and their own satisfaction. For instance, patients influence the quality of service they receive by obeying or disobeying the advice of a medical doctor and by observing the use of their medication. A customer can also influence the outcome of another customer’s service. The customers present in a cinema, sports stadium or lecture hall can influence the quality of service received by other customers. The behaviour of customers can, therefore, enhance (e.g. by providing unique insights during a lecture discussion) or detract from (e.g. by behaving noisily during a film) how other customers experience a service. Table 15.2 The expanded marketing mix for services: The seven ‘P’s

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2.2.2 Process The process component of service delivery refers to all activities, procedures and mechanisms involved in producing and delivering the service. The actual delivery of the activities that a customer experiences, or the operational flow of the service, also provides a customer with evidence by which to judge the service. Some activities are visible to customers, for example the Nando’s attendant who takes the order, or the attendant at a petrol station. These activities are referred to as ‘front-stage’ activities. However, other activities that are unseen by the customer, such as those undertaken by kitchen staff (preparing meals) and staff preparing the laundry for a hotel, are called backstage activities. A process may involve both front-stage and backstage activities, and both influence customers’ satisfaction with the service they receive. Service processes may be simple or complex, standard or customised. Irrespective of the process characteristics, the importance of the process is that it provides a customer with a form of evidence by which to judge a service. By asking who or what is the direct recipient of the service and what is the nature of the service act, we can distinguish four types of processing, namely people, possession, mental stimulus and information processing.4 Table 15.3 illustrates these four "****** DEMO - www.ebook-converter.com*******"

types of processing.

2.2.3 Physical evidence Ever wondered why hotel staff daily put a sticker on the toilet tissue or fold and stack the towels in the bathroom when they have cleaned the room? It is to show the customer that a service has taken place and that the room is now clean. These are examples of physical evidence that a service has been performed. The physical evidence component of service delivery includes both the physical environment in which a service is delivered as well as all the tangible components that facilitate the performance or communication of the service. The physical environment in which a service is delivered is called the ‘servicescape’. In some instances, the servicescape is very important in the delivery of a service. Examples are the dining area of a restaurant or the beauty salon where a facial is provided. Customers expect servicescapes to adhere to certain minimum requirements in terms of hygiene, neatness or other criteria that are important in the evaluation of the service that is delivered. On the other hand, certain services, such as office cleaning or advertising, do not have servicescapes. Where servicescapes are absent or not important, service providers utilise other tangibles, such as account statements, business cards, equipment and signage, as indicators of quality. When consumers have little on which to judge the actual quality of service, they rely on the cues offered by these tangibles just as they rely on the cues provided by the people and the service process. Physical evidence cues provide "****** DEMO - www.ebook-converter.com*******"

ample opportunities for the firm to send consistent, strong messages about the firm and its services. Table 15.3 The four types of service processing

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What is the nature of the service act?

Who or what is the direct recipient of the service?

People

Possessions

Tangible actions

People processing (services directed at people’s bodies): • Passenger transportation • Medical care • Haircare salon • Physical therapy • Fitness gym • Restaurant/bar

Possession processing (services directed at physical possessions): • Parcel delivery • Repair and maintenance • Office plant caring • Laundry and drycleaning • Garden service

Intangible actions

Mental-stimulus processing (services directed at people’s minds): • Advertising • Art exhibition • TV/radio • Management consulting • Education • Music concert

Information processing (services directed at intangible assets): • Accounting • Banking • Life/short-term insurance • Legal services • Research • Share broking

SOURCE: Adapted from Lovelock, C. & Wirtz, J. 2011. Services marketing: People, Technology, Strategy. Upper Saddle River: Pearson Education International, p. 41

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Unfortunately, service delivery in South Africa is generally of a poor standard, which often leads to low levels of loyalty to service providers (see Reader 65 ‘Customer loyalty at BMW’).

READER 65 >> Customer loyalty at BMW One of the things that struck me very forcibly as soon as I arrived back in this country was how low the standards of service had fallen. Compared with the United States or even a Far East country like Singapore, I think our standards are absolutely appalling. Compared with the UK, however, I think they’re on a par. So I see the major opportunity for us at BMW South Africa is to focus on the real needs of the customer and to focus on building customer loyalty. Because what we have found is that although BMW owners are loyal to the brand, they are very disloyal to the individual dealerships where they may have purchased the car. We have discovered that people who have bought five, six or even seven BMWs have bought them from five, six or even seven dealerships. They are desperately searching for someone who will provide a standard of service that matches their perception of the technology and excellence of the vehicle itself. This service initiative is based on a programme we brought from the Harvard Business School. I became fascinated with the work of a small group of professors who specialise in service management at the school. After about 20 years of research, they have proved conclusively that a relatively small shift in customer loyalty results in a huge improvement in overall profitability because operating costs, including the expensive task of continually trying to win new customers, come down and the ongoing revenue stream goes up – to the extent that even a 5 per cent improvement in customer loyalty can result in up to a 100 per cent increase in overall profitability. I’ve made a rough calculation that a 5 per cent improvement in customer loyalty, even at BMW South Africa where our customer loyalty is already high, could deliver at least "****** DEMO - www.ebook-converter.com*******"

50 per cent greater profitability. SOURCE: BMW South Africa spokesperson

3. Sports marketing and marketing through sport

LO4

Sport has become a major global business. The 1990s saw a big surge in the sports business, and this period has been described as ‘the golden age of sport’. The worldwide market for spending on sports and related activities is continually on the increase. For example, a PricewaterhouseCoopers report estimates that global sports spending will rise from $121,4 billion in 2010 to $145 billion in 2015, representing a compound annual growth rate of 3,7 per cent over the four years.5 The Super Bowl sold its advertising time for Super Bowl XL at a rate of $4 million for a 30-second advertising spot in 2014.6 The amount of money that sports stars such as Rory Mcllroy, Roger Federer, Lewis Hamilton, Lionel Messi and Serena Williams earn on and off the sports arenas also provides an indication of how many consumers want to see, hear and experience sport. Real Madrid paid Tottenham Hotspur £86 (€100) million for Gareth Bale in 2013.7 Events such as the FIFA World Cup, the IRB Rugby World Cup, the Wimbledon Tennis Championship and others create enormous excitement, and the broadcasting rights and merchandise sold are worth millions of rands. Even Hollywood cashes in on the sports business. The 1997 video "****** DEMO - www.ebook-converter.com*******"

release of Jerry Maguire set a weekend record, when almost 3 million copies were rented and 3,5 million copies sold.8 Sport, recreation and leisure activities compete with one another for consumers, and the competition among different sports for consumers’ money is just as high. Defining sports marketing is not as simple as it may appear. The first attempt to define sports marketing emerged in 1978 when Advertising Age described the activities of consumer and industrial product and service marketers who increasingly used sport as a means to communicate with their target markets.9 This first attempt ignored the marketing of sports products, events and services. It is, therefore, considered more appropriate to distinguish between marketing of sport and marketing through sport. Sports marketing consists of all activities designed to meet the needs and wants of sport consumers through exchange processes. Sports marketing has two major channels: the marketing of sport products and services directly to consumers of sport, and the marketing of other consumer and industrial products or services through the use of sport promotions.10

3.1 The special characteristics of sport

LO5

From a marketing point of view, sport is challenging in the sense that it has both product and service attributes. Essentially there are five main areas of difference that sport marketers need to consider, namely the usual four ‘P’s of product, price, place and promotion, and also people, which refers to the market characteristics.11 Table 15.4 provides a "****** DEMO - www.ebook-converter.com*******"

summary of some of the more salient differentiating characteristics of sport.

3.2 The sports product

LO6

The sports product, to be distinguished from other products, includes at least the following distinguishing characteristics:12 • • • • •

Playful competition, typically in the form of a game A separation from ‘normal’ space and time Regulation by special rules Physical prowess and physical training Special facilities and equipment.

As indicated earlier, the sports product is a complex package of tangible and intangible elements. Figure 15.1 illustrates the characteristics of the sports product. The core benefits offered by sport vary from health and achievement for players to pure entertainment and socialisation for spectators. Many of these core benefits are intangible and, therefore, pose challenges to marketers.

3.3 Licensed and branded sports products

LO7

Most sports organisations, clubs and tournaments try to exploit the commercial value of their logos, names and "****** DEMO - www.ebook-converter.com*******"

facilities. Wimbledon has a range of clothing and tennis equipment that is marketed under the exclusive name, Wimbledon. Real Madrid soccer club has a wide range of clothing, souvenirs and other merchandise that are sold all over the world. A fair share of the club’s income come from merchandising and in the 2008-2012 period the club sold more than 1,4 million replica shirts alone. Real Madrid’s total revenue for 2012/13 was €518,9 million; this achievement made them the first sports team to generate revenue of more than €500 million in a year.13 The manufacture and marketing of products utilising the logos of sports clubs and unions normally takes place under the terms of a licensing agreement with the particular club or union. Table 15.4 Some differentiating characteristics of sport Category People

Specific characteristics Despite the fact that events are ‘virtual’ in many instances and personal interaction between consumers and players rarely takes place, consumers ‘know’ players and officials and they strongly identify with the sport. Therefore, there are many ‘expert consumers’ in sport. The wide range of motivations that can be satisfied by sport consumption offer particular challenges to sport marketers. For instance, people may attend a major rugby match for all the following reasons: • They love the sport of rugby • They support one of the sides • They attend the game as part of a social group who do not

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• • • •

really feel strongly about rugby They want to be seen by others – especially if invited to a hospitality suite They play rugby and want to watch a specific individual play to learn from the player They coach or work as administrators and wish to pick up ideas Pople like to associate with winning teams or individuals, and consumer demand, therefore, fluctuates quickly. A team that was unknown before a tournament but excels during the tournament may create a new excitement for the spectators. In turn, new followers may start paying high prices for tickets to a final match in which this team may feature.

The experiences of sport are often influenced by the atmosphere at matches or games. Product

The sports product is exercised or supported by people from all walks of life and all corners of the globe. Most people have some or other interest in sport, varying from the fervent followers of English soccer to occasional observers. The characteristics of a service, namely heterogeneity, inseparability, intangibility and perishability, are directly applicable to the sports product. The consumption of sport is experiential and this serves as an important element to set it apart from other services and products. Sports organisations compete and co-operate with one another at the same time. Before teams of sports clubs can compete, the clubs work together to form a league or association. Competition schedules, rules, disciplinary actions and a host of other activities need to be addressed and

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decided upon before competitions can start. There is no control over the core product of sport. Weather conditions, the performance of players and crowd behaviour are inconsistent, so the outcome of the customer’s experience cannot be predicted with certainty. Price

The cost of a sports product is generally small to the consumer in comparison with the total cost price. The cost of an individual ticket for a match at Wimbledon or any sport code during the Olympic Games is small compared with the cost of hosting such events. The indirect income generated by sport is frequently bigger than the direct operating income. Ticket sales income for an event such as the Olympic Games is small compared with income from sponsorship, television rights, merchandising and licences. Many sport codes operate on a not-for-profit basis. Only sport codes that operate at national and international level usually succeed in obtaining sponsorships and other forms of assistance because of the exposure they offer to potential sponsors.

Promotion

The high visibility of sport and the extent to which people identify personally with sport make it attractive to firms through sponsorships. Because marketers have little or no control over the core product (competition, achievement, etc.), they concentrate marketing efforts on product extensions such as merchandise, hospitality facilities and parking.

Place

The advances in electronic media make it possible to deliver sports in real time to consumers around the world. "****** DEMO - www.ebook-converter.com*******"

SOURCE: Based on Bennett, et al. 2003. Services marketing – a managerial approach. Milton: John Wiley & Sons Australia, p. 446

EXAMPLE >> Clothing and sports goods manufacturers, such as Nike, Adidas, Fila and Reebok, hold licences to manufacture and sell products bearing the logos and marks of professional and amateur sports entities. In South Africa, ASICS and various other licensees are at present licensed by the South African Rugby Union (SARU) to manufacture and sell, among other items, rugby jerseys, caps, shorts and T-shirts that display the Springbok logo owned by the South African Rugby Union. Owning a licensed product scuh as a football shirt allows fans to ‘take the experience home’ after a game, and in some cases, the product is a substitute for experiencing a game.14 Wearing or displaying licensed products indicates to others that the user is a supporter. The person, therefore, exhibits support of and involvement with the sports organisation, and, the user hopes, his or her affiliation with that organisation. Using or displaying the product is an attempt to bridge the barriers between players and fans. Fans may not be able to play like their sports heroes, but licensed products allow them in a sense to experience a reflected identification. Such products also allow users to transmit their affiliation to others that might share it, thereby building a sense of a social community of fans. The pavilions that are filled with supporters wearing blue when the Bulls play is an example of this common affiliation.

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Figure 15.1 Characteristics of the sports product

SOURCE: Adapted from Mullin, B.J., Hardy, S. & Sutton, W.A. 2007. Sport marketing (3rd edition). Champaign: Human Kinetics, p. 17

Branded products, on the other hand, display only the logo and marks of the manufacturer. The popularity of branded products affects the demand for licensed products. Several reasons have been put forward for the popularity of branded products. One of the reasons is that firms like Nike, for instance, base their efforts to foster consumer identification not with a particular sport, team or individual, but rather with what sports consumers perceive the Nike brand to stand for: a culture of athletic excellence based on individual performance and participation. "****** DEMO - www.ebook-converter.com*******"

WEBSITE Visit http://www.megapro.co.za/ to get a sense of the extent to which sport can be used to advertise and promote a firm and its products or services.

3.4 Marketing through sport

LO8

Many sports are able to draw large crowds to their matches and competitions, and are, therefore, attractive as a market venue or medium to communicate with large captive audiences. As a result, sponsorships have been widely used by many marketers to communicate with consumers. Sponsorship is the marketing activity through which a sponsor contractually provides financial and/or other support to a firm or individual in return for rights to use the sponsor’s name (i.e. company, product or brand) and logo in connection with the sponsored event or activity. Sponsorships also generate large sums of money for sports clubs and associations. For example, in the 2014 season, Real Madrid was sponsored by the following thirteen sponsors:15 • • • • • • • •

Adidas Audi bwin BBVA Coca-Cola Campofrio Emirates Mahou

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• • • • •

Nivea for men Salo’n De Cobras Samsung Sanitas STC.

Of Real Madrid’s 2012/13 annual turnover of €518,9 million, sponsorships and royalties accounted for 40 per cent.16 The long-term benefits and rewards that flow from a committed, well-managed approach to sponsorship are significant and multi-faceted, both in business and society. These benefits are unique to sponsorship and include the following:17 •

•

Flexibility: Sponsorship allows for niche marketing, enabling marketers to segment and target their markets on the basis of demographics, psychographics, time and location criteria. Many events and activities can be sponsored in many different ways. Events can be selected to fit demographic and psychographic requirements, providing the opportunity to connect with consumers one-on-one by associating the firm (brand or product) with the qualities of the event or activity itself, while simultaneously projecting the firm’s personality, values and style. This positions the firm in line with its target market’s interests and shows it as responsive to their preferences, lifestyles and attitudes. Brand equity: Sponsorship can serve as an important branding vehicle that can expand, reinforce and even alter brand personality traits through the association with the qualities of an event. This is a unique way of

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generating brand loyalty and long-term corporate awareness. Sponsorship accrues value over time, increasing its effectiveness and improving the return on investment. When fully integrated and leveraged, events build brand equity. • Media exposure: Sponsorship is the only form of marketing communication in which a marketer can dominate the ‘stage’ without having to compete with other promotional clutter. It can also extend the value of advertising campaigns by creating a dynamic, interactive environment that makes key messages more relevant and persuasive. • Cost effectiveness: Sponsorship enables marketers to obtain coverage and brand awareness at a more favourable rate than traditional advertising, adding greater value to the advertising rand spent, and it simultaneously incorporates corporate public relations and social-responsibility programmes. • Industrial labour relations: A firm’s reputation and image have a direct bearing on the morale of existing staff and can encourage the highest quality of future job applications. • Sponsorship opens doors: Through corporate hospitality and by establishing a good corporate image and reputation, a firm’s ability to do business with local and national government and other influential organisations can be enhanced by providing access that would otherwise be extremely difficult and costly to attain. • Crosses all frontiers: The involvement of South African firms with South African sporting success is an "****** DEMO - www.ebook-converter.com*******"

•

invaluable tool in export drives and the international promotion of the country. Sponsorship is global – it crosses all barriers of bureaucracy, national prejudice and languages. Presents new challenges: Leveraging sponsorship to maximise profitability presents great challenges to creativity and often reveals the ingenuity in marketers.

Despite the benefits of sponsorship, sponsors need to be watchful of other firms that might want to have a free ride at their sponsored events. This is known as ambush marketing, and is defined as the attempt of a firm to create the impression of being an official sponsor of the event or activity by affiliating itself with that event without having paid the sponsorship rights fee or being a party to the sponsorship contract. The ambush marketing tactics that can be, and have been, used are seemingly limitless. For example, a firm may use taglines in its advertising, such as ‘We support the South African team’, or it may use symbols commonly associated with the event, such as the Olympic flame. This creates confusion in the market as to who the sponsor is, and dilutes the sponsorship investment. For example, the official sponsor of the 1996 Comrades Marathon, which paid for the right to use its name and logo at the event, was ambushed by another firm. The publicity that the ‘ambusher’ received from this completely overshadowed the sponsor’s involvement, and as a result the sponsor’s sponsorship investment became virtually worthless. Ambush marketing is extremely destructive. Why should a firm bother to invest money in sports or the arts if it can "****** DEMO - www.ebook-converter.com*******"

still have its logo, name and subsequent publicity at the event without paying a cent of the rights fee? Ambush marketing could be extremely detrimental to the future of sponsorable events and activities in South Africa. During the 2010 FIFA World Cup in South Africa, Bavaria Beer was accused of ambush marketing. It is essential that the event should benefit financially from the sponsorship, as this enables its future growth and development, without which these events and activities would not exist. To protect sponsorship rights, the government has passed tough legislation to prevent firms from using ambush marketing tactics.18 Instances have been reported in which ambush marketing has been highly successful. Table 15.5 provides information on the 1992 Olympic Games. Note how nonsponsors outperformed some of the official sponsors with highly effective commercials that were aired during the Olympic Games.19 Table 15.5 People’s perception of corporate sponsors: 1992 Olympic Games

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Percentage identifying

Category

Correct percentage (official sponsor)

Incorrect percentage (not official sponsor)

Credit card

46% (Visa)

24,3% (American Express)

Overnight delivery service

13,2% (Express Mail)

60,4% (Federal Express) 19,6% (UPS)

Coffee

25,5% (Maxwell House)

41,7% (Folger’s)

Retailer

11,9% (J.C. Penney)

34,7% (Sears) 27,7% (Kmart) 14,9% (Wal-Mart)

Pain reliever

15% (Nuprin)

41% (Tylenol)

SOURCE: Graham, P.J. 1994. ‘Ambush marketing: An American perspective’. Third Annual Conference on Sports Marketing Law, Tax and Finance. Lausanne: 27–28 September 1994

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4. Non-business marketing

LO9

A non-business organisation is one that exists to achieve some goal other than the usual business goals of profit, market share or return on investment. Few people realise that non-business organisations account for over 20 per cent of the economic activity in the United States. The cost of government entities, the predominant form of non-business organisation, has become the biggest single item in the American family budget – more than housing, food or healthcare. Together, federal, state and local governments collect revenues that amount to more than a third of the United States’ gross domestic product. Moreover, they employ nearly one in five of all non-agricultural civilian workers. In addition to government entities, non-business organisations include hundreds of thousands of private museums, theatres, schools, churches and others. Non-business marketing involves the marketing activities conducted by non-business organisations. These can be divided into two categories: social marketing and non-profit marketing. •

Social marketing is the use of marketing methods to spread socially beneficial ideas or behaviours. Examples include the marketing of efforts to persuade people to seek help for problems such as alcohol or drug dependency, child or spouse abuse and depression. Social marketing is also used to urge people to vote, stop smoking, undergo medical check-ups, refrain from polluting the environment, prevent forest fires and

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•

perform a variety of other socially beneficial actions. Social marketing can be used by private and for-profit firms as well as non-profit organisations, as is the case when, for example, liquor producers, such as South African Breweries, urge people not to drink and drive. Non-profit organisation marketing, on the other hand, is the effort by non-profit organisations to bring about mutually satisfying exchanges with target markets. Although these organisations vary substantially in size and purpose and operate in different environments, most perform the following marketing activities: > Identify the customers they wish to serve or attract (although they usually use terms other than ‘customers’, such as clients, patients, members or sponsors) > Explicitly or implicitly specify objectives > Develop, manage and terminate programmes and services > Decide on prices to charge (although they use other terms, such as fees, donations, tuition, fares, fines or rates) > Schedule events or programmes and determine where they will be held or where services will be offered > Communicate their availability through brochures, signs, public-service announcements or advertisements.

Often the non-profit organisations that carry out these functions do not realise they are engaged in marketing. The biggest obstacle to introducing marketing into a non"****** DEMO - www.ebook-converter.com*******"

business organisation may be the word ‘marketing’ itself. Many people think marketing is of value only to commercial, profit-seeking firms. Some even consider marketing activities unprofessional, unethical, or otherwise inappropriate for non-business organisations. These views clearly reflect inaccurate perceptions of marketing.

4.1 Factors contributing to the acceptance of LO10 marketing by non-profit organisations Global events of the past decade have again highlighted the severe pressure most non-profit organisations face when they try to alleviate human suffering. The extent of the floods in the Philippines, the tsunami in Indonesia, and the war in Iraq have forced many non-profit organisations that provide relief and aid to operate a less-than-sufficient service because of the lack of adequate funding and shortage of volunteers. In addition to the pressure and demands created directly by such tragedies – which reinforce the need for the application of marketing principles in non-profit organisations – other factors have also contributed to a possibly greater role for marketing in non-profit organisations. These factors are: •

Increased privatisation. Governments are increasingly shifting their responsibility for certain social services by means of privatisation to non-profit organisations. Nonprofit organisations are experienced and use innovative means to decrease costs and improve the effectiveness with which they deliver services that were traditionally

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managed by government departments. Privatisation can take on many formats, such as short-term contracts, management contracts, joint ventures or total divestiture of public programmes.20 In short, many governments want to rid themselves of these functions. • Decreased support from traditional sources. Excluding their direct income from sales and services rendered, many non-profit organisations are highly dependent for their financial resources on government subsidies or grants, and corporate and private donations. Many nonprofit organisations experience a decline in such sources of income. Difficult financial times for businesses usually mean reduced financial support for non-profit organisations. • Increased competition among non-profit organisations. Some non-profit organisations have managed to become very effective at marketing themselves. Some large non-profit organisations even employ highly sophisticated marketing strategies. This approach creates pressure for competing non-profit organisations that are not skilled in marketing themselves for contributions from donors. • Increase in the number of non-profit organisations. Specifically, there is an increase in non-profit organisations that attend to relatively newer phenomena, such as HIV/Aids. • Absence of tax incentives. For a number of years now, contributions to registered non-profit organisations have not qualified for deductions from income for tax purposes. Therefore, there are limited tax incentives available to individuals or organisations to contribute "****** DEMO - www.ebook-converter.com*******"

financially to non-profit organisations. The abovementioned factors, especially as far as donors and volunteers are concerned, warrant a consideration of marketing to help non-profit organisations become more effective in their ability to draw funds and volunteers.

4.2 The dual role of marketing in non-profit LO11 organisations The marketing task of a non-profit organisation is more demanding than that of firms that market products or services. Non-profit organisations have to market themselves to various stakeholders, such as the general public and government. In addition to this, the stakeholders are very diverse in nature. On the one hand, the non-profit organisation must market itself to its beneficiaries or potential beneficiaries; additionally, it must market the organisation to appeal to donors and volunteers. The dual nature of non-profit marketing has been described as ‘the clients for whom the charity exists to benefit, and the donors without whom the charity would not exist’.21 Figure 15.2 illustrates these two highly diverse constituencies at which the non-profit organisation must direct its marketing efforts. When a non-profit organisation markets itself to its beneficiaries the marketing objective will focus on the problem to be solved or the relief to be provided to alleviate the distress of members of its target market. This focus is at times an ‘easy’ task when shelter, food and clothing, for "****** DEMO - www.ebook-converter.com*******"

example, are provided to disaster victims. But the task can be very difficult, on the other hand, when the ‘beneficiary’ does not want to benefit from the non-profit organisation’s endeavours. An example of the latter type would be an alcoholic who does not want to undergo treatment offered by a non-profit organisation. Marketing their services or products to beneficiaries is a natural task for non-profit organisations – this is the reason they exist. When a non-profit organisation has to market itself for inputs, the marketing exercise becomes more complicated. For instance, the marketing approach that will appeal to donors and volunteers not only differs between these two groups, but different donors must also be approached in different ways. Table 15.6 illustrates the diversity of donors and volunteers that can be of value to non-profit organisations. Figure 15.2 The diverse marketing constituencies of non-profit organisations

Table 15.6 Major types of donors and volunteers

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Donors •

•

Fund donors > Foundations - Corporate - Family - General - Community > Business enterprises > Government > Individuals Donors of gifts in kind

Volunteers • • •

Day-to-day workers Day-to-day professional staff Non-paid board of directors or trustees

When a non-profit organisation wishes to approach a potential donor, it should ensure that its activities fall within its declared mission statement. A good fit between the nonprofit organisation’s activities and the donor’s mission is essential for effective solicitation of donor funds. Businesses are progressively involving themselves more with corporate social responsibility activities to get an edge in competition. The following are some examples that illustrate this fit: • • •

•

Literacy: Efforts to increase literacy are supported by publishing firms HIV/Aids: Life-insurance firms invest in Aids-prevention measures Environmentalism: Firms that manufacture outdoor clothing and organisations that extract natural resources support non-profit environmentally concerned groups Medical care: Medical schemes advise their members to

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join health clubs and gyms for regular exercise. Although it is expected of business firms to undertake or contribute to programmes that project them as socially responsible, it can be argued that a business firm’s main motive for donating funds is driven by self-interest. The message for non-profit organisations is this that business firms will donate to causes that will benefit their own longterm interests.

4.3 Sources of competition faced by nonprofit organisations

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Non-profit organisations have to contend with diverse forms of competition such as the following: •

•

•

Competition with for-profit firms. Many non-profit organisations rent out their halls or have gift shops or bookshops on their premises. In this instance, non-profit organisations compete directly with firms that undertake such ventures for profit. ‘Competition’ with the public sector. Although competition does not literally take place, one can ask the question – why do non-profit organisations exist? It has been found that non-profit organisations are generally more responsive and specialised to deal with consumer needs. They tend to be more flexible, less bureaucratic and more innovative than government departments or agencies that attend to social issues. Competition with other non-profit organisations. Four

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areas of competition are relevant when considering competition with other non-profit organisations, namely funding, personnel, users and influence and prestige. When a non-profit organisation competes for funding, it not only competes with other organisations that offer similar, related or substitutable services, but also with those that employ similar forms of fund-raising appeals. Most non-profit organisations are labour-intensive and, therefore, have to rely on a cadre of social workers and volunteers. The supply of voluntary assistance is not inexhaustible and non-profit organisations compete with one another not only for the acquisition of such labour and skills, but also for the retention of labour and skills. In contrast with the competition for funding, many nonprofit organisations are unaware of the competition for users. The term ‘users’ refers to customers and clients, and includes both existing and potential users who are either unaware of the services offered or need to be persuaded to use the services of the non-profit organisation. The last facet of competition with other non-profit organisations is competition for influence and prestige. Influence and prestige are important when non-profit organisations lobby for their cause or approach businesses for support. Some non-profit organisations are so large, powerful and well known (the Red Cross is an example) that they receive a large share of resources regardless of the efforts of competing non-profit organisations. Another, not so noticeable, source of competition is generic competition. A history museum, for instance, may compete with guided tours of a famous sports ground for visitors. "****** DEMO - www.ebook-converter.com*******"

•

International competition. Some large non-profit organisations, such as the Red Cross and World Vision, operate all over the world. Local non-profit organisations experience difficulties in competing with such large nonprofit organisations because the latter possess a large reservoir of skills and have also created a lot of goodwill for themselves over the years. These factors make it difficult for local organisations to compete with large international non-profit organisations.

4.4 The unique aspects of non-business marketing strategies

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Like their counterparts in for-profit firms, non-business managers develop marketing strategies to bring about mutually satisfying exchanges with target markets. However, marketing in non-business organisations is unique in many ways – including the setting of marketing objectives, the selection of target markets and the development of appropriate marketing mixes.

4.4.1 Objectives In the private sector, the profit motive is both an objective for guiding decisions and a criterion for evaluating results. Non-business organisations do not pursue profitability for redistribution to owners or shareholders. Instead, their focus is to deliver the services or products to its beneficiaries, such as influencing people’s behaviour or distributing food or medical care. For example, the "****** DEMO - www.ebook-converter.com*******"

Methodist Church does not gauge its success by the amount of money left in the collection plates. The Museum of Science and Industry does not base its performance evaluations on the monetary value of tokens put into the turnstiles. Instead, most non-business organisations are expected to provide equitable, effective and efficient services that respond to the needs and preferences of multiple constituencies. These include users, players, donors, politicians, appointed officials, the media and the general public. Non-business organisations cannot measure their success or failure in strictly financial terms. The lack of a financial ‘bottom line’ and the existence of multiple, diverse, intangible and sometimes vague or conflicting objectives make prioritising objectives, making decisions and evaluating performance difficult for nonbusiness managers.

4.4.2 Target markets Three issues relating to target markets are characteristic of non-business organisations: •

Apathetic or strongly opposed targets. Private-sector firms usually give priority to developing those market segments that are most likely to respond to particular offerings. By contrast, non-business organisations must often target those who are apathetic about or strongly opposed to receiving their services. These services may include vaccinations, family-planning guidance, help for problems such as drug or alcohol abuse and

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psychological counselling. Given the desire or need to reach unresponsive markets, should the organisation focus on the least resistant segment, the most resistant segment – or both? Valid arguments can be made for any of these options, depending on availability of financial resources, public health or welfare considerations, and the like. • Pressure to adopt undifferentiated segmentation strategies. Non-business organisations often adopt undifferentiated strategies by default. Sometimes they fail to recognise the advantages of careful targeting, or an undifferentiated approach may appear to offer economies of scale and low per capita costs. In other instances, non-business organisations are pressured or required to serve the maximum number of people by targeting the average user. The problem with developing services targeted at the average user is that there are few ‘average’ users. Therefore, such strategies typically fail to satisfy fully any market segment. Most profit-seeking firms are well aware of the need for segmenting markets and developing targeted marketing programmes. • Complementary positioning. The main role of many non-business organisations is to provide services, using available resources, to those who are not adequately served by private-sector firms. As a result, the nonbusiness organisation must often complement rather than compete with the efforts of others. The positioning task is to identify under-served market segments and develop marketing programmes that match their needs, rather than to target the niches that may be most profitable. "****** DEMO - www.ebook-converter.com*******"

4.4.3 Product decisions Non-business organisations share important characteristics with private-sector service firms. Both market intangible products, but often require the customer to be present during the production business. Both business and nonbusiness services vary greatly from producer to producer and from day to day, even from the same producer. Business and non-business services cannot be stored in such a way that tangible goods can be produced, saved and sold at a later date. However, there are three product-related distinctions between business and non-business organisations: •

Benefit complexity. Rather than simple product concepts, like ‘Africa’s warmest welcome’ or ‘We earn money the old-fashioned way’, non-business organisations often promote complex behaviours or ideas. Examples are the need to exercise and eat healthily, not to drink and drive and not to smoke tobacco. The benefits that a person would receive are complex, long-term and intangible, and may, therefore, be difficult to communicate to consumers. • Benefit strength. The benefit strength of many nonbusiness offerings is quite weak or indirect. What are the direct, personal benefits to you of driving at 60 kilometres per hour, donating blood or asking your neighbours to contribute money to charity? By contrast, most private-sector (for-profit) service firms can offer customers direct, personal benefits in an exchange relationship. • Involvement. Many non-business organisations market "****** DEMO - www.ebook-converter.com*******"

products that elicit either very low involvement (e.g. ‘Prevent forest fires’ or ‘Don’t litter’) or very high involvement (e.g. ‘Join the military’ or ‘Stop smoking’). In the case of private-sector goods and services, the typical involvement range is much narrower. Traditional marketing-communication tools may be inadequate to motivate the adoption of either low- or highinvolvement products.

4.4.4 Distribution decisions The nature of services means that distribution channels must often be direct from producer to consumer and that services cannot be inventorised in anticipation of demand. Non-business organisations share these characteristics with profit-sector service firms. A non-profit organisation’s capacity for distributing its service offerings to potential customer groups when and where they want those services is usually a key variable in determining the success of those service offerings. For example, educational institutions offer educational programmes to reach the general public. Many large universities have satellite campus locations to provide easier access for students in other areas, such as the University of Pretoria’s satellite campus in Nelspruit. Some educational institutions also offer classes to students at off-campus locations via video technology, such as North West University’s distance learning courses. The extent to which a service depends on fixed facilities has important implications for distribution decisions. Obviously, services like rail transit and lake fishing can be "****** DEMO - www.ebook-converter.com*******"

delivered only at specific points. Many non-business services, however, do not depend on special facilities. Counselling, for example, need not take place in a psychologist’s office. It may occur wherever counsellors and clients can meet. Fund-raising also requires good channels of distribution. The Salvation Army places its collection tins in areas with heavy pedestrian traffic during the Christmas season. The donations then flow mostly to local units, with a small amount going to the national office. The Cancer Association of South Africa has the annual Sanlam Cancer Challenge, and there is the ‘Green Campaign’ of Child Welfare.

4.4.5 Marketing communication decisions Many non-business organisations are explicitly or implicitly prohibited from advertising, which obviously limits their advertising and promotion options. Other non-business organisations simply do not have the resources to utilise the services of advertising agencies, promotion consultants or marketing staff for fund-raising purposes. However, nonbusiness organisations have at their disposal unique advertising and promotion options: •

Professional volunteers. Non-business organisations often contract marketing, sales and advertising professionals to help them develop and implement marketing-communication strategies. In some instances, an advertising agency donates its services in exchange for potential long-term benefits. For example, one advertising agency donated its services to a major US

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•

symphony orchestra because the orchestra had a blueribbon board of directors. Donated services create goodwill, personal contacts and general awareness of the donor’s organisation, reputation and competency. Sales promotion activities. Sales promotion activities that make use of existing services or other resources are increasingly being used to draw attention to the market offering of non-business organisations.

4.4.6 Price decisions •

•

Pricing objectives: Revenue is the main pricing objective in the profit sector – or, more specifically, profit maximisation, sales maximisation, target return on sales or investment, and so on. Many non-business organisations must also be concerned about revenue. However, non-business organisations strive to defray costs either partially or fully, rather than achieve a profit for distribution to owners or shareholders. Non-business organisations aim to redistribute income, for example through taxation and sliding-scale fees. Moreover, they strive to allocate resources fairly among individuals or households or across geographic or political boundaries. Non-financial prices: In many non-business situations, consumers are not charged a monetary price, but instead must absorb non-monetary costs. The importance of those costs is illustrated by the large number of eligible citizens who do not take advantage of so-called ‘free services’ for the poor. Non-monetary costs consist of the opportunity cost of time, embarrassment costs and effort costs.

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•

•

•

Indirect payment: Indirect payment through taxes is common to marketers of ‘free’ services, such as libraries, fire protection and police protection. Indirect payment is not a common practice in the for-profit sector. Separation between payers and users: By design, the services of many charitable organisations are provided to those who are relatively poor, and largely supported by those who are financially better off. Although examples of separation between payers and users can be found in the profit sector (such as insurance claims), the practice is much less prevalent than in the non-profit sector. Below-cost pricing: An example of below-cost pricing is university tuition. Virtually all public colleges and universities price their services at below full cost. This practice also exists in the profit sector, although it is generally an undesirable, temporary situation.

5. Business-to-business marketing

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Business-to-business marketing is the marketing of goods and services to individuals and organisations for purposes other than personal consumption. The sale of a computer to be used on the production line of a motor vehicle manufacturer is an example of a business-to-business product. Business-to-business products include those that are used to manufacture other products, which become part of another product, that aid the normal operations of a firm or that are acquired for resale without any substantial change in form. The key characteristic distinguishing "****** DEMO - www.ebook-converter.com*******"

business-to-business products from consumer products is ‘intended use’ rather than ‘physical characteristics’. A product that is purchased for personal or family consumption or as a gift is a consumer product. If that same product, such as a microcomputer or a cellphone, is bought for use in a business, then it is a business-to-business product.

5.1 Business-to-business customers

LO15

The business-to-business market consists of four major categories of customers: producers, resellers, governments and institutions.

5.1.1 Producers The producer segment of the business-to-business market includes profit-orientated individuals and organisations that use purchased goods and services to produce other products, to incorporate into other products or to facilitate the daily operations of the firm. Individual producers often buy large quantities of goods and services. Firms like Toyota in Japan spend billions of dollars annually on business products like steel and metal components that are used to manufacture motor vehicles.

5.1.2 Resellers The reseller market includes retail and wholesale businesses that buy finished goods and resell them for a profit. A retailer sells mainly to final consumers; wholesalers sell "****** DEMO - www.ebook-converter.com*******"

mostly to retailers and other organisational customers. Consumer-product firms, like Unilever, Nestlé and Adcock Ingram, sell directly to large retailers and retail chains, and through wholesalers, to smaller retail units. Businessproduct intermediaries are wholesalers that buy business products and resell them to business customers. They often carry thousands of items in stock and employ sales forces to call on business customers. Businesses that wish to buy 50 pencils or 100 kilograms of fertiliser usually purchase these items from local intermediaries rather than directly from manufacturers.

5.1.3 Governments A third major segment of the business-to-business market is governments. Government organisations include hundreds of central, provincial and local buying units. They make up what is considered to be the largest single market for goods and services in the world. Contracts for government purchases are often put out to tender. Interested suppliers submit tenders (usually sealed) to provide specified products during a particular time. Sometimes the lowest tenderer is awarded the contract. When the lowest tender is not awarded the contract, strong evidence must be presented to justify the decision. Grounds for rejecting the lowest tender include lack of experience, inadequate financing or poor past performance. Tendering allows all potential suppliers a fair chance of winning government contracts and helps ensure that public funds are spent wisely. "****** DEMO - www.ebook-converter.com*******"

5.1.4 Central government Name just about any product or service available and chances are that someone in the central government uses it. The US Federal Government, the central government in the United States, is the world’s largest customer. Although much of the central government’s buying is centralised, no single central agency or department contracts for all the government’s requirements, and no single buyer in any agency or department purchases all that the agency or department needs. A central government can be described as a combination of several large firms with overlapping responsibilities and thousands of small, independent units. Selling to provinces and cities can be less frustrating for both small and large suppliers than selling to central government. Paperwork is usually simpler and more manageable than at the central-government level. On the other hand, at central-government level, suppliers are faced with hundreds of governmental units that are likely to buy their wares. Provincial and local buying agencies include schools, hospitals and road departments.

5.1.5 Institutions The fourth major segment of the business-to-business market is institutions that seek to achieve goals different from such ordinary business goals as profit, market share and return on investment. This segment includes schools, hospitals, universities, churches, research foundations and other so-called non-business organisations. Table 15.7 The standard industrial classification for South Africa: Major "****** DEMO - www.ebook-converter.com*******"

divisions 1

Agriculture, hunting, forestry and fishing

2

Mining and quarrying

3

Manufacturing

4

Electricity, gas and water supply

5

Construction

6

Wholesale and retail trade; repair of motor vehicles, motor cycles and personal and household goods; hotels and restaurants

7

Transport, storage and communication

8

Financial intermediation, insurance, real estate and business services

9

Community, social and personal services

10

Private households, extraterritorial organisations, representatives of foreign governments and other activities not adequately defined

5.2 Classification of business and government markets

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The standard industrial classification system (SIC) is a detailed numbering system for classifying business and government organisations by their main economic activity. "****** DEMO - www.ebook-converter.com*******"

The SIC system divides the economy into ten main divisions and assigns two-digit numbers to major industry groups within each division. Table 15.7 lists all the main divisions of the SIC in South Africa. For each two-digit code, Statistics South Africa publishes data on total industry sales and employment. This information is further broken down by geographic region and is available for each province in South Africa. Two-digit SIC industry categories are then further subdivided into three-digit and four-digit categories, which represent sub-industries within the broader two-digit categories. Although SIC data are helpful for analysing, segmenting and targeting markets, they have significant limitations. For example, only one code is assigned to each firm. Therefore, the system does not accurately describe firms that engage in several different activities or that provide various types of products. Furthermore, the system is too general to describe adequately industries that are growing more sophisticated and diversified.

5.3 Differences between business-tobusiness and consumer markets

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The basic philosophy and practice of marketing is the same whether the customer is a business organisation or a final consumer. Business markets do, however, have different characteristics from consumer markets. Table 15.8 summarises the main differences between business-tobusiness and consumer markets. "****** DEMO - www.ebook-converter.com*******"

5.3.1 Demand Consumer demand for products is quite different from demand in the business-to-business market. Unlike consumer demand, business-to-business demand may be derived, inelastic, joint and fluctuating. Derived demand The demand for business-to-business products is called derived demand because firms buy products to be used in producing consumer products. In other words, the demand for business-to-business products is derived from the demand for consumer products. For example, motor vehicle and truck manufacturers account for a major share of steel, rubber and aluminium consumption. Because demand for these products is derived from the demand for motor vehicles and trucks by final consumers, business-tobusiness marketers must carefully monitor demand patterns and changing preferences in final consumer markets, even though their customers are not in those markets. Moreover, business-to-business marketers must carefully monitor their customers’ forecasts because derived demand is based on expectations of future demand for those customers’ products. Some business-to-business marketers not only monitor final consumer demand and consumer forecasts, but also try to influence final consumer demand. In South Africa, lower interest rates in the period 2004– 2006 led to almost unprecedented demand for housing, which drove the demand for cement, which, in turn, led to huge profits for cement-producing firms, such as PPC and Lafarge. The demand for cement is, therefore, ‘derived’ from the demand for housing. Similarly, the demand for carbon dioxide used "****** DEMO - www.ebook-converter.com*******"

in fizzy drinks depends on the demand for fizzy drinks. Table 15.8 Principal differences between business-to-business and consumer markets Characteristic

Business-to-business market

Consumer market

Demand

Organisational

Individual

Purchase volume

Larger

Smaller

Number of customers

Fewer

Many

Location of buyers

Geographically concentrated

Dispersed

Distribution structure

More direct

More indirect

Nature of buying

More professional

More personal

Nature of buying influence

Multiple

Single

Type of negotiations

More complex

Simpler

Use of reciprocity

Yes

No

Use of leasing

Greater

Lesser

Primary promotional method

Personal selling

Advertising

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Inelastic demand The demand for many business-to-business products is inelastic with regard to price. Inelastic demand means that an increase or decrease in the price of the product will not significantly affect demand for the product. The price of a product used in the production of or as part of a final product is often a minor part of the final product’s total price. Therefore, demand for the final consumer product is not affected. If the price of motor vehicle paint or spark plugs rose significantly – say by 200 per cent in one year – do you think the number of new cars sold that year would be affected? Probably not. Joint demand Joint demand occurs when two or more items are used together in a final product. For example, a decline in the availability of memory chips will slow the production of laptops, which will, in turn, reduce the demand for flash disks. Many business products, like hammer heads and hammer handles, also exemplify joint demand. Fluctuating demand The demand for business-to-business products – particularly new plants and equipment – tends to be more unstable than the demand for consumer products. A small increase or decrease in consumer demand can produce a much larger change in demand for the facilities and equipment needed to make the consumer product. Economists refer to this phenomenon as the multiplier effect (or the accelerator principle). Boeing Aircraft uses sophisticated surface grinders to "****** DEMO - www.ebook-converter.com*******"

make aeroplane parts. Suppose that Boeing currently uses 20 surface grinders. Each machine lasts about ten years. Purchases have been timed so that two machines will wear out and be replaced annually. If the demand for aeroplane parts does not change, two grinders will be bought this year. If the demand for parts declines slightly, only 18 grinders may be needed, and Boeing won’t replace the worn ones. However, suppose next year demand returns to previous levels plus a little more. To meet the new level of demand, Boeing will need to replace the two machines that wore out in the first year and the two that wore out in the second year, and buy one or more additional machines. The multiplier effect works this way in many industries, producing highly fluctuating demand for business-to-business products.

5.3.2 Purchase volume Business-to-business customers buy in much larger quantities than consumers. Just think how large an order Kelloggs typically places for the wheat bran and raisins used to manufacture Raisin Bran. Imagine the number of tyres that Volkswagen buys at one time.

5.3.3 Number of customers Business-to-business marketers usually have far fewer customers to serve than consumer marketers. The advantage is that it is a lot easier to identify prospective buyers, monitor current customers’ needs and levels of satisfaction and personally attend to existing customers. The main disadvantage is that each customer becomes crucial – especially for those business-to-business manufacturers "****** DEMO - www.ebook-converter.com*******"

that have only a few customers.

5.3.4 Location of buyers Business-to-business customers tend to be much more geographically concentrated than consumers. Examples are the mining, fishing, sugar and wine industries. A large metropolitan city such as Johannesburg will also contain a large proportion of business-to-business customers for many products and services.

5.3.5 Distribution structure Many consumer products pass through a distribution system that includes the producer, one or more wholesalers and a retailer. However, because of many of the characteristics already mentioned, channels of distribution are typically shorter in business-to-business marketing. Direct channels, whereby manufacturers market directly to users, are more common.

5.3.6 Nature of buying Unlike consumers, business-to-business buyers usually approach purchasing rather formally. Businesses use professionally trained purchasing agents or buyers who spend their entire career purchasing a limited number of items. They get to know the items and the sellers well and continued business is often dependent on sound relations.

5.3.7 Nature of buying influence Normally more people are involved in a single business "****** DEMO - www.ebook-converter.com*******"

purchase decision than in a consumer purchase. Experts from fields as varied as quality control, marketing and finance, as well as professional buyers and users, may be grouped in a single buying centre, and all contribute to buying decisions.

5.3.8 Types of negotiations Consumers are used to negotiating prices on motor vehicles and real estate. But with most products/services, South African consumers expect sellers to set the price and other conditions of sale, such as time of delivery and credit terms. However, negotiating is common in business-to-business marketing. Buyers and sellers negotiate product specifications, delivery dates, payment terms and other pricing matters. Sometimes these negotiations occur during many meetings over several months. Final contracts are often very long and detailed.

5.3.9 Use of reciprocity Business purchasers often choose to buy from their own customers, a practice known as reciprocity. This practice is neither unethical nor illegal unless one party coerces the other and the result is unfair competition. Reciprocity is generally considered a reasonable business practice. If all possible suppliers sell about the same product for about the same price, doesn’t it make sense to buy from those firms that buy from you?

5.3.10 Use of leasing Consumers normally buy products rather than leasing them. "****** DEMO - www.ebook-converter.com*******"

Businesses, on the other hand, commonly lease expensive equipment, like computers, construction equipment, vehicles and aircraft. This allows firms to reduce capital outflow, acquire a seller’s latest models and receive better services – and they often gain a tax advantage as well.22 The lessor, the firm providing the product, may be either the manufacturer or an independent intermediary. The benefits to the lessor include greater total income from leasing compared with selling and a chance to do business with customers that cannot afford to buy. Leasing, however, is not without risks. When airlines in the United States slashed spending in the early 1990s, hundreds of planes owned by aircraft makers and leasing firms lay idle.23

5.3.11 Primary promotional method Business-to-business marketers tend to emphasise personal selling in their promotional efforts, especially for expensive items, custom-designed products, large-volume purchases and situations requiring negotiations. The sale of many business-to-business products requires a great deal of personal contact. With so much riding on a single sale in the business-to-business market, salespeople tend to go to great lengths to sway buyers’ opinions. So it is perhaps not surprising that ethical issues sometimes arise.

5.4 Types of business-to-business products

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Business-to-business products generally fall into one of the "****** DEMO - www.ebook-converter.com*******"

following seven categories, depending on their use: major equipment, accessory equipment, raw materials, component parts, processed materials, supplies and business services.

5.4.1 Major equipment Major equipment includes such capital goods as large or expensive machines, mainframe computers, blast furnaces, generators, aircraft and buildings. (These items are also commonly called installations.) Major equipment is depreciated over time rather than charged as an expense in the year it is purchased. In addition, major equipment is often custom-designed for each customer. Personal selling is an important part of the marketing strategy for major equipment because distribution channels are almost always direct from the producer to the business user.

5.4.2 Accessory equipment Accessory equipment is generally less expensive and has a shorter lifespan than major equipment. Examples include portable drills, power tools, microcomputers and fax machines. Accessory equipment is often charged as an expense in the year it is bought rather than depreciated over its useful life. Unlike major equipment, accessories are more often standardised and are usually bought by more customers. These customers tend to be widely dispersed. For example, all types of businesses buy microcomputers. Local industrial intermediaries (wholesalers) play an important role in the marketing of accessory equipment, because business buyers often purchase accessories from "****** DEMO - www.ebook-converter.com*******"

them. Regardless of where accessories are bought, advertising is a more important promotional tool for accessory equipment than for major equipment.

5.4.3 Raw materials Raw materials are unprocessed extractive or agricultural products. Examples include mineral ore, timber, wheat, corn, fruit, vegetables and fish. Raw materials become part of finished products. Extensive users, such as steel or wood mills, food canners and soft-drink bottlers, generally buy huge quantities of raw materials such as wood, fruit and sugar. Because there is often a large number of relatively small sellers of raw materials, none can greatly influence price or supply. Therefore, the market tends to set the price of raw materials, and individual producers have little pricing flexibility unless they organise a collective effort. Promotion is almost always personal selling, and distribution channels are usually direct from producer to business user. When advertising is used, it is placed in trade journals, such as Food & Beverage Reporter Online (see the Huletts advertisement).

5.4.4 Component parts Component parts are either finished items ready for assembly or products that need very little or no processing before becoming part of some other product. Examples include spark plugs, tyres and electric motors for cars. A special feature of component parts is that they often retain their identity after becoming part of the final product. For example, car tyres are clearly recognisable as part of a car. "****** DEMO - www.ebook-converter.com*******"

Moreover, because component parts often wear out, they may need to be replaced several times during the life of the final product. As a result, there are two important markets for many component parts: the original equipment manufacturer (OEM) market and the replacement market. Many of the business-to-business features listed in Table 15.8 characterise the OEM market. The difference between unit costs and selling prices in the OEM market is often small, but profits can be quite substantial because of volume buying.

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EXAMPLE >> Rarely does advertising play a key role in the promotion strategy for OEM markets. Even rarer is advertising to end-users. Two exceptions to this generalisation are NutraSweet, the artificial sweetener, and Intel, the semi-conductor firm. NutraSweet encourages the manufacturers of products such as Coke Light and Extra chewing gum to feature its logo on their containers and "****** DEMO - www.ebook-converter.com*******"

packages. Intel pays computer manufacturers to feature its trademark – ‘Intel inside’ – in their advertisements and on their products. Because NutraSweet and Intel are not observable they try to create a brand image and customer preference for their brands by ‘visualising’ it. Buyers needn’t know exactly what NutraSweet is or what Intel makes if those buyers can be convinced that products containing these components are preferable. The replacement market is composed of organisations and individuals that buy component parts to replace worn-out parts. Because components often retain their identity in final products, users may choose to replace a component part with the same brand used by the manufacturer, for example, the same brand of car tyre or battery. The replacement market operates differently from the OEM market, however. Whether replacement buyers are organisations or individuals, they tend to demonstrate the characteristics of consumer markets that are shown in Table 15.8. Consider, for example, a motor vehicle replacement part. Purchase volume is usually small, and there are many geographically dispersed customers, who typically buy from car dealers or parts stores. Negotiations do not occur, and neither reciprocity nor leasing is usually an option. Manufacturers of component parts often direct their advertising towards replacement buyers. Volkswagen and other motor vehicle manufacturers, for example, compete with independent firms in the market for replacement car parts.

5.4.5 Processed materials Processed materials are used directly in the manufacture of other products. Unlike raw materials, they have undergone "****** DEMO - www.ebook-converter.com*******"

some processing. Examples include sheet metal, chemicals, speciality steel, wood and plastics. Unlike component parts, processed materials do not retain their identity in final products. Most processed materials are marketed to OEMs or to intermediaries servicing the OEM market. Processed materials are generally bought according to customer specifications or to some industry standard, as is the case with steel and wood. Price and service are important factors in choosing a supplier.

5.4.6 Supplies Supplies are consumable items that do not become part of the final product, such as lubricants, detergents, paper towels, pencils and paper. Supplies are normally standardised items that purchasing agents routinely buy. They usually have relatively short lives and are inexpensive compared with other business goods. Because supplies generally fall into one of three categories – maintenance, repair or operating supplies – these items are often referred to as MRO. Competition in the MRO market is intense. Bic and Paper-Mate, for example, battle for business purchases of inexpensive ballpoint pens.

5.4.7 Business services Business services are expense items that do not become part of a final product. Businesses often retain outside providers to perform janitorial, advertising, legal, management consulting, marketing research, maintenance and other services. Hiring an outside provider is a good option when it costs less than hiring or assigning an employee to perform "****** DEMO - www.ebook-converter.com*******"

the task, or when an outside provider is needed for particular expertise.

5.5 The business-to-business purchase process

LO19

The business-to-business purchase process is set out in Table 15.9. The process begins with the recognition of a need. For example, a firm may realise that it must replace old machinery or expand its production facilities. Occasionally business-to-business marketers will use advertising to make potential business buyers aware of a need by emphasising the benefits of a product by means of advertising. SupaCrisp palm oil, for example, is targeted at restaurants, hotels and other establishments that prepare large numbers of meals at a time. ‘Your customer will taste the difference … while you reap the benefits’, says the advertisement. ‘For the best results in the kitchen, satisfied customers and more profits, use SupaCrisp Palm Oil. It’s the best way to cook. It’s cholesterol-free, it’s additive-free, and it has a longer working life than other vegetable oils. You save money.’ The next step in the purchase sequence is a tentative decision on the type of product needed. Sometimes the buying firm then drafts product specifications. More often, though, members of the buying centre select several potential sources of supply and begin negotiations. Purchasing agents may even keep lists of approved suppliers for various types of products. Negotiations begin with a discussion of the product needed, the time frame within which it is needed and the terms of delivery. Negotiations "****** DEMO - www.ebook-converter.com*******"

often end when each of the potential suppliers submits a proposal with a bid or price to be charged for the product. The buyer then analyses the proposals and either selects the best one or asks suppliers for clarifications.

Table 15.9 shows that although business-to-business purchasing and consumer buyer behaviour (see Chapter 3) share many similarities, the former certainly has some "****** DEMO - www.ebook-converter.com*******"

differentiating features. Negotiations are also increasingly done by means of electronic platforms, as Technology reader ‘Electronic marketplace’ (below) shows. Table 15.9 Steps in the business-to-business purchase process Need recognition

The user realises that the current product either can no longer do the job or cannot do it as well as newer products.

Product definition

The user, having extensive knowledge of the task to be done, defines the type of product needed to complete the task.

Development of product specifications

When the product must be customised, the influencer works with the salesperson to develop specifications. The influencer is often an engineer who knows how to adapt machinery.

Search for qualified suppliers

The purchasing agent searches for qualified suppliers. Names of suppliers may be provided by influencers, such as quality-control personnel who have come into contact with potential suppliers at trade shows or exhibitions.

Acquisition and analysis of products

The purchasing agent takes product proposals or ‘bids’ from suppliers and, with the decision-makers, analyses the proposals.

Selection of supplier

The purchasing agent and other members of the buying centre analyse alternative bids and vendors, and select a supplier.

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Order placement

The purchasing agent (usually) places the order and establishes the delivery and order routines, as well as the financial terms.

Product inspection

Receiving, inspection or quality-control employees check for shortages, damaged merchandise or incorrect shipments.

Product performance evaluation

Purchasing agents and others monitor the supplier’s performances. Users monitor the product’s performance.

>>Technology in action Electronic marketplace Arch-rivals in the European food sector are reportedly lining up to join a new electronic marketplace started by Nestlé. France’s Danone has joined the venture, and Unilever has been invited. Companies that sign up for the venture, known as CPGMarket.com, will supposedly drive down their costs by combining orders for supplies ranging from office furniture and packaging material to raw food commodities, such as cocoa and butter. Members will be able to automate bookkeeping chores, carry out transactions, hold auctions and solicit contract tenders – all online. The companies will be able to see the different prices from all suppliers. Nestlé’s chief executive, Peter Brabeck, said: ‘We don’t believe very much in Old Economy and "****** DEMO - www.ebook-converter.com*******"

New Economy. What we believe in is [that] through this new information technology, there are new possibilities for making the way we’re running our business even more efficient.’ SOURCE: Electronic marketplace. Food & Beverage Reporter Online, no. 69, 28 July 2000

6. Travel and tourism marketing

LO20

Major events around the world during the past two decades, such as the fall of the Berlin Wall and the demise of communism in many Eastern European countries, have opened up the whole world for travel and tourism. Visitors from the Western world can now visit Moscow, for example, for a holiday, which was almost impossible during the era of the Soviet Union. Travel/tourism has become the world’s largest industry; the World Travel and Tourism Council (WTTC) estimates that travel and tourism generated $6,99 billion (9 per cent of the world GDP) in 2013.24 It was also responsible for 266 million jobs, representing 1 in every eleven jobs globally in 2013. 25 Travel and tourism have become major contributors to economic development. South Africa also benefits greatly from international travel and tourism. In 2013, tourists spent R97,8 billion in South Africa.26

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6.1 The main sectors of the travel and tourism industry

LO21

Travel and tourism is, essentially, a total market in itself, with consumer demand for a very broad spectrum of travelrelated products. The total market consists of many segments and even more products and services provided by a host of organisations which deliver specialised products and services. These different segments are shown in Table 15.10.

6.2 The special characteristics of travel and tourism services In addition to the generic characteristics common to all services, travel and tourism services have at least three further features that are particularly relevant to this industry. These three characteristics are seasonality, the interdependence of different tourism products and the relatively high fixed costs of tourism operations.27

6.2.1 Seasonality and demand fluctuations The demand for leisure tourism markets fluctuates greatly during the year. In South Africa, the summer is the main season for holidays. In Europe, the winter is a busy holiday season for skiing and other snow-bound activities. School holidays and business-year cycles also tend to influence the time most people go on holiday. The result is that many tourism firms dealing with holiday markets fluctuate from "****** DEMO - www.ebook-converter.com*******"

peaks of 90 to 100 per cent capacity utilisation for a few weeks in the year, to troughs of 30 per cent or less for the rest of the year. The demand variations are acute because of the perishability of travel and tourism products, and it is always a major preoccupation of marketing managers to generate as much demand as market conditions permit in the troughs (low seasons). The response of marketing managers is to manage or manipulate demand. During the low-demand season (winter) for coastal accommodation in South Africa, most of the larger hotels offer breakaway packages, such as weekend specials, at a fraction of what they would cost during the peak season. If a firm can succeed in drawing business in the off-season, it will utilise the regular, available and inseparable capacity, and generate extra or marginal sales, which produce income at very little extra cost.

6.2.2 Interdependence of tourism products/services Most clients combine various services and products when they make travel and tourism decisions. Someone who books a holiday, as well as the mode of travel chosen to get to the destination, will also purchase accommodation, meals, entertainment and visit tourist attractions. From a supplier viewpoint, it is ideal, therefore, if various different suppliers can find ways to combine their respective efforts. Over time, the interdependence of tourism products and services has led to the development of product packages. Product packages are defined as ‘quality-assured, repeatable offers comprising two or more elements of transport, accommodation, food, destination attractions, "****** DEMO - www.ebook-converter.com*******"

other facilities and services (such as travel insurance). Product packages are marketed to the general public, described in print or electronic media, and offered for sale to prospective customers at a published, inclusive price, in which the costs of the product components cannot be separately identified.’28

6.2.3 High fixed costs of service operations An analysis of the income statements of travel and tourism businesses reveals a relatively high fixed cost to operate available capacity. Variable costs, on the other hand, tend to be relatively low. Fixed costs in respect of premises, rentals, leases, equipment, salaries and wages of full-time personnel have to be paid, irrespective of whether an attraction draws 10 000 or 1 000 visitors on any day. The reality of high fixed operational costs focuses service operators’ attention on the need to generate extra demand, especially additional or marginal sales, a very high proportion of which represent income gain at little or no extra cost. Table 15.10 Categories of organisations that provide products and services in the travel and tourism industry

SOURCE: Adapted from Middleton, V.T.C., Fyall, A., Morgan, M. & Ranchhod, A.

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2009. Marketing in travel and tourism (4th edition). Oxford: Elsevier, p. 11

6.3 The marketing mix in travel and tourism Because most of what is offered in the travel and tourism industry contains both product and service characteristics, it is deemed necessary to apply the seven ‘P’s marketing mix to the products and services of the travel and tourism industry. Table 15.11 highlights some of the product and service characteristics of travel and tourism. Table 15.11 also illustrates some of the adjustments that marketers of tourism-related services need to make to the marketing mix to appeal to the needs of the tourist consumer and traveller. Table 15.11 Example of the marketing mixes in travel and tourism

Hotel

Product (designed characteristics; packaging; branding)

Location; building size; room size; facilities in hotel; Holiday Inn; Marriott

Product (physical evidence)

Airline Routes; service frequency; aircraft type; seat size; decor; meals; style; SAA; Lufthansa

Staff numbers; uniforms; reception desk; decor Staff numbers; uniforms; check-in counters; type of food served

Price "****** DEMO - www.ebook-converter.com*******"

(normal or regular price; promotional prices – for each product offered)

Rack rates; corporate rates; frequent-user rates

First class; business class; economy class; standby

Promotion (solo and collaborative)

Advertising; sales promotions; public relations; sales force

Advertising in newspapers; travel magazines; agencies; financial publications, etc.

Advertising in newspapers; travel magazines; agencies; financial publications, etc.

Place Channels of distribution, including reservation systems Internet bookings

Computerised reservation systems; other hotels in group; travel agents; tour operators; airlines; 086 telephone numbers; Internet bookings

Computerised reservation systems; city offices; airport desks; travel agents; 086 telephone numbers; Internet bookings

Process

Reception desk; documentation

Check-in systems; baggage handling

People

Receptionists; waiters;

Cabin crew; ground staff

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cleaners

SASOL sponsorship At Sasol we pursue sponsorships that enhance our brand, inspire creativity "****** DEMO - www.ebook-converter.com*******"

and innovation, and create unique opportunities to build stakeholder relationships. We are proud to support selected sporting and artistic initiatives, as well environmental and educational organisations and events. We currently devote most of our sponsorship investment in South Africa to sport and sponsor several South African national teams, including: • The South African national women’s football team – ‘Banyana Banyana’ www.safa.net • The Sasol League www.safa.net • The South African Paralympics team www.sascoc.co.za • The men’s national wheelchair basketball team • The annual Sasol Rally www.sasolmotorsport.co.za. We also sponsor: • The Sasol New Signatures art competition www.sasolsignatures.co.za • The Black Tie Ensemble and the South African National Youth Orchestra www.sanyo.org.za/events • The Sasol Solar Challenge www.solarchallenge.org.za • The Techno X festival of science, engineering and technology www.sasoltechnox.co.za. In addition to these, we support environmental programmes focused on the conservation of wild dogs, vultures and ground hornbills, as well as educational programmes including natural history publications and birdingrelated projects. Through our corporate membership programme, Sasol supports socioeconomic initiatives including the Nepad Business Foundation, the Business Trust and the Black Management Forum. SOURCE: SASOL website http://www.sasol.co.za/about-sasol/company-profile/sponsorships (Accessed 26 August 2014)

QUESTIONS "****** DEMO - www.ebook-converter.com*******"

1 2 3

Do you think it is necessary for a firm like SASOL to become involved in sponsorships? Do you think SASOL’s sponsorship of sport and other organisations and events is a good idea? How does SASOL’s brand awareness compare with that of its competitors?

KEY CONCEPTS Accessory equipment: examples include portable drills, power tools, microcomputers and fax machines; generally less expensive and with a shorter life span than major equipment. Ambush marketing: the attempt of an organisation to create the impression of being an official sponsor of the event or activity by affiliating itself with that event without having paid the sponsorship rights fee or being a party to the sponsorship contract. Branded products: products that display only the logo and marks of the manufacturer. Business services: expense items that do not become part of a final product and are sometimes provided by outside providers, who perform advertising, legal, management consulting, marketing research, maintenance and other services. Component parts: either finished items ready for assembly or products that need very little or no processing before becoming part of some other product – examples include spark plugs, tyres and electric motors for cars. Derived demand: in cases where business-to-business products are used in the production of consumer products the demand for such products is derived from the demand for consumer products. Fluctuating demand: a small increase or decrease in consumer demand may produce a much larger change in demand for the facilities and equipment needed to make the consumer product. Economists refer to this phenomenon as the multiplier effect (or the accelerator principle). Heterogeneity: a characteristic of services that makes them less standardised and uniform than physical goods. Inelastic demand: an increase or decrease in the price of the product will not significantly affect demand for the product. Inseparability: a characteristic of services that allows them to be produced and consumed simultaneously.

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Intangibility: a characteristic of services that prevents them from being touched, seen, heard or felt in the same manner in which goods can be sensed. Joint demand: occurs when two or more items are used together in a final product. for example, a decline in the availability of memory chips will slow the production of microcomputers, which will, in turn, reduce the demand for disk drives. Licensed products: clothing and sports goods manufacturers, such as Nike, Adidas, Fila and Reebok, hold licences to manufacture and sell products bearing the logos and trademarks of professional and amateur sports entities, e.g. ASICS and the Springbok logo owned by SARU. Major equipment: capital goods, such as large or expensive machines, mainframe computers, blast furnaces, generators, aircraft and buildings; such items are depreciated over time. Non-business organisation: a firm that exists to achieve some goal other than the usual business goals of profit, market share or return on investment. Non-profit organisation marketing: the effort by non-profit organisations to bring about mutually satisfying exchanges with target markets. OEM: original equipment manufacturer. Perishability: a characteristic of services that prevents them from being stored, warehoused or inventorised. Physical evidence: both the physical environment in which a service is delivered and all the tangible components that facilitate the performance or communication of the service. Processed materials: materials that are used directly in the manufacturing of other products; unlike raw materials, they have undergone some processing (e.g. sheet metal, chemicals, speciality steel, wood and plastics) and unlike component parts, processed materials do not retain their identity in final products. Product packages in travel and tourism: standardised, quality-controlled, repeatable offers comprising two or more elements of transport, accommodation, food, destination attractions, other facilities and services (such as travel insurance). Replacement market: organisations and individuals that buy component parts to replace worn-out parts. Services marketing mix: an extended version of the marketing mix for goods; in addition to product, distribution, promotion and pricing, services marketing includes people, process and physical evidence. Social marketing: the use of marketing methods to spread socially beneficial ideas or behaviours. Sponsorship: the marketing activity whereby a sponsor contractually provides financial and/or other support to a firm or individual in return for rights to use

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the sponsor’s name (company, product, brand) and logo in connection with the sponsored event or activity. Supplies in business-to-business markets: consumable items that do not become part of the final product, such as lubricants, detergents, paper towels, pencils and paper. Unique characteristics of services: the four characteristics that distinguish services from physical goods: intangibility, inseparability, heterogeneity and perishability.

REFERENCES 1 CIA. 2014. The world fact book – United States. Available, https://www.cia.gov/library/publications/ the-world-factbook/geos/us.html (Accessed 17 August 2014). 2 Bloom, P.N. & Reve, T. 1990. Transmitting signals to consumers for competitive advantage. Business Horizons, July–August 1990, pp. 58–66. 3 American Marketing Association. 1994. That’s entertainment. Service Marketing Today, May–June 1994, p. 4. 4 Lovelock, C. & Wirtz, J. 2011. Services marketing (7th edition). Upper Saddle River: Pearson Education International, pp. 40–43. 5 Changing the game. Outlook for the global sports market to 2015. PricewaterhouseCoopers Global. December 2011. Available, http://www.pwc.com/en_gx/gx/hospitality-leisure/pdf/changing-the-gameoutlook-for-the-global-sports-market-to-2015.pdf (Accessed 17 August 2014). 6 Super Bowls by average advertisement cost up to Super Bowl XLVIII in 2014 Available http://www. statista.com/statistics/217134/total-advertisementrevenue-of-super-bowls/ (Accessed 17 August 2014). 7 Wilson, Jeremy (1 September 2013). Gareth Bale joins Real Madrid from Tottenham for a world record fee of £86. London: The Telegraph. 8 Wolk, M. Super Bowl advertisers take to the Web. Available, http://www.msnbc.msn.com/id/10992887 (Accessed 30 June 2010) and Mullin, B.J., Hardy, S. & Sutton, W.A. 2000. Sport marketing (2nd edition). Champaign: Human Kinetics, p. 4. 9 Kesler, L. 1979. Man created ads in sport’s own image. Advertising Age, 27 August 1979, pp. 5–10. 10 Mullin, B.J., Hardy, S. & Sutton, W.A. 2000. Sport marketing (2nd edition). Champaign: Human Kinetics, p. 9. 11 Bennett, R., Bove, L., Dunn, S., Drennan, J., Frazer, L., Gabbott, M., Hill, R., Lawley, M., Matear, S., Perry, C., Sparks, B., Summers, J., Sweeney, J., Ward,

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12

13

14 15

16

17 18

19 20 21 22 23 24 25 26 27

T. & White, L. 2003. Services marketing – a managerial approach. Milton: John Wiley & Sons Australia, pp. 446–457. Enis, B. & Roering, K. 1981. Services marketing: Different products, similar strategy. In Donnelly J.H & George W.R (eds) Marketing of services. Chicago: American Marketing Association, p. 1; Loy J. 1968. The nature of sport. Quest, 10 May 1968, pp. 1–15. Jones, D., Houlihan, A., Battle, R., Bosshardt, A., Bridge, T., Hanson, C., Savage, J. Andy Shaffer, A., Stenson, C. and Thorpe, A. All to play for: Football Money League. 2014. Sports Business Group at Deloitte, Manchester, January 2014, p. 10. Mullin, B.J., Hardy, S. & Sutton, W.A. 2000. Sport marketing (2nd edition). Champaign: Human Kinetics, p. 141. Real Madrid C.F. Official website. 2014. http://www.realmadrid.com/en/about-real-madrid/the-club/sponsors (Accessed 18 August 2014). Jones, D., Houlihan, A., Battle, R., Bosshardt, A., Bridge, T., Hanson, C., Savage, J. Andy Shaffer, A., Stenson, C. and Thorpe, A. All to play for: Football Money League. 2014. Sports Business Group at Deloitte, Manchester, January 2014, p. 10. Association of Marketers. 1997. Sponsorship guidelines. Bryanston: Association of Marketers, pp. 2–3. Dean, O. 2012. Ambush marketing and protected events. http://blogs.sun.ac.za/iplaw/files/2012/08/Ambush-marketing-andprotected-events.pdf (Accessed 18 August 2014). Meenaghan, T. 1996. Ambush marketing – a threat to corporate sponsorship. Sloan Management Review, fall 1996, pp. 107–108. Andreasen, A.R. & Kotler, P. & 2007. Strategic marketing for nonprofit organisations (7th Ed). Upper Saddle River: Prentice Hall. Kinnell, M. & Macdougall, J. 1997. Marketing in the not-for-profit sector. Oxford: Butterworth Heinemann. Bingham, F.R. (Jnr) & Raffield, B.T. III. 1995. Business marketing management. Cincinnati: South Western, p. 12. O’Brian, B. 1991. Airlines’ ailments give most of their suppliers big headaches as well. Wall Street Journal, 31 December 1991, p. A1. World Travel & Tourism Council. 2014. Available, http://www.wttc.org/ (Accessed 18 August 2014). Ibid. World Travel & Tourism Council. 2014.Travel & Tourism Economic Impact 2014. South Africa, p.1. Middleton, V.T.C., Fyall, A., Morgan, M. & Ranchhod, A. 2009. Marketing in travel and tourism (4th edition). Oxford: Elsevier, pp. 51–52.

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28 Middleton, V.T.C., Fyall, A., Morgan, M. & Ranchhod, A. 2009. Marketing in travel and tourism (4th edition). Oxford: Elsevier, p. 429.

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CHAPTER

16

Sustainable marketing

LEARNING OUTCOMES After studying this chapter, you should be able to:

1 2 3

Understand the concept of sustainable marketing Distinguish between green marketing and social marketing Evaluate the key sustainability issues and how they put pressure on businesses to adopt more sustainable business practices 4 Discuss consumer social responsibility and the stages in the move towards sustainability 5 Discuss the role of marketing in sustainability 6 Comment on the impact of sustainable marketing on the product life cycle 7 Appreciate the impact of a sustainable marketing approach on the marketing mix 8 Consider the limitations of adopting a sustainable marketing approach 9 Advise marketers on the steps to implement the concept of sustainability into marketing 10 Illustrate your grasp of the theory discussed in this chapter by providing appropriate practical examples to illustrate any marketing principle or concept. 11 Provide a marketing-management solution related to any of the above outcomes. "****** DEMO - www.ebook-converter.com*******"

>> Marketing in practice Eco is epic, Dude! Any young surfer (known in the surfing sub-culture as a grommet) starts out by surfing ‘foamies’ (the foam wave that is formed after a wave has broken) and hopes to graduate to surfing ‘green water’, the unbroken or breaking ocean swell. However, despite surfing ‘green water’, the surfboards used by surfers in South Africa (and the rest of the world) are anything but green. The problem associated with ‘greening’ the business of surfing is that consumers have few options to buy sustainable products, and manufacturers are reluctant to create such products because of perceived lack of interest and fears over lower profits. Two people who are passionate about transforming the surf industry are Kevin Whilden and Michael Stewart, the founders of the non-profit organization, Sustainable Surf. Stewart says ‘…making a typical surfboard involves a fairly toxic stew of petrochemical materials. But we can change that by working together. And if we can succeed at transforming the surfboardmaking industry into a sustainable model, it can be a catalyst for spurring the larger surf apparel businesses to follow suit.’ It may appear that ‘transforming the industry’ may be an improbable goal, but Whilden and Stewart have a proven track record of market transformation in the energy efficiency and appliance world. "****** DEMO - www.ebook-converter.com*******"

The first step in any market transformation plan is to identify major barriers, and work out how to get around them. ‘Engagement and education are keys,’ says Stewart. ‘Most surfers don’t know sustainable surfboard materials even exist, while surfboard makers don’t have enough experience with these newer materials to trust their performance.’ Consequently, Stewart and Whilden have launched a program called Waste-to-Waves which encourages surfers to gather up expanded polystyrene foam (EPS) – also known as Styrofoam from waste packaging, and bring it to their local surf shop, where it gets collected in Waste-to-Waves branded bins. It is then picked up and recycled into new EPS material, which is bought by surfboard core manufacturers to make new, recycled surfboard cores. These ‘blanks’ – which have a CO2 footprint of less than 50 per cent of conventional surfboards– can be used by top shapers to create a complete, high-performance surfboard. Alongside education and engagement, acceptance of the new materials by manufacturers is another major key to success. A few years ago, there was a push toward sustainable materials in surfboards, but the technology wasn’t mature and the end product underperformed. This created skepticism in the market. The new materials perform much better, so much so that even pro surfers cannot tell the difference. Consequently, renowned surfboard shapers (manufacturers) are starting to use recycled surfboard blanks. "****** DEMO - www.ebook-converter.com*******"

Sustainable Surf is preparing to launch the ECOBOARD Project, designed to encourage surfers to buy surfboards made of environmentally-friendly materials. ‘Surfers, like anybody else, want to know the products they buy actually bring a meaningful benefit to the environment and human health,’ says Whilden. The ECOBOARD Project uses incentives to increase customer demand. ‘Our market research strongly suggests that demand for ECOBOARDs will grow rapidly because many surfers feel it’s the right thing to buy, and performance is on par with the more toxicmaterials-based counterparts.’ says Whilden. Although incentives are important, Whilden says that ‘the surfing lifestyle is strongly connected to environmentallyresponsible consumption, provided the knowledge and opportunities are there. Once the program becomes established, this sense of community will provide a stronger motivation than money.’ SOURCE: Stoiber, M. 2012. Market Transformation: A 3 Step Plan to Clean Up the Surf Industry, Sustainable Brands, 28 May. Available from http://www.sustainablebrands.com/news_and_views/articles/markettransformation-3-step-plan-clean-surf-industry (Accessed 13 November 2012)

QUESTIONS 1 2

What environmental trends created the opportunity for Sustainable Surfing to launch its ECOBOARD project? Conduct a SWOT analysis of Sustainable Surfing and identify the company’s main sources of competitive advantage. WEBSITE Read more about environmentally-friendly surfboards at the

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following websites: http://sustainablesurf.org http://wastetowaves.org http://www.sustainablesurf.org/ecoboard

1. Introduction In Chapter 1 we referred to the integrated nature of contemporary marketing practices which have as their foundation the understanding and meeting of consumer’s needs. As consumer needs have changed (and extended beyond the introspective focus reflected in Maslow’s hierarchy of needs, discussed in Chapter 3) to include the need for products which in their form or production do not harm the environment or society, the concept of sustainable marketing has become a key strategic issue in business today. This change in the values of some consumers means that businesses have to revisit not only the way their products are communicated, but also the way their goods and services are produced.1 This chapter attempts to explain what is understood by the concept of sustainable marketing, why it is important, and the implications of this phenomenon for the marketing process.

2. The concept of sustainable marketing LO1 "****** DEMO - www.ebook-converter.com*******"

Sustainable marketing is underpinned by the philosophy of creating ‘sustainable economic development’1 which was defined by the Brundtland report2 as a development which ‘meets the needs of the present without compromising the ability of future generations to meet their own needs’. Although the concept of sustainable economic development may be interpreted in a number of ways, sustainability is primarily about limiting the throughput of resources, while making the most efficient use of the resources available in the environment.3 For example, to ensure sustainable development in India may mean addressing issues of poverty alleviation, water and biodiversity; for Brazil, it may be deforestation and poverty; for sub-Saharan Africa, water and peace; for many developing countries, access to opportunity, education, finance and markets; for the European Union (EU), the United States and China, it may be energy security and climate change. On a global basis, the issue of sustainability is ‘global equity’.4

EXAMPLE >> According to Nielsen’s 2011 Global Online Environment and Sustainability Survey (http://www.nielsen.com/us/en/insights/pressroom/2011/global-warming-cools-off-as-top-concern.html) of more than 25 000 Internet respondents in fifty-one countries, three out of four global consumers rated air pollution (77 percent) and water pollution (75 percent) as top concerns, both increasing 6 percentage points compared to 2009. The areas where concern is mounting fastest is over the use of pesticides, packaging waste, and water shortages, with reported concern increasing 16, 14, and 13 percentage points, respectively. Top environmental concerns among Asia Pacific consumers include water shortages and air pollution. Water pollution was the main concern for Latin Americans, Middle Easterners, Africans, Europeans, and North Americans. "****** DEMO - www.ebook-converter.com*******"

Environmental sustainability attempts to maintain or prolong the physical environment in the face of development. Essentially it emphasises the use of renewable rather than finite raw materials, as well as the minimisation and eventual elimination of polluting effluents and toxic or hazardous waste.5 Sustainable marketing contributes to the goal of environmental sustainability by considering environmental issues and reducing environmental damage by creating, producing and delivering sustainable solutions while continuing to satisfy the needs of customers and other stakeholders.6 Thus, sustainable marketing is a broader management concept which focuses on addressing the ‘triple bottom line’ by creating, producing and delivering sustainable solutions with higher net sustainable value, at a profit, whilst continuously satisfying customers and other stakeholders. Irrespective of the size of the business, every firm makes a contribution to the growth of the economy, but this development needs to be sustainable. China, for example, has been criticised for embracing short-term economic growth without regard for the sustainability of this development. In particular China’s economic development has used coal to generate energy which is not only a nonrenewable resource but is also harmful to the environment.7 WEBSITE A global group of companies led by BT Group, Carlsberg, Coca-Cola, Marks & Spencer and Unilever believes mainstream media coverage of sustainable consumer lifestyles is too subdued. So they teamed up in October 2014 with non-profit Forum for the Future

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to create their own dialogue in the form of a new site, called Collectively, which predominantly targets millennials. Its mission: expose the most sustainable options and innovations from the world of fashion, food, design, architecture and technology, among other things. Visit the Collectively website (https://collectively.org/en/) to read about how to become actively involved in supporting sustainable initiatives.

Sustainable marketing comprises several dimensions that are controllable to a lesser or greater extent by the individual firm. The marketer’s understanding of sustainable marketing has evolved in recent times to its current conceptualisation as the embracing of the philosophy and practice by the individual firm of green marketing and encouraging socially responsible consumption practices by its customers. These two elements are considered in the sections below. WEBSITE Visit the following websites to read more about organic suppliers: www.doleorganic.com www.organicbabychick.com

2.1 Green marketing

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Green marketing is not restricted to the development and marketing of products that are not harmful to the environment, but also extends to ensuring that the distribution and other business processes associated with delivering the product to the consumer are environmentally "****** DEMO - www.ebook-converter.com*******"

friendly.

EXAMPLE >> One of the biggest concerns about the distribution of products is the carbon footprint associated with their transport from their production facility to the markets. Dole Organic, for instance, is a supplier of organic bananas and pineapples and is committed to establishing a carbon neutral product supply chain. To demonstrate their commitment, Dole Organic has an application on their website that allows the consumer to enter a number (reflected on a sticker pasted on the fruit) which will disclose the place where the fruit was grown. Another example is Organic Baby Chick (www.organicbabychick.com/) an online boutique where parents can shop for all-natural, chemical-free, earthfriendly, baby-safe products, ranging from diapers to furniture. The contemporary conceptualisation of green marketing is restricted to those business processes which the company can directly control or influence. However, green marketing alone is not sufficient to implement sustainable marketing. Unless ‘green’ principles are embraced by consumers in their consumption habits, green goods and services will not be able to be successfully produced and marketed. However, when green marketing is combined with social marketing, this can be an effective strategy to set sustainable marketing solutions in motion. Social marketing attempts to change the behaviour of the firm’s target market to realise certain goals to benefit the social or public good.

2.2 Social marketing

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Social marketing, like traditional marketing, focuses on "****** DEMO - www.ebook-converter.com*******"

changing consumers’ attitudes (and consequently their behaviour). However, rather than focusing on increasing market share or turnover, social marketing focuses on changing the behaviour of consumers for the benefit of society as a whole.8 For example, excessive electricity consumption is clearly bad for the environment – the more electricity produced, the more coal used which (some activists say) contributes to global warming. Consequently Eskom encourages consumers to embrace environmentallyfriendly practices such as using solar-powered geysers and compact fluorescent lamps. Thus, Eskom’s strategy moves South African domestic electricity consumers away from an intensive form of consumption to a much lower utilisation of electricity. This social marketing approach is based on the societal marketing concept (see Chapter 1) which considers the needs and wants of individual consumers along with perceived accountability to society.9 For example, if a company encourages the consumption of organic products (which are grown without the use of pesticides), the whole ecosystem will benefit from the change in consumption patterns as the physical environment will be less polluted. Against this background social marketing has been defined as ‘…the use of marketing principles and techniques to influence a target audience to voluntarily accept, reject, modify, or abandon a behaviour for the benefit of individuals, groups or society as a whole.’10 Although many of the established practices associated with traditional marketing are applicable to social marketing, a number of unique principles need to be "****** DEMO - www.ebook-converter.com*******"

applied to successfully implement a social marketing campaign.11 •

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Set behavioural goals. Unlike traditional marketing the measure of success of a Social Marketing Intervention is vaguer. Therefore there needs to be clear focus on behaviour with specific behavioural goals. Base the intervention on prior consumer research. Make sure that intervention is consumer-orientated and based on consumer research which ideally is triangulated from several different sources (discussed in Chapter 5). Use theory to guide the strategy. Interventions should preferably be based on behavioural theory (which is discussed in Chapter 3) The strategy needs to be insight-driven. The focus should be on gaining a deeper understanding of what moves and what motivates the consumer. Identification of key factors and issues relevant to influencing behaviour allows actionable insights to be developed. This could be based on either primary or secondary research data as is set out more fully in Chapter 5. Apply the principles of segmentation and targeting (as set out in Chapter 6). This will allow interventions to be tailored to specific segments. Targeting is considered in more detail below. Use the whole of the marketing mix and do not restrict the social marketing campaign to promotion. Consider other innovative ways of influencing consumer behaviour, such as changing policies or training consumers in new ways of behaving with respect to their

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consumption behaviour. Create attractive motivational exchanges with the target group. Establish what will motivate people to engage voluntarily with the intervention and offer them something beneficial in return. The offered benefit may be tangible (rewards or incentives for participation or making behavioural changes) or intangible (for example, personal satisfaction, improved health and wellbeing). Address the opposition to the desired behaviour. Resistance to the desired behaviour should be analysed and the intervention should take into account the appeal of competing behaviours. For example, consumers of beverages may prefer to purchase their cooldrinks in non-recyclable disposable cans when going away for a weekend on the Wild Coast because they are easier to transport. However, social marketing communications, attempting to change holiday-goers consumption habits to use environmentally-friendly returnable bottles, might emphasise the positive impact that action will have on their holiday destination by way of less dumpsites and litter.

3. The origins of sustainable marketing Sustainable marketing has its origins in the concept of sustainability which implies that any economic activity needs to balance immediate human needs with the longer term imperative of preserving the environment. Marketers have to balance the often competing interests of "****** DEMO - www.ebook-converter.com*******"

shareholders, customers, society and the environment.12 While this concept is fairly straightforward in theory, in practice it is a complex process to manage the contradictions inherent in sustaining development in the contemporary business environment. As a result, the development of the concept of sustainable marketing has been evolutionary in nature. The first signs of what we now refer to as sustainable marketing emerged in the 1970s but it was not until the 1980s and 1990s that sustainable marketing gained mainstream appeal. In the 1970s the focus was on ecological marketing that focused on particular environmental problems, such as air pollution, the depletion of oil reserves and the impact of pesticides on the environment. The focus was on the acknowledgment of an impending ecological crisis and the willingness and ability of marketers to accept responsibility for avoiding this catastrophe. In essence this approach to marketing had its roots in the societal marketing approach,13 as is discussed in Chapter 1. In the 1980s the emphasis moved to environmental marketing that focused on advocating clean technology, and understanding and targeting the ‘green consumer’ (discussed below). This approach views responsible socioenvironmental practices as a potential basis of sustainable competitive advantage and encourages marketers to take a physical systems view of business. As a result of changing consumption patterns (and a legislative push) towards improved, environmentally friendly corporate practices and products, the concept of green marketing emerged.14 In essence this is a conventional micromarketing approach.15 "****** DEMO - www.ebook-converter.com*******"

This marketing strategy became feasible as changing societal values dictated that consumers were prepared to pay additional costs for products with environmentally friendly characteristics.16 In addition, environmentally responsible business practices often contributed directly to the profitability of the firm by encouraging practices that used fewer raw materials, generated less waste, and were less likely to incur financial sanctions as a result of polluting the environment.17

EXAMPLE >> In the late nineties Woolworths wrote their first internal green newsletter, followed by a workshop at head office entitled: ‘Towards Sustainable Retailing’. These actions drew in enthusiastic staff who got together to form a voluntary group. Members of this group became the internal ‘champions’ to generate wider staff interest and involvement. They brought in ‘The Natural Step’ who provided sustainability awareness training to middle and senior management, and work-shopped practical applications of sustainability for products. Next, Woolworths drafted a corporate environmental policy, and produced a staff training and induction video, as well as an internal ecoinformation intranet site. The voluntary group later became a formal Sustainability Forum - with a company director as chairman. As a result of these actions, Woolworths published its first Sustainability section in their annual report in 2004. They then went on to be named the Responsible Retailer of the Year in the 2008 World Retail Awards.18 Another example is found in the consumer electronics sector which used green marketing to attract new customers. One example of this was Hewlett-Packard’s promise to cut its global energy use by 20 percent by the year 2010. To accomplish this reduction below 2005 levels, the Hewlett-Packard Company announced plans to deliver energy-efficient products and services and institute energy-efficient operating practices in its facilities worldwide. Consequently, many contemporary business plans take into account their "****** DEMO - www.ebook-converter.com*******"

customer’s concerns of the environment when formulating their marketing plans. Take the visible example of the McDonald’s fast food chain. McDonald’s was critised for using Styrofoam packaging that was not biodegradable and difficult to dispose of in an environmentally-friendly manner. Responding to this concern, McDonald’s has replaced the plastic packaging with paper packaging so that they were seen by their customers as being concerned about the environment. Similarly, the South African government promulgated regulations, in May 2003, which restricted the proliferation of plastic bags, by forcing retailers to sell plastic bags to consumers because of the litter and waste associated with their use. Following this legislation a consumer packaging trend that developed is the use of reusable shopping bags at grocery stores. Consumers and retailers are recognising this, encouraging new behaviour, and now it is almost fashionable to bring your reusable shopping bags to your local store. Similarly, the New Zealand government decided that since the country was already known for its clean and green environment, anything connected with the New Zealand brand would benefit from the association. As a consequence fruit, vegetables, lamb, agricultural equipment and other products were automatically tagged with the ‘Made in New Zealand’ label, which signalled environmental responsibility. WEBSITE To view Unilever’s Sustainable Living Plan, visit http://www.unilever.com/images/slp_UnileverSustainable-Living-Plan-2013_tcm13388693.pdf and go to page seven.

Although many firms seem to follow the New Zealand branding approach of ‘green selling’, commonly referred to as post-hoc identification of environmental features in existing products, this hop on the green bandwagon is usually short-term. This approach is consistent with a typical sales orientation, since interest in the environment "****** DEMO - www.ebook-converter.com*******"

tended to be limited to promotional activity, with little or no input into product development. The same products continued to be produced, but green themes were added to promotional campaigns in order to take advantage of any environmental concerns of consumers.19 Some firms take the concept of ‘green selling’, even further and use ‘greenwashing’, defined in the Oxford English Dictionary20 as ‘disinformation disseminated by an organisation so as to present an environmentally responsible public image.’ In other words, firms mislead consumers to believe that certain products are green, eco-friendly or organic when in fact they are not. Another failed approach to green marketing has been enviropreneur marketing, whereby a committed individual or firm places innovative green products into the market. This has resulted in an emergence of new green brands in a wide range of markets such as cleaning products, paper goods, cosmetics and food. All efforts are focused on producing the most environmentally-orientated products, rather than the products that consumers actually wanted. Thus, many firms ended up with products that were perceived as under-performing, or over-priced, or just unworthy and ‘unsexy’. For example, consumers would not understand that green washing-up liquids would not produce a big fluffy bowl of soap bubbles because they lacked polluting, cosmetic ingredients. Although the enviropreneur marketers may have meant well and had the right environmental goals, they were always destined to have problems establishing a sustainable market presence because of their lack of market orientation (see Chapter 1). They failed to successfully research, understand or educate "****** DEMO - www.ebook-converter.com*******"

their customers.21 Nevertheless, since marketing operates at the interface between the firm and its environment it is uniquely positioned to lead the move towards more sustainable products and strategies. Although changing environmental considerations and standards can be a threat to firms, they can also provide opportunities.

EXAMPLE >> Toyota has responded to environmental trends by successfully launching the Toyota Prius hybrid car, which supplements normal fuel with an electric-powered engine. The electric engine starts the car and operates at low speeds using a battery. At higher speeds the Prius automatically switches to normal engine and fuel. This switch-over saves fuel and results in less pollution. The success of the Prius has led many of its rivals, including Honda, launching similar hybrid cars and has led to the development of electric-powered cars using lithium-ion batteries. Similarly, a South African consortium has developed a prototype of an electric car known as the Joule. Its manufacturing has, however, been temporarily halted due to lack of government funding and the consortium is now focusing on producing electric busses. The problems associated with bringing the Joule car to market, despite its obvious benefit and its contribution to the sustainable development suggest that implementing sustainable solutions to meet the needs of the consumer are complex and influenced by many different factors. In particular, consumers’ attitudes towards the additional cost (transactional or monetary) associated with the use of many sustainable products varies markedly and for this reason it is important to understand the different green market segments. "****** DEMO - www.ebook-converter.com*******"

3.1 Green consumer segments The idea that concern about the environment could influence consumer behaviour developed into the concept of the ‘Green Consumer’ during the early 1990s.22 This change in the values of some consumers (i.e. the ‘Green Consumer’) meant the emergence of an opportunity for firms who were prepared to develop new products and services tailored to this emerging market segment’s needs. On the other hand, for firms with a poor environmental record, a threat was posed by the increase in information (with the emergence of the Internet during the early 1990s) available to green consumers, along with the increasing sophistication of pressure groups and the growing media coverage devoted to the environment. While buying green products may not appeal to everyone, there are many consumers who are potentially receptive to a green appeal. However, as with any individual consumer, there are substantial differences in their attitudes and ways of thinking in respect of the green movement as well as green products. Understanding the target consumer will help marketers to appreciate whether greenness is an appropriate attribute and how it should be incorporated into the broader marketing mix. As discussed above, it may well be that consumers do not embrace environmentally-sound consumption patterns, and any green marketing strategy may have to be integrated to a social marketing element to encourage changes in behaviour. The green market comprises a number of different market segments: 23 • True Blue Greens (9 per cent): True Blues have strong "****** DEMO - www.ebook-converter.com*******"

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environmental values and take it upon themselves to try to effect positive change. They are over four times more likely than other market segments to avoid products made by firms that are not environmentally conscious. Greenback Greens (6 per cent): Greenbacks differ from True Blues in that they do not take the time to be politically active. But they are more willing than the average consumer to purchase environmentally friendly products. Sprouts (31 per cent): Sprouts believe in environmental causes in theory but not in practice. Sprouts will rarely buy a green product if it means spending more, but they are capable of going either way and can be persuaded to buy green if appealed to appropriately. Grousers (19 per cent): Grousers tend to be uneducated about environmental issues and cynical about their ability to effect change. They believe that green products cost too much and do not perform as well as the competition. Basic Browns (33 per cent): Basic Browns are caught up with day-to-day concerns and do not care about environmental and social issues.

These figures indicate that somewhere between 15 and 46 per cent of the overall consumer market could be receptive to a green appeal, depending on the product category and other factors such as social, cultural and economic trends (which could cause the size of this target market to grow). One trend worth noting is the ageing of the baby boomers (see Chapter 2) – their concern about living longer, healthier lives is leading them to place a high priority on "****** DEMO - www.ebook-converter.com*******"

environmental quality. During the second half of the 1990s, it became clear that the logic of generating sustainable competitive advantage from good environmental performance was often difficult in practice. Products marketed on an environmental platform often proved vulnerable to competitor tactics such as discounting, or attacks on the level of technical performance offered, or on the credibility of their environmental claims. Capitalising on good eco performance in search of competitive advantage was also made difficult by the attitude of the media.24 The Body Shop, for instance, who sought to take a lead in the ‘greening’ of their industry, found that the media was more inclined to attack them on the basis of any absolute shortcomings, than to highlight the relatively poor eco-performance of their more conventional rivals. Although their products are more expensive than most competitors and other green brands, and despite periodic media attacks, their credibility and customer loyalty have remained strong. This suggests that the sustainable marketing is a complex exercise with myriad issues that need to be considered when targeting the green consumer. Some of the most important issues influencing the development and marketing of sustainable products are considered below.

3.2 Key sustainability issues

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From the discussion above, it is clear that sustainable marketing is marketing that serves firms’ triple bottom line. It’s marketing that aims to empower communities by "****** DEMO - www.ebook-converter.com*******"

enriching their social capital (People), protecting and restoring the environment (Planet) and generating prosperity for the organisation and its stakeholders (Prosperity). Sustainable marketing therefore returns to the roots of marketing by discovering and understanding people’s needs and then developing a marketing mix that satisfies these needs, while generating prosperity and restoring the environment.25 In order to be successful in sustainable marketing, a number of key issues need to be considered.26 •

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Population pressure. The world’s population has doubled from around 3 billion to over 6 billion in the last 50 years. The United Nations (UN) forecasts the addition of a further 3,3 billion people between the years of 2000– 2050 as the most likely future scenario. Only a rapid decrease in the birth rate in the next decade can halt the expected severe degradation of our natural habitats, many of which are already under pressure. This pressure will be felt most acutely in developing regions where over 90 per cent of the forecasted population growth will occur and where environmental controls are still being developed. This ever-increasing population is placing pressure on the available natural resources – either directly or indirectly via its production processes.27 Product and consumption. Population growth leads to increased levels of production and consumption. This growth is intensified by the fact that a growing proportion of the world has expectations for improved material living standards and an increasing number have more discretionary spending power. The growth in

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consumption of energy, water and wood in particular is creating concern about future social and environmental impacts. Globalisation. The globalisation of trade has often been proposed as a means of closing the gap between rich and poor nations and better meeting the world’s consumption needs. Practical experience is casting increasing doubt on this assertion. Many individuals are becoming increasingly aware of the North-South divide, the need for more sustainable development, the ethics of third world marketing and use of child-labour in outsourced factories. As public awareness increases, people are starting to focus on the activities of transnational corporations. The globalisation movement is also targeting major brands such as Nestlé, Nike and Gap that are perceived not to be acting socially responsible. The growth of Internet usage and access to global news networks is moving everyone ever closer towards the concept of the global village. Global warming and climate change. A quadrupling of carbon dioxide (CO2) emissions over the last 50 years has raised concerns about the potential for global warming and climate change. Although the effects of climate changes are difficult to predict accurately, climate-based impacts on industries such as insurance and agriculture are already growing. To avoid irreversible consequences it has been internationally agreed that two forms of preventive action are required, namely the reduction of CO2 emissions and a ban on the use of chlorofluorocarbons (CFCs).

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Ozone depletion. CFCs and greenhouse gases deplete the ozone layer letting through increased levels of harmful ultraviolet radiation (UV rays), with potentially devastating health effects. The global response began with the 1987 Montreal Protocol – but increased participation from all countries is required to return the protective ozone layer to its previous levels. Acid rain. Air pollution as a result of sulphur dioxide (SO2) and nitrogen oxide (NO3) emissions leads to acidification and environmental damage, particularly to forests and lakes. Acid rain is also damaging to buildings, cars and even to human health. The US Government values the potential indirect health benefits of significantly reducing acid rain at over $50 billion annually. Genetic engineering. The use of genetically modified organisms (GMOs) as a means of increasing crop yields has been suggested as an important contribution to reducing world hunger. Critics point to the potentially disastrous effects that any mistakes would have, if there were unintended flows of genes and characteristics between species or unforeseen impacts on the balance of natural systems. Loss of habitats and species diversity. Biological diversity is the wealth of life – plants, animals, microorganisms and the genes they contain. All this is maintained by a range of different habitats. Retaining this diversity is essential for many reasons. It allows us to adapt crops and livestock to changing conditions and to retain the yet unknown medical applications for many

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plant-based compounds. • Changing values and attitudes. Many of the accepted human norms and values have changed in the last few decades. In particular, many consumers do not accept that large multinational corporations are acting in good faith or that their assertions are necessarily based on fact. In addition many consumers have realised that the environment is a finite resource and is susceptible to misuse; the environment is precious and its protection cannot be taken for granted. As a result environmentally concerned consumers would prefer to support a takeaway that uses biodegradable cutlery (made of such materials as bamboo or mielie/potato starch) rather than the plastic cutlery that is common in most South African fast-food outlets. • Pressure group activity. In the last 20 years, the budgets and communications strategies of pressure groups concerned with the socio-environmental impact of businesses have increased dramatically. The communications strategies of many of the green interest groups have evolved to be as sophisticated as that of many of the large multi-national corporations. • Media interest. Environmental issues are a focus of many of the large news corporations and poor environmental performance is deemed to be especially newsworthy. For example, CNN (which currently has a reach of 200 million households and hotel rooms in over 200 countries), could potentially ruin a company’s reputation in one day should that company’s perceived environmental misdemeanour be deemed newsworthy. • Political and legal interest. The quantity and "****** DEMO - www.ebook-converter.com*******"

complexity of social and environmental legislation faced by firms continues to grow. In South Africa, our constitution (in particular Section 24a) provides that everyone has the right to an environment that is not harmful to their health or well-being and to have the environment protected while promoting justifiable economic and social development. This requirement has influenced much of our current legislation, but even if specific topics or concerns have not been specifically considered in legislation, Section 38c of the Constitution provides for certain persons listed in that section (which includes anyone acting in the public interest) to approach a court if their rights in terms of Section 24 of the Constitution has been infringed or threatened.28

READER 66 >> Vodafone unveils Africa’s greenest building On 24 January 2012, Vodacom unveiled the completed Vodafone Site Solutions Innovation Centre, the first ever in South Africa, at its head office in Midrand. The Green Building Council of South Africa rating validates the centre as the greenest building in Africa. The concept started with an idea to create a centre to speed up the development of Vodafone’s sustainability goals to meet the group’s target of reducing global CO2 emissions by 50 per cent by 2020, and to achieve a 20 per cent carbon intensity reduction target for emerging markets by March 2015. What makes this building so environmentally ahead of the curve are the following elements: • Recycling: Wherever possible, demolition material from the site had been reused or recycled. • Structure of building: The project reduced the amount of concrete "****** DEMO - www.ebook-converter.com*******"

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used in the foundations and sub-structure by 34 per cent. Energy efficiency: Usage of Solyndra photovoltaic panels reduced the wind load, absolute weight and ultimately the total amount of wood and structural material required for the roof. Water efficiency: Efficient water fixtures and fittings had been installed resulting in significant savings in water consumption. Indoor environmental quality: The mechanical air conditioning, heating and ventilation system was designed to deliver 2 500 litres/second of fresh air to the office during normal operations, and 1 250 litres/second of fresh air in heating mode. Emissions: The chiller uses Lithium Bromide as the refrigerant which has both a zero Ozone Depleting Potential (ODP) and a zero Greenhouse Warming Potential. All thermal insulants have an Ozone Depleting Potential (ODP) of zero. Vodafone and its local partner, Vodacom, have already started making some significant progress in their commitment to developing sustainable technology while remaining at the forefront of the mobile industry. In November 2011, they developed an environmentally focused hybrid cell tower that uses a combination of solar, wind and fuel cell technology. This cell tower was used to connect delegates at the Conference of the Parties (COP17) in Durban late last year. Vodafone (and Vodacom) also launched a community power programme that showed how mobile operators can bridge the energy divide in communities without power, by oversupplying base stations in an area with renewable energy which could be diverted to critical points within the (usually disadvantaged) community. The community power initiative could become a game changer for rural areas that have no access to power. If power is, for example, being supplied to the community high school, it also has the potential to increase the quality of education in the area. Both projects are a good example of how a sustainable approach can reduce both environmental impact and operational costs while increasing the tangible

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and intangible value of a firm. SOURCE: Press release, 24 January 2012. Vodafone unveils Africa’s greenest building. Available from http://www.vodacom.com/news_article.php?articleID=1162&pid=press_group (Accessed on 5 March 2012)

4. Consumer social responsibility and the LO4 move towards sustainability As the different marketing management philosophies can influence a firm’s marketing activities (see Chapter 1) so is sustainable marketing a firm-wide practice that is usually embedded in an underlying philosophy or set of values such as corporate social responsibility. Corporate social responsibility (CSR) is the actions of the firm to act in a socially responsible manner to protect and enhance the various stakeholders that have an interest in the firm, the community in which it operates, the environment that surrounds it, and society.29 Although CSR is perceived as comprising altruistic (or charitable) actions by the firm without any expectation of an immediate financial return, sustainability practices are often at the core of the firm’s business model. Nevertheless, the approach to succeeding in both these strategies is similar and businesses should start to progressively move towards a policy of excellence in environmental performance and CSR. This process will take time and as such needs to be planned for, with appropriate targets and resources. Firms may move through several stages, as indicated in Figure 16.1. The process set out in "****** DEMO - www.ebook-converter.com*******"

Figure 16.1 implies that the first step in achieving excellence in sustainable practices would be to formulate a policy which will give direction to the efforts of the firm in moving towards sustainability. Thereafter, the process is gradual with a firm first starting off with a single sustainable product, thereafter moving to a position where all its products are sustainable. Ultimately the firm would aim for its production processes to be sustainable, including sourcing inputs to the production process from sustainable sources. One obvious step that firms could take would be to source goods required for the production process from local suppliers which would in turn reduce carbon emissions. Although the argument against implementing sustainable practices in production processes (which include the supply chain) would be that this practice would add additional costs, it can often reduce costs. For example, General Motors managed to reduce their costs by over $12 million annually entering into a reusable container program with their suppliers. Figure 16.1 The stages in the move towards sustainable excellence30

The process that sets out the stages in the move towards sustainable excellence implies that the firm needs to move beyond considering the impact of particular products and services towards consideration of the impact of the firm as a whole. Consequently the firm will need to think differently about traditional organisational boundaries. The inter"****** DEMO - www.ebook-converter.com*******"

relationship of environmental and CSR considerations will affect each business function in the firm, and it will be essential that a holistic view is taken. For example, firms could use alternative energy sources such as solar or wind power to heat and light buildings. This will also involve broadening perspectives to take account of the wider role of stakeholders in the development of more sustainable solutions. For example, since 2012, Nike has assessed its suppliers not only on the traditional supply-chain measures of quality, cost and delivery but also their sustainability practices.31 Another example of sustainable marketing is BP’s regular publishing of its Sustainability Report, which details the company’s efforts to build goodwill and corporate social responsibility amongst its stakeholders by means of sustainable practices. The change in values of the broader society are an important contextual consideration for businesses and although firms must still focus on wants and needs of consumers (consistent with the market orientation referred to in Chapter 1), this is no longer sufficient. Firms must not only produce excellent goods and services and healthy profit, but also be concerned with their relationship with society at large as well as with the environment. Not only do consumers expect that business firms will operate legally and fairly, they also want them to act ethically, help charitable causes, clean up the environment and improve conditions for citizens locally, regionally, nationally and in some cases even internationally. In other words, firms must now be socially responsible. In South Africa, companies listed on the Johannesburg Stock Exchange (JSE) are able to ‘prove’ their social responsibility by being ‘accredited’ by "****** DEMO - www.ebook-converter.com*******"

the Socially Responsible Investment (SRI) index (see Reader 67 ‘Investing in social responsibility’).

READER 67 >> Investing in social responsibility South Africa’s first Socially Responsible Investment (SRI) index was launched on the Johannesburg Stock Exchange (JSE) in July, putting South Africa in line with global trends in corporate governance. Companies apply to be listed on the index, and have to meet the conditions of 94 criteria gauging, among other things, a business’s commitment to black economic empowerment, tackling HIV/Aids in the workplace, labour policies and environmental practices. These criteria are consistent with the King report’s code of good corporate governance - or the ‘triple bottom line’ principles of environmental, social and financial sustainability. Additionally, if it can be shown that socially responsible business practices do mean more profit in the long run, it will be a way of incen-tivising businesses generally towards better corporate governance. According to some, the index will put big companies in the spotlight and hold companies accountable, and even place peer pressure on those not listed to toe the line of sustainable business. Most agree that the index is a step in the right direction. Marketing companies are looking to brand corporates differently, and are investigating the potential of socially responsible marketing, or combining a social message with brand identity. It’s a combination that has been shown capable of strengthening a brand immeasurably. SOURCE: Finlay, A. 2004. Investing in social responsibility. Available from http://www.southafrica.info/business/economy/development/socialindex.htm (Accessed 21 May 2012)

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5. The role of marketing in sustainability LO5 As with the marketing of any product (or idea), the precise role of marketing in responding to sustainability issues will vary among firms depending on their industry, size, corporate culture and whether the style of marketing they practice is classically customer-led, technology (product) led or communications focused. For firms in markets characterised by green pressure from customers, marketers may lead the move towards more sustainable products, services and strategies. In essence, the marketing of sustainable products should resonate with the values of the target market. For example it is relatively easy to market energy efficient (fluorescent) bulbs because their higher price (compared to conventional bulbs) is offset by lower electricity costs. Compare this to the marketing of a Toyota Prius, where the running costs of this environmentally friendly vehicle will never be able to offset the initial purchase costs. In the case of the fluorescent bulbs, the marketing would probably focus on the issue of price whereas for the Toyota Prius, a feasible marketing strategy would be to emphasise the long term benefits of the product for the environment and society at large.32 In firms where the decision to pursue sustainability is based more on the firm’s core values, or broader issues of social responsibility, marketers may well be handed a mandate to pursue sustainability through the revision and re-alignment of the firm’s business strategy. This may involve the marketing of the firm in addition to more conventional product-business related marketing. To "****** DEMO - www.ebook-converter.com*******"

respond effectively, marketing as a business function needs to address a range of questions from the broad and strategic, to the specific and technical. Some of the broad, corporate level questions that will need to be tackled include:33 •

•

•

Has the marketing plan analysed the effect of sustainability issues on firm activities? In South Africa, a recent study by TNS Research Surveys indicates that the number of consumers in South Africa unconcerned with sustainability issues has dropped from 41 per cent to 22 per cent, indicating a rise in consciousness. The issue for marketers is to appreciate how this change in attitude will translate into buying behaviour. For example, will consumers be prepared to pay a premium for sustainable products?34 Has the firm conducted market research into the probable impacts on the firm of sustainability issues? SABMiller, for example, recently conducted a study in conjunction with the World Wildlife Fund (WWF) to understand the water footprint of its beer production. The study revealed that it takes the equivalent of 155 litres of water for every litre of beer brewed. About 98,3 per cent of the water footprint is generated by the cultivation of both domestic and imported crops. As a result, SABMiller commissioned water engineers to assist suppliers in finding ways to reduce their water usage in order to reduce SABMiller’s water footprint. Can the firm modify existing products, services or processes to take account of sustainability considerations? Or will new innovations be required? Take for example Coca-Cola’s answer to the notoriously

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•

•

unreliable distribution systems of developing countries. Instead of using traditional routes to market, Coca-Cola built a network of smaller, local distribution centres, run by entrepreneurs, who often use environmentallyfriendly bicycles, and in so doing reduce the carbon footprint of distributing the product to the many small shops and retail outlets in an area. The solution both helped to deliver on Coca-Cola’s promise of always being available and to provide a network of employment to the community.35 Is the firm developing positive links with environmental and human rights groups? In conducting research together with the WWF, SABMiller clearly showed its concern for the environment and built up a good working relationship with the WWF. Similarly, Hewlett Packard has set specific packaging reduction goals and product content targets, and it’s working with the Carbon Disclosure Project to measure supply chain carbon footprints. Do communications strategies accurately emphasise environmental and social considerations?

Developing more sustainable marketing strategies can place unique demands on marketers. It involves familiar activities such as the researching of customer needs, preferences and expectations and the analysis of the firm’s ability to meet those expectations compared to its rivals. It can also require new types of information on stakeholder attitudes to sustainability issues relevant to the sourcing, production, use or disposal of the product. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> HiFi Corporation’s commitment to managing its environmental impact was formalised with the completion of its sustainable charter during 2011. Its programmes include an in-store initiative to promote electronic waste (e-waste) recycling in eight stores, rolled out to all HiFi Corporation stores during 2012. To reduce the use of plastic bags, HiFi Corporation is charging customers for bags and is in the process of introducing environmentally responsible hemp bags manufactured by local communities. Another example within the JD Group is Incredible Connection which recycled 122 tons of e-waste in 2011, in partnership with an external electronic recycling specialist. Customers and other members of the public use the e-waste bins located in each of the Incredible Connection stores throughout the country to dispose of their used computer and electronic components. The waste is collected and transported to a processing plant in Gauteng where mainstream waste is manually dismantled, sorted and recycled. Independent parallel electricity consumption metering systems have been installed across the cash retail division. These have highlighted instances of abnormally high consumption and savings of up to 15 per cent of costs are being achieved.36 Selling a simple cup of coffee, for example, already requires much more knowledge than how to brew and serve it. Where was the coffee grown, under what labour conditions and with what pesticides? Is the cup made from recycled paper, and how many trees were cut down and how much water was used to manufacture it? Does the plastic lid leak toxins and does it secure and seal the cup well enough to prevent burns from spills? Key strategic choices in sustainable marketing involves identifying markets that are likely to grow as a result of sustainability concerns, and products or services which can be positioned as market leaders in social or environmental markets. Success in many markets will require a change in focus away from products "****** DEMO - www.ebook-converter.com*******"

towards services or total product/service packages, for example, moving to offering sustainable mobility solutions rather that providing cars (i.e. shifting mindsets to satisfying customer needs through functional solutions rather than through products per se). WEBSITE eEcosphere is a new app that aims to help users discover, adopt and share actionable ideas to build a more sustainable lifestyle – providing personally tailored tips and local resources to improve their everyday decisions. The company targets millennials, is co-led by one, and offers a practical solution for the conscious, connected generation searching for a sense of meaningful action. The objective: to transform the idea of ‘being sustainable’ from a destination into a lens for evaluating one’s current lifestyle, and through which opportunities to make simple yet meaningful behaviour changes become apparent – not to mention fun and collaborative. Along the way, it aims to create new opportunities for companies to evolve more personal, valuable relationships with their younger customers. Download the app from http://www.eecosphere.com/ and see how you can start making a difference.

6. The impact of sustainable marketing on LO6 the product life cycle "****** DEMO - www.ebook-converter.com*******"

Traditionally, products are said to go through a series of life cycle stages from development, launch, to growth, maturity and decline (see Chapter 9). This is an economic view of a product’s evolution based on sales volume. It is also important to think of the environmental and social impacts of the product over time. Life Cycle Thinking (LCT) should be used to evaluate the sustainability impacts of the product, service or system from cradle to grave (i.e. from extraction, to manufacturing, to transport, through use and disposal). It is important not to confuse LCT with Life Cycle Assessment (LCA), which is an appropriate instrument to analyse the environmental impact of products. The relevance and importance of social and ecological issues vary from one product category to the other. Take for example, beverages: fair trade with third world countries is a key issue in the coffee market; obesity is becoming increasingly important for sugared soft drinks and in the case of milk products the main issues are organic farming, genetically modified organisms (GMOs) and packaging.37 Similarly, Germany’s AEG, a producer of white goods, recovered from near bankruptcy in the early 1980s by manufacturing a washing machine that used less detergent, energy and water than its rivals. Therefore Life Cycle Assessment (LCA) is one example of an environmental evaluation tool that may be used in the product development process. Nike for example has developed a five stage ecological lifecycle for their sports footwear: 38 1

Research and design: Where they aim to design in postconsumer materials and design their products to avoid the use of hazardous materials.

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2

3

4

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Manufacturing: Working with business partners to implement improvements such as their ‘Regrind’ technology to utilise excess mold rubber Retail: Where box styles have been reduced from 18 to 2 and 100 percent post-consumer recycled corrugated cardboard boxes have been developed. Consumers: The Reuse-A-Shoe scheme has already kept more than 7,5 million post-consumer and defective shoes out of landfills. Downcycling: Where reclaimed shoe material is recycled into sports surfaces like tennis courts.

What then is special about sustainable marketing? To which extent does it differ from other marketing approaches? There are at least six distinctive characteristics of sustainable marketing when compared with conventional marketing.39 •

Socio-ecological problems. The analysis and identification of ecological and social problems are points of departure in sustainable marketing. Social and ecological aspects are integrated throughout the whole process of sustainable marketing. This requires our understanding that environmental consequences (the product’s aggregate impact on everyone affected by its use) are more important determinants of its acceptability than either user satisfaction or corporate profitability.40 The true socio-ecological product is thus one that becomes a consumer’s first choice, since it meets their consumption needs along with their need for a healthy, sustainable physical environment.

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•

•

•

•

•

Intersection. Sustainable marketing tries to find solutions to the socio-ecological problems and at the same time satisfy customer’s needs. Normative aspects. Sustainable marketing pursues sustainable and profitable relationships with customers, the natural environment and the social environment. Besides common marketing goals such as sales, market share and profits, ecological and social objectives are taken into consideration and balanced in a responsible way. Information asymmetries. Social and ecological qualities of products are often very important qualities. This is why signalling, credibility and trust are essential in sustainable marketing. Transformational aspects. Within the existing framework, there are few economic incentives to behave in a sustainable way, either for producers or consumers. By engaging in public and political discourses and changing the institutional design in favour of sustainability, firms set the conditions for the successful marketing of sustainable products beyond niches. Time. Sustainability marketing aims at building lasting relationships with customers, the social environment and the natural environment. Thus, long-term thinking are fundamental components of sustainable marketing.

Sustainable marketing means more than pollution reduction and life-cycle responsibility. The goal must be to make the manufacturing, use, and disposal of products more compatible with sustainable development. Nevertheless, as with marketing traditional products, the "****** DEMO - www.ebook-converter.com*******"

marketing mix is a critical element in sustainable marketing.

READER 68 >> Walmart’s Packaging Sustainability Initiative41 Walmart has pledged to eliminate twenty million metric tons of greenhouse gas emissions from their global supply chain by the end of 2015. That is 150 per cent of the company’s estimated global carbon footprint growth over the next five years. As part of this initiative, Walmart is planning to reduce its packaging globally by 5 per cent versus their 2008 baseline. Through a sustainable packaging scorecard that Walmart has developed and put in place to help monitor their suppliers’ efforts, Walmart can track and use their immense weight to push suppliers to help them achieve their goals. The following are some of their notable successes with their suppliers to date: 42 • The transition of all liquid laundry detergents to concentrated versions has saved more than 125 million pounds of cardboard, 95 million pounds of plastics, and 400 million gallons of water. • Packaging of Apple iPods was changed to 100 per cent renewable, recyclable, and more sustainable materials. • By reducing the packaging size of its Kid Connection line of toys, Walmart claims to have saved over $2,4 million in freight costs. • The apple juice sold under the Member’s Mark label at Sam’s Club now uses 35 per cent renewable energy in producing half the corrugated box packaging, and 50 per cent of that corrugated packaging is from 100 per cent recycled corrugated cardboard. • All of Walmart’s cut fruit and forty-ounce vegetable trays and some of the nine-ounce trays are packaged with NatureWorks PLA, a biodegradable polymer. According to the company, by making that change to PLA in 2005 on just four produce items, they saved about eight hundred thousand gallons of gasoline and avoided more than eleven million pounds of greenhouse gas emissions. "****** DEMO - www.ebook-converter.com*******"

7. Making the marketing mix more sustainable

LO7

Business sustainability is a holistic concept – and many firms are uncomfortable with this, preferring to keep environmental and CSR issues separate. Sustainable marketing requires an aware, open and targeted approach to environmental and social issues which takes account of all direct and indirect stakeholders. Firms embarking on environmentally and socially-related strategies need to debate the total effect of launching a more sustainable product or service programme. Heightened media attention is likely to focus attention on the firm’s other market operations and on the firm, in general. This means there is a need to consider the environmental and social impacts of products and services from the procurement of materials and manufacturing to the distribution, consumption and disposal, both from an environmental and social point of view. It also means that all the aspects of the marketing mix need to be considered, although the emphasis across the mix will change dependent on the firm, its product or service portfolio, its markets and its particular circumstances.43 As is evident from the discussion to follow, existing marketing practices need to change to allow products and their production and consumption to become more sustainable. To implement sustainability marketing strategies, a consistent marketing mix has to be developed "****** DEMO - www.ebook-converter.com*******"

aimed at particular target group(s).

7.1 Product At the heart of sustainability marketing are sustainable products. Sustainable products are products that have a higher socio-ecological efficiency than other products in the same category.44 Product development processes must be guided by the firm’s sustainable development objectives, must understand the nature of the customer’s interest in sustainability issues, and the potential market for sustainability focused products and services. The paper manufacturer Mondi, for example, is conscious of the need to develop sustainable products, both to meet their responsibility as a corporate citizen in South Africa and to meet the growing demand from customers for more environmentally responsible packaging. Their pioneering Sustainex® biodegradable packaging is a range of sustainable plastics, including extruded film and coated materials based on biodegradable polymers made from renewable materials.45 Other desirable products in the age of sustainability should: • • • • • • •

Be energy efficient (e.g. reduced CO2 emissions) Be easily repairable Be designed to last Be re-usable and recyclable Have environmentally-friendly packaging Be manufactured from renewable resources Be free of hazardous materials

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• • • • •

Be manufactured from locally sourced material to minimise transport costs Provide sufficient information on contents Not be tested on animals Not use child or forced labour in the manufacturing process (in-house or contract) Be developed in partnership with not-for-profit firms or government agencies.

In the future products and services will need to be modified and adapted to changing customer attitudes and tougher legislation. In some cases firms may need to work with various stakeholders to bring about changes in the overall consumption system, and not simply change corporate activity. When looking at a sustainable-marketed product, consideration should be made for sourcing of materials, ingredients used, and the manufacturing of the product. This includes using all natural and organic materials, sourcing local and fair trade suppliers, utilising environmentally friendly materials, and using lean manufacturing and distribution methods that minimise the company’s carbon footprint. Fair trade is a global trade system that ensures producers get a fair price for their goods. It is the cornerstone of a sustainable economy. Starbucks began purchasing Fair Trade Certified coffee in 2000, helping to grow the market for Fair Trade Certified™ coffee in the United States. Fair Trade Certified™ coffee empowers small-scale farmers organised in cooperatives to invest in their farms and communities, protect the environment, and develop the business skills necessary to compete in the global marketplace.46 "****** DEMO - www.ebook-converter.com*******"

7.2 Price Price is a key element of the sustainable marketing equation. Traditionally, many environmental and social costs are treated as ‘externalities’ and are not included in existing market structures. This means that external costs, such as those linked to pollution, are not reflected in the prices of the products that we buy, or the cost accounting of the firms that produce them. This situation is gradually changing. Many of these external costs now have a price attached to them by legislation and stakeholder pressure. For sustainable products, pricing has often been an issue limiting a product’s or service’s mass acceptance and market growth. Green products tend to be more expensive because the ingredients may cost more than their conventional counterparts. For example, organic food grown with natural fertilisers may be more expensive than those foods not utilising natural fertilisers. Legislation is making firms more responsible for emissions and the use of new fiscal measures such as carbon taxes is increasing costs for business. Marketers can, for example, link a proportion of the product price to a relevant social or environmental cause (i.e. cause-related marketing), identify opportunities to increase margins and/or improve price competitiveness through environmental efficiencies. Marketers can also identify any price premium that can be captured by the sustainability attributes of the products, and factor the full social and environmental costs of products into the price.47 The problem is that marketing has tended to focus on the price that a consumer pays for product or service, rather "****** DEMO - www.ebook-converter.com*******"

than the total cost to the consumer. An example is the car industry and car purchasers, who do not directly pay for the costs associated with air pollution, global warming, oil depletion or road deaths and injuries. In theory, governments can raise taxes on consumers and firms to meet the external costs. However, in an era when tax minimisation dominates election debates, and when national regulators struggle to contain the lobbying power of global firms, this looks increasingly like wishful thinking. Similarly the costs of raw material replacement or associated environmental impacts are often not met. Therefore, the costs of the fishing industry reflect the costs of fishing, but not the costs of over-fishing. As a result the full costs of the environmental capital are not covered, which means that the environment effectively provides a subsidy. Environmentally-orientated products often encounter problems because they are perceived as unrealistically expensive. They are, in fact, competing with products effectively subsidised by the environment and therefore are unrealistically cheap.48

7.3 Promotion A firm’s marketing information and promotional claims must be based on sound research and must be communicated consistently and effectively to all stakeholders. A variety of approaches can be taken using a range of promotional media, but the keywords for all communication strategies are that it must be appropriate, consistent and coordinated. Measures to ensure "****** DEMO - www.ebook-converter.com*******"

sustainability in the marketing and product process include: emphasising the sustainability attributes of products in promotions, examining the strength of existing claims regarding social and environmental attributes of products, ensuring that existing marketing materials are in line with the social and environmental performance of the firm, and developing adequate control procedures to identify possible product risks and inform consumers of such risks. Nike made a big splash with its marketing focused on creating a better world through sports. Their efforts included the first 100 per cent recycled television advertising, reusing and remixing film from their previous campaigns over the years to create a new spot to introduce their Better World campaign. The digital mash-up showcases the inspiration and history of the brand while bringing attention to the sustainability concept of reusing and reducing resources. This is also a good example of sustainability principles actually benefitting the bottom line. By reusing existing film, Nike did not have to spend the thousands of dollars to produce a new television commercial nor expend energy costs for a production shoot - the cost of an average television commercial exceeds $300 000.49 Consider the Toyota Prius example discussed earlier in this chapter. Interestingly, the Prius was not strongly marketed on its ecofriendliness but more on its fuel efficiency and the likelihood of reduced fuel costs. This highlights that impacts upon sustainability do not need to be the headline-grabbing act in a marketing effort but can still be made.50

7.4 Distribution "****** DEMO - www.ebook-converter.com*******"

The physical distribution, wholesaling and retailing of products and services have both direct and indirect environmental impacts. These can be reduced through careful management. As the environmental costs of fossil fuels are more accurately reflected through measures such as the climate levy, so distribution systems may focus more strongly on localised production and distribution systems.51 Consideration should be given to attract customers through new distribution channels such as the Internet, which minimises social and environmental impacts, and to identify markets in which products will promote social inclusion and economic regeneration.

READER 69 >> Cherubs: flushable, biodegradable products During 2010, one of South Africa’s most established and trusted baby brands, Cherubs launched their ‘new-look’ packaging as well as innovative product upgrades and range extensions. In addition to the existing ‘Classic’, ‘Sensitive’ and ‘Sticky Fingers’ variants, Cherubs has introduced a new ‘Eco-Care’ baby wipe, which is fragrance, chlorine and alcohol-free, as well as bio-degradable and flushable. Also part of the ‘green’ range are Cherubs Eco-rounds and Cherubs Eco-buds, both of which are flushable. The bud is currently the only ear-bud on the market available in this country that is flushable, because the stalk is made from paper and not plastic.

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SOURCE: Press Release supplied by Mrs Jessica Rycroft, Marketing Manager of Cherubs (July – October 2010)

7.5 People An integral part of business sustainability is to keep in mind that people are the business and they have to implement change. Any firm that embarks on the process of making itself more sustainable is likely to face a difficult and turbulent time. It will mean that projects will need to be looked at in different ways, and inter-disciplinary skills will be needed. Implementation of strategies and policies will be more likely to succeed if employees are involved in decisionmaking and are given a sense of strategy ownership. Therefore to ensure that management and staff accept projects, internal marketing programmes should be carefully introduced and monitored. Initiatives should be clearly communicated to staff through presentations, "****** DEMO - www.ebook-converter.com*******"

workshops, Internet resources and newsletters, and encouraged to participate in environmental and social programmes. It is important for firms to recognise that although their workforce might be quite happy to endorse such programmes, the concept of sustainability and many of the issues that are central to it are not yet widely understood throughout society. This means that it is just as important to inform and educate the workforce about key environmental and social issues as it is to communicate professionally about the firm’s response and the importance of supporting it. The process of tackling these issues should lead to them being interwoven into corporate strategy and culture, for example by introducing sustainability issues into recruitment and training programmes.52

7.6 Processes In 2008 the Direct Marketing Association (DMA) made public its goal to reduce carbon emissions from the directmarketing community by 100 million tons by 2013, through more highly targeted mail and better list and data management, in an effort to green the digital process they follow. During 2012 the DMA began asking its online and offline members to commit to 15 triple-bottom-line (profitplanet-people) principles for improving marketing’s sustainability.53 Despite this there is still a dearth of information on greening the digital-marketing process. This has begun to change, beginning with a focus on the greening of IT and energy conservation. "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> Standard Bank South Africa developed a tool during 2010 to help customers measure and manage the carbon footprint of their fleet vehicles. Standard Bank receives information on how much it costs to run fleets by looking at how many litres are bought and the cost from their customer’s fleet management cards. Using this information Standard Bank calculates the resultant carbon emissions per fleet. In addition, their ECO2 Fleet Management unit provides consulting services to help the bank’s customers manage their fleets more efficiently. For example, by comparing the actual emissions produced by a vehicle against the vehicle manufacturer’s specifications they are able to identify which vehicles are not being used efficiently. Inefficiency could be as a result of various factors such as the way the vehicle is being driven, that it is not suited to the function it is being used to perform or that the vehicle’s age is such that it may have reached a point where fuel consumption is excessive. By identifying these factors Standard Bank is able to help their customers reduce their carbon emissions, as well as their costs to run the fleet. Customers can also access a database of their information and compare vehicles and identify where other vehicles might be more suitable and efficient for their requirements.54 For more information visit www.standardbank.co.za/eco2fleet

7.7 Physical evidence Physical evidence is the environment in which the service is delivered and where the firm and customer interact, and any tangible components that facilitate performance or communication of the service. Due to the intangible nature of services, customers search service cues from physical evidence. The physical evidence design includes facility design, equipment, signage, employee dress, and other tangibles such as reports, statements and guarantees. In terms of physical evidence the firm can communicate its environmental orientation with the help of tangibles, for "****** DEMO - www.ebook-converter.com*******"

example ISO14000, Life Cycle Assessment (LCA) and different kinds of third party eco-labels and certificates. An environmentally sustainable service provider should use eco-labelled machines, durable furniture, clothes and materials as well as recycled paper. In a sports centre for instance, physical evidence would also include a second hand shop and repair service to promote reuse. Eco-labels can cover a range of environmental attributes and they allow consumers to make comparisons among products/services as well as include environmental aspects as criteria in their purchasing decisions.55

8. The disadvantages of a sustainable marketing approach

LO8

Although sustainable marketing practices can be a source of sustainable competitive advantage for firms when consumers associate these actions as being socially responsible, the outcome of these actions on the perception of the firm is uncertain.56 One study found that the fact that a firm follows ethically sound business principles does not mean that the consumers will buy that firm’s products if the products do not meet the consumer’s minimum standards in terms of price and quality. Nevertheless, consumers will expect firms to follow certain minimum standards when it comes to being socially responsible and following green marketing practices.57 "****** DEMO - www.ebook-converter.com*******"

EXAMPLE >> In the 1990s Nike was accused of selling shoes manufactured in sweatshops using child labour. Despite initial denials of responsibility, Nike succumbed to pressure from action groups and persuaded its manufacturing partners to change their production processes. However, the extent to which green and socially-responsible marketing practices impact on consumer behaviour will depend on the nature of the business.58 For example, a firm manufacturing chemicals and discharging toxic effluent into a recreational river such as the Nahoon river near East London will be under a lot more pressure to embrace environmentally-friendly manufacturing principles than Eskom which releases toxic coal fumes into the environment in the rural parts of Limpopo in its production of electricity. Compounding the matter is the fact that many consumers do not embrace the green movement. Importantly, they do not find any altruistic reasons for supporting green firms or green products and the decision-making process would be no different from that in respect of any other product. In addition many of those who initially embraced the green movement are now suffering from ‘green fatigue’ which is where consumers are worn out by the constant barrage of stories of the enormity of climate change and as a result start to question whether their contribution (such as buying a particular green product) is largely irrelevant within the bigger scheme of things.59

9. Implementing sustainability

LO9

As evident from the discussion so far in this chapter sustainable marketing essentially means getting better "****** DEMO - www.ebook-converter.com*******"

results using fewer resources. It means using strategies and tactics to effectively grow profits, increase business efficiencies, speed up sales cycles, enhance customer loyalty and improve employee attraction and retention – with lower costs and lower environmental impact. In order to accomplish the above, it is recommended that marketers follow the following seven steps to sustainable marketing:60 •

•

Step 1: Think long-term. Sustainability is above all about taking a long-term perspective of your business. It means more than your operational footprint. Sustainable marketing is about meeting immediate business objectives – like creating a competitive advantage, increasing revenue, retaining employees, establishing a green corporate image – while ensuring efforts have the staying power to sustain long-term results. Building genuine, enduring relationships with staff, suppliers, customers, community and the environment also builds lasting value for the business. Step 2: Create a sustainable brand position. As a marketer one must know the brand’s core values and key strengths. This must then be translated into a brand position that delivers real value to customers. By doing this, marketers develop a brand position that exploits their natural competitive advantages that will genuinely appeal to one’s customers and that has the potential to strengthen and grow. This will also help marketers make quicker, wiser choices to support sustainable success. Sometimes marketers will want to fundamentally change their brand positioning, which involves transforming the entire business strategy and investing in new resources

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to bring that positioning to life. Many companies have initiated efforts to reformulate products to either remove the harmful ingredients, like phosphates in detergent, or make them more energy efficient. Repositioning products as environmentally friendly offers an opportunity to gain early market recognition and support of the conscious consumer and it also provides higher visibility in the already cluttered advertising media. With the largest environmental product portfolio worldwide, Siemens is a leader in climate protection technologies. In order to strengthen their green brand, they aimed to further position themselves as an environmentally-friendly and ecologically-sustainable company whilst simultaneously creating awareness around nature and the environment for consumers. Coca-Cola, L’Oreal and Cadbury have all acquired brands (Innocent Smoothies, The Body Shop and Green & Black’s Organic respectively) with strong sustainability credentials. It is important to realise that brands are becoming increasingly important in consumer markets, and a strong brand is something that firms are keen to develop, nurture and sustain. Increasingly sustainability issues are becoming linked to reputation management and brand trust. Within increased outsourcing and contract manufacturing there is a need to be highly sensitive to societal and consumer concerns, and to reduce environmental and social impacts within supply networks. A strong brand implies high visibility and brings the threat of targeting by the media or pressure groups following any social or environmental incidents or scandals. "****** DEMO - www.ebook-converter.com*******"

•

Step 3: Maintain focus. The marketing budget should be concentrated on one or two segments and craft clear, targeted messages that appeal to those specific customers. Marketers must stay focused on the defined segments and consistently repeat the marketing messages. In this way marketers will build brand recognition faster, get a greater response with less expense and maximise the return on investment. Doing this can then leverage one’s profits to broaden one’s marketing messages and branch out into other customer segments. • Step 4: Actively engage with customers. Communication with existing and potential customers is a two-way activity in sustainable marketing. When marketers build genuine relationships with customers, they will truly understand their needs, their motives and their desires. One of the best ways to engage with one’s target customers is by ‘hanging out where they hang out’. In the digital age, this often means using the social mediums they use and participating in their online communities. • Step 5: Use technology. Technology can be used to build strong relationships, improve collaboration with suppliers and staff, get to market faster and reduce costs. From online forums to video conferencing to the iPad, it’s a strategy that uses minimal resources to attract a large number of targeted customers. • Step 6: Apply genuine green certifications and logos. Consumers are on the lookout for easy identification marks to give them confidence in the product and help them make quick purchase decisions. Consumers want "****** DEMO - www.ebook-converter.com*******"

•

to make decisions that will help the environment, but they don’t always trust promotional claims. If marketer’s sustainability efforts are genuine and can be backed up by certifications or logos, use them to increase consumer confidence and sales. They must, however, be authentic and relevant. Step 7: Include the whole workforce. One of the most effective methods of introducing and maintaining sustainable marketing is by extending it to include all employees and suppliers. Asking your suppliers to complete sustainability checklists, like Wal-Mart has done, establishes a firm as a concerned corporate citizen and helps build brand credibility. Motivating employees to become sustainability ambassadors, and giving them the tools to do so, increases satisfaction and retention. It’s also about attraction, with many generation Y’s making career decisions based on their desire to work for green firms. Marketing’s critical role in development will be appreciated only when, through sustainable marketing as explained above, it meets the needs of the present without compromising the ability of future generations to meet their own needs.

EXAMPLE >> Levi’s boasts of designer jeans made out of used plastic bottles. The strapline to their advertisement is ‘These jeans are made of garbage’ as displayed below. Each pair of Levi’s Waste> South Africa’s largest retailers: "****** DEMO - www.ebook-converter.com*******"

How do they weigh in at the sustainability arena? 62 The retail sector in South Africa has been singled out as one that does not perform well in terms of sustainability. Located at the centre of the consumer goods value chain, retailers have the power to impact all other elements of this value chain, and are beginning to use that power responsibly. Retailers influence consumers on the one end, but also have the ability to impact the supply chain on the other end of the value chain – including farmers and product manufacturers, as well as logistics firms transporting goods to stores. As integrated reporting gains traction in South Africa, there are an increasing number of indices assessing sustainability. Environmental and societal impacts of a company, along with financial data and results, strategy, risks and governance processes, must all be reported to give investors a transparent view of an organisation. In South Africa, and particularly among the top retailers (Shoprite, Pick n Pay, Massmart, Spar, and Woolworths), there are vast differences in the quality and quantity of information provided in the sustainability report. The use of different metrics also makes it difficult to compare information. The closest thing to a uniform sustainability reporting framework is said to be the Sustainability Reporting Guidelines (GRI Guidelines) by the Global Reporting Initiative (GRI), which is the most-used sustainability reporting framework in South Africa and globally. The GRI is a voluntary standard and lacks any regulatory mandate at this time. A study conducted in the US highlights the links between sustainability practices and financial performance, and claims that during the global financial crisis, companies that showed a ‘true commitment to sustainability appear to outperform their industry peers in the financial markets’. However, the JSE’s Sustainability Reporting Index (SRI) noted that in 2011, the retail and food producing sectors in South Africa displayed the poorest performance on the index. Woolworths was the only retailer that was included in the Carbon Disclosure Leadership Index (top 10 per cent in terms of disclosure for JSElisted companies), which recognises leaders in terms of transparency and accountability regarding climate change related issues, and the quality of their "****** DEMO - www.ebook-converter.com*******"

data management practices. An important point to remember is that Woolworths produces a lot of its own branded products, and thus does not rely on outside suppliers to the extent that other retailers in South Africa do – making it somewhat easier to monitor the supply chain. The CDP is certainly an important source of climate change related information about listed companies, and as well as providing figures (where available) it also provides information on company ‘performance bands’ from A to E, which are an indication of the extent to which companies are addressing the potential opportunities and risks presented by climate change. In terms of retailers, Pick n Pay and Woolworths were given A-scores in 2011, which represents a fully integrated climate change strategy, driving significant maturity in climate change initiatives. Massmart and Spar received C performance band scores, indicating some activity on climate change with varied levels of integration of those initiatives into strategy. Shoprite, which answered the CDP questionnaire but would not allow the information to be made public, was not given a performance band score.

KEY CONCEPTS Corporate social responsibility (CSR): The actions of the firm to act in a socially responsible manner to protect and enhance the various stakeholders that have an interest in the firm, the community in which it operates, the environment that surrounds it and society. Enviropreneur marketing: The practice of bringing green products to market without properly considering the needs of the consumers. Green Consumers: These are consumers who embrace the concept of buying products produced in an environmentally sustainable manner. Green Marketing: Production and distribution of products environmentally friendly manner. Greenwashing: The practice of misleading consumers to believe that certain products are green, eco-friendly or organic when in fact they are not. Social Marketing: Focuses on changing consumers’ attitudes (and consequently their behaviour) for the benefit of society as a whole. Sustainable development: Making the most efficient use of the resources available in the environment.

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Sustainable Marketing: Meeting the needs of customers in a sustainable manner while minimising harm to the environment and society.

REFERENCES 1 2 3 4

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Van Dam, Y.K. & Apeldoorn, P.A.C. 1996. Sustainable marketing. Journal of Macromarketing, 16(2): 45. World Commission on Environment and Development. 1987. Our Common Future. New York: Oxford University Press, p. 8. Cooper, T. 2005. Slower Consumption: reflections on product life spans and the Throwaway Society. Journal of Industrial Ecology, 9(12), p. 51. Mulder, H. 2007. Sustainable Development and Climate Change: A Business Perspective. Available from: http://www.un.org/wcm/content/site/chronicle/cache/bypass/home/archive/issue pid/5017?print=1 (Accessed 29 March 2012). Jobber, D. 2010. Principles of Marketing. 6th Edition. New York: McGraw-Hill Companies, Inc., p. 191. Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Australia: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 12. Poon, J., Casas, I., & He, C. 2006. The impact of energy, transport, and trade on air pollution in china. Eurasian Geography and Economics, 47, No. x, pp. 1–17. Available from http://www.law.buffalo.edu/baldycenter/Regional07Scholarship.htm (Accessed 11 May 2012). Gordon, R., Carrigan, M., Hastings, G. 2011. A framework for sustainable marketing. Marketing Theory, 11(2): pp. 143–163. Laczniak, Gene R., and Murphy Patrick E. 2006. Normative perspectives for ethical and socially responsible marketing. Journal of Macromarketing 26: pp. 154–77. Kotler, P, Roberto, W and Lee, N. 2002. Social Marketing - Improving the quality of life (2nd Edition). Sage Publications. Andreasen, A.R. 2002. Marketing Social Marketing in the Social Change Marketplace. Journal of Public Policy and Marketing, 21(1): pp. 3–13. Shearman, R. 1990. The meaning of ethics of sustainability. Environmental Management, 14(1): p. 2. Van Dam, Y.K. & Apeldoorn, P.A.C. 1996. Sustainable Marketing. Journal of MacroMarketing, Fall, p. 46.

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Peattie, K. 2001. Towards sustainability: the third stage of green marketing. The Marketing Review, 2(2): p. 129. Van Dam, Y.K. & Apeldoorn, P.A.C. 1996. Sustainable Marketing. Journal of MacroMarketing, Fall, p. 46. Mintel. 1991. The Green Consumer Report. Mintel, London. Wasik, J.F. 1996. Green marketing and management. Oxford: Blackwell. GreenEdge Case Study. GreenEdge sets Woolworths on its green path. Available from http://greenedge.co.za/case.html (Accessed 15 May 2012). Peattie, K. & Crane, A. 2005. Green marketing legend, myth, farce or prophesy? Qualitative Market Research: An International Journal, 8(4), p. 359. Oxford English Dictionary. 2007. 7nd ed. Oxford: Clarendon Press. Hollensen, S. 2010. Marketing Management: a relationship approach. 2nd Edition. Harlow: Pearson Education Limited, pp. 340–341. Peattie, K. 2001. Towards Sustainability: The Third Age of Green Marketing. The Marketing Review, 2: p. 132. Ginsberg, J. M. and Bloom, P. N. 2003. Choosing the Right Green Marketing Strategy, MIT Sloan Management Journal, Fall: pp. 79–84. Peattie, K. 2001. Towards Sustainability: The Third Age of Green Marketing. The Marketing Review, 2: p. 136. The three goals of sustainable marketing. Available from http://www.semiosiscommunications.com/goals-of-sustainable-marketing/ (Accessed 2 September 2012). Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Cardiff: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 13. Palmer, A. 2009. Introduction to Marketing. 2nd Edition. New York: Oxford University Press, p. 82. Baker, M.J. 2003. The Marketing Book, 5th Edition. Oxford: Butterworth Heinemann, p. 731. West, D., Ford, J. & Ibrahim, E. 2006. Strategic Marketing: creating competitive advantage. New York: Oxford University Press, p. 434. Jobber, D. 2010. Principles and Practice of Marketing, 6th Edition. New York: McGraw-Hill Companies, Inc., p. 194. Kennedy, B. 2012. Leaner, faster, greener: Nike’s new supply chain goals, Greenbiz.com. Available from http://www.greenbiz.com/blog/2012/05/07/nike-sustainability-goalssupply-chain (Accessed 15 May 2012). Babin, B.J. and Harris, E.G. 2012. Consumer Behaviour 4th edition. Cengage

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Learning. Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Cardiff: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 17. Tucker, A and Ellens, A. 2012. Innovation can change the world, Added Value. Available from http://www.added-value.com/source/2011/03/innovationcan-change-the-world/ (Accessed 22 May 2012). Tucker, A and Ellens, A. 2012. Innovation can change the world, Added Value. Available from http://www.added-value.com/source/2011/03/innovationcan-change-the-world/ (Accessed 22 May 2012). JG Group Annual Report. 2011. Available from http://financialresults.co.za/2011/jdgroup_ar2011/ (Accessed on 28 May 2012), p. 73. Belz, F. 2006. Marketing in the 21st Century. Business Strategy and the Environment, 15: p. 140. Stoner, C. 2006. NIKE is Quietly Taking Greener Steps. Available from http://www.peakinsight.com/insights_files/nike.pdf (Accessed 5 March 2012). Belz, F. 2005. Sustainable Marketing: Blueprint for a Research Agenda. Marketing and Management in the Food Industry, Discussion Paper 1. TUM Business School: Munich, pp. 21–22. Cracco, E. & Rostene, J. 1971. The socio-ecological product. MSU Business Topics, 19 (Summer), pp. 28–29. Walmart. Remarks as Prepared for Mike Duke, President and CEO of Walmart Greenhouse Gas Goal Announcement. News release, February 25, 2010, Available from http://walmartstores.com/pressroom/news/9669.aspx. Kevin Hagen. 2010. The Effects of Walmart’s Packaging Scorecard on Environmental Sustainability. Yahoo!, January 22, Available from http://www.associatedcontent.com/article/2614159/the_effects_of_walmarts_packa cat=3. Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Cardiff: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 29. Belz, F. 2006. Marketing in the 21st Century. Business Strategy and the Environment, 15: p. 141. Mondi. 2011. Product responsibility. Available from http://www.mondigroup.com/desktopdefault.aspx/tabid-1336 (Accessed 15 March 2012). Starbucks. Responsibly Grown and Fair Trade Coffee. Available from

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http://www.starbucks.com/responsibility/sourcing/coffee (Accessed 6 October 2014). Next Generation. 2010. Sustainable Marketing, Market and Product Stewardship: Contributing to corporate social responsibility strategies. Available from http://www.nextgeneration.co.za/sustainable-marketingmarket-and-product-stewardship-contributing-to-corporate-socialresponsibility-strategies/ (Accessed 20 March 2012). Peattie, K. 2001. Towards Sustainability: The Third Age of Green Marketing. The Marketing Review, 2: pp. 141–142. O’ Leary, T. 2010. The Latest on How Much It Costs to Produce a TV Commercial. Bizzy Life, May 23. Available from http://bizzylife.com/2010/05/the-latest-on-how-much-it-costs-to-producea-television-commercial. Gorib, R., Carrigan, M. & Hastings, G. 2011. A framework for sustainable marketing. Marketing Theory, 11(2), p. 148. Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Cardiff: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 25. Charter, M., Peattie, K., Ottman, J. & Polonsky, M.J. 2002. Marketing and sustainability. Cardiff: Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) in association with The Centre for Sustainable Design, p. 20. The Green Times. 2012. E-marketing greening the digital process. Available from http://www.thegreentimes.co.za/stories/business/item/370-emarketing-greening-the-digital-process (Accessed 15 March 2012). Standard Bank. 2012. Products and Services. Available from https://sustainability.standardbank.com/economic-performance/productsand-services/ (Accessed 15 March 2012). Grundey, D. & Zaharia, R.M. 2008. Sustainable incentives in marketing and strategic greening: the case of Lithuania and Romania. Technological and economic development Baltic Journal on Sustainability, 14 (2), pp. 130–143. Brown T.J. and Dacin P.A. 1997. The Company and the Product: Corporate Association and Consumer Product Responses. Journal of Marketing, vol. 61, January. Page, G. and Fearn, H. 2005. Corporate Reputation: What Do Consumers Really Care About? Journal of Advertising Research. Lamb, C.W., Joseph F. Hair, J. F. and McDaniel, C. 2011. Introduction to Marketing (International Edition). 12th ed. South Western Cengage Learning, Canada. Wilson, H, 2007. Have you got green fatigue? The Independent online. 20

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September 2007. 60 Anderson, M. 2010. 7 Steps to sustainable marketing. WME Magazine, pp. 22–23. 61 Voight, J. 2013. Green Is the New Black: Levi’s, Nike Among Marketers Pushing Sustainability Responding to a consumer behavior shift. 23 October. Available from http://www.adweek.com/ 62 Smith, J. South Africa’s Largest Retailers: How do they Weigh in at the Sustainability Arena? Available from http://www.greenbusinessjournal.co.za/articles/south-africas-largestretailers-how-do-they-weigh-in-at-the-sustainability-arena-10291.html (Accessed 8 October 2014).

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Index A acid rain 569 advertising appeals 419–420 and brand loyalty 385 campaigns 417–420, 429–430 and the consumer 384 effects of 382–383 media, choosing 422–427 message, executing 420–422 types of 386–388 Advertising Standards Authority (ASA) of South Africa 66 agents 374 age segmentation 208 AIDA and the hierarchy of effects 398–399, 399 All Media Products Survey (AMPS) 56 allowances 482–483 alternative media 425–427 analysers 506 attitudes 102–103, 184–186 attributes, changing beliefs about 103 available funds 403–404

B Baby Boomers 53, 208 bargaining power 140–141 base prices, tactics for finetuning 482–488 Basic Browns 567 behaviour, opposition to desired 565 behavioural goals 564

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behavioural segmentation 205–207 behavioural theory 564 beliefs 102–105 benefit segmentation 216–217 biogradable products 578 black diamonds 54 Boston Consulting Group portfolio matrix 46, 507–509 brand equity 283–284 brand familiarity 206–207, 289 branding benefits of 281–284 co-branding 287–288 copyright 292 favourable conditions 287 “green selling” approach 566 legal implications of 290–291 names, effective 284 new brands, positioning 250–254 sports products 534 strategies 284–285 sustainable position 580 trademarks 289–290 [i]See also[n] packaging brand loyalty and advertising 385 generic versus branded products 285–286 break-even pricing 473–475 brokers 374 Brundtland Report 562 business analyses 311–312 business environment 41 business mission 500–502 business-to-business marketing consumer markets, differences to 546–548 customers 544–545 products 548–550 purchase process 550–551 Standard Industrial Classification (SIC) 545–546 buyers’ bargaining power 140–141

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buying decisions individual factors in consumers 95–96 involvement of consumers 92–95 purchase situation, influence of 106–107 social factors influencing 107–108 and technology 118 types of 403

C carbon footprint 563 career opportunities 32 central government legislation 68–70 channel crowding 138 channel leadership 353–354 climate change 73, 569 co-branding 287–288 Code of Advertising Practice 67 Code Revision Committee 67 commercialisation, of new products 315 communication process 390–394 comparative advertising 387–388 competition and industry structures 134–136 and non-profit organisations 540–541 and pricing decisions 475–477 foreign competitors 48 international 72 laws limiting 67 Competition Act 67, 69, 77 competitive advantage 47, 49, 64 classifying industries according to 237–239 importance of 23–28 and marketing planning 510 competitive advertising 387 competitive arena, defining 134–137 competitive environment 77, 503–504 competitive factors 72–73 competitors 41 actions, anticipating 151–153

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cultures of 146 current, understanding 144–147 direct rivalry among 154–155 foreign 48 identifying 127–134 key, analysing 143–144 objectives and commitment 146 potential, understanding 147–148 reaction patterns, likely 151–153 strengths and weaknesses, evaluating 148–151 to attack, to avoid, deciding which 156–157 concentrated targeting 223–224 concept development and testing 310–311 consulting service 243 consumerism 66 consumer markets, and business-to-business markets, differences 546–550 consumer orientation 13–14 consumer products 272 consumers 574 and advertising 384 and market reactions to economy 76 behaviour 82–83 branding, benefits 281–284 buying decisions and involvement 92–95 decision-making process 84–92 evaluation of alternatives and purchase 89–90 individual factors influencing buying decisions 95–106 needs 39, 562 older 53–54 research 564 rights 66, 67 sales promotions to 437–439 social factors and buying decisions 107–117 spending patterns 61 values 49 [i]See also[n] customers Consumer Protection Act 69 contact efficiency 339–340 consumption 568 environmentally-sound patterns 567 patterns 62, 564, 565

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socially responsible practices 563 convenience products 273–274 corporate culture 504–506 corporate social responsibility (CSR) 570, 583 cost, as determinant of price 470–475 cost efficiency 41 cost structures, of competitors 146–147 creativity 308–309 criticisms of marketing 29–32 culture 107–108 customer-based approach to identifying competitors 129–131 customer choices 130 customer loyalty 9–10 customers actively engaging with 581 business-to-business 544–545 training 243 [i]See also[n] consumers customer satisfaction 5–9, 25–26 customer value 25, 171–172

D data, collection and analysis 188 database marketing, and micro-marketing 165 decision-making 49 improving quality of 169–170 decision-making process, of consumers 84–92 decision support systems (DSSs) 163–165, 167 decline stage 319, 320–321 decoding, of advertising messages 392–393 defenders 505 delivery 242 Delphi Technique 45 demand business-to-business 546–547 as determinant of price 462–469 fluctuations 552–553 demographic factors 55–56, 58, 76 demographic segmentation 207–213 Department of Trade and Industry 66 development stage of new products 312

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differentiation 235–236, 239–247 Direct Marketing Association (DMA) 578 discounts 482–483 discrepancies, overcoming 338–339 discretionary income (disposable income) 51 disintermediation 343 distribution 40, 577 channels 351–352 decisions, and non-business organisations 542 strategies 476, 513 diversification 506 division of labour 338 double-income families 50 downcycling 574 dual-career families/households 49, 50 durability 241

E economic environment 76 factors 61–63 economy 41 economies of scale 138 ecosystem 564 education and literacy 59 effective differentiation and high switching costs 138 effects, of advertising 382–386 elasticity of demand 467–469 Electronic Communications and Transactions Act 70, 77, 167 Electronic Communications Security (Pty) Ltd Act 72 electronic surveys 179 emissions 569, 570 employees, as competitive advantage 26–27 encoding 392 energy conservation 578 efficiency 570 entry barriers 148 environment (Planet) 568 environmental damage 569 environmentally friendly ingredients 74–75

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management 48 marketing 563 sustainability 562–563 variables or trends 48 environmental-scanning 44 process 43 enviropreneur marketing 566 European Union (EU) 563 ethnic segmentation 210–213 evaluation, of alternatives, and purchase 89–90 exchange 10–11 exit barriers 147 experiments to collect primary data 184 exploratory research 173–176 external environment 41, 42, 47 of marketing and impact 75 understanding 43–45

F factor cost advantages 138 fads and trends 50–51 failure of new products 315 fair adjudication 67 families, changing role of 50, 114–115, 213 families and gender, changing influence of 50 family brands versus individual brands 287 features, of products 239–240 feedback 393 fertility 55 financial services ombudsman 66 firms business of 20–23 existing, implementing marketing concept in 19 focus and goals 17 marketing, position and role of 29 fixing, of prices 481 focus, maintaining 580 foreign markets 65 formal trade agreements 77 four ‘P’s 39 focus groups 180

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franchising 369–371 free-market economic systems 65

G gender segmentation 209 General Agreement on Trade and Tariffs (GATT) 71, 77 General Electric market attractiveness/company strength matrix 509 General Export Incentive Scheme 71 general merchandise retailers 364–365 generation X 52 generation Y 52 generations 51–54 generic products versus branded products 285–286 genetically modified organisms (GMOs) 569, 574 genetic engineering 569 geodemographics 215 geographic segmentation 207 governments 545 global equity 563 warming 569 globalisation 569 goals 39 Greenback Greens 567 green certification and logos 581 green consumers segments 567–568 targeting of 565 greening of IT 578 green marketing 563–564 greenwashing 566 Gross Domestic Product (GDP) 55 Grousers 567 growth stage 319–320, 323

H habitats, loss of 569 heterogeneity 529 hierarchy of effects 398–400 HIV/Aids 51

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horizontal conflict 350 household incomes 50 monthly 58 Housewives League 66

I idea generation 307–308 idea screening 309–310 image, of competitors 144–145 image differentiation 244–247 importing, protection against 48 income segmentation 210 individual brands versus family brands 287 indoor environmental quality 570 industries classifying according to potential for differentiation and competitive advantage 237–239 structures 134–136 infant mortality rate 55 inflation 61–62, 76 and pricing 489–490 and recession 62–63 external sources 45 internal sources 45 information asymmetries 574 information, management’s need for 162 information search 86–89 informative marketing communication 395 inseparability 528 insight-driven strategy 564 installation 243 institutional advertising 386 institutions 545 [i]See also[n] non-profit organisations intangibility 528 integrated marketing communications (IMC) 350–351 interest rates 61 intermediaries retailers 361–372 wholesalers 372–374 internal environment 41

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international agreements 71 International Charter of Consumer Rights 66 international competition 48 Internet 64, 65, 76, 567 Internet, and consumer markets 64 intersection 574 intrapreneurs 317 introductory stage 318–319, 321–323 inventory control 358

J just-in-time (JIT) inventory management 358–359

K key success factors (KSFs) 149–151 Kyoto Protocol 73

L labelling 295 language 59–60 laws [i]See[n] legal factors laws and regulations as threat or opportunity 68 leadership of channels 353–355 leads 442–443 learning 101–102 leased departments 371 legal factors and implications 43, 67–68, 290–291, 481–482, 533, 534–535 legal interest 569 legislation 48 business’s attitude towards 77 licensed sports products 533–535 life-cycle, in families 107, 213 [i]See also[n] product life cycle Life Cycle Assessment (LCA) 574, 579 Life Cycle Thinking (LCT) 574 life expectancy 55 lifestyle 50, 106–107, 213 Likert scale 185–186 lines, of products 276–280 literacy and education 59

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Living Standards Measure (LSM) 55–58, 76 clothing per group 60 magazine exposure per group 60 number of people per group 59 use of to understand markets 58–59 location, of shop 366–368 long-term thinking 575

M macro environment 42 magazines 423 mail surveys 179 management uses of marketing research 168–169 managerial information, need for 162 manufacturing 574 manufacturers’ brands versus private brands 286 market area, size of 368 market communication strategies 513 market development 506 marketing adoption process, implications 330–331 business, importance to 31–32 career opportunities 32 communication strategy 40 defined 5 environment 40–43 marketing environment, influence on 40–43 to non-profit organisations 537–544 position and role in firms 29 reasons for studying 31–33 of services 526–531 strategies 41 strategies during recession 62–63 through sport 532–537 trends in environment 44 marketing channels alternative arrangements 343–345 and benefits 337–340 choice, factors influencing 345–347 conflict. potential 349–350, 354 distribution intensity, levels of 347–349

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functions of 340–341 leadership 353–355 power in 351–353 strategies, factors that influence 345–347 structures 341–343 [i]See also[n] physical distribution; products marketing communication advertising 382–388 AIDA and the hierarchy of effects 398–405 budgets 408–409 decisions 543 factors affecting the mix 400–404 integrated 395 objectives, setting 407–408 objectives and tasks of 396–398 personal selling 390 plans, steps in developing 405–409 and pricing 476 process 390–394 public relations and publicity 388–390 sales promotion 390 marketing concepts, implementing in existing firms 19–20 marketing environment competitive factors 72–73 demographic factors 56–58 economic factors 61–63 influence of marketing on 39–40 language 59–60 legal factors 67–72 management of 48 opportunities and threats 48–49 physical forces 73–75 political factors 65–67 scanning methods 43–44 social factors 49–55 technological factors 63–65 marketing mix 39, 564 marketing communication, role of 381 for services 529–531 in strategic marketing planning 512–513 in travel and tourism 553–554 sustainable 575–579 marketing myopia 21

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marketing orientation [i]See[n] customer orientation marketing process 28–29 marketing research in analyses of marketing 406–407 characteristics of good research 191 criticisms of 192 functions of 167 projects 172–190 role of 167 when to conduct 190–191 market penetration 506 markets, understanding 170–171 market share and advertising 383 mark-up pricing 472 Maslow’s hierarchy of needs 99, 99–100, 562 materials handling 357 maturity stage, of products 320, 324–325 media scheduling 429 selection and evaluation 427–429 media interest 569 Media Monitoring Group 66 merchant wholesalers 373 message transmission 392 micro-marketing approach 565 micro-marketing and database marketing 165 monopolistic competition 136, 504 monopoly 134 monthly household income 58 motivation 99–100 multi-segment targeting 224–226

N National Council Against Smoking 66 National Credit Act 68, 70, 77 nature of the product 401 needs assessments 443 new entrants 137–139 new opportunities, importance of 19–20 new products

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categories of 305–306 development process 306–315, 316–317 failure, reasons for 315–316 importance of 303–304 innovation, diffusion of 328–331 market acceptance of 328 organising for 316–317 pioneer advertising 387 positioning 250–254 product characteristics and rate of adoption 329–330 [i]See also[n] product life cycle newspapers 422–423 new-to-the-world products 118 non-business marketing 537–538 non-probability samples 187–188 non-profit organisations 538–541 [i]See also[n] institutions non-shop retailers 371–372 non-wasteful packaging and recycling 74 normative aspects 574

O objectives 39 objectives, of non-business organisations 541 observation research 182–184 occasions, as bases for market segmentation 206 older consumers 53–54 oligopoly 134 opinion leaders 113–114 opportunities 39, 43, 45–47, 70 identifying 48–49 to utilise 502, 506–507 opportunity-utilisation strategies 506–507 order processing 359–360 organic products 564 outdoor media 425 ozone depletion 569

P packaging

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functions of 292–296 non-wasteful 74 people, in services 529–530 people and business sustainability 578 perception 95–99 perceptions and attitudes, measuring 184–185 performance, of products 240–241 perishability 529 personal interviews 177 personality 106–107, 213 personal selling 390, 440–444 personnel differentiation 243–244 persuasive marketing communication 397, 402 philosophies, of marketing management 11–18 physical distribution importance of 355 subsystems 355–361 physical evidence, of services 579 physical forces 73–75 pioneer advertising 387 place, see distribution objective place strategies 512 political factors 66–67, 76 interest 569–570 pollution 73–74 population 55 female 55 growth 55 pressure 568 positioning competitors’ strategies 145 differentiation 234–237, 239–247 errors 259–261 failure to select 234–234 in the market 227 nature of 234 new products or brands 250–254 of products 247–250, 254–258 repositioning 254–258 strategy 233–234, 259–261 tools and approaches 261 Postal Services Act 67

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post-purchase behaviour 91 post-purchase dissonance 91–92 power, in distribution channels 351–353 pressure group activity 569 pre-teens 51 price and pricing base price, tactics for fine-tuning 482–483 cost determinant 470–475 decisions 543–544 demand as determinant 462–469 difficult economic times 489–491 fixing 481 geographic 484–485 marketing managers, importance to 458–459 objectives 459–462, 478 penetration pricing 480–481 predatory pricing 481–482 and quality 477 skimming 480 special tactics 485 status quo pricing 481 strategies 479–481, 513 and sustainable marketing 576–577 privacy and data protection 68–69 private brands versus manufacturer’s brands 286 probability samples 187 problem recognition 85–86 problems defining 172 identifying 170 processes 578–579 process, in services 578–579 process of market communication 390–394 producers 544 [i]See also[n] manufacturers products 502 biodegradable 578 and consumption 568 life cycle 574–575 strategy 39 sustainability 576

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product benefits 418 product decisions, in non-business organisations 542 product development 506 product differentiation 239–242 production orientation 11–12 product life cycle concept, evaluation of 328 stages in 318–321, 401–403, 475–476 strategies during 321–327 [i]See also[n] new products product orientation 12 product range 242 products advertising 387 attributes 385–385 business-to-business 548–550 consumer products 272–276 defined 270 items, lines and mixes 276–280, 432–433 levels of 270–271 nature of 356 positioning 247–250, 254–256 pricing of 424–427, 488 sports 532–535 in travel and tourism industry 553 warranties 296 [i]See also[n] marketing channels; services product strategies 512 profit maximisation pricing 472–473 profitability 43 profit-orientated pricing objectives 459–460 promotion 577 [i]See[n] marketing communication strategy 39 prospectors 505 prosperity 568 Protection of Personal Information Act (POPI) 68 provincial government legislation 70 psychographic segmentation 213–216 public relations and publicity 388–390, 433–434

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purchase process, business-to-business 550–551 purchase situation, influence on buying behaviour 117–118 purchasing patterns 50 pure competition 135 pure-use associations 130–131 push and pull strategies 404–405 pyramid schemes 66

Q quality fostering 171–172 and price 477–478 questionnaire design 180–188

R radio 424 reactors 505 rebates 482–483 receivers, of advertising messages 392–393 recession 62–63, 76 and inflation 61–63 and pricing 490–491 recycling and non-wasteful packaging 74 Recycling and Economic Development Plan 73 reference groups 111–113 [i]See also[n] families Regulation of Interception of Communication and the Promotion of Access to Information Act 72 reintermediation 343 relationship marketing orientation 15–16 relationship with other businesses 369 reliability 241 reminder marketing communication 398 repairs 243 reparability 241 repositioning 254–258 research and design 574 research design 176–188

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research objectives, formulating 176 reseller brands 242 resellers 544 [i]See also[n] intermediaries resources, scarce 74 retail 574 retailers 78 ‘bricks-and-mortar’ 48 non-shop 371–372 retailing intermediaries 361–374 retail operations, classification 361–374 retail shops, types 362 risks co-branding 288 rivalry among competitors 154–155 in segments 141–143

S sales 43 sales force 448–450 sales management 444–450 sales-orientated pricing objectives 461–462 sales orientation 12–13, 16–17 sales promotion 390, 436–439 sales tasks 440 sampling procedures 186–188 scanning, of external environment 43–44 scarce resources 74 scenario planning 45 seasonality of demand 552–553 secondary data, collecting 173–176 segmentation, of markets bases for 204–217 criteria 203–204 importance of 202–203 nature of 201–202 positioning 227 steps in 220–221 target markets, strategies for selecting 221–226 segmentation principle 564

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segment rivalry 141–143 self-concept 105–106 self-regulation, advantages of 66 self-regulatory agencies 66–67 semantic differential scale 186 senders, of advertising message 392 service quality, as competitive advantage 24–25 service rendered, type of 368–369 services accompanying products 242–243 marketing mixes for 529–531 physical products, differences 527–529 in the travel and tourism industry 552 shop location 366–368 shopping mall intercept interviews 178 shopping patterns 59 shopping products 274–275 simultaneous product development 317 situation analyses 502–503 social capital (People) 568 social classes 115–117 social factors 43, 49–54, 76 social marketing 564–565 social responsibility and consumers 570–571 investing in 572 social trend 49 or a fad 50–51 societal values, changing 565 socio-ecological problems 574 societal marketing orientation 14–15 South Africa cultural values 108–109 subcultures 110–111 South African Advertising Research Foundation (SAARF) 55, 76 Southern African Customs Union 71 Southern African Development Community (SADC) 71, 77 South African Law Reform Commission 68 specialisation 338 speciality products 275–276 species diversity, loss of 569 sponsorships 434–435

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sports marketing 532–537 [i]See also[n] marketing, through sport Sprouts 567 State Information Technology Agency (SITA) Amendment Bill 72 status quo pricing objectives 462 Strategic Business Units (SBUs) 507 strategic-group approach to identifying competitors 131–134 strategic management tools 507–509 strategic marketing plans and planning competitive advantage 510 elements of 499–502 formulating the strategy 511–513 implementation, evaluation and control of 513–514 management tools, strategic 507–509 marketing mix 512–513 objectives 502, 510–511 opportunity-utilisation strategies 502, 506–507 outline of 515–517 value of 499 writing 514 strategic planning, effective 514–517 strategies, of competitors 146 strategy 564 strengths and weaknesses 39 of competitors 148–151 structure of building 570 style 241 subcultures 109–110 substitute products 139–140 success of new products 315–316 suppliers’, bargaining power 141 survey research 177–180 sustainability corporate level questions 572–573 desirable products 576 implementation of 580–581 key issues 568–570 role of marketing 572–573 sustainable development 567 sustainable economic development 562 sustainable excellence, stages in 571

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sustainable marketing 568 concept 563–565 disadvantages of approach 579–580 impact on product life cycle 574–575 origins of 565–570 strategies 573–574 SWOT analyses 47

T target markets 39–40 characteristics 403 and non-business organisations 541–542 strategies 221–226, 512–513 [i] See also[n] segmentation, of markets motivational exchanges with group 565 audiences 407 targeting, concentrated 223–224 targeting principle 564 teamwork, as competitive advantage 27–28 technological factors 43, 63–65 technology 48, 63–65, 76, 581 sustainable 570 threat 64 and buying behaviour 118 teenagers 51–52 television 424–425 test marketing 313–314 threats 44, 45–47, 75 in the external environment 44 time 575 Tobacco Products Control Act 69 tourism marketing [i]See[n] travel and tourism marketing trade loading 483 trademarks 289–292 transformational aspects 575 transportation 360–361 travel and tourism marketing 552–554 trends and fads 50–51 triple bottom line 563, 578 True Blue Greens 567

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U undifferentiated targeting 221–223 Universal Living Standards Measure (LSM) 55–56 unsought products 276 urban areas 55 usage-rate segmentation 205–206 Usury Act 68

V values 102–103, 108–109 values and attitudes, changing 569 venture teams 317 vertical conflict 350

W warehousing 356 warranties 296 water efficiency 570 wholesaling intermediaries 361–374 workforce 581 working women 50 World Trade Organisation (WTO) 71

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Contents Cover Title Copyright Citation Abridged Table of Contents Table of Contents PART ONE Introduction to marketing CHAPTER 1: An overview of marketing Introduction What is marketing? Customer satisfaction Measuring customer satisfaction Customer satisfaction or customer dissatisfaction? The benefits of customer satisfaction and loyalty The concept of exchange Marketing management philosophies "****** DEMO - www.ebook-converter.com*******"

Production orientation Product orientation Sales orientation Consumer orientation Societal marketing orientation Relationship marketing orientation Differences between sales and consumer orientations A word of caution Implementing the marketing concept in existing firms Changes in authority and responsibility The importance of new opportunities The firm’s business The importance of a competitive advantage The marketing process The position and role of marketing in the firm Why are there critics of marketing? Why study marketing? Marketing plays an important role in society "****** DEMO - www.ebook-converter.com*******"

Marketing is important to businesses Marketing offers outstanding career opportunities Marketing influences your life every day Looking ahead Looking back Summary Discussion and writing questions Key concepts References CHAPTER 2: Analysing the external environment’s influence on marketing Introduction The marketing environment Marketing’s interaction with the internal and external environment Understanding the external environment Opportunities and threats Environmental management Identifying opportunities and threats Social factors "****** DEMO - www.ebook-converter.com*******"

Consumer values The changing influence of families and gender Is it a new social trend or a fad? Today’s pre-teens: Born to shop Teenagers: Demanding and opinionated Generation Y Generation X America’s baby boomers and South Africa’s prime timers Older consumers: Not just grandparents The Black diamonds Survivors Demographic factors Universal Living Standards Measure Using LSM and other demographic factors to understand markets Education and literacy Language Economic factors Inflation "****** DEMO - www.ebook-converter.com*******"

Recession Technological factors Political factors Self-regulatory agencies Legal factors Central government legislation Provincial government legislation International agreements The marketing implications of legislation Competitive factors Physical forces Climate change Pollution Scarce resources Recycling and non-wasteful packaging Environmentally-friendly ingredients Looking back Summary Discussion and writing questions Key concepts "****** DEMO - www.ebook-converter.com*******"

References CHAPTER 3: Understanding consumer decisionmaking Introduction The importance of understanding consumer behavior A model of consumer behavior The consumer decision-making process Problem recognition Information search Evaluation of alternatives and purchase Post-purchase behavior Types of consumer buying decisions and consumer involvement Factors determining the level of consumer involvement The marketing implications of consumer involvement Individual factors influencing consumer buying decisions Perception "****** DEMO - www.ebook-converter.com*******"

Motivation Learning Values, beliefs and attitudes Personality, self-concept and lifestyle Social factors influencing consumer buying decisions Culture Subculture Reference groups Opinion leaders Family Social class The influence of the purchase situation on buying decisions Buying ‘new-to-the-world’ products Buying behaviour and technology Looking back Summary Discussion and writing questions Key concepts References "****** DEMO - www.ebook-converter.com*******"

CHAPTER 4: Analysing the competitive situation Introduction Identifying competitors Approaches to identifying competitors Using the strategic-group approach to identify competitors Defining the competitive arena The four industry structures The competitive structure of an industry Threat of new entrants Threat of substitute products Threat of buyers’ growing bargaining power Threat of suppliers’ growing bargaining power Threat of intense segment rivalry Analysing key competitors Understanding current competitors Size, growth and profitability Image and positioning strategy "****** DEMO - www.ebook-converter.com*******"

Competitor objectives and commitment The current and past strategies of competitors Competitor culture Cost structure Exit barriers Understanding potential competitors Entry barriers Evaluating competitors’ strengths and weaknesses Step 1: Identify key success factors in the industry Step 2: Rate the firm and competitors on each KSF Step 3: Consider the implications for competitive strategy Anticipating competitors’ actions Likely reaction patterns of competitors Direct rivalry among competitors Deciding which competitors to attack and which to avoid "****** DEMO - www.ebook-converter.com*******"

Looking back Summary Discussion and writing questions Key concepts References CHAPTER 5: Information for marketing decisionmaking and marketing research Introduction The need for managerial information Marketing decision support systems Database marketing and micro-marketing The importance of database marketing The role of marketing research The functions of marketing research The relationship between marketing research and DSS Management uses of marketing research Improving the quality of decision-making Identifying problems Understanding the market Fostering customer value and quality "****** DEMO - www.ebook-converter.com*******"

The steps in a marketing research project Step 1: Define the marketing problem Step 2: Exploratory research by collecting secondary data Step 3: Formulate the research objectives Step 4: Planning the research design Step 5: Collecting the data Step 6: Analysing the data Step 7: Preparing and presenting the report When should marketing research be conducted? The characteristics of good research Why is marketing research criticised? Looking back Summary Discussion and writing questions Key concepts References CHAPTER 6: Segmenting and targeting markets Introduction "****** DEMO - www.ebook-converter.com*******"

The nature of market segmentation The importance of market segmentation The criteria for successful segmentation Bases for segmenting consumer markets Behavioural segmentation Geographic segmentation Demographic segmentation Psychographic segmentation Benefit segmentation Qualifying and determining bases for segmentation Steps in segmenting a market Strategies for selecting target markets Undifferentiated targeting Concentrated targeting Multi-segment targeting Contrasting target marketing strategies Positioning Looking back Summary Discussion and writing questions "****** DEMO - www.ebook-converter.com*******"

Key concepts References CHAPTER 7: Positioning the firm and its products Introduction Planning a positioning strategy The nature of positioning The consequences of failing to select a position Differentiation – the cornerstone of positioning Classifying industries according to their potential for differentiation and competitive advantage Bases for differentiation Product differentiation Differentiation based on services accompanying the product Personnel differentiation Image differentiation Bases for positioning products The process of positioning a new product or brand "****** DEMO - www.ebook-converter.com*******"

Repositioning a product or brand The repositioning process Repositioning in the maturity phase of the product life cycle Development of a positioning strategy Typical positioning errors Tools and approaches to facilitate positioning Looking back Summary Discussion and writing questions Key concepts References PART TWO Implementing marketing mix strategies CHAPTER 8: Product decisions Introduction What is a product? Product levels Classifying consumer products Types of consumer products Convenience products "****** DEMO - www.ebook-converter.com*******"

Shopping products Speciality products Unsought products Product items, lines and mixes Organising related items into product lines Adjustments to product items, lines and mixes Branding Benefits of branding Features of effective brand names Branding strategies Generic products versus branded products Manufacturers’ brands versus private brands Individual brands versus family brands Conditions favourable to branding Co-branding Levels of brand familiarity Trademarks "****** DEMO - www.ebook-converter.com*******"

Packaging Packaging functions Containing and protecting products Promoting products Facilitating storage, use and convenience Facilitating recycling and reducing environmental damage Labelling Universal product codes Product warranties Looking back Summary Discussion and writing questions Key concepts References CHAPTER 9: Developing and managing products Introduction The importance of new products Categories of new products The new-product development process Idea generation "****** DEMO - www.ebook-converter.com*******"

Creativity Idea screening Concept development and testing Business analysis The development stage Test marketing Commercialisation Why some new products succeed and others fail Organising for new-product development New-product committees and departments Venture teams and ‘intrapreneurs’ Simultaneous product development The product life cycle Stages of the product life cycle Strategies during the product life cycle Strategies during the introductory stage Strategies during the growth stage Strategies during the maturity stage Strategies during the decline stage "****** DEMO - www.ebook-converter.com*******"

Evaluating the product life cycle concept The market acceptance of new products Diffusion of innovation Looking back Summary Discussion and writing questions Key concepts References CHAPTER 10: Marketing channels and the role of intermediaries Introduction The benefits of marketing channels Providing specialisation and division of labour Overcoming discrepancies Providing contact efficiency The functions of a marketing channel Marketing channel structures Utilising alternative marketing channel arrangements Factors that influence marketing channel "****** DEMO - www.ebook-converter.com*******"

strategies Market factors Product factors Producer factors Levels of distribution intensity Intensive distribution Selective distribution Exclusive distribution Potential channel conflict Horizontal conflict Vertical conflict Power in the distribution channel Reward power Coercive power Legitimate power Referent power Expert power Channel leadership Manufacturers as channel captains "****** DEMO - www.ebook-converter.com*******"

Retailers as channel captains Wholesalers as channel captains The importance of physical distribution The nature of physical distribution subsystems Warehousing Materials handling Order processing Transportation Retailing and wholesaling intermediaries The classification of retail operations Looking back Summary Discussion and writing questions Key concepts References CHAPTER 11: Marketing communication strategy Introduction The role of marketing communication in the marketing mix "****** DEMO - www.ebook-converter.com*******"

The elements of the marketing communication mix Advertising Public relations and publicity Personal selling Sales promotion The marketing communication process Elements of the communication process The communication process and the marketing communication mix Integrated marketing communications The objectives and tasks of marketing communication Informing Persuading Reminding AIDA and the hierarchy of effects The hierarchy of effects and the marketing communication mix Factors affecting the marketing communication mix "****** DEMO - www.ebook-converter.com*******"

Push and pull strategies Steps in developing the marketing communication plan Analysing the market Identifying the target audience Setting marketing communication objectives Developing a marketing communication budget Deciding on a marketing communication mix Looking back Summary Discussion and writing questions Key concepts References CHAPTER 12: Implementing marketing communication mix strategies Introduction Steps in creating an advertising campaign Formulating campaign objectives "****** DEMO - www.ebook-converter.com*******"

Making creative decisions Identifying product benefits Developing and evaluating advertising appeals Executing the message Deciding which advertising media to use Media evaluation and selection considerations Media scheduling Evaluating the advertising campaign Pre-tests Post-tests Public relations Public relations tools Managing unfavourable publicity Sales promotion The objectives of sales promotion Tools for consumer sales promotion Tools for trade sales promotion Personal selling Contrasting personal selling with other "****** DEMO - www.ebook-converter.com*******"

forms of marketing communication Sales tasks Steps in the personal-selling process Sales management Defining sales objectives and the sales process Designing the sales organisation Developing the sales force Directing the sales force Evaluating the sales force Looking back Summary Discussion and writing questions Key concepts References CHAPTER 13: Pricing concepts and setting the right price Introduction The importance of price to marketing managers Pricing objectives "****** DEMO - www.ebook-converter.com*******"

Profit-orientated pricing objectives Sales-orientated pricing objectives Status quo pricing objectives The demand determinant of price The nature of demand How demand and supply determine prices Elasticity of demand The cost determinant of price Mark-up pricing Profit maximisation pricing Break-even pricing Other determinants of price Stages in the product life cycle The competition Distribution strategy Marketing communication The relationship between price and quality How to set a price on a product Formulating pricing objectives "****** DEMO - www.ebook-converter.com*******"

Estimate demand, costs and profits Choose a price strategy The legality and ethics of price strategies Tactics for fine-tuning the base price Relationships between products Pricing during difficult economic times Looking back Summary Discussion and writing questions Key concepts References CHAPTER 14: Putting it all together: The strategic marketing plan Introduction The nature of strategic planning The strategic marketing plan The value of a strategic marketing plan The elements of a marketing plan Defining the business mission Strategic marketing objectives Identifying opportunities to utilise "****** DEMO - www.ebook-converter.com*******"

Conducting a situation analysis Assessing the competitive environment Strategic windows Assessing the corporate culture Opportunity-utilisation strategies Strategic management tools Competitive advantage Setting marketing-strategy objectives Formulating the marketing strategy Implementation, evaluation and control of the marketing plan Writing the marketing plan Effective strategic planning Looking back Summary Discussion and writing questions Key concepts References PART THREE Specialised marketing CHAPTER 15: Marketing in specialised markets Introduction "****** DEMO - www.ebook-converter.com*******"

Services marketing How services differ from physical products Marketing mixes for services Sports marketing and marketing through sport The special characteristics of sport The sports product Licensed and branded sports products Marketing through sport Non-business marketing Factors contributing to the acceptance of marketing by non-profit organisations The dual role of marketing in non-profit organisations Sources of competition faced by nonprofit organisations The unique aspects of non-business marketing strategies Business-to-business marketing Business-to-business customers "****** DEMO - www.ebook-converter.com*******"

Classification of business and government markets Differences between business-tobusiness and consumer markets Types of business-to-business products The business-to-business purchase process Travel and tourism marketing The main sectors of the travel and tourism industry The special characteristics of travel and tourism services The marketing mix in travel and tourism Looking back Summary Discussion and writing questions Key concepts References CHAPTER 16: Sustainable marketing Introduction The concept of sustainable marketing "****** DEMO - www.ebook-converter.com*******"

Green marketing Social marketing The origins of sustainable marketing Green consumer segments Key sustainability issues Consumer social responsibility and the move towards sustainability The role of marketing in sustainability The impact of sustainable marketing on the product life cycle Making the marketing mix more sustainable Product Price Promotion Distribution People Processes Physical evidence The disadvantages of a sustainable marketing approach Implementing sustainability "****** DEMO - www.ebook-converter.com*******"

Summary Discussion and writing questions Key concepts References Index

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